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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
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Commission File Number 333-42147
LAS VEGAS SANDS, INC.
Incorporated pursuant to the Laws of Nevada State
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IRS -- Employer Identification No. 04-3010100
3355 Las Vegas Boulevard South, Room 1A, Las Vegas, Nevada 89109
(702) 414-1000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of registrant
as of April 1, 2002 was $0.
The Company had 1,000,000 shares of Common Stock outstanding as of April 1,
2002.
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Las Vegas Sands, Inc.
Table of Contents
Part I
Item 1. Business .................................................1
Item 2. Properties...............................................21
Item 3. Legal Proceedings........................................21
Item 4. Submission of Matters to a Vote of Security Holders......22
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .....................................23
Item 6. Selected Financial Data..................................24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .....................25
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk .............................................35
Item 8. Financial Statements and Supplementary Data..............36
Item 9. Changes In and Disagreements With Accountants On
Accounting and Financial Disclosure .....................75
Part III
Item 10. Directors and Executive Officers of the Registrant.......76
Item 11. Executive Compensation...................................77
Item 12. Security Ownership of Certain Beneficial Owners and
Management ..............................................79
Item 13. Certain Relationships and Related Transactions...........80
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ................................................84
Signatures...............................................88
PART I
ITEM 1. -- BUSINESS
General
Las Vegas Sands, Inc. ("LVSI") and its subsidiaries (collectively, the
"Company") own and operate the Venetian Casino Resort (the "Casino Resort"), a
Renaissance Venice-themed resort situated at one of the premier locations on the
Las Vegas Strip (the "Strip"). The Casino Resort is located across from The
Mirage and the Treasure Island Hotel and Casino. The Casino Resort includes the
first and only all-suites hotel on the Strip with 3,036 suites (the "Hotel"); a
gaming facility of approximately 116,000 square feet (the "Casino"); an enclosed
retail, dining and entertainment complex of approximately 445,000 net leasable
square feet (the "Mall"); and a meeting and conference facility of approximately
500,000 square feet (the "Congress Center").
The Casino Resort is physically connected to the approximately 1.15 million
square foot Sands Expo and Convention Center (the "Expo Center"), one of the
largest facilities in the United States specifically designed for trade shows
and conventions. Management believes that the combined facilities of the Casino
Resort and the Expo Center (which is separately owned by an affiliate of the
Company) is one of the largest hotel and meeting complexes in the United States.
LVSI was incorporated in 1988 under the laws of the State of Nevada. In
April 1989, LVSI acquired the Sands Hotel and Casino (the "Sands") from MGM
Grand. LVSI owned and operated the Sands from April 1989 to June 1996 when
operations ceased to begin demolition of the Sands and construction of the
Casino Resort. Ground breaking for the Casino Resort occurred in April 1997, the
entire Casino Resort (excluding the Mall) opened on May 4, 1999, the Mall opened
on June 19, 1999 and substantial completion of the entire Casino Resort was
achieved on November 12, 1999.
LVSI is the managing member and owner of 100% of the common equity of
Venetian Casino Resort, LLC ("Venetian"). Venetian is the owner and operator of
the Hotel and Congress Center, and the owner of the Casino. Under a casino lease
(the "Casino Lease"), Venetian leases the Casino to LVSI, which conducts all
gaming operations in the Casino Resort. Grand Canal Shops Mall Subsidiary, LLC,
an indirect subsidiary of LVSI (the "New Mall Subsidiary"), owns and operates
the Mall.
The Casino Resort was developed on a stand-alone basis as the first phase
of a two-phase development. In the second phase of the development, it is
contemplated that another similarly sized themed resort (the "Phase II Resort")
will be constructed and developed by a wholly-owned, indirect subsidiary of LVSI
(the "Phase II Subsidiary").
The executive offices of LVSI are located at 3355 Las Vegas Boulevard
South, Room 1A, Las Vegas, Nevada 89109 and its telephone number is (702)
414-1000.
This Annual Report on Form 10-K contains certain forward-looking
statements. See "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Special Note Regarding Forward - Looking
Statements."
The Casino Resort
The Hotel
The Hotel presently has 3,036 single and multiple bedroom suites situated
in a 35-story, three-winged tower rising above the Casino. The lobby features a
65-foot domed ceiling decorated with Venetian-themed fresco-style paintings, a
main passageway formed by a barrel-vaulted ceiling carried on ornamental
columns, and a replica of the unique three dimensional-style marble floors found
in Venetian palaces.
A typical Hotel suite approximates 655 to 735 square feet, consisting of a
raised sleeping area and bathroom and a sunken living/working area. The suite's
bi-level configuration creates a multi-function living space in which guests can
sleep, work and entertain and includes two queen-size beds or one king-size bed,
a writing desk, dual-line speaker phones, a fax machine and a sitting area.
Approximately 318 of the suites are of larger size for use by gaming customers.
The Casino Resort's average daily room rates increased to $196 in the year
ended December 31, 2001 from $182 in 2000. Gross room revenues during the year
ended December 31, 2001 were $204.2 million, representing an increase of $11.9
million when compared to $192.3 million during 2000. During 2001, the occupancy
rate for available guestrooms in the Hotel was 94.6%.
1
The Hotel leases space to eight restaurants that are located adjacent to
the Casino and five other food outlets located in a Venetian-style market food
court located at the casino level of the Hotel. Live entertainment is offered at
the 50,000 square foot entertainment complex, "C2K". In addition, the Hotel
provides a variety of amenities for its guests, including a state-of-the-art
health spa, operated by Canyon Ranch, with massage and treatment rooms, exercise
and fitness areas. The Hotel features an outdoor swimming complex (including
three pools, spas, pool bars and cabanas) surrounded by gardens, waterways,
fountains and sculptures.
In addition to the Congress Center, the Hotel includes approximately 63,000
square feet of exhibition hall space that was completed in October 2001 and that
currently houses various art exhibits in conjunction with the Guggenheim Museum
in New York. The Hotel has been designed to accommodate additional expansion; in
2001, the Company began construction of a 1,000-room hotel tower on top of the
Casino Resort's existing parking garage and a 1,000 parking space expansion of
the garage. See " - New Developments - Phase IA Addition".
The Casino
The Casino has 116,000 square feet of gaming space and is situated adjacent
to the Hotel lobby. The Casino floor is accessible from each of the Hotel, the
Mall, the Congress Center, the Expo Center and the Strip. The Casino is marketed
to attract a broad base of patrons, with a specific focus on frequent premium
gaming customers. The Company markets the Casino directly to this gaming market
segment using database-marketing techniques, slot clubs and traditional
incentives such as reduced room rates and complimentary meals and suites. The
Company offers "high roller" gaming customers premium suites and special hotel
services.
The Casino and its adjacent amenities, including several "signature"
restaurants, are stylized to resemble a Venetian "palazzo," with architectural
and interior design features representative of Venice's Renaissance era. The
ceiling in the table games area features fresco-style paintings of Venetian
palaces. The gaming facilities include approximately 2,124 slot machines of
various denominations, including popular multi-property, linked progressive
games. A high-end slot area, with a private lounge, provides slot customers with
premium slot products and services. The Casino's approximately 122 table games
(excluding baccarat tables) feature the traditional games of blackjack, craps
and roulette, Asian games, such as "Pai Gow" and "Pai Gow Poker," and popular
progressive table games, such as "Caribbean Stud Poker" and "Let It Ride." In
addition, the Casino offers gaming customers an upscale sportsbook room and an
upscale gaming salon with 10 baccarat tables. The gaming salon is specially
designed for premium, "high roller" gaming, with baccarat, blackjack and
roulette, direct access to private cash-out windows at the Casino cage and
direct access to the Casino's credit department.
The Mall
The Mall offers approximately 445,000 net leasable square feet of shopping,
dining and entertainment space located: (i) on two levels within the Casino
Resort's main structure, between the Casino level and the Hotel tower; and (ii)
in a separate approximately 38,000 square foot retail annex adjacent to the
Casino Resort's main structure and directly accessible from the Strip. The Mall
includes eight restaurants, six food court outlets, three specialty food shops
and 58 retail stores. Visitors and guests can enter the Mall from several
different directions, including from the Strip via a moving sidewalk, from the
main gaming area of the Casino via escalators, from the Expo Center through the
Congress Center, from a cross-over bridge across the Strip and directly from the
Hotel.
The Mall offers an array of quality dining experiences, including upscale
restaurants that offer international and American regional cuisines. The Mall's
retail offerings include exclusive showcase boutiques, popular brand name
mid-priced stores and themed entertainment concepts. Luxury tenants in the Mall
include Mikimoto, Movado, Burberry and Jimmy Choo. The restaurants and stores
are set along an approximately one-quarter mile Venetian-themed streetscape and
front on the Venetian-themed canal running its length; they are grouped in
"piazza"-style settings. Store and restaurant facades are designed to project
the Venetian theme.
In 2001, the Mall leased approximately 95% of its gross leasable space at
an average of approximately $100 per leasable square foot. Additional tenants
and increased proceeds from rents raised Mall revenues to $33.5 million in 2001
from $29.9 million in 2000. The average term of a lease in the Mall is 10 years.
2
The Expo Center and the Congress Center
With over 1.15 million gross square feet of exhibit and meeting space,
including four exhibit halls and 20 meeting rooms, the separately owned and
operated Expo Center is one of the largest trade show and convention facilities
in the United States (as measured by net leasable square footage). As part of
the Casino Resort, the Company owns and operates the Congress Center, an
approximately 500,000 gross square foot meeting and conference facility which
links the Expo Center and the rest of the Casino Resort. The Congress Center
includes an approximately 80,000 square foot column-free "Venetian Ballroom," an
approximately 13,500 square foot "Palazzo Ballroom" and a meeting complex of 42
individual rooms which can be combined to create three additional ballrooms.
Together, the Expo Center and the Congress Center offer nearly 1.65 million
square feet of state-of-the-art exhibition and meeting facilities, which can be
configured to provide 108 meeting rooms or accommodate large-scale multi-media
events. The Company is also planning to add 150,000 square feet of additional
meeting and conference facility space to the Casino Resort. See "-New
Developments - Phase IA Addition."
Management markets the Congress Center to complement the operations of the
Expo Center by target marketing the Congress Center for business conferences and
upscale business events typically held during the mid-week period. The Company
markets the Congress Center to generate room-night demand and drive average
daily room rates during the weekday move-in/move-out phases of Expo Center
events. The Company's goal is to draw from attendees and exhibitors at Expo
Center events and from attendees of Congress Center events to maintain weekday
room-night demand at the Hotel from this higher budget market segment, when room
demand would otherwise be derived from the lower budget tour and travel group
market segment.
In 2001, approximately 1,039,000 visitors attended trade shows and
conventions at the Expo Center during 110 show days. The Expo Center hosted 17
events on the 2001 Trade Show Week 200 list of the largest trade shows in the
United States in 2001, including the Spring and Fall Western Shoe Show and JCK
Jewelry Show, as well as the convention of National Association of Broadcasters
and the Automotive Service Industry Association Week, each of which were
multiple location events.
It should be noted that the Company has no ownership of or financial
interest in the Expo Center or Interface Group-Nevada, Inc. ("Interface"), the
owner of the Expo Center, and does not exercise any control over the business or
management of the Expo Center or Interface. All of the capital stock of
Interface is beneficially owned by Sheldon G. Adelson, the principal stockholder
of the Company (the "Principal Stockholder"). See "Item 13 - Certain
Relationships and Related Transactions - Possible Conflicts of Interest."
Relationships and Related Transactions - Possible Conflicts of Interest."
Venetian, the New Mall Subsidiary and Interface are parties to an Amended
and Restated Reciprocal Easement, Use and Operating Agreement (the "Cooperation
Agreement") which, among other things, provides for the integrated operation of
all the facilities. Under the Cooperation Agreement, Interface, the New Mall
Subsidiary and Venetian allocate expenses shared by the Expo Center and the
Casino Resort. In addition, the Company and Interface jointly market the Hotel
and Casino, the Mall, the Congress Center and the Expo Center. The Cooperation
Agreement provides that until December 31, 2010, Interface will use commercially
reasonable efforts to have the Hotel designated as the "headquarters hotel" for
trade show and convention events at the Expo Center, and the Company will use
commercially reasonable efforts to promote the use and occupancy of the Expo
Center. In order to obtain the Casino Resort's "headquarters hotel" designation,
the Company has agreed with Interface that, except under certain circumstances,
trade shows of the type generally held at the Expo Center will not be held in
the Congress Center. It should be noted that trade show and convention promoters
are under no obligation to select the Casino Resort as the "headquarters hotel"
for their events. See "Item 13 - Certain Relationships and Related Transactions
- - Cooperation Agreement."
Business and Marketing Strategy
The Company's primary business objective is to provide a premium
destination casino resort experience in order to drive superior returns on
invested capital and to increase asset value. To achieve this objective, the
Company: (i) operates a "must-see" destination resort at a premier location at
the heart of the Strip; (ii) captures premium room rates through a
differentiated superior all-suites product; (iii) drives hotel occupancy and
casino utilization through the link to the Expo Center and the Congress Center;
(iv) caters to a higher-budget customer mix by offering a unique combination of
assets and facilities; (v) leverages the Casino Resort's premium co-branding
strategy to drive revenues; and (vi) targets premium gaming customers.
3
Operate a "Must-See" Destination Casino Resort at the Heart of the Las
Vegas Strip
The Casino Resort, with its extensive theming, dining, shopping and
entertainment, is a "must-see" destination located at the heart of the Strip.
The Casino Resort is designed and operated to provide visitors with the sense of
being surrounded by the festivity and splendor of Renaissance Venice's
architecture, music, art and history. The Venetian-themed setting along the
Casino Resort's frontage on the Strip includes waterways, gondolas and replicas
of Venetian landmarks, such as the Doge's Palace, the Rialto Bridge, the Ca Doro
and the Campanile Tower. The Mall features a one-quarter mile Venetian
streetscape, with intimate "piazza"-style settings. A 630-foot canal runs along
the Venetian streetscape, with gondolas and waterside cafes and crossed by
authentically styled Venetian bridges.
The Casino Resort has approximately 740 feet of frontage on the east side
of the Strip and is located next to Harrah's and across from some of the most
visited casino resorts and attractions on the Strip, including The Mirage, the
Treasure Island Hotel and Casino and The Forum Shops at Caesars Palace Hotel.
Capture Premium Room Rates through Differentiated All-Suites Product
The Hotel offers the first and only all-suites product with first-class
services and facilities on the Strip. The typical Hotel suite ranges in size
from approximately 655 square feet to 735 square feet (compared to approximately
360 to 400 square feet on average for a standard room in competing facilities on
the Strip), and consists of a sunken living/working area and a raised sleeping
area with a marble bathroom; each area has its own television entertainment
center. Each suite living/working area includes a sitting area and a writing
desk and offer business amenities such as dual-line speakerphones, a fax machine
and dataport access. The bathrooms are oversized, featuring a separate bathtub
and shower, dual sinks and a telephone. In addition, the Hotel offers larger
suites, including the "Presidential" and penthouse suites.
In 2001, the Hotel was awarded the Exxon Mobil "Four Star Award," Conde
Nast's "Best 100 Hotels in the World," AAA's "Four Diamond Award" and Meetings
and Convention Magazine's Prestigious "Gold Key Award" for meeting hotels in the
United States. In management's experience, business and leisure travelers
consider suites desirable, superior accommodations. For business travelers, the
Hotel's suites, which accommodate informal business meetings and social
gatherings, offer guests a unique, single location in which to work and
entertain in close proximity to the Expo Center and the Strip. Leisure travelers
appreciate both the Hotel's spacious suites and extensive facilities. The
Company believes that the all-suites format, together with the Casino Resort's
many other unique attributes, results in a highly differentiated resort product,
allows for premium pricing on rooms and provides a competitive advantage over
other Strip hotel/casino properties and resorts.
The Company's mix of hotel sales is as follows: group and convention room
sales are 39%, casino customers 19%, wholesale 9% and free and independent
travelers 33% of total sales. The Hotel's average daily room rates were $196 in
2001.
Drive Hotel Occupancy and Casino Utilization through Link to Expo Center
and Congress Center
The Casino Resort is the first themed entertainment resort in Las Vegas
designed specifically to accommodate large-scale trade shows, conventions,
conferences and meetings. The Expo Center and the Congress Center provide
recurring, predictable demand for mid-week room nights from business travelers.
The Company's diverse business model draws convention attendees from all parts
of the United States and the world. In connection with 110 show days during
2001, approximately 1,039,000 visitors attended trade shows and conventions at
the Expo Center. The Hotel had a mid-week occupancy rate of 92.2% in 2001
(compared to an 81.6% mid-week average occupancy rate on the Strip), due in
large part to the Casino Resort's trade show and convention business. Pursuant
to the Cooperation Agreement, the owner of the Expo Center markets the Casino
Resort to promoters of Expo Center trade show conventions and other events as
the "headquarters hotel" for such events. The Casino Resort offers attendees of
events at the Expo Center and the Congress Center the most convenient hotel
accommodations in Las Vegas.
4
Cater to a Higher-Budget Customer Mix by Offering Unique Assets and
Facilities
Management markets the Casino Resort to attract higher-budget business
travelers and free and independent travelers, resulting in a higher-budget
customer mix both on weekdays and on weekends. By appealing to customers in
these upscale market segments, the Company has reduced its reliance on the
lower-budget tour and travel market. Management believes that business travelers
typically pay more for rooms and spend more on entertainment than weekday
customers in other categories, such as tour groups. Management believes that the
Casino Resort's Congress Center, its central location adjacent to the Expo
Center at the heart of the Strip, and its all-suites hotel product all combine
to allow it to compete effectively for the higher-budget mid-week trade show,
convention and meeting attendees. On both weekdays and weekends, the all-suites
product at the Hotel appeals to free and independent leisure travelers and
"high-roller" gaming customers, also segments of the travel market who spend
more on rooms and entertainment.
Leverage the Casino Resort's Premium Co-Branding Strategy to Drive Revenues
The Company expects to build upon awareness of the Venetian brand by
continuing to attract a unique collection of "signature" restaurant concepts and
premier global retail brands to the Casino Resort. This strategy allows the
Company to focus on its core competency of providing first-class hotel and
meeting facilities while attracting additional guests and foot traffic because
of its own brand name and its concentration of other premier brands. The Casino
Resort has been designed such that foot traffic from the Strip, the Expo Center,
the Congress Center and the Hotel are funneled through the Casino floor in order
to attract and retain a broad base of Casino patrons. The Company seeks to
maximize guest spending from the Casino Resort's target markets by offering a
concentration of fine restaurants, exclusive boutiques, the Canyon Ranch health
spa and the 50,000 square foot entertainment complex, "C2K". Several well-known
restaurateurs operate "signature" restaurants on the premises, such as Emeril's
Delmonico and Wolfgang Puck's Postrio, and the Mall includes luxury retailers
such as Mikimoto and Burberry. In addition, the Casino Resort includes the
Guggenheim Las Vegas Museum and the Guggenheim Hermitage Museum (the "Guggenheim
Museum Projects"), which house various art exhibits in conjunction with the
Guggenheim Museum in New York. The co-branding strategy enhances the Casino
Resort's appeal to the higher budget room guests. Moreover, the Casino captures
gaming revenues from: (i) foot traffic generated by Expo Center and Congress
Center events; (ii) Hotel guests; (iii) foot traffic generated by shoppers and
diners at the Mall; (iv) visitors attracted to the Casino Resort's unique,
Venetian-themed facilities; and (v) the Guggenheim Museum Projects. This
world-class combination of offerings and attractions drives Hotel utilization -
a high-margin revenue source - through increased occupancy and premium average
daily room rates. The Casino Resort's premier location on the Strip, its
extensive theming as well as its established and growing concentration of
premium brands is an effective strategy for continued revenue growth and
awareness of the Venetian brand.
Target Premium Gaming Customers
Management believes that the Casino Resort's all-suites product, themed
atmosphere and high-end amenities, including premium restaurants and shops,
offer gaming customers a unique Las Vegas experience. The Company actively
markets the Casino to frequent premium gaming customers. In particular, the
Company seeks to attract "high roller" gaming customers by offering premium
suites and special hotel services. Because of the all-suites format in the
Hotel, the Casino Resort is able to offer many gaming customers complementary
suites (considered premium accommodations in Las Vegas) during high occupancy
periods, such as weekends and holidays, when they would not be offered such
suites by the Company's competitors. The Casino Resort is the first and only
all-suites resort on the Strip with facilities and amenities designed from
inception to attract and serve premium gaming customers.
The Las Vegas Market
Las Vegas is one of the fastest-growing and largest entertainment markets
in the country. Las Vegas hotel occupancy rates are among the highest of any
major market in the United States. According to the Las Vegas Convention and
Visitors Authority (the "LVCVA"), the number of visitors traveling to Las Vegas
has increased at a steady and significant rate for the last ten years from 21.3
million visitors in 1991 to 35.0 million visitors in 2001, a compound annual
growth rate of 5.1%. In addition, the population of Las Vegas has grown from
approximately 821,000 in 1991 to approximately 1,486,000 in 2001, a compound
annual growth rate of 6.1%. Management believes that the growth in the Las Vegas
market has been enhanced by a dedicated program of the LVCVA and major Las Vegas
hotels to promote Las Vegas as an exciting vacation and convention site, the
increased capacity of McCarran International Airport and the introduction of
large, themed destination resorts in Las Vegas.
5
Las Vegas as a Trade Show, Convention and Meeting Destination
In 2001, according to the LVCVA, Las Vegas was the most popular trade show
destination (with a 25% market share of the Trade Show Week 200 Shows in terms
of net square footage) and the fourth most popular convention destination in the
United States. In 1991, approximately 1.8 million persons attended trade shows
and conventions in Las Vegas and spent approximately $1.5 billion. In 2001, the
number of trade show and convention attendees had increased to 4.0 million and
the amount spent by trade show and convention attendees was approximately $4.8
billion.
Trade shows are held for the purpose of getting sellers and buyers of
products or services together in order to conduct business. Trade shows differ
from conventions in that trade shows typically require substantial amounts of
space for exhibition purposes and participant circulation. Conventions generally
are gatherings of companies or groups that require less space for breakout
meetings and general meetings of the overall group. Las Vegas offers trade shows
and conventions a unique infrastructure for handling the world's largest shows,
including the concentration of 48,000 hotel rooms located on the Strip, two
convention centers (the Expo Center and the Las Vegas Convention Center (the
"LVCC")) with a total of approximately 4.0 million square feet of convention and
exhibition space, convenient air service from major cities throughout the United
States and other countries, and significant entertainment attractions. In
addition to the Expo Center and the LVCC, The MGM Grand Hotel and Casino has
constructed a conference and meeting facility of approximately 300,000 gross
square feet, the Mirage has recently added 100,000 gross square feet of meeting
space and Mandalay Bay has begun construction of an approximately 1.8 million
square foot convention center with an estimated completion date of early 2003.
Management believes that Las Vegas will continue to evolve as the country's
preferred trade show and convention destination.
Expanding Hotel Market
During 2001, Las Vegas was among the most popular vacation destinations in
the United States. Las Vegas has experienced a period of rapid hotel development
with the number of hotel and motel rooms in Las Vegas increasing by 65% over the
last 10 years, from 76,879 in 1991 to 126,610 in 2001. The Company expects that
the concentration of quality themed casino hotels and resorts will increase
visitor interest in Las Vegas as a business event and vacation destination, and,
as a result, increase overall demand for hotel rooms, gaming and entertainment.
Growth of Las Vegas Retail Sector and Non-Gaming Revenue Expenditures
In order to draw additional visitors, an increasing number of destination
resorts are developing non-gaming entertainment to complement their gaming
activities. According to the LVCVA, while gaming revenues have increased from
$4.2 billion in 1991 to $7.6 billion in 2001 (a compound annual growth rate of
6.1%), non-gaming tourist revenues increased from $10.2 billion to $23.8 billion
over the same period (a compound annual growth rate of 8.8%). The newer, large
themed Las Vegas destination resorts have been designed to capitalize on this
growth by providing better quality hotel rooms at higher rates and by providing
expanded shopping, dining and entertainment opportunities to their patrons in
addition to gaming.
Infrastructure Improvements
Clark County and metropolitan Las Vegas have completed several
infrastructure improvements to accommodate the increase in travel to Las Vegas
by all modes of transportation. According to the LVCVA, in 2001 visitors to Las
Vegas arrived by the following methods of transportation: 45% by air; 40% by
auto; 8% by recreational vehicle; and 7% by bus.
McCarran International Airport Expansion
During the past five years, the facilities of McCarran International
Airport have been expanded to accommodate the increased number of airlines and
passengers that it services. The number of passengers traveling through McCarran
International Airport has increased from 20.2 million in 1991 to 35.2 million in
2001. Long-term expansion plans for McCarran International Airport provide for
additional runway and related areas (a new runway was completed in October 1997
and a new terminal and additional gates were completed in 1998).
Competition
The casino/hotel industry is highly competitive. Strip hotels compete with
other hotels on the Strip and with other hotels in downtown Las Vegas. The
Casino Resort also competes with a large number of hotels and motels near Las
Vegas. Many of the Company's competitors are subsidiaries or divisions of large
public companies and may have greater financial and other resources than the
Company.
6
Hotel/Casino Properties
Competitors of the Casino Resort include new themed resorts on the Strip,
such as The Bellagio, Mandalay Bay and Paris. In August 2001, Steve Wynn filed
his plans for La Reve with the Clark County Planning Commission. La Reve is
intended to be a 2,500-room resort on the site of the former Desert Inn on Sands
Avenue across from the site of the anticipated Phase II Resort. Management is
not aware of any other new significant developments of casino properties in Las
Vegas in the near future. The Casino Resort may also compete with the Phase II
Resort, to the extent its business is not complementary to that of the Casino
Resort.
The Company believes that themed resorts are generally more successful at
generating higher traffic volumes and higher revenues and operating income than
the large-scale non-themed properties in Las Vegas. Themed resorts compete on
the basis of the quality of theming, as well as on more traditional bases, such
as quality of rooms, pricing and location. Themed resorts tend to be clustered
on the Strip, creating a critical mass of entertainment experiences which
generate significant traffic for the themed resorts as a group, thereby
capturing a larger portion of the Las Vegas hotel and gaming market than
non-themed properties. The Company believes that the existence of other themed
resorts in close proximity to the Casino Resort directly benefits the Casino
Resort. The Casino Resort is part of a cluster of themed properties, which
includes The Mirage, the Treasure Island Hotel and Casino, The Bellagio and The
Forum Shops at Caesars Palace Hotel, and may in the future also include La Reve
and the Phase II Resort.
In addition to the advantages of being a centrally-located, themed resort,
the Cooperation Agreement and the Casino Resort's direct connection with the
Expo Center provide the Casino Resort with a unique tie-in to one of the premier
trade show and convention facilities in the United States. With these
competitive advantages, the Casino Resort is positioned to appeal to the
mid-week meeting, trade show and convention market composed of customers who pay
higher average room rates and have higher average travel budgets than other
categories of weekday customers, such as tour groups.
The hotel-casino operation of the Casino Resort also competes, to some
extent, with other hotel-casino facilities in Nevada and in Atlantic City,
hotel/casino and other resort facilities elsewhere in the country and the world,
Internet gaming web sites and state lotteries. In addition, certain states have
legalized, and others may legalize, casino gaming in specific areas. The passage
of the Indian Gaming Regulatory Act in 1988, for example, has led to rapid
increases in Native American gaming operations. Such proliferation of gaming
venues could significantly and adversely affect the business of the Company. In
particular, the legalization of casino gaming in or near major metropolitan
areas, such as New York, Los Angeles, San Francisco and Boston, from which the
Company attracts customers, could have a material adverse effect on the business
of the Company. In October 2001, the New York legislature approved a bill for
expanded casino gaming on Native American reservations in that state. The
expansion of gaming in New York could also have a material adverse effect on the
business of the Company.
Trade Show and Convention Facilities
The Expo Center, the Congress Center and Las Vegas generally compete with
trade show and convention facilities located in and around major U.S. cities,
including Atlanta, Chicago, New York and Orlando. Within Las Vegas, the Expo
Center and the Congress Center compete with the LVCC, which is located off the
Strip and currently has 3.3 million gross square feet of convention and exhibit
facilities, including over 1.0 million square feet of new meeting and exhibition
space that was added in 2001 (the "LVCC Expansion"). The MGM Grand Hotel and
Casino has also opened a new conference and meeting facility of approximately
300,000 square feet, the Mirage has recently added 100,000 gross square feet of
meeting space and Mandalay Bay has begun construction of an approximately 1.8
million square foot convention center. The conference and meeting facilities at
these hotel/resorts are the Congress Center's primary competition. The LVCC and
Mandalay Bay are expected to be the primary competitors of the Expo Center. To
the extent that any of the competitors of the Casino Resort can offer a
hotel/casino experience that is integrated with substantial trade show,
convention, conference and meeting facilities, the Casino Resort's competitive
advantage in attracting trade show and convention meeting and conference
attendees could be adversely affected.
Mall
The Mall competes with both themed resorts, which offer shopping, dining
and entertainment opportunities to their patrons, and other retail malls in or
near Las Vegas. The Mall's direct competition includes The Forum Shops at
Caesars Palace and The Desert Passage Shops at the Aladdin. The Forum Shops at
Caesars Palace may undergo additional expansions in the future. The Mall also
competes with The Fashion Show Mall, a more traditional mall located near the
Casino Resort which is currently undergoing an expansion that will almost double
its size. In the future, the Mall may also compete with the planned retail,
dining and entertainment facilities in the Phase II Resort. Mandalay Resort
Group had also announced, but has since suspended, the development of a retail
center near its new Mandalay Bay Resort.
7
Advertising and Marketing
The Company advertises in many types of media, including television, radio,
newspapers, magazines and billboards, to promote general market awareness of the
Casino Resort as a unique vacation, business and convention destination due to
its first-class hotel, casino, retail stores and restaurants. The Mall tenants
also pursue their own general advertising and promotional activity, which
benefits the Mall. The Company actively engages in direct marketing which is
targeted at specific market segments, such as the meeting, convention and trade
show market and the premium gaming market, and database marketing which focuses
on high-frequency, high-margin market segments such as the "high-roller" gaming
market. The Company uses a preview center featuring a full-scale model suite in
the Expo Center to market Casino Resort and Expo Center events.
Agreements Relating to the Casino Resort
As of December 31, 1999, construction of the Casino Resort and the Mall was
complete and virtually all construction costs had been paid. The Company is
currently involved in various lawsuits, has asserted various claims against
various parties, and has had various claims asserted against it by various
parties, in connection with the construction of the Casino Resort. The Company
is vigorously pursuing these claims and vigorously defending itself in all
relevant legal proceedings. See "Item 3 - Legal Proceedings."
Construction Management Contract and Construction Manager's Contract
Guaranty
The construction of the principal components of the Casino Resort was
undertaken by Lehrer McGovern Bovis, Inc. (the "Construction Manager") pursuant
to a construction management agreement and certain amendments thereto (as so
amended, the "Construction Management Contract"). The Construction Management
Contract established a final guaranteed maximum price (the "Final GMP") of
$645.0 million, so that, subject to certain exceptions (including an exception
for cost overruns due to "scope changes"), the Construction Manager was
responsible for any costs of the work covered by the Construction Management
Contract in excess of $645.0 million. The Construction Management Contract also
established a required "substantial completion" date (the date on which the
construction of the Casino Resort was sufficiently complete, including the
receipt of necessary permits, licenses and approvals, so that all components of
the Casino Resort could be open to the general public) of April 21, 1999
(subject to extensions on account of "scope changes" and force majeure events),
with a per-day liquidated damages penalty for failure to meet such deadline.
The Company paid the Construction Manager a construction management fee of
1 1/2% of the Final GMP, payable in monthly installments.
The obligations of the Construction Manager under the Construction
Management Contract were guaranteed by Bovis, Inc. ("Bovis"), the Construction
Manager's direct parent at the time the Construction Management Contract was
entered into (such guaranty, the "Bovis Guaranty"). Bovis's obligations under
the Bovis Guaranty were guaranteed by The Peninsula and Oriental Steam
Navigation Company ("P&O"), a British public company and the Construction
Manager's ultimate parent at the time the Construction Management Contract was
entered into (such guaranty, the "P&O Guaranty"). With respect to the
Construction Manager's obligation to complete construction on schedule: (i) for
the first 30 days of any delay in such scheduled completion, the Construction
Manager solely (and not Bovis or P&O) is liable for liquidated damages; (ii) for
the 90-day period thereafter and subject to certain conditions and exceptions,
only the insurers under the LD Policy described below (and not the Construction
Manager, Bovis or P&O), are liable for liquidated damages; and (iii) the
Construction Manager, Bovis and P&O are liable for liquidated damages to the
extent, if any, that the Construction Manager missed the required deadline by
more than 120 days.
Liquidated Damages Insurance
The Construction Manager obtained, on behalf of the Company (and at the
Company's expense), a liquidated damages insurance policy (the "LD Policy"). The
LD Policy covers (with certain exceptions) liquidated damages for delays of not
less than one month and not more than four months in achieving substantial
completion beyond the date substantial completion was required to be achieved
under the Construction Management Contract. See "Item 3 - Legal Proceedings."
Cooperation Agreement
The Casino Resort (excluding the Mall), the Mall and the Expo Center,
respectively, though separately owned, are integrally-related components of one
facility. In order to establish terms for the integrated operation of these
components, Venetian (as owner of the Hotel, Casino and Congress Center), the
New Mall Subsidiary (as owner of the Mall) and Interface (as owner of the Expo
Center) are parties to the Cooperation Agreement. See "Item 13 - Certain
Relationships and Related Transactions - Cooperation Agreement."
8
Mall Management Contract
The New Mall Subsidiary has entered into an agreement with Forest City
Enterprises ("Forest City"), a subsidiary of Forest City Ratner Enterprises, a
leading developer and manager of retail and commercial real estate developments,
whereby Forest City manages the Mall and supervises and assists in the creation
of an advertising and promotional program and a marketing plan for the Mall.
Forest City is also responsible for, among other things, preparation of a
detailed plan for the routine operation of the Mall, collection and deposit
procedures for rents and other tenant charges, supervision of maintenance and
repairs and, on an annual basis, preparation of a detailed budget (including any
anticipated extraordinary expenses and capital expenditures) for the Mall. The
term of the management contract is five years from June 19, 1999, the date the
Mall opened to the public. Forest City currently receives a management fee of 2%
of all gross rents received from the operation of the Mall, provided that Forest
City receives a minimum fee of $450,000 per year. Beginning in June 2002, the
minimum fee will increase to $600,000 per year. Forest City is not affiliated
with the Principal Stockholder or any of his affiliates.
HVAC Services Agreement and Related Documents
Atlantic Pacific Las Vegas, LLC (the "HVAC Provider") is a Delaware limited
liability company and is owned by an indirect subsidiary of Sempra Energy, a
utility holding company.
Thermal energy (i.e., heating and air conditioning) is provided to the
Casino Resort and the Expo Center by the HVAC Provider using certain heating and
air conditioning-related and other equipment (the "HVAC Equipment"). In
addition, the HVAC Provider provides the Company with other energy-related
services. The central HVAC facility (the "HVAC Plant") is located on land owned
by the Company, which land and HVAC Plant have been leased to the HVAC Provider
for a nominal annual rent. The HVAC Equipment is owned by the HVAC Provider, and
the HVAC Provider has been granted appropriate easements and other rights so as
to be able to use the HVAC Plant and the HVAC Equipment to supply thermal energy
to the Casino Resort and the Expo Center (and, potentially, other buildings), so
long as such easements do not materially interfere with the operations of the
Casino Resort and the Expo Center. The HVAC Provider paid all costs ("HVAC
Costs") in connection with the purchase and installation of the HVAC Equipment,
which costs totaled $70 million. The HVAC Provider has entered into separate
service contracts (collectively, the "HVAC Service Agreements") with: (i)
Venetian; (ii) Interface; and (iii) the New Mall Subsidiary, for the provision
of heat and cooling requirements at agreed-to rates. The charges payable by all
users include a fixed component that enables the HVAC Provider to recover 85% of
the HVAC Costs over the initial term of the service contracts, with interest at
a fixed annual rate of 7.1%. In addition, the users reimburse the HVAC Provider
for the annual cost of operating and maintaining the HVAC Equipment and
providing certain other energy related services, and pay the HVAC Provider a
management fee of $500,000 per year. Each user is allocated a portion of the
total agreed-to charges and fees through its service contract, which portion
includes paying 100% of the cost of services in connection with the HVAC
Equipment relating solely to such user. Each user is not liable for the
obligations of the other users; provided, however, that the New Mall Subsidiary
is liable for the obligations of each Mall tenant. The HVAC Service Agreements
expire in 2009, at which time the users will have the right, but not the
obligation, to collectively either extend the term of their agreements for two
consecutive periods of five years each or purchase the HVAC Equipment in
accordance with purchase provisions set forth in the HVAC Service Agreements.
Agreements Relating to the Phase II Resort
The Casino Resort was developed on a stand-alone basis as the first phase
of a planned two-phase development. In the second phase of the development, it
is contemplated that the Phase II Subsidiary will construct and develop the
Phase II Resort, which also is planned to be a themed resort. In the event that
the Phase II Resort is not constructed, the Casino Resort has all the attributes
and facilities to continue to operate as a stand-alone resort. See "Item 13 -
Certain Relationships and Related Transactions - Possible Conflicts of
Interest."
On October 19, 2001, Venetian entered into a five-year lease (the "Phase II
Lease") with the Phase II Subsidiary for use of the land on which the Phase II
Resort will ultimately be built (the "Phase II Land"). Under the terms of the
Phase II Lease, Venetian pays the Phase II Subsidiary $8.0 million of annual
rent for use of the Phase II Land. The Company is considering constructing
150,000 square feet of convention center space on the Phase II Land. See "-New
Developments - Phase IA Addition. "
9
Construction of the Phase II Resort would require that the Company and/or
the Phase II Subsidiary incur additional indebtedness. It is contemplated that a
portion of the proceeds of such indebtedness would be used to pay off existing
indebtedness of the Phase II Subsidiary that has been used to fund
pre-development expenses for the Phase II Resort. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Aggregate Indebtedness and Fixed Payment Obligations to the
HVAC Provider." Upon repayment of such indebtedness, the Phase II Subsidiary
would have the right to terminate the Phase II Lease. If the Phase II Resort is
constructed on the Phase II Land, the following additional agreements may also
be entered into by the Phase II Subsidiary, on the one hand, and the Company,
Venetian and the New Mall Subsidiary, on the other hand:
Phase II Casino Lease
If the Phase II Resort is constructed, in order to avoid the need for a
separate gaming license for the Phase II Subsidiary, LVSI or Venetian may
operate the casino for the Phase II Resort pursuant to a lease (the "Phase II
Casino Lease"). The Phase II Casino Lease may have terms substantially similar
to the Casino Lease. The Company or Venetian, as the case may be, may agree to
operate the casino in the Phase II Resort and the Casino in a substantially
similar manner, and the Company or Venetian, as the case may be, may agree to
have common gaming and surveillance operations in such casinos (based on pro
rata allocations of operating costs).
Phase II HVAC Services Agreement
The Cooperation Agreement permits the owner of the Phase II Land to enter
into an HVAC Services Agreement to receive HVAC services from the HVAC Plant.
Any such agreement would have to be on terms satisfactory to the HVAC Provider.
See "Item 13 - Certain Relationships and Related Transactions - Cooperation
Agreement."
Phase I - Phase II Joint Operation Arrangements
With respect to the future development of the Phase II Resort, the
Cooperation Agreement provides that, prior to the commencement of construction
of the Phase II Resort, Venetian must approve the plans and specifications for
any portions of the Phase II Resort that will connect with or adjoin the Casino
Resort. Additionally, prior to such construction, Venetian and the Phase II
Subsidiary must agree in good faith, and upon commercially reasonable terms, on:
(i) appropriate mutual operating covenants for the Casino Resort and the Phase
II Resort; (ii) joint marketing and advertising of the Casino Resort and the
Phase II Resort; (iii) certain shared casino operations at the Casino Resort and
the Phase II Resort; (iv) the sharing of customer information with respect to
the Casino Resort and the Phase II Resort; (v) the joint purchasing of insurance
for the Casino Resort and the and the Phase II Resort; (vi) shared security
operations for the Casino Resort and the Phase II Resort; and (vii) any other
matters that would be of mutual benefit in owning and operating the Casino
Resort and the Phase II Resort.
Regulation and Licensing
The ownership and operation of casino gaming facilities in the State of
Nevada are subject to the Nevada Gaming Control Act and the regulations
promulgated thereunder (collectively, the "Nevada Act") and various local
regulations. The Company's gaming operations are also subject to the licensing
and regulatory control of the Nevada Gaming Commission (the "Nevada
Commission"), the Nevada Gaming Control Board (the "NGCB") and the Clark County
Liquor and Gaming Licensing Board (the "CCLGLB" and, together with the Nevada
Commission and the NGCB, the "Nevada Gaming Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy that are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record-keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) the establishment of a source of state and local
revenues through taxation and licensing fees. Any change in such laws,
regulations and procedures could have an adverse effect on the Company's gaming
operations or on the operation of the Casino Resort.
10
The Company is required to be licensed by the Nevada Gaming Authorities to
operate a casino, and is currently so licensed. The gaming license requires the
periodic payment of fees and taxes and is not transferable. The Company was
registered by the Nevada Commission as a publicly-traded corporation
("Registered Corporation") and as such, must periodically submit detailed
financial and operating reports to the Nevada Gaming Authorities and furnish any
other information that the Nevada Gaming Authorities may require. No person may
become a stockholder of, or receive any percentage of profits from, the Company
without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company operates the Casino pursuant to the Casino Lease
between LVSI and Venetian, which provides for a fixed monthly rental payment.
The Company possesses all state and local government registrations, approvals,
permits and licenses required in order for the Company to engage in gaming
activities at the Casino Resort.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or Venetian
to determine whether such individual is suitable or should be licensed as a
business associate of a gaming licensee. Officers, directors and certain key
employees of the Company must file applications and be licensed by the Nevada
Gaming Authorities
The Nevada Gaming Authorities may deny an application for licensing or a
finding of suitability for any cause they deem reasonable. A finding of
suitability is comparable to licensing; both require submission of detailed
personal and financial information followed by a thorough investigation. The
applicant for licensing or a finding of suitability, or the gaming licensee by
whom the applicant is employed or for whom the applicant serves, must pay all
the costs of the investigation. Changes in licensed positions must be reported
to the Nevada Gaming Authorities, and in addition to their authority to deny an
application for a finding of suitability or licensure, the Nevada Gaming
Authorities have jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or to have an inappropriate relationship with
the Company, the Company would have to sever all relationships with such person.
In addition, the Nevada Commission may require the Company to terminate the
employment of any person who refuses to file appropriate applications.
Determinations of suitability or of questions pertaining to licensing are not
subject to judicial review in Nevada.
The Company is required to submit periodic detailed financial and operating
reports to the Nevada Commission. Substantially all material loans, leases,
sales of securities and similar financing transactions by the Company must be
reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by the Company, the
registration and gaming licenses it then holds could be limited, conditioned,
suspended or revoked, subject to compliance with certain statutory and
regulatory procedures. In addition, the Company and the persons involved could
be subject to substantial fines for each separate violation of the Nevada Act at
the discretion of the Nevada Commission. Further, a supervisor could be
appointed by the Nevada Commission to operate the Casino Resort and, under
certain circumstances, earnings generated during the supervisor's appointment
(except for the reasonable rental value of the Casino Resort) could be forfeited
to the State of Nevada. Limitation, conditioning or suspension of any gaming
registration or license or the appointment of a supervisor could (and revocation
of any gaming license would) materially adversely affect the gaming operations
of the Company.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have their suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of the
Company's voting securities to report the acquisition to the Nevada Commission.
The Nevada Act requires that beneficial owners of more than 10% of the Company's
voting securities apply to the Nevada Commission for a finding of suitability
within thirty days after the Chairman of the Nevada Board mails the written
notice requiring such filing. Under certain circumstances, an "institutional
investor" as defined in the Nevada Act, which acquires more than 10% but not
more than 15% of the Company's voting securities, may apply to the Nevada
Commission for a waiver of such finding of suitability if such institutional
investor holds the voting securities only for investment purposes. An
institutional investor shall not be deemed to hold voting securities only for
11
investment purposes unless the voting securities were acquired and are held in
the ordinary course of business as an institutional investment and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies or operations of the Company or
any of its gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding the Company's voting securities only for
investment purposes. Activities that are not deemed to be inconsistent with
holding voting securities only for investment purposes include: (i) voting on
all matters voted on by stockholders; (ii) making financial and other inquiries
of management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies or operations;
and (iii) such other activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust, it
must submit detailed business and financial information including a list of
beneficial owners.
Under a provision of the Nevada Act, under certain circumstances, an
"institutional investor" as defined in the Nevada Act, which intends to acquire
not more than 15% of any class of nonvoting securities of a privately-held
corporation, limited partnership or limited liability company that is also a
registered holder or intermediary company of the holder of a gaming license, may
apply to the Nevada Commission for a waiver of the usual prior licensing or
finding of suitability requirements if such institutional investor holds such
nonvoting securities only for investment purposes. An institutional investor
shall not be deemed to hold nonvoting securities only for investment purposes
unless the nonvoting securities were acquired and are held in the ordinary
course of business as an institutional investor, do not give the institutional
investor management authority, and do not, directly or indirectly, allow the
institutional investor to vote for the election or appointment of members of the
board of directors, a general partner or manager, cause any change in the
articles of organization, operating agreement, other organic document,
management, polices or operations, or cause any other action that the Nevada
Commission finds to be inconsistent with holding nonvoting securities only for
investment purposes. Activities that are not deemed to be inconsistent with
holding nonvoting securities only for investment purposes include: (i)
nominating any candidate for election or appointment to the entity's board of
directors or equivalent in connection with a debt restructuring; (ii) making
financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in the
entity's management, polices or operations; and (iii) such other activities as
the Nevada Commission may determine to be consistent with such investment
intent. If the beneficial holder of nonvoting securities who must be licensed or
found suitable is a corporation, partnership or trust, it must submit detailed
business and financial information including a list of beneficial owners. The
applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board may be found to be unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found to be unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company, it: (i)
pays that person any dividend or interest upon voting securities of the Company;
(ii) allows that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person; (iii) pays remuneration in any
form to that person for services rendered or otherwise; or (iv) fails to pursue
all lawful efforts to require such unsuitable person to relinquish his voting
securities for cash at fair market value. Additionally, the CCLGLB has taken the
position that it has the authority to approve all persons owning or controlling
the stock of any corporation holding a gaming license.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file an application, be
investigated and be found suitable to own the debt security of such Registered
Corporation. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including the loss of its approvals, if without the prior
approval of the Nevada Commission, it: (i) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever; (ii) recognizes any voting
right by such unsuitable person in connection with such securities; (iii) pays
the unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
12
LVSI is required to maintain a current stock ledger in Nevada that may be
examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company is also required to disclose the identity of the
beneficial owner to the Nevada Gaming Authorities. A failure to make such
disclosure may be grounds for finding the record holder unsuitable. The Company
is also required to render maximum assistance in determining the identity of the
beneficial owner. LVSI stock certificates bear a legend indicating that such
securities are subject to the Nevada Act.
Neither LVSI nor Venetian may make a public offering of any securities
without the prior approval of the Nevada Commission if the securities or the
proceeds therefrom are intended to be used to construct, acquire or finance
gaming facilities in Nevada, or to retire or extend obligations incurred for
such purposes. The hypothecation of the Company's assets and restrictions on
stock in connection with any public offering also require the prior approval of
the Nevada Commission. In addition, the hypothecation of Venetian's assets and
restrictions on stock in respect of any public offering require the approval of
the Nevada Commission to remain effective.
Changes in control of the Company through a merger, consolidation, stock or
asset acquisition, management or consulting agreement, or any act or conduct by
any person whereby he or she obtains control, shall not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the NGCB and the Nevada Commission
concerning a variety of stringent standards prior to assuming control of such
Registered Corporation. The Nevada Commission may also require controlling
stockholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire control, to be
investigated and licensed as part of the approval process of the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially-adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated.
The Nevada Act also requires prior approval of a plan of recapitalization
proposed by the Company's board of directors in response to a tender offer made
directly to the Registered Corporation's stockholders for the purposes of
acquiring control of the Registered Corporation.
License fees and taxes, computed in various ways depending upon the type of
gaming or activity involved, are payable to the State of Nevada and to Clark
County, Nevada. Depending upon the particular fee or tax involved, these fees
and taxes are payable either monthly, quarterly or annually and are based upon
either: (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; or (iii) the number of table games operated. A casino
entertainment tax also is paid by the Company to the extent that certain
entertainment is provided in a cabaret, nightclub, cocktail lounge or casino
showroom in connection with the serving or selling of food, refreshments or
merchandise.
Any person who is licensed, required to be licensed, registered, required
to be registered, or under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the NGCB, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of any investigation
by the NGCB into their participation in such foreign gaming. The revolving fund
is subject to increase or decrease at the discretion of the Nevada Commission.
Thereafter, Licensees are also required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of any foreign jurisdiction pertaining to such foreign gaming operation, fail to
conduct such foreign gaming operation in accordance with the standards of
honesty and integrity required of Nevada gaming operations, engage in activities
that are harmful to the State of Nevada or its ability to collect gaming taxes
and fees, or employ a person in such foreign operation who has been denied a
license or a finding of suitability in Nevada on the ground of personal
unsuitability.
The sale of alcoholic beverages by the Company on the premises of the
Casino Resort is subject to licensing, control and regulation by the applicable
local authorities. The Company has obtained Clark County gaming and liquor
licenses. All licenses are revocable and are not transferable. The agencies
involved have full power to limit, condition, suspend or revoke any such
licenses, and any such disciplinary action could (and revocation of such
licenses would) have a material adverse effect upon the operations of the
Company.
13
New Developments
Phase IA Addition
During 2001, the Company began designing, planning, permitting and
constructing: (1) an approximately 1,000-room hotel tower on top of the Casino
Resort's existing parking garage; (2) an approximately 1,000-parking space
expansion to the parking garage; and (3) approximately 150,000 square feet of
additional convention center space on the Phase II Land (collectively, the
"Phase IA Addition"). The Company anticipates that the additional 1,000 single
and multiple bedroom suites, designed in the same manner and style as the
Hotel's existing suites, will meet unserved room demand and provide incremental
casino revenue at the Casino Resort. The Company also expects to achieve
additional economies of scale when it completes the Phase IA Addition, including
shared administration, HVAC facility and back-of-the-house functions.
To date, the Company has completed the design and has substantially
completed the foundation and support systems for, the 1,000-room hotel tower on
top of the existing parking garage. Due to the travel disruption to Las Vegas
during the fourth quarter of 2001, the Company decided to suspend construction
of the Phase IA Addition at that time. Certain designing, planning and
permitting of the Phase IA Addition is, however, continuing. The Company is
currently exploring financing alternatives to complete construction of the Phase
IA Addition, which it estimates will cost approximately $225.0 million to
complete.
Macau Joint Venture
On February 8, 2002, the Government of the Macau Special Administrative
Region of the People's Republic of China ("Macau") granted a provisional
concession to operate casinos in Macau to Galaxy Casino Company Limited, a
proposed joint venture comprised of a subsidiary of the Company (the "Macau
Subsidiary") and a group of Macau- and Hong Kong-based investors. Macau, the
former Portuguese colony located near Hong Kong, currently has annual gaming
revenues of approximately $2.0 to $2.5 billion and is widely regarded as one of
the fastest growing gaming markets in the world. Approximately 10 million
visitors arrived in Macau during 2001, according to the Macau Tourism Board. The
following factors are expected to continue to significantly improve Macau's
status as a world-class gaming and resort destination: (i) the increased ease of
access from Hong Kong, China and Taiwan and other Asian regional gaming markets
(where casinos are currently banned); (ii) significant foreign and domestic
investment in new and expanded gaming products; and (iii) the development of
Disneyland - China and other new resort developments in the Zhuhai province.
Galaxy Casino Company Limited was one of three parties selected for final
negotiations, out of twenty-one competitors that submitted applications, to be
considered for one of the three casino licenses to be granted in Macau. The
other two parties selected for final negotiations are a group led by Steve Wynn
and a group led by Stanley Ho, who holds Macau's only existing casino license.
The joint venture participants are currently negotiating joint venture,
development, management, licensing and related agreements and the terms of a
binding concession agreement with Macau. The Company expects the agreements with
its joint venture partners and Macau to be completed by April 2002, although
there can be no assurance that the joint venture will be entered into or
successful, or that the concession to operate casinos in Macau will be obtained.
During the year ended December 31, 2001, the Company incurred $0.4 million
of expenses associated with the Macau joint venture. Under the contemplated
terms of the agreements between the Macau Subsidiary and its joint venture
partners, neither the Company nor the Macau Subsidiary will be obligated to pay
for any of the costs of constructing and developing the contemplated
hotel/casino resorts in Macau.
The Macau joint venture tentatively plans to build a 500-suite hotel,
casino and convention center complex, with a Venetian-style theme similar to
that of the Company's Las Vegas property. It also has plans to develop two
smaller facilities. Under the contemplated terms of the Macau Subsidiary's
agreements with its joint venture partners, the Macau Subsidiary or subsidiaries
thereof (a) will develop and manage the hotel/casino/convention center complex
and smaller facilities, and will receive development and various recurring
management and licensing fees and (b) will have an option to acquire a 30%
ownership interest in the complex and smaller facilities. The Company believes
that the Macau opportunity provides an international platform to expand its
premier Venetian brand and create increased diversification of, and a new source
of significant growth for, its revenue base.
14
Internet Gaming and Other New Business Ventures
The Company is actively pursuing the possibility of developing and
operating an Internet gaming site and is currently exploring other business
opportunities for expansion, including Native American gaming and the
possibility of operating casino resorts in certain foreign jurisdictions. During
January 2002, the Company entered into a joint venture agreement to assess the
feasibility of developing and operating an Internet gaming site, which would
require a license to operate the venture from a jurisdiction where Internet
gaming is legal as well as approval from the Nevada Gaming Authorities. Although
the Company's Internet and other projects are in the exploration stage and there
can be no assurance that any of these ventures will prove to be attractive
opportunities, or that if implemented they will be successful, the Company
intends to continue to explore similar new business opportunities.
Employees
The Company directly employs approximately 4,000 employees in connection
with the Casino Resort. The Casino Resort's employees are not covered by
collective bargaining agreements. Most, but not all, major casino resorts
situated on the Strip have collective bargaining contracts covering at least
some of the labor force at such sites. The unions currently on the Strip include
the Local 226 of the Hotel Employees and Restaurant Employees International
Union (the "Local"), the Operating Engineers Union and the Teamsters Union.
Although no assurances can be given, if employees decide to be represented by
labor unions, management does not believe that such representation would have a
material impact upon the Company's results of operations, cash flows or
financial position.
The Local has requested the Company to recognize it as the bargaining agent
for employees of the Casino Resort. The Company has declined to do so, believing
that current and future employees are entitled to select their own bargaining
agent, if any. In the past, when other hotel-casino operators have taken a
similar position, the Local has engaged in certain confrontational and
obstructive tactics, including contacting potential customers, tenants and
investors, objecting to various administrative approvals and picketing. The
Local has engaged in such tactics with respect to the Casino Resort and may
continue to do so. Although the Company believes it will be able to operate
despite such dispute, no assurance can be given that it will be able to do so or
that the failure to do so would not result in a material adverse effect on the
Company's results of operations, cash flows or financial position.
Risk Factors
The following risk factors should be read carefully in connection with
evaluating the Company and the forward-looking statements contained in this
Annual Report on Form 10-K. Any of the following risks could materially
adversely affect the Company, its operating results, its financial condition and
the actual outcome of matters as to which forward-looking statements are made in
this Annual Report on Form 10-K. Certain statements in "Risk Factors" constitute
"forward-looking statements." Actual results could differ materially from those
projected in the forward-looking statements as a result of certain factors and
uncertainties set forth below and elsewhere in this Annual Report on Form 10-K.
See "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Special Note Regarding Forward-Looking Statements."
Substantial Leverage; Ability to Service Debt
At December 31, 2001, the Company had total indebtedness of approximately
$941.0 million (including $3.4 million of accreted original issue discount on
the Senior Subordinated Notes), of which $129.1 million represent current
maturities of long term debt due during 2002. See "Item 8 - Financial Statements
and Supplementary Data - Notes to Financial Statements - Note 8 Long-Term Debt."
The Company's substantial indebtedness could limit its ability to respond to
changing business and economic conditions. Further, there can be no assurance
that the Company will have the right under the agreements governing its debt
obligations to issue any additional debt as may be necessary or desirable.
The ability of the Company to make scheduled interest payments on its
existing indebtedness depends on its ability to generate sufficient cash flow
from operations, as well as a range of economic, competitive and business
factors, many of which are outside of the Company's control. The Company has
estimated interest payments of $90.0 million due during 2002 in connection with
its existing indebtedness. If the Company does not generate sufficient cash flow
from operations to satisfy such debt obligations, it may have to undertake
alternative financing plans, such as refinancing or restructuring its debt,
selling assets, reducing or delaying capital investments or seeking to raise
additional capital. There can be no assurance that any refinancing would be
possible, that any assets could be sold, or, if sold, of the timing of the sales
and the amount of proceeds realized from those sales, that additional financing
could be obtained on acceptable terms, if at all, or that it would be permitted
under the terms of the Company's various debt instruments then in effect. The
Company's inability to generate sufficient cash flow to satisfy debt
obligations, or to refinance its obligations on commercially reasonable terms,
would have an adverse effect on the Company's business, financial condition and
results of operations.
15
Operating Restrictions
The terms of the Company's secured bank credit facility, its indentures and
the other agreements governing the indebtedness of the Company impose
significant operating and financial restrictions on the Company. Such
restrictions significantly limit or prohibit, among other things, the ability of
LVSI, Venetian and their subsidiaries to incur additional indebtedness, make
certain capital expenditures, repay indebtedness prior to its stated maturity,
create liens, sell assets, pay dividends or engage in mergers or acquisitions.
There can be no assurances that these restrictions will not adversely affect the
ability of the Company to finance its future operations or capital needs. See
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
Business Contingencies
The Company's operations are subject to significant business, economic,
regulatory and competitive uncertainties and contingencies, many of which are
beyond its control. There can be no assurance that the Company will continue to
manage the Casino Resort on a profitable basis or that it will be able to
attract a sufficient number of guests, gaming customers and other visitors to
the Casino Resort to make its various operations profitable independently or as
a whole.
On September 11, 2001, acts of terrorism occurred in New York City and
Washington D.C. As a result of these terrorist acts, domestic and international
travel was severely disrupted. As approximately 45% of customers utilize air
travel to come to Las Vegas, these terrorist acts and travel disruptions
decreased customer visitation to the Casino Resort. Although air travel levels
have rebounded, the Company cannot predict the extent to which the events of
September 11th may continue to have an effect, directly or indirectly, in the
future. Any further terrorist act, outbreak of hostilities or escalation of war
could have a material adverse effect on the economy in general and on the
hotel/casino industry in particular, or could further disrupt air travel, which
would adversely affect the Company's financial condition, results of operations
or cash flows.
Competition
The casino/hotel industry is highly competitive. Hotels located on or near
the Strip compete with other Strip hotels and with other hotels in Las Vegas.
Many of the Company's competitors are subsidiaries or divisions of large public
companies and may have greater financial and other resources.
The Casino Resort competes with a large number of major hotel-casinos and a
number of smaller casinos located on or near the Strip and in and near Las
Vegas, including The Bellagio, Mandalay Bay and Paris. The Company also
competes, to some extent, with other hotel-casino facilities in Nevada and in
Atlantic City, and with hotel-casinos and other resort facilities and vacation
destinations elsewhere in the United States and the world.
The Company also competes with legalized gaming from casinos located on
Native American tribal lands. In March 2000, California voters approved an
amendment to the California Constitution permitting Native American tribes in
California to operate a limited number of slot and video poker machines and
house-banked card games. The governor of California has entered into compacts
with numerous tribes in California. The federal government has approved
approximately 60 such compacts, and casino-style gaming is now legal on those
tribal lands. While the competitive impact on the Company's operations in Las
Vegas from the continued growth of Native American gaming establishments in
California remains uncertain, the proliferation of gaming throughout California
and other areas located near the Casino Resort could have an adverse effect on
the Company's operating results.
In addition, certain states have legalized, and others may legalize, casino
gaming in specific areas, including metropolitan areas, such as New York, Los
Angeles, San Francisco and Boston, from which the Company attracts customers. In
October 2001, the New York legislature approved a bill designed to expand casino
gaming on Native American reservations in that state. Such proliferation of
gaming venues, by luring customers close to home and away from Las Vegas, could
significantly and adversely affect the Company's financial condition, results of
operations or cash flows.
The construction of new properties and the enhancement or expansion of
existing properties in Las Vegas could have a negative impact on the Company's
business. With the expansion of its facilities, the Las Vegas Convention Center
will be able to solely host many large trade shows which had previously split
space between the Las Vegas Convention Center and the Expo Center. In addition,
the Company anticipates increased competition from the MGM Grand Hotel and
Casino, the Mirage and Mandalay Bay, which are adding conference and meeting
facilities. To the extent that these competitors are able to capture a
substantially larger portion of the trade show and convention business in Las
Vegas, there could be a materially adverse impact on the Expo Center and, given
the Casino Resort's link to the Expo Center, the Company's financial position,
results of operations or cash flows.
16
Construction Claims
The Company is party to litigation matters and claims related to its
operations and the construction of the Casino Resort. The Company is currently
involved in various lawsuits, has asserted various claims against various
parties, and has had various claims asserted against it by various parties, in
connection with the construction of the Casino Resort. All of the pending
litigation is in preliminary stages, and it is not yet possible to determine the
ultimate outcomes. If any litigation or other lien proceedings concerning the
claims of the Construction Manager or its subcontractors were decided adversely
to the Company, such litigation or other lien proceedings could have a material
adverse effect on the financial position, results of operations or cash flows of
the Company to the extent such litigation or lien proceedings are not covered by
the Insurance Policy. See "Item 3 - Legal Proceedings."
Risk of New Ventures
The Company is actively pursuing the possibility of developing and
operating an Internet gaming site and is currently exploring other business
opportunities for expansion, including Native American gaming and the
possibility of operating casino resorts in certain foreign jurisdictions. At
this point, it is unclear how long it would take, or if it would be feasible or
attractive, for the Company to develop, operate, obtain the necessary regulatory
approvals for, acquire land in connection with or take any of the other
necessary business risks and measures to complete any of such ventures. If the
Company were successful in launching any such ventures, there can be no
assurance that any of these projects would be successful, or that they would not
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
In October 2001, the Macau Subsidiary entered into a non-binding letter of
intent with Asian American Entertainment Corporation, Limited, ("AAEC"), a Macau
corporation whose largest shareholder is China Development Industrial Bank, a
Taiwanese bank, to enter into a joint venture to obtain a casino license in
Macau. In February 2002, the Company elected to exercise its right to terminate
this letter of intent and to create a joint venture with other parties to seek a
Macau casino license. AAEC has threatened, in a press release, to sue the
Company in connection with the Company's termination of the letter of intent and
the potential awarding of a casino license to the Macau Subsidiary's new joint
venture. The Company believes AAEC's claims lack merit and, if sued by AAEC,
intends to defend itself vigorously.
Risks of Planned Construction Projects
Some of the major construction projects that the Company anticipates for
the future, such as the Phase IA Addition, entail significant risks, including
shortages of materials or skilled labor, unforeseen engineering, environmental
and/or geological problems, work stoppages, weather interference, unanticipated
cost increases and unavailability of construction equipment. Construction,
equipment or staffing problems or difficulties in obtaining any of the requisite
licenses, permits, allocations and authorizations from governmental or
regulatory authorities could increase the total cost, delay, or prevent the
construction or opening of such projects or otherwise affect the design and
features of the Phase IA Addition or other ventures.
The anticipated costs and completion date for the Phase IA Addition are
based on budgets, conceptual design documents and schedule estimates that the
Company has prepared with the assistance of architects. To date, the Company has
completed the design and plans for the Phase IA Addition and substantially
completed a foundation and support systems for the 1,000-room hotel tower to be
built on top of the parking garage. The Company has hired various trade
contractors for the construction of certain aspects of the Phase IA Addition but
has not yet selected, or finalized an agreement with, a construction manager for
the entire project. The Company cannot be assured that it will select and reach
an agreement with a construction manager on financial and other terms that will
meet the forecasted cost budget and timeline. Further, there can be no assurance
that the Company will not incur cost overruns that will not be covered by a
construction manager, trade contractors or insurance, or that construction will
be completed on schedule. If significant cost overruns are not so covered, the
Company may not be able to arrange for additional financing or may not be able
to find additional financing on commercially reasonable terms to fund these
additional costs. A failure to complete the Phase IA Addition on budget or on
schedule may adversely affect the Company's financial condition, results of
operations and cash flows.
17
Insurance Costs
The September 11th terrorist attacks have substantially affected the
availability of insurance coverage for certain types of damages or occurrences.
In addition, insurance premiums have increased. The Company's current insurance
policy terminates in April 2002. The Company does not believe that it will be
able to purchase a new insurance policy or renew its existing policy on terms as
favorable as the terms of its current policy. The Company anticipates that the
cost of a new insurance policy will be higher as a result of this increase in
premium levels. The cost of coverage may become so high that the Company may
need to agree to exclusions from its coverage. The Company also believes that
its future insurance policy will exclude from coverage certain losses and
damages that are covered under the existing insurance policy. In particular, the
Company cannot be assured that it will be able to obtain any insurance coverage
with respect to occurrences of terrorist acts and any losses that could result
from these acts. This could expose the Company to heavy losses in the event that
any damages occur, directly or indirectly, as a result of terrorist acts.
Government Regulation
The gaming operations and the ownership of securities of the Company are
subject to extensive regulation by the Nevada Commission, the NGCB and the
CCLGLB. The Nevada Gaming Authorities have broad authority with respect to
licensing and registration of entities and individuals involved with the
Company. See "-Regulation and Licensing."
Although the Company currently holds a gaming license issued by the Nevada
Gaming Authorities, the Nevada Gaming Authorities may, among other things,
revoke the gaming license of any corporate entity (a "Corporate Licensee") or
the registration of a Registered Corporation or any entity registered as a
holding company of a Corporate Licensee. In addition, the Nevada Gaming
Authorities may revoke the license or finding of suitability of any officer,
director, controlling person, shareholder, noteholder or key employee of a
licensed or registered entity. If the gaming licenses of the Company were
revoked for any reason, the Nevada Gaming Authorities could require the closing
of the Casino, which would result in a material adverse effect on the business
of the Company.
Dependence Upon Key Management
The ability of the Company to maintain its competitive position is
dependent to a large degree on the services of the Company's senior management
team, including Sheldon G. Adelson, the Principal Stockholder. There can be no
assurance that such individuals will remain with the Company. The death or loss
of the services of any of the Company's senior managers or an inability to
attract and retain additional senior management personnel could have a material
adverse effect on the Company. There can be no assurance that the Company will
be able to retain its existing senior management personnel or to attract
additional qualified senior management personnel.
Principal Stockholder
The Principal Stockholder beneficially owns all of the outstanding common
stock of LVSI, the managing member of Venetian. See "Item 12 - Security
Ownership of Certain Beneficial Owners and Management - Beneficial Ownership."
Except for actions that require the approval of the Special Director (as defined
herein), the Principal Stockholder will be able to control the business,
policies and affairs of the Company, including the election of directors and
major corporate transactions of LVSI.
Possible Conflicts of Interest
Construction of the Phase II Resort
The Phase II Resort is planned to be constructed on the Phase II Land,
which is adjacent to the Casino Resort. There is no guarantee that the Phase II
Resort will be built in the near future, in the manner currently planned, or at
all. In addition, although the Company intends to construct the Phase II Resort
so as to mitigate the impact of such construction on the Casino Resort, there
can be no assurance that such construction will commence as planned, and
therefore, the construction of the Phase II Resort may adversely impact portions
of the Casino Resort.
Common Ownership of the Casino Resort and the Phase II Resort
The common ownership of the Casino Resort and the Phase II Resort may
result in potential conflicts of interest. For example, management may offer
discounts and other incentives for visitors to stay at the Phase II Resort,
which might result in a competitive advantage of the Phase II Resort over the
Casino Resort. In addition, management may choose to allocate certain business
opportunities to the Phase II Resort rather than to the Casino Resort. Although
common ownership of both the Casino Resort and the Phase II Resort often may
result in economies, efficiencies and joint business opportunities for the two
resorts in the aggregate, the Casino Resort may, in certain circumstances, bear
the greater burden of the expenses that are shared by both resorts. In addition,
inasmuch as there may be common management personnel for both the Casino Resort
18
and the Phase II Resort, management's time may be split between overseeing the
operation of each resort, and management, in certain circumstances, may devote
more time to its ownership and operations responsibilities of the Phase II
Resort than those of the Casino Resort. Finally, because it is expected that the
Company will lease and operate the casino for the Phase II Resort, potential
conflicts may arise from the common operation of the Casino and the Phase II
Resort casino, such as the allocation of management's time.
The Expo Center and the Congress Center
The common ultimate ownership, and management, of the Casino Resort and the
Expo Center also may result in potential conflicts of interest. The Expo Center
and the Congress Center are potential competitors in the business conference and
meetings business. Under the Cooperation Agreement, Venetian has agreed that it
will not conduct, or permit to be conducted at the Casino Resort's Congress
Center, trade shows or expositions of the type generally held at the Expo
Center. Furthermore, marketing practices may be implemented that are intended to
benefit the Expo Center and may have a detrimental effect on the Casino Resort.
See "Item 13 - Certain Relationships and Related Transactions - Cooperation
Agreement."
ITEM 2. --PROPERTIES
The Casino Resort sits on an approximately 30-acre parcel of land owned by
the Company. The Phase II Subsidiary owns an additional approximately 15-acre
adjacent parcel on which the conference center for the Phase IA Addition and the
Phase II Resort is planned to be constructed.
ITEM 3. --LEGAL PROCEEDINGS
The Company is party to litigation matters and claims related to its
operations and the construction of the Casino Resort. Except as described below,
the Company does not expect that the final resolution of these matters will have
a material adverse impact on the financial position, results of operations or
cash flows of the Company.
On July 30, 1999, Venetian filed a complaint against the Construction
Manager and Bovis in United States District Court for the District of Nevada.
The action alleges breach of contract by the Construction Manager of its
obligations under the Construction Management Contract and a breach of contract
by Bovis of its obligations under the Bovis Guaranty, including failure to fully
pay trade contractors and vendors and failure to meet the April 21, 1999
guaranteed completion date. The Company amended this complaint on November 23,
1999 to add P&O as an additional defendant. The suit is intended to ask the
courts, among other remedies, to require the Construction Manager and its
guarantors to pay its contractors, to compensate Venetian for the Construction
Manager's failure to perform its duties under the Construction Management
Contract and to pay the Company the agreed upon liquidated damages penalty for
failure to meet the guaranteed substantial completion date. Venetian seeks total
damages in excess of $100.0 million. The Construction Manager subsequently filed
motions to dismiss the Company's complaint on various grounds, which the Company
opposed. The Construction Manager's principal motions to date have either been
denied by the court or voluntarily withdrawn.
In response to Venetian's breach of contract claims against the
Construction Manager, Bovis and P&O, the Construction Manager filed a complaint
on August 3, 1999 against Venetian in the District Court of Clark County,
Nevada. The action alleges a breach of contract and quantum meruit claims under
the Construction Management Contract and also alleges that Venetian defrauded
the Construction Manager in connection with the construction of the Casino
Resort. The Construction Manager seeks damages, attorney's fees and costs and
punitive damages. In the lawsuit, the Construction Manager claims that it is
owed approximately $90.0 million from Venetian and its affiliates. This
complaint was subsequently amended by the Construction Manager, which also filed
an additional complaint against the Company relating to work done and funds
advanced with respect to the contemplated development of the Phase II Resort.
Based upon its preliminary review of the complaints, the fact that the
Construction Manager has not provided Venetian with reasonable documentation to
support such claims, and the Company's belief that the Construction Manager has
materially breached its agreements with the Company, the Company believes that
the Construction Manager's claims are without merit and intends to vigorously
defend itself and pursue its claims against the Construction Manager in any
litigation.
In connection with these disputes, as of December 31, 1999 the Construction
Manager and its subcontractors filed mechanics liens against the Casino Resort
for $145.6 million and $182.2 million, respectively. The Company believes that a
major reason these lien amounts exceed the Construction Manager's claims of
$90.0 million is based upon a duplication of liens through the inclusion of
lower-tier claims by subcontractors in the liens of higher-tier contractors,
including the lien of the Construction Manager. As of December 31, 1999, the
Company had purchased surety bonds for virtually all of the claims underlying
these liens (other than approximately $15.0 million of claims with respect to
which the Construction Manager purchased bonds). As a result, there can be no
19
foreclosure of the Casino Resort in connection with the claims of the
Construction Manager and its subcontractors. However, the Company will be
required to pay or immediately reimburse the bonding company if, and to the
extent that, the underlying claims are judicially determined to be valid. If
such claims are not settled, it is likely to take a significant amount of time
for their validity to be judicially determined.
The Company believes that these claims are, in general, unsubstantiated,
without merit, overstated and/or duplicative. The Construction Manager itself
has publicly acknowledged that at least some of the claims of its subcontractors
are without merit. In addition, the Company believes that pursuant to the
Construction Management Contract and the Final GMP, the Construction Manager is
responsible for payment of any subcontractors' claims to the extent they are
determined to be valid. The Company may also have a variety of other defenses to
the liens that have been filed, including, for example, the fact that the
Construction Manager and its subcontractors previously waived or released their
rights to file liens against the Casino Resort. The Company intends to
vigorously defend itself in any lien proceedings.
On August 9, 1999, the Company notified the insurance companies providing
coverage under the LD Policy that it has a claim under the LD Policy. The LD
Policy provides insurance coverage for the failure of the Construction Manager
to achieve substantial completion of the portions of the Casino Resort covered
by the Construction Management Contract within 30 days of the April 21, 1999
deadline, with a maximum liability under the LD Policy of approximately $24.1
million and with coverage being provided, on a per-day basis, for days 31-120 of
the delay in the achievement of substantial completion. Because the Company
believes that substantial completion was not achieved until November 12, 1999,
the Company's claim under the LD Policy is likely to be for the above-described
maximum liability of $24.1 million. The Company expects the LD Policy insurers
to assert many of the same claims and defenses that the Construction Manager has
asserted or will assert in the above-described litigations. Liability under the
LD Policy may ultimately be determined by binding arbitration.
In June 2000, the Company purchased an insurance policy (the "Insurance
Policy") for loss coverage in connection with all litigation relating to the
construction of the Casino Resort (the "Construction Litigation"). Under the
Insurance Policy, the Company will self-insure the first $45.0 million and the
insurer will insure up to the next $80.0 million of any possible covered losses.
The Insurance Policy provides coverage for any amounts determined in the
Construction Litigation to be owed to the Construction Manager or its
subcontractors relating to claimed delays, inefficiencies, disruptions, lack of
productivity/unauthorized overtime or schedule impact, allegedly caused by the
Company during construction of the Casino Resort, as well as any defense costs.
The insurance is in addition to, and does not affect, any scope change
guarantees provided by the Principal Stockholder pursuant to the Principal
Stockholder's $25.0 million collateralized completion guaranty (the "Completion
Guaranty").
All of the pending litigation described above is in preliminary stages and
it is not yet possible to determine a range of loss or its ultimate outcome. If
any litigation or other lien proceedings concerning the claims of the
Construction Manager or its subcontractors were decided adversely to the
Company, such litigation or other lien proceedings could have a material adverse
effect on the financial position, results of operations or cash flows of the
Company, to the extent such litigation or lien proceedings are not covered by
the Insurance Policy.
ITEM 4. --SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
20
PART II
ITEM 5.--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
There is no established trading market for the common stock of LVSI and the
Company is not aware of any bid quotations for the common stock of LVSI.
Holders
As of April 1, 2002, the Principal Stockholder was the only holder of
record of the common stock of LVSI.
Dividends
LVSI did not pay any dividends in 1999, 2000 or 2001. The Company's current
long-term debt arrangements generally prohibit or restrict the payment of cash
dividends. See "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and "Item
8 - Financial Statements and Supplementary Data - Notes to Financial Statements
- - Note 8 - Long-Term Debt."
21
ITEM 6. --SELECTED FINANCIAL DATA
The historical selected financial data set forth below should be read in
conjunction with "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and Notes
thereto included elsewhere in this Annual Report on Form 10-K. The statement of
operations data for the years ended December 31, 2001, 2000 and 1999, and the
balance sheet data at December 31, 2001 and 2000 are derived from, and are
qualified by reference to, the audited financial statements included elsewhere
in this Annual Report on Form 10-K. The statement of operations data for the
years ended December 31, 1998 and 1997 and the balance sheet data at December
31, 1999, 1998 and 1997 are derived from the Company's audited financial
statements that do not appear herein. The historical results are not necessarily
indicative of the results of operations to be expected in the future.
Year Ended December 31,
2001 2000(2) 1999(1)(2) 1998 1997
---------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA
Gross revenues $ 566,493 $ 627,266 $ 273,498 $ 937 $ 895
Promotional allowances (42,594) (46,296) (25,045) -- --
---------- ---------- ---------- ---------- ----------
Net revenues 523,899 580,970 248,453 937 895
Operating expenses (414,620) (444,197) (244,640) (8,822) 1,727
---------- ---------- ---------- ---------- ----------
Operating income (loss) 109,279 136,773 3,813 (7,885) 2,622
Interest expense, net (109,359) (118,036) (68,847) (21,878) (3,142)
Other income (expense) (1,938) -- -- -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before preferred return and
extraordinary item (2,018) 18,737 (65,034) (29,763) (520)
Preferred return on Redeemable Preferred
Interest in Venetian Casino Resort, LLC
(2000, 1999 and 1998, as restated) (3) (20,766) (18,482) (14,399) (13,647) --
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item (2000,
1999 and 1998, as restated) (3) (22,784) 255 (79,433) (43,410) (520)
Extraordinary item-loss on early retirement
of debt (1,383) (2,785) (589) -- --
--------- ---------- ---------- ---------- ----------
Net income (loss) (2000, 1999, and 1998,
as restated)(3) $ (24,167) $ (2,530) $ (80,022) $ (43,410) $ (520)
========== ========== ========== ========== ==========
Per Share Data
Basic and diluted income (loss) per share
before extraordinary item (4) $ (22.78) $ 0.26 $ (79.43) $ (43.41) $ (0.52)
========== ============ ========== ========== ==========
Basic and diluted loss per share (4) $ (24.17) $ (2.53) $ (80.02) $ (43.41) $ (0.52)
========== ============ ========== ========== ==========
OTHER DATA
Capital expenditures $ 55,134 $ 28,589 $ 319,106 $ 508,399 $ 130,827
Cash dividends per common share $ -- $ -- $ -- $ -- $ 27.60
As of December 31,
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA
Total assets $1,271,786 $1,232,385 $1,209,602 $1,005,944 $ 747,767
Long-term debt $ 811,869 $ 863,293 $ 907,754 $ 744,154 $ 515,612
Stockholder's equity $ (10,991) $ 13,176 $ 15,706 $ 67,937 $ 111,347
<FN>
- ---------------
(1) The Casino Resort opened May 4, 1999.
(2) Financial data for 2000 and 1999 has been restated to reflect the
reclassification of certain cash incentives of $6.1 million and $3.3
million, respectively in connection with the adoption of Emerging Issues
Task Force Issue 00-22 ("EITF 00-22"). The adoption of EITF 00-22 had no
effect on net income. See "Item 8 - Financial Statements and Supplementary
Data - Notes to Financial Statements - Note 2 - Summary of Significant
Accounting Policies - Revenue Recognition - Casino Revenue and Promotional
Allowances."
(3) The Company has restated certain income statement items for each of the
three years in the period ended December 31, 2000 to include preferred
return on preferred stock of a subsidiary. Such amounts had been previously
reflected as a charge against capital in excess of par. See "Item 8 -
Financial Statements and Supplementary Data - Notes to Financial Statements
- Note 1 - Organization and Business of the Company - Restatement of
Previously Reported Amounts."
(4) Net income (loss) per share and shares outstanding for all periods
presented retroactively reflect the impact of the Company's first quarter
2002 stock split which increased the number of shares of common stock
outstanding from 925,000 to 1,000,000.
</FN>
22
ITEM 7.--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements and the
notes thereto and other financial information included elsewhere in this Annual
Report on Form 10-K. Certain statements in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" are forward-looking
statements. See -"Special Note Regarding Forward-Looking Statements."
General
The Company owns and operates the Casino Resort, a large-scale
Venetian-themed hotel, casino, retail, meeting and entertainment complex in Las
Vegas, Nevada. The Casino Resort includes the first and only all-suites hotel on
the Strip with 3,036 suites; a gaming facility of approximately 116,000 square
feet; an enclosed retail, dining and entertainment complex of approximately
445,000 net leasable square feet; and a meeting and conference facility of
approximately 500,000 square feet. The Company is party to litigation matters
and claims related to its operations and construction of the Casino Resort that
could have a material adverse effect on the financial position, results of
operations or cash flows of the Company to the extent such litigation is not
covered by the Insurance Policy. See "Item 3 - Legal Proceedings."
The Company was significantly impacted by a decline in tourism following
the terrorist attacks of September 11, 2001 as well as an unusually low table
games win percentage. Consolidated net revenues for the year ended December 31,
2001 were $523.9 million, representing a decrease of $57.1 million of
consolidated net revenues as compared to 2000. Despite the impact of the
terrorist attacks, the Company continues to improve operating revenues, due in
large part to: (1) forward hotel room and meeting space bookings from
conventions and trade shows at the Expo Center and Casino Resort; (2) increase
in average daily room rates in all major segments of the Casino Resort's hotel
rooms business; (3) a stable recurring revenue stream from the Mall; and (4)
successful cost-cutting initiatives. Although the Company continues to recover,
the extent to which the events of September 11th will continue to directly or
indirectly impact operating results in the future cannot be predicted, nor can
the Company predict the extent to which future security alerts and/or additional
terrorist attacks may impact operations.
The Company opened additional attractions at the Casino Resort on October
7, 2001, including the Guggenheim Museum Projects. The Company also began
designing, planning, permitting and constructing the Phase IA Addition during
2001. The Phase IA Addition consists of: (1) an approximately 1,000-room hotel
tower on top of the Casino Resort's existing parking garage; (2) an
approximately 1,000-parking space expansion to the parking garage; and (3)
approximately 150,000 square feet of additional convention center space on the
Phase II Land. To date, the Company has completed the design of, and has
substantially completed the foundation and support systems for, the 1,000-room
hotel tower on top of the existing parking garage. Due to the travel disruption
to Las Vegas during the fourth quarter of 2001, the Company decided to suspend
construction of the Phase IA Addition at that time. Certain designing, planning
and permitting of the Phase IA Addition is, however, continuing. The Company is
currently exploring financing alternatives to complete construction of the Phase
IA Addition, which it estimates will cost approximately $225.0 million to
complete.
The Company has also recently announced its intention (with joint venture
partners) to seek a license to operate casinos in Macau, is pursuing the
possibility of developing an Internet gaming site and is currently exploring
other business opportunities for expansion. See "Item 1 - Business - New
Developments."
Critical Accounting Policies and Estimates
Management has identified the following critical accounting policies that
affect the Company's more significant judgments and estimates used in the
preparation of the Company's consolidated financial statements. The preparation
of the Company's financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company's
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. On an on-going basis, management evaluates
those estimates, including those related to asset impairment, accruals for slot
marketing points, self-insurance, compensation and related benefits, revenue
recognition, allowance for doubtful accounts, contingencies and litigation. The
Company states these accounting policies in the notes to the consolidated
financial statements and in relevant sections in this discussion and analysis.
These estimates are based on the information that is currently available to the
Company and on various other assumptions that management believes to be
reasonable under the circumstances. Actual results could vary from those
estimates.
23
The Company believes that the following critical accounting policies affect
significant judgments and estimates used in the preparation of its consolidated
financial statements:
The Company recognizes revenue upon occupancy of hotel rooms, as net wins
and losses occur in the casino and upon delivery of food, beverage and
other services. Cancellation fees for hotel and food and beverage services
are recognized as revenue when collection is probable and upon cancellation
by the customer as defined by a written contract entered into with the
customer. Minimum rental revenues in the Mall and Casino Resort are
recognized on a straight-line basis over the terms of the related lease.
Percentage rents are recognized in the period in which the tenants exceed
their respective percentage rent thresholds. Recoveries from tenants for
real estate taxes, insurance and other shopping center operating expenses
are recognized as revenues in the period billed, which approximates the
period in which the applicable costs are incurred.
The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make required
payments, which results in bad debt expense. Management determines the
adequacy of this allowance by continually evaluating individual customer
receivables, considering the customer's financial condition, credit history
and current economic conditions. If the financial condition of customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
The Company maintains accruals for health and workers compensation
self-insurance, slot club point redemption and group sales commissions,
which are classified in other accrued liabilities in the consolidated
balance sheets. Management determines the adequacy of these accruals by
periodically evaluating the historical experience and projected trends
related to these accruals. If such information indicates that the accruals
are overstated or understated, the Company will adjust the assumptions
utilized in the methodologies and reduce or provide for additional accruals
as appropriate.
The Company is subject to various claims and legal actions in the ordinary
course of business. Some of these matters relate to personal injuries to
customers and damage to customers' personal assets. Management estimates
guest claims expense and accrues for such liability based upon historical
experience in the other accrued liability category in its consolidated
balance sheet.
Year Ended December 31, 2001 compared to the Year Ended December 31, 2000
Operating Revenues
Consolidated net revenues for the year ended December 31, 2001 were $523.9
million, representing a decrease of $57.1 million when compared with $581.0
million of consolidated net revenues during 2000. The decrease in net revenues
was primarily due to a decline in casino revenue, offset by increases in hotel
and other revenues.
Casino revenues were $227.2 million in the year ended December 31, 2001, a
decrease of $71.9 million from 2000. The decrease was attributable to several
factors, including: (1) an unusually low historical table games win percentage
(calculated before discounts) of 15.3% during 2001 as compared to 20.5% during
2000 (the table games win percentage is reasonably predictable over time, but
may vary considerably during shorter periods); (2) more stringent table games
marketing parameters during 2001 that resulted in decreased table games volume;
and (3) decreased visitor traffic to Las Vegas after the terrorist attacks of
September 11, 2001. Table games drop (volume) decreased to $966.6 million in the
year ended December 31, 2001 from $1,130.0 million during 2000. Slot handle
(volume) in the year ended December 31, 2001 decreased to $1,825.1 million from
$1,939.6 million reported during 2000, a result of decreased visitor traffic to
Las Vegas after September 11, 2001.
The Casino Resort's average daily room rates increased from $196 in the
year ended December 31, 2001 as compared to $182 in 2000. Room revenues during
the year ended December 31, 2001 were $204.2 million, representing an increase
of $11.9 million when compared to $192.3 million during 2000. The increase in
room rates occurred in all major segments of the Casino Resort's hotel rooms
business, including the mid-week, group and convention business, and the weekend
retail business. The occupancy of available guestrooms was 94.6% during the year
ended December 31, 2001 compared to 95.2% during 2000.
Food and beverage revenues were $62.0 million during the year ended
December 31, 2001, representing a decrease of $5.1 million compared to $67.1
million for 2000. The decrease was attributable to lower room occupancy and
banquet sales as a result of travel disruption to Las Vegas during the fourth
quarter of 2001.
Mall revenues were $33.5 million during 2001, compared to $29.9 million
during 2000. The increase was attributable to higher foot traffic, additional
tenants and increased proceeds from rents calculated on tenant gross revenues.
24
Retail and other revenues increased $4.2 million, to $73.0 million in 2001
from $68.8 million in 2000. Other revenue includes $5.4 million of group
cancellation fees during the year ended December 31, 2001, including $5.2
million during the fourth quarter of 2001, as compared to $1.9 million during
all of 2000. In addition, during the fourth quarter of 2001, the Company added
$1.0 million to its provision for bad debts as an estimate of settlement losses
associated with $1.9 million of uncollected group cancellation fees. The
calculation of other revenue for 2001 takes into account an operating loss of
$2.1 million from the Art of the Motorcycle exhibition at the Guggenheim Las
Vegas Museum. This amount represents the Company's share of the exhibition
operating losses during the fourth quarter of 2001. The exhibit opened to the
public on October 7, 2001 and the exhibition incurred substantial amounts of
pre-opening and advertising costs during its first quarter of operations.
Operating Expenses
Operating expenses (including pre-opening, developmental and corporate
expenses) were $414.6 million in the year ended December 31, 2001, representing
a decrease of $29.6 million when compared to $444.2 million during 2000. The
decrease in operating expenses was primarily attributable to lower operating
revenues and business volumes in all departments of the Casino Resort and
reduced general & administrative costs during 2001. Provision for bad debts for
the year ended December 31, 2001 was $20.2 million compared to $19.3 million
during 2000. The increase was primarily attributable to estimates of losses
associated with hotel receivables and group cancellation fees during the fourth
quarter of 2001.
Mall operating expenses were $20.9 million during 2001 compared to $19.3
million during 2000. The increase in Mall operating expenses was primarily
attributable to increased advertising costs during 2001 as compared to 2000.
Corporate expense was $6.4 million in 2001, compared with $6.3 million in
2000.
Fixed payment obligations primarily related to the HVAC Plant for the year
ended December 31, 2001 were $8.1 million, including $5.9 million for the Casino
Resort and $2.2 million for the Mall. Fixed payment obligations were $8.7
million during 2000, including $6.5 million for the Casino Resort and $2.2
million for the Mall. The decrease was primarily attributable to increased
allocation of costs to tenants during 2001.
Interest Income (Expense)
Interest expense net of amounts capitalized was $110.7 million for 2001,
compared to $119.8 million in 2000. Of the net interest expense incurred during
2001, $95.6 million was related to the Casino Resort (excluding the Mall) and
$15.1 million was related to the Mall. The decrease in interest expense was
attributable to decreases in interest rates on the Company's variable rate debt
during 2001 and capitalization of $2.0 million of interest in connection with
current construction projects.
Interest income was $1.4 million and $1.8 million for the years ended
December 31, 2001 and 2000, respectively.
Year Ended December 31, 2000 compared to the Year Ended December 31, 1999
The Casino Resort began operations on May 4, 1999 and the Mall began
operations on June 19, 1999, and therefore, neither the Casino Resort nor the
Mall had any operating revenues or operating expense before such dates. All
references to 1999 include 242 days of operations of the Casino Resort and 195
days of operations of the Mall.
Operating Revenues
Consolidated net revenues for the year ended December 31, 2000 were $581.0
million, representing an increase of $332.5 million when compared with $248.5
million during 1999. The increase in net revenues was due to growth in every
revenue segment at the Casino Resort and the longer operating period in 2000.
Casino revenues for the year ended December 31, 2000 were $299.1 million,
representing an increase of $174.9 million when compared with $124.2 million
during 1999. The increase in casino revenues at the Casino Resort was primarily
a result of the longer operating period in 2000, as well as higher table games
and slots volume during comparable periods.
Room revenues for 2000 were $192.3 million, representing an increase of
$102.7 million when compared with $89.6 million during 1999. The increase was
due to the longer operating period in 2000 and a higher occupancy of 95.2% in
2000, when compared with 81.7% in 1999. In addition, the Company achieved a
higher average daily room rate of $182 in 2000 versus $159 in 1999.
Food and beverage revenues for 2000 were $67.1 million, representing an
increase of $36.3 million when compared with $30.8 million for 1999. This
increase resulted from the longer operating period in 2000, additional banquet
revenues generated from a full year of operation at the Congress Center and
greater room service revenues as a result of higher occupancy levels.
25
Retail and other revenues increased $39.8 million, from $29.0 million in
1999 to $68.8 million in 2000. The Mall revenues were $29.9 million during 2000,
compared to $9.6 million during 1999. The increase in Mall revenues was
attributable to completion of leasing of the Mall space and the longer operating
period in 2000. Mall occupancy in 2000 was approximately 95% of leaseable space.
Operating Expenses
Operating expenses (including pre-opening and corporate expenses) for 2000
were $444.2 million, representing an increase of $199.6 million when compared
with $244.6 million for 1999. The increase was primarily due to the longer
operating period in 2000, increased casino expenses resulting from higher gaming
taxes and marketing expenses on the increased revenues, and an increase in the
provision for doubtful accounts. Mall operating expenses were $19.3 million
during 2000 compared to $9.2 million during 1999. The increase was attributable
to completion of leasing of the Mall space and the longer operating period in
2000.
Pre-opening and other non-recurring expenses for the year ended December
31, 1999 of $21.5 million represent costs principally associated with the
opening of the Casino Resort on May 4, 1999. There were no pre-opening expenses
during the year ended December 31, 2000.
Corporate expense was $6.3 million in 2000, compared with $2.5 million in
1999. The increase was due to the creation of the corporate division in the
fourth quarter of 1999 and consequently the longer operating period in 2000.
Fixed payment obligations primarily related to the HVAC Plant for 2000 were
$8.7 million, including $6.5 million for the Casino Resort and $2.2 million for
the Mall. Fixed payment obligations were $5.5 million during the shorter
operating period in 1999, including $4.3 million for the Casino Resort and $1.2
million for the Mall.
Interest Income (Expense)
Reflecting the investments in the Hotel, the Casino and Congress Center and
the Mall, the Company's debt levels and associated interest costs increased
significantly. With the opening of these new facilities, the Company's
capitalization of interest costs associated with the construction of the Casino
Resort ceased. Interest expense was $119.8 million in 2000, compared to $71.4
million (net of capitalized interest of $31.3 million in 1999). Because
construction of the Casino Resort was virtually complete during the fourth
quarter of 1999, the Company only capitalized interest of $0.1 million during
the year ended December 31, 2000, versus $31.3 million of interest capitalized
during the year ended December 31, 1999.
Interest income was $1.8 million and $2.6 million for the years ended
December 31, 2000 and 1999, respectively.
Other Factors Affecting Earnings
The Company incurred development expenses related to new ventures of $0.4
million during the year ended December 31, 2001. The Company did not incur any
such expenses in the year ended December 31, 2000. Since the inception of the
Casino Resort project, the Company has expensed $30.6 million for pre-opening
activities. Pre-opening expenses include payroll, advertising, professional
services and other general and administrative expenses related to the opening of
the Casino Resort and other ventures.
The Company incurred extraordinary charges in 2001 and 2000 of $1.4 million
and $2.8 million, respectively, for early retirement of debt related to
restructuring of the Company's secured bank credit facility (the "Bank Credit
Facility"), and $0.6 million in 1999 related to the take-out financing of the
Mall. See "-Liquidity and Capital Resources - New Mall Subsidiary and Transfer
of Mall Assets."
During early 2000, the Company initiated a change to its business strategy
as it relates to premium casino customers and marketing to foreign premium
casino customers. The Company has generally raised its betting limits for table
games to be competitive with other premium resorts on the Strip. There are
additional risks associated with this change in strategy, including risk of bad
debts, risks to profitability margins in a highly competitive market and the
need for additional working capital to accommodate possible higher levels of
trade receivables and foreign currency fluctuations associated with collection
of trade receivables in other countries. The Company has opened domestic and
foreign marketing offices and bank collection accounts in several foreign
countries to accommodate this change in business strategy, thereby increasing
marketing costs. The Company continually evaluates its costs associated with
marketing to the various segments of the premium casino customer market.
26
Liquidity and Capital Resources
Cash Flow and Capital Expenditures
As of December 31, 2001 and December 31, 2000, the Company held cash and
cash equivalents of $57.6 million and $45.2 million, respectively. Net cash
provided by operating activities for the year ended December 31, 2001 was $50.8
million, compared with $81.0 million for 2000. The Company's operating cash flow
in 2001 was negatively impacted as compared to the prior year because of a $71.9
million decrease in casino revenues. Net trade receivables were $57.1 million as
of December 31, 2001 and $64.3 million as of December 31, 2000.
Capital expenditures paid from operating cash flow during the year ended
December 31, 2001 were $55.1 million, including expenditures for the Guggenheim
Museum Projects and the Phase IA Addition. The Company entered into an agreement
during 2001 with a subsidiary of the Solomon R. Guggenheim Foundation to operate
the Guggenheim Las Vegas Museum in the Casino Resort. The agreement requires the
Company to make certain contributions of capital. In addition to capital
expenditures, the Company contributed $9.0 million to the Guggenheim Museum
Projects during 2001. Capital expenditures for 2000 were $16.4 million,
including a variety of on-going capital improvement projects and $12.2 million
for construction of the Casino Resort. The Company expects capital expenditures
in 2002 to total approximately $30.0 million (excluding additional Phase IA
construction cost). These expenditures for 2002 primarily relate to liquidation
of construction payables and commitments related to the Guggenheim Museum
Projects, Phase IA Addition design and foundation costs and the continuation of
other capital expenditure projects undertaken during 2001.
Aggregate Indebtedness and Fixed Payment Obligations to the HVAC Provider
The Company's total long-term indebtedness and fixed payment obligations to
the HVAC Provider are summarized by year below:
2002 2003 2004 2005 Thereafter
------- ------- ------- ------- ----------
Long -Term Indebtedness
Mortgage Notes -- -- 425,000 -- --
Subordinated Notes -- -- -- 94,113 --
Bank Credit Facility 1,527 190,459 -- -- --
FF&E Credit Facility 21,494 21,494 10,747 -- --
Tranche A Take-out Loan 105,000 -- -- -- --
Tranche B Take-out Loan -- -- 35,000 -- --
Completion Guaranty Loan -- -- -- 31,123 --
Phase II Subsidiary Credit Facility -- 3,933 -- -- --
Phase II Unsecured Bank Loan 1,092 -- -- -- --
Fixed Payment Obligations To The
HVAC Provider
HVAC Provider fixed payments 7,657 7,657 7,657 7,657 26,799
------- ------- ------- ------- ------
Total indebtedness and HVAC fixed
payment obligations 136,770 223,543 478,404 132,893 26,799
======= ======= ======= ======= ======
During the year ended December 31, 2001, the Company made principal
payments of $0.8 million and $21.5 million on the Bank Credit Facility and its
credit facility secured by certain furniture, fixtures and equipment (the "FF&E
Credit Facility"), respectively. The Company has debt service payments due
aggregating $129.1 million during 2002, including: principal payments on (1) the
Bank Credit Facility of $1.5 million; (2) the FF&E Credit Facility of $21.5
million; (3) an unsecured bank line of credit for the Phase II Subsidiary (the
"Phase II Unsecured Bank Loan") of $1.1 million; and (4) a first priority
mortgage loan secured by the Mall (the "Tranche A Take-out Loan") of $105.0
million. Based on current interest rates under the Bank Credit Facility, the
FF&E Credit Facility and the Tranche A Take-out Loan, the Company has estimated
total interest payments (excluding noncash amortization of debt offering costs)
of: (1) approximately $79.5 million during fiscal 2002 for indebtedness secured
by the Casino Resort; and (2) approximately $10.5 million during fiscal 2002 for
indebtedness secured by the Mall.
The Company also has fixed payments obligations due during 2002 of $7.7
million under its energy service agreements with the HVAC Provider. The total
remaining payment obligation under this arrangement is $57.4 million, payable in
equal monthly installments during the period of January 1, 2002 through July 1,
2009. See - "Item 8 - Financial Statements and Supplementary Data - Notes to
Financial Statements - Note 13 - Commitments and Contingencies - Energy Services
Agreements and Operating Lease Agreements."
27
On October 19, 2001, the Phase II Subsidiary entered into a loan agreement
providing for a $17.5 million term and revolving loan, with a one time option to
increase such loan to $30.0 million (the "Phase II Subsidiary Credit Facility").
The Phase II Subsidiary Credit Facility is secured by the Phase II Land, as well
as the Phase II Subsidiary's interest in the Phase II Lease. The Phase II
Subsidiary immediately drew $12.5 million for a letter of credit under the
revolver portion of the Phase II Subsidiary Credit Facility (the "Letter of
Credit") pursuant to the terms of and to be provided as credit support for the
Bank Credit Facility. The Letter of Credit was released in full on February 11,
2002, pursuant to its terms, immediately following the first fiscal quarter
period ending after September 30, 2001 in which the Company's consolidated
adjusted EBITDA exceeded $30.0 million.
The Company drew $3.9 million on the Phase II Credit Facility during 2001
and during January 2002, $2.5 million of that amount was repaid. The remaining
portion of the Phase II Subsidiary Credit Facility and proceeds from rental
payments of $8.0 million per year from Venetian to the Phase II Subsidiary under
the Phase II Lease are each available for any Phase II Resort pre-development
expenses or may be loaned or distributed by the Phase II Subsidiary to the
Company for other liquidity needs.
For the next twelve months, the Company expects to fund Casino Resort
operations, capital expenditures and debt service requirements (excluding the
Tranche A Take-out Loan) from existing cash balances, operating cash flow,
borrowings under its revolving credit line (the "Revolver") to the extent that
funds are available, distributions of excess cash from the New Mall Subsidiary
to the extent permitted under the Tranche A Take-out Loan, and loans or
distributions of excess cash from the Phase II Subsidiary as a result of rental
payments under the Phase II Lease and borrowings under the Phase II Subsidiary
Credit Facility. Although there can be no assurance that it will be successful,
the Company currently plans to refinance the Tranche A Take-out Loan prior to
its due date of December 20, 2002. As of December 31, 2001, all of the Company's
$40.0 million Revolver availability was drawn. As of April 1, 2002, the
Revolver balance was approximately $32.0 million.
The Company's existing debt instruments contain certain restrictions that,
among other things, limit the ability of the Company and/or certain subsidiaries
to incur additional indebtedness, issue disqualified stock or equity interests,
pay dividends or make other distributions, repurchase equity interests or
certain indebtedness, create certain liens, enter into certain transactions with
affiliates, enter into certain mergers or consolidations or sell assets of the
Company without prior approval of the lenders or noteholders. Financial
covenants included in the Bank Credit Facility and FF&E Credit Facility include
a minimum fixed charge ratio, maximum leverage ratio, minimum consolidated
adjusted EBITDA standard, minimum equity standard and maximum capital
expenditures standard. The financial covenants in the Bank Credit Facility and
the FF&E Credit Facility involving EBITDA are applied on a rolling four quarter
basis, and the Company's compliance with financial covenants can be temporarily
affected if the Company experiences a decline in hotel occupancy or room rates,
or an unusually low win percentage in a particular quarter, which is not offset
in subsequent quarters or by other results of operations. As a result of these
fluctuations, no assurance can be given that the Company will be in compliance
with its financial covenants. See "Item 8 - Financial Statements and
Supplementary Data - Notes to Financial Statements - Note 8 Long-Term Debt."
The Company was challenged to meet these covenant tests in 2001 for certain
quarters during the rolling measurement period due to an extremely low win
percentage and reduced travel to Las Vegas during the fourth quarter of 2001
because of the September 11th terrorist attacks. These covenants allow the
Principal Stockholder to increase EBITDA for measurement purposes by issuing a
standby letter of credit to the Company's lenders. The covenants also allow the
New Mall Subsidiary and the Phase II Subsidiary, subject to certain limitations,
to make distributions to LVSI which would increase EBITDA for debt covenant
measurement purposes.
During the fourth quarter of 2001, the Company entered into a limited
waiver amendment to the Bank Credit Facility and FF&E Credit Facility to obtain
a waiver with respect to the minimum consolidated adjusted EBITDA requirement.
During February 2002, the New Mall Subsidiary paid a 7.0 million distribution to
Venetian.
The Company expects to be challenged to meet certain of its covenant tests
in the first quarter of 2002 due to the carry-over effects that the extremely
low win percentage for certain of its fiscal 2001 quarters will have on the
rolling measurement period. The Company has certain options available to it in
the event that it needs to seek a cure in order to meet such covenants,
including the ability to draw down on the Phase II Subsidiary Credit Facility,
make distributions of excess cash from the Mall under the terms of the Tranche A
Take-out Loan or the negotiation with its lenders of further waivers for debt
covenant violations in 2002. The Company anticipates that ultimately its win
percentage will return to normal levels and that it will no longer need to rely
on the various cures and waivers described above.
28
In order for the Company to be able to resume construction and complete the
Phase IA Addition, the Company and/or the Phase II Subsidiary would need to
incur additional indebtedness. Depending upon the structure of such
indebtedness, this may require the consent of certain existing lenders and
modifications to certain existing lender financial covenants. The current
estimated cost to complete the Phase IA Addition is approximately $225.0
million.
The Company is also currently in active discussions to consider refinancing
all or a portion of its outstanding indebtedness, including the Tranche A
Take-out Loan. This review is taking into account the cost to refinance all
outstanding indebtedness, current interest rates, collateral arrangements and
the ability to raise additional funds to fund on-going and upcoming projects
discussed in "Item 1 - Business - New Developments" above. The Company has not
yet entered into any definitive agreements for a refinancing and no assurance
can be given that refinancing for some or all of such outstanding indebtedness
will be available, or that such a refinancing will be on terms that will be
favorable to the Company.
If the Company is required to pay certain significant contested
construction costs (See "-Litigation Contingencies and Available Resources"), or
if the Company is unable to meet its debt service requirements, the Company will
seek, if necessary and to the extent permitted under its indentures and the
terms of the Bank Credit Facility and the FF&E Credit Facility or any other debt
instruments then outstanding, additional financing through bank borrowings or
debt or equity financings. Also, there can be no assurance that new business
developments or unforeseen events will not occur resulting in the need to raise
additional funds. There also can be no assurance that additional or replacement
financing, if needed, will be available to the Company, and, if available, that
the financing will be on terms favorable to the Company, or that the Principal
Stockholder or any of his affiliates will provide any such financing.
Litigation Contingencies and Available Resources
The Company is a party to certain litigation matters and claims related to
the construction of the Casino Resort. If the Company is required to pay any of
the Construction Manager's contested construction costs (the "Contested
Construction Costs") which are not covered by the Insurance Policy, the Company
may use cash received from the following sources to fund such costs: (i) the LD
Policy; (ii) the Construction Manager, Bovis and P&O pursuant to the
Construction Management Contract, the Bovis Guaranty and the P&O Guaranty,
respectively; (iii) third parties, pursuant to their liability to the Company
under their agreements with the Company; (iv) amounts received from the Phase II
Subsidiary for shared facilities designed and constructed to accommodate the
operations of the Casino Resort and the Phase II Resort, (v) the Principal
Stockholder, pursuant to his liability under the Completion Guaranty; (vi)
borrowings under the Revolver; (vii) additional debt or equity financings; and
(viii) operating cash flow. The Principal Stockholder has remaining liability of
approximately $5.0 million under the Completion Guaranty to fund excess
construction costs (which liability is collateralized with cash and cash
equivalents), provided that there is no cap on the Principal Stockholder's
liability for excess construction costs due to scope changes. If the Company
were required to pay substantial Contested Construction Costs, and if it were
unable to raise or obtain the funds from the sources described above, there
could be a material adverse effect on the Company's financial position, results
of operations or cash flows.
New Mall Subsidiary and Transfer of Mall Assets and Related Assets
On November 12, 1999, Grand Canal Shops Mall Construction, LLC transferred
the Mall and related assets (the Mall and such assets, collectively, the "Mall
Assets") to its subsidiary, Grand Canal Shops Mall, LLC (the "Mall Subsidiary").
Upon such transfer, the Mall Assets were released as security to the holders of
the Company's 12 1/4 % Mortgage Notes due 2004 (the "Mortgage Notes") and for
the indebtedness under the Bank Credit Facility, the indebtedness under a $140.0
million mall construction loan facility (the "Mall Construction Loan Facility")
was assumed by the Mall Subsidiary and all entities comprising the Company,
other than the Mall Subsidiary, were released from all obligations under the
Mall Construction Loan Facility.
29
On December 20, 1999, the Mall Construction Loan Facility was paid off in
full with the proceeds of (a) the Tranche A Take-out Loan, made by Goldman Sachs
Mortgage Company, the Bank of Nova Scotia and other lenders (collectively, the
Tranche A Take-out Lender") and (b) a $35.0 million second priority take-out
loan (the "Tranche B Take-out Loan" and, together with the Tranche A Take-out
Loan, the "Mall Take-out Financing") made by an entity wholly-owned by the
Principal Stockholder (the "Tranche B Take-out Lender"). The Mall Take-out
Financing is secured by a $20.0 million guaranty made by the Principal
Stockholder (the "Mall Take-out Guaranty"). The annual interest rate on the
Tranche A Take-out Loan is 350 basis points over 30 day LIBOR. The Tranche A
Take-out Loan is due in full on December 20, 2002 and no principal payments are
due thereunder until such date. The Company currently plans to refinance the
Tranche A Take-out Loan prior to its due date, however, no assurance can be
given that refinancing for such indebtedness will be available to the Company
prior to this date. The Tranche B Take-out Loan bears interest at 14% per annum.
The initial maturity date is December 20, 2004 with a right of extension to
December 20, 2007. No principal payments are due until maturity. Also on
December 20, 1999, the Mall Assets were transferred from the Mall Subsidiary to
the New Mall Subsidiary, the obligor under the Mall Take-out Financing.
Because the New Mall Subsidiary is not a guarantor of any indebtedness of
the Company (other than the Mall Take-out Financing), creditors of the Company
(including the holders of the Notes but excluding creditors of the New Mall
Subsidiary) do not have a direct claim against the Mall Assets. As a result,
indebtedness of the entities comprising the Company other than the New Mall
Subsidiary (including the Notes) is now, with respect to the Mall Assets,
effectively subordinated to indebtedness of the New Mall Subsidiary. The New
Mall Subsidiary is not restricted by any of the debt instruments of LVSI,
Venetian or the Company's other subsidiary guarantors (including its indentures)
from incurring any indebtedness. The terms of the Tranche A Take-out Loan
prohibit the New Mall Subsidiary from paying dividends or making distributions
to any of the other entities comprising the Company unless payments under the
Tranche A Take-out Loan are current, and, with certain limited exceptions,
prohibit the New Mall Subsidiary from making any loans to such entities. Any
additional indebtedness incurred by the New Mall Subsidiary may include
additional restrictions on the ability of the New Mall Subsidiary to pay any
such dividends and make any such distributions or loans.
Phase II Resort and Transfer of Phase II Land
If the Phase II Subsidiary determines to construct the Phase II Resort, the
Phase II Subsidiary will be required to raise substantial debt and/or equity
financings. Currently, there are no commitments to fund the hard construction
costs of the Phase II Resort. Approximately 14-acres of the Phase II Land was
transferred to the Phase II Subsidiary in 1998. On December 31, 1999, an
additional 1.75 acres of land were contributed indirectly by the Principal
Stockholder to the Phase II Subsidiary. The development of the Phase II Resort
may require obtaining additional regulatory approvals. The Company has not yet
set a date to begin construction of the Phase II Resort.
The Phase II Subsidiary has outstanding project payables in the amount of
$3.2 million to be funded from future equity contributions or borrowings by the
Phase II Subsidiary. During the first quarter of 2001, the Phase II Subsidiary
borrowed $1.1 million under the Phase II Unsecured Bank Loan, which is due and
payable on July 15, 2002. The proceeds were used to fund payments of Phase II
Subsidiary operating costs.
Because the Phase II Subsidiary is not a guarantor of the Company's
indebtedness, creditors of the Company (including the holders of the Notes) do
not have a direct claim against the assets of the Phase II Subsidiary. As a
result the existing indebtedness of the Company (including the Notes) is, with
respect to these assets, effectively subordinated to indebtedness of the Phase
II Subsidiary. The Phase II Subsidiary is not subject to any of the restrictive
covenants of the debt instruments of the Company (including, without limitation,
the covenants with respect to the limitations on indebtedness and restrictions
on the ability to pay dividends or to make distributions or loans to the Company
and its subsidiaries). Any indebtedness to be incurred by the Phase II
Subsidiary in addition to the Phase II Subsidiary Credit Facility may include
material restrictions on the ability of the Phase II Subsidiary to pay dividends
or make distributions or loans to the Company and its subsidiaries.
The debt instruments of the Company limit the ability of LVSI, Venetian or
any of their subsidiaries to guarantee or otherwise become liable for any
indebtedness of the Phase II Subsidiary. Such debt instruments also restrict the
sale or other disposition by the Company and its subsidiaries of capital stock
of the Phase II Subsidiary, including the sale of any such capital stock to the
Principal Stockholder or any affiliate of the Principal Stockholder. In
addition, prior to commencement of construction of the Phase II Resort, Venetian
has the right to approve the plans and specifications for the Phase II Resort.
30
Risk Related to the Subordination Structure of the Mortgage Notes
The Mortgage Notes represent senior secured debt obligations of LVSI and
Venetian, secured by second priority liens on the collateral securing the
Mortgage Notes (the "Note Collateral"). However, the guarantees of the Mortgage
Notes by its subsidiaries, Mall Intermediate Holding Company, LLC and Lido
Intermediate Holding Company, LLC, each a special purpose entity which is a
wholly-owned subsidiary of LVSI and Venetian (collectively, the "Subordinated
Guarantors"), are unsecured, subordinated debt obligations of such guarantors.
The structure of these guarantees present certain risks for holders of the
Mortgage Notes. For example, if the Note Collateral were insufficient to pay the
debt secured by such liens, or such liens were found to be invalid, then holders
of the Mortgage Notes would have a senior claim against any remaining assets of
LVSI and Venetian. In contrast, because of the subordination provision with
respect to the Subordinated Guarantors, holders of the Mortgage Notes will
always be fully subordinated to the claims of holders of senior indebtedness of
the Subordinated Guarantors.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 133 ("SFAS 133") entitled "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If specific conditions are met, a derivative may be specifically
designated as a hedge of specific financial exposures. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and, if used in hedging activities, on its effectiveness as a hedge.
SFAS 133 as amended is effective for all fiscal quarters of fiscal years
beginning after December 31, 2000. SFAS 133 should not be applied retroactively
to financial statements of prior periods. The Company adopted SFAS 133 on
January 1, 2001.
Effective in the fourth quarter of 2000 and the first quarter of 2001, the
Company adopted Emerging Issues Task Force Issue 00-14 ("EITF 00-14") and
Emerging Issues Task Force Issue 00-22 ("EITF 00-22"), respectively. EITF 00-14
and EITF 00-22 require that cash discounts and other cash incentives related to
gaming play be recorded as a reduction of gross casino revenues. EITF 00-14 and
EITF 00-22 also require that prior periods be restated to conform to this
presentation. The Company previously recorded such discounts as an operating
expense and has reclassified prior period amounts, which has no effect on
previously reported net income. In connection with the adoption of EITF 00-14 in
the fourth quarter of 2000, the Company reclassified $6.1 million of such
discounts in the 1999 financial statements. In connection with the adoption of
EITF 00-22 in the first quarter of 2001, the Company reclassified $6.1 million
and $3.3 million of such discounts in the 2000 and 1999 financial statements,
respectively.
In July 2001, the Financial Accounting Standards Board issued Statement No.
141 ("SFAS 141"), entitled "Business Combination," and Statement No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets". SFAS 141 provides as follows: (a)
use of the pooling-of-interests method is prohibited for business combinations
initiated after June 30, 2001; and (b) the provisions of SFAS 141 also apply to
all business combinations accounted for by the purchase method that are
completed after June 30, 2001. There are also transition provisions that apply
to business combinations completed before July 1, 2001 that were accounted for
by the purchase method. SFAS 142 is effective for fiscal years beginning after
December 15, 2001 and applies to all goodwill and other intangible assets
recognized in an entity's statement of financial position at that date,
regardless of when those assets were initially recognized.
In August 2001, the Financial Accounting Standards Board issued Statement
No. 143 ("SFAS 143"), "Accounting for Obligations Associated with the Retirement
of Long-Lived Assets". The objective of SFAS 143 is to establish accounting
standards for the recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. SFAS 143 is effective for fiscal years
beginning after June 15, 2002.
In October 2001, the Financial Accounting Standards Board issued Statement
No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 is effective for fiscal
years beginning after December 15, 2001 and, generally, is to be applied
prospectively.
The Company is currently evaluating the provisions of SFAS 141, SFAS 142,
SFAS 143 and SFAS 144 and does not anticipate that the effects of these changes
will have an impact on the Company's financial position or results of
operations.
31
Special Note Regarding Forward-Looking Statements
Certain statements in this section and elsewhere in this Annual Report on
Form 10-K (as well as information included in oral statements or other written
statements made or to be made by the Company) constitute "forward-looking
statements." Such forward-looking statements include the discussions of the
business strategies of the Company and expectations concerning future
operations, margins, profitability, liquidity and capital resources. In
addition, in certain portions of this Form 10-K, the words: "anticipates",
"believes", "estimates", "seeks", "expects", "plans", "intends" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Although the Company believes that such
forward-looking statements are reasonable, it can give no assurance that any
forward-looking statements will prove to be correct. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the risks associated with entering into new construction and new
ventures, including the Phase IA Addition and the Macau joint venture, increased
competition and other planned construction in Las Vegas, including the opening
of a new casino resort on the site of the former Desert Inn and upcoming
increases in meeting and convention space, the completion of infrastructure
projects in Las Vegas, government regulation of the casino industry, including
gaming license approvals and regulation in foreign jurisdictions, the
legalization of gaming in certain jurisdictions, such as Native American
reservations in the States of California and New York and regulation of gaming
on the Internet, leverage and debt service (including sensitivity to
fluctuations in interest rates and other capital markets trends), uncertainty of
casino spending and vacationing at casino resorts in Las Vegas, disruptions or
reductions in travel to Las Vegas, the September 11, 2001 attacks and any future
terrorist incidents, fluctuations in occupancy rates and average daily room
rates in Las Vegas, demand for all-suites rooms, the popularity of Las Vegas as
a convention and trade show destination, insurance risks (including the risk
that the Company will not be able to obtain coverage against acts of terrorism
or will only be able to obtain such coverage at significantly increased rates),
litigation risks, including the outcome of the pending disputes with the
Construction Manager and its subcontractors, and general economic and business
conditions which may impact levels of disposable income, consumer spending and
pricing of hotel rooms.
ITEM 7A. --QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates and
commodity prices. The Company's primary exposure to market risk is interest rate
risk associated with its long-term debt. The Company attempts to manage its
interest rate risk by managing the mix of its long-term fixed-rate borrowings
and variable rate borrowings, and by use of interest rate cap and floor
agreements. The ability to enter into interest rate cap and floor agreements
allows the Company to manage its interest rate risk associated with its variable
rate debt.
The Company does not hold or issue financial instruments for trading
purposes and does not enter into deliverable transactions that would be
considered speculative positions. The Company's derivative financial instruments
consist exclusively of interest rate cap and floor agreements. Interest
differentials resulting from these agreements are recorded on an accrual basis
as an adjustment to interest expense.
To manage exposure to counterparty credit risk in interest rate cap and
floor agreements, the Company enters into agreements with highly-rated
institutions that can be expected to fully perform under the terms of such
agreements. Frequently, these institutions are also members of the bank group
providing the Company's credit facility, which management believes further
minimizes the risk of nonperformance.
32
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents notional amounts and weighted average interest
rates by contractual maturity dates.
FAIR
2002 2003 2004 2005 TOTAL VALUE(1)
------ ------ ------ ------ ------ --------
(Dollars In Millions)
LIABILITIES
Short-term debt
Variable rate $129.1 -- -- -- $129.1 $129.1
Average interest rate (2) 5.0% -- -- -- 5.0% --
Long-term debt
Fixed rate -- -- $460.0 $125.2 $585.2 $602.0
Average interest rate (2) -- -- 13.1% 14.3% 13.7% --
Variable rate -- $215.9 $ 10.7 -- $226.6 $228.6
Average interest rate (2) -- 5.7% 5.8% -- 5.8% --
<FN>
- ----------
(1) The fair values are based on the borrowing rates currently available for
debt instruments with similar terms and maturities and market quotes of the
Company's publicly traded debt.
(2) Based upon contractual interest rates for fixed rate indebtedness or
current LIBOR rates for variable rate indebtedness.
</FN>
Foreign currency translation gains and losses were not material to the
Company's results of operations for the year ended December 31, 2001.
See also "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and "
Item 8 - Financial Statements and Supplementary Data - Notes to Financial
Statements - Note 8 Long-Term Debt."
33
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Financial Statements:
Report of Independent Accountants.......................................37
Consolidated Balance Sheets at December 31, 2001 and 2000...............38
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 2001...................................39
Consolidated Statements of Stockholder's Equity (Deficit) for
each of the three years in the period ended December 31, 2001...........40
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2001...................................41
Notes to Financial Statements...........................................42
Financial Statement Schedules:
Report of Independent Accountants...................................73
Schedule II - Valuation and Qualifying Accounts.....................74
The financial information included in the financial statement schedule should be
read in conjunction with the consolidated financial statements. All other
financial statement schedules have been omitted because they are not applicable
or the required information is included in the consolidated financial statements
or the notes thereto.
34
Report of Independent Accountants
To the Directors and Stockholder of Las Vegas Sands, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholder's equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of Las Vegas Sands, Inc. and its subsidiaries at December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As more fully described in Note 1, the Company has restated previously
reported net income (loss) for the years ended December 31, 2000 and 1999 to
include preferred return on preferred stock of a subsidiary.
PricewaterhouseCoopers LLP
Las Vegas, Nevada
February 1, 2002
35
LAS VEGAS SANDS, INC.
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 54,936 $ 42,606
Restricted cash and investments ......................................... 2,646 2,549
Accounts receivable, net ................................................ 57,092 64,328
Inventories ............................................................. 4,747 3,868
Prepaid expenses ........................................................ 3,862 3,672
----------- -----------
Total current assets ........................................................ 123,283 117,023
Property and equipment, net ................................................. 1,096,307 1,062,093
Deferred offering costs, net ................................................ 18,989 22,314
Other assets, net ........................................................... 33,207 30,955
----------- -----------
$ 1,271,786 $ 1,232,385
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable ........................................................ $ 36,353 $ 23,835
Construction payables ................................................... 26,115 6,212
Construction payables-contested ......................................... 7,232 7,232
Accrued interest payable ................................................ 10,008 13,277
Other accrued liabilities ............................................... 70,035 76,735
Current maturities of long-term debt .................................... 129,113 50,119
----------- -----------
Total current liabilities ................................................... 278,856 177,410
Other long-term liabilities ................................................. 3,274 10,494
Long-term debt .............................................................. 745,746 801,222
Long-term subordinated loans payable to Principal Stockholder ............... 66,123 62,071
----------- -----------
1,093,999 1,051,197
----------- -----------
Redeemable Preferred Interest in Venetian Casino Resort, LLC,
a wholly owned subsidiary ............................................... 188,778 168,012
----------- -----------
Commitments and contingencies
Stockholder's equity (Deficit):
Common stock, $.10 par value, 3,000,000 shares authorized, 925,000 shares
issued and outstanding ............................................... 92 92
Capital in excess of par value (2000, as restated) ...................... 140,768 140,768
Accumulated deficit since June 30, 1996 (2000, as restated) ............. (151,851) (127,684)
----------- -----------
(10,991) 13,176
----------- -----------
$ 1,271,786 $ 1,232,385
=========== ===========
<FN>
- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
36
LAS VEGAS SANDS, INC.
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended December 31,
2001 2000 1999
----------- ----------- -----------
Revenues:
Casino ................................................................... $ 227,240 $ 299,083 $ 124,161
Rooms .................................................................... 204,242 192,327 89,585
Food and beverage ........................................................ 61,977 67,052 30,786
Retail and other ......................................................... 73,034 68,804 28,966
----------- ----------- -----------
566,493 627,266 273,498
Less-promotional allowances ................................................. (42,594) (46,296) (25,045)
----------- ----------- -----------
Net revenues ............................................................. 523,899 580,970 248,453
----------- ----------- -----------
Operating expenses:
Casino ................................................................... 139,936 163,157 69,664
Rooms .................................................................... 50,039 49,618 25,532
Food and beverage ........................................................ 29,630 32,627 19,134
Retail and other ......................................................... 32,302 29,406 11,581
Provision for doubtful accounts .......................................... 20,198 19,252 13,655
General and administrative ............................................... 86,887 93,413 50,450
Corporate expense ........................................................ 6,376 6,275 2,510
Rental expense ........................................................... 8,074 8,727 5,485
Pre-opening and developemental expense ................................... 355 -- 21,484
Depreciation and amortization ............................................ 40,823 41,722 25,145
----------- ----------- -----------
414,620 444,197 244,640
----------- ----------- -----------
Operating income ............................................................ 109,279 136,773 3,813
Other income (expense):
Interest income ........................................................... 1,385 1,771 2,551
Interest expense, net of amounts capitalized .............................. (101,724) (111,026) (71,235)
Interest expense on indebtedness to Principal Stockholder ................. (9,020) (8,781) (163)
Other income (expense) .................................................... (1,938) -- --
----------- ----------- -----------
Income (loss) before preferred return and extraordinary item ................ (2,018) 18,737 (65,034)
Preferred return on Redeemable Preferred Interest in Venetian Casino
Resort, LLC (2000 and 1999, as restated) ................................. (20,766) (18,482) (14,399)
----------- ----------- -----------
Income (loss) before extraordinary item (2000 and 1999, as restated) ........ (22,784) 255 (79,433)
Extraordinary item-loss on early retirement of debt ....................... (1,383) (2,785) (589)
----------- ----------- -----------
Net income (loss)(2000 and 1999, as restated) ............................... $ (24,167) $ (2,530) $ (80,022)
=========== =========== ============
Basic and diluted income (loss) per share before extraordinary item ......... $ (22.78) $ 0.26 $ (79.43)
=========== =========== ============
Basic and diluted loss per share ............................................ $ (24.17) $ (2.53) $ (80.02)
=========== =========== ============
<FN>
- ---------- The accompanying notes are an integral part of these consolidated
financial statements.
</FN>
37
LAS VEGAS SANDS, INC.
Consolidated Statements of Stockholder's Equity (Deficit)
(Dollars in thousands)
Common Stock
--------------------------
Capital in
Number Excess of Accumulated
Shares Amount Par Value Deficit Total
-------------------------------------------------------------------
As Restated (1998-2000)
-----------------------
Balance at December 31, 1998 ..................... 925,000 $ 92 $ 112,977 $ (45,132) $ 67,937
Capital contributions ............................ -- -- 27,791 -- 27,791
Net loss ......................................... -- -- -- (80,022) (80,022)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 ..................... 925,000 92 140,768 (125,154) 15,706
Net loss ......................................... -- -- -- (2,530) (2,530)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 ..................... 925,000 92 140,768 (127,684) 13,176
Net loss ......................................... -- -- -- (24,167) (24,167)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 ..................... 925,000 $ 92 $ 140,768 $ (151,851) $ (10,991)
=========== =========== =========== =========== ===========
<FN>
- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
38
LAS VEGAS SANDS, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year Ended December 31,
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss)(2000 and 1999, as restated)................................. $ 24,167) $ (2,530) $ (80,022)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................................ 40,823 41,722 25,145
Amortization of debt offering costs and original issue discount ...... 8,691 8,502 7,569
Non-cash preferred return on Redeemable Preferred Interest in
Venetian (2000 and 1999, as restated) .............................. 20,766 18,482 14,399
Loss on early retirement of debt ..................................... 1,383 2,785 589
Non-cash interest on completion guaranty loan ........................ 4,052 3,568 --
Provision for doubtful accounts ...................................... 20,198 19,252 13,655
Interest earned on restricted investments ............................ -- -- --
Changes in operating assets and liabilities:
Accounts receivable ................................................ (12,962) (40,377) (56,748)
Inventories ........................................................ (879) 648 (4,443)
Prepaid expenses ................................................... (190) 400 (4,070)
Other assets ....................................................... (2,252) (19,433) (10,141)
Accounts payable ................................................... 12,518 5,707 17,863
Accrued interest payable ........................................... (3,269) 787 3,421
Other accrued liabilities .......................................... (13,920) 41,504 42,720
----------- ----------- -----------
Net cash provided by (used in) operating activities .......................... 50,792 81,017 (30,063)
----------- ----------- -----------
Cash flows from investing activities:
(Increase) decrease in restricted cash ....................................... (97) 8,431 122,956
Capital expenditures ......................................................... (55,134) (16,409) --
Construction of Casino Resort ................................................ -- (12,180) (319,106)
----------- ----------- -----------
Net cash used in investing activities ........................................ (55,231) (20,158) (196,150)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from capital contributions .......................................... -- -- 16,000
Proceeds from preferred interest in Venetian ................................. -- -- 44,431
Repayments on mall construction loan facility ................................ -- -- (140,000)
Proceeds from mall construction loan facility ................................ -- -- 37,287
Proceeds from mall-tranche A take-out Loan ................................... -- -- 105,000
Proceeds from mall-tranche B take-out Loan ................................... -- -- 35,000
Proceeds from completion guaranty loan ....................................... -- -- 23,503
Repayments on bank credit facility-tranche A term loan ....................... (103,125) (35,625) (11,250)
Proceeds from bank credit facility-tranche A term loan ....................... -- -- 34,000
Repayments on bank credit facility-tranche B term loan ....................... (49,750) (250) --
Proceeds from bank credit facility-tranche B term loan ....................... -- 50,000 --
Repayments on bank credit facility-tranche C term loan ....................... (5,750) -- --
Proceeds from bank credit facility-tranche C term loan ....................... 5,750 -- --
Repayments on bank credit term facility ...................................... (764) -- --
Proceeds from bank credit term facility ...................................... 152,750 -- --
Repayments on bank credit facility-revolver .................................. (18,000) (50,160) (10,231)
Proceeds from bank credit facility-revolver .................................. 58,000 11,000 40,506
Repayments on FF&E credit facility ........................................... (21,494) (16,609) (5,862)
Proceeds from FF&E credit facility ........................................... -- -- 83,842
Proceeds from Phase II Subsidiary credit facility ............................ 3,933 -- --
Proceeds from Phase II Subsidiary unsecured bank loan ........................ 1,092 -- --
Payments of deferred offering costs .......................................... (5,873) (2,861) (2,046)
----------- ----------- -----------
Net cash provided by (used in) financing activities .......................... 16,769 (44,505) 250,180
----------- ----------- -----------
Increase in cash and cash equivalents ........................................ 12,330 16,354 23,967
Cash and cash equivalents at beginning of year ............................... 42,606 26,252 2,285
----------- ----------- -----------
Cash and cash equivalents at end of year ..................................... $ 54,936 $ 42,606 $ 26,252
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash payments for interest ................................................. $ 106,150 $ 106,143 $ 91,611
=========== =========== ===========
Non-cash investing and financing activities:
Contribution of land by Principal Stockholder ................................ $ -- $ -- $ 11,791
=========== =========== ===========
Non-cash interest on completion guaranty loan ................................ $ 4,052 $ 3,568 $ --
=========== =========== ===========
Property and equipment asset acquisitions included in accounts payable ....... $ 33,347 $ 13,444 $ 17,410
=========== =========== ===========
<FN>
- ----------
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
39
LAS VEGAS SANDS, INC.
Notes to Financial Statements
Note 1 - Organization and Business of Company
Las Vegas Sands, Inc. ("LVSI") is a Nevada corporation. On April 28, 1989,
LVSI commenced gaming operations in Las Vegas, Nevada, by acquiring the Sands
Hotel and Casino (the "Sands"). On June 30, 1996, LVSI closed the Sands and
subsequently demolished the facility in order to construct a planned two-phase
hotel-casino resort. The first phase of the hotel-casino resort (the "Casino
Resort") includes 3,036 suites, casino space approximating 116,000 square feet,
approximately 500,000 square feet of convention space, and approximately 475,000
gross leasable square feet of retail shops and restaurants. In connection with
the closing of the Sands, LVSI effected a quasi-reorganization (Note 3).
The consolidated financial statements include the accounts of LVSI and its
wholly owned subsidiaries (the "Subsidiaries"), including Venetian Casino
Resort, LLC ("Venetian"), Grand Canal Shops Mall, LLC (the "Mall Subsidiary"),
Grand Canal Shops Mall Subsidiary, LLC (the "New Mall Subsidiary"), Lido Casino
Resort, LLC (the "Phase II Subsidiary"), Mall Intermediate Holding Company, LLC
("Mall Intermediate"), Grand Canal Shops Mall Construction, LLC ("Mall
Construction"), Lido Intermediate Holding Company, LLC ("Lido Intermediate"),
Grand Canal Shops Mall Holding Company, LLC, Grand Canal Shops Mall MM
Subsidiary, Inc., Lido Casino Resort Holding Company, LLC, Grand Canal Shops
Mall MM, Inc. and Lido Casino Resort MM, Inc. (collectively, and including all
other direct and indirect subsidiaries of LVSI, the "Company"). Each of LVSI and
the Subsidiaries is a separate legal entity and the assets of each such entity
are intended to be available only to the creditors of such entity.
Venetian was formed on March 20, 1997 to own and operate certain portions
of the Casino Resort. LVSI is the managing member and owns 100% of the common
voting equity in Venetian. The entire preferred interest in Venetian is owned by
Interface Group Holding Company, Inc. ("Interface Holding"), which is wholly
owned by LVSI's Principal stockholder (the "Principal Stockholder") (Note 9).
Mall Intermediate and Lido Intermediate are special purpose companies,
which are wholly owned subsidiaries of Venetian. They are guarantors or
co-obligors of certain indebtedness related to the construction of the Casino
Resort.
The New Mall Subsidiary, an indirect wholly-owned subsidiary of LVSI, was
formed on December 9, 1999 and owns and operates the retail mall in the Casino
Resort (the "Mall").
The Casino Resort is physically connected to the approximately 1.15 million
square foot Sands Expo and Convention Center (the "Expo Center"). Interface
Group-Nevada, Inc. ("IGN"), the owner of the Expo Center, is beneficially owned
by the Principal Stockholder. Venetian, the New Mall Subsidiary and IGN transact
business with each other and are parties to certain agreements. The nature of
such transactions and the amounts involved are disclosed in the notes to the
financial statements.
Restatement of Previously Reported Amounts
As more fully described above, Interface Holding (an entity controlled by
LVSI's principal stockholder) owns a redeemable preferred interest in LVSI's
wholly owned subsidiary, Venetian. The preferred return on the redeemable
preferred interest has not been paid, but it has been accrued by the Company
each year and historically accounted for as a charge against capital. Under
guidance by the Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board, dividends on a subsidiary's preferred stock should be reflected
as a minority interest and recognized as a charge against income.
The Company has recognized the preferred return as a charge against income
in the accompanying 2001 financial statements, and has restated certain income
statement items, capital in excess of par value and accumulated deficit for the
years ended December 31, 2000 and 1999 to include the preferred return, which
amounts were $18.5 million and $14.4 million, respectively. Accumulated deficit
as of December 31, 1998 has also been restated for the cumulative effect of
years prior to 1999, which amount was $13.6 million. The restatement has no
impact on the previously reported carrying balances of the redeemable preferred
interest, or on the previously reported financial position of the Company. In
addition, because such preferred return was deducted from income available to
common stockholders in calculating earnings per share, the restatement has no
impact on previously reported amounts for earnings per share.
40
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 2 - Summary of Significant Accounting Policies
Principals of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Significant intercompany balances and transactions have
been eliminated.
Significant Accounting Policies and Estimates
The preparation of the consolidated financial statements in accordance with
generally accepted accounting principles requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, management evaluates those estimates, including those related to
asset impairment, accruals for slot marketing points, self-insurance,
compensation and related benefits, revenue recognition, allowance for doubtful
accounts, contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
original maturities not in excess of 90 days.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out and specific identification methods. Inventories
consist primarily of food, beverage and retail products.
Accounts Receivable
Accounts receivable are due within one year and are recorded net of amounts
estimated to be uncollectible.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided on a straight-line basis over the estimated useful lives of the
assets as follows:
Building and improvements 15 to 40 years
Furniture, fixtures and equipment 3 to 15 years
Leasehold improvements 5 to 10 years
Maintenance, repairs and renewals that neither materially add to the value
of the property nor appreciably prolong its life are charged to expense as
incurred. Gains or losses on disposition of property and equipment are included
in the statements of operations.
Management reviews assets for possible impairment of long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
such assets exceeds their fair value. Impairment losses are recognized when
estimated future undiscounted cash flows expected to result from the use of the
assets and their eventual disposition are less than their carrying amounts. See
Note 3 for adjustment of carrying values as a result of the
quasi-reorganization.
Capitalized Interest
Interest costs associated with major construction projects are capitalized.
Interest is capitalized on amounts expended on the Casino Resort using the
weighted-average cost of the Company's outstanding borrowings. Capitalization of
interest ceases when the project is substantially complete.
Pre-opening and Developmental Costs
Pre-opening and developmental costs, representing primarily direct
personnel and other costs incurred prior to the opening of the Casino Resort and
other new ventures are expensed as incurred.
41
Debt Discount and Deferred Offering Costs
Debt discount and offering costs are amortized based on the terms of the
related debt instruments using the straight-line method, which approximates the
effective interest method.
Per Share Data
Basic and diluted loss per share are calculated based upon the weighted
average number of shares outstanding. As further described in Note 10, in the
first quarter of 2002, the Company completed a stock split whereby the number of
common shares outstanding was increased to 1,000,000 from 925,000. Accordingly,
all earnings per share calculations have been adjusted to retroactively give
effect to the increase in shares outstanding to 1,000,000.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, performance of the service or delivery of the product has occurred, the
sales price is fixed or determinable and collectibility is probable.
Casino Revenue and Promotional Allowances
Casino revenue is the aggregate of gaming wins and losses. Effective in the
fourth quarter of 2000 and the first quarter of 2001, the Company adopted
Emerging Issues Task Force Issue 00-14 ("EITF 00-14") and Emerging Issues Task
Force Issue 00-22 ("EITF 00-22"), respectively. EITF 00-14 and EITF 00-22
require that cash discounts and other cash incentives related to gaming play be
recorded as a reduction of gross casino revenues. EITF 00-14 and EITF 00-22 also
require that prior periods be restated to conform to this presentation. The
Company previously recorded such discounts as an operating expense and has
reclassified prior period amounts, which has no effect on previously reported
net income. In connection with the adoption of EITF 00-22 in the first quarter
of 2001, the Company reclassified $6.1 million and $3.3 million of such
discounts in the 2000 and 1999 financial statements, respectively. In addition,
the retail value of accommodations, food and beverage, and other services
furnished to hotel/casino guests without charge is included in gross revenue and
then deducted as promotional allowances. The estimated departmental cost of
providing such promotional allowances is included primarily in casino operating
expenses as follows (in thousands):
Cost
December 31,
----------------------------------------------------
2001 2000 1999
---- ---- ----
Food and Beverage $ 9,357 $ 10,391 $ 7,126
Rooms 6,996 7,956 5,077
Other 1,752 1,904 836
--------------- --------------- ---------------
$ 18,105 $ 20,251 $ 13,039
=============== =============== ===============
The estimated retail value of such promotional allowances is included in
operating revenues as follows (in thousands):
Revenue
December 31,
----------------------------------------------------
2001 2000 1999
---- ---- ----
Food and Beverage $ 14,749 $ 16,053 $ 8,265
Rooms 25,828 27,421 15,445
Other 2,017 2,822 1,335
--------------- --------------- ---------------
$ 42,594 $ 46,296 $ 25,045
=============== =============== ===============
Rental Revenue
Minimum rental revenues are recognized on a straight-line basis over the
terms of the related lease. Percentage rents are recognized in the period in
which the tenants exceed their respective percentage rent thresholds. Charges to
tenants for real estate taxes, insurance and other shopping center operating
expenses are recognized as revenues in the period billed which approximates the
period in which the applicable costs are incurred.
42
Hotel and Food and Beverage Revenues
Hotel sales criteria are generally met at the time of occupancy. Deposits
for future hotel occupancy or food and beverage services contracts are recorded
as deferred income until revenue recognition criteria are met. Cancellation fees
for hotel and food and beverage services are recognized upon cancellation by the
customer as defined by a written contract entered into with the customer.
Joint Venture Revenue
The Company entered into an agreement during 2001 with a subsidiary of the
Solomon R. Guggenheim Foundation to operate the Guggenheim Las Vegas Museum in
the Casino Resort. The Guggenheim entity is the manager of the Guggenheim Las
Vegas Museum. The agreement requires the Company to make certain contributions
of capital. The Company is reimbursed for certain expenses incurred and certain
advances made to open the exhibition at the Guggenheim Las Vegas Museum. After
such expenses are reimbursed, the Company is to receive 49% of the operating
income generated pursuant to the agreement. The Company's share of operating
losses generated pursuant to the agreements is also 49%. The agreement is
accounted for on the equity method of accounting.
Slot Club Promotion and Progressive Jackpot Payouts
The Company has established a promotional club to encourage repeat business
from frequent and active slot machine customers and table games patrons. Members
earn points based on gaming activity and such points can be redeemed for cash.
The Company accrues for club points based upon the estimates for expected
redemptions. The Company maintains a number of progressive slot machines and
table games. As wagers are made on the respective progressive games, the amount
available to win (to be paid out when the appropriate jackpots are hit)
increases. The Company has recorded the progressive jackpots as a liability with
a corresponding charge against casino revenue.
Income Taxes
LVSI has elected to be taxed as an S Corporation and its wholly owned
subsidiaries are either limited liability companies or S Corporations, each of
which is a tax pass-through entity for federal income tax purposes. Nevada does
not levy a corporate income tax. Accordingly, no provision for federal or state
income taxes is included in the statement of operations.
Advertising Costs
Costs for advertising are expensed as incurred, except costs for
direct-response advertising, which are capitalized and amortized over the period
of the related program. Direct-response advertising consists primarily of
mailing costs associated with the direct-mail programs. Capitalized advertising
costs, included in prepaid expense, were immaterial at December 31, 2001 and
2000. Advertising costs that were expensed during the year were $5.6 million,
$8.7 million and $5.2 million in 2001, 2000 and 1999, respectively.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of short-term investments and
receivables. The short-term investments are placed with a high credit quality
financial institution, which invests primarily in money market funds.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), entitled "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If specific conditions are met, a derivative may be specifically
designated as a hedge of specific financial exposures. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and, if used in hedging activities, it depends on its effectiveness
as a hedge. SFAS 133 as amended is effective for all fiscal quarters of fiscal
years beginning after December 31, 2000. SFAS 133 should not be applied
retroactively to financial statements of prior periods. The Company adopted SFAS
133 on January 1, 2001.
The Company, from time to time, uses interest rate caps and floors and
similar financial instruments to assist in managing interest incurred on its
long-term debt. The difference between amounts received and amounts paid under
such agreements, as well as any costs or fees, is recorded as a reduction of, or
addition to, interest expense as incurred over the life of the cap and floor or
similar financial instrument.
43
The Company has a policy aimed at managing interest rate risk associated
with its current and anticipated future borrowings. This policy enables the
Company to use any combination of interest rate swaps, futures, options, cap and
similar instruments. To the extent the Company employs such financial
instruments pursuant to this policy, and the instruments qualify for hedge
accounting, they are accounted for as hedging instruments. In order to qualify
for hedge accounting, the underlying hedged item must expose the Company to
risks associated with market fluctuations and the financial instrument used must
be designated as a hedge and must reduce the Company's exposure to market
fluctuation throughout the hedge period. If these criteria are not met, a change
in the market value of the financial instrument is recognized as a gain or loss
in the period of change. Otherwise, gains and losses are not recognized except
to the extent that the financial instrument is disposed of prior to maturity.
Net interest paid or received pursuant to the financial instrument is included
as interest expense in the period.
Reclassifications
The consolidated financial statements and footnotes for prior years reflect
certain reclassifications to conform with the current year presentation, which
have no effect on previously reported net income.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement No.
141 ("SFAS 141"), entitled "Business Combinations" and Statement No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets". SFAS 141 is effective as follows:
(a) use of the pooling-of-interests method is prohibited for business
combinations initiated after June 30 2001; and (b) the provisions of SFAS 141
also apply to all business combinations accounted for by the purchase method
that are completed after June 30, 2001. There are also transition provision that
apply to business combinations completed before July 1, 2001 that were accounted
for by the purchase method. SFAS 142 is effective for fiscal years beginning
after December 15, 2001 and applies to all goodwill and other intangible assets
recognized in an entity's statement of financial position at that date,
regardless of when those assets were initially recognized.
In August 2001, the Financial Accounting Standards Board issued Statement
No. 143 ("SFAS 143"), "Accounting for Obligations Associated with the Retirement
of Long-Lived Assets". The objectives of SFAS 143 are to establish accounting
standards for the recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. SFAS 143 is effective for fiscal years
beginning after June 15, 2002.
In October 2001, the Financial Accounting Standards Board issued Statement
No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 is effective for fiscal
years beginning after December 15, 2001 and, generally, is to be applied
prospectively.
The Company is currently evaluating the provisions of SFAS 141, SFAS 142,
SFAS 143 and SFAS 144 and does not anticipate that the effects of these changes
will have an impact the Company's financial position or results of operations.
Note 3 - Strategic Redirection and Quasi-Reorganization
During 1996, in response to increasing competition and rapid market
changes, management decided to strategically redirect the Company's business. On
June 30, 1996, the Company suspended operations and closed the existing Sands
property in order to construct a new hotel-casino resort (Note 1). As a result,
approximately 1,400 employee positions were eliminated. The estimated severance
and related closing costs were included in selling, general and administrative
expense for 1996. In December 1997, the Company reevaluated its accrued closing
costs resulting in a credit of $1.8 million to selling, general and
administrative expense.
In connection with the closing of the Sands (Note 1), the Company's
director and Principal Stockholder approved a quasi-reorganization, effective as
of June 30, 1996, pursuant to which the Company revalued certain of its assets
as of that date. This revaluation, in accordance with the accounting principles
applicable to a quasi-reorganization, permitted the Company to eliminate the
adjusted accumulated deficit account as of that date, by a charge against
capital in excess of par value, and to establish a new retained earnings account
for the accumulation of the results of future operations. The
quasi-reorganization resulted in an increase in the carrying value of land of
$51.7 million and a corresponding decrease of $45.0 million in buildings and
other property and equipment, net of accumulated depreciation and $6.7 million
in severance and related closing costs. The remaining accumulated depreciation
against the cost basis of the remaining property was eliminated, and the
accumulated deficit of $155.0 million as of June 30, 1996, was transferred to
capital in excess of par value.
44
Note 4 - Restricted Cash
The net proceeds of the Company's 12 1/4% Mortgage Notes due 2004 (the
"Mortgage Notes") and its 14 1/4% Senior Subordinated Notes due 2005 (the
"Senior Subordinated Notes" and, together with the Mortgage Notes, the "Notes")
were deposited into restricted accounts and invested in cash or permitted
investments by a disbursement agent for the Company's lenders until required for
project costs under the terms of the disbursement agreement with certain of the
Company's lenders (the "Disbursement Agreement") (Note 8). Additional amounts
have been deposited to other restricted accounts, which are controlled by the
Company, but which are also restricted as to use under the terms of the
Disbursement Agreement.
Note 5 - Accounts Receivable
Components of accounts receivable were as follows:
December 31,
------------------------------
2001 2000
---------- ----------
Casino $ 58,689 $ 66,520
Hotel 13,987 15,387
Other 8,409 5,334
---------- ----------
81,085 87,241
---------- ----------
Less: allowance for doubtful accounts and discounts (23,993) (22,913)
---------- ----------
$ 57,092 $ 64,328
========== ==========
The Company extends credit to approved casino customers following
background checks and investigations of creditworthiness. At December 31, 2001,
a substantial portion of the Company's casino receivables were due from
customers residing in foreign countries. Business or economic conditions, the
legal enforceability of gaming debts, or other significant events in these
countries could affect the collectibility of such receivables.
An estimated allowance for doubtful accounts and discounts is maintained
to reduce the Company's receivables to their estimated net realizable value.
Although management believes the allowance is adequate, it is possible that the
estimated amount of cash collections with respect to the casino accounts
receivable could change.
Note 6 - Property and Equipment, Net
Property and equipment includes costs incurred to construct the Casino
Resort and consists of the following (in thousands):
December 31,
-----------------------------
2001 2000
----------- -----------
Land and land improvements $ 113,309 $ 109,863
Building and improvements 882,395 832,429
Equipment, furniture, fixtures and leasehold improvements 138,978 134,008
Construction in progress 68,542 52,129
----------- -----------
1,203,224 1,128,429
Less: accumulated depreciation and amortization (106,917) (66,336)
----------- -----------
$ 1,096,307 $ 1,062,093
=========== ===========
The Casino Resort serves as collateral for various financing facilities
(Note 8).
During the years ended December 31, 2001, 2000 and 1999, the Company
capitalized interest expense of $2.0 million, $0.1 million, and $31.3 million ,
respectively.
45
Note 7 - Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands):
December 31,
----------------------------
2001 2000
--------- ---------
Customer deposits $ 32,735 $ 33,807
Payroll and related 16,901 21,226
Taxes and licenses 6,360 8,476
Outstanding gaming chips and tokens 5,849 5,095
Other accruals 8,190 8,131
--------- ---------
$ 70,035 $ 76,735
========= =========
Note 8 - Long-Term Debt
Long-term debt consists of the following (in thousands):
December 31,
----------------------------
2001 2000
---------- ----------
Indebtedness of the Company and its Subsidiaries
other than the New Mall Subsidiary:
-----------------------------------
12 1/4% Mortgage Notes, due November 15, 2004 $ 425,000 $ 425,000
14 1/4% Senior Subordinated Notes, due November
15, 2005 (net of unamortized discount of $3,387
in 2001 and $4,263 in 2000) 94,113 93,237
Bank Credit Facility-Revolver 40,000 --
Bank Credit Facility- Tranche A Term Loan -- 103,125
Bank Credit Facility- Tranche B Term Loan -- 49,750
Bank Credit Facility- Term Loan 151,986 --
FF&E Credit Facility 53,735 75,229
Indebtedness of the New Mall Subsidiary:
----------------------------------------
Mall Tranche A Take-out Loan 105,000 105,000
Indebtedness of the Phase II Subsidiary:
----------------------------------------
Phase II Subsidiary Credit Facility 3,933 --
Phase II Unsecured Bank Loan 1,092 --
Less: current maturities (129,113) (50,119)
---------- ----------
Total long-term debt $ 745,746 $ 801,222
========== ==========
Subordinated Owner Indebtedness:
--------------------------------
Completion Guaranty Loan (Indebtedness of Venetian) $ 31,123 $ 27,071
Subordinated Mall Tranche B Take-out Loan
from Principal Stockholder (Indebtedness of New
Mall Subsidiary) 35,000 35,000
---------- ----------
Total long-term subordinated loans payable to
Principal Stockholder $ 66,123 $ 62,071
========== ==========
46
Mortgage Notes and Senior Subordinated Notes
In November 1997, the Company issued $425.0 million aggregate principal
amount of the Mortgage Notes and $97.5 million aggregate principal amount of the
Senior Subordinated Notes in a private placement. Interest on the Notes is
payable each May 15 and November 15, commencing on May 15, 1998. On June 1,
1998, LVSI and Venetian completed an exchange offer to exchange the Notes for
notes with substantially the same terms.
The Mortgage Notes are secured by second priority liens on the Notes
Collateral (the real estate improvements and personal property that comprise the
Hotel, the Casino and the Congress Center, with certain exceptions). The Senior
Subordinated Notes are unsecured. The Notes are redeemable at the option of LVSI
and Venetian at prices ranging from 100% to 106.125% for the Mortgage Notes and
100% to 107.125% for the Senior Subordinated Notes commencing after November 14,
2001, as set forth in the Notes and the indentures pursuant to which the Notes
were issued (the "Indentures"). Upon a change of control (as defined in the
Indentures), each Note holder may require LVSI and Venetian to repurchase such
Notes at 101% of the principal amount thereof plus accrued interest and other
amounts which are then due, if any. The Notes are not subject to a sinking fund
requirement.
The Senior Subordinated Notes bear cash interest at the rate of 10% per
annum through November 15, 1999, and thereafter at a rate of 14 1/4% per annum.
The Senior Subordinated Notes were sold at a $7.0 million discount to their face
amount in order to yield 14 1/4% per annum to maturity and accrued to par
through the second anniversary date of the issuance.
Bank Credit Facility
In November 1997, LVSI and Venetian and a syndicate of lenders entered into
a Bank Credit Facility (the "Bank Credit Facility") providing for up to $150.0
million in multiple draw term loans (the "Tranche A Term Loan") to the Company
for construction and development of the Casino Resort. Up to $40.0 million of
additional credit in the form of revolving loans under the Bank Credit Facility
(the "Revolver") was made available generally for working capital. In June 2000,
the Company amended certain terms of the Bank Credit Facility in order to: (1)
add a new senior secured tranche B term loan (the "Tranche B Term Loan") in the
amount of $50.0 million, the proceeds of which were applied to (x) prepay the
Tranche A Term Loan in forward order of maturity in the amount of $30.0 million
and (y) reduce outstanding loans under the Revolver by $20.0 million (net of
fees and expenses) without decreasing available commitments of the Revolver; and
(2) adjust certain financial covenants provided for in the Bank Credit Facility.
The Company recorded a $2.8 million extraordinary loss on early retirement of
debt in connection with this transaction.
On September 17, 2001, the Company entered into its second amendment and
restatement of the Bank Credit Facility in order to: (1) combine the $97.5
million Tranche A Term Loan, $49.5 million Tranche B Term Loan and an additional
$5.8 million tranche C term loan into a single term loan of $152.8 million; (2)
modify the Company's scheduled amortization payments to instead repay $381,875
per quarter until December 2002, to be followed by two bullet payments of $75.2
million during each of March 2003 and June 2003; (3) extend the commitment
termination date of the Revolver from September 15, 2001 to June 30, 2003; (4)
eliminate the "cash sweep" provision of such agreement in connection with any
excess cash flows of the Company; and (5) modify the financial covenants. The
Company recorded a $1.4 million extraordinary loss on early retirement of debt
in connection with this transaction. Each of the term loan and revolving loans
under the Bank Credit Facility has an interest rate of 350 basis points over
LIBOR. The average interest rate incurred during 2001 was 7.68% and was payable
upon expiration of each LIBOR contract, limited to three months.
The Company is required to enter into interest rate cap and/or floor
agreements to limit the impact of increases in interest rates on its floating
rate debt derived from the Bank Credit Facility. To meet the requirements of the
Bank Credit Facility, the Company entered into a cap and floor agreement during
1998 which was further amended in 2000 and 2001 (the "Cap and Floor Agreement"),
which resulted in a premium payment to counterparties and receipt of an equal
payment from the counterparties, based upon notional principal amounts for a
term equal to the term of the Bank Credit Facility. The interest rate cap
provisions of the Cap and Floor Agreement entitle the Company to receive from
the counterparties the amounts, if any, by which the selected market interest
rates exceed the strike rates stated in such agreement. Conversely, the interest
rate floor provisions of the Cap and Floor Agreement require the Company to pay
the counterparties the amounts, if any, by which the selected market interest
rates are less than the strike rates stated in such agreement. The net effect of
all such cap and floor agreements resulted in an increase of interest expense of
$0.5 million for the year ended December 31, 2001. If the Company had terminated
the cap and floor agreements as of December 31, 2001, the Company would have had
to pay a net amount of $1.9 million based on quoted market values from the
various institutions holding the swaps. In accordance with SFAS 133, the Company
has recorded the fair value of its obligation in the accompanying financial
statements. The notional amount of the Cap and Floor Agreement at December 31,
2001 was $76.2 million.
47
FF&E Financing
In December 1997, a credit facility (the "FF&E Credit Facility") secured by
certain furniture, fixtures and equipment (the "Specified FF&E") was entered
into with certain lenders (the "FF&E Lenders") to provide $97.7 million of
financing for the Specified FF&E and an electrical substation. The financing
provides for an interim loan during construction and a 60-month basic term loan
after completion of the Casino Resort. In the initial and subsequent draws, the
FF&E Lenders reimbursed the Company for amounts spent by the Company for
Specified FF&E prior to the initial draw.
Interest on the FF&E Credit Facility is the lower of (x) base rate plus 100
basis points and (y) a floating monthly rate calculated at the higher of (a) the
reserve-adjusted 30-day LIBOR rate plus 375 basis points and (b) the eurodollar
interest rate margin in effect on the Bank Credit Facility plus 125 basis
points. The average interest rate incurred during 2001 was 8.36% and was payable
quarterly. Amortization on the FF&E basic loan was 3% of the principal for the
first four quarters beginning September 30, 1999 and 5.5% of the principal for
the next 16 quarters. On September 28, 2001, the Company entered into a fourth
amendment to the FF&E Credit Facility in order to modify its financial covenants
to substantially match those under the September 17, 2001 amended and restated
Bank Credit Facility, as described above. As of December 31, 2001, $97.7 million
had been drawn and $44.0 million principal repayments had been paid under the
FF&E Credit Facility.
Completion Guaranty Loan
In accordance with its terms, advances made under the Principal Stockholder
completion guaranty (the "Completion Guaranty") are treated as a junior loan
from the Principal Stockholder to Venetian (the "Completion Guaranty Loan") that
is subordinated in right of payment to the indebtedness under the Bank Credit
Facility, the FF&E Credit Facility and the Notes. The Completion Guaranty Loan
matures on November 16, 2005, bears interest at a rate of 14 1/4% per annum and
compounds and is added to the principal balance semi-annually. Although interest
may accrue on the Completion Guaranty Loan, no cash payments with respect to
such loan may be made until senior indebtedness is repaid, except for payments
made from certain construction-related recoveries. On November 12, 1999, an
advance of approximately $23.5 million was made under the Completion Guaranty
and treated as a Completion Guaranty Loan. During 2001 and 2000 the Company
incurred interest expense of $4.1 million and $3.6 million, respectively under
this loan which has been added to the principal balance of the Completion
Guaranty Loan, resulting in a total balance of $31.1 million at December 31,
2001.
Mall Tranche A Take-out Loan
On December 20, 1999, certain take-out lenders (collectively, the "Tranche
A Take-out Lender") funded a $105.0 million Tranche A take-out loan to the New
Mall Subsidiary (the "Tranche A Take-out Loan"). The proceeds were used to repay
indebtedness under the mall construction loan facility for the Mall.
The indebtedness under the Tranche A Take-out Loan is secured by first
priority liens on the assets that comprise the Mall (the "Mall Assets"). The
annual interest rate on the Tranche A Take-out Loan is 350 basis points over
30-day LIBOR and is payable monthly. The average interest rate incurred during
2001 was 7.71%. The Tranche A Take-out Loan is due in full on December 20, 2002.
The Company currently plans to refinance the Tranche A Take-out Loan prior to
its due date of December 20, 2002; however, no assurance can be given that
refinancing for such indebtedness will be available to the Company prior to this
date. No principal payments are due thereunder until December 20, 2002.
The Company is required to enter into an interest rate cap agreement to
limit the impact of increases in interest rates on its floating rate debt
derived from the Tranche A Take-out Loan. To meet the requirements of the
Tranche A Take-out Loan, the Company entered into a cap agreement during 2000
(the "Cap Agreement"), which resulted in a premium payment to counterparties
based upon notional principal amounts for a term equal to the term of the
Tranche A Take-out Loan. The interest rate cap provisions of the Cap Agreement
entitle the Company to receive from the counterparties the amounts, if any, by
which the selected market interest rates exceed the strike rates stated in such
agreement. The net effect on interest expense of the cap agreements was zero for
the year ended December 31, 2001. If the Company had terminated the Cap
Agreement as of December 31, 2001, the Company would not have had to pay any
amounts based on quoted market values from the various institutions holding the
swaps. The notional amount of the Cap Agreement at December 31, 2001 was $42.3
million.
The New Mall Subsidiary is also required pursuant to the Tranche A Take-out
Loan to maintain certain funds in escrow for mall management fees, tenant
disputes, tenant allowances and leasing commissions. At each of December 31,
2001 and 2000, $1.1 million was held in escrow for these purposes and classified
as restricted cash in the accompanying financial statements.
48
Mall Tranche B Take-out Loan
On December 20, 1999, the Principal Stockholder funded a Tranche B take-out
loan to provide $35.0 million in financing to the New Mall Subsidiary (the
"Tranche B Take-out Loan" and, together with the Tranche A Take-out Loan, the
"Mall Take-out Financing"). The proceeds, along with $105.0 million of proceeds
from the Tranche A Take-out Loan, were used to repay the mall construction loan
facility for the Mall in full.
The indebtedness under the Tranche B Take-out Loan is secured by second
priority liens on the Mall Assets. The loan bears interest at 14% per annum and
is payable monthly. During 2001, 2000 and 1999, the Company incurred interest
expense of $5.0 million, $5.2 million and $0.2 million, respectively, under this
loan. The initial maturity date of the Tranche B Take-out Loan is December 20,
2004 with a right of extension to December 20, 2007. No principal payments are
due thereunder until maturity.
Phase II Subsidiary Credit Facility
On October 19, 2001, the Phase II Subsidiary entered into a loan agreement
providing for a $17.5 million term and revolving loan, with a one time option to
increase such loan to $30.0 million (the "Phase II Subsidiary Credit Facility").
The Phase II Subsidiary Credit Facility is secured by a first priority mortgage
on the land on the site located adjacent to the Casino Resort (the "Phase II
Land"), as well as the Phase II Subsidiary's interest in a five year lease of
the Phase II Land to Venetian for an annual rental payment of $8.0 million (the
"Phase II Lease"). The Phase II Subsidiary immediately drew $12.5 million for a
letter of credit under the revolver portion of the Phase II Subsidiary Credit
Facility (the "Letter of Credit") pursuant to the terms of and to be provided as
credit support for the Bank Credit Facility. The Letter of Credit was released
in February 2002, pursuant to its terms, immediately following the first fiscal
quarter period ending after September 30, 2001 in which the Company's
consolidated adjusted EBITDA exceeded $30.0 million. The Company drew $3.9
million on the Phase II Credit Facility during 2001. The remaining portion of
the Phase II Subsidiary Credit Facility and proceeds from rental payments from
Venetian to the Phase II Subsidiary under the Phase II Lease are each available
for any Phase II Resort pre-development expenses or may be loaned or distributed
by the Phase II Subsidiary to the Company for other liquidity needs. The Phase
II Subsidiary Credit Facility bears interest at LIBOR plus 400 basis points and
is due on June 30, 2003. The average interest rate incurred during 2001 was 6.5%
and was payable upon expiration of each LIBOR contract, limited to three months.
Phase II Unsecured Bank Loan
In February 2001, the Phase II Subsidiary entered into an unsecured bank
line of credit, as amended on May 31, 2001, for $1,092,000 and payable on July
15, 2002. This line of credit bears interest at LIBOR plus 100 basis points. The
proceeds of the line of credit were used to fund payments of Phase II Subsidiary
operating costs. The average interest rate incurred during 2001 was 5.25%.
Scheduled Maturities of Long-Term Debt
Scheduled maturities of long-term debt outstanding at December 31, 2001 are
summarized as follows: $129.1 million for 2002, $215.9 million for 2003, $470.7
million for 2004, and $125.3 million for 2005 (which includes unamortized
discount on the Senior Subordinated Notes).
Waivers
On November 12, 1999, the Company entered into various limited waiver
agreements (the "Waivers") with the administrative agent and lenders under: (1)
the Bank Credit Facility; (2) the FF&E Credit Facility; and (3) certain parties
to the Disbursement Agreement. Under the Waivers, the various lenders waived
certain defaults and events of default (to the extent, if any, they existed or
may have existed) arising from the Company's litigation with Lehrer McGovern
Bovis, Inc., its construction manager (the "Construction Manager"), the facts
relating to the underlying dispute with the Construction Manager and the
mechanics liens that were filed against the Casino Resort (Note 13). As
conditions to the effectiveness of the Waivers, the Company and the Principal
Stockholder, among other things: (i) agreed to pay a fee to the lenders under
the Bank Credit Facility and the FF&E Credit Facility; (ii) agreed to purchase
surety bonds for all of the mechanics liens and cause the title company to
provide endorsements ensuring that the deeds of trust under the Bank Credit
Facility and the Mortgage Notes are superior in priority to all mechanics liens;
and (iii) agreed that the Principal Stockholder's $25.0 million Completion
Guaranty would, notwithstanding the prior agreement of the parties providing for
termination of such guaranty upon substantial completion of the Casino Resort,
remain in effect until "final completion" (i.e., the completion of all remaining
punchlist items and the final resolution or settlement of all disputes with the
Construction Manager and subcontractors) and be unlimited in amount with respect
to all construction costs arising from scope changes. In order to be able to
purchase the surety bonds, the Principal Stockholder had to provide a $5.0
million irrevocable letter of credit as collateral to the bonding company. All
of the conditions to the effectiveness of the limited waivers were satisfied on
November 12, 1999.
49
The debt instruments described above contain certain covenants that require
the Company to pass a number of financial tests relating to, among other things,
a minimum consolidated earnings before interest, taxes, depreciation and
amortization ("EDITDA"), a consolidated leverage ratio, and a fixed charge
coverage ratio (all as defined in the respective credit agreements).
Additionally, the debt instruments contain certain restrictions that, among
other things, limit the ability of the Company and/or certain subsidiaries to
incur additional indebtedness, issue disqualified stock or equity interests, pay
dividends or make other distributions, repurchase equity interests or certain
indebtedness, create certain liens, enter into certain transactions with
affiliates, enter into certain mergers or consolidations or sell assets of the
Company without prior approval of the lenders or noteholders. The Company is
also a party to certain intercreditor agreements. The intercreditor agreements
set forth the lender's interests and claims in the Company's assets as
collateral for borrowings.
Consolidated EBITDA is dependent on the Company's results of operations,
which in turn are partially dependent on tables games revenues. While the table
games win percentage is reasonably predictable over the long term, it can
fluctuate significantly from quarter to quarter, affecting table games revenues.
The financial covenants involving EBITDA are applied on a rolling four-quarter
basis, and the Company's compliance with financial covenants can be temporarily
affected if the Company experiences a decline in hotel occupancy or room rates,
or an unusually low win percentage in a particular quarter, which is not offset
in subsequent quarters or by other results of operations.
The Company was challenged to meet these covenant tests in 2001 for certain
quarters during the rolling measurement period due to an extremely low win
percentage and reduced travel to Las Vegas during the fourth quarter of 2001
because of the September 11th terrorist attacks. These covenants allow the
Principal Stockholder to increase EBITDA for measurement purposes by issuing a
standby letter of credit to the Company's lenders. The covenants also allow the
New Mall Subsidiary and the Phase II Subsidiary, subject to certain limitations,
to make distributions to LVSI which would increase EBITDA for debt covenant
measurement purposes. The Company used the letter of credit mechanism in the
amount of $10.0 million during the first quarter of 2001. Pursuant to the terms
of the Company's indebtedness, the letter of credit was subsequently reduced to
$6.9 million during the third quarter of 2001.
Due to decreased casino revenues attributable to an unusually low table
games win percentage, the Company also would not have met its financial
covenants in the second quarter of 2001. As a result, on June 29, 2001, the
Company entered into limited waivers, consents and amendments to the Bank Credit
Facility and the FF&E Credit Facility in order to, among other things: (1)
obtain a waiver with respect to each of its minimum fixed charge ratio covenant,
maximum leverage ratio covenant and minimum consolidated adjusted EBITDA
covenant for the quarter ending June 30, 2001; and (2) amend the maximum
consolidated capital expenditures covenant. Additionally, during the fourth
quarter of 2001, the Company entered into a limited waiver amendment to the Bank
Credit Facility and FF&E Credit Facility to obtain a wavier with respect to the
minimum consolidated adjusted EBITDA requirement. These covenants also allow the
New Mall Subsidiary and the Phase II Subsidiary to make distributions to LVSI
which would increase EBITDA for debt covenant measurement purposes. The ability
of the New Mall Subsidiary and the Phase II Subsidiary to make distributions is
subject to certain limitations. During February 2002, the New Mall Subsidiary
paid a $7.0 million distribution to Venetian.
For the next twelve months, the Company expects to fund Casino Resort
operations, capital expenditures and debt service requirements (excluding the
Tranche A Take-out Loan) from existing cash balances, operating cash flow,
borrowings under its revolving credit line (the "Revolver") to the extent that
funds are available, distributions of excess cash from the New Mall Subsidiary
to the extent permitted under the Tranche A Take-out Loan, and loans or
distributions of excess cash from the Phase II Subsidiary as a result of rental
payments under the Phase II Lease and borrowings under the Phase II Subsidiary
Credit Facility.
The Company expects to be challenged to meet certain of its covenant tests
in the first quarter of 2002 due to the carry-over effects that the extremely
low win percentage for certain of its fiscal 2001 quarters will have on the
rolling measurement period. The Company has certain options available to it in
the event that it needs to seek a cure in order to meet such covenants,
including the ability to draw down on the Phase II Subsidiary Credit Facility,
make distributions of excess cash from the Mall under the terms of the Tranche A
Take-out Loan or the negotiation with its lenders of further waivers for debt
covenant violations in 2002. The Company anticipates that ultimately its win
percentage will return to normal levels and that it will no longer need to rely
on the various cures and waivers described above.
The Company is also currently in active discussions to consider refinancing
all or a portion of its outstanding indebtedness, including the Tranche A
Take-out Loan. This review is taking into account the cost to refinance all
outstanding indebtedness, current interest rates, collateral arrangements, and
the ability to raise additional funds to fund on-going and upcoming projects.
The Company has not yet entered into any definitive agreements for a refinancing
and no assurance can be given that refinancing for some or all of such
outstanding indebtedness will be available, or that such a refinancing will be
on terms that will be favorable to the Company.
50
Fair Value
Estimated fair values of the Company's debt and related financial
instruments are as follows (in thousands) :
December 31,
---------------------------------------------------------------
2001 2000
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
12 1/4% Mortgage Notes $ 425,000 $ 439,875 $ 425,000 $ 422,875
14 1/4% Senior Subordinated Notes 94,113 95,995 93,237 93,600
Mall Tranche A Take-out Loan 105,000 105,000 105,000 105,000
Mall Tranche B Take-out Loan 35,000 35,000 35,000 35,000
Completion Guaranty Loan 31,123 31,123 27,071 27,071
Bank Credit Facility-Tranche A Term Loan -- -- 103,125 103,125
Bank Credit Facility-Tranche B Term Loan -- -- 49,750 49,750
Bank Credit Facility-Term Loan 151,986 151,986 -- --
Bank Credit Facility-Revolver 40,000 40,000 -- --
Phase II Subsidiary Credit Facility 3,933 3,933 -- --
Phase II Subsidiary Bank Loan 1,092 1,092 -- --
FF&E Credit Facility 53,735 53,735 75,229 75,229
Cap and Floor Agreement 1,937 1,937 -- 184
Cap Agreement 1 1 -- 4
The fair values of the Mortgage Notes and the Senior Subordinated Notes are
based on quoted market prices. The fair values of the Senior Subordinated Notes
are based upon the $94.1 million carrying value amounts. The fair values of
other indebtedness and the FF&E Credit Facility approximate their respective
carrying amounts based on the variable nature of these facilities. The fair
value of the Cap and Floor Agreement and the Cap Agreement are based upon quotes
from brokers.
Note 9 - Redeemable Preferred Interest in Venetian Casino Resort, LLC
During 1997, Interface Holding contributed $77.1 million in cash to
Venetian in exchange for a Series A preferred interest (the "Series A Preferred
Interest") in Venetian. By its terms, the Series A Preferred Interest was
convertible at any time into a Series B preferred interest in Venetian (the
"Series B Preferred Interest"). In August 1998, the Series A Preferred Interest
was converted into the Series B Preferred Interest. The rights of the Series B
Preferred Interest include the accrual of a preferred return of 12% from the
date of contribution in respect of the Series A Preferred Interest. Until the
indebtedness under the Bank Credit Facility is repaid and cash payments are
permitted under the restricted payment covenants of the indentures entered into
in connection with the Notes, the preferred return on the Series B Preferred
Interest will accrue and will not be paid in cash. Commencing in November 2009,
distributions must be made to the extent of the positive capital account of the
holder. During the second and third quarters of 1999, Interface Holding
contributed $37.3 million and $7.1 million, respectively, in cash in exchange
for an additional Series B Preferred Interest. During the years ended December
31, 2001, 2000 and 1999, $20.8 million, $18.5 million and $14.4 million,
respectively, were accrued on the Series B Preferred Interest related to the
contributions made. There were no distributions of preferred interest or
preferred return paid during 1999, 2000 or 2001.
Note 10 - Stockholder's Equity
Increase in Shares Authorized and Outstanding
In November 1997, the Company's Board of Directors increased the number of
authorized shares of LVSI from 100,000 to 3,000,000 and authorized and consented
to increase the number of shares outstanding with respect to the outstanding
shares of common stock of LVSI, so that each share of such common stock would
henceforth be deemed to represent 18.4996 shares of common stock, resulting in
925,000 shares of common stock outstanding on such date. The par value remained
$.10 per share. In the first quarter of 2002, the Company completed a stock
split whereby the number of common shares held by the Principal Stockholder was
increased to 1,000,000 from 925,000. At the date of the stock split, the
Principal Stockholder maintained 100% ownership of the Company's common stock.
All references to share and per share data herein have been adjusted
retroactively to give effect to the increase in shares outstanding to 1,000,000.
51
1997 Fixed Stock Option Plan
The Company established a nonqualified stock option plan, which provides
for the granting of stock options pursuant to the applicable provisions of the
Internal Revenue Code and regulations. The stock option plan provides for the
granting of up to 75,000 shares of common stock to officers and other key
employees of the Company. As of December 31, 2001, no grants under the stock
option plan had occurred. In the first quarter of 2002, options to purchase
49,900 shares, which represented approximately 5% of the Company's outstanding
common stock, were granted from the Principal Stockholder to certain key
employees of the Company. On the date of grant, the exercise price of the
options of $271 per share was higher than the fair market value of the Company's
common stock based upon a preliminary determination of the fair market value of
a per share minority interest in the common stock of LVSI, performed by an
independent third-party appraiser. The options granted were fully vested and
exercisable upon grant. All of the options were exercised immediately after
issuance by the respective employees by delivery of a notice of exercise. The
notice contemplates that the exercise price of the options will be loaned to the
optionees by the Principal Stockholder on a secured basis under full recourse
notes. The applicable shares of common stock have not yet been delivered.
Note 11 - Employee Savings Plan
Participation in the Venetian Casino Resort, LLC 401 (k) employee savings
plan is available for all full time employees. The savings plan allows
participants to defer, on a pre-tax basis, a portion of their salary and
accumulate tax-deferred earnings as a retirement fund. Venetian matches 150% of
the first $390 of employee contributions and 50% of employee contributions in
excess of $390 up to a maximum of 3% of participating employee's eligible gross
wages. For the year ended December 31, 2001, 2000 and 1999, contributions
accrued under the savings plan were $2.0 million, $1.8 million and $0.8 million,
respectively.
Note 12 - Related Party Transactions
As support for the development and operation of the Casino Resort, the
Principal Stockholder or his affiliates currently provide the following:
(i) a construction completion guaranty unlimited in amount with respect to
excess construction costs due to scope changes, with a remaining liability
of approximately $5.0 million (collateralized by cash and cash equivalents)
with respect to all other construction costs. On November 12, 1999,
approximately $23.5 million of the completion guaranty collateral was
utilized for excess construction costs, leaving the $5.0 million of cash
collateral remaining as described above;
(ii) the $35.0 million Tranche B Take-out Loan; and
(iii)a $20.0 million unsecured guaranty of the $105.0 million Tranche A Take-out
Loan.
The Principal Stockholder is a partner in four entities formed to operate
restaurants in the Casino Resort. The terms and conditions of the leases granted
by the Company for such restaurants are at amounts which management believes
would be no less favorable than those negotiated with independent third parties.
Valentino Las Vegas LLC and Night Market, LLC paid Venetian $1.0 million, $0.7
million and zero, and Postrio Las Vegas LLC and Carnevale Coffee Bar LLC paid
the Mall Subsidiary $1.1 million, $0.8 million and zero for the years ended
December 31, 2001, 2000 and 1999, respectively.
During 2001, the Principal Stockholder guaranteed a $2.9 million bank loan
made to architects of the Phase II Subsidiary to secure a trade payable owed to
the architects by the Phase II Subsidiary.
During November 1999, the Principal Stockholder purchased idle construction
equipment from the Company (tower cranes) for $2.0 million, the cost basis of
the equipment which was its fair value.
During the fourth quarter of 1999, the Principal Stockholder purchased
certain construction claims from various contractors and subcontractors for an
aggregate price equal to the aggregate amount of the claims (approximately $1.6
million). On November 12, 1999, with the approval of all of the Company's
lenders, the Company paid the Principal Stockholder the aggregate amount of
these claims.
In 2001, LVSI received from, and rendered to, IGN and its affiliates
certain administrative and other services such as travel. Any such services were
provided at amounts which management believes would be no less favorable than
those negotiated with independent third parties. The Company paid certain
affiliates $1.1 million, $2.1 million and $0.9 million for these services during
2001, 2000 and 1999, respectively.
IGN provides audio visual services to group customers of the Casino Resort.
These services are provided pursuant to a contract that provides for an equal
sharing of revenues after direct operating expenses. The Company received $2.5
million, $3.7 million and $1.3 million pursuant to this contract during 2001,
2000 and 1999, respectively.
52
The Company, the New Mall Subsidiary and IGN are parties to an Amended and
Restated Reciprocal Easement, Use and Operating Agreement (the "Cooperation
Agreement") which, among other things, provides for the integrated operation of
all the facilities and addresses, encroachments, joint marketing and the sharing
of certain facilities and costs related thereto.
In conjunction with the Phase II Subsidiary Credit Facility on October 19,
2001, the Phase II Subsidiary leased the Phase II Land to Venetian for five
years at an annual rent of $8.0 million. Prior to October 2001, IGN leased
parking spaces on the Phase II Land from the Phase II Subsidiary for rent of
$5,000 per month.
Note 13 - Commitments and Contingencies
Energy Services Agreements and Operating Lease Agreements
During 1997, Venetian and the Mall Subsidiary entered into separate energy
service agreements with a heating and air conditioning ("HVAC") provider (the
"HVAC Provider"). Under the terms of the energy services agreement and other
separate energy services agreements, HVAC energy and services will be purchased
by Venetian, the New Mall Subsidiary, its mall tenants and IGN over initial
terms expiring in 2009 with an option to collectively extend the terms of their
agreements for two consecutive five-year periods.
Pursuant to the Company's construction management contract (as more fully
defined under "Litigation" below), the HVAC plant was constructed by the
Construction Manager on land owned by the Company and leased to the HVAC
Provider. The HVAC equipment is owned by the HVAC Provider, which paid all costs
("HVAC Costs") in connection with the purchase and installation of the HVAC
equipment. The total HVAC Costs were $70.0 million.
The charges payable under the separate energy services agreements include a
fixed component applied to the HVAC Costs paid by the HVAC Provider,
reimbursement of operational and related costs and a management fee.
As of December 31, 2001, Venetian and the New Mall Subsidiary were
obligated under the energy services agreements to make future minimum payments
as follows (in thousands):
Years Ending December 31,
2002 $ 7,657
2003 7,657
2004 7,657
2005 7,657
2006 7,657
Thereafter 19,142
-------
Total minimum payments $57,427
=======
Expenses incurred under the energy services agreements were $6.2 million,
$7.0 million ($7.657 million less leasee reimbursements) and $4.3 million for
the years ended December 31, 2001, 2000 and 1999, respectively. The New Mall
Subsidiary is responsible for 19% of energy services rental payments and these
amounts exclude payments by IGN. Expenses incurred under short-term, variable
rate operating lease agreements totaled $1.9 million, $1.7 million and $1.2
million for the years ended December 31, 2001, 2000 and 1999, respectively.
Litigation
The Company is party to litigation matters and claims related to its
operations and construction of the Casino Resort that could have a material
adverse effect on the financial position, results of operations or cash flows of
the Company to the extent such litigation is not covered by the Insurance
Policy.
The construction of the principal components of the Casino Resort was
undertaken by the Construction Manager pursuant to a construction management
agreement and certain amendments thereto (as so amended, the "Construction
Management Contract"). The Construction Management Contract established a final
guaranteed maximum price (the "Final GMP") of $645.0 million, so that, subject
to certain exceptions (including an exception for cost overruns due to "scope
53
changes"), the Construction Manager was responsible for any costs of the work
covered by the Construction Management Contract in excess of the Final GMP. The
obligations of the Construction Manager under the Construction Management
Contract are guaranteed by Bovis, Inc. ("Bovis" and such guaranty, the "Bovis
Guaranty"), the Construction Manager's direct parent at the time the
Construction Management Contract was entered into. Bovis' obligations under the
Bovis Guaranty are guaranteed by The Peninsular and Oriental Steam Navigation
Company ("P&O"), a British public company and the Construction Manager's
ultimate parent at the time the Construction Management Contract was entered
into (such guaranty, the "P&O Guaranty").
On July 30, 1999, Venetian filed a complaint against the Construction
Manager and Bovis in United States District Court for the District of Nevada.
The action alleges breach of contract by the Construction Manager of its
obligations under the Construction Management Contract and a breach of contract
by Bovis of its obligations under the Bovis Guaranty, including failure to fully
pay trade contractors and vendors and failure to meet the April 21, 1999
guaranteed completion date. The Company amended this complaint on November 23,
1999 to add P&O as an additional defendant. The suit is intended to ask the
courts, among other remedies, to require the Construction Manager and its
guarantors to pay its contractors, to compensate Venetian for the Construction
Manager's failure to perform its duties under the Construction Management
Contract and to pay the Company the agreed upon liquidated damages penalty for
failure to meet the guaranteed substantial completion date. Venetian seeks total
damages in excess of $100.0 million. The Construction Manager subsequently filed
motions to dismiss the Company's complaint on various grounds, which the Company
opposed. The Construction Manager's principal motions to date have either been
denied by the court or voluntarily withdrawn.
In response to Venetian's breach of contract claims against the
Construction Manager, Bovis and P&O, the Construction Manager filed a complaint
on August 3, 1999 against Venetian in the District Court of Clark County,
Nevada. The action alleges a breach of contract and quantum meruit claims under
the Construction Management Contract and also alleges that Venetian defrauded
the Construction Manager in connection with the construction of the Casino
Resort. The Construction Manager seeks damages, attorney's fees and costs and
punitive damages. In the lawsuit, the Construction Manager claims that it is
owed approximately $90.0 million from Venetian and its affiliates. This
complaint was subsequently amended by the Construction Manager, which also filed
an additional complaint against the Company relating to work done and funds
advanced with respect to the contemplated development of the Phase II Resort.
Based upon its preliminary review of the complaints, the fact that the
Construction Manager has not provided Venetian with reasonable documentation to
support such claims, and the Company's belief that the Construction Manager has
materially breached its agreements with the Company, the Company believes that
the Construction Manager's claims are without merit and intends to vigorously
defend itself and pursue its claims against the Construction Manager in any
litigation.
In connection with these disputes, as of December 31, 1999 the Construction
Manager and its subcontractors filed mechanics liens against the Casino Resort
for $145.6 million and $182.2 million, respectively. The Company believes that a
major reason these lien amounts exceed the Construction Manager's claims of
$90.0 million is based upon a duplication of liens through the inclusion of
lower-tier claims by subcontractors in the liens of higher-tier contractors,
including the lien of the Construction Manager. As of December 31, 1999, the
Company had purchased surety bonds for virtually all of the claims underlying
these liens (other than approximately $15.0 million of claims with respect to
which the Construction Manager purchased bonds). As a result, there can be no
foreclosure of the Casino Resort in connection with the claims of the
Construction Manager and its subcontractors. However, the Company will be
required to pay or immediately reimburse the bonding company if and to the
extent that the underlying claims are judicially determined to be valid. If such
claims are not settled, it is likely to take a significant amount of time for
their validity to be judicially determined.
The Company believes that these claims are, in general, unsubstantiated,
without merit, overstated and/or duplicative. The Construction Manager itself
has publicly acknowledged that at least some of the claims of its subcontractors
are without merit. In addition, the Company believes that pursuant to the
Construction Management Contract and the Final GMP, the Construction Manager is
responsible for payment of any subcontractors' claims to the extent they are
determined to be valid. The Company may also have a variety of other defenses to
the liens that have been filed, including, for example, the fact that the
Construction Manager and its subcontractors previously waived or released their
rights to file liens against the Casino Resort. The Company intends to
vigorously defend itself in any lien proceedings.
54
On August 9, 1999, the Company notified the insurance companies providing
coverage under its liquidated damages insurance policy (the "LD Policy") that it
has a claim under the LD Policy. The LD Policy provides insurance coverage for
the failure of the Construction Manager to achieve substantial completion of the
portions of the Casino Resort covered by the Construction Management Contract
within 30 days of the April 21, 1999 deadline, with a maximum liability under
the LD Policy of approximately $24.1 million and with coverage being provided,
on a per-day basis, for days 31-120 of the delay in the achievement of
substantial completion. Because the Company believes that substantial completion
was not achieved until November 12, 1999, the Company's claim under the LD
Policy is likely to be for the above-described maximum liability of $24.1
million. The Company expects the LD Policy insurers to assert many of the same
claims and defenses that the Construction Manager has asserted or will assert in
the above-described litigations. Liability under the LD Policy may ultimately be
determined by binding arbitration.
In June 2000, the Company purchased an insurance policy (the "Insurance
Policy") for loss coverage in connection with all litigation relating to the
construction of the Casino Resort (the "Construction Litigation"). Under the
Insurance Policy, the Company will self-insure the first $45.0 million and the
insurer will insure up to the next $80.0 million of any possible covered losses.
The Insurance Policy provides coverage for any amounts determined in the
Construction Litigation to be owed to the Construction Manager or its
subcontractors relating to claimed delays, inefficiencies, disruptions, lack of
productivity/unauthorized overtime or schedule impact, allegedly caused by the
Company during construction of the Casino Resort, as well as any defense costs.
The insurance is in addition to, and does not affect, any scope change
guarantees provided by the Principal Stockholder pursuant to the Completion
Guaranty.
All of the pending litigation described above is in preliminary stages and
it is not yet possible to determine a range of loss or its ultimate outcome. If
any litigation or other lien proceedings concerning the claims of the
Construction Manager or its subcontractors were decided adversely to the
Company, such litigation or other lien proceedings could have a material adverse
effect on the financial position, results of operations or cash flows of the
Company to the extent such litigation or lien proceedings are not covered by the
Insurance Policy.
Note 14 - Minimum Lease Income
The Company has entered into a number of operating leases in relation to
the New Mall Subsidiary and various retail and food and beverage outlets in the
Casino Resort, which range in length from 5 to 20 years. The future minimum
lease income under these leases (of which approximately 90% is attributable to
the New Mall Subsidiary) consisted of the following at December 31, 2001 (in
thousands):
2002 $ 19,342
2003 19,117
2004 18,382
2005 16,467
2006 15,964
Thereafter 62,542
---------
Total $ 151,814
=========
Most of the leases include provisions for reimbursements of other charges
including real estate taxes, utilities and other operating costs. Total
reimbursements amounted to $11.4 million, $9.9 million and $3.6 in 2001, 2000
and 1999, respectively.
The New Mall Subsidiary has entered into an agreement with Forest City
Enterprises (the "Mall Manager"), a subsidiary of Forest City Ratner
Enterprises, a leading developer and manager of retail and commercial real
estate developments, whereby the Mall Manager manages the Mall and supervises
and assists in the creation of an advertising and promotional program and a
marketing plan for the Mall. The Mall Manager is also responsible for, among
other things, preparation of a detailed plan for the routine operation of the
Mall, collection and deposit procedures for rents and other tenant charges,
supervision of maintenance and repairs and, on an annual basis, preparation of a
detailed budget (including any anticipated extraordinary expenses and capital
expenditures) for the Mall. The term of the management contract is five years
from June 19, 1999, the date the Mall opened to the public. The Mall Manager
receives a management fee of 2% of all gross rents received from the operation
of the Mall; provided that the Mall Manager will receive a minimum fee of
$450,000 per year. For the years ended December 31, 2001, 2000 and 1999,
management fees paid to the Mall Manager were $450,000, $450,000 and $240,000,
respectively. Beginning in June 2002, the minimum management fee will increase
to $600,000 per year.
55
Note 15 - Summarized Financial Information
Venetian and LVSI are co-obligors of the Notes and certain other
indebtedness related to construction of the Casino Resort and are jointly and
severally liable for such indebtedness (including the Notes). Venetian, Mall
Intermediate, Mall Construction and Lido Intermediate (collectively, the
"Subsidiary Guarantors") are wholly-owned subsidiaries of LVSI. The Subsidiary
Guarantors have jointly and severally guaranteed (or are co-obligors of) such
debt on a full and unconditional basis. No other subsidiary of LVSI is an
obligor or guarantor of any of the Casino Resort financing.
Because the New Mall Subsidiary is not a guarantor of any indebtedness of
the Company (other than the Mall Take-out Financing), creditors of the Company's
entities comprising the Company other than the New Mall Subsidiary (including
the holders of the Notes but excluding creditors of the New Mall Subsidiary) do
not have a direct claim against the Mall Assets. As a result, indebtedness of
the entities comprising the Company other than the New Mall Subsidiary
(including the Notes) is, with respect to the Mall Assets, effectively
subordinated to indebtedness of the New Mall Subsidiary. The New Mall Subsidiary
is not restricted by any of the debt instruments of LVSI, Venetian or the
Company's other subsidiary guarantors (including the Indentures) from incurring
any indebtedness. The terms of the Tranche A Take-out Loan prohibit the New Mall
Subsidiary from paying dividends or making distributions to any of the other
entities comprising the Company unless payments under the Tranche A Take-out
Loan are current, and, with certain limited exceptions, prohibit the New Mall
Subsidiary from making any loans to such entities. Any additional indebtedness
incurred by the New Mall Subsidiary may include additional restrictions on the
ability of the New Mall Subsidiary to pay any such dividends and make any such
distributions or loans.
Prior to October 1998, Venetian owned approximately 44 acres of land on or
near the Las Vegas Strip (the "Strip"), on the site of the former Sands. Such
property includes the site on which the Casino Resort was constructed.
Approximately 14 acres of such land was transferred to the Phase II Subsidiary
in October 1998. On December 31, 1999, an additional 1.75 acres of land was
contributed indirectly by the Principal Stockholder to the Phase II Subsidiary.
The Phase II Resort is planned to be constructed adjacent to the Casino Resort.
Because the Phase II Subsidiary will not be a guarantor of the Company's
indebtedness, creditors of the Company (including the holders of the Notes) will
not have a direct claim against the assets of the Phase II Subsidiary. As a
result, the indebtedness of the Company (including the Notes) will, with respect
to these assets, be effectively subordinated to indebtedness of the Phase II
Subsidiary. The Phase II Subsidiary is not subject to any of the restrictive
covenants of the debt instruments of the Company (including the Notes). Any
indebtedness incurred by the Phase II Subsidiary in addition to the Phase II
Subsidiary Credit Facility may include material restrictions on the ability of
the Phase II Subsidiary to pay dividends or make distributions or loans to the
Company and its subsidiaries.
Separate financial statements and other disclosures concerning each of
Venetian and the Subsidiary Guarantors are not presented below because
management believes that they are not material to investors. Summarized
financial information of LVSI, Venetian, the Subsidiary Guarantors and the
non-guarantor subsidiaries on a combined basis as of December 31, 2001 and 2000
and the three years for the period ended December 31, 2001 is as follows (in
thousands):
56
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED BALANCE SHEETS
December 31, 2001
GUARANTOR SUBSIDIARIES
----------------------
Lido Mall
Venetian Intermediate Intermediate
Las Vegas Casino Resort Holding Holding
Sands, Inc. LLC Company LLC Company LLC
-------------- --------------- -------------- --------------
Cash and cash equivalents .................................. $ 37,367 $ 7,806 $ 4 $ 4
Restricted cash and investments ............................ -- 1,528 -- --
Intercompany receivable .................................... 60,882 -- -- --
Accounts receivable, net ................................... 37,416 18,240 -- --
Inventories ................................................ -- 4,747 -- --
Prepaid expenses ........................................... 546 2,953 -- --
-------------- --------------- -------------- --------------
Total current assets ..................................... 136,211 35,274 4 4
Property and equipment, net ................................ -- 878,239 -- --
Investment in Subsidiaries ................................. 843,935 -- -- --
Deferred offering costs, net ............................... -- 16,250 -- --
Other assets, net .......................................... 3,771 25,691 -- --
-------------- --------------- -------------- --------------
$ 983,917 $ 955,454 $ 4 $ 4
============== ============== ============== ==============
Accounts payable ........................................... $ 2,880 $ 33,105 $ -- $ --
Construction payable ....................................... -- 22,955 -- --
Construction payable-contested ............................. -- 7,232 -- --
Intercompany payables ...................................... -- 39,455 -- --
Accrued interest payable ................................... -- 9,125 -- --
Other accrued liabilities .................................. 21,249 47,074 -- --
Current maturities of long-term debt (3).................... 23,021 23,021 -- --
-------------- --------------- -------------- --------------
Total current liabilities ................................ 47,150 181,967 -- --
Other long-term liabilities ................................ -- 3,274 -- --
Long-term debt (3).......................................... 741,813 741,813 -- --
Long-term subordinated loans payable to Principal Stockholder -- 31,123 -- --
-------------- --------------- -------------- --------------
788,963 958,177 -- --
-------------- --------------- -------------- --------------
Redeemable Preferred interest in Venetian .................. -- 188,778 -- --
-------------- --------------- -------------- --------------
Stockholder's equity (Deficit).............................. 194,954 (191,501) 4 4
-------------- --------------- -------------- --------------
$ 983,917 $ 955,454 $ 4 $ 4
============== ============== ============== ==============
57
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED BALANCE SHEETS (continued)
December 31, 2001
NON-GUARANTOR SUBSIDIARIES
--------------------------
Grand Canal
Shops Mall Other Non- Consolidating/
Subsidiary Guarantor Eliminating
LLC (1) Subsidiaries (2) Entries Total
-------------- -------------- --------------- --------------
Cash and cash equivalents ................................... $ 6,650 $ 3,105 $ -- $ 54,936
Restricted cash and investments ............................. 1,118 -- -- 2,646
Intercompany receivable ..................................... -- 1,508 (62,390) --
Accounts receivable, net .................................... 1,436 -- -- 57,092
Inventories ................................................. -- -- -- 4,747
Prepaid expenses ............................................ 363 -- -- 3,862
-------------- -------------- --------------- --------------
Total current assets ...................................... 9,567 4,613 (62,390) 123,283
Property and equipment, net ................................. 136,167 81,901 -- 1,096,307
Investment in Subsidiaries .................................. -- -- (843,935) --
Deferred offering costs, net ................................ 1,903 836 -- 18,989
Other assets, net ........................................... 3,745 -- -- 33,207
-------------- -------------- --------------- --------------
$ 151,382 $ 87,350 $ (906,325) $ 1,271,786
============== ============== =============== ===============
Accounts payable ............................................ $ 368 $ -- $ -- $ 36,353
Construction payable ........................................ -- 3,160 -- 26,115
Construction payable-contested .............................. -- -- -- 7,232
Intercompany payables ....................................... 22,935 -- (62,390) --
Accrued interest payable .................................... 872 11 -- 10,008
Other accrued liabilities ................................... 1,647 65 -- 70,035
Current maturities of long-term debt (3)..................... 105,000 1,092 (23,021) 129,113
-------------- -------------- --------------- --------------
Total current liabilities ................................. 130,822 4,328 (85,411) 278,856
Other long-term liabilities ................................. -- -- -- 3,274
Long-term debt (3)........................................... -- 3,933 (741,813) 745,746
Long-term subordinated loans payable to Principal Stockholder 35,000 -- -- 66,123
-------------- -------------- --------------- --------------
165,822 8,261 (827,224) 1,093,999
-------------- -------------- --------------- --------------
Redeemable Preferred interest in Venetian ................... -- -- -- 188,778
-------------- -------------- --------------- --------------
Stockholder's equity (Deficit)............................... (14,440) 79,089 (79,101) (10,991)
-------------- -------------- --------------- --------------
$ 151,382 $ 87,350 $ (906,325) $ 1,271,786
============== ============== =============== ===============
<FN>
- ----------------
(1) The assets and liabilities of Mall Construction, a guarantor, were transferred to the Mall Subsidiary, a non-guarantor
subsidiary, upon substantial completion of the Casino Resort on November 12, 1999, and subsequently transferred to the New Mall
Subsidiary on December 20, 1999. As a result, Mall Construction had no assets or liabilities as of December 31, 2001.
(2) Land with a historical cost basis of $29.2 million was transferred from Venetian, a co-obligor of the Notes, to the Phase II
Subsidiary, a non-guarantor subsidiary, in October 1998 and land with a value of $11.8 million was indirectly contributed by
the Principal Stockholder during December 1999.
(3) As more fully described in Note 8, Las Vegas Sands, Inc. and Venetian Casino Resort LLC are co-obligors of certain of the
Company's indebtedness. Accordingly, such indebtedness has been presented as an obligation of both entities in the above
balance sheets.
</FN>
58
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED BALANCE SHEETS
December 31, 2000
GUARANTOR SUBSIDIARIES
----------------------
Lido Mall
Venetian Intermediate Intermediate
Las Vegas Casino Resort Holding Holding
Sands, Inc. LLC Company LLC Company LLC
-------------- -------------- --------------- --------------
Cash and cash equivalents ................................... $ 35,332 $ 4,260 $ 4 $ 4
Restricted cash and investments ............................. -- 1,471 -- --
Intercompany receivable ..................................... 43,152 -- -- --
Accounts receivable, net .................................... 45,609 17,686 -- --
Inventories ................................................. -- 3,868 -- --
Prepaid expenses ............................................ 458 2,897 -- --
-------------- -------------- --------------- --------------
Total current assets ...................................... 124,551 30,182 4 4
Property and equipment, net ................................. -- 840,960 -- --
Investment in Subsidiaries .................................. 824,427 -- -- --
Deferred offering costs, net................................. -- 18,335 -- --
Other assets, net............................................ 4,928 22,120 -- --
-------------- -------------- --------------- --------------
$ 953,906 $ 911,597 $ 4 $ 4
============== ============== =============== ===============
Accounts payable ............................................ $ 4,794 $ 18,036 $ -- $ --
Construction payable ........................................ -- 3,297 -- --
Construction payable-contested .............................. -- 7,232 -- --
Intercompany payables ....................................... -- 20,626 -- --
Accrued interest payable .................................... -- 11,498 -- --
Other accrued liabilities ................................... 27,939 47,380 -- --
Current maturities of long-term debt (3)..................... 50,119 50,119 -- --
-------------- -------------- --------------- --------------
Total current liabilities ................................. 82,852 158,188 -- --
Other long-term liabilities ................................. -- 10,494 -- --
Long-term debt (3)........................................... 696,222 696,222 -- --
Long-term subordinated loans payable to Principal Stockholder -- 27,071 -- --
-------------- -------------- --------------- --------------
779,074 891,975 -- --
-------------- -------------- --------------- --------------
Redeemable Preferred interest in Venetian ................... -- 168,012 -- --
-------------- -------------- --------------- --------------
Stockholder's equity (Deficit)............................... 174,832 (148,390) 4 4
-------------- -------------- --------------- --------------
$ 953,906 $ 911,597 $ 4 $ 4
============== ============== =============== ===============
59
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED BALANCE SHEETS (continued)
December 31, 2000
NON-GUARANTOR SUBSIDIARIES
--------------------------
Grand Canal
Shops Mall Other Non- Consolidating/
Subsidiary Guarantor Eliminating
LLC (1) Subsidiaries (2) Entries Total
-------------- -------------- --------------- --------------
Cash and cash equivalents ................................... $ 2,972 $ 34 $ -- $ 42,606
Restricted cash and investments ............................. 1,078 -- -- 2,549
Intercompany receivable ..................................... -- -- (43,152) --
Accounts receivable, net .................................... 973 60 -- 64,328
Inventories ................................................. -- -- -- 3,868
Prepaid expenses ............................................ 317 -- -- 3,672
-------------- -------------- --------------- --------------
Total current assets ...................................... 5,340 94 (43,152) 117,023
Property and equipment, net ................................. 140,185 80,948 -- 1,062,093
Investment in Subsidiaries .................................. -- -- (824,427) --
Deferred offering costs, net................................. 3,979 -- -- 22,314
Other assets, net............................................ 3,907 -- -- 30,955
-------------- -------------- --------------- --------------
$ 153,411 $ 81,042 $ (867,579) $ 1,232,385
============== ============== =============== ===============
Accounts payable ............................................ $ 1,005 $ -- $ -- $ 23,835
Construction payable ........................................ -- 2,915 -- 6,212
Construction payable-contested .............................. -- -- -- 7,232
Intercompany payables ....................................... 22,526 -- (43,152) --
Accrued interest payable .................................... 1,779 -- -- 13,277
Other accrued liabilities ................................... 1,363 53 -- 76,735
Current maturities of long-term debt (3)..................... -- -- (50,119) 50,119
-------------- -------------- --------------- --------------
Total current liabilities ................................. 26,673 2,968 (93,271) 177,410
-------------- -------------- --------------- --------------
Other long-term liabilities ................................. -- -- -- 10,494
Long-term debt (3)........................................... 105,000 -- (696,222) 801,222
Long-term subordinated loans payable to Principal Stockholder 35,000 -- -- 62,071
-------------- -------------- --------------- --------------
166,673 2,968 (789,493) 1,051,197
-------------- -------------- --------------- --------------
Redeemable Preferred interest in Venetian ................... -- -- -- 168,012
-------------- -------------- --------------- --------------
Stockholder's equity (Deficit)............................... (13,262) 78,074 (78,086) 13,176
-------------- -------------- --------------- --------------
$ 153,411 $ 81,042 $ (867,579) $ 1,232,385
============== ============== =============== ===============
<FN>
- ----------------
(1) The assets and liabilities of Mall Construction, a guarantor, were transferred to the Mall Subsidiary, a non-guarantor
subsidiary, upon substantial completion of the Casino Resort on November 12, 1999, and subsequently transferred to the New Mall
Subsidiary on December 20, 1999. As a result, Mall Construction had no assets or liabilities as of December 31, 2000.
(2) Land with a historical cost basis of $29.2 million was transferred from Venetian Casino Resort, LLC, a co-obligor of the Notes
to Lido Casino Resort, LLC., a non-guarantor subsidiary, in October 1998 and land with a value of $11.8 million was indirectly
contributed by the Principal Stockholder during December 1999.
(3) As more fully described in Note 8, Las Vegas Sands, Inc. and Venetian Casino Resort LLC are co-obligors of certain of the
Company's indebtedness. Accordingly, such indebtedness has been presented as an obligation of both entities in the above
balance sheets.
</FN>
60
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED STATEMENT OF OPERATIONS
For the year ended December 31, 2001
GUARANTOR SUBSIDIARIES
----------------------
Lido Mall
Venetian Intermediate Intermediate
Las Vegas Casino Resort Holding Holding
Sands, Inc. LLC Company LLC Company LLC
-------------- -------------- --------------- --------------
Revenues:
Casino .................................................... $ 227,240 $ -- $ -- $ --
Room ...................................................... -- 204,242 -- --
Food and beverage ......................................... -- 61,977 -- --
Retail and other .......................................... 1,417 84,098 -- --
-------------- -------------- --------------- --------------
Total revenue ............................................. 228,657 350,317 -- --
Less promotional allowance .................................. -- (42,594) --
-------------- -------------- --------------- --------------
Net revenues .............................................. 228,657 307,723 -- --
-------------- -------------- --------------- --------------
Operating expenses:
Casino .................................................... 185,909 -- -- --
Rooms ..................................................... -- 50,039 -- --
Food and beverage ......................................... -- 29,630 -- --
Retail and other .......................................... -- 21,287 -- --
Provision for doubtful accounts ........................... 18,200 1,866 -- --
General and administrative ................................ 2,711 82,603 -- --
Corporate expense ......................................... 2,459 3,917 -- --
Rental expense ............................................ 914 6,625 -- --
Pre-opening and developemental expense .................... -- 355 -- --
Depreciation and amortization ............................. -- 36,039 -- --
-------------- -------------- --------------- --------------
210,193 232,361 -- --
-------------- -------------- --------------- --------------
Operating income (loss) ..................................... 18,464 75,362 -- --
-------------- -------------- --------------- --------------
Other income (expense):
Interest income ......................................... 643 613 -- --
Interest expense, net of amounts capitalized ............ -- (90,947) -- --
Interest expense on indebtedness to Principal Stockholder -- (4,052) -- --
Other income (expense) .................................. -- (1,938) -- --
Income (loss) from equity investment in subsidiaries .... (43,274) --
-------------- -------------- --------------- --------------
Income (loss) before preferred return and extraordinary item (24,167) (20,962) -- --
Preferred return on Redeemable Preferred Interest in Venetian -- (20,766) -- --
-------------- -------------- --------------- --------------
Income (loss) before extrordinary item (24,167) (41,728) -- --
Loss on early retirement of debt ........................ -- (1,383) -- --
-------------- -------------- --------------- --------------
Net income (loss) ........................................... $ (24,167) $ (43,111) $ -- $ --
============== ============== =============== ==============
61
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED STATEMENT OF OPERATIONS (continued)
For the year ended December 31, 2001
NON-GUARANTOR SUBSIDIARIES
--------------------------
Grand Canal
Shops Mall Other Non- Consolidating/
Subsidiary Guarantor Eliminating
LLC (1) Subsidiaries Entries Total
-------------- -------------- --------------- --------------
Revenues:
Casino .................................................... $ -- $ -- $ -- $ 227,240
Room ...................................................... -- -- -- 204,242
Food and beverage ......................................... -- -- -- 61,977
Retail and other .......................................... 34,707 1,622 (48,810) 73,034
-------------- -------------- --------------- --------------
Total revenue ............................................. 34,707 1,622 (48,810) 566,493
Less promotional allowance .................................. -- -- -- (42,594)
-------------- -------------- --------------- --------------
Net revenues .............................................. 34,707 1,622 (48,810) 523,899
-------------- -------------- --------------- --------------
Operating expenses:
Casino .................................................... -- -- (45,973) 139,936
Rooms ..................................................... -- -- -- 50,039
Food and beverage ......................................... -- -- -- 29,630
Retail and other .......................................... 12,230 -- (1,215) 32,302
Provision for doubtful accounts ........................... 132 -- -- 20,198
General and administrative ................................ 1,570 3 -- 86,887
Corporate expense ......................................... -- -- -- 6,376
Rental expense ............................................ 2,157 -- (1,622) 8,074
Pre-opening and developemental expense .................... -- -- -- 355
Depreciation and amortization ............................. 4,784 -- -- 40,823
-------------- -------------- --------------- --------------
20,873 3 (48,810) 414,620
-------------- -------------- --------------- --------------
Operating income (loss) ..................................... 13,834 1,619 -- 109,279
-------------- -------------- --------------- --------------
Other income (expense):
Interest income ......................................... 129 -- -- 1,385
Interest expense, net of amounts capitalized ............ (10,173) (604) -- (101,724)
Interest expense on indebtedness to Principal Stockholder (4,968) -- -- (9,020)
Other income (expense) .................................. -- -- -- (1,938)
Income (loss) from equity investment in subsidiaries .... -- -- 43,274 --
-------------- -------------- --------------- --------------
Income (loss) before preferred return and extraordinary item (1,178) 1,015 43,274 (2,018)
Preferred return on Redeemable Preferred Interest in Venetian -- -- -- (20,766)
-------------- -------------- --------------- --------------
Income (loss) before extraordinary item ..................... (1,178) 1,015 43,274 (22,784)
Loss on early retirement of debt ........................ -- -- -- (1,383)
-------------- -------------- --------------- --------------
Net income (loss) ........................................... $ (1,178) $ 1,015 $ 43,274 $ (24,167)
============== ============== ============== ==============
<FN>
- ----------
(1) The assets and liabilities of Mall Construction, a guarantor, were transferred to the Mall Subsidiary, a non-guarantor
subsidiary, upon substantial completion of the Casino Resort on November 12, 1999, and subsequently transferred to the New Mall
Subsidiary on December 20, 1999. As a result, Mall Construction had no revenues or expenses as of December 31, 2001.
</FN>
62
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED STATEMENT OF OPERATIONS
For the year ended December 31, 2000
GUARANTOR SUBSIDIARIES
----------------------
Lido Mall
Venetian Intermediate Intermediate
Las Vegas Casino Holding Holding
Sands, Inc. Resort LLC Company LLC Company LLC
-------------- -------------- --------------- --------------
Revenues:
Casino .................................................... $ 299,083 $ -- $ -- $ --
Room ...................................................... -- 192,327 -- --
Food and beverage ......................................... -- 67,052 -- --
Retail and other .......................................... 1,646 82,455 -- --
-------------- -------------- --------------- --------------
Total revenue ............................................. 300,729 341,834 -- --
Less promotional allowance .................................. -- (46,296) -- --
-------------- -------------- --------------- --------------
Net revenues .............................................. 300,729 295,538 -- --
-------------- -------------- --------------- --------------
Operating expenses:
Casino .................................................... 208,321 -- -- --
Rooms ..................................................... -- 49,618 -- --
Food and beverage ......................................... -- 32,627 -- --
Retail and other .......................................... -- 19,126 -- --
Provision for doubtful accounts ........................... 17,743 1,300 -- --
General and administrative ................................ 3,819 88,344 -- 10
Corporate expense ......................................... 2,293 3,982 -- --
Rental expense ............................................ 714 5,856 -- --
Depreciation and amortization ............................. -- 37,180 -- --
-------------- -------------- --------------- --------------
232,890 238,033 -- 10
-------------- -------------- --------------- --------------
Operating income (loss) ..................................... 67,839 57,505 -- (10)
-------------- -------------- --------------- --------------
Other income (expense):
Interest income ......................................... 739 960 -- --
Interest expense, net of amounts capitalized ............ -- (98,437) -- --
Interest expense on indebtedness to Principal Stockholder -- (3,568) -- --
Income (loss) from equity investment in subsidiaries .... (71,108) -- -- --
-------------- -------------- --------------- --------------
Income (loss) before preferred return and extraordinary item (2,530) (43,540) -- (10)
Preferred return on Redeemable Preferred Interest in Venetian -- (18,482) -- --
-------------- -------------- --------------- --------------
Income (loss) before extraordinary item ..................... (2,530) (62,022) -- (10)
Loss on early retirement of debt ........................ -- (2,785) -- --
-------------- -------------- --------------- --------------
Net income (loss) ........................................... $ (2,530) $ (64,807) $ -- $ (10)
============== ============== ============== ==============
63
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED STATEMENT OF OPERATIONS (continued)
For the year ended December 31, 2000
NON-GUARANTOR SUBSIDIARIES
--------------------------
Grand Canal
Shops Mall Other Non- Consolidating/
Subsidiary Guarantor Eliminating
LLC (1) Subsidiaries Entries Total
-------------- -------------- --------------- --------------
Revenues:
Casino .................................................... $ -- $ -- $ -- $ 299,083
Room ...................................................... -- -- -- 192,327
Food and beverage ......................................... -- -- -- 67,052
Retail and other .......................................... 30,781 -- (46,078) 68,804
-------------- -------------- --------------- --------------
Total revenue ............................................. 30,781 -- (46,078) 627,266
Less promotional allowance .................................. -- -- -- (46,296)
-------------- -------------- --------------- --------------
Net revenues .............................................. 30,781 -- (46,078) 580,970
-------------- -------------- --------------- --------------
Operating expenses:
Casino .................................................... -- -- (45,164) 163,157
Rooms ..................................................... -- -- -- 49,618
Food and beverage ......................................... -- -- -- 32,627
Retail and other .......................................... 11,194 -- (914) 29,406
Provision for doubtful accounts ........................... 209 -- -- 19,252
General and administrative ................................ 1,219 21 -- 93,413
Corporate expense ......................................... -- -- -- 6,275
Rental expense ............................................ 2,157 -- -- 8,727
Depreciation and amortization ............................. 4,542 -- -- 41,722
-------------- -------------- --------------- --------------
19,321 21 (46,078) 444,197
-------------- -------------- --------------- --------------
Operating income (loss) ..................................... 11,460 (21) -- 136,773
-------------- -------------- --------------- --------------
Other income (expense):
Interest income ......................................... 72 -- -- 1,771
Interest expense, net of amounts capitalized ............ (12,589) -- -- (111,026)
Interest expense on indebtedness to Principal Stockholder (5,213) -- -- (8,781)
Income (loss) from equity investment in subsidiaries .... -- -- 71,108 --
-------------- -------------- --------------- --------------
Income (loss) before preferred return and extraordinary item (6,270) (21) 71,108 18,737
Preferred return on Redeemable Preferred Interest in Venetian -- -- -- (18,482)
-------------- -------------- --------------- --------------
Income (loss) before extraordinary item ..................... (6,270) (21) 71,108 255
Loss on early retirement of debt ........................ -- -- -- (2,785)
-------------- -------------- --------------- --------------
Net income (loss) ........................................... $ (6,270) $ (21) $ 71,108 $ (2,530)
============== ============== ============== ==============
<FN>
- ----------
(1) The assets and liabilities of Mall Construction, a guarantor, were transferred to the Mall Subsidiary, a non-guarantor
subsidiary, upon substantial completion of the Casino Resort on November 12, 1999, and subsequently transferred to the New Mall
Subsidiary on December 20, 1999. As a result, Mall Construction had no revenues or expenses as of December 31, 2000.
</FN>
64
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED STATEMENT OF OPERATIONS
For the year ended December 31, 1999
GUARANTOR SUBSIDIARIES
----------------------
Lido Mall
Venetian Intermediate Intermediate
Las Vegas Casino Holding Holding
Sands, Inc. Resort LLC Company LLC Company LLC
-------------- -------------- --------------- --------------
Revenues:
Casino .................................................... $ 124,161 $ -- $ -- $ --
Room ...................................................... -- 89,585 -- --
Food and beverage ......................................... -- 30,786 -- --
Retail and other .......................................... 1,592 47,197 -- --
-------------- -------------- --------------- --------------
Total revenue ............................................. 125,753 167,568 -- --
Less promotional allowance .................................. -- (25,045) -- --
-------------- -------------- --------------- --------------
Net revenues .............................................. 125,753 142,523 -- --
-------------- -------------- --------------- --------------
Operating expenses:
Casino .................................................... 99,130 -- -- --
Rooms ..................................................... -- 25,532 -- --
Food and beverage ......................................... -- 19,134 -- --
Retail and other .......................................... -- 7,385 -- --
Provision for doubtful accounts ........................... 12,225 730 -- --
General and administrative ................................ 1,369 48,566 1 --
Corporate expense ......................................... 1,794 716 -- --
Rental expense ............................................ 455 3,852 -- --
Pre-opening expense ....................................... 143 21,341 -- --
Depreciation and amortization ............................. 52 22,692 -- --
-------------- -------------- --------------- --------------
115,168 149,948 1 --
-------------- -------------- --------------- --------------
Operating income (loss) ..................................... 10,585 (7,425) (1) --
-------------- -------------- --------------- --------------
Other income (expense):
Interest income ......................................... 209 2,336 -- --
Interest expense, net of amounts capitalized ............ -- (63,819) -- --
Interest expense on indebtedness to Principal Stockholder -- -- -- --
Income (loss) from equity investment in subsidiaries .... (90,816) -- -- --
-------------- -------------- --------------- --------------
Income (loss) before preferred return and extraordinary item (80,022) (68,908) (1) --
Preferred return on Redeemable Preferred Interest in Venetian -- (14,399) -- --
-------------- -------------- --------------- --------------
Income (loss) before extraordinary item ..................... (80,022) (83,307) (1) --
Loss on early retirement of debt ........................ -- -- -- --
-------------- -------------- --------------- --------------
Net income (loss) ........................................... $ (80,022) $ (83,307) $ (1) $ --
============== ============== ============== ==============
65
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED STATEMENT OF OPERATIONS (continued)
For the year ended December 31, 1999
NON-GUARANTOR SUBSIDIARIES
--------------------------
Grand Canal
Shops Mall Other Non- Consolidating/
Subsidiary Guarantor Eliminating
LLC (1) Subsidiaries Entries Total
-------------- -------------- --------------- --------------
Revenues:
Casino .................................................... $ -- $ -- $ -- $ 124,161
Room ...................................................... -- -- -- 89,585
Food and beverage ......................................... -- -- -- 30,786
Retail and other .......................................... 9,844 -- (29,667) 28,966
-------------- -------------- --------------- --------------
Total revenue ............................................. 9,844 -- (29,667) 273,498
Less promotional allowance .................................. -- -- -- (25,045)
-------------- -------------- --------------- --------------
Net revenues .............................................. 9,844 -- (29,667) 248,453
-------------- -------------- --------------- --------------
Operating expenses:
Casino .................................................... -- -- (29,466) 69,664
Rooms ..................................................... -- -- -- 25,532
Food and beverage ......................................... -- -- -- 19,134
Retail and other .......................................... 4,397 -- (201) 11,581
Provision for doubtful accounts ........................... 700 -- -- 13,655
General and administrative ................................ 512 2 -- 50,450
Corporate expense ......................................... -- -- -- 2,510
Rental expense ............................................ 1,178 -- -- 5,485
Pre-opening expense ....................................... -- -- -- 21,484
Depreciation and amortization ............................. 2,401 -- -- 25,145
-------------- -------------- --------------- --------------
9,188 2 (29,667) 244,640
-------------- -------------- --------------- --------------
Operating income (loss) ..................................... 656 (2) -- 3,813
-------------- -------------- --------------- --------------
Other income (expense):
Interest income ......................................... 6 -- -- 2,551
Interest expense, net of amounts capitalized ............ (7,416) -- -- (71,235)
Interest expense on indebtedness to Principal Stockholder (163) -- -- (163)
Income (loss) from equity investment in subsidiaries .... -- -- 90,816 --
-------------- -------------- --------------- --------------
Income (loss) before preferred return and extraordinary item (6,917) (2) 90,816 (65,034)
Preferred return on Redeemable Preferred Interest in Venetian -- -- -- (14,399)
-------------- -------------- --------------- --------------
Income (loss) before extraordinary item ..................... (6,917) (2) 90,816 (79,433)
Loss on early retirement of debt ........................ (589) -- -- (589)
-------------- -------------- --------------- --------------
Net income (loss) ........................................... $ (7,506) $ (2) $ 90,816 $ (80,022)
============== ============== ============== ==============
<FN>
- ----------------
(1) The assets and liabilities of Mall Construction, a guarantor, were transferred to the Mall Subsidiary, a non-guarantor
subsidiary, upon substantial completion of the Casino Resort on November 12, 1999, and subsequently transferred to the New Mall
Subsidiary on December 20, 1999. As a result, Mall Construction had no revenues or expenses as of December 31, 1999.
</FN>
66
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2001
GUARANTOR SUBSIDIARIES
----------------------
Lido Mall
Intermediate Intermediate
Las Vegas Venetian Casino Holding Holding
Sands, Inc. Resort LLC Company LLC Company LLC
-------------- -------------- --------------- --------------
Net cash provided by operating activities ................... $ 19,765 $ 26,390 $ -- $ --
-------------- -------------- --------------- --------------
Cash flows from investing activities:
(Increase) decrease in restricted cash .................... -- (57) -- --
Capital expenditures ...................................... -- (53,660) -- --
-------------- -------------- --------------- --------------
Net cash used in investing activities ....................... -- (53,717) -- --
-------------- -------------- --------------- --------------
Cash flows from financing activities:
Repayments on bank credit facility-tranche A term loan .... -- (103,125) -- --
Repayments on bank credit facility-tranche B term loan .... -- (49,750) -- --
Repayments on bank credit facility-tranche C term loan .... -- (5,750) -- --
Proceeds from bank credit facility-tranche C term loan .... -- 5,750 -- --
Repayments on bank credit facility-term ................... -- (764) -- --
Proceeds from bank credit facility-term ................... -- 152,750 -- --
Repayments on bank credit facility-revolver ............... -- (18,000) -- --
Proceeds from bank credit facility-revolver ............... -- 58,000 -- --
Repayments on FF&E credit facility ........................ -- (21,494) -- --
Proceeds from Phase II Subsidiary credit facility ......... -- -- -- --
Proceeds from Phase II Subsidiary unsecured bank loan ..... -- -- -- --
Payments of deferred offering costs ....................... -- (5,573) -- --
Net increase (decrease) in intercompany accounts .......... (17,730) 18,829 -- --
-------------- -------------- --------------- --------------
Net cash provided by (used in) financing activities ........ (17,730) 30,873 -- --
-------------- -------------- --------------- --------------
Increase in cash and cash equivalents ....................... 2,035 3,546 -- --
Cash and cash equivalents at beginning of year .............. 35,332 4,260 4 4
-------------- -------------- --------------- --------------
Cash and cash equivalents at end of year .................... $ 37,367 $ 7,806 $ 4 $ 4
============== ============== ============== ==============
67
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED STATEMENTS OF CASH FLOWS (continued)
For the year ended December 31, 2001
NON-GUARANTOR SUBSIDIARIES
--------------------------
Grand Canal
Shops Mall Other Non- Consolidating/
Subsidiary Guarantor Eliminating
LLC (1) Subsidiaries Entries Total
-------------- -------------- --------------- --------------
Net cash provided by operating activities ................... $ 4,075 $ 562 $ -- $ 50,792
-------------- -------------- --------------- --------------
Cash flows from investing activities:
(Increase) decrease in restricted cash .................... (40) -- -- (97)
Capital expenditures ...................................... (766) (708) -- (55,134)
-------------- -------------- --------------- --------------
Net cash used in investing activities ....................... (806) (708) -- (55,231)
-------------- -------------- --------------- --------------
Cash flows from financing activities:
Repayments on bank credit facility-tranche A term loan .... -- -- -- (103,125)
Repayments on bank credit facility-tranche B term loan .... -- -- -- (49,750)
Repayments on bank credit facility-tranche C term loan .... -- -- -- (5,750)
Proceeds from bank credit facility-tranche C term loan .... -- -- -- 5,750
Repayments on bank credit facility-term ................... -- -- -- (764)
Proceeds from bank credit facility-term ................... -- -- -- 152,750
Repayments on bank credit facility-revolver ............... -- -- -- (18,000)
Proceeds from bank credit facility-revolver ............... -- -- -- 58,000
Repayments on FF&E credit facility ........................ -- -- -- (21,494)
Proceeds from Phase II Subsidiary credit facility ......... -- 3,933 -- 3,933
Proceeds from Phase II Subsidiary unsecured bank loan ..... -- 1,092 -- 1,092
Payments of deferred offering costs ....................... -- (300) -- (5,873)
Net increase (decrease) in intercompany accounts .......... 409 (1,508) -- --
-------------- -------------- --------------- --------------
Net cash provided by (used in) financing activities ........ 409 3,217 -- 16,769
-------------- -------------- --------------- --------------
Increase in cash and cash equivalents ....................... 3,678 3,071 -- 12,330
Cash and cash equivalents at beginning of year .............. 2,972 34 -- 42,606
-------------- -------------- --------------- --------------
Cash and cash equivalents at end of year .................... $ 6,650 $ 3,105 $ -- $ 54,936
============== ============== ============== ==============
<FN>
- ----------------
(1) The assets and liabilities of Mall Construction, a guarantor, were transferred to the Mall Subsidiary, a non-guarantor
subsidiary, upon substantial completion of the Casino Resort on November 12, 1999, and subsequently transferred to the New Mall
Subsidiary on December 20, 1999. As a result, Mall Construction had no cash flows as of December 31, 2001.
</FN>
68
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2000
GUARANTOR SUBSIDIARIES
----------------------
Lido Mall
Intermediate Intermediate
Las Vegas Venetian Casino Holding Holding
Sands, Inc. Resort LLC Company LLC Company LLC
-------------- -------------- --------------- --------------
Net cash provided by (used in) operating
activities ................................................ $ 56,574 $ 21,142 $ -- $ (10)
-------------- -------------- --------------- --------------
Cash flows from investing activities:
Proceeds from purchases of investments .................... -- 7,319 -- --
Capital expenditures ...................................... -- (15,647) -- --
Construction of Casino Resort ............................. -- (12,178) -- --
-------------- -------------- --------------- --------------
Net cash used in investing activities ....................... -- (20,506) -- --
-------------- -------------- --------------- --------------
Cash flows from financing activities:
Proceeds from capital contributions ....................... -- (35) -- 9
Repayments on bank credit facility-tranche A term loan .... -- (35,625) -- --
Repayments on bank credit facility-tranche B term loan .... -- (250) -- --
Proceeds from bank credit facility-tranche B term loan .... -- 50,000 -- --
Repayments on bank credit facility-revolver ............... -- (50,160) -- --
Proceeds from bank credit facility-revolver ............... -- 11,000 -- --
Repayments on FF&E credit facility ........................ -- (16,609) -- --
Payments of deferred offering costs ....................... -- (2,296) -- --
Net increase (decrease) in intercompany accounts .......... (45,203) 45,362 -- --
-------------- -------------- --------------- --------------
Net cash provided by (used in) financing activities ........ (45,203) 1,387 -- 9
-------------- -------------- --------------- --------------
Increase (decrease) in cash and cash equivalents ............ 11,371 2,023 -- (1)
Cash and cash equivalents at beginning of year .............. 23,961 2,237 4 5
-------------- -------------- --------------- --------------
Cash and cash equivalents at end of year .................... $ 35,332 $ 4,260 $ 4 $ 4
============== ============== ============== ==============
69
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2000
NON-GUARANTOR SUBSIDIARIES
--------------------------
Grand Canal
Shops Mall Other Non- Consolidating/
Subsidiary Guarantor Eliminating
LLC (1) Subsidiaries Entries Total
-------------- -------------- --------------- --------------
Net cash provided by (used in) operating
activities ................................................ $ 3,341 $ (30) $ -- $ 81,017
-------------- -------------- --------------- --------------
Cash flows from investing activities:
Proceeds from purchases of investments .................... 1,112 -- -- 8,431
Capital expenditures ...................................... (762) -- -- (16,409)
Construction of Casino Resort ............................. -- (2) -- (12,180)
-------------- -------------- --------------- --------------
Net cash used in investing activities ....................... 350 (2) -- (20,158)
-------------- -------------- --------------- --------------
Cash flows from financing activities:
Proceeds from capital contributions ....................... 5 21 -- --
Repayments on bank credit facility-tranche A term loan .... -- -- -- (35,625)
Repayments on bank credit facility-tranche B term loan .... -- -- -- (250)
Proceeds from bank credit facility-tranche B term loan .... -- -- -- 50,000
Repayments on bank credit facility-revolver ............... -- -- -- (50,160)
Proceeds from bank credit facility-revolver ............... -- -- -- 11,000
Repayments on FF&E credit facility ........................ -- -- -- (16,609)
Payments of deferred offering costs ....................... (565) -- -- (2,861)
Net increase (decrease) in intercompany accounts .......... (159) -- -- --
-------------- -------------- --------------- --------------
Net cash provided by (used in) financing activities ........ (719) 21 -- (44,505)
-------------- -------------- --------------- --------------
Increase (decrease) in cash and cash equivalents ............ 2,972 (11) -- 16,354
Cash and cash equivalents at beginning of year .............. -- 45 -- 26,252
-------------- -------------- --------------- --------------
Cash and cash equivalents at end of year .................... $ 2,972 $ 34 $ -- $ 42,606
============== ============== ============== ==============
<FN>
- ----------------
(1) The assets and liabilities of Mall Construction, a guarantor, were transferred to the Mall Subsidiary, a non-guarantor
subsidiary, upon substantial completion of the Casino Resort on November 12, 1999, and subsequently transferred to the New Mall
Subsidiary on December 20, 1999. As a result, Mall Construction had no cash flows as of December 31, 2000.
</FN>
70
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the year ended December 31, 1999
GUARANTOR SUBSIDIARIES
Lido Mall
Intermediate Intermediate
Las Vegas Venetian Holding Holding
Sands, Inc. Casino LLC Company LLC Company LLC
-------------- -------------- --------------- --------------
Net cash provided by (used in) operating activities ........ $ (7,608) $ (64,828) $ (1) $ --
-------------- -------------- --------------- --------------
Cash flows from investing activities:
Proceeds from purchases of investments .................... -- 125,147 -- --
Construction of Casino Resort ............................. (52) (228,393) -- --
-------------- -------------- --------------- --------------
Net cash used in investing activities ....................... (52) (103,246) -- --
-------------- -------------- --------------- --------------
Cash flows from financing activities:
Proceeds from capital contributions ....................... 27,791 -- -- --
Proceeds from preferred interest in Venetian .............. -- 44,431 -- --
Repayments on mall construction loan facility ............. -- -- -- --
Proceeds from mall construction loan facility ............. -- -- -- --
Proceeds from mall-tranche A take-out loan ................ -- -- -- --
Proceeds from mall- tranche B take-out loan ............... -- -- -- --
Proceeds from completion guaranty loan .................... -- 23,503 -- --
Repayments on bank credit facility- tranche A term loan ... -- (11,250) -- --
Proceeds from bank credit facility-tranche A term loan .... -- 34,000 -- --
Repayments on bank credit facility-revolver ............... -- (10,231) -- --
Proceeds from bank credit facility-revolver ............... -- 40,506 -- --
Repayments on FF&E credit facility ........................ -- (5,862) -- --
Proceeds from FF&E credit facility ........................ -- 83,842 -- --
Payments of deferred offering costs ....................... -- (1,299) -- --
Net increase (decrease) in intercompany accounts .......... 2,614 (28,354) -- --
-------------- -------------- --------------- --------------
Net cash provided by financing activities ................... 30,405 169,286 -- --
-------------- -------------- --------------- --------------
Increase (decrease) in cash and cash equivalents ............ 22,745 1,212 (1) --
Cash and cash equivalents at beginning of year .............. 1,216 1,025 5 5
-------------- -------------- --------------- --------------
Cash and cash equivalents at end of year .................... $ 23,961 $ 2,237 $ 4 $ 5
============== ============== ============== ==============
71
LAS VEGAS SANDS, INC.
Notes to Financial Statements (continued)
Note 15 Summarized Financial Information (continued)
CONDENSED STATEMENTS OF CASH FLOWS (continued)
For the year ended December 31, 1999
NON-GUARANTOR SUBSIDIARIES
--------------------------
Grand Canal
Shops Mall Other Non- Consolidating/
Subsidiary Guarantor Eliminating
LLC (1) Subsidiaries Entries Total
-------------- -------------- --------------- --------------
Net cash provided by (used in) operating activities ......... $ (7,174) $ (3) $ 49,551 $ (30,063)
-------------- -------------- --------------- --------------
Cash flows from investing activities:
Proceeds from purchases of investments .................... (2,191) -- -- 122,956
Construction of Casino Resort ............................. (53,593) (37,068) -- (319,106)
-------------- -------------- --------------- --------------
Net cash used in investing activities ....................... (55,784) (37,068) -- (196,150)
-------------- -------------- --------------- --------------
Cash flows from financing activities:
Proceeds from capital contributions ....................... 498 37,262 (49,551) 16,000
Proceeds from preferred interest in Venetian .............. -- -- -- 44,431
Repayments on mall construction loan facility ............. (140,000) -- -- (140,000)
Proceeds from mall construction loan facility ............. 37,287 -- -- 37,287
Proceeds from mall-tranche A take-out loan ................ 105,000 -- -- 105,000
Proceeds from mall- tranche B take-out loan ............... 35,000 -- -- 35,000
Proceeds from completion guaranty loan .................... -- -- -- 23,503
Repayments on bank credit facility- tranche A term loan ... -- -- -- (11,250)
Proceeds from bank credit facility-tranche A term loan .... -- -- -- 34,000
Repayments on bank credit facility-revolver ............... -- -- -- (10,231)
Proceeds from bank credit facility-revolver ............... -- -- -- 40,506
Repayments on FF&E credit facility ........................ -- -- -- (5,862)
Proceeds from FF&E credit facility ........................ -- -- -- 83,842
Payments of deferred offering costs ....................... (747) -- -- (2,046)
Net increase (decrease) in intercompany accounts .......... 25,910 (170) -- --
-------------- -------------- --------------- --------------
Net cash provided by financing activities ................... 62,948 37,092 (49,551) 250,180
-------------- -------------- --------------- --------------
Increase (decrease) in cash and cash equivalents ............ (10) 21 -- 23,967
Cash and cash equivalents at beginning of year .............. 10 24 -- 2,285
-------------- -------------- --------------- --------------
Cash and cash equivalents at end of year .................... $ -- $ 45 $ -- $ 26,252
============== ============== ============== ==============
<FN>
- ----------------
(1) The assets and liabilities of Mall Construction, a guarantor, were transferred to the Mall Subsidiary, a non-guarantor
subsidiary, upon substantial completion of the Casino Resort on November 12, 1999, and subsequently transferred to the New Mall
Subsidiary on December 20, 1999. As a result, Mall Construction had no cash flows as of December 31, 1999.
</FN>
72
Note 16 Quarterly Financial Information (Unaudited)
The following unaudited information shows selected items (in thousands,
except per share data), for each quarter in the years ended December 31, 2001
and 2000. As more fully described in Note 1, under guidance by the Emerging
Issues Task Force ("EITF") of the Financial Accounting Standards Board,
dividends on the Venetian's preferred stock have been reflected as a charge
against income. The "as previously reported" amounts are included for reference
purposes. The restatements have no impact on previously reported quarterly
earnings per share.
73
LAS VEGAS SANDS, INC.
Notes for Financial Statements (continued)
Note 16 Quarterly Financial Information (Unaudited)
First Second Third Fourth Year
2001 --------- --------- --------- --------- ---------
Gross revenues ............................................... $ 155,926 $ 146,576 $ 133,594 $ 130,397 $ 566,493
Less-promotional allowances .................................. (12,286) (9,658) (10,440) (10,210) (42,594)
--------- --------- --------- --------- ---------
Net revenues .............................................. 143,640 136,918 123,154 120,187 523,899
--------- --------- --------- --------- ---------
Operating income .......................................... 33,201 27,389 20,405 28,284 109,279
--------- --------- --------- --------- ---------
Income (loss) before preferred return
and extraordinary item .................................. 4,679 414 (5,979) (1,132) (2,018)
Preferred return on redeemable Preferred Interest
in Venetian Casino Resort, LLC ............................ (5,040) (5,040) (5,343) (5,343) (20,766)
--------- --------- --------- --------- ---------
Loss before extraordinary item ............................ (361) (4,626) (11,322) (6,475) (22,784)
Extraordinary item-loss on early retirement of debt .......... -- -- (1,383) -- (1,383)
--------- --------- --------- --------- ---------
Net loss .................................................. $ (361) $ (4,626) $ (12,705) $ (6,475) $ (24,167)
========= ========= ========= ========= =========
Basic and diluted (loss) per share before extraordinary item . $ (0.36) $ (4.63) $ (11.32) $ (6.48) $ (22.78)
========= ========= ========= ========= =========
Basic and diluted loss per share ............................. $ (0.36) $ (4.63) $ (12.71) $ (6.48) $ (24.17)
========= ========= ========= ========= =========
Income (loss) before extraordinary
item (as previously reported) ............................. $ 4,679 $ 414 $ (5,979)
Extraordinary item-loss on early retirement
of debt (as previously reported) .......................... -- -- (1,383)
--------- --------- ---------
Net income (loss) (as previously reported) ................ $ 4,679 $ 414 $ (7,362)
========= ========= =========
Basic and diluted loss per share before extraordinary item
(as previously reported) .................................. $ (0.36) $ (4.63) $ (11.32)
========= ========= =========
Basic and diluted (loss) per share (as previously reported) .. $ (0.36) $ (4.63) $ (12.71)
========= ========= =========
74
LAS VEGAS SANDS, INC.
Notes for Financial Statements (continued)
Note 16 Quarterly Financial Information (Unaudited) (continued)
First Second Third Fourth Year
2000 --------- --------- --------- --------- ---------
Gross revenues ............................................... $ 166,847 $ 154,939 $ 148,508 $ 156,972 $ 627,266
Less-promotional allowances .................................. (10,933) (11,693) (11,971) (11,699) (46,296)
--------- --------- --------- --------- ---------
Net revenues .............................................. 155,914 143,246 136,537 145,273 580,970
--------- --------- --------- --------- ---------
Operating income .......................................... 45,578 31,051 25,523 34,621 136,773
--------- --------- --------- --------- ---------
Income (loss) before preferred return
and extraordinary item .................................. 16,630 1,635 (4,676) 5,148 18,737
Preferred return on redeemable Preferred Interest
in Venetian Casino Resort, LLC ............................ (4,419) (4,553) (4,755) (4,755) (18,482)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ................... 12,211 (2,918) (9,431) 393 255
Extraordinary item-loss on early retirement of debt .......... -- (2,785) -- -- (2,785)
--------- --------- --------- --------- ---------
Net income (loss) ......................................... $ 12,211 $ (5,703) $ (9,431) $ 393 $ (2,530)
========= ========= ========= ========= =========
Basic and diluted income (loss) per share before
extraordinary item ........................................ $ 12.21 $ (2.92) $ (9.43) $ 0.39 $ 0.26
========= ========= ========= ========= =========
Basic and diluted income (loss) per share .................... $ 12.21 $ (5.70) $ (9.43) $ 0.39 $ (2.53)
========= ========= ========= ========= =========
Income (loss) before extraordinary item (as previously
reported) ................................................ $ 16,630 $ 1,635 $ (4,676) $ 5,148 $ 18,737
Extraordinary item-loss on early retirement of debt (as
previously reported) ..................................... -- (2,785) -- -- (2,785)
--------- --------- --------- --------- ---------
Net income (loss)(as previously reported) ................. $ 16,630 $ (1,150) $ (4,676) $ 5,148 $ 15,952
========= ========= ========= ========= =========
Basic and diluted income (loss) per share before
extraordinary item (as previously reported) ............... $ 12.21 $ (2.92) $ (9.43) $ 0.39 $ 0.26
========= ========= ========= ========= =========
Basic and diluted income (loss) per share
(as previously reported) .................................. $ 12.21 $ (5.70) $ (9.43) $ 0.39 $ (2.53)
========= ========= ========= ========= =========
75
Report of Independent Accountants on Financial Statements Schedule
To the Board of Directors of Las Vegas Sands, Inc.
Our audits of the consolidated financial statements referred to in our
report dated February 1, 2002 appearing in this Annual Report on Form 10-K of
Las Vegas Sands, Inc. also included an audit of the financial statement schedule
listed in Item 14 (a)(2) of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
Las Vegas, Nevada
February 1, 2002
76
LAS VEGAS SANDS, INC.
Financial Statement Schedule
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions Deductions
Balance at Charge to Accounts Balance
beginning costs and charged off at end
Description of period expenses (recovered) of period
- ---------------------------------------------- ----------- ----------- ----------- ----------
Allowance for doubtful accounts and discounts:
Year ended December 31:
1999 ................. $ -- 13,655 (6,758) $ 6,897
=========== =========== =========== =========
2000 ................. $ 6,897 19,252 (3,236) $ 22,913
=========== =========== =========== ==========
2001 ................. $ 22,913 20,198 (19,118) $ 23,993
=========== =========== =========== ==========
77
ITEM 9.--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
78
PART III
ITEM 10. --DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
LVSI has a Board of Directors comprised of two persons. One director is the
Principal Stockholder, who has two votes for all matters before the Board of
Directors. In the event that LVSI increases the number of directors comprising
the Board of Directors, the number of votes which the Principal Stockholder has
will be increased so that the Principal Stockholder will have one more vote than
the number of votes of all of the other directors aggregated. The second
director (the "Special Director") is unaffiliated with the Principal Stockholder
or any other affiliate of the Principal Stockholder, has no other position with
LVSI or Venetian and has one vote for all matters before the Board of Directors.
To the extent the Special Director receives compensation, it is paid by LVSI
from sources unrelated to and independent from the Principal Stockholder and its
affiliates (other than LVSI and Venetian). The Special Director is required to
file an application for a gaming license with the Nevada Gaming Authorities.
The table below sets forth the executive officers and the directors of the
Company.
Name Age Position
- --------------------------------------- -------- ---------------------------------------------------------------
Sheldon G. Adelson 68 Chairman of the Board, Chief Executive Officer and Director
Robert F. List 65 Special Director
William P. Weidner 56 President and Chief Operating Officer
Bradley H. Stone 47 Executive Vice President
Robert G. Goldstein 46 Senior Vice President
David Friedman 45 Assistant to Chairman of the Board and Secretary
Harry D. Miltenberger 58 Vice President-Finance
Sheldon G. Adelson has been the Chairman of the Board, Chief Executive
Officer and a director of the Company since April 1988 when the Company was
formed to own and operate the former Sands Hotel and Casino. Mr. Adelson has
extensive experience in the convention, trade show, tour and travel businesses.
Mr. Adelson also has investments in other business enterprises. He has been
President and Chairman of Interface since the mid-1970s and Chairman of
Interface Group-Massachusetts Inc. since 1990. Mr. Adelson created and developed
the COMDEX Trade Shows, including the COMDEX/Fall Trade Show, the world's
largest computer show, all of which were sold to Softbank Corporation in April
1995.
Robert F. List was elected as Special Director of LVSI in April 2000. Mr.
List is the Chief Executive Officer of the Robert List Company, a Las
Vegas-based consulting firm, and serves as counsel to the law firm of Beckley,
Singleton, Jemison, Cobeaga and List. Mr. List served as Executive Vice
President, Corporate Counsel and Member of the Board of Directors of Boomtown,
Inc. from 1992 to 1999. Mr. List has served in various elected positions in the
State of Nevada including Attorney General from 1970 to 1978 and Governor from
1978 to 1982.
William P. Weidner has been the President and Chief Operating Officer of
the Company since December 1995. From 1985 to 1995, Mr. Weidner was President
and Chief Operating Officer and served on the board of Pratt Hotel Corporation.
From February 1991 to December 1995, Mr. Weidner was also the President of
Pratt's Hollywood Casino-Aurora subsidiary and from June 1992 until December
1995, he served on the board of the Hollywood Casino Corporation. Since
September 1993, Mr. Weidner has served on the Board of Directors of Shorewood
Packaging Corporation. Mr. Weidner directed the opening of Hollywood Casino, one
of Chicago's first riverboat casino hotels, New York City's Maxim's de Paris
(now the Peninsula), and hotels in Orlando and Palm Springs.
Bradley H. Stone has been Executive Vice President of the Company since
December 1995. From June 1984 through December 1995, Mr. Stone was President and
Chief Operating Officer of the Sands Hotel in Atlantic City. Mr. Stone also
served as an Executive Vice President of the parent Pratt Hotel Corporation from
June 1986 through December 1995.
Robert G. Goldstein has been Senior Vice President of the Company since
December 1995. From 1992 until joining the Company in December 1995, Mr.
Goldstein was the Executive Vice President of Marketing at the Sands in Atlantic
City as well as an Executive Vice President of the parent Pratt Hotel
Corporation.
David Friedman has been Assistant to the Chairman of Interface since
October 1995. Subsequently, Mr. Friedman became both Assistant to the Chairman
of the Board and Secretary of the Company. Mr. Friedman is also an officer of
other companies owned by the Principal Stockholder. Prior to joining the
Company, Mr. Friedman was the Senior Vice President of Development and Legal
Affairs for President Casinos, Inc. from May 1993 to October 1995.
79
Harry D. Miltenberger is a certified public accountant and has been Vice
President-Finance of the Company since February 1997. From March 1995 until
February 1997, he was Senior Vice President and Chief Financial Officer of SUB,
a banking company.
ITEM 11.--EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation for the last three fiscal years of those persons who were, at
December 31, 2001, the Chief Executive Officer and the four highest paid
executive officers of LVSI, which is the managing member of Venetian. Under the
limited liability company agreement of Venetian, LVSI is entitled to be
reimbursed for all expenses incurred in connection with its activities as the
managing member of Venetian, including all employee compensation costs.
Long Term
Compensation
Annual Compensation Awards
-------------------------------- --------------
Securities All Other
Underlying Compensation
Name and Principal Position Year Salary Bonus Options (1)
- ------------------------------------- ------------- ---------------- --------------- -------------- --------------
Sheldon G. Adelson 2001 -- -- -- --
Chairman of the Board and Chief 2000 1,500,000 -- -- --
Executive Officer 1999 -- -- -- --
William P. Weidner 2001 1,038,462 500,000 2,322
President and Chief Operating 2000 951,284 300,000 -- 2,239
Officer 1999 797,165 -- -- 1,917
Bradley H. Stone 2001 830,769 400,000 -- 810
Executive Vice President 2000 726,214 240,000 -- 789
1999 511,882 -- -- 729
Robert G. Goldstein 2001 778,846 375,000 -- 810
Senior Vice President 2000 686,269 225,000 -- 789
1999 457,881 -- -- 729
David Friedman 2001 415,385 200,000 -- 1,057
Assistant to Chairman of the 2000 359,615 170,000 -- 540
Board and Secretary 1999 300,000 -- -- 745
<FN>
- ----------
(1) Represents Group Life Insurance.
</FN>
Las Vegas Sands, Inc. 1997 Fixed Stock Option Plan
The Las Vegas Sands, Inc. 1997 Fixed Stock Option Plan (the "Plan")
provides for 75,000 shares of common stock of the Company to be reserved for
issuance by the Company to officers and other key employees or consultants of
the Company or any of its Affiliates or Subsidiaries (each as defined in the
Plan) pursuant to options granted under the Plan. The grant of such options has
been approved by the Nevada Gaming Authorities. The purpose of the Plan is to
promote the interest of the Company and its Principal Stockholder by (i)
attracting and retaining exceptional officers and other key employees and
consultants to the Company and its Affiliates and Subsidiaries and (ii) enabling
such individuals to participate in the long-term growth and financial success of
the Company. The Board of Directors has the authority to determine the
participants to whom options are granted, the number of shares covered by each
option or any repurchase or other disposition of shares thereunder, the exercise
price therefor, and the conditions and limitations applicable to the exercise of
the option. The Board of Directors is authorized to make adjustments in the
terms and conditions of, and the criteria included in, options, in the case of
certain unusual or nonrecurring events, whenever the Board of Directors
determines that such adjustments are appropriate in order to prevent dilution or
enlargement of benefits or potential benefits under the Plan. Options granted
under the Plan expire on the earlier of (i) a specified number of years from the
date of grant, (ii) the date three days prior to a Change in Control
Acceleration Event (as defined in the Plan) and (iii) the date three days prior
to a Public Offering Acceleration Event (as defined in the Plan). In the event
of any Acceleration Event (as defined in the Plan) any outstanding options then
held by the participants which are unexercisable or otherwise unvested, shall
automatically become fully vested and shall be exercisable pursuant to the
applicable award agreement. The Plan provides that the Principal Stockholder
may, at any time, assume the Plan or certain obligations under the Plan, in
which case the Principal Stockholder will be the administrator of the Plan, the
issuer of the options, and will have all the rights, powers, and
responsibilities granted to the Company or the Board of Directors under the Plan
with respect to such assumed obligations.
80
The Board of Directors may amend, alter, suspend, discontinue or terminate
the Plan or any portion thereof at any time, provided that any such action shall
not be taken without shareholder approval if such approval is necessary to
comply with any tax or regulatory requirement applicable to the Plan and
provided that any such amendment, alteration, suspension, discontinuance or
termination that would impair the rights of any holder of an option already
granted shall not be effective without the holder's consent.
The Principal Stockholder has assumed the obligations of the Company under
the Plan and has granted options to Mr. Weidner, Mr. Stone, Mr. Goldstein and
Mr. Friedman (the "Named Optionees") to acquire shares representing 1.996%,
1.497%, .9980%, and .4990%, respectively, of the common stock of the Company.
The specific terms and conditions of the options were agreed to in 1999 and were
memorialized in the first quarter of 2002. The exercise price of the stock
options on the grant date was not lower than the fair market value of the common
stock of the Company. The options granted to the Named Optionees were fully
vested and exercisable upon grant. The options of the Named Optionees were
exercised immediately after issuance by delivery of a notice of exercise from
each of the Named Optionees to the Principal Stockholder. The notice
contemplates that the exercise price of the options will be loaned to the Named
Optionees by the Principal Stockholder on a secured basis. See "Item 13-Certain
Relationships and Related Transactions-Stock Option Loans." The applicable
shares of common stock have not yet been delivered. Shares issued to the Named
Optionees pursuant to the exercise of an option and held at the time of each
Named Optionee's termination of employment are subject to redemption by the
Principal Stockholder.
ITEM 12. --SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial Ownership
The following table sets forth certain information as of April 1, 2002
with respect to the beneficial ownership of the common stock of LVSI by (i) each
person who, to the knowledge of LVSI, beneficially owns more than 5% of its
outstanding common stock, (ii) the directors of LVSI, (iii) all executive
officers named in the summary compensation table in "Item 11 - Executive
Compensation" and (iv) all executive officers and directors of LVSI as a group.
Percentage of
Number of Shares Outstanding Common
Beneficial Owner (1) Beneficially Owned Stock
- -------------------- ------------------ ------------------
Sheldon G. Adelson 1,000,000 100%
Robert F. List -- --
William P. Weidner 19,960 (2) 2.00%
Bradley H. Stone 14,970 (2) 1.50%
Robert G. Goldstein 9,980 (2) *
David Friedman 4,990 (2) *
All executive officers and the directors
of the Company as a group 1,000,000 100%
<FN>
- ----------
* Less than 1%
(1) The address of each person named above is c/o the Company, 3355 Las Vegas
Boulevard South, Room 1A, Las Vegas, NV 89109, other than Mr. List, whose
address is 3993 Howard Hughes Parkway, Suite 850, Las Vegas, NV 89109.
(2) Includes the right to purchase shares of common stock of the Company from
the Principal Stockholder pursuant to an exercise of options within 60 days
of the date hereof. Each of the Named Optionees has delivered a notice of
exercise pursuant to such options, however, the applicable shares of common
stock have not yet been issued. See "Item 11 - Executive Compensation - Las
Vegas Sands, Inc. 1997 Fixed Stock Option Plan."
</FN>
Stockholders' Agreement
Upon the Named Optionees becoming stockholders of the Company, the Named
Optionees, the Principal Stockholder and the Company expect to enter into a
Stockholders' Agreement (the "Stockholders' Agreement"). It is contemplated that
the Stockholders' Agreement will provide that no Named Optionee, nor any of
their permitted transferees who has agreed to be bound by the terms and
conditions of the Stockholders' Agreement (together with the Named Optionees,
the "Additional Stockholders"), will sell, assign, pledge, encumber or otherwise
dispose of any shares of common stock of the Company, except in accordance with
the provisions of the Stockholders' Agreement. The parties also expect the
Stockholders' Agreement to provide the Additional Stockholders with certain
tag-along rights, piggyback registration rights and preemptive rights.
81
ITEM 13. --CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Redeemable Preferred Interest
Venetian currently has two members, the Company and Interface Group Holding
Company, Inc. ("Interface Holding"), which owns all of the capital stock of
Interface. LVSI is the managing member of Venetian and owns 100% of the common
equity interest in Venetian. Interface Holding currently holds a Series B
preferred interest in Venetian (the "Series B Preferred Interest"). The rights
of the Series B Preferred Interest are non-voting, not subject to mandatory
redemption or redemption at the option of the holder and have a preferred return
of 12%. Upon the 12th anniversary of the closing of the offering of the Notes,
to the extent of the positive capital account of the holders of the Series B
Preferred Interest, there must be a distribution on the Series B Preferred
Interest. Until the indebtedness under the Bank Credit Facility is repaid and
cash payments are permitted under the restricted payment covenants under the
Indentures, the preferred return on the Series B Preferred Interest will accrue
and will not be paid in cash. Subject to the foregoing, distributions with
respect to the preferred capital of the holders of the Series B Preferred
Interest may, at the option of the Company, be made at any time.
Tranche B Take-out Loan and Principal Stockholder's $20.0 million Guaranty of
Tranche A Take-out Loan
On December 20, 1999, each of the $105.0 million Tranche A Take-out Loan
and the $35.0 million Tranche B Take-out Loan were made, and were secured by
mortgages on the Mall Assets. The Principal Stockholder has agreed to guarantee,
on an unsecured basis, $20.0 million of indebtedness under the Tranche A
Take-out Loan. In addition, the Tranche B Take-out Lender is wholly-owned by the
Principal Stockholder. The Tranche B Take-out Loan is deeply subordinated to the
Tranche A Take-out Loan, so that, among other things, (a) the Tranche A Take-out
Lender has first priority liens on the Mall Assets, and the Tranche B Take-out
Lender has second priority liens; (b) no payment can be made on the Tranche B
Take-out Loan unless (x) all payments then due under the Tranche A Take-out Loan
have been paid in full, (y) there is no default under the Tranche A Take-out
Loan and (z) there is available cash flow (taking into account certain required
reserves) to make such payment; and (c) the Tranche B Take-out Lender cannot
exercise any remedies or take any enforcement actions under the Tranche B
Take-out Loan for so long as the Tranche A Take-out Loan is outstanding, unless
the Tranche A Take-out Lender consents. The Tranche B Take-out Loan is due
December 16, 2004, provided that the New Mall Subsidiary has an option to extend
the loan until December 16, 2007. See "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
Completion Guaranty
The Completion Guaranty with respect to the construction of the Casino
Resort was provided by the Principal Stockholder in November 1997. Pursuant to
the Completion Guaranty, the Principal Stockholder guaranteed, subject to
certain conditions and limitations, payment of Casino Resort construction costs
in excess of available funds, up to a maximum of $25.0 million (plus interest
accrued on the collateral for such guaranty, as described below), provided that
such cap on liability under the Completion Guaranty does not apply with respect
to excess construction costs attributable to scope changes. The Principal
Stockholder's obligations under the Completion Guaranty were collateralized by
$25.0 million in cash and cash equivalents and the interest accrued thereon (the
"Guaranty Collateral"). On November 12, 1999, an advance of approximately $23.5
million was made under the Completion Guaranty and is being treated as a
Completion Guaranty loan that is subordinated in right of payment (except as
described below) to the indebtedness under the Bank Credit Facility, the FF&E
Credit Facility and the Notes (the "Completion Guaranty Loan"). The Completion
Guaranty Loan matures on November 16, 2005 and bears interest at a rate of
14-1/4% per annum. Although interest may accrue on the Completion Guaranty Loan,
no cash payments with respect thereto may be made until senior indebtedness is
repaid, except for payments made from certain construction-related recoveries
(including any payments received by the Company from the Construction Manager or
its subcontractors in connection with the litigations discussed above). As of
December 31, 2001, there was approximately $5.0 million of Guaranty Collateral
remaining, and the Company expects that such collateral will be used to fund
excess construction costs, with a portion of such funding being treated as
another completion guaranty loan. Although the Completion Guaranty provided that
the Principal Stockholder's liability thereunder would expire upon substantial
completion of the Casino Resort, which was achieved on November 12, 1999, the
Principal Stockholder agreed on November 12, 1999 that he would remain liable
under the Completion Guaranty until "final completion" (i.e., the completion of
all remaining punchlist items and the final resolution of all disputes with the
Construction Manager and subcontractors) is achieved. The Completion Guaranty
does not provide for the incurrence by the Principal Stockholder, directly or
indirectly, of any obligation, contingent or otherwise, for the payment of
principal or interest on the Notes or any other indebtedness described herein.
82
Cooperation Agreement
The Company's business plan calls for each of the Hotel, the Casino and
Congress Center, the Mall and the Expo Center (and, potentially, the Phase II
Resort), though separately owned, to be part of an integrally related project.
In order to establish terms for the integrated operation of these facilities,
Venetian (as owner of the Hotel, Casino and Congress Center, and the Phase II
Land), the New Mall Subsidiary and Interface are parties to the Cooperation
Agreement. The Cooperation Agreement sets forth agreements among the parties
regarding, among other things, encroachments, easements, operating standards,
maintenance requirements, insurance requirements, casualty and condemnation,
joint marketing, the sharing of certain facilities and costs relating thereto.
The obligations set forth in the Cooperation Agreement "run with the land" and
so bind the respective property owners and their successors, provided that
certain of the obligations under the Cooperation Agreement, are not senior to
previously recorded mortgages encumbering the Expo Center and so would not
survive any foreclosure of such mortgages.
The Cooperation Agreement contains cross encroachment provisions which
permit the Mall to encroach, to a limited extent, on other portions of the
Casino Resort, and which will permit other portions of the Casino Resort to
encroach, to a limited extent, on the Mall.
The Cooperation Agreement also contains certain covenants respecting the
operation of the Expo Center and the Casino Resort. Such covenants include, for
example, (a) a covenant by Venetian to operate the Hotel and Casino continuously
and to use the Hotel and the Casino exclusively in accordance with standards of
first-class Las Vegas Boulevard-style hotels and casinos; (b) a covenant by the
New Mall Subsidiary to operate and to use the Mall exclusively in accordance
with standards of first-class retail and restaurant complexes; and (c) a
covenant by Interface to operate and to use the Expo Center exclusively in
accordance with standards of first-class convention, trade show and exposition
centers. Additionally, with respect to the joint marketing of the Casino Resort
and the Expo Center, the Cooperation Agreement provides that until December 31,
2010, Interface (upon request from the owner of the Hotel and Casino) will use
commercially reasonable efforts to have the Hotel designated as the
"headquarters hotel" for trade show and convention events at the Expo Center,
and the owner of the Hotel and Casino will use commercially reasonable efforts
to promote the use and occupancy of the Expo Center. It should be noted that
trade show and convention promoters will be under no obligation to designate the
Hotel as the "headquarters hotel" for their events.
The Cooperation Agreement also requires each of: (a) the owners of each
component of the Casino Resort; and (b) the owner of the Expo Center, to
maintain certain minimum types and levels of insurance, including property
damage, general liability and business interruption insurance.
Administrative Services Agreement
Pursuant to a certain services agreement (the "Services Sharing Agreement")
among LVSI, certain of its subsidiaries and Interface Holding (collectively, the
"Participants"), the Participants have agreed to share ratably in the costs of,
and under certain circumstances provide to one another, shared services,
including legal services, accounting services, insurance administration,
benefits administration, and such other services as each party may request of
the other. In addition, under the Services Sharing Agreement, the Participants
have agreed to share ratably the costs of any shared office space. Total
payments made by the Company to Interface and its affiliates pursuant to the
Services Sharing Agreement were $1.1 million in 2001.
Temporary Lease
On November 1, 1996, LVSI and Interface entered into a lease agreement
whereby LVSI agreed to lease approximately 5,000 square feet in the Expo Center
to be used as its temporary executive offices during the construction of the
Casino Resort. Management believes that the lease agreement, which provides for
monthly rent of $5,000 to be paid by LVSI to Interface, is at least as favorable
as the Company could have obtained from an independent third party. The initial
term of the lease agreement expired on November 1, 1998, but LVSI and Interface
have extended this term on a month-to-month basis. Total payments made by LVSI
to Interface pursuant to the lease agreement in 2001 totaled $60,000.
Audio Visual Services
IGN provides audio visual services to group customers of the Casino Resort.
These services are provided pursuant to a contract that provides for an equal
sharing of revenues after direct operating expenses. The Company received $2.5
million pursuant to this contract during 2001.
Possible Conflicts of Interest
The common ultimate ownership of the Casino Resort, the Phase II Resort and
the Expo Center may present potential conflicts of interest. For example,
management may offer discounts and other incentives for visitors to stay at the
Phase II Resort which might result in a competitive advantage of the Phase II
Resort over the Casino Resort. In addition, management may choose to allocate
certain business opportunities to the Phase II Resort rather than to the Casino
Resort. Although common ownership of both the Casino Resort and the Phase II
Resort often may result in economies, efficiencies and joint business
opportunities for the two resorts in the aggregate, the Casino Resort may, in
certain circumstances, bear the greater burden of the expenses that are shared
83
by both resorts. In addition, inasmuch as there may be a common management for
both the Casino Resort and the Phase II Resort, management's time may be split
between overseeing the operation of each resort, and management, in certain
circumstances, may devote more time to its ownership and operations
responsibilities of the Phase II Resort than those of the Casino Resort.
Finally, because it is expected that the Company will lease and operate the
casino for the Phase II Resort, potential conflicts may arise from the common
operation of the Casino and the Phase II Resort casino, such as the allocation
of management's time. In order to share expenses and provide for efficient
management and operations of the Casino Resort and Phase II Resort and shared
facilities, Venetian and the Phase II Subsidiary entered into the Cooperation
Agreement and may in the future enter into additional cost sharing and easement
agreements.
The common ultimate ownership, and management, of the Casino Resort and the
Expo Center also may result in potential conflicts of interest. The Expo Center
and the Congress Center are potential competitors in the business conference and
meetings business. Under the Cooperation Agreement, Venetian has agreed that it
will not conduct, or permit to be conducted at the Casino Resort, trade shows or
expositions of the type generally held at the Expo Center. Furthermore,
marketing practices may be implemented that are intended to benefit the Expo
Center and may have a detrimental effect on the Casino Resort.
Restaurant Leases
The Principal Stockholder is a partner in four entities formed that operate
restaurants in the Casino Resort. The terms and conditions of the leases granted
by the Company for such restaurants are at amounts which management believes
would be no less favorable than those negotiated with independent third parties.
Valentino Las Vegas LLC and Night Market, LLC paid Venetian $1.0 million, and
Postrio Las Vegas LLC and Carnevale Coffee Bar LLC paid the Mall Subsidiary $1.1
million, for the year ended December 31, 2001.
Phase II Land Lease
In conjunction with the Phase II Subsidiary Credit Facility on October 19,
2001, the Phase II Subsidiary leased the Phase II Land to Venetian for five
years at an annual rent of $8.0 million. Prior to October 2001, IGN leased
parking spaces on the Phase II Land from the Phase II Subsidiary for rent of
$5,000 per month.
Phase II Subsidiary Bank Loan Guarantee
During 2001, the Principal Stockholder guaranteed a $2.9 million bank loan
made to architects of the Phase II Subsidiary to secure a trade payable owed to
the architects by the Phase II Subsidiary.
Stock Option Loans
The Principal Stockholder intends to make loans to each of the Named
Optionees (collectively, the "Stock Option Loans") to allow such executive
officers to exercise options that they have been granted from the Principal
Stockholder to purchase common stock of the Company. Each Stock Option Loan is
expected to be evidenced by a full recourse promissory note, to be secured by a
pledge of the Named Optionee's common stock. See "Item 11 - Executive
Compensation - Las Vegas Sands, Inc. 1997 Fixed Stock Option Plan."
84
PART IV
ITEM 14.--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of the report.
(1) List of Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholder's Equity
Consolidated Statements of Cash Flows
Notes to Financial Statements
(2) List of Financial Statement Schedules
Report of Independent Accountants
Schedule II - Valuation and Qualifying Accounts
(3) List of Exhibits
Exhibit No. Description of Document
----------- -----------------------
3.1 Amended and Restated Articles of Incorporation of LVSI.(1)
3.2 Certificate of Amendment of Amended and Restated Articles of
Incorporation of LVSI.(1)
3.3 Amended and Restated By-laws of LVSI.(1)
3.4 Amended and Restated Limited Liability Company Agreement of
Venetian(1)
4.1 Indenture, dated as of November 14, 1997, by and among
LVSI and Venetian, as issuers, Mall
Intermediate Holding Company, LLC ("Mall Intermediate"),
Lido Intermediate Holding Company, LLC ("Lido
Intermediate") and Grand Canal Shops Mall Construction,
LLC ("Mall Construction"), as Mortgage Note guarantors,
and U.S. Bank Trust National Association (previously
known as First Trust National Association), as Mortgage
Note trustee (the "Mortgage Note Trustee").(1)
4.2 Indenture, dated as of November 14, 1997, by and among
LVSI and Venetian, as issuers, Mall Intermediate, Lido
Intermediate and Mall Construction, as Senior
Subordinated Note guarantors, and First Union National
Bank ("First Union"), as Senior Subordinated Note
trustee.(1)
4.3 Registration Rights Agreement, dated as of November 14,
1997, by and among LVSI, Venetian, Mall
Intermediate, Lido Intermediate and Mall Construction, and
Goldman, Sachs & Co. and Bear, Stearns
& Co. Inc. (the "Initial Purchasers").(1)
4.4 Funding Agents' Disbursement and Administration Agreement,
dated as of November 14, 1997, by and among LVSI, Venetian,
Mall Construction, jointly and severally, The Bank of
Nova Scotia ("Scotiabank"), as Bank Agent, the Mortgage
Note Trustee, Atlantic Pacific Las Vegas, LLC (the "HVAC
Provider") and Scotiabank, as disbursement agent (the
"Disbursement Agent").(1)
4.5 FADAA Limited Waiver, dated as of November 12, 1999, by and
among LVSI, Sheldon G. Adelson, as Principal stockholder
(the "Principal Stockholder"), the Bank Agent, the Mortgage
Note Trustee, Salomon Brothers Realty Corp. ("SBRC"), as
successor-in-interest to GMAC Commercial Mortgage
Corporation ("GMAC"), and the HVAC Provider. (5)
4.6 Company Security Agreement, dated as of November 14, 1997,
by and among LVSI, Venetian, Mall Construction and
Scotiabank, as the Intercreditor Agent.(1)
4.7 Mall Construction Subsidiary Security Agreement, dated as
of November 14, 1997, between Mall Construction and
Scotiabank, as the Intercreditor Agent.(1)
4.8 Deed of Trust, Assignment of Rents and Leases and Security
Agreement made by Venetian and LVSI, jointly and
severally as trustor, to Lawyers Title of Nevada, Inc.
("Lawyer's Title"), as trustee, for the benefit of the
Mortgage Note Trustee, as Beneficiary.(1)
85
Exhibit No. Description of Document
----------- -----------------------
4.9 First Amendment to Deed of Trust, Assignment of Rents
and Leases and Security Agreement made by Venetian and
LVSI, jointly and severally as trustor, to Lawyer's
Title, as trustee, for the benefit of the Mortgage
Note Trustee, as Beneficiary. (3)
4.10 Leasehold Deed of Trust, Assignment of Rents and Leases
and Security Agreement made by Mall Construction, as
trustor, to Lawyer's Title, as trustee, for the benefit
of the Mortgage Note Trustee, as Beneficiary. (1)
4.11 First Amendment to Leasehold Deed of Trust, Assignment
of Rents and Leases and Security Agreement made by Mall
Construction, as trustor, to Lawyer's Title, as
trustee, for the benefit of the Mortgage Note Trustee,
as Beneficiary. (3)
4.12 Disbursement Collateral Account Agreement, dated as
of November 14, 1997, by, among LVSI, Venetian, Mall
Construction and Scotiabank, as Disbursement Agent,
and as Securities Intermediary. (1)
4.13 Mortgage Notes Proceeds Collateral Account Agreement,
dated as of November 14, 1997, by and among LVSI,
Venetian and Scotiabank, as Disbursement Agent. (1)
4.14 Mortgage Notes Proceeds Account Third-Party Account
Agreement, dated as of November 14, 1997, by and among
LVSI, Venetian, Scotiabank, as Disbursement Agent,
and Goldman, Sachs & Co., as Securities Intermediary. (1)
4.15 Intercreditor Agreement, dated as of November 14, 1997,
among Scotiabank, as Bank Agent and Intercreditor Agent,
the Mortgage Note Trustee, GMAC, as Interim Mall Lender,
and First Union, as Senior Subordinated Note trustee. (1)
4.16 Completion Guaranty, dated as of November 14, 1997, made
by the Principal Stockholder, in favor of Scotiabank,
as the Bank Agent acting on behalf of the bank lender
parties, GMAC, as the Interim Mall Lender, and the
Mortgage Note Trustee. (1)
4.17 Completion Guaranty Collateral Account Agreement,
dated as of November 14, 1997, by and between the
Principal Stockholder, as Pledgor, and Scotiabank, as
Disbursement Agent. (1)
4.18 Completion Guaranty Third-Party Account Agreement,
dated as of November 14, 1997, by and among the Principal
Stockholder, Scotiabank, as Disbursement Agent, and
Goldman, Sachs & Co., as Securities Intermediary. (1)
4.19 Unsecured Indemnity Agreement, dated as of November
14, 1997, by and among LVSI, Venetian and Mall
Construction, to and for the benefit of the Mortgage Note
Trustee. (1)
10.1 Energy Services Agreement, dated as of November 14,
1997, by and between the HVAC Provider and Venetian. (1)
10.2 Energy Services Agreement Amendment No. 1, dated July
1, 1999, by and between the HVAC Provider and
Venetian. (5)
10.3 Energy Services Agreement, dated as of November 14,
1997, by and between the HVAC Provider and Mall
Construction. (1)
10.4 Energy Services Agreement Amendment No. 1, dated
July 1, 1999, by and between the HVAC Provider and Mall
Construction. (5)
10.5 Construction Management Agreement, dated as of
February 15, 1997, between LVSI, as owner, and Lehrer
McGovern Bovis, Inc. as construction manager (the
"Construction Manager"). (1)
10.6 Assignment, Assumption and Amendment of Construction
Management Agreement, dated as of November 14, 1997, by
and among LVSI, Venetian and the Construction
Manager. (1)
10.7 Guaranteed Maximum Price Amendment to Construction
Management Agreement, dated June 17, 1998 (effective
September 9, 1998), between the Construction Manager and
Venetian. (2)
10.8 Agreement, effective as of January 1, 1996, between
Venetian, as owner, and the architect, a collaboration
between the firms of TSA of Nevada, LLP and WAT&G, Inc.,
Nevada. (1)
10.9 Amended and Restated Reciprocal Easement, Use and
Operating Agreement, dated as of November 14, 1997,
by and among Interface Group-Nevada, Inc. ("Interface"),
Mall Construction and Venetian. (1)
86
Exhibit No. Description of Document
----------- -----------------------
10.10 First Amendment to Amended and Restated Reciprocal
Easement, Use and Operating Agreement, dated as of
December 20, 1999, by and among Interface, Grand Canal
Shops Mall Subsidiary, LLC (the "New Mall Subsidiary"),
Lido Casino Resort, LLC (the "Phase II Subsidiary") and
Venetian. (5)
10.11 Casino Lease, dated as of November 14, 1997, by and
between LVSI and Venetian. (1)
10.12 Amended and Restated Services Agreement, dated as of
November 14, 1997, by and among Venetian, Interface
Group Holding Company, Inc., Interface, Lido Casino
Resort, LLC, Grand Canal Shops Mall MM, Inc. and certain
subsidiaries of Venetian named therein. (1)
10.13 Intercreditor Agreement, dated as of November 14,
1997, by and among Scotiabank, as the Administrative
Agent, the Mortgage Note Trustee, GMAC, as the Interim
Mall Lender, First Union, as Subordinated Note trustee,
LVSI, Venetian, Mall Construction and the Principal
Stockholder. (1)
10.14 Indemnity and Guaranty Agreement, dated as of
December 20, 1999, made by the Principal
Stockholder. (5)
10.15 Guaranty, dated as of December 20, 1999, made by the
Principal Stockholder. (5)
10.16 Mall Scope Change Guaranty, dated as of December 20,
1999, made by the Principal Stockholder. (5)
10.17 Note, dated December 20, 1999, by the New Mall
Subsidiary in favor of SGA Development, Inc., in
the amount of $35,000,000. (5)
10.18 Construction Agency Agreement, dated as of November
14, 1997, by and between Venetian and the HVAC
Provider. (1)
10.19 Management Agreement, dated as of April 23, 1997, by
and between LVSI and Forest City Commercial
Management, Inc. ("Forest City"), as assigned by
LVSI to Mall Construction by that certain
Assignment and Assumption of Contracts. (1)
10.20 Management Agreement, dated as of November 12, 1999,
by and between the Mall Construction and Forest City,
as assigned by Mall Construction to the Mall Subsidiary
by that certain Assignment and Assumption of Contracts. (5)
10.21 Primary Liquidated Damages Insurance Agreement,
dated August 4, 1997, by and between the
Construction Manager and C.J. Coleman & Companies,
Ltd. (1)
10.22 Guaranty of Performance, dated as of August 19,
1997, by the Peninsula and Oriental Steam Navigation
Company in favor of LVSI, as assigned by LVSI to Venetian
by that certain Assignment, Assumption and Amendment of
Contracts. (1)
10.23 Guaranty of Performance and Completion, dated as of
August 19, 1997, by Bovis, Inc., LVSI, Venetian and
Mall Construction, for the benefit of Scotiabank, as the
Intercreditor Agent. (1)
10.24 Sands Resort Hotel and Casino Agreement, dated February
18, 1997, by and between Clark County and LVSI, and all
amendments thereto. (1)
10.25 Las Vegas Sands, Inc. 1997 Fixed Stock Option Plan. (1)
10.26 Term Loan and Security Agreement, dated as of December
22, 1997, by and among LVSI and Venetian, as Borrowers,
the lender parties thereto, BancBoston Leasing, Inc., as
co-agent ("BancBoston"), and General Electric Capital
Corporation ("GECC"), as administrative agent. (1)
10.27 Limited Waiver and First Amendment to Term Loan and
Security Agreement, dated November 12, 1999, by and
among LVSI and Venetian, as Borrowers, the lender
parties thereto, BancBoston, and GECC, as
administrative agent. (5)
10.28 Intercreditor Agreement, dated as of December 22, 1997,
by and among Scotiabank, as Bank Agent, First Trust, as
Mortgage Note trustee, GMAC and GECC. (1)
10.29 Loan Agreement, dated as of December 20, 1999, by and
among Goldman Sachs Mortgage Company, as Syndication
Agent, Scotiabank, as Administrative Agent and as
Collateral Agent, and the New Mall Subsidiary, as
Borrower. (5)
10.30 Subordination and Intercreditor Agreement (Trade
Claims), dated November 12, 1999, by and among
Scotiabank, as Bank Agent, LVSI and the Principal
Stockholder. (5)
87
Exhibit No. Description of Document
----------- -----------------------
10.31 Amended and Restated Credit Agreement, dated as of
September 17, 2001, by and among LVSI and Venetian, as
Borrowers, the lenders party thereto and Scotiabank,
as Lead Arranger and Administrative Agent. (8)
10.32 Limited Waiver and Second Amendment to Term Loan and
Security Agreement, dated as of June 14, 2000, by and
among LVSI and Venetian, as borrowers, GECC, as
Administrative Agent, and the lender parties thereto. (6)
10.33 Limited Waiver, Consent and Third Amendment to Term Loan
and Security Agreement, dated as of June 29, 2001, by
and among LVSI and Venetian, as borrowers, GECC, as
Administrative Agent, and the lender parties
thereto. (7)
10.34 Fourth Amendment to Term Loan and Security Agreement,
dated as of September 28, 2001, by and among LVSI and
Venetian, as joint and several obligors, the financial
institutions party thereto and GECC, as Administrative
Agent. (8)
10.35 Credit Agreement, dated as of October 19, 2001, by and
among Phase II Subsidiary, as Borrower, the lenders
party thereto and Scotiabank, as Administrative
Agent. (8)
10.36 Limited Waiver under Term Loan and Security Agreement,
dated as of December 31, 2001, by and among LVSI and
Venetian, as borrowers, GECC, as Administrative
Agent, and the lender parties thereto. (9)
10.37 Limited Waiver Regarding Credit Agreement, dated as of
December 31, 2001, by and among LVSI and Venetian, as
borrowers, Scotiabank, as Lead Arranger and
Administrative Agent, and the lender parties
thereto. (9)
10.38 Limited Waiver Regarding Credit Agreement, dated as
of December 31, 2001, by and among Lido Casino Resort,
LLC, as borrower, Scotiabank, as Administrative Agent,
and the other lender parties thereto. (9)
21.1 Subsidiaries of the registrant. (9)
24.1 Powers of Attorney (included on signature pages).
<FN>
- ----------
(1) Incorporated by reference from Registration Statement on Form S-4
of the Company and certain of its subsidiaries (File No.
333-42147).
(2) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the Quarter ended September 30, 1998.
(3) Incorporated by reference from the Company's Annual Report on
Form 10-K for the Fiscal Year ended December 31, 1998.
(4) Incorporated by reference from the Company's Annual Report on
Form 10-K for the Fiscal Year ended December 31, 1999.
(5) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the Quarter ended June 30, 2000.
(6) Incorporated by reference from the Company's Annual Report on
Form 10-K for the Fiscal Year ended December 31, 2000.
(7) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the Quarter ended June 30, 2001.
(8) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the Quarter ended September 30, 2001.
(9) Filed herewith.
</FN>
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended December 31,
2001.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
LAS VEGAS SANDS, INC.
/s/ Sheldon G. Adelson
------------------------------------
Sheldon G. Adelson,
Chairman of the Board and
Chief Executive Officer
We, the undersigned officers and directors of Las Vegas Sands, Inc., hereby
severally constitute William P. Weidner and David Friedman and each of them
singly, our true and lawful attorneys with full power to them, and each of them
singly, to sign for us and in our names in the capacities indicated below, any
and all amendments to this Annual Report on Form 10-K, and generally do all such
things in our name and behalf in such capacities to enable Las Vegas Sands, Inc.
to comply with the applicable provisions of the Securities Exchange Act of 1934,
and all requirements of the Securities and Exchange Commission, and we hereby
ratify and confirm our signatures as they may be signed by our said attorneys,
or either of them, to any and all such amendments.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Sheldon G. Adelson Chairman of the Board, Chief April 1, 2002
- -----------------------------
Sheldon G. Adelson Executive Officer and Director
/s/ Robert F. List Special Director April 1, 2002
- -----------------------------
Robert F. List
/s/ Harry D. Miltenberger Vice President--Finance (principal April 1, 2002
- -----------------------------
Harry D. Miltenberger financial and accounting officer)