The following table sets
forth certain historical consolidated financial information of the Company for
each of the five years ended December 31, 2004. The historical financial information as of December 31,
2004 and 2003 and for each of the three years in the period ended December 31,
2004, as set forth below, has been derived from our audited consolidated
financial statements, prepared in accordance with U.S. GAAP, included in this
Annual Report. The information set forth
below is not necessarily indicative of future results and should be read in
conjunction with “Item 5. Operating
and Financial Review and Prospects” and the consolidated financial statements,
related notes and other financial information included elsewhere in this Annual
Report. Amounts are reported in U.S.
dollars and have been prepared in accordance with U.S. GAAP. We have not paid dividends for the five years
ended December 31, 2004.
5
(In
thousands of U.S. dollars, except share data)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
For the Year Ended December 31,
2004(a)
2003(b)
2002(c)
2001(d)
2000(e)
Gross
revenues
$
644,119
$
582,092
$
564,472
$
614,209
$
920,143
Net
revenues
621,085
558,513
542,262
573,436
868,364
Income
(loss) from operations
50,347
63,206
64,619
66,960
(90,695
)
Relinquishment
fees - equity in earnings of TCA
35,909
33,960
30,041
24,263
19,508
Income
(loss) from continuing operations
68,132
70,267
47,664
37,269
(115,447
)
Net
income (loss)
68,132
71,572
39,603
32,661
(115,447
)
Basic
earnings (loss) per share:
Income
(loss) from continuing operations
$
2.09
$
2.46
$
1.71
$
1.39
$
(3.74
)
Income
(loss) from discontinued operations
—
0.04
(0.29
)
(0.18
)
—
Net
income (loss) per share
$
2.09
$
2.50
$
1.42
$
1.21
$
(3.74
)
Diluted
earnings (loss) per share:
Income
(loss) from continuing operations
$
2.01
$
2.39
$
1.67
$
1.34
$
(3.74
)
Income
(loss) from discontinued operations
—
0.05
(0.28
)
(0.17
)
—
Net
income (loss) per share
$
2.01
$
2.44
$
1.39
$
1.17
$
(3.74
)
CONSOLIDATED BALANCE SHEET DATA:
For the Year Ended December 31,
2004(a)
2003
2002
2001
2000
Total
assets
$
2,087,275
$
1,455,928
$
1,395,039
$
1,337,740
$
1,438,776
Long-term
debt, net of current maturities
754,129
417,220
497,756
518,231
668,908
Shareholders’
equity
1,116,278
839,590
729,021
674,662
637,081
Number
of shares outstanding, net of treasury shares
35,900
30,284
28,125
27,318
26,786
(a)
We consolidated Palmilla JV, LLC effective
January 1, 2004 in accordance with Interpretation No. 46R, “Consolidation of Variable
Interest Entities” (“FIN 46R”), which increased revenues, cost and expenses,
assets and liabilities. During 2004, we
recognized an impairment of the Atlantic City land of $7.3 million, $4.6
million of expenses related to Hurricane Frances and operating losses from
Palmilla JV, LLC, which reflect $3.3 million of pre-opening expenses.
(b)
In 2003, we recognized $2.8 million of
insurance recovery and a $2.5 million gain on damaged assets related to
Hurricane Michelle. The operations of
our online gaming subsidiary, Kerzner Interactive Limited, were discontinued
during the first quarter of 2003. In
connection with the discontinuance of Kerzner Interactive Limited, we
recognized $4.5 million of income related to an option agreement with Station
Casinos, Inc., which was terminated during the first quarter of 2003. This amount was partially offset by expenses
and write-offs related to the termination of Kerzner Interactive Limited’s
operations.
(c)
In 2002, we recognized a loss on the early
extinguishment of debt of $20.5 million related to the redemption and
repurchase of our 9% Senior Subordinated Notes and our 8
5
/
8
% Senior Subordinated Notes and a $14.5 million gain on settlement of
territorial and other disputes in connection with a settlement with a major
shareholder.
(d)
In 2001, we recognized the results of
operations of Resorts Atlantic City from January 1, 2001 to April 24, 2001.
(e)
In 2000, we recognized a $229.2 million
write-down of the carrying value of Resorts Atlantic City and a related option
to purchase certain real estate from us at its net realizable value, a
$76.4 million gain on real estate related sales at the Ocean Club Estates
and $7.6 million of pre-opening expenses related to the expansion of the
One&Only Ocean Club and the Ocean Club Golf Course.
We have reclassified “Relinquishment
Fees – equity in earnings of TCA” from operating income to a separate line item
after income from operations but before other income (expense) for each of the
four years ended December 31, 2003.
For the years ended December 31, 2003, 2002 and 2001, we have
reclassified insurance
6
recovery of $2.8
million, $1.1 million and $2.0 million, respectively, from revenues to a line
item credit within cost and expenses (there was no such recovery during 2000).
(B)
Capitalization and Indebtedness
Not applicable.
(C)
Reasons for the Offer and Use of Proceeds
Not applicable.
(D)
Risk Factors
The
resort and casino industries are highly competitive and increases in
competition could adversely affect our financial performance.
Our properties compete
with other resorts, hotels and casinos, including land-based casinos,
riverboat, dockside and cruise ship casinos and other forms of gaming, as well
as other forms of entertainment. If
other properties operate more successfully, if existing properties are enhanced
or expanded or if additional hotels or casinos are established in and around
the markets in which we conduct business, we may lose market share. In particular, the expansion, upgrade or
construction of competing resort or casino properties in or near any market
from which we attract or expect to attract a significant number of customers
could have a significant adverse effect on our business, financial condition or
results of operations.
A number of our
competitors are larger and have greater financial and other resources than we
do. In addition, a number of
jurisdictions have legalized gaming and other jurisdictions are considering the
legalization and/or expansion of gaming.
This could open markets in which we currently compete to new entrants
and could create new markets that may compete as tourist destinations. Our gaming operations compete, and will in
the future compete, with all forms of existing legalized gaming and with new
forms of gaming that may be legalized in the future. Our competitive position could be materially
adversely affected by competing companies, new entrants, new markets and new
forms of gaming, and our revenues could decline, harming our financial
condition.
A further discussion of
competition at our operations by geographic location is included in “Item 4. Information on the Company, (B) Business
Overview—Competition.”
New
projects and expansion and renovation efforts are inherently subject to
significant development and construction risks.
We regularly evaluate
potential development opportunities and engage in expansion, development,
upgrade and renovation projects at properties that we develop or operate. Each of these projects, including the Phase III
expansion on Paradise Island (“Phase III”) discussed in “Item 4. Information on the Company, (B) Business
Overview—The Properties—Destination Resorts—Atlantis, Paradise Island,” the
development of Atlantis, The Palm, Dubai (“Atlantis, The Palm”) discussed in “Item 4. Information on the Company, (B) Business
Overview—The Properties—Destination Resorts—Atlantis, The Palm,” the four
proposed development projects in the United Kingdom, the proposed development
project in Morocco and the completion of our projects in the Maldives and South
Africa will be subject to the many risks associated with expanding or
renovating an existing enterprise or developing new projects, including
unanticipated design, construction, regulatory, environmental and operating
problems, and the significant risks commonly associated with implementing an
expansion strategy in new markets. In
particular, any such projects are subject to the risks associated with the
following:
•
the
availability of financing and the terms and covenants in our Fifth Amended and
Restated Credit Facility (the “Amended Credit Facility”) and other debt;
•
shortages
in materials;
•
insufficient
public infrastructure improvements or maintenance;
•
shortages
of skilled labor or work stoppages;
•
unforeseen
construction, scheduling, engineering, environmental or geological problems;
•
weather
interference, natural disasters, floods, fires or other casualty losses;
•
the
failure to obtain required licenses, permits or approvals;
7
•
difficulties
and uncertainties associated with the regulatory environment in non-U.S.
jurisdictions;
•
regulatory
or private litigation arising out of projects; and
•
unanticipated
cost increases and budget overruns.
For example, our projects
are subject to regulation at the national, state and local levels in their
respective jurisdictions, which could adversely affect the progress of our
projects. In order to proceed with projects,
we may need to, among other things, notify authorities of our proposals or
submit environmental statements. We
could be sanctioned for any failure to follow any of these procedures,
including fines or even temporary closure of our work sites. We cannot guarantee that we will be
successful in obtaining required permits and approvals. Delays and compliance costs associated with
our projects as a result of regulatory obstacles could have a material adverse
effect on our business, financial condition or results of operations.
The anticipated costs and
construction periods for projects are based upon budgets, conceptual design
documents and construction schedule estimates prepared by us in consultation
with architects and contractors. The
cost of any project may vary from initial expectations, and we, or the owners
of the property, may have a limited amount of capital resources to fund cost
overruns on any project. If cost
overruns cannot be financed on a timely basis, the completion of one or more
projects may be delayed until adequate funding is available. The completion dates of development projects
could also differ significantly from expectations for construction-related or
other reasons. We cannot ensure that any
project will be completed, if at all, on time or within established
budgets. Significant delays or cost
overruns on projects could have a material adverse effect on our business,
financial condition or results of operations.
Litigation may also
impede or delay our ability to complete construction or expansion
projects. We have on occasion been named
as a defendant in lawsuits brought to delay, alter or enjoin projects in which
we have been involved. If litigation is
successfully brought against us as a result of our expansion or renovation
projects around the world, it could have a material adverse effect on our
business, financial condition or results of operations.
In addition, although we
design our projects for existing facilities to minimize disruption of business
operations, expansion and renovation projects require, from time to time,
portions of the existing operations to be closed or disrupted. Any extended disruptions in our operations
could have a material adverse effect on our business, financial condition or
results of operations.
If
we are unable to finance our expansion, development and renovation projects as
well as other capital expenditures through cash on hand, cash flows or
borrowings, our expansion, development and renovation efforts could be
jeopardized.
If we are unable to finance existing or future
projects with cash on hand, cash flows from operations or borrowings, we will
have to adopt one or more alternatives, such as reducing or delaying planned
expansion, development and renovation projects and other capital expenditures,
selling assets, restructuring indebtedness, obtaining equity financing or joint
venture partners or modifying our Amended Credit Facility. These sources of funds may not be sufficient
to finance existing or future projects, and other financing may not be
available on acceptable terms, in a timely manner or at all. In addition, our Amended Credit Facility and
the indenture governing our 8
7
/
8
% senior subordinated notes
due 2011 (the “8
7
/
8
% Senior Subordinated Notes”) contain
certain restrictions on our ability to incur additional indebtedness, and our
future indebtedness will likely contain similar restrictions. If we are unable to secure additional
financing, we could be forced to limit or cancel expansion, development or
renovation projects, which may materially adversely affect our business,
financial condition or results of operations.
Severe
weather conditions or natural disasters could adversely affect our business,
financial condition or results of operations, or further increase our insurance
premiums and deductibles or make insurance unavailable at commercially
reasonable rates.
The Bahamas, Mexico, the
Maldives, Morocco and Mauritius are subject to tropical weather and natural
disasters, which, if severe, could adversely affect our operations and
tourism. Similarly, inclement weather
can adversely affect the relinquishment fees that we earn from the Mohegan Sun
Casino (“Mohegan Sun”), as the principal access to this property is by
road. In September 1999, Hurricane
Floyd, a hurricane rated by the United States National Weather Service as a
category five, its highest rating, passed within 60 miles of Paradise
Island. Our Paradise Island properties
suffered approximately $45.0 million of property damage. In November 2001, Hurricane Michelle
impacted our Paradise Island properties.
Although the storm caused minimal disruption to our operations,
8
our properties
(other than Harborside at Atlantis, which was closed from August 2002
through December 2002 due to water damage resulting primarily from
Hurricane Michelle—see “Item 4.
Information on the Company, (B) Business Overview—The
Properties—Destination Resorts—Atlantis, Paradise Island”) suffered
approximately $28.3 million in damage.
Our losses for Hurricane Floyd and Hurricane Michelle were predominately
covered by insurance.
In September 2004,
Hurricane Frances passed just to the north of Paradise Island. Costs associated with Hurricane Frances were
$4.6 million, which consisted of $3.4 million of clean up and repair costs
and complimentary goods and services to guests and a $1.2 million loss on
damaged assets.
In December 2004, the
tsunami caused by an earthquake off the coast of Indonesia in southern Asia
resulted in flooding damage at our two properties in the Maldives. We estimate that the One&Only Kanuhura
and the One&Only Reethi Rah sustained aggregate property damages of
approximately $24.0 million. In
addition, the One&Only Kanuhura sustained approximately $7.0 million in
business interruption losses. We expect
the owners of the One&Only Kanuhura and the One&Only Reethi Rah to
submit claims to their respective insurers, and that a significant portion of
their damages will be covered. In 2004,
equity earnings from the One&Only Kanuhura were $0.4 million and we
received $1.2 million in management fees.
In 2005, we expect both equity earnings and management fees from the
One&Only Kanuhura to be adversely affected by the tsunami.
Hurricanes and other
natural disasters, in addition to causing property damage, lead to decreased
revenues until business returns to normal operations and business interruption
expenses, such as increased marketing expenses.
We cannot assure you that our business and, consequently, our financial
condition or results of operations, will not be adversely affected by severe
weather conditions or other natural disasters in the future, which could cause
significant damage and suspension of services provided to our patrons, further
increases in our insurance premiums and per occurrence deductibles or
cancellations of, or decreases in, our coverage and harm to our business.
We
are subject to extensive governmental gaming regulations, that may harm our
business.
Our operation of gaming
facilities is subject to extensive governmental regulations. Regulatory authorities typically require
various registrations, licenses, findings of suitability and approvals to be
held by operators of gaming facilities.
The regulatory authorities in these jurisdictions generally have broad
discretion in the granting, renewal, suspension and revocation of licenses and
require that such registrations, licenses, findings and approvals be renewed or
updated periodically. The Company and
its key personnel are currently qualified to do business in all of the
jurisdictions in which we operate gaming facilities. We cannot assure you that any new or
permanent licenses, permits or approvals that may be required by us, our key
employees and our partners, if applicable, in the future will be granted or
that our existing licenses, permits and approvals will be renewed or will not
be suspended or revoked in the future.
The failure to receive or renew licenses and/or the suspension or
revocation of licenses could materially adversely affect our business,
financial condition or results of operations.
Our
gaming operations are subject to significant taxation and fees that, if
increased, could harm our profitability.
Our gaming operations are
subject to significant taxation and fees.
We pay substantial taxes and fees with respect to our gaming operations
in The Bahamas and Connecticut and will likely incur significant taxes and fees
in other jurisdictions, including the United Kingdom and Morocco, in which we
expect to conduct gaming operations in the future. Any material increase in existing taxes and
fees, the adoption of new taxes or fees or the loss or reduction of any
existing or future tax incentives could have a material adverse effect on our
profitability.
Our
business is seasonal, which could increase our exposure to disruptions caused
by weather and other factors.
Historically, our
revenues and operating profits in The Bahamas and Mexico have been higher
during the first quarter, the prime tourist season, than in successive
quarters. Higher revenues and earnings
are typically realized from the Mauritius properties during the fourth quarter
of the year and from Mohegan Sun during the second and third quarters of the
year. If any of these properties were
unable to accommodate guests during such periods for any reason, including
disruptions caused by weather, our revenues and profits could be adversely
affected.
Work
stoppages and other labor disputes could harm our financial condition and
results of operations.
In The Bahamas, a union
represents approximately 3,600 of our approximately 5,800 local employees. We participate in an employer association
whose existing contract with the union will expire on January 7,
2008. Labor
9
relations in The
Bahamas have been unstable at times over the last few years and there have been
occasional work stoppages. As the
country’s largest private employer, we are sometimes the target of labor
disputes. Any protracted labor disputes
or work stoppages affecting any of the properties that we own or operate could
reduce our revenues. In addition, many
of the public sector industries in The Bahamas, such as electricity,
telecommunication and airport facilities, are unionized. The Bahamian government’s labor relations
with these unions have been unstable at times and there have been work
stoppages on occasion that have been disruptive to our business.
Lack
of sufficient air service could adversely affect our revenues and profits.
Most patrons of our properties
arrive by air. Although we consider the
current level of air service to our properties in The Bahamas, Mauritius,
Mexico, Dubai and the Maldives to be adequate, any interruption or reduction of
air service to any such locations could restrict the growth of our businesses,
negatively affect our competitive position and adversely affect our revenues
and profits. As we continue to expand or
develop additional properties, such future growth may require additional air
service to meet demand.
We
are subject to environmental, health and safety laws and regulations, and our
noncompliance or a significant regulatory change could adversely affect our
business, financial condition or results of operations.
Our operations are
regulated under a number of federal, provincial, state and local laws and
regulations that govern, among other things, the handling of waste materials,
some of which are classified as hazardous materials, and the discharge of
hazardous materials into the environment.
Our operations are subject to stringent regulations relating to
protection of the environment and waste handling. In addition to liability for our own
noncompliance, these laws and regulations may expose us to liability for the
noncompliance of other parties, without regard to whether we were
negligent. Sanctions for noncompliance
with applicable environmental laws and regulations may include administrative,
civil and criminal penalties, revocation of permits and corrective action
orders. Furthermore, we may be liable
for costs for environmental cleanup at currently or previously owned or
operated properties or off-site locations.
Our failure to comply with existing laws or regulations, the adoption of
new laws or regulations with additional or more rigorous compliance standards
or the more vigorous enforcement of environmental laws or regulations could
significantly harm our business by increasing our expenses and limiting our
future opportunities.
We
do not own, manage or control Mohegan Sun and the revenues that we derive from
Mohegan Sun are therefore outside of our control and are subordinated to
certain existing and future obligations of Mohegan Sun.
In 2004, we earned
approximately $36.8 million from Trading Cove Associates (“TCA”), which is
party to a relinquishment agreement with the Mohegan Tribal Gaming Authority (“MTGA”). Pursuant to the agreement, in exchange for
relinquishing its right to manage Mohegan Sun, TCA is entitled to receive 5% of
Mohegan Sun’s gross revenues through December 2014. As a result, decisions that affect Mohegan
Sun’s business or operations, and therefore the revenues that TCA earns under
the agreement, are outside of our control.
Revenues on which TCA’s fees are based exclude any revenues generated by
any future expansion of Mohegan Sun. The
senior and junior relinquishment fees from the MTGA to TCA rank behind all of
the MTGA’s obligations to pay certain minimum priority distributions to the
Mohegan Tribe of Indians of Connecticut (the “Mohegan Tribe”) and all of the
MTGA’s existing and future senior secured indebtedness. The junior fees also rank behind all
unsecured indebtedness. Should the MTGA
not be able to meet these obligations, it would not be able to pay TCA its
relinquishment fees, which could have a material adverse effect on our
financial position and results of operations.
A
small number of our shareholders control a significant percentage of our
Ordinary Shares and are able to control decisions affecting our company.
As of February 28,
2005, Caledonia Investments PLC (“Caledonia”), Cement Merchants SA (“CMS”),
Baron Capital Group, Inc. (“Baron”), FMR Corp. (“FMR”), and Istithmar PJSC
(“Istithmar”) had the right to vote approximately 11.2%, 7.6%, 16.2%, 11.9%, and
12.4%, respectively, of our Ordinary Shares.
As of February 28, 2005, the Kerzner Family Trust and its
subsidiary, World Leisure Group (“WLG”), both of which are controlled by
Mr. S. Kerzner, had the right to vote approximately 12.5% of our Ordinary
Shares. See “Item 7. Major Shareholders and Related Party Transactions,
(A) Major Shareholders” for more information as to how the foregoing
ownership percentages were determined.
If any combination of our major shareholders act together, they may be
able to effectively control the outcome of substantially all matters requiring
shareholder approval, including the election of our directors, thereby
controlling our management, policies and business operations. For example, our major shareholders could
combine to use this voting power to block our ability to obtain certain types
of
10
financing for
development plans, renovations or expansions, which could materially adversely
affect our ability to develop our business and pursue our strategies.
We
significantly rely on technology.
The resort and casino industries
continue to demand the use of sophisticated technology, including technology
utilized for property management, casino-related technology, procurement,
reservation systems and guest amenities.
In 2005, we expect to introduce a real-time web-accessible reservation
system. We expect the technologies
utilized at our properties to require refinements. There can be no assurance that, as certain
technologies become outdated or as advanced technologies are introduced, we
will be able to replace or introduce such technologies as quickly as our
competition, within our established budgets or that we will be able to
integrate such technologies into our existing systems. Further, there can be no assurance that we
will achieve any benefits from any new technology.
Joint
ventures decrease our ability to manage risk.
We have from time to time
invested, and expect to continue to invest, in joint ventures. Joint venturers typically have shared control
over the joint venture assets. As a
result, joint venture investments involve risks, such as the possibility that
the co-venturer in an investment might become bankrupt or not have the
financial resources to meet its obligations, have economic or business
interests that are inconsistent with our business interests or take action
contrary to our instructions or requests or contrary to our policies or
objectives. Any of such actions may
subject the properties owned by the joint venture to additional risk. In general, we seek to maintain sufficient
control of any joint venture, however, we may be unable to take action without
the approval of our joint venture partners.
If a joint venture partner becomes bankrupt, we could become liable for
such partner’s share of joint venture liabilities. If we are unable to maintain sufficient
control of any joint venture, our business, financial condition or results of
operations could be materially adversely affected.
We
may have disputes with the owners and joint venture partners of the properties
that we manage.
Our obligations under our
management agreements to manage each property and enforce certain required
standards may, in some instances, be subject to interpretation and may give
rise to disagreements. While we will seek
to resolve any disagreements in a manner that develops and maintains positive
relationships with current and potential owners and joint venture partners, our
failure to resolve any such disagreements could result in litigation or could
interrupt the services or operating quality of the affected property, which
could materially adversely affect our business, financial condition and results
of operations.
You
may have difficulty enforcing judgments against us or our directors or
management that reside outside the United States.
Kerzner is an
international business company incorporated under the laws of the Commonwealth
of The Bahamas. Certain of our directors
and executive officers reside outside the United States. In addition, a substantial portion of the
assets of our directors and officers and of our assets are located outside the
United States. As a result, it may be
difficult or impossible to:
•
effect
service of process within the United States upon us or these persons; or
•
enforce,
against us or these persons, court judgments obtained in U.S. courts, including
judgments relating to 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 based 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 fraud, public policy and natural justice.
We
may have difficulty enforcing gaming debts in certain foreign jurisdictions or
in certain jurisdictions within the United States, which could negatively
affect our operating results.
Gaming debts may not be
legally enforced in certain foreign jurisdictions or in certain jurisdictions
within the United States. A substantial
portion of the customers at Atlantis, Paradise Island reside in the United
States. As a
11
result, we may be
unable to collect gaming debts from our patrons who reside in such
jurisdictions, which could negatively affect our operating results.
Reassessments
of and changes to our business plans could hinder our development and result in
charges or fees that could harm our financial condition or results of
operations.
We are regularly
reviewing our business plans in light of a variety of factors, including the
availability of financing, regulatory and political considerations, competition
and other business and strategic concerns.
As a result of such assessments, our management may choose to change
such plans, which could result in failure to expand and could also cause us to
incur fees or charges. We cannot assure
you that we will carry forward and complete any proposed business plans.
Energy
price increases may adversely affect our cost of operations and our revenues.
Resorts use significant
amounts of electricity, natural gas and other forms of energy. Although we have not experienced shortages of
energy, substantial increases in the cost of electricity or natural gas may
negatively affect our operating results.
The extent of any impact is subject to the magnitude and duration of the
energy price increases and could be material.
In addition, energy price increases in locations that constitute a
significant source of customers for our properties could result in a decline in
disposable income of potential customers and a decrease in visitation and
spending at our properties, which could negatively impact revenues.
Additional
increases in our insurance premiums and deductibles may increase our costs and
impair our ability to obtain or maintain insurance on our properties.
Due to changes in the insurance market arising prior
to the September 11
th
terrorist attacks and the effects of such
attacks, it has become more difficult and/or more expensive to obtain
insurance. We may encounter difficulty
in obtaining or renewing property or casualty insurance on certain of our
properties which are subject to the potential negative impact of
hurricanes. In addition, such insurance
may be more limited and may not cover catastrophic risks or terrorist acts at
current levels or at all. The tsunami in
December 2004 in southeast Asia will result in increases in local
insurance rates. Even if we are able to
renew our policies or to obtain new policies at levels and with limitations
consistent with our current policies, we cannot be sure that we will be able to
obtain such insurance at premium rates that are commercially reasonable. In addition to the “all risk” coverage
described below, we have insured Atlantis, Paradise Island for up to
$300.0 million per occurrence (and in an annual aggregate amount) from
damages directly resulting from certain terrorist acts to cover property damage
and related business interruption losses.
If any such event were to affect all or part of one or more of our
properties, it is possible that we would suffer a substantial loss beyond what
is covered by our insurance policies.
The amount of our “all
risk” property and business interruption insurance with regard to our Paradise
Island business (inclusive of a per occurrence deductible) in the 2004 policy
year commencing June 1, 2004, was $300.0 million, as compared to
$175.0 million in the 2003 policy year and $150.0 million in the 2002
policy year. (“Policy Years” are defined
as June 1 of that year through May 31 of the following year.) “All risk” insurance includes coverage for
the windstorm related effects of hurricanes among other casualty losses.
In 2002, with regard to
our Paradise Island property insurance, our “all risk” premium increased from
approximately $4.6 million in the 2001 Policy Year to a total of
approximately $14.1 million in the 2002 Policy Year, and Kerzner’s
deductibles also increased from $4.0 million per occurrence in the 2001 Policy
Year to $15.0 million per occurrence in the 2002 Policy Year with an
annual aggregate deductible of $30.0 million. For the 2003 Policy Year, our premium for
Paradise Island property insurance decreased to $13.5 million with the
deductibles remaining the same as in the 2002 Policy Year. For the 2004 Policy Year, our premium for
Paradise Island property insurance increased to $14.1 million with the
deductibles remaining the same as in the 2003 Policy Year. In light of the significant hurricane
activity in the Caribbean, our insurance premium and deductibles may
significantly increase.
Acts
of terrorism and war could adversely affect the travel market and reduce our
operating revenues.
The terrorist attacks of
September 11
th
had a significant impact on the travel and
tourism industries in which we operate.
The considerable reduction in both business and leisure air travel
following that date significantly reduced visitation to all our properties,
including our Paradise Island properties, during the fourth quarter of 2001,
resulting in a significant decline in our operating results during this
period. On March 19, 2003, the U.S.
and coalition forces commenced a war with Iraq.
Although the official combat in the war with Iraq ceased in
May 2003, the U.S. and coalition forces still maintain a presence in Iraq
and terrorist activities in the country have continued. These events,
12
the potential for
future terrorist attacks (in the United States and in foreign locations), the
national and international responses to terrorist attacks and other acts of war
or hostility have created many economic and political uncertainties, which
could adversely affect our business and results of operations. Future acts of terror, anti-terrorist
efforts, war or other armed conflicts involving the United States or other
countries may reduce our guests’ willingness to travel, which could have a
material adverse effect on the U.S. and global economies and on our business,
financial condition or results of operations.
Additional
risks may be associated with Atlantis, The Palm.
In September 2003, we entered into agreements to
form a joint venture with Nakheel LLC, an entity owned by the Royal Family of
Dubai, to develop Atlantis, The Palm. In
June 2004, we entered into an agreement with Istithmar, an entity indirectly
wholly owned by the Royal Family of Dubai, which has assumed all obligations
and rights of its affiliate, Nakheel LLC.
Dubai is one of seven autonomous Sheikhdoms that form the federation of
the United Arab Emirates. The United
Arab Emirates is located along the Persian Gulf, and bordered on the south and west
by Saudi Arabia, on the west by Qatar and on the north and east by Oman. These states and others in the region, more
specifically Bahrain and Kuwait, through an organization formed to strengthen
relations among the six states, the Gulf Cooperation Council, maintain peaceful
relations and cooperate on trade, regional defense and economic issues. His Highness Sheikh Zayed bin Sultan Al Nahyan
served as President of the United Arab Emirates from 1971 until his death on
November 2, 2004. On November 3,
2004, His Highness Sheikh Khalifa bin Zayed Al Nahyan was named President of
the United Arab Emirates. His Highness Sheikh
Maktoum bin Rashid Al Maktoum has ruled in Dubai since 1990. Although the Sheikh-led government appears to
be stable and not subject to any significant local challenges, the
September 11
th
terrorist attacks on the United States and the
war and ongoing efforts in Iraq have both increased scrutiny and heightened
tensions throughout the Middle East, including the United Arab Emirates. Al-Qaeda and other terrorist organizations,
in their hostile campaign against supporters of the West, present a threat to
stability in the Middle East. The United
Arab Emirates maintains friendly relations with the United States. For example, it allowed U.S. troops to be
stationed there in preparation for the invasion of Iraq in 2003 and it has
pledged humanitarian assistance in the Iraqi reconstruction efforts and
encouraged the United States to maintain security even after the handover of
power to the Iraqis on July 1, 2004.
This support for the United States may increase the likelihood of
attacks on the state by terrorist organizations. As publicly reported on May 5, 2004,
Pakistani intelligence uncovered a plot by a small group of terrorists to
hijack and possibly bomb a plane bound for the United Arab Emirates. The firm relationship between Saudi Arabia
and the United States has in recent years led to a number of significant
terrorist activities in Saudi Arabia and similar events could occur in the
United Arab Emirates.
The U.S. Department of
State is concerned that terrorists may be planning to carry out attacks against
Westerners and oil workers in the Gulf.
Perceptions of the safety of the region could affect Atlantis, The Palm,
as the viability of this undertaking is dependent on the continued growth of
tourism in the region, primarily from Western Europe and Asia. Future acts of terrorism, anti-terrorist
efforts, war or political and civil unrest in the region could have a material
adverse effect on global economies, the economies of the Gulf States and in
particular on the development of Atlantis, The Palm. Dubai is generally viewed as the most
progressive, open and pro-Western emirate.
In addition, it is currently the only emirate that permits the sale of
land to foreigners. With its relatively
high profile, Dubai could represent a potentially attractive target to terrorist
organizations.
Atlantis, The Palm will
be located at the apex of the crescent, which forms the external border of The
Palm, Jumeirah, a $1.5 billion land reclamation project in Dubai, and is
expected to be connected to the rest of The Palm, Jumeirah by a roadway tunnel
and proposed monorail. As with any
reclamation project, there are inherent subsidence and liquefaction risks. The Company and Nakheel have been monitoring
the construction site for subsidence, which to date has been isolated and not
in excess of three millimeters. However,
the Company has not monitored or had any opportunity to monitor other sites on
The Palm, Jumeirah for subsidence. In
the event of unforeseeable subsidence on the site or on other sites on The
Palm, Jumeirah, we would expect at a minimum for there to be a material
reduction in hotel bookings for Atlantis, The Palm and in day visitors to the
water attractions, which in turn could have a material adverse impact on the
operations and financial condition of Atlantis, The Palm. In the event of an earthquake, there is the
risk of liquefaction. While there has
not been recent significant seismic activity in the immediate vicinity of
Dubai, earthquakes have recently occurred in Iran, Egypt, Syria and southern
Asia, off the coast of Indonesia. In
addition, severe storms accompanied by high winds can develop over the
Gulf. These storms could lead to surges
and high wave heights that could erode or top the breakwater that has been
erected on the Gulf-side of the site, thereby leading to flooding. Aside from the property damage that could
occur from such floods, any such flooding could also damage the roads on the
crescent or the proposed monorail, as well
13
as flood the
tunnel, which would limit or curtail arrivals and departures to Atlantis, The
Palm. Any of these structural, climatic
or geological events would likely have a material adverse impact on the site
and operations of Atlantis, The Palm, including the extensive marine
environment and animals that will be a key attraction of the resort. Nakheel and other developers have also
announced other reclamation projects in Dubai of a similar scale to The Palm,
Jumeirah. Should any of these
reclamation projects suffer from any of these events, Atlantis, The Palm and,
as a result, the Company could be materially adversely affected.
Additional
risks may be associated with our proposed destination resort casino in Morocco.
In July 2004, we
announced that Kerzner and two local Moroccan companies, Société Maroc Emirates
Arabs Unis de Développement (“SOMED”) and Caisse de Dépôt et de Gestion (“CDG”),
had entered into an agreement with the Government of the Kingdom of Morocco for
the ownership, development and management of a destination resort casino. This agreement is subject to the fulfillment
of certain conditions. Morocco is
located in Northern Africa and is bordered by Algeria, the North Atlantic Ocean
and the Mediterranean Sea. The Head of
State of Morocco is His Majesty King Mohammed IV and the Prime Minister of
Morocco is Mr. Driss Jettou. Although
Morocco is largely stable, with limited security risks, the May 2003 suicide
bomb attacks in Casablanca have raised concerns about terrorist activity in the
region. The implication of several
Moroccans in the March 2004 Madrid train bombing has further heightened
concerns about terrorism. There are
several loose-knit terrorist groups in Morocco that have connections to
Al-Qaeda. Morocco has been an ally of
the United States, although it did express opposition to the war in Iraq. Its historic support for the United States
may increase the likelihood of attacks on the state by terrorist
organizations. Establishments which are
readily identifiable with Western interests are potential targets for future
attacks. Such targets may include
establishments where activities occur that may offend religious sensitivities,
such as casinos or places where alcoholic beverages are sold or consumed. At present, there are five casinos located in
Morocco, however, our proposed resort would be the largest casino in Morocco
and therefore, a potentially more high-profile target. Future acts of terrorism, anti-terrorist efforts,
war or political and civil unrest in the region could have a material adverse
effect on global economies, the economy of Morocco and in particular, on the
development and success of our destination resort casino in Morocco.
Our
success depends on certain key employees.
Our success depends upon
the continued services of certain key employees, in particular our senior
management. Our senior management is
responsible for the implementation and development of our various projects, the
development and maintenance of our relationships with current and potential
hotel and resort owners and joint venture partners and the marketing and
related activities necessary to attract patrons to our properties. Although we believe that we could replace our
key employees within a reasonable amount of time should the need arise, the
loss of key personnel could have a material adverse effect on our business.
Deterioration
in general economic and market conditions could adversely affect our business.
Our business is affected
by general economic and market conditions, particularly in the United States
and Europe. A large portion of our
business at Atlantis, Paradise Island is generated by group convention sales and
individual tour and travel. A recession
or economic slowdown could cause a reduction in group sales bookings or the
willingness or ability of tourists to book vacations at our properties, which
could materially adversely affect our operating results.
Kerzner was incorporated
in The Bahamas in 1993 under the name “Sun International Hotels Limited,” and
is an international business company under the International Business Companies
Act, 2000 of the Commonwealth of The Bahamas.
The Company is registered under number 46,600B at the Companies Registry
of The Bahamas. Our executive offices
are located at Executive Offices, Coral Towers, Paradise Island, The Bahamas,
and the telephone number is 242-363-6018.
Our agent for service of process in the United States is Corporation
Services Company, 1013 Centre Road, Wilmington, Delaware 19805. On March 1, 1996, we listed our Ordinary
Shares for trading on The New York Stock Exchange (“NYSE”). On July 1, 2002, we changed our
corporate name from Sun International Hotels Limited to Kerzner International
Limited and our stock, which was trading on the NYSE under the symbol “SIH,”
was listed under the new ticker symbol “KZL.” The name change was implemented
in accordance with agreements related to the restructuring of Sun International
Investments Limited (“SIIL”), which
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