<PAGE>
Exhibit 99.4(a)
SUN INTERNATIONAL HOTELS LIMITED
Consolidated Financial Statements as of December 31, 1999
F-1
<PAGE>
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, 1999 and 1998,
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, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 18, 2000 (except for the matters
discussed in Notes 15 and 20 as to which
the date is June 23, 2000)
F-2
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 39,229 $ 61,206
Restricted cash equivalents 981 1,917
Trade receivables, net 44,425 36,319
Due from affiliates 14,212 7,062
Inventories 13,742 8,899
Prepaid expenses 8,412 5,126
----------- -----------
Total current assets 121,001 120,529
Property and equipment, net 1,378,138 1,257,165
Subordinated notes receivable -- 87,385
Deferred charges and other assets, net 49,884 36,889
Investment in associated companies 28,593 26,894
Goodwill, net 93,855 96,871
----------- -----------
Total assets $ 1,671,471 $ 1,625,733
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Current maturities of long-term debt $ 1,100 $ 2,382
Accounts payable and accrued liabilities 133,334 130,989
Capital creditors 16,950 33,736
----------- -----------
Total current liabilities 151,384 167,107
Long-term debt, net of current maturities 578,033 565,752
Deferred income taxes 42,223 42,253
----------- -----------
Total liabilities 771,640 775,112
----------- -----------
Commitments and contingencies
Shareholders' equity:
Ordinary Shares 34 34
Capital in excess of par 677,918 675,595
Cumulative other comprehensive income (5,569) (3,611)
Retained earnings 248,425 178,603
----------- -----------
920,808 850,621
Treasury stock (20,977) --
----------- -----------
Total shareholders' equity 899,831 850,621
----------- -----------
Total liabilities and shareholders' equity $ 1,671,471 $ 1,625,733
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Revenues:
Gaming $ 351,545 $ 319,342 $ 329,610
Rooms 164,831 94,942 96,846
Food and beverage 137,100 86,593 91,329
Tour operations 28,714 14,757 15,403
Management and other fees 46,898 40,645 22,979
Other revenues 45,910 35,391 44,503
Insurance recovery 14,209 -- --
--------- --------- ---------
Gross revenues 789,207 591,670 600,670
Less: promotional allowances (50,240) (40,792) (41,758)
--------- --------- ---------
Net revenues 738,967 550,878 558,912
--------- --------- ---------
Costs and expenses:
Gaming 209,177 190,543 199,269
Rooms 30,448 15,352 15,696
Food and beverage 91,539 59,145 60,750
Other operating expenses 92,705 72,102 75,982
Selling, general and administrative 93,962 70,024 64,846
Tour operations 27,816 14,653 14,913
Corporate expenses 16,260 18,811 14,193
Depreciation and amortization 57,230 32,081 28,639
Pre-opening expenses 5,398 25,961 --
--------- --------- ---------
Total cost and expenses 624,535 498,672 474,288
--------- --------- ---------
Income from operations 114,432 52,206 84,624
--------- --------- ---------
Other income (expense):
Interest income 12,725 15,651 16,144
Interest expense, net of capitalization (50,699) (4,516) (24,370)
Equity in earnings of associated companies 2,628 2,730 2,214
Gain on sale of equity interest in
associated company -- -- 13,386
Other, net 60 (316) 335
--------- --------- ---------
Total other income (expense), net (35,286) 13,549 7,709
--------- --------- ---------
Income before provision for income taxes
and extraordinary item 79,146 65,755 92,333
Provision for income taxes (9,324) (8,009) (6,368)
--------- --------- ---------
Income before extraordinary item 69,822 57,746 85,965
Extraordinary item, net -- -- (2,957)
--------- --------- ---------
Net income $ 69,822 $ 57,746 $ 83,008
========= ========= =========
Earnings per share:
Basic $ 2.09 $ 1.74 $ 2.52
========= ========= =========
Diluted $ 2.05 $ 1.70 $ 2.44
========= ========= =========
</TABLE>
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)
<TABLE>
<CAPTION>
ORDINARY SHARES
------------------------- CAPITAL IN
SHARE AMOUNT EXCESS OF PAR
----- ------ -------------
<S> <C> <C> <C>
Balance at December 31, 1996 32,707 $ 32 $ 666,262
Translation reserves -- -- --
Exercise of share options 254 1 4,599
Net income -- -- --
--------- --------- ---------
Balance at December 31, 1997 32,961 33 670,861
Translation reserves -- -- --
Exercise of share options 393 1 4,734
Exercise of warrants 223 -- --
Net income -- -- --
--------- --------- ---------
Balance at December 31, 1998 33,577 34 675,595
Translation reserves -- -- --
Repurchase of 1 million Ordinary Shares -- -- --
Exercise of share options 112 -- 2,696
Shares canceled (7) -- (373)
Net income -- -- --
--------- --------- ---------
Balance at December 31, 1999 33,682 $ 34 $ 677,918
========= ========= =========
<CAPTION>
RETAINED EARNINGS
-----------------------------
ACCUMULATED
OTHER COMPREHENSIVE
RETAINED COMPREHENSIVE TREASURY TOTAL INCOME FOR
EARNINGS INCOME STOCK EQUITY THE PERIOD
-------- ------ ----- ------ ----------
<S> > <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 37,849 $ (1,154) $ -- $ 702,989
Translation reserves -- (314) -- (314) $ (314)
Exercise of share options -- -- -- 4,600 --
Net income 83,008 -- -- 83,008 83,008
--------- --------- --------- --------- ---------
Balance at December 31, 1997 120,857 (1,468) -- 790,283 $ 82,694
=========
Translation reserves -- (2,143) -- (2,143) $ (2,143)
Exercise of share options -- -- -- 4,735 --
Exercise of warrants -- -- -- -- --
Net income 57,746 -- -- 57,746 57,746
--------- --------- --------- --------- ---------
Balance at December 31, 1998 178,603 (3,611) -- 850,621 $ 55,603
=========
Translation reserves -- (1,958) -- (1,958) $ (1,958)
Repurchase of 1 million Ordinary Shares -- (20,977) (20,977) --
Exercise of share options -- -- -- 2,696 --
Shares canceled -- -- -- (373) --
Net income 69,822 -- -- 69,822 69,822
--------- --------- --------- --------- ---------
Balance at December 31, 1999 $ 248,425 $ (5,569) $ (20,977) $ 899,831 $ 67,864
========= ========= ========= ========= =========
</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,
---------------------------------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 69,822 $ 57,746 $ 83,008
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary item -- -- 2,957
Depreciation and amortization 60,147 34,960 30,640
Gain on sale of equity interest in
associated company -- -- (13,386)
(Gain) loss on sale of assets (60) 316 (628)
Equity in earnings of associated companies,
net of dividends received 23 (670) (625)
Utilization of tax benefits acquired in merger -- 1,887 4,085
Provision for doubtful receivables 6,466 2,189 1,314
Provision for discount on CRDA
obligations, net 587 572 987
Net change in working capital accounts:
Receivables (20,440) (19,744) (10,475)
Due from affiliates (7,150) 839 (2,833)
Inventories and prepaid expenses (8,129) (1,896) (49)
Accounts payable and accrued liabilities 4,198 22,603 6,587
Net change in deferred charges and other assets 4,548 (4,953) 733
Net change in deferred tax liability (30) (3,747) --
--------- --------- ---------
Net cash provided by operating activities 109,982 90,102 102,315
--------- --------- ---------
Cash flows from investing activities:
Payments for capital expenditures (205,046) (443,996) (219,700)
Proceeds from sale of investment -- -- 18,785
Proceeds from sale of assets 5,186 110,313 7,712
Proceeds from redemption of Subordinated Notes 94,126 -- --
Purchase of Additional Subordinated Notes -- -- (8,000)
Desert Inn acquisition costs (16,117) -- --
Payments for investment in joint venture (600) -- --
Sale of Additional Subordinated Notes 2,798 2,798 2,800
Payments for expenses of merger -- (745) (8,057)
Payment received from loan to affiliate -- -- 1,108
CRDA deposits (2,746) (2,955) (3,122)
--------- --------- ---------
Net cash used in investing activities (122,399) (334,585) (208,474)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from exercise of share options 2,696 4,735 4,600
Early redemption of debt -- -- (153,712)
Borrowings 129,000 264,000 299,084
Repurchase of Ordinary Shares (20,977) -- --
Debt issuance and modification costs (2,361) (694) (12,762)
Repayment of borrowings (118,854) (113,596) (754)
--------- --------- ---------
Net cash provided by (used in) financing activities (10,496) 154,445 136,456
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (22,913) (90,038) 30,297
Cash and cash equivalents at beginning of period 63,123 153,161 122,864
--------- --------- ---------
Cash and cash equivalents at end of period $ 40,210 $ 63,123 $ 153,161
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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/or
casinos in The Bahamas, Atlantic City, Indian Ocean and Dubai. In addition, the
Company earns income based on the gross revenues of a casino in Connecticut. The
Company's largest property is Atlantis, a 2,317-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 Towers, as well as the Royal Towers which opened in December 1998, the
Ocean Club Golf & Tennis Resort, a golf course, a water plant, 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. During the second quarter of
1999, the Company completed construction of a new convention facility. In 1999,
the Company commenced construction of the new Villas at the Ocean Club, the
renovation of the golf course and clubhouse, as well as the development of
infrastructure at the east-end of Paradise Island in preparation for the sale of
lots at Ocean Club Estates.
ATLANTIC CITY
Through its wholly owned subsidiary Sun International North America, Inc.
("SINA"), the Company owns and operates the Resorts Atlantic City hotel and
casino in Atlantic City, New Jersey ("Resorts Atlantic City"). SINA, which has
been doing business since 1958, was acquired by SIHL in a merger transaction in
December 1996. Resorts Atlantic City includes two hotel towers which comprise of
644 guest rooms, a 70,000 square foot casino and an 5,000 square foot
pari-mutual betting and slot machine area.
CONNECTICUT
The Company has a 50% interest in, and is a managing partner of, Trading Cove
Associates ("TCA"), a Connecticut general partnership that developed, and until
December 31, 1999, had a management agreement with the Mohegan Tribal Gaming
Authority ("MTGA"), an instrumentality of the Mohegan Tribe of Indians of
Connecticut (the "Tribe"), to operate, 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
F-7
<PAGE>
management agreement, which covered development, management, marketing and
administration services, provided that TCA was entitled to receive between 30%
and 40% of the net profits, as defined, of the Mohegan Sun Casino.
On February 9, 1998, the Tribe appointed TCA to develop its proposed expansion
of the Mohegan Sun Casino, which is currently expected to cost approximately
$800.0 million. In addition, effective January 1, 2000, TCA turned 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 previously 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.
In connection with the original development of the Mohegan Sun Casino, in 1996
the Company acquired $20.0 million of subordinated notes (the "Subordinated
Notes") issued by MTGA. The Subordinated Notes earned interest at 15% per annum.
Interest payable on the Subordinated Notes was satisfied by the issuance of
additional Subordinated Notes. Interest payments through December 31, 1999 of
approximately $17.0 million on the Subordinated Notes were satisfied in this
manner.
In 1996, the Company also acquired $50.0 million of notes (the "Additional
Subordinated Notes") from MTGA related to a construction completion guarantee,
which bore interest at prime plus 1%. Interest payable on the Additional
Subordinated Notes was satisfied by the further issuance of Additional
Subordinated Notes. Interest payments through December 31, 1999 of approximately
$15.5 million on the Additional Subordinated Notes were satisfied in this
manner. In each of October 1999, 1998 and 1997, the Company sold $2.8 million
Additional Subordinated Notes, which included accrued interest thereon, to its
partner in TCA.
On December 31, 1999, the aggregate balance on the Subordinated Notes and the
Additional Subordinated Notes of $94.1 million, including accrued interest, was
repaid in full.
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 accounting principles
generally accepted in the United States 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.
F-8
<PAGE>
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.
REVENUE RECOGNITION
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:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------
(In thousands of US dollars) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Rooms $ 7,894 $ 6,671 $ 5,965
Food and beverage 21,692 17,921 19,315
Other 7,762 5,819 5,402
------- ------- -------
$37,348 $30,411 $30,682
======= ======= =======
</TABLE>
PRE-OPENING EXPENSES
In 1998, 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 charged to operations in the fourth quarter of 1998 in
conjunction with the opening. Effective 1999, the Company adopted Statement of
Position 98-5 which states that all such costs will be charged to expense as
incurred. In 1999, pre-opening expenses related to the opening of the newly
renovated casino at Resorts Atlantic City.
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, 1999, 1998 and 1997.
F-9
<PAGE>
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 as a component of
other comprehensive income. 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 counterparties
to manage the impact of 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 interest 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, 1999 and 1998.
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.
Land improvements and utilities 14-40 years
Hotels and other buildings 15-40 years
Furniture, machinery and equipment 2-15 years
Interest costs incurred during the construction period are capitalized.
F-10
<PAGE>
DEFERRED CHARGES AND OTHER ASSETS
Deferred charges related to the Mohegan Sun Casino are generally amortized over
the term of the original 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 $2.6 million, $2.7 million and $2.4 million for the years ended
December 31, 1999, 1998 and 1997, 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 each
of the years ended December 31, 1999, 1998 and 1997 is net of $264,000 of
amortization expense related to such goodwill.
STOCK OPTION COMPENSATION
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. The Company does not believe that any
such changes have occurred.
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. 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.
F-11
<PAGE>
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:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
(In thousands) 1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Weighted average shares
used in basic computations 33,465 33,270 32,920
Stock options, warrants and
restricted shares awarded 540 764 1,031
------ ------ ------
Weighted average shares
used in diluted computations 34,005 34,034 33,951
====== ====== ======
</TABLE>
The net income amount used as the numerator in calculating basic and diluted
earnings per share is the net income in the accompanying consolidated statements
of income.
RECLASSIFICATIONS
Certain balances in the accompanying consolidated financial statements for 1998
and 1997 have been reclassified to conform to the current year presentation.
NOTE 3-CASH AND CASH EQUIVALENTS
Cash equivalents at December 31, 1999 and 1998 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, 1999, the Company held
reverse repurchase agreements of $.5 million, all of which matured January 3,
2000.
F-12
<PAGE>
NOTE 4-TRADE RECEIVABLES
Components of trade receivables were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
(In thousands of US dollars) 1999 1998
---------- ---------
<S> <C> <C>
Gaming $ 29,673 $ 18,269
Less: allowance for doubtful accounts (9,943) (6,047)
-------- --------
19,730 12,222
-------- --------
Non-gaming:
Hotel and related 19,792 13,752
Other 8,595 11,510
-------- --------
28,387 25,262
Less: allowance for doubtful accounts (3,692) (1,165)
-------- --------
24,695 24,097
-------- --------
$ 44,425 $ 36,319
======== ========
</TABLE>
NOTE 5-PROPERTY AND EQUIPMENT
Components of property and equipment were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
(In thousands of US dollars) 1999 1998
------------ -----------
<S> <C> <C>
Land and land rights $ 351,495 $ 351,826
Land improvements and utilities 185,268 185,048
Hotels and other buildings 704,765 611,958
Furniture, machinery and equipment 185,824 141,284
Construction in progress 73,645 39,812
----------- -----------
1,500,997 1,329,928
Less: accumulated depreciation (122,859) (72,763)
----------- -----------
$ 1,378,138 $ 1,257,165
=========== ===========
</TABLE>
Interest costs of $4,865,000, $35,304,000 and $6,778,000 were capitalized in
1999, 1998 and 1997, respectively.
F-13
<PAGE>
NOTE 6-DEFERRED CHARGES AND OTHER ASSETS
Components of deferred charges and other assets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
(In thousands of US dollars) 1999 1998
-------- --------
<S> <C> <C>
CRDA bonds and deposits $16,983 $14,831
Desert Inn acquisition costs 16,117 --
Debt issuance costs 13,400 13,917
Mohegan Sun Casino 2,049 2,429
Other 1,335 5,712
------- -------
$ 49,884 $ 36,889
======== ========
</TABLE>
NOTE 7-ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Components of accounts payable and accrued liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
(In thousands of US dollars) 1999 1998
--------- --------
<S> <C> <C>
Trade payables $36,798 $41,216
Accrued payroll and related taxes
and benefits 15,541 17,361
Customer deposits and unearned
revenues 28,555 17,897
Accrued interest 7,853 8,187
Accrued income taxes 7,137 4,472
Other accrued liabilities 37,450 41,856
-------- --------
$133,334 $130,989
======== ========
</TABLE>
F-14
<PAGE>
NOTE 8-LONG TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
(In thousands of US dollars) 1999 1998
------------ ----------
<S> <C> <C>
9% Senior Notes due 2007 $ 200,000 $ 200,000
Unamortized discount (738) (807)
--------- ---------
199,262 199,193
--------- ---------
8.625% Senior Notes due 2007 100,000 100,000
--------- ---------
Revolving Credit Facility 278,000 259,000
--------- ---------
Other 1,871 9,941
--------- ---------
579,133 568,134
Less: amounts due within one year (1,100) (2,382)
--------- ---------
$ 578,033 $ 565,752
</TABLE>
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 semi-annually. 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. The indenture for the 8.625% Senior Notes
contains the same covenants and restrictions as those in the Senior Indenture.
REVOLVING CREDIT FACILITY
In November 1999, the Company amended an existing facility (the "Revolving
Credit Facility") with a syndicate of banks (the "Lenders"), with The Bank of
Nova Scotia acting as administrative agent, to allow for an increase in the
amount of borrowings. Without further consent by the Lenders, the maximum amount
of borrowings that may be outstanding on the Revolving Credit Facility is $475.0
million, and with further consent by the Lenders, borrowings may be allowed up
to $625.0 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
F-15
<PAGE>
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, 1999 and 1998. 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,
1999 and 1998, no amounts were outstanding under the Overdraft Facility.
PRINCIPAL PAYMENTS
Minimum principal payments of long-term debt outstanding as of December 31, 1999
for each of the next five years and thereafter are as follows: 2000-$1,100,000;
2001-$227,000; 2002-$278,203,000; 2003-$107,000; 2004-$100,000;
thereafter-$300,134,000.
NOTE 9-SHAREHOLDERS' EQUITY
The Company's authorized, issued and outstanding shares were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
(In thousands, except per share data) 1999 1998
--------- ---------
<S> <C> <C>
Ordinary Shares
Par value per share $ 0.001 $ 0.001
Authorized 250,000 250,000
Issued and outstanding 33,682 33,577
Preference Shares
Par value per share $ 0.001 $ 0.001
Authorized 100,000 100,000
Issued and outstanding -- --
</TABLE>
F-16
<PAGE>
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 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
(In thousands of US dollars, 1999 1998 1997
except per share data) --------------------- --------------------- ---------------------
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 3,017 $31.38 2,795 $26.32 1,640 $17.41
Granted 1,140 25.10 701 41.50 1,476 35.61
Exercised (112) 23.56 (393) 14.45 (253) 18.20
Terminated and other (127) 37.69 (86) 36.45 (68) 33.25
----- ----- -----
Outstanding at end of year 3,918 29.60 3,017 31.38 2,795 26.32
===== ===== =====
Exercisable at end of year 1,014 360 342
===== ===== =====
Available for grant - 125 272
===== ===== =====
</TABLE>
Certain of the options granted during 1999 were granted outside of the Plans.
F-17
<PAGE>
For purposes of supplemental disclosures required by SFAS 123, the fair value of
options granted during 1999, 1998 and 1997 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,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rates 5.5% 4.9% 5.8%
Volatility factors of the expected market
price of Ordinary Shares 39.0% 38.0% 34.0%
Expected life of options in years 6-7 6-7 6-7
Expected dividend yields - - -
Weighted average grant date fair value $7.67 $12.71 $11.46
Proforma results based on these assumptions
were as follows:
Net income (000's) $62,001 $50,943 $80,109
Diluted earnings per share $ 1.82 $ 1.50 $ 2.36
</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. The compensation
expense relating to the bonus plan amounted to $458,000 and $3.1 million for the
years ended December 31, 1999 and 1998, respectively.
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
(In thousands of US dollars) 1999 1998
------- ------
<S> <C> <C>
Trading Cove Associates $ 8,301 $2,090
Sun Indian Ocean 5,251 4,662
Other 660 310
------- ------
$14,212 $7,062
======= ======
</TABLE>
F-18
<PAGE>
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 $876,000, $895,000 and $830,000
for the years ended December 31, 1999, 1998 and 1997, 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
$6.4 million, $4.8 million and $3.0 million for the years ended December 31,
1999, 1998 and 1997, 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 1999, 1998 and 1997, the Company recorded
income tax provisions (benefits) relating to its US operations as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
(In thousands of US dollars) 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 9,197 $11,477 $ 5,754
State 157 279 614
------- ------- -------
9,354 11,756 6,368
Deferred:
Federal (30) (3,747)
------- ------- -------
$ 9,324 $ 8,009 $ 6,368
======= ======= =======
</TABLE>
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.
F-19
<PAGE>
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:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Non US-source income (40.3) (27.1) (31.6)
NOL's and temporary differences
for which no taxes were provided or
benefits recognized 8.7 (5.7) -
Branch profits taxes and other taxes
on US services 6.3 4.4 .8
Other 2.1 5.6 2.7
----- ----- -----
Effective tax rate 11.8% 12.2% 6.9%
===== ===== =====
</TABLE>
The components of the deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
(In thousands of US dollars) 1999 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Basis differences on land held for
investment, development or resale $ (6,100) $ (6,200)
Basis differences on property and equipment (44,400) (44,300)
Other (2,402) (2,100)
--------- ---------
Total deferred tax liabilities (52,902) (52,600)
Deferred tax assets:
Net operating loss carryforwards 196,700 187,300
Book reserves not yet deductible for tax
return purposes 14,000 15,800
Tax credit carryforwards 2,700 2,800
Other 5,700 6,400
--------- ---------
Total deferred tax assets 219,100 212,300
Valuation allowance for deferred tax assets (208,421) (201,953)
--------- ---------
Deferred tax assets, net of valuation allowance 10,679 10,347
--------- ---------
Net deferred tax liabilities $ (42,223) $ (42,253)
========= =========
</TABLE>
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 December 16, 1996, the effective date of its
merger transaction with SIHL. If such deferred tax assets were to be realized,
the corresponding reduction to the valuation allowance would reduce the carrying
value of goodwill.
F-20
<PAGE>
For federal income tax purposes, SINA had net operating loss carryforwards of
approximately $562.0 million at December 31, 1999; however, due to the merger
transaction in December 1996, $423.0 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 expire as follows: $50.0 million in 2005, $23.0 million in 2006,
$28.0 million in 2007, $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: $2.0 million in 2007, $57.0 million in 2008, $57.0 million in
2012 and $23.0 million in 2019.
NOTE 14-SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid in 1999, 1998 and 1997, net of amounts capitalized, amounted to
$48.7 million, $3.4 million and $21.1 million respectively. Income taxes paid in
1999, 1998 and 1997 amounted to $6.7 million, $7.0 million and $519,000,
respectively.
Non-cash investing and financing activities in 1999, 1998 and 1997 included the
following:
<TABLE>
<CAPTION>
(In thousands of US dollars) DECEMBER 31,
------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Refinancing of capital lease obligation $1,444 $ - $ -
Property and equipment acquired under capital
lease obligations 938 5,098 -
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
</TABLE>
F-21
<PAGE>
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 3.6% to 7.0% and have repayment terms of
between 20 and 50 years.
At December 31, 1999, the Company had $8.2 million face value of bonds issued by
the CRDA and had $18.2 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.
In February 1999, the Company and various Atlantic City casinos entered into
agreements with the CRDA to invest in a project the CRDA and the New Jersey
Sports and Exposition Authority are planning, to renovate the existing Atlantic
City Boardwalk Convention Center into a 10,000 to 14,000 seat special events
center (the "Project").
The Project will be funded in phases through direct investments from various
Atlantic City casinos, including the Company. Of the total budgeted cost, the
Company has agreed to invest $8.7 million in cash which will be paid from funds
the Company has or will have deposited with the CRDA to meet its investment
obligations as described above. As of December 31, 1999, $1.8 million of the
total amount deposited with the CRDA by the Company had been allocated to the
Project. As the CRDA allocates funds deposited by the Company to the Project,
the Company will receive an investment credit reducing its obligation to
purchase CRDA bonds in an equal amount.
NEW HEADS OF AGREEMENT
In 1997, the Company amended an agreement 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.
In order to secure the tax incentives, the Company was obligated to begin
construction of 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 Company had plans for an
additional 700-room Phase III hotel project at Atlantis which would have
satisfied this condition. However, considering its available
F-22
<PAGE>
development resources and alternative uses of capital, the Company has postponed
this project. As a result, in June 2000, the Company was notified by the
Bahamian Government that these additional incentives have been suspended.
Effective July 1, 2000, the casino win tax will revert back to the previous
structure, as follows. There is no change in win tax on gaming win up to $20
million, however, the Company will incur 12.5% win tax on gaming win between $20
million and $120 million, and 10% win tax on gaming win in excess of $120
million. The $5 million annual reduction of fees will still apply, however, in
lieu of the 50% credit on win tax to be paid on gaming win over $20 million, the
Company will receive a 45% credit on win tax to be paid on gaming win between
$20 million and $120 million. Under its agreement with the Bahamian Government,
the additional tax incentives will be reinstated in the event the Company begins
construction of these additional rooms. Although the Company currently has no
plans to proceed with the Phase III development, it will continue to consider
the results at its Paradise Island operations as well as general business trends
and alternative uses of its capital in determining the timing of proceeding with
Phase III.
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 $4.0 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 SIHL
Sun International Investments Limited ("SIIL"), majority shareholder of SIHL,
has agreed to control a majority of the SIHL Board of Directors through June 30,
2004.
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.
Beginning on or about January 20, 2000, eight class action lawsuits were filed
in courts of the states of New York, New Jersey and Florida, by certain
shareholders of SIHL. These actions, purportedly brought as class actions on
behalf of all public shareholders, name SIIL, SIHL and directors of SIHL
(including Chairman and Chief Executive Officer Solomon Kerzner) as defendants,
alleging generally that they breached their fiduciary duties to shareholders in
connection with SIIL's proposal to acquire all of the ordinary shares of SIHL
not owned by SIIL or its shareholders for $24 per share. Answers were filed to
each of the complaints on or about March 27, 2000. No further action is likely
to occur pending efforts to consolidate the lawsuits. See "Proposed Acquisition
of SIHL Ordinary Shares" described in Note 20.
PURCHASE COMMITMENTS
F-23
<PAGE>
At December 31, 1999, the Company had unfunded contracts in place for capital
expenditures in The Bahamas of $27.1 million.
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 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
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
(In thousands of US dollars) 1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Casino/hotel:
Atlantic City, New Jersey:
Gaming $221,015 $234,736 $244,156
Rooms 15,160 16,148 16,514
Food and beverage 25,512 26,692 27,085
Other 8,075 11,460 11,344
Less: promotional allowances (26,632) (28,295) (28,465)
-------- -------- --------
243,130 260,741 270,634
-------- -------- --------
Paradise Island, The Bahamas:
Gaming 130,529 84,606 85,454
Rooms 149,671 78,794 80,332
Food and beverage 111,588 59,901 64,244
Other (a) 58,732 34,157 36,886
Insurance recovery 14,209 - -
Less: promotional allowances (23,608) (12,497) (13,293)
-------- -------- --------
441,121 244,961 253,623
-------- -------- --------
Total casino/hotel 684,251 505,702 524,257
Management and other fees:
Connecticut 39,282 34,613 17,356
Indian Ocean 6,477 6,032 5,273
Dubai 538 - -
Other segments 8,419 4,531 12,026
-------- -------- --------
Net revenues $738,967 $550,878 $558,912
======== ======== ========
</TABLE>
F-24
<PAGE>
CONTRIBUTION TO CONSOLIDATED INCOME BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY ITEM
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
(In thousands of US dollars) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Casino/hotel:
Atlantic City, New Jersey $ (253) $ 19,915 $ 21,591
Paradise Island, The Bahamas (a) 93,609 42,132 46,240
-------- -------- --------
93,356 62,047 67,831
-------- -------- --------
Management and other fees, net of amortization:
Connecticut 38,802 33,376 16,504
Indian Ocean 6,477 6,032 5,273
Dubai 538 - -
General corporate (16,899) (19,505) (14,682)
Pre-opening expenses (5,398) (25,961) -
Other segments 2,348 621 9,698
Corporate marketing, retail and public relations (4,792) (4,404) -
-------- -------- --------
Income from operations 114,432 52,206 84,624
-------- -------- --------
Other income (expense):
Interest income 12,725 15,651 16,144
Interest expense, net of capitalization (50,699) (4,516) (24,370)
Equity in earnings of associated companies:
Indian Ocean 2,628 2,730 1,691
France (b) - - 523
Gain on sale of equity interest
in associated company (b) - - 13,386
Other, net 60 (316) 335
-------- -------- --------
Income before provision for income
taxes and extraordinary item $ 79,146 $ 65,755 $ 92,333
======== ======== ========
</TABLE>
F-25
<PAGE>
TOTAL ASSETS, DEPRECIATION AND AMORTIZATION OF GOODWILL AND CAPITAL ADDITIONS
<TABLE>
<CAPTION>
(In thousands of US dollars) AS OF DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1999
----------------------- ----------------------------------
DEPRECIATION AND
AMORTIZATION CAPITAL
TOTAL ASSETS OF GOODWILL ADDITIONS
------------ -------------------- ---------
<S> <C> <C> <C>
Casino/hotel:
Atlantic City, New Jersey $ 429,854 $ 16,156 $ 42,574
Paradise Island, The Bahamas 1,054,708 39,631 24,200
Paradise Island Expansion,
opened December 1998 (c) - - 117,808
---------- -------- --------
1,484,562 55,787 184,582
---------- -------- --------
Real estate related:
Atlantic City, New Jersey 61,307 - 9,433
Paradise Island, The Bahamas 30,022 - 4
---------- -------- --------
91,329 - 9,437
---------- -------- --------
Equity investment in Indian Ocean 24,871 - -
General Corporate 68,222 1,120 10,828
Corporate marketing, retail and
public relations 1,729 321 199
Other segments 758 2 -
---------- -------- --------
$1,671,471 $ 57,230 $205,046
========== ======== ========
</TABLE>
F-26
<PAGE>
TOTAL ASSETS, DEPRECIATION AND AMORTIZATION OF GOODWILL AND CAPITAL ADDITIONS,
CONTINUED
<TABLE>
<CAPTION>
(In thousands of US dollars) 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 (c) - - 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>
<TABLE>
<CAPTION>
(In thousands of US dollars) 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
========== ======= ========
</TABLE>
(a) Includes tour operations.
(b) Equity investment in France was sold in June 1997.
F-27
<PAGE>
(c) The total assets and depreciation for 1999 and 1998 are included in
Paradise Island, The Bahamas.
NOTE 17-EQUITY IN EARNINGS OF ASSOCIATED COMPANIES
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, 1999, 1998 and 1997; converted to thousands of US
dollars at the appropriate exchange rate.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 84,007 $ 88,773 $ 87,576
Income from operations 15,630 17,172 13,942
Income before income taxes 13,171 14,237 9,114
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current assets $ 21,075 $ 23,123 $ 25,821
Total assets 264,345 152,594 160,245
Current liabilities 61,595 31,714 36,271
Shareholders' equity 140,865 83,394 88,990
</TABLE>
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 counterparties 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 counterparties. The Company does not obtain collateral in
connection with its derivative financial instruments.
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<PAGE>
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,
1999.
INTEREST RATE RISK MANAGEMENT
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 counterparties, 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, 1999 and 1998, notional principal amounts related to interest rate
swaps (variable to fixed rate) were $125.0 million and $90.0 million,
respectively. The swap portfolio maturities at December 31, 1999 are as follows:
December 31, 2001-$50.0 million and January 2, 2002-$75.0 million. As of
December 31, 1999, the weighted average fixed rate payment on the variable to
fixed rate swaps was 6.89%. 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. The carrying value and negative fair
value of the Company's interest rate swaps was $0 and $644,000 at December 31,
1999, respectively, and $0 and $5.2 million at December 31, 1998, respectively.
NOTE 20-SUBSEQUENT EVENTS
PROPOSED ACQUISITION OF SIHL ORDINARY SHARES
On January 19, 2000, the Company announced that it had received a proposal from
SIIL to acquire in a merger transaction all Ordinary Shares of the Company not
already owned by SIIL or its shareholders for $24 per share in cash. To consider
the proposal, the Company formed a committee of independent members of the Board
of Directors (the "Special Committee") which retained its own financial and
legal advisors. The proposed transaction
F-29
<PAGE>
was subject to various conditions, including approval by the Special Committee.
On June 16, 2000, the Company announced that it was not able to negotiate a
mutually satisfactory transaction with the Special Committee and that SIIL
advised the Company that its proposal had been withdrawn.
In order to allow shareholders of the Company to sell at least a portion of
their Ordinary Shares at the price formerly proposed by SIIL, the Board of
Directors of the Company approved a self-tender offer for up to 5,000,000
Ordinary Shares at a $24 per share cash price. It is anticipated that the
self-tender offer will commence on June 26, 2000 and will be made by an Offer to
Purchase and related materials, copies of which will be filed with the
Securities and Exchange Commission and mailed to the Company's shareholders. The
self-tender offer is subject to the terms and conditions set forth in the Offer
to Purchase, including the condition that the Ordinary Shares continue to be
listed for trading on the New York Stock Exchange and that the Company remain
subject to periodic reporting requirements of the Securities Exchange Act of
1934. The Company has been advised that the approximately 53% of the outstanding
Ordinary Shares held by SIIL and its shareholders will not be sold in the
self-tender.
In order to effect the self-tender, the Company amended its existing Revolving
Bank Credit Agreement (the "Revolving Credit Facility") to allow the Company to
repurchase up to $175 million worth of Ordinary Shares. As part of this
amendment, the Revolving Credit Facility was reduced from $625 million to $500
million.
TERMINATION OF DESERT INN ACQUISITION AGREEMENT
In SIHL's Form 20-F Annual Report for the year ended December 31, 1998, it was
reported that SIHL had entered into an Asset and Land Purchase Agreement with
Starwood Hotels and Resorts Worldwide Inc. ("Starwood") pursuant to which SIHL
had agreed to acquire the Desert Inn Hotel and Casino in Las Vegas (the "Desert
Inn") for $275 million.
On March 2, 2000, SIHL and Starwood announced that they have agreed to terminate
their agreement and that if Starwood sold the Desert Inn for less that the
purchase price originally agreed by SIHL, then SIHL will pay to Starwood 50% of
such deficit, up to a maximum of $15 million. In the event that Starwood sold
the property for an amount in excess of the purchase price originally agreed to
by SIHL, then SIHL will share 50% of such excess. Should SIHL be required to pay
$15 million of any potential deficit, it would be paid from the $15 million
previously paid to Starwood. The deposit is included in deferred charges and
other assets in the accompanying consolidated balance sheets. On April 28, 2000,
it was announced by Starwood that it had agreed to sell the Desert Inn for
approximately $270 million and the parties intended to close the transaction by
June 30, 2000.
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