UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-14573
PARK PLACE ENTERTAINMENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 88-0400631
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3930 HOWARD HUGHES PARKWAY
LAS VEGAS, NEVADA 89109
(Address of principal executive offices) (Zip code)
(702) 699-5000
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
TITLE OF EACH CLASS OUTSTANDING AT APRIL 30, 1999
------------------- -----------------------------
Common Stock, par value $0.01 per share 302,037,857
1
PARK PLACE ENTERTAINMENT
INDEX
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income (unaudited)
Three months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
(UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
Assets
Cash and equivalents $ 185 $ 247
Restricted cash 6 135
Accounts receivable, net 124 119
Inventory, prepaids and other 137 133
----------- -----------
Total current assets 452 634
----------- -----------
Investments 183 169
Property and equipment, net 5,154 4,991
Goodwill 1,282 1,290
Other assets 85 90
----------- -----------
Total assets $ 7,156 $ 7,174
----------- -----------
----------- -----------
Liabilities and stockholders' equity
Accounts payable and accrued expenses $ 361 $ 434
Current maturities of long-term debt 7 6
Income taxes payable 23 -
----------- -----------
Total current liabilities 391 440
----------- -----------
Long-term debt, net of current maturities 2,429 2,466
Deferred income taxes, net 634 609
Other liabilities 52 51
----------- -----------
Total liabilities 3,506 3,566
----------- -----------
Commitments and contingencies
Stockholders' equity
Common stock, $0.01 par value, 400.0 million shares 3 3
authorized, 303.4 million shares issued and 303.0 million
shares outstanding
Additional paid-in capital 3,613 3,613
Other (8) (8)
Retained earnings 45 -
Common stock in treasury at cost, 0.4 million shares (3) -
----------- -----------
Total stockholders' equity 3,650 3,608
----------- -----------
Total liabilities and stockholders' equity $ 7,156 $ 7,174
----------- -----------
----------- -----------
See notes to condensed consolidated financial statements
3
PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
----------- ----------
Revenues
Casino $540 $ 383
Rooms 90 76
Food and beverage 67 58
Other revenue 51 58
----------- ----------
748 575
----------- ----------
Expenses
Casino 277 206
Rooms 31 24
Food and beverage 62 57
Other expenses 177 135
Depreciation and amortization 71 56
Pre-opening expense 3 -
Corporate expense 8 5
----------- ----------
629 483
----------- ----------
Operating income 119 92
Interest and dividend income 3 9
Interest expense (29) (23)
Interest expense, net from unconsolidated affiliates (3) (3)
----------- ----------
Income before income taxes, minority interest and
cumulative effect of accounting change 90 75
Provision for income taxes 42 35
Minority interest, net 1 1
----------- ----------
Income before cumulative effect of accounting change 47 39
Cumulative effect of accounting change, net of tax (2) -
----------- ----------
Net income $ 45 $ 39
----------- ----------
----------- ----------
Basic earnings per share
Income before cumulative effect of accounting change $ 0.16
Cumulative effect of accounting change $ (0.01)
Net income per share $ 0.15
Diluted earnings per share
Income before cumulative effect of accounting change $ 0.15
Cumulative effect of accounting change $ (0.01)
Net income per share $ 0.15
Basic and diluted earnings per share - pro forma
Net income per share - pro forma $ 0.15
See notes to condensed consolidated financial statements
4
PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 1998
---------- ----------
Operating activities
Net income $ 45 $ 39
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 71 56
Change in working capital components 18 (22)
Change in deferred income taxes 19 (6)
Other 6 1
---------- ----------
Net cash provided by operating activities 159 68
---------- ----------
Investing activities
Capital expenditures (223) (134)
Change in other investments (11) 36
Acquisitions, net of cash acquired - (43)
Other (3) -
---------- ----------
Net cash used in investing activities (237) (141)
---------- ----------
Financing activities
Net borrowings on Senior Credit Facility 585 -
Payments on debt (621) (4)
Payments to Hilton (73) (13)
Other (4) -
---------- ----------
Net cash used in financing activities (113) (17)
---------- ----------
Decrease in cash and equivalents (191) (90)
Cash and equivalents at beginning of period 382 199
---------- ----------
Cash and equivalents at end of period $ 191 $ 109
---------- ----------
---------- ----------
Supplemental cash flow disclosure
Cash paid for:
Interest (net of amounts capitalized) $ 12 $ 7
---------- ----------
---------- ----------
Income taxes $ 1 $ -
---------- ----------
---------- ----------
See notes to condensed consolidated financial statements
5
PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
Park Place Entertainment Corporation (the "Company"), a Delaware
corporation, was formed in June 1998. On December 31, 1998, Hilton Hotels
Corporation ("Hilton") completed the transfer of the operations, assets and
liabilities of its gaming business to the Company. The stock of the Company
was distributed to Hilton's shareholders tax-free on a one-for-one basis.
Also on December 31, 1998, immediately following the Hilton distribution, the
Company acquired, by means of a merger, the Mississippi gaming business of
Grand Casinos, Inc. ("Grand") which includes the Grand Casino Biloxi, Grand
Casino Gulfport and Grand Casino Tunica properties, in exchange for the
assumption of debt and the issuance of Company common stock on a one-for-one
basis.
The Company is primarily engaged in the ownership, operation and
development of gaming facilities. The operations of the Company currently are
conducted under the Hilton, Flamingo, Bally, Conrad and Grand brands and
include twelve U.S. casinos, an interest in one U.S. riverboat casino, and
interests in two land-based casinos in Australia and one land-based casino in
Uruguay. The Company is also in the process of developing the 2,900-room
Paris Casino Resort on the Las Vegas Strip, which is expected to open in the
fall of 1999.
NOTE 2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
the Company, its wholly owned subsidiaries and investments accounted for
under the equity method of accounting. Material intercompany accounts
and transactions have been eliminated.
The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, 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 three
month period are not necessarily indicative of results to be expected for the
full fiscal year. These financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
The accompanying condensed consolidated financial statements include
revenues, expenses and cash flows of Hilton's gaming business on a
stand-alone basis, including an allocation of corporate expenses, for the
three months ending March 31, 1998. The balance sheet as of December 31, 1998
reflects the distribution by Hilton and the merger with Grand.
The condensed consolidated financial statements for the prior period
reflect certain reclassifications to conform to classifications adopted in
1999. These classifications have no effect on net income.
6
NOTE 3. PRE-OPENING EXPENSE
The Company adopted Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-Up Activities" in the first quarter of 1999. The adoption of
SOP 98-5 resulted in a write off of the unamortized balance of pre-opening
costs in the first quarter of 1999 of $2 million, net of tax. The impact is
shown as a cumulative effect of accounting change in the condensed
consolidated statements of income. In addition, as required by SOP 98-5, the
Company expensed $3 million of pre-opening costs during the three months
ended March 31, 1999, related primarily to the development of Paris.
NOTE 4. STOCK REPURCHASE
In March 1999, the Company's Board of Directors approved a stock
repurchase program allowing for the purchase of up to 8 million shares of the
Company's currently outstanding common stock. During the three months ended
March 31, 1999, the Company repurchased approximately .4 million shares.
Subsequent to March 31, 1999, the Company repurchased approximately 1.3
million shares under this program.
NOTE 5. GRAND ACQUISITION
Effective December 31, 1998, the Company completed the acquisition of
Grand pursuant to an agreement dated June 30, 1998. Aggregate consideration
consisted of approximately 42 million shares of the Company's common stock
with an equity value of $270 million and assumption of Grand's debt at fair
market value totaling $625 million at December 31, 1998.
The acquisition has been accounted for using the purchase method of
accounting. The purchase price has been preliminarily allocated based on
estimated fair values at the date of acquisition, pending final determination
of certain acquired balances.
The following unaudited pro forma information for the three months ended
March 31, 1998 has been prepared assuming that the Grand merger had taken
place at January 1, 1998. This pro forma information does not purport to be
indicative of future results or what would have occurred had the Grand merger
occurred as of January 1, 1998.
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
Revenue.............................................. $ 718
Operating income..................................... $ 108
Net income........................................... $ 43
Basic and diluted earnings per share................. $0.14
NOTE 6. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income by
the weighted average number of common shares outstanding for the period. The
weighted average number of common shares outstanding for the three months
ended March 31, 1999 was 303 million. Diluted EPS reflects the effect of
assumed stock option exercises. The dilutive effect of the assumed exercise
of stock options increased the weighted average number of common shares by 2
million.
7
Pro forma earnings per share is calculated for the three months ended
March 31, 1998. The weighted average number of common shares outstanding was
261 million. The dilutive effect of the assumed exercise of stock options
increased the weighted average number of common shares by 3 million.
NOTE 7. LONG TERM DEBT
Long term debt is as follows (in millions):
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
Senior and senior subordinated notes, with an average rate of
7.5%, due 2002 to 2005 ........................................... $ 1,023 $ 1,023
10 1/8% First Mortgage Notes due 2003 .............................. 6 490
9% Senior Unsecured Notes due 2004 ................................. 135
Senior Credit Facility ............................................. 1,395 810
Capital leases and other ........................................... 12 14
------- -------
2,436 2,472
Less current maturities ......................................... (7) (6)
------- -------
------- -------
Net long-term debt ................................................. $ 2,429 $ 2,466
------- -------
------- -------
In November 1995, Grand sold $450 million aggregate principal amount of
10.125% First Mortgage Notes due 2003 ("First Mortgage Notes"). In connection
with the Grand merger, the Company 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.
In October 1997, Grand sold $115 million aggregate principal amount of
9.0% Senior Unsecured Notes due 2004 ("Senior Notes"). On December 31, 1998,
Grand completed a covenant defeasance for the Senior Notes by placing into
trust approximately $135 million representing all future payments of
principal, interest and early redemption premium. The Senior Notes were
redeemed on February 1, 1999.
NOTE 8. CAESARS WORLD INC. ACQUISITION
In April 1999, the Company announced that it had entered into an
agreement to purchase Caesars World Inc. and other gaming assets from
Starwood Hotels and Resorts Worldwide Inc. The purchase price is $3 billion
in cash. The acquisition will be accounted for as a purchase and accordingly,
the purchase price will be allocated to the assets and liabilities based on
their estimated fair market values at the date of acquisition. The
acquisition is subject to regulatory approvals and is expected to be
completed in the fourth quarter of 1999.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Results of operations include Park Place Entertainment Corporation's
(the "Company") wholly owned subsidiaries and investments accounted for under
the equity method of accounting. Prior to the merger with Grand Casinos, Inc.
("Grand"), the Company operated under the Hilton, Flamingo, Bally and Conrad
brand names with six wholly owned Nevada casino hotels; two wholly owned
casino hotels in Atlantic City, New Jersey; a wholly owned riverboat casino
in Robinsonville, Mississippi; a 49.9% owned and managed riverboat casino in
New Orleans; two partially owned and managed casino hotels in Australia; and
a partially owned and managed casino hotel in Punta del Este, Uruguay. On
December 31, 1998, the Company completed its acquisition of the Mississippi
gaming operations of Grand. As a result of the Grand merger, the Company now
owns Grand Casino Tunica, Grand Casino Gulfport and Grand Casino Biloxi
(collectively the "Grand Properties"). The results of operations for the
Grand Properties are not included in the Company's condensed consolidated
statement of income for the three months ended March 31, 1998, as the merger
was completed on December 31, 1998.
The following discussion presents an analysis of the results of
operations of the Company for the three months ended March 31, 1999 and 1998.
EBITDA (earnings before interest, taxes, depreciation, amortization,
pre-opening and non-cash items) is presented supplementally in the tables
below and in the discussion of operating results because management believes
it allows for a more complete analysis of results of operations. This
information should not be considered as an alternative to any measure of
performance as promulgated under generally accepted accounting principles
(such as operating income or net income), nor should it be considered as an
indicator of the overall financial performance of the Company. The Company's
calculation of EBITDA may be different from the calculation used by other
companies and therefore comparability may be limited.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
A summary of the Company's consolidated revenue and earnings for the
three months ended March 31, 1999 and 1998 is as follows:
1999 1998 %CHANGE
(in millions)
Revenue ................................... $ 748 $ 575 30%
Operating income .......................... $ 119 $ 92 29%
Net income ................................ $ 45 $ 39 15%
Basic and diluted earnings per share ...... $0.15 $0.15
Other operating data
EBITDA .................................... $ 193 $ 148 30%
9
The Company recorded net income of $45 million or diluted earnings per
share of $0.15 for the three months ended March 31, 1999, compared with net
income of $39 million or diluted earnings per share of $0.15 for the three
months ended March 31, 1998. Impacting results in the current year was the
Grand merger, which was effective December 31, 1998 and the adoption of
Statement of Position (SOP) 98-5 "Reporting on the costs of Start-Up
Activities." SOP 98-5 requires that start-up costs or pre-opening costs be
expensed as incurred. The Company recorded a cumulative effect of accounting
change net of tax of $2 million and expensed $3 million of pre-opening costs
incurred during the quarter.
Consolidated revenues increased 30 percent to $748 million for the three
months ended March 31, 1999, from $575 million in 1998. This increase in
revenues was primarily a result of the Grand merger. EBITDA increased 30
percent to $193 million for the three months ended March 31, 1999, from $148
million in 1998. The Grand properties contributed $41 million of the
increase. Properties in the Western Region contributed $15 million to the
increase, which was offset by a decrease in the Eastern Region of $2 million
and at the Company's International properties of $7 million.
WESTERN REGION
EBITDA for the Western Region was $95 million for the three months ended
March 31, 1999, an increase of 19 percent over the $80 million for the three
months ended March 31, 1998. Occupancy for the Western Region properties was
88 percent in the first quarter of 1999, compared to 86 percent in the first
quarter of the prior year. The average room rate was $82 compared to $79 in
the prior year period. The Las Vegas Hilton and Flamingo Hilton Las Vegas
made signification contributions to these increases.
EBITDA at the Las Vegas Hilton increased 59 percent to $27 million for
the three months ended March 31, 1999. Total casino revenue increased
significantly due to higher volumes and an increase in hold percentage in
Baccarat. Table game win (excluding baccarat) and slot win remained constant
with the prior year.
Results at the Las Vegas Hilton are more volatile than the Company's
other casinos because this property caters to the premium play segment of the
market. Future fluctuations in premium play volume and win percentage could
result in continued volatility in the results at this property. However, the
Company believes that its implementation of new casino marketing and
entertainment strategies has broadened the Las Vegas Hilton's domestic
customer base and increased non-premium play volume.
EBITDA at the Flamingo Hilton Las Vegas increased 28 percent in the
first quarter of 1999, generating $32 million compared to $25 million in
1998. Casino revenue and rooms revenue were the main contributors to the
increase. The increase in casino revenue was mainly attributable to a ten
percent increase in slot win and a five percent increase in table game win.
Bally's Las Vegas generated EBITDA of $24 million in the 1999 first
quarter, a decrease of $1 million from the first quarter in the prior year.
An increase in slot win offset an increase in operating expenses.
Combined EBITDA from the Reno Hilton, the Flamingo Hilton Reno and the
Flamingo Hilton Laughlin was $12 million, a decrease of $1 million from the 1998
quarter. For the first quarter of 1999, both Reno properties recorded lower
occupancy offset by an increased average rate compared to the 1998 period. The
Flamingo Hilton Laughlin recorded an 11 point increase in occupancy percentage
and a five percent increase in average daily rate. The Flamingo Hilton Laughlin
also recorded a four percent increase in slot win and a six percent decrease in
table game win.
10
EASTERN REGION
EBITDA for the Eastern Region was $39 million for the three months ended
March 31, 1999, a decrease of $2 million when compared to $41 million for the
three months ended March 31, 1998. Occupancy and average room rate remained
constant at 94 percent and $74, respectively.
Bally's Park Place generated EBITDA of $33 million, a decrease of 11
percent from last year's $37 million. The decrease was primarily attributable
to lower hold percentage and increased costs associated with competitive
market conditions.
The Atlantic City Hilton reported EBITDA of $6 million, $2 million or
50 percent above the first quarter last year. The improvement was due to
higher table game drop and win, which was offset by a decrease in slot hold
percentage. The Atlantic City Hilton also recorded a 20 percent increase in
rooms revenue.
MID-SOUTH REGION
EBITDA for the Mid-South region increased $42 million to $52 million for
the three months ended March 31, 1999, from $9 million in 1998. The Grand
properties contributed $41 million of the increase. The Grand properties
results are not included in the 1998 first quarter results because the merger
occurred on December 31, 1998. Occupancy percentage and average room rate for
the three months ended March 31, 1999, were 94 percent and $60, respectively.
Combined EBITDA from Bally's Robinsonville and Bally's New Orleans increased
$1 million over the prior year.
INTERNATIONAL
On a combined basis, first quarter 1999 EBITDA from the Conrad
properties in Uruguay and Australia decreased to $15 million from $22 million
in 1998. The decrease came primarily from the casino resort in Punta del
Este, Uruguay, which was impacted by the devaluation of the Brazilian Real
resulting in lower levels of play from Brazilian customers. On a combined
basis the International properties reported an average daily rate of $112 and
an occupancy percentage of 69 percent, an increase of one percent and 6
percentage points, respectively.
DEPRECIATION AND AMORTIZATION
Consolidated depreciation and amortization increased $15 million to $71
million for the three months ended March 31, 1999. All of this increase is
attributable to the Grand properties.
CORPORATE EXPENSE
Corporate expense increased $3 million to $8 million for the three
months ended March 31, 1999. The increase is attributable to the
infrastructure put in place to operate and manage the Company as a public
company.
11
INTEREST INCOME AND INTEREST EXPENSE
Interest and dividend income decreased $6 million in the first quarter
of 1999 to $3 million. The 1998 period includes interest income from the
Company's investment in certain mortgage notes that were sold in the second
half of 1998. Consolidated net interest expense increased $6 million to $32
million due primarily to an increase in long-term debt associated with the
Grand merger offset by an increase in capitalized interest. Capitalized
interest for the three months ended March 31, 1999 and 1998 was $13 million
and $4 million, respectively.
INCOME TAXES
The effective income tax rate for the 1999 period remained flat with the
three months ended March 31, 1998 at 46.7 percent. The Company's effective
income tax rate is determined by the level and composition of pretax income
subject to varying foreign, state and local taxes and exceeds the Federal
statutory rate due primarily to non-deductible amortization of goodwill.
OTHER
The gaming industry continues to experience growth primarily in existing
markets. The Las Vegas and Atlantic City markets are becoming increasingly
competitive due to new developments and expansion projects which challenge
the Company's existing market share. These projects could adversely impact
the Company's future gaming income.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash and cash equivalents of $185
million. Cash provided by operating activities for the three months ended
March 31, 1999 was $159 million. In addition, the Company had borrowings
available under its senior bank credit facility of $750 million at March 31,
1999. The Company expects to finance its current operations and capital
expenditures through cash flow from operations, existing cash balances,
commercial paper borrowings, and borrowings under its senior credit facility.
In the first quarter of 1999, the Company borrowed approximately $600
million on its senior bank credit facility in order to settle the tender
offer for the 10.125% Grand First Mortgage Notes and to redeem the Grand 9.0%
Senior Unsecured Notes.
Capital expenditures for the three months ended March 31, 1999 were $223
million and include costs relating to the construction (which began in April
1997) of the $760 million, 2,900-room Paris Casino-Resort ("Paris"). This
property, which is located adjacent to the Bally's Las Vegas on the Strip,
will feature an 85,000 square foot casino, a 50-story replica of the Eiffel
Tower, eight restaurants, five lounges, 130,000 square feet of convention
space and a retail shopping complex with a French influence. This project is
expected to be completed in the fall of 1999.
In addition to an estimated $350 million in 1999 expenditures related to
new construction, the Company anticipates spending approximately $160 million
in 1999 on normal capital replacements and technology upgrades and $60
million on improvement projects that are evaluated on a return on investment
basis.
12
In April 1999, the Company announced that it had entered into an
agreement to purchase Caesars World Inc. ("Caesars") and other gaming assets
from Starwood Hotels and Resorts Worldwide Inc. The purchase price is $3
billion in cash. The acquisition is subject to regulatory approvals and
expected to be completed in the fourth quarter of 1999. The Company
anticipates financing the $3 billion purchase price through additional bank
borrowings and the issuance of long-term debt.
In January 1999, the Company filed a shelf registration statement (the
"Shelf") with the Securities and Exchange Commission registering up to $1
billion in debt or equity securities. The terms of any securities offered
pursuant to the Shelf will be determined by market conditions at the time of
issuance.
In March 1999, the Company's Board of Directors approved a common stock
repurchase program to acquire up to 8 million shares of the Company's common
stock. During the three months ended March 31, 1999, the Company repurchased
approximately .4 million shares. Subsequent to March 31, 1999, the Company
repurchased approximately 1.3 million shares under this program.
The Company has established a $1 billion commercial paper program as of
December 31, 1998. No amounts were outstanding at March 31, 1999. Interest
under the program will be a market rate for varying periods.
STRATEGY
As exemplified by the acquisition of Bally Entertainment Corporation in
1996, Grand Casinos, Inc. in 1998, the anticipated opening of Paris in the
fall of 1999, and the expected purchase of Caesars World and related assets
in late 1999, the Company is interested in expanding its business through the
acquisition of quality gaming assets and selective new development. It
believes it is well-positioned to, and may from time to time, pursue
additional strategic acquisitions or alliances which it believes to be
financially beneficial to the Company and its long term interests.
OTHER MATTERS
YEAR 2000
The Company is currently working to resolve the potential impact of the
Year 2000 on the processing of date-sensitive information by its computerized
information systems. The Year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the applicable
year. Any of the Company's programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the Year 2000, which
could result in miscalculations or system failures.
The Company has a Year 2000 program, the objective of which is to
determine and assess the risks of the Year 2000 issue, and plan and institute
mitigating actions to minimize those risks. The Company's standard for
compliance requires that for a computer system or business process to be Year
2000 compliant, it must be designed to operate without error in dates and
date-related data prior to, on and after January 1, 2000. The Company expects
to be fully Year 2000 compliant with respect to all significant business
systems prior to December 31, 1999.
The Company's various project teams are focusing their attention in the
following major areas:
INFORMATION TECHNOLOGY (IT). Information Technology systems account for much
of the Year 2000 work and include all computer systems and technology managed
by The Company. These core systems have been assessed, plans are in place,
and work is being undertaken to test and implement changes where required. No
significant remediation has been identified. The appropriate vendors and
suppliers
13
have been contacted as to their Year 2000 compliance and their deliverables
have been factored into the Company's plans.
NON-IT SYSTEMS. An inventory of all property level non-IT systems (including
elevators, electronic door locks, gaming devices, etc.) is near completion.
The majority of these non-IT systems have been assessed, plans are in place,
and work is being undertaken to test and implement changes where required.
The appropriate vendors and suppliers have been contacted as to their Year
2000 compliance and their deliverables have been factored into the Company's
plans.
SUPPLIERS. The Company is communicating with its significant suppliers to
understand their Year 2000 issues and how they might prepare themselves to
manage those issues as they relate to the Company. To date, no significant
supplier has informed the Company that a material Year 2000 issue exists
which will have a material effect on the Company.
During the remainder of 1999, the Company will continually review its
progress against its Year 2000 plans and determine what contingency plans are
appropriate to reduce its exposure to Year 2000 related issues.
Based on the Company's current assessment, the costs of addressing
potential problems are expected to be less than $4 million. However, if the
Company is unable to resolve its Year 2000 issues, contingency plans to
update existing systems (i.e., reservation, payroll, etc.) are in place for
which the Company expects the cost to be an additional $2 million. If the
Company's customers or vendors identify significant Year 2000 issues in the
future and are unable to resolve such issues in a timely manner, it could
result in a material financial risk. Accordingly, the Company plans to devote
the necessary resources to resolve all significant Year 2000 issues in a
timely manner.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this report, including without limitation,
those set forth under the captions "Strategy," "Results of Operations,"
"Liquidity and Capital Resources" and "Other Matters," and statements
relating to the Company's plans, strategies, objectives, expectations,
intentions and adequacy of resources, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The words
"believes," "anticipates," "expects," "continues" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements reflect the Company's current views with respect to future events
and financial performance, and are subject to certain risks and
uncertainties, including those identified above under "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
other factors described from time to time in the Company's reports filed with
the SEC, and (i) the effect of economic conditions, (ii) the impact of
competition, (iii) customer demand, which could cause actual results to
differ materially from historical results or those anticipated, (iv)
regulatory, licensing, and other governmental approvals, (v) access to
available and reasonable financing, (vi) political uncertainties, including
legislative action, referendum, and taxation, (vii) litigation and judicial
actions, (viii) third party consents and approvals, and (ix) construction
issues, including environmental restrictions, weather, soil conditions,
building permits and zoning approvals. Although the Company believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will
be attained.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of certain litigation to which the Company and its
subsidiaries are a party, see the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
Grand Casinos, Inc. ("Grand") and its subsidiaries are parties to
various lawsuits and any liability with respect thereto is an obligation of
the Company. Pursuant to the Grand distribution agreement and the merger
agreement, Grand is to be indemnified by Lakes Gaming, Inc. (the Company that
retained the non-Mississippi business of Grand prior to the merger) for
certain liabilities. If Lakes is unable to satisfy its indemnification
obligations, Grand will be responsible for any liabilities which could have a
material adverse effect on the Company.
GRAND DERIVATIVE ACTION
Certain of Grand's current and former officers and directors are
defendants in a legal action filed on February 6, 1997 in the Minnesota
District Court, Hennepin County. The plaintiffs, who are current or former
Grand shareholders, allege the defendants breached fiduciary duties to the
shareholders of Grand as a result of certain transactions involving the
Stratosphere project. Grand is providing the defense for the defendants
pursuant to Grand's indemnification obligations to the defendants. Grand's
Board of Directors appointed an independent special litigation committee
under Minnesota law to evaluate whether Grand should pursue claims against
the officers and directors. The committee recommended to the court that the
plaintiffs' claims not be pursued. In May 1998, the Court granted Grand's
motion for summary judgment, thereby dismissing the plaintiffs' claims. On
March 9, 1999 the Minnesota Court of Appeals affirmed the summary judgment.
Plaintiffs have petitioned for appellate consideration by the Minnesota
Supreme Court, which petition is being contested by Grand.
BELLE OF ORLEANS
Bally's Louisiana, Inc. (the "Louisiana Subsidiary"), owns 49.9% of the
Belle of Orleans, L.L.C. ("Belle"), a limited liability company which owns
and holds the riverboat gaming license to operate Bally's Casino Lakeshore
Resort. Metro Riverboat Associates, Inc. ("Metro") owns the remaining 50.1%
interest in Belle. The parties entered into certain operating and management
agreements defining their relationships and the operation and governance of
the riverboat casino. The parties are currently involved in numerous lawsuits
regarding their rights and obligations under those agreements, which lawsuits
have been described in previous Company filings. Current significant
developments are as follows:
On December 28, 1998, Metro filed an action in the Civil District Court
for the Parish of Orleans, State of Louisiana, seeking injunctive relief to
prevent the spin-off of Hilton's gaming operations to the Company. Both the
Louisiana Fourth Circuit Court of Appeal (on December 31, 1998) and the
Louisiana Supreme Court (on January 7 and 27, 1999) denied the issuance of a
temporary restraining order against the Louisiana Subsidiary. On March 5,
1999, the trial court additionally denied Metro's petition for a preliminary
injunction.
From January 5, 1999 to date, Metro has filed several petitions in the
Nineteenth Judicial District Court for the Parish of East Baton Rouge, State
of Louisiana, against the Louisiana Subsidiary and the Louisiana Gaming
Control Board ("Gaming Board") seeking to: (a) compel the Gaming Board to
conduct a public hearing prior to approval of the Hilton/Park Place
Entertainment transaction and prior to renewal of Belle's gaming license, (b)
stay or reverse the Gaming Board's December 29, 1998 conditional approval of
the Hilton/Park Place Entertainment spin-off, and (c) compel the Louisiana
Subsidiary and
15
the Gaming Board to escrow certain Belle operating funds. On January 27, 1999
the court ordered the Gaming Board to conduct a public hearing to determine
whether the Hilton/Park Place Entertainment transaction should be approved.
Upon application by the Gaming Board, that order was suspended and no stay of
enforcement was issued. On March 16, 1999, The Gaming Board ordered that the
gross gaming revenues of the Belle be placed into escrow, subject to
disbursement upon approval by the Gaming Board or the Louisiana State Police.
On March 26, 1999, the Louisiana Subsidiary filed suit against the Gaming
Board in the Nineteenth Judicial District Court for the Parish of East Baton
Rouge, State of Louisiana, appealing the mandatory escrow order. At a Gaming
Board meeting of April 20, 1999, the Gaming Board stayed implementation of
its escrow order, and ordered that cash disbursements merely be monitored by
the Louisiana State Police, with no prior approvals required for
disbursement. The Gaming Board also ordered Metro to provide the Louisiana
Subsidiary with a listing of cash disbursements to which it objects and the
basis for such objections.
CITY OF NEW ORLEANS
In two separate actions brought in the Civil District Court for the
Parish of Orleans, Belle of Orleans L.L.C. is contesting allegedly unpaid
taxes to the City of New Orleans in the total amount of approximately $2.72
million dollars. The dispute arises out of a disagreement over how admission
fees are to be collected. In the first action, brought on March 26, 1998,
Belle sued the city to recover approximately $1.12 in taxes paid under
protest. Judgment was entered by the Court in favor of Belle, and the City
has appealed. In the second action, the City filed suit on December 29, 1998
against Belle to recover an additional approximate $1.6 million in allegedly
owed subsequent taxes which Belle declines to pay in light of the Court's
judgment in the earlier case.
BALLY MERGER LITIGATION
An action against Bally Entertainment Corporation ("Bally"), its
directors, and Hilton, was commenced in September, 1996 in the Delaware Court
of Chancery, in connection with the December 1996 merger of Bally and Hilton.
The allegations include alleged breach of fiduciary duties to Plaintiff, who
purports to bring the action on behalf of a class of all Bally shareholders.
Both injunctive relief and damages were sought. Defendants filed a motion to
dismiss the complaint in its entirety, which was granted by the Court. On
January 25, 1999, the Delaware Supreme Court reversed the dismissal order and
remanded the case to the Court of Chancery for further proceedings.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Stock Purchase Agreement dated as of April 27, 1999
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed a Form 8-K dated January 8, 1999. The Company
reported under "Item 2" the merger with Grand Casinos, Inc. and under
"Item 5" the spin-off of the Company from Hilton Hotels Corporation
and related matters.
The Company filed a Form 8-K dated January 20, 1999. The Company
reported under "Item 5" the expansion of its Board of Directors and
the appointment of a new director.
The Company filed a form 8-K dated February 4, 1999. The Company
reported under "Item 5" its earnings for its fourth fiscal quarter
and year ended December 31, 1998.
The Company filed a Form 8-K/A dated March 12, 1999. The Company
reported under "Item 7" the audited financial statements of Grand
Casinos, Inc. following its spin-off of Lakes Gaming, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARK PLACE ENTERTAINMENT CORPORATION
(Registrant)
Date: May 14, 1999
/s/ SCOTT A. LAPORTA
- ----------------------------
Scott A. LaPorta
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
18