As filed with the Securities and Exchange Commission on June 30, 1999
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 1998
Commission file number 0-22794
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SUN INTERNATIONAL HOTELS LIMITED
(Exact name of Registrant as specified in its charter)
Commonwealth of The Bahamas
(Jurisdiction of incorporation or organization)
Executive Offices
Coral Towers
Paradise Island, The Bahamas
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Name of each exchange
Title of each class on which registered
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Ordinary Shares, $.001 par value per share New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report. Ordinary Shares: 33,576,720
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark which financial statement item the Registrant has elected
to follow.
Item 17 |_| Item 18 |X|
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SUN INTERNATIONAL HOTELS LIMITED
TABLE OF CONTENTS
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PART I
Page
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Items 1 & 2 Description of Business and Properties 3
Item 3 Legal Proceedings 22
Item 4 Control of Registrant 22
Item 5 Nature of Trading Market 23
Item 6 Exchange Controls and Other Limitations Affecting Security
Holders 24
Item 7 Taxation 24
Item 8 Selected Financial Data 26
Item 9 Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 9A Quantitative and Qualitative Disclosures About Market Risk 36
Item 10 Directors and Officers of Registrant 36
Item 11 Compensation of Directors and Officers 39
Item 12 Options to Purchase Securities from Registrant or
Subsidiaries 39
Item 13 Interest of Management in Certain Transactions 40
PART II*
PART III
Item 15 Defaults Upon Senior Securities 40
Item 16 Changes in Securities and Changes in Security for Registered
Securities 40
PART IV
Item 17 Financial Statements 40
Item 18 Financial Statements 40
Item 19 Financial Statement and Exhibits 40
* Omitted pursuant to General Instruction G(b) of Form 20-F
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SUN INTERNATIONAL HOTELS LIMITED
PART I
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ITEMS 1. & 2. DESCRIPTION OF BUSINESS AND PROPERTIES
General
Sun International Hotels Limited ("Sun International" or the "Company") is an
international resort and gaming company incorporated in The Bahamas which
develops and manages premier resort and casino properties. The Company, through
its subsidiaries, currently operates resort hotels and casinos in The Bahamas,
Atlantic City, Connecticut and the Indian Ocean. The Company's largest property
is the Atlantis Resort and Casino, a 2,327-room resort and casino located on
Paradise Island, The Bahamas. In December 1998, the Company completed a major
expansion at the Atlantis Resort and Casino. This expansion included a deluxe
1,200-room hotel, a new 100,000 square-foot casino entertainment complex, a new
marina as well as a dramatic expansion to the ocean-themed adventure environment
of Atlantis. A new convention facility was completed during the second quarter
of 1999.
In December 1996, the Company acquired Griffin Gaming & Entertainment, Inc.
("GGE"), which was subsequently re-named Sun International North America, Inc.
("SINA"). SINA is a holding company which, through Resorts International Hotel,
Inc., ("RIH") its indirect wholly owned subsidiary, is engaged in the ownership
and operation of the Resorts Casino Hotel in Atlantic City (the "Resorts Casino
Hotel"), which is situated on approximately seven acres of land and has
approximately 660 guest rooms, a 68,000 square foot casino and an 8,000 square
foot simulcast pari-mutuel betting and slot machine area, located on the
Boardwalk. At June 30, 1999, The Company had substantially completed the
renovation (the "Renovation") of the Resorts Casino Hotel which included the
renovation of the casino, public spaces and the existing guestrooms. SINA also
provides management services to certain affiliated companies and owns a tour
operator which wholesales tour packages and provides reservation services. SINA
owns approximately 15 acres of land immediately adjacent to the Resorts Casino
Hotel, and approximately 11 acres of other developable real estate in the
Atlantic City area, most of which is vacant land. The Company is currently
reviewing the development potential of the Resorts Casino Hotel and the adjacent
real estate.
In 1996, the Mohegan Sun Casino in Uncasville, Connecticut (the "Mohegan Sun
Casino") was developed for the Mohegan Tribe of Indians of Connecticut (the
"Mohegan Tribe") by Trading Cove Associates ("TCA"), a partnership in which the
Company, through its indirect, wholly owned subsidiary, Sun Cove Limited ("Sun
Cove"), owns a 50% interest. TCA also manages the facility. The Mohegan Sun
Casino has a unique Native American theme and includes approximately 150,000
square feet of gaming space and features approximately 3,000 slot machines, 152
table games, 42 poker tables and parking for 7,200 cars.
In total, the Company currently operates nine hotels containing approximately
4,500 rooms and three casinos with an aggregate of over 280,000 square feet of
gaming space containing more than 6,300 slot machines and 300 table games.
Sun International was established in 1993 in order to acquire the Paradise
Island Resort and Casino and related operations from Resorts International, Inc.
In May 1995, the Company acquired from Sun International Investments Limited
("SIIL") equity interests in Sun Resorts Limited ("Sun Indian Ocean") and
Societe de Participation et d'Investissement dans les Casinos ("Sun France") and
SIIL's project development and management businesses. SIIL controls
approximately 48% of the Company's $.001 par value capital stock (the "Ordinary
Shares"). The Company sold its interest in Sun France in early 1997. The Company
is SIIL's sole investment vehicle for the development of entertainment, resort
and gaming operations outside southern Africa. SIIL is a private holding company
in which each of Caledonia
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SUN INTERNATIONAL HOTELS LIMITED
Investments Plc ("Caledonia"), Kersaf Investments Limited ("Kersaf") and a trust
for the benefit of the family of Mr. Solomon Kerzner, Chairman and Chief
Executive Officer of the Company, controls approximately a one-third interest.
The Properties
The Bahamas
Sun International, through its wholly owned Bahamian subsidiary, Sun
International Bahamas Limited ("Sun Bahamas"), owns approximately 600 acres or
almost 70% of Paradise Island. Approximately 220 acres are available for future
development. Sun International also owns 561 acres of undeveloped land on Andros
Island. Paradise Island has extensive existing infrastructure and is easily
accessible from the densely populated eastern United States. There are regularly
scheduled airline flights from South Florida, New York City and various other
major US cities to either Paradise Island or neighboring Nassau. Flights from
South Florida and New York City having flight times of approximately 50 minutes
and two and one-half hours, respectively.
Following the acquisition of its Paradise Island operations in May 1994, the
Company embarked upon a development program, pursuant to which the Company
reconstructed and refurbished its existing Paradise Island facilities and
created the ocean-themed environment of "Atlantis". Included in the development
program was the refurbishment of all existing 1,147 guest rooms, the
construction of new specialty food and beverage facilities, an upgrading of the
then 30,000-square foot Atlantis Casino and the creation of a 14-acre saltwater
marine life habitat. The marine life habitat features the world's largest open
air aquarium, showcasing over 100 species of marine life, waterfalls, lagoons,
adventure walks and a clear tunnel submerged in a predator lagoon through which
visitors can walk and be surrounded by sharks, sea turtles, stingrays and other
marine life.
The Company successfully completed a major expansion to the Atlantis complex in
December 1998. The expansion included the 1,200-room Royal Tower, bringing the
total number of guest rooms at Atlantis to 2,327. The expansion also included a
100,000 square foot casino and entertainment center and expansive marine
habitats, adventure rides, swimming pools and other entertainment attractions.
The new Atlantis Casino, the largest in the Caribbean, with approximately 1,000
slot machines and 78 table games, is the center of the new entertainment
complex, which spans a seven-acre lagoon and connects the Royal Tower to the
Coral Tower. The final project cost for the expansion totaled approximately $500
million, excluding $40 million of capitalized interest.
During the fourth quarter of 1998, the Company achieved the substantial
completion of several additional development projects including the Marina at
Atlantis, a 30,000 square foot retail link connecting the Coral Tower to the new
entertainment center, the new porte cochere for the Coral Tower, an 1,800 car
parking garage, a new laundry facility and an arts and crafts market for 100
Bahamian tenants. During the second quarter of 1999, the Company completed the
conversion of the previously existing casino space into a convention center. In
addition the Company began construction of a sports center which will include a
signature 18-hole putting course and a tennis center. These projects, excluding
the convention center which is part of the expansion, will cost approximately
$100 million.
As well as Atlantis, the Company's Paradise Island operations include the Ocean
Club, a luxury resort hotel with 59 guest rooms. Sun Bahamas also owns and
operates shops, restaurants, bars and lounges, tennis courts, the Paradise
Island Golf Course and other resort facilities on Paradise Island, as well as
roads and other land improvements on Paradise Island, the Paradise Island
Airport and a water and sewage system
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SUN INTERNATIONAL HOTELS LIMITED
which serves, at stated charges, substantially all facilities on Paradise
Island, including non-affiliated customers. In connection with the Company's
expansion at Paradise Island, the Bahamian Government constructed a new bridge
connecting New Providence/Nassau and Paradise Island, and the Paradise Island
Tourist and Development Authority, a non-profit entity formed to promote
Paradise Island, implemented a $20 million road and infrastructure improvement
program.
In an attempt to further diversify the product mix available at Atlantis, the
Company has formed a joint venture with Vistana, Inc. to develop a timeshare
project. The Company and Vistana each have a 50% interest in the joint venture.
The Company's current plans are to develop 375 timeshare units with Vistana with
a first phase consisting of 198 units. As part of its joint venture agreement,
the Company will contribute land and Vistana will contribute cash based on the
number of timeshare units to be developed.
In October 1998, the Company demolished the 562-room Pirate's Cove Hotel. Since
September 1997 the Pirate's Cove Hotel had been used to house expatriate
professional and construction staff engaged in construction projects on Paradise
Island. The purpose of the demolition of the Pirate's Cove Hotel was to
facilitate further expansion of the Atlantis Resort in the medium term.
In addition, the 100-room beach front resort hotel, Paradise Paradise, was
closed to the public in September 1998 and has been used since then to house
expatriate professionals and construction staff.
Sun Bahamas owns approximately 220 acres of undeveloped land on Paradise Island
with extensive beach and golf course frontage. The Company continues to explore
additional development opportunities on Paradise Island. Management's growth
plan includes the potential development of additional resort properties on
Paradise Island, each appealing to a distinct target market. In addition,
management believes that similar expansion opportunities exist in the luxury end
of the market with a further build-out of the Ocean Club. Other potential
development projects may include residential villas, timeshare developments,
marinas and golf course communities.
Sun International Resorts, Inc., a Florida corporation and an indirect
wholly-owned subsidiary of the Company, together with its subsidiaries based in
Florida, provides general and administrative support services, marketing
services, travel reservations and wholesale tour services for the Company's
Paradise Island operations.
Atlantic City
The Resorts Casino Hotel in Atlantic City, New Jersey commenced operations in
May 1978 and was the first casino/hotel opened in Atlantic City. This was
accomplished by the conversion of the former Haddon Hall Hotel, a classic hotel
structure originally built in the early 1900's, into a casino/hotel. It is
situated on approximately seven acres of land with approximately 310 feet of
Boardwalk frontage overlooking the Atlantic Ocean. The Resorts Casino Hotel
consists of two hotel towers, the 15-story East Tower and the nine story North
Tower, a 700 car parking garage and approximately three acres of surface lot
parking. In addition to the casino facilities described below, the casino/hotel
complex includes approximately 660 guest rooms, the 1,400-seat Superstar
Theater, seven restaurants, a VIP slot and table player lounge, an indoor
swimming pool and health club and retail stores. The complex also has
approximately 50,000 square feet of convention facilities, including eight large
meeting rooms and a 16,000 square foot ballroom.
The Resorts Casino Hotel has a 68,000 square foot casino and a simulcast
pari-mutuel betting and slot machine area of approximately 8,000 square feet.
These gaming areas contain approximately 42 blackjack tables, eight roulette
tables, seven craps tables, and 19 other speciality games that include Caribbean
Stud,
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SUN INTERNATIONAL HOTELS LIMITED
Baccarat, Let It Ride, Three-card Poker, Pai Gow Poker, Big Six, and Pai Gow.
There are also 2,190 slot machines, five betting windows and four
customer-operated terminals for simulcast pari-mutuel betting.
The Company has substantially completed the Renovation which included the
renovation of public spaces as well as the existing guest rooms. A grand opening
celebration is scheduled in early July with extensive advertising planned to
promote the renovated facility.
In addition to the Resorts Casino Hotel, which is located on approximately seven
acres, SINA owns approximately 15 acres of additional developable land
immediately adjacent to Resorts Casino Hotel. Approximately 4.4 acres of this
land is currently utilized by Resorts Casino Hotel for parking. SINA, through a
wholly owned subsidiary, also owns the approximate 5.5 acre site of the former
Steeplechase Pier directly across the Boardwalk from Resorts Casino Hotel. A
portion of this site is available for future development. In total, the
Company's Resorts Casino Hotel and adjacent development parcels approximate 27
acres.
The Company is currently reviewing the development potential of the Resorts
Casino Hotel and the adjacent real estate.
SINA also owns a 2.5 acre site in Atlantic City which is utilized as a warehouse
for Resorts Casino Hotel and various other non-operating sites approximating 15
acres. SINA also owns in fee simple an approximately 552 acre parcel located in
Atlantic City on Blackhorse Pike, of which approximately 545 acres are
considered to be woodlands and wetlands, which may not be developed.
Until January 29, 1998, SINA owned approximately 10 acres of land (the "Showboat
Land") upon which the Showboat Casino Hotel (the "Showboat") is situated. This
land was leased to the owner of the Showboat pursuant to a lease (the "Showboat
Lease"). On January 29, 1998, the Company sold the Showboat Land and the
Showboat Lease for $110 million. The majority of the proceeds was used to redeem
the Company's non-recourse debt.
Connecticut
Sun International, through its indirect, wholly owned subsidiary, Sun Cove, has
a 50% interest in, and is a managing partner of, TCA, a Connecticut general
partnership, which developed and manages the Mohegan Sun Casino, a casino and
entertainment complex in Uncasville, Connecticut, for the Mohegan Tribe. TCA
manages the Mohegan Sun Casino pursuant to a seven-year management agreement
that commenced in October 1996 (the "TCA Management Agreement") with the Mohegan
Tribal Gaming Authority (the "Mohegan Tribal Gaming Authority" or the "MTGA").
Pursuant to the TCA Management Agreement, TCA earns between 30% - 40% of the
earnings of the Mohegan Sun Casino, after depreciation and interest.
Construction of the Mohegan Sun Casino began in early October 1995, and the
facility commenced operations in October 1996.
The Mohegan Sun Casino has a Native American theme, which is conveyed through
architectural features and the use of natural design elements such as timber,
stone and water. Guests enter the Mohegan Sun Casino through one of four major
entrances, each of which is distinguished by a separate seasonal theme - winter,
spring, summer and fall - emphasizing the importance of the seasonal changes to
tribal life. The Mohegan Sun Casino includes approximately 150,000 square feet
of gaming space and features approximately 3,000 slot machines, 152 table games,
42 poker tables and parking for 7,200 cars. The site for the Mohegan Sun Casino
is located approximately one mile from the interchange of Interstate 395 and
Connecticut Route 2A (which has been widened to a four-lane expressway). As part
of its integrated
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SUN INTERNATIONAL HOTELS LIMITED
development plan, the MTGA constructed a four-lane access road (with its own
exit) from Route 2A, which gives patrons of the Mohegan Sun Casino direct access
to Interstate 395, which, in turn, gives direct access to Interstate 95, the
main highway connecting Boston, Providence and New York. This road system allows
customers to drive directly into the property from the interstate highway system
without encountering any traffic lights.
The Company believes that the demographics of the area surrounding the Mohegan
Sun Casino are favorable, with 2.4 million adults residing within 50 miles, 10.2
million adults residing within 100 miles and 21.8 million adults residing within
150 miles of the Mohegan Sun Casino in 1995, according to market research
reports. The Mohegan Sun Casino is located approximately 10 miles west of
Foxwoods Resort and Casino ("Foxwoods"), which the Company believes to be one of
the most profitable casinos in the world.
The Company currently owns $20 million of subordinated notes (the "Subordinated
Notes") issued by MTGA. The Subordinated Notes earn interest at 15% per annum.
Interest payable on the Subordinated Notes can be satisfied by the issuance of
additional Subordinated Notes. Interest payments due to the Company through May
31, 1999 of approximately $14 million on the Subordinated Notes have been
satisfied in this manner.
The Company also owns $45 million of additional subordinated notes (the
"Additional Subordinated Notes" and together with the Subordinated Notes, the
"MTGA Sub Notes") from MTGA which accrue interest at prime rate plus 1% and can
be satisfied by the further issuance of Additional Subordinated Notes. Interest
payments due to the Company through May 31, 1999 of approximately $12 million on
the Additional Subordinated Notes have been satisfied in this manner.
Pursuant to an agreement with the Mohegan Tribe, effective January 1, 2000, the
MTGA Sub Notes shall be repaid. An amount of U.S. Treasury securities sufficient
to satisfy this obligation has been deposited with a defeasance agent.
On February 9, 1998, the Company announced that the Mohegan Tribe appointed TCA
to develop its proposed expansion of the Mohegan Sun Casino, which is currently
expected to cost approximately $800 million. In addition, TCA and the Mohegan
Tribe agreed that effective January 1, 2000, TCA will turn over management of
the Mohegan Sun Resort Complex (which comprises the existing operations and the
proposed expansion) to the Mohegan Tribe. In exchange for relinquishing its
rights under its existing agreements, beginning January 1, 2000, TCA will
receive annual payments of five percent of the gross revenues of the Mohegan Sun
Resort Complex for a 15-year period. Until January 1, 2000, there will no change
in TCA's existing agreements with the Mohegan Tribe.
Sun Cove, an indirect, wholly owned subsidiary of the Company, is one of two
managing partners of TCA. All decisions of the managing partners require the
concurrence of Sun Cove and the other managing partner, Waterford Gaming, L.L.C.
In the event of deadlock there are mutual buy-out provisions.
Indian Ocean
Sun International owns a 22.8% interest in Sun Indian Ocean, a Mauritian company
which is publicly traded on the Mauritius Stock Exchange. Sun Indian Ocean is
regarded as one of the premier resort operators in the Indian Ocean and owns
five beach resort hotels in Mauritius: the 175-room Le Saint Geran Hotel, Golf
Club & Casino ("Le Saint Geran"), the 200-room Le Touessrok Hotel & Ile Aux
Cerfs ("Le Touessrok"), the 248-room La Pirogue Hotel & Casino ("La Pirogue"),
the 333-room Le CoCo Beach
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("Le CoCo Beach") and the 238-room Sugar Beach Resort Hotel ("Sugar Beach"). Sun
Indian Ocean also owns the 187-room Le Galawa Beach Resort ("Le Galawa") in the
Comoros. Mauritius and the Comoros are tropical islands located in the Indian
Ocean approximately 1,200 miles and 200 miles, respectively, from the east coast
of mainland Africa.
Le Saint Geran was closed in April 1999 for room renovations. It is anticipated
that the hotel will reopen in December 1999.
The resorts in Mauritius and the Comoros are marketed primarily to luxury and
mid-market tourists from Europe and southern Africa. Le Saint Geran and Le
Touessrok offer deluxe accommodations and are acknowledged by the European
travel trade to be among the finest beach resorts in the world. The Conde Nast
Awards for Tourism recently rated Le Touessrok as the number one resort in the
world and Le Saint Geran was also included in the top ten. La Pirogue, Le CoCo
Beach, Sugar Beach and Le Galawa cater to mid-market and budget travelers. Sun
Indian Ocean owns five of the 16 major hotels in Mauritius representing
approximately 36% of the room inventory among properties with more than 80
rooms.
Mauritius' tourist industry mainly comprises visitors from Great Britain,
Germany, France, Italy and South Africa. Scheduled air service to and from
Mauritius is provided through scheduled flights on numerous airlines including
Air France, British Airways, Cathay Pacific, Singapore Airlines, Air India, Air
Mauritius, Condor and South African Airlines. Sun Indian Ocean is a leading
resort operator at the upper end of the market, as there is only one other
five-star property on Mauritius. The Company believes that the recent openings
of Le CoCo Beach and Sugar Beach have increased its market share on Mauritius,
further enhanced its presence in the mid-market and provided certain economies
of scale.
Pursuant to the management agreements with Sun Indian Ocean, the Company
provides comprehensive management services under individual management
agreements with each of Le Saint Geran, Le Touessrok, La Pirogue, Sugar Beach
and Le CoCo Beach. The term of each of these management agreements (the "Sun
Indian Ocean Management Agreements") continues through December 2003. The
Company has the right to extend each Sun Indian Ocean Management Agreement for a
five-year period by notice in writing delivered to Sun Indian Ocean by December
2001.
Under each of the Sun Indian Ocean Management Agreements, the Company receives a
management fee calculated as a percentage of revenues (2%) and adjusted EBITDA
(15%). The Company receives project consulting fees charged at 2.5% of the total
project costs for construction and refurbishment at each resort.
The Company also has a management agreement to provide services to Le Galawa in
the Comoros. The terms of this agreement are identical to the terms of the Sun
Indian Ocean Management Agreements except that the Company is entitled to
receive a basic fee of 3.5% of revenues rather than 2%.
Dubai
The Company has entered into an agreement to manage The Royal Mirage Hotel in
Dubai. The 258-room hotel is currently being constructed and it is anticipated
that it will open in August 1999. The agreement has a term of twenty years from
the opening of the hotel. Under the terms of the management agreement, the
Company will receive a management fee calculated as a percentage of revenues (1
1/2%) and gross operating profits, as defined (10%). The management fee schedule
may be renegotiated after ten years.
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Seasonality and Weather
The Company's business has historically been seasonal, with the largest number
of patrons visiting The Bahamas, Mauritius and the Comoros during late December
and the first three months of the calendar year. Accordingly, revenues and
operating profits for the Company have historically been higher during the first
calendar quarter than in successive quarters. In addition, The Bahamas,
Mauritius and the Comoros are subject to tropical weather and storms which, if
severe, can interrupt the normal operations of the Company and affect tourism.
Similarly, inclement weather can adversely affect the operations of the
Company's Atlantic City and Connecticut operations as the principal means of
transportation to these properties is by automobile or bus. Higher revenues and
earnings are typically realized from the Atlantic City and Connecticut
operations during the middle third of the year.
Competition
General
The resort and casino industries are characterized by a high degree of
competition among a large number of participants and are largely dependent on
tourism. The Company competes with resorts both with and without gaming and with
gaming facilities generally, including land-based casinos, riverboat, dockside
and cruise ship on-board casinos and other forms of gaming, as well as other
forms of entertainment. A number of the Company's competitors are larger and
have greater financial and other resources than the Company. In addition, a
number of jurisdictions have recently legalized gaming and other jurisdictions
are considering the legalization of gaming. The Company cannot predict what
effect a continued proliferation of gaming and the resulting increase in
competition could have on the Company's ability to compete effectively in the
future.
The Company believes that the ability to compete effectively in the resort and
gaming industries, particularly the destination resort and gaming industries, is
based on several factors, including the scope, quality, location and
accessibility of resort and gaming facilities and amenities, the effectiveness
of marketing efforts, customer service, the relative convenience of available
transportation, service and the quality and price of rooms, food and beverages,
convention facilities and entertainment.
The Bahamas
The Company's Paradise Island operations compete with cruise ships and other
hotels and resorts, particularly those on Paradise Island and New Providence
Island in The Bahamas as well as those on Grand Bahama Island and the Caribbean
islands. There are approximately 8,000 rooms for overnight guests on Paradise
Island and New Providence Island combined, of which approximately 3,300 are
located on Paradise Island, including 2,406 in hotels owned and operated by the
Company. The Marriott Crystal Palace, a resort and casino with a theater and
other amenities located on New Providence Island, across Nassau harbor from
Paradise Island, is Atlantis' primary competitor on Paradise Island and New
Providence Island.
The Atlantis Casino also competes with the Princess Casino which offers hotel
accommodations, restaurants, gaming and other leisure facilities on Grand
Bahamas Island, approximately 40 minutes by air from Paradise Island. The
Atlantis Casino also competes with gaming casino facilities located in hotels
and resorts in Puerto Rico, with cruise ships which effectively provide
additional rooms and with resorts and
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casinos located on other Caribbean islands, in Atlantic City, in Las Vegas and
elsewhere in the United States.
Atlantic City
Competition in the Atlantic City casino/hotel market is very strong.
Casino/hotels compete on a number of different bases, including promotional
allowances given to customers, entertainment, advertising, services provided to
patrons, caliber of personnel, attractiveness of the hotel and casino areas and
related amenities, and parking facilities. The Resorts Casino Hotel competes
directly with 11 casino/hotels in Atlantic City which, in the aggregate, contain
approximately 1,173,000 square feet of gaming area, including simulcast betting
and poker rooms, and over 11,000 hotel rooms. In addition, several gaming
companies have announced plans to enter the Atlantic City market.
The Resorts Casino Hotel is located at the eastern end of the Boardwalk adjacent
to the Trump Taj Mahal Casino Resort (the "Taj Mahal"), which is next to the
Showboat. These three properties have a total of approximately 2,700 hotel rooms
and approximately 325,000 square feet of gaming space in close proximity to each
other. A 28-foot wide enclosed pedestrian bridge between the Resorts Casino
Hotel and the Taj Mahal allows patrons of both hotels and guests for events
being held at the Resorts Casino Hotel and the Taj Mahal to move between the
facilities without exposure to the weather. A similar enclosed pedestrian bridge
connects the Showboat to the Taj Mahal, allowing patrons to walk under cover
among all three casino/hotels. The remaining nine Atlantic City casino/hotels
are located approximately one-half mile to one and one-half miles to the west on
the Boardwalk or in the Marina area of Atlantic City.
In recent years, competition for the gaming patron within a radius of 150 miles
of Atlantic City has become extremely intense. For instance, gaming operations
run by federally recognized Indian tribes throughout New York and New England,
including the Mohegan Sun Casino and Foxwoods, and other gaming operations that
federally recognized Indian tribes are currently seeking or plan to seek
authorization for, directly compete with Atlantic City for the day-trip patron.
Other Indian tribes in the northeastern United States are seeking federal
recognition in order to establish gaming operations which would further increase
the competition for day-trip patrons. In addition, the State of Delaware has
authorized slot machines at the state's horse racetracks which compete directly
against the Atlantic City casinos.
Connecticut
Because the Mohegan Sun Casino is marketed primarily to day-trip customers, it
competes primarily with Foxwoods and, to a lesser extent, with casinos in
Atlantic City, New Jersey, certain of which have greater resources and name
recognition than the Company or the Mohegan Sun Casino. Currently, Foxwoods is
the only casino in operation within 150 miles of the Mohegan Sun Casino site.
Foxwoods is located approximately 10 miles from the Mohegan Sun Casino site and
is currently the largest gaming facility in the United States in terms of the
number of slot machines, with more than 5,500 slot machines currently in
operation. In addition, Foxwoods offers a number of amenities that the Mohegan
Sun Casino does not currently offer, including hotels and extensive non-gaming
entertainment facilities.
Casino gaming in the northeastern United States may be conducted only by
federally recognized Indian tribes operating under the Indian Gaming Regulatory
Act of 1988 ("IGRA"). In addition to the Pequot Tribe, which operates Foxwoods,
a federally recognized tribe in Rhode Island and a federally recognized tribe in
Massachusetts are each seeking to establish gaming operations in their
respective states. In April 1999, the St. Regis Mohawk Tribe opened a casino in
upstate New York while the Oneida Tribe, which operates a previously existing
gaming facility in upstate New York, is seeking to expand its operations. In
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addition, a number of Indian tribes in the northeastern United States are
seeking federal recognition in order to establish gaming operations. The Company
cannot predict whether any of these tribes will be successful in establishing
gaming operations and, if established, whether such gaming operations will have
a material adverse effect on the operations of the Mohegan Sun Casino.
In addition, a number of states, including Connecticut, have explored legalizing
casino gaming by non-Indians in one or more locations. In November 1995, the
Connecticut state legislature rejected a proposal submitted by the Pequot Tribe
to develop a casino in Bridgeport, Connecticut. The Pequot proposal had been
submitted in response to a request for proposals made by the State of
Connecticut. Under the tribal-state compact between the Mohegan Tribe and the
State of Connecticut, if Connecticut were to legalize any gaming operations
other than pursuant to IGRA (i.e., by an Indian tribe on Indian land) with slot
machines or other commercial casino games, the Mohegan Tribe would no longer be
required to make payments to the State of Connecticut related to slot machine
revenues. The Company is unable to predict whether the Connecticut state
legislature will accept any other casino proposal and, if such proposal results
in a casino being constructed and opened, whether such casino will have a
material adverse effect on the Mohegan Sun Casino.
Other Existing Operations
Sun Indian Ocean's resorts on Mauritius and the Comoros, as vacation
destinations, are in competition with other locations offering vacations to
tourists from Europe, southern Africa and parts of Asia. In Mauritius, there is
also competition from other resorts on the island. In the Comoros, however,
there are no competitive resorts at the current time. Sun Indian Ocean has a
leading position in the luxury end of the Mauritian hotel market where it owns
two of the three luxury hotels offering a total of 375 rooms, while the
competing hotel offers only 84 rooms. It faces more competition for the
mid-market La Pirogue and Sugar Beach and for the budget Le CoCo Beach. In
total, there are approximately 4,000 hotel rooms of international quality
available in Mauritius, of which 1,500 are marketed in approximately the same
price bracket as La Pirogue, Le CoCo Beach and Sugar Beach.
Certain Matters Affecting the Company's Bahamian Operations
Airline Arrangements
The majority of patrons at the Company's resorts on Paradise Island arrive
through Nassau International Airport located on New Providence Island. This
large modern facility is served by several carriers offering frequently
scheduled jet service from New York, Atlanta, Toronto, Miami and other cities.
Ground transportation is facilitated by two bridges linking Paradise Island and
New Providence Island.
Additionally, Sun Bahamas, through a subsidiary, owns and operates the Paradise
Island Airport, a short takeoff and landing facility, including a 3,000-foot
runway, airport terminal and customs building, situated on 63 acres of land
located at the southeast corner of Paradise Island. Paradise Island Airlines
provides regularly scheduled air service from South Florida to Paradise Island.
Union Contract Arrangements
In The Bahamas, approximately 2,600 employees are represented by The Bahamas
Catering and Allied Workers Union (the "Union"). Sun Bahamas participates in The
Bahamas Hotel Employers Association (the "Association"), which represents resort
operators in the Paradise Island-New Providence Island area. The Association's
existing contract with the Union expired in 1998. In June 1998, the Union
engaged in
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SUN INTERNATIONAL HOTELS LIMITED
a three day work action in connection with negotiating a new contract. A new
five-year contract effective January 1, 1998 has since been agreed between the
Association and the Union.
Casino License
Paradise Enterprises Limited, a subsidiary of Sun Bahamas ("PEL"), is currently
licensed to operate the Atlantis Casino under the Bahamian Gaming Act (the
"Gaming Act"). In accordance with Bahamian casino licensing requirements, PEL is
obligated to have its casino license renewed annually by the Gaming Board. In
addition, other than an existing contingent obligation to grant two casino
licenses, the Bahamian Government has agreed that it will grant no new casino
licenses with respect to gaming operations on Paradise Island or New Providence
Island until 2013, provided that Sun Bahamas achieves 75% of its projected
minimum employment growth of 2,000 full-time jobs in connection with its
expansion and development plans by year ten of the renewal period. The
moratorium on granting new casino licenses will remain in place, however, in the
event such growth is not achieved because of overall poor market conditions
rather than inadequate management by Sun International.
Basic License Fee
Currently, the Gaming Act provides for taxes on casino revenues consisting of an
annual basic license fee of $200,000.
Casino Win Tax
In replacement of the higher gaming taxes and fees previously payable to The
Hotel Corporation of The Bahamas (the "HCB") the Bahamian Government agreed,
beginning January 1, 1998, until December 2018 to set annual casino license fees
at $100,000 per thousand square feet of casino space, plus a minimum annual
casino win tax of $4.1 million on all gaming win up to $20 million and 10% on
all gaming win over $20 million. Additionally, during the 11 years beginning
1998, the Bahamian Government will reduce the annual casino license fees by $5
million and reduce by 50% the win tax to be paid on gaming win over $20 million.
The following table summarizes, for the periods shown, the taxes and fees paid
or accrued by Sun Bahamas under the Gaming Act and certain agreements with the
Bahamian Government:
Years Ended December 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Casino win $ 7,327,000 $ 7,400,000 $ 7,000,000
Basic license and operating fees 200,000 6,500,000 6,000,000
----------- ----------- -----------
Total $ 7,527,000 $13,900,000 $13,000,000
=========== =========== ===========
Heads of Agreement
In 1997, the Company amended an agreement reached with the Bahamian Government
in 1995 that provided for certain investment incentives to encourage the Company
to undertake an expansion program at Atlantis. As noted above, this agreement
provides for certain fixed gaming taxes as well as a 10% gaming tax to be paid
on gaming win over $20 million. The agreement also provides for a 50% credit
against all variable gaming tax paid for a period of 11 years. This tax
structure became effective January 1, 1998.
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In order to secure the tax incentives as described, the Company is obligated to
construct at least 562 rooms on Paradise Island in place of the Pirate's Cove
Beach Resort (a 562-room hotel on Paradise Island) which the Company demolished
during the fourth quarter of 1998.
The agreement also provides for a new five-year joint marketing agreement,
pursuant to which the Bahamian Government shall match the Company's
contribution, up to $4 million annually, toward the direct costs related to
staging certain marketing events, public relations activities and the production
and placement of advertisements in all media.
Control of Sun International
SIIL has agreed with the Bahamian Government not to reduce its voting interest
in Sun International below 45% until June 30, 1999. Thereafter, SIIL has agreed
to control a majority of the Sun International Board of Directors for a period
of five additional years.
Certain Matters Affecting the Company's Atlantic City Operations
New Convention Center and Casino/Hotel Expansion
In May 1997, the State of New Jersey opened a new convention center. The new
convention center has 500,000 square feet of continuous exhibit space, and an
additional 109,000 square feet of meeting rooms, making it the largest center
from Atlanta to Boston.
The convention center is part of a broader plan that includes expansion of the
Atlantic City International Airport, a new 500-room convention hotel, which
opened in November 1997 and the transformation of the main entryway into
Atlantic City into a new corridor. In 1997, this new corridor, which links the
new convention center and hotel with the Boardwalk, was completed. In all, six
blocks were transformed into an expansive park with extensive landscaping,
night-time lighting, and a large fountain and pool with an 86-foot lighthouse.
Officials have commented upon the need for improved commercial air service into
Atlantic City as a factor in the success of the convention center. See further
discussion under "Transportation Facilities" below.
It is believed that additional hotel rooms are necessary to support the
convention center as well as to allow Atlantic City to become a competitive
destination resort. In November 1997, the new 500- room convention hotel opened.
To further spur construction of new hotel rooms and renovation of substandard
hotel rooms into deluxe accommodations, a total of $175 million has been set
aside by the Casino Reinvestment Development Authority (the "CRDA"), a public
authority, to aid in financing such projects. To date, the CRDA has authorized
financing in the amount of $105 million which has resulted in the construction
of approximately 2,680 new hotel rooms and has reserved funding in the amount of
$70 million to four casinos, including Resorts Casino Hotel, for the
construction of up to 3,770 additional hotel rooms. RIH's share of the funding
reserved by the CRDA is $27.3 million to construct up to 1,500 rooms. Also,
Mirage Resorts, Inc. ("Mirage"), a Las Vegas, Nevada casino/hotel company, has
been selected to be the developer of an approximate 180- acre tract in the
Marina area of Atlantic City (the "H-Tract"). Mirage has announced plans to
build a 2,000-room destination resort. Mirage has also entered into an agreement
with Boyd Gaming Corp to build a $750 million, 1,500-room casino/hotel to be
called the Borgata. Groundbreaking for the Borgata is expected in the fall of
1999 with an opening in 2002. Circus Circus Enterprises, Inc., an original
partner in the development of the H-Tract, has been dropped from the project,
leaving room for the possibility of another property to be developed in the
area. Also included in the development of the H-Tract is the construction of a
tunnel and connector road link between the Atlantic
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SUN INTERNATIONAL HOTELS LIMITED
City Expressway and the Marina area, for which infrastructure improvements were
considered requisite to the expansion plans announced for the Marina area. The
groundbreaking for the tunnel construction occurred in November 1998 and is
expected to be completed in 2001. Mirage has indicated that its proposed resort
will open shortly after the roadway is complete. MGM Grand, Inc. has also
announced plans for the construction of a new casino/hotel in the South Inlet
section of Atlantic City, the size and scope of which has yet to be formally
announced.
Although these developments are viewed as positive and favorable to the future
prospects of the Atlantic City gaming industry, management of RIH, at this
point, can make no representations as to whether, to what extent or to how these
developments may affect RIH's operations.
Union Contract Arrangements
At the Resorts Casino Hotel approximately 1,400 employees of the total 3,400
workforce are covered under collective bargaining agreements with RIH. There are
four separate unions representing hotel and restaurant employees, electrical
workers, engineers and painters and maintenance workers. The contract relating
to hotel and restaurant employees, which includes 1,100 of RIH's unionized
waiters, is scheduled to expire in September 1999, while the other contracts run
until December 2001.
Regulation, Gaming Taxes and Fees
General
The Company's operations in Atlantic City are subject to regulation under the
New Jersey Casino Control Act (the "NJCCA"), which authorizes the establishment
of casinos in Atlantic City, provides for licensing, regulation and taxation of
casinos and related persons and entities and created the New Jersey Casino
Control Commission (the "NJCCC") and the Division of Gaming Enforcement to
administer the NJCCA. In general, the provisions of the NJCCA concern: (i) the
ability, reputation, character, financial stability and integrity of casino
operators, their officers, directors and employees and others financially
interested in or in control of a casino; (ii) the nature and suitability of
hotel and casino facilities, operating methods and conditions; and (iii)
financial and accounting practices. Gaming operations are subject to a number of
restrictions relating to the rules of games, types of games permitted, credit
play, size of hotel and casino operations, hours of operation, persons who may
be employed and licensure of such persons, persons or entities that may do
business with casinos, the maintenance of accounting and cash control
procedures, security and other aspects of the business.
Casino License
A casino license is initially issued for a term of one year and must be renewed
annually by action of the NJCCC for the first two renewal periods succeeding the
initial issuance of a casino license. Thereafter the NJCCC may renew a casino
license for a period of four years, although the NJCCC may reopen licensing
hearings at any time. A license is not transferable and may be conditioned,
revoked or suspended at any time upon proper action by the NJCCC. The NJCCA also
requires an operations certificate which, in effect, has a term coextensive with
that of a casino license. On February 26, 1979, the NJCCC granted a casino
license to RIH for the operation of the Resorts Hotel Casino. In January 1996,
RIH's license was renewed until January 31, 2000. In order for a casino license
to be renewed, the licensee must show by clear and convincing evidence that it
meets all of the criteria set out in the NJCCA, including the qualification of
holding, intermediary and subsidiary companies of a casino licensee and of the
directors, officers and certain employees of such companies.
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Restrictions on Ownership of Securities
The NJCCA imposes certain restrictions upon the ownership of securities issued
by a corporation which holds a casino license or is a holding, intermediary or
subsidiary company of a corporate licensee (collectively, "holding company").
Among other restrictions, the sale, assignment, transfer, pledge or other
disposition of any security issued by a corporation which holds a casino license
is conditional and shall be ineffective if disapproved by the NJCCC. If the
NJCCC finds that an individual owner or holder of any securities of a corporate
licensee or its holding company must be qualified and is not qualified under the
NJCCA, the NJCCC has the right to propose any necessary remedial action. In the
case of corporate holding companies and affiliates whose securities are publicly
traded, the NJCCC may require divestiture of the security held by any
disqualified holder who is required to be qualified under the NJCCA.
In the event that entities or persons required to be qualified refuse or fail to
qualify and fail to divest themselves of such security interest, the NJCCC has
the right to take any necessary action, including the revocation or suspension
of the casino license. If any security holder of the licensee or its holding
company or affiliate who is required to be qualified is found disqualified, it
will be unlawful for the security holder to (i) receive any dividends or
interest upon any such securities, (ii) exercise, directly or through any
trustee or nominee, any right conferred by such securities or (iii) receive any
remuneration in any form from the corporate licensee for services rendered or
otherwise. The Company's Articles of Association, as amended, provide that all
securities of the Company are held subject to the condition that if the holder
thereof is found to be disqualified by the NJCCC pursuant to provisions of the
NJCCA, then that holder must dispose of his or her interest in the securities.
Remedies Under the NJCCA
In the event that it is determined that a licensee has violated, or fails to
affirmatively prove that it meets all of the criteria of, the NJCCA, or if a
security holder of the licensee required to be qualified is found disqualified
but does not dispose of his securities in the licensee or holding company, under
certain circumstances the licensee could be subject to fines or have its license
suspended, conditioned or revoked. The NJCCA provides for the mandatory
appointment of a conservator to operate the casino and hotel facility if a
license is revoked or not renewed and permits the appointment of a conservator
if a license is suspended for a period in excess of 120 days. If a conservator
is appointed, the suspended or former licensee is entitled to a "fair rate of
return out of net earnings, if any, during the period of the conservatorship,
taking into consideration that which amounts to a fair rate of return in the
casino or hotel industry." Under certain circumstances, upon the revocation of a
license or failure to renew, the conservator, after approval by the NJCCC and
consultation with the former licensee, may sell, assign, convey or otherwise
dispose of all of the property of the casino/hotel. In such cases, the former
licensee is entitled to a summary review of such proposed sale by the NJCCC and
creditors of the former licensee and other parties in interest are entitled to
prior written notice of sale.
License Fees, Taxes and Investment Obligations
The NJCCA provides for casino license renewal fees, other fees based upon the
cost of maintaining control and regulatory activities and various license fees
for the various classes of employees. In addition, a casino licensee is subject
annually to a tax of 8% of "gross revenue" (defined under the NJCCA as casino
win, less provision for uncollectible accounts up to 4% of casino win) and
license fees of $500 on each slot machine. Also, the NJCCA has been amended to
create an Atlantic City fund (the "AC Fund") for economic development projects
other than the construction and renovation of casino/hotels. Beginning in fiscal
year 1995/1996 and for the following three fiscal years, if the amount of money
expended by the
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SUN INTERNATIONAL HOTELS LIMITED
NJCCC and the Division of Gaming Enforcement is less than $57,300,000, the prior
year's budget for these agencies, the amount of the difference is to be
contributed to the AC Fund. Thereafter, beginning with fiscal year 1999/2000 and
for the following three fiscal years, an amount equal to the average paid into
the AC Fund for the previous four fiscal years shall be contributed to the AC
Fund. Each licensee's share of the amount to be contributed to the AC Fund is
based upon its percentage of the total industry gross revenue for the relevant
fiscal year. After eight years, the casino licensee's requirement to contribute
to this fund ceases.
The following table summarizes, for the periods shown, the fees, taxes and
contributions assessed upon RIH by the NJCCC.
Years Ended December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
Gaming tax $18,785,000 $19,581,000 $20,661,000
License and other fees 3,733,000 3,453,000 3,672,000
Contribution to AC Fund 496,000 392,000 570,000
----------- ----------- -----------
Total $23,014,000 $23,426,000 $24,903,000
=========== =========== ===========
The NJCCA, as originally adopted, required a licensee to make investments equal
to 2% of the licensee's gross revenue (the "investment obligation") for each
calendar year, commencing in 1979, in which such gross revenue exceeded its
"cumulative investments" (as defined in the NJCCA). A licensee had five years
from the end of each calendar year to satisfy this investment obligation or
become liable for an "alternative tax" in the same amount. In 1984 the New
Jersey legislature amended the NJCCA so that these provisions now apply only to
investment obligations for the years 1979 through 1983.
Effective for 1984 and subsequent years, the amended NJCCA requires a licensee
to satisfy its investment obligation by purchasing bonds to be issued by the
CRDA or by making other investments authorized by the CRDA, in an amount equal
to 1.25% of a licensee's gross revenue. If the investment obligation is not
satisfied, then the licensee will be subject to an investment alternative tax of
2.5% of gross revenue. Licensees are required to make quarterly deposits with
the CRDA against their current year investment obligations. RIH's investment
obligations for the years 1998, 1997 and 1996 amounted to $2.9 million, $3.1
million and $3.2 million, respectively, and, with the exception of minor credits
received for making donations, have been satisfied by deposits made with the
CRDA. At December 31, 1998, RIH held $10.9 million face amount of bonds issued
by the CRDA and had $16.0 million on deposit with the CRDA. The CRDA bonds
issued through 1998 have interest rates ranging from 3.6% to 7.0% and have
repayment terms of between 20 and 50 years.
Certain Matters Affecting the Company's Connecticut Operations
Regulation
The Mohegan Tribe is a federally recognized Native American Indian tribe with
approximately 1,100 members, whose federal recognition became effective May 15,
1994. In May 1994, the Mohegan Tribe and the State of Connecticut entered into a
gaming compact to authorize and regulate Class III gaming
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SUN INTERNATIONAL HOTELS LIMITED
operations (slot machines and table games). TCA managed the development and
construction and manages the operation and marketing of the Mohegan Sun Casino.
Each of the partners of TCA and certain employees of the Mohegan Sun Casino must
be licensed by relevant tribal and state authorities. Each of the partners of
TCA has received a gaming license from the Commissioner of Revenue Services of
the State of Connecticut. In addition, gaming licenses or management agreements
held or subsequently acquired by the Company or its subsidiaries pursuant to
applicable law and regulations, including the IGRA and the National Indian
Gaming Commission (the "NIGC") regulations, may require review, approval or
licensing of any person or entity directly, or indirectly possessing or
acquiring 10% or more of the Company's equity securities (a "Substantial
Interest"). The NIGC is required to review and approve any such person or entity
and make a finding of suitability pursuant to the IGRA and NIGC regulations. If
the NIGC were to determine that a person or entity holding a Substantial
Interest in a gaming management agreement was unsuitable, prior approval of the
management agreement could be revoked, subsequent approvals or renewals could be
blocked and certain required gaming licenses could be suspended, rescinded or
denied.
Expansion
On February 9, 1998, the Company announced that the Mohegan Tribe appointed TCA
to develop its proposed expansion of the Mohegan Sun Casino, which is currently
expected to cost approximately $800 million. It is anticipated that the first
stage, which would include a new casino, new retail space, an event center and
increased parking will be completed by the summer of 2001. A 1500-room hotel is
planned to follow.
TCA Management Agreement
The Mohegan Tribe and TCA have entered into the TCA Management Agreement
pursuant to which the Mohegan Tribe has engaged TCA to develop, operate, manage
and maintain the Mohegan Sun Casino in exchange for an annual fee which is
calculated in three tiers based upon net revenues (as defined) as set forth
below (in thousands):
I II III
----------------------------------------------
Annual Fee Annual Fee
From From
Tier I Tiers I & II
40% of Plus 35% of Net Plus 30% of
Net Revenues Revenues Net Revenues
Up To Between Above
------------ ------------------ ------------
Year 1 $50,546 $ 50,547 - 63,183 $ 63,183
Year 2 73,115 73,116 - 91,394 91,394
Year 3 91,798 91,799 - 114,747 114,747
Year 4 95,693 95,694 - 119,616 119,616
Year 5 104,107 104,108 - 130,134 130,134
Year 6 (subject to buyout option) 114,335 114,336 - 142,919 142,919
Year 7 (subject to buyout option) 130,944 130,945 - 163,680 163,680
Management Fees
The monthly management fee payments to TCA are calculated against 1/12th of
targeted annual net revenue amounts set forth in the TCA Management Agreement
and then adjusted to actual net revenue amounts realized annually within 60 days
of the close of each fiscal year. The annual adjustment may or may not have a
material effect on cash flow. As defined in the TCA Management Agreement, "Net
Revenues"
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of the Mohegan Sun Casino means the amount of gross revenues of the facility,
less operating expenses and certain specified categories of revenue, such as
income from any financing or refinancing, taxes or charges received from patrons
on behalf of and remitted to a governmental entity, proceeds from the sale of
capital assets, insurance proceeds and interest on the reserve fund. Net
revenues include "Net Gaming Revenues", which are equal to the amount of "net
win" (the difference between gaming wins and losses) less all gaming related
operational expenses. In addition, TCA will be required to establish, and,
together with the Mohegan Tribe, make monthly contributions to, a replacement
reserve fund (the "Reserve Fund"), which may be used to pay any approved
budgeted capital expenditures for the Mohegan Sun Casino. The annual TCA
contribution to such fund is $1.2 million.
Term
The term of the TCA Management Agreement is seven years from the date of the
opening of the Mohegan Sun Casino. However, TCA and the Mohegan Tribe have
agreed that effective January 1, 2000, TCA will turn over management of the
Mohegan Sun Resort Complex (which comprises the existing operations and the
proposed expansion) to the Mohegan Tribe. In exchange for relinquishing its
rights under its existing agreements, beginning January 1, 2000, TCA will
receive annual payments of five percent of the gross revenues of the Mohegan Sun
Resort Complex for a 15-year period. Until January 1, 2000, there will be no
change in TCA's existing agreements with the Mohegan Tribe.
Priority Payments
Pursuant to subcontracts for management services, organization and
administrative services and marketing services provided to TCA, the Company
receives priority payments from TCA. Each of these priority payments are paid
from TCA's management fees prior to the pro rata distribution to TCA's partners
of TCA's profits.
Business Board
Pursuant to the TCA Management Agreement, certain decision-making authority and
oversight duties are delegated to a committee comprised of an equal number of
representatives of the Mohegan Tribe and of TCA (the "Business Board"). Actions
by the Business Board require the unanimous approval of its members or their
respective designees. The Mohegan Tribe and TCA have agreed that, in the event
that the Business Board is unable to reach a mutual decision or compromise, any
disputes will be submitted to summary arbitration before a single arbitrator,
who will render a decision within 48 hours of submission of the dispute.
Waiver of Sovereign Immunity
Pursuant to the TCA Management Agreement, the Mohegan Tribe has waived sovereign
immunity for the purpose of permitting, compelling or enforcing arbitration and
has agreed to be sued by TCA in any court of competent jurisdiction for the
purpose of compelling arbitration or enforcing any arbitration or judicial award
arising out of the TCA Management Agreement, Subordinated Notes or the
Additional Subordinated Notes. The parties have agreed that all disputes and
claims arising out of the TCA Management Agreement or the Mohegan Tribe's gaming
ordinance will be submitted to binding arbitration, which shall be the sole
remedy of the parties, and that punitive damages may not be awarded to either
party by any arbitrator. The Mohegan Tribe's waiver of sovereign immunity is
limited to enforcement of money damages from undistributed or future net
revenues of the Mohegan Sun Casino (or, under certain
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SUN INTERNATIONAL HOTELS LIMITED
conditions, net revenues of other gaming operations of the Mohegan Tribe). Funds
earned and paid to the Mohegan Tribe as the Mohegan Tribe's share of net
revenues prior to any judgment or award are not subject to the waiver and would
not be available for levy pursuant to any judgment or award.
Gaming Disputes Court
The Mohegan Tribe's Constitution (the "Mohegan Constitution") provides for the
governance of the Mohegan Tribe by a tribal council, in which the legislative
and executive powers of the Mohegan Tribe are vested, and a constitutional
review board. On July 20, 1995, the tribal council enacted a tribal ordinance
creating the Gaming Disputes Court (the "Court"), which is composed of a trial
and an appellate branch. The Mohegan Constitution and the tribal ordinance
establishing the Court give the Court exclusive jurisdiction for the Mohegan
Tribe over all disputes and controversies related to gaming between any person
or entity and the Mohegan Gaming Authority, the Mohegan Tribe or TCA. The Court
has been authorized by the Mohegan Constitution to consist of at least four
judges, none of whom may be members of the Mohegan Tribe and each of whom must
be either a retired federal judge or Connecticut Attorney Trial Referee (who is
an attorney appointed by the Connecticut Supreme Court).
Environmental Matters
The Company is subject to federal, state and local laws and regulations that (i)
govern activities or operations that may have adverse environmental effects,
such as discharges to air and water as well as handling and disposal practices
for solid and hazardous wastes, and (ii) impose liability for the costs of
cleaning up, and certain damages resulting from, past spills, disposals or other
releases of hazardous substances (together, "Environmental Laws"). From time to
time, the Company's operations have resulted or may result in certain
noncompliance with applicable Environmental Laws. However, the Company believes
that any such noncompliance would not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
The Mohegan Sun Casino site was formerly occupied by UNC, a naval products
manufacturer of, among other things, nuclear reactor fuel components. UNC's
facility was officially decommissioned on June 8, 1994, when the Nuclear
Regulatory Commission (the "NRC") confirmed that all licensable quantities of
special nuclear material ("SNM") had been removed from the Mohegan Sun Casino
site and that any residual SNM contamination was remediated in accordance with
the NRC-approved decommissioning plan.
From 1991 through 1993, UNC commissioned an environmental consultant to perform
a series of environmental assessments on the Mohegan Sun Casino site, including
extensive soil investigations and groundwater monitoring. The environmental
assessments detected among other things, volatile organic chemicals, heavy
metals and fuel hydrocarbons in the soil and groundwater. Extensive remediation
of contaminated soils and additional investigations were then completed.
Although the Mohegan Sun Casino site currently meets applicable remediation
requirements, no assurance can be given that the various environmental
assessments with respect to the Mohegan Sun Casino site revealed all existing
environmental conditions, that any prior owners or tenants of the Mohegan Sun
Casino site did not create any material environmental condition not known to the
Mohegan Gaming Authority, that future laws, ordinances or regulations will not
impose any material environmental liability or that a material environmental
condition does not otherwise exist on the Mohegan Sun Casino site. Future
remediation may be necessary if excavation and construction exposes contaminated
soil which has otherwise been deemed isolated and not subject to cleanup
requirements. Such remediation could adversely impact the results of operations
of the Mohegan Sun Casino and therefore the results of operations and financial
conditions of the Company.
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In addition, the Environmental Protection Agency (the "EPA") has named a
predecessor to SINA as a potentially responsible party ("PRP") under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") for the cleanup of contamination resulting from past disposals of
hazardous waste at the Bay Drum site in Florida, to which the predecessor, among
others, sent waste in the past. CERCLA requires PRPs to pay for cleanup of sites
at which there has been a release or threatened release of hazardous substances.
Courts have interpreted CERCLA to impose strict, joint and several liability
upon all persons liable for cleanup costs. As a practical matter, however, at
sites where there are multiple PRPs, the costs of cleanup typically are
allocated among the parties according to a volumetric or other standard. Because
the Company has only limited information at this time regarding this site and
the wastes sent to it by the predecessor, the Company is unable to determine the
extent of its potential liability, if any, at this site.
Recent Events
Nevada
On May 17, 1999, the Company entered into an Asset and Land Purchase Agreement
(the "DI Purchase Agreement") with Starwood Hotels and Resorts Worldwide
("Starwood") pursuant to which the Company has agreed to acquire the Desert Inn
Hotel and Casino in Las Vegas for $275 million. The all cash transaction is
subject to the satisfaction of various conditions contained in the DI Purchase
Agreement, including receipt by the Company of a gaming license in Nevada. The
Company has been advised by counsel that the licensing process in Nevada could
take up to 12 to 18 months.
Pursuant to the DI Purchase Agreement, the Company has agreed to acquire all of
the assets of Starwood that comprise the Desert Inn, including, a 715-room
hotel, casino, spa and country club situated on 25 acres, an 18 hole
championship golf course and a further 32 acres of undeveloped land on the Las
Vegas Strip located across from the 3,036-room Venetian Resort Hotel and Casino
and the 1.2 million square foot Sands Convention Center. The Desert Inn
facilities are in excellent condition, having undergone a $200 million expansion
and renovation in 1997.
As part of the transaction, the Company and Starwood have entered into a
marketing alliance, pursuant to which the Company's properties on Paradise
Island and the Desert Inn will be included in Starwood's Preferred Guest
Program. The Company and Starwood also agreed to establish a joint venture with
the intention of developing 350 timeshare units at the Desert Inn.
On June 1, 1999, the Company paid $15 million into an escrow account as a
deposit, which amount plus interest will be credited towards the $275 million
purchase price at the closing of the transaction. At the closing, Starwood has
agreed that the Desert Inn will be transferred with $5 million of working
capital, as defined. In addition, the Company has agreed to pay to Starwood
interest on the $275 million purchase price for the period beginning on the date
the sale of Starwood's Caesar's operations to Park Place Entertainment is
consummated until the date the DI Purchase Agreement is consummated at an annual
interest rate equal to the lesser of (i) the interest rate for revolving loans
under Starwood's bank credit agreement and (ii) 7.00%. In the event the closing
of the DI Purchase Agreement does not occur until after July 17, 2000, interest
on the purchase price thereafter shall accrue at 10%.
The Company intends to finance the payment of the amounts due under the DI
Purchase Agreement by using its cash flow from operations, the cash from the
repayment of the MTGA Sub Notes, drawing on its existing bank lines and
accessing the capital markets. In this regard, the Company anticipates
increasing the size of its existing revolving credit facility (the "Bank
Facility").
20
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SUN INTERNATIONAL HOTELS LIMITED
The Commonwealth of The Bahamas
The Commonwealth of The Bahamas had a population of approximately 300,000 in
1998. The Bahamas includes approximately 700 islands, 29 of which are inhabited,
and extends from east of the Florida coast to just north of Cuba and Haiti. Over
60% of the population lives on New Providence Island, where Nassau, the capital
of The Bahamas, is located. The Bahamas first obtained internal self-government
in 1964 and became an independent nation within the British Commonwealth in
1973. The first elections under universal adult suffrage were held in November
1962. The present government was first elected in 1992 and re-elected in March
1997, having succeeded a government that was in power for over 20 years. The
official language is English.
The currency of The Bahamas has been tied to the U.S. dollar since 1970 with an
official exchange rate of U.S. $1.00 = 1.00 Bahamian dollar.
The Ministry of Tourism spends over $35 million annually to promote The Bahamas
and in recent years the government has made large investments in the expansion
of both Nassau Harbor and Nassau International Airport.
The Republic of Mauritius
The Republic of Mauritius is a small, multi-ethnic, independent country
consisting of several islands with a land area of about 720 square miles. The
Republic of Mauritius is located in the Indian Ocean and has a population of
approximately 1,100,000. The main island, Mauritius, lies approximately 1,200
miles off the east coast of mainland Africa. The other islands are Rodrigues
Island, the Agalega Islands and the Cargados Carajos Shoals. The climate is
subtropical and generally humid. Most residents are bilingual, speaking English
and French. Mauritius has been independent since 1968 and a republic since 1991.
Presidential elections are held every five years and the next election will be
held in 2000.
ITEM 3. LEGAL PROCEEDINGS
David Goldkrantz vs. Merv Griffin, Sun International Hotels Limited, et al.
A complaint was filed in December 1997, in the United States District Court,
Southern District of New York (the "Court") on behalf of David Goldkrantz and a
purported class of Company shareholders against the Company and various
affiliates, certain directors and officers of the Company. The complaint alleges
that the Proxy Statement and Prospectus issued by the Company in November 1996,
in connection with their merger, was false and misleading with regard to
statements made about a license and service agreement entered into between GGE
and The Griffin Group. The Company's Motion for Summary Judgment to dispose of
the claim was granted by the Court on April 5, 1999. Goldkrantz has filed an
appeal with the United States Circuit Court of Appeals, Second Circuit, which
appeal is pending.
ITEM 4. CONTROL OF THE REGISTRANT
SIIL, through its voting control of approximately 48% of the outstanding
Ordinary Shares, is the principal shareholder of the Company. World Leisure
Group Limited ("WLG"), a company controlled by a trust for the benefit of the
family of Mr. Solomon Kerzner, Chairman of the Board of Directors and Chief
Executive Officer of the Company, indirectly controls through intermediate
entities approximately one-third of the outstanding ordinary shares of SIIL.
Peter Buckley, a director of the Company and SIIL, is also chairman
21
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SUN INTERNATIONAL HOTELS LIMITED
and chief executive officer of Caledonia, an English corporation, which
indirectly owns through intermediate entities approximately one-third of the
outstanding ordinary shares of SIIL. Derek Hawton, a director of the Company and
SIIL, is also chairman and chief executive officer of Kersaf, a South African
corporation, which indirectly controls through intermediate entities
approximately one-third of the outstanding ordinary shares of SIIL.
SIIL and its shareholders have agreed with the Bahamian Government, among other
things, to maintain voting power in the Company of not less than 45% until June
30, 1999 and thereafter to control a majority of the Board of Directors of the
Company for an additional five years.
Ownership participation in SIIL is governed by a Subscription and Shareholders'
Agreement. Rosegrove Limited ("Rosegrove") owns approximately two-thirds of the
outstanding equity of SIIL and World Leisure Investments Limited, a Bermuda
corporation ("WLI"), owns the remaining shares. WLI is owned by WLG, which is
owned by a trust for the benefit of the Kerzner family. Rosegrove is owned
indirectly and equally by Kersaf and Caledonia. Caledonia is a diversified
trading and investment company listed on The London Stock Exchange. Kersaf is an
industrial conglomerate whose interests span casino resorts, hotels, cinemas and
entertainment centers. Kersaf is listed on The Johannesburg Stock Exchange.
The following table sets forth certain information as of March 31, 1999
regarding the ownership of Ordinary Shares by: (i) any person who is known to
the Company to be the owner of more than 10% of any class of the Company's
voting securities and (ii) the directors and officers of the Company as a group:
Class of Shares Beneficial Owner Amount Percent of Class
- --------------- ---------------- ---------- ----------------
Ordinary Shares SIIL 16,112,000 47.8%
Ordinary Shares Baron Capital Group, Inc. 4,301,000 12.8%
Ordinary Shares Merril Lynch
Asset Management 2,602,000 7.7%
Ordinary Shares FMR Corp. 1,767,000 5.2%
Ordinary Shares Directors and Officers -- less than 1%
as a Group
ITEM 5. NATURE OF TRADING MARKET
As of June 22, 1999, the Company had approximately 894 holders of record of
approximately 33,681,012 Ordinary Shares. As of June 22, 1999, there were an
estimated 800 US holders of record holding approximately 48% of the Ordinary
Shares. The Ordinary Shares do not trade on any foreign exchange. The Ordinary
Shares have been listed and traded on the New York Stock Exchange (the "NYSE")
since March 1, 1996. The following table sets forth the range of high and low
closing sale prices of the Ordinary Shares as reported on the NYSE during the
periods shown.
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SUN INTERNATIONAL HOTELS LIMITED
High Low
---- ---
1999: 1st quarter $43.88 $32.88
2nd quarter (through June 22, 1999) 47.19 33.00
1998: 1st quarter 47.38 35.06
2nd quarter 50.38 42.00
3rd quarter 46.75 34.63
4th quarter 45.44 31.00
1997: 1st quarter 41.50 35.00
2nd quarter 38.63 30.00
3rd quarter 38.63 30.56
4th quarter 40.31 34.00
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
The Central Bank of The Bahamas (the "Central Bank") must approve any payments
made to companies, including the Company, which are non-resident companies for
exchange control purposes. The Central Bank has granted approved investment
status in respect of the Company's holding of the capital stock of Sun Bahamas.
The granting of such status will mean that all payments of a current nature,
including the repatriation of dividends or other distributions to the Company
out of the revenues of the Company's Bahamian subsidiaries and any proceeds
received on the sale of such subsidiaries will be routinely approved by the
Central Bank following proper application. Any other payments to the Company by
its Bahamian subsidiaries will require standard approval by the Central Bank.
There currently are no limitations on the right of nonresident or foreign owners
to hold or vote the Ordinary Shares imposed by foreign law or by the Company's
Articles of Association.
ITEM 7. TAXATION
Certain United States Federal Income Tax Considerations
The following is a general discussion of certain United States federal income
tax consequences to the acquisition, ownership and disposition of Ordinary
Shares. For purposes of this discussion, a "United States Holder" means an
individual citizen or resident of the United States, a corporation organized
under the laws of the United States or of any state of political subdivision
thereof, any partner in a partnership (only to the extent that the partnership's
income is subject to United States federal income tax) or an estate or trust the
income of which is includible in gross income for United States federal income
tax purposes regardless of its source.
This discussion is not intended to be exhaustive and is based on statutes,
regulations, rulings and judicial decisions currently in effect. This discussion
does not consider any specific circumstances of any particular United States
Holder and applies only to United States Holders that hold Ordinary Shares as a
capital asset. Investors are urged to consult their tax advisors regarding the
United States federal tax consequences of acquiring, holding and disposing of
Ordinary Shares, as well as any tax consequences that may arise under the laws
of any foreign, state, local or other taxing jurisdiction.
Ownership of Ordinary Shares
Dividends on Ordinary Shares paid to United States Holders will be treated as
dividend income for United States federal income tax purposes to the extent of
the Company's undistributed current or accumulated earnings and profits as
computed for federal income tax purposes. Such dividends will generally not be
23
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SUN INTERNATIONAL HOTELS LIMITED
eligible for the dividends received deduction available to certain United States
corporations under Section 243 of the Internal Revenue Code of 1986, as amended.
The Company is not a "passive foreign investment company" (a "PFIC"), a "foreign
personal holding company" (a "FPHC") or a "controlled foreign corporation" (a
"CFC") for United States federal income tax purposes.
The Company is not a CFC or a FPHC mainly due to SIIL's approximate 48% voting
interest in the Company. If more than 50% of the voting power or value of the
Company's stock were owned (directly, indirectly or by attribution) by United
States persons who each owned (directly, indirectly or by attribution) 10% or
more of the voting power of the stock of the Company ("10% Shareholders"), the
Company would become a CFC and each such 10% Shareholder would be required to
include in its taxable income as a constructive dividend an amount equal to its
share of certain undistributed income of the Company. If more than 50% of the
voting power or value of the Company were owned (directly, indirectly or by
attribution) by five or fewer individuals who are citizens or residents of the
United States and if at least 60% of the Company's income consisted of certain
interest, dividend or other enumerated types of income, the Company would be an
FPHC. If the Company were an FPHC, each United States Holder (regardless of the
amount of stock owned by such United States Holder) would be required to include
in its taxable income as a constructive dividend its share of the Company's
undistributed income of specified types. If SIIL's ownership interest were to
decrease, or if United States persons were to acquire a greater ownership
interest in SIIL, then it is possible that the Company could become a CFC or
FPHC if it otherwise satisfied the tests set forth above.
The Company is not a PFIC because it is anticipated that less than 75% of its
annual gross income will consist of certain "passive" income and less than 50%
of the average value of its assets in any year will consist of assets that
produce, or are held for the production of, such passive income. If such income
and asset tests were not met and the Company were to become a PFIC, all United
States Holders would be required to include in their taxable income certain
undistributed amounts of the Company's income, or in certain circumstances, to
pay an interest charge together with tax calculated at maximum rates on certain
"excess distributions"(defined to include any gain on the sale of stock).
Any gain or loss on sale or exchange of Ordinary Shares by a United States
Holder will be a capital gain or loss. If the United States Holder has held such
Ordinary Shares for more than one year, such gain or loss will be a long-term
capital gain or loss.
Any United States person who owns 5% or more in value of the stock of the
Company may be required to file IRS form 5471 with respect to the Company and
its non-United States subsidiaries to report certain acquisitions or
dispositions of stock of the Company. Annual filings of Form 5471 would be
required from any United States person owning 5% or more of the stock of the
Company or, if the Company were an FPHC or a CFC, from certain United States
persons owning 10% or more of the stock of the Company.
Certain Bahamian Tax Considerations
The following is a brief and general summary of certain Bahamian tax matters as
they may relate to the Company and the holders of the Ordinary Shares of the
Company. The discussion is not exhaustive and is based on Bahamian law currently
in effect.
The Bahamas does not impose any income, capital gains or withholding taxes.
Therefore, the Company will not be subject to income tax in The Bahamas on an
ongoing basis and dividends paid on Ordinary
24
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SUN INTERNATIONAL HOTELS LIMITED
Shares to holders thereof will not be subject to a Bahamian withholding tax (the
Company, however, is subject to gaming taxes and other governmental fees and
charges).
ITEM 8. SELECTED FINANCIAL DATA
The following table sets forth certain historical consolidated financial
information of the Company for each of the five years ended December 31, 1998.
The historical financial information as of December 31, 1998 and 1997, and for
each of the three years ended December 31, 1998, 1997 and 1996 as set forth
below, has been derived from the audited consolidated financial statements of
the Company, included in this Form 20-F. All financial information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations", the audited consolidated financial
statements and the related notes thereto, all included in this Form 20-F.
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SUN INTERNATIONAL HOTELS LIMITED
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
(a)(b) (b) (c) (d)
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross Revenues $ 591,670 $ 600,670 $ 252,218 $ 223,214 $ 79,957
Net Revenues 550,878 558,912 240,116 213,940 76,740
Income (loss) from Operations 52,206 84,624 34,258 22,990 (19,441)
Net Income 57,746 83,008 45,722 18,359 16,475
Diluted earnings (loss) per share (e) 1.70 2.44 1.58 0.87 (1.06)
BALANCE SHEET DATA:
Total Assets $1,625,733 $1,374,740 $1,122,619 $ 370,427 $ 316,675
Long-term Debt, net of current maturities 565,752 412,209 262,618 116,153 75,000
Redeemable Common Stock 0 0 0 63,543 62,020
Shareholders' Equity 850,621 790,283 702,989 135,611 94,520
</TABLE>
(a) The results of operations for the year ended 1998 include only two weeks
of operations of the Royal Towers on Paradise Island after its grand
opening in mid-December. Income from operations and net income for the
year ended 1998 reflect $26 million in pre-opening costs.
(b) The Company acquired GGE on December 16, 1996. Accordingly, the results of
operations for the years ended December 31, 1998 and 1997 include results
of operations related to the GGE acquired assets including Resorts Casino
Hotel in Atlantic City. The results of operations for the last 16 days of
1996 were considered immaterial and were not included in the Company's
results of operations for that year. In addition, the results of
operations for the year ended December 31, 1997 included a gain of $13.4
million on the sale of the Company's casino interest in France.
(c) The Company opened the Mohegan Sun Casino in Uncasville, Connecticut in
October 1996. Accordingly, the results in 1996 reflect the Company's share
of revenues from two months of operations at this facility.
(d) The Company acquired its Paradise Island operations on May 3, 1994.
Accordingly, the results of operations for the year ended December 31,
1994 only reflect eight months of the Paradise Island operations.
(e) As indicated in Note 2 of Notes to Consolidated Financial Statements,
effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share".
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SUN INTERNATIONAL HOTELS LIMITED
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Consolidated Results
1998 vs. 1997 The Company recorded net income of $57.7 million in 1998 compared
to $83.0 million in 1997. Diluted earnings per share decreased to $1.70 in 1998
as compared to $2.44 in 1997. In December 1998, the Company completed an
expansion of its resort on Paradise Island which included the Royal Towers, a
1200-room deluxe hotel, a new 100,000 square-foot casino and entertainment
center, expanded marine habitats and other entertainment attractions. Net income
in 1998 included the write-off of incremental and non-recurring pre-opening
expenses of $26.0 million related primarily to the December opening of the Royal
Towers. In addition, in 1997, net income reflected an extraordinary loss on the
extinguishment of debt of $3.0 million and a non-recurring gain of $13.4 million
on the sale of an equity interest in an associated company. On a proforma basis,
giving effect to these non-recurring items, the Company earned net income of
$83.7 million, or $2.46 per share on a diluted basis, and $72.6 million, or
$2.14 per share in 1998 and 1997, respectively. Excluding lease income received
pursuant to the Showboat Lease, net revenues were $550.1 million in 1998 as
compared to $549.9 million in 1997. Operating expenses excluding the write-off
of pre-opening expenses were $472.7 million in 1998 versus $474.3 million in
1997.
1997 vs. 1996 The Company recorded net income of $83.0 million in 1997 compared
to $45.7 million in 1996. Diluted earnings per share increased to $2.44 in 1997
as compared to $1.58 in 1996. Net income in 1997 reflected the extraordinary
loss of $3.0 million and the non-recurring gain of $13.4 million discussed in
the paragraph above. Excluding such items, the Company earned income of $72.6
million in 1997, or $2.14 per share on a diluted basis. Net revenues, excluding
receipts from the Showboat Lease, of $549.9 million in 1997 were 129% above the
$240.1 million of net revenues recorded in 1996. Excluding receipts from the
Showboat Lease, income from operations increased to $75.6 million in 1997 from
$34.3 million in 1996. Contributing to this growth was the inclusion of the
results of the Resorts Casino Hotel in Atlantic City, which was purchased by the
Company at the end of 1996, and the strong performance of the Company's Paradise
Island operations in The Bahamas. In addition, the Mohegan Sun Casino in
Connecticut, which opened in October 1996, produced a full year's operating
results in 1997.
Segment Results
Segment results stated below conform to the Segment Information included in Note
16 of Notes to Consolidated Financial Statements included herein.
Paradise Island
1998 vs. 1997 The Company's Paradise Island operations generated income from
operations before pre-opening expenses of $42.1 million in 1998, as compared to
the $46.2 million realized in 1997. The Company's largest property on Paradise
Island, Atlantis, achieved an average occupancy of 87% for the year compared to
88% in 1997, while the average daily room rate increased by 8% to $187. The
casino generated gaming win of $84.6 million, including table game win of $50.0
million, an increase in table game win of 4% over 1997. Slot win of $34.6
million represented a decrease of 7% from the previous year. The growth in table
game win resulted from an increase in table game drop (the dollar amount of
chips purchased) of $25.2 million (or 8%) which was partially offset by a
decrease in the hold percentage (ratio of table game win to dollar amount of
chips purchased) from 15.5% to 14.9%. Slot win decreased due to a reduction in
handle (dollar amounts wagered) of $11.2 million (or 3%) and a reduction in slot
hold
27
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SUN INTERNATIONAL HOTELS LIMITED
percentage from 10.3% to 9.8%.
A significant factor in the decrease in operating earnings was the loss of
earnings from Pirate's Cove Beach Resort, a 562-room hotel, which beginning in
September 1997, was only used to house expatriate professionals and construction
staff engaged in construction on Paradise Island and was not open to the public
after that date. In 1997, Pirate's Cove Beach Resort contributed $3.1 million to
income from operations. In October 1998, the Pirate's Cove Beach Resort was
demolished. In addition, general and administrative expenses increased in 1998
by $3.2 million over the previous year (due primarily to the settlement of a new
union contract) and operating earnings in 1998 included depreciation of
approximately $1.0 million related to the Royal Towers for the last two weeks of
the year after its opening. These reductions were partially offset by an
increase in room revenues and increased casino department earnings, some of
which was attributable to the opening of the Royal Towers in December 1998. The
improved contribution from the casino was due primarily to a reduction in the
rates of taxes and fees payable to the Government on casino win.
During the year, the property was negatively impacted by the construction of the
Royal Towers of which caused some rooms to be taken out of service to house
construction workers and discounts to be given on patron room rates due to the
disruption caused by the construction activities. In addition, the casino
results reflected disruption during the process of its relocation. The
entertainment center opened in October 1998 and the Royal Towers opened in
December 1998.
1997 vs. 1996 The Company's Paradise Island operations performed well,
generating income from operations of $46.2 million in 1997, a 41% increase over
1996, on increased revenues of 11.4%. Atlantis achieved an average occupancy of
88% for the year, compared to 87% in 1996, and the average daily room rate grew
by 10% to $173. Food and beverage revenues on Paradise Island increased by 6% to
$64.2 million. The casino produced gaming win of $85.5 million, with table game
win of $48.1 million, which was a 13% increase over 1996. The growth in table
win was primarily the result of an improvement in the average hold percentage
from the unusually low 13.6% experienced in 1996 to 15.5% in 1997. Slot win for
1997, at $37.4 million, was 8% greater than that recorded in 1996 due to a 9%
increase in slot handle to $365.4 million.
The increased revenues described above were partially offset by an increase in
costs of $12.5 million. The increase in costs resulted primarily from higher
levels of business at Atlantis and the additional five months of activity at
Pirate's Cove Beach Resort which had been acquired by the Company in September
1996. At Atlantis, food and beverage costs increased by $1.0 million and gaming
taxes increased by $800,000, as a result of increased levels of activity. In
addition, major repair and maintenance projects undertaken at Atlantis increased
by $1.0 million over the prior year and depreciation and amortization increased
by $2.5 million. At Pirate's Cove Beach Resort, food and beverage costs
increased by $2.8 million, utilities by $1.1 million and property maintenance
costs by $900,000.
As described above, Pirate's Cove Beach Resort was closed to the public in
September 1997. In 1997, Pirate's Cove Beach Resort contributed $3.1 million to
income from operations, as compared to an operating loss of $300,000 in 1996.
Atlantic City
1998 vs. 1997 The Company operates in Atlantic City through the Resorts Casino
Hotel. In 1998, the property generated net revenues of $260.7 million as
compared to $270.6 million in 1997. Net revenues included gaming win of $234.7
million and $244.2 million in 1998 and 1997, respectively. Slot revenues were
$170.4 million in 1998 as compared to $170.0 million in 1997. The marginal
increase in slot revenues resulted from an improved hold percentage (from 8.7%
in 1997 to 9.4% in 1998) which was partially offset by a decline in handle of
$124.6 million to $1.822 billion. The improvement in hold percentage was due
28
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
to a change in the mix of business in favor of lower denomination machines,
which generally have a higher hold percentage. Beginning in September 1997,
management began the process of upgrading its slot product to include more of
the popular $.25 machines. Table game win totaled $62.1 million in 1998 compared
to $69.0 million in 1997. The decrease was due primarily to a decrease of $43.0
million in table game drop to $415.6 million. The reduced drop resulted
primarily from the elimination of less profitable junket business and lower
volumes of summer walk-in business. Poker, simulcast and keno revenues were $2.2
million in 1998 as compared to $5.2 million in 1997 as the Company eliminated
both poker and keno in March 1998. Operating earnings decreased by $1.7 million
as reduced revenues were significantly offset by a cost containment program and
cost reductions associated with the discontinued pursuit of certain market
segments. The Company is currently in the process of renovating the Resorts
Casino Hotel and it is anticipated that the improvement in the physical
condition of the building will have a positive impact on future earnings.
1997 As the Company acquired the Atlantic City operations in December 1996,
comparisons with the prior year are not appropriate. In 1997, the Resorts Casino
Hotel generated net revenues of $270.6 million, including $244.2 million of
gaming revenues. Slot revenues were $170.0 million for the year, with slot
handle of $1.947 billion and an average hold percentage of 8.7%. Table game
revenues for 1997 totaled $69.0 million, with table game drop of $458.6 million
and a hold percentage of 15.0%. Poker, simulcast and keno revenues were $5.2
million for the year. Other revenues were $54.9 million, which included income
from rooms, food and beverage, entertainment and miscellaneous items.
Promotional allowances totaled $28.5 million for the year. Income from
operations was $21.6 million, with gaming costs and expenses of $154.6 million
and selling, general and administrative costs of $28.6 million.
Connecticut
TCA earns management fees of between 30% to 40% of the Mohegan Sun Casino's
earnings after depreciation and interest. The percentage of profits distributed
to the partnership starts at 40% and declines to 30% based on predetermined
profitability thresholds. Prior to distributing its profits equally to its
partners, TCA contributes $1.2 million per annum to the casino's capital reserve
account, funds its own operating costs and then makes certain priority payments
to its partners or their affiliates.
In February 1998, the Mohegan Tribe announced that it had appointed TCA to
develop its proposed approximate $800 million expansion of the Mohegan Sun
Casino. In addition, TCA and the Mohegan Tribe agreed that effective January 1,
2000, TCA will turn over management of the Mohegan Sun Resort Complex (which
comprises the existing operations and the proposed expansion) to the Mohegan
Tribe. In exchange for relinquishing its rights under its existing agreements,
beginning January 1, 2000, TCA will receive annual payments of five percent of
the gross revenues of the Mohegan Sun Resort Complex for a 15-year period. Until
January 1, 2000, there will be no change in TCA's existing agreements with the
Mohegan Tribe. Pursuant to an agreement with the Mohegan Tribe, effective
January 1, 2000, the MTGA Sub Notes shall be repaid. An amount of U.S. Treasury
securities sufficient to satisfy this obligation has been deposited with a
defeasance agent.
1998 vs. 1997 During 1998, the Mohegan Sun Casino generated net revenues of
$605.6 million as compared to $495.2 million in 1997. Net revenues included
gaming win of $576.7 million and $469.4 million in 1998 and 1997, respectively.
Slot win in 1998 was $422.1 million as compared to $333.0 million in 1997. This
was due primarily to an increase in the slot handle of $1.040 billion to $5.288
billion. The hold percentage increased from 7.8% in 1997 to 8.0% in 1998 and the
gross win per slot machine per day increased from $327 in 1997 to $395 in 1998.
Table game win totaled $143.3 million in 1998 compared to $128.1 million in
1997. Table game drop increased by $60.3 million to $800.1 million and the hold
percentage increased by 0.6 percentage points to 17.9%. The increase in level of
play resulted from strong market growth in the region. Operating earnings before
bingo (which is not managed by TCA) and management fees increased by $77.7
million to $199.4 million.
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SUN INTERNATIONAL HOTELS LIMITED
TCA earned management fees of $53.7 million in 1998 as compared to $28.3 million
in 1997. The Company earned fees from TCA of $34.6 million and $17.4 million in
1998 and 1997, respectively.
1997 As the Mohegan Sun Casino opened in October 1996, comparisons to the prior
year are not appropriate. For the year ended December 31, 1997, the operations
of the Mohegan Sun Casino generated net revenues of $495.2 million including
$469.4 million of gaming revenues. The average daily gross win per slot machine
for 1997 was $327, which resulted in total slot revenues of $333.0 million.
Table revenues were $128.1 million for the year and poker revenues for the
period were $8.3 million. Income from operations before bingo and management
fees for 1997 was $121.8 million.
Total management fees to TCA for the year were $28.3 million. In 1997, the
Company earned fees of $17.4 million from TCA.
1996 The Mohegan Sun Casino generated net revenues of $97.0 million from its
opening on October 12, 1996 through December 31, 1996, including $90.9 million
of gaming revenues. The average daily gross win per slot machine for the period
was $317, which resulted in total slot revenues of $64.7 million for the period.
Table game revenues were $26.2 million, although the hold percentage of 14.5%
was low given the slower rate of play due to the initial level of inexperience
among dealers. From its opening through December 31, 1996, the operation
generated income from operations before bingo and management fees of $15.2
million. The Company earned fees of $3.6 million from TCA in 1996.
Indian Ocean
The Company has a 22.8% interest in Sun Indian Ocean, which owns five beach
resort hotels in Mauritius and one in the Comoro Islands. The Company also has
long-term management contracts with these properties, which expire in 2003. The
Company has the right to extend these agreements for a further five-year period.
1998 vs. 1997 In 1998, the Indian Ocean resorts generated revenues of $88.8
million as compared to $87.6 million in 1997 and had net income in 1998 of $12.0
million as compared to $7.4 million in 1997. As a result of the effective
devaluation of the Mauritian Rupee to the US dollar, the operating margin in
1998 improved over the prior year as revenues were maintained in US dollar
terms, although costs in US dollar terms were lower than in 1997. This was
partially offset by reduced operating profit in the Comoro Islands. In
Mauritius, the average occupancy and average room rate in 1998 were 80% and
$133, as compared to 76% and $134 in 1997. The decrease in average room rate
reflected a decrease in the dollar value of the Mauritian currency.
In 1998, the Company earned management fees from Sun Indian Ocean of $5.9
million as compared to $5.3 million in 1997. The Company also earned $90,000 of
development fees in 1998. Equity earnings in 1998 were $2.7 million as compared
to $1.7 million in 1997.
1997 vs. 1996 In 1997, the Indian Ocean resorts generated revenues of $87.6
million as compared to $74.9 million in 1996 and had net income in 1997 of $7.4
million as compared to $6.4 million in 1996. The increased profitability
resulted mainly from two new resorts which were opened in 1996 in Mauritius but
operated for a full year in 1997. These two new properties, which were developed
by the Company and are targeted at the moderate priced segments of the market,
provide a more complete product offering in the Indian Ocean. On a comparable
basis, the four established properties achieved an average occupancy of 72% in
1997, as compared to 74% in 1996, and average room rates in 1997 of $155
compared to $153 in 1996. Although the increase in average room rate is
marginal, it reflects the decrease in the dollar value of the Mauritian
currency. Including the effect of opening the two new properties, one of which
opened in March 1996 and the other in October 1996, all properties achieved an
average occupancy of
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<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
74% and an average room rate of $126 in 1997.
In 1997, the Company earned management fees from Sun Indian Ocean of $5.3
million as compared to $4.3 million in 1996. The Company also earned $226,000 of
development fees in 1996. Equity earnings in 1997 were $1.7 million as compared
to $1.5 million in 1996.
France
In June 1997, the Company sold its 25% investment in Sun France for a gain of
$13.4 million. In 1997, prior to its sale, the Company recorded equity earnings
of $523,000 and technical services fees of $350,000. In 1996, the Company
recorded equity earnings of $1.1 million and technical services fees of
$800,000.
Other Factors Affecting Earnings
1998 vs. 1997 In 1998, pre-opening expenses related to the opening of the Royal
Towers totaled $25.3 million. These represented incremental and non-recurring
charges specifically associated with the expansion and included payroll during
the training period, non-recurring marketing of the new resort and the cost of a
grand opening promotion. In addition, $631,000 of pre-opening expenses were
incurred related to the establishment of a new tour operator subsidiary in
France. Such costs were not related to the ongoing operations of the Company and
included no allocations of operating department costs.
General corporate expenses were $19.5 million in 1998 as compared to $14.7
million in 1997. The increase was due primarily to the creation in 1998 of a
management incentive bonus plan.
In 1998, the Company opened a corporate marketing, retail and public relations
office in New York City. The total cost to operate this office in 1998 was $4.4
million.
Other segments contributed $621,000 in 1998 as compared to $9.7 million in 1997
due primarily to the termination of the Showboat Lease in January 1998. The
Showboat Lease contributed $754,000 in 1998 and $9.0 million in 1997.
The Company had total interest income of $15.7 million in 1998 as compared to
$16.1 million in 1997. This included interest income on the MTGA Sub Notes
purchased from the Mohegan Tribal Gaming Authority, the owner of the Mohegan Sun
Casino, of $9.4 million in 1998 as compared to $8.5 million in 1997. The MTGA
Sub Notes currently pay interest through the issuance of additional notes. As of
December 31, 1998, the Company owned a total of $87.4 million of MTGA Sub Notes
of which $32.1 million bear interest at 15% and the balance bears interest at
prime plus 1%. The increase in interest income from MTGA was partially offset by
a decrease in bank interest income as available cash balances were used to fund
the construction of the Royal Towers.
Interest expense of $4.5 million in 1998 was lower than the prior year by $19.9
million. Interest expense before capitalization increased by $8.6 million in
1998 due to a net increase in total debt outstanding. This increase was offset
by an increase in amounts capitalized of $28.5 million.
1997 vs. 1996 Corporate expenses were $14.7 million for 1997, or 2.6% of net
revenues, compared to $10.9 million in the prior year, or 4.6% of net revenues.
The reduction in this percentage of revenues resulted primarily from the
inclusion of the results of the Resorts Casino Hotel, which did not result in a
corresponding increase in corporate expenses.
Other segments increased to $9.7 million in 1997 from $4.5 million in 1996. The
Company acquired the Showboat Lease at the end of 1996 and it contributed $9.0
million in 1997. In 1997, real estate related
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SUN INTERNATIONAL HOTELS LIMITED
costs of $1.1 million were incurred as compared to none in 1996.
The Company had total interest income of $16.1 million in 1997 as compared to
$12.5 million in 1996. This included interest income on MTGA Sub Notes of $8.5
million in 1997 as compared to $6.2 million in 1996.
Interest expense increased by $21.2 million to $24.4 million in 1997. In
connection with the acquisition of the Company's operations in Atlantic City in
December 1996, the Company acquired total debt of $252.4 million, including
$105.3 million of non-recourse debt. As described below, in March 1997, the
Company retired $140.6 million of the recourse debt with funds provided by the
issuance of $200.0 million senior unsecured subordinated notes. In March 1996,
all then outstanding bank debt of the Company was repaid with a portion of the
proceeds from a public offering of the Company's capital stock.
Liquidity, Capital Resources and Capital Spending
At December 31, 1998, the Company's current liabilities exceeded its current
assets by $46.6 million. Current liabilities included $33.7 million in capital
creditors related to the construction of the Royal Towers. Current operating
payables were high at year end due to the opening of the Royal Towers. At
December 31, 1998, unrestricted cash and cash equivalents were $61.2 million.
During the year, the Company generated $90.1 million in operating cash flow.
Pursuant to the DI Purchase Agreement, on May 17, 1999, the Company agreed to
acquire the Desert Inn Hotel and Casino for $275 million. The Company intends to
finance the payment of the amounts due under the purchase agreement by using its
cash flow from operations, the cash from the repayment of the MTGA Sub Notes,
drawing on its existing bank lines and accessing the capital markets. In this
regard, the Company anticpates increasing the size of its Bank Facility.
In 1998, the Company invested $444.0 million in capital expenditures, which
included approximately $381.3 million for the construction of the Royal Towers
and related facilities, $11.7 million for the renovation of the Resorts Casino
Hotel in Atlantic City, $18.4 million for land on Paradise Island and $11.7
million for land in Atlantic City. Expenditures for the construction of the
Royal Towers included $35.3 million of capitalized interest. At December 31,
1998, the Company had unfunded contracts in place for capital expenditures
related to the construction of the Royal Towers of approximately $28.0 million.
In 1997, the Company invested $219.7 million in capital expenditures, which
included approximately $178.3 million for the Paradise Island Expansion and
$19.8 million for land in Atlantic City. Expenditures for the Paradise Island
Expansion included $6.8 million of capitalized interest. In comparison, capital
expenditures in 1996 totaled $79.5 million, which included approximately $38.0
million for the purchase of the Pirate's Cove Beach Resort, $18.2 million for
the Paradise Island Expansion and $10.3 million for a corporate aircraft.
In Atlantic City, the Company has begun a renovation of the Resorts Casino Hotel
which will include the renovation of public spaces as well as the existing
guestrooms. It is anticipated that the renovation will cost approximately $50.0
million. Management expects the renovation to be complete by early July 1999. In
addition, during the second quarter of 1999, the Company completed construction
of a new convention center at Atlantis for a cost of approximately $20.0
million.
In 1998, the Company borrowed a net $259.0 million against an existing $375.0
million revolving credit facility to fund the construction of the Royal Towers
and related construction projects. The balance of the facility will be available
as necessary to fund the 1999 capital expenditure program and for general
corporate purposes.
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SUN INTERNATIONAL HOTELS LIMITED
In January 1998, the Company sold the land under the Showboat Casino Hotel in
Atlantic City for proceeds of $110.0 million. The majority of these proceeds was
used to redeem $105.3 million of non-recourse debt.
Pursuant to an agreement with the Mohegan Tribe, effective January 1, 2000, the
MTGA Sub Notes shall be repaid. An amount of U.S. Treasury securities sufficient
to satisfy this obligation has been deposited with a defeasance agent.
In November 1997, the Company filed a registration statement with the Securities
and Exchange Commission pursuant to which the Company may, from time to time,
issue in one or more series an aggregate of $300.0 million of debt securities
(the "Shelf Registration"). Pursuant to the Shelf Registration, in December
1997, the Company issued $100.0 million of senior subordinated unsecured notes
due December 2007. The notes bear interest at 8.625% and have the same terms as
the Senior Notes. The issuance generated net proceeds of $98.1 million.
Management believes that available cash on hand at December 31, 1998, combined
with funds generated from operations, the repayment of the MTGA Sub Notes and
funds available under the Bank Facility will be sufficient to finance its
planned operating and development activities for at least the next twelve
months; provided, however, the Company expects to need to access the capital
markets to close the DI Purchase Agreement, and in that regard anticipates
increasing the size of its Bank Facility.
Other Matters
Year 2000 Compliance
The Company utilizes software and related technologies in parts of its business
that may be affected by the date change in the year 2000 ("Y2K"). The Company is
continuing to address the impact of Y2K on its computer programs, resort
facilities and third party suppliers. The Company has established a dedicated
Year 2000 Program Office and has contracted with independent consultants to
coordinate the compliance efforts at each of its subsidiaries and ensure that
the project status is monitored and reported throughout the organization.
The Company primarily uses industry standard automated applications in most of
its locations. The majority of these applications are believed to be Y2K
compliant but the Company is currently testing compliance in coordination with
the vendors.
The Company has finalized its assessment of systems and third party suppliers.
As information is received related to these areas, the Company develops a
strategy for repair or replacement of non-compliant systems as well as testing
and validation of such items. The remediation phase is expected to be complete
by the third quarter of 1999.
Through May 31, 1999, the Company estimates that it has spent approximately $1.5
million on Y2K efforts across all areas and expects to spend a total of
approximately $2 million when complete. The Company expects to fund Y2K costs
through operating cash flows. All system modification costs associated with Y2K
will be expensed as incurred.
The Company presently believes that upon remediation of its business software
applications, as well as other equipment, the Y2K issue will not present a
materially adverse risk to the Company's future consolidated results of
operations, liquidity and capital resources. However, if such remediation is not
completed in a timely manner or the level of timely compliance by key suppliers
or vendors is not sufficient, the Y2K issue could have a material impact on the
Company's operations including, but not limited to the ability of major airlines
to service the Company's resort destinations and the provision of adequate
utility
33
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
services at these resorts, resulting in loss of revenue, increased operating
costs, loss of customers or suppliers, or other significant disruptions to the
Company's business. The Company has initiated business continuity and recovery
plans which address these issues as far as can be practical.
Determining the Y2K readiness of third party products and business dependencies
(including suppliers) requires pursuit, collection and appraisal of voluntary
statements made or provided by those parties, if available, together with
independent factual research. Although the Company has taken, and will continue
to take, reasonable efforts to gather information to determine and verify the
readiness of such products and business dependencies, there can be no assurance
that reliable information will be offered or otherwise available. Accordingly,
notwithstanding the foregoing efforts, there are no assurances that the Company
is correct in its determination or belief that a business dependency is Y2K
ready.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires computer
software costs associated with internal use software to be expensed as incurred
until certain capitalization criteria are met. The Company will adopt SOP 98-1
beginning January 1, 1999. Adoption of this statement will not have a material
impact on the Company's consolidated financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. SFAS 133 cannot
be applied retroactively. The Company will adopt SFAS 133 beginning January 1,
2000. Adoption of this statement is not expected to have a material impact on
the Company's consolidated financial position or results of operations.
34
<PAGE>
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information below provides information about the Company's market sensitive
financial instruments and constitutes "forward-looking statements". All items
described are non-trading.
The Company's major market risk exposure is changing interest rates. Due to
current governmental policies in The Bahamas which equate one Bahamian dollar to
one United States dollar and to its limited foreign operations in other
jurisdictions, the Company does not have material market risk exposures relative
to changes in foreign exchange rates. The Company's policy is to manage interest
rates through the use of a combination of fixed and floating rate debt. These
interest rate swaps were entered into with a group of financial institutions
with investment grade credit ratings, thereby minimizing the risk of credit
loss. Expected maturity dates for variable rate debt and interest rate swaps are
based upon contractual maturity dates. The Company uses variable to fixed
interest rate swap agreements to manage the impact of interest rate changes on
the Company's variable rate debt. Average pay rates under interest rate swaps
are based upon contractual fixed rates. Average variable receive rates under
interest rate swaps are based on implied forward rates in the yield curve at the
reporting date.
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment. The fair value of variable rate debt approximates the carrying value
since interest rates are variable and, thus, approximate current market rates.
The fair value of interest rate swaps is determined from representations of
financial institutions and represents the discounted future cash flows through
maturity or expiration using current rates, and is effectively the amount the
Company would pay or receive to terminate the agreements.
<TABLE>
<CAPTION>
December 31, 1998 Expected Maturity Date Fair Value
(In Thousands of Dollars) ----------------------------------------- December
Asset (liability) 1999 2000 2001 2002 2003 Thereafter Total 31, 1998
- ----------------------- ---- ---- ------ -------- ---- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable rate debt $ -- $ -- $ -- $259,000 $ -- $ -- $259,000 $259,000
Average interest rates
Interest rate swaps -- -- 50,000 40,000 -- -- 90,000 (5,200)
Average pay rate 6.78% 6.96%
Average receive rate 5.16% 5.31%
</TABLE>
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The current directors of the Company are:
Country of Director
Name Citizenship Since
- ---- ----------- -----
Derek Hawton................................ South Africa 1993
Solomon Kerzner............................. South Africa 1993
Peter Buckley............................... United Kingdom 1994
Howard Marks................................ United States 1994
Eric Siegel................................. United States 1994
Pursuant to the Company's Articles of Association, as amended, the maximum
number of directors of the Company is fixed at five. The current directors of
the Company were elected at the annual general meeting held in May 1999 and will
hold office until the date of the annual general meeting to be held in 2000. At
the annual general meeting to be held in 2000 and at each subsequent annual
general meeting, directors will
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SUN INTERNATIONAL HOTELS LIMITED
be appointed by resolution of the holders of Ordinary Shares to hold office
until the date of the next annual general meeting.
The current executive officers of the Company are:
Executive Officer
Name Age Since
- ---- --- -----------------
Solomon Kerzner
Chairman and Chief Executive Officer.................. 63 1993
Howard B. Kerzner
President............................................. 35 1995
Charles D. Adamo
Executive Vice President-Corporate Development &
General Counsel....................................... 38 1995
John R. Allison
Executive Vice President-Chief Financial Officer...... 53 1994
James Boocher
Executive Vice President-Project Development.......... 43 1996
Kevin DeSanctis
Chief Operating Officer-Gaming Operations ............ 46 1995
Peter J. Venison
Chief Operating Officer-Europe & Indian Ocean......... 56 1995
The backgrounds of each of the directors and the executive officers of the
Company are described below:
Solomon Kerzner, Chairman and Chief Executive Officer. Mr. Kerzner has been the
Chairman and Chief Executive Officer of Sun International since October 1993 and
from October 1993 to June 1996 was President. Mr. Kerzner is the Chairman of
SIIL, the Company's controlling shareholder, and of WLG, which owns an indirect
interest in SIIL. Mr. Kerzner is one of the visionary leaders of the resort and
gaming industries. Prior to founding Sun International, Mr. Kerzner pioneered
the concept of an entertainment and gaming destination resort designed and
managed to appeal to multiple market segments by developing Sun City. Located
approximately 100 miles northwest of Johannesburg, South Africa, Sun City has
been expanded in phases since its opening in 1979. The resort has been designed
to cater to a broad public market by combining gaming with a wide variety of
nongaming entertainment experiences. Today, Sun City covers approximately 620
acres and attracts over two million visitors annually. The facilities at Sun
City include four hotels with approximately 1,300 rooms, an entertainment center
that includes a 6,000-seat indoor superbowl, a 46-acre man-made lake for
watersports and approximately 55,000 square feet of gaming space. In 1992, Sun
City was expanded to include The Lost City, a $275 million themed resort which
recreates a forgotten African civilization that has been rediscovered. The Lost
City covers approximately 60 acres and its center includes The Palace, a
350-room luxury hotel. The resort also includes a man-made jungle in which over
one million trees were transplanted and the Valley of the Waves, which includes
a wave pool, adventure rides and sand beaches. During Mr. Kerzner's 30-year
career he has been responsible for the development of 21 hotels with over 5,500
rooms, and was the founder of the largest hotel chain in southern Africa. The
Company does not have any interest in any of the southern African properties
developed by Mr. Kerzner. Mr. Kerzner is the father of Mr. Howard B. Kerzner.
36
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
Howard B. Kerzner, President. Mr. Kerzner joined Sun International in May 1995
as Executive Vice President-Corporate Development and has been President of the
Company since June 1996. Prior to that time, he was Director-Corporate
Development of SIIL from September 1992. Previously Mr. Kerzner was an Associate
of Lazard Freres & Co. LLC from September 1991. Prior to that Mr. Kerzner worked
for the First Boston Corporation. Mr. Kerzner is the son of Mr. Solomon Kerzner.
Charles D. Adamo, Executive Vice President-Corporate Development & General
Counsel. Mr. Adamo joined Sun International in May 1995 as General Counsel and
has been responsible for corporate development since January 1997. Prior to that
time, he was Group Legal Advisor of SIIL from September 1994. Previously, Mr.
Adamo was engaged in the practice of law at the firm of Cravath, Swaine & Moore
in New York from 1986. Mr. Adamo is admitted to the bar in the State of New
York.
John R. Allison, Executive Vice President-Chief Financial Officer. Mr. Allison
joined Sun International in May 1995 as Chief Financial Officer. Mr. Allison
joined SIIL in March 1994 as Group Financial Director. From December 1987 until
February 1994, Mr. Allison was Financial Director of Sun International Inc.
("SII"), a resort and management holding company with interests in approximately
27 hotels in southern Africa. Prior to that time, he was the Group Financial
Director of Kimberly-Clark (South Africa) Limited for four years. He is a fellow
of the Institute of Chartered Accountants in England and Wales and a member of
the South African Institute of Chartered Accountants.
James Boocher, Executive Vice President-Project Development. Mr. Boocher joined
Sun International in November 1996. He is the executive in charge of Sun
International's expansion on Paradise Island. Before joining Sun International,
Mr. Boocher was President of Ellis-Don Construction Ltd., Canada's second
largest construction company. Prior to joining Ellis-Don, Mr. Boocher was a
construction Director for Olympia and York Development. He was involved in
projects in the World Financial Center, New York, Canary Wharf, London, England
and two office buildings in Dallas, Texas. Mr. Boocher attended Ball State
University.
Peter Buckley, Director. Mr. Buckley has been a Director of Sun International
since April 1994. Mr. Buckley is Chairman and Chief Executive Officer of
Caledonia. In 1994 he was appointed Chairman of Caledonia having been Deputy
Chairman and Chief Executive since 1987. He is also Chairman of Sterling
Industries plc--a listed company associated with Caledonia--as well as being
Chairman of English & Scottish Investors plc and Bristow Helicopter Group
Limited. He is a non-executive Director of Close Brothers Group plc,
Intercapital plc, RHS Enterprises Ltd., Offshore Logistics, Inc. (a NASDAQ
linked company), SIIL and The Telegraph plc.
Kevin DeSanctis, Chief Operating Officer - Gaming Operations. Mr. DeSanctis
joined Sun International in July 1995 as President, Gaming. Prior to joining Sun
International, Mr. DeSanctis served as Executive Vice President and Chief
Operating Officer of Hemmeter Enterprises since April 1994. From 1991 to 1994,
Mr. DeSanctis served as President and Chief Operating Officer of the Trump Plaza
Hotel and Casino. From August 1989 to February 1991, Mr. DeSanctis served as
Vice President of Casino Operations of The Mirage Hotel and Casino in Las Vegas,
Nevada. Prior to August 1989, Mr. DeSanctis served in various positions in the
casino industry.
Derek Hawton, Director. Mr. Hawton has been a Director of Sun International
since December 1993. Mr. Hawton is Executive Chairman of Kersaf . He is also a
Director of South African Mutual Life Assurance (South Africa's largest
insurance company with assets in excess of $40 billion) and a Director of
Standard Bank Investment Corporation (South Africa's largest banking group). Mr.
Hawton is a fellow of South Africa's Chartered Institute of Secretaries.
Howard Marks, Director. Mr. Marks has been a Director of Sun International since
April 1994. Mr. Marks is Chairman of Oaktree Capital Management, LLC ("Oaktree
Capital"). Oaktree Capital
37
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SUN INTERNATIONAL HOTELS LIMITED
manages funds in excess of $12 billion for institutional investors. Previously
Mr. Marks was employed by The TCW Group, Inc. where he became Chief Investment
Officer for Domestic Fixed Income and President of its largest affiliate, TCW
Asset Management Company.
Eric Siegel, Director. Mr. Siegel has been a Director of Sun International since
April 1994. Mr. Siegel is a Principal of Pegasus Insurance Partners and a
retired limited partner of Apollo Advisors, L.P. Lion Advisors, L.P. Mr. Siegel
is also a Director and member of the executive committee of El Paso Electric
Company, a publicly traded utility company.
Peter J. Venison, Chief Operating Officer-Europe & Indian Ocean. Mr. Venison
joined Sun International in May 1995 as Executive Vice President and President,
Europe & Indian Ocean. Prior to that time, he was a Managing Director of SII
from May 1990. Before joining SII, Mr. Venison was President of Treadev Limited,
a resort development company.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate compensation for directors and officers of the Company for the
year ended December 31, 1998 was $7,329,000. None of the directors or officers
participate in the Company's pension plan.
The Company has adopted an executive level bonus plan (the "Bonus Plan")
effective for 1998 pursuant to which certain executives of the Company may
qualify for bonuses if the Company attains certain target level Earnings Per
Share ("EPS") in the years ending 1998, 1999 and 2000. Under the Bonus Plan,
bonuses could range between 20% to 100% of the respective employee's base salary
if target EPS is reached in the given year with 50% of the bonus paid in cash
and 50% paid in restricted capital stock. The restricted stock would vest
equally over three years.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
The Company has adopted a Stock Option Plan (the "1995 Plan") which was approved
by shareholders at the annual general meeting held in 1995, and a Stock Option
Plan (the "1997 Plan"), which was approved by shareholders at the annual general
meeting held in 1997 and amended by shareholders at the annual general meeting
in 1998 and 1999. The 1995 Plan provides for options to be granted to purchase
up to 2,000,000 Ordinary Shares, of which options to acquire 2,000,000 Ordinary
Shares at exercise prices ranging from $11.6875 to $35.00 have been granted as
of June 1, 1999. The 1997 Plan provides for options to be granted to purchase up
to 2,500,000 Ordinary Shares, of which options to acquire 1,429,461 Ordinary
Shares at exercise prices ranging from $31.50 to $44.63 have been granted as of
June 1, 1999. The 1995 Plan provides for the options to become exercisable,
unless otherwise specified by the Board of Directors of the Company and subject
to certain acceleration and termination provisions, after two years from the
date of grant in respect of 20% of such options and thereafter in installments
of 20% per year over a four-year period. Options issued under the 1997 Plan
become exercisable one year from the date of grant with respect to 20% of such
options and thereafter in installments of 20% per year over a four-year period.
All options have a term of 10 years from the date of grant. Employees, officers
and directors of the Company and subsidiaries of the Company may be granted
options under the plans. Such options may be transferred to trusts with respect
to which any such participants are beneficiaries and corporations or other
entities controlled by such participants. As of December 31, 1998, options to
acquire 3,016,937 Ordinary Shares were outstanding, of which 360,443 were
exercisable as of that date.
As of June 1, 1999, the officers and directors of the Company, as a group, hold
options granted pursuant to the plans to acquire 1,904,678 Ordinary Shares, of
which 393,522 are currently exercisable.
38
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Not applicable.
PART III
- --------------------------------------------------------------------------------
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
Not applicable.
PART IV
- --------------------------------------------------------------------------------
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to Item 19(a) for a list of all financial statements filed as
part of this Annual Report.
39
<PAGE>
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) List of Financial Statements and Financial Statement Schedules
Page
----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Changes in Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
(b) List of Exhibits
Sequentially
Exhibit No. Description Numbered Page
----------- ----------- -------------
3.1 Asset and Land Purchase 72
SUN INTERNATIONAL HOTELS LIMITED
Agreement between
Sheraton Desert Inn Corporation,
Starwood Hotels and Resorts
Worldwide, Inc., Sheraton Gaming
Corporation, Sun International
Hotels Limited and Sun
International Nevada, Inc. Dated
as of May 17, 1999
3.2 Management Agreement between the 159
Government of Dubai and Sun
International Management Limited
and Sun International Hotels
Limited Dated as of June 5, 1998
40
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
ENFORCEABILITY OF CIVIL LIABILITIES
The Company is a Bahamian international business company incorporated under the
International Business Companies Act, 1989 of the Commonwealth of The Bahamas
(the "Companies Act"). Certain of the directors and executive officers of the
Company reside outside the United States. A substantial portion of the assets of
such persons and of the Company is located outside the United States. As a
result, in the opinion of Harry B. Sands and Company, Bahamian counsel to the
Company, it may be difficult or impossible to effect service of process within
the United States upon such persons, to bring suit in the United States or to
enforce, in the U.S. courts, any judgment obtained there against such persons
predicated upon any civil liability provisions of the U.S. federal securities
laws. It is unlikely that Bahamian courts would entertain original actions
against Bahamian companies, their directors or officers predicated solely upon
U.S. federal securities laws. Furthermore, judgments predicated upon any civil
liability provisions of the U.S. federal securities laws are not directly
enforceable in The Bahamas. Rather, a lawsuit must be brought in The Bahamas on
any such judgment. Subject to consideration of private international law, in
general, a judgment obtained after due trial by a court of competent
jurisdiction, which is final and conclusive as to the issues in connection, is
actionable in Bahamian courts and is impeachable only upon the grounds of (i)
fraud, (ii) public policy and (iii) natural justice.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain information included in this Form 20-F filing contains forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements are based on current expectations, estimates,
projections, management's beliefs and assumptions made by management. Words such
as "expects", "anticipates", "intends", "plans", "believes", "estimates" and
variations of such words and similar expressions are intended to identify such
forward-looking statements. Such statements include information relating to
plans for future expansion and other business development activities as well as
other capital spending, financing sources and the effects of regulation
(including gaming and tax regulation) and competition. Such forward-looking
information involves important risks and uncertainties that could significantly
affect anticipated results in the future and accordingly, such results may
differ from those expressed in any forward-looking statements made herein. These
risks and uncertainties include, but are not limited to, those relating to
development and construction activities, dependence on existing management,
leverage and debt service (including sensitivity to fluctuations in interest
rates), availability of financing, democratic or global economic conditions,
pending litigation, changes in tax laws or the administration of such laws and
changes in gaming laws or regulations (including the legalization of gaming in
certain jurisdictions).
41
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
SUN INTERNATIONAL HOTELS LIMITED
Accounts for the year ended December 31, 1998
F-1
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Sun International Hotels Limited:
We have audited the accompanying consolidated balance sheets of Sun
International Hotels Limited and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the three years in the period ended 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 Sun International Hotels
Limited and subsidiaries as of December 31, 1998 and 1997 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Roseland, New Jersey
January 29, 1999
F-2
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
CONSOLIDATED BALANCE SHEETS
(In thousands of US dollars)
ASSETS
December 31,
-----------------------
1998 1997
---------- ----------
Current assets:
Cash and cash equivalents $ 61,206 $ 145,018
Restricted cash equivalents 1,917 8,143
Trade receivables, net 36,319 27,986
Due from affiliates 7,062 7,901
Inventories 8,899 6,442
Prepaid expenses 5,126 5,687
---------- ----------
Total current assets 120,529 201,177
Property and equipment, net 1,257,165 929,724
Subordinated notes receivable 87,385 80,961
Deferred charges and other assets, net 36,889 33,072
Investment in associated companies 26,894 28,396
Goodwill, net 96,871 101,410
---------- ----------
Total assets $1,625,733 $1,374,740
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
-----------------------
1998 1997
---------- ----------
Current liabilities:
Current maturities of long-term debt $ 2,382 $ 406
Accounts payable and accrued liabilities 130,989 106,364
Capital creditors 33,736 19,478
---------- ----------
Total current liabilities 167,107 126,248
Long-term debt, net of current maturities 565,752 412,209
Deferred income taxes 42,253 46,000
---------- ----------
Total liabilities 775,112 584,457
---------- ----------
Commitments and contingencies
Shareholders' equity:
Ordinary Shares 34 33
Capital in excess of par 675,595 670,861
Retained earnings 174,992 119,389
---------- ----------
Total shareholders' equity 850,621 790,283
---------- ----------
Total liabilities and shareholders' equity $1,625,733 $1,374,740
========== ==========
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of US dollars, except per share data)
For The Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Revenues
Gaming $319,342 $329,610 $ 77,342
Rooms 94,942 96,846 67,243
Food and beverage 86,593 91,329 60,372
Tour operations 14,757 15,403 15,048
Management and other fees 40,645 22,979 8,896
Other revenues 35,391 44,503 23,317
-------- -------- --------
Gross revenues 591,670 600,670 252,218
Less: Promotional allowances (40,792) (41,758) (12,102)
-------- -------- --------
Net revenues 550,878 558,912 240,116
-------- -------- --------
Costs and expenses
Gaming 190,543 199,269 42,975
Rooms 15,352 15,696 12,047
Food and beverage 59,145 60,750 41,069
Other operating expenses 72,102 75,982 37,505
Selling, general and administrative 70,024 64,846 34,663
Tour operations 14,653 14,913 15,262
Corporate expenses 18,811 14,193 10,895
Depreciation and amortization 32,081 28,639 11,442
Pre-opening expenses 25,961 -- --
-------- -------- --------
Total cost and expenses 498,672 474,288 205,858
-------- -------- --------
Income from operations 52,206 84,624 34,258
-------- -------- --------
Other income (expense):
Interest income 15,651 16,144 12,499
Interest expense, net of capitalization (4,516) (24,370) (3,133)
Equity in earnings of associated companies 2,730 2,214 2,530
Gain on sale of equity interest in
associated company -- 13,386 --
Other, net (316) 335 144
-------- -------- --------
Total other income, net 13,549 7,709 12,040
-------- -------- --------
Income before provision for income taxes
and extraordinary item 65,755 92,333 46,298
Provision for income taxes (8,009) (6,368) (576)
-------- -------- --------
Income before extraordinary item 57,746 85,965 45,722
Extraordinary item, net -- (2,957) --
-------- -------- --------
Net income $ 57,746 $ 83,008 $ 45,722
======== ======== ========
Earnings per share:
Basic $ 1.74 $ 2.52 $ 1.64
======== ======== ========
Diluted $ 1.70 $ 2.44 $ 1.58
======== ======== ========
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of US dollars)
<TABLE>
<CAPTION>
Ordinary Shares Retained Earnings (Deficit)
--------------------- ---------------------------------
Accumulated Other Comprehensive
Capital in Retained Comprehensive Total Income for
Shares Amount Excess of Par Earnings (Deficit) Income Equity the Period
--------- --------- ------------- ------------------ ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 16,952 $ 17 $ 143,257 $ (7,873) $ 210 $ 135,611 --
Accretion of Series A Shares -- -- (300) -- -- (300) --
Conversion of Series A Shares 4,000 4 63,839 -- -- 63,843 --
Issuance of Ordinary Shares 8,050 8 281,226 -- -- 281,234 --
Stock issuance costs -- -- (17,868) -- -- (17,868) --
Exercise of share options 264 -- 3,111 -- -- 3,111 --
Translation reserves -- -- -- -- (1,364) (1,364) $ (1,364)
Issuance of Ordinary Shares
pursuant to the Merger 3,441 3 192,997 -- -- 193,000 --
Net income -- -- -- 45,722 -- 45,722 45,722
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 32,707 32 666,262 37,849 (1,154) 702,989 $ 44,358
=========
Translation reserves -- -- -- -- (314) (314) (314)
Exercise of share options 254 1 4,599 -- -- 4,600 --
Net income -- -- -- 83,008 -- 83,008 $ 83,008
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 32,961 33 670,861 120,857 (1,468) 790,283 $ 82,694
=========
Translation reserves -- -- -- -- (2,143) (2,143) $ (2,143)
Exercise of share options 393 1 4,734 -- -- 4,735 --
Exercise of warrants 223 -- -- -- -- -- --
Net Income -- -- -- 57,746 -- 57,746 57,746
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1998 33,577 $ 34 $ 675,595 $ 178,603 $ (3,611) $ 850,621 $ 55,603
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of US dollars)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 57,746 $ 83,008 $ 45,722
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary item -- 2,957 --
Depreciation and amortization 34,960 30,640 10,451
Gain on sale of equity interest in
associated company -- (13,386) --
(Gain) loss on sale of assets 316 (628) (144)
Equity in earnings of associated companies,
net of dividends received (670) (625) (1,111)
Utilization of tax benefits acquired in Merger 1,887 4,085 --
Provision for doubtful receivables 2,189 1,314 1,639
Provision for discount on CRDA
obligations, net 572 987 --
Net change in working capital accounts:
Receivables (19,744) (10,475) (11,679)
Due from affiliates 839 (2,833) --
Inventories and prepaid expenses (1,896) (49) (3,010)
Accounts payable and accrued liabilities 22,603 6,587 (1,603)
Net change in deferred charges
and other assets (4,953) 733 (27)
Net change in deferred tax liability (3,747) -- --
--------- --------- ---------
Net cash provided by operating activities 90,102 102,315 40,238
--------- --------- ---------
Cash flows from investing activities:
Payments for capital expenditures (443,996) (219,700) (79,476)
Proceeds from sale of investment -- 18,785 --
Proceeds from sale of assets 110,313 7,712 681
Cash acquired in connection with Merger -- -- 33,805
Purchase of Additional Subordinated Notes -- (8,000) (42,000)
Sale of Additional Subordinated Notes 2,798 2,800 22,502
Payments for expenses of Merger (745) (8,057) --
Payment received from loan to affiliate -- 1,108 --
CRDA deposits (2,955) (3,122)
Increased investment in associated companies -- -- (1,739)
--------- --------- ---------
Net cash used in investing activities (334,585) (208,474) (66,227)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of Ordinary Shares -- -- 281,234
Proceeds from exercise of share options 4,735 4,600 3,111
Early redemption of debt -- (153,712) --
Borrowings 264,000 299,084 --
Stock issuance costs -- -- (17,868)
Decrease in amounts due to affiliates -- -- (8,506)
Debt issuance costs (694) (12,762) (3,909)
Repayments of borrowings (113,596) (754) (120,099)
--------- --------- ---------
Net cash provided by financing activities 154,445 136,456 133,963
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (90,038) 30,297 107,974
Cash and Cash Equivalents at Beginning of Period 153,161 122,864 14,890
--------- --------- ---------
Cash and Cash Equivalents at End of Period $ 63,123 $ 153,161 $ 122,864
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN INTERNATIONAL HOTELS LIMITED
Note 1-Organization and Basis of Presentation
Sun International Hotels Limited ("SIHL") is an international resort and gaming
company that develops, operates and manages premier resort and casino
properties. The term "Company" as used herein includes SIHL and its
subsidiaries. The Company currently operates or manages resort hotels and
casinos in The Bahamas, Atlantic City, Connecticut and the Indian Ocean. The
Company's largest property is Atlantis, a 2,327-room resort and casino located
on Paradise Island, The Bahamas.
The Bahamas
SIHL was incorporated under the laws of the Commonwealth of The Bahamas on
August 13, 1993. The Company, through certain Bahamian subsidiaries, owns and
operates the Atlantis Resort and Casino Complex which includes the Coral and
Beach Towerss, as well as the recently opened Royal Towers, the Ocean Club Golf
& Tennis Resort, a golf course, a water plant, an airport facility and other
improvements on Paradise Island as well as land available for sale or
development.
In December 1998, the Company completed a major expansion at the Atlantis Resort
and Casino (the "Paradise Island Expansion"). The Paradise Island Expansion
included a deluxe 1,200-room hotel, a new 100,000 square-foot casino
entertainment complex, a new marina as well as a dramatic expansion to the
ocean-themed adventure environment of Atlantis. A new convention facility is
currently under construction and it is anticipated that it will cost
approximately $20.0 million and will be completed during the second quarter of
1999.
Atlantic City
Pursuant to a merger agreement (the "Merger Agreement"), on December 16, 1996
(the "Effective Date"), the Company acquired Griffin Gaming & Entertainment,
Inc. ("GGE") in a merger transaction (the "Merger"). Subsequent to the Merger,
GGE's name was changed to Sun International North America, Inc. ("SINA"). The
Company operates in Atlantic City through the Resorts Casino Hotel.
Pursuant to the Merger Agreement, each share of SINA common stock outstanding
immediately prior to the Effective Date of the Merger was converted into .4324
Ordinary Shares of the Company's capital stock (the "Ordinary Shares"). Also,
each outstanding share of SINA's Class B common stock was converted into .1928
Ordinary Shares. Each .1928 Ordinary Share received in exchange for a share of
SINA's Class B common stock trades as part of a unit along with $1,000 principal
amount of 11.375% Junior Mortgage Notes due December 15, 2004, issued by a
special purpose finance subsidiary of SINA.
At the time of the Merger, SINA also had certain warrants outstanding, which
entitled the holder thereof to purchase shares of SINA Common Stock. Pursuant to
the Merger Agreement, the warrants were adjusted into rights to acquire Ordinary
Shares. During 1998, these rights were exercised.
The Company accounted for the Merger in accordance with APB 16, "Business
Combinations" utilizing the purchase method of accounting. The purchase method
of accounting requires that SINA's acquired net assets and liabilities be
recorded at their fair values based on independent appraisals, evaluations,
estimations and other studies. Pursuant to APB 16, valuation adjustments were
made in 1997 as additional information became available, which allowed more
accurate valuations. These adjustments resulted in an increase to goodwill of
$6.9 million, a reduction in land value of $5.0 million and an increase in
accrued liabilities of $1.9 million.
F-7
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
The following unaudited proforma information for the year ended December 31,
1996 reflects the results of the Company's operations as though the Merger had
occurred on January 1, 1996. The proforma information is not necessarily
indicative of future results or what the Company's results of operations would
have been had the Merger occurred on January 1, 1996.
Dollars in thousands (except per share data)
Net revenues $ 532,061
Net income $ 52,584
Diluted earnings per share $ 1.60
Connecticut
The Company has a 50% interest in Trading Cove Associates ("TCA"), a Connecticut
general partnership that entered into a management agreement with the Mohegan
Tribal Gaming Authority ("MTGA"), an instrumentality of the Mohegan Tribe of
Indians of Connecticut (the "Tribe"), to develop and manage a casino resort and
entertainment complex situated in the town of Uncasville, Connecticut (the
"Mohegan Sun Casino"). The Mohegan Sun Casino opened on October 12, 1996. The
management agreement provides that TCA is entitled to receive between 30% and
40% of the net profits, as defined, of the Mohegan Sun Casino. The management
agreement covers development, management, marketing and administration services.
On February 9, 1998, the Company announced that the Tribe appointed TCA to
develop its proposed expansion of the Mohegan Sun Casino, which is currently
expected to cost approximately $750.0 million. In addition, TCA and the Tribe
agreed that effective January 1, 2000, TCA will turn over management of the
Mohegan Sun Resort Complex (which comprises the existing operations and the
proposed expansion) to the Tribe. In exchange for relinquishing its rights under
its existing agreements, beginning January 1, 2000, TCA will receive annual
payments of five percent of the gross revenues of the Mohegan Sun Resort Complex
for a 15-year period. Until January 1, 2000, there will be no change in TCA's
existing agreements with the Tribe.
The Company and TCA acquired $38.3 million and $1.7 million respectively, of
subordinated notes (the "Subordinated Notes") issued by MTGA. As of November 8,
1996, the Company sold $19.2 million of the Subordinated Notes and the accrued
interest thereon to its partner in TCA, at carrying value as of the date of the
sale. Also, as of that date, TCA distributed $850,000 of Subordinated Notes plus
accrued interest to the Company as a return of capital. The Subordinated Notes
earn interest at 15% per annum. Interest payable on the Subordinated Notes can
be satisfied by the issuance of additional Subordinated Notes. Interest payments
through December 31, 1998 of approximately $12.1 million on the Subordinated
Notes have been satisfied in this manner.
The Company also acquired $50.0 million of notes (the "Additional Subordinated
Notes") from MTGA related to a construction completion guarantee, which bear
interest at prime plus 1%. Interest payable on the Additional Subordinated Notes
can be satisfied by the further issuance of Additional Subordinated Notes.
Interest payments through December 31, 1998 of approximately $10.3 million on
the Additional Subordinated Notes have been satisfied in this manner. In each of
October 1998 and 1997, the Company sold $2.8 million Additional Subordinated
Notes, which included accrued interest thereon, to its partner in TCA.
Pursuant to an agreement with the Tribe, effective January 1, 2000, the
Subordinated Notes and the Additional Subordinated Notes shall be repaid and the
Company will use the proceeds to acquire a new
F-8
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
series of publicly issued subordinated notes of MTGA.
TCA is obligated to pay certain amounts to each of its partners or their
affiliates, as priority payments from its management fees, for services
provided. These amounts are paid as TCA receives sufficient management fees to
meet the priority distribution.
Share Offering
On March 1, 1996, the Company completed a public offering of 8,049,737 of its
Ordinary Shares at a price of $35 per share (the "Public Offering"). Prior to
the Public Offering, the Company had two series of stock, the Series A Ordinary
Shares (the "Series A Shares") and the Series B Ordinary Shares (the "Series B
Shares"). As a result of the Public Offering, the Company's Series A Shares and
Series B Shares were automatically redesignated as Ordinary Shares without
reference to series (the "Redesignation").
In addition, the Redesignation resulted in the elimination of a put right
associated with the Series A Shares and an increase of $63,843,000 in
shareholders' equity on the Company's consolidated balance sheet. Prior to the
Redesignation, holders of the Series A Shares were entitled to sell and require
the Company to purchase any Series A Shares tendered at a price of $17.50 per
share on May 3, 1999 (the "Put Right"). While the Series A Shares were
outstanding, the Company accreted the difference between the original issue
price of $15 and the Put Right price by charging amounts to shareholders' equity
based on the effective interest method.
Reclassification
Certain balances in the accompanying consolidated financial statements for 1997
and 1996 have been reclassified to conform with the current year presentation.
Note 2-Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of SIHL
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation. Investments in associated companies,
which are less than 50% and more than 20% owned, are accounted for under the
equity method of accounting.
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. The Company provides
allowances for doubtful accounts arising from casino, hotel and other services,
which are based upon a specific review of certain outstanding receivables. In
determining the amounts of the allowances, the Company is required to make
certain estimates and assumptions and actual results may differ from these
estimates and assumptions.
F-9
<PAGE>
Revenue Recognition
SUN INTERNATIONAL HOTELS LIMITED
The Company recognizes the net win from casino gaming activities (the difference
between gaming wins and losses) as casino revenues. Revenues from hotel and
related services are recognized at the time the related service is performed.
Management fees and other operating revenues include fees charged to
unconsolidated affiliates for casino hotel management, executive management and
project consulting. Revenues are recorded at the time the service is provided.
Promotional Allowances
The retail value of accommodations, food, beverage and other services provided
to customers without charge is included in gross revenues and deducted as
promotional allowances. The estimated departmental costs of providing such
promotional allowances are included in gaming costs and expenses as follows:
For The Year Ended December 31,
-----------------------------------
(In Thousands of Dollars) 1998 1997 1996
------- ------- -------
Rooms $ 6,671 $ 5,965 $ 919
Food and beverage 17,921 19,315 4,131
Other 5,819 5,402 260
------- ------- -------
$30,411 $30,682 $ 5,310
======= ======= =======
Amounts in 1998 and 1997 include the results of the Resorts Casino Hotel. If
these results were excluded, the total for 1998 and 1997 would be $5.7 million
and $5.4 million, respectively.
Pre-Opening Expenses
The Company capitalized pre-opening costs, substantially all of which were
associated with the Paradise Island Expansion, as they were incurred. All such
costs were written off in the fourth quarter of 1998 in conjunction with the
opening. In the first quarter of 1999, the Company will be required to adopt
Statement of Position 98-5 which states that all such costs will be charged to
expense as incurred. Adoption of this new standard is not expected to have a
material impact on the consolidated financial statements.
Foreign Currency
Transactions denominated in foreign currencies are recorded in local currency at
actual exchange rates at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies at the balance sheet dates are
reported at the rates of exchange prevailing at those dates.
Any gains or losses arising on monetary assets and liabilities from a change in
exchange rates subsequent to the date of the transaction have been included in
corporate expenses in the accompanying consolidated financial statements. These
amounts were not significant for the years ended December 31, 1998, 1997 and
1996. The financial statements of the Company's equity method investees and
certain subsidiaries are translated from their functional currencies into US
dollars using current and historical exchange rates. Translation adjustments
resulting from this process are reported separately and accumulated in
shareholders' equity. Upon sale or liquidation of the Company's investments, the
translation adjustment is reported as part of the gain or loss on sale or
liquidation.
Derivative Financial Instruments
The Company utilizes interest rate protection agreements with two counter
parties to manage the impact of
F-10
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
interest rate changes on the Company's variable rate debt obligation. The
Company does not use derivative financial instruments for trading purposes.
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed notional principal amount.
Income or expense on derivative financial instruments used to manage interest
rate exposure is recorded on an accrual basis, as an adjustment to the yield of
the underlying indebtedness over the periods covered by the contracts. If an
interest rate swap is terminated early, any resulting gain or loss is deferred
and amortized as an adjustment of the cost of the underlying indebtedness over
the remaining periods originally covered by the terminated swap. If all or part
of an underlying position is terminated, the related pro-rata portion of any
unrecognized gain or loss on the swap is recognized in income at that time as
part of the gain or loss on the termination. Amounts receivable or payable under
the agreements are included in receivables or accrued liabilities in the
accompanying consolidated balance sheets and were not material at December 31,
1998 and 1997.
Cash Equivalents
The Company considers all of its short-term money market securities purchased
with original maturities of three months or less to be cash equivalents.
Inventories
Inventories of provisions and supplies are carried at the lower of cost
(first-in, first-out) or market value. Provisions have been made to reduce
excess or obsolete inventories to their estimated net realizable value.
Property and Equipment
Property and equipment are stated at cost and are depreciated over the estimated
useful lives reported below using the straight-line method. Interest costs
incurred during the construction period are capitalized in accordance with
Statement of Financial Accounting Standards No. 34, "Capitalization of Interest
Costs".
Land improvements and utilities 14-40 years
Hotels and other buildings 15-40 years
Furniture, machinery and equipment 2-10 years
Deferred Charges and Other Assets
Deferred charges related to the Mohegan Sun Casino are generally amortized over
the term of the related management agreement. Debt issuance costs are amortized
over the terms of the related indebtedness.
Goodwill
Goodwill is amortized on a straight line basis over 40 years. Amortization
expense included in the accompanying consolidated statements of income related
to goodwill was $2.7 million, $2.4 million and $0 for the years ended December
31, 1998, 1997 and 1996, respectively. Goodwill related to the investment in
associated companies is included therein in the accompanying consolidated
balance sheets. Equity in earnings of associated companies for the years ended
December 31, 1998, 1997 and 1996 is net of $264,000, $264,000 and $263,000,
respectively, of amortization expense related to such goodwill.
F-11
<PAGE>
Stock Option Compensation
SUN INTERNATIONAL HOTELS LIMITED
The Company has elected to apply Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" in accounting for compensation under
its stock option plans in lieu of the alternative fair value accounting provided
for under Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"). Certain proforma disclosures related to
SFAS 123 are included in Note 10.
Long Lived Assets
The Company reviews its long lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable. As a result of its review, the Company
does not believe that any asset impairment exists with respect to its long lived
assets.
Income Taxes
The Company is subject to income taxes in certain jurisdictions. Accordingly,
the accompanying consolidated statements of income include provisions and
benefits for income taxes based on prevailing tax laws of those jurisdictions.
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes". Under this standard,
deferred tax assets and liabilities are determined based on the difference
between the financial reporting and tax bases of assets and liabilities at
enacted tax rates that will be in effect for the years in which the differences
are expected to reverse. A valuation allowance is recognized based on an
estimate of the likelihood that some portion or all of the deferred tax asset
will not be realized.
Other Comprehensive Income
Other comprehensive income items are not reported net of tax as they relate to
translation reserves on investments owned by foreign entities that are not
subject to taxation.
Per Share Data
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings per Share". The following
reconciliation of the shares used in the per share computations is presented:
For The Year Ended December 31,
-------------------------------
(In Thousands) 1998 1997 1996
------ ------ ------
Weighted average shares
used in basic computations 33,270 32,920 27,962
Stock options and warrants 764 1,031 953
Weighted average shares
used in diluted computations 34,034 33,951 28,915
F-12
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
The net income amount used as the numerator in calculating basic and diluted
earnings per share equals net income in the accompanying consolidated statements
of income.
Note 3- Cash and Cash Equivalents
Cash equivalents at December 31, 1998 and 1997 included reverse repurchase
agreements (federal government securities purchased under agreements to resell
those securities) under which the Company had not taken delivery of the
underlying securities and investments in a money market fund that invests
exclusively in US Treasury obligations. At December 31, 1998, the Company held
reverse repurchase agreements of $30.3 million, all of which matured January 4,
1999.
Note 4-Trade Receivables
Components of trade receivables were as follows:
December 31,
---------------------
(Dollars in Thousands) 1998 1997
-------- --------
Gaming $ 18,269 $ 15,986
Less: allowance for doubtful accounts (6,047) (5,378)
-------- --------
12,222 10,608
-------- --------
Non-gaming
Hotel and related 13,752 13,811
Other 11,510 6,830
-------- --------
25,262 20,641
Less: allowance for doubtful accounts (1,165) (3,263)
-------- --------
24,097 17,378
-------- --------
$ 36,319 $ 27,986
======== ========
Note 5 -Property and Equipment
Components of property and equipment were as follows
F-13
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
December 31,
--------------------------
(Dollars in Thousands) 1998 1997
----------- -----------
Land and land rights $ 351,826 $ 401,188
Land improvements and utilities 203,048 86,362
Hotels and other buildings 593,958 181,244
Furniture, machinery and equipment 141,284 84,801
Construction in progress 39,812 222,351
----------- -----------
1,329,928 975,946
Less: accumulated depreciation (72,763) (46,222)
----------- -----------
$ 1,257,165 $ 929,724
=========== ===========
Interest costs of $35,304,000, $6,778,000 and $438,000 were capitalized in 1998,
1997 and 1996, respectively.
Note 6 -Deferred Charges and Other Assets
Components of deferred charges and other assets were as follows:
December 31,
----------------------
(Dollars in Thousands) 1998 1997
------- -------
CRDA bonds and deposits $14,831 $12,467
Mohegan Sun Casino 2,429 3,768
Debt issuance costs 13,917 16,154
Other 5,712 683
------- -------
$36,889 $33,072
======= =======
Note 7-Accounts Payable and Accrued Liabilities
Components of accounts payable and accrued liabilities were as follows:
December 31,
---------------------
(Dollars in Thousands) 1998 1997
-------- --------
Trade payables $ 41,216 $ 35,514
Accrued payroll and related taxes
and benefits 17,361 13,735
Customer deposits and unearned
revenues 17,897 14,198
Accrued gaming taxes, fees and
related assessments 3,050 6,351
Accrued interest 8,187 9,940
Other accrued liabilities 43,278 26,626
-------- --------
$130,989 $106,364
======== ========
Note 8- Long Term Debt
F-14
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
Long-term debt consisted of the following:
December 31,
-----------------------
(Dollars in Thousands) 1998 1997
--------- ---------
9% Senior Notes due 2007 $ 200,000 $ 200,000
Unamortized discount (807) (869)
--------- ---------
199,193 199,131
--------- ---------
8.625% Senior Notes due 2007 100,000 100,000
Revolving Credit Facility 259,000 --
11% Mortgage Notes 5,352 5,354
Unamortized premium 246 285
--------- ---------
5,598 5,639
--------- ---------
11.375% Junior Mortgage Notes 1,095 1,095
Unamortized premium 54 60
--------- ---------
1,149 1,155
--------- ---------
Showboat Notes -- 105,333
Other 3,194 1,357
--------- ---------
568,134 412,615
Less: amounts due within one year (2,382) (406)
--------- ---------
$ 565,752 $ 412,209
========= =========
9% Senior Notes
The 9% senior subordinated unsecured notes due 2007 (the "9% Senior Notes"), are
unconditionally guaranteed by certain subsidiaries of SINA. Interest on the 9%
Senior Notes is payable on March 15 and September 15 each year. The indenture
for the 9% Senior Notes (the "Senior Indenture") contains certain covenants,
including limitations on the ability of the issuers and the guarantors to, among
other things: (i) incur additional indebtedness, (ii) incur certain liens, (iii)
engage in certain transactions with affiliates and (iv) pay dividends and make
certain other payments.
8.625% Senior Notes
In December 1997, the Company filed a registration statement with the Securities
and Exchange Commission pursuant to which the Company may, from time to time,
issue in one or more series an aggregate of $300.0 million of its debt
securities (the "Shelf Registration"). Pursuant to the Shelf Registration, in
December 1997 the Company issued $100.0 million of senior subordinated unsecured
notes due December 2007 (the "8.625% Senior Notes"). Interest on the 8.625%
Senior Notes is payable semi-annually on June 15 and December 15 of each year.
The indenture for the 8.625% Senior Notes contains the same covenants and
restrictions as those in the Senior Indenture.
Showboat Notes
F-15
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
The First Mortgage Non-Recourse Pass-Through Notes due June 30, 2000 (the
"Showboat Notes"), were non-recourse notes, secured by a mortgage encumbered by
a collateral assignment of the Showboat Lease, defined below, and by a pledge of
any proceeds of the sale of such mortgage and collateral assignment. Interest on
the Showboat Notes consisted of a pass-through of the lease payments received
pursuant to the lease of 10 acres of land under the Showboat Casino Hotel (the
"Showboat Lease").
On January 29, 1998, the Company sold the land under the Showboat Casino Hotel
for $110.0 million, its net book value. The majority of the proceeds were used
to redeem the Showboat Notes effective February 28, 1998.
Revolving Credit Facility
In 1997, the Company amended an existing facility (the "Revolving Credit
Facility") with a syndicate of banks led by The Bank of Nova Scotia and Societe
Generale to allow for borrowings up to $375.0 million. Loans under the Revolving
Credit Facility bear interest at (i) the higher of (a) The Bank of Nova Scotia's
base rate or (b) the Federal Funds rate, in either case plus an additional
0.750% to 1.625% based on a debt to earnings ratio during the period, as defined
(the "Debt Ratio") or (ii) The Bank of Nova Scotia's reserve-adjusted LIBOR rate
plus 1.50% to 2.25% based on the Debt Ratio. Loans under the Revolving Credit
Facility may be prepaid and reborrowed at any time and are due in full on August
12, 2002. Commitment fees are calculated at per annum rates ranging from 0.375%
to 0.500%, based on the Debt Ratio, applied to the undrawn amount of the
Revolving Credit Facility and are due, along with accrued interest, quarterly.
The Revolving Credit Facility contains restrictive covenants that include: (a)
restrictions on the payment of dividends, (b) minimum levels of earnings before
interest expense, income taxes, depreciation and amortization ("EBITDA") and (c)
a minimum relationship between EBITDA and interest expense and debt.
Overdraft Loan Facility
Pursuant to a letter of commitment dated September 30, 1994, as amended, between
the Company and The Bank of Nova Scotia, the Company has a revolving overdraft
loan facility (the "Overdraft Facility") in the amount of Bahamian $5.0 million
which was equal to US $5.0 million as of December 31, 1998 and 1997. The
Overdraft Facility bears interest at The Bank of Nova Scotia's base rate for
Bahamian dollar loans plus 1.5% with repayment subject to annual review. The
Overdraft Facility is secured by substantially all of the Company's Bahamian
assets and ranks pari passu with the Revolving Credit Facility. At December 31,
1998 and 1997, no amounts were outstanding under the Overdraft Facility.
Principal Payments
Minimum principal payments of long-term debt outstanding as of December 31, 1998
for each of the next five years and thereafter are as follows: 1999-$2,382,000;
2000-$148,000; 2001-$148,000; 2002-$259,148,000; 2003-$5,474,000;
thereafter-$300,834,000.
Note 9-Shareholders' Equity
The Company's authorized, issued and outstanding shares were as follows:
F-16
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
December 31,
-----------------
(In Thousands, except per share data) 1998 1997
------- -------
Ordinary Shares
Par value per share $ 0.001 $ 0.001
Authorized 250,000 250,000
Issued and outstanding 33,577 32,961
Preference Shares
Par value per share $ 0.001 $ 0.001
Authorized 100,000 100,000
Issued and outstanding -- --
Note 10-Stock-Based Compensation
Stock Options
In May 1995, the shareholders of the Company approved a stock option plan (the
"1995 Plan") that provided for the issuance of options to acquire up to
2,000,000 Ordinary Shares and in May 1997 the shareholders approved a stock
option plan (the "1997 Plan", and together with the 1995 Plan, the "Plans") that
provided for the issuance of options to acquire up to 1,000,000 Ordinary Shares.
In May 1998, the size of the 1997 Plan was increased to 1,500,000 Ordinary
Shares. Pursuant to the Plans, the option prices are equal to the market value
per share of the Ordinary Shares on the date of the grant. The 1995 Plan
provided for the options to become exercisable, unless otherwise specified by
the Board of Directors and subject to certain acceleration and termination
provisions, after two years from the date of grant in respect of 20% of such
options, and thereafter in installments of 20% per year over a four-year period.
The 1997 Plan provides that the vesting period begins one year after the grant
date. The options have a term of 10 years from the date of grant.
The Plans provide for options with respect to Ordinary Shares to be granted to
directors, officers and employees of SIHL and its subsidiaries.
A summary of the Company's stock option activity for 1998, 1997 and 1996 is as
follows
F-17
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
<TABLE>
<CAPTION>
December 31 ,
------------------------------------------------------------
(In Thousands, Except Per Share Data) 1998 1997 1996
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Shares Per Share Shares Per Share Shares Per Share
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 2,795 $ 26.32 1,640 $ 17.41 1,733 $ 13.73
Granted 701 41.50 1,476 35.61 103 45.68
Exercised (393) 14.45 (253) 18.20 (264) 11.78
Terminated and other (86) 36.45 (68) 33.25 (200) 10.77
Converted SINA to SIHL
options -- -- -- -- 268 19.76
----- ----- -----
Outstanding at end of year 3,017 31.38 2,795 26.32 1,640 17.41
----- ----- -----
Exercisable at end of year 360 342 368
----- ----- -----
Available for grant 125 272 394
----- ----- -----
</TABLE>
For purposes of supplemental disclosures required by SFAS 123, the fair value of
options granted during 1998, 1997 and 1996 was estimated as of the respective
dates of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for the periods presented:
<TABLE>
<CAPTION>
For The Year Ended December 31,
-------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rates 4.9% 5.8% 6.2%
Volatility factors of the expected market
price of Ordinary Shares 38.0% 34.0% 42.0%
Expected life of options in years 6-7 6-7 7
Expected dividend yields -- -- --
Weighted average grant date fair value $ 12.71 $ 11.46 $ 20.25
Proforma results based on these assumptions were as follows:
Net income (000's) $50,943 $80,109 $44,877
Diluted earnings per share $ 1.50 $ 2.36 $ 1.55
</TABLE>
Executive Bonus Plan
In 1998, the Company created a bonus plan for certain of its executives that is
payable based upon the attainment of specified earnings per share. A portion of
the bonus is payable in Ordinary Shares that vest over a three-year period. Any
unvested shares at termination of employment are forfeited.
Note 11-Related Party Transactions
In the normal course of business, the Company undertakes transactions with a
number of unconsolidated affiliated companies. Certain of the Company's
subsidiaries provide project consulting and management services to such
affiliates. Due from affiliates consisted of the following:
F-18
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
December 31,
---------------
(Dollars In Thousands) 1998 1997
------ ------
Trading Cove Associates $2,090 $3,605
Sun Indian Ocean 4,662 4,247
Other 310 49
------ ------
$7,062 $7,901
====== ======
Note 12-Retirement Plans
Certain of the Company's subsidiaries participate in a defined contribution plan
covering substantially all of their full-time employees. The Company makes
contributions to this plan based on a percentage of eligible employee
contributions. Total expense for this plan was $895,000, $830,000 and $55,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
In addition to the plan described above, union and certain other employees of
the Company's subsidiaries in The Bahamas and Atlantic City are covered by
multi-employer defined benefit pension plans to which employers make
contributions. In connection with these plans, the Company was billed and paid
$4.8 million, $3.0 million and $1.8 million for the years ended December 31,
1998, 1997 and 1996, respectively.
Note 13- Income Taxes
A significant portion of the Company's operations are located in The Bahamas
where there are no income taxes. In 1998, 1997 and 1996, the Company recorded
current federal income tax provisions of $11,477,000, $5,754,000 and $513,000
and current state income tax provisions of $279,000, $614,000 and $63,000,
respectively, relating to US operations, and in 1998, the Company recorded a
deferred federal income tax benefit of $3,747,000 relating to US operations. In
1997, the Company also recorded $1,593,000 and $450,000 in current federal and
state income tax benefits resulting from an extraordinary loss.
The effective income tax rate on income before extraordinary items varies from
the statutory federal income tax rate as a result of the following factors:
For The Year Ended December 31,
------------------------------
(Dollars In Thousands) 1998 1997 1996
------ ------ ------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Non US-source income (27.1) (31.6) (33.9)
Other 4.3 3.5 .1
------ ------ ------
Effective tax rate 12.2% 6.9% 1.2%
====== ====== ======
The components of the deferred tax assets and liabilities were as follows:
F-19
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
December 31,
----------------------
(Dollars In Thousands) 1998 1997
--------- ---------
Deferred tax liabilities
Basis differences on land held for
investment, development or resale $ (6,200) $ (50,600)
Basis differences on property and equipment (44,300) (44,300)
Other (2,100) (3,100)
--------- ---------
Total deferred tax liabilities (52,600) (98,000)
--------- ---------
Deferred tax assets
Net operating loss carryforwards 187,300 215,400
Book reserves not yet deductible for tax
return purposes 15,800 18,400
Basis difference on debt 400 9,500
Tax credit carryforwards 2,800 1,000
Other 6,000 5,300
--------- ---------
Total deferred tax assets 212,300 249,600
Valuation allowance for deferred tax assets (201,953) (197,600)
--------- ---------
Deferred tax assets, net of valuation
allowance 10,347 52,000
--------- ---------
Net deferred tax liabilities $ (42,253) $ (46,000)
========= =========
A valuation allowance has been recorded against the portion of those deferred
tax assets that the Company believes will more likely than not remain
unrealized. Such deferred tax assets primarily relate to the net operating loss
carryforwards related to SINA at the Effective Date. If such deferred tax assets
were to be realized, the corresponding reduction to the valuation allowance
would reduce the carrying value of goodwill.
For federal income tax purposes, SINA had net operating loss carryforwards of
approximately $535.0 million at December 31, 1998; however, due to the Merger,
$434.0 million of these net operating loss carryforwards (the "Pre-Change NOLs")
are limited in their availability to offset future taxable income of the
Company. As a result of these limitations, approximately $11.3 million of
Pre-Change NOLs will become available for use each year through the year 2008;
an additional $8.4 million will be available in 2009. An additional $13.0
million of these Pre-Change NOLs would be available to offset gains on sales of
assets owned at the date of the Merger that are sold within five years of that
date. The remaining Pre-Change NOLs are expected to expire unutilized.
The restricted NOL carryforwards that the Company believes will become available
for utilization in spite of the limitations expire as follows: $60.0 million in
2005, $23.0 million in 2006, $31.0 million in 2007, $12.0 million in 2008, $1.0
million in 2009 and $8.0 million in 2011. The unrestricted NOLs that the Company
believes may be used to offset future income expire as follows: $44.0 million in
2008 and $57.0 million in 2012.
Note 14-Supplemental Cash Flow Disclosures
Interest paid in 1998 and 1997, net of amounts capitalized, amounted to
$3,390,000 and $21,052,000, respectively. Income taxes paid in 1998 and 1997
amount to $6,960,000 and $519,000, respectively. In 1996, these amounts were not
materially different than amounts reflected as provisions in the accompanying
consolidated statements of income.
F-20
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
Non-cash investing and financing activities in 1998 and 1997 included the
following:
(Dollars In Thousands) December 31,
-----------------
1998 1997
------- -------
Increase (decrease) for valuation adjustments
Goodwill -- $ 6,950
Land -- $(5,000)
Accounts payable and accrued liabilities -- $ 1,950
Exchange of real estate in Atlantic City
for reduction in CRDA obligation -- $ 2,200
Property and equipment acquired under capital
lease obligations $ 5,098 --
Note 15 -Commitments and Contingencies
Casino License
The operations of casinos in both The Bahamas and Atlantic City are subject to
regulatory controls. A casino license must be obtained in each jurisdiction by
the operator and the license must be periodically renewed and is subject to
revocation at any time. In the event that the Company is not able to maintain
its licenses, management believes that the Company would still realize the
carrying value of its related assets.
Casino Reinvestment Development Authority ("CRDA") Obligations
The New Jersey Casino Control Act, as amended, requires the Company to purchase
bonds issued by the CRDA, or to make other investments authorized by the CRDA,
in an amount equal to 1.25% of its gross gaming revenues, as defined. The CRDA
bonds have interest rates ranging from 3.9% to 7.0% and have repayment terms of
between 20 and 50 years.
At December 31, 1998, the Company had $10.9 million face value of bonds issued
by the CRDA and had $16.0 million on deposit with the CRDA. These bonds and
deposits, net of an estimated discount to reflect the below-market interest rate
payable on the bonds, are included in deferred charges and other assets in the
accompanying consolidated balance sheets. The fair value of the CRDA bonds
approximates their carrying value.
New Heads of Agreement
In 1997, the Company amended an agreement (the "Amended Agreement") reached with
the Bahamian Government in 1995 that provided for certain investment incentives
to encourage the Company to undertake an expansion program at Atlantis. The
Amended Agreement provides for additional incentives in recognition of the
significant increase in the size and scope of the Paradise Island Expansion. The
Amended Agreement
F-21
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
provides for certain fixed gaming taxes as well as a 10% gaming tax to be paid
on gaming win over $20.0 million. Further, the Amended Agreement provides for a
50% credit against all variable gaming tax paid for a period of 11 years. This
tax structure became effective January 1, 1998.
In order to secure the tax incentives as described, in addition to the Paradise
Island Expansion and creation of a minimum of 2,000 new jobs for Bahamian
citizens at Atlantis, the Company is obligated to construct an additional 562
rooms on Paradise Island in place of the Pirate's Cove Beach Resort (a 562-room
hotel on Paradise Island) which the Company demolished during the fourth quarter
of 1998.
The Amended Agreement also provides for a new five-year joint marketing
agreement, pursuant to which the Bahamian Government shall match the Company's
contribution, up to $4.0 million annually, toward the direct costs related to
staging certain marketing events, public relations activities and the production
and placement of advertisements in all media.
Control of Sun International
Sun International Investments Limited ("SIIL") has agreed with the Bahamian
Government not to reduce its voting interest in SIHL below 45% until six months
after completion of the Paradise Island Expansion. Thereafter, SIIL has agreed
to control a majority of the SIHL Board of Directors for a period of five
additional years.
Litigation, Claims and Assessments
The Company is a defendant in certain litigation and is aware of certain claims
and assessments incurred in the normal course of business. In the opinion of
management, based on the advice of counsel, the aggregate liability, if any,
arising from such matters will not have a material adverse effect on the
accompanying consolidated financial statements.
A complaint was filed in December 1997 on behalf of a plaintiff and a purported
class of GGE shareholders against SIHL, GGE and various affiliates, directors
and officers of SIHL and GGE. The complaint alleges that the Proxy Statement and
Prospectus issued by SIHL and GGE in November 1996, in connection with the
Merger, was false and misleading with regard to statements made about a License
and Service Agreement entered into between GGE and The Griffin Group. The
Company believes that the case is without merit and intends to vigorously defend
its actions. In September 1998, the Company filed a Motion for Summary Judgment
to dispose of the claim, which motion has been fully briefed and is pending a
court decision.
Purchase Commitments
At December 31, 1998, the Company had unfunded contracts in place for capital
expenditures related to the Paradise Island Expansion and related to room
renovations at the Resorts Casino Hotel in Atlantic City of $28.0 million and
$12.0 million, respectively.
Note 16-Segment Information
Statement of Financial Accounting Standards No.131 "Disclosures about Segments
of an Enterprise and Related Information" requires the disclosure of information
regarding the operations of the Company based upon how management makes
operating decisions and assesses performance of such segments. The Company
operates in four geographical segments in one industry, the development,
operation and management of premier resort and casino properties. The Company
evaluates the performance of its
F-22
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
segments based primarily on operating profit before corporate expenses, interest
expense, interest income, income taxes and non-recurring items. The following is
an analysis of net revenues, contribution to consolidated income before
provision for income taxes and extraordinary item and total assets, depreciation
and amortization of goodwill and capital additions by geographical location:
Net Revenues
For The Year Ended December 31,
------------------------------
(Dollars In Thousands) 1998 1997 1996
-------- -------- --------
Casino/hotel
Atlantic City, New Jersey (a)
Gaming $234,736 $244,156 $ --
Rooms 16,148 16,514 --
Food and beverage 26,692 27,085 --
Other casino/hotel 11,460 11,344 --
Less: promotional allowances (28,295) (28,465) --
-------- -------- --------
260,741 270,634 --
-------- -------- --------
Paradise Island, The Bahamas
Gaming 84,606 85,454 77,342
Rooms 78,794 80,332 67,243
Food and beverage 59,901 64,244 60,372
Other casino/hotel (b) 34,157 36,886 34,746
Less: promotional allowances (12,497) (13,293) (12,102)
-------- -------- --------
244,961 253,623 227,601
-------- -------- --------
Total casino/hotel 505,702 524,257 227,601
Management and other fees
Connecticut (c) 34,613 17,356 3,565
Indian Ocean 6,032 5,273 4,497
Other segments 4,531 12,026 4,453
-------- -------- --------
Net revenues $550,878 $558,912 $240,116
======== ======== ========
F-23
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
Contribution to Consolidated Income before Provision for Income Taxes and
Extraordinary Item
For The Year Ended December 31,
------------------------------
(Dollars In Thousands) 1998 1997 1996
-------- -------- --------
Casino/hotel
Atlantic City, New Jersey (a) $ 19,915 $ 21,591 $ --
Paradise Island, The Bahamas (b) 42,132 46,240 32,690
-------- -------- --------
62,047 67,831 32,690
-------- -------- --------
Management and other fees, net of amortization
Connecticut (c) 33,376 16,504 3,565
Indian Ocean 6,032 5,273 4,497
General corporate (19,505) (14,682) (10,947)
Non-recurring pre-opening expenses (25,961) -- --
Other segments 621 9,698 4,453
Corporate marketing, retail and public relations (4,404) -- --
-------- -------- --------
Income from operations 52,206 84,624 34,258
-------- -------- --------
Other income (expense)
Interest income 15,651 16,144 12,499
Interest expense, net of capitalization (4,516) (24,370) (3,133)
Equity in earnings of associated companies
Indian Ocean 2,730 1,691 1,452
France (d) -- 523 1,078
Gain on sale of equity interest
in associated company (d) -- 13,386 --
Other, net (316) 335 144
-------- -------- --------
Income before provision for income
taxes and extraordinary item $ 65,755 $ 92,333 $ 46,298
======== ======== ========
Total Assets, Depreciation and Amortization of Goodwill and Capital Additions
<TABLE>
<CAPTION>
(Dollars In Thousands) As of December 31, 1998 Year Ended December 31, 1998
----------------------- ----------------------------
Depreciation
and
Amortization Capital
Total Assets of Goodwill Additions
------------ ------------ ------------
<S> <C> <C> <C>
Casino/hotel
Atlantic City, New Jersey $ 407,060 $ 14,155 $ 16,572
Paradise Island, The Bahamas 981,014 15,993 13,569
Paradise Island Expansion,
opened December 1998 (e) -- -- 381,321
------------ ------------ ------------
1,388,074 30,148 411,462
------------ ------------ ------------
Real estate related
Atlantic City, New Jersey 56,839 -- 11,727
Paradise Island, The Bahamas 31,726 -- 18,371
------------ ------------ ------------
88,565 -- 30,098
------------ ------------ ------------
Equity investment in Indian Ocean 26,894 -- --
General corporate 119,614 1,835 553
Corporate marketing, retail and public relations 1,891 97 1,870
Other segments 695 1 13
------------ ------------ ------------
$ 1,625,733 $ 32,081 $ 443,996
============ ============ ============
</TABLE>
F-24
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
<TABLE>
<CAPTION>
(Dollars In Thousands) As of December 31, 1997 Year Ended December 31, 1997
----------------------- ----------------------------
Depreciation
and
Amortization Capital
Total Assets of Goodwill Additions
------------ ------------ ------------
<S> <C> <C> <C>
Casino/hotel
Atlantic City, New Jersey $ 418,486 $ 13,424 $ 9,062
Paradise Island, The Bahamas 327,910 13,874 11,107
Paradise Island Expansion,
under construction 225,514 -- 178,328
------------ ------------ ------------
971,910 27,298 198,497
------------ ------------ ------------
Real estate related
Atlantic City, New Jersey 155,368 -- 19,726
Paradise Island, The Bahamas 28,284 -- 1,012
------------ ------------ ------------
183,652 -- 20,738
------------ ------------ ------------
Equity investment in Indian Ocean 28,396 -- --
General corporate 190,782 1,341 465
------------ ------------ ------------
$ 1,374,740 $ 28,639 $ 219,700
============ ============ ============
<CAPTION>
(Dollars In Thousands) As of December 31, 1996 Year ended December 31, 1996
----------------------- ----------------------------
Depreciation
and
Amortization Capital
Total Assets of Goodwill Additions
------------ ------------ ------------
<S> <C> <C> <C>
Casino/hotel
Atlantic City, New Jersey (a) $ 380,470 $ -- $ --
Paradise Island, The Bahamas 286,101 11,357 12,936
Purchase of Pirate's Cove Beach Resort 38,000 -- 38,000
Paradise Island Expansion,
under construction 20,646 -- 18,200
------------ ------------ ------------
725,217 11,357 69,136
------------ ------------ ------------
Real estate related
Atlantic City, New Jersey (a) 159,104 -- --
Paradise Island, The Bahamas 27,272 -- --
------------ ------------ ------------
186,376 -- --
------------ ------------ ------------
Equity investment in Indian Ocean 28,295 -- --
Equity investment in France (d) 4,831 -- --
General Corporate 177,900 85 10,340
------------ ------------ ------------
$ 1,122,619 $ 11,442 $ 79,476
============ ============ ============
</TABLE>
(a) Atlantic City operations are included in SIHL's consolidated financial
statements effective January 1, 1997 pursuant to the Merger described in
Note 1.
(b) Includes tour operations.
(c) Mohegan Sun Casino in Connecticut opened in October 1996.
(d) Equity investment in France was sold in June 1997.
(e) The total assets and depreciation for 1998 are included in Paradise
Island, The Bahamas.
Note 17 -Equity in Earnings of Associated Companies
F-25
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
The accompanying consolidated financial statements include equity in earnings of
associated companies as a result of the Company's 22.8% interest in a company
that owns and operates beach resort hotels in the Indian Ocean ("Sun Indian
Ocean") and 25% equity holding in a company that owns and operates casinos in
France ("Sun France").
On June 17, 1997, the Company sold its investment in Sun France for cash
proceeds of $18.8 million. The resulting gain on sale of investment was $13.4
million.
The following summarized financial information of Sun Indian Ocean has been
prepared under United States generally accepted accounting principles at and for
the years ended December 31, 1998, 1997 and 1996; converted to thousands of US
dollars at the appropriate exchange rate.
For The Year Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
Revenues $ 88,773 $ 87,576 $ 74,850
Income from operations 17,172 13,942 13,626
Income before income taxes 14,237 9,114 9,858
December 31,
------------------------------
1998 1997 1996
-------- -------- --------
Current assets $ 23,123 $ 25,821 $ 24,497
Total assets 152,594 160,245 167,634
Current liabilities 31,714 36,271 40,428
Shareholders' equity 83,394 88,990 92,241
Note 18-Derivative Financial Instruments
The Company is exposed to market risks arising from changes in interest rates.
Due to current governmental policies in The Bahamas which equate one Bahamian
dollar to one United States dollar and to its limited foreign operations in
other jurisdictions, the Company does not have material market risk exposures
relative to changes in foreign exchange rates.
Credit Exposure
The Company is exposed to credit related losses in the event of non-performance
by counter parties to certain interest rate swaps. The Company monitors the
credit worthiness of the counter parties and presently does not expect default
by any of the counter parties. The Company does not obtain collateral in
connection with its derivative financial instruments.
The credit exposure that results from interest rate swaps is represented by the
fair value of contracts with a positive fair value as of the reporting date. See
Note 19, Fair Value of Financial Instruments, for the fair value of derivatives.
The Company had no credit exposure on its interest rate swaps at December 31,
1998.
Interest Rate Risk Management
F-26
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
The Company uses interest rate swap agreements to manage the impact of interest
rate changes on the Company's Revolving Credit Facility. The amounts exchanged
by the counter parties to interest rate swap agreements normally are based upon
the notional amounts and other terms, generally related to interest rates, of
the derivatives. While notional amounts of interest rate swaps form part of the
basis for the amounts exchanged by the counter parties, the notional amounts are
not themselves exchanged, and therefore do not represent a measure of the
Company's exposure as an end user of derivative financial instruments. At
December 31, 1998 and 1997, notional principal amounts related to interest rate
swaps (variable to fixed rate) were $90.0 million and $20.0 million,
respectively. As of January 1, 1999, the notional principal amounts increased by
$35.0 million which amount matures January 1, 2002. The swap portfolio
maturities at December 31, 1998 are as follows: December 31, 2001- $50.0 million
and January 1, 2002- $40.0 million. As of December 31, 1998, the weighted
average fixed rate payment on the variable to fixed rate swaps was 6.86%.
Variable rates received are indexed to LIBOR rate.
Note 19-Fair Value of Financial Instruments
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation.
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. The assumptions used
have a significant effect on the estimated amounts reported.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments: (a) Cash and cash equivalents,
receivables, other current assets, accounts payable, accrued liabilities and
variable rate debt: The amounts reported in the accompanying consolidated
balance sheets approximate fair value; (b) Fixed-rate debt: Fixed rate debt is
valued based upon published market quotations, as applicable. The carrying
amount of remaining fixed-rate debt approximates fair value; (c) Interest rate
swaps: The fair value of interest rate swaps was determined from the
representations of financial institutions. At December 31, 1998, the carrying
value and negative fair value of the Company's interest rate swaps was $0 and
$5.2 million, respectively.
F-27
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all the requirements for filing on
Form 20-F and has duly caused this annual report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SUN INTERNATIONAL HOTELS LIMITED
Date: June 29, 1999 By: John R. Allison
--------------------------------
Name: John R. Allison
Title: Executive Vice President
Chief Financial Officer
F-28
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
3.1 Asset and Land Purchase 72
Agreement between
Sheraton Desert Inn Corporation, Starwood
Hotels and Resorts Worldwide, Inc.,
Sheraton Gaming Corporation,
Sun International Hotels Limited
and Sun International Nevada, Inc.
dated as of May 17, 1999
3.2 Management Agreement between the
government of Dubai and Sun 159
International Management Limited
and Sun International Hotels Limited
dated as of June 5, 1998
F-29
Execution Copy
ASSET AND LAND PURCHASE AGREEMENT
BETWEEN
SHERATON DESERT INN CORPORATION
STARWOOD HOTELS AND RESORTS WORLDWIDE, INC.
SHERATON GAMING CORPORATION
SUN INTERNATIONAL HOTELS LIMITED
AND
SUN INTERNATIONAL NEVADA, INC.
Dated as of
May 17, 1999
<PAGE>
TABLE OF CONTENTS
ARTICLE I
Terms and Definitions
SECTION 1.1 Terms and Definitions . . . . . . . . . . . . . . .1
SECTION 1.2 Terms and Usage Generally . . . . . . . . . . . . 11
ARTICLE II
Purchase and Sale of and Description of Assets
SECTION 2.1 Purchase and Sale.. . . . . . . . . . . . . . . . 11
SECTION 2.2 Description of Assets . . . . . . . . . . . . . . 12
SECTION 2.3 Description of Excluded Assets. . . . . . . . . . 16
ARTICLE III
Contracts and Liabilities To Be Assumed
SECTION 3.1 Contracts . . . . . . . . . . . . . . . . . . . . 18
SECTION 3.2 Assumed Liabilities . . . . . . . . . . . . . . . 18
SECTION 3.3 Consents. . . . . . . . . . . . . . . . . . . . . 19
ARTICLE IV
Purchase Price
SECTION 4.1 Purchase Price. . . . . . . . . . . . . . . . . . 20
SECTION 4.2 Payment of Purchase Price; Extension Amount . . . 20
SECTION 4.3 Disbursement of Deposit.. . . . . . . . . . . . . 21
SECTION 4.4 Purchase Price Adjustment . . . . . . . . . . . . 22
ARTICLE V
Confidential Information
SECTION 5.1 Confidentiality . . . . . . . . . . . . . . . . . 24
<PAGE>
ARTICLE VI
Representations and Warranties of
each of Parents and Seller
SECTION 6.1 Parents' and Seller's Representations and
Warranties. . . . . . . . . . . . . . . . . . . 25
SECTION 6.2 No Implied Representations. . . . . . . . . . . . 32
SECTION 6.3 Survival of Seller's Warranties . . . . . . . . . 33
ARTICLE VII
Representations and Warranties of SUN and Buyer
SECTION 7.1 SUN's and Buyer's Representations and
Warranties. . . . . . . . . . . . . . . . . . . 34
SECTION 7.2 Survival of Buyer's and SUN'S Representations
and Warranties. . . . . . . . . . . . . . . . . 35
ARTICLE VIII
Title Insurance
SECTION 8.1 Title Policies and Exceptions . . . . . . . . . . 35
ARTICLE IX
Conduct of Business Prior to Closing
SECTION 9.1 Seller's Conduct. . . . . . . . . . . . . . . . . 37
SECTION 9.2 Operating Restrictions. . . . . . . . . . . . . . 39
ARTICLE X
Other Pre-Closing Obligations
SECTION 10.1 Access; Observers. . . . . . . . . . . . . . . . 42
SECTION 10.2 No Control . . . . . . . . . . . . . . . . . . . 43
SECTION 10.3 Hart-Scott-Rodino Filing . . . . . . . . . . . . 43
SECTION 10.4 Cooperation. . . . . . . . . . . . . . . . . . . 44
SECTION 10.5 Gaming and Other Licenses. . . . . . . . . . . . 44
SECTION 10.6 Best Efforts . . . . . . . . . . . . . . . . . . 45
SECTION 10.7 Notice . . . . . . . . . . . . . . . . . . . . . 45
SECTION 10.8 Parcel Map Requirement . . . . . . . . . . . . . 45
SECTION 10.9 Additional Agreements of Seller. . . . . . . . . 45
<PAGE>
ARTICLE XI
Conditions to Closing
SECTION 11.1 Buyer's Conditions . . . . . . . . . . . . . . . 46
SECTION 11.2 Seller's Conditions. . . . . . . . . . . . . . . 48
SECTION 11.3 Frustration of Closing Conditions. . . . . . . . 49
ARTICLE XII
Escrow
SECTION 12.1 Escrow . . . . . . . . . . . . . . . . . . . . . 50
SECTION 12.2 Investment . . . . . . . . . . . . . . . . . . . 50
ARTICLE XIII
Closing
SECTION 13.1 Time; Location.. . . . . . . . . . . . . . . . . 51
SECTION 13.2 Recordation of Deeds . . . . . . . . . . . . . . 51
SECTION 13.3 Payment of Closing Date Amount.. . . . . . . . . 51
SECTION 13.4 Certain Expenses . . . . . . . . . . . . . . . . 52
SECTION 13.5 Transfer of Possession . . . . . . . . . . . . . 52
ARTICLE XIV
[Intentionally Omitted] . . . . . . . . 52
ARTICLE XV
Survival; Indemnification
SECTION 15.1 Survival . . . . . . . . . . . . . . . . . . . . 52
SECTION 15.2 Indemnification. . . . . . . . . . . . . . . . . 52
SECTION 15.3 Calculation of Losses. . . . . . . . . . . . . . 53
SECTION 15.4 Procedures Relating to Indemnification . . . . . 53
SECTION 15.5 Other Claims . . . . . . . . . . . . . . . . . . 54
SECTION 15.6 Exclusivity. . . . . . . . . . . . . . . . . . . 55
SECTION 15.7 No Consequential Damages . . . . . . . . . . . . 55
<PAGE>
ARTICLE XVI
Termination
SECTION 16.1 Grounds for Termination. . . . . . . . . . . . . 55
SECTION 16.2 Effect of Termination. . . . . . . . . . . . . . 56
SECTION 16.3 Liquidated Damages.. . . . . . . . . . . . . . . 57
SECTION 16.4 Survival . . . . . . . . . . . . . . . . . . . . 58
ARTICLE XVII
Collection of Chips and Tokens;
Baggage and Safe Deposits
SECTION 17.1 Collection of Chips and Tokens . . . . . . . . . 58
SECTION 17.2 Baggage. . . . . . . . . . . . . . . . . . . . . 59
SECTION 17.3 Safe Deposits. . . . . . . . . . . . . . . . . . 59
SECTION 17.4 Valet Parking. . . . . . . . . . . . . . . . . . 59
ARTICLE XVIII
Loss by Fire or Other Casualty; Condemnation
SECTION 18.1 Fire or Other Casualty; Condemnation . . . . . . 60
ARTICLE XIX
Employee and Employee Benefit Matters
SECTION 19.1 Salaries and Benefits. . . . . . . . . . . . . . 61
SECTION 19.2 Multiemployer Plan . . . . . . . . . . . . . . . 62
ARTICLE XX
Miscellaneous
SECTION 20.1 Entire Agreement . . . . . . . . . . . . . . . . 65
SECTION 20.2 Notices. . . . . . . . . . . . . . . . . . . . . 65
SECTION 20.3 Governing Law. . . . . . . . . . . . . . . . . . 66
SECTION 20.4 Successors and Assigns . . . . . . . . . . . . . 66
SECTION 20.5 Closing Costs. . . . . . . . . . . . . . . . . . 66
SECTION 20.6 Attorneys' Fees. . . . . . . . . . . . . . . . . 67
SECTION 20.7 Amendments . . . . . . . . . . . . . . . . . . . 67
SECTION 20.8 Further Assurances . . . . . . . . . . . . . . . 67
SECTION 20.9 Headings . . . . . . . . . . . . . . . . . . . . 67
SECTION 20.10 Non-Waiver . . . . . . . . . . . . . . . . . . . 67
SECTION 20.11 No Third Party Benefitted. . . . . . . . . . . . 67
SECTION 20.12 Publicity; No Recordation. . . . . . . . . . . . 68
SECTION 20.13 Counterparts . . . . . . . . . . . . . . . . . . 68
SECTION 20.14 Severability . . . . . . . . . . . . . . . . . . 68
SECTION 20.15 Exhibits and Schedules . . . . . . . . . . . . . 68
SECTION 20.16 Finder's Fees. . . . . . . . . . . . . . . . . . 68
SECTION 20.17 Cooperation. . . . . . . . . . . . . . . . . . . 69
SECTION 20.18 Consent to Jurisdiction. . . . . . . . . . . . . 69
EXHIBITS
Exhibit 10.6(b)-1 Timeshare Joint Venture Agreement
Exhibit 10.6(b)-2 Golf Course Management Agreement
Exhibit 10.6(b)-3 Marketing Alliance Agreement
<PAGE>
Execution Copy
ASSET AND LAND PURCHASE AGREEMENT
This Asset and Land Purchase Agreement ("Agreement") is made and
entered into as of May 17, 1999 ("Effective Date") by and between Sheraton
Desert Inn Corporation, a Nevada corporation ("SDIC" or "Seller"), Starwood
Hotels and Resorts Worldwide, Inc., a Maryland corporation ("Starwood"),
Sheraton Gaming Corporation, a Nevada corporation ("SGC", and together with
Starwood, the "Parents"), Sun International Hotels Limited, an international
business company organized under the laws of the Commonwealth of the Bahamas
("SUN") and Sun International Nevada, Inc., a Nevada corporation and a
wholly-owned subsidiary of SUN ("Buyer"), with reference to the following facts:
A. SDIC and its affiliates own the Assets (as defined below).
B. SDIC and its affiliates desire to sell, and each of the Parents desires
to cause SDIC and its affiliates to sell, the Assets to Buyer and Buyer desires
to purchase, and SUN desires to cause Buyer to purchase, the Assets and to
assume certain liabilities associated with the Assets and certain other
liabilities, on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein set forth, and other valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
Terms and Definitions
SECTION 1.1 Terms and Definitions.
(a) As used in this Agreement, the following terms shall have the
following meanings:
"Accountant" means Arthur Andersen LLP or such other nationally
recognized independent public accounting firm selected by Seller and reasonably
acceptable to Buyer and Seller.
"Accrued Interest" has the meaning set forth in Section 4.1(a).
"ACSM" has the meaning set forth in Section 8.1(e).
<PAGE>
"Adjusted Purchase Price" has the meaning set forth in Section
4.4(c).
"Affiliate" or "affiliate" means, in respect of any Person, another
Person which owns, controls, is controlled by or is under common control with
such Person, including any subsidiary or parent.
"Agreement" has the meaning set forth in the introductory paragraph
hereof.
"ALTA" has the meaning set forth in Section 8.1(e).
"Applicable Interest Rate" has the meaning set forth in Section
4.1(a).
"Applicable Accrued Deposit" means an amount equal to the sum of (x)
$15,000,000 and (y) the product of (i) $15,000,000, (ii) a fraction, the
numerator of which shall be the number of days in the period from and including
date on which the Deposit is placed in the Escrow to but excluding the Closing
Date, and the denominator of which shall be 365 and (iii) a rate of interest
equal to one-half (1/2) of the average rate of interest per annum for one-year
U.S. Treasury Notes for such period.
"Assets" has the meaning set forth in Section 2.1.
"Assumed Contracts" has the meaning set forth in Section 3.1.
"Assumed Liabilities" has the meaning set forth in Section 3.2(a).
"Balance Sheet" has the meaning set forth in Section 4.4(d).
"Business" means the hotel, casino (gaming), convention, meeting,
restaurant, bar, golf course, spa and recreational facilities and functions of
The Desert Inn Resort & Casino in Las Vegas, Nevada, and all marketing and
<PAGE>
sales offices or other property owned, leased or occupied by SDIC, its
subsidiaries or affiliates relating to the Business whether on or away from the
Business Premises.
"Business Day" means any day other than a Saturday, a Sunday or a
day on which banking institutions in New York or Nevada are authorized by law to
close.
"Business Premises" means and includes the Real Estate and all sales
offices or real property owned, leased or occupied by SDIC or its subsidiaries
or affiliates used solely in connection with the Business, whether on or away
from the Real Estate. To the extent not located on the Real Estate, the Business
Premises are listed in Schedule 2.2(f).
"Buyer" has the meaning set forth in the introductory paragraph
hereof.
"Buyer's Closing Conditions" has the meaning set forth in Section
11.1.
"Buyer Material Adverse Effect" has the meaning set forth in Section
7.1(c).
"Caesars Closing Date" has the meaning set forth in Section 4.1(a).
"Caesars World Agreement" means the Stock Purchase Agreement entered
into as of April 27, 1999, by and among Starwood, certain wholly owned
subsidiaries of Starwood and Park Place Entertainment Corp., a Delaware
corporation.
"Closing" has the meaning set forth in Section 13.1.
"Closing Date" has the meaning set forth in Section 13.1.
"Closing Date Amount" means the Purchase Price plus or minus the
estimated adjustment being made pursuant to Section 4.4.
<PAGE>
"Closing Working Capital" has the meaning set forth in Section
4.4(a).
"Code" means the Internal Revenue Code of 1986, as amended.
"Collective Bargaining Agreement" has the meaning set forth in
Section 19.1.
"Confidential Information" has the meaning set forth in Section
5.1(b).
"Corner Land" has the meaning set forth in Section 2.2(b).
"Country Club Lane" means the real property described on Schedule
1.1(a).
"Current Assets" has the meaning set forth in Section 4.4(d).
"Current Liabilities" has the meaning set forth in Section 4.4(d).
"Deeds" means collectively, the deeds to be delivered pursuant to
Section 11.1(c).
"Deposit" has the meaning set forth in Section 4.2(a).
"DIIC" has the meaning set forth in Section 2.2(m).
"DIIC Land" has the meaning set forth in Section 8.1(c).
"Dio Drive Vacated Area" means the real property described on
Schedule 1.1(b).
"Effective Date" has the meaning set forth in the introductory
paragraph hereof.
<PAGE>
"Environmental Claim" means any claim for any Loss, liability, cost
or expense, including damage to or restoration of natural resources,
administrative or regulatory oversight costs, consultants' fees and expenses,
medical monitoring costs and property value diminution, asserted by any third
Person, including any governmental authority, and arising under Environmental
Law.
"Environmental Laws" means all Federal, state and local laws, rules,
regulations, decrees, ordinances and orders which regulate the treatment,
management, storage or use of Hazardous Materials or the release of Hazardous
Materials to the environment, or impose requirements relating to environmental
protection or restoration or to public or employee health and safety.
"ERISA" has the meaning set forth in Section 19.2(b).
"Escrow" has the meaning set forth in Section 12.1.
"Escrowee" means Nevada Title Company, 3320 W. Sahara Avenue, Las
Vegas, Nevada 89102, Attention: Mr. Frank Brader, Title Officer and Troy
Lochhead, Escrow Officer.
"Excluded Assets" has the meaning set forth in Section 2.3.
"Excluded Liabilities" has the meaning set forth in Section 3.2(b).
"Extension Amount" has the meaning set forth in Section 4.2(c).
"GAAP" has the meaning set forth in Section 4.4(d).
"Gaming Equipment" means "associated equipment" as defined in NRS
Section 463.0136, "gaming devices" as defined in NRS Section 463.0155, gaming
tables, keno and sports book furniture and equipment and all other
<PAGE>
equipment and paraphernalia, including (subject to those exclusionary provisions
of Section 2.2(g) concerning proprietary hardware and software) computer
equipment and computer software owned or licensed by SDIC or its subsidiaries or
affiliates and used in the conduct of gaming on the Business Premises.
"Gaming Licenses" has the meaning set forth in Section 10.5.
"Gaming Receivable" means any "Credit instrument", as such term is
defined in Chapter 463 of NRS or any successor statute thereto.
"Golf Course Management Agreement" has the meaning set forth in
Section 9.1(i).
"Hazardous Materials" means any (a) oil, petroleum products,
flammable substances, explosives, radioactive materials, hazardous materials,
wastes or substances, toxic wastes or substances; and (b) any chemical, material
or substance defined as or included in the definition of "hazardous substances,"
"hazardous wastes," "hazardous materials," "acute hazardous waste," "extremely
hazardous waste," "restricted hazardous waste," "toxic substances," "toxic
chemicals," "infectious wastes," "contaminants" or "pollutants" or words of
similar import under any applicable Environmental Law or otherwise regulated
under applicable Environmental Law.
"HSR Act" has the meaning set forth in Section 10.3.
"Indemnified Party" has the meaning set forth in Section 15.3.
"Intangible Property" has the meaning set forth in Section 2.2(j).
"Inventoried Baggage" has the meaning set forth in Section 17.2.
"Inventoried Vehicles" has the meaning set
<PAGE>
forth in Section 17.4.
"Inventories" has the meaning set forth in Section 2.2(q).
"ITT" means ITT Corporation, a Nevada corporation.
"knowledge" means, as of any date of determination, (a) with respect
to Seller, the actual knowledge or awareness, as of such date, of Peter Boynton,
Robert Pearson, Mark Lefever, Thomas Smock or Kathy Moore and (b) with respect
to Buyer, the actual knowledge or awareness, as of such date, of Howard Kerzner,
Charles Adamo or John Allison. The words "know", "knowing" and "known" shall be
construed accordingly.
"Legal Requirements" means any applicable law, statute, treaty,
ordinance, code, orders, judgments, decrees, injunctions, rules, regulations,
permits, licenses, authorizations, directions and requirements of all
governments and governmental authorities having jurisdiction over the Real
Estate (including, for purposes hereof, any local Board of Fire Underwriters),
the Assets, the Business or over the operation thereof.
"Licenses" has the meaning set forth in Section 10.5.
"Losses" has the meaning set forth in Section 15.2.
"Marketing Alliance Agreement" has the meaning set forth in Section
10.6(b).
"Material Adverse Effect" means a material adverse effect on the
business, assets, condition (financial or otherwise) or results of operations of
the Business or the Assets taken as a whole, including the revocation or failure
to obtain any Gaming License or any permit or license necessary or required for
the continued operation of the Casino, but shall exclude any effect to the
extent resulting from (i) any condition or event that adversely
<PAGE>
affects the gaming industry generally or the gaming industry in Nevada, (ii)
general economic conditions, (iii) the implementation of California Proposition
No. 5 or the proposal, passage or implementation of any similar law or
initiative or (iv) the proposal or passage of any law or other initiative
restricting or adversely affecting the conduct of gaming operations generally.
"Material Damage" means unrepaired damage as a result of fire or
other casualty to all or any Material Portion of the Business Premises or the
Assets such that the cost to replace or repair such damaged Business Premises
and Assets exceeds $50,000,000 or which results in any Material Portion of the
Business Premises or the Assets being unusable for a period in excess of six
months.
"Material Portion" means (i) all or any portion of the Business
Premises that represents at least 15% of the assessed value for tax purposes of
the Real Estate or (ii) 5% or more of the Corner Land.
"Multiemployer Plans" has the meaning set forth in Section 19.2(a).
"Nevada Gaming Authorities" means the Nevada State Gaming Control
Board, the Nevada Gaming Commission and the Clark County Liquor and Gaming
Licensing Board.
"Nevada Power Land" means the real property subject to the Nevada
Power Sale Agreement, and consisting of a portion of the Corner Land, as more
fully set forth in Schedule 2.2(a).
"Nevada Power Sale Agreement" means that certain Property Agreement
between Nevada Power Company and SDIC, fully executed as of March 21, 1997,
relating to the Nevada Power Land.
"Notice of Disagreement" has the meaning set forth in Section
4.4(b).
"NRS" means Nevada Revised Statutes.
<PAGE>
"Out Parcel" means the real property described on Schedule 1.1(c).
"Outside Date" has the meaning set forth in Section 13.1.
"Parcel Map" has the meaning set forth in Section 6.1(z).
"parent" means a corporation, trust, partnership, limited
partnership, limited liability company or other entity or person which directly
or indirectly holds more than 50% of the beneficial equity interest in or voting
control of another such entity. Such other entity shall be deemed the Subsidiary
or subsidiary of its parent.
"Parents" has the meaning set forth in the introductory paragraph
hereto.
"Permits" has the meaning set forth in Section 6.1(e).
"Permitted Exceptions" has the meaning set forth in Section 8.1(a).
"Permitted Liens" has the meaning set forth in Section 6.1(u).
"Person" means any general partnership, limited partnership,
corporation, limited liability company, joint venture, trust, business trust,
governmental agency, cooperative, association, individual or other entity, and
the heirs, executors, administrators, legal representatives, successors and
assigns of such person, as the context may require.
"Personal Property" has the meaning set forth in Section 2.2(h).
"Property Taxes" means real, personal and intangible property taxes
and assessments, together with any interest, penalty or other additional amount
imposed by a taxing authority.
<PAGE>
"PUC" has the meaning set forth in Section 2.2(m).
"Purchase Price" has the meaning set forth in Section 4.1(a).
"Real Estate" has the meaning set forth in Section 2.2(a).
"Receivables" means all of Seller's and its subsidiaries' and
affiliates' accounts receivable, notes and loans receivable, Gaming Receivables,
Real Estate tenant receivables and ledger receivables and other accounts
generated by or otherwise relating to the Assets.
"Recording Instructions" has the meaning set forth in Section 4.3.
"Representatives" has the meaning set forth in Section 5.1(a)
hereof.
"Required Records" has the meaning set forth in Section 2.2(n).
"Residential Real Estate" has the meaning set forth in Section
2.2(c).
"SGC" has the meaning set forth in the introductory paragraph
hereof.
"SDIC" has the meaning set forth in the introductory paragraph
hereof.
"Seller" has the meaning set forth in the introductory paragraph
hereof.
"Seller's Closing Conditions" has the meaning set forth in Section
11.2.
"Sheraton" means ITT Sheraton Corporation, a Delaware corporation.
<PAGE>
"Starwood" has the meaning set forth in the introductory paragraph
hereof.
"Statement" has the meaning set forth in Section 4.4(a).
"Stock" has the meaning set forth in Section 2.2(m).
"Subsidiary" or "subsidiary" means a corporation, trust,
partnership, limited partnership, limited liability company, or other entity
more than 50% of the beneficial equity interest in or voting control of which is
directly or indirectly held by another person or entity. Such other person or
entity shall be deemed the "Parent" or "parent" of its subsidiary.
"Survey" has the meaning set forth in Section 8.1(a).
"Tax" means any income, gross receipts, sales, use, real estate, ad
valorem, transfer, franchise, withholding, payroll, employment, excise,
severance, occupation, premium or property tax or other like assessment or
charge of any kind whatsoever, together with any interest, penalty or other
additional amount imposed by any taxing authority.
"Third Party Claim" has the meaning set forth in Section 15.4(a).
"Timeshare Joint Venture Agreement" has the meaning set forth in
Section 10.6(b).
"Title Insurer" has the meaning set forth in Section 8.1(c).
"Title Policies" has the meaning set forth in Section 8.1(c).
"Title Report" has the meaning set forth in Section 8.1(a).
<PAGE>
"Transferred Software Programs" has the meaning set forth in Section
2.2(h).
"Transfer Time" has the meaning set forth in Section 13.1.
"Union Employees" has the meaning set forth in Section 9.2(k).
"WC Amount" has the meaning set forth in Section 4.4(c).
"Working Capital" has the meaning set forth in Section 4.4(d).
SECTION 1.2 Terms and Usage Generally. The definitions referred to in
Section 1.1 shall apply equally to both the singular and plural forms of the
terms defined. Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. All references herein to
Articles, Sections, Exhibits and Schedules shall be deemed to be references to
Articles and Sections of, and Exhibits and Schedules to, this Agreement unless
the context shall otherwise require. All Exhibits and Schedules attached hereto
shall be deemed incorporated herein as if set forth in full herein. The words
"include", "includes" and "including" shall be deemed to be followed by the
phrase "without limitation". The words "hereof", "herein" and "hereunder" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement.
References to a Person are also to its successors and permitted assigns. Unless
otherwise expressly provided herein, any agreement, instrument or statute
defined or referred to herein or in any agreement or instrument defined or
referred to herein means such agreement, instrument or statute as from time to
time amended, modified or supplemented, including (in the case of agreements or
instruments) by waiver or consent and (in the case of statutes) by succession of
comparable successor statutes, and references to all attachments thereto and
instruments incorporated therein.
<PAGE>
ARTICLE II
Purchase and Sale of and Description of Assets
SECTION 2.1 Purchase and Sale. Subject to the terms and provisions of this
Agreement, each of SDIC, its subsidiaries and affiliates shall, and each of the
Parents shall cause each of the foregoing to, sell, convey, transfer and assign
to Buyer at the Closing, free and clear of all liens and encumbrances (except
Permitted Exceptions and Permitted Liens), and Buyer shall purchase from SDIC or
such subsidiaries or affiliates (w) all of the tangible and intangible assets
owned by SDIC or such subsidiaries or affiliates and constituting, associated
with or used or usable in connection with the ownership or operation of the
Business existing as of the Effective Date, whether or not such assets are
located on or about the Business Premises, as augmented or diminished as
permitted by Section 9.2 in the ordinary course of the operation of the Business
between the Effective Date and the Transfer Time and all tangible and intangible
assets owned by SDIC or such subsidiaries or affiliates which are necessary to
cause all of Parents' and Seller's representations, warranties and covenants
contained herein to be materially true and correct as of the Closing Date,
except the Excluded Assets, (x) the Stock, (y) the Corner Land and (z) the
Residential Real Estate (collectively, the "Assets"), including those items
described in Section 2.2.
SECTION 2.2 Description of Assets. The term "Assets" shall include:
(a) fee simple title to the real property described on Schedule
2.2(a)(i), together with all buildings, improvements and fixtures (other than
such fixtures which are leased) located thereon, and all of SDIC's right, title
and interest in and to all hereditaments and rights appurtenant thereto,
including (i) any easements or rights of way pertaining to or benefitting such
real property, (ii) all water rights, air rights and mineral, oil, gas and other
hydrocarbon substance rights owned by SDIC or such subsidiary's or affiliate's
with respect to
<PAGE>
such real property and (iii) any interest in streets, alleys, advantages, and
any strips or gores appurtenant thereto, if, and to the extent, included within
the perimeter boundaries of such real estate (collectively, the "Real Estate"),
subject in each case to the Permitted Exceptions; provided, however, that Seller
is making no representations and warranties as to the status of title with
respect to the Dio Drive Vacated Area, Country Club Lane and the Out Parcel
beyond those implied under Nevada Law by the grant, bargain and sale deed);
(b) fee simple title to the Corner Land, excluding the Nevada Power
Land. As used herein, the "Corner Land" means (i) the real property described in
Schedule 2.2(b), together with all buildings, improvements and fixtures
(excluding leased fixtures) located thereon, and (ii) all of SDIC's right, title
and interest in and to all hereditaments and rights appurtenant thereto,
including (A) any easements or other rights of way pertaining to or benefitting
such real property, (B) all water rights, air rights and mineral, oil, gas and
other hydrocarbon substance rights owned by SDIC with respect to such real
property and (C) any interest in streets, alleys, advantages, and any strips or
gores appurtenant thereto, subject in each case to the Permitted Exceptions;
(c) fee simple title to those certain parcels of real property
located in the County of Clark, State of Nevada, and more particularly described
on Schedule 2.2(c), together with all buildings, improvements and fixtures
located thereon, and all of SDIC's right, title and interest in and to all
hereditaments and rights appurtenant thereto, including (i) any easements or
rights of way pertaining to or benefitting such real property, (ii) all water
rights, air rights and mineral, oil, gas and other hydrocarbon substance rights
owned by SDIC with respect to such real property and (iii) any interest in
streets, alleys, advantages, and any strips or gores appurtenant thereto, if,
and to the extent, included within the perimeter boundaries of such real estate
(collectively, the "Residential Real Estate"), subject in each case to the
Permitted Exceptions;
<PAGE>
(d) fee simple title to any real property contiguous to the Real
Estate, Corner Land and Residential Real Estate owned by SDIC or its
subsidiaries or affiliates as of the Effective Date, and located within the area
bounded by Las Vegas Boulevard, Sands Avenue, Paradise Road and Desert Inn
Arterial;
(e) subject to the Timeshare Joint Venture Agreement, all of SDIC's
right, title and interest in and to any development rights of SDIC or its
affiliates appurtenant to the Real Estate, the Corner Land and Residential Real
Estate;
(f) all right, title and interest in the Business Premises not
located on the Real Estate, the Corner Land and Residential Real Estate, if any,
as described in Schedule 2.2(f);
(g) all right, title and interest to any Gaming Equipment;
(h) all right, title and interest of SDIC or any of its affiliates
in and to all machinery, equipment, furniture, office equipment, telephone and
communications equipment, restaurant equipment, consumables, inventory,
merchandise, linen, utensils, liquor, food, vehicles, storage tanks, spare and
replacement parts, fuel, cleaning and office supplies and other tangible
property (other than Gaming Equipment) located on the Real Estate, the Corner
Land or the Residential Real Estate, including personal computers and computer
hardware and related transferable software non-proprietary of SDIC, its
subsidiaries or affiliates (the "Transferred Software Programs"), but excluding
(i) any and all proprietary computer hardware or software of SDIC, its
subsidiaries or affiliates (including Starwood's Reservation software and SDIC's
"forecasting program" financial analysis software), (ii) any and all proprietary
operating manuals and other information and materials belonging to SDIC, its
subsidiaries or affiliates and (iii) any copyrights relating to any such
software, information and materials (collectively, and together with the Gaming
Equipment, the "Personal Property");
<PAGE>
(i) to the extent assignable, all Permits affecting or relating to
the Business or the Assets;
(j) all right, title and interest of SDIC or any of its affiliates
to any and all copyrights, trademarks, trade names, service marks, displays,
symbols, color arrangements, designs, logos, applications, registrations and
other intangible personal property used or held for use in the operation of the
Business and/or the Assets, including "Desert Inn" and any derivative names or
marks and all logos, designs and other intellectual property related thereto
(but excluding "Sheraton", "ITT", "Caesars", "ITT Sheraton Luxury Collection"
and any derivative names or marks and all logos, designs and other intellectual
property related thereto), and related applications and registrations, if any,
and all other intangible property or rights, and all goodwill associated
therewith, directly or indirectly relating thereto or used in the ownership, use
or operation of the Business or the Assets, (collectively, the "Intangible
Property");
(k) all right, title and interest of SDIC or any of its affiliates
in and to all benefits arising after the Transfer Time, if any, from contracts,
agreements, leases, licenses, commitments, sale and purchase orders and other
items included in the Assumed Contracts, including all contracts, leases,
agreements, claims and rights (and benefits arising therefrom) with or against
all persons whomsoever, relating to the Business or the Assets or any portion
thereof, including all warranties, guaranties, indemnities, development
agreements, supply agreements, service agreements and/or franchise agreements,
if any, and all leases of personal property, regardless of whether SDIC or its
subsidiaries or affiliates is lessee or lessor thereunder, including matters of
public record;
(l) all plans, specifications, drawings, renderings, models and
photographs relating to the improvements located on the Real Estate and the
Residential Real Estate, or any proposed improvements on the Corner Land, that
are in the possession or control of SDIC or its subsidiaries or affiliates and
that are not proprietary to any third party, including those commissioned or
prepared in
<PAGE>
connection with the recent renovation of the improvements on the Real Estate,
and, to the extent transferable, any and all warranties given to SDIC or its
subsidiaries or affiliates by suppliers and traders in connection with such
renovations;
(m) all issued and outstanding shares of common stock, $100 par
value per share (the "Stock"), of Desert Inn Improvement Co., a Nevada
corporation and a wholly owned subsidiary of SGC ("DIIC") and the corporate
minute books and stock records and business records of DIIC; provided, however,
that the parties hereto acknowledge that DIIC is a "Public Utility" in
accordance with the provisions of NRS Sections 704.020 and 704.329 and sale and
transfer of the Stock contemplated hereby, which constitutes more than
twenty-five percent of the outstanding shares of DIIC, requires prior
authorization of the Nevada Public Utilities Commission ("PUC");
(n) all books and records required by the Nevada Gaming Authorities
to be maintained at the Business Premises, and copies (Seller may retain the
originals) of such other books and records, if any, which are necessary for the
ongoing operations of the Business after the Transfer Time (including only such
employee records as it is lawful to transfer) (collectively, the "Required
Records");
(o) all advance reservations, bookings and room deposits applicable
to any period following the Closing, and originals of casino credit files with
respect to the casino operations, and any telephone numbers used exclusively in
connection with the Business;
(p) all customer lists relating to the Business prepared in
accordance with Section 9.1(h);
(q) all inventory purchased by SDIC or any of its affiliates in the
ordinary course of business and then located on the Business Premises
("Inventories");
(r) all of SDIC's cash on hand and/or on deposit in banks or other
financial institutions, trade deposits, prepaid rent, security deposits or other
pre-
<PAGE>
expenses paid by SDIC, its subsidiaries or affiliates, and rights arising
therefrom, cash equivalents, coins and marketable securities, whether or not
such assets relate to SDIC's ownership of Assets or SDIC's operation of the
Business; and
(s) all Receivables existing as of the Transfer Time, including the
Receivable arising from Seller's sale of the Nevada Power Land not theretofore
paid.
SECTION 2.3 Description of Excluded Assets. Seller shall not, and shall
not cause its subsidiaries or affiliates to, sell, convey, transfer or assign to
Buyer, and Buyer shall not purchase or acquire from Seller, any of the following
assets, which shall remain the sole and exclusive property of Seller
(collectively, the "Excluded Assets"):
(a) all proprietary computer hardware and software of Seller,
Sheraton and its affiliates, including Starwood's Reservation software and
SDIC's "forecasting program" financial analysis software and any copyrights
relating to any such software, and any Intangible Property involving the names
"Sheraton," "ITT," "Caesars," "ITT Sheraton Luxury Collection," including any
derivative names and related marks, designs or logos and all proprietary
operating manuals and related knowhow;
(b) all of SDIC's right, title and interest in and to all books and
records, in whatever medium, including digitally or magnetically stored data,
files relating to the Business or the Assets, including all financial
statements, certified financial reports, gaming tax returns (including
supporting , originals of all credit reports and files, including casino files
and all books and accounting records relating to the Business or the Assets in
the possession or control of SDIC and its subsidiaries and affiliates, save and
except the Required Records; provided that upon reasonable request by Buyer,
Buyer shall be provided with access and the right to copy the portions of such
records that reasonably relate to the Business or the Assets;
<PAGE>
(c) all corporate charter, minute and stock record books, corporate
seals and tax returns and supporting schedules and documents of Sheraton or SDIC
or its subsidiaries or affiliates relating to the Business, and all refunds,
claims, entitlements or liabilities for income taxes or other taxes of any type
whatsoever which SDIC or its subsidiaries or affiliates may hereafter receive or
be responsible for by reason of its ownership of the Assets or operation of the
Business prior to the Transfer Time; provided that upon reasonable request by
Buyer, Buyer shall be provided with the access and the right to copy the
portions of such tax materials that reasonably relate to the Business or the
Assets;
(d) except as otherwise specifically provided for in this Agreement,
all insurance policies relating to the Business or the Assets and all rights and
claims thereunder, including refund claims;
(e) all claims and litigation and causes of action, and any tax
refunds relating to any of the Excluded Assets;
(f) all of SDIC's gaming chips and tokens (including all (i) slot
machine tokens not currently in circulation and (ii) "reserve" chips, if any,
not currently in circulation), except that at Buyer's written election made
within six months following the Effective Date, such tokens may be acquired by
Buyer at the Closing without further consideration other than Buyer's assumption
of SDIC's liability with respect to tokens in circulation;
(g) any Assets sold or otherwise disposed of in the ordinary course
of business and as permitted by Section 9.2 during the period from the Effective
Date until the Transfer Time;
(h) all rights of indemnification, claims and causes of action which
relate to the conduct of the Business prior to the Transfer Time, including
those arising by operation of law or in equity or otherwise, but excluding
warranty claims with respect to the inventory or the equipment described in
Section 2.2(g) or 2.2(h) above, or
<PAGE>
product liability against the suppliers or manufacturers thereof; and
(i) all issued and outstanding shares of common stock of Sheraton
Corner Enterprises Corporation, a Nevada corporation, all issued and outstanding
shares of common stock of Rimtech Marketing Incorporated, a Nevada corporation,
and all issued and outstanding shares of common stock of Sheraton Tunica
Corporation, a Delaware corporation.
ARTICLE III
Contracts and Liabilities To Be Assumed
SECTION 3.1 Contracts. The "Assumed Contracts" shall be all contracts,
agreements, licenses, leases, commitments, sales and purchase orders and other
orders relating to the Assets or Business and those entered into by SDIC or its
subsidiaries after the Effective Date and prior to the Closing as permitted by
Section 9.2 hereof.
SECTION 3.2 Assumed Liabilities.
(a) Buyer shall assume as of the Transfer Time and shall pay,
perform and discharge when due all obligations and liabilities of whatever kind
and nature, primary or secondary, direct or indirect, absolute or contingent,
known or unknown, of SDIC or its aforementioned subsidiaries or affiliates to
the extent arising out of or relating to the Business or the Assets and to the
extent arising or accruing after the Transfer Time ("Assumed Liabilities"),
including the following (other than any Excluded Liabilities):
(i) all obligations and liabilities included as Current Liabilities
in the calculation of Closing Working Capital pursuant to Section 4.4,
including any such Current Liabilities for progressive prizes associated
with keno, slot machines and coin operated
<PAGE>
gaming devices and sportsbook and racebook gaming;
(ii) all obligations and liabilities of SDIC or its subsidiaries or
affiliates under the Assumed Contracts not performed or not required to
have been performed as of the Transfer Time;
(iii) all liabilities to customers with respect to all unrefunded
cash deposits paid by such customers to SDIC or its subsidiaries or
affiliates prior to the Transfer Time to the extent included as a Current
Liability in the calculation of Closing Working Capital pursuant to
Section 4.4; and
(iv) all obligations and liabilities relating to Taxes relating to
the Business or the Assets with respect to any period ending after the
Transfer Time, but to the extent attributable to periods prior to the
Transfer Time, only to the extent included as a Current Liability in the
calculation of Closing Working Capital pursuant to Section 4.4.
(b) Buyer shall not assume any of the following obligations and
liabilities of Seller or its subsidiaries or affiliates (the "Excluded
Liabilities"), all of which shall be retained and paid, performed and discharged
when due by Seller or its subsidiaries or affiliates:
(i) any Loss or liability of Seller or its subsidiaries or
affiliates of any nature or description, whether liquidated or contingent,
to the extent (A) resulting from events or conditions which occurred or
existed prior to the Transfer Time, regardless of whether they are due and
payable before or after the Transfer Time or (B) arising out of or
relating to the Excluded Assets;
(ii) any Loss or liability incurred as the result of an
Environmental Claim, or any condition requiring correction, investigation,
remediation or monitoring under Environmental Law, in either case to the
extent arising from facts, conditions or circumstances, known
<PAGE>
or unknown, occurring or existing at or before the Transfer Time and
related in any manner to the Assets; and
(iii) any Loss or liability relating to current or former employees
of the Business (and their eligible dependents and beneficiaries) with
respect to employment or benefit plans which accrued on or prior to the
Transfer Time, except to the extent specified in Article XIX or included
as a Current Liability in the calculation of Closing Working Capital
pursuant to Section 4.4.
(b) Buyer's obligations under this Section 3.2 will not be subject
to offset or reduction by reason of any actual or alleged breach of any
representation, warranty or covenant contained in this Agreement or any document
delivered in connection herewith or any right or alleged right to
indemnification hereunder.
SECTION 3.3 Consents. To the extent that the assignment of any of the
Assumed Contracts or other rights(including Permits, except as set forth in
Section 11.1(e)) to be transferred hereunder requires the consent of any other
party thereto (including Seller or any affiliate thereof), or shall be subject
to any option in any other person or entity by virtue of a request for
permission to assign or transfer, or by reason of or pursuant to any transfer to
Buyer, this Agreement shall not constitute a contract to assign the same if any
attempted assignment would be ineffective, impair any material right of Buyer
thereunder or give rise to such an option, and Seller and Buyer shall use
commercially reasonable efforts to procure consent to any such assignment;
provided, however, that in the event that any such consent is not obtained at or
prior to the Closing Date, such event shall not cause the Closing to be delayed
or constitute a default by Seller of any obligation hereunder or result in a
reduction of the Purchase Price. If any such consent is not obtained, or if for
any reason any such assignment is not consummated, at Buyer's request, Seller
shall reasonably cooperate with Buyer to provide for Buyer the benefit, monetary
or otherwise, of any such Assumed Contract or other right,
<PAGE>
including enforcement of any and all rights of Seller against the other party
thereto arising out of any breach or cancellation thereof by such party or
otherwise, and, at Buyer's request, by appointing Buyer as Seller's
representative and agent thereunder. Any such cooperation \(i) shall be at
Buyer's cost and expense and (ii) shall not cause Seller to violate any such
Assumed Contract.
ARTICLE IV
Purchase Price
SECTION 4.1 Purchase Price. (a) In consideration of the foregoing
sale, conveyance, transfer and assignment of the Assets, Buyer shall pay to
Seller the sum of $275,000,000 plus the sum of (1) if the Closing occurs after
the "Closing Date" under the Caesars World Agreement (the "Caesars Closing
Date"), the Accrued Interest, (2) the aggregate amount by which documented
capital expenditures actually incurred by SDIC as contemplated by Section
9.1(g)(i) exceeds an average of $225,000 per month from and after January 1,
1999 and (3) an amount equal to 80% of all documented capital expenditures up to
$3,000,000 actually incurred by SDIC pursuant to Section 9.1(g)(ii), and 100% of
all documented capital expenditures incurred by SDIC pursuant to Section
9.1(g)(ii) in excess of such $3,000,000 (the "Purchase Price"). "Accrued
Interest" means an amount equal to the product of (i) $275,000,000 (less the
Applicable Accrued Deposit), (ii) a fraction, the numerator of which shall be
the number of days in the period from and including the Caesars Closing Date to
but excluding the Closing Date, and the denominator of which shall be 365 and
(iii) the average Applicable Interest Rate per annum for such period.
"Applicable Interest Rate" means (i) for any day during the period from the
Effective Date to the date which is fourteen months following the Effective
Date, a rate per annum equal to the lesser of (x) the applicable "rate of
interest" for revolving loans under the Credit Agreement among Starwood and
certain other borrowers and lenders named therein, dated February 23, 1998 (as
amended to the date hereof) and (y) 7.00% and (ii) for any day thereafter,
10.00%.
<PAGE>
(b) The Purchase Price shall be subject to adjustment as set forth
in Section 4.4.
SECTION 4.2 Payment of Purchase Price; Extension Amount. The Purchase
Price and the Extension Amount shall be payable as follows:
(a) The sum of Fifteen Million Dollars ($15,000,000) in immediately
available funds (the "Deposit"), shall be delivered to Escrowee no later than
the tenth Business Day following the execution of this Agreement, to be
deposited in interest-bearing investments approved by Buyer and Seller and held
by Escrowee in accordance with the terms of this Agreement.
(b) The Purchase Price less the Applicable Accrued Deposit plus or
minus an estimate, prepared by Seller (and reasonably satisfactory to Buyer) and
delivered to Buyer at least two Business Days prior to the Closing Date, of any
adjustment to the Purchase Price under Section 4.4, shall be delivered to Buyer
in immediately available funds on the Closing Date.
(c) An extension amount of $1,000,000 in immediately available funds
(the "Extension Amount") shall be paid directly by Buyer to Seller on the
earliest to occur of (i) the Closing, (ii) termination of this Agreement other
than pursuant to Section 16.1(vi) or Section 16.1 (vii), and (iii) a date which
is fourteen (14) months following the Effective Date.
(d) Time is of the strictest essence of this Section 4.2.
SECTION 4.3 Disbursement of Deposit. Seller and Buyer shall provide joint
written instructions to Escrowee in customary form mutually approved by Seller
and Buyer, each of whose approval shall not be unreasonably withheld (the
"Recording Instructions"), which shall among other things, govern the
disbursement of the Deposit and the payment for and obtaining the Title
Policies, and other escrow and related charges; provided, however, that such
<PAGE>
Recording Instructions shall provide that the Deposit, together with any
interest or other payments thereon, shall be disbursed to Seller on the Closing
Date. The Recording Instructions shall comply with all applicable Code
provisions. The Escrowee shall be designated as the "reporting party" for
purposes of the Code. The Recording Instructions are intended to carry out the
intent of this Agreement and shall not be inconsistent with this Agreement.
SECTION 4.4 Purchase Price Adjustment. (a) Within 75 days after the
Closing Date, Buyer shall prepare and deliver to Seller a statement (the
"Statement"), certified by an officer of Buyer, setting forth Working Capital as
of the close of business on the Closing Date ("Closing Working Capital"). A
physical inventory shall be conducted by Seller and Buyer consistent with past
practice and immediately prior to the Closing Date for the purpose of preparing
the Statement, and each of Seller and Buyer and their respective independent
auditors shall have the right to observe the taking of such physical inventory.
Any costs or expenses incurred by the parties in connection with such physical
inventory shall be shared equally by Seller and Buyer.
(b) During the 30-day period following Seller's receipt of the Statement,
Seller and its independent auditors shall be permitted to review the working
papers relating to the Statement. The Statement shall become final and binding
upon the parties on the 30th day following delivery thereof, unless Seller gives
written notice of its disagreement with the Statement (a "Notice of
Disagreement") to Buyer prior to such date. Any Notice of Disagreement shall (i)
specify in reasonable detail the nature of any disagreement so asserted and (ii)
only include disagreements based on mathematical errors or based on Closing
Working Capital not being calculated in accordance with this Section 4.4. If a
Notice of Disagreement is received by Buyer in a timely manner, then the
Statement (as revised in accordance with this sentence) shall become final and
binding upon Seller and Buyer on the earlier of (A) the date Seller and Buyer
resolve in writing any differences they have with respect to the matters
specified in the Notice of Disagreement or (B) the date any disputed matters are
<PAGE>
finally resolved in writing by the Accountant. During the 30-day period
following the delivery of a Notice of Disagreement, Seller and Buyer shall seek
in good faith to resolve in writing any differences that they may have with
respect to the matters specified in the Notice of Disagreement. During such
period Buyer and its auditors shall have access to any working papers of
Seller's auditors prepared in connection with the Notice of Disagreement. At the
end of such 30-day period, Seller and Buyer shall submit to the Accountant for
arbitration any and all matters that remain in dispute and which were properly
included in the Notice of Disagreement, in the form of a written brief. Seller
and Buyer shall use their reasonable efforts to cause the Accountant to render a
decision resolving the matters submitted to the Accountant within 30 days
following submission thereto. Judgment may be entered upon the determination of
the Accountant in any court having jurisdiction over the party against which
such determination is to be enforced. The fees and expenses of the Accountant
shall be borne equally by Buyer and Seller. Each party shall bear the costs and
expenses of its own counsel, accountants and other advisers in connection with
any such Notice of Disagreement.
(c) The Purchase Price shall be increased by the amount by which Closing
Working Capital exceeds $5,000,000 (the "WC Amount"), and the Purchase Price
shall be decreased by the amount by which Closing Working Capital is less than
the WC Amount (the Purchase Price as so increased or decreased shall hereinafter
be referred to as the "Adjusted Purchase Price"). If the Closing Date Amount is
less than the Adjusted Purchase Price, Buyer shall, and if the Closing Date
Amount is more than the Adjusted Purchase Price, Seller shall, within 10
Business Days after the Statement becomes final and binding on the parties, make
payment by wire transfer in immediately available funds of the amount of such
difference, together with interest thereon at a rate equal to the rate of
interest from time to time announced publicly by Citibank, N.A. as its prime
rate, calculated on the basis of the actual number of days elapsed divided by
365, from the Closing Date to the date of payment.
(d) The term "Working Capital" means Current
<PAGE>
Assets minus Current Liabilities. The terms "Current Assets" and "Current
Liabilities" mean the current assets and current liabilities, respectively, of
the Business other than Excluded Assets or Excluded Liabilities, as the case may
be, calculated in accordance with United States generally accepted accounting
principles ("GAAP"), applied on a basis consistent with Seller's current
practices (as reflected in the consolidated balance sheet of SDIC dated as of
December 31, 1998 and the applicable portions of the Caesars Palace, Caesars
Tahoe and Desert Inn Supplementary Combining Financial Information as of
December 31, 1998 (collectively, the "Balance Sheet"). Notwithstanding the
foregoing, in addition to all other Current Liabilities, (i) $300,000 for
repairing the water utility system owned by DIIC shall be included as a Current
Liability in the calculation of Closing Working Capital hereunder, less the
amount of (x) all documented capital expenditures for such repairs in excess of
$200,000 for the year 1999 and (y) all such documented expenditures in the year
2000 and (ii) all unredeemed chips and tokens of Seller, and all progressive
prizes associated with keno, slot machines and coin operated gaming devices and
sportsbook and racebook gaming, in each case as of the Transfer Time, shall be
included as a Current Liability in the calculation of Closing Working Capital
hereunder.
(e) Following the Closing, Buyer shall not take any actions with respect
to the accounting books and records of the Business on which the Statement is to
be based that would obstruct or prevent the preparation of the Statement and the
determination of Closing Working Capital as provided in this Section 4.4. During
the period of time from and after the date of delivery of the Statement to
Seller through the resolution of any adjustment to the Purchase Price
contemplated by this Section 4.4, Buyer shall afford to Seller and any
accountants, counsel or financial advisers retained by Seller in connection with
any adjustment to the Purchase Price contemplated by this Section 4.4 reasonable
access during normal business hours to the books and records of the Business (if
within the control of Buyer) to the extent relevant to the adjustment
contemplated by this Section 4.4).
<PAGE>
ARTICLE V
Confidential Information
SECTION 5.1 Confidentiality. (a) Seller and Buyer each agree that all
Confidential Information will be kept confidential and will be used solely in
connection with this Agreement and the transactions contemplated hereby, and
that each of the parties and their respective directors, trustees, officers,
employees, advisors, agents, lenders and consultants (collectively
"Representatives") will not disclose in any manner whatsoever any of the
Confidential Information received by it; provided, however, that (i) each party
may make any disclosure of such information to which the other party gives its
prior consent and (ii) any of such information may and shall only be disclosed
to the parties' respective Representatives to the extent such Representatives
need to know such information for the sole purpose of effecting the sale of the
Assets pursuant to this Agreement. Notwithstanding the foregoing, each of the
parties may make such disclosures (i) as may be required by law, (ii) in
connection with any proceedings before any regulatory bodies or agencies, and
(iii) to the Nevada Gaming Authorities. Upon the termination of this Agreement
for any reason, all Confidential Information in the possession of either party
or its Representatives shall be returned to the party that provided such
Confidential Information.
(b) The term "Confidential Information" means all information and data
furnished by either party or its Representatives to the other party or its
Representatives, in each case, in connection with this Agreement or the
transactions contemplated hereby and shall be deemed to include all notes,
analyses, compilations, studies, interpretations or other documents prepared by
any of the parties or their respective Representatives that contain, reflect or
are based upon, in whole or in part, such information furnished to one party by
or on behalf of the other party. The term "Confidential Information" does not
include information that (i) was or becomes generally available to the public
other than as a result of a
<PAGE>
disclosure by a party or its Representatives acting in violation of this
provision, (ii) was known to a party or its Representatives prior to being
furnished to such party in accordance with the terms of this Agreement or (iii)
was or becomes available to a party on a nonconfidential basis from a source
other than a party or its Representatives; provided, that the source of such
information was not known to the recipient to be bound by a confidentiality
agreement or other contractual, legal or fiduciary obligation of confidentiality
with respect to such information.
ARTICLE VI
Representations and Warranties of
each of Parents and Seller
SECTION 6.1 Parents' and Seller's Representations and Warranties. Each of
the Parents and Seller represents and warrants to Buyer as follows:
(a) Each of SGC and SDIC is a corporation duly organized, validly
existing and in good standing under the laws of the State of Nevada, and
Starwood is a corporation duly organized, validly existing and in good standing
under the laws of the State of Maryland, in each case with all requisite
corporate power and authority to execute, enter into and carry out its
obligations under this Agreement, the Deeds and the other agreements and
instruments to be executed and delivered or caused to be delivered by it in
connection herewith. Each officer of the foregoing who shall execute and deliver
this Agreement on behalf of any of the foregoing has been duly authorized to so
act by all requisite action on the part of such party.
(b) The execution, delivery, and performance of this Agreement, the
Deeds and the other agreements and instruments to be executed and delivered by
each of the Parents and SDIC in connection herewith by the persons executing the
same on behalf of such parties have been or will be duly and validly authorized
by all necessary corporate action on the part of such parties, and this
Agreement, the Deeds and such other agreements and
<PAGE>
instruments constitute or as of the Closing will constitute the legal, valid and
binding obligations of each of them, enforceable in accordance with their
respective terms.
(c) The execution, delivery and performance of this Agreement, the
Deeds and the other agreements and instruments to be executed and delivered by
each of the Parents and SDIC in connection herewith will not (i) violate the
certificate of incorporation or by-laws of any of the Parents or SDIC, (ii)
violate any provision of law applicable to any of the Parents or SDIC, the
Business Premises or the Business, the violation of which would have a Material
Adverse Effect or which would prevent the consummation of the transactions
contemplated by this Agreement or (iii) conflict with or result in the breach or
termination of, or constitute a default under or pursuant to any judgment,
order, injunction, decree or ruling of any court or governmental authority, or
any other agreement or instrument by which SDIC or the Assets are bound, or to
which any of them are subject, which conflict, breach, termination or default
would have a Material Adverse Effect or would prevent the consummation of the
transactions contemplated by this Agreement, or (iv) result in the creation of
any material lien, charge or encumbrance upon any of the Assets which is not
removed prior to the Closing other than, in each case, Permitted Exceptions and
Permitted Liens.
(d) Schedule 6.1(d) sets forth a list of all agreements having a
remaining term in excess of twelve (12) months following the Effective Date and
which may not be terminated without penalty on less than 90 days prior notice
and which in each case require aggregate consideration in cash or in kind in
excess of $500,000 for the unexpired term thereof relating to the Business. To
the knowledge of each of the Parents and Seller, all such Assumed Contracts are
in full force and effect, neither Seller nor any other party to any thereof is
in material default thereunder, and no event has occurred which, with notice or
the passage of time, or both, would constitute a material default by Seller or
by any other party to the Assumed Contracts.
(e) Schedule 6.1(e) represents a true,
<PAGE>
correct and complete list of all material licenses, permits, certificates of
occupancy, franchises, consents, approvals and governmental authorizations
("Permits"), including liquor licenses and gaming licenses, currently necessary
for the ownership of the Assets and the operation of the Business, including the
business of, and the services provided by, DIIC. No material default has
occurred in the due observance or condition of any material Permit which has not
been heretofore corrected and, to the knowledge of each of the Parents and
Seller, no event has occurred which, merely by notice or the passage of time, or
both, would result in a material default thereunder. The Permits are in full
force and effect and all the material requirements and conditions of the Permits
have been fully complied with.
(f) Except as set forth on Schedule 6.1(f), other than personal
property leased by Seller pursuant to the Assumed Contracts, all personal
property used by Seller in the operation and maintenance of the Business is
owned by Seller or its affiliates and constitutes a part of the Assets. Except
as set forth on Schedule 6.1(f), Seller has or will have at Closing good and
valid title to the personal property included in the Assets that are conveyed at
the Closing, free and clear of all liens, security interests, claims, charges
and encumbrances, except Permitted Exceptions and Permitted Liens.
(g) Schedule 6.1(g) lists all the pending and registered trademarks,
service marks and trade names owned by SDIC or its affiliates and used, or held
for use, exclusively in connection with the Business. All the Intangible
Property is valid, in good standing, free and clear of any encumbrances and is
not being challenged in any way. To the knowledge of the Parents and Seller,
Seller is not currently infringing on any trademark, service mark, trade name or
copyright of another, and there is no claim pending or, to the knowledge of each
of the Parents and Seller, threatened against Seller with respect to an alleged
infringement of any trademark, service mark, trade name or copyright owned by
another nor, to the knowledge of each of the Parents and Seller, does the
operation of the Business in the manner in which it has heretofore been operated
give rise to any such infringement. Seller has not granted any
<PAGE>
party or entity any license to use any such Intangible Property.
(h) Schedule 6.1(h) identifies all contracts or reservations for the
use or occupancy of guest rooms, meeting and banquet facilities, tee times for
the golf course or other facilities of the Business to be fulfilled after
January 1, 2000, that are not terminable without penalty on less than 90 days
notice and that would result in payments to Seller in excess of $100,000.
(i) Except as set forth in Schedule 6.1(i), to the knowledge of each
of the Parents and Seller, no agreements have been entered into with any Person,
including home builders, prospective home buyers, owners, or occupants of the
land surrounding the Business, regarding: (A) the right to membership in the
golf course included in the Assets or the intent to operate such golf course as
private or semi-private country club, (B) the right to play golf on such golf
course or (C) the manner in which the Business will be operated, managed,
maintained, or improved.
(j) Except as described on Schedule 6.1(j), there are no material
actions, claims, suits, or proceedings (including gaming audits, arbitrations,
grievances, judicial proceedings, administrative proceedings and tax consents)
pending or, to any of the Parents' or Seller's knowledge, threatened against
Seller or DIIC or affecting Seller's or DIIC's rights, in each case with respect
to the Business, the Assets, at law or in equity, before any Federal, state,
municipal, or other governmental agency or instrumentality, nor is any of the
Parents or Seller aware of any investigation with respect to any of the
foregoing or any facts which to their knowledge are reasonably likely to result
in any such action, investigation, suit or proceedings affecting Seller, DIIC,
the Assets or the Business. In addition, except as described on Schedule 6.1(j),
there are no material judgments, orders, awards or decrees currently in effect
against Seller or DIIC with respect to the ownership, marketing, development or
operation of any part of the Assets or the Business.
(k) With the exception of proposed
<PAGE>
pedestrian bridges and a proposed beautification assessment, no material
governmental assessment for sewer, sidewalk, water, paving, roadways,
electrical, power or other improvements is pending, or to any of the Parents' or
Seller's knowledge threatened, with respect to the Assets.
(l) Except for the Nevada Power Sale Agreement or as set forth on
Schedule 6.1(l), no proceedings are presently pending or, to any of the Parents'
or Seller's knowledge, threatened, for the taking by exercise of the power of
eminent domain, or in any other manner for a public or quasi-public purpose, of
all or any part of the Real Estate, the Corner Land or the Residential Real
Estate. Except as set forth on Schedule 6.1(l), to Parents' and Seller's
knowledge, there is no plan, study or effort by any governmental authority or
agency that in any way materially adversely affects or which would reasonably be
expected to materially adversely affect the present or future use or zoning of
the Real Estate, the Corner Land or the Residential Real Estate.
(m) Except as set forth on Schedule 6.1(m), there exist no
outstanding covenants or agreements in connection with the zoning or development
of the Real Estate, the Corner Land or the Residential Real Estate or any
portion thereof which would bind or require Buyer to perform any material
actions or pay any material monies in connection therewith.
(n) There is no pending or, to any of the Parents' or Seller's
knowledge, threatened curtailment or reduction of any utility service to the
Real Estate, the Corner Land or the Residential Real Estate or any part thereof,
and Seller has not received any written notice of any such pending or threatened
curtailment or reduction. No off-site easements, parking or other facilities are
by law or restrictive covenant needed for the use and operation of the Real
Estate, the Corner Land or the Residential Real Estate.
(o) Except as would not reasonably be expected to have a Material
Adverse Effect:
<PAGE>
(i) Seller has, and is in compliance with, all Permits required
under Environmental Law for the ownership and operation of the Assets;
(ii) Seller is in compliance with all Environmental Laws governing
the ownership or operation of the Assets;
(iii) there are no pending or threatened Environmental Claims
relating to Seller's ownership or operation of the Assets;
(iv) no Hazardous Materials have been released or disposed of,
whether by Seller or any other Person, at, on, under or from the Assets in
any manner or to any place that, in any such case, has resulted in, or
could reasonably be expected to result in, an Environmental Claim;
(v) there is no requirement or restriction imposed by any
Environmental Law that will prohibit, impair or impede any currently
planned or projected, alteration by Seller or addition to or expansion of
any of the Assets;
(vi) there is no outstanding order pursuant to any Environmental Law
with which Seller has not complied pertaining to the closure or cessation
of sewer treatment services, operations and facilities formerly provided
with respect to the Business Premises; and
(vii) Seller is under no obligation pursuant to Environmental Law to
remove, encapsulate or otherwise treat any asbestos or asbestos-continuing
materials at or in the Business Premises.
(p) Seller is either the owner or the licensee of the Transferred
Software Programs and, except as set forth in the contracts or agreements listed
in Schedule 6.1(p), the Transferred Software Programs and all rights thereunder
are transferable to Buyer without restrictions other than those restrictions
that would not reasonably be expected to have a Material Adverse Effect.
<PAGE>
(q) Except as set forth on Schedule 6.1(q), neither the Parents nor
Seller has any knowledge of any material settlement, earth movement, termite
infestation, or damage affecting the Real Estate or the Residential Real Estate,
the Corner Land or any material defects in any mechanical, electrical, plumbing,
sewer, heating, air conditioning, sprinkler systems, or irrigation systems at
the Real Estate, the Corner Land or the Residential Real Estate, all of which
are in good operating condition and repair.
(r) Except as may be shown on Schedules 6.1(j) and 6.1(l), to the
knowledge of each of Parents and Seller, neither SDIC nor any of the Assets is
in violation of, under investigation with respect to, threatened to be charged
with or given notice of any violation of, any law, rule, regulation, ordinance
or code, judgment, injunction, order or decree applicable to the Assets or the
conduct of the Business (including Environmental Laws), except for violations
that are not reasonably likely to have a Material Adverse Effect. Seller has not
received any notice from any insurer that any portion of the Assets contains any
defects or conditions that are reasonably likely to materially adversely affect
the insurability of the Assets.
(s) Except as set forth on Schedule 6.1(s) and except for the
Excluded Assets, the Assets comprise all of the material assets, property and
rights of every type and description, real, personal and mixed, tangible and
intangible, used in the conduct of the Business as presently conducted.
(t) Schedule 6.1(t) sets forth a list of all employee benefit plans
within the meaning of Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended, and all other bonus, deferred compensation, severance,
incentive and equity-based compensation, pension, profit-sharing and stock bonus
plans, programs, policies and arrangements in which employees of the Business
participate. There are no material unfunded liabilities in respect of employees
(and their dependents and beneficiaries) of the Business (or in respect of
benefit
<PAGE>
plans in which they participate) as to which Buyer could be liable.
(u) Seller will or will cause its affiliates to convey good and
valid title (subject to the provisions of Section 2.2(a) with respect to the Dio
Drive Vacated Area, Country Club Lane and the Out Parcel) to the Assets (other
than the Nevada Power Land), free and clear of all liens, security interests,
claims, charges and encumbrances (except (i) those pertaining to the Assumed
Contracts, (ii) such as are disclosed in Schedule 6.1(f), (iii) to the extent
bonded against mechanics', carriers', workmen's, repairmen's or other like liens
arising or incurred in the ordinary course of business, (iv) liens arising under
original purchase price conditional sales contracts and equipment leases with
third parties entered into in the ordinary course of business and providing for
periodic payments, (v) liens for taxes, assessments and other governmental
charges (A) which charges are not due and payable or (B) to the extent bonded
against, which are being contested in good faith by appropriate proceedings and
(vi) other imperfections of title or encumbrances expressly permitted hereunder
or which arise after the Effective Date other than by Seller's voluntary act and
do not materially impair the continued use and operation of the Assets to which
they relate in the operation of the Business as presently conducted
(collectively, the "Permitted Liens"), and, subject to Section 3.3, SDIC has or
will have the right, power and authority to sell, convey, transfer and assign
the Assets (other than the Nevada Power Land and the Stock) at the Closing as
contemplated by this Agreement. No material claims are being asserted that could
reasonably be expected to result in a Tax lien on the Assets.
(v) DIIC is duly organized, validly existing and in good standing
under the laws of the State of Nevada with all requisite power and authority to
conducts its business as presently conducted. The Stock constitutes all issued
and outstanding shares of common stock in DIIC. All such outstanding shares of
Stock have been duly authorized and validly issued and are fully paid and
nonassessable. There are no outstanding options, warrants, right, calls,
commitments, conversion rights, rights of exchange, plans or
<PAGE>
other agreements or claims of any character providing for the purchase, issuance
or sale of any shares of the Stock other than as contemplated by this Agreement.
Except for the Stock, no other shares of capital stock or securities of DIIC
will be authorized, issued or outstanding at the Closing.
(w) The conveyance of the Stock to Buyer will transfer to Buyer
valid title thereto free and clear of all liens, encumbrances, restrictions,
preemptive rights, options and claims of every kind subject, however, to PUC
restrictions.
(x) Except as set forth on Schedule 6.1(x), DIIC has no material
liabilities or obligations of any nature (whether absolute, accrued, contingent,
or otherwise).
(y) All offices which Seller owns, maintains or otherwise uses in
connection with the operation of the Business are set forth on Schedule 6.1(y).
(z) Seller has filed with the Clark County Planning Commission an
application for a parcel map determination in respect of the Corner Land and the
Nevada Power Land (the "Parcel Map").
SECTION 6.2 No Implied Representations. Buyer acknowledges that except as
expressly set forth in this Agreement and in the documents and instruments
delivered by Seller at the Closing, none of Starwood, ITT, Sheraton, SGC, SDIC,
or any of their respective parents, subsidiaries, affiliates, agents or
representatives or purported agents or representatives has made, and none of the
foregoing entities or Persons is liable for or bound in any manner by, any
express or implied warranties, guaranties, promises, statements, inducements,
representations or information pertaining to the Assets or any part thereof, the
physical condition thereof, environmental matters, the income, expenses or
operation thereof, the financial prospects for the Business, the uses which can
be lawfully made of the Assets under applicable zoning or other laws or any
other matter or thing with respect thereto, including any existing
<PAGE>
or prospective Permits. Without limiting the foregoing, Buyer acknowledges and
agrees that, except as expressly set forth in this Agreement and in the
documents and instruments delivered by or for Seller at the Closing, Seller is
not liable for or bound by (and Buyer has not relied upon) any verbal or written
statements, representations, warranties, agreements, arrangements,
understandings, investment bankers or real estate brokers "setups" or offering
materials or any other information respecting any or all of the Assets furnished
by Starwood, ITT, Sheraton, SGC, SDIC or any affiliate, representative or other
person representing or purportedly representing any of the foregoing. Nothing
contained in this Section 6.2 shall be deemed to impair, limit or otherwise
affect any rights of Buyer under this Agreement in respect of the
representations, warranties and covenants of Seller set forth in this Agreement
and the other provisions hereof binding on Seller.
SECTION 6.3 Survival of Seller's Warranties.
(a) All of Seller's representations and warranties contained in this
Article VI (other than those contained in (i) Sections 6.1(a), 6.1(b) and
6.1(c), which shall survive the Closing indefinitely and (ii) Section 6.1(o),
which shall survive until twenty-four (24) months after the date of the
Closing), shall survive until eighteen (18) months after the date of the
Closing; provided, however, that Seller's liability for breach of such
representations and warranties shall not expire as to any breach or alleged
breach thereof if notice of such breach or alleged breach is given by Buyer to
Seller prior to eighteen (18) or twenty-four (24), as applicable, months after
the date of the Closing.
(b) Notwithstanding anything to the contrary set forth in this
Article VI, Seller shall have no liability to Buyer for breach of any warranty
and representation set forth in this Article VI or for breach by Seller of any
of its agreements set forth in Article VIII (other than with respect to
liability with respect to Taxes) unless and except to the extent that the
damages due to Buyer by reason of all such breaches exceeds $1,000,000.
<PAGE>
ARTICLE VII
Representations and Warranties of SUN and Buyer
SECTION 7.1 SUN's and Buyer's Representations and Warranties. Each of SUN
and Buyer represents and warrants to Seller as follows:
(a) Buyer is a Nevada corporation duly organized, validly existing
and in good standing under the laws of the State of Nevada, and SUN is an
international business company duly organized, validly existing and in good
standing under the laws of the Commonwealth of the Bahamas, in each case with
all requisite corporate power and authority to enter into and carry out its
obligations under this Agreement and the other agreements and instruments to be
executed and delivered by it in connection herewith. Each officer of SUN and
Buyer who shall execute and deliver this Agreement and such other agreements and
instruments has been duly authorized to so act by all requisite corporate action
on the part of SUN and Buyer.
(b) The execution, delivery, and performance of this Agreement and
the other agreements and instruments to be executed and delivered by SUN and
Buyer in connection herewith by the persons executing the same on behalf of SUN
and Buyer have been duly and validly authorized by all necessary corporate
action on the part of SUN and Buyer and this Agreement and such other agreements
and instruments constitute the legal, valid and binding obligations of each of
them, enforceable in accordance with their respective terms.
(c) The execution, delivery and performance of this Agreement, and
the other agreements and instruments to be executed and delivered by SUN and
Buyer in connection herewith will not (i) violate the articles of association or
memorandum of association or other similar organizational documents of SUN or
Buyer, (ii) violate any provision of law applicable to SUN or Buyer, the
violation of which would have a material adverse effect on SUN's or Buyer's
ability to consummate the transaction contemplated by this Agreement
<PAGE>
or otherwise perform its obligations hereunder ("Buyer Material Adverse Effect")
or which would prevent the consummation of the transaction contemplated by this
Agreement, or (iii) conflict with or result in the breach or termination of, or
constitute a default under or pursuant to any judgment, order, injunction,
decree or ruling of any court or governmental authority, or other agreement or
instrument by which Buyer or its properties are bound, or to which any of them
are subject, which conflict, breach, termination or default would have a Buyer
Material Adverse Effect or which would prevent the consummation of the
transactions contemplated by this Agreement.
(d) Neither SUN nor Buyer nor any of the principals of either of
them has ever been denied a Gaming License. SUN and its required affiliates are
currently licensed and in good standing to conduct gaming activities in the
State of New Jersey in accordance with the New Jersey Gaming Control Act.
(e) SUN has arranged for, or will promptly following the Effective
Date arrange for, Buyer to have in its possession prior to the Closing
sufficient cash, available lines of credit or other sources of immediately
available funds to enable it to purchase the Assets and pay any other amount to
be paid by it hereunder.
SECTION 7.2 Survival of Buyer's and SUN's Representations and Warranties.
The representations and warranties of Buyer and SUN contained in Sections
7.1(a), 7.1(b) and 7.1(c) shall survive the Closing indefinitely.
ARTICLE VIII
Title Insurance
SECTION 8.1 Title Policies and Exceptions.
(a) Attached hereto as Schedule 8.1(a) is a preliminary title report
for each of the Real Estate, the Corner Land and each parcel of the Residential
Real Estate (collectively, the "Title Report"). All title exceptions
<PAGE>
shown on the Title Report except those exceptions listed on Schedule 8.1(a) and
all matters disclosed by the surveys listed on Part II of Schedule 8.1(a)
(collectively, the "Survey"), copies of which have been delivered to Buyer, are
hereinafter referred to as the "Permitted Exceptions". The Permitted Exceptions
shall also include those other title exceptions which are disclosed or become
apparent to Buyer after the Effective Date, which are not already Permitted
Exceptions, which cannot be removed by the payment of a sum of money, which are
not caused by the intentional act of Seller or Seller's affiliates after the
Effective Date and which do not materially adversely affect the value of the
Real Estate, the Corner Land or the Residential Real Estate, or the continued
use thereof as currently conducted, or as to which Buyer has not timely
objected. Buyer must notify Seller in writing of its objection to any such
subsequently arising matter on or before the date that is ten (10) days after
Buyer's receipt of notice thereof.
(b) Seller shall cause all title exceptions (other than Permitted
Exceptions) not approved by Buyer to be removed on or before the Closing.
Seller, however, shall have the right to (i) cause the Title Insurer to remove a
lien by bonding over it or (ii) obtain the commitment of the Title Insurer to
insure Buyer against loss or damage that may be occasioned by such exceptions
that are not Permitted Exceptions.
(c) Prior to the Closing, Buyer shall obtain a ALTA extended owner's
policy of title insurance (Form B-1970) (Amended 4-6-90), issued by Nevada Title
Company or, if Nevada Title Company is unable to do so, by a title insurance
company reasonably acceptable to Buyer in its reasonable discretion ("Title
Insurer"), insuring that Buyer has fee title to the Real Estate, the Corner Land
and the Residential Real Estate, and DIIC has fee title to the real property
described as parcels 46 and 47 in the Title Report (the "DIIC Land") subject
only to (i) the Permitted Exceptions, (ii) liens for taxes not yet due and
payable, (iii) all standard exceptions, exclusions, conditions and stipulations
from coverage for the Title Insurer's Extended Coverage Form ALTA Owner's Policy
of Title Insurance, including any and all endorsements and affirmative coverage
<PAGE>
customary in real estate sale transactions involving the magnitude and type of
the Assets (including, without limitation, an ALTA 3.1 Zoning Endorsement and as
to the DIIC Land, a non-imputation endorsement) as Buyer shall reasonably
request and (iv) those exceptions arising after the Effective Date and approved
by Buyer as provided above (the "Title Policies"). The coverage amount of the
Title Policies for the Real Estate shall be no more than the amount of (i)
$270,000,000 less (ii) the book value, net of depreciation on Seller's books as
at December 31, 1998, of all furniture, fixtures, equipment and other personal
property included in the Assets. Buyer shall have the right to require the Title
Insurer to obtain facultative reinsurance, with direct access provisions against
the reinsurer with respect to the Title Policies in such amounts and with such
title companies as Buyer shall determine in its reasonable discretion.
(d) Buyer and Seller equally shall pay the premiums for the Title
Policies.. Buyer shall pay for non-standard endorsements and any lender's
coverage premiums. Buyer and Seller shall each cooperate diligently to provide
customary documents required by Title Insurer as condition to issuance of the
Title Policies.
(e) Seller shall order an update of the Survey, which shall be
certified to Buyer and its lenders, if any, the Title Insurer and any other
parties reasonably requested by Buyer. In addition, Seller shall cause the
updated Survey to be prepared and be certified as having been prepared in
accordance with "Minimum Standard Detail Requirements for ALTA/ACSM Land Title
Surveys" jointly established and adopted by the American Land Title Association
("ALTA") and the American Congress of Survey and Mapping ("ACSM") in 1997 and
including all ALTA optional items except No. 5 (Contour Maps) and No. 12
(Governmental Agency Survey Requirements) and the updated Survey shall include a
certification as to whether or not the Real Estate, the Corner Land and the
Residential Real Estate are located in a floodplain or designated floodway and
such information as may be required by the Title Insurer to issue extended
coverage (consistent with all matters shown on such Survey) over all general
printed exceptions to title.
<PAGE>
ARTICLE IX
Conduct of Business Prior to Closing
Each of the Parents and Seller agrees that, subject to the terms and
provisions of this Agreement, after the execution hereof and prior to Closing
(unless Buyer consents in writing otherwise):
SECTION 9.1 Seller's Conduct. Seller shall and shall cause each of its
subsidiaries and affiliates (as applicable) to:
(a) deliver the Assets to Buyer at the Closing in substantially
their present condition, except as otherwise permitted herein, and prior to such
time maintain and keep the Assets in substantially the same repair, working
order and condition as the Assets are in on the Effective Date (ordinary wear
and tear and damage from fire or other casualty subject to Article XVIII
excepted) so as to maintain the Business Premises as a hotel and resort with a
casino of substantially the same quality as such establishment exists as of the
Effective Date; provided, however, that, except as expressly provided in this
Agreement, SDIC shall not be required to make or undertake capital improvements,
repairs (other than in the ordinary course of business) or replacements with
respect to the Assets prior to the Transfer Time;
(b) continue in the ordinary course the existing use and operation
of the Business;
(c) promptly notify Buyer of (i) any notice or other communication
from any Person alleging that the consent of such Person is or may be required
in connection with the transactions contemplated by this Agreement, (ii) any
notice or other communication from any governmental or regulatory agency or
authority in connection with the transactions contemplated by this Agreement and
(iii) any actions, suits, claims, Environmental Claims, investigations or
proceedings commenced or, to its knowledge threatened
<PAGE>
against, relating to or involving or otherwise affecting SDIC or the Business
that, if adversely determined, would reasonably be expected to result in a
Material Adverse Effect or prevent or preclude the consummation of the
transactions contemplated by this Agreement;
(d) maintain a supply of consumables, inventory and operating
equipment of the type included at substantially the levels maintained on the
date of execution of this Agreement (with such increases or decreases due to
seasonality as and consistent with practice in the gaming industry in Las Vegas)
and in sufficient amounts to allow the efficient operation of the Business in a
first-class manner;
(e) comply in all material respects with all Legal Requirements
relating to the Assets or the Business and promptly provide Buyer with all
notices alleging violations of any Legal Requirement (including any violations
under applicable Legal Requirements relating to gaming) and cure, at its own
expense such violations;
(f) use best efforts to preserve in force all Permits and to cause
all expiring Permits to be renewed prior to the Closing Date. If any material
Permit shall be suspended, revoked or otherwise challenged, Seller shall
promptly notify Buyer and shall take all measures necessary to cause the
reinstatement of such material Permit without any additional limitation or
condition;
(g) make the following capital expenditures:
(i) budgeted capital expenditures of not less than $2,700,000 for
calendar year 1999 for maintenance and repair in respect of the Assets
and, following December 31, 1999, capital expenditures for such
maintenance and repair of not less than an average of $225,000 per month
in the aggregate; and
(ii) capital expenditures to install and operate an independent
information technology system, consisting of hardware and software, that
<PAGE>
will allow Buyer, after the Transfer Time, to operate the Business as
currently conducted, which system (x) shall use the AS 400 platform and be
reasonably acceptable to Buyer, (y) shall include customer lists and
related information constituting Assets and (z) after the Transfer Time,
shall not be accessible by any Person other than Buyer and its affiliates;
(h) as promptly as practicable following the Effective Date, create
from the Caesars World customer list a separate list of the customers of the
Desert Inn, and thereafter continue to maintain and update such customer list;
and
(i) enter into a golf course management agreement covering the
Desert Inn Golf Club and Pro Shop which is substantially consistent with Exhibit
10.6(b)-2 (the "Golf Course Management Agreement").
SECTION 9.2 Operating Restrictions. Except as required by law, as
otherwise expressly provided in this Agreement or with the consent of Buyer
(such consent not to be unreasonably withheld or delayed), SDIC shall not:
(a) create any mortgage, pledge, lien, encumbrance or charge on any
of the Assets which would bind any of the Assets following Closing (other than
Permitted Liens and Permitted Exceptions);
(b) sell or transfer the Business Premises, or any portion thereof
included as part of the Assets except transactions pursuant to the Assumed
Contracts or agreements entered into in the ordinary course of business which
sales or transfers would not, individually or in the aggregate, reasonably be
expected to materially impair the continued operation of the Business as
currently conducted;
(c) sell or transfer any Personal Property included as part of the
Assets except as contemplated by the Assumed Contracts or pursuant to agreements
entered into in the ordinary course of business which sales or transfers would
not, individually or in the aggregate, reasonably be
<PAGE>
expected to materially impair the continued operation of the Business as
currently conducted;
(d) cancel or terminate (other than for cause or in the ordinary
course of business which would not, individually or in the aggregate, reasonably
be expected to materially impair the continued operation of the Business as
currently conducted) any of the Assumed Contracts or, with-out Buyer's prior
written consent, enter into any new contracts (except for the Golf Course
Management Agreement) which (i) require payments in excess of $250,000, (ii)
continue for more than twelve months from the Effective Date or (iii) grant to
any person any material rights with respect to the Business or the Assets unless
any such contract can be terminated on 30 days' notice without liability to
Buyer; provided, however, that the entry by SDIC into any such contract shall
not constitute a breach or default under this Agreement or a failure of any
condition of the Closing if SGC shall assume all obligations under such contract
(and indemnify Buyer in respect thereof) and if SGC has the ability to perform
all such obligations without use of the Assets following the Transfer Time;
(e) waive any material rights of substantial value that are included
as a part of the Assets;
(f) except for the Golf Course Management Agreement, enter into any
contracts or agreements with any affiliates of SDIC which will be binding on
Buyer after the Transfer Time;
(g) consent to, authorize or approve any change in the zoning, land
use classification, development rights or obligations for or with respect to the
Real Estate, the Residential Real Estate or the Corner Land or any part thereof,
except that Seller reserves the right to consummate the Nevada Power Sale
Agreement, continue to prosecute the proposed subdivision of the Corner Land and
continue, following the execution and delivery of the Timeshare Joint Venture
Agreement by the parties thereto as contemplated by this Agreement, to further
subdivide portions of the Golf Course and Residential Real Estate in a
<PAGE>
manner consistent with, or pursuant to, such Timeshare Joint Venture Agreement;
(h) enter into any lease, license, occupancy agreement or other
agreement or contract which allows for the use or occupancy of any portion of
the Real Estate, the Residential Real Estate or the Corner Land other than (i)
bookings in the ordinary course of business which would result in aggregate
payments to Seller of less than $100,000, (ii) the conveyance contemplated by
the Nevada Power Sale Agreement and (iii) golf tournaments or events permitted
by Section 9.2(i);
(i) except for tournaments or events occurring on or prior to twelve
months following the Effective Date, enter into any agreements with respect to
use of the golf course located on the Real Estate, or any portion of such golf
course, for any tournaments or events which require, that the golf course be
unavailable to the public or to guests of the Business for more than one
calendar day;
(j) market or solicit offers to sell, transfer, convey, finance or
refinance, directly or indirectly, any interest in the Assets or in the owner of
any Asset to any party other than Buyer, or directly or indirectly negotiate,
participate or encourage the submission of any proposal with or from any other
Person relating to the sale of the Assets, nor shall Seller authorize any other
Person to do any of the foregoing on its behalf;
(k) except as set forth on Schedule 9.2(k), enter into any
collective bargaining or other agreements with any union for the employees of
the Business or enter into any agreement with any employee who will remain an
employee of the manager of the Business; provided, however, that Seller (i) may
engage in negotiations for and enter into successor collective bargaining
agreements to those collective bargaining agreements referenced in Schedule
3.1(a) which have expired or are due to expire, or may be terminated on seven
(7) days' notice by either party thereto, prior to the Transfer Time, (ii) may
engage in
<PAGE>
negotiations and enter into a collective bargaining agreement with the
Professional, Clerical and Miscellaneous Employees, Teamsters Local Union No.
995, which was certified as the bargaining representative for the laundry
workers at the Business after an election held on October 30, 1998, and (iii)
will be required to engage in "effects bargaining", and may enter into
agreements in connection therewith, with the labor unions representing employees
of the Business (the "Union Employees"), and, provided, further, that any such
entering into collective bargaining agreements (or renewals thereof) will be on
commercially reasonable terms, and, in connection therewith, Seller will
undertake to involve Buyer, subject to agreement of the applicable labor unions,
in the foregoing negotiations;
(l) hire or solicit any employee of SDIC for employment at any of
Seller's or ITT's or its affiliates' other business or increase the compensation
of any such employee unless required by law or the terms of a collective
bargaining agreement, except for ordinary course merit increases in compensation
for non-union employees consistent with past practice for such employees or for
employees holding similar positions;
(m) except as required by applicable law (and then only following
notice to Buyer to the extent practicable) commence or commit to any capital
expenditures or capital project with respect to the Business or the Assets which
involves the payment of $500,000 or more;
(n) transfer, sell, assign, pledge, encumber or grant a security
interest in the Stock other than to Buyer. Notwithstanding any provision in this
Agreement to the contrary, the agreement contained in the immediately preceding
sentence shall survive the Closing Date until the Stock is transferred to Buyer;
or
(o) enter into any amendment, modification or supplement to the
Nevada Power Sale Agreement.
Buyer agrees to respond to Seller's request with respect to any of the
matters set forth in this Section 9.2 within 5 Business Days after receipt by
Buyer of Seller's
<PAGE>
written request, and the failure of Buyer to respond within such 5 Business Day
period shall be deemed to be approval and consent thereto by Buyer.
ARTICLE X
Other Pre-Closing Obligations
SECTION 10.1 Access; Observers. (a) After the Effective Date and prior to
the Closing, upon prior written notice from Buyer and, if requested by Seller,
accompanied by a representative of Seller, Seller shall (unless prohibited by
law) give Buyer and its representatives, employees and agents reasonable access
during normal business hours to the Business Premises and to the books and
records relating to the Assets and shall (unless prohibited by law) furnish
Buyer during such period with such information in Seller's possession concerning
the Assets and operation of the Business as Buyer may reasonably request. Seller
and Buyer agree that prior to Closing Seller shall have no obligation to give
Buyer the names or addresses of, or other identifying information with respect
to, any of Seller's customers or players, and Buyer shall not have any access to
such identifying information or to other proprietary information of SIDC and its
Affiliates not included among the Assets. Any such access and the furnishing of
any such information shall not unduly interfere with the normal activities of
the Business, and Buyer acknowledges that no investigation by Seller or Buyer or
other information received by Buyer shall operate as a waiver or otherwise
affect any representation, warranty or agreement given or made by Seller
hereunder. Notwithstanding the foregoing, Buyer shall not have access to
personnel records of SDIC relating to individual performance or evaluation
records, medical histories or other information which in Seller's reasonable
good faith opinion is prohibited by Legal Requirements or the disclosure of
which could subject Seller to risk of liability.
(b) Buyer shall be responsible for its costs and
<PAGE>
expenses in connection with any inspection or tests undertaken pursuant to this
Section 10.1.
SECTION 10.2 No Control. Prior to the Transfer Time, Buyer shall not
directly or indirectly control, supervise, direct or interfere with, or attempt
to control, supervise, direct or interfere with, the Assets or the Business.
Until the Transfer Time, the operations and affairs of the Business are the sole
responsibility of and (subject to the provisions of Article IX) under Seller's
complete control.
SECTION 10.3 Hart-Scott-Rodino Filing. Buyer and Seller shall use their
commercially reasonable efforts to comply as expeditiously as practicable with
the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended ("HSR Act"), to the extent applicable to the transactions contemplated
by this Agreement, and shall make their initial filings with the Federal Trade
Commission and the United States Department of Justice as soon as practical and
no later than sixty (60) days after the Effective Date. Each party agrees to use
its commercially reasonable efforts to satisfy any requests for additional
information or other requirements imposed by the Federal Trade Commission or the
Department of Justice in connection with the transactions contemplated by this
Agreement as soon as practical and, if requested by any party, to request early
termination of any waiting period otherwise imposed by statute. Buyer shall pay
the filing fee, if any, required under the HSR Act.
SECTION 10.4 Cooperation. Each party shall use its commercially reasonable
efforts to make or file all other required notifications and to obtain all
consents, approvals and authorizations, including the Permits, which must be
obtained by such party in order to consummate the transactions contemplated
hereby. Each party shall render the other its full and complete cooperation in
giving such notices or obtaining such consents, approvals and authorizations,
including the Permits. Each party covenants and agrees promptly to furnish to
the other all information and data in the furnishing party's possession
requested in writing by the requesting party which such furnishing party
<PAGE>
has the right to disclose and which is reasonable or necessary in order to
assist the requesting party to give the necessary notices or secure the permits,
licenses and approvals required as contemplated by this Agreement, including the
Permits.
SECTION 10.5 Gaming and Other Licenses. (a) As soon as practical after the
Effective Date, but in no event later than 60 days following the Effective Date,
Buyer will file applications with the Nevada Gaming Authorities on behalf of
Buyer, the board of directors and executive officers (if any) of Buyer, SUN and
the board of directors and executive officers of SUN for all required gaming
licenses (the "Gaming Licenses"), liquor licenses and for all other required
licenses (collectively with the Gaming Licenses and the liquor licenses, the
"Licenses") in connection with the Business, and all related necessary findings
of suitability, registrations and approvals, and no later than 120 days
following the Effective Date, Buyer will file such applications on behalf of all
other required parties in connection with the foregoing. Buyer will use its best
efforts to obtain the Licenses as soon as possible after the Effective Date, and
will respond promptly to all requests made by the Nevada Gaming Authorities
and/or the alcoholic beverage control authorities. Seller shall cooperate in
good faith to assist Buyer in obtaining the Licenses as soon as possible after
the Effective Date; provided, however, that the foregoing shall not require SUN
or Buyer, directly or indirectly, (i) to divest, or agree to divest, any
material assets of SUN or Buyer on the Effective Date or (ii) to cease to
conduct business or operations in any jurisdiction in which SUN, Buyer or their
respective subsidiaries conducts business or operations as of the Effective
Date.
(b) Seller will deliver to Buyer as promptly as practicable following the
filing thereof true, correct and complete copies of material gaming financial
reports, if any, filed by Seller with respect to the Business with the State of
Nevada or Nevada Gaming Authorities between the Effective Date and the Closing.
SECTION 10.6 Best Efforts. (a) Subject to the
<PAGE>
terms and conditions of this Agreement, each party shall use its best efforts to
cause the Closing to occur as promptly as practicable following the Effective
Date.
(b) Without limiting the generality of the foregoing, each of Seller and
Buyer or their respective affiliates, as applicable, shall use its best efforts
to negotiate in good faith as soon as possible after the Effective Date, and
enter into as promptly as practicable following such Effective Date (or cause
their respective affiliates to enter into, as the case may be) (A) a timeshare
joint venture agreement between Starwood or an affiliate of Starwood and Buyer
or an affiliate of Buyer, the terms of which shall be substantially as set forth
in Exhibit 10.6(b)-1 (the "Timeshare Joint Venture Agreement"), and (B) a
marketing alliance agreement between Starwood or an affiliate of Starwood and
Buyer or an affiliate of Buyer, the terms of which shall be substantially as set
forth in Exhibit 10.6(b)-3 (the "Marketing Alliance Agreement").
SECTION 10.7 Notice. Each party covenants and agrees promptly to notify
the other of any claim, action, suit, proceeding or investigation relating to
the Business or this Agreement which is commenced or threatened and becomes
known to any of them between the Effective Date and the Closing.
SECTION 10.8 Parcel Map Requirement. Except for any change therefrom
approved in writing by Buyer (such approval not to be unreasonably withheld or
delayed), Seller shall effect any parcelization of the real property subject to
the Parcel Map substantially in accordance with the specifications of such
Parcel Map.
SECTION 10.9 Additional Agreements of Seller. (a) Seller agrees that
except as set forth on Schedule 6.1(x) or as contemplated by this Agreement,
DIIC shall not incur any material liabilities other than for the purchase of
water from the Las Vegas Valley Water District. Seller will pay for or cause to
be paid for (but not by DIIC) any water purchased by DIIC prior to the Closing
which is not paid for by DIIC prior to the Closing.
<PAGE>
(b) Seller agrees that it will be solely responsible for the payment of
any fees or taxes due pursuant to any subsequent deficiency determinations made
under the Nevada Gaming Control Act (chapter 463 of the NRS) which encompasses
any period of time before the Closing Date. The foregoing provision, required by
the Nevada Gaming Control Act to be included in this Agreement, shall not be
construed to exonerate Buyer from paying, or to require Seller to pay, for fees
or taxes attributable to operations of the Business from and after the Transfer
Time.
ARTICLE XI
Conditions to Closing
SECTION 11.1 Buyer's Conditions. The obligation of Buyer to consummate the
Closing and the purchase of the Assets is conditioned upon the satisfaction or
waiver by Buyer as of the Closing Date of each of the following conditions
(collectively "Buyer's Closing Conditions"):
(a) Seller shall have delivered to Buyer a certificate of its Chief
Executive Officer or Chief Financial Officer, dated as of the Closing Date, to
the effect that all the terms, covenants, agreements and conditions of this
Agreement to be complied with and performed by Seller on or prior to the Closing
Date have been complied with and performed in all material respects, and all the
representations and warranties of Seller herein qualified as to materiality are
true and all such representations and warranties not so qualified are true in
all material respects as if made on and as of such date (unless an earlier date
is indicated in the representation and warranty).
(b) Seller, Parents or their respective affiliates shall have delivered,
or cause to be delivered, to Buyer (i) any documents, instruments or agreements
called for under this Agreement which have not previously been delivered; (ii)
Bills of Sale, endorsements of certificates of title and similar instruments of
conveyance as appropriate, in customary form covering title to the
<PAGE>
Personal Property; and reasonably satisfactory to Seller's and Buyer's counsel;
(iii) an Assignment of Trademarks and intangible rights in customary form; (iv)
an Assignment and Assumption of Assumed Contracts in customary form and
reasonably satisfactory to Seller's and Buyer's counsel; (v) such other
customary instruments of conveyance as Buyer may reasonably request with respect
to the Assets; (vi) a "nonforeign affidavit", properly executed by an officer of
SDIC in customary form containing such information as is required by Section
1445(b)(2) of the Code; (vii) Seller's customer and player lists and related
documents, instruments or agreements called for under this Agreement which have
not been previously delivered; and (viii) such other documents, instruments or
agreements as may be reasonably required by Buyer or its counsel to transfer the
Assets to Buyer and to effectuate the transactions contemplated hereby.
(c) SDIC shall have delivered to Escrowee or to Buyer grant, bargain and
sale deeds conveying fee simple title to the Real Estate, the Corner Land and
the Residential Real Estate subject only to the Permitted Exceptions (including
the Nevada Power Sales Agreement) except as otherwise expressly provided herein,
in a form reasonably satisfactory to Buyer's and Seller's counsel.
(d) Any waiting period, including extensions thereof, applicable to the
consummation of the transactions contemplated hereunder required pursuant to the
provisions of the HSR Act shall have either expired without notice of objection
to the transaction or been previously terminated.
(e) Buyer shall have obtained all necessary approvals from the Nevada
Gaming Authorities, including Gaming Licenses, to operate the Business
substantially as currently conducted on the Effective Date.
(f) No injunction shall have been entered which prohibits or makes
impossible the consummation of the transactions contemplated hereby, whether
preliminary or permanent; provided, however, that Buyer and Seller shall use
their commercially reasonable efforts to prevent any such event (including
appealing any adverse decision).
<PAGE>
(g) Buyer shall have received the Title Policies or commitments therefor,
and Seller shall have delivered to the Title Insurer such other documents or
affidavits as may be reasonably required as a condition to the issuance of the
Title Policies in the form herein required.
(h) Buyer shall have received from counsel to SDIC and Parents, an opinion
or opinions, dated as of the Closing Date, in form and substance reasonably
satisfactory to Buyer and its counsel, that: (i) each of SDIC and the Parents is
validly existing corporation organized and in good standing under the laws of
the state of its formation, and has all necessary power to own the Assets,
operate the Business and to consummate the transactions contemplated hereby; and
(ii) this Agreement and the other agreements and instruments to be executed and
delivered by Seller or the Parents on or prior to the Closing Date have been
duly and validly authorized by Seller or the Parents and will on the Closing
Date be valid and binding on Seller and the Parents and enforceable in
accordance with their terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and other similar laws affecting
creditors' rights generally from time to time in effect and to general
principles of equity (including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing) regardless of whether considered in
a proceeding in equity or at law.
(i) The Outside Date shall not have passed, except that the same shall not
be a condition for the benefit of Buyer to the extent of any contributory delay
by Buyer in performing its obligations hereunder.
SECTION 11.2 Seller's Conditions. The obligation of Seller to consummate
the Closing is conditioned upon the satisfaction or waiver by Seller as of the
Closing Date of each of the following conditions (collectively "Seller's Closing
Conditions"):
(a) Buyer shall have delivered to Escrowee or to Seller the Closing
Date Amount (less the Applicable Accrued Deposit).
<PAGE>
(b) Buyer, SUN or their respective affiliates shall have delivered,
or cause to be delivered, to Seller a certificate, dated as of the Closing Date,
to the effect that all the terms, covenants, agreements and conditions of this
Agreement to be complied with and performed by Buyer on or prior to the Closing
Date have been complied with and performed in all material respects, and all the
representations and warranties of Buyer herein qualified as to materiality are
true and all such representations and warranties not so qualified are true in
all material respects on the Closing Date as if made on and as of such date
(unless an earlier date is indicated in the representation and warranty).
(c) Buyer shall have delivered to Seller the instruments and
documents specified in Section 11.1 to be accepted and executed by Buyer and any
other documents, instruments and agreements called for under this Agreement
which have not previously been delivered.
(d) Seller shall have received from counsel to Buyer and SUN an
opinion or opinions dated as of the Closing Date, in form and substance
reasonably satisfactory to Seller and its counsel, that: (i) each of Buyer and
SUN is validly existing and in good standing under the laws of the state or
commonwealth of its formation, is duly qualified to conduct business in such
jurisdiction, and has all necessary corporate power to consummate the
transactions contemplated hereby; and (ii) this Agreement and the other
agreements and instruments to be executed and delivered by Buyer or SUN on or
prior to the Closing Date have been duly and validly authorized by Buyer or SUN
and will on the Closing Date be valid and binding on Buyer and SUN and
enforceable in accordance with their terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and other similar
laws affecting creditors' rights generally from time to time in effect and to
general principles of equity (including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing) regardless of whether
considered in a proceeding in equity or at law.
(e) Any waiting period, including extensions
<PAGE>
thereof, applicable to the consummation of the transactions contemplated
hereunder required pursuant to the provisions of the HSR Act shall have either
expired without notice of objection to the transaction or been previously
terminated.
(f) No injunction shall have been entered which prohibits or makes
impossible the consummation of the transactions contemplated hereby, whether
preliminary or permanent; provided, however, that Buyer and Seller shall use
their reasonable best efforts to prevent any such event (including appealing any
adverse decision).
(g) The Outside Date shall not have passed, except that same shall
not be a condition for the benefit of Seller to the extent of any contributory
delay by Seller in performing its obligations hereunder.
(h) Buyer shall have obtained all necessary approvals from the
Nevada Gaming Authorities, including Gaming Licenses, to operate the Business
substantially as conducted on the Effective Date.
SECTION 11.3 Frustration of Closing Conditions. Neither Buyer nor Seller
may rely on the failure of any condition set forth in this Article XI to be
satisfied if such failure was caused by such party's failure to act in good
faith or to use its best efforts to cause the Closing to occur as required by
Section 10.6.
ARTICLE XII
Escrow
SECTION 12.1 Escrow. If Buyer shall deliver the Deposit to Escrowee
pursuant to Section 4.2(a), then prior to or concurrently with such delivery
Buyer and Seller shall open an escrow (the "Escrow") with Escrowee by delivery
of a fully executed copy of this Agreement to Escrowee, and by Buyer's delivery
to Escrowee of the Deposit no later than the tenth Business Day following the
date of this Agreement. Escrowee will notify Seller and Buyer when Escrow has
been opened. This Agreement together with the Recording
<PAGE>
Instructions shall constitute joint escrow instructions to Escrowee. In
addition, Seller and Buyer agree to be bound by such other reasonable and
customary escrow instructions as may be necessary or reasonably required by
Escrowee or the parties hereto in order to consummate the purchase and sale
described herein, or otherwise to distribute and pay the funds held in Escrow as
provided in this Agreement. In the event of any inconsistency between the terms
and provisions of such supplemental escrow instructions and the terms and
provisions of this Agreement and the Recording Instructions, the terms and
provisions of this Agreement and the Recording Instructions shall control,
absent an express written agreement between Seller and Buyer to the contrary
which acknowledges this Article XII. The Assets described in Sections 2.2(a),
(b) and (c) shall be conveyed at the Closing through such Escrow and the other
Assets shall be conveyed at the Closing outside of such Escrow, all in
accordance with the terms and provisions of this Agreement.
SECTION 12.2 Investment. The Escrowee shall invest or deposit all monies
delivered to the Escrowee for deposit into the Escrow in such account(s) at, or
in such certificates of deposit issued by, such bank or savings and loan
association located in Las Vegas, Nevada, as Buyer shall direct and as shall be
reasonably satisfactory to Seller. Except as otherwise expressly provided
herein, all interest, dividends and other income earned in respect of such
deposited monies shall accrue to the account and for the benefit of Buyer and
shall be reinvested or deposited as aforesaid.
ARTICLE XIII
Closing
SECTION 13.1 Time; Location. The consummation of the purchase and sale of
the Assets pursuant to this Agreement (the "Closing") shall be held at the
offices of Cravath, Swaine & Moore, 825 Eighth Avenue, New York, New York 10019
(or such other place as the parties shall agree) and shall be deemed to occur at
midnight following 11:59 P.M. Las Vegas time on the Closing Date (the "Transfer
<PAGE>
Time"). The Closing shall occur on a date (the "Closing Date") as soon as
practicable, but no later than the sixth Business Day after satisfaction (or
waiver by the applicable party) of the conditions set forth in Sections 11.1 and
11.2, and in any event on or prior to November 17, 2000 (the "Outside Date").
SECTION 13.2 Recordation of Deeds. The Closing shall, for all purposes
under this Agreement, be deemed to have occurred as of the Transfer Time. The
matters and deliveries described in Article XI shall be deemed accomplished
concurrently. The recordation of the Deeds shall be accomplished on the Closing
Date, if possible, but in any event not later than one Business Day following
the Closing Date and then only provided that the Title Insurer will insure over
the gap.
SECTION 13.3 Payment of Closing Date Amount. Prior to the Closing, Buyer
shall deliver to Escrowee or to Seller the Closing Date Amount less the
Applicable Accrued Deposit by wire transfer of immediately available funds.
Except to the extent such amounts are included as a Current Liability in the
calculation of Closing Working Capital pursuant to Section 4.4, the Escrowee
shall withhold from the monies to be delivered to Seller pursuant to the
immediately preceding paragraph such amounts as Seller and Buyer shall agree are
necessary to comply with the provisions of Nevada Revised Statutes ("NRS")
612.695, 360.525 and 616B.269 until such time as Seller furnishes to Buyer and
the Escrowee the receipts or certificates provided for in said statute or, if
not so provided for, such evidence as Buyer may reasonably require in order to
assure Buyer that the applicable obligations have been satisfied. If Sellers do
not produce such receipts and certificates within the time period provided in
said statute, or if any lien or other claim therefor is asserted against Buyer
or the Assets by a governmental authority, the Escrowee shall pay such withheld
funds to the appropriate governmental authorities.
SECTION 13.4 Certain Expenses. Buyer and Seller shall equally share the
following expenses: (i) all real estate transfer taxes, (ii) any and all sales
and use taxes
<PAGE>
payable in respect of the transfer of the Gaming Equipment and other applicable
personal property to Buyer and (iii) the costs of filing or publishing any and
all notices or documents required by law or this Agreement to be filed or
published in connection with Buyer's purchase of the Gaming Equipment and other
applicable personal property.
SECTION 13.5 Transfer of Possession. Possession of the Assets shall be
delivered to Buyer at the Transfer Time.
ARTICLE XIV
[Intentionally omitted]
ARTICLE XV
Survival; Indemnification
SECTION 15.1 Survival. Other than Sections 5.1(a) and 15.2 through 15.7,
which shall survive indefinitely, and as otherwise provided in Sections 6.3, 7.2
and 9.2(n), any covenants, agreements, representations and warranties of the
parties hereto contained in this Agreement, the Deeds or in any other agreement,
certificate or other writing delivered pursuant hereto or in connection herewith
shall not survive the Closing.
SECTION 15.2 Indemnification. Seller agrees to indemnify and hold Buyer
harmless from and against any and all damages, losses, penalties, liabilities
and expenses, including reasonable attorneys' fees and expenses (collectively,
"Losses"), which Buyer may incur by reason of any action or claim arising from
acts or omissions of Seller (or any of its affiliates) prior to the Transfer
Time, in connection with the Assets or the Business and all liabilities in
respect of the Assets or the Business that are not Assumed Liabilities, all
liabilities in respect of the Excluded Assets, Excluded Liabilities and all
liabilities in respect of contracts assumed by SGC pursuant to Section 9.2(d).
Buyer agrees to indemnify and hold
<PAGE>
Seller and its affiliates harmless from and against any and all Losses, which
Seller or any of its affiliates may incur by reason of (i) any action or claim
arising after the Transfer Time from acts or omissions of Buyer or otherwise
arising out of the Assets or the Business after the Transfer Time, including
Buyer's failure to discharge any of the Assumed Liabilities, (ii) any claims or
actions arising in connection with, or asserted by any broker contacted or
retained by Buyer, or (iii) Seller's cooperation with Buyer pursuant to Section
3.3 in providing Buyer with the benefits of any Assumed Contract for which
consent is not obtained.
SECTION 15.3 Calculation of Losses. The amount of any Loss for which
indemnification is provided under this Article XV shall be net of any amounts
recovered or recoverable by the party entitled to indemnification hereunder (the
"Indemnified Party") under insurance policies with respect to such Losses and
shall be (i) increased to take account of any net tax cost incurred by the
Indemnified Party arising from the receipt of indemnity payments hereunder
(grossed up for such increase) and (ii) reduced to take account of any net tax
benefit realized by the Indemnified Party arising from the incurrence or payment
of any such Losses. In computing the amount of any such tax cost or tax benefit,
the Indemnified Party shall be deemed to recognize all other items of income,
gain, loss, deduction or credit before recognizing any item arising from the
receipt of any indemnity payment hereunder or the incurrence or payment of any
indemnified Losses. Any indemnification payment hereunder shall initially be
made without regard to this paragraph and shall be increased or reduced to
reflect any such net tax cost (including gross-up) or net tax benefit only
after the Indemnified Party has actually realized such cost or benefit.
SECTION 15.4 Procedures Relating to Indemnification. (a) In order for an
Indemnified Party to be entitled to any indemnification provided for under this
Agreement in respect of, arising out of or involving a claim or demand made by
any person against the Indemnified Party (a "Third Party Claim"), such
Indemnified Party must notify the indemnifying party in writing, and in
reasonable detail, of the Third Party Claim within 10 business days after
<PAGE>
receipt by such Indemnified Party of written notice of the Third Party Claim;
provided, however, that failure to give such notification shall not affect the
indemnification provided hereunder except to the extent the indemnifying party
shall have been actually prejudiced as a result of such failure (except that the
indemnifying party shall not be liable for any expenses incurred during the
period in which the Indemnified Party failed to give such notice).
(b) If a Third Party Claim is made against an Indemnified Party, the
indemnifying party shall be entitled to participate in the defense thereof and,
if it so chooses and acknowledges its obligation to indemnify the Indemnified
Party therefor, to assume the defense thereof with counsel selected by the
indemnifying party; provided that such counsel is not reasonably objected to by
the Indemnified Party. Should the indemnifying party so elect to assume the
defense of a Third Party Claim, the indemnifying party shall not be liable to
the Indemnified Party for legal expenses subsequently incurred by the
Indemnified Party in connection with the defense thereof. If the indemnifying
party assumes such defense, the Indemnified Party shall have the right to
participate in the defense thereof and to employ counsel (not reasonably
objected to by the indemnifying party), at its own expense, separate from the
counsel employed by the indemnifying party, it being understood that the
indemnifying party shall control such defense.
(c) If the indemnifying party so elects to assume the defense of any
Third Party Claim, all of the indemnified parties shall cooperate with the
indemnifying party in the defense or prosecution thereof. Whether or not the
indemnifying party shall have assumed the defense of a Third Party Claim, the
Indemnified Party shall not admit any liability with respect to, or settle,
compromise or discharge, such Third Party Claim without the indemnifying party's
prior written consent (which consent shall not be unreasonably withheld). If the
indemnifying party shall have assumed the defense of a Third Party Claim, the
Indemnified Party shall agree to any settlement, compromise or discharge of a
Third Party Claim which the indemnifying party may recommend and which by its
terms obligates the
<PAGE>
indemnifying party to pay the full amount of the liability in connection with
such Third Party Claim and which releases the Indemnified Party completely in
connection with such Third Party Claim.
SECTION 15.5 Other Claims. In the event any Indemnified Party should have
a claim against any indemnifying party under Section 15.2 that does not involve
a Third Party Claim being asserted against or sought to be collected from such
Indemnified Party, the Indemnified Party shall deliver notice of such claim with
reasonable promptness to the indemnifying party. The failure by any Indemnified
Party so to notify the indemnifying party shall not relieve the indemnifying
party from any liability which it may have to such Indemnified Party, except to
the extent that the indemnifying party demonstrates that it has been materially
prejudiced by such failure. If the indemnifying party does not notify the
Indemnified Party within 10 calendar days following its receipt of such notice
that the indemnifying party disputes its liability to the Indemnified Party,
such claim specified by the Indemnified Party in such notice shall be
conclusively deemed a liability of the indemnifying party under Section 15.2 and
the indemnifying party shall pay the amount of such liability to the Indemnified
Party on demand or, in the case of any notice in which the amount of the claim
(or any portion thereof) is estimated, on such later date when the amount of
such claim (or such portion thereof) becomes finally determined. If the
indemnifying party has timely disputed its liability with respect to such claim,
as provided above, the indemnifying party and the Indemnified Party shall
proceed in good faith to negotiate a resolution of such dispute and, if not
resolved through negotiations, such dispute shall be resolved by litigation in
an appropriate court of competent jurisdiction.
SECTION 15.6 Exclusivity. After the Closing, and except for a party's
right to recover damages for breach of a representation or warranty (as limited
by Sections 6.3 and 7.2), Section 15.2 will provide the exclusive remedy for any
Losses arising out of this Agreement, the Assets, the Business or the
transactions contemplated hereby.
<PAGE>
SECTION 15.7 No Consequential Damages. Notwithstanding anything to the
contrary in this Agreement, in no event shall any party be obligated to
indemnify any Person, including any Indemnified Party, for any special or
consequential damages.
ARTICLE XVI
Termination
SECTION 16.1 Grounds for Termination. This Agreement may be terminated at
any time prior to the Closing:
(i) by mutual written agreement of Seller and Buyer;
(ii) by Seller if Buyer shall fail timely to make the Deposit;
(iii) by Seller if the Closing shall not have been consummated on or
before the Outside Date other than by reason of Seller's default, or by
Buyer if the Closing shall not have been consummated on or before the
Outside Date, other than by reason of Buyer's default;
(iv) by Seller if any of the conditions set forth in Section 11.2
shall have become incapable of fulfillment and shall not have been waived
by Seller;
(v) by Buyer if any of the conditions set forth in Section 11.1
shall have become incapable of fulfillment and shall not have been waived
by Buyer;
(vi) by Buyer pursuant to Section 18.1;
(vii) by Buyer upon a breach in any material respect of any
representation, warranty, covenant or agreement hereunder by Seller unless
<PAGE>
(x) such breach is capable of being cured, (y) Seller diligently seeks to
cure such breach and (z) such breach is cured prior to the Closing Date;
and
(viii) by Seller upon a breach in any material respect of any
representation, warranty, covenant or agreement hereunder by Buyer unless
(x) such breach is capable of being cured, (y) Buyer diligently seeks to
cure such breach and (z) such breach is cured prior to the Closing Date.
provided, however, that the party seeking termination (except pursuant to clause
(i)) is not in breach in any material respect of any of its representations,
warranties, covenants or agreements contained in this Agreement.
SECTION 16.2 Effect of Termination. Except as set forth in this Section
16.2 or in Section 16.3, if this Agreement is terminated as permitted by Section
16.1, such termination shall be without liability of either party (or any
stockholder, director, officer, employee, agent, consultant or representative of
such party) to the other party to this Agreement and the Deposit, together with
any interest or other payments made thereon during the Escrow, shall be
irrevocably returned to Buyer by the Escrowee within two (2) Business Days of
such termination. If a termination shall result from the willful failure of
either party to fulfill a condition to the performance of the obligations of the
other party, failure to perform a covenant of this Agreement or breach by either
party to this Agreement of any representation or warranty or agreement contained
herein, such party shall be fully liable for any and all Losses incurred or
suffered by the other party as a result of such failure or breach.
SECTION 16.3 Liquidated Damages.
(a) BECAUSE OF THE MAGNITUDE AND THE UNIQUE NATURE OF THE ASSETS,
THE PARTIES ACKNOWLEDGE THAT SELLER'S DAMAGES IN THE EVENT OF BUYER'S FAILURE TO
CONSUMMATE THE CLOSING IN ACCORDANCE WITH BUYER'S OBLIGATIONS HEREUNDER
<PAGE>
WOULD BE EXTREMELY DIFFICULT OR IMPRACTICAL OF ASCERTAINMENT. BUYER AND SELLER
HAVE EXPRESSLY NEGOTIATED THIS PROVISION, AND HAVE AGREED THAT IN LIGHT OF THE
CIRCUMSTANCES EXISTING AT THE TIME OF EXECUTION OF THIS AGREEMENT, AN AMOUNT
EQUAL TO THE DEPOSIT, TOGETHER WITH INTEREST AND OTHER PAYMENTS MADE THEREON
DURING THE PERIOD OF ESCROW, REPRESENTS A REASONABLE ESTIMATE OF THE HARM LIKELY
TO BE SUFFERED BY SELLER IN THE EVENT THAT THE NEVADA GAMING AUTHORITIES DENY
BUYER A GAMING LICENSE TO OPERATE THE BUSINESS AS CURRENTLY CONDUCTED UP BY A
FINAL NON-APPEALABLE DECISION, THAT SELLER'S ACTUAL DAMAGES MIGHT WELL EXCEED
THE AMOUNT OF THE DEPOSIT, BUT THAT PROOF OF ACTUAL DAMAGES WOULD BE COSTLY OR
IMPRACTICAL. ACCORDINGLY, IN THE EVENT THAT THE NEVADA GAMING AUTHORITIES DENY
BUYER A GAMING LICENSE TO OPERATE THE BUSINESS AS CURRENTLY CONDUCTED BY A FINAL
NON-APPEALABLE DECISION, THEN SELLER SHALL BE ENTITLED TO RECEIVE THE DEPOSIT
(TOGETHER WITH SUCH INTEREST AND OTHER PAYMENTS) FROM ESCROWEE AS ITS SOLE
REMEDY AND AS LIQUIDATED DAMAGES; PROVIDED, HOWEVER, THAT THE FOREGOING SHALL
NOT IMPAIR OR LIMIT ANY REMEDY OF SELLER FOR ANY BREACH OF THIS AGREEMENT BY SUN
OR BUYER.
(b) Notwithstanding the foregoing, Seller's agreement to accept the
Deposit (together with interest and other payments made thereon during the
period of Escrow) as liquidated damages pursuant to Section 16.3(a) for failure
of the Nevada Gaming Authorities to grant Buyer a Gaming License to operate the
Business as currently conducted by a final and non-appealable decision is
expressly conditioned on Buyer's full cooperation and that Buyer refrain from
obstructing or interfering in any way with Seller's exercise of such remedies
and execute a release in form reasonably satisfactory to Seller's counsel of any
and all claims against Starwood, ITT, Sheraton, SGC, SDIC and the Assets within
three (3) Business Days of Seller's demand therefor. In the event Buyer shall
fail or refuse so to cooperate with Seller in the termination of this Agreement,
the cancellation of Escrow, the payment of liquidated damages and the execution
and delivery of the foregoing described release in favor of Seller and its
affiliates, then Seller may elect to pursue any and all remedies available to it
at law or in equity. In the event of an action commenced by Seller or Buyer over
disposition of the Deposit or money
<PAGE>
damages asserted by Buyer for Seller's alleged breach of this Agreement, the
prevailing party shall be entitled to recover, in addition to its costs of
enforcement, including attorneys' and consultants' fees, interest at ten (10%)
percent per annum on the sum ultimately recovered, calculated from the
expiration of said three (3) Business Days, and inclusive of interest earned on
the Deposit from and after said date.
(c) The parties acknowledge that, subject to the provisions of
Section 16.3(b), Buyer has the right to seek both money damages and specific
performance in the event of Seller's breach of this Agreement.
(d) In the event of Buyer's failure to timely consummate the
Closing, other than by reason of a failure of a Buyer's Closing Condition, time
being of the strictest essence of each and every provision hereof, Seller shall
be entitled to pursue any and all remedies available to it at law or in equity
(including retention of the Deposit).
SECTION 16.4 Survival. The provisions of Sections 5.1(a), 20.5, 20.6,
20.12, 20.16 and Sections 16.2 and 16.3 shall survive any termination hereof
pursuant to Section 16.1.
ARTICLE XVII
Collection of Chips and Tokens;
Baggage and Safe Deposits
SECTION 17.1 Collection of Chips and Tokens. Buyer shall redeem, as
Seller's agent but without any liability therefor, any chips or tokens, racebook
and keno tickets (from any series in use as of or prior to the Transfer Time) of
Seller relating to the use and operation of the Business, which are presented by
patrons of the Business or Buyer for payment within the applicable Nevada
statutory time periods for such redemptions. Seller's chips and tokens, racebook
and keno tickets, to the extent redeemed by Buyer during such statutory periods,
shall be
<PAGE>
redeemed as often as weekly by Seller, upon delivery to Seller of such Seller's
chips, tokens, racebook and keno tickets redeemed. Seller agrees to make
arrangements for the additional redemption of its chips, tokens and wagers as
required by Nevada law.
SECTION 17.2 Baggage. At the Transfer Time an authorized representative of
Seller shall perform the following functions for all baggage, trunks and other
property that was checked and placed in the care of Seller: (i) seal all pieces
of baggage with tape; (ii) prepare an inventory ("Inventoried Baggage") of such
items indicating the check number applicable thereto; and (iii) deliver the
Inventoried Baggage to an authorized representative of Buyer and secure a
receipt for the Inventoried Baggage. Thereafter, Buyer shall be responsible for
such Inventoried Baggage.
SECTION 17.3 Safe Deposits. Safe deposit boxes in use by customers at the
Transfer Time will be sealed in a reasonable manner mutually agreeable to Buyer
and Seller. At the Transfer Time, Seller and Buyer shall designate in writing
their initial safe deposit representatives. Representatives of both Buyer and
Seller are to be present when a seal is broken. Seller will have no further
responsibility for seals broken without the presence of Seller's representative.
Buyer will have no responsibility for loss or theft from a safe deposit box
whose seal was broken in the presence of Seller's representative. Seller will
make a representative available within one hour after Buyer notifies a person or
persons whom Seller will from time to time designate. All safe deposit keys,
combinations and records shall be delivered at the Transfer Time to Buyer.
SECTION 17.4 Valet Parking. At the Transfer Time, an authorized
representative of Seller shall perform the following functions for all motor
vehicles that were checked and placed in the care of Seller: (i) mark all motor
vehicles with a sticker or tape; (ii) prepare an inventory ("Inventoried
Vehicles") of such items indicating the check number applicable thereto; and
(iii) transfer control of the Inventoried Vehicles to an authorized
<PAGE>
representative of Buyer and secure a receipt for the Inventoried Vehicles.
Thereafter, Buyer shall be responsible for the Inventoried Vehicles.
ARTICLE XVIII
Loss by Fire or Other Casualty; Condemnation
SECTION 18.1 Fire or Other Casualty; Condemnation. In the event that prior
to the Closing Date, a Material Portion of the Assets is destroyed or suffers
Material Damage, or if condemnation proceedings are commenced against all or a
Material Portion of the Business Premises, Seller shall promptly give Buyer
written notice of the occurrence of such damage, destruction or condemnation
proceeding. Buyer shall then have the right, exercisable by giving notice of
such decision to Seller within 10 Business Days after receiving such written
notice from Seller of such damage, destruction or condemnation proceedings, to
terminate this Agreement, in which case neither party shall have any further
rights or obligations hereunder and the Deposit, together with interest thereon
in Escrow, shall be returned to Buyer. If Buyer elects within such 10 Business
Day period to accept the Assets in their then condition, all proceeds of
insurance (other than any business interruption insurance), after deducting all
reasonable expenses of Seller in repairing such damage, if any, or Seller's
share of any such condemnation awards (but exclusive of awards for business
interruption) shall be paid or assigned to Buyer at the Closing with no
reduction in the Purchase Price. In the event that, after the Effective Date,
there is damage to the Assets which does not constitute Material Damage, Buyer
shall not have the right to terminate the Agreement by reason thereof and Seller
will promptly repair or replace the affected Assets at Seller's expense prior to
or within a reasonable time after the Closing Date or pay Buyer the cost of such
repair or replacement as determined below. Seller shall give Buyer written
notice within 15 Business Days of the occurrence of any such non-Material Damage
and of Seller's election to repair or replace the affected Assets as provided
above or to pay Buyer the cost of such repair or replacement. If Seller does not
deliver the notice
<PAGE>
described above within such 15 Business Day period, Seller shall be deemed to
have elected to pay Buyer the cost of any such repair or replacement. Any
payment from Seller for the cost of the repair or replacement shall be
determined based on bids or other advice from one or more qualified contractors,
architects or engineers reasonably acceptable to Seller. Any such payment from
Seller shall be made within 10 days after the determination of the amount of
such payment. In the event of condemnation which is not of all or a Material
Portion of the Business Premises, Buyer shall not have the right to terminate
this Agreement by reason thereof and all condemnation awards payable to Seller
by reason thereof shall be paid or assigned to Buyer at the Closing with no
reduction in the Purchase Price. This Article XVIII is intended as an express
provision with respect to destruction and condemnation which supersedes the
provisions of the Nevada Uniform Vendor and Purchaser Risk Act NRS Section
113.030 et seq.
ARTICLE XIX
Employee and Employee Benefit Matters
SECTION 19.1 Salaries and Benefits. SDIC shall pay, or cause to be paid,
on or before the Transfer Time in accordance with applicable law, all salaries,
wages and related payroll expenses (including payroll taxes, social security and
unemployment compensation taxes) and employee benefits of employees or labor,
vacation pay and sick pay which has accrued for the period ending at the
Transfer Time, to all employees of the Business; provided that with the consent
of any applicable labor union representing Union Employees, Union Employees may
be permitted to carry forward such accrued vacation or sick pay, to be paid by
Buyer, the amount of such accrued items as of the Transfer Time to be included
as a payable in the calculation of Closing Working Capital pursuant to Section
4.4. Subject to the second immediately following sentence, Buyer shall offer
employment on substantially the same terms (except that all such offers shall be
for at-will employment) to all current employees of the Business (including
employees who are on an approved leave of absence as of the Transfer Time).
Unless otherwise
<PAGE>
required by law or pursuant to the terms of any Collective Bargaining Agreement,
Buyer may condition any offer of employment to any employees of the Business who
are on an approved leave of absence as of the Transfer Time upon their
presenting themselves to Buyer for employment within six months following the
Transfer Time. All such offers of employment shall be made (i) in accordance
with all applicable laws and regulations, and (ii) for Union Employees, in
accordance with the terms of each applicable collective bargaining agreement
pertaining to such Union Employees (each a "Collective Bargaining Agreement").
All employees of the Business shall cease to be employees of Seller or its
affiliates as of the Transfer Time, and their period of employment by Buyer
shall begin as of the Transfer Time or, if later, the date that such employees
present themselves to Buyer for employment if they are not actively employed as
of the Transfer Time. With regard to Union Employees, Buyer shall (i) recognize
each labor union representing Union Employees as their exclusive bargaining
representative, (ii) assume, and become party to and bound by the terms and
conditions of, each Collective Bargaining Agreement until its respective
expiration date, (iii) comply with its legal obligations under Federal labor law
with regard to Union Employees, and (iv) treat service with Seller prior to the
Transfer Time in the same manner as such service has been recognized by Seller
for purposes of determining seniority rights and benefits under the Collective
Bargaining Agreement (except where recognition of such service by Buyer would
result in a duplication of benefits provided). Seller covenants and agrees to
indemnify and hold Buyer harmless from and against any and all claims, damages,
and liabilities arising from or in connection with (a) any matters involving the
Business' employees, (b) any claims by employees of SDIC, for wages, vacation
and/or sick pay, other benefits, and all claims, liabilities and rights of such
employees, (c) and any claims for violation of agreements with unions in all
cases which arise from SDIC's employment of such employees, or from acts or
omissions, or in connection with events occurring on or prior to the Transfer
Time. Buyer covenants and agrees to indemnify and hold Starwood, ITT Sheraton,
SGC, SDIC and their respective affiliates similarly harmless from all such
matters described in the preceding sentence in all cases
<PAGE>
which arise from Buyer's employment of such employees, agreements with unions,
acts or omissions, or in connection with events occurring after the Transfer
Time.
SECTION 19.2 Multiemployer Plan. With respect to each Multiemployer Plan
(as defined below), after the Closing:
(a) Buyer will be obligated to make contributions to the Multiemployer
Plans (as defined below) in accordance with all collective bargaining agreements
relating thereto and shall contribute to each such Multiemployer Plan with
respect to such operations for substantially the same number of contribution
base units for which SDIC has an obligation to contribute to such Multiemployer
Plan.
For purposes of this Agreement, the "Multiemployer Plans" shall mean,
collectively: (i) the Teamsters Security Fund for Southern Nevada; (ii) the
Western Conference of Teamsters Pension Trust Fund; (iii) the Hotel Employees
and Restaurant Employees International Union Welfare Fund; (iv) the Southern
Nevada Culinary Workers and Bartenders Pension Plan Trust Agreement; (v) the
Operating Engineers Local 501 Security Fund; (vi) the Central Pension Fund of
the International Union of Operating Engineers and Participating Employers;
(vii) the Hotel Employees and Restaurant Employees International Union Welfare
Fund; (viii) the American Federation of Musicians' and Employers' Pension Fund;
(ix) the Electrical Workers Health and Welfare Trust Fund; (x) the National
Employees Benefit Board; (xi) the Nevada Resort Association-I.A.T.S.E. Local 720
Pension Trust; (xi) the Nevada Resort Association-I.A.T.S.E. Local 720
Apprentice and Journeyman Training and Education Trust; (xii) the Nevada Resort
Association-I.A.T.S.E. Local 720 Disability Trust; (xiii) the Carpenters Health
and Welfare Trust Fund; (xiv) the Construction Industry and Carpenters Joint
Pension Trust Fund; (xv) the Painters' Trust (welfare fund); and (xvi) the
I.B.P.A.T. Union and Industry National Pension Fund.
(b) Unless and until a variance or exemption is obtained in accordance
with section 4204(c) of the Employee Retirement Income Security Act of 1974, as
amended
<PAGE>
("ERISA"), Buyer will provide to each Multiemployer Plan, for a period of five
plan years commencing with the first plan year beginning after the Closing, a
bond issued by a corporate surety company that is an acceptable surety for
purposes of section 412 of ERISA, or an amount held in escrow by a bank or
similar financial institution satisfactory to the Multiemployer Plan, or such
other security as may be permitted under section 4204(a)(1)(B) of ERISA or
regulations thereunder, in an amount equal to the greater of:
(i) the average annual contribution required to be made by SDIC to
each Multiemployer Plan with respect to the operations thereunder for the
three plan years preceding the plan year in which the Closing occurs, or
(ii) the annual contribution that SDIC was required to make with
respect to the operations under each Multiemployer Plan for the last plan
year before the plan year in which the Closing occurs,
which bond or escrow shall be paid to any such Multiemployer Plan if Buyer
withdraws from such Multiemployer Plan, or fails to make a contribution to such
Multiemployer Plan when due, at any time during the first five plan years
beginning after the Closing.
(c) If Buyer withdraws from any Multiemployer Plan in a complete
withdrawal or a partial withdrawal with respect to the union employees within
the period referred to in the preceding subsection 19.2(b), SDIC agrees to be
secondarily liable for any withdrawal liability SDIC would have had at the
Closing Date to such Multiemployer Plan, but for the application of section 4204
of ERISA, if the withdrawal liability of Buyer with respect to such
Multiemployer Plan is not paid.
(d) Buyer shall indemnify and hold SDIC harmless from, against and in
respect of (and shall on demand reimburse SDIC for) the amount of any secondary
liability incurred by SDIC under section 4204 of ERISA which is in excess of 50%
of the potential withdrawal liability of SDIC determined as of the Closing, such
determination to be made
<PAGE>
on a plan-by-plan basis; provided, however, that if withdrawal liability is
triggered by reason of Buyer's failure to comply with any provision of the
preceding Sections 19.2(a) or (b) (it being understood that any withdrawal by
Buyer from any Multiemployer Plan shall not be deemed such a failure to comply),
Buyer's indemnification of SDIC shall be without limitation for any such
secondary liability.
(e) In the event of a subsequent sale of Assets by Buyer during the
five-year period referenced in Section 19.2(b), Buyer agrees to use its
reasonable best efforts to comply with the provisions of section 4204(a)(1) of
ERISA if such sale of Assets would trigger secondary liability on Buyer.
(f) If SDIC is liquidated before the end of the first five plan years
beginning after Closing, then, except as may otherwise be required by law, SDIC
shall provide a bond, an amount in escrow or such other security as may be
permitted under section 4204(a)(1)(B) of ERISA or regulations thereunder, equal
to the present value of the withdrawal liability SDIC or its affiliates would
have had but for the application of section 4204 of ERISA, which bond, amount in
escrow or other security may be applied toward the satisfaction of SDIC's
secondary liability described in subsection 19.2(c) hereof.
(g) Buyer agrees to provide SDIC with reasonable advance notice of any
action or event which could result in the imposition of withdrawal liability
contemplated by this Section 19.2 and in any event Buyer shall immediately
furnish SDIC with a copy of any notice of withdrawal liability it may receive
with respect to the Multiemployer Plan, together with all the pertinent details.
In the event that any such withdrawal liability shall be assessed against Buyer,
Buyer further agrees to provide SDIC with reasonable advance notice of any
intention on the part of Buyer not to make full payment of any withdrawal
liability when the same shall become due.
ARTICLE XX
<PAGE>
Miscellaneous
SECTION 20.1 Entire Agreement. This Agreement (and the Schedules and
Exhibits), the Timeshare Joint Venture Agreement and the Marketing Alliance
Agreement shall be deemed to be the complete and entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes any and
all prior negotiations, correspondence, understandings or other agreements or
statements between the parties and/or their representatives.
SECTION 20.2 Notices. All notices required, permitted or given pursuant to
the provisions of this Agreement shall be made in writing, and either (a) hand
delivered, (b) delivered by certified mail, postage prepaid, return receipt
requested or by reputable overnight courier, (c) delivered by an overnight
delivery service or (d) delivered by facsimile machine followed within 24 hours
by transmittal under option (a), (b) or (c) above addressed as follows:
If to Parents or Seller:
In care of Starwood Hotels & Resorts Worldwide,
Inc.
777 Westchester Avenue
White Plains, New York 10604
Attention: General Counsel
Fax No.: (914) 640-8260
with a copy to:
Sidley & Austin
555 West Fifth Street
Los Angeles, California 90013-1010
Attention: Marc I. Hayutin, Esq.
Fax No.: (213) 896-6600
If to SUN or Buyer:
Sun International Hotels Limited
Atlantis -- Executive Offices
<PAGE>
Coral Towers
Nassau, The Bahamas
Attention: Charles A. Adamo
Fax No.: (242) 363-4581
with a copy to:
Cravath, Swaine & Moore
825 Eighth Avenue
New York, NY 10019
Attention: Kevin J. Grehan, Esq.
Fax No.: (212) 474-3700
Notices shall be deemed delivered (i) on the date that is three calendar
days after the notice is deposited in the U.S. mail, if sent by certified mail
(one business day in the case of overnight courier service), return receipt
requested, (ii) on the date the hand delivery is made, if hand delivered, (iii)
on the date the transmission is made, if delivered by facsimile machine and
delivery is confirmed, and followed with notice by mail, or (iv) on the date
that the notice is delivered by an overnight delivery service, if given by an
overnight delivery service. The addressee given above may be changed by any
party by notice given in the manner provided herein.
SECTION 20.3 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (REGARDLESS OF
THE LAWS THAT MAY OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF
LAW).
SECTION 20.4 Successors and Assigns. Neither Buyer nor Seller may assign
this Agreement or any interest herein (by operation of law or otherwise) to any
other person without the prior written consent of the other party hereto. All
the terms, covenants and conditions of this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. No assignment or transfer permitted hereunder shall relieve
any such assignor or transferor of any of its obligations hereunder and any
assignee or transferee shall assume in writing (which writing shall be
<PAGE>
in form reasonably satisfactory to Seller and Buyer) all of the undertakings of
assignor or transferor under this Agreement.
SECTION 20.5 Closing Costs. Seller and Buyer shall each bear their
respective costs of negotiating and completing this transaction, including
attorneys' and accountants' fees. The fees charged by Escrowee, and any and all
survey, title and recording fees, real and personal property transfer fees,
documentary Taxes or fees, and the costs of all premiums with respect to the
Title Policies in accordance with Section 8.1 shall be paid one-half by Seller
and one-half by Buyer, except that the costs of any ALTA endorsements or
extended coverage premiums shall be borne solely by Buyer. Seller and Buyer, on
or before the Closing Date, shall each deposit with Escrowee in immediately
available funds on or prior to the Closing Date an amount sufficient to cover
each party's costs set forth herein.
SECTION 20.6 Attorneys' Fees. A party in breach of this Agreement shall,
on demand, indemnify and hold harmless the other party for and against all
reasonable out-of-pocket expenses, including legal fees, incurred by such other
party by reason of the enforcement and protection of its rights under this
Agreement. The payment of such expenses is in addition to any other relief to
which such other party may be entitled.
SECTION 20.7 Amendments. This Agreement shall not be modified except by an
instrument in writing signed by the parties hereto.
SECTION 20.8 Further Assurances. From time to time, at the request and
expense of the requesting party, whether prior to, at or after the Closing, each
party agrees to and shall execute and deliver such further instruments and take
such other action as the requesting party may reasonably request in order to
effectuate the transactions set forth herein.
SECTION 20.9 Headings. All of the Article and Section headings herein are
inserted for convenience only and shall have no meaning for purposes of this
Agreement.
<PAGE>
SECTION 20.10 Non-Waiver. No delay or omission or exercise of a right or
remedy accruing to Seller on any breach or default by Buyer shall impair any
such right or remedy, and the same shall not be construed to be a waiver of any
such breach or default. No delay or omission in the exercise of a right or
remedy accruing to Buyer on any breach or default by Seller shall impair any
such right or remedy, and the same shall not be construed to be a waiver of any
such breach or default. Any waiver must be in writing and executed by all the
parties hereto and shall be effective only the extent specifically allowed by
such writing.
SECTION 20.11 No Third Party Benefitted. Except as provided in Section
15.2, no term or provision of this Agreement is intended to be, nor shall any
term or provision of this Agreement be, for the benefit of any person or entity
not a party hereto, and no such other person or entity shall have any right or
cause of action hereunder.
SECTION 20.12 Publicity; No Recordation. Between the Effective Date and
the Closing Date (or earlier termination of this Agreement), the parties shall
consult with one another and coordinate the issuance of any press release or
similar public announcement or communication in respect of the initial execution
of this Agreement and any material new development relating to the performance
of this Agreement or the transactions contemplated hereby; provided, however,
that (i) the contents of the initial press release announcing the Agreement and
the transactions hereby shall be agreed by the parties and (ii) no party shall
be restrained, after consultation with the other, from making such disclosure as
it shall be advised by counsel it is required by law (whether the laws of the
United States or another country) or by the applicable regulations of any stock
exchange to make. Buyer and Seller agree that neither this Agreement nor any
memorandum hereof shall be recorded.
SECTION 20.13 Counterparts. This Agreement may be executed in any number
of counterparts, which when so executed and delivered shall be deemed an
original, and such counterparts shall constitute one and the same Agreement.
<PAGE>
SECTION 20.14 Severability. The invalidity or unenforceability of any one
or more of the provisions of this Agreement or the Schedules hereto (or any
portion thereof) shall not affect the validity or enforceability of any of the
other provisions hereof (or the remaining portion thereof).
SECTION 20.15 Exhibits and Schedules. Any Exhibits and Schedules annexed
hereto or referred to herein are hereby incorporated in and made a part of this
Agreement as if set forth in full herein, and any matter disclosed in one
Schedule hereto shall be deemed incorporated by reference into each other
Schedule hereto and disclosed in each such Schedule.
SECTION 20.16 Finder's Fees. Each of Seller and Buyer agrees to indemnify,
defend (with counsel reasonably satisfactory to the other party), and hold the
other party and its successors and assigns and their respective directors,
officers, affiliates, representatives, stockholders, employees and agents
harmless from and against any and all claims, loss, cost, damage and expense,
including reasonable attorneys' fees and expenses arising from, by reason of or
in connection with any claim for or entitlement to any fee, commission,
compensation or reimbursement for brokerage, finders, advisers or similar
services by any person, firm or entity claiming by, through or under Seller or
Buyer, as applicable, or any officer, director, agent or affiliate of Seller or
Buyer, as applicable.
SECTION 20.17 Cooperation. Each party acknowledges that the other may be a
party to audits, investigations and other proceedings following the Closing
which relate to the Business or the Assets, and agrees to reasonably cooperate
with such other party in connection with such proceedings.
SECTION 20.18 Consent to Jurisdiction. Each of the parties hereto
irrevocably submits to the exclusive jurisdiction of (a) the Supreme Court of
the State of New York, New York County, and (b) the United States District
<PAGE>
Court for the Southern District of New York, for the purposes of any suit,
action or other proceeding arising out of this Agreement or any transaction
contemplated hereby. Each of the parties hereto agrees, to the extent permitted
under applicable rules of procedure, to commence any action, suit or proceeding
relating hereto either in the United States District Court for the Southern
District of New York, or if such suit, action or other proceeding may not be
brought in such court for jurisdictional reasons, in any court of the Supreme
Court of the State of New York, New York County. Each of the parties hereto
further agrees that service of any process, summons, notice or document by U.S.
registered mail to such party's respective address set forth in Section 20.2
shall be effective service of process for any action, suit or proceeding in New
York with respect to any matters to which it has submitted to jurisdiction in
this Section 20.18. Each of the parties hereto irrevocably and unconditionally
waives any objection to the laying of venue of any action, suit or proceeding
arising out of this Agreement or the transactions contemplated hereby in (i) the
Supreme Court of the State of New York, New York County, or (ii) the United
States District Court for the Southern District of New York, and hereby further
irrevocably and unconditionally waives and agrees not to plead or claim in any
such court that any such action, suit or proceeding brought in any such court
has been brought in an inconvenient forum.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as
of the date first above written.
SHERATON DESERT INN CORPORATION,
By: ______________________________
Name:
Title:
STARWOOD HOTELS AND RESORTS
<PAGE>
WORLDWIDE, INC.,
By: ______________________________
Name:
Title:
SHERATON GAMING CORPORATION,
By: ______________________________
Name:
Title:
SUN INTERNATIONAL HOTELS LIMITED,
By: ______________________________
Name:
Title:
SUN INTERNATIONAL NEVADA, INC.,
By: ______________________________
Name:
Title:
Execution Copy
EXHIBIT 10.6(b)-1
Timeshare Joint Venture Agreement
Parties: Buyer and an affiliate of Starwood.
<PAGE>
General: Buyer and an affiliate of Starwood shall enter into a
50/50 joint venture (the "Joint Venture") pursuant to which
they will agree to use their best efforts to develop, manage,
market and sell at least 350 timeshare units to be located on
The Desert Inn Golf Club (the "Golf Course") (or the perimeter
thereof) and to be affiliated with The Desert Inn Resort and
Casino (the "Desert Inn", and, together with the Golf Course,
the "Property"). The Joint Venture will be responsible for all
costs relating to the development of timeshare units,
including the cost to acquire homes or homesites on the
perimeter of the Golf Course. Capital will be contributed, and
profits will be distributed, on a 50/50 basis.
Land: Buyer agrees to contribute up to six acres of land on
the perimeter of the Golf Course (as it shall reasonably deem
appropriate) available for contribution to the Joint Venture
at a value of $750,000 per acre.
Starwood, (i) in consultation with Buyer, may in advance of
the Closing under the Asset and Land Purchase Agreement,
acquire additional lots on the perimeter of the Golf Course in
preparation for the timeshare project, and (ii) with Buyer's
approval, may commence trading of Country Club Lane lots
(#70-84) for perimeter
<PAGE>
lots, acquisition of options to purchase lots, preparation of
concept designs and proposed subdivision maps, filing of
proposed maps and potential litigation with homeowners.
At the time of formation of the Timeshare Joint Venture,
Starwood shall contribute such additional lots, rights,
designs and maps, and shall be credited with its costs plus
interest at the Applicable Interest Rate as defined in clause
(i) of the definition thereof set forth in Section 4.1(a) of
the Asset and Land Purchase Agreement.
Governance: All major decisions of the Joint Venture, including the
selection of a location for the timeshare units, will be
subject to the reasonable approval of both parties.
Term; Right of
First Offer: The Joint Venture will be given a 5 year (from Closing
under the Asset and Land Purchase Agreement) exclusive right
to develop timeshare units on the Property. After the
expiration of the 5 year exclusive period and provided the
Joint Venture has met certain minimum performance standards,
the Joint Venture will have a right of first offer to develop
additional timeshare units on the Property.
Timeshare
Expertise: Within twelve (12) months after the date of the Asset
and Land Purchase Agreement Starwood must as a condition to
the formation or
<PAGE>
continuance of the Joint Venture, demonstrate to the
reasonable satisfaction of Buyer that it has the expertise in
timeshare sales and marketing and administration required by
the Joint Venture. Such expertise shall be deemed to be
demonstrated conclusively if Starwood or its affiliates
provide sales, marketing and administrative services to, or
has management with experience sufficient to operate, a
timeshare project at the Phoenician Hotel in Scottsdale, AZ
and at least 2 separate timeshare projects of at least, 200
units each.
Liquidated
Damages: Buyer will use commercially reasonable efforts to effect
the timeshare development. If the Joint Venture is precluded
by Buyer from commencing "substantial timeshare development
activities" during the 5 year exclusive right period (other
than by reason of Starwood's default under the Joint Venture
agreement) Buyer shall pay to Starwood the sum of $15,000,000,
plus Starwood's costs to date of the Joint Venture. Such
liquidated damages will not be payable if Buyer has used its
commercially reasonable efforts to effect the timeshare
development. Buyer agrees not to engage in any other timeshare
development on the Property for two (2) years following the
date of any payment of such liquidated damages to Seller.
<PAGE>
Services: Buyer or its affiliates will provide certain development
and hospitality services to the Joint Venture, and Starwood or
its affiliates will provide certain sales and marketing and
administrative services to the Joint Venture. In all cases
these services will be provided for reasonable and customary
fees as agreed by the parties.
Paradise Island: Buyer and Starwood also agree to explore in good faith
the possibility of an arrangement on terms similar to the
Joint Venture (except for land contribution values) for the
development of timeshare units on the eastern end of Paradise
Island under the St. Regis brand or at another location on
Paradise Island under the Westin brand.
Execution Copy
EXHIBIT 10.6(b)-2
Golf Course Management Agreement
Parties: SDIC and affiliate of Starwood (the "Starwood
Affiliate").
General: Starwood Affiliate shall operate and manage The Desert
Inn Golf Club and Proshop (the "Golf Course").
Term: The agreement shall be for a term
<PAGE>
commencing on execution, and continuing for 5 years from
Closing under the Asset and Land Purchase Agreement (with
customary "for cause" termination rights), and provide for an
annual fee and incentive fees from Golf Course operations over
an agreed upon base case performance.
Buyer or the Starwood Affiliate may terminate the agreement
effective as of the Closing Date under the Asset and Land
Purchase Agreement at no cost; provided, that, if Buyer shall
so terminate the agreement, Buyer shall grant such Starwood
Affiliate a one-time right of first offer with respect to
management of the Golf Course.
Execution Copy
EXHIBIT 10.6(b)-3
Marketing Alliance Agreement
The parties recognize that there may be certain restrictions and technical
limitations with respect to the provisions of services described herein and
agree to work together in good faith to implement the provisions of this Exhibit
as nearly as practicable in light of any such restrictions and limitations.
Parties: Buyer and Starwood (or their appropriate affiliates).
Term: 5 years from execution thereof as
<PAGE>
provided in Section 10.6 of the Asset and Land Purchase
Agreement.
General: The Atlantis Resort and the Ocean Club and, after the
Closing under the Asset and Land Purchase Agreement, The
Desert Inn Hotel and Casino or other property developed on the
Desert Inn Property (the "Desert Inn"), shall participate in
Starwood's marketing and reservation system for a fee of 2.9%
of gross room revenues paid by guests booked through the
reservation system, and Starwood shall provide such properties
with marketing and reservation services similar to comparable
properties that participate in Starwood's marketing and
reservations program. Buyer shall reimburse Starwood for
customary out-of-pocket expenses incurred by Starwood in
connection with such services, such as travel agent
commissions and other customary third party charges and
reimbursed costs.
Exclusivity: Starwood shall also include the Ocean Club and the
Desert Inn within its Starwood portfolio of luxury properties
and the Atlantis Resort within a portfolio of properties to be
agreed.
<PAGE>
Starwood and its affiliates will agree not to enter into any
marketing alliance agreement on the Las Vegas "strip"
effective from and after the Closing under the Asset and Land
Purchase Agreement during the term of the agreement.
Starwood
Preferred
Guest Program: Notwithstanding the foregoing, Starwood may enter into
such agreement with (i) respect to the Caesar's Palace
property so long as such agreement does not extend past the
date the Desert Inn has at least 2,000 rooms (the" Expanded DI
Date") or (ii) a person in which it holds, directly or
indirectly, a 20% greater equity interest. Prior to the
Expanded DI Date, Starwood may place group bookings and
business at other hotels to the extent the Desert Inn is not
capable of accommodating such groups.
<PAGE>
Buyer agrees to distribute Starwood's "Preferred Guest" program
information at the Desert Inn, the Atlantis Resort and the Ocean Club.
Starwood shall continue to award points to its "Preferred
Guest" program participants for stays at the Desert Inn, and
as soon as practicable after the Effective Date under the
Asset and Land Purchase Agreement, will award such points for
stays at the Atlantis Resort and the Ocean Club at no cost to
Buyer. The parties will discuss arrangements relating to the
award of airline miles for stays at the properties.
As soon as practicable after the Effective Date under the
Asset and Land Purchase Agreement, Starwood's "Preferred
Guest" program participants shall be entitled to redeem points
for nights at the Atlantis Resort. Buyer shall be paid for
each such night as follows: (i) if the resort's occupancy rate
on such night was 80% or greater, Buyer shall be paid an
amount equal to its average cash paid room rate in effect for
such night; and (ii) if the resort's occupancy rate on such
night was less than 80%, Buyer shall be paid $150 (with
increases thereto pro rata with increases in the resort's
average room rates over time).
There will be a similar program at Ocean Club and Desert Inn.
Rates and occupancy hurdles for Ocean Club and Desert Inn to
be agreed.
Internet: Buyer and its affiliates shall be provided with an
Internet "Hot Link" on Starwood's web site at no charge, and
Starwood and its affiliates shall be provided with an Internet
"Hot Link" on SUN's
<PAGE>
web site at no charge.
THE ROYAL MIRAGE
BEACH HOTEL
(A SUN INTERNATIONAL RESORT)
Management Agreement between
The Government of Dubai (hereinafter called "Owner")
and
Sun International Management Limited (hereinafter called "Manager"), a company
incorporated under the laws of the British Virgin Islands and having its
registered office in P.O. Box 146, Road Town, Tortola, British Virgin Islands
and
Sun International Hotels Limited, a company Incorporated under the laws of The
Commonwealth of the Bahamas
Recitals
Whereas Owner is causing to have constructed a 258 room luxury resort hotel
("the Property") at Jumeira Beach, Dubai:
Whereas Manager has extensive experience in planning, designing, constructing,
decorating, furnishing, equipping, promoting, operating and managing luxury
resort hotels in different areas of the world and is willing to manage the
operation of the Property and to perform certain pre-opening management
services;
<PAGE>
Whereas as Owner and Manager wish to enter into an agreement for such operating
management and pre-opening management services;
Now therefore the parties hereto covenant and agree as hereinafter set out:
1. Definitions
Unless inconsistent with the context, the following terms shall have the
meaning assigned to them hereunder. When used herein, the words
1.1 "Owner" - The Government of Dubai
1.2 "Manager" - Sun International Management Limited
1.3 "The Property" - the luxury resort hotel, currently being constructed and
currently named the Mirage Beach, located at Jumeria Beach, Dubai, as well
as any extension and/or addition to the resort on the adjacent site
1.4 "IAS" - the accounting standard as published by the International
Accounting Standards Committee
1.5 "Gross Revenues" - all revenue and income generated from the operation of
the Property and the related facilities as calculated in accordance with
IAS, after deducting all bad debts written off (unless and until such
debts are recovered whereupon they shall be treated as receipts and
revenue in the operating year during which they are recovered), direct
subsidy payments, governmental allowances, grants and awards, or other
forms of incentive payments, or awards, gratuities to employees, PROVIDED
that such revenue shall not include:
(a) receipts of tenants, licensees and concessionaires (but including
rents received from such tenants, licensees and concessionaires);
(b) federal and local taxes collected from patrons or guests;
(c) proceeds arising from the sale or other disposition of capital
assets, operating equipment or supplies;
(d) all proceeds from insurance claims (except those resulting from loss
of revenue);
(e) interest income earned on funds deposited in banks or any other
investment activity; and
<PAGE>
(f) service charge collected from patrons or guests;
1.6 "Gross Operating Profit" - the Gross Revenues of the Property (including
any staff gratuities not paid out to employees) and its related facilities
LESS:
A. All operating expenses calculated pursuant to IAS including, but not
limited to:
(i) cost of food, beverages and other saleable items;
(ii) remuneration, benefits and entitlement of all the employees of
the Property and the related facilities including the General
Manager and the Financial Controller;
(iii) operating expenses of a revenue nature including but not
limited to costs of re-supplying rooms, after occupancy, of
printing and stationery and other guest supplies, laundry and
all other costs associated with supplies and providing
accommodation and food and beverage services;
(iv) unallocated expenses of a revenue nature related to the
operation of the Property and the related facilities including
administration and general expenses, cost of training
employees, advertising and business promotion expenses, heat,
light, power and water and repairs and maintenance expenses;
(v) all other expenses of a revenue nature relating to the
operation of the Property and the related facilities including
the cost of replacement of items of operating equipment;
(vi) a reasonable provision for doubtful debts;
(vii) taxes (if any and only to that extent) assessed against or
payable by the Manager in connection with the operation of the
Property and the related facilities, but excluding any tax
payable on profit and/or income in the hands of the Owner
and/or of the Manager and/or on or in respect
<PAGE>
of the fees receivable by the Manager hereunder and/or in the
nature of withholding tax or lump sum deductions;
(viii) the Base Fee payable to the Manager under Section 8.1;
(ix) legal, accountancy and other professional fees, costs and
expenses incurred in connection with the operation of the
Property and the related facilities;
(x) costs incurred in respect of any local recruited persons who
may be selected for a reasonable period of training prior to
entering the service of the Property and the related facility;
(xi) out-of-pocket and traveling expenses of employees of the
Manager necessarily incurred to ensure the efficient
management of the Property and the related facilities;
(xii) commissions allowed to travel agents;
(xiii) insurance premiums;
(xiv) rent paid to the Owner for staff accommodation; and
(xv) all other payments/expenses of a revenue nature incurred in
the course of operating the Property and the related
facilities.
B. Depreciation of furniture, fixtures and equipment as listed in
Schedule A, but excluding depreciation on building; and
C. Amortization of pre-opening management expenses and pre-opening
expenses over a period of sixty (60) months from the opening of the
Property to paying patrons.
1.7 "Base Fees" - the fees based upon a percentage of Gross Revenues payable
by Owner to Manager for performance of the management duties described
herein
1.8 "Incentive Fee" - the fees based upon a percentage of Gross Operating
Profit payable by Owner to Manager for performance of the management
duties described herein
<PAGE>
2. Appointment
2.1 Owner appoints and engages Manager, which accepts such appointment and
engagement, to service Owner as its exclusive agent in the performance of
the ongoing and pre-opening management, direction, control and general
conduct of the Property subject to the terms and conditions herein
contained.
2.2 Owner recognizes that Manager is part of an international organization and
that some services to be performed by the Manager hereunder may be
performed by Manager at such location as Manager may reasonably determine
other than Dubai.
3. Terms of Agreement
3.1 Subject to earlier termination as provided in Clause 16 below this
agreement shall commence from the date of signature and shall endure until
twenty (20) years from the opening of the Property to paying patrons.
3.2 Owner and Manager shall have the right to renegotiate the management fee
schedule described in Clause 8 of this agreement after 10 years from the
opening of the Property provided that any amendments to this Clause 8
shall be commercially reasonable and consistent with prevailing industry
standards.
4. Pre-opening Management
4.1 Manager shall, as exclusive agent for Owner for such purposes, perform
Pre-opening management services during the course of the development of
the Property which shall comprise some of or any combination of the
following:
4.1.1 to review and give advice on the schematic plans, final sets of
architectural plans and specifications;
4.1.2 to give assistance and advice regarding interior design, including
the theme treatment and functional layout of facilities, advice
regarding layout plans, elevations, color schemes and
specifications for carpeting, furniture, fabrics, decor and such
like;
<PAGE>
4.1.3 to give assistance and advice regarding the recommended standards
for water treatment, heating, ventilation, air conditioning,
plumbing and drainage, electrical distribution, elevators,
escalators and telephone and public address systems;
4.1.4 to give assistance and advice regarding lighting plans and
specifications;
4.1.5 the establishment of operating standards, practices and procedures
in accordance with those generally associated with international
luxury resort hotels;
4.1.6 the recruitment and training of the optimum number of employees
required to operate the Property and to ensure that they are
competent to deliver the standards of service required in a luxury
property; and
4.1.7 the organization and operation of a pre-opening marketing campaign
including any pre-opening promotional functions.
5. Manager's Reimbursement for Pre-opening Management
5.1 As consideration for the performance of the Pre-opening management
services pursuant to the terms of Article 4.1, Owner shall reimburse
Manager in U.S. dollars all reasonable traveling and reasonable
out-of-pocket expenses of Manager which are directly attributable to the
performance of Manager's duties in terms of Article 4 including the
payroll costs of Manager's executives involved. Manager shall submit
quarterly estimates of these costs and expenses to Owner in advance. These
expenses shall be paid by Owner to Manager within thirty (30) days of the
periodic rendition of an account therefor by Manager, duly supported by
vouchers and other relevant back-up documentation but that, in regard to
executive time, travel and subsistence, these reimbursable shall be
limited to two hundred and fifty thousand U.S. Dollars ($250,000).
6. Manager's Management of Owner's Property
6.1 Manager shall, subject to the terms hereof, define, alter and vary from
time to time the policies and procedures to be observed in the management
of the Property, which shall encompass all administrative, accounting,
budgeting, marketing, personnel, operational and other practices and
procedures to be observed and applied in relation to the
<PAGE>
operation of the Property, provided that Manager shall continue to operate
the Property in accordance with internationally accepted luxury standards
for resort hotels.
6.2 Subject only to the provisions of Article (6.1), (7) and (11) of this
Agreement, Manager as exclusive agent for Owner for such purposes shall
provide the management, administration, control and conduct of the
Property and to that end Manager shall utilize its resources and skills
and is hereby authorized and empowered to supervise, monitor, approve and
otherwise oversee, or to procure the supervision, monitoring or approval,
as the case may be, of the following:
6.2.1 the selection and appointment of a General Manager, other senior
executives, other managers and heads of department of the Property
all of whom shall be employed on a full time basis by and for the
account of Owner, as may be considered necessary from time to
time;
6.2.2 the determination of the terms of service and the remuneration
payable to all members of personnel of the Property including all
perquisites of employment;
6.2.3 the conduct of purchasing of necessary provisions and supplies for
the Property;
6.2.4 the setting and maintenance of operations procedures, systems and
standards for the Property commensurate with a deluxe resort
hotel;
6.2.5 the retention and periodic renewal, as applicable, of authorities
and licences required in connection with the operation of the
Property;
6.2.6 the administration of such functions as are usually carried out by
managers, secretaries and accountants of an hotel business similar
to that which is conducted at the Owner's property;
6.2.7 after the opening of the Property, the procurement of the
furniture, fixtures, equipment and operating supplies, and of such
services and other merchandise as may be required for the proper
operation and maintenance of the Property;
6.2.8 the completion and submission of returns and the compliance
<PAGE>
with other formalities required by any applicable laws, rules or
regulations pertaining to property taxes, business license fees
and any other legislation applicable to the operation of a
property in Dubai;
6.2.9 the planning and execution of all major advertising and
promotional campaigns and other marketing activities for the
promotion of the Property;
6.2.10 the determination and establishment of tariffs, prices and rates
for the facilities to be offered by the various elements of the
Property;
6.2.11 the establishment and maintenance of accounting and other
appropriate managerial systems for the control and administration
of the Property;
6.2.12 the keeping of proper books of account and records as required by
law and good management accounting and secretarial practices;
6.2.13 the preparation and submission to the Owner, not later than thirty
(30) days before the commencement of each financial year, of an
annual operating plan and budget for the Property as well as an
annual capital expenditure plan;
6.2.14 the preparation and provision to the Owner of quarterly unaudited
financial statements in respect of the Property, not later than
six (6) weeks after the end of the quarter to which they relate;
6.2.15 the preparation and provision to the Owner of annual audited
financial statements in respect of the Property prepared in
accordance with IAS by not later than ninety (90) days after the
end of each financial year;
6.2.16 to make available all books of account and other records for
inspection by Owner;
6.2.17 the maintenance of the physical plant of the Property in first
class condition;
6.2.18 generally, the doing or procurement of whatever else may
<PAGE>
be necessary to carry out the Manager's mandate as described in
this Agreement.
7.7. Entrenched Provisions
7.1 Notwithstanding anything to the contrary contained in this Agreement
Manager shall not engage in, agree not to perform or undertake any of the
acts, procedures or matters referred to in Article 7.2, except with the
prior written approval of Owner.
7.2 The acts, procedures and matters referred to in Article 7.1 are the
following: -
7.2.1 the establishment and opening of new lines of business as agent
for the Owner except those directly related to the operation of
the Property;
7.2.2 the purchase or sale of assets not provided for in any budget
approved by Owner.
7.2.3 the incurring of borrowings as agent for Owner not provided for in
any budget approved by the Owner;
7.2.4 the issuing and entering into any guarantees, indemnity or
suretyship of whatsoever nature in respect of the Property and the
related facilities;
7.2.5 the pledging, mortgaging, hypothecating or encumbering of any
assets of the Owner;
7.2.6 the hiring of the Property General Manager and the Property
Controller and the termination of the services of either of them;
7.2.7 making any loan other than normal credit allowed to guests and
other customers in the ordinary and usual course of business;
7.2.8 demolishing, removing, scrapping, selling or disposing of any item
forming part of the Property and the related facilities, their
furnishing, fixture, furniture, equipment or motor vehicles other
than in the ordinary and usual course of business;
7.2.9 the appointing of the Property's lawyers and external auditors;
and
<PAGE>
7.2.10 the hiring of any employee whose total emoluments (including
without limitation salary and other benefits) exceed seventy five
thousand U.S. Dollars ($75,000) per annum.
8. Management Fees and Reimbursables
Owner shall pay to Manager, as remuneration for the operating management
services rendered under this Agreement, the amounts set out in this
Article 8 in respect of each of Owner's financial years during the period
that the Property is open to paying patrons throughout the term of this
Agreement, or proportionately in respect of a fraction of such a financial
year.
8.1 Base Fee
Owner shall pay to Manager a base fee equal to one and one half percent
(1 1/2%) of the Gross Revenue.
The base fee shall be calculated by reference to the annual audited
financial statements in regard to the Property, but shall be paid at
quarterly intervals within forty five (45) days after the end of the
quarter in respect of which the sum is payable. The payment in respect of
the final quarter shall be made within fourteen (14) days of the
completion, signature and certification by the Property's external
auditors of the annul audited financial statements for that financial
year. Each payment to be made in respect of the first three quarters shall
be computed on a cumulative basis by reference to the quarterly management
accounts for the preceding quarter, and on completion, signature and
certification of the annual audited financial statements for the financial
year the Base Fee for the whole of that year shall be computed and
8.1.1 the amount by which the Base Fee so computed exceeds the three
quarterly payments on account thereof in terms of the foregoing
shall be paid immediately by Owner to Manager, or
8.1.2 the amount by which the Base Fee is computed falls short of the
three quarterly payments of account hereof in terms of the
foregoing shall be paid immediately by Manager to Owner.
8.2 Incentive Fee
Owner shall pay to Manager, in addition to the base fee, an incentive fee
<PAGE>
equal to ten percent (10%) of the Gross Operating Profit.
The incentive fee shall be calculated by reference to the annual audited
financial statements, in respect of the Property, but shall be paid at
quarterly intervals, within forty five (45) days after the end of the
quarter in respect of which same is payable. Teach payment to be made in
respect of the first three quarters shall be computed by reference to the
quarterly management account of the preceding quarter. The payment in
respect of the final quarter shall be made within fourteen (14) days of
the completion, signature and certification by the Property's external
auditors of the annual audited financial statements for that financial
year and shall be computed by taking into account the three previous
payments of account thereof.
8.2.1 If the amount of 10% of the annual Gross Operating Profits as
certified by the Property's external auditors exceeds the three
quarterly payments, the excess shall be paid immediately by Owner
to Manager; or
8.2.2 If the amount of 10% of the annual Gross Operating Profits as
certified by the Property's external auditors falls short of the
quarterly payments, the shortfall shall be paid immediately by
Manager to Owner;
8.3 Reimbursement of Expenses
Owner acknowledges that Manager and its affiliates operate an
international marketing and sales organization with offices in Europe,
Africa and the U.S.A. and representation through general sales agents in
other territories. Owner shall bear and accordingly reimburse Manager,
within thirty (30) days of receiving Manager's invoice and relevant
support documentation, for all reasonable costs and expenses incurred by
Manager for Owner's account under the provisions of this agreement,
provided that after the opening of the property, the proposed expenses for
each year will be submitted in the yearly operation budget and should be
mutually agreed between the Owner and the Manager. Only agreed expenses as
per the yearly budget (or by subsequent agreement between Owner and
Manager), if actually incurred by the Manager, shall constitute
reimbursable expenses after opening.
By way of example, the costs and expenses to be reimbursed under this
Article 8.3 subject to the limitations described in 8.3 shall include the
following: -
<PAGE>
8.3.1 reasonable travel and reasonable out-of-pocket expenses directly
attributable to the carrying out by the Manager of its management
services in terms of this Agreement and incurred by, among others,
Manager's management executives, food and beverage executives,
marketing and sales executives, accounting and computer systems
executives, design and construction executives and other
specialist executive personnel;
8.3.2 marketing costs incurred by Manager (other than overhead marketing
office costs) directly related to the marketing and promotion of
the Property, inclusive of payroll costs for time spent by
personnel engaged in marketing and/or representing the Property;
and
8.3.3 the salaries and wages and other payroll costs and moving and
related expenses, without any profit or premium, of employees of
Manager attributable to any extended periods where they are
seconded to the employment of the Owner and the Property.
8.4 Payments
All payments by Owner to Manager in terms of this Article 8 shall be made
in United States Dollars, free of bank commission or other deductions, and
be remitted to such place(s) as Manager may designate from time to time.
9. Insurance to be Maintained by Owner
9.1 Owner shall at all times during the period of any development project,
procure and maintain, as may be applicable under the development project
in question, adequate third party liability and property insurance
protecting both Manager and Owner against loss or damage arising in
connection with the preparation, construction, refurbishment, upgrading,
furnishing and equipping of any of Owner's businesses, including that of
contractors, subcontractors and such like in the performance of all
construction and related agreements entered into in respect of the
development project in question.
9.2 The Manager and the Owner shall agree to take out (as an operating
expense) and maintain, at all times, with effect from the opening of the
Property and throughout the continuance of this Agreement, under such
insurance policies issued by such insurers as the Owner and Manager
<PAGE>
agreed, adequate coverage in relation to the Property and the related
facilities and their operation against risks mutually agreed by Manager
and Owner. The Manager and Owner shall agree on the level and adequacy of
all insurances, and neither Manager nor Owner shall have any claim against
the other with respect to adequacy of level of insurance. Notwithstanding
anything to the contracy contained in this agreement, the Manager is
responsible to, and shall ensure that, the following classes of insurance
are maintained as agreed between Owner and Manager.
MINIMUM ACCEPTABLE
(a) Property All Risks - Actual value of building
Material Damage - and contents
(b) Deterioration of Stock Actual Value
a) Refrigerated Stocks
b) Other Stocks and
Working Replacements
(c) Business Interruption 3 years gross profit (sales
less variable expense)
(d) Workmen's Compensation Premium basis As per U.A.E. Law is the annual
wage cost
(e) Employers Liability As per U.A.E. Law and up to 1.5
million pound sterling or 10
million Dirhams whichever is
higher
(f) Public Liability 10 million Dirhams or 1.5 million
pound sterling whichever is higher
(g) Loss of Money Negotiable 400.0 thousand Dirhams
Instruments
Non-negotiable 500.0 thousand Dirhams
Instruments
<PAGE>
(h) Fidelity Guarantee No restriction UK pound sterling 250.0 thousand
to any category per employee
of employee
(i) Motor Vehicles As per Inventory
(Including motorized
vessels)
Each insurance policy obtained under this Clause 9.2 shall provide that
its cover will not lapse or be terminated, suspended or altered until thirty
(30) days after the relevant insurer has given notice to that effect to the
Manager at the Property and to the Owner at his address as stated in this
Agreement (or such other address as he may from time to time notify to the
relevant insurance for the purpose).
The Manager shall supply copies of each of the insurance policies obtained
under this Clause 9.2 to the Owner forthwith upon effecting the same and of each
insurance certificate and premium receipt forthwith upon receiving the same. The
Owner and his representatives shall be entitled to have access to the originals
of all the insurance policies obtained under this Clause 9.2 and to have
produced to him or them any other evidence he or they may from time to time
require that all the said policies are in full force and effect.
The Manager shall not do or omit to do any act or thing whereby the said
policies or any of them may be or become void or voidable.
Each of the insurance policies obtained under this Clause 9.2 shall be
reviewed by the Manager with the Owner at least annually during the continuance
of this Agreement to determine its continuing suitability in view of exposures
reasonably anticipated over the following year and, after each such review, the
Manager shall take such action with
<PAGE>
regard thereto as the Owner may reasonable require, including without limitation
action to increase the amount covered thereby PROVIDED that the Manager shall
not without its agreement be required to decrease the amount covered by any such
insurance policies.
The Manager shall promptly cause to be investigated all accidents, claims
and other occurrences which may be within the coverage of any of the insurance
policies obtained under this Clause 9.2 and shall promptly report the same both
to the Owner and to the relevant insurer, and shall comply strictly with the
provisions of the relevant policy concerning claims made thereunder.
If the Property or the furnishing, fixtures, furniture or equipment
thereof or therein shall from any cause whatsoever be wholly or partially
destroyed or rendered unfit for use;
(a) The Owner shall, as soon as possible after receipt thereof, expend
any insurance monies paid under the property insurance policy in, or
so far as such monies may go towards, repair, reinstatement,
reconstruction and replacement, as necessary, of the property
destroyed or rendered unfit for use; and
(b) except as provided in paragraph (a) above, the Manager shall have no
claim against the Owner whether for compensation for loss of profit
or opportunity or for any other matter or thing whatsoever save only
for its share of any insurance monies paid under the business
interruption insurance policy.
9.3 All insurances referred to in Clauses 9.1 and 9.2 shall note the interest
of Manager as an "additional insured" and shall contain both severability
of interest and cross liability clauses and a waiver of the insurers'
rights of subrogation in favor of Manager and Owner.
10. Damage and Destruction
If any aspect of the infrastructure of any of the Property or any portion
thereof shall be damaged or destroyed at any time or times during the term
of this Agreement by fire or any casualty risk or otherwise, Owner, if it
elects to repair, rebuild or replace the same, shall, at its own cost and
expense and with
<PAGE>
due diligence, repair, rebuild or replace the same so that after such
repairing, rebuilding or replacing, the facilities in question shall be
substantially the same as prior to such damage or destruction.
11. Alterations, Improvements and Capital Expenditure
11.1 Manager shall have the right to procure that, from time to time, such
renewals, replacements, alterations, additions or improvements are
effected to the Property, which are customarily made in the operation of
luxury international resorts subject to the prior written approval of
Owner. Manager shall submit an annual capital expenditure plan and budget
to Owner for Owner's approval or alteration, not later than one month
prior to the commencement of each fiscal year. Manager shall only proceed
with capital expenditure which has been approved by Owner as part of the
annual plan or with specific approval by Owner for items outside of the
annual plan. The costs of such customary renewals, replacements,
alternations, additions or improvements shall be charged directly to
current expenses or shall be capitalized in the books of account of the
Owner, un accordance with IAS.
11.2 If renewals, replacements, alterations, additions or improvements as
referred to in Article 11.1 will involve or result in a fundamental change
of the business concerned, Manager will submit or procure the submission
of a budget and plan for the proposed renewals, replacements, alterations,
additions or improvements to Owner for Owner's prior written approval as
regards the budget cost in question provided that Owner shall reply to the
submission within thirty (30) days of its receipt.
12. Trade Name
12.1 The parties acknowledge that the name "Sun International" is or will be
the exclusive property of Manager and/or any member of its group of
companies world-wide. Upon the expiry or earlier termination of this
Agreement for any reason, Owner shall as promptly as practicable cease
using, the "Sun International" name or any other trade name or
intellectual property developed, licensed or owned by Manager.
<PAGE>
12.2 The Manager shall accord to the Property and its related facilities the
status of a SUN INTERNATIONAL Hotel and the Owner shall accordingly be
entitled to use that description in respect of the Property and the
related facilities which shall be so described by the Manager and its
respective subsidiaries and affiliate throughout the continuance of this
Management Agreement. The Owner's aforesaid right to use in respect of and
the Property the description of the Property's right to be described as a
SUN INTERNATIONAL Hotel shall be exclusive in the Emirate of Dubai.
13. Assignment
13.1 Manager shall be entitled at any time, without the consent of Owner (or if
such consent is an inalienable right under any provision of applicable
law, then owner shall grant such consent) -
13.1.1 to cede, assign and delegate its rights and obligations under this
Agreement to any company which controls, is controlled by or is
under common control with Manager. Provided that such company
undertakes and agrees in writing to be bound by the provisions of
this Agreement.
13.2 Except as set forth in Article 13.1, Manager shall not cede, assign or
delegate its rights or obligations under this Agreement without the prior
written consent of Owner and any such cession, assignment, delegation or
other transfer made in violation of this Article 13.2 shall be void and of
no further force or effect.
13.3 The terms and conditions of this Agreement shall be binding upon and inure
to the benefit of the third party(ies) to which either Manager or Owner
may validly cede, assign and delegate their respective rights and
obligations.
14. Indemnification
14.1 Owner shall indemnify, save, and defend, at Owner's sole cost and expense,
and hold harmless, Manager and its officers, agents, employees,
representatives, shareholders and affiliates (collectively - "Owner
<PAGE>
Indemnitees"), from and against the full amounts of any and all Section
14.1 Losses, excluding losses caused directly or indirectly by an Owner
indemnitte's misconduct whether wilful, wanton, criminal or otherwise,
negligence, fraud or any other illegal or improper act or omission or the
failure to perform or observe any obligation pursuant to this Agreement.
The term "Section 14.1 Losses" shall mean any and all liabilities, claim,
suits, administrative proceedings, losses, damages or costs of any nature
whatsoever which may be asserted against or incurred by an Owner
Indemnitee arising from the proper performance of the Manager's
obligations under this Agreement and the operation of the Property (except
if the same arises from any of the eventualities set out in paragraph (a)
to (d) below) and shall include reasonable expenses of defense including,
without limitation reasonable attorneys' fees provided, however, that
Section 14.1 Losses shall not include consequential losses or liabilities.
Save as provided in this Section 14.1, Owner shall have no liability
hereunder to Manager or any Manager Indemnitee for any other losses or
damages.
14.2 Manager shall indemnify, save and defend, at Manager's cost and expense,
and hold harmless, Owner and its officers, directors, agents, employees,
representatives and affiliates (collectively - "Manager Indemnitees") from
and against all Section 14.2 Losses. The term "Section 14.2 Losses" shall
mean any and all liabilities, claims, suits, administrative proceedings,
losses, damages or costs of any nature whatsoever (but shall specifically
exclude any consequential losses or liabilities) which may be asserted
against or incurred by a Manager Indemnitee arising from:
(a) The failure of the Manager to perform or observe all or any of the
obligations under this Agreement or any agreement concluded by the
Manager pursuant to the powers vested in the Manager under this
Agreement;
(b) Any fraudulent, improper, illegal or gross negligent act of the
Manager, any of its respective subsidiaries or affiliates or any of
its respective employees or the
<PAGE>
employees of such subsidiaries or affiliates;
(c) Any fraudulent, improper, illegal or gross negligent acts of the
General Manager or the Financial Controller of the Property.
(d) In no event shall Manager ever be responsible for Section 14.2
losses for an amount exceeding the aggregate of Insurance recovery
plus the Base Fee and Incentive Fee received in the year such
Section 14.2 Loss has occurred. Save as provided in this Section 14,
Manager shall have no liability hereunder to any Manager indemnitee
for any other losses or damages.
14.3 Each party to be indemnified in accordance with Clauses 14.1 and 14.2
above shall keep the party to indemnify it fully informed of all matters
pertaining thereto and take such steps on behalf of the party to indemnify
it as that party may reasonably require. Each such indemnity shall without
limitation include the legal expenses of resisting any third party claim,
suit, demand or action.
14.4 Nothing in this Agreement shall entitle either the Owner on the one hand
or the Manager on the other hand to make any claim against each other to
the extent that it is able to obtain compensation or reimbursement from
any of the insurances provided for in Clause 9 above.
14.5 The parties agree that the waivers and disclaimers of liability,
indemnities, releases from liability and limitations on liability
expressed in this Clause 14 shall survive the expiry or earlier
termination for any reason of this Agreement.
15. Arbitration Any dispute or difference between the parties or any of them
which may arise out of or in connection with this Agreement shall be
submitted to arbitration in Dubai before a panel of three arbitrators. The
Owner shall appoint one such arbitrator and the other party or parties to
the dispute or difference shall appoint another such arbitrator. Each such
appointment shall be made within fifteen (15) days of any party to the
dispute or difference giving notice to the other or
<PAGE>
others that the same shall be referred to arbitration. Within thirty (30)
days after the appointment of the second such arbitrator, the first such
arbitrator and the second such arbitrator shall jointly appoint the third
such arbitrator but if, by the end of that period, they have been unable
to agree on any such joint appointment, the third such arbitrator shall be
appointed by the President for the time being of the Dubai Chamber of
Commerce and Industry. The arbitration shall be conducted in accordance
with such law and procedures for the time being in force in the Emirate of
Dubai. The costs of the arbitration shall form an issue between the
parties to the relevant dispute or difference and be borne as provided in
the arbitration award. The arbitration award rendered by all or the
majority of the arbitrators shall be final and binding on the parties and
there shall be no appeal therefrom to any Court.
16. Termination
16.1 Notwithstanding anything to the contrary herein contained, Owner may
terminate this Agreement if -
16.1.1 for a period of thirty (30) days (or such longer period as may be
reasonable, having regard to the nature of the default and the
prevailing circumstances but not in any event to exceed sixty (60)
days) after written notice has been served on it and without
reasonable cause, Manager neglects, omits, refuses or fails to
discharge or diligently take action to discharge any of its
material obligations hereunder, whether through the operation of
law or otherwise, provided that this right of termination shall
not apply or be available if such failure to discharge such
obligations is cured prior to termination, or if such right of
termination is not exercised within ninety (90) days after it
first becomes available: or
16.2 Notwithstanding anything to the contrary herein contained, Manager may
terminate this Agreement if:
16.2.1 for a period of thirty (30) days (or such longer period as may be
reasonable, having regard to the nature of the default and the
prevailing circumstances but not in any event to exceed sixty (60)
days) after written notice has been served on it and without
<PAGE>
reasonable cause, Owner neglects, omits, refuses or fails to
discharge or diligently take action to discharge any of its
material obligations hereunder, whether through the operation of
law or otherwise, provided that this right of termination, shall
not apply or be available if such failure to discharge such
obligations is cured prior to termination or if such right of
termination is not exercised within ninety (90) days after if
first available; or
16.2.2 Manager's association with Owner could reasonably jeopardize the
qualification of Manager or one of its affiliates to hold a gaming
license in any jurisdiction.
16.3 The rights granted in Article 16.1 and 16.2 shall be in addition to any
and all rights and remedies for breach of contract granted by the laws as
designated by Article 18.6, subject, however, to the provisions of Article
14; provided, however, that in the event of a breach of this Agreement by
Owner or Manager, the parties hereby waive any and all claims either may
have for consequential losses or damages resulting from such breach.
16.4 Notwithstanding the foregoing, neither party shall be deemed to be in
default under this Agreement if a bona fide dispute with respect to any of
the foregoing events or default has arisen between the parties and such
dispute has been submitted to arbitration.
16.5 Except in the case of a termination by Manager pursuant to Article 16.2.1,
if this Agreement is terminated pursuant to Article 16.1, Owner shall have
the right to elect, by written notice delivered to Manager within three
(3) business days after the date on which Manager first gives notice of
its election to terminate this Agreement, to continue this Agreement in
force for a transitional period reasonably sufficient to allow Owner to
retain an alternative manager; and Owner and Manager shall agree on
reasonable compensation for Manager for such transitional period.
16.6 If no agreement is reached between Owner and Manager on the management fee
after ten years from the opening of the property as provided in Clause 3.2
above, termination may be effected by giving not less than twelve (12)
months
<PAGE>
notice after the end of the tenth year of operation of the Property.
17. Force Majeure
If by reason of war, terrorism, explosion, bombing, revolution, riots,
civil commotion, strikes, lockout, inability to obtain labor or materials,
fire, flood, storm, earthquake, hurricanes, tornado, drought or other acts
or elements, accident, government restrictions or appropriation or other
causes, whether like or unlike the foregoing, beyond the reasonable
control of either party hereto, such party is unable to perform in whole
or in part its obligations under this Agreement, then such party shall be
relieved of those obligations to the extent it is so unable to perform and
such inability to perform so caused shall not make such party liable to
the other.
18. Miscellaneous
18.1 Funding of Owner accounts
Notwithstanding anything to the contrary in this Agreement contained,
Manager shall not be obligated to perform its duties and shall be excused
from its obligations and responsibilities hereunder to the extent that
funds to be provided by Owner are not available to allow Manager to
perform such duties pursuant to the provisions of this Agreement.
18.2 Manager's right to request instructions
At any time, Manager may, if it reasonably deems it to be necessary or
appropriate, request written instructions from Owner within a reasonable
period prior to the necessity for taking action with respect to any matter
contemplated by this Agreement where the approval of the Owner is
required, and may defer action thereon pending receipt of such written
instructions. Owner shall promptly respond to any such request for written
instructions. Actions taken by Manager, its officers, employees and
representatives in accordance with the written instructions of Owner, or
failures to act by such persons pending the receipt of such written
instructions, shall be deemed to be proper conduct within the scope of
Manager's authority under this Agreement.
18.3 Independent contractors
Manager shall be an independent contractor with respect to the performance
of its duties hereunder. Neither Manager nor its employees or other agents
employed in the performance of such duties shall be deemed to be agents,
<PAGE>
partners, joint venturers, representatives or employees of Owner, except
to the extent of the agency expressly created under this Agreement.
18.4 Conflicts
Nothing contained in this Agreement shall be construed so as to restrict
or prevent, in any manner, Manager from engaging in any other businesses
or investments during the term of this Agreement, including, without
limitation, any similar or competitive operations to those of Owner,
anywhere in the world except in the Emirate of Dubai without the prior
written approval of the Owner. Owner acknowledges that Manager and/or its
affiliates operate and/or manager other hotels, casinos and resorts
presently and may in the future operate and/or manage additional hotels,
casinos and resorts in different areas of the world, and that marketing
efforts may cross over into the same markets and with respect to the same
potential customer base.
18.5 Notices
All notices, requests, approvals, demands and other communications by
either party to the other pursuant to this Agreement shall be in writing
and be deemed to have been duly given and to be effective fifteen (15)
business days after being mailed by registered/certified pre-paid airmail,
or on the first business day after the deliver thereof or the transmission
thereof by facsimile, to either party at its address set out on the first
page hereof or to such other address as the parties may designate from
time to time by similar notice.
18.6 Applicable Law
This Agreement shall be construed, interpreted and applied in accordance
with, and governed by, the laws in force in the Emirate of Dubai.
18.7 Sole record
This document constitutes the sole record of the Agreement between the
parties concerning the subject matter thereof. No addition or variation
to, or agreed cancellation of this Agreement shall be of any force or
effect unless in writing and signed by the parties.
18.8 Indulgence - no waiver
No indulgence by either party ("the grantor") to the other ("the grantee")
shall constitute a waiver by the grantor, except in the instance and to
the extent
<PAGE>
given, nor preclude the grantor from exercising any rights against the
grantee arising before or after the grant of such indulgence.
18.9 Severability
Any provision of this Agreement which may for any reason be held to be
unlawful or invalid shall be severable from the remaining provisions of
this agreement, which shall remain in full force and effect.
18.10 Interpretation
The Table of Contents and captions to the Articles shall not be used in
the interpretation of this Agreement. Unless the context indicates a
contrary intention, an expression which denotes any gender shall include
the other genders, a natural person shall include an artificial person and
vice versa and the singular shall include the plural and vice versa.
19. Sun International Hotels Limited agrees that it will cause all obligations
of Manager under this Agreement to be performed and observed fully and
faithfully.
Signed
__________________________________________
For the Government of Dubai
Date _____________________________________
Signed
__________________________________________
For Sun International Management Limited
<PAGE>
Date _____________________________________
Signed
__________________________________________
For Sun International Hotels Limited
Date _____________________________________
SCHEDULE A
SCHEDULE OF DEPRECIATION
NO. CATEGORY YEARS OF DEPRECIATION
- --- -------- ---------------------
1) Major laundry equipment 10/15
2) Small laundry equipment 5
3) Major/heavy kitchen equipment 10
4) Small/light kitchen equipment 5
5) Fixed/heavy furniture 10/15
6) Moveable/light furniture 5/10
7) Motor vehicles 3
8) Soft furnishings 3/5
9) Unclassified fixtures and fittings - Category (A) 3/5
- Category (B) 3/5
10) Communication/audio-visual equipment -
telephone systems 10
Other equipment 5
11) Accounting and office equipment software 3/5
12) Catering equipment 5/10
13) Fire fighting equipment 5/10
<PAGE>
14) Gym/leisure/out-door equipment 5
15) Gain/loss on disposal - credit/debit depreciation expense
-
APPLIES ONLY TO ADDITIONS AND REPLACEMENTS:
16) Boilers 20
17) Chillers 20
18) Generators 20
19) Bathroom fittings 5/15
20) Electrical light fittings 10/15
21) Water supply system/pumps 5/15
