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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
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Commission File Number 333-42147
LAS VEGAS SANDS, INC.
Incorporated pursuant to the Laws of Nevada State
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IRS -- Employer Identification No. 04-3010100
3355 Las Vegas Boulevard South, Room 1A, Las Vegas, Nevada 89109
(702) 414-1000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of registrant
as of March 30, 2000 was $0.
The Company had 925,000 shares of Common Stock outstanding as of March 30, 2000.
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Las Vegas Sands, Inc.
Table of Contents
Part I
Item 1. Business ...................................................1
Item 2. Properties ................................................18
Item 3. Legal Proceedings .........................................19
Item 4. Submission of Matters to a Vote of
Security Holders ..........................................20
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .......................................21
Item 6. Selected Financial Data ...................................22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations .............23
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk .........................................29
Item 8. Financial Statements and Supplementary Data ...............30
Item 9. Changes In and Disagreements With Accountants
On Accounting and Financial Disclosure ....................49
Part III
Item 10. Directors and Executive Officers of the Registrant ........50
Item 11. Executive Compensation ....................................51
Item 12. Security Ownership of Certain Beneficial Owners and
Management ................................................53
Item 13. Certain Relationships and Related Transactions ............54
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ...............................................57
Signatures ................................................61
PART I
ITEM 1. -- BUSINESS
General
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Las Vegas Sands, Inc. ("LVSI") and its subsidiaries (collectively, the
"Company") own and operate the Venetian Casino Resort (the "Casino Resort"), a
Renaissance Venice-themed resort situated at one of the premier locations on the
Las Vegas Strip (the "Strip"). The Casino Resort is located across from The
Mirage and the Treasure Island Hotel and Casino at the site of the former Sands
Hotel and Casino (the "Sands"). The Casino Resort includes the first all-suites
hotel on the Strip with 3,036 suites (the "Hotel"); a gaming facility of
approximately 116,000 square feet (the "Casino"); an enclosed retail, dining and
entertainment complex of approximately 445,000 net leasable square feet (the
"Mall"); and a meeting and conference facility of approximately 500,000 square
feet (the "Congress Center"). The Casino Resort is physically connected to the
approximately 1.15 million square foot Sands Expo and Convention Center (the
"Expo Center"), one of the largest facilities in the United States specifically
designed for trade shows and conventions. Management believes that the combined
facilities of the Casino Resort and the Expo Center (which is separately owned
by an affiliate of the Company) is one of the largest hotel and meeting
complexes in the United States. Ground breaking for the Casino Resort occurred
in April 1997, the Casino Resort opened on May 4, 1999, the Mall opened on June
19, 1999 and substantial completion was achieved on November 12, 1999.
LVSI was incorporated in 1988 under the laws of the State of Nevada. In
April 1989, LVSI acquired the Sands from MGM Grand. LVSI owned and operated the
Sands from April 1989 to June 1996 when operations ceased to begin demolition
and construction of the Casino Resort. LVSI is the managing member and owner of
100% of the common equity of Venetian Casino Resort, LLC ("Venetian"). Venetian
is the owner and operator of the Hotel and Congress Center, and the owner of the
Casino. Under a casino lease (the "Casino Lease"), Venetian leases the Casino to
LVSI, which conducts all gaming operations in the Casino Resort. Grand Canal
Shops Mall Subsidiary, LLC, an indirect subsidiary of LVSI (the "New Mall
Subsidiary"), owns and operates the Mall. The executive offices of LVSI are
located at 3355 Las Vegas Boulevard South, Room 1A, Las Vegas, Nevada 89109 and
its phone number is (702) 414-1000.
This Annual Report on Form 10-K contains certain forward-looking
statements. See "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Special Note Regarding Forward-Looking
Statements."
The Casino Resort
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The Hotel
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The Hotel has 3,036 single and multiple bedroom suites situated in a
35-story, three-winged tower rising above the Casino. The lobby features a
65-foot domed ceiling decorated with Venetian-themed fresco-style paintings, a
main passageway formed by a barrel-vaulted ceiling carried on ornamental
columns, and a replica of the unique three dimensional-style marble floors found
in Venetian palaces.
A typical Hotel suite approximates 655 to 735 square feet, consisting of
a raised sleeping area and bathroom and a sunken living/working area. The
suite's bi-level configuration creates a multi-function living space in which
guests can sleep, work or entertain and includes two queen-size beds or one
king-size bed, a writing desk, dual-line speaker phones, a fax machine and a
sitting area. Approximately 318 of the suites are of larger size for use by
gaming customers.
The Hotel leases space to eight restaurants that are located adjacent to
the Casino and five other food outlets located in a Venetian-style market food
court located at the casino level of the Hotel. Live entertainment is offered at
the 50,000 square foot entertainment complex, "C2K". In addition, the Hotel
provides a variety of amenities for its guests, including a state-of-the-art
health spa, operated by Canyon Ranch, with massage and treatment rooms, exercise
and fitness areas. The Hotel also features an outdoor swimming complex
(including three pools, spas, pool bars and cabanas) surrounded by gardens,
waterways, fountains and sculptures. The Hotel has been designed to accommodate
future expansion, including a 1,500-seat showcase theater.
The Casino
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The Casino has 116,000 square feet and is situated adjacent to the Hotel
lobby. The Casino floor is accessible from each of the Hotel, the Mall, the
Congress Center, the Expo Center and the Strip. The Casino is marketed to
attract a broad base of patrons, with a specific focus on frequent premium
gaming customers. The Company markets the Casino directly to this gaming market
segment using database-marketing techniques, slot clubs and traditional
incentives, such as reduced room rates and complimentary meals and suites. The
Company offers "high roller" gaming customers premium suites and special hotel
services.
The Casino and its adjacent amenities are stylized to resemble a Venetian
"palazzo," with architectural and interior design features representative of
Venice's Renaissance era. The ceiling in the table games area feature
fresco-style paintings of Venetian palaces. The gaming facilities include
approximately 2,150 slot machines of various denominations, including popular
multi-property, linked progressive games. A high-end slot area, with a private
lounge, provides slot customers with premium slot products and services. The
Casino's approximately 119 table games (excluding baccarat tables) feature the
traditional games of blackjack, craps and roulette, Asian games, such as "Pai
Gow" and "Pai Gow Poker," and popular progressive table games, such as
"Caribbean Stud Poker" and "Let It Ride." In addition, the Casino offers gaming
customers an upscale sportsbook room, a poker area and an upscale baccarat pit
with 4 baccarat tables. The baccarat pit is specially designed for premium,
"high roller" gaming, with baccarat, blackjack and roulette, direct access to
private cash-out windows at the Casino cage and direct access to the Casino's
credit department.
The Mall
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The Mall offers approximately 445,000 net leasable square feet of
shopping, dining and entertainment space located (i) on two levels within the
Casino Resort's main structure, between the Casino level and the Hotel tower,
and (ii) in a separate approximately 38,000 square foot retail annex adjacent to
the Casino Resort's main structure and accessible from the Strip. The Mall
includes six dining establishments, five food court outlets and 60 retail
stores. Visitors and guests can enter the Mall from several different
directions, including from the Strip via a moving sidewalk, from the main gaming
area of the Casino via escalators, from the Expo Center through the Congress
Center, and directly from the Hotel.
The Mall offers an array of quality dining experiences, including upscale
restaurants that offer international and American regional cuisines. The Mall's
retail offerings include exclusive showcase boutiques, popular brand name
mid-priced stores and themed entertainment concepts. The restaurants and stores
are set along an approximately one-quarter mile Venetian-themed streetscape and
front on the Venetian-themed canal running its length and grouped in
"piazza"-style settings. Store and restaurant facades are designed to project
the Venetian theme.
Expo Center and the Congress Center
-----------------------------------
With over 1.15 million gross square feet of exhibit and meeting space,
including four exhibit halls and 20 meeting rooms, the existing separately owned
and operated Expo Center is one of the largest trade show and convention
facilities in the United States (as measured by net leasable square footage). As
part of the Casino Resort, the Company owns and operates the Congress Center, an
approximately 500,000 gross square foot meeting and conference facility which
links the Expo Center and the rest of the Casino Resort. The Congress Center
includes an approximately 80,000 square foot column-free "Venetian Ballroom," an
approximately 13,500 square foot "Palazzo Ballroom" and a meeting complex of 42
individual rooms which can be combined to create three additional ballrooms.
Together, the Expo Center and the Congress Center offer nearly 1.65 million
square feet of state-of-the-art exhibition and meeting facilities, which can be
configured to provide 108 meeting rooms or accommodate large-scale multi-media
events. Management markets the Congress Center to complement the operations of
the Expo Center by target marketing the Congress Center for business conferences
and upscale business events typically held during the mid-week period. The
Company markets the Congress Center to generate room night demand during the
move-in/move-out phases of Expo Center events. The Company's goal is to draw
from attendees and exhibitors at Expo Center events and from attendees of
Congress Center events to maintain weekday room-night demand at the Hotel from
this higher budget market segment, when room demand would otherwise be derived
from the lower budget tour and travel group market segment.
In 1999, approximately 1,168,000 visitors attended trade shows and
conventions at the Expo Center during 123 show days. The Expo Center hosted 17
events on the 1999 Trade Show Week 200 list of the largest trade shows in the
United States in 1999, including the COMDEX Fall Trade Show, the Spring and Fall
Western Shoe Show and JCK Jewelry Show, as well as the convention of National
Association of Broadcasters, the Automotive Service Industry Association Week
and the International Consumer Electronics Show, each of which were multiple
location events.
It should be noted that the Company has no ownership or financial interest
in the Expo Center or Interface Group-Nevada, Inc. ("Interface"), the owner of
the Expo Center, and does not exercise any control over the business or
management of the Expo Center or Interface. All of the capital stock of
Interface is beneficially owned by Sheldon G. Adelson, the sole stockholder of
the Company (the "Sole Stockholder"). See "Item 13 - Certain Relationships and
Related Transactions."
Venetian, the New Mall Subsidiary and Interface are parties to an Amended
and Restated Reciprocal Easement, Use and Operating Agreement (the "Cooperation
Agreement") which, among other things, provides for the integrated operation of
all the facilities. Under the Cooperation Agreement, Interface, the New Mall
Subsidiary and Venetian allocate expenses shared by the Expo Center and the
Casino Resort. In addition, the Company and Interface jointly market the Hotel
and Casino, the Mall, the Congress Center and the Expo Center. The Cooperation
Agreement provides that until December 31, 2010, Interface will use commercially
reasonable efforts to have the Hotel designated as the "headquarters hotel" for
trade show and convention events at the Expo Center, and the Company will use
commercially reasonable efforts to promote the use and occupancy of the Expo
Center. In order to obtain the Casino Resort's "headquarters hotel" designation,
the Company has agreed with Interface that, except under certain circumstances,
trade shows of the type generally held at the Expo Center will not be held in
the Congress Center. It should be noted that trade show and convention promoters
are under no obligation to select the Casino Resort as the "headquarters hotel"
for their events. See "Item 13 - Certain Relationships and Related Transactions
- - Cooperation Agreement."
Business and Marketing Strategy
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The Company's business strategy is to (i) operate a "must-see" destination
resort at a premier location at the heart of the Strip, (ii) provide a
differentiated superior all-suites product, (iii) capitalize on the link to the
Expo Center and the Congress Center, (iv) utilize the Casino Resort's unique
assets and facilities to appeal to a higher budget customer mix, (v) use the
Casino Resort's themed facilities and location to generate Casino revenues and
(vi) target premium gaming customers.
Create a "Must-See" Destination Casino Resort at the Heart of the Las
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Vegas Strip
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The Casino Resort, with its extensive theming, dining, shopping and
entertainment, is a "must-see" destination resort located at the heart of the
Strip. The Casino Resort is operated to provide visitors with the sense of being
surrounded by the festivity and splendor of Renaissance Venice's architecture,
music, art and history. The Venetian-themed setting along the Casino Resort's
frontage on the Strip includes waterways, gondolas, and replicas of Venetian
landmarks, such as the Doge's Palace, the Rialto Bridge, the Ca Doro and the
Campanile Tower. The Mall features a one-quarter mile Venetian streetscape, with
intimate "piazza"-style settings and a 630-foot canal running its length, with
gondolas and waterside cafes and crossed by authentically styled Venetian
bridges.
The Casino Resort has approximately 740 feet of frontage on the east side
of the Strip and is located next to Harrah's and across from some of the most
visited casino resorts and attractions on the Strip, including The Mirage, the
Treasure Island Hotel and Casino and The Forum Shops at Caesars Palace Hotel.
Provide a Differentiated Superior All-Suites Product
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The Hotel offers the only all-suites product with first-class services and
facilities on the Strip. In management's experience, business and leisure
travelers consider suites desirable, superior accommodations. For business
travelers, the Hotel's suites, which accommodate informal business meetings and
social gatherings, offer guests a unique, single location in which to work and
entertain in close proximity to the Expo Center and the Strip. Leisure travelers
appreciate both the Hotel's spacious suites and extensive facilities. The
Company believes that the all-suites format, together with the Casino Resort's
many other unique attributes, result in a highly differentiated resort product,
and provide a competitive advantage over other Strip hotel/casino properties and
resorts.
The typical Hotel suite ranges in size from approximately 655 square feet
to 735 square feet (compared to 360 to 400 square feet on average for a standard
room in competing facilities on the Strip), and consists of a sunken
living/working area and a raised sleeping area with a marble bathroom. The suite
living/working areas include a sitting area and a writing desk and offer
business amenities such as dual-line speakerphones, a fax machine and dataport
access. The bathrooms are oversized, featuring a separate bathtub and shower,
dual sinks and a phone. In addition, the Hotel offers larger suites, including
the "Presidential" and penthouse suites.
Capitalize on the Link to the Expo Center and the Congress Center
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The Casino Resort is the first themed entertainment resort in Las Vegas
designed specifically to accommodate large-scale trade shows, conventions,
conferences and meetings. The Expo Center and the Congress Center provide
recurring, predictable demand for mid-week room nights from business travelers.
During 1999, approximately 1,168,000 visitors attended trade shows and
conventions at the Expo Center. Pursuant to the Cooperation Agreement, the owner
of the Expo Center markets the Casino Resort to promoters of Expo Center trade
show conventions and other events as the "headquarters hotel" for such events.
The Casino Resort offers attendees of events at the Expo Center and the Congress
Center the most convenient hotel accommodations in Las Vegas.
Appeal to a Higher Budget Customer Mix
--------------------------------------
Management markets the Casino Resort to attract higher budget business
travelers and free and independent travelers, resulting in a higher budget
customer mix both on weekdays and weekends. By appealing to customers in these
market segments, the Company has reduced its reliance on the lower-budget tour
and travel market. Management believes that business travelers typically pay
more for rooms and spend more on entertainment than weekday customers in other
categories, such as tour groups. Management believes that the Casino Resort's
central location adjacent to the Expo Center and the Strip and its all-suites
hotel product will allow it to compete effectively for the higher budget
mid-week trade show, convention and meeting attendees. On both weekdays and
weekends, the all-suites product at the Hotel appeals to free and independent
leisure travelers and "high-roller" gaming customers, also segments of the
travel market that spend more on rooms and entertainment.
Use the Casino Resort's Themed Facilities and Location to Generate Casino
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Revenues
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Management believes the Casino captures gaming revenues from (i) the foot
traffic generated by Expo Center and Congress Center events, (ii) Hotel guests,
(iii) the foot traffic generated by shoppers and diners at the Mall and (iv)
visitors attracted to the Casino Resort's unique, Venetian-themed facilities.
The Casino Resort includes a concentration of some of the finest restaurants in
Las Vegas, brand name and exclusive boutique shopping, and themed entertainment
concepts. Restaurants are leased and operated by several well-known
restaurateurs, such as Wolfgang Puck, to operate their "signature" restaurants
at the Casino Resort. In addition, the Casino Resort has leased out a 50,000
square foot entertainment complex, "C2K", located partly in the Mall and partly
in the Hotel. The combination of brand name awareness and extensive theming
generates significant foot traffic for the Casino Resort. The Casino Resort has
been designed so that foot traffic from the Strip, the Expo Center, the Congress
Center and the Hotel are funneled through the Casino floor in order to attract
and retain a broad base of Casino patrons.
Target Premium Gaming Customers
-------------------------------
Management believes that the Casino Resort's all-suites product, themed
atmosphere and amenities offer gaming customers a unique Las Vegas experience.
The Company markets the Casino to frequent premium gaming customers. In
particular, the Company seeks to attract "high roller" gaming customers by
offering premium suites and special hotel services. Because of the all-suites
format in the Hotel, the Casino Resort is able to offer many gaming customers
complementary suites (considered premium accommodations in Las Vegas) during
high occupancy periods such as weekends and holidays when they would not
otherwise be offered such suites by the Company's competitors. The Company
believes that the premium gaming customer is a significant market segment that
has been inadequately addressed by the Casino Resort's competitors. The Casino
Resort is the first all-suites resort on the Strip with facilities and amenities
designed from inception to attract and serve premium gaming customers.
The Las Vegas Market
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Las Vegas is one of the fastest growing and largest entertainment markets
in the country. Las Vegas hotel occupancy rates are among the highest of any
major market in the United States. According to the Las Vegas Convention and
Visitors Authority ("LVCVA"), the number of visitors traveling to Las Vegas has
increased at a steady and significant rate for the last ten years from 18.1
million visitors in 1989 to 33.8 million visitors in 1999, a compound annual
growth rate of 5.3%. In addition, the population of Las Vegas has grown from
approximately 863,000 in 1990 to approximately 1,321,319 in 1999, a compound
growth rate of 4.8%. Management believes that the growth in the Las Vegas market
has been enhanced as a result of a dedicated program by the LVCVA and major Las
Vegas hotels to promote Las Vegas as a major vacation and convention site, the
increased capacity of McCarran International Airport and the introduction of
large, themed destination resorts in Las Vegas.
Las Vegas as a Trade Show, Convention and Meeting Destination
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In 1999, Las Vegas was the most popular trade show destination (with a 25%
market share of the Trade Show Week 200 Shows in terms of net square footage)
and the fourth most popular convention destination in the United States. In
1989, approximately 1.5 million persons attended trade shows and conventions in
Las Vegas and spent approximately $1.1 billion. In 1999, the number of trade
show and convention attendees had increased to more than 3.8 million and the
amount spent by trade show and convention attendees was approximately $4.0
billion.
Trade shows are held for the purpose of getting sellers and buyers of
products or services together for the purpose of conducting business. Trade
shows differ from conventions in that trade shows typically require substantial
amounts of space for exhibition purposes and circulation. Conventions generally
are group gatherings of companies or groups that require less space for breakout
meetings and general meetings of the overall group. Las Vegas offers trade shows
and conventions a unique infrastructure for handling the world's largest shows,
including the concentration of 45,000 hotel rooms located on the Strip, two
convention centers (the Las Vegas Convention Center and the Expo Center) with a
total of approximately 3.0 million square feet of convention and exhibition
space, convenient air service from major cities throughout the United States and
other countries and significant entertainment opportunities. Plans have been
announced for the addition of 1.0 million square feet of meeting and convention
space to the Las Vegas Convention Center. The expansion of the Las Vegas
Convention Center is expected to bring convention and exhibit space in Las Vegas
to over 4.5 million square feet. In addition, The MGM Grand Hotel and Casino has
constructed a conference and meeting facility of approximately 300,000 gross
square feet. Management believes that Las Vegas will continue to evolve as the
country's preferred trade show and convention destination.
Expanding Hotel Market
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During 1999, Las Vegas was among the most popular vacation destinations
in the United States. Las Vegas has experienced a period of rapid hotel
development with the number of hotel and motel rooms in Las Vegas increasing by
84%, from 67,391 in 1989 to 120,000 in 1999. Other major properties on the Strip
opened during 1998 and 1999 include The Bellagio, Paris Casino Resort and
Mandalay Bay Resort. The Company expects that the concentration of quality
themed casino hotels and resorts will increase visitor interest in Las Vegas as
a business event and vacation destination, and, as a result, increase overall
demand for hotel rooms, gaming and entertainment.
Growth of Las Vegas Retail Sector and Non-Gaming Revenue Expenditures
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An increasing number of destination resorts are developing non-gaming
entertainment to complement their gaming activities in order to draw additional
visitors. According to the LVCVA, while gaming revenues have increased from $3.4
billion in 1989 to $7.2 billion in 1999, the percentage of an average tourist's
budget spent on gaming has declined from 29.0% in 1989 to 26.0% in 1998, with
non-gaming tourist revenues increasing from $8.5 billion in 1989 to $18.2
billion in 1998. The newer large themed Las Vegas destination resorts have been
designed to capitalize on this development by providing better quality hotel
rooms at higher rates and by providing expanded shopping, dining and
entertainment opportunities to their patrons in addition to gaming.
Infrastructure Improvements
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Clark County and metropolitan Las Vegas have completed several
infrastructure improvements to accommodate the increase in travel to Las Vegas
by all modes of transportation. According to the LVCVA, in 1999 visitors to Las
Vegas arrived by the following methods of transportation: 44% by air; 41% by
auto; 7% by bus; and 8% by recreational vehicle.
McCarran International Airport Expansion. During the past five years, the
facilities of McCarran International Airport have been expanded to accommodate
the increased number of airlines and passengers which it services. The number of
passengers traveling through McCarran International Airport has increased from
17.1 million in 1989 to 33.7 million in 1999. Long-term expansion plans for
McCarran International Airport provide for additional runway and related areas
(a new runway was completed in October 1997 and a new terminal and additional
gates were completed in 1998).
Spring Mountain Road Improvements. A new high-speed off-ramp from
Interstate 15 (the primary vehicular access from Los Angeles) onto Spring
Mountain Road to ease traffic congestion on the Strip was completed in 1999.
Spring Mountain Road becomes Sands Avenue and intersects the Strip adjacent to
the Venetian's 44-acre site. This major interchange is located approximately
one-half mile from the Casino Resort.
Competition
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The casino/hotel industry is highly competitive. Strip hotels compete
with other hotels on the Strip and with other hotels in downtown Las Vegas. The
Casino Resort also competes with a large number of hotels and motels in and near
Las Vegas. Many of the competitors of the Company are subsidiaries or divisions
of large public companies and may have greater financial and other resources
than the Company.
Hotel/Casino Properties
-----------------------
Competitors of the Casino Resort include new themed resorts on the Strip,
such as The Bellagio, Mandalay Bay Resort and Paris Casino Resort. These
projects and others added approximately 11,000 hotel rooms to the Las Vegas
inventory in 1998 and 1999. The Casino Resort may also compete with a planned
second casino resort to be owned by a subsidiary of the Company (the "Phase II
Resort"), to the extent its business is not complementary to that of the Casino
Resort. The future operating results of the Company could be adversely affected
by excess Las Vegas room, gaming, conference center and trade show capacity.
The Company believes that themed resorts are generally more successful at
generating high volume traffic and higher revenues and operating income when
compared with large-scale non-themed properties in Las Vegas.
The Company also believes that recently developed integrated themed
resorts have been more successful than expansions to existing Strip hotels.
Themed resorts compete on the basis of the quality of theming, as well as on
more traditional bases, such as quality of rooms, pricing and location. Themed
resorts tend to be clustered on the Strip, creating a critical mass of
entertainment experiences which generate significant traffic for the themed
resorts as a group, thereby capturing a larger portion of the Las Vegas hotel
and gaming market than non-themed properties. The Company believes that the
existence of other competitive themed resorts in close proximity to the Casino
Resort directly benefits the Casino Resort. The Casino Resort is part of a
cluster of themed properties, which includes The Mirage, the Treasure Island
Hotel and Casino, The Bellagio and The Forum Shops at Caesars Palace Hotel. The
Company believes that the Casino Resort benefits from the significant traffic
drawn to these properties. In addition to the advantages of being a centrally
located, themed resort, the Cooperation Agreement and the Casino Resort's direct
connection with the Expo Center provides the Casino Resort a unique tie-in with
one of the premier trade show and convention facilities in the United States.
With these competitive advantages, the Casino Resort is positioned to appeal to
the mid-week meeting, trade show, convention and meeting market composed of
customers who pay higher average room rates and have higher average travel
budgets than other categories of weekday customers, such as tour groups.
The hotel/casino operation of the Casino Resort also competes, to some
extent, with other hotel/casino facilities in Nevada and in Atlantic City, with
hotel/casino facilities elsewhere in the world and with state lotteries. In
addition, certain states have recently legalized, and others may legalize,
casino gaming in specific areas, and passage of the Indian Gaming Regulatory Act
in 1988 has led to rapid increases in Native American gaming operations. Such
proliferation of gaming venues could significantly and adversely affect the
business of the Company. In particular, the legalization of casino gaming in or
near metropolitan areas, such as New York, Los Angeles, San Francisco and
Boston, from which the Company attracts customers, could have a material adverse
effect on the business of the Company. In March 2000, voters in California
approved expanded casino gaming on Native American Reservations in that state.
The expansion of gaming in California could have a material adverse effect on
the business of the Company.
Trade Show and Convention Facilities
------------------------------------
The Expo Center, the Congress Center and Las Vegas generally compete with
trade show and convention facilities located in and around major cities,
including Atlanta, Chicago, New York and Orlando. Within Las Vegas, the Expo
Center and the Congress Center compete with the Las Vegas Convention Center (the
"LVCC") which is located off the Strip and currently has 1.3 million gross
square feet of convention and exhibit facilities. An additional expansion of
over 1.0 million square feet of meeting and exhibition space is planned for the
Las Vegas Convention Center in 2001 (the "LVCC Expansion"). In addition, The MGM
Grand Hotel and Casino has opened a new conference and meeting facility of
approximately 300,000 square feet and several other existing or planned major
Strip hotel/casino properties are intending to expand or construct conference
facilities. The conference and meeting facilities at these hotel/resorts are the
Congress Center's primary competition. However, because none of these
hotel/resorts plan to offer convention and trade show facilities on the same
relative size as the Expo Center (over 1.15 million gross square feet), the LVCC
is expected to remain the primary competitor of the Expo Center. See "Item
3-Legal Proceedings". To the extent that any of the competitors of the Casino
Resort can offer substantial integrated hotel/casino and trade show and
convention or conference and meeting facilities, the Casino Resort's competitive
advantage in attracting trade show and convention meeting and conference
attendees could be adversely affected.
If the LVCC Expansion is successful, the LVCC will be a much more
formidable competitor of the Expo Center and will be able to solely host many
large trade shows which had split space between the LVCC and the Expo Center. To
the extent that the LVCC is able to capture a substantially larger portion of
the trade show and convention business in Las Vegas, there could be a materially
adverse impact on the Company's financial position, results of operations or
cash flows. The Company is currently challenging the legality of the LVCC
Expansion. See "Item 3-Legal Proceedings".
Mall
----
The Mall competes with both themed resorts, which offer shopping, dining
and entertainment opportunities to their patrons and other retail malls in or
near Las Vegas. The Mall's direct competition includes The Forum Shops at
Caesars Palace Hotel and other similar themed mall attractions under
construction, such as the mall under construction on the site of the Aladdin
Hotel and Casino. The Forum Shops at Caesars Palace Hotel may undergo additional
expansions in the future. The Mall also competes with The Fashion Show Mall, a
more traditional mall located near the Casino Resort which currently plans to
undergo expansions which will almost double such facility's size, and the
planned retail, dining and entertainment mall in the Phase II Resort. Mandalay
Group has also announced the development of a retail center near its new
Mandalay Bay Resort.
Advertising and Marketing
- -------------------------
The Company advertises in many types of media, including television,
radio, newspapers, magazines and billboards to promote general market awareness
of the Casino Resort as a unique vacation, business and convention destination
for its first-class hotel, casino, retail stores and restaurants. The Mall
tenants also pursue their own general advertising and promotional activity,
which benefits the Mall. The Company actively engages in direct marketing which
is targeted at specific market segments, such as the meeting, convention and
trade show market and the premium gaming market, and database marketing which
focuses on high frequency, high-margin market segments such as the "high-roller"
gaming market. The Company continues to use a preview center featuring a
full-scale model suite in the Expo Center to market Casino Resort and Expo
Center events.
Agreements Relating to the Casino Resort
- ----------------------------------------
Portions of the Casino Resort (excluding the Mall) first opened to the
general public on May 4, 1999, and the Mall opened to the general public on June
19, 1999. Substantial completion of the Casino Resort was achieved on November
12, 1999, and as of December 31, 1999, construction of the Casino Resort and the
Mall was virtually complete (with only minor punchlist items remaining) and
virtually all construction costs had been paid for. The Company is currently
involved in various lawsuits, has asserted various claims against various
parties, and has had various claims asserted against it by various parties, in
connection with the construction of the Casino Resort. The Company is vigorously
pursuing these claims and vigorously defending itself in all relevant legal
proceedings. See "Item 3 - Legal Proceedings."
Construction Management Contract and Construction Manager's Contract
--------------------------------------------------------------------
Guaranty
- --------
The construction of the principal components of the Casino Resort was
undertaken by Lehrer McGovern Bovis, Inc. (the "Construction Manager") pursuant
to a construction management agreement and certain amendments thereto (as so
amended, the "Construction Management Contract"). The Construction Management
Contract established a final guaranteed maximum price (the "Final GMP") of
$645.0 million, so that, subject to certain exceptions (including an exception
for cost overruns due to "scope changes"), the Construction Manager was
responsible for any costs of the work covered by the Construction Management
Contract in excess of $645.0 million. The Construction Management Contract also
established a required "substantial completion" date (the date on which the
construction of the Casino Resort was sufficiently complete, including the
receipt of necessary permits, licenses and approvals, so that all are components
of the Casino Resort could be open to the general public) of April 21, 1999
(subject to extensions on account of scope changes and force majeure events),
with a per-day liquidated damages penalty for failure to meet such deadline.
The Company paid the Construction Manager a construction management fee of
1 1/2% of the Final GMP, payable in monthly installments.
The obligations of the Construction Manager under the Construction
Management Contract are guaranteed by Bovis, Inc. ("Bovis"), the Construction
Manager's direct parent at the time the Construction Management Contract was
entered into (such guaranty, the "Bovis Guaranty") . Bovis's obligations under
the Bovis Guaranty are guaranteed by The Peninsula and Oriental Steam Navigation
Company ("P&O"), a British public company and the Constructor Manager's ultimate
parent at the time the Construction Management Contract was entered into (such
guaranty, the "P&O Guaranty"). With respect to the Construction Manager's
obligation to complete construction on schedule: (i) for the first 30 days of
any delay in such scheduled completion, the Construction Manager solely (and not
Bovis or P&O) is liable for liquidated damages, (ii) for the 90-day period
thereafter and subject to certain conditions and exceptions, only the insurers
under the LD Policy described below (and not the Construction Manager, Bovis or
P&O), are liable for liquidated damages, and (iii) the Construction Manager,
Bovis and P&O are liable for liquidated damages to the extent, if any, that the
Construction Manager misses the required deadline by more than 120 days.
Liquidated Damages Insurance
----------------------------
The Construction Manager obtained on behalf of the Company (and at the
Company's expense) a liquidated damage insurance policy (the "LD Policy"). The
LD Policy covers (with certain exceptions) liquidated damages for delays of not
less than one month and not more than four months in achieving substantial
completion beyond the date substantial completion is required to be achieved
under the Construction Management Contract.
Cooperation Agreement
---------------------
The Hotel, the Casino and Congress Center, the Mall and the Expo Center,
respectively, though separately owned, are part of an integrally related
project. In order to establish terms for the integrated operation of these
facilities, Venetian (as owner of the Hotel, Casino and Congress Center), the
New Mall Subsidiary (as owner of the Mall ) and Interface (as owner of the Expo
Center) are parties to the Cooperation Agreement. See "Item 13 - Certain
Relationships and Related Transactions - Cooperation Agreement."
Mall Management Contract
------------------------
The New Mall Subsidiary has entered into an agreement with Forest City
Enterprises ("Forest City"), a subsidiary of Forest City Ratner Enterprises, a
leading developer and manager of retail and commercial real estate developments,
whereby Forest City manages the Mall and supervises and assists in the creation
of an advertising and promotional program and a marketing plan for the Mall.
Forest City is also responsible for, among other things, preparation of a
detailed plan for the routine operation of the Mall, collection and deposit
procedures for rents and other tenant charges, supervision of maintenance and
repairs and, on an annual basis, preparation of a detailed budget (including any
anticipated extraordinary expenses and capital expenditures) for the Mall. The
term of the management contract is five years from June 19, 1999, the date the
Mall opened to the public. Forest City receives a management fee of 2% of all
gross rents received from the operation of the Mall; provided that Forest City
will receive a minimum fee of $450,000 per year. Forest City is not affiliated
with the Sole Stockholder or any of his affiliates.
HVAC Services Agreement and Related Documents
- ---------------------------------------------
Atlantic Pacific Las Vegas, LLC (the "HVAC Provider") is a Delaware
limited liability company whose members are (a) an indirect subsidiary of
Atlantic Energy, Inc., a utility holding company and (b) an indirect subsidiary
of Pacific Enterprises, a utility holding company.
Thermal energy (i.e., heating and air conditioning) is provided to the
Casino Resort and the Expo Center by the HVAC Provider using certain heating and
air conditioning- related and other equipment (the "HVAC Equipment"). In
addition, the HVAC Provider provides other energy-related services. Pursuant to
the Construction Management Contract, the central HVAC facility (the "HVAC
Plant") was constructed by the Construction Manager on land owned by Venetian,
which land and HVAC Plant has been leased to the HVAC Provider for a nominal
annual rent. The HVAC Equipment is owned by the HVAC Provider, and the HVAC
Provider has been granted appropriate easements and other rights so as to be
able to use the HVAC Plant and the HVAC Equipment to supply thermal energy to
the Casino Resort and the Expo Center (and, potentially, other buildings), so
long as such easements do not materially interfere with the operations of the
Casino Resort and the Expo Center. The HVAC Provider paid all costs ("HVAC
Costs") in connection with the purchase and installation of the HVAC Equipment,
which costs totaled $70 million. Venetian acted as the HVAC Provider's agent to
cause such purchase and installation to be accomplished. The HVAC Provider has
entered into separate service contracts (collectively, the "HVAC Service
Agreements") with (i) Venetian; (ii) Interface; and (iii) the New Mall
Subsidiary, for the provision of heat and cooling requirements at agreed-to
rates. The charges payable by all users include a fixed component derived using
a fixed annual interest rate of 7.1% applied to the HVAC Costs paid by the HVAC
Provider to recover a portion of the fair value of the HVAC Equipment over the
initial term of the service contracts and leave an agreed-upon residual value.
In addition, the users reimburse the HVAC Provider for the annual cost of
operating and maintaining the HVAC Equipment and providing certain other energy
related services, and pay the HVAC Provider a management fee of $500,000 per
year. Each user is allocated a portion of the total agreed-to charges and fees
through its service contract, which portion includes paying 100% of the cost of
services in connection with the HVAC Equipment relating solely to such user.
Each user is not liable for the obligations of the other users; provided,
however, that the New Mall Subsidiary is liable for the obligations of each Mall
tenant. The HVAC Service Agreements have an initial term of ten years, and
provide that upon expiration of such term users will have the right, but not the
obligation, to collectively either extend the term of their agreements for two
consecutive periods of five years each or purchase the HVAC Equipment in
accordance with purchase provisions set forth in the service contracts.
Agreements Relating to the Phase II Resort
- ------------------------------------------
The Casino Resort was developed on a stand-alone basis as the first phase
of the planned two-phase redevelopment at the site of the demolished Sands. In
the planned second phase of the redevelopment, it is contemplated that a
wholly-owned, indirect subsidiary of Venetian (the "Phase II Subsidiary") will
construct and develop the Phase II Resort, which also is planned to be a themed
resort. In the event the Phase II Resort is not constructed, the Casino Resort
has all the attributes and facilities to operate as a stand-alone resort. See
"Item 13 - Certain Relationships and Related Transactions - Possible Conflicts
of Interest."
If the Phase II Resort is constructed, the following agreements may be
entered into by the Phase II Subsidiary and its subsidiaries, on the one hand,
and the Company, Venetian and the New Mall Subsidiary, on the other hand:
Casino Lease
------------
If the Phase II Resort is constructed, in order to avoid the need for a
separate gaming license for the Phase II Subsidiary, LVSI or Venetian may
operate the casino for the Phase II Resort pursuant to a lease (the "Phase II
Casino Lease"). The Phase II Casino Lease may have terms substantially similar
to the Casino Lease. The Company or Venetian, as the case may be, may agree that
they shall operate the casino in the Phase II Resort and the Casino in
substantially similar manners, and the Company or Venetian, as the case may be,
may agree to have common gaming and surveillance operations in such casinos
(based on equal allocations of revenues and operating costs).
Phase II HVAC Services Agreement
--------------------------------
The Cooperation Agreement permits the owner of the land on which the
Phase II Resort will be built (the "Phase II Land") to enter into an HVAC
Services Agreement to receive HVAC services from the HVAC Plant. Any such
agreement would have to be on terms satisfactory to the HVAC Provider. See "Item
13 - Certain Relationships and Related Transactions - Cooperation Agreement."
Phase I - Phase II Joint Operation Arrangements
-----------------------------------------------
With respect to the future development of the Phase II Resort, the
Cooperation Agreement provides that, prior to the commencement of construction
of the Phase II Resort, Venetian may approve the plans and specifications for
the Phase II Resort, subject to the rights of certain lenders of the Company to
approve any construction or operation of a restaurant or retail mall complex
located in the Phase II Resort and connected to the Mall. Additionally, Venetian
and the Phase II Subsidiary will agree in good faith, and upon commercially
reasonable terms, on: (i) appropriate mutual operating covenants for the Hotel
and the Casino and the Phase II Resort other than the mall in the Phase II
Casino Resort (the "Phase II Mall"), (ii) joint marketing and advertising of the
Hotel and the Casino and the Phase II Resort other than the Phase II Mall, (iii)
certain shared casino operations at the Hotel and the Casino and the Phase II
Resort other than the Phase II Mall, (iv) the sharing of customer information
with respect to the Hotel and the Casino and the Phase II Resort other than the
Phase II Mall, (v) the joint purchasing of insurance for the Hotel and the
Casino and the Phase II Resort other than the Phase II Mall, (vi) shared
security operations for the Hotel and the Casino and the Phase II Resort other
than the Phase II Mall and (vii) any other matters that would be of mutual
benefit in owning and operating the Hotel and the Casino and the Phase II Resort
other than the Phase II Mall.
Regulation and Licensing
- ------------------------
The ownership and operation of casino gaming facilities in the State of
Nevada are subject to the Nevada Gaming Control Act and the regulations
promulgated thereunder (collectively, the "Nevada Act") and various local
regulations. The Company's gaming operations are subject to the licensing and
regulatory control of the Nevada Gaming Commission (the "Nevada Commission"),
the NGCB and the Clark County Liquor and Gaming Licensing Board (the "CCLGLB"
and, together with the Nevada Commission and the NGCB, the "Nevada Gaming
Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy that are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) providing a source of state and local revenues
through taxation and licensing fees. Any change in such laws, regulations and
procedures could have an adverse effect on the Company's gaming operations or on
the operation of the Casino Resort.
The Company is required to be licensed by the Nevada Gaming Authorities to
operate a casino, and is currently so licensed. The gaming license requires the
periodic payment of fees and taxes and is not transferable. The Company was
registered by the Nevada Commission as a publicly traded corporation
("Registered Corporation") and as such, must periodically to submit detailed
financial and operating reports to the Nevada Gaming Authorities and furnish any
other information that the Nevada Gaming Authorities may require. No person may
become a stockholder of, or receive any percentage of profits from, the Company
without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company operates the Casino pursuant to the Casino Lease
between LVSI and Venetian, which provides for a fixed monthly rental payment.
The Company possesses all state and local government registrations, approvals,
permits and licenses required in order for the Company to engage in gaming
activities at the Casino Resort.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or Venetian
to determine whether such individual is suitable or should be licensed as a
business associate of a gaming licensee. Officers, directors and certain key
employees of the Company have been licensed by the Nevada Gaming Authorities.
The Nevada Gaming Authorities may deny an application for licensing or a
finding of suitability for any cause they deem reasonable. A finding of
suitability is comparable to licensing, both require submission of detailed
personal and financial information followed by a thorough investigation. The
applicant for licensing or a finding of suitability, or the gaming licensee by
whom the applicant is employed or for whom the applicant serves, must pay all
the costs of the investigation. Changes in licensed positions must be reported
to the Nevada Gaming Authorities, and in addition to their authority to deny an
application for a finding of suitability or licensure, the Nevada Gaming
Authorities have jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or to continue having a relationship with the
Company or Venetian, it would have to sever all relationships with such person.
In addition, the Nevada Commission may require the Company to terminate the
employment of any person who refuses to file appropriate applications.
Determinations of suitability or of questions pertaining to licensing are not
subject to judicial review in Nevada.
The Company is required to submit detailed financial and operating reports
to the Nevada Commission. Substantially all material loans, leases, sales of
securities and similar financing transactions by the Company must be reported to
or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by the Company, the
registration and gaming licenses it then holds could be limited, conditioned,
suspended or revoked, subject to compliance with certain statutory and
regulatory procedures. In addition, the Company and the persons involved could
be subject to substantial fines for each separate violation of the Nevada Act at
the discretion of the Nevada Commission. Further, a supervisor could be
appointed by the Nevada Commission to operate the Casino Resort and, under
certain circumstances, earnings generated during the supervisor's appointment
(except for the reasonable rental value of the Casino Resort) could be forfeited
to the State of Nevada. Limitation, conditioning or suspension of any gaming
registration or license or the appointment of a supervisor could (and revocation
of any gaming license would) materially adversely affect the gaming operations
of the Company.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have their suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of the
Company's voting securities to report the acquisition to the Nevada Commission.
The Nevada Act requires that beneficial owners of more than 10% of the Company's
voting securities apply to the Nevada Commission for a finding of suitability
within thirty days after the Chairman of the Nevada Board mails the written
notice requiring such filing. Under certain circumstances, the "institutional
investor" as defined in the Nevada Act, which acquires more than 10% but not
more than 15% of the Company's voting securities, may apply to the Nevada
Commission for a waiver of such finding of suitability if such institutional
investor holds the voting securities for investment purposes only. An
institutional investor shall not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies or operations of the Company or
any of its gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding the Company's voting securities for
investment purposes only. Activities that are not deemed to be inconsistent with
holding voting securities for investment purposes only include: (i) voting on
all matters voted on by stockholders; (ii) making financial and other inquiries
of management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies or operations;
and (iii) such other activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust, it
must submit detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or Venetian
it: (i) pays that person any dividend or interest upon voting securities of the
Company; (ii) allows that person to exercise, directly or indirectly, any voting
right conferred through securities held by that person; (iii) pays remuneration
in any form to that person for services rendered or otherwise; or (iv) fails to
pursue all lawful efforts to require such unsuitable person to relinquish his
voting securities for cash at fair market value. Additionally, the CCLGLB has
taken the position that it has the authority to approve all persons owning or
controlling the stock of any corporation controlling a gaming license.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file an application, be
investigated and be found suitable to own the debt security of a Registered
Corporation. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including the loss of its approvals, if without the prior
approval of the Nevada Commission, it: (i) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever; (ii) recognizes any voting
right by such unsuitable person in connection with such securities; (iii) pays
the unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
LVSI is required to maintain a current stock ledger in Nevada that may be
examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company is also required to disclose the identity of the
beneficial owner to the Nevada Gaming Authorities. A failure to make such
disclosure may be grounds for finding the record holder unsuitable. The Company
is also required to render maximum assistance in determining the identity of the
beneficial owner. LVSI stock certificates bear a legend indicating that such
securities are subject to the Nevada Act.
LVSI and Venetian may not make a public offering of any securities without
the prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used to construct, acquire or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. The hypothecation of the Company's assets and restrictions on stock in
connection with any public offering will require the prior approval of the
Nevada Commission. In addition, the hypothecation of Venetian's assets and
restrictions on stock in respect of any public offering will require the
approval of the Nevada Commission to remain effective.
Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by any person whereby he or she obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the NGCB and the Nevada Commission
concerning a variety of stringent standards prior to assuming control of such
Registered Corporation. The Nevada Commission may also require controlling
stockholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire control, to be
investigated and licensed as part of the approval process of the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (1) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated.
The Nevada Act also requires prior approval of a plan of recapitalization
proposed by the Company's board of directors in response to a tender offer made
directly to the Registered Corporation's stockholders for the purposes of
acquiring control of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to Clark
County, Nevada. Depending upon the particular fee or tax involved, these fees
and taxes are payable either monthly, quarterly or annually and are based upon
either: (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; or (iii) the number of table games operated. A casino
entertainment tax also is paid by the Company where certain entertainment is
provided in a cabaret, nightclub, cocktail lounge or casino showroom in
connection with the serving or selling of food, refreshments or merchandise.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the NGCB and, thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the NGCB of their participation in such foreign gaming. The revolving fund is
subject to increase or decrease at the discretion of the Nevada Commission.
Thereafter, Licensees are also required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employ a person in the foreign operation who has been denied a license
or a finding of suitability in Nevada on the ground of personal unsuitability.
The sale of alcoholic beverages by the Company on the premises of the
Casino Resort is subject to licensing, control and regulation by the applicable
local authorities. The Company has obtained a Clark County gaming license. All
licenses are revocable and are not transferable. The agencies involved have full
power to limit, condition, suspend or revoke any such license, and any such
disciplinary action could (and revocation would) have a material adverse effect
upon the operations of the Company.
Employees
---------
The Company directly employs approximately 4,000 employees in connection
with the Casino Resort. The Casino Resort's employees are not covered by
collective bargaining agreements. Most, but not all major casino resorts
situated on the Strip have collective bargaining contracts covering at least
some of the labor force at such sites. The unions currently on the Strip include
the Local 226 of the Hotel Employees and Restaurant Employees International
Union (the "Local"), the Operating Engineers Union and the Teamsters Union.
Although no assurances can be given, if employees decided to be represented by
labor unions, management does not believe that such representation would have a
material impact upon the Company's results of operations, cash flows or
financial position.
The Local has requested the Company to recognize it as the bargaining agent
for employees of the Casino Resort. The Company has declined to do so, believing
that the future employees are entitled to select their own bargaining agent, if
any. In the past, when other hotel/casino operators have taken a similar
position, the Local has engaged in certain confrontational and obstructive
tactics, including contacting potential customers, tenants and investors,
objecting to various administrative approvals and picketing. The Local has
engaged in such tactics with respect to the Casino Resort and may continue to do
so. Although the Company believes it will be able to operate despite such
dispute, no assurance can be given that it will be able to do so and that such
failure would not result in a material adverse effect on the Company's result of
operations, cash flows or financial position.
ITEM 2. --PROPERTIES
- --------------------
Prior to October 1998, Venetian owned approximately 44 acres of land on or
near the Strip on the site of the former Sands. Such property includes the site
on which the Casino Resort was constructed. Approximately 14 acres of such land
was transferred to the Phase II Subsidiary in October 1998. On December 31,
1999, the Sole Stockholder indirectly contributed an additional 1.75 acres of
land located on the Strip to the Phase II Subsidiary (at its historical cost of
$11.8 million) as a common equity capital contribution. The Phase II Resort is
planned to be constructed adjacent to the Casino Resort.
ITEM 3. --LEGAL PROCEEDINGS
- ---------------------------
The Company is party to litigation matters and claims related to its
operations and the construction of the Casino Resort. Except as described below,
the Company does not expect that the final resolution of these matters will have
a material 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 Bovis in United States District Court for the District of Nevada.
The action alleges breach of contract by the Construction Manager of its
obligations under the Construction Management Contract and a breach of contract
by Bovis of its obligations under the Bovis Guaranty, including failure to fully
pay trade contractors and vendors and failure to meet the April 21, 1999
guaranteed completion date. This complaint was amended by the Company on
November 23, 1999 to add Bovis' guarantor, P&O, as an additional defendant. The
suit is intended to ask the courts, among other remedies, to require the
Construction Manager and its guarantors to pay its contractors, to compensate
Venetian for the Construction Manager's failure to perform its duties under the
Construction Management Contract and to pay the Company the agreed upon
liquidated damages penalty for failure to meet the guaranteed substantial
completion date. Venetian seeks total damages in excess of $50.0 million. The
Construction Manager subsequently filed motions to dismiss the Company's
complaint on various grounds, which the Company opposed. The Construction
Manager's principal motions to date have either been denied by the court or
voluntarily withdrawn.
In response to Venetian's breach of contract claims against the
Construction Manager, Bovis and P&O, the Construction Manager filed a complaint
on August 3, 1999 against Venetian in the District Court of Clark County,
Nevada. The action alleges a breach of contract and quantum meruit claim under
the Construction Management Contract and also alleges that Venetian defrauded
the Construction Manager in connection with the construction of the Casino
Resort. The Construction Manager seeks damages, attorney's fees and costs and
punitive damages. In the lawsuit, the Construction Manager claims that it is
owed $145.6 million from Venetian and its affiliates. This complaint was
subsequently amended by the Construction Manager , which also filed an
additional complaint against the Company relating to work done and funds
advanced with respect to the contemplated development of the Phase II Resort.
Based upon its preliminary review of the complaints, the fact that the
Construction Manager has not provided Venetian with reasonable documentation to
support such claims, and the Company's belief that the Construction Manager has
materially breached its agreements with the Company, the Company believes that
the Construction Manager's claims are without merit and intends to vigorously
defend itself and pursue its claims against the Construction Manager in any
litigation.
In connection with these disputes, as of December 31, 1999 the Construction
Manager and its subcontractors filed mechanics liens against the Casino Resort
for $145.6 million and $182.2 million, respectively. As of December 31, 1999,
the Company had purchased surety bonds for virtually all of the claims
underlying these liens (other than approximately $15.0 million of claims with
respect to which the Construction Manager purchased bonds). As a result, there
can be no foreclosure of the Casino Resort in connection with the claims of
Construction Manager and its subcontractors. However, the Company will be
required to pay or immediately reimburse the bonding company if and to the
extent that the underlying claims are judicially determined to be valid. If such
claims are not settled, it is likely to take a significant amount of time for
their validity to be judicially determined.
The Company believes that these claims are, in general, unsubstantiated,
without merit, overstated and/or duplicative. The Construction Manager itself
has publicly acknowledged that at least some of the claims of its subcontractors
are without merit. In addition, the Company believes that pursuant to the
Construction Management Contract and the Final GMP, the Construction Manager is
responsible for payment of any subcontractors' claims to the extent they are
determined to be valid. The Company may also have 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 released their right to file liens against
the Casino Resort. The Company intends to vigorously defend itself in any lien
proceedings.
On August 9, 1999, the Company notified the insurance companies providing
coverage under the LD Policy that it has a claim under the LD Policy. The LD
Policy provides insurance coverage for the failure of the Construction Manager
to achieve substantial completion of the portions of the Casino Resort covered
by the Construction Management Contract within 30 days of the April 21, 1999
deadline, with a maximum liability under the LD Policy of approximately $24.1
million and with coverage being provided, on a per-day basis, for days 31-120 of
the delay in the achievement of substantial completion. Because the Company
believes that substantial completion was not achieved until November 12, 1999,
the Company's claim under the LD Policy is likely to be for the above-described
maximum liability of $24.1 million. The Company expects the LD Policy insurers
to assert many of the same claims and defenses that the Construction Manager has
or will assert in the above-described litigations. Liability under the LD Policy
may ultimately be determined by binding arbitration.
On July 8, 1999, the Company and other competitors filed an action in the
Eighth Judicial District Court for the State of Nevada challenging the actions
of the Board of the LVCVA with respect to the LVCC Expansion, as well as the
LVCVA's financing through proposed sale of "revenue bonds". In that litigation,
the Company and others alleged inter alia that the LVCVA engaged in violations
of Nevada's Open Meeting Law, and further alleged that the proposed bonds were
not "revenue" bonds and thus could not be issued without prior approval of the
voters of Clark County, Nevada. After a trail on the merits of that case, the
Court rendered a decision in favor of the LVCVA and against the plaintiffs. On
December 22, 1999, the Company filed a Notice of Appeal of the State Court
Action to the Supreme Court of the State of Nevada. For more information on the
LVCC as a competitor, see "Item 1-Business - Competition - Trade Show and
Convention Facilities".
All of the pending litigation described above is in preliminary stages and
it is not yet possible to determine its ultimate outcome. If any litigation or
other proceedings concerning the claims of the Construction Manager or its
subcontractors were decided adversely to the Company, such litigation or other
lien proceedings could have a material effect on the financial position, results
of operations or cash flows of the Company.
ITEM 4. --SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------
Not applicable.
PART II
ITEM 5.--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
Market Information
- ------------------
There is no established trading market for the common stock of LVSI and
the Company is not aware of any bid quotations for the common stock of LVSI.
Holders
As of March 30, 2000, the Sole Stockholder was the only holder of record
of the common stock of LVSI.
Dividends
- ---------
LVSI did not pay any dividends in 1999 or 1998. The Company's current
long-term debt arrangements prohibit or restrict the payment of cash dividends.
See "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" and "Item 8 -Financial
Statements and Supplementary Data - Notes to Financial Statements - Note 8
Long-Term Debt."
ITEM 6. --SELECTED FINANCIAL DATA
- ---------------------------------
The historical selected financial data set forth below should be read in
conjunction with "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and Notes
thereto included elsewhere in this Annual Report on Form 10-K. The statement of
operations data for the years ended December 31, 1999, 1998 and 1997, and the
balance sheet data at December 31, 1999 and 1998 are derived from, and are
qualified by reference to, the audited financial statements included elsewhere
in this Annual Report on Form 10-K. The statement of operations data for the
years ended December 31, 1996 and 1995 and the balance sheet data at December
31, 1997, 1996 and 1995 are derived from the Company's audited financial
statements that do not appear herein. The historical results are not necessarily
indicative of the results of operations to be expected in the future.
================================================================================
STATEMENT OF OPERATIONS DATA
(In thousands, except per share data)
================================================================================
Year-Ended December 31,
-----------------------
1999(1) 1998 1997
--------- --------- ---------
Gross revenues $ 283,919 $ 937 $ 895
Promotional allowance (25,045) -- --
--------- --------- ---------
Net revenues 258,874 937 895
Operating expenses 255,061 8,822 (1,727)
--------- --------- ---------
Operating income
(loss) 3,813 (7,885) 2,622
Interest expense, net (68,847) (21,878) (3,142)
--------- --------- ---------
Net loss before
extraordinary item (65,034) (29,763) (520)
--------- --------- ---------
Loss on early
retirement of debt (589)
Net Loss $ (65,623) $ (29,763) $ (520)
========= ========= =========
Per Share Data
Basic and diluted
loss per share
before extra-
ordinary item $ (85.87) $ (46.93) $ (0.56)
========= ========= =========
Basic and diluted
loss per share
before extra-
ordinary item $ (86.51) $ (46.93) $ (0.56)
========= ========= =========
OTHER DATA
Capital expenditures $ 319,106 $ 508,399 $ 130,827
Cash dividends per
common share $ -- $ -- $ 29.84
As of December 31
-----------------
1999 1998 1997
---- ---- ----
BALANCE SHEET DATA
Total assets $1,209,602 $1,005,944 $ 747,767
Long-term debt 907,754 744,154 515,612
Stockholders' equity 15,706 67,937 111,347
- ----------
(1) Operations of the Sands ceased in June 1996 to accommodate demolition of
the facility and the construction of the Casino Resort. The Casino Resort
opened May 4, 1999.
================================================================================
STATEMENT OF OPERATIONS DATA
(In thousands, except per share data)
================================================================================
Year-Ended December 31,
-----------------------
1996(1)(2) 1995(3)
Gross revenues $ 44,044 $ 95,469
Promotional allowance (3,483) (7,046)
--------- ---------
Net revenues 40,561 88,423
Operating expenses 99,890 84,449
--------- ---------
Operating income
(loss) (59,329) 3,974
Interest expense, net (3,666) (7,352)
--------- ---------
Net loss before
extraordinary item (62,995) (3,378)
--------- ---------
Loss on early
retirement of debt
Net Loss $ (62,995) $ (3,378)
========= =========
Per Share Data
Basic and diluted
loss per share
before extra-
ordinary item $ (68.10) $ (2.54)
========= =========
Basic and diluted
loss per share
after extra-
ordinary item $ (68.10) $ (2.54)
========= =========
OTHER DATA
Capital expenditures $ 18,829 $ 1,661
Cash dividends per
common share $ -- $ --
As of December 31
-----------------
1996 1995
---- ----
BALANCE SHEET DATA
Total assets $114,109 $178,099
Long-term debt -- 120,066
Stockholders' equity 106,335 45,989
- ----------
(1) Operations of the Sands ceased in June 1996 to accommodate demolition of
the facility and the construction of the Casino Resort. The Casino Resort
opened May 4, 1999.
(2) Results of operations include a charge for the write-down of property and
equipment of $45,042 resulting from a revaluation of the Company's assets as
of June 30, 1996, the date the Company approved a quasi-reorganization.
(3) Financial data has been restated to reflect the December 1995 merger of LVSI
and Nevada Funding Group, Inc. ("NFG"), the common stock of which was owned
entirely by the Sole Stockholder (the "NFG Merger").
ITEM 7.--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Financial Statements and the notes thereto and
other financial information included elsewhere in this Annual Report on Form
10-K. Certain statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward-looking statements.
See "- Special Note Regarding Forward-Looking Statements."
General
- -------
The Company owns and operates the Casino Resort, a large-scale
Venetian-themed hotel, casino, retail, meeting and entertainment complex in Las
Vegas, Nevada.
Construction and Construction Costs
-----------------------------------
Substantial completion of the construction of the Casino Resort was
achieved on November 12, 1999. This means that on November 12, 1999, all
components of the Casino Resort were fully constructed and operational, with the
exception of "punchlist" items. As of December 31, 1999, most of these punchlist
items had been completed and the construction of the Casino Resort was virtually
complete. All remaining construction tasks are not expected to interfere with
the day-to-day use and operation of the Casino Resort.
The aggregate project and construction costs for the Casino Resort is
estimated to be approximately $1.05 billion, excluding the costs of acquiring
and installing the HVAC Equipment and land acquisition costs. Virtually all
project and construction costs had been paid as of December 31, 1999. Such costs
were paid from various sources, including (a) loan proceeds under the Notes, the
Bank Credit Facility and the Mall Construction Loan Facility (as such terms are
defined below) and (b) the Sole Stockholder's $25.0 million Completion Guaranty.
See "Item 8--Financial Statements and Supplementary Data - Notes to Financial
Statements - Note 8 Long-Term Debt".
The construction of the principal components of the Casino Resort was
undertaken by the Construction Manager under the Construction Management
Contract. Under the Construction Management Contract, the Construction Manager
agreed to substantially complete the Casino Resort by April 21, 1999. The
Construction Management Contract also established a Final GMP for work included
within the scope of work of the Construction Manager of $645.0 million. Subject
to certain exceptions, if the cost of the work covered by the Construction
Management Contract exceeded the amount of the Final GMP plus the cost of scope
changes, the Construction Manager must pay such excess costs.
The Company believes that substantial completion of the Casino Resort was
not achieved until November 12, 1999, and that the total cost of the work
covered by the Construction Management Contract was approximately $60.0 million
in excess of the Final GMP. The Company believes that it is entitled to receive
a per-day liquidated damages penalty for the Construction Manager's failure to
meet the April 21, 1999 deadline, and that the Construction Manager is
responsible for paying the above-described excess costs. The Construction
Manager has asserted that it was entitled to an extension of the April 21, 1999
deadline and that such excess costs were due to scope changes that the Company
is obligated to pay for, but the Company believes that these claims are
unfounded. The Construction Manger has also made other claims against the
Company. As a result of this dispute, the Company and the Construction Manager
have filed lawsuits against each other and the Construction Manager and its
subcontractors filed mechanics liens against the Casino Resort. For a
description of the construction litigation, see "Item 3 -Legal Proceedings".
On August 9, 1999, the Company notified the insurance companies providing
coverage under the LD Policy that it has a claim under the LD Policy. The LD
Policy provides insurance coverage for the failure of the Construction Manager
to achieve substantial completion of the portions of the Casino Resort covered
by the Construction Management Contract within 30 days of the April 21, 1999
deadline, with a maximum liability under the LD Policy of approximately $24.1
million and with coverage being provided, on a per-day basis, for days 31-120 of
the delay in the achievement of substantial completion. Because the Company
believes that substantial completion was not achieved until November 12, 1999,
the Company's claim under the LD Policy is likely to be for the above-described
maximum liability of $24.1 million. The Company expects the LD Policy insurers
to assert many of the same claims and defenses that the Construction Manager has
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 and in "Item 3 -Legal
Proceedings" is in preliminary stages and it is not yet possible to determine
its ultimate outcome. If any litigation or other proceedings concerning the
claims of the Construction Manager or its subcontractors were decided adversely
to the Company, such litigation or other lien proceedings could have a material
effect on the financial position, results of operations or cash flows of the
Company.
Waivers; Additional Indebtedness and Equity
-------------------------------------------
On November 12, 1999, the Company entered into various limited waiver
agreements (the "Waivers") with the administrative agent and lenders under (1)
its secured bank credit facility (the "Bank Credit Facility"), (2) its $140.0
million mall construction loan facility (the "Mall Construction Loan Facility"),
(3) its $97.7 million credit facility secured by certain furniture, fixtures and
equipment (the "FF&E Credit Facility") and (4) its funds disbursement and
administration agreement (the "Disbursement Agreement"). Under the Waivers, the
various lenders waived certain defaults and events of default (to the extent, if
any, they existed or may have existed) arising from the litigation with the
Construction Manager, the facts relating to the underlying dispute with the
Construction Manager and the mechanics liens that were filed against the Casino
Resort. As conditions to the effectiveness of the Waivers, the Company and the
Sole Stockholder, among other things (i) agreed to pay a fee to the lenders
under the Bank Credit Facility and the FF&E Credit Facility, (ii) agreed to
purchase surety bonds for all of the mechanics liens and cause the title company
to provide endorsements ensuring that the deeds of trust under the Bank Credit
Facility, the Mall Construction Loan Facility and the Company's $425.0 million
of 12 1/4% Mortgage Notes due 2004 (the "Mortgage Notes") are superior in
priority to all mechanics liens, and (iii) agreed that the Sole Stockholder's
$25.0 million collaterized completion guaranty (the "Completion Guaranty")
would, notwithstanding the prior agreement of the parties providing for
termination of such guaranty upon substantial completion of the Casino Resort,
remain in effect until "final completion" (i.e., the completion of all remaining
punchlist items and the final resolution or settlement of all disputes with the
Construction Manager and subcontractors). In order to be able to purchase the
surety bonds, the Sole Stockholder had to provide a $5.0 million irrevocable
letter of credit as collateral to the bonding company. All of the conditions to
the effectiveness of the limited waivers were satisfied on November 12, 1999.
The Waivers under the Bank Credit Facility and the FF&E Credit Facility also
each provided that the Company could incur additional indebtedness up to an
aggregate principal amount of $15.0 million.
On November 12, 1999, an advance of approximately $23.5 million was made
under the Completion Guaranty. Advances made under the Completion Guaranty up to
$25.0 million are treated as a junior loan from the Sole Stockholder to Venetian
(the "Completion Guaranty Loan") that is subordinated in right of payment to the
indebtedness under the Bank Credit Facility, the FF&E Credit Facility, the
Mortgage Notes and the Company's 14 1/4% Senior Subordinated Notes due 2005 (the
"Senior Subordinated Notes" and, together with the Mortgage Notes, the "Notes").
The Completion Guaranty Loan matures on November 16, 2005 and bears interest at
a rate of 14 1/4% per annum. Although interest may accrue on the Completion
Guaranty Loan, no cash payments with respect to such loan may be made until
senior indebtedness is repaid, except for payments made from certain
construction-related recoveries (including payments received from the
Construction Manager and/or its subcontractors in settlement or disposition of
the disputes described above).
On November 12, 1999, the Sole Stockholder agreed to provide a working
capital facility to LVSI in the form of a subordinated working capital note (the
"Subordinated Note") and the Company borrowed $15.0 million under the
Subordinated Note to fund its working capital requirements (including interest
payments under its indebtedness ). On November 15, 1999, the entire Subordinated
Note was contributed by the Sole Stockholder to LVSI as a common equity capital
contribution.
Because the Company could not access the revolver portion of the Bank
Credit Facility (the "Revolver") from August 3, 1999 to November 12, 1999 while
mechanics liens against the Casino Resort were outstanding, the Sole Stockholder
contributed $7.1 million to Venetian in return for a Series B preferred interest
(the "Series B Preferred Interest") and $16.0 million to LVSI (including
conversion of the $15.0 million Subordinated Note) as a common equity capital
contribution. Also, 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 as a Series B
Preferred Interest) to reimburse the Company for a portion of the shared
facilities costs between the Casino Resort and the Phase II Resort. During the
fourth quarter, the Sole Stockholder indirectly contributed 1.75 acres of land
on the Strip to the Phase II Subsidiary, which was recorded at its historical
cost of $11.8 million as a common equity capital contribution.
Result of Operations
- --------------------
On June 30, 1996 the Company suspended operations and closed the Sands to
begin the construction of the Casino Resort. The Company's operating income from
June 30, 1996 to May 4, 1999 consisted primarily of rental and royalty income.
Pre-opening activities associated with the opening of the Casino Resort
commenced during the second quarter of 1998 and related costs are included in
operating expenses during 1999 and 1998. Other income and expenses during 1998
and through May 4, 1999 consisted of interest income and non-capitalized
interest expense associated with financing the development of the Casino Resort.
Year Ended December 31, 1999 compared to the Year Ended December 31, 1998
-------------------------------------------------------------------------
Operating Revenues
------------------
During its nearly eight months of operations in 1999, the Company produced
net revenues of $258.9 million, of which $134.4 million and $89.6 million
represented casino and gross hotel revenues, respectively. Revenues from table
games and slots were $78.1 million and $54.8 million, respectively. Operating
profit before interest, depreciation, amortization, rental expense, corporate
and pre-opening expenses was $59.2 million.
For the quarter ended December 31, 1999, the Company produced net revenues
of $115.6 million. Casino revenues totaled $57.0 million and included table
games and slots revenues of $36.3 million and $19.9 million, respectively. The
Company has improved operating results for its two most recent fiscal quarters.
Operating profit before interest, depreciation, amortization, rental expense,
corporate and pre-opening expenses was $34.9 million for the fourth quarter
versus $22.0 million for the third quarter.
Construction disruptions impacted the Company's earnings throughout most
of 1999 as a result of the on-going major construction of the Casino Resort.
Although the Casino Resort opened on May 4, 1999, substantial completion did not
occur until November 12, 1999. These construction disruptions and delays created
inefficiencies during the opening periods of the Casino Resort. These
construction activities also impacted the Casino Resort's service levels and
public image during 1999. In addition, at year-end there were approximately
120,000 hotel and motel rooms in Las Vegas, compared with approximately 109,000
at December 31, 1998. In spite of this increase, there was an increase in
citywide occupancy from 86% to 88% (the 1999 citywide hotel occupancy average)
as the new capacity was absorbed. The Casino Resort's occupancy rate of 82%
generally underperformed the Las Vegas averages as a result of the ongoing
construction activity at the Casino Resort. The 1999 average daily room rate of
the Casino Resort was $159. As of March 2000, all attractions, showroom, spas,
restaurants and retail shops were open in the Casino Resort.
A lower win percentage also impacted the Company's earnings. The table
games win percentage was 17.8% in 1999, compared to the Company's budgeted
average of 20%.
The Company believes that its earnings will continue to improve as it
intensifies marketing efforts toward gaining a larger share of the table games
and slot markets on the Strip and becomes more efficient in operations.
Operating Expenses
------------------
During its nearly eight months of operations in 1999, the Company's total
operating expenses were $231.1 million. Of this amount, $79.1 million
represented casino operating expenses and $25.5 million represented hotel
operating expenses. General and administrative expenses for the period were
$49.9 million.
The Company's provision for bad debts and discounts was $13.7 million in
1999. The Company believes it has established the same credit, collection
standards and reserves as other premium Strip resorts and that actual collection
experience will be well within established reserves. The Company currently
establishes its bad debt reserve based upon a combination of specific account
review and percentage of table games credit volume. The Company will evaluate
this process as it gains collection history over the next year.
After completion of the Casino Resort during the fourth quarter of 1999,
the Company has continued to develop and implement improvements to its service
levels, training of team members, marketing and advertising efforts and profit
margins. A strength of the Casino Resort is its excellent design and
completeness as a competitive resort at the heart of the Strip. Upon the
completion of construction and implementation of the above strategies, the
Company's earnings have shown considerable improvement.
Interest Income (Expense)
------------------------
Reflecting the investments in the Hotel, the Casino and Congress Center
and the Mall, the Company's debt levels and associated interest cost have risen
significantly. With the opening of these new facilities, the Company's
capitalization of interest cost has ceased. Net interest expense was $68.9
million in 1999, compared to $21.9 million in 1998. Subject to interest rate
fluctuations and the effect on the Company's variable rate debt, the Company
currently estimates that its total net interest expense in 2000 will increase to
$105.7 million, including $90.6 million for the Casino Resort (excluding the
Mall) and $15.1 million for the Mall.
Interest income decreased from $17.1 million to $2.6 million for the years
ended December 31, 1999 and 1998, respectively, 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 was virtually complete during the
fourth quarter of 1999. The Company capitalized $31.3 million of interest during
the year ended December 31, 1999, versus $39.7 million of interest capitalized
during the year ended December 31, 1998.
Year Ended December 31, 1998 compared to the Year Ended December 31, 1997
- -------------------------------------------------------------------------
Operating Revenues
------------------
Revenues for the years ended December 31, 1998 and 1997 were each $0.9
million and consisted primarily of rental and royalty income.
Operating Expenses
-------------------
Operating expenses during 1998 include pre-opening expenses of $8.7
million. No pre-opening expenses were incurred in 1997. Pre-opening expenses
included payroll, advertising, professional services and other general and
administrative expenses related to the opening of the Casino Resort. The credit
amount reflected in selling, general and administrative expense of $(1.8)
million during 1997 resulted from a re-evaluation of the accrued closing costs
associated with the closing of the Sands. Amortization expense was $0.1 million
for both years.
Interest Income (Expense)
------------------------
Interest income increased to $17.1 million during 1998 from $3.4 million
during 1997, primarily as a result of investing proceeds received from the sale
of the Notes in the aggregate principal amount of $522.5 million on November 14,
1997. The increase in interest expense to $39.0 million, excluding capitalized
interest of $39.7 million, during 1998 from $6.6 million, excluding capitalized
interest of $2.2 million, during 1997 represents the non-capitalized interest
expense resulting from debt incurred related to the financing of the Casino
Resort.
Other Factors Affecting Earnings
- --------------------------------
The Company incurred pre-opening expenses of $21.5 million during the year
ended December 31, 1999. From the inception of the project, 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.
The Company incurred a debt related extraordinary charge during 1999 of
$589,000, relating to the early retirement of debt for the take-out financing of
the Mall. See "Liquidity and Capital Resources - New Mall Subsidiary, Transfer
of Mall Assets and Mall Take-out Financing".
During early 2000, the Company initiated a change to its business strategy
as it relates to premium casino customers and marketing to foreign premium
casino customers. The Company has generally raised its betting limits for table
games to be competitive with other premium resorts on the Strip. There are
additional risks associated with this change in strategy, including risk of bad
debts, risks to profitability margins in a highly competitive market and the
need for additional working capital to accommodate possible higher levels of
trade receivables and foreign currency fluctuations associated with collection
of trade receivables in other countries. The Company has opened domestic and
foreign marketing offices and bank collection accounts in several foreign
countries to accommodate this change in business strategy, thereby increasing
marketing costs.
Liquidity and Capital Resources
- --------------------------------
Venetian Hotel, Casino and Congress Center
------------------------------------------
As of December 31, 1999 and December 31, 1998, the Company held cash and
cash equivalents of $26.3 million and $2.3 million, respectively. On such dates,
the Company also held restricted cash and investments of $11.0 million and
$133.9 million, respectively. Net cash used in operating activities for 1999 and
1998 was $30.0 million and $26.0 million, respectively. The Company's operating
cash flow in 1999 was negatively impacted by a substantial increase in trade
receivables occurring mainly at year-end. The revenues associated with the
receivables are included in the Company's 1999 operating income. Due to the
normal timing of collections, a large portion of the receivables remained
outstanding at the end of 1999, especially those associated with casino credit
granted before the New Year. Net trade receivables at September 30, 1999 were
$33.1 million, and at December 31, 1999 were $43.2 million. The rate of increase
is consistent with the increase in the Company's revenues. The Company expects a
continued increase in trade receivables during 2000 in connection with the
extension of casino credit.
Capital expenditures during 1999 were $319.1 million, consisting primarily
of construction of the Casino Resort. Of the cost expended or incurred during
1999, $74.5 million, $37.3 million and $83.8 million were drawn from the Bank
Credit Facility (including a net of $30.3 million under the Revolver), 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 accruals for construction payables.
On November 12, 1999, an advance of approximately $23.5 million was made
under the Completion Guaranty and, as noted above, is being treated as a
Completion Guaranty Loan. The Sole Stockholder has unlimited liability under the
Completion Guaranty with respect to excess construction costs attributable to
scope changes.
As of December 31, 1999, approximately $6.3 million of construction costs
(excluding construction costs (the "Contested Construction Costs") that are the
subject of the above-described litigations and claims) remained to be paid. Such
remaining costs (excluding the Contested Construction Costs) will be liquidated
from restricted cash balances or settled during the course of 2000. In addition,
the Phase II Subsidiary has outstanding project payables in the amount of $3.9
million to be funded from future equity contributions or borrowings by the Phase
II Subsidiary.
If the Company is required to pay any of the Contested Construction Costs,
the Company may use cash received from the following sources to fund such costs:
(i) the LD Policy, (ii) the Construction Manager, Bovis and P&O pursuant to the
Construction Management Contract, the Bovis Guaranty and the P&O Guaranty,
respectively, (iii) third parties, pursuant to their liability to the Company
under their agreements with the Company, (iv) amounts received from the Phase II
Subsidiary for shared facilities designed and constructed to accommodate the
operations of the Casino Resort and the Phase II Resort, (v) the Sole
Stockholder, pursuant to his liability under the Completion Guaranty, (vi)
borrowings under the Revolver, (vii) additional debt or equity financings, and
(viii) operating cash flow. If the Company were required to pay substantial
Contested Construction Costs, and if it were unable to raise or obtain the funds
from the sources described above, there could be a material adverse effect on
the Company's financial position, results of operations or cash flows. The Sole
Stockholder has remaining liability of approximately $5.0 million under the
Completion Guaranty to fund excess construction costs (which liability is
collaterlized with cash and cash equivalents).
As described below, the Company refinanced the Mall Construction Loan
Facility on December 20, 1999. See - "New Mall Subsidiary, Transfer of Mall
Assets and Mall Take-out Financing".
For the next twelve months, the Company expects to fund its operations and
debt service requirements from existing cash balances, operating cash flow and
borrowings under the Revolver of the Bank Credit Facility. The Revolver loan
commitment will expire on March 15, 2001. As of December 31, 1999, $39.2 million
of the $40.0 million Revolver under the Bank Credit Facility was drawn. During
early 2000, approximately $9.3 million was repaid and the balance on the
Revolver was reduced to $29.9 million. The Company has significant debt service
payments due during 2000, including principal quarterly payments on its Bank
Credit Facility and FF&E Credit Facility aggregating $42.9 million and estimated
total interest payments of $90.6 million for indebtedness secured by the Casino
Resort and $15.1 million for indebtedness secured by the Mall. In addition, the
Company estimates capital expenditures for the Casino Resort of $9.0 million
during 2000. To fund these payments from improved operating cash flow will
require the Company to achieve substantially improved operating results. The
Company anticipates that its existing cash balances, operating cash flow and
available borrowing capacity will provide it with sufficient resources to meet
existing debt obligations and foreseeable capital expenditures requirements,
however, no assurance can be given that the Company will achieve such improved
operating results.
In addition, the Company has had discussions with the administrative agent
under the Bank Credit Facility in order to discuss modifications to the terms of
the Bank Credit Facility, including the expiration date of the Revolver,
schedule of principal payments and financial covenants. The Bank Credit Facility
and the FF&E Credit Facility each provide for a variety of financial tests,
relating to, among other things, the Company's minimum consolidated earnings
before interest, taxes, depreciation and amortization ("EBITDA"); consolidated
leverage ratio and fixed charge coverage ratio. These covenants become more
stringent over time to match the scheduled repayment of the Company's
indebtedness. The purpose of the proposed modifications to the Bank Credit
Facility would be to provide additional flexibility and the ability to fund
capital expenditures and possible working capital requirements associated with
the Company's premium casino table games business. Similar financial covenant
modifications would need to be made to the FF&E Credit Facility which has
substantially identical financial covenants.
Although the Company has remained in compliance with the covenants in the
Bank Credit Facility and the FF&E Credit Facility, and expects to be in
compliance during the remainder of 2000, it will be challenged to meet its
minimum EBITDA, leverage and other covenants reflected in such agreements while
also maintaining the flexibility and level of capital expenditure spending that
management believes is necessary for success in the Company's premium casino
business. Depending on the financial results of the next several quarters, no
assurance can be given that without the approval of the Company's bank syndicate
and the FF&E Lender of the proposed modifications that the Company will not need
to otherwise re-negotiate its financial covenants.
If the Company is required to pay certain significant Contested
Construction Costs, 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 governing the terms of the Notes (the "Indentures") and the
terms of the Bank Credit 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.
New Mall Subsidiary, Transfer of Mall Assets and Mall Take-Out Financing
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On November 12, 1999, Grand Canal Shops Mall Construction, LLC transferred
the Mall and related assets ( the Mall and such assets, collectively, the "Mall
Assets") to its subsidiary, Grand Canal Shops Mall, LLC (the "Mall Subsidiary").
Upon such transfer, (i) the Mall Assets were released by the trustee under the
Mortgage Notes and the agent under the Bank Credit Facility and so were no
longer security to the holders of the Mortgage Notes or for the indebtedness
under the Bank Credit Facility, (ii) the indebtedness under the Mall
Construction Loan Facility was assumed by the Mall Subsidiary, and (iii) all
entities comprising the Company, other than the Mall Subsidiary, were released
from all obligations under the Mall Construction Loan Facility.
On December 20, 1999, the Mall Construction Loan Facility was paid off in
full with the proceeds of (a) a $105.0 million first priority take-out loan (the
"Tranche A Take-out Loan") made by Goldman Sachs Mortgage Company, the Bank of
Nova Scotia and others lenders (collectively, the "Tranche A Take-out Lender")
and (b) a $35.0 million second priority take-out loan (the "Tranche B Take-out
Loan" and, together with the Tranche A Take-out Loan, the "Mall Take-out
Financing") made by an entity wholly owned by the Sole Stockholder ( the
"Tranche B Take-out Lender"). The Mall Take-out Financing is secured by
mortgages on the Mall Assets, and the Tranche A Take-out Loan is also secured by
a $20.0 million guaranty made by the Sole Stockholder (the "Mall Take-out
Guaranty"). The annual interest rate on the Tranche A Take-out Loan is 350 basis
points over 30 day LIBOR. The Tranche A Take-out Loan is due in full on December
20, 2002 and no principal payments are due thereunder until such date. The
Tranche B Take-out Loan bears interest at 14% per annum. The initial maturity
date is December 20, 2004 with a right of extension to December 20, 2007. No
principal payments are due until maturity. Also on December 20, 1999, the Mall
Assets were transferred from the Mall Subsidiary to the New Mall Subsidiary, the
obligor under the Mall Take-out Financing.
Because the New Mall Subsidiary is not a guar