<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: to
------------------ ------------------
Commission file number: 333-49717 and 333-49717-01
-------------------------------------------------------
ALADDIN GAMING HOLDINGS, LLC
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 88-0379607
- --------------------------------- ---------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
831 Pilot Road, Las Vegas, Nevada 89119
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(702) 736-7114
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
ALADDIN CAPITAL CORP.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 88-0379606
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
831 Pilot Road, Las Vegas, Nevada 89119
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(702) 736-7114
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--------- ---------
Indicate the number of shares outstanding of the issuer's classes of common
stock, as of the latest practicable date.
<PAGE>
ALADDIN GAMING HOLDINGS, LLC
Not applicable
ALADDIN CAPITAL CORP.
2,500 shares of common stock, no par value as of October 31, 1998.
<PAGE>
ALADDIN GAMING HOLDINGS, LLC
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX
<TABLE>
<CAPTION>
PAGE NO.
------------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997...................................... 1
Consolidated Statements of Operations -
For the three and nine months ended September 30, 1998 and for the
period from inception (December 1, 1997) through September 30, 1998........... 2
Consolidated Statement of Members' Equity
For the period from inception (December 1, 1997) through
September 30, 1998............................................................ 3
Consolidated Statements of Cash Flows -
For the nine months ended September 30, 1998 and for the period
from inception (December 1, 1997) through September 30, 1998.................. 4
Notes to the Consolidated Financial Statements.................................. 5 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 10 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 16
Item 2. Changes in Securities and Use of Proceeds....................................... 16
Item 3. Defaults upon Senior Securities................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............................. 16
Item 5. Other Information............................................................... 16
Item 6. Exhibits and Reports on Form 8-K................................................ 16
Signatures ................................................................................ 17
Exhibit Index ................................................................................ 18
</TABLE>
<PAGE>
PART I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
ALADDIN GAMING HOLDINGS, LLC
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,175,116 $ 6,895
Other current assets 717,426 --
------------------------- ------------------------
Total current assets 2,892,542 6,895
------------------------- ------------------------
Property and equipment:
Land 33,407,500 --
Furniture and equipment 79,452 --
Construction in progress 60,229,365 --
Capitalized interest 4,940,752 --
------------------------- -----------------------
98,657,069 --
Less accumulated depreciation 4,637 --
------------------------- -----------------------
98,652,432 --
------------------------- -----------------------
Other assets:
Restricted cash 255,255,113 --
Restricted land 6,842,500 --
Other assets 2,057,905 --
Debt issuance costs, net of accumulated
amortization of $1,967,676 as of
September 30, 1998 35,177,917 --
------------------------- -----------------------
Total other assets 299,333,435 --
------------------------- -----------------------
$ 400,878,409 $ 6,895
------------------------- -----------------------
------------------------- -----------------------
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable 8,702,628 --
Payable to related parties 2,503,574 1,245
Obligation to transfer land 6,842,500 --
Accrued expenses 3,217,902 --
------------------------- -----------------------
Total current liabilities 21,266,604 1,245
------------------------- -----------------------
Long-term debt: 383,857,381 --
Advances to purchase membership interests 2,850 2,850
Members' equity:
Common membership interest 28,607,979 2,800
Deficit Accumulated during the development stage (32,856,405) --
------------------------- ----------------------
Total members' equity (4,248,426) 2,800
------------------------- ----------------------
$ 400,878,409 $ 6,895
------------------------- ----------------------
------------------------- ----------------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
1
<PAGE>
ALADDIN GAMING HOLDINGS, LLC
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND FOR THE
PERIOD FROM INCEPTION (DECEMBER 1, 1997) THROUGH SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
For the period
For the three months For the nine months December 1, 1997
ended September 30, ended September 30, (inception) through
1998 1998 September 30, 1998
(Unaudited) (Unaudited) (Unaudited)
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Pre-opening costs $ 6,140,992 $ 20,425,197 $ 20,425,197
Other (income) expense:
Interest income (3,664,361) (9,302,066) (9,302,066)
Interest expense 11,214,823 26,674,026 26,674,026
Less: Interest capitalized (2,526,823) (4,940,752) (4,940,752)
---------------------- ---------------------- ----------------------
Total other (income) expense 5,023,639 12,431,208 12,431,208
---------------------- ---------------------- ----------------------
Net loss accumulated during the
development stage $ 11,164,631 $ 32,856,405 $ 32,856,405
---------------------- ---------------------- ----------------------
---------------------- ---------------------- ----------------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
2
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ALADDIN GAMING HOLDINGS, LLC
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
FOR THE PERIOD FROM INCEPTION (DECEMBER 1, 1997)
THROUGH SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Sommer
Enterprises, Aladdin Gaming London Clubs
LLC Enterprises, LLC Nevada, Inc. GAI, LLC Total
---------------- ----------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 1, 1997 $ -- $ -- $ -- $ -- $ --
Members' contribution 669 331 -- 1,800 2,800
---------------- ----------------- ------------------- ------------------ ---------------
BALANCE, DECEMBER 31, 1997 669 331 -- 1,800 2,800
Net loss accumulated during the
development stage (15,442,511) (8,214,101) (8,214,101) (985,692) (32,856,405)
Members' contributions (47,317,023) 28,247,202 50,000,000 -- 30,930,179
Members' equity costs (1,092,750) (581,250) (581,250) (69,750) (2,325,000)
---------------- ----------------- -------------------- ------------------ ---------------
BALANCE, SEPTEMBER 30, 1998 $ (63,851,615) $ 19,452,182 $ 41,204,649 $ (1,053,642) $ (4,248,426)
---------------- ----------------- -------------------- ------------------ ---------------
---------------- ----------------- -------------------- ------------------ ---------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<PAGE>
ALADDIN GAMING HOLDINGS, LLC
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND FOR THE PERIOD
FROM INCEPTION (DECEMBER 1, 1997) THROUGH SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
For the period December 1,
For the nine months ended 1997 (inception) through
September 30, 1998 September 30, 1998
(Unaudited) (Unaudited)
------------------------------ ---------------------------
<S> <C> <C>
Cash Flows used for investing activities:
Cash used in operating activities $ (14,382,461) $ (14,382,461)
------------------------------ ---------------------------
Cash flows from investing activities:
Payments for construction in progress, furniture,
equipment and capitalized interest (52,746,414) (52,746,414)
Increase in restricted cash (255,255,113) (255,255,113)
------------------------------ ---------------------------
Net cash used in investing activities (308,001,527) (308,001,527)
------------------------------ ---------------------------
Cash flows from financing activities:
Proceeds from issuance of notes 100,047,100 100,047,100
Proceeds from long-term debt 274,000,000 274,000,000
Repayment of long-term debt (546,976) (546,976)
Debt issuance costs (37,145,594) (37,145,594)
Members' contributions 65,000,000 65,002,800
Payment of debt on contributed land (74,477,321) (74,477,321)
Members' equity costs (2,325,000) (2,325,000)
Payable to related parties -- 1,245
Advances to purchase membership interests -- 2,850
------------------------------ ---------------------------
Net cash provided by financing activities 324,552,209 324,559,104
------------------------------ ---------------------------
Net increase in cash 2,168,221 2,175,116
Cash at the beginning of the period 6,895 --
------------------------------ ---------------------------
Cash at the end of the period $ 2,175,116 $ 2,175,116
------------------------------ ---------------------------
------------------------------ ---------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized $ 8,228,185 $ 8,228,185
Non-cash investing and financing activities:
Members' contributions -- book value
Land 33,407,500 33,407,500
Construction in progress 7,000,000 7,000,000
Equipment acquired equal to assumption of debt 546,976 546,976
Increase in construction payables 4,956,180 4,956,180
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE>
ALADDIN GAMING HOLDINGS, LLC
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. ORGANIZATION AND BUSINESS
Aladdin Gaming Holdings, LLC, a Nevada limited liability company
("Gaming Holdings"), was established on December 1, 1997. Gaming Holdings was
initially owned by Aladdin Gaming Enterprises, Inc., a Nevada corporation,
(25%); Sommer Enterprises, LLC, a Nevada limited liability company, (72%);
and GAI, LLC, a Nevada limited liability company, (3%). On February 26, 1998,
London Clubs International plc, through its subsidiary London Clubs Nevada,
Inc. ("LCNI"), contributed $50.0 million for a 25% interest of Gaming
Holdings common membership interests. Sommer Enterprises, LLC contributed a
portion of land for common membership interests in Gaming Holdings. Aladdin
Gaming Enterprises, Inc. ("Gaming Enterprises") contributed a portion of
land, $7.0 million of predevelopment costs and $15.0 million in cash for
common membership interests in Gaming Holdings. After the additional
contributions, Sommer Enterprises, LLC owns 47% of Gaming Holdings, LCNI owns
25% of Gaming Holdings, Gaming Enterprises owns 25% of Gaming Holdings and
GAI, LLC owns 3% of Gaming Holdings.
Aladdin Holdings, LLC, a Delaware limited liability company
("Holdings"), indirectly holds a majority interest in Gaming Holdings. The
members of Holdings are the Trust Under Article Sixth u/w/o Sigmund Sommer
(the "Sommer Trust") which holds a 95% interest in Holdings, and GW Vegas,
LLC, a Nevada limited liability company ("GW"), a wholly owned subsidiary of
Trust Company of the West ("TCW") which holds a 5% interest in Holdings.
Distributions shall be made in accordance with the respective
ownership interests subject to the Company's operating agreement.
Gaming Holdings, through its subsidiaries, plans to develop,
construct and operate a new hotel and casino, the Aladdin Hotel and Casino
(the "Aladdin"), as the centerpiece of an approximately 35 acre world-class
resort, casino and entertainment complex in Las Vegas, Nevada. The resort
will be located at the center of Las Vegas Boulevard. Gaming Holdings,
through its subsidiaries, also owns 100% of Aladdin Music, LLC ("Aladdin
Music"). Aladdin Music intends to construct a second hotel and casino with a
music and entertainment theme ("Aladdin Music Project") on the southeast
corner of the 35-acre parcel. Aladdin Music is currently seeking a joint
venture partner for the Aladdin Music Project.
2. PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of Gaming
Holdings and its subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
Gaming Holding's wholly owned subsidiaries are Aladdin Capital
Corp., a Nevada corporation, Aladdin Gaming, LLC, a Nevada limited liability
company ("Gaming"), Aladdin Music Holdings, LLC, a Nevada limited liability
company, and Aladdin Music, LLC, a Nevada limited liability company.
The accompanying unaudited consolidated financial statements contain
all adjustments which, in the opinion of management, are necessary for a fair
statement of the results of the interim period. The results of operations for
the interim periods are not indicative of results of operations for an entire
year. Certain prior period balances have been reclassified to conform to the
current period's presentation.
5
<PAGE>
3. PRE-OPENING COSTS
Pre-opening costs are expensed in the period during which they are
incurred. Pre-opening costs include, but are not limited to, salary related
expenses for new employees and management opening team, travel and lodging
expenses, training costs, advertising and marketing, organization costs and
all temporary facilities costs (i.e. rent, insurance, utilities, etc.).
4. INCOME TAXES
The Company will file federal information tax returns only. Each
member reports taxable income or loss on their respective tax returns.
5. PURCHASE OF RESTRICTED MEMBERSHIP INTERESTS
Certain members of Gaming Holdings' executive management have
purchased unvested restricted membership interests, in aggregate, of 4.75% of
Gaming Holdings. These membership interests will vest 25% on the opening of
the Aladdin and 25% on each successive annual anniversary. As of September
30, 1998, none of these membership interests had vested.
6. PRIVATE OFFERING
On February 26, 1998, Gaming Holdings, Aladdin Capital Corp.
("Capital," and together with Gaming Holdings, "Issuers") and Gaming
Enterprises consummated a private offering ("Offering") under Rule 144A of
the Securities Act of 1933. The Offering consisted of 221,500 units
("Units"), each Unit consisting of (i) $1,000 principal amount of maturity of
13 1/2% Senior Discount Notes due 2010 ("Notes") of Gaming Holdings and
Capital; and (ii) 10 Warrants ("Warrants") to purchase 10 shares of Class B
non-voting Common Stock, no par value, of Gaming Enterprises. The Notes and
the Warrants became separately transferable on July 23, 1998. The Warrants
became exercisable on July 23, 1998, and will expire on March 1, 2010.
On August 26, 1998, Gaming Holdings and Capital completed an
exchange offer for 100% of the $221.5 million aggregate principal amount of
their 13 1/2% Senior Discount Notes due 2010 ("Notes"), pursuant to a
registration statement dated July 23, 1998. The Notes were exchanged for
notes with substantially the same terms issued in a private placement on
February 26, 1998.
The initial accreted value of the Notes was $519.40 per $1,000
principal amount at maturity of the Notes. The Notes will mature on March 1,
2010. The Notes will accrete at 13 1/2% (computed on a semi-annual bond
equivalent basis) based on the initial accreted value, calculated from
February 26, 1998. Cash interest on the Notes will not accrue prior to March
1, 2003. Thereafter, cash interest on the Notes will accrue at the rate of 13
1/2% per annum based on the accreted value at maturity of the Notes and will
be payable semi-annually in arrears on March 1 and September 1 of each year,
commencing on September 1, 2003.
The Notes are secured by a first priority pledge of all the issued
and outstanding Series A Preferred Interests of Aladdin Gaming, LLC held by
Gaming Holdings. The Indenture to the Notes contains certain covenants that
(subject to certain exceptions) restrict the ability of the Issuers and
certain of their subsidiaries to, among other things: (i) make restricted
payments; (ii) incur additional indebtedness and issue preferred stock; (iii)
incur liens; (iv) pay dividends or make other distributions; (v) enter into
mergers or consolidations; (vi) enter into certain transactions with
affiliates; or (vii) enter into new lines of business.
6
<PAGE>
7. LONG-TERM DEBT
On February 26, 1998, Aladdin Gaming, LLC entered into a $410.0
million Credit Agreement ("Bank Credit Facility" or "Credit Agreement") with
various financial institutions and the Bank of Nova Scotia as the
administrative agent for the lenders. The Credit Agreement consists of three
separate term loans. Term A Loan comprises a term loan of $136.0 million and
matures seven years after the initial borrowing date. Term B Loan comprises a
term loan of $114.0 million and matures eight and one-half years after the
initial borrowing date. Term C Loan comprises a term loan of $160.0 million
and matures ten years after the borrowing date. The Term B Loan and the Term
C Loan were funded by the lenders on February 26, 1998 and the funds are held
by Gaming in the cash collateral account for the future development of the
Aladdin. The Term B Loan and the Term C Loan proceeds could not be utilized
until the proceeds from the Notes were completely exhausted. As of September
30, 1998, 100% of the Notes proceeds, approximately $10.2 million of the Term
B loan and $8.7 million of the Term C loan had been utilized to develop and
construct the Aladdin. The Term A loan has not been funded.
The Company pays interest on the term loans as follows: Term A Loan,
LIBOR plus 300 basis points until the Aladdin commences operations, then
LIBOR plus an amount between 150 basis points and 275 basis points depending
upon the Company's EBITDA results; Term B Loan, LIBOR plus 200 basis points
while the funds are held in the cash collateral account and LIBOR plus 350
basis points once the funds are utilized for the construction of the Aladdin;
and Term C Loan, LIBOR plus 200 basis points while the funds are held in the
cash collateral account and LIBOR plus 400 basis points once the funds are
utilized for the construction of the Aladdin. The Company has entered into
various interest rate swaps to manage interest expense, which is subject to
fluctuations due to the variable nature of LIBOR. The Company has interest
rate swap agreements under which it pays a fixed interest rate and receives a
variable interst rate. The interest rate swaps effectively convert the LIBOR
into fixed rates of interest as follows: (a) until Aladdin commences
operation, for the Term A Loan and the Term B Loan LIBOR is fixed at 5.883%
and for the Term C Loan LIBOR is fixed at 6.485%; and (b) once the Aladdin
has commenced operations, for the Term A Loan and Term B Loan, the maximum
LIBOR is 7.00% and the minimum is 5.65%, and for the Term C Loan, the LIBOR
has been fixed at 6.485%. The rate swaps for the Term A Loan and Term B Loan
are in place until the respective loan maturity date and for the Term C Loan
the hedge arrangements are cancelable at the call date of March 2003. No
principal repayments are required prior to the opening of the Aladdin.
The Company is exposed to credit loss in the event of nonperformance
by the other parties to the interest rate swap agreements. However, the
Company considers the risk of nonperformance by the counterparties to be
minimal because the parties to the swap are predominantely members of the
Company's bank group.
7
<PAGE>
Under the Credit Agreement, $25 million of the contingency funds is
made available to the Company as a function of the project's percentage of
construction complete. However, to enhance the quality of the project, the
Company has committed to changes in the plans and specifications early in the
project while the percentage of completion is low. In addition, the Company
revised certain items of the project budget and adjusted the budget
accordingly, including an increase to pre-opening costs. Thus, because
financial commitments were made when the contingency funds were not yet
available to pay for such changes, an out-of-balance of approximately $6.5
million ("Out-of-Balance") was created. While the Out-of-Balance is due to a
timing difference that the Company believes will be resolved over time, the
Credit Agreement nonetheless requires that Gaming fund such Out-of-Balance.
London Clubs and the Sommer Trust are negotiating to post a letter of credit
to fund such Out-of-Balance, which would require an amendment to the Credit
Agreement. Management believes such amendment will be approved by the
Lenders. As the Out-of-Balance is reduced, the amount of the letter of credit
would be correspondingly reduced. In addition to amending other technical
provisions of the Credit Agreement, the amendment would also revise the net
worth requirement to reflect the accounting treatment requiring certain costs
to be expensed rather than capitalized. If the Lenders do not approve a
letter of credit to fund the Out-of-Balance and the other proposed
amendments, or if Gaming, London Clubs and/or the Sommer Trust do not
otherwise fund the Out-of-Balance, the Lenders will not disburse funds under
the Credit Agreement. Any delay in the disbursement of funds under the Credit
Agreement could result in delays to the project, which would materially and
adversely impact the Company.
On June 30, 1998, the Company entered into FF&E financing which
provides for operating lease financing of up to $60.0 million and term loan
facility of $20.0 million to obtain gaming equipment and other specified
equipment. Funding under the FF&E financing is available beginning six months
prior to the construction completion date of the Aladdin. Repayment of
principal and interest is due in quarterly installments upon the construction
completion date of the Aladdin. The term of the operating lease financing is
36 months (with the Company having two, one year options to renew) and the
term of the loan facility is five years. The interest rate from the funding
date until the construction of the Aladdin is completed is either 30-day
LIBOR plus 478 basis points or Prime Rate plus 275 basis points. After the
construction completion date, the interest rate shall be the 90-day LIBOR
plus 478 basis points.
The amendments to the Credit Agreement discussed above are also
required for the Company's FF&E financing.
8. RESTRICTED LAND
Approximately 12.4 acres of land was deeded to Aladdin Gaming, LLC
on February 26, 1998, with an obligation to transfer such land to Aladdin
Bazaar, LLC at a future date. Aladdin Bazaar, LLC intends to construct and
operate a themed entertainment shopping mall and a 4,800-space car parking
facility (the "Mall Project"). The Mall Project is expected to be an integral
part of the Aladdin entertainment complex.
9. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity sections of a statement
of financial position, and is
8
<PAGE>
effective for financial statements issued for fiscal years beginning after
December 15, 1997. The Company has adopted SFAS No. 130, during the
three-month period ended March 31,1998 and has determined that such adoption
will not result in comprehensive income different from net income as reported
in the accompanying financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
additional standards for segment reporting in financial statements and is
effective for fiscal years beginning after December 15, 1997. The Company
currently operates as one segment.
9
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the various other reports which have been
previously filed with the United States Securities and Exchange Commission
("SEC"), which may be inspected, without charge, at the Public Reference
Section of the SEC located at 450 Fifth Street, NW, Washington, D.C. 20549 or
at the SEC internet site address, http://www.sec.gov.
DEVELOPMENT ACTIVITIES
Aladdin Gaming Holdings, LLC, a Nevada limited liability company
("Gaming Holdings"), was established on December 1, 1997. Gaming Holdings was
initially owned by Aladdin Gaming Enterprises, Inc., a Nevada corporation
(25%), Sommer Enterprises, LLC, a Nevada limited liability company (72%), and
GAI, LLC, a Nevada limited liability company (3%). On February 26, 1998,
London Clubs International plc ("London Clubs"), through its subsidiary
London Clubs Nevada, Inc. ("LCNI"), contributed $50.0 million for a 25%
interest of Gaming Holdings common membership interests. Sommer Enterprises,
LLC contributed a portion of land for common membership interests in Gaming
Holdings. Aladdin Gaming Enterprises, Inc. ("Gaming Enterprises") contributed
a portion of land, $7.0 million of predevelopment costs and $15.0 million in
cash for common membership interests in Gaming Holdings. After the additional
contributions, Sommer Enterprises, LLC owns 47% of Gaming Holdings, LCNI owns
25% of Gaming Holdings, Gaming Enterprises owns 25% of Gaming Holdings and
GAI, LLC owns 3% of Gaming Holdings.
Aladdin Holdings, LLC, a Delaware limited liability company
("Holdings"), indirectly holds a majority interest in Gaming Holdings. The
members of Holdings are the Trust Under Article Sixth u/w/o Sigmund Sommer
("Sommer Trust") which holds a 95% interest in Holdings, and GW Vegas, LLC, a
Nevada limited liability company ("GW"), a wholly owned subsidiary of Trust
Company of the West ("TCW") which holds a 5% interest in Holdings.
Gaming Holdings is a holding company, the material assets of which
are 100% of the outstanding common membership interests and 100% of the
outstanding Series A preferred interests of Aladdin Gaming, LLC ("Gaming").
Aladdin Capital Corp. ("Capital") is a wholly owned subsidiary of Gaming
Holdings and was incorporated solely for the purpose of serving as a
co-issuer of the 13 1/2% Senior Discount Notes ("Notes"). Capital will not
have any material operations or assets and will not have any revenues. Gaming
Holdings, through its subsidiaries, also owns 100% of Aladdin Music, LLC
("Aladdin Music").
The operations of Gaming Holdings and its subsidiaries, collectively
known as "the Company," have been primarily limited to the design, development,
financing and construction of a new hotel and casino ("Aladdin"). The Aladdin
will be the centerpiece of an approximately 35 acre world-class resort,
casino and entertainment complex ("Complex") located on the site of the
former Aladdin hotel and casino in Las Vegas, Nevada, a premier location at
the center of the Las Vegas Boulevard ("Strip"). The Aladdin has been
designed to include a luxury themed hotel of approximately 2,600 rooms, an
approximately 116,000 square foot casino, an approximately 1,400-seat
production showroom and seven restaurants. The casino's main gaming area will
contain approximately 2,800 slot machines, 87 table games, keno and a race
and sports book facility. Included on a separate level of the casino will be
a 15,000 square foot luxurious gaming section that is expected to contain an
additional 20 to 30 high denomination table games and approximately 100 high
denomination slot machines. The Complex, which has been designed to promote
casino traffic and to provide customers with a wide variety of entertainment
alternatives, will comprise: (i) the Aladdin; (ii) the themed entertainment
shopping mall with approximately 522,000 square feet of retail space ("Desert
Passage"); (iii) a second hotel and casino with a music and entertainment
theme ("Aladdin Music Project"); (iv) the newly renovated 7,000-seat Theater
of the
10
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Performing Arts ("Theater"); and (v) the approximately 4,800-space car
parking facility ("Carpark" and, together with the Desert Passage,
hereinafter, "Mall Project"). The Mall Project will be separately owned by an
affiliate of the Company and Aladdin Music is currently seeking a joint
venture partner for the Aladdin Music Project. The grand opening date for the
Aladdin and the Mall Project is currently anticipated to occur during the
spring of the year 2000, with the opening of the Aladdin Music Project
expected to occur within six months after the opening of the Aladdin assuming
project financing and a joint venture partner are secured by the end of the
first quarter 1999.
RESULTS OF OPERATIONS
The Company is in the development stage and has no significant
operations to date. The Company has capitalized all qualifying construction
costs except for a portion of the interest expense incurred during the
period. Accordingly, the Company does not have any historical operating
income. The capitalized costs consist primarily of land contributed by
certain members of Gaming Holdings, design fees, financing and commitment
fees, construction costs and interest on qualifying assets. Capitalized costs
include approximately $1.7 million related to Aladdin Music for design and
architectural fees. The Company's operating expenses primarily have consisted
of interest, amortization costs and expenses related to the Notes and
pre-opening costs.
The Company anticipates that its results of operations from
inception to the grand opening of the Aladdin will be adversely affected by
the expensing of pre-opening costs and interest not qualifying for
capitalization and should not be indicative of future operations.
Accordingly, historical results will not be indicative of future operating
results. Future operating results of the Company are subject to significant
business, economic, regulatory and competitive uncertainties and
contingencies, many of which are beyond the Company's control. While the
Company believes that the Aladdin will be able to attract a sufficient number
of patrons and achieve the level of activity necessary to permit the Company
to meet its payment obligations, including the Notes and other indebtedness,
there can be no assurance with respect thereto.
The Company recorded a net loss of approximately $11.2 million for
the three months ended September 30, 1998 and approximately $32.9 million for
the nine months ended September 30, 1998. The loss was due to pre-opening
costs, interest expense amortization costs and expenses related to the Notes.
The pre-opening costs include approximately $.7 million related to Aladdin
Music.
MATERIAL CHANGES IN FINANCIAL CONDITION
Through September 30, 1998, approximately $181.5 million had been
expended primarily on the development of the Aladdin, of which approximately
$74.5 million had been expended on repayment of debt associated with the land
contributed to the Company, approximately $53.2 million in construction,
furniture, fixtures and equipment, and capitalized interest, approximately
$39.5 million in debt issuance and member equity costs, and approximately
$14.3 million in pre-opening costs, net interest expense, and other current
assets.
LIQUIDITY AND CAPITAL RESOURCES
On August 26, 1998, Gaming Holdings and Capital completed an
exchange offer for 100% of the $221.5 million aggregate principal amount of
their 13 1/2% Senior Discount Notes due 2010 ("Notes"), pursuant to a
registration statement dated July 23, 1998. The Notes were exchanged for
notes with substantially the same terms issued in a private placement on
February 26, 1998. For further details on the Notes, please refer to "Note
6-Private Offering" of the Notes to Consolidated Financial Statements.
Gaming has a $410.0 million Credit Agreement ("Bank Credit Facility"
or "Credit Agreement") with various financial institutions and the Bank of
Nova Scotia as the administrative agent for the lenders. The Credit Agreement
consists of three separate term loans. Term A Loan comprises a term loan of
11
<PAGE>
$136.0 million and matures seven years after the initial borrowing date.
Term B Loan comprises a term loan of $114.0 million and matures eight and
one-half years after the initial borrowing date. Term C Loan comprises a term
loan of $160.0 million and matures ten years after the borrowing date. As of
September 30, 1998, approximately $10.2 million of the Term B Loan and
approximately $8.7 million of the Term C Loan had been utilized to develop
and construct the Aladdin. The Term A loan has not been funded. For further
details on the Bank Credit Facility, please refer to "Note 7-Long Term Debt"
of the Notes to Consolidated Financial Statements.
The Company has operating lease financing of up to $60.0 million and
term loan facility of $20.0 million to obtain gaming equipment and other
specified equipment. For further details on the operating lease financing and
term loan facility, please refer to "Note 7-Long Term Debt" of the Notes to
Consolidated Financial Statements.
London Clubs, the Sommer Trust, and Aladdin Bazaar Holdings, LLC
("Bazaar Holdings"), a subsidiary of the Sommer Trust, have entered into a
completion guaranty ("Bank Completion Guaranty") for the benefit of the
lenders under the Bank Credit Facility, under which they have agreed to
guarantee, among other things, the completion of the Aladdin. The Bank
Completion Guaranty is not subject to any maximum dollar limitations. The
holders of the Notes are not party to the Bank Completion Guaranty, however,
London Clubs, the Sommer Trust and Bazaar Holdings have entered into a
limited completion guarantee for the benefit of the Noteholders ("Noteholder
Completion Guaranty"), under which they guarantee completion of the Aladdin,
subject to certain important exceptions, limitations and qualifications. The
Noteholder Completion Guaranty contains certain intercreditor provisions
which significantly limit the rights of the Trustee under the Noteholder
Completion Guaranty.
London Clubs, Holdings and Bazaar Holdings have entered into the
Keep-Well Agreement for the benefit of the lenders under the Bank Credit
Facility. Pursuant to the Keep-Well Agreement, London Clubs, Holdings and
Bazaar Holdings have agreed to contribute funds to the Company to ensure the
Company's compliance with certain financial ratios and other requirements
under the Bank Credit Facility for the period up to the earlier of the date
on which the Company complies with all the financial covenants set forth in
the Bank Credit Facility for six consecutive quarterly periods from and after
the Conversion Date or the date on which the aggregate outstanding principal
amounts of the Bank Credit Facility are reduced below certain amounts and
prior to certain dates, subject to certain conditions.
In connection with the development of the Mall Project, Aladdin
Bazaar, LLC, will only reimburse the Company approximately $14.2 million for
the construction of certain areas shared by the Aladdin and the Mall Project
and the facade to the Aladdin. Additionally, Aladdin Bazaar, LLC is obligated
to spend no more than $36.0 million for the Carpark. Therefore, any cost
overruns associated with these items will be borne by the Company. In
addition, the Company is obligated to pay to Aladdin Bazaar, LLC (i) a $3.2
million fee per year for a term of 99 years, which is adjusted annually
pursuant to a consumer price index-based formula, for usage of the Carpark;
and (ii) the Company's proportionate share of the operating costs associated
therewith.
The funds provided by the Notes, Credit Agreement and owner
contributions (collectively, "Funding Transactions") are expected to be
sufficient to develop, complete and commence operations of the Aladdin,
assuming no delays or construction cost overruns, which are (i) not covered by
the $31.8 million contingency or (ii) Fluor Corporation and/or its subsidiary
Fluor Daniel, are not responsible for pursuant to the Fluor Guaranty and the
Design/Build Contract, respectively. As of September 30, 1998,
the Company has utilized approximately $5.3 million of the contingency.
Subject to the discussion below regarding the Credit Agreement, it is not
expected that additional external funding will need to be obtained in order
to develop and commence the operations of the Aladdin. However, there can be
no assurance that such funds will be sufficient for the development,
construction and commencement of the Aladdin.
Following the commencement of operations of the Aladdin, the Company
expects to fund its operating, debt service and capital needs, as currently
contemplated, with $15.0 million of working capital from the funding
transactions and operating cash flows. In addition, upon the opening of the
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<PAGE>
Aladdin, the Company is expected to have an aggregate of $10.0 million
available under a working capital facility. Although no additional financing
is contemplated, the Company will seek, if necessary and to the extent
permitted under the Notes Indenture and the terms of the Bank Credit
Facility, additional financing through additional bank borrowings or debt or
equity financings. There can be no assurance that additional financing, if
needed, will be available to the Company, or that, if available, the
financing will be on terms favorable to the Company. There can also be no
assurance that estimates by the Company of its reasonably anticipated
liquidity needs are accurate or that new business developments or other
unforeseen events will not occur, resulting in the need to raise additional
funds.
RECENT DEVELOPMENTS
On November 11, 1998, the Company and Fluor Daniel, Inc. ("Fluor")
entered into a letter of understanding ("Letter") whereby the parties agreed
to negotiate the definitive terms of an amendment to the Design/Build
Contract ("Contract") (which Contract is subject to price adjustments if the
plans and specifications are changed) for the construction of the Aladdin.
The Letter provides that such amendment would (i) convert the Contract from a
$267 million guaranteed maximum price contract to a $265.29 million
substantially lump sum price contract; (ii) increase Fluor's responsibilities
for the project's scope within the lump sum amount and eliminate existing
delay claims, estimated to be approximately $11 million in total; (iii)
reaffirm the April 27, 2000 project completion date; (iv) permit Fluor to
retain the previously paid $2 million advance bonus; (v) increase from 60% to
100% the amount of the Contract savings to which Fluor would be entitled;
(vi) reduce from $9 million to $3 million the maximum amount Fluor would pay
as liquidated damages for late completion (due to delays caused by Fluor);
and (vii) amend other technical provisions/matters of the Contract and the
project. Any amendment to the Contract requires the approval of the Company's
Lenders under the Bank Credit Facility, which approval has not yet been
obtained. While the parties have agreed to negotiate definitive terms of the
Contract amendment as expeditiously as possible, there can be no assurance
that: (i) the Company and Fluor will enter into a definitive Contract
amendment; (ii) the definitive Contract amendment will not differ materially
from the Letter; and (iii) the Company's Lenders will approve the definitive
Contract amendment. While Management believes that the changes to the
Contract contemplated by the Letter will increase the likelihood that the
project will be completed on time and within the budget, in the event a
definitive Contract amendment is not reached or, if reached, differs
materially from the Letter, Management believes that the project could still
be completed on time and within the budget.
Under the Credit Agreement, $25 million of the contingency funds is
made available to the Company as a function of the project's percentage of
construction complete. However, to enhance the quality of the project, the
Company has committed to changes in the plans and specifications early in the
project while the percentage of completion is low. In addition, the Company
revised certain items of the project budget and adjusted the budget
accordingly, including an increase to pre-opening costs. Thus, because
financial commitments were made when the contingency funds were not yet
available to pay for such changes, an out-of-balance of approximately $6.5
million ("Out-of-Balance") was created. While the Out-of-Balance is due to a
timing difference that the Company believes will be resolved over time, the
Credit Agreement nonetheless requires that Gaming fund such Out-of-Balance.
London Clubs and the Sommer Trust are negotiating to post a letter of credit
to fund such Out-of-Balance, which would require an amendment to the Credit
Agreement. Management believes such amendment will be approved by the
Lenders. As the Out-of-Balance is reduced, the amount of the letter of credit
would be correspondingly reduced. In addition to amending other technical
provisions of the Credit Agreement, the amendment would also revise the net
worth requirement to reflect the accounting treatment requiring certain costs
to be expensed rather than capitalized. Management believes that the
Out-of-Balance is a short-term timing issue and that as the percentage of
construction complete is increased, the available contingency funds will
exceed the amount of funds needed, thereby assuring that the project in total
has sufficient funds for its completion. However, there can be no assurances
that the Out-of-Balance will be reduced, that it will not increase as the
project continues, or that there will be sufficient funds to complete the
project. If the Lenders do not approve a
13
<PAGE>
letter of credit to fund the Out-of-Balance and the other proposed
amendments, or if Gaming, London Clubs, and/or the Sommer Trust do not
otherwise fund the Out-of-Balance, the Lenders will not disburse funds under
the Credit Agreement. Any delay in the disbursement of funds under the
Credit Agreement could result in delays to the project, which would
materially and adversely impact the Company. While Management believes such
amendments will be approved and the Out-of-Balance will be funded, and there
will be no delays to the project due to the Out-of-Balance, there can be no
assurances.
The amendments to the Credit Agreement discussed above are also
required for the Company's operating lease financing and equipment term loan.
While Management believes such amendment will be approved by this lender,
there can be no assurances.
YEAR 2000
The Company and its subsidiaries are development stage companies
that are developing, constructing, and upon completion (currently anticipated
to occur in the spring of the year 2000), will operate a hotel casino. The
selection of software applications, hardware and other technology currently
in use principally occurred within the last twelve months. The only computer
systems in place at the current time are several financial applications, word
processing and an internal e-mail system that are Year 2000 compliant.
Accordingly, it is not expected that the Company will incur significant
amounts, if any, to modify its systems for Year 2000 compliance.
The Company has requested representations regarding Year 2000
compliance from Fluor Corporation and/or its subsidiary Fluor Daniel, the
design/builder for the Aladdin (the "Design/Builder"), and through
Design/Builder will seek similar representations of the other contractors and
subcontractors for the construction of the Aladdin (collectively, the
"Contractors") to assess the impact of Year 2000 noncompliance on the
construction of the Aladdin. Construction delays will have a significant
impact on the financial results of the Company. There can be no assurance
that the systems of the Contractors or other companies on which the Company
may rely, such as vendors, will be properly converted before the Year 2000
and that failure to convert by another company will not have an adverse
effect on the Company's operations.
START-UP ACTIVITIES
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position No. 98-5 REPORTING ON THE COSTS OF START-UP ACTIVITIES ("SOP 98-5").
The provisions of SOP 98-5 are effective for fiscal years beginning after
December 15, 1998 and require that the costs associated with start-up
activities (including pre-opening costs of casinos) be expensed as incurred.
SOP 98-5 permits early adoption in fiscal years for which annual financial
statements have not yet been issued.
Effective January 1, 1998 the Company has adopted the provisions of
SOP 98-5.
CERTAIN FORWARD LOOKING STATEMENTS
Certain information included in this Form 10-Q and other materials
filed or to be filed by the Company with the Securities and Exchange
Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) contains statements
that are forward-looking within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Such statements include those relating to the Design/Build
Contract, the Credit Agreement and other agreements, plans for future
operations, construction and development, other business development
activities, capital spending, financing sources, the effect of regulation
(including gaming and tax regulations) and competition. Such forward-looking
information involves important risks and uncertainties that could
significantly affect anticipated results in the future and, accordingly, such
results may differ from those expressed in any forward-looking
14
<PAGE>
statements made by or on behalf of the Company. These risks and uncertainties
include, but are not limited to, those relating to whether various parties
can reach agreement on amendments to and concerning the Design/Build
Contract, the Credit Agreement and other agreements, development and
construction activities, dependence on existing management, leverage and debt
service (including sensitivity to fluctuations in interest rates), domestic
or international economic conditions (including sensitivity to fluctuations
in foreign currencies), changes in federal or state tax laws or the
administration of such laws, changes in gaming laws or regulations (including
the legalization of gaming in certain jurisdictions) and application for
licenses and approvals under applicable jurisdictional laws and regulations
(including gaming laws and regulations).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As of September 30, 1998, the Company did not hold any investments
in market risk sensitive instruments.
15
<PAGE>
PART II Other Information
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Form 8-K with the Securities and
Exchange Commission on or about September 17, 1998,
disclosing that the Company had not yet concluded
negotiations on a joint venture with Planet Hollywood
International, Inc. and that the Company intends to pursue
additional prospective joint venture partners for the
development, construction and opening of a proposed hotel
and casino with a music and entertainment theme.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
ALADDIN GAMING HOLDINGS, LLC
November 16, 1998 By: /s/ Richard J. Goeglein
----------------------------------
Richard J. Goeglein, President and
Chief Executive Officer
November 16, 1998 By: /s/ Cornelius T. Klerk
----------------------------------
Cornelius T. Klerk,
Senior Vice President and
Chief Financial Officer
ALADDIN CAPITAL CORP.
November 16, 1998 By: /s/ Richard J. Goeglein
----------------------------------
Richard J. Goeglein,
Chief Executive Officer
November 16, 1998 By: /s/ Cornelius T. Klerk
-----------------------------------
Cornelius T. Klerk,
Senior Vice President and
Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001059127
<NAME> ALADDIN GAMING HOLDINGS, LLC
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,175,116
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 9,677
<CURRENT-ASSETS> 2,892,542
<PP&E> 79,452
<DEPRECIATION> 4,637
<TOTAL-ASSETS> 400,878,409
<CURRENT-LIABILITIES> 21,266,604
<BONDS> 383,857,381
0
0
<COMMON> 0
<OTHER-SE> (4,248,426)
<TOTAL-LIABILITY-AND-EQUITY> 400,878,409
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 20,425,197
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,733,274
<INCOME-PRETAX> (32,856,405)
<INCOME-TAX> 0
<INCOME-CONTINUING> (32,856,405)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,856,405)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
