<PAGE>
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, 1999
------------------------------------
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 of (I.R.S. Employer Identification No.)
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 of (I.R.S. Employer Identification No.)
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.
ALADDIN GAMING HOLDINGS, LLC
Not applicable
ALADDIN CAPITAL CORPORATION
2,500 shares of common stock, no par value as of September 30, 1999.
<PAGE>
ALADDIN GAMING HOLDINGS, LLC
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX
<TABLE>
<CAPTION>
PAGE NO.
------------
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998............................. 1
Consolidated Statements of Operations
For the three and nine months ended September 30, 1999 and 1998 and
for the period from inception (December 1, 1997) through
September 30, 1999................................................... 2
Consolidated Statements of Members' Equity
For the period from inception (December 1, 1997) through September
30, 1999............................................................. 3-5
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998 and for the
period from inception (December 1, 1997) through September 30, 1999.. 6-7
Notes to the Consolidated Financial Statements.......................... 8-11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 12-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 17
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................ 17
Signatures ........................................................................ 18
Exhibit Index ........................................................................ 19
</TABLE>
i
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ALADDIN GAMING HOLDINGS, LLC
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,455 $ 1,248
Restricted land 6,842 6,842
Other current assets 549 1,021
------------------ -----------------
Total current assets 9,846 9,111
------------------ -----------------
Property and equipment:
Land 33,407 33,407
Furniture and equipment 619 272
Construction in progress 228,007 86,557
Capitalized interest 27,198 8,213
------------------ -----------------
289,231 128,449
Less accumulated depreciation (106) (17)
------------------ -----------------
289,125 128,432
Other assets
Restricted cash 116,754 227,983
Other assets 2,304 2,920
Debt issuance costs, net of accumulated amortization of
$5,509 and $2,831 31,637 34,315
------------------ -----------------
Total other assets 150,695 265,218
------------------ -----------------
$ 449,666 $ 402,761
------------------ -----------------
------------------ -----------------
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable $ 1,567 $ 3,394
Construction payable 16,767 12,063
Obligation to transfer land 6,842 6,842
Accrued expenses 3,854 1,847
------------------ -----------------
Total current liabilities 29,030 24,146
------------------ -----------------
Long-term debt, net of discount 402,832 388,353
Related party payables and other liabilities 6,329 4,122
Members' equity:
Preferred membership interest - Series A 48,255 ---
Preferred membership interest - Series B --- ---
Common membership interest 28,608 28,608
Deficit accumulated during the development stage (65,388) (42,468)
------------------ -----------------
Total members' equity 11,475 (13,860)
------------------ -----------------
$ 449,666 $ 402,761
------------------ -----------------
------------------ -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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, 1999 AND 1998
AND FOR THE PERIOD FROM INCEPTION (DECEMBER 1, 1997)
THROUGH SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the period
December 1, 1997
For the three For the three For the nine For the nine (inception)
months ended months ended months ended months ended through
September 30, September 30, September 30, September 30, September 30,
1999 1998 1999 1998 1999
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
-------------- ------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Pre-opening costs $ 3,369 $ 6,141 $ 8,210 $ 20,425 $ 32,947
Other (income) expense:
Interest income (1,979) (3,664) (6,872) (9,302) (19,344)
Interest expense 12,866 11,215 38,463 26,674 76,879
Less: Interest capitalized (8,001) (2,527) (18,985) (4,941) (27,198)
-------------- ------------- ------------- ------------- ----------------
Total other (income) expense 2,886 5,024 12,606 12,431 30,337
-------------- ------------- ------------- ------------- ----------------
Net loss accumulated during the
development stage $ 6,255 $ 11,165 $ 20,816 $ 32,856 $ 63,284
-------------- ------------- ------------- ------------- ----------------
-------------- ------------- ------------- ------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
ALADDIN GAMING HOLDINGS, LLC
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOR THE PERIOD FROM INCEPTION (DECEMBER 1, 1997)
THROUGH SEPTEMBER 30, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Sommer Enterprises, LLC Aladdin Gaming Enterprises, LLC
-------------------------------------------------- ----------------------------------------------
Common Preferred Deficit Accumulated Common Preferred Deficit Accumulated
Membership Membership During the Membership Membership During the
Interest Interest Development Stage Interest Interest Development Stage
--------------- -------------- ------------------- ------------ ------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 1, 1997 - - - - - -
Member Contributions 1 - - - - -
--------------- -------------- ------------------- ------------ ------------ --------------------
Balance, December 31, 1997 1 - - - - -
Net loss for the period - - (19,960) - - (10,617)
Member Contributions (47,317) - - 28,247 - -
Members' equity costs (1,093) - - (581) - -
--------------- -------------- ------------------- ------------ ------------ --------------------
Balance, December 31, 1998 (48,409) - (19,960) 27,666 - (10,617)
Net loss for the period - - (9,784) - - (5,204)
Member Contributions - 34,613 - - - -
Preferred Return - 1,578 (989) - - (526)
--------------- -------------- ------------------- ------------ ------------ --------------------
Balance, September 30, 1999 (48,409) 36,191 (30,733) 27,666 - (16,347)
--------------- -------------- ------------------- ------------ ------------ --------------------
</TABLE>
3
<PAGE>
ALADDIN GAMING HOLDINGS, LLC
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOR THE PERIOD FROM INCEPTION (DECEMBER 1, 1997)
THROUGH SEPTEMBER 30, 1999
(IN THOUSANDS)
(UNAUDITED)
(continued)
<TABLE>
<CAPTION>
London Clubs Nevada, Inc. GAI, LLC
-------------------------------------------- --------------------------------------------
Common Preferred Deficit Accumulated Common Preferred Deficit Accumulated
Membership Membership During the Membership Membership During the
Interest Interest Development Stage Interest Interest Development Stage
----------- ----------- -------------------- ----------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 1, 1997 - - - - - -
Member Contributions - - - 2 - -
----------- ----------- -------------------- ----------- ----------- --------------------
Balance, December 31, 1997 - - - 2 - -
Net loss for the period - - (10,617) - (1,274)
Member Contributions 50,000 - - - - -
Members' equity costs (581) - - (70) - -
----------- ----------- -------------------- ----------- ----------- --------------------
Balance, December 31, 1998 49,419 - (10,617) (68) - (1,274)
Net loss for the period - - (5,204) - - (624)
Member Contributions - 11,538 - - - -
Preferred Return - 526 (526) - - (63)
----------- ----------- -------------------- ----------- ----------- --------------------
Balance, September 30, 1999 49,419 12,064 (16,347) (68) - (1,961)
----------- ----------- -------------------- ----------- ----------- --------------------
</TABLE>
4
<PAGE>
ALADDIN GAMING HOLDINGS, LLC
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOR THE PERIOD FROM INCEPTION (DECEMBER 1, 1997)
THROUGH SEPTEMBER 30, 1999
(IN THOUSANDS)
(UNAUDITED)
(continued)
<TABLE>
<CAPTION>
TOTAL
--------------------------------------------------------------------
Common Preferred Deficit Accumulated
Membership Membership During the
Interest Interest Development Stage
---------------------- ------------------- -------------------------
<S> <C> <C> <C>
Balance, December 1, 1997 - - -
Member Contributions 3 - -
---------------------- ------------------- -------------------------
Balance, December 31, 1997 3 - -
Net loss for the period - - (42,468)
Member Contributions 30,930 - -
Members' equity costs (2,325) - -
---------------------- ------------------- -------------------------
Balance, December 31, 1998 28,608 - (42,468)
Net loss for the period - - (20,816)
Member Contributions - 46,151 -
Preferred Return - 2,104 (2,104)
---------------------- ------------------- -------------------------
Balance, September 30, 1999 28,608 48,255 (65,388)
---------------------- ------------------- -------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ALADDIN GAMING HOLDINGS, LLC
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND FOR
THE PERIOD FROM INCEPTION (DECEMBER 1, 1997)
THROUGH SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the period
For the nine December 1, 1997
Months ended For the nine (inception)
September 30, Months ended through September
1999 September 30, 1998 30, 1999
(unaudited) (unaudited) (unaudited)
------------------- ---------------------- --------------------
<S> <C> <C> <C>
Cash used in operating activities $ (95) $ (14,382) $ (20,754)
------------------- ---------------------- --------------------
Cash flows from investing activities:
Payments for construction in progress,
furniture, equipment and capitalized
interest (156,077) (52,747) (230,746)
Decrease (increase) in restricted cash 111,229 (255,255) (116,754)
------------------- ---------------------- --------------------
Net cash used in investing activities (44,848) (308,002) (347,500)
------------------- ---------------------- --------------------
Cash flows from financing activities:
Proceeds from issuance of notes - 100,047 100,047
Proceeds from long-term debt - 274,000 274,000
Repayment of long-term debt - (547) (547)
Debt issuance costs - (37,146) (37,146)
Members' contributions 46,151 65,000 111,154
Payment of debt on contributed land - (74,477) (74,477)
Members' equity costs - (2,325) (2,325)
Payable to related parties (1) - -
Advances to purchase membership
interests - - 3
------------------- ---------------------- --------------------
Net cash provided by financing activities 46,150 324,552 370,709
------------------- ---------------------- --------------------
Net increase in cash 1,207 2,168 2,455
Cash and cash equivalents at the beginning
of the period 1,248 7 -
------------------- ---------------------- --------------------
Cash and cash equivalents at the end of the
period $ 2,455 $ 2,175 $ 2,455
------------------- ---------------------- --------------------
------------------- ---------------------- --------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
ALADDIN GAMING HOLDINGS, LLC
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND FOR
THE PERIOD FROM INCEPTION (DECEMBER 1, 1997)
THROUGH SEPTEMBER 30, 1999
(continued)
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
<S> <C> <C> <C>
Cash paid for interest, net of amount
capitalized $(798) $ 8,228 $12,926
Non-cash investing and financing activities:
Members' contributions - book value
Land - 33,407 33,407
Construction in progress - 7,000 7,000
Equipment acquired equal to assumption
of debt - 547 547
Increase in construction payables 4,705 4,956 16,767
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
ALADDIN GAMING HOLDINGS, LLC
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
Aladdin Gaming Holdings, LLC, a Nevada limited liability company
("Gaming Holdings"), through its wholly-owned subsidiary Aladdin Gaming, LLC
("Gaming"), is developing, constructing and will operate a new hotel and
casino, the Aladdin Resort and Casino ("Aladdin"), as the centerpiece of an
approximately 35-acre 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 plans 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 and financing for the Aladdin Music Project.
The consolidated financial statements include the accounts of Gaming
Holdings and all of its subsidiaries. This information should be read in
conjunction with the financial statements set forth in Gaming Holdings'
Annual Report on Form 10-K for the year ended December 31, 1998, the Form
8-K, dated April 27, 1999 and the Form 10-Qs for the quarters ended March 31,
1999 and June 30, 1999.
Accounting policies utilized in the preparation of the financial
information herein presented are the same as set forth in Gaming Holdings'
annual financial statements except as modified for interim accounting
policies. The interim consolidated financial information is unaudited. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of the results for the interim
periods have been included. Interim results of operations are not necessarily
indicative of the results of operations for the full year.
Certain prior period amounts have been reclassified to conform with
the current period's presentation.
2. CLASSES OF INTEREST
Gaming Holdings has three classes of shares (which represent units
of membership interests in Gaming Holdings): Common Shares ("Gaming Holdings
Common Membership Interests"), Series A Preferred Shares ("Gaming Holdings
Series A Preferred Interests") and Series B Preferred Shares ("Gaming
Holdings Series B Preferred Interests" and together with the Gaming Holdings
Common Membership Interests and the Gaming Holdings Series A Preferred
Interests, the "Gaming Holdings Interests"). Gaming Holdings' authorized
capital stock consists of 10,000,000 Gaming Holdings Common Membership
Interests, 1,500,000 Gaming Holdings Series A Preferred Interests and
1,500,000 Gaming Holdings Series B Preferred Interests. As of September 30,
1999, Gaming Holdings Common Membership Interests of 1,000,000 and Gaming
Holdings Series A Preferred Interests of 461,506 were issued and outstanding.
No Gaming Holdings Series B Preferred Interests have been issued as of
September 30, 1999.
8
<PAGE>
Gaming Holdings will periodically distribute cash, to the extent
available, to the holders of Gaming Holdings Common Membership Interests (or,
if any such holder is a pass-through entity, its equity interest holders) to
the extent of the increase in their cumulative United States federal, state
or local income tax liability in respect of their interests in Gaming
Holdings for such period and make any additional distributions of cash to
Gaming Holdings Members that may be necessary to cover United States federal,
state or local income taxes arising from the ownership of an interest in
Gaming Holdings. No other distributions shall be made to any Gaming Holdings
Interests until all distributions to cover tax liability in respect of any
Gaming Holdings Interests for such period have been made.
The Gaming Holdings Series A Preferred Interests are issued to
London Clubs Nevada, Inc. ("LCNI"), a subsidiary of London Clubs
International, plc ("London Clubs"), or Sommer Enterprises, LLC ("Sommer
Enterprises") in consideration for any payment required pursuant to the Bank
Completion Guaranty, the Noteholder Completion Guaranty or the Keep-Well
Agreement which is made by Aladdin Holdings, LLC, LCNI or their respective
affiliates to Gaming where such payment is not required to be made to pay
down Gaming's bank debt pursuant to Section 13 of the Keep-Well Agreement.
Except for distributions to cover any tax liability in respect of any Gaming
Holding Interests, the Gaming Holdings Series A Preferred Interests will have
a first priority in the allocation of profits and a distribution, redemption
and liquidation preference over all Gaming Holdings Common Membership
Interests and Gaming Holdings Series B Preferred Interests. The capital
account in respect of the Gaming Holdings Series A Preferred Interests will
cumulate and compound semi-annually at the rate of 12% per annum on the
capital account balance in respect thereof at the time of compounding and,
subject to the limitations on Restricted Payments set forth in the Indenture,
will be paid upon approval of a supermajority of the Gaming Holdings Board of
Managers.
During the second and third quarters of 1999, a total of $46.2
million in payments were made pursuant to the Bank Completion Guaranty in
exchange for Gaming Holdings Series A Preferred Interests. As of September
30, 1999, $2.1 million was accrued on the Series A Preferred Interests
related to contributions made in the second and third quarters of 1999.
Gaming Holdings Series A Preferred Interests will be automatically
redeemed when distributions have been made to the extent of the capital
account balance in respect thereof. Should Gaming Holdings liquidate any time
prior to the redemption of the Gaming Holdings Series A Preferred Interests,
the Gaming Holdings Series A Preferred Interests will be entitled to a
distribution of cash, to the extent available, before any distributions are
made to the Gaming Holdings Series B Preferred Interests or Gaming Holdings
Common Membership Interests, in an amount equal to the capital account of the
Gaming Holdings Series A Preferred Interests.
The Gaming Holdings Series B Preferred Interests will be issued to
LCNI in the event of and in exchange for a payment required by London Clubs
to pay down Gaming's bank debt pursuant to Section 13 of the Keep-Well
Agreement. Except for distributions to cover any tax liability in respect of
any Gaming Holdings Interests, the Gaming Holdings Series B Preferred
Interests will have a distribution, redemption and liquidation preference
over all Gaming Holdings Common Membership Interests. To the extent of any
net profits left to be allocated after special allocations (as defined in the
Operating Agreement) and allocations to Gaming Holdings Series A Preferred
Interests, the capital account in respect of Gaming Holdings Series B
Preferred Interests will cumulate and compound quarterly at a rate equal to
the rate on the bank debt of the Company which was paid down by the payment
required pursuant to the Keep-Well Agreement, such rate to be applied to the
capital account balance in respect of the Gaming Holdings Series B Preferred
Interests at the time of compounding and, subject to the limitations on
Restricted Payments set forth in the Indenture, will be paid upon approval of
9
<PAGE>
a supermajority of the Gaming Holdings Board of Managers and after all Gaming
Holdings Series A Preferred Interests have been redeemed. Gaming Holdings
Series B Preferred Interests will be automatically redeemed when
distributions have been made to the extent of the capital account balance.
Should Gaming Holdings liquidate at any time prior to the redemption of the
Gaming Holdings Series B Preferred Interests, the Holdings Series B Preferred
Interests will be entitled to a distribution of cash, to the extent
available, before any distributions.
Other than distributions to cover any tax liability in respect of
any Gaming Holdings Interests, the Gaming Holdings Common Membership
Interests will be entitled to distribution only after all discretionary and
mandatory distributions have been made to all other interests in Gaming
Holdings.
Except for matters affecting rights of the holders of Gaming
Holdings Series A Preferred Interests and Gaming Holdings Series B Preferred
Interests to distributions, including upon redemption, (which may not be
diminished or affected without the vote of the holders of at least two-thirds
of the issued and outstanding shares of the affected class) and matters
affecting the anti-dilution protections and tag-along participation rights of
the holders of the Warrants and the Warrant Shares (which may not be amended
without the consent of Aladdin Gaming Enterprises, Inc.), all management and
voting rights will be vested in the Gaming Holdings Common Membership
Interests.
The above summary should be read in conjunction with, and is
qualified in its entirety by, the Gaming Holdings Operating Agreement, see
Exhibit 3.5 to the Gaming Holdings Form 10-K for the fiscal year ended
December 31, 1998.
3. INTEREST RATE SWAPS
Effective June 30, 1999, Gaming restructured its interest rate swap
arrangements in an effort to reduce future expenditures for interest. Gaming
has entered into these agreements to manage interest expense, which is
subject to fluctuations due to the variable nature of the London Interbank
Offered Rate ("LIBOR"). In exchange for entering into the transaction, Gaming
received $500,000 from the counterparty in July, 1999.
Beginning June 30, 1999, Gaming has the following interest rate
swaps, interest rate ceilings and floor caps, and related notional amounts in
effect: (i) an interest rate swap with an original notional amount of $114
million increasing to a maximum of $222.5 million whereby interest is fixed
at 5.50% through March 31, 2000. After March 31, 2000, an interest rate
collar with a notional amount of $250 million, a maximum and minimum interest
rate of 7.5% and 5.15%, respectively, will go into effect and mature on
September 30, 2006; and (ii) an interest rate collar with a notional amount
of $160 million, a maximum rate of 8.00%, a minimum rate of 5.15% and a
maturity date of March 31, 2003. All rates noted above are LIBOR equivalents
only and do not include the impact of the basis point additions to LIBOR that
are used in calculating interest expense on Gaming's term loans. The LIBOR
applicable to these agreements is adjusted every three months and on
September 30, 1999 was set at 5.51%. The fair market value of the Company's
interest rate swaps, interest rate ceilings and floor caps as provided by the
counterparty to the swaps, is a net receivable of approximately $4.6 million
at October 22, 1999.
The notional amounts do not represent amounts exchanged by the
parties, and thus are not a measure of exposure of the Company. The amounts
exchanged are normally based on the notional amounts and other terms of the
swaps. The variable rates are subject to change over time as LIBOR fluctuates.
10
<PAGE>
Neither the Company nor the counterparty, which is a prominent
financial institution, is required to collateralize their respective
obligations under these swaps. The Company is exposed to loss if the
counterparty defaults. The Company does not hold or issue rate agreements for
trading purposes.
4. INCOME TAXES
Gaming Holdings will file federal information tax returns only. Each
member reports taxable income or loss on their respective tax returns.
5. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that entities record all derivatives as assets or liabilities
measured at fair value, with the change in fair value recognized in earnings
or in other comprehensive income, depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 amends or supercedes
several current accounting statements. In July, 1999, the FASB issued SFAS
No. 137 which delays the effective date of SFAS No. 133 from fiscal year 2000
to fiscal year 2001. Gaming Holdings is in the process of analyzing SFAS No.
133 and the impact on its consolidated financial position and results of
operations.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with 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, N.W.,
Washington, D.C. 20549 or the SEC internet site address: http://www.sec.gov.
DEVELOPMENT ACTIVITIES
Aladdin Gaming Holdings, LLC, a Nevada limited liability company
("Gaming Holdings"), was formed on December 1, 1997. Gaming Holdings was
initially owned by Aladdin Gaming Enterprises, Inc., a Nevada corporation
("Gaming Enterprises") (25%), Sommer Enterprises, LLC, a Nevada limited
liability company ("Sommer Enterprises") (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 ("Gaming Holdings Common Membership
Interests"). Sommer Enterprises contributed a portion of land for Gaming
Holdings Common Membership Interests. Gaming Enterprises, which is owned 100%
by Sommer Enterprises, contributed a portion of land, $7 million of
predevelopment costs and $15 million in cash for Gaming Holdings Common
Membership Interests. 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. On November 30, 1998, the Trust Under Article Sixth u/w/o Sigmund
Sommer ("Sommer Trust") and its affiliates agreed that they shall vote their
respective Gaming Holdings Common Membership Interests and cause Gaming
Enterprises to vote its Gaming Holdings Common Membership Interests so that
(taking into account Gaming Holdings Common Membership Interests held by
London Clubs or its affiliates) London Clubs controls fifty percent of the
voting power of Gaming Holdings.
Aladdin Holdings, LLC, a Delaware limited liability company ("AHL"),
indirectly holds a majority interest in Gaming Holdings. The members of AHL are
the Sommer Trust, which holds a 95% interest in AHL, 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 AHL.
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 Gaming
Holdings 13 1/2% Senior Discount Notes ("Notes"). Capital does not have any
material operations or assets and does not have any revenues. Gaming Holdings,
through its subsidiaries, also owns 100% of Aladdin Music, LLC, a Nevada limited
liability company ("Aladdin Music"). Gaming Holdings and its subsidiaries are
collectively referred to herein as "Company."
The operations of the Company have been limited to the design,
development, financing and construction of a new Aladdin Resort 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 on Las Vegas Boulevard. The Aladdin has been designed to include a
luxury themed hotel of approximately 2,600 rooms ("Hotel"), an approximately
116,000 square foot casino ("Casino") and six restaurants. The Casino's main
gaming area will contain approximately 2,800 slot machines, 87 table games, and
a race
12
<PAGE>
and sports book facility. Included on a separate level of the Casino will
be a 15,000 square foot luxurious gaming section ("The London Club") 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 496,000 square feet of retail
space ("Desert Passage"); (iii) a planned second hotel and casino with a music
and entertainment theme ("Aladdin Music Project"); (iv) the newly renovated
7,000-seat Theater of the 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 is separately owned in
part by an affiliate of the Company and Aladdin Music is currently seeking a
joint venture partner and financing for the Aladdin Music Project. The Company
believes that the completion of the Aladdin will occur during the second quarter
of the year 2000.
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. 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
$2.2 million related to the Aladdin Music Project for necessary predevelopment
costs and expenses of the Aladdin Music Project. The Company's operating
expenses primarily have consisted of interest, amortization costs, expenses
related to the Notes and pre-opening costs.
The Company anticipates that its results of operations from inception
to the 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 debt payment obligations, including the Notes and other
indebtedness, and its other obligations, there can be no assurance with respect
thereto.
Pre-opening expenses for the three and nine months ended September 30,
1999 were $3.4 million and $8.2 million, respectively, compared to $6.1 million
and $20.4 million, respectively, during the same periods of the prior year.
Pre-opening expenses were higher in the prior year due to organizational costs
and expenses related to arranging the financing of the Aladdin.
Interest expense for the three and nine months ended September 30, 1999
was $12.9 million and $38.5 million, respectively, compared to $11.2 million and
$26.7 million, respectively, during the same periods of the prior year. Interest
expense increased in the current year due to higher funded debt levels as
construction has progressed on the project. The Company pays a higher interest
rate on its bank debt once the funds are utilized for construction compared to
the amount paid for interest when the funds are held in the cash collateral
account. Capitalized interest has also increased in the current year as
construction in progress has increased.
Interest income has decreased in the current year compared to the prior
year as cash balances have been used to fund construction costs, pre-opening
expenses and interest expense.
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<PAGE>
The Company recorded a net loss of approximately $6.3 million for the
three months ended September 30, 1999 and approximately $20.8 million for the
nine months ended September 30, 1999 as compared to a net loss of approximately
$11.2 million for the three month period ended September 30, 1998 and
approximately $32.9 million for the nine months ended September 30, 1998. The
cumulative loss for the period of inception (December 1, 1997) to September 30,
1999 was approximately $63.3 million. The Company had no operations for the
period of inception (December 1, 1997) to September 30, 1999. The losses were
due to the pre-opening costs, interest expense, amortization costs and expenses
related to the Notes.
MATERIAL CHANGES IN FINANCIAL CONDITION
Through September 30, 1999, approximately $365.5 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
contribution to the Company, approximately $230.7 million in construction,
furniture, fixtures and equipment, and capitalized interest, approximately $39.5
million in debt issuance and member equity costs, and approximately $20.8
million in pre-opening costs, net interest expense, and other current assets.
LIQUIDITY AND CAPITAL RESOURCES
On February 26, 1998, Gaming Holdings and Capital issued $221.5 million
aggregate principal amount of their 13 1/2% Senior Discount Notes due 2010
("Notes"). The proceeds to the Company from the Notes were approximately $115.0
million and all the proceeds have been utilized by the Company for the
development and construction of the Aladdin. For further details on the Notes,
including the covenants, restrictions and limitations on the Company pursuant to
the Notes Indenture, see Exhibit 4.1 to the Company's Form 10-K for the year
ended December 31, 1998.
Gaming has a credit facility ("Bank Credit Facility" or "Credit
Agreement") with various financial institutions and The Bank of Nova Scotia as
the administrative agent for the lenders (collectively, "Lenders"). The Credit
Agreement consists of three separate term loans. Term A Loan comprises a term
loan of $129.7 million and matures seven years after the initial borrowing date.
Term B Loan comprises a term loan of $114 million and matures eight and one-half
years after the initial borrowing date. Term C Loan comprises a term loan of
$160 million and matures ten years after the initial borrowing date. As of
September 30, 1999, approximately $26.1 million of the Term B Loan proceeds,
plus accrued interest, and approximately $72.1 million of the Term C Loan
proceeds, plus accrued interest, is available. The Term A Loan has not been
funded. Under the Credit Agreement, Gaming had $21.3 million available for its
investment in Aladdin Music. However, during the Third Quarter of 1999, pursuant
to the Credit Agreement, Gaming could, and did, allocate $15.0 million of such
funds to the Theater renovation and reduced the Term A Loan by the remaining
$6.3 million. For further details on the Bank Credit Facility, including the
covenants, restrictions and limitations on Gaming pursuant to the Bank Credit
Facility, see Exhibit 10.7 to the Company's Form 10-K for the year ended
December 31, 1998 and Exhibit 10.01 to the Company's Form 8-K, dated
April 27, 1999.
Gaming has operating lease financing of up to $60 million and a term
loan facility of $20 million to obtain gaming equipment and other specified
equipment (collectively, "FF&E Financing"). For further details on the operating
lease financing and term loan facility, including the covenants, restrictions
and
14
<PAGE>
limitations on Gaming pursuant to the FF&E Financing, see Exhibit 10.35 to
the Company's Form 10-K for the year ended December 31, 1998.
Upon the later of (a) the transfer of the real property under the Mall
Project by Gaming to Aladdin Bazaar, LLC ("Aladdin Bazaar") or (b) the
commencement of Aladdin's operations, Aladdin Bazaar will execute a promissory
note of approximately $16.7 million to Gaming. Principal and interest on the
note is payable by Aladdin Bazaar to Gaming in the amount of $2 million per
year. The required payments are subordinated to various restrictions under the
Aladdin Bazaar operating agreement. Due to the restrictions upon the payments,
there can be no assurances that Gaming will receive any payments under this
note.
London Clubs, the Sommer Trust, and Aladdin Bazaar Holdings, LLC
("Bazaar Holdings"), which is owned 99% by 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. From
January 1, 1999 to September 30, 1999, there has been a total of
approximately $46.2 million in payments pursuant to the Bank Completion
Guaranty, which has been funded approximately $41.8 million by London Clubs
and approximately $4.4 million by the Sommer Trust. Pursuant to a
contribution agreement ("Contribution Agreement"), dated as of February 26,
1998, the Sommer Trust and London Clubs agreed to share all obligations under
the Bank Completion Guaranty, 75% and 25%, respectively, and to the extent
that one of the parties could not fund its proportionate amount under the
Contribution Agreement, the other party could fund the non-contributing
party's proportionate amount. The holders of the Notes are not a party to the
Bank Completion Guaranty, however, London Clubs, the Sommer Trust and Bazaar
Holdings have entered into a limited completion guaranty 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.
During the Third Quarter of 1999, the Company increased the Main
Project Budget by approximately $10.2 million, of which $6.2 million was
funded in the Fourth Quarter of 1999. This amount reflected an increase in
construction costs of approximately $7.6 million, an increase in pre-opening
costs of approximately $1.6 million and an increase in capitalized interest
of $1 million. Pursuant to the Bank Completion Guaranty, the Sommer Trust and
London Clubs funded to Gaming approximately $1 million and $9.2 million,
respectively, to fund the Main Project Budget increase.
As required by the Company's Operating Agreement upon advances under
the Bank Completion Guaranty, the Company will issue, effective as of the
dates of the respective fundings, Series A Preferred Shares in the names of
Sommer Enterprises and London Clubs Nevada, Inc. in the amounts specified in
the Company's Operating Agreement. All said shares are required to be pledged
in favor of the Lenders, and, on a subordinated basis, the shares issued in
the name of Sommer Enterprises (as well as its Common Shares in Gaming
Holdings) are required to be pledged in favor of London Clubs.
In connection with the development of the Mall Project, Aladdin Bazaar
will 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 is obligated to spend no more than $36
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: (i) a $3.2 million fee per year for a term of 99 years, which
is adjusted every fifth year 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 with the Carpark and other common areas.
The Company is evaluating the amount of additional increases to the
Main Project Budget which will be necessary to complete and open the Aladdin.
The Bank Completion Guaranty requires that increases to the Main Project
Budget be funded by the Sommer Trust and London Clubs. The Company believes
that the funds provided by the Notes, Bank Credit Facility, FF&E Financing,
London Clubs' equity contribution and contributions pursuant to the Bank
Completion Guaranty (collectively, "Funding Transactions") will be sufficient
to develop, complete and commence operation of the Aladdin.
15
<PAGE>
However, there can be no assurance that the Funding Transactions 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 million of working capital from the Funding Transactions
and operating cash flows. In addition, upon the opening of the Aladdin, the
Company is expected to have an aggregate of $10.0 million available under a
working capital facility; however, there can be no assurance such facility will
be available to the Company, or that, if available, the facility will be on
terms favorable to the Company.
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 and the FF&E Financing, 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.
YEAR 2000
The Company and its subsidiaries are development stage companies that
are developing, constructing, and upon completion, 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 email 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. Further, the Company has
requested representation for software applications, hardware or other technology
regarding the Year 2000 compliance by the vendors from whom the Company has
purchased or will purchase such products.
The Company has requested representations regarding the Year 2000
compliance from Fluor Corporation and/or its subsidiary, Fluor Daniel, the
design/builder for the Aladdin ("Design/Builder"), and has requested
Design/Builder to seek similar representations of the other contractors and
subcontractors for the construction of the Aladdin (collectively, "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.
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 SEC (as well as information
included in oral statements or other written statements made, or to be made, by
the Company) contain 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, without
limitation, those relating to plans for future operations, current construction
and development activities (including completion dates, budgets and cost
estimates), other business development activities, capital spending, financing
sources, the Year 2000 compliance, the effect of regulation (including gaming
and tax regulations) and competition. Such
16
<PAGE>
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 statements made by, or on behalf of, the Company. These risks
and uncertainties include, but are not limited to, those relating to the
current development and construction activities and costs and timing thereof,
the sources and extent of financing for the project, 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
Effective June 30, 1999, Gaming restructured its interest rate swap
arrangements in an effort to reduce future expenditures for interest. Gaming has
entered into these agreements to manage interest expense, which is subject to
fluctuations due to the variable nature of the London Interbank Offered Rate
("LIBOR"). In exchange for entering into the transaction, Gaming received
$500,000 from the counterparty in July, 1999.
Beginning June 30, 1999, Gaming has the following interest rate swaps,
interest rate ceilings and floor caps, and related notional amounts in effect:
(i) an interest rate swap with an original notional amount of $114 million
increasing to a maximum of $222.5 million whereby interest is fixed at 5.50%
through March 31, 2000; (ii) after March 31, 2000, an interest rate collar with
a notional amount of $250 million, a maximum and minimum interest rate of 7.5%
and 5.15%, respectively, will go into effect and mature on September 30, 2006;
and (iii) an interest rate collar with a notional amount of $160 million, a
maximum rate of 8.00%, a minimum rate of 5.15% and a maturity date of March 31,
2003. All rates noted above are LIBOR equivalents only and do not include the
impact of the basis point additions to LIBOR that are used in calculating
interest expense on Gaming's term loans. The LIBOR applicable to these
agreements is adjusted every three months and on September 30, 1999 was set at
5.51%. The fair market value of the Gaming's interest rate swaps, interest rate
ceilings and floor caps as provided by the counterparty, is a net receivable of
approximately $4.6 million at October 22, 1999.
The notional amounts do not represent amounts exchanged by the parties,
and thus are not a measure of exposure of Gaming. The amounts exchanged are
normally based on the notional amounts and other terms of the swaps. The
variable rates are subject to change over time as LIBOR fluctuates.
Neither Gaming nor the counterparty, which is a prominent financial
institution, is required to collateralize their respective obligations under
these swaps. Gaming is exposed to loss if the counterparty defaults. Gaming does
not hold or issue rate agreements for trading purposes.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.01 Financial Data Schedule
(b) Reports on Form 8-K
None.
17
<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 15, 1999 By: /s/ Richard J. Goeglein
---------------------------------------------
Richard J. Goeglein, President and Chief
Executive Officer
November 15, 1999 By: /s/ Cornelius T. Klerk
---------------------------------------------
Cornelius T. Klerk, Senior Vice President and
Chief Financial Officer
ALADDIN CAPITAL CORP.
November 15, 1999 By: /s/ Richard J. Goeglein
---------------------------------------------
Richard J. Goeglein, Chief Executive Officer
November 15, 1999 By: /s/ Cornelius T. Klerk
---------------------------------------------
Cornelius T. Klerk, Senior Vice President and
Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
PAGE
NO.
EXHIBIT DESCRIPTION
NO.
27.01 Financial Data Schedule
19
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,455
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,846
<PP&E> 289,231
<DEPRECIATION> 106
<TOTAL-ASSETS> 449,666
<CURRENT-LIABILITIES> 29,030
<BONDS> 402,832
0
0
<COMMON> 0
<OTHER-SE> 11,475
<TOTAL-LIABILITY-AND-EQUITY> 449,666
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,210
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,478
<INCOME-PRETAX> (20,816)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,816)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,816)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
