As filed with the Securities and Exchange Commission on June 30, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 1999
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
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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: 32,681,480
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark which financial statement item the Registrant has elected
to follow.
Item 17 Item 18 X
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TABLE OF CONTENTS
PART I
Page
Items 1 & 2 Description of Business and Properties 3
Item 3 Legal Proceedings 27
Item 4 Control of Registrant 27
Item 5 Nature of Trading Market 29
Item 6 Exchange Controls and Other Limitations Affecting
Security Holders 29
Item 7 Taxation 30
Item 8 Selected Financial Data 32
Item 9 Management's Discussion and Analysis of Financial
Condition and Results of Operations 35
Item 9A Quantitative and Qualitative Disclosures About
Market Risk 44
Item 10 Directors and Officers of Registrant 45
Item 11 Compensation of Directors and Officers 48
Item 12 Options to Purchase Securities from Registrant or
Subsidiaries 49
Item 13 Interest of Management in Certain Transactions 49
PART II*
PART III
Item 15 Defaults Upon Senior Securities 50
Item 16 Changes in Securities and Changes in Security for
Registered Securities 50
PART IV
Item 17 Financial Statements 50
Item 18 Financial Statements 50
Item 19 Financial Statement and Exhibits 50
* Omitted pursuant to General Instruction G(b) of Form 20-F
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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/or casinos in The
Bahamas, Atlantic City, the 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 the Atlantis Resort and Casino, a 2,317-room
resort and casino located on Paradise Island, The Bahamas.
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 and certain of its
direct and indirect shareholders own approximately 54% 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 Africa.
SIIL is a private holding company in which each of Caledonia Investments Plc, an
English company publicly traded on the London Stock Exchange ("Caledonia"),
Kersaf Investments Limited, a South African company traded on the Johannesburg
Stock Exchange ("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.
In December 1996, the Company acquired Griffin Gaming & Entertainment, Inc.,
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 Resorts Atlantic City ("Resorts Atlantic City"). In addition, SINA,
through its wholly owned subsidiary Sun Cove Limited ("Sun Cove") has a 50%
interest in Trading Cove Associates ("TCA"), a Connecticut general partnership.
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
Resorts Atlantic City, and approximately nine acres at various sites in the
Atlantic City area.
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 TCA. Prior to January 1, 2000, TCA held a management
agreement (the "Management Agreement") with the Mohegan Tribal Gaming Authority
(the "MTGA") relating to the management of the Mohegan Sun Casino. The
Management
<PAGE>
Agreement provided that TCA was entitled to receive between 30% and 40% of the
net profits, as defined, of the Mohegan Sun Casino and was scheduled to expire
in 2003. TCA was obligated to pay certain amounts to its partners or their
affiliates as priority payments from its management fee income for services
provided. These amounts were paid as TCA received sufficient management fees to
meet the priority distributions.
In February 1998, the Mohegan Tribe appointed TCA to develop its approximately
$800 million expansion of the Mohegan Sun Casino. In addition, TCA and the
Mohegan Tribe agreed that effective January 1, 2000, TCA would 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 previous agreements, including the Management
Agreement, beginning January 1, 2000, TCA receives annual payments of five
percent of the gross revenues of the Mohegan Sun Resort complex for a 15-year
period.
On May 18, 1999, the Company announced that it had entered into an Asset and
Land Purchase Agreement (the "DI Purchase Agreement") with Starwood Hotels and
Resorts Worldwide Inc. ("Starwood") pursuant to which the Company had agreed to
acquire the Desert Inn Hotel and Casino in Las Vegas (the "Desert Inn") for
approximately $275 million, subject to certain adjustments. On March 2, 2000,
the Company and Starwood announced that they agreed to terminate the DI Purchase
Agreement and that if Starwood sold the Desert Inn for less than the purchase
price originally agreed by the Company, then the Company will pay to Starwood
50% of such deficit, as defined, 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 by the Company, then the Company will share 50% of such excess
as defined. Should the Company be required to pay $15 million of any potential
deficit, it would be paid from a $15 million deposit (the "Deposit") previously
paid to Starwood. The Deposit is included in deferred charges and other assets
in the accompanying consolidated balance sheets. On April 28, 2000, Starwood
announced that it had agreed to sell the Desert Inn for approximately $270
million, subject to certain post-closing adjustments, and on June 23, 2000,
Starwood announced that it had closed on this transaction. Based on preliminary
discussions with Starwood, the Company expects to be obligated to pay Starwood
approximately $8 million and, accordingly, Starwood would return to the Company
approximately $7 million of the Deposit.
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 was subject to various conditions,
including approval by the Special Committee. On June 16, 2000, the Company
announced that SIIL 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.
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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. The self-tender offer was
commenced on June 26, 2000 and was made by an Offer to Purchase and related
materials, copies of which were 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 54% 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.
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 90 acres remain available for
future development. 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 neighboring Nassau. Flights from South Florida
and New York City have flight times of approximately 50 minutes and two and
one-half hours, respectively.
The Company's largest property is the ocean-themed environment of "Atlantis" on
Paradise Island. The property includes a 14-acre saltwater marine life habitat
which 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 total number of
guest rooms at Atlantis is 2,317, which includes the 1,200-room Royal Towers
which opened in December 1998 as part of a major expansion.
The expansion also included a new 100,000 square foot casino and entertainment
center and expansive marine habitats, adventure rides, swimming pools and other
entertainment attractions, as well as the Marina at Atlantis. The new Atlantis
Casino, 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 Towers to the Coral Towers. The final project cost for this expansion
totaled approximately $500 million, excluding $40 million of capitalized
interest.
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During the first quarter of 1999, the Company completed several additional
development projects including a 30,000 square foot retail link connecting the
Coral Towers to the new entertainment center, the new porte cochere for the
Coral Towers, 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 30,000 square
foot casino space into a convention center and construction of a sports center
which includes an 18-hole putting course and a tennis center. These projects,
excluding the convention center, which is part of the expansion described above,
cost approximately $100 million.
During the second half of 2000, the Company expects to implement an extensive
maintenance capital expenditure program of approximately $15 million at
Atlantis' Beach Towers. This program is scheduled to begin in August and be
completed in December and will include the renovation of all of the Beach
Towers' 425 rooms and improvements to certain public spaces.
During the fourth quarter of 1999, the redevelopment of the Paradise Island Golf
Club into a first class championship venue, designed by Tom Weiskopf, was
started. In early 2000, the Company began work on the infrastructure to support
the Ocean Club Estates housing development, which comprises 121 luxury homesites
surrounding the golf course. The cost of the golf course redevelopment and the
infrastructure will be approximately $50 million. As of mid-June 2000, 100 of
the available sites have been sold and the Company expects to realize
approximately $100 million in net proceeds by June 30, 2000.
In addition to Atlantis and the Paradise Island Golf Club, the Company's
Paradise Island operations include the Ocean Club, a luxury resort hotel with 59
guest rooms. The Company is in the process of expanding the Ocean Club to add an
additional forty deluxe rooms, ten luxurious suites, two new restaurants--one of
which will be associated with the renowned restaurateur Jean Georges, and
significant enhancements to the existing pool and garden areas. It is
anticipated that the Ocean Club expansion will be completed by October 2000 and
will cost approximately $50 million.
Sun Bahamas also owns and operates shops, restaurants, bars and lounges, tennis
courts and other resort facilities on Paradise Island, as well as roads and
other land improvements on Paradise Island, and a water and sewage system which
serves, at stated charges, substantially all facilities on Paradise Island,
including non-affiliated customers. In connection with the Company=s expansion
on 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. ("Vistana"), a subsidiary
of Starwood, 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
198 timeshare units with Vistana with the first phase consisting of 82 units. As
part of its joint venture agreement, the Company contributed land and Vistana
contributed cash based on the number of
<PAGE>
timeshare units to be developed. During the second quarter of 2000, construction
began on the first phase and timeshare sales began in May 2000.
Sun Bahamas owns a 100-room beach front resort hotel, Paradise Paradise. This
property was closed to the public in September 1998 and has been used since then
to house expatriate professionals and construction staff.
The Company previously had plans for an additional 700-room Phase III hotel
project at Atlantis. However, considering its available development resources
and alternative uses of capital, the Company has postponed this project, and as
a result, annual tax incentives of approximately $3.0 million pursuant to the
Company's agreement with the Bahamian Government have been suspended. See "Items
1&2. Description of Business and Properties - Certain Matters Affecting the
Company's Bahamian Operations - Heads of Agreement" for a description of these
tax incentives. In the event the Company begins construction of the Phase III
project, these tax incentives will be reinstated. 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.
In September 1999, Paradise Island was hit by Hurricane Floyd, a hurricane rated
by the United States National Weather Service as a category five, its highest
rating. The Paradise Island properties suffered approximately $45 million of
property damage. At Atlantis, 230 rooms were taken out of service for three
months and the Ocean Club was closed for approximately three and a half months.
The Company had full property and business interruption insurance coverage and
remedial work was completed by year-end 1999. Hurricane Floyd was the first
significant hurricane to hit Paradise Island in over thirty years.
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
Resorts Atlantic City 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. Resorts Atlantic City consists of two hotel towers, the 15-story
Ocean Tower and the nine-story Atlantic City 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 644
guest rooms, the 1,400-seat Superstar Theater, seven restaurants, a VIP slot and
table player lounge, an indoor swimming pool, a public lounge, a 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.
<PAGE>
Resorts Atlantic City has approximately 77,000 square feet of gaming space which
includes a 59,000 square foot casino, a 13,000 square foot satellite simulcast
facility and a simulcast pari-mutuel betting area of approximately 5,000 square
feet. Within the facilities Resorts Atlantic City operates 70 table games
comprising 33 blackjack tables, seven roulette tables, seven craps tables, and
23 other specialty games that include Caribbean Stud, Baccarat, Mini-Baccarat,
Let It Ride, Three-card Poker, Pai Gow Poker, Big Six, Pai Gow, and Spanish
Twenty One. There are also 2,330 slot machines and five betting windows and four
customer-operated terminals for simulcast pari-mutuel betting.
In July 1999, the Company completed a renovation of Resorts Atlantic City which
included extensive renovations to the casino floor, hotel lobby, guest rooms and
suites, room corridors, restaurants, the hotel porte cochere, public areas and
the addition of a new VIP player lounge. The total cost of the 1999 expansion
was approximately $47 million. In the third quarter of 2000, the Company expects
to begin an additional renovation of the casino which includes construction of a
new nine-bay bus depot, a waiting area with seating for approximately 250
patrons and various other amenities. The relocation of the bus waiting area will
provide better access to certain slot machines which is currently hindered when
the existing waiting area is full. Additionally, the casino floor will be
expanded to include an additional 148 slot machines, 4 to 5 table games and a
simulcast machine. The total cost of this project is expected to be
approximately $5 million.
In addition to Resorts Atlantic City, SINA owns approximately 15 acres of
additional developable land immediately adjacent to Resorts Atlantic City.
Approximately 4.4 acres of this land is currently utilized by Resorts Atlantic
City 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 Atlantic City. A portion of this site is available for
future development. In total, Resorts Atlantic City and adjacent development
parcels approximate 27 acres. The Company is currently reviewing the development
potential of Resorts Atlantic City and the adjacent real estate.
SINA also owns a 2.5 acre site in Atlantic City which is utilized as a warehouse
for Resorts Atlantic City and various other non-operating sites approximating 15
acres.
Connecticut
Sun Cove has a 50% interest in, and is a managing partner of, TCA, a Connecticut
general partnership, that developed and, until January 1, 2000, managed the
Mohegan Sun Casino, a casino and entertainment complex in Uncasville,
Connecticut. TCA managed the Mohegan Sun Casino pursuant to the Management
Agreement. The Management Agreement provided that TCA was entitled to receive
between 30% and 40% of the net profits, as defined, of the Mohegan Sun Casino
and was scheduled to expire in 2003.
The Tribe appointed TCA to develop its approximately $800 million expansion of
the Mohegan Sun Casino. The expansion includes an additional 120,000 square foot
casino, a 1,200-room hotel, an arena and additional retail space. It is
anticipated that the new casino will open in the fourth quarter of 2001 with the
hotel opening in the second quarter of 2002. In addition, TCA and the Mohegan
Tribe agreed that effective
<PAGE>
January 1, 2000, TCA would 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 previous
agreements, including the Management Agreement, beginning January 1, 2000, TCA
receives income of five percent of the gross revenues of the Mohegan Sun Resort
complex for a 15-year period.
The Mohegan Sun Casino has a Native American theme that 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 currently includes approximately 150,000
square feet of gaming space and features more than 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 is a four-lane expressway. A
four-lane access road from Route 2A (with its own exit) gives patrons of the
Mohegan Sun Casino direct access to Interstate 395, which is connected to
Interstate 95, the main highway linking 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 light.
In connection with the original development of the Mohegan Sun Casino, in 1996
the Company acquired $20 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 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.
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.
<PAGE>
Indian Ocean
Through June 16, 2000, Sun International owned a 22.8% interest in Sun Indian
Ocean, a Mauritian company which is publicly traded on the Mauritius Stock
Exchange. Effective June 16, 2000, Sun Indian Ocean issued additional shares of
stock under a rights issue in which the Company did not participate, effectively
reducing the Company's ownership interest to 20.4%. 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 ("Le Saint
Geran"), the 200-room Le Touessrok Hotel & Ile Aux Cerfs ("Le Touessrok"), the
248-room La Pirogue Hotel ("La Pirogue"), the 333-room Le CoCo Beach ("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 reconstruction and reopened 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 beach 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.
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.
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 2008.
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%.
<PAGE>
Dubai
The Company has entered into an agreement to manage the 258-room Royal Mirage
Hotel in Dubai which opened 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 receives a management fee calculated as a percentage of
revenues (1.5%) and gross operating profits, as defined (10%). The management
fee schedule may be renegotiated after ten years.
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.
During the third and fourth quarter of 1999, the Company's Bahamian operations
were negatively impacted by the effects of Hurricane Floyd in September 1999.
The Company's property in The Bahamas sustained some damage, for which remedial
work was completed by year-end 1999, and experienced a number of customer
cancellations. The Company was fully insured for property loss and business
interruption. The Company expects to remain fully insured against property and
business interruption damage resulting from storms. However, as a result of
Hurricane Floyd, as well as substantial losses experienced by the overall
insurance industry throughout the past year, effective July 1, 2000, the Company
anticipates that premiums on its insurance coverage will increase substantially.
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, river boat, 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.
<PAGE>
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 8,300 rooms for overnight guests on Paradise
Island and New Providence Island combined, of which approximately 3,700 are
located on Paradise Island, including 2,376 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.
Atlantis also competes with the Princess Casino and Hotel and The Lucayan, which
are both located on Grand Bahama Island, approximately 40 minutes by air from
Paradise Island. The Princess Casino and Hotel includes a 30,000 square foot
casino, a 960-room hotel, restaurants and other leisure facilities. The Lucayan
is a new property which opened its first phase in May 2000 consisting of 550
hotel rooms. An additional 800 rooms are scheduled to open in December 2000,
bringing the total room count to 1,350. Once completed, The Lucayan will also
include 14 restaurants and lounges, a 36-hole golfing complex and 40,000 square
feet of meeting space. In addition, a new 30,000 square foot casino is planned
at The Lucayan and is expected to open in the summer of 2001. 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 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 intense. 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. Resorts Atlantic City 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. Significant additional expansion is expected
in the near future due to expansion projects to be financed by the Casino
Reinvestment Development Authority (the "CRDA"), a public authority, as well as
the construction of new casino/hotels announced for the Marina area and the
South Inlet section.
Resorts Atlantic City 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 Casino Hotel (the "Showboat"). These three
<PAGE>
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 Resorts Atlantic City and the Taj Mahal
allows patrons of both hotels and guests for events being held at Resorts
Atlantic City 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 outside of Atlantic City has
become extremely intense. In 1988, only Nevada and New Jersey had legalized
casino operations. Currently, almost every state in the United States has some
form of legalized gaming. Also, The Bahamas and other destination resorts in the
Caribbean and Canada have increased the competition for gaming revenue. Directly
competing with Atlantic City for the day-trip patron are two gaming properties
on Indian reservations in Connecticut. One is Foxwoods Resort and Casino
("Foxwoods") operated by the Pequot Tribe. Foxwoods currently has more than
5,800 slot machines, and for the year 1999 had slot revenue of approximately
$730 million, which is more than twice the slot revenue of the largest
casino/hotel in Atlantic City. The other, the Mohegan Sun Casino, which opened
in October 1996 and until December 31, 1999 was managed by TCA, has more than
3,000 slot machines and had slot revenue of approximately $490 million in 1999.
The Oneida Indians operate a casino near Syracuse, New York. Other Indian tribes
in the states of New York, Rhode Island and Connecticut are seeking federal
recognition in order to establish gaming operations which would further increase
the competition for day-trip patrons. In addition, three racetracks in the State
of Delaware, combined, operate more than 4,000 slot machines.
This rapid expansion of casino gaming, particularly that which has been or may
be introduced into jurisdictions in close proximity to Atlantic City, adversely
affects RIH's operations as well as the Atlantic City gaming industry.
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 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 5,800 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 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
<PAGE>
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 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.
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. In the luxury end of the
Mauritian hotels market, Sun Indian Ocean owns two of the five luxury hotels
offering a total of 375 rooms, while the competing hotels offers a combined 344
rooms. A sixth hotel, with 90 rooms, which would be further competition in the
luxury end market is scheduled to open in September 2000. Sun Indian Ocean 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 facility is served by several carriers offering 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.
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
<PAGE>
Association's existing contract with the Union expires January 1, 2003. Labor
relations in The Bahamas have not been stable over the last few years with
occasional work stoppages occuring, not only at Atlantis, but also at publicly
run entities, such as the Bahamian Electric Corporation and Bahamas Telephone
Company. As the country's largest private employer, the Company is often the
target of labor disputes.
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 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. These
terms are subject to an agreement with the Bahamian Government described below
under "Heads of Agreement".
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,
------------------------------------------
1999 1998 1997
------------------------------------------
Casino win $ 9,631,000 $ 7,327,000 $ 7,400,000
Basic license and operating fees 200,000 200,000 6,500,000
------------ ------------ ------------
Total $ 9,831,000 $ 7,527,000 $ 13,900,000
============ ============ ============
<PAGE>
Heads of Agreement
In 1995, the Company reached an agreement with the Bahamian Government that
provided for certain investment incentives to encourage the Company to undertake
an expansion program at Atlantis (the "1995 Agreement"). In 1997, this agreement
was amended to provide additional tax incentives (the "1997 Agreement") provided
that certain conditions were met by the Company. The tax structure under the
1997 Agreement, which became effective January 1, 1998, is described above under
"Casino Win Tax".
In order to secure the tax incentives provided in the 1997 Agreement, 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 previously had plans for an additional 700-room Phase III hotel project
at Atlantis which would have satisfied this condition. However, considering its
available 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 some of these additional incentives have been
suspended. Effective July 1, 2000, the casino win tax will revert back to the
structure in the 1995 Agreement, as follows. There is no change in the $4.1
million 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. The effect of
these changes is expected to approximate a $3 million per year increase of
gaming win tax. Under its agreement with the Bahamian Government, the additional
tax incentives under the 1997 Agreement 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 1997 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 to control a majority of Sun International's Board of Directors
through June 30, 2004.
<PAGE>
CERTAIN MATTERS AFFECTING THE COMPANY'S ATLANTIC CITY OPERATIONS
Convention Center and Casino/Hotel Expansion
In May 1997, the State of New Jersey opened a convention center. The 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 was part of a broader plan that included the 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. 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 CRDA, 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
Atlantic City 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
previously announced plans to build a 2,000-room destination resort and 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 third quarter of 2000 with an opening in 2002. Also included in
the development of the H-Tract is the construction of a tunnel and connector
road link between the Atlantic 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 the tunnel is expected to be completed in 2001.
Mirage had indicated that its proposed resort would open shortly after the
roadway is complete. MGM Grand, Inc. ("MGM") had 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. In the second
quarter of 2000, MGM acquired all of the outstanding shares of Mirage. As a
result of this merger, the scope and timing of the Mirage and MGM developments
in Atlantic City is uncertain.
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.
<PAGE>
Transportation Facilities
The lack of an adequate transportation infrastructure in the Atlantic City area
continues to negatively affect the industry's ability to attract patrons from
outside its core geographic area. In 1996, the Atlantic City International
Airport (located approximately 12 miles from Atlantic City) was expanded to
double the size of the terminal and add departure gates, to improve the baggage
handling system and provide sheltered walkways connecting the terminal and
planes. However, scheduled service to that airport from major cities by national
air carriers remains extremely limited.
Since the inception of gaming in Atlantic City there has been no significant
change in the industry's marketing base or in the principal means of
transportation to Atlantic City, which continues to be by automobile and bus.
The resulting geographic limitations and traffic congestion have restricted
Atlantic City's growth as a major destination resort.
RIH continues to utilize day-trip bus programs. A non-exclusive easement enables
Resorts Atlantic City to utilize a bus tunnel under the adjacent Taj Mahal,
which connects Pennsylvania and Maryland Avenues, and a service road exit from
the bus tunnel. This reduces congestion around the Pennsylvania Avenue bus
entrance to Resorts Atlantic City. To accommodate its bus patrons, Resorts
Atlantic City currently has a temporary waiting area which is located adjacent
to the casino. As noted above in "Items 1 & 2 Description of Business and
Properties - Atlantic City", in the third quarter of 2000, the Company expects
to begin construction of a new bus depot and waiting area consisting of nine
bays, seats for approximately 250 patrons and other various amenities.
In conjunction with a street beautification and housing project that was given
approval by the CRDA, that agency has engaged consultants to explore the
feasibility of the beautification and widening of North Carolina Avenue which
would allow for improved traffic flow in a more appealing corridor from Absecon
Boulevard (Route 30) to the main entrance of Resorts Atlantic City. Also, as
noted in "Convention Center and Casino/Hotel Expansions" above, construction of
a tunnel and connector road link between the Atlantic City Expressway and the
Marina area began in November 1998.
Union Contract Arrangements
At Resorts Atlantic City, approximately 1,400 employees of the total 3,300
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, was renewed in September 1999 for a term of five years, while the other
contracts run until December 2001.
<PAGE>
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 2000,
RIH's license was renewed until January 31, 2004. 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.
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.
<PAGE>
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 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
<PAGE>
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,
-------------------------------------------
1999 1998 1997
-------------------------------------------
Gaming tax $ 17,701,000 $ 18,785,000 $ 19,581,000
License and other fees 3,603,000 3,733,000 3,453,000
Contribution to AC Fund 307,000 496,000 392,000
------------ ------------ ------------
Total $ 21,611,000 $ 23,014,000 $ 23,426,000
============ ============ ============
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 1999, 1998 and 1997 amounted to $2.8 million, $2.9
million and $3.1 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, 1999, RIH held $8.2 million face amount of bonds issued by
the CRDA and had $18.2 million on deposit with the CRDA. The CRDA bonds issued
through 1999 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 operations (slot
machines and table games). TCA managed the development and construction and,
until January 1, 2000, managed the operation and marketing of the Mohegan Sun
Casino.
<PAGE>
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
In February 1998, the Mohegan Tribe appointed TCA to develop its approximately
$800 million expansion of the Mohegan Sun Casino, which includes an additional
120,000 square foot casino, an entertainment arena and additional retail space
expected to open by the end of 2001, as well as a 1,200-room hotel expected to
open in the second quarter of 2002.
TCA Management Agreement
The Mohegan Tribe and TCA entered into the Management Agreement pursuant to
which the Mohegan Tribe 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):
<TABLE>
<CAPTION>
I II III
-----------------------------------------------
Annual Fee Annual Fee
From Tier I From Tiers I &
40% of Plus 35% of II Plus 30% of
Net Revenues Net Revenues Net Revenues
Up To Between Above
------------ ------------------ --------------
<S> <C> <C> <C>
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
</TABLE>
<PAGE>
Management Fees
The monthly management fee payments to TCA were 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. As defined in the Management Agreement, "Net
Revenues" 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 was required to establish, and, together
with the Mohegan Tribe, make monthly contributions to, a replacement reserve
fund (the "Reserve Fund"), which was used to pay approved budgeted capital
expenditures for the Mohegan Sun Casino. The annual TCA contribution to such
fund was $1.2 million.
Term
The term of the Management Agreement was seven years from the date of the
opening of the Mohegan Sun Casino. However, pursuant to an agreement between TCA
and the Mohegan Tribe, 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 Mohegan Tribe. In exchange for relinquishing its
rights under its existing agreements, including the Management Agreement,
beginning January 1, 2000, TCA receives 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 were no changes 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, prior to January
1, 2000 the Company received priority payments from TCA. Each of these priority
payments were paid from TCA's management fees prior to the pro rata distribution
to TCA's partners of TCA's profits. For seven years beginning January 1, 2000,
TCA will pay to the Company the first $5 million from the five percent of gross
revenues it receives from the MTGA as a priority payment prior to the prorata
distributions to its partners.
Waiver of Sovereign Immunity
Pursuant to the Management Agreement and the Company's new agreement with the
Mohegan Tribe, 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 TCA's
agreement with the Mohegan Tribe. The parties have agreed that all disputes and
claims arising out of TCA's agreement with the Mohegan Tribe or the Mohegan
Tribe's gaming ordinance will be submitted to binding arbitration, which
<PAGE>
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 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 MTGA, 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
<PAGE>
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.
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 the DI Purchase Agreement with
Starwood pursuant to which the Company agreed to acquire the Desert Inn for
approximately $275 million, subject to certain adjustments. On June 1, 1999, the
Company paid the $15 million Deposit into an escrow account. On May 1, 2000, the
Company and Starwood announced that they agreed to terminate the DI Purchase
Agreement and that if Starwood sold the Desert Inn for less than the purchase
price originally agreed by the Company, then the Company will pay to Starwood
50% of such deficit, as defined, up to a maximum of $15 million. In the event
that Starwood sold the property in excess of the purchase price originally
agreed by the Company, then the Company will share 50% in such excess, as
defined. On April 28, 2000, Starwood announced that it had agreed to sell the
Desert Inn for approximately $270 million, subject to certain post- closing
adjustments, and on June 23, 2000, Starwood announced that it had closed on this
transaction. Based on preliminary discussions with Starwood, the Company expects
to be obligated to pay Starwood approximately $8 million and, accordingly,
Starwood would return to the Company approximately $7 million of its $15 million
Deposit.
<PAGE>
Proposed Acquisition of Ordinary Shares
In 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. In response
to the proposal, the Company formed the Special Committee which retained its own
financial and legal advisors. The proposed transaction was subject to various
conditions, including approval by the Special Committee. On June 16, 2000, the
Company announced that SIIL was not able to negotiate a mutually satisfactory
transaction with the Special Committee and that SIIL advised the Company that
its proposal has 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 has approved a self-tender offer for up to 5,000,000
shares at a $24 per share cash price. The self-tender offer was commenced on
June 26, 2000 and was made by an Offer to Purchase and related materials, copies
of which were 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 54% of the outstanding Ordinary Shares held by SIIL and its
shareholders will not be sold in the self-tender.
Forecast Earnings Announcement
The Company recently announced that it expects its second quarter of 2000
earnings per share (excluding land sales and certain non-recurring items) to be
in the range of $.53 to $.58. The second quarter's results were adversely
affected by disappointing trading at Resorts Atlantic City and a lower than
expected hold percentage at the Atlantis Casino.
THE COMMONWEALTH OF THE BAHAMAS
The Commonwealth of The Bahamas had a population of approximately 300,000 in
1999. 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.
<PAGE>
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 2001.
ITEM 3. LEGAL PROCEEDINGS
Shareholder Litigation
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 the Company. These actions, purportedly brought as class actions
on behalf of all public shareholders, name SIIL, the Company and directors of
the Company (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 not owned by SIIL or its shareholders for $24 per share. Currently, SIIL
and its shareholders own approximately 54% of the outstanding shares of the
Company. Answers were filed to each of the complaints on or about March 27,
2000. Subsequently, the eight class action lawsuits were consolidated into one,
the Sun International Hotels Limited Class Action Lawsuit, and in May 2000, this
consolidated complaint was filed with the Supreme Court of the State of New
York, County of New York, docket No. 600250.
ITEM 4. CONTROL OF THE REGISTRANT
SIIL owns approximately 42% of the outstanding Ordinary Shares and 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 and chief executive officer of
Caledonia, 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
<PAGE>
chairman and chief executive officer of Kersaf, which indirectly controls
through intermediate entities approximately one-third of the outstanding
ordinary shares of SIIL.
SIIL has agreed with the Bahamian Government, among other things, to control a
majority of the Board of Directors of the Company until June 30, 2004.
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. In
addition to its holdings in SIIL, Rosegrove owns directly 2,625,000 Ordinary
Shares, or approximately 8% of the outstanding Ordinary Shares of the Company.
Certain subsidiaries of Kersaf own directly 1,610,000 Ordinary Shares, or
approximately 4% of the outstanding Ordinary Shares of the Company and Kerry
International Investments Limited, a subsidiary of WLG, owns directly 150,000
Ordinary Shares.
The following table sets forth certain information as of June 15, 2000 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:
<TABLE>
Class of Shares Owner Amount Percent of Class
--------------- ----- ---------- ----------------
<S> <C> <C> <C>
Ordinary Shares SIIL 13,787,383 42.0%
Ordinary Shares Baron Capital Group, Inc. 5,878,000 17.5%
Ordinary Shares Directors and Officers as
a Group (excluding shares - less than 1%
deemed owned by WLG)
</TABLE>
<PAGE>
ITEM 5. NATURE OF TRADING MARKET
As of June 15, 2000, the Company had approximately 837 holders of record of
approximately 32,682,350 Ordinary Shares, excluding one million shares held as
treasury stock. As of June 15, 2000, there were an estimated 825 US holders of
record holding approximately 46% 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.
High Low
2000: 1st quarter $22.50 $15.88
2nd quarter (through June 15, 2000) 21.00 17.00
1999: 1st quarter 43.88 32.88
2nd quarter 47.19 33.00
3rd quarter 44.63 20.19
4th quarter 24.13 17.31
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
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.
<PAGE>
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
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 42% 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
<PAGE>
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 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).
<PAGE>
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, 1999.
The historical financial information as of December 31, 1999 and 1998, and for
each of the three years ended December 31, 1999, 1998 and 1997 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.
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
(a)(c) (b)(c) (c)(d) (e)
---------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross revenues $ 789,207 $ 591,670 $ 600,670 $ 252,218 $ 223,214
Net revenues 738,967 550,878 558,912 240,116 213,940
Income from operations 114,432 52,206 84,624 34,258 22,990
Net income 69,822 57,746 83,008 45,722 18,359
Diluted earnings per share (f) 2.05 1.70 2.44 1.58 0.87
BALANCE SHEET DATA:
Total assets $1,671,471 $1,625,733 $1,374,740 $1,122,619 $ 370,427
Long-term debt, net of current maturities 578,033 565,752 412,209 262,618 116,153
Redeemable common stock - - - - 63,543
Shareholders' equity 899,831 850,621 790,283 702,989 135,611
(a) The results of operations for the year ended 1999 include pre-opening costs of $5.4 million related to a
renovation completed at Resorts Atlantic City in July 1999.
(b) 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.
(c) The Company acquired SINA on December 16, 1996. Accordingly, the results of operations for the years
ended December 31, 1999, 1998 and 1997 include results of operations related to the SINA acquired
assets including Resorts 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.
(d) 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.
</TABLE>
<PAGE>
(e) 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.
(f) Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share".
<PAGE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated Results
1999 vs. 1998 The Company recorded net income of $69.8 million compared to $57.7
million in 1998. Diluted earnings per share increased to $2.05 in 1999 as
compared to $1.70 in 1998. In July 1999, the Company completed a renovation of
Resorts Atlantic City. Net income in 1999 included the write-off of incremental
and non-recurring pre-opening expenses of $5.4 million related to the
renovation. In 1998, net income included the write-off of incremental and
non-recurring pre-opening expenses of $26.0 million related primarily to the
opening at Atlantis in December 1998 of The Royal Tower, a 1,200 room deluxe
hotel, a new 100,000 square-foot casino and entertainment center, expanded
marine habitats and other entertainment attractions. On a proforma basis,
excluding these non-recurring items, the Company earned net income of $75.2
million, or $2.21 per share on a diluted basis, and $83.7 million, or $2.46 per
share in 1999 and 1998, respectively. Net revenues were $739.0 million in 1999
as compared to $550.1 million in 1998, excluding income received from Showboat
pursuant to a lease that was terminated in February 1998 (the "Showboat Lease").
Operating expenses excluding the write-off of pre-opening expenses were $619.1
million in 1999 versus $472.7 million in 1998. This increase was largely due to
the opening of the Royal Tower.
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. As noted above, net income in 1998 included the
write-off of incremental and non-recurring pre-opening expenses of $26.0 million
related primarily to the 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 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.
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
1999 vs. 1998 The Company's Paradise Island operations generated income from
operations of $93.6 million in 1999, as compared to $42.1 million in 1998. The
Company's largest property on Paradise Island, Atlantis, achieved an average
occupancy of 81%, compared to 87% in 1998, while the average daily rate
<PAGE>
increased by 13% to $211. The number of room nights available at Atlantis nearly
doubled over 1998 as a result of the opening of The Royal Towers in December
1998. The casino generated gaming win of $130.5 million in 1999 as compared to
$84.6 million in 1998. In 1999, table game win of $82.5 million, an increase of
$32.5 million, was a result of increased table game drop (the dollar amount of
chips purchased) of $177.7 million (or 52%), as well as increased hold
percentage (ratio of table game win to dollar amount of chips purchased) from
14.9% to 16.1%. Slot win, of $48.1 million in 1999 reflected an increase from
$34.6 million achieved in 1998 as a result of an increase in handle (dollar
amounts wagered) of $147.2 million (or 41.6%), partially offset by a reduction
in hold percentage from 9.8% to 9.7%.
The increase in income from operations reflects a substantial contribution in
1999 from Atlantis' new 1,200-room Royal Towers Complex, 100,000 square foot
casino and associated recreational and entertainment facilities. In the fourth
quarter of 1999, operations at Atlantis were negatively impacted by the effects
of Hurricane Floyd in September 1999. The Company recorded revenues of $14.2
million as business interruption insurance recovery. During the fourth quarter
of 1999, the average occupancy at Atlantis was 74% with an average room rate of
$204.
Other factors effecting Paradise Island income from operations were increases in
depreciation expense and management services fees paid to an affiliate.
Depreciation expense increased by $23.6 million largely due to the opening of
Royal Towers and related facilities in December 1998. In 1999, management fees
paid to affiliates increased by approximately $4.3 million as a result of
changes in the management services agreement.
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. 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 of $25.2 million (or 8%) which was partially offset by a decrease in
the hold percentage from 15.5% to 14.9%. Slot win decreased due to a reduction
in handle of $11.2 million (or 3%) and a reduction in slot hold 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 were 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.
<PAGE>
During the year, the property was negatively impacted by the construction of the
Royal Towers 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.
Atlantic City
1999 vs. 1998 The Company operates in Atlantic City, New Jersey through its
wholly-owned hotel and casino, Resorts Atlantic City. In 1999, the property
generated net revenues of $243.1 million as compared to $260.7 million in 1998.
Net revenues in 1999 included gaming win of $221.0 million, a decrease of $13.7
million (or 5.8%) from gaming win of $234.7 million in 1998. Slot revenues
decreased by $15.7 million (or 9.2%) mainly due to a decrease in handle of
$138.9 million (or 7.6%). Commencing in February 1999, the Company had taken out
of service and/or removed from the floor as many as 800 slot units at a time
during the renovation of Resorts Atlantic City described below. As a result,
there was an average of 2,033 slot machines in service during the year 1999
compared to 2,253 in 1998.
The lower slot revenues were partially offset by an increase in table game
revenues of $2.2 million (or 3.6%) over 1998. This was primarily due to an
increase in table game drop of $39.2 million (or 9.4%) which was partially
offset by a reduction in hold percentage to 14.1% in 1999 from 14.9% in 1998.
The property also experienced slight decreases in rooms and food and beverage
revenues in 1999 as a result of the renovation. Throughout the year, in order to
complete the renovation of its existing hotel rooms, Resorts Atlantic City took
out of service an average of 45 rooms of its existing inventory of 658. Upon
completion of the renovation, the number of available rooms decreased to 644
compared to 662 in 1998. The decrease in other casino/hotel revenues was
primarily due to lower complimentary entertainment revenues. With the
availability of "Club 1133", an entertainment lounge which offers free admission
to patrons, there were fewer headliner shows in the main theater. Operating
earnings decreased by $20.2 million. While gaming revenues were down $13.7
million for the year 1999, gaming expense increased by $5.5 million. This was
primarily due to increased promotional costs. The effect of fewer slot machines
on the floor and lower hold percentage on table games had an unfavorable impact
on casino revenues. Therefore, the property was not able to fully realize the
effects of the increased promotional costs. Partially offsetting these
unfavorable variances was a reduction in casino win tax which is based on a
percentage of casino win.
On June 30, 1999, management completed the renovation of Resorts Atlantic City.
The construction included extensive renovations to the casino, hotel lobby,
guestrooms and suites, room corridors, restaurants, the hotel porte cochere and
public areas. In addition, three new restaurants were created, replacing two
older restaurants and a VIP player lounge was constructed. As of December 31,
1999, RIH had spent $47.3 million on the renovation.
1998 vs. 1997 In 1998, Resorts Atlantic City 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. The improvement in hold
<PAGE>
percentage was due 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. 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.
Connecticut
Until January 1, 2000, TCA earned 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 started at 40% and declined to 30% based
on predetermined profitability thresholds. Prior to distributing its profits
equally to its partners, TCA contributed $1.2 million per annum to the casino=s
capital reserve account, funded its own operating costs and then made certain
priority payments to its partners or their affiliates.
In 1998, the Mohegan Tribe appointed TCA to develop its approximately $800
million expansion of the Mohegan Sun Casino. The expansion includes an
additional 120,000 square foot casino, a 1,200-room hotel, an arena and
additional retail space. It is anticipated that the new casino will open in the
fourth quarter of 2001 with the hotel opening in the second quarter of 2002. In
addition, TCA and the Mohegan Tribe agreed that effective January 1, 2000, TCA
would 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, including
the Management Agreement, beginning January 1, 2000, TCA receives annual
payments of five percent of the gross revenues of the Mohegan Sun Resort Complex
for a 15-year period.
1999 vs. 1998 During 1999, the Mohegan Sun Casino generated net revenues of
$684.3 million as compared to $605.6 million in 1998. Net revenues included
gaming win of $653.4 million and $576.7 million in 1999 and 1998, respectively.
Slot win increased by $63.1 million to $485.2 million in 1999 from $422.1
million in1998. This was due to an increase in handle of $913.4 million to
$6.201 billion, partially offset by a slight decrease in hold percentage. The
gross win per slot machine per day increased from $395 in 1998 to $447 in 1999.
Table game win increased by $7.8 million to $151.1 million in 1999 from $143.3
million in 1998. An increase in table game drop of $89.5 million (or 11.2%) was
partially offset by a decreased hold percentage, from 17.9% in 1998 to 17% in
1999. Operating earnings before bingo (which is not managed by TCA) increased by
$9.6 million (or 4.8%) to $209.0 million in 1999 from $199.4 million in 1998.
The overall Connecticut gaming market continued to demonstrate good growth
during 1999 with slot revenues increasing by 9.9% over 1998.
<PAGE>
TCA earned management fees of $59.6 million in 1999 as compared to $53.7 million
in 1998. The Company earned fees from TCA of $32.6 million and $34.6 million in
1999 and 1998, respectively. The Company also earned development fees of $6.7
million in 1999.
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 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 and management fees increased by $77.7 million to $199.4 million.
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.
Indian Ocean
Through June 16, 2000, Sun International owned a 22.8% interest in Sun Indian
Ocean. Effective June 16, 2000, Sun Indian Ocean issued additional shares of
stock under a rights issue in which the Company did not participate, effectively
reducing the Company's ownership interest to 20.4%. Sun Indian Ocean 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 2008.
1999 vs. 1998 In 1999, the Indian Ocean resorts generated revenues of $84.0
million as compared to $88.8 million in 1998 and had net income of $11.9 million
in 1999 compared to $10.8 in 1998. Although revenues and net income in 1999
reflect slight decreases compared to 1998, the hotels in the Mauritius performed
extremely well over the previous year. The decreased operating results were
primarily due to reduced revenues at Le St. Geran, a high-end luxury hotel which
closed in April 1999 for renovations and did not reopen until December.
Operating results included approximately $4.6 million of costs associated with
the closing and re-opening of Le Saint Geran. Exclusive of Le Saint Geran, the
other four hotels in the Mauritius had aggregate favorable variances in revenues
and operating profits of $9.0 million and $5.2 million, respectively. These
results were partially offset by reduced operating profit in the Comoro Islands.
In 1999, the occupancy and average room rate in the Mauritius were 82.3% and
$131, as compared to 80% and $133 in 1998.
In 1999 the Company earned management fees from Sun Indian Ocean of $5.7 million
as compared to $5.9 million in 1998. The Company also earned $760,000 of
development fees in 1999 compared to $90,000 in 1998. Equity earnings were $2.6
million and $2.7 million in 1999 and 1998, respectively.
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 $10.8
million as compared to $7.4 million in 1997. As a
<PAGE>
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 Comoros
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.
Dubai
The Company entered into an agreement to manage the Royal Mirage Hotel, a
258-room beach resort hotel on Jumeira Beach in Dubai which opened in August
1998. During its four months of operation in 1999, the property earned revenues
of $8.9 million and achieved net income of $873,000 after pre-opening costs of
$1.0 million. In 1999, the Company earned management fees from the property of
$538,000.
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.
Other Factors Affecting Earnings
1999 vs. 1998 In 1999, pre-opening expenses were $5.4 million compared to $26.0
million in 1998. All of the pre-opening expenses in 1999 related to the opening
of the renovation completed at Resorts Atlantic City in July. In 1998,
pre-opening expenses related to the opening of the Royal Towers amounted to
$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, in 1998, $631,000 of pre-opening expenses
were incurred related to the establishment of a new tour operation 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 $16.9 million in 1999 as compared to $19.5
million in 1998. The decrease was due primarily to lower payroll and related
costs as no bonuses were earned in 1999 under the executive incentive bonus
plan. Bonuses under this plan are based on the Company meeting certain earnings
per share thresholds.
Other segments in 1999 include net revenues of $2.9 million received from Kersaf
as a contribution against certain overhead costs. This contribution was fixed at
$2.4 million in 1994 and increases at a rate of 3% per annum and has been paid
annually. The Company is currently in discussions with Kersaf regarding the
duration of Kersaf's obligation to make this contribution. Other segments
contributed $2.3 million to consolidated operating income as compared to
$621,000 in 1998. In 1999, $1 million of notes that were
<PAGE>
previously included in long-term debt were canceled and written off. Also in
1999, the Company received $600,000 as a final installment on the 1996 sale of a
management contract as a result of certain conditions being met. Costs related
to the Company's Year 2000 compliance were lower by $500,000 in 1999 compared to
1998. Other segments in 1998 included $754,000 rental from the Showboat Lease
which was terminated in February 1998.
Interest expense of $50.7 million in 1999 was higher than the previous year by
$46.2 million. In 1999, the amount of capitalized interest was $4.9 million
compared to $35.3 million in 1998. Also in 1999, interest costs on the Company's
revolving credit facility were $18.3 million higher than 1998 due to higher
average borrowing levels.
1998 vs. 1997 In 1998, pre-opening expenses related to the opening of the Royal
Towers totaled $25.3 million. In addition, $631,000 of pre-opening expenses were
incurred related to the establishment of a new tour operator subsidiary in
France.
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 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.
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.
Liquidity, Capital Resources and Capital Spending
At December 31, 1999, the Company's current liabilities exceeded its current
assets by $30.4 million. Current liabilities included $17.0 million in capital
creditors related to development projects on Paradise Island. At December 31,
1999, unrestricted cash and cash equivalents were $39.2 million. During the
year, the Company generated $110 million in operating cash flow.
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 million of debt securities (the
"Shelf Registration"). Pursuant to the Shelf Registration, in December 1997, the
Company issued $100 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.
<PAGE>
On June 26, 2000, a self-tender offer, pursuant to which the Company is offering
to purchase up to 5,000,000 Ordinary Shares at a $24 per share cash price, was
made by an Offer to Purchase and related materials, copies of which were 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.
In order to effect the self-tender, the Company amended its existing 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. As of December 31, 1999, borrowings
under the Revolving Credit Facility amount to $278 million. Effective August 12,
2001, the maximum amount of borrowings outstanding on the Revolving Credit
Facility will be $375 million.
During the fourth quarter of 1999, the redevelopment of the Paradise Island Golf
Club was started. In early 2000, the Company began work on the infrastructure to
support the Ocean Club Estates housing development, which comprised 121 luxury
homesites surrounding the golf course. The cost of the golf course redevelopment
and the infrastructure will be approximately $50 million. As of mid-June 2000,
100 of the available sites have been sold and the Company expects to realize
approximately $100 million in net proceeds by June 30, 2000.
The Company is in the process of expanding the Ocean Club to add an additional
50 deluxe rooms, including ten suites, two new restaurants and significant
enhancements to the existing pool and garden areas. It is anticipated that the
Ocean Club expansion will be completed by October 2000 and will cost
approximately $50 million.
During the second half of 2000, the Company expects to implement an extensive
maintenance capital expenditure program of approximately $15 million at
Atlantis' Beach Tower. This program is scheduled to begin in August and be
completed in December and will include the renovation of all of the Beach
Tower's 425 rooms and improvements to certain public spaces. The disruption
caused by this program is expected to reduce revenues for the second half of the
year by approximately two to three million dollars.
In June 2000, the Company began a renovation of the casino at Resorts Atlantic
City which includes construction of a new bus depot and waiting area. The
relocation of the bus waiting area will provide better access to certain slot
machines which is currently hindered when the existing waiting area is full.
Additionally, the casino floor will be expanded to include an additional 148
slot machines, 4 to 5 table games and a simulcast machine. The total cost of
this project is expected to be approximately $5 million.
Management believes that available cash on hand at December 31, 1999, combined
with funds generated from operations, funds available under the Revolving Credit
Facility, and proceeds received from the sale of Ocean Club Estates homesites
will be sufficient to finance its planned operating and development activities
for at least the next twelve months.
<PAGE>
OTHER MATTERS
Year 2000 Compliance
In order to address the impact of the date change in the year 2000 ("Y2K") on
its computer programs, resort facilities and third party suppliers, the Company
established a dedicated Year 2000 Program Office and contracted with independent
consultants to coordinate the compliance efforts and ensure that the project
status was monitored and reported throughout the organization. As a result of
these efforts, the Company did not experience any significant negative impact
from Y2K.
New Accounting Pronouncements
In the first quarter of 1999, the Company adopted Statement of Position 98-5
which states that all start up costs, including pre-opening expenses will be
charged to expense as incurred. Adoption of this Statement of Position did not
have a material impact on the consolidated financial statements.
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 137 amends FASB Statement of Financial
Accounting Standards 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") by deferring the effective date of SFAS 133 to fiscal
years beginning after June 15, 2000. SFAS 133, as further amended by SFAS 138 in
June 2000, 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. The Company will adopt SFAS 133 beginning
January 1, 2001, and does not anticipated that it will have a material impact on
its consolidated financial statements.
<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, 1999
(In Thousands Fair Value
of Dollars) Expected Maturity Date December
Asset (liability) 2000 2001 2002 2003 2004 Thereafter Total 31, 1999
--------------------- ---------------------------------------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable rate debt $- $- $278,000 $- $- $- $278,000 $278,000
Average interest rates
Interest rate swaps - 50,000 75,000 - - - 125,000 (644)
Average pay rate 6.78% 6.96%
Average receive rate 5.16% 5.31%
</TABLE>
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The current directors of the Company are:
Country of Director
Name Citizenship Since
---- ----------- --------
Solomon Kerzner South Africa 1993
Derek Hawton 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 2000 and will
hold office until the date of the annual general meeting to be held in 2001. At
the annual general meeting to be held in 2001 and at each subsequent annual
general meeting, directors will be appointed by resolution of the holders of
Ordinary Shares to hold office until the date of the next annual general
meeting.
The Board of Directors of the Company has appointed an Audit Committee of the
Board consisting of Messrs. Marks and Siegel. Currently, the Audit Committee is
required to consist of at least two independent directors with an increase to
three by June 2001 to comply with requirements of the New York Stock Exchange.
Members of the Audit Committee comprise individuals who have no relationship to
the Company that may interfere with the exercise of their independence from
management and the Company. To ensure complete independence, Arthur Andersen LLP
has full and free access to meet with the Audit Committee, without management
representatives present, to discuss the results of the audit, the adequacy of
internal controls, and the quality of financial reporting. The primary function
of the Audit Committee is to assist the Company's Board of Directors in
fulfilling its oversight responsibilities by reviewing the financial information
which will be provided to the stockholders and others, the systems of internal
controls which the Company's management and Board of Directors have established,
and the audit process. The Audit Committee meets four times per year.
The Company also has a Remuneration Committee consisting of Messrs. S. Kerzner,
Buckley and Hawton. The Remuneration Committee is mandated to review and adopt
the Company's executive compensation plans and policies, including the adoption
of stock option plans and the granting of options to senior executives
thereunder. The Company's Stock Option Committee, consisting of Messrs. S.
Kerzner, H. Kerzner and Adamo, is authorized to grant stock options under the
Company's stock options plans in amounts not to exceed (i) 100,000 Ordinary
Shares in any one quarter or (ii) 15,000 per grant for any one individual.
<PAGE>
The current executive officers of the Company are:
Executive Officer
Name Age Since
----- --- -----------------
Solomon Kerzner
Chairman and Chief Executive Officer 64 1993
Howard B. Kerzner
President 36 1995
Charles D. Adamo
Executive Vice President-Corporate Development &
General Counsel 39 1995
John R. Allison
Executive Vice President-Chief Financial Officer 54 1994
James Boocher
Executive Vice President-Project Development 44 1996
Kevin DeSanctis
Chief Operating Officer-North American Operations 47 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
<PAGE>
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.
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-Ca listed company associated with Caledonia-Cas 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.
<PAGE>
Kevin DeSanctis, Chief Operating Officer - North American 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 manages funds in excess of $17 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.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate compensation for directors and officers of the Company for the
year ended December 31, 1999 was $5,574,000. None of the directors or officers
participate in the Company's pension plan.
The Company has adopted an executive level bonus plan (the ABonus 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. In 1998, executive officers of the Company earned an
aggregate of $3.1 million in cash bonuses, which were paid by the Company by the
first quarter of 1999, and approximately 75,000 shares of restricted stock (the
"Restricted Stock"). In June 2000, the Bonus Plan was eliminated and the Company
canceled approximately 42,000 shares of the Restricted Stock and paid to the
holders thereof approxiately $1.6 million. In 1999, no bonuses were earned under
the Bonus Plan.
<PAGE>
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 15, 2000. The 1997 Plan provides for options to be granted to purchase
up to 2,500,000 Ordinary Shares, of which options to acquire 2,500,000 Ordinary
Shares at exercise prices ranging from $19.25 to $44.63 have been granted as of
June 15, 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, 1999, options to
acquire 3,918,000 Ordinary Shares were outstanding, of which 1,014,000 were
exercisable as of that date.
In connection with the self-tender offer for up to 5,000,000 Ordinary Shares at
$24 per share launched by the Company on June 26, 2000, unvested options to
acquire approximately 700,000 Ordinary Shares under the 1995 Plan and the 1997
Plan with exercise prices below $24 per share were vested.
The Company is currently evaluating its compensation policies and plans, and
intends to modify existing plans and/or adopt new plans, including adopting a
new stock option plan and granting stock options pursuant thereto, as the
Company deems necessary and appropriate to retain and motivate management.
As of June 27, 2000, the officers and directors of the Company, as a group, hold
options to acquire approximately 2,300,000 Ordinary Shares, of which
approximately 1,500,000 are currently exercisable.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Not applicable.
<PAGE>
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.
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
<PAGE>
(2) List of Exhibits
Sequentially
Exhibit No. Description Numbered Page
3.1 Termination Agreement among Sheraton Incorporated by reference
Desert Inn Corporation, Starwood, to Exhibit 2 to Sun
Sheraton Gaming Corporation, Sun International's Form 6-K
International and Sun International Current Report dated
Nevada, Inc. ("Sun Nevada") dated as March 17, 2000, in
of February 29, 2000, terminating File No. 0-22794
the Asset and Land Purchase Agreement
among the parties, dated as of May
17, 1999.
3.2 Third Amended and Restated Revolving Incorporated by reference
Credit Agreement, dated as of November to Exhibit 99(b)(1)
1, 1999, among Sun International, Sun to Sun International's
International Bahamas Limited ("SIB"), Tender Offer Statement
RIH and Sun Nevada as the Borrowers dated June 26, 2000, in
and Guarantors, and The Bank of Nova File No. 005-48645
Scotia as the Administrative Agent
and Various Financial Institutions as
the Lenders.
3.3 First Amendment to the Third Amended Incorporated by reference
and Restated Credit Agreement, dated to Exhibit 99(b)(2)
as of June 13, 2000, among Sun to Sun International's
International, SIB, RIH and Sun Nevada Tender Offer Statement
as the Borrowers and Guarantors, and dated June 26, 2000, in
The Bank of Nova Scotia as the File No. 005-48645
Administrative Agent and Various
Financial Institutions as the Lenders.
3.4 Sun International Hotel Limited 86
Audit Committee Charter
<PAGE>
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).
<PAGE>
SUN INTERNATIONAL HOTELS LIMITED
Consolidated Financial Statements as of December 31, 1999
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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)
<PAGE>
<TABLE>
SUN INTERNATIONAL HOTELS LIMITED
CONSOLIDATED BALANCE SHEETS
(In thousands of US dollars)
<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
=========== ===========
The accompanying notes are an integral part of these balance sheets.
</TABLE>
<PAGE>
<TABLE>
SUN INTERNATIONAL HOTELS LIMITED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of US dollars, except per share data)
<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
========= ========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
SUN INTERNATIONAL HOTELS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
<CAPTION>
Retained Earnings
-----------------------
Accumulated
Ordinary Shares Other Comprehensive
----------------- Capital in Retained Comprehensive Treasury Total Income for
Share Amount Excess of Par Earnings Income Stock Equity the Period
-------- ------ ------------- -------- ------------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 32,707 $32 $666,262 $ 37,849 $ (1,154) $ - $702,989
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
=======
Translation reserves - - - - (1,958) - (1,958) $(1,958)
Repurchase of 1 million Ordinary Share - - - - - (20,977) (20,977) -
Exercise of share options 112 - 2,696 - - - 2,696 -
Shares canceled (7) - (373) - - - (373) -
Net income - - - 69,822 - - 69,822 69,822
------- --- -------- -------- -------- -------- -------- -------
Balance at December 31, 1999 33,682 $34 $677,918 $248,425 $ (5,569) $(20,977) $899,831 $67,864
======= === ======== ======== ======== ======== ======== =======
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
SUN INTERNATIONAL HOTELS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of US dollars)
<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
======== ======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
<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 management agreement, which
covered development, management, marketing and
<PAGE>
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.
<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>
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.
<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.
<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
AAccounting 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.
<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.
<PAGE>
Note 4-Trade Receivables
<TABLE>
Components of trade receivables were as follows:
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
<TABLE>
Components of property and equipment were as follows:
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
========== ==========
Interest costs of $4,865,000, $35,304,000 and $6,778,000 were capitalized in
1999, 1998 and 1997, respectively.
</TABLE>
<PAGE>
Note 6-Deferred Charges and Other Assets
<TABLE>
Components of deferred charges and other assets were as follows:
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
<TABLE>
Components of accounts payable and accrued liabilities were as follows:
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>
<PAGE>
Note 8-Long Term Debt
<TABLE>
Long-term debt consisted of the following:
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
<PAGE>
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, 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
<TABLE>
The Company's authorized, issued and outstanding shares were as follows:
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>
<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>
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
===== ===== =====
Certain of the options granted during 1999 were granted outside of the Plans.
</TABLE>
<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>
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:
December 31,
----------------------
(In thousands of US dollars) 1999 1998
--------- ---------
Trading Cove Associates $ 8,301 $ 2,090
Sun Indian Ocean 5,251 4,662
Other 660 310
-------- --------
$14,212 $ 7,062
======== =======
<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>
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.
<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:
For The Year Ended December 31,
1999 1998 1997
------- ------- -------
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%
======= ======= ======
The components of the deferred tax assets and liabilities were as follows:
<TABLE>
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 liabilitie (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.
<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:
(In thousands of US dollars) December 31,
-------------------------------
1999 1998 1997
--------- -------- --------
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
<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
<PAGE>
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 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.
<PAGE>
Purchase Commitments
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:
<TABLE>
Net Revenues
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>
<PAGE>
Contribution to Consolidated Income before Provision for Income Taxes and
Extraordinary Item
<TABLE>
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>
<PAGE>
Total Assets, Depreciation and Amortization of Goodwill and Capital Additions
<TABLE>
As of December 31, 1999 Year ended December 31, 1999
---------------------- ----------------------------
Depreciation and
Amortization Capital
(In thousands of US dollars) 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>
<PAGE>
Total Assets, Depreciation and Amortization of Goodwill and Capital Additions,
Continued
<TABLE>
As of December 31, 1998 Year ended December 31, 1998
---------------------- ----------------------------
Depreciation and
Amortization Capital
(In thousands of US dollars) 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>
As of December 31, 1997 Year ended December 31, 1997
---------------------- ----------------------------
Depreciation and
Amortization Capital
(In thousands of US dollars) 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
========== ======= ========
<FN>
(a) Includes tour operations.
(b) Equity investment in France was sold in June 1997.
(c) The total assets and depreciation for 1999 and 1998 are included in Paradise
Island, The Bahamas.
</FN>
</TABLE>
<PAGE>
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>
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
As of December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
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.
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.
<PAGE>
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 was subject to various conditions,
including approval by the Special Committee. On June 16, 2000, the Company
announced that SIIL 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.
<PAGE>
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 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.
<PAGE>
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 30, 1999 By: /s/John R. Allison
-------------------
Name: John R. Allison
Title: Executive Vice President
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
3.1 Termination Agreement among Sheraton Incorporated by reference
Desert Inn Corporation, Starwood, to Exhibit 2 to
Sheraton Gaming Corporation, SIHL SIHL's Form 6-K
and Sun International Current Report dated
Nevada, Inc. ("Sun Nevada") dated as March 17, 2000, in
of February 29, 2000, terminating File No. 0-22794
the Asset and Land Purchase Agreement
among the parties, dated as of May
17, 1999.
3.2 Third Amended and Restated Revolving Incorporated by reference
Credit Agreement, dated as of November to Exhibit 99(b)(1)
1, 1999, among SIHL, Sun to SIHL's Tender
International Bahamas Limited ("SIB"), Offer Statement
RIH and Sun Nevada as the Borrowers dated June 26, 2000, in
and Guarantors, and The Bank of Nova File No. 005-48645
Scotia as the Administrative Agent
and Various Financial Institutions as
the Lenders.
3.3 First Amendment to the Third Amended Incorporated by reference
and Restated Credit Agreement, dated to Exhibit 99(b)(2)
as of June 13, 2000, among SIHL, to SIHL's Tender
SIB, RIH and Sun Nevada as the Offer Statement
Borrowers and Guarantors, and dated June 26, 2000, in
The Bank of Nova Scotia as the File No. 005-48645
Administrative Agent and Various
Financial Institutions as the Lenders.
3.4 Sun International Hotel Limited 86
Audit Committee Charter
<PAGE>
