<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
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Commission file number: 333-49715
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ALADDIN GAMING ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 88-0379695
- -------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
831 Pilot Road, Las Vegas, Nevada 89119
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(Address of principal executive offices) (Zip Code)
(702) 736-7114
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
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
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Indicate the number of shares outstanding of the issuer's classes of common
stock, as of the latest practicable date.
Class A Common Stock,
2,000,000 shares authorized 1,107,500 issued,
no par value
Class B Common Stock, Non-voting,
8,000,000 shares authorized 2,215,000 issued,
no par value
<PAGE>
ALADDIN GAMING ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets -
September 30, 1998 and December 31, 1997.............................. 1
Statements of Operations -
For the three and nine months ended September 30, 1998
and for the period from inception (December 3, 1997)
through September 30, 1998............................................ 2
Statement of Stockholders' Equity -
For the period from inception (December 3, 1997) through
September 30, 1998.................................................... 3
Statements of Cash Flows -
For the nine months ended September 30, 1998 and for
the period from inception (December 3, 1997) through
September 30, 1998.................................................... 4
Notes to the Financial Statements....................................... 5 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 8 - 13
Item 3. Quantitative and Qualitative Disclosures About Market Risks............. 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 13
Item 2. Changes in Securities and Use of Proceeds............................... 13
Item 3. Defaults upon Senior Securities......................................... 13
Item 4. Submission of Matters to a Vote of Security Holders..................... 13
Item 5. Other Information....................................................... 14
Item 6. Exhibits and Reports on Form 8-K........................................ 14
Signatures ........................................................................ 15
Exhibit Index...................................................................... 16
</TABLE>
<PAGE>
PART I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
ALADDIN GAMING ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------- -------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash $ 669 $ 669
Investment in unconsolidated affiliate 19,452,182 331
-------------------- -------------------
$ 19,452,851 $ 1,000
-------------------- -------------------
-------------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to related party $ 1,500 $ -
Common Stock
Class A, no par value, 2,000,000 and 2,500 shares
authorized, 1,107,500 and 1 shares issued and
outstanding as of September 30, 1998 and
December 31, 1997, respectively. Class B, no par
value and non-voting 8,000,000 and 0 shares
authorized, 2,215,000 and 0 shares issued and
outstanding, and 2,215,000 and 0 shares reserved
pursuant to the warrant agreement as of
September 30, 1998 and December 31, 1997, respectively. 13,247,203 1
Additional paid-in capital 15,000,999 999
Deficit accumulated during the development stage (8,796,851) -
-------------------- -------------------
$ 19,452,851 $ 1,000
-------------------- -------------------
-------------------- -------------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
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<PAGE>
ALADDIN GAMING ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
AND FOR THE PERIOD
FROM INCEPTION (DECEMBER 3, 1997) THROUGH SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
For the period
For the three months For the nine months December 3, 1997
ended September 30, ended September 30, (inception) through
1998 1998 September 30, 1998
(Unaudited) (Unaudited) (Unaudited)
------------------------ ---------------------- -----------------------
<S> <C> <C> <C>
Other expenses $ - $ (1,500) $ (1,500)
Equity in loss of unconsolidated affiliate (2,791,157) (8,214,101) (8,214,101)
Income tax expense (benefit) - - -
------------------------ ---------------------- -----------------------
Net loss accumulated during the development
stage $ (2,791,157) $ (8,215,601) $ (8,215,601)
------------------------ ---------------------- -----------------------
------------------------ ---------------------- -----------------------
Basic and Dilutive loss per share $ (0.84) $ (3.01) $ (3.01)
Shares used in per share calculation 3,322,500 2,726,154 2,726,154
</TABLE>
The accompanying notes are an integral part of this financial statement.
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<PAGE>
ALADDIN GAMING ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (DECEMBER 3, 1997)
THROUGH SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Common Stock Paid in Retained
Class A and Class B Capital Earnings Total
-------------------- --------------- ----------------- ------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 3, 1997 $ - $ - $ - $ -
Issuance of Class A common stock, 1 share
issued 1 999 - 1,000
-------------------- --------------- ----------------- ------------------
BALANCE, DECEMBER 31, 1997 1 999 - 1,000
Net loss accumulated during the
development stage - - (8,215,601) (8,215,601)
Issuance of Class A common stock,
1,107,499 shares issued, and Class B
common stock, 2,215,000 shares issued 13,247,202 - - 13,247,202
Issuance of Warrants to purchase
Class B common stock, 2,215,000 Warrants - 15,000,000 - 15,000,000
issued
Equity costs from unconsolidated
affiliate - - (581,250) (581,250)
-------------------- --------------- ----------------- ------------------
BALANCE, SEPTEMBER 30, 1998 $ 13,247,203 $ 15,000,999 $ (8,796,851) $ 19,451,351
-------------------- --------------- ----------------- ------------------
-------------------- --------------- ----------------- ------------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
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<PAGE>
ALADDIN GAMING ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND FOR THE PERIOD
FROM INCEPTION (DECEMBER 3, 1997) THROUGH SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
For the period
For the nine months December 3, 1997
ended (inception) through
September 30, 1998 September 30, 1998
(Unaudited) (Unaudited)
------------------------ ----------------------
<S> <C> <C>
Cash Flows used for investing activities:
Investment in unconsolidated affiliate $ (15,000,000) $ (15,000,331)
Cash Flows from financing activities:
Proceeds from the issuance of stock - 1,000
Proceeds from the issuance of warrants 15,000,000 15,000,000
------------------------ ----------------------
Increase in cash and cash equivalents - 669
Cash and cash equivalents at beginning of period 669 -
------------------------ ----------------------
Cash and cash equivalents at end of period $ 669 $ 669
------------------------ ----------------------
------------------------ ----------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Equity contributions - non-cash $ 13,247,202 $ 13,247,202
</TABLE>
The accompanying notes are an integral part of this financial statement.
-4-
<PAGE>
ALADDIN GAMING ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. ORGANIZATION AND BUSINESS
Aladdin Gaming Enterprises, Inc., a Nevada corporation ("Enterprises"),
was established on December 3, 1997. Enterprises holds a 25% interest in
Aladdin Gaming Holdings, LLC ("Gaming Holdings") and is wholly owned by
Sommer Enterprises, LLC, a Nevada limited-liability company ("Sommer
Enterprises"). Aladdin Holdings, LLC, a Delaware limited liability company
("Holdings"), holds a majority interest in Sommer Enterprises. 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.
Enterprises' interest in Gaming Holdings has been accounted for under
the equity method.
Enterprises has no other business or activities other than its
investment in Gaming Holdings which is a development stage company. Gaming
Holdings through its subsidiary, Aladdin Gaming, LLC ("Gaming"), plans to
develop, construct and operate a new hotel and casino, the Aladdin Hotel and
Casino as the centerpiece of an approximately 35 acre world-class resort,
casino and entertainment complex in Las Vegas, Nevada. 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. INCOME TAXES
Enterprises accounts for income taxes using the liability method as set
forth in the Statement of Financial Accounting Standards No. 109, ACCOUNTING
FOR INCOME TAXES. Under the liability method, deferred taxes are provided
based on the temporary differences between the financial reporting basis and
the tax basis of Enterprises' assets and liabilities.
There was no income tax expense or benefit recorded for the period from
inception (December 3, 1997) through September 30, 1998 as Enterprises is a
development stage company and the realization of any deferred tax asset is
uncertain.
3. PRIVATE OFFERING
On February 26, 1998, Gaming Holdings, Aladdin Capital Corp. ("Capital"
together with Gaming Holdings, the "Issuers") and Enterprises consummated a
private offering (the "Offering") under Rule 144A of the Securities Act of
1933. The private offering consisted of 221,500 units (the "Units"), each
unit consisting of (i) $1,000 principal amount at maturity of 13 1/2% Senior
Discount Notes due 2010 (the "Notes") of Gaming Holdings and Capital and (ii)
10 Warrants (the "Warrants") to purchase 10 shares of Class B non-voting
Common Stock, no par value, of Enterprises. The Notes and the Warrants became
separately transferable on July 23, 1998 and 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"),
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<PAGE>
pursuant to a registration statement dated July 23, 1998. The Notes were
exchanged for notes with substantially the same terms issued in the private
placement.
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 of the issued
and outstanding Series A Preferred Interests of Gaming Holdings in Aladdin
Gaming, LLC.
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.
4. LONG-TERM DEBT OF UNCONSOLIDATED AFFILIATE
On February 26, 1998, Gaming 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.
Gaming 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 Gaming'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. Gaming has entered into various
interest rate swaps to manage interest expense, which is subject to
fluctuations due to the variable nature of LIBOR. Gaming 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.
-6-
<PAGE>
Gaming is exposed to credit loss in the event of nonperformance by
the other parties to the interest rate swap agreements. However, Gaming
considers the risk of nonperformance by the counterparties to be minimal
because the parties to the swap are predominantely members of Gaming's bank
group.
Under the Credit Agreement, $25 million of the contingency funds is
made available to Gaming as a function of the project's percentage of
construction complete. However, to enhance the quality of the project, Gaming
has committed to changes in the plans and specifications early in the project
while the percentage of completion is low. In addition, Gaming 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 Gaming believes will be resolved over time, the Credit
Agreement nonetheless requires that Gaming fund such Out-of-Balance. London
Clubs, a 25% owner (through its subsidiary) of Gaming Holdings, 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 Gaming and Enterprises.
5. EQUITY CONTRIBUTIONS
On February 26, 1998, Sommer Enterprises, LLC contributed a portion of
land and $7.0 million of predevelopment costs in exchange for 100% of the
Class A Common Stock in Enterprises. Enterprises contributed the portion of
land, the $7.0 million of predevelopment costs and the net proceeds $15.0
million allocable from the sale of the Warrants to Gaming Holdings in
exchange for 25% of the common membership interests in Gaming Holdings.
6. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In September 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 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 September 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.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the 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 Enterprises, Inc., a Nevada corporation ("Enterprises"),
was established on December 3, 1997. Enterprises holds a 25% interest in
Aladdin Gaming Holdings, LLC ("Gaming Holdings") and is wholly owned by
Sommer Enterprises, LLC, a Nevada limited-liability company ("Sommer
Enterprises"). Aladdin Holdings, LLC, a Delaware limited-liability company
("Holdings"), holds a majority interest in Sommer Enterprises. 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.
Enterprises has no other business or activities other than its
investment in Gaming Holdings which is a development stage company. 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 membership 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 is not expected to 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 Enterprises and 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 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.
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<PAGE>
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 their payment
obligations, including the Notes and other indebtedness, there can be no
assurance with respect thereto.
Gaming Holdings recorded a net loss of approximately $11.1 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.
Enterprises recorded its 25% share of the Gaming Holdings' losses as
equity in loss of unconsolidated affiliate and reported a net loss of
approximately $2.8 million and $8.2 million for the three months and nine
months ended September 30, 1998, respectively.
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 3-Private
Offering" of the Notes to Consolidated Financial Statements.
Aladdin Gaming, LLC 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 $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
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<PAGE>
funds are held by Gaming in a 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 all of the $115.0 million of the Notes
proceeds had been utilized. The proceeds from the Term B Loan and Term C Loan
have been funded and the funds placed in a cash collateral account from which
the Company withdraws amounts monthly. 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 had 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 interest 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 casino.
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 predominately members of the Company's
bank group.
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. 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 the 30-day LIBOR plus 478 basis points or the Prime Rate (as defined)
plus 275 basis points. After the construction completion date, the interest
rate shall be the 90-day LIBOR plus 478 basis points.
London Clubs International, plc ("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.
-10-
<PAGE>
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 (i) are 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
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, Gaming 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 Gaming'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) Gaming and Fluor will enter into a definitive Contract amendment;
(ii) the definitive Contract amendment will not differ materially from the
Letter; and (iii) Gaming'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
-11-
<PAGE>
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 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 for 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 approximately 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.
-12-
<PAGE>
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 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) or the administration of
such laws, 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.
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
-13-
<PAGE>
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 Aladdin Gaming Holdings, LLC had not yet
concluded negotiations on a joint venture with Planet Hollywood
International, Inc. and that Aladdin Gaming Holdings, LLC 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.
-14-
<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 ENTERPRISES, INC.
November 16, 1998 By: /s/ Ronald Dictrow
--------------------------------------
Ronald Dictrow, Secretary
November 16, 1998 By: /s/ Cornelius T. Klerk
--------------------------------------
Cornelius T. Klerk, Chief Accounting
Officer and Treasurer
-15-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 669
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 669
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,452,851
<CURRENT-LIABILITIES> 1,500
<BONDS> 0
0
0
<COMMON> 13,247,203
<OTHER-SE> 6,204,148
<TOTAL-LIABILITY-AND-EQUITY> 19,452,851
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,215,601
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,215,601)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,215,601)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,215,601)
<EPS-PRIMARY> (3.01)
<EPS-DILUTED> (3.01)
</TABLE>
