EX-99.(4)(A) 14 ex-99_4a.txt EXIBIT 99.(4)(A) Exhibit 99.4(a) SUN INTERNATIONAL HOTELS LIMITED Consolidated Financial Statements as of December 31, 1999 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Sun International Hotels Limited: We have audited the accompanying consolidated balance sheets of Sun International Hotels Limited and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sun International Hotels Limited and subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Roseland, New Jersey January 18, 2000 (except for the matters discussed in Notes 15 and 20 as to which the date is June 23, 2000) F-2 SUN INTERNATIONAL HOTELS LIMITED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF US DOLLARS)
DECEMBER 31, --------------------------- 1999 1998 ------------ ----------- 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. F-3 SUN INTERNATIONAL HOTELS LIMITED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- 1999 1998 1997 ------- ------ ------ 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. F-4 SUN INTERNATIONAL HOTELS LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
ORDINARY SHARES ------------------------- CAPITAL IN SHARE AMOUNT EXCESS OF PAR ----- ------ ------------- Balance at December 31, 1996 32,707 $ 32 $ 666,262 Translation reserves -- -- -- Exercise of share options 254 1 4,599 Net income -- -- -- --------- --------- --------- Balance at December 31, 1997 32,961 33 670,861 Translation reserves -- -- -- Exercise of share options 393 1 4,734 Exercise of warrants 223 -- -- Net income -- -- -- --------- --------- --------- Balance at December 31, 1998 33,577 34 675,595 Translation reserves -- -- -- Repurchase of 1 million Ordinary Shares -- -- -- Exercise of share options 112 -- 2,696 Shares canceled (7) -- (373) Net income -- -- -- --------- --------- --------- Balance at December 31, 1999 33,682 $ 34 $ 677,918 ========= ========= ========= RETAINED EARNINGS ----------------------------- ACCUMULATED OTHER COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY TOTAL INCOME FOR EARNINGS INCOME STOCK EQUITY THE PERIOD -------- ------ ----- ------ ---------- > Balance at December 31, 1996 $ 37,849 $ (1,154) $ -- $ 702,989 Translation reserves -- (314) -- (314) $ (314) Exercise of share options -- -- -- 4,600 -- Net income 83,008 -- -- 83,008 83,008 --------- --------- --------- --------- --------- Balance at December 31, 1997 120,857 (1,468) -- 790,283 $ 82,694 ========= Translation reserves -- (2,143) -- (2,143) $ (2,143) Exercise of share options -- -- -- 4,735 -- Exercise of warrants -- -- -- -- -- Net income 57,746 -- -- 57,746 57,746 --------- --------- --------- --------- --------- Balance at December 31, 1998 178,603 (3,611) -- 850,621 $ 55,603 ========= Translation reserves -- (1,958) -- (1,958) $ (1,958) Repurchase of 1 million Ordinary Shares -- (20,977) (20,977) -- Exercise of share options -- -- -- 2,696 -- Shares canceled -- -- -- (373) -- Net income 69,822 -- -- 69,822 69,822 --------- --------- --------- --------- --------- Balance at December 31, 1999 $ 248,425 $ (5,569) $ (20,977) $ 899,831 $ 67,864 ========= ========= ========= ========= =========
The accompanying notes are an integral part of these statements. F-5 SUN INTERNATIONAL HOTELS LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF US DOLLARS)
FOR THE YEAR ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 ----------- ----------- ------------ 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. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1-ORGANIZATION AND BASIS OF PRESENTATION Sun International Hotels Limited ("SIHL") is an international resort and gaming company that develops, operates and manages premier resort and casino properties. The term "Company" as used herein includes SIHL and its subsidiaries. The Company currently operates or manages resort hotels and/or casinos in The Bahamas, Atlantic City, Indian Ocean and Dubai. In addition, the Company earns income based on the gross revenues of a casino in Connecticut. The Company's largest property is Atlantis, a 2,317-room resort and casino located on Paradise Island, The Bahamas. THE BAHAMAS SIHL was incorporated under the laws of the Commonwealth of The Bahamas on August 13, 1993. The Company, through certain Bahamian subsidiaries, owns and operates the Atlantis Resort and Casino Complex, which includes the Coral and Beach Towers, as well as the Royal Towers which opened in December 1998, the Ocean Club Golf & Tennis Resort, a golf course, a water plant, and other improvements on Paradise Island, as well as land available for sale or development. In December 1998, the Company completed a major expansion at the Atlantis Resort and Casino (the "Paradise Island Expansion"). The Paradise Island Expansion included a deluxe 1,200-room hotel, a new 100,000 square-foot casino entertainment complex, a new marina, as well as a dramatic expansion to the ocean-themed adventure environment of Atlantis. During the second quarter of 1999, the Company completed construction of a new convention facility. In 1999, the Company commenced construction of the new Villas at the Ocean Club, the renovation of the golf course and clubhouse, as well as the development of infrastructure at the east-end of Paradise Island in preparation for the sale of lots at Ocean Club Estates. ATLANTIC CITY Through its wholly owned subsidiary Sun International North America, Inc. ("SINA"), the Company owns and operates the Resorts Atlantic City hotel and casino in Atlantic City, New Jersey ("Resorts Atlantic City"). SINA, which has been doing business since 1958, was acquired by SIHL in a merger transaction in December 1996. Resorts Atlantic City includes two hotel towers which comprise of 644 guest rooms, a 70,000 square foot casino and an 5,000 square foot pari-mutual betting and slot machine area. CONNECTICUT The Company has a 50% interest in, and is a managing partner of, Trading Cove Associates ("TCA"), a Connecticut general partnership that developed, and until December 31, 1999, had a management agreement with the Mohegan Tribal Gaming Authority ("MTGA"), an instrumentality of the Mohegan Tribe of Indians of Connecticut (the "Tribe"), to operate, a casino resort and entertainment complex situated in the town of Uncasville, Connecticut (the "Mohegan Sun Casino"). The Mohegan Sun Casino opened on October 12, 1996. The F-7 management agreement, which covered development, management, marketing and administration services, provided that TCA was entitled to receive between 30% and 40% of the net profits, as defined, of the Mohegan Sun Casino. On February 9, 1998, the Tribe appointed TCA to develop its proposed expansion of the Mohegan Sun Casino, which is currently expected to cost approximately $800.0 million. In addition, effective January 1, 2000, TCA turned over management of the Mohegan Sun Resort Complex (which comprises the existing operations and the proposed expansion) to the Tribe. In exchange for relinquishing its rights under its previously existing agreements, beginning January 1, 2000, TCA will receive annual payments of five percent of the gross revenues of the Mohegan Sun Resort Complex for a 15-year period. In connection with the original development of the Mohegan Sun Casino, in 1996 the Company acquired $20.0 million of subordinated notes (the "Subordinated Notes") issued by MTGA. The Subordinated Notes earned interest at 15% per annum. Interest payable on the Subordinated Notes was satisfied by the issuance of additional Subordinated Notes. Interest payments through December 31, 1999 of approximately $17.0 million on the Subordinated Notes were satisfied in this manner. In 1996, the Company also acquired $50.0 million of notes (the "Additional Subordinated Notes") from MTGA related to a construction completion guarantee, which bore interest at prime plus 1%. Interest payable on the Additional Subordinated Notes was satisfied by the further issuance of Additional Subordinated Notes. Interest payments through December 31, 1999 of approximately $15.5 million on the Additional Subordinated Notes were satisfied in this manner. In each of October 1999, 1998 and 1997, the Company sold $2.8 million Additional Subordinated Notes, which included accrued interest thereon, to its partner in TCA. On December 31, 1999, the aggregate balance on the Subordinated Notes and the Additional Subordinated Notes of $94.1 million, including accrued interest, was repaid in full. NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of SIHL and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Investments in associated companies, which are less than 50% and more than 20% owned, are accounted for under the equity method of accounting. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-8 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:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------ (In thousands of US dollars) 1999 1998 1997 ------- ------- ------- 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 ======= ======= =======
PRE-OPENING EXPENSES In 1998, the Company capitalized pre-opening costs, substantially all of which were associated with the Paradise Island Expansion, as they were incurred. All such costs were charged to operations in the fourth quarter of 1998 in conjunction with the opening. Effective 1999, the Company adopted Statement of Position 98-5 which states that all such costs will be charged to expense as incurred. In 1999, pre-opening expenses related to the opening of the newly renovated casino at Resorts Atlantic City. FOREIGN CURRENCY Transactions denominated in foreign currencies are recorded in local currency at actual exchange rates at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet dates are reported at the rates of exchange prevailing at those dates. Any gains or losses arising on monetary assets and liabilities from a change in exchange rates subsequent to the date of the transaction have been included in corporate expenses in the accompanying consolidated financial statements. These amounts were not significant for the years ended December 31, 1999, 1998 and 1997. F-9 The financial statements of the Company's equity method investees and certain subsidiaries are translated from their functional currencies into US dollars using current and historical exchange rates. Translation adjustments resulting from this process are reported separately and accumulated as a component of other comprehensive income. Upon sale or liquidation of the Company's investments, the translation adjustment is reported as part of the gain or loss on sale or liquidation. DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes interest rate protection agreements with two counterparties to manage the impact of interest rate changes on the Company's variable rate debt obligation. The Company does not use derivative financial instruments for trading purposes. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount. Income or expense on derivative financial instruments used to manage interest rate exposure is recorded on an accrual basis, as an adjustment to the yield of the underlying indebtedness over the periods covered by the contracts. If an interest rate swap is terminated early, any resulting gain or loss is deferred and amortized as an adjustment of the interest cost of the underlying indebtedness over the remaining periods originally covered by the terminated swap. If all or part of an underlying position is terminated, the related pro-rata portion of any unrecognized gain or loss on the swap is recognized in income at that time as part of the gain or loss on the termination. Amounts receivable or payable under the agreements are included in receivables or accrued liabilities in the accompanying consolidated balance sheets and were not material at December 31, 1999 and 1998. CASH EQUIVALENTS The Company considers all of its short-term money market securities purchased with original maturities of three months or less to be cash equivalents. INVENTORIES Inventories of provisions and supplies are carried at the lower of cost (first-in, first-out) or market value. Provisions have been made to reduce excess or obsolete inventories to their estimated net realizable value. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are depreciated over the estimated useful lives reported below using the straight-line method. Land improvements and utilities 14-40 years Hotels and other buildings 15-40 years Furniture, machinery and equipment 2-15 years Interest costs incurred during the construction period are capitalized. F-10 DEFERRED CHARGES AND OTHER ASSETS Deferred charges related to the Mohegan Sun Casino are generally amortized over the term of the original management agreement. Debt issuance costs are amortized over the terms of the related indebtedness. GOODWILL Goodwill is amortized on a straight line basis over 40 years. Amortization expense included in the accompanying consolidated statements of income related to goodwill was $2.6 million, $2.7 million and $2.4 million for the years ended December 31, 1999, 1998 and 1997, respectively. Goodwill related to the investment in associated companies is included therein in the accompanying consolidated balance sheets. Equity in earnings of associated companies for each of the years ended December 31, 1999, 1998 and 1997 is net of $264,000 of amortization expense related to such goodwill. STOCK OPTION COMPENSATION The Company has elected to apply Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" in accounting for compensation under its stock option plans in lieu of the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). Certain proforma disclosures related to SFAS 123 are included in Note 10. LONG LIVED ASSETS The Company reviews its long lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company does not believe that any such changes have occurred. INCOME TAXES The Company is subject to income taxes in certain jurisdictions. Accordingly, the accompanying consolidated statements of income include provisions and benefits for income taxes based on prevailing tax laws of those jurisdictions. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". Under this standard, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities at enacted tax rates. A valuation allowance is recognized based on an estimate of the likelihood that some portion or all of the deferred tax asset will not be realized. OTHER COMPREHENSIVE INCOME Other comprehensive income items are not reported net of tax as they relate to translation reserves on investments owned by foreign entities that are not subject to taxation. F-11 PER SHARE DATA The Company calculates earnings per share in accordance with Statement of Financial Accounting Standards No. 128 "Earnings per Share". The following reconciliation of the shares used in the per share computations is presented:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- (In thousands) 1999 1998 1997 ------- -------- -------- 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 ====== ====== ======
The net income amount used as the numerator in calculating basic and diluted earnings per share is the net income in the accompanying consolidated statements of income. RECLASSIFICATIONS Certain balances in the accompanying consolidated financial statements for 1998 and 1997 have been reclassified to conform to the current year presentation. NOTE 3-CASH AND CASH EQUIVALENTS Cash equivalents at December 31, 1999 and 1998 included reverse repurchase agreements (federal government securities purchased under agreements to resell those securities) under which the Company had not taken delivery of the underlying securities and investments in a money market fund that invests exclusively in US Treasury obligations. At December 31, 1999, the Company held reverse repurchase agreements of $.5 million, all of which matured January 3, 2000. F-12 NOTE 4-TRADE RECEIVABLES Components of trade receivables were as follows:
DECEMBER 31, ----------------------- (In thousands of US dollars) 1999 1998 ---------- --------- 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 ======== ========
NOTE 5-PROPERTY AND EQUIPMENT Components of property and equipment were as follows:
DECEMBER 31, ---------------------------- (In thousands of US dollars) 1999 1998 ------------ ----------- 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. F-13 NOTE 6-DEFERRED CHARGES AND OTHER ASSETS Components of deferred charges and other assets were as follows:
DECEMBER 31, ------------------- (In thousands of US dollars) 1999 1998 -------- -------- 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 ======== ========
NOTE 7-ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Components of accounts payable and accrued liabilities were as follows:
DECEMBER 31, ------------------- (In thousands of US dollars) 1999 1998 --------- -------- 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 ======== ========
F-14 NOTE 8-LONG TERM DEBT Long-term debt consisted of the following:
DECEMBER 31, ------------------------- (In thousands of US dollars) 1999 1998 ------------ ---------- 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
9% SENIOR NOTES The 9% senior subordinated unsecured notes due 2007 (the "9% Senior Notes"), are unconditionally guaranteed by certain subsidiaries of SINA. Interest on the 9% Senior Notes is payable semi-annually. The indenture for the 9% Senior Notes (the "Senior Indenture") contains certain covenants, including limitations on the ability of the issuers and the guarantors to, among other things: (i) incur additional indebtedness, (ii) incur certain liens, (iii) engage in certain transactions with affiliates and (iv) pay dividends and make certain other payments. 8.625% SENIOR NOTES In December 1997, the Company filed a registration statement with the Securities and Exchange Commission pursuant to which the Company may, from time to time, issue in one or more series an aggregate of $300.0 million of its debt securities (the "Shelf Registration"). Pursuant to the Shelf Registration, in December 1997 the Company issued $100.0 million of senior subordinated unsecured notes due December 2007 (the "8.625% Senior Notes"). Interest on the 8.625% Senior Notes is payable semi-annually. The indenture for the 8.625% Senior Notes contains the same covenants and restrictions as those in the Senior Indenture. REVOLVING CREDIT FACILITY In November 1999, the Company amended an existing facility (the "Revolving Credit Facility") with a syndicate of banks (the "Lenders"), with The Bank of Nova Scotia acting as administrative agent, to allow for an increase in the amount of borrowings. Without further consent by the Lenders, the maximum amount of borrowings that may be outstanding on the Revolving Credit Facility is $475.0 million, and with further consent by the Lenders, borrowings may be allowed up to $625.0 million. Loans under the Revolving Credit Facility bear interest at (i) the higher of (a) The Bank of Nova Scotia's base rate or (b) the Federal Funds rate, in either case plus an F-15 additional 0.750% to 1.625% based on a debt to earnings ratio during the period, as defined (the "Debt Ratio") or (ii) The Bank of Nova Scotia's reserve-adjusted LIBOR rate plus 1.50% to 2.25% based on the Debt Ratio. Loans under the Revolving Credit Facility may be prepaid and reborrowed at any time and are due in full on August 12, 2002. Commitment fees are calculated at per annum rates ranging from 0.375% to 0.500%, based on the Debt Ratio, applied to the undrawn amount of the Revolving Credit Facility and are due, along with accrued interest, quarterly. The Revolving Credit Facility contains restrictive covenants that include: (a) restrictions on the payment of dividends, (b) minimum levels of earnings before interest expense, income taxes, depreciation and amortization ("EBITDA") and (c) a minimum relationship between EBITDA and interest expense and debt. OVERDRAFT LOAN FACILITY Pursuant to a letter of commitment dated September 30, 1994, as amended, between the Company and The Bank of Nova Scotia, the Company has a revolving overdraft loan facility (the "Overdraft Facility") in the amount of Bahamian $5.0 million which was equal to US $5.0 million as of December 31, 1999 and 1998. The Overdraft Facility bears interest at The Bank of Nova Scotia's base rate for Bahamian dollar loans plus 1.5% with repayment subject to annual review. The Overdraft Facility is secured by substantially all of the Company's Bahamian assets and ranks pari passu with the Revolving Credit Facility. At December 31, 1999 and 1998, no amounts were outstanding under the Overdraft Facility. PRINCIPAL PAYMENTS Minimum principal payments of long-term debt outstanding as of December 31, 1999 for each of the next five years and thereafter are as follows: 2000-$1,100,000; 2001-$227,000; 2002-$278,203,000; 2003-$107,000; 2004-$100,000; thereafter-$300,134,000. NOTE 9-SHAREHOLDERS' EQUITY The Company's authorized, issued and outstanding shares were as follows:
DECEMBER 31, ---------------------- (In thousands, except per share data) 1999 1998 --------- --------- 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 -- --
F-16 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:
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 ------ --------- ------ --------- ------ --------- 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. F-17 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:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- 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
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 ======= ======
F-18 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:
FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------- (In thousands of US dollars) 1999 1998 1997 ---------- ---------- ---------- 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 ======= ======= =======
In 1997, the Company also recorded $1,593,000 and $450,000 in current federal and state income tax benefits resulting from an extraordinary loss. F-19 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:
DECEMBER 31, ------------------------------- (In thousands of US dollars) 1999 1998 -------- -------- Deferred tax liabilities: Basis differences on land held for investment, development or resale $ (6,100) $ (6,200) Basis differences on property and equipment (44,400) (44,300) Other (2,402) (2,100) --------- --------- Total deferred tax liabilities (52,902) (52,600) Deferred tax assets: Net operating loss carryforwards 196,700 187,300 Book reserves not yet deductible for tax return purposes 14,000 15,800 Tax credit carryforwards 2,700 2,800 Other 5,700 6,400 --------- --------- Total deferred tax assets 219,100 212,300 Valuation allowance for deferred tax assets (208,421) (201,953) --------- --------- Deferred tax assets, net of valuation allowance 10,679 10,347 --------- --------- Net deferred tax liabilities $ (42,223) $ (42,253) ========= =========
A valuation allowance has been recorded against the portion of those deferred tax assets that the Company believes will more likely than not remain unrealized. Such deferred tax assets primarily relate to the net operating loss carryforwards related to SINA at December 16, 1996, the effective date of its merger transaction with SIHL. If such deferred tax assets were to be realized, the corresponding reduction to the valuation allowance would reduce the carrying value of goodwill. F-20 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
F-21 NOTE 15-COMMITMENTS AND CONTINGENCIES CASINO LICENSE The operations of casinos in both The Bahamas and Atlantic City are subject to regulatory controls. A casino license must be obtained in each jurisdiction by the operator and the license must be periodically renewed and is subject to revocation at any time. In the event that the Company is not able to maintain its licenses, management believes that the Company would still realize the carrying value of its related assets. CASINO REINVESTMENT DEVELOPMENT AUTHORITY ("CRDA") OBLIGATIONS The New Jersey Casino Control Act, as amended, requires the Company to purchase bonds issued by the CRDA, or to make other investments authorized by the CRDA, in an amount equal to 1.25% of its gross gaming revenues, as defined. The CRDA bonds have interest rates ranging from 3.6% to 7.0% and have repayment terms of between 20 and 50 years. At December 31, 1999, the Company had $8.2 million face value of bonds issued by the CRDA and had $18.2 million on deposit with the CRDA. These bonds and deposits, net of an estimated discount to reflect the below-market interest rate payable on the bonds, are included in deferred charges and other assets in the accompanying consolidated balance sheets. The fair value of the CRDA bonds approximates their carrying value. In February 1999, the Company and various Atlantic City casinos entered into agreements with the CRDA to invest in a project the CRDA and the New Jersey Sports and Exposition Authority are planning, to renovate the existing Atlantic City Boardwalk Convention Center into a 10,000 to 14,000 seat special events center (the "Project"). The Project will be funded in phases through direct investments from various Atlantic City casinos, including the Company. Of the total budgeted cost, the Company has agreed to invest $8.7 million in cash which will be paid from funds the Company has or will have deposited with the CRDA to meet its investment obligations as described above. As of December 31, 1999, $1.8 million of the total amount deposited with the CRDA by the Company had been allocated to the Project. As the CRDA allocates funds deposited by the Company to the Project, the Company will receive an investment credit reducing its obligation to purchase CRDA bonds in an equal amount. NEW HEADS OF AGREEMENT In 1997, the Company amended an agreement with the Bahamian Government in 1995 that provided for certain investment incentives to encourage the Company to undertake an expansion program at Atlantis. As noted above, this agreement provides for certain fixed gaming taxes as well as a 10% gaming tax to be paid on gaming win over $20 million. The agreement also provides for a 50% credit against all variable gaming tax paid for a period of 11 years. This tax structure became effective January 1, 1998. In order to secure the tax incentives, the Company was obligated to begin construction of at least 562 rooms on Paradise Island in place of the Pirate's Cove Beach Resort (a 562-room hotel on Paradise Island) which the Company demolished during the fourth quarter of 1998. The Company had plans for an additional 700-room Phase III hotel project at Atlantis which would have satisfied this condition. However, considering its available F-22 development resources and alternative uses of capital, the Company has postponed this project. As a result, in June 2000, the Company was notified by the Bahamian Government that these additional incentives have been suspended. Effective July 1, 2000, the casino win tax will revert back to the previous structure, as follows. There is no change in win tax on gaming win up to $20 million, however, the Company will incur 12.5% win tax on gaming win between $20 million and $120 million, and 10% win tax on gaming win in excess of $120 million. The $5 million annual reduction of fees will still apply, however, in lieu of the 50% credit on win tax to be paid on gaming win over $20 million, the Company will receive a 45% credit on win tax to be paid on gaming win between $20 million and $120 million. Under its agreement with the Bahamian Government, the additional tax incentives will be reinstated in the event the Company begins construction of these additional rooms. Although the Company currently has no plans to proceed with the Phase III development, it will continue to consider the results at its Paradise Island operations as well as general business trends and alternative uses of its capital in determining the timing of proceeding with Phase III. The agreement also provides for a new five-year joint marketing agreement, pursuant to which the Bahamian Government shall match the Company's contribution, up to $4.0 million annually, toward the direct costs related to staging certain marketing events, public relations activities and the production and placement of advertisements in all media. CONTROL OF SIHL Sun International Investments Limited ("SIIL"), majority shareholder of SIHL, has agreed to control a majority of the SIHL Board of Directors through June 30, 2004. LITIGATION, CLAIMS AND ASSESSMENTS The Company is a defendant in certain litigation and is aware of certain claims and assessments incurred in the normal course of business. In the opinion of management, based on the advice of counsel, the aggregate liability, if any, arising from such matters will not have a material adverse effect on the accompanying consolidated financial statements. Beginning on or about January 20, 2000, eight class action lawsuits were filed in courts of the states of New York, New Jersey and Florida, by certain shareholders of SIHL. These actions, purportedly brought as class actions on behalf of all public shareholders, name SIIL, SIHL and directors of SIHL (including Chairman and Chief Executive Officer Solomon Kerzner) as defendants, alleging generally that they breached their fiduciary duties to shareholders in connection with SIIL's proposal to acquire all of the ordinary shares of SIHL not owned by SIIL or its shareholders for $24 per share. Answers were filed to each of the complaints on or about March 27, 2000. No further action is likely to occur pending efforts to consolidate the lawsuits. See "Proposed Acquisition of SIHL Ordinary Shares" described in Note 20. PURCHASE COMMITMENTS F-23 At December 31, 1999, the Company had unfunded contracts in place for capital expenditures in The Bahamas of $27.1 million. NOTE 16-SEGMENT INFORMATION Statement of Financial Accounting Standards No.131 "Disclosures about Segments of an Enterprise and Related Information" requires the disclosure of information regarding the operations of the Company based upon how management makes operating decisions and assesses performance of such segments. The Company operates in four geographical segments in one industry, the development, operation and management of premier resort and casino properties. The Company evaluates the performance of its segments based primarily on operating profit before corporate expenses, interest expense, interest income, income taxes and non-recurring items. The following is an analysis of net revenues, contribution to consolidated income before provision for income taxes and extraordinary item and total assets, depreciation and amortization of goodwill and capital additions by geographical location: NET REVENUES
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------- (In thousands of US dollars) 1999 1998 1997 ------------ ------------ ------------ 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 ======== ======== ========
F-24 CONTRIBUTION TO CONSOLIDATED INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------- (In thousands of US dollars) 1999 1998 1997 -------- -------- -------- 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 ======== ======== ========
F-25 TOTAL ASSETS, DEPRECIATION AND AMORTIZATION OF GOODWILL AND CAPITAL ADDITIONS
(In thousands of US dollars) AS OF DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1999 ----------------------- ---------------------------------- DEPRECIATION AND AMORTIZATION CAPITAL TOTAL ASSETS OF GOODWILL ADDITIONS ------------ -------------------- --------- 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 ========== ======== ========
F-26 TOTAL ASSETS, DEPRECIATION AND AMORTIZATION OF GOODWILL AND CAPITAL ADDITIONS, CONTINUED
(In thousands of US dollars) AS OF DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1998 ----------------------- ---------------------------------- DEPRECIATION AND AMORTIZATION CAPITAL TOTAL ASSETS OF GOODWILL ADDITIONS ------------ -------------------- --------- 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 ========== ======== ========
(In thousands of US dollars) AS OF DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1997 ----------------------- ---------------------------------- DEPRECIATION AND AMORTIZATION CAPITAL TOTAL ASSETS OF GOODWILL ADDITIONS ------------ -------------------- --------- 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 ========== ======= ========
(a) Includes tour operations. (b) Equity investment in France was sold in June 1997. F-27 (c) The total assets and depreciation for 1999 and 1998 are included in Paradise Island, The Bahamas. NOTE 17-EQUITY IN EARNINGS OF ASSOCIATED COMPANIES The accompanying consolidated financial statements include equity in earnings of associated companies as a result of the Company's 22.8% interest in a company that owns and operates beach resort hotels in the Indian Ocean ("Sun Indian Ocean") and 25% equity holding in a company that owns and operates casinos in France ("Sun France"). On June 17, 1997, the Company sold its investment in Sun France for cash proceeds of $18.8 million. The resulting gain on sale of investment was $13.4 million. The following summarized financial information of Sun Indian Ocean has been prepared under United States generally accepted accounting principles at and for the years ended December 31, 1999, 1998 and 1997; converted to thousands of US dollars at the appropriate exchange rate.
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 ---------- ---------- ---------- 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
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. F-28 The credit exposure that results from interest rate swaps is represented by the fair value of contracts with a positive fair value as of the reporting date. See Note 19, Fair Value of Financial Instruments, for the fair value of derivatives. The Company had no credit exposure on its interest rate swaps at December 31, 1999. INTEREST RATE RISK MANAGEMENT The Company uses interest rate swap agreements to manage the impact of interest rate changes on the Company's Revolving Credit Facility. The amounts exchanged by the counter parties to interest rate swap agreements normally are based upon the notional amounts and other terms, generally related to interest rates, of the derivatives. While notional amounts of interest rate swaps form part of the basis for the amounts exchanged by the counterparties, the notional amounts are not themselves exchanged, and therefore do not represent a measure of the Company's exposure as an end user of derivative financial instruments. At December 31, 1999 and 1998, notional principal amounts related to interest rate swaps (variable to fixed rate) were $125.0 million and $90.0 million, respectively. The swap portfolio maturities at December 31, 1999 are as follows: December 31, 2001-$50.0 million and January 2, 2002-$75.0 million. As of December 31, 1999, the weighted average fixed rate payment on the variable to fixed rate swaps was 6.89%. Variable rates received are indexed to LIBOR rate. NOTE 19-FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The assumptions used have a significant effect on the estimated amounts reported. The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: (a) Cash and cash equivalents, receivables, other current assets, accounts payable, accrued liabilities and variable rate debt: The amounts reported in the accompanying consolidated balance sheets approximate fair value; (b) Fixed-rate debt: Fixed rate debt is valued based upon published market quotations, as applicable. The carrying amount of remaining fixed-rate debt approximates fair value; (c) Interest rate swaps: The fair value of interest rate swaps was determined from the representations of financial institutions. The carrying value and negative fair value of the Company's interest rate swaps was $0 and $644,000 at December 31, 1999, respectively, and $0 and $5.2 million at December 31, 1998, respectively. NOTE 20-SUBSEQUENT EVENTS PROPOSED ACQUISITION OF SIHL ORDINARY SHARES On January 19, 2000, the Company announced that it had received a proposal from SIIL to acquire in a merger transaction all Ordinary Shares of the Company not already owned by SIIL or its shareholders for $24 per share in cash. To consider the proposal, the Company formed a committee of independent members of the Board of Directors (the "Special Committee") which retained its own financial and legal advisors. The proposed transaction F-29 was subject to various conditions, including approval by the Special Committee. On June 16, 2000, the Company announced that it was not able to negotiate a mutually satisfactory transaction with the Special Committee and that SIIL advised the Company that its proposal had been withdrawn. In order to allow shareholders of the Company to sell at least a portion of their Ordinary Shares at the price formerly proposed by SIIL, the Board of Directors of the Company approved a self-tender offer for up to 5,000,000 Ordinary Shares at a $24 per share cash price. It is anticipated that the self-tender offer will commence on June 26, 2000 and will be made by an Offer to Purchase and related materials, copies of which will be filed with the Securities and Exchange Commission and mailed to the Company's shareholders. The self-tender offer is subject to the terms and conditions set forth in the Offer to Purchase, including the condition that the Ordinary Shares continue to be listed for trading on the New York Stock Exchange and that the Company remain subject to periodic reporting requirements of the Securities Exchange Act of 1934. The Company has been advised that the approximately 53% of the outstanding Ordinary Shares held by SIIL and its shareholders will not be sold in the self-tender. In order to effect the self-tender, the Company amended its existing Revolving Bank Credit Agreement (the "Revolving Credit Facility") to allow the Company to repurchase up to $175 million worth of Ordinary Shares. As part of this amendment, the Revolving Credit Facility was reduced from $625 million to $500 million. TERMINATION OF DESERT INN ACQUISITION AGREEMENT In SIHL's Form 20-F Annual Report for the year ended December 31, 1998, it was reported that SIHL had entered into an Asset and Land Purchase Agreement with Starwood Hotels and Resorts Worldwide Inc. ("Starwood") pursuant to which SIHL had agreed to acquire the Desert Inn Hotel and Casino in Las Vegas (the "Desert Inn") for $275 million. On March 2, 2000, SIHL and Starwood announced that they have agreed to terminate their agreement and that if Starwood sold the Desert Inn for less that the purchase price originally agreed by SIHL, then SIHL will pay to Starwood 50% of such deficit, up to a maximum of $15 million. In the event that Starwood sold the property for an amount in excess of the purchase price originally agreed to by SIHL, then SIHL will share 50% of such excess. Should SIHL be required to pay $15 million of any potential deficit, it would be paid from the $15 million previously paid to Starwood. The deposit is included in deferred charges and other assets in the accompanying consolidated balance sheets. On April 28, 2000, it was announced by Starwood that it had agreed to sell the Desert Inn for approximately $270 million and the parties intended to close the transaction by June 30, 2000. F-30