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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1997
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Commission File Number 333-42147
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LAS VEGAS SANDS, INC.
(Exact name of registration as specified in its charter)
Nevada 04-3010100
- --------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3355 Las Vegas Boulevard South, Room 1A
Las Vegas, Nevada 89109
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(Address of principal offices) (Zip Code)
(702) 733-5499
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Registrant's telephone number, including Area Code:
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 |_| No |X|
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 27, 1998 was $0.
The Company had 925,000 shares of Common Stock outstanding as of March 27,
1998.
Las Vegas Sands, Inc.
Table of Contents
Part I
Item 1. Business ................................................................................ 1
Item 2. Properties .............................................................................. 24
Item 3. Legal Proceedings ....................................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders ..................................... 24
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................... 25
Item 6. Selected Financial Data ................................................................. 26
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............................. 32
Item 8. Financial Statements and Supplementary Data ............................................. 33
Item 9. Changes in and Disagreements With Accountants On Accounting and Financial Disclosure 50
Part III
Item 10. Directors and Executive Officers of the Registrant ...................................... 51
Item 11. Executive Compensation .................................................................. 52
Item 12. Security Ownership of Certain Beneficial Owners and Management .......................... 55
Item 13. Certain Relationships and Related Transactions .......................................... 55
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ......................... 59
Signatures .............................................................................. 63
i
PART I
ITEM 1.--BUSINESS
General
Las Vegas Sands, Inc. ("LVSI") and its subsidiaries (collectively, the
"Company") are constructing and will own and operate the Venetian Casino Resort
(the "Casino Resort"), a Renaisssance 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"). As planned, the
Casino Resort will include the first all-suites hotel on the Strip with
approximately 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 500,000 net leasable square feet (the
"Mall"); and a meeting and conference facility of approximately 500,000 square
feet (the "Congress Center"). The Casino Resort will be physically connected to
the approximately 1,150,000 square foot existing 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) will be one of the largest
hotel and meeting complexes in the United States. Ground breaking for the
Casino Resort occurred in April 1997, with an opening to the general public
scheduled for April 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 hotel operations ceased. Construction
of the Casino Resort commenced in April 1997. 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 Casino Resort. Under a casino lease
(the "Casino Lease"), Venetian will lease the Casino to LVSI, which will
conduct all gaming operations in the Casino Resort. The executive offices of
LVSI are located at 3355 Las Vegas Boulevard South, Room 1A, Las Vegas, Nevada
89109 and their phone number is (702) 733-5000.
This Annual Report on Form 10-K contains certain forward-looking
statements. See "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Special Note Regarding Forward-Looking
Statements."
The Casino Resort
The Hotel
The Hotel will have approximately 3,036 single and multiple bedroom suites
situated in a 35-story, three-winged tower rising above the Casino. The lobby
will feature 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 will be approximately 655 to 735 square feet
consisting of a raised sleeping area with a bathroom and a sunken
living/working area. The suite's bi-level configuration is intended to create a
multi-function living space in which guests can sleep, work or entertain and
will include two queen-size beds or one king-size bed, a writing desk, dual
line speaker phones, a fax machine and a sitting area. Furthermore,
approximately 318 of the suites will be of larger size allowing for the
possibility of entertaining from 20 to 100 persons in the living area.
The Hotel will lease space to (or operate) approximately six restaurants
that will be located adjacent to the Casino. The Hotel is expected to include
upscale restaurants. Hotel guests also will have the option of casual dining at
a 20,000 square foot cafe, which is expected to be operated by a
nationally-recognized operator of premium casual restaurants, and at a 15,000
square foot Venetian-style market food court, both of which will be located at
the casino level of the Hotel. Live entertainment will be offered at a 50,000
square foot "Billboard Live!" entertainment complex in the Mall. Hotel guests
will have access to concierge services and express room service through
pantries that are planned for every other floor of the Hotel tower. In
addition, the Hotel will provide a variety of amenities for its guests,
including a state-of-the-art health spa, with massage and treatment rooms,
exercise and fitness areas and a beauty salon. The Hotel also will feature an
outdoor swimming complex (including five pools, spas, pool bars and cabanas)
surrounded by gardens, waterways, fountains and sculptures. The Hotel has been
designed to accommodate future expansion, including a 1,500 seat showcase
theater.
1
The Casino
The Casino will be approximately 116,000 square feet and will be situated
adjacent to the Hotel lobby. The Casino floor will be accessible from each of
the Hotel, the Mall, Congress Center, the Expo Center and the Strip. The Casino
will be marketed to attract a broad base of patrons, with a specific focus on
frequent premium gaming customers. The Company will market the Casino directly
to this gaming market segment using database marketing techniques, slot clubs
and traditional incentives, such as reduced room rates and complementary meals
and suites. The Company will offer "high roller" gaming customers premium
suites and special hotel services.
The Casino and its adjacent amenities will be stylized to resemble a
Venetian "palazzo," with architectural and interior design features
representative of Venice's Renaissance era. The ceilings in the table games
area will feature fresco-style paintings of Venetian palaces. The gaming
facilities will include approximately 2,500 slot machines of various
denominations, including the popular multi-property, linked progress games. A
high-end slot area, with a private lounge, will provide slot customers with
premium slot products and services. The Casino's approximately 114 table games
(excluding baccarat tables) will feature the traditional games of black jack,
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 will offer gaming customers an upscale
sportsbook room, a keno lounge, a poker room and an upscale baccarat pit. The
baccarat pit is specially designed for premium, "high roller" gaming, with
baccarat, black jack and roulette, a private lounge with butler service, direct
access to private cash-out windows at the Casino cage and direct access to the
Casino's credit department. Although the Company intends to target "high
roller" gaming customers, it does not expect to target the known top 50 to 100
baccarat players in the world in order to avoid the risks associated with the
amounts wagered by these players.
The Mall
The Mall will offer approximately 500,000 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 28,000 square foot retail annex adjacent
to the Casino Resort's main structure. The Mall is expected to include
approximately seven dining establishments and 55 retail stores. Visitors and
guests can enter the Mall from several different directions, including from the
Strip via a moving sidewalk or by pedestrian bridges, from the main gaming area
of the Casino via escalators, from the Expo Center through the Congress Center,
and directly from the Hotel.
The Mall has been planned to include well-known restaurants and retail
establishments to draw on brand name awareness, all offered at various price
points in order to appeal to a broad market. The success of brand name and
boutique retailers at The Forum Shops at Caesars Palace Hotel and the Fashion
Show Mall on the Strip, and the success of brand name, premium restaurants at
The Forum Shops at Caesars Palace Hotel and existing themed resorts has
demonstrated the demand in Las Vegas for quality shopping and dining.
The Company has planned for an array of quality dining experiences for the
Mall, including upscale restaurants that will offer international and American
regional cuisines. The Mall is also expected to offer themed restaurants, such
as the "Billboard Live!" Cafe. The Mall's retail offerings are expected to
include exclusive showcase boutiques, popular brand name mid-priced stores and
themed entertainment concepts. The restaurants and stores will be set along an
approximately one-quarter mile Venetian-themed streetscape, and will front on
the Venetian-themed canal running its length or will be grouped in
"piazza"-style settings. Store and restaurant facades will be designed to
project the Venetian theme, and state-of-the-art lighting will alternately
simulate a day and night sky in an open-air environment beneath the Mall's
vaulted ceiling.
Expo Center and the Congress Center
With over 1.15 million gross square feet of exhibit and meeting space,
including four exhibit halls and 22 meeting rooms, the existing 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 is constructing and will own and operate the Congress Center, an
approximately 500,000 gross square foot meeting and conference facility which
will link the Expo Center and the rest of the Casino Resort. The Congress
Center, which management expects will open concurrently with the Casino Resort,
will include an approximately 80,000 square foot column-free "Grand Ballroom,"
an approximately 13,500 square foot "Venetian Ballroom" and a meeting complex
of 42 indi-
2
vidual rooms which can be combined to create three additional ballrooms.
Together, the Expo Center and the Congress Center will 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 intends to market 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 believes that the Congress Center also
can be marketed 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 1997, approximately 1,150,000 visitors attended the trade shows and
conventions at the Expo Center during 150 show days. The Expo Center hosted 17
events on the 1996 Trade Show Week 200 list of the largest trade shows in the
United States in 1997, 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. In 1998, approximately 16 trade show
events included on the 1996 Trade Show Week 200 list and 145 show days are
scheduled for the Expo Center. For 1999, the Expo Center has already booked or
reserved 37 major trade shows and conventions over the course of 131 show days,
including approximately 16 trade shows of a size that would qualify for the
1996 Trade Show Week 200 list.
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."
The Company and Interface intend to market jointly the Hotel and Casino,
the Mall and the Expo Center. In order to establish terms for the integrated
operation of these facilities, Venetian, Grand Canal Shops Mall Construction,
LLC (the "Mall Construction Subsidiary") and Interface have entered into the
Amended and Restated Reciprocal Easement, Use and Operating Agreement (the
"Cooperation Agreement"). 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.
Under the Cooperation Agreement, Interface and Venetian will allocate expenses
shared by the Expo Center and the Casino Resort. It should be noted that trade
show and convention promoters will be 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."
3
Major Trade Show and Convention Events
Booked or Reserved for 1999 at the Expo Center (1)
Estimated
Show Day Number of Days of 1997
Name of Event Pattern Show Days the Week Attendance (2)
- ----------------------------------------------------------------------- ---------- ----------- ---------- --------------
International Winter Consumer Electronic Show (IWCES) (3) 1/7-10 4 Th-Su 95,000*
GiftSource West - Spring 1/17-20 4 Su-W 7,500
Night Club and Bar 1/19-20 2 T-W 8,000
Aqua '99 1/19-21 3 T-Th 5,000
World Floor Covering Assn. (Surfaces) (3) 1/27-29 3 W-F 37,000
Western Shoe Associates - Spring (3) 2/9-12 4 T-F 43,000
Associated Surplus Dealers/Associated Merchandise Dealers
(ASD/AMD) - Spring (3) 2/21-25 5 Su-Th 50,000
Men's Apparel Guild in California (MAGIC) - Spring (3) 3/1-4 4 M-Th 80,000*
Int'l Security Conference 3/10-12 3 W-F 12,000
National Archery 3/12-14 3 F-Su 5,000
Bedroom Show 3/17-19 3 W-F 5,000
Century 21 3/17-19 3 W-F 10,000
Amusement Showcase International 3/18-20 3 Th-S 10,000
ASI Show 3/22-24 3 M-W 15,000
International Gaming Business Expo 3/29-31 3 T-Th 10,000
Hospitality Design 4/8-10 3 Th-S 10,000
National Association of Broadcasters (NAB) (3) 4/19-22 4 M-Th 101,000*
National OTC 5/2-4 3 Su-T 7,000
Las Vegas Merchandise 5/16-19 4 Su-W 5,000
International Trucking Show (3) 5/19-21 3 W-F 31,000
Jeweler's Circular Keystone International Jewelry Show
(JCK) (3) 6/4-8 5 F-T 35,000
GiftSource West - Fall 6/13-16 4 Su-W 7,500
National Nutritional Foods 6/25-27 3 F-Su 7,500
Furniture & Decorative Expo 6/26-28 3 S-M 6,000
Billiard Congress 7/15-17 3 Th-S 7,000
Western Shoe Associates - Fall (3) 8/5-8 4 Th-Su 45,000
Associated Surplus Dealers/Associated Merchandise Dealers
(ASD/AMD) - Fall (3) 8/15-19 5 Su-Th 50,000
Men's Apparel Guild in California (MAGIC) - Fall (3) 8/30-9/2 4 M-Th 80,000*
Interbike Show (3) 9/10-13 4 F-M 35,000
Western Nursery 9/22-23 2 W-Th 10,000
Amusement and Music Operator's Assn. (AMOA) 9/23-25 3 Th-S 8,500
LV '99 Italian Furniture 9/24-27 4 F-M 5,000
True Serve (3) 10/4-8 5 M-F 20,000
Package Machinery Manufacturers' Institute
(Pack Expo West) (3) 10/18-20 3 M-W 19,000
Automotive Service Industry Assn. (ASIA) Motor and Equipment
Manufacturers' Assn. (MEMA) Automotive Parts And
Accessories Assn. (APAA) (3) 11/2-5 4 T-F 80,000*
Softbank COMDEX '99 (3) 11/15-19 5 M-F 220,000*
Aqua 2000 12/1-3 3 W-F 5,000
Total 131 1,187,000
=== =========
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(1) Shows include those contracted and those reserved, some of which are
scheduled to occur prior to the scheduled opening of the Casino Resort.
The Company believes that these shows are representative of the typical
major events at the Expo Center.
(2) Based solely on the number of attendees for the 1997 trade show or
convention events. Certain of the estimates for these shows or conventions
are marked with an asterisk because they were held at multiple locations
in Las Vegas, and not all attendees visited the Expo Center.
(3) A 1996 Trade Show Week 200 show.
4
Business and Marketing Strategy
The Company's business strategy is to (i) create a "must-see" destination
resort at a premier location at the heart of the Las Vegas 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,
(vi) target premium gaming customers, and (vii) carefully manage construction
costs and risks.
Create a "Must-See" Destination Casino Resort at the Heart of the Las
Vegas Strip
The Casino Resort, with its extensive theming, dining, shopping and
entertainment, is expected to be a "must-see" destination resort located at the
heart of the Strip. The Casino Resort is designed 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 will include 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 will feature a one-quarter mile
Venetian streetscape, with intimate "piazza"-style settings and a 630 foot
"grand" canal running its length, with gondolas and water-side cafes and
crossed by authentically-styled Venetian bridges.
The Company believes that the Casino Resort's Venetian-theming, and its
central location on the Strip will appeal to business travelers, leisure
travelers and gaming customers and will position the Casino Resort to draw
significant pedestrian traffic from the Strip. The Casino Resort will have
approximately 740 feet of frontage on the east side of the Strip and will be
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. Based on
information gathered from public sources, the Company estimates that on average
each day during 1996, approximately 57,000 vehicles passed the site of the
Casino Resort, approximately 13,000 persons watched the pirate show in front of
the Treasure Island Hotel and Casino, and approximately 43,000 persons visited
The Forum Shops at Caesars Palace Hotel.
Provide a Differentiated Superior All-Suites Product
The Hotel is expected to offer 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 will
accommodate informal business meetings and social gatherings, will offer guests
a unique, single location in which to work and entertain in close proximity to
the Expo Center and the Strip. Leisure travelers will 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, will result in a highly differentiated resort product, and provide
a competitive advantage over other Strip hotel/casino properties and resorts.
The typical Hotel suite will range 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 will consist of a
sunken living/working area and a raised sleeping area with a marble bathroom.
The suite's living/working area will include a sitting area and a writing desk
and will offer business amenities such as dual-line speaker phones, a fax
machine and dataport access. The bathrooms will be oversized, featuring a
separate bathtub and shower, dual sinks and a phone. In addition, the Hotel
will offer larger suites, including the "Presidential" and penthouse suites,
with exclusive services such as butlers.
Capitalize on the Link to the Expo Center and the Congress Center
The Casino Resort will be 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
are expected to provide recurring, predictable demand for mid-week room nights
from business travelers. During 1997, approximately 1,150,000 visitors attended
trade shows and conventions at the Expo Center. Through the Cooperation
Agreement, the owner of the Expo Center has agreed to market the Casino Resort
to promoters of Expo Center trade shows, conventions and other events as the
"headquarters hotel" for such events. The Casino Resort will offer attendees of
events at the Expo Center and the Congress Center the most convenient hotel
accommodations in Las Vegas. The Expo Center already has booked or reserved 37
trade shows, conventions and business events for the calendar year 1999,
covering 131 separate show days. It should be noted that trade show and con-
5
vention promoters will be under no obligation to select the Casino Resort as
the "headquarters hotel" for their events. See "Item 13--Certain Relationships
and Related Transactions--Possible Conflicts of Interest." In addition to being
an expected source of room demand for the Hotel, the Expo Center and the
Congress Center are expected to draw pedestrian traffic from guests of hotels
throughout Las Vegas, providing a significant source of traffic for the Casino
and the Mall.
Appeal to a Higher Budget Customer Mix
Management expects 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 expects to reduce 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 is expected to appeal 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 will capture 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
the Casino and (iv) visitors attracted to the Casino Resort's unique,
Venetian-themed facilities. The Casino Resort is planned to include a
concentration of some of the finest restaurants in Las Vegas, brand name and
exclusive boutique shopping, and themed entertainment concepts. Letters of
intent have been signed with several well-known restauranteurs, such as
Wolfgang Puck, to operate their "signature" restaurants at the Casino Resort.
In addition, the Company has entered into a lease for the "Billboard Live!"
entertainment complex, which is affiliated with Billboard Magazine. Management
believes that the combination of brand name awareness and extensive theming
will generate 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 will offer gaming customers a unique Las Vegas
experience. The Company intends to market the Casino to frequent premium gaming
customers. In particular, the Company will seek 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 will be 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 will be the first all-Suites resort on the Strip
with facilities and amenities designed from inception to attract and serve
premium gaming customers.
Carefully Manage Construction Costs and Risks
The Casino Resort is budgeted to cost approximately $1.065 billion to
develop, equip and open (such costs include approximately $70.0 million for
certain heating and air conditioning-related and other equipment (the "HVAC
Equipment") to be owned by a third party, but exclude land acquisition costs).
As of December 31, 1997, approximately $228.1 million of this total budgeted
cost has been expended or incurred. Of the amount expended and incurred,
approximately $95.3 million represents cash contributed to the Company by the
Sole Stockholder, through affiliates of the Company.
As of December 31, 1997, (i) the foundation for the principal structure of
the Casino Resort has been constructed and the superstructure is under
construction and (ii) pursuant to the Construction Management Contract (as
defined herein), and otherwise, trade contracts in excess of $303.7 million for
various components of the project, including excavation, foundations,
structural steel, mechanical and plumbing systems and structural concrete have
been entered into or negotiated. In order to manage its construction risk, the
Company has entered into various agreements designed to protect it against
construction delays and cost overruns (including (i) a guaranteed maximum
6
price construction management contract (the "Construction Management
Contract"), which protects the Company against certain cost overruns in the
amount of $547.8 million (or approximately 52% of the expected cost of the
Casino Resort) with Lehrer McGovern Bovis, Inc. (the "Construction Manager"),
(ii) guaranties of certain of the Construction Manager's obligations (with
certain limited exceptions) by its parent corporation, Peninsular and Oriental
Steam Navigation Company ("P&O"), and (iii) a liquidated damages insurance
policy for costs of certain construction delays (the "Liquidated Damages
Insurance"). The budget for the Casino Resort contains a Construction Manager's
construction budget contingency and an owner's contingency totaling $66.1
million in the aggregate that can be used to cover cost overruns. Further, the
Sole Stockholder has provided a $25.0 million collateralized completion
guaranty (the "Completion Guaranty"). The Completion Guaranty is not available
to fund any increases in costs attributable to discretionary "scope changes."
Any such "scope changes" may only be implemented if the Company demonstrates
that it has sufficient available funds to cover the anticipated increased
costs, or if the Sole Stockholder increases his Completion Guaranty by such
amount. To the extent that any cost overruns are not covered by the
Construction Management Contract or the other protections described above, such
cost overruns could be substantial and have a material adverse effect on the
Company's liquidity and results of operations and its ability to complete the
Casino Resort.
To further ensure that there are sufficient funds to construct the Casino
Resort as planned and that such funds are disbursed appropriately, certain
lenders of the Company have entered into a funds disbursement and
administration agreement (the "Disbursement Agreement") to establish the
conditions for and the sequencing of funding construction costs and procedures
for approving construction change orders and amendments to the construction
budget and schedule. The Disbursement Agreement provides that project costs
(other than costs for the HVAC Equipment, furniture, fixtures and other
equipment) will, generally, be funded first from a $95.3 million cash
contribution by the Sole Stockholder and his affiliates (the "Cash
Contribution") and the net cash proceeds of the issuance of $97.5 aggregate
principal amount of the Company's 141/4% Senior Subordinated Notes due 2005
(the "Senior Subordinated Notes"), and thereafter on a pro rata basis from the
proceeds of: (i) borrowings of approximately $150.0 million under a secured
bank credit facility (the "Bank Credit Facility"), (ii) borrowings of
approximately $140.0 million under a secured mall construction loan facility
(the "Mall Construction Loan Facility") and (iii) $425.0 aggregate principal
amount of the Company's 121/4% Mortgage Notes due 2004 (the "Mortgage Notes"
and, together with the Senior Subordinated Notes, the "Notes"). The HVAC
Equipment will be funded through the Disbursement Agreement from a separate
commitment from Atlantic-Pacific Las Vegas, LLC (the "HVAC Provider"), subject
to limited exceptions.
Under the Disbursement Agreement, a subsidiary of Tishman Corporation
("Tishman"), one of the nation's leading construction managers and largest
hotel developers and owners, acts as construction consultant (the "Construction
Consultant") to such lenders and is required to review each request by the
Company for the disbursement of funds. The disbursement conditions under the
Disbursement Agreement provide that, subject to certain exceptions, funds will
be disbursed to the Company only if it is determined that construction is on
schedule and that there are sufficient available funds to complete the Casino
Resort in accordance with the construction drawings and budget.
The Las Vegas Market
Las Vegas is one of the fastest growing and largest entertainment markets
in the country. Las Vegas hotel occupancy rates are among the highest of any
major market in the United States. According to the Las Vegas Convention and
Visitors Authority ("LVCVA"), the number of visitors traveling to Las Vegas has
increased at a steady and significant rate for the last ten years from 17.2
million visitors in 1988 to 30.5 million visitors in 1997, a compound annual
growth rate of 6.5%. Aggregate expenditures by Las Vegas visitors increased at
a compound annual growth rate of 11.3% from $8.6 billion (or $531 per visitor)
in 1987 to $22.5 billion (or $760 per visitor) in 1996. In addition, the
population of Las Vegas has grown from approximately 863,000 in 1990 to
approximately 1,193,000 in 1997, 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.
7
Las Vegas Convention Market Trends
[Graph showing Number of Delegates and Number of Conventions]
Number of Conventions
1990 1011
1991 1655
1992 2199
1993 2443
1994 2662
1995 2826
1996 3827
1997 3749
Number of Delegates [millions]
1990 1.74
1991 1.97
1992 1.97
1993 2.44
1994 2.68
1995 2.92
1996 3.31
1997 3.52
Source: LVCVA
Las Vegas as a Trade Show, Convention and Meeting Destination
In 1996, 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
1988, approximately 1.7 million persons attended trade shows and conventions in
Las Vegas and spent approximately $1.2 billion. In 1997, the number of trade
show and convention attendees had increased to more than 3.5 million and the
amount spent by trade show and convention attendees was approximately $4.4
billion.
Trade shows are held for the purpose of getting sellers and buyers of
products or services together for the purpose of conducting business. Trade
shows differ from conventions in that trade shows typically require substantial
amounts of space for exhibition purposes and circulation. Conventions generally
are group gatherings of companies or groups that require less space for
breakout meetings and general meetings of the overall group. Las Vegas offers
trade shows and conventions a unique infrastructure for handling the world's
largest shows, including the concentration of 45,000 hotel rooms located on the
Strip, two convention centers 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
300,000 square feet of meeting and convention space to the Las Vegas Convention
Center. The expansion of the Las Vegas Convention Center is expected to bring
convention and exhibit space in Las Vegas to over 3.5 million square feet. In
addition, The MGM Grand Hotel and Casino has announced plans to construct
conference and meeting facilities of approximately 300,000 gross square feet.
Management believes that Las Vegas will continue to evolve as the country's
preferred trade show and convention destination.
Expanding Hotel Market
During 1997, Las Vegas was among the most popular vacation destinations in
the United States. Following the opening of The Mirage in 1989, Las Vegas
experienced a period of rapid hotel development with the number of hotel and
motel rooms in Las Vegas increasing by 72% from 61,394 in 1988 to 105,347 in
1997. Other major properties on the Strip opening over this time period include
Excalibur Hotel and Casino, The MGM Grand Hotel and Casino, the Treasure Island
Hotel and Casino, Luxor Hotel, The Monte Carlo Resort and Casino, The
Stratosphere Hotel and Casino and New York-New York Hotel and Casino. In
addition, a number of existing properties on the Strip embarked on expansions,
including Harrah's, Flamingo Hilton Las Vegas and The Las Vegas Hilton. Despite
this significant increase in the supply of hotel rooms in Las Vegas, hotel room
occupancy rates (which exclude motels) exceeded on average 92.1% for the years
1993 to 1997, averaged 93.4% in 1996 and 90.3% in 1997. By the end of 1999, it
is anticipated that, in addition to the Casino Resort, at least another 19,800
hotel rooms will be opened on the Strip, including the Bellagio, Paris Casino
Resort and Mandalay Bay Resort under construction, the expansions at Caesars
Palace Hotel and Harrah's, and the planned expansions of Hard Rock Hotel and
8
Casino, Aladdin Hotel and Casino and The MGM Grand Hotel and Casino. 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. In the event that the increased concentration
does not substantially increase visitor interest, overcapacity at these casino
hotels and resorts could lead to price competition in the form of reduced room
rates. Lost revenue from such reduced room rates could materially impact the
Company's financial condition and results of operations.
Las Vegas Hotel Room Inventory and Occupancy Rates
[Graph showing Hotel/Motel Room Inventory and Total Occupancy Percentage(1)]
Hotel/Motel Room Inventory
1990 73,000
1991 76,000
1992 75,500
1993 87,000
1994 89,000
1995 90,000
1996 98,000
1997 105,500
Total Occupancy Percentage(1)
1990 85%
1991 81%
1992 84%
1993 88%
1994 89%
1995 88%
1996 91%
1997 90%
(1) Occupancy is calculated based on the inventory of Las Vegas Hotel rooms, and
does not include motel rooms.
Source: LVCVA
The table below indicates mid-week and weekend occupancy rates for all Las
Vegas hotels and motels. While weekend occupancy rates have remained above 90%
for the past 10 years, mid-week occupancy rates have trended upward from below
80% to near 85%. Management believes that due to the lower mid-week demand
demonstrated by the table, many hotels and motels offer reduced room rates and
rely on lower budget tour groups for occupancy.
Occupancy Rates Mid-Week and Weekend (all Las Vegas Hotels)
[Graph showing Las Vegas Hotel Occupancy Rates]
Mid-Week Weekend
1987 78.8% 94.5%
1988 81.4% 93.5%
1989 81.6% 94%
1990 80.9% 93.6%
1991 76% 89.8%
1992 80.4% 92%
1993 87.6% 94.2%
1994 86.5% 94.4%
1995 85.6% 93.5%
1996 88.7% 94.4%
1997 84.1% 91.6%
Source: LVCVA
9
Expanding Gaming Market
The expansion of gaming in the United States has been accompanied by an
increasing acceptance of gaming as a form of entertainment. Gaming has
continued to be a strong and growing business in Las Vegas. Since 1988, Las
Vegas gaming revenues have increased at a compound annual rate of 7.2% from
$3.1 billion in 1988 to $6.2 billion in 1997. With the increased popularity and
public acceptance of gaming, Las Vegas has sought to increase its popularity as
an overall vacation resort destination.
The following table sets forth certain information derived from published
reports of the LVCVA and the Nevada State Gaming Control Board (the "NGCB")
concerning Las Vegas Strip gaming revenues and visitor volume and hotel data
for the years 1988 to 1997. As shown in the table, the Las Vegas market has
achieved significant growth in visitor volume and gaming and non-gaming tourist
revenues and favorably absorbed significant additional room capacity despite
the occurrence of a series of adverse economic, regulatory and competitive
events during the past decade, such as the recession of the early 1990s, the
expansion of gaming into new jurisdictions, the modification of existing
regulations in other jurisdictions, and the expansion of Native American
gaming.
10
Historical Data for Las Vegas Gaming Industry (1)
1988 1989 1990 1991
--------------- --------------- --------------- ---------------
Las Vegas visitor volume 17,199,608 18,129,684 20,954,420 21,315,116
Percentage change 6.1% 5.4% 15.6% 1.7%
Total visitor expenditures(2) $10,039,448 $11,912,941 $14,320,746 $14,326,554
Percentage change 16.7% 18.7% 20.2% 0.0%
Las Vegas Strip gaming
revenue(2) $ 1,944,401 $ 2,070,328 $ 2,583,314 $2,539,995
Percentage change 10.9% 6.4% 24.8% (1.7)%
Las Vegas convention
attendance 1,702,158 1,508,842 1,742,194 1,794,444
Percentage change 1.5% 11.4% 15.5% 3.0%
Las Vegas hotel occupancy
rate 89.3% 89.8% 89.1% 85.2%
U.S. hotel occupancy rate(3) 63.4% 64.3% 63.5% 61.8%
Las Vegas room supply 61,394 67,391 73,730 76,879
Percentage change 5.0% 9.8% 9.4% 4.3%
1992 1993 1994 1995 1996 1997
--------------- --------------- --------------- --------------- --------------- ---------------
Las Vegas visitor volume 21,886,865 23,522,993 28,214,362 29,002,122 29,636,631 30,464,635
Percentage change 2.7% 7.5% 19.9% 2.8% 2.2% 2.8%
Total visitor expenditures(2) $14,686,644 $15,127,267 $19,163,212 20,686,800 22,533,258 N/A
Percentage change 2.5% 3.0% 26.7% 8.0% 8.8%
Las Vegas Strip gaming
revenue(2) $2,625,274 $ 2,896,630 $ 3,485,307 $ 3,629,036 $ 3,579,673 $ 3,809,395
Percentage change 3.4% 10.3% 20.3% 4.1% (1.4%) 6.4%
Las Vegas convention
attendance 1,969,435 2,439,734 2,684,171 2,924,879 3,305,507 3,519,424
Percentage change 9.8% 23.9% 10.0% 9.0% 13.0% 6.5%
Las Vegas hotel occupancy
rate 88.8% 92.6% 92.6% 91.4% 93.4% 90.3%
U.S. hotel occupancy rate(3) 62.6% 63.5% 64.7% 65.0% 65.1% 64.5%
Las Vegas room supply 76,523 86,053 88,560 90,046 99,072 105,347
Percentage change (0.5)% 12.5% 2.9% 1.7% 10.0% 6.3%
- ------------
(1) Sources: LVCVA and the NGCB for the fiscal years ended December 31.
(2) In thousands.
(3) Source: Smith Travel Research for the years ended December 31.
11
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
$2.8 billion in 1987 to $5.8 billion in 1996, the percentage of an average
tourist's budget spent on gaming has declined from 32.6% in 1987 to 25.8% in
1996, with non-gaming tourist revenues increasing from $5.8 billion in 1987 to
$16.7 billion in 1996. 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 commenced or completed
several infrastructure improvements to accommodate the increase in travel to
Las Vegas by all modes of transportation. According to the LVCVA, in 1996
visitors to Las Vegas arrived by the following methods of transportation: 44%
by air; 41% by auto; 7% by bus; and 8% by recreational vehicle.
McCarran International Airport Expansion. During the past five years, the
facilities of McCarran International Airport have been expanded to accommodate
the increased number of airlines and passengers which it services. The number
of passengers traveling through McCarran International Airport has increased
from 16.2 million in 1988 to 30.3 million in 1997, a compound annual rate of
6.9%. A $200 million expansion project was completed in 1995, allowing for the
accommodation of up to 30 million travelers annually. Long-term expansion plans
for McCarran International Airport provide for additional runway and related
areas (a new runway was completed in October 1997), three new satellite
concourses, 65 additional gates, improved public transportation roads and other
infrastructure leading from McCarran International Airport to the Strip and
other facilities which would allow McCarran International Airport to handle up
to 60 million Las Vegas visitors annually. To the extent that McCarran
International Airport is not expanded in accordance with its plans, the
occupancy rates and average daily hotel room rates in Las Vegas could be
adversely affected due to the planned construction of new hotel rooms.
Spring Mountain Road Improvements. A new high speed off-ramp is being
constructed from Interstate 15 (the primary vehicular access from Los Angeles)
onto Spring Mountain Road to ease traffic congestion on the Strip. Spring
Mountain Road becomes Sands Avenue and intersects the Strip adjacent to the 45
acre project site (the "Project Site"). This major interchange will be located
approximately one-half mile from the Casino Resort and is scheduled to be
completed in 1999.
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 will compete 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 will include themed resorts on the Strip,
such as Caesars Palace Hotel, The Mirage, the Treasure Island Hotel and Casino,
Harrah's, The MGM Grand Hotel and Casino, the New York-New York Hotel and
Casino, The Monte Carlo Resort and Casino, Bally's Casino Resort Las Vegas and
the Excalibur Hotel and Casino. In addition, the construction of several new
major resort projects that will compete with the Casino Resort and the
expansion of several existing resorts recently have commenced or have been
announced. These include the Bellagio, Paris Casino Resort and Mandalay Bay
Resort under construction, expansions at Caesars Palace Hotel and Harrah's and
the planned expansions of Hard Rock Hotel and Casino, Aladdin Hotel and Casino
and The MGM Grand Hotel and Casino. These projects and others are expected to
add approximately 19,800 hotel rooms to the Las Vegas inventory by the end of
1999. Finally, the Casino Resort will compete with a planned second casino
resort to be owned by a subsidiary of the Company (the "Phase II Resort"), to
the extent its business is not complementary to that of the Casino Resort. The
future operating results of the Company could be adversely affected by excess
Las Vegas room, gaming, conference center and trade show capacity.
The Company believes that themed resorts are generally more successful at
generating high volume traffic and higher revenues and operating income when
compared with large-scale non-themed properties in Las Vegas.
12
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 will be 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 will benefit 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 will provide 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 will be
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 will also compete, to some
extent, with other hotel/casino facilities in Nevada and in Atlantic City, with
hotel/casino facilities elsewhere in the world and with state lotteries. In
addition, certain states have recently legalized, and others may legalize,
casino gaming in specific areas, and passage of the Indian Gaming Regulatory
Act in 1988 has led to rapid increases in Native American gaming operations.
Such proliferation of gaming venues could significantly and adversely affect
the business of the Company. In particular, the legalization of casino gaming
in or near metropolitan areas, such as New York, Los Angeles, San Francisco and
Boston, from which the Company intends to attract customers, could have a
material adverse effect on the business of the Company.
Trade Show and Convention Facilities
The Expo Center and Las Vegas generally compete, and the Congress Center
will 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 competes, and the Congress Center will compete, with the
Las Vegas Convention Center, which is located off the Strip and currently has
1.3 million gross square feet of convention and exhibit facilities. An
expansion of 300,000 square feet of meeting and exhibition space is planned for
the Las Vegas Convention Center for 1998. In addition, The MGM Grand Hotel and
Casino has announced plans to construct new conference and meeting facilities
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 expected to be the Congress Center's primary competition.
However, because none of these hotel/resorts plans to offer convention and
trade show facilities on the same relative size as the Expo Center (over 1.15
million gross square feet), the Las Vegas Convention Center 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. However, the ability of
any such competitor to offer such show facilities equal to the nearly 1.65
million combined gross square footage of the Expo Center and the planned
Congress Center is limited by any such competitor's location and available
contiguous undeveloped land. In addition, trade show and convention centers
book major events three to five years in advance. As a result, any newly
developed trade show and convention facility would experience a significant
vacancy period before events would commit to any such facility. The Company
believes this vacancy period acts as a barrier to entry into the trade show and
convention business by private developers.
Mall
The Mall will compete with both themed resorts which offer shopping,
dining and entertainment opportunities to their patrons and other retail malls
in or near Las Vegas. The direct competition of the Mall will include The Forum
Shops at Caesars Palace Hotel and other similar themed mall attractions whose
planned construction has been announced, such as the mall to be constructed on
the site of the Aladdin Hotel and Casino. The Forum Shops at Caesars Palace
Hotel has recently undergone an expansion of approximately 250,000 square feet.
The Mall also will compete with The Fashion Show Mall, a more traditional mall,
located near the Casino Resort. The Fashion
13
Show Mall is currently undergoing or plans to undergo expansions which will
almost double such facility's size. The Mall also will compete with the planned
retail, dining and entertainment mall in the Phase II Resort.
Construction Schedule and Budget
Formal ground-breaking for the Casino Resort occurred in April 1997 with
an opening to the general public scheduled for April 1999. The Casino Resort is
expected to be developed on a stand-alone basis as the first phase of the
planned two phase redevelopment of the Sands. In the planned second phase of
the redevelopment, it is contemplated that a subsidiary of Venetian (the "Phase
II Subsidiary") will construct and develop the Phase II Resort, which also is
planned to be a themed resort. The completion and full operation of the Casino
Resort is not contingent upon the subsequent financing or completion of the
Phase II Resort, and the Casino Resort has all the attributes and facilities to
operate as a stand-alone resort. See "Item 13--Certain Relationships and
Related Transactions."
The Casino Resort (including the HVAC Equipment) is budgeted to cost
approximately $1.065 billion, which includes $637.0 million of construction
costs and $428.0 million of other costs (including furniture, fixtures and
equipment, certain so-called "soft" construction costs (which include fees of
architects, attorneys and other professionals), costs of obtaining required
governmental approvals, pre-opening expenses, construction period interest and
other costs that are not so-called "hard" construction costs, but excluding
land acquisition costs). In order to manage its construction risk, the Company
has entered into various agreements designed to protect it against construction
delays and cost overruns. The Company and the Construction Manager have entered
into the Construction Management Contract pursuant to which the Construction
Manager has agreed to construct the Casino Resort (with certain exceptions, but
including the HVAC Equipment) for a guaranteed maximum price of $547.8 million
(subject to certain conditions and limitations, such as an exclusion from the
guaranteed maximum price of cost overruns due to "scope changes"). The
Construction Management Contract and the guaranteed maximum price does not
include certain construction costs, including $69.7 million of owner managed
construction costs. The Company believes that the construction budget is
reasonable, and the Construction Management Contract contains certain
incentives designed to put downward pressure on the construction budget and
actual construction costs; however, given the risks inherent in the
construction process, it is possible that construction costs could be
significantly higher. If construction costs do exceed the amounts set forth in
the construction budget, potential sources to pay such excess include:
(i) a Construction Management Contract contingency of approximately $26.1
million;
(ii) the owner's contingency of approximately $40.0 million;
(iii) the Liquidated Damages Insurance and proceeds of other (e.g.,
casualty) insurance policies;
(iv) the Construction Manager, Bovis, Inc., the parent of the
Construction Manager ("Bovis"), and P&O, pursuant to their liability
to the Company under the Construction Management Contract, the
guaranty by Bovis of the obligations of the Construction Manager
under the Construction Management Contract (the "Construction
Management Contract Guaranty") and the guaranty by P&O of the
obligations of Bovis under the Construction Management Contract
Guaranty (the "P&O Guaranty"), respectively;
(v) other third parties pursuant to their liability to the Company under
their agreements with the Company; and
(vi) the Sole Stockholder, pursuant to his liability under the
collateralized Completion Guaranty of up to $25.0 million.
As of December 31, 1997, (i) pursuant to the Construction Management
Contract, and otherwise, trade contracts in excess of $303.7 million for
various components of the project, including excavation, foundations,
structural steel, mechanical and plumbing systems and structural concrete had
been entered into or negotiated, (ii) the foundation for the principal
structure of the Casino Resort had been constructed and the superstructure is
under construction and (iii) approximately $228.1 million of the total project
cost of $1.065 billion had been expended.
Advertising and Marketing
The Company has a $9.4 million pre-opening marketing and advertising
budget, including a planned pre-opening marketing campaign targeted at select
core markets such as Southern California. To date, the Company has spent $2.0
million to create the Casino Resort's preview center (the "Preview Center"),
which opened in August 1997 and includes models of the Casino Resort and a full
scale model suite. The Company intends to use the Preview
14
Center to market the Casino Resort and Expo Center events. The Company will
advertise in many types of media, including television, radio, newspapers,
magazines and billboards. The pre-opening advertising will 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. It is also expected that Mall tenants, such as "Billboard Live!"
will pursue their own general advertising and promotional activity, which the
Company expects to benefit the Mall. The Company will also actively engage in
direct marketing which will be targeted at specific market segments, such as
the meeting, convention and trade show market and the premium gaming market,
and data base marketing which will focus on high-frequency, high-margin market
segments such as the "high-roller" gaming market.
Design and Construction Team
The Company has assembled what it believes to be a highly qualified team
of specialists to design and construct the Casino Resort.
Lehrer McGovern Bovis, Inc.
The Casino Resort is being constructed by Lehrer McGovern Bovis, Inc., a
leading international construction concern. The Construction Manager is an
indirectly owned subsidiary of Bovis whose ultimate parent company is P&O. The
Construction Manager is primarily engaged in the business of providing
construction management services. The Construction Manager also provides
construction consulting, project and program management, preconstruction,
estimating, design-build and mortgage loan monitoring services. Major market
sectors include commercial, education, transportation, sports and recreation,
healthcare, research and development, correctional, civic and cultural.
Services are performed under contracts whereby the Construction Manager acts as
an agent for an owner supervising the construction activity of trade
subcontractors and others. Projects are also performed under fixed or
guaranteed maximum price arrangements and on certain of these projects, the
Construction Manager may contract directly with trade subcontractors performing
the construction activities.
Bovis
Bovis has worked on a number of hotel and resort projects throughout the
world including the Trump Castle Expansion program and the Atlantic City
Seaside Resort in Atlantic City, the Embassy Suites Hotels in New York, La
Jolla, California and Washington, D.C., the Parc Fifty Five Hotel in San
Francisco, California, the Hyatt Regency Grand Cypress and Universal Studios
Florida Theme Park in Orlando, Florida, the 1996 Summer Olympic Games in
Atlanta, Georgia, the Grand InterContinental Hotel in Yokohoma Japan, The
Langham and Canary Wharf in London, England, and Euro Disney Theme Park in
France.
P&O
P&O is a corporation based in the United Kingdom and is listed on the
London Stock Exchange. P&O is a holding company which through its subsidiaries
provides a variety of services throughout the world. P&O's businesses include
operating cruise ships and ferries, providing container, cargo and bulk
shipping services, home construction and building and managing construction
projects. Under United Kingdom accounting standards (which differ from
generally accepted accounting standards in the United States ("U.S. GAAP"), P&O
reported that it earned a profit of \P250.6 million on revenues of \P7,090.8
million in 1996 and had net operating assets of \P4,726.4 million at December
31, 1996. Under U.S. GAAP, the Construction Manager reported that it had net
income of $5.7 million on revenues of $703.2 million in 1996 and had total
assets of $248.7 million at December 31, 1996.
Architects
Wimberly Allison Tong & Goo ("WATG") and The Stubbins Associates Design
Group ("TSA") are the principal architects for the Casino Resort. WATG is an
architectural, planning and consultant firm active throughout the world. WATG
specializes in the design and planning of resorts and hotels, and in the
related fields of entertainment and leisure design, new town and environmental
design, residential projects from high to low density, mixed-use and retail
centers, office buildings, conference and recreational facilities. WATG has
designed and completed projects in over 65 countries, including The Palace of
the Lost City in South Africa, The Ritz-Carlton Laguna Niguel in California,
Hotel Bora Bora in French Polynesia, Shangri-La Garden Wing in Singapore, Grand
Hyatt Bali in Indonesia, Cheju Shilla Hotel in South Korea, Hyatt Regency Kauai
in Hawaii, Four Seasons Chinzan-so in Tokyo, and Disney's Grand Floridian Beach
Resort in Orlando.
TSA is an international architecture, planning and interior design firm.
TSA's professional services include: feasibility studies, programming and
master planning; architectural, interior and landscape design; and technical
15
services including construction documentation and construction administration.
Among TSA's completed hotel/ casino projects are: the Spa at Bally's Park Place
Hotel and Casino and the interior design for Harrah's Marina Hotel Casino in
Atlantic City. In addition, TSA was the principal architect for the Expo
Center.
Tishman
Tishman Construction Corporation of Nevada, a subsidiary of Tishman, is
providing construction management consulting services on behalf of the various
lenders, including pre-construction consulting project analysis. The
Construction Consultant also has agreed to review, on behalf of the lenders,
contribution plans and the progress of construction. In addition, the
Construction Consultant will review and approve, on behalf of the lenders,
proposed contracts, proposed plan changes, proposed budget changes and
disbursement requests during the course of construction. Tishman is one of the
nation's leading construction companies and is one of the nation's largest
hotel developers and owners. As a developer and owner, Tishman has developed
5,665 rooms around the country in various types of lodging markets including
downtown commercial, convention and resort hotels. In its capacity as owner and
builder of hotels, Tishman has worked with virtually every major hotel
operator/owner including Hilton, Sheraton, Westin, Hyatt, Marriott, Ritz
Carlton, Holiday Inn Crown Plaza, Four Seasons, The Walt Disney Company, Golden
Nugget, Nikko Hotels International, Fairmont and Loews.
Other Consultants
Wilson & Associates, Inc. ("Wilson") and Dougall Designs ("Dougall") are
designing the interior of the Casino Resort. Wilson specializes in the interior
architectural design of hotels, restaurants, clubs and casinos and offers a
full range of interior architectural design services from initial space
planning and design through construction documents and construction
administration. Wilson has designed and installed more than 75,000 guest rooms
in over 150 hotels world-wide. Wilson's interior design credits include The MGM
Grand Hotel and Casino, The Mirage Resorts' Beau Rivage and Caesars Palace
Hotel in Atlantic City and Las Vegas.
Dougall specializes in the interior design of casino resorts. Dougall's
projects in Las Vegas include The Luxor, The Monte Carlo Resort and Casino, The
Forum Shops at Caesars Palace Hotel, Stardust Resort and Casino and Harrah's.
Martin & Peltyn ("Martin & Peltyn") is providing structural engineering
services in connection with the construction of the Casino Resort. Martin &
Peltyn has provided structural engineering services for over twenty hotel/
casinos in the United States, including the following Las Vegas resorts: The
MGM Grand Hotel and Casino, The Mirage, the Treasure Island Hotel and Casino,
Tropicana Resort and Casino and The Las Vegas Hilton.
Agreements Relating to the Casino Resort
Construction Management Contract
The Company and the Construction Manager have entered into the
Construction Management Contract for the construction (but not the design) of
the Casino Resort (exclusive of certain demolition work, certain furniture,
fixtures and equipment, the fabrication of certain theming elements, the
parking garage/electrical substation facility and certain other items, the
aggregate cost of which is approximately $517.7 million) for a guaranteed
maximum price (the "GMP"). To the extent actual costs incurred or expended in
connection with the construction of the items covered by the Construction
Management Contract exceed the GMP, then, subject to certain limitations and
exceptions, the Construction Manager is liable for such excess. As of the date
hereof, the GMP (the "Initial GMP"), is approximately $547.8 million, including
a 5% contingency amount. After (i) the completion by the Company's architects
and engineers, and approval by the Company, of the final design documents that
set forth in detail the plans and specifications for the Casino Resort and (ii)
the execution of trade contracts for 90% (by dollar amount) of the trade
contracts portion of the GMP, a final GMP ("Final GMP") will be calculated by
adjusting the Initial GMP to take into account (among other things): (a)
certain "scope changes" or other changes implemented at the request of the
Company; (b) the amount by which the actual aggregate amount of the signed
trade contracts is less than the amount allocated to such contracts in the
Initial GMP; and (iii) a reduction in the contingency amount from 5% to 3%. The
GMP does not include the construction management fee to be paid to the
Construction Manager or the fee payable to the Construction Manager's ultimate
parent, P&O, for the P&O Guaranty. The GMP is to be appropriately increased to
reflect (a) deficiencies or changes in the drawings prepared by the Company's
architects and engineers, and (b) Company-mandated "scope changes" and "change
orders."
The Company will pay the Construction Manager a construction management
fee of 1-1/2% of the Final GMP, payable in monthly installments commencing in
May 1997. In addition, upon final completion of the Casino Resort,
16
if the total construction costs covered by the Construction Management Contract
fall below the Final GMP, the savings will be allocated 50% to the Company and
50% to the Construction Manager. The Company has paid P&O a $6.5 million fee
for the P&O Guaranty.
The obligations of the Construction Manager under the Construction
Management Contract are guaranteed by Bovis, pursuant to the Construction
Management Contract Guaranty, and Bovis's obligations under such guaranty are
guaranteed by P&O, pursuant to 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, only the insurers under the Liquidated
Damages Insurance procured by the Construction Manager on behalf of the Company
(and not the Construction Manager, Bovis or P&O), subject to certain conditions
and exceptions (including the failure of the Construction Manager to make "good
faith efforts" to prevent or mitigate any delay), are liable for liquidated
damages, and (iii) Bovis and P&O are liable for liquidated damages only to the
extent, if any, that the Construction Manager misses the required deadline by
more than 120 days.
Liquidated Damages Insurance
The Construction Manager has obtained on behalf of the Company (and at the
Company's expense) the Liquidated Damages Insurance. The Liquidated Damages
Insurance covers liquidated damages for any delay in achieving "Substantial
Completion" (the stage in the progress of the development of the Casino Resort
when it is sufficiently complete, including the receipt of necessary permits,
licenses and approvals, so that all aspects of the Casino Resort can be open to
the general public) beyond April 1999 (the "Required Completion Date") as
assessed under the Construction Management Contract, provided that the
Liquidated Damages Insurance does not cover liquidated damages with respect to
the first 30 days of any delay in achieving Substantial Completion by the
Required Completion Date. Commencing with the 31st day of any such delay, and
continuing until the 60th day thereof, the Company will receive under the
Liquidated Damages Insurance approximately $300,000 per day until Substantial
Completion is achieved. Commencing with the 61st day of any such delay, and
continuing until the 120th day thereof, the Company will receive under the
Liquidated Damages Insurance approximately $250,000 per day until Substantial
Completion is achieved. The Liquidated Damages Insurance does not cover
penalties assessed after the 120th day of any such delay. Additionally, the
Liquidated Damages Insurance contains various exceptions. For example, the
Liquidated Damages Insurance does not cover delays caused by (i) certain events
of "force majeure" (with respect to some of which the Company will have other
insurance coverage), (ii) any failure by the Construction Manager to make "good
faith efforts" to timely achieve Substantial Completion and to avoid or
mitigate any delay when an event likely to cause a delay occurs (which failure
is a breach by Construction Manager under the Construction Management Contract
with respect to which the Construction Manager, Bovis and P&O, pursuant to the
Construction Management Contract, Construction Management Contract Guaranty and
the P&O Guaranty, respectively, are jointly and severally liable for damages)
and (iii) the "insolvency and/or financial default" of the Construction
Manager, the Company, any trade contractor or any other person or entity.
Disbursement Agreement
LVSI, Venetian, the Mall Construction Subsidiary, First Trust National
Association, as Mortgage Note trustee (the "Mortgage Note Trustee"), The Bank
of Nova Scotia, as administrative agent under the Bank Credit Facility (the
"Bank Agent"), the lender under the Mall Construction Loan Facility (the "Mall
Construction Lender"), The Bank of Nova Scotia, as disbursement agent (the
"Disbursement Agent") and the HVAC Provider have entered into a disbursement
agreement (the "Disbursement Agreement"). The Disbursement Agreement sets forth
the material obligations of the Company to construct and complete the Casino
Resort and establishes a line item budget for the Casino Resort and a schedule
for construction of the Casino Resort. The Disbursement Agreement also
establishes the conditions to, and the relative sequencing of, the making of
disbursements from the Cash Contribution, the proceeds from the offering of the
Notes, the Bank Credit Facility, the Mall Construction Loan Facility and the
funding commitment of the HVAC Provider, and establishes the obligations of the
Mortgage Note Trustee, the Bank Agent, the Mall Construction Lender and the
HVAC Provider to make disbursements under their respective funding commitments
upon satisfaction of such conditions. The Disbursement Agreement further sets
forth (i) the mechanics for allocating disbursement requests among the funding
sources, (ii) the mechanics for approving change orders and amendments to the
project budget and schedule during the construction period, (iii) certain
representations, warranties, covenants and events of default that are common to
the various credit facilities, (iv) the conditions for
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release of the approximately 14 acres of the Project Site which may be
transferred to the Phase II Subsidiary (the "Phase II Land") and the Mall and
certain related assets (collectively, the "Mall Collateral") from the lien of
the collateral documents, and (v) the conditions to the exercise of the
Disbursement Agent's right to draw on the irrevocable, stand-by letters of
credit furnished by the HVAC Provider if the HVAC Provider does not comply with
its funding obligations set forth in the Disbursement Agreement.
Cooperation Agreement
The Company's business plan calls for the Hotel and Casino, the Mall and
the Expo Center, though separately owned, to be part of an integrally related
project. In order to establish terms for the integrated operation of these
facilities, Venetian (as owner of the Hotel and Casino and the Phase II Land),
the Mall Construction Subsidiary and Interface have entered into the
Cooperation Agreement. See "Item 13--Certain Relationships and Related
Transactions--Cooperation Agreement."
Agreements Relating to the Mall
Mall Lease
Venetian, as landlord, and the Mall Construction Subsidiary, as tenant,
have entered into a Mall Lease (the "Mall Lease") pursuant to which Venetian
will lease the Mall to the Mall Construction Subsidiary for a nominal annual
rent. The Mall consists of (i) the space within the principal structure of the
Casino Resort located immediately above the Casino and immediately below the
Hotel Tower, (ii) certain additional land (the "Mall Parcel") and (iii) the
improvements thereon. The Mall Lease automatically expires upon the 99th
anniversary of the commencement date of the Mall Lease. The tenant under the
Mall Lease will own all improvements to be made to the Mall Parcel during the
term of the Mall Lease. The Mall Lease will provide that fee title in and to
the Mall Parcel automatically will vest in the Mall Construction Subsidiary
when and if the Mall Parcel becomes a separate legal and tax parcel, and the
Mall Lease thereupon shall terminate.
Sale and Contribution Agreement
Venetian, the Mall Construction Subsidiary and Grand Canal Shops Mall,
LLC, a Delaware limited liability company and indirect subsidiary of the
Company formed separately to own and operate the Mall after completion (the
"Mall Subsidiary"), have entered into a Sale and Contribution Agreement (the
"Sale and Contribution Agreement") whereby the Mall Construction Subsidiary
agreed to sell and the Mall Subsidiary agreed to purchase, among other things,
(i) all of its right, title and interest (whether in fee or in leasehold) in
and to the property and improvements that constitute the Mall in their "as is"
condition on the date of Completion (as defined in the Disbursement Agreement),
(ii) monies deposited in certain reserve accounts relating to the Mall, (iii)
all right, title and interest of the Mall Construction Subsidiary in and to a
lease with B.L. International of Nevada, Inc. for a portion of the "Billboard
Live!" entertainment complex which is adjacent to the casino floor and (iv) all
right, title and interest of the Mall Construction Subsidiary (a) as landlord
under Mall tenant leases, (b) under the Cooperation Agreement, (c) in and to
all other easements, fixtures and improvements appurtenant thereto, (d) under
an Energy Services Agreement, dated as of June 1, 1997 with the HVAC Provider
and any other mall intangible property rights, and (e) in and to all mall
personal property (collectively, the "Mall Assets"). In connection with the
sale of the Mall, the Mall Construction Subsidiary also will transfer to the
Mall Subsidiary the proceeds of the final draw under the Mall Construction Loan
(and, under certain circumstances, a specified amount under the Completion
Guaranty). As consideration for such transfers, the Mall Subsidiary shall,
among other things, repay or assume in full the outstanding balance of the
indebtedness under the Mall Construction Loan Facility (or certain refinancings
thereof), including the amount of the final draw thereunder.
Mall Management Contract
The 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 Enterprises will manage the Mall and
supervise and assist in the creation of an advertising and promotional program
and a marketing plan for the Mall. Forest City will also be 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 the date the Mall opens for business to the public. Forest City will
receive 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.
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Mall Leasing Contract
LVSI has engaged the San Francisco and Los Angeles offices of Blatteis
Realty Co. ("BRC") as its retail leasing consultant (the "BRC Contract"). BRC
is a national real estate brokerage organization specializing in the leasing
and sales of high profile retail properties and representation of a select
portfolio of retailers and restaurants. Recent retail leasing transactions that
BRC has been involved with (at locations other than the Casino Resort) have
included the following tenants: Emporio Armani, Giorgio Armani, Jose Eber,
Prada, Salvatore Ferragamo, Barnes & Noble Superstore, The Pottery Barn, the
Disney Store, Williams-Sonoma, Planet Hollywood and Cafe Med. BRC will assist
with planning, marketing and leasing of the Mall. BRC also will advise the
Company and its architects, designers, consultants and other agents with
respect to the Mall's tenant mix and the conceptual layout of tenant space. The
term of the BRC Contract is for a period of 18 months from December 1, 1996,
and may be terminated by either party at any time on 60 days' prior written
notice to the other party. BRC, which is not affiliated with the Sole
Stockholder or any of his affiliates, receives a monthly consulting fee of
$10,000 plus a refundable monthly sum of $10,000 as an advance against, and
credited to the payment of, lease brokerage commissions. Leasing commissions
payable to BRC are calculated on the basis of $8.00 per leased square foot or
$4.00 per leased square foot, depending upon the location of the applicable
leased space within the Mall.
HVAC Services Agreement and Related Documents
The HVAC Provider is a Delaware limited liability company whose members
are comprised of (a) Atlantic Thermal Systems, Inc., an indirect subsidiary of
Atlantic Energy, Inc., a utility holding company and (b) an indirect subsidiary
of Pacific Enterprises, a utility holding company.
Thermal energy (i.e., heating and air conditioning) will be provided to
the Casino Resort and the Expo Center by the HVAC Provider, using the HVAC
Equipment. In addition, the HVAC Provider also will provide other energy-related
services. Pursuant to the Construction Management Contract, the HVAC facility
(the "HVAC Plant") is being 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 and will be 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 Expo Center (and,
potentially, other buildings), so long as such easements do not materially
interfere with the operations of the Casino Resort and Expo Center. The HVAC
Provider will pay all costs ("HVAC Costs") in connection with the purchase and
installaton of the HVAC Equipment, up to $70 million. Venetian is acting as the
HVAC Provider's agent to cause such purchase and installation to be
accomplished, and is responsible for any costs in connection therewith in
excess of $70.0 million. The HVAC Provider has entered into separate service
contracts with (i) Venetian; (ii) Interface; and (iii) the Mall Construction
Subsidiary, and will enter into separate service contracts with each Mall
tenant, for the provision of heat and cooling requirements at agreed-to rates.
The charges payable by all users will include a fixed component derived using a
fixed annual interest rate of 8.5% (subject to adjustment based on the change
in the rate on 10-year Treasury Constant Maturities from January 23, 1997 until
the service commencement date) 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
(the "Fixed Rate Portion"). In addition, the users will reimburse the HVAC
Provider for the annual cost of operating and maintaining the HVAC Equipment
providing certain other energy related services (such reimbursement to include
an agreed upon margin to compensate the HVAC Provider for operating and
maintaining the HVAC Equipment). Each user will be allocated a portion of the
total agreed-to charges through its service contract, which portion shall
include paying 100% of the cost of services in connection with the HVAC
Equipment relating solely to such user. Each user will not be liable for the
obligations of the other users; provided, however, that the Mall Subsidiary
will be liable for the obligations of each Mall tenant. In the event of any
substantial capital improvements to the HVAC Equipment, the costs of such
improvements will be spread over the lesser of (i) the useful life of such
improvements and (ii) the remaining term of thermal energy service agreements
with Venetian, Interface and the Mall Construction Subsidiary to receive HVAC
services from the HVAC Plant (collectively, the "HVAC Service Agreements"), and
will include reimbursement to the HVAC Provider for use of its money at a
market rate. 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.
19
Agreements Relating to the Lido Casino Resort
If the Phase II Resort is constructed, the following agreements may be
entered into by the Phase II Subsidiary and its subsidiaries, on one hand, and
the Company, Venetian and the 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 will have terms substantially similar
to the Casino Lease except that (i) the rent payable under such lease shall be
equal to all revenue derived from such casino minus the sum of (a) the
operating costs related to such casino (including an allocated portion (based
on gaming revenue) of the Company's or Venetian's, as the case may be,
administrative costs related to its gaming operations) and (b) the lesser of
$250,000 or 1.0% of such casino's operating income (or zero if there is an
operating loss) (determined in accordance with generally accepted accounting
principles), (ii) 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 (iii) 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 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 II Mall Arrangments
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 Phase II
Mall, (ii) joint marketing and advertising of the Hotel and the Casino and the
Phase II Resort other than the Phase II Mall, (iii) certain shared casino
operations at the Hotel and the Casino and the Phase II Resort other than the
Phase II Mall, (iv) the sharing of customer information with respect to the
Hotel and the Casino and the Phase II Resort other than the Phase II Mall, (v)
the joint purchasing of insurance for the Hotel and the Casino and the Phase II
Resort other than the Phase II Mall, (vi) shared security operations for the
Hotel and the Casino and the Phase II Resort other than the Phase II Mall and
(vii) any other matters that would be of mutual benefit in owning and operating
the Hotel and the Casino and the Phase II Resort other than the Phase II Mall.
Regulation and Licensing
The ownership and operation of casino gaming facilities in the State of
Nevada are subject to the Nevada Gaming Control Act and the regulations
promulgated thereunder (collectively, the "Nevada Act") and various local
regulations. The Company's gaming operations are subject to the licensing and
regulatory control of the Nevada Gaming Commission (the "Nevada Commission"),
the NGCB and the Clark County Liquor and Gaming Licensing Board (the "CCLGLB"
and, together with the Nevada Commission and the NGCB, the "Nevada Gaming
Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy that are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of
periodic reports with the Nevada Gaming Authorities; (iv) the prevention of
cheating and fraudulent practices; and (v) providing a source of state and
local revenues through taxation and licensing fees. Any change in such laws,
regulations and procedures could have an adverse effect on the Company's gaming
operations or on the operation of the Casino Resort.
20
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 will be
required to be, and has applied for, registration by the Nevada Commission as a
publicly traded corporation ("Registered Corporation") and as such, will be
required periodically to submit detailed financial and operating reports to the
Nevada Commission and furnish any other information that the Nevada Commission
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 will operate the Casino
pursuant to a casino lease between LVSI and Venetian (the "Casino Lease"),
which will provide for a fixed monthly rental payment. The Company and Venetian
have applied for approval by the Nevada Gaming Commission of a registered
exchange offer of the Mortgage Notes and the Senior Subordinated Notes (the
"Exchange Offer"). There can be no assurance that the Company and Venetian will
be granted all the various approvals required to consummate the Exchange Offer.
The offering will not be completed until such approvals are received. The
Company possesses, has applied for, or will apply for, 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. There can be
no assurance that the Company will be granted all of such approvals. Venetian
intends to apply for a state gaming license, registration or other finding of
suitability, however the receipt of such by Venetian is not required in
connection with the Exchange Offer. If a gaming license is issued to Venetian,
the Casino Lease may be terminated.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or Venetian
to determine whether such individual is suitable or should be licensed as a
business associate of a gaming licensee. Officers, directors and certain key
employees of the Company must file applications with the Nevada Gaming
Authorities and may be required to 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, and 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.
21
The Nevada Act requires any person who acquires more than 5% of the
Company's voting securities to report the acquisition to the Nevada Commission.
The Nevada Act requires that beneficial owners of more than 10% of the
Company's voting securities apply to the Nevada Commission for a finding of
suitability within thirty days after the Chairman of the Nevada Board mails the
written notice requiring such filing. Under certain circumstances, the
"institutional investor" as defined in the Nevada Act, which acquires more than
10% but not more than 15% of the Company's voting securities, may apply to the
Nevada Commission for a waiver of such finding of suitability if such
institutional investor holds the voting securities for investment purposes
only. An institutional investor shall not be deemed to hold voting securities
for investment purposes unless the voting securities were acquired and are held
in the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies or operations of the Company or
any of its gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding the Company's voting securities for
investment purposes only. Activities that are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial
holder of voting securities who must be found suitable is a corporation,
partnership or trust, it must submit detailed business and financial
information including a list of beneficial owners. The applicant is required to
pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner. Any stockholder found unsuitable and
who holds, directly or indirectly, any beneficial ownership of the common stock
of a Registered Corporation beyond such period of time as may be prescribed by
the Nevada Commission may be guilty of a criminal offense. The Company is
subject to disciplinary action if, after it receives notice that a person is
unsuitable to be a stockholder or to have any other relationship with the
Company or Venetian it: (i) pays that person any dividend or interest upon
voting securities of the Company; (ii) allows that person to exercise, directly
or indirectly, any voting right conferred through securities held by that
person; (iii) pays remuneration in any form to that person for services
rendered or otherwise; or (iv) fails to pursue all lawful efforts to require
such unsuitable person to relinquish his voting securities for cash at fair
market value. Additionally, the CCLGLB has taken the position that it has the
authority to approve all persons owning or controlling the stock of any
corporation controlling a gaming license.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file an application, be
investigated and be found suitable to own the debt security of a Registered
Corporation, such as the Notes. 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 Com-
22
pany's assets and restrictions on stock in connection with any public offering
will require the prior approval of the Nevada Commission. In addition, if
Venetian receives a gaming license, the hypothecation of its assets and
restrictions on stock in respect of any public offering will require the
approval of the Nevada Commission to remain effective. LVSI and Venetian have
applied for approval by the Nevada Commission of the Exchange Offer, the
hypothecation of assets and restrictions on stock. However, there can be no
assurance such approval will be granted. The Exchange Offer will not be
completed until such approvals are received. Any such approval does not
constitute a finding, recommendation or approval by the Nevada Commission or
the NGCB as to the accuracy or adequacy of the prospectus or the investment
merits of the securities offered. Any representation to the contrary is
unlawful.
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 will also be required to apply for and receive a
Clark County gaming license. All licenses are revocable and are not
transferable. The agencies involved have full power to limit, condition,
suspend or revoke any such license, and any such disciplinary action could (and
revocation would) have a material adverse effect upon the operations of the
Company.
23
Employees
The Company anticipates that it will directly employ approximately 3,800
employees in connection with the Casino Resort. The Company will be required to
undertake a major recruiting and training program prior to the opening of the
Casino Resort at a time when other major new facilities may be approaching
completion and also recruiting employees. The Company believes that it will be
able to attract and retain a sufficient number of qualified individuals to
operate the Casino Resort. The Company does not know whether or to what extent
the Casino Resort's employees will be covered by collective bargaining
agreements, as that determination will ultimately be made by the employees.
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 Union (the "Local"), the Operating Engineers Union and
the Teamsters Union. Although no assurances can be given, management does not
believe that the representation of its employees by labor unions would have a
material impact upon the Company's results of operations, liquidity or
financial position.
The Local has requested the Company to recognize it as the bargaining
agent for future 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
opening of the Preview Site at the Casino Resort. 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.
ITEM 2.--PROPERTIES
Venetian currently owns approximately 45 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 is being constructed and the site on which the Phase II
Resort is planned to be constructed. Approximately 14 acres of such land may be
transferred to the Phase II Subsidiary upon completion of the subdivision for
the Project Site.
ITEM 3.--LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various claims and legal
actions arising from the construction of the Casino Resort, in the ordinary
course of their businesses and in the ordinary course of business of the Sands.
Although the amount of any liability that could arise with respect to these
claims and actions cannot be accurately predicted, the Company believes that
any such liability will not have a material adverse effect on the Company.
ITEM 4.--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 6, 1997, the Sole Stockholder adopted a written consent in
lieu of a meeting whereby he approved and consented to the following actions:
(1) an amendment and restatement of the By-Laws of LVSI;
(2) an amendment and restatement of the Articles of Incorporation of LVSI
(the "New LVSI Articles");
(3) a stock split, as of November 14, 1997, with respect to the outstanding
50,001 shares of common stock of LVSI, so that each share of such common
stock would henceforth be deemed to represent 18.4996 shares of common
stock, resulting in 925,000 shares of common stock outstanding on such
date; and
(4) the appointment of himself as Stockholder Director and William J.
Raggio as Special Director (as defined herein) of LVSI upon the filing
of the New LVSI Articles.
24
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 27, 1998, the Sole Stockholder was the only holder of record
of the common stock of LVSI.
Dividends
On July 31, 1997 and September 30, 1997, LVSI paid ca