- Quarterly Report (10-Q)

Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended: June 30, 2010

 

¨	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)

2200 Casino Drive, Laughlin, Nevada 89029

(Address of principal executive office and zip code)

[phone]

(Registrant’s telephone number, including area code)

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

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

 

 

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

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

 

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

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

 

6,017,944		as of		August 13, 2010

 

 

 

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Table of Contents

ARCHON CORPORATION

INDEX

 

				Page
PART I		FINANCIAL INFORMATION
Item 1		Condensed Consolidated Financial Statements:
		Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and September 30, 2009 (Audited)		1
		Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2010 and 2009 (Unaudited)		3
		Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended June 30, 2010 and 2009 (Unaudited)		5
		Consolidated Statement of Stockholders’ Equity for the Nine Months Ended June 30, 2010 (Unaudited)		6
		Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2010 and 2009 (Unaudited)		7
		Notes to Unaudited Consolidated Financial Statements		8
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3		Quantitative and Qualitative Disclosures About Market Risk		34
Item 4		Controls and Procedures		35
PART II		OTHER INFORMATION
Item 1		Legal Proceedings		36
Item 2		Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		37
Item 3		Defaults Upon Senior Securities		37
Item 4		Submission of Matters to a Vote of Security Holders		37
Item 5		Other Information		38
Item 6		Exhibits		38

 

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PART I – FINANCIAL INFORMATION

 

Item 1.

Consolidated Financial Statements

Archon Corporation and Subsidiaries

Consolidated Balance Sheets

 

		June 30, 2010 (Unaudited)				September  30, 2009 Audited
ASSETS
Current assets:
Cash and cash equivalents		$	14,173,633			$	31,646,498
Investment in marketable securities			15,399,847				5,995,289
Accounts receivable, net			404,124				170,935
Inventories			154,805				231,689
Prepaid expenses and other			606,042				945,167
Deferred tax assets			761,367				512,695
Total current assets			31,499,818				39,502,273
Property held for sale			54,984,625				55,357,905
Property and equipment:
Rental property held for investment, net			88,248,498				89,511,868
Land used in operations			3,960,589				3,925,589
Buildings and improvements			25,704,561				25,751,045
Machinery and equipment			8,255,038				8,264,373
Accumulated depreciation			(28,490,288	)			(28,103,429	)
Property and equipment, net			97,678,398				99,349,446
Other assets			3,056,978				2,774,685
Total assets		$	187,219,819			$	196,984,309

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

 

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Archon Corporation and Subsidiaries

Consolidated Balance Sheets (continued)

 

		June 30, 2010 (Unaudited)				September  30, 2009 Audited
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit		$	7,971,114			$	7,866,659
Accounts payable			857,760				2,099,581
Accrued and other liabilities			2,255,104				2,722,690
Exchangeable redeemable preferred stock - unredeemed			814,897				821,259
Current liabilities – property held for sale			3,620,736				3,342,837
Total current liabilities			15,519,611				16,853,026
Long term liabilities – property held for sale			34,475,787				37,114,921
Non-recourse debt – less current portion			31,199,288				31,199,288
Deferred tax liabilities			21,505,682				21,828,674
Deferred rent income			34,266,480				36,836,466
Total liabilities			136,966,848				143,832,375
Stockholders’ equity:
Preferred stock, exchangeable, redeemable 16.0% cumulative $2.14 per share liquidation value, authorized - 10,000,000 shares; none issued and outstanding			0				0
Common stock, $0.01 par value; authorized - 100,000,000 shares; issued and outstanding – 6,316,576, and 6,316,576 shares			63,166				63,166
Additional paid-in capital			63,247,158				62,982,941
Accumulated deficit			(7,849,194	)			(8,737,568	)
Accumulated other comprehensive loss			(1,064,905	)			(1,044,883	)
Sub-total			54,396,225				53,263,656
Less: Notes receivable from stockholders			(111,722	)			(111,722	)
Treasury stock – 298,632 and 0 common shares, at cost			(4,031,532	)			0
Total stockholders’ equity			50,252,971				53,151,934
Total liabilities and stockholders’ equity		$	187,219,819			$	196,984,309

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

 

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Archon Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

		Three Months Ended June 30,								Nine Months Ended June 30,
		2010				2009				2010				2009
Revenues:
Casino		$	2,815,874			$	3,814,896			$	9,583,746			$	12,759,506
Hotel			381,899				487,810				1,096,106				1,285,349
Food and beverage			1,027,374				1,515,505				3,425,678				4,472,409
Investment properties			1,910,180				2,413,481				5,703,040				7,954,243
Other			133,972				443,812				1,132,746				1,360,969
Gross revenues			6,269,299				8,675,504				20,941,316				27,832,476
Less casino promotional allowances			(660,608	)			(951,046	)			(2,438,645	)			(3,018,179	)
Net operating revenues			5,608,691				7,724,458				18,502,671				24,814,297
Operating expenses:
Casino			1,778,237				2,402,022				6,025,902				7,447,874
Hotel			187,359				224,083				466,551				586,833
Food and beverage			729,364				1,062,455				2,188,573				3,023,293
Other			80,317				136,830				244,641				520,329
Selling, general and administrative:
Corporate expenses			786,719				760,175				2,456,464				2,539,009
Other			684,475				789,660				2,105,386				2,322,500
Utilities and property expenses			936,635				1,024,250				2,861,190				2,986,598
Depreciation and amortization			592,646				621,631				1,780,408				1,936,765
Total operating expenses			5,775,752				7,021,106				18,129,115				21,363,201
Operating income (loss)			(167,061	)			703,352				373,556				3,451,096
Other income and (expense):
Interest expense			(1,182,095	)			(1,228,071	)			(3,361,903	)			(3,578,569	)
Gain (loss) on sale of marketable securities			36,070				(16,520	)			(31,537	)			(111,509	)
Interest and other income			103,515				149,953				871,848				547,053
Income (loss) before income tax expense			(1,209,571	)			(391,286	)			(2,148,036	)			308,071
Federal income tax (expense) benefit from continuing operations			1,019,477				136,969				1,372,913				(93,231	)
Income (loss) from continuing operations			(190,094	)			(254,317	)			(775,123	)			214,840
Discontinued operations gain, net of tax expense of $178,856 and $137,611 QTD and $895,730 and $402,945 YTD, respectively			332,160				255,563				1,663,497				748,327
Net income		$	142,066			$	1,246			$	888,374			$	963,167

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

 

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Archon Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

		Three Months Ended June 30,								Nine Months Ended June 30,
		2010				2009				2010				2009
Average common shares outstanding			6,316,576				6,370,176				6,316,576				6,356,510
Average common and common equivalent shares outstanding			6,316,576				6,370,176				6,316,576				6,356,510
Income (loss) from continuing operations per common share
Net basic income (loss) per common share		$	(0.03	)		$	(0.04	)		$	(0.12	)		$	0.03
Diluted income (loss) per common share		$	(0.03	)		$	(0.04	)		$	(0.12	)		$	0.03
Discontinued operations per share
Net basic income per common share		$	0.05			$	0.04			$	0.26				0.12
Diluted income per common share		$	0.05			$	0.04			$	0.26				0.12
Income per common share
Net basic income per common share		$	0.02			$	0.00			$	0.14			$	0.15
Diluted income per common share		$	0.02			$	0.00			$	0.14			$	0.15

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

 

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Archon Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

		Three Months Ended June 30,							Nine Months Ended June 30,
		2010				2009			2010				2009
Net income		$	142,066			$	1,246		$	888,374			$	963,167
Unrealized gain (loss) on marketable securities, net of income taxes			(270,964	)			480,477			(20,022	)			(1,276,728	)
Comprehensive income (loss)		$	(128,898	)		$	481,723		$	868,352			$	(313,561	)

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

 

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Corporation and Subsidiaries

Consolidated Statement of Stockholders’ Equity

For the Nine Months Ended June 30, 2010

(Unaudited)

 

		Preferred Stock $			Common Stock		Common Stock $			Additional Paid-In Capital			Accumulated Deficit				Accumulated Other Comprehen- sive Income (Loss)				Notes Receivable From Stockholders				Treasury Stock				Total
Balances, October 1, 2009		$	0		6,316,576		$	63,166		$	62,982,941		$	(8,737,568	)		$	(1,044,883	)		$	(111,722	)		$	0			$	53,151,934
Net income														888,374																888,374
Additional Paid-In Capital											264,217																			264,217
Purchase of treasury stock																										(4,031,532	)			(4,031,532	)
Unrealized gain on marketable securities																		(20,022	)											(20,022	)
Balances, June 30, 2010		$	0		6,316,576		$	63,166		$	63,247,158		$	(7,849,194	)		$	(1,064,905	)		$	(111,722	)		$	(4,031,532	)		$	50,252,971

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

 

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Archon Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

		Nine Months Ended June 30,
		2010				2009
Cash flows from operating activities:
Net income		$	888,374			$	963,167
Discontinued operations, net of tax effect			(1,663,497	)			(748,327	)
Net income (loss) from continuing operations -			(775,123	)			214,840
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,780,408				1,936,765
Interest expense from amortization of debt issuance costs			275,524				355,679
Loss on sale of marketable securities			31,537				111,509
Change in assets and liabilities:
Accounts receivable			(233,189	)			(404,110	)
Inventories			76,884				93,794
Prepaid expenses and other			339,125				471,588
Deferred income taxes			(1,456,613	)			496,176
Other assets			(557,817	)			85,617
Accounts payable			(1,241,821	)			(1,002,782	)
Interest payable			0				(8,539	)
Accrued expenses and other current liabilities			(203,369	)			(1,152,382	)
Other liabilities			(2,569,986	)			(2,227,088	)
Net cash used in operating activities			(4,534,440	)			(1,028,933	)
Cash flows from investing activities:
Capital expenditures			(109,360	)			(1,232,312	)
Marketable securities purchased			(12,215,169	)			(2,779,199	)
Marketable securities sold or redeemed			2,748,271				1,949,641
Net cash used in investing activities			(9,576,258	)			(2,061,870	)
Cash flows from financing activities:
Proceeds from line of credit			104,455				0
Payments on debt and obligation under capital lease			0				(946,127	)
Common stock purchased and retired			(4,031,532	)			(230,259	)
Preferred stock redeemed and retired			(6,362	)			(13,086	)
Net cash used in financing activities			(3,933,439	)			(1,189,472	)
Cash flows from discontinued operations			571,272				5,420
Decrease in cash and cash equivalents			(17,472,865	)			(4,274,855	)
Cash and cash equivalents, beginning of period			31,646,498				37,973,564
Cash and cash equivalents, end of period		$	14,173,633			$	33,698,709

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

 

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ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended June 30, 2010, and 2009

1. BASIS OF PRESENTATION AND GENERAL INFORMATION

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

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

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

Income (Loss) Per Common Share . The Company computes net income (loss) per share in accordance with FASB ASC 260-10, Earnings per Share . FASB ASC 260-10 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during the period. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive. Dilutive stock options of approximately 741,000 were not included in calculations of diluted income per common share for the three months and nine months ended June 30, 2010, as the options were out of the money and, therefore, would be anti-dilutive.

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

Investment in Marketable Securities . Debt securities available-for-sale are stated at fair market value with unrealized gains or losses determined by the specific identification method and reported as a component of accumulated other comprehensive income. Debt securities available-for-sale at June 30, 2010 includes investments in corporate bonds.

 

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ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Nine Months Ended June 30, 2010, and 2009

 

Equity securities available-for-sale are reported at fair value with unrealized gains or losses reported as a component of accumulated other comprehensive income. Realized and unrealized gains and losses are determined by the specific identification method. At June 30, 2010, investments in equity securities available-for-sale included shares of common and preferred stocks.

Included in “Gain (loss) on sale of marketable securities” on the consolidated statements of operations are approximately $36,070 of realized gains and $16,520 of realized losses for the three months ended June 30, 2010 and 2009, respectively. The Company recorded approximately $(0.3) million and $0.5 million and $(0.02) million and $(1.3) million of other comprehensive gain (loss), net of tax effect, associated with unrealized losses on these investments during the three and nine months ended June 30, 2010 and 2009, respectively. Through June 30, 2010, the Company experienced a year-to-date $30,802 further decline in the value of these investments.

The following is a summary of available-for-sale marketable securities as of June 30, 2010 and September 30, 2009 (amounts in thousands):

 

		6/30/2010
		Cost			Unrealized Gain			Unrealized Losses				Market or Fair  Value
Debt securities		$	8,994		$	217		$	(28	)		$	9,183
Equity securities			8,044			288			(2,115	)			6,217
Total		$	17,038		$	505		$	(2,143	)		$	15,400
		9/30/2009
		Cost			Unrealized Gain			Unrealized (Losses)				Market or Fair  Value
Debt securities		$	3,261		$	231		$	(20	)		$	3,472
Equity securities			4,342			228			(2,047	)			2,523
Total		$	7,603		$	459		$	(2,067	)		$	5,995

The following is a summary of the net unrealized gains and losses as presented in accumulated Other Comprehensive Income as of June 30, 2010 and September 30, 2009, respectively (amounts in thousands):

 

		6/30/2010
Description		Unrealized Gains			Unrealized (Losses) Short Term				(Unrealized Losses) Long Term				Deferred Taxes (Benefit)				Accrued Other Comprehensive Income (Loss)
Debt Securities		$	217		$	(23	)		$	(6	)		$	66			$	122
Equity Securities			288			(447	)			(1,667	)			(639	)			(1,187	)
Total		$	505		$	(470	)		$	(1,673	)		$	(573	)		$	(1,065	)

 

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ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Nine Months Ended June 30, 2010, and 2009

 

		9/30/2009
Description		Unrealized Gains			Unrealized (Losses) Short Term				(Unrealized Losses) Long Term				Deferred Taxes (Benefit)				Accrued Other Comprehensive Income (Loss)
Debt Securities		$	231		$	(1	)		$	(19	)		$	74			$	137
Equity Securities			228			(464	)			(1,583	)			(637	)			(1,182	)
Total		$	459		$	(465	)		$	(1,602	)		$	(563	)		$	(1,045	)

The Company recorded the combined total of unrealized gains and (losses) shown in the above table, on the balance sheet as $1.1 million or 65% as retained earnings – other comprehensive loss, and $0.6 million or 35% as deferred income taxes.

The following is a summary of the proceeds from the sale of marketable securities and the gains or losses reclassified from Other Comprehensive Income (“OCI”) as of June 30, 2010 and 2009 (amounts in thousands):

 

		6/30/2010
Description		Proceeds From Sales			Gross Realized Gains			Gross Realized (Losses)				Gain or (Loss Reclassified From OCI
Debt securities		$	0		$	0		$	0			$	0
Equity securities			2,748			53			(17	)			36
Total		$	2,748		$	53		$	(17	)		$	36
		06/30/2009
Description		Proceeds From Sales			Gross Realized Gains			Gross Realized (Losses)				Gain or (Loss Reclassified From OCI
Debt securities		$	0		$	0		$	0			$	0
Equity securities			1,950			10			(27	)			(17	)
Total		$	1,950		$	10		$	(27	)		$	(17	)

Revenue Recognition . Casino revenue is recorded as gaming wins less losses. Hotel, food and beverage, entertainment and other operating revenues are recognized as the services are performed. Casino revenues are recognized net of certain sales incentives in accordance with FASB ASC 605-50, Revenue Recognition, Customer Payments and Incentives. Accordingly, cash incentives to customers for gambling, and the cash value of points and coupons earned by the slot club members totaling $0.1 million for the three months ended June 30, 2010 and 2009, have been recognized as a direct reduction of casino revenue.

 

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ARCHON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Nine Months Ended June 30, 2010, and 2009

 

Advance deposits on rooms, if any, are recorded as deferred revenue until services are provided to the customer. Revenues include the retail amount of room, food, beverage and other services provided gratuitously to customers totaling $2.4 million and $3.0 million for the nine months ended June 30, 2010 and 2009, respectively. The estimated cost of providing these promotional services has been reported in the accompanying consolidated statements of operations as an expense of each department granting complimentary services. The table below summarizes the departments’ costs of such services (amounts in thousands):

 

		6/30/2010			6/30/2009
Food and beverage		$	2,145		$	2,774
Hotel			301			383
Other			4			10
Total		$	2,450		$	3,167

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

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

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

Concentrations of revenue by segment as of June 30, 2010 and 2009 follows (dollars in thousands)

 

		6/30/2010
Pioneer		$	12,189		66	%
Rental properties held for investment		$	5,704		31	%
Other and eliminations		$	610		3	%
		6/30/2009
Pioneer		$	16,110		65	%
Rental properties held for investment		$	7,954		32	%
Other and eliminations		$	750		3	%

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

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

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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Nine Months Ended June 30, 2010, and 2009

 

2. FEDERAL INCOME TAX

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

3. RELATED PARTIES

The Company’s Chairman of the Board and CEO has personally guaranteed certain loans for which the Company has accrued a loan guarantee fee equal to 0.5% of the guaranteed loan balance per calendar quarter. These loan fees were disclosed in the annual report for fiscal year ended September 30, 2009. Mr. Lowden has agreed to forgo payment of the loan fees which were accrued prior to the fiscal year ended September 30, 2009. Accordingly, loan guarantee fees accrued prior to the fiscal year ended September 30, 2009, in the amount of $0.3 million, has been transferred to additional paid in capital, with a corresponding reduction in the remaining amount accrued. The accrual increased slightly during the quarter ended March 31, 2010 with no significant change from the remaining $0.1 million in the quarter ended September 30, 2009.

The Company is subject to a Patent Rights and Royalty Agreement with the brother of the Company’s Chairman of the Board and CEO with respect to certain gaming technology for which he had been issued a patent. The Company agreed to pay certain royalty payments with respect to the technology incorporated into gaming devices placed in operation, as well as costs related to maintain the patent. The patentholder granted the Company an exclusive five-year royalty license that expired in January 2007 in the United States with respect to the technology, but which automatically renewed until 2011 and will renew for an additional two-year term unless the Company terminates the agreement. The Company also has an understanding with the related party patentholder that it will pay for the costs of commercial development of the technology. Through September 30, 2009, the Company had expended approximately $0.4 million for commercial development of the technology, and no additional costs were expended during the nine-month periods ended June 30, 2010. No royalties were paid to the patentholder during the periods referenced above.

4. PURCHASE AND SALE AGREEMENT OF GAITHERSBURG PROPERTY

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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Nine Months Ended June 30, 2010, and 2009

 

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

Assets Held For Sale . The Company reviewed the guidance provided by FASB ASC 360-10-45-11, and thus has classified the assets associated to the Gaithersburg Property as held for sale. The following table summarizes the asset components classified as held for sale as of June 30, 2010 and September 30, 2009 (amounts in thousands):

 

		6/30/2010				9/30/2009
Gaithersburg - Warehouse:
Loan Issue Costs		$	774			$	929
Deferred Rent			2,464				2,683
Land			23,000				23,000
Buildings & Improvements			36,600				36,600
Machinery & Equipment			3,000				3,000
Allowance for depreciation			(10,854	)			(10,854	)
Total		$	54,984			$	55,358

Liabilities On Assets Held For Sale . The Company issued approximately $55.4 million of first mortgage debt with a 7.01% interest rate per annum in connection with its acquisition of a commercial office building located in Gaithersburg, Maryland. The building is under lease through April 2014. The monthly lease payments are applied against the outstanding indebtedness. Monthly principal and interest payments amortize the debt to approximately $22.3 million by the end of the lease in April 2014 and the building is subject to acquisition by the County before that date. The Company anticipates that the future tenant payments related to the net leases will be sufficient to fund required payments under the first mortgage notes and IRC Section 467 debt. The principal balance due as of June 30, 2010 and September 30, 2009 was $38.0 million and $40.0 million, respectively. The following debt table is related to assets held for sale (amounts in thousands):

 

		6/30/2010			9/30/2009
Interest payable		$	148		$	157
Current portion of debt			3,473			3,186
Total current liability			3,621			3,343
Long-term debt less current portion			34,476			37,115
Total		$	38,097		$	40,458

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

The Gaithersburg Property in Gaithersburg, Maryland, is a building used for commercial office space. The Gaithersburg Property is under a net lease through 2014 with a single tenant. Under the lease, the tenant is responsible for substantially all obligations related to the Property. The Gaithersburg Property

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Nine Months Ended June 30, 2010, and 2009

 

was acquired for $62.6 million, plus debt issuance costs of $2.7 million. The Company paid $9.9 million in cash and issued $55.4 million in nonrecourse first mortgage indebtedness. The Company allocated approximately $23.0 million of the purchase price to land, $3.0 million to machinery and equipment and the balance to building and improvements. The expenses incurred to acquire the Property (approximately $2.7 million) are recorded in other assets in the accompanying Consolidated Balance Sheets and are being amortized over the remaining loan period.

5. OPEN MARKET PURCHASES OF COMPANY COMMON STOCK

During the fiscal years 2009 and 2010, the Company determined that as a result of the current difficult economic conditions and in light of low interest rates being paid on its deposit of surplus funds, that open market purchase(s) of the Company’s own shares, up to 5.0% of its outstanding common stock and 225,000 shares, respectively, represented a desirable use of its available and surplus cash.

In December 2008 and June 2010, the Board of Directors of the Company approved the Company’s adoption of plans, effective January 5, 2009 and June 30, 2010, for the Company to make periodic and ongoing open market purchases of up to 5.0% of its own common stock (up to 319,539 shares of common stock) and 225,000 shares, respectively, in accordance with Rule 10b-18 (the “Rule”) of the Rules and Regulations Promulgated Under The Securities Exchange Act Of 1934 (the “Act”), and, more specifically, in accordance with SEC Release No. 33-8335 (the “Release”). The Release is a ‘safe harbor’ and approved method to make open market purchases of a company’s own common stock in compliance with the Rule without those purchases being deemed manipulative under the Act.

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

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

On January 8, 2010, the Company purchased a grouping of shares of common stock of the Company sufficient to cause it to effectively reach the maximum shares allotted to be purchased pursuant to the Rule and Release referenced above (when combined with prior program purchases since December 2008). As a result, the Company, on January 13, 2010, announced the close of the common stock purchase program with an effective date of January 5, 2010.

The open market purchase(s) are intended to be voluntary and there are no assurances that the Company will actually purchase all or any of its common shares noted above.

The Company is in possession of sufficient and available liquid funds to undertake any open market purchase(s) of its own shares without the need for additional borrowing. The Company will be utilizing licensed securities broker-dealers to effect any open market purchases.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Nine Months Ended June 30, 2010, and 2009

 

The table below summarizes the Company’s buy back of its common stock for the last 12-month period ended June 30, 2010:

 

Period		(a) Total Number of Shares (or  Units) Purchased		(b) Average Price  Paid per Share (or Unit)			(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or  Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Beginning balance									316,215
January 2009		3,996		$	27.83		3,996		312,219
February 2009		4,590			16.96		8,586		307,629
March 2009		7,150			16.60		15,736		300,479
April 2009		0			0		15,736		300,479
May 2009		0			0		15,736		300,479
June 2009		0			0		15,736		300,479
July 2009		0			0		15,736		300,479
August 2009		0			0		15,736		300,479
September 2009		0			0		15,736		300,479
October 2009		0			0		15,736		300,479
November 2009		0			0		15,736		300,479
December 2009		0			0		15,736		300,479
January 2010		298,632			13.50		314,368		1,847
February 2010		0			0		314,368		1,847
March 2010		0			0		314,368		1,847
April 2010		0			0		314,368		1,847
May 2010		0			0		314,368		1,847
June 2010		0			0		314,368		225,000
Ending balance		314,368		$	13.80		314,368		225,000

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

The Company called all outstanding shares of its Exchangeable Redeemable Preferred Stock for redemption on and as of August 31, 2007, at a redemption price of $5.241 per share, which sum included accrued and unpaid dividends to the date of redemption. From and after August 31, 2007, all shares of the Exchangeable Redeemable Preferred Stock ceased to be outstanding and to accrue dividends. As of August 13, 2010, the holders of 4,261,092 shares of the Exchangeable Redeemable Preferred Stock have surrendered their shares and received payment of the redemption price; while 155,485 shares have yet to be surrendered and still have the right to receive their payment due without interest. As of June 30, 2010 and September 30, 2009, exchangeable redeemable preferred stock –unredeemed was $814,897 and $821,259, respectively.

On August 27, 2007, a group of institutional investors filed an action, in Nevada, against the Company. The Complaint was subsequently amended to add an additional party plaintiff (collectively, the “Plaintiffs”). The Amended Complaint: (i) seeks a finding by the Court that the Company has breached its obligations under the Company’s Certificate of Designation of the Preferred Stock, dated September 30, 1993 (the “Certificate”), and awarding the Plaintiffs full compensation of any and all available damages suffered by the Plaintiffs as a result of the Company’s breach of the Certificate; (ii) seeks a finding by the Court that the Company’s issuance of its redemption notice with an improper redemption price is an anticipatory breach of a material term of the Certificate and awarding the Plaintiffs full compensation of any and all available damages suffered as a result of the Company’s anticipatory breach of the Certificate; (iii) seeks a declaration by the Court that the dividends be properly calculated and

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Nine Months Ended June 30, 2010, and 2009

 

compounded per the terms of the Certificate in an amount not less than $7,235,351 up through and including the date of final judgment; (iv) seeks an order from the Court calling for the Company to reimburse the Plaintiffs’ attorneys’ fees, expenses and costs incurred in enforcing their rights; and (v) seeks such other and further relief as the Court may deem appropriate.

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

Recently, Plaintiffs have filed a second motion for entry of final judgment, again seeking entry of judgment that the redemption price for the preferred shares should have been $8.69 per share. The Company has substantively opposed that motion and has urged the Court to reconsider its August 8, 2008 order. Briefing on Plaintiffs’ second motion for entry of final judgment has been completed and a hearing was held before the Court and the parties are awaiting a ruling.

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

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

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

7. STOCK-BASED COMPENSATION

The Company’s Stock Option Plan (“Plan”) provides for the grant of up to 1.4 million shares of its common stock to key employees. The Plan provides for both incentive stock options and non-qualified stock options. Stock option grants generally vest over a three-year period from the employee’s hire date. During the nine-month period ended June 30, 2010 and 2009, zero options were granted. As of June 30, 2010 and 2009, there were approximately 741,500 options, outstanding and exercisable under the Plan. During the third quarters ended June 30, 2010 and 2009, no options were exercised.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Nine Months Ended June 30, 2010, and 2009

 

The outstanding options have expiration dates through 2018 and have an average remaining life of approximately 7.5 years. The average exercise price of the outstanding options at June 30, 2010 is approximately $28.09.

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

SFHI Inc., SLVC and PHI (collectively, the “Subsidiaries”), have adopted subsidiary stock option plans (the “Subsidiary Plans”). The Subsidiary Plans provide for the grant of options by each of the Subsidiaries with respect to an aggregate of up to 10% of the outstanding shares of such Subsidiary’s Common Stock to employees, non-employee directors, consultants or affiliates of the Company or the Subsidiaries. The purpose of the Subsidiary Plans is to enable the Subsidiaries and the Company to attract, retain and motivate their employees, non-employee directors, consultants and affiliates by providing for or increasing the proprietary interest of such persons in the Subsidiaries. As of June 30, 2010, no options have been granted under any of the Subsidiary Plans.

The following table summarizes stock option activity during the nine months ended June 30, 2010 under all plans:

 

		Number of Shares (000’s)		Weighted- Average Exercise Price Per Share			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value ($000’s)
Options outstanding at September 30, 2009:		742		$	28.09		8.3 yrs.		$	(12,457	)
Granted		0			N/A		N/A			N/A
Exercised		0			N/A		N/A			N/A
Canceled		0			N/A		N/A			N/A
Options outstanding at June 30, 2010		742		$	28.09		6.5 yrs.		$	11,901
Exercisable at June 30, 2010		742		$	28.09		6.5 yrs.		$	11,901

As of June 30, 2010, there was no unrecognized compensation cost related to unvested stock options.

8. SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION

Supplemental statement of cash flows information for the nine-month periods ended June 30, 2010 and 2009, respectively, is presented below (amounts in thousands).

 

		6/30/2010				6/30/2009
Operating activities:
Cash paid during the period for interest		$	5,320			$	5,978
Non cash:
Unrealized losses on securities		$	(31	)			(1,964	)
Adjustment to redeemable preferred		$	0			$	139

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Nine Months Ended June 30, 2010, and 2009

 

9. SEGMENT INFORMATION

The Company’s operations are in the hotel/casino industry and the rental of commercial real estate properties. The Company’s hotel/casino operations are conducted at the Pioneer in Laughlin, Nevada. As discussed above, the Company owns rental properties held for investment in the Dorchester section of Boston, Massachusetts and Las Vegas Strip, Nevada. “Property Held for Sale” below includes a rental property in Gaithersburg, Maryland. “Other and Eliminations” below includes financial information for the Company’s corporate operations, adjusted to reflect eliminations upon consolidation.

Set forth below is the unaudited financial information for the segments in which the Company operates for the three-month and nine-month periods ended June 30, 2010 and 2009 (amounts in thousands).

 

		Three Months Ended June 30,
		2010				2009
Pioneer Hotel / Casino:
Net operating revenues		$	3,671			$	5,021
Operating loss			(615	)			(813	)
Depreciation and amortization			135				163
Interest expense			104				336
Interest and other income			0				1
Loss before income taxes			(719	)			(1,148	)
Capital expenditures / transfers			20				45
Rental Properties Held for Investment:
Net operating revenues		$	1,910			$	2,413
Operating income			1,279				1,795
Depreciation and amortization			421				421
Interest expense			1,078				955
Interest and other income			0				2
Income before income taxes			201				842
Capital expenditures / transfers			0				0
Property Held for Sale:
Net operating revenues		$	0			$	0
Operating income			0				0
Depreciation and amortization			0				0
Interest expense			0				0
Interest and other income			0				0
Discontinued operations, net of tax			332				256
Capital expenditures / transfers			0				0
Other and Eliminations:
Net operating revenues		$	28			$	290
Operating loss			(831	)			(278	)
Depreciation and amortization			37				38
Interest expense			0				(63	)
Interest and other income			104				147
Loss before income taxes			(692	)			(85	)
Capital expenditures / transfers			0				0
Total:
Net operating revenues		$	5,609			$	7,724
Operating income (loss)			(167	)			703
Depreciation and amortization			593				622
Interest expense			1,182				1,228
Interest and other income			104				150
Loss before income taxes			(1,210	)			(391	)
Discontinued operations, net of tax			332				256
Capital expenditures / transfers			20				45

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Nine Months Ended June 30, 2010, and 2009

 

		Nine Months Ended June 30,
		2010				2009
Pioneer Hotel / Casino:
Net operating revenues		$	12,189			$	16,110
Operating loss			(1,378	)			(1,404	)
Depreciation and amortization			407				561
Interest expense			104				854
Interest and other income			53				5
Loss before income taxes			(1,430	)			(2,253	)
Capital expenditures / transfers			79				1,218
Identifiable assets (1)			11,777				16,491
Rental Properties Held for Investment:
Net operating revenues		$	5,704			$	7,954
Operating income			3,798				6,106
Depreciation and amortization			1,264				1,264
Interest expense			3,255				2,866
Interest and other income			5				34
Income before income taxes			547				3,274
Capital expenditures / transfers			0				0
Identifiable assets (1)			88,762				91,046
Property Held for Sale:
Net operating revenues		$	0			$	0
Operating income			0				0
Depreciation and amortization			0				0
Interest expense			0				0
Interest and other income			0				0
Discontinued operations, net of tax			1,663				748
Capital expenditures / transfers			0				0
Identifiable assets (1)			55,149				55,926
Other and Eliminations:
Net operating revenues		$	610			$	750
Operating loss			(2,046	)			(1,251	)
Depreciation and amortization			109				112
Interest expense			3				(141	)
Interest and other income			814				508
Loss before income taxes			(1,265	)			(713	)
Capital expenditures / transfers			0				15
Identifiable assets (1)			31,532				39,220
Total:
Net operating revenues		$	18,503			$	24,814
Operating income			374				3,451
Depreciation and amortization			1,780				1,937
Interest expense			3,362				3,579
Interest and other income			872				547
Income (loss) before income taxes			(2,148	)			308
Discontinued operations, net of tax			1,663				748
Capital expenditures / transfers			79				1,233
Identifiable assets (1)			187,220				202,683

 

(1)	Identifiable assets represent total assets less elimination for intercompany items.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Nine Months Ended June 30, 2010, and 2009

 

10. SUBSEQUENT EVENTS

On July 1, 2010, the Company paid $3.0 million including interest due on its line of credit to bring the outstanding balance to $5.0 million.

On July 1, 2010, the Company received $0.4 million which was due on that day from GXS related to the sale agreement for the Gaithersburg Property.

On July 23, 2010, Mr. Christopher Lowden, the son of Mr. Paul W. Lowden, CEO, paid off his portion of the note receivable from stockholders in the amount of $53,881 including interest due.

 

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ARCHON CORPORATION

 

Item 2.

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

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

General

Overview of Business Operations and Trends : Historically, the Company, has owned, managed and operated hotel/casino properties through a number of acquisitions or developments, and it has divested itself of certain of these properties. Presently, the Company operates the Pioneer in Laughlin, Nevada.

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

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

Property Held for Sale

During fiscal year 2001, the Company acquired certain properties as part of an IRS Section 1031 exchange. The property held for sale is located in Gaithersburg, Maryland (the “Gaithersburg Property”). The Company acquired the Gaithersburg Property and nonrecourse debt associated with the Gaithersburg Property which is subject to a long-term lease. A tenant remits payment to the bank according to the terms of the lease and note. The payments are used to liquidate the nonrecourse debt obligations. Rental income is recorded by the Company on a straight-line basis and totals approximately $5.6 million annually and will remain at this level until approximately 2014 or until the asset is sold, otherwise disposed of or becomes impaired. The buildings on the Gaithersburg Property are no longer being depreciated subsequent to the classification being changed from a rental property held for investment to a property held for sale. Interest expense is also recorded based on the outstanding nonrecourse debt remaining to be paid based on unamortized loan issue costs and remaining debt

 

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amortization timetables. At any time during the term of the lease and debt amortization, the fair market value of the Gaithersburg Property may be different from its book values. Interest is presently being expensed at approximately $2.9 million annually and will decrease in relation to debt principal reductions through 2014 or until the asset is sold, otherwise disposed of or becomes impaired.

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

Simultaneous with the execution of the Purchase and Sale Agreement, the County entered into a sublease with the existing tenant of SFHI at this location, GXS, Inc., whereby the County, as of October 1, 2009, leased and occupied the entire Gaithersburg Property until the earlier of (i) completion of its purchase of the Gaithersburg Property or (ii) April 30, 2014. Pursuant to the applicable provisions of the existing lease with GXS, Inc., SFHI consented to the sublease. In addition, GXS, Inc. agreed to pay SFHI the sum of $2,125,000, $1,725,000 of which was paid on October 1, 2009, with the balance of $400,000 being paid on July 1, 2010. Due to the pending sale of the Gaithersburg Property, the related results of operations have been reported as discontinued operations. See Notes to Consolidated Financial Statements, Note 4, Sale of Gaithersburg Property

Rental Properties Held for Investment

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

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

 

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

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

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

Critical Accounting Policies and Estimates

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

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

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

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

 

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

Revenue Recognition : Casino revenue is recorded as gaming wins minus losses. Hotel, food and beverage, entertainment and other operating revenues are recognized as the services are performed. Casino revenues are recognized net of certain sales incentives in accordance with FASB ASC 605-50 Revenue Recognition, Customer Payments and Incentives. Accordingly, cash incentives to customers for gambling, and the cash value of points and coupons earned by the slot club members totaling $0.1 million and $0.2 million for the quarters ended March 31, 2010 and 2009, respectively, have been recognized as a direct reduction of casino revenue.

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

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

Recently Issued Accounting Standards

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

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

 

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

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

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

Results of Operations – Nine Months Ended June 30, 2010 and 2009

General

During the nine months ended June 30, 2010, the Company’s net operating revenues decreased $6.3 million and operating expenses decreased $3.2 million, resulting in a decrease in operating income of $3.1 million from the nine months ended June 30, 2009. The change in operating results was primarily due to a decrease in revenues at the investment properties. The operating results at the Pioneer and the rental properties were unchanged.

Consolidated

Net Operating Revenues. Consolidated net operating revenues for the nine months ended June 30, 2010 were $18.5 million, a $6.3 million decrease or 25%, as compared to $24.8 million for the nine months ended June 30, 2009. The change in net operating revenues was primarily related to lower revenues at the Pioneer and the investment properties. Revenues at the Pioneer for the nine months ended June 30, 2010 were $12.2 million, a $3.9 million decrease or 24%, as compared to $16.1 million for the nine months ended June 30, 2009. Revenues from the investment properties for the nine months ended June 30, 2010 were $5.7 million, a $2.3 million decrease or 29%, as compared to $8.0 million for the nine months ended June 30, 2009. Revenues at corporate for the nine months ended June 30, 2010 decreased $0.1 million as compared to the nine months ended June 30, 2009.

 

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Operating Expenses. Total operating expenses for the nine months ended June 30, 2010 were $18.1 million, a $3.2 million decrease or 15%, as compared to $21.3 million for the nine months ended June 30, 2009. The change in operating expenses resulted from an increase in corporate expense of $0.7 million, combined with a $3.9 million reduction in operating expenses at the Pioneer. Total operating expenses as a percentage of revenue increased to 98% in the current year period from 86% in the prior year period, as a result of the revenues reducing more than the operating expenses. Operating expenses at the Pioneer for the nine months ended June 30, 2010 were $13.6 million, a $3.9 million decrease or 22%, as compared to $17.5 million for the nine months ended June 30, 2009.

Operating Income. Consolidated operating income for the nine months ended June 30, 2010 was approximately $0.4 million, a $3.1 million decrease or 89%, as compared to approximately $3.5 million for the nine months ended June 30, 2009. This decrease was due to the aforementioned change in corporate and Pioneer operating income and expenses. Operating income at the Dorchester Property and the Strip Property decreased by $2.3 million to $3.8 million for the nine months ended June 30, 2010. Operating loss at the Pioneer remained unchanged at $1.4 million for the nine months ended June 30, 2010. The operating loss at corporate increased by $0.8 million to $2.0 million for the nine months ended June 30, 2010.

Interest Expense. Consolidated interest expense for the nine months ended June 30, 2010 was $3.4 million, a $0.2 million decrease or 6%, as compared to $3.6 million for the nine months ended June 30, 2009. The decrease was primarily due to the reduction of nonrecourse debt associated with the rental properties.

Interest and Other Income. Consolidated interest and other income for the nine months ended June 30, 2010 was $0.9 million, a $0.4 million increase or 80%, as compared to $0.5 million for the nine months ended June 30, 2009. The decrease was primarily due to the decrease in cash flows from operating and investing activities.

Federal Income Tax. The Company recorded a net federal income tax benefit for the nine months ended June 30, 2010 of $0.5 million based on estimated annual effective rates. The Company recorded a net federal income tax expense of $0.5 million for the nine months ended June 30, 2009. These net taxes are a combination of the federal income tax on both continuing and discontinued operations.

Net Income (Loss) Applicable to Common Shares. Consolidated net income attributable to common shares for the nine months ended June 30, 2010 was $0.9 million, or $0.14 per common share, as compared to net income attributable to common shares of $1.0 million, or $0.15 per common share, for the nine months ended June 30, 2009.

Pioneer

Net Operating Revenues. Net operating revenues at the Pioneer for the nine months ended June 30, 2010 were $12.2 million, a $3.9 million decrease or 24%, as compared to $16.1 million for the nine months ended June 30, 2009 primarily due to the reasons set forth below.

Casino revenues for the nine months ended June 30, 2010 were $9.6 million, a $3.2 million decrease or 25%, as compared to $12.8 million for the nine months ended June 30, 2009. Slot and video poker revenues for the nine months ended June 30, 2010 were $8.8 million, a $2.7 million decrease or 23%, as compared to $11.5 million for the nine months ended June 30, 2009. Other gaming revenues, including table games for the nine months ended June 30, 2010 were $0.8 million, a $0.5 million decrease or 38%, as compared to $1.3 million for the nine months ended June 30, 2009. Casino promotional allowances were $2.4 million compared to $3.0 million, a decrease of $0.6 million.

 

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Hotel revenues for the nine months ended June 30, 2010 were $1.1 million, a $0.2 million decrease or 15%, as compared to $1.3 million for the nine months ended June 30, 2009. A decrease in rooms occupied was compounded by a decrease in the average room rate. Food and beverage revenues for the nine months ended June 30, 2010 were $3.4 million, a $1.1 million decrease or 24%, as compared to $4.5 million for the nine months ended June 30, 2009. Other revenues for the nine months ended June 30, 2010 were $0.5 million, a $0.1 million decrease or 17%, as compared to $0.6 million for the nine months ended June 30, 2009.

Operating Expenses. Operating expenses for the nine months ended June 30, 2010 were $13.6 million a $3.9 million decrease or 22%, from $17.5 million for the nine months ended June 30, 2009. The decrease was primarily associated with the reduction in the operating revenues. Operating expenses as a percentage of revenue increased to 111% in the current year period from 109% in the prior year period.

Casino expenses for the nine months ended June 30, 2010 were $6.0 million, a $1.4 million decrease or 19%, as compared to $7.4 million for the nine months ended June 30, 2009. Casino expenses as a percentage of casino revenue increased to 63% in the current year period from 58% in the prior year period.

Hotel expenses for the nine months ended June 30, 2009 were $0.5 million, a $0.1 million decrease or 17%, as compared to $0.6 million for the nine months ended June 30, 2009, due to the decrease in occupied rooms and associated expenses. Hotel expenses as a percentage of hotel revenue decreased to 45% in the current year period from 46% in the prior year period. Food and beverage expenses for the nine months ended June 30, 2010 were $2.2 million, a $0.8 million decrease or 27%, as compared to $3.0 million for the nine months ended June 30, 2009. Food and beverage expenses as a percentage of food and beverage revenue decreased to 65% in the current year period from 67% in the prior period. Other expenses for the nine months ended June 30, 2010 were $0.2 million, a $0.3 million decrease or 60%, as compared to $0.5 million for the nine months ended June 30, 2009. Other expenses as a percentage of other revenue decreased to 40% in the current year period from 83% in the prior year period.

Selling, general and administrative expenses for the nine months ended June 30, 2010 were $2.1 million, a $1.0 million decrease or 32%, as compared to $3.1 million for the nine months ended June 30, 2009. Selling, general and administrative expenses as a percentage of revenue decreased to 17% in the current year period from 19% in the prior year period. Pioneer’s selling, general and administrative expenses are greater than the consolidated total due to the elimination of intercompany transactions in consolidation. Utilities and property expenses for the nine months ended June 30, 2010 were $2.2 million, a $0.2 million decrease or 8%, as compared to $2.4 million for the nine months ended June 30, 2009. Utilities and property expenses as a percentage of revenue increased to 18% in the current year period from 15% in the prior year period. Depreciation and amortization expenses for the nine months ended June 30, 2010 were $0.4 million, a $0.1 million decrease or 20%, as compared to $0.5 million for the nine months ended June 30, 2009.

Results of Operations – Three Months Ended June 30, 2010 and 2009

General

During the quarter ended June 30, 2010, the Company’s net operating revenues decreased $2.1 million and operating expenses decreased $1.2 million, resulting in a decrease in operating income of $0.9 million as compared to the three months ended June 30, 2009. The change in operating results was primarily due to a greater decrease in revenues than the offsetting decreases in associated expenses.

 

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Consolidated

Net Operating Revenues. Consolidated net operating revenues were $5.6 million for the quarter ended June 30, 2010, a $2.1 million or 27% decrease, from $7.7 million for the quarter ended June 30, 2009. Revenues at the Pioneer of $3.7 million for the three months ended June 30, 2010 decreased $1.3 million, or 26%, from $5.0 million for the three months ended June 30, 2009. Income from the rental properties was approximately $1.9 million for the three months ended June 30, 2010, a $0.5 million or 21% decrease, from $2.4 million for the three months ended June 30, 2009. Revenues at corporate decreased $0.3 million for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009.

Operating Expenses. Total operating expenses for the three months ended June 30, 2010 were $5.8 million, a $1.2 million decrease or 17%, as compared to $7.0 million for the three months ended June 30, 2009. Total operating expenses as a percentage of revenue increased to 104% in the current period from 91% in the prior year period.

Operating Income. Consolidated operating loss for the three months ended June 30, 2010 was $0.2 million, a $0.9 million decrease, as compared to operating revenue of $0.7 million for the three months ended June 30, 2009. The decrease was due to the aforementioned decrease in operating revenues and expenses. Operating income at the rental properties for the three months ended June 30, 2010 was $1.3 million, a $0.5 million decrease, as compared to $1.8 million for the three months ended June 30, 2009. Operating loss at the Pioneer for the three months ended June 30, 2009 was $0.6 million, a $0.2 million decrease, or 25%, as compared to $0.8 million for the three months ended June 30, 2009. The operating loss at corporate increased by $0.5 million to $0.8 million. Operating income changes are a result of the aforementioned changes in operating revenues and expenses.

Interest Expense. Consolidated interest expense was unchanged from the prior year period at $1.2 million for the three months ended June 30, 2010.

Interest and Other Income. Consolidated interest and other income for the three months ended June 30, 2010 was $0.1 million, no change as compared to the three months ended June 30, 2009.

Income (Loss) Before Income Tax (Expense) Benefit and Discontinued Operations. Consolidated loss before income tax and discontinued operations for the three months ended June 30, 2010 was $1.2 million, a $0.8 million decrease, as compared to a $0.4 million for the three months ended June 30, 2009.

Federal Income Tax. The Company recorded a net federal income tax benefit for the three months ended June 30, 2010 of $0.8 million based on estimated annual effective rates. The Company recorded a minimal net federal income tax expense for the three months ended June 30, 2009. These net taxes are a combination of the federal income tax on both continuing and discontinued operations.

Net Income (Loss) Applicable to Common Shares. Consolidated net income attributable to common shares for the three months ended June 30, 2010 was $0.2 million, or $0.02 per common share, as compared to $0.0 million, or $0.00 per common share, for the three months ended June 30, 2009.

Pioneer

Net Operating Revenues. Net operating revenues at the Pioneer for the three months ended June 30, 2010 were $3.7 million, a $1.3 million decrease or 26%, as compared to $5.0 million for the three months ended June 30, 2009, primarily for the reasons set forth below.

 

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Casino revenues for the three months ended June 30, 2010 were $2.8 million, a $1.0 million decrease or 26%, as compared to $3.8 million for the three months ended June 30, 2009. Slot and video poker revenues for the three months ended June 30, 2010 were $2.6 million, a $0.8 million decrease or 24%, as compared to $3.4 million for the three months ended June 30, 2009. Management believes the lower slot handle was a direct result of the weaker economic conditions impacting the Laughlin market. Other gaming revenues, including table games, for the three months ended June 30, 2010 were $0.2 million, a $0.2 million decrease or 50%, as compared to $0.4 million, for the three months ended June 30, 2009. Casino promotional allowances for the quarter ended June 30, 2010 were $0.7 million, a $0.3 million decrease or 30%, as compared to $1.0 million for the three months ended June 30, 2009.

Hotel revenues for the quarter ended June 30, 2010 were $0.4 million, a $0.1 million decrease or 20%, as compared to $0.5 million for the three months ended June 30, 2009. Food and beverage revenues for the quarter ended June 30, 2010 were $1.0 million, a $0.5 million decrease or 33%, as compared to $1.5 million for the three months ended June 30, 2009. Other revenues for the three months ended June 30, 2010 were $0.1 million, a $0.1 million decrease or 50%, as compared to $0.2 million for the three months ended June 30, 2009.

Operating Expenses. Operating expenses for the quarter ended June 30, 2010 were $4.3 million, a $1.5 million decrease or 26%, as compared to $5.8 million for the three months ended June 30, 2009. Operating expenses as a percentage of revenue remained unchanged from the prior year period at 116%.

Casino expenses for the three months ended June 30, 2010 were $1.8 million, a $0.6 million decrease or 25%, as compared to $2.4 million for the three months ended June 30, 2009. Casino expenses as a percentage of casino revenue increased to 64% from 63% resulting from the more rapid decline in revenues than expenses.

Hotel expenses for the three months ended June 30, 2010 were $0.2 million, unchanged from the prior year period. Hotel expenses as a percentage of hotel revenue increased to 50% for the three months ended June 30, 2010 from 40% for the three months ended June 30, 2009. Food and beverage expenses for the three months ended June 30, 2010 were $0.7 million, a $0.4 million decrease or 36%, as compared to $1.1 million in the three months ended June 30, 2009. Food and beverage expenses as a percentage of food and beverage revenue decreased to 70% for the three months ended June 30, 2010 from 73% for the three months ended June 30, 2009. Other expenses for the three months ended June 30, 2010 were $0.1 million, unchanged from the prior year period. Other expenses as a percentage of other revenue increased to 100% for the three months ended June 30, 2010 from 50% in the three months ended June 30, 2009.

Selling, general and administrative expenses for the three months ended June 30, 2009 were $0.7 million, a $0.3 million decrease or 30%, as compared to $1.0 million in the three months ended June 30, 2009. Selling, general and administrative expenses as a percentage of revenue decreased to 19% for the three months ended June 30, 2010 from 20% for the three months ended June 30, 2009. Pioneer’s selling, general and administrative expenses are greater than the consolidated total due to the elimination of intercompany transactions in consolidation. Utilities and property expenses for the three months ended June 30, 2010 were $0.7 million, a $0.1 million decrease or 13%, as compared to $0.8 million in the three months ended June 30, 2009. Utilities and property expenses as a percentage of revenue increased to 19% for the three months ended June 30, 2010 from 16% for the three months ended June 30, 2009. Depreciation and amortization expenses for the three months ended June 30, 2010 were $0.1 million, a $0.1 million decrease or 50%, as compared to $0.2 million for the three months ended June 30, 2009.

 

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

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

 

		Payments Due By Period
		2010			2011			2012			2013			2014			2015 and Thereafter			Total
Continuing Operations
Nonrecourse debt:
Dorchester		$	0		$	0		$	0		$	0		$	0		$	31,199		$	31,199
Long-term debt:
Mortgage obligation			7,971			0			0			0			0			0			7,971
Operating leases:
Ground lease			98			392			392			392			392			25,090			26,756
Corporate offices			6			24			25			19			0			0			74
Total Continuing Operations		$	8,075		$	416		$	417		$	411		$	392		$	56,289		$	66,000
Discontinued Operations
Gaithersburg		$	834		$	3,573		$	3,987		$	4,448		$	25,107		$	0		$	37,949

The Company is required to make the following cash interest payments related to the foregoing debt obligations: (i) Non-recourse debt – $1.0 million (2010), $3.8 million (2011), $3.8 million (2012), $3.8 million (2013), $3.8 million (2014) and $21.9 million (2015 and thereafter); and (ii) Long-term debt – $0.1 million (2010), $0 million (2011), $0 million (2012), $0 million (2013), $0 million (2014) and $0 million (2015 and thereafter); and (iii) Discontinued Operations debt – $0.7 million (2010), $2.5 million (2011), $2.3 million (2012), $2.0 million (2013), $1.1 million (2014) and $0 million (2015 and thereafter).

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

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

Liquidity and Capital Resources

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

 

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

As of June 30, 2010, the Company held cash and cash equivalents of approximately $14.2 million compared to $31.6 million at September 30, 2009. The Company had $15.4 million in investment in marketable securities at June 30, 2010 compared to $6.0 million at September 30, 2009. The Dorchester Property and the Strip Property are structured such that future tenants’ payments cover future required mortgage payments including any balloon payments. Management believes that the Company will have sufficient available cash and cash resources to meet its cash requirements for a reasonable period of time.

Cash Flows from Operating Activities . The Company’s cash used for operating activities was $4.5 million for the nine months ended June 30, 2010 as compared to $1.0 million for the nine months ended June 30, 2009.

Cash Flows from Investing Activities . Cash used in investing activities was $9.5 million for the nine months ended June 30, 2010, as compared to $2.1 million for the nine months ended June 30, 2009. In the current year period, the company paid $0.1 million for capital improvements at the Pioneer, and $12.2 million for marketable securities which were offset by the sale of $2.8 million in marketable securities. In the prior year period, the Company paid $1.2 million for capital improvements at the Pioneer, and $2.8 million for marketable securities which were offset by the sale of $1.9 million in marketable securities.

Cash Used in Financing Activities . Cash used in financing activities was $3.9 million for the nine months ended June 30, 2010 as compared to $1.2 million for the nine months ended June 30, 2009. In the current year period, $0.1 million was provided by proceeds from line of credit, and $4.0 million was used for the purchase of common stock for retirement. In the prior year period, $0.9 million was used for debt payments, and approximately $0.3 million for the purchase of common stock for retirement.

The Company’s primary source of operating cash is from the Pioneer operations, from interest income on available cash and cash equivalents and investments in marketable securities and, to a lesser extent, from net cash generated from the leasing of Strip Property. Rental income from the Company’s Dorchester Property and Gaithersburg Property is contractually committed to reducing the nonrecourse indebtedness issued or assumed in connection with the acquisition of the rental properties. Under the two leases, the tenants are responsible for substantially all obligations related to the respective property. SLVC, an indirect wholly-owned subsidiary of the Company, owns the 27-acre Strip Property on Las Vegas Boulevard South which is subject to a lease with the adjacent property owner to facilitate development of the adjacent property.

Pioneer

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

 

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Payments of rent were approximately $0.03 million in each of the nine months ended June 30, 2010 and 2009, respectively. Capital expenditures to maintain the facility in fiscal 2010 are expected to be approximately $0.3 million.

Property Held for Sale

The Gaithersburg Property in Gaithersburg, Maryland is located on 51.57 acres and includes one building with approximately 342,000 square feet of commercial office space. The Gaithersburg Property was acquired for $62.6 million, plus debt issuance costs of $2.7 million. The Company paid $9.9 million in cash and issued $55.4 million in nonrecourse first mortgage indebtedness. The Gaithersburg Property is under a net lease through 2014 with a single tenant with an investment grade credit rating. Under the lease, the tenant is responsible for substantially all obligations related to the Gaithersburg Property. The Gaithersburg Property is under contract to be sold. See Note 4, Purchase and Sale Agreement of Gaithersburg Property

Rental Properties Held for Investment

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

Termination of Option to Purchase Las Vegas Boulevard Land

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

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

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

 

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

The Company called all outstanding shares of its Exchangeable Redeemable Preferred Stock for redemption on and as of August 31, 2007, at a redemption price of $5.241 per share, which sum included accrued and unpaid dividends to the date of redemption. From and after August 31, 2007, all shares of the Exchangeable Redeemable Preferred Stock ceased to be outstanding and to accrue dividends. As of August 7, 2010, the holders of 4,261,092 shares of the Exchangeable Redeemable Preferred Stock have surrendered their shares and received payment of the redemption price; while 155,485 shares have yet to be surrendered and still have the right to receive their payment due without interest. As of June 30, 2010 and September 30, 2009, exchangeable redeemable preferred stock –unredeemed was $814,897 and $821,259, respectively.

On August 27, 2007, a group of institutional investors filed an action, in Nevada, against the Company. The Complaint was subsequently amended to add an additional party plaintiff (collectively, the “Plaintiffs”). The Amended Complaint: (i) seeks a finding by the Court that the Company has breached its obligations under the Company’s Certificate of Designation of the Preferred Stock, dated September 30, 1993 (the “Certificate”), and awarding the Plaintiffs full compensation of any and all available damages suffered by the Plaintiffs as a result of the Company’s breach of the Certificate; (ii) seeks a finding by the Court that the Company’s issuance of its redemption notice with an improper redemption price is an anticipatory breach of a material term of the Certificate and awarding the Plaintiffs full compensation of any and all available damages suffered as a result of the Company’s anticipatory breach of the Certificate; (iii) seeks a declaration by the Court that the dividends be properly calculated and compounded per the terms of the Certificate in an amount not less than $7,235,351 up through and including the date of final judgment; (iv) seeks an order from the Court calling for the Company to reimburse the Plaintiffs’ attorneys’ fees, expenses and costs incurred in enforcing their rights; and (v) seeks such other and further relief as the Court may deem appropriate.

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

Recently, Plaintiffs have filed a second motion for entry of final judgment, again seeking entry of judgment that the redemption price for the preferred shares should have been $8.69 per share. The Company has substantively opposed that motion and has urged the Court to reconsider its August 8, 2008 order. Briefing on Plaintiffs’ second motion for entry of final judgment has been completed and a hearing was held before the Court and the parties are awaiting a ruling.

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

 

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

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

Effects of Inflation

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

Private Securities Litigation Reform Act

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

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss arising from changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity process. Excluding its nonrecourse debt, the Company has total interest-bearing debt at June 30, 2010 of approximately $8.0 million, of which approximately $8.0 million bears interest at a variable rate (approximately 6% at June 30, 2010). Therefore, the Company maintains certain market rate risk related to this debt. A change in the interest rates of 1% would cause an approximate $0.1 million change in the amount of interest the Company would incur based on the amount of variable-interest rate debt outstanding for any current or future year in which this debt is outstanding. Future borrowings related to this debt will be exposed to this same market rate risk.

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

 

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Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures:

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

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

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

Changes in Internal Controls:

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

Limitations on the Effectiveness of Internal Controls:

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

 

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ARCHON CORPORATION

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

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

The Company called all outstanding shares of its Exchangeable Redeemable Preferred Stock for redemption on and as of August 31, 2007, at a redemption price of $5.241 per share, which sum included accrued and unpaid dividends to the date of redemption. From and after August 31, 2007, all shares of the Exchangeable Redeemable Preferred Stock ceased to be outstanding and to accrue dividends. As of August 7, 2010, the holders of 4,261,092 shares of the Exchangeable Redeemable Preferred Stock have surrendered their shares and received payment of the redemption price; while 155,485 shares have yet to be surrendered and still have the right to receive their payment due without interest. As of June 30, 2010 and September 30, 2009, exchangeable redeemable preferred stock –unredeemed was $814,897 and $821,259, respectively.

On August 27, 2007, a group of institutional investors filed an action, in Nevada, against the Company. The Complaint was subsequently amended to add an additional party plaintiff (collectively, the “Plaintiffs”). The Amended Complaint: (i) seeks a finding by the Court that the Company has breached its obligations under the Company’s Certificate of Designation of the Preferred Stock, dated September 30, 1993 (the “Certificate”), and awarding the Plaintiffs full compensation of any and all available damages suffered by the Plaintiffs as a result of the Company’s breach of the Certificate; (ii) seeks a finding by the Court that the Company’s issuance of its redemption notice with an improper redemption price is an anticipatory breach of a material term of the Certificate and awarding the Plaintiffs full compensation of any and all available damages suffered as a result of the Company’s anticipatory breach of the Certificate; (iii) seeks a declaration by the Court that the dividends be properly calculated and compounded per the terms of the Certificate in an amount not less than $7,235,351 up through and including the date of final judgment; (iv) seeks an order from the Court calling for the Company to reimburse the Plaintiffs’ attorneys’ fees, expenses and costs incurred in enforcing their rights; and (v) seeks such other and further relief as the Court may deem appropriate.

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

Recently, Plaintiffs have filed a second motion for entry of final judgment, again seeking entry of judgment that the redemption price for the preferred shares should have been $8.69 per share. The Company has substantively opposed that motion and has urged the Court to reconsider its August 8, 2008 order. Briefing on Plaintiffs’ second motion for entry of final judgment has been completed and a hearing was held before the Court and the parties are awaiting a ruling.

 

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

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

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

 

Item 2.

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

None

 

Item 3.

Defaults Upon Senior Securities

None

 

Item 4.

Submission of Matters to a Vote of Security Holders

Stockholders and investors may obtain a free copy of the information statement (when available) and other related documents filed by the Company with the SEC at its website at www.sec.gov .

At the Annual Meeting of Stockholders held on June 14, 2010, common stockholders elected two directors, Suzanne Lowden and Richard H. Taggart and voted on a proposal to ratify the selection of De Joya Griffith & Company LLC (“De Joya”) as the Company’s independent registered public accounting firm for fiscal year ended September 30, 2010 and approval of the financial statements for fiscal year ended September 30, 2009.

 

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The Directors whose terms in office continued after the meeting are as follows:

 

		Term Expires
Paul W. Lowden		2011
William J. Raggio		2011
John W. Delaney		2012
Howard E. Foster		2012
Suzanne Lowden		2013
Richard H. Taggart		2013

There were 6,017,944 shares of Common Stock entitled to vote at the 2010 Annual Meeting. A total of 6,136,377 stockholders votes (97.2%)  were represented at the meeting.

The result of the vote taken on the election of Directors elected by the common stockholders to hold office until the 2013 Annual Meeting of Stockholders and until their successors are elected and have qualified are as follows:

 

		For		Withheld
Suzanne Lowden		5,487,191		266,707
Richard H. Taggart		5,189,955		563,943

The result of the vote taken for ratification of the selection of De Joya as the Company’s independent registered public accounting firm for fiscal year ended September 30, 2010 and approval of the financial statements for fiscal year ended September 30, 2009 are as follows:

 

For		Against		Abstain		Broker Non-Vote
6,083,724		52,437		216		0

 

Item 5.

Other Information

None

 

Item 6.

Exhibits

 

a.		Exhibits .

 

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

 

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SIGNATURES

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

 

ARCHON CORPORATION, Registrant
By:		/ S /    P AUL W. L OWDEN
		Paul W. Lowden Chairman of the Board, President and Chief Executive Officer

Date: August 13, 2010

 

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