-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EzexlAvNTb3ScKYxMW/MUCyzdOgzxQb83yVasl/wSXLKyvMbsOrMRZpBie92s4bq INiB9I+qevVFDW2NJyOK/A== 0001005477-99-003031.txt : 19990701 0001005477-99-003031.hdr.sgml : 19990701 ACCESSION NUMBER: 0001005477-99-003031 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990630 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUN INTERNATIONAL HOTELS LTD CENTRAL INDEX KEY: 0000914444 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 980136554 STATE OF INCORPORATION: C5 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 001-04226 FILM NUMBER: 99657268 BUSINESS ADDRESS: STREET 1: 1415 EAST SUNRISE BLVD STREET 2: 10TH FLOOR CITY: FORT LAUDERDALE STATE: FL ZIP: 33304 BUSINESS PHONE: 9547132500 MAIL ADDRESS: STREET 1: 1414 EAST SUNRISE BLVD STREET 2: CORAL TOWERS CITY: FORT LAUDERDALE STATE: FL ZIP: 33304 20-F 1 FORM 20-F As filed with the Securities and Exchange Commission on June 30, 1999 ================================================================================ 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, 1998 Commission file number 0-22794 -------------------------- 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 ------------------- ----------------------- Ordinary Shares, $.001 par value per share New York Stock Exchange Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. Ordinary Shares: 33,576,720 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark which financial statement item the Registrant has elected to follow. Item 17 |_| Item 18 |X| ================================================================================ SUN INTERNATIONAL HOTELS LIMITED TABLE OF CONTENTS - -------------------------------------------------------------------------------- PART I Page ---- Items 1 & 2 Description of Business and Properties 3 Item 3 Legal Proceedings 22 Item 4 Control of Registrant 22 Item 5 Nature of Trading Market 23 Item 6 Exchange Controls and Other Limitations Affecting Security Holders 24 Item 7 Taxation 24 Item 8 Selected Financial Data 26 Item 9 Management's Discussion and Analysis of Financial Condition and Results of Operations 28 Item 9A Quantitative and Qualitative Disclosures About Market Risk 36 Item 10 Directors and Officers of Registrant 36 Item 11 Compensation of Directors and Officers 39 Item 12 Options to Purchase Securities from Registrant or Subsidiaries 39 Item 13 Interest of Management in Certain Transactions 40 PART II* PART III Item 15 Defaults Upon Senior Securities 40 Item 16 Changes in Securities and Changes in Security for Registered Securities 40 PART IV Item 17 Financial Statements 40 Item 18 Financial Statements 40 Item 19 Financial Statement and Exhibits 40 * Omitted pursuant to General Instruction G(b) of Form 20-F 2 SUN INTERNATIONAL HOTELS LIMITED PART I - -------------------------------------------------------------------------------- ITEMS 1. & 2. DESCRIPTION OF BUSINESS AND PROPERTIES General Sun International Hotels Limited ("Sun International" or the "Company") is an international resort and gaming company incorporated in The Bahamas which develops and manages premier resort and casino properties. The Company, through its subsidiaries, currently operates resort hotels and casinos in The Bahamas, Atlantic City, Connecticut and the Indian Ocean. The Company's largest property is the Atlantis Resort and Casino, a 2,327-room resort and casino located on Paradise Island, The Bahamas. In December 1998, the Company completed a major expansion at the Atlantis Resort and Casino. This expansion included a deluxe 1,200-room hotel, a new 100,000 square-foot casino entertainment complex, a new marina as well as a dramatic expansion to the ocean-themed adventure environment of Atlantis. A new convention facility was completed during the second quarter of 1999. In December 1996, the Company acquired Griffin Gaming & Entertainment, Inc. ("GGE"), which was subsequently re-named Sun International North America, Inc. ("SINA"). SINA is a holding company which, through Resorts International Hotel, Inc., ("RIH") its indirect wholly owned subsidiary, is engaged in the ownership and operation of the Resorts Casino Hotel in Atlantic City (the "Resorts Casino Hotel"), which is situated on approximately seven acres of land and has approximately 660 guest rooms, a 68,000 square foot casino and an 8,000 square foot simulcast pari-mutuel betting and slot machine area, located on the Boardwalk. At June 30, 1999, The Company had substantially completed the renovation (the "Renovation") of the Resorts Casino Hotel which included the renovation of the casino, public spaces and the existing guestrooms. SINA also provides management services to certain affiliated companies and owns a tour operator which wholesales tour packages and provides reservation services. SINA owns approximately 15 acres of land immediately adjacent to the Resorts Casino Hotel, and approximately 11 acres of other developable real estate in the Atlantic City area, most of which is vacant land. The Company is currently reviewing the development potential of the Resorts Casino Hotel and the adjacent real estate. In 1996, the Mohegan Sun Casino in Uncasville, Connecticut (the "Mohegan Sun Casino") was developed for the Mohegan Tribe of Indians of Connecticut (the "Mohegan Tribe") by Trading Cove Associates ("TCA"), a partnership in which the Company, through its indirect, wholly owned subsidiary, Sun Cove Limited ("Sun Cove"), owns a 50% interest. TCA also manages the facility. The Mohegan Sun Casino has a unique Native American theme and includes approximately 150,000 square feet of gaming space and features approximately 3,000 slot machines, 152 table games, 42 poker tables and parking for 7,200 cars. In total, the Company currently operates nine hotels containing approximately 4,500 rooms and three casinos with an aggregate of over 280,000 square feet of gaming space containing more than 6,300 slot machines and 300 table games. Sun International was established in 1993 in order to acquire the Paradise Island Resort and Casino and related operations from Resorts International, Inc. In May 1995, the Company acquired from Sun International Investments Limited ("SIIL") equity interests in Sun Resorts Limited ("Sun Indian Ocean") and Societe de Participation et d'Investissement dans les Casinos ("Sun France") and SIIL's project development and management businesses. SIIL controls approximately 48% of the Company's $.001 par value capital stock (the "Ordinary Shares"). The Company sold its interest in Sun France in early 1997. The Company is SIIL's sole investment vehicle for the development of entertainment, resort and gaming operations outside southern Africa. SIIL is a private holding company in which each of Caledonia 3 SUN INTERNATIONAL HOTELS LIMITED Investments Plc ("Caledonia"), Kersaf Investments Limited ("Kersaf") and a trust for the benefit of the family of Mr. Solomon Kerzner, Chairman and Chief Executive Officer of the Company, controls approximately a one-third interest. The Properties The Bahamas Sun International, through its wholly owned Bahamian subsidiary, Sun International Bahamas Limited ("Sun Bahamas"), owns approximately 600 acres or almost 70% of Paradise Island. Approximately 220 acres are available for future development. Sun International also owns 561 acres of undeveloped land on Andros Island. Paradise Island has extensive existing infrastructure and is easily accessible from the densely populated eastern United States. There are regularly scheduled airline flights from South Florida, New York City and various other major US cities to either Paradise Island or neighboring Nassau. Flights from South Florida and New York City having flight times of approximately 50 minutes and two and one-half hours, respectively. Following the acquisition of its Paradise Island operations in May 1994, the Company embarked upon a development program, pursuant to which the Company reconstructed and refurbished its existing Paradise Island facilities and created the ocean-themed environment of "Atlantis". Included in the development program was the refurbishment of all existing 1,147 guest rooms, the construction of new specialty food and beverage facilities, an upgrading of the then 30,000-square foot Atlantis Casino and the creation of a 14-acre saltwater marine life habitat. The marine life habitat features the world's largest open air aquarium, showcasing over 100 species of marine life, waterfalls, lagoons, adventure walks and a clear tunnel submerged in a predator lagoon through which visitors can walk and be surrounded by sharks, sea turtles, stingrays and other marine life. The Company successfully completed a major expansion to the Atlantis complex in December 1998. The expansion included the 1,200-room Royal Tower, bringing the total number of guest rooms at Atlantis to 2,327. The expansion also included a 100,000 square foot casino and entertainment center and expansive marine habitats, adventure rides, swimming pools and other entertainment attractions. The new Atlantis Casino, the largest in the Caribbean, with approximately 1,000 slot machines and 78 table games, is the center of the new entertainment complex, which spans a seven-acre lagoon and connects the Royal Tower to the Coral Tower. The final project cost for the expansion totaled approximately $500 million, excluding $40 million of capitalized interest. During the fourth quarter of 1998, the Company achieved the substantial completion of several additional development projects including the Marina at Atlantis, a 30,000 square foot retail link connecting the Coral Tower to the new entertainment center, the new porte cochere for the Coral Tower, an 1,800 car parking garage, a new laundry facility and an arts and crafts market for 100 Bahamian tenants. During the second quarter of 1999, the Company completed the conversion of the previously existing casino space into a convention center. In addition the Company began construction of a sports center which will include a signature 18-hole putting course and a tennis center. These projects, excluding the convention center which is part of the expansion, will cost approximately $100 million. As well as Atlantis, the Company's Paradise Island operations include the Ocean Club, a luxury resort hotel with 59 guest rooms. Sun Bahamas also owns and operates shops, restaurants, bars and lounges, tennis courts, the Paradise Island Golf Course and other resort facilities on Paradise Island, as well as roads and other land improvements on Paradise Island, the Paradise Island Airport and a water and sewage system 4 SUN INTERNATIONAL HOTELS LIMITED which serves, at stated charges, substantially all facilities on Paradise Island, including non-affiliated customers. In connection with the Company's expansion at Paradise Island, the Bahamian Government constructed a new bridge connecting New Providence/Nassau and Paradise Island, and the Paradise Island Tourist and Development Authority, a non-profit entity formed to promote Paradise Island, implemented a $20 million road and infrastructure improvement program. In an attempt to further diversify the product mix available at Atlantis, the Company has formed a joint venture with Vistana, Inc. to develop a timeshare project. The Company and Vistana each have a 50% interest in the joint venture. The Company's current plans are to develop 375 timeshare units with Vistana with a first phase consisting of 198 units. As part of its joint venture agreement, the Company will contribute land and Vistana will contribute cash based on the number of timeshare units to be developed. In October 1998, the Company demolished the 562-room Pirate's Cove Hotel. Since September 1997 the Pirate's Cove Hotel had been used to house expatriate professional and construction staff engaged in construction projects on Paradise Island. The purpose of the demolition of the Pirate's Cove Hotel was to facilitate further expansion of the Atlantis Resort in the medium term. In addition, the 100-room beach front resort hotel, Paradise Paradise, was closed to the public in September 1998 and has been used since then to house expatriate professionals and construction staff. Sun Bahamas owns approximately 220 acres of undeveloped land on Paradise Island with extensive beach and golf course frontage. The Company continues to explore additional development opportunities on Paradise Island. Management's growth plan includes the potential development of additional resort properties on Paradise Island, each appealing to a distinct target market. In addition, management believes that similar expansion opportunities exist in the luxury end of the market with a further build-out of the Ocean Club. Other potential development projects may include residential villas, timeshare developments, marinas and golf course communities. Sun International Resorts, Inc., a Florida corporation and an indirect wholly-owned subsidiary of the Company, together with its subsidiaries based in Florida, provides general and administrative support services, marketing services, travel reservations and wholesale tour services for the Company's Paradise Island operations. Atlantic City The Resorts Casino Hotel in Atlantic City, New Jersey commenced operations in May 1978 and was the first casino/hotel opened in Atlantic City. This was accomplished by the conversion of the former Haddon Hall Hotel, a classic hotel structure originally built in the early 1900's, into a casino/hotel. It is situated on approximately seven acres of land with approximately 310 feet of Boardwalk frontage overlooking the Atlantic Ocean. The Resorts Casino Hotel consists of two hotel towers, the 15-story East Tower and the nine story North Tower, a 700 car parking garage and approximately three acres of surface lot parking. In addition to the casino facilities described below, the casino/hotel complex includes approximately 660 guest rooms, the 1,400-seat Superstar Theater, seven restaurants, a VIP slot and table player lounge, an indoor swimming pool and health club and retail stores. The complex also has approximately 50,000 square feet of convention facilities, including eight large meeting rooms and a 16,000 square foot ballroom. The Resorts Casino Hotel has a 68,000 square foot casino and a simulcast pari-mutuel betting and slot machine area of approximately 8,000 square feet. These gaming areas contain approximately 42 blackjack tables, eight roulette tables, seven craps tables, and 19 other speciality games that include Caribbean Stud, 5 SUN INTERNATIONAL HOTELS LIMITED Baccarat, Let It Ride, Three-card Poker, Pai Gow Poker, Big Six, and Pai Gow. There are also 2,190 slot machines, five betting windows and four customer-operated terminals for simulcast pari-mutuel betting. The Company has substantially completed the Renovation which included the renovation of public spaces as well as the existing guest rooms. A grand opening celebration is scheduled in early July with extensive advertising planned to promote the renovated facility. In addition to the Resorts Casino Hotel, which is located on approximately seven acres, SINA owns approximately 15 acres of additional developable land immediately adjacent to Resorts Casino Hotel. Approximately 4.4 acres of this land is currently utilized by Resorts Casino Hotel for parking. SINA, through a wholly owned subsidiary, also owns the approximate 5.5 acre site of the former Steeplechase Pier directly across the Boardwalk from Resorts Casino Hotel. A portion of this site is available for future development. In total, the Company's Resorts Casino Hotel and adjacent development parcels approximate 27 acres. The Company is currently reviewing the development potential of the Resorts Casino Hotel and the adjacent real estate. SINA also owns a 2.5 acre site in Atlantic City which is utilized as a warehouse for Resorts Casino Hotel and various other non-operating sites approximating 15 acres. SINA also owns in fee simple an approximately 552 acre parcel located in Atlantic City on Blackhorse Pike, of which approximately 545 acres are considered to be woodlands and wetlands, which may not be developed. Until January 29, 1998, SINA owned approximately 10 acres of land (the "Showboat Land") upon which the Showboat Casino Hotel (the "Showboat") is situated. This land was leased to the owner of the Showboat pursuant to a lease (the "Showboat Lease"). On January 29, 1998, the Company sold the Showboat Land and the Showboat Lease for $110 million. The majority of the proceeds was used to redeem the Company's non-recourse debt. Connecticut Sun International, through its indirect, wholly owned subsidiary, Sun Cove, has a 50% interest in, and is a managing partner of, TCA, a Connecticut general partnership, which developed and manages the Mohegan Sun Casino, a casino and entertainment complex in Uncasville, Connecticut, for the Mohegan Tribe. TCA manages the Mohegan Sun Casino pursuant to a seven-year management agreement that commenced in October 1996 (the "TCA Management Agreement") with the Mohegan Tribal Gaming Authority (the "Mohegan Tribal Gaming Authority" or the "MTGA"). Pursuant to the TCA Management Agreement, TCA earns between 30% - 40% of the earnings of the Mohegan Sun Casino, after depreciation and interest. Construction of the Mohegan Sun Casino began in early October 1995, and the facility commenced operations in October 1996. The Mohegan Sun Casino has a Native American theme, which is conveyed through architectural features and the use of natural design elements such as timber, stone and water. Guests enter the Mohegan Sun Casino through one of four major entrances, each of which is distinguished by a separate seasonal theme - winter, spring, summer and fall - emphasizing the importance of the seasonal changes to tribal life. The Mohegan Sun Casino includes approximately 150,000 square feet of gaming space and features approximately 3,000 slot machines, 152 table games, 42 poker tables and parking for 7,200 cars. The site for the Mohegan Sun Casino is located approximately one mile from the interchange of Interstate 395 and Connecticut Route 2A (which has been widened to a four-lane expressway). As part of its integrated 6 SUN INTERNATIONAL HOTELS LIMITED development plan, the MTGA constructed a four-lane access road (with its own exit) from Route 2A, which gives patrons of the Mohegan Sun Casino direct access to Interstate 395, which, in turn, gives direct access to Interstate 95, the main highway connecting Boston, Providence and New York. This road system allows customers to drive directly into the property from the interstate highway system without encountering any traffic lights. The Company believes that the demographics of the area surrounding the Mohegan Sun Casino are favorable, with 2.4 million adults residing within 50 miles, 10.2 million adults residing within 100 miles and 21.8 million adults residing within 150 miles of the Mohegan Sun Casino in 1995, according to market research reports. The Mohegan Sun Casino is located approximately 10 miles west of Foxwoods Resort and Casino ("Foxwoods"), which the Company believes to be one of the most profitable casinos in the world. The Company currently owns $20 million of subordinated notes (the "Subordinated Notes") issued by MTGA. The Subordinated Notes earn interest at 15% per annum. Interest payable on the Subordinated Notes can be satisfied by the issuance of additional Subordinated Notes. Interest payments due to the Company through May 31, 1999 of approximately $14 million on the Subordinated Notes have been satisfied in this manner. The Company also owns $45 million of additional subordinated notes (the "Additional Subordinated Notes" and together with the Subordinated Notes, the "MTGA Sub Notes") from MTGA which accrue interest at prime rate plus 1% and can be satisfied by the further issuance of Additional Subordinated Notes. Interest payments due to the Company through May 31, 1999 of approximately $12 million on the Additional Subordinated Notes have been satisfied in this manner. Pursuant to an agreement with the Mohegan Tribe, effective January 1, 2000, the MTGA Sub Notes shall be repaid. An amount of U.S. Treasury securities sufficient to satisfy this obligation has been deposited with a defeasance agent. On February 9, 1998, the Company announced that the Mohegan Tribe appointed TCA to develop its proposed expansion of the Mohegan Sun Casino, which is currently expected to cost approximately $800 million. In addition, TCA and the Mohegan Tribe agreed that effective January 1, 2000, TCA will turn over management of the Mohegan Sun Resort Complex (which comprises the existing operations and the proposed expansion) to the Mohegan Tribe. In exchange for relinquishing its rights under its existing agreements, beginning January 1, 2000, TCA will receive annual payments of five percent of the gross revenues of the Mohegan Sun Resort Complex for a 15-year period. Until January 1, 2000, there will no change in TCA's existing agreements with the Mohegan Tribe. Sun Cove, an indirect, wholly owned subsidiary of the Company, is one of two managing partners of TCA. All decisions of the managing partners require the concurrence of Sun Cove and the other managing partner, Waterford Gaming, L.L.C. In the event of deadlock there are mutual buy-out provisions. Indian Ocean Sun International owns a 22.8% interest in Sun Indian Ocean, a Mauritian company which is publicly traded on the Mauritius Stock Exchange. Sun Indian Ocean is regarded as one of the premier resort operators in the Indian Ocean and owns five beach resort hotels in Mauritius: the 175-room Le Saint Geran Hotel, Golf Club & Casino ("Le Saint Geran"), the 200-room Le Touessrok Hotel & Ile Aux Cerfs ("Le Touessrok"), the 248-room La Pirogue Hotel & Casino ("La Pirogue"), the 333-room Le CoCo Beach 7 SUN INTERNATIONAL HOTELS LIMITED ("Le CoCo Beach") and the 238-room Sugar Beach Resort Hotel ("Sugar Beach"). Sun Indian Ocean also owns the 187-room Le Galawa Beach Resort ("Le Galawa") in the Comoros. Mauritius and the Comoros are tropical islands located in the Indian Ocean approximately 1,200 miles and 200 miles, respectively, from the east coast of mainland Africa. Le Saint Geran was closed in April 1999 for room renovations. It is anticipated that the hotel will reopen in December 1999. The resorts in Mauritius and the Comoros are marketed primarily to luxury and mid-market tourists from Europe and southern Africa. Le Saint Geran and Le Touessrok offer deluxe accommodations and are acknowledged by the European travel trade to be among the finest beach resorts in the world. The Conde Nast Awards for Tourism recently rated Le Touessrok as the number one resort in the world and Le Saint Geran was also included in the top ten. La Pirogue, Le CoCo Beach, Sugar Beach and Le Galawa cater to mid-market and budget travelers. Sun Indian Ocean owns five of the 16 major hotels in Mauritius representing approximately 36% of the room inventory among properties with more than 80 rooms. Mauritius' tourist industry mainly comprises visitors from Great Britain, Germany, France, Italy and South Africa. Scheduled air service to and from Mauritius is provided through scheduled flights on numerous airlines including Air France, British Airways, Cathay Pacific, Singapore Airlines, Air India, Air Mauritius, Condor and South African Airlines. Sun Indian Ocean is a leading resort operator at the upper end of the market, as there is only one other five-star property on Mauritius. The Company believes that the recent openings of Le CoCo Beach and Sugar Beach have increased its market share on Mauritius, further enhanced its presence in the mid-market and provided certain economies of scale. Pursuant to the management agreements with Sun Indian Ocean, the Company provides comprehensive management services under individual management agreements with each of Le Saint Geran, Le Touessrok, La Pirogue, Sugar Beach and Le CoCo Beach. The term of each of these management agreements (the "Sun Indian Ocean Management Agreements") continues through December 2003. The Company has the right to extend each Sun Indian Ocean Management Agreement for a five-year period by notice in writing delivered to Sun Indian Ocean by December 2001. Under each of the Sun Indian Ocean Management Agreements, the Company receives a management fee calculated as a percentage of revenues (2%) and adjusted EBITDA (15%). The Company receives project consulting fees charged at 2.5% of the total project costs for construction and refurbishment at each resort. The Company also has a management agreement to provide services to Le Galawa in the Comoros. The terms of this agreement are identical to the terms of the Sun Indian Ocean Management Agreements except that the Company is entitled to receive a basic fee of 3.5% of revenues rather than 2%. Dubai The Company has entered into an agreement to manage The Royal Mirage Hotel in Dubai. The 258-room hotel is currently being constructed and it is anticipated that it will open in August 1999. The agreement has a term of twenty years from the opening of the hotel. Under the terms of the management agreement, the Company will receive a management fee calculated as a percentage of revenues (1 1/2%) and gross operating profits, as defined (10%). The management fee schedule may be renegotiated after ten years. 8 SUN INTERNATIONAL HOTELS LIMITED Seasonality and Weather The Company's business has historically been seasonal, with the largest number of patrons visiting The Bahamas, Mauritius and the Comoros during late December and the first three months of the calendar year. Accordingly, revenues and operating profits for the Company have historically been higher during the first calendar quarter than in successive quarters. In addition, The Bahamas, Mauritius and the Comoros are subject to tropical weather and storms which, if severe, can interrupt the normal operations of the Company and affect tourism. Similarly, inclement weather can adversely affect the operations of the Company's Atlantic City and Connecticut operations as the principal means of transportation to these properties is by automobile or bus. Higher revenues and earnings are typically realized from the Atlantic City and Connecticut operations during the middle third of the year. Competition General The resort and casino industries are characterized by a high degree of competition among a large number of participants and are largely dependent on tourism. The Company competes with resorts both with and without gaming and with gaming facilities generally, including land-based casinos, riverboat, dockside and cruise ship on-board casinos and other forms of gaming, as well as other forms of entertainment. A number of the Company's competitors are larger and have greater financial and other resources than the Company. In addition, a number of jurisdictions have recently legalized gaming and other jurisdictions are considering the legalization of gaming. The Company cannot predict what effect a continued proliferation of gaming and the resulting increase in competition could have on the Company's ability to compete effectively in the future. The Company believes that the ability to compete effectively in the resort and gaming industries, particularly the destination resort and gaming industries, is based on several factors, including the scope, quality, location and accessibility of resort and gaming facilities and amenities, the effectiveness of marketing efforts, customer service, the relative convenience of available transportation, service and the quality and price of rooms, food and beverages, convention facilities and entertainment. The Bahamas The Company's Paradise Island operations compete with cruise ships and other hotels and resorts, particularly those on Paradise Island and New Providence Island in The Bahamas as well as those on Grand Bahama Island and the Caribbean islands. There are approximately 8,000 rooms for overnight guests on Paradise Island and New Providence Island combined, of which approximately 3,300 are located on Paradise Island, including 2,406 in hotels owned and operated by the Company. The Marriott Crystal Palace, a resort and casino with a theater and other amenities located on New Providence Island, across Nassau harbor from Paradise Island, is Atlantis' primary competitor on Paradise Island and New Providence Island. The Atlantis Casino also competes with the Princess Casino which offers hotel accommodations, restaurants, gaming and other leisure facilities on Grand Bahamas Island, approximately 40 minutes by air from Paradise Island. The Atlantis Casino also competes with gaming casino facilities located in hotels and resorts in Puerto Rico, with cruise ships which effectively provide additional rooms and with resorts and 9 SUN INTERNATIONAL HOTELS LIMITED casinos located on other Caribbean islands, in Atlantic City, in Las Vegas and elsewhere in the United States. Atlantic City Competition in the Atlantic City casino/hotel market is very strong. Casino/hotels compete on a number of different bases, including promotional allowances given to customers, entertainment, advertising, services provided to patrons, caliber of personnel, attractiveness of the hotel and casino areas and related amenities, and parking facilities. The Resorts Casino Hotel competes directly with 11 casino/hotels in Atlantic City which, in the aggregate, contain approximately 1,173,000 square feet of gaming area, including simulcast betting and poker rooms, and over 11,000 hotel rooms. In addition, several gaming companies have announced plans to enter the Atlantic City market. The Resorts Casino Hotel is located at the eastern end of the Boardwalk adjacent to the Trump Taj Mahal Casino Resort (the "Taj Mahal"), which is next to the Showboat. These three properties have a total of approximately 2,700 hotel rooms and approximately 325,000 square feet of gaming space in close proximity to each other. A 28-foot wide enclosed pedestrian bridge between the Resorts Casino Hotel and the Taj Mahal allows patrons of both hotels and guests for events being held at the Resorts Casino Hotel and the Taj Mahal to move between the facilities without exposure to the weather. A similar enclosed pedestrian bridge connects the Showboat to the Taj Mahal, allowing patrons to walk under cover among all three casino/hotels. The remaining nine Atlantic City casino/hotels are located approximately one-half mile to one and one-half miles to the west on the Boardwalk or in the Marina area of Atlantic City. In recent years, competition for the gaming patron within a radius of 150 miles of Atlantic City has become extremely intense. For instance, gaming operations run by federally recognized Indian tribes throughout New York and New England, including the Mohegan Sun Casino and Foxwoods, and other gaming operations that federally recognized Indian tribes are currently seeking or plan to seek authorization for, directly compete with Atlantic City for the day-trip patron. Other Indian tribes in the northeastern United States are seeking federal recognition in order to establish gaming operations which would further increase the competition for day-trip patrons. In addition, the State of Delaware has authorized slot machines at the state's horse racetracks which compete directly against the Atlantic City casinos. Connecticut Because the Mohegan Sun Casino is marketed primarily to day-trip customers, it competes primarily with Foxwoods and, to a lesser extent, with casinos in Atlantic City, New Jersey, certain of which have greater resources and name recognition than the Company or the Mohegan Sun Casino. Currently, Foxwoods is the only casino in operation within 150 miles of the Mohegan Sun Casino site. Foxwoods is located approximately 10 miles from the Mohegan Sun Casino site and is currently the largest gaming facility in the United States in terms of the number of slot machines, with more than 5,500 slot machines currently in operation. In addition, Foxwoods offers a number of amenities that the Mohegan Sun Casino does not currently offer, including hotels and extensive non-gaming entertainment facilities. Casino gaming in the northeastern United States may be conducted only by federally recognized Indian tribes operating under the Indian Gaming Regulatory Act of 1988 ("IGRA"). In addition to the Pequot Tribe, which operates Foxwoods, a federally recognized tribe in Rhode Island and a federally recognized tribe in Massachusetts are each seeking to establish gaming operations in their respective states. In April 1999, the St. Regis Mohawk Tribe opened a casino in upstate New York while the Oneida Tribe, which operates a previously existing gaming facility in upstate New York, is seeking to expand its operations. In 10 SUN INTERNATIONAL HOTELS LIMITED addition, a number of Indian tribes in the northeastern United States are seeking federal recognition in order to establish gaming operations. The Company cannot predict whether any of these tribes will be successful in establishing gaming operations and, if established, whether such gaming operations will have a material adverse effect on the operations of the Mohegan Sun Casino. In addition, a number of states, including Connecticut, have explored legalizing casino gaming by non-Indians in one or more locations. In November 1995, the Connecticut state legislature rejected a proposal submitted by the Pequot Tribe to develop a casino in Bridgeport, Connecticut. The Pequot proposal had been submitted in response to a request for proposals made by the State of Connecticut. Under the tribal-state compact between the Mohegan Tribe and the State of Connecticut, if Connecticut were to legalize any gaming operations other than pursuant to IGRA (i.e., by an Indian tribe on Indian land) with slot machines or other commercial casino games, the Mohegan Tribe would no longer be required to make payments to the State of Connecticut related to slot machine revenues. The Company is unable to predict whether the Connecticut state legislature will accept any other casino proposal and, if such proposal results in a casino being constructed and opened, whether such casino will have a material adverse effect on the Mohegan Sun Casino. Other Existing Operations Sun Indian Ocean's resorts on Mauritius and the Comoros, as vacation destinations, are in competition with other locations offering vacations to tourists from Europe, southern Africa and parts of Asia. In Mauritius, there is also competition from other resorts on the island. In the Comoros, however, there are no competitive resorts at the current time. Sun Indian Ocean has a leading position in the luxury end of the Mauritian hotel market where it owns two of the three luxury hotels offering a total of 375 rooms, while the competing hotel offers only 84 rooms. It faces more competition for the mid-market La Pirogue and Sugar Beach and for the budget Le CoCo Beach. In total, there are approximately 4,000 hotel rooms of international quality available in Mauritius, of which 1,500 are marketed in approximately the same price bracket as La Pirogue, Le CoCo Beach and Sugar Beach. Certain Matters Affecting the Company's Bahamian Operations Airline Arrangements The majority of patrons at the Company's resorts on Paradise Island arrive through Nassau International Airport located on New Providence Island. This large modern facility is served by several carriers offering frequently scheduled jet service from New York, Atlanta, Toronto, Miami and other cities. Ground transportation is facilitated by two bridges linking Paradise Island and New Providence Island. Additionally, Sun Bahamas, through a subsidiary, owns and operates the Paradise Island Airport, a short takeoff and landing facility, including a 3,000-foot runway, airport terminal and customs building, situated on 63 acres of land located at the southeast corner of Paradise Island. Paradise Island Airlines provides regularly scheduled air service from South Florida to Paradise Island. Union Contract Arrangements In The Bahamas, approximately 2,600 employees are represented by The Bahamas Catering and Allied Workers Union (the "Union"). Sun Bahamas participates in The Bahamas Hotel Employers Association (the "Association"), which represents resort operators in the Paradise Island-New Providence Island area. The Association's existing contract with the Union expired in 1998. In June 1998, the Union engaged in 11 SUN INTERNATIONAL HOTELS LIMITED a three day work action in connection with negotiating a new contract. A new five-year contract effective January 1, 1998 has since been agreed between the Association and the Union. Casino License Paradise Enterprises Limited, a subsidiary of Sun Bahamas ("PEL"), is currently licensed to operate the Atlantis Casino under the Bahamian Gaming Act (the "Gaming Act"). In accordance with Bahamian casino licensing requirements, PEL is obligated to have its casino license renewed annually by the Gaming Board. In addition, other than an existing contingent obligation to grant two casino licenses, the Bahamian Government has agreed that it will grant no new casino licenses with respect to gaming operations on Paradise Island or New Providence Island until 2013, provided that Sun Bahamas achieves 75% of its projected minimum employment growth of 2,000 full-time jobs in connection with its expansion and development plans by year ten of the renewal period. The moratorium on granting new casino licenses will remain in place, however, in the event such growth is not achieved because of overall poor market conditions rather than inadequate management by Sun International. Basic License Fee Currently, the Gaming Act provides for taxes on casino revenues consisting of an annual basic license fee of $200,000. Casino Win Tax In replacement of the higher gaming taxes and fees previously payable to The Hotel Corporation of The Bahamas (the "HCB") the Bahamian Government agreed, beginning January 1, 1998, until December 2018 to set annual casino license fees at $100,000 per thousand square feet of casino space, plus a minimum annual casino win tax of $4.1 million on all gaming win up to $20 million and 10% on all gaming win over $20 million. Additionally, during the 11 years beginning 1998, the Bahamian Government will reduce the annual casino license fees by $5 million and reduce by 50% the win tax to be paid on gaming win over $20 million. The following table summarizes, for the periods shown, the taxes and fees paid or accrued by Sun Bahamas under the Gaming Act and certain agreements with the Bahamian Government: Years Ended December 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Casino win $ 7,327,000 $ 7,400,000 $ 7,000,000 Basic license and operating fees 200,000 6,500,000 6,000,000 ----------- ----------- ----------- Total $ 7,527,000 $13,900,000 $13,000,000 =========== =========== =========== Heads of Agreement In 1997, the Company amended an agreement reached with the Bahamian Government in 1995 that provided for certain investment incentives to encourage the Company to undertake an expansion program at Atlantis. As noted above, this agreement provides for certain fixed gaming taxes as well as a 10% gaming tax to be paid on gaming win over $20 million. The agreement also provides for a 50% credit against all variable gaming tax paid for a period of 11 years. This tax structure became effective January 1, 1998. 12 SUN INTERNATIONAL HOTELS LIMITED In order to secure the tax incentives as described, the Company is obligated to construct at least 562 rooms on Paradise Island in place of the Pirate's Cove Beach Resort (a 562-room hotel on Paradise Island) which the Company demolished during the fourth quarter of 1998. The agreement also provides for a new five-year joint marketing agreement, pursuant to which the Bahamian Government shall match the Company's contribution, up to $4 million annually, toward the direct costs related to staging certain marketing events, public relations activities and the production and placement of advertisements in all media. Control of Sun International SIIL has agreed with the Bahamian Government not to reduce its voting interest in Sun International below 45% until June 30, 1999. Thereafter, SIIL has agreed to control a majority of the Sun International Board of Directors for a period of five additional years. Certain Matters Affecting the Company's Atlantic City Operations New Convention Center and Casino/Hotel Expansion In May 1997, the State of New Jersey opened a new convention center. The new convention center has 500,000 square feet of continuous exhibit space, and an additional 109,000 square feet of meeting rooms, making it the largest center from Atlanta to Boston. The convention center is part of a broader plan that includes expansion of the Atlantic City International Airport, a new 500-room convention hotel, which opened in November 1997 and the transformation of the main entryway into Atlantic City into a new corridor. In 1997, this new corridor, which links the new convention center and hotel with the Boardwalk, was completed. In all, six blocks were transformed into an expansive park with extensive landscaping, night-time lighting, and a large fountain and pool with an 86-foot lighthouse. Officials have commented upon the need for improved commercial air service into Atlantic City as a factor in the success of the convention center. See further discussion under "Transportation Facilities" below. It is believed that additional hotel rooms are necessary to support the convention center as well as to allow Atlantic City to become a competitive destination resort. In November 1997, the new 500- room convention hotel opened. To further spur construction of new hotel rooms and renovation of substandard hotel rooms into deluxe accommodations, a total of $175 million has been set aside by the Casino Reinvestment Development Authority (the "CRDA"), a public authority, to aid in financing such projects. To date, the CRDA has authorized financing in the amount of $105 million which has resulted in the construction of approximately 2,680 new hotel rooms and has reserved funding in the amount of $70 million to four casinos, including Resorts Casino Hotel, for the construction of up to 3,770 additional hotel rooms. RIH's share of the funding reserved by the CRDA is $27.3 million to construct up to 1,500 rooms. Also, Mirage Resorts, Inc. ("Mirage"), a Las Vegas, Nevada casino/hotel company, has been selected to be the developer of an approximate 180- acre tract in the Marina area of Atlantic City (the "H-Tract"). Mirage has announced plans to build a 2,000-room destination resort. Mirage has also entered into an agreement with Boyd Gaming Corp to build a $750 million, 1,500-room casino/hotel to be called the Borgata. Groundbreaking for the Borgata is expected in the fall of 1999 with an opening in 2002. Circus Circus Enterprises, Inc., an original partner in the development of the H-Tract, has been dropped from the project, leaving room for the possibility of another property to be developed in the area. Also included in the development of the H-Tract is the construction of a tunnel and connector road link between the Atlantic 13 SUN INTERNATIONAL HOTELS LIMITED City Expressway and the Marina area, for which infrastructure improvements were considered requisite to the expansion plans announced for the Marina area. The groundbreaking for the tunnel construction occurred in November 1998 and is expected to be completed in 2001. Mirage has indicated that its proposed resort will open shortly after the roadway is complete. MGM Grand, Inc. has also announced plans for the construction of a new casino/hotel in the South Inlet section of Atlantic City, the size and scope of which has yet to be formally announced. Although these developments are viewed as positive and favorable to the future prospects of the Atlantic City gaming industry, management of RIH, at this point, can make no representations as to whether, to what extent or to how these developments may affect RIH's operations. Union Contract Arrangements At the Resorts Casino Hotel approximately 1,400 employees of the total 3,400 workforce are covered under collective bargaining agreements with RIH. There are four separate unions representing hotel and restaurant employees, electrical workers, engineers and painters and maintenance workers. The contract relating to hotel and restaurant employees, which includes 1,100 of RIH's unionized waiters, is scheduled to expire in September 1999, while the other contracts run until December 2001. Regulation, Gaming Taxes and Fees General The Company's operations in Atlantic City are subject to regulation under the New Jersey Casino Control Act (the "NJCCA"), which authorizes the establishment of casinos in Atlantic City, provides for licensing, regulation and taxation of casinos and related persons and entities and created the New Jersey Casino Control Commission (the "NJCCC") and the Division of Gaming Enforcement to administer the NJCCA. In general, the provisions of the NJCCA concern: (i) the ability, reputation, character, financial stability and integrity of casino operators, their officers, directors and employees and others financially interested in or in control of a casino; (ii) the nature and suitability of hotel and casino facilities, operating methods and conditions; and (iii) financial and accounting practices. Gaming operations are subject to a number of restrictions relating to the rules of games, types of games permitted, credit play, size of hotel and casino operations, hours of operation, persons who may be employed and licensure of such persons, persons or entities that may do business with casinos, the maintenance of accounting and cash control procedures, security and other aspects of the business. Casino License A casino license is initially issued for a term of one year and must be renewed annually by action of the NJCCC for the first two renewal periods succeeding the initial issuance of a casino license. Thereafter the NJCCC may renew a casino license for a period of four years, although the NJCCC may reopen licensing hearings at any time. A license is not transferable and may be conditioned, revoked or suspended at any time upon proper action by the NJCCC. The NJCCA also requires an operations certificate which, in effect, has a term coextensive with that of a casino license. On February 26, 1979, the NJCCC granted a casino license to RIH for the operation of the Resorts Hotel Casino. In January 1996, RIH's license was renewed until January 31, 2000. In order for a casino license to be renewed, the licensee must show by clear and convincing evidence that it meets all of the criteria set out in the NJCCA, including the qualification of holding, intermediary and subsidiary companies of a casino licensee and of the directors, officers and certain employees of such companies. 14 SUN INTERNATIONAL HOTELS LIMITED Restrictions on Ownership of Securities The NJCCA imposes certain restrictions upon the ownership of securities issued by a corporation which holds a casino license or is a holding, intermediary or subsidiary company of a corporate licensee (collectively, "holding company"). Among other restrictions, the sale, assignment, transfer, pledge or other disposition of any security issued by a corporation which holds a casino license is conditional and shall be ineffective if disapproved by the NJCCC. If the NJCCC finds that an individual owner or holder of any securities of a corporate licensee or its holding company must be qualified and is not qualified under the NJCCA, the NJCCC has the right to propose any necessary remedial action. In the case of corporate holding companies and affiliates whose securities are publicly traded, the NJCCC may require divestiture of the security held by any disqualified holder who is required to be qualified under the NJCCA. In the event that entities or persons required to be qualified refuse or fail to qualify and fail to divest themselves of such security interest, the NJCCC has the right to take any necessary action, including the revocation or suspension of the casino license. If any security holder of the licensee or its holding company or affiliate who is required to be qualified is found disqualified, it will be unlawful for the security holder to (i) receive any dividends or interest upon any such securities, (ii) exercise, directly or through any trustee or nominee, any right conferred by such securities or (iii) receive any remuneration in any form from the corporate licensee for services rendered or otherwise. The Company's Articles of Association, as amended, provide that all securities of the Company are held subject to the condition that if the holder thereof is found to be disqualified by the NJCCC pursuant to provisions of the NJCCA, then that holder must dispose of his or her interest in the securities. Remedies Under the NJCCA In the event that it is determined that a licensee has violated, or fails to affirmatively prove that it meets all of the criteria of, the NJCCA, or if a security holder of the licensee required to be qualified is found disqualified but does not dispose of his securities in the licensee or holding company, under certain circumstances the licensee could be subject to fines or have its license suspended, conditioned or revoked. The NJCCA provides for the mandatory appointment of a conservator to operate the casino and hotel facility if a license is revoked or not renewed and permits the appointment of a conservator if a license is suspended for a period in excess of 120 days. If a conservator is appointed, the suspended or former licensee is entitled to a "fair rate of return out of net earnings, if any, during the period of the conservatorship, taking into consideration that which amounts to a fair rate of return in the casino or hotel industry." Under certain circumstances, upon the revocation of a license or failure to renew, the conservator, after approval by the NJCCC and consultation with the former licensee, may sell, assign, convey or otherwise dispose of all of the property of the casino/hotel. In such cases, the former licensee is entitled to a summary review of such proposed sale by the NJCCC and creditors of the former licensee and other parties in interest are entitled to prior written notice of sale. License Fees, Taxes and Investment Obligations The NJCCA provides for casino license renewal fees, other fees based upon the cost of maintaining control and regulatory activities and various license fees for the various classes of employees. In addition, a casino licensee is subject annually to a tax of 8% of "gross revenue" (defined under the NJCCA as casino win, less provision for uncollectible accounts up to 4% of casino win) and license fees of $500 on each slot machine. Also, the NJCCA has been amended to create an Atlantic City fund (the "AC Fund") for economic development projects other than the construction and renovation of casino/hotels. Beginning in fiscal year 1995/1996 and for the following three fiscal years, if the amount of money expended by the 15 SUN INTERNATIONAL HOTELS LIMITED NJCCC and the Division of Gaming Enforcement is less than $57,300,000, the prior year's budget for these agencies, the amount of the difference is to be contributed to the AC Fund. Thereafter, beginning with fiscal year 1999/2000 and for the following three fiscal years, an amount equal to the average paid into the AC Fund for the previous four fiscal years shall be contributed to the AC Fund. Each licensee's share of the amount to be contributed to the AC Fund is based upon its percentage of the total industry gross revenue for the relevant fiscal year. After eight years, the casino licensee's requirement to contribute to this fund ceases. The following table summarizes, for the periods shown, the fees, taxes and contributions assessed upon RIH by the NJCCC. Years Ended December 31, ------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Gaming tax $18,785,000 $19,581,000 $20,661,000 License and other fees 3,733,000 3,453,000 3,672,000 Contribution to AC Fund 496,000 392,000 570,000 ----------- ----------- ----------- Total $23,014,000 $23,426,000 $24,903,000 =========== =========== =========== The NJCCA, as originally adopted, required a licensee to make investments equal to 2% of the licensee's gross revenue (the "investment obligation") for each calendar year, commencing in 1979, in which such gross revenue exceeded its "cumulative investments" (as defined in the NJCCA). A licensee had five years from the end of each calendar year to satisfy this investment obligation or become liable for an "alternative tax" in the same amount. In 1984 the New Jersey legislature amended the NJCCA so that these provisions now apply only to investment obligations for the years 1979 through 1983. Effective for 1984 and subsequent years, the amended NJCCA requires a licensee to satisfy its investment obligation by purchasing bonds to be issued by the CRDA or by making other investments authorized by the CRDA, in an amount equal to 1.25% of a licensee's gross revenue. If the investment obligation is not satisfied, then the licensee will be subject to an investment alternative tax of 2.5% of gross revenue. Licensees are required to make quarterly deposits with the CRDA against their current year investment obligations. RIH's investment obligations for the years 1998, 1997 and 1996 amounted to $2.9 million, $3.1 million and $3.2 million, respectively, and, with the exception of minor credits received for making donations, have been satisfied by deposits made with the CRDA. At December 31, 1998, RIH held $10.9 million face amount of bonds issued by the CRDA and had $16.0 million on deposit with the CRDA. The CRDA bonds issued through 1998 have interest rates ranging from 3.6% to 7.0% and have repayment terms of between 20 and 50 years. Certain Matters Affecting the Company's Connecticut Operations Regulation The Mohegan Tribe is a federally recognized Native American Indian tribe with approximately 1,100 members, whose federal recognition became effective May 15, 1994. In May 1994, the Mohegan Tribe and the State of Connecticut entered into a gaming compact to authorize and regulate Class III gaming 16 SUN INTERNATIONAL HOTELS LIMITED operations (slot machines and table games). TCA managed the development and construction and manages the operation and marketing of the Mohegan Sun Casino. Each of the partners of TCA and certain employees of the Mohegan Sun Casino must be licensed by relevant tribal and state authorities. Each of the partners of TCA has received a gaming license from the Commissioner of Revenue Services of the State of Connecticut. In addition, gaming licenses or management agreements held or subsequently acquired by the Company or its subsidiaries pursuant to applicable law and regulations, including the IGRA and the National Indian Gaming Commission (the "NIGC") regulations, may require review, approval or licensing of any person or entity directly, or indirectly possessing or acquiring 10% or more of the Company's equity securities (a "Substantial Interest"). The NIGC is required to review and approve any such person or entity and make a finding of suitability pursuant to the IGRA and NIGC regulations. If the NIGC were to determine that a person or entity holding a Substantial Interest in a gaming management agreement was unsuitable, prior approval of the management agreement could be revoked, subsequent approvals or renewals could be blocked and certain required gaming licenses could be suspended, rescinded or denied. Expansion On February 9, 1998, the Company announced that the Mohegan Tribe appointed TCA to develop its proposed expansion of the Mohegan Sun Casino, which is currently expected to cost approximately $800 million. It is anticipated that the first stage, which would include a new casino, new retail space, an event center and increased parking will be completed by the summer of 2001. A 1500-room hotel is planned to follow. TCA Management Agreement The Mohegan Tribe and TCA have entered into the TCA Management Agreement pursuant to which the Mohegan Tribe has engaged TCA to develop, operate, manage and maintain the Mohegan Sun Casino in exchange for an annual fee which is calculated in three tiers based upon net revenues (as defined) as set forth below (in thousands): I II III ---------------------------------------------- Annual Fee Annual Fee From From Tier I Tiers I & II 40% of Plus 35% of Net Plus 30% of Net Revenues Revenues Net Revenues Up To Between Above ------------ ------------------ ------------ Year 1 $50,546 $ 50,547 - 63,183 $ 63,183 Year 2 73,115 73,116 - 91,394 91,394 Year 3 91,798 91,799 - 114,747 114,747 Year 4 95,693 95,694 - 119,616 119,616 Year 5 104,107 104,108 - 130,134 130,134 Year 6 (subject to buyout option) 114,335 114,336 - 142,919 142,919 Year 7 (subject to buyout option) 130,944 130,945 - 163,680 163,680 Management Fees The monthly management fee payments to TCA are calculated against 1/12th of targeted annual net revenue amounts set forth in the TCA Management Agreement and then adjusted to actual net revenue amounts realized annually within 60 days of the close of each fiscal year. The annual adjustment may or may not have a material effect on cash flow. As defined in the TCA Management Agreement, "Net Revenues" 17 SUN INTERNATIONAL HOTELS LIMITED of the Mohegan Sun Casino means the amount of gross revenues of the facility, less operating expenses and certain specified categories of revenue, such as income from any financing or refinancing, taxes or charges received from patrons on behalf of and remitted to a governmental entity, proceeds from the sale of capital assets, insurance proceeds and interest on the reserve fund. Net revenues include "Net Gaming Revenues", which are equal to the amount of "net win" (the difference between gaming wins and losses) less all gaming related operational expenses. In addition, TCA will be required to establish, and, together with the Mohegan Tribe, make monthly contributions to, a replacement reserve fund (the "Reserve Fund"), which may be used to pay any approved budgeted capital expenditures for the Mohegan Sun Casino. The annual TCA contribution to such fund is $1.2 million. Term The term of the TCA Management Agreement is seven years from the date of the opening of the Mohegan Sun Casino. However, TCA and the Mohegan Tribe have agreed that effective January 1, 2000, TCA will turn over management of the Mohegan Sun Resort Complex (which comprises the existing operations and the proposed expansion) to the Mohegan Tribe. In exchange for relinquishing its rights under its existing agreements, beginning January 1, 2000, TCA will receive annual payments of five percent of the gross revenues of the Mohegan Sun Resort Complex for a 15-year period. Until January 1, 2000, there will be no change in TCA's existing agreements with the Mohegan Tribe. Priority Payments Pursuant to subcontracts for management services, organization and administrative services and marketing services provided to TCA, the Company receives priority payments from TCA. Each of these priority payments are paid from TCA's management fees prior to the pro rata distribution to TCA's partners of TCA's profits. Business Board Pursuant to the TCA Management Agreement, certain decision-making authority and oversight duties are delegated to a committee comprised of an equal number of representatives of the Mohegan Tribe and of TCA (the "Business Board"). Actions by the Business Board require the unanimous approval of its members or their respective designees. The Mohegan Tribe and TCA have agreed that, in the event that the Business Board is unable to reach a mutual decision or compromise, any disputes will be submitted to summary arbitration before a single arbitrator, who will render a decision within 48 hours of submission of the dispute. Waiver of Sovereign Immunity Pursuant to the TCA Management Agreement, the Mohegan Tribe has waived sovereign immunity for the purpose of permitting, compelling or enforcing arbitration and has agreed to be sued by TCA in any court of competent jurisdiction for the purpose of compelling arbitration or enforcing any arbitration or judicial award arising out of the TCA Management Agreement, Subordinated Notes or the Additional Subordinated Notes. The parties have agreed that all disputes and claims arising out of the TCA Management Agreement or the Mohegan Tribe's gaming ordinance will be submitted to binding arbitration, which shall be the sole remedy of the parties, and that punitive damages may not be awarded to either party by any arbitrator. The Mohegan Tribe's waiver of sovereign immunity is limited to enforcement of money damages from undistributed or future net revenues of the Mohegan Sun Casino (or, under certain 18 SUN INTERNATIONAL HOTELS LIMITED conditions, net revenues of other gaming operations of the Mohegan Tribe). Funds earned and paid to the Mohegan Tribe as the Mohegan Tribe's share of net revenues prior to any judgment or award are not subject to the waiver and would not be available for levy pursuant to any judgment or award. Gaming Disputes Court The Mohegan Tribe's Constitution (the "Mohegan Constitution") provides for the governance of the Mohegan Tribe by a tribal council, in which the legislative and executive powers of the Mohegan Tribe are vested, and a constitutional review board. On July 20, 1995, the tribal council enacted a tribal ordinance creating the Gaming Disputes Court (the "Court"), which is composed of a trial and an appellate branch. The Mohegan Constitution and the tribal ordinance establishing the Court give the Court exclusive jurisdiction for the Mohegan Tribe over all disputes and controversies related to gaming between any person or entity and the Mohegan Gaming Authority, the Mohegan Tribe or TCA. The Court has been authorized by the Mohegan Constitution to consist of at least four judges, none of whom may be members of the Mohegan Tribe and each of whom must be either a retired federal judge or Connecticut Attorney Trial Referee (who is an attorney appointed by the Connecticut Supreme Court). Environmental Matters The Company is subject to federal, state and local laws and regulations that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water as well as handling and disposal practices for solid and hazardous wastes, and (ii) impose liability for the costs of cleaning up, and certain damages resulting from, past spills, disposals or other releases of hazardous substances (together, "Environmental Laws"). From time to time, the Company's operations have resulted or may result in certain noncompliance with applicable Environmental Laws. However, the Company believes that any such noncompliance would not have a material adverse effect on the Company's financial position, results of operations or cash flows. The Mohegan Sun Casino site was formerly occupied by UNC, a naval products manufacturer of, among other things, nuclear reactor fuel components. UNC's facility was officially decommissioned on June 8, 1994, when the Nuclear Regulatory Commission (the "NRC") confirmed that all licensable quantities of special nuclear material ("SNM") had been removed from the Mohegan Sun Casino site and that any residual SNM contamination was remediated in accordance with the NRC-approved decommissioning plan. From 1991 through 1993, UNC commissioned an environmental consultant to perform a series of environmental assessments on the Mohegan Sun Casino site, including extensive soil investigations and groundwater monitoring. The environmental assessments detected among other things, volatile organic chemicals, heavy metals and fuel hydrocarbons in the soil and groundwater. Extensive remediation of contaminated soils and additional investigations were then completed. Although the Mohegan Sun Casino site currently meets applicable remediation requirements, no assurance can be given that the various environmental assessments with respect to the Mohegan Sun Casino site revealed all existing environmental conditions, that any prior owners or tenants of the Mohegan Sun Casino site did not create any material environmental condition not known to the Mohegan Gaming Authority, that future laws, ordinances or regulations will not impose any material environmental liability or that a material environmental condition does not otherwise exist on the Mohegan Sun Casino site. Future remediation may be necessary if excavation and construction exposes contaminated soil which has otherwise been deemed isolated and not subject to cleanup requirements. Such remediation could adversely impact the results of operations of the Mohegan Sun Casino and therefore the results of operations and financial conditions of the Company. 19 SUN INTERNATIONAL HOTELS LIMITED In addition, the Environmental Protection Agency (the "EPA") has named a predecessor to SINA as a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") for the cleanup of contamination resulting from past disposals of hazardous waste at the Bay Drum site in Florida, to which the predecessor, among others, sent waste in the past. CERCLA requires PRPs to pay for cleanup of sites at which there has been a release or threatened release of hazardous substances. Courts have interpreted CERCLA to impose strict, joint and several liability upon all persons liable for cleanup costs. As a practical matter, however, at sites where there are multiple PRPs, the costs of cleanup typically are allocated among the parties according to a volumetric or other standard. Because the Company has only limited information at this time regarding this site and the wastes sent to it by the predecessor, the Company is unable to determine the extent of its potential liability, if any, at this site. Recent Events Nevada On May 17, 1999, the Company entered into an Asset and Land Purchase Agreement (the "DI Purchase Agreement") with Starwood Hotels and Resorts Worldwide ("Starwood") pursuant to which the Company has agreed to acquire the Desert Inn Hotel and Casino in Las Vegas for $275 million. The all cash transaction is subject to the satisfaction of various conditions contained in the DI Purchase Agreement, including receipt by the Company of a gaming license in Nevada. The Company has been advised by counsel that the licensing process in Nevada could take up to 12 to 18 months. Pursuant to the DI Purchase Agreement, the Company has agreed to acquire all of the assets of Starwood that comprise the Desert Inn, including, a 715-room hotel, casino, spa and country club situated on 25 acres, an 18 hole championship golf course and a further 32 acres of undeveloped land on the Las Vegas Strip located across from the 3,036-room Venetian Resort Hotel and Casino and the 1.2 million square foot Sands Convention Center. The Desert Inn facilities are in excellent condition, having undergone a $200 million expansion and renovation in 1997. As part of the transaction, the Company and Starwood have entered into a marketing alliance, pursuant to which the Company's properties on Paradise Island and the Desert Inn will be included in Starwood's Preferred Guest Program. The Company and Starwood also agreed to establish a joint venture with the intention of developing 350 timeshare units at the Desert Inn. On June 1, 1999, the Company paid $15 million into an escrow account as a deposit, which amount plus interest will be credited towards the $275 million purchase price at the closing of the transaction. At the closing, Starwood has agreed that the Desert Inn will be transferred with $5 million of working capital, as defined. In addition, the Company has agreed to pay to Starwood interest on the $275 million purchase price for the period beginning on the date the sale of Starwood's Caesar's operations to Park Place Entertainment is consummated until the date the DI Purchase Agreement is consummated at an annual interest rate equal to the lesser of (i) the interest rate for revolving loans under Starwood's bank credit agreement and (ii) 7.00%. In the event the closing of the DI Purchase Agreement does not occur until after July 17, 2000, interest on the purchase price thereafter shall accrue at 10%. The Company intends to finance the payment of the amounts due under the DI Purchase Agreement by using its cash flow from operations, the cash from the repayment of the MTGA Sub Notes, drawing on its existing bank lines and accessing the capital markets. In this regard, the Company anticipates increasing the size of its existing revolving credit facility (the "Bank Facility"). 20 SUN INTERNATIONAL HOTELS LIMITED The Commonwealth of The Bahamas The Commonwealth of The Bahamas had a population of approximately 300,000 in 1998. The Bahamas includes approximately 700 islands, 29 of which are inhabited, and extends from east of the Florida coast to just north of Cuba and Haiti. Over 60% of the population lives on New Providence Island, where Nassau, the capital of The Bahamas, is located. The Bahamas first obtained internal self-government in 1964 and became an independent nation within the British Commonwealth in 1973. The first elections under universal adult suffrage were held in November 1962. The present government was first elected in 1992 and re-elected in March 1997, having succeeded a government that was in power for over 20 years. The official language is English. The currency of The Bahamas has been tied to the U.S. dollar since 1970 with an official exchange rate of U.S. $1.00 = 1.00 Bahamian dollar. The Ministry of Tourism spends over $35 million annually to promote The Bahamas and in recent years the government has made large investments in the expansion of both Nassau Harbor and Nassau International Airport. The Republic of Mauritius The Republic of Mauritius is a small, multi-ethnic, independent country consisting of several islands with a land area of about 720 square miles. The Republic of Mauritius is located in the Indian Ocean and has a population of approximately 1,100,000. The main island, Mauritius, lies approximately 1,200 miles off the east coast of mainland Africa. The other islands are Rodrigues Island, the Agalega Islands and the Cargados Carajos Shoals. The climate is subtropical and generally humid. Most residents are bilingual, speaking English and French. Mauritius has been independent since 1968 and a republic since 1991. Presidential elections are held every five years and the next election will be held in 2000. ITEM 3. LEGAL PROCEEDINGS David Goldkrantz vs. Merv Griffin, Sun International Hotels Limited, et al. A complaint was filed in December 1997, in the United States District Court, Southern District of New York (the "Court") on behalf of David Goldkrantz and a purported class of Company shareholders against the Company and various affiliates, certain directors and officers of the Company. The complaint alleges that the Proxy Statement and Prospectus issued by the Company in November 1996, in connection with their merger, was false and misleading with regard to statements made about a license and service agreement entered into between GGE and The Griffin Group. The Company's Motion for Summary Judgment to dispose of the claim was granted by the Court on April 5, 1999. Goldkrantz has filed an appeal with the United States Circuit Court of Appeals, Second Circuit, which appeal is pending. ITEM 4. CONTROL OF THE REGISTRANT SIIL, through its voting control of approximately 48% of the outstanding Ordinary Shares, is the principal shareholder of the Company. World Leisure Group Limited ("WLG"), a company controlled by a trust for the benefit of the family of Mr. Solomon Kerzner, Chairman of the Board of Directors and Chief Executive Officer of the Company, indirectly controls through intermediate entities approximately one-third of the outstanding ordinary shares of SIIL. Peter Buckley, a director of the Company and SIIL, is also chairman 21 SUN INTERNATIONAL HOTELS LIMITED and chief executive officer of Caledonia, an English corporation, which indirectly owns through intermediate entities approximately one-third of the outstanding ordinary shares of SIIL. Derek Hawton, a director of the Company and SIIL, is also chairman and chief executive officer of Kersaf, a South African corporation, which indirectly controls through intermediate entities approximately one-third of the outstanding ordinary shares of SIIL. SIIL and its shareholders have agreed with the Bahamian Government, among other things, to maintain voting power in the Company of not less than 45% until June 30, 1999 and thereafter to control a majority of the Board of Directors of the Company for an additional five years. Ownership participation in SIIL is governed by a Subscription and Shareholders' Agreement. Rosegrove Limited ("Rosegrove") owns approximately two-thirds of the outstanding equity of SIIL and World Leisure Investments Limited, a Bermuda corporation ("WLI"), owns the remaining shares. WLI is owned by WLG, which is owned by a trust for the benefit of the Kerzner family. Rosegrove is owned indirectly and equally by Kersaf and Caledonia. Caledonia is a diversified trading and investment company listed on The London Stock Exchange. Kersaf is an industrial conglomerate whose interests span casino resorts, hotels, cinemas and entertainment centers. Kersaf is listed on The Johannesburg Stock Exchange. The following table sets forth certain information as of March 31, 1999 regarding the ownership of Ordinary Shares by: (i) any person who is known to the Company to be the owner of more than 10% of any class of the Company's voting securities and (ii) the directors and officers of the Company as a group: Class of Shares Beneficial Owner Amount Percent of Class - --------------- ---------------- ---------- ---------------- Ordinary Shares SIIL 16,112,000 47.8% Ordinary Shares Baron Capital Group, Inc. 4,301,000 12.8% Ordinary Shares Merril Lynch Asset Management 2,602,000 7.7% Ordinary Shares FMR Corp. 1,767,000 5.2% Ordinary Shares Directors and Officers -- less than 1% as a Group ITEM 5. NATURE OF TRADING MARKET As of June 22, 1999, the Company had approximately 894 holders of record of approximately 33,681,012 Ordinary Shares. As of June 22, 1999, there were an estimated 800 US holders of record holding approximately 48% of the Ordinary Shares. The Ordinary Shares do not trade on any foreign exchange. The Ordinary Shares have been listed and traded on the New York Stock Exchange (the "NYSE") since March 1, 1996. The following table sets forth the range of high and low closing sale prices of the Ordinary Shares as reported on the NYSE during the periods shown. 22 SUN INTERNATIONAL HOTELS LIMITED High Low ---- --- 1999: 1st quarter $43.88 $32.88 2nd quarter (through June 22, 1999) 47.19 33.00 1998: 1st quarter 47.38 35.06 2nd quarter 50.38 42.00 3rd quarter 46.75 34.63 4th quarter 45.44 31.00 1997: 1st quarter 41.50 35.00 2nd quarter 38.63 30.00 3rd quarter 38.63 30.56 4th quarter 40.31 34.00 ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS The Central Bank of The Bahamas (the "Central Bank") must approve any payments made to companies, including the Company, which are non-resident companies for exchange control purposes. The Central Bank has granted approved investment status in respect of the Company's holding of the capital stock of Sun Bahamas. The granting of such status will mean that all payments of a current nature, including the repatriation of dividends or other distributions to the Company out of the revenues of the Company's Bahamian subsidiaries and any proceeds received on the sale of such subsidiaries will be routinely approved by the Central Bank following proper application. Any other payments to the Company by its Bahamian subsidiaries will require standard approval by the Central Bank. There currently are no limitations on the right of nonresident or foreign owners to hold or vote the Ordinary Shares imposed by foreign law or by the Company's Articles of Association. ITEM 7. TAXATION Certain United States Federal Income Tax Considerations The following is a general discussion of certain United States federal income tax consequences to the acquisition, ownership and disposition of Ordinary Shares. For purposes of this discussion, a "United States Holder" means an individual citizen or resident of the United States, a corporation organized under the laws of the United States or of any state of political subdivision thereof, any partner in a partnership (only to the extent that the partnership's income is subject to United States federal income tax) or an estate or trust the income of which is includible in gross income for United States federal income tax purposes regardless of its source. This discussion is not intended to be exhaustive and is based on statutes, regulations, rulings and judicial decisions currently in effect. This discussion does not consider any specific circumstances of any particular United States Holder and applies only to United States Holders that hold Ordinary Shares as a capital asset. Investors are urged to consult their tax advisors regarding the United States federal tax consequences of acquiring, holding and disposing of Ordinary Shares, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction. Ownership of Ordinary Shares Dividends on Ordinary Shares paid to United States Holders will be treated as dividend income for United States federal income tax purposes to the extent of the Company's undistributed current or accumulated earnings and profits as computed for federal income tax purposes. Such dividends will generally not be 23 SUN INTERNATIONAL HOTELS LIMITED eligible for the dividends received deduction available to certain United States corporations under Section 243 of the Internal Revenue Code of 1986, as amended. The Company is not a "passive foreign investment company" (a "PFIC"), a "foreign personal holding company" (a "FPHC") or a "controlled foreign corporation" (a "CFC") for United States federal income tax purposes. The Company is not a CFC or a FPHC mainly due to SIIL's approximate 48% voting interest in the Company. If more than 50% of the voting power or value of the Company's stock were owned (directly, indirectly or by attribution) by United States persons who each owned (directly, indirectly or by attribution) 10% or more of the voting power of the stock of the Company ("10% Shareholders"), the Company would become a CFC and each such 10% Shareholder would be required to include in its taxable income as a constructive dividend an amount equal to its share of certain undistributed income of the Company. If more than 50% of the voting power or value of the Company were owned (directly, indirectly or by attribution) by five or fewer individuals who are citizens or residents of the United States and if at least 60% of the Company's income consisted of certain interest, dividend or other enumerated types of income, the Company would be an FPHC. If the Company were an FPHC, each United States Holder (regardless of the amount of stock owned by such United States Holder) would be required to include in its taxable income as a constructive dividend its share of the Company's undistributed income of specified types. If SIIL's ownership interest were to decrease, or if United States persons were to acquire a greater ownership interest in SIIL, then it is possible that the Company could become a CFC or FPHC if it otherwise satisfied the tests set forth above. The Company is not a PFIC because it is anticipated that less than 75% of its annual gross income will consist of certain "passive" income and less than 50% of the average value of its assets in any year will consist of assets that produce, or are held for the production of, such passive income. If such income and asset tests were not met and the Company were to become a PFIC, all United States Holders would be required to include in their taxable income certain undistributed amounts of the Company's income, or in certain circumstances, to pay an interest charge together with tax calculated at maximum rates on certain "excess distributions"(defined to include any gain on the sale of stock). Any gain or loss on sale or exchange of Ordinary Shares by a United States Holder will be a capital gain or loss. If the United States Holder has held such Ordinary Shares for more than one year, such gain or loss will be a long-term capital gain or loss. Any United States person who owns 5% or more in value of the stock of the Company may be required to file IRS form 5471 with respect to the Company and its non-United States subsidiaries to report certain acquisitions or dispositions of stock of the Company. Annual filings of Form 5471 would be required from any United States person owning 5% or more of the stock of the Company or, if the Company were an FPHC or a CFC, from certain United States persons owning 10% or more of the stock of the Company. Certain Bahamian Tax Considerations The following is a brief and general summary of certain Bahamian tax matters as they may relate to the Company and the holders of the Ordinary Shares of the Company. The discussion is not exhaustive and is based on Bahamian law currently in effect. The Bahamas does not impose any income, capital gains or withholding taxes. Therefore, the Company will not be subject to income tax in The Bahamas on an ongoing basis and dividends paid on Ordinary 24 SUN INTERNATIONAL HOTELS LIMITED Shares to holders thereof will not be subject to a Bahamian withholding tax (the Company, however, is subject to gaming taxes and other governmental fees and charges). ITEM 8. SELECTED FINANCIAL DATA The following table sets forth certain historical consolidated financial information of the Company for each of the five years ended December 31, 1998. The historical financial information as of December 31, 1998 and 1997, and for each of the three years ended December 31, 1998, 1997 and 1996 as set forth below, has been derived from the audited consolidated financial statements of the Company, included in this Form 20-F. All financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the audited consolidated financial statements and the related notes thereto, all included in this Form 20-F. 25 SUN INTERNATIONAL HOTELS LIMITED
For the Year Ended December 31, -------------------------------------------------------------- 1998 1997 1996 1995 1994 (a)(b) (b) (c) (d) - ---------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Gross Revenues $ 591,670 $ 600,670 $ 252,218 $ 223,214 $ 79,957 Net Revenues 550,878 558,912 240,116 213,940 76,740 Income (loss) from Operations 52,206 84,624 34,258 22,990 (19,441) Net Income 57,746 83,008 45,722 18,359 16,475 Diluted earnings (loss) per share (e) 1.70 2.44 1.58 0.87 (1.06) BALANCE SHEET DATA: Total Assets $1,625,733 $1,374,740 $1,122,619 $ 370,427 $ 316,675 Long-term Debt, net of current maturities 565,752 412,209 262,618 116,153 75,000 Redeemable Common Stock 0 0 0 63,543 62,020 Shareholders' Equity 850,621 790,283 702,989 135,611 94,520
(a) The results of operations for the year ended 1998 include only two weeks of operations of the Royal Towers on Paradise Island after its grand opening in mid-December. Income from operations and net income for the year ended 1998 reflect $26 million in pre-opening costs. (b) The Company acquired GGE on December 16, 1996. Accordingly, the results of operations for the years ended December 31, 1998 and 1997 include results of operations related to the GGE acquired assets including Resorts Casino Hotel in Atlantic City. The results of operations for the last 16 days of 1996 were considered immaterial and were not included in the Company's results of operations for that year. In addition, the results of operations for the year ended December 31, 1997 included a gain of $13.4 million on the sale of the Company's casino interest in France. (c) The Company opened the Mohegan Sun Casino in Uncasville, Connecticut in October 1996. Accordingly, the results in 1996 reflect the Company's share of revenues from two months of operations at this facility. (d) The Company acquired its Paradise Island operations on May 3, 1994. Accordingly, the results of operations for the year ended December 31, 1994 only reflect eight months of the Paradise Island operations. (e) As indicated in Note 2 of Notes to Consolidated Financial Statements, effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share". 26 SUN INTERNATIONAL HOTELS LIMITED ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Consolidated Results 1998 vs. 1997 The Company recorded net income of $57.7 million in 1998 compared to $83.0 million in 1997. Diluted earnings per share decreased to $1.70 in 1998 as compared to $2.44 in 1997. In December 1998, the Company completed an expansion of its resort on Paradise Island which included the Royal Towers, a 1200-room deluxe hotel, a new 100,000 square-foot casino and entertainment center, expanded marine habitats and other entertainment attractions. Net income in 1998 included the write-off of incremental and non-recurring pre-opening expenses of $26.0 million related primarily to the December opening of the Royal Towers. In addition, in 1997, net income reflected an extraordinary loss on the extinguishment of debt of $3.0 million and a non-recurring gain of $13.4 million on the sale of an equity interest in an associated company. On a proforma basis, giving effect to these non-recurring items, the Company earned net income of $83.7 million, or $2.46 per share on a diluted basis, and $72.6 million, or $2.14 per share in 1998 and 1997, respectively. Excluding lease income received pursuant to the Showboat Lease, net revenues were $550.1 million in 1998 as compared to $549.9 million in 1997. Operating expenses excluding the write-off of pre-opening expenses were $472.7 million in 1998 versus $474.3 million in 1997. 1997 vs. 1996 The Company recorded net income of $83.0 million in 1997 compared to $45.7 million in 1996. Diluted earnings per share increased to $2.44 in 1997 as compared to $1.58 in 1996. Net income in 1997 reflected the extraordinary loss of $3.0 million and the non-recurring gain of $13.4 million discussed in the paragraph above. Excluding such items, the Company earned income of $72.6 million in 1997, or $2.14 per share on a diluted basis. Net revenues, excluding receipts from the Showboat Lease, of $549.9 million in 1997 were 129% above the $240.1 million of net revenues recorded in 1996. Excluding receipts from the Showboat Lease, income from operations increased to $75.6 million in 1997 from $34.3 million in 1996. Contributing to this growth was the inclusion of the results of the Resorts Casino Hotel in Atlantic City, which was purchased by the Company at the end of 1996, and the strong performance of the Company's Paradise Island operations in The Bahamas. In addition, the Mohegan Sun Casino in Connecticut, which opened in October 1996, produced a full year's operating results in 1997. Segment Results Segment results stated below conform to the Segment Information included in Note 16 of Notes to Consolidated Financial Statements included herein. Paradise Island 1998 vs. 1997 The Company's Paradise Island operations generated income from operations before pre-opening expenses of $42.1 million in 1998, as compared to the $46.2 million realized in 1997. The Company's largest property on Paradise Island, Atlantis, achieved an average occupancy of 87% for the year compared to 88% in 1997, while the average daily room rate increased by 8% to $187. The casino generated gaming win of $84.6 million, including table game win of $50.0 million, an increase in table game win of 4% over 1997. Slot win of $34.6 million represented a decrease of 7% from the previous year. The growth in table game win resulted from an increase in table game drop (the dollar amount of chips purchased) of $25.2 million (or 8%) which was partially offset by a decrease in the hold percentage (ratio of table game win to dollar amount of chips purchased) from 15.5% to 14.9%. Slot win decreased due to a reduction in handle (dollar amounts wagered) of $11.2 million (or 3%) and a reduction in slot hold 27 SUN INTERNATIONAL HOTELS LIMITED percentage from 10.3% to 9.8%. A significant factor in the decrease in operating earnings was the loss of earnings from Pirate's Cove Beach Resort, a 562-room hotel, which beginning in September 1997, was only used to house expatriate professionals and construction staff engaged in construction on Paradise Island and was not open to the public after that date. In 1997, Pirate's Cove Beach Resort contributed $3.1 million to income from operations. In October 1998, the Pirate's Cove Beach Resort was demolished. In addition, general and administrative expenses increased in 1998 by $3.2 million over the previous year (due primarily to the settlement of a new union contract) and operating earnings in 1998 included depreciation of approximately $1.0 million related to the Royal Towers for the last two weeks of the year after its opening. These reductions were partially offset by an increase in room revenues and increased casino department earnings, some of which was attributable to the opening of the Royal Towers in December 1998. The improved contribution from the casino was due primarily to a reduction in the rates of taxes and fees payable to the Government on casino win. During the year, the property was negatively impacted by the construction of the Royal Towers of which caused some rooms to be taken out of service to house construction workers and discounts to be given on patron room rates due to the disruption caused by the construction activities. In addition, the casino results reflected disruption during the process of its relocation. The entertainment center opened in October 1998 and the Royal Towers opened in December 1998. 1997 vs. 1996 The Company's Paradise Island operations performed well, generating income from operations of $46.2 million in 1997, a 41% increase over 1996, on increased revenues of 11.4%. Atlantis achieved an average occupancy of 88% for the year, compared to 87% in 1996, and the average daily room rate grew by 10% to $173. Food and beverage revenues on Paradise Island increased by 6% to $64.2 million. The casino produced gaming win of $85.5 million, with table game win of $48.1 million, which was a 13% increase over 1996. The growth in table win was primarily the result of an improvement in the average hold percentage from the unusually low 13.6% experienced in 1996 to 15.5% in 1997. Slot win for 1997, at $37.4 million, was 8% greater than that recorded in 1996 due to a 9% increase in slot handle to $365.4 million. The increased revenues described above were partially offset by an increase in costs of $12.5 million. The increase in costs resulted primarily from higher levels of business at Atlantis and the additional five months of activity at Pirate's Cove Beach Resort which had been acquired by the Company in September 1996. At Atlantis, food and beverage costs increased by $1.0 million and gaming taxes increased by $800,000, as a result of increased levels of activity. In addition, major repair and maintenance projects undertaken at Atlantis increased by $1.0 million over the prior year and depreciation and amortization increased by $2.5 million. At Pirate's Cove Beach Resort, food and beverage costs increased by $2.8 million, utilities by $1.1 million and property maintenance costs by $900,000. As described above, Pirate's Cove Beach Resort was closed to the public in September 1997. In 1997, Pirate's Cove Beach Resort contributed $3.1 million to income from operations, as compared to an operating loss of $300,000 in 1996. Atlantic City 1998 vs. 1997 The Company operates in Atlantic City through the Resorts Casino Hotel. In 1998, the property generated net revenues of $260.7 million as compared to $270.6 million in 1997. Net revenues included gaming win of $234.7 million and $244.2 million in 1998 and 1997, respectively. Slot revenues were $170.4 million in 1998 as compared to $170.0 million in 1997. The marginal increase in slot revenues resulted from an improved hold percentage (from 8.7% in 1997 to 9.4% in 1998) which was partially offset by a decline in handle of $124.6 million to $1.822 billion. The improvement in hold percentage was due 28 SUN INTERNATIONAL HOTELS LIMITED to a change in the mix of business in favor of lower denomination machines, which generally have a higher hold percentage. Beginning in September 1997, management began the process of upgrading its slot product to include more of the popular $.25 machines. Table game win totaled $62.1 million in 1998 compared to $69.0 million in 1997. The decrease was due primarily to a decrease of $43.0 million in table game drop to $415.6 million. The reduced drop resulted primarily from the elimination of less profitable junket business and lower volumes of summer walk-in business. Poker, simulcast and keno revenues were $2.2 million in 1998 as compared to $5.2 million in 1997 as the Company eliminated both poker and keno in March 1998. Operating earnings decreased by $1.7 million as reduced revenues were significantly offset by a cost containment program and cost reductions associated with the discontinued pursuit of certain market segments. The Company is currently in the process of renovating the Resorts Casino Hotel and it is anticipated that the improvement in the physical condition of the building will have a positive impact on future earnings. 1997 As the Company acquired the Atlantic City operations in December 1996, comparisons with the prior year are not appropriate. In 1997, the Resorts Casino Hotel generated net revenues of $270.6 million, including $244.2 million of gaming revenues. Slot revenues were $170.0 million for the year, with slot handle of $1.947 billion and an average hold percentage of 8.7%. Table game revenues for 1997 totaled $69.0 million, with table game drop of $458.6 million and a hold percentage of 15.0%. Poker, simulcast and keno revenues were $5.2 million for the year. Other revenues were $54.9 million, which included income from rooms, food and beverage, entertainment and miscellaneous items. Promotional allowances totaled $28.5 million for the year. Income from operations was $21.6 million, with gaming costs and expenses of $154.6 million and selling, general and administrative costs of $28.6 million. Connecticut TCA earns management fees of between 30% to 40% of the Mohegan Sun Casino's earnings after depreciation and interest. The percentage of profits distributed to the partnership starts at 40% and declines to 30% based on predetermined profitability thresholds. Prior to distributing its profits equally to its partners, TCA contributes $1.2 million per annum to the casino's capital reserve account, funds its own operating costs and then makes certain priority payments to its partners or their affiliates. In February 1998, the Mohegan Tribe announced that it had appointed TCA to develop its proposed approximate $800 million expansion of the Mohegan Sun Casino. In addition, TCA and the Mohegan Tribe agreed that effective January 1, 2000, TCA will turn over management of the Mohegan Sun Resort Complex (which comprises the existing operations and the proposed expansion) to the Mohegan Tribe. In exchange for relinquishing its rights under its existing agreements, beginning January 1, 2000, TCA will receive annual payments of five percent of the gross revenues of the Mohegan Sun Resort Complex for a 15-year period. Until January 1, 2000, there will be no change in TCA's existing agreements with the Mohegan Tribe. Pursuant to an agreement with the Mohegan Tribe, effective January 1, 2000, the MTGA Sub Notes shall be repaid. An amount of U.S. Treasury securities sufficient to satisfy this obligation has been deposited with a defeasance agent. 1998 vs. 1997 During 1998, the Mohegan Sun Casino generated net revenues of $605.6 million as compared to $495.2 million in 1997. Net revenues included gaming win of $576.7 million and $469.4 million in 1998 and 1997, respectively. Slot win in 1998 was $422.1 million as compared to $333.0 million in 1997. This was due primarily to an increase in the slot handle of $1.040 billion to $5.288 billion. The hold percentage increased from 7.8% in 1997 to 8.0% in 1998 and the gross win per slot machine per day increased from $327 in 1997 to $395 in 1998. Table game win totaled $143.3 million in 1998 compared to $128.1 million in 1997. Table game drop increased by $60.3 million to $800.1 million and the hold percentage increased by 0.6 percentage points to 17.9%. The increase in level of play resulted from strong market growth in the region. Operating earnings before bingo (which is not managed by TCA) and management fees increased by $77.7 million to $199.4 million. 29 SUN INTERNATIONAL HOTELS LIMITED TCA earned management fees of $53.7 million in 1998 as compared to $28.3 million in 1997. The Company earned fees from TCA of $34.6 million and $17.4 million in 1998 and 1997, respectively. 1997 As the Mohegan Sun Casino opened in October 1996, comparisons to the prior year are not appropriate. For the year ended December 31, 1997, the operations of the Mohegan Sun Casino generated net revenues of $495.2 million including $469.4 million of gaming revenues. The average daily gross win per slot machine for 1997 was $327, which resulted in total slot revenues of $333.0 million. Table revenues were $128.1 million for the year and poker revenues for the period were $8.3 million. Income from operations before bingo and management fees for 1997 was $121.8 million. Total management fees to TCA for the year were $28.3 million. In 1997, the Company earned fees of $17.4 million from TCA. 1996 The Mohegan Sun Casino generated net revenues of $97.0 million from its opening on October 12, 1996 through December 31, 1996, including $90.9 million of gaming revenues. The average daily gross win per slot machine for the period was $317, which resulted in total slot revenues of $64.7 million for the period. Table game revenues were $26.2 million, although the hold percentage of 14.5% was low given the slower rate of play due to the initial level of inexperience among dealers. From its opening through December 31, 1996, the operation generated income from operations before bingo and management fees of $15.2 million. The Company earned fees of $3.6 million from TCA in 1996. Indian Ocean The Company has a 22.8% interest in Sun Indian Ocean, which owns five beach resort hotels in Mauritius and one in the Comoro Islands. The Company also has long-term management contracts with these properties, which expire in 2003. The Company has the right to extend these agreements for a further five-year period. 1998 vs. 1997 In 1998, the Indian Ocean resorts generated revenues of $88.8 million as compared to $87.6 million in 1997 and had net income in 1998 of $12.0 million as compared to $7.4 million in 1997. As a result of the effective devaluation of the Mauritian Rupee to the US dollar, the operating margin in 1998 improved over the prior year as revenues were maintained in US dollar terms, although costs in US dollar terms were lower than in 1997. This was partially offset by reduced operating profit in the Comoro Islands. In Mauritius, the average occupancy and average room rate in 1998 were 80% and $133, as compared to 76% and $134 in 1997. The decrease in average room rate reflected a decrease in the dollar value of the Mauritian currency. In 1998, the Company earned management fees from Sun Indian Ocean of $5.9 million as compared to $5.3 million in 1997. The Company also earned $90,000 of development fees in 1998. Equity earnings in 1998 were $2.7 million as compared to $1.7 million in 1997. 1997 vs. 1996 In 1997, the Indian Ocean resorts generated revenues of $87.6 million as compared to $74.9 million in 1996 and had net income in 1997 of $7.4 million as compared to $6.4 million in 1996. The increased profitability resulted mainly from two new resorts which were opened in 1996 in Mauritius but operated for a full year in 1997. These two new properties, which were developed by the Company and are targeted at the moderate priced segments of the market, provide a more complete product offering in the Indian Ocean. On a comparable basis, the four established properties achieved an average occupancy of 72% in 1997, as compared to 74% in 1996, and average room rates in 1997 of $155 compared to $153 in 1996. Although the increase in average room rate is marginal, it reflects the decrease in the dollar value of the Mauritian currency. Including the effect of opening the two new properties, one of which opened in March 1996 and the other in October 1996, all properties achieved an average occupancy of 30 SUN INTERNATIONAL HOTELS LIMITED 74% and an average room rate of $126 in 1997. In 1997, the Company earned management fees from Sun Indian Ocean of $5.3 million as compared to $4.3 million in 1996. The Company also earned $226,000 of development fees in 1996. Equity earnings in 1997 were $1.7 million as compared to $1.5 million in 1996. France In June 1997, the Company sold its 25% investment in Sun France for a gain of $13.4 million. In 1997, prior to its sale, the Company recorded equity earnings of $523,000 and technical services fees of $350,000. In 1996, the Company recorded equity earnings of $1.1 million and technical services fees of $800,000. Other Factors Affecting Earnings 1998 vs. 1997 In 1998, pre-opening expenses related to the opening of the Royal Towers totaled $25.3 million. These represented incremental and non-recurring charges specifically associated with the expansion and included payroll during the training period, non-recurring marketing of the new resort and the cost of a grand opening promotion. In addition, $631,000 of pre-opening expenses were incurred related to the establishment of a new tour operator subsidiary in France. Such costs were not related to the ongoing operations of the Company and included no allocations of operating department costs. General corporate expenses were $19.5 million in 1998 as compared to $14.7 million in 1997. The increase was due primarily to the creation in 1998 of a management incentive bonus plan. In 1998, the Company opened a corporate marketing, retail and public relations office in New York City. The total cost to operate this office in 1998 was $4.4 million. Other segments contributed $621,000 in 1998 as compared to $9.7 million in 1997 due primarily to the termination of the Showboat Lease in January 1998. The Showboat Lease contributed $754,000 in 1998 and $9.0 million in 1997. The Company had total interest income of $15.7 million in 1998 as compared to $16.1 million in 1997. This included interest income on the MTGA Sub Notes purchased from the Mohegan Tribal Gaming Authority, the owner of the Mohegan Sun Casino, of $9.4 million in 1998 as compared to $8.5 million in 1997. The MTGA Sub Notes currently pay interest through the issuance of additional notes. As of December 31, 1998, the Company owned a total of $87.4 million of MTGA Sub Notes of which $32.1 million bear interest at 15% and the balance bears interest at prime plus 1%. The increase in interest income from MTGA was partially offset by a decrease in bank interest income as available cash balances were used to fund the construction of the Royal Towers. Interest expense of $4.5 million in 1998 was lower than the prior year by $19.9 million. Interest expense before capitalization increased by $8.6 million in 1998 due to a net increase in total debt outstanding. This increase was offset by an increase in amounts capitalized of $28.5 million. 1997 vs. 1996 Corporate expenses were $14.7 million for 1997, or 2.6% of net revenues, compared to $10.9 million in the prior year, or 4.6% of net revenues. The reduction in this percentage of revenues resulted primarily from the inclusion of the results of the Resorts Casino Hotel, which did not result in a corresponding increase in corporate expenses. Other segments increased to $9.7 million in 1997 from $4.5 million in 1996. The Company acquired the Showboat Lease at the end of 1996 and it contributed $9.0 million in 1997. In 1997, real estate related 31 SUN INTERNATIONAL HOTELS LIMITED costs of $1.1 million were incurred as compared to none in 1996. The Company had total interest income of $16.1 million in 1997 as compared to $12.5 million in 1996. This included interest income on MTGA Sub Notes of $8.5 million in 1997 as compared to $6.2 million in 1996. Interest expense increased by $21.2 million to $24.4 million in 1997. In connection with the acquisition of the Company's operations in Atlantic City in December 1996, the Company acquired total debt of $252.4 million, including $105.3 million of non-recourse debt. As described below, in March 1997, the Company retired $140.6 million of the recourse debt with funds provided by the issuance of $200.0 million senior unsecured subordinated notes. In March 1996, all then outstanding bank debt of the Company was repaid with a portion of the proceeds from a public offering of the Company's capital stock. Liquidity, Capital Resources and Capital Spending At December 31, 1998, the Company's current liabilities exceeded its current assets by $46.6 million. Current liabilities included $33.7 million in capital creditors related to the construction of the Royal Towers. Current operating payables were high at year end due to the opening of the Royal Towers. At December 31, 1998, unrestricted cash and cash equivalents were $61.2 million. During the year, the Company generated $90.1 million in operating cash flow. Pursuant to the DI Purchase Agreement, on May 17, 1999, the Company agreed to acquire the Desert Inn Hotel and Casino for $275 million. The Company intends to finance the payment of the amounts due under the purchase agreement by using its cash flow from operations, the cash from the repayment of the MTGA Sub Notes, drawing on its existing bank lines and accessing the capital markets. In this regard, the Company anticpates increasing the size of its Bank Facility. In 1998, the Company invested $444.0 million in capital expenditures, which included approximately $381.3 million for the construction of the Royal Towers and related facilities, $11.7 million for the renovation of the Resorts Casino Hotel in Atlantic City, $18.4 million for land on Paradise Island and $11.7 million for land in Atlantic City. Expenditures for the construction of the Royal Towers included $35.3 million of capitalized interest. At December 31, 1998, the Company had unfunded contracts in place for capital expenditures related to the construction of the Royal Towers of approximately $28.0 million. In 1997, the Company invested $219.7 million in capital expenditures, which included approximately $178.3 million for the Paradise Island Expansion and $19.8 million for land in Atlantic City. Expenditures for the Paradise Island Expansion included $6.8 million of capitalized interest. In comparison, capital expenditures in 1996 totaled $79.5 million, which included approximately $38.0 million for the purchase of the Pirate's Cove Beach Resort, $18.2 million for the Paradise Island Expansion and $10.3 million for a corporate aircraft. In Atlantic City, the Company has begun a renovation of the Resorts Casino Hotel which will include the renovation of public spaces as well as the existing guestrooms. It is anticipated that the renovation will cost approximately $50.0 million. Management expects the renovation to be complete by early July 1999. In addition, during the second quarter of 1999, the Company completed construction of a new convention center at Atlantis for a cost of approximately $20.0 million. In 1998, the Company borrowed a net $259.0 million against an existing $375.0 million revolving credit facility to fund the construction of the Royal Towers and related construction projects. The balance of the facility will be available as necessary to fund the 1999 capital expenditure program and for general corporate purposes. 32 SUN INTERNATIONAL HOTELS LIMITED In January 1998, the Company sold the land under the Showboat Casino Hotel in Atlantic City for proceeds of $110.0 million. The majority of these proceeds was used to redeem $105.3 million of non-recourse debt. Pursuant to an agreement with the Mohegan Tribe, effective January 1, 2000, the MTGA Sub Notes shall be repaid. An amount of U.S. Treasury securities sufficient to satisfy this obligation has been deposited with a defeasance agent. In November 1997, the Company filed a registration statement with the Securities and Exchange Commission pursuant to which the Company may, from time to time, issue in one or more series an aggregate of $300.0 million of debt securities (the "Shelf Registration"). Pursuant to the Shelf Registration, in December 1997, the Company issued $100.0 million of senior subordinated unsecured notes due December 2007. The notes bear interest at 8.625% and have the same terms as the Senior Notes. The issuance generated net proceeds of $98.1 million. Management believes that available cash on hand at December 31, 1998, combined with funds generated from operations, the repayment of the MTGA Sub Notes and funds available under the Bank Facility will be sufficient to finance its planned operating and development activities for at least the next twelve months; provided, however, the Company expects to need to access the capital markets to close the DI Purchase Agreement, and in that regard anticipates increasing the size of its Bank Facility. Other Matters Year 2000 Compliance The Company utilizes software and related technologies in parts of its business that may be affected by the date change in the year 2000 ("Y2K"). The Company is continuing to address the impact of Y2K on its computer programs, resort facilities and third party suppliers. The Company has established a dedicated Year 2000 Program Office and has contracted with independent consultants to coordinate the compliance efforts at each of its subsidiaries and ensure that the project status is monitored and reported throughout the organization. The Company primarily uses industry standard automated applications in most of its locations. The majority of these applications are believed to be Y2K compliant but the Company is currently testing compliance in coordination with the vendors. The Company has finalized its assessment of systems and third party suppliers. As information is received related to these areas, the Company develops a strategy for repair or replacement of non-compliant systems as well as testing and validation of such items. The remediation phase is expected to be complete by the third quarter of 1999. Through May 31, 1999, the Company estimates that it has spent approximately $1.5 million on Y2K efforts across all areas and expects to spend a total of approximately $2 million when complete. The Company expects to fund Y2K costs through operating cash flows. All system modification costs associated with Y2K will be expensed as incurred. The Company presently believes that upon remediation of its business software applications, as well as other equipment, the Y2K issue will not present a materially adverse risk to the Company's future consolidated results of operations, liquidity and capital resources. However, if such remediation is not completed in a timely manner or the level of timely compliance by key suppliers or vendors is not sufficient, the Y2K issue could have a material impact on the Company's operations including, but not limited to the ability of major airlines to service the Company's resort destinations and the provision of adequate utility 33 SUN INTERNATIONAL HOTELS LIMITED services at these resorts, resulting in loss of revenue, increased operating costs, loss of customers or suppliers, or other significant disruptions to the Company's business. The Company has initiated business continuity and recovery plans which address these issues as far as can be practical. Determining the Y2K readiness of third party products and business dependencies (including suppliers) requires pursuit, collection and appraisal of voluntary statements made or provided by those parties, if available, together with independent factual research. Although the Company has taken, and will continue to take, reasonable efforts to gather information to determine and verify the readiness of such products and business dependencies, there can be no assurance that reliable information will be offered or otherwise available. Accordingly, notwithstanding the foregoing efforts, there are no assurances that the Company is correct in its determination or belief that a business dependency is Y2K ready. New Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires computer software costs associated with internal use software to be expensed as incurred until certain capitalization criteria are met. The Company will adopt SOP 98-1 beginning January 1, 1999. Adoption of this statement will not have a material impact on the Company's consolidated financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133 cannot be applied retroactively. The Company will adopt SFAS 133 beginning January 1, 2000. Adoption of this statement is not expected to have a material impact on the Company's consolidated financial position or results of operations. 34 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.
December 31, 1998 Expected Maturity Date Fair Value (In Thousands of Dollars) ----------------------------------------- December Asset (liability) 1999 2000 2001 2002 2003 Thereafter Total 31, 1998 - ----------------------- ---- ---- ------ -------- ---- ---------- -------- ---------- Variable rate debt $ -- $ -- $ -- $259,000 $ -- $ -- $259,000 $259,000 Average interest rates Interest rate swaps -- -- 50,000 40,000 -- -- 90,000 (5,200) Average pay rate 6.78% 6.96% Average receive rate 5.16% 5.31%
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT The current directors of the Company are: Country of Director Name Citizenship Since - ---- ----------- ----- Derek Hawton................................ South Africa 1993 Solomon Kerzner............................. South Africa 1993 Peter Buckley............................... United Kingdom 1994 Howard Marks................................ United States 1994 Eric Siegel................................. United States 1994 Pursuant to the Company's Articles of Association, as amended, the maximum number of directors of the Company is fixed at five. The current directors of the Company were elected at the annual general meeting held in May 1999 and will hold office until the date of the annual general meeting to be held in 2000. At the annual general meeting to be held in 2000 and at each subsequent annual general meeting, directors will 35 SUN INTERNATIONAL HOTELS LIMITED be appointed by resolution of the holders of Ordinary Shares to hold office until the date of the next annual general meeting. The current executive officers of the Company are: Executive Officer Name Age Since - ---- --- ----------------- Solomon Kerzner Chairman and Chief Executive Officer.................. 63 1993 Howard B. Kerzner President............................................. 35 1995 Charles D. Adamo Executive Vice President-Corporate Development & General Counsel....................................... 38 1995 John R. Allison Executive Vice President-Chief Financial Officer...... 53 1994 James Boocher Executive Vice President-Project Development.......... 43 1996 Kevin DeSanctis Chief Operating Officer-Gaming Operations ............ 46 1995 Peter J. Venison Chief Operating Officer-Europe & Indian Ocean......... 56 1995 The backgrounds of each of the directors and the executive officers of the Company are described below: Solomon Kerzner, Chairman and Chief Executive Officer. Mr. Kerzner has been the Chairman and Chief Executive Officer of Sun International since October 1993 and from October 1993 to June 1996 was President. Mr. Kerzner is the Chairman of SIIL, the Company's controlling shareholder, and of WLG, which owns an indirect interest in SIIL. Mr. Kerzner is one of the visionary leaders of the resort and gaming industries. Prior to founding Sun International, Mr. Kerzner pioneered the concept of an entertainment and gaming destination resort designed and managed to appeal to multiple market segments by developing Sun City. Located approximately 100 miles northwest of Johannesburg, South Africa, Sun City has been expanded in phases since its opening in 1979. The resort has been designed to cater to a broad public market by combining gaming with a wide variety of nongaming entertainment experiences. Today, Sun City covers approximately 620 acres and attracts over two million visitors annually. The facilities at Sun City include four hotels with approximately 1,300 rooms, an entertainment center that includes a 6,000-seat indoor superbowl, a 46-acre man-made lake for watersports and approximately 55,000 square feet of gaming space. In 1992, Sun City was expanded to include The Lost City, a $275 million themed resort which recreates a forgotten African civilization that has been rediscovered. The Lost City covers approximately 60 acres and its center includes The Palace, a 350-room luxury hotel. The resort also includes a man-made jungle in which over one million trees were transplanted and the Valley of the Waves, which includes a wave pool, adventure rides and sand beaches. During Mr. Kerzner's 30-year career he has been responsible for the development of 21 hotels with over 5,500 rooms, and was the founder of the largest hotel chain in southern Africa. The Company does not have any interest in any of the southern African properties developed by Mr. Kerzner. Mr. Kerzner is the father of Mr. Howard B. Kerzner. 36 SUN INTERNATIONAL HOTELS LIMITED Howard B. Kerzner, President. Mr. Kerzner joined Sun International in May 1995 as Executive Vice President-Corporate Development and has been President of the Company since June 1996. Prior to that time, he was Director-Corporate Development of SIIL from September 1992. Previously Mr. Kerzner was an Associate of Lazard Freres & Co. LLC from September 1991. Prior to that Mr. Kerzner worked for the First Boston Corporation. Mr. Kerzner is the son of Mr. Solomon Kerzner. Charles D. Adamo, Executive Vice President-Corporate Development & General Counsel. Mr. Adamo joined Sun International in May 1995 as General Counsel and has been responsible for corporate development since January 1997. Prior to that time, he was Group Legal Advisor of SIIL from September 1994. Previously, Mr. Adamo was engaged in the practice of law at the firm of Cravath, Swaine & Moore in New York from 1986. Mr. Adamo is admitted to the bar in the State of New York. John R. Allison, Executive Vice President-Chief Financial Officer. Mr. Allison joined Sun International in May 1995 as Chief Financial Officer. Mr. Allison joined SIIL in March 1994 as Group Financial Director. From December 1987 until February 1994, Mr. Allison was Financial Director of Sun International Inc. ("SII"), a resort and management holding company with interests in approximately 27 hotels in southern Africa. Prior to that time, he was the Group Financial Director of Kimberly-Clark (South Africa) Limited for four years. He is a fellow of the Institute of Chartered Accountants in England and Wales and a member of the South African Institute of Chartered Accountants. James Boocher, Executive Vice President-Project Development. Mr. Boocher joined Sun International in November 1996. He is the executive in charge of Sun International's expansion on Paradise Island. Before joining Sun International, Mr. Boocher was President of Ellis-Don Construction Ltd., Canada's second largest construction company. Prior to joining Ellis-Don, Mr. Boocher was a construction Director for Olympia and York Development. He was involved in projects in the World Financial Center, New York, Canary Wharf, London, England and two office buildings in Dallas, Texas. Mr. Boocher attended Ball State University. Peter Buckley, Director. Mr. Buckley has been a Director of Sun International since April 1994. Mr. Buckley is Chairman and Chief Executive Officer of Caledonia. In 1994 he was appointed Chairman of Caledonia having been Deputy Chairman and Chief Executive since 1987. He is also Chairman of Sterling Industries plc--a listed company associated with Caledonia--as well as being Chairman of English & Scottish Investors plc and Bristow Helicopter Group Limited. He is a non-executive Director of Close Brothers Group plc, Intercapital plc, RHS Enterprises Ltd., Offshore Logistics, Inc. (a NASDAQ linked company), SIIL and The Telegraph plc. Kevin DeSanctis, Chief Operating Officer - Gaming Operations. Mr. DeSanctis joined Sun International in July 1995 as President, Gaming. Prior to joining Sun International, Mr. DeSanctis served as Executive Vice President and Chief Operating Officer of Hemmeter Enterprises since April 1994. From 1991 to 1994, Mr. DeSanctis served as President and Chief Operating Officer of the Trump Plaza Hotel and Casino. From August 1989 to February 1991, Mr. DeSanctis served as Vice President of Casino Operations of The Mirage Hotel and Casino in Las Vegas, Nevada. Prior to August 1989, Mr. DeSanctis served in various positions in the casino industry. Derek Hawton, Director. Mr. Hawton has been a Director of Sun International since December 1993. Mr. Hawton is Executive Chairman of Kersaf . He is also a Director of South African Mutual Life Assurance (South Africa's largest insurance company with assets in excess of $40 billion) and a Director of Standard Bank Investment Corporation (South Africa's largest banking group). Mr. Hawton is a fellow of South Africa's Chartered Institute of Secretaries. Howard Marks, Director. Mr. Marks has been a Director of Sun International since April 1994. Mr. Marks is Chairman of Oaktree Capital Management, LLC ("Oaktree Capital"). Oaktree Capital 37 SUN INTERNATIONAL HOTELS LIMITED manages funds in excess of $12 billion for institutional investors. Previously Mr. Marks was employed by The TCW Group, Inc. where he became Chief Investment Officer for Domestic Fixed Income and President of its largest affiliate, TCW Asset Management Company. Eric Siegel, Director. Mr. Siegel has been a Director of Sun International since April 1994. Mr. Siegel is a Principal of Pegasus Insurance Partners and a retired limited partner of Apollo Advisors, L.P. Lion Advisors, L.P. Mr. Siegel is also a Director and member of the executive committee of El Paso Electric Company, a publicly traded utility company. Peter J. Venison, Chief Operating Officer-Europe & Indian Ocean. Mr. Venison joined Sun International in May 1995 as Executive Vice President and President, Europe & Indian Ocean. Prior to that time, he was a Managing Director of SII from May 1990. Before joining SII, Mr. Venison was President of Treadev Limited, a resort development company. ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS The aggregate compensation for directors and officers of the Company for the year ended December 31, 1998 was $7,329,000. None of the directors or officers participate in the Company's pension plan. The Company has adopted an executive level bonus plan (the "Bonus Plan") effective for 1998 pursuant to which certain executives of the Company may qualify for bonuses if the Company attains certain target level Earnings Per Share ("EPS") in the years ending 1998, 1999 and 2000. Under the Bonus Plan, bonuses could range between 20% to 100% of the respective employee's base salary if target EPS is reached in the given year with 50% of the bonus paid in cash and 50% paid in restricted capital stock. The restricted stock would vest equally over three years. ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES The Company has adopted a Stock Option Plan (the "1995 Plan") which was approved by shareholders at the annual general meeting held in 1995, and a Stock Option Plan (the "1997 Plan"), which was approved by shareholders at the annual general meeting held in 1997 and amended by shareholders at the annual general meeting in 1998 and 1999. The 1995 Plan provides for options to be granted to purchase up to 2,000,000 Ordinary Shares, of which options to acquire 2,000,000 Ordinary Shares at exercise prices ranging from $11.6875 to $35.00 have been granted as of June 1, 1999. The 1997 Plan provides for options to be granted to purchase up to 2,500,000 Ordinary Shares, of which options to acquire 1,429,461 Ordinary Shares at exercise prices ranging from $31.50 to $44.63 have been granted as of June 1, 1999. The 1995 Plan provides for the options to become exercisable, unless otherwise specified by the Board of Directors of the Company and subject to certain acceleration and termination provisions, after two years from the date of grant in respect of 20% of such options and thereafter in installments of 20% per year over a four-year period. Options issued under the 1997 Plan become exercisable one year from the date of grant with respect to 20% of such options and thereafter in installments of 20% per year over a four-year period. All options have a term of 10 years from the date of grant. Employees, officers and directors of the Company and subsidiaries of the Company may be granted options under the plans. Such options may be transferred to trusts with respect to which any such participants are beneficiaries and corporations or other entities controlled by such participants. As of December 31, 1998, options to acquire 3,016,937 Ordinary Shares were outstanding, of which 360,443 were exercisable as of that date. As of June 1, 1999, the officers and directors of the Company, as a group, hold options granted pursuant to the plans to acquire 1,904,678 Ordinary Shares, of which 393,522 are currently exercisable. 38 SUN INTERNATIONAL HOTELS LIMITED ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS Not applicable. PART III - -------------------------------------------------------------------------------- ITEM 15. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES Not applicable. PART IV - -------------------------------------------------------------------------------- ITEM 17. FINANCIAL STATEMENTS Not applicable. ITEM 18. FINANCIAL STATEMENTS Reference is made to Item 19(a) for a list of all financial statements filed as part of this Annual Report. 39 ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS (a) List of Financial Statements and Financial Statement Schedules Page ---- Report of Independent Public Accountants F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Income F-4 Consolidated Statements of Changes in Shareholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 (b) List of Exhibits Sequentially Exhibit No. Description Numbered Page ----------- ----------- ------------- 3.1 Asset and Land Purchase 72 SUN INTERNATIONAL HOTELS LIMITED Agreement between Sheraton Desert Inn Corporation, Starwood Hotels and Resorts Worldwide, Inc., Sheraton Gaming Corporation, Sun International Hotels Limited and Sun International Nevada, Inc. Dated as of May 17, 1999 3.2 Management Agreement between the 159 Government of Dubai and Sun International Management Limited and Sun International Hotels Limited Dated as of June 5, 1998 40 SUN INTERNATIONAL HOTELS LIMITED ENFORCEABILITY OF CIVIL LIABILITIES The Company is a Bahamian international business company incorporated under the International Business Companies Act, 1989 of the Commonwealth of The Bahamas (the "Companies Act"). Certain of the directors and executive officers of the Company reside outside the United States. A substantial portion of the assets of such persons and of the Company is located outside the United States. As a result, in the opinion of Harry B. Sands and Company, Bahamian counsel to the Company, it may be difficult or impossible to effect service of process within the United States upon such persons, to bring suit in the United States or to enforce, in the U.S. courts, any judgment obtained there against such persons predicated upon any civil liability provisions of the U.S. federal securities laws. It is unlikely that Bahamian courts would entertain original actions against Bahamian companies, their directors or officers predicated solely upon U.S. federal securities laws. Furthermore, judgments predicated upon any civil liability provisions of the U.S. federal securities laws are not directly enforceable in The Bahamas. Rather, a lawsuit must be brought in The Bahamas on any such judgment. Subject to consideration of private international law, in general, a judgment obtained after due trial by a court of competent jurisdiction, which is final and conclusive as to the issues in connection, is actionable in Bahamian courts and is impeachable only upon the grounds of (i) fraud, (ii) public policy and (iii) natural justice. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Certain information included in this Form 20-F filing contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates, projections, management's beliefs and assumptions made by management. Words such as "expects", "anticipates", "intends", "plans", "believes", "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements include information relating to plans for future expansion and other business development activities as well as other capital spending, financing sources and the effects of regulation (including gaming and tax regulation) and competition. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include, but are not limited to, those relating to development and construction activities, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), availability of financing, democratic or global economic conditions, pending litigation, changes in tax laws or the administration of such laws and changes in gaming laws or regulations (including the legalization of gaming in certain jurisdictions). 41 SUN INTERNATIONAL HOTELS LIMITED SUN INTERNATIONAL HOTELS LIMITED Accounts for the year ended December 31, 1998 F-1 SUN INTERNATIONAL HOTELS LIMITED REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Sun International Hotels Limited: We have audited the accompanying consolidated balance sheets of Sun International Hotels Limited and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sun International Hotels Limited and subsidiaries as of December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Arthur Andersen LLP Roseland, New Jersey January 29, 1999 F-2 SUN INTERNATIONAL HOTELS LIMITED CONSOLIDATED BALANCE SHEETS (In thousands of US dollars) ASSETS December 31, ----------------------- 1998 1997 ---------- ---------- Current assets: Cash and cash equivalents $ 61,206 $ 145,018 Restricted cash equivalents 1,917 8,143 Trade receivables, net 36,319 27,986 Due from affiliates 7,062 7,901 Inventories 8,899 6,442 Prepaid expenses 5,126 5,687 ---------- ---------- Total current assets 120,529 201,177 Property and equipment, net 1,257,165 929,724 Subordinated notes receivable 87,385 80,961 Deferred charges and other assets, net 36,889 33,072 Investment in associated companies 26,894 28,396 Goodwill, net 96,871 101,410 ---------- ---------- Total assets $1,625,733 $1,374,740 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY December 31, ----------------------- 1998 1997 ---------- ---------- Current liabilities: Current maturities of long-term debt $ 2,382 $ 406 Accounts payable and accrued liabilities 130,989 106,364 Capital creditors 33,736 19,478 ---------- ---------- Total current liabilities 167,107 126,248 Long-term debt, net of current maturities 565,752 412,209 Deferred income taxes 42,253 46,000 ---------- ---------- Total liabilities 775,112 584,457 ---------- ---------- Commitments and contingencies Shareholders' equity: Ordinary Shares 34 33 Capital in excess of par 675,595 670,861 Retained earnings 174,992 119,389 ---------- ---------- Total shareholders' equity 850,621 790,283 ---------- ---------- Total liabilities and shareholders' equity $1,625,733 $1,374,740 ========== ========== The accompanying notes are an integral part of these statements. F-3 SUN INTERNATIONAL HOTELS LIMITED CONSOLIDATED STATEMENTS OF INCOME (In thousands of US dollars, except per share data) For The Year Ended December 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Revenues Gaming $319,342 $329,610 $ 77,342 Rooms 94,942 96,846 67,243 Food and beverage 86,593 91,329 60,372 Tour operations 14,757 15,403 15,048 Management and other fees 40,645 22,979 8,896 Other revenues 35,391 44,503 23,317 -------- -------- -------- Gross revenues 591,670 600,670 252,218 Less: Promotional allowances (40,792) (41,758) (12,102) -------- -------- -------- Net revenues 550,878 558,912 240,116 -------- -------- -------- Costs and expenses Gaming 190,543 199,269 42,975 Rooms 15,352 15,696 12,047 Food and beverage 59,145 60,750 41,069 Other operating expenses 72,102 75,982 37,505 Selling, general and administrative 70,024 64,846 34,663 Tour operations 14,653 14,913 15,262 Corporate expenses 18,811 14,193 10,895 Depreciation and amortization 32,081 28,639 11,442 Pre-opening expenses 25,961 -- -- -------- -------- -------- Total cost and expenses 498,672 474,288 205,858 -------- -------- -------- Income from operations 52,206 84,624 34,258 -------- -------- -------- Other income (expense): Interest income 15,651 16,144 12,499 Interest expense, net of capitalization (4,516) (24,370) (3,133) Equity in earnings of associated companies 2,730 2,214 2,530 Gain on sale of equity interest in associated company -- 13,386 -- Other, net (316) 335 144 -------- -------- -------- Total other income, net 13,549 7,709 12,040 -------- -------- -------- Income before provision for income taxes and extraordinary item 65,755 92,333 46,298 Provision for income taxes (8,009) (6,368) (576) -------- -------- -------- Income before extraordinary item 57,746 85,965 45,722 Extraordinary item, net -- (2,957) -- -------- -------- -------- Net income $ 57,746 $ 83,008 $ 45,722 ======== ======== ======== Earnings per share: Basic $ 1.74 $ 2.52 $ 1.64 ======== ======== ======== Diluted $ 1.70 $ 2.44 $ 1.58 ======== ======== ======== The accompanying notes are an integral part of these statements. F-4 SUN INTERNATIONAL HOTELS LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands of US dollars)
Ordinary Shares Retained Earnings (Deficit) --------------------- --------------------------------- Accumulated Other Comprehensive Capital in Retained Comprehensive Total Income for Shares Amount Excess of Par Earnings (Deficit) Income Equity the Period --------- --------- ------------- ------------------ ------------- --------- ------------- Balance at December 31, 1995 16,952 $ 17 $ 143,257 $ (7,873) $ 210 $ 135,611 -- Accretion of Series A Shares -- -- (300) -- -- (300) -- Conversion of Series A Shares 4,000 4 63,839 -- -- 63,843 -- Issuance of Ordinary Shares 8,050 8 281,226 -- -- 281,234 -- Stock issuance costs -- -- (17,868) -- -- (17,868) -- Exercise of share options 264 -- 3,111 -- -- 3,111 -- Translation reserves -- -- -- -- (1,364) (1,364) $ (1,364) Issuance of Ordinary Shares pursuant to the Merger 3,441 3 192,997 -- -- 193,000 -- Net income -- -- -- 45,722 -- 45,722 45,722 --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 1996 32,707 32 666,262 37,849 (1,154) 702,989 $ 44,358 ========= Translation reserves -- -- -- -- (314) (314) (314) Exercise of share options 254 1 4,599 -- -- 4,600 -- Net income -- -- -- 83,008 -- 83,008 $ 83,008 --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 1997 32,961 33 670,861 120,857 (1,468) 790,283 $ 82,694 ========= Translation reserves -- -- -- -- (2,143) (2,143) $ (2,143) Exercise of share options 393 1 4,734 -- -- 4,735 -- Exercise of warrants 223 -- -- -- -- -- -- Net Income -- -- -- 57,746 -- 57,746 57,746 --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 1998 33,577 $ 34 $ 675,595 $ 178,603 $ (3,611) $ 850,621 $ 55,603 ========= ========= ========= ========= ========= ========= =========
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, ----------------------------------- 1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net income $ 57,746 $ 83,008 $ 45,722 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item -- 2,957 -- Depreciation and amortization 34,960 30,640 10,451 Gain on sale of equity interest in associated company -- (13,386) -- (Gain) loss on sale of assets 316 (628) (144) Equity in earnings of associated companies, net of dividends received (670) (625) (1,111) Utilization of tax benefits acquired in Merger 1,887 4,085 -- Provision for doubtful receivables 2,189 1,314 1,639 Provision for discount on CRDA obligations, net 572 987 -- Net change in working capital accounts: Receivables (19,744) (10,475) (11,679) Due from affiliates 839 (2,833) -- Inventories and prepaid expenses (1,896) (49) (3,010) Accounts payable and accrued liabilities 22,603 6,587 (1,603) Net change in deferred charges and other assets (4,953) 733 (27) Net change in deferred tax liability (3,747) -- -- --------- --------- --------- Net cash provided by operating activities 90,102 102,315 40,238 --------- --------- --------- Cash flows from investing activities: Payments for capital expenditures (443,996) (219,700) (79,476) Proceeds from sale of investment -- 18,785 -- Proceeds from sale of assets 110,313 7,712 681 Cash acquired in connection with Merger -- -- 33,805 Purchase of Additional Subordinated Notes -- (8,000) (42,000) Sale of Additional Subordinated Notes 2,798 2,800 22,502 Payments for expenses of Merger (745) (8,057) -- Payment received from loan to affiliate -- 1,108 -- CRDA deposits (2,955) (3,122) Increased investment in associated companies -- -- (1,739) --------- --------- --------- Net cash used in investing activities (334,585) (208,474) (66,227) --------- --------- --------- Cash flows from financing activities: Proceeds from issuance of Ordinary Shares -- -- 281,234 Proceeds from exercise of share options 4,735 4,600 3,111 Early redemption of debt -- (153,712) -- Borrowings 264,000 299,084 -- Stock issuance costs -- -- (17,868) Decrease in amounts due to affiliates -- -- (8,506) Debt issuance costs (694) (12,762) (3,909) Repayments of borrowings (113,596) (754) (120,099) --------- --------- --------- Net cash provided by financing activities 154,445 136,456 133,963 --------- --------- --------- Increase (decrease) in cash and cash equivalents (90,038) 30,297 107,974 Cash and Cash Equivalents at Beginning of Period 153,161 122,864 14,890 --------- --------- --------- Cash and Cash Equivalents at End of Period $ 63,123 $ 153,161 $ 122,864 ========= ========= =========
The accompanying notes are an integral part of these statements. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUN INTERNATIONAL HOTELS LIMITED Note 1-Organization and Basis of Presentation Sun International Hotels Limited ("SIHL") is an international resort and gaming company that develops, operates and manages premier resort and casino properties. The term "Company" as used herein includes SIHL and its subsidiaries. The Company currently operates or manages resort hotels and casinos in The Bahamas, Atlantic City, Connecticut and the Indian Ocean. The Company's largest property is Atlantis, a 2,327-room resort and casino located on Paradise Island, The Bahamas. The Bahamas SIHL was incorporated under the laws of the Commonwealth of The Bahamas on August 13, 1993. The Company, through certain Bahamian subsidiaries, owns and operates the Atlantis Resort and Casino Complex which includes the Coral and Beach Towerss, as well as the recently opened Royal Towers, the Ocean Club Golf & Tennis Resort, a golf course, a water plant, an airport facility and other improvements on Paradise Island as well as land available for sale or development. In December 1998, the Company completed a major expansion at the Atlantis Resort and Casino (the "Paradise Island Expansion"). The Paradise Island Expansion included a deluxe 1,200-room hotel, a new 100,000 square-foot casino entertainment complex, a new marina as well as a dramatic expansion to the ocean-themed adventure environment of Atlantis. A new convention facility is currently under construction and it is anticipated that it will cost approximately $20.0 million and will be completed during the second quarter of 1999. Atlantic City Pursuant to a merger agreement (the "Merger Agreement"), on December 16, 1996 (the "Effective Date"), the Company acquired Griffin Gaming & Entertainment, Inc. ("GGE") in a merger transaction (the "Merger"). Subsequent to the Merger, GGE's name was changed to Sun International North America, Inc. ("SINA"). The Company operates in Atlantic City through the Resorts Casino Hotel. Pursuant to the Merger Agreement, each share of SINA common stock outstanding immediately prior to the Effective Date of the Merger was converted into .4324 Ordinary Shares of the Company's capital stock (the "Ordinary Shares"). Also, each outstanding share of SINA's Class B common stock was converted into .1928 Ordinary Shares. Each .1928 Ordinary Share received in exchange for a share of SINA's Class B common stock trades as part of a unit along with $1,000 principal amount of 11.375% Junior Mortgage Notes due December 15, 2004, issued by a special purpose finance subsidiary of SINA. At the time of the Merger, SINA also had certain warrants outstanding, which entitled the holder thereof to purchase shares of SINA Common Stock. Pursuant to the Merger Agreement, the warrants were adjusted into rights to acquire Ordinary Shares. During 1998, these rights were exercised. The Company accounted for the Merger in accordance with APB 16, "Business Combinations" utilizing the purchase method of accounting. The purchase method of accounting requires that SINA's acquired net assets and liabilities be recorded at their fair values based on independent appraisals, evaluations, estimations and other studies. Pursuant to APB 16, valuation adjustments were made in 1997 as additional information became available, which allowed more accurate valuations. These adjustments resulted in an increase to goodwill of $6.9 million, a reduction in land value of $5.0 million and an increase in accrued liabilities of $1.9 million. F-7 SUN INTERNATIONAL HOTELS LIMITED The following unaudited proforma information for the year ended December 31, 1996 reflects the results of the Company's operations as though the Merger had occurred on January 1, 1996. The proforma information is not necessarily indicative of future results or what the Company's results of operations would have been had the Merger occurred on January 1, 1996. Dollars in thousands (except per share data) Net revenues $ 532,061 Net income $ 52,584 Diluted earnings per share $ 1.60 Connecticut The Company has a 50% interest in Trading Cove Associates ("TCA"), a Connecticut general partnership that entered into a management agreement with the Mohegan Tribal Gaming Authority ("MTGA"), an instrumentality of the Mohegan Tribe of Indians of Connecticut (the "Tribe"), to develop and manage a casino resort and entertainment complex situated in the town of Uncasville, Connecticut (the "Mohegan Sun Casino"). The Mohegan Sun Casino opened on October 12, 1996. The management agreement provides that TCA is entitled to receive between 30% and 40% of the net profits, as defined, of the Mohegan Sun Casino. The management agreement covers development, management, marketing and administration services. On February 9, 1998, the Company announced that the Tribe appointed TCA to develop its proposed expansion of the Mohegan Sun Casino, which is currently expected to cost approximately $750.0 million. In addition, TCA and the Tribe agreed that effective January 1, 2000, TCA will turn over management of the Mohegan Sun Resort Complex (which comprises the existing operations and the proposed expansion) to the Tribe. In exchange for relinquishing its rights under its existing agreements, beginning January 1, 2000, TCA will receive annual payments of five percent of the gross revenues of the Mohegan Sun Resort Complex for a 15-year period. Until January 1, 2000, there will be no change in TCA's existing agreements with the Tribe. The Company and TCA acquired $38.3 million and $1.7 million respectively, of subordinated notes (the "Subordinated Notes") issued by MTGA. As of November 8, 1996, the Company sold $19.2 million of the Subordinated Notes and the accrued interest thereon to its partner in TCA, at carrying value as of the date of the sale. Also, as of that date, TCA distributed $850,000 of Subordinated Notes plus accrued interest to the Company as a return of capital. The Subordinated Notes earn interest at 15% per annum. Interest payable on the Subordinated Notes can be satisfied by the issuance of additional Subordinated Notes. Interest payments through December 31, 1998 of approximately $12.1 million on the Subordinated Notes have been satisfied in this manner. The Company also acquired $50.0 million of notes (the "Additional Subordinated Notes") from MTGA related to a construction completion guarantee, which bear interest at prime plus 1%. Interest payable on the Additional Subordinated Notes can be satisfied by the further issuance of Additional Subordinated Notes. Interest payments through December 31, 1998 of approximately $10.3 million on the Additional Subordinated Notes have been satisfied in this manner. In each of October 1998 and 1997, the Company sold $2.8 million Additional Subordinated Notes, which included accrued interest thereon, to its partner in TCA. Pursuant to an agreement with the Tribe, effective January 1, 2000, the Subordinated Notes and the Additional Subordinated Notes shall be repaid and the Company will use the proceeds to acquire a new F-8 SUN INTERNATIONAL HOTELS LIMITED series of publicly issued subordinated notes of MTGA. TCA is obligated to pay certain amounts to each of its partners or their affiliates, as priority payments from its management fees, for services provided. These amounts are paid as TCA receives sufficient management fees to meet the priority distribution. Share Offering On March 1, 1996, the Company completed a public offering of 8,049,737 of its Ordinary Shares at a price of $35 per share (the "Public Offering"). Prior to the Public Offering, the Company had two series of stock, the Series A Ordinary Shares (the "Series A Shares") and the Series B Ordinary Shares (the "Series B Shares"). As a result of the Public Offering, the Company's Series A Shares and Series B Shares were automatically redesignated as Ordinary Shares without reference to series (the "Redesignation"). In addition, the Redesignation resulted in the elimination of a put right associated with the Series A Shares and an increase of $63,843,000 in shareholders' equity on the Company's consolidated balance sheet. Prior to the Redesignation, holders of the Series A Shares were entitled to sell and require the Company to purchase any Series A Shares tendered at a price of $17.50 per share on May 3, 1999 (the "Put Right"). While the Series A Shares were outstanding, the Company accreted the difference between the original issue price of $15 and the Put Right price by charging amounts to shareholders' equity based on the effective interest method. Reclassification Certain balances in the accompanying consolidated financial statements for 1997 and 1996 have been reclassified to conform with the current year presentation. Note 2-Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of SIHL and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Investments in associated companies, which are less than 50% and more than 20% owned, are accounted for under the equity method of accounting. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company provides allowances for doubtful accounts arising from casino, hotel and other services, which are based upon a specific review of certain outstanding receivables. In determining the amounts of the allowances, the Company is required to make certain estimates and assumptions and actual results may differ from these estimates and assumptions. F-9 Revenue Recognition SUN INTERNATIONAL HOTELS LIMITED The Company recognizes the net win from casino gaming activities (the difference between gaming wins and losses) as casino revenues. Revenues from hotel and related services are recognized at the time the related service is performed. Management fees and other operating revenues include fees charged to unconsolidated affiliates for casino hotel management, executive management and project consulting. Revenues are recorded at the time the service is provided. Promotional Allowances The retail value of accommodations, food, beverage and other services provided to customers without charge is included in gross revenues and deducted as promotional allowances. The estimated departmental costs of providing such promotional allowances are included in gaming costs and expenses as follows: For The Year Ended December 31, ----------------------------------- (In Thousands of Dollars) 1998 1997 1996 ------- ------- ------- Rooms $ 6,671 $ 5,965 $ 919 Food and beverage 17,921 19,315 4,131 Other 5,819 5,402 260 ------- ------- ------- $30,411 $30,682 $ 5,310 ======= ======= ======= Amounts in 1998 and 1997 include the results of the Resorts Casino Hotel. If these results were excluded, the total for 1998 and 1997 would be $5.7 million and $5.4 million, respectively. Pre-Opening Expenses The Company capitalized pre-opening costs, substantially all of which were associated with the Paradise Island Expansion, as they were incurred. All such costs were written off in the fourth quarter of 1998 in conjunction with the opening. In the first quarter of 1999, the Company will be required to adopt Statement of Position 98-5 which states that all such costs will be charged to expense as incurred. Adoption of this new standard is not expected to have a material impact on the consolidated financial statements. Foreign Currency Transactions denominated in foreign currencies are recorded in local currency at actual exchange rates at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet dates are reported at the rates of exchange prevailing at those dates. Any gains or losses arising on monetary assets and liabilities from a change in exchange rates subsequent to the date of the transaction have been included in corporate expenses in the accompanying consolidated financial statements. These amounts were not significant for the years ended December 31, 1998, 1997 and 1996. The financial statements of the Company's equity method investees and certain subsidiaries are translated from their functional currencies into US dollars using current and historical exchange rates. Translation adjustments resulting from this process are reported separately and accumulated in shareholders' equity. Upon sale or liquidation of the Company's investments, the translation adjustment is reported as part of the gain or loss on sale or liquidation. Derivative Financial Instruments The Company utilizes interest rate protection agreements with two counter parties to manage the impact of F-10 SUN INTERNATIONAL HOTELS LIMITED interest rate changes on the Company's variable rate debt obligation. The Company does not use derivative financial instruments for trading purposes. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount. Income or expense on derivative financial instruments used to manage interest rate exposure is recorded on an accrual basis, as an adjustment to the yield of the underlying indebtedness over the periods covered by the contracts. If an interest rate swap is terminated early, any resulting gain or loss is deferred and amortized as an adjustment of the cost of the underlying indebtedness over the remaining periods originally covered by the terminated swap. If all or part of an underlying position is terminated, the related pro-rata portion of any unrecognized gain or loss on the swap is recognized in income at that time as part of the gain or loss on the termination. Amounts receivable or payable under the agreements are included in receivables or accrued liabilities in the accompanying consolidated balance sheets and were not material at December 31, 1998 and 1997. Cash Equivalents The Company considers all of its short-term money market securities purchased with original maturities of three months or less to be cash equivalents. Inventories Inventories of provisions and supplies are carried at the lower of cost (first-in, first-out) or market value. Provisions have been made to reduce excess or obsolete inventories to their estimated net realizable value. Property and Equipment Property and equipment are stated at cost and are depreciated over the estimated useful lives reported below using the straight-line method. Interest costs incurred during the construction period are capitalized in accordance with Statement of Financial Accounting Standards No. 34, "Capitalization of Interest Costs". Land improvements and utilities 14-40 years Hotels and other buildings 15-40 years Furniture, machinery and equipment 2-10 years Deferred Charges and Other Assets Deferred charges related to the Mohegan Sun Casino are generally amortized over the term of the related management agreement. Debt issuance costs are amortized over the terms of the related indebtedness. Goodwill Goodwill is amortized on a straight line basis over 40 years. Amortization expense included in the accompanying consolidated statements of income related to goodwill was $2.7 million, $2.4 million and $0 for the years ended December 31, 1998, 1997 and 1996, respectively. Goodwill related to the investment in associated companies is included therein in the accompanying consolidated balance sheets. Equity in earnings of associated companies for the years ended December 31, 1998, 1997 and 1996 is net of $264,000, $264,000 and $263,000, respectively, of amortization expense related to such goodwill. F-11 Stock Option Compensation SUN INTERNATIONAL HOTELS LIMITED The Company has elected to apply Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" in accounting for compensation under its stock option plans in lieu of the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). Certain proforma disclosures related to SFAS 123 are included in Note 10. Long Lived Assets The Company reviews its long lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. As a result of its review, the Company does not believe that any asset impairment exists with respect to its long lived assets. Income Taxes The Company is subject to income taxes in certain jurisdictions. Accordingly, the accompanying consolidated statements of income include provisions and benefits for income taxes based on prevailing tax laws of those jurisdictions. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". Under this standard, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities at enacted tax rates that will be in effect for the years in which the differences are expected to reverse. A valuation allowance is recognized based on an estimate of the likelihood that some portion or all of the deferred tax asset will not be realized. Other Comprehensive Income Other comprehensive income items are not reported net of tax as they relate to translation reserves on investments owned by foreign entities that are not subject to taxation. Per Share Data The Company calculates earnings per share in accordance with Statement of Financial Accounting Standards No. 128 "Earnings per Share". The following reconciliation of the shares used in the per share computations is presented: For The Year Ended December 31, ------------------------------- (In Thousands) 1998 1997 1996 ------ ------ ------ Weighted average shares used in basic computations 33,270 32,920 27,962 Stock options and warrants 764 1,031 953 Weighted average shares used in diluted computations 34,034 33,951 28,915 F-12 SUN INTERNATIONAL HOTELS LIMITED The net income amount used as the numerator in calculating basic and diluted earnings per share equals net income in the accompanying consolidated statements of income. Note 3- Cash and Cash Equivalents Cash equivalents at December 31, 1998 and 1997 included reverse repurchase agreements (federal government securities purchased under agreements to resell those securities) under which the Company had not taken delivery of the underlying securities and investments in a money market fund that invests exclusively in US Treasury obligations. At December 31, 1998, the Company held reverse repurchase agreements of $30.3 million, all of which matured January 4, 1999. Note 4-Trade Receivables Components of trade receivables were as follows: December 31, --------------------- (Dollars in Thousands) 1998 1997 -------- -------- Gaming $ 18,269 $ 15,986 Less: allowance for doubtful accounts (6,047) (5,378) -------- -------- 12,222 10,608 -------- -------- Non-gaming Hotel and related 13,752 13,811 Other 11,510 6,830 -------- -------- 25,262 20,641 Less: allowance for doubtful accounts (1,165) (3,263) -------- -------- 24,097 17,378 -------- -------- $ 36,319 $ 27,986 ======== ======== Note 5 -Property and Equipment Components of property and equipment were as follows F-13 SUN INTERNATIONAL HOTELS LIMITED December 31, -------------------------- (Dollars in Thousands) 1998 1997 ----------- ----------- Land and land rights $ 351,826 $ 401,188 Land improvements and utilities 203,048 86,362 Hotels and other buildings 593,958 181,244 Furniture, machinery and equipment 141,284 84,801 Construction in progress 39,812 222,351 ----------- ----------- 1,329,928 975,946 Less: accumulated depreciation (72,763) (46,222) ----------- ----------- $ 1,257,165 $ 929,724 =========== =========== Interest costs of $35,304,000, $6,778,000 and $438,000 were capitalized in 1998, 1997 and 1996, respectively. Note 6 -Deferred Charges and Other Assets Components of deferred charges and other assets were as follows: December 31, ---------------------- (Dollars in Thousands) 1998 1997 ------- ------- CRDA bonds and deposits $14,831 $12,467 Mohegan Sun Casino 2,429 3,768 Debt issuance costs 13,917 16,154 Other 5,712 683 ------- ------- $36,889 $33,072 ======= ======= Note 7-Accounts Payable and Accrued Liabilities Components of accounts payable and accrued liabilities were as follows: December 31, --------------------- (Dollars in Thousands) 1998 1997 -------- -------- Trade payables $ 41,216 $ 35,514 Accrued payroll and related taxes and benefits 17,361 13,735 Customer deposits and unearned revenues 17,897 14,198 Accrued gaming taxes, fees and related assessments 3,050 6,351 Accrued interest 8,187 9,940 Other accrued liabilities 43,278 26,626 -------- -------- $130,989 $106,364 ======== ======== Note 8- Long Term Debt F-14 SUN INTERNATIONAL HOTELS LIMITED Long-term debt consisted of the following: December 31, ----------------------- (Dollars in Thousands) 1998 1997 --------- --------- 9% Senior Notes due 2007 $ 200,000 $ 200,000 Unamortized discount (807) (869) --------- --------- 199,193 199,131 --------- --------- 8.625% Senior Notes due 2007 100,000 100,000 Revolving Credit Facility 259,000 -- 11% Mortgage Notes 5,352 5,354 Unamortized premium 246 285 --------- --------- 5,598 5,639 --------- --------- 11.375% Junior Mortgage Notes 1,095 1,095 Unamortized premium 54 60 --------- --------- 1,149 1,155 --------- --------- Showboat Notes -- 105,333 Other 3,194 1,357 --------- --------- 568,134 412,615 Less: amounts due within one year (2,382) (406) --------- --------- $ 565,752 $ 412,209 ========= ========= 9% Senior Notes The 9% senior subordinated unsecured notes due 2007 (the "9% Senior Notes"), are unconditionally guaranteed by certain subsidiaries of SINA. Interest on the 9% Senior Notes is payable on March 15 and September 15 each year. The indenture for the 9% Senior Notes (the "Senior Indenture") contains certain covenants, including limitations on the ability of the issuers and the guarantors to, among other things: (i) incur additional indebtedness, (ii) incur certain liens, (iii) engage in certain transactions with affiliates and (iv) pay dividends and make certain other payments. 8.625% Senior Notes In December 1997, the Company filed a registration statement with the Securities and Exchange Commission pursuant to which the Company may, from time to time, issue in one or more series an aggregate of $300.0 million of its debt securities (the "Shelf Registration"). Pursuant to the Shelf Registration, in December 1997 the Company issued $100.0 million of senior subordinated unsecured notes due December 2007 (the "8.625% Senior Notes"). Interest on the 8.625% Senior Notes is payable semi-annually on June 15 and December 15 of each year. The indenture for the 8.625% Senior Notes contains the same covenants and restrictions as those in the Senior Indenture. Showboat Notes F-15 SUN INTERNATIONAL HOTELS LIMITED The First Mortgage Non-Recourse Pass-Through Notes due June 30, 2000 (the "Showboat Notes"), were non-recourse notes, secured by a mortgage encumbered by a collateral assignment of the Showboat Lease, defined below, and by a pledge of any proceeds of the sale of such mortgage and collateral assignment. Interest on the Showboat Notes consisted of a pass-through of the lease payments received pursuant to the lease of 10 acres of land under the Showboat Casino Hotel (the "Showboat Lease"). On January 29, 1998, the Company sold the land under the Showboat Casino Hotel for $110.0 million, its net book value. The majority of the proceeds were used to redeem the Showboat Notes effective February 28, 1998. Revolving Credit Facility In 1997, the Company amended an existing facility (the "Revolving Credit Facility") with a syndicate of banks led by The Bank of Nova Scotia and Societe Generale to allow for borrowings up to $375.0 million. Loans under the Revolving Credit Facility bear interest at (i) the higher of (a) The Bank of Nova Scotia's base rate or (b) the Federal Funds rate, in either case plus an additional 0.750% to 1.625% based on a debt to earnings ratio during the period, as defined (the "Debt Ratio") or (ii) The Bank of Nova Scotia's reserve-adjusted LIBOR rate plus 1.50% to 2.25% based on the Debt Ratio. Loans under the Revolving Credit Facility may be prepaid and reborrowed at any time and are due in full on August 12, 2002. Commitment fees are calculated at per annum rates ranging from 0.375% to 0.500%, based on the Debt Ratio, applied to the undrawn amount of the Revolving Credit Facility and are due, along with accrued interest, quarterly. The Revolving Credit Facility contains restrictive covenants that include: (a) restrictions on the payment of dividends, (b) minimum levels of earnings before interest expense, income taxes, depreciation and amortization ("EBITDA") and (c) a minimum relationship between EBITDA and interest expense and debt. Overdraft Loan Facility Pursuant to a letter of commitment dated September 30, 1994, as amended, between the Company and The Bank of Nova Scotia, the Company has a revolving overdraft loan facility (the "Overdraft Facility") in the amount of Bahamian $5.0 million which was equal to US $5.0 million as of December 31, 1998 and 1997. The Overdraft Facility bears interest at The Bank of Nova Scotia's base rate for Bahamian dollar loans plus 1.5% with repayment subject to annual review. The Overdraft Facility is secured by substantially all of the Company's Bahamian assets and ranks pari passu with the Revolving Credit Facility. At December 31, 1998 and 1997, no amounts were outstanding under the Overdraft Facility. Principal Payments Minimum principal payments of long-term debt outstanding as of December 31, 1998 for each of the next five years and thereafter are as follows: 1999-$2,382,000; 2000-$148,000; 2001-$148,000; 2002-$259,148,000; 2003-$5,474,000; thereafter-$300,834,000. Note 9-Shareholders' Equity The Company's authorized, issued and outstanding shares were as follows: F-16 SUN INTERNATIONAL HOTELS LIMITED December 31, ----------------- (In Thousands, except per share data) 1998 1997 ------- ------- Ordinary Shares Par value per share $ 0.001 $ 0.001 Authorized 250,000 250,000 Issued and outstanding 33,577 32,961 Preference Shares Par value per share $ 0.001 $ 0.001 Authorized 100,000 100,000 Issued and outstanding -- -- Note 10-Stock-Based Compensation Stock Options In May 1995, the shareholders of the Company approved a stock option plan (the "1995 Plan") that provided for the issuance of options to acquire up to 2,000,000 Ordinary Shares and in May 1997 the shareholders approved a stock option plan (the "1997 Plan", and together with the 1995 Plan, the "Plans") that provided for the issuance of options to acquire up to 1,000,000 Ordinary Shares. In May 1998, the size of the 1997 Plan was increased to 1,500,000 Ordinary Shares. Pursuant to the Plans, the option prices are equal to the market value per share of the Ordinary Shares on the date of the grant. The 1995 Plan provided for the options to become exercisable, unless otherwise specified by the Board of Directors and subject to certain acceleration and termination provisions, after two years from the date of grant in respect of 20% of such options, and thereafter in installments of 20% per year over a four-year period. The 1997 Plan provides that the vesting period begins one year after the grant date. The options have a term of 10 years from the date of grant. The Plans provide for options with respect to Ordinary Shares to be granted to directors, officers and employees of SIHL and its subsidiaries. A summary of the Company's stock option activity for 1998, 1997 and 1996 is as follows F-17 SUN INTERNATIONAL HOTELS LIMITED
December 31 , ------------------------------------------------------------ (In Thousands, Except Per Share Data) 1998 1997 1996 ------------------ ------------------ ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Price Price Price Shares Per Share Shares Per Share Shares Per Share ------ --------- ------ --------- ------ --------- Outstanding at beginning of year 2,795 $ 26.32 1,640 $ 17.41 1,733 $ 13.73 Granted 701 41.50 1,476 35.61 103 45.68 Exercised (393) 14.45 (253) 18.20 (264) 11.78 Terminated and other (86) 36.45 (68) 33.25 (200) 10.77 Converted SINA to SIHL options -- -- -- -- 268 19.76 ----- ----- ----- Outstanding at end of year 3,017 31.38 2,795 26.32 1,640 17.41 ----- ----- ----- Exercisable at end of year 360 342 368 ----- ----- ----- Available for grant 125 272 394 ----- ----- -----
For purposes of supplemental disclosures required by SFAS 123, the fair value of options granted during 1998, 1997 and 1996 was estimated as of the respective dates of grant using a Black-Scholes option pricing model with the following weighted average assumptions for the periods presented:
For The Year Ended December 31, ------------------------------- 1998 1997 1996 ------- ------- ------- Risk-free interest rates 4.9% 5.8% 6.2% Volatility factors of the expected market price of Ordinary Shares 38.0% 34.0% 42.0% Expected life of options in years 6-7 6-7 7 Expected dividend yields -- -- -- Weighted average grant date fair value $ 12.71 $ 11.46 $ 20.25 Proforma results based on these assumptions were as follows: Net income (000's) $50,943 $80,109 $44,877 Diluted earnings per share $ 1.50 $ 2.36 $ 1.55
Executive Bonus Plan In 1998, the Company created a bonus plan for certain of its executives that is payable based upon the attainment of specified earnings per share. A portion of the bonus is payable in Ordinary Shares that vest over a three-year period. Any unvested shares at termination of employment are forfeited. Note 11-Related Party Transactions In the normal course of business, the Company undertakes transactions with a number of unconsolidated affiliated companies. Certain of the Company's subsidiaries provide project consulting and management services to such affiliates. Due from affiliates consisted of the following: F-18 SUN INTERNATIONAL HOTELS LIMITED December 31, --------------- (Dollars In Thousands) 1998 1997 ------ ------ Trading Cove Associates $2,090 $3,605 Sun Indian Ocean 4,662 4,247 Other 310 49 ------ ------ $7,062 $7,901 ====== ====== Note 12-Retirement Plans Certain of the Company's subsidiaries participate in a defined contribution plan covering substantially all of their full-time employees. The Company makes contributions to this plan based on a percentage of eligible employee contributions. Total expense for this plan was $895,000, $830,000 and $55,000 for the years ended December 31, 1998, 1997 and 1996, respectively. In addition to the plan described above, union and certain other employees of the Company's subsidiaries in The Bahamas and Atlantic City are covered by multi-employer defined benefit pension plans to which employers make contributions. In connection with these plans, the Company was billed and paid $4.8 million, $3.0 million and $1.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. Note 13- Income Taxes A significant portion of the Company's operations are located in The Bahamas where there are no income taxes. In 1998, 1997 and 1996, the Company recorded current federal income tax provisions of $11,477,000, $5,754,000 and $513,000 and current state income tax provisions of $279,000, $614,000 and $63,000, respectively, relating to US operations, and in 1998, the Company recorded a deferred federal income tax benefit of $3,747,000 relating to US operations. In 1997, the Company also recorded $1,593,000 and $450,000 in current federal and state income tax benefits resulting from an extraordinary loss. The effective income tax rate on income before extraordinary items varies from the statutory federal income tax rate as a result of the following factors: For The Year Ended December 31, ------------------------------ (Dollars In Thousands) 1998 1997 1996 ------ ------ ------ Statutory federal income tax rate 35.0% 35.0% 35.0% Non US-source income (27.1) (31.6) (33.9) Other 4.3 3.5 .1 ------ ------ ------ Effective tax rate 12.2% 6.9% 1.2% ====== ====== ====== The components of the deferred tax assets and liabilities were as follows: F-19 SUN INTERNATIONAL HOTELS LIMITED December 31, ---------------------- (Dollars In Thousands) 1998 1997 --------- --------- Deferred tax liabilities Basis differences on land held for investment, development or resale $ (6,200) $ (50,600) Basis differences on property and equipment (44,300) (44,300) Other (2,100) (3,100) --------- --------- Total deferred tax liabilities (52,600) (98,000) --------- --------- Deferred tax assets Net operating loss carryforwards 187,300 215,400 Book reserves not yet deductible for tax return purposes 15,800 18,400 Basis difference on debt 400 9,500 Tax credit carryforwards 2,800 1,000 Other 6,000 5,300 --------- --------- Total deferred tax assets 212,300 249,600 Valuation allowance for deferred tax assets (201,953) (197,600) --------- --------- Deferred tax assets, net of valuation allowance 10,347 52,000 --------- --------- Net deferred tax liabilities $ (42,253) $ (46,000) ========= ========= A valuation allowance has been recorded against the portion of those deferred tax assets that the Company believes will more likely than not remain unrealized. Such deferred tax assets primarily relate to the net operating loss carryforwards related to SINA at the Effective Date. If such deferred tax assets were to be realized, the corresponding reduction to the valuation allowance would reduce the carrying value of goodwill. For federal income tax purposes, SINA had net operating loss carryforwards of approximately $535.0 million at December 31, 1998; however, due to the Merger, $434.0 million of these net operating loss carryforwards (the "Pre-Change NOLs") are limited in their availability to offset future taxable income of the Company. As a result of these limitations, approximately $11.3 million of Pre-Change NOLs will become available for use each year through the year 2008; an additional $8.4 million will be available in 2009. An additional $13.0 million of these Pre-Change NOLs would be available to offset gains on sales of assets owned at the date of the Merger that are sold within five years of that date. The remaining Pre-Change NOLs are expected to expire unutilized. The restricted NOL carryforwards that the Company believes will become available for utilization in spite of the limitations expire as follows: $60.0 million in 2005, $23.0 million in 2006, $31.0 million in 2007, $12.0 million in 2008, $1.0 million in 2009 and $8.0 million in 2011. The unrestricted NOLs that the Company believes may be used to offset future income expire as follows: $44.0 million in 2008 and $57.0 million in 2012. Note 14-Supplemental Cash Flow Disclosures Interest paid in 1998 and 1997, net of amounts capitalized, amounted to $3,390,000 and $21,052,000, respectively. Income taxes paid in 1998 and 1997 amount to $6,960,000 and $519,000, respectively. In 1996, these amounts were not materially different than amounts reflected as provisions in the accompanying consolidated statements of income. F-20 SUN INTERNATIONAL HOTELS LIMITED Non-cash investing and financing activities in 1998 and 1997 included the following: (Dollars In Thousands) December 31, ----------------- 1998 1997 ------- ------- Increase (decrease) for valuation adjustments Goodwill -- $ 6,950 Land -- $(5,000) Accounts payable and accrued liabilities -- $ 1,950 Exchange of real estate in Atlantic City for reduction in CRDA obligation -- $ 2,200 Property and equipment acquired under capital lease obligations $ 5,098 -- Note 15 -Commitments and Contingencies Casino License The operations of casinos in both The Bahamas and Atlantic City are subject to regulatory controls. A casino license must be obtained in each jurisdiction by the operator and the license must be periodically renewed and is subject to revocation at any time. In the event that the Company is not able to maintain its licenses, management believes that the Company would still realize the carrying value of its related assets. Casino Reinvestment Development Authority ("CRDA") Obligations The New Jersey Casino Control Act, as amended, requires the Company to purchase bonds issued by the CRDA, or to make other investments authorized by the CRDA, in an amount equal to 1.25% of its gross gaming revenues, as defined. The CRDA bonds have interest rates ranging from 3.9% to 7.0% and have repayment terms of between 20 and 50 years. At December 31, 1998, the Company had $10.9 million face value of bonds issued by the CRDA and had $16.0 million on deposit with the CRDA. These bonds and deposits, net of an estimated discount to reflect the below-market interest rate payable on the bonds, are included in deferred charges and other assets in the accompanying consolidated balance sheets. The fair value of the CRDA bonds approximates their carrying value. New Heads of Agreement In 1997, the Company amended an agreement (the "Amended Agreement") reached with the Bahamian Government in 1995 that provided for certain investment incentives to encourage the Company to undertake an expansion program at Atlantis. The Amended Agreement provides for additional incentives in recognition of the significant increase in the size and scope of the Paradise Island Expansion. The Amended Agreement F-21 SUN INTERNATIONAL HOTELS LIMITED provides for certain fixed gaming taxes as well as a 10% gaming tax to be paid on gaming win over $20.0 million. Further, the Amended Agreement provides for a 50% credit against all variable gaming tax paid for a period of 11 years. This tax structure became effective January 1, 1998. In order to secure the tax incentives as described, in addition to the Paradise Island Expansion and creation of a minimum of 2,000 new jobs for Bahamian citizens at Atlantis, the Company is obligated to construct an additional 562 rooms on Paradise Island in place of the Pirate's Cove Beach Resort (a 562-room hotel on Paradise Island) which the Company demolished during the fourth quarter of 1998. The Amended Agreement also provides for a new five-year joint marketing agreement, pursuant to which the Bahamian Government shall match the Company's contribution, up to $4.0 million annually, toward the direct costs related to staging certain marketing events, public relations activities and the production and placement of advertisements in all media. Control of Sun International Sun International Investments Limited ("SIIL") has agreed with the Bahamian Government not to reduce its voting interest in SIHL below 45% until six months after completion of the Paradise Island Expansion. Thereafter, SIIL has agreed to control a majority of the SIHL Board of Directors for a period of five additional years. Litigation, Claims and Assessments The Company is a defendant in certain litigation and is aware of certain claims and assessments incurred in the normal course of business. In the opinion of management, based on the advice of counsel, the aggregate liability, if any, arising from such matters will not have a material adverse effect on the accompanying consolidated financial statements. A complaint was filed in December 1997 on behalf of a plaintiff and a purported class of GGE shareholders against SIHL, GGE and various affiliates, directors and officers of SIHL and GGE. The complaint alleges that the Proxy Statement and Prospectus issued by SIHL and GGE in November 1996, in connection with the Merger, was false and misleading with regard to statements made about a License and Service Agreement entered into between GGE and The Griffin Group. The Company believes that the case is without merit and intends to vigorously defend its actions. In September 1998, the Company filed a Motion for Summary Judgment to dispose of the claim, which motion has been fully briefed and is pending a court decision. Purchase Commitments At December 31, 1998, the Company had unfunded contracts in place for capital expenditures related to the Paradise Island Expansion and related to room renovations at the Resorts Casino Hotel in Atlantic City of $28.0 million and $12.0 million, respectively. Note 16-Segment Information Statement of Financial Accounting Standards No.131 "Disclosures about Segments of an Enterprise and Related Information" requires the disclosure of information regarding the operations of the Company based upon how management makes operating decisions and assesses performance of such segments. The Company operates in four geographical segments in one industry, the development, operation and management of premier resort and casino properties. The Company evaluates the performance of its F-22 SUN INTERNATIONAL HOTELS LIMITED segments based primarily on operating profit before corporate expenses, interest expense, interest income, income taxes and non-recurring items. The following is an analysis of net revenues, contribution to consolidated income before provision for income taxes and extraordinary item and total assets, depreciation and amortization of goodwill and capital additions by geographical location: Net Revenues For The Year Ended December 31, ------------------------------ (Dollars In Thousands) 1998 1997 1996 -------- -------- -------- Casino/hotel Atlantic City, New Jersey (a) Gaming $234,736 $244,156 $ -- Rooms 16,148 16,514 -- Food and beverage 26,692 27,085 -- Other casino/hotel 11,460 11,344 -- Less: promotional allowances (28,295) (28,465) -- -------- -------- -------- 260,741 270,634 -- -------- -------- -------- Paradise Island, The Bahamas Gaming 84,606 85,454 77,342 Rooms 78,794 80,332 67,243 Food and beverage 59,901 64,244 60,372 Other casino/hotel (b) 34,157 36,886 34,746 Less: promotional allowances (12,497) (13,293) (12,102) -------- -------- -------- 244,961 253,623 227,601 -------- -------- -------- Total casino/hotel 505,702 524,257 227,601 Management and other fees Connecticut (c) 34,613 17,356 3,565 Indian Ocean 6,032 5,273 4,497 Other segments 4,531 12,026 4,453 -------- -------- -------- Net revenues $550,878 $558,912 $240,116 ======== ======== ======== F-23 SUN INTERNATIONAL HOTELS LIMITED Contribution to Consolidated Income before Provision for Income Taxes and Extraordinary Item For The Year Ended December 31, ------------------------------ (Dollars In Thousands) 1998 1997 1996 -------- -------- -------- Casino/hotel Atlantic City, New Jersey (a) $ 19,915 $ 21,591 $ -- Paradise Island, The Bahamas (b) 42,132 46,240 32,690 -------- -------- -------- 62,047 67,831 32,690 -------- -------- -------- Management and other fees, net of amortization Connecticut (c) 33,376 16,504 3,565 Indian Ocean 6,032 5,273 4,497 General corporate (19,505) (14,682) (10,947) Non-recurring pre-opening expenses (25,961) -- -- Other segments 621 9,698 4,453 Corporate marketing, retail and public relations (4,404) -- -- -------- -------- -------- Income from operations 52,206 84,624 34,258 -------- -------- -------- Other income (expense) Interest income 15,651 16,144 12,499 Interest expense, net of capitalization (4,516) (24,370) (3,133) Equity in earnings of associated companies Indian Ocean 2,730 1,691 1,452 France (d) -- 523 1,078 Gain on sale of equity interest in associated company (d) -- 13,386 -- Other, net (316) 335 144 -------- -------- -------- Income before provision for income taxes and extraordinary item $ 65,755 $ 92,333 $ 46,298 ======== ======== ======== Total Assets, Depreciation and Amortization of Goodwill and Capital Additions
(Dollars In Thousands) 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 (e) -- -- 381,321 ------------ ------------ ------------ 1,388,074 30,148 411,462 ------------ ------------ ------------ Real estate related Atlantic City, New Jersey 56,839 -- 11,727 Paradise Island, The Bahamas 31,726 -- 18,371 ------------ ------------ ------------ 88,565 -- 30,098 ------------ ------------ ------------ Equity investment in Indian Ocean 26,894 -- -- General corporate 119,614 1,835 553 Corporate marketing, retail and public relations 1,891 97 1,870 Other segments 695 1 13 ------------ ------------ ------------ $ 1,625,733 $ 32,081 $ 443,996 ============ ============ ============
F-24 SUN INTERNATIONAL HOTELS LIMITED
(Dollars In Thousands) 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 ============ ============ ============ (Dollars In Thousands) As of December 31, 1996 Year ended December 31, 1996 ----------------------- ---------------------------- Depreciation and Amortization Capital Total Assets of Goodwill Additions ------------ ------------ ------------ Casino/hotel Atlantic City, New Jersey (a) $ 380,470 $ -- $ -- Paradise Island, The Bahamas 286,101 11,357 12,936 Purchase of Pirate's Cove Beach Resort 38,000 -- 38,000 Paradise Island Expansion, under construction 20,646 -- 18,200 ------------ ------------ ------------ 725,217 11,357 69,136 ------------ ------------ ------------ Real estate related Atlantic City, New Jersey (a) 159,104 -- -- Paradise Island, The Bahamas 27,272 -- -- ------------ ------------ ------------ 186,376 -- -- ------------ ------------ ------------ Equity investment in Indian Ocean 28,295 -- -- Equity investment in France (d) 4,831 -- -- General Corporate 177,900 85 10,340 ------------ ------------ ------------ $ 1,122,619 $ 11,442 $ 79,476 ============ ============ ============
(a) Atlantic City operations are included in SIHL's consolidated financial statements effective January 1, 1997 pursuant to the Merger described in Note 1. (b) Includes tour operations. (c) Mohegan Sun Casino in Connecticut opened in October 1996. (d) Equity investment in France was sold in June 1997. (e) The total assets and depreciation for 1998 are included in Paradise Island, The Bahamas. Note 17 -Equity in Earnings of Associated Companies F-25 SUN INTERNATIONAL HOTELS LIMITED The accompanying consolidated financial statements include equity in earnings of associated companies as a result of the Company's 22.8% interest in a company that owns and operates beach resort hotels in the Indian Ocean ("Sun Indian Ocean") and 25% equity holding in a company that owns and operates casinos in France ("Sun France"). On June 17, 1997, the Company sold its investment in Sun France for cash proceeds of $18.8 million. The resulting gain on sale of investment was $13.4 million. The following summarized financial information of Sun Indian Ocean has been prepared under United States generally accepted accounting principles at and for the years ended December 31, 1998, 1997 and 1996; converted to thousands of US dollars at the appropriate exchange rate. For The Year Ended December 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Revenues $ 88,773 $ 87,576 $ 74,850 Income from operations 17,172 13,942 13,626 Income before income taxes 14,237 9,114 9,858 December 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Current assets $ 23,123 $ 25,821 $ 24,497 Total assets 152,594 160,245 167,634 Current liabilities 31,714 36,271 40,428 Shareholders' equity 83,394 88,990 92,241 Note 18-Derivative Financial Instruments The Company is exposed to market risks arising from changes in interest rates. Due to current governmental policies in The Bahamas which equate one Bahamian dollar to one United States dollar and to its limited foreign operations in other jurisdictions, the Company does not have material market risk exposures relative to changes in foreign exchange rates. Credit Exposure The Company is exposed to credit related losses in the event of non-performance by counter parties to certain interest rate swaps. The Company monitors the credit worthiness of the counter parties and presently does not expect default by any of the counter parties. The Company does not obtain collateral in connection with its derivative financial instruments. The credit exposure that results from interest rate swaps is represented by the fair value of contracts with a positive fair value as of the reporting date. See Note 19, Fair Value of Financial Instruments, for the fair value of derivatives. The Company had no credit exposure on its interest rate swaps at December 31, 1998. Interest Rate Risk Management F-26 SUN INTERNATIONAL HOTELS LIMITED The Company uses interest rate swap agreements to manage the impact of interest rate changes on the Company's Revolving Credit Facility. The amounts exchanged by the counter parties to interest rate swap agreements normally are based upon the notional amounts and other terms, generally related to interest rates, of the derivatives. While notional amounts of interest rate swaps form part of the basis for the amounts exchanged by the counter parties, the notional amounts are not themselves exchanged, and therefore do not represent a measure of the Company's exposure as an end user of derivative financial instruments. At December 31, 1998 and 1997, notional principal amounts related to interest rate swaps (variable to fixed rate) were $90.0 million and $20.0 million, respectively. As of January 1, 1999, the notional principal amounts increased by $35.0 million which amount matures January 1, 2002. The swap portfolio maturities at December 31, 1998 are as follows: December 31, 2001- $50.0 million and January 1, 2002- $40.0 million. As of December 31, 1998, the weighted average fixed rate payment on the variable to fixed rate swaps was 6.86%. Variable rates received are indexed to LIBOR rate. Note 19-Fair Value of Financial Instruments The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The assumptions used have a significant effect on the estimated amounts reported. The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: (a) Cash and cash equivalents, receivables, other current assets, accounts payable, accrued liabilities and variable rate debt: The amounts reported in the accompanying consolidated balance sheets approximate fair value; (b) Fixed-rate debt: Fixed rate debt is valued based upon published market quotations, as applicable. The carrying amount of remaining fixed-rate debt approximates fair value; (c) Interest rate swaps: The fair value of interest rate swaps was determined from the representations of financial institutions. At December 31, 1998, the carrying value and negative fair value of the Company's interest rate swaps was $0 and $5.2 million, respectively. F-27 SUN INTERNATIONAL HOTELS LIMITED SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. SUN INTERNATIONAL HOTELS LIMITED Date: June 29, 1999 By: John R. Allison -------------------------------- Name: John R. Allison Title: Executive Vice President Chief Financial Officer F-28 SUN INTERNATIONAL HOTELS LIMITED EXHIBIT INDEX Sequentially Exhibit No. Description Numbered Page - ----------- ----------- ------------- 3.1 Asset and Land Purchase 72 Agreement between Sheraton Desert Inn Corporation, Starwood Hotels and Resorts Worldwide, Inc., Sheraton Gaming Corporation, Sun International Hotels Limited and Sun International Nevada, Inc. dated as of May 17, 1999 3.2 Management Agreement between the government of Dubai and Sun 159 International Management Limited and Sun International Hotels Limited dated as of June 5, 1998 F-29 EX-3.1 2 ASSET AND LAND PURCHASE AGREEMENT Execution Copy ASSET AND LAND PURCHASE AGREEMENT BETWEEN SHERATON DESERT INN CORPORATION STARWOOD HOTELS AND RESORTS WORLDWIDE, INC. SHERATON GAMING CORPORATION SUN INTERNATIONAL HOTELS LIMITED AND SUN INTERNATIONAL NEVADA, INC. Dated as of May 17, 1999 TABLE OF CONTENTS ARTICLE I Terms and Definitions SECTION 1.1 Terms and Definitions . . . . . . . . . . . . . . .1 SECTION 1.2 Terms and Usage Generally . . . . . . . . . . . . 11 ARTICLE II Purchase and Sale of and Description of Assets SECTION 2.1 Purchase and Sale.. . . . . . . . . . . . . . . . 11 SECTION 2.2 Description of Assets . . . . . . . . . . . . . . 12 SECTION 2.3 Description of Excluded Assets. . . . . . . . . . 16 ARTICLE III Contracts and Liabilities To Be Assumed SECTION 3.1 Contracts . . . . . . . . . . . . . . . . . . . . 18 SECTION 3.2 Assumed Liabilities . . . . . . . . . . . . . . . 18 SECTION 3.3 Consents. . . . . . . . . . . . . . . . . . . . . 19 ARTICLE IV Purchase Price SECTION 4.1 Purchase Price. . . . . . . . . . . . . . . . . . 20 SECTION 4.2 Payment of Purchase Price; Extension Amount . . . 20 SECTION 4.3 Disbursement of Deposit.. . . . . . . . . . . . . 21 SECTION 4.4 Purchase Price Adjustment . . . . . . . . . . . . 22 ARTICLE V Confidential Information SECTION 5.1 Confidentiality . . . . . . . . . . . . . . . . . 24 ARTICLE VI Representations and Warranties of each of Parents and Seller SECTION 6.1 Parents' and Seller's Representations and Warranties. . . . . . . . . . . . . . . . . . . 25 SECTION 6.2 No Implied Representations. . . . . . . . . . . . 32 SECTION 6.3 Survival of Seller's Warranties . . . . . . . . . 33 ARTICLE VII Representations and Warranties of SUN and Buyer SECTION 7.1 SUN's and Buyer's Representations and Warranties. . . . . . . . . . . . . . . . . . . 34 SECTION 7.2 Survival of Buyer's and SUN'S Representations and Warranties. . . . . . . . . . . . . . . . . 35 ARTICLE VIII Title Insurance SECTION 8.1 Title Policies and Exceptions . . . . . . . . . . 35 ARTICLE IX Conduct of Business Prior to Closing SECTION 9.1 Seller's Conduct. . . . . . . . . . . . . . . . . 37 SECTION 9.2 Operating Restrictions. . . . . . . . . . . . . . 39 ARTICLE X Other Pre-Closing Obligations SECTION 10.1 Access; Observers. . . . . . . . . . . . . . . . 42 SECTION 10.2 No Control . . . . . . . . . . . . . . . . . . . 43 SECTION 10.3 Hart-Scott-Rodino Filing . . . . . . . . . . . . 43 SECTION 10.4 Cooperation. . . . . . . . . . . . . . . . . . . 44 SECTION 10.5 Gaming and Other Licenses. . . . . . . . . . . . 44 SECTION 10.6 Best Efforts . . . . . . . . . . . . . . . . . . 45 SECTION 10.7 Notice . . . . . . . . . . . . . . . . . . . . . 45 SECTION 10.8 Parcel Map Requirement . . . . . . . . . . . . . 45 SECTION 10.9 Additional Agreements of Seller. . . . . . . . . 45 ARTICLE XI Conditions to Closing SECTION 11.1 Buyer's Conditions . . . . . . . . . . . . . . . 46 SECTION 11.2 Seller's Conditions. . . . . . . . . . . . . . . 48 SECTION 11.3 Frustration of Closing Conditions. . . . . . . . 49 ARTICLE XII Escrow SECTION 12.1 Escrow . . . . . . . . . . . . . . . . . . . . . 50 SECTION 12.2 Investment . . . . . . . . . . . . . . . . . . . 50 ARTICLE XIII Closing SECTION 13.1 Time; Location.. . . . . . . . . . . . . . . . . 51 SECTION 13.2 Recordation of Deeds . . . . . . . . . . . . . . 51 SECTION 13.3 Payment of Closing Date Amount.. . . . . . . . . 51 SECTION 13.4 Certain Expenses . . . . . . . . . . . . . . . . 52 SECTION 13.5 Transfer of Possession . . . . . . . . . . . . . 52 ARTICLE XIV [Intentionally Omitted] . . . . . . . . 52 ARTICLE XV Survival; Indemnification SECTION 15.1 Survival . . . . . . . . . . . . . . . . . . . . 52 SECTION 15.2 Indemnification. . . . . . . . . . . . . . . . . 52 SECTION 15.3 Calculation of Losses. . . . . . . . . . . . . . 53 SECTION 15.4 Procedures Relating to Indemnification . . . . . 53 SECTION 15.5 Other Claims . . . . . . . . . . . . . . . . . . 54 SECTION 15.6 Exclusivity. . . . . . . . . . . . . . . . . . . 55 SECTION 15.7 No Consequential Damages . . . . . . . . . . . . 55 ARTICLE XVI Termination SECTION 16.1 Grounds for Termination. . . . . . . . . . . . . 55 SECTION 16.2 Effect of Termination. . . . . . . . . . . . . . 56 SECTION 16.3 Liquidated Damages.. . . . . . . . . . . . . . . 57 SECTION 16.4 Survival . . . . . . . . . . . . . . . . . . . . 58 ARTICLE XVII Collection of Chips and Tokens; Baggage and Safe Deposits SECTION 17.1 Collection of Chips and Tokens . . . . . . . . . 58 SECTION 17.2 Baggage. . . . . . . . . . . . . . . . . . . . . 59 SECTION 17.3 Safe Deposits. . . . . . . . . . . . . . . . . . 59 SECTION 17.4 Valet Parking. . . . . . . . . . . . . . . . . . 59 ARTICLE XVIII Loss by Fire or Other Casualty; Condemnation SECTION 18.1 Fire or Other Casualty; Condemnation . . . . . . 60 ARTICLE XIX Employee and Employee Benefit Matters SECTION 19.1 Salaries and Benefits. . . . . . . . . . . . . . 61 SECTION 19.2 Multiemployer Plan . . . . . . . . . . . . . . . 62 ARTICLE XX Miscellaneous SECTION 20.1 Entire Agreement . . . . . . . . . . . . . . . . 65 SECTION 20.2 Notices. . . . . . . . . . . . . . . . . . . . . 65 SECTION 20.3 Governing Law. . . . . . . . . . . . . . . . . . 66 SECTION 20.4 Successors and Assigns . . . . . . . . . . . . . 66 SECTION 20.5 Closing Costs. . . . . . . . . . . . . . . . . . 66 SECTION 20.6 Attorneys' Fees. . . . . . . . . . . . . . . . . 67 SECTION 20.7 Amendments . . . . . . . . . . . . . . . . . . . 67 SECTION 20.8 Further Assurances . . . . . . . . . . . . . . . 67 SECTION 20.9 Headings . . . . . . . . . . . . . . . . . . . . 67 SECTION 20.10 Non-Waiver . . . . . . . . . . . . . . . . . . . 67 SECTION 20.11 No Third Party Benefitted. . . . . . . . . . . . 67 SECTION 20.12 Publicity; No Recordation. . . . . . . . . . . . 68 SECTION 20.13 Counterparts . . . . . . . . . . . . . . . . . . 68 SECTION 20.14 Severability . . . . . . . . . . . . . . . . . . 68 SECTION 20.15 Exhibits and Schedules . . . . . . . . . . . . . 68 SECTION 20.16 Finder's Fees. . . . . . . . . . . . . . . . . . 68 SECTION 20.17 Cooperation. . . . . . . . . . . . . . . . . . . 69 SECTION 20.18 Consent to Jurisdiction. . . . . . . . . . . . . 69 EXHIBITS Exhibit 10.6(b)-1 Timeshare Joint Venture Agreement Exhibit 10.6(b)-2 Golf Course Management Agreement Exhibit 10.6(b)-3 Marketing Alliance Agreement Execution Copy ASSET AND LAND PURCHASE AGREEMENT This Asset and Land Purchase Agreement ("Agreement") is made and entered into as of May 17, 1999 ("Effective Date") by and between Sheraton Desert Inn Corporation, a Nevada corporation ("SDIC" or "Seller"), Starwood Hotels and Resorts Worldwide, Inc., a Maryland corporation ("Starwood"), Sheraton Gaming Corporation, a Nevada corporation ("SGC", and together with Starwood, the "Parents"), Sun International Hotels Limited, an international business company organized under the laws of the Commonwealth of the Bahamas ("SUN") and Sun International Nevada, Inc., a Nevada corporation and a wholly-owned subsidiary of SUN ("Buyer"), with reference to the following facts: A. SDIC and its affiliates own the Assets (as defined below). B. SDIC and its affiliates desire to sell, and each of the Parents desires to cause SDIC and its affiliates to sell, the Assets to Buyer and Buyer desires to purchase, and SUN desires to cause Buyer to purchase, the Assets and to assume certain liabilities associated with the Assets and certain other liabilities, on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein set forth, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I Terms and Definitions SECTION 1.1 Terms and Definitions. (a) As used in this Agreement, the following terms shall have the following meanings: "Accountant" means Arthur Andersen LLP or such other nationally recognized independent public accounting firm selected by Seller and reasonably acceptable to Buyer and Seller. "Accrued Interest" has the meaning set forth in Section 4.1(a). "ACSM" has the meaning set forth in Section 8.1(e). "Adjusted Purchase Price" has the meaning set forth in Section 4.4(c). "Affiliate" or "affiliate" means, in respect of any Person, another Person which owns, controls, is controlled by or is under common control with such Person, including any subsidiary or parent. "Agreement" has the meaning set forth in the introductory paragraph hereof. "ALTA" has the meaning set forth in Section 8.1(e). "Applicable Interest Rate" has the meaning set forth in Section 4.1(a). "Applicable Accrued Deposit" means an amount equal to the sum of (x) $15,000,000 and (y) the product of (i) $15,000,000, (ii) a fraction, the numerator of which shall be the number of days in the period from and including date on which the Deposit is placed in the Escrow to but excluding the Closing Date, and the denominator of which shall be 365 and (iii) a rate of interest equal to one-half (1/2) of the average rate of interest per annum for one-year U.S. Treasury Notes for such period. "Assets" has the meaning set forth in Section 2.1. "Assumed Contracts" has the meaning set forth in Section 3.1. "Assumed Liabilities" has the meaning set forth in Section 3.2(a). "Balance Sheet" has the meaning set forth in Section 4.4(d). "Business" means the hotel, casino (gaming), convention, meeting, restaurant, bar, golf course, spa and recreational facilities and functions of The Desert Inn Resort & Casino in Las Vegas, Nevada, and all marketing and sales offices or other property owned, leased or occupied by SDIC, its subsidiaries or affiliates relating to the Business whether on or away from the Business Premises. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in New York or Nevada are authorized by law to close. "Business Premises" means and includes the Real Estate and all sales offices or real property owned, leased or occupied by SDIC or its subsidiaries or affiliates used solely in connection with the Business, whether on or away from the Real Estate. To the extent not located on the Real Estate, the Business Premises are listed in Schedule 2.2(f). "Buyer" has the meaning set forth in the introductory paragraph hereof. "Buyer's Closing Conditions" has the meaning set forth in Section 11.1. "Buyer Material Adverse Effect" has the meaning set forth in Section 7.1(c). "Caesars Closing Date" has the meaning set forth in Section 4.1(a). "Caesars World Agreement" means the Stock Purchase Agreement entered into as of April 27, 1999, by and among Starwood, certain wholly owned subsidiaries of Starwood and Park Place Entertainment Corp., a Delaware corporation. "Closing" has the meaning set forth in Section 13.1. "Closing Date" has the meaning set forth in Section 13.1. "Closing Date Amount" means the Purchase Price plus or minus the estimated adjustment being made pursuant to Section 4.4. "Closing Working Capital" has the meaning set forth in Section 4.4(a). "Code" means the Internal Revenue Code of 1986, as amended. "Collective Bargaining Agreement" has the meaning set forth in Section 19.1. "Confidential Information" has the meaning set forth in Section 5.1(b). "Corner Land" has the meaning set forth in Section 2.2(b). "Country Club Lane" means the real property described on Schedule 1.1(a). "Current Assets" has the meaning set forth in Section 4.4(d). "Current Liabilities" has the meaning set forth in Section 4.4(d). "Deeds" means collectively, the deeds to be delivered pursuant to Section 11.1(c). "Deposit" has the meaning set forth in Section 4.2(a). "DIIC" has the meaning set forth in Section 2.2(m). "DIIC Land" has the meaning set forth in Section 8.1(c). "Dio Drive Vacated Area" means the real property described on Schedule 1.1(b). "Effective Date" has the meaning set forth in the introductory paragraph hereof. "Environmental Claim" means any claim for any Loss, liability, cost or expense, including damage to or restoration of natural resources, administrative or regulatory oversight costs, consultants' fees and expenses, medical monitoring costs and property value diminution, asserted by any third Person, including any governmental authority, and arising under Environmental Law. "Environmental Laws" means all Federal, state and local laws, rules, regulations, decrees, ordinances and orders which regulate the treatment, management, storage or use of Hazardous Materials or the release of Hazardous Materials to the environment, or impose requirements relating to environmental protection or restoration or to public or employee health and safety. "ERISA" has the meaning set forth in Section 19.2(b). "Escrow" has the meaning set forth in Section 12.1. "Escrowee" means Nevada Title Company, 3320 W. Sahara Avenue, Las Vegas, Nevada 89102, Attention: Mr. Frank Brader, Title Officer and Troy Lochhead, Escrow Officer. "Excluded Assets" has the meaning set forth in Section 2.3. "Excluded Liabilities" has the meaning set forth in Section 3.2(b). "Extension Amount" has the meaning set forth in Section 4.2(c). "GAAP" has the meaning set forth in Section 4.4(d). "Gaming Equipment" means "associated equipment" as defined in NRS Section 463.0136, "gaming devices" as defined in NRS Section 463.0155, gaming tables, keno and sports book furniture and equipment and all other equipment and paraphernalia, including (subject to those exclusionary provisions of Section 2.2(g) concerning proprietary hardware and software) computer equipment and computer software owned or licensed by SDIC or its subsidiaries or affiliates and used in the conduct of gaming on the Business Premises. "Gaming Licenses" has the meaning set forth in Section 10.5. "Gaming Receivable" means any "Credit instrument", as such term is defined in Chapter 463 of NRS or any successor statute thereto. "Golf Course Management Agreement" has the meaning set forth in Section 9.1(i). "Hazardous Materials" means any (a) oil, petroleum products, flammable substances, explosives, radioactive materials, hazardous materials, wastes or substances, toxic wastes or substances; and (b) any chemical, material or substance defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "acute hazardous waste," "extremely hazardous waste," "restricted hazardous waste," "toxic substances," "toxic chemicals," "infectious wastes," "contaminants" or "pollutants" or words of similar import under any applicable Environmental Law or otherwise regulated under applicable Environmental Law. "HSR Act" has the meaning set forth in Section 10.3. "Indemnified Party" has the meaning set forth in Section 15.3. "Intangible Property" has the meaning set forth in Section 2.2(j). "Inventoried Baggage" has the meaning set forth in Section 17.2. "Inventoried Vehicles" has the meaning set forth in Section 17.4. "Inventories" has the meaning set forth in Section 2.2(q). "ITT" means ITT Corporation, a Nevada corporation. "knowledge" means, as of any date of determination, (a) with respect to Seller, the actual knowledge or awareness, as of such date, of Peter Boynton, Robert Pearson, Mark Lefever, Thomas Smock or Kathy Moore and (b) with respect to Buyer, the actual knowledge or awareness, as of such date, of Howard Kerzner, Charles Adamo or John Allison. The words "know", "knowing" and "known" shall be construed accordingly. "Legal Requirements" means any applicable law, statute, treaty, ordinance, code, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all governments and governmental authorities having jurisdiction over the Real Estate (including, for purposes hereof, any local Board of Fire Underwriters), the Assets, the Business or over the operation thereof. "Licenses" has the meaning set forth in Section 10.5. "Losses" has the meaning set forth in Section 15.2. "Marketing Alliance Agreement" has the meaning set forth in Section 10.6(b). "Material Adverse Effect" means a material adverse effect on the business, assets, condition (financial or otherwise) or results of operations of the Business or the Assets taken as a whole, including the revocation or failure to obtain any Gaming License or any permit or license necessary or required for the continued operation of the Casino, but shall exclude any effect to the extent resulting from (i) any condition or event that adversely affects the gaming industry generally or the gaming industry in Nevada, (ii) general economic conditions, (iii) the implementation of California Proposition No. 5 or the proposal, passage or implementation of any similar law or initiative or (iv) the proposal or passage of any law or other initiative restricting or adversely affecting the conduct of gaming operations generally. "Material Damage" means unrepaired damage as a result of fire or other casualty to all or any Material Portion of the Business Premises or the Assets such that the cost to replace or repair such damaged Business Premises and Assets exceeds $50,000,000 or which results in any Material Portion of the Business Premises or the Assets being unusable for a period in excess of six months. "Material Portion" means (i) all or any portion of the Business Premises that represents at least 15% of the assessed value for tax purposes of the Real Estate or (ii) 5% or more of the Corner Land. "Multiemployer Plans" has the meaning set forth in Section 19.2(a). "Nevada Gaming Authorities" means the Nevada State Gaming Control Board, the Nevada Gaming Commission and the Clark County Liquor and Gaming Licensing Board. "Nevada Power Land" means the real property subject to the Nevada Power Sale Agreement, and consisting of a portion of the Corner Land, as more fully set forth in Schedule 2.2(a). "Nevada Power Sale Agreement" means that certain Property Agreement between Nevada Power Company and SDIC, fully executed as of March 21, 1997, relating to the Nevada Power Land. "Notice of Disagreement" has the meaning set forth in Section 4.4(b). "NRS" means Nevada Revised Statutes. "Out Parcel" means the real property described on Schedule 1.1(c). "Outside Date" has the meaning set forth in Section 13.1. "Parcel Map" has the meaning set forth in Section 6.1(z). "parent" means a corporation, trust, partnership, limited partnership, limited liability company or other entity or person which directly or indirectly holds more than 50% of the beneficial equity interest in or voting control of another such entity. Such other entity shall be deemed the Subsidiary or subsidiary of its parent. "Parents" has the meaning set forth in the introductory paragraph hereto. "Permits" has the meaning set forth in Section 6.1(e). "Permitted Exceptions" has the meaning set forth in Section 8.1(a). "Permitted Liens" has the meaning set forth in Section 6.1(u). "Person" means any general partnership, limited partnership, corporation, limited liability company, joint venture, trust, business trust, governmental agency, cooperative, association, individual or other entity, and the heirs, executors, administrators, legal representatives, successors and assigns of such person, as the context may require. "Personal Property" has the meaning set forth in Section 2.2(h). "Property Taxes" means real, personal and intangible property taxes and assessments, together with any interest, penalty or other additional amount imposed by a taxing authority. "PUC" has the meaning set forth in Section 2.2(m). "Purchase Price" has the meaning set forth in Section 4.1(a). "Real Estate" has the meaning set forth in Section 2.2(a). "Receivables" means all of Seller's and its subsidiaries' and affiliates' accounts receivable, notes and loans receivable, Gaming Receivables, Real Estate tenant receivables and ledger receivables and other accounts generated by or otherwise relating to the Assets. "Recording Instructions" has the meaning set forth in Section 4.3. "Representatives" has the meaning set forth in Section 5.1(a) hereof. "Required Records" has the meaning set forth in Section 2.2(n). "Residential Real Estate" has the meaning set forth in Section 2.2(c). "SGC" has the meaning set forth in the introductory paragraph hereof. "SDIC" has the meaning set forth in the introductory paragraph hereof. "Seller" has the meaning set forth in the introductory paragraph hereof. "Seller's Closing Conditions" has the meaning set forth in Section 11.2. "Sheraton" means ITT Sheraton Corporation, a Delaware corporation. "Starwood" has the meaning set forth in the introductory paragraph hereof. "Statement" has the meaning set forth in Section 4.4(a). "Stock" has the meaning set forth in Section 2.2(m). "Subsidiary" or "subsidiary" means a corporation, trust, partnership, limited partnership, limited liability company, or other entity more than 50% of the beneficial equity interest in or voting control of which is directly or indirectly held by another person or entity. Such other person or entity shall be deemed the "Parent" or "parent" of its subsidiary. "Survey" has the meaning set forth in Section 8.1(a). "Tax" means any income, gross receipts, sales, use, real estate, ad valorem, transfer, franchise, withholding, payroll, employment, excise, severance, occupation, premium or property tax or other like assessment or charge of any kind whatsoever, together with any interest, penalty or other additional amount imposed by any taxing authority. "Third Party Claim" has the meaning set forth in Section 15.4(a). "Timeshare Joint Venture Agreement" has the meaning set forth in Section 10.6(b). "Title Insurer" has the meaning set forth in Section 8.1(c). "Title Policies" has the meaning set forth in Section 8.1(c). "Title Report" has the meaning set forth in Section 8.1(a). "Transferred Software Programs" has the meaning set forth in Section 2.2(h). "Transfer Time" has the meaning set forth in Section 13.1. "Union Employees" has the meaning set forth in Section 9.2(k). "WC Amount" has the meaning set forth in Section 4.4(c). "Working Capital" has the meaning set forth in Section 4.4(d). SECTION 1.2 Terms and Usage Generally. The definitions referred to in Section 1.1 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. All references herein to Articles, Sections, Exhibits and Schedules shall be deemed to be references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. All Exhibits and Schedules attached hereto shall be deemed incorporated herein as if set forth in full herein. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. References to a Person are also to its successors and permitted assigns. Unless otherwise expressly provided herein, any agreement, instrument or statute defined or referred to herein or in any agreement or instrument defined or referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes, and references to all attachments thereto and instruments incorporated therein. ARTICLE II Purchase and Sale of and Description of Assets SECTION 2.1 Purchase and Sale. Subject to the terms and provisions of this Agreement, each of SDIC, its subsidiaries and affiliates shall, and each of the Parents shall cause each of the foregoing to, sell, convey, transfer and assign to Buyer at the Closing, free and clear of all liens and encumbrances (except Permitted Exceptions and Permitted Liens), and Buyer shall purchase from SDIC or such subsidiaries or affiliates (w) all of the tangible and intangible assets owned by SDIC or such subsidiaries or affiliates and constituting, associated with or used or usable in connection with the ownership or operation of the Business existing as of the Effective Date, whether or not such assets are located on or about the Business Premises, as augmented or diminished as permitted by Section 9.2 in the ordinary course of the operation of the Business between the Effective Date and the Transfer Time and all tangible and intangible assets owned by SDIC or such subsidiaries or affiliates which are necessary to cause all of Parents' and Seller's representations, warranties and covenants contained herein to be materially true and correct as of the Closing Date, except the Excluded Assets, (x) the Stock, (y) the Corner Land and (z) the Residential Real Estate (collectively, the "Assets"), including those items described in Section 2.2. SECTION 2.2 Description of Assets. The term "Assets" shall include: (a) fee simple title to the real property described on Schedule 2.2(a)(i), together with all buildings, improvements and fixtures (other than such fixtures which are leased) located thereon, and all of SDIC's right, title and interest in and to all hereditaments and rights appurtenant thereto, including (i) any easements or rights of way pertaining to or benefitting such real property, (ii) all water rights, air rights and mineral, oil, gas and other hydrocarbon substance rights owned by SDIC or such subsidiary's or affiliate's with respect to such real property and (iii) any interest in streets, alleys, advantages, and any strips or gores appurtenant thereto, if, and to the extent, included within the perimeter boundaries of such real estate (collectively, the "Real Estate"), subject in each case to the Permitted Exceptions; provided, however, that Seller is making no representations and warranties as to the status of title with respect to the Dio Drive Vacated Area, Country Club Lane and the Out Parcel beyond those implied under Nevada Law by the grant, bargain and sale deed); (b) fee simple title to the Corner Land, excluding the Nevada Power Land. As used herein, the "Corner Land" means (i) the real property described in Schedule 2.2(b), together with all buildings, improvements and fixtures (excluding leased fixtures) located thereon, and (ii) all of SDIC's right, title and interest in and to all hereditaments and rights appurtenant thereto, including (A) any easements or other rights of way pertaining to or benefitting such real property, (B) all water rights, air rights and mineral, oil, gas and other hydrocarbon substance rights owned by SDIC with respect to such real property and (C) any interest in streets, alleys, advantages, and any strips or gores appurtenant thereto, subject in each case to the Permitted Exceptions; (c) fee simple title to those certain parcels of real property located in the County of Clark, State of Nevada, and more particularly described on Schedule 2.2(c), together with all buildings, improvements and fixtures located thereon, and all of SDIC's right, title and interest in and to all hereditaments and rights appurtenant thereto, including (i) any easements or rights of way pertaining to or benefitting such real property, (ii) all water rights, air rights and mineral, oil, gas and other hydrocarbon substance rights owned by SDIC with respect to such real property and (iii) any interest in streets, alleys, advantages, and any strips or gores appurtenant thereto, if, and to the extent, included within the perimeter boundaries of such real estate (collectively, the "Residential Real Estate"), subject in each case to the Permitted Exceptions; (d) fee simple title to any real property contiguous to the Real Estate, Corner Land and Residential Real Estate owned by SDIC or its subsidiaries or affiliates as of the Effective Date, and located within the area bounded by Las Vegas Boulevard, Sands Avenue, Paradise Road and Desert Inn Arterial; (e) subject to the Timeshare Joint Venture Agreement, all of SDIC's right, title and interest in and to any development rights of SDIC or its affiliates appurtenant to the Real Estate, the Corner Land and Residential Real Estate; (f) all right, title and interest in the Business Premises not located on the Real Estate, the Corner Land and Residential Real Estate, if any, as described in Schedule 2.2(f); (g) all right, title and interest to any Gaming Equipment; (h) all right, title and interest of SDIC or any of its affiliates in and to all machinery, equipment, furniture, office equipment, telephone and communications equipment, restaurant equipment, consumables, inventory, merchandise, linen, utensils, liquor, food, vehicles, storage tanks, spare and replacement parts, fuel, cleaning and office supplies and other tangible property (other than Gaming Equipment) located on the Real Estate, the Corner Land or the Residential Real Estate, including personal computers and computer hardware and related transferable software non-proprietary of SDIC, its subsidiaries or affiliates (the "Transferred Software Programs"), but excluding (i) any and all proprietary computer hardware or software of SDIC, its subsidiaries or affiliates (including Starwood's Reservation software and SDIC's "forecasting program" financial analysis software), (ii) any and all proprietary operating manuals and other information and materials belonging to SDIC, its subsidiaries or affiliates and (iii) any copyrights relating to any such software, information and materials (collectively, and together with the Gaming Equipment, the "Personal Property"); (i) to the extent assignable, all Permits affecting or relating to the Business or the Assets; (j) all right, title and interest of SDIC or any of its affiliates to any and all copyrights, trademarks, trade names, service marks, displays, symbols, color arrangements, designs, logos, applications, registrations and other intangible personal property used or held for use in the operation of the Business and/or the Assets, including "Desert Inn" and any derivative names or marks and all logos, designs and other intellectual property related thereto (but excluding "Sheraton", "ITT", "Caesars", "ITT Sheraton Luxury Collection" and any derivative names or marks and all logos, designs and other intellectual property related thereto), and related applications and registrations, if any, and all other intangible property or rights, and all goodwill associated therewith, directly or indirectly relating thereto or used in the ownership, use or operation of the Business or the Assets, (collectively, the "Intangible Property"); (k) all right, title and interest of SDIC or any of its affiliates in and to all benefits arising after the Transfer Time, if any, from contracts, agreements, leases, licenses, commitments, sale and purchase orders and other items included in the Assumed Contracts, including all contracts, leases, agreements, claims and rights (and benefits arising therefrom) with or against all persons whomsoever, relating to the Business or the Assets or any portion thereof, including all warranties, guaranties, indemnities, development agreements, supply agreements, service agreements and/or franchise agreements, if any, and all leases of personal property, regardless of whether SDIC or its subsidiaries or affiliates is lessee or lessor thereunder, including matters of public record; (l) all plans, specifications, drawings, renderings, models and photographs relating to the improvements located on the Real Estate and the Residential Real Estate, or any proposed improvements on the Corner Land, that are in the possession or control of SDIC or its subsidiaries or affiliates and that are not proprietary to any third party, including those commissioned or prepared in connection with the recent renovation of the improvements on the Real Estate, and, to the extent transferable, any and all warranties given to SDIC or its subsidiaries or affiliates by suppliers and traders in connection with such renovations; (m) all issued and outstanding shares of common stock, $100 par value per share (the "Stock"), of Desert Inn Improvement Co., a Nevada corporation and a wholly owned subsidiary of SGC ("DIIC") and the corporate minute books and stock records and business records of DIIC; provided, however, that the parties hereto acknowledge that DIIC is a "Public Utility" in accordance with the provisions of NRS Sections 704.020 and 704.329 and sale and transfer of the Stock contemplated hereby, which constitutes more than twenty-five percent of the outstanding shares of DIIC, requires prior authorization of the Nevada Public Utilities Commission ("PUC"); (n) all books and records required by the Nevada Gaming Authorities to be maintained at the Business Premises, and copies (Seller may retain the originals) of such other books and records, if any, which are necessary for the ongoing operations of the Business after the Transfer Time (including only such employee records as it is lawful to transfer) (collectively, the "Required Records"); (o) all advance reservations, bookings and room deposits applicable to any period following the Closing, and originals of casino credit files with respect to the casino operations, and any telephone numbers used exclusively in connection with the Business; (p) all customer lists relating to the Business prepared in accordance with Section 9.1(h); (q) all inventory purchased by SDIC or any of its affiliates in the ordinary course of business and then located on the Business Premises ("Inventories"); (r) all of SDIC's cash on hand and/or on deposit in banks or other financial institutions, trade deposits, prepaid rent, security deposits or other pre- expenses paid by SDIC, its subsidiaries or affiliates, and rights arising therefrom, cash equivalents, coins and marketable securities, whether or not such assets relate to SDIC's ownership of Assets or SDIC's operation of the Business; and (s) all Receivables existing as of the Transfer Time, including the Receivable arising from Seller's sale of the Nevada Power Land not theretofore paid. SECTION 2.3 Description of Excluded Assets. Seller shall not, and shall not cause its subsidiaries or affiliates to, sell, convey, transfer or assign to Buyer, and Buyer shall not purchase or acquire from Seller, any of the following assets, which shall remain the sole and exclusive property of Seller (collectively, the "Excluded Assets"): (a) all proprietary computer hardware and software of Seller, Sheraton and its affiliates, including Starwood's Reservation software and SDIC's "forecasting program" financial analysis software and any copyrights relating to any such software, and any Intangible Property involving the names "Sheraton," "ITT," "Caesars," "ITT Sheraton Luxury Collection," including any derivative names and related marks, designs or logos and all proprietary operating manuals and related knowhow; (b) all of SDIC's right, title and interest in and to all books and records, in whatever medium, including digitally or magnetically stored data, files relating to the Business or the Assets, including all financial statements, certified financial reports, gaming tax returns (including supporting , originals of all credit reports and files, including casino files and all books and accounting records relating to the Business or the Assets in the possession or control of SDIC and its subsidiaries and affiliates, save and except the Required Records; provided that upon reasonable request by Buyer, Buyer shall be provided with access and the right to copy the portions of such records that reasonably relate to the Business or the Assets; (c) all corporate charter, minute and stock record books, corporate seals and tax returns and supporting schedules and documents of Sheraton or SDIC or its subsidiaries or affiliates relating to the Business, and all refunds, claims, entitlements or liabilities for income taxes or other taxes of any type whatsoever which SDIC or its subsidiaries or affiliates may hereafter receive or be responsible for by reason of its ownership of the Assets or operation of the Business prior to the Transfer Time; provided that upon reasonable request by Buyer, Buyer shall be provided with the access and the right to copy the portions of such tax materials that reasonably relate to the Business or the Assets; (d) except as otherwise specifically provided for in this Agreement, all insurance policies relating to the Business or the Assets and all rights and claims thereunder, including refund claims; (e) all claims and litigation and causes of action, and any tax refunds relating to any of the Excluded Assets; (f) all of SDIC's gaming chips and tokens (including all (i) slot machine tokens not currently in circulation and (ii) "reserve" chips, if any, not currently in circulation), except that at Buyer's written election made within six months following the Effective Date, such tokens may be acquired by Buyer at the Closing without further consideration other than Buyer's assumption of SDIC's liability with respect to tokens in circulation; (g) any Assets sold or otherwise disposed of in the ordinary course of business and as permitted by Section 9.2 during the period from the Effective Date until the Transfer Time; (h) all rights of indemnification, claims and causes of action which relate to the conduct of the Business prior to the Transfer Time, including those arising by operation of law or in equity or otherwise, but excluding warranty claims with respect to the inventory or the equipment described in Section 2.2(g) or 2.2(h) above, or product liability against the suppliers or manufacturers thereof; and (i) all issued and outstanding shares of common stock of Sheraton Corner Enterprises Corporation, a Nevada corporation, all issued and outstanding shares of common stock of Rimtech Marketing Incorporated, a Nevada corporation, and all issued and outstanding shares of common stock of Sheraton Tunica Corporation, a Delaware corporation. ARTICLE III Contracts and Liabilities To Be Assumed SECTION 3.1 Contracts. The "Assumed Contracts" shall be all contracts, agreements, licenses, leases, commitments, sales and purchase orders and other orders relating to the Assets or Business and those entered into by SDIC or its subsidiaries after the Effective Date and prior to the Closing as permitted by Section 9.2 hereof. SECTION 3.2 Assumed Liabilities. (a) Buyer shall assume as of the Transfer Time and shall pay, perform and discharge when due all obligations and liabilities of whatever kind and nature, primary or secondary, direct or indirect, absolute or contingent, known or unknown, of SDIC or its aforementioned subsidiaries or affiliates to the extent arising out of or relating to the Business or the Assets and to the extent arising or accruing after the Transfer Time ("Assumed Liabilities"), including the following (other than any Excluded Liabilities): (i) all obligations and liabilities included as Current Liabilities in the calculation of Closing Working Capital pursuant to Section 4.4, including any such Current Liabilities for progressive prizes associated with keno, slot machines and coin operated gaming devices and sportsbook and racebook gaming; (ii) all obligations and liabilities of SDIC or its subsidiaries or affiliates under the Assumed Contracts not performed or not required to have been performed as of the Transfer Time; (iii) all liabilities to customers with respect to all unrefunded cash deposits paid by such customers to SDIC or its subsidiaries or affiliates prior to the Transfer Time to the extent included as a Current Liability in the calculation of Closing Working Capital pursuant to Section 4.4; and (iv) all obligations and liabilities relating to Taxes relating to the Business or the Assets with respect to any period ending after the Transfer Time, but to the extent attributable to periods prior to the Transfer Time, only to the extent included as a Current Liability in the calculation of Closing Working Capital pursuant to Section 4.4. (b) Buyer shall not assume any of the following obligations and liabilities of Seller or its subsidiaries or affiliates (the "Excluded Liabilities"), all of which shall be retained and paid, performed and discharged when due by Seller or its subsidiaries or affiliates: (i) any Loss or liability of Seller or its subsidiaries or affiliates of any nature or description, whether liquidated or contingent, to the extent (A) resulting from events or conditions which occurred or existed prior to the Transfer Time, regardless of whether they are due and payable before or after the Transfer Time or (B) arising out of or relating to the Excluded Assets; (ii) any Loss or liability incurred as the result of an Environmental Claim, or any condition requiring correction, investigation, remediation or monitoring under Environmental Law, in either case to the extent arising from facts, conditions or circumstances, known or unknown, occurring or existing at or before the Transfer Time and related in any manner to the Assets; and (iii) any Loss or liability relating to current or former employees of the Business (and their eligible dependents and beneficiaries) with respect to employment or benefit plans which accrued on or prior to the Transfer Time, except to the extent specified in Article XIX or included as a Current Liability in the calculation of Closing Working Capital pursuant to Section 4.4. (b) Buyer's obligations under this Section 3.2 will not be subject to offset or reduction by reason of any actual or alleged breach of any representation, warranty or covenant contained in this Agreement or any document delivered in connection herewith or any right or alleged right to indemnification hereunder. SECTION 3.3 Consents. To the extent that the assignment of any of the Assumed Contracts or other rights(including Permits, except as set forth in Section 11.1(e)) to be transferred hereunder requires the consent of any other party thereto (including Seller or any affiliate thereof), or shall be subject to any option in any other person or entity by virtue of a request for permission to assign or transfer, or by reason of or pursuant to any transfer to Buyer, this Agreement shall not constitute a contract to assign the same if any attempted assignment would be ineffective, impair any material right of Buyer thereunder or give rise to such an option, and Seller and Buyer shall use commercially reasonable efforts to procure consent to any such assignment; provided, however, that in the event that any such consent is not obtained at or prior to the Closing Date, such event shall not cause the Closing to be delayed or constitute a default by Seller of any obligation hereunder or result in a reduction of the Purchase Price. If any such consent is not obtained, or if for any reason any such assignment is not consummated, at Buyer's request, Seller shall reasonably cooperate with Buyer to provide for Buyer the benefit, monetary or otherwise, of any such Assumed Contract or other right, including enforcement of any and all rights of Seller against the other party thereto arising out of any breach or cancellation thereof by such party or otherwise, and, at Buyer's request, by appointing Buyer as Seller's representative and agent thereunder. Any such cooperation \(i) shall be at Buyer's cost and expense and (ii) shall not cause Seller to violate any such Assumed Contract. ARTICLE IV Purchase Price SECTION 4.1 Purchase Price. (a) In consideration of the foregoing sale, conveyance, transfer and assignment of the Assets, Buyer shall pay to Seller the sum of $275,000,000 plus the sum of (1) if the Closing occurs after the "Closing Date" under the Caesars World Agreement (the "Caesars Closing Date"), the Accrued Interest, (2) the aggregate amount by which documented capital expenditures actually incurred by SDIC as contemplated by Section 9.1(g)(i) exceeds an average of $225,000 per month from and after January 1, 1999 and (3) an amount equal to 80% of all documented capital expenditures up to $3,000,000 actually incurred by SDIC pursuant to Section 9.1(g)(ii), and 100% of all documented capital expenditures incurred by SDIC pursuant to Section 9.1(g)(ii) in excess of such $3,000,000 (the "Purchase Price"). "Accrued Interest" means an amount equal to the product of (i) $275,000,000 (less the Applicable Accrued Deposit), (ii) a fraction, the numerator of which shall be the number of days in the period from and including the Caesars Closing Date to but excluding the Closing Date, and the denominator of which shall be 365 and (iii) the average Applicable Interest Rate per annum for such period. "Applicable Interest Rate" means (i) for any day during the period from the Effective Date to the date which is fourteen months following the Effective Date, a rate per annum equal to the lesser of (x) the applicable "rate of interest" for revolving loans under the Credit Agreement among Starwood and certain other borrowers and lenders named therein, dated February 23, 1998 (as amended to the date hereof) and (y) 7.00% and (ii) for any day thereafter, 10.00%. (b) The Purchase Price shall be subject to adjustment as set forth in Section 4.4. SECTION 4.2 Payment of Purchase Price; Extension Amount. The Purchase Price and the Extension Amount shall be payable as follows: (a) The sum of Fifteen Million Dollars ($15,000,000) in immediately available funds (the "Deposit"), shall be delivered to Escrowee no later than the tenth Business Day following the execution of this Agreement, to be deposited in interest-bearing investments approved by Buyer and Seller and held by Escrowee in accordance with the terms of this Agreement. (b) The Purchase Price less the Applicable Accrued Deposit plus or minus an estimate, prepared by Seller (and reasonably satisfactory to Buyer) and delivered to Buyer at least two Business Days prior to the Closing Date, of any adjustment to the Purchase Price under Section 4.4, shall be delivered to Buyer in immediately available funds on the Closing Date. (c) An extension amount of $1,000,000 in immediately available funds (the "Extension Amount") shall be paid directly by Buyer to Seller on the earliest to occur of (i) the Closing, (ii) termination of this Agreement other than pursuant to Section 16.1(vi) or Section 16.1 (vii), and (iii) a date which is fourteen (14) months following the Effective Date. (d) Time is of the strictest essence of this Section 4.2. SECTION 4.3 Disbursement of Deposit. Seller and Buyer shall provide joint written instructions to Escrowee in customary form mutually approved by Seller and Buyer, each of whose approval shall not be unreasonably withheld (the "Recording Instructions"), which shall among other things, govern the disbursement of the Deposit and the payment for and obtaining the Title Policies, and other escrow and related charges; provided, however, that such Recording Instructions shall provide that the Deposit, together with any interest or other payments thereon, shall be disbursed to Seller on the Closing Date. The Recording Instructions shall comply with all applicable Code provisions. The Escrowee shall be designated as the "reporting party" for purposes of the Code. The Recording Instructions are intended to carry out the intent of this Agreement and shall not be inconsistent with this Agreement. SECTION 4.4 Purchase Price Adjustment. (a) Within 75 days after the Closing Date, Buyer shall prepare and deliver to Seller a statement (the "Statement"), certified by an officer of Buyer, setting forth Working Capital as of the close of business on the Closing Date ("Closing Working Capital"). A physical inventory shall be conducted by Seller and Buyer consistent with past practice and immediately prior to the Closing Date for the purpose of preparing the Statement, and each of Seller and Buyer and their respective independent auditors shall have the right to observe the taking of such physical inventory. Any costs or expenses incurred by the parties in connection with such physical inventory shall be shared equally by Seller and Buyer. (b) During the 30-day period following Seller's receipt of the Statement, Seller and its independent auditors shall be permitted to review the working papers relating to the Statement. The Statement shall become final and binding upon the parties on the 30th day following delivery thereof, unless Seller gives written notice of its disagreement with the Statement (a "Notice of Disagreement") to Buyer prior to such date. Any Notice of Disagreement shall (i) specify in reasonable detail the nature of any disagreement so asserted and (ii) only include disagreements based on mathematical errors or based on Closing Working Capital not being calculated in accordance with this Section 4.4. If a Notice of Disagreement is received by Buyer in a timely manner, then the Statement (as revised in accordance with this sentence) shall become final and binding upon Seller and Buyer on the earlier of (A) the date Seller and Buyer resolve in writing any differences they have with respect to the matters specified in the Notice of Disagreement or (B) the date any disputed matters are finally resolved in writing by the Accountant. During the 30-day period following the delivery of a Notice of Disagreement, Seller and Buyer shall seek in good faith to resolve in writing any differences that they may have with respect to the matters specified in the Notice of Disagreement. During such period Buyer and its auditors shall have access to any working papers of Seller's auditors prepared in connection with the Notice of Disagreement. At the end of such 30-day period, Seller and Buyer shall submit to the Accountant for arbitration any and all matters that remain in dispute and which were properly included in the Notice of Disagreement, in the form of a written brief. Seller and Buyer shall use their reasonable efforts to cause the Accountant to render a decision resolving the matters submitted to the Accountant within 30 days following submission thereto. Judgment may be entered upon the determination of the Accountant in any court having jurisdiction over the party against which such determination is to be enforced. The fees and expenses of the Accountant shall be borne equally by Buyer and Seller. Each party shall bear the costs and expenses of its own counsel, accountants and other advisers in connection with any such Notice of Disagreement. (c) The Purchase Price shall be increased by the amount by which Closing Working Capital exceeds $5,000,000 (the "WC Amount"), and the Purchase Price shall be decreased by the amount by which Closing Working Capital is less than the WC Amount (the Purchase Price as so increased or decreased shall hereinafter be referred to as the "Adjusted Purchase Price"). If the Closing Date Amount is less than the Adjusted Purchase Price, Buyer shall, and if the Closing Date Amount is more than the Adjusted Purchase Price, Seller shall, within 10 Business Days after the Statement becomes final and binding on the parties, make payment by wire transfer in immediately available funds of the amount of such difference, together with interest thereon at a rate equal to the rate of interest from time to time announced publicly by Citibank, N.A. as its prime rate, calculated on the basis of the actual number of days elapsed divided by 365, from the Closing Date to the date of payment. (d) The term "Working Capital" means Current Assets minus Current Liabilities. The terms "Current Assets" and "Current Liabilities" mean the current assets and current liabilities, respectively, of the Business other than Excluded Assets or Excluded Liabilities, as the case may be, calculated in accordance with United States generally accepted accounting principles ("GAAP"), applied on a basis consistent with Seller's current practices (as reflected in the consolidated balance sheet of SDIC dated as of December 31, 1998 and the applicable portions of the Caesars Palace, Caesars Tahoe and Desert Inn Supplementary Combining Financial Information as of December 31, 1998 (collectively, the "Balance Sheet"). Notwithstanding the foregoing, in addition to all other Current Liabilities, (i) $300,000 for repairing the water utility system owned by DIIC shall be included as a Current Liability in the calculation of Closing Working Capital hereunder, less the amount of (x) all documented capital expenditures for such repairs in excess of $200,000 for the year 1999 and (y) all such documented expenditures in the year 2000 and (ii) all unredeemed chips and tokens of Seller, and all progressive prizes associated with keno, slot machines and coin operated gaming devices and sportsbook and racebook gaming, in each case as of the Transfer Time, shall be included as a Current Liability in the calculation of Closing Working Capital hereunder. (e) Following the Closing, Buyer shall not take any actions with respect to the accounting books and records of the Business on which the Statement is to be based that would obstruct or prevent the preparation of the Statement and the determination of Closing Working Capital as provided in this Section 4.4. During the period of time from and after the date of delivery of the Statement to Seller through the resolution of any adjustment to the Purchase Price contemplated by this Section 4.4, Buyer shall afford to Seller and any accountants, counsel or financial advisers retained by Seller in connection with any adjustment to the Purchase Price contemplated by this Section 4.4 reasonable access during normal business hours to the books and records of the Business (if within the control of Buyer) to the extent relevant to the adjustment contemplated by this Section 4.4). ARTICLE V Confidential Information SECTION 5.1 Confidentiality. (a) Seller and Buyer each agree that all Confidential Information will be kept confidential and will be used solely in connection with this Agreement and the transactions contemplated hereby, and that each of the parties and their respective directors, trustees, officers, employees, advisors, agents, lenders and consultants (collectively "Representatives") will not disclose in any manner whatsoever any of the Confidential Information received by it; provided, however, that (i) each party may make any disclosure of such information to which the other party gives its prior consent and (ii) any of such information may and shall only be disclosed to the parties' respective Representatives to the extent such Representatives need to know such information for the sole purpose of effecting the sale of the Assets pursuant to this Agreement. Notwithstanding the foregoing, each of the parties may make such disclosures (i) as may be required by law, (ii) in connection with any proceedings before any regulatory bodies or agencies, and (iii) to the Nevada Gaming Authorities. Upon the termination of this Agreement for any reason, all Confidential Information in the possession of either party or its Representatives shall be returned to the party that provided such Confidential Information. (b) The term "Confidential Information" means all information and data furnished by either party or its Representatives to the other party or its Representatives, in each case, in connection with this Agreement or the transactions contemplated hereby and shall be deemed to include all notes, analyses, compilations, studies, interpretations or other documents prepared by any of the parties or their respective Representatives that contain, reflect or are based upon, in whole or in part, such information furnished to one party by or on behalf of the other party. The term "Confidential Information" does not include information that (i) was or becomes generally available to the public other than as a result of a disclosure by a party or its Representatives acting in violation of this provision, (ii) was known to a party or its Representatives prior to being furnished to such party in accordance with the terms of this Agreement or (iii) was or becomes available to a party on a nonconfidential basis from a source other than a party or its Representatives; provided, that the source of such information was not known to the recipient to be bound by a confidentiality agreement or other contractual, legal or fiduciary obligation of confidentiality with respect to such information. ARTICLE VI Representations and Warranties of each of Parents and Seller SECTION 6.1 Parents' and Seller's Representations and Warranties. Each of the Parents and Seller represents and warrants to Buyer as follows: (a) Each of SGC and SDIC is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada, and Starwood is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland, in each case with all requisite corporate power and authority to execute, enter into and carry out its obligations under this Agreement, the Deeds and the other agreements and instruments to be executed and delivered or caused to be delivered by it in connection herewith. Each officer of the foregoing who shall execute and deliver this Agreement on behalf of any of the foregoing has been duly authorized to so act by all requisite action on the part of such party. (b) The execution, delivery, and performance of this Agreement, the Deeds and the other agreements and instruments to be executed and delivered by each of the Parents and SDIC in connection herewith by the persons executing the same on behalf of such parties have been or will be duly and validly authorized by all necessary corporate action on the part of such parties, and this Agreement, the Deeds and such other agreements and instruments constitute or as of the Closing will constitute the legal, valid and binding obligations of each of them, enforceable in accordance with their respective terms. (c) The execution, delivery and performance of this Agreement, the Deeds and the other agreements and instruments to be executed and delivered by each of the Parents and SDIC in connection herewith will not (i) violate the certificate of incorporation or by-laws of any of the Parents or SDIC, (ii) violate any provision of law applicable to any of the Parents or SDIC, the Business Premises or the Business, the violation of which would have a Material Adverse Effect or which would prevent the consummation of the transactions contemplated by this Agreement or (iii) conflict with or result in the breach or termination of, or constitute a default under or pursuant to any judgment, order, injunction, decree or ruling of any court or governmental authority, or any other agreement or instrument by which SDIC or the Assets are bound, or to which any of them are subject, which conflict, breach, termination or default would have a Material Adverse Effect or would prevent the consummation of the transactions contemplated by this Agreement, or (iv) result in the creation of any material lien, charge or encumbrance upon any of the Assets which is not removed prior to the Closing other than, in each case, Permitted Exceptions and Permitted Liens. (d) Schedule 6.1(d) sets forth a list of all agreements having a remaining term in excess of twelve (12) months following the Effective Date and which may not be terminated without penalty on less than 90 days prior notice and which in each case require aggregate consideration in cash or in kind in excess of $500,000 for the unexpired term thereof relating to the Business. To the knowledge of each of the Parents and Seller, all such Assumed Contracts are in full force and effect, neither Seller nor any other party to any thereof is in material default thereunder, and no event has occurred which, with notice or the passage of time, or both, would constitute a material default by Seller or by any other party to the Assumed Contracts. (e) Schedule 6.1(e) represents a true, correct and complete list of all material licenses, permits, certificates of occupancy, franchises, consents, approvals and governmental authorizations ("Permits"), including liquor licenses and gaming licenses, currently necessary for the ownership of the Assets and the operation of the Business, including the business of, and the services provided by, DIIC. No material default has occurred in the due observance or condition of any material Permit which has not been heretofore corrected and, to the knowledge of each of the Parents and Seller, no event has occurred which, merely by notice or the passage of time, or both, would result in a material default thereunder. The Permits are in full force and effect and all the material requirements and conditions of the Permits have been fully complied with. (f) Except as set forth on Schedule 6.1(f), other than personal property leased by Seller pursuant to the Assumed Contracts, all personal property used by Seller in the operation and maintenance of the Business is owned by Seller or its affiliates and constitutes a part of the Assets. Except as set forth on Schedule 6.1(f), Seller has or will have at Closing good and valid title to the personal property included in the Assets that are conveyed at the Closing, free and clear of all liens, security interests, claims, charges and encumbrances, except Permitted Exceptions and Permitted Liens. (g) Schedule 6.1(g) lists all the pending and registered trademarks, service marks and trade names owned by SDIC or its affiliates and used, or held for use, exclusively in connection with the Business. All the Intangible Property is valid, in good standing, free and clear of any encumbrances and is not being challenged in any way. To the knowledge of the Parents and Seller, Seller is not currently infringing on any trademark, service mark, trade name or copyright of another, and there is no claim pending or, to the knowledge of each of the Parents and Seller, threatened against Seller with respect to an alleged infringement of any trademark, service mark, trade name or copyright owned by another nor, to the knowledge of each of the Parents and Seller, does the operation of the Business in the manner in which it has heretofore been operated give rise to any such infringement. Seller has not granted any party or entity any license to use any such Intangible Property. (h) Schedule 6.1(h) identifies all contracts or reservations for the use or occupancy of guest rooms, meeting and banquet facilities, tee times for the golf course or other facilities of the Business to be fulfilled after January 1, 2000, that are not terminable without penalty on less than 90 days notice and that would result in payments to Seller in excess of $100,000. (i) Except as set forth in Schedule 6.1(i), to the knowledge of each of the Parents and Seller, no agreements have been entered into with any Person, including home builders, prospective home buyers, owners, or occupants of the land surrounding the Business, regarding: (A) the right to membership in the golf course included in the Assets or the intent to operate such golf course as private or semi-private country club, (B) the right to play golf on such golf course or (C) the manner in which the Business will be operated, managed, maintained, or improved. (j) Except as described on Schedule 6.1(j), there are no material actions, claims, suits, or proceedings (including gaming audits, arbitrations, grievances, judicial proceedings, administrative proceedings and tax consents) pending or, to any of the Parents' or Seller's knowledge, threatened against Seller or DIIC or affecting Seller's or DIIC's rights, in each case with respect to the Business, the Assets, at law or in equity, before any Federal, state, municipal, or other governmental agency or instrumentality, nor is any of the Parents or Seller aware of any investigation with respect to any of the foregoing or any facts which to their knowledge are reasonably likely to result in any such action, investigation, suit or proceedings affecting Seller, DIIC, the Assets or the Business. In addition, except as described on Schedule 6.1(j), there are no material judgments, orders, awards or decrees currently in effect against Seller or DIIC with respect to the ownership, marketing, development or operation of any part of the Assets or the Business. (k) With the exception of proposed pedestrian bridges and a proposed beautification assessment, no material governmental assessment for sewer, sidewalk, water, paving, roadways, electrical, power or other improvements is pending, or to any of the Parents' or Seller's knowledge threatened, with respect to the Assets. (l) Except for the Nevada Power Sale Agreement or as set forth on Schedule 6.1(l), no proceedings are presently pending or, to any of the Parents' or Seller's knowledge, threatened, for the taking by exercise of the power of eminent domain, or in any other manner for a public or quasi-public purpose, of all or any part of the Real Estate, the Corner Land or the Residential Real Estate. Except as set forth on Schedule 6.1(l), to Parents' and Seller's knowledge, there is no plan, study or effort by any governmental authority or agency that in any way materially adversely affects or which would reasonably be expected to materially adversely affect the present or future use or zoning of the Real Estate, the Corner Land or the Residential Real Estate. (m) Except as set forth on Schedule 6.1(m), there exist no outstanding covenants or agreements in connection with the zoning or development of the Real Estate, the Corner Land or the Residential Real Estate or any portion thereof which would bind or require Buyer to perform any material actions or pay any material monies in connection therewith. (n) There is no pending or, to any of the Parents' or Seller's knowledge, threatened curtailment or reduction of any utility service to the Real Estate, the Corner Land or the Residential Real Estate or any part thereof, and Seller has not received any written notice of any such pending or threatened curtailment or reduction. No off-site easements, parking or other facilities are by law or restrictive covenant needed for the use and operation of the Real Estate, the Corner Land or the Residential Real Estate. (o) Except as would not reasonably be expected to have a Material Adverse Effect: (i) Seller has, and is in compliance with, all Permits required under Environmental Law for the ownership and operation of the Assets; (ii) Seller is in compliance with all Environmental Laws governing the ownership or operation of the Assets; (iii) there are no pending or threatened Environmental Claims relating to Seller's ownership or operation of the Assets; (iv) no Hazardous Materials have been released or disposed of, whether by Seller or any other Person, at, on, under or from the Assets in any manner or to any place that, in any such case, has resulted in, or could reasonably be expected to result in, an Environmental Claim; (v) there is no requirement or restriction imposed by any Environmental Law that will prohibit, impair or impede any currently planned or projected, alteration by Seller or addition to or expansion of any of the Assets; (vi) there is no outstanding order pursuant to any Environmental Law with which Seller has not complied pertaining to the closure or cessation of sewer treatment services, operations and facilities formerly provided with respect to the Business Premises; and (vii) Seller is under no obligation pursuant to Environmental Law to remove, encapsulate or otherwise treat any asbestos or asbestos-continuing materials at or in the Business Premises. (p) Seller is either the owner or the licensee of the Transferred Software Programs and, except as set forth in the contracts or agreements listed in Schedule 6.1(p), the Transferred Software Programs and all rights thereunder are transferable to Buyer without restrictions other than those restrictions that would not reasonably be expected to have a Material Adverse Effect. (q) Except as set forth on Schedule 6.1(q), neither the Parents nor Seller has any knowledge of any material settlement, earth movement, termite infestation, or damage affecting the Real Estate or the Residential Real Estate, the Corner Land or any material defects in any mechanical, electrical, plumbing, sewer, heating, air conditioning, sprinkler systems, or irrigation systems at the Real Estate, the Corner Land or the Residential Real Estate, all of which are in good operating condition and repair. (r) Except as may be shown on Schedules 6.1(j) and 6.1(l), to the knowledge of each of Parents and Seller, neither SDIC nor any of the Assets is in violation of, under investigation with respect to, threatened to be charged with or given notice of any violation of, any law, rule, regulation, ordinance or code, judgment, injunction, order or decree applicable to the Assets or the conduct of the Business (including Environmental Laws), except for violations that are not reasonably likely to have a Material Adverse Effect. Seller has not received any notice from any insurer that any portion of the Assets contains any defects or conditions that are reasonably likely to materially adversely affect the insurability of the Assets. (s) Except as set forth on Schedule 6.1(s) and except for the Excluded Assets, the Assets comprise all of the material assets, property and rights of every type and description, real, personal and mixed, tangible and intangible, used in the conduct of the Business as presently conducted. (t) Schedule 6.1(t) sets forth a list of all employee benefit plans within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, and all other bonus, deferred compensation, severance, incentive and equity-based compensation, pension, profit-sharing and stock bonus plans, programs, policies and arrangements in which employees of the Business participate. There are no material unfunded liabilities in respect of employees (and their dependents and beneficiaries) of the Business (or in respect of benefit plans in which they participate) as to which Buyer could be liable. (u) Seller will or will cause its affiliates to convey good and valid title (subject to the provisions of Section 2.2(a) with respect to the Dio Drive Vacated Area, Country Club Lane and the Out Parcel) to the Assets (other than the Nevada Power Land), free and clear of all liens, security interests, claims, charges and encumbrances (except (i) those pertaining to the Assumed Contracts, (ii) such as are disclosed in Schedule 6.1(f), (iii) to the extent bonded against mechanics', carriers', workmen's, repairmen's or other like liens arising or incurred in the ordinary course of business, (iv) liens arising under original purchase price conditional sales contracts and equipment leases with third parties entered into in the ordinary course of business and providing for periodic payments, (v) liens for taxes, assessments and other governmental charges (A) which charges are not due and payable or (B) to the extent bonded against, which are being contested in good faith by appropriate proceedings and (vi) other imperfections of title or encumbrances expressly permitted hereunder or which arise after the Effective Date other than by Seller's voluntary act and do not materially impair the continued use and operation of the Assets to which they relate in the operation of the Business as presently conducted (collectively, the "Permitted Liens"), and, subject to Section 3.3, SDIC has or will have the right, power and authority to sell, convey, transfer and assign the Assets (other than the Nevada Power Land and the Stock) at the Closing as contemplated by this Agreement. No material claims are being asserted that could reasonably be expected to result in a Tax lien on the Assets. (v) DIIC is duly organized, validly existing and in good standing under the laws of the State of Nevada with all requisite power and authority to conducts its business as presently conducted. The Stock constitutes all issued and outstanding shares of common stock in DIIC. All such outstanding shares of Stock have been duly authorized and validly issued and are fully paid and nonassessable. There are no outstanding options, warrants, right, calls, commitments, conversion rights, rights of exchange, plans or other agreements or claims of any character providing for the purchase, issuance or sale of any shares of the Stock other than as contemplated by this Agreement. Except for the Stock, no other shares of capital stock or securities of DIIC will be authorized, issued or outstanding at the Closing. (w) The conveyance of the Stock to Buyer will transfer to Buyer valid title thereto free and clear of all liens, encumbrances, restrictions, preemptive rights, options and claims of every kind subject, however, to PUC restrictions. (x) Except as set forth on Schedule 6.1(x), DIIC has no material liabilities or obligations of any nature (whether absolute, accrued, contingent, or otherwise). (y) All offices which Seller owns, maintains or otherwise uses in connection with the operation of the Business are set forth on Schedule 6.1(y). (z) Seller has filed with the Clark County Planning Commission an application for a parcel map determination in respect of the Corner Land and the Nevada Power Land (the "Parcel Map"). SECTION 6.2 No Implied Representations. Buyer acknowledges that except as expressly set forth in this Agreement and in the documents and instruments delivered by Seller at the Closing, none of Starwood, ITT, Sheraton, SGC, SDIC, or any of their respective parents, subsidiaries, affiliates, agents or representatives or purported agents or representatives has made, and none of the foregoing entities or Persons is liable for or bound in any manner by, any express or implied warranties, guaranties, promises, statements, inducements, representations or information pertaining to the Assets or any part thereof, the physical condition thereof, environmental matters, the income, expenses or operation thereof, the financial prospects for the Business, the uses which can be lawfully made of the Assets under applicable zoning or other laws or any other matter or thing with respect thereto, including any existing or prospective Permits. Without limiting the foregoing, Buyer acknowledges and agrees that, except as expressly set forth in this Agreement and in the documents and instruments delivered by or for Seller at the Closing, Seller is not liable for or bound by (and Buyer has not relied upon) any verbal or written statements, representations, warranties, agreements, arrangements, understandings, investment bankers or real estate brokers "setups" or offering materials or any other information respecting any or all of the Assets furnished by Starwood, ITT, Sheraton, SGC, SDIC or any affiliate, representative or other person representing or purportedly representing any of the foregoing. Nothing contained in this Section 6.2 shall be deemed to impair, limit or otherwise affect any rights of Buyer under this Agreement in respect of the representations, warranties and covenants of Seller set forth in this Agreement and the other provisions hereof binding on Seller. SECTION 6.3 Survival of Seller's Warranties. (a) All of Seller's representations and warranties contained in this Article VI (other than those contained in (i) Sections 6.1(a), 6.1(b) and 6.1(c), which shall survive the Closing indefinitely and (ii) Section 6.1(o), which shall survive until twenty-four (24) months after the date of the Closing), shall survive until eighteen (18) months after the date of the Closing; provided, however, that Seller's liability for breach of such representations and warranties shall not expire as to any breach or alleged breach thereof if notice of such breach or alleged breach is given by Buyer to Seller prior to eighteen (18) or twenty-four (24), as applicable, months after the date of the Closing. (b) Notwithstanding anything to the contrary set forth in this Article VI, Seller shall have no liability to Buyer for breach of any warranty and representation set forth in this Article VI or for breach by Seller of any of its agreements set forth in Article VIII (other than with respect to liability with respect to Taxes) unless and except to the extent that the damages due to Buyer by reason of all such breaches exceeds $1,000,000. ARTICLE VII Representations and Warranties of SUN and Buyer SECTION 7.1 SUN's and Buyer's Representations and Warranties. Each of SUN and Buyer represents and warrants to Seller as follows: (a) Buyer is a Nevada corporation duly organized, validly existing and in good standing under the laws of the State of Nevada, and SUN is an international business company duly organized, validly existing and in good standing under the laws of the Commonwealth of the Bahamas, in each case with all requisite corporate power and authority to enter into and carry out its obligations under this Agreement and the other agreements and instruments to be executed and delivered by it in connection herewith. Each officer of SUN and Buyer who shall execute and deliver this Agreement and such other agreements and instruments has been duly authorized to so act by all requisite corporate action on the part of SUN and Buyer. (b) The execution, delivery, and performance of this Agreement and the other agreements and instruments to be executed and delivered by SUN and Buyer in connection herewith by the persons executing the same on behalf of SUN and Buyer have been duly and validly authorized by all necessary corporate action on the part of SUN and Buyer and this Agreement and such other agreements and instruments constitute the legal, valid and binding obligations of each of them, enforceable in accordance with their respective terms. (c) The execution, delivery and performance of this Agreement, and the other agreements and instruments to be executed and delivered by SUN and Buyer in connection herewith will not (i) violate the articles of association or memorandum of association or other similar organizational documents of SUN or Buyer, (ii) violate any provision of law applicable to SUN or Buyer, the violation of which would have a material adverse effect on SUN's or Buyer's ability to consummate the transaction contemplated by this Agreement or otherwise perform its obligations hereunder ("Buyer Material Adverse Effect") or which would prevent the consummation of the transaction contemplated by this Agreement, or (iii) conflict with or result in the breach or termination of, or constitute a default under or pursuant to any judgment, order, injunction, decree or ruling of any court or governmental authority, or other agreement or instrument by which Buyer or its properties are bound, or to which any of them are subject, which conflict, breach, termination or default would have a Buyer Material Adverse Effect or which would prevent the consummation of the transactions contemplated by this Agreement. (d) Neither SUN nor Buyer nor any of the principals of either of them has ever been denied a Gaming License. SUN and its required affiliates are currently licensed and in good standing to conduct gaming activities in the State of New Jersey in accordance with the New Jersey Gaming Control Act. (e) SUN has arranged for, or will promptly following the Effective Date arrange for, Buyer to have in its possession prior to the Closing sufficient cash, available lines of credit or other sources of immediately available funds to enable it to purchase the Assets and pay any other amount to be paid by it hereunder. SECTION 7.2 Survival of Buyer's and SUN's Representations and Warranties. The representations and warranties of Buyer and SUN contained in Sections 7.1(a), 7.1(b) and 7.1(c) shall survive the Closing indefinitely. ARTICLE VIII Title Insurance SECTION 8.1 Title Policies and Exceptions. (a) Attached hereto as Schedule 8.1(a) is a preliminary title report for each of the Real Estate, the Corner Land and each parcel of the Residential Real Estate (collectively, the "Title Report"). All title exceptions shown on the Title Report except those exceptions listed on Schedule 8.1(a) and all matters disclosed by the surveys listed on Part II of Schedule 8.1(a) (collectively, the "Survey"), copies of which have been delivered to Buyer, are hereinafter referred to as the "Permitted Exceptions". The Permitted Exceptions shall also include those other title exceptions which are disclosed or become apparent to Buyer after the Effective Date, which are not already Permitted Exceptions, which cannot be removed by the payment of a sum of money, which are not caused by the intentional act of Seller or Seller's affiliates after the Effective Date and which do not materially adversely affect the value of the Real Estate, the Corner Land or the Residential Real Estate, or the continued use thereof as currently conducted, or as to which Buyer has not timely objected. Buyer must notify Seller in writing of its objection to any such subsequently arising matter on or before the date that is ten (10) days after Buyer's receipt of notice thereof. (b) Seller shall cause all title exceptions (other than Permitted Exceptions) not approved by Buyer to be removed on or before the Closing. Seller, however, shall have the right to (i) cause the Title Insurer to remove a lien by bonding over it or (ii) obtain the commitment of the Title Insurer to insure Buyer against loss or damage that may be occasioned by such exceptions that are not Permitted Exceptions. (c) Prior to the Closing, Buyer shall obtain a ALTA extended owner's policy of title insurance (Form B-1970) (Amended 4-6-90), issued by Nevada Title Company or, if Nevada Title Company is unable to do so, by a title insurance company reasonably acceptable to Buyer in its reasonable discretion ("Title Insurer"), insuring that Buyer has fee title to the Real Estate, the Corner Land and the Residential Real Estate, and DIIC has fee title to the real property described as parcels 46 and 47 in the Title Report (the "DIIC Land") subject only to (i) the Permitted Exceptions, (ii) liens for taxes not yet due and payable, (iii) all standard exceptions, exclusions, conditions and stipulations from coverage for the Title Insurer's Extended Coverage Form ALTA Owner's Policy of Title Insurance, including any and all endorsements and affirmative coverage customary in real estate sale transactions involving the magnitude and type of the Assets (including, without limitation, an ALTA 3.1 Zoning Endorsement and as to the DIIC Land, a non-imputation endorsement) as Buyer shall reasonably request and (iv) those exceptions arising after the Effective Date and approved by Buyer as provided above (the "Title Policies"). The coverage amount of the Title Policies for the Real Estate shall be no more than the amount of (i) $270,000,000 less (ii) the book value, net of depreciation on Seller's books as at December 31, 1998, of all furniture, fixtures, equipment and other personal property included in the Assets. Buyer shall have the right to require the Title Insurer to obtain facultative reinsurance, with direct access provisions against the reinsurer with respect to the Title Policies in such amounts and with such title companies as Buyer shall determine in its reasonable discretion. (d) Buyer and Seller equally shall pay the premiums for the Title Policies.. Buyer shall pay for non-standard endorsements and any lender's coverage premiums. Buyer and Seller shall each cooperate diligently to provide customary documents required by Title Insurer as condition to issuance of the Title Policies. (e) Seller shall order an update of the Survey, which shall be certified to Buyer and its lenders, if any, the Title Insurer and any other parties reasonably requested by Buyer. In addition, Seller shall cause the updated Survey to be prepared and be certified as having been prepared in accordance with "Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys" jointly established and adopted by the American Land Title Association ("ALTA") and the American Congress of Survey and Mapping ("ACSM") in 1997 and including all ALTA optional items except No. 5 (Contour Maps) and No. 12 (Governmental Agency Survey Requirements) and the updated Survey shall include a certification as to whether or not the Real Estate, the Corner Land and the Residential Real Estate are located in a floodplain or designated floodway and such information as may be required by the Title Insurer to issue extended coverage (consistent with all matters shown on such Survey) over all general printed exceptions to title. ARTICLE IX Conduct of Business Prior to Closing Each of the Parents and Seller agrees that, subject to the terms and provisions of this Agreement, after the execution hereof and prior to Closing (unless Buyer consents in writing otherwise): SECTION 9.1 Seller's Conduct. Seller shall and shall cause each of its subsidiaries and affiliates (as applicable) to: (a) deliver the Assets to Buyer at the Closing in substantially their present condition, except as otherwise permitted herein, and prior to such time maintain and keep the Assets in substantially the same repair, working order and condition as the Assets are in on the Effective Date (ordinary wear and tear and damage from fire or other casualty subject to Article XVIII excepted) so as to maintain the Business Premises as a hotel and resort with a casino of substantially the same quality as such establishment exists as of the Effective Date; provided, however, that, except as expressly provided in this Agreement, SDIC shall not be required to make or undertake capital improvements, repairs (other than in the ordinary course of business) or replacements with respect to the Assets prior to the Transfer Time; (b) continue in the ordinary course the existing use and operation of the Business; (c) promptly notify Buyer of (i) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement, (ii) any notice or other communication from any governmental or regulatory agency or authority in connection with the transactions contemplated by this Agreement and (iii) any actions, suits, claims, Environmental Claims, investigations or proceedings commenced or, to its knowledge threatened against, relating to or involving or otherwise affecting SDIC or the Business that, if adversely determined, would reasonably be expected to result in a Material Adverse Effect or prevent or preclude the consummation of the transactions contemplated by this Agreement; (d) maintain a supply of consumables, inventory and operating equipment of the type included at substantially the levels maintained on the date of execution of this Agreement (with such increases or decreases due to seasonality as and consistent with practice in the gaming industry in Las Vegas) and in sufficient amounts to allow the efficient operation of the Business in a first-class manner; (e) comply in all material respects with all Legal Requirements relating to the Assets or the Business and promptly provide Buyer with all notices alleging violations of any Legal Requirement (including any violations under applicable Legal Requirements relating to gaming) and cure, at its own expense such violations; (f) use best efforts to preserve in force all Permits and to cause all expiring Permits to be renewed prior to the Closing Date. If any material Permit shall be suspended, revoked or otherwise challenged, Seller shall promptly notify Buyer and shall take all measures necessary to cause the reinstatement of such material Permit without any additional limitation or condition; (g) make the following capital expenditures: (i) budgeted capital expenditures of not less than $2,700,000 for calendar year 1999 for maintenance and repair in respect of the Assets and, following December 31, 1999, capital expenditures for such maintenance and repair of not less than an average of $225,000 per month in the aggregate; and (ii) capital expenditures to install and operate an independent information technology system, consisting of hardware and software, that will allow Buyer, after the Transfer Time, to operate the Business as currently conducted, which system (x) shall use the AS 400 platform and be reasonably acceptable to Buyer, (y) shall include customer lists and related information constituting Assets and (z) after the Transfer Time, shall not be accessible by any Person other than Buyer and its affiliates; (h) as promptly as practicable following the Effective Date, create from the Caesars World customer list a separate list of the customers of the Desert Inn, and thereafter continue to maintain and update such customer list; and (i) enter into a golf course management agreement covering the Desert Inn Golf Club and Pro Shop which is substantially consistent with Exhibit 10.6(b)-2 (the "Golf Course Management Agreement"). SECTION 9.2 Operating Restrictions. Except as required by law, as otherwise expressly provided in this Agreement or with the consent of Buyer (such consent not to be unreasonably withheld or delayed), SDIC shall not: (a) create any mortgage, pledge, lien, encumbrance or charge on any of the Assets which would bind any of the Assets following Closing (other than Permitted Liens and Permitted Exceptions); (b) sell or transfer the Business Premises, or any portion thereof included as part of the Assets except transactions pursuant to the Assumed Contracts or agreements entered into in the ordinary course of business which sales or transfers would not, individually or in the aggregate, reasonably be expected to materially impair the continued operation of the Business as currently conducted; (c) sell or transfer any Personal Property included as part of the Assets except as contemplated by the Assumed Contracts or pursuant to agreements entered into in the ordinary course of business which sales or transfers would not, individually or in the aggregate, reasonably be expected to materially impair the continued operation of the Business as currently conducted; (d) cancel or terminate (other than for cause or in the ordinary course of business which would not, individually or in the aggregate, reasonably be expected to materially impair the continued operation of the Business as currently conducted) any of the Assumed Contracts or, with-out Buyer's prior written consent, enter into any new contracts (except for the Golf Course Management Agreement) which (i) require payments in excess of $250,000, (ii) continue for more than twelve months from the Effective Date or (iii) grant to any person any material rights with respect to the Business or the Assets unless any such contract can be terminated on 30 days' notice without liability to Buyer; provided, however, that the entry by SDIC into any such contract shall not constitute a breach or default under this Agreement or a failure of any condition of the Closing if SGC shall assume all obligations under such contract (and indemnify Buyer in respect thereof) and if SGC has the ability to perform all such obligations without use of the Assets following the Transfer Time; (e) waive any material rights of substantial value that are included as a part of the Assets; (f) except for the Golf Course Management Agreement, enter into any contracts or agreements with any affiliates of SDIC which will be binding on Buyer after the Transfer Time; (g) consent to, authorize or approve any change in the zoning, land use classification, development rights or obligations for or with respect to the Real Estate, the Residential Real Estate or the Corner Land or any part thereof, except that Seller reserves the right to consummate the Nevada Power Sale Agreement, continue to prosecute the proposed subdivision of the Corner Land and continue, following the execution and delivery of the Timeshare Joint Venture Agreement by the parties thereto as contemplated by this Agreement, to further subdivide portions of the Golf Course and Residential Real Estate in a manner consistent with, or pursuant to, such Timeshare Joint Venture Agreement; (h) enter into any lease, license, occupancy agreement or other agreement or contract which allows for the use or occupancy of any portion of the Real Estate, the Residential Real Estate or the Corner Land other than (i) bookings in the ordinary course of business which would result in aggregate payments to Seller of less than $100,000, (ii) the conveyance contemplated by the Nevada Power Sale Agreement and (iii) golf tournaments or events permitted by Section 9.2(i); (i) except for tournaments or events occurring on or prior to twelve months following the Effective Date, enter into any agreements with respect to use of the golf course located on the Real Estate, or any portion of such golf course, for any tournaments or events which require, that the golf course be unavailable to the public or to guests of the Business for more than one calendar day; (j) market or solicit offers to sell, transfer, convey, finance or refinance, directly or indirectly, any interest in the Assets or in the owner of any Asset to any party other than Buyer, or directly or indirectly negotiate, participate or encourage the submission of any proposal with or from any other Person relating to the sale of the Assets, nor shall Seller authorize any other Person to do any of the foregoing on its behalf; (k) except as set forth on Schedule 9.2(k), enter into any collective bargaining or other agreements with any union for the employees of the Business or enter into any agreement with any employee who will remain an employee of the manager of the Business; provided, however, that Seller (i) may engage in negotiations for and enter into successor collective bargaining agreements to those collective bargaining agreements referenced in Schedule 3.1(a) which have expired or are due to expire, or may be terminated on seven (7) days' notice by either party thereto, prior to the Transfer Time, (ii) may engage in negotiations and enter into a collective bargaining agreement with the Professional, Clerical and Miscellaneous Employees, Teamsters Local Union No. 995, which was certified as the bargaining representative for the laundry workers at the Business after an election held on October 30, 1998, and (iii) will be required to engage in "effects bargaining", and may enter into agreements in connection therewith, with the labor unions representing employees of the Business (the "Union Employees"), and, provided, further, that any such entering into collective bargaining agreements (or renewals thereof) will be on commercially reasonable terms, and, in connection therewith, Seller will undertake to involve Buyer, subject to agreement of the applicable labor unions, in the foregoing negotiations; (l) hire or solicit any employee of SDIC for employment at any of Seller's or ITT's or its affiliates' other business or increase the compensation of any such employee unless required by law or the terms of a collective bargaining agreement, except for ordinary course merit increases in compensation for non-union employees consistent with past practice for such employees or for employees holding similar positions; (m) except as required by applicable law (and then only following notice to Buyer to the extent practicable) commence or commit to any capital expenditures or capital project with respect to the Business or the Assets which involves the payment of $500,000 or more; (n) transfer, sell, assign, pledge, encumber or grant a security interest in the Stock other than to Buyer. Notwithstanding any provision in this Agreement to the contrary, the agreement contained in the immediately preceding sentence shall survive the Closing Date until the Stock is transferred to Buyer; or (o) enter into any amendment, modification or supplement to the Nevada Power Sale Agreement. Buyer agrees to respond to Seller's request with respect to any of the matters set forth in this Section 9.2 within 5 Business Days after receipt by Buyer of Seller's written request, and the failure of Buyer to respond within such 5 Business Day period shall be deemed to be approval and consent thereto by Buyer. ARTICLE X Other Pre-Closing Obligations SECTION 10.1 Access; Observers. (a) After the Effective Date and prior to the Closing, upon prior written notice from Buyer and, if requested by Seller, accompanied by a representative of Seller, Seller shall (unless prohibited by law) give Buyer and its representatives, employees and agents reasonable access during normal business hours to the Business Premises and to the books and records relating to the Assets and shall (unless prohibited by law) furnish Buyer during such period with such information in Seller's possession concerning the Assets and operation of the Business as Buyer may reasonably request. Seller and Buyer agree that prior to Closing Seller shall have no obligation to give Buyer the names or addresses of, or other identifying information with respect to, any of Seller's customers or players, and Buyer shall not have any access to such identifying information or to other proprietary information of SIDC and its Affiliates not included among the Assets. Any such access and the furnishing of any such information shall not unduly interfere with the normal activities of the Business, and Buyer acknowledges that no investigation by Seller or Buyer or other information received by Buyer shall operate as a waiver or otherwise affect any representation, warranty or agreement given or made by Seller hereunder. Notwithstanding the foregoing, Buyer shall not have access to personnel records of SDIC relating to individual performance or evaluation records, medical histories or other information which in Seller's reasonable good faith opinion is prohibited by Legal Requirements or the disclosure of which could subject Seller to risk of liability. (b) Buyer shall be responsible for its costs and expenses in connection with any inspection or tests undertaken pursuant to this Section 10.1. SECTION 10.2 No Control. Prior to the Transfer Time, Buyer shall not directly or indirectly control, supervise, direct or interfere with, or attempt to control, supervise, direct or interfere with, the Assets or the Business. Until the Transfer Time, the operations and affairs of the Business are the sole responsibility of and (subject to the provisions of Article IX) under Seller's complete control. SECTION 10.3 Hart-Scott-Rodino Filing. Buyer and Seller shall use their commercially reasonable efforts to comply as expeditiously as practicable with the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act"), to the extent applicable to the transactions contemplated by this Agreement, and shall make their initial filings with the Federal Trade Commission and the United States Department of Justice as soon as practical and no later than sixty (60) days after the Effective Date. Each party agrees to use its commercially reasonable efforts to satisfy any requests for additional information or other requirements imposed by the Federal Trade Commission or the Department of Justice in connection with the transactions contemplated by this Agreement as soon as practical and, if requested by any party, to request early termination of any waiting period otherwise imposed by statute. Buyer shall pay the filing fee, if any, required under the HSR Act. SECTION 10.4 Cooperation. Each party shall use its commercially reasonable efforts to make or file all other required notifications and to obtain all consents, approvals and authorizations, including the Permits, which must be obtained by such party in order to consummate the transactions contemplated hereby. Each party shall render the other its full and complete cooperation in giving such notices or obtaining such consents, approvals and authorizations, including the Permits. Each party covenants and agrees promptly to furnish to the other all information and data in the furnishing party's possession requested in writing by the requesting party which such furnishing party has the right to disclose and which is reasonable or necessary in order to assist the requesting party to give the necessary notices or secure the permits, licenses and approvals required as contemplated by this Agreement, including the Permits. SECTION 10.5 Gaming and Other Licenses. (a) As soon as practical after the Effective Date, but in no event later than 60 days following the Effective Date, Buyer will file applications with the Nevada Gaming Authorities on behalf of Buyer, the board of directors and executive officers (if any) of Buyer, SUN and the board of directors and executive officers of SUN for all required gaming licenses (the "Gaming Licenses"), liquor licenses and for all other required licenses (collectively with the Gaming Licenses and the liquor licenses, the "Licenses") in connection with the Business, and all related necessary findings of suitability, registrations and approvals, and no later than 120 days following the Effective Date, Buyer will file such applications on behalf of all other required parties in connection with the foregoing. Buyer will use its best efforts to obtain the Licenses as soon as possible after the Effective Date, and will respond promptly to all requests made by the Nevada Gaming Authorities and/or the alcoholic beverage control authorities. Seller shall cooperate in good faith to assist Buyer in obtaining the Licenses as soon as possible after the Effective Date; provided, however, that the foregoing shall not require SUN or Buyer, directly or indirectly, (i) to divest, or agree to divest, any material assets of SUN or Buyer on the Effective Date or (ii) to cease to conduct business or operations in any jurisdiction in which SUN, Buyer or their respective subsidiaries conducts business or operations as of the Effective Date. (b) Seller will deliver to Buyer as promptly as practicable following the filing thereof true, correct and complete copies of material gaming financial reports, if any, filed by Seller with respect to the Business with the State of Nevada or Nevada Gaming Authorities between the Effective Date and the Closing. SECTION 10.6 Best Efforts. (a) Subject to the terms and conditions of this Agreement, each party shall use its best efforts to cause the Closing to occur as promptly as practicable following the Effective Date. (b) Without limiting the generality of the foregoing, each of Seller and Buyer or their respective affiliates, as applicable, shall use its best efforts to negotiate in good faith as soon as possible after the Effective Date, and enter into as promptly as practicable following such Effective Date (or cause their respective affiliates to enter into, as the case may be) (A) a timeshare joint venture agreement between Starwood or an affiliate of Starwood and Buyer or an affiliate of Buyer, the terms of which shall be substantially as set forth in Exhibit 10.6(b)-1 (the "Timeshare Joint Venture Agreement"), and (B) a marketing alliance agreement between Starwood or an affiliate of Starwood and Buyer or an affiliate of Buyer, the terms of which shall be substantially as set forth in Exhibit 10.6(b)-3 (the "Marketing Alliance Agreement"). SECTION 10.7 Notice. Each party covenants and agrees promptly to notify the other of any claim, action, suit, proceeding or investigation relating to the Business or this Agreement which is commenced or threatened and becomes known to any of them between the Effective Date and the Closing. SECTION 10.8 Parcel Map Requirement. Except for any change therefrom approved in writing by Buyer (such approval not to be unreasonably withheld or delayed), Seller shall effect any parcelization of the real property subject to the Parcel Map substantially in accordance with the specifications of such Parcel Map. SECTION 10.9 Additional Agreements of Seller. (a) Seller agrees that except as set forth on Schedule 6.1(x) or as contemplated by this Agreement, DIIC shall not incur any material liabilities other than for the purchase of water from the Las Vegas Valley Water District. Seller will pay for or cause to be paid for (but not by DIIC) any water purchased by DIIC prior to the Closing which is not paid for by DIIC prior to the Closing. (b) Seller agrees that it will be solely responsible for the payment of any fees or taxes due pursuant to any subsequent deficiency determinations made under the Nevada Gaming Control Act (chapter 463 of the NRS) which encompasses any period of time before the Closing Date. The foregoing provision, required by the Nevada Gaming Control Act to be included in this Agreement, shall not be construed to exonerate Buyer from paying, or to require Seller to pay, for fees or taxes attributable to operations of the Business from and after the Transfer Time. ARTICLE XI Conditions to Closing SECTION 11.1 Buyer's Conditions. The obligation of Buyer to consummate the Closing and the purchase of the Assets is conditioned upon the satisfaction or waiver by Buyer as of the Closing Date of each of the following conditions (collectively "Buyer's Closing Conditions"): (a) Seller shall have delivered to Buyer a certificate of its Chief Executive Officer or Chief Financial Officer, dated as of the Closing Date, to the effect that all the terms, covenants, agreements and conditions of this Agreement to be complied with and performed by Seller on or prior to the Closing Date have been complied with and performed in all material respects, and all the representations and warranties of Seller herein qualified as to materiality are true and all such representations and warranties not so qualified are true in all material respects as if made on and as of such date (unless an earlier date is indicated in the representation and warranty). (b) Seller, Parents or their respective affiliates shall have delivered, or cause to be delivered, to Buyer (i) any documents, instruments or agreements called for under this Agreement which have not previously been delivered; (ii) Bills of Sale, endorsements of certificates of title and similar instruments of conveyance as appropriate, in customary form covering title to the Personal Property; and reasonably satisfactory to Seller's and Buyer's counsel; (iii) an Assignment of Trademarks and intangible rights in customary form; (iv) an Assignment and Assumption of Assumed Contracts in customary form and reasonably satisfactory to Seller's and Buyer's counsel; (v) such other customary instruments of conveyance as Buyer may reasonably request with respect to the Assets; (vi) a "nonforeign affidavit", properly executed by an officer of SDIC in customary form containing such information as is required by Section 1445(b)(2) of the Code; (vii) Seller's customer and player lists and related documents, instruments or agreements called for under this Agreement which have not been previously delivered; and (viii) such other documents, instruments or agreements as may be reasonably required by Buyer or its counsel to transfer the Assets to Buyer and to effectuate the transactions contemplated hereby. (c) SDIC shall have delivered to Escrowee or to Buyer grant, bargain and sale deeds conveying fee simple title to the Real Estate, the Corner Land and the Residential Real Estate subject only to the Permitted Exceptions (including the Nevada Power Sales Agreement) except as otherwise expressly provided herein, in a form reasonably satisfactory to Buyer's and Seller's counsel. (d) Any waiting period, including extensions thereof, applicable to the consummation of the transactions contemplated hereunder required pursuant to the provisions of the HSR Act shall have either expired without notice of objection to the transaction or been previously terminated. (e) Buyer shall have obtained all necessary approvals from the Nevada Gaming Authorities, including Gaming Licenses, to operate the Business substantially as currently conducted on the Effective Date. (f) No injunction shall have been entered which prohibits or makes impossible the consummation of the transactions contemplated hereby, whether preliminary or permanent; provided, however, that Buyer and Seller shall use their commercially reasonable efforts to prevent any such event (including appealing any adverse decision). (g) Buyer shall have received the Title Policies or commitments therefor, and Seller shall have delivered to the Title Insurer such other documents or affidavits as may be reasonably required as a condition to the issuance of the Title Policies in the form herein required. (h) Buyer shall have received from counsel to SDIC and Parents, an opinion or opinions, dated as of the Closing Date, in form and substance reasonably satisfactory to Buyer and its counsel, that: (i) each of SDIC and the Parents is validly existing corporation organized and in good standing under the laws of the state of its formation, and has all necessary power to own the Assets, operate the Business and to consummate the transactions contemplated hereby; and (ii) this Agreement and the other agreements and instruments to be executed and delivered by Seller or the Parents on or prior to the Closing Date have been duly and validly authorized by Seller or the Parents and will on the Closing Date be valid and binding on Seller and the Parents and enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other similar laws affecting creditors' rights generally from time to time in effect and to general principles of equity (including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing) regardless of whether considered in a proceeding in equity or at law. (i) The Outside Date shall not have passed, except that the same shall not be a condition for the benefit of Buyer to the extent of any contributory delay by Buyer in performing its obligations hereunder. SECTION 11.2 Seller's Conditions. The obligation of Seller to consummate the Closing is conditioned upon the satisfaction or waiver by Seller as of the Closing Date of each of the following conditions (collectively "Seller's Closing Conditions"): (a) Buyer shall have delivered to Escrowee or to Seller the Closing Date Amount (less the Applicable Accrued Deposit). (b) Buyer, SUN or their respective affiliates shall have delivered, or cause to be delivered, to Seller a certificate, dated as of the Closing Date, to the effect that all the terms, covenants, agreements and conditions of this Agreement to be complied with and performed by Buyer on or prior to the Closing Date have been complied with and performed in all material respects, and all the representations and warranties of Buyer herein qualified as to materiality are true and all such representations and warranties not so qualified are true in all material respects on the Closing Date as if made on and as of such date (unless an earlier date is indicated in the representation and warranty). (c) Buyer shall have delivered to Seller the instruments and documents specified in Section 11.1 to be accepted and executed by Buyer and any other documents, instruments and agreements called for under this Agreement which have not previously been delivered. (d) Seller shall have received from counsel to Buyer and SUN an opinion or opinions dated as of the Closing Date, in form and substance reasonably satisfactory to Seller and its counsel, that: (i) each of Buyer and SUN is validly existing and in good standing under the laws of the state or commonwealth of its formation, is duly qualified to conduct business in such jurisdiction, and has all necessary corporate power to consummate the transactions contemplated hereby; and (ii) this Agreement and the other agreements and instruments to be executed and delivered by Buyer or SUN on or prior to the Closing Date have been duly and validly authorized by Buyer or SUN and will on the Closing Date be valid and binding on Buyer and SUN and enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other similar laws affecting creditors' rights generally from time to time in effect and to general principles of equity (including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing) regardless of whether considered in a proceeding in equity or at law. (e) Any waiting period, including extensions thereof, applicable to the consummation of the transactions contemplated hereunder required pursuant to the provisions of the HSR Act shall have either expired without notice of objection to the transaction or been previously terminated. (f) No injunction shall have been entered which prohibits or makes impossible the consummation of the transactions contemplated hereby, whether preliminary or permanent; provided, however, that Buyer and Seller shall use their reasonable best efforts to prevent any such event (including appealing any adverse decision). (g) The Outside Date shall not have passed, except that same shall not be a condition for the benefit of Seller to the extent of any contributory delay by Seller in performing its obligations hereunder. (h) Buyer shall have obtained all necessary approvals from the Nevada Gaming Authorities, including Gaming Licenses, to operate the Business substantially as conducted on the Effective Date. SECTION 11.3 Frustration of Closing Conditions. Neither Buyer nor Seller may rely on the failure of any condition set forth in this Article XI to be satisfied if such failure was caused by such party's failure to act in good faith or to use its best efforts to cause the Closing to occur as required by Section 10.6. ARTICLE XII Escrow SECTION 12.1 Escrow. If Buyer shall deliver the Deposit to Escrowee pursuant to Section 4.2(a), then prior to or concurrently with such delivery Buyer and Seller shall open an escrow (the "Escrow") with Escrowee by delivery of a fully executed copy of this Agreement to Escrowee, and by Buyer's delivery to Escrowee of the Deposit no later than the tenth Business Day following the date of this Agreement. Escrowee will notify Seller and Buyer when Escrow has been opened. This Agreement together with the Recording Instructions shall constitute joint escrow instructions to Escrowee. In addition, Seller and Buyer agree to be bound by such other reasonable and customary escrow instructions as may be necessary or reasonably required by Escrowee or the parties hereto in order to consummate the purchase and sale described herein, or otherwise to distribute and pay the funds held in Escrow as provided in this Agreement. In the event of any inconsistency between the terms and provisions of such supplemental escrow instructions and the terms and provisions of this Agreement and the Recording Instructions, the terms and provisions of this Agreement and the Recording Instructions shall control, absent an express written agreement between Seller and Buyer to the contrary which acknowledges this Article XII. The Assets described in Sections 2.2(a), (b) and (c) shall be conveyed at the Closing through such Escrow and the other Assets shall be conveyed at the Closing outside of such Escrow, all in accordance with the terms and provisions of this Agreement. SECTION 12.2 Investment. The Escrowee shall invest or deposit all monies delivered to the Escrowee for deposit into the Escrow in such account(s) at, or in such certificates of deposit issued by, such bank or savings and loan association located in Las Vegas, Nevada, as Buyer shall direct and as shall be reasonably satisfactory to Seller. Except as otherwise expressly provided herein, all interest, dividends and other income earned in respect of such deposited monies shall accrue to the account and for the benefit of Buyer and shall be reinvested or deposited as aforesaid. ARTICLE XIII Closing SECTION 13.1 Time; Location. The consummation of the purchase and sale of the Assets pursuant to this Agreement (the "Closing") shall be held at the offices of Cravath, Swaine & Moore, 825 Eighth Avenue, New York, New York 10019 (or such other place as the parties shall agree) and shall be deemed to occur at midnight following 11:59 P.M. Las Vegas time on the Closing Date (the "Transfer Time"). The Closing shall occur on a date (the "Closing Date") as soon as practicable, but no later than the sixth Business Day after satisfaction (or waiver by the applicable party) of the conditions set forth in Sections 11.1 and 11.2, and in any event on or prior to November 17, 2000 (the "Outside Date"). SECTION 13.2 Recordation of Deeds. The Closing shall, for all purposes under this Agreement, be deemed to have occurred as of the Transfer Time. The matters and deliveries described in Article XI shall be deemed accomplished concurrently. The recordation of the Deeds shall be accomplished on the Closing Date, if possible, but in any event not later than one Business Day following the Closing Date and then only provided that the Title Insurer will insure over the gap. SECTION 13.3 Payment of Closing Date Amount. Prior to the Closing, Buyer shall deliver to Escrowee or to Seller the Closing Date Amount less the Applicable Accrued Deposit by wire transfer of immediately available funds. Except to the extent such amounts are included as a Current Liability in the calculation of Closing Working Capital pursuant to Section 4.4, the Escrowee shall withhold from the monies to be delivered to Seller pursuant to the immediately preceding paragraph such amounts as Seller and Buyer shall agree are necessary to comply with the provisions of Nevada Revised Statutes ("NRS") 612.695, 360.525 and 616B.269 until such time as Seller furnishes to Buyer and the Escrowee the receipts or certificates provided for in said statute or, if not so provided for, such evidence as Buyer may reasonably require in order to assure Buyer that the applicable obligations have been satisfied. If Sellers do not produce such receipts and certificates within the time period provided in said statute, or if any lien or other claim therefor is asserted against Buyer or the Assets by a governmental authority, the Escrowee shall pay such withheld funds to the appropriate governmental authorities. SECTION 13.4 Certain Expenses. Buyer and Seller shall equally share the following expenses: (i) all real estate transfer taxes, (ii) any and all sales and use taxes payable in respect of the transfer of the Gaming Equipment and other applicable personal property to Buyer and (iii) the costs of filing or publishing any and all notices or documents required by law or this Agreement to be filed or published in connection with Buyer's purchase of the Gaming Equipment and other applicable personal property. SECTION 13.5 Transfer of Possession. Possession of the Assets shall be delivered to Buyer at the Transfer Time. ARTICLE XIV [Intentionally omitted] ARTICLE XV Survival; Indemnification SECTION 15.1 Survival. Other than Sections 5.1(a) and 15.2 through 15.7, which shall survive indefinitely, and as otherwise provided in Sections 6.3, 7.2 and 9.2(n), any covenants, agreements, representations and warranties of the parties hereto contained in this Agreement, the Deeds or in any other agreement, certificate or other writing delivered pursuant hereto or in connection herewith shall not survive the Closing. SECTION 15.2 Indemnification. Seller agrees to indemnify and hold Buyer harmless from and against any and all damages, losses, penalties, liabilities and expenses, including reasonable attorneys' fees and expenses (collectively, "Losses"), which Buyer may incur by reason of any action or claim arising from acts or omissions of Seller (or any of its affiliates) prior to the Transfer Time, in connection with the Assets or the Business and all liabilities in respect of the Assets or the Business that are not Assumed Liabilities, all liabilities in respect of the Excluded Assets, Excluded Liabilities and all liabilities in respect of contracts assumed by SGC pursuant to Section 9.2(d). Buyer agrees to indemnify and hold Seller and its affiliates harmless from and against any and all Losses, which Seller or any of its affiliates may incur by reason of (i) any action or claim arising after the Transfer Time from acts or omissions of Buyer or otherwise arising out of the Assets or the Business after the Transfer Time, including Buyer's failure to discharge any of the Assumed Liabilities, (ii) any claims or actions arising in connection with, or asserted by any broker contacted or retained by Buyer, or (iii) Seller's cooperation with Buyer pursuant to Section 3.3 in providing Buyer with the benefits of any Assumed Contract for which consent is not obtained. SECTION 15.3 Calculation of Losses. The amount of any Loss for which indemnification is provided under this Article XV shall be net of any amounts recovered or recoverable by the party entitled to indemnification hereunder (the "Indemnified Party") under insurance policies with respect to such Losses and shall be (i) increased to take account of any net tax cost incurred by the Indemnified Party arising from the receipt of indemnity payments hereunder (grossed up for such increase) and (ii) reduced to take account of any net tax benefit realized by the Indemnified Party arising from the incurrence or payment of any such Losses. In computing the amount of any such tax cost or tax benefit, the Indemnified Party shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt of any indemnity payment hereunder or the incurrence or payment of any indemnified Losses. Any indemnification payment hereunder shall initially be made without regard to this paragraph and shall be increased or reduced to reflect any such net tax cost (including gross-up) or net tax benefit only after the Indemnified Party has actually realized such cost or benefit. SECTION 15.4 Procedures Relating to Indemnification. (a) In order for an Indemnified Party to be entitled to any indemnification provided for under this Agreement in respect of, arising out of or involving a claim or demand made by any person against the Indemnified Party (a "Third Party Claim"), such Indemnified Party must notify the indemnifying party in writing, and in reasonable detail, of the Third Party Claim within 10 business days after receipt by such Indemnified Party of written notice of the Third Party Claim; provided, however, that failure to give such notification shall not affect the indemnification provided hereunder except to the extent the indemnifying party shall have been actually prejudiced as a result of such failure (except that the indemnifying party shall not be liable for any expenses incurred during the period in which the Indemnified Party failed to give such notice). (b) If a Third Party Claim is made against an Indemnified Party, the indemnifying party shall be entitled to participate in the defense thereof and, if it so chooses and acknowledges its obligation to indemnify the Indemnified Party therefor, to assume the defense thereof with counsel selected by the indemnifying party; provided that such counsel is not reasonably objected to by the Indemnified Party. Should the indemnifying party so elect to assume the defense of a Third Party Claim, the indemnifying party shall not be liable to the Indemnified Party for legal expenses subsequently incurred by the Indemnified Party in connection with the defense thereof. If the indemnifying party assumes such defense, the Indemnified Party shall have the right to participate in the defense thereof and to employ counsel (not reasonably objected to by the indemnifying party), at its own expense, separate from the counsel employed by the indemnifying party, it being understood that the indemnifying party shall control such defense. (c) If the indemnifying party so elects to assume the defense of any Third Party Claim, all of the indemnified parties shall cooperate with the indemnifying party in the defense or prosecution thereof. Whether or not the indemnifying party shall have assumed the defense of a Third Party Claim, the Indemnified Party shall not admit any liability with respect to, or settle, compromise or discharge, such Third Party Claim without the indemnifying party's prior written consent (which consent shall not be unreasonably withheld). If the indemnifying party shall have assumed the defense of a Third Party Claim, the Indemnified Party shall agree to any settlement, compromise or discharge of a Third Party Claim which the indemnifying party may recommend and which by its terms obligates the indemnifying party to pay the full amount of the liability in connection with such Third Party Claim and which releases the Indemnified Party completely in connection with such Third Party Claim. SECTION 15.5 Other Claims. In the event any Indemnified Party should have a claim against any indemnifying party under Section 15.2 that does not involve a Third Party Claim being asserted against or sought to be collected from such Indemnified Party, the Indemnified Party shall deliver notice of such claim with reasonable promptness to the indemnifying party. The failure by any Indemnified Party so to notify the indemnifying party shall not relieve the indemnifying party from any liability which it may have to such Indemnified Party, except to the extent that the indemnifying party demonstrates that it has been materially prejudiced by such failure. If the indemnifying party does not notify the Indemnified Party within 10 calendar days following its receipt of such notice that the indemnifying party disputes its liability to the Indemnified Party, such claim specified by the Indemnified Party in such notice shall be conclusively deemed a liability of the indemnifying party under Section 15.2 and the indemnifying party shall pay the amount of such liability to the Indemnified Party on demand or, in the case of any notice in which the amount of the claim (or any portion thereof) is estimated, on such later date when the amount of such claim (or such portion thereof) becomes finally determined. If the indemnifying party has timely disputed its liability with respect to such claim, as provided above, the indemnifying party and the Indemnified Party shall proceed in good faith to negotiate a resolution of such dispute and, if not resolved through negotiations, such dispute shall be resolved by litigation in an appropriate court of competent jurisdiction. SECTION 15.6 Exclusivity. After the Closing, and except for a party's right to recover damages for breach of a representation or warranty (as limited by Sections 6.3 and 7.2), Section 15.2 will provide the exclusive remedy for any Losses arising out of this Agreement, the Assets, the Business or the transactions contemplated hereby. SECTION 15.7 No Consequential Damages. Notwithstanding anything to the contrary in this Agreement, in no event shall any party be obligated to indemnify any Person, including any Indemnified Party, for any special or consequential damages. ARTICLE XVI Termination SECTION 16.1 Grounds for Termination. This Agreement may be terminated at any time prior to the Closing: (i) by mutual written agreement of Seller and Buyer; (ii) by Seller if Buyer shall fail timely to make the Deposit; (iii) by Seller if the Closing shall not have been consummated on or before the Outside Date other than by reason of Seller's default, or by Buyer if the Closing shall not have been consummated on or before the Outside Date, other than by reason of Buyer's default; (iv) by Seller if any of the conditions set forth in Section 11.2 shall have become incapable of fulfillment and shall not have been waived by Seller; (v) by Buyer if any of the conditions set forth in Section 11.1 shall have become incapable of fulfillment and shall not have been waived by Buyer; (vi) by Buyer pursuant to Section 18.1; (vii) by Buyer upon a breach in any material respect of any representation, warranty, covenant or agreement hereunder by Seller unless (x) such breach is capable of being cured, (y) Seller diligently seeks to cure such breach and (z) such breach is cured prior to the Closing Date; and (viii) by Seller upon a breach in any material respect of any representation, warranty, covenant or agreement hereunder by Buyer unless (x) such breach is capable of being cured, (y) Buyer diligently seeks to cure such breach and (z) such breach is cured prior to the Closing Date. provided, however, that the party seeking termination (except pursuant to clause (i)) is not in breach in any material respect of any of its representations, warranties, covenants or agreements contained in this Agreement. SECTION 16.2 Effect of Termination. Except as set forth in this Section 16.2 or in Section 16.3, if this Agreement is terminated as permitted by Section 16.1, such termination shall be without liability of either party (or any stockholder, director, officer, employee, agent, consultant or representative of such party) to the other party to this Agreement and the Deposit, together with any interest or other payments made thereon during the Escrow, shall be irrevocably returned to Buyer by the Escrowee within two (2) Business Days of such termination. If a termination shall result from the willful failure of either party to fulfill a condition to the performance of the obligations of the other party, failure to perform a covenant of this Agreement or breach by either party to this Agreement of any representation or warranty or agreement contained herein, such party shall be fully liable for any and all Losses incurred or suffered by the other party as a result of such failure or breach. SECTION 16.3 Liquidated Damages. (a) BECAUSE OF THE MAGNITUDE AND THE UNIQUE NATURE OF THE ASSETS, THE PARTIES ACKNOWLEDGE THAT SELLER'S DAMAGES IN THE EVENT OF BUYER'S FAILURE TO CONSUMMATE THE CLOSING IN ACCORDANCE WITH BUYER'S OBLIGATIONS HEREUNDER WOULD BE EXTREMELY DIFFICULT OR IMPRACTICAL OF ASCERTAINMENT. BUYER AND SELLER HAVE EXPRESSLY NEGOTIATED THIS PROVISION, AND HAVE AGREED THAT IN LIGHT OF THE CIRCUMSTANCES EXISTING AT THE TIME OF EXECUTION OF THIS AGREEMENT, AN AMOUNT EQUAL TO THE DEPOSIT, TOGETHER WITH INTEREST AND OTHER PAYMENTS MADE THEREON DURING THE PERIOD OF ESCROW, REPRESENTS A REASONABLE ESTIMATE OF THE HARM LIKELY TO BE SUFFERED BY SELLER IN THE EVENT THAT THE NEVADA GAMING AUTHORITIES DENY BUYER A GAMING LICENSE TO OPERATE THE BUSINESS AS CURRENTLY CONDUCTED UP BY A FINAL NON-APPEALABLE DECISION, THAT SELLER'S ACTUAL DAMAGES MIGHT WELL EXCEED THE AMOUNT OF THE DEPOSIT, BUT THAT PROOF OF ACTUAL DAMAGES WOULD BE COSTLY OR IMPRACTICAL. ACCORDINGLY, IN THE EVENT THAT THE NEVADA GAMING AUTHORITIES DENY BUYER A GAMING LICENSE TO OPERATE THE BUSINESS AS CURRENTLY CONDUCTED BY A FINAL NON-APPEALABLE DECISION, THEN SELLER SHALL BE ENTITLED TO RECEIVE THE DEPOSIT (TOGETHER WITH SUCH INTEREST AND OTHER PAYMENTS) FROM ESCROWEE AS ITS SOLE REMEDY AND AS LIQUIDATED DAMAGES; PROVIDED, HOWEVER, THAT THE FOREGOING SHALL NOT IMPAIR OR LIMIT ANY REMEDY OF SELLER FOR ANY BREACH OF THIS AGREEMENT BY SUN OR BUYER. (b) Notwithstanding the foregoing, Seller's agreement to accept the Deposit (together with interest and other payments made thereon during the period of Escrow) as liquidated damages pursuant to Section 16.3(a) for failure of the Nevada Gaming Authorities to grant Buyer a Gaming License to operate the Business as currently conducted by a final and non-appealable decision is expressly conditioned on Buyer's full cooperation and that Buyer refrain from obstructing or interfering in any way with Seller's exercise of such remedies and execute a release in form reasonably satisfactory to Seller's counsel of any and all claims against Starwood, ITT, Sheraton, SGC, SDIC and the Assets within three (3) Business Days of Seller's demand therefor. In the event Buyer shall fail or refuse so to cooperate with Seller in the termination of this Agreement, the cancellation of Escrow, the payment of liquidated damages and the execution and delivery of the foregoing described release in favor of Seller and its affiliates, then Seller may elect to pursue any and all remedies available to it at law or in equity. In the event of an action commenced by Seller or Buyer over disposition of the Deposit or money damages asserted by Buyer for Seller's alleged breach of this Agreement, the prevailing party shall be entitled to recover, in addition to its costs of enforcement, including attorneys' and consultants' fees, interest at ten (10%) percent per annum on the sum ultimately recovered, calculated from the expiration of said three (3) Business Days, and inclusive of interest earned on the Deposit from and after said date. (c) The parties acknowledge that, subject to the provisions of Section 16.3(b), Buyer has the right to seek both money damages and specific performance in the event of Seller's breach of this Agreement. (d) In the event of Buyer's failure to timely consummate the Closing, other than by reason of a failure of a Buyer's Closing Condition, time being of the strictest essence of each and every provision hereof, Seller shall be entitled to pursue any and all remedies available to it at law or in equity (including retention of the Deposit). SECTION 16.4 Survival. The provisions of Sections 5.1(a), 20.5, 20.6, 20.12, 20.16 and Sections 16.2 and 16.3 shall survive any termination hereof pursuant to Section 16.1. ARTICLE XVII Collection of Chips and Tokens; Baggage and Safe Deposits SECTION 17.1 Collection of Chips and Tokens. Buyer shall redeem, as Seller's agent but without any liability therefor, any chips or tokens, racebook and keno tickets (from any series in use as of or prior to the Transfer Time) of Seller relating to the use and operation of the Business, which are presented by patrons of the Business or Buyer for payment within the applicable Nevada statutory time periods for such redemptions. Seller's chips and tokens, racebook and keno tickets, to the extent redeemed by Buyer during such statutory periods, shall be redeemed as often as weekly by Seller, upon delivery to Seller of such Seller's chips, tokens, racebook and keno tickets redeemed. Seller agrees to make arrangements for the additional redemption of its chips, tokens and wagers as required by Nevada law. SECTION 17.2 Baggage. At the Transfer Time an authorized representative of Seller shall perform the following functions for all baggage, trunks and other property that was checked and placed in the care of Seller: (i) seal all pieces of baggage with tape; (ii) prepare an inventory ("Inventoried Baggage") of such items indicating the check number applicable thereto; and (iii) deliver the Inventoried Baggage to an authorized representative of Buyer and secure a receipt for the Inventoried Baggage. Thereafter, Buyer shall be responsible for such Inventoried Baggage. SECTION 17.3 Safe Deposits. Safe deposit boxes in use by customers at the Transfer Time will be sealed in a reasonable manner mutually agreeable to Buyer and Seller. At the Transfer Time, Seller and Buyer shall designate in writing their initial safe deposit representatives. Representatives of both Buyer and Seller are to be present when a seal is broken. Seller will have no further responsibility for seals broken without the presence of Seller's representative. Buyer will have no responsibility for loss or theft from a safe deposit box whose seal was broken in the presence of Seller's representative. Seller will make a representative available within one hour after Buyer notifies a person or persons whom Seller will from time to time designate. All safe deposit keys, combinations and records shall be delivered at the Transfer Time to Buyer. SECTION 17.4 Valet Parking. At the Transfer Time, an authorized representative of Seller shall perform the following functions for all motor vehicles that were checked and placed in the care of Seller: (i) mark all motor vehicles with a sticker or tape; (ii) prepare an inventory ("Inventoried Vehicles") of such items indicating the check number applicable thereto; and (iii) transfer control of the Inventoried Vehicles to an authorized representative of Buyer and secure a receipt for the Inventoried Vehicles. Thereafter, Buyer shall be responsible for the Inventoried Vehicles. ARTICLE XVIII Loss by Fire or Other Casualty; Condemnation SECTION 18.1 Fire or Other Casualty; Condemnation. In the event that prior to the Closing Date, a Material Portion of the Assets is destroyed or suffers Material Damage, or if condemnation proceedings are commenced against all or a Material Portion of the Business Premises, Seller shall promptly give Buyer written notice of the occurrence of such damage, destruction or condemnation proceeding. Buyer shall then have the right, exercisable by giving notice of such decision to Seller within 10 Business Days after receiving such written notice from Seller of such damage, destruction or condemnation proceedings, to terminate this Agreement, in which case neither party shall have any further rights or obligations hereunder and the Deposit, together with interest thereon in Escrow, shall be returned to Buyer. If Buyer elects within such 10 Business Day period to accept the Assets in their then condition, all proceeds of insurance (other than any business interruption insurance), after deducting all reasonable expenses of Seller in repairing such damage, if any, or Seller's share of any such condemnation awards (but exclusive of awards for business interruption) shall be paid or assigned to Buyer at the Closing with no reduction in the Purchase Price. In the event that, after the Effective Date, there is damage to the Assets which does not constitute Material Damage, Buyer shall not have the right to terminate the Agreement by reason thereof and Seller will promptly repair or replace the affected Assets at Seller's expense prior to or within a reasonable time after the Closing Date or pay Buyer the cost of such repair or replacement as determined below. Seller shall give Buyer written notice within 15 Business Days of the occurrence of any such non-Material Damage and of Seller's election to repair or replace the affected Assets as provided above or to pay Buyer the cost of such repair or replacement. If Seller does not deliver the notice described above within such 15 Business Day period, Seller shall be deemed to have elected to pay Buyer the cost of any such repair or replacement. Any payment from Seller for the cost of the repair or replacement shall be determined based on bids or other advice from one or more qualified contractors, architects or engineers reasonably acceptable to Seller. Any such payment from Seller shall be made within 10 days after the determination of the amount of such payment. In the event of condemnation which is not of all or a Material Portion of the Business Premises, Buyer shall not have the right to terminate this Agreement by reason thereof and all condemnation awards payable to Seller by reason thereof shall be paid or assigned to Buyer at the Closing with no reduction in the Purchase Price. This Article XVIII is intended as an express provision with respect to destruction and condemnation which supersedes the provisions of the Nevada Uniform Vendor and Purchaser Risk Act NRS Section 113.030 et seq. ARTICLE XIX Employee and Employee Benefit Matters SECTION 19.1 Salaries and Benefits. SDIC shall pay, or cause to be paid, on or before the Transfer Time in accordance with applicable law, all salaries, wages and related payroll expenses (including payroll taxes, social security and unemployment compensation taxes) and employee benefits of employees or labor, vacation pay and sick pay which has accrued for the period ending at the Transfer Time, to all employees of the Business; provided that with the consent of any applicable labor union representing Union Employees, Union Employees may be permitted to carry forward such accrued vacation or sick pay, to be paid by Buyer, the amount of such accrued items as of the Transfer Time to be included as a payable in the calculation of Closing Working Capital pursuant to Section 4.4. Subject to the second immediately following sentence, Buyer shall offer employment on substantially the same terms (except that all such offers shall be for at-will employment) to all current employees of the Business (including employees who are on an approved leave of absence as of the Transfer Time). Unless otherwise required by law or pursuant to the terms of any Collective Bargaining Agreement, Buyer may condition any offer of employment to any employees of the Business who are on an approved leave of absence as of the Transfer Time upon their presenting themselves to Buyer for employment within six months following the Transfer Time. All such offers of employment shall be made (i) in accordance with all applicable laws and regulations, and (ii) for Union Employees, in accordance with the terms of each applicable collective bargaining agreement pertaining to such Union Employees (each a "Collective Bargaining Agreement"). All employees of the Business shall cease to be employees of Seller or its affiliates as of the Transfer Time, and their period of employment by Buyer shall begin as of the Transfer Time or, if later, the date that such employees present themselves to Buyer for employment if they are not actively employed as of the Transfer Time. With regard to Union Employees, Buyer shall (i) recognize each labor union representing Union Employees as their exclusive bargaining representative, (ii) assume, and become party to and bound by the terms and conditions of, each Collective Bargaining Agreement until its respective expiration date, (iii) comply with its legal obligations under Federal labor law with regard to Union Employees, and (iv) treat service with Seller prior to the Transfer Time in the same manner as such service has been recognized by Seller for purposes of determining seniority rights and benefits under the Collective Bargaining Agreement (except where recognition of such service by Buyer would result in a duplication of benefits provided). Seller covenants and agrees to indemnify and hold Buyer harmless from and against any and all claims, damages, and liabilities arising from or in connection with (a) any matters involving the Business' employees, (b) any claims by employees of SDIC, for wages, vacation and/or sick pay, other benefits, and all claims, liabilities and rights of such employees, (c) and any claims for violation of agreements with unions in all cases which arise from SDIC's employment of such employees, or from acts or omissions, or in connection with events occurring on or prior to the Transfer Time. Buyer covenants and agrees to indemnify and hold Starwood, ITT Sheraton, SGC, SDIC and their respective affiliates similarly harmless from all such matters described in the preceding sentence in all cases which arise from Buyer's employment of such employees, agreements with unions, acts or omissions, or in connection with events occurring after the Transfer Time. SECTION 19.2 Multiemployer Plan. With respect to each Multiemployer Plan (as defined below), after the Closing: (a) Buyer will be obligated to make contributions to the Multiemployer Plans (as defined below) in accordance with all collective bargaining agreements relating thereto and shall contribute to each such Multiemployer Plan with respect to such operations for substantially the same number of contribution base units for which SDIC has an obligation to contribute to such Multiemployer Plan. For purposes of this Agreement, the "Multiemployer Plans" shall mean, collectively: (i) the Teamsters Security Fund for Southern Nevada; (ii) the Western Conference of Teamsters Pension Trust Fund; (iii) the Hotel Employees and Restaurant Employees International Union Welfare Fund; (iv) the Southern Nevada Culinary Workers and Bartenders Pension Plan Trust Agreement; (v) the Operating Engineers Local 501 Security Fund; (vi) the Central Pension Fund of the International Union of Operating Engineers and Participating Employers; (vii) the Hotel Employees and Restaurant Employees International Union Welfare Fund; (viii) the American Federation of Musicians' and Employers' Pension Fund; (ix) the Electrical Workers Health and Welfare Trust Fund; (x) the National Employees Benefit Board; (xi) the Nevada Resort Association-I.A.T.S.E. Local 720 Pension Trust; (xi) the Nevada Resort Association-I.A.T.S.E. Local 720 Apprentice and Journeyman Training and Education Trust; (xii) the Nevada Resort Association-I.A.T.S.E. Local 720 Disability Trust; (xiii) the Carpenters Health and Welfare Trust Fund; (xiv) the Construction Industry and Carpenters Joint Pension Trust Fund; (xv) the Painters' Trust (welfare fund); and (xvi) the I.B.P.A.T. Union and Industry National Pension Fund. (b) Unless and until a variance or exemption is obtained in accordance with section 4204(c) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), Buyer will provide to each Multiemployer Plan, for a period of five plan years commencing with the first plan year beginning after the Closing, a bond issued by a corporate surety company that is an acceptable surety for purposes of section 412 of ERISA, or an amount held in escrow by a bank or similar financial institution satisfactory to the Multiemployer Plan, or such other security as may be permitted under section 4204(a)(1)(B) of ERISA or regulations thereunder, in an amount equal to the greater of: (i) the average annual contribution required to be made by SDIC to each Multiemployer Plan with respect to the operations thereunder for the three plan years preceding the plan year in which the Closing occurs, or (ii) the annual contribution that SDIC was required to make with respect to the operations under each Multiemployer Plan for the last plan year before the plan year in which the Closing occurs, which bond or escrow shall be paid to any such Multiemployer Plan if Buyer withdraws from such Multiemployer Plan, or fails to make a contribution to such Multiemployer Plan when due, at any time during the first five plan years beginning after the Closing. (c) If Buyer withdraws from any Multiemployer Plan in a complete withdrawal or a partial withdrawal with respect to the union employees within the period referred to in the preceding subsection 19.2(b), SDIC agrees to be secondarily liable for any withdrawal liability SDIC would have had at the Closing Date to such Multiemployer Plan, but for the application of section 4204 of ERISA, if the withdrawal liability of Buyer with respect to such Multiemployer Plan is not paid. (d) Buyer shall indemnify and hold SDIC harmless from, against and in respect of (and shall on demand reimburse SDIC for) the amount of any secondary liability incurred by SDIC under section 4204 of ERISA which is in excess of 50% of the potential withdrawal liability of SDIC determined as of the Closing, such determination to be made on a plan-by-plan basis; provided, however, that if withdrawal liability is triggered by reason of Buyer's failure to comply with any provision of the preceding Sections 19.2(a) or (b) (it being understood that any withdrawal by Buyer from any Multiemployer Plan shall not be deemed such a failure to comply), Buyer's indemnification of SDIC shall be without limitation for any such secondary liability. (e) In the event of a subsequent sale of Assets by Buyer during the five-year period referenced in Section 19.2(b), Buyer agrees to use its reasonable best efforts to comply with the provisions of section 4204(a)(1) of ERISA if such sale of Assets would trigger secondary liability on Buyer. (f) If SDIC is liquidated before the end of the first five plan years beginning after Closing, then, except as may otherwise be required by law, SDIC shall provide a bond, an amount in escrow or such other security as may be permitted under section 4204(a)(1)(B) of ERISA or regulations thereunder, equal to the present value of the withdrawal liability SDIC or its affiliates would have had but for the application of section 4204 of ERISA, which bond, amount in escrow or other security may be applied toward the satisfaction of SDIC's secondary liability described in subsection 19.2(c) hereof. (g) Buyer agrees to provide SDIC with reasonable advance notice of any action or event which could result in the imposition of withdrawal liability contemplated by this Section 19.2 and in any event Buyer shall immediately furnish SDIC with a copy of any notice of withdrawal liability it may receive with respect to the Multiemployer Plan, together with all the pertinent details. In the event that any such withdrawal liability shall be assessed against Buyer, Buyer further agrees to provide SDIC with reasonable advance notice of any intention on the part of Buyer not to make full payment of any withdrawal liability when the same shall become due. ARTICLE XX Miscellaneous SECTION 20.1 Entire Agreement. This Agreement (and the Schedules and Exhibits), the Timeshare Joint Venture Agreement and the Marketing Alliance Agreement shall be deemed to be the complete and entire agreement between the parties hereto with respect to the subject matter hereof and supersedes any and all prior negotiations, correspondence, understandings or other agreements or statements between the parties and/or their representatives. SECTION 20.2 Notices. All notices required, permitted or given pursuant to the provisions of this Agreement shall be made in writing, and either (a) hand delivered, (b) delivered by certified mail, postage prepaid, return receipt requested or by reputable overnight courier, (c) delivered by an overnight delivery service or (d) delivered by facsimile machine followed within 24 hours by transmittal under option (a), (b) or (c) above addressed as follows: If to Parents or Seller: In care of Starwood Hotels & Resorts Worldwide, Inc. 777 Westchester Avenue White Plains, New York 10604 Attention: General Counsel Fax No.: (914) 640-8260 with a copy to: Sidley & Austin 555 West Fifth Street Los Angeles, California 90013-1010 Attention: Marc I. Hayutin, Esq. Fax No.: (213) 896-6600 If to SUN or Buyer: Sun International Hotels Limited Atlantis -- Executive Offices Coral Towers Nassau, The Bahamas Attention: Charles A. Adamo Fax No.: (242) 363-4581 with a copy to: Cravath, Swaine & Moore 825 Eighth Avenue New York, NY 10019 Attention: Kevin J. Grehan, Esq. Fax No.: (212) 474-3700 Notices shall be deemed delivered (i) on the date that is three calendar days after the notice is deposited in the U.S. mail, if sent by certified mail (one business day in the case of overnight courier service), return receipt requested, (ii) on the date the hand delivery is made, if hand delivered, (iii) on the date the transmission is made, if delivered by facsimile machine and delivery is confirmed, and followed with notice by mail, or (iv) on the date that the notice is delivered by an overnight delivery service, if given by an overnight delivery service. The addressee given above may be changed by any party by notice given in the manner provided herein. SECTION 20.3 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (REGARDLESS OF THE LAWS THAT MAY OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAW). SECTION 20.4 Successors and Assigns. Neither Buyer nor Seller may assign this Agreement or any interest herein (by operation of law or otherwise) to any other person without the prior written consent of the other party hereto. All the terms, covenants and conditions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. No assignment or transfer permitted hereunder shall relieve any such assignor or transferor of any of its obligations hereunder and any assignee or transferee shall assume in writing (which writing shall be in form reasonably satisfactory to Seller and Buyer) all of the undertakings of assignor or transferor under this Agreement. SECTION 20.5 Closing Costs. Seller and Buyer shall each bear their respective costs of negotiating and completing this transaction, including attorneys' and accountants' fees. The fees charged by Escrowee, and any and all survey, title and recording fees, real and personal property transfer fees, documentary Taxes or fees, and the costs of all premiums with respect to the Title Policies in accordance with Section 8.1 shall be paid one-half by Seller and one-half by Buyer, except that the costs of any ALTA endorsements or extended coverage premiums shall be borne solely by Buyer. Seller and Buyer, on or before the Closing Date, shall each deposit with Escrowee in immediately available funds on or prior to the Closing Date an amount sufficient to cover each party's costs set forth herein. SECTION 20.6 Attorneys' Fees. A party in breach of this Agreement shall, on demand, indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees, incurred by such other party by reason of the enforcement and protection of its rights under this Agreement. The payment of such expenses is in addition to any other relief to which such other party may be entitled. SECTION 20.7 Amendments. This Agreement shall not be modified except by an instrument in writing signed by the parties hereto. SECTION 20.8 Further Assurances. From time to time, at the request and expense of the requesting party, whether prior to, at or after the Closing, each party agrees to and shall execute and deliver such further instruments and take such other action as the requesting party may reasonably request in order to effectuate the transactions set forth herein. SECTION 20.9 Headings. All of the Article and Section headings herein are inserted for convenience only and shall have no meaning for purposes of this Agreement. SECTION 20.10 Non-Waiver. No delay or omission or exercise of a right or remedy accruing to Seller on any breach or default by Buyer shall impair any such right or remedy, and the same shall not be construed to be a waiver of any such breach or default. No delay or omission in the exercise of a right or remedy accruing to Buyer on any breach or default by Seller shall impair any such right or remedy, and the same shall not be construed to be a waiver of any such breach or default. Any waiver must be in writing and executed by all the parties hereto and shall be effective only the extent specifically allowed by such writing. SECTION 20.11 No Third Party Benefitted. Except as provided in Section 15.2, no term or provision of this Agreement is intended to be, nor shall any term or provision of this Agreement be, for the benefit of any person or entity not a party hereto, and no such other person or entity shall have any right or cause of action hereunder. SECTION 20.12 Publicity; No Recordation. Between the Effective Date and the Closing Date (or earlier termination of this Agreement), the parties shall consult with one another and coordinate the issuance of any press release or similar public announcement or communication in respect of the initial execution of this Agreement and any material new development relating to the performance of this Agreement or the transactions contemplated hereby; provided, however, that (i) the contents of the initial press release announcing the Agreement and the transactions hereby shall be agreed by the parties and (ii) no party shall be restrained, after consultation with the other, from making such disclosure as it shall be advised by counsel it is required by law (whether the laws of the United States or another country) or by the applicable regulations of any stock exchange to make. Buyer and Seller agree that neither this Agreement nor any memorandum hereof shall be recorded. SECTION 20.13 Counterparts. This Agreement may be executed in any number of counterparts, which when so executed and delivered shall be deemed an original, and such counterparts shall constitute one and the same Agreement. SECTION 20.14 Severability. The invalidity or unenforceability of any one or more of the provisions of this Agreement or the Schedules hereto (or any portion thereof) shall not affect the validity or enforceability of any of the other provisions hereof (or the remaining portion thereof). SECTION 20.15 Exhibits and Schedules. Any Exhibits and Schedules annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein, and any matter disclosed in one Schedule hereto shall be deemed incorporated by reference into each other Schedule hereto and disclosed in each such Schedule. SECTION 20.16 Finder's Fees. Each of Seller and Buyer agrees to indemnify, defend (with counsel reasonably satisfactory to the other party), and hold the other party and its successors and assigns and their respective directors, officers, affiliates, representatives, stockholders, employees and agents harmless from and against any and all claims, loss, cost, damage and expense, including reasonable attorneys' fees and expenses arising from, by reason of or in connection with any claim for or entitlement to any fee, commission, compensation or reimbursement for brokerage, finders, advisers or similar services by any person, firm or entity claiming by, through or under Seller or Buyer, as applicable, or any officer, director, agent or affiliate of Seller or Buyer, as applicable. SECTION 20.17 Cooperation. Each party acknowledges that the other may be a party to audits, investigations and other proceedings following the Closing which relate to the Business or the Assets, and agrees to reasonably cooperate with such other party in connection with such proceedings. SECTION 20.18 Consent to Jurisdiction. Each of the parties hereto irrevocably submits to the exclusive jurisdiction of (a) the Supreme Court of the State of New York, New York County, and (b) the United States District Court for the Southern District of New York, for the purposes of any suit, action or other proceeding arising out of this Agreement or any transaction contemplated hereby. Each of the parties hereto agrees, to the extent permitted under applicable rules of procedure, to commence any action, suit or proceeding relating hereto either in the United States District Court for the Southern District of New York, or if such suit, action or other proceeding may not be brought in such court for jurisdictional reasons, in any court of the Supreme Court of the State of New York, New York County. Each of the parties hereto further agrees that service of any process, summons, notice or document by U.S. registered mail to such party's respective address set forth in Section 20.2 shall be effective service of process for any action, suit or proceeding in New York with respect to any matters to which it has submitted to jurisdiction in this Section 20.18. Each of the parties hereto irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding arising out of this Agreement or the transactions contemplated hereby in (i) the Supreme Court of the State of New York, New York County, or (ii) the United States District Court for the Southern District of New York, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the date first above written. SHERATON DESERT INN CORPORATION, By: ______________________________ Name: Title: STARWOOD HOTELS AND RESORTS WORLDWIDE, INC., By: ______________________________ Name: Title: SHERATON GAMING CORPORATION, By: ______________________________ Name: Title: SUN INTERNATIONAL HOTELS LIMITED, By: ______________________________ Name: Title: SUN INTERNATIONAL NEVADA, INC., By: ______________________________ Name: Title: Execution Copy EXHIBIT 10.6(b)-1 Timeshare Joint Venture Agreement Parties: Buyer and an affiliate of Starwood. General: Buyer and an affiliate of Starwood shall enter into a 50/50 joint venture (the "Joint Venture") pursuant to which they will agree to use their best efforts to develop, manage, market and sell at least 350 timeshare units to be located on The Desert Inn Golf Club (the "Golf Course") (or the perimeter thereof) and to be affiliated with The Desert Inn Resort and Casino (the "Desert Inn", and, together with the Golf Course, the "Property"). The Joint Venture will be responsible for all costs relating to the development of timeshare units, including the cost to acquire homes or homesites on the perimeter of the Golf Course. Capital will be contributed, and profits will be distributed, on a 50/50 basis. Land: Buyer agrees to contribute up to six acres of land on the perimeter of the Golf Course (as it shall reasonably deem appropriate) available for contribution to the Joint Venture at a value of $750,000 per acre. Starwood, (i) in consultation with Buyer, may in advance of the Closing under the Asset and Land Purchase Agreement, acquire additional lots on the perimeter of the Golf Course in preparation for the timeshare project, and (ii) with Buyer's approval, may commence trading of Country Club Lane lots (#70-84) for perimeter lots, acquisition of options to purchase lots, preparation of concept designs and proposed subdivision maps, filing of proposed maps and potential litigation with homeowners. At the time of formation of the Timeshare Joint Venture, Starwood shall contribute such additional lots, rights, designs and maps, and shall be credited with its costs plus interest at the Applicable Interest Rate as defined in clause (i) of the definition thereof set forth in Section 4.1(a) of the Asset and Land Purchase Agreement. Governance: All major decisions of the Joint Venture, including the selection of a location for the timeshare units, will be subject to the reasonable approval of both parties. Term; Right of First Offer: The Joint Venture will be given a 5 year (from Closing under the Asset and Land Purchase Agreement) exclusive right to develop timeshare units on the Property. After the expiration of the 5 year exclusive period and provided the Joint Venture has met certain minimum performance standards, the Joint Venture will have a right of first offer to develop additional timeshare units on the Property. Timeshare Expertise: Within twelve (12) months after the date of the Asset and Land Purchase Agreement Starwood must as a condition to the formation or continuance of the Joint Venture, demonstrate to the reasonable satisfaction of Buyer that it has the expertise in timeshare sales and marketing and administration required by the Joint Venture. Such expertise shall be deemed to be demonstrated conclusively if Starwood or its affiliates provide sales, marketing and administrative services to, or has management with experience sufficient to operate, a timeshare project at the Phoenician Hotel in Scottsdale, AZ and at least 2 separate timeshare projects of at least, 200 units each. Liquidated Damages: Buyer will use commercially reasonable efforts to effect the timeshare development. If the Joint Venture is precluded by Buyer from commencing "substantial timeshare development activities" during the 5 year exclusive right period (other than by reason of Starwood's default under the Joint Venture agreement) Buyer shall pay to Starwood the sum of $15,000,000, plus Starwood's costs to date of the Joint Venture. Such liquidated damages will not be payable if Buyer has used its commercially reasonable efforts to effect the timeshare development. Buyer agrees not to engage in any other timeshare development on the Property for two (2) years following the date of any payment of such liquidated damages to Seller. Services: Buyer or its affiliates will provide certain development and hospitality services to the Joint Venture, and Starwood or its affiliates will provide certain sales and marketing and administrative services to the Joint Venture. In all cases these services will be provided for reasonable and customary fees as agreed by the parties. Paradise Island: Buyer and Starwood also agree to explore in good faith the possibility of an arrangement on terms similar to the Joint Venture (except for land contribution values) for the development of timeshare units on the eastern end of Paradise Island under the St. Regis brand or at another location on Paradise Island under the Westin brand. Execution Copy EXHIBIT 10.6(b)-2 Golf Course Management Agreement Parties: SDIC and affiliate of Starwood (the "Starwood Affiliate"). General: Starwood Affiliate shall operate and manage The Desert Inn Golf Club and Proshop (the "Golf Course"). Term: The agreement shall be for a term commencing on execution, and continuing for 5 years from Closing under the Asset and Land Purchase Agreement (with customary "for cause" termination rights), and provide for an annual fee and incentive fees from Golf Course operations over an agreed upon base case performance. Buyer or the Starwood Affiliate may terminate the agreement effective as of the Closing Date under the Asset and Land Purchase Agreement at no cost; provided, that, if Buyer shall so terminate the agreement, Buyer shall grant such Starwood Affiliate a one-time right of first offer with respect to management of the Golf Course. Execution Copy EXHIBIT 10.6(b)-3 Marketing Alliance Agreement The parties recognize that there may be certain restrictions and technical limitations with respect to the provisions of services described herein and agree to work together in good faith to implement the provisions of this Exhibit as nearly as practicable in light of any such restrictions and limitations. Parties: Buyer and Starwood (or their appropriate affiliates). Term: 5 years from execution thereof as provided in Section 10.6 of the Asset and Land Purchase Agreement. General: The Atlantis Resort and the Ocean Club and, after the Closing under the Asset and Land Purchase Agreement, The Desert Inn Hotel and Casino or other property developed on the Desert Inn Property (the "Desert Inn"), shall participate in Starwood's marketing and reservation system for a fee of 2.9% of gross room revenues paid by guests booked through the reservation system, and Starwood shall provide such properties with marketing and reservation services similar to comparable properties that participate in Starwood's marketing and reservations program. Buyer shall reimburse Starwood for customary out-of-pocket expenses incurred by Starwood in connection with such services, such as travel agent commissions and other customary third party charges and reimbursed costs. Exclusivity: Starwood shall also include the Ocean Club and the Desert Inn within its Starwood portfolio of luxury properties and the Atlantis Resort within a portfolio of properties to be agreed. Starwood and its affiliates will agree not to enter into any marketing alliance agreement on the Las Vegas "strip" effective from and after the Closing under the Asset and Land Purchase Agreement during the term of the agreement. Starwood Preferred Guest Program: Notwithstanding the foregoing, Starwood may enter into such agreement with (i) respect to the Caesar's Palace property so long as such agreement does not extend past the date the Desert Inn has at least 2,000 rooms (the" Expanded DI Date") or (ii) a person in which it holds, directly or indirectly, a 20% greater equity interest. Prior to the Expanded DI Date, Starwood may place group bookings and business at other hotels to the extent the Desert Inn is not capable of accommodating such groups. Buyer agrees to distribute Starwood's "Preferred Guest" program information at the Desert Inn, the Atlantis Resort and the Ocean Club. Starwood shall continue to award points to its "Preferred Guest" program participants for stays at the Desert Inn, and as soon as practicable after the Effective Date under the Asset and Land Purchase Agreement, will award such points for stays at the Atlantis Resort and the Ocean Club at no cost to Buyer. The parties will discuss arrangements relating to the award of airline miles for stays at the properties. As soon as practicable after the Effective Date under the Asset and Land Purchase Agreement, Starwood's "Preferred Guest" program participants shall be entitled to redeem points for nights at the Atlantis Resort. Buyer shall be paid for each such night as follows: (i) if the resort's occupancy rate on such night was 80% or greater, Buyer shall be paid an amount equal to its average cash paid room rate in effect for such night; and (ii) if the resort's occupancy rate on such night was less than 80%, Buyer shall be paid $150 (with increases thereto pro rata with increases in the resort's average room rates over time). There will be a similar program at Ocean Club and Desert Inn. Rates and occupancy hurdles for Ocean Club and Desert Inn to be agreed. Internet: Buyer and its affiliates shall be provided with an Internet "Hot Link" on Starwood's web site at no charge, and Starwood and its affiliates shall be provided with an Internet "Hot Link" on SUN's web site at no charge. EX-3.2 3 MANAGEMENT AGREEMENT THE ROYAL MIRAGE BEACH HOTEL (A SUN INTERNATIONAL RESORT) Management Agreement between The Government of Dubai (hereinafter called "Owner") and Sun International Management Limited (hereinafter called "Manager"), a company incorporated under the laws of the British Virgin Islands and having its registered office in P.O. Box 146, Road Town, Tortola, British Virgin Islands and Sun International Hotels Limited, a company Incorporated under the laws of The Commonwealth of the Bahamas Recitals Whereas Owner is causing to have constructed a 258 room luxury resort hotel ("the Property") at Jumeira Beach, Dubai: Whereas Manager has extensive experience in planning, designing, constructing, decorating, furnishing, equipping, promoting, operating and managing luxury resort hotels in different areas of the world and is willing to manage the operation of the Property and to perform certain pre-opening management services; Whereas as Owner and Manager wish to enter into an agreement for such operating management and pre-opening management services; Now therefore the parties hereto covenant and agree as hereinafter set out: 1. Definitions Unless inconsistent with the context, the following terms shall have the meaning assigned to them hereunder. When used herein, the words 1.1 "Owner" - The Government of Dubai 1.2 "Manager" - Sun International Management Limited 1.3 "The Property" - the luxury resort hotel, currently being constructed and currently named the Mirage Beach, located at Jumeria Beach, Dubai, as well as any extension and/or addition to the resort on the adjacent site 1.4 "IAS" - the accounting standard as published by the International Accounting Standards Committee 1.5 "Gross Revenues" - all revenue and income generated from the operation of the Property and the related facilities as calculated in accordance with IAS, after deducting all bad debts written off (unless and until such debts are recovered whereupon they shall be treated as receipts and revenue in the operating year during which they are recovered), direct subsidy payments, governmental allowances, grants and awards, or other forms of incentive payments, or awards, gratuities to employees, PROVIDED that such revenue shall not include: (a) receipts of tenants, licensees and concessionaires (but including rents received from such tenants, licensees and concessionaires); (b) federal and local taxes collected from patrons or guests; (c) proceeds arising from the sale or other disposition of capital assets, operating equipment or supplies; (d) all proceeds from insurance claims (except those resulting from loss of revenue); (e) interest income earned on funds deposited in banks or any other investment activity; and (f) service charge collected from patrons or guests; 1.6 "Gross Operating Profit" - the Gross Revenues of the Property (including any staff gratuities not paid out to employees) and its related facilities LESS: A. All operating expenses calculated pursuant to IAS including, but not limited to: (i) cost of food, beverages and other saleable items; (ii) remuneration, benefits and entitlement of all the employees of the Property and the related facilities including the General Manager and the Financial Controller; (iii) operating expenses of a revenue nature including but not limited to costs of re-supplying rooms, after occupancy, of printing and stationery and other guest supplies, laundry and all other costs associated with supplies and providing accommodation and food and beverage services; (iv) unallocated expenses of a revenue nature related to the operation of the Property and the related facilities including administration and general expenses, cost of training employees, advertising and business promotion expenses, heat, light, power and water and repairs and maintenance expenses; (v) all other expenses of a revenue nature relating to the operation of the Property and the related facilities including the cost of replacement of items of operating equipment; (vi) a reasonable provision for doubtful debts; (vii) taxes (if any and only to that extent) assessed against or payable by the Manager in connection with the operation of the Property and the related facilities, but excluding any tax payable on profit and/or income in the hands of the Owner and/or of the Manager and/or on or in respect of the fees receivable by the Manager hereunder and/or in the nature of withholding tax or lump sum deductions; (viii) the Base Fee payable to the Manager under Section 8.1; (ix) legal, accountancy and other professional fees, costs and expenses incurred in connection with the operation of the Property and the related facilities; (x) costs incurred in respect of any local recruited persons who may be selected for a reasonable period of training prior to entering the service of the Property and the related facility; (xi) out-of-pocket and traveling expenses of employees of the Manager necessarily incurred to ensure the efficient management of the Property and the related facilities; (xii) commissions allowed to travel agents; (xiii) insurance premiums; (xiv) rent paid to the Owner for staff accommodation; and (xv) all other payments/expenses of a revenue nature incurred in the course of operating the Property and the related facilities. B. Depreciation of furniture, fixtures and equipment as listed in Schedule A, but excluding depreciation on building; and C. Amortization of pre-opening management expenses and pre-opening expenses over a period of sixty (60) months from the opening of the Property to paying patrons. 1.7 "Base Fees" - the fees based upon a percentage of Gross Revenues payable by Owner to Manager for performance of the management duties described herein 1.8 "Incentive Fee" - the fees based upon a percentage of Gross Operating Profit payable by Owner to Manager for performance of the management duties described herein 2. Appointment 2.1 Owner appoints and engages Manager, which accepts such appointment and engagement, to service Owner as its exclusive agent in the performance of the ongoing and pre-opening management, direction, control and general conduct of the Property subject to the terms and conditions herein contained. 2.2 Owner recognizes that Manager is part of an international organization and that some services to be performed by the Manager hereunder may be performed by Manager at such location as Manager may reasonably determine other than Dubai. 3. Terms of Agreement 3.1 Subject to earlier termination as provided in Clause 16 below this agreement shall commence from the date of signature and shall endure until twenty (20) years from the opening of the Property to paying patrons. 3.2 Owner and Manager shall have the right to renegotiate the management fee schedule described in Clause 8 of this agreement after 10 years from the opening of the Property provided that any amendments to this Clause 8 shall be commercially reasonable and consistent with prevailing industry standards. 4. Pre-opening Management 4.1 Manager shall, as exclusive agent for Owner for such purposes, perform Pre-opening management services during the course of the development of the Property which shall comprise some of or any combination of the following: 4.1.1 to review and give advice on the schematic plans, final sets of architectural plans and specifications; 4.1.2 to give assistance and advice regarding interior design, including the theme treatment and functional layout of facilities, advice regarding layout plans, elevations, color schemes and specifications for carpeting, furniture, fabrics, decor and such like; 4.1.3 to give assistance and advice regarding the recommended standards for water treatment, heating, ventilation, air conditioning, plumbing and drainage, electrical distribution, elevators, escalators and telephone and public address systems; 4.1.4 to give assistance and advice regarding lighting plans and specifications; 4.1.5 the establishment of operating standards, practices and procedures in accordance with those generally associated with international luxury resort hotels; 4.1.6 the recruitment and training of the optimum number of employees required to operate the Property and to ensure that they are competent to deliver the standards of service required in a luxury property; and 4.1.7 the organization and operation of a pre-opening marketing campaign including any pre-opening promotional functions. 5. Manager's Reimbursement for Pre-opening Management 5.1 As consideration for the performance of the Pre-opening management services pursuant to the terms of Article 4.1, Owner shall reimburse Manager in U.S. dollars all reasonable traveling and reasonable out-of-pocket expenses of Manager which are directly attributable to the performance of Manager's duties in terms of Article 4 including the payroll costs of Manager's executives involved. Manager shall submit quarterly estimates of these costs and expenses to Owner in advance. These expenses shall be paid by Owner to Manager within thirty (30) days of the periodic rendition of an account therefor by Manager, duly supported by vouchers and other relevant back-up documentation but that, in regard to executive time, travel and subsistence, these reimbursable shall be limited to two hundred and fifty thousand U.S. Dollars ($250,000). 6. Manager's Management of Owner's Property 6.1 Manager shall, subject to the terms hereof, define, alter and vary from time to time the policies and procedures to be observed in the management of the Property, which shall encompass all administrative, accounting, budgeting, marketing, personnel, operational and other practices and procedures to be observed and applied in relation to the operation of the Property, provided that Manager shall continue to operate the Property in accordance with internationally accepted luxury standards for resort hotels. 6.2 Subject only to the provisions of Article (6.1), (7) and (11) of this Agreement, Manager as exclusive agent for Owner for such purposes shall provide the management, administration, control and conduct of the Property and to that end Manager shall utilize its resources and skills and is hereby authorized and empowered to supervise, monitor, approve and otherwise oversee, or to procure the supervision, monitoring or approval, as the case may be, of the following: 6.2.1 the selection and appointment of a General Manager, other senior executives, other managers and heads of department of the Property all of whom shall be employed on a full time basis by and for the account of Owner, as may be considered necessary from time to time; 6.2.2 the determination of the terms of service and the remuneration payable to all members of personnel of the Property including all perquisites of employment; 6.2.3 the conduct of purchasing of necessary provisions and supplies for the Property; 6.2.4 the setting and maintenance of operations procedures, systems and standards for the Property commensurate with a deluxe resort hotel; 6.2.5 the retention and periodic renewal, as applicable, of authorities and licences required in connection with the operation of the Property; 6.2.6 the administration of such functions as are usually carried out by managers, secretaries and accountants of an hotel business similar to that which is conducted at the Owner's property; 6.2.7 after the opening of the Property, the procurement of the furniture, fixtures, equipment and operating supplies, and of such services and other merchandise as may be required for the proper operation and maintenance of the Property; 6.2.8 the completion and submission of returns and the compliance with other formalities required by any applicable laws, rules or regulations pertaining to property taxes, business license fees and any other legislation applicable to the operation of a property in Dubai; 6.2.9 the planning and execution of all major advertising and promotional campaigns and other marketing activities for the promotion of the Property; 6.2.10 the determination and establishment of tariffs, prices and rates for the facilities to be offered by the various elements of the Property; 6.2.11 the establishment and maintenance of accounting and other appropriate managerial systems for the control and administration of the Property; 6.2.12 the keeping of proper books of account and records as required by law and good management accounting and secretarial practices; 6.2.13 the preparation and submission to the Owner, not later than thirty (30) days before the commencement of each financial year, of an annual operating plan and budget for the Property as well as an annual capital expenditure plan; 6.2.14 the preparation and provision to the Owner of quarterly unaudited financial statements in respect of the Property, not later than six (6) weeks after the end of the quarter to which they relate; 6.2.15 the preparation and provision to the Owner of annual audited financial statements in respect of the Property prepared in accordance with IAS by not later than ninety (90) days after the end of each financial year; 6.2.16 to make available all books of account and other records for inspection by Owner; 6.2.17 the maintenance of the physical plant of the Property in first class condition; 6.2.18 generally, the doing or procurement of whatever else may be necessary to carry out the Manager's mandate as described in this Agreement. 7.7. Entrenched Provisions 7.1 Notwithstanding anything to the contrary contained in this Agreement Manager shall not engage in, agree not to perform or undertake any of the acts, procedures or matters referred to in Article 7.2, except with the prior written approval of Owner. 7.2 The acts, procedures and matters referred to in Article 7.1 are the following: - 7.2.1 the establishment and opening of new lines of business as agent for the Owner except those directly related to the operation of the Property; 7.2.2 the purchase or sale of assets not provided for in any budget approved by Owner. 7.2.3 the incurring of borrowings as agent for Owner not provided for in any budget approved by the Owner; 7.2.4 the issuing and entering into any guarantees, indemnity or suretyship of whatsoever nature in respect of the Property and the related facilities; 7.2.5 the pledging, mortgaging, hypothecating or encumbering of any assets of the Owner; 7.2.6 the hiring of the Property General Manager and the Property Controller and the termination of the services of either of them; 7.2.7 making any loan other than normal credit allowed to guests and other customers in the ordinary and usual course of business; 7.2.8 demolishing, removing, scrapping, selling or disposing of any item forming part of the Property and the related facilities, their furnishing, fixture, furniture, equipment or motor vehicles other than in the ordinary and usual course of business; 7.2.9 the appointing of the Property's lawyers and external auditors; and 7.2.10 the hiring of any employee whose total emoluments (including without limitation salary and other benefits) exceed seventy five thousand U.S. Dollars ($75,000) per annum. 8. Management Fees and Reimbursables Owner shall pay to Manager, as remuneration for the operating management services rendered under this Agreement, the amounts set out in this Article 8 in respect of each of Owner's financial years during the period that the Property is open to paying patrons throughout the term of this Agreement, or proportionately in respect of a fraction of such a financial year. 8.1 Base Fee Owner shall pay to Manager a base fee equal to one and one half percent (1 1/2%) of the Gross Revenue. The base fee shall be calculated by reference to the annual audited financial statements in regard to the Property, but shall be paid at quarterly intervals within forty five (45) days after the end of the quarter in respect of which the sum is payable. The payment in respect of the final quarter shall be made within fourteen (14) days of the completion, signature and certification by the Property's external auditors of the annul audited financial statements for that financial year. Each payment to be made in respect of the first three quarters shall be computed on a cumulative basis by reference to the quarterly management accounts for the preceding quarter, and on completion, signature and certification of the annual audited financial statements for the financial year the Base Fee for the whole of that year shall be computed and 8.1.1 the amount by which the Base Fee so computed exceeds the three quarterly payments on account thereof in terms of the foregoing shall be paid immediately by Owner to Manager, or 8.1.2 the amount by which the Base Fee is computed falls short of the three quarterly payments of account hereof in terms of the foregoing shall be paid immediately by Manager to Owner. 8.2 Incentive Fee Owner shall pay to Manager, in addition to the base fee, an incentive fee equal to ten percent (10%) of the Gross Operating Profit. The incentive fee shall be calculated by reference to the annual audited financial statements, in respect of the Property, but shall be paid at quarterly intervals, within forty five (45) days after the end of the quarter in respect of which same is payable. Teach payment to be made in respect of the first three quarters shall be computed by reference to the quarterly management account of the preceding quarter. The payment in respect of the final quarter shall be made within fourteen (14) days of the completion, signature and certification by the Property's external auditors of the annual audited financial statements for that financial year and shall be computed by taking into account the three previous payments of account thereof. 8.2.1 If the amount of 10% of the annual Gross Operating Profits as certified by the Property's external auditors exceeds the three quarterly payments, the excess shall be paid immediately by Owner to Manager; or 8.2.2 If the amount of 10% of the annual Gross Operating Profits as certified by the Property's external auditors falls short of the quarterly payments, the shortfall shall be paid immediately by Manager to Owner; 8.3 Reimbursement of Expenses Owner acknowledges that Manager and its affiliates operate an international marketing and sales organization with offices in Europe, Africa and the U.S.A. and representation through general sales agents in other territories. Owner shall bear and accordingly reimburse Manager, within thirty (30) days of receiving Manager's invoice and relevant support documentation, for all reasonable costs and expenses incurred by Manager for Owner's account under the provisions of this agreement, provided that after the opening of the property, the proposed expenses for each year will be submitted in the yearly operation budget and should be mutually agreed between the Owner and the Manager. Only agreed expenses as per the yearly budget (or by subsequent agreement between Owner and Manager), if actually incurred by the Manager, shall constitute reimbursable expenses after opening. By way of example, the costs and expenses to be reimbursed under this Article 8.3 subject to the limitations described in 8.3 shall include the following: - 8.3.1 reasonable travel and reasonable out-of-pocket expenses directly attributable to the carrying out by the Manager of its management services in terms of this Agreement and incurred by, among others, Manager's management executives, food and beverage executives, marketing and sales executives, accounting and computer systems executives, design and construction executives and other specialist executive personnel; 8.3.2 marketing costs incurred by Manager (other than overhead marketing office costs) directly related to the marketing and promotion of the Property, inclusive of payroll costs for time spent by personnel engaged in marketing and/or representing the Property; and 8.3.3 the salaries and wages and other payroll costs and moving and related expenses, without any profit or premium, of employees of Manager attributable to any extended periods where they are seconded to the employment of the Owner and the Property. 8.4 Payments All payments by Owner to Manager in terms of this Article 8 shall be made in United States Dollars, free of bank commission or other deductions, and be remitted to such place(s) as Manager may designate from time to time. 9. Insurance to be Maintained by Owner 9.1 Owner shall at all times during the period of any development project, procure and maintain, as may be applicable under the development project in question, adequate third party liability and property insurance protecting both Manager and Owner against loss or damage arising in connection with the preparation, construction, refurbishment, upgrading, furnishing and equipping of any of Owner's businesses, including that of contractors, subcontractors and such like in the performance of all construction and related agreements entered into in respect of the development project in question. 9.2 The Manager and the Owner shall agree to take out (as an operating expense) and maintain, at all times, with effect from the opening of the Property and throughout the continuance of this Agreement, under such insurance policies issued by such insurers as the Owner and Manager agreed, adequate coverage in relation to the Property and the related facilities and their operation against risks mutually agreed by Manager and Owner. The Manager and Owner shall agree on the level and adequacy of all insurances, and neither Manager nor Owner shall have any claim against the other with respect to adequacy of level of insurance. Notwithstanding anything to the contracy contained in this agreement, the Manager is responsible to, and shall ensure that, the following classes of insurance are maintained as agreed between Owner and Manager. MINIMUM ACCEPTABLE (a) Property All Risks - Actual value of building Material Damage - and contents (b) Deterioration of Stock Actual Value a) Refrigerated Stocks b) Other Stocks and Working Replacements (c) Business Interruption 3 years gross profit (sales less variable expense) (d) Workmen's Compensation Premium basis As per U.A.E. Law is the annual wage cost (e) Employers Liability As per U.A.E. Law and up to 1.5 million pound sterling or 10 million Dirhams whichever is higher (f) Public Liability 10 million Dirhams or 1.5 million pound sterling whichever is higher (g) Loss of Money Negotiable 400.0 thousand Dirhams Instruments Non-negotiable 500.0 thousand Dirhams Instruments (h) Fidelity Guarantee No restriction UK pound sterling 250.0 thousand to any category per employee of employee (i) Motor Vehicles As per Inventory (Including motorized vessels) Each insurance policy obtained under this Clause 9.2 shall provide that its cover will not lapse or be terminated, suspended or altered until thirty (30) days after the relevant insurer has given notice to that effect to the Manager at the Property and to the Owner at his address as stated in this Agreement (or such other address as he may from time to time notify to the relevant insurance for the purpose). The Manager shall supply copies of each of the insurance policies obtained under this Clause 9.2 to the Owner forthwith upon effecting the same and of each insurance certificate and premium receipt forthwith upon receiving the same. The Owner and his representatives shall be entitled to have access to the originals of all the insurance policies obtained under this Clause 9.2 and to have produced to him or them any other evidence he or they may from time to time require that all the said policies are in full force and effect. The Manager shall not do or omit to do any act or thing whereby the said policies or any of them may be or become void or voidable. Each of the insurance policies obtained under this Clause 9.2 shall be reviewed by the Manager with the Owner at least annually during the continuance of this Agreement to determine its continuing suitability in view of exposures reasonably anticipated over the following year and, after each such review, the Manager shall take such action with regard thereto as the Owner may reasonable require, including without limitation action to increase the amount covered thereby PROVIDED that the Manager shall not without its agreement be required to decrease the amount covered by any such insurance policies. The Manager shall promptly cause to be investigated all accidents, claims and other occurrences which may be within the coverage of any of the insurance policies obtained under this Clause 9.2 and shall promptly report the same both to the Owner and to the relevant insurer, and shall comply strictly with the provisions of the relevant policy concerning claims made thereunder. If the Property or the furnishing, fixtures, furniture or equipment thereof or therein shall from any cause whatsoever be wholly or partially destroyed or rendered unfit for use; (a) The Owner shall, as soon as possible after receipt thereof, expend any insurance monies paid under the property insurance policy in, or so far as such monies may go towards, repair, reinstatement, reconstruction and replacement, as necessary, of the property destroyed or rendered unfit for use; and (b) except as provided in paragraph (a) above, the Manager shall have no claim against the Owner whether for compensation for loss of profit or opportunity or for any other matter or thing whatsoever save only for its share of any insurance monies paid under the business interruption insurance policy. 9.3 All insurances referred to in Clauses 9.1 and 9.2 shall note the interest of Manager as an "additional insured" and shall contain both severability of interest and cross liability clauses and a waiver of the insurers' rights of subrogation in favor of Manager and Owner. 10. Damage and Destruction If any aspect of the infrastructure of any of the Property or any portion thereof shall be damaged or destroyed at any time or times during the term of this Agreement by fire or any casualty risk or otherwise, Owner, if it elects to repair, rebuild or replace the same, shall, at its own cost and expense and with due diligence, repair, rebuild or replace the same so that after such repairing, rebuilding or replacing, the facilities in question shall be substantially the same as prior to such damage or destruction. 11. Alterations, Improvements and Capital Expenditure 11.1 Manager shall have the right to procure that, from time to time, such renewals, replacements, alterations, additions or improvements are effected to the Property, which are customarily made in the operation of luxury international resorts subject to the prior written approval of Owner. Manager shall submit an annual capital expenditure plan and budget to Owner for Owner's approval or alteration, not later than one month prior to the commencement of each fiscal year. Manager shall only proceed with capital expenditure which has been approved by Owner as part of the annual plan or with specific approval by Owner for items outside of the annual plan. The costs of such customary renewals, replacements, alternations, additions or improvements shall be charged directly to current expenses or shall be capitalized in the books of account of the Owner, un accordance with IAS. 11.2 If renewals, replacements, alterations, additions or improvements as referred to in Article 11.1 will involve or result in a fundamental change of the business concerned, Manager will submit or procure the submission of a budget and plan for the proposed renewals, replacements, alterations, additions or improvements to Owner for Owner's prior written approval as regards the budget cost in question provided that Owner shall reply to the submission within thirty (30) days of its receipt. 12. Trade Name 12.1 The parties acknowledge that the name "Sun International" is or will be the exclusive property of Manager and/or any member of its group of companies world-wide. Upon the expiry or earlier termination of this Agreement for any reason, Owner shall as promptly as practicable cease using, the "Sun International" name or any other trade name or intellectual property developed, licensed or owned by Manager. 12.2 The Manager shall accord to the Property and its related facilities the status of a SUN INTERNATIONAL Hotel and the Owner shall accordingly be entitled to use that description in respect of the Property and the related facilities which shall be so described by the Manager and its respective subsidiaries and affiliate throughout the continuance of this Management Agreement. The Owner's aforesaid right to use in respect of and the Property the description of the Property's right to be described as a SUN INTERNATIONAL Hotel shall be exclusive in the Emirate of Dubai. 13. Assignment 13.1 Manager shall be entitled at any time, without the consent of Owner (or if such consent is an inalienable right under any provision of applicable law, then owner shall grant such consent) - 13.1.1 to cede, assign and delegate its rights and obligations under this Agreement to any company which controls, is controlled by or is under common control with Manager. Provided that such company undertakes and agrees in writing to be bound by the provisions of this Agreement. 13.2 Except as set forth in Article 13.1, Manager shall not cede, assign or delegate its rights or obligations under this Agreement without the prior written consent of Owner and any such cession, assignment, delegation or other transfer made in violation of this Article 13.2 shall be void and of no further force or effect. 13.3 The terms and conditions of this Agreement shall be binding upon and inure to the benefit of the third party(ies) to which either Manager or Owner may validly cede, assign and delegate their respective rights and obligations. 14. Indemnification 14.1 Owner shall indemnify, save, and defend, at Owner's sole cost and expense, and hold harmless, Manager and its officers, agents, employees, representatives, shareholders and affiliates (collectively - "Owner Indemnitees"), from and against the full amounts of any and all Section 14.1 Losses, excluding losses caused directly or indirectly by an Owner indemnitte's misconduct whether wilful, wanton, criminal or otherwise, negligence, fraud or any other illegal or improper act or omission or the failure to perform or observe any obligation pursuant to this Agreement. The term "Section 14.1 Losses" shall mean any and all liabilities, claim, suits, administrative proceedings, losses, damages or costs of any nature whatsoever which may be asserted against or incurred by an Owner Indemnitee arising from the proper performance of the Manager's obligations under this Agreement and the operation of the Property (except if the same arises from any of the eventualities set out in paragraph (a) to (d) below) and shall include reasonable expenses of defense including, without limitation reasonable attorneys' fees provided, however, that Section 14.1 Losses shall not include consequential losses or liabilities. Save as provided in this Section 14.1, Owner shall have no liability hereunder to Manager or any Manager Indemnitee for any other losses or damages. 14.2 Manager shall indemnify, save and defend, at Manager's cost and expense, and hold harmless, Owner and its officers, directors, agents, employees, representatives and affiliates (collectively - "Manager Indemnitees") from and against all Section 14.2 Losses. The term "Section 14.2 Losses" shall mean any and all liabilities, claims, suits, administrative proceedings, losses, damages or costs of any nature whatsoever (but shall specifically exclude any consequential losses or liabilities) which may be asserted against or incurred by a Manager Indemnitee arising from: (a) The failure of the Manager to perform or observe all or any of the obligations under this Agreement or any agreement concluded by the Manager pursuant to the powers vested in the Manager under this Agreement; (b) Any fraudulent, improper, illegal or gross negligent act of the Manager, any of its respective subsidiaries or affiliates or any of its respective employees or the employees of such subsidiaries or affiliates; (c) Any fraudulent, improper, illegal or gross negligent acts of the General Manager or the Financial Controller of the Property. (d) In no event shall Manager ever be responsible for Section 14.2 losses for an amount exceeding the aggregate of Insurance recovery plus the Base Fee and Incentive Fee received in the year such Section 14.2 Loss has occurred. Save as provided in this Section 14, Manager shall have no liability hereunder to any Manager indemnitee for any other losses or damages. 14.3 Each party to be indemnified in accordance with Clauses 14.1 and 14.2 above shall keep the party to indemnify it fully informed of all matters pertaining thereto and take such steps on behalf of the party to indemnify it as that party may reasonably require. Each such indemnity shall without limitation include the legal expenses of resisting any third party claim, suit, demand or action. 14.4 Nothing in this Agreement shall entitle either the Owner on the one hand or the Manager on the other hand to make any claim against each other to the extent that it is able to obtain compensation or reimbursement from any of the insurances provided for in Clause 9 above. 14.5 The parties agree that the waivers and disclaimers of liability, indemnities, releases from liability and limitations on liability expressed in this Clause 14 shall survive the expiry or earlier termination for any reason of this Agreement. 15. Arbitration Any dispute or difference between the parties or any of them which may arise out of or in connection with this Agreement shall be submitted to arbitration in Dubai before a panel of three arbitrators. The Owner shall appoint one such arbitrator and the other party or parties to the dispute or difference shall appoint another such arbitrator. Each such appointment shall be made within fifteen (15) days of any party to the dispute or difference giving notice to the other or others that the same shall be referred to arbitration. Within thirty (30) days after the appointment of the second such arbitrator, the first such arbitrator and the second such arbitrator shall jointly appoint the third such arbitrator but if, by the end of that period, they have been unable to agree on any such joint appointment, the third such arbitrator shall be appointed by the President for the time being of the Dubai Chamber of Commerce and Industry. The arbitration shall be conducted in accordance with such law and procedures for the time being in force in the Emirate of Dubai. The costs of the arbitration shall form an issue between the parties to the relevant dispute or difference and be borne as provided in the arbitration award. The arbitration award rendered by all or the majority of the arbitrators shall be final and binding on the parties and there shall be no appeal therefrom to any Court. 16. Termination 16.1 Notwithstanding anything to the contrary herein contained, Owner may terminate this Agreement if - 16.1.1 for a period of thirty (30) days (or such longer period as may be reasonable, having regard to the nature of the default and the prevailing circumstances but not in any event to exceed sixty (60) days) after written notice has been served on it and without reasonable cause, Manager neglects, omits, refuses or fails to discharge or diligently take action to discharge any of its material obligations hereunder, whether through the operation of law or otherwise, provided that this right of termination shall not apply or be available if such failure to discharge such obligations is cured prior to termination, or if such right of termination is not exercised within ninety (90) days after it first becomes available: or 16.2 Notwithstanding anything to the contrary herein contained, Manager may terminate this Agreement if: 16.2.1 for a period of thirty (30) days (or such longer period as may be reasonable, having regard to the nature of the default and the prevailing circumstances but not in any event to exceed sixty (60) days) after written notice has been served on it and without reasonable cause, Owner neglects, omits, refuses or fails to discharge or diligently take action to discharge any of its material obligations hereunder, whether through the operation of law or otherwise, provided that this right of termination, shall not apply or be available if such failure to discharge such obligations is cured prior to termination or if such right of termination is not exercised within ninety (90) days after if first available; or 16.2.2 Manager's association with Owner could reasonably jeopardize the qualification of Manager or one of its affiliates to hold a gaming license in any jurisdiction. 16.3 The rights granted in Article 16.1 and 16.2 shall be in addition to any and all rights and remedies for breach of contract granted by the laws as designated by Article 18.6, subject, however, to the provisions of Article 14; provided, however, that in the event of a breach of this Agreement by Owner or Manager, the parties hereby waive any and all claims either may have for consequential losses or damages resulting from such breach. 16.4 Notwithstanding the foregoing, neither party shall be deemed to be in default under this Agreement if a bona fide dispute with respect to any of the foregoing events or default has arisen between the parties and such dispute has been submitted to arbitration. 16.5 Except in the case of a termination by Manager pursuant to Article 16.2.1, if this Agreement is terminated pursuant to Article 16.1, Owner shall have the right to elect, by written notice delivered to Manager within three (3) business days after the date on which Manager first gives notice of its election to terminate this Agreement, to continue this Agreement in force for a transitional period reasonably sufficient to allow Owner to retain an alternative manager; and Owner and Manager shall agree on reasonable compensation for Manager for such transitional period. 16.6 If no agreement is reached between Owner and Manager on the management fee after ten years from the opening of the property as provided in Clause 3.2 above, termination may be effected by giving not less than twelve (12) months notice after the end of the tenth year of operation of the Property. 17. Force Majeure If by reason of war, terrorism, explosion, bombing, revolution, riots, civil commotion, strikes, lockout, inability to obtain labor or materials, fire, flood, storm, earthquake, hurricanes, tornado, drought or other acts or elements, accident, government restrictions or appropriation or other causes, whether like or unlike the foregoing, beyond the reasonable control of either party hereto, such party is unable to perform in whole or in part its obligations under this Agreement, then such party shall be relieved of those obligations to the extent it is so unable to perform and such inability to perform so caused shall not make such party liable to the other. 18. Miscellaneous 18.1 Funding of Owner accounts Notwithstanding anything to the contrary in this Agreement contained, Manager shall not be obligated to perform its duties and shall be excused from its obligations and responsibilities hereunder to the extent that funds to be provided by Owner are not available to allow Manager to perform such duties pursuant to the provisions of this Agreement. 18.2 Manager's right to request instructions At any time, Manager may, if it reasonably deems it to be necessary or appropriate, request written instructions from Owner within a reasonable period prior to the necessity for taking action with respect to any matter contemplated by this Agreement where the approval of the Owner is required, and may defer action thereon pending receipt of such written instructions. Owner shall promptly respond to any such request for written instructions. Actions taken by Manager, its officers, employees and representatives in accordance with the written instructions of Owner, or failures to act by such persons pending the receipt of such written instructions, shall be deemed to be proper conduct within the scope of Manager's authority under this Agreement. 18.3 Independent contractors Manager shall be an independent contractor with respect to the performance of its duties hereunder. Neither Manager nor its employees or other agents employed in the performance of such duties shall be deemed to be agents, partners, joint venturers, representatives or employees of Owner, except to the extent of the agency expressly created under this Agreement. 18.4 Conflicts Nothing contained in this Agreement shall be construed so as to restrict or prevent, in any manner, Manager from engaging in any other businesses or investments during the term of this Agreement, including, without limitation, any similar or competitive operations to those of Owner, anywhere in the world except in the Emirate of Dubai without the prior written approval of the Owner. Owner acknowledges that Manager and/or its affiliates operate and/or manager other hotels, casinos and resorts presently and may in the future operate and/or manage additional hotels, casinos and resorts in different areas of the world, and that marketing efforts may cross over into the same markets and with respect to the same potential customer base. 18.5 Notices All notices, requests, approvals, demands and other communications by either party to the other pursuant to this Agreement shall be in writing and be deemed to have been duly given and to be effective fifteen (15) business days after being mailed by registered/certified pre-paid airmail, or on the first business day after the deliver thereof or the transmission thereof by facsimile, to either party at its address set out on the first page hereof or to such other address as the parties may designate from time to time by similar notice. 18.6 Applicable Law This Agreement shall be construed, interpreted and applied in accordance with, and governed by, the laws in force in the Emirate of Dubai. 18.7 Sole record This document constitutes the sole record of the Agreement between the parties concerning the subject matter thereof. No addition or variation to, or agreed cancellation of this Agreement shall be of any force or effect unless in writing and signed by the parties. 18.8 Indulgence - no waiver No indulgence by either party ("the grantor") to the other ("the grantee") shall constitute a waiver by the grantor, except in the instance and to the extent given, nor preclude the grantor from exercising any rights against the grantee arising before or after the grant of such indulgence. 18.9 Severability Any provision of this Agreement which may for any reason be held to be unlawful or invalid shall be severable from the remaining provisions of this agreement, which shall remain in full force and effect. 18.10 Interpretation The Table of Contents and captions to the Articles shall not be used in the interpretation of this Agreement. Unless the context indicates a contrary intention, an expression which denotes any gender shall include the other genders, a natural person shall include an artificial person and vice versa and the singular shall include the plural and vice versa. 19. Sun International Hotels Limited agrees that it will cause all obligations of Manager under this Agreement to be performed and observed fully and faithfully. Signed __________________________________________ For the Government of Dubai Date _____________________________________ Signed __________________________________________ For Sun International Management Limited Date _____________________________________ Signed __________________________________________ For Sun International Hotels Limited Date _____________________________________ SCHEDULE A SCHEDULE OF DEPRECIATION NO. CATEGORY YEARS OF DEPRECIATION - --- -------- --------------------- 1) Major laundry equipment 10/15 2) Small laundry equipment 5 3) Major/heavy kitchen equipment 10 4) Small/light kitchen equipment 5 5) Fixed/heavy furniture 10/15 6) Moveable/light furniture 5/10 7) Motor vehicles 3 8) Soft furnishings 3/5 9) Unclassified fixtures and fittings - Category (A) 3/5 - Category (B) 3/5 10) Communication/audio-visual equipment - telephone systems 10 Other equipment 5 11) Accounting and office equipment software 3/5 12) Catering equipment 5/10 13) Fire fighting equipment 5/10 14) Gym/leisure/out-door equipment 5 15) Gain/loss on disposal - credit/debit depreciation expense - APPLIES ONLY TO ADDITIONS AND REPLACEMENTS: 16) Boilers 20 17) Chillers 20 18) Generators 20 19) Bathroom fittings 5/15 20) Electrical light fittings 10/15 21) Water supply system/pumps 5/15 -----END PRIVACY-ENHANCED MESSAGE-----