10-Q 1 c73000e10vq.txt FORM 10-Q FOR QUARTER ENDING SEPTEMBER 30, 2002 UNITED STATES 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 SEPTEMBER 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NO. 1-12030 STRATOSPHERE CORPORATION ------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 88-0292318 -------- ---------- (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2000 LAS VEGAS BOULEVARD SOUTH LAS VEGAS, NEVADA 89104 ----------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (702) 383-5242 -------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY 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 --- --- 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 SECTIONS 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 X NO --- --- INDICATE THE NUMBER OF SHARES OUTSTANDING FOR EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: 2,030,000 AS OF SEPTEMBER 30, 2002. STRATOSPHERE CORPORATION FORM 10-Q INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2002 (UNAUDITED) AND DECEMBER 31, 2001 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 4 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7-9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17 ITEM 4. CONTROLS AND PROCEDURES 17-18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 18-19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19-25

2 CONDENSED CONSOLIDATED BALANCE SHEETS STRATOSPHERE CORPORATION AND SUBSIDIARIES

See notes to condensed consolidated financial statements. 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) STRATOSPHERE CORPORATION AND SUBSIDIARIES

See notes to condensed consolidated financial statements. 4 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) STRATOSPHERE CORPORATION AND SUBSIDIARIES

See notes to condensed consolidated financial statements. 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) STRATOSPHERE CORPORATION AND SUBSIDIARIES

See notes to condensed consolidated financial statements. 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS STRATOSPHERE CORPORATION AND SUBSIDIARIES (1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY The accompanying condensed consolidated financial statements present the financial position, results of operations and cash flows of Stratosphere Corporation and its wholly-owned subsidiaries; Stratosphere Gaming Corp., Stratosphere Land Corporation, Stratosphere Advertising Agency, Stratosphere Leasing, LLC ("Leasing"), 2000 Las Vegas Boulevard Retail Corporation and Stratosphere Development, LLC, as it pertains to the interests of Stratosphere Corporation (collectively the "Company"). The Company operates an integrated casino, hotel and entertainment facility and a 1,149 foot, free-standing observation tower located in Las Vegas, Nevada. PRINCIPLES OF PRESENTATION The condensed consolidated financial statements have been prepared in accordance with the accounting policies described in the Company's 2001 Annual Report on Form 10-K/A. Although the Company believes that the disclosures are adequate to make the information presented not misleading, the Company suggests these financial statements be read in conjunction with the notes to the consolidated financial statements which appear in that report. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments (consisting only of a normal recurring nature) which are necessary for a fair presentation of the results for the interim periods presented. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations of the Securities and Exchange Commission. Interim results are not necessarily indicative of results to be expected for any future interim period or for the entire fiscal year. All significant intercompany accounts and transactions have been eliminated in consolidation. RECLASSIFICATIONS Certain amounts in the 2001 condensed consolidated financial statements have been reclassified to conform to the 2002 presentation. These reclassifications had no effect on the Company's net income. EARNINGS PER SHARE ("EPS") The Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128") in 1997. However, there is no effect on the EPS calculation as all Common Stock and potentially dilutive securities have been canceled as of the Effective Date, October 14, 1998. Pursuant to the Restated Second Amended Plan, 2,030,000 shares of new Common Stock were issued on the Effective Date. There were no potentially dilutive securities as of September 30, 2002. (2) INCOME TAXES The tax effect of significant temporary differences representing deferred tax assets for the Company principally consist of the excess of tax over book basis of assets due to the write down of assets for book purposes. The Company has recorded a valuation allowance at September 30, 2002 related to recorded tax benefits because of the significant uncertainty as to whether such benefits will ever be realized. To the extent realized, benefits remaining from pre-bankruptcy tax attributes will be reported as direct additions to contributed capital. (3) RELATED PARTY TRANSACTIONS Carl C. Icahn related entities own approximately 89.6% of the Company's Common Stock as of September 30, 2002. American Real Estate Holdings Limited Partnership ("AREH") owns 51% of the Company's Common Stock. AREH is the subsidiary limited partnership of American Real Estate Partners L.P. ("AREP"), a master limited partnership whose units are traded on the New York Stock Exchange. Mr. Icahn owns approximately 86% of the outstanding equity interests in AREP. 7 On February 1, 2002, the Company announced that it entered into a merger agreement under which AREH, through an affiliate, will acquire the remaining shares of Stratosphere that AREH does not currently own. AREH currently owns approximately 51% of Stratosphere and Nybor Limited Partnership, an entity affiliated with Mr. Icahn, owns approximately 38.6%. The initial determination to engage in the transaction at the prices set forth below was previously announced by AREP in September 2000. Under the agreement the stockholders who are unaffiliated with Mr. Icahn are to receive a cash price of $45.32 per share, and the Icahn related stockholders (other than AREH) are to receive a cash price of $44.33 per share. AREH is to pay an aggregate of approximately $44.3 million for the Stratosphere shares. On July 3, 2002, the Company paid AREH $730,000 and $125,000 to extend the maturity dates of the promissory notes payable to AREH as discussed in the "Debt" subsection of the "Liquidity and Capital Resources" section of "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" following. Certain employees of the Company provide management and other administrative services to Arizona Charlie's, Inc. and Fresca, LLC d.b.a. Arizona Charlie's East (entities indirectly owned 100% by Mr. Icahn). For the three months ended September 30, 2002, the Company received $234,786 and $164,904 from Arizona Charlie's, Inc. and Arizona Charlie's East, respectively, as reimbursement for these services. For the three months ended September 30, 2001, the Company received $265,613 and $176,944 from Arizona Charlie's, Inc. and Arizona Charlie's East, respectively, as reimbursement for these services. For the nine months ended September 30, 2002, the Company received $685,846 and $589,825 from Arizona Charlie's, Inc. and Arizona Charlie's East, respectively, as reimbursement for these services. For the nine months ended September 30, 2001, the Company received $433,187 and $458,314 from Arizona Charlie's, Inc. and Arizona Charlie's East, respectively, as reimbursement for these services. These amounts are reflected as a reduction in selling, general and administrative expenses on the Statement of Operations. Pursuant to wholesale tour and travel agreements with Maupintour Holding, LLC and Maupintour, LLC (companies owned by Mr. Icahn), the Company recorded hotel revenues of $21,902 and $175,281 during the three months ended September 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002 and 2001, the Company recorded hotel revenues of $118,492 and $484,212, respectively, from Maupintour Holding, LLC and Maupintour, LLC. (4) CONTINGENCIES The Company has filed a complaint for the avoidance of preferential transfers made to Grand Casinos, Inc. ("Grand"). Included in the complaint are approximately $5.9 million of payments made to Grand prior to the Company beginning bankruptcy proceedings. Trial was conducted on June 20 and June 21, 2002 and the matter is currently under submission. The Company is awaiting the Court's decision. At December 31, 2001 and September 30, 2002, the Company classified preferential transfers of $2.3 million as an Other Receivable on the Consolidated Balance Sheet. On January 31, 2001, the Company was named in an action styled Disabled Rights Action Committee v. Stratosphere Gaming Corp., Case No A430070, in the Eighth Judicial District Court of the State of Nevada. The complaint alleges a number of violations of the Americans with Disabilities Act ("ADA"), including inadequate room selection, door widths and other similar items. Simultaneously with the complaint, plaintiffs filed a Motion for Preliminary Injunction, seeking to have construction halted on the new hotel tower until the property fully complies with the ADA. The Company removed the action to the United States District Court in Nevada, and it is now styled Disabled Rights Action Committee v. Stratosphere Gaming Corp., Case No. CV-S-01-0162-RLH (PAL). The federal district court held a hearing on plaintiffs' Motion for Preliminary Injunction and denied the motion, focusing upon what the Court believed to be the plaintiffs' lack of irreparable injury. The federal district court also granted the Company's Motion to Dismiss the plaintiffs' state law claims, leaving in place only the ADA claims. The Company and the Plaintiffs then filed Motions for Summary Judgment. The District Court granted and denied in part each of the parties' respective motions. The Court ordered that the Company must make certain renovations to 532 rooms that were opened in 1996. The Court issued an injunction requiring that these renovations be completed by August 9, 2002. The Company has appealed the injunction based on its belief that the plaintiffs lack standing. The Company had already commenced these renovations prior to the Court's Order and completed these renovations in June, 2002. On April 5, 2002, plaintiffs filed a motion seeking attorney's fees of approximately $50,000. The Company opposed the motion on the basis the fees sought were 8 excessive. The court agreed and awarded the plaintiffs $8,305 in fees and costs. The plaintiffs have appealed that award. The matter of the legal fees was settled by agreement of the parties. Tiffiny Decorating Company ("Tiffiny"), a subcontractor to Great Western Drywall ("Great Western"), filed a legal action against Stratosphere Corporation, Stratosphere Development, LLC, American Real Estate Holdings Limited Partnership (Stratosphere Corporation, Stratosphere Development, LLC and American Real Estate Holdings Limited Partnership are herein collectively referred to as the "Stratosphere Parties"), Great Western, Nevada Title and Safeco Insurance, Case No. A443926 in the Eighth Judicial District Court of the State of Nevada. The legal action asserts claims that include breach of contract, unjust enrichment and foreclosure of lien. The Stratosphere Parties have filed a cross-claim against Great Western in that action. Additionally, Great Western has filed a separate legal action against the Stratosphere Parties setting forth the same disputed issues. That separate action, Case No. A448299 in the Eighth Judicial Court of the State of Nevada, has been consolidated with the case brought by Tiffiny. The initial complaint brought by Tiffiny asserts that Tiffiny performed certain services on construction at the Stratosphere and was not fully paid for those services. Tiffiny claims the sum of $521,562 against Great Western, the Stratosphere Parties, and the other defendants, which the Stratosphere Parties contend have been paid to Great Western for payment to Tiffiny. Great Western is alleging that it is owed payment from the Stratosphere Parties for work performed and for delay and disruption damages. Great Western is claiming damages in the sum of $3,935,438 plus interest, costs and legal fees from the Stratosphere Parties. This amount apparently includes the Tiffiny claim. The Stratosphere Parties have evaluated the project and have determined that the amount of $1,004,059, of which $195,953 and $371,973 were disbursed on October 29, 2002 to Tiffiny and Great Western, respectively, is properly due and payable to satisfy all claims for the work performed, including the claim by Tiffiny. The remaining amount has been segregated in a separate interest bearing account and is classified in Accounts Payable - Construction on the Consolidated Balance Sheet. The Early Case Conference in the Tiffiny case has already been concluded and initial documents and witnesses have been exchanged which has been the discovery to date, however, it is not possible to give an opinion as to probable outcome of the action. The case will proceed with discovery from this point forward until such time as a resolution is reached or the matter is brought to trial. The matter has been preliminarily set for trial on April 14, 2003. The Stratosphere Parties intend to vigorously defend the action for claims in excess of $1,004,059. In addition, in the ordinary course of business, the Company is party to various legal actions. In management's opinion, the ultimate outcome of such legal actions will not have a material effect on the results of operations or the financial position of the Company. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties. The actual results of the Company could differ materially from the Company's historical results of operations and those discussed in the forward-looking statements. OVERVIEW The Company operates an integrated casino, hotel and entertainment facility and a 1,149 foot, free-standing observation tower in Las Vegas, Nevada. As of September 30, 2002, the operations included 1,505 slot machines, 48 table games, a race and sports book, keno lounge, 2,444 hotel rooms and seven theme restaurants. In June 2001 the Company completed construction of the new hotel tower that includes 1,000 new guestrooms and amenities including a 67,000-square foot pool and recreation area with a new snack and cocktail bar, private cabanas and a large spa (the "Hotel Expansion"). "Lucky's Cafe" a 350-seat coffee shop, a new porte-cochere and valet parking entrance, gift shop and new tour bus entrance and lobby have also been completed. The Company refurbished and expanded the "Stratosphere Courtyard Buffet" as well as remodeled "Montana's Steak House" and converted it into the "Crazy Armadillo" featuring Tex-Mex cuisine and an oyster bar. CRITICAL ACCOUNTING POLICIES The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes its estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions. CASINO REVENUES AND PROMOTIONAL ALLOWANCES During the first quarter, 2001, the Emerging Issues Task Force reached a consensus on the portion of Issue 00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future," which addressed the income statement classification of the value of the points redeemable for cash awarded under point programs similar to the Company's Player's Club and Guaranteed Refund programs. The consensus states the cost of these programs should be reported as a contra-revenue, rather than an expense and is retroactive to January 1, 2001, with prior year restatement required. The Company has adopted the current consensus recommendations on Issue 00-22. Debate continues on a number of other facets of Issue 00-22, which may have an impact on the presentation of the Company's financial statements. The Company recognizes revenues in accordance with industry practice. Casino revenue is the net win from gaming activities (the difference between gaming wins and losses). Casino revenues are net of accruals for anticipated payouts of progressive and certain other slot machine jackpots. Revenues include the retail value of rooms, food and beverage and other items that are provided to customers on a complimentary basis. A corresponding amount is deducted as promotional allowances. RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or a group of assets may not be recoverable. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company deems an asset to be impaired if a forecast of undiscounted future operating cash flows directly related to the asset, including disposal value if any, is less than its carrying amount. If an asset is determined to be impaired, the loss is measured as the amount by which 10 the carrying amount of the asset exceeds fair value. The Company generally estimates fair value by discounting estimated cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. RESULTS OF OPERATIONS COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 REVENUES Casino revenues increased $.7 million (5%) from $17.0 million for the third quarter, 2001 to $17.7 million for the third quarter, 2002. Revenues from table games increased $.3 million (6%) from $4.5 million for the third quarter, 2001 to $4.8 million for the third quarter, 2002. The Company's win percentage for table games increased 1.3 percentage points (7%) from 18.9% for the third quarter, 2001 to 20.2% for the third quarter, 2002. The increased win percentage and increased customer play resulting from the completion of the 1,000 additional rooms associated with the Hotel Expansion at the end of June, 2001 contributed equally to the table games revenue increase. Revenues from slots increased $.3 million (2%) from $12.3 million for the third quarter, 2001 to $12.6 million for the third quarter, 2002. Casino revenues represented 40% and 39% of total gross revenues for the third quarters ended September 30, 2002 and 2001, respectively. Hotel revenues decreased $.2 million (2%) from $9.6 million for the third quarter, 2001 to $9.4 million for the third quarter, 2002. The average daily rate ("ADR") decreased $1 (3%) from $46 during the third quarter, 2001 to $45 during the third quarter, 2002. Room occupancy decreased 1.1 percentage points (1%) from 94.6% during the third quarter, 2001 to 93.5% for the third quarter, 2002. Management attributes the decrease in ADR and occupancy percentage to uncertain general economic conditions and increased competition from high-end casinos and hotels who have entered the mid-level casino customer market as a result of the September 11, 2001 terrorist attacks and the recent economic downturn. Hotel revenues represented 21% and 22% of total gross revenues for the third quarters ended September 30, 2002 and 2001, respectively. Food and beverage revenues increased $.3 million (3%) from $9.8 million for the third quarter, 2001 to $10.1 million for the third quarter, 2002. Food and beverage revenues increased during the third quarter as a result of increased guest volume brought about by the completion of the 1,000 rooms associated with the Hotel Expansion. Food and beverage revenues represented 22% and 23% of total gross revenues for the third quarters ended September 30, 2002 and 2001, respectively. Tower, retail and other income increased $.6 million (8%) from $6.9 million for the third quarter, 2001 to $7.5 million for the third quarter, 2002. Tower revenues increased $.4 million (14%) from $3.4 million for the third quarter, 2001 to $3.8 million for the third quarter, 2002. Tower visitations (including Top of the World dining) decreased 2,575 (1%) from 474,981 for the third quarter, 2001 to 472,406 for the third quarter, 2002. Management expects revenues from the Tower to decrease as visitors who have previously visited the Tower choose to experience other Las Vegas attractions and entertainment options. Management is investigating options to increase Tower revenues including, but not limited to, adding new thrill rides to the Tower. Entertainment revenues increased $.2 million (13%) from $1.4 million for the third quarter, 2001 to $1.6 million for the third quarter, 2002. Retail revenues decreased $.1 million (8%) from $1.1 million during the third quarter, 2001 to $1.0 million for the third quarter, 2002. Management expects retail revenues to decrease as leases associated with the Retail Center have been, and will continue to be, negotiated at lower rent rates in order to maintain tenant occupancy. Additionally, in July 2001, Leasing entered into an agreement with Tower Merchandise Management, LLC ("TMM") to lease the Stratosphere gift shops located in various places throughout the hotel property. TMM had been managing the operation of these shops since April 1996. Other revenues decreased $.2 million (14%) from $1.1 million for the third quarter, 2001 to $.9 million for the third quarter, 2002. Tower, retail and other revenues represented 17% and 16% of total gross revenues for the third quarters ended September 30, 2002 and 2001, respectively. Promotional allowances decreased $.3 million (7%) from $3.8 million for the third quarter, 2001 to $3.5 million for the third quarter, 2002. Management anticipates promotional allowances will increase in future periods with an increase in the number of hosted players, direct marketing efforts and special event offers targeting casino guests. 11 Management anticipates the fourth quarter, 2002 revenues may be improved when compared to the fourth quarter, 2001 because the fourth quarter, 2001 was severely impacted by the September 11, 2001 terrorist attacks. COSTS AND EXPENSES Casino operating expenses increased $.1 million (1%) from $9.1 million for the third quarter, 2001 to $9.2 million for the third quarter, 2002. Hotel operating expenses increased $.4 million (11%) from $4.0 million for the third quarter, 2001 to $4.4 million for the third quarter, 2002. Payroll increased $.3 million due to increased benefit expenses. Food and beverage costs have decreased $.2 million (3%) from $7.4 million for the third quarter, 2001 to $7.2 million for the third quarter, 2002. Other operating expenses remained flat at $3.3 million for the third quarter, 2001 and 2002. As a result of producing more shows in the Outdoor Events Center, entertainment fees have increased $.1 million (14%) from $.8 million for the third quarter, 2001 to $.9 million for the third quarter, 2002. Depreciation and amortization expenses have increased $1 million (42%) from $2.3 million for the third quarter, 2001 to $3.3 million for the third quarter, 2002. Management attributes the increase to the depreciation and amortization of the retail mall assets over the remaining lease life of the current tenants and the depreciation of the Hotel Expansion completed in late June 2001. Approximately 1,050 employees working in kitchen production, food service, slot service, bell service, housekeeping, and beverage service are currently covered by a collective bargaining agreement between Stratosphere Gaming Corporation and the Culinary Workers Union Local 226 and the Bartenders Union Local 165 (the "Unions"). This agreement had been in effect since June 1, 1997 and expired on May 31, 2002. On June 10, 2002, Stratosphere Gaming Corporation and the Unions agreed to a tentative agreement, which was subsequently ratified by the majority of the membership. Stratosphere and the Unions are currently in the process of finalizing the language of the new agreement. The new agreement was retroactive to June 1, 2002 and will expire on May 31, 2007 and provides for an increase in benefits of $.685 per hour worked or paid during the first year. Future increases are $.60, $.65, $.65 and $.65 per hour worked or paid for the years beginning June 1, 2003, 2004, 2005, and 2006, respectively. In addition, work rules and productivity standards were agreed to with respect to guestroom attendants and their daily room quotas. At current staffing and work levels, this new agreement is expected to increase payroll and related expenses $1.0 million for the 2002 fiscal year. Payroll and related expenses are anticipated to increase $1.5 million, $1.5 million, $1.6 million, $1.6 million and $.7 million for years 2003, 2004, 2005, 2006 and first half, 2007, respectively, as a result of this new agreement at current staffing and work levels. OTHER FACTORS IMPACTING EARNINGS Interest income decreased $.1 million (61%) from $.2 million for the third quarter, 2001 to $.1 million during the third quarter, 2002 due to lower interest rates from banking and financial institutions. Interest expense decreased $.5 million (30%) from $1.6 million for the third quarter, 2001 to $1.1 million during the third quarter, 2002. Interest from the Company's note associated with the purchase of the retail mall and interest expenses associated with the Capital Lease each decreased $.1 million. Interest expense associated with the $73.0 million Note Payable to AREH used to finance the Hotel Expansion was $.9 million during the third quarter, 2002. Interest associated with this note was capitalized as part of the construction costs during the second quarter, 2001. Amortization of debt issuance cost also increased interest expense by $.1 million. 12 COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 REVENUES Casino revenues increased $5.5 million (12%) from $44.6 million for the nine months ended September 30, 2001 to $50.1 million for the nine months ended September 30, 2002. Revenues from table games increased $2.1 million (18%) from $11.6 million for the nine months ended September 30, 2001 to $13.7 million for the nine months ended September 30, 2002. The Company's win percentage for table games increased 1.1 percentage points (6%) from 17.9% for the nine months ended September 30, 2001 to 19.0% for the nine months ended September 30, 2002. The increased win percentage and increased customer play resulting from the completion of the 1,000 additional rooms associated with the Hotel Expansion at the end of June, 2001 contributed 30% and 70%, respectively, to the table games revenue increase. Revenues from slots increased $3.8 million (12%) from $32.3 million for the nine months ended September 30, 2001 to $36.1 million for the nine months ended September 30, 2002. Management attributes the increased slot revenues to increased customer play resulting from the completion of the 1,000 rooms associated with the Hotel Expansion. Race and Sports book revenues decreased $.4 million from $.5 million for the nine months ended September 30, 2001 to $.1 million for the nine months ended September 30, 2002. The Company experienced an unexpected sports book loss of $.6 million related to the 2002 National Football League Superbowl. Casino revenues represented 39% of total gross revenues for the nine months ended September 30, 2002 and 2001. Hotel revenues increased $5.7 million (26%) from $22.6 million for the nine months ended September 30, 2001 to $28.3 million for the nine months ended September 30, 2002. The average daily rate ("ADR") remained at $48 during the nine months ended September 30, 2001 and 2002. However, room occupancy decreased 6.6 percentage points (7%) from 96.6% during the nine months ended September 30, 2001 to 90.0% for the nine months ended September 30, 2002. The increase in hotel revenues is directly attributed to the increased room capacity brought about by the Hotel Expansion. Management attributes the decrease in the occupancy percentage to uncertain general economic conditions and increased competition from high-end casinos and hotels who have entered the mid-level casino customer market as a result of the September 11, 2001 terrorist attacks and the recent economic downturn. Hotel revenues represented 22% and 20% of total gross revenues for the nine months ended September 30, 2002 and 2001, respectively. Food and beverage revenues increased $2.3 million (9%) from $27.4 million for the nine months ended September 30, 2001 to $29.7 million for the nine months ended September 30, 2002. Food and beverage revenues increased during the third quarter as a result of increased guest volume brought about by the completion of the 1,000 rooms associated with the Hotel Expansion. Food and beverage revenues represented 23% of total gross revenues for the nine months ended September 30, 2002 and 2001. Tower, retail and other income decreased $1.2 million (6%) from $21 million for the nine months ended September 30, 2001 to $19.8 million for the nine months ended September 30, 2002. Tower revenues increased $.2 million (2%) from $9.9 million for the nine months ended September 30, 2001 to $10.1 million for the nine months ended September 30, 2002. Tower visitations (including Top of the World dining) decreased 134,896 (9%) from 1,455,601 for the nine months ended September 30, 2001 to 1,320,705 for the nine months ended September 30, 2002. Management expects revenues from the Tower to decrease as visitors who have previously visited the Tower choose to experience other Las Vegas attractions and entertainment options. Management is investigating options to increase Tower revenues including, but not limited to, adding new thrill rides to the Tower. Entertainment revenues increased $.3 million (9%) from $3.9 million for the nine months ended September 30, 2001 to $4.2 million for the nine months ended September 30, 2002. Retail revenues decreased $2.1 million (46%) from $4.6 million during the nine months ended September 30, 2001 to $2.5 million for the nine months ended September 30, 2002. Management expects retail revenues to decrease as leases associated with the Retail Center have been, and will continue to be, negotiated at lower rent rates in order to maintain tenant occupancy. Additionally, in July 2001, Leasing entered into an agreement with Tower Merchandise Management, LLC ("TMM") to lease the Stratosphere gift shops located in various places throughout the hotel property. TMM had been managing the operation of these shops since April 1996. Retail revenues, as a result of this transaction, decreased $2.1 million (46%) from $4.6 million for the nine months ended September 30, 2001 to $2.5 million for the nine months ended September 30, 2002. Other revenues remained flat at $2.6 million for the nine months ended September 30, 2001 and 2002. Tower, retail and other revenues represented 16% and 18% of total gross revenues for the nine months ended September 30, 2002 and 2001, respectively. 13 Promotional allowances increased $.7 million (6%) from $10.1 million for the nine months ended September 30, 2001 to $10.8 million for the nine months ended September 30, 2002. The increase in promotion allowances was the result of more direct mail promotions that include room, food and beverage being offered to guests on a complimentary basis. Complimentary rooms, food and beverage given to hosted players also contributed to the increase in promotional allowances. Management anticipates promotional allowances will increase in future periods with an increase in the number of hosted players, direct marketing efforts and special event offers targeting casino guests. Management anticipates the fourth quarter, 2002 revenues may be improved when compared to the fourth quarter, 2001 because fourth quarter, 2001 was severely impacted by the September 11, 2001 terrorist attacks. COSTS AND EXPENSES Casino operating expenses increased $2.4 million (10%) from $24.0 million for the nine months ended September 30, 2001 to $26.4 million for the nine months ended September 30, 2002. The Company's slot lease, payroll and gaming tax expenses increased $.7 million (25%), $1.0 million (9%) and $.3 million (9%), respectively, as a result of increased casino play. Beginning in April 2002, the Company has reduced the number of participation slot machines on the casino floor in order to reduce slot lease expense. The costs associated with providing casino guests additional room nights on a complimentary basis and non-cash promotional expenses increased $.9 million. Because of this increase, management is reevaluating the number and amount of complimentary room nights and promotional items being offered to lower-tiered casino and hotel guests. Hotel operating expenses increased $2.5 million (27%) from $9.4 million for the nine months ended September 30, 2001 to $11.9 million for the nine months ended September 30, 2002. Payroll and supplies expenses increased $2.3 million (24%) and $.3 million (18%), respectively, due to the additional 1,000 rooms associated with the Hotel Expansion. The increased costs of providing guests with complimentary room nights have been charged to casino and marketing operations. As a result, hotel complimentary expense decreased $.2 million. Food and beverage costs have increased $1.2 million (6%) from $19.9 million for the nine months ended September 30, 2001 to $21.1 million for the nine months ended September 30, 2002. Cost of sales and payroll expenses increased $.5 million (6%) and $.7 million (5%), respectively. Management attributes this increase to increased guest volume brought about by the completion of the 1,000 rooms and new restaurants associated with the Hotel Expansion. Other operating expenses decreased $1.2 million (11%) from $10.3 million for the nine months ended September 30, 2001 to $9.1 million for the nine months ended September 30, 2002. In July 2001, Leasing entered into an agreement with Tower Merchandise Management, LLC ("TMM") to lease the Stratosphere gift shops located in various places throughout the hotel property. TMM had been managing the operation of these shops since April 1996. Retail expenses, as a result of this transaction, decreased $1.6 million (100%) from $1.6 million for the nine months ended September 30, 2001 to $-0- for the nine months ended September 30, 2002. These retail expense savings will discontinue in the third quarter, 2002 indefinitely. Also, as a result of producing more shows in the Outdoor Events Center, entertainment fees have increased $.4 million (18%) from $2.3 million for the nine months ended September 30, 2001 to $2.7 million for the nine months ended September 30, 2002. Depreciation and amortization expenses have increased $3.0 million (42%) from $7.0 million for the nine months ended September 30, 2001 to $10.0 million for the nine months ended September 30, 2002. Management attributes the increase to the depreciation and amortization of the retail mall assets over the remaining lease life of the current tenants and the depreciation of the Hotel Expansion completed in late June 2001. Approximately 1,050 employees working in kitchen production, food service, slot service, bell service, housekeeping, and beverage service are currently covered by a collective bargaining agreement between 14 Stratosphere Gaming Corporation and the Culinary Workers Union Local 226 and the Bartenders Union Local 165 (the "Unions"). This agreement had been in effect since June 1, 1997 and expired on May 31, 2002. On June 10, 2002, Stratosphere Gaming Corporation and the Unions agreed to a tentative agreement, which was subsequently ratified by the majority of the membership. Stratosphere and the Unions are currently in the process of finalizing the language of the new agreement. The new agreement was retroactive to June 1, 2002 and will expire on May 31, 2007 and provides for an increase in benefits of $.685 per hour worked or paid during the first year. Future increases are $.60, $.65, $.65 and $.65 per hour worked or paid for the years beginning June 1, 2003, 2004, 2005, and 2006, respectively. In addition, work rules and productivity standards were agreed to with respect to guestroom attendants and their daily room quotas. At current staffing and work levels, this new agreement is expected to increase payroll and related expenses $1.0 million for the 2002 fiscal year. Payroll and related expenses are anticipated to increase $1.5 million, $1.5 million, $1.6 million, $1.6 million and $.7 million for years 2003, 2004, 2005, 2006 and first half, 2007, respectively, as a result of this new agreement at current staffing and work levels. OTHER FACTORS IMPACTING EARNINGS Interest income decreased $.5 million (58%) from $.8 million for the nine months ended September 30, 2001 to $.3 million during the nine months ended September 30, 2002 due to lower interest rates from banking and financial institutions. Interest expense increased $1.4 million (57%) from $2.5 million for the nine months ended September 30, 2001 to $3.9 million during the nine months ended September 30, 2002. Interest from the Company's note associated with the purchase of the retail mall and interest expenses associated with the Capital Lease decreased $.3 million and $.2 million, respectively. Interest expense associated with the $73.0 million Note Payable to AREH used to finance the Hotel Expansion was $2.7 million during the nine months ended September 30, 2002. Interest associated with this note was capitalized as part of the construction costs during the six months ended June 30, 2001. Amortization of debt issuance cost also increased interest expense by $.4 million. LIQUIDITY AND CAPITAL RESOURCES DEBT On May 1, 2001, the Company delivered a $73.0 million promissory note for a construction loan to AREH in order to finance the construction of the Hotel Expansion. The promissory note is secured by a deed of trust on the real property occupied by Stratosphere. In November 2001 the Company began making principal payments on the loan in equal monthly installments based on a twenty (20) year amortization schedule and continuing through and including June 2002 when the remaining balance shall be due. Interest accrues at a variable rate per annum equal to the sum of (i) three hundred (300) basis points plus (ii) the 90 day London Interbank Offered Rate ("LIBOR"). This interest rate at September 30, 2002 was 4.83%. The Company paid AREH one point or $730,000 on July 3, 2001 for this loan. On July 3, 2002, the Company paid an additional $730,000 to obtain a twenty-four (24) month extension of the loan term. On May 1, 2001, the Company delivered a $12.5 million promissory note to AREH to replace the $12.5 million demand note used to acquire the property under the Master Lease from Strato-Retail, LLC. The promissory note is secured by a deed of trust on the real property occupied by Stratosphere. In November 2001 the Company began making principal payments on the loan in equal installments based on a twenty (20) year amortization schedule and continuing through and including July 8, 2002, when the remaining balance shall be due. Interest accrues at a variable rate per annum equal to the sum of (i) three hundred fifty (350) basis points plus (ii) the 90 day LIBOR. This interest rate at September 30, 2002 was 5.33%. The Company paid AREH one point or $125,000 on May 4, 2001 for this loan. On July 3, 2002, the Company paid an additional $125,000 to obtain a twelve (12) month extension of the loan term. On May 28, 1999, the Company entered into a $10.0 million capital lease ("New Capital Lease Obligation") in which certain existing gaming and other equipment was financed over a thirty-six month period. Interest was calculated based on the LIBOR rate for each period plus 2.5%. On May 23, 2002, the Company paid the final installment, which included a $2.0 million balloon payment, to complete the terms of the lease. 15 CASH FLOW, WORKING CAPITAL AND CAPITAL EXPENDITURES The Company had unrestricted cash balances of $34.5 million as of September 30, 2002. The Company has relied on unrestricted cash balances and its ability to generate cash flow from operations to fund its working capital needs. During the nine months ended September 30, 2002, the Company generated $17.4 million in cash flows from operating activities. These funds were used to pay $3.2 million on notes to related parties, $3.1 million for payments on the capital lease, $3.5 million for property, equipment and construction costs and $.8 million to fund restricted investments. As of September 30, 2002, the Company had approximately $1.9 million accrued for unsecured disputed claims related to the Restated Second Amended Plan. The $1.9 million estimated accrual for unsecured disputed claims is included in other accrued expenses on the accompanying September, 2002 Condensed Consolidated Balance Sheet. Additional payments required, if any, will be made from restricted cash and/or investment balances. Management believes that existing cash balances and operating cash flow will provide the Company with sufficient resources to fund its working capital needs, existing debt obligations and foreseeable capital expenditure requirements. OTHER On March 8, 2000, California residents voted to expand Native American gaming operations within that state. The Native American gaming expansion could result in up to 43,000 slot machines on 57 tribal reservations. The Company estimates that approximately 35% of its hotel occupancy are from guests traveling from southern California. The potential proliferation of gaming in southern California could have a material adverse effect on the Company's business. PRIVATE SECURITIES LITIGATION REFORM ACT The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Form 10-Q and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contains statements that are forward-looking, such as statements relating to plans for future expansion, future construction costs and other business development activities as well as other capital spending, financing sources and the effects of regulation (including gaming and tax regulation) and competition. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to development and construction activities, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, changes in federal or state tax laws or the administration of such laws and changes in gaming laws or regulations (including the legalization of gaming in certain jurisdictions). ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The Company's debt obligations are subject to interest rate risk. The interest rates under these obligations are based on LIBOR plus applicable margins. As interest rates fluctuate, the Company will experience changes in interest expense. The Company has not entered into any interest rate swap agreements, or similar instruments, to protect against the risk of interest rate fluctuations. The fair value of the Company's long-term debt approximates carrying values. Assuming the current level of borrowings, if interest rates increased 100 basis points, interest expense on the Company's debt obligations at September 30, 2002 would increase $.8 million during the next 12 months. 16 ITEM 4. CONTROLS AND PROCEDURES As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's management, including our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. 17 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company has filed a complaint for the avoidance of preferential transfers made to Grand Casinos, Inc. ("Grand"). Included in the complaint are approximately $5.9 million of payments made to Grand prior to the Company beginning bankruptcy proceedings. Trial was conducted on June 20 and June 21, 2002 and the matter is currently under submission. The Company is awaiting the Court's decision. At December 31, 2001 and September 30, 2002, the Company classified preferential transfers of $2.3 million as an Other Receivable on the Consolidated Balance Sheet. On January 31, 2001, the Company was named in an action styled Disabled Rights Action Committee v. Stratosphere Gaming Corp., Case No A430070, in the Eighth Judicial District Court of the State of Nevada. The complaint alleges a number of violations of the Americans with Disabilities Act ("ADA"), including inadequate room selection, door widths and other similar items. Simultaneously with the complaint, plaintiffs filed a Motion for Preliminary Injunction, seeking to have construction halted on the new hotel tower until the property fully complies with the ADA. The Company removed the action to the United States District Court in Nevada, and it is now styled Disabled Rights Action Committee v. Stratosphere Gaming Corp., Case No. CV-S-01-0162-RLH (PAL). The federal district court held a hearing on plaintiffs' Motion for Preliminary Injunction and denied the motion, focusing upon what the Court believed to be the plaintiffs' lack of irreparable injury. The federal district court also granted the Company's Motion to Dismiss the plaintiffs' state law claims, leaving in place only the ADA claims. The Company and the Plaintiffs then filed Motions for Summary Judgment. The District Court granted and denied in part each of the parties' respective motions. The Court ordered that the Company must make certain renovations to 532 rooms that were opened in 1996. The Court issued an injunction requiring that these renovations be completed by August 9, 2002. The Company has appealed the injunction based on its belief that the plaintiffs lack standing. The Company had already commenced these renovations prior to the Court's Order and completed these renovations in June, 2002. On April 5, 2002, plaintiffs filed a motion seeking attorney's fees of approximately $50,000. The Company opposed the motion on the basis the fees sought were excessive. The court agreed and awarded the plaintiffs $8,304.67 in fees and costs. The plaintiffs have appealed that award. The matter of the legal fees was settled by agreement of the parties. Tiffiny Decorating Company ("Tiffiny"), a subcontractor to Great Western Drywall ("Great Western"), filed a legal action against Stratosphere Corporation, Stratosphere Development, LLC, American Real Estate Holdings Limited Partnership (Stratosphere Corporation, Stratosphere Development, LLC and American Real Estate Holdings Limited Partnership are herein collectively referred to as the "Stratosphere Parties"), Great Western, Nevada Title and Safeco Insurance, Case No. A443926 in the Eighth Judicial District Court of the State of Nevada. The legal action asserts claims that include breach of contract, unjust enrichment and foreclosure of lien. The Stratosphere Parties have filed a cross-claim against Great Western in that action. Additionally, Great Western has filed a separate legal action against the Stratosphere Parties setting forth the same disputed issues. That separate action, Case No. A448299 in the Eighth Judicial Court of the State of Nevada, has been consolidated with the case brought by Tiffiny. The initial complaint brought by Tiffiny asserts that Tiffiny performed certain services on construction at the Stratosphere and was not fully paid for those services. Tiffiny claims the sum of $521,562 against Great Western, the Stratosphere Parties, and the other defendants, which the Stratosphere Parties contend have been paid to Great Western for payment to Tiffiny. Great Western is alleging that it is owed payment from the Stratosphere Parties for work performed and for delay and disruption damages. Great Western is claiming damages in the sum of $3,935,438 plus interest, costs and legal fees from the Stratosphere Parties. This amount apparently includes the Tiffiny claim. The Stratosphere Parties have evaluated the project and have determined that the amount of $1,004,059, of which $195,953 and $371,973 were disbursed on October 29, 2002 to Tiffiny and Great Western, respectively, is properly due and payable to satisfy all claims for the work performed, including the claim by Tiffiny. The remaining amount has been segregated in a separate interest bearing account and is classified in Accounts Payable - Construction on the Consolidated Balance Sheet. The Early Case Conference in the Tiffiny case has already been concluded and initial documents and witnesses have been exchanged which has been the discovery to date, however, it is not possible to give an opinion as to 18 probable outcome of the action. The case will proceed with discovery from this point forward until such time as a resolution is reached or the matter is brought to trial. The matter has been preliminarily set for trial on April 14, 2003. The Stratosphere Parties intend to vigorously defend the action for claims in excess of $1,004,059. In addition, in the ordinary course of business, the Company is party to various legal actions. In management's opinion, the ultimate outcome of such legal actions will not have a material effect on the results of operations or the financial position of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002). 99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002). (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the fiscal quarter ended September 30, 2002. 19 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. STRATOSPHERE CORPORATION Registrant Date: November 13, 2002 By: /s/ Richard P. Brown ------------------------------------- Name: Richard P. Brown Title: President By: /s/ Denise Barton ------------------------------------- Name: Denise Barton Title: Chief Financial Officer 20 FORM OF SECTION 302 CERTIFICATION I, Richard P. Brown, President of Stratosphere Corporation (the "Registrant"), certify that: (1) I have reviewed this quarterly report on Form 10Q of Stratosphere Corporation; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly represent in all material respects the financial condition, results of operations and cash flows of the registrant as of , and for, the periods presented in this quarterly report; (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; (6) The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By: /s/ Richard P. Brown --------------------------------- Name: Richard P. Brown Title: President 21 FORM OF SECTION 302 CERTIFICATION I, Denise Barton, Chief Financial Officer of Stratosphere Corporation (the "Registrant"), certify that: (1) I have reviewed this quarterly report on Form 10Q of Stratosphere Corporation; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly represent in all material respects the financial condition, results of operations and cash flows of the registrant as of , and for, the periods presented in this quarterly report; (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; (6) The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By: /s/ Denise Barton --------------------------------- Name: Denise Barton Title: Chief Financial Officer 22 EXHIBIT INDEX STRATOSPHERE CORPORATION Exhibit Number ------- (a) Exhibits 99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002). 99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002). (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the fiscal quarter ended September 30, 2002. 23

STRATOSPHERE CORP 10-Q