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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, 1998
Commission file number 333-49691
THE RESORT AT SUMMERLIN, LIMITED PARTNERSHIP
THE RESORT AT SUMMERLIN, INC.
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(Exact name of registrants as specified in their charters)
Nevada 86-0857506
Nevada 86-0857505
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(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
1160 Town Center Drive, Suite 200, Las Vegas, NV 89134
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(Address of principal executive offices, Zip Code)
(702) 869-7000
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(Registrants' telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Limited partnership interests
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Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Pargraph 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrants' 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. [ ]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. (See definition of
affiliate in Rule 12-b-2 of the Exchange Act.) Not applicable.
Indicate the number of shares outstanding of each of the registrants'
classes of common stock, as of the latest practicable date. Not applicable.
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DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-K contains certain
"forward-looking statements" which represent expectations or beliefs of The
Resort at Summerlin, Limited Partnership (the "Partnership") and The Resort at
Summerlin, Inc. ("RAS"), including, but not limited to, statements concerning
(i) the completion and opening of The Resort At Summerlin (the "Resort Casino");
(ii) the Partnership's operations, performance, financial condition, plans,
growth and strategies; (iii) industry performance and competitive environment;
and (iv) the effects of regulation, including gaming and tax regulation. Any
statements contained in this Form 10-K that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, words such as "may," "will," "expect,"
"anticipate," "intend," "could," "estimate," or "continue" or the negative or
other variations thereof or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, including, but not limited to, those relating to
development and construction activities; market fluctuations; gaming and other
regulatory matters; the receipt of building permits and certificates of
occupancy; the impact of internal and external problems caused by the Year 2000
computer problem; taxation; dependence on existing management; leverage and debt
service (including sensitivity to fluctuations in interest rates); domestic or
international economic conditions; changes in federal and state laws or the
administration of such laws; and changes in gaming laws or regulations
(including the legalization of gaming in certain jurisdictions). Certain of
these risks and uncertainties are beyond the Partnership's control, and actual
results may differ materially depending on a variety of important factors,
including those described in this Form 10-K.
As used herein, the term "Partnership" includes the Partnership and RAS
unless the context indicates otherwise.
GENERAL
The Partnership is currently constructing and intends to own and operate the
Resort Casino, a Mediterranean-style luxury hotel, casino and spa complex in Las
Vegas, Nevada. The Resort Casino is located approximately nine miles from the
Las Vegas Strip (the "Strip") and approximately 15 miles from McCarran
International Airport. The 54.5-acre Resort Casino site (the "Site") is located
at the gateway to Summerlin ("Summerlin"), a 22,500-acre land development of
Howard Hughes Properties, Limited Partnership ("HHP"). As planned, the Resort
Casino will feature two luxury hotels with a total of 461 rooms and 80 suites, a
50,000 square foot gaming facility, a 40,000 square foot state-of-the-art spa
and fitness facility, up to eight restaurants of varied cuisine and an
indoor/outdoor buffet, a 60,000 square foot lifestyle complex, 2,550 parking
spaces and a 50,000 square foot conference and banquet center. The Resort
Casino, including the parking garage, is expected to be approximately 1.5
million square feet. The Partnership believes that, when completed, the Resort
Casino will represent one of a few luxury golf and spa resorts with gaming in
the United States and a premier "off-Strip" casino in Las Vegas. Construction of
the Resort Casino began in January 1998 with an opening to the general public
anticipated on June 29, 1999.
The Partnership was formed as a limited partnership in Nevada in August
1996. Its general partner is RAS, a Nevada corporation formed in August 1996.
The executive offices of the Partnership are located at 1160 Town Center Drive,
Suite 200, Las Vegas, Nevada 89134 and its telephone number is (702) 869-7000.
THE RESORT CASINO
Hotels
The Resort Casino is designed with two six-story hotels with a combined 541
guest rooms and suites. The Partnership believes it is critical to keep each
hotel small enough to retain the ambiance and service expected of a five-star
operation. A full range of hotel services are anticipated, including business
services, concierge and transportation services, 24-hour room service, spa and
fitness facilities, dining and lounge offerings, laundry and valet services,
state-of-the-art telecommunications systems, and luxury guest and bath
amenities. The Partnership believes that the quality and size of the hotel rooms
will be one of the most attractive features to its guests. The hotel's standard
guest room will be approximately 564 square feet, which the Partnership believes
will make it among the
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most spacious in Las Vegas. The rooms are designed to offer resort guests the
sense of comfort expected at a luxury resort and will be equipped with upscale
furnishings and appointments.
Gaming Operations
Situated at the hub of the Resort Casino, the casino will emphasize comfort,
space and informality, and consist of approximately 50,000 square feet of gaming
space, with 1,270 slot machines, 40 table games and a sports and race betting
club. Two salons prives will offer higher stakes slots and table games in a more
intimate setting.
The Partnership believes that few casinos in the Las Vegas market that cater
to Las Vegas residents place a significant emphasis on table games. The Resort
Casino's marketing efforts will emphasize its table game limits and credit
facilities. Maximum bet limits will accommodate many of the local players who
currently patronize the Strip due to the prevailing low maximum bet limits
imposed by the other local casinos. The table operation will be marketed
directly to local players and visitors with table gaming budgets from $5,000 up
to $250,000. The Partnership anticipates that the Resort Casino will extend
credit to any creditworthy customers, irrespective of whether they are residents
or visitors.
Food and Beverage
Few restaurants are currently available within Summerlin and the neighboring
communities. The Resort Casino will seek to target this market by offering up to
nine separate dining facilities and nine bars and lounges. The largest dining
facility will be a 684-seat indoor/outdoor buffet serving two meals daily on the
second floor of the Resort Casino with panoramic views of the mountains, golf
courses and city lights. The Resort Casino also will have up to eight other
restaurants offering a variety of menus at many price points. The Partnership
will operate three restaurants and has entered into four leases with operators
of restaurants serving steak and seafood, Japanese, Continental and Italian
cuisine.
Lifestyle Complex
The 60,000 square foot Lifestyle Complex (the "Lifestyle Complex") will tie
together the Resort Casino's restaurants, shops and other entertainment areas.
The Lifestyle Complex has been designed to facilitate indoor and outdoor
activities with Mediterranean-themed terraces, fountains and pools, will target
middle to upper income residents and is expected to include:
- Gift Shop - Cigar Bar
- Florist - Clothing Store
- Golf Shop - Jewelry Store
- Ice Cream Parlor/ - Optician
Chocolatier
- Authentic Irish Pub - Wine Shop
- Art Gallery - Live Entertainment
Executive Office, Conference and Banquet Complex
The Resort Casino will have 50,000 square feet of dedicated conference room
and meeting space, outfitted with state-of-the-art audio and visual support
equipment. An on-site business center with a mix of small and large rooms will
provide corporate travelers with access to the latest technology including full
service audio-visual equipment, computer terminals, laser printers, telephones,
fax machines, online market updates and other business services. The office and
conference complex will be designed to support the Resort Casino's strategy of
attracting out-of-state group business (such as corporate retreats and small
conventions) as well as meetings of local residents. The proximity to 183 holes
of golf is expected to be a key additional element in the Resort Casino's
attractiveness as a center for small meetings.
Recreational Amenities
Golf. The Resort Casino will be associated with the highly rated, 18-hole,
Tournament Players Club ("TPC") at the Canyons golf course ("TPC Canyons")
which currently hosts the Senior PGA Tour's Las Vegas Senior Classic. As part
of a contractual agreement with the TPC Canyons, the Resort Casino has the
ability to control 50.0% of the available tee times for the next 99 years. At
the Resort Casino's option, this percentage may be increased to 75.0%. TPC
Canyons is one of 17 TPC clubs and courses nationwide. Home to numerous PGA
Tour and Senior PGA Tour events, the TPC network has a reputation for providing
some of the finest golf facilities in the world.
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To the north of the Resort Casino is the TPC Summerlin championship course,
home to the PGA Tour's annual Las Vegas Invitational and the site of Tiger
Woods' first PGA tour victory. TPC Summerlin is a private club that will be
accessible to the Resort Casino's best customers as guests of the Partnership.
Moreover, for those golfers desiring a variety of course offerings during their
stay in Las Vegas, an additional 48 holes of golf are available at Angel Park
including a lighted 12-hole par three course. Five other public and private
18-hole courses and one 27-hole public course are located within a five-minute
drive of the Site.
In total, guests of the Resort Casino will be in close proximity to 183 golf
holes, as follows:
LAS VEGAS GOLF COURSES
(Immediate Areas of the Resort Casino)
<TABLE>
<CAPTION>
COURSE NAME LOCATION HOLES
- --------------------------------- ---------------------------- -----
<S> <C> <C>
TPC Canyons...................... Adjoining 18
TPC Summerlin.................... Immediately North 18
Angel Park....................... Immediately South and East 36
Angel Park (Executive)........... Immediately South and East 12
Badlands......................... 1/2 Mile South 27
Palm Valley...................... Sun City 18
Highland Falls................... Sun City 18
Eagle Crest...................... Sun City 18
Canyon Gate Country Club......... 2 Miles South 18
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TOTAL..................... 183
</TABLE>
Superior Spa and Fitness Center. The Resort Casino will contain a 40,000
square foot superior spa, salon and fitness center, which the Partnership
believes will be one of the largest and best equipped in Las Vegas. Resort
Casino guests and day visitors will have access to facilities including locker
rooms, showers, steam room, sauna, whirlpool and specialty baths, and a
cascading waterfall shower. The spa is expected to offer a variety of
treatments, including facials, massages and body treatments. The salon will
provide hair care services, manicures, pedicures, make-up and waxing. The spa's
boutique will sell fitness attire, Resort Casino logo wear, hydrotherapy bath
products, massage and aromatherapy oils, and skin care products. The fitness
center will contain state-of-the-art workout equipment including Gravitrons,
Stairmasters, treadmills, rowing machines and Lifecycles; an aerobics studio;
and a full range of weight training equipment.
Gardens and Swimming Pool. The Resort Casino is expected to have an 11,000
square foot outdoor pool and children's pool. The pool area will offer Resort
Casino guests and members several acres of elaborate landscaping, water features
and walking paths throughout the Site.
Parking and Transportation
The Resort Casino will have parking sufficient to accommodate both
out-of-town and local guests. A four-level covered parking structure will
provide parking for approximately 918 vehicles and surface parking space for an
additional 1,632 vehicles. Resort Casino guests and visitors will have the
option of either self-parking or using a complimentary valet service. The Resort
Casino will provide transportation for VIP guests to and from the airport and
shuttles and limousines to the Strip and popular shows.
CONSTRUCTION
Construction of the Resort Casino began in January 1998 with a scheduled
completion in the second quarter of 1999. As with any major construction
project, construction of the Resort Casino involves many risks, including
potential shortages of materials and labor, work stoppages, labor disputes,
weather interference, receipt of necessary building permits and certificates of
occupancy, unforeseen engineering, environmental or geological problems and
unanticipated cost increases, any of which could give rise to delays or cost
overruns. Construction, equipment or staffing requirements or problems or
difficulties in obtaining any of the requisite licenses,
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permits, or authorizations from regulatory authorities could increase the cost
or delay the construction or opening of the Resort Casino or otherwise affect
the planned design and features. There can be no assurance that the Resort
Casino will be completed within the time period or budget currently
contemplated. See Footnote 5 to the Financial Statements filed herewith (the
"Financial Statements"), "Commitments and Contingencies -- Construction
Agreement."
BUSINESS AND MARKETING STRATEGY
The Partnership's business and the goal of its marketing strategy are to (i)
create the Resort Casino as a premier off-Strip location with geographic
exclusivity, (ii) deliver superior and market-unique resort amenities within the
local off-Strip market, (iii) target middle- to upper-income customers, (iv)
capitalize on its marquee hotel flag and extensive travel network relationship
and (v) leverage management's track record and continuity.
- Create a Premier Off-Strip Location with Geographic Exclusivity. The
Partnership believes that, at the time of its completion, the Resort Casino
will be the only luxury gaming destination of its kind in the United States
with nine golf courses within a five minute drive. The Resort Casino will be
situated at the gateway to Summerlin, and the area within a 5-mile radius of
the Site is projected by the University of Nevada Reno - Bureau of Business
and Economic Research ("BBER") to have a 1999 population base of 284,000
residents. The Site is readily accessible from most major points in the city
including downtown Las Vegas (approximately eight miles), the Strip
(approximately nine miles) and McCarran International Airport (approximately
15 miles). Accessibility will be further enhanced by the planned connection
of the Las Vegas beltway to Summerlin Parkway in 2000.
The Partnership has obtained rights of first offer from HHP (the "Rights of
First Offer") to develop an additional four designated gaming sites in
Summerlin which rights may be assigned to certain affiliates in certain
circumstances. Additionally, Nevada Senate Bill #208, enacted in July 1997,
from which the Resort Casino and the additional four gaming sites subject to
the Rights of First Offer are exempt, limits the development of casinos near
residential neighborhoods, churches and schools, restricting entry by
competitors into the market.
- Deliver Superior Resort Amenities. The Resort Casino is designed along the
lines of a Scottsdale- or Palm Springs-type facility with
Mediterranean-style architecture, intimate ambiance and strong focus on
service intended to create a lifestyle experience for its guests and offer
visitors a haven from the pressures of daily life. The Partnership believes
that this atmosphere generally is unavailable in Las Vegas or other gaming
locales in the United States.
The Resort Casino's amenities are expected to include:
- Two luxury hotels with a total of 461 standard rooms and 80 suites;
- A 50,000 square foot casino;
- Access to area golf courses;
- A 40,000 square foot upscale spa;
- Nine restaurants and nine bars;
- A 50,000 square foot conference center; and
- A 60,000 square foot Lifestyle Complex with retail areas and
restaurants.
See Item 1, "Business - The Resort Casino."
- Target Middle- to Upper-Income Customer Segments. The Resort Casino is
designed to cater to the affluent, higher-end customer. The Partnership
believes that the Resort Casino's hotels and recreational amenities will
appeal to customers from the following principal long-term markets:
The Captive Summerlin Market. The population within a five-mile radius of
the Site, which encompasses Summerlin and other residential neighborhoods
in metropolitan Las Vegas, is estimated by BBER to be approximately 271,000
in 1998 and projected by BBER to grow to 284,000 by 1999. According to the
Nevada State Demographer's Office ("NSDO"), the population of Clark County
has grown approximately 48.8% since 1990, and the population within a
five-mile radius of the Site is projected by BBER to grow at approximately
4.9% per year. The median household income of approximately $54,400 for
residents in this target market is approximately 20.0% above the Las Vegas
median household income of approximately $45,300 and approximately 49.2%
above the United States national average according to BBER. The
Partnership's goal is to position the Resort Casino as the Summerlin
residents' "country club."
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Middle- to Upper-Income Local Market. The Partnership believes this segment
is characterized by a highly profitable, repeat clientele that has long been
under-served by "local" casinos, and expects the Resort Casino will appeal
strongly to the affluent local population, including the estimated 72.0% of
adult Las Vegas residents who game an average of 51.31 times a year and
spend an average of $51.44 (in 1995 dollars) per each visit according to the
Las Vegas Convention and Visitors Authority ("LVCVA").
Golfer/Gamer and Resort Vacationer. According to Simmons Market Research
Bureau ("SMRB"), approximately 3.4 million golfer/gamers visit Las Vegas at
least once annually and 51.6% of golfer/gamers spend over $1,500 per trip.
The Partnership believes the Resort Casino will represent the only gaming
resort in the United States in close proximity to two TPC and seven other
golf courses. Additionally, the high levels of service and amenities
expected to be provided by the Resort Casino will cater to resort table
players with gaming budgets from $5,000 to $250,000 per visit.
Local and Out-of-State Conferences and Banquets. The Resort Casino is
expected to have one of the few high-tech business meeting facilities in Las
Vegas catering to small-and mid-size conferences. Designed with the
necessary services and amenities to cater to executive retreats, including
ample parking, the Partnership believes that the Resort Casino will provide
an ideal setting for small-to mid-sized conferences and will have the
capacity to host charity and social events for up to 1,100 people in dinner
seating.
- Capitalize on Marquee Hotel Flag and Travel Network Relationship. The
Partnership has entered into an agreement with Regent International, an
affiliate of the Carlson Hospitality group. The Regent International hotels
are a group of luxury hotels concentrated around the Pacific Rim, with the
Resort Casino representing its only property in Las Vegas. As of March
1999, Regent International's only flagged property in the U.S. is the Regent
Beverly Wilshire-Los Angeles. The Resort Casino will benefit from Regent's
reservation network and Carlson Wagonlit Travel, a national travel agency
with no existing Las Vegas hotel affiliate.
- Leverage Management Team Track Record and Continuity. The Partnership
expects to leverage the gaming experience and track record of RAS's senior
and middle management. RAS's senior management has a cumulative 75 years of
experience in the gaming and resort industry. Brian McMullan, the President
and Chief Executive Officer of RAS, and Jim Fonseca, the Senior Vice
President Gaming Operations of RAS, have worked together for over 20 years.
Quinton Boshoff, the Senior Vice President Slot Operations of RAS, has
worked with Messrs. McMullan and Fonesca for over 11 years. Messrs.
McMullan, Fonseca and Boshoff each were previously employed by Sun
International, an international casino group, and participated in designing,
building and operating six casinos in South Africa including Sun
International's Carousel. John Tipton, the Senior Vice President, Chief
Financial Officer and General Counsel of RAS, served in Colorado Governor
Roy Romer's cabinet as Executive Director of the Colorado Department of
Revenue, during which time he successfully drafted and implemented casino
gaming legislation. The Partnership's middle management includes other
gaming and non-gaming professionals with experience principally in the
United States, the United Kingdom and southern Africa.
The ability of the Partnership to execute its business and marketing
strategy depends upon several factors, including, but not limited to, (i) its
ability to attract hotel guests who currently patronize the Strip and
destination golf resorts elsewhere in the country and (ii) its ability to
attract local residents who currently patronize existing casinos in Las Vegas.
See Item 1, "Business - Competition and Las Vegas Market" below in this section.
All of the Partnership's operations are conducted in the United States.
All of the Partnership's revenues from external customers for the fiscal year
ended December 31, 1998 may be attributed to, and all of its long-term assets
are located in, the United States. See the Partnership's Financial Statements
included in this Form 10-K for a statement of the Partnership's revenues,
profits and total assets.
EMPLOYEES
The Partnership anticipates that it will directly employ approximately 1,800
employees in connection with the Resort Casino. The Partnership will be required
to undertake a major recruiting and training program prior to the opening of the
Resort Casino at a time when other major new facilities may be approaching
completion and also recruiting employees. The Partnership believes that it will
be able to attract and retain a sufficient number of qualified individuals to
operate the Resort Casino.
COMPETITION AND LAS VEGAS MARKET
The casino hotel industry is a highly fragmented and competitive industry.
The Partnership has identified four major industry sectors that are expected to
pose competition to the Resort Casino: (i) upscale golfing destinations
throughout the United States, (ii) casinos in suburban Las Vegas, (iii) the Las
Vegas Strip and (iv) other gaming markets throughout the United States. Many of
the Resort Casino's competitors have greater resources and, as such, place the
Resort Casino at a disadvantage.
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Upscale Golfing Destinations throughout the United States
According to SMRB, in 1997, the total United States market for
golfer/gamers was estimated to be approximately 11.8 million. Of the
destinations visited, 70% of the golfer/gamers had visited at least one of six
states within the past year: Florida, California, Nevada, Texas, Arizona and
Colorado. Nevada had approximately 13.6% of total golfer/gamer visits and
28.7%, or 3.4 million, of all golfer/gamers have visited Las Vegas during the
last 12 months.
The Resort Casino will compete for this segment against destination golf
resorts throughout the United States, particularly in upscale southwestern
locations such as Palm Springs, California and Scottsdale, Arizona. Other states
with competitive destination golf resorts include Hawaii, Texas, Florida,
Colorado, North Carolina and South Carolina, among others.
At present, those resorts in the southwestern United States which offer a
competitive product for the golfer, but are situated outside Nevada, are unable
to offer the gaming attractions which will be available at the Resort Casino.
Arizona and California have a limited number of casinos on Indian reservations,
but the Partnership believes there are problems with the location of these
casinos and, as of the date of this Form 10-K, in neither state is it possible
to offer the full service gaming product which is available in Nevada. The
Partnership believes that the Resort Casino is properly positioned with regard
to its market, which the Partnership believes will enable it to charge premium
rates and attract more affluent customers. There can be no assurance that the
Partnership will be successful in doing so. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - California
Proposition 5."
Casinos in Suburban Las Vegas
Las Vegas is one of the fastest growing cities in the United States. The
current rate of immigration is approximately 6,000 people per month. Clark
County's population has grown from approximately .5 million in 1980 to
approximately 1.3 million in 1998 and is projected to exceed 2.0 million in
2010, according to the NSDO. The Partnership believes that as major new Strip
properties are built and opened in 1999 and 2000, the resulting employment is
likely to fuel further population growth in suburban Las Vegas.
According to BBER, in 1998 the Las Vegas metro area had a total population
of approximately 1.2 million, of whom approximately .8 million were adults and,
based on the LVCVA surveys, approximately .6 million were casino gamers.
According to the LVCVA, Las Vegas residents who game do so, on average, just
over once per week and 54.0% game at least once a week. The 1995-96 LVCVA study
indicates an average of 51.31 visits per year among locals. According to the
1995-96 LVCVA study, approximately 44.0% of local residents game at off-Strip
casinos. In terms of gaming spend, the LVCVA arrived at a mean spend per visit
of $51.44 (in 1995 dollars). The total local gaming market for metropolitan Las
Vegas has been estimated to be approximately $1.5 billion.
The Resort Casino will compete directly for local residents with the
existing and planned casinos located near the Site. Existing casinos in
northwestern Las Vegas include the following:
<TABLE>
<CAPTION>
CASINO NUMBER OF NUMBER OF
CASINO SQUARE FOOTAGE SLOT MACHINES TABLE GAMES
------ -------------- ------------- -----------
<S> <C> <C> <C>
Texas Station 131,000 2,950 34
Santa Fe 77,882 1,740 29
Arizona Charlie's 56,316 1,435 21
Fiesta 44,910 1,335 20
</TABLE>
In February 1999, Texas Station opened a $55 million expansion, including
58,000 square feet of casino space. Also in February 1999, Fiesta announced a
$22 million expansion, including 20,000 square feet of casino space. Fiesta's
expansion is planned to open in mid-December 1999.
Coast Resorts, Inc. ("Coast Resorts") has announced plans for the Suncoast
Casino, which is located approximately 1/2 mile south of the Site. According to
a company press release, the Suncoast will cost from $140 to $150 million and
will include a 240 room hotel, a 70,000 square-foot casino, four restaurants, a
bowling alley and a 16-screen movie theater. Coast Resorts hopes to break ground
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by April or May 1999. Coast Resorts has a second casino site approximately 6
miles from the Site, across the street from Texas Station and Fiesta. Coast
Resorts has not announced detailed plans for developing that site.
The Partnership believes that all of the existing and planned casinos in
northwestern Las Vegas target the middle and lower end of the local market. The
Resort Casino intends to focus on the upper end of the local casino market by
offering higher table limits, credit, upscale food and beverage offerings and
the spa experience.
The Las Vegas Strip
Las Vegas is the oldest and largest gaming market in the United States. The
Las Vegas metro area gaming market is divided into four geographic sectors: the
Downtown, Strip, North Las Vegas and Boulder Strip areas. The Strip is the
location of approximately 40 casinos, including Las Vegas' largest and newest
mega-casinos. The Downtown area includes approximately 18 casinos on and near
Fremont Street in old Las Vegas. The Boulder Strip and North Las Vegas markets
are comprised of suburban casinos and primarily target local residents and their
guests. Total 1998 gaming revenues in Clark County, which includes Las Vegas,
were approximately $6.3 billion, an increase of 3.0% over 1997.
New development in Las Vegas is occurring primarily on the Strip. The
Bellagio opened in October 1998, and Mandalay Bay opened in March 1999. New
casinos scheduled to open in 1999 include The Venetian and Paris, with the new
Aladdin scheduled to open in 2000. In addition to this development, certain
existing properties on the Strip are undergoing, or have recently undergone,
substantial renovation and improvement to upgrade facilities and increase hotel
and gaming capacity. According to the LVCVA, total rooms inventory in Las Vegas
has increased from approximately 90,000 in 1995 to approximately 109,000 in
1998, and is expected to increase to over 125,000 by the end of 2000.
According to the LVCVA, in 1998 there were a total of 30.6 million visitors
to Las Vegas, a .5% increase over 1997. The LVCVA has projected 1999 visitation
to increase to 32.3 million, an increase of 5.5% over 1998. According to the
LVCVA, approximately 47.0% of visitors to Las Vegas currently arrive by air. The
city is served by McCarran International Airport, which has grown substantially
over the last several decades to keep pace with visitor demand generated by the
gaming and lodging market. The airport serves more than 20 scheduled air
carriers and 19 charter service airlines. According to the LVCVA, McCarran
International support serviced 30.2 million passengers in 1998.
The Partnership believes very few of the existing Las Vegas properties have
a competitive product in this segment of the market. Only the Desert Inn and the
Las Vegas Hilton have a golf course adjacent to their properties, and the
Partnership believes only the Venetian's Canyon Ranch spa is larger than the
Resort Casino's spa. In the future, the proposed development of Lake Las Vegas
and the Mountain Spa could create significant competitors in the market.
However, the Resort Casino will have the advantage of being first to the market
with its product, it will be associated directly with a TPC course which is host
to a nationally televised tournament, and 183 holes of golf are within a five
minute drive of the Site. The Site is also only about 20 minutes from McCarran
International Airport and 15 minutes from the Strip. From the PGA Tour and
Senior PGA Tour events, the Summerlin name enjoys a degree of recognition in the
U.S. among the golfing community which, the Partnership believes, will benefit
the Resort Casino.
Other Gaming Markets throughout the United States
As recently as 1987, casino gaming was only legal in two jurisdictions -
Nevada and Atlantic City, New Jersey. With the proliferation of casino gaming
during the last decade, casino gaming now exists in over thirty states,
including riverboats, dockside casinos, Indian casinos and land-based casinos.
In addition, all but two states have some form of legalized gaming, including
lotteries, bingo and pari-mutual racing.
The Resort Casino will compete to a limited extent with other gaming markets
in the United States. In particular, Indian casinos operate in Arizona and
California. Recently passed legislation in California was passed to clarify the
legal status of the California Indian casinos. With 28.0% of visitors to Las
Vegas coming from Southern California in 1998, expansion of gaming in California
could have a material adverse effect on the financial condition of the
Partnership. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operation - California Proposition Five."
REGULATION AND LICENSING
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Nevada
The ownership and operation of casino gaming facilities in Nevada are
subject to the Nevada Gaming Control Act (the "Nevada Act"), various local
regulations and the licensing and regulatory control of the Nevada Gaming
Commission (the "Nevada Commission"), the Nevada State Gaming Control Board (the
"Nevada Board") and the City of Las Vegas (collectively, the "Nevada Gaming
Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which 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. Change in such laws, regulations and
procedures could have a material adverse effect on the financial condition of
the Partnership.
The Partnership will be required to obtain certain licenses from the Nevada
Gaming Authorities (the "Gaming Licenses"). The Gaming Licenses require the
periodic payment of fees and taxes and are not transferable. Once licensed and
registered by the Nevada Commission as a publicly-traded corporation
("Registered Company"), the Partnership will be required to submit periodic
detailed financial and operating reports to the Nevada Commission and furnish
any other information which the Nevada Commission may require. No person may be
a partner of, or receive any percentage of profits from, the Partnership without
first obtaining licenses and approvals from the Nevada Gaming Authorities
("Gaming Approvals").
In connection with the licensing and registration of the Partnership, RAS
will be required to be registered as a Registered Company and licensed as the
general partner. In connection with the registration of RAS as a Registered
Company and licensure as the general partner, each direct and indirect owner of
RAS, including without limitation, Swiss Casinos of America, Inc., a corporation
that owns 100% of RAS and 76.6% of the Partnership ("SCA"), Swiss Casinos
Holding, AG, a Swiss corporation that owns 83.0% of SCA and a direct 16.7%
interest in the Partnership (the "Swiss Parent") and their respective owners
(collectively, the "RAS Owners") will be required to obtain from the Nevada
Gaming Authorities the applicable Gaming Approvals.
The Partnership has entered into a Management Services Agreement with Seven
Circle Resorts, Inc. ("SCR"), a wholly-owned subsidiary of SCA, whereby certain
employees of SCR will provide substantial management and general and
administrative services and other support to the Partnership and RAS, in
consideration of the payment of a monthly fee to SCR and the reimbursement of
SCR's actual expenses and appropriate portions of the salaries and benefits of
its employees providing such management services. Accordingly, SCR will be
required to be licensed as a key employee of the Partnership in connection with
the licensing and registration of the Partnership to operate the Resort Casino.
SCR has applied for licensure as a key employee of the Partnership.
The Partnership and RAS are each a "publicly traded corporation" as defined
in the Nevada Act. In order to receive a gaming license as a publicly traded
corporation, the Partnership must be exempted by the Nevada Commission from a
prohibition in the Nevada Act which makes Registered Companies ineligible to
apply for or hold a Gaming License. The Nevada Commission has exempted companies
from this provision in the past and has granted gaming licenses to publicly
traded corporations. The Partnership has applied for an exemption from this
requirement (the "Exemption") in connection with its application for a Gaming
License. In connection with licensing and receipt of the Exemption, RAS and the
Partnership each also will be required to be registered by the Nevada Commission
as a Registered Company. The following regulatory requirements will be
applicable to the Partnership and RAS upon their receipt of all necessary Gaming
Approvals from the Nevada Gaming Authorities. The Partnership, RAS and the RAS
Owners have not yet obtained from the Nevada Gaming Authorities the Gaming
Approvals required in order for the Partnership to conduct gaming operations at
the Resort Casino and there can be no assurances given that such Gaming
Approvals will be obtained, or that they will be obtained on a timely basis.
There can also be no assurances that the Partnership's officers, partners and
key employees will obtain Gaming Approvals from the Nevada Gaming Authorities.
The failure of either RAS or the Partnership and their officers, partners,
directors, stockholders and key employees to obtain Gaming Approval would have a
material adverse effect on the Partnership's financial condition.
10
<PAGE> 11
As a Registered Company, the Partnership will be required periodically to
submit detailed financial information and operating reports to the Nevada
Commission and furnish any other information that the Nevada Commission may
require. No person may become a partner of, or receive any percentage of profits
from, a licensee ("Licensee") without first obtaining licenses and approvals
from the Nevada Gaming Authorities.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Partnership, RAS,
SCR and the RAS Owners to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
managers and certain key employees of the Partnership, RAS, SCR, SCA and the
Swiss Parent have filed applications with the Nevada Gaming Authorities and will
be required to be licensed, or found suitable, by the Nevada Gaming Authorities
in connection with the Partnership's application. 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 the
Nevada Gaming Authorities have jurisdiction to disapprove a change in a
position.
If the Gaming Authorities were to find an officer, director, partner,
stockholder or key employee unsuitable for licensing or unsuitable to continue
having a relationship with the Partnership, RAS, SCR, SCA or the Swiss Parent,
the companies involved would have to sever all relationships with such person.
In addition, the Nevada Commission may require the Partnership, RAS, SCR, SCA or
the Swiss Parent 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.
If the Partnership, RAS, SCR, SCA or the Swiss Parent violated the Nevada
Act, any gaming licenses held by the Partnership could be limited, conditioned,
suspended or revoked, subject to compliance with certain statutory and
regulatory procedures. In addition, the Swiss Parent, SCA, RAS, SCR, the
Partnership, 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 Resort Casino and, under certain circumstances, earnings generated
during the supervisor's appointment (except for the reasonable rental value
thereof) could be forfeited to the State of Nevada. Limitation, conditioning or
suspension of any Gaming License or the appointment of a supervisor could (and
revocation of any Gaming License would) materially adversely affect the
financial condition of the Partnership.
Even if a Registered Company is granted certain exemptions by the Nevada
Commission, any beneficial holder of the Registered Company's voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated, and have his suitability as a beneficial holder of
the Registered 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. Each beneficial owner of an
interest in the Partnership may be required to be licensed or found suitable.
The applicant must pay all costs of investigation incurred by the Gaming
Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5.0% of a
Registered Company's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than 10.0% of
a Registered Company's voting securities apply to the Nevada Commission for a
finding of suitability within 30 days after the Chairman of the Nevada Board
mails the written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires
beneficial ownership of more than 10.0%, but not more than 15.0%, of a
Registered Company's voting securities may apply to the Nevada Commission for a
waiver of such finding of suitability requirements if the institutional investor
holds the voting securities for investment purposes only. An institutional
investor is not deemed to hold voting securities for investment purposes unless
the voting securities are acquired and 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 a Registered Company, any change in a Registered Company's corporate charter,
bylaws, management, policies or operations, or any of its gaming affiliates, or
any other action which the Nevada Commission finds to be inconsistent with
holding a Registered Company's voting securities for investment purposes only.
Activities which 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) other
activities as the Nevada Commission may determine to be consistent with
investment intent. A corporation, partnership or trust which is a beneficial
owner which must be found suitable, must submit detailed business and financial
information including a list of beneficial owners and pay all costs of
investigation.
11
<PAGE> 12
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board may be found unsuitable, including any record
owner who, upon request, fails to identify a beneficial owner. Any stockholder
found unsuitable and who holds, directly or indirectly, any beneficial ownership
of the voting securities of a Registered Company beyond such period of time as
may be prescribed by the Nevada Commission may be guilty of a criminal offense.
A Registered Company is subject to disciplinary action if, after it receives
notice that a person is unsuitable to be a stockholder or limited partner or to
have any other relationship with the Resort Casino or an affiliate, it (i) pays
that person any dividend or interest upon voting securities of the Registered
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.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Company to file applications, be investigated and be
found suitable to own the debt security of a Registered Company. If the Nevada
Commission determines that a person is unsuitable to own a debt security, then
pursuant to the Nevada Act, the Registered Company 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.
All Registered Companies are required to maintain a current ledger in Nevada
reflecting all ownership interests, which 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. All
Registered Companies also are required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to require that certificates representing ownership interest in a
Registered Company bear a legend indicating that such securities are subject to
the Nevada Act. It is unknown at this time whether the Nevada Commission will
impose this requirement on the Partnership.
None of the Swiss Parent, SCA, RAS, SCR or the Partnership may make a public
offering of its 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. Such approval, if given, does not
constitute a finding, recommendation or approval by the Nevada Commission or the
Nevada Board as to the accuracy or adequacy of the prospectus or the investment
merits of the securities, and any representation to the contrary is unlawful.
Changes in control of a Registered Company through merger, consolidation,
stock or asset acquisitions, management or consulting agreements, or any act or
conduct by a person whereby he obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Company must satisfy the Nevada Board and the Nevada Commission in a
variety of stringent standards prior to assuming control of such Registered
Company. The Nevada Commission also may 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 relating to 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 Companies 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: (i) 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 environmental for the orderly governance of corporate affairs. Approvals
are, in certain circumstances, required from the Nevada Commission before a
Registered 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 a Registered Company's Board of Directors
in response to a tender offer made directly to a Registered Company's
stockholders or partners for the purposes of acquiring control of a Registered
Company.
License fees and taxes vary depending on the type of gaming or activity
involved and are payable to the State of Nevada and to the counties and cities
in which the Nevada Licensee's respective operations are conducted. 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
12
<PAGE> 13
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
casino operations 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. Licensees such as Seven Circle
Resorts of Nevada, Inc., a wholly-owned subsidiary of SCA ("SCRN"), that hold a
distributor's license also pay certain fees and taxes to the State of Nevada.
With the exception of lotteries, nearly all types of gaming are legal in
Nevada. Taxes on nonrestricted gaming locations (more than 15 slot machines) are
paid monthly on a sliding scale: 3.0% on the first $50,000 of gross gaming
revenues, 5.0% on the next $90,000 and 6.25% on revenues exceeding $140,000. The
casino entertainment tax is 10% on all admissions, concessions, merchandise and
services for certain events and other forms of entertainment offered by the
gaming establishment. Quarterly and annual fees are assessed by the state,
county and local governments based on the number of table games and slot
machines.
The gaming industry represents a significant source of tax revenues to the
State of Nevada and Clark County. From time to time, federal and state
legislators and officials have proposed changes in tax law, or in the
administration of such law, affecting the gaming industry. Recent proposals have
included a federal gaming tax and increases in state or local gaming taxes. They
have also included limitations on the federal income tax deductibility of the
cost of furnishing certain complimentary promotional items to customers and
complimentary meals to employees. It is not possible to determine with certainty
the likelihood of possible changes in tax law or in the administration of such
law. Such changes, if adopted, could have a material adverse effect on the
Partnership's financial results.
Any Licensee who proposes to become involved in a gaming venture outside of
Nevada is required to deposit and maintain with the Nevada Board a revolving
fund in the amount of $10,000 to pay the expenses of investigation of the Nevada
Board of their participation in such foreign gaming. The revolving fund is
subject to increase or decrease in the discretion of the Nevada Commission.
Thereafter, Licensees are required to comply with certain reporting requirements
imposed by the Nevada Act. Licensees also are 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 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 finding of
suitability in Nevada on the ground of personal unsuitability.
The sale of alcoholic beverages by the Partnership on the premises of the
Resort Casino will be subject to licensing, control and regulation by the City
of Las Vegas. All licenses are revocable and are not transferable. The City of
Las Vegas has full power to limit, condition, suspend or revoke any such
license, and any such disciplinary action could, and suspension or revocation
would, have a material adverse effect on the financial condition of the
Partnership.
Other Gaming Jurisdictions
The Swiss Parent and SCA are subject to the jurisdiction of other gaming
authorities in the United States, including the Colorado Limited Gaming Control
Commission, the State of North Dakota Attorney General's Office, the Standing
Rock Tribal Gaming Control Commission and the National Indian Gaming Commission,
as well as European gaming authorities (each a "Gaming Authority" and
collectively, the "Gaming Authorities"). Should any of these other Gaming
Authorities take certain actions against the Swiss Parent, SCA or a corporate
Affiliate of RAS or the Partnership, such action could have a material adverse
effect on the Partnership's ability to obtain or maintain a Nevada gaming
license and additional sanctions could be imposed by the Nevada Gaming
Authorities for regulatory violations outside the State of Nevada. Any action by
any Gaming Authority may adversely affect the Gaming Licenses of RAS or the
Partnership, which would have a material adverse effect on the financial
condition of the Partnership.
NATIONAL GAMBLING COMMISSION
A National Gambling Impact Study Commission (the "National Commission") has
been established by the United States Congress to conduct a comprehensive study
of the social and economic impact of gaming in the United States. The National
Commission is required by the enabling legislation to issue a report containing
its findings and conclusions, together with recommendations of the National
Commission for legislation and administrative actions, by June 20, 1999. Any
recommendations which may be made by the National Commission could result in the
enactment of new laws and/or the adoption of new regulations which could
adversely impact the gaming industry in general and the Partnership in
particular. The Partnership is unable at this time to determine what
recommendations, if any, the National Commission will make, or the ultimate
disposition of any recommendations the National Commission may make.
13
<PAGE> 14
ENVIRONMENTAL MATTERS
The Partnership's operations and properties are subject to a wide variety of
increasingly complex and stringent environmental laws. The Partnership believes
its operations and properties are in compliance in all material respects with
environmental laws. Based upon its experience to date, the Partnership believes
that the future cost of compliance with and liability under existing
environmental laws will not have a material adverse effect on the financial
condition of the Partnership.
FUTURE SITES AND DEVELOPMENT
The Resort Casino is located at the only approved gaming site in the
portion of Summerlin known as Summerlin North. The Partnership has obtained the
Rights of First Offer from HHP for future development on the four approved
gaming sites in Summerlin South and West which rights, in certain circumstances,
may be assigned to an affiliate of SCA. Development of Summerlin South began in
1997, and Summerlin West is anticipated to be developed over the next five to 10
years. The Partnership believes this geographic exclusivity enhances the
Partnership's future prospects in the Las Vegas market that will give the Resort
Casino a sustainable competitive advantage. Moreover, recently passed
legislation will further restrict the ability of new casinos to enter the
Partnership's targeted market. This legislation prohibits new casino development
within 500 feet of a residential area or within 1,500 feet of a church or
school. This legislation also requires clear and convincing evidence that a
proposed casino will not adversely affect residential areas, schools or churches
located within 2,500 feet. Casino sites in master-planned communities that had
been previously zoned and approved for casino development at the time the
legislation became law are exempted from these requirements under Nevada Senate
Bill #208. Examples of such sites are the four additional sites subject to the
Right of First Offer in Summerlin West and Summerlin South as well as Coast
Resorts' Suncoast Casino site in close proximity to the Site. In addition,
Nevada Senate Bill #208 imposed a time certain deadline for receipt of
governmental approvals for certain other proposed casino development in
neighborhood areas not otherwise exempted by terms of the legislation.
ITEM 2. PROPERTIES
The Partnership acquired the Site at the intersection of Summerlin Parkway
and Rampart Boulevard in Las Vegas, Nevada in August 1996 for approximately
$16.6 million. The Site is located at the gateway to Summerlin. When completed,
the Resort Casino will feature two luxury hotels with a total of 461 rooms and
80 suites, a 50,000 square foot gaming facility, a 40,000 square foot spa and
fitness facility, up to eight restaurants of varied cuisine and an
indoor/outdoor buffet, a 60,000 square foot lifestyle complex and a 50,000
square foot conference and banquet center. See Item 1, "Business - The Resort
Casino," for a more detailed description of the Resort Casino.
The Partnership maintains five offices: (i) Corporate Office at 1160 Town
Center Drive, Suite 200, Las Vegas, Nevada 89134, (ii) Development Office at
3330 West Desert Inn Road, Unit 5, Las Vegas, Nevada 89102, (iii) Operations
Office at 3320 W. Sahara Avenue, Suite 300, Las Vegas, Nevada 89102, (iv)
Recruiting Center at 6344 W. Sahara Avenue, Las Vegas, Nevada 89102, and (v)
the Construction Office at 221 N. Rampart Boulevard, Las Vegas, Nevada 89128.
With the exception of the Site, all of these properties are leased. The
Partnership anticipates closing all leased locations except the corporate
office during 1999. The main telephone number of the Partnership is (702)
869-7000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any material legal proceedings,
nor, to its knowledge, are any material claims threatened against the Company or
its properties other than claims arising in the ordinary course of business. See
Note 5 to Financial Statements, "Commitments and Contingencies - Construction
Agreement."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 28, 1998, the Swiss Parent was admitted into the Partnership as
a limited partner. In accordance with the terms of the Partnership's agreement
of limited partnership, the admission of a new limited partner required the vote
of at least 75% of the limited partnership interests, which vote was obtained.
No other matters were submitted to a vote of the Partnership's security
holders during the fourth quarter of the fiscal year ended December 31, 1998.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The limited partnership interests (the "Interests") do not have an
established trading market. The Partnership does not intend to list the
Interests on any national securities exchange or seek the admission thereof to
trading in the National Association of Securities Dealers Automated Quotation
System. The Partnership does not intend to make a market in the Interests, nor
is it obligated to do so.
As of December 31, 1998, there were six direct and approximately 13
beneficial owners of the Interests. Any sale or other transfer of the Interests
is subject to restrictions contained in the Partnership's agreement of limited
partnership and by the Nevada gaming regulations. See Item 1, "Business -
Regulation and Licensing - Nevada."
On December 31, 1997, the Partnership and RAS issued 100,000 units
consisting of $1,000 principal amount of Series A 13% Senior Subordinated PIK
Notes Due 2007 ("Series A Senior Subordinated Notes"), all of which were later
exchanged for Series B Senior Subordinated PIK Notes Due 2007 ("Senior
Subordinated Notes"), and a warrant to purchase one share of common stock (a
"Corporate Warrant") in RAS Warrant Co. ("Warrant Co."), which may be exchanged
for a warrant to purchase an Interest representing 0.00008% of the total
partnership interest in the Partnership (an "L.P. Warrant," and collectively
with the Corporate Warrants, the "Note Warrants") at the purchaser's election.
Warrant Co. is a wholly-owned subsidiary of SCA. Each L.P. Warrant entitles the
holder to acquire through December 15, 2007, one Interest representing 0.00008%
of the total partnership interest in the Partnership at a price per L.P. Warrant
of $0.01, subject to the provisions of the partnership agreement and adjustments
from time to time upon the occurrence of certain changes in the terms of the
partnership interests, distributions, and certain issuances of options or
convertible securities. Holders of L.P. Warrants do not by virtue of being such
holders have any rights as limited partners of the Partnership. The Note
Warrants in the aggregate will represent an 8.0% interest in the Partnership
when exercised. As of December 31, 1998, there were 100,000 outstanding L.P.
Warrants, all of which were held by Warrant Co.
The Partnership does not currently pay a cash dividend, nor is one
contemplated in the foreseeable future. Any dividend or other cash distribution
to the partners is restricted by the terms of the December 30, 1997 Credit
Agreement among the Partnership, RAS and National Westminster Bank PLC (the
"Credit Agreement") and the December 31, 1997 Indenture among the Partnership,
RAS and the United States Trust Company as trustee (the "Indenture").
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The selected historical financial data set forth below as of December 31,
1998 and December 31, 1997, for the years ended December 31, 1998 and 1997, for
the period from inception through December 31, 1996, and for the period from
inception through December 31, 1998 have been derived from the Financial
Statements of RAS and the Partnership included elsewhere herein which have been
audited by Ernst & Young LLP, independent auditors, and should be read in
conjunction with those Financial Statements (including the notes thereto) and
with Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," all appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
RAS CONSOLIDATED
- ----------------
PERIOD FROM PERIOD FROM
YEARS ENDED INCEPTION THROUGH INCEPTION THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------------------------
1998 1997 1996 1998
---------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues...................... $ --- $ --- $ --- $ ---
Cost and Expenses:
General and administrative 781,851 498,427 84,458 1,364,736
Depreciation and
amortization............... 2,236,546 113,312 --- 2,349,858
Other Income (Expense):
Interest income............... 7,699,976 41,255 --- 7,741,231
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C> <C> <C>
Interest expense, including
accretion of warrant
liability (16,705,042) (48,346) --- (16,753,388)
------------- ---------- --------- -------------
Loss before limited
partners' interests........... (12,023,463) (618,830) (84,458) (12,726,751)
Limited partners' interests..... (11,898,152) (608,145) (83,613) (12,589,910)
------------- ---------- --------- ------------
Net loss........................ $ (125,311) $ (10,685) $ (845) $ (136,841)
============= ========= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents...................... $117,888,827 $175,491,628
Total current assets........................... 123,253,188 175,515,795
Preopening costs............................... 10,610,858 4,838,812
Construction in progress........................ 125,586,536 3,782,333
Total property and equipment, net............... 150,352,495 20,871,112
Total assets................................... 304,915,288 226,237,440
Total current liabilities...................... 21,087,918 1,127,313
Long-term debt, net of discount................ 207,261,809 154,131,067
Warrants redeemable for partnership
interests.................................. 15,202,121 5,869,565
Total liabilities.............................. 243,566,848 161,127,945
Limited partners' interest..................... 60,802,781 64,438,525
Total stockholder's equity..................... 545,659 670,970
Total liabilities, limited partners' interest
and stockholder's equity............ 304,915,288 226,237,440
</TABLE>
<TABLE>
<CAPTION>
THE PARTNERSHIP
- ---------------
PERIOD FROM PERIOD FROM
YEARS ENDED INCEPTION THROUGH INCEPTION THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------------------------
1998 1997 1996 1998
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues...................... $ --- $ --- $ --- $ ---
Cost and Expenses:
General and administrative 776,723 493,885 84,458 1,355,066
Depreciation and
amortization.............. 2,236,546 113,312 --- 2,349,858
Other Income (Expense):
Interest income............... 7,699,976 41,255 --- 7,741,231
Interest expense, including
accretion of warrant
liability ................. (16,705,042) (48,346) --- (16,753,388)
-------------- ------------- ----------- --------------
Net loss........................ $ (12,018,335) $ (614,288) $(84,458) $(12,717,081)
============== =========== ======== ============
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................. $117,884,859 $175,487,660
Total current assets....................... 123,254,348 175,511,827
Preopening costs........................... 10,610,858 4,838,812
Construction in progress.................... 125,586,536 3,782,333
Total property and equipment, net........... 150,352,495 20,871,112
Total assets............................... 304,916,448 226,233,472
Total current liabilities.................. 21,086,908 1,126,303
Long-term debt, net of discount............ 207,261,809 154,131,067
Warrants redeemable for partnership
interests............................. 15,202,121 5,869,565
Total liabilities.......................... 243,565,838 161,126,935
Total partners' interest................... 61,350,610 65,106,537
Total liabilities and partners' interest 304,916,448 226,233,472
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the information contained in the Financial
Statements, including the notes thereto included in this Form 10-K.
DEVELOPMENT AND CONSTRUCTION ACTIVITIES
The Partnership is constructing, and will own and operate, the Resort
Casino, which is expected to include two luxury hotel facilities, a casino, a
spa and fitness center, and a retail, meeting and entertainment complex in Las
Vegas, Nevada. Construction of the Resort Casino began in January 1998, and the
Resort Casino is expected to commence operations on June 29, 1999.
Construction projects of this nature entail significant risks, and the
anticipated costs and construction schedule are based upon budgets, conceptual
design documents and schedule estimates. As construction progresses, there is
always a possibility that delay claims and construction change orders may occur
or that necessary building permits and certificates of occupancy may not be
obtained on a timely basis.
On December 22, 1998, the Partnership entered into a settlement agreement
(the "Settlement Agreement") with J.A. Jones Construction ("Jones") concerning a
dispute which has arisen with respect to the cost and timing of the completion
of the Resort Casino being developed by the Partnership. Pursuant to the
Settlement Agreement, the Partnership will pay Jones an additional $23.0 million
(inclusive of $3.0 million previously budgeted for the completion of the second
hotel at the Resort Casino) for the completion of the Resort Casino (the
"Settlement Amount"), as set forth in the construction contract and including
additional work as set forth in the Settlement Agreement. In consideration of
the additional payments by the Partnership, the Partnership will not be
responsible for any additional project costs necessary to accomplish substantial
completion of the Resort Casino on or before April 30, 1999 except as otherwise
expressly set forth in the Settlement Agreement. Jones will be solely
responsible, and indemnify the Partnership, for all costs of substantial
completion except as otherwise expressly provided in the Settlement Agreement.
If substantial completion of the Resort Casino has not occurred on or before
April 30, 1999, all delay and other penalties provided for in the construction
contract shall commence as of April 30, 1999 and Jones shall not be entitled to
any amounts for general conditions or any other payments of a similar nature
from that date unless certain savings specified in the construction contract are
achieved. In the Settlement Agreement, Jones has represented that it has
reviewed all of the construction documents and determined that the Resort
Casino, including the second hotel, can be constructed "in a fashion and of a
functionality, quality and level of aesthetics reasonably inferable from the
architects' design to create a five-star rated property" and that Jones does not
know of any reason that the Resort Casino cannot be constructed as described in
the Settlement Agreement or substantially completed or on before April 30, 1999
for the amount set forth in the construction contract as modified by the
Settlement Agreement.
In addition to the payment of the Settlement Amount, the Settlement
Agreement provides that depending upon Jones' profit under the construction
contract as determined pursuant to accounting methodology set forth therein,
Jones may be entitled to a bonus of up to $1.0 million provided that the Resort
Casino is substantially completed on or before April 30, 1999 and Jones meets
interim
17
<PAGE> 18
construction progress milestones. The Settlement Agreement provides that under
no circumstances shall the bonus exceed $1.0 million; no bonus shall be paid if
the project is not substantially completed on or before April 30, 1999; and that
the maximum potential bonus shall be subject to a $200,000 reduction for each of
the progress milestones which are not met by Jones.
Jones has advised management that it is unlikely that it will be able to
complete the Resort Casino by April 30, 1999. Management has advised Jones that
it expects Jones to adhere to its contractual obligations; however, management
has set an opening date of June 29, 1999 in order to mitigate damages which may
be caused by Jones' failure to meet the April 30, 1999 deadline.
In conjunction with the execution of the Settlement Agreement, the
Partnership received an additional $8.5 million equity contribution from the
Swiss Parent.
The Companies believe the terms of the Settlement Agreement are in
compliance with all applicable contractual covenants and obligations pursuant to
the Credit Agreement and the Indenture. See "Item 1 - Business - Construction"
and Footnote 5 to the Financial Statements, "Commitments and Contingencies -
Construction Agreement."
RESULTS OF OPERATIONS
The Partnership was formed in Nevada in August 1996. The Partnership is in
the development stage and, accordingly, has no significant operating results.
The Partnership incurred a net loss of $12.0 million for the year ended
December 31, 1998 and a net loss of $.6 million for the year ended December 31,
1997. The general and administrative costs represent the proportion of expenses
incurred that have not been capitalized as preopening costs. Depreciation and
amortization expense includes depreciation of equipment already placed in
service and amortization of debt issuance costs and original issue discount.
Interest income is from the investment of the remaining proceeds of the $100.0
million First Mortgage Notes due March 31, 2004 (the "Mortgage Notes"), the
Senior Subordinated Notes and capital contributions. Interest expense consists
of the interest payable on the Mortgage Notes, nominal interest at 13.0% for the
Senior Subordinated Notes, and an accrual of 9.2% to account for the put option
feature of the Note Warrants (see Footnote 2 to the Financial Statements,
"Long-term Debt - Warrants"). The Partnership capitalized interest of $12.4
million for the year ended December 31, 1998.
PREOPENING COSTS
Development costs incurred by the Partnership prior to December 31, 1998
were capitalized. These costs include legal fees, personnel, travel, and other
costs related to the development of the Resort Casino. In April 1998, the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants issued Statement of Position 98-5 entitled "Reporting on the
Costs of Start-up Activities" ("SOP 98-5") which requires entities to expense
costs of preopening activities as they are incurred. SOP 98-5 is effective for
fiscal years beginning after December 15, 1998. Accordingly, the Partnership
will adopt the statement in fiscal year 1999. Upon adoption, the Partnership
will be required to report the initial adoption as a cumulative effect of a
change of accounting principle as described in Accounting Principles Board
Opinion No. 20, "Accounting Changes," during the first quarter of its fiscal
year 1999 and expense subsequent preopening costs as incurred. The cumulative
effect upon adoption will result in a one-time charge to income in an amount
equal to the net book value of the Partnership's preopening costs. Under the
Partnership's existing policy, the preopening expenses would have been expensed
upon the opening of the Resort Casino.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, approximately $179.8 million of the estimated total
project cost of $276.0 million (excluding leased items) had been expended or
incurred to fund construction and development of the Resort Casino ($51.4
million as of December 31, 1997). Of the costs incurred, approximately $135.3
million represents land, construction in progress and furniture, fixtures and
equipment ($21.0 million as of December 31, 1997), and the balance represents
related development costs, financing costs and funds deposited into the Mortgage
Notes interest escrow account.
The remaining construction and development costs for the Resort Casino are
expected to be funded from a combination of (i) cash held in the Partnership's
bank accounts ($19.0 million at December 31, 1998), (ii) the remaining balance
of the $100.0 million gross proceeds from the Mortgage Notes ($98.9 million at
December 31, 1998), and (iii) operating lease facilities for up to approximately
$44.4 million.
The Mortgage Notes consist of $100.0 million of loans ("Construction Loans")
which may be used to finance construction of the Resort Casino, with the
principal amount of Construction Loans outstanding on the Commencement Date to
convert into term loans (the "Term Loans"). Construction Loans and Term Loans
may not be re-borrowed once repaid. Under the terms of the Credit
18
<PAGE> 19
Agreement and the Indenture, the Partnership may obtain additional sources of
liquidity, if necessary, including (i) up to $15.0 million of capital lease
financing for furniture, fixtures and equipment, (ii) up to $5.0 million of
unsecured debt, and (iii) operating lease financing.
On August 6, 1998, the Partnership executed commitments with a lease
financing company for certain credit facilities. The Partnership closed the
facilities on December 21, 1998. In March 1999, the Partnership executed
additional commitments with the same lease financing company and amended certain
terms of the original credit facilities.
The Partnership has closed on the following credit facilities, as amended:
- Capital lease facility for up to approximately $15.0 million of
general equipment, which may be converted to an operating lease
facility;
- Operating lease facility for up to approximately $13.1 million for
gaming equipment, subsequently reduced to approximately $10.4 million;
and
- Unsecured credit facility for $5.0 million.
The Partnership has executed commitments for the following credit
facilities:
- Operating lease facility for up to approximately $15.0 million of
hotel and casino furniture, fixtures and equipment; and
- Operating lease facility for up to approximately $4.0 million for air
handling equipment.
The operating lease facilities may be used to finance new gaming devices,
related systems, vehicles and furniture, fixtures and equipment acceptable to
the leasing company. The terms of the facilities are for 36 or 48 months at
imputed interest rates of 11% to 15%. Maximum annual payments under the
facilities will be approximately $14.4 million. Upon expiration of the
facilities, the Partnership has been granted an option to (i) purchase not less
than all of the equipment, by equipment category, at fair market value as
determined by an independent appraiser, (ii) renew the facility for 12 months,
or (iii) return the equipment to the leasing company.
The unsecured credit facility will be available from the opening of the
Resort Casino until December 21, 1999. The Partnership will be required to give
45 days notice for each draw, which must be a minimum of $1.0 million and a
maximum of $2.0 million. The Partnership will be required to pay 2.0% of each
draw as a credit facility, legal and syndication fee at the time of closing each
draw. Each loan will include a 2.0% original issue discount and be converted to
a 24-month term note fully amortizing at an interest rate of 13.0%.
A commitment fee totaling $140,500 was paid on execution of the lease
facility commitment on August 6, 1998. Upon closing the transaction on December
21, 1998, the fee was applied to the security deposit of the leases, and
additional fees, rental payments and security deposits totaling $1,395,870 were
paid. In addition to paying the first and last month's rental payments on each
lease facility at closing, the Partnership must pay a $2.9 million general
security deposit relating to the air handling equipment lease and the casino and
hotel furniture, fixtures and equipment lease.
Based on management's most recent review of all project costs, management
expects to utilize all or a portion of the leasing facilities prior to or after
the opening of the Resort Casino and all or a portion of the unsecured credit
facility after the opening of the Resort Casino. The funds provided by these
sources are expected to be sufficient to develop, construct and commence
operations of the Resort Casino assuming there are no significant delays,
material cost or construction cost overruns.
Based on current cash balances and anticipated expenditures, management
estimates a cash balance upon opening of $37.1 million, consisting of (i) $2.3
million for casino bankroll; (ii) $0.2 million for slot machine coin inventory;
(iii) $12.4 million of Mortgage Notes interest escrow; (iv) $14.3 million of
general contractor retention, deferred general contractor fee and construction
payables; (v) $2.4 million of advance guest deposits; (vi) $0.5 million of
preopening payables and (vii) $5.0 million of general project costs and
operating shortfall reserves. Any significant delays or project cost overruns
would have a material impact on the Partnership's cash balance upon opening.
Beginning with the anticipated opening of the Resort Casino on June 29,
1999, the Partnership expects to fund its operations, capital requirements and
debt service from (i) operating cash flow; (ii) a forecasted cash balance upon
opening of $37.1 million; (iii)
19
<PAGE> 20
any remaining sale leaseback financing allowed under the Credit Agreement and
the Indenture; and (iv) the unsecured $5.0 million credit facility. Such
financing is subject to certain conditions, including completion of the Resort
Casino. Management believes that forecasted cash balances, forecasted operating
cash flow and additional borrowings allowed under the Credit Agreement and the
Indenture will provide the Partnership with sufficient resources to meet its
existing debt obligations and foreseeable capital expenditure requirements.
Certain occurrences may prevent the Partnership from achieving an adequate level
of resources, including, but not limited to: (i) failure to obtain the required
state and local gaming licenses on a timely basis; (ii) failure to obtain the
necessary building permits and certificates of occupancy on a timely basis;
(iii) significant construction delays or project cost overruns; and (iv) failure
to achieve expected operating results.
The Partnership may seek, if necessary, to the extent permitted under the
Credit Agreement and the Indenture, additional financing through additional bank
borrowings or debt or equity financing. There can be no assurance that
additional financing, if needed, will be available to the Partnership and, if
available, that the financing will be on favorable terms. Finally, there can be
no assurance that new business development or other unforeseen events will not
occur resulting in the need to raise additional funds.
REGULATION AND TAXES
The Partnership is subject to numerous regulations and taxes, significant
changes in which could have a material adverse effect on the operations of the
Resort Casino. See Item 1, "Business - Regulation and Licensing."
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, those
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions or engage in similar normal
business activities.
Based on recent assessments, the Partnership believes that its systems are
Year 2000 compliant and will properly utilize dates beyond December 31, 1999.
Given that the Partnership is a relatively new entity and significant systems
were not implemented until 1997, management was able to select and implement
systems which had previously been certified as Year 2000 compliant.
The Partnership is in the process of contacting its significant suppliers
and subcontractors that do not share information systems with the Partnership
(external agents) as to their compliance with Year 2000 certification. To date,
the Partnership is not aware of any external agent with a Year 2000 issue that
would materially impact the Partnership's results of operations, liquidity, or
capital resources. However, the Partnership has no means of ensuring that
external agents will be Year 2000 compliant. The inability of external agents to
complete their Year 2000 resolution process in a timely fashion could materially
adversely impact the Partnership. The effect of non-compliance by external
agents is not determinable. Possible Year 2000 related problems due to external
agents could include loss of power, loss of telephone service, supply shortages
and flight cancellations.
In the event that the Partnership experiences difficulties with its systems
or with significant external agents, the Partnership has contingency plans for
certain critical applications and is working on such plans for others.
Contingency plans generally consist of performing mission critical procedures
manually or with substitute systems which are Year 2000 compliant.
CALIFORNIA PROPOSITION 5
On November 3, 1998, the electorate in the State of California approved
Proposition 5, which was proposed by several California Indian Tribes. This
referendum purports to legalize games currently operated by certain tribes in
contravention of California and Federal law and could lead to the expansion of
gaming operations by California Indian tribes, which could have a material
adverse effect on the Partnership. Two legal challenges to Proposition 5 were
filed in California state court challenging the validity of Proposition 5 under
the California constitution. On or about December 3, 1998, the California State
Supreme Court blocked the implementation of Proposition 5 while it considers the
lawsuits raising constitutional challenges. The Partnership remains in the
process of evaluating the potential impact of Proposition 5 on the Partnership.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
20
<PAGE> 21
The Partnership is exposed to market risk in the form of fluctuations in
interest rates and their potential impact upon the Mortgage Notes, which are
variable-rate debt. Of the $100.0 million Mortgage Notes, $50.0 million are
covered under a cap of 11.0% until March 31, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and supplementary data are attached to this Form
10-K. Reference is made to the Index to the Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
The current directors and executive officers of RAS, the general partner of
the Partnership, are:
<TABLE>
<CAPTION>
NAME TITLE AGE COUNTRY OF CITIZENSHIP DIRECTOR/OFFICER SINCE
----- ------ --- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Hans Jecklin.......... Chairman of the Board 53 Switzerland 1996
Christiane
Jecklin............... Director 53 Switzerland 1996
Brian
McMullan.............. Director, President 52 United Kingdom 1996
and Chief Executive
Officer
John Tipton........... Director, Senior 52 United States 1996
Vice President,
Chief Financial
Officer and General
Counsel
Jim Fonseca........... Director, Senior 49 United Kingdom 1996
Vice President Gaming
Operations
Quinton
Boshoff............... Director, Senior Vice 45 South Africa 1996
President Operations
Jeff Smith............ Treasurer, Secretary 33 United States 1996
and Financial
Controller
</TABLE>
Hans Jecklin, the Chairman of the Board of RAS since June 1996 and the
husband of Christiane Jecklin, first became involved in the gaming industry in
Zurich, Switzerland in 1968. In 1975, he founded the predecessor to the Swiss
Parent in Zurich, whose core business was gaming. Today, the Swiss Parent's
operations include gaming, hotels, restaurants and real estate investment.
Christiane Jecklin, a director of RAS since June 1996 and the wife of Hans
Jecklin, has been involved in the gaming industry and the management of SCA
since its formation in 1989.
Brian McMullan, the President and Chief Executive Officer of RAS and a
director since June 1996, has nearly 30 years of gaming experience, much of that
time in senior management positions for gaming companies in Great Britain and
South Africa. Mr.
21
<PAGE> 22
McMullan entered the gaming industry in Britain in 1968. From 1986 to 1992, Mr.
McMullan served as Sun International's Director of Gaming Operations.
John Tipton, Senior Vice President, Chief Financial Officer and General
Counsel of RAS and a director since June 1996, has over 25 years experience in
the private and public sector, including a number of years in private legal
practice during which time he was managing partner of Calkins, Kramer, Grimshaw
& Harring, a Denver law firm. From 1988 to 1992, Mr. Tipton served as Executive
Director of the Colorado Department of Revenue, where he was charged with
drafting and implementing the casino gaming legislation in Colorado. He was also
responsible for managing the Colorado Lottery, the Colorado Division of Gaming
and pari-mutuel racing in Colorado. Mr. Tipton joined SCA in 1993 and is
responsible for regulatory, development and legal matters.
Jim Fonseca, Senior Vice President Gaming Operations of RAS and a director
since June 1996, has over 25 years of gaming experience. Starting in 1972, he
worked for a number of London casinos and has experience in the primary casino
table games. From 1987 to 1992, Mr. Fonseca was Regional Gaming Manager of Sun
International (Bophuthatswana) Ltd.
Quinton Boshoff, the Senior Vice President Slot Operations of RAS and a
director since June 1996, entered the gaming business in southern Africa in
1979. As Regional Slots Manager of Sun International (Bophuthatswana) Ltd., Mr.
Boshoff led a team in marketing, security and operating procedures with respect
to slot development. In 1992, Mr. Boshoff came to the U.S. as a member of the
original team that set up SCA.
Jeff Smith, the Treasurer, Secretary and Financial Controller of RAS since
June 1996, has been involved in the casino and resort industry for over 10
years. From 1986 to 1991, Mr. Smith was an accountant at Ernst & Young LLP. Mr.
Smith joined SCA in 1991 and has been involved in the openings of all three U.S.
properties.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following sets forth the annual compensation for services in all
capacities to the Partnership and RAS for the fiscal years ended December 31,
1998 and 1997 of Mr. McMullan, the President and Chief Executive Officer of RAS,
the Partnership's general partner, and Messrs. Tipton, Fonseca, Boshoff and
Smith, the remaining executive officers of RAS.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------
OTHER ALL OTHER
NAME AND PRINCIPAL POSITION(1) YEAR SALARY BONUS COMPENSATION(2) COMPENSATION(3)
- -------------------------------------------- ---- ------ ----- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Brian McMullan.............................. 1998 $ 325,000 $ --- $ 68,728 $ 55,986
President and Chief Executive Officer 1997 275,000 10,781 71,151 107,167
John Tipton.................................
Senior Vice President, Chief Financial 1998 $ 275,000 $ --- $ 57,205 $ 46,509
Officer and General Counsel 1997 225,000 5,391 62,718 97,761
Jim Fonseca.................................
Senior Vice President 1998 $ 275,000 $ --- $ 73,030 $ 42,530
Gaming Operations 1997 225,000 5,391 59,347 93,757
Quinton Boshoff............................. 1998 $ 175,000 $ --- $ 64,526 $ 32,662
Senior Vice President Slot Operations 1997 150,000 5,391 54,715 82,024
Jeff Smith..................................
Treasurer, Secretary and 1998 $ 150,000 $ --- $ 8,653 $ 17,486
Financial Controller 1997 125,000 --- 5,932 65,936
</TABLE>
(1) Executive officers of RAS are compensated by SCR, a wholly-owned subsidiary
of SCA, and neither the Partnership nor RAS pays any compensation to any of
the executive officers. See Item 13, "Certain Relationships and Related
Transactions."
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<PAGE> 23
(2) Each perquisite or other personal benefit exceeding 25.0% of the total
perquisites and other personal benefits for each named executive officer is:
<TABLE>
<CAPTION>
TAXES FOR LIFE
INSURANCE
PREMIUMS AND
NAME YEAR CAR ALLOWANCE CAR ALLOWANCE OTHER
---- ---------------- ---------------- -------
<S> <C> <C> <C> <C>
Brian McMullan... 1998 $ 32,860 $ 27,000 $ 8,868
1997 38,164 29,030 ---
John Tipton...... 1998 $ 26,261 $ 27,000 $ 3,944
1997 30,499 29,030 ---
Jim Fonseca...... 1998 $ 30,454 $ 37,000 $ 5,576
1997 27,244 29,030 ---
Quinton Boshoff.. 1998 $ 23,582 $ 37,000 $ 3,944
1997 19,243 29,030 ---
Jeff Smith....... 1998 $ 5,509 --- $ 3,144
1997 5,157 --- ---
</TABLE>
(3) Items included in "All Other Compensation" are:
<TABLE>
<CAPTION>
ONE-TIME EXECUTIVE LIFE
MOVING INSURANCE 401(k)
NAME YEAR ALLOWANCE PREMIUMS CONTRIBUTIONS
- --------------------- ---- ----------- ------------------ -------------
<S> <C> <C> <C> <C>
Brian McMullan....... 1998 $ --- $ 47,186 $ 8,800
1997 50,000 46,867 10,300
Jim Tipton........... 1998 $ --- $ 37,709 $ 8,800
1997 50,000 37,461 10,300
Jim Fonseca.......... 1998 $ --- $ 33,730 $ 8,800
1997 50,000 33,457 10,300
Quinton Boshoff...... 1998 $ --- $ 23,862 $ 8,800
1997 50,000 23,631 8,393
Jeff Smith........... 1998 $ --- $ 9,202 $ 8,284
1997 50,000 9,061 6,875
</TABLE>
COMPENSATION OF DIRECTORS
RAS does not pay any fees or other compensation (other than reimbursement of
expenses incurred to attend meetings) to directors for their services in that
capacity.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Neither the Partnership, RAS, SCA or SCR has a compensation committee or
other committee of the board of directors which performs a similar function.
Each of the executive officers' compensation, which is paid by SCR, was
determined by Messrs. Jecklin, McMullan and Tipton. Each of the directors of RAS
is a director of SCR. See Item 13, "Certain Relationships and Related
Transactions."
EMPLOYMENT AGREEMENTS AND EQUITY ARRANGEMENTS
There are no employment agreements between either the Partnership and RAS
and any of the directors or executive officers of RAS or senior operating
management of the Partnership or RAS. Messrs. McMullan, Tipton, Fonseca and
Boshoff, however, are employees of SCR, a wholly-owned subsidiary of SCA, and
each has an employment agreement which may be terminated by the employee or SCR
with 90 days prior written notice. As employees of SCR, each of Messrs.
McMullan, Tipton, Fonseca and Boshoff currently are engaged, and in the future
will engage, in the development and management of SCR's other businesses and
properties. They will devote only as much of their time to the business of the
Partnership as they, in their judgment, deem to be reasonably required, which
will be less than their full time. These officers may experience conflicts of
interest in allocating management time,
23
<PAGE> 24
services and functions among the Partnership and the various other business
activities of SCR. See Item 13, "Certain Relationships and Related
Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Interests in the Partnership by (i) each person who,
to the knowledge of the Partnership, beneficially owns more than 5.0% of the
outstanding Interests in the Partnership and (ii) all executive officers and
directors of RAS as a group as of March 15, 1999.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP
BENEFICIAL OWNER (1)(2) PERCENTAGE
- ----------------------------- ----------
<S> <C>
RAS (3)........................................... 1.0%
SCA (4)........................................... 76.6
Swiss Casinos Holding, AG (5)..................... 80.3
Tivolino Holding AG (6)........................... 80.3
Hans Jecklin (7).................................. 60.2
Christiane Jecklin (8)............................ 20.1
Brian McMullan (9)................................ 4.6
John Tipton (10).................................. 2.3
Jim Fonseca (11).................................. 3.1
Quinton Boshoff (12).............................. 2.3
Jeff Smith........................................ ---
All executive officers and directors of RAS as
a group (13).................................... 93.3%
</TABLE>
- -----------
(1) The address of each person named is c/o The Resort at Summerlin, Limited
Partnership, 1160 Town Center Drive, Suite 200, Las Vegas, Nevada 89134.
(2) Percentages exclude percentage ownership attributable to the Note Warrants
(as defined in Item 5, "Market for the Registrant's Common Equity and
Related Stockholder Matters").
(3) RAS is a wholly-owned subsidiary of SCA and owns a 1.0% general partnership
Interest in the Partnership.
(4) SCA holds a 75.6% limited partnership Interest and a beneficial 1.0%
general partnership interest in the Partnership through the ownership of
RAS.
(5) Swiss Casinos Holding, A.G., the Swiss Parent, owns a 16.7% limited
partnership Interest in the Partnership and is the owner of 8,300
outstanding shares of SCA, which owns a 75.6% limited partnership Interest
and a beneficial 1.0% general partnership Interest in the Partnership.
(6) Tivolino Holding AG is the owner of all of the outstanding shares of SCH,
which owns 8,300 outstanding shares of SCA, which owns a 75.6% limited
partnership Interest and a beneficial 1.0% general partnership Interest in
the Partnership, and which owns a 16.7% limited partnership Interest in the
Partnership.
(7) Mr. Jecklin is the beneficial owner of 6,225 shares of SCA, which owns a
75.6% limited partnership Interest and a beneficial 1.0% general
partnership Interest in the Partnership, and the beneficial owner of
224,999 shares of SCH, which owns a 16.7% limited partnership Interest in
the Partnership. Excludes 2,075 shares of SCA and 75,000 shares of SCH
owned by Christiane Jecklin, his wife, in which he disclaims beneficial
interest.
(8) Ms. Jecklin is the beneficial owner of 2,075 shares of SCA, which owns a
75.6% limited partnership Interest and a beneficial 1.0% general
partnership Interest in the Partnership, and the beneficial owner of 75,000
shares of SCH, which owns a 16.7%
24
<PAGE> 25
limited partnership Interest in the Partnership. Excludes 6,225 shares of
SCA and 224,999 shares of SCH owned by Hans Jecklin, her husband, in which
she disclaims beneficial interest.
(9) Mr. McMullan owns 600 shares of SCA, which owns a 75.6% limited partnership
Interest and a beneficial 1.0% general partnership Interest in the
Partnership.
(10) Mr. Tipton owns 300 shares of SCA, which owns a 75.6% limited partnership
Interest and a beneficial 1.0% general partnership Interest in the
Partnership.
(11) Mr. Fonseca owns 400 shares of SCA, which owns a 75.6% limited partnership
Interest and a beneficial 1.0% general partnership Interest in
the Partnership.
(12) Mr. Boshoff owns 300 shares of SCA, which owns a 75.6% limited partnership
Interest and a beneficial 1.0% general partnership Interest in the
Partnership.
(13) Messrs. Jecklin, McMullan, Tipton, Fonseca, Boshoff and Smith are
directors and executive officers of SCA, which owns all of the outstanding
shares of common stock of RAS, and such persons, as a group, beneficially
own 100.0% of SCA's common stock, and, therefore, may be deemed to
beneficially own all the Partnership Interests held by RAS and SCA. In
addition, through certain voting arrangements that expire in 2004, Mr.
Jecklin has the power to vote all the shares of common stock of SCA owned
by these executives, which totals 16.0% of the outstanding stock of SCA.
Mr. Jecklin, through his ownership and control of the Swiss Parent, also
has voting and dispositive power with respect to 83.0% of the outstanding
stock of SCA, all of which is owned by the Swiss Parent. The remaining 1.0%
is held by a director of the Swiss Parent. Mr. Jecklin also owns 75.0% of
the outstanding stock of SCH, and, therefore, may be deemed to beneficially
own all of the Partnership Interest held by SCH.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the terms of the Agreement of Limited Partnership of the
Partnership (the "Partnership Agreement"), RAS is entitled to 3.0% of monthly
net revenues of the Partnership and 6.0% of the monthly earnings before
interest, taxes, depreciation and amortization ("EBITDA") with the net revenue
fee deducted each calendar month, as compensation for management of the
Partnership. The maximum amount of compensation payable to RAS, however, shall
not exceed 10.0% of the Partnership's total net revenue. Distribution of these
fees shall be made quarterly, subject to the terms of the Indenture and the
Credit Agreement. Such compensation shall be subordinated to the Senior
Subordinated Notes and the Mortgage Notes.
Substantial management and general and administrative services, including
the services of Messrs. McMullan, Tipton, Fonseca, Boshoff and Smith, certain
members of additional senior management, certain clerical and administrative
employees, and certain other general and administrative support including office
space, will be provided to the Partnership by SCR. All executive officers of the
Partnership will be compensated by SCR and neither the Partnership nor RAS will
pay any compensation to any of the Partnership's executive officers. In
consideration of the foregoing, in 1998 the Partnership paid to SCR a fee of
approximately $2.0 million plus 65.0% (approximately $200,000) of SCR's
overhead. The fee is subject to negotiation annually between the Partnership and
SCR. The Partnership has entered into a Management Service Agreement with SCR
whereby certain employees of SCR will provide substantial management and general
and administrative services and other support to the Partnership and RAS, in
consideration of the payment of a monthly fee to SCR and the reimbursement of
SCR's actual expenses and appropriate portions of the salaries and benefits of
its employees providing such management services. Accordingly, SCR will be
required to be licensed as a key employee of the Partnership in connection with
the licensing and registration of the Partnership to operate the Resort Casino.
SCR has applied for licensure as a key employee of the Partnership. The current
fee was not, and any future fee will not be, the result of arms-length
negotiation between both the Partnership and SCR.
Prior to December 31, 1997, the Partnership assigned its option rights on a
22.5-acre parcel (the "Option Parcel") adjacent to the Resort Casino to SCA
through a preferential distribution subject to the approval of HHP. The right to
purchase the Option Parcel was originally purchased by the Partnership for $1.2
million. It is anticipated that a new entity will be established for any
development of the Option Parcel. Any interest retained by SCA in the Option
Parcel development and any other economic benefit from the Option Parcel will be
shared by the partners based upon their Partnership Interests as of the date of
the assignment.
The Partnership currently holds the Rights of First Offer with respect to
four other potential gaming sites in Summerlin. If the Partnership is given a
notice to exercise its Rights of First Offer, and it elects to exercise such
right, it must first attempt to develop and finance such site under the terms of
the Indenture and Credit Agreement. If, however, the financing of such site is
restricted under
25
<PAGE> 26
the Indenture and Credit Agreement, the Partnership will be permitted to assign
such rights to an affiliate of SCA in exchange for an equity interest in such
affiliate provided, however, that SCA owns at least 85.0% of such affiliate. The
determination of the value of the Rights of First Offer that may be assigned to
the affiliate of SCA will be determined by RAS as general partner of the
Partnership. RAS currently holds a 1.0% interest in the Partnership as the
general partner. SCA also owns a limited partnership Interest that represents
75.6% of the Partnership's total Interests, excluding the Note Warrants.
Christiana, L. P., an entity controlled by Paul Steelman, the principal of
the architect for the Resort Casino (the "Architect"), owns a 4.2% limited
partnership Interest in the Partnership. The Partnership entered into the
December 29, 1997 American Institute of Architects "Standard Form of Agreement
between Owner and Architect where the Construction Manager is NOT a Constructor
- - Construction Manager - Advisor Edition" between the Partnership and the
Architect (the "Architect Agreement") prior to December 31, 1997, pursuant to
which the Architect shall be paid compensation of approximately $2.4 million and
any reimbursable expenses. The Architect Agreement also provides for additional
expenditures of up to approximately $2.3 million primarily for third party
engineering, landscaping and other consulting fees.
Mr. Jecklin, the Chairman of the Board of RAS, is the Chairman of the Board
of SCA and the Swiss Parent. Additionally, Messrs. McMullan, Tipton, Fonseca,
Boshoff and Smith, the executive officers of RAS, also serve as executive
officers of SCA.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a)(1) Financial Statements
See page F-1 for an index to the Financial Statements.
(a)(2) Financial Statement Schedules
(a)(3) Exhibits
2.1 December 22, 1997 Purchase Agreement.*
3.1 Certificate of Limited Partnership of The Resort at Summerlin, Limited Partnership.*
3.2 Agreement of Limited Partnership, as amended, of The Resort at Summerlin, Limited Partnership.*
3.3 Articles of Incorporation of The Resort At Summerlin, Inc.*
3.4 Bylaws of The Resort at Summerlin, Inc.*
4.1 December 31, 1997 Indenture.*
4.2 December 30, 1997 Exchange and Registration Rights Agreement.*
4.3 December 30, 1997 Registration Rights and Limited Partners' Agreement.*
4.4 December 30, 1997 Warrant Agreement for Partnership Warrants.*
4.5 December 30, 1997 Warrant Agreement for Corporate Warrants.*
4.6 Disbursement Agreement dated December 31, 1997.*
4.7 Subordinated Notes Proceeds Accounts Agreement dated December 31, 1997.*
4.8 Mortgage Notes Proceeds Account Agreement dated December 31, 1997.*
4.9 Interest Escrow Account Agreement dated December 31, 1997.*
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C>
4.10 Partnership Funds Account Agreement dated December 31, 1997.*
4.11 December 31, 1997 Global Note.*
4.12 Form of Partnership Warrants.*
4.13 Form of Corporate Warrants.*
10.1 December 22, 1997 Construction Contract.*
10.2 December 16, 1997 License Agreement between RAS and Regent Hotels Worldwide, Inc.*
10.3 December 29, 1997 Architect Agreement between RAS and Paul Steelman, Ltd.*
10.4 August 15, 1996 Development Declaration and Option to Repurchase between RAS and Howard Hughes
Properties, Limited Partnership.*
10.5 August 15, 1996 Royalty Agreement between RAS and Howard Hughes Properties, Limited Partnership.*
10.6 December 22, 1997 Guaranty of Completion of J.A. Jones, Inc.*
10.7 December 31, 1997 Credit Agreement.*
10.8 December 30, 1997 Subordinated Notes Proceeds Agreement.*
10.9 Golf Course Agreement.*
10.10 January 13, 1998 Construction Management Contract.*
10.11 March 24, 1999 Amendment to Credit Agreement.**
27.1 Financial Data Schedule.**
27.2 Financial Data Schedule.**
</TABLE>
- ----------
* Filed previously.
** Filed herewith.
(b) Reports on Form 8-K
The Partnership filed no reports on Form 8-K during the three-month period
ended December 31, 1998.
27
<PAGE> 28
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this report to the signed
on their behalf by the undersigned, thereunto duly authorized.
The Resort at Summerlin, Limited
Partnership (Registrant)
By: The Resort at Summerlin, Inc., a
Nevada corporation, its general partner
Date: March 31, 1999 By: /s/ Brian McMullan
----------------------
Brian McMullan
Its: President and Chief Executive
Officer (Principal Executive Officer)
Date: March 31, 1999 By: /s/ John J. Tipton
----------------------
John J. Tipton
Its: Senior Vice President and Chief
Financial Officer and General Counsel
(Principal Financial Officer)
The Resort at Summerlin, Inc.
(Registrant)
Date: March 31,1999 By: /s/ Brian McMullan
----------------------
Brian McMullan
Its: President and Chief Executive
Officer (Principal Executive Officer)
Date: March 31, 1999 By: /s/ John J. Tipton
----------------------
John J. Tipton
Its: Senior Vice President and Chief
Financial Officer and General Counsel
(Principal Financial Officer)
28
<PAGE> 29
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of The Resort at
Summerlin, Limited Partnership and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Signature Title Date
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
/s/ Hans Jecklin Chairman of the Board of Directors March 31, 1999
Hans Jecklin
/s/ Christiane Jecklin Member of the Board of Directors March 31, 1999
Christiane Jecklin
/s/ Brian D. McMullan Director, President and Chief Executive Officer of The March 31, 1999
Brian D. McMullan Resort at Summerlin, Inc., its General Partner (Principal
Executive Officer)
/s/ John J. Tipton Director, Senior Vice President, Chief Financial Officer March 31, 1999
John J. Tipton and General Counsel of The Resort at Summerlin, Inc., its
General Partner (Principal Financial and Accounting
Officer)
/s/ Jeff Smith Treasurer, Secretary and Financial
Jeff Smith Controller (Principal Accounting Officer)
/s/ John James Assis-Fonseca Director, Senior Vice President and Chief Operating March 31, 1999
John James Assis-Fonseca Officer of The Resort at Summerlin, Inc., its General
Partner
/s/ Quinton Boshoff Director and Senior Vice President - Slot Operations of March 31, 1999
Quinton Boshoff The Resort at Summerlin, Inc., its General Partner
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of The Resort at
Summerlin, Inc. and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Signature Title Date
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
/s/ Hans Jecklin Chairman of the Board of Directors March 31, 1999
Hans Jecklin
/s/ Christiane Jecklin Member of the Board of Directors March 31, 1999
Christiane Jecklin
/s/ Brian D. McMullan Director, President and Chief Executive Officer (Principal March 31, 1999
Brian D. McMullan Executive Officer)
/s/ John J. Tipton Director, Senior Vice President, Chief Financial Officer March 31, 1999
John J. Tipton and General Counsel (Principal Financial and Accounting
Officer)
/s/ Jeff Smith Treasurer, Secretary and Financial
Jeff Smith Controller (Principal Accounting Officer)
/s/ John James Assis-Fonseca Director, Senior Vice President and Chief Operating March 31, 1999
John James Assis-Fonseca Officer
/s/ Quinton Boshoff Director and Senior Vice President - Slot Operations March 31, 1999
Quinton Boshoff
</TABLE>
29
<PAGE> 30
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997, THE PERIOD FROM
INCEPTION THROUGH DECEMBER 31, 1996 AND THE PERIOD FROM
INCEPTION THROUGH DECEMBER 31, 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors ........................................................................F-1
Audited Financial Statements
The Resort at Summerlin, Inc. (a development stage company)
Balance Sheets...................................................................................F-2
Statements of Operations.........................................................................F-6
Statements of Changes in Stockholder's Equity...................................................F-10
Statements of Cash Flows........................................................................F-12
The Resort at Summerlin, L.P. (a development stage company)
Balance Sheets...................................................................................F-2
Statements of Operations.........................................................................F-6
Statements of Partnership Interests.............................................................F-11
Statements of Cash Flows........................................................................F-12
The Resort at Summerlin, Inc. (consolidated) (a development stage company)
Balance Sheets...................................................................................F-2
Statements of Operations.........................................................................F-6
Statements of Changes in Stockholder's Equity...................................................F-10
Statements of Cash Flows........................................................................F-12
Notes to Financial Statements (all entities)..........................................................F-19
</TABLE>
<PAGE> 31
Report of Independent Auditors
Board of Directors and Partners
The Resort at Summerlin, Inc. and
The Resort at Summerlin, L.P. ("Companies")
We have audited the accompanying balance sheets for the Companies specified in
the attached table of contents (both of which are development stage companies)
as of December 31, 1998 and 1997, and the related statements of operations,
partnership interests, changes in stockholder's equity and cash flows for the
years ended December 31, 1998 and 1997, the period from inception through
December 31, 1996 and the period from inception through December 31, 1998. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Companies at December 31,
1998 and 1997, and the results of their operations and their cash flows for the
years ended December 31, 1998 and 1997, the period from inception through
December 31, 1996 and the period from inception through December 31, 1998, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
March 29, 1999
F-2
<PAGE> 32
Balance Sheets
(Development stage companies)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
CONSOLIDATED
RAS INC. RAS L.P. RAS INC.
----------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,968 $ 117,884,859 $ 117,888,827
Restricted assets - 4,437,500 4,437,500
Interest receivable - 150,961 150,961
Related party receivable - 9,238 4,110
Other current assets - 771,790 771,790
----------------------------------------------------------------
Total current assets 3,968 123,254,348 123,253,188
Property and equipment:
Land - 16,628,459 16,628,459
Land improvements - 628,986 628,986
Construction in progress - 125,586,536 125,586,536
Furniture, fixtures and equipment - 7,924,965 7,924,965
----------------------------------------------------------------
- 150,768,946 150,768,946
Accumulated depreciation - (416,451) (416,451)
----------------------------------------------------------------
- 150,352,495 150,352,495
Restricted assets - 7,977,500 7,977,500
Debt issuance costs - 11,520,334 11,520,334
Investment in The Resort at Summerlin, L.P. 547,829 - -
Intangible assets - 519,333 519,333
Security deposit - 681,580 681,580
Preopening costs - 10,610,858 10,610,858
----------------------------------------------------------------
Total assets $ 551,797 $ 304,916,448 $ 304,915,288
================================================================
LIABILITIES
Current liabilities:
Accounts payable $ - $ 1,042,105 $ 1,042,105
Construction and preopening accounts payable - 17,513,949 17,513,949
Interest payable - 2,166,559 2,166,559
Partner distribution payable - 237,592 237,592
Related party payable 6,138 124,203 125,213
Other current liabilities - 2,500 2,500
----------------------------------------------------------------
Total current liabilities 6,138 21,086,908 21,087,918
Tenant security deposits payable - 15,000 15,000
Long-term debt, net of discount - 207,261,809 207,261,809
Warrants redeemable for partnership interests - 15,202,121 15,202,121
----------------------------------------------------------------
Total liabilities 6,138 243,565,838 243,566,848
Limited partners' interests - - 60,802,781
STOCKHOLDER'S EQUITY AND PARTNERSHIP INTERESTS
Common stock, no par value, 2,500 shares authorized,
1,000 shares issued 682,500 - 682,500
General partner interest - 675,000 -
</TABLE>
<TABLE>
<S> <C> <C> <C>
Limited partners' interests - 73,392,691 -
Deficit accumulated during development stage (136,841) (12,717,081) (136,841)
----------------------------------------------------------------
Total stockholder's equity and partnership interests 545,659 61,350,610 545,659
----------------------------------------------------------------
Total liabilities, stockholder's equity and partnership
Interests $ 551,797 $ 304,916,448 $ 304,915,288
================================================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 33
Balance Sheets
(Development stage companies)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
CONSOLIDATED
RAS INC. RAS L.P. RAS INC.
------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,968 $175,487,660 $175,491,628
Interest receivable - 24,167 24,167
------------------------------------------------------
Total current assets 3,968 175,511,827 175,515,795
Property and equipment:
Land - 16,628,459 16,628,459
Construction in progress - 3,782,333 3,782,333
Furniture, fixtures and equipment - 573,000 573,000
------------------------------------------------------
- 20,983,792 20,983,792
Accumulated depreciation - (112,680) (112,680)
------------------------------------------------------
- 20,871,112 20,871,112
Restricted assets - 12,400,000 12,400,000
Debt issuance costs - 12,561,721 12,561,721
Investment in The Resort at Summerlin, L.P. 668,012 - -
Intangible assets - 50,000 50,000
Preopening costs - 4,838,812 4,838,812
------------------------------------------------------
Total assets $671,980 $226,233,472 $226,237,440
======================================================
LIABILITIES
Current liabilities:
Accounts payable $ - $ 103,193 $ 103,193
Construction and preopening accounts payable - 619,373 619,373
Interest payable - 55,278 55,278
Related party payable 1,010 348,459 349,469
------------------------------------------------------
Total current liabilities 1,010 1,126,303 1,127,313
Long-term debt, net of discount - 154,131,067 154,131,067
Warrants redeemable for partnership interests - 5,869,565 5,869,565
------------------------------------------------------
Total liabilities 1,010 161,126,935 161,127,945
Limited partners' interests - - 64,438,525
STOCKHOLDER'S EQUITY AND PARTNERSHIP INTERESTS
Common stock, no par value, 2,500 shares authorized,
1,000 shares issued 682,500 - 682,500
General partner interest - 675,000 -
Limited partners' interests - 65,130,283 -
Deficit accumulated during development stage (11,530) (698,746) (11,530)
------------------------------------------------------
Total stockholder's equity and partnership interests 670,970 65,106,537 670,970
------------------------------------------------------
Total liabilities, stockholder's equity and partnership
interests $671,980 $226,233,472 $226,237,440
======================================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 34
Statements of Operations
(Development stage companies)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
CONSOLIDATED
RAS INC. RAS L.P. RAS INC.
----------------------------------------------------
<S> <C> <C> <C>
Revenues $ - $ - $ -
Costs and expenses:
Equity in loss of The Resort at
Summerlin, L.P. 120,183 - -
General and administrative 5,128 776,723 781,851
Depreciation and amortization - 2,236,546 2,236,546
----------------------------------------------------
125,311 3,013,269 3,018,397
Other income (expense):
Interest income - 7,699,976 7,699,976
Interest expense, net of
amounts capitalized:
Long-term debt - (11,386,013) (11,386,013)
Accretion of warrant
liability - (5,319,029) (5,319,029)
----------------------------------------------------
- (9,005,066) (9,005,066)
----------------------------------------------------
Loss before limited partners' interest (125,311) (12,018,335) (12,023,463)
Limited partners' interest - - (11,898,152)
----------------------------------------------------
Net loss $(125,311) $(12,018,335) $ (125,311)
====================================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 35
Statements of Operations
(Development stage companies)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
CONSOLIDATED
RAS INC. RAS L.P. RAS INC.
----------------------------------------------------
<S> <C> <C> <C>
Revenues $ - $ - $ -
Costs and expenses:
Equity in loss of The Resort at
Summerlin, L.P. 6,143 - -
General and administrative 4,542 493,885 498,427
Depreciation and amortization - 113,312 113,312
----------------------------------------------------
10,685 607,197 611,739
Other income (expense):
Interest income - 41,255 41,255
Interest expense, net of amounts
capitalized - long-term debt - (48,346) (48,346)
----------------------------------------------------
- (7,091) (7,091)
----------------------------------------------------
Loss before limited partners' interest (10,685) (614,288) (618,830)
Limited partners' interest - - (608,145)
----------------------------------------------------
Net loss $(10,685) $(614,288) $ (10,685)
====================================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 36
Statements of Operations
(Development stage companies)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1996
CONSOLIDATED
RAS INC. RAS L.P. RAS INC.
---------------------------------------------------
<S> <C> <C> <C>
Revenues $ - $ - $ -
Costs and expenses:
Equity in loss of The Resort at
Summerlin, L.P. 845 - -
General and administrative - 84,458 84,458
---------------------------------------------------
845 84,458 84,458
---------------------------------------------------
Loss before limited partners' interest (845) (84,458) (84,458)
Limited partners' interest - - (83,613)
---------------------------------------------------
Net loss $(845) $(84,458) $ (845)
===================================================
</TABLE>
See accompanying notes.
F-7
<PAGE> 37
Statements of Operations
(Development stage companies)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1998
CONSOLIDATED
RAS INC. RAS L.P. RAS INC.
---------------------------------------------------
<S> <C> <C> <C>
Revenues $ - $ - $ -
Costs and expenses:
Equity in loss of The Resort at
Summerlin, L.P. 127,171 - -
General and administrative 9,670 1,355,066 1,364,736
Depreciation and amortization - 2,349,858 2,349,858
---------------------------------------------------
136,841 3,704,924 3,714,594
Other income (expense):
Interest income - 7,741,231 7,741,231
Interest expense, net of
amounts capitalized:
Long-term debt - (11,434,359) (11,434,359)
Accretion of warrant liability - (5,319,029) (5,319,029)
---------------------------------------------------
- (9,012,157) (9,012,157)
---------------------------------------------------
Loss before limited partners' interest (136,841) (12,717,081) (12,726,751)
Limited partners' interest - - (12,589,910)
---------------------------------------------------
Net loss $(136,841) $(12,717,081) $ (136,841)
===================================================
</TABLE>
See accompanying notes.
F-8
<PAGE> 38
The Resort at Summerlin, Inc.
(a development stage company)
Statements of Changes in Stockholder's Equity
<TABLE>
<CAPTION>
Deficit
Accumulated
During Total
Common Development Stockholder's
Stock Stage Equity
-------------------------------------------------
<S> <C> <C> <C>
Balance at June 12, 1996 (inception) $ - $ - $ -
Capital contributions 501,000 - 501,000
Net loss - (845) (845)
-------------------------------------------------
Balance at December 31, 1996 501,000 (845) 500,155
Capital contributions 181,500 - 181,500
Net loss - (10,685) (10,685)
-------------------------------------------------
Balance at December 31, 1997 682,500 (11,530) 670,970
Net loss - (125,311) (125,311)
-------------------------------------------------
Balance at December 31, 1998 $682,500 $(136,841) $ 545,659
=================================================
</TABLE>
See accompanying notes.
F-9
<PAGE> 39
The Resort at Summerlin, L.P.
Statements of Partnership Interests
(a development stage company)
<TABLE>
<CAPTION>
Deficit
Accumulated
General Limited During Total
Partner Partners' Development Partnership
Interest Interests Stage Interests
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at August 15, 1996 (inception) $ - $ - $ - $ -
Capital contributions by partners 500,000 18,230,439 - 18,730,439
Net loss - - (84,458) (84,458)
--------------------------------------------------------------------
Balance at December 31, 1996 500,000 18,230,439 (84,458) 18,645,981
Capital contributions by partners 175,000 48,081,046 - 48,256,046
Distribution of non-cash asset - (1,181,202) - (1,181,202)
Net loss - - (614,288) (614,288)
--------------------------------------------------------------------
Balance at December 31, 1997 675,000 65,130,283 (698,746) 65,106,537
Capital contributions by partner - 8,500,000 - 8,500,000
Distribution of tax allowance amounts - (237,592) - (237,592)
Net loss - - (12,018,335) (12,018,335)
--------------------------------------------------------------------
Balance at December 31, 1998 $675,000 $73,392,691 $(12,717,081) $ 61,350,610
====================================================================
</TABLE>
See accompanying notes.
F-10
<PAGE> 40
Statements of Cash Flows
(Development stage companies)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
CONSOLIDATED
RAS INC. RAS L.P. RAS INC.
---------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(125,311) $ (12,018,335) $ (125,311)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation of property and equipment - 303,771 303,771
Amortization of debt discount and issuance costs - 1,950,316 1,950,316
Accretion of warrant liability, net of amounts
capitalized - 5,319,029 5,319,029
Interest paid by issuance of Senior
Subordinated Notes, net of amounts capitalized - 7,318,075 7,318,075
Equity in loss of limited partnership 120,183 - -
Limited partners' interest - - (11,898,152)
Changes in operating assets and liabilities:
Interest receivable - (126,794) (126,794)
Other assets - (769,290) (769,290)
Related party receivable and payable 5,128 (233,494) (228,366)
Interest payable - 1,179,538 1,179,538
---------------------------------------------------
Net cash provided by operating activities - 2,922,816 2,922,816
INVESTING ACTIVITIES
Acquisition of property and equipment - (117,337,840) (117,337,840)
Interest capitalized into construction in progress - (1,980,119) (1,980,119)
Preopening costs - (5,772,046) (5,772,046)
Increase in construction and preopening
accounts payable - 17,833,488 17,833,488
Proceeds from maturity of investments held-to-maturity - 147,399,908 147,399,908
Purchases of investments held-to-maturity - (147,399,908) (147,399,908)
Security deposit - (681,580) (681,580)
Investment in intangible assets - (469,333) (469,333)
---------------------------------------------------
Net cash used in investing activities - (108,407,430) (108,407,430)
FINANCING ACTIVITIES
Capital contributions from limited partner - 8,500,000 8,500,000
Issuance of First Mortgage Notes - 40,000,000 40,000,000
Increase in restricted assets - (15,000) (15,000)
Tenant security deposits payable - 15,000 15,000
Debt issuance costs - (618,187) (618,187)
---------------------------------------------------
Net cash provided by financing activities - 47,881,813 47,881,813
---------------------------------------------------
Net change in cash and cash equivalents - (57,602,801) (57,602,801)
Cash and cash equivalents at beginning of year 3,968 175,487,660 175,491,628
---------------------------------------------------
Cash and cash equivalents at end of year $ 3,968 $ 117,884,859 $ 117,888,827
===================================================
</TABLE>
<TABLE>
<S> <C> <C> <C>
SUPPLEMENTAL INFORMATION
Interest paid $ - $ 4,604,731 $ 4,604,731
Interest capitalized in construction in progress accrued
in warrant liability, PIK notes and interest payable - 10,467,197 10,467,197
</TABLE>
See accompanying notes.
F-11
<PAGE> 41
Statements of Cash Flows
(Development stage companies)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
CONSOLIDATED
RAS INC. RAS L.P. RAS INC.
-------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(10,685) $(614,288) $(10,685)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property and equipment - 112,680 112,680
Amortization of debt discount - 632 632
Equity in loss of limited partnership 6,143 - -
Limited partners' interest - - (608,145)
Changes in operating assets and liabilities:
Accounts payable 1,010 - 1,010
Interest receivable - (24,167) (24,167)
-------------------------------------------------
Net cash used in operating activities (3,532) (525,143) (528,675)
INVESTING ACTIVITIES
Acquisition of property and equipment - (3,829,245) (3,829,245)
Preopening costs - (1,637,360) (1,637,360)
Increase in construction and preopening
accounts payable - 701,313 701,313
Investment in intangible assets (50,000) (50,000)
Investment in option fee - (597,312) (597,312)
Investment in The Resort at Summerlin, L.P. (175,000) - -
-------------------------------------------------
Net cash used in investing activities (175,000) (5,412,604) (5,412,604)
FINANCING ACTIVITIES
Capital contributions 182,500 - 182,500
Capital contribution from General Partner - 175,000 -
Capital contributions from limited partners - 45,787,128 45,787,128
Issuance of First Mortgage Notes - 60,000,000 60,000,000
Issuance of Senior Subordinated Notes - 100,000,000 100,000,000
Debt issuance costs - (12,136,721) (12,136,721)
Increase in restricted assets - (12,400,000) (12,400,000)
-------------------------------------------------
Net cash provided by financing activities 182,500 181,425,407 181,432,907
-------------------------------------------------
Net change in cash and cash equivalents 3,968 175,487,660 175,491,628
Cash and cash equivalents at beginning of year - - -
=================================================
Cash and cash equivalents at end of year $ 3,968 $175,487,660 $175,491,628
=================================================
SUPPLEMENTAL INFORMATION
Preopening costs incurred and paid by
SCA on behalf of The Resort at
Summerlin, L.P. $ - $ 2,293,918 $ 2,293,918
Distribution of non-cash asset - 1,181,202 1,181,202
Accrued debt issuance costs - 425,000 425,000
</TABLE>
See accompanying notes.
F-12
<PAGE> 42
Statements of Cash Flows
(Development stage companies)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1996
CONSOLIDATED
RAS INC. RAS L.P. RAS INC.
------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (845) $ (84,458) $ (845)
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in loss of limited partnership 845 - -
Limited partners' interest - - (83,613)
------------------------------------------------------------
Net cash used in operating activities - (84,458) (84,458)
INVESTING ACTIVITIES
Acquisition of property and equipment - (17,154,547) (17,154,547)
Preopening costs - (551,016) (551,016)
Investment in option fee - (583,900) (583,900)
Investment in The Resort at Summerlin, L.P. (500,000) - -
------------------------------------------------------------
Net cash used in investing activities (500,000) (18,289,463) (18,289,463)
FINANCING ACTIVITIES
Capital contributions 500,000 - 500,000
Capital contribution from General Partner - 500,000 -
Capital contributions from limited partners - 17,873,921 17,873,921
------------------------------------------------------------
Net cash provided by financing activities 500,000 18,373,921 18,373,921
------------------------------------------------------------
Net change in cash and cash equivalents - - -
Cash and cash equivalents at beginning of year - - -
------------------------------------------------------------
Cash and cash equivalents at end of year $ - $ - $ -
============================================================
SUPPLEMENTAL INFORMATION
Preopening costs incurred and paid by
SCA on behalf of The Resort at
Summerlin, L.P. $ - $ 356,518 $ 356,518
</TABLE>
See accompanying notes.
F-13
<PAGE> 43
Statements of Cash Flows
(Development stage companies)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1998
CONSOLIDATED
RAS INC. RAS L.P. RAS INC.
------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(136,841) $ (12,717,081) $ (136,841)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation of property and equipment - 416,451 416,451
Amortization of debt discount and issuance costs - 1,950,948 1,950,948
Accretion of warrant liability, net of amounts
capitalized - 5,319,029 5,319,029
Interest paid by issuance of Senior
Subordinated Notes, net of amounts capitalized - 7,318,075 7,318,075
Equity in loss of limited partnership 127,171 - -
Limited partners' interest - - (12,589,910)
Changes in operating assets and liabilities:
Interest receivable - (150,961) (150,961)
Related party receivable and payable 6,138 (233,494) (227,356)
Other assets - (769,290) (769,290)
Interest payable - 1,179,538 1,179,538
------------------------------------------------------
Net cash provided by (used in) operating activities (3,532) 2,313,215 2,309,683
INVESTING ACTIVITIES
Acquisition of property and equipment - (138,321,632) (138,321,632)
Interest capitalized into construction in progress - (1,980,119) (1,980,119)
Preopening costs - (7,960,422) (7,960,422)
Increase in construction and preopening
payables - 18,534,801 18,534,801
Investment in The Resort at Summerlin, L.P. (675,000) - -
Proceeds from maturity of investments held-to-maturity 147,399,908 147,399,908
Purchases of investments held-to-maturity (147,399,908) (147,399,908)
Security deposit - (681,580) (681,580)
Investment in intangible assets - (519,333) (519,333)
Investment in option fee - (1,181,212) (1,181,212)
------------------------------------------------------
Net cash used in investing activities (675,000) (132,109,497) (132,109,497)
FINANCING ACTIVITIES
Capital contributions 682,500 - 682,500
Capital contribution from General Partner - 675,000 -
Capital contribution from limited partners - 72,161,049 72,161,049
Issuance of First Mortgage Notes - 100,000,000 100,000,000
Issuance of Senior Subordinated Notes - 100,000,000 100,000,000
Debt issuance costs - (12,754,908) (12,754,908)
Tenant security deposits payable - 15,000 15,000
Increase in restricted assets - (12,415,000) (12,415,000)
------------------------------------------------------
Net cash provided by financing activities 682,500 247,681,141 247,688,641
------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Net change in cash and cash equivalents 3,968 117,884,859 117,888,827
Cash and cash equivalents at beginning of period - - -
------------------------------------------------------
Cash and cash equivalents at end of period $ 3,968 $ 117,884,859 $ 117,888,827
======================================================
SUPPLEMENTAL INFORMATION
Preopening costs incurred and paid by
SCA on behalf of The Resort at
Summerlin, L.P. $ - $ 2,650,436 $ 2,650,436
Distribution of non-cash asset - 1,181,202 1,181,202
Interest paid - 4,604,731 4,604,731
Interest capitalized in construction in progress accrued
in warrant liability, PIK notes and interest payable - 10,467,197 10,467,197
</TABLE>
See accompanying notes.
F-14
<PAGE> 44
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Resort at Summerlin, Limited Partnership ("RAS L.P.") is majority owned by
Swiss Casinos of America, Inc., formerly known as Seven Circle Gaming
Corporation ("SCA"). It was formed on August 15, 1996 for the purpose of
acquiring land and developing a casino resort in the Summerlin master planned
community in Las Vegas, Nevada ("Summerlin"). The Resort at Summerlin, Inc.
("RAS Inc.") is a wholly owned subsidiary of SCA and serves as general partner
of RAS L.P. Swiss Casinos Holding AG ("SCH") owns 83% of SCA and is a limited
partner in RAS L.P. The ownership percentages in RAS L.P. of RAS Inc., SCA, SCH
and unaffiliated investors are 1.00%, 75.58%, 16.70% and 6.72%, respectively.
RAS L.P. allocates earnings and losses to the partners in accordance with these
percentages.
RAS L.P. purchased 54.5 acres of land located in Summerlin on which it is
developing and plans to operate a resort facility (the "Resort"), to include a
casino, hotel, conference center, spa, restaurants and retail center. The land
is zoned for gaming, and the Las Vegas City Council has granted the special use
permit required to develop the proposed facility.
RAS L.P. and RAS Inc. (collectively the "Companies") are development stage
companies as they are devoting substantially all of their efforts to develop the
Resort. The Companies have no current source of income and do not anticipate any
material amounts until such time as the Resort is operational. The Resort is
expected to open for business on June 29, 1999.
BASIS OF PRESENTATION
As prescribed by Statement of Position 78-9, Accounting for Investments in Real
Estate Ventures, RAS Inc.'s indirect ownership in RAS L.P. through SCA and its
direct 1% general partnership investment constitutes a controlling interest and
is therefore considered a subsidiary requiring consolidation in the financial
statements of RAS Inc. RAS Inc.'s sole business activity at this time is its 1%
general partnership interest in RAS L.P. The consolidated RAS Inc. financial
statements include the following adjusting entries:
- Elimination of RAS Inc.'s investment in RAS L.P.
- Reclassification of the 99% limited partnership interests in RAS L.P. to
minority interest within the balance sheet.
- Allocation of 99% of the net losses of RAS L.P. to the limited partners
and the elimination of RAS Inc. equity interest in the losses of RAS L.P.
- Elimination of intercompany accounts payable and receivable.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid debt instruments with a maturity of three
months or less when purchased. Cash equivalents are carried at cost which
approximates fair value.
RESTRICTED ASSETS
Restricted assets consist of funds held in escrow for future payment of interest
incurred on the $100.0 million of First Mortgage Notes due March 31, 2004 (the
"Mortgage Notes", see Note 2) during the first five quarters following the
opening of the Resort and tenant security deposits. Use of the escrow funds for
each interest payment is subject to various financial tests. Any unused funds at
the end of the five quarter period must be applied to the outstanding principal
balance on the notes. As of December 31, 1998 and 1997, all escrow funds were
held in a cash equivalent fund.
F-15
<PAGE> 45
CONSTRUCTION IN PROGRESS
Expenditures incurred for the design and construction of the Resort have been
capitalized as construction in progress. These amounts are expected to be
reclassified to buildings upon completion of the facility and will be
depreciated over the useful life of the asset.
DEPRECIATION
Property and equipment are stated at cost and are depreciated on a straight-line
basis over the following estimated useful lives:
Buildings 30 years
Furniture, fixtures and equipment 3-7 years
INVESTMENTS
Management determines the appropriate classification of debt securities at the
time of purchase. Debt securities are classified as held-to-maturity when the
Companies have the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost.
The amortized cost of debt securities classified as held-to-maturity is adjusted
for amortization of premiums and accretion of discounts to maturity, or in the
case of mortgage-backed securities, over the estimated life of the security.
Such amortization is included in interest income from investments. Interest and
dividends are included in interest income from investments. Realized gains and
losses, declines in value judged to be other-than-temporary are included in net
securities gains (losses). The cost of securities sold is based on the specific
identification method.
During the year ended December 31, 1998, the Companies purchased investments in
U.S. governmental agency mortgage backed securities with contractual maturities
of six to nine months. All of the Companies' investments were classified as
held-to-maturity and matured during 1998. Gross realized gains and losses were
not material.
DEBT DISCOUNT AND ISSUANCE COSTS
Debt discount and issuance costs are capitalized and amortized to expense based
on the terms of the related debt agreements using the effective interest method
or a method which approximates the effective interest method.
PREOPENING COSTS
Development costs incurred by RAS L.P. prior to December 31, 1998 were
capitalized. These costs include legal fees, incremental personnel costs,
travel, and other costs related to the development of the Resort.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 entitled Reporting on the Costs of Start-up
Activities ("SOP 98-5") which requires entities to expense costs of preopening
activities as they are incurred. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998. Accordingly, the Companies will adopt the
statement in fiscal year 1999. Upon adoption, the Companies are required to
report the initial adoption as a cumulative effect of a change of accounting
principle as described in Accounting Principles Board Opinion No. 20, Accounting
Changes, during the first quarter of its fiscal year 1999 and expense subsequent
preopening costs as incurred. The cumulative effect upon adoption will result in
a one-time charge to income in an amount equal to the net book value of the
Companies' preopening costs. Under the Companies' existing policy, the
preopening
F-16
<PAGE> 46
expenses would have been expensed upon the opening of the Resort, which is
currently estimated to be on June 29, 1999.
LICENSING COSTS
RAS L.P. capitalizes certain license costs required for the operation of the
casino, hotel and restaurants. These costs will be amortized over the term of
the license (15 years for the hotel license), commencing with the opening of the
Resort.
CAPITALIZATION OF INTEREST
RAS L.P. capitalizes interest costs on amounts expended on capital projects
based upon the weighted average interest costs of borrowings outstanding during
the period of construction. During the years ended December 31, 1998 and 1997,
RAS L.P. capitalized interest costs of $12,447,316 and $6,932, respectively, as
construction in progress.
INCOME TAXES
RAS L.P. is a limited partnership. Accordingly, no provision for federal or
state income taxes was recorded because any taxable income or loss is included
in the income tax returns of the partners.
SCA includes RAS Inc. in its consolidated state and federal tax returns. During
1998 and 1997, RAS Inc. had minimal operating losses on both a tax and book
basis. However, the utilization of these losses against future earnings is
uncertain and all deferred tax assets will be fully reserved until such time as
the earnings have been realized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation.
FINANCIAL INSTRUMENTS
The Companies' financial instruments consist of cash, accounts payable, accrued
expenses, long-term debt and warrants redeemable for partnership interests. The
carrying value of cash, accounts payable and accrued expenses approximate fair
value. The Companies believe the fair values and the carrying value of the
long-term debt and warrants would not be materially different due to the
instruments' interest rates approximating market rates for similar projects at
December 31, 1998.
F-17
<PAGE> 47
2. LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---------------------------
<S> <C> <C>
First Mortgage Notes due 2004 $100,000,000 $60,000,000
Senior Subordinated Pay-in-Kind Notes due 2007 112,840,000 100,000,000
Original issue discount (5,578,191) (5,868,933)
------------ -----------
107,261,809 94,131,067
------------ -----------
Total long-term debt $207,261,809 $154,131,067
============ ===========
</TABLE>
On December 31, 1997, the Companies issued, as joint and several co-obligors,
$100.0 million of First Mortgage Notes due March 31, 2004 of which $60.0 million
was drawn at closing and $100.0 million of Senior Subordinated Notes due 2007
(the "Senior Subordinated Notes"). RAS L.P. borrowed the remaining $40.0 million
of the Mortgage Notes on December 31, 1998. The Mortgage Notes Credit Agreement
(the "Credit Agreement") and the Senior Subordinated Notes Indenture (the
"Indenture") contain various covenants and restrictions as more fully described
below.
MORTGAGE NOTES
Prior to the Resort opening for business, at the option of the Companies,
interest on the Mortgage Notes will accrue at the London Interbank Offered Rate
("LIBOR") for one or three month periods plus 4% or at the Base Rate (higher of
Federal Reserve prime rate or federal funds rate plus one half of 1%) plus 3%.
The interest rate was established at 11.5% on December 31, 1997 and subsequently
adjusted to 9.7% in January 1998 and 9.0% in December 1998. Interest is payable
on the last business day of each calendar quarter for Base Rate tranches and at
the end of the applicable interest period but no less frequently than quarterly
for LIBOR tranches. Subsequent to the opening of the Resort, the percentage
above LIBOR or the base rate reference rates will decrease based on the debt
ratios of RAS L.P.
The Mortgage Notes are secured by a first perfected security interest in all
assets comprising the Resort, including all real and personal property, all
intangibles and all furniture, fixtures and equipment, together with title
insurance. In addition, $12.4 million was deposited in an interest escrow
account for the benefit of the Mortgage Note holders, which will support the
interest payment obligations during the five fiscal quarters following the
opening of the Resort (the "Commencement Date"). This amount is reflected as
restricted assets on the accompanying balance sheet.
Scheduled maturities of the Mortgage Notes will be as follows (in millions):
1999 $ ---
2000 12.5
2001 14.5
2002 19.0
2003 23.0
Thereafter 31.0
------
$100.0
======
An amount equal to 75% of the first $15.0 million of excess cash flow, as
defined in the Credit Agreement, and 25% of the excess cash flow above $15.0
million is due annually in addition to the above amounts.
F-18
<PAGE> 48
The Credit Agreement contains certain covenants including those restricting
additional indebtedness, liens, change of business, sale and purchase of assets,
mergers and consolidations, investments thereafter with affiliates and financial
covenants. At December 31, 1998, management believes the Companies are in
compliance with all covenants.
SENIOR SUBORDINATED NOTES
The Companies have issued 100,000 units consisting of $1,000 principal amount of
13% Senior Subordinated Notes due December 15, 2007 and an L.P. Warrant, which
can be exchanged for a Corporate Warrant at the purchaser's election. RAS L.P.
issued the L.P. Warrants, and RAS Warrant Co. ("Warrant Co.") issued the
Corporate Warrants (both warrants collectively referred to as the "Note
Warrants"). Warrant Co. is a wholly-owned subsidiary of SCA and at December 31,
1998 and 1997, Warrant Co. has one share of common stock outstanding from a
total of 100,001 authorized shares (see "Warrants" below). The Senior
Subordinated Notes are unsecured and subordinated in right of payment to all
existing and future senior indebtedness of the Note Issuers, including the
Mortgage Notes.
Interest at the rate of 13% per annum of the principal is payable semiannually
beginning in June 1998. The interest is payable either in cash or in additional
Senior Subordinated Notes at the option of RAS L.P. through June 1999, and
thereafter is payable in cash. In addition to the 13% coupon rate on the Senior
Subordinated Notes, RAS L.P. accrues additional interest expense of 9.2% for a
total of 22.2% (see "Warrants" below).
On or after December 15, 2002, the Senior Subordinated Notes may be redeemed at
the Companies' option in whole or in part at face value plus accrued and unpaid
interest at the time of redemption. In addition, at any time prior to December
15, 2000, the Companies may redeem up to 35% of the aggregate principal with the
cash proceeds received from one or more public equity offerings at a redemption
price equal to 113% of the principal amount, provided that at least $65.0
million of the original principal amount remains outstanding immediately after
the redemption.
If the Nevada Gaming Commission (the "Commission") or the Nevada State Gaming
Control Board (the "Board") (each a "Nevada Gaming Authority" or together the
"Nevada Gaming Authorities") requires that a holder or beneficial holder of the
Senior Subordinated Notes must be licensed, qualified or found suitable, and if
the holder fails to apply or is not licensed, the Companies have the option to
redeem such Senior Subordinated Notes, at a redemption price as defined in the
Indenture.
The restrictive covenants relating to the Senior Subordinated Notes will limit
the incurrence of additional indebtedness, the payment of dividends on and the
redemption of certain subordinated obligations, investments, sale of assets and
subsidiary stock, transactions with affiliates and consolidations, mergers and
transfers of all or substantially all the assets of the Companies. At December
31, 1998, management believes the Companies are in compliance with all
covenants.
WARRANTS
Each L.P. Warrant entitles the holder to one L.P. Partnership Interest
representing 0.00008% of the total partnership interest in RAS L.P. at a price
per L.P. Warrant of $0.01, subject to the provisions of the partnership
agreement and adjustments from time to time upon the occurrence of certain
changes in the terms of the partnership interests, distributions, and certain
issuances of options or convertible securities. Holders of L.P. Warrants will
not by virtue of being such holders have any rights as limited partners of RAS
L.P.
F-19
<PAGE> 49
Each Corporate Warrant entitles the holder to acquire one share of common stock
of Warrant Co. at a price of $0.01 per share, subject to certain adjustments
from time to time upon the occurrence of certain changes in the Common Stock of
Warrant Co. Upon the exercise of a Corporate Warrant, Warrant Co. will exercise
an L.P. Warrant in RAS L.P. entitling it to the ownership percentage in RAS L.P.
discussed above. Holders of Corporate Warrants will not, by virtue of being such
holders, have any rights as stockholders of Warrant Co. As of December 31, 1998,
all warrants outstanding were Corporate Warrants.
The L.P. Warrants and the Corporate Warrants expire December 15, 2007.
In the event that any existing limited partner proposes to sell or otherwise
transfer at least 15% of the total L.P. Partnership Interests, the holders of
the Note Warrants and L.P. Partnership interests shall have the right to require
such existing limited partner to cause the proposed purchaser to purchase, on
the same terms and conditions, a percentage of the number of Note Warrants and
the L.P. Partnership interests owned by each such holder.
In the event that any existing limited partner proposes to sell or transfer any
L.P. Partnership Interests aggregating 51% or more of the total L.P. Partnership
Interests, the existing Limited Partner shall have the right to require the
holders of the Note Warrants and L.P. Partnership interests to sell on the same
terms and conditions from each of them a percentage of the number of Note
Warrants and L.P. Partnership Interests owned by each such holder.
If RAS L.P. has not completed an initial public equity offering of at least
$50.0 million of gross proceeds with respect to the L.P. Partnership Interests
on or before December 31, 2005, each holder of the Note Warrants will have, for
a 30-day period beginning on April 15, 2006, or if the Mortgage Notes are
prepaid prior to their maturity date, beginning on April 15, 2003, the one-time
right to require RAS L.P. to purchase the Note Warrants at the takeout price,
described below. RAS L.P. will have a one-time right, for a 30-day period
beginning on October 15, 2006, or if the Mortgage Notes are prepaid prior to
their maturity date, beginning on October 15, 2003, to purchase the Note
Warrants on a pro rata basis, for a purchase price equal to the takeout price.
The takeout price is defined as the greatest of:
- the value of the Note Warrants as determined by a formula based on eight
times earnings before interest, taxes, depreciation and amortization
("EBITDA") for the fiscal year ending December 31, 2005, or if the
Mortgage Notes are prepaid, for the fiscal year ending December 31, 2003;
or
- the value of the Note Warrants as determined by a formula based on eight
times the average EBITDA for each of the fiscal years ending December 31,
2003, 2004, and 2005, or if the Mortgage Notes are prepaid, December 31,
2001, 2002, and 2003; or
- an amount necessary to cause the Senior Subordinated Notes and the Note
Warrants to create a bond equivalent internal rate of return of 20% from
the issue date to the date of purchase.
RAS L.P. records interest expense at a total rate of 22.2% to account for the
put option. Interest in excess of the stated Senior Subordinated Notes is
credited to warrant liability and will be settled in the terms above or upon the
exercise of the warrants. The change in the warrant liability for the year ended
December 31, 1998 was $9,332,556.
3. LEASE FINANCING AND UNSECURED DEBT
Under the terms of the Credit Agreement and the Indenture, RAS L.P. may
obtain additional sources of liquidity, if necessary, including (i) up to $15.0
million of capital lease financing for furniture, fixtures and equipment, (ii)
up to $5.0 million of unsecured debt and (iii) operating lease financing.
In August 1998 and March 1999, RAS L.P. executed commitments with a lease
financing company for capital and operating lease facilities for up to
approximately $44.4 million and an unsecured credit facility for $5.0 million. A
capital lease facility for $15.0 million, which is included in the $44.4 million
total, may be converted to an operating lease facility.
F-20
<PAGE> 50
The operating lease facilities may be used to lease new gaming devices, related
systems, vehicles and furniture, fixtures and equipment acceptable to the
leasing company. The term of the facilities will be 36 or 48 months at
anticipated imputed interest rates of 11% to 15%. Maximum annual payments under
the facility will be approximately $14.4 million. Upon expiration of the term,
RAS L.P. will be granted an option to (i) purchase all but not less than all of
the equipment, by equipment category, at fair market value as determined by an
independent appraiser, (ii) renew the facility for 12 months or (iii) return the
equipment to the leasing company.
The unsecured credit facility will be available from the opening of the
Resort until December 21, 1999. RAS L.P. will be required to give 45 days
notice for each draw, which must be a minimum of $1.0 million and a maximum of
$2.0 million. RAS L.P. will be required to pay 2.0% of each draw as a credit
facility, legal and syndication fee at the time of closing each draw. Each loan
will include a 2.0% original issue discount and be converted to a 24-month term
note fully amortizing at an interest rate of 13.0%.
A commitment fee totaling $140,500 was paid on execution of the lease facility
commitment in August 1998. Upon closing the transaction on December 21, 1998,
the fee was applied to the security deposit of the leases, and additional fees,
rental payments and security deposits totaling $1,395,870 were paid. In addition
to paying the first and last month's rental payment on each lease facility at
closing, RAS L.P. must pay a $2.9 million general security deposit relating
to the air handling equipment lease and the casino and hotel furniture fixtures
and equipment lease.
4. LAND PURCHASE AND OPTION AGREEMENT
On May 22, 1996, Seven Circle Resorts, Inc. ("SCR"), a wholly-owned
subsidiary of SCA, executed a Purchase and Option Agreement (the "Purchase
Agreement") to purchase approximately 54.5 acres of property ("Sale Parcel")
and to secure an option to acquire approximately 22 additional acres of
property ("Option Parcel") in Las Vegas, Nevada, to construct and operate a
resort hotel and casino. SCR assigned the Purchase Agreement to RAS L.P. on
August 15, 1996.
LAND PURCHASE AGREEMENT
On August 15, 1996, RAS L.P. closed on the purchase of the Sale Parcel for
$16,620,000. On January 7, 1998, RAS L.P. commenced grading and construction on
the site, having substantially complied with all conditions outlined in the
Purchase Agreement.
OPTION AGREEMENT
On August 15, 1996, RAS L.P. executed an option agreement ("Option Agreement"),
paying $583,900 for the right to purchase the Option Parcel. The Option
Agreement is valid until August 15, 2000.
The option purchase price is $5,839,000, plus an increase each anniversary date
equal to inflation for the previous year. On the subsequent anniversary dates of
the Option Agreement, RAS L.P. will be required to pay an additional option fee
equal to 10% of the purchase price then in effect.
The amount of each option fee that exceeds the original option fee of $583,900
will be credited towards the option purchase price at closing. RAS L.P. can
allow the option to lapse by failing to make an annual option fee payment.
On August 8, 1997, RAS L.P. paid and capitalized the second option fee of
$597,312.
F-21
<PAGE> 51
On December 27, 1997, RAS L.P. assigned the Option Agreement to SCA through a
preferential distribution. A new company will be established to develop the
option parcel. Any carried interest held by SCA in the Option Parcel development
company and any other economic benefit derived from the Option Parcel will be
shared by the Partners based on their ownership interests in RAS L.P. as of the
date of the assignment.
5. COMMITMENTS AND CONTINGENCIES
LICENSING
As a condition of the Purchase Agreement, RAS L.P., or an affiliate, was
required to obtain a Nevada gaming license prior to the commencement of
construction of the facility (see "Land Purchase Agreement" above). Seven Circle
Resorts of Nevada, Inc. ("SCRN"), an affiliated company, was formed for this
purpose.
Effective September 5, 1997, the Commission granted a distributor's gaming
license to SCRN. The receipt of this gaming license indicates the Board and the
Commission have found SCRN and its key principals suitable. In order to operate
a casino, RAS L.P. will have to obtain a nonrestricted gaming license, for which
it applied in June 1998. In addition to findings of suitability, the receipt of
a nonrestricted gaming license requires the review by the Board and the
Commission of several aspects of the proposed casino, including the source of
funds, location, internal controls, surveillance systems and operating
procedures. The Board and Commission may act upon the suitability and/or license
certain key executives and other investors in the nonrestricted gaming
operations. Because of the common ownership and control shared by SCRN and RAS
L.P., management believes the granting of SCRN's distributor's license has
increased the likelihood that RAS L.P.'s nonrestricted license application will
be approved.
In the event RAS L.P. does not obtain a nonrestricted gaming license due to the
ownership by one or more of the minority partners, the other partners have the
right to purchase the noncomplying partner's ownership interest, thereby
enabling receipt of the gaming license.
CONSTRUCTION AGREEMENT
RAS L.P. executed a construction contract for the Resort on the basis of the
cost of work plus the fee payable to the general contractor, with a guaranteed
maximum price of $133 million.
On December 22, 1998, the Companies entered into a settlement agreement (the
"Settlement Agreement") with J.A. Jones Construction ("Jones") concerning a
dispute which has arisen with respect to the cost and timing of the completion
of the Resort Casino being developed by the Companies. Pursuant to the
Settlement Agreement, RAS L.P. will pay to Jones an additional $23.0 million
(inclusive of $3.0 million previously budgeted for the completion of the second
hotel at the Resort) for the completion of the Resort (the "Settlement
Amount"), as set forth in the construction contract and including additional
work as set forth in the Settlement Agreement. In consideration of the
additional payments by RAS L.P., the Companies will not be responsible for any
additional project costs necessary to accomplish substantial completion of the
Resort on or before April 30, 1999 except as otherwise expressly set forth in
the Settlement Agreement. Jones will be solely responsible, and indemnify the
Companies, for all costs of substantial completion except as otherwise
expressly provided in the Settlement Agreement. If substantial completion of
the Resort has not occurred on or before April 30, 1999, all delay and other
penalties provided for in the construction contract shall commence as of April
30, 1999 and Jones shall not be entitled to any amounts for general conditions
or any other payments of a similar nature from that date unless certain savings
specified in the construction contract are achieved. In the Settlement
Agreement, Jones has represented that it has reviewed all of the construction
documents and determined that the Resort,
F-22
<PAGE> 52
including the second hotel, can be constructed "in a fashion and of a
functionality, quality and level of aesthetics reasonably inferable from the
architects' design to create a five-star rated property" and that Jones does not
know of any reason that the Resort cannot be constructed as described in the
Settlement Agreement or substantially completed or on before April 30, 1999 for
the amount set forth in the construction contract as modified by the Settlement
Agreement.
In addition to the payment of the Settlement Amount, the Settlement Agreement
provides that depending upon Jones' profit under the construction contract as
determined pursuant to accounting methodology set forth therein, Jones may be
entitled to a bonus of up to $1.0 million provided that the Resort is
substantially completed on or before April 30, 1999 and Jones meets interim
construction progress milestones. The Settlement Agreement provides that under
no circumstances shall the bonus exceed $1.0 million; no bonus shall be paid if
the project is not substantially completed on or before April 30, 1999; and that
the maximum potential bonus shall be subject to a $200,000 reduction for each of
the progress milestones which are not met by Jones.
Jones has advised management that it is unlikely that it will be able to
complete the Project by April 30, 1999. Management has advised Jones that it
expects Jones to adhere to its contractual obligations; however, management has
set an opening date of June 29, 1999 in order to mitigate damages which may be
caused by Jones' failure to meet the April 30, 1999 deadline.
In conjunction with the execution of the Settlement Agreement, RAS L.P.
received an additional $8.5 million equity contribution from SCH.
The Companies believe the terms of the Settlement Agreement are in compliance
with all applicable contractual covenants and obligations pursuant to the Credit
Agreement and the Indenture.
ROYALTY AGREEMENT
RAS L.P. is subject to a royalty agreement to pay a royalty fee of $1 million in
each of the first five years commencing at the earlier of the opening of the
hotel and casino operations or 18 months following commencement of construction.
The royalty agreement and a related golf course agreement will enable RAS L.P.
to use the Summerlin name and will provide RAS L.P. with up to 50% of the tee
times on the adjacent Tournament Players Club at the Canyons golf course. The
royalty fee will increase on each fifth anniversary thereafter by an amount
equal to 15% of the annual amount paid in the preceding five-year period. RAS
L.P. has the right to secure up to 75% of the tee times by paying an additional
$125,000 per year.
HOTEL FRANCHISE LICENSE AGREEMENT
On December 16, 1997, RAS L.P. entered into a franchise license agreement. The
agreement gives RAS L.P. the right to operate under the name of the franchisor,
and to use its trade name, trademarks and systems in connection with nongaming
operations.
The term of the license is for 15 years. RAS L.P. has the right to terminate the
agreement effective December 31, 2005 or December 31, 2010 if the franchisor has
not met certain numbers of hotels or guest rooms under contract. The franchisor
will provide access to its central reservation system in order to facilitate
worldwide reservations at the hotels, in addition to providing marketing
services. The franchisor will provide training to the employees with respect to
the reservation and property management system.
RAS L.P. will pay the following fees:
- Fixed fee, currently $200 per room per annum.
- Variable fee of 3% of gross room revenue derived from reservations made
through the central reservation system.
- Continuing fee of 1.75% of the hotels' gross revenues, as defined.
- A marketing fee of 1.5% of the hotels' gross revenues, as defined.
- Certain incidental program costs.
F-23
<PAGE> 53
OFFICE LEASES
RAS L.P. leases office space under noncancelable operating leases expiring at
various dates through June of 1999. Rental expense relating to operating leases
was $188,782 for the year ended December 31, 1998. Under the terms of the
leases, RAS L.P. is obligated to pay future minimum lease payments of $252,048
during 1999.
FUTURE DEVELOPMENTS
RAS L.P. negotiated the right of first offer with the master developer of
Summerlin to develop an additional four designated gaming sites in Summerlin. In
the event that RAS L.P. cannot finance the development of a gaming site under
the Credit Agreement or the Indenture, RAS L.P. has the ability to assign the
rights to SCA or an affiliate.
MANAGEMENT FEES
Under the terms of RAS L.P.'s limited partnership agreement, RAS L.P. is to pay
RAS Inc. a monthly fee equal to 3% of monthly net revenues and 6% of earnings
before interest, taxes, depreciation and amortization as compensation for
management services provided to RAS L.P. This fee cannot exceed 10% of net
revenues in any given month and may be restricted by certain covenants in the
Credit Agreement and the Indenture.
PURCHASE COMMITMENTS
The Companies have construction and purchase contracts outstanding at December
31, 1998 totaling $79.5 million for the completion of the Resort.
6. RELATED PARTY TRANSACTIONS
ADVERTISING COSTS
Effective September 1, 1998, RAS L.P. entered into an agreement with SCRHMG,
L.L.C., ("Vento") a wholly owned subsidiary of SCA, whereby RAS L.P. pays a
monthly retainer of $50,000 to Vento in exchange for advertising services. In
addition, RAS L.P. must reimburse Vento for certain production costs, media buys
and other out-of-pocket expenses related to RAS L.P.'s marketing campaign. This
agreement expires on August 31, 1999. RAS L.P. incurred expenses of $327,000
during 1998 for advertising services provided by Vento which are included in
preopening costs.
EXPENDITURES INCURRED BY SCA
In 1998, RAS L.P. reimbursed SCR $2,266,233 for various expenditures incurred
on behalf of RAS, L.P. These amounts primarily relate to salaries and personnel
costs of employees who have devoted a portion of their time to the development
of the Resort.
Prior to 1998, SCA, through SCR, incurred various expenditures on behalf of RAS
L.P. which are reflected as contributed capital on the books of RAS L.P. These
amounts primarily relate to salaries and personnel costs of employees who have
devoted a portion of their time to the development of the Resort. During 1997
and the period from inception through December 31, 1996, these expenditures
were $2,293,918 and $356,518, respectively.
In accordance with the accounting policies noted above, RAS L.P. capitalized a
portion of these costs as preopening costs and expensed amounts relating to
general and administrative activities.
F-24
<PAGE> 54
7. EMPLOYEE BENEFIT PLAN
RAS L.P. has a 401(k) plan (the "Plan") available to all employees who are age
21 and over. Participants may contribute up to 20% of their annual eligible
compensation to the Plan, subject to IRS limits. RAS L.P. contributes an amount
equal to 100% of participant contributions limited to 3% to 5% of the
participant's eligible compensation, depending on the duration of the
participant's employment. Contributions to the Plan for the year ended December
31, 1998 were $26,595. There were no contributions made to the Plan in 1997 or
1996.
F-25
<PAGE> 1
EXHIBIT 10.11
AMENDMENT TO CREDIT AGREEMENT
AMENDMENT, dated as of March 24, 1999 (this "Amendment"), among THE
RESORT AT SUMMERLIN, LIMITED PARTNERSHIP, THE RESORT AT SUMMERLIN, INC., the
financial institutions party to the Credit Agreement described below (the
"Lenders") and NATIONAL WESTMINSTER BANK PLC, as Administrative Agent. All
capitalized terms used herein and not otherwise defined shall have the
respective meanings provided such terms in the Credit Agreement referred to
below.
WITNESSETH:
WHEREAS, the Borrowers, the Lenders and the Administrative Agent are
parties to a Credit Agreement, dated as of December 30, 1997 (as in effect on
the date hereof, the "Credit Agreement");
WHEREAS, the parties hereto wish to amend the Credit Agreement as herein
provided;
NOW THEREFORE, it is agreed:
1. Section 7.11 of the Credit Agreement is hereby amended by changing
the reference to "June 30, 1999" therein to "December 31, 1999".
2. Section 7.12 of the Credit Agreement is hereby amended by deleting
the first two lines of the table contained therein, i.e. the first test shall
be December 31, 1999.
3. Section 7.13 of the Credit Agreement is hereby amended by adding
after the reference to "Test Period" therein the phrase "commencing on and
after December 31, 1999,".
4. This Amendment shall become effective for all purposes on the date
(the "Effective Date") on which the Borrowers and the Required Lenders shall
have signed a counterpart hereof (whether the same or different counterparts)
and shall have delivered (included by way of telecopier) the same to the
Administrative Agent's counsel (attention: D. Taylor Fax: 212-354-8113).
5. This Amendment may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Partnership and the Administrative Agent.
6. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
<PAGE> 2
7. From and after the Effective Date, all references in the Credit
Agreement and each of the Credit Documents to the Credit Agreement or each of
the Credit Documents shall be deemed to be references to such Credit Agreement
or each of the Credit Documents as amended hereby.
* * * *
-2-
<PAGE> 3
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of
the date first above written.
THE RESORT AT SUMMERLIN,
LIMITED PARTNERSHIP
By: The Resort at Summerlin, Inc., its
General Partner
By: /s/ BRIAN D. MCMULLAN
-----------------------------------
Name: Brian D. McMullan
Title: President
THE RESORT AT SUMMERLIN, INC.
By: /s/ BRIAN D. MCMULLAN
-----------------------------------
Name: Brian D. McMullan
Title: President
NATIONAL WESTMINSTER BANK, PLC
Individually and as Administrative Agent
By: /s/ ANDREW S. WEINBERG
-----------------------------------
Name: ANDREW S. WEINBERG
Title: SENIOR VICE PRESIDENT
ML CLO XV PILGRIM AMERICAN
(CAYMAN)LTD.
By: Pilgrim Investments, Inc.,
as its investment manager
By: /s/ MICHEL PRINCE
-----------------------------------
Name: MICHEL PRINCE, CFA
Title: VICE PRESIDENT
-3-
<PAGE> 4
ARCHIMEDES FUNDING L.L.C.
By: ING Capital Advisors LLC, as
Collateral Manager
By: /s/ MICHAEL D. HATLEY
-------------------------------------
Name: MICHAEL D. HATLEY
Title: SENIOR VICE PRESIDENT
THE ING CAPITAL SENIOR SECURED
HIGH INCOME FUND, L.P.
By: ING Capital Advisors LLC, as
Investment Advisor
By: /s/ MICHAEL D. HATLEY
-------------------------------------
Name: MICHAEL D. HATLEY
Title: SENIOR VICE PRESIDENT
STEIN ROE & FARNHAM
INCORPORATED,
AS AGENT FOR KEYPORT LIFE
INSURANCE COMPANY
By: /s/ BRIAN W. GOOD
-----------------------------------------
Name: Brian W. Good
Title: Vice President & Portfolio Manager
ARAMA-2 FINANCE LTD.
By:
-------------------------------------
Name:
Title:
ARAMA-1 FINANCE LTD.
By:
-------------------------------------
Name:
Title:
MORGAN STANLEY SENIOR FUNDING
INC.
By: /s/ CHRIS PACILLO
-------------------------------------
Name: Chris Pacillo
Title:
STRATA FUNDING LTD.
By: /s/ John H. Cullinane
-------------------------------------
Name: John H. Cullinane
Title: Director
CERES FINANCE LTD.
By: /s/ John H. Cullinane
-------------------------------------
Name: John H. Cullinane
Title: Director
AERIES FINANCE LTD.
By: /s/ Andrew Ian Wignall
-------------------------------------
Name: Andrew Ian Wignall
Title: Director
CAPTIVA FINANCE LTD.
By: /s/ John H. Cullinane
-------------------------------------
Name: John H. Cullinane
Title: Director
FLOATING RATE PORTFOLIO
By: Invesco Senior Secured Management, Inc.
as Attorney-in-Fact
By: /s/ Anne M. McCarthy
-------------------------------------
Name: Anne M. McCarthy
Title: Authorized Signatory
-4-
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