SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): March 12, 1999
(December 31, 1998)
Park Place Entertainment Corporation
------------------------------------
(Exact Name of Registrant as
Specified in Charter)
Delaware 1-14573 88-0400631
---------------- ------------ --------------
(State or Other (Commission (IRS Employer
Jurisdiction of File Identification
Incorporation) Number) No.)
3930 Howard Hughes Parkway
Las Vegas, Nevada 89109
--------------------------------
(Address of Principal
Executive Offices)
(702) 699-5000
----------------------------
(Registrant's telephone
number, including area code)
Park Place Entertainment Corporation hereby amends Item 7(a) of its
Current Report on Form 8-K filed with the Securities and Exchange Commission
on January 8, 1999 to file (i) the consolidated balance sheets of Grand
Casinos, Inc. and subsidiaries as of December 28, 1997 and September 27, 1998
and the related consolidated statements of earnings, shareholders' equity and
cash flows for the year ended December 28, 1997 and the nine months ended
September 27, 1998 and September 28, 1997 and (ii) the consent of the
independent public accountants with respect thereto.
2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financal Statements
(c) EXHIBITS.
Exhibit
Number Description
- - ------ -----------
23.1 Consent of Independent Public Accountants
3
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Amendment No. 1 to Form 8-K filed
on Form 8-K/A to be signed on its behalf by the undersigned hereunto duly
authorized.
PARK PLACE ENTERTAINMENT CORPORATION
Dated: March 12, 1999 By: /s/ CLIVE S. CUMMIS
-------------------------------------------
Name: Clive S. Cummis
Title: Executive Vice President
Law & Corporate Affairs, and
Secretary
4
[ARTHUR ANDERSEN LLP LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Grand Casinos, Inc.:
We have audited the accompanying consolidated balance sheet of Grand Casinos,
Inc. and Subsidiaries (a Minnesota Corporation, see Note 1) as of December 28,
1997, and the related consolidated statements of earnings, shareholders' equity
and cash flows for the year ended December 28, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grand Casinos, Inc.
and Subsidiaries as of December 28, 1997,and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 6, 1998
GRAND CASINOS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands--See Note 1)
December 28, September 27,
1997 1998
----------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 205,427 $ 78,928
Receivables 9,421 11,682
Deferred income taxes 8,411 7,725
Other current assets 14,536 15,438
---------- ----------
Total current assets 237,795 113,773
---------- ----------
PROPERTY AND EQUIPMENT, net 937,951 1,063,001
---------- ----------
OTHER ASSETS:
Cash and cash equivalents--restricted 3,742 2,579
Securities available for sale 8,268 6,781
Debt issuance and deferred licensing costs--net 26,000 20,867
Other long-term assets 2,673 1,440
---------- ----------
Total other assets 40,683 31,667
---------- ----------
Total assets $1,216,429 $1,208,441
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable--trade and construction $ 12,870 $ 11,118
Current installments of long-term debt and capital leases 100,872 418
Accrued interest 5,814 19,188
Accrued payroll and related expenses 25,555 24,312
Other accrued expenses 26,347 33,698
---------- ----------
Total current liabilities 171,458 88,734
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt--less current installments 565,459 565,455
Deferred income taxes 95,694 95,694
Total long-term liabilities 661,153 661,149
---------- ----------
Total liabilities 832,611 749,883
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 7, 9 and 10)
SHAREHOLDERS' EQUITY:
Capital stock, $.01 par value; 100,000 shares authorized;
41,966 and 42,294 issued and outstanding 420 423
Additional paid-in capital 413,631 416,590
Retained earnings (accumulated deficit) (30,233) 41,545
---------- ----------
Total shareholders' equity 383,818 458,558
Total liabilities and shareholders' equity $1,216,429 $1,208,441
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
GRAND CASINOS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(In Thousands--See Note 1)
Nine-Month Period Ended
Year Ended ------------------------------------
December 28, September 28, September 27,
1997 1997 1998
------------ ------------- -------------
(Unaudited) (Unaudited)
REVENUES:
Casino $ 462,756 $ 348,072 $ 385,225
Hotel 26,124 19,765 27,473
Food and beverage 28,421 21,896 24,688
Retail and other income 11,605 8,852 9,219
--------- --------- ---------
Net revenues 528,906 398,585 446,605
--------- --------- ---------
COSTS AND EXPENSES:
Casino 161,566 121,040 126,559
Hotel 8,764 6,572 11,553
Food and beverage 33,122 25,272 28,288
Other operating expenses 31,466 23,828 26,936
Depreciation and amortization 45,343 33,204 44,841
Selling, general, and administrative 160,619 117,649 126,796
Corporate expenses 16,819 12,496 20,333
--------- --------- ---------
Total costs and expenses 457,699 340,061 385,306
--------- --------- ---------
Earnings from operations 71,207 58,524 61,299
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 7,490 5,573 4,734
Interest expense (46,006) (35,871) (32,685)
Other (402) (191) (2,779)
--------- --------- ---------
Total other expense, net (38,918) (30,489) (30,730)
--------- --------- ---------
Earnings before income taxes 32,289 28,035 30,569
Provision for income taxes 11,301 9,765 10,779
--------- --------- ---------
Earnings before extraordinary loss 20,988 18,270 19,790
Extraordinary loss, net of income taxes -- -- (1,560)
--------- --------- ---------
Net earnings $ 20,988 $ 18,270 $ 18,230
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
GRAND CASINOS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Year Ended December 28, 1997
and for the Nine-Month Period Ended September 27 1998 (Unaudited)
(In Thousands--See Note 1)
Retained
Common Stock Additional Earnings
-------------- Paid-In (Accumulated
Shares Amount Capital Deficit) Total
--------- --------- --------- --------- ---------
BALANCE, December 29, 1996 $ 41,796 $ 418 $ 412,576 $ (76,903) $ 336,091
Issuance of stock on options exercised 170 2 1,055 -- 1,057
Contribution from Lakes -- -- -- 25,682 25,682
Net earnings -- -- -- 20,988 20,988
--------- --------- --------- --------- ---------
BALANCE, December 28, 1997 41,966 420 413,631 (30,233) 383,818
Issuance of stock on options
exercised (unaudited) 328 3 2,959 -- 2,962
Contribution from Lakes (unaudited) -- -- -- 53,548 53,548
Net earnings (unaudited) -- -- -- 18,230 18,230
--------- --------- --------- --------- ---------
BALANCE, September 27, 1998 (unaudited) $ 42,294 $ 423 $ 416,590 $ 41,545 $ 458,558
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
See accompanying notes to consolidated financial statements.
GRAND CASINOS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands--See Note 1)
Nine-Month Period Ended
Year Ended --------------------------------
December 28, September 28, September 27,
1997 1997 1998
------------ ------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings before extraordinary charge $ 20,988 $ 18,270 $ 19,790
Adjustments to reconcile net earnings to net cash provided by
operating activities-
Depreciation and amortization 49,543 36,241 47,805
Deferred income taxes 27,169 -- --
Changes in operating assets and liabilities:
Current assets 5,064 (5,707) (4,987)
Accounts payable (7,100) (6,773) (1,752)
Accrued expenses (7,713) 18,449 19,535
---------- ---------- ----------
Net cash provided by operating activities 87,951 60,480 80,391
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (162,652) (144,100) (167,755)
Proceeds from repayment of notes receivable 1,474 1,234 113
Decrease in cash and cash equivalents--restricted and other 5,309 4,198 1,163
Increase in other long-term assets 3,851 4,060 2,722
---------- ---------- ----------
Net cash used in investing activities (152,018) (134,608) (163,757)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 160,088 45,096 1,233
Payments on long-term debt (23,961) (16,116) (100,876)
Contribution from Lakes 25,682 38,169 53,548
Proceeds from issuance of common stock--net 1,057 956 2,962
Debt issuance costs and deferred financing costs (6,774) (276) --
Net cash provided by (used in) financing activities 156,092 67,829 (43,133)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 92,025 (6,299) (126,499)
CASH AND CASH EQUIVALENTS, beginning of period 113,402 113,402 205,427
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 205,427 $ 107,103 $ 78,928
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (refunded) for-
Interest (net of capitalized interest) $ 55,348 $ 29,658 $ 30,528
Income taxes (13,877) 10,348 460
See accompanying notes to consolidated financial statements.
GRAND CASINOS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Includes Data Applicable to Unaudited Periods)
1. MERGER AGREEMENT:
On December 31, 1998, Grand Casinos, Inc. (Grand or the Company) separated
its Mississippi business and certain other assets and liabilities (which
include the Grand Casino Biloxi, Grand Casino Gulfport and Grand Casino
Tunica casino and entertainment properties) from its non-Mississippi business
(comprised primarily of the management of Indian-owned casinos, certain
property under development in Las Vegas, Nevada, and certain other assets and
liabilities) by transferring the above-mentioned assets and liabilities of
the non-Mississippi business to its subsidiary, Lakes Gaming, Inc. (Lakes),
and distributing the common stock of Lakes to its shareholders. On December
31, 1998, Hilton Hotels Corporation (Hilton) completed a similar separation
whereby Hilton transferred its gaming business to its subsidiary, Park Place
Entertainment Corporation (Park Place), and distributed the common stock of
Park Place to its stockholders. Immediately following the distributions,
Grand was acquired by Park Place by way of a merger (the Merger). Following
the Merger, Grand is a wholly owned subsidiary of Park Place. Each Grand
shareholder received one share of Lakes stock for every four owned shares of
Grand and one share of Park Place stock for every one owned share of Grand.
2. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements were prepared for the
purpose of complying with the Securities and Exchange Commission's
regulations in regard to significant acquisitions. The accompanying financial
statements differ from the Grand financial statements previously filed as
these financial statements only include the assets and liabilities of the
subsidiaries and operating units owned and held by Grand which develop,
construct and manage casinos and related hotel and entertainment facilities
in Mississippi and which were acquired by Park Place on December 31, 1998.
Grand includes the assets, liabilities and operations of two dockside casinos
on the Mississippi Gulf Coast and one dockside casino in Tunica County,
Mississippi. The financial statements exclude the accounts of entities or
divisions which were transferred to Lakes. All expenses have been allocated
to Lakes and the Company based on management's assessment of whether the
underlying expense related to the Mississippi business or non-Mississippi
business. Certain amounts earned by Lakes were utilized by Grand for working
capital and other operating purposes. Such amounts have been identified on
the accompanying consolidated financial statements as contributions from
Lakes.
The accompanying financial statements are presented on a consolidated basis. All
material intercompany transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Ultimate results could differ from those
estimates.
REVENUES
The Company recognizes revenues from its owned and operated casinos in
accordance with industry practice. Casino revenue is the net win from gaming
activities (the difference between gaming wins and losses). Casino revenues
are net of accruals for anticipated payouts of progressive and certain other
slot machine jackpots. The estimated cost of providing rooms, food and
beverage, and other items that are provided to customers on a complimentary
basis are included as hotel, food and beverage, and other expenses on the
accompanying consolidated statements of earnings.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and in banks,
interest-bearing deposits, and money market funds and other instruments with
original maturities of three months or less. Restricted cash and cash
equivalents consist primarily of funds restricted for workers' compensation
benefits.
INVENTORIES
Inventories consisting primarily of food and beverage, goods to be sold at
retail, and operating supplies are stated at the lower of cost or market.
Cost is determined using the first-in, first-out method.
PREOPENING EXPENSES
Historically, expenses incurred prior to the opening of Company-owned
facilities were capitalized and amortized to expense using the straight-line
method over the six months following the opening of the respective
facilities. Amortization for 1997 includes approximately $1.3 million of
preopening amortization expense.
Effective January 1, 1999, the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities," which requires all
preopening costs to be expensed as incurred. The effect of adoption was not
significant.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, except in the case of capitalized
lease assets, which are stated at the lower of the present value of the
future minimum lease payments or fair market value at the inception of the
lease. Expenditures for additions, renewals and improvements are capitalized.
Costs of repairs and maintenance are expensed when incurred.
Depreciation and amortization of property and equipment is computed using the
straight-line method over the following estimated useful lives:
Building and leasehold improvements 15-40 years
Furniture and equipment 3-15 years
Land improvements 15 years
The Company capitalizes interest incurred on debt during the course of
qualifying construction projects. Such costs are amortized over the related
assets' estimated useful lives. Capitalized interest totaled $12.9 million
during 1997.
The Company periodically evaluates whether events and circumstances have
occurred that may affect the recoverability of the net book value of its
long-lived assets. If such events or circumstances indicate that the carrying
amount of an asset may not be recoverable, the Company estimates the future
cash flows expected to result from the use of the asset. If the sum of the
expected future undiscounted cash flows does not exceed the carrying value of
the asset, the Company will recognize an impairment loss.
DEBT ISSUANCE COSTS
The costs of issuing long-term debt, including all underwriting, legal and
accounting fees, have been capitalized and are being amortized over the life
of the related indebtedness.
DEFERRED LICENSING COSTS
Costs incurred to obtain licensing rights from an unrelated third party for
the Company's Gulfport, Mississippi, casino are being charged to income over
30 years. The 30-year period, which commenced in May 1993, represents the
anticipated life of the related license subject to periodic suitability
reviews.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The Company
classifies deferred tax liabilities and assets into current and noncurrent
amounts based on the classification of the related assets and liabilities.
3. PROPERTY AND EQUIPMENT--NET:
Property and equipment consist of the following (in thousands):
December 28,
1997
------------
Land and improvements, including land held for development $ 118,907
Buildings and improvements 554,516
Furniture and equipment 169,736
Construction in progress 129,038
-----------
1,042,197
Less- Accumulated depreciation and amortization (104,246)
-----------
Property and equipment-net $ 937,951
-----------
-----------
Included in property and equipment at December 28, 1997 are assets recorded
under capital leases of $120.5 million. Accumulated depreciation and
amortization at December 28, 1997 includes amounts recorded for capital
leases of $12.9 million.
4. INCOME TAXES:
The provision for income taxes for 1997 consisted of the following (in
thousands):
1997
--------
Current federal $(7,199)
Deferred 18,500
--------
$11,301
--------
--------
The Company's effective tax rate based on earnings before income taxes for
1997 is equal to the statutory federal income tax rate.
The Company's deferred income tax liabilities and assets are as follows (in
thousands):
1997
---------
Noncurrent deferred taxes:
Tax depreciation in excess of book depreciation $ 52,109
Financial reporting bases in excess of tax reporting bases of acquired land 40,600
Capital loss carryforwards (12,000)
Other temporary differences 2,985
Valuation allowance 12,000
---------
Net noncurrent deferred tax liability $ 95,694
---------
---------
Current deferred taxes:
Accruals, reserves, and other $ 4,908
Other 3,503
---------
Net current deferred tax asset $ 8,411
---------
---------
Management determined that the deferred tax asset relative to capital loss
carryforwards did not satisfy the recognition criteria set forth in Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Accordingly, a valuation allowance was recorded for the applicable deferred
tax asset.
5. LEASES AND CAPITAL LEASE OBLIGATIONS:
The Company has entered into various operating leases for land adjacent to
its dockside casinos in Mississippi. The lease for land adjacent to the
Company's Grand Casino Gulfport is for the period from July 1, 1997, through
June 30, 2002, and contains renewal options totaling 40 years. The Company is
required to make annual rental payments of $800,000, subject to adjustment as
defined, plus 5% of gross annual gaming revenues in excess of $25.0 million
and 3% of all nongaming revenues.
The lessor of the Grand Casino Gulfport site has the right to cancel the
lease at any time for reason of port expansion, in which case the lessor will
be liable to the Company for the depreciated value of improvements and other
structures placed on the leased premises (as defined).
The lease for land adjacent to the Company's Biloxi Casino has an initial
term of 99 years, and the Company is required to make annual rental payments
of $2.5 million, subject to adjustment as defined. Percentage rent is also
due equal to 5% of gross gaming revenues in excess of $50.0 million per year,
plus 10% of net profits from certain other nongaming-related activities.
The Company also entered into a 15-year lease for submerged land adjacent to
the Biloxi Casino, with an option to extend the lease for 5 years after the
expiration of the initial 15-year term. The lease provides for annual rental
payments of $405,000 during the first year of its term and annual increases
of $73,750 for the next four years, and subsequent rental payments as defined
in the agreement.
The land lease in connection with the operation of Grand Casino Tunica
provides for annual rental payments of $2.5 million, subject to adjustment as
defined. The term of the lease is initially for 6 years with nine six-year
renewal options, for a total of 60 years.
On May 10, 1996, the Company completed a $120.0 million Capital Lease
facility. The five-year facility, with varying interest rates ranging from
1.75% to 2.50% over the LIBO rate, was being used for the continued
development of the Company's Grand Casino Tunica project, located in northern
Mississippi, just outside of Memphis, Tennessee. Approximately $90.0 million
of the facility was used for furniture, fixtures and equipment for the
340,000 square-foot casino complex. The balance of approximately $30.0
million was used to construct a 600-room hotel at Grand Casino Tunica. On
March 31, 1998, the Company repaid all amounts outstanding under the
facility. Additionally, concurrent with the transactions noted in Note 1, the
facility was cancelled.
In addition to the aforementioned land leases, the Company leases certain
other property and equipment under noncancelable operating leases. Future
minimum lease payments, excluding contingent rentals, due under noncancelable
operating and capital leases as of December 28, 1997 are as follows (in
thousands):
Capital Operating
Leases Leases
-------- ---------
1998 $99,430 $ 8,790
1999 - 8,625
2000 - 7,854
2001 - 7,616
2002 - 7,681
Thereafter - 399,607
-------- ---------
Total minimum lease payments 99,430 $440,173
---------
Less- Amounts representing interest at 8.219% (2,054)
--------
Present value of minimum capital lease payments 97,376
Less- Current installments (97,376)
--------
Obligations under capital leases-less current liabilities $ -
--------
--------
Rent expense, under noncancelable operating leases, exclusive of real estate
taxes, insurance and maintenance expense for 1997, was approximately $19.8
million. Percentage rental expense for 1997 was $14.6 million.
6. LONG-TERM DEBT:
Long-term debt at December 28, 1997 consisted of the following (in thousands):
1997
--------
First Mortgage Notes due December 1, 2003 $450,000
Senior Unsecured Notes due October 16, 2004 115,000
Various notes payable in varying installments of principal and interest with
interest from 9.0% to 10.75%, maturing through December 2002 3,955
--------
568,955
Less- Current installments (3,496)
--------
Long-term debt- less current installments $565,459
--------
--------
The 10.125% First Mortgage Notes are secured by substantially all the assets
of Grand Casino Biloxi, Grand Casino Gulfport and Grand Casino Tunica
included in Phase 1 development (as defined in the loan documents). The First
Mortgage Notes require semiannual payments of interest only on June 1 and
December 1 of each year, which commenced on June 1, 1996, until December 1,
2003, at which time the entire principal plus accrued interest is due and
payable. The First Mortgage Notes may be redeemed at the Company's option, in
whole or in part, at
anytime on or after December 1, 1999, at a premium, declining ratably
thereafter to par value on December 1, 2002.
In connection with the Merger, Park Place made a tender offer for the First
Mortgage Notes and purchased approximately $444.5 million of the outstanding
First Mortgage Notes, which were subsequently cancelled. In January 1999, the
Company completed a covenant defeasance for approximately $5.5 million of
remaining outstanding First Mortgage Notes by placing into trust all future
payments of principal, interest and premium on the First Mortgage Notes to
the first optional redemption date on December 1, 1999. As a result of the
defeasance, the Company is no longer required to comply with substantially
all of the restrictive covenants and security provisions of the indenture.
On October 14, 1997, the Company sold $115.0 million aggregate principal
amount of 9.0%, seven-year, Senior Unsecured Notes due 2004, realizing net
cash proceeds of approximately $111.8 million after underwriting and other
related offering costs. The Notes were redeemed on February 1, 1999.
At December 28, 1997, the terms of the 10.125% First Mortgage Notes and the
9.0% Senior Unsecured Notes contained covenants relating to certain business,
operational, and financing matters including, but not limited to, maintenance
of certain financial ratios and limitations on additional debt, dividends,
stock repurchases, disposition of assets, mergers, restricted payments (as
defined) and similar transactions. The Company was in compliance with all
such covenants as of December 28, 1997.
The future aggregate annual maturities of long-term debt at December 28, 1997
are as follows (in thousands):
1998 $ 3,496
1999 56
2000 60
2001 66
2002 71
Thereafter 565,206
--------
$568,955
--------
--------
7. STOCK OPTIONS:
The Company has a Stock Option and Compensation Plan and a Director Stock
Option Plan whereby incentive and nonqualified stock options and other awards
to acquire up to an aggregate of 6,451,500 shares of the Company's common
stock may be granted to officers, directors and employees. Information with
respect to the stock option plans is summarized as follows:
Number of Common Shares
-----------------------------------------------------
Options Available for Option Price Range
Outstanding Grant Per Share
----------- ------------- ------------------
Balance at December 29, 1996 4,194,277 1,422,039 $(3.03-32.12)
Granted 1,431,050 (1,431,050) (9.25-15.63)
Canceled (483,980) 483,980 (8.08-32.12)
Exercised (170,421) - (3.03-11.00)
---------- ---------- -------------
Balance at December 28, 1997 4,970,926 474,969 $(3.03-32.12)
---------- ---------- -------------
---------- ---------- -------------
Exercisable at December 28, 1997 1,660,734
----------
----------
The Company accounts for these plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensations," the Company's net earnings would have been as follows (in
thousands):
1997
-------
Net earnings:
As reported $20,988
Pro forma 13,292
The SFAS No. 123 method of accounting has not been applied to options granted
prior to January 1, 1995; thus, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. The fair value
of each award under the option plans is estimated on the date of grant using
the Black-Scholes option pricing model. The fair value of the options issued
in 1997 range from $7.15 per share to $11.78 per share. The following
assumptions were used to estimate the fair value of options:
1997
-----------
Risk-free interest rate 6.04%-6.98%
Expected life 10 years
Expected volatility 0.563-0.629
Expected dividend yield --
As a result of the Lakes distribution and the Merger, the outstanding stock
options became options to purchase common stock of both Park Place and Lakes.
The exercise prices of the options were adjusted to preserve their intrinsic
value, based on the estimated fair market value of each respective company
based on the trading prices of the new company stocks.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate
that value.
CASH EQUIVALENTS, RECEIVABLES AND ACCOUNTS PAYABLE
The carrying amount approximates fair value because of the short maturity of
these instruments.
AVAILABLE-FOR-SALE SECURITIES
The fair value of the Company's investments equals the quoted market price
when available and a quoted market price for similar securities if a quoted
market price is not available.
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The fair value of the Company's long-term debt is estimated based on quoted
market rates for the Notes. The fair value of capital lease obligations
approximates the carrying amount based on the maturity and security of the
related obligation.
9. EMPLOYEE RETIREMENT PLAN:
The Company has a section 401(k) employee savings plan for all full-time
employees. The Company's employees are not part of a bargaining unit and, as
such, all employees who are eligible can participate. The savings plan allows
participants to defer, on a pretax basis, a portion of their salary and
accumulate tax-deferred earnings as a retirement fund. Eligibility is based
on years of service and minimum age requirements. Contributions are invested,
at the direction of the employee, in one or more funds available. The Company
matches employee contributions up to a maximum of 1% of participating
employees' gross wages. Company contributions are vested over a period of
five years. The 401(k) plan commenced on September 1, 1995. Company
contributions for 1997 were $0.5 million.
As a part of the Merger, all Grand employees who continued on with Park Place
transferred their 401(k) balances into a Park Place 401(k) Plan.
10. COMMITMENTS AND CONTINGENCIES:
STRATOSPHERE CORPORATION
The Company previously owned approximately 41% of the common stock issued by
Stratosphere Corporation (Stratosphere). Stratosphere and its whollyowned
operating subsidiary developed and operate the Stratosphere Tower, Hotel and
Casino in Las Vegas, Nevada. In January 1997, Stratosphere and its
whollyowned operating subsidiary filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code.
On November 7, 1997, Stratosphere filed its Second Amended Plan, which was
approved by the Bankruptcy Court and declared effective on October 14, 1998.
Pursuant to the Second
Amended Plan, Stratosphere common stock that was outstanding prior to the
effective date of the Second Amended Plan was cancelled.
In March 1995, in connection with Stratosphere's issuance of its First
Mortgage Notes, the Company entered into a Standby Equity Commitment
Agreement (the Standby Equity Commitment) between Stratosphere and the
Company. The Company agreed in the Standby Equity Commitment, subject to the
terms and conditions stated in the Standby Equity Commitment, to purchase up
to $20.0 million of additional equity in Stratosphere during each of the
first three years Stratosphere is operating (as defined in the Standby Equity
Commitment) to the extent Stratosphere's consolidated cash flow (as defined
in the Standby Equity Commitment) during each of such years does not exceed
$50.0 million.
The enforceability of the Standby Equity Commitment is the subject of
litigation to which the Company is a party in (i) the Stratosphere bankruptcy
case (as a result of a motion brought by the Official Committee), and (ii)
the U. S. District Court for the District of Nevada (as a result of an action
brought by the Trustee). On February 19, 1998, the Bankruptcy Court ruled
that the Standby Equity Commitment is not enforceable in the Stratosphere
bankruptcy proceeding as a matter of law. The Official Committee has stated
that it intends to appeal the Bankruptcy Court's decision.
The Second Amended Plan contemplates the formation of a new limited liability
company which will own and pursue certain alleged claims and causes of action
that Stratosphere and other persons may have against numerous third parties,
including Grand and/or officers and/or directors of Grand. The Second Amended
Plan contemplates capitalizing this new limited liability company with an
investment of $5 million. As of February 5, 1999, Grand has not been served
with any such litigation.
STRATOSPHERE SECURITIES LITIGATION
The Company and certain persons who have been indemnified by the Company
(including certain former and current Company officers and directors) are
defendants in legal actions pending in the state court and in the federal
court in Nevada. These actions arise out of the Company's involvement in the
Stratosphere Tower, Casino and Hotel project (the Stratosphere Project) in
Las Vegas, Nevada.
The plaintiffs in the actions who are current and/or former Stratosphere
Corporation shareholders seek to pursue the actions as class actions, and
make various claims against the Company and the Company-related defendants,
including securities fraud. In September 1997, the Company and the
Company-related defendants submitted a motion to dismiss the federal action.
In April 1998, this motion was granted, in part, and denied, in part. The
plaintiffs are pursuing the claims that survived the motion to dismiss. Grand
and Grand-related defendants have also submitted a motion for summary
judgment seeking an order that such defendants are entitled to judgment as a
matter of law. As of February 5, 1999, the plaintiffs are engaged in
discovery related to the issues raised by the summary judgment motion. The
court will not decide the motion until after such discovery is completed and
the parties have submitted their respective arguments. The state court action
has been stayed pending resolution of the federal court action.
The Company intends to vigorously defend itself and the other Company-related
defendants against the claims made in both the state and the federal action.
GRAND SECURITIES LITIGATION
The Company and certain of the Company's current and former officers and
directors are defendants in a legal action pending in the federal court in
Minnesota. This action arises out of the Company's involvement in the
Stratosphere Project.
The plaintiffs in the action who are current and/or former Company
shareholders seek to pursue the action as a class action, and make various
claims against the Company and the other defendants, including securities
fraud. The Company and the Company-related defendants submitted a motion to
dismiss the plaintiffs' claims. In December 1997, that motion was granted, in
part, and denied, in part. Grand and Grand-related defendants have also
submitted a motion for summary judgment. As of February 5, 1999, the
plaintiffs and the Company and the other defendants are engaged in discovery
in the action.
The Company intends to vigorously defend itself and the other defendants
against the claims that survived the Company's motion to dismiss.
DERIVATIVE ACTION
Certain of the Company's current and former officers and directors are
defendants in a legal action pending in the state court of Minnesota. This
action arises out of the Company's involvement in Stratosphere.
The plaintiffs in the action who are current and/or former Company
shareholders seek to pursue the action against the defendants on behalf of
the Company, and make various claims that the defendants failed to fulfill
claimed duties to the Company. The Company is providing the defense for the
defendants pursuant to the Company's indemnification obligations to the
defendants.
The Company's board of directors appointed an independent special litigation
committee under Minnesota law to evaluate whether the Company should pursue
the claims made by the plaintiffs. That committee has completed its
evaluation and has recommended to the court that the plaintiffs' claims not
be pursued.
In May 1998, the court granted a motion for summary judgment submitted by
Grand, thereby dismissing the plaintiffs' claims. In August 1998, the
plaintiffs appealed the court's ruling. As of February 5, 1999, that appeal
is pending.
TULALIP TRIBES LITIGATION
In 1995, Grand entered into discussion with Seven Arrows LLC (Seven Arrows)
regarding possible participation by Grand in a proposed casino resort
development on land in the state of Washington held in trust by the United
States for the Tulalip Tribes. Grand and Seven Arrows entered into a letter
of intent providing for the negotiation of a revision to the Seven Arrows
limited liability company agreement by which Grand (or a subsidiary of Grand)
would become a member of Seven Arrows. Those negotiations were not completed,
and no revision to the limited liability company agreement was signed.
During the negotiations, Grand entered into an agreement (the Advance
Agreement) with Seven Arrows and the Tulalip Tribes which provided for the
loan by Grand and Seven Arrows of certain amounts to the Tulalip Tribes upon
the satisfaction of certain conditions. Grand
contends that those conditions were never satisfied. Neither Grand nor Seven
Arrows advanced any amount under the Advance Agreement.
As of February 5, 1999, Seven Arrows, the Tulalip Tribes and Grand are
parties to litigation in the U.S. District Court in Washington with respect
to a lease and sublease between the Tulalip tribes and Seven Arrows for the
land on which the casino was proposed and the Advance Agreement. Among other
things, Seven Arrows seeks damages from the Tulalip Tribes for lost profits
of up to $15 million and for recovery of sums paid to the Tulalip Tribes
between $2 million and $3 million in its second amended complaint. Grand is
not a party to the second amended complaint.
The Tulalip Tribes filed a complaint against Grand on September 30, 1998. The
complaint against Grand contains several counts including (i) a request for
judgment declaring that the Tulalip Tribe's termination of the agreements was
effective and quieting title in the land; (ii) a claim that Grand is liable
on the lease, sublease and Advance Agreement; (iii) a claim for negligent
misrepresentation; (iv) a claim that Grand stands as warrantor and surety of
Seven Arrow's obligations; and (v) a claim for estoppel. Each claim for
damages seeks the sum of $856,000 for out-of-pocket expenses and for "lost
profit damages" in an amount to be proved at trial.
As of February 5, 1999, Grand's answer had not yet been filed. Grand does not
oppose the Tulalip Tribe's effort to quiet title to its land. Grand denies
that it is factually or legally liable for the obligations or liabilities of
Seven Arrows under the lease and sublease. Grand contends that it did not
breach the Advance Agreement. Grand denies that it is liable for negligent
misrepresentation.
Seven Arrows has, on previous occasions, threatened unpleaded claims against
Grand. Grand does not know the nature or extent of any such additional claims
and, as of February 5, 1999, had not received any pleading in any action
stating such a claim. However, Grand expects to receive a claim by Seven
Arrows in the near future. Such a claim, if made, could be material.
Grand's liability for damages to all parties in the aggregate cannot exceed
$15 million under the partial settlement agreement. As of February 5, 1999,
discovery had commenced, but no trial date had been set.
STRATOSPHERE PREFERENCE ACTION
In April 1998, Stratosphere served on Grand and Grand Media & Electronics
Distributing, Inc., a wholly owned subsidiary of Grand (Grand Media), a
complaint in the Stratosphere bankruptcy case seeking recovery of certain
amounts paid by Stratosphere to Grand as management fees and for costs and
expenses under a management agreement between Stratosphere and Grand, and to
Grand Media for electronic equipment purchased by Stratosphere from Grand
Media.
Stratosphere claims in its complaint that such amounts are recoverable by
Stratosphere as preferential payments under bankruptcy law.
In May 1998, Grand responded to Stratosphere's complaint. That response
denies that Stratosphere is entitled to recover the amounts described in the
complaint. As of February 5, 1999, discovery remains in process.
SLOT MACHINE LITIGATION
Certain parties have commenced an action in the U.S. District Court for the
District of Nevada in which various parties (including Grand) alleged to
operate casinos or be slot machine manufacturers were named as defendants.
The action includes claims under the federal Racketeering-Influenced and
Corrupt Organizations Act and under state law, and seeks compensatory and
punitive damages. The plaintiffs claim 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 March 1997, various defendants (including Grand) 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 has been filed. Grand has
filed its answer to the new complaint. The plaintiffs have filed a motion
seeking an order certifying the action as a class action. Grand and certain
of the defendants have opposed the motion. As of February 5, 1999, the court
had not ruled on the motion.
OTHER LITIGATION
The Company is involved in various other inquiries, administrative
proceedings and litigation relating to contracts and other matters arising in
the normal course of business. While any proceeding or litigation has an
element of uncertainty, management currently believes that the final outcomes
of these matters are not likely to have a material adverse effect upon the
Company's consolidated financial position or its results of operations.
INDEMNIFICATION AGREEMENT
As a part of the Merger and Lakes distribution, Lakes agreed to indemnify
Grand against all costs, expenses and liabilities incurred or suffered by the
Company and certain subsidiaries and their respective current and former
directors and officers in connection with or arising out of certain pending
and threatened claims and legal proceedings, including those indentified
above, to which Grand and certain of its subsidiaries are parties. Lake's
indemnification obligations include the obligation to provide the defense of
all claims made in such proceedings against Grand and to pay all related
settlements and judgments.
As security to support Lakes' indemnification obligations to Grand under each
of the Grand Distribution Agreement and the Merger Agreement, and as a
condition to the consummation of the Merger, Lakes has agreed to deposit, in
trust for the benefit of Grand, as a wholly owned subsidiary of Park Place,
an aggregate of $30 million, consisting of four annual installments of $7.5
million at the end of each year during the four-year period subsequent to
December 31, 1998.
EXHIBIT INDEX
Exhibit
Number Description
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23.1 Consent of Independent Public Accountants