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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
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COMMISSION FILE NUMBER 333-42147
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LAS VEGAS SANDS, INC.
(Exact name of registration as specified in its charter)
NEVADA 04-3010100
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
3355 LAS VEGAS BOULEVARD SOUTH, ROOM 1A 89109
LAS VEGAS, NEVADA (Zip Code)
(Address of principal executive offices)
(702) 414-1000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 16, 1999.
CLASS OUTSTANDING AT AUGUST 16, 1999
Common Stock, $.10 par value 925,000 shares
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LAS VEGAS SANDS, INC.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets at June 30, 1999 and December 31, 1998.......... 1
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 1999 and June 30, 1998............................................. 2
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999
and June 30, 1998........................................................... 3
Notes to Consolidated Financial Statements.................................. 4-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 12-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 20
PART II
OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 21-22
Item 6. Exhibits and Reports on Form 8-K............................................ 23
Signatures.................................................................. 24
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAS VEGAS SANDS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 19,953 $ 2,285
Restricted cash and investments.................................................... 26,501 133,936
Accounts receivable, net........................................................... 13,762 112
Inventories........................................................................ 3,105 73
Prepaid expenses................................................................... 3,590 2
------------ ------------
Total current assets................................................................. 66,911 136,408
Property and equipment, net........................................................ 1,076,946 833,054
Deferred offering costs, net....................................................... 32,542 35,101
Other assets....................................................................... 27,294 1,381
------------ ------------
$ 1,203,693 $1,005,944
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................................... $ 23,475 $ 265
Construction payables.............................................................. 54,376 77,025
Other accrued liabilities.......................................................... 33,369 12,074
Current maturities of long-term debt............................................... 34,224 13,788
------------ ------------
Total current liabilities............................................................ 145,444 103,152
Other long-term liabilities.......................................................... 2,517
Long-term debt....................................................................... 899,843 744,154
------------ ------------
1,047,804 847,306
------------ ------------
Redeemable Preferred Interest in Venetian Casino Resort, LLC, a wholly owned
subsidiary......................................................................... 134,031 90,701
------------ ------------
Commitments and contingencies
Stockholder's equity:
Common stock, $.10 par value, 3,000,000 shares authorized, 925,000 shares issued
and outstanding.................................................................. 92 92
Capital in excess of par value..................................................... 93,261 99,330
Accumulated deficit................................................................ (71,495) (31,485)
------------ ------------
21,858 67,937
------------ ------------
$ 1,203,693 $1,005,944
------------ ------------
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
1
LAS VEGAS SANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
1999 1998 1999 1998
---------- --------- ---------- ----------
Revenues:
Casino........................................................... $ 24,644 $ -- $ 24,644 $ --
Room............................................................. 13,428 13,428
Food and beverage................................................ 5,869 5,869
Retail and other................................................. 3,467 298 3,724 447
---------- --------- ---------- ----------
Total revenue.................................................... 47,408 298 47,665 447
Less: promotional allowances..................................... 4,691 4,691
---------- --------- ---------- ----------
Net revenue...................................................... 42,717 298 42,974 447
---------- --------- ---------- ----------
Operating expenses:
Casino........................................................... 18,772 18,772
Room............................................................. 4,331 4,331
Food and beverage................................................ 4,225 4,225
Retail and other................................................. 1,298 1,298
Provision for doubtful accounts and discounts.................... 1,092 1,092
Selling, general and administrative.............................. 12,271 12,271
Depreciation and amortization.................................... 4,538 25 4,563 50
---------- --------- ---------- ----------
46,527 25 46,552 50
---------- --------- ---------- ----------
Operating profit (loss) before pre-opening expenses................ (3,810) 273 (3,578) 397
Pre-opening expenses............................................. 14,706 1,873 21,484 1,873
---------- --------- ---------- ----------
Operating loss..................................................... (18,516) (1,600) (25,062) (1,476)
---------- --------- ---------- ----------
Other income (expense):
Interest income.................................................. 530 4,994 1,798 10,693
Interest expense, net of amounts capitalized..................... (12,908) (11,018) (16,746) (23,620)
---------- --------- ---------- ----------
Net loss........................................................... $ (30,894) $ (7,624) $ (40,010) $ (14,403)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Basic and diluted loss per share................................... $ (36.04) $ (8.24) $ (49.81) $ (15.57)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
2
LAS VEGAS SANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................................. $ (40,010) $ (14,403)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................... 4,563 50
Amortization of debt offering costs..................................................... 2,559
Interest earned on restricted investments............................................... (6,358)
Provision for doubtful accounts and discounts........................................... 1,092
Changes in assets and liabilities:
Accounts receivable................................................................... (14,742)
Inventories........................................................................... (3,032) 11
Prepaid expenses...................................................................... (3,588)
Other assets.......................................................................... (25,963) (26)
Accounts payable...................................................................... 23,210 (1,701)
Other accrued liabilities............................................................. 23,812 (369)
---------- ----------
Net cash used in operating activities..................................................... (32,099) (22,796)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments......................................................... 107,435 116,844
Construction of Casino Resort............................................................. (270,617) (186,037)
---------- ----------
Net cash used in investing activities..................................................... (163,182) (69,193)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred interest in Venetian Casino Resort, LLC........................... 37,262
Proceeds from Mall Construction Loan Facility............................................. 37,287 38,292
Proceeds from Bank Credit Facility-term loan.............................................. 34,000 46,000
Proceeds from Bank Credit Facility-revolver............................................... 20,558 8,025
Proceeds from FF&E Credit Facility........................................................ 83,842
---------- ----------
Net cash provided by financing activities................................................. 212,949 92,317
---------- ----------
Increase in cash and cash equivalents..................................................... 17,668 328
Cash and cash equivalents at beginning of period........................................ 2,285 857
---------- ----------
Cash and cash equivalents at end of period.............................................. $ 19,953 $ 1,185
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information:
Cash payments for interest.............................................................. $ 42,803 $ 33,114
---------- ----------
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
3
LAS VEGAS SANDS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998. The year end balance sheet data was derived from audited financial
statements but does not include all disclosures required by generally accepted
accounting principles. In the opinion of management, all adjustments and normal
recurring accruals considered necessary for a fair presentation of the results
for the interim period have been included. The interim results reflected in the
unaudited financial statements are not necessarily indicative of expected
results for the full year.
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 to make way for 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 445,000
gross leasable square feet of retail shops and restaurants (the "Mall").
The consolidated financial statements as of June 30, 1999, June 30, 1998 and
December 31, 1998 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"), 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, Lido Casino Resort Holding Company, LLC, Grand Canal
Shops Mall MM, Inc. and Lido Casino Resort MM, Inc. (collectively, 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 sole stockholder (the "Sole Stockholder").
Mall Intermediate, Mall Construction 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 Mall Subsidiary is an indirect wholly owned subsidiary of Mall
Intermediate and was formed on March 20, 1997 to own and operate the Mall.
Construction of the Casino Resort commenced in April 1997. The casino space
and certain suites and facilities at the Casino Resort opened on May 4, 1999 and
the Mall opened on June 19, 1999.
NOTE 2 PER SHARE DATA
Basic and diluted loss per share are calculated based upon the weighted
average number of shares outstanding. The weighed average number of shares
outstanding used in the computation of loss per share of common stock was
925,000 for all periods presented. The net loss available to common stockholders
used in computing the basic and diluted loss per share includes accrued
preferred dividends of approximately $2.5 million and $6.1 million for the three
and six month periods ended June 30, 1999.
4
LAS VEGAS SANDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment includes costs incurred to construct the Casino
Resort and consists of the following (in thousands):
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
Land and land improvements....................................... $ 93,634 $ 93,634
Building......................................................... 803,197
Equipment, furniture and fixtures................................ 139,286 392
Construction in progress......................................... 45,342 739,028
Less: accumulated depreciation................................... (4,513)
------------ ------------
$ 1,076,946 $ 833,054
------------ ------------
------------ ------------
The amounts of interest capitalized as of June 30, 1999 and December 31,
1998 were $73.1 million and $41.9 million, respectively.
NOTE 4 LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
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 $5,576 and $6,014)................................................................ 91,924 91,486
Mall Construction Loan Facility........................................................ 140,000 102,713
Bank Credit Facility-revolver.......................................................... 29,443 8,885
Bank Credit Facility-term loan......................................................... 150,000 116,000
FF&E Credit Facility................................................................... 97,700 13,858
Less: current maturities............................................................... (34,224) (13,788)
---------- ------------
Total long-term debt $ 899,843 $ 744,154
---------- ------------
---------- ------------
In connection with the financing for the Casino Resort, the Company entered
into a series of transactions during 1997 to provide for the development and
construction of the Casino Resort. In November 1997, the Company issued $425.0
million aggregate principal amount of Mortgage Notes (the "Mortgage Notes") and
$97.5 million aggregate principal amount of Senior Subordinated Notes (the
"Senior Subordinated Notes" and, together with the Mortgage Notes, the "Notes")
in a private placement. On June 1, 1998, LVSI and Venetian completed an exchange
offer to exchange the Notes for Notes with substantially the same terms. In
November 1997, LVSI, Venetian and a syndicate of lenders entered into a bank
credit facility (the "Bank Credit Facility"). The Bank Credit Facility provides
up to $150.0 million in multiple draw term loans 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 is available
generally for working capital. In November 1997, LVSI, Venetian, Mall
Construction and a major non-bank lender entered into a mall construction loan
facility to provide up to $140.0 million in financing for the retail mall in the
Casino Resort (the "Mall Construction Loan Facility"). In December 1997, the
Company entered into an agreement (the "FF&E Credit Facility") with certain
lenders to provide for
5
LAS VEGAS SANDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 LONG-TERM DEBT (CONTINUED)
$97.7 million of financing for certain furniture, fixtures and equipment to be
secured under the FF&E Credit Facility and an electrical substation.
During the six months ended June 30, 1999, $37.3 million, $54.6 million and
$83.8 million were drawn from the Mall Construction Loan Facility, the Bank
Credit Facility (including $20.6 million under its revolver) and the FF&E Credit
Facility, respectively. In addition, at June 30, 1999 the Company had committed
to $1.1 million of irrevocable letters of credit drawn on the revolver of the
Bank Credit Facility.
No additional borrowings from the Bank Credit Facility can be obtained until
the liens (as further described in Note 6) are bonded or released. The Company
has significant debt service payments due during the remainder of 1999,
including principal repayments on its Bank Credit Facility and FF&E Credit
Facility aggregating $8.6 million on September 30, 1999 and an interest payment
of $30.9 million for the Notes on November 15, 1999. To fund these payments from
operating cash flow, the Company must achieve improved operating results for its
next fiscal quarter.
NOTE 5 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. During the second quarter of
1999, Interface Holding contributed $37.3 million in cash in exchange for
additional 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 applicable Series A Preferred Interest or Series
B 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 "Indentures"), 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 six months
ended June 30, 1999, $6.1 million was accrued on the Series B Preferred
Interest.
NOTE 6 COMMITMENTS AND CONTINGENCIES
CONSTRUCTION COSTS
Ground breaking for the Casino Resort occurred in April 1997. The
redevelopment of the site of the Sands is expected to be completed in two phases
(with the first phase being construction of the Casino Resort and the second
phase being construction of a second casino resort and referred to herein as the
"Phase II Resort"). There can be no assurance, however, as to when, or if,
construction of the Phase II Resort will be commenced or completed due to risks
and uncertainties inherent in the development process.
The total construction cost of the Casino Resort is currently estimated at
approximately $1.04 billion (excluding certain heating, ventilating, air
conditioning equipment and land acquisition costs). In connection with the
construction of the principal components of the Casino Resort, the Company
entered into a construction management agreement (the "Construction Management
Agreement") with Lehrer McGovern Bovis, Inc. (the "Construction Manager"). Such
agreement (after taking into account amendments thereto and approved change
orders through June 30, 1999) provides for a guaranteed maximum price (the
6
LAS VEGAS SANDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 COMMITMENTS AND CONTINGENCIES (CONTINUED)
"Final GMP") for construction costs covered by the Construction Management
Agreement of $642.0 million, and a guaranteed completion date of April 21, 1999.
After June 30, 1999, the Final GMP was subsequently increased to $652.0 million
with additional approved change orders. As noted below, the Company is currently
engaged in a dispute with the Construction Manager with respect to both the
Final GMP and the guaranteed completion date.
LITIGATION
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 impact on the financial position, results of operation and cash flows
of the Company.
On July 30, 1999, Venetian filed a complaint against the Construction
Manager and its parent, Bovis, Inc. ("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
Agreement and a breach of contract by Bovis of its obligations under a guaranty
of the Construction Management Agreement, including failure to fully pay trade
contractors and vendors. The suit is intended to ask the courts to require the
Construction Manager to pay its contractors and to compensate Venetian for the
Construction Manager's failure to perform its other duties under the
Construction Management Agreement. Venetian seeks total damages in excess of
$50.0 million.
In response to Venetian's breach of contract claims against the Construction
Manager and Bovis, 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 under the Construction
Management Agreement 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 $145.6
million from Venetian and its affiliates. Based upon its preliminary review of
the complaint and the fact that the Construction Manager has not provided
Venetian with reasonable documentation to support such claims, the Company
believes that the Construction Manager's claims are without merit and intends to
vigorously defend itself in any litigation.
In connection with these disputes, the Construction Manager and its
subcontractors have also filed mechanics liens against the Casino Resort for
$145.6 million and $65.7 million, respectively. The Construction Manager has
already bonded or provided indemnification to the Company's title company with
respect to $15.9 million of the subcontractors' mechanics liens. The Company
intends to bond all liens that the court determines are not defective. Although
bonding these liens will prevent any foreclosure of the Casino Resort in
connection with the claims of Bovis and its subcontractors, the Company will be
required to pay or immediately reimburse the bonding company if and to the
extent that the claims underlying such liens 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.
Although neither the Construction Manager nor the subcontractors have
provided the Company with any detailed description of their lien claims, the
Company believes that a substantial portion of these claims are 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 Agreement and the Final GMP,
7
LAS VEGAS SANDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
and is in the process of investigating 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 partially released their
right to file liens against the Casino Resort. The Company intends to vigorously
defend itself in the event of any lien proceedings.
On August 11, 1999, the Company, the Construction Manager and Bovis agreed
to (i) return to negotiations in a good faith effort to resolve all issues
relating to the construction of the Casino Resort, (ii) stay the litigations
pending among the Construction Manager, Bovis and the Company for a reasonable
period in order to allow negotiations to take place and (iii) cooperate with
each other and the subcontractors to complete construction of the Casino Resort.
All of the pending litigation described above is in preliminary stages and
it is not yet possible to determine the ultimate outcome of the lawsuits, lien
proceedings or the pending settlement talks. If any litigation or other
proceedings concerning the claims of the Construction Manager or subcontractors
were decided adversely to the Company, such litigation or other lien proceedings
could have a material effect on the financial position, results of operations or
cash flows of the Company.
NOTE 7 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 and 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 (other than indebtedness under the Mall
Construction Loan Facility, which is guaranteed only by Mall Intermediate and
Mall Construction). No other subsidiary of LVSI is an obligor or guarantor of
any of the Casino Resort financing.
Venetian, Mall Construction and the Mall Subsidiary, have entered into a
Sale and Contribution Agreement (the "Sale and Contribution Agreement") whereby,
upon substantial completion of the Casino Resort and the satisfaction of certain
other conditions, Mall Construction, a guarantor, has agreed to sell and the
Mall Subsidiary has agreed to purchase, among other things, (i) all of its
right, title and interest (whether in fee or in leasehold) in and to the
property and improvements that constitute the Mall in their "as is" condition on
the date of Completion (as defined in the funds disbursement and administration
agreement among certain lenders of the Company (the "Disbursement Agreement"),
(ii) monies deposited in certain reserve accounts relating to the Mall, (iii)
all right, title and interest of Mall Construction and to a lease for an
entertainment complex which is adjacent to the casino floor and (iv) all right,
title and interest of Mall Construction (a) as landlord under Mall tenant
leases, (b) under an Amended and Restated Reciprocal, Easement, Use and
Operating Agreement among Venetian, Mall Construction and Interface
Group-Nevada, Inc. (the "Cooperation Agreement"), (c) in and to all other
easements, fixtures and improvements appurtenant thereto, (d) under an Energy
Services Agreement, dated as of June 1, 1997, with a heating, ventilating and
air conditioning provider (the "HVAC Provider") and any other Mall intangible
property rights and (e) in and to all Mall personal property (collectively the
"Mall Assets"). In connection with the sale of the Mall, Mall Construction also
will transfer to the Mall Subsidiary, under certain circumstances, a specified
amount of the proceeds from the Sole Stockholder's $25.0 million collateralized
completion guaranty (the "Completion Guaranty"). As consideration for such
transfers, the
8
LAS VEGAS SANDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 SUMMARIZED FINANCIAL INFORMATION (CONTINUED)
Mall Subsidiary shall, among other things, repay or assume in full the
outstanding balance of the indebtedness under the Mall Construction Loan
Facility (or certain refinancings thereof).
Because the Mall Subsidiary will not be a guarantor of any indebtedness of
the Company, creditors of the Company (including the holders of the Notes) will
not have a direct claim against the assets of the Mall Subsidiary. As a result,
indebtedness of the Company (including the Notes) will be effectively
subordinated to indebtedness of the Mall Subsidiary. The Mall Subsidiary is not
restricted by any of the debt instruments of the Company (including the
Indentures) from incurring any indebtedness. Any indebtedness incurred by the
Mall Subsidiary may include material restrictions on the ability of the Mall
Subsidiary to pay dividends or to make distributions or loans to the Company and
its subsidiaries.
Prior to October 1998, Venetian owned approximately 44 acres of land on or
near the Las Vegas 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.
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 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 is expected to 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 and for the six months
ended June 30, 1999 is as follows (in thousands):
9
LAS VEGAS SANDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 SUMMARIZED FINANCIAL INFORMATION (CONTINUED)
CONDENSED BALANCE SHEETS
JUNE 30, 1999
(1)
LIDO MALL GRAND CANAL
VENETIAN INTERMEDIATE INTERMEDIATE SHOPS MALL NON- CONSOLIDATING/
LAS VEGAS CASINO RESORT HOLDING HOLDING CONSTRUCTION GUARANTOR ELIMINATING
SANDS, INC. LLC COMPANY LLC COMPANY LLC LLC SUBSIDIARIES ENTRIES
----------- ------------- ------------ ------------ ------------ ----------- -------------
Cash and cash equivalents....... $ 16,157 $ 2,308 $ 5 $ 5 $ 454 $ 1,024 $
Restricted cash and
investments................... 26,501
Intercompany receivable......... 40,926 (40,926)
Accounts receivable, net........ 7,553 5,853 356
Inventories..................... 3,105
Prepaid expenses................ 1,114 2,414 62
----------- ------------- ------------ ------------ ------------ ----------- -------------
Total current assets........ 24,824 81,107 5 5 872 1,024 (40,926)
----------- ------------- ------------ ------------ ------------ ----------- -------------
Property and equipment, net..... 864,960 138,033 73,953
Investment in Subsidiaries...... 114,225 66,593 (180,818)
Deferred offering costs, net.... 26,500 6,042
Other assets.................... 1,807 11,108 14,379
----------- ------------- ------------ ------------ ------------ ----------- -------------
$ 140,856 $ 1,050,268 $ 5 $ 5 $ 159,326 $ 74,977 $ (221,744)
----------- ------------- ------------ ------------ ------------ ----------- -------------
----------- ------------- ------------ ------------ ------------ ----------- -------------
Accounts payable................ $ 506 $ 14,401 $ $ $ 71 $ 8,497 $
Construction payables........... 54,376
Intercompany payables........... 21,864 18,868 194 (40,926)
Other accrued liabilities....... 6,523 25,752 1,094
Current maturities of long-term
debt.......................... 34,224
----------- ------------- ------------ ------------ ------------ ----------- -------------
Total current liabilities... 28,893 128,753 20,033 8,691 (40,926)
Other long-term liabilities..... 2,517
Long-term debt.................. 759,843 140,000
----------- ------------- ------------ ------------ ------------ ----------- -------------
28,893 891,113 160,033 8,691 (40,926)
----------- ------------- ------------ ------------ ------------ ----------- -------------
Redeemable Preferred interest in
Venetian...................... 134,031
----------- ------------- ------------ ------------ ------------ ----------- -------------
Stockholder's equity............ 111,963 25,124 5 5 (707) 66,286 (180,818)
----------- ------------- ------------ ------------ ------------ ----------- -------------
$ 140,856 $ 1,050,268 $ 5 $ 5 $ 159,326 $ 74,977 $ (221,744)
----------- ------------- ------------ ------------ ------------ ----------- -------------
----------- ------------- ------------ ------------ ------------ ----------- -------------
TOTAL
-----------
Cash and cash equivalents....... $ 19,953
Restricted cash and
investments................... 26,501
Intercompany receivable.........
Accounts receivable, net........ 13,762
Inventories..................... 3,105
Prepaid expenses................ 3,590
-----------
Total current assets........ 66,911
-----------
Property and equipment, net..... 1,076,946
Investment in Subsidiaries......
Deferred offering costs, net.... 32,542
Other assets.................... 27,294
-----------
$ 1,203,693
-----------
-----------
Accounts payable................ $ 23,475
Construction payables........... 54,376
Intercompany payables...........
Other accrued liabilities....... 33,369
Current maturities of long-term
debt.......................... 34,224
-----------
Total current liabilities... 145,444
Other long-term liabilities..... 2,517
Long-term debt.................. 899,843
-----------
1,047,804
-----------
Redeemable Preferred interest in
Venetian...................... 134,031
-----------
Stockholder's equity............ 21,858
-----------
$ 1,203,693
-----------
-----------
(1) The assets and liabilities of Grand Canal Shops Mall Construction, LLC, a
guarantor, will be transferred to Grand Canal Shops Mall, LLC, a
non-guarantor subsidiary, upon substantial completion of the Casino Resort
and satisfaction of certain other conditions.
10
LAS VEGAS SANDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 SUMMARIZED FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
LIDO MALL GRAND CANAL
VENETIAN INTERMEDIATE INTERMEDIATE SHOPS MALL
LAS VEGAS CASINO RESORT HOLDING HOLDING CONSTRUCTION
SANDS, INC. LLC COMPANY LLC COMPANY LLC LLC
----------- ------------- ------------- ------------- ---------------
Revenues:
Casino........................................ $ 24,644 $ $ $ $
Room.......................................... 13,428
Food and beverage............................. 5,869
Retail and other.............................. 758 9,966 149
----------- ------------- ------------- ------------- -----
Total revenue................................. 25,402 29,263 149
Less: promotional allowance................... 4,691
----------- ------------- ------------- ------------- -----
Net revenue................................... 25,402 24,572 149
----------- ------------- ------------- ------------- -----
Operating expenses:
Casino........................................ 25,921
Room.......................................... 4,331
Food and beverage............................. 4,225
Retail and other.............................. 1,298
Provision for doubtful accounts and
discounts................................... 862 230
Selling, general and administrative........... 725 11,332 214
Depreciation and amortization................. 50 4,369 144
----------- ------------- ------------- ------------- -----
27,558 25,785 358
----------- ------------- ------------- ------------- -----
Operating profit (loss) before pre-opening
expenses.................................... (2,156) (1,213) (209)
Pre-opening expenses.......................... 145 21,339
----------- ------------- ------------- ------------- -----
Operating loss................................ (2,301) (22,552) (209)
----------- ------------- ------------- ------------- -----
Other income (expense):
Interest income............................. 88 1,710
Interest expense, net of amounts
capitalized............................... (16,237) (509)
----------- ------------- ------------- ------------- -----
Net loss...................................... $ (2,213) $ (37,079) $ $ $ (718)
----------- ------------- ------------- ------------- -----
----------- ------------- ------------- ------------- -----
NON- CONSOLIDATING/
GUARANTOR ELIMINATING
SUBSIDIARIES ENTRIES TOTAL
----------- --------------- ---------
Revenues:
Casino........................................ $ $ $ 24,644
Room.......................................... 13,428
Food and beverage............................. 5,869
Retail and other.............................. (7,149) 3,724
----------- ------- ---------
Total revenue................................. (7,149) 47,665
Less: promotional allowance................... 4,691
----------- ------- ---------
Net revenue................................... (7,149) 42,974
----------- ------- ---------
Operating expenses:
Casino........................................ (7,149) 18,772
Room.......................................... 4,331
Food and beverage............................. 4,225
Retail and other.............................. 1,298
Provision for doubtful accounts and
discounts................................... 1,092
Selling, general and administrative........... 12,271
Depreciation and amortization................. 4,563
----------- ------- ---------
(7,149) 46,552
----------- ------- ---------
Operating profit (loss) before pre-opening
expenses.................................... (3,578)
Pre-opening expenses.......................... 21,484
----------- ------- ---------
Operating loss................................ (25,062)
----------- ------- ---------
Other income (expense):
Interest income............................. 1,798
Interest expense, net of amounts
capitalized............................... (16,746)
----------- ------- ---------
Net loss...................................... $ $ $ (40,010)
----------- ------- ---------
----------- ------- ---------
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
LIDO MALL GRAND CANAL
VENETIAN INTERMEDIATE INTERMEDIATE SHOPS MALL NON-
LAS VEGAS CASINO RESORT HOLDING HOLDING CONSTRUCTION GUARANTOR
SANDS, INC. LLC COMPANY LLC COMPANY LLC LLC SUBSIDIARIES
----------- ------------- ------------- ------------- ------------- -----------
Net cash provided by (used in) operating
activities................................ $ (7,486) $ (19,582) $ $ $ (13,524) $ 8,493
----------- ------------- ------------- ------------- ------------- -----------
Cash flows from investing activities:
Proceeds from sale of investments......... 107,435
Construction of Casino Resort............. (180,426) (45,407) (44,784)
Investments in subsidiaries............... (37,262)
----------- ------------- ------------- ------------- ------------- -----------
Net cash used in investing activities....... (110,253) (45,407) (44,784)
----------- ------------- ------------- ------------- ------------- -----------
Cash flows from financing activities:
Proceeds from preferred interest in
Venetian................................ 37,262
Proceeds from Mall Construction Loan
Facility................................ 37,287
Proceeds from Bank Credit Facility-term
loan.................................... 34,000
Proceeds from Bank Credit
Facility-revolver....................... 20,558
Proceeds from FF&E Credit Facility........ 83,842
Net increase (decrease) in intercompany
accounts................................ 22,427 (44,544) 22,093 24
Proceeds from investment by parent
company................................. 37,262
----------- ------------- ------------- ------------- ------------- -----------
Net cash provided by financing activities... 22,427 131,118 59,380 37,286
----------- ------------- ------------- ------------- ------------- -----------
Increase in cash and cash equivalents....... 14,941 1,283 449 995
Cash and cash equivalents at beginning of
period.................................... 1,216 1,025 5 5 5 29
----------- ------------- ------------- ------------- ------------- -----------
Cash and cash equivalents at end of
period.................................... $ 16,157 $ 2,308 $ 5 $ 5 $ 454 $ 1,024
----------- ------------- ------------- ------------- ------------- -----------
----------- ------------- ------------- ------------- ------------- -----------
CONSOLIDATING/
ELIMINATING
ENTRIES TOTAL
------------- ---------
Net cash provided by (used in) operating
activities................................ $ -- $ (32,099)
------------- ---------
Cash flows from investing activities:
Proceeds from sale of investments......... 107,435
Construction of Casino Resort............. (270,617)
Investments in subsidiaries............... 37,262
------------- ---------
Net cash used in investing activities....... 37,262 (163,182)
------------- ---------
Cash flows from financing activities:
Proceeds from preferred interest in
Venetian................................ 37,262
Proceeds from Mall Construction Loan
Facility................................ 37,287
Proceeds from Bank Credit Facility-term
loan.................................... 34,000
Proceeds from Bank Credit
Facility-revolver....................... 20,558
Proceeds from FF&E Credit Facility........ 83,842
Net increase (decrease) in intercompany
accounts................................
Proceeds from investment by parent
company................................. (37,262)
------------- ---------
Net cash provided by financing activities... (37,262) 212,949
------------- ---------
Increase in cash and cash equivalents....... 17,668
Cash and cash equivalents at beginning of
period.................................... 2,285
------------- ---------
Cash and cash equivalents at end of
period.................................... $ $ 19,953
------------- ---------
------------- ---------
11
LAS VEGAS SANDS, INC.
ITEM 2. 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 in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998. 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 Company's first two months of operations were negatively impacted by
significant construction delays. As a result, the entire Casino Resort did not
open simultaneously. These delays in turn caused delays in openings by
restaurants and Mall tenants. The Casino Resort opened to the public on May 4,
1999 rather than the Construction Manager's guaranteed completion date of April
21, 1999. On May 4, 1999, neither the Mall nor 2,700 of the 3,036 rooms in the
Casino Resort were open to the public. The daily weighted average number of
rooms available during May and June were 1,990 and 2,766, respectively. The Mall
opened on June 19, 1999 with 15 of the 65 leased Mall tenant spaces occupied.
Moving sidewalks from the Las Vegas Strip to the Casino Resort opened on July
15, 1999. The failure to open the entire Casino Resort on the guaranteed
completion date and the lack of major conventions in the Sands Expo and
Convention Center during the operating period adversely affected the Company's
operating results. In May and June, the occupancy rate for available rooms was
63% and the average room rate was $152.
The Company expects significantly improved operating results for its next
fiscal quarter. Currently, 3,000 of the Casino Resort's rooms are available for
use. The Company anticipates that 60 of the 65 leased Mall tenant spaces will be
occupied by the end of September 1999. In July, a traditionally slow month in
Las Vegas, the Company's daily average number of rooms available was 2,963, the
occupancy rate for these rooms was 85% and the average room rate was $127. From
August 1 through August 11, 1999, occupancy increased to 90% and the average
daily room rate was $144.
CONSTRUCTION COSTS
The Company currently estimates that the construction costs for the Casino
Resort will be approximately $1.04 billion (excluding the HVAC Equipment (as
defined) and land acquisition costs). The construction of the principal
components of the Casino Resort was undertaken by the Construction Manager under
the Construction Management Agreement. Under the Construction Management
Agreement, the Construction Manager agreed to substantially complete the Casino
Resort by April 21, 1999. The Construction Management Agreement also provided
that the Company and the Construction Manager would establish the Final GMP. The
Company and the Construction Manager agreed on a Final GMP for work included
within the scope of work of the Construction Manager of $652.0 million. Included
within the Final GMP is up to $70.0 million to construct and install certain
heating, ventilating and air conditioning equipment (the "HVAC Equipment") (as
defined). Subject to certain exceptions, under the Construction Management
Agreement if the cost of the work covered by such agreement exceeded the amount
of the Final GMP plus approved change orders, the Construction Manager agreed to
be responsible for such excess costs. As contemplated by the project agreements,
certain funds, such as the original $40.0 million general project contingency,
realized cost savings, other available funds and the Sole Stockholder's $25.0
million Completion Guaranty have been reallocated, applied or are available to
pay for the Final GMP.
12
LAS VEGAS SANDS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Through July 12, 1999, the Company had paid all construction amounts for
which the Construction Manager had submitted proper payment requisitions within
the Final GMP. The Construction Manager has asserted that it is entitled to
substantial amounts in excess of the Final GMP and that it is entitled to an
extension of the guaranteed completion date of April 21, 1999. The Company
believes that the Construction Manager's claims are unfounded.
Since May 1999, the Company has negotiated with the Construction Manager in
an effort to resolve their dispute. Venetian commenced a lawsuit on July 30,
1999 against the Construction Manager and its parent, Bovis, for breach of
contract by the Construction Manager of its obligations under the Construction
Management Agreement and a breach of contract by Bovis of its obligations under
a guaranty of the Construction Management Agreement, including failure to fully
pay trade contractors and vendors. The suit is intended to ask the court to
require the Construction Manager to pay its contractors and to compensate
Venetian for the Construction Manager's failure to perform its other duties
under the Construction Management Agreement. The suit seeks total damages in
excess of $50.0 million.
On August 3, 1999, the Construction Manager filed a complaint in state court
in Nevada against the Company, alleging breach of contract, QUANTUM MERUIT and
fraud. The Construction Manager claims damages, attorney fees and punitive
damages. Among other things, the Construction Manager claims it is owed $145.6
million by Venetian and its affiliates. Except in connection with prior claims
by the Construction Manager that it was entitled to increases in the Final GMP
totaling $48.7 million, which claims the Company rejected, the Construction
Manager has provided no data or reasonable documentation to support such claim.
On August 2, 1999, in connection with the disputes described above, the
Construction Manager filed mechanics liens against the Casino Resort for $145.6
million. Subcontractors which performed work at, or furnished labor, materials
or equipment to the project have also filed mechanics liens against the Casino
Resort for $65.7 million. The Construction Manager has already bonded or
provided indemnification to the Company's title company with respect to $15.9
million of the subcontractors' mechanics liens. The Company intends to bond all
liens that the court determines are not defective. Although bonding these liens
will prevent any foreclosure of the Casino Resort in connection with the claims
of Bovis and its subcontractors, the Company will be required to pay or
immediately reimburse the bonding company if and to the extent that the claims
underlying such liens 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 intends to vigorously defend
itself and the Casino Resort in any litigation and lien proceedings.
On August 11, 1999, the Company, the Construction Manager and Bovis agreed
to (i) return to negotiations in a good faith effort to resolve all issues
relating to the construction of the Casino Resort, (ii) stay the litigations
pending among the Construction Manager, Bovis and Venetian for a reasonable
period in order to allow negotiations to take place and (iii) cooperate with
each other and the subcontractors to complete construction of the Casino Resort.
On August 9, 1999, the Company notified the insurance companies providing
coverage under the Construction Manager's 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 Agreement within 30 days of the April 21, 1999
deadline, with a maximum liability under the LD Policy of $24,062,000 and with
coverage being provided for days 31-120 of the delay in the achievement of
13
LAS VEGAS SANDS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
substantial completion. The Company is in the process of determining when and
whether substantial completion, as defined in the LD Policy, has occurred so
that it can determine the exact amount of its claim under the LD Policy. The
Company expects the LD Policy insurers to assert many of the same claims and
defenses that the Construction Manager has or will assert in the above-described
litigations. Liability under the LD Policy may ultimately be determined by
binding arbitration.
All of the pending litigation described above is in preliminary stages and
it is not yet possible to determine the ultimate outcome of the lawsuits, lien
proceedings or the pending settlement talks. If any litigation or other
proceedings concerning the claims of the Construction Manager or subcontractors
were decided adversely to the Company, such litigation could have a material
effect on the financial position, results of operations or cash flows of the
Company.
For more information, see "--Liquidity and Capital Resources" and "Part II,
Item 1. Legal Proceedings."
OPERATING RESULTS
For the six month period ended June 30, 1999, net revenues totaled $43.0
million of which $24.6 million and $13.4 million represented casino and gross
hotel revenues, respectively. During this period revenues from table games and
slots were $12.2 million and $12.4 million, respectively. Operating profit
before interest, depreciation, amortization and pre-opening expenses was $1.0
million for the six month period ended June 30, 1999 and $0.7 million for the
three month period ended June 30, 1999.
The Company incurred pre-opening expenses of $14.7 million and $21.5 million
for the three-month and six month periods ended June 30, 1999, respectively.
From the inception of the project through June 30, 1999, the Company expensed
$30.2 million for pre-opening activities. Pre-opening expenses included payroll,
advertising, professional services and other general and administrative expenses
related to the opening of the Casino Resort.
Other factors affecting earnings included interest income that decreased by
$4.5 million and $8.9 million for the three-month and six month periods ended
June 30, 1999, respectively versus the same periods of 1998 as a result of
expending the proceeds from the sale of the Notes to fund construction expenses
of the Casino Resort. Construction of the Casino Resort continued during the
second quarter of 1999 and the Company capitalized interest of $11.9 million and
$31.2 million for the three-month and six month periods ended June 30, 1999,
respectively. During the same periods of 1998, the Company capitalized interest
of $10.1 million and $15.2 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999 and December 31, 1998, the Company held cash and cash
equivalents of $20.0 million and $2.3 million, respectively. On such dates, the
Company also held restricted cash and investments of $26.5 million and $133.9
million, respectively. Net cash used in operating activities for the first six
months of 1999 was $32.1 million, compared with $22.8 million for the same
period in 1998.
Capital expenditures during the first six months of 1999 were $270.6
million, consisting of construction of the Casino Resort. Of the cost expended
or incurred during the first six months of 1999, $54.6 million, $37.3 million
and $83.8 million were drawn from the Bank Credit Facility (including $20.6
million under the revolving credit facility), the Mall Construction Loan
Facility and the FF&E Credit Facility, respectively. The balance of the capital
expenditures represents proceeds from the Notes and reduction of
14
LAS VEGAS SANDS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
accruals for construction payables. During the second quarter of 1999, the
Company received $37.3 million from the Phase II Subsidiary (which was funded
from indirect equity contributions by the Sole Stockholder through Venetian) to
reimburse it for a portion of the shared facilities costs between the Casino
Resort and the Phase II Resort.
As of June 30, 1999, $991.9 million of the total project cost of
approximately $1.04 billion (excluding the HVAC Equipment and land acquisition
costs) had been expended to fund construction and development of the Casino
Resort. The remaining estimated construction and development costs for the
Casino Resort are expected to be funded from a combination of (i) use of
restricted cash and investments held pursuant to the Disbursement Agreement,
(ii) 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, (iii) borrowings under the revolving credit facility of the
Bank Credit Facility and (iv) other third parties (including the Construction
Manager and Bovis), pursuant to their liability to the Company under their
agreements with the Company.
Assuming there are no additional delay costs or construction cost overruns
and the Company is not obligated to pay for the Construction Manager's or its
subcontractors' asserted claims in excess of the Final GMP amount, the funds
provided by the above sources are expected to be sufficient to complete
construction of the Casino Resort. If there are any additional delay costs and
construction cost overruns, or if the Company is required to pay any of the
asserted claims of the Construction Manager and its subcontractors, the Company
may use cash received from the following sources to fund such costs, cost
overruns and claims: (i) the LD Policy for costs of certain construction delays
and the proceeds of other (e.g., casualty) insurance policies, (ii) the
Construction Manager, Bovis and its ultimate parent corporation, Peninsular and
Oriental Steam Navigation Company ("P & O"), pursuant to the Construction
Management Agreement, a guaranty of the Construction Management Agreement by
Bovis and a guaranty of Bovis's obligation under such guaranty by P & O,
respectively, (iii) other third parties, pursuant to their liability to the
Company under their agreements with the Company, (iv) other 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
Sole Stockholder, pursuant to his liability under the Completion Guaranty and
(vi) additional debt or equity financings as described below. The Completion
Guaranty provides that, subject to certain conditions and limitations, if
available funds are not sufficient to fund all construction and development
costs, the Sole Stockholder is obligated to fund excess costs up to a maximum
aggregate amount of $25.0 million. The Sole Stockholder's obligation to fund
such excess construction and development costs is collateralized by $25.0
million of cash or cash equivalents pledged to the Bank of Nova Scotia, as
disbursement agent under the Disbursement Agreement. If the Sole Stockholder
provides funds under the Completion Guaranty, the amount of such funds will be
treated as a junior subordinated loan from the Sole Stockholder to Venetian. If
the Company were required to pay additional construction costs, cost overruns
and claims and if it were unable to raise the funds from the sources described
above, there could be a material adverse effect on the Company.
Under the Disbursement Agreement, the Company cannot access the restricted
cash and investments thereunder, the borrowings under the revolving credit
facility of the Bank Credit Facility, the Completion Guaranty or other project
funds described above until the mechanics liens filed by the Construction
Manager and its subcontractors described in "--Construction Costs" are bonded or
released. Although the Company currently expects to bond these liens, there can
be no assurance that the liens will be bonded or released in a timely manner or
at all.
15
LAS VEGAS SANDS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
For the remainder of 1999, the Company expects to fund its operations and
debt service requirements from (i) operating cash flow and (ii) borrowings under
the Bank Credit Facility. As of June 30, 1999, $29.4 million of the $40.0
million revolving credit facility under the Bank Credit Facility was drawn. As
described above, no additional borrowings from the revolving credit facility can
be obtained until the mechanics liens described above are bonded or released.
Prior to the end of 1999, the Company expects to refinance the Mall Construction
Loan Facility as described under "--Mall Subsidiary and Transfer of Mall
Assets." Also, the Company has significant debt service payments due during the
remainder of 1999, including principal payments on its Bank Credit Facility and
FF&E Credit Facility aggregating $8.6 million on September 30, 1999 and interest
payments of $30.9 million for the Notes on November 15, 1999. To fund these
payments from operating cash flow will require the Company to achieve
substantially improved operating results for its next fiscal quarter. No
assurance can be given that the Company will achieve such improved operating
results.
If the Company is required to pay additional construction costs or any of
the Construction Manager's or its subcontractors' claims, or if the Company is
unable to meet its debt service requirements, the Company will seek, if
necessary and to the extent permitted under the Indentures and the terms of the
Bank Credit Facility and the Mall Construction Loan Facility, additional
financing through bank borrowings or debt or equity financings. Also, there can
be no assurance that new business developments or other unforeseen events will
not occur resulting in the need to raise additional funds. There 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 Sole Stockholder or any of his affiliates will
provide any such financing.
MALL SUBSIDIARY AND TRANSFER OF MALL ASSETS
Upon the substantial completion of the Casino Resort and the satisfaction of
certain other conditions, Mall Construction will transfer the substantial Mall
Assets to the Mall Subsidiary pursuant to the Sale and Contribution Agreement.
Upon such transfer, (i) the Mall Assets will be released by the trustee under
the Mortgage Notes and the agent under the Bank Credit Facility and will not be
available as security to the holders of the Mortgage Notes or for the
indebtedness under the Bank Credit Facility, and (ii) the indebtedness under the
Mall Construction Loan Facility will either be repaid or assumed by the Mall
Subsidiary (and the Company and its subsidiary guarantors will be released from
all obligations under such indebtedness).
To finance the obligations of the Mall Subsidiary under the Sale and
Contribution Agreement, Goldman Sachs Mortgage Company ("GSMC") and an entity
wholly owned by the Sole Stockholder (the "Tranche B Take-out Lender")
separately have entered into commitment agreements with the Mall Subsidiary
whereby GSMC has agreed to provide debt financing to the Mall Subsidiary of up
to $105.0 million (the "Tranche A Take-out Financing") and the Tranche B
Take-out Lender has agreed to provide debt financing to the Mall Subsidiary of
up to $35.0 million (the "Tranche B Take-out Financing" and, together with the
Tranche A Take-out Financing, the "Mall Take-out Financing"). The consummation
of the Tranche A Take-out Financing is subject to certain conditions, including
substantial completion of the Casino Resort and delivery of legal opinions
(including certain substantive non-consolidation opinions).
Until the above described transfer of the Mall Assets is consummated, the
Company expects to explore or examine refinancing alternatives to the Mall
Take-out Financing. No assurance can be given that
16
LAS VEGAS SANDS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
any such alternative financing will be completed. Pending the closing of the
Mall Take-out Financing or an alternative financing, the Company has increased
the margin for the interest rate under the Mall Construction Loan Facility by
0.5% per annum.
Because the Mall Subsidiary will not be a guarantor of any indebtedness of
the Company, creditors of the Company (including the holders of the Notes) will
not have a direct claim against the assets of the Mall Subsidiary. As a result,
indebtedness of the Company (including the Notes) will be effectively
subordinated to indebtedness of the Mall Subsidiary. The Mall Subsidiary is not
restricted by any of the debt instruments of LVSI, Venetian or the Company's
subsidiary guarantors (including the Indentures) from incurring any
indebtedness. Any indebtedness incurred by the Mall Subsidiary (including the
Tranche A Take-out Financing) may include material restrictions on the ability
of the Mall Subsidiary to pay dividends or to make distributions or loans to the
Company and its subsidiaries.
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 any portion of the
construction and development costs of the Phase II Resort. In accordance with
the Disbursement Agreement, land on which the Phase II Resort (the "Phase II
Land") will be built was transferred to the Phase II Subsidiary in October 1998.
The development, construction and opening of the Casino Resort is not
dependent on the construction and opening of the Phase II Resort. The
development of the Phase II Resort may require obtaining additional regulatory
approvals. The Company does not expect to begin construction on the Phase II
Resort until at least next year.
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 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, 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 incurred by the Phase II Subsidiary is expected
to 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.
However, such 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 Sole Stockholder or any affiliate of the Sole 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.
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") and third priority liens on the Mall
Assets. The Mortgage Notes are also guaranteed on a senior secured basis by
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LAS VEGAS SANDS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Mall Construction and are secured by third priority liens on the Mall Assets
held by such subsidiary. However, the guarantees of the Mortgage Notes by its
subsidiaries, Mall Intermediate and Lido Intermediate (collectively, the
"Subordinated Guarantors") are unsecured, subordinated debt obligations of the
guarantors. The structure of these guarantees present certain risks for holders
of the Mortgage Notes. For example, if the Note Collateral and the Mall Assets
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, Venetian and Mall Construction. 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.
YEAR 2000
The Company has purchased and installed new computer hardware and software
to operate the Casino Resort. The Company is addressing the issue of computer
programs and embedded computer chips being unable to distinguish between the
years 1900 and 2000. The Company has established an internal review system to
ensure that all new systems purchased and installed to operate the Casino Resort
are year 2000 compliant. The new systems have been implemented in connection
with the opening of the Casino Resort. The review system includes requiring all
computer software vendors to certify in writing that software acquired is year
2000 compliant and testing all new systems for year 2000 compliance. The review
system is under the direction of the Casino Resort's Vice President of
Information Systems.
COST
The total cost associated with required testing of systems to become year
2000 compliant is not expected to be material to the Company's financial
position. Funds for the screening and testing of the new systems are included in
the project budget for the purchase of computer systems.
RISKS
Due to the general uncertainty inherent in the year 2000 problem, resulting
in part from the uncertainty of the year 2000 readiness of third party suppliers
and customers, the Company is unable to determine at this time whether the
consequences of year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. The Company believes
that with the screening process in place the possibility of significant
interruptions of normal operations should be reduced. The Company has made
inquiries to determine whether the year 2000 issue will have any effect on its
suppliers and business partners. The Company has not, however, determined the
adequacy of year 2000 compliance for other industries that the Casino Resort
will rely upon, including but not limited to, the airline industry and telephone
service suppliers.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this section and elsewhere in this Quarterly Report on
Form 10-Q (as well as information included in oral statements or other written
statement 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. Although
the Company believes that such forward-looking statements are
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LAS VEGAS SANDS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 a new venture and new construction, competition
and other planned construction in Las Vegas, year 2000 risks, government
regulation related to the casino industry (including the legalization of gaming
in certain jurisdictions, such as Native American reservations in the state of
California), leverage and debt service (including sensitivity to fluctuations in
interest rates), uncertainty of casino spending and vacationing in casino
resorts in Las Vegas, 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, the completion of infrastructure improvements in Las
Vegas, including the current expansion of the Las Vegas Convention Center and
the recent expansion of McCarran International Airport, litigation risks,
including the outcome of the pending disputes with the Construction Manager and
subcontractors, successful and timely completion of the remaining construction
for the Casino Resort, and general economic and business conditions which may
impact levels of disposable income of consumers and pricing of hotel rooms.
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LAS VEGAS SANDS, INC.
ITEM 3. 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 under the Bank Credit Facility, the Mall
Construction Loan Facility and the FF&E Credit Facility, and by use of interest
rate cap and floor agreements. The ability to enter into interest rate cap and
floor agreements will allow the Company to manage its interest rate risk
associated with its variable rate debt. See "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources."
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LAS VEGAS SANDS, INC.
PART II
OTHER INFORMATION
ITEM 1. 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 impact on the financial position, results of operation and cash flows
of the Company.
On July 30, 1999, Venetian filed a complaint against the Construction
Manager and its parent, 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 Agreement and a breach of
contract by Bovis of its obligations under a guaranty of the Construction
Management Agreement, including failure to fully pay trade contractors and
vendors. The suit is intended to ask the courts to require the Construction
Manager to pay its contractors and to compensate Venetian for the Construction
Manager's failure to perform its other duties under the Construction Management
Agreement. Venetian seeks total damages in excess of $50.0 million.
In response to Venetian's breach of contract claims against the Construction
Manager and Bovis, 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 under the Construction
Management Agreement 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 $145.6
million from Venetian and its affiliates. Based upon its preliminary review of
the complaint and the fact that the Construction Manager has not provided
Venetian with reasonable documentation to support such claims, the Company
believes that the Construction Manager's claims are without merit and intends to
vigorously defend itself in any litigation.
In connection with these disputes, the Construction Manager and its
subcontractors have also filed mechanics liens against the Casino Resort for
$145.6 million and $65.7 million, respectively. The Construction Manager has
already bonded or provided idemnification to the Company's title company with
respect to $15.9 million of the subcontractors' mechanics liens. The Company
intends to bond all liens that the court determines are not defective. Although
bonding these liens will prevent any foreclosure of the Casino Resort in
connection with the claims of Bovis and its subcontractors, the Company will be
required to pay or immediately reimburse the bonding company if and to the
extent that the claims underlying such liens 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.
Although neither the Construction Manager nor the subcontractors have
provided the Company with any detailed description of their lien claims, the
Company believes that a substantial portion of these claims are 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 Agreement 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 and is in the process of
investigating 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 partially released their right to file liens
against the Casino Resort. The Company intends to vigorously defend itself in
any lien proceedings.
On August 11, 1999, the Company, the Construction Manager and Bovis agreed
to (i) return to negotiations in a good faith effort to resolve all issues
relating to the construction of the Casino Resort, (ii) stay the litigations
pending among the Construction Manager, Bovis and Venetian for a reasonable
period in order to allow negotiations to take place and (iii) cooperate with
each other and the subcontractors to complete construction of the Casino Resort.
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LAS VEGAS SANDS, INC.
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
All of the pending litigation described above is in preliminary stages and
it is not yet possible to determine the ultimate outcome of the lawsuits, lien
proceedings or the pending settlement talks. If any litigation or other
proceedings concerning the claims of the Construction Manager or subcontractors
were decided adversely to the Company, such litigation or other lien proceedings
could have a material effect on the financial position, results of operations or
cash flows of the Company.
For additional information, see "Part I, Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Construction Costs."
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LAS VEGAS SANDS, INC.
PART II
OTHER INFORMATION
ITEMS 2 THROUGH 5 OF PART II ARE NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended June 30, 1999.
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LAS VEGAS SANDS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LAS VEGAS SANDS, INC.
AUGUST 16, 1999 By: /s/ SHELDON G. ADELSON
------------------------------------------
Sheldon G. Adelson
Chairman of the Board, Chief
Executive Officer and Director
August 16, 1999 By: /s/ HARRY D. MILTENBERGER
------------------------------------------
Harry D. Miltenberger
Vice President-Finance
(principal financial and accounting
officer)
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