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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, 2000
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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, 2001 was $0.
The Company had 925,000 shares of Common Stock outstanding as of March 30, 2001.
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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. The Casino Resort was developed on a stand-alone basis as the first
phase of a two-phase redevelopment at the site of the Sands. In the second phase
of the redevelopment, it is contemplated that another themed resort will be
constructed and developed (the "Phase II Resort") by a subsidiary of the
Company. 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 63,000 square foot exhibition hall currently under
construction to house various art exhibits in conjunction with the Guggenheim
Museum with an expected completion date of September 2001.
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 2,159 slot machines of various denominations, including popular
multi-property, linked progressive games. A high-end slot area, with a private
lounge, provides slot customers with premium slot products and services. The
Casino's approximately 122 table games (excluding baccarat tables) feature the
traditional games of blackjack, craps and roulette, Asian games, such as "Pai
Gow" and "Pai Gow Poker," and popular progressive table games, such as
"Caribbean Stud Poker" and "Let It Ride." In addition, the Casino offers gaming
customers an upscale sportsbook room, 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, from a cross-over bridge across the Strip and directly from the Hotel.
The Mall offers an array of quality dining experiences, including upscale
restaurants that offer international and American regional cuisines. The Mall's
retail offerings include exclusive showcase boutiques, popular brand name
mid-priced stores and themed entertainment concepts. 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 2000, approximately 1,356,000 visitors attended trade shows and
conventions at the Expo Center during 159 show days. The Expo Center hosted 18
events on the 2000 Trade Show Week 200 list of the largest trade shows in the
United States in 2000, 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
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
----------------------------------------------------
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
-----------------------------------------------------------------
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 2000, approximately 1,356,000 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
Revenues
-------------------------------------------------------------------------
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 21.0
million visitors in 1990 to 35.8 million visitors in 2000, a compound annual
growth rate of 5.4%. In addition, the population of Las Vegas has grown from
approximately 863,000 in 1990 to approximately 1,350,000 in 2000, 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 2000, 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
1990, approximately 1.7 million persons attended trade shows and conventions in
Las Vegas and spent approximately $1.1 billion. In 2000, the number of trade
show and convention attendees had increased to 3.9 million and the amount spent
by trade show and convention attendees was approximately $4.3 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 48,000 hotel rooms located on the Strip, two
convention centers (the Las Vegas Convention Center (the "LVCC") 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 LVCC. The expansion of the LVCC is expected to bring
convention and exhibit space in Las Vegas to over 4.0 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 and the Mirage has
announced plans to add 100,000 gross square feet of meeting space. Management
believes that Las Vegas will continue to evolve as the country's preferred trade
show and convention destination.
Expanding Hotel Market
----------------------
During 2000, 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 69%, from
73,730 in 1990 to 124,270 in 2000. One additional major property on the Strip,
the Aladdin, opened during 2000. 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
---------------------------------------------------------------------
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 1990 to $7.7 billion in 2000, non-gaming tourist revenues increased
from $10.2 billion in 1990 to $21.4 billion in 2000. 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
---------------------------
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 2000 visitors to Las
Vegas arrived by the following methods of transportation: 45% by air; 40% 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
19.1 million in 1990 to 36.9 million in 2000. 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 30-acre site. This major interchange is located approximately
one-half mile from the Casino Resort.
Competition
- -----------
The casino/hotel industry is highly competitive. Strip hotels compete with
other hotels on the Strip and with other hotels in downtown Las Vegas. The
Casino Resort also competes with a large number of hotels and motels 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, Paris and the Aladdin. These projects and
others added approximately 14,900 hotel rooms to the Las Vegas inventory from
1998 to 2000. The Casino Resort may also compete with the Phase II Resort, to
the extent its business is not complementary to that of the Casino Resort. The
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 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 also have a material adverse effect on
the business of the Company.
Trade Show and Convention Facilities
------------------------------------
The Expo Center, the Congress Center and Las Vegas generally compete with
trade show and convention facilities located in and around major cities,
including Atlanta, Chicago, New York and Orlando. Within Las Vegas, the Expo
Center and the Congress Center compete with the LVCC, which is located off the
Strip and currently has 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 LVCC 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.
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 the on Expo Center and in turn the Company's financial position,
results of operations or cash flows given its link to the Expo Center.
Mall
----
The Mall competes with both themed resorts, which offer shopping, dining
and entertainment opportunities to their patrons and other retail malls in or
near Las Vegas. The Mall's direct competition includes The Forum Shops at
Caesars Palace and The Desert Passage Shops at the Aladdin. The Forum Shops at
Caesars Palace may undergo additional expansions in the future. The Mall also
competes with The Fashion Show Mall, a more traditional mall located near the
Casino Resort which currently is undergoing expansion which will almost double
such facility's size, and the planned retail, dining and entertainment mall in
the Phase II Resort. Mandalay Resort 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 complete and virtually all construction costs had been paid. The
Company is currently involved in various lawsuits, has asserted various claims
against various parties, and has had various claims asserted against it by
various parties, in connection with the construction of the Casino Resort. The
Company is vigorously pursuing these claims and vigorously defending itself in
all relevant legal proceedings. See "Item 3 - Legal Proceedings."
Construction Management Contract and Construction Manager's Contract
Guaranty
--------------------------------------------------------------------
The construction of the principal components of the Casino Resort was
undertaken by Lehrer McGovern Bovis, Inc. (the "Construction Manager") pursuant
to a construction management agreement and certain amendments thereto (as so
amended, the "Construction Management Contract"). The Construction Management
Contract established a final guaranteed maximum price (the "Final GMP") of
$645.0 million, so that, subject to certain exceptions (including an exception
for cost overruns due to "scope changes"), the Construction Manager was
responsible for any costs of the work covered by the Construction Management
Contract in excess of $645.0 million. The Construction Management Contract also
established a required "substantial completion" date (the date on which the
construction of the Casino Resort was sufficiently complete, including the
receipt of necessary permits, licenses and approvals, so that all components of
the Casino Resort could be open to the general public) of April 21, 1999
(subject to extensions on account of scope changes and force majeure events),
with a per-day liquidated damages penalty for failure to meet such deadline.
The Company paid the Construction Manager a construction management fee of
1 1/2% of the Final GMP, payable in monthly installments.
The obligations of the Construction Manager under the Construction
Management Contract 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 Construction Manager's
ultimate parent at the time the Construction Management Contract was entered
into (such guaranty, the "P&O Guaranty"). With respect to the Construction
Manager's obligation to complete construction on schedule: (i) for the first 30
days of any delay in such scheduled completion, the Construction Manager solely
(and not Bovis or P&O) is liable for liquidated damages, (ii) for the 90-day
period thereafter and subject to certain conditions and exceptions, only the
insurers under the LD Policy described below (and not the Construction Manager,
Bovis or P&O), are liable for liquidated damages, and (iii) the Construction
Manager, Bovis and P&O are liable for liquidated damages to the extent, if any,
that the Construction Manager 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. See "Item 3 - Legal Proceedings."
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 and is owned by an indirect subsidiary of Sempra
Energy, a utility holding company.
Thermal energy (i.e., heating and air conditioning) is provided to the
Casino Resort and the Expo Center by the HVAC Provider using certain heating and
air conditioning-related and other equipment (the "HVAC Equipment"). In
addition, the HVAC Provider provides 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 Nevada Gaming Control Board (the "NGCB") and the Clark County Liquor and
Gaming Licensing Board (the "CCLGLB" and, together with the Nevada Commission
and the NGCB, the "Nevada Gaming Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy that are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) 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 submit detailed
financial and operating reports to the Nevada Gaming Authorities and furnish any
other information that the Nevada Gaming Authorities may require. No person may
become a stockholder of, or receive any percentage of profits from, the Company
without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company operates the Casino pursuant to the Casino Lease
between LVSI and Venetian, which provides for a fixed monthly rental payment.
The Company possesses all state and local government registrations, approvals,
permits and licenses required in order for the Company to engage in gaming
activities at the Casino Resort.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or Venetian
to determine whether such individual is suitable or should be licensed as a
business associate of a gaming licensee. Officers, directors and certain key
employees of the Company must file application and be licensed by the Nevada
Gaming Authorities
The Nevada Gaming Authorities may deny an application for licensing or a
finding of suitability for any cause they deem reasonable. A finding of
suitability is comparable to licensing; both require submission of detailed
personal and financial information followed by a thorough investigation. The
applicant for licensing or a finding of suitability, or the gaming licensee by
whom the applicant is employed or for whom the applicant serves, must pay all
the costs of the investigation. Changes in licensed positions must be reported
to the Nevada Gaming Authorities, and in addition to their authority to deny an
application for a finding of suitability or licensure, the Nevada Gaming
Authorities have jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or to 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. Under a new provision of the Nevada Act and under certain
circumstances, an "institutional investor" as defined in the Nevada Act, which
intends to acquire not more than 15% of any class of nonvoting securities of a
privately-held corporation, limited partnership or limited liability company
that is also a registered holding or intermediary company or the holder of a
gaming license, may apply to the Nevada Commission for a waiver of the usual
prior licensing or finding of suitability requirement if such institutional
investor holds such nonvoting securities for investment purposes only. An
institutional investor shall not be deemed to hold nonvoting securities for
investment purpose unless the nonvoting securities were acquired and are held in
the ordinary course of business as an institutional investor, do not give the
institutional investor management authority, and do not, directly or indirectly,
allow the institutional investor to vote for the election or appointment of
members of the board of directors, a general partner or manager, cause any
change in the articles of organization, operating agreement, other organic
document, management, polices or operations, or cause any other action that the
Nevada Commission finds to be inconsistent with holding nonvoting securities for
investment purposes only. Activities that are not deemed to be inconsistent with
holding nonvoting securities for investment purpose only include: (i) nominating
any candidate for election or appointment to the entity's board of directors or
equivalent in connection with a debt restructuring; (ii) making financial and
other inquires of management of the type normally made by securities analyst for
informational purposes and not to cause a change in the entity's management,
polices or operations; and (iii) such other activities as the Nevada Commission
may determine to be consistent with such investment intent. If the beneficial
holder of nonvoting securities who must be 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 Clark County gaming and liquor
licenses. All licenses are revocable and are not transferable. The agencies
involved have full power to limit, condition, suspend or revoke any such
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.
Risk Factors
- ------------
The following risk factors should be read carefully in connection with
evaluating the Company and the forward-looking statements contained in this
Annual Report on Form 10-K. Any of the following risks could materially
adversely affect the Company, its operating results, its financial condition and
the actual outcome of matters as to which forward-looking statements are made in
this Annual Report on Form 10-K. Certain statements in "Risk Factors" constitute
"forward-looking statements." Actual results could differ materially from those
projected in the forward-looking statements as a result of certain factors and
uncertainties set forth below and elsewhere in this Annual Report on Form 10-K.
See "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Special Note Regarding Forward-Looking Statements."
Substantial Leverage; Ability to Service Debt
---------------------------------------------
At December 31, 2000, the Company had total indebtedness of approximately
$913,412,000 (including $4,263,000 million of accreted original issue discount
on the Senior Subordinated Notes). See "Item 8 - Financial Statements and
Supplementary Data - Notes to Financial Statements - Note 8 Long-Term Debt." The
substantial indebtedness of the Company could limit its ability to respond to
changing business and economic conditions. Further, there can be no assurance
that the Company will have the right under the agreements governing its debt
obligations to issue any additional debt as may be necessary or desirable.
The ability of the Company to make interest payments on its existing
indebtedness depends on its ability to generate sufficient cash flow from
operations. There can be no assurance that the Company will be able to generate
sufficient cash flow to meet its expenses, including such debt service
requirements.
Operating Restrictions
----------------------
The terms of the Company's secured bank credit facility, the Indentures
and the other agreements governing the indebtedness of the Company impose
significant operating and financial restrictions on the Company. Such
restrictions significantly limit or prohibit, among other things, the ability of
LVSI, Venetian and their subsidiaries to incur additional indebtedness, make
certain capital expenditures, repay indebtedness prior to its stated maturity,
create liens, sell assets or engage in mergers or acquisitions. There can be no
assurances that these restrictions will not adversely affect the ability of the
Company to finance its future operations or capital needs. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Business Contingencies; Competition
-----------------------------------
The operations of the Company are subject to significant business,
economic, regulatory and competitive uncertainties and contingencies, many of
which are beyond the control of the Company. No assurances can be given that the
Company will continue to manage the Casino Resort on a profitable basis or to
attract a sufficient number of guests, gaming customers and other visitors to
the Casino Resort to make its various operations profitable independently or as
a whole.
The casino/hotel industry is highly competitive. Hotels located on or near
the Strip compete with other Strip hotels and with other hotels in Las Vegas.
The Casino Resort also competes with a large number of hotels and motels located
in and near Las Vegas. The Mall competes with retail malls in or near Las Vegas,
including The Fashion Show Mall, The Forum Shops at Caesars Palace Hotel and
retailers in theme-oriented resorts. 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. See "- Competition."
Construction Claims
-------------------
The Company is party to litigation matters and claims related to its
operations and the construction of the Casino Resort. The Company is currently
involved in various lawsuits, has asserted various claims against various
parties, and has had various claims asserted against it by various parties, in
connection with the construction of the Casino Resort. All of the pending
litigation is in preliminary stages, and it is not yet possible to determine the
ultimate outcomes. If any litigation or other proceedings concerning the claims
of the Construction Manager or its subcontractors were decided adversely to the
Company, such litigation or other lien proceedings could have a material adverse
effect on the financial position, results of operations or cash flows of the
Company to the extent such litigation is not covered by the Insurance Policy.
See "Item 3 - Legal Proceedings."
Government Regulation
---------------------
The gaming operations and the ownership of securities of the Company are
subject to extensive regulation by the Nevada Commission, the NGCB and the
CCLGLB. The Nevada Gaming Authorities have broad authority with respect to
licensing and registration of entities and individuals involved with the
Company. See "- Regulation and Licensing."
Although the Company currently holds a gaming license issued by the Nevada
Gaming Authorities, the Nevada Gaming Authorities may, among other things,
revoke the gaming license of any corporate entity (a "Corporate Licensee") or
the registration of a Registered Corporation or any entity registered as a
holding company of a Corporate Licensee. In addition, the Nevada Gaming
Authorities may revoke the license or finding of suitability of any officer,
director, controlling person, shareholder, noteholder or key employee of a
licensed or registered entity. If the gaming licenses of the Company were
revoked for any reason, the Nevada Gaming Authorities could require the closing
of the Casino, which would result in a material adverse effect on the business
of the Company.
Dependence Upon Key Management
------------------------------
The ability of the Company to maintain its competitive position is
dependent to a large degree on the services of the Company's senior management
team, including Sheldon G. Adelson, currently LVSI's sole stockholder. Although
certain of the senior managers of the Company have employment agreements with
the Company, there can be no assurance that such individuals will remain with
the Company. The death or loss of the services of any of the senior managers or
an inability to attract and retain additional senior management personnel could
have a material adverse effect on the Company. There can be no assurance that
the Company will be able to retain its existing senior management personnel or
to attract additional qualified senior management personnel.
Sole Stockholder
----------------
The Sole Stockholder beneficially owns all of the outstanding common
equity of Venetian and LVSI. LVSI acts as the managing member of Venetian.
Except for actions that require the approval of the Special Director (as defined
herein), the Sole Stockholder will be able to control the business, policies and
affairs of the Company, including the election of directors and major corporate
transactions of LVSI.
Possible Conflicts of Interest
------------------------------
The planned second phase of the redevelopment at the site of the
demolished Sands is the Phase II Resort. The Phase II Resort is planned to be
constructed on the Phase II Land. There is no guarantee that the Phase II Resort
will be built in the near future, in the manner currently planned, or at all. In
addition, although the Company intends to construct the Phase II Resort so as to
mitigate the impact of such construction on the Casino Resort, there can be no
assurance that such construction will commence as planned, and therefore, the
construction of the Phase II Resort may adversely impact portions of the Casino
Resort.
The common ownership of the Casino Resort and the Phase II Resort may
result in potential conflicts of interest. For example, management may offer
discounts and other incentives for visitors to stay at the Phase II Resort,
which might result in a competitive advantage of the Phase II Resort over the
Casino Resort. In addition, management may choose to allocate certain business
opportunities to the Phase II Resort rather than to the Casino Resort. Although
common ownership of both the Casino Resort and the Phase II Resort often may
result in economies, efficiencies and joint business opportunities for the two
resorts in the aggregate, the Casino Resort may, in certain circumstances, bear
the greater burden of the expenses that are shared by both resorts. In addition,
inasmuch as there may be a common management for both the Casino Resort and the
Phase II Resort, management's time may be split between overseeing the operation
of each resort, and management, in certain circumstances, may devote more time
to its ownership and operations responsibilities of the Phase II Resort than
those of the Casino Resort. Finally, because it is expected that the Company
will lease and operate the casino for the Phase II Resort, potential conflicts
may arise from the common operation of the Casino and the Phase II Resort
casino, such as the allocation of management's time.
The common ultimate ownership, and management, of the Casino Resort and
the Expo Center also may result in potential conflicts of interest. The Expo
Center and the Congress Center are potential competitors in the business
conference and meetings business. As a result, the Casino Resort could engage in
certain businesses that may have an adverse impact on the Expo Center. However,
under the Cooperation Agreement, Venetian has agreed that it will not conduct,
or permit to be conducted at the Casino Resort, trade shows or expositions of
the type generally held at the Expo Center. Furthermore, management may engage
in marketing practices with respect to the Casino Resort that are intended to
benefit the Expo Center and may have a detrimental effect on the Casino Resort.
See "Item 13 - Certain Relationships and Related Transactions - Cooperation
Agreement."
ITEM 2. --PROPERTIES
- --------------------
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 adverse impact on the financial position, results of operations or
cash flows of the Company.
On July 30, 1999, Venetian filed a complaint against the Construction
Manager and Bovis in United States District Court for the District of Nevada.
The action alleges breach of contract by the Construction Manager of its
obligations under the Construction Management Contract and a breach of contract
by Bovis of its obligations under the Bovis Guaranty, including failure to fully
pay trade contractors and vendors and failure to meet the April 21, 1999
guaranteed completion date. The Company amended this complaint on November 23,
1999 to add P&O as an additional defendant. The suit is intended to ask the
courts, among other remedies, to require the Construction Manager and its
guarantors to pay its contractors, to compensate Venetian for the Construction
Manager's failure to perform its duties under the Construction Management
Contract and to pay the Company the agreed upon liquidated damages penalty for
failure to meet the guaranteed substantial completion date. Venetian seeks total
damages in excess of $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 approximately $90.0 million from Venetian and its affiliates. This
complaint was subsequently amended by the Construction Manager, which also filed
an additional complaint against the Company relating to work done and funds
advanced with respect to the contemplated development of the Phase II Resort.
Based upon its preliminary review of the complaints, the fact that the
Construction Manager has not provided Venetian with reasonable documentation to
support such claims, and the Company's belief that the Construction Manager has
materially breached its agreements with the Company, the Company believes that
the Construction Manager's claims are without merit and intends to vigorously
defend itself and pursue its claims against the Construction Manager in any
litigation.
In connection with these disputes, as of December 31, 1999 the
Construction Manager and its subcontractors filed mechanics liens against the
Casino Resort for $145.6 million and $182.2 million, respectively. The Company
believes that a major reason these lien amounts exceed the Construction
Manager's claims of $90.0 million is based upon a duplication of liens through
the inclusion of lower tier claims by subcontractors in the liens of higher tier
contractors, including the lien of the Construction Manager. As of December 31,
1999, the Company had purchased surety bonds for virtually all of the claims
underlying these liens (other than approximately $15.0 million of claims with
respect to which the Construction Manager purchased bonds). As a result, there
can be no foreclosure of the Casino Resort in connection with the claims of
Construction Manager and its subcontractors. However, the Company will be
required to pay or immediately reimburse the bonding company if, and to the
extent that, the underlying claims are judicially determined to be valid. If
such claims are not settled, it is likely to take a significant amount of time
for their validity to be judicially determined.
The Company believes that these claims are, in general, unsubstantiated,
without merit, overstated and/or duplicative. The Construction Manager itself
has publicly acknowledged that at least some of the claims of its subcontractors
are without merit. In addition, the Company believes that pursuant to the
Construction Management Contract and the Final GMP, the Construction Manager is
responsible for payment of any subcontractors' claims to the extent they are
determined to be valid. The Company may also have a variety of other defenses to
the liens that have been filed, including, for example, the fact that the
Construction Manager and its subcontractors previously waived or released their
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.
In June 2000, the Company purchased an insurance policy (the "Insurance
Policy") for loss coverage in connection with all litigation relating to the
construction of the Casino Resort (the "Construction Litigation"). Under the
Insurance Policy, the Company will self-insure the first $45.0 million and the
insurer will insure up to the next $80.0 million of any possible covered losses.
The Insurance Policy provides coverage for any amounts determined in the
Construction Litigation to be owed to the Construction Manager or its
subcontractors relating to claimed delays, inefficiencies, disruptions, lack of
productivity/unauthorized overtime or schedule impact, allegedly caused by the
Company during construction of the Casino Resort, as well as any defense costs.
The insurance is in addition to, and does not affect; any scope change
guarantees provided by the Sole Stockholder pursuant to the Sole Stockholder's
$25.0 million collateralized completion guaranty (the "Completion Guaranty").
All of the pending litigation described above is in preliminary stages and
it is not yet possible to determine 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 adverse effect on the financial position,
results of operations or cash flows of the Company, to the extent such
litigation is not covered by the Insurance Policy.
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, 2001, 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 2000. 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, 2000, 1999 and 1998, and the
balance sheet data at December 31, 2000 and 1999 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, 1997 and 1996 and the balance sheet data at December
31, 1998, 1997 and 1996 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,
-----------------------
2000 1999(1)(3) 1998
--------- --------- ---------
Gross revenues $ 635,974 $ 277,807 $ 937
Promotional allowance (46,296) (25,045) --
--------- --------- ---------
Net revenues 589,678 252,762 937
Operating expenses 452,905 248,949 8,822
--------- --------- ---------
Operating income (loss) 136,773 3,813 (7,885)
Interest expense, net (118,036) (68,847) (21,878)
--------- --------- ---------
Income (loss) before extraordinary
item 18,737 (65,034) (29,763)
Loss on early
retirement of debt (2,785) (589) --
--------- --------- ---------
Net income (loss) $ 15,952 $ (65,623) $ (29,763)
========= ========= =========
Per Share Data
Basic and diluted income (loss) per
share before extraordinary item $ 0.28 $ (85.87) $ (46.93)
========= ========= =========
Basic and diluted loss per share
after extraordinary item $ (2.74) $ (86.51) $ (46.93)
========= ========= =========
OTHER DATA
Capital expenditures $ 28,589 $ 319,106 $ 508,399
Cash dividends per common share $ -- $ -- $ --
As of December 31
-----------------
2000 1999 1998
-------- -------- --------
BALANCE SHEET DATA
Total assets $1,232,059 $1,209,602 $1,005,944
Long-term debt 863,293 907,754 744,154
Stockholders' equity 13,176 15,706 67,937
- ----------
(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.
(3) Financial data for 1999 has been restated to reflect the adoption of
Emerging Issues Task Force Issue 00-14 ("EITF 00-14"). The adoption of EITF
00-14 had no effect on net income. See Item 8 - Financial Statements and
Supplementary Data - Notes to Financial Statements - Notes 2 - Summary of
Significant Accounting Polices - Casino Revenue and Promotional Allowances.
================================================================================
STATEMENT OF OPERATIONS DATA
(In thousands, except per share data)
================================================================================
Year-Ended December 31,
-----------------------
1997 1996(1)(2)
--------- ----------
Gross revenues $ 895 $ 44,044
Promotional allowance -- (3,483)
--------- ---------
Net revenues 895 40,561
Operating expenses (1,727) 99,890
--------- ---------
Operating income (loss) 2,622 (59,329)
Interest expense, net (3,142) (3,666)
--------- ---------
Income (loss) before extraordinary
item (520) (62,995)
Loss on early retirement of debt -- --
--------- ---------
Net income (loss) $ (520) $ (62,995)
========= =========
Per Share Data
Basic and diluted income (loss) per
share before extraordinary item $ (0.56) $ (68.10)
========= =========
Basic and diluted loss per share
after extraordinary item $ (0.56) $ (68.10)
========= =========
OTHER DATA
Capital expenditures $ 130,827 $ 18,829
Cash dividends per
common share $ 29.84 $ --
As of December 31
-----------------
1997 1996
------ ------
BALANCE SHEET DATA
Total assets $ 747,767 $114,109
Long-term debt 515,612 --
Stockholders' equity 111,347 106,335
- ----------
(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.
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. The Casino Resort includes the first all-suites hotel on the
Strip with 3,036 suites; a gaming facility of approximately 116,000 square feet;
an enclosed retail, dining and entertainment complex of approximately 445,000
net leasable square feet; and a meeting and conference facility of approximately
500,000 square feet. The Company is party to litigation matters and claims
related to its operations and construction of the Casino Resort that it does not
expect to have a material adverse effect on its financial position, result of
operation or its cash flows. See "Item 3-Legal Proceedings."
Result of Operations
- --------------------
Prior to the opening 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, 2000 compared to the Year Ended December 31, 1999
- -------------------------------------------------------------------------
The Casino Resort began operations on May 4, 1999 and the Mall began
operations on June 19, 1999, and therefore, neither the Casino Resort nor the
Mall had any operating revenues or operating expense before such dates. All
references to 1999 include 242 days of operations of the Casino Resort and 195
days of operations of the Mall.
Operating Revenues
------------------
Net revenues for the year ended December 31, 2000 were $589.7 million,
representing an increase of $336.9 million when compared with $252.8 million
during 1999. The increase in net revenues was due to growth in every revenue
segment at the Casino Resort and the longer operating period in 2000.
Casino revenues for the year ended December 31, 2000 were $307.5 million,
representing an increase of $179.2 million when compared with $128.3 million
during 1999. The increase in casino revenues at the Casino Resort was primarily
a result of the longer operating period in 2000, as well as higher table games
and slots volume during comparable periods.
Room revenues for 2000 were $192.3 million, representing an increase of
$102.7 million when compared with $89.6 million during 1999. The increase was
due to the longer operating period in 2000 and a higher occupancy of 95.2% in
2000, when compared with 81.7% in 1999. In addition, the Company achieved a
higher average daily room rate of $182 in 2000 versus $159 in 1999.
Food and beverage revenues for 2000 were $67.1 million, representing an
increase of $36.3 million when compared with $30.8 million for 1999. This
increase resulted from the longer operating period in 2000, additional banquet
revenues generated from a full year of operation at the Congress Center and
greater room service revenues as a result of higher occupancy levels.
Retail and other revenues increased $39.9 million, from $29.2 million in
1999 to $69.1 million in 2000. The Mall revenues were $30.2 million during 2000,
compared to $9.8 million during 1999. The increase in Mall revenues was
attributable to completion of leasing of the Mall space and the longer operating
period in 2000. Mall occupancy is currently approximately 95% of leaseable
space.
Operating Expenses
------------------
Operating expenses (before pre-opening and corporate expense) for 2000
were $446.6 million, representing an increase of $221.6 million when compared
with $225.0 million for 1999. The increase was primarily due to the longer
operating period in 2000, increased casino expenses resulting from higher gaming
taxes and marketing expenses on the increased revenues, and an increase in the
provision for doubtful accounts. Mall operating expenses were $19.3 million
during 2000 compared to $9.2 million during 1999. The increase was attributable
to completion of leasing of the Mall space and the longer operating period in
2000.
Pre-opening and other non-recurring expenses for the year ended December
31, 1999 of $21.5 million represent costs principally associated with the
opening of the Casino Resort on May 4, 1999. There were no pre-opening expenses
during the year ended December 31, 2000.
Corporate expense was $6.3 million in 2000, compared with $2.5 million in
1999. The increase was due to the creation of the corporate division in the
fourth quarter of 1999 and consequently the longer operating period in 2000.
Rental expense primarily related to the HVAC Plant for 2000 was $11.1
million, including $8.9 million for the Casino Resort and $2.2 million for the
Mall. Rental expenses were $6.3 million during the shorter operating period in
1999 including, $5.1 million for the Casino Resort and $1.2 million for the
Mall.
Interest Income (Expense)
-------------------------
Reflecting the investments in the Hotel, the Casino and Congress Center
and the Mall, the Company's debt levels and associated interest costs have risen
significantly. With the opening of these new facilities, the Company's
capitalization of interest costs has ceased. Interest expense was $119.8 million
in 2000, compared to $71.4 million, excluding capitalized interest of $31.3
million in 1999.
Interest income was $1.8 million and $2.5 million for the years ended
December 31, 2000 and 1999, respectively. Because construction of the Casino
Resort was virtually complete during the fourth quarter of 1999, the Company
only capitalized interest of $0.1 million during the year ended December 31,
2000, versus $31.3 million of interest capitalized during the year ended
December 31, 1999.
Year Ended December 31, 1999 compared to the Year Ended December 31, 1998
- -------------------------------------------------------------------------
The Casino Resort began operations on May 4, 1999 and therefore only had
minimal operating revenues and operating expenses during 1998.
Operating Revenues
------------------
Revenues for the year ended December 31, 1998 were $0.9 million and
consisted primarily of rental and royalty income.
Operating Expenses
------------------
Operating expenses during 1999 include pre-opening expenses of $21.5
million and $8.7 million during 1998. Pre-opening expenses included payroll,
advertising, professional services and other general and administrative expenses
related to the opening of the Casino Resort. Depreciation and amortization
expense was $0.1 million for 1998 and $25.1 million for 1999.
Interest Income (Expense)
-------------------------
Interest income decreased to $2.5 million during 1999 from $17.1 million
during 1998, primarily as a result of expending the proceeds received from the
sale of the Company's $425.0 million of 12 1/4% Mortgage Notes due 2004 (the
"Mortgage Notes") and 14 1/4% Senior Subordinated Notes due 2005 (the "Senior
Subordinated Notes" and together with the Mortgage Notes, the "Notes") on
November 14, 1997. The increase in interest expense to $71.4 million, excluding
capitalized interest of $31.3 million, during 1999 from $39.0 million, excluding
capitalized interest of $39.7 million, during 1998 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, compared to $8.7 million for the year ended December
31, 1998. 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 an extraordinary charge in 2000 of $2.8 million for
early retirement of debt related to re-structuring the Company's secured bank
credit facility (the "Bank Credit Facility"), and $0.6 million in 1999 related
to the take-out financing of the Mall. See "-Liquidity and Capital Resources -
New Mall Subsidiary and Transfer of Mall Assets."
During early 2000, the Company initiated a change to its business strategy
as it relates to premium casino customers and marketing to foreign premium
casino customers. The Company has generally raised its betting limits for table
games to be competitive with other premium resorts on the Strip. There are
additional risks associated with this change in strategy, including risk of bad
debts, risks to profitability margins in a highly competitive market and the
need for additional working capital to accommodate possible higher levels of
trade receivables and foreign currency fluctuations associated with collection
of trade receivables in other countries. The Company has opened domestic and
foreign marketing offices and bank collection accounts in several foreign
countries to accommodate this change in business strategy, thereby increasing
marketing costs.
Liquidity and Capital Resources
- -------------------------------
Venetian Hotel, Casino and Congress Center
------------------------------------------
As of December 31, 2000 and December 31, 1999, the Company held cash and
cash equivalents of $42.6 million and $26.3 million, respectively. On such
dates, the Company also held restricted cash and investments of $2.5 million and
$11.0 million, respectively. Net cash provided by operating activities for 2000
was $81.0 million and net cash used in operating activities in 1999 was $30.1
million. The Company's operating cash flow in 2000 was negatively impacted by an
increase in trade receivables. The Company expects a more modest increase in
trade receivables during 2001 in connection with the extension of casino credit.
Capital expenditures paid from operating cash flow during 2000 were $16.4
million and capital expenditures for construction of the Casino Resort paid from
restricted project funds and operating cash flows were $12.2 million. Capital
expenditures during 1999 were $319.1 million, consisting primarily of
construction of the Casino Resort.
On September 19, 2000, the Company announced plans to construct the
Guggenheim Exhibition Hall, a 63,000 square foot structure adjacent to the
Casino Resort (the "Exhibition Hall"), to house various exhibits in conjunction
with the Guggenheim Museum Foundation. The Exhibition Hall is presently under
construction and is expected to be completed in September 2001, at an estimated
cost of $21.0 million. In addition, the Company announced plans to construct
8,000 square feet of display space within the Casino Resort to display art
masterworks from the Guggenheim Museum and the State Hermitage Museum in St.
Petersburg, Russia at an estimated cost of $6.0 million. The Bank Credit
Facility and the Company's $97.7 million credit facility secured by certain
furniture, fixtures and equipment (the "FF&E Credit Facility") each currently
allow the Company to spend up to $25.0 million per year for capital expenditures
along with unused amounts from previous years. The Company estimates total
planned capital expenditures for the Casino Resort of approximately $46.4
million during 2001. The Company will seek approval from the lenders under the
Bank Credit Facility and the FF&E Credit Facility to modify such capital
expenditure limitations. If the Company does not receive approval for the
increase in the capital expenditure limitations it will defer certain capital
expenditures to comply with the limitations.
The Company has also announced that it is in the preliminary feasibility
and design stages of a capital improvement project to add approximately 1,000
all-suite hotel rooms to the Casino Resort (the "Phase I-A Room Addition"). The
preliminary plan provides for construction of the Phase I-A Room Addition above
the Casino Resort's parking structure. In addition coinciding with the
construction of the Phase I-A Room Addition, the Phase II Subsidiary will
construct 100,000 square feet of meeting space with tentative plans to lease the
space to the Casino Resort. For the Company to proceed with this project would
require the Company and the Phase II Subsidiary to incur additional
indebtedness. Depending upon the structure of such indebtedness, this may
require the consent of certain existing lenders and modifications to certain
existing lender financial covenants. As of this date, no final budget for this
project has been determined and the Company has not entered into any agreements
to fund such project.
The Phase II Subsidiary has outstanding project payables in the amount of
$2.9 million to be funded from future equity contributions or borrowings by the
Phase II Subsidiary.
As discussed in "Item 3-Legal Proceedings" above, the Company is a party
to certain litigation matters and claims related to construction of the Casino
Resort. If the Company is required to pay any of the Construction Manager's
contested construction costs (the "Contested Construction Costs") which are not
covered by the Insurance Policy, the Company may use cash received from the
following sources to fund such costs: (i) the LD Policy, (ii) the Construction
Manager, Bovis and P&O pursuant to the Construction Management Contract, the
Bovis Guaranty and the P&O Guaranty, respectively, (iii) third parties, pursuant
to their liability to the Company under their agreements with the Company, (iv)
amounts received from the Phase II Subsidiary for shared facilities designed and
constructed to accommodate the operations of the Casino Resort and the Phase II
Resort, (v) the Sole Stockholder, pursuant to his liability under the Completion
Guaranty, (vi) borrowings under the revolver portion of the Bank Credit Facility
(the "Revolver"), (vii) additional debt or equity financings, and (viii)
operating cash flow. The Sole Stockholder has remaining liability of
approximately $5.0 million under the Completion Guaranty to fund excess
construction costs (which liability is collateralized with cash and cash
equivalents). 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.
For the next twelve months, the Company expects to fund its operations,
capital expenditures (that are unrelated to the Phase I-A Room Addition) and
debt service requirements from existing cash balances, operating cash flow and
borrowings under the Revolver. As of December 31, 2000, none of the $40.0
million Revolver availability was drawn. The Company recently obtained an
extension of the availability date of the Revolver from the lenders under the
Bank Credit Facility, from March 15, 2001 to September 15, 2001. The Company
anticipates the Revolver to be extended beyond September 5, 2001 however, there
can be no assurance that such financing arrangement will be completed during
2001. The Company has significant debt service payments due during the next
twelve months, including principal payments on its Bank Credit Facility and FF&E
Credit Facility aggregating $50.1 million and estimated total interest payments
(excluding noncash amortization of debt offering costs) of approximately $87.8
million for indebtedness secured by the Casino Resort and $15.7 million for
indebtedness secured by the Mall. In addition, the Company estimates total
capital expenditures for the Casino Resort of approximately $46.4 million during
2001. The Company anticipates that its existing cash balances, operating cash
flow and available borrowing capacity will continue to provide it with
sufficient resources to meet existing debt obligations and foreseeable capital
expenditures requirements. As mentioned above, construction of the Phase I-A
Room Addition or additional plans for the Phase II Resort would require the
Company to incur additional indebtedness.
The Bank Credit Facility and FF&E Credit Facility contain certain
covenants that require the Company to pass a number of financial tests relating
to, a