EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Starwood Hotels & Resorts Worldwide, Inc.:
We have audited the accompanying combined consolidated balance sheets of
Starwood Hotels & Resorts Worldwide, Inc. Gaming Operations To Be Sold to Park
Place Entertainment Corporation (the "Company") as described in Note 1 to the
Financial Statements as of December 31, 1998 and 1997, and the related combined
consolidated statements of operations, comprehensive income and cash flows for
the years then ended. 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 did not audit the financial
statements of Sheraton Casinos Nova Scotia, which includes: the Sheraton Halifax
and Sheraton Sydney, which statements reflect total assets, total revenues and
operating income of 2.0%, 3.3% and 16.0% in 1998, and 1.6%, 3.9% and 18.2% in
1997, respectively of the consolidated totals. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for those entities, is based solely on the
report of the other auditors.
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, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of the Company as described in Note 1 to the Financial
Statements as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the years then ended, in conformity with
generally accepted accounting principles.
As explained in the Note 2 to the Financial Statements, effective January 1,
1997, the Company changed its method of accounting for start-up costs.
ARTHUR ANDERSEN LLP
New York, New York
May 21, 1999
AUDITORS' REPORT
To the Partners of METROPOLITAN
ENTERTAINMENT GROUP, OPERATING
AS SHERATON CASINOS NOVA SCOTIA
We have audited the balance sheets of METROPOLITAN ENTERTAINMENT GROUP
OPERATING AS SHERATON CASINOS NOVA SCOTIA (the "Partnership") as at December 31,
1998 and 1997, and the statements of income, partners' equity and cash flow for
the years then ended (not included herein). These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Canada. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the partnership as at December 31, 1998 and
1997, and the results of its operations and the changes in its financial
position for the years then ended in accordance with accounting principles
generally accepted in Canada.
Ernst & Young, LLP
Chartered Accountants
Halifax, Canada
January 29, 1999
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
GAMING OPERATIONS TO BE SOLD TO PARK PLACE ENTERTAINMENT CORPORATION
COMBINED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF DECEMBER 31,
-------------------------- AS OF
1998 1997 SEPTEMBER 30, 1999
------------ ------------ ------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 102,664 $ 63,488 $ 79,118
Receivables, net..................................................... 122,860 136,933 101,968
Inventories.......................................................... 15,341 16,226 17,928
Prepaid expenses and other........................................... 31,884 39,892 29,391
------------ ------------ -------------
Total current assets................................................... 272,749 256,539 228,405
------------ ------------ -------------
Property and equipment, net............................................ 1,992,590 1,767,408 1,981,507
Goodwill, net.......................................................... 983,748 1,010,389 963,252
Investments............................................................ 47,898 17,684 60,055
Other assets........................................................... 92,729 90,933 89,274
------------ ------------ -------------
$ 3,389,714 $ 3,142,953 $ 3,322,493
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses................................ $ 216,620 $ 234,098 $ 168,983
Current maturities of long-term debt and capital leases.............. 10,212 4,033 11,104
Accrued taxes payable................................................ 28,469 34,533 25,005
------------ ------------ -------------
Total current liabilities.............................................. 255,301 272,664 205,092
Due to parent and affiliates........................................... 1,134,157 886,811 1,309,038
Long-term debt and capital leases, net of current maturities........... 165,815 166,444 31,261
Deferred income taxes, net............................................. 79,717 63,037 80,365
Other non-current liabilities.......................................... 31,156 38,296 27,742
Commitments and Contingencies
Minority interest...................................................... 11,167 3,641 8,608
Shareholder's equity:
Starwood/ITT investment.............................................. 1,227,264 1,227,264 1,227,264
Retained earnings.................................................... 489,014 483,303 434,216
Cumulative translation adjustment.................................... (3,877) 1,493 (1,093)
------------ ------------ -------------
Total shareholder's equity............................................. 1,712,401 1,712,060 1,660,387
------------ ------------ -------------
Total liabilities and shareholder's equity............................. $ 3,389,714 $ 3,142,953 $ 3,322,493
------------ ------------ -------------
------------ ------------ -------------
The accompanying notes to the combined consolidated
financial statements are an integral part of these statements.
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
GAMING OPERATIONS TO BE SOLD TO PARK PLACE ENTERTAINMENT CORPORATION
COMBINED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- ----------------------
1998 1997 1999 1998
------------ ------------ ---------- ----------
(UNAUDITED)
Revenues:
Casino..................................................... $ 936,649 $ 898,244 $ 808,045 $ 703,157
Hotel...................................................... 104,968 57,302 89,534 78,448
Food and beverage.......................................... 101,190 68,416 82,871 74,579
Earnings of unconsolidated affiliate....................... 16,151 14,040 25,983 11,851
Other...................................................... 97,622 85,165 78,558 83,798
------------ ------------ ---------- ----------
Total revenues............................................... 1,256,580 1,123,167 1,084,991 951,833
Costs and expenses:
Casino..................................................... 527,597 537,064 444,062 393,906
Hotel...................................................... 32,570 18,724 25,036 23,907
Food and beverage.......................................... 87,998 60,177 70,788 65,359
Other operating expenses................................... 50,094 51,387 47,976 49,109
Selling, general and administrative........................ 207,886 167,735 193,429 150,235
Pre-opening expenses....................................... 41,661 20,878 934 34,900
Depreciation and amortization.............................. 143,291 73,854 132,830 95,689
Provision for doubtful accounts............................ 29,903 39,065 18,373 17,174
Special charges............................................ 39,000 62,481 -- 39,000
------------ ------------ ---------- ----------
Total costs and expenses..................................... 1,160,000 1,031,365 933,428 869,279
------------ ------------ ---------- ----------
Operating income before management service fees............ 96,580 91,802 151,563 82,554
Management service fees.................................... 32,705 28,711 24,181 24,776
------------ ------------ ---------- ----------
Operating income............................................. 63,875 63,091 127,382 57,778
Other (income) expense:
Interest expense, net...................................... 26,143 11,053 48,944 18,313
Minority interest.......................................... (10,675) 632 (2,034) (5,762)
------------ ------------ ---------- ----------
Income before income taxes, extraordinary item and
cumulative effect of accounting change..................... 48,407 51,406 80,472 45,227
Provision for income taxes................................. 28,507 30,335 38,881 24,932
------------ ------------ ---------- ----------
Income before extraordinary item and cumulative effect
of accounting change....................................... 19,900 21,071 41,591 20,295
Extraordinary item, net...................................... -- -- 1,713 --
Cumulative effect of accounting change....................... -- 5,180 -- --
------------ ------------ ---------- ----------
Net income................................................... $ 19,900 $ 15,891 $ 39,878 $ 20,295
------------ ------------ --------- ----------
------------ ------------ --------- ----------
The accompanying notes to the combined consolidated
financial statements are an integral part of these statements.
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
GAMING OPERATIONS TO BE SOLD TO PARK PLACE ENTERTAINMENT CORPORATION
COMBINED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1999 1998
--------- --------- --------- ---------
(UNAUDITED)
Net income............................................................ $ 19,900 $ 15,891 $ 39,878 $ 20,295
Other comprehensive income (loss)
Foreign currency translation arising during the period.............. (5,370) (458) 2,784 (1,804)
--------- --------- --------- ---------
Comprehensive income.................................................. $ 14,530 $ 15,433 $ 42,662 $ 18,491
--------- --------- --------- ---------
--------- --------- --------- ---------
The accompanying notes to the combined consolidated
financial statements are an integral part of these statements.
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
GAMING OPERATIONS TO BE SOLD TO PARK PLACE ENTERTAINMENT CORPORATION
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1999 1998
---------- ----------- ---------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net income................................................... $ 19,900 $ 15,891 $ 39,878 $ 20,295
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 143,291 73,854 132,830 95,689
Provision for doubtful accounts............................ 29,903 39,065 18,373 17,174
Special charges............................................ 39,000 35,472 -- 39,000
Earnings in excess of distributions from unconsolidated
affiliates............................................... (8,104) (7,277) (11,800) (7,543)
Changes in assets and liabilities due to operating
activities:
Receivables, net......................................... (30,030) (49,476) 2,519 (18,239)
Inventories.............................................. 885 (2,207) (2,587) 1,657
Prepaid expenses and other............................... (16,792) (29,998) 2,493 (9,397)
Accounts payable and accrued expenses.................... (17,478) 53,559 (52,356) (49,397)
Accrued and deferred income taxes........................ 10,616 31,641 18,156 26,193
Other, net................................................. (7,993) (34,453) (6,268) (2,096)
---------- ----------- ---------- ---------
Net cash provided by operating activities............ 163,198 126,071 141,238 113,336
Cash flows from investing activities:
Purchases of property and equipment........................ (329,946) (672,414) (92,159) (272,143)
Investments in joint ventures.............................. (22,110) -- (357) (2,151)
---------- ----------- ---------- ---------
Net cash used in investing activities................ (352,056) (672,414) (92,516) (274,294)
Cash flows from financing activities:
Proceeds from long-term borrowings......................... 6,831 26,022 28,994 6,831
Payments of long-term borrowings........................... (1,281) (27,721) (162,656) (4,800)
Net (payments) borrowings from affiliates.................. 247,346 574,956 174,881 188,620
Payment of dividends and equity transactions with
affiliates............................................... (14,188) (36,829) (110,928) (17,327)
Minority interest.......................................... (10,674) 2,237 (2,559) (5,761)
---------- ----------- ---------- ---------
Net cash (used in) provided by financing
activities......................................... 228,034 538,665 (72,268) 167,563
Increase (decrease) in cash and cash equivalents............. 39,176 (7,678) (23,546) 6,605
Cash and cash equivalents at the beginning of year........... 63,488 71,166 102,664 63,488
---------- ----------- ---------- ---------
Cash and cash equivalents at the end of year................. $ 102,664 $ 63,488 $ 79,118 $ 70,093
---------- ----------- ---------- ---------
---------- ----------- ---------- ---------
Supplemental cash flow disclosures:
Interest paid to third parties, net of amounts
capitalized.............................................. $ 1,932 $ -- $ 6,021 $ --
---------- ----------- ---------- ---------
---------- ----------- ---------- ---------
Income taxes paid.......................................... $ 17,077 $ 10,335 $ 205 $ 5,155
---------- ----------- ---------- ---------
---------- ----------- ---------- ---------
The accompanying notes to the combined consolidated
financial statements are an integral part of these statements.
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
GAMING OPERATIONS TO BE SOLD TO PARK PLACE ENTERTAINMENT CORPORATION
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements include certain gaming operations of Starwood
Hotels & Resorts Worldwide, Inc. ("Starwood") to be sold to Park Place
Entertainment Corporation ("PPE") pursuant to a definitive agreement entered
into between Starwood and PPE on April 27, 1999. The gaming operations include
Caesars World, Inc., comprised primarily of Caesars Palace, Caesars Atlantic
City, Caesars Tahoe, Caesars Indiana, and its equity investments in casinos in
South Africa, Manila and Canada, and the Sheraton Tunica, Sheraton Halifax and
Sheraton Sydney (collectively the "Company"). All significant intercompany
balances and transactions within the Company have been eliminated. Investments
in unconsolidated affiliates are stated at cost adjusted by equity in
undistributed earnings.
Prior to February 23, 1998, the Company was owned by ITT Corporation ("ITT")
upon which date ITT was acquired by Starwood ("ITT Merger"). The acquisition was
treated as a reverse purchase for financial accounting purposes, whereupon, ITT
continued as the surviving corporation for accounting purposes. Accordingly, no
adjustments have been made to the carrying amounts of assets and liabilities as
a result of the Starwood acquisition.
INTERIM FINANCIAL INFORMATION
The combined consolidated financial statements for the nine months ended
September 30, 1999 and 1998 included herein have been prepared by the
Company, without audit. Certain information and disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted, although the Company believes that
the disclosures are adequate to make the information presented not
misleading. In the opinion of management, all adjustments (which include
normal recurring adjustments) necessary for a fair statement of results for
the interim periods have been made. The results for the nine-month periods are
not necessarily indicative of results to be expected for the full fiscal year.
NATURE OF OPERATIONS
The Company is primarily engaged in the ownership, operation and development
of gaming facilities. The Company's gaming operations are located in several key
domestic jurisdictions and in certain countries outside the United States.
CASINO REVENUE AND PROMOTIONAL ALLOWANCES
Casino revenue represents the net win from gaming wins and losses. Revenue
excludes the retail value of rooms, food, beverage, entertainment and other
promotional allowances provided on a complimentary basis to customers. The
estimated retail value of these promotional allowances was $174,267 and $139,979
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for the years ended December 31, 1998 and 1997, respectively. The estimated
costs of providing such promotional allowances have been classified primarily as
casino costs and expenses as follows:
YEARS ENDED
DECEMBER 31,
----------------------
1998 1997
---------- ----------
Rooms................................................................. $ 27,391 $ 21,789
Food and beverage..................................................... 86,271 77,702
Other operating expenses.............................................. 10,807 11,173
---------- ----------
$ 124,469 $ 110,664
---------- ----------
---------- ----------
CURRENCY TRANSLATION ADJUSTMENT
Assets and liabilities denominated in foreign currencies are translated into
U.S. dollars at the year-end exchange rates and the related translation gains
and losses are reflected in shareholder's equity.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
GOODWILL
Goodwill arose in connection with the acquisition of Caesars World, Inc. by
ITT in 1995 and is amortized using the straight-line method over 40 years.
Accumulated amortization was $108,248 and $80,542 at December 31, 1998 and 1997,
respectively.
The Company periodically reviews the carrying value of goodwill to assess
recoverability from future operations using undiscounted cash flows. Impairments
would be recognized in operating results if a permanent diminution in value is
deemed to have occurred.
INVENTORIES
Inventories are stated at the lower of cost or market, determined
principally on the first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and includes interest on funds
borrowed to finance construction. Capitalized interest was $11,381 and $24,878
in 1998 and 1997, respectively. Depreciation and amortization are provided for
on the straight-line method over the following estimated useful lives:
Buildings and improvements............................... 5 to 40 years
Leasehold improvements................................... 3 to 40 years
Furniture, fixtures and equipment........................ 2 to 10 years
Betterments, renewals and extraordinary repairs that extend the life of the
asset are capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation applicable to assets
retired are removed from the accounts and the gain or loss on disposition is
recognized in income.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company reviews the carrying value of its assets when events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. If it is determined that an impairment loss has occurred based upon
expected undiscounted cash flows, then a loss is recognized in the income
statement reducing the carrying amount of the asset to fair value.
AMORTIZATION OF LOAN COSTS
Debt discount and loan issuance costs in connection with long-term debt are
capitalized and amortized to interest expense during the period the debt is
outstanding using the effective interest method.
INCOME TAXES
The Company's domestic operations are in Starwood's consolidated Federal
income tax return. The Company records income taxes based upon the amount that
would have been incurred had each company filed a separate return. The Company
accounts for income taxes according to Statement of Financial Accounting
Standards No. 109. Deferred income taxes are provided for temporary differences
between book and tax recognition of revenues and expenses.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company extends credit to certain casino patrons, a substantial portion
of whom reside in countries other than the United States, following background
investigations and evaluation of credit worthiness. The Company maintains an
allowance for doubtful casino accounts receivable which is based on management's
estimate of the amount expected to be uncollectible considering historical
experience and the information management obtains regarding the credit
worthiness of the customer. The collectibility of these receivables could be
affected by future business or economic trends or other significant events in
the countries in which such customers reside. Although management believes the
allowance is adequate, the estimated amount of cash collections with respect to
the casino accounts receivable could change.
NOTE 2. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1997, the Company changed its method of accounting for
start-up costs on major gaming projects to expense these costs as incurred.
Prior to 1997, the Company capitalized these costs and amortized them over a
three-year period. The Company's 1997 results include a charge of $7,970 before
income taxes of $2,790 as the cumulative effect of this accounting change.
NOTE 3. SPECIAL CHARGES
In 1998, the Company abandoned plans to develop a shared services group
within the gaming business and wrote-off its investment relating to information
systems under development which aggregated approximately $24.8 million.
Additionally, reserves related to certain casino accounts receivables have been
recorded as special charges (See Note 5).
NOTE 3. SPECIAL CHARGES (CONTINUED)
In November 1997, ITT entered into a definitive agreement to be acquired by
Starwood. As a result, the Company recorded a special charge of approximately
$27 million relating to the conversion of the accounting for stock options
issued to employees of the Company under the ITT Stock Option Plan to variable
accounting due to limited stock appreciation rights subject to exercise.
In 1997, the Company also deferred or abandoned a number of potential
development projects and wrote-off costs associated with such projects which
aggregated approximately $35.5 million. The decision to defer or abandon such
projects resulted from the uncertainties caused by the potential change in
control of ITT following Hilton Hotels Corporation unsolicited takeover offer in
February 1997.
NOTE 4. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"("SFAS 130"). SFAS
130 establishes new rules for the reporting and displaying of comprehensive
income and its components. The Company has included the required statements of
comprehensive income in the accompanying financial statements.
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information". The
Statement requires the Company to report segment financial information
consistent with the presentation made to the Company's management for decision
making purposes. The Company is managed as one segment and all revenues are
derived solely from casino operations and related activities.
For the years ended December 31, 1998 and 1997, approximately 6% of total
revenues and approximately 46% and 48%, respectively, of operating income was
derived from the Company's foreign operations.
NOTE 5. RECEIVABLES
Components of receivables were as follows:
AT DECEMBER 31,
----------------------
1998 1997
---------- ----------
Accounts and notes receivable
Casino.............................................................. $ 135,992 $ 181,137
Hotel............................................................... 13,092 8,067
Other............................................................... 22,989 15,218
---------- ----------
172,073 204,422
Less allowance for doubtful accounts.................................. (49,213) (67,489)
---------- ----------
$ 122,860 $ 136,933
---------- ----------
---------- ----------
In the third quarter of 1998, due to the economic deterioration in Asia, the
Company recorded an additional marker reserve of approximately $14 million.
At December 31, 1998 and 1997, approximately 58% and 61%, respectively, of
the Company's casino receivables were from customers whose primary residence is
outside the United States with one country making up approximately 22% of the
total gross casino receivables.
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
AT DECEMBER 31,
--------------------------
1998 1997
------------ ------------
Land.............................................................. $ 423,757 $ 368,101
Buildings and improvements........................................ 1,247,054 705,699
Leasehold improvements............................................ 72,261 64,446
Furniture, fixtures and equipment................................. 434,048 222,507
Construction in progress.......................................... 58,346 549,832
------------ ------------
2,235,466 1,910,585
Less accumulated depreciation and amortization.................... (242,876) (143,177)
------------ ------------
$ 1,992,590 $ 1,767,408
------------ ------------
------------ ------------
NOTE 7. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
In 1998, Caesars World, Inc. entered into a joint venture agreement with
Global Resorts, Inc., and the Black Empowerment Group to operate Caesars
Gauteng, a temporary casino, located in Johannesburg, South Africa. The
permanent casino, being built on the same site, is expected to be completed in
2000. The Company is to receive 50% of the management fee, based on 5% of net
revenues. During 1998, the Company contributed $22,111, representing its 25%
ownership interest in the joint venture. The temporary facility opened in the
middle of December 1998, therefore, the joint venture had no significant income
or losses from operations for the year.
In 1993, Caesars World, Inc. entered into a 50/50 joint venture agreement
with Hilton Hotels Corporation to operate Windsor Casino, Limited located in
Windsor, Canada. As of December 31, 1998 and 1997, Caesars World, Inc.'s
investment in this joint venture was $25,787 and $17,684, respectively. For the
years ended December 31, 1998 and 1997, Caesars World, Inc. earned income of
$16,151 and $14,040, respectively, in relation to this joint venture. No cash
advances have been made by Caesars World, Inc. to this joint venture during 1998
and 1997.
NOTE 8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
AT DECEMBER 31,
----------------------
1998 1997
---------- ----------
Accounts payable...................................................... $ 20,775 $ 15,165
Chip float............................................................ 23,848 23,895
Construction payable.................................................. 24,693 75,095
Accrued salaries, wages and employee benefits......................... 40,779 27,607
Other accrued expenses................................................ 106,525 92,336
---------- ----------
$ 216,620 $ 234,098
---------- ----------
---------- ----------
NOTE 9. LONG-TERM DEBT
Long-term debt including capital leases consisted of the following:
AT DECEMBER 31,
----------------------
1998 1997
---------- ----------
Senior subordinated notes, due August 15, 2002, at 8 7/8 percent payable semi-annually in
February and August..................................................................... $ 150,000 $ 150,000
Note payable to vendor due November 1999, in monthly installments of $158, including
interest at 10% per annum............................................................... 1,655 1,655
Mortgage note, due September 2011, in monthly installments of $100, including interest at
10% per annum; with a balloon payment of $500 at September 25, 2011..................... 807 842
Harrison County Facility Loan, due ratably over three-year period beginning 1999,
including interest at 8% per annum...................................................... 1,798 --
Capital lease obligations (See Note 11)................................................... 21,767 17,980
---------- ----------
176,027 170,477
Less current maturities................................................................... (10,212) (4,033)
---------- ----------
$ 165,815 $ 166,444
---------- ----------
---------- ----------
On August 15, 1992, Caesars World, Inc. issued $150,000 of 8 7/8 percent
Senior Subordinated Notes (the "Notes") that mature in 2002. The Notes are
subordinated to all senior indebtedness (as defined in the Indenture) and the
Notes are effectively subordinated to liabilities of the Company's subsidiaries
and are senior in the right of payment to other subordinated indebtedness. The
Notes are redeemable at the Company's option, in whole or in part, beginning
August 15, 1997, at a premium price of 103.27 percent, declining annually to par
at August 15, 2000, and thereafter. The original issue discount and costs are
being amortized over the term of the Notes. The Notes were redeemed in August
1999.
The Notes contain covenants, among others, that require the maintenance of
certain financial ratios and include restrictions on the Company and its
subsidiaries with respect to additional debt, dividends, stock repurchases,
sales of certain assets, investments and capital expenditures, mergers,
consolidations and similar transactions, liens, acquisitions, disposition of
property, and prepayment of other debt.
The annual maturities of long-term debt, excluding capital leases, as of
December 31, 1998, follow:
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
1999.............................................................................. $ 2,870
2000.............................................................................. 619
2001.............................................................................. 21
2002.............................................................................. 150,023
2003.............................................................................. 26
Thereafter........................................................................ 701
----------
$ 154,260
----------
----------
NOTE 10. INCOME TAXES
The Company determines its provision for income taxes and related asset and
liability accounts on a separate entity basis. Income tax data from continuing
operations is as follows:
YEARS ENDED
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Pretax income
U.S............................................................... $ 21,000 $ 21,291
Foreign........................................................... 27,407 30,115
--------- ---------
$ 48,407 $ 51,406
--------- ---------
--------- ---------
Provision (benefit) for income tax
Current:
Federal........................................................... $ 2,784 $ 1,288
State............................................................. (2,851) 779
Foreign........................................................... 11,867 12,960
--------- ---------
Total Current....................................................... 11,800 15,027
Deferred:
Federal........................................................... 15,226 14,760
State............................................................. 1,481 548
Foreign........................................................... -- --
--------- ---------
Total Deferred...................................................... 16,707 15,308
--------- ---------
$ 28,507 $ 30,335
--------- ---------
--------- ---------
The income tax effects of temporary differences between financial and income
tax reporting that gave rise to deferred income tax assets and liabilities were
as follows:
AT DECEMBER 31,
------------------------
1998 1997
----------- -----------
Deferred tax assets:
Bad debt reserves................................................. $ 17,465 $ 24,225
Deferred compensation............................................. 9,453 9,453
Accrued expenses.................................................. 22,344 19,225
Other............................................................. 39,669 46,244
----------- -----------
Total deferred tax asset............................................ 88,931 99,147
----------- -----------
Deferred tax liabilities:
Depreciation...................................................... (35,348) (28,598)
Asset basis difference............................................ (100,587) (100,587)
Other............................................................. (32,713) (32,999)
----------- -----------
Total deferred tax liability........................................ (168,648) (162,184)
----------- -----------
Net deferred tax liability.......................................... $ (79,717) $ (63,037)
----------- -----------
----------- -----------
NOTE 10. INCOME TAXES (CONTINUED)
The provision for income taxes differed from the amount computed at the
statutory rate of 35% as follows:
YEARS ENDED DECEMBER
31,
--------------------
1998 1997
--------- ---------
Federal................................................................. $ 16,942 $ 17,992
State income taxes, net of federal benefit.............................. (891) 863
Foreign income taxes in excess of the statutory rate.................... 2,275 2,420
Non-deductible goodwill................................................. 9,495 9,506
Other, net.............................................................. 686 (446)
--------- ---------
$ 28,507 $ 30,335
--------- ---------
--------- ---------
NOTE 11. LEASES
The Caesars Tahoe land and building are leased pursuant to an operating
lease which expires in 2004 and is renewable for two additional 25-year periods.
The lease provides for a minimum rent of $2,831 for the period from August 1,
1997 to July 1, 1998, increasing by $75 per year on August 1, 1998 and in each
subsequent year, and for percentage rent of 20 percent of the casino/hotel's net
profit (as therein defined). Percentage rent expense included in selling,
general and administrative expenses was $1,614 and $949 for the years ended
December 31, 1998 and 1997, respectively. The aggregate fixed lease payments,
including amounts paid on a mortgage note retired in prior years, are amortized
on a straight-line basis over the remaining initial lease term. At December 31,
1998 and 1997, there was $5,318 and $6,516, respectively, of prepaid rent
included in "Other Assets" related to this lease.
At December 31, 1998, the Company was obligated under non-cancelable
operating leases and capital leases to make future minimum lease payments as
follows:
YEAR ENDING DECEMBER 31, OPERATING CAPITAL
- ------------------------------------------------------------------------ ----------- ---------
1999.................................................................... $ 5,351 $ 7,342
2000.................................................................... 5,045 7,150
2001.................................................................... 4,785 7,149
2002.................................................................... 4,623 2,188
2003.................................................................... 4,250 917
Thereafter.............................................................. 9,600 --
----------- ---------
Total minimum lease payments............................................ $ 33,654 $ 24,746
----------- ---------
----------- ---------
Less amount representing interest....................................... (2,979)
Present value of minimum lease payments................................. 21,767
Less current maturities................................................. 7,342
---------
Long-term obligations................................................... $ 14,425
---------
---------
NOTE 11. LEASES (CONTINUED)
Rental expense was comprised of the following:
YEARS ENDED DECEMBER
31,
--------------------
1998 1997
--------- ---------
Minimum rentals under lease obligations.................................. $ 7,876 $ 7,868
Less sublease income..................................................... (2,158) (1,889)
Contingent rentals under operating and capital leases.................... 2,123 1,800
--------- ---------
$ 7,841 $ 7,779
--------- ---------
--------- ---------
NOTE 12. STOCK OPTIONS
The Company participates in its parent's stock option plans. The Company
applies APB Opinion No. 25 and related interpretations in accounting for
stock-based compensation plans. Accordingly, compensation expense recognized was
different than what would have otherwise been recognized under the fair value
based method defined in SFAS No. 123, "Accounting for Stock-Based Compensation."
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net income would
have been reduced to the pro forma amount of $13,312 for the year ended December
31, 1998. The fair value of the option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998: dividend yield of 3.0%; expected volatility
of 47.6%; risk-free interest rate of 4.5%; and expected lives of three to four
years for all options.
At the date of the ITT Merger, each ITT stock option and related stock
appreciation right that was outstanding became fully exercisable. In November
1997, due to the election of the holder of each ITT stock option to receive
cash, Starwood Units or a combination, variable accounting required an expense
to be recognized for the difference between the option price and the formula
market price. There is no pro forma effect to income in 1997 as a result of this
variable accounting.
At December 31, 1998, Starwood had 564,000 and 606,914 options outstanding
relating to Company employees at exercise prices of $49.19 and $54.85,
respectively. There are 246,811 stock options exercisable with an exercise price
of $54.85. During 1998, Starwood issued all of its stock options at market value
and the weighted average fair value of these options was $18.54.
NOTE 13. EMPLOYEE BENEFIT PLANS
The Company has defined benefit pension plans covering any officer or other
employee designated as a key executive of the Company and its subsidiaries. The
benefits are based on years of service (not to exceed 30) and the employee's
highest five years of compensation during the last 10 years of employment. The
Company has funded the vested benefits of certain current employees by making
contributions to revocable trusts. Income earned by the trusts accrues to the
benefit of the Company. At December 31, 1998, the amount in these revocable
trusts was $14,854 and is recorded in "Other Assets." Such trusts shall become
irrevocable in the event of a change of control (as defined).
NOTE 13. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the plans' status and amounts recognized in
the Company's financial statements:
AT DECEMBER 31,
----------------------
1998 1997
---------- ----------
CHANGE IN BENEFIT OBLIGATION:
Net benefit obligation at beginning of year............................................... $ 18,102 $ 18,261
Service cost.............................................................................. 1,659 1,287
Interest cost............................................................................. 1,150 1,221
Actuarial (gain) loss..................................................................... 2,206 (1,535)
Curtailments.............................................................................. (4,100) --
Gross benefits paid....................................................................... (1,156) (1,132)
---------- ----------
Net benefit obligation end of year........................................................ $ 17,861 $ 18,102
---------- ----------
---------- ----------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year............................................ $ -- $ --
Employer contributions.................................................................... 1,156 1,132
Gross benefits paid....................................................................... (1,156) (1,132)
---------- ----------
Fair value of plan assets at end of year.................................................. $ -- $ --
---------- ----------
---------- ----------
RECONCILIATION OF FUNDED STATUS:
Funded status at end of year.............................................................. $ (17,861) $ (18,102)
Unrecognized net actuarial (gain) loss.................................................... 44 (1,736)
Unrecognized net transition obligation.................................................... -- 189
---------- ----------
Net amount recognized at end of year...................................................... $ (17,817) $ (19,649)
---------- ----------
---------- ----------
Assumptions used in accounting for the Company's defined benefit plans were:
AT DECEMBER 31,
--------------------
1998 1997
--------- ---------
Discount rate for obligations.................................................................. 6.50% 7.25%
Rate of increase in compensation levels........................................................ 5.00% 5.00%
Expected long-term rate of return on plan assets............................................... N/A N/A
NOTE 13. EMPLOYEE BENEFIT PLANS (CONTINUED)
The periodic net pension expense included the following components:
YEARS ENDED DECEMBER
31,
--------------------
1998 1997
--------- ---------
Service cost.............................................................. $ 1,659 $ 1,287
Interest cost............................................................. 1,150 1,222
Amortization of net transition amount..................................... 31 40
Recognized net gain....................................................... (16) --
--------- ---------
SFAS 87 cost.............................................................. 2,824 2,549
Curtailment credit........................................................ (3,500) --
--------- ---------
Net periodic benefit cost................................................. $ (676) $ 2,549
--------- ---------
--------- ---------
Effective February 23, 1998, Starwood adopted the Company's
401(k)-retirement plan covering substantially all of its non-union employees.
The plan provides for the Company to contribute 1 percent of certain
compensation for eligible employees who may also contribute up to 5 percent of
their base compensation to this plan and their contributions are matched by the
Company in an amount equal to 50 percent of each employee's contribution.
Employees may also contribute an additional 11 percent of base compensation to
the plan, with certain limitations, which is not matched by the Company. The
matching contributions vest to the employee ratably based on the employee's
years of service and fully vest after five years of service. The Company's one
percent contributions and all employee contributions vest immediately. The
Company's basic one percent and matching contributions for the years ended
December 31, 1998 and 1997 were $6,234 and $5,174, respectively.
In addition to the Company's plans described above, union employees are
covered by various multi-employer pension plans. The Company charged to expense
approximately $4,347 and $3,639 in 1998 and 1997, respectively, for such plans.
For the union sponsored plans, information from the plans' sponsors is not
available to permit the Company to determine its share of unfunded vested
benefits, if any.
NOTE 14. FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments at December
31, 1998 and 1997 are as follows:
1998 1997
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
Cash and cash equivalent..................... $ 102,664 $ 102,664 $ 63,488 $ 63,488
Long-term debt............................... 176,027 176,777 170,477 173,852
CASH AND CASH EQUIVALENTS
The estimated fair value of cash and cash equivalents is estimated based on
the quoted market price of the investments, where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable investments.
LONG-TERM DEBT
The estimated fair value of long-term debt is based on the quoted market
prices for the same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities.
NOTE 15. RELATED PARTY TRANSACTIONS
Starwood charges the Company a management service fee equal to 2.75% of net
revenues. The fee represents compensation for certain support services in the
fields of management, operations, administration, finance, treasury, tax,
personnel, accounting, legal, intellectual property, information systems, real
estate and insurance applicable to the business operations of the Company. The
service charge was $32,705 and $28,711 for the years ended December 31, 1998 and
1997, respectively.
In addition, Starwood charges the Company interest associated with certain
funds advanced to the Company. For the years ended December 31, 1998 and 1997,
Starwood charged the Company $23,926 and $21,153, respectively, as interest
expense.
A subsidiary of the Company also advances to and receives funds and services
with ITT Sheraton Corporation and its wholly owned subsidiary, Sheraton Gaming
Corporation, for operating capital, construction funding, upper management
payroll and benefits, reservation fees, and other marketing programs.
NOTE 16. COMMITMENTS AND CONTINGENCIES
DEVELOPMENT OBLIGATION
The New Jersey Casino Control Act obligation provides, among other things,
for an investment obligation on licensees based upon 1.25% of their gross casino
revenues, as defined. This obligation may be satisfied by investing in qualified
eligible direct investments, by purchasing bonds issued by the Casino
Reinvestment Development Authority ("CRDA"), and/or by making qualified
contributions. At December 31, 1998, all CRDA investment obligations had been
substantially satisfied or prepaid.
CAESARS INDIANA
RDI/Caesars Riverboat Casino LLC (the "LLC") is a limited liability company
formed under the laws of the state of Indiana. The members of the LLC include
Riverboat Development, Inc. and Roman Holding Corporation of Indiana, which is
owned by the Company. Pursuant to an operating agreement between the members,
certain equity and income (loss) allocations are provided. The agreement
provides that if any member has a deficit balance in their capital account, the
profits shall be allocated in proportion to those deficit balances until the
capital accounts of all members have been increased to zero. Profits are next
allocated so that the capital accounts of the members are proportionate to their
Units (as defined in the agreement). Thereafter, profits are allocated so that
RDI receives 25% of the LLC's profits less an imputed interest expense and Roman
receives all remaining profits.
DISPUTE WITH NOVA SCOTIA GAMING CORPORATION
Metropolitan Gaming Corporation (MEG), is a partnership between ITT Sheraton
Canada Ltd. and Purdy's Wharf Developments Limited which operates the casinos in
Halifax and Sydney. MEG is in dispute with the Nova Scotia Gaming Corporation
over the expense treatment of the Goods and Services Tax and the Harmonized
Sales Tax ("GST/HST") as it relates to deductibility for the purposes of the
income guarantee as defined in the Operating Contract. The parties expect to
enter into arbitration as provided for in the Contract. The outcome of the
arbitration is binding on both parties and cannot be appealed. The maximum
contingent liability related to the GST/HST dispute, including the effect of the
income guarantee, in the event of an outcome which is unfavorable to MEG, is
estimated to be approximately $14 million.
NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LICENSE RENEWAL
During 1996, the New Jersey Casino Control Commission (the "CCC") renewed
the Company's license to operate its casino hotel complex in Atlantic City. A
casino license is not transferable, and must be renewed every four years by
filing an application which must be acted upon by the CCC no later than 30 days
prior to the expiration of the license then in force.
LITIGATION
On April 26, 1994, William H. Poulos brought an action in the U.S. District
Court for the Middle District of Florida, Orlando Division-William H. Poulos, ET
AL V. CAESARS WORLD, INC. ET AL-Case No. 39-478-CIV-ORL-22--in which various
parties (including the Company) alleged to operate casinos or be slot machine
manufacturers were named as defendants. The plaintiff sought to have the action
certified as a class action suit.
An action subsequently filed on May 10, 1994 in the United States District
Court for the Middle District of Florida--WILLIAM AHEARN, ET AL V. CAESARS
WORLD, INC. ET AL--Case No. 94-532--CIV-ORL-22--made similar allegations and was
consolidated with the Poulos action.
Both actions included claims under the Federal Racketeering-Influenced and
Corrupt Organizations Act and under state law, and sought compensatory and
punitive damages. The plaintiffs claimed that the defendants are involved in a
scheme to induce people to play electronic video poker and slot machines based
on false beliefs regarding how such machines operate and the extent to which a
player is likely to win on any given play.
In December 1994, the consolidated actions were transferred to the U.S.
District Court for the District of Nevada.
On September 26, 1995, Larry Schreier brought an action in the U.S. District
Court for the District of Nevada--LARRY SCHREIR, ET AL V. CAESARS WORLD, INC. ET
AL-Case No. CV-95-00923-DWH (RJJ).
The plaintiff's allegations in the Schreier action were similar to those
made by the plaintiffs in the Poulos and Ahearn actions, except that Schreier
claimed to represent a more precisely defined class of plaintiffs than Poulos or
Ahearn.
In December 1996, the court ordered the Poulos, Ahearn and Schreier actions
consolidated under the title WILLIAM H. POULOS, ET AL V. CAESARS WORLD, INC. ET
AL-Case No. CV-S-94-11236-DAE (RJJ)--(Base File), and required the plaintiffs to
file a consolidated and amended complaint. On February 14, 1997, the plaintiffs
filed a consolidated and amended complaint.
In March 1997, various defendants filed motions to dismiss or stay the
consolidated action until the plaintiffs submitted their claims to gaming
authorities and those authorities considered the claims submitted by the
plaintiffs.
In December 1997, the court denied all of the motions submitted by the
defendants, and ordered the plaintiffs to file a new consolidated and amended
complaint. That complaint was filed in February 1998. The plaintiffs have filed
a motion seeking an order certifying the action as a class action. Certain of
the defendants have opposed the motion. The Court has not ruled on the motion.
There are additional lawsuits currently pending against the Company arising
in the normal course of business. Management believes the final disposition of
the foregoing action will not have a material adverse effect on the Company's
financial position or its results of operations.