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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) April 16, 1999
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ALADDIN GAMING ENTERPRISES, INC.
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(Exact name of Registrant as specified in charter)
Nevada
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(State or other jurisdiction of incorporation)
333-49715 88-0379695
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(Commission File Number) (IRS Employee Identification No.)
831 Pilot Road, Las Vegas, Nevada 89119
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (702) 736-7114
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Not Applicable
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(Former name or former address, if changed since last report)
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Item 5. Other Events
On April 16, 1999, Aladdin Gaming Enterprises, Inc. ("Company") was
informed that the various lenders and The Bank of Nova Scotia, as the
administrative agent for the lenders, (collectively, "Lenders") had approved
the Second Amendment to the Credit Agreement among Aladdin Gaming, LLC
("Gaming") and the Lenders. As discussed below, the Second Amendment to the
Credit Agreement waived or cured certain events of default which existed
under the Credit Agreement and were discussed in the Company's Form 10-K for
the year ended December 31, 1998 ("1998 10-K").
In March 1999, Gaming completed its review of the Main Project
Budget and determined it was appropriate to increase the Main Project Budget
by approximately $18.5 million, which amount reflected an increase in
construction costs of approximately $9.5 million and an increase in
pre-opening costs of approximately $9.0 million. On April 2, 1999, pursuant
to the Guaranty of Performance and Completion ("Completion Guaranty"), which
is a joint and several obligation of the Sommer Trust and London Clubs
International, plc ("London Clubs"), London Clubs funded to Gaming the
approximately $18.5 million in order to bring the Main Project Budget "In
Balance" (as defined in the Credit Agreement) and the Lenders funded Gaming's
March 1999 funding draw ("March Draw") under the Credit Agreement. Upon
receipt of the March Draw, on April 2, 1999, Gaming immediately paid the
outstanding March 1999 payment to Fluor Daniel, Inc., the design/builder
("Design/Builder") of the Aladdin Hotel and Casino ("Project"). The delay in
payment to the Design/Builder did not effect or delay the Project's
construction.
On April 5, 1999, effective as of March 10, 1999, the Sommer Trust,
London Clubs, Aladdin Bazaar Holdings, LLC ("ABH") and The Bank of Nova
Scotia, as administrative agent for the Lenders, entered into the First
Amendment to the Completion Guaranty, which requires the Sommer Trust, London
Clubs and ABH to guarantee Gaming's minimum Net Worth as required by the
Second Amendment to the Credit Agreement, which is discussed below.
As reported in the 1998 10-K there existed certain events of default
under the Credit Agreement. Specifically, (a) the incurrence of indebtedness
in connection with the Aladdin Music Project, which indebtedness was
contemplated by the Credit Agreement, but was not pre-approved by the Lenders
("Music Indebtedness") and (b) not securing certain amendments to Gaming's
furniture, fixtures and equipment financing ("FF&E Financing") documents. In
addition, the issuance of Aladdin Gaming Holdings, LLC's annual financial
statements with an "Impermissible Qualification" (as defined in the Credit
Agreement), unless cured within thirty days, would have also been an event of
default under the Credit Agreement.
The Lenders have approved, effective as of March 10, 1999, the
Second Amendment to the Credit Agreement ("Second Amendment to the Credit
Agreement"), which cured or waived the events of default arising from the
Music Indebtedness and the requirement to amend the FF&E Financing documents.
Specifically, the Second Amendment to the Credit Agreement provides or
acknowledges: (i) the Music Indebtedness has been paid by or on behalf of
Aladdin Music and this event of default has now been waived by the Lenders;
(ii) a capital contribution in the amount of approximately $18.5 million has
been made to bring the Main Project Budget "In Balance"; (iii) the
approximately $6.5 million of letters of credit, which had been previously
posted by London Clubs and the Sommer Trust to fund a prior increase in the
Main Project Budget (and resulting imbalance), have been drawn and the
proceeds deposited in Gaming's guaranty deposit account; (iv) amending
certain definitions in the Credit Agreement, including, "Available Funds,"
"Indebtedness," and "Realized Savings"; (v) any costs in excess of $36
million for completing the carpark associated with the Project will be funded
by the Sommer Trust and London Clubs; (vi) Gaming will be required to
maintain a minimum "Net Worth" at the close of each calendar month, until the
end of the fiscal quarter during which the Project opens (and then reverting
to the Credit Agreement's requirement to maintain the minimum Net Worth on a
fiscal quarterly basis thereafter), of not less than $100 million plus 85% of
positive Net Income (as defined in the Credit Agreement); and (vii) for other
technical amendments to the Credit Agreement. The above summary should be
read in conjunction with, and is qualified in its entirety by, the Second
Amendment to the Credit
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Agreement which is an exhibit to this Form 8-K and incorporated herein by
this reference. Aladdin Gaming Holdings, LLC has been advised by its counsel
that the Second Amendment to the Credit Agreement did not require the
approval of either the FF&E Financing lenders or the holders of Aladdin
Gaming Holdings, LLC 13 1/2% Senior Discount Notes due 2010.
As required by the Aladdin Gaming Holdings, LLC Operating Agreement
upon advances under the Completion Guaranty, Aladdin Gaming Holdings, LLC will
issue, effective the dates of the respective fundings, Series A Preferred
Shares in the names of Sommer Enterprises, LLC and London Clubs Nevada, Inc.
in the amounts specified in the Aladdin Gaming Holdings, LLC Operating
Agreement. All said shares have been pledged in favor of the Lenders, and, on
a subordinated basis, the shares issued in the name of Sommer Enterprises,
LLC (as well as its common shares) have been pledged in favor of London Clubs.
On April 27, 1999, Arthur Andersen LLP, the Company's independent
public accountants, reissued its report in connection with its audit of the
Company's annual financial statements ("Reissued Auditor Opinion"). The
Reissued Auditor Opinion now contains an unqualified opinion. Further,
Aladdin Gaming Holdings, LLC has revised its 1998 year end financial
statements by decreasing Current Maturities of Long-term Debt and
reclassifying it as Long-term Debt, net of discount. Attached hereto as
exhibits to this Form 8-K is the Reissued Auditor Opinion and the Company's
consolidated financial statements, with accompanying notes, and the reissued
auditor opinion and consolidated financial statements, with accompanying
notes, for Aladdin Gaming Holdings, LLC.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired.
Not Applicable
(b) Pro Forma Financial Information.
Not Applicable
(c) Exhibits.
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10.01 Second Amendment to Credit Agreement, dated as of
April 5, 1999, effective March 10, 1999, among Aladdin
Gaming, LLC, Various Financial Institutions, the Bank
of Nova Scotia, Merrill Lynch Capital Corporation and
CIBC Oppenheimer Corp.
10.02 First Amendment to Guaranty of Performance and
Completion, dated as of April 5, 1999, effective March
10, 1999, by London Clubs International, plc, the
Trust Under Article Sixth Under the Will of Sigmund
Sommer, Aladdin Bazaar Holdings, LLC and the Bank of
Nova Scotia.
99.01 Report of the Independent Public Accountants and
Consolidated Financial Statements of Aladdin Gaming
Enterprises, Inc. and accompanying notes thereto.
99.02 Report of the Independent Public Accountants and
Consolidated Financial Statements of Aladdin Gaming
Holdings, LLC and its subsidiaries and accompanying
notes thereto.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ALADDIN GAMING ENTERPRISES, INC.
(Registrant)
Dated: April 27, 1999 By: /s/ Cornelius T. Klerk
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Cornelius T. Klerk
Chief Accounting Officer/Treasurer
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EXHIBIT 10.01
SECOND AMENDMENT TO
CREDIT AGREEMENT
Dated as of April 5, 1999
(amending the Credit Agreement,
dated as of
February 26, 1998)
among
ALADDIN GAMING, LLC,
as the Borrower,
VARIOUS FINANCIAL INSTITUTIONS,
as the Lenders,
THE BANK OF NOVA SCOTIA,
as the Administrative Agent for the Lenders,
MERRILL LYNCH CAPITAL CORPORATION,
as the Syndication Agent for the Lenders,
and
CIBC OPPENHEIMER CORP.,
as the Documentation Agent for the Lenders.
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SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "SECOND AMENDMENT TO CREDIT
AGREEMENT") dated as of April 5, 1999, effective as of March 10, 1999, by and
among ALADDIN GAMING, LLC, a Nevada limited-liability company (the "BORROWER"),
the various financial institutions as are or may become parties hereto
(collectively, the "LENDERS"), THE BANK OF NOVA SCOTIA, as administrative agent
(together with any successor thereto in such capacity, the "ADMINISTRATIVE
AGENT") for the Lenders, MERRILL LYNCH CAPITAL CORPORATION, as syndication agent
(together with any successor thereto in such capacity, the "SYNDICATION AGENT")
for the Lenders, and CIBC OPPENHEIMER CORP., as documentation agent (together
with any successor thereto in such capacity, the "DOCUMENTATION AGENT") for the
Lenders.
In consideration of the mutual agreements herein contained and other good
and valuable consideration, receipt of which is hereby acknowledged, the parties
hereto, intending to be legally bound, agree as follows:
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders, the Administrative Agent, the
Syndication Agent and the Documentation Agent have heretofore entered into (x)
that certain Credit Agreement (the "CA"), dated as of February 26, 1998 and (y)
that certain First Amendment to Credit Agreement (the "FIRST AMENDMENT TO CREDIT
AGREEMENT") dated as of January 29, 1999 (the CA, as amended by the First
Amendment to Credit Agreement, shall be referred to herein as the "CREDIT
AGREEMENT"); and
WHEREAS, the Borrower has requested the Lenders to acknowledge certain
waivers under the Credit Agreement and to enter into certain amendments of the
Credit Agreement; and
WHEREAS, each of the parties hereto is willing, on the terms and subject to
the conditions hereinafter set forth, to so amend the Credit Agreement and grant
the waivers, but only upon the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
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DEFINITIONS
SECTION 1.1. CERTAIN DEFINED TERMS. The following terms (whether or not
italicized) when used in this Second Amendment to Credit Agreement, including
its preamble and recitals, shall, except where the context otherwise requires,
have the following meanings:
"FIRST AMENDMENT TO COMPLETION GUARANTY" shall mean that certain First
Amendment to Completion Guaranty of even date between the Completion Guarantors
and the Administrative Agent for the benefit of the Lenders.
"FIRST AMENDMENT TO CREDIT AGREEMENT" is defined in the FIRST RECITAL.
"GECC FACILITIES AGREEMENT" shall mean that certain Facilities Agreement
between General Electric Capital Corporation ("GECC"), for itself and as agent
for certain participants, and the Borrower dated as of June 26, 1998, as amended
by that certain First Amendment to Facilities Agreement between GECC, for itself
and as agent for certain participants, and the Borrower dated as of September 2,
1998, as the same may from time to time be further amended, supplemented,
amended and restated or otherwise modified in accordance with the terms of the
Credit Agreement, as amended by the Second Amendment to Credit Agreement, and
the GECC Intercreditor Agreement.
"GECC INTERCREDITOR AGREEMENT" shall mean that certain Intercreditor
Agreement by and among the Administrative Agent, GECC and the Borrower dated as
of June 30, 1998 and as thereafter from time to time amended, supplemented,
amended and restated or otherwise modified in accordance with the terms thereof.
"SECOND AMENDMENT TO CREDIT AGREEMENT" is defined in the PREAMBLE.
SECTION 1.2. OTHER DEFINED TERMS; CONSTRUCTION. For purposes of this
Second Amendment to Credit Agreement, capitalized terms used but not defined
herein shall have the meanings assigned to them in the Credit Agreement, as
amended by this Second Amendment to Credit Agreement, and the rules of
construction set forth in ARTICLE I of the Credit Agreement shall apply to this
Second Amendment to Credit Agreement.
ARTICLE II
WAIVERS BY THE LENDERS
SECTION 2.1. INDEBTEDNESS OF ALADDIN MUSIC. Aladdin Music incurred the
Indebtedness listed on SCHEDULE 2.1 to the First Amendment to Credit Agreement
which, at the time of incurrence, was not permitted under SECTION 7.2.2 of the
Credit Agreement. The
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existence of such Indebtedness by Aladdin Music constituted an Event of
Default under the Credit Agreement. Pursuant to the First Amendment to
Credit Agreement, the Lenders agreed to forbear from exercising their rights,
remedies and options under the Credit Agreement based upon such Event of
Default from January 29, 1999 until March 10, 1999 during which time such
Indebtedness was to be discharged and/or subordinated to the obligations of
the Borrower under the Loan Documents as set forth in SECTION 2.1 of the
First Amendment to Credit Agreement. All of the Indebtedness listed on
SCHEDULE 2.1 to the First Amendment to Credit Agreement has been paid by or
on behalf of Aladdin Music and the Event of Default described in SECTION 2.1
of the First Amendment to Credit Agreement is hereby waived by the Lenders.
SECTION 2.2. BALANCING THE MAIN PROJECT BUDGET. The Borrower acknowledges
that as of the date of this Second Amendment to Credit Agreement, the amount
required in order for the Main Project Budget to be In Balance is $21,202,175
(collectively, the "IN BALANCE AMOUNT"). The Pepsi-Cola Company has entered
into that certain concession agreement with the Borrower dated November 17, 1998
pursuant to which the Pepsi-Cola Company has agreed to pay the Borrower
approximately $2,750,000 at the times and in the amounts set forth in such
concession agreement. The Lenders agree that the In Balance Amount shall be
reduced by $2,750,000 so long as the Pepsi-Cola Company remains obligated to
make such payments to the Borrower and is making such payments to the Borrower
in accordance with such concession agreement. Such concession agreement shall
not be amended, modified or terminated without the prior written consent of the
Administrative Agent.
SECTION 2.3. LETTERS OF CREDIT. On or about November 30, 1998, the
Completion Guarantors delivered letters of credit to the Administrative Agent in
the aggregate amount of $6,574,000 in order to bring the Main Project Budget In
Balance. The Completion Guarantors have directed the Administrative Agent to
draw such letters of credit and deposit the proceeds thereof into the Guaranty
Deposit Account for disbursement in accordance with the Disbursement Agreement.
SECTION 2.4. RESERVATION OF RIGHTS. The Borrower agrees that neither this
Second Amendment to Credit Agreement nor the making of any Advance by the
Disbursement Agent and the Administrative Agent's consent thereto shall
constitute (w) an approval of all or any portion of any Advance Request, (x) a
waiver or forbearance by the Disbursement Agent or the Administrative Agent
under any of the Loan Documents, except as expressly set forth herein, (y) the
acceptance by the Disbursement Agent or the Administrative Agent of any course
of conduct by the Borrower or the Completion Guarantors or (z) an agreement by
the Administrative Agent to amend any of the Loan Documents without the approval
from the Required Lenders and a corresponding amendment of the GECC Facilities
Agreement. The Borrower further agrees that the Administrative Agent and the
Disbursement Agent reserve all rights, remedies and options under the Loan
Documents to require the Borrower to satisfy in all respects the conditions
relating to each Advance and perform all of its obligations under the Loan
Documents which are then due and owing or are susceptible of performance, as the
case may be.
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ARTICLE III
AMENDMENTS
SECTION 3.1. AMENDMENTS. The parties hereto hereby agree as follows:
(a) Provided that the Borrower has delivered an opinion of counsel
(the "COUNSEL OPINION") which conforms to the requirements of CLAUSE (H) of
SECTION 4.1 which expressly provides, in relevant part, that no approval is
required under the GECC Facilities Agreement or the GECC Intercreditor Agreement
for the amendment set forth below, the definition of "AVAILABLE FUNDS" in
SECTION 1.1 of the Credit Agreement shall be amended in its entirety to read as
set forth below:
"AVAILABLE FUNDS" means, from time to time, the sum of (t) so long as
no default (beyond the expiration of applicable grace, notice and cure
periods) exists under an executed lease, occupancy, concession or license
agreement (but not including any letter of intent or other interim
agreement) covering a portion of the Main Project which has been approved
by the Administrative Agent in its sole discretion (which approval may be
conditioned upon the delivery of a subordination, non-disturbance and
attornment agreement or continuation agreement, as applicable, and estoppel
certificate, each in form and content satisfactory to the Administrative
Agent in its sole discretion), amounts payable thereunder prior to the
Conversion Date for Project Costs which amounts (1) would otherwise have
been paid by the Borrower if such lease, occupancy, concession or license
agreement had not been entered into and (2) are not otherwise payments or
prepayments of rent or other periodic payments to be made for the
occupancy, use or right to market products at the Main Project as
determined by the Administrative Agent in its sole discretion, PLUS (u) the
aggregate of the unutilized Commitments (EXCLUDING, HOWEVER, the
Commitments of all Defaulting Lenders) under the Bank Credit Facility, PLUS
(v) the aggregate of the amounts on deposit in the Borrower's Funds
Account, the Construction Note Disbursement Account and all Anticipated
Earnings thereon, PLUS (w) the aggregate of the amounts on deposit in the
Guaranty Deposit Account, the Cash Management Account, the Bank Proceeds
Account, the Loss Proceeds Account and the Interest Payment Account, PLUS
(x) so long as (1) no default under the Site Work Agreement and the Mall
Project Loan and no Default hereunder have occurred and are continuing at
the relevant time of computation, (2) advances of the Mall Project Loan
have commenced on or before June 30, 1999 and have continued in accordance
with the approved draw schedule for the Mall Project Loan, (3) advances of
the Mall Project Loan to reimburse the Borrower in accordance with the Site
Work Agreement are made within 45 days after the
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Construction Consultant and the Owner Representative have approved the
work to be completed by the Borrower pursuant to the Site Work
Agreement, the aggregate amounts payable to the Borrower by Aladdin
Bazaar pursuant to SECTION 4.5 of the Site Work Agreement, PLUS (y) the
lesser of (1) the aggregate of the amounts available to be drawn under
all Approved Equipment Funding Commitments and (2) the aggregate amount
of Remaining Costs on the date of calculation for the Equipment
Component (as in effect from time to time), PLUS (z) the aggregate
amount of Main Project Costs which the Design/Builder and/or Fluor have
agreed or confirmed in writing, to the reasonable satisfaction of the
Administrative Agent, that they are responsible for paying (on a timely
basis relative to the Main Project's cash needs) from their own funds
but which they have not yet paid."
(b) Provided that the Borrower has delivered the Counsel Opinion
which expressly provides that no approval is required under the GECC Facilities
Agreement or the GECC Intercreditor Agreement for the addition of the
definitions set forth below, the following definitions shall be added to SECTION
1.1 of the Credit Agreement:
"COMMON PARKING AREA" is defined in the Site Work Agreement.
"COMMON PARKING AREA BUDGET" is defined in SECTION 7.1.24.
"EXCESS CONTRIBUTION" is defined in SECTION 7.1.24.
"EXCESS CONTRIBUTION AGREEMENT" is defined in SECTION 7.1.24.
(c) Provided that the Borrower has delivered the Counsel Opinion
which expressly provides that no approval is required under the GECC Facilities
Agreement or the GECC Intercreditor Agreement for the addition of the
parenthetical clause set forth below, the following parenthetical clause shall
be added at the end of CLAUSE (D) of the definition of "INDEBTEDNESS" in SECTION
1.1 of the Credit Agreement:
"(other than (x) prior to the Conversion Date Indebtedness which is to be
funded from Available Funds and (y) after the Conversion Date accounts
payable by the Borrower arising in the ordinary course of business in
connection with the operation of the Main Project as a casino/hotel)"
(d) Provided that the Borrower has delivered the Counsel Opinion
which expressly provides that no approval is required under the GECC Facilities
Agreement or the GECC Intercreditor Agreement for the amendment set forth below,
the definition of "LOAN DOCUMENTS" in SECTION 1.1 of the Credit Agreement shall
be amended in its entirety to read as set forth below:
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"LOAN DOCUMENTS" means, collectively, this Agreement, the Notes, the
Letters of Credit, each Pledge Agreement, each Rate Protection Agreement,
each Borrowing Request, each Letter of Credit Issuance Request, the
Security Agreement, the Keep-Well Agreement, the Completion Guaranty, the
Excess Contribution Agreement, the GECC Intercreditor Agreement, the
Trademark Security Agreement, the Deed of Trust, the Disbursement
Agreement, the Mall Project Completion Assignment, the Fee Letters, the
Environmental Indemnity, the Assignment of Contracts, the Assignment of
Consulting Agreement, the Assignment of Design/Build Contract, the
Assignment of Salle Privee Agreement, the Assignment of Project Management
Agreement, the Borrower Collateral Account Agreement, the Holdings
Collateral Account Agreement, the Servicing and Collateral Account
Agreement, the Design/Builder Consent and Acknowledgment and any other
agreement, certificate, document or Instrument delivered in connection with
this Agreement and such other agreements, whether or not specifically
mentioned herein or therein."
(e) Provided that the Borrower has delivered the Counsel Opinion
which expressly provides that no approval is required under the GECC Facilities
Agreement or the GECC Intercreditor Agreement for the addition of the sentence
set forth below, the following sentence shall be added at the end of the
definition of "MAIN PROJECT BUDGET" in SECTION 1.1 of the Credit Agreement:
"The Main Project Budget shall include a Line Item and a Line Item Category
consistent with the Common Parking Area Budget."
(f) Provided that the Borrower has delivered the Counsel Opinion
which expressly provides that no approval is required under the GECC Facilities
Agreement or the GECC Intercreditor Agreement for the amendment set forth below,
the definition of "MAIN PROJECT DOCUMENTS" in SECTION 1.1 of the Credit
Agreement shall be amended in its entirety to read as set forth below:
"MAIN PROJECT DOCUMENTS" means, collectively, the Design/Build
Contract, the Fluor Guaranty, the Contracts, the Energy Project Service
Agreement, the Energy Project Ground Lease, the Energy Project Development
Agreement, the Mall Project Ground Lease, the Music Project Ground Lease,
the Theater Lease (if entered into), the Reciprocal Easement Agreement, the
Common Parking Area Use Agreement, the Site Work Agreement, the Project
Management Agreement, the Development Agreement, the GECC Facilities
Agreement and any other document or agreement entered into on, prior to or
after the Effective Date, relating to the development, construction,
maintenance or operation of the Main Project (other than the Loan Documents
and the Discount Note Trust
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Indenture), as the same may be amended from time to time in accordance
with the terms and conditions hereof and thereof."
(g) Provided that the Borrower has delivered the Counsel Opinion
which expressly provides that no approval is required under the GECC Facilities
Agreement or the GECC Intercreditor Agreement for the amendment set forth below,
the definition of "MATERIAL MAIN PROJECT DOCUMENTS" in SECTION 1.1 of the Credit
Agreement shall be amended in its entirety to read as set forth below:
"MATERIAL MAIN PROJECT DOCUMENTS" means the Mall Project Ground Lease,
the Music Project Ground Lease, the Reciprocal Easement Agreement, the Site
Work Agreement, the Common Parking Area Use Agreement, the Energy Project
Service Agreement, the Energy Project Ground Lease, the Energy Project
Development Agreement, the GECC Facilities Agreement, the Theater Lease,
the Design/Build Contract, the Fluor Guaranty, the Project Management
Agreement, the Development Agreement and any other certificate, document or
Instrument delivered in connection with or by the Borrower and any other
Person pursuant to any Material Main Project Document, and such other
agreements, whether or not specifically mentioned herein or therein and,
without duplication, any Main Project Document with a total contract amount
in excess of $2,500,000.
(h) Provided that the Borrower has delivered the Counsel Opinion
which expressly provides that no approval is required under the GECC Facilities
Agreement or the GECC Intercreditor Agreement for the amendment set forth below,
the definition of "REALIZED SAVINGS" in SECTION 1.1 of the Credit Agreement
shall be amended in its entirety to read as set forth below:
"REALIZED SAVINGS" means:
(a) the portion of any decrease to the Guaranteed Maximum Price
retained or to be retained by the Borrower in accordance with the
provisions of Attachment H to the Design/Build Contract in the "COST OF THE
WORK" (as defined in Section 3 of Attachment G to the Design/Build
Contract) contemplated by a Line Item but only to the extent that the
Guaranteed Maximum Price has been reduced as a result of such decrease in
the anticipated "COST OF THE WORK" as approved in writing by the
Design/Builder and such reduction is confirmed by the Construction
Consultant;
(b) with respect to the Construction Period Interest Line Item, a
decrease in the anticipated cost of construction period interest resulting
from (x) a decrease in the interest rates payable by the Borrower prior to
the date which is six months after the Conversion Date as determined by the
Administrative Agent with the
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reasonable concurrence of the Borrower taking into account the current
and future anticipated interest rates and the anticipated times and
amounts of draws under the Bank Credit Facility for the payment of Main
Project Costs or (y) the anticipated Conversion Date being earlier than
the date set therefor in the Construction Benchmark Schedule as
determined by the Owner Representative with the reasonable concurrence
of the Construction Consultant; and
(c) with respect to any other Line Item, the amount by which the
total cost allocated to such Line Item exceeds the total cost incurred by
the Borrower to complete all aspects of the Work contemplated by such Line
Item which amount shall not be established until the Borrower has actually
completed 90% of all such Work or provided other evidence acceptable to the
Administrative Agent in its sole discretion (with the concurrence of the
Construction Consultant) that such amount is reasonably expected to be
realized as a permanent savings prior to completion of 90% of such Work;
in each case, which is documented by the Borrower in a Realized Savings
Certificate substantially in the form of EXHIBIT W hereto, duly executed
and completed with all exhibits and attachments thereto."
(i) Provided that the Borrower has delivered the Counsel Opinion
which expressly provides that no approval is required under the GECC
Facilities Agreement or the GECC Intercreditor Agreement for the addition
of the new Section set forth below, the following new Section shall be
added to the Credit Agreement as SECTION 7.1.24:
"Section 7.1.24 SITE WORK AGREEMENT; EXCESS CONTRIBUTION AGREEMENT.
Aladdin Bazaar has asked the Borrower and AHL to agree under the Site Work
Agreement that Aladdin Bazaar will pay up to $36,000,000 for amounts
attributable to the design and construction of the Common Parking Area and
that the Borrower and AHL will pay all amounts in excess of $36,000,000 for
such design and construction. The Borrower has delivered a budget (the
"COMMON PARKING AREA BUDGET") which is being reviewed by the Construction
Consultant. The Borrower agrees that if the Construction Consultant
reasonably determines that adjustments are required in order for the Common
Parking Area Budget to be accurate, the Borrower shall make such
adjustments as so determined. The Borrower shall pay all reasonable costs,
expenses and fees of the Administrative Agent and the Lenders with respect
to any reviews of the Common Parking Area Budget and the design and
construction of the Common Parking Area including, without limitation, the
costs and expenses of the Construction Consultant's reviews of the Common
Parking Area Budget from time to time and, if required, attorneys' fees and
costs and expenses. In addition, if the Common Parking Area Budget, as
approved by the Construction Consultant, shows a cost of completion
exceeding
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$36,000,000, the amount over $36,000,000 (but not to exceed the amount
permitted under the Discount Note Indenture) shall be funded by the
Borrower by delivery of a cash deposit in such amount upon the earlier
of (x) such time as the Borrower is otherwise required to bring the Loan
In Balance (without giving effect to such excess amount) in accordance
with this Credit Agreement and the other Loan Documents and (y) such
time as such amount is required in order to pay for such costs of
completion (each such amount being referred to as an "EXCESS
CONTRIBUTION"). In no event shall (x) any portion of any contingency,
reserve or Realized Savings be allocated to the Common Parking Area Line
Item Category in the Main Project Budget for amounts to be funded by the
Borrower pursuant to this section or (y) any contingency, reserve or
Realized Savings be used to fund any such amounts without the prior
written consent of the Administrative Agent in its sole discretion. Each
month the Construction Consultant shall verify the amounts required to
complete construction of the Common Parking Area as part of its review
of the Main Project Budget and In Balance requirements. If the
Construction Consultant determines in its sole discretion that there
should be an increase in the Excess Contributions, the Borrower shall,
in accordance with this SECTION 7.1.24, deposit cash into the Guaranty
Deposit Account in such increased amount. London Clubs and the Trust
shall enter into an agreement (the "EXCESS CONTRIBUTION AGREEMENT") for
the benefit of the Lenders and the Administrative Agent which shall
provide, in relevant part, that London Clubs and the Trust, jointly and
severally (x) shall make all Excess Contributions required from time to
time in accordance with this SECTION 7.1.24 (in addition to all other
payments under the Excess Contribution Agreement, the Completion
Guaranty, the Environmental Indemnity and the Keep-Well Agreement) and
(y) shall perform the obligation to keep the Line Item Category for all
such amounts in excess of $36,000,000 In Balance in accordance with the
Excess Contribution Agreement if the Borrower fails or refuses to do so.
The form and content of the Excess Contribution Agreement shall be
satisfactory to the Administrative Agent in its sole discretion."
(j) As of the Effective Date of this Second Amendment to Credit
Agreement, the following section shall be added to the Credit Agreement as
SECTION 7.2.23:
"Section 7.2.23. NET WORTH PRIOR TO THE CONVERSION DATE. From and
after April 1, 1999 until close of the Fiscal Quarter in which the
Conversion Date occurs, the Borrower will not permit Net Worth as of the
close of each calendar month during such period to be less than the sum of
$100,000,000 PLUS 85% of positive Net Income (after giving effect to the
amount of Restricted Payments made by the Borrower in cash in accordance
with CLAUSES (A) and (C) of SECTION 7.2.6, subject to the terms thereof for
the period, treated as one accounting period). The Borrower will furnish,
or will cause to be furnished, to the Administrative Agent (x) as soon as
available after the end of each
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calendar month during which time the Borrower is required to perform the
financial covenant set forth herein but in no event later than (i) 9
days immediately preceding the date on which an Advance is to be made by
the Lenders pursuant to the Loan Documents or, if applicable, by the
Disbursement Agent pursuant to the Disbursement Agreement, as the case
may be, or (ii) the tenth day of a calendar month if no Advance is being
made, as applicable, a Compliance Certificate, executed by the chief
financial or accounting Authorized Representative of the Borrower,
showing (in reasonable detail and with appropriate calculations and
computations in all respects reasonably satisfactory to the
Administrative Agent) compliance (currently and on a PRO FORMA basis
after giving effect to the payments to be made in respect of all
federal, state and local income taxes of the Borrower or, if the
Borrower is treated as a pass-through entity or is not treated as a
separate entity for United States federal income tax purposes, the
payments to be made pursuant to CLAUSE (C) OF SECTION 7.2.6) with the
financial covenants set forth in this SECTION 7.2.23 and (y) as soon as
available after the end of each calendar month during which time the
Borrower is required to perform the financial covenant set forth herein
but in no event later 30 days after each such month's end an agreed upon
procedures report (which shall be substantially in the form annexed to
the Second Amendment to Credit Agreement) from nationally recognized
independent public accountants acceptable to the Administrative Agent."
ARTICLE IV
CONDITIONS PRECEDENT AND COVENANT
SECTION 4.1. CONDITIONS TO EFFECTIVENESS. This Second Amendment to Credit
Agreement shall be and become effective as of March 10, 1999 (the "EFFECTIVE
DATE") on the date (the "SECOND AMENDMENT DATE") on which each of the following
conditions precedent shall have been satisfied.
(a) EXECUTION OF DOCUMENTS. The Administrative Agent shall have
received counterparts of (i) the First Amendment to Completion Guaranty
executed by Authorized Representatives of the parties thereto, (ii) the
"RATIFICATION OF LCI SUBSIDIARY GUARANTY" (as defined in the First
Amendment to Completion Guaranty) executed by Authorized Representatives of
London Clubs and its Subsidiaries which are parties thereto, (iii) this
Second Amendment to Credit Agreement executed by Authorized Representatives
of the Borrower, the Administrative Agent, the Syndication Agent, the
Documentation Agent and the Required Lenders, (iv) the Excess Contribution
Agreement executed by Authorized Representatives of London Clubs and the
Trust, (v) all documentation required by SECTION 2.1 of the First Amendment
to Credit Agreement and (vi) the concession agreement with the Pepsi-Cola
Company.
(b) INCUMBENCY, ETC. The Administrative Agent shall have received
(with
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copies for each Lender) a certificate, dated the Second Amendment Date,
of an Authorized Representative of the Borrower certifying
(i) as to the incumbency and signatures of the Person or Persons
authorized to execute and deliver this Second Amendment to Credit
Agreement and any instruments or agreements required hereunder,
(ii) as to an attached copy of one or more resolutions or other
authorizations of the manager of the Borrower certified by the
Authorized Representative of such manager as being in full force and
effect on the date hereof, authorizing the execution, delivery and
performance of this Second Amendment to Credit Agreement and any
instruments or agreements required hereunder, and
(iii) that the Organizational Documents of the Borrower have not
been modified since the date on which they were last delivered to the
Administrative Agent,
upon which certificate the Administrative Agent, the Syndication Agent, the
Documentation Agent and each Consenting Lender (collectively, the
"FINANCING PARTIES") may conclusively rely until it shall have received a
further certificate of an Authorized Representative of the Borrower
canceling or amending such prior certificate.
(c) FEES. All reasonable fees and costs and expenses of Mayer, Brown
& Platt and other professionals employed by the Administrative Agent and
all other reasonable expenses of the Administrative Agent in connection
with the negotiation, execution and delivery of this Second Amendment to
Credit Agreement and the transactions contemplated herein shall have been
paid in full.
(d) SATISFACTORY LEGAL FORM. Each Financing Party and its counsel
shall have received all information, approvals, opinions, documents or
instruments as each Financing Party or its counsel may have reasonably
requested, and all documents executed or submitted pursuant hereto by or on
behalf of the Borrower shall be satisfactory in form and substance to each
Financing Party and its counsel.
(e) DEFAULT. After giving effect to this Second Amendment to Credit
Agreement the following statements shall be true and correct: (i) to the
best knowledge of the Borrower, no act or condition exists which, with the
giving of notice or passage of time would constitute a "DEFAULT" or "EVENT
OF DEFAULT" (as defined in the Credit Agreement and the GECC Facilities
Agreement) has occurred and is continuing as of the date hereof (other than
a Default which may result from the delivery of financial statements
containing an Impermissible Qualification), and (ii) no material adverse
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change in (A) the financial condition, business, property, prospects or
ability of the Borrower to perform in all material respects its obligations
under any Operative Document or any of the documents evidencing and
securing the FF&E Financing to which it is a party or (B) the financial
condition, business, property, prospects and ability of any other Aladdin
Party or, to the best knowledge of the Borrower, LCNI, the Design/Builder
or Fluor to perform in all material respects its obligations under any
Operative Document to which it is a party has occurred since the Closing
Date.
(f) CONSENTS AND APPROVALS. All approvals and consents required to
be taken, given or obtained, as the case may be, by or from any
Governmental Instrumentality or another Person, or by or from any trustee
(including, without limitation, GECC and the Discount Note Indenture
Trustee) or holder of any indebtedness or obligation of the Borrower, that
are necessary or, in the reasonable opinion of the Administrative Agent,
advisable in connection with the execution, delivery and performance of
this Second Amendment to Credit Agreement by all parties hereto, shall have
been taken, given or obtained, as the case may be, shall be in full force
and effect and the time for appeal with respect to any thereof shall have
expired (or, if an appeal shall have been taken, the same shall have been
dismissed) and shall not be subject to any pending proceedings or appeals
(administrative, judicial or otherwise) and shall be in form and substance
satisfactory to the Administrative Agent.
(g) DELIVERY OF SECOND AMENDMENT TO CREDIT AGREEMENT. The Borrower
shall have delivered this Second Amendment to Credit Agreement to all
Persons entitled under the Operative Documents to receive delivery hereof.
(h) OPINIONS. The Administrative Agent shall have received such
opinions of counsel as it deems necessary, dated the Second Amendment Date
and addressed to the Administrative Agent, the Lenders and, if applicable,
the Disbursement Agent, which shall be in form and substance satisfactory
to the Administrative Agent.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
In order to induce each Financing Party to enter into this Second Amendment
to Credit Agreement, the Borrower hereby reaffirms, as of the Second Amendment
Date, its representations and warranties contained in Article VI of the Credit
Agreement and additionally represents and warrants unto each Financing Party as
set forth in this ARTICLE V.
SECTION 5.1. MATTERS PERTAINING TO THE GECC FACILITIES AGREEMENT.
(a) The Borrower has not directly or indirectly amended (by Change
Order or otherwise), modified (by Change Order or otherwise), allocated,
reallocated or
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<PAGE>
supplemented or permitted or consented to the amendment (by Change Order
or otherwise), modification (by Change Order or otherwise) allocation,
reallocation or supplementation of the Construction Benchmark Schedule
in any manner which would extend the Completion Date.
(b) The Borrower has performed all of its obligations under ITEM (1)
of CLAUSE (A) of SECTION 12 of the GECC Facilities Agreement.
(c) After giving effect to this Second Amendment and the performance
by the Borrower of its obligation to keep the Main Project Budget In
Balance, no "DEFAULT" or "EVENT OF DEFAULT" exists under the GECC
Facilities Agreement (without giving effect to the GECC Intercreditor
Agreement) other than a Default which may result from the delivery of
financial statements containing an Impermissible Qualification.
SECTION 5.2. DUE AUTHORIZATION, NON-CONTRAVENTION, ETC. The execution,
delivery and performance by the Borrower of this Second Amendment to Credit
Agreement and each other document executed or to be executed by it in connection
with this Second Amendment to Credit Agreement are within the Borrower's powers,
have been duly authorized by all necessary action, and do not
(a) contravene the Borrower's Organizational Documents;
(b) contravene any contractual restriction binding on or affecting the
Borrower;
(c) contravene any court decree or order or Legal Requirement binding
on or affecting the Borrower; or
(d) result in, or require the creation or imposition of, any Lien on
any of the Borrower's properties except as expressly contemplated by the
Operative Documents,
and the Financing Parties may conclusively rely on such representation and
warranty.
SECTION 5.3. GOVERNMENT APPROVAL, REGULATION, ETC. No authorization or
approval or other action by, and no notice to or filing with, any governmental
authority or regulatory body or other Person is required for the due execution,
delivery or performance by the Borrower of this Second Amendment to Credit
Agreement or any other document to be executed by it in connection with this
Second Amendment to Credit Agreement.
SECTION 5.4. VALIDITY, ETC. This Second Amendment to Credit Agreement
constitutes, and each other document executed by the Borrower in connection with
this Second Amendment to Credit Agreement, on the due execution and delivery
thereof, will constitute, the legal, valid and binding obligations of the
Borrower enforceable in accordance with their respective terms,
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except as such enforceability may be limited by applicable bankruptcy,
insolvency or similar laws affecting the enforcement of creditors rights
generally and by general principles of equity.
SECTION 5.5. LIMITATION. Except as expressly provided hereby, all of the
representations, warranties, terms, covenants and conditions of the Credit
Agreement and each other Operative Document shall remain unamended and unwaived
and shall continue to be, and shall remain, in full force and effect in
accordance with their respective terms. The amendments, modifications and
consents set forth herein shall be limited precisely as provided for herein, and
shall not be deemed to be a waiver of, amendment of, consent to or modification
of any other term or provision of the Credit Agreement, the GECC Facilities
Agreement, any Operative Document, or other Instrument referred to therein or
herein, or of any transaction or further or future action on the part of the
Borrower or any other Person which would require the consent of the Agents, the
Lenders, GECC or the Discount Note Indenture Trustee.
SECTION 5.6. OFFSETS AND DEFENSES. The Borrower has no offsets or
defenses to its obligations under the Loan Documents or the documents evidencing
and securing the FF&E Financing and no claims or counterclaims against any of
the Agents, the Lenders or the Construction Consultant.
ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 6.1. RATIFICATION OF AND REFERENCES TO THE CREDIT AGREEMENT. This
Second Amendment to Credit Agreement shall be deemed to be an amendment to the
Credit Agreement, and the Credit Agreement, as amended by this Second Amendment
to Credit Agreement, shall continue in full force and effect and is hereby
ratified, approved and confirmed in each and every respect. All references to
the Credit Agreement in any other document, instrument, agreement or writing
shall hereafter be deemed to refer to the Credit Agreement, as amended by this
Second Amendment to Credit Agreement.
SECTION 6.2. HEADINGS. The various headings of this Second Amendment to
Credit Agreement are inserted for convenience only and shall not affect the
meaning or interpretation of this Second Amendment to Credit Agreement or any
provisions hereof.
SECTION 6.3. APPLICABLE LAW. THIS SECOND AMENDMENT TO CREDIT AGREEMENT
AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS SECOND AMENDMENT TO
CREDIT AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING SECTION 5-1401 OF
THE NEW YORK GENERAL OBLIGATIONS LAW, BUT EXCLUDING ALL OTHER CHOICE OF LAW AND
CONFLICTS OF LAW RULES OF SUCH STATE.
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SECTION 6.4. CROSS-REFERENCES. References in this Second Amendment to
Credit Agreement to any Article or Section are, unless otherwise specified, to
such Article or Section of this Second Amendment to Credit Agreement.
SECTION 6.5. OPERATIVE DOCUMENT. This Second Amendment to Credit
Agreement is a Loan Document executed pursuant to the Credit Agreement and shall
(unless otherwise expressly indicated therein) be construed, administered and
applied in accordance with the terms and provisions of the Credit Agreement.
SECTION 6.6. SUCCESSORS AND ASSIGNS. This Second Amendment to Credit
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns.
SECTION 6.7. COUNTERPARTS. This Second Amendment to Credit Agreement may
be executed by the parties hereto in any number of counterparts and on separate
counterparts, each of which shall be an original but all of which together shall
constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment to Credit Agreement as of the day and year first above written.
ALADDIN GAMING, LLC
By: /s/ RICHARD GOEGLEIN
---------------------------------
Name: Richard J. Goeglein
Title: President and Chief
Executive Officer
THE BANK OF NOVA SCOTIA, as the
Administrative Agent
By: /s/ ALAN PENDERGAST
---------------------------------
Name: Alan Pendergast
Title: Relationship Manager
MERRILL LYNCH CAPITAL CORPORATION,
as the Syndication Agent
By: /s/ HOWARD SPLEY
---------------------------------
Name: Howard Spley
Title: Vice President
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By signing below, the Guarantors confirm their agreement to the terms of this
Second Amendment to Credit Agreement.
ALADDIN BAZAAR HOLDINGS, LLC
By: /s/ JACK SOMMER
- -------------------------------------
Name: Jack Sommer
Title: President
THE TRUST UNDER ARTICLE SIXTH
UNDER THE WILL OF SIGMUND SOMMER
By: /s/ VIOLA SOMMER
- -------------------------------------
Name: Viola Sommer
Title: Trustee
By: /s/ JACK SOMMER
- -------------------------------------
Name: Jack Sommer
Title: Trustee
LONDON CLUBS INTERNATIONAL PLC
By: /s/ G. BARRY HARDY
- -------------------------------------
Name: G. Barry Hardy
Title: Finance Director
18
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ANNEX I
FORM OF AGREED UPON PROCEDURES REPORT
Independent Public Accountants' Report
We have performed the procedures enumerated below, which were agreed to by
Aladdin Gaming, LLC (the borrower), various financial institutions (the
"Lenders") The Bank Of Nova Scotia (the administrative agent for the Lenders),
Merrill Lynch Capital Corporation (the syndication agent for the Lenders) and
CIBC Oppenheimer Corp. (the documentation agent for the Lenders), solely to
assist the users in evaluating management's assertion about Aladdin Gaming,
LLC's compliance with Section 7.2.23, regarding maintenance of net worth, of its
credit agreement during the month ended [INSERT DATE], included in the
accompanying calculation of net worth schedule ("Net Worth Schedule"). This
agreed-upon procedures engagement was performed in accordance with standards
established by the American Institute of Certified Public Accountants. The
sufficiency of these procedures is solely the responsibility of the specified
users of the report. Consequently, we make no representation regarding the
sufficiency of the procedures described below either for the purpose for which
this report has been requested or for any other purpose. This report does not
constitute a legal determination as to Aladdin Gaming LLC's compliance with
specified requirements.
1. We tested management's Net Worth Schedule for clerical accuracy, noting
that the schedule was clerically accurate [OR NOTE EXCEPTIONS].
2. We obtained from management a schedule of costs incurred during the month
that had been capitalized. For all items in excess of $100,000, we vouched
the amount to a relevant invoice and reviewed the invoice to determine
whether the cost was appropriately classified as a capitalizable item.
No exceptions were noted. [OR LIST EXCEPTIONS].
3. We obtained from management a schedule of costs incurred during the month
that had been expensed. For all items in excess of $100,000, we vouched
that amount to a relevant invoice and reviewed the invoice to determine
whether the cost was appropriately classified as an expense.
No exceptions were noted. [OR LIST EXCEPTIONS].
We were not engaged to perform an examination, the objective of which would be
the expression of an opinion on management's assertion. Accordingly, we do not
express such an opinion. Had we been engaged to perform additional procedures,
other matters might have come to our attention that would have been reported to
you.
This report is intended solely for the use of management and the parties listed
in the first paragraph, and should not be used by those who have not agreed to
the procedures and taken responsibility for the sufficiency of those procedures
for their purposes.
<PAGE>
EXHIBIT 10.02
FIRST AMENDMENT TO
GUARANTY OF PERFORMANCE AND COMPLETION
Dated as of April 5, 1999
(amending the Guaranty of Performance and Completion
dated as of
February 26, 1998)
by
LONDON CLUBS INTERNATIONAL, PLC,
THE TRUST UNDER ARTICLE SIXTH UNDER
THE WILL OF
SIGMUND SOMMER
and
ALADDIN BAZAAR HOLDINGS, LLC
as the Guarantors,
and
THE BANK OF NOVA SCOTIA,
as the Administrative Agent for various financial institutions
as the Lenders,
<PAGE>
FIRST AMENDMENT TO COMPLETION GUARANTY
THIS FIRST AMENDMENT TO COMPLETION GUARANTY (this "FIRST AMENDMENT TO
COMPLETION GUARANTY") dated as of April 5, 1999, effective as of March 10, 1999,
by and among LONDON CLUBS INTERNATIONAL, PLC, a company registered in England
and Wales under company number 2862479 ("LCI"), THE TRUST UNDER ARTICLE SIXTH
UNDER THE WILL OF SIGMUND SOMMER (the "TRUST") and ALADDIN BAZAAR HOLDINGS, LLC,
a Nevada limited-liability company ("ABH"; ABH, the Trust and LCI are
individually called a "COMPLETION GUARANTOR" and collectively called the
"COMPLETION GUARANTORS") and THE BANK OF NOVA SCOTIA, as administrative agent
(together with any successor thereto in such capacity, the "ADMINISTRATIVE
AGENT") for the various financial institutions as are or may become parties
hereto (individually, a "LENDER" and collectively, the "LENDERS").
In consideration of the mutual agreements herein contained and other good
and valuable consideration, receipt of which is hereby acknowledged, the parties
hereto, intending to be legally bound, agree as follows:
W I T N E S S E T H:
WHEREAS, pursuant to a Credit Agreement, dated as of February 26, 1998
(together with that certain First Amendment to Credit Agreement (the "FIRST
AMENDMENT TO CREDIT AGREEMENT") dated as of January 29, 1999 and that certain
Second Amendment to Credit Agreement (the "SECOND AMENDMENT TO CREDIT
AGREEMENT") dated as of even date herewith and all other amendments and other
modifications from time to time hereafter made thereto, the "CREDIT AGREEMENT"),
among Aladdin Gaming, LLC, a Nevada limited-liability company (the "BORROWER"),
the Lenders and the Administrative Agent, Merrill Lynch Capital Corporation as
the syndication agent (together with any successor thereto in such capacity, the
"SYNDICATION AGENT") and CIBC Oppenheimer Corp. as the documentation agent
(together with any successor thereto in such capacity, the "DOCUMENTATION
AGENT"), the Lenders have extended Commitments to make Loans to the Borrower and
to issue Letters of Credit for the account of the Borrower; and
WHEREAS, the Borrower has requested the Lenders to enter into the Second
Amendment to Credit Agreement; and
WHEREAS, the Guarantors executed and delivered a Guaranty of Performance
and Completion (the "COMPLETION GUARANTY") in favor of the Lenders and the
Administrative Agent dated as of February 26, 1998 pursuant to which the
Guarantors agreed, INTER ALIA, to perform the
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<PAGE>
"GUARANTEED OBLIGATIONS" (as such term is defined in the Completion Guaranty;
each capitalized term not otherwise defined herein shall have the meaning
ascribed to such term in the Completion Guaranty) and certain subsidiaries of
LCI (the "SUBSIDIARY GUARANTORS") have agreed to fully and unconditionally
guarantee the payment of LCI's obligations under the Completion Guaranty
pursuant to a guaranty agreement dated February 26, 1998 (the "LCI SUBSIDIARY
GUARANTY"); and
WHEREAS, the Borrower has requested the Guarantors to enter into certain
amendments to the Completion Guaranty; and
WHEREAS, the Guarantors have duly authorized the execution, delivery and
performance of this First Amendment to Completion Guaranty and the Subsidiary
Guarantors have duly authorized the execution, delivery and performance of a
ratification, reaffirmation and consent agreement (the "RATIFICATION OF LCI
SUBSIDIARY GUARANTY") with respect to the Subsidiary Guaranty, an executed
counterpart of which is annexed hereto (the LCI Subsidiary Guaranty, together
with the Ratification of LCI Subsidiary Guaranty and all other amendments and
other modifications from time to time hereafter made thereto, the "SUBSIDIARY
GUARANTY"); and
WHEREAS, it is in the best interests of the Guarantors to execute this
First Amendment to Completion Guaranty and the Subsidiary Guarantors to execute
the Ratification of LCI Subsidiary Guaranty inasmuch as the Guarantors and the
Subsidiary Guarantors have and will continue to derive substantial direct and
indirect benefits from the Loans made to the Borrower by the Lenders pursuant to
the Credit Agreement and the Letters of Credit issued for the account of the
Borrower under the Credit Agreement; and
WHEREAS, each of the parties hereto is willing, on the terms and subject to
the conditions hereinafter set forth, to so amend the Completion Guaranty upon
the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
LETTERS OF CREDIT
SECTION 1.1. LETTERS OF CREDIT. On or about November 30, 1998, the
Guarantors delivered letters of credit to the Administrative Agent in the
aggregate amount of $6,574,000 in order to bring the Main Project Budget In
Balance. The Guarantors hereby direct the Administrative Agent to draw such
letters of credit and deposit the proceeds thereof into the
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<PAGE>
Guaranty Deposit Account for disbursement in accordance with the Disbursement
Agreement. The Guarantors agree that such demand or draw under the letter of
credit delivered by each of them shall be based upon the first certification
or statement contained in each such letter of credit.
SECTION 1.2. RESERVATION OF RIGHTS. The Guarantors agree that neither
this First Amendment to Completion Guaranty nor the making of any Advance by the
Disbursement Agent and the Administrative Agent's consent thereto shall
constitute (w) an approval of all or any portion of any Advance Request, (x) a
waiver or forbearance by the Disbursement Agent or the Administrative Agent
under any of the Loan Documents, except as expressly set forth in the Second
Amendment to Credit Agreement, (y) the acceptance by the Disbursement Agent or
the Administrative Agent of any course of conduct by the Borrower or either of
the Guarantors or (z) an agreement by the Administrative Agent to amend any of
the Loan Documents without the required approval from the Required Lenders and a
corresponding amendment of the Facilities Agreement. The Guarantors further
agree that the Administrative Agent and the Disbursement Agent reserve all
rights, remedies and options under the Loan Documents to require the Borrower
and, if applicable, the Guarantors to satisfy in all respects the conditions
relating to each Advance and perform all of its obligations under the Loan
Documents which are then due and owing or are susceptible of performance, as the
case may be.
ARTICLE II
AMENDMENT
SECTION 2.1. AMENDMENT. The parties hereto hereby agree that provided
each of the Guarantors have delivered an opinion of counsel which conforms to
the requirements of CLAUSE (H) of SECTION 3.1 and expressly provides, in
relevant part, that no approval is required under the "GECC FACILITIES
AGREEMENT" (as defined in the Second Amendment to Credit Agreement), the "GECC
INTERCREDITOR AGREEMENT" (as defined in the Second Amendment to Credit
Agreement) for the amendment set forth below, ITEM (F) of CLAUSE (II) of SECTION
2 of the Completion Guaranty shall be amended in its entirety to read as set
forth below:
"(F) the obligation of the Borrower to keep the Bank Credit Facility
In Balance and to perform its covenants in SECTION 7.2.23 of the
Credit Agreement (which was added thereto by CLAUSE (J) of SECTION 3.1
of the Second Amendment to Credit Agreement)"
ARTICLE III
CONDITIONS PRECEDENT AND COVENANT
SECTION 3.1. CONDITIONS TO EFFECTIVENESS. This First Amendment to
Completion
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<PAGE>
Guaranty shall be and become effective as of March 10, 1999 (the "EFFECTIVE
DATE") on the date (the "FIRST AMENDMENT DATE") on which each of the
following conditions precedent shall have been satisfied.
(a) EXECUTION OF DOCUMENTS. The Administrative Agent shall have
received counterparts of (i) this First Amendment to Completion Guaranty
executed by Authorized Representative of the parties hereto, (ii) the
Ratification of LCI Subsidiary Guaranty executed by the Authorized
Representatives of the Subsidiary Guarantors and LCI, (iii) the Second
Amendment to Credit Agreement executed by Authorized Representatives of the
Borrower, the Administrative Agent, the Syndication Agent, the
Documentation Agent and the Required Lenders together with all documents
required thereby, (iv) the Excess Contribution Agreement executed by
Authorized Representatives of London Clubs and the Trust and (v) all
documentation required by SECTION 2.1 of the First Amendment to Credit
Agreement.
(b) INCUMBENCY, ETC. The Administrative Agent shall have received
(with copies for each Lender) a certificate, dated the First Amendment
Date, of an Authorized Representative of each Guarantor certifying
(i) as to the incumbency and signatures of the Person or Persons
authorized to execute and deliver this First Amendment to Completion
Guaranty and any instruments or agreements required hereunder,
(ii) as to an attached copy of one or more resolutions or other
authorizations of the Guarantors certified by the Authorized
Representative of each such Guarantor as being in full force and
effect on the date hereof, authorizing the execution, delivery and
performance of this First Amendment to Completion Guaranty and any
instruments or agreements required hereunder, and
(iii) that the Organizational Documents of such Guarantor have
not been modified since the date on which they were last delivered to
the Administrative Agent,
upon which certificate the Administrative Agent, the Syndication Agent, the
Documentation Agent and each Consenting Lender (collectively, the
"FINANCING PARTIES") may conclusively rely until it shall have received a
further certificate of an Authorized Representative of such Completion
Guarantor canceling or amending such prior certificate.
(c) FEES. All reasonable fees and costs and expenses of Mayer, Brown
& Platt and other professionals employed by the Administrative Agent and
all other reasonable expenses of the Administrative Agent in connection
with the negotiation,
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<PAGE>
execution and delivery of this First Amendment to Completion Guaranty and
the transactions contemplated herein shall have been paid in full.
(d) SATISFACTORY LEGAL FORM. Each Financing Party and its counsel
shall have received all information, approvals, opinions, documents or
instruments as each Financing Party or its counsel may have reasonably
requested, and all documents executed or submitted pursuant hereto by or on
behalf of the Borrower shall be satisfactory in form and substance to each
Financing Party and its counsel.
(e) DEFAULT. After giving effect to this First Amendment to
Completion Guaranty the following statements shall be true and correct: (i)
to the best knowledge of each Guarantor, no act or condition exists which,
with the giving of notice or passage of time would constitute a "DEFAULT"
or "EVENT OF DEFAULT" (as defined in the Credit Agreement, the GECC
Facilities Agreement and the Facilities Agreement) has occurred and is
continuing as of the date hereof (other than a Default which may result
from the delivery of financial statements containing an Impermissible
Qualification), and (ii) no material adverse change in (A) the financial
condition, business, property, prospects or ability of the Guarantor or the
Borrower to perform in all material respects its respective obligations
under any Operative Document or any of the documents evidencing and
securing the FF&E Financing to which it is a party or (B) the financial
condition, business, property, prospects and ability of any other Aladdin
Party or, to the best knowledge of such Guarantor, LCNI, the Design/Builder
or Fluor to perform in all material respects its obligations under any
Operative Document to which it is a party has occurred since the Closing
Date.
(f) CONSENTS AND APPROVALS. All approvals and consents required to
be taken, given or obtained, as the case may be, by or from any
Governmental Instrumentality or another Person, or by or from any trustee
(including, without limitation, GECC and the Discount Note Indenture
Trustee) or holder of any indebtedness or obligation of the Borrower or the
Guarantor, that are necessary or, in the reasonable opinion of the
Administrative Agent, advisable in connection with the execution, delivery
and performance of this First Amendment to Completion Guaranty by all
parties hereto, shall have been taken, given or obtained, as the case may
be, shall be in full force and effect and the time for appeal with respect
to any thereof shall have expired (or, if an appeal shall have been taken,
the same shall have been dismissed) and shall not be subject to any pending
proceedings or appeals (administrative, judicial or otherwise) and shall be
in form and substance satisfactory to the Administrative Agent.
(g) DELIVERY OF FIRST AMENDMENT TO COMPLETION GUARANTY. The Borrower
shall have delivered this First Amendment to Completion Guaranty to all
Persons entitled thereto under the Operative Documents to receive delivery
hereof.
-6-
<PAGE>
(h) OPINIONS. The Administrative Agent shall have received such
opinions of counsel as it deems necessary, dated as of the First Amendment
Date and addressed to the Administrative Agent, the Lenders and, if
applicable, the Disbursement Agent, which shall be in form and substance
satisfactory to the Administrative Agent.
-7-
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
In order to induce each Financing Party to enter into this First Amendment
to Completion Guaranty, each Guarantor, as to itself, reaffirms, as of the First
Amendment Date, its representations and warranties contained in the Completion
Guaranty and additionally represents and warrants, as to itself, unto each
Financing Party as set forth in this ARTICLE IV.
SECTION 4.1. DUE AUTHORIZATION, NON-CONTRAVENTION, ETC. The execution,
delivery and performance by each Guarantor of this First Amendment to Completion
Guaranty and each other document executed or to be executed by it in connection
with this First Amendment to Completion Guaranty are within the Borrower's
powers, have been duly authorized by all necessary action, and do not
(a) contravene such Guarantor's Organizational Documents;
(b) contravene any contractual restriction binding on or affecting
such Guarantor;
(c)contravene any court decree or order or Legal Requirement binding
on or affecting such Guarantor; or
(d) result in, or require the creation or imposition of, any Lien on
any of such Guarantor's properties except as expressly contemplated by the
Operative Documents,
and the Financing Parties may conclusively rely on such representation and
warranty.
SECTION 4.2. GOVERNMENT APPROVAL, REGULATION, ETC. No authorization or
approval or other action by, and no notice to or filing with, any governmental
authority or regulatory body or other Person is required for the due execution,
delivery or performance by the Borrower of this First Amendment to Completion
Guaranty or any other document to be executed by it in connection with this
First Amendment to Completion Guaranty.
SECTION 4.3. VALIDITY, ETC. This First Amendment to Completion Guaranty
constitutes, and each other document executed by the Completion Guarantors in
connection with the Second Amendment to Credit Agreement, on the due execution
and delivery thereof, will constitute the legal, valid and binding obligations
of the Completion Guarantors enforceable in accordance with their respective
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency or similar laws affecting the enforcement of creditors rights
generally and by general principles of equity.
-8-
<PAGE>
SECTION 4.4. LIMITATION. Except as expressly provided hereby, all of the
representations, warranties, terms, covenants and conditions of the Completion
Guaranty and each other Operative Document shall remain unamended and unwaived
and shall continue to be, and shall remain, in full force and effect in
accordance with their respective terms. The amendments and modifications set
forth herein shall be limited precisely as provided for herein, and shall not be
deemed to be a waiver of, amendment or modification of any other term or
provision of the Completion Guaranty or other Instrument referred to therein or
herein, or of any transaction or further or future action on the part of the
Borrower or any other Person which would require the consent of the Agents, the
Lenders, GECC or the Discount Note Indenture Trustee.
SECTION 4.5. OFFSETS AND DEFENSES. The Guarantors have no offsets or
defenses to their obligations under the Loan Documents to which they are a party
and no claims or counterclaims against any of the Agents, the Lenders or the
Construction Consultant.
ARTICLE V
MISCELLANEOUS PROVISIONS
SECTION 5.1. RATIFICATION OF AND REFERENCES TO THE CREDIT AGREEMENT. This
First Amendment to Completion Guaranty shall be deemed to be an amendment to the
Completion Guaranty and the Completion Guaranty, as amended by this First
Amendment to Completion Guaranty, shall continue in full force and effect and is
hereby ratified, approved and confirmed in each and every respect. All
references to the Completion Guaranty in any other document, instrument,
agreement or writing shall hereafter be deemed to refer to the Completion
Guaranty, as amended by this First Amendment to Completion Guaranty.
SECTION 5.2. HEADINGS. The various headings of this First Amendment to
Completion Guaranty are inserted for convenience only and shall not affect the
meaning or interpretation of this First Amendment to Completion Guaranty or any
provisions hereof.
SECTION 5.3. APPLICABLE LAW. THIS FIRST AMENDMENT TO COMPLETION GUARANTY
AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS FIRST AMENDMENT TO
COMPLETION GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING SECTION 5-1401 OF
THE NEW YORK GENERAL OBLIGATIONS LAW, BUT EXCLUDING ALL OTHER CHOICE OF LAW AND
CONFLICTS OF LAW RULES OF SUCH STATE.
SECTION 5.4. CROSS-REFERENCES. References in this First Amendment to
Completion Guaranty to any Article or Section are, unless otherwise specified,
to such Article or Section of this First Amendment to Completion Guaranty.
-9-
<PAGE>
SECTION 5.5. OPERATIVE DOCUMENT. This First Amendment to Completion
Guaranty is a Loan Document executed pursuant to the Credit Agreement and shall
(unless otherwise expressly indicated therein) be construed, administered and
applied in accordance with the terms and provisions of the Credit Agreement.
SECTION 5.6. SUCCESSORS AND ASSIGNS. This First Amendment to Completion
Guaranty shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns.
SECTION 5.7. COUNTERPARTS. This First Amendment to Completion Guaranty
may be executed by the parties hereto in any number of counterparts and on
separate counterparts, each of which shall be an original but all of which
together shall constitute one and the same instrument.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to Completion Guaranty as of the day and year first above written.
ALADDIN BAZAAR HOLDINGS, LLC
By: /s/ JACK SOMMER
--------------------------------------
Name: Jack Sommer
Title: President
THE TRUST UNDER ARTICLE SIXTH
UNDER THE WILL OF SIGMUND
SOMMER
By: /s/ VIOLA SOMMER
--------------------------------------
Name: Viola Sommer
Title: Trustee
By: /s/ JACK SOMMER
--------------------------------------
Name: Jack Sommer
Title: Trustee
LONDON CLUBS INTERNATIONAL
PLC
By: /s/ G. BARRY HARDY
--------------------------------------
Name: G. Barry Hardy
Title: Finance Director
THE BANK OF NOVA SCOTIA, as the
Administrative Agent
By: /s/ ALAN PENDERGAST
--------------------------------------
Name: Alan Pendergast
Title: Relationship Manager
-11-
<PAGE>
MERRILL LYNCH CAPITAL
CORPORATION, as the Syndication Agent
By: /s/ HOWARD SPLEY
--------------------------------------
Name: Howard Spley
Title: Vice President
-12-
<PAGE>
EXHIBIT 99.01
Report of Independent Public Accountants
To the Board of Directors of
Aladdin Gaming Enterprises, Inc.:
We have audited the accompanying balance sheets of Aladdin Gaming
Enterprises, Inc. (a Nevada corporation in the development stage) as of December
31, 1998 and 1997, and the related statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1998 and for the period
from inception (December 3, 1997) to December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Aladdin Gaming
Enterprises, Inc. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the year ended December 31, 1998 and for the
period from inception (December 3, 1997) to December 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 30, 1999 (except with respect
to the matters discussed in Note 5,
as to which the date is April 27, 1999)
1
<PAGE>
ALADDIN GAMING ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(In Thousands except for share data)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents ................................................. $ 1 $1
Investment in unconsolidated affiliate .................................... 17,049 --
--------------------- -------------------
$ 17,050 $1
--------------------- -------------------
--------------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to related party ............................................... $ 3 $--
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 December
31, 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 December 31, 1998 and December 31, 1997, respectively ........ 13,247 --
Additional paid-in capital 14,420 1
Deficit accumulated during the development stage (10,620) --
--------------------- -------------------
$ 17,050 $1
--------------------- -------------------
--------------------- -------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
ALADDIN GAMING ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD
FROM INCEPTION (DECEMBER 3, 1997) THROUGH DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
FOR THE YEAR ENDED (DECEMBER 3, 1997)
DECEMBER 31, 1998 THROUGH DECEMBER 31, 1998
------------------ --------------------------
<S> <C> <C>
Other expenses.......................................................... $ 3 $ 3
Equity in loss of unconsolidated affiliate.............................. 10,617 10,617
Income tax expense (benefit)............................................ -- --
------------------ -------------------------
Net loss accumulated during the development stage................... $10,620 $10,620
------------------ -------------------------
------------------ -------------------------
Basic and dilutive loss per share....................................... $ 3.69 $ 3.97
Shares used in per share calculation.................................... 2,876,466 2,671,527
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ALADDIN GAMING ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
CLASS A AND B PAID-IN CAPITAL DEFICIT TOTAL
------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 3, 1997 .................... $ -- $ -- $ -- $ --
Issuance of common stock, 1 share issued ..... -- 1 -- 1
------------- --------------- ----------- ---------------
BALANCE, DECEMBER 31, 1997 ................... $ -- $ 1 $ -- $ 1
Net loss accumulated during the development
stage ...................................... -- -- (10,620) (10,620)
Issuance of Class A common stock, 1,107,499
shares issued, and Class B common stock,
2,215,000 shares issued .................... 13,247 -- -- 13,247
Issuance of Warrants to purchase Class B
common stock, 2,215,000 warrants issued ... -- 15,000 -- 15,000
Equity costs from unconsolidated affiliate .. -- (581) (581)
------------- --------------- ----------- ---------------
BALANCE, DECEMBER 31, 1998 .................. $13,247 $14,420 $(10,620) $ 17,047
------------- --------------- ----------- ---------------
------------- --------------- ----------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ALADDIN GAMING ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD
FROM INCEPTION (DECEMBER 3, 1997 ) THROUGH DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(DECEMBER 3, 1997)
FOR THE YEAR ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................. $(10,620) $(10,620)
Loss of unconsolidated affiliate......................................... 10,617 10,617
Increase in related party payable........................................ 3 3
----------------- -----------------
Net cash used in operating activities...................................... -- --
----------------- -----------------
Cash flows used in investing activities:
Investment in unconsolidated affiliate................................... (15,000) (15,000)
----------------- -----------------
Cash flows from financing activities:
Proceeds from the issuance of stock...................................... -- 1
Proceeds from the issuance of warrants................................... 15,000 15,000
----------------- -----------------
Net cash provided by financing activities.................................. 15,000 15,001
----------------- -----------------
Net increase in cash and cash equivalents.................................. -- 1
Cash and cash equivalents at beginning of period........................... 1 --
----------------- -----------------
Cash and cash equivalents at end of period................................. $ 1 $ 1
----------------- -----------------
----------------- -----------------
Supplemental disclosures of non-cash investing and financing activities:
Stockholders' equity contribution--book value
Land .................................................................. $ 6,247 $ 6,247
Construction in progress .............................................. 7,000 7,000
Equity costs from unconsolidated affiliate ............................ (581) (581)
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ALADDIN GAMING ENTERPRISES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND EQUITY METHOD ACCOUNTING
Aladdin Gaming Enterprises, Inc., a Nevada corporation ("Gaming
Enterprises"), was established on December 3, 1997. Gaming Enterprises holds a
25% interest in Aladdin Gaming Holdings, LLC, a Nevada limited liability company
("Gaming Holdings") which was established on December 1, 1997. Gaming Holdings
was initially owned by Gaming Enterprises (25%), Sommer Enterprises, LLC, a
Nevada limited liability company (72%) ("Sommer Enterprises"), 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 million for a 25% interest in Gaming Holdings'
common membership interests ("Holdings Common Membership Interests"). Sommer
Enterprises, contributed a portion of land for 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 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 Sommer Trust and its
affiliates agreed that they shall vote their respective Holdings Common
Membership Interests and cause Gaming Enterprises to vote its Holding Common
Membership Interests so that (taking into account 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 Trust Under Article Sixth u/w/o
Sigmund Sommer ("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 Enterprises has no other business or activity 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 interests of Aladdin Gaming, LLC ("Gaming"). Aladdin Capital Corp.
("Capital") is a wholly owned subsidiary of Gaming Holdings and was incorporated
solely for the purpose of serving as a co-issuer of the 13 1/2% Senior Discount
Notes ("Notes"). Capital will not have any material operations or assets and
will not have any revenues. Gaming Holdings, through its subsidiaries, also owns
100% of Aladdin Music, LLC ("Aladdin Music"). Gaming Holdings and its
subsidiaries are collectively referred to as "Company."
6
<PAGE>
The operations of the Company have been primarily limited to the
design, development, financing and construction of a new Aladdin 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 Las Vegas Boulevard. 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 six restaurants.
The Complex will comprise: (i) the Aladdin; (ii) a themed entertainment
shopping mall with approximately 496,000 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) an approximately 4,800 space car parking
facility ("Carpark" and, together with the Desert Passage, hereinafter, "Mall
Project"). The Mall Project will be separately owned in part by an affiliate of
the Company and Aladdin Music is currently seeking a joint venture partner for
the Aladdin Music Project.
Gaming Enterprises' interest in Gaming Holdings has been accounted for
under the equity method. Under the equity method, the original investment is
recorded at cost, and is adjusted by Gaming Enterprises' share of earnings,
losses and distributions received from and made to the investee.
CASH AND CASH EQUIVALENTS
Gaming Enterprises considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
INCOME TAXES
Gaming Enterprises accounts for income taxes using the liability method
as set forth in the SFAS 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 Gaming Enterprises'
assets and liabilities.
There was no income tax expense or benefit recorded for the period from
inception (December 3, 1997) through December 31, 1998 as Gaming Enterprises is
a development stage company and the realization of any deferred tax asset is
uncertain.
LOSS PER BASIC AND DILUTED SHARE
Loss per basic and diluted share is based on the weighted average
number of shares outstanding. Basic and diluted shares outstanding were
2,876,466 and 2,671,527 for the year ended December 31, 1998 and from inception
(December 3, 1997) through December 31, 1998, respectively. Diluted shares
include stock options and warrants when dilutive. Due to the loss accumulated
during the development stage, Gaming Enterprises' warrants would be
anti-dilutive and therefore have not been utilized in the computation of
dilutive shares.
7
<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," SFAS No. 130 requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity sections of a statement of
financial position, and is effective for financial statements issued for fiscal
years beginning after December 15, 1997. Gaming Enterprises has determined that
comprehensive income and net income as reported in the accompanying financial
statements are the same.
In June, 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes additional
standards for segment reporting in financial statements and is effective for
fiscal years beginning after December 15, 1997. Gaming Enterprises currently
operates as one segment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PRIVATE OFFERING
On February 26, 1998, Gaming Holdings, Gaming Capital Corp. ("Capital"
together with Gaming Holdings, the "Issuers") and Gaming Enterprises consummated
a private offering ("Offering") under Rule 144A of the Securities Act of 1933.
The private offering consisted of 221,500 units ("Units"), each unit consisting
of (i) $1,000 principal amount at maturity of 13 1/2% Senior Discount Notes due
2010 ("Notes") of Gaming Holdings and Capital and (ii) 10 Warrants ("Warrants")
to purchase 10 shares of Class B non-voting Common Stock, no par value, of
Gaming Enterprises. The Notes and the Warrants became separately transferable on
July 23, 1998 and the Warrants became exercisable on July 23, 198 and will
expire on March 1, 2010. The total amount paid for the warrants was $15 million
and is reflected as additional paid-in capital in the accompanying financial
statements.
8
<PAGE>
3. INVESTMENT IN UNCONSOLIDATED AFFILIATE
As discussed in Note 1, Gaming Enterprises holds a 25% interest in
Gaming Holdings. Summarized condensed financial information of Gaming Holdings
as of and for the year ended December 31, 1998, is as follows:
<TABLE>
<CAPTION>
1998
(IN THOUSANDS)
--------------
<S> <C>
Aladdin Gaming Holdings, LLC
Statement of Operations Data:
Net Revenue............................................................... None
Net Loss.................................................................. $ 42,468
Gaming Enterprises' share of net loss..................................... $ 10,617
Balance Sheet Data:
Assets:
Current Assets.......................................................... $ 9,111
Property and equipment, net............................................. 128,432
Other assets............................................................ 265,218
--------------
Total assets.......................................................... $402,761
--------------
--------------
Liabilities and Members' Equity
Liabilities............................................................... $416,621
Members' equity
Gaming Enterprises...................................................... 17,049
Other members........................................................... (30,909)
--------------
Total liabilities and members' equity................................... $402,761
--------------
--------------
The changes in Gaming Enterprises' investment in unconsolidated affiliate is as follows:
1998
(IN THOUSANDS)
--------------
<S> <C>
Investment on February 26, 1998............................................... $ 28,247
Losses........................................................................ (10,617)
Members' share of equity costs................................................ (581)
--------------
Balance as of December 31, 1998......................................... $ 17,049
--------------
--------------
</TABLE>
4. EQUITY CONTRIBUTIONS
On February 26, 1998, Sommer Enterprises, LLC contributed land and $7
million of predevelopment costs in exchange for 100% of the Class A Common Stock
in Gaming Enterprises. Gaming Enterprises contributed the land, the $7 million
of predevelopment costs and the net proceeds, $15 million allocable from the
sale of the Warrants, to Gaming Holdings in exchange for 25% of the common
membership interests in Gaming Holdings.
9
<PAGE>
5. SUBSEQUENT EVENT
Gaming Enterprises' principal asset consists of its investment in
Gaming Holdings. As of March 30, 1999, Gaming Holdings' 100% owned
subsidiary, Gaming, was in default of certain debt covenants under its $410
million Credit Agreement ("Credit Agreement"). On April 16, 1999, the lenders
under the Credit Agreement approved, effective as of March 10, 1999, the
Second Amendment to the Credit Agreement, which cured or waived the events of
default. The Second Amendment to the Credit Agreement, which among other
things, required the Sommer Trust and London Clubs to contribute
approximately $18.5 million to Gaming and requires the lenders to draw on
approximately $6.5 million of previously posted letters of credit. These
additional funds of approximately $25 million are to be used to develop and
construct the Aladdin. On April 2, 1999, London Clubs funded the entire $18.5
million to Gaming and on or about April 16, 1999, the letters of credit were
drawn down and the funds were deposited in Gaming's account.
In addition to the contributions discussed above, the Second
Amendment to the Credit Agreement requires Gaming to maintain a minimum "Net
Worth" at the close of each calendar month, until the end of the fiscal
quarter during which the Aladdin opens for business (and then reverting to
the Credit Agreement's requirement to maintain the minimum Net Worth on a
fiscal quarterly basis thereafter), of not less than $100 million plus 85% of
positive Net Income (as defined in the Credit Agreement). Gaming has informed
both London Clubs and the Sommer Trust of its estimate of future equity
contributions of approximately $33 million to maintain the revised minimum
Net Worth requirement. On April 5, 1999, effective March 10, 1999, the Sommer
Trust and London Clubs entered into an agreement whereby the Sommer Trust and
London Clubs guaranteed the performance by Gaming of Gaming's minimum Net
Worth as required under the Second Amendment to the Credit Agreement.
10
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and Members of
Aladdin Gaming Holdings, LLC:
We have audited the accompanying consolidated balance sheets of
Aladdin Gaming Holdings, LLC (a Nevada limited liability company in the
development stage) and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, members' equity and cash flows
for the year ended December 31, 1998 and for the period from inception
(December 1, 1997) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Aladdin Gaming
Holdings, LLC and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the year ended December
31, 1998, and for the period from inception (December 1, 1997) to December
31, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 30, 1999 (except with respect to
the matters dicsussed in Note 7, as to
which the date is April 27, 1999)
1
<PAGE>
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(In Thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 1,248 $7
Receivables, related parties.......................................................... 77 -
Other receivables..................................................................... 765 -
Inventory............................................................................. 60 -
Prepaid assets........................................................................ 119 -
Restricted land to be transferred..................................................... 6,842 -
-------- -----
Total current assets............................................................... 9,111 7
-------- -----
Property and equipment:
Land.................................................................................. 33,407 -
Furniture, fixtures and equipment..................................................... 272 -
Construction in progress.............................................................. 86,557 -
Capitalized interest.................................................................. 8,213 -
-------- -----
128,449 -
Less accumulated depreciation and amortization........................................... 17 -
-------- -----
Net property and equipment............................................................ 128,432 -
-------- -----
Other assets:
Restricted cash and cash equivalents.................................................. 227,983 -
Interest receivable--restricted cash.................................................. 859 -
Other assets.......................................................................... 2,061 -
Debt issuance costs, net of accumulated amortization of $2,831 and $0
as of December 31, 1998 and 1997, respectively..................................... 34,315 -
-------- -----
Total other assets............................................................... 265,218 -
-------- -----
$402,761 $7
-------- -----
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 3,394 $-
Construction payable.................................................................. 12,063 -
Obligation to transfer land........................................................... 6,842 -
Accrued interest...................................................................... 1,734 -
Accrued expenses...................................................................... 113 -
-------- -----
Total current liabilities........................................................ 24,146 -
-------- -----
Long-term debt, net of discount.......................................................... 388,353 -
Related party payables................................................................... 4,119 1
Advances to purchase membership interests................................................ 3 3
Members' equity:
Common membership interest, 1,000,000 common shares issued and outstanding as of
December 31, 1998.................................................................. 28,608 3
Deficit accumulated during the development stage...................................... (42,468) -
-------- -----
Total members' equity............................................................ (13,860) 3
-------- -----
$402,761 $7
-------- -----
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1998 and the Period
from Inception (December 1, 1997) through December 31, 1998
(In Thousands)
<TABLE>
<CAPTION>
For the period from inception
For the year ended (December 1, 1997)
December 31, 1998 through December 31, 1998
------------------ ------------------------------
<S> <C> <C>
Pre-opening costs...................................................... $24,737 $24,737
Other (income) expense:
Interest income.................................................. (12,472) (12,472)
Interest expense................................................. 38,416 38,416
Less: Interest capitalized....................................... (8,213) (8,213)
------- -------
Total other (income) expense............................... 17,731 17,731
------- -------
Net loss accumulated during the development stage...................... $42,468 $42,468
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
Years Ended December 31, 1998 and 1997
(In Thousands)
<TABLE>
<CAPTION>
Sommer Aladdin Gaming London Clubs
Enterprises, LLC Enterprises, LLC Nevada, INC. GAI, LLC Total
---------------- ---------------- ------------- --------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 1, 1997........................ $ -- $ -- $ -- $ -- $ --
Members' contributions........................... 1 -- -- 2 3
---------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997....................... 1 -- -- 2 3
Net loss accumulated during the development stage (19,960) (10,617) (10,617) (1,274) (42,468)
Members' contributions........................... (47,317) 28,247 50,000 -- 30,930
Members' equity costs............................ (1,093) (581) (581) (70) (2,325)
---------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1998....................... $ (68,369) $17,049 $ 38,802 $(1,342) $(13,860)
---------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
4
<PAGE>
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1998 and the Period
from Inception (December 1, 1997)
through December 31, 1998
(In Thousands)
<TABLE>
<CAPTION>
For the period from inception
For the year ended (December 1, 1997)
December 31, 1998 through December 31, 1998
----------------- -----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................ $(42,468) $(42,468)
Depreciation and amortization....................................... 17 17
Amortization of debt costs.......................................... 2,831 2,831
Amortization of original issue discount............................. 14,306 14,306
Increase in interest receivable..................................... (859) (859)
Increase in inventory............................................... (60) (60)
Increase in prepaid expense......................................... (118) (118)
Increase in accounts receivable..................................... (842) (842)
Increase in other assets............................................ (2,061) (2,061)
Increase in accounts payable........................................ 3,394 3,394
Increase in accrued expenses........................................ 113 113
Increase in accrued interest........................................ 1,734 1,734
Increase in related party payable................................... 3,354 3,354
--------- ---------
Net cash used in operating activities.................................. (20,659) (20,659)
--------- ---------
Cash flows from investing activities:
Payments for construction in progress............................... (66,184) (66,184)
Payments for furniture and equipment................................ (272) (272)
Payments for capitalized interest................................... (8,213) (8,213)
Increase in restricted cash......................................... (227,983) (227,983)
--------- ---------
Net cash used in investing activities.................................. (302,652) (302,652)
--------- ---------
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.............................................. 65,000 65,003
Members' equity costs............................................... (2,325) (2,325)
Payment of debt on contributed land................................. (74,477) (74,477)
Payable to related parties.......................................... - 1
Advances to purchase membership interests........................... - 3
--------- ---------
Net cash provided by financing activities.............................. 324,552 324,559
--------- ---------
Net increase in cash................................................... 1,241 1,248
Cash at beginning of period............................................ 7 -
--------- ---------
Cash at end of period.................................................. $ 1,248 $ 1,248
--------- ---------
Supplemental disclosures of cash flow information and non-cash
investing and financing activities:
Cash paid for interest, net of amount capitalized...................... $ 11,332 $ 11,332
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...................................... 12,826 12,826
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
ALADDIN GAMING HOLDINGS, LLC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
Aladdin Gaming Holdings, LLC, a Nevada limited liability company
("Gaming Holdings"), was established on December 1, 1997. Gaming Holdings was
initially owned by Aladdin Gaming Enterprises, Inc., a Nevada corporation
(25%), Sommer Enterprises, LLC, a Nevada limited liability company (72%)
("Sommer Enterprises"), 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
million for a 25% interest in Gaming Holdings common membership interests
("Holdings Common Membership Interests"). Sommer Enterprises contributed a
portion of land for Holdings Common Membership Interests. Aladdin Gaming
Enterprises, Inc. ("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 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 Sommer Trust and its affiliates agreed that they shall vote their
respective Holdings Common Membership Interests and cause Gaming Enterprises
to vote its Holding Common Membership Interests so that (taking into account
Holdings Common Membership Interests held by London Clubs or its affiliates)
London Clubs controls fifty percent of the voting power of Gaming Holdings.
See Note 4 for additional disclosures regarding voting power. Aladdin
Holdings, LLC, a Delaware limited liability company ("AHL"), indirectly holds
a majority interest in Gaming Holdings. The members of AHL are the Trust
Under Article Sixth u/w/o Sigmund Sommer ("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 13 1/2% Senior Discount Notes ("Notes"). Capital will not
have any material operations or assets and will not have any revenues. Gaming
Holdings, through its subsidiaries, also owns 100% of Aladdin Music, LLC
("Aladdin Music"). Gaming Holdings and its subsidiaries are collectively
referred to herein as "Company."
The operations of the Company have been primarily limited to the
design, development, financing and construction of a new Aladdin 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 Las Vegas Boulevard. 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 six restaurants.
The Complex will comprise: (i) the Aladdin; (ii) a themed
entertainment shopping mall with approximately 496,000 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) an 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 for the Aladdin Music Project.
6
<PAGE>
The consolidated financial statements include the accounts of Gaming
Holdings and its wholly-owned subsidiaries. Significant inter-company
accounts are eliminated in consolidation.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents. As of
December 31, 1998, restricted cash consisted of cash and cash equivalents
held for construction and development of the Aladdin.
PROPERTY AND EQUIPMENT
Property and equipment consists primarily of expenditures incurred
for the design and construction of the Aladdin and have been capitalized as
construction in progress. These amounts are expected to be reclassified to
buildings and land improvements upon completion of the facility and will be
depreciated over the useful life of the assets. Furniture, fixtures and
equipment are stated at cost and depreciation is computed using the
straight-line method over the estimated useful life of between three and ten
years.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using first-in first-out method.
FAIR VALUE OF CERTAIN FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, receivables and all current
liabilities approximates fair value because of the short term maturity of
these instruments. The fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction between
willing parties. See Note 2 for additional fair value disclosures.
INTEREST COSTS
Interest costs associated with major construction projects are
capitalized. Interest is capitalized on amounts expended to construct the
Aladdin using the weighted-average cost of the Company's outstanding
borrowings. The capitalized interest will be recorded as part of the asset to
which it relates and will be amortized over the asset's useful life.
Capitalization of interest ceases when the project is substantially complete.
INTEREST RATE SWAPS
The Company uses interest rate swaps and similar financial
instruments to assist in managing interest incurred on its long-term debt.
The difference between amounts received and amounts paid under such
agreements, as well as any costs or fees, is recorded as a reduction of, or
addition to, interest expense as incurred over the life of the swap or
similar financial instruments.
PRE-OPENING COSTS
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.
7
<PAGE>
Effective January 1, 1998, the Company adopted the provisions of SOP
98-5. Pre-opening costs include, but are not limited to, salary related
expenses for new employees and management opening team, travel and lodging
expenses, training costs, advertising and marketing, organizational costs and
all temporary facility costs (i.e. rent, insurance, utilities, etc.).
DEBT DISCOUNT AND ISSUANCE COSTS
Debt discount and issuance costs are capitalized and amortized to
expense based on the terms of the related debt agreements using the effective
interest method or a method which approximates the effective interest method.
INCOME TAXES
The Company is a limited liability company and will be taxed as a
partnership for federal income tax purposes. Accordingly, no provision for
federal income taxes was recorded because the taxable income or loss is
included in the income tax returns of the members.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity sections of a statement
of financial position, and is effective for financial statements issued for
fiscal years beginning after December 15, 1997. The Company has determined
that comprehensive income and net income as reported in the accompanying
financial statements are the same.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
additional standards for segment reporting in financial statements and is
effective for fiscal years beginning after December 15, 1997. The Company
currently operates as one segment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
December 31, 1998
(In Thousands)
-----------------
<S> <C>
Long-term debt:
Senior Discount Notes (Net of unamortized discount of $107,147)............... $114,353
Term B Loan................................................................... 114,000
Term C Loan................................................................... 160,000
--------
Total long-term debt....................................................... $388,353
--------
</TABLE>
8
<PAGE>
SENIOR DISCOUNT NOTES
On February 26, 1998, Gaming Holdings, Capital and Gaming
Enterprises consummated a private offering ("Offering") under Rule 144A of
the Securities Act of 1933. The Offering consisted of 221,500 units
("Units"), each Unit consisting of: (i) $1,000 principal amount of maturity
of 13 1/2% Senior Discount Notes due 2010 ("Notes") of Gaming Holdings and
Capital; and (ii) 10 warrants ("Warrants") to purchase 10 shares of Class B
non-voting common stock, no par value, of Gaming Enterprises. The Notes and
the Warrants became separately transferable on July 23, 1998. The Warrants
became exercisable on July 23, 1998, and will expire on March 1, 2010.
On August 26, 1998, Gaming Holdings and Capital completed an
exchange offer for 100% of the aggregate principal amount of the Notes
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 on February 26, 1998.
The initial accreted value of the Notes was $519.40 per $1,000
principal amount at maturity of the Notes. The Notes will mature on March 1,
2010. The Notes will accrete at 13 1/2% (computed on a semi-annual bond
equivalent basis) based on the initial accreted value, calculated from
February 26, 1998. Cash interest on the Notes will not accrue prior to March
1, 2003. Thereafter, cash interest on the Notes will accrue at the rate of
13 1/2% per annum based on the accreted value at maturity of the Notes and will
be payable semi-annually in arrears on March 1 and September 1 of each year,
commencing on September 1, 2003. The Notes are secured by a first priority
pledge of all the issued and outstanding Series A Preferred Interests of
Gaming held by Gaming Holdings. The Indenture to the Notes contains certain
covenants that (subject to certain exceptions) restrict the ability of Gaming
Holdings, Capital 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.
Gaming Holdings' future interest and principal payments required
under the Note will be funded from distributions by Gaming to the extent
available. Gaming has certain restrictions which limit its ability to
distribute cash to Gaming Holdings (see the following discussion under "Term
Loans"). There can be no assurance that Gaming's distributions will be
sufficient to meet the required principal and interest payments of the Notes.
TERM LOANS
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 (collectively, "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 initial 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 December 31, 1998, 100% of the Notes proceeds,
approximately $23.6 million of the Term B Loan Proceeds, net of interest
earned and approximately $21.5 million of the Term C Loan proceeds, net of
interest earned had been utilized to develop and construct the Aladdin. The
Term A Loan has not been funded. The Company pays interest on the term loans
as follows: Term A Loan, at the London Interbank Offered Rate ("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
earnings before interest, taxes, depreciation and amortization ("EBITDA");
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
9
<PAGE>
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. Interest on the term loans is due quarterly.
During 1998, the Company's indirect subsidiary, Aladdin Music,
incurred indebtedness of approximately $2.8 million in connection with the
pre-development costs and expenses of the Aladdin Music Project while
pursuing prospective joint-venture partners ("Music Indebtedness"). The
incurrence of the Music Indebtedness was not pre-approved by the Lenders as
required under the Credit Agreement and thus the incurrence of the Music
Indebtedness constituted an event of default under the Credit Agreement. See
Note 7 regarding the subsequent cure or waiver of the Music Indebtedness
default.
On January 29, 1999, the Credit Agreement was amended for the
following: (i) a reduction in the net worth requirement; (ii) a waiver of the
event of default due to the Music Indebtedness, assuming satisfaction of
certain conditions; (iii) changes to certain definitions in the Credit
Agreement, including the definition of "Available Funds," "Realized Savings"
and "Indebtedness;" (iv) permit the utilization of letters of credit to fund
the November, 1998 Out-of-Balance (see Note 4 regarding additional disclosure
related to the November, 1998 Out-of-Balance); (v) require the Company to
fund costs for the Carpark which are in excess of $36 million; (vi) permit
Aladdin Music to incur an additional aggregate indebtedness of $3.5 million
for reasonable and necessary predevelopment costs and expenses for the
Aladdin Music Project and to enter into agreements for the payment of certain
commissions; (vii) permit certain indebtedness in connection with a
1,400-seat production theater; and (viii) other technical amendments
(collectively, "First Amendment to the Credit Agreement"). Further, the First
Amendment to the Credit Agreement provided that if the FF&E Financing
documents (see the following discussion under "Furniture, Fixtures and
Equipment Financing" ("FF&E Financing")) were not correspondingly amended by
March 10, 1999, an event of default would exist under the Credit Agreement.
After various discussions with the lenders under the FF&E Financing,
the Company determined that it would not be in its best interest to effect
corresponding amendments to the FF&E Financing documents consistent with the
First Amendment to the Credit Agreement. The Company, London Clubs and the
Sommer Trust have submitted a proposed second amendment to the Credit
Agreement ("Second Amendment to the Credit Agreement"), to cure the events of
default. The Second Amendment to the Credit Agreement provides: (i) the Music
Indebtedness has been paid by or on behalf of Aladdin Music and this event of
default is waived by the Lenders; (ii) a capital contribution in the amount
of approximately $18.5 million (see Note 7 regarding additional disclosures)
has been made to bring the Main Project Budget "In Balance," as defined in
the Credit Agreement; (iii) the letters of credit which were posted in
connection with the November 1998 Out-of-Balance will be drawn and the
proceeds deposited in Gaming's account; (iv) amending certain definitions of
the Credit Agreement, including, "Available Funds," "Indebtedness," and
"Realized Savings"; (v) requiring any costs in excess of $36 million for
completing the Carpark will be funded by the Sommer Trust and London Clubs;
(vi) requiring that Gaming maintain a minimum "Net Worth" at the close of
each calendar month of not less than $100.0 million plus 85% of positive Net
Income (as defined); and (vii) other technical amendments to the Credit
Agreement. The Company has been advised by its counsel, that the Second
Amendment to the Credit Agreement will not require the approval or consent of
either the FF&E Financing lenders or the Noteholders. See Note 7 regarding
the subsequent cure or waiver of the requirement to amend the FF&E Financing
documents.
The Second Amendment to the Credit Agreement would require
additional contributions to the Company on a monthly basis if the Company's
net worth falls below $100 million. The Company estimates that additional
contributions of approximately $33 million will be required to maintain a net
worth of $100 million prior to the opening of the Aladdin. The Company has
informed both London Clubs and the Sommer Trust of the estimated future
equity contributions required under the net worth limit.
Principal payments for the Term Loans do not commence until the end
of the first quarter following the commencement of operations of the Aladdin.
The following table details the required yearly principal amortization during
operations.
10
<PAGE>
<TABLE>
<CAPTION>
Principal Amortization (after Term A Loan Term B Loan Term C Loan
commencement of operations)
----------------------------- ------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C>
Year 1 $ 16,000 $ 1,200 $ 1,600
Year 2 20,000 1,200 1,600
Year 3 28,000 1,200 1,600
Year 4 32,000 1,200 1,600
Year 5 40,000 1,200 1,600
Year 6 68,000 1,600
Year 7 40,000 48,400
Year 8 102,000
-------- -------- --------
TOTALS $136,000 $114,000 $160,000
-------- -------- --------
</TABLE>
In addition to the principal amortization schedules, the Company is
required to make mandatory prepayments beginning the first quarter following
the commencement of operations of the Aladdin. The mandatory prepayments are
based on a percentage of Gaming's excess cash flow as defined in the Credit
Agreement. The mandatory prepayments are due quarterly and the percentages of
excess cash flow are detailed below:
<TABLE>
<CAPTION>
Percentage of
Excess Cash Flow
----------------
<S> <C>
Year 1 65%
Year 2 60%
Year 3 and thereafter 55%
</TABLE>
As security for the Bank Credit Facility, the Company has entered
into a deed of trust in favor of the Lenders securing the Notes and all
obligations of the Company under the Bank Credit Facility, encumbering the
Aladdin (including any and all leasehold interests) as a first priority lien.
In addition, the Company has either assigned or entered into security
agreements in favor of the Lenders for all present and future leases,
accounts, accounts receivable, licenses and any other tangible or intangible
assets owned or leased by the Company, subject to the rights of the FF&E
Lenders under the FF&E Financing (see the following discussion under
"Furniture, Fixtures and Equipment Financing ("FF&E Financing")).
As further security for the Bank Credit Facility and to the extent
permissible, the owners of the Company have pledged their interests in the
Company to the Lenders and Gaming Holdings has pledged its interest in Gaming
to the Lenders other than the Series A Preferred Interests.
The Bank Credit Facility contains covenants that (subject to certain
exceptions) restrict the ability of Gaming and its subsidiaries to, among
other things: (i) incur additional indebtedness, liens or other encumbrances;
(ii) pay dividends or make similar distributions; (iii) sell assets or make
investments; (iv) enter into mergers, consolidations, or acquisition
transactions; or (v) enter into certain transactions with affiliates.
FURNITURE, FIXTURES AND EQUIPMENT FINANCING ("FF&E FINANCING")
On June 30, 1998, the Company entered into FF&E Financing which
provides for operating lease financing of up to $60.0 million and a 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
11
<PAGE>
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 complete is either the 30-day LIBOR plus 478 basis points or
the Prime Rate plus 275 basis points. After the construction completion date,
the interest rate shall be the 90-day LIBOR plus 478 basis points. As of
December 31, 1998, the FF&E financing had not been funded.
On February 17, 1999, GMAC Commercial Mortgage ("GMAC"), one of the
participants in the FF&E Financing, issued a "Notice of Default" to the
primary lender under the FF&E Financing based on the Company's proposal to
amend the minimum net worth amount under the FF&E Financing documents and
further provided that GMAC was terminating its obligations to fund under the
FF&E Financing. On February 26, 1999, the Company responded that, pursuant to
the Intercreditor Agreement, dated June 30, 1998, no participant in the FF&E
Financing, including GMAC, could declare a Default or Event of Default (other
than a payment default) prior to the initial funding under the FF&E Financing
and that in fact no default or event of default existed.
INTEREST RATE SWAPS
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.
At December 31, 1998, the Company had interest rate swaps with a
notional amount of approximately $787.3 million that consist of the
following: (i) a cap and floor notional amount of $250 million; (ii) a swap
with an original notional amount of $114 million increasing to a maximum of
$222.5 million; (iii) a swap with a notional amount of $160 million; and (iv)
a swap option with a notional amount of $154.8 million. As of December 31,
1998, the Company had a portfolio of variable rate debt outstanding in the
amount of $274 million.
Under these agreements, the Company will receive interest from the
counterparty at a variable rate equal to LIBOR and the Company will pay the
counterparty fixed rates of interest as follows: (a) until the Aladdin
commences operations, for the Term A Loan and the Term B Loan interest is
fixed at 5.883% and for the Term C Loan interest is fixed at 6.485%; and (b)
once the Aladdin has commenced operations, for the Term A Loan and the Term B
Loan, the maximum interest is 7.00% and the minimum is 5.65%, and for the
Term C Loan, the interest has been fixed at 6.485%. The LIBOR applicable to
these agreements was 5.3125% at December 31, 1998. 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.
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 swap
agreements for trading purposes.
12
<PAGE>
FAIR VALUE OF LONG-TERM DEBT AND INTEREST RATE SWAPS
The estimated fair value of the Company's long-term debt and
interest rate swaps have been determined using appropriate market information
and valuation methodologies. Considerable judgment is required to determine
the estimates of fair value; thus, the estimates provided herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.
<TABLE>
<CAPTION>
Carrying Amount Fair Value
--------------- ----------
December 31, 1998
----------------------------------
(In Thousands)
<S> <C> <C>
Senior Discount Notes................................... $114,353 $50,945
Term B Loan............................................. 114,000 114,000
Term C Loan............................................. 160,000 160,000
Interest Rate Swaps Loss................................ 13,895
</TABLE>
The fair value for the Company's Senior Discount Notes is based on
dealer quotes for those instruments. The fair values for the Company's Term B
Loan and Term C Loan are assumed to approximate carrying values as the
interest rate on the loans fluctuate with changes in LIBOR (i.e., a variable
rate loan). The fair market value of the Company's interest rate swaps is
based on the estimated termination values at December 31, 1998 as provided by
the counterparty to the swaps.
3. LEASES
The Company leases certain real property, furniture and equipment.
At December 31, 1998 aggregate minimum rental commitments under noncancelable
operating leases with initial or remaining terms of one year or more
consisted of the following:
<TABLE>
<CAPTION>
Operating Leases
Year Ending December 31, (In Thousands)
------------------------ -------------------
<S> <C>
1999 $646
2000 200
2001 15
----
Total Minimum Lease Payments $861
----
</TABLE>
Rental expense amounted to approximately $0.5 million for the year
ended December 31, 1998.
4. INCREASE IN THE COMPANY'S BOARD OF MANAGERS
Under the Credit Agreement, $25 million of the total project costs
were designated as contingency funds. Contingency funds are made available to
the Company as a function of the project's percentage of construction
complete. However, the Company committed to changes in the plans and
specifications early in the project while the percentage of completion was
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 was created in November, 1998 ("November 1998 Out-of-Balance").
The Sommer Trust and London Clubs posted letters of credit in the amounts of
$1,030,500 and $5,543,500, respectively, to fund the November 1998
Out-of-Balance (see Note 7 regarding the subsequent draw on the letters of
credit). The Sommer Trust and London Clubs are parties to the Bank Completion
Guaranty whereby, among other things, the parties agreed to fund certain
project costs increases and to a
<PAGE>
contribution agreement ("Contribution Agreement"), dated as of February 26,
1998, whereby, among other things, the parties agreed to share all the
obligations under the Bank Completion Guaranty, 75% to the Sommer Trust and
25% to London Clubs. On November 30, 1998, the Sommer Trust and London Clubs
agreed that because the Sommer Trust did not fund its proportionate share of
the November 1998 Out-of-Balance, (a) the Sommer Trust and its affiliates
shall vote their respective Holdings Common Membership Interests and cause
Gaming Enterprises to vote its Holdings Common Membership Interests so that
(taking into account Holdings Common Membership Interests held by London
Clubs or its affiliates) London Clubs controls fifty percent of the voting
power of Gaming Holdings, and (b) the Board of Managers for Gaming Holdings
and Gaming was expanded from the then-current five Board members to six and
the number of Board Members London Clubs designated was increased from two to
three. Notwithstanding the change to increase London Clubs' voting power and
the increase in the number of board members, the supermajority provisions
contained in the Gaming Holdings' Operating Agreement which require the
approval of the holders of at least 80% of the Gaming Holdings Common
Membership Interests remain unaffected by this agreement.
5. RELATED PARTY TRANSACTIONS AND GUARANTEES
LAND CONTRIBUTION AND RESTRICTED LAND
As discussed in Note 1, both Sommer Enterprises and Gaming
Enterprises contributed land to the Company. The land was originally owned by
AHL, a related party under common control, and therefore the land has been
recorded at its carryover basis. In addition, the land was subject to certain
indebtedness which was paid by the Company on the date of the contribution.
The indebtedness exceeded the carryover basis of the land and therefore
resulted in a negative contribution by Sommer Enterprises.
The carryover basis of the land was approximately $40.25 million,
but a portion of the land has been classified as restricted land due to a
requirement to transfer the land to Aladdin Bazaar, LLC. Aladdin Bazaar, LLC
is owned effectively 37.5% by the Sommer Trust. Aladdin Bazaar, LLC is
currently constructing and will operate the Mall Project. The Mall Project is
expected to be an integral part of the Aladdin entertainment complex. The
carryover basis of the land was allocated to the Mall Project based on an
appraisal of the entire land parcel. The Company expects to transfer the land
before the end of 1999.
PURCHASE OF RESTRICTED MEMBERSHIP INTERESTS
Certain members of the Company's executive management have purchased
unvested restricted membership interests, in the aggregate, of 4.75% of the
Company. Except for Mr. Goeglein, these membership interests will vest 25% on
the opening of the Aladdin and 25% upon the expiration of the term of the
executive's employment agreement. If Gaming continues to employ the executive
after the expiration of the employment agreement, 25% of the interest will
continue to vest on each anniversary of the Aladdin opening date until such
interests are fully vested. After the term of the employment agreement, if
Gaming does not continue to employ the executive, other than for Cause (as
defined), or if the officer no longer continues his employment for Good Reason
(as defined), only an additional 25% of the interest vests. Mr. Goeglein's
membership interests become fully vested at the earlier of July 1, 2002 or the
date on which such interests become publicly traded, conditioned upon Mr.
Goeglein's continued relationship with Gaming. As of December 31, 1998, none of
these membership interests had vested.
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<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment contracts with five members
of its senior management. The terms of these agreements provide for an
aggregate annual amount of approximately $1.5 million, plus any bonuses
granted by the Board of Directors and based on relevant criteria and
performance standards. The agreements have an initial duration of between
four years and five years and six months. All agreements were entered into
during 1997. One agreement additionally provides for the individual to be
retained as a consultant for $100,000 per year for 5 years after the initial
term.
GAI, LLC CONSULTING AGREEMENT
Gaming has entered into a consulting agreement with GAI, LLC, a
Nevada limited liability company, 100 percent beneficially owned by Gaming's
Chief Executive Officer. This agreement requires Gaming to pay to GAI, LLC a
retainer of $12,500 per month until June 30, 2002 for remaining on call to
provide services and expertise.
THE LONDON CLUB MANAGEMENT AGREEMENT
Gaming, London Clubs and LCNI are parties to a management agreement
which relates to the operations to be managed by London Clubs ("The London
Club"). Under this agreement, London Clubs has agreed to guaranty the
obligations of LCNI. In consideration for the services to be furnished by
LCNI under the management agreement, Gaming will pay to LCNI a
performance-based incentive fee. This fee will be calculated based on a range
of percentages applied to certain thresholds of The London Club EBITDA
(defined as gross revenue attributable to The London Club, less all costs and
expenses directly attributable to The London Club).
COMPLETION GUARANTY AND KEEP-WELL AGREEMENT
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 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 guaranty is not subject to any
maximum dollar limitations. In addition, AHL, London Clubs and Bazaar
Holdings (collectively, "Sponsors") have entered into an agreement
("Keep-Well Agreement") in favor of the Lenders under the Bank Credit
Facility. The Keep-Well Agreement requires the Sponsors to make certain
quarterly cash equity contributions to Gaming beginning with the commencement
of operations if Gaming fails to comply with the minimum fixed charge
coverage ratio set forth in the Bank Credit Facility. Under the Keep-Well
Agreement, the Sponsors are not required to contribute an aggregate of more
than $150.0 million to Gaming ($30.0 million in any one fiscal year), and are
not required to contribute any amounts to Gaming on or after the earlier of
the date on which Gaming complies with all of the financial covenants set
forth in the Credit Agreement for six consecutive quarterly periods or the
date on which the aggregate outstanding principal amounts of the Credit
Agreement are reduced below certain amounts.
The Sommer Trust, London Clubs, Bazaar Holdings and the Bank of Nova
Scotia, as administrative agent for the Lenders, have entered into the First
Amendment to the Guaranty of Performance and Completion, dated as of April 5,
1999 and effective March 10, 1999 ("First Amendment to the Bank Completion
Guaranty"). The First Amendment to the Bank Completion Guaranty requires that
the Sommer Trust, London Clubs and Bazaar Holdings jointly and severally
guarantee that Gaming maintains the minimum Net Worth required by the Second
Amendment to the Credit Agreement. On March 30, 1999, the Sommer Trust and
London Clubs agreed that if either party is required to contribute more than
its proportionate share of any amounts necessary for Gaming to maintain the
revised Net Worth as required in the Second Amendment to the Credit
Agreement, then the party who contributes more than its proportionate share
will be deemed to have made a recourse loan to the party who contributes less
than its proportionate share in the amount not funded by such party. The
recourse loan will bear
14
<PAGE>
interest at 20% per annum and will be payable by a transfer at par value of
the corresponding amount of the Holdings Common Membership Interests held
directly by the party who did not contribute its proportionate share. Until
the recourse loan is paid, the party who contributed more than its
proportionate share will have a security interest and continuing lien in said
Holdings Common Membership Interests.
During 1998, London Clubs received a fee of $2.65 million for its
obligations under the Keep-Well Agreement and in addition is entitled to an
annual fee of 1.5%, payable in arrears, of the Company's annual average
indebtedness with respect to a $265.0 million portion of the Bank Credit
Facility, which is supported by the Keep-Well Agreement. Such fees accrue
from the closing date of the Bank Credit Facility and are payable from
available cash flow after the opening of the Aladdin. As of December 31,
1998, the Company had accrued approximately $3.4 million in Keep-Well fees to
London Clubs, which is reported in the Balance Sheet as Related Party
Payables. Additionally, the Company agreed to reimburse approximately $2.8
million to London Clubs for certain expenses incurred relating to the
Aladdin; however, in November 1998, London Clubs agreed to defer the payment
of approximately $189,000 of this reimbursement until the Main Project Budget
under the Credit Agreement is In Balance (as defined in the Credit
Agreement). As of December 31, 1998, London Clubs received approximately $2.4
million of this $2.8 million reimbursement obligation.
In consideration for certain expenses incurred by the Sommer Trust
prior to February 26, 1998, relating to the management and coordination of
the development of the Aladdin, the Company reimbursed $3.0 million to the
Sommer Trust on February 26, 1998. In addition, Gaming will reimburse certain
ongoing out-of-pocket expenses of the Sommer Trust relating to the
development of the Aladdin, not to exceed $0.9 million. In November 1998, the
Sommer Trust agreed to defer such reimbursement until the Main Project Budget
under the Credit Agreement is In Balance (as defined in the Credit
Agreement). As of December 31, 1998, the Sommer Trust had received
approximately $3.3 million of the total $3.9 million reimbursement.
PAYMENT OF MUSIC INDEBTEDNESS
During 1998, the Sommer Trust, the approximately 72% beneficial
owner of the Company, paid approximately $260,000 to certain trade creditors
on behalf of Aladdin Music and Mr. Sommer, the Company's Chairman of the
Board, individually paid $500,000 to a trade creditor on behalf of Aladdin
Music. Further, during the first quarter of 1999, the Sommer Trust paid
approximately $747,000 to a trade creditor on behalf of Aladdin Music. On or
about April 9, 1999, the Sommer Trust and London Clubs contributed an
additional $766,000 and $504,000, respectively, to the Company, which amounts
were utilized to extinguish the remaining Music Indebtedness. All of the
amounts contributed to the Company or paid on behalf of Aladdin Music will be
accounted for as member equity contributions to the Company.
6. COMMITMENTS AND CONTINGENCIES
ENERGY SERVICES AGREEMENT
The Company entered into an energy services agreement for hot and
cold water and electricity that will be purchased by the Company and the Mall
Project (which would include the tenants of the mall) over initial terms of
20 years.
The central utility plant is being constructed by Northwind Aladdin,
LLC ("Northwind") on land owned by the Company and leased to Northwind. The
central utility plant and equipment (collectively, "Costs") will be owned by
Northwind, which will pay all costs in connection with the construction,
purchase and installation. The current budget for the Costs is $40.0 million.
The charges payable under the energy services agreement will include
a fixed component applied to the
15
<PAGE>
Costs paid by Northwind and reimbursement of operational related costs.
The Company's share of Costs under its energy services agreement is
based on the total Costs (currently budgeted at $40 million) less the amounts
payable by the Mall Project and Aladdin Music, if and when, Aladdin Music
enters into an energy services agreement with Northwind. The Mall Project's
share of Costs is approximately $2.9 million.
If Aladdin Music: (i) does not enter into an energy services
agreement with Northwind prior to the Company incurring Costs under its
energy services agreement; and (ii) the share of Costs assumed by Aladdin
Music are not significant, then the Company intends to account for the total
Costs incurred by Northwind as a capital lease. If however, items (i) and
(ii) above are accomplished prior to the Company incurring any Costs under
its energy services agreement, the Company will account for the energy
services agreement as an executory contract and expense the Costs as incurred.
MALL PROJECT COSTS
In connection with the development of the Mall Project, Aladdin
Bazaar, LLC 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, LLC is obligated to
spend no more than $36.0 million for the parking garage. Therefore, any cost
overruns associated with these items will be borne by the Company. In
addition, the Company is obligated to pay 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 parking
garage; and (ii) the Company's proportionate share of the operating costs
associated therewith.
CONSTRUCTION COSTS
Fluor Daniel, Inc. is the design/builder ("Design/Builder") of the
Aladdin. The Design/Builder has entered into a guaranteed maximum price
design/build contract ("Design/Build Contract") (subject to scope changes)
with the Company to design and construct the Aladdin. During the course of
construction, a number of issues and items have arisen in connection with
various change orders and delay claims submitted with the project and the
scope of the Design/Build Contract. The Company has submitted three disputed
Design/Builder equitable scope change requests ("Claims") to arbitration
("Arbitration") pursuant to the provisions of the Design/Build Contract. The
Company believes that the Claims relate to design and work which is base work
contemplated in the Design/Build Contract and therefore should be included in
the guaranteed maximum price of the Design/Builder. The Design/Builder has
responded to the Company's argument in Arbitration, alleging, among other
things, that the Claims relate to unforeseen conditions, and/or are due to
the actions of the Company, and therefore, the Company is responsible for all
costs and delays associated with the Claims. While the Company intends to
aggressively and vigorously pursue the Claims, and believes that it will
ultimately prevail in arbitration, the Claims are only in the preliminary
stages of the Arbitration process, and therefore, no assurances can be given
with respect to the ultimate outcome. The Design/Builder has presented Claims
in the amount of approximately $4.7 million.
DEVELOPMENT AND CONSTRUCTION OF ALADDIN
The development of the Aladdin commenced during the first quarter of
1998. In March 1999, the Company completed a review of the project budget and
determined that it was appropriate to increase the project budget by
approximately $18.5 million, which amount reflected an increase in
construction costs of approximately $9.5 million and an increase in
pre-opening costs of approximately $9.0 million (collectively, "March 1999
Out-of-Balance").
16
<PAGE>
The Company informed the Sommer Trust and London Clubs of the March
1999 Out-of-Balance and requested that, pursuant to the Bank Completion
Guaranty, the Sommer Trust and London Clubs fund the March 1999
Out-of-Balance. As of March 30, 1999, neither party had funded the March 1999
Out-of-Balance; however, London Clubs advised the Company that it would fund
the full March 1999 Out-of-Balance amount. See Note 7 regarding the
subsequent funding of the March 1999 Out-of-Balance.
The March 1999 funding under the Credit Agreement was to be made,
assuming payment of the March 1999 Out-of-Balance, on or about March 18,
1999. As of March 30, 1999, such funding had not occurred, and the Company
believed the funding would not occur without the payment by London Clubs of
the March 1999 Out-of-Balance. Even if the March 1999 Out-of-Balance was
paid, due to the existing events of default under the Credit Agreement, there
would be no assurances that any funding would be made under the Credit
Agreement or that the Credit Agreement would not be terminated. See Note 7
regarding the subsequent March 1999 funding under the Credit Agreement.
The monthly payment to the Design/Builder of the Aladdin was due
from the Company on or about March 18, 1999. As the Company did not receive
its March 1999 funding under the Credit Agreement, as of March 30, 1999, the
Company had not paid the Design/Builder. Under the Design/Build Contract, ten
days after payment is due, the Design/Builder can issue a written notice of
non-payment and if payment is not made within ten days after such notice,
Design/Builder can stop work on the Project. If the Design/Builder stops work
on the Project, it would cause delays and expenses to the Project which would
have a material and adverse effect on the Company. After expiration of the
applicable time periods, a default under the Design/Build Contract is an
event of default under the Credit Agreement. See Note 7 regarding the
subsequent payment to the Design/Builder.
7. SUBSEQUENT EVENTS
SECOND AMENDMENT TO THE CREDIT AGREEMENT
On April 2, 1999, pursuant to the Bank Completion Guaranty, London
Clubs funded approximately $18.5 million in order to bring the Main Project
Budget "In Balance" (as defined in the Credit Agreement) and the Lenders
funded Gaming's March 1999 funding draw ("March Draw") under the Credit
Agreement. Upon receipt of the March Draw on April 2, 1999, Gaming
immediately paid the outstanding March 1999 payment to the Design/Builder.
The delay in payment to Design/Builder did not effect or delay the project's
construction.
On April 16, 1999, the Lenders approved, effective as of March 10,
1999, the Second Amendment to the Credit Agreement, which cured or waived the
events of default arising form the Music Indebtedness and the requirement to
amend the FF&E Financing documents. Specifically, the Second Amendment to the
Credit Agreement provides: (i) the Music Indebtedness has been paid by or on
behalf of Aladdin Music and this event of default has now been waived by the
Lenders; (ii) a capital contribution in the amount of approximately $18.5
million has been made to bring the Main Project Budget "In Balance;" (iii)
the approximately $6.5 million of letters of credit, which have been
previously posted by the Sommer Trust and London Clubs to fund a prior
increase in the Main Project Budget, have been drawn and the proceeds
deposited in Gaming's account; (iv) amending certain definitions of the
Credit Agreement, including, "Available Funds," "Indebtedness," and "Realized
Savings;" (v) requiring any costs in excess of $36 million for completing the
carpark associated with the project be funded by the Sommer Trust and London
Clubs; (vi) requiring that Gaming maintain a minimum "Net Worth" at the close
of each calendar month, until the end of the fiscal quarter during which the
project opens (and then reverting to the Credit Agreement's requirement to
maintain the minimum Net Worth on a fiscal quarterly basis thereafter), of
not less than $100 million plus 85% of positive Net Income (as defined in the
Credit Agreement); and (vii) other technical amendments to the Credit
Agreement.
17
