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| WYNN > SEC Filings for WYNN > Form 10-K on 15-Mar-2004 | All Recent SEC Filings |
15-Mar-2004
Annual Report
The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements. See "Forward-Looking Statements" in Part I, Item. 1.
Overview
In June 2000, the Company acquired the Desert Inn assets from Starwood Hotels & Resorts Worldwide, Inc. and ceased operations of the Desert Inn after approximately ten weeks. The Company demolished some of the buildings that constituted the Desert Inn in anticipation of the construction of Wynn Las Vegas. The remaining structures have, to date, been utilized as offices by the Company, however we are currently exploring the potential development of the land upon which these structures reside. Since the Company ceased operating the Desert Inn, our efforts have been devoted principally to the development activities described below with respect to Wynn Las Vegas and Wynn Macau. In addition, the financial position and operating results of World Travel, LLC and Las Vegas Jet, LLC which comprise principally the ownership and operation of a corporate aircraft, are included in the Company's financial statements. Moreover, we continue to operate an art gallery displaying works from The Wynn Collection, which consists of artwork from the personal art collection of Stephen A. and Elaine Wynn. Through June 2002, we also operated the golf course located on the site of the Desert Inn.
Our activities have included the design, development, financing and construction of Wynn Las Vegas and applying for certain permits, licenses and approvals necessary for the development and operation of Wynn Las Vegas. We are constructing and plan to operate Wynn Las Vegas as part of a world-class destination casino resort which, together with the new golf course located behind the hotel, will occupy approximately 192 acres of a 212-acre parcel of land on the Las Vegas Strip in Las Vegas, Nevada. Construction of Wynn Las Vegas began with groundbreaking in October 2002 and we expect Wynn Las Vegas to commence operations in April 2005. The budget for Wynn Las Vegas is approximately $2.4 billion. We expect to complete the project on time and on budget.
We have funded approximately $1.1 billion of project costs through December 31, 2003 with equity contributions and debt. Costs still to be incurred are approximately $1.3 billion. A majority of these costs have been committed or contracted for. We currently have more than $1.1 billion available under our existing credit agreements and approximately $220 million of long-term restricted cash available for the project.
The overall scope and general design of Wynn Las Vegas is complete and the construction of the project is tracking on schedule and within budget. For the purpose of managing the design, procurement and construction of Wynn Las Vegas, the project is divided into several design and construction components. We have made significant progress towards constructing and developing Wynn Las Vegas, including:
• Construction of the 45-story high-rise core and shell is
substantially complete, with the expected completion of the top
floor in March 2004. Exterior glass has been installed through
the 36th floor.
• The public areas including the casino, are in various stages of construction. Interior framing and drywall installation continues
and the central power plant is scheduled to go online in April
2004.
• Construction of the Aqua Theater showroom continues to progress
on schedule. Excavation, foundation, erection of the steel
exterior frame and the pool walls are complete. Completion of
the Aqua Theater showroom is expected in the fourth quarter of
2004.
• The hotel parking garage is substantially complete and is
currently used for parking by construction personnel.
• Construction on the fairway villas, consisting of eighteen luxury suites, is under way. The building structure has been completed
and progress continues on the interior framing and drywall
installation.
• Construction of the golf course is proceeding according to
schedule, with completion expected prior to the opening of Wynn
Las Vegas. Grassing is complete for ten of the eighteen holes.
Rough grading and shaping continues for the remaining holes.
Work continues on the streams and lakes.
• Construction of the lake-mountain feature continues. Internal
access tunnels for this feature have been completed and equipment
housing and elevator columns are under construction.
Construction is proceeding in accordance with the overall scope and general design of Wynn Las Vegas, but we continue to evaluate and refine certain elements of the project design. We expect to implement certain project design changes that will not significantly increase the project cost or extend the construction schedule. We are also actively exploring certain additions on the Wynn Las Vegas site as well as the development of our adjacent parcel of approximately 20 acres fronting the Strip. These additional developments might be initiated before the completion of Wynn Las Vegas. There are significant risks associated with any major construction project, and unexpected developments may occur; therefore, we cannot assure you that the funds available will be sufficient for the construction, development and opening of Wynn Las Vegas or that it will be completed by April 2005. Wynn Las Vegas will also be required to obtain a state gaming license and county gaming and liquor licenses before it is able to fully commence operations.
On June 24, 2002, Wynn Macau, S.A. entered into a 20-year concession agreement with the government of Macau granting Wynn Macau, S.A. the right to construct and operate one or more casinos in Macau. The concession agreement obligates Wynn Macau, S.A. to invest no less than a total of 4 billion patacas (approximately US $500 million at the December 31, 2003 exchange rate) in Macau-related projects by June 2009, and to commence operations of Wynn Macau no later than December 2006. The development of Wynn Macau is subject to a number of uncertainties, including risks associated with doing business in foreign locations and risks associated with Macau's developing gaming regulatory framework. If Wynn Macau, S.A. does not invest 4 billion patacas by June 2009, it is obligated to invest the remaining amount in projects related to its gaming operations in Macau that the Macau government approves, or in projects of public interest designated by the Macau government. We have obtained the services of architects and designers and have begun preliminary discussions to arrange the additional financing that would be required to complete Wynn Macau. Wynn Macau, S.A. will not finalize any lease for land for any casino or begin construction or operation of any casino in Macau until a number of objectives and conditions are met, including: 1) obtaining sufficient financing to commence construction of Wynn Macau, 2) obtaining the ability to extend credit to gaming customers and enforce gaming debts in Macau, and 3) in the case of commencing operations only, obtaining certain relief related to Macau's tax regulations. In February 2004, the necessary legislative and regulatory changes with respect to obtaining the ability to extend credit and enforce gaming debts in Macau were introduced in the Macau Legislative Assembly. Although we expect the legislation to be enacted in the first or second quarter of 2004, we cannot assure you that such proposed legislative and regulatory changes will be enacted. In addition, we cannot assure you that we will be able to obtain the relief related to Macau's tax regulations or obtain sufficient financing for the project.
As of December 31, 2003, Wynn Macau was owned 82.5% by the Company through a series of wholly-owned and partially owned domestic and foreign subsidiaries, none of which is a guarantor of, or otherwise restricted by, the Notes, the Debentures or the other debt facilities related to Wynn Las Vegas.
Results of Operations
As is customary for a development stage company, the Company has not commenced principal operations and therefore revenues are not significant. Consequently, the Company has incurred losses in each period from inception to December 31, 2003. Management expects these losses to continue and increase until planned principal operations have commenced. These losses will grow due to increasing pre-opening expenses as the Wynn Las Vegas project nears completion. The acceleration of these costs is expected and was included in the project budget. The Company does not expect that its operating results prior to opening Wynn Las Vegas and Wynn Macau will be indicative of operating results thereafter.
We intend to continue our operation of the art gallery (admissions and retail revenues) and the corporate aircraft once our principal operations have begun. We expect that the revenues associated with these businesses
will be immaterial compared to the revenues that will be associated with the lodging, gaming, dining and entertainment operations of our casino resorts.
Results of operations for the year ended December 31, 2003 compared to the year ended December 31, 2002
The Company's development operations resulted in a net loss for the year ended December 31, 2003, of approximately $48.9 million, a $17.2 million or 54% increase over the net loss of approximately $31.7 million for the year ended December 31, 2002, due to increased development activities.
Total revenues for the year ended December 31, 2003, of approximately $1.0 million decreased approximately $141,000 or 12% from total revenues of approximately $1.2 million for the year ended December 31, 2002. The Company sold its original aircraft in February 2002 and purchased a new aircraft concurrent with the acquisition of World Travel, LLC and Las Vegas Jet, LLC in May 2002. The new aircraft is not licensed for charter services; consequently, charter revenues, which now consist solely of fees charged for personal usage by certain executive officers, have decreased significantly, thus decreasing aircraft revenues by approximately $254,000 or 40% to $375,000 for the year ended December 31, 2003 from $629,000 during the year ended December 31, 2002. Offsetting the decrease in aircraft revenues are increases in revenues from the art gallery and the retail shop of approximately $38,000 and $75,000, respectively, due to increased patronage.
Total expenses for the year ended December 31, 2003 increased approximately $18.8 million, or 55% to $54.4 million, as compared to $35.6 million for the year ended December 31, 2002 primarily due to an approximately $21.2 million or 84% increase in pre-opening costs to $46.3 million for the year ended December 31, 2003 from $25.1 million for the year ended December 31, 2002, offset by a decrease in depreciation and amortization expenses of approximately $3.2 million from approximately $8.9 million for the year ended December 31, 2002 to approximately $5.7 million for the year ended December 31, 2003. The increase in pre-opening costs, which consist primarily of salaries and wages, including non-recurring employee separation expenses of approximately $1.4 million, and consulting and legal fees, is directly attributable to an increase in pre-opening activities as compared to the same period in the prior year. We expect pre-opening costs to continue to increase as development of Wynn Las Vegas, and Wynn Macau pre-development activities, progress. The decrease in depreciation and amortization expenses is a result of most current buildings and improvements becoming fully depreciated in June of 2003.
Other income/(expense)—net for the year ended December 31, 2003, decreased by approximately $507,000 to income of approximately $1.3 million from approximately $1.8 million of income during the year ended December 31, 2002. Interest expense for the year ended December 31, 2003 increased approximately $7.1 million to approximately $9.0 million or 376% over the interest expense of approximately $1.9 million for the year ended December 31, 2002, due primarily to the commitment fees related to certain of the unused outstanding debt facilities entered into in October 2002. Offsetting the increase in interest expense is an increase in interest income for the year ended December 31, 2003 of approximately $6.6 million to approximately $10.3 million or 178% over interest income of approximately $3.7 million for the year ended December 31, 2002, as a result of the significant increase in invested cash from the net proceeds from equity and debt financing activity.
Results of operations for the year ended December 31, 2002 compared to the year ended December 31, 2001
The Company's development operations resulted in a net loss for the year ended December 31, 2002, of approximately $31.7 million, a 79% increase over the net loss of approximately $17.7 million for the comparable year ended December 31, 2001, due to increased development activities.
Total revenues for the year ended December 31, 2002, were nearly consistent with the year ended December 31, 2001. The Company sold its original aircraft in February 2002 and purchased a new aircraft concurrent with the acquisition of World Travel, LLC and Las Vegas Jet, LLC in May 2002. The new aircraft was not licensed
for charter services; consequently, charter revenues subsequent to the new aircraft purchase consisted solely of fees charged for personal usage by officers of the Company, and therefore decreased by $448,000 or 42% to $629,000 in 2002 from $1.1 million in 2001. Offsetting the decrease in aircraft revenues are increases in revenues from the art gallery and the retail shop, which were opened in November 2001, of $244,000 and 210,000, respectively.
Total expenses for the year ended December 31, 2002 increased approximately $14.3 million, or 68%, as compared to the year ended December 31, 2001 primarily due to an approximately $13.3 million increase in pre-opening costs, a loss from incidental operations of approximately $700,000, and approximately $771,000 of increased depreciation expense offset by the absence of facility closure expenses of $373,000 relating to the 2001 closure of the Desert Inn. The increase in pre-opening costs, which consist primarily of salaries and wages and consulting and legal fees, was directly attributable to an increase in pre-opening activities as compared to the same period in the prior year. Depreciation expenses increased primarily due to the addition of the new aircraft in May 2002, while incidental operations incurred a loss due to the closure of the golf course in summer 2002.
Other income—net for the year ended December 31, 2002 decreased approximately $513,000 from the year ended December 31, 2001, primarily as a result of an approximately $1.3 million increase in interest income from 2002 to 2001, offset by an approximately $1.9 million increase in interest expenses. Higher interest income is attributable mainly to the significant increase in cash from the net proceeds from equity and debt financing activity which took place in the fourth quarter of 2002, while increased outstanding debt resulting from the aircraft purchase in May 2002 and subsequent refinancing from the FF&E Facility increased the interest expense. See "Liquidity and Capital Resources" below.
Certain trends that may affect development activities and future results of operations
In the near term, our development activities may be impacted by various economic factors, including, among other things, the availability and cost of materials, the availability of labor resources, interest rate levels and, specifically in connection with Wynn Macau, foreign exchange rates and legislative and regulatory issues relating to gaming and income taxes. The strength and profitability of our business after our casinos open will depend on consumer demand for hotel casino resorts in general and for the type of luxury amenities that Wynn Las Vegas and Wynn Macau will offer. Adverse changes in consumer preferences, discretionary income and general economic conditions as well as fears of recession, reduced consumer confidence in the economy, the possibility of continued terrorist activities in the United States and elsewhere, the war in Iraq and other military conflicts in the Middle East and a resurgence of SARS or another infectious disease, could reduce customer demand for the products and services we will offer, thus imposing practical limits on pricing and harming our operations.
In addition, a Nevada statute enacted in the second quarter of 2003 significantly increased, among other things, gaming taxes by 0.5%, and instituted a business payroll tax of 0.65% on all wages. These fee and tax increases will increase our previously estimated tax liabilities and reduce our previously estimated cash flows and net income accordingly.
Liquidity and Capital Resources
Material Transactions Affecting Liquidity and Capital Resources
Since Valvino's (Wynn Resorts' predecessor) inception on April 21, 2000, there have been a number of transactions that have had a significant impact on the Company's liquidity. Our operations have required substantial capital investment for the acquisition of the land on which Wynn Las Vegas will be located and for development of Wynn Las Vegas and Wynn Macau.
Capital Contributions and Distributions
Stephen A. Wynn organized Valvino and initially was its sole member. Between April of 2000 and September of 2000, Mr. Wynn made equity contributions to Valvino in an aggregate amount of approximately $220.7 million. On June 15, 2000, Mr. Wynn loaned Valvino $100 million at an interest rate of 7.875% per year.
In July 2000, Valvino used proceeds from a $125 million loan agreement with Deutsche Bank Securities Inc., as lead arranger, and Bankers Trust Company, as administrative agent, to make an approximately $110.5 million equity distribution to Mr. Wynn. At the time of this distribution, Mr. Wynn was the only member of Valvino.
On October 3, 2000, Aruze USA made a contribution of $260 million in cash ($250 million net of finders' fee) to Valvino in exchange for 50% of the membership interests in Valvino and was admitted as a member of Valvino. Mr. Wynn was designated as the managing member of Valvino. On October 3, 2000, $70 million of Mr. Wynn's loan was repaid out of the proceeds of this capital contribution and on October 10, 2000, the Deutsche Bank loan discussed above was repaid in full. The remaining approximately $32.3 million balance of Mr. Wynn's loan, including accrued interest, was converted to equity as a member contribution.
On April 16, 2001, Baron Asset Fund, a Massachusetts business trust, made a contribution of $20.8 million in cash ($20 million net of finders' fees) to Valvino in exchange for approximately 3.7% of the membership interests in Valvino and was admitted as a member of Valvino. Immediately following the admission of Baron Asset Fund, Mr. Wynn and Aruze USA each owned approximately 48.2% of the membership interests in Valvino.
In April 2002, Mr. Wynn, Aruze USA and Baron Asset Fund each made the following further capital contributions to Valvino:
• Mr. Wynn contributed approximately $32 million in cash plus his
90% interest in Wynn Macau, which in June 2002 entered into a
concession agreement with the government of Macau permitting it
to construct and operate one or more casinos in Macau. The $32
million contribution was comprised of approximately $22.5 million
of cash deposited in a Macau bank account which Mr. Wynn assigned
to Valvino, Mr. Wynn's right to be reimbursed for approximately
$825,000 advanced to Wynn Macau, S.A. and an additional $8.6
million in cash. Mr. Wynn's 90% interest in Wynn Macau, the
principal asset of which was a provisional license to negotiate a
concession agreement with the Macau government, had no historical
cost basis. This interest was valued at approximately $56 million
by the parties to the negotiation of Mr. Wynn's contribution of
his interest. For financial statement purposes, as a combination
of entities under common control, the contribution of Mr. Wynn's
90% interest in Wynn Macau was recorded at carryover basis (with
the primary asset recorded in the financial statements being the
approximate $22.5 million of cash) rather than fair value.
However, Mr. Wynn's resulting 47.5% ownership interest in
Valvino, after these contributions, reflects the fair value of
his investment in Wynn Macau, S.A. relative to the fair value of
the contributions from Aruze USA and Baron Asset Fund;
• Aruze USA contributed an additional $120 million in cash; and
• Baron Asset Fund contributed an additional approximately $20.3
million in cash.
Immediately following these additional capital contributions, Mr. Wynn and Aruze USA each owned 47.5% of the membership interests and Baron Asset Fund owned 5% of the membership interests in Valvino. The percentage of membership interests held by Baron Asset Fund were held by it on behalf of two series of Baron Asset Funds: (1) approximately 3.6% of the membership interests in Valvino for the Baron Asset Fund Series, and (2) approximately 1.4% of the membership interests in Valvino for the Baron Growth Fund Series. Neither Mr. Wynn nor Aruze USA increased their relative ownership interests as a result of the April 2002 capital contributions.
On June 24, 2002, the Kenneth R. Wynn Family Trust contributed $1.2 million in cash to Valvino in exchange for 0.146% of the outstanding membership interests in Valvino.
On September 24, 2002, all the members of Valvino contributed 100% of the membership interests in Valvino to the Company in a tax-free exchange for 40,000,000 shares of the Company's common stock, making Valvino and its subsidiaries a wholly-owned subsidiary of the Company.
Acquisitions
On June 22, 2000, Valvino acquired the Desert Inn from Starwood Hotels & Resorts Worldwide, Inc., including the Desert Inn golf course and some, but not all, of the residential lots located in the interior of and around the golf course, for approximately $270 million in cash. In connection with that transaction, Valvino and its subsidiaries also acquired approximately 985 acre-feet of certificated water rights. In addition to acquiring the assets of the Desert Inn, Valvino assumed most of its liabilities, and, to the extent assignable, all of its contracts. Valvino later acquired all of the remaining lots located in the interior of, and some of the remaining lots around, the golf course for a total of $47.8 million, bringing the size of the parcel to approximately 212 acres. On August 28, 2000, Valvino closed the Desert Inn and, in June of 2002, Valvino closed the golf course at the site. Since then, Valvino has been engaged primarily in the development of Wynn Las Vegas.
On April 1, 2001, the Company acquired Kevyn, LLC, a previously unconsolidated affiliate which was wholly owned by Mr. Wynn and whose principal asset was an airplane, for approximately $10 million. The acquisition was treated as a reorganization of entities under common control. In accordance with Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations", the assets and liabilities acquired have been recorded at the carrying value at the time of the acquisition and the operating results of Kevyn, LLC are included in the operating statements of the Company from the earliest period presented. As a result, the previously separate historical financial position and results of operations of Kevyn, LLC are combined with the financial position and results of operations of the Company for all periods presented.
Additionally, effective June 28, 2001, the Public Utilities Commission of Nevada approved the transfer of ownership of Desert Inn Water Company, also a previously unconsolidated affiliate and wholly owned company of Mr. Wynn, to the Company. As the Desert Inn Water Company consisted entirely of all of the shares of Desert Inn Improvement Company whose assets primarily consisted of water rights, this transaction was treated as an acquisition of assets for financial reporting purposes. The Company exchanged the receivable from the Desert Inn Water Company in this acquisition, which was equivalent to the fair market value of the water rights of $6.4 million.
In May 2002, the Company acquired World Travel, LLC and Las Vegas Jet, LLC (entities previously wholly-owned by Mr. Wynn). The acquisitions were accounted for as reorganizations of entities under common control. Accordingly, the assets and liabilities of these entities have been recorded at the carrying value at the time of the acquisition and the operating results of the entities are included in the operating statements of the Company from the earliest period presented. As a result, the previously separate historical financial position and results of operations of World Travel, LLC and Las Vegas Jet, LLC are combined with the financial position and results of operations of the Company for all periods presented.
Financings
On October 25, 2002, Wynn Resorts completed the initial public offering of 34,615,000 shares of its common stock at a price of $13 per share. The common stock trades on the NASDAQ National Market under the symbol "WYNN". Stephen A. Wynn, Chairman of the Board, CEO and a principal stockholder of Wynn Resorts, and Aruze USA, another principal stockholder of Wynn Resorts, collectively purchased approximately 11,150,000 of these shares directly from the Company at the $13 per share price. Total proceeds of approximately $450 million were reduced by underwriting discounts and commissions of approximately $19.5
million and legal and professional expenses directly incurred with respect to the offering of approximately $4.1 million for net proceeds to the Company of approximately $426.4 million, which will be used to finance construction of Wynn Las Vegas and provide some funds for the additional intended investment in Macau.
Concurrent with the initial public offering, two wholly-owned subsidiaries of the Company (Wynn Las Vegas, LLC and Wynn Capital) issued $370 million aggregate principal amount of the Notes. In addition, Wynn Las Vegas, LLC entered into the Revolver, the Term Loan and the FF&E Facility for additional construction and furniture, fixtures and equipment financing for Wynn Las Vegas. See "Description of Certain Indebtedness" below for additional information.
The Notes were issued for proceeds of approximately $343.3 million net of an original issue discount of approximately $26.7 million. The proceeds were further reduced by approximately $10.1 million of underwriting discounts and commissions and approximately $4.3 million of legal and professional expenses, all of which are capitalized and amortized over the term of the Notes using the effective interest method. Net proceeds were approximately $328.9 million and will be used to finance the development and construction of Wynn Las Vegas, to pay pre-opening expenses and meet debt service obligations.
In addition to the offering costs associated with the initial public offering of the Company's common stock and the issuance of the Notes, approximately $47.3 million of legal and professional expenses were incurred in connection with the Credit Facilities and the FF&E Facility. These expenses are capitalized and amortized over the terms of the respective facilities.
Wynn Resorts has fully and unconditionally guaranteed the payment in full of the Credit Facilities, the FF&E Facility and the Notes on an unsecured basis, but is not directly subject to the restrictive covenants in its subsidiaries' debt facilities. However, if Wynn Resorts grants specified liens to secure other guarantees or indebtedness, it will be required to secure the guarantees of the Credit Facilities and the Notes on a pari passu basis. Wynn Resorts' domestic and foreign subsidiaries related to the Macau opportunity are not guarantors or restricted entities and will not be subject to the covenants in the Notes or the Credit Facilities. In addition, a $30.0 million liquidity reserve account has been established and a special purpose subsidiary of Wynn Las Vegas has been capitalized with $50 million of the equity proceeds and provides a completion guarantee in favor of the lenders under the Credit Facilities and the Notes to secure completion of Wynn Las Vegas. After completion of Wynn Las Vegas, any remaining amounts will be released to the Company.
On November 11, 2002 the underwriters to the initial public offering exercised a 3,219,173 share over-allotment option in full, resulting in additional net proceeds of approximately $38.9 million, net of the underwriting discounts and commissions of approximately $2.9 million.
In connection with the acquisitions of World Travel, LLC and Las Vegas Jet, LLC, the Company partially financed the purchase of a private jet aircraft for $38.0 million with the issuance of a note payable for $28.5 million collateralized by the aircraft. In November 2002, the Company withdrew $38.0 million against the FF&E Facility to repay the note payable secured by the aircraft acquired in connection with the acquisition of World Travel, LLC. The unused portion of the draw will be used for construction of Wynn Las Vegas.
During the second quarter of 2003, we entered into two interest rate swap agreements to hedge the underlying interest rate risk on $825 million of our expected future floating-rate borrowings. See Item 7A—"Quantitative and Qualitative Disclosures About Market Risk" below.
On June 20, 2003, we entered into a strategic business alliance with Socit des Bains de Mer et du Cercle des Etrangers Monaco, a socit anonyme Monegasque organized under the laws of the Principality of Monaco ("SBM") that provides for, among other things, a mutual exchange of management expertise and the development of cross-marketing initiatives between SBM and us. In connection with the strategic alliance, we sold 3,000,000 shares of our common stock to SBM for $45 million in a privately negotiated, all cash transaction.
In return, SBM has agreed, subject to certain exceptions, to refrain from transferring its shares prior to April 1, 2005, and will be entitled to certain registration rights thereafter.
In July 2003, we consummated a private placement under Rule 144A of the Securities Act, of a total of $250 million aggregate principal amount of the Debentures. Approximately $44 million of the $241.3 million net proceeds of the offering after expenses were contributed to a newly formed subsidiary, Wynn Resorts Funding, LLC, which purchased U.S. government securities and is restricted to secure the payment of three years of scheduled interest payments as required by the indenture governing the Debentures.
Expected Capital Resources and Commercial Commitments
At December 31, 2003, the Company had approximately $341.6 million of cash and cash equivalents. In addition, the Company had approximately $400.4 million in restricted cash and investments from the proceeds of the debt and equity financings discussed above and restricted in accordance with the Disbursement Agreement described below, including the $80.0 million restricted for the liquidity reserve account and the completion guarantee as also discussed below. The restricted cash and investments also includes approximately $44.3 million of investments restricted for the payment of the first three years of interest on the Debentures, $2.5 million in cash restricted to collateralize certain construction insurance claims and sales tax deposits. Cash equivalents are comprised of investments in overnight money market funds. Restricted investments are kept in money market funds or relatively short-term, government-backed marketable debt securities as required by the Disbursement Agreement and the indenture governing the Debentures.
As of December 31, 2003, approximately $1.1 billion of the total Wynn Las Vegas project cost of approximately $2.4 billion (including the cost of the land, capitalized interest, pre-opening expenses and all financing fees) had been expended or incurred to fund the design, development and construction, of Wynn Las Vegas. This total spent or incurred was funded primarily from a combination of our cash on hand from contributed capital and proceeds from the initial public offering of the Company's common stock and the Notes. The remaining $1.3 billion of development and construction costs for Wynn Las Vegas are to be funded from the remaining net proceeds of the Notes and additional borrowings under the Credit Facilities and the FF&E Facility. Any delays or change orders with respect to the Wynn Las Vegas project could have a material adverse effect on our liquidity and operations. If we do not complete construction of Wynn Las Vegas by September 30, 2005, the lenders under the agreements governing our Credit Facilities and FF&E Facility and the holders of the Notes will have the right to accelerate the indebtedness thereunder and exercise other rights and remedies against Wynn Las Vegas and the guarantors of the indebtedness. Any such acceleration would have a material adverse effect on us.
The following table summarizes certain information regarding our expected long-term indebtedness and material commercial commitments based upon our best estimate at December 31, 2003 of our expected long-term indebtedness and commercial commitments (amounts in millions):
Payments Due By Period
----------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
Long-Term Indebtedness Total 1 Year Years Years Years
-------------------------------------------- ---------- ----------- ------- --------- -------
FF&E facility(1) $ 38.0 $ — $ 38.0 $ — $ —
Second mortgage notes 370.0 — — — 370.0
Convertible subordinated Debentures(2). 250.0 — — — 250.0
Other long-term obligations(3) 0.3 0.1 0.1 0.1 —
-- ------- -- -------- - ----- - ------- - -----
Total long-term indebtedness $ 658.3 $ 0.1 $ 38.1 $ 0.1 $ 620.0
-- ------- -- -------- - ----- - ------- - -----
Amount of Commitment Expiration Per Period
----------------------------------------------------------------
Total
Amounts Less Than 1 to 3 4 to 5 After
Other Commercial Commitments Committed 1 Year Years Years 5 Years
-------------------------------------------- ---------- ----------- ------- --------- -------
Revolving credit facility(4) $ 726.2 $ — $ — $ 726.2 $ —
Delay draw term loan facility(5) 250.0 — 50.0 100.0 100.0
FF&E facility(1) 150.5 — 20.9 94.3 35.3
Construction contracts(6) 663.9 562.5 101.4 — —
Macau concession agreement(7) 500.0 — — — 500.0
Employment agreements(8) 71.5 21.2 37.4 12.9 —
Other commercial commitments(9) 943.3 106.3 298.0 305.0 234.0
-- ------- -- -------- - ----- - ------- - -----
Total commercial commitments $ 3,305.4 $ 690.0 $ 507.7 $ 1,238.4 $ 869.3
-- ------- -- -------- - ----- - ------- - -----
(1) As of December 31, 2003, we have borrowed approximately $38.0 million under the FF&E Facility. Approximately $28.5 million of these borrowings were used to refinance a loan, secured by
a mortgage on World Travel's Bombardier Global Express
aircraft, made by Bank of America, N.A. to World Travel, LLC,
a wholly owned subsidiary of Wynn Las Vegas. The remaining
$9.5 million of currently borrowed funds and the unused
portion of the $188.5 million facility are, or are expected,
to be used for furniture, fixtures and equipment to be used
at Wynn Las Vegas.
(2) Represents the full obligation under the Debentures assuming
no conversion to common stock. The Debentures are
convertible, at the holders' option, into a maximum of
10,869,550 shares of our common stock (subject to adjustment
as provided in the indenture governing the Debentures),
which is equivalent to a conversion price of $23.00 per
share.
(3) Approximately $300,000 represents the amount owing pursuant to an annuity issued by ITT Sheraton in connection with the
acquisition of a parcel of land in 1994. The annuity bears
interest at an annual rate of 8% and requires payment of
$5,000 per month until February 2009. The Company assumed the
obligations under the annuity in connection with its
acquisition of the Desert Inn.
(4) As of December 31, 2003, we have not borrowed any amounts
under the Revolver, however, we anticipate that drawing
approximately $726.2 million to fund the design, construction,
development, equipping and opening of Wynn Las Vegas, assuming
that Wynn Las Vegas is completed on schedule. An additional
$23.8 million is available under the Revolver, subject to
certain limitations. Once the total extensions of credit under
the Revolver equal or exceed $200 million, lead arrangers
holding a majority of the commitments of the lead arrangers
under that facility will have the right to convert between
$100 million and $400 million of the outstanding revolving
loans into term loans on the same terms and conditions as the
term loans under the delay draw term loan facility or on such
other terms as we and the administrative agent and syndication
agent can agree. In addition, the Revolver will provide for a
cash flow sweep each year that will reduce the commitment
under that facility by the amount of the cash swept.
(5) As of December 31, 2003, we have not borrowed any amounts
under the Term Loan, however we anticipate drawing the
entire available balance in the future for additional
funding of the construction and development of Wynn Las
Vegas. Term Loans will be repayable in quarterly
installments from the first full fiscal quarter after
completion of Wynn Las Vegas until the seventh anniversary
of the closing in amounts to be determined in accordance
with the terms of the Credit Facilities.
(6) Represents obligations under our signed construction contracts with Marnell Corrao, Wadsworth Golf Construction Company, Bomel Construction Company, Inc. and certain other construction companies in connection with the construction of Wynn Las Vegas. We expect to satisfy some of the payment
obligations under these contracts using amounts borrowed
under the long-term indebtedness shown above.
(7) The Macau concession agreement requires Wynn Macau to invest 4
billion Patacas (approximately $500 million) on one or more
casino projects over a seven-year period. Wynn Macau is
obligated to operate its first casino in Macau by December
2006. The full contractual commitment is shown as having to be
made after five years, but the timing of the expenditures is
subject to change. In addition, contractual obligations are
stated in Macau Patacas and therefore the amount of commitment
as expressed in US dollars may be subject to increases
depending on fluctuations in the foreign rate of exchange.
(8) We have entered into employment agreements with several
executive officers, other members of management, and
certain key employees. These agreements generally have
three to five year terms, typically indicate a base salary
with specified annual increases, and often contain
provisions for guaranteed bonuses. If we terminate certain
executives without "cause" or if certain executives
terminate employment with us for "good reason" following a
"change of control" (as these terms are defined in the
employment contracts), we will pay the executive a
"separation payment" in a lump sum, which typically is
equal to the base salary of the remaining term of the
employment contract plus foregone bonuses, plus certain
other payments. Amounts represent the aggregate
contractual salaries and guaranteed bonuses during the
periods specified in the agreements.
(9) $2.3 million of the total and amounts expiring in less than one
year represents a standby letter of credit for our
owner-controlled insurance program. Remaining amounts for all
periods represent our estimated future interest payments,
including unused commitment fees on unborrowed amounts from our
Credit Facilities and the FF&E Facility, based upon currently
existing commitments, anticipated LIBOR rates based upon
expected yield curves (including the effect of our interest rate
swaps) as well as expected levels of borrowings and the timing
of repayments.
Description of Certain Indebtedness
The following discussion summarizes the material terms of certain material debt agreements to which certain of our subsidiaries are parties. However, this summary is qualified in its entirety by reference to the relevant agreements described herein. References to the "restricted entities" or to the "Notes Guarantors" mean Valvino; Wynn Resorts Holdings; Wynn Design & Development, LLC; World Travel, LLC; Las Vegas Jet, LLC; Desert Inn Water Company, LLC and Palo, LLC and references to the "Notes Issuers" mean Wynn Las Vegas, LLC and Wynn Capital.
Convertible Subordinated Debentures
In July 2003, we sold a total of $250 million aggregate principal amount of the Debentures maturing July 15, 2015 with semi-annual interest payments at 6% beginning January 15, 2004. Approximately $44 million of the net proceeds of the offering were contributed to a newly formed subsidiary, Wynn Resorts Funding, LLC, which purchased U.S. government securities and is restricted to secure the payment of three years of scheduled interest payments as required by the indenture governing the Debentures.
Each $1,000 principal amount of the Debentures is convertible, at each holder's option, into 43.4782 shares of our common stock (subject to adjustment as provided on the indenture governing the Debentures), a
conversion rate equivalent to a conversion price of $23.00 per share. We may redeem some or all of the Debentures for cash on or after July 20, 2007 at prices specified in the indenture governing the Debentures. In addition, the holders may require us to repurchase all or a portion of their Debentures, subject to certain exceptions, following a change of control in the Company. If any holder requires the repurchase of the Debentures, we may elect to pay the repurchase price in cash or shares of our common stock or a combination thereof.
The Debentures are guaranteed by Wynn Resorts Funding, LLC and Wynn Resorts has guaranteed the obligations of Wynn Resorts Funding, LLC. Other than with respect to three years of scheduled interest payments, the Debentures are subordinated unsecured obligations and rank junior in right of payment to all our existing and future senior indebtedness, and equally with any existing and future subordinated indebtedness.
We have filed a shelf registration statement with respect to the resale of the Debentures, the guarantees and the common stock issuable upon conversion of the Debentures which was declared effective by the United States Securities and Exchange Commission on February 2, 2004.
Second Mortgage Notes
On October 30, 2002, the Issuers, issued the Notes maturing November 1, 2010 with semi-annual interest payments at an annual rate of 12% beginning in May 2003. The Notes are unconditionally guaranteed by Wynn Resorts, Limited as the parent company and certain other subsidiary guarantors, are secured by a first priority security interest in the net proceeds of the offering and a second priority security interest in substantially all the assets of the Issuers and certain restricted subsidiaries, and rank senior in right of payment to all of the Issuers' existing and future subordinated indebtedness. In addition, the Notes contain certain affirmative and negative covenants applicable to the Issuers and the restricted entities, including limitations on additional indebtedness, declaration and payment of dividends (see Part I, Item 5—"Market for Registrants Common Equity and Related Stockholder Matters; Dividends"), issuance of preferred stock and equity interests of wholly-owned subsidiaries, certain payments or investments, golf course and Phase II land development, transactions with affiliates, asset sales, sale-leaseback transactions, and various other restrictions as defined in the Indenture. While Wynn Resorts is not subject to a majority of the restrictive covenants in the Indenture, pursuant to the terms of its parent guaranty, if it grants specified liens to secure other guarantees or indebtedness it will be required to grant pari passu liens on the same assets to secure its parent guaranty of the Notes. As of December 31, 2003, the Company is in compliance with all such covenants.
Other than mandatory redemption required by gaming authorities resulting from unsuitable persons, the Issuers will not be required to make mandatory redemption or sinking fund payments. However, if a change of control occurs, the holders of the Notes may require the Issuers to repurchase all or part of the Notes at 101% of the principal amount, plus accrued interest. In addition, after November 1, 2006, the Issuers may elect to redeem all or part of the Notes at the redemption prices below, plus accrued interest on the redemption date, if redeemed during the twelve-month period beginning on November 1 of the years below:
Year Percentage
------------------- ----------
2006 112 %
2007 108 %
2008 104 %
2009 and thereafter 100 %
Credit Facilities
Effective October 30, 2002, Wynn Las Vegas entered into the Credit Facilities for additional construction financing for Wynn Las Vegas. The Credit Facilities are guaranteed by Wynn Resorts as the parent company, Valvino and its subsidiaries, and certain of Valvino's affiliates. While Wynn Resorts is not subject to a majority
of the restrictive covenants in the Credit Facilities, pursuant to the terms of its parent guaranty, if it grants specified liens to secure other guarantees or indebtedness it will be required to grant pari passu liens on the same assets to secure its parent guaranty of the Credit Facilities. The Credit Facilities are also secured by a first priority security interest in a $30.0 million liquidity reserve account as further described below, a first priority pledge of all equity interests in, and a first priority security interest in substantially all the assets of, Wynn Las Vegas, LLC, Wynn Capital and the restricted entities, first mortgages on all real property constituting Wynn Las Vegas, and a second priority security interest on the furniture, fixtures and equipment securing the FF&E Facility described below.
The Revolver and the Term Loan mature in October 2008 and October 2009, respectively. Prior to the opening of Wynn Las Vegas, annual interest is charged on outstanding borrowings at the London Interbank Offered Rate ("LIBOR") plus 4% on the Revolver and LIBOR plus 5.5% on the Term Loan. Subsequent to the opening of Wynn Las Vegas, the rates will be adjusted based upon a leverage ratio. In addition, the Revolver requires quarterly payments on the unused available borrowings at an annual rate of 2%, while the Term Loan requires quarterly payments at an annual rate of 2.5% through December 31, 2002, 3% from January 1, 2003 to June 30, 2003 and 4% thereafter. As required by the Credit Agreement governing the Credit Facilities, Wynn Las Vegas, LLC has obtained interest rate protection through interest rate swaps against increases in the interest rates with respect to $825 million of borrowings under the Credit Facilities.
When borrowings outstanding under the Revolver equal or exceed $200 million, lead arrangers holding a majority of the commitments will have the right to convert $100 million to $400 million of the amounts outstanding to term loans with the same terms and conditions as those made under Term Loan facility.
The Term Loan provides for draws of funds under one or more term loans no more frequently than once per month for 27 months after the closing. Once repaid, term loans may not be reborrowed.
The Notes Issuers and Notes Guarantors are required to comply with several affirmative and negative covenants, including limitations on additional indebtedness, guarantees, dividends, transactions with affiliates, capital expenditures, asset sales and others. There are also several financial covenants including the maintenance of a minimum fixed charge coverage ratio, minimum earnings before interest, taxes, depreciation and amortization ("EBITDA"), total debt to EBITDA and net worth. As of December 31, 2003, the Company is in compliance with all such covenants.
FF&E Facility
Effective October 30, 2002, Wynn Las Vegas entered the FF&E Facility to provide financing and refinancing for furniture, fixtures and equipment to be used at Wynn Las Vegas. The proceeds from the FF&E Facility may also be used to refinance a replacement corporate aircraft, in which case, Wynn Las Vegas, LLC would request the FF&E lenders to increase the total commitment under the FF&E Facility by $10 million to $198.5 million.
In connection with the acquisitions of World Travel, LLC and Las Vegas Jet, LLC, the Company partially financed the purchase of a private jet aircraft for $38.0 million with the issuance of a note payable for $28.5 million collateralized by the aircraft. In November 2002, the Company withdrew $38.0 million against the FF&E Facility to repay the note payable secured by the aircraft acquired in connection with the acquisition of World Travel, LLC. The unused portion of the draw will be used for construction of Wynn Las Vegas.
The FF&E Facility is guaranteed by the same guarantors as the Credit Facilities, on a senior unsecured basis, matures in October 2009, and has substantially the same interest rates and elections as the Revolver discussed above.
Disbursement Agreement
The Company has entered into an agreement (the "Disbursement Agreement") with Deutsche Bank Trust Company Americas, as the bank agent and disbursement agent, Wells Fargo Bank, National Association, as the second mortgage note trustee, and Wells Fargo Bank Nevada, National Association as the FF&E agent, which sets forth the Company's material obligations to construct and complete Wynn Las Vegas, establishes a line-item budget and schedule for its construction and establishes the conditions to, and the relative sequencing of, the making of disbursements from the proceeds of the Notes, the Credit Facilities and the FF&E Facility. The Disbursement Agreement restricts the Company's use of the proceeds of the Notes, the Credit Facilities and the FF&E Facility to only project costs related to Wynn Las Vegas and, subject to certain limitations, corporate overhead and related costs.
In order to facilitate the funding of disbursements in accordance with the Disbursement Agreement, the Company established certain accounts including, but not limited to, the Completion Guarantee Deposit Account and the Liquidity Reserve Account discussed in further detail below, which are pledged to the lenders under the Credit Facilities and, with respect to the secured account holding the proceeds of the Notes, the holders of the Notes. Prior to borrowing any amounts under the Credit Facilities or the FF&E Facility or receiving any disbursements from the secured account holding the proceeds of the Notes, the Company is required to use a substantial portion of the equity offering proceeds and other available funds to commence construction of Wynn Las Vegas. At that point the proceeds of the Notes, other than amounts sufficient to pay interest, will be used; followed thereafter by the proceeds of the Credit Facilities and the FF&E Facility. However, as a condition to borrowing amounts under the Credit Facilities or the FF&E Facility or receiving any disbursements from the secured account holding the proceeds of the Notes, the Company is required to submit evidence acceptable to the third-party construction consultant that construction of Wynn Las Vegas has been completed at the time of such borrowing in accordance with the plans and specifications, on budget and on schedule.
Completion Guarantee and Liquidity Reserve
The Company contributed $50 million of the net proceeds of the equity offering to Wynn Completion Guarantor, LLC, a special purpose subsidiary of Wynn Las Vegas formed in October 2002 to provide a completion guarantee in favor of the lenders under the Credit Facilities and the Notes to secure completion of Wynn Las Vegas. The funds were deposited into a required escrow Completion Guarantee Deposit Account. These funds will gradually be available to fund certain cost overruns, if any, commencing after 50% of the construction work has been completed. After completion of Wynn Las Vegas, any remaining amounts will be released to the Company.
In addition, the Company deposited $30.0 million from the net proceeds of the equity offering into a required escrow Liquidity Reserve Account to secure the completion and opening of Wynn Las Vegas. The lenders under the Credit Facilities have a first priority security interest and the holders of the Notes have a perfected second priority security interest in these funds. These funds will gradually be available to fund certain cost overruns, if any, commencing after 50% of the construction work has been completed. Any amounts remaining upon completion will be used for debt service under the Credit Facilities and the Notes, and if consolidated EBITDA levels permit, to reduce the Revolver.
Financing for the Macau Opportunity
We are continuing work on the design of Wynn Macau, as well as our efforts to lease the land and obtain the financing to be used for Wynn Macau. We have not yet finalized the budget for its construction and development. We have invested approximately $23.8 million in Wynn Macau, S.A. to date, and, in addition, in January 2004, we loaned $5 million to Wynn Macau, S.A., bearing interest at 6.25% and payable on April 14, 2004 (which due date may be extended). We intend to invest additional capital in Wynn Macau, S.A. to enable it to finalize the land lease contract in Macau and repay the $5 million loan. We have additional capital available
from a portion of the net proceeds we received from the initial public offering of our common stock (including as a result of the exercise of the overallotment option in connection therewith) and from the sale of the Debentures. We intend to use the net proceeds from the sale of the Debentures (excluding amounts contributed to Wynn Resorts Funding, LLC) to help finance Wynn Macau and for general corporate purposes, including possibly financing potential future acquisitions or other investments. The minority investors in Wynn Macau are obligated, subject to certain limitations, to make additional capital contributions in proportion to their economic interests (17.5% in the aggregate) to fund the construction, development and other activities of Wynn Macau, S.A. We have obtained the services of architects and designers and have begun preliminary discussions to arrange the additional financing that would be required to complete Wynn Macau. Wynn Macau, S.A. will not finalize any lease for land for any casino or begin construction or operation of any casino in Macau until a number of objectives and conditions are met, including: 1) obtaining sufficient financing to commence construction of Wynn Macau, 2) obtaining the ability to extend credit to gaming customers and enforce gaming debts in Macau and 3) with respect to commencing operations, obtaining certain relief related to Macau tax regulations. In February 2004, legislative changes relating to credit extension and the collection of gaming debts were introduced in the Macau Legislative Assembly. Although we expect the legislation to be enacted in the first or second quarter of 2004, we cannot assure you that any of the proposed legislative changes will be enacted. In addition, we cannot assure you that we will be able to obtain the relief related to Macau's tax regulations or obtain sufficient financing for the project.
At the present time, we have not yet determined the amount or composition of financing that will be required to complete the project. If we decide to raise additional equity at the Wynn Resorts level or at the Wynn Macau, S.A. or intermediary holding company level to fund the Macau opportunity, stockholders would suffer direct or indirect dilution of their interests. Although discussions are ongoing, Wynn Macau, S.A. currently has not received any commitments relating to financing from any third-party. Except for Wynn Resorts, we do not expect financing for any such project to be provided by or through any of the issuers or guarantors of the Notes or any other indebtedness relating to the Wynn Las Vegas project. After construction of Wynn Macau, we intend to satisfy our remaining financial obligations, if any, under our concession agreement through the development of future phased expansions and, possibly, additional casino resorts.
Other Liquidity Matters
New business developments or other unforeseen events may occur, resulting in the need to raise additional funds. For example, we continue to explore opportunities to develop additional gaming or related businesses in Las Vegas or other international or domestic markets, whether through acquisition, investment or development. Any such development could require us to obtain additional financing. We may also decide to conduct any such development directly through Wynn Resorts or indirectly through a line of subsidiaries separate from the Wynn Las Vegas or Wynn Macau, S.A. entities. In addition, Wynn Resorts' articles of incorporation provide that Wynn Resorts may redeem shares of its capital stock, including its common stock, that are owned or controlled by an unsuitable person or its affiliates to the extent a gaming authority makes a determination of unsuitability and orders the redemption, or to the extent deemed necessary or advisable by the board of directors. The redemption price may be paid in cash, by promissory note or both, as required by the applicable gaming authority and, if not, as we elect. Any promissory note that we issue to an unsuitable person or its affiliate in exchange for its shares could increase our debt to equity ratio and will increase our leverage ratio.
Furthermore, if completion of the Wynn Las Vegas project is delayed, then Wynn Las Vegas, LLC's debt service obligations accruing prior to the actual opening of Wynn Las Vegas will increase correspondingly. We are a holding company, with no operations of our own, and our cash flow needs and ability to fund debt service obligations are primarily dependent on our subsidiaries. Following the completion of Wynn Las Vegas, we expect the Wynn Las Vegas entities to fund their operations and capital requirements from operating cash flow and borrowings under the revolving credit facility. We cannot assure you, however, that the Wynn Las Vegas entities' business will generate sufficient cash flow from operations or that future borrowings available to the Wynn Las Vegas entities under the Credit Facilities will be sufficient to enable the Wynn Las Vegas entities to
service and repay their indebtedness and to fund their other liquidity needs. Our subsidiaries, other than Wynn Resorts Funding, LLC with respect to the Debentures, have no obligation to pay any amounts due on Wynn Resorts' indebtedness or to provide Wynn Resorts with funds for its payment obligations on any of its indebtedness. Our subsidiaries currently have no material operations or earnings and the debt agreements of the Wynn Las Vegas entities contain significant restrictions on those entities' ability to distribute funds to Wynn Resorts. We may refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of the indebtedness, including the Credit Facilities, the FF&E Facility, the Notes or the Debentures on acceptable terms or at all.
Critical Accounting Policies and Estimates
The consolidated financial statements of the Company were prepared in conformity with accounting principles generally accepted in the United States of America. Certain of our accounting policies, including the estimated lives of our depreciable assets, our annual evaluation of assets for impairment and the purchase price allocations made in connection with acquisitions, require that management apply significant judgment in defining the appropriate assumptions integral to financial estimates. Judgments are based on historical experience, terms of existing contracts, industry trends and information available from outside sources, as appropriate. However, by their nature, judgments are subject to an inherent degree of uncertainty, and therefore actual results could differ from our estimates. As of, and for the period from inception to December 31, 2003, management does not believe there are any highly uncertain matters or other underlying assumptions that would have a material effect on the statement of financial position or results of operations of the Company if actual results differ from our estimates.
Critical accounting policies currently reflected in the consolidated financial statements primarily relate to expensing pre-opening costs as incurred, capitalizing construction costs, including portions of interest attributable to certain qualifying assets, and other policies related to our development stage status.
During the period of the construction of Wynn Las Vegas, direct costs such as those expected to be incurred for the design and construction of the hotel and casino, the championship golf course and the water-based entertainment production, including interest, are capitalized. Accordingly, the recorded amounts of property and equipment will increase significantly. Depreciation expense related to the capitalized construction costs will not be recognized until the related assets are put in service. Accordingly, upon completion of construction and commencement of operation of Wynn Las Vegas, depreciation expense recognized based on the estimated useful life of the corresponding asset will have a significant effect on the results of our operations.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prohibits the pooling of interests method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142, which was effective for the Company as of January 1, 2002, requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing intangibles as goodwill, reassessment of the useful lives of existing intangibles and ongoing assessments of potential impairment of existing goodwill. As of December 31, 2001, the Company had no goodwill but did have intangible assets consisting of trademarks and water rights with indefinite useful lives. Accordingly, the adoption of this statement on January 1, 2002 did not have a material impact on the Company's consolidated financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to legal obligations associated with the retirement of certain obligations of lessees. This Statement is effective for fiscal years beginning after June 15, 2002. The Company's adoption of SFAS No. 143 on January 1, 2003 did not have a material impact on the Company's consolidated financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The provisions of this Statement are effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 on January 1, 2002 with no material impact on the Company's consolidated financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Among other things, this statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," will now be used to classify those gains and losses. The Company's adoption of this statement did not have a material impact on its consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No.146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. A fundamental conclusion reached by the FASB in this statement is that an entity's commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. The Company's adoption of this statement did not have a material impact on its consolidated financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34." FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued, and requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. A fundamental conclusion reached by the FASB in this interpretation is the exclusion from the liability recognition provisions of guarantees issued between entities under common control or parent or subsidiary guarantees of third party debt on behalf of that parent or subsidiary. Such guarantees, however, are not excluded from the enhanced disclosure provisions. The initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, however the disclosure provisions are effective for financial statements of interim or annual periods ending after December 15, 2002. As a result, the Company adopted the disclosure provisions of FIN No. 45 for its 2002 annual consolidated financial statements, which had no material impact. The Company's subsequent adoption of the recognition and measurement provisions on January 1, 2003, also did not have a material impact upon its consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123." SFAS No.148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 permits companies to continue to apply the intrinsic value based method of accounting for stock-based employee compensation as provided for in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," however it requires that companies that elect to do so, provide specific tabular pro forma disclosures required by SFAS No. 123 in the Summary of Significant Accounting Policies. In addition, SFAS No.148 requires these disclosures in financial reports for interim periods. The Company continues to apply the intrinsic value based method of accounting for stock-based employee compensation as allowed by SFAS No. 148, and therefore adoption of this statement did not have a material impact upon its consolidated financial position or results of operations. However, the Company has provided the required disclosures for the accompanying consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments and hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", by requiring that contracts with comparable characteristics be accounted for similarly to result in more consistent reporting of contracts as either derivatives or hybrid instruments. This statement was effective for contracts entered into or modified after June 30, 2003. The Company adopted SFAS No. 149 on July 1, 2003 with no material impact on the Company's consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for an issuer's classification and measurement of certain financial instruments with characteristics of both liabilities and equity and requires that such financial instruments generally be classified as a liability as those instruments embody obligations of the issuer. This statement was effective for financial instruments entered into or modified after May 31, 2003, and was otherwise effective for most financial instruments included in the scope of the standard beginning the interim period beginning after June 15, 2003. The Company's adoption of SFAS No. 150 on July 1, 2003, had no material impact upon its consolidated financial position or results of operations.
In January 2003, the Financial Accounting Standards Board (FASB) issued FIN 46 (revised December 2003), Consolidation of Variable Interest Entities(VIEs). FIN 46 clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, and establishes standards for determining under what circumstances VIEs should be consolidated with their primary beneficiary, including those to which the usual condition for consolidation does not apply. FIN 46 also requires disclosures about unconsolidated VIEs in which the Company has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to VIEs created after December 31, 2003. The consolidation requirements apply to older entities in the first period ending after March 15, 2004. Certain disclosure requirements apply to all financial statements issued after December 31, 2003. The application of FIN 46 has not and is not expected to have a material impact on the Company financial position or results of operations.
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