EXHIBIT 99.1
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Public Accountants
To the Board of Directors and Members of
Aladdin Gaming Holdings, LLC:
We have audited the accompanying consolidated balance sheets of Aladdin
Gaming Holdings, LLC (a Nevada limited liability company in the development
stage) and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, members' equity and cash flows for the
years ended December 31, 1999 and 1998 and for the period from inception
(December 1, 1997) to December 31, 1999. 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 in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aladdin Gaming Holdings, LLC
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998,
and for the period from inception (December 1, 1997) to December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 30, 2000
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,669 $ 1,248
Restricted cash and cash equivalents...................... 80,471 --
Interest receivable restricted cash....................... 222 859
Receivables, related parties.............................. 8 77
Other receivables......................................... 1 765
Inventory................................................. 59 60
Prepaid assets............................................ 320 119
Restricted land to be transferred......................... 6,842 6,842
-------- --------
Total current assets.................................... 89,592 9,970
-------- --------
Property and equipment:
Land...................................................... 33,407 33,407
Furniture, fixtures and equipment......................... 950 272
Construction in progress.................................. 274,398 86,557
Capitalized interest...................................... 37,758 8,213
-------- --------
346,513 128,449
Less accumulated depreciation and amortization.............. (176) (17)
-------- --------
Net property and equipment................................ 346,337 128,432
-------- --------
Other assets:
Restricted cash and cash equivalents...................... -- 227,983
Other assets.............................................. 2,067 2,061
Debt issuance costs, net of accumulated amortization of
$6,442 and $2,831 as of December 31, 1999 and 1998,
respectively............................................ 30,704 34,315
-------- --------
Total other assets...................................... 32,771 264,359
-------- --------
$468,700 $402,761
======== ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 4,700 $ --
Accounts payable.......................................... 2,752 1,005
Construction payable...................................... 12,193 12,063
Obligation to transfer land............................... 6,842 6,842
Accrued interest.......................................... 2,183 1,734
Accrued expenses.......................................... 2,068 2,502
-------- --------
Total current liabilities............................... 30,738 24,146
-------- --------
Long-term debt, net of discount............................. 403,393 388,353
Related party payables...................................... 7,330 4,119
Advances to purchase membership interests................... 3 3
Commitments and contingencies............................... -- --
Members' equity:
Preferred membership interest............................. 75,044 --
Common membership interest, 10,000,000 membership
interests authorized; 1,000,000 common membership
interests issued and outstanding as of December 31, 1999
and 1998................................................ 28,608 28,608
Deficit accumulated during the development stage.......... (76,416) (42,468)
-------- --------
Total members' equity................................... 27,236 (13,860)
-------- --------
$468,700 $402,761
======== ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 1998 AND THE PERIOD
FROM INCEPTION (DECEMBER 1, 1997) THROUGH DECEMBER 31, 1999
(IN THOUSANDS)
FOR THE PERIOD FROM
INCEPTION
(DECEMBER 1, 1997)
FOR THE YEAR ENDED FOR THE YEAR ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1999
------------------- ------------------- -------------------
Pre-opening costs.......................... $ 11,735 $ 24,737 $ 36,472
Other (income) expense:
Interest income.......................... (8,280) (12,472) (20,752)
Interest expense......................... 52,202 38,416 90,618
Less: Interest capitalized............... (29,545) (8,213) (37,758)
-------- -------- --------
Total other (income) expense........... 14,377 17,731 32,108
-------- -------- --------
Net loss accumulated during the development
stage.................................... $ 26,112 $ 42,468 $ 68,580
======== ======== ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOR THE PERIOD FROM INCEPTION (DECEMBER 1, 1997)
THROUGH DECEMBER 31, 1999
(IN THOUSANDS)
SOMMER ENTERPRISES, LLC ALADDIN GAMING ENTERPRISES, LLC
------------------------------------- -------------------------------------
DEFICIT DEFICIT
ACCUMULATED ACCUMULATED
COMMON PREFERRED DURING THE COMMON PREFERRED DURING THE
MEMBERSHIP MEMBERSHIP DEVELOPMENT MEMBERSHIP MEMBERSHIP DEVELOPMENT
INTEREST INTEREST STAGE INTEREST INTEREST STAGE
---------- ---------- ----------- ---------- ---------- -----------
BALANCE, DECEMBER 1, 1997.... $ -- $ -- $ -- $ -- $ -- $ --
Member Contributions......... 1 -- -- -- -- --
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31,
1997....................... 1 -- -- -- -- --
Net loss for the period...... -- -- (19,960) -- -- (10,617)
Member Contributions......... (47,317) -- -- 28,247 -- --
Members' equity costs........ (1,093) -- -- (581) -- --
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31,
1998....................... (48,409) -- (19,960) 27,666 -- (10,617)
Net loss for the period...... -- -- (12,273) -- -- (6,528)
Member Contributions......... -- 34,613 -- -- -- --
Restatement of Preferred
Interests.................. -- (30,280) -- -- -- --
Preferred Return............. -- 1,944 (2,637) -- -- (1,402)
Restatement of Preferred
Return..................... -- (1,069) (1,046) -- -- (557)
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31,
1999....................... $(48,409) $ 5,208 $(35,916) $ 27,666 $ -- $(19,104)
======== ======== ======== ======== ======== ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (CONTINUED)
FOR THE PERIOD FROM INCEPTION (DECEMBER 1, 1997)
THROUGH DECEMBER 31, 1999
(IN THOUSANDS)
LONDON CLUBS NEVADA, INC. GAI, LLC
------------------------------------- -------------------------------------
DEFICIT DEFICIT
ACCUMULATED ACCUMULATED
COMMON PREFERRED DURING THE COMMON PREFERRED DURING THE
MEMBERSHIP MEMBERSHIP DEVELOPMENT MEMBERSHIP MEMBERSHIP DEVELOPMENT
INTEREST INTEREST STAGE INTEREST INTEREST STAGE
---------- ---------- ----------- ---------- ---------- -----------
BALANCE, DECEMBER 1, 1997.... $ -- $ -- $ -- $ -- $-- $ --
Member Contributions......... -- -- -- 2 -- --
-------- ------- -------- ---- --- -------
BALANCE, DECEMBER 31,
1997....................... -- -- -- 2 -- --
Net loss for the period...... -- -- (10,617) -- -- (1,274)
Member Contributions......... 50,000 -- -- -- -- --
Members' equity costs........ (581) -- -- (70) -- --
-------- ------- -------- ---- --- -------
BALANCE, DECEMBER 31,
1998....................... (49,419) -- (10,617) (68) -- (1,274)
Net loss for the period...... -- -- (6,528) -- -- (783)
Member Contributions......... -- 32,595 -- -- -- --
Restatement of Preferred
Interests.................. -- 30,280 -- -- -- --
Preferred Return............. -- 3,665 (1,402) -- -- (168)
Restatement of Preferred
Return..................... -- 3,296 (557) -- -- (67)
-------- ------- -------- ---- --- -------
BALANCE, DECEMBER 31,
1999....................... $(49,419) $69,836 $(19,104) $(68) $-- $(2,292)
======== ======= ======== ==== === =======
See accompanying summary of accounting policies and notes to consolidated
financial statements.
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (CONTINUED)
FOR THE PERIOD FROM INCEPTION (DECEMBER 1, 1997)
THROUGH DECEMBER 31, 1999
(IN THOUSANDS)
TOTAL
-------------------------------------
DEFICIT
ACCUMULATED
COMMON PREFERRED DURING THE
MEMBERSHIP MEMBERSHIP DEVELOPMENT
INTEREST INTEREST STAGE
---------- ---------- -----------
BALANCE, DECEMBER 1, 1997................................. $ -- $ -- $ --
Member Contributions...................................... 3 -- --
------- ------- --------
BALANCE, DECEMBER 31, 1997................................ 3 -- --
Net loss for the period................................... -- -- (42,468)
Member Contributions...................................... 30,930 -- --
Members' equity costs..................................... (2,325) -- --
------- ------- --------
BALANCE, DECEMBER 31, 1998................................ 28,608 -- (42,468)
Net loss for the period................................... -- -- (26,112)
Member Contributions...................................... -- 67,208 --
Restatement of Preferred Interests........................ -- -- --
Preferred Return.......................................... -- 5,609 (5,609)
Restatement of Preferred Return........................... -- 2,227 (2,227)
------- ------- --------
BALANCE, DECEMBER 31, 1999................................ $28,608 $75,044 $(76,416)
======= ======= ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999 AND 1998 AND THE PERIOD
FROM INCEPTION (DECEMBER 1, 1997)
THROUGH DECEMBER 31, 1999
(IN THOUSANDS)
FOR THE PERIOD
FROM INCEPTION
(DECEMBER 1, 1997)
FOR THE YEAR ENDED FOR THE YEAR ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1999
------------------- ------------------- -------------------
Cash flows from operating activities:
Net loss.................................. $ (26,112) $ (42,468) $ (68,580)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization............. 159 17 176
Amortization of debt costs................ 3,611 2,831 6,442
Amortization of original issue discount... 19,740 14,306 34,046
Change in assets and liabilities:
Interest receivable....................... 637 (859) (222)
Inventory................................. 1 (60) (59)
Prepaid expense........................... (201) (118) (320)
Receivables............................... 833 (842) (8)
Other assets.............................. (6) (2,061) (2,067)
Accounts payable.......................... 1,747 3,394 2,752
Accrued expenses.......................... (434) 113 2,068
Accrued interest.......................... 449 1,734 2,183
Related party payable..................... 3,211 3,354 6,565
--------- --------- ---------
Net cash provided by (used in) operating
activities................................ 3,635 (20,659) (17,024)
--------- --------- ---------
Cash flows from investing activities:
Payments for construction in progress..... (187,711) (66,184) (253,895)
Payments for furniture and equipment...... (678) (272) (950)
Payments for capitalized interest......... (29,545) (8,213) (37,758)
(Increase) Decrease in restricted cash.... 147,512 (227,983) (80,471)
--------- --------- ---------
Net cash used in investing activities....... (70,422) (302,652) (373,074)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes........... -- 100,047 100,047
Proceeds from long-term debt.............. -- 274,000 274,000
Repayment of long-term debt............... -- (547) (547)
Debt issuance costs....................... -- (37,146) (37,146)
Members' contributions.................... 67,208 65,000 132,211
Members' equity costs..................... -- (2,325) (2,325)
Payment of debt on contributed land....... -- (74,477) (74,477)
Payable to related parties................ -- -- 1
Advances to purchase membership
interests............................... -- -- 3
--------- --------- ---------
Net cash provided by financing activities... 67,208 324,552 391,767
--------- --------- ---------
Net increase in cash........................ 421 1,241 1,669
Cash at beginning of period................. 1,248 7 --
--------- --------- ---------
Cash at end of period....................... 1,669 $ 1,248 $ 1,669
--------- --------- ---------
Supplemental disclosures of cash flow
information and non-cash investing and
financing activities:
Cash paid for interest, net of amount
capitalized............................... (5,118) $ 11,332 $ 6,214
Members' contributions book value
Land...................................... -- 33,407 33,407
Construction in progress.................. -- 7,000 7,000
Equipment acquired equal to assumption of
debt...................................... -- 547 547
Increase in construction payables........... 130 12,063 12,193
Preferred dividends......................... 7,836 -- --
See accompanying summary of accounting policies and notes to consolidated
financial statements.
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
Aladdin Gaming Holdings, LLC, a Nevada limited liability company ("Gaming
Holdings"), was formed on December 1, 1997. Gaming Holdings initially was owned
by Aladdin Gaming Enterprises, Inc., a Nevada corporation ("Gaming Enterprises")
(25%), Sommer Enterprises, LLC, a Nevada limited liability company ("Sommer
Enterprises") (72%), and GAI, LLC, a Nevada limited liability company ("GAI")
(3%). On February 26, 1998, London Clubs International plc ("London Clubs"),
through its subsidiary London Clubs Nevada Inc. ("LCNI"), contributed $50
million for a 25% interest in Gaming Holdings common membership interests
("Holdings Common Membership Interests"). Sommer Enterprises contributed a
portion of land for Holdings Common Membership Interests. Gaming Enterprises,
which is owned 100% by Sommer Enterprises, contributed a portion of land, $7
million of predevelopment costs and $15 million in cash for Holdings Common
Membership Interests. After the additional contributions, Sommer Enterprises
owns 47% of Gaming Holdings, Gaming Enterprises owns 25% of Gaming Holdings,
LCNI owns 25% of Gaming Holdings, and GAI owns 3% of Gaming Holdings. On
November 30, 1998, the Sommer Trust and its affiliates agreed that they will
cause Sommer Enterprises and Gaming Enterprises to vote their respective
Holdings Common Membership Interests so that (taking into account Holdings
Common Membership Interests held by London Clubs or its affiliates) London Clubs
controls fifty percent of the voting power of Gaming Holdings. See Note 3 for
additional disclosures regarding voting power. On December 10, 1999, the holders
of Holdings Common Membership Interest agreed to restate the capital structure
of Gaming Holdings, which restatement provided, in addition to other matters,
that LCNI has an option to convert certain preferred membership interests of
Gaming Holdings into 15% of Holding Common Membership Interests, the creation of
certain new classes of preferred membership interests and for LCNI's control of
the majority of the Board of Managers of Gaming Holdings; however, most material
decisions remain subject to the supermajority consent of Gaming Holdings
members. See "Note 3. Classes of Interest." Aladdin Holdings, LLC, a Delaware
limited liability company ("AHL"), indirectly holds a majority interest in
Gaming Holdings. The members of AHL are the Trust Under Article Sixth u/w/o
Sigmund Sommer ("Sommer Trust") which holds a 95% interest in AHL and GW Vegas,
LLC, a Nevada limited liability company ("GW"), a wholly owned subsidiary of
Trust Company of the West ("TCW"), which holds a 5% interest in AHL.
Gaming Holdings is a holding company, the material assets of which are 100%
of the outstanding common membership interests and 100% of the outstanding
Series A preferred interests of Aladdin Gaming, LLC ("Gaming"). Aladdin Capital
Corp. ("Capital") is a wholly owned subsidiary of Gaming Holdings and was
incorporated solely for the purpose of serving as a co-issuer of the 13 1/2%
Senior Discount Notes ("Notes"). Capital will not have any material operations
or assets and will not have any revenues. Gaming Holdings, through its
subsidiaries, also owns 100% of Aladdin Music, LLC ("Aladdin Music"). Gaming
Holdings and its subsidiaries are collectively referred to herein as "Company."
The operations of the Company have been primarily limited to the design,
development, financing and construction of a new Aladdin Resort and Casino
("Aladdin"). The Aladdin will be the centerpiece of an approximately 35-acre
world-class resort, casino and entertainment complex ("Complex") located on the
site of the former Aladdin hotel and casino in Las Vegas, Nevada, a premier
location at the center of Las Vegas Boulevard. The Aladdin has been designed to
include a luxury themed hotel of approximately 2,600 rooms, an approximately
116,000 square foot casino, an approximately 1,200-seat production showroom and
six restaurants.
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Complex will comprise: (i) the Aladdin; (ii) a themed entertainment
shopping mall with approximately 496,000 square feet of retail space ("Desert
Passage"); (iii) a second hotel and casino with a music and entertainment theme
("Aladdin Music Project"); (iv) the newly renovated 7,000 seat Theater of the
Performing Arts ("Theater"); and (v) an approximately 4,800 space car parking
facility ("Carpark" and, together with the Desert Passage, hereinafter, "Mall
Project"). The Mall Project will be separately owned in part by an affiliate of
the Company and Aladdin Music is currently seeking a joint venture partner for
the Aladdin Music Project.
The consolidated financial statements include the accounts of Gaming
Holdings and its wholly-owned subsidiaries. Significant inter-company accounts
are eliminated in consolidation.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. As of December
31, 1999, restricted cash consisted of cash and cash equivalents held for
construction and development of the Aladdin.
PROPERTY AND EQUIPMENT
Property and equipment consists primarily of expenditures incurred for the
design and construction of the Aladdin and have been capitalized as construction
in progress. These amounts are expected to be reclassified to buildings and land
improvements upon completion of the facility and will be depreciated over the
useful life of the assets. Furniture, fixtures and equipment are stated at cost
and depreciation is computed using the straight-line method over the estimated
useful life of between three and ten years.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using first-in first-out method.
FAIR VALUE OF CERTAIN FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, receivables and all current
liabilities approximates fair value because of the short term maturity of these
instruments. The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
See Note 2 for additional fair value disclosures.
INTEREST COSTS
Interest costs associated with major construction projects are capitalized.
Interest is capitalized on amounts expended to construct the Aladdin using the
weighted-average cost of the Company's outstanding borrowings. The capitalized
interest will be recorded as part of the asset to which it relates and will be
amortized over the asset's useful life. Capitalization of interest ceases when
the project is substantially complete.
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST RATE SWAPS
The Company uses interest rate swaps 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 swap or similar financial instruments.
PRE-OPENING COSTS
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position No. 98-5
REPORTING ON THE COSTS OF START-UP ACTIVITIES ("SOP 98-5"). The provisions of
SOP 98-5 are effective for fiscal years beginning after December 15, 1998 and
require that the costs associated with start-up activities (including
pre-opening costs of casinos) be expensed as incurred. SOP 98-5 permits early
adoption in fiscal years for which annual financial statements have not yet been
issued.
Effective January 1, 1998, the Company adopted the provisions of SOP 98-5.
Pre-opening costs include, but are not limited to, salary related expenses for
new employees and management opening team, travel and lodging expenses, training
costs, advertising and marketing, organizational costs and all temporary
facility costs (i.e. rent, insurance, utilities, etc.).
DEBT DISCOUNT AND ISSUANCE COSTS
Debt discount and issuance costs are capitalized and amortized to expense
based on the terms of the related debt agreements using the effective interest
method or a method which approximates the effective interest method.
INCOME TAXES
The Company is a limited liability company and will be taxed as a
partnership for federal income tax purposes. Accordingly, no provision for
federal income taxes was recorded because the taxable income or loss is included
in the income tax returns of the members.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires that
entities record all derivatives as assets or liabilities measured at fair value,
with the change in fair value recognized in earnings or in other comprehensive
income, depending on the use of the derivative and whether it qualifies for
hedge accounting. SFAS 133 amends or supercedes several current accounting
statements. In July 1999, the FASB issued SFAS No. 137 which delays the
effective date of SFAS No. 133 from fiscal year 2000 to fiscal year 2001. Gaming
Holdings is in the process of analyzing SFAS No. 133 and the impact on its
consolidated financial position and results of operations.
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform with 1999 presentations.
2. LONG-TERM DEBT
Long-term debt and current maturities of long-term debt are comprised of the
following:
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
(IN THOUSANDS)
Long-term debt:
Senior Discount Notes (Net of unamortized
discount of $87,407 at 12/31/99 and
$107,147 at 12/31/98)................... $134,093 $114,353
-------- --------
Term B Loan............................... $114,000 $114,000
Term C Loan............................... 160,000 160,000
-------- --------
$408,093 $388,353
Less current maturities of long-term
debt.................................. 4,700 --
-------- --------
Total long-term debt.................... $403,393 $388,353
======== ========
SENIOR DISCOUNT NOTES
On February 26, 1998, Gaming Holdings, Capital and Gaming Enterprises
consummated a private offering ("Offering") under Rule 144A of the Securities
Act of 1933. The Offering consisted of 221,500 units ("Units"), each Unit
consisting of: (i) $1,000 principal amount of maturity of 13 1/2% Senior
Discount Notes due 2010 ("Notes") of Gaming Holdings and Capital; and (ii) 10
warrants ("Warrants") to purchase 10 shares of Class B non-voting common stock,
no par value, of Gaming Enterprises. The Notes and the Warrants became
separately transferable on July 23, 1998. The Warrants became exercisable on
July 23, 1998, and will expire on March 1, 2010.
On August 26, 1998, Gaming Holdings and Capital completed an exchange offer
for 100% of the aggregate principal amount of the Notes pursuant to a
registration statement dated July 23, 1998. The Notes were exchanged for notes
with substantially the same terms issued in the private placement on February
26, 1998.
The initial accreted value of the Notes was $519.40 per $1,000 principal
amount at maturity of the Notes. The Notes will mature on March 1, 2010. The
Notes will accrete at 13 1/2% (computed on a semi-
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LONG-TERM DEBT (CONTINUED)
annual bond equivalent basis) based on the initial accreted value, calculated
from February 26, 1998. Cash interest on the Notes will not accrue prior to
March 1, 2003. Thereafter, cash interest on the Notes will accrue at the rate of
13 1/2% per annum based on the accreted value at maturity of the Notes and will
be payable semi-annually in arrears on March 1 and September 1 of each year,
commencing on September 1, 2003. The Notes are secured by a first priority
pledge of all the issued and outstanding Series A Preferred Interests of Gaming
held by Gaming Holdings. The Indenture relating to the Notes contains certain
covenants that (subject to certain exceptions) restrict the ability of Gaming
Holdings, Capital and certain of their subsidiaries to, among other things: (i)
make restricted payments; (ii) incur additional indebtedness and issue preferred
stock; (iii) incur liens; (iv) pay dividends or make other distributions; (v)
enter into mergers or consolidations; (vi) enter into certain transactions with
affiliates; or (vii) enter into new lines of business.
Gaming Holdings' future interest and principal payments required under the
Notes will be funded from distributions by Gaming to the extent available.
Gaming has certain restrictions which limit its ability to distribute cash to
Gaming Holdings (see the following discussion under "Term Loans"). There can be
no assurance that Gaming's distributions will be sufficient to meet the required
principal and interest payments of the Notes.
TERM LOANS AND CURRENT MATURITIES OF LONG-TERM DEBT
Gaming has a credit facility ("Bank Credit Facility" or "Credit Agreement")
with various financial institutions and the Bank of Nova Scotia as the
administrative agent for the lenders (collectively, "Lenders"). The Credit
Agreement consists of three separate term loans. Term A Loan comprises a term
loan of $129.7 million and matures approximately five and one-half years after
the initial borrowing date. Term B Loan comprises a term loan of $114.0 million
and matures eight and one-half years after the initial borrowing date. Term C
Loan comprises a term loan of $160.0 million and matures ten years after the
borrowing date. The disbursement of the proceeds of the Term A Loan has not
commenced as of the date hereof. Under the Credit Agreement, Gaming had $21.3
million available for its investment in Aladdin Music. However, during the third
quarter of 1999, pursuant to the Credit Agreement, Gaming could, and did,
allocate $15 million of such funds to the Theater renovation and reduced the
Term A Loan from $136 million to $129.7 million. The Company pays interest on
the term loans as follows: Term A Loan, at the London Interbank Offered Rate
("LIBOR") plus 300 basis points until the Aladdin commences operations, then
LIBOR plus an amount between 150 basis points and 275 basis points depending
upon Gaming's earnings before interest, taxes, depreciation and amortization
("EBITDA"); Term B Loan, LIBOR plus 200 basis points while the funds are held in
the cash collateral account and LIBOR plus 350 basis points once the funds are
utilized for the construction of the Aladdin; and Term C Loan, LIBOR plus 200
basis points while the funds are held in the cash collateral account and LIBOR
plus 400 basis points once the funds are utilized for the construction of the
Aladdin. Interest on the term loans is due quarterly.
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LONG-TERM DEBT (CONTINUED)
Principal payments for the Term Loans do not commence until the end of the
first quarter following the commencement of operations of the Aladdin. The
following table details the required yearly principal amortization during
operations.
PRINCIPAL AMORTIZATION
(AFTER COMMENCEMENT
OF OPERATIONS) TERM A LOAN TERM B LOAN TERM C LOAN
- - ---------------------- ----------- ----------- -----------
(IN THOUSANDS)
Year 1 $ 16,000 $ 1,200 $ 1,600
Year 2 20,000 1,200 1,600
Year 3 28,000 1,200 1,600
Year 4 32,000 1,200 1,600
Year 5 33,750 1,200 1,600
Year 6 -- 68,000 1,600
Year 7 -- 40,000 48,400
Year 8 -- -- 102,000
-------- -------- --------
TOTALS $129,750 $114,000 $160,000
======== ======== ========
In addition to the principal amortization schedules, the Company is required
to make mandatory prepayments beginning the first quarter following the
commencement of operations of the Aladdin. The mandatory prepayments are based
on a percentage of Gaming's excess cash flow as defined in the Credit Agreement.
The mandatory prepayments are due quarterly and the percentages of excess cash
flow are detailed below:
PERCENTAGE OF
EXCESS CASH FLOW
----------------
Year 1 65%
Year 2 60%
Year 3 and thereafter 55%
As security for the Bank Credit Facility, the Company has entered into a
deed of trust in favor of the Lenders securing the Notes and all obligations of
the Company under the Bank Credit Facility, encumbering the Aladdin (including
any and all leasehold interests) as a first priority lien. In addition, the
Company has either assigned or entered into security agreements in favor of the
Lenders for all present and future leases, accounts, accounts receivable,
licenses and any other tangible or intangible assets owned or leased by the
Company, subject to the rights of the FF&E Lenders under the FF&E Financing (see
the following discussion under "Furniture, Fixtures and Equipment Financing
("FF&E Financing")).
As further security for the Bank Credit Facility and to the extent
permissible, the owners of the Company have pledged their interests in the
Company to the Lenders and Gaming Holdings has pledged its interest in Gaming to
the Lenders other than the Series A Preferred Interests.
The Bank Credit Facility contains covenants that (subject to certain
exceptions) restrict the ability of Gaming and its subsidiaries to, among other
things: (i) incur additional indebtedness, liens or other encumbrances; (ii) pay
dividends or make similar distributions; (iii) sell assets or make investments;
(iv)
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LONG-TERM DEBT (CONTINUED)
enter into mergers, consolidations, or acquisition transactions; or (v) enter
into certain transactions with affiliates.
FURNITURE, FIXTURES AND EQUIPMENT FINANCING ("FF&E FINANCING")
On June 30, 1998, the Company entered into FF&E Financing that provides for
operating lease financing of up to $60.0 million and a term loan facility of
$20.0 million to obtain gaming equipment and other specified equipment. Funding
under the FF&E Financing is available beginning six months prior to the
construction completion date of the Aladdin. Repayment of principal and interest
is due in quarterly installments upon the construction completion date of the
Aladdin. The term of the operating lease financing is 36 months (with the
Company having two, one year options to renew) and the term of the loan facility
is five years. The interest rate from the funding date until the construction of
the Aladdin is complete is either the 30-day LIBOR plus 478 basis points or the
Prime Rate plus 275 basis points. After the construction completion date, the
interest rate shall be the 90-day LIBOR plus 478 basis points. On March 6, 2000,
the disbursements under the FF&E Financing commenced.
INTEREST RATE SWAPS
Effective June 30, 1999, Gaming restructured its interest rate swap
arrangements in an effort to reduce future expenditures for interest. Gaming has
entered into these agreements to manage interest expense, which is subject to
fluctuations due to the variable nature of the London Interbank Offered Rate
("LIBOR"). In exchange for entering into the transaction, Gaming received
$500,000 from the counterparty in July, 1999.
Beginning June 30, 1999, Gaming has the following interest rate swaps,
interest rate ceilings and floor caps, and related notional amounts in effect:
(i) an interest rate swap with an original notional amount of $114 million
increasing to a maximum of $222.5 million whereby interest is fixed at 5.50%
through March 31, 2000. After March 31, 2000, an interest rate collar with a
notional amount of $250 million, a maximum and minimum interest rate of 7.5% and
5.15%, respectively, will go into effect and mature on September 30, 2006; and
(ii) an interest rate collar with a notional amount of $160 million, a maximum
rate of 8.00%, a minimum rate of 5.15% and a maturity date of March 31, 2003.
All rates noted above are LIBOR equivalents only and do not include the impact
of the basis point additions to LIBOR that are used in calculating interest
expense on Gaming's term loans. The LIBOR applicable to these agreements on
December 31, 1999 was set at 6.16% as of December 31, 1999. The fair market
value of the Company's interest rate swaps, interest rate ceilings and floor
caps as provided by the counterparty to the swaps, is a net receivable of
approximately $4.9 million at December 31, 1999.
The notional amounts do not represent amounts exchanged by the parties, and
thus are not a measure of exposure of the Company. The amounts exchanged are
normally based on the notional amounts and other terms of the swaps. The
variable rates are subject to change over time as LIBOR fluctuates.
Neither the Company nor the counterparty, which is a prominent financial
institution, is required to collateralize their respective obligations under
these swaps. The Company is exposed to loss if the counterparty defaults.
However, the Company considers the risk of non-performance to be minimal as the
counterparty is a member of the bank credit facility. The Company does not hold
or issue rate agreements for trading purposes.
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LONG-TERM DEBT (CONTINUED)
FAIR VALUE OF LONG-TERM DEBT
The estimated fair value of the Company's long-term debt, current maturities
of long-term debt and interest rate swaps have been determined using appropriate
market information and valuation methodologies. Considerable judgment is
required to determine the estimates of fair value; thus, the estimates provided
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
DECEMBER 31, 1999
----------------------------
CARRYING AMOUNT FAIR VALUE
--------------- ----------
(IN THOUSANDS)
Senior Discount Notes.............................. $134,093 $ 88,635
Term B Loan........................................ 114,000 114,000
Term C Loan........................................ 160,000 160,000
Interest Rate Swaps (Receivable)................... -- (4,886)
The fair value of the Company's Senior Discount Notes is based on dealer
quotes for those instruments. The fair values of the Company's Term B Loan and
Term C Loan are assumed to approximate carrying values as the interest rate on
the loans fluctuate with changes in LIBOR (i.e., a variable rate loan). The fair
market value of the Company's interest rate swaps is based on the estimated
termination values at December 31, 1999 as provided by the counterparty to the
swaps.
3. CLASSES OF INTEREST
Preferred Membership Interest is comprised of the following:
SOMMER
LCNI ENTERPRISES, LLC TOTAL
-------- ---------------- --------
(IN THOUSANDS)
Series A........................................... $36,559 -- $36,559
Series C (Convertible to Common)................... 30,000 -- 30,000
Series CC.......................................... 1,496 -- 1,496
Series D........................................... 1,781 -- 1,781
Series E........................................... -- 5,208 5,208
------- ------ -------
TOTAL.............................................. $69,836 $5,208 $75,044
======= ====== =======
On December 10, 1999, the holders of Holdings Common Membership Interests
entered into an agreement ("Agreement") to restate the capital structure of
Gaming Holdings. The Sommer Trust and London Clubs are collectively referred to
below as the "Guarantors."
Prior to the execution of the Agreement, if either of the Sommer Trust or
London Clubs (each a "Guarantor") was unable to make a capital contribution to
Gaming Holdings as required under the Bank Completion Guaranty (as defined in
Note 5. "Related Party Transactions and Guarantees") and the Gaming Holdings
Operating Agreement, the contributing Guarantor could lend funds to the other
Guarantor to satisfy its obligations under the guaranty. Gaming Holdings issued
Series A Preferred Shares
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CLASSES OF INTEREST (CONTINUED)
in exchange for all completion guaranty payments made prior to the execution of
the Agreement. The Guarantors determined that this mechanism for contributing
such amounts to Gaming Holdings was not adequate. Accordingly, they adopted the
Agreement to rescind the loans between them and restate all Completion Guaranty
Payments as contributions from the Guarantor providing the capital directly to
Gaming Holdings.
Pursuant to the Agreement, the Series A Preferred Shares previously issued
in exchange for payments made pursuant to the Bank Completion Guaranty were
rescinded and Gaming Holdings issued (i) Series A Preferred Shares to London
Clubs for $11,817,539 of Completion Guaranty Payments plus $2,534,519 of unpaid
preferred return accrued on such payments prior to October 1, 1999, (ii) Series
C Convertible Preferred Shares to London Clubs for $30,000,000 of Completion
Guaranty Payments made prior to October 1, 1999, (iii) Series CC Convertible
Preferred Shares to London Clubs for the unpaid cumulative preferred return on
the Series C Convertible Preferred Shares that accrued between October 1, 1999
and the date of conversion of the Series C Convertible Preferred Shares, (iv)
Series D Preferred Shares to London Clubs representing a profits only interest
in Gaming Holdings, and (v) Series E Preferred Shares to the Sommer Trust for
$4,333,034 of Completion Guaranty Payments made prior to October 1, 1999. The
Agreement further provides that Gaming Holdings shall issue, for all future
completion guaranty payments made by the Guarantors (i) Series A Preferred
Shares in exchange for the contribution of such payments and (ii) Series D
Preferred Shares representing a profits only interest in Gaming Holdings.
The Series C Convertible Preferred Shares shall earn a return equal to
twenty percent (20%) per annum, cumulative and compounded semi-annually from
October 1, 1999. London Clubs has the option to convert all (but not less than
all) of the Series C Convertible Preferred Shares into fifteen percent (15%) of
the Holdings Common Membership Interests at any time on or before April 30,
2000. If the Series C Convertible Preferred Shares are converted, LCNI's
ownership interest would increase to forty percent (40%) of the Holdings Common
Membership Interests and Sommer Enterprises' ownership interest would decrease
to thirty-two percent (32%) of the Holdings Common Membership Interests, so
that, when combined with Sommer Enterprises interest in Gaming Enterprises,
Sommer Enterprises would have a total ownership interest of fifty seven percent
(57%). The Series CC Preferred Shares shall earn a return equal to twenty
percent (20%) per annum, cumulative and compounded semi-annually. The Series A
Preferred Shares earn a return equal to twelve percent (12%) per annum,
cumulative and compounded semi-annually. Pursuant to a subsequent Letter
Agreement between the Guarantors dated February 23, 2000, the Series D Preferred
Shares and the Series A Preferred Shares shall earn a combined preferred return
equal to the return earned on the Series E Preferred Shares (i.e., thirty
percent (30%) per annum, cumulative and compounded semi-annually). The Series E
Preferred Shares shall earn a return equal to thirty percent (30%) per annum,
cumulative and compounded semi-annually. With respect to the allocation of
Profits and Losses, and Distributions including distributions in liquidation,
the following is the order of priority of the Preferred Shares: Series A
Preferred Shares, Series D Preferred Shares, Series C Convertible, and Series CC
Preferred Shares, and collectively (pari passu) Series E and B Preferred Shares.
Series B Preferred Shares would be issued to LCNI in the event of and in
exchange for any payment required by London Clubs to pay down Gaming's Bank
Credit Facility pursuant to Section 13 of the Keep-Well Agreement. As of
December 31, 1999, there are no Series B Preferred Shares outstanding.
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CLASSES OF INTEREST (CONTINUED)
As a function of the Agreement, the Guarantors further amended, effective as
of October 1, 1999, the Contribution Agreement so that the "Contribution
Percentage" shall mean, for the purposes of Completion Guaranty Payments, (a)
sixty percent (60%) in the case of the Sommer Trust and (b) forty percent (40%)
in the case of London Clubs.
As part of the Agreement, Gaming Holdings, the Sommer Trust, London Clubs
and LCNI entered into a Redemption Agreement with regard to their respective
right to redeem or purchase, as the case may be, the Series A and D Preferred
Shares (as a unit consisting of one Series A Preferred Share and one Series D
Preferred Share "Redeemable Preferred Share") as follows:
Gaming Holdings shall have the right, subject to and in conformity with the
provisions of the Indenture to redeem any amount of Redeemable Preferred Shares
at an amount equal to the fully accreted value of such shares at the time of
redemption, together with a "make whole" agreement whereby the holder of the
Redeemable Preferred Shares being redeemed shall be made whole by Gaming
Holdings with respect to the holder's costs and expenses incurred in financing
the Redeemable Preferred Shares and making them available for redemption by
Gaming Holdings.
If the Sommer Trust, Sommer Enterprises or a wholly-owned subsidiary of the
Sommer Trust or Sommer Enterprises to be designated by the Sommer Trust is in a
position to offer payment to London Clubs or LCNI at the fully accreted value on
the date of offer to buy Redeemable Preferred Shares of Gaming Holdings held by
London Clubs and LCNI, the Sommer Trust, Sommer Enterprises or a wholly-owned
subsidiary of the Sommer Trust or Sommer Enterprises to be designated by the
Sommer Trust shall have the right from time to time but not the obligation to
purchase from London Clubs and LCNI an amount of such shares so that the total
Redeemable Preferred Shares held by the Sommer Trust, Sommer Enterprises or a
wholly-owned subsidiary of the Sommer Trust or Sommer Enterprises to be
designated by the Sommer Trust and all its Affiliates (including such Redeemable
Preferred shares they may have held) would be up to 60% of all outstanding
Redeemable Preferred Shares at a price equal to their then fully accreted value.
Purchase by the Sommer Trust of any Redeemable Preferred Shares held by London
Clubs or LCNI shall include a "make whole" payment by the Sommer Trust to London
Clubs or LCNI consisting of (i) the Sommer Trust's applicable proportionate
share of all fees, transaction costs, call premiums and other expenses borne by
London Clubs or LCNI in connection with the financing of the acquisition of the
Redeemable Preferred Shares (but solely with respect to the proportionate share
of the proceeds from such financing which are directly invested in the Aladdin)
and their purchase by the Sommer Trust including interest at the rate of prime
plus two percent (2%) per annum from the time expenses were incurred by London
Clubs to the time of the make whole payment; and (ii) 100% of any increased tax
consequences to London Clubs or LCNI resulting from the purchase of the
Redeemable Preferred Shares by the Sommer Trust as opposed to redemption by
Gaming Holdings. Upon purchase by the Sommer Trust, and at its option to be
exercised at the time of purchase, the Redeemable Preferred Shares purchased
from London Clubs or LCNI may either (i) (a) be subordinated to those Redeemable
Preferred Shares still held by London Clubs or LCNI, but rank ahead of all other
Preferred Shares, and (b) earn a reduced unit return to be no greater than
twenty percent (20%) or less than fifteen percent (15%) per annum, cumulative
and compounded semi-annually to be determined no later than the time the parties
enter into formal amendments to the Operating and Contribution Agreements; or
(ii) (a) be pari passu with the Redeemable Preferred Shares still held by London
Clubs or LCNI and (b) earn a reduced unit return equal to the yield to worst on
the Notes at the time of purchase by the Sommer Trust plus 100 basis
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CLASSES OF INTEREST (CONTINUED)
points, such return to be per annum, cumulative and compounded semi-annually. In
the event that the Sommer Trust is in the position to offer payment as set forth
herein, and makes a good faith offer to purchase up to 60% of the Redeemable
Preferred Shares but London Clubs or LCNI, as the case may be, is unable to sell
such shares for any reason, London Clubs will negotiate in good faith with the
Sommer Trust a "make whole" agreement whereby the Sommer Trust shall be
compensated no more than its actual losses, taking account of the full costs
including financing costs and "make whole" payments it would have incurred in
acquiring and holding such shares, and in any event no more than the return it
would have received by owning the Redeemable Preferred Shares if offered to
purchase from London Clubs or LCNI and exercising the option set forth herein,
less the return the Sommer Trust would receive if it acquired an equivalent
amount of United States Treasury securities, at the then prevailing rate.
In the event that the terms of the financing arrangements obtained by London
Clubs with respect to financing future Completion Guaranty Payments requires a
transfer of Holdings Common Membership Interest to London Club's lenders in the
form of non-voting warrants, or otherwise, the Trust and London Clubs have
agreed that both LCNI and Sommer Enterprises shall be diluted in such
proportions and in such amounts as shall be agreed upon by the parties when the
terms of such financing arrangements have been finalized.
The holders of Holdings Common Membership Interests also amended the Gaming
Holdings Operating Agreement, in regards to (a) the definition of "Permitted
Transferee" and "Prohibited Transferee;" (b) to provide that the Board of
Managers of Gaming Holdings shall be expanded to seven Board Members and
appointed as follows: (i) Aladdin Enterprises shall appoint three Board Members
and (ii) LCNI shall appoint four Board Members, and as of March 15, 2000, the
Board Members are Jack Sommer, Ronald B. Dictrow and Richard J. Goeglein as
Aladdin Enterprises appointees and Alan L. Goodenough, G. Barry C. Hardy,
William Timmins and one other appointee who shall be an officer, director or
employee of LCI still to be named by LCNI; (c) to provide that the failure of
either the Sommer Trust or London Clubs to pay its pro rata shares of Completion
Guaranty Payments (i) shall not result in the removal by LCNI if London Clubs
has failed to pay its pro rata share, or Aladdin Enterprises, if the Sommer
Trust has failed to pay its pro rata share, of one of their respective
designated Board Members and (ii) shall not result in the replacement of Jack
Sommer as Chairman of the Board; (d) eliminating the requirement of the vote or
consent in writing of a Supermajority to declare setting aside or payment of any
Distribution with respect to Series A Preferred Shares; (e) including Music
within the definition of Subsidiary of Gaming Holdings.
Section 6.7(b), (c) and (d) of the Amended and Restated Purchase Agreement
dated as of February 26, 1998 between LCNI, London Clubs, Gaming Holdings,
Gaming, Aladdin Holdings, LLC, Sommer Enterprises and the Sommer Trust, which
relates to certain participation and approval rights of LCNI with respect to the
Aladdin Music Project is deleted.
The Board of Managers for Aladdin Music Holdings, LLC and Aladdin Music, LLC
shall each have six Board Members appointed as follows: (a) the Sommer Trust
shall appoint three Board Members; and (b) London Clubs shall appoint three
Board Members.
Notwithstanding any other provision in the parties' agreement as detailed
above, if the parties are unable for any reason to effect a transfer of fifteen
percent (15%) of the Holdings Common Membership
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CLASSES OF INTEREST (CONTINUED)
Interests to LCNI upon conversion of the Series C Convertible Preferred Shares,
no part of the Agreement shall be effective.
Except for matters affecting the rights of the holders of Preferred
Interests to distributions, including upon redemption, and matters affecting the
anti-dilution protections and tag-along participation rights of the holders of
the Warrants and the Warrant Shares (which may not be amended without the
consent of Aladdin Gaming Enterprises, Inc.), all management and voting rights
will be vested in the Gaming Holdings Common Membership Interests.
As of February 23, 2000, the holders of Holdings Common Membership Interests
entered into an agreement whereby, if certain payments are made with respect to
certain letters of credit issued in connection with the acquisition of
furniture, fixture, and equipment, such payments shall be treated in a manner
similar to Completion Guaranty Payments as set forth above.
4. LEASES
The Company leases certain real property, furniture and equipment. At
December 31, 1999 aggregate minimum rental commitments under noncancelable
operating leases with initial or remaining terms of one year or more consisted
of the following:
YEAR ENDING DECEMBER 31, OPERATING LEASES
------------------------ ----------------
(IN THOUSANDS)
2000 $804
2001 180
2002 3
----
Total Minimum Lease Payments $987
====
Rental expense amounted to approximately $.7 million and $0.5 million for
the years ended December 31, 1999 and 1998.
5. RELATED PARTY TRANSACTIONS AND GUARANTEES
LAND CONTRIBUTION AND RESTRICTED LAND
As discussed in Note 1, both Sommer Enterprises, LLC and Gaming Enterprises
contributed land to the Company. The land was originally owned by AHL, a related
party under common control, and therefore the land has been recorded at its
carryover basis. In addition, the land was subject to certain indebtedness which
was paid by the Company on the date of the contribution. The indebtedness
exceeded the carryover basis of the land and therefore resulted in a negative
contribution by Sommer Enterprises, LLC.
The carryover basis of the land was approximately $40.25 million, but a
portion of the land has been classified as restricted land due to a requirement
to transfer the land to Aladdin Bazaar, LLC. Aladdin Bazaar, LLC is owned
effectively 37.5% by the Sommer Trust. Aladdin Bazaar, LLC is currently
constructing and will operate a themed entertainment shopping mall and
4,800-space car parking facility (together known as the "Mall Project"). The
Mall Project is expected to be an integral part of the Aladdin
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS AND GUARANTEES (CONTINUED)
entertainment complex. The carryover basis of the land was allocated to the Mall
Project based on an appraisal of the entire land parcel.
PURCHASE OF RESTRICTED MEMBERSHIP INTERESTS
Certain members of the Company's executive management have purchased
unvested restricted membership interests, in the aggregate, of 2.75% of the
Company, subject to the Company granting further unvested restricted membership
interests to certain senior executives or developing alternative economic
arrangements. Except for Mr. Goeglein, these membership interests will vest 25%
on the opening of the Aladdin and 25% upon the expiration of the term of the
executive's employment agreement. If Gaming continues to employ the executive
after the expiration of the employment agreement, 25% of the interest will
continue to vest on each anniversary of the Aladdin opening date until such
interests are fully vested. After the term of the employment agreement, if
Gaming does not continue to employ the executive, other than for Cause (as
defined), or if the officer no longer continues his employment for Good Reason
(as defined), only an additional 25% of the interest vests. Mr. Goeglein's
membership interests become fully vested at the earlier of July 1, 2002 or the
date on which such interests become publicly traded, conditioned upon Mr.
Goeglein's continued relationship with Gaming. As of December 31, 1999, none of
these membership interests had vested.
EMPLOYMENT AGREEMENTS
The Company has entered into employment contracts with six members of its
senior management. The terms of these agreements provide for an aggregate annual
amount of approximately $1.8 million, with one agreement which provided for a
signing bonus of $300,000, plus any bonuses granted by the Board of Directors
and based on relevant criteria and performance standards. The agreements have
varying duration, but no agreement has a duration exceeding five years and six
months. The agreements were entered into at varying times from 1997 to 2000. One
agreement additionally provides for the individual to be retained as a
consultant for $100,000 per year for 5 years after the initial term.
GAI, LLC CONSULTING AGREEMENT
Gaming has entered into a consulting agreement with GAI, LLC, a Nevada
limited liability company, 100% beneficially owned by Gaming's Chief Executive
Officer; however, an option to acquire a 15% interest in GAI, LLC has been
granted to a third party. This agreement requires Gaming to pay to GAI, LLC a
retainer of $12,500 per month until June 30, 2002 for remaining on call to
provide services and expertise for such month.
THE LONDON CLUB MANAGEMENT AGREEMENT
Gaming, London Clubs and LCNI are parties to a management agreement which
relates to the operations to be managed by London Clubs ("The London Club").
Under this agreement, London Clubs has agreed to guaranty the obligations of
LCNI. In consideration for the services to be furnished by LCNI under the
management agreement, Gaming will pay to LCNI a performance-based incentive fee.
This fee will be calculated based on a range of percentages applied to certain
thresholds of The London Club EBITDA (defined as gross revenue attributable to
The London Club, less all costs and expenses directly attributable to The London
Club).
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS AND GUARANTEES (CONTINUED)
COMPLETION GUARANTY AND KEEP-WELL AGREEMENT
London Clubs, the Sommer Trust and Aladdin Bazaar Holdings, LLC ("Bazaar
Holdings"), which is owned 99% by the Sommer Trust, have entered into a
completion guaranty for the benefit of the Lenders under the Bank Credit
Facility, under which they have agreed to guarantee, among other things, the
completion of the Aladdin. The guaranty is not subject to any maximum dollar
limitations. In addition, AHL, London Clubs and Bazaar Holdings (collectively,
"Sponsors") have entered into an agreement ("Keep-Well Agreement") in favor of
the Lenders under the Bank Credit Facility. The Keep-Well Agreement requires the
Sponsors to make certain quarterly cash equity contributions to Gaming beginning
with the commencement of operations if Gaming fails to comply with the minimum
fixed charge coverage ratio set forth in the Bank Credit Facility. Under the
Keep-Well Agreement, the Sponsors are not required to contribute an aggregate of
more than $150.0 million to Gaming ($30.0 million in any one fiscal year), and
are not required to contribute any amounts to Gaming on or after the earlier of
the date on which Gaming complies with all of the financial covenants set forth
in the Credit Agreement for six consecutive quarterly periods or the date on
which the aggregate outstanding principal amounts of the Credit Agreement are
reduced below certain amounts.
The Sommer Trust, London Clubs, Aladdin Bazaar Holdings, LLC and the Bank of
Nova Scotia, as administrative agent for the Lenders, have entered into the
First Amendment to the Guaranty of Performance and Completion, dated as of March
10, 1999 ("First Amendment to the Bank Completion Guaranty"). The First
Amendment to the Bank Completion Guaranty requires that the Sommer Trust, London
Clubs and Aladdin Bazaar Holdings, LLC jointly and severally guarantee that
Gaming maintains the minimum Net Worth required by the Second Amendment to the
Credit Agreement.
During 1999, London Clubs received a fee of $2.65 million for its
obligations under the Keep-Well Agreement and in addition is entitled to an
annual fee of 1.5%, payable in arrears, of the Company's annual average
indebtedness with respect to a $265.0 million portion of the Bank Credit
Facility, which is supported by the Keep-Well Agreement. Such fees accrue from
the closing date of the Bank Credit Facility and are payable from available cash
flow after the opening of the Aladdin. As of December 31, 1999, the Company had
accrued approximately $7.3 million in Keep-Well fees to London Clubs, which is
reported in the Balance Sheet as Related Party Payables. Additionally, the
Company agreed to reimburse approximately $2.8 million to London Clubs for
certain expenses incurred relating to the Aladdin; however, London Clubs has
agreed to defer the payment of approximately $189,000 of this reimbursement
until after the opening of the Aladdin. As of December 31, 1999, London Clubs
received approximately $2.4 million of this $2.8 million reimbursement
obligation.
In consideration for certain expenses incurred by the Sommer Trust prior to
February 26, 1998, relating to the management and coordination of the
development of the Aladdin, the Company reimbursed $3.0 million to the Sommer
Trust on February 26, 1998. In addition, Gaming will reimburse certain ongoing
out-of-pocket expenses of the Sommer Trust relating to the development of the
Aladdin, not to exceed $0.9 million. The Sommer Trust agreed to defer such
reimbursement until after the opening of the Aladdin. As of December 31, 1999,
the Sommer Trust had received approximately $3.3 million of the total $3.9
million reimbursement.
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS AND GUARANTEES (CONTINUED)
PAYMENT OF MUSIC INDEBTEDNESS
During 1998, the Sommer Trust paid approximately $260,000 to certain trade
creditors on behalf of Aladdin Music and Mr. Sommer, the Company's Chairman of
the Board, individually paid $500,000 to a trade creditor on behalf of Aladdin
Music. Further, during the first quarter of 1999, the Sommer Trust paid
approximately $747,000 to a trade creditor on behalf of Aladdin Music. To the
extent permissible, Aladdin Music has agreed, if and when Aladdin Music secures
a joint venture partner and financing for the Aladdin Music Project to reimburse
the Sommer Trust and Mr. Sommer such advanced funds.
6. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AND PRE-OPENING COSTS
During 1999, the Company increased the Main Project Budget by approximately
$79.6 million. This amount reflected an increase in construction costs of
approximately $53.2 million, an increase in pre-opening costs of approximately
$21.9 million and an increase in capitalized interest of $4.5 million. Pursuant
to the Bank Completion Guaranty, during 1999, a total of $67.2 million was paid,
approximately $62.8 million by London Clubs and approximately $4.4 million by
the Sommer Trust. The remaining $12.4 million was funded in the first quarter of
2000.
The Aladdin project budget ("Budget") was $826 million when Gaming and
Gaming Holdings entered into arrangements to finance construction of the Aladdin
in February 1998. Since that time and to March 1, 2000, the Budget was increased
by an aggregate of $87.8 million to $913 million, which amounts were funded
pursuant to the Bank Completion Guaranty by London Clubs and the Sommer Trust.
Pursuant to the Contribution Agreement between London Clubs and the Sommer
Trust, dated February 26, 1998 ("Contribution Agreement"), Sommer Trust and
London Clubs agreed that any amounts required to be paid pursuant to the Bank
Completion Guaranty would be funded 75% by the Sommer Trust and 25% by London
Clubs. Effective as of October 1, 1999, these contribution percentages were
amended to be 60% in the case of the Sommer Trust and 40% in the case of London
Clubs. Notwithstanding the Contribution Agreement, the $87.8 million Budget
increase was funded approximately $83.5 million by London Clubs and
approximately $4.3 million by the Sommer Trust. During March 2000, the Company
completed a review of the estimated total costs to complete and open the Aladdin
and, as a result of that review, increased the Budget by $60.4 million. The
Company advised the Sommer Trust and London Clubs of the need to fund such
increase pursuant to the Bank Completion Guaranty. The Sommer Trust advised the
Company and London Clubs that it is not at this time making any capital
contribution in order to fund any portion of this Budget increase of
$60.4 million. In light of the joint and several obligation of the Bank
Completion Guaranty, London Clubs has advised the Company that it would fund all
of this Budget increase by (a) providing a cash equity contribution to the
Company of approximately $13.1 million, which the Company received on March 30,
2000, and (b) establishing a letter of credit in the amount of approximately
$47.3 million to be used to fund the Budget increase. The Company believes that
the Budget as set out above is reasonable and can be achieved.
The Company is subject to risks common to developing a large scale
construction project. While the Company believes that its estimates are
reasonable, and that the projected targets can be met, there can be no assurance
that the Complex will be completed within the time period or budget currently
contemplated. In addition, if the additional identified potential funding
sources are insufficient or unavailable to fully
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
cover any excess, the Company could be materially and adversely affected. So,
while the Company believes that its estimates are reasonable, and that the
projected targets can be met, there can be no assurance that the Complex,
including the Aladdin, will be completed within the time period or budget
currently contemplated.
ENERGY SERVICES AGREEMENT
The Company entered into an energy services agreement for hot and cold water
and electricity that will be purchased by the Company and the Mall Project
(which would include the tenants of the mall) over initial terms of 20 years.
The central utility plant is being constructed by Northwind Aladdin, LLC
("Northwind") on land owned by the Company and leased to Northwind. The central
utility plant and equipment (collectively, "Costs") will be owned by Northwind,
which will pay all costs in connection with the construction, purchase and
installation. The current budget for the Costs is $40.0 million.
The charges payable under the energy services agreement will include a fixed
component applied to the Costs paid by Northwind and reimbursement of
operational-related costs.
The Company's share of Costs under its energy services agreement is based on
the total Costs (currently budgeted at $40 million) less the amounts payable by
the Mall Project and Aladdin Music, if and when, Aladdin Music enters into an
energy services agreement with Northwind. The Mall Project's share of Costs is
approximately $2.9 million. The Company will account for the energy services
contract as a capitalized power purchase obligation when the utility plant
becomes operational in the first quarter of 2000.
MALL PROJECT COSTS
In connection with the development of the Mall Project, Aladdin Bazaar, LLC
will reimburse the Company approximately, $14.2 million for the construction of
certain areas shared by the Aladdin and the Mall Project and the facade to the
Aladdin. Additionally, Aladdin Bazaar, LLC is obligated to spend no more than
$36.0 million for the parking garage. Therefore, any cost overruns associated
with these items will be borne by the Company. In addition, the Company is
obligated to pay Aladdin Bazaar, LLC: (i) a $3.2 million fee per year for a term
of 99 years, which is adjusted annually pursuant to a consumer price index-based
formula, for usage of the parking garage; and (ii) the Company's proportionate
share of the operating costs associated therewith.
CONSTRUCTION ARBITRATION
Fluor Daniel, Inc. is the design/builder ("Design/Builder") of the Aladdin.
The Design/Builder has entered into a guaranteed maximum price design/build
contract ("Design/Build Contract") (subject to scope changes) with the Company
to design and construct the Aladdin. During the course of construction, a number
of issues and items have arisen in connection with various change orders and
delay claims submitted with the project and the scope of the Design/Build
Contract. The Company has submitted these matters ("Claims") to arbitration
("Arbitration") pursuant to the provisions of the Design/Build Contract. The
Company believes that the Claims relate to design and work which is base work
contemplated in the Design Build Contract and therefore should be included in
the guaranteed maximum price of the Design/
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Builder. The Design/Builder has responded to the Company's argument in
Arbitration, alleging, among other things, that the Claims relate to unforeseen
conditions, and/or are due to the actions of the Company, and therefore, the
Company is responsible for all costs and delays associated with the Claims.
While the Company intends to aggressively and vigorously pursue the Claims, and
believes that it will ultimately prevail in arbitration, the Claims are only in
the preliminary stages of the Arbitration process, and therefore, no assurances
can be given with respect to the ultimate outcome. The Design/Builder has
presented Claims in the amount of approximately $13.8 million of which amount
the Company has funded $8.3 million.