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 JUNE 30, 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 AUGUST 2, 1999
------------------- -----------------------------
Common Stock, par value $0.01 per share 302,333,415
1
PARK PLACE ENTERTAINMENT
INDEX
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) 3
June 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Income (unaudited)
Three and six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited) 5
Six months ended June 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
JUNE 30, DECEMBER 31,
1999 1998
-------------- ---------------
(UNAUDITED)
Assets
Cash and equivalents $ 152 $ 247
Restricted cash 6 135
Accounts receivable, net 132 119
Inventory, prepaids and other 142 133
-------------- ---------------
Total current assets 432 634
Investments 181 169
Property and equipment, net 5,250 4,991
Goodwill 1,278 1,295
Other assets 82 85
-------------- ---------------
Total assets $ 7,223 $ 7,174
============== ===============
Liabilities and stockholders' equity
Accounts payable and accrued expenses $ 345 $ 434
Current maturities of long-term debt 7 6
Income taxes payable 4 -
-------------- ---------------
Total current liabilities 356 440
Long-term debt, net of current maturities 2,486 2,466
Deferred income taxes, net 644 609
Other liabilities 51 51
-------------- ---------------
Total liabilities 3,537 3,566
-------------- ---------------
Commitments and contingencies
Stockholders' equity
Common stock, $0.01 par value, 400.0 million shares authorized,
302.3 million and 303.1 million shares outstanding at
June 30, 1999 and December 31, 1998, respectively 3 3
Additional paid-in capital 3,618 3,613
Other (8) (8)
Retained earnings 85 -
Common stock in treasury at cost, 1.7 million shares (12) -
-------------- ---------------
Total stockholders' equity 3,686 3,608
-------------- ---------------
Total liabilities and stockholders' equity $ 7,223 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
--------- --------- ---------- ---------
Revenues
Casino $ 530 $ 394 $ 1,070 $ 777
Rooms 91 80 181 156
Food and beverage 65 57 132 115
Other revenue 53 43 104 101
--------- --------- ---------- ---------
739 574 1,487 1,149
--------- --------- ---------- ---------
Expenses
Casino 281 207 558 413
Rooms 34 30 65 54
Food and beverage 60 46 122 103
Other expenses 176 136 353 271
Depreciation and amortization 71 56 142 112
Pre-opening expense 7 - 10 -
Corporate expense 9 4 17 9
--------- --------- ---------- ---------
638 479 1,267 962
--------- --------- ---------- ---------
Operating income 101 95 220 187
Interest and dividend income 3 5 6 14
Interest expense (29) (20) (58) (43)
Interest expense, net from unconsolidated affiliates (3) (3) (6) (6)
--------- --------- ---------- ---------
Income before income taxes, minority interest and
cumulative effect of accounting change 72 77 162 152
Provision for income taxes 31 35 73 70
Minority interest, net 1 1 2 2
--------- --------- ---------- ---------
Income before cumulative effect of accounting change 40 41 87 80
Cumulative effect of accounting change, net of tax - - (2) -
--------- --------- ---------- ---------
Net income $ 40 $ 41 $ 85 $ 80
========= ========= ========== =========
Basic earnings per share
Income before cumulative effect of accounting change $ 0.13 $ 0.29
Cumulative effect of accounting change $ - $ (0.01)
Net income per share $ 0.13 $ 0.28
Diluted earnings per share
Income before cumulative effect of accounting change $ 0.13 $ 0.28
Cumulative effect of accounting change $ - $ (0.01)
Net income per share $ 0.13 $ 0.28
Basic earnings per share - pro forma $ 0.16 $ 0.31
Diluted earnings per share - pro forma $ 0.16 $ 0.30
See notes to condensed consolidated financial statements
4
PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
-------- ---------
Operating activities
Net income $ 85 $ 80
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 142 112
Change in working capital components (34) (27)
Change in deferred income taxes 29 (9)
Other 17 (12)
-------- ---------
Net cash provided by operating activities 239 144
-------- ---------
Investing activities
Capital expenditures (385) (311)
Change in investments (14) (2)
Acquisitions, net of cash acquired - (58)
Other (4) 10
-------- ---------
Net cash used in investing activities (403) (361)
-------- ---------
Financing activities
Net borrowings on Senior Credit Facilities 620 -
Net borrowings on commercial paper program 24 -
Payments on debt (623) (6)
Payments (to) from Hilton (73) 147
Purchases of treasury stock (12) -
Other 4 -
-------- ---------
Net cash (used in) provided by financing activities (60) 141
-------- ---------
Decrease in cash and equivalents (224) (76)
Cash and equivalents at beginning of year 382 224
-------- ---------
Cash and equivalents at end of period $ 158 $ 148
======== =========
Supplemental cash flow disclosure
Cash paid for:
Interest (net of amounts capitalized) $ 52 $ 30
======== =========
Income taxes $ 36 $ -
======== =========
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. The
Company operates twelve U.S. casino hotels including three in Las Vegas, two
in Reno and one in Laughlin, Nevada; two in Atlantic City, New Jersey; and
two in Tunica County, one in Biloxi and one in Gulfport, Mississippi. In
addition, the Company has 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. The
Company is also in the process of completing the 2,900-room Paris Casino
Resort ("Paris") on the Las Vegas Strip, which is expected to open on
September 1, 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
presentation of results for the interim periods have been made. The results
for the six month period are not necessarily indicative of results to be
expected for the full fiscal year. These condensed consolidated 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 and six months ended June 30, 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 periods
reflect certain reclassifications to conform to classifications adopted in
1999. These classifications have no effect on previously reported 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 provisions of
SOP 98-5 require that all costs associated with start-up activities
(including pre-opening costs) be expensed as incurred. 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, the Company expensed $10 million of
pre-opening costs during the six months ended June 30, 1999. Pre-opening
costs for the periods presented related primarily to 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 six months ended
June 30, 1999, the Company repurchased approximately 1.7 million shares of
its common stock.
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 and six
months ended June 30, 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.
Three months ended Six months ended
JUNE 30, 1998 JUNE 30, 1998
-------------------- --------------------
(in millions, except (in millions, except
per share amounts) per share amounts)
Revenue .................................................... $ 718 $ 1,436
Operating income ........................................... 113 221
Net income ................................................. 46 89
Basic and diluted earnings per share ....................... 0.15 0.29
7
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 and six
months ended June 30, 1999 was 302 million and 303 million, respectively.
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 6 million and 3 million for the
three and six months ended June 30, 1999, respectively.
For the three and six months ended June 30, 1998, pro forma earnings per
share is calculated using weighted average number of common shares
outstanding of 260 million and 261 million, respectively. The dilutive effect
of the assumed exercise of stock options increased the weighted average
number of common shares by 3 million for the three and six months ended June
30, 1998.
NOTE 7. LONG-TERM DEBT
Long term debt is as follows (in millions):
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
Senior and senior subordinated notes, with an average rate of 7.5%,
Due 2002 to 2005, net of unamortized discount of $2 million ................. $ 1,023 $ 1,023
10.125% First Mortgage Notes due 2003 .......................................... 6 490
9% Senior Unsecured Notes due 2004 ............................................. - 135
Senior Credit Facilities ....................................................... 1,430 810
Commercial paper program ....................................................... 24 -
Capital leases and other ....................................................... 10 14
----------- ------------
2,493 2,472
Less current maturities ..................................................... (7) (6)
=========== ============
Net long-term debt $ 2,486 $ 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 $6 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.
8
In December 1998, the Company entered into senior credit facilities with
a syndicate of financial institutions. The senior credit facilities consist
of (i) a 364-day senior unsecured revolving credit facility of up to $650
million ("364-day Revolver"); and (ii) a five-year senior unsecured revolving
credit facility of up to $1.5 billion ("Five-year Revolver") (collectively
the "Senior Credit Facilities"). At June 30, 1999, $1.4 billion of the
aggregate commitment was outstanding, leaving approximately $720 million of
the Senior Credit Facilities available to the Company at such date.
The Company has established a $1 billion commercial paper program as of
December 31, 1998. To the extent that the Company incurs debt under this
program, it must maintain an equivalent amount of credit available under its
Senior Credit Facilities. The Company has borrowed under the program for
varying periods during 1999. At June 30, 1999, the Company had outstanding
borrowings of $24 million under the commercial paper program at an average
interest rate of 5.5 percent.
NOTE 8. CAESARS WORLD INC. ACQUISITION
On April 27, 1999, the Company entered into a definitive agreement with
Starwood Hotels & Resorts Worldwide, Inc. and several of its subsidiaries to
acquire all of the outstanding stock of Caesars World, Inc. ("Caesars"), a
wholly owned subsidiary of Starwood, and all of their interests in several
other gaming entities for $3.0 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.
NOTE 9. SUBSEQUENT EVENTS
In July 1999, the Company received commitments from a syndicate of
financial institutions to enter into a new $2.0 billion revolving credit
facility which will replace the existing $650 million 364-day Revolver.
Borrowings under the proposed $2.0 billion facility would be limited to $650
million until the closing of the Caesars acquisition. The commitments are
subject to the negotiation of final documentation.
In addition to the proposed $2.0 billion 364-day facility, the Company
received commitments from a syndicate of financial institutions to enter into
a $1.0 billion 364-day facility which would only be drawn to provide funding
for the Caesars acquisition. The commitments are subject to the negotiation
of final documentation.
On August 2, 1999, the Company issued $300 million of Senior Notes due
2003 (the "Notes") in a private placement offering to institutional
investors. The Notes were issued with a coupon rate of 7.95%. The Notes are
unsecured and will rank senior to the Company's subordinated indebtedness and
equally with the Company's other senior indebtedness. Proceeds from this
offering were used to reduce the Company's borrowings under the existing
Senior Credit Facilities.
9
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. The operations of the Company currently are
conducted under the Hilton, Flamingo, Bally, Conrad and Grand brands. The
Company operates twelve U.S. casino hotels including three in Las Vegas, two
in Reno and one in Laughlin, Nevada; two in Atlantic City, New Jersey; and
two in Tunica County, one in Biloxi and one in Gulfport, Mississippi. In
addition, the Company has 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. The
Company is also in the process of completing the 2,900-room Paris Casino
Resort on the Las Vegas Strip, which is expected to open on September 1,
1999. 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
statements of income for the three and six months ended June 30, 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 and six months ended June 30, 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. The Company's depreciation, amortization and pre-opening costs for
the three months ended June 30, 1999 and 1998 and the six months ended June
30, 1999 and 1998 totaled $78 million, $56 million, $152 million and $112
million, respectively. The Company had no non-cash items for the periods
presented.
COMPARISON OF THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
A summary of the Company's consolidated revenue and earnings for the
three and six months ended June 30, 1999 and 1998 is as follows (in millions):
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
Revenue $ 739 $ 574 $ 1,487 $ 1,149
Operating income 101 95 220 187
Net income 40 41 85 80
Basic earnings per share 0.13 0.16 0.28 0.31
Diluted earnings per share 0.13 0.16 0.28 0.30
Other operating data:
EBITDA $ 179 $ 151 $ 372 $ 299
10
The Company recorded net income of $40 million or diluted earnings
per share of $0.13 for the three months ended June 30, 1999, compared with
net income of $41 million or pro forma diluted earnings per share of $0.16
for the three months ended June 30, 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 expensed $7 million of pre-opening
costs incurred during the three months ended June 30, 1999, related primarily
to the development of Paris. For the six months ended June 30, 1999, the
Company recorded net income of $85 million or diluted earnings per share of
$0.28 compared with net income of $80 million or pro forma diluted earnings
per share of $0.30 in the prior year. The Grand merger and SOP 98-5 also
impacted the year to date results. As required by SOP 98-5, the Company
recorded a cumulative effect of accounting change net of tax of $2 million
for pre-opening costs incurred and capitalized prior to January 1, 1999, and
expensed $10 million of pre-opening costs incurred during the six months
ended June 30, 1999.
Consolidated revenues increased 29 percent to $739 million for the three
months ended June 30, 1999, from $574 million in 1998. For the six months
ended June 30, 1999, consolidated revenues were $1.5 billion, an increase of
29 percent when compared to the six months ended June 30, 1998. This increase
in revenues for the three and six months ended June 30, 1999, was primarily a
result of the Grand merger. EBITDA increased 19 percent to $179 million for
the three months ended June 30, 1999, from $151 million in 1998. The Grand
Properties contributed $42 million of the increase in EBITDA. The Eastern
Region contributed $8 million to the increase, which was offset by a decrease
in the Western Region of $18 million. For the six months ended June 30, 1999,
EBITDA was $372 million an increase of 24 percent when compared to EBITDA of
$299 million in the prior year. The Grand Properties contributed $83 million
of the increase. The Eastern Region contributed $6 million to the increase,
which was offset by decreases in the Western Region of $3 million and the
International properties of $8 million. See below for an analysis by region.
WESTERN REGION
EBITDA for the Western Region was $72 million for the three months ended
June 30, 1999, a decrease of 20 percent compared to $90 million for the three
months ended June 30, 1998. The decrease in EBITDA was primarily attributable
to results at the Las Vegas Hilton. Occupancy for the Western Region was 88
percent for the three months ended June 30, 1999, compared to 91 percent in
the prior year period. The average room rate was $77 compared to $76 in the
prior year period. For the six months ended June 30, 1999, the Western Region
EBITDA decreased $3 million to $167 million when compared to the six months
ended June 30, 1998. Occupancy percentage remained flat at 88 percent, and
average room rate was $79 for the six months ended June 30, 1999 compared to
$78 in the prior year.
EBITDA at the Las Vegas Hilton decreased 68 percent to $7 million for
the three months ended June 30, 1999. The decrease in the results at the Las
Vegas Hilton was attributable to added supply in the Las Vegas market,
concentration of play in the first quarter of 1999, general softness in the
baccarat market and unusually high drop and hold in the comparable quarter of
1998. For the six months ended June 30, 1999, EBITDA decreased $5 million to
$34 million.
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 of 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.
11
EBITDA at the Flamingo Hilton Las Vegas decreased $1 million to $29
million for the three months ended June 30, 1999. For the six months ended
June 30, 1999, the Flamingo Hilton Las Vegas generated $61 million of EBITDA
compared to $55 million in 1998. Casino revenue was the primary contributor
to the increase. The increase in casino revenue was mainly attributable to an
eight percent increase in slot win and a three percent increase in table game
win.
Bally's Las Vegas generated EBITDA of $21 million in the second quarter
of 1999, a decrease of $1 million from the second quarter in the prior year.
A reduction in table game drop and hold percentage contributed to the
decrease. For the six months ended June 30, 1999, EBITDA was $45 million, a
decrease of $2 million from the prior year. A decrease in table game drop was
the main contributor.
Combined EBITDA from the Reno Hilton, the Flamingo Hilton Reno and the
Flamingo Hilton Laughlin was $15 million for the three months ended June 30,
1999, a decrease of $1 million from the comparable 1998 quarter. For the six
months ended June 30, 1999, the Reno Hilton, the Flamingo Hilton Reno and the
Flamingo Hilton Laughlin recorded EBITDA of $27 million, a seven percent
decrease when compared to the prior year.
In Las Vegas the Company continues to expand its gaming operations with
the development of the 2900-room Paris Casino Resort ("Paris") on the Las
Vegas Strip. This property, which is located adjacent to 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. The
Company expects to open Paris Las Vegas on September 1, 1999.
The completion of a number of room expansion projects coupled with the
opening of new casino hotels has increased competition in all segments of the
Las Vegas market. Three new mega-resorts have opened since October 1998. Our
competitors have announced other projects in Las Vegas which, if completed,
will add significant casino space and hotel rooms to this market. The new
capacity additions to the Las Vegas market could adversely impact the
Company's future operating results.
EASTERN REGION
EBITDA for the Eastern Region was $57 million for the three months ended
June 30, 1999, an increase of 16 percent when compared to $49 million for the
three months ended June 30, 1998. Marketing programs that primarily boosted
table game play drove the increase. In addition, slot handle increased 12
percent, the average room rate increased to $87 from $84 and the occupancy
percentage increased six percentage points to 99 percent for the three months
ended June 30, 1999. For the six months ended June 30, 1999, the Eastern
Region recorded EBITDA of $96 million, an increase of $6 million over the
prior year.
Bally's Park Place generated EBITDA of $43 million for the three months
ended June 30, 1999, an increase of five percent from last year's quarter of
$41 million. The increase was a result of increases in slot handle and table
game drop, offset by a decrease in hold percentages. For the six months ended
June 30, 1999, EBITDA decreased $2 million. The decrease was primarily
attributable to lower hold percentage and increased costs in the first
quarter of 1999, associated with competitive market conditions.
12
For the three months ended June 30, 1999, the Atlantic City Hilton
reported EBITDA of $14 million, $6 million or 75 percent above the second
quarter last year. The improvement was due to a 29 percent increase in table
game win and an increase in rooms revenue attributable to an increase in
occupancy percentage. For the six months ended June 30, 1999, EBITDA at the
Atlantic City Hilton was $20 million, an increase of $8 million over the
prior year. The increase was a result of the marketing programs, which are
having a positive impact on occupancy and play at the property.
Several competitors have announced projects in the Atlantic City market,
including new properties and renovation projects. Such new development could
adversely impact the Company's market share and future operating results in
the Atlantic City market.
MID-SOUTH REGION
EBITDA for the Mid-South Region increased $43 million to $52 million for
the three months ended June 30, 1999, up from $9 million in 1998. The Grand
Properties contributed $42 million of the increase. The Grand Properties
results are not included in the 1998 results because the merger occurred on
December 31, 1998. In the Mid-South Region, occupancy percentage and average
room rate for the three months ended June 30, 1999, were 94 percent and $57,
respectively. Combined EBITDA from Bally's Tunica and Bally's New Orleans
increased $1 million over the prior year. For the six months ended June 30,
1999, EBITDA in the Mid-South Region increased $86 million. The Grand
Properties contributed $83 million of the increase.
In Mississippi the Company continues to expand its properties with the
March 1999 opening of the Terrace Hotel at Grand Casino Tunica and the June
1999 opening of the Oasis Resort and Spa at Grand Casino Gulfport.
Supply on the Gulf Coast has recently increased with the opening of a
new resort by a competitor. Currently the new supply into the market
continues to drive interest and visitation to the Company's two Gulf Coast
properties. This increase in supply could ultimately have an adverse impact
on the operating results of the Company's Gulf Coast properties.
INTERNATIONAL
On a combined basis, second quarter 1999 EBITDA from the Conrad
properties in Uruguay and Australia decreased $1 million to $7 million. For
the six months ended June 30, 1999, the International Region recorded EBITDA
of $22 million, a decrease of 27 percent over the prior year. The decrease
came primarily in the first quarter of 1999 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
$101, flat with the prior year, and an occupancy percentage of 64 percent, an
increase of two percentage points over the prior year.
DEPRECIATION AND AMORTIZATION
Consolidated depreciation and amortization increased $15 million to $71
million for the three months ended June 30, 1999. For the six months ended
June 30, 1999, depreciation and amortization increased $30 million to $142
million. The increase in depreciation and amortization for the three and six
months ended June 30, 1999 was primarily attributable to the addition of the
Grand Properties.
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CORPORATE EXPENSE
Corporate expense increased $5 million to $9 million for the three
months ended June 30, 1999. For the six months ended June 30, 1999, corporate
expense increased $8 million to $17 million. The increases are attributable
to the infrastructure put in place to operate and manage the Company as a
separate publicly traded entity.
INTEREST INCOME AND INTEREST EXPENSE
Interest and dividend income decreased $2 million in the second 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 interest expense increased $9 million to $32
million for the three months ended June 30, 1999. For the six months ended
June 30, 1999, consolidated interest expense increased $15 million to $64
million. The increase in interest expense for the quarter and six months
ended June 30, 1999, was due primarily to an increase in long-term debt
associated with the Grand merger, offset by an increase in capitalized
interest primarily due to the construction of Paris. Capitalized interest for
the three months ended June 30, 1999 and 1998 was $14 million and $5 million,
respectively. For the six months ended June 30, 1999 and 1998 capitalized
interest was $27 million and $9 million, respectively. Capitalized interest
is expected to decline significantly with the opening of Paris.
INCOME TAXES
The effective income tax rate for the three and six months ended June
30, 1999 was 43 percent and 45 percent, respectively. For the three and six
months ended June 30, 1998, the effective income tax rate was 45 percent and
46 percent, respectively. 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.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
As of June 30, 1999, the Company had cash and cash equivalents of $152
million. Cash provided by operating activities for the six months ended June
30, 1999 was $239 million. In addition, the Company had borrowings available
under its Senior Credit Facilities of $720 million at June 30, 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 Facilities.
INVESTING ACTIVITIES
For the six months ended June 30, 1999, net cash used in investing
activities was $403 million, primarily related to capital expenditures.
Capital expenditures for the six months ended June 30, 1999 were $385 million
and include normal maintenance capital expenditures as well as major
construction projects. Major construction projects primarily consist of Paris
(which began in April 1997), the Terrace Hotel at Grand Casino Tunica and the
Oasis Resort and Spa at Grand Casino Gulfport.
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In addition to an estimated $375 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.
FINANCING ACTIVITIES
In December 1998, the Company entered into senior credit facilities with
a syndicate of financial institutions. The senior credit facilities consist
of (i) a 364-day senior unsecured revolving credit facility of up to $650
million ("364-day Revolver"); and (ii) a five-year senior unsecured revolving
credit facility of up to $1.5 billion ("Five-year Revolver") (collectively
the "Senior Credit Facilities"). At June 30, 1999, $1.4 billion of the
aggregate commitment was outstanding, leaving approximately $720 million of
the Senior Credit Facilities available to the Company at such date.
In the first quarter of 1999, the Company borrowed approximately $600
million on its Senior Credit Facilities in order to settle the tender offer
for the 10.125% Grand First Mortgage Notes and to redeem the 9.0% Grand
Senior Unsecured Notes.
On April 27, 1999, the Company entered into a definitive agreement with
Starwood Hotels & Resorts Worldwide, Inc. and several of its subsidiaries to
acquire all of the outstanding stock of Caesars World, Inc. ("Caesars"), a
wholly owned subsidiary of Starwood, and all of their interests in several
other gaming entities for $3.0 billion in cash. The acquisition is subject to
regulatory approvals and expected to be completed in the fourth quarter of
1999.
In connection with the financing of the Caesars transaction, the Company
received commitments in July 1999 from a syndicate of financial institutions
to enter into a new $2.0 billion revolving credit facility which will replace
the existing $650 million 364-day Revolver. Borrowings under the proposed
$2.0 billion facility would be limited to $650 million until the closing of
the Caesars acquisition. The commitments are subject to the negotiation of
final documentation.
In addition to the proposed $2.0 billion 364-day facility, the Company
received commitments from a syndicate of financial institutions to enter into
a $1.0 billion 364-day facility which would only be drawn to provide funding
for the Caesars acquisition. The commitments are subject to the negotiation
of final documentation.
On August 2, 1999, the Company issued $300 million of Senior Notes due
2003 (the "Notes") in a private placement offering to institutional
investors. The Notes were issued with a coupon rate of 7.95%. The Notes are
unsecured and will rank senior to the Company's subordinated indebtedness and
equally with the Company's other senior indebtedness. Proceeds from this
offering were used to reduce the Company's borrowings under the existing
Senior Credit Facilities.
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 six months ended June 30, 1999, the Company repurchased
approximately 1.7 million shares of its common stock.
15
The Company has established a $1 billion commercial paper program as of
December 31, 1998. To the extent that the Company incurs debt under this
program, it must maintain an equivalent amount of credit available under its
Senior Credit Facilities. The Company has borrowed under the program for
varying periods during 1999. At June 30, 1999, the Company had outstanding
borrowings of $24 million under the commercial paper program at an average
interest rate of 5.5 percent.
STRATEGY
As exemplified by the acquisition of Bally Entertainment Corporation in
1996, Grand Casinos, Inc. in 1998, the expected opening of Paris on September
1, 1999, and the expected purchase of Caesars World, Inc. 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, dispositions 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. Significant efforts have already been
undertaken and have resulted in near completion of systems testing, as well
as substantial completion of remedial work.
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, testing is
substantially completed and changes are being implemented as required. No
significant remediation has been identified. 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.
NON-IT SYSTEMS. An inventory of all property level non-IT systems (including
elevators, electronic door locks, gaming devices, etc.) has been completed.
The majority of these non-IT systems have been assessed, testing is
substantially completed and changes are being implemented as 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.
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SUPPLIERS. The Company has communicated 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 last two quarters of 1999, the Company will continually
review its progress against its Year 2000 plans and determine whether any
additional contingency plans are necessary to reduce its exposure to Year
2000 related issues. Based on the Company's current assessment, the cost of
addressing potential problems is expected to be less than $4 million.
However, if the Company is unable to resolve a Year 2000 issue, 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 has been
devoting the necessary resources to resolve all significant Year 2000 issues
in a timely manner and will continue to do so.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this report, including without limitation,
those set forth under the captions "Results of Operations," "Liquidity and
Capital Resources," "Strategy" 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," "intends," "interested in," "plans," "continues,"
"projects" 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 any of its
expectations will be attained in light of these risks and uncertainties.
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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, and the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999.
BELLE OF ORLEANS
The Company's wholly owned subsidiary, Bally's Louisiana, Inc., owns
49.9% of the Belle of Orleans, LLC ("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 and proceedings regarding their rights and obligations
under those agreements, which lawsuits and proceedings have been described in
greater detail in previous Company filings.
On March 16, 1999, the Louisiana Gaming Control Board ordered that the
gross gaming revenues of the Belle be placed into escrow, subject to
disbursement upon approvals by the Louisiana Gaming Control Board or the
Louisiana State Police. Upon reconsideration, at its meeting of June 15,
1999, the Board revised its order to require that only the net profits and
the 12.25% management fee paid to Bally's Louisiana, and not the gross
revenues, be placed into escrow. Bally's Louisiana has challenged in court
that order of the Louisiana Gaming Control Board and a temporary restraining
order has been issued by the Nineteenth Judicial District Court for the
Parish of East Baton Rouge, State of Louisiana, staying enforcement of the
Board's escrow order. A hearing on a preliminary injunction is pending.
On June 14, 1999 the Louisiana Gaming Control Board issued a Notice of
Violation and has set for hearing the issue of whether the assignments from
Bally's entities, which ultimately resulted in Bally's Louisiana obtaining
the management agreement for the casino, were accomplished in violation of
gaming statutes or regulations. Management of the Company does not believe
that any violation occurred and that if any is ultimately found to have
occurred, it is technical in nature and will not result in material adverse
impact to Bally's Louisiana, Inc., to the Belle, or to 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 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 petitioned for
appellate consideration. On May 18, 1999 the Minnesota Supreme Court denied
Plaintiffs' petition for appellate consideration, effectively upholding the
summary judgment in Grand's favor.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
On May 10, 1999, the Company filed a Form 8-K dated April 27, 1999. The
Company reported under "Item 5" that it had entered into an agreement to
acquire Caesars World, Inc. and other gaming assets from Starwood Hotels and
Resorts Worldwide, 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: August 12, 1999
/s/ SCOTT A. LAPORTA
Scott A. LaPorta
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
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