**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 June 30,2002**

 

| **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**                                                              |
|-------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)                              |
|                                                                                |   |   |
| **Nevada**                                                                          |   | **88-0304348** |
| (State or other jurisdiction of incorporation or organization)                      |   | (I.R.S. Employer Identification Number) |
|                                                                                |   |   |
| **3993 Howard Hughes Parkway, Suite 630,  Las Vegas, Nevada  89109**      |
| (Address of principal executive office and zip code)                                |
|                                                                                |   |   |
| **(702) 732-9120**                                                                  |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |   |   |
|                                                                                |   |   |
| (Former name, former address and former fiscal year, if changed since  last report) |

 

Indicate by acheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  YES   ý     NO    o

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate bycheck mark whether the registrant has filed all documents and reports requiredto be filed by Section 12, 13 or 15(d) of the Securities Exchange Actof 1934 subsequent to the distribution of securities under a plan confirmed bya court. YES o NO o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 

6,221,431 as of August 14, 2002 

 

 

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**ARCHON CORPORATION**

 

**INDEX**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                     |
|--------------|-------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                          |
| ITEM 1  | Condensed Consolidated Financial Statements                                                                                   |
|         |                                                                                                                          |
|         | CONDENSED CONSOLIDATED BALANCE SHEETS  (UNAUDITED)  June 30, 2002 and September 30, 2001                            |
|         |                                                                                                                          |
|         | CONDENSED CONSOLIDATED STATEMENTS OF  OPERATIONS (UNAUDITED)  for the three and nine months ended June 30, 2002 and 2001 |
|         |                                                                                                                          |
|         | CONDENSED CONSOLIDATED STATEMENTS OF  STOCKHOLDERS’ EQUITY (UNAUDITED)  for the nine months ended June 30, 2002     |
|         |                                                                                                                          |
|         | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (UNAUDITED)  for the nine months ended June 30, 2002 and 2001           |
|         |                                                                                                                          |
|         | NOTES TO CONDENSED CONSOLIDATED 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**

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

 
|                                            |   | **June 30,  2002** |        | **September  30, 2001** |   |
|-------------------------------------------------|--------|--------------------|-------------|-------------------------|--------|
| ASSETS                                          |   |               |        |                    |   |
| Current assets:                                 |   |               |        |                    |   |
| Cash and cash equivalents                       |   | $                  | 9,516,620   |                    | $      | 16,213,088 |   |
| Investment in marketable securities             |   | 12,998,297         |        | 9,816,079               |   |
| Restricted cash                                 |   | 12,383,891         |        | 15,506,855              |   |
| Accounts receivable, net                        |   | 350,101            |        | 3,186,262               |   |
| Inventories                                     |   | 296,638            |        | 274,043                 |   |
| Prepaid expenses and other                      |   | 1,145,623          |        | 969,570                 |   |
|                                            |   |               |        |                    |   |
| Total current assets                            |   | 36,691,170         |        | 45,965,897              |   |
|                                            |   |               |        |                    |   |
| Land held for development                       |   | 23,109,400         |        | 23,109,400              |   |
|                                            |   |               |        |                    |   |
| Rental property held for investment, net        |   | 140,789,449        |        | 143,457,948             |   |
|                                            |   |               |        |                    |   |
| Property and equipment, net                     |   | 34,353,036         |        | 32,234,701              |   |
|                                            |   |               |        |                    |   |
| Other assets                                    |   | 6,303,734          |        | 4,717,112               |   |
|                                            |   |               |        |                    |   |   |   |
| Total assets                                    |   | $                  | 241,246,789 |                    | $      | 249,485,058 |   |
|                                            |   |               |        |                    |   |
| LIABILITIES and STOCKHOLDERS’ EQUITY       |   |               |        |                    |   |
| Current liabilities:                            |   |               |        |                    |   |
| Accounts payable                                |   | $                  | 1,040,768   |                    | $      | 1,003,978 |   |
| Interest payable                                |   | 214,619            |        | 2,377,018               |   |
| Accrued and other liabilities                   |   | 2,891,222          |        | 3,333,875               |   |
| Current portion of long-term debt               |   | 96,539             |        | 66,674                  |   |
| Current portion of non-recourse debt            |   | 5,681,889          |        | 5,105,010               |   |
|                                            |   |               |        |                    |   |
| Total current liabilities                       |   | 9,925,037          |        | 11,886,555              |   |
|                                            |   |               |        |                    |   |
| Long-term debt — less current portion      |   | 285,684            |        | 283,126                 |   |
|                                            |   |               |        |                    |   |
| Non-recourse debt — less current portion   |   | 117,721,419        |        | 123,135,704             |   |
|                                            |   |               |        |                    |   |
| Obligation under lease                          |   | 35,072,222         |        | 34,247,897              |   |
|                                            |   |               |        |                    |   |
| Deferred income taxes                           |   | 34,724,076         |        | 34,724,076              |   |
|                                            |   |               |        |                    |   |
| Other liabilities                               |   | 10,226,790         |        | 6,442,238               |   |
|                                            |   |               |        |                    |   |
| Stockholders’ equity                       |   | 33,291,561         |        | 38,765,462              |   |
|                                            |   |               |        |                    |   |
| Total liabilities and stockholders’ equity |   | $                  | 241,246,789 |                    | $      | 249,485,058 |   |

 

See the accompanying Notes toUnaudited Condensed Consolidated Financial Statements.

 

2

----

** **

**Archon Corporation and Subsidiaries**

**Condensed Consolidated Statements ofOperations**

**(Unaudited)**

 
|                                                     |   | **Three  Months Ended June 30,** |       | **Nine  Months Ended June 30,** |   |
|----------------------------------------------------------|--------|----------------------------------|------------|---------------------------------|--------|
|                                                     |   | **2002**                         |       | **2001**                        |   | **2002** |   | **2001** |   |
| Revenues:                                                |   |                             |       |                            |   |   |   |   |   |
| Casino                                                   |   | $                                | 6,345,538  |                            | $      | 8,038,720 |   | $ | 23,393,762 |   | $ | 25,853,948 |   |
| Hotel                                                    |   | 770,796                          |       | 730,428                         |   | 1,996,248 |   | 1,932,851 |   |
| Food and beverage                                        |   | 1,928,230                        |       | 2,130,227                       |   | 6,130,140 |   | 6,474,566 |   |
| Investment properties                                    |   | 3,100,562                        |       | 3,768,213                       |   | 9,301,685 |   | 4,136,807 |   |
| Other                                                    |   | 682,320                          |       | 931,510                         |   | 2,370,769 |   | 3,500,859 |   |
| Gross revenues                                           |   | 12,827,446                       |       | 15,599,098                      |   | 43,192,604 |   | 41,899,031 |   |
| Less casino promotional allowances                       |   | (1,444,555                       | )          | (1,809,215                      | )      | (5,376,472 | ) | (5,893,122 | ) |
| Net operating revenues                                   |   | 11,382,891                       |       | 13,789,883                      |   | 37,816,132 |   | 36,005,909 |   |
|                                                     |   |                             |       |                            |   |   |   |   |   |
| Operating expenses:                                      |   |                             |       |                            |   |   |   |   |   |
| Casino                                                   |   | 3,775,549                        |       | 4,265,805                       |   | 12,443,582 |   | 13,177,859 |   |
| Hotel                                                    |   | 243,435                          |       | 244,557                         |   | 607,315 |   | 598,175 |   |
| Food and beverage                                        |   | 1,105,955                        |       | 1,288,275                       |   | 3,182,233 |   | 3,402,598 |   |
| Other operating expenses                                 |   | 470,828                          |       | 794,626                         |   | 1,568,731 |   | 2,713,972 |   |
| Selling, general and administrative                      |   | 1,141,967                        |       | 1,365,395                       |   | 3,603,454 |   | 4,482,919 |   |
| Corporate expenses                                       |   | 732,843                          |       | 693,509                         |   | 2,189,688 |   | 2,077,790 |   |
| Utilities and property expenses                          |   | 1,397,490                        |       | 1,497,230                       |   | 4,258,783 |   | 3,996,871 |   |
| Depreciation and amortization                            |   | 1,442,938                        |       | 1,293,735                       |   | 4,587,012 |   | 2,895,879 |   |
| Total operating expenses                                 |   | 10,311,005                       |       | 11,443,132                      |   | 32,440,798 |   | 33,346,063 |   |
| Operating income                                         |   | 1,071,886                        |       | 2,346,751                       |   | 5,375,334 |   | 2,659,846 |   |
| Interest expense                                         |   | (3,983,272                       | )          | (5,016,496                      | )      | (12,184,767 | ) | (6,922,787 | ) |
| Gain on sale of assets                                   |   | 0                                |       | 0                               |   | 0 |   | 137,238,005 |   |
| Litigation settlement, net                               |   | 0                                |       | (319,296                        | )      | 0 |   | 3,374,482 |   |
| Interest income                                          |   | 360,293                          |       | 406,544                         |   | 930,059 |   | 1,629,892 |   |
| Income (loss) before income tax (expense)  benefit       |   | (2,551,093                       | )          | (2,582,497                      | )      | (5,879,374 | ) | 137,979,438 |   |
| Federal income tax (expense) benefit                     |   | (1,131,616                       | )          | 878,049                         |   | 0 |   | (46,913,009 | ) |
| Net income (loss)                                        |   | (3,682,709                       | )          | (1,704,448                      | )      | (5,879,374 | ) | 91,066,429 |   |
| Dividends accrued  on preferred shares                   |   | (397,116                         | )          | (378,747                        | )      | (1,164,554 | ) | (1,589,119 | ) |
| Net income (loss)  applicable to common shares           |   | $                                | (4,079,825 | )                               | $      | (2,083,195 | ) | $ | (7,043,928 | ) | $ | 89,477,310 |   |
| Average common shares outstanding                        |   | 6,192,213                        |       | 6,206,856                       |   | 6,166,242 |   | 6,205,374 |   |
| Average common and common equivalent shares  outstanding |   | 6,764,934                        |       | 6,829,891                       |   | 6,764,172 |   | 6,825,862 |   |
| Income (loss) per common share                           |   |                             |       |                            |   |   |   |   |   |
| Basic                                                    |   | $                                | (0.66      | )                               | $      | (0.34 | ) | $ | (1.14 | ) | $ | 14.42 |   |
| Diluted                                                  |   | $                                | (0.66      | )                               | $      | (0.34 | ) | $ | (1.14 | ) | $ | 13.11 |   |

 

See the accompanying Notes toUnaudited Condensed Consolidated Financial Statements.

 

3

----

 

**Archon Corporation and Subsidiaries**

**Condensed Consolidated Statements ofStockholders’ Equity**

**(Unaudited)**

 
|                                     |   | **Common  Stock** |   | **Preferred  Stock** |   | **Additional    Paid-in  Capital** |   | **Accumulated  Deficit** |       | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Stock  Subscriptions  Receivable** |   | **Treasury  Stock** |      | **Total**  |   |
|------------------------------------------|--------|-------------------|--------|----------------------|--------|------------------------------------|--------|--------------------------|------------|------------------------------------------------------|--------|--------------------------------------|--------|---------------------|-----------|------------|--------|
| Balances, October 1, 2001                |   | $                 | 61,533 |                 | $      | 16,746,586                         |   | $                        | 57,283,784 |                                                 | $      | (34,831,966)                         |   | $                   | (406,701) |       | $      | 0 |   | $ | (87,774) |   | $ | 38,765,462 |   |
|                                     |   |              |   |                 |   |                               |   |                     |       |                                                 |   |                                 |   |                |      |       |   |
| Net loss                                 |   |              |   |                 |   |                               |   | (5,879,374               | )          |                                                 |   |                                 |   |                |      | (5,879,374 | )      |
|                                     |   |              |   |                 |   |                               |   |                     |       |                                                 |   |                                 |   |                |      |       |   |
| Preferred stock dividends accrued, net   |   |              |   | 1,164,554            |   |                               |   | (1,164,554               | )          |                                                 |   |                                 |   |                |      | 0          |   |
|                                     |   |              |   |                 |   |                               |   |                     |       |                                                 |   |                                 |   |                |      |       |   |
| Preferred stock purchased                |   |              |   | (13,544              | )      | 5,950                              |   |                     |       |                                                 |   |                                 |   |                |      | (7,594     | )      |
|                                     |   |              |   |                 |   |                               |   |                     |       |                                                 |   |                                 |   |                |      |       |   |
| Stock options exercised                  |   | 681               |   |                 |   | 73,062                             |   |                     |       |                                                 |   | (73,743                              | )      |                |      | 0          |   |
|                                     |   |              |   |                 |   |                               |   |                     |       |                                                 |   |                                 |   |                |      |       |   |
| Unrealized gain on marketable securities |   |              |   |                 |   |                               |   |                     |       | 413,067                                              |   |                                 |   |                |      | 413,067    |   |
|                                     |   |              |   |                 |   |                               |   |                     |       |                                                 |   |                                 |   |                |      |       |   |
| Balances, June 30, 2002                  |   | $                 | 62,214 |                 | $      | 17,897,596                         |   | $                        | 57,362,796 |                                                 | $      | (41,875,894                          | )      | $                   | 6,366     |       | $      | (73,743 | ) | $ | (87,774 | ) | $ | 33,291,561 |   |

 

See the accompanying Notes toUnaudited Condensed Consolidated Financial Statements.

 

4

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**Archon Corporation and Subsidiaries**

**Condensed Consolidated Statements of CashFlows**

**(Unaudited)**

 
|                                                 |   | **Nine  Months Ended  June 30, 2002** |      | **Nine  Months Ended  June 30, 2001** |   |
|------------------------------------------------------|--------|---------------------------------------|-----------|---------------------------------------|--------|
| Cash flows from operating activities:                |   |                                  |      |                                  |   |
| Cash and cash equivalents used in  operations        |   | $                                     | (468,038  | )                                     | $      | (40,591,788 | ) |
| Changes in assets and liabilities:                   |   |                                  |      |                                  |   |
| Accounts receivable, net                             |   | 2,836,161                             |      | 885,026                               |   |
| Inventories                                          |   | (22,595                               | )         | 207,975                               |   |
| Prepaid expenses and other                           |   | (176,053                              | )         | 1,755,905                             |   |
| Deferred income taxes                                |   | 0                                     |      | 46,835,014                            |   |
| Other assets                                         |   | (1,715,637                            | )         | (493,398                              | )      |
| Accounts payable                                     |   | 36,790                                |      | (1,117,200                            | )      |
| Interest payable                                     |   | (2,162,399                            | )         | (3,847,329                            | )      |
| Accrued and other liabilities                        |   | 3,444,889                             |      | (3,443,876                            | )      |
|                                                 |   |                                  |      |                                  |   |
| Net cash provided by operating activities            |   | 1,773,118                             |      | 190,329                               |   |
|                                                 |   |                                  |      |                                  |   |
| Cash flows from investing activities:                |   |                                  |      |                                  |   |
| Proceeds of sale of assets                           |   | 0                                     |      | 207,500,000                           |   |
| Decrease (increase) in restricted cash               |   | 3,122,964                             |      | (15,368,287                           | )      |
| Cost and expenses related to sale of assets          |   | 0                                     |      | (3,691,166                            | )      |
| Capital expenditures                                 |   | (3,907,230                            | )         | (68,601,172                           | )      |
| Marketable securities purchased                      |   | (3,876,930                            | )         | (7,165,401                            | )      |
| Marketable securities sold                           |   | 1,107,779                             |      | 0                                     |   |
|                                                 |   |                                  |      |                                  |   |
| Net cash provided by (used in) investing  activities |   | (3,553,417                            | )         | 112,673,974                           |   |
|                                                 |   |                                  |      |                                  |   |
| Cash flows from financing activities:                |   |                                  |      |                                  |   |
| Non-recourse debt                                    |   | 0                                     |      | 55,434,006                            |   |
| Obligation under lease                               |   | 0                                     |      | 32,500,000                            |   |
| Paid on debt                                         |   | (4,908,575                            | )         | (177,381,432                          | )      |
| Paid on note payable — officer                  |   | 0                                     |      | (1,500,000                            | )      |
| Minority capital contribution                        |   | 0                                     |      | 100,000                               |   |
| Capital stock acquired                               |   | (7,594                                | )         | (5,704,120                            | )      |
| Stock options exercised                              |   | 0                                     |      | 8,000                                 |   |
| Debt issue costs                                     |   | 0                                     |      | (3,194,349                            | )      |
|                                                 |   |                                  |      |                                  |   |
| Net cash used in financing activities                |   | (4,916,169                            | )         | (99,737,895                           | )      |
|                                                 |   |                                  |      |                                  |   |
| Increase (decrease) in cash and cash  equivalents    |   | (6,696,468                            | )         | 13,126,408                            |   |
|                                                 |   |                                  |      |                                  |   |
| Cash and cash equivalents, beginning of  period      |   | 16,213,088                            |      | 6,986,984                             |   |
|                                                 |   |                                  |      |                                  |   |
| Cash and cash equivalents, end of period             |   | $                                     | 9,516,620 |                                  | $      | 20,113,392 |   |

 

See the accompanying Notes toUnaudited Condensed Consolidated Financial Statements.

 

5

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**ARCHON CORPORATIONAND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

1.             Basis of Presentation and General Information

 

Archon Corporation (the“Company” or “Archon”), is a publicly traded Nevada corporation. The Company’sprimary business operations are conducted through a wholly-owned subsidiarycorporation, Pioneer Hotel Inc. (“PHI”), which operates the PioneerHotel & Gambling Hall (the “Pioneer”) in Laughlin, Nevada under longterm lease and license agreements.  Inaddition, the Company owns real estate on Las Vegas Boulevard South (the“Strip”) and at the corner of Rainbow and Lone Mountain Road, both in LasVegas, Nevada, and also owns investment properties in Dorchester, Massachusettsand Gaithersburg, Maryland.

 

The condensed consolidatedfinancial statements included herein are unaudited and have been prepared bythe Company pursuant to the rules and regulations of the United StatesSecurities and Exchange Commission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to such rules and regulations, although the Company believesthat the disclosures are adequate to make the information presented notmisleading.  In the opinion ofmanagement, all adjustments (which include normal recurring adjustments)necessary for a fair presentation of results for the interim periods have beenmade.  The results for the three andnine-month periods are not necessarily indicative of results to be expected forthe full fiscal year.  These condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended September 30, 2001 and theCompany’s Quarterly Reports on Form 10-Q for the quarters endedMarch 31, 2002 and December 31, 2001.

 

2.             Summary of Significant Accounting Policies

 

*Principles of Consolidation. *The accompanying unaudited condensedconsolidated financial statements include the accounts of Archon and itswholly-owned subsidiaries.  Amountsrepresenting the Company’s investment in less than majority–ownedcompanies in which a significant equity ownership interest is held areaccounted for on the equity method.  Allmaterial intercompany accounts and transactions have been eliminated inconsolidation.

 

*Earnings Per Share. *The Company presents its per shareresults in accordance with Statement of Accounting Standards (“SFAS”)No. 128, “Earnings Per Share” (“SFAS 128”).  SFAS 128 requires the presentation of basic net income (loss) pershare and diluted net income (loss) per share. Basic per share amounts are computed by dividing net income (loss) byaverage shares outstanding during the period. 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.  The effect of options outstanding wasincluded in diluted calculations during the nine months ended June 30,2001 but was not included in diluted calculations during the three and ninemonths ended June 30, 2002 

 

6

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and the three months endedJune 30, 2001 since the Company incurred a net loss in those periods.  The dilutive effect of the assumed exerciseof stock options increased the weighted average number of shares of commonstock by 572,721 and 597,930 shares for the three and nine months endedJune 30, 2002, and by 623,035 and 620,488 shares for the three andnine months ended June 30, 2001, respectively.

 

*Estimates and Assumptions. *The preparation of financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect 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 reclassifications have been madein the prior year’s unaudited condensed consolidated financial statements toconform to the presentation used in fiscal 2002.

 

*Recently Issued Accounting Standards. *In June 2002, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandard No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities*(“SFASNo. 146”).  SFAS No. 146addresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force Issue No. 94–3,*Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring*). SFAS No. 146 requires that a liability for a cost associated withan exit or disposal activity be recognized when the liability is incurred.  A fundamental conclusion reached by the FASBin this statement is that an entity’s commitment to a plan, by itself, does notcreate a present obligation to others that meets the definition of a liability.  SFAS No. 146 also establishes that fairvalue is the objective for initial measurement of the liability.  The provisions of this statement areeffective for exit or disposal activities that are initiated afterDecember 31, 2002, with early application encouraged.  The Company has determined that SFASNo. 146 will not have a material impact on its financial position andresults of operations.

 

3.             Cash and Cash Equivalents

 

At June 30, 2002, theCompany held cash and cash equivalents of $9.5 million compared to$16.2 million at September 30, 2001. Approximately $2.2 million was held by PHI and was subject tocertain restrictions and limitations on its use, including restrictions on itsavailability for distribution to the Company, by the terms of the agreementsentered into in connection with the sale/leaseback transactions in December2000 relating to the Pioneer.

 

AtJune 30, 2002, approximately $1.6 million was held inescrow pursuant to the agreements related to the sale of substantially all ofthe assets of the Santa Fe Hotel & Casino.

 

7

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4.             Property and Equipment, net

 

In May 2002, the Pioneerpurchased gaming equipment previously subject to lease for approximately$2.1 million, $1.8 million of which was released from the restrictedcash account.  As a result, the rentalexpense for gaming equipment decreased by approximately $63,000 per monthsubsequent to April 30, 2002.  Inaddition, the Company used approximately $1.0 million from the restrictedcash account for partial payment for a slot tracking system at the Pioneer andapproximately $400,000 from the restricted cash account for additional capitalexpenditures at the Pioneer, including the purchase of new slot equipment.

 

5.             Other Assets

 

Included in other assets atJune 30, 2002 is $900,000 of commercial and residential mortgage loans,representing loans originally funded by J & J Mortgage tounaffiliated third parties as well as loans made directly toJ & J Mortgage under a master loan agreement.  The loans purchased by the Company werepurchased for the principal amount, plus accrued interest, if any.  The advances to J & J Mortgageunder the master loan agreement bear interest at the prime rate plus 2%.  J & J Mortgage is owned byLICO, which in turn is wholly–owned by Paul W. Lowden, thePresident, Chief Executive Officer and majority stockholder of theCompany.  John W. Delaney, adirector of the Company, is the president of J & J Mortgage.

 

6.             Related Parties

 

The Company has entered into aPatent Rights and Royalty Agreement with David Lowden, brother of Paul W.Lowden, with respect to certain gaming technology for which David Lowden hasbeen issued a patent.  The Company hasagreed to pay certain royalty payments with respect to the technologyincorporated into gaming devices placed in operation, as well as costs relatedto maintain the patent.  David Lowdenhas granted the Company an exclusive five-year license in the United Stateswith respect to the technology, which will be automatically renewed foradditional two-year terms unless Archon terminates the agreement within thirtydays prior to the renewal or the agreement is otherwise earlier terminated inaccordance with its terms.  The Companyalso has an understanding with David Lowden that it will pay for the costs ofcommerical development of the technology. At June 30, 2002, the Company had expended $245,000 for commercialdevelopment of the technology.

 

In fiscal 2001, the Companypurchased for $100,000 Class B member interests in Dukes, LLC, a Nevadalimited liability company (“Dukes”) that is developing a restricted slotoperation, restaurant and entertainment facility.  Christopher W. Lowden, son of Paul W. Lowden, is alimited partner in the company that is the managing member of Dukes.  The Company entered into a casino spacelease with Dukes under which, subject to approval of the Nevada gamingauthorities, the Company would have operated the casino operations the Dukesfacility upon commencement of operations. However, the Company has provided notice of termination of the lease inaccordance with the terms of the lease. The Company is negotiating with Dukesregarding the terms , if any on which Company will operate all or a portion ofthe Dukes facility or otherwise invest in. or provide funding to Dukes.

 

See Note 5 for informationregarding transactions between the Company and J & J Mortgage.

 

In May 2002, the Company issued68,175 shares of common stock to a former officer of the Company upon theformer officer’s exercise of outstanding stock options.  In connection with the 

 

8

----

 

option exercise, the Companyloaned the former officer $73,743 to fund substantially all of the optionexercise price.  The loan, which is duein January 2008, is included in stock subscriptions receivable in theequity section of the accompanying condensed consolidated financial statements.

 

7.             Federal Income Tax

 

The operating losses incurredby the Company through the third quarter of fiscal 2002 are substantiallyhigher than forecasted by management at the beginning of the fiscal year, andexceed any projected gains or income from transactions expected to occur in thecurrent or next fiscal year.  As such,the Company has reversed the income tax benefit of approximately $1.1 millionrecorded for the first two quarters of fiscal 2002 in the quarter ended June30, 2002.

 

8.             Contingencies

 

*Local Joint Executive Board et al.*  The Company is the defendant in a pendingaction titled Local Joint Executive Board et al. v. Santa Fe Gaming Corporationet al., No. CV-S-01-0233-RLH.  Theplaintiffs instituted the action on or about February 28, 2001 in theUnited States District Court for the District of Nevada, alleging that theCompany violated the Worker Adjustment Retraining and Notification Act (“WARNAct”), by improperly providing notification of the closing of the Santa FeHotel and Casino.  The plaintiffs seekdamages in the amount provided for by the statute.  The plaintiffs filed a motion for class certification, and theCompany stipulated to the certification. On October 12, 2001, Archon filed a motion for summary judgment todismiss the complaint in its entirety. Plaintiffs filed a memorandum in opposition to defendant’s motion forsummary judgment, as well as a counter-motion for summary judgment alleging theWARN Act notices sent by Archon were invalid. On February 1, 2002 a hearing was held on the motions and the courtdenied both the plaintiffs’ and Archon’s motions for summary judgment.  However, the court subsequently narrowed thescope of the case, which is currently set for trial in October 2002.  Pre-trial preparation is in process by theCompany.

 

9

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9.             Supplemental Statement of Cash Flows Information

 

Supplemental statement of cashflows information for the nine month periods ended June 30, 2002 and 2001is presented below:

 
|                                                                                   |   | **Nine  Months Ended June 30,** |   |
|----------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                   |   | **2002**                        |   | **2001** |   |
|                                                                                   |   | **(Amounts in thousands)**      |   |
| Operating activities:                                                                  |   |                            |   |   |   |
| Cash paid during the period for interest                                               |   | $                               | 11,438 |   | $ | 9,426 |   |
|                                                                                   |   |                            |   |   |   |
| Cash paid during the period for income  taxes                                          |   | $                               | 0      |   | $ | 198 |   |
|                                                                                   |   |                            |   |   |   |
| Investing and financing activities:                                                    |   |                            |   |   |   |
| Non-recourse debt assumed with the  acquisition of investment properties               |   | $                               | 0      |   | $ | 77,255 |   |
| Long-term debt incurred in connection with  the acquisition of machinery and equipment |   | $                               | 104    |   | $ | 0 |   |
| Negative amortization of obligation under  lease                                       |   | $                               | 824    |   | $ | 490 |   |
| Unrealized gain on marketable securities                                               |   | $                               | 413    |   | $ | 0 |   |

 

10

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10.           Segment Information

 

The Company’s operations are inthe hotel/casino industry and investment properties.  The Company’s hotel/casino operations are conducted at thePioneer in Laughlin, Nevada.  TheCompany owns investment properties in Dorchester, Massachusetts andGaithersburg, Maryland, which were acquired in March 2001.  “Other & Eliminations” below includesfinancial information for the Company’s corporate operations, adjusted toreflect eliminations upon consolidation.

 

Set forth below is financialinformation for the segments in which the Company operates for the three andnine–month periods ended June 30, 2001 and 2002.

 
|                          |   | **Nine  Months Ended June 30,** |   |
|-------------------------------|--------|--------------------------------------|--------|
|                          |   | **2002**                             |   | **2001** |   |
|                          |   | **(Dollars in thousands)**           |   |
| **Pioneer Hotel**             |   |                                 |   |   |   |
| Operating revenues            |   | $                                    | 27,933 |   | $ | 31,258 |   |
| Operating income              |   | 901                                  |   | 2,066 |   |
| Interest expense              |   | 3,562                                |   | 3,207 |   |
| Depreciation and amortization |   | 1,482                                |   | 1,591 |   |
| Rents                         |   | 1,098                                |   | 954 |   |
| Corporate expenses            |   | 750                                  |   | 690 |   |
| Interest income               |   | 11                                   |   | 51 |   |
| EBITDA (1)                    |   | 4,242                                |   | 5,352 |   |
| Capital expenditures          |   | 3,699                                |   | 463 |   |
| Identifiable assets (2)       |   | 37,908                               |   | 37,563 |   |
|                          |   |                                 |   |   |   |
| **Investment Properties (3)** |   |                                 |   |   |   |
| Operating revenues            |   | 9,302                                |   | 4,137 |   |
| Operating income              |   | 6,459                                |   | 3,129 |   |
| Interest expense              |   | 8,731                                |   | 4,207 |   |
| Depreciation and amortization |   | 2,842                                |   | 1,008 |   |
| EBITDA (1)                    |   | 9,301                                |   | 4,137 |   |
| Capital expenditures          |   | 0                                    |   | 145,019 |   |
| Identifiable assets (2)       |   | 144,736                              |   | 147,209 |   |
|                          |   |                                 |   |   |   |
| **Other & Eliminations**  |   |                                 |   |   |   |
| Operating revenues            |   | 581                                  |   | 611 |   |
| Operating loss                |   | (1,985                               | )      | (2,535 | ) |
| Interest expense              |   | (108                                 | )      | (491 | ) |
| Depreciation and amortization |   | 263                                  |   | 297 |   |
| Corporate expenses            |   | 1,440                                |   | 1,388 |   |
| Interest income               |   | 919                                  |   | 1,579 |   |
| EBITDA (1)                    |   | 638                                  |   | 729 |   |
| Capital expenditures          |   | 312                                  |   | 382 |   |
| Identifiable assets (2)       |   | 58,603                               |   | 65,203 |   |
|                          |   |                                 |   |   |   |
| **Total**                     |   |                                 |   |   |   |
| Operating revenues            |   | 37,816                               |   | 36,006 |   |
| Operating income              |   | 5,375                                |   | 2,660 |   |
| Interest expense              |   | 12,185                               |   | 6,923 |   |
| Depreciation and amortization |   | 4,587                                |   | 2,896 |   |
| Rents                         |   | 1,098                                |   | 954 |   |
| Corporate expenses            |   | 2,190                                |   | 2,078 |   |
| Interest income               |   | 930                                  |   | 1,630 |   |
| EBITDA (1)                    |   | 14,181                               |   | 10,218 |   |
| Capital expenditures          |   | 4,011                                |   | 145,864 |   |
| Identifiable assets (2)       |   | 241,247                              |   | 249,975 |   |
|                               |        |                                      |        |  |  |  |  |

 

----

(1)                                  EBITDArepresents earnings before interest, taxes, depreciation and amortization,rents and corporate expenses plus interest income.  The Company’s definition of EBITDA may not be the same as that ofsimilarly captioned measures used by other companies.

(2)                                  Identifiableassets represent total assets less elimination for intercompany items.

(3)                                  Duringfiscal 2001, the Company acquired investment properties in Dorchester, Massachusettsand Gaithersburg, Maryland.  Thepayments received under lease agreements with respect to both properties areapplied to debt service payments on non–recourse indebtedness secured bythe respective properties.

 

11

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|                          |   | **Three  Months Ended June 30,** |   |
|-------------------------------|--------|---------------------------------------|--------|
|                          |   | **2002**                              |   | **2001** |   |
|                          |   | **(Dollars  in thousands)**           |   |
| **Pioneer Hotel**             |   |                                  |   |   |   |
| Operating revenues            |   | $                                     | 8,176  |   | $ | 9,959 |   |
| Operating income (loss)       |   | (472                                  | )      | 86 |   |
| Interest expense              |   | 1,190                                 |   | 1,159 |   |
| Depreciation and amortization |   | 507                                   |   | 478 |   |
| Rents                         |   | 331                                   |   | 384 |   |
| Corporate expenses            |   | 250                                   |   | 250 |   |
| Interest income               |   | 6                                     |   | 28 |   |
| EBITDA (1)                    |   | 622                                   |   | 1,227 |   |
| Capital expenditures          |   | 2,335                                 |   | 133 |   |
| Identifiable assets (2)       |   | 37,908                                |   | 37,563 |   |
|                          |   |                                  |   |   |   |
| **Investment Properties (3)** |   |                                  |   |   |   |
| Operating revenues            |   | 3,101                                 |   | 3,768 |   |
| Operating income              |   | 2,250                                 |   | 3,037 |   |
| Interest expense              |   | 2,831                                 |   | 3,894 |   |
| Depreciation and amortization |   | 851                                   |   | 732 |   |
| EBITDA (1)                    |   | 3,101                                 |   | 3,769 |   |
| Capital expenditures          |   | 0                                     |   | 0 |   |
| Identifiable assets (2)       |   | 144,736                               |   | 147,209 |   |
|                          |   |                                  |   |   |   |
| **Other & Eliminations**  |   |                                  |   |   |   |
| Operating revenues            |   | 106                                   |   | 63 |   |
| Operating loss                |   | (706                                  | )      | (776 | ) |
| Interest expense              |   | (38                                   | )      | (37 | ) |
| Depreciation and amortization |   | 85                                    |   | 84 |   |
| Corporate expenses            |   | 483                                   |   | 444 |   |
| Interest income               |   | 354                                   |   | 379 |   |
| EBITDA (1)                    |   | 216                                   |   | 128 |   |
| Capital expenditures          |   | 87                                    |   | 172 |   |
| Identifiable assets (2)       |   | 58,603                                |   | 65,203 |   |
|                          |   |                                  |   |   |   |
| **Total**                     |   |                                  |   |   |   |
| Operating revenues            |   | 11,383                                |   | 13,790 |   |
| Operating income              |   | 1,072                                 |   | 2,347 |   |
| Interest expense              |   | 3,983                                 |   | 5,016 |   |
| Depreciation and amortization |   | 1,443                                 |   | 1,294 |   |
| Rents                         |   | 331                                   |   | 384 |   |
| Corporate expenses            |   | 733                                   |   | 694 |   |
| Interest income               |   | 360                                   |   | 407 |   |
| EBITDA (1)                    |   | 3,939                                 |   | 5,124 |   |
| Capital expenditures          |   | 2,422                                 |   | 305 |   |
| Identifiable assets (2)       |   | 241,247                               |   | 249,975 |   |
|                               |        |                                       |        |  |  |  |  |

 

----

(1)                                  EBITDArepresents earnings before interest, taxes, depreciation and amortization,rents and corporate expenses plus interest income.  The Company’s definition of EBITDA may not be the same as that ofsimilarly captioned measures used by other companies.

(2)                                  Identifiableassets represent total assets less elimination for intercompany items.

(3)                                  Duringfiscal 2001, the Company acquired investment properties in Dorchester,Massachusetts and Gaithersburg, Maryland. The payments received under lease agreements with respect to bothproperties are applied to debt service payments on non–recourseindebtedness secured by the respective properties.

 

12

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**ARCHON CORPORATION**

 

**Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

**CriticalAccounting Policies and Estimates**

 

Management’s Discussion andAnalysis of Financial Condition and Results of Operations discusses Archon’scondensed consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  On an ongoing basis, management evaluatesits estimates and judgments, including those related to customer incentives,bad debts, inventories, investments, long-lived assets, estimated liabilitiesfor slot club bonus point programs, income taxes, contingencies andlitigation.  Management bases itsestimates and judgments on historical experience and on various other factorsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources.  Actual results may differ from these estimatesunder different assumptions or conditions.

 

Management believes thefollowing critical accounting policy, among others, affects its moresignificant judgments and estimates used in the preparation of its consolidatedfinancial statements:

 

The Company has recorded avaluation allowance to eliminate its deferred tax assets.  The Company has recorded the valuationallowance based upon forecasted losses from its current operations.  Realization of the net deferred tax assetsis dependent on the Company’s ability to generate profits from operations orthe sale of long-lived assets.  Therecan be no assurance that the Company will sell those assets or will generateprofits from sales if they were to occur in the future.  In the event the Company does generateprofits from sales of long-lived assets in the future, an adjustment to thevaluation allowance would increase income in the period in which the profit isrealized.

 

**Resultsof Operations — Nine Months Ended June 30, 2002 and 2001**

 

**Consolidated**

* *

*Net Operating Revenues. *Consolidated netoperating revenues for the nine months ended June 30, 2002 were$37.8 million, a $1.8 million, or 5.0%, increase from$36.0 million for the same period in the prior fiscal year.  The current period includes rental income of$9.3 million from investment properties, compared to $4.1 million forthe same period in the prior fiscal year. The investment properties were purchased in March 2001.  Revenues decreased by $3.3 million to$27.9 million at the Pioneer Hotel and Gambling Hall (the “Pioneer”) inthe nine months ended June 30, 2002 compared to the nine months endedJune 30, 2001.

 

13

----

 

*Operating Expenses. *Total operating expenses decreased$900,000, or 2.7%, to $32.4 million for the nine months endedJune 30, 2002 from $33.3 million for the nine months endedJune 30, 2001.  Total operatingexpenses as a percentage of revenue decreased to 85.8% in the current period endedJune 30, 2002 from 92.6% in the prior year period.  An increase of $1.7 million indepreciation and amortization expenses to $4.6 million in the 2002nine-month period related to the investment properties acquired in March 2001was offset in part by decreased operating expenses at the Pioneer and SFHI,Inc. (“SFHI”).  Pioneer operatingexpenses decreased by $2.2 million or 7.4%.  SFHI operating expenses, comprised primarily of general andadministrative expenses, decreased $700,000.

* *

*Operating Income. *Consolidated operating income for thenine months ended June 30, 2002 was $5.4 million, a $2.7 millionincrease from $2.7 million for the same period in fiscal 2001.  Operating income of $6.5 million in the2002 period is attributable to investment properties compared to$3.1 million in the prior year period. The lower operating income in the 2001 period is primarily due to thefact that the Company acquired the investment properties in March 2001.  Operating income decreased by$1.2 million at the Pioneer and operating loss decreased by $400,000 atSFHI.

* *

*Interest Expense. *Consolidated interest expense for thenine months ended June 30, 2002 was $12.2 million, a$5.3 million increase compared to $6.9 million in the nine monthsended June 30, 2001.  The increaseis due to interest expense related to $132.7 million of non-recourse debtincurred and assumed in the second quarter of fiscal 2001 in connection withthe acquisition of two investment properties, as well as the interest expensecomponent of the $33.5 million obligation under lease incurred on December 29,2000 in connection with the Pioneer sale/leaseback transactions.

* *

*Gain on Sale of Assets*.  The Company recorded a $137.2 milliongain on the sale of substantially all of the assets of the Santa Fe Hotel &Casino (the “Santa Fe”) in the quarter ended December 31, 2000.

* *

*Litigation Settlement, Net.*  The Company recorded an approximate$3.4 million net gain from a litigation settlement in the nine monthsended June 30, 2001.

* *

*Interest Income.*  Interest income for the nine months ended June 30, 2002, was$900,000, a decrease of $700,000 from $1.6 million in the prior year’speriod due to a decrease in cash and cash equivalents available for investmentand lower returns on investment.

* *

*Income (Loss) Before Income Tax. *Consolidated lossbefore income tax for the nine months ended June 30, 2002 was$5.9 million, a $143.9 million decrease compared to income of$138.0 million in the fiscal 2001 period, which was related principally tothe gain on sale of the Santa Fe assets and the litigation settlement in theprior year.

* *

*Federal Income Tax. *The Company recorded no federal incometax benefit in the current nine-month period, compared to a $46.9 millionprovision for income taxes in the prior year nine-month period.  The operating losses incurred by the Companythrough the third quarter of fiscal 2002 are substantially higher thanforecasted by management at the beginning of the fiscal year, and exceed anyprojected gains or income from transactions expected to occur in the current ornext fiscal year.  As such, the Companyhas reversed the income tax benefit of approximately $1.1 million recorded forthe first two quarters of fiscal 2002 in the quarter ended June 30, 2002.

* *

*Preferred Share Dividends. *Dividends ofapproximately $1.2 million and $1.6 million for the nine monthperiods ended June 30, 2002 and 2001, respectively, accrued on thepreferred stock.  

 

14

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The dividend rate increased to14.5% effective April 1, 2002 from 14.0% beginning on October 1,2001.  The dividend rate increases by50 basis points on each October 1 and April 1, up to a maximumdividend rate of 16%, in accordance with the terms of the Certificate ofDesignations of the preferred stock.

* *

*Net Income (Loss). *Consolidated net loss attributable tocommon shares was $7.0 million, or $1.14 per common share, in the2002 period compared to net income attributable to common shares of$89.5 million, or $14.42 per common share, in the prior year period.

 

**Pioneer**

* *

*Net Operating Revenues. *Revenues at thePioneer decreased $3.3 million, or 10.6%, to $27.9 million in thenine months ended June 30, 2002 from $31.2 million in the nine monthsended June 30, 2001.

 

Casino revenues decreased$2.5 million, or 9.5%, to $23.4 million in the nine month period endedJune 30, 2002 from $25.9 million in the nine month period endedJune 30, 2001 due to a continuing decrease in visitor volume in theLaughlin market, which management believes is due to expansion of NativeAmerican gaming facilities in Southern California, Arizona and New Mexico.  Slot and video poker revenues decreased$2.4 million, or 10.7%, to $20.3 million in the nine months endedJune 30, 2002 from $22.7 million in the nine months ended June 30,2001.  Other gaming revenues, includingtable games, remained unchanged at approximately $3.1 million.  Casino promotional allowances decreased$500,000, or 8.8%, to $5.4 million in the current period from$5.9 million in the prior year period, related to the decrease in slot andvideo poker revenues.

 

Hotel revenues were relativelyunchanged at $2.0 million for the nine months ended June 30, 2002compared to $1.9 million for the nine months ended June 30, 2001, asan increase in occupancy rate to 75.0% from 73.4% in the fiscal year 2002 periodwas partially offset by a decrease in the average daily room rate.  Food and beverage revenues decreased$400,000, or 5.3% to $6.1 million in the current period compared to$6.5 million in the prior year period, due to the decrease in visitorvolume.  Other revenues decreased$1.1 million, or 38.1%, to $1.8 million in the current period from$2.9 million in the prior year period due to decreased sales in thePioneer’s retail outlets caused by increased competition from retail sales inother casinos in Laughlin.

* *

*Operating Expenses. *Operating expenses decreased$2.2 million, or 7.4%, to $27.0 million in the nine months endedJune 30, 2002 from $29.2 million in the nine months endedJune 30, 2001.  Operating expensesas a percentage of revenue increased to 96.8% in the current period from 93.4%in the prior year period.

 

Casino expenses decreased$700,000, or 5.6%, to $12.4 million in the nine-month period endedJune 30, 2002 from $13.1 million in the nine-month period endedJune 30, 2001, related to the decrease in casino promotionalallowances.  Casino expenses as apercentage of casino revenues increased to 53.2% in the current period from51.0% in the prior year period.

 

Hotel expenses were unchangedat $600,000 in the nine-month periods ended June 30, 2002 and 2001.  Food and beverage expenses decreased$200,000, or 6.5%, to $3.2 million from $3.4 million, related to thedecrease in food and beverage revenues. Food and beverage expenses 

 

15

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as a percentage of food and beveragerevenues decreased to 51.9% in the current period from 52.6% in the prior yearperiod.  Other operating expensesdecreased $1.2 million, or 42.6%, to $1.5 million for the currentyear period compared to $2.7 million for the prior year period, related tothe lower volume of retail sales.  Otheroperating expenses as a percentage of other revenues decreased to 86.5% in thecurrent period from 93.4% in the prior year period.

 

Selling, general andadministrative expenses were unchanged at $4.1 million in the nine monthsended June 30, 2002 and 2001. Selling, general and administrative expenses as a percentage of revenuesincreased to 14.7% in the current year period from 13.2% in the prior yearperiod.  Utilities and property expensesincreased $100,000, or 2.5%, to $3.7 million in the current year periodfrom $3.6 million in the prior year period, primarily due to additionalrent expense associated with the lease of gaming equipment that was leased fromJanuary 2001 through April 2002. Utilities and property expenses as a percentage of revenues increased to13.2% in the current period from 11.5% in the prior year period.  Depreciation and amortization expensesdecreased $100,000, or 6.9%, to $1.5 million in the current period from$1.6 million in the prior year period, due to the sale of gaming equipmenton December 29, 2000.  The gamingequipment was repurchased in May 2002, which will result in an increase indepreciation and amortization expense in future periods.

 

**Resultsof Operations — Three Months Ended June 30, 2002 and 2001**

 

**Consolidated**

 

*Net Operating Revenues. *Consolidated netoperating revenues for the three months ended June 30, 2002 were$11.4 million, a $2.4 million, or 17.5%, decrease from$13.8 million for the same period in the prior fiscal year.  The current period includes rental income of$3.1 million from investment properties, compared to $3.8 million forthe same period in the prior fiscal year as a result of a portion of March 2001revenues being recorded in the June 2001 quarter after the Company'sacquisition of the investment properties in March 2001.  Revenues decreased by $1.8 million, or17.9%, at the Pioneer.

* *

*Operating Expenses. *Total operating expenses decreased$1.1 million, or 9.9%, to $10.3 million for the quarter ended June 30,2002 from $11.4 million in the quarter ended June 30, 2001.  Total operating expenses as a percentage ofrevenue increased to 90.6% in the quarter ended June 30, 2002 from 83.0%in the quarter ended June 30, 2001. Pioneer operating expenses decreased by $1.3 million, or 12.4%.

* *

*Operating Income. *Consolidated operating income for thequarter ended June 30, 2002 was $1.1 million, a $1.2 million, or54.3% decrease from $2.3 million for the same period in fiscal 2001.  Operating income of $2.2 million isattributable to investment properties, compared to $3.0 million in theprior year period, as a result of a portion of March 2001 income being recordedin the June 2001 quarter after the Company’s acquisition of the investmentproperties in March 2001. Operating income decreased $600,000 at the Pioneer.

* *

*Interest Expense. *Consolidated interest expense for thequarter ended June 30, 2002 was $4.0 million, a $1.0 milliondecrease compared to $5.0 million in the quarter ended June 30, 2001.  The current period includes interest expenseof $2.8 million with respect to the non–recourse debt related to theinvestment properties, compared to $3.9 million for the same period in theprior fiscal year, as a result of a portion of March 2001 interest expense beingrecorded in the June

 

16

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2001 quarter after theCompany’s acquisition of the investment properties in March 2001.

* *

*Interest Income.*  Interest income was $360,000 in the 2002 quarter compared to$400,000 in the 2001 quarter due to a decrease in cash and cash equivalentsavailable for investment and lower returns on investments.

* *

*Loss Before Income Tax. *Consolidated lossbefore income tax was $2.6 million for the quarters ended June 30,2002 and 2001.

* *

*Federal Income Tax. *The operating losses incurred by theCompany through the third quarter of fiscal 2002 are substantially higher thanforecasted by management at the beginning of the fiscal year, and exceed anyprojected gains or income from transactions expected to occur in the current ornext fiscal year.  As such, the Companyhas reversed the income tax benefit of approximately $1.1 million recorded forthe first two quarters of fiscal 2002 in the quarter ended June 30, 2002.  The Company recorded a federal income taxbenefit of $900,000 in the quarter ended June 30, 2001.

* *

*Preferred Share Dividends. *Dividends ofapproximately $400,000 for each of the quarters ended June 30, 2002 and2001 accrued on the preferred stock. The dividend rate was 14.5% in the 2002 quarter compared to 13.5% in the2001 quarter.  The dividend accrual wasapproximately the same for both quarters despite the increase in dividend rateas a result of fewer shares outstanding in the current quarter.

* *

*Net Loss. *Consolidated net loss attributable to commonshares was $4.1 million, or $0.66, per common share, in the 2002 period,compared to a net loss attributable to common shares of $2.1 million, or$0.34, per common share in the prior year period.

 

**Pioneer**

 

*Net Operating Revenues. *Revenues at thePioneer decreased $1.8 million, or 17.9%, to $8.2 million in thequarter ended June 30, 2002 from $10.0 million in the quarter endedJune 30, 2001.

 

Casino revenues decreased$1.7 million, or 21.1%, to $6.3 million in the quarter endedJune 30, 2002 from $8.0 million in the quarter ended June 30,2001 due to a continuing decrease in visitor volume in the Laughlin market,which management believes is due to expansion of Native American gamingfacilities in Southern California, Arizona and New Mexico.  Slot and video poker revenues decreased$1.7 million, or 23.7%, to $5.4 million in the quarter endedJune 30, 2002 from $7.1 million in the quarter ended June 30,2001.  Other gaming revenues, includingtable games, remained unchanged at $900,000.  Casino promotional allowances decreased $400,000, or 20.2%, to$1.4 million in the quarter ended June 30, 2002 from$1.8 million in the quarter ended June 30, 2001, related to thedecrease in slot and video poker revenues.

 

Hotel revenues were slightly higherat $800,000 for the three months ended June 30, 2002 compared to $700,000for the three months ended June 30, 2001, due to an increase in occupancyrate to 77.5% in the fiscal year 2002 quarter from 76.2% and an increase in theaverage daily room rate.  Food andbeverage revenues decreased $200,000, or 9.5% to $1.9 million in thequarter ended June 30, 2002 compared to $2.1 million in the quarterended June 30, 2001 due to the decrease in visitor volume.  Other revenues decreased $300,000, or 33.7%,to $600,000 in the quarter ended June 30, 2002 from $900,000 in thequarter ended June 30, 2001 due to decreased sales in the Pioneer’s retailoutlets caused by increased competition from retail sales in other casinos inLaughlin.

 

17

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*Operating Expenses. *Operating expenses decreased$1.3 million, or 12.4%, to $8.6 million in the quarter endedJune 30, 2002 from $9.9 million in the quarter ended June 30,2001.  Operating expenses as a percentageof revenue increased to 105.8% in the quarter ended June 30, 2002 from99.1% in the quarter ended June 30, 2001.

 

Casino expenses decreased$500,000, or 11.5%, to $3.8 million in the quarter ended June 30,2002 compared to $4.3 million in the quarter ended June 30, 2001,primarily due to decreases in casino promotional allowances and reduced payrollcosts.  Casino expenses as a percentageof casino revenues increased to 59.5% in the quarter ended June 30, 2002from 53.1% in the prior year period.

 

Hotel expenses were unchangedat $200,000 in the quarters ended June 30, 2002 and 2001.  Food and beverage expenses decreased$200,000, or 14.2%, to $1.1 million from $1.3 million, related to thedecrease in food and beverage revenues. Food and beverage expenses as a percentage of food and beverage revenuesdecreased to 57.4% in the quarter ended June 30, 2002 from 60.5% in thequarter ended June 30, 2001.  Otherexpenses decreased $300,000, or 41.2%, to $500,000 for the quarter endedJune 30, 2002 compared to $800,000 for the quarter ended June 30,2001 due to the lower volume of retail sales. Other expenses as a percentage of other revenues decreased to 80.8% inthe current year quarter from 91.1% in the prior year quarter.

 

Selling, general andadministrative expenses decreased $200,000, or 8.6%, to $1.3 million inthe quarter ended June 30, 2002 from $1.5 million in the quarterended June 30, 2001, primarily due to decreased legal expenses.  Selling, general and administrative expensesas a percentage of revenues increased to 16.5% in the quarter endedJune 30, 2002 from 14.8% in the quarter ended June 30, 2001.  Utilities and property expenses decreased$100,000, or 9.5% to $1.2 million in the current year period from $1.3 millionin the prior year period, primarily due to decreased rent expense resultingfrom the repurchase in May 2002 of gaming equipment that was leased fromJanuary 2001 through April 2002. Utilities and property expenses as a percentage of revenues increased to14.7% in the quarter ended June 30, 2002 from 13.3% in the quarter endedJune 30, 2001.  Depreciation andamortization expenses were unchanged at $500,000 in the quarters endedJune 30, 2002 and 2001.

 

**Liquidityand Capital Resources; Trends and Factors Relevant to Future Operations**

* *

*Contractual Obligations and Commitments*:* *Thefollowing table summarizes the Company’s fiscal year contractual obligationsand commitments as of June 30, 2002:

 

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|                    |   | **Fiscal  year ending September 30,** |   |     |   |
|-------------------------|--------|---------------------------------------|--------|----------|--------|
|                    |   | **2002**                              |   | **2003** |   | **2004** |   | **2005 and  Thereafter** |   | **Total** |   |
|                    |   | **(dollars in thousands)**            |   |
| Non-Recourse Debt       |   |                                  |   |     |   |   |   |   |   |   |   |
| Gaithersburg            |   | $                                     | 268    |     | $      | 1,204 |   | $ | 1,411 |   | $ | 51,389 |   | $ | 54,272 |   |
| Sovereign               |   | $                                     | 0      |     | $      | 4,530 |   | $ | 5,003 |   | $ | 59,599 |   | $ | 69,132 |   |
|                    |   |                                  |   |     |   |   |   |   |   |   |   |
| Obligations under Lease |   |                                  |   |     |   |   |   |   |   |   |   |
| Pioneer Hotel Inc.      |   | $                                     | 854    |     | $      | 3,415 |   | $ | 3,902 |   | $ | 105,333 |   | $ | 113,504 |   |
|                    |   |                                  |   |     |   |   |   |   |   |   |   |
| Long-Term Debt          |   |                                  |   |     |   |   |   |   |   |   |   |
| Building                |   | $                                     | 12     |     | $      | 53 |   | $ | 61 |   | $ | 164 |   | $ | 290 |   |
| Other                   |   | $                                     | 5      |     | $      | 5 |   | $ | 0 |   | $ | 0 |   | $ | 10 |   |
|                    |   |                                  |   |     |   |   |   |   |   |   |   |
| Operating Leases (1)    |   |                                  |   |     |   |   |   |   |   |   |   |
| Ground Lease            |   | $                                     | 193    |     | $      | 772 |   | $ | 772 |   | $ | 57,286 |   | $ | 59,023 |   |
| Executive Offices       |   | $                                     | 36     |     | $      | 146 |   | $ | 127 |   | $ | 161 |   | $ | 470 |   |
|                    |   |                                  |   |     |   |   |   |   |   |   |   |
| Total                   |   | $                                     | 1,368  |     | $      | 10,125 |   | $ | 11,276 |   | $ | 273,932 |   | $ | 296,701 |   |

 

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(1)                  InMay 2002, the Company purchased for approximately $2.1 million all gamingequipment subject to the equipment leases from the lessor.  Subsequent to that purchase, the Company hasno outstanding equipment leases.

 

Our ability to service ourcontractual obligations and commitments will be dependent on the futureperformance of the Pioneer, which will be affected by, among other things,prevailing economic conditions and financial, business and other factors,including competitive pressure from the expansion of Native American gamingfacilities in the southwest United States, certain of which are beyond ourcontrol. In addition, we will be dependent on the continued ability of thetenants in the investment properties in Gaithersburg, Maryland and Dorchester,Massachusetts to make payments pursuant to the leases with the Company.  The payments under the leases arecontractually committed to be used to make payments on the Company’snon-recourse debt obligations related to the properties.

 

As of June 30, 2002, theCompany held cash and cash equivalents of $9.5 million compared to$16.2 million at September 30, 2001. Approximately $1.6 million of cash and cash equivalents atJune 30, 2002 was held in escrow pursuant to the agreements related to thesale of the Santa Fe assets.  Inaddition, the Company had $13.0 million in marketable securities atJune 30, 2002.  Management believesthat the Company will have sufficient available cash and cash resources to meetits cash requirements through the twelve-month period ending June 30,2003.

 

At June 30, 2002,$12.4 million held by SFHI had been pledged to secure SFHI’s guaranty ofPHI’s lease and license obligations. Approximately $1.9 million of the restricted funds may be 

 

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used for capital expendituresat the Pioneer and acquisition of real property and equipment under lease atthe Pioneer.

* *

*Cash Flow from Operating Activities. *The Company’s cashprovided by operations was $1.8 million for the nine months endedJune 30, 2002 as compared to $200,000 for same period in the prioryear.  In the prior year, cash was usedto reduce accounts payable, make interest payments and pay other liabilities inconnection with the Santa Fe asset sale.

* *

*Cash Flow from Investing Activities. *Cash used ininvesting activities was $3.6 million during the nine months endedJune 30, 2002, compared to cash provided by investing activities of$112.7 million during the nine months ended June 30, 2001.  In the current period, the Company investedan additional $2.8 million, net, in marketable securities and madeapproximately $3.9 million in capital expenditures.  These uses of cash were funded in part by adecrease of $3.1 million, net of interest income, in the restricted cashaccounts.  Cash provided by investingactivities in the nine–month period ended June 30, 2001 includedproceeds received in October 2000 from the sale of substantially all ofthe Santa Fe assets for total consideration of $205.0 million.  In the nine months ended June 30, 2001,$67.7 million was used in the acquisition of investment properties.  In December 2000, pursuant tocontractual obligations entered into in connection with the December 2000sale/leaseback of the Pioneer (the “Pioneer Transactions”), $15.0 millionof cash was restricted in use, $3.3 million of which had been used for thepurchase of gaming equipment and capital expenditures as of June 30,2002.  See “Pioneer Transactions.”

* *

*Cash Used in Financing Activities. *Cash used infinancing activities was $4.9 million in the nine month period endedJune 30, 2002 compared to $99.7 million during the same period in2001.  In the current period, theCompany repaid $4.8 million of non–recourse long-term debt.  In the nine–month period endedJune 30, 2001, the Company used approximately $175.2 million of theproceeds from the sale of substantially all of the Santa Fe assets to retiresubstantially all of the Company’s then–outstanding debt.  This use was offset in part by (i) cashproceeds of $32.5 million from the creation of the obligation under leaseattributable to the Pioneer Transactions in December 2000, and (ii) theissuance in March 2001 of $55.4 million of non–recourse firstmortgage indebtedness in connection with the acquisition of an investmentproperty.  The Company incurred anaggregate $3.2 million of costs in conjunction with issuing the$55.4 million of non-recourse debt and assuming $77.3 millionprincipal amount of non–recourse debt in connection with the acquisitionof another investment property.

 

The Company’s primary sourcesof cash are cash flow from the Pioneer operations and from interest income onavailable cash and cash equivalents and investments in marketablesecurities.  Rental income from theCompany’s two investment properties is contractually committed to reducing thenon-recourse indebtedness issued or assumed in connection with the acquisitionof the investment properties.  Under thetwo leases, the tenants are responsible for substantially all obligations relatedto the property.  Sahara Las Vegas Corp.(“SLVC”), an indirect wholly-owned subsidiary of the Company, owns anapproximately 27-acre parcel of real property on Las Vegas Boulevard Southwhich is subject to a lease with a water theme park operator.  SLVC generates minimal cash from the leaseagreement after payment of property costs. The lease may be terminated at any time by SLVC.  A loan owed by the tenant to the formerowner would have 

 

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been payable by SLVC if itterminated the lease prior to December 31, 2004; however, that loan waspaid in full by the tenant in July 2002.

 

The Company’s primary use offunds is for Pioneer operations as well as costs of executive andadministrative personnel, and administrative functions and costs to exploredevelopment opportunities.

 

**PioneerTransactions**

 

Results of operations at thePioneer for the three and nine–month periods ended June 30, 2002generated earnings before interest, taxes, depreciation and amortization, rentsand corporate expenses plus interest income (“EBITDA”) of $600,000 and$4.2 million, respectively, compared to $1.2 million and$5.4 million of EBITDA in the same periods in 2001.  The EBITDA margin decreased to 15.2% in thenine months ended June 30, 2002 from 17.1% for the nine months endedJune 30, 2001, and decreased to 7.6% in the three months endedJune 30, 2002 from 12.3% for the three months ended June 30,2001.  EBITDA should not be construed asa substitute for operating income or a better indicator of liquidity than cashflow from operating, investing and financing activities, which are determinedin accordance with generally accepted accounting principles, and it is includedto provide additional information with respect to the ability of PHI to meetits future obligations under lease, rent expense, debt service, capitalexpenditure and working capital requirements. Although EBITDA is not necessarily a measure of Pioneer’s ability tofund its cash needs, management believes that EBITDA is a useful tool formeasuring the ability of Pioneer to service its debt and obligation underlease.  The Company’s definition ofEBITDA may not be the same as that of similarly captioned measures used byother companies.

 

PHI’s principal uses of cashare for payments of obligations under lease, capital expenditures to maintainthe facility and, to the extent permitted to be paid, the management feepayable to the Company.  Payments ofobligations under lease were $2.6 million and $1.7 million in thenine months ended June 30, 2002 and 2001, respectively.  Payments of obligations under lease began inJanuary 2001.  Rent expense wasapproximately $1.1 million and $1.0 million in the nine–monthperiods ended June 30, 2002 and 2001, respectively.  Rent expense increased in January 2001 as aresult of the lease of gaming equipment and decreased in May 2002 as a resultof the repurchase of gaming equipment under lease.  Capital expenditures at the Pioneer in fiscal 2002 are expectedto be approximately $5.0 million, $3.7 million of which had beenincurred as of June 30, 2002, including approximately $1.0 millionfor a new slot tracking system and $2.1 million used to purchase gamingequipment under lease.  Capitalexpenditures have been and are expected to be funded primarily from therestricted cash account.

 

OnDecember 29, 2000, the Company entered into a series of agreements totransfer, pursuant to Section 721 and 351 of the Internal Revenue Code,the real and personal property, excluding gaming equipment, and intangibleassets used in the operation of the Pioneer to a third party (the “Purchaser”)and agreed to lease and license the assets for up to 20 years, during whichperiod the Company will operate the Pioneer (collectively, the “PioneerTransactions”).  The consideration forthe Pioneer Transactions consisted of the assumption and immediate repayment bythe Purchaser of $32.5 million of debt owed by PHI to SFHI and preferredstock of the Purchaser having a $1.0 million liquidation preference.

 

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Archon and SFHI guaranteed thepayments under the lease and license agreements and agreed to certaincovenants, including restrictions on paying management fees to Archon,competing in the Laughlin, Nevada area and paying dividends with respect to theArchon preferred stock.  In addition,Archon agreed to maintain consolidated liquidity (as defined in the agreementsrelating to the Pioneer Transactions) of not less than $25 million.  Archon has agreed to forgo all or a portionof the management fees payable by PHI if PHI’s ratio of operating cash flow tofixed charges falls below 1.20 to 1.00. Further, Archon has agreed to contribute capital to PHI and in certainevents to deposit cash to restricted cash accounts in the event PHI’s ratio offixed charges to operating cash flow falls below 1.00 to 1.00 during anyrolling four quarter period, calculated on a quarterly basis.

 

Specifically, if the ratio offixed charges to operating cash flow is less than 1.00 to 1.00 for any four–quarterperiod ending on or before December 31, 2003, Archon will be obligated tocontribute capital to PHI in the amount of the deficiency and, if the fixedcharge coverage ratio is less than 1.00 to 1.00 for three consecutive quartersduring that period, to deposit additional cash to restricted cash accountsbased upon a specified percentage of the stipulated loss value set forth in thelease.  With respect to four–quarterperiods ending after December 31, 2003, if the fixed charge ratiorequirement is not met, Archon will be required to make a capital contributionin the amount of the deficiency and an additional cash payment to therestricted cash account based upon a specified percentage of the stipulatedloss value set forth in the lease. Notwithstanding the foregoing, if the fixed charge coverage ratio isless than 1.00 to 1.00 for four consecutive quarters and the fourth consecutivequarter ends after the quarter ending December 31, 2003, Archon will notbe permitted to cure the deficiency.  IfArchon fails to make any required payments or is not permitted to cure adeficiency with respect to quarters ending after the quarter ending December31, 2002, an event of default will occur under the lease.

 

Pursuant to the agreementsrelating to the Pioneer Transactions, Archon has foregone the management feeotherwise payable to it since April 2001. Additionally, PHI’s ratio of fixed charges to operating cash flow forthe four quarters ended June 30, 2002 was 0.92 to 1.00.  As a result, Archon has made a capitalcontribution to PHI in the amount of approximately $375,000.  Furthermore, Archon would have been requiredto make capital contributions aggregating approximately $400,000 as of a resultof PHI’s fixed charge ratios for the four quarters ended December 31, 2001and March 31, 2002.  The ratio offixed charges to operating cash flow for the four quarters endedDecember 31, 2001 was 0.93 to 1.00, and for the four quarters endedMarch 31, 2002 was 0.92 to 1.00. However, in May 2002, the Company completed the purchase, for approximately$2.1 million, of leased gaming equipment with $1.8 million of cashfrom the restricted cash account and cash from operations.  The elimination of the rent payments willreduce fixed charges in periods subsequent to the repurchase date.  Giving effect to the gaming equipmentpurchase as if it has occurred at the beginning of the relevant four quarterperiod, on a pro forma basis PHI’s ratio of fixed charges to operating cashflow for the four quarters ended December 31, 2001 and March 31, 2002would have been 1.04 to 1.00 and 1.045 to 1.00, respectively.  Archon advised the Purchaser that it is notmaking any capital contributions to PHI for the four–quarter periodsended December 31, 2001 and March 31, 2002 based on the pro forma fixedcharge ratios giving effect to the May 2002 purchase of leased gamingequipment.  The Purchaser has notadvised the Company whether it agrees that the Company has the right tocalculate the ratios on a pro forma basis. If the Purchaser disagrees, the Company will be required to make capitalcontributions with respect to the four-quarter periods ended December 31,2001 and March 31, 2002 and will be required to deposit additional cash tothe restricted cash account. 

22

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The agreements related to thePioneer Transactions provide an option for the Company to purchase the assetsunder the lease and license agreements to PHI between the end of the third andseventh years, at purchase price amounts ranging between $35.5 million and$38.7 million, which, as of the date of the agreements, approximatedestimated fair market value at the relevant purchase dates, and at the end ofthe lease term for fair market value.

 

**PreferredStock**

 

The Company’s preferred stockprovides that dividends accrue on a semi-annual basis, to the extent notdeclared.  Prior to fiscal 1997, theCompany satisfied the semi-annual dividend payments on its preferred stockthrough the issuance of paid in kind dividends.  The Company has accrued the semi-annual preferred stock dividendssince October 1, 1996.  Thedividend rate per annum was 8% of $2.14 for each share of preferred stock untilSeptember 30, 1998, at which date the dividend rate began increasing by anadditional 50 basis points on each succeeding semi-annual dividend payment dateup to a maximum of 16% per annum.  InApril  2002, the dividend rate increased to 14.5%.  The accrued stock dividends have beenrecorded as an increase to the preferred stock account.  As of June 30, 2002, the aggregate liquidationpreference of the preferred stock was $17.5 million, or $3.42 pershare.

 

Pursuant to the Certificate ofDesignations of Preferred Stock, dividends are payable only when, as and ifdeclared by the Board of Directors and the liquidation preference is payableonly upon a liquidation, dissolution or winding up of the Company.  Because dividends in an amount equal todividend payments for one dividend period have accrued and remain unpaid for atleast two years, the preferred stockholders, voting as a separate class, areentitled to elect two directors.  Theagreements relating to the Pioneer Transactions contain provisions restrictingthe payment of dividends on the preferred stock.  The Board of Directors of the Company has authorized the purchasefrom time to time by the Company of preferred stock for total consideration ofup to $1.5 million.  As ofAugust 13, 2002, the Company has purchased 292,789 shares ofpreferred stock for $481,308 under this program.

 

**RecentlyIssued Accounting Standards**

 

In June 2002, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*(“SFASNo. 146”).  SFAS No. 146addresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force Issue No. 94–3,*Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring*). SFAS No. 146 requires that a liability for a cost associated withan exit or disposal activity be recognized when the liability is incurred.  A fundamental conclusion reached by the FASBin this statement is that an entity’s commitment to a plan, by itself, does notcreate a present obligation to others that meets the definition of aliability.  SFAS No. 146 alsoestablishes that fair value is the objective for initial measurement of theliability.  The provisions of thisstatement are effective for exit or disposal activities that are initiatedafter December 31, 2002, with early application encouraged.  

 

23

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The Company has determined thatSFAS No. 146 will not have a material impact on its financial position andresults of operations.

 

**Effectsof Inflation**

 

TheCompany has been generally successful in recovering costs associated withinflation through price adjustments in its hotel.  Any such future increases in costs associated with casinooperations and maintenance of properties may not be completely recovered by theCompany.

 

**ForwardLooking Statements**

 

Certain statements in thisQuarterly Report on Form 10–Q which are not historical facts areforward looking statements, such as statements relating to future operatingresults, existing and expected competition, financing and refinancing sourcesand availability and plans for future development or expansion activities,capital expenditures and expansion of business operations into new areas.  Such forward looking statements involve anumber of risks and uncertainties that may significantly affect the Company’sliquidity and results in the future and, accordingly, actual results may differmaterially from those expressed in any forward looking statements.  Such risks and uncertainties include, butare not limited to, those related to effects of competition, leverage and debtservice, general economic conditions, changes in gaming laws or regulations (includingthe legalization of gaming in various jurisdictions) and risks related todevelopment activities and the startup of non-gaming operations.

 

**Item 3.  MARKET RISK DISCLOSURE**

 

Market risk is the risk of lossarising from changes in market rates and prices, such as interest rates,foreign currency exchange rates and commodity process.  The Company has no debt instruments subjectto interest rate fluctuation.

 

The Company holds investmentsin various available-for-sale securities; however, management believes thatexposure to price risk arising from the ownership of these investments is notmaterial to our consolidated financial position, results of operations or cashflow.

 

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**ARCHON CORPORATION**

**PARTII – OTHER INFORMATION**

 

**Item 1- Legal Proceedings**

 

None

 

**Item 2- Changes in Securities**

 

None

 

**Item 3- Defaults Upon Senior Securities**

 

The Company has outstandingredeemable exchangeable cumulative preferred stock (“Preferred Stock”).  Prior to fiscal 1997, the Company satisfiedthe semi-annual dividend payments on its Preferred Stock through the issuanceof paid in kind dividends.  Commencingin fiscal 1997, dividends paid on the Preferred Stock, to the extent declared,must be paid in cash.  No dividends havebeen declared on the Preferred Stock since October 1, 1996.  Pursuant to the terms of the Certificate ofDesignation with respect to the Preferred Stock, dividends that are notdeclared are cumulative and accrue.  Thedividend rate per annum was 8% of $2.14 for each share of preferred stock untilSeptember 30, 1998, after which dividend rate began increasing by anadditional 50 basis points on each succeeding semi-annual dividend payment dateup to a maximum of 16% per annum.  Thedividend rate is 14.5% per share effective April 1, 2002.  The accrued stock dividends have beenrecorded as an increase to the Preferred Stock account.  As of June 30, 2002, the aggregateliquidation preference of the Preferred Stock was $17.5 million, or $3.42 pershare.

 

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

 

None

 

**Item 5- Other Information**

 

None

 

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

 

Exhibits

 
| 10.31  |   | Patent  Rights Royalty Agreement dated as of January 2, 2002 between Archon Corporation  and David G.Lowden. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                              |
| 99.1   |   | Certification  of Chief Executive Officer pursuant to Section 906 of the  Sarbanes-Oxley  Act of 2002.  |
|   |   |                                                                                                              |
| 99.2   |   | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.        |

 

Reportson Form 8-K

 

On April 11, 2002, theCompany filed a Current Report on Form 8–K under Item 5, OtherEvents and Regulation FD Disclosure, with respect to an authorization ofan increase in the Company’s preferred stock repurchase program.

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoauthorized.

 
|                              | ARCHON  CORPORATION, Registrant |
|-----------------------------------|---------------------------------|
|                              |                            |
|                              | By:                             | /s/ |
|                              | Charles W. Sandefur,            |
|                              | Chief Financial Officer         |
|                              |                            |
| Dated:  August 14, 2002 |                            |

 

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