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Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: December 31, 2009

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 1-9481

 

 

ARCHON CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Nevada   88-0304348

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

4336 Losee Road, Suite 5, North Las Vegas, Nevada 89030

(Address of principal executive office and zip code)

(702) 732-9120

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer:   ¨    Accelerated filer:   ¨
Non-accelerated filer:   ¨    Small reporting company:   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ¨    No  ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

6,017,944   as of   February 22, 2010

 

 

 


Table of Contents

ARCHON CORPORATION

INDEX

 

               Page

PART I

   FINANCIAL INFORMATION   

Item 1

   Unaudited Condensed Consolidated Financial Statements:   
      Consolidated Balance Sheets as of December 31, 2009 (Unaudited) and September 30, 2009 (Audited)    1
      Consolidated Statements of Operations for the Three Months Ended December 31, 2009 and 2008 (Unaudited)    3
      Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended December 31, 2009 and 2008 (Unaudited)    4
      Consolidated Statement of Stockholders’ Equity for the Three Months Ended December 31, 2009 (Unaudited)    6
      Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2009 and 2008 (Unaudited)    7
      Notes to Unaudited Consolidated Financial Statements    8

Item 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    20

Item 3

   Quantitative and Qualitative Disclosures About Market Risk    31

Item 4

   Controls and Procedures    31

PART II

   OTHER INFORMATION   

Item 1

   Legal Proceedings    33

Item 2

   Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities    34

Item 3

   Defaults Upon Senior Securities    34

Item 4

   Submission of Matters to a Vote of Security Holders    34

Item 5

   Other Information    34

Item 6

   Exhibits    35

 

-i-


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Unaudited Consolidated Financial Statements

Archon Corporation and Subsidiaries

Consolidated Balance Sheets

 

     December 31,
2009
(Unaudited)
    September 30,
2009

(Audited)
 
ASSETS     

Current assets:

    

Cash and equivalents

   $ 29,515,874      $ 31,646,498   

Investment in marketable securities

     6,987,860        5,995,289   

Accounts receivable, net

     178,268        170,935   

Inventories

     213,579        231,689   

Prepaid expenses and other

     1,094,363        945,167   

Deferred tax assets

     4,305,675        512,695   
                

Total current assets

     42,295,619        39,502,273   
                

Property held for sale

     55,241,681        55,357,905   
                

Property and equipment:

    

Rental property held for investment, net

     89,090,503        89,511,868   

Land used in operations

     3,925,589        3,925,589   

Buildings and improvements

     25,751,045        25,751,045   

Machinery and equipment

     8,266,210        8,264,373   

Accumulated depreciation

     (28,276,364     (28,103,429
                

Property and equipment, net

     98,756,983        99,349,446   
                

Other assets

     2,805,258        2,774,685   
                

Total assets

   $ 199,099,541      $ 196,984,309   
                

The accompanying notes are an integral part of these consolidated financial statements.

 

1


Table of Contents

Archon Corporation and Subsidiaries

Consolidated Balance Sheets (continued)

 

     December 31,
2009
(Unaudited)
    September 30,
2009

(Audited)
 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Line of credit

   $ 7,866,659      $ 7,866,659   

Accounts payable

     1,696,270        2,099,581   

Other accrued expenses

     2,715,040        2,722,690   

Exchangeable redeemable preferred stock – unredeemed

     821,259        821,259   

Current liabilities – assets held for sale

     3,438,802        3,342,837   
                

Total current liabilities

     16,538,030        16,853,026   

Long term liabilities – assets held for sale

     36,258,965        37,114,921   

Nonrecourse debt – less current portion

     31,199,288        31,199,288   

Deferred tax liabilities

     25,664,666        21,828,674   

Deferred rent income

     35,979,804        36,836,466   
                

Total liabilities

     145,640,753        143,832,375   
                

Stockholders’ equity:

    

Preferred stock, exchangeable, redeemable 16.0% cumulative $2.14 liquidation value, authorized-10,000,000 shares; none issued and outstanding

     0        0   

Common stock , $.01 par value; authorized-100,000,000 shares; issued and outstanding – 6,316,576, and 6,316,576 shares

     63,166        63,166   

Additional paid-in capital

     62,982,941        62,982,941   

Accumulated deficit

     (8,364,972     (8,737,568

Accumulated other comprehensive loss

     (1,110,625     (1,044,883
                

Sub-total

     53,570,510        53,263,656   

Less notes receivable from principal stockholders

     (111,722     (111,722
                

Total stockholders’ equity

     53,458,788        53,151,934   
                

Total liabilities and stockholders’ equity

   $ 199,099,541      $ 196,984,309   
                

The accompanying notes are an integral part of these consolidated financial statements.

 

2


Table of Contents

Archon Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended
December 31,
 
     2009     2008  

Revenues:

    

Casino

   $ 3,226,752      $ 4,157,097   

Hotel

     320,807        356,517   

Food and beverage

     1,214,213        1,378,671   

Rental properties

     1,882,680        2,777,381   

Other

     640,613        417,855   
                

Gross revenues

     7,285,065        9,087,521   

Less casino promotional allowances

     (909,358     (1,127,015
                

Net operating revenues

     6,375,707        7,960,506   
                

Operating expenses:

    

Casino

     2,227,266        2,271,879   

Hotel

     135,655        181,619   

Food and beverage

     744,468        957,788   

Other

     80,625        211,293   

Selling, general and administrative:

    

Corporate

     832,644        906,758   

Other

     765,848        751,495   

Utilities and property expenses

     971,352        989,275   

Depreciation

     594,300        660,932   
                

Total operating expenses

     6,352,158        6,931,039   
                

Operating income

     23,549        1,029,467   

Other income and (expense):

    

Interest expense

     (1,104,209     (1,129,887

Loss on sale of marketable securities

     (64,278     (61,007

Interest and other income

     306,092        270,357   
                

Income (loss) before income tax expense

     (838,846     138,930   

Federal income tax (expense) benefit, continuing operations

     318,570        (35,910
                

Income (loss) from continuing operations

     (520,276     76,842   

Discontinued operations gain, net of tax expense of $480,778 and $127,695, respectively

     892,872        237,148   
                

Net income

   $ 372,596      $ 310,168   
                

The accompanying notes are an integral part of these consolidated financial statements

 

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Table of Contents

Archon Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited) (continued)

 

     Three Months Ended
December 31,
     2009     2008

Average common shares outstanding

     6,316,576        6,329,177
              

Average common and common equivalent shares outstanding

     6,316,576        6,329,177
              

Income (loss) from continuing operations per common share

    

Net basic income (loss) per common share

   $ (0.08   $ 0.01
              

Diluted income per common share

   $ N/A      $ 0.01
              

Discontinued operations per share

    

Net basic income per common share

   $ 0.14      $ 0.04
              

Diluted income per common share

   $ 0.14      $ 0.04
              

Income per common share

    

Net basic income per common share

   $ 0.06      $ 0.05
              

Diluted income per common share

   $ 0.06      $ 0.05
              

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Table of Contents

Archon Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

     Three Months Ended
December
 
     2009     2008  

Net income

   $ 372,596      $ 310,168   

Unrealized loss on marketable securities, net of income taxes

     (65,741     (1,365,064
                

Comprehensive income (loss)

   $ 306,855      $ (1,054,896
                

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

Archon Corporation and Subsidiaries

Consolidated Statement of Stockholders’ Equity

For the Three Months Ended December 31, 2009

(Unaudited)

 

     Preferred
Stock $
   Common
Stock
   Common
Stock $
   Additional
Paid-In
Capital
   Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Notes
Receivable
From
Stockholders
    Treasury
Stock
   Total  

Balances, October 1, 2009

     0    6,316,576    $ 63,166    $ 62,982,941    $ (8,737,567   $ (1,044,884   $ (111,722   $ 0    $ 53,151,934   

Net income

                 372,595               372,595   

Purchase of treasury stock

                       

Common shares retired

                       

Unrealized loss on marketable securities

                   (65,741          (65,741
                                                                 

Balances, December 31, 2009

   $ 0    6,316,576    $ 63,166    $ 62,982,941    $ (8,364,972   $ (1,110,625   $ (111,722   $ 0    $ 53,458,788   
                                                                 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


Table of Contents

Archon Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

     Three Months Ended
December 31,
 
     2009     2008  

Cash flows from operating activities:

    

Net income

   $ 372,596      $ 310,168   

Discontinued operations, net of tax effect

     (892,872     (237,148
                

Net income (loss) from continuing operations

     (520,276     73,020   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     594,300        660,932   

Interest expense from amortization of debt issuance costs

     57,023        70,892   

Loss on sale of marketable securities

     64,278        61,007   

Change in assets and liabilities:

    

Accounts receivable

     (7,333     34,941   

Inventories

     18,110        52,976   

Prepaid expenses and other

     (149,196     337,207   

Deferred income taxes

     (402,366     (151,551

Other assets

     (87,596     37,821   

Accounts payable

     (403,311     (622,933

Interest payable

     0        2,470   

Other accrued expenses

     (7,650     (1,270,995

Deferred rent income

     (856,662     (742,363
                

Net cash used in operating activities

     (1,700,679     (1,456,576
                

Cash flows from investing activities:

    

Proceeds from sale of assets, continuing operations

     28,885        0   

Capital expenditures

     (30,722     (760,645

Marketable securities purchased

     (2,190,324     (654,570

Marketable securities sold or redeemed

     1,032,333        1,233,256   
                

Net cash used in investing activities

     (1,159,828     (181,959
                

Cash flows from financing activities:

    

Payments on nonrecourse debt and obligation under capital lease

     0        128,702   

Preferred stock redeemed and retired

     0        (9,806
                

Net cash used in financing activities

     0        118,896   
                

Cash flows from Discontinued Operations:

     729,883        4,488   
                

Increase (decrease) in cash and cash equivalents

     (2,130,624     (1,515,151

Cash and cash equivalents, beginning of period

     31,646,498        37,973,564   
                

Cash and cash equivalents, end of period

   $ 29,515,874      $ 36,458,413   
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the quarters ended December 31, 2009, and 2008

1. BASIS OF PRESENTATION AND GENERAL INFORMATION

The primary business operations of Archon Corporation (the “Company” or “Archon”) are conducted through a wholly-owned subsidiary corporation, Pioneer Hotel Inc. (“PHI”), which operates the Pioneer Hotel & Gambling Hall (the “Pioneer”) in Laughlin, Nevada. In addition, the Company owns real estate on Las Vegas Boulevard South (the “Strip”) in Las Vegas, Nevada, currently rented and also owns rental properties in Dorchester, Massachusetts and Gaithersburg, Maryland.

The consolidated financial statements included herein have been prepared by management of the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations under Regulation S-X of the SEC, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments necessary for a fair presentation of results for the interim periods have been made. The results for the current three month period ended December 31, 2009 are not necessarily indicative of results to be expected for the full fiscal year ended September 30, 2010. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009, from which the balance sheet information as of that date is derived.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates that affect the reported amounts. Actual results may differ from estimates.

Income Per Common Share. The Company computes net income (loss) per share in accordance with FASB ASC 260-10, Earnings per share. FASB ASC 260-10 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during the period. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive. Dilutive stock options of approximately 741,000 were not included in calculations of diluted income per common share for the three months ended December 31, 2009, as the options were out of the money and, therefore, would be anti-dilutive.

Uninsured Deposits. At various times during the period and subsequently, the Company maintained account balances that exceeded federally insured limits, and the risk of losses related to such concentrations may be increasing as a result of economic developments.

Investment in Marketable Securities. Debt securities available-for-sale are stated at fair market value with unrealized gains or losses determined by the specific identification method and reported as a component of accumulated other comprehensive income. Debt securities available-for-sale at December 31, 2009 includes investments in corporate bonds.

 

8


Table of Contents

ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the quarters ended December 31, 2009, and 2008

 

Equity securities available-for-sale are reported at fair value with unrealized gains or losses reported as a component of accumulated other comprehensive income. Realized and unrealized gains and losses are determined by the specific identification method. At December 31, 2009, investments in equity securities available-for-sale included common and preferred stocks.

Included in “Other income” on the consolidated statements of operations are approximately $67,789 and $61,007 of realized losses for the three months ended December 31, 2009 and 2008, respectively. The Company recorded approximately $(0.1) million and $(1.4) million of other comprehensive (loss) associated with unrealized losses on these investments during the three months ended December 31, 2009 and 2008, respectively.

The following is a summary of available-for-sale marketable securities as of December 31, 2009 and September 30, 2009.

 

     December 31, 2009
     Cost    Unrealized
Gain
   Unrealized
(Losses)
    Market or
Fair Value

Debt securities

   $ 3,363,167    $ 194,410    $ (26,353   $ 3,531,224

Equity securities

     5,333,347      258,034      (2,134,745     3,456,636
                            

Total

   $ 8,696,514    $ 452,444    $ (2,161,098   $ 6,987,960
                            

 

     September 30, 2009
     Cost    Unrealized
Gain
   Unrealized
(Losses)
    Market or
Fair Value

Debt securities

   $ 3,260,893    $ 230,700    $ (19,833   $ 3,471,760

Equity securities

     4,341,909      228,720      (2,047,100     2,523,529
                            

Total

   $ 7,602,802    $ 459,420    $ (2,066,933   $ 5,995,289
                            

The following is a summary of the net unrealized gains and losses as presented in accumulated Other Comprehensive Income as of December 31, 2009 and September 30, 2009.

 

     December 31, 2009  

Description

   Unrealized
Gains
   Unrealized
(Losses)
Short Term
    Unrealized
(Losses)

Long Term
    Deferred
Taxes
(Benefit)
    Acc. Other
Comprehensive
Income (Loss)
 

Debt Securities

   $ 194,410    $ (2,262   $ (24,092   $ 58,820      $ 109,236   

Equity Securities

     258,034      (4,748     (2,129,998     (656,851     (1,219,861
                                       

Total

   $ 452,444    $ (7,010   $ (2,154,090   $ (598,031   $ (1,110,625
                                       

 

     September 30, 2009  

Description

   Unrealized
Gains
   Unrealized
(Losses)
Short Term
    Unrealized
(Losses) Long
Term
    Deferred
Taxes
(Benefit)
    Acc. Other
Comprehensive
Income (Loss)
 

Debt Securities

   $ 230,699    $ (958   $ (18,875   $ (73,803   $ 137,063   

Equity Securities

     228,720      (464,058     (1,583,042     (636,433     (1,044,884
                                       

Total

   $ 459,419    $ (465,016   $ (1,601,917   $ (562,630   $ (1,044,884
                                       

 

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Table of Contents

ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the quarters ended December 31, 2009, and 2008

 

The Company recorded the combined total of unrealized gains and (losses) disclosed in the above tables, on the balance sheet with 65% as retained earnings – other comprehensive income, and 35% as deferred income taxes, in the amounts shown in the above tables.

The following is a summary of the proceeds from sale of marketable securities and the gains or losses reclassified from Other Comprehensive Income (OCI) as of December 31, 2009 and 2008.

 

     2010  

Description

   Proceeds
From

Sales
   Gross
Realized
Gains
   Gross
Realized
(Losses)
    Gain or (Loss)
Reclassified
From OCI
 

Debt securities

   $ 0    $ 0    $ 0      $ 0   

Equity securities

     1,164,400      0      (67,789     (67,789
                              

Total

   $ 1,164,400    $ 0    $ (67,789   $ (67,789
                              

 

     2009  

Description

   Proceeds
From

Sales
   Gross
Realized
Gains
   Gross
Realized
(Losses)
    Gain or (Loss)
Reclassified
From OCI
 

Debt securities

   $ 0    $ 0    $ 0      $ 0   

Equity securities

     1,355,270      0      (61,007     (61,007
                              

Total

   $ 1,355,270    $ 0    $ (61,007   $ (61,007
                              

Revenue Recognition. Casino revenue is recorded as gaming wins less losses. Hotel, food and beverage, entertainment and other operating revenues are recognized as services are performed. Casino revenues are recognized net of certain sales incentives in accordance with FASB ASC 605-50, Revenue Recognition, Customer Payments and Incentives. Accordingly, cash incentives to customers for gambling, and the cash value of points and coupons earned by the slot club members totaling $0.1 million and $0.2 million for the three months ended December 31, 2009 and 2008, have been recognized as a direct reduction of casino revenue.

Advance deposits on rooms, if any, are recorded as deferred revenue until services are provided to the customer. Revenues include the retail amount of room, food, beverage and other services provided gratuitously to customers totaling $0.9 million and $1.1 million for the three months ended December 31, 2009 and 2008, respectively. The estimated cost of providing these promotional services has been reported in the accompanying consolidated statements of operations as an expense of each department granting complimentary services. The table below summarizes the departments’ costs of such services (amounts in thousands):

 

     2009    2008

Food and beverage

   $ 367    $ 562

Hotel

     50      77

Other

     2      5
             

Total

   $ 419    $ 644
             

Rental revenue from rental properties is recognized as earned on a straight-line basis over the term of the lease. When rental payments received exceed rents earned and recognized, the difference is recorded as deferred rental income in the current liabilities section of the balance sheet, and conversely, when rents earned and recognized exceed rental payments received, the difference is recorded as other assets.

 

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Table of Contents

ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the quarters ended December 31, 2009, and 2008

 

Concentrations. The Company’s primary operations are concentrated in the geographic area of Laughlin, Nevada and in the hotel and casino industry. Thus the Company is at risk of unfavorable changes in general economic conditions including recession, economic slowdown, or higher fuel or other transportation costs. These factors may reduce disposable income of casino patrons or result in fewer patrons visiting casinos.

The Company owns real estate on the Las Vegas, Nevada Strip and on the East Coast of the United States. Although the Company is presently not dependent on cash flows from these properties, a significant decline in real estate values in these markets could have an impact on the Company’s ability to readily generate cash flow from the real estate.

Concentrations of revenue by segment as of December 31, 2009 and 2008 follows (dollars in thousands)

 

     2010  

Pioneer

   $ 3,959    62
             

Rental properties held for investment

   $ 1,883    30
             

Other and eliminations

   $ 534    8
             

 

     2009  

Pioneer

   $ 4,938    62
             

Rental properties held for investment

   $ 2,777    35
             

Other and eliminations

   $ 246    3
             

Reclassifications. Certain minor reclassifications have been made in prior year’s consolidated financial statements to conform to the presentations used in fiscal 2010.

Consolidated Statements of Operations: A new line was added allowing the separation of the gain or (loss) on sale of marketable securities from interest and other income. These changes did not change the net income or earnings per share. The property reclassified from rental property held for investment to property held for sale is reflected as discontinued operations net of tax in both years for comparison purposes.

Other minor reclassifications were made throughout the remaining schedules, all without any change to the overall total numbers.

2. FEDERAL INCOME TAX

Deferred income taxes are reported for timing differences between items of income or expense reported in the financial statements and those reported for income tax purposes in accordance with FASB ASC 740-10, Income Taxes, which requires the use of the asset/liability method of accounting for income taxes. Deferred income taxes and tax benefits are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax loss and credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company provides for deferred taxes for the estimated future tax effects attributable to temporary differences and carryforwards when realization is more likely than not.

 

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ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the quarters ended December 31, 2009, and 2008

 

3. RELATED PARTIES

The Company’s Chairman of the Board and CEO has personally guaranteed certain loans for which the Company has accrued a loan guarantee fee equal to 0.5% of the guaranteed loan balance per calendar quarter. The total accrued increased slightly during the quarter ended December 31, 2009 with no significant change from $0.3 million in the quarter ended September 30, 2009.

The Company is subject to a Patent Rights and Royalty Agreement with the brother of the Company’s Chairman of the Board and CEO with respect to certain gaming technology for which he had been issued a patent. The Company agreed to pay certain royalty payments with respect to the technology incorporated into gaming devices placed in operation, as well as costs related to maintain the patent. The patentholder granted the Company an exclusive five-year license that expired in January 2007 in the United States with respect to the technology, but which automatically renewed until 2009 and will renew for an additional two-year term unless the Company terminates the agreement. The Company also has an understanding with the related party patentholder that it will pay for the costs of commercial development of the technology. Through September 30, 2006, the Company had expended approximately $0.4 million for commercial development of the technology, and no additional costs were expended during the three-month periods ended December 31, 2009 or 2008. No royalties were paid to the patentholder during the periods presented.

4. PURCHASE AND SALE AGREEMENT OF GAITHERSBURG PROPERTY

On May 28, 2009, the Company, through its wholly owned subsidiary SFHI, LLC (“SFHI”), entered into a Purchase and Sale Agreement (the “Agreement”) with Montgomery County, Maryland (the “County”) whereby the County will purchase SFHI’s 51.57 acre parcel of land together with an approximately 341,693 square feet office building erected thereon (the “Property”), located at 100 Edison Park Drive in Gaithersburg, Maryland. The purchase price for the Property will be seventy-six million three hundred forty thousand dollars ($76,340,000). The Agreement provided the County with a 90-day feasibility period during which the County determined that the Property is suitable for its intended use, and the County will now proceed to close escrow by notifying the Company of the closing date, which date may be no sooner than 90 days from the date of notice and no later than April 30, 2014.

Simultaneous with the execution of the Purchase and Sale Agreement, the County entered into a sublease with the existing tenant of SFHI at this location, GXS, Inc., whereby the County, as of October 1, 2009, leased and occupied the entire Property until the earlier of (i) completion of its purchase of the Property or (ii) April 30, 2014. Pursuant to the applicable provisions of the existing lease with GXS, Inc., SFHI consented to the sublease. In addition, GXS, Inc. agreed to pay SFHI the sum of $2,125,000, $1,725,000 of which was paid on October 1, 2009, with the balance of $400,000 payable on or before July 1, 2010.

 

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ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the quarters ended December 31, 2009, and 2008

 

ASSETS HELD FOR SALE

The Company reviewed the guidance provided by FASB ASC 360-10-45-11, and thus has classified the assets associated to the Gaithersburg property as held for sale. The following table summarizes the components classified as held for sale as of December 31, 2009 and September 30, 2009 (amounts in thousands):

 

Property Held for Sale – Discontinued Operations:

   Dec 31, 2009     Sep 30, 2009  

Gaithersburg – Warehouse:

    

Loan Issue Costs

   $ 877,683      $ 929,310   

Deferred Rent

     2,617,747        2,682,345   

Land

     23,000,000        23,000,000   

Buildings & Improvements

     36,600,000        36,600,000   

Machinery & Equipment

     3,000,000        3,000,000   

Allowance for depreciation

     (10,853,750     (10,853,750
                

Total

   $ 55,241,680      $ 55,357,905   
                

LIABILITIES ON ASSETS HELD FOR SALE

The following debt is related to assets held for sale. The Company issued approximately $55.4 million of first mortgage debt with a 7.01% interest rate per annum in connection with its acquisition of a commercial office building located in Gaithersburg, Maryland. The building is under lease through April 2014. The monthly lease payments are applied against the outstanding indebtedness. Monthly principal and interest payments amortize the debt to approximately $22.3 million by the end of the lease in April 2014. The Company anticipates that the future tenant payments related to the net leases will be sufficient to fund required payments under the first mortgage notes and Section 467 debt. The principle balance due as of December 31, 2009 and September 30, 2009 was $40 million and $41 million, respectively.

 

LIABILITIES

   12/31/09    9/30/09

Interest payable

   $ 159,114    $ 156,949

Current portion of debt

     3,279,688      3,185,888
             

Total current liability

     3,438,802      3,342,837

Long-term debt less current portion

     36,258,965      37,114,921
             

Total

   $ 39,697,767    $ 40,457,758
             

DISCONTINUED OPERATIONS

As a result of the pending sale of the Gaithersburg property, the result of operations related to this property has been reflected as discontinued operations. The prior year result of operations of this property has also been reclassified and discontinued for comparative purposes.

The property in Gaithersburg, Maryland, is a building used for commercial office space. The property is under a net lease through 2014 with a single tenant. Under the lease, the tenant is responsible for substantially all obligations related to the property. The property was acquired for $62.6 million, plus debt issuance costs of $2.7 million. The Company paid $9.9 million in cash and issued $55.4 million in nonrecourse first mortgage indebtedness. The Company allocated approximately $23.0 million of the purchase price to land, $3.0 million to machinery and equipment and the balance to building and improvements. The expenses incurred to acquire the property (approximately $2.7 million) are recorded in other assets in the accompanying Consolidated Balance Sheets and are being amortized over the remaining loan period.

 

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ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the quarters ended December 31, 2009, and 2008

 

6. OPEN MARKET PURCHASES OF COMPANY COMMON STOCK

During fiscal year 2009 the Company determined that in the current difficult economy and in light of low interest rates being paid on deposit of surplus funds that open market purchase(s) of its own shares, up to 5.0% of its outstanding common stock, represented a desirable use of its available and surplus cash.

In December 2008, the Board of Directors of the Company approved the Company’s adoption of a plan, effective January 5, 2009, for the Company to make periodic and ongoing open market purchases of up to 5.0% of its own common stock (up to 319,539 shares of common stock) in accordance with Rule 10b-18 (the “Rule”) of the Rules and Regulations Promulgated Under The Securities Exchange Act Of 1934 (the “Act”), and, more specifically, in accordance with SEC Release No. 33-8335 (the “Release”). The Release is a ‘safe harbor’ and approved method to make open market purchases of a company’s own common stock in compliance with the Rule without those purchases being deemed manipulative under the Act.

The Rule and Release impose certain specific restrictions on the Company as to purchases of its own common shares. These include specific restrictions as to timing of open market purchases, manner of purchases, pricing of purchases and when purchases will (and will not) be allowed.

The Rule and Release also mandate certain additional and periodic disclosures that the Company must make concerning the open market purchases in its Series 10 filings (Report on Forms 10-K and 10-Q).

On January 8, 2010, subsequent to the end of the quarter, the Company purchased a grouping of shares of common stock of the Company sufficient to cause it to effectively reach the maximum shares allotted to be purchased pursuant to the Rule and Release referenced above (when combined with prior program purchases since December 2008). As a result, the Company, on January 13, 2010, announced the close of the common stock purchase program.

All open market purchases were voluntary and effected utilizing licensed securities broker-dealers.

The table below summarizes the Company’s buy back of its common stock for the last 12-month period ended December 31, 2009, as well as, the total shares purchased under the program through its close on January 13, 2010:

 

Period

   (a) Total
Number of
Shares (or
Units)
Purchased
   (b) Average
Price Paid per
Share (or
Unit)
   (c) Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans or
Programs
   (d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs

Beginning balance

            316,215

January 2009

   3,996    $ 27.83    3,996    312,219

February 2009

   4,590    $ 16.96    8,586    307,629

March 2009

   7,150    $ 16.60    15,736    300,479

April 2009

   0      0    15,736    300,479

May 2009

   0      0    15,736    300,479

June 2009

   0      0    15,736    300,479

July 2009

   0      0    15,736    300,479

August 2009

   0      0    15,736    300,479

September 2009

   0      0    15,736    300,479

October 2009

   0      0    15,736    300,479

November 2009

   0      0    15,736    300,479

December 2009

   0      0    15,736    300,479

January 2010

   298,632    $ 13.50    314,368    1,847

Ending balance

   314,368    $ 13.80    314,368    1,847

As of December 31, 2009, the Company retired 15,736 of the shares repurchased and as of February 22, 2010, the Company is holding 298,632 shares in treasury.

 

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ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the quarters ended December 31, 2009, and 2008

 

7. REDEMPTION OF THE COMPANY’S PREFERRED STOCK AND REDEMPTION PRICE DISPUTES

The Company called all outstanding shares of its Exchangeable Redeemable Preferred Stock for redemption on and as of August 31, 2007, at a redemption price of $5.241 per share, which sum included accrued and unpaid dividends to the date of redemption. From and after August 31, 2007, all shares of the Exchangeable Redeemable Preferred Stock ceased to be outstanding and to accrue dividends. As of February 2, 2010, the holders of 4,259,878 shares of the Exchangeable Redeemable Preferred Stock have surrendered their shares and received payment of the redemption price; while 156,699 shares have yet to be surrendered and still have the right to receive their payment due without interest. As of December 31, 2009 and September 30, 2009, exchangeable redeemable preferred stock –unredeemed was $821,259 and $821,259, respectively.

On August 27, 2007, a group of institutional investors filed an action, in Nevada, against the registrant. The Complaint was subsequently amended to add an additional party plaintiff (collectively, the “Plaintiffs”). The Amended Complaint: (i) seeks a finding by the Court that the Company has breached its obligations under the Company’s Certificate of Designation of the Preferred Stock, dated September 30, 1993 (the “Certificate”), and awarding the Plaintiffs full compensation of any and all available damages suffered by the Plaintiffs as a result of the Company’s breach of the Certificate; (ii) seeks a finding by the Court that the Company’s issuance of its redemption notice with an improper redemption price is an anticipatory breach of a material term of the Certificate and awarding the Plaintiffs full compensation of any and all available damages suffered as a result of the Company’s anticipatory breach of the Certificate; (iii) seeks a declaration by the Court that the dividends be properly calculated and compounded per the terms of the Certificate in an amount no less than $7,235,351 up through and including the date of final judgment; (iv) seeks an order from the Court calling for the Company to reimburse the Plaintiffs’ attorneys’ fees, expenses and costs incurred in enforcing their rights; and (v) seeks such other and further relief as the Court may deem appropriate.

The Plaintiffs, thereafter, filed a motion for partial summary judgment, seeking a ruling from the court that the Company breached its obligations under the Certificate of Designation by calculating the redemption price as it did. The Court granted that motion on August 8, 2008, finding the language of the Certificate of Designation to be unambiguous and that the redemption price should have been calculated differently. The Court has not yet issued a monetary judgment against the Company. Subsequent to the Court’s ruling on the motion for partial summary judgment, Plaintiffs filed a motion for entry of final judgment, seeking entry of judgment that the redemption price for the preferred shares should have been $8.69 per share. At the same time, the Company filed a request for certification asking the Court to certify its partial summary judgment order for immediate interlocutory appeal. The Court granted the request for certification and denied the request for entry of final judgment without prejudice. The Company filed a Petition for Permission to Appeal with the Ninth Circuit Court of Appeals and the Ninth Circuit declined to accept the matter for interlocutory review at this time.

 

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ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the quarters ended December 31, 2009, and 2008

 

The Company has initiated proceedings against a third-party firm concerning that firm’s potential liability related to the drafting of the Certificate of Designation. This third-party action has subsequently been removed by the firm to Federal Court in April, 2009 and is at an early stage of resolution. The third-party has moved to compel arbitration of the dispute. The Magistrate Judge issued an order that the matter be referred to arbitration and the District Court confirmed that order. The Company intends to pursue its claims against the firm in arbitration. The Company is also considering rights and remedies it may have with regard to other parties who participated in the issuance of the Preferred Stock in the event that the Company does not prevail on its interpretation of the Certificate of Designation.

Also, two other holders of the Exchangeable Redeemable Preferred Stock filed Complaints, both alleging essentially the same claim as the first complaint related to the case set forth immediately above. If the plaintiffs in these two additional actions are correct, the redemption price as of August 31, 2007 should have been $8.69 per share and not $5.241 per share as calculated by the Company. If applied to all the then outstanding shares of Exchangeable Redeemable Preferred Stock, including the shares held by the Company’s officers and directors, valuation of the redemption price at $8.69 per share would increase the redemption price in excess of $15.2 million.

Management is unable to estimate the minimum liability that may be incurred, if any, as a result of the outcome of each of these matters and, therefore, has made no provision in the financial statements for liability related to these cases.

8. STOCK-BASED COMPENSATION

The Company’s Stock Option Plan (“Plan”) provides for the grant of up to 1.4 million shares of its common stock to key employees. The Plan provides for both incentive stock options and non-qualified stock options. Stock option grants generally vest over a three-year period from the employee’s hire date. During the quarters ended December 31, 2009 and 2008, zero options were granted. As of December 31, 2009 and 2008, there were approximately 741,500 and 741,500 options, respectively, outstanding and exercisable under the Plan. During the quarters ended December 31, 2009 and 2009, zero options were exercised.

The outstanding options have expiration dates through 2018 and have an average remaining life of approximately 7.0 years. The average exercise price of the outstanding options at December 31, 2009 is approximately $28.09.

In December 2008, the Company’s Board of Directors authorized, approved by the shareholders at the June 15, 2009 annual meeting, an increase of 250,000 in the number of shares available for grant under the Plan.

SFHI Inc., SLVC and PHI (collectively, the “Subsidiaries”), have adopted subsidiary stock option plans (the “Subsidiary Plans”). The Subsidiary Plans provide for the grant of options by each of the Subsidiaries with respect to an aggregate of up to 10% of the outstanding shares of such Subsidiary’s Common Stock to employees, non-employee directors, consultants or affiliates of the Company or the Subsidiaries. The purpose of the Subsidiary Plans is to enable the Subsidiaries and the Company to attract, retain and motivate their employees, non-employee directors, consultants and affiliates by providing for or increasing the proprietary interest of such persons in the Subsidiaries. As of December 31, 2009, no options had been granted under any of the Subsidiary Plans.

 

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ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the quarters ended December 31, 2009, and 2008

 

The following table summarizes stock option activity during the fiscal quarter 2010 under all plans:

 

     Number
of
Shares
(000’s)
   Weighted-
Average
Exercise
Price

Per Share
   Weighted-
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic
Value
($000’s)
 

Options outstanding at September 30, 2009:

   742    $ 28.09    8.3 yrs    $ (12,457

Granted

   0      N/A    N/A      N/A   

Exercised

   0      N/A    N/A      N/A   

Canceled

   0      N/A    N/A      N/A   

Options outstanding at December 31, 2009

   742    $ 28.09    7.0 yrs.    $ 11,345   

Exercisable at December 31, 2009

   742    $ 28.09    7.0 yrs.    $ 11,345   

As of December 31, 2009, there was no unrecognized compensation cost related to unvested stock options.

9. SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION

Supplemental statement of cash flows information for the three months ended December 31, 2009 and 2008 is presented below (amounts in thousands):

 

     2010    2009

Operating activities:

     

Cash paid during the period for interest

   $ 1,807    $ 1,838
             

10. SEGMENT INFORMATION

The Company’s operations are in the hotel/casino industry and rental properties. The Company’s hotel/casino operations are conducted at the Pioneer in Laughlin, Nevada. As discussed above, the Company owns rental properties in Dorchester, Massachusetts and Gaithersburg, Maryland. “Other and Eliminations” below includes financial information for the Company’s corporate operations, adjusted to reflect eliminations upon consolidation.

Set forth below is the unaudited financial information for the segments, which the Company operates, for the three months ended December 31, 2009 and 2008 (dollars in thousands).

 

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ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the quarters ended December 31, 2009, and 2008

 

     Three Months Ended
December 31,
 
     2009     2008  

Pioneer Hotel:

    

Net operating revenues

   $ 3,959      $ 4,938   

Operating loss

     (872     (646

Depreciation

     137        202   

Interest expense

     0        206   

Interest and other income

     0        2   

Loss before income taxes

     (872     (850

Capital expenditures / transfers

     31        746   

Identifiable assets (1)

     11,896        16,713   

Investment Properties:

    

Net operating revenues

   $ 1,883      $ 2,777   

Operating income

     1,250        2,164   

Depreciation

     421        421   

Interest expense

     1,102        955   

Interest and other income

     4        29   

Income before income taxes

     152        1,237   

Capital expenditures / transfers

     0        0   

Identifiable assets (1)

     90,244        91,348   

Property Held for Sale:

    

Net operating revenues

   $ 0      $ 0   

Operating income

     0        0   

Depreciation

     0        0   

Interest expense

     0        0   

Interest and other income

     0        0   

Discontinued operations, net of tax

     893        237   

Capital expenditures / transfers

     0        0   

Identifiable assets (1)

     55,242        55,358   

Other and Eliminations:

    

Net operating revenues

   $ 534      $ 246   

Operating income

     (354     (489

Depreciation

     36        38   

Interest expense

     2        (31

Interest and other income

     302        239   

Income (loss) before income taxes

     (119     (278

Capital expenditures / transfers

     0        15   

Identifiable assets (1)

     41,718        41,586   

Total:

    

Net operating revenues

   $ 6,376      $ 7,961   

Operating income

     24        1,029   

Depreciation

     594        661   

Interest expense

     1,104        1,130   

Interest and other income

     306        270   

Income before income taxes

     (839     109   

Discontinued operations, net of tax

     893        237   

Capital expenditures / transfers

     31        761   

Identifiable assets (1)

     199,100        205,005   

 

(1)

Identifiable assets represent total assets less elimination for intercompany items

 

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ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the quarters ended December 31, 2009, and 2008

 

11. SUBSEQUENT EVENTS

The Company has evaluated subsequent events through February 19, 2010, the date which the financial statements were available to be issued and the following items are disclosed:

Treasury Stock

On January 8, 2010, subsequent to the end of the quarter 2009, the Company purchased a grouping of 298,632 shares of common stock of the Company sufficient to cause it to effectively reach the maximum shares allotted to be purchased pursuant to the Rule and Release referenced above (when combined with prior program purchases since December 2008). As a result, the Company, on January 13, 2010, announced the close of the common stock purchase program.

 

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ARCHON CORPORATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion is intended to further the reader’s understanding of the consolidated financial condition and results of operations of Archon Corporation (the “Company” or “Archon”). It should be read in conjunction with the financial statements included in this quarterly report on Form 10-Q and the Company’s annual report on Form 10-K for the year ended September 30, 2009. These historical financial statements may not be indicative of the Company’s future performance.

General

Overview of Business Operations and Trends

The Company, historically, has owned, managed and operated hotel/casino properties through a number of acquisitions or developments, and it has divested itself of certain of these properties. Presently, the Company operates the Pioneer in Laughlin, Nevada.

The Pioneer has experienced a flattening and, to a certain extent, a decline of its revenues over the last few years after experiencing strong revenue and profit growth in the early 1990’s. Management believes the growth of casino properties on Native American lands in such locations as California and Arizona within the last several years caused revenue declines and caused the Company to focus on market definition and development in the local Laughlin area to maintain profitability. Harsh economic conditions impacting customers, including high fuel costs, has significantly reduced disposable income, and limited customer travel and gaming practices. Management believes Laughlin is a mature market with marginal growth forecasted for the next few years based on its current plans. Management believes the recent revenue and expense trends in its Laughlin hotel/casino property may not change significantly over the next few years, or until the current economic conditions and trends begin to reverse.

The Company also owns rental properties on the East Coast and Las Vegas Strip, but revenues from these rental properties are used to meet their related mortgages and thus do not contribute significant net cash flow to the Company.

Property Held for Sale

During fiscal year 2001, the Company acquired certain properties as part of an IRS Section 1031 exchange. The property held for sale is located in Gaithersburg, Maryland. The Company acquired the property and nonrecourse debt associated with the property which is subject to a long-term lease. A tenant remits payment to the bank according to the terms of the lease and note. The payments are used to liquidate the nonrecourse debt obligations. Rental income is recorded by the Company on a straight-line basis and totals approximately $5.6 million annually and will remain at this level until approximately 2014 or until the asset is sold, otherwise disposed of or becomes impaired. The buildings are also being depreciated on a straight-line basis and the depreciation expense is approximately $0.9 million annually and will remain at this level until approximately 2041 or until the asset is sold, otherwise disposed of or becomes impaired. Interest expense is also recorded based on the outstanding nonrecourse debt remaining to be paid based on unamortized loan issue costs and remaining debt amortization timetables. At any time during the life of the lease and debt amortization, the fair market value of the property may be different from its book values. Interest is presently being expensed at approximately $2.9 million annually and will decrease in relation to debt principal reductions through 2014 or until the asset is sold, otherwise disposed of or becomes impaired.

 

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On May 28, 2009, the Company, through its wholly owned subsidiary SFHI, LLC (“SFHI”), entered into a Purchase and Sale Agreement (the “Agreement”) with Montgomery County, Maryland (the “County”) whereby the County will purchase SFHI’s 51.57 acre parcel of land together with an approximately 341,693 square feet office building erected thereon (the “Property”), located at 100 Edison Park Drive in Gaithersburg, Maryland. The purchase price for the Property will be seventy-six million three hundred forty thousand dollars ($76,340,000). The Agreement provided the County with a 90-day feasibility period during which the County determined that the Property is suitable for its intended use, and the County will now proceed to close escrow by notifying the Company of the closing date, which date may be no sooner than 90 days from the date of notice and no later than April 30, 2014.

Simultaneous with the execution of the Purchase and Sale Agreement, the County entered into a sublease with the existing tenant of SFHI at this location, GXS, Inc., whereby the County, as of October 1, 2009, leased and occupied the entire Property until the earlier of (i) completion of its purchase of the Property or (ii) April 30, 2014. Pursuant to the applicable provisions of the existing lease with GXS, Inc., SFHI consented to the sublease. In addition, GXS, Inc. agreed to pay SFHI the sum of $2,125,000, $1,725,000 of which was paid on October 1, 2009, with the balance of $400,000 payable on or before July 1, 2010. Due to the pending sale of this property, the related results of operations have been reported as discontinued operations. See Notes to Consolidated Financial Statements, Note 6, Sale of Gaithersburg Property

Rental Properties Held for Investment

During fiscal year 2001, the Company acquired certain rental property as part of an IRS Section 1031 exchange. The rental property is located in Dorchester, Massachusetts. The Company acquired the property and nonrecourse debt associated with the property which is subject to a long-term lease. A tenant remits payments to a bank according to the terms of the lease and note. The payments are used to liquidate the nonrecourse debt obligations. Rental income is recorded by the Company on a straight-line basis and totals approximately $6.7 million annually and will remain at this level until approximately 2020 or until the asset is sold, otherwise disposed of or becomes impaired. The buildings are also being depreciated on a straight-line basis and the depreciation expense is approximately $1.7 million annually and will remain at this level until approximately 2041 or until the asset is sold, otherwise disposed of or becomes impaired. Interest expense is also recorded based on the outstanding nonrecourse debt remaining to be paid based on unamortized loan issue costs and remaining debt amortization timetables. At any time during the life of the lease and debt amortization, the fair market values of the property may be different from its book value. Interest is presently being expensed at approximately $4.5 million annually and will decrease in relation to debt principal reductions through 2020 or until the asset is sold, otherwise disposed of or becomes impaired.

The Company owns, through its wholly owned subsidiary, Sahara Las Vegas Corp. (“SLVC”), an approximately 27-acre parcel of land (the “Property”) located on the east side of Las Vegas Boulevard South, just south of Sahara Avenue. The Company presently leases the Property to three different lessees for an aggregate amount of $35,000 per month. The leases may be terminated in the event the property is sold or developed by the Company.

On December 22, 2008, SLVC, entered into an Option Agreement with Las Vegas Towers, LLC (“LVT”), a Delaware limited liability company, in which SLVC granted LVT an option to purchase SLVC’s approximately 27-acre parcel of land located at 2600 Las Vegas Boulevard South, Las Vegas, Nevada.

The Option Agreement designated the purchase price to acquire the land at $618.0 million.

 

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Simultaneous with the execution of the Option Agreement, SLVC executed a Contingent Warrant (the “Warrant”) to Purchase Series A Preferred Stock (the “Preferred Stock”), entitling LVT to purchase 60,000 shares of Series A Preferred Stock of SLVC upon terms and conditions set forth in the Warrant. The designation and amount of the Preferred Stock as well as the powers, preferences and relative, participating, optional and other special rights of the shares of the series of this Preferred Stock and the qualifications, limitations or restrictions thereof are set forth in the Certificate of Designation, Preferences and Rights of the Series A Preferred Stock also dated December 22, 2008. Had LVT exercised the Warrant prior to its expiration on April 1, 2009, the Option Agreement would have remained valid until March 31, 2010. LVT failed to exercise the Warrant before its expiration, thus the Option Agreement terminated on March 31, 2009.

Critical Accounting Policies and Estimates

The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to customer incentives, bad debts, inventories, investments, estimated useful lives for depreciable and amortizable assets, valuation reserves and estimated cash flows in assessing the recoverability of long-lived assets, estimated liabilities for slot club bonus point programs, income taxes, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies, among others, affects its more significant judgments and estimates used in the preparation of its consolidated financial statements:

Allowance for Doubtful Accounts. The Company allows for an estimated amount of receivables that may not be collected. The Company estimates its allowance for doubtful accounts using a specific formula applied to aged receivables as well as a specific review of large balances. Historical experience is considered, as are customer relationships, in determining specific reserves.

Long-Lived Assets. The Company has a significant investment in long-lived property and equipment. Management reviews useful lives and obsolescence and assesses commercial viability of these assets periodically, at least annually. Based on these reviews, management estimates that the undiscounted future cash flows expected to result from the use of these assets exceeds the current carrying value of these assets. Any adverse change in the estimate of these undiscounted future cash flows could necessitate an impairment charge that would adversely affect operating results. Management also estimates useful lives for its assets based on historical experience, estimates of assets’ commercial lives, and the likelihood of technological obsolescence. Should the actual useful life of a class of assets differ from the estimated useful life, the Company would record an impairment charge. We review useful lives and obsolescence and we assess commercial viability of these assets periodically.

Income Taxes. The Company has recorded deferred tax assets related to net operating losses as the Company is able to offset these assets with deferred tax liabilities. Realization of the net deferred tax assets is dependent on the Company’s ability to generate profits from operations or from the sale of long-lived assets that would reverse the temporary differences which established the deferred tax liabilities. There can be no assurance that the Company will generate profits from operations or sell those assets or will generate profits from sales if they were to occur in the future. In the event the Company does generate profits from sales of long-lived assets in the future a valuation allowance may need to be recorded, which would impact the Company’s future results of operations. Annualized effective income tax rates for calculating interim period provisions and benefits have been estimated to be not significantly different than the estimated annual effective rate and the statutory rate. Although Financial Accounting Standards Board, Accounting Standard Codification (FASB ASC) 740-10, Income Taxes, became effective for the year ending September 30, 2008, based on its evaluation, management determined that FASB ASC 740-10 did not have a material effect on the financial statements or the net operating loss carryovers or the related deferred tax assets or valuation allowance.

 

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Revenue Recognition. Casino revenue is recorded as gaming wins less losses. Hotel, food and beverage, entertainment and other operating revenues are recognized as services are performed. Casino revenues are recognized net of certain sales incentives in accordance with FASB ASC 605-50 Revenue Recognition, Customer Payments and Incentives. Accordingly, cash incentives to customers for gambling, and the cash value of points and coupons earned by the slot club members totaling $0.1 million and $0.2 million for the quarters ended December 31, 2009 and 2008, have been recognized as a direct reduction of casino revenue.

Advance deposits on rooms, if any, are recorded as deferred revenue until services are provided to the customer. Hotel, food and beverage revenues are recognized as services are performed.

Rental revenue from rental properties is recognized as earned on a straight-line basis over the term of the lease. When rental payments received exceed rents earned and recognized, the difference is recorded as deferred rental income in the current liabilities section of the balance sheet, and conversely, when rents earned and recognized exceed rental payments received, the difference is recorded as other assets.

Recently Issued Accounting Standards

FASB ASC 105-10. In June 2009, the FASB issued FASB ASC 105-10, Overview and Background FASB Codification. FASB ASC 105-10 establishes the FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”). FASB ASC 105-10 is effective for interim and annual periods ending after September 15, 2009. The Company implemented the new Codification when referring to GAAP in its annual report on Form 10-K for the fiscal year ending September 30, 2009. This did not have an impact on the consolidated results of the Company.

FASB ASC 810-10. In June 2009, the FASB issued FASB ASC 810-10, Consolidation. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. FASB ASC 810-10 is effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period. The Company will adopt FASB ASC 810-10 in fiscal 2010. The Company does not expect that the adoption of FASB ASC 810-10 will have a material impact on the consolidated financial statements.

FASB ASC 860-10. In June 2009, the FASB issued FASB ASC 860-10, Transfers and Servicing. FASB ASC 860-10 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. FASB ASC 860-10 is effective for fiscal years beginning after November 15, 2009. The Company will adopt FASB ASC 860-10 in fiscal 2010. The Company does not expect that the adoption of FASB ASC 860-10 will have a material impact on the consolidated financial statements.

FASB ASC 855-10. In June 2009, the FASB issued FASB ASC 855-10, Subsequent Events. FASB ASC 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FASB ASC 855-10 applies to both interim financial statements and annual financial statements. FASB ASC 855-10 is effective for interim or annual financial periods ending after June 15, 2009. FASB ASC 855-10 does not have a material impact on our consolidated financial statements.

 

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FASB ASC 944-20. In May 2008, the FASB issued FASB ASC 944-20, Financial Services-Insurance. FASB ASC 944-20 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how previous standards apply to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. FASB ASC 944-20 will be effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of FASB ASC 944-20 will have a material impact on its financial condition or results of operation.

FASB ASC 815-10. In March 2008, the FASB issued FASB ASC 815-10, Derivative Instruments and Hedging. FASB ASC 815-10, which will require enhanced disclosures regarding the impact on financial position, financial performance, and cash flows, will be effective for the Company beginning on October 1, 2009. However, since the Company does not now have, nor does it contemplate issuing or obtaining any derivative instruments, or engaging in any hedging activities, in the foreseeable future, we do not currently expect any effect on our future financial statements by adopting FASB ASC 815-10.

FASB ASC 810-10. In December 2007, the FASB issued FASB ASC 810-10, Consolidation. It requires that a noncontrolling (minority) interest in a subsidiary, including a consolidatable variable interest entity should be reported as equity in the consolidated financial statements. FASB ASC 810-10 will not likely have any effect on the Company’s consolidated financial statements since we do not presently have and are not contemplating investing in, establishing or acquiring a subsidiary with a noncontrolling interest. FASB ASC 810-10 will be effective, if applicable, for the Company’s fiscal year beginning October 1, 2009.

FASB ASC 820-10 and 825-10. In September 2006, the FASB issued FASB ASC 810-10, Fair Value Measurements. FASB ASC 810-10 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States, and expands disclosure about fair value measurements. In February 2007, the FASB issued FASB ASC 810-10, Financial Instruments, which will permit the option of choosing to measure certain eligible items at fair value at specified election dates and report unrealized gains and losses in earnings. We have no present intention of opting to adopt FASB ASC 810-10. FASB ASC 810-10 will become effective for us for financial assets and liabilities carried at fair value for fiscal year ended September 30, 2009 but will not become effective for nonfinancial assets until fiscal year ended September 30, 2010 (including interim periods within those years). We do not now expect any other effects of FASB ASC 810-10 since it is unlikely that we will choose to value assets or liabilities at fair value.

FASB ASC 805-10. In December 2007, the FASB issued FASB ASC 805-10, Business Combinations. This Statement requires that the acquisition method of accounting (which previous standards called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. We have not yet evaluated this statement for the impact, if any, which FASB ASC 805-10 might have on the consolidated financial statements, in the event we make any business combination or other covered acquisitions after September 30, 2009.

 

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Results of Operations – Three Months Ended December 31, 2009 and 2008

General

During the quarter ended December 31, 2009, the Company’s net operating revenues decreased $1.6 million and operating expenses decreased $0.6 million, resulting in a decrease in operating income of $1.0 million from the quarter ended December 31, 2008. The decline in operating results was primarily due to unfavorable changes in general economic conditions including recession and economic slowdown. Net operating revenues at the rental properties decreased $0.9 million from the quarter ended December 31, 2008. The decline in the rental properties is substantially due to the decrease in rental revenue associated with the Las Vegas Strip property.

Consolidated

Net Operating Revenues. Consolidated net operating revenues for the quarter ended December 31, 2009 were approximately $6.4 million, a $1.6 million, or 20%, decrease from $8.0 million for the quarter ended December 31, 2008. Income from the rental properties in the quarter ended December 31, 2009 was $1.9 million, a $0.9 million, or 32%, decrease from $2.8 million for the quarter ended December 31, 2008. Revenues at the Pioneer of approximately $3.9 million for the quarter ended December 31, 2009, decreased $1.0 million or 20%, from $4.9 million for the quarter ended December 31, 2008.

Operating Expenses. Total operating expenses decreased $0.6 million, or 8%, to approximately $6.3 million for the quarter ended December 31, 2009 from $6.9 million for the quarter ended December 31, 2008. Total operating expenses as a percentage of net revenue increased to 100% for the 2009 quarter from 87% for the 2008 quarter. Operating expenses at the Pioneer of $4.8 million for the quarter ended December 31, 2009 decreased $0.8 million or 13%, from $5.6 million for the quarter ended December 31, 2008.

Operating Income. Consolidated operating income for the quarter ended December 31, 2009 was $0.0 million, a decrease of $1.0 million, or 98%, from $1.0 million for the quarter ended December 31, 2008. This decrease was due to the aforementioned changes in net operating revenues and operating expenses. Operating income attributable to the rental properties of $1.9 million for quarter ended December 31, 2009 decreased $0.9 million or 32%, from $2.8 million for the quarter ended December 31, 2008. Operating loss at the Pioneer of $0.9 million for the quarter ended December 31, 2009 increased $0.2 million or 35%, from approximately $0.7 million for the quarter ended December 31, 2008.

Interest Expense. Consolidated interest expense for the quarter ended December 31, 2009 was $1.1 million, relatively unchanged with a slight reduction from the quarter ended December 31, 2008.

Interest and Other Income. Consolidated interest and other income for the quarter ended December 31, 2009, was $0.3 million, relatively unchanged with a slight improvement from the quarter ended December 31, 2008.

Loss on Sale of Marketable Securities. The loss on marketable securities for the quarter ended December 31, 2009 was approximately $0.1 million, relatively unchanged from the quarter ended December 31, 2008.

Federal Income Tax. Federal income tax benefit for the quarter ended December 31, 2009 was $0.3 million, compared to a relatively small expense for the quarter ended December 31, 2008, based on federal statutory rates.

 

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Discontinued Operations, Net of Tax. The discontinued operations associated with the property held for sale during the quarter ended December 31, 2009 was $0.9 million, an increase of $0.7 million from $0.2 million for the quarter ended December 31, 2008.

Pioneer

Net Operating Revenues. Net operating revenues at the Pioneer were approximately $3.9 million for the quarter ended December 31, 2009, a decrease of $1.0 million, or 20%, compared to $4.9 million in the quarter ended December 31, 2008.

Casino revenues for the three months ended December 31, 2009 were $3.2 million, a decrease of $1.0 million, or 22%, compared to $4.2 million in the three months ended December 31, 2008. Slot and video poker revenues were $2.9 million, a decrease of $0.9 million, or 23%, compared to $3.8 million. Other gaming revenues, including table games, decreased slightly remaining at $0.3 million. Casino promotional allowances were $0.9 million compared to $1.1 million, a decrease of approximately $0.2 million, or 19%.

Hotel revenues for the three months ended December 31, 2009 were $0.3 million, a decrease of approximately $0.1 million or 10%, compared to $0.4 million in the three months ended December 31, 2008. A decrease in hotel occupancy was compounded by a decrease in the average room rate. Competitive pressures in the Laughlin market in the 2009 period caused the decline in average room rate. Food and beverage revenues decreased approximately $0.2 million, or 12%, to $1.2 million from $1.4 million. Other revenues decreased $0.1 million, or 38%, to $0.1 million from $0.2 million.

Operating Expenses. Operating expenses were $4.8 million for the quarter ended December 31, 2009, a decrease of $0.8 million, or 13%, from $5.6 million in the quarter ended December 31, 2008. Operating expenses as a percentage of net revenue increased to 122% in the current quarter from 113% in the prior year quarter.

Casino expenses were $2.2 million, a decrease of $0.1 million, or 2%, from $2.3 million, primarily due to the decrease in casino revenues. Casino expenses as a percentage of casino revenues increased to 69% from 55%.

Hotel expenses were $0.1 million, a decrease of $0.1 million or 25%, from $0.2 million, as a result of the decline in room occupancy. Food and beverage expenses were $0.7 million, a decrease of $0.2 million or 22%, from approximately $0.9 million, due to a decrease in the number of food and beverage covers sold. Food and beverage expenses as a percentage of food and beverage revenues decreased to 61% from 69%. Other expenses were $0.1 million, a decrease of $0.1 million or 58%, from $0.2 million. Other expenses as a percentage of other revenues decreased to 75% from 111%.

Selling, general and administrative expenses were $0.8 million, a decrease of $0.2 million, or 24%, compared to $1.0 million. Selling, general and administrative expenses as a percentage of revenues decreased to 19% from 20%. Pioneer’s selling, general and administrative expenses are greater than the consolidated total due to the elimination of intercompany transactions in consolidation. Utilities and property expenses were $0.7 million, a decrease of approximately $0.1 million or 4%, compared to $0.8 million. Utilities and property expenses as a percentage of operating revenues increased to 19% from 16%. Depreciation and amortization expenses were $0.1 million, a decrease of $0.1 million or 32%, from $0.2 million. Depreciation and amortization as a percentage of operating revenues decreased to 3% from 4%.

 

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Liquidity and Capital Resources; Trends and Factors Relevant to Future Operations

Contractual Obligations and Commitments

The following table summarizes the Company’s fiscal year contractual obligations and commitments as of December 31, 2009 (for the nine-month period ending September 30, 2010 and for the fiscal years ending September 30, 2011, 2012, 2013, 2014, 2015 and thereafter.) (amounts in thousands):

 

     Payments Due By Period
     2010    2011    2012    2013    2014    2015 and
Thereafter
   Total
     (Amounts in Thousands)

Continuing Operations

  

Nonrecourse debt:

                    

Dorchester

   $ 0    $ 0    $ 0    $ 0    $ 0    $ 31,199    $ 31,199

Long-term debt:

                    

Mortgage obligation

     7,867      0      0      0      0      0      7,867

Operating leases:

                    

Ground lease

     287      383      383      383      383      24,530      26,349

Corporate offices

     42      0      0      0      0      0      42
                                                

Total Continuing Operations

   $ 8,196    $ 383    $ 383    $ 383    $ 383    $ 55,729    $ 65,457
                                                

Discontinued Operations

                    

Gaithersburg

   $ 2,424    $ 3,573    $ 3,987    $ 4,448    $ 25,107    $ 0    $ 39,539
                                                

The Company is required to make the following cash interest payments related to the above debt obligations: (i) Nonrecourse debt - $2.9 million (2010), $3.8 million (2011), $3.8 million (2012), $3.8 million (2013), $3.8 million (2014) and $21.9 million (2015 and thereafter); (ii) Long-term debt - $0.4 million (2010), $0.0 million (2011), $0.0 million (2012), $0.0 million (2013) $0.0 million (2014), and $0.0 million (2015 and thereafter); (iii) Discontinued operations - $2.0 million (2010), $2.5 million (2011), $2.3 million (2012), $2.0 million (2013) $1.0 million (2014), and $0.0 million (2015 and thereafter).

The Company has no significant purchase commitments or obligations other than those included in the above schedule.

The Company’s ability to service its contractual obligations and commitments, other than the nonrecourse debt, will be dependent on the future performance of the Pioneer, which will be affected by, among other things, prevailing economic conditions and financial, business and other factors, including competitive pressure from the expansion of Native American gaming facilities in the southwest United States, certain of which are beyond the Company’s control. In addition, the Company will be dependent on the continued ability of the tenants in the rental property in Dorchester, Massachusetts, and the property held for sale in Gaithersburg, Maryland, to make payments pursuant to the leases with the Company. The payments under the leases are contractually committed to be used to make payments on the Company’s nonrecourse debt obligations related to the properties.

Liquidity and Capital Resources

Mortgage Note Obligation. The Company’s wholly owned subsidiary, SLVC, secured and maintains a $15.0 million line of credit loan granted by a Nevada bank. The loan and promissory note, secured by deed of trust on SLVC’s approximate 27 acre parcel of land on Las Vegas Boulevard South (the

 

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“Property”), are for a period of one year commencing November 15, 2009, and ending November 14, 2010. The line of credit loan is revolving and is subject to additional lending requirements. The line of credit loan in the amount of $7.9 million at the end of the fiscal year is reported as a current liability. The initial advance under the line of credit loan was used to pay in full the previous line of credit loan secured by the Property. The SLVC line of credit loan is guaranteed by SLVC and the Company, as well as, personally guaranteed by Paul W. Lowden, President of SLVC, and Suzanne Lowden, Secretary/Treasurer of SLVC.

As of December 31, 2009, the Company held cash and cash equivalents of $29.4 million compared to $31.5 million at September 30, 2009. The Company had $7.0 million in investment in marketable securities at December 31, 2009 compared to $6.0 million at September 30, 2009. The rental properties are structured such that future tenants’ payments cover future required mortgage payments including any balloon payments. Management believes that the Company will have sufficient available cash and cash resources to meet its cash requirements for a reasonable period of time.

Cash Flows from Operating Activities. The Company’s cash used for operating activities was $1.7 million for the three months ended December 31, 2009 as compared to $1.5 million for the three months ended December 31, 2008. The increase of $0.2 million was primarily due to the aforementioned reduction in operating revenues.

Cash Flows from Investing Activities. Cash used for investing activities was approximately $1.0 million for the three months ended December 31, 2009, as compared to $0.1 million for the three months ended December 31, 2008. In the current year period, the Company used $1.0 million for the purchase of marketable securities net of sales. In the prior year period, the Company received $0.7 million from the sale of marketable securities net of purchases, and spent $0.8 million for capital expenditures.

Cash Used in Financing Activities. Cash used in financing activities was relatively insignificant for the three months ended December 31, 2009 and 2008.

The Company’s primary source of operating cash is from the Pioneer operations, from interest income on available cash and cash equivalents and investments in marketable securities and, to a lesser extent, from net cash generated from the leasing of certain land owned on the Las Vegas strip. Rental income from the Company’s rental property and property held for sale is contractually committed to reducing the nonrecourse indebtedness issued or assumed in connection with the acquisition of the rental properties. Under the two leases, the tenants are responsible for substantially all obligations related to the property.

The Company owns, through its wholly owned subsidiary, Sahara Las Vegas Corp. (“SLVC”), an approximately 27-acre parcel of land (the “Property”) located on the east side of Las Vegas Boulevard South, just south of Sahara Avenue. The Company presently leases the Property to three different lessees for an aggregate amount of $35,000 per month. The leases may be terminated in the event the property is sold or developed by the Company.

Pioneer

Pioneer’s principal uses of cash are for payments of slot machine debt obligations, ground lease rent and capital expenditures to maintain the facility. The Company has implemented changes in personnel and promotional programs and installed new slot equipment to address the decreases in revenues and operating income. One of management’s main focuses is to recapture market share in the Laughlin market. Management, however, can give no assurance that market share will be recaptured in its Laughlin market as its competition in the market typically has greater capital resources than does the Pioneer.

 

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Payments of rent were approximately $100,000 for each of the three months ended December 31, 2009 and 2008. Capital expenditures to maintain the facility in fiscal 2009 are expected to be less than $1.0 million.

Property Held for Sale

The property in Gaithersburg, Maryland is located on 51 acres and includes one building with approximately 342,000 square feet of commercial office space. The property was acquired for $62.6 million, plus debt issuance costs of $2.7 million. The Company paid $9.9 million in cash and issued $55.4 million in nonrecourse first mortgage indebtedness. The property is under a net lease through 2014 with a single tenant with an investment grade credit rating. Under the lease, the tenant is responsible for substantially all obligations related to the property. The Gaithersburg, Maryland, property is under contract to be sold.

Rental Properties Held for Investment

The Company acquired rental property in Dorchester, Massachusetts in March 2001. The Dorchester, Massachusetts property is located on 12 acres and includes several buildings with approximately 425,000 square feet of commercial office space. The property was acquired for approximately $82.4 million plus $0.5 million in debt issuance costs. The Company paid $5.6 million in cash and assumed $77.3 million in nonrecourse debt associated with the property. The property is under a net lease through 2020 with a single tenant with an investment grade credit rating. Under the lease, the tenant is responsible for substantially all obligations related to the property.

Termination of Option to Purchase Las Vegas Boulevard Land

On December 22, 2008, SLVC, a wholly owned subsidiary of Archon Corporation, entered into an Option Agreement with Las Vegas Towers, LLC (“LVT”), a Delaware limited liability company, in which SLVC granted LVT an option to purchase SLVC’s approximately 27-acre parcel of land located at 2600 Las Vegas Boulevard South, Las Vegas, Nevada.

The Option Agreement designated the purchase price to acquire the land at $618.0 million.

Simultaneous with the execution of the Option Agreement, SLVC executed a Contingent Warrant (the “Warrant”) to Purchase Series A Preferred Stock (the “Preferred Stock”), entitling LVT to purchase 60,000 shares of Series A Preferred Stock of SLVC upon terms and conditions set forth in the Warrant. The designation and amount of the Preferred Stock as well as the powers, preferences and relative, participating, optional and other special rights of the shares of the series of this Preferred Stock and the qualifications, limitations or restrictions thereof are set forth in the Certificate of Designation, Preferences and Rights of the Series A Preferred Stock (the “Certificate”) also dated December 22, 2008. Had LVT exercised the Warrant prior to its expiration on April 1, 2009, the Option Agreement would have remained valid until March 31, 2010. LVT failed to exercise the Warrant before its expiration, thus the Option Agreement terminated on March 31, 2009.

Redemption of the Company’s Preferred Stock and Redemption Price Disputes

The Company called all outstanding shares of its Exchangeable Redeemable Preferred Stock for redemption on and as of August 31, 2007, at a redemption price of $5.241 per share, which sum included accrued and unpaid dividends to the date of redemption. From and after August 31, 2007, all shares of the Exchangeable Redeemable Preferred Stock ceased to be outstanding and to accrue dividends. As of February 2, 2010, the holders of 4,259,878 shares of the Exchangeable Redeemable Preferred Stock have surrendered their shares and received payment of the redemption price; while 156,699 shares have yet to be surrendered and still have the right to receive their payment due without interest.

 

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On August 27, 2007, a group of institutional investors filed an action, in Nevada, against the registrant. The Complaint was subsequently amended to add an additional party plaintiff (collectively, the “Plaintiffs”). The Amended Complaint: (i) seeks a finding by the Court that the Company has breached its obligations under the Company’s Certificate of Designation of the Preferred Stock, dated September 30, 1993 (the “Certificate”), and awarding the Plaintiffs full compensation of any and all available damages suffered by the Plaintiffs as a result of the Company’s breach of the Certificate; (ii) seeks a finding by the Court that the Company’s issuance of its redemption notice with an improper redemption price is an anticipatory breach of a material term of the Certificate and awarding the Plaintiffs full compensation of any and all available damages suffered as a result of the Company’s anticipatory breach of the Certificate; (iii) seeks a declaration by the Court that the dividends be properly calculated and compounded per the terms of the Certificate in an amount no less than $7,235,351 up through and including the date of final judgment; (iv) seeks an order from the Court calling for the Company to reimburse the Plaintiffs’ attorneys’ fees, expenses and costs incurred in enforcing their rights; and (v) seeks such other and further relief as the Court may deem appropriate.

The Plaintiffs, thereafter, filed a motion for partial summary judgment, seeking a ruling from the court that the Company breached its obligations under the Certificate of Designation by calculating the redemption price as it did. The Court granted that motion on August 8, 2008, finding the language of the Certificate of Designation to be unambiguous and that the redemption price should have been calculated differently. The Court has not yet issued a monetary judgment against the Company. Subsequent to the Court’s ruling on the motion for partial summary judgment, Plaintiffs filed a motion for entry of final judgment, seeking entry of judgment that the redemption price for the preferred shares should have been $8.69 per share. At the same time, the Company filed a request for certification asking the Court to certify its partial summary judgment order for immediate interlocutory appeal. The Court granted the request for certification and denied the request for entry of final judgment without prejudice. The Company filed a Petition for Permission to Appeal with the Ninth Circuit Court of Appeals and the Ninth Circuit declined to accept the matter for interlocutory review at this time.

The Company has initiated proceedings against a third-party firm concerning that firm’s potential liability related to the drafting of the Certificate of Designation. This third-party action has subsequently been removed by the firm to Federal Court in April, 2009 and is at an early stage of resolution. The third-party has moved to compel arbitration of the dispute. The Magistrate Judge issued an order that the matter be referred to arbitration and the District Court confirmed that order. The Company intends to pursue its claims against the firm in arbitration. The Company is also considering rights and remedies it may have with regard to other parties who participated in the issuance of the Preferred Stock in the event that the Company does not prevail on its interpretation of the Certificate of Designation.

Also, two other holders of the Exchangeable Redeemable Preferred Stock filed Complaints, both alleging essentially the same claim as the first complaint related to the case set forth immediately above. If the plaintiffs in these two additional actions are correct, the redemption price as of August 31, 2007 should have been $8.69 per share and not $5.241 per share as calculated by the Company. If applied to all the then outstanding shares of Exchangeable Redeemable Preferred Stock, including the shares held by the Company’s officers and directors, valuation of the redemption price at $8.69 per share would increase the redemption price in excess of $15.2 million.

Management is unable to estimate the minimum liability that may be incurred, if any, as a result of the outcome of each of these matters and, therefore, has made no provision in the financial statements for liability related to these cases.

 

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Effects of Inflation

The Company has been generally successful in recovering costs associated with inflation through price adjustments in its hotel. Any such future increases in costs associated with casino operations and maintenance of properties may not be completely recovered by the Company.

Private Securities Litigation Reform Act

Certain statements in this Quarterly Report on Form 10-Q which are not historical facts are forward-looking statements, such as statements relating to future operating results, existing and expected competition, financing and refinancing sources and availability and plans for future development or expansion activities, capital expenditures and expansion of business operations into new areas. Such forward-looking statements involve a number of risks and uncertainties that may significantly affect the Company’s liquidity and results in the future and, accordingly, actual results may differ materially from those expressed in any forward-looking statements. Such risks and uncertainties include, but are not limited to, those related to effects of competition, leverage and debt service, general economic conditions, changes in gaming laws or regulations (including the legalization of gaming in various jurisdictions) and risks related to development activities and the startup of non-gaming operations.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss arising from changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity process. Excluding its nonrecourse debt, the Company has total interest-bearing debt at December 31, 2009 of approximately $7.9 million, which bears interest at a variable rate (approximately 6.25% at December 31, 2009). Therefore, the Company maintains certain market rate risk related to this debt. A change in the interest rates of 1% would cause an approximate $0.1 million change in the amount of interest the Company would incur based on the amount of variable-interest rate debt outstanding for any current or future year in which this debt is outstanding. Future borrowings related to this debt will be exposed to this same market rate risk.

The Company holds investments in various available-for-sale securities; however, management believes that exposure to price risk arising from the ownership of these investments is not material to the Company’s consolidated financial position, results of operations or cash flow as historically price fluctuations of these securities have not been material.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures:

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

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Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

As of the end of the period covered by this report, under the supervision and with the participation of management, including our Chief Executive Officer and Principal Accounting Officer, an evaluation of the effectiveness of the Company’s internal control over financial reporting was conducted based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that evaluation, the Company’s management concluded that the Company’s control over financial reporting was effective.

Changes in Internal Controls

As part of our normal operations, we update our internal controls as necessary to accommodate any modifications to our business processes or accounting procedures. There have not been any significant changes in our internal controls or in other factors that materially affected, or are reasonably likely to materially affect these controls as of the end of the period covered by this report.

Limitations on the Effectiveness of Controls

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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ARCHON CORPORATION

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

Mercury Real Estate Securities Fund, LP and Mercury Real Estate Securities Offshore Limited v. Archon Corporation:

The Company called all outstanding shares of its Exchangeable Redeemable Preferred Stock for redemption on and as of August 31, 2007, at a redemption price of $5.241 per share, which sum included accrued and unpaid dividends to the date of redemption. From and after August 31, 2007, all shares of the Exchangeable Redeemable Preferred Stock ceased to be outstanding and to accrue dividends. As of February 2, 2010, the holders of 4,259,878 shares of the Exchangeable Redeemable Preferred Stock have surrendered their shares and received payment of the redemption price; while 156,699 shares have yet to be surrendered and still have the right to receive their payment due without interest.

On August 27, 2007, a group of institutional investors filed an action, in Nevada, against the registrant. The Complaint was subsequently amended to add an additional party plaintiff (collectively, the “Plaintiffs”). The Amended Complaint: (i) seeks a finding by the Court that the Company has breached its obligations under the Company’s Certificate of Designation of the Preferred Stock, dated September 30, 1993 (the “Certificate”), and awarding the Plaintiffs full compensation of any and all available damages suffered by the Plaintiffs as a result of the Company’s breach of the Certificate; (ii) seeks a finding by the Court that the Company’s issuance of its redemption notice with an improper redemption price is an anticipatory breach of a material term of the Certificate and awarding the Plaintiffs full compensation of any and all available damages suffered as a result of the Company’s anticipatory breach of the Certificate; (iii) seeks a declaration by the Court that the dividends be properly calculated and compounded per the terms of the Certificate in an amount no less than $7,235,351 up through and including the date of final judgment; (iv) seeks an order from the Court calling for the Company to reimburse the Plaintiffs’ attorneys’ fees, expenses and costs incurred in enforcing their rights; and (v) seeks such other and further relief as the Court may deem appropriate.

The Plaintiffs, thereafter, filed a motion for partial summary judgment, seeking a ruling from the court that the Company breached its obligations under the Certificate of Designation by calculating the redemption price as it did. The Court granted that motion on August 8, 2008, finding the language of the Certificate of Designation to be unambiguous and that the redemption price should have been calculated differently. The Court has not yet issued a monetary judgment against the Company. Subsequent to the Court’s ruling on the motion for partial summary judgment, Plaintiffs filed a motion for entry of final judgment, seeking entry of judgment that the redemption price for the preferred shares should have been $8.69 per share. At the same time, the Company filed a request for certification asking the Court to certify its partial summary judgment order for immediate interlocutory appeal. The Court granted the request for certification and denied the request for entry of final judgment without prejudice. The Company filed a Petition for Permission to Appeal with the Ninth Circuit Court of Appeals and the Ninth Circuit declined to accept the matter for interlocutory review at this time.

The Company has initiated proceedings against a third-party firm concerning that firm’s potential liability related to the drafting of the Certificate of Designation. This third-party action has subsequently been removed by the firm to Federal Court in April, 2009 and is at an early stage of resolution. The third-

 

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party has moved to compel arbitration of the dispute. The Magistrate Judge issued an order that the matter be referred to arbitration and the District Court confirmed that order. The Company intends to pursue its claims against the firm in arbitration. The Company is also considering rights and remedies it may have with regard to other parties who participated in the issuance of the Preferred Stock in the event that the Company does not prevail on its interpretation of the Certificate of Designation.

Also, two other holders of the Exchangeable Redeemable Preferred Stock filed Complaints, both alleging essentially the same claim as the first complaint related to the case set forth immediately above. If the plaintiffs in these two additional actions are correct, the redemption price as of August 31, 2007 should have been $8.69 per share and not $5.241 per share as calculated by the Company. If applied to all the then outstanding shares of Exchangeable Redeemable Preferred Stock, including the shares held by the Company’s officers and directors, valuation of the redemption price at $8.69 per share would increase the redemption price in excess of $15.2 million.

Management is unable to estimate the minimum liability that may be incurred, if any, as a result of the outcome of each of these matters and, therefore, has made no provision in the financial statements for liability related to these cases.

 

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

None

 

Item 3. Defaults Upon Senior Securities

None

 

Item 4. Submission of Matters to a Vote of Security Holders

None

 

Item 5. Other Information

None

 

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Item 6. Exhibits

a. Exhibits.

 

Exhibit
Number

 

Description of Exhibit

31.1   Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2   Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32   Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ARCHON CORPORATION,

Registrant

By:  

/s/    PAUL W. LOWDEN        

   

Paul W. Lowden

Chairman of the Board, President and

Principal Executive Officer

Date: February 22, 2010

 

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