Stratosphere Corp · 10-Q · For 9/29/96

Filed On 11/13/96   ·   SEC File 1-12030   ·   Accession Number 897101-96-964

Quarterly Report   ·   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                      16±    94K 
 2: EX-10.01    Standstill and Amendment Agreement                    11±    37K 
 3: EX-10.02    Funding Agreement                                      3±    18K 
 4: EX-10.03    Agreement Letter                                       2±    14K 
 5: EX-10.04    Senior Executive Severance Agreement                   3±    17K 
 6: EX-10.05    Senior Executive Severance Agreement                   3±    17K 
 7: EX-27       Financial Data Schedule                                1      6K 

10-Q   ·   Quarterly Report
Document Table of Contents

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 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 FORM 10-Q

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES     
        EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 1996

OR

[ ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   
  EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO
________                                                      

 COMMISSION FILE NO. 1-12030

STRATOSPHERE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

           DELAWARE                                         88-0292318
    (STATE OR OTHER JURISDICTION                            (I.R.S. EMPLOYER
    OF INCORPORATION OR ORGANIZATION)                        IDENTIFICATION NO.)

2000 LAS VEGAS BOULEVARD SOUTH                                        
   LAS VEGAS, NEVADA                                       89104
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        (ZIP CODE)      

(702) 382-4446
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS     
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING         
REQUIREMENTS FOR THE PAST 90 DAYS.                                              

YES X       NO ______               

INDICATE THE NUMBER OF SHARES OUTSTANDING FOR EACH OF THE ISSUER'S CLASSES OF   
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: 58,393,105.                    

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FORM 10-Q                              STRATOSPHERE CORPORATION AND SUBSIDIARIES         
INDEX                                                                                    
                                                                                 Page No.
                                                                                         

Part I.  FINANCIAL INFORMATION                                                           
Item 1.  Consolidated Financial Statements                                               

         Condensed Consolidated Balance Sheets at September 29, 1996 and                 
         December 31, 1995                                                           3   

         Condensed Consolidated Statements of Operations for the nine months             
         ended September 29, 1996 and September 30, 1995                             4   

         Condensed Consolidated Statements of Operations for the three months            
         ended September 29, 1996 and September 30, 1995                             5   

         Condensed Consolidated Statements of Cash Flows for the nine months             
         ended September 29, 1996 and September 30, 1995                            6-7  

         Notes to Condensed Consolidated Financial Statements                      8-10  

Item 2.  Management's Discussion and Analysis of Financial Condition and                 
         Results of Operations                                                    11-13  

Part II. OTHER INFORMATION                                                               

Item 1.  Legal Proceedings                                                         14    

Item 3.  Defaults Upon Senior Securities                                           14    

Item 6.  Exhibits and Reports on Form 8-K                                          15    


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CONDENSED CONSOLIDATED                 STRATOSPHERE CORPORATION AND SUBSIDIARIES                               
BALANCE SHEETS                                                                                                 
                                                                                 SEPTEMBER 29,   DECEMBER 31,  
                                                                                     1996             1995     
                                                                                 -------------   ------------- 
                                                                                  (UNAUDITED)                  
                                                                                                               
ASSETS                                                                                                         
Current Assets:                                                                                                
       Cash and cash equivalents                                                 $  38,371,796   $  92,595,770 
       Cash and cash equivalents-restricted                                         20,099,258            --   
       Accounts receivable                                                           9,823,078       5,417,030 
       Other current assets                                                          6,522,419       1,125,548 
                                                                                 -------------   ------------- 
Total Current Assets                                                                74,816,551      99,138,348 
                                                                                 -------------   ------------- 
Property and Equipment, Net                                                        435,681,686     194,908,237 
                                                                                 -------------   ------------- 
Other Assets:                                                                                                  
       Cash and cash equivalents-restricted                                               --       115,413,435 
       Securities available for sale                                                 1,996,540       5,140,950 
       Debt issuance and deferred licensing costs-net                               12,946,152      13,507,699 
       Pre-opening costs-net                                                         4,051,922       5,796,862 
                                                                                 -------------   ------------- 
Total Other Assets                                                                  18,994,614     139,858,946 
                                                                                 -------------   ------------- 
TOTAL ASSETS                                                                     $ 529,492,851   $ 433,905,531 
                                                                                 =============   ============= 

LIABILITIES AND SHAREHOLDERS' EQUITY                                                                           
Current Liabilities:                                                                                           
       Accounts payable-trade                                                    $   2,920,542   $     338,745 
       Accounts payable-construction                                                36,094,517      33,523,612 
       Current installments of long-term debt and capital lease                     10,800,000            --   
       Accrued interest                                                             11,342,145       3,645,657 
       Accrued payroll and related expenses                                          3,648,236         166,485 
       Affiliate payable                                                             5,771,773         803,865 
       Other accrued expenses                                                        4,738,546         137,403 
                                                                                 -------------   ------------- 
Total Current Liabilities                                                           75,315,759      38,615,767 
                                                                                 -------------   ------------- 
Long-term Liabilities:                                                                                         
       Long-term debt and capital lease-less current installments                  228,000,000     203,000,000 
       Note payable to affiliate                                                    50,000,000            --   
                                                                                 -------------   ------------- 
Total Long-Term Liabilities                                                        278,000,000     203,000,000 
                                                                                 -------------   ------------- 
TOTAL LIABILITIES                                                                  353,315,759     241,615,767 
                                                                                 -------------   ------------- 

COMMITMENTS AND CONTINGENCIES                                                                                  
Shareholders' Equity:                                                                                          
       Preferred stock, $.01 par value; authorized 10,000,000 shares                                           
           authorized; no shares issued and outstanding                                                        
       Common stock, $.01 par value; authorized 100,000,000 shares;                                            
           issued and outstanding 58,393,105 and 56,361,117                                                    
           at September 29, 1996 and December 31, 1995, respectively                   583,931         563,611 
       Additional paid-in-capital                                                  218,779,007     199,697,889 
       Accumulated deficit                                                         (43,185,846)     (7,971,736)
                                                                                 -------------   ------------- 
Total Shareholders' Equity                                                         176,177,092     192,289,764 
                                                                                 -------------   ------------- 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                       $ 529,492,851   $ 433,905,531 
                                                                                 =============   ============= 


SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.                       

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CONDENSED CONSOLIDATED                 STRATOSPHERE CORPORATION AND SUBSIDIARIES               
STATEMENTS OF OPERATIONS                   (UNAUDITED)                                         

NINE MONTHS ENDED SEPTEMBER 29, 1996                        1996                      1995     
   AND SEPTEMBER 30, 1995                              ------------              ------------  
                                                                                               
REVENUES:                                                                                      
        Casino                                          $ 26,569,994              $       --   
        Hotel                                             12,036,486                      --   
        Food and beverage                                 17,050,798                      --   
        Tower, retail and other income                    16,345,496                    45,371 
                                                        ------------              ------------ 
Gross Revenues                                            72,002,774                    45,371 
        Less:  Promotional allowances                      6,786,251                      --   
                                                        ------------              ------------ 
NET REVENUES                                              65,216,523                    45,371 
                                                        ------------              ------------ 

COSTS AND EXPENSES:                                                                            
        Casino                                            13,504,136                      --   
        Hotel                                              4,747,348                      --   
        Food and beverage                                 14,474,982                      --   
        Other operating expenses                           6,342,519                      --   
        Depreciation and amortization                      5,719,196                 1,186,984 
        Pre-opening costs amortization                    19,886,459                      --   
        Selling, general and administrative               28,098,738                   550,069 
                                                        ------------              ------------ 
                   Total Costs and Expenses               92,773,378                 1,737,053 
                                                        ------------              ------------ 

LOSS FROM OPERATIONS                                     (27,556,855)               (1,691,682)
                                                        ------------              ------------ 

OTHER INCOME (EXPENSE):                                                                        
        Interest income                                    3,665,175                 4,779,559 
        Interest expense                                 (11,322,430)               (8,700,050)
        Loss on sale of assets                                  --                    (166,815)
                                                        ------------              ------------ 
                   Total Other Expense, net               (7,657,255)               (4,087,306)
                                                        ------------              ------------ 

NET LOSS                                                $(35,214,110)             $ (5,778,988)
                                                        ============              ============ 

LOSS PER COMMON SHARE                                   $      (0.61)             $      (0.17)
                                                        ============              ============ 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                58,047,766                34,797,939 
                                                        ============              ============ 


SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.                       

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CONDENSED CONSOLIDATED                 STRATOSPHERE CORPORATION AND SUBSIDIARIES                 
STATEMENTS OF OPERATIONS                                        (UNAUDITED)                      

THREE MONTHS ENDED SEPTEMBER 29, 1996                                   1996            1995     
     AND SEPTEMBER 30, 1995                                        ------------    ------------  
                                                                                                 
REVENUES:                                                                                        
        Casino                                                      $ 14,259,954    $       --   
        Hotel                                                          7,031,268            --   
        Food and beverage                                              9,815,438            --   
        Tower, retail and other income                                 9,115,553          23,715 
                                                                    ------------    ------------ 
Gross Revenues                                                        40,222,213          23,715 
        Less:  Promotional allowances                                  4,903,269            --   
                                                                    ------------    ------------ 
NET REVENUES                                                          35,318,944          23,715 
                                                                    ------------    ------------ 

COSTS AND EXPENSES:                                                                              
        Casino                                                         7,512,100            --   
        Hotel                                                          2,627,149            --   
        Food and beverage                                              8,970,014            --   
        Other operating expenses                                       3,994,785            --   
        Depreciation and amortization                                  3,230,179         530,673 
        Pre-opening costs amortization                                12,234,201            --   
        Selling, general and administrative                           16,284,130         221,319 
                                                                    ------------    ------------ 
                               Total Costs and Expenses               54,852,558         751,992 
                                                                    ------------    ------------ 

LOSS FROM OPERATIONS                                                 (19,533,614)       (728,277)
                                                                    ------------    ------------ 

OTHER INCOME (EXPENSE):                                                                          
        Interest income                                                  363,176       1,875,857 
        Interest expense                                              (6,855,271)     (3,429,831)
                                                                    ------------    ------------ 
                               Total Other Expense, net               (6,492,095)     (1,553,974)
                                                                    ------------    ------------ 

NET LOSS                                                            $(26,025,709)   $ (2,282,251)
                                                                    ============    ============ 

LOSS PER COMMON SHARE                                               $      (0.45)   $      (0.06)
                                                                    ============    ============ 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                            58,393,105      39,398,777 
                                                                    ============    ============ 


SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.                       

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CONDENSED CONSOLIDATED                 STRATOSPHERE CORPORATION AND SUBSIDIARIES                                
STATEMENTS OF CASH FLOWS (UNAUDITED)                                                                            

NINE MONTHS ENDED SEPTEMBER 29, 1996                                                   1996            1995     
     AND SEPTEMBER 30, 1995                                                       -------------   ------------- 
                                                                                                                
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                           
       Net loss                                                                   $ (35,214,110)  $  (5,778,988)
       Adjustments to reconcile net loss to net cash                                                            
         provided by (used in) operating activities:                                                            
               Depreciation and amortization                                          7,009,427       1,186,984 
               Amortization of pre-opening costs                                     19,886,459            --   
               Loss on sale or disposal of assets                                       307,520         166,815 
               Changes in operating assets and liabilities:                                                     
                    Other current assets                                            (27,944,438)       (297,960)
                    Accounts payable - trade                                          2,581,797        (550,444)
                    Accrued expenses and income taxes                                15,779,382      16,499,515 
                                                                                  -------------   ------------- 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                                 (17,593,963)     11,225,922 
                                                                                  -------------   ------------- 

CASH FLOWS FROM INVESTING ACTIVITIES:                                                                           
       Advances to stockholder                                                             --        (4,411,798)
       (Increase) decrease in cash and cash equivalents-restricted                   95,162,455    (103,028,651)
       (Increase) decrease in securities available for sale                           3,144,410     (58,383,717)
       Payments for property and equipment                                         (226,024,500)    (52,703,690)
       Increase in other long-term assets                                                  --        (1,669,248)
                                                                                  -------------   ------------- 
NET CASH USED IN INVESTING ACTIVITIES                                              (127,717,635)   (220,197,104)
                                                                                  -------------   ------------- 

CASH FLOWS FROM FINANCING ACTIVITIES:                                                                           
       Proceeds from issuance of common stock-net                                     1,296,446            --   
       Proceeds from exercise of stock options/common stock                                                     
          purchase warrants                                                                --        10,935,056 
       Costs of secondary stock offering                                               (248,046)           --   
       Debt issuance costs and deferred financing costs                                (728,684)    (10,195,344)
       Proceeds from issuance of long-term debt and capital lease obligations        38,670,375     216,493,458 
       Payments on long-term debt and capital lease obligations                      (2,870,375)     (3,737,763)
       Increase in affiliate payable                                                  4,967,908            --   
       Proceeds from issuance of  debt to affiliate                                  50,000,000       1,900,000 
       Cash proceeds from sale of property and equipment                                   --           928,134 
                                                                                  -------------   ------------- 
NET CASH PROVIDED BY  FINANCING ACTIVITIES                                           91,087,624     216,323,541 
                                                                                  -------------   ------------- 

Net increase (decrease)  in cash and cash equivalents                               (54,223,974)      7,352,359 
Cash and cash equivalents - beginning of period                                      92,595,770         516,479 
                                                                                  -------------   ------------- 
CASH AND CASH EQUIVALENTS - END OF PERIOD                                         $  38,371,796   $   7,868,838 
                                                                                  =============   ============= 


SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.                       

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CONDENSED CONSOLIDATED                 STRATOSPHERE CORPORATION AND SUBSIDIARIES                                
STATEMENTS OF CASH FLOWS  (UNAUDITED)                                                                           

NINE MONTHS ENDED SEPTEMBER 29, 1996                                                          1996         1995 
     AND SEPTEMBER 30, 1995                                                                                     

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                                              
                                                                                                                
Cash paid during the period for:                                                                                
       Interest-net of capitalized interest                                              7,001,580         --   
       Income taxes                                                                           --        275,877 
Non-Cash Investing and Financing Activities:                                                                    
       Increase (decrease)  in land and improvements and construction in progress                               
            included in long-term debt and accounts payable-construction                 2,570,905     (121,409)
       Issuance of common stock in purchase of land                                     18,204,760         --   
       Issuance of common stock in payment of underwriting fees in connection                                   
            with First Mortgage Notes                                                         --      4,000,000 
       Purchase of land, buildings, furniture and equipment from                                                
            stockholder (principally Vegas World assets) as follows:                                            
               Purchase price                                                                 --      1,000,000 
               Cash paid                                                                      --           --   
                                                                                       -----------  ----------- 
               Note payable to stockholder                                                    --      1,000,000 
               Preferential distribution to                                                                     
                  stockholder                                                                 --      1,226,841 
                                                                                       -----------  ----------- 
                        Predecessor cost of assets aquired for non-cash consideration         --      2,226,841 
                                                                                       ===========  =========== 
       Increase in furniture and equipment from                                                                 
            reduction in notes receivable from stockholder                                    --         80,000 
       Offering costs recognized as a reduction in additional paid-in capital                                   
            in connection with initial public offering of common stock                        --         23,570 
       Issuance of preferred stock to parent in payment of notes payable                      --     33,524,860 


SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.                       

NOTES TO CONDENSED CONSOLIDATED        STRATOSPHERE CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS                                                            

(1)  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES          

THE COMPANY                                                                     

      The accompanying condensed consolidated financial statements present
the financial position, results of operations and cash flows of Stratosphere    
Corporation and its wholly-owned subsidiaries, Stratosphere Gaming Corporation, 
Stratosphere Land Corporation and Stratosphere Advertising Agency (collectively 
the "Company"). The Company commenced operations on April 29, 1996, with an     
integrated casino, hotel and entertainment facility and an 1,149 foot,          
free-standing observation tower.                                                

PRINCIPLES OF PRESENTATION                                                      

       The condensed consolidated financial statements have been prepared in
accordance with the accounting policies described in the Company's 1995 Annual  
Report on Form 10-K. Although the Company believes that the disclosures are     
adequate to make the information presented not misleading, it is suggested that 
these financials be read in conjunction with the Notes to Condensed Consolidated
Financial Statements which appear in that report.                               

     In the opinion of management, the accompanying financial statements
include all adjustments (of a normal recurring nature) which are necessary for a
fair presentation of the results for the interim periods presented. Certain     
information and footnote disclosures normally included in financial statements  
have been condensed or omitted pursuant to such rules and regulations of the    
Securities and Exchange Commission.                                             

RECLASSIFICATIONS                                                               

Certain amounts in the 1995 condensed consolidated financial statements have    
been reclassified to conform with the 1996 presentation. These reclassifications
had no effect on the Company's net income.                                      

REVENUES AND EXPENSES                                                           

Casino revenue is the net win from gaming activities (the difference between    
gaming wins and losses). Casino revenues are net of accruals for anticipated    
payouts of progressive and certain other slot machine jackpots. Revenues include
the retail value of rooms, food and beverage, and other items that are provided 
to customers on a complimentary basis. A corresponding amount is deducted as    
promotional allowances. The costs of such complimentaries are included in hotel,
and food and beverage expenses in the accompanying Condensed Consolidated       
Statements of Operations.                                                       

PROPERTY AND EQUIPMENT                                                          

Property and equipment are stated at cost, except in the case of capitalized    
lease assets, which are stated at the lower of the present value of the future  
minimum lease payments or fair market value at the inception of the lease.      
Expenditures for additions, renewals, and improvements are capitalized. Costs of
repairs and maintenance are expensed when incurred. Leasehold acquisition costs 
are amortized over the shorter of their estimated useful lives or the term of   
the respective leases once the assets are placed in service.                    

Depreciation and amortization of property and equipment is computed using the   
straight-line method over the following estimated useful lives:                 

Building and Leasehold Improvements         30 years                
Leasehold Acquisition Costs                 30 years                
Furniture and Equipment                   3-15 years                
Land Improvements                           15 years                

LOSS PER COMMON SHARE                                                           

Loss per common share was computed by dividing net loss by the weighted average 
number of common shares outstanding for the period. Stock options and warrants  
have not been included in these calculations as their impact would be           
anti-dilutive.                                                                  

(2)  COMMITMENTS                                                                

On May 3, 1996, the Company consummated a $37.5 million capital lease           
transaction of which $33.3 million had been advanced as of September 29, 1996.  
Based upon the Company's results of operations for the third fiscal quarter the 
Company does not meet certain financial covenants that it has made part of the  
capital lease. Failure to meet such financial covenants constitutes an event of 
default under the capital lease that gives the lender the right to accelerate   
such indebtedness. The Company does not have the ability to repay such          
indebtedness. The acceleration of such indebtedness will also constitute an     
event of default under the Company's First Mortgage Note Indenture - (See       
Subsequent Events Note-4).                                                      

Pursuant to the Completion Guarantee under the Indenture to the First Mortgage  
Notes the Company has borrowed $50 million from Grand Casinos, Inc. as of       
September 29, 1996. The loan is subordinate to the First Mortgage Notes and     
capital lease obligations and accrues interest at the rate of 14.25%. The       
interest will accrue but will not be paid until the Company meets certain       
financial covenants pursuant to the Indenture under the First Mortgage Notes.   
The loan has been utilized to fund the completion of Phase I of the project.    

(3)  CONTINGENCIES                                                              

On August 5, 1996, a complaint was filed in the United States District Court for
the District of Nevada (Michael Caesar, et al. v. Stratosphere Corporation, et  
al.) against the Company, Lyle A. Berman (an officer and director of the Company
and Grand Casinos, Inc. ("Grand"), Robert E. Stupak (a former officer and       
director of the Company), Bob Stupak Enterprises, David R. Wirshing (a former   
officer and director of the Company), Thomas A. Lettero (an officer of the      
Company), Thomas G. Bell (a director of the Company), Andrew S. Blumen (an      
officer and director of the Company), and Grand. The complaint purports to seek 
relief on behalf of a class of plaintiffs who purchased the Company's Common    
Stock during the period from December 19, 1995, through July 22, 1996,          
inclusive. The complaint alleges that the defendants made misrepresentations and
engaged in other wrong doing. The Company believes that the claims made in the  
complaint are without merit. The Company plans to vigorously defend such claims.

In addition to the Caesar case, additional cases making the same claims against 
the same defendants have been filed by the following plaintiffs: Mitchel Gordon 
on October 7, 1996; Robert Johnson on September 19, 1996; Regina Peltz on August
13, 1996; and Ronald Stengel on August 13, 1996. The court is currently         
considering a motion to consolidate these cases with the Caesar case. These     
complaints purport to seek relief on behalf of a class of plaintiffs who        
purchased the Company's Common Stock during the period from December 19, 1995,  
through July 22, 1996, inclusive. The complaints allege that the defendants made
misrepresentations and engaged in other wrong doing. The Company believes that  
the claims made in the complaint are without merit. The Company plans to        
vigorously defend such claims.                                                  

On August 16, 1996, a complaint was filed in District Court , Clark County,     
Nevada (Victor Opitz et al. v. Stratosphere Corporation et al.) against the     
Company, Grand Casinos ("Grand"), Robert Stupak (a former officer and director  
of the Company), Lyle Berman (an officer and director of the Company and Grand  
Casinos) and Stanley Taube (a director of the Company and Grand Casinos). The   
complaint purports to seek relief on behalf of a class of plaintiffs who        
purchased stock during the period from December 19, 1995, to July 22, 1996. The 
complaint alleges the defendants made misrepresentations and engaged in other   
wrong doing. The Company believes that the claims made in this complaint are    
without merit. The Company plans to vigorously defend such claims.              

See the Company's Annual Report on Form 10-K for the fiscal year ended December 
31, 1995, and the Company's Quarterly Reports on Form 10-Q for the fiscal       
quarters ended March 31, 1996 and June 30, 1996, for information regarding other
pending legal proceedings.                                                      

(4)  SUBSEQUENT EVENTS                                                          

On October 24, 1996, the Company announced that it is continuing to seek        
additional financing and is discussing restructuring both its existing First    
Mortgage Note indebtedness and capital lease obligation. Based on its current   
and projected cash position, the Company does not plan to make the First        
Mortgage Note interest payment of $14.5 million that is due November 15, 1996.  
Failure to make such payment will result in an event of default that gives the  
note holders the right to accelerate such indebtedness. This right does not vest
until the expiration of the 30 day right to cure this default by the Company.   
The Company does not currently have the ability to repay the indebtedness. It is
likely that negotiations with creditors, whether successful or not at arriving  
at a restructuring, will involve a bankruptcy filing as a means of formalizing  
and approving a consensual or nonconsensual restructuring. If the Company cannot
restructure its existing indebtedness, there will be serious doubt as to whether
or not the Company will be able to continue as a going concern.                 

On October 30, 1996, the Company executed a Standstill Agreement with the       
lenders associated with the capital lease obligation. The Standstill will remain
in place for the period up until the earlier of a bankruptcy filing or payment  
default. The agreement required the Company to make the scheduled payment due on
October 30, 1996, of $3.2 million. The payment was made on October 31, 1996. In 
addition, the agreement provided that $4.2 million in funds yet to be advanced  
from the escrow would be used to reduce the principal payment on a pro rata     
basis to the balance of the capital lease obligation. The application to        
principal of the remaining funds was completed October 30, 1996.                

As a result of the announced restructuring plans and the subsequent loss of     
certain management, as well as the concern of further losses due to the opening 
of other new hotel casinos, the Company has entered into agreements with        
various key personnel, wherein these employees agreed to remain employed by the 
Company for a period of one year in exchange for the promise of severance pay   
should the employee be terminated as a result of the restructuring or change in 
management or board of directors.                                               

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND        
RESULTS OF OPERATIONS                   

RESULTS OF OPERATIONS                                                           

The Company commenced operations on April 29, 1996, with a 1,149 foot, free     
standing observation tower with an integrated casino, hotel and entertainment   
complex. Prior to opening, the Company was in the development stage and did not 
have any historical operating income as there were no operating revenues.       
Expenses consisted primarily of interest and amortization of costs and expenses 
relating to the First Mortgage Notes issued in March 1995. Due to the short     
operating period, historical results may not be indicative of future operating  
results.                                                                        

THREE MONTHS ENDED SEPTEMBER 29, 1996                                           

The third-quarter was the first full period of operations producing gross       
revenues of $40.2 million. Casino revenue represented 35% of gross revenue,     
hotel 18%, food and beverage 24%, and tower, retail and other revenue 23%.      
Revenues generated from slot machines represented 66% of total casino revenue.  
The net loss for the quarter was $26.0 million inclusive of amortization of     
pre-opening expenses of $12.2 million. The loss per common share was $0.45      
consisting of $0.24 from operations and $0.21 from the amortization of          
pre-opening expenses.                                                           

The Company experienced hotel occupancy of 90.9% at an average daily rate of $59
for the quarter. Tower visitation totaled 881,861 for the period inclusive of   
guests dining at the Top of The World revolving restaurant. The average weekly  
visitation dropped from 79,113 during the second fiscal quarter to 67,835 for   
the third fiscal quarter.                                                       

NINE MONTHS ENDED SEPTEMBER 29, 1996                                            

As indicated above, the Company began operations April 29, 1996. The nine month 
period ended September 29, 1996, represents only five months of operations. The 
Company generated net revenues of $65.2 million for the period. The net loss was
$35.2 million inclusive of amortization of pre-opening expense of $19.9 million.
The loss per common share was $0.61 consisting of $0.27 from operations and     
$0.34 from the amortization of pre-opening costs.                               

OTHER FACTORS AFFECTING EARNINGS                                                

The Company's policy is to fully amortize pre-opening costs over a six-month    
period following commencement of operations. Approximately $4.1 million remains 
to be amortized during the fourth quarter.                                      

Construction of the facility continued during the third quarter and the Company 
capitalized interest of $2.5 million for the three months ended September 29,   
1996, and $13.7 million for the nine months ended September 29, 1996. A portion 
of interest will be capitalized through the period ending when construction of  
Phase II ceased.                                                                

The Company completed the partial remodel and reconfiguration of the casino     
floor and launched a new casino marketing campaign on October 1, 1996. The      
campaign and casino changes position the casino product as the best gaming value
in Las Vegas by offering favorable rules on table games and liberal pay backs on
slot machines. Gaming revenue has increased 73.9% to $7.6 million for the period
September 30, 1996, through October 27, 1996, as compared to the same number of 
days during the prior month. Revenues generated by slot machines grew to 74.5%  
of total casino revenue. The Company estimates that earnings before interest,   
taxes, depreciation and amortization will be $2.2 million (15% of net revenues) 
for the month ended October 27, 1996. There can be no assurance that this       
improvement will continue or be indicative of future trends.                    

Since opening, the roller coaster at the top of the tower has only operated for 
parts of 28 days. Its shutdown negatively impacted tower visitation.            
Modifications to the roller coaster were completed October 28, 1996, at which   
point full-time operation commenced. There can also be no assurance that the    
modified roller coaster will increase visitation and gaming levels.             

As the Company continues to seek additional financing and negotiations continue 
regarding the restructuring of existing indebtedness, such restructuring        
activities may unfavorably impact earnings due to the additional administrative 
costs associated with professional fees and the financial statement impact of   
any changes to the Company's capital structure resulting from the outcome of    
such restructuring.                                                             

The Company currently employs 2,800 full-time Associates, which is a decrease   
of approximately 400 since opening. Management continues to implement           
cost-containment programs and expects additional efficiencies as the Company's  
operations mature.                                                              

LIQUIDITY AND CAPITAL RESOURCES                                                 

On May 3, 1996, the Company consummated a $37.5 million capital lease           
transaction of which $33.3 million had been advanced to the Company as of       
September 29, 1996. Based upon the Company's third fiscal quarter results, it   
was determined that the Company would not meet certain financial covenants which
would constitute an event of default under the capital lease that would give the
lender the right to accelerate the maturity of the capital lease. On October 30,
1996, the Company entered a Standstill Agreement with the lenders that will     
remain in effect until the earlier of a bankruptcy filing or payment default.   
Pursuant to the agreement, the Company made its scheduled payment on October 31,
1996, of $3.2 million. In addition, the agreement requires the return of $4.2   
million (including interest) remaining in the escrow account to the lenders to  
be applied to the principal balance on a pro rata basis. The amount was applied 
to the principal balance on October 30, 1996. In the event the Standstill       
Agreement is terminated for reasons mentioned and lenders accelerate the capital
lease indebtedness, the Company would not have the ability to repay such        
indebtedness. The acceleration of such capital lease indebtedness would also    
constitute an event of default under the Company's First Mortgage Note Indenture
by reason of a cross default provision included in such Indenture.              

Pursuant to the Completion Guarantee under the Indenture to the First Mortgage  
Notes the Company has borrowed $50 million from Grand Casinos, Inc. as of       
September 29, 1996. The loan is subordinate to the First Mortgage Notes and     
capital lease obligations and accrues interest at the rate of 14.25%. The       
interest will accrue but will not be paid until the Company meets certain       
financial covenants pursuant to the Indenture under the First Mortgage Notes.   
The loan has been utilized to fund the completion of Phase I of the project.    

On October 10, 1996, the Company paid $2.3 million to Grand Casinos, Inc.       
("Grand") pursuant to the Management and Development Agreement entered into on  
July 1, 1994. Grand has agreed to either refund the $2.3 million to the Company 
or advance the amount as a loan by November 5, 1996. As of November 13, 1996,   
such amount has not been paid to the Company. In addition, the Company has      
purchased certain equipment from a wholly-owned subsidiary of Grand in the      
approximate amount of $3.7 million. As of November 13, 1996, approximately $2.5 
million of such amount remained unpaid. The Company has accrued this cost and   
intends to pay such amount as part of the final funding of Phase I.             

As of September 29, 1996, the Company has completed construction of Phase I and 
has remaining funding requirements of $19.0 million all of which is included in 
the construction payable caption on the balance sheet as of September 29, 1996. 

The Company has ceased construction of Phase II due to its inability to fund    
further construction. The Company anticipates construction costs associated with
Phase II up to and including the time of shut down will be approximately $76.0  
million of which $43.0 million has been spent, $17.0 million is included in     
construction payables as of September 29, 1996, and $16.0 million is expected to
be billed subsequently. The Company estimates the total cost of Phase II to be  
approximately $142.0 million. The Company estimates that the completion of Phase
II will take approximately seven months once resumed and cost an estimated      
additional $66 million. The Company believes that the completion of Phase II is 
critical to its long-term viability.                                            

Cash on hand and internally generated funds will not be sufficient to fund the  
cash requirements of the Company's existing operations, current trade and       
construction payables and debt service. The Company does not plan to make its   
regularly scheduled interest payment on its First Mortgage Notes due on November
15, 1996, of $14.5 million. Failure to make such interest payment will          
constitute an event of default under the Company's First Mortgage Note Indenture
which could result in the lenders acceleration of the notes which include the   
face amount plus any accrued interest. The Company does not have the ability to 
repay such indebtedness. The Company is continuing to seek additional financing 
and is discussing restructuring the First Mortgage Notes. There can be no       
assurance that additional financing will be available to the Company or that if 
available, will be on terms favorable to the Company. In addition, it is highly 
likely that negotiations with its creditors, whether successful or not at       
arriving at a restructuring, will involve a bankruptcy filing as a means of     
formalizing and approving either a consensual or nonconsensual restructuring. If
the Company cannot restructure its existing indebtedness, there will be serious 
doubt as to whether or not the Company will be able to continue as a going      
concern.                                                                        

PRIVATE SECURITIES LITIGATION REFORM ACT                                        

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"   
for forward-looking statements. Certain information included in this Form 10-Q  
and other materials filed or to be filed by the Company with the Securities and 
Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) contains statements that  
are forward-looking, such as statements relating to plans for future expansion, 
future construction costs and other business development activities as well as  
other capital spending, financing sources and the effects of regulation         
(including gaming and tax regulation) and competition. Such forward-looking     
information involves important risks and uncertainties that could significantly 
affect anticipated results in the future and, accordingly, such results may     
differ from those expressed in any forward-looking statements made by or on     
behalf of the Company. These risks and uncertainties include, but are not       
limited to, those relating to development and construction activities,          
dependence on existing management, leverage and debt service (including         
sensitivity to fluctuations in interest rates), domestic or global economic     
conditions, changes in federal or state tax laws or the administration of such  
laws and changes in gaming laws or regulations (including the legalization of   
gaming in certain jurisdictions).                                               

PART II.  OTHER INFORMATION                                                     

ITEM 1.  LEGAL PROCEEDINGS                                                      

On August 5, 1996, a complaint was filed in the United States District Court for
the District of Nevada (Michael Caesar, et al. v. Stratosphere Corporation, et  
al.) against the Company, Lyle A. Berman (an officer and director of the Company
and Grand Casinos, Inc. ("Grand"), Robert E. Stupak (a former officer and       
director of the Company), Bob Stupak Enterprises, David R. Wirshing (a former   
officer and director of the Company), Thomas A. Lettero (an officer of the      
Company), Thomas G. Bell (a director of the Company), Andrew S. Blumen (an      
officer and director of the Company), and Grand. The complaint purports to seek 
relief on behalf of a class of plaintiffs who purchased the Company's Common    
Stock during the period from December 19, 1995, through July 22, 1996,          
inclusive. The complaint alleges that the defendants made misrepresentations and
engaged in other wrong doing. The Company believes that the claims made in the  
complaint are without merit. The Company plans to vigorously defend such claims.

In addition to the Caesar case, additional cases making the same claims against 
the same defendants have been filed by the following plaintiffs: Mitchel Gordon 
on October 7, 1996; Robert Johnson on September 19, 1996; Regina Peltz on August
13, 1996; and Ronald Stengel on August 13, 1996. The court is currently         
considering a motion to consolidate these cases with the Caesar case. These     
complaints purport to seek relief on behalf of a class of plaintiffs who        
purchased the Company's Common Stock during the period from December 19, 1995,  
through July 22, 1996, inclusive. The complaints allege that the defendants made
misrepresentations and engaged in other wrong doing. The Company believes that  
the claims made in the complaint are without merit. The Company plans to        
vigorously defend such claims.                                                  

On August 16, 1996, a complaint was filed in District Court , Clark County,     
Nevada (Victor Opitz et al. v. Stratosphere Corporation et al.) against the     
Company, Grand Casinos ("Grand"), Robert Stupak (a former officer and director  
of the Company), Lyle Berman (an officer and director of the Company as Grand   
Casinos) and Stanley Taube (a director of the Company and Grand Casinos). The   
complaint purports to seek relief on behalf of a class of plaintiffs who        
purchased stock during the period from December 19, 1995, to July 22, 1996. The 
complaint alleges the defendants made misrepresentations and engaged in other   
wrong doing. The Company believes that the claims made in this complaint are    
without merit. The Company plans to vigorously defend such claims.              

See the Company's Annual Report on Form 10-K for the fiscal year ended December 
31, 1995, and the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1996, for information regarding other pending legal proceedings.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                        

Based upon the third quarter results, the Company determined that it would not  
meet certain financial covenants which would constitute an event of default     
under the capital lease that would give the lender the right to accelerate      
maturity. On October 30, 1996, the Company entered a Standstill Agreement with  
the lenders that will remain in effect until the earlier of the bankruptcy      
filing or payment default. Pursuant to the agreement, the Company made its      
scheduled payment on October 31, 1996, of $3.2 million. In addition, the        
agreement required the return of $4.2 million (including interest) remaining in 
the escrow account to the lenders to be applied to the principal balance on a   
pro rata basis. The amount was applied to the principal balance on October 30,  
1996, reducing it to a total of $28.3 million. In the event the Standstill      
Agreement is terminated for reasons mentioned and the lenders accelerate the    
capital lease indebtedness, the Company would not have the ability to repay such
indebtedness. The acceleration of such capital lease indebtedness would also    
constitute an event of default under the Company's First Mortgage Note Indenture
by reason of a cross default provision included in such Indenture.              

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                       

(a) Exhibits                                                                    

Exhibit                                                                         
No.                                                                       

10.01    Standstill and Amendment Agreement dated as October 30, 1996, by and   
  among Stratosphere Corporation, Stratosphere Gaming Corp., First
       Security Trust Company of Nevada, Bank of Scotland, Wells Fargo Bank,
      National Association, Societe Generale, Credit Lyonnais, Los Angeles
Branch, BA Leasing & Capital Corporation.                     

10.02    Funding Agreement dated as of September 27, 1996, by and among Grand   
        Casinos, Inc., Stratosphere Corporation, and Stratosphere Gaming Corp.

10.03    Letter Agreement dated as of September 27, 1996, by and among Grand    
       Casinos, Inc., Stratosphere Corporation and Stratosphere Gaming Corp.

10.04    Senior Executive Severance Agreement dated September 27, 1996, by and  
between Andrew Blumen and Stratosphere Corporation.           

10.05    Senior Executive Severance Agreement dated September 30, 1996, by and  
between Thomas Lettero and Stratosphere Corporation.          

27       Financial Data Schedule                                                

(b) No reports on Form 8-K were filed during the quarterly period               
ended September 29, 1996.                                               

SIGNATURES

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

                        STRATOSPHERE CORPORATION

Date:   November 13, 1996               By: /s/ Richard J. Schuetz              
                        Name: Richard J. Schuetz
                       Title:  President & CEO

                         By: /s/ Thomas A. Lettero
                       Name: Thomas A. Lettero
                               Title:  Chief Financial Officer

 EXHIBIT INDEX
STRATOSPHERE CORPORATION

Exhibit                                                                         
No.                                                                       

10.01    Standstill and Amendment Agreement dated as October 30, 1996, by and   
  among Stratosphere Corporation, Stratosphere Gaming Corp., First
       Security Trust Company of Nevada, Bank of Scotland, Wells Fargo Bank,
      National Association, Societe Generale, Credit Lyonnais, Los Angeles
Branch, BA Leasing & Capital Corporation.                     

10.02    Funding Agreement dated as of September 27, 1996, by and among Grand   
        Casinos, Inc., Stratosphere Corporation, and Stratosphere Gaming Corp.

10.03    Letter Agreement dated as of September 27, 1996, by and among Grand    
       Casinos, Inc., Stratosphere Corporation and Stratosphere Gaming Corp.

10.04    Senior Executive Severance Agreement dated September 27, 1996, by and  
between Andrew Blumen and Stratosphere Corporation.           

10.05    Senior Executive Severance Agreement dated September 30, 1996, by and  
between Thomas Lettero and Stratosphere Corporation.          

27       Financial Data Schedule                                                

Dates Referenced Herein   and   Documents Incorporated By Reference

This 10-Q Filing		Date		Other Filings
		7/1/94
		9/30/95
		12/19/95
		12/31/95
		3/31/96		10-Q
		4/29/96
		5/3/96
		6/30/96		10-Q
		7/22/96
		8/5/96		SC 13D/A
		8/13/96
		8/16/96
		9/19/96
		9/27/96
For The Period Ended		9/29/96
		9/30/96
		10/1/96		SC 13D/A
		10/7/96
		10/10/96
		10/24/96
		10/27/96
		10/28/96
		10/30/96
		10/31/96
		11/5/96
Filed On / Filed As Of		11/13/96
		11/14/96
		11/15/96
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