**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| ý | **QUARTERLY****REPORT****PURSUANT TO  SECTION 13****OR 15(d) OF****THE SECURITIES EXCHANGE ACT****OF****1934** |
|--------|----------------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended DECEMBER 31, 2001**

 

| **o** | **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**

(Exactname of registrant as specified in its charter)

 

| **Nevada**                                                                          |   | **88-0304348**                        |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization)                     |   | (I.R.S.  Employer Identification No.) |
|                                                                                |   |                                  |
| **3993 Howard Hughes Parkway, Suite 630, Las Vegas,  Nevada  89030**           |
| (Address  of principal executive offices 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 check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past90 days. 

ý Yes    oNo

 

APPLICABLEONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGSDURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documentsand reports required to be filed by Sections 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court.

o Yes    o No

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

| 6,153,256 | as  of | February  14, 2002 |
|-----------|--------|--------------------|

 

 

**ARCHON CORPORATION**

 

**INDEX**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                |
|--------------|--------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                     |
| ITEM 1       | Consolidated  Condensed Financial Statements                                                                             |
|         |                                                                                                                     |
|         | Consolidated Condensed  Balance Sheets (Unaudited) December 31, 2001 and September 30, 2001                              |
|         |                                                                                                                     |
|         | Consolidated  Condensed Statements Of Operations (Unaudited) for the three months ended  December 31, 2001 and 2000      |
|         |                                                                                                                     |
|         | Consolidated  Condensed Statement Of Stockholders’ Equity (Unaudited) for the three months  ended December 31, 2001 |
|         |                                                                                                                     |
|         | Consolidated  Condensed Statements Of Cash Flows (Unaudited) for the three months ended  December 31, 2001 and 2000      |
|         |                                                                                                                     |
|         | Notes  To Consolidated Condensed Financial Statements (Unaudited)                                                        |
|         |                                                                                                                     |
| ITEM  2      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              |
|         |                                                                                                                     |
| ITEM 3       | Market Risk  Disclosure                                                                                                  |
|         |                                                                                                                     |
| **PART II.** | **OTHER INFORMATION**                                                                                                    |

 

1

----

 

**Archon Corporation and Subsidiaries**

# **Consolidated Condensed Balance Sheets**(Unaudited)

 
| ASSETS                                           |   | **December 31,  2001** |        | **September 30,  2001** |   |
|--------------------------------------------------|--------|------------------------|-------------|-------------------------|--------|
| Current assets:                                  |   |                   |        |                    |   |
| Cash and cash  equivalents                       |   | $                      | 12,169,032  |                    | $      | 16,213,088 |   |
| Investment in  marketable securities             |   | 12,399,567             |        | 9,816,079               |   |
| Restricted cash                                  |   | 15,586,258             |        | 15,506,855              |   |
| Accounts receivable,  net                        |   | 402,630                |        | 3,186,262               |   |
| Inventories                                      |   | 369,432                |        | 274,043                 |   |
| Prepaid expenses and  other                      |   | 969,341                |        | 969,570                 |   |
| Total current assets                             |   | 41,896,260             |        | 45,965,897              |   |
|                                             |   |                   |        |                    |   |
| Land held for  development                       |   | 23,109,400             |        | 23,109,400              |   |
|                                             |   |                   |        |                    |   |
| Property held for  investment, net               |   | 142,789,083            |        | 143,457,948             |   |
|                                             |   |                   |        |                    |   |
| Property and  equipment, net                     |   | 31,899,729             |        | 32,234,701              |   |
|                                             |   |                   |        |                    |   |
| Other assets                                     |   | 5,315,503              |        | 4,717,112               |   |
|                                             |   |                   |        |                    |   |
| Total assets                                     |   | $                      | 245,009,975 |                    | $      | 249,485,058 |   |
|                                             |   |                   |        |                    |   |
| LIABILITIES and  STOCKHOLDERS’ EQUITY       |   |                   |        |                    |   |
|                                             |   |                   |        |                    |   |
| Current liabilities:                             |   |                   |        |                    |   |
| Accounts payable                                 |   | $                      | 1,022,197   |                    | $      | 1,003,978 |   |
| Interest payable                                 |   | 216,836                |        | 2,377,018               |   |
| Accrued and other  liabilities                   |   | 3,588,644              |        | 3,333,875               |   |
| Current portion of  long-term debt               |   | 103,251                |        | 66,674                  |   |
| Current portion of  non-recourse debt            |   | 5,362,427              |        | 5,105,010               |   |
| Total current  liabilities                       |   | 10,293,355             |        | 11,886,555              |   |
|                                             |   |                   |        |                    |   |
| Long-term debt — less  current portion      |   | 328,464                |        | 283,126                 |   |
|                                             |   |                   |        |                    |   |
| Non-recourse debt —  less current portion   |   | 120,644,291            |        | 123,135,704             |   |
|                                             |   |                   |        |                    |   |
| Obligation under lease                           |   | 34,513,810             |        | 34,247,897              |   |
|                                             |   |                   |        |                    |   |
| Deferred income taxes                            |   | 34,018,738             |        | 34,724,076              |   |
|                                             |   |                   |        |                    |   |
| Other liabilities                                |   | 7,634,749              |        | 6,442,238               |   |
|                                             |   |                   |        |                    |   |
| Stockholders’ equity                        |   | 37,576,568             |        | 38,765,462              |   |
| Total liabilities and  stockholders’ equity |   | $                      | 245,009,975 |                    | $      | 249,485,058 |   |

 

See the accompanying Notes to Consolidated Condensed FinancialStatements (Unaudited).

 

2

----

 

**Archon Corporation and Subsidiaries**

# **Consolidated Condensed Statements of Operations**(Unaudited)

 
|                                                     |   | **Three Months Ended December 31,** |       |
|----------------------------------------------------------|--------|-------------------------------------|------------|
|                                                     |   | **2001**                            |       | **2000** |   |
| Revenues:                                                |   |                                |       |   |   |
| Casino                                                   |   | $                                   | 7,887,102  |   | $ | 8,185,825 |   |
| Hotel                                                    |   | 556,741                             |       | 524,362 |   |
| Food and beverage                                        |   | 2,005,592                           |       | 2,074,226 |   |
| Investment properties                                    |   | 3,100,562                           |       | 0 |   |
| Other                                                    |   | 740,113                             |       | 1,184,315 |   |
| Gross revenues                                           |   | 14,290,110                          |       | 11,968,728 |   |
| Less casino promotional allowances                       |   | (1,884,106                          | )          | (1,954,992 | ) |
| Net operating revenues                                   |   | 12,406,004                          |       | 10,013,736 |   |
|                                                     |   |                                |       |   |   |
| Operating expenses:                                      |   |                                |       |   |   |
| Casino                                                   |   | 4,387,148                           |       | 4,331,252 |   |
| Hotel                                                    |   | 188,112                             |       | 173,122 |   |
| Food and beverage                                        |   | 1,016,694                           |       | 1,028,371 |   |
| Other                                                    |   | 610,862                             |       | 1,028,376 |   |
| Selling, general and administrative                      |   | 1,258,444                           |       | 1,735,037 |   |
| Corporate expenses                                       |   | 597,602                             |       | 691,523 |   |
| Utilities and property expenses                          |   | 1,462,784                           |       | 1,131,277 |   |
| Depreciation and amortization                            |   | 1,298,217                           |       | 831,503 |   |
| Total operating expenses                                 |   | 10,819,863                          |       | 10,950,461 |   |
|                                                     |   |                                |       |   |   |
| Operating income (loss)                                  |   | 1,586,141                           |       | (936,725 | ) |
|                                                     |   |                                |       |   |   |
| Interest expense                                         |   | (4,007,361                          | )          | (483,366 | ) |
| Gain on sale of assets                                   |   | 0                                   |       | 137,238,005 |   |
| Interest income                                          |   | 346,697                             |       | 466,170 |   |
| Income (loss) before income tax (expense) benefit        |   | (2,074,523                          | )          | 136,284,084 |   |
|                                                     |   |                                |       |   |   |
| Federal income tax (expense) benefit                     |   | 705,338                             |       | (46,336,589 | ) |
|                                                     |   |                                |       |   |   |
| Net income (loss)                                        |   | (1,369,185                          | )          | 89,947,495 |   |
|                                                     |   |                                |       |   |   |
| Dividends accrued on preferred shares, net               |   | (383,719                            | )          | (612,440 | ) |
|                                                     |   |                                |       |   |   |
| Net income (loss) applicable to common shares            |   | $                                   | (1,752,904 | ) | $ | 89,335,055 |   |
|                                                     |   |                                |       |   |   |
| Average common shares outstanding                        |   | 6,153,256                           |       | 6,200,356 |   |
|                                                     |   |                                |       |   |   |
| Average common and common equivalent shares  outstanding |   | 6,763,791                           |       | 6,842,391 |   |
|                                                     |   |                                |       |   |   |
| Income (loss) per common share                           |   |                                |       |   |   |
| Basic                                                    |   | $                                   | (0.28      | ) | $ | 14.41 |   |
| Diluted                                                  |   | $                                   | (0.28      | ) | $ | 13.06 |   |

 

See the accompanying Notes to Consolidated Condensed FinancialStatements (Unaudited).

 

3

----

 

# **ArchonCorporation and Subsidiaries**ConsolidatedCondensed Statements of Stockholders’ Equity(Unaudited)

 
|                                     |   | **Common Stock** |   | **Preferred Stock** |   | **Additional Paid in Capital** |   | **Accumulated Deficit** |       | **Accumulated-Other Comprehensive Loss** |   | **Treasury Stock** |   | **Total**  |      |
|------------------------------------------|--------|------------------|--------|---------------------|--------|--------------------------------|--------|-------------------------|------------|------------------------------------------|--------|--------------------|--------|------------|-----------|
| Balances,  October 1, 2001               |   | $                | 61,533 |                | $      | 16,746,586                     |   | $                       | 57,283,784 |                                     | $      | (34,831,966        | )      | $          | (406,701  | ) | $ | (87,774 | ) | $ | 38,765,462 |   |
| Net loss                                 |   |             |   |                |   |                           |   | (1,369,185              | )          |                                     |   |               |   | (1,369,185 | )         |
| Preferred stock dividends accrued, net   |   |             |   | 383,719             |   |                           |   | (383,719                | )          |                                     |   |               |   | 0          |      |
| Unrealized gain on marketable securities |   |             |   |                |   |                           |   |                    |       | 180,291                                  |   |               |   | 180,291    |      |
| Balances,  December 31, 2001             |   | $                | 61,533 |                | $      | 17,130,305                     |   | $                       | 57,283,784 |                                     | $      | (36,584,870        | )      | $          | ($226,410 | ) | $ | ($87,774 | ) | $ | 37,576,568 |   |

 

See the accompanying Notes to Consolidated Condensed FinancialStatements (Unaudited).

 

4

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# **ArchonCorporation and Subsidiaries**ConsolidatedCondensed Statements of Cash Flows(Unaudited)

 
|                                                        |   | **Three Months Ended December 31,** |       |
|-------------------------------------------------------------|--------|------------------------------------------|------------|
|                                                        |   | **2001**                                 |       | **2000** |   |
| Cash flows from operating activities:                       |   |                                     |       |   |   |
| Cash and cash equivalents provided by (used in)  operations |   | $                                        | 194,945    |   | $ | (46,459,007 | ) |
| Changes in assets and liabilities:                          |   |                                     |       |   |   |
| Accounts receivable, net                                    |   | 2,783,632                                |       | 643,261 |   |
| Inventories                                                 |   | (95,389                                  | )          | 211,103 |   |
| Prepaid expenses and other                                  |   | 228                                      |       | (650,736 | ) |
| Deferred income taxes                                       |   | (705,338                                 | )          | 46,336,589 |   |
| Other assets                                                |   | (609,157                                 | )          | 64,766 |   |
| Accounts payable                                            |   | 18,219                                   |       | (1,029,635 | ) |
| Interest payable                                            |   | (2,160,182                               | )          | (4,174,686 | ) |
| Accrued and other liabilities                               |   | 1,483,949                                |       | (2,195,827 | ) |
|                                                        |   |                                     |       |   |   |
| Net cash provided by (used in) operating  activities        |   | 910,907                                  |       | (7,254,172 | ) |
|                                                        |   |                                     |       |   |   |
| Cash flows from investing activities:                       |   |                                     |       |   |   |
| Proceeds of sale of assets                                  |   | 0                                        |       | 207,500,000 |   |
| Increase in restricted cash                                 |   | (79,403                                  | )          | (15,000,000 | ) |
| Cost and expenses related to sale of assets                 |   | 0                                        |       | (3,691,166 | ) |
| Capital expenditures                                        |   | (216,689                                 | )          | (210,432 | ) |
| Increase in marketable securities                           |   | (2,403,197                               | )          | 0 |   |
|                                                        |   |                                     |       |   |   |
| Net cash provided by (used in) investing  activities        |   | (2,699,289                               | )          | 188,598,402 |   |
|                                                        |   |                                     |       |   |   |
| Cash flows from financing activities:                       |   |                                     |       |   |   |
| Proceeds of obligation under lease                          |   | 0                                        |       | 32,500,000 |   |
| Paid on long-term debt                                      |   | (2,255,674                               | )          | (175,240,151 | ) |
| Paid on note payable — officer                         |   | 0                                        |       | (1,500,000 | ) |
| Minority capital contribution                               |   | 0                                        |       | 100,000 |   |
| Common and preferred stock acquired                         |   | 0                                        |       | (77,193 | ) |
|                                                        |   |                                     |       |   |   |
| Net cash used in financing activities                       |   | (2,255,674                               | )          | (144,217,344 | ) |
|                                                        |   |                                     |       |   |   |
| Increase (decrease) in cash and cash equivalents            |   | (4,044,056                               | )          | 37,126,886 |   |
|                                                        |   |                                     |       |   |   |
| Cash and cash equivalents, beginning of period              |   | $                                        | 16,213,088 |   | $ | 6,986,984 |   |
|                                                        |   |                                     |       |   |   |
| Cash and cash equivalents, end of period                    |   | $                                        | 12,169,032 |   | $ | 44,113,870 |   |

 

See the accompanying Notes to Consolidated Condensed FinancialStatements (Unaudited).

 

5

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**ARCHON CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

 

## **1.**                                      Basis of Presentation and GeneralInformation

 

Archon Corporation (the “Company” or “Archon”), is a publicly tradedNevada corporation.  The Company’sprimary business operations are conducted through a wholly-owned subsidiarycorporation, Pioneer Hotel Inc. (“PHI”), which operates the Pioneer Hotel &Gambling Hall (the “Pioneer”) in Laughlin, Nevada under long-term lease andlicense agreements.  In addition, theCompany owns real estate on Las Vegas Boulevard South (the “Strip”) and at thecorner of Rainbow and Lone Mountain Road, both in Las Vegas, Nevada, and alsoowns investment properties in Dorchester, Massachusetts and Gaithersburg,Maryland.

 

                The condensedconsolidated financial statements included herein are unaudited and have beenprepared by the Company pursuant to the rules and regulations of the UnitedStates Securities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to such rules and regulations, althoughthe Company believes that the disclosures are adequate to make the informationpresented not misleading. In the opinion of management, all adjustments (whichinclude normal recurring adjustments) necessary for a fair presentation ofresults for the interim periods have been made. The results for the three monthperiod is not necessarily indicative of results to be expected for the fullfiscal year. These condensed consolidated financial statements should be readin conjunction with the consolidated financial statements and notes theretoincluded in the Company's Annual Report on Form 10-K for the year endedSeptember 30, 2001.

## ** **

## **2.**                                      Summary of Significant AccountingPolicies

 

*Principles of Consolidation**. *The accompanying unauditedconsolidated condensed financial statements include the accounts of Archon andits wholly-owned subsidiaries.  Amountsrepresenting the Company’s investment in less than majority-owned companies inwhich a significant equity ownership interest is held are accounted for on theequity method.  All materialintercompany accounts and transactions have been eliminated in consolidation.

 

*Earnings Per Share**.*  The Company presents its per share resultsin accordance with SFAS No. 128 "Earnings Per Share" ("SFAS128"). SFAS 128 requires the presentation of basic net income (loss) pershare and diluted net income (loss) per share. Basic per share amounts arecomputed by dividing net income (loss) by average shares outstanding during theperiod. Diluted per share amounts are computed by dividing net income (loss) byaverage shares outstanding plus the dilutive net income (loss) by averageshares outstanding plus the dilutive effect of common share equivalents. Theeffect of options outstanding was included in diluted calculations during thequarter ended December 31, 2000 but was not included in diluted calculationsduring the quarter ended December 31, 2001 since the Company incurred a netloss. The dilutive effect of the assumed exercise of stock options increased theweighted average number of shares of common stock by 610,535 and 642,035 sharesfor the quarters ended December 31, 2001 and 2000, respectively.

 

*Estimates and Assumptions**. *The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Significant estimates used by the Companyinclude estimated useful lives for depreciable and amortizable assets, certainother estimated liabilities and valuation reserves and estimated cash flows inassessing the recoverability of long-lived assets.  Actual results may differ from estimates.

 

*Reclassifications**. *Certain reclassificationshave been made in the prior year’s unaudited consolidated condensed financialstatements to conform to the presentation used in fiscal 2002.

## ** **

## **3.**                                      Cash and Cash Equivalents

 

At December 31, 2001, the Company held cash and cash equivalentsof $12.2 million compared to $16.2 million at September 30,2001.  Approximately $2.5 millionwas held by PHI and was subject to certain restrictions and limitations on itsuse, including restrictions on its availability for distribution to theCompany, by the terms of the agreements entered into in connection with thesale/leaseback transactions in December 2000 relating to the Pioneer.

 

6

----

 

At December 31, 2001, approximately $1.6 millionwas held in escrow pursuant to the agreements related to the sale ofsubstantially all of the assets of the Santa Fe Hotel & Casino.

 

## **4.**                                      Other Assets

 

Included in other assets at December 31, 2001 is $450,000 ofcommercial and residential mortgage loans originally funded byJ & J Mortgage to unaffiliated third parties.  The loans were purchased by the Company forthe principal amount, plus accrued interest, if any.  J & J Mortgage is owned by LICO, which in turn iswholly owned by Paul W. Lowden, the President, Chief ExecutiveOfficer and majority stockholder of the Company.  John W. Delaney, a director of the Company, is thepresident of J & J Mortgage.

 

**5.             Related Parties**

 

TheCompany has an understanding with David Lowden, brother of Paul W. Lowden, withrespect to certain gaming technology for which David Lowden has been issued apatent. The Company has agreed to pay for the costs of commercial developmentof the technology, and David Lowden has agreed to grant the Company anexclusive perpetual license with respect to the technology. In January 2002,the Company expended $122,500 for commercial development of the technology.

 

Infiscal 2001, the Company purchased for $100,000 Class B member interests inDukes, a Nevada limited liability company that is developing a restricted slotoperation, restaurant and entertainment facility. Christopher W. Lowden, son ofPaul W. Lowden, is a limited partner in the company that is the managing memberof Dukes.

 

**6.             Contingencies**

 

Local Joint Executive Board et al.

 

TheCompany is the defendant in a pending action titled Local Joint Executive Boardet al. v. Santa Fe Gaming Corporation et al., No. CV-S-01-0233-RLH. Theplaintiffs instituted the action on or about February 28, 2001 in the UnitedStates District Court for the District of Nevada, alleging that the Companyviolated the Worker Adjustment Retraining and Notification Act ("WARNAct"), by improperly providing notification of the closing of the Santa FeHotel and Casino. The plaintiffs seek damages in the amount provided for by thestatute. The plaintiffs filed a motion for class certification, and the Companystipulated to the certification. On October 12, 2001, Archon filed a motion forsummary judgment to dismiss the complaint in its entirety. Plaintiffs filed amemorandum in opposition to defendant's motion for summary judgment, as well asa counter-motion for summary judgment alleging the WARN Act notices sent byArchon were invalid. On February 1, 2002 a hearing was held on the motions andthe court denied both the plaintiffs' and Archon's motions for summaryjudgment. Pre-trial preparation is in process by the Company.

 

## **7.**                                      Supplemental Statement of Cash FlowsInformation

 

Supplemental statement of cash flows information for the quarters endedDecember 31, 2001 and 2000 is presented below:

 
|                                                                                   |   | **2001**                   |       | **2000** |   |
|----------------------------------------------------------------------------------------|--------|----------------------------|------------|----------|--------|
|                                                                                   |   | **(Amounts in thousands)** | ** ** |
| Operating activities:                                                                  |   |                       |       |     |   |
| Cash paid during the  period for interest                                              |   | $                          | 6,257      |     | $      | 4,663 |   |
| Cash paid during the  period for income taxes                                          |   | $                          | 0          |     | $      | 120 |   |
|                                                                                   |   |                       |       |     |   |
| Investing and financing  activities:                                                   |   |                       |       |     |   |
| Long-term debt incurred in  connection with the acquisition of machinery and equipment |   | $                          | 104        |     | $      | 0 |   |
| Negative amortization of  obligation under lease                                       |   | $                          | 266        |     | $      | 0 |   |
| Unrealized gain on  marketable securities                                              |   | $                          | 180        |     | $      | 0 |   |

## ** **

## **8.**                                      Segment Information

 

The Company’s primary operations are in the hotel/casino industry andinvestment properties.  Subsequent toOctober 2, 2000, the Company’s primary operations are conducted at thePioneer in Laughlin, Nevada.  

 

7

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|                           |   | **Three Months Ended  December 31,** |    |
|--------------------------------|--------|-------------------------------------------|---------|
|                           |   | **2001**                                  |    | **2000** | ** ** |
|                           |   | **(Dollars in thousands)**                |    |
| **Pioneer Hotel**              |   |                                      |    |   |   |
| Operating revenues             |   | $                                         | 9,211   |   | $ | 9,892 |   |
| Operating income (loss)        |   | $                                         | (114    | ) | $ | 474 |   |
| Interest expense               |   | $                                         | 1,184   |   | $ | 903 |   |
| Depreciation and  amortization |   | $                                         | 487     |   | $ | 642 |   |
| Rents                          |   | $                                         | 384     |   | $ | 186 |   |
| Corporate expenses             |   | $                                         | 250     |   | $ | 190 |   |
| Interest income                |   | $                                         | 7       |   | $ | 6 |   |
| EBITDA (1)                     |   | $                                         | 1,014   |   | $ | 1,498 |   |
| Capital expenditures           |   | $                                         | 106     |   | $ | 151 |   |
| Identifiable assets (2)        |   | $                                         | 35,671  |   | $ | 37,961 |   |
| **Investment Properties  (3)** |   |                                      |    |   |   |
| Operating revenues             |   | $                                         | 3,101   |   | N/A |   |
| Operating income               |   | $                                         | 2,374   |   | N/A |   |
| Interest expense               |   | $                                         | 2,857   |   | N/A |   |
| Depreciation and  amortization |   | $                                         | 727     |   | N/A |   |
| Rents                          |   | $                                         | 0       |   | N/A |   |
| EBITDA (1)                     |   | $                                         | 3,101   |   | N/A |   |
| Capital expenditures           |   | $                                         | 0       |   | N/A |   |
| Identifiable assets (2)        |   | $                                         | 146,471 |   | N/A |   |

----

 

(1)  EBITDA represents earningsbefore interest, taxes, depreciation and amortization, rents, corporateexpenses and other nonrecurring charges plus interest income.  The Company’s definition of EBITDA may notbe the same as that of similarly captioned measures used by other companies.

 

(2)  Identifiable assetsrepresents total assets less elimination for intercompany items.

 

(3)  During fiscal 2001, theCompany acquired investment properties in Dorchester Massachusetts andGaithersburg, Maryland.  The paymentsreceived under lease agreements with respect to both properties are applied todebt service payments on non-recourse indebtedness secured by the respectiveproperties.

 

8

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**ARCHON CORPORATION**

 

**Item2.  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

## **General**

 

**Results of Operations — Three Months EndedDecember 31, 2001 and 2000**

 

**Consolidated**

 

*NetOperating Revenues. *Consolidatednet operating revenues for the three months ended December 31, 2001 were$12.4 million, a $2.4 million, or 23.9%, increase from$10.0 million for the same period in the prior fiscal year.  The current period includes rental income of$3.1 million from investment properties, which were purchased in thesecond quarter of the prior fiscal year. Revenues decreased by $700,000 at the Pioneer Hotel and Gambling Hall(the “Pioneer”).

* *

*OperatingExpenses. *Total operatingexpenses decreased $100,000, or 1.2%, to $10.8 million for the quarterended December 31, 2001 from $10.9 million in the quarter endedDecember 31, 2000.  Total operatingexpenses as a percentage of revenue decreased to 87.2% in the quarter endedDecember 31, 2001 from 109.4% in the quarter ended December 31,2000.  Operating expenses decreased by$100,000 or 1.0% at the Pioneer. Depreciation and amortization expenses in the amount of approximately$700,000 in the current fiscal quarter related to the investment propertiesacquired in March 2001 were offset in part by decreased operating expenses ofSFHI, Inc. (“SFHI”).

* *

*OperatingIncome (Loss). *Consolidatedoperating income for the quarter ended December 31, 2001 was$1.6 million, a $2.5 million, or 269.3%, improvement from anoperating loss of $900,000 for the same period in fiscal 2001.  Operating income of $2.4 million isattributable to investment properties. Operating income decreased by $600,000 at the Pioneer.

* *

*InterestExpense. *Consolidatedinterest expense for the quarter ended December 31, 2001 was$4.0 million, a $3.5 million increase compared to $500,000 in thequarter ended December 31, 2000. The increase is due to interest expense related to the$132.7 million of non-recourse debt incurred and assumed in the secondquarter of fiscal 2001 in connection with the acquisition of two investmentproperties, as well as the interest expense component of the $33.5 millionobligation under lease incurred on December 29, 2000 in connection withthe Pioneer sale/leaseback transactions.

* *

*Gain onSale of Assets*.  TheCompany recorded a $137.2 million gain on the sale of substantially all ofthe assets of the Santa Fe Hotel & Casino (the “Santa Fe”) in the quarterended December 31, 2000.

* *

*Income(Loss) Before Income Tax. *Consolidatedloss before income tax for the quarter ended December 31, 2001 was$2.1 million, a $138.4 million decrease compared to income of 

 

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$136.3 million in the fiscal 2001 quarter, which was relatedprincipally to the gain on sale of the Santa Fe assets in the prior year.

* *

*FederalIncome Tax. *The Companyrecorded a federal income tax benefit of $700,000 in the current quarter,compared to a $46.3 million provision in the prior year’s quarter.

* *

*PreferredShare Dividends. *Dividends ofapproximately $400,000 and $600,000 for each of the quarters endedDecember 31, 2001 and 2000, respectively, accrued on the preferred stock.  The dividend rate increased to 14% in thecurrent period compared to 13% in the prior year pursuant to the terms of theCertificate of Designations of the preferred stock.

* *

*Net Income(Loss). *Consolidated net lossattributable to common shares was $1.8 million, or $0.28 per common share,in the 2002 period compared to net income attributable to common shares of$89.3 million, or $14.41 per common share, in the prior year period.

## ** **

## **Pioneer**

* *

*NetOperating Revenues. *Revenues at thePioneer decreased $700,000, or 6.9%, to $9.2 million in the quarter endedDecember 31, 2001 from $9.9 million in the quarter endedDecember 31, 2000.

 

Casino revenues decreased $300,000, or 3.6%, to $7.9 million inthe quarter ended December 31, 2001 from $8.2 million in the quarterended December 31, 2000 due to a decrease in visitor volume.  Slot and video poker revenues decreased$200,000, or 3.9%, to $6.9 million in the quarter ended December 31,2001 from $7.1 million in the quarter ended December 31, 2000.  Other gaming revenues, including tablegames, remained unchanged at $1.0 million.  Casino promotional allowances decreased $100,000, or 3.6%, to$1.9 million in the quarter ended December 31, 2001 from$2.0 million in the quarter ended December 31, 2000, due to thedecrease in wagers.

 

Hotel revenues remained unchanged at approximately $500,000 for thequarters ended December 31, 2001 and 2000, as an increase in occupancyrate to 65.3% from 62.2% in the fiscal year 2002 quarter was offset by andecrease in average daily room rate. Food and beverage revenues decreased $100,000, or 3.3% to$2.0 million in the quarter ended December 31, 2001 compared to$2.1 million in the quarter ended December 31, 2000 due to the decreasein visitor volume.  Other revenuesdecreased $400,000, or 39.2%, to $600,000 in the quarter endedDecember 31, 2001 from $1.0 million in the quarter endedDecember 31, 2000 due to decreased sales in the Pioneer’s retail outletscaused by increased competition from retail sales in other casinos in Laughlin.

* *

*OperatingExpenses. *Operatingexpenses decreased $100,000, or 1.0%, to $9.3 million in the quarter endedDecember 31, 2001 from $9.4 million in the quarter endedDecember 31, 2000.  Operatingexpenses as a percentage of revenue increased to 101.2% in the quarter endedDecember 31, 2001 from 95.2% in the quarter ended December 31, 2000.

 

Casino expenses were substantially unchanged at $4.4 million inthe quarter ended December 31, 2001 compared to $4.3 million in thequarter ended December 31, 2000. Casino expenses as a percentage of casino revenues increased to 55.6% inthe quarter ended December 31, 2001 from 

 

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52.9% in the quarter ending December 31, 2000.  Hotel expenses were unchanged at $200,000 inthe quarters ended December 31, 2001 and 2000.  Food and beverage expenses were unchanged at $1.0 million inthe quarters ended December 31, 2001 and 2000 despite the decrease in foodand beverage revenues.  Food andbeverage expenses as a percentage of food and beverage revenues increased to50.7% in the quarter ended December 31, 2001 from 49.6% in the quarterended December 31, 2000.  Otherexpenses decreased $400,000, or 40.9%, to $600,000 for the quarter endedDecember 31, 2001 compared to $1.0 million for the quarter endedDecember 31, 2000; the decrease was related to the lower volume of retailsales.  Other expenses as a percentageof other revenues decreased to 93.2% in the quarter ended December 31, 2001from 95.9% in the quarter ended December 31, 2000.

 

Selling, general and administrative expenses increased $200,000, or15.0%, to $1.4 million in the quarter ended December 31, 2001 from$1.2 million in the quarter ended December 31, 2000.  Selling, general and administrative expensesas a percentage of revenues increased to 14.9% in the quarter endedDecember 31, 2001 from 12.1% in the quarter ended December 31,2000.  Utilities and property expensesincreased $300,000, or 23.4%, to $1.3 million in the quarter endedDecember 31, 2001 from $1.0 million in the quarter endedDecember 31, 2000, primarily due to additional rent expense associatedwith the lease of gaming equipment. Utilities and property expenses as a percentage of revenues increased to13.8% in the quarter ended December 31, 2001 from 10.4% in the quarterended December 31, 2000. Depreciation and amortization expenses decreased $100,000, or 24.2%, to$500,000 in the quarter ended December 31, 2001 from $600,000 in thequarter ended December 31, 2000, due to the sale of gaming equipment subsequentto the first quarter of fiscal 2001.

** **

**Liquidity and Capital Resources; Trends and Factors Relevantto Future Operations**

* *

*Liquidity. *As of December 31,2001, the Company held cash and cash equivalents of $12.2 million comparedto $16.2 million at September 30, 2001.  Approximately $1.6 million at December 31, 2001 washeld in escrow pursuant to the agreements related to the sale of the Santa Feassets.  In addition, the Company had$12.4 million in investment in marketable securities at December 31,2001.  Management believes that theCompany will have sufficient available cash and cash resources to meet its cashrequirements through the twelve month period ending December 31, 2002.

* *

*Cash Flowfrom Operating Activities. *The Company’scash provided by operations was $900,000 for the quarter endedDecember 31, 2001 as compared to cash used in operations of$7.3 million for same period in the prior year.  In the prior year cash was used to pay off accounts payable,interest payable and other liabilities in connection with the Santa Fe assetsale.

* *

*Cash Flowfrom Investing Activities. *Cash used ininvesting activities was $2.7 million during the quarter endedDecember 31, 2001, compared to cash provided by investing activities of$188.6 million during the quarter ended December 31, 2000.  In the current quarter, the Company invested$2.4 million in marketable securities. In October 2000, the Company completed the sale of substantiallyall of the Santa Fe assets for total consideration of $205.0 million.  In December 2000, pursuant tocontractual restrictions entered into in connection with the December 2000sale/leaseback of the Pioneer (the “Pioneer Transactions”), $15.0 millionof cash was restricted in use.  See“Pioneer Transactions.”

 

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*Cash Usedin Financing Activities. *Cash used infinancing activities was $2.3 million in the three month period endedDecember 31, 2001 compared to $144.2 million during the same periodin 2000.  In the current quarter, theCompany repaid $2.3 million of non-recourse long-term debt.  In the quarter ended December 31, 2000,the Company used approximately $175.2 million of the proceeds from thesale of substantially all of the Santa Fe assets to retire substantially all ofthe Company’s then-outstanding debt. This use was offset in part by cash proceeds of $32.5 million fromthe creation of the obligation under lease attributable to the PioneerTransactions in December 2000.

 

The Company’s primary source of operating cash is from Pioneeroperations and from interest income on available cash and cash equivalents andinvestment in marketable securities. Rental income from the Company’s two investment properties iscontractually committed to reducing the non-recourse indebtedness issued orassumed in connection with the acquisition of the investment properties.  Under the two leases, the tenants areresponsible for substantially all obligations related to the property.  Sahara Las Vegas Corp. (“SLVC”), an indirectwholly-owned subsidiary of the Company, owns an approximately 27-acre parcel ofreal property on Las Vegas Boulevard South which is subject to a lease with awater theme park operator.  SLVCgenerates minimal cash from the lease agreement after payment of property costs.  The lease may be terminated at any time bySLVC; however, if it is terminated prior to 2004, SLVC has agreed to pay a loanowed by the tenant.  The loan, whichamortizes over the remaining life of the lease, had an outstanding balance of$2.6 million as of December 31, 2001.

 

The Company’s primary use of funds is for operations of Archon, whichincludes costs of executive and administrative personnel, administrativefunctions and costs to explore development opportunities.

## ** **

## **PioneerTransactions**

 

Results of operations at the Pioneer for the quarter endedDecember 31, 2001 generated earnings before interest, taxes, depreciationand amortization, rents, corporate expenses and other non-recurring chargesplus interest income (“EBITDA”) of $1.0 million, compared to$1.5 million of EBITDA in the same period in 2000.  The EBITDA margin decreased to 11.0% infiscal 2002 from 15.1% in fiscal 2001. EBITDA should not be construed as a substitute for operating income or abetter indicator of liquidity than cash flow from operating, investing andfinancing activities, which are determined in accordance with generallyaccepted accounting principles, and it is included to provide additionalinformation with respect to the ability of the PHI to meet its future debt service,capital expenditure and working capital requirements.  Although EBITDA is not necessarily a measure of Pioneer’s abilityto fund its cash needs, management believes that EBITDA is a useful tool formeasuring the ability of Pioneer to service its debt.  The Company’s definition of EBITDA may not be the same as that ofsimilarly captioned measures used by other companies.

 

PHI’s principal uses of cash are for payments of obligations underlease, capital expenditures to maintain the facility and, to the extentpermitted to be paid, the management fee payable to the Company.  Rent expense was approximately $400,000 and$200,000, respectively, in the quarters ended December 31, 2001 and 2000.  Rent expense increased in January 2001 as aresult 

 

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of the lease and license agreements related to the Pioneer Transactionscompleted in December 30, 2000. Capital expenditures to maintain the facility in fiscal 2002 areexpected to be approximately $3.0 million, which includes a new slot trackingsystem. Capital expenditures will mainly be funded from the restricted cashaccount.

 

On December 29, 2000, the Company enteredinto a series of agreements to transfer, pursuant to Section 721 and 351of the Internal Revenue Code, the real and personal property, excluding gamingequipment, and intangible assets used in the operation of the Pioneer to athird party (the “Purchaser”) and agreed to lease and license the assets for upto 20 years, during which period the Company will operate the Pioneer(collectively, the “Pioneer Transactions”). The consideration for the Pioneer Transactions consisted of theassumption and immediate repayment by the Purchaser of $32.5 million of debtowed by PHI to SFHI and preferred stock of the Purchaser having a$1.0 million liquidation preference.

 

Archon and SFHI guaranteed the payments under the lease and licenseagreements and agreed to certain covenants, including restrictions on thepayment of management fees, competing in the Laughlin, Nevada area and paymentof dividends with respect to the Archon preferred stock.  In addition, Archon agreed to maintainconsolidated liquidity (as defined in the agreements relating to the PioneerTransactions) of not less than $25 million. Archon has agreed to forgo all or a portion of the management feespayable by PHI if PHI’s ratio of operating cash flow to fixed charges fallsbelow 1.20 to 1.00.  Further, Archon hasagreed to contribute capital to PHI and in certain events to deposit cash torestricted cash accounts in the event PHI’s ratio of fixed charges to operatingcash flow falls below 1.00 to 1.00 during any rolling four quarter period,calculated on a quarterly basis.  Theratio of fixed charges to operating cash flow at December 31, 2001 was 0.93 to1.00.  As a result, Archon is obligatedto contribute capital to PHI in the amount by which operating cash flow wasless than fixed charges, approximately $400,000.

 

If the ratio of fixed charges to operating cash flow is less than 1.00to 1.00 for any three consecutive quarters ending on or before December 31,2003, Archon will be obligated to contribute capital to PHI in the amount ofthe deficiency.  Thereafter, Archon willbe required to make an additional cash payment to the restricted cash accountbased upon a specified percentage of the stipulated loss value set forth in thelease.  If Archon fails to make therequired payments, an event of default will occur under the lease.

 

The agreements related to the Pioneer Transactions provide an optionfor the Company to purchase the assets under the lease and license agreementsto PHI between the end of the third and seventh years, at purchase priceamounts which, as of the date of the agreements, approximated estimated fairmarket value at the relevant purchase dates, and at the end of the lease termfor fair market value.

## ** **

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## **Preferred Stock**

 

The Company’s preferred stock provides that dividends accrue on asemi-annual basis, to the extent not declared. Prior to fiscal 1997, the Company satisfied the semi-annual dividendpayments on its preferred stock through the issuance of paid in kinddividends.  The Company has accrued thesemi-annual preferred stock dividends since October 1, 1996.  The dividend rate per annum was equal to 8%of $2.14 for each share of preferred stock until September 30, 1998, atwhich date the dividend rate increased to 11% and the dividend continues toincrease by an additional 50 basis points on each succeeding semi-annualdividend payment date up to a maximum of 16% per annum.  In October 2001, the dividend rateincreased to 14%.  The accrued stockdividends have been recorded as an increase to the preferred stockaccount.  As of December 31, 2001,the aggregate liquidation preference of the preferred stock was$17.1 million, or $3.34 per share.

 

Pursuant to the Certificate of Designations of Preferred Stock,dividends are payable only when, as and if declared by the Board of Directorsand the liquidation preference is payable only upon a liquidation, dissolutionor winding up of the Company.  Becausedividends in an amount equal to dividend payments for one dividend period haveaccrued and remain unpaid for at least two years, the preferred stockholders,voting as a separate class, are entitled to elect two directors.  The agreements relating to the PioneerTransactions contain provisions restricting the incurrence of debt by theCompany and the payment of dividends on the preferred stock.  In December 2000, the Board of Directorsof the Company authorized the purchase from time to time by the Company ofpreferred stock for total consideration of up to $500,000.  As of February 14, 2002, the Companyhas purchased 276,627 shares of preferred stock for $452,232 under this program.

## ** **

## **Effects ofInflation**

 

The Company has been generally successful inrecovering costs associated with inflation through price adjustments in itshotel.  Any such future increases incosts associated with casino operations and maintenance of properties may notbe completely recovered by the Company.

## ** **

## **Private SecuritiesLitigation Reform Act**

 

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

# ** **

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# **Item 3.  Market Risk Disclosure**

 

Market risk is the risk of loss arising from changes in market ratesand prices, such as interest rates, foreign currency exchange rates andcommodity process.  The Company has nodebt instruments subject to interest rate fluctuation.

 

The Company holds investments in various available-for-sale securities;however, management believes that exposure to price risk arising from theownership of these investments is not material to our consolidated financialposition, results of operations or cash flow.

 

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**ARCHON CORPORATION**

 

# **PART II — OTHER INFORMATION**

 

**Item 1 - Legal Proceedings**

 

Local Joint ExecutiveBoard et al.—Recent Developments

 

The Company is thedefendant in a pending action titled Local Joint Executive Board et al. v.Santa Fe Gaming Corporation et al., No. CV-S-01-0233-RLH.  The plaintiffs instituted the action on orabout February 28, 2001 in the United States District Court for the District ofNevada, alleging that the Company violated the Worker Adjustment Retraining andNotification Act (“WARN Act”), by improperly providing notification of theclosing of the Santa Fe Hotel and Casino. The plaintiffs seek damages in the amount provided for by thestatute.  The plaintiffs filed a motionfor class certification, and the Company stipulated to the certification.  On October 12, 2001, Archon filed amotion for summary judgment to dismiss the complaint in its entirety.  Plaintiffs filed a memorandum in oppositionto defendant’s motion for summary judgment, as well as a counter-motion forsummary judgment alleging the WARN Act notices sent by Archon wereinvalid.  On February 1, 2002 a hearingwas held on the motions and the court denied both the plaintiffs’ and Archon’smotions for summary judgment.  Pre-trialpreparation is in process by the Company.

 

 

 

**Item 2 - Changes in Securities**

 

None

 

**Item 3 - Defaults Upon Senior Securities**

 

The Company has outstanding redeemable exchangeable cumulativepreferred stock (“Preferred Stock”). Prior to fiscal 1997, the Company satisfied the semi-annual dividendpayments on its Preferred Stock through the issuance of paid in kinddividends.  Commencing in fiscal 1997,dividends paid on the Preferred Stock, to the extent declared, must be paid incash.  No dividends have been declaredon the Preferred Stock since October 1, 1996.  Pursuant to the terms of the Certificate of Designation withrespect to the Preferred Stock, dividends that are not declared are cumulativeand accrue.  The dividend rate per annumwas equal to 8% of $2.14 for each share of preferred stock until September 30,1998, at which date the dividend rate increased to 11% and the dividendcontinues to increase by an additional 50 basis points on each succeedingsemi-annual dividend payment date up to a maximum of 16% per annum.  The dividend rate is 14% effectiveOctober 1, 2001.  The accrued stockdividends have been recorded as an increase to the Preferred Stockaccount.  As of December 31, 2001,the aggregate liquidation preference of the Preferred Stock was$17.1 million, or $3.34 per share.

** **

**Item 4 - Submission ofMatters to a****Vote of Security Holders**

 

None

 

**Item 5 - Other Information**

 

None

 

**Item 6 - Exhibits and Reports on Form 8–K**

 

Exhibits

 

None

 

Reports on Form 8-K

 

None

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto authorized.

 
|                                | ARCHON CORPORATION, Registrant |
|-------------------------------------|--------------------------------|
|                                |                           |
|                                | By:                            | /s/ | Thomas  K. Land |   |
|                                |                           | Thomas  K. Land, Chief Financial Officer |
| Dated:  February 14, 2002 |                           |   |
|                                |                           |   |
|                                |                           |   |

 

 

 

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