<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
-----------
PARK PLACE ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in charter)
DELAWARE 88-0400631
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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)
-----------------------
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
COMMON STOCK, PAR VALUE $0.01 PER SHARE NEW YORK STOCK EXCHANGE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PARK PLACE ENTERTAINMENT CORPORATION
CROSS REFERENCE SHEET BETWEEN
JOINT PROXY STATEMENT/PROSPECTUS AND ITEMS OF FORM 10
ITEM 1. BUSINESS.
The information required by this item is contained in the sections
"Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Park Place," and "Business and Properties of Park
Place" of the Joint Proxy Statement/Prospectus (the "Prospectus") dated
October 23, 1998 of Hilton Hotels Corporation, Grand Casinos, Inc. and Park
Place Entertainment Corporation (formerly known as Gaming Co., Inc.) (the
"Registrant") attached hereto as Exhibit 99.1 and such sections are
incorporated herein by reference.
ITEM 2. FINANCIAL INFORMATION.
The information required by this item is contained in the sections
"Summary -- Summary Historical and Pro Forma Financial Data," "Recent
Developments," "Unaudited Pro Forma Condensed Financial Statements -- New
Park Place Unaudited Pro Forma Financial Statements," and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Park Place" of the Prospectus and such sections are incorporated
herein by reference.
ITEM 3. PROPERTIES.
The information required by this item is contained in the section
"Business and Properties of Park Place" of the Prospectus and such
section is incorporated herein by reference.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item is contained in the sections
"Summary" and "Security Ownership of Park Place" of the Prospectus and such
sections are incorporated herein by reference.
ITEM 5. DIRECTORS AND OFFICERS.
The information required by this item is contained in the section
"Management of Park Place" of the Prospectus and such section is incorporated
herein by reference.
ITEM 6. EXECUTIVE COMPENSATION.
The information required by this item is contained in the section
"Management of Park Place" of the Prospectus and such section is incorporated
herein by reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is contained in the sections
"Summary," "The Transactions -- Interests of Certain Persons in the
Transactions," "Management of Park Place -- Park Place CEO and Chairman
Employment Agreements," "Certain Relationships and Related Transactions--
<PAGE>
Park Place" and "--Interests of Certain Persons in the Transactions" of the
Prospectus and such sections are incorporated herein by reference.
ITEM 8. LEGAL PROCEEDINGS.
The information required by this item is contained in the section
"Business and Properties of Park Place -- Litigation" of the Prospectus and
such section is incorporated herein by reference.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The information required by this item is contained in the sections
"Questions and Answers About The Transactions," "Summary," "Risk Factors--
Risks Relating to the Transactions -- No Current Market for Common Stock,"
"Markets and Market Prices" and "Description of Park Place Capital Stock" of
the Prospectus and such sections are incorporated herein by reference.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
On June 12, 1998, the Registrant sold 100 shares of its common stock,
par value $.01 per share, to Hilton Hotels U.S.A., Inc., a wholly owned
subsidiary of Hilton Hotels Corporation, for $1,000 in cash in connection
with the initial capitalization of the Registrant. The sale of such stock
was exempt from registration under Section 4(2) of the Securities Act of
1933, as amended.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The information required by this item is contained in the sections
"Questions and Answers About The Transactions," "Summary," "Risk Factors --
Risks Relating to the Transactions -- No Current Market for Common Stock,"
"Markets and Market Prices," "Description of Park Place Capital Stock,"
"Certain Antitakeover Provisions Applicable to Park Place" and "Liability and
Indemnification of Directors and Officers of Park Place" of the Prospectus
and such sections are incorporated herein by reference.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The information required by this item is contained in the section
"Liability and Indemnification of Directors and Officers of Park Place" of
the Prospectus and such section is incorporated herein by reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is contained in the sections
"Summary -- Summary Historical and Pro Forma Financial Data," "Recent
Developments," "Unaudited Pro Forma Condensed Financial Statements -- New
Park Place Unaudited Pro Forma Financial Statements," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Park Place" and in the Financial Statements of Park Place Entertainment
Corporation in the Prospectus and such sections are incorporated
herein by reference.
<PAGE>
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL MATTERS.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) (i) The following Consolidated Financial Statements of Park Place
Entertainment Corporation (attached as pages F-2 through F-17 of the
Prospectus) are incorporated herein by reference:
Report of Independent Public Accountants;
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995;
Consolidated Statements of Income for the Six Months Ended June 30,
1998 and 1997 (unaudited);
Consoidated Balance Sheets as of June 30, 1998 (unaudited),
December 31, 1997 and 1996;
Consolidated Statements of Cash Flow for the Years Ended December 31,
1997, 1996 and 1995;
Consolidated Statements of Cash Flow for the Six Months Ended June 30,
1998 and 1997 (unaudited); and
Notes to Consolidated Financial Statements
(ii) Schedules.
None.
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of June 30, 1998, by and
among Hilton Hotels Corporation, the Registrant, Gaming
Acquisition Corporation, GCI Lakes, Inc. and Grand Casinos,
Inc. (incorporated by reference to Exhibit 2.1 to the Form 10-Q
for the quarter ended June 30, 1998 of Hilton Hotels
Corporation)
3.1 Form of Amended and Restated Certificate of Incorporation of
the Registrant (attached as Annex I to the Prospectus and
incorporated herein by reference)
3.2 Form of Amended and Restated Bylaws of the Registrant (attached
as Annex J to the Prospectus and incorporated herein by reference)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
4.1 Form of First Supplemental Indenture by and among Hilton Hotels
Corporation, BNY Western Trust Company, as Trustee, and the
Registrant, to the Indenture dated as of April 15, 1997 between
Hilton Hotels Corporation and BNY Western Trust Company, as
Trustee (incorporated by reference from Exhibit 4.1 to the
Registrant's Form S-4 Registration Statement filed with the
Commission on October 14, 1998)
4.2 Form of Rights Agreement of the Registrant (incorporated by
reference from Exhibit 4.2 to the Registrant's Form S-4
Registration Statement filed with the Commission on October 14,
1998)
10.1 Form of 1998 Stock Incentive Plan of Registrant (attached as
Annex D to the Prospectus and incorporated herein by reference)
10.2 Form of 1998 Independent Director Stock Option Plan of
Registrant (attached as Annex E to the Prospectus and
incorporated herein by reference)
10.3 Form of Distribution Agreement between Hilton Hotels
Corporation and the Registrant (incorporated by reference from
Exhibit 10.3 to the Registrant's Form S-4 Registration Statement
filed with the Commission on October 14, 1998)
10.4 Form of Debt Assumption Agreement between Hilton Hotels
Corporation and the Registrant (incorporated by reference from
Exhibit 10.4 to the Registrant's Form S-4 Registration Statement
filed with the Commission on October 14, 1998)
10.5 Form of Employment Agreement between the Registrant and Arthur M.
Goldberg (incorporated by reference from Exhibit 10.5 to the
Registrant's Form S-4 Registration Statement filed with the
Commission on October 14, 1998)
10.6 Form of Employment Agreement between the Registrant and Stephen F.
Bollenbach (incorporated by reference from Exhibit 10.6 to the
Registrant's Form S-4 Registration Statement filed with the
Commission on October 14, 1998)
10.7 Form of Assignment and License Agreement by and between Hilton
Hotels Corporation, Conrad International Royalty Corporation
and the Registrant (incorporated by reference from Exhibit 10.7
to the Registrant's Form S-4 Registration Statement filed with
the Commission on October 14, 1998)
10.8 Form of Hilton Hotels Corporation Corporate Services Agreement by
and between Hilton Hotels Corporation and the Registrant
(incorporated by reference from Exhibit 10.8 to the Registrant's
Form S-4 Registration Statement filed with the Commission on
October 14, 1998)
10.9 Form of Gaming Co., Inc. Corporate Services Agreement by and
between Hilton Hotels Corporation and the Registrant
(incorporated by reference to Exhibit 10.9 to the Registrant's
Form S-4 Registration Statement filed with the Commission on
October 14, 1998)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
10.10 Form of Employee Benefits and Other Employment Matters
Allocation Agreement by and between Hilton Hotels Corporation
and the Registrant (incorporated by reference from Exhibit 10.10
to the Registrant's Form S-4 Registration Statement filed with
the Commission on October 14, 1998)
10.11 Form of Tax Allocation and Indemnity Agreement by and between
Hilton Hotels Corporation and the Registrant (incorporated by
reference from Exhibit 10.11 to the Registrant's Form S-4
Registration Statement filed with the Commission on October 14,
1998)
10.12 Form of Non-Competition Agreement by and between Lyle Berman,
Thomas J. Brosig, Stanley M. Taube and Registrant (incorporated
by reference from Exhibit 10.12 to the Registrant's Form S-4
Registration Statement filed with the Commission on October 14,
1998)
11 Statement re Computation of Per Share Earnings (incorporated by
reference to Exhibit 11 to the Registrant's Form S-4 Registration
Statement filed with the Commission on October 14, 1998)
21 Subsidiaries of the Registrant (incorporated by reference from
Exhibit 21 to the Registrant's Form S-4 Registration Statement
filed with the Commission October 14, 1998).
27 Financial Data Schedule
99.1 Joint Proxy Statement/Prospectus dated October 23, 1998 of Hilton
Hotels Corporation, Grand Casinos, Inc. and Park Place
Entertainment Corporation
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
PARK PLACE ENTERTAINMENT CORPORATION
By: /s/ Scott A. LaPorta
-----------------------------------
Name: Scott A. LaPorta
Title: Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
Dated: October 23, 1998
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of June 30, 1998, by and
among Hilton Hotels Corporation, the Registrant, Gaming
Acquisition Corporation, GCI Lakes, Inc. and Grand Casinos,
Inc. (incorporated by reference to Exhibit 2.1 to the Form 10-Q
for the quarter ended June 30, 1998 of Hilton Hotels
Corporation)
3.1 Form of Amended and Restated Certificate of Incorporation of
the Registrant (attached as Annex I to the Prospectus and
incorporated herein by reference)
3.2 Form of Amended and Restated Bylaws of the Registrant (attached
as Annex J to the Prospectus and incorporated herein
by reference)
4.1 Form of First Supplemental Indenture by and among Hilton Hotels
Corporation, BNY Western Trust Company, as Trustee, and the
Registrant, to the Indenture dated as of April 15, 1997 between
Hilton Hotels Corporation and BNY Western Trust Company, as
Trustee (incorporated by reference from Exhibit 4.1 to the
Registrant's Form S-4 Registration Statement filed with the
Commission on October 14, 1998)
4.2 Form of Rights Agreement of the Registrant (incorporated by
reference from Exhibit 4.2 to the Registrant's Form S-4
Registration Statement filed with the Commission on October 14,
1998)
10.1 Form of 1998 Stock Incentive Plan of Registrant (attached as
Annex D to the Prospectus and incorporated herein by reference)
10.2 Form of 1998 Independent Director Stock Option Plan of
Registrant (attached as Annex E to the Prospectus and
incorporated herein by reference)
10.3 Form of Distribution Agreement between Hilton Hotels
Corporation and the Registrant (incorporated by reference from
Exhibit 4.3 to the Registrant's Form S-4 Registration Statement
filed with the Commission on October 14, 1998)
10.4 Form of Debt Assumption Agreement between Hilton Hotels
Corporation and the Registrant (incorporated by reference from
Exhibit 10.4 to the Registrant's Form S-4 Registration Statement
filed with the Commission on October 14, 1998)
10.5 Form of Employment Agreement between the Registrant and Arthur M.
Goldberg (incorporated by reference from Exhibit 10.5 to the
Registrant's Form S-4 Registration Statement filed with the
Commission on October 14, 1998)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
10.6 Form of Employment Agreement between the Registrant and Stephen F.
Bollenbach (incorporated by reference from Exhibit 10.6 to the
Registrant's Form S-4 Registration Statement filed with the
Commission on October 14, 1998)
10.7 Form of Assignment and License Agreement by and between Hilton
Hotels Corporation, Conrad International Royalty Corporation
and the Registrant (incorporated by reference from Exhibit 10.7
to the Registrant's Form S-4 Registration Statement filed with
the Commission on October 14, 1998)
10.8 Form of Corporate Services Agreement by and between Hilton
Hotels Corporation and the Registrant (incorporated by
reference from Exhibit 10.8 to the Registrant's Form S-4
Registration Statement filed with the Commission on October 14,
1998)
10.9 Form of Gaming Co., Inc. Corporate Services Agreement by and
between Hilton Hotels Corporation and the Registrant
(incorporated by reference to Exhibit 10.9 to the Registrant's
Form S-4 Registration Statement filed with the Commission on
October 14, 1998)
10.10 Form of Employee Benefits and Other Employment Matters
Allocation Agreement by and between Hilton Hotels Corporation
and the Registrant (incorporated by reference from Exhibit 10.10
to the Registrant's Form S-4 Registration Statement filed with
the Commission on October 14, 1998)
10.11 Form of Tax Allocation and Indemnity Agreement by and between
Hilton Hotels Corporation and the Registrant (incorporated by
reference from Exhibit 10.11 to the Registrant's Form S-4
Registration Statement filed with the Commission on October 14,
1998)
10.12 Form of Non-Competition Agreement by and between Lyle Berman,
Thomas J. Brosig, Stanley M. Taube and Registrant (incorporated
by reference from Exhibit 10.12 to the Registrant's Form S-4
Registration Statement filed with the Commission on October 14,
1998)
11 Statement re Computation of Per Share Earnings (incorporated by
reference from Exhibit 11 to the Registrant's Form S-4
Registration Statement filed with the Commission on October 14,
1998).
21 Subsidiaries of the Registrant (incorporated by reference from
Exhibit 21 to the Registrant's Form S-4 Registration Statement
filed with the Commission October 14, 1998).
27 Financial Data Schedule
99.1 Joint Proxy Statement/Prospectus dated October 21, 1998 of Hilton
Hotels Corporation and Grand Casinos, Inc.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 DEC-31-1997
<CASH> 148 224
<SECURITIES> 2 40
<RECEIVABLES> 178 183
<ALLOWANCES> 45 24
<INVENTORY> 19 21
<CURRENT-ASSETS> 394 509
<PP&E> 4,335 4,002
<DEPRECIATION> 460 381
<TOTAL-ASSETS> 5,834 5,689
<CURRENT-LIABILITIES> 366 393
<BONDS> 1,557 1,272
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 3,293 3,381
<TOTAL-LIABILITY-AND-EQUITY> 5,834 5,689
<SALES> 1,355 2,572
<TOTAL-REVENUES> 1,355 2,572
<CGS> 0 0
<TOTAL-COSTS> 1,148 2,327
<OTHER-EXPENSES> 4 15
<LOSS-PROVISION> 16 29
<INTEREST-EXPENSE> 35 67
<INCOME-PRETAX> 152 134
<INCOME-TAX> 70 63
<INCOME-CONTINUING> 80 67
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 80 67
<EPS-PRIMARY> .31 .25
<EPS-DILUTED> .30 .25
</TABLE>
<PAGE>
[LOGO]
HILTON HOTELS CORPORATION
October 23, 1998
To Our Stockholders:
You are cordially invited to attend a special meeting of stockholders of
Hilton Hotels Corporation ("Hilton") to be held at the Beverly Hilton, 9876
Wilshire Boulevard, Beverly Hills, California on November 24, 1998 at 2:00 p.m.,
local time, at which you will be asked to ratify a major transaction that will
separate Hilton's gaming and lodging operations, creating a new publicly held
gaming company.
At the special meeting, you will be asked to vote upon a group of related
proposals that provide for, among other things, the tax-free distribution to
holders of common stock of Hilton of all outstanding shares of Park Place
Entertainment Corporation ("Park Place"), an indirect, wholly owned subsidiary
of Hilton which will be a new publicly held corporation that will own and
operate Hilton's gaming business. Following the distribution, Park Place will
acquire, by means of a merger, Grand Casinos, Inc. ("Grand"), which, at the time
of the merger, will consist solely of Grand's Mississippi gaming operations, in
exchange for the issuance of Park Place common stock to the shareholders of
Grand.
The Hilton Board of Directors believes that the distribution is in the best
interests of its stockholders and recommends that stockholders vote FOR the
proposals to be considered at the special meeting.
The enclosed notice and Joint Proxy Statement/Prospectus contain details
concerning the distribution and the other matters to come before the special
meeting. We urge you to read and consider these documents carefully. Whether or
not you plan to be at the special meeting, please be sure to sign, date and
return the enclosed proxy card in the enclosed envelope as promptly as possible
so that your shares may be represented at the special meeting and voted in
accordance with your wishes. Your vote is important regardless of the number of
shares you own.
Sincerely,
/s/ BARRON HILTON
Barron Hilton
CHAIRMAN OF THE BOARD OF DIRECTORS
<PAGE>
[LOGO]
GRAND CASINOS, INC.
October 23, 1998
To Our Shareholders:
You are cordially invited to attend a special meeting of shareholders of
Grand Casinos, Inc. ("Grand") to be held at the Radisson Hotel & Conference
Center, 3131 Campus Drive, Plymouth, Minnesota on November 24, 1998 at 2:00 p.m.
local time at which you will be asked to consider and vote upon a group of
related proposals that provide for, among other things, the tax-free
distribution to holders of common stock of Grand of all outstanding shares of
Lakes Gaming, Inc. ("Lakes"), a wholly owned subsidiary of Grand, which will
consist of Grand's non-Mississippi gaming operations and certain other assets.
At the special meeting you will also be asked to consider and vote upon the
merger of Grand with a wholly owned subsidiary of Park Place Entertainment
Corporation ("Park Place"), a new publicly held company consisting of the gaming
operations of Hilton Hotels Corporation ("Hilton"), which is being separately
spun off to Hilton stockholders.
The Grand Board of Directors believes that the proposed distribution and
merger are in the best interests of its shareholders and recommends that
shareholders vote FOR the proposals to be considered at the special meeting.
The enclosed notice and Joint Proxy Statement/Prospectus contain details
concerning the distribution and the merger and the other matters to come before
the special meeting. We urge you to read and consider these documents carefully.
Whether or not you plan to be at the special meeting, please be sure to sign,
date and return the enclosed proxy card in the enclosed envelope as promptly as
possible so that your shares may be represented at the special meeting and voted
in accordance with your wishes. Your vote is important regardless of the number
of shares you own.
Very truly yours,
/s/ Lyle Berman
Lyle Berman
CHAIRMAN OF THE BOARD OF DIRECTORS
<PAGE>
HILTON HOTELS CORPORATION
9336 CIVIC CENTER DRIVE
BEVERLY HILLS, CALIFORNIA 90210
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 24, 1998
------------------------
To the Stockholders of Hilton Hotels Corporation:
A special meeting of stockholders (the "Hilton Special Meeting") of Hilton
Hotels Corporation, a Delaware corporation ("Hilton"), will be held on November
24, 1998, at 2:00 p.m. at The Beverly Hilton, 9876 Wilshire Boulevard, Beverly
Hills, California for the following purposes:
1. To consider and to vote upon the following proposals (collectively, the
"Hilton Proposals") described in the accompanying Joint Proxy
Statement/Prospectus, which provide for:
(i) PROPOSAL ONE: Ratification of a special dividend, consisting of the
distribution (the "Hilton Distribution") to the holders of Hilton's
outstanding shares of common stock, par value $2.50 per share, on a
one-for-one basis, of all the outstanding shares of common stock,
par value $.01 per share, and the associated stockholders' rights,
of Park Place Entertainment Corporation (formerly known as Gaming
Co., Inc.), an indirect, wholly owned subsidiary of Hilton ("Park
Place"), to be effected in accordance with the terms of a
distribution agreement to be entered into between Hilton and Park
Place (the "Hilton Distribution Proposal");
(ii) PROPOSAL TWO: Approval of the Park Place Entertainment Corporation
1998 Stock Incentive Plan, including the grant of options
thereunder, as described herein;
(iii) PROPOSAL THREE: Approval of the Park Place Entertainment
Corporation 1998 Independent Director Stock Option Plan;
(iv) PROPOSAL FOUR: Approval of an amendment and restatement of the
Hilton Hotels Corporation 1996 Stock Incentive Plan, including the
grant of options thereunder, as described herein; and
(v) PROPOSAL FIVE: Ratification of the election of ten directors of Park
Place specified in the accompanying Joint Proxy
Statement/Prospectus, who will be divided into three classes, the
initial terms of which will expire in 2000, 2001 and 2002.
2. To transact such other business as may properly come before the Hilton
Special Meeting or any adjournment thereof.
THE EFFECTIVENESS OF EACH OF THE HILTON PROPOSALS IS CONDITIONED UPON, AMONG
OTHER THINGS, THE APPROVAL OF ALL OF THE HILTON PROPOSALS. ACCORDINGLY, FAILURE
OF THE STOCKHOLDERS TO APPROVE ANY ONE OR MORE OF THE HILTON PROPOSALS WILL
RESULT IN THE INEFFECTIVENESS OF ALL OF THE HILTON PROPOSALS.
Following the Hilton Distribution, Park Place will acquire, by means of a
merger, Grand Casinos, Inc. ("Grand") which, at the time of the merger, will
consist solely of Grand's Mississippi gaming operations.
Stockholders of record at the close of business on October 20, 1998 are
entitled to notice of, and to vote at, the Hilton Special Meeting and at any and
all adjournments or postponements thereof. A complete list of such stockholders
will be available for examination at the offices of Hilton in Beverly Hills,
California, during normal business hours by any Hilton stockholder, for any
purpose germane to the Hilton Special Meeting, for a period of ten days prior to
the Hilton Special Meeting.
<PAGE>
THE HILTON BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR EACH OF THE HILTON
PROPOSALS.
By Order of the Board of Directors
/s/ Thomas E. Gallagher
Thomas E. Gallagher
EXECUTIVE VICE PRESIDENT, GENERAL
COUNSEL AND SECRETARY
October 23, 1998
Beverly Hills, California
Stockholders are urged, whether or not they plan to attend the Hilton
Special Meeting, to sign, date and mail the enclosed proxy card in the
postage-paid envelope provided. If a stockholder who has returned a proxy
attends the Hilton Special Meeting in person, such stockholder may revoke the
proxy and vote in person on all matters submitted at the Hilton Special Meeting.
<PAGE>
GRAND CASINOS, INC.
130 CHESHIRE LANE
MINNETONKA, MN 55305
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 24, 1998
------------------------
To the Shareholders of Grand Casinos, Inc.:
Notice is Hereby Given that a Special Meeting of Shareholders (the "Grand
Special Meeting") of Grand Casinos, Inc. ("Grand") will be held on November 24,
1998 at 2:00 p.m. local time at the Radisson Hotel & Conference Center, 3131
Campus Drive, Plymouth, Minnesota for the following purposes:
1. To consider and vote upon the following proposals (collectively, the
"Grand Proposals") described in the accompanying Joint Proxy
Statement/Prospectus which provide for:
(i) PROPOSAL ONE: Ratification of a special dividend, consisting of the
distribution (the "Grand Distribution") to the holders of Grand's
outstanding shares of common stock, $.01 par value per share (the
"Grand Common Stock"), on a one-for-four basis, of all the
outstanding shares of capital stock of Lakes Gaming, Inc., a wholly
owned subsidiary of Grand, formerly known as GCI Lakes, Inc.
("Lakes") to be effected in accordance with the terms of a
distribution agreement to be entered into between Grand and Lakes
(the "Grand Distribution Proposal");
(ii) PROPOSAL TWO: To consider and vote upon the approval and adoption
of the Agreement and Plan of Merger, dated as of June 30, 1998 (the
"Merger Agreement"), by and among Hilton Hotels Corporation, Park
Place Entertainment Corporation, formerly known as Gaming Co., Inc.
("Park Place"), Gaming Acquisition Corporation, Lakes and Grand
pursuant to which, after consummation of the Grand Distribution,
Gaming Acquisition Corporation will merge with and into Grand (the
"Merger"), and each share of Grand Common Stock outstanding
immediately prior to the effective time of the Merger (other than
shares of Grand Common Stock as to which appraisal rights have been
properly perfected) will be converted into Park Place common stock
pursuant to a formula described in the Merger Agreement (the "Grand
Merger Proposal");
(iii) PROPOSAL THREE: Approval of the Lakes Gaming, Inc. 1998 Stock
Option and Compensation Plan;
(iv) PROPOSAL FOUR: Approval of the Lakes Gaming, Inc. 1998 Director
Stock Option Plan; and
(v) PROPOSAL FIVE: Ratification of the election by Grand, as sole
shareholder of Lakes, of eight directors of Lakes specified in the
accompanying Joint Proxy Statement/Prospectus.
2. To transact such other business as may properly come before the Grand
Special Meeting or any adjournment thereof.
THE EFFECTIVENESS OF THE GRAND DISTRIBUTION PROPOSAL IS CONDITIONED UPON THE
APPROVAL OF THE GRAND MERGER PROPOSAL AND THE EFFECTIVENESS OF THE GRAND MERGER
PROPOSAL IS CONDITIONED UPON THE RATIFICATION OF THE GRAND DISTRIBUTION
PROPOSAL. ACCORDINGLY, FAILURE OF THE SHAREHOLDERS TO VOTE IN FAVOR OF EITHER OF
THESE PROPOSALS WILL RESULT IN THE INEFFECTIVENESS OF BOTH PROPOSALS.
Under Minnesota law, shareholders of Grand are eligible to exercise
dissenters' rights in connection with the proposed Merger, as described in
greater detail in the accompanying Joint Proxy Statement/ Prospectus.
<PAGE>
Shareholders of record at the close of business on October 20, 1998 are
entitled to notice of, and to vote at, the Grand Special Meeting and at any and
all adjournments or postponements thereof.
THE GRAND BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR EACH OF THE GRAND
PROPOSALS.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Timothy J. Cope
Timothy J. Cope
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND SECRETARY
October 23, 1998
Minneapolis, Minnesota
Shareholders are urged, whether or not they plan to attend the Grand Special
Meeting, to sign, date and mail the enclosed proxy card in the postage-paid
envelope provided. If a shareholder who has returned a proxy attends the Grand
Special Meeting in person, such shareholder may revoke the proxy and vote in
person on all matters submitted at the Grand Special Meeting.
<PAGE>
SPECIAL MEETINGS OF STOCKHOLDERS--YOUR VOTE IS VERY IMPORTANT
The Board of Directors of Hilton Hotels Corporation has approved a
transaction that will separate Hilton's gaming and lodging operations, creating
a new publicly held gaming company. The separation will be accomplished through
the distribution to Hilton stockholders of all the outstanding shares of common
stock of Park Place Entertainment Corporation (formerly known as Gaming Co.,
Inc.), an indirect, wholly owned subsidiary of Hilton.
The Board of Directors of Grand Casinos, Inc. has approved a transaction
that will separate Grand's Mississippi gaming operations from its
non-Mississippi gaming operations. The separation will be accomplished through a
distribution to Grand shareholders of all the outstanding shares of common stock
of Lakes Gaming, Inc., a wholly owned subsidiary of Grand.
Following the distributions, Park Place will acquire Grand, by means of a
merger, which at the time of the merger will consist solely of Grand's
Mississippi gaming operations, in exchange for the issuance of Park Place common
stock to the shareholders of Grand. Upon completion of the merger, Park Place
will conduct, directly and indirectly through its subsidiaries, the historical
gaming operations of Hilton and the Mississippi gaming operations of Grand.
The Hilton Board of Directors has scheduled a special meeting for Hilton
stockholders to vote to ratify the distribution of Park Place common stock and
approve related proposals, and the Grand Casinos Board of Directors has
scheduled a special meeting for Grand Casinos shareholders to vote to ratify the
distribution of Lakes common stock and approve the merger and related proposals.
The dates, times and places of the special meetings are as follows:
For HILTON stockholders:
TUESDAY, NOVEMBER 24, 1998
2:00 P.M., LOCAL TIME
THE BEVERLY HILTON
9876 WILSHIRE BOULEVARD
BEVERLY HILLS, CALIFORNIA 90210
For GRAND shareholders:
TUESDAY, NOVEMBER 24, 1998
2:00 P.M., LOCAL TIME
THE RADISSON HOTEL & CONFERENCE CENTER
3131 CAMPUS DRIVE
PLYMOUTH, MINNESOTA 55441
SHAREHOLDERS ARE URGED TO CONSIDER THOSE MATTERS SET FORTH IN "RISK FACTORS"
BEGINNING ON PAGE 27 OF THIS JOINT PROXY STATEMENT/PROSPECTUS. NONE OF THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION, THE NEVADA GAMING
COMMISSION, THE NEVADA STATE GAMING CONTROL BOARD, THE MISSISSIPPI GAMING
COMMISSION, THE NEW JERSEY CASINO CONTROL COMMISSION, THE LOUISIANA GAMING
CONTROL BOARD, THE MISSOURI GAMING COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Joint Proxy Statement/Prospectus provides you with detailed information
about the proposed transactions. In addition, you may obtain information about
our companies from documents that we have filed with the Securities and Exchange
Commission. We encourage you to read this entire document carefully.
JOINT PROXY STATEMENT/PROSPECTUS DATED OCTOBER 23, 1998 AND
FIRST MAILED TO STOCKHOLDERS ON OCTOBER 26, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS... 1
EXAMPLES OF WHAT GRAND SHAREHOLDERS COULD
RECEIVE IN THE MERGER........................ 5
SUMMARY........................................ 7
The Companies................................ 7
Reasons for the Transactions................. 7
The Special Meetings......................... 8
Recommendations to Stockholders.............. 8
Votes Required............................... 8
The Transactions............................. 9
Risk Factors................................. 15
Forward-Looking Statements May Prove
Inaccurate................................. 16
Structure of the Transactions................ 17
Summary Historical and Pro Forma Financial
Data....................................... 18
RISK FACTORS................................... 27
Risks Relating to the Transactions........... 27
Certain Financial and Operating
Conditions............................... 27
No Current Market for Common Stock......... 27
Structure of the Transactions;
Indemnification Obligations.............. 28
Lakes Funding Obligation................... 28
Statewide Gaming Referenda................. 28
Use of Trademarks.......................... 29
Ongoing Relationships...................... 29
Certain Antitakeover Features.............. 30
Certain Tax Considerations to Hilton,
Hilton Stockholders, and Grand
Shareholders Relating to the Hilton
Distribution and the Grand
Distribution............................. 30
Certain Tax Considerations to Grand and
Park Place Relating to the Grand
Distribution............................. 32
Certain Tax Considerations Relating to the
Merger................................... 32
Highly Regulated Industry.................. 33
Asian Economic Crisis...................... 33
Risks Relating to the Business of Lakes...... 33
Stratosphere Corporation; Pending
Litigation............................... 33
<CAPTION>
PAGE
---------
<S> <C>
Operating Covenants; Dividend
Restrictions............................. 34
Future Capital Needs; Uncertainty of
Additional Funding....................... 34
Competition................................ 34
Management Contracts of Limited Duration... 35
Management Contracts Subject to
Governmental Modification................ 36
Limited Recourse Against Tribal Assets..... 36
Dependence on Key Personnel................ 36
Limited Base of Operations................. 36
RECENT DEVELOPMENTS............................ 37
Third Quarter Earnings....................... 37
Possible Stock Repurchases by Hilton......... 38
Effects of Hurricane Georges on Grand's
Mississippi Casinos........................ 38
Chapter 11 Reorganization of Stratosphere
Corporation Becomes Effective.............. 38
THE SPECIAL MEETINGS........................... 39
The Hilton Special Meeting................... 39
The Grand Special Meeting.................... 42
BACKGROUND AND REASONS......................... 45
Background of the Transactions............... 45
Reasons for the Recommendation of the Hilton
Board...................................... 47
Reasons for the Recommendation of the Grand
Board...................................... 49
Opinion of Financial Advisor to Hilton....... 52
Opinion of Financial Advisor to Grand........ 58
THE TRANSACTIONS............................... 66
Overview..................................... 66
The Merger Agreement......................... 68
Arrangements Between Hilton and Park Place... 79
Arrangements Between Grand and Lakes......... 86
Arrangements Relating to the Merger
Agreement.................................. 93
Interests of Certain Persons in the
Transactions............................... 94
Indemnification Obligations.................. 97
Accounting Treatment......................... 99
Appraisal Rights............................. 99
Cautionary Statements Concerning
Forward-Looking Statements................. 101
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
UNAUDITED PRO FORMA CONDENSED FINANCIAL
STATEMENTS................................... 103
Hilton Hotels Corporation Unaudited Pro Forma
Financial Statements....................... 103
New Park Place Unaudited Pro Forma Financial
Statements................................. 111
Grand Casinos, Inc. Unaudited Pro Forma
Financial Statements....................... 118
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--PARK PLACE....................... 126
Strategy..................................... 126
Financial Condition.......................... 126
Results of Operations........................ 127
Year 2000.................................... 132
Recent Accounting Pronouncements............. 133
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--LAKES............................ 134
Overview..................................... 134
Results of Operations........................ 134
Capital Resources, Capital Spending, and
Liquidity.................................. 136
Year 2000.................................... 137
Accounting Pronouncements.................... 138
BUSINESS AND PROPERTIES OF PARK PLACE.......... 139
General...................................... 139
Properties................................... 139
Nevada Casinos............................... 141
New Jersey Casinos........................... 142
Mississippi Casinos.......................... 143
Missouri Casino.............................. 144
Louisiana Casino............................. 144
Other Domestic Assets........................ 145
International Casinos........................ 145
Expansion Program............................ 145
Employees.................................... 146
Competition.................................. 146
Statistical Data............................. 147
Litigation................................... 147
Environmental Matters........................ 147
Regulation and Licensing..................... 148
Headquarters................................. 162
MANAGEMENT OF PARK PLACE....................... 163
Park Place Board of Directors................ 163
<CAPTION>
PAGE
---------
<S> <C>
Committees of the Park Place Board........... 164
Compensation of Park Place Directors......... 165
Executive Officers of Park Place............. 165
Executive Officer Compensation............... 165
Compensation Committee Interlocks and Insider
Participation.............................. 166
Park Place CEO and Chairman Employment
Agreements................................. 166
SECURITY OWNERSHIP OF PARK PLACE............... 169
Section 16(a) Beneficial Ownership Reporting
Compliance................................. 170
BUSINESS AND PROPERTIES OF LAKES............... 171
General...................................... 171
Business Strategy............................ 171
Growth Strategy.............................. 171
Marketing.................................... 172
Managed Properties........................... 172
Funding Agreements........................... 174
Polo Plaza................................... 174
Employees.................................... 176
Regulation................................... 176
Leased Properties............................ 179
Competition.................................. 179
Legal Proceedings............................ 180
Headquarters................................. 185
MANAGEMENT OF LAKES............................ 186
Lakes Board of Directors..................... 186
Committees of the Lakes Board................ 187
Compensation of Lakes Directors.............. 187
Executive Officers of Lakes.................. 187
Executive Officer Compensation............... 188
Compensation Committee Interlocks and Insider
Participation.............................. 188
SECURITY OWNERSHIP OF LAKES.................... 189
Section 16(a) Beneficial Ownership Reporting
Compliance................................. 190
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................. 191
Park Place................................... 191
Lakes........................................ 191
Interests of Certain Persons in the
Transactions............................... 191
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE
TRANSACTIONS................................. 196
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consequences of the Hilton Distribution and
the Grand Distribution..................... 196
Consequences of the Merger................... 200
MARKETS AND MARKET PRICES...................... 202
DESCRIPTION OF PARK PLACE CAPITAL STOCK........ 203
General...................................... 203
Common Stock................................. 203
Preferred Stock.............................. 204
Rights Agreement and Preferred Share Purchase
Rights..................................... 204
Certain Effects of Preferred Share Purchase
Rights..................................... 205
DESCRIPTION OF LAKES CAPITAL STOCK............. 205
COMPARISON OF RIGHTS OF HOLDERS OF GRAND
CAPITAL STOCK AND PARK PLACE CAPITAL STOCK... 206
General...................................... 206
Authorized Capital Stock..................... 206
Amendment of Governing Instruments........... 206
Classified Board and Cumulative Voting....... 207
Removal of Directors and Vacancies........... 207
Limitation of Director Liability............. 208
Indemnification.............................. 208
Special Meetings of Stockholders............. 209
Actions by Stockholders Without a Meeting.... 210
Stockholder Nominations and Proposals........ 210
Mergers, Share Exchanges, Sales of Assets,
Business Combinations with Certain Persons
and Acquisitions of Shares................. 211
Anti-Greenmail Provisions.................... 213
Stockholder Rights Plan...................... 213
Dissenters' Rights of Appraisal.............. 213
Stockholder's Right to Examine Books and
Records.................................... 214
Payment of Dividends......................... 214
Dissolution.................................. 215
CERTAIN ANTITAKEOVER PROVISIONS APPLICABLE TO
PARK PLACE................................... 215
Park Place Certificate and Bylaws............ 215
Park Place Rights Agreement.................. 219
<CAPTION>
PAGE
---------
<S> <C>
Section 203 of the DGCL...................... 219
CERTAIN ANTITAKEOVER PROVISIONS APPLICABLE TO
LAKES........................................ 220
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS OF PARK PLACE....................... 221
Limitation of Liability for Directors........ 221
Indemnification of Directors and Officers.... 222
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS OF LAKES............................ 223
THE HILTON PROPOSALS........................... 224
Proposal One: Ratification of the Hilton
Distribution............................... 224
Proposal Two: Approval of the Park Place
Entertainment Corporation 1998 Stock
Incentive Plan............................. 224
Proposal Three: Approval of the Park Place
Entertainment Corporation 1998 Independent
Director Stock Option Plan................. 233
Proposal Four: Approval of an Amendment and
Restatement of the Hilton Hotels
Corporation 1996 Stock Incentive Plan...... 236
Proposal Five: Ratification of the Park Place
Board of Directors......................... 241
THE GRAND PROPOSALS............................ 242
Proposal One: Ratification of the Grand
Distribution............................... 242
Proposal Two: Approval of the Merger......... 242
Proposal Three: Approval of the Lakes Gaming,
Inc. 1998 Stock Option and Compensation
Plan....................................... 242
Proposal Four: Approval of the Lakes Gaming,
Inc. 1998 Director Stock Option Plan....... 247
Proposal Five: Ratification of the Lakes
Board of Directors......................... 249
SUBMISSION OF STOCKHOLDER PROPOSALS............ 250
LEGAL MATTERS.................................. 250
EXPERTS........................................ 250
OTHER MATTERS.................................. 250
WHERE YOU CAN FIND MORE INFORMATION............ 251
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE.................................... 251
INDEX TO FINANCIAL STATEMENTS.................. F-1
Park Place Entertainment Corporation......... F-2
Lakes Gaming, Inc............................ F-18
ANNEX A--AGREEMENT AND PLAN OF MERGER.......... A-1
ANNEX B--DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION FAIRNESS OPINION...... B-1
ANNEX C--LADENBURG THALMANN & CO. INC. FAIRNESS
OPINION...................................... C-1
ANNEX D--FORM OF PARK PLACE ENTERTAINMENT
CORPORATION 1998 STOCK INCENTIVE PLAN........ D-1
ANNEX E--FORM OF PARK PLACE ENTERTAINMENT
CORPORATION 1998 INDEPENDENT DIRECTOR STOCK
OPTION PLAN.................................. E-1
<CAPTION>
PAGE
---------
<S> <C>
ANNEX F--FORM OF HILTON HOTELS CORPORATION
AMENDED AND RESTATED 1996 STOCK INCENTIVE
PLAN......................................... F-1
ANNEX G--FORM OF LAKES GAMING, INC. 1998 STOCK
OPTION AND COMPENSATION PLAN................. G-1
ANNEX H--FORM OF LAKES GAMING, INC. 1998
DIRECTOR STOCK OPTION PLAN................... H-1
ANNEX I--FORM OF PARK PLACE ENTERTAINMENT
CORPORATION AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION............................. I-1
ANNEX J--FORM OF PARK PLACE ENTERTAINMENT
CORPORATION AMENDED AND RESTATED BYLAWS...... J-1
ANNEX K--SECTIONS 302A.471 AND 302A.473 OF THE
MINNESOTA BUSINESS CORPORATION ACT........... K-1
</TABLE>
iv
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS
Q: WHAT ARE THE TRANSACTIONS?
A: THE HILTON DISTRIBUTION.
The board of directors of Hilton proposes to spin off to the holders of its
common stock the shares of Park Place, which will be a new public company
that will own and operate, directly and indirectly through its subsidiaries,
the gaming businesses currently operated by Hilton. In this Joint Proxy
Statement/Prospectus we refer to those gaming businesses as the "Hilton
Gaming Business." Hilton will retain its lodging and timeshare and vacation
ownership businesses, its strategic alliance with Ladbroke Group PLC and its
affiliates, as well as its interest in the management operations of the
Casino Windsor property.
THE GRAND DISTRIBUTION.
The board of directors of Grand proposes to spin off to the holders of its
common stock the shares of Lakes, which will be a new public company that
will operate, directly and indirectly through its subsidiaries, Grand's
gaming business located outside the State of Mississippi which will be
comprised primarily of the management of three Indian owned casinos, an
interest in the development of the Polo Plaza in Las Vegas, up to $33
million in cash and certain other assets and liabilities. Grand will retain
its gaming business located within the State of Mississippi, which includes
the Grand Casino Biloxi, Grand Casino Gulfport and Grand Casino Tunica
properties. In this Joint Proxy Statement/Prospectus we refer to Grand's
non-Mississippi gaming business as the "Non-Mississippi Business" and
Grand's Mississippi gaming business as the "Mississippi Business."
THE MERGER.
Following the Hilton distribution and immediately after the Grand
distribution, Park Place will acquire, by means of a merger, Grand's
Mississippi Business in exchange for the issuance of Park Place common stock
to the shareholders of Grand. Upon completion of the merger, Park Place will
conduct, directly and indirectly through its subsidiaries, the Hilton Gaming
Business and the Mississippi Business.
In this Joint Proxy Statement/Prospectus the distributions and the merger
are collectively referred to as the "Transactions."
Q: WHY ARE WE PROPOSING THE TRANSACTIONS?
A: The board of directors of Hilton believes that the Hilton distribution must
be accomplished to permit the merger to occur on an economically efficient
basis. The Hilton board believes that the Transactions will create two
strong, well focused companies, each of which will have a leadership position
in its industry. The Hilton board also believes that the Hilton distribution
will afford each of the lodging and gaming businesses greater flexibility to
pursue business opportunities, including acquisitions, joint ventures or
business combinations.
The board of directors of Grand believes that the Transactions will offer
its shareholders a unique opportunity to participate in the growth of a
preeminent and more diversified operator of casinos that will have access to
capital at a lower cost.
Q: WHAT IS PARK PLACE?
A: Upon completion of the merger, Park Place will be the largest gaming company,
as measured by casino square footage and revenues, with 1.4 million square
feet of gaming space in 1999 and 1997 revenues of $2.7 billion. Park Place
will also be the only gaming company with a significant presence in the three
largest gaming markets in the United States (Nevada, New Jersey and
Mississippi). Park Place will have a total of 18 properties in 1999 located
throughout the United States and in Australia and Uruguay.
Q: WHAT IS LAKES?
A: Upon completion of the Grand distribution, Lakes will conduct Grand's
Indian-owned casino management business, in addition to owning certain other
assets. Lakes' strategy is
1
<PAGE>
to distinguish itself within its markets by offering superior facilities with
extensive non-gaming amenities, combined with experienced corporate and
casino management.
Q: WHEN WILL THE TRANSACTIONS OCCUR?
A: We plan to complete the Transactions as soon as possible after the special
meetings, subject to the satisfaction or waiver of the other conditions to
the Transactions. Although we cannot predict exactly when our conditions will
be satisfied, we hope to complete the Transactions by December 31, 1998.
Q: WHAT DO I NEED TO DO NOW?
A: This Joint Proxy Statement/Prospectus contains important information
regarding the proposed Transactions, as well as information about Hilton,
Grand, Park Place and Lakes. It also contains important information about
what the management and the boards of directors of Hilton and Grand
considered in evaluating the Transactions. We urge you to read this Joint
Proxy Statement/Prospectus carefully, including its Annexes, and to consider
how the Transactions affect you as a shareholder. You may also want to review
the documents referenced under "Where You Can Find More Information." For
information about where to call to get answers to your questions, see "Whom
Should I Call with Questions?" on page 4.
Q: HOW DO I VOTE?
A: Just indicate on your proxy cards how you want to vote, and sign and mail it
in the enclosed return envelope as soon as possible so that your shares may
be represented at the special meetings. Hilton stockholders also have the
ability to vote by telephone as indicated on the Hilton proxy card. The
Hilton and Grand special meetings will both take place on November 24, 1998.
The Hilton board of directors recommends a vote in favor of the Hilton
distribution and each of the related proposals. The Grand board of directors
recommends a vote in favor of the Grand distribution, the merger and each of
the related proposals.
Q: CAN I CHANGE MY VOTE?
A: Yes. You can change your vote at any time before we vote your proxy at the
Hilton special meeting or the Grand special meeting. You can do so in several
different ways.
- First, you can send a written notice stating that you would like to revoke
your proxy to Hilton at the address listed below if you are a Hilton
stockholder, or to Grand at the address listed below if you are a Grand
shareholder.
- Second, you can complete a new proxy card and send it to Hilton or Grand,
as the case may be, and the new proxy card will automatically replace any
earlier dated proxy card that you returned.
- Third, you can attend your special meeting and vote in person. The special
meetings will take place on November 24, 1998.
- Fourth, telephonic votes may be revoked in the same manner as indicated
above, and may also be revoked by subsequent telephone votes until
midnight on November 23, 1998.
You should send any notice of revocation or your completed new proxy card to
Hilton or Grand, as the case may be, to the following addresses:
Hilton Hotels Corporation
c/o ChaseMellon Shareholder Services, L.L.C.
600 Willowtree Road
Leonia, NJ 07605
Grand Casinos, Inc.
c/o Norwest Bank Minnesota, N.A.
Stock Transfer
161 North Concord Exchange
South St. Paul, MN 55075
Q: IF MY SHARES ARE HELD IN "STREET" NAME BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote. You should instruct your broker to vote your shares by following the
directions provided by your broker. Without instructions, your shares will
not be voted.
2
<PAGE>
Q: SHOULD I SEND IN ANY STOCK CERTIFICATES?
A: No. Hilton stockholders do not need to send in any stock certificates at any
time. If you are a Grand shareholder, you will receive instructions that will
outline the method to exchange your existing stock certificates at the
appropriate time.
Q: WHAT WILL I RECEIVE IN THE TRANSACTIONS?
A: THE HILTON DISTRIBUTION.
For every share of Hilton common stock you own of record on the record date
for the Hilton distribution you will receive one share of Park Place common
stock, together with the associated stockholders' rights. In addition, you
will retain ownership of your shares of Hilton common stock.
THE GRAND DISTRIBUTION.
For every four shares of Grand common stock you own of record on the record
date for the Grand distribution, you will receive one share of Lakes common
stock. In addition, you will retain ownership of your shares of Grand common
stock, which, as more fully described below, will be exchanged for shares of
Park Place common stock in the merger.
THE MERGER.
In the merger, Grand shareholders will receive Park Place common stock in
exchange for Grand common stock (other than shares of Grand common stock as
to which appraisal rights have been properly perfected). The exact number of
Park Place shares that Grand shareholders will receive will be determined by
an exchange ratio based upon a separate "valuation factor" for each of the
Mississippi Business and the Hilton Gaming Business. Based on the
assumptions under one of the examples included on page 5 under "Examples of
What Grand Shareholders Could Receive in the Merger," Hilton stockholders
would own 86.4% of Park Place and Grand shareholders would own 13.6% of Park
Place following the merger. However, the actual percentages are likely to
differ based upon changes in any of the factors used to determine the
exchange ratio. Between the date of this Joint Proxy Statement/Prospectus
and the date of the Hilton and Grand stockholder meetings, you may call our
joint proxy solicitor at (800) 207-3155 to hear information regarding the
exchange ratio.
Even if the conditions to the Transactions are not satisfied by December 31,
1998, the exchange ratio for determining the number of shares of Park Place
common stock that Grand shareholders will receive will be based upon the
respective net debt levels for each of the Mississippi Business and the
Hilton Gaming Business as of December 31, 1998, regardless of the actual
closing date.
Q: WHAT WILL BE THE TRADING VALUE OF THE SECURITIES I RECEIVE?
A: The marketplace will determine the prices at which shares of Hilton common
stock, Park Place common stock and Lakes common stock will trade following
the Transactions.
You should be aware that, for Hilton stockholders, as a result of the Hilton
distribution, the total value of your investment in Hilton will be divided
between Hilton common stock and Park Place common stock and for Grand
shareholders, as a result of the Grand distribution and the merger, the
total value of your investment in Grand will be divided between Park Place
common stock and Lakes common stock.
Q: WHAT WILL HAPPEN TO MY DIVIDENDS?
A: The declaration and amounts of future dividends of Hilton and Park Place, if
any, will be up to their respective boards of directors and will depend on
the earnings and growth prospects of such companies after the distribution
and certain other factors their boards may deem relevant.
Lakes is prohibited from declaring or paying any dividends to its
shareholders pursuant to the merger agreement for as long as Grand is
required to indemnify its former directors and officers, among others, for
certain alleged acts and omissions occurring prior to the merger.
Q: WILL I HAVE TO PAY TAXES ON THE RECEIPT OF PARK PLACE COMMON STOCK OR LAKES
COMMON STOCK IN THE DISTRIBUTIONS?
A: No, based on the rulings that we expect to obtain from the Internal Revenue
Service to
3
<PAGE>
the effect that the distributions will be tax free to stockholders for U.S.
federal income tax purposes. However, Grand shareholders may pay tax on any
cash payments they may receive in the Lakes distribution instead of
fractional shares. We explain the material tax consequences of the
distributions and the merger starting on page 196.
Q. WILL I HAVE TO PAY TAXES AS A RESULT OF THE MERGER?
A: No. The merger is anticipated to be tax-free to Park Place stockholders and
to Grand shareholders who receive Park Place common stock. However, Grand
shareholders who receive cash in the merger instead of fractional shares of
Park Place common stock may pay tax on these cash payments.
Q. WHAT WILL BE MY NEW TAX BASIS IN THESE SECURITIES?
A. Following the Hilton distribution, a Hilton stockholder's original tax basis
in Hilton common stock will be allocated between the shares of Hilton common
stock and Park Place common stock, based on their relative fair market
values. Following the Grand distribution and the merger, a Grand
shareholder's original tax basis in Grand common stock will be allocated
between the shares of Park Place common stock and Lakes common stock, based
on their relative fair market values.
Q: WHERE WILL MY STOCK BE TRADED?
A: Park Place has applied to list the Park Place common stock on the New York
Stock Exchange. Park Place intends to request "PPE" as its trading symbol for
the Park Place common stock.
Lakes will apply to list the Lakes common stock on the Nasdaq National
Market. Lakes intends to request "LACO" as its trading symbol for the Lakes
common stock.
Hilton will continue to list its common stock on the New York Stock Exchange
and the Pacific Stock Exchange under the symbol "HLT."
Q: WHAT RISKS ARE ASSOCIATED WITH THE TRANSACTIONS?
A: In addition to the other information in this Joint Proxy
Statement/Prospectus, the following risk factors (and the other risk factors
identified under the caption "Risk Factors" beginning on page 27) should be
considered carefully in evaluating the transactions:
- Park Place's and Lakes' lack of operating histories as stand-alone
companies and their increased susceptibility to competitive market factors
specific to their core businesses;
- potential difficulties in creating a public market and sustaining a
suitable price for the shares of Park Place and Lakes;
- the potential inability of Lakes to fund its indemnification obligations
and the impact that this inability might have on Park Place;
- the potential material adverse effect certain pending gaming referenda may
have, if approved, on gaming operations;
- the risk that the Hilton distribution, the Grand distribution and the
merger are taxable; and
- potential difficulties relating to the business of Lakes including pending
litigation, uncertainty of future capital needs, competition in the gaming
industry, short-term management contracts and its limited base of
operations.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: If you would like additional copies of this Joint Proxy Statement/Prospectus
or a new proxy card or if you have questions about the Transactions, you
should contact D.F. King & Co., Inc. by mail at 77 Water Street, New York,
New York 10005, or by telephone, toll free, at (800) 207-3155 if you are a
Hilton stockholder or (800) 290-6429 if you are a Grand shareholder. D.F.
King & Co., Inc. is acting as our joint proxy solicitor.
If you are a Hilton stockholder, you can
also call the Investor Relations Department
at Hilton at (310) 278-4321. If you are a Grand shareholder, you can also
call the Investor Relations Department at Grand at (612) 449-9092.
4
<PAGE>
EXAMPLES OF WHAT GRAND SHAREHOLDERS COULD RECEIVE IN THE MERGER
Pursuant to the merger with Park Place, Grand shareholders will receive
shares of Park Place common stock determined by an exchange ratio based upon a
"valuation factor" for Grand's Mississippi Business and a "valuation factor" for
the Hilton Gaming Business.
The following is one example illustrating how the exchange ratio is
calculated based on information available at June 30, 1998, the date Grand and
Hilton signed the merger agreement:
Assuming the merger closes on December 31, 1998, and at that time Grand has
$549.9 million in total net debt outstanding and 42.29 million shares
outstanding and Park Place has $1,896.8 million in total net debt outstanding
and 260.45 million shares outstanding, then the exchange ratio will be .9699.
This would mean that each Grand shareholder would receive .9699 of a share of
Park Place common stock for each share of Grand common stock held by such
shareholder. Based upon these assumptions, the exchange ratio will result in
Hilton's stockholders owning 86.4% of Park Place and Grand's shareholders owning
13.6% of Park Place following the merger.
The exchange ratio of .9699 is determined by dividing the Grand valuation
factor by the Park Place valuation factor. The Grand valuation factor is
determined after the Grand distribution by taking Grand's agreed upon gross
enterprise value of $1,200 million and deducting its total net debt of $549.9
million and dividing the resulting number by Grand's total shares outstanding of
42.29 million. This results in a numerator of 15.3724. The Park Place valuation
factor is determined after the Hilton distribution by taking Park Place's agreed
upon gross enterprise value of $6,024.6 million and deducting its total net debt
of $1,896.8 million and dividing the resulting number by Park Place's total
shares outstanding of 260.45 million. This results in a denominator of 15.8487.
The exchange ratio of .9699 is then determined by dividing 15.3724 by 15.8487.
The following table illustrates five additional examples of the exchange
ratio assuming different levels of Grand and Hilton net debt and a sixth example
demonstrating the effect if Hilton were to repurchase shares of Hilton common
stock prior to the merger:
<TABLE>
<CAPTION>
EXAMPLE 1(1) EXAMPLE 2(2) EXAMPLE 3 EXAMPLE 4(3) EXAMPLE 5(3) EXAMPLE 6(4)
-------------- -------------- ----------- -------------- -------------- --------------
(IN MILLIONS, EXCEPT FOR PERCENTAGES, PER SHARE AMOUNTS AND EXCHANGE RATIOS)
<S> <C> <C> <C> <C> <C> <C>
Park Place enterprise value: (5)...... $6,024.6 $6,024.6 $6,024.6 $6,024.6 $6,024.6 $6,024.6
Park Place net debt:.................. $2,200.0 $2,000.0 $2,000.0 $2,000.0 $1,950.0 $2,070.8
-------------- -------------- ----------- -------------- -------------- --------------
Park Place net equity value:.......... $3,824.6 $4,024.6 $4,024.6 $4,024.6 $4,074.6 $3,953.8
Park Place shares outstanding:........ 260.45 260.45 260.45 260.45 260.45 252.95
Park Place price per share: (6)....... $14.6846 $15.4525 $15.4525 $15.4525 $15.6445 $15.6308
Grand enterprise value: (5)........... $1,200.0 $1,200.0 $1,200.0 $1,200.0 $1,200.0 $1,200.0
Grand net debt:....................... $515.0 $545.0 $565.0 $614.9 $615.0 $545.0
-------------- -------------- ----------- -------------- -------------- --------------
Grand net equity value:............... $685.0 $655.0 $635.0 $617.6(3) $585.0 $655.0
Grand shares outstanding:............. 42.29 42.29 42.29 42.29 42.29 42.29
Grand price per share: (7)............ $16.1977 $15.4883 $15.0154 $14.6039 $13.8331 $15.4883
Exchange ratio: (8)................... 1.1030 1.0023 .9717 .9451 .8842 .9909
Ownership of Park Place by Hilton
shareholders:....................... 84.8% 86.0% 86.4% 86.7% 87.4% 85.8%
Ownership of Park Place by Grand
shareholders:....................... 15.2% 14.0% 13.6% 13.3% 12.6% 14.2%
</TABLE>
- ------------------------
(1) Example 1 illustrates Hilton's and Grand's best estimate of the lowest point
in the range of the ownership percentages in Park Place to be held by Hilton
shareholders following the merger.
5
<PAGE>
(2) This example is based on information available at September 30, 1998
concerning the amount of net debt of Park Place and Grand currently
estimated to be outstanding upon consummation of the transactions.
(3) Example 4 assumes that Grand's net equity value is between $617.6 million
and $585.1 million; in that event, pursuant to the terms of the merger
agreement Grand's net equity value is assumed to be $617.6 million. In the
event that Grand's net equity value is less than $585.1 million, Hilton will
be entitled to terminate the merger agreement. Example 5 illustrates the
lowest point in the range of consideration that Grand shareholders would
receive from Park Place in the merger. Grand would resolicit its
shareholders in the event they were to receive consideration that falls
below the consideration reflected in Example 5.
(4) Hilton may repurchase shares of its common stock pursuant to its existing
repurchase program, although as of the date of this Joint Proxy
Statement/Prospectus it does not have an immediate plan to do so. Hilton
management anticipates that any such repurchases prior to the consummation
of the merger would be limited to an amount not to exceed 3% of Hilton's
outstanding common stock, which as of September 15, 1998, would equal
approximately 7.5 million shares. See "Recent Developments-- Possible Stock
Repurchases by Hilton." This example assumes that Hilton has elected to
repurchase 7.5 million shares of its common stock and incurs debt ($141.6
million) to fund such repurchase, with half of this debt ($70.8 million)
being allocated to Park Place. The reduction in the number of Park Place
shares due to the repurchase would not by itself have an effect on the
percentage ownership of Park Place by Grand shareholders. Financing any such
repurchase through the issuance of debt would have the effect of increasing
the percentage ownership of Park Place by Grand shareholders because the
incurrence of debt by Park Place would reduce Park Place's net equity value.
(5) Pursuant to the terms of the merger agreement, the gross enterprise values
of Grand and Park Place are fixed and do not fluctuate.
(6) This amount is determined by dividing Park Place's net equity value by the
Park Place shares outstanding.
(7) This amount is determined by dividing Grand's net equity value by Grand
shares outstanding.
(8) The exchange ratio is determined by dividing the Grand price per share by
the Park Place price per share.
Although the table was not prepared by Hilton's or Grand's financial
advisors, the exchange ratios above are consistent with the range of potential
exchange ratios contemplated by the merger agreement and therefore considered by
DLJ in arriving at its fairness opinion. The range of exchange ratios set forth
in examples 2 through 6 in the table above is consistent with the range of
potential exchange ratios considered by Ladenburg in arriving at its fairness
opinion. See "Background and Reasons--Opinion of Financial Advisor to Hilton"
and "--Opinion of Financial Advisor to Grand."
Between the date of this Joint Proxy Statement/Prospectus and the date of
the Hilton and Grand stockholder meetings, you may call our joint proxy
solicitor at (800) 207-3155 to hear information regarding the exchange ratio.
Although the gross enterprise values attributed to each of Grand and Park
Place are fixed in the merger agreement, the foregoing examples make certain
assumptions regarding the closing date and the total net debt and number of
shares outstanding of Grand and Park Place on the closing date. There can be no
assurance that the actual closing date and the actual total net debt and number
of shares outstanding of Grand and Park Place will be the same as in the
foregoing examples. Accordingly, the actual exchange ratio may vary
substantially from these illustrations. For a more detailed description of the
exchange ratio, see "The Transactions--The Merger Agreement--Conversion of
Shares."
6
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS JOINT PROXY
STATEMENT/PROSPECTUS AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS
IMPORTANT TO YOU. TO BETTER UNDERSTAND THE TRANSACTIONS AND FOR A MORE COMPLETE
DESCRIPTION OF THE TERMS OF THE TRANSACTIONS, YOU SHOULD CAREFULLY READ THIS
ENTIRE DOCUMENT AND THE DOCUMENTS TO WHICH WE HAVE REFERRED YOU. SEE "WHERE YOU
CAN FIND MORE INFORMATION" ON PAGE 251. REFERENCES IN THIS JOINT PROXY
STATEMENT/PROSPECTUS TO "HILTON," "PARK PLACE," "GRAND" AND "LAKES" INCLUDE
THEIR RESPECTIVE SUBSIDIARIES UNLESS THE CONTEXT OTHERWISE REQUIRES, AND
REFERENCES TO "NEW PARK PLACE" REFER TO PARK PLACE FOLLOWING THE MERGER.
THE COMPANIES
HILTON HOTELS CORPORATION
9336 Civic Center Drive
Beverly Hills, California 90210
(310) 278-4321
Hilton is a leading owner and operator of full service hotels and casino
hotels in the United States. The Hilton name is one of the best recognized and
most respected lodging brands in the world. Hilton owns, leases and operates
major lodging and gaming properties in gateway cities, urban and suburban
centers and resort areas. In the Hilton distribution, Hilton will separate its
gaming and lodging operations, creating a new publicly held gaming company.
Hilton will retain its lodging operations following the Hilton distribution.
GRAND CASINOS, INC.
130 Cheshire Lane
Minnetonka, Minnesota 55305
(612) 449-9092
Grand is a casino entertainment company that develops, constructs and
manages land-based and dockside casinos and related hotel and entertainment
facilities in emerging and established gaming jurisdictions. Grand owns and
operates three casinos in the State of Mississippi and manages two Indian owned
casinos in Louisiana and one in Minnesota. Grand's strategy is to distinguish
itself within its markets by offering superior facilities with extensive
nongaming amenities. In the Grand distribution, Grand will separate its
Mississippi Business from its Non-Mississippi Business creating a new, publicly
held company that will manage three Indian-owned casinos, own certain real
estate interests in the Polo Plaza development project in Las Vegas, Nevada and
retain certain other identified assets and liabilities. Grand will retain its
Mississippi Business following the Grand distribution.
PARK PLACE ENTERTAINMENT CORPORATION
3930 Howard Hughes Parkway
Las Vegas, Nevada 89109
(702) 699-5000
Upon completion of the merger, Park Place will be the largest gaming
company, as measured by casino square footage and revenues, with 1.4 million
square feet of gaming space in 1999 and 1997 revenues of $2.7 billion. Park
Place will also be the only gaming company with a significant presence in the
three largest gaming markets in the United States (Nevada, New Jersey and
Mississippi). Park Place will have a total of 18 properties in 1999 located
throughout the United States and in Australia and Uruguay.
LAKES GAMING, INC.
130 Cheshire Lane
Minnetonka, Minnesota 55305
(612) 449-9092
Upon completion of the Transactions, Lakes will manage three Indian-owned
casinos in Minnesota and Louisiana and may develop, construct and manage other
Indian-owned casinos and resort facilities. Lakes will also own certain real
estate interests in the Polo Plaza development project in Las Vegas, Nevada,
which Lakes will either sell or hold for investment and possible future
development.
REASONS FOR THE TRANSACTIONS
The Hilton board of directors has identified various benefits that are
likely to result from the Transactions. The Hilton board believes the Hilton
distribution will:
- afford each of the lodging and gaming businesses greater flexibility to
pursue business opportunities, including acquisitions, joint ventures or
business combinations;
7
<PAGE>
- create two strong, well-focused companies, each of which will have a
leadership position in its industry; and
- afford the lodging business access to a larger pool of capital.
The Grand board of directors has identified various benefits that are likely
to result from the Transactions. The Grand board believes the Transactions will:
- diversify its present operations which are concentrated in Mississippi by
merging with a larger gaming operator that will have access to capital at
a lower cost;
- benefit from operational synergies such as reduced overhead; and
- afford its Non-Mississippi Business greater flexibility to pursue business
opportunities.
These and other reasons for approving and recommending the Transactions
identified by each of the Hilton board and the Grand board are explained in
greater detail on pages 47 through 51 of this Joint Proxy Statement/Prospectus.
THE SPECIAL MEETINGS
The Hilton special meeting will be held at the Beverly Hilton, 9876 Wilshire
Boulevard, Beverly Hills, California on November 24, 1998 at 2:00 p.m. local
time.
The Grand special meeting will be held at the Radisson Hotel & Conference
Center, 3131 Campus Drive, Plymouth, Minnesota on November 24, 1998 at 2:00 p.m.
local time.
RECOMMENDATIONS TO STOCKHOLDERS
TO HILTON STOCKHOLDERS:
The Hilton board of directors believes that the Hilton distribution is in
its stockholders' best interest and recommends that you vote FOR the proposals
to:
- ratify the Hilton distribution;
- approve the Park Place Entertainment Corporation 1998 Stock Incentive Plan
and the grant of options thereunder, as described in this Joint Proxy
Statement/Prospectus;
- approve the Park Place Entertainment Corporation 1998 Independent Director
Stock Option Plan;
- approve an amendment and restatement of the Hilton Hotels Corporation 1996
Stock Incentive Plan and the grant of options thereunder, as described in
this Joint Proxy Statement/Prospectus; and
- ratify the election of Park Place directors.
TO GRAND SHAREHOLDERS:
The Grand board of directors believes that the Grand distribution and the
merger are in its shareholders' best interest and recommends that you vote FOR
the proposals to:
- ratify the Grand distribution;
- approve the merger;
- approve the Lakes Gaming, Inc. 1998 Stock Option and Compensation Plan;
- approve the Lakes Gaming, Inc. 1998 Director Stock Option Plan; and
- ratify the election of Lakes directors.
VOTES REQUIRED
HILTON PROPOSALS:
- To ratify the Hilton distribution and approve or ratify, as applicable,
the related proposals, the holders of at least a majority of the shares of
Hilton common stock present in person or represented by proxy at the
Hilton special meeting must vote in favor of the proposals.
GRAND PROPOSALS:
- To ratify the Grand distribution and approve or ratify, as applicable, the
related proposals (other than the merger proposal), the holders of at
least a majority of the shares present in person or represented by proxy
at the Grand special meeting must vote in favor of the proposals;
- To approve the merger, the holders of at least a majority of the
outstanding shares of Grand common stock must vote in favor of the merger
proposal.
8
<PAGE>
Hilton has conditioned the effectiveness of its proposals on the approval by
its stockholders of all its proposals because Hilton believes its proposals are
important components of the Transactions and approval of the incentive plans is
integral to successfully attracting management.
Directors and executive officers of Hilton who collectively owned, as of
September 15, 1998, approximately 12% of the outstanding shares of Hilton common
stock, and directors and executive officers of Grand who collectively owned, as
of September 15, 1998, approximately 11.5% of the outstanding shares of Grand
common stock, have expressed their intent to vote in favor of, in the case of
Hilton, the Hilton distribution, and in the case of Grand, the Grand
distribution and the merger. In addition, certain holders of shares of Grand
common stock who collectively owned, as of September 15, 1998, approximately
16.4% of the outstanding Grand shares (including approximately 10.1% owned by
Lyle Berman and 1.2% owned by Thomas J. Brosig who are also directors and
executive officers of Grand) have agreed to vote their Grand shares in favor of
the Grand distribution and the merger.
THE TRANSACTIONS
THE HILTON DISTRIBUTION (SEE PAGE 66)
In the Hilton distribution, Hilton will transfer all of the assets and
liabilities of the Hilton Gaming Business (excluding its interest in the
management operations of the Casino Windsor property) to Park Place and will
spin off all of the outstanding shares of common stock of Park Place to the
holders of Hilton common stock in a transaction intended to be tax-free to such
holders for U.S. federal income tax purposes. Each stockholder will receive one
share of Park Place common stock for every share of Hilton common stock held on
the record date for the Hilton distribution and will continue to hold their
shares of Hilton common stock.
THE GRAND DISTRIBUTION (SEE PAGE 66)
In the Grand distribution, Grand will transfer all of the assets and
liabilities of its Non-Mississippi Business (comprised primarily of the
management of three Indian owned casinos, certain real estate interests in the
Polo Plaza development project in Las Vegas (which Lakes will either sell or
hold for investment and possible future development), up to $33 million in cash
and certain other assets and liabilities) to Lakes and will spin off all of the
outstanding shares of common stock of Lakes to the holders of Grand common stock
in a transaction intended to be tax-free to such holders for U.S. federal income
tax purposes. Each shareholder will receive one share of Lakes common stock for
every four shares of Grand common stock held on the record date for the Grand
distribution.
THE MERGER (SEE PAGE 67)
Following the Hilton distribution and immediately after the Grand
distribution, Park Place will acquire, by means of a merger, Grand's Mississippi
Business, which includes the Grand Casino Biloxi, Grand Casino Gulfport and
Grand Casino Tunica properties, in exchange for the issuance of Park Place
common stock to Grand shareholders. The number of Park Place shares received by
Grand shareholders will be determined by an exchange ratio based upon a
"valuation factor" for each of Grand's Mississippi Business and the Hilton
Gaming Business following the respective distributions. Based on the assumptions
under one of the examples included on page 5 under "Examples of What Grand
Shareholders Could Receive in the Merger," Grand shareholders would receive in
exchange for their shares of Grand common stock 13.6% of the shares of Park
Place common stock that will be issued and outstanding immediately after the
Transactions and Hilton stockholders would own 86.4% of the Park Place common
stock. The actual percentages are likely to differ based upon changes in any of
the factors used to determine the exchange ratio.
The merger agreement is attached as Annex A to this Joint Proxy
Statement/Prospectus. We encourage you to read this document as it is the legal
document that governs the merger.
THE REFINANCING (SEE PAGE 67)
Hilton and Park Place currently anticipate that at the closing of the
Transactions:
- Hilton and Park Place will split Hilton's outstanding debt such that, pro
forma for the assumption of Grand's debt, Park Place
9
<PAGE>
and Hilton will have relatively equal amounts of net debt and, in
connection therewith, Park Place will assume payment obligations under
certain of Hilton's publicly held debt securities;
- Hilton will retain its existing credit facility;
- Park Place will enter into a new credit facility; and
- Park Place will purchase certain outstanding debt securities of Grand
pursuant to a tender offer.
BOARD OF DIRECTORS AND MANAGEMENT OF PARK PLACE FOLLOWING THE TRANSACTIONS (SEE
PAGE 163)
If the Transactions are completed, certain directors and executive officers
of Hilton will become directors and executive officers of Park Place:
- Stephen F. Bollenbach, the current President and Chief Executive Officer
of Hilton, will become Chairman of the Board of Park Place;
- Arthur M. Goldberg, the current President--Gaming Operations and a
director of Hilton, will become President, Chief Executive Officer and a
director of Park Place; and
- Barron Hilton, the current Chairman of the Board of Hilton and Eric M.
Hilton and A. Steven Crown, each directors of Hilton, will each become a
director of Park Place.
All of the foregoing persons will continue to serve as directors of Hilton,
except Eric Hilton. Lyle Berman, the current Chairman of the Board of Grand,
will also become a director of Park Place.
BOARD OF DIRECTORS AND MANAGEMENT OF LAKES FOLLOWING THE TRANSACTIONS (SEE PAGE
186)
If the Transactions are completed, each of the current members of Grand's
board of directors will become directors and/or executive officers of Lakes:
- Lyle Berman, the current Chairman of the Board of Grand will become
Chairman and Chief Executive Officer of Lakes;
- Thomas J. Brosig, the current President, Chief Executive Officer and a
director of Grand will become the President and a director of Lakes; and
- Timothy J. Cope, the current Chief Financial Officer, Executive Vice
President and a director of Grand will become the Chief Financial Officer
and a director of Lakes.
INTERESTS OF OFFICERS AND DIRECTORS IN THE TRANSACTIONS (SEE PAGES 94 AND 191)
Certain officers and directors of Hilton and Grand have interests in the
Transactions that are different from or in addition to your interests. For
example:
- The executive officers of Grand have employment agreements containing
change of control payment provisions which could be triggered if these
officers are terminated after the merger. Grand currently estimates that
the aggregate payments that Park Place would be required to make under
these agreements, if triggered, would amount to approximately $4,025,000.
In addition, the employment agreements permit the executive officers to
exercise outstanding stock options for a two year period after a
termination;
- As a result of the merger, all stock options to purchase Grand common
stock held by directors, officers and employees of Grand will vest and
become fully exercisable options to purchase shares of Park Place common
stock; 1,588,000 of such options are held by directors and executive
officers of Grand. The exercise price of these unvested options exceeded
the market price of Grand common stock on September 15, 1998;
- Stephen Bollenbach, President and Chief Executive Officer of Hilton, has
entered into a new employment agreement with Hilton that provides for the
grant, upon consummation of the Hilton Distribution, of options to
purchase 6,000,000 shares of Hilton common stock and provides for a
minimum annual base salary of $620,000 with an annual bonus opportunity of
up to $380,000. In addition, Park Place and Mr.
10
<PAGE>
Bollenbach anticipate that they will enter into an employment agreement
that will provide for the grant, upon consummation of the Hilton
Distribution, of options to purchase 3,000,000 shares of Park Place common
stock. Mr. Bollenbach will also be entitled to an annual base salary of
$100,000 under the Park Place agreement. In connection with the Hilton
distribution, Mr. Bollenbach has waived rights under his current
employment agreement with Hilton that provide for accelerated vesting of
Hilton options owned by Mr. Bollenbach;
- Park Place and Arthur Goldberg, Executive Vice President and
President--Gaming Operations of Hilton, anticipate that they will enter
into an employment agreement which will become effective upon consummation
of the Hilton distribution. It is anticipated that Mr. Goldberg will be
entitled to an annual base salary of $2 million and an annual bonus
opportunity of $1 million under the agreement and will be granted options
to purchase 6,000,000 shares of Park Place common stock;
- Barron Hilton, Eric Hilton and Steve Crown, who are currently directors of
Hilton, will become directors of Park Place and will each receive an
annual directors fee of $30,000;
- As a result of the Hilton distribution, each outstanding stock option to
purchase shares of Hilton common stock, other than options held by Mr.
Goldberg, will become an option to purchase one share of Hilton common
stock and an option to purchase one share of Park Place common stock, and
the exercise prices will be adjusted to preserve the intrinsic value of
such options on the date of the Hilton distribution. Directors and
executive officers of Hilton, other than Mr. Goldberg, holding options to
purchase, in the aggregate, 6,940,300 shares of Hilton common stock will
receive options to purchase an equivalent number of shares of Park Place
common stock. As of September 15, 1998, the exercise prices of options
held by executive officers and directors of Hilton exceeded the market
price of Hilton common stock, except as follows: Mr. Bollenbach and Dieter
Huckestein held options with aggregate values of approximately $468,750
and $676,063, respectively.
- As a result of the Hilton distribution, all outstanding options held by
Mr. Goldberg to purchase shares of Hilton common stock will be converted
solely into options to purchase shares of Park Place common stock, and the
number of shares subject to and the exercise price of such options will be
adjusted to preserve the intrinsic value of such options on the date of
the Hilton distribution. As of September 15, 1998, Mr. Goldberg held
options to purchase 1,200,000 shares of Hilton common stock. In addition,
under his employment agreement with Hilton, Mr. Goldberg is entitled to
receive an option to purchase 600,000 shares of Hilton common stock on
December 18, 1998 which will also be subject to the adjustment. The number
of shares of Park Place common stock which will be subject to Mr.
Goldberg's options following the adjustment is not currently determinable
because this number will depend on the prices at which the Hilton common
stock and the Park Place common stock trade on the date of the Hilton
distribution. If, for example, the value of the Park Place common stock on
the date of the Hilton distribution is equal to 45% of the value of the
Hilton common stock prior to the Hilton distribution, each of Mr.
Goldberg's options, after the foregoing adjustment, will be exercisable
for approximately 2.22 shares of Park Place common stock and the exercise
price will be equal to 45% of the exercise price of Mr. Goldberg's options
prior to the Hilton distribution. Based on Mr. Goldberg's 1,800,000
options (including the option to be granted to him on December 18, 1998
pursuant to his existing 1996 Hilton employment agreement), this would
result in options to purchase approximately 4,000,000 shares of Park Place
common stock.
- As a result of the Grand distribution, all stock options held by
directors, officers and employees of Grand will become options to
11
<PAGE>
purchase an equivalent number of shares of Lakes common stock and Grand
common stock, and, accordingly, the exercise prices will be adjusted to
preserve the intrinsic value of such options on the date of the Grand
distribution. Directors and executive officers of Grand holding options to
purchase, in the aggregate, 2,029,600 shares of Grand common stock will
receive options to purchase shares of Lakes common stock;
- Lyle Berman, Chairman of the Board of
Grand, will become the Chairman and Chief Executive Officer of Lakes and a
director of Park Place. Mr. Berman will receive an annual compensation
package from Lakes in an amount which has yet to be determined. It is also
anticipated that he will be granted options to purchase shares of Lakes
common stock;
- Thomas Brosig, President and Chief Executive Officer of Grand will become
the senior executive of Park Place in charge of Mississippi, New Orleans
and Missouri operations and will also become the President and a director
of Lakes. Mr. Brosig will receive an annual compensation package from
Lakes in an amount which has yet to be determined. It is also anticipated
that he will be granted options to purchase shares of Lakes common stock;
and
- The value of the stock options to be received by the executive officers
and directors of Hilton and Grand following the Hilton distribution and
the Grand distribution is not currently determinable because these options
will represent options to acquire stock in the post-distribution
companies. The prices at which the common stock of Hilton, Park Place,
Grand and Lakes will trade following the distributions is unknown. The
grant of these options will have the effect of diluting non-affiliated
stockholders' ownership interests in the companies.
Other than as set forth above, directors and executive officers of Hilton
and Grand are not currently entitled to any additional compensation as a result
of the distributions. Please refer to pages 94, 166 and 191 generally for more
information concerning employment agreements, accelerated vesting of stock
options and other arrangements benefiting each company's directors and officers.
CONDITIONS TO THE TRANSACTIONS (SEE PAGE 74)
Before we can complete the Transactions, a number of conditions must be met,
including, but not limited to, the following:
- holders of Hilton common stock must ratify the Hilton distribution;
- holders of Grand common stock must ratify the Grand distribution and
approve the merger agreement;
- the waiting period applicable under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 shall have expired or been terminated;
- gaming regulatory approval must be received in certain jurisdictions;
- each of Hilton and Grand must receive private letter rulings from the
Internal Revenue Service (or, if mutually agreed to, legal opinions in
lieu of such rulings) confirming that the Hilton distribution will not be
taxable to Hilton stockholders and the Grand distribution will not be
taxable to Grand shareholders;
- no law shall prohibit the completion of the merger or the distributions;
and
- the shares of Park Place common stock to be issued in the merger must be
approved for listing on a national securities exchange.
Some of the conditions to the Transactions may be waived by the company
entitled to assert the condition. In the event either company waives any
condition following stockholder approval of the Transactions, and the waiver
would have a material adverse effect on the stockholders of Hilton or Grand,
then Hilton or Grand will resolicit their consent.
NO SOLICITATION (SEE PAGE 76)
Grand has agreed that it will not initiate any discussions regarding a
business combination with
12
<PAGE>
any other party so long as the merger agreement is in effect.
REGULATORY APPROVALS (SEE PAGE 74)
Before we can complete the Transactions, we must make certain regulatory
filings and receive certain regulatory approvals, including the approval of
various domestic and international gaming commissions.
In August 1998, the waiting period applicable under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 expired, thus satisfying one of the
conditions to the merger.
Hilton and Grand have applied for approval of the Transactions from gaming
regulatory authorities in Nevada, New Jersey, Mississippi, Louisiana, Missouri,
Australia and Uruguay. Grand intends to make inquiry to the National Indian
Gaming Commission with respect to the need for approval from that agency.
TERMINATION OF THE TRANSACTIONS (SEE PAGE 77)
Hilton and Grand can mutually agree to terminate the Transactions before the
Transactions are completed and either Hilton or Grand can terminate the
Transactions if any of the following occurs:
- the merger is not completed by December 31, 1998; this deadline may be
extended to March 1, 1999 upon notice by either party;
- a court or other governmental authority permanently prohibits the merger
or the distributions;
- prior to the effective time of the Transactions, the Internal Revenue Code
is amended so as to materially alter any of the tax consequences provided
by the private letter rulings; or
- the other party breaches any of its obligations or any representations or
warranties and such breach causes certain conditions to fail to be
satisfied.
Hilton can terminate the merger agreement under certain additional
circumstances, including, if:
- the Grand shareholders do not approve the merger agreement and the merger;
- the Grand board of directors withdraws or modifies its recommendation of
the merger agreement or the merger;
- the Grand board of directors recommends an alternative transaction; or
- the net equity value of Grand following the Grand distribution (calculated
as the difference between $1,200 million (the agreed upon gross enterprise
value of Grand after the Grand distribution) and its net indebtedness on
the earlier of the closing date of the merger or December 31, 1998) is
less than $585.1 million.
Grand can terminate the merger agreement under certain additional
circumstances, including, if:
- the Hilton stockholders do not ratify the Hilton distribution;
- prior to closing, Park Place acquires assets or property with a net equity
value in excess of $300 million and Grand's financial advisor has not
reissued its fairness opinion after being requested to do so by Grand; or
- Hilton completes the Hilton distribution after Grand's shareholders have
approved the merger, the closing date of the merger has not occurred
within 20 business days of the Hilton distribution, Grand has not received
an alternative acquisition proposal, and thereafter Grand's financial
advisor has not reissued its fairness opinion after being requested to do
so by Grand.
Please refer to pages 77 and 78 for more information regarding additional
circumstances under which Hilton and Grand can terminate the merger agreement.
TERMINATION FEES (SEE PAGE 78)
The merger agreement generally requires Grand to pay Hilton a termination
fee of $30 million if the merger agreement terminates under certain
circumstances.
13
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (SEE PAGE 200)
GRAND SHAREHOLDERS. The merger is anticipated to be tax-free to Grand
shareholders, except that such shareholders will recognize gain or loss with
respect to cash received instead of fractional shares of Park Place common
stock, measured by the difference between the amount of cash received and the
portion of the basis of the shares of Grand common stock allocable to such
fractional shares. Any gain or loss recognized by Grand shareholders in
connection with the merger will generally be characterized as a capital gain or
loss, provided such Grand common stock is held as a capital asset at the time of
the merger.
PARK PLACE STOCKHOLDERS. No gain or loss generally will be recognized by
Park Place or by its stockholders as a result of the merger.
ACCOUNTING TREATMENT (SEE PAGE 99)
The merger will be accounted for using the purchase method of accounting
with Park Place as the acquiror.
OPINIONS OF FINANCIAL ADVISORS (SEE PAGES 52 AND 58)
In deciding to approve the Transactions, each of Hilton's and Grand's boards
of directors considered opinions from each of their financial advisors. Hilton
received an opinion dated June 29, 1998 from its financial advisor, Donaldson,
Lufkin & Jenrette Securities Corporation, and Grand received an opinion from its
financial advisor, Ladenburg Thalmann & Co. Inc., dated June 30, 1998. These
opinions are attached as Annexes B and C to this Joint Proxy
Statement/Prospectus, respectively, and you are encouraged to carefully read
them in their entirety.
DLJ received a $1.5 million fee for rendering its opinion. Ladenburg will be
entitled to an approximately $6.5 million fee for rendering its opinion and
providing other investment banking services to Grand in connection with the
Transactions, all of which is contingent upon consummation of the merger. The
financial advisors' respective opinions reflect an opinion as of a specific date
and do not address additional data arising subsequent to the data considered by
the financial advisors in reaching their respective opinions, including market
prices of securities, reported results of operations, publicly announced
transactions and factors that may affect the estimates of future earnings, which
could alter their opinions if the opinions were rendered as of a different date.
Stockholders should note that the merger agreement does not provide Hilton
or Grand with any opportunities to terminate the merger agreement or fail to
consummate the transactions contemplated thereby based solely upon changes in
financial market conditions from those that existed on the date of DLJ's and
Ladenburg's opinions. However, Grand may terminate the merger agreement in the
event Ladenburg fails to update its opinion after being requested to do so by
Grand's board of directors in the following two instances:
- prior to the closing, Park Place acquires assets or property with a net
equity value in excess of $300 million; or
- Hilton completes the Hilton distribution after Grand's shareholders have
approved the merger, the closing date of the merger has not occurred
within 20 business days of the Hilton distribution and Grand has not
received an alternative acquisition proposal.
No provision has been made in the merger agreement for Hilton to seek, and
Hilton does not intend to seek, an updated opinion from DLJ. If the merger
agreement were amended in a manner which affects the relevant factors considered
by DLJ or Ladenburg in rendering their opinions, Hilton and Grand would consider
engaging their financial advisors to provide a supplemental opinion.
APPRAISAL RIGHTS (SEE PAGE 99)
Under Delaware law, Hilton stockholders do not have the right to an
appraisal of the value of their shares in connection with the Hilton
distribution or the merger.
Under Minnesota law, Grand shareholders do not have the right to an
appraisal of the value of their shares in connection with the Grand
distribution, but do have the right to an appraisal of the value of their shares
in connection with the merger. A discussion of these rights is included on
14
<PAGE>
pages 99 through 101. We encourage Grand shareholders to read it.
COMPARISON OF SHAREHOLDER RIGHTS (SEE PAGE 206)
Upon completion of the merger, Grand shareholders will become Park Place
stockholders. As a result, the rights of the holders of Park Place common stock
will be governed by the certificate of incorporation and bylaws of Park Place
and by Delaware law. We have provided a summary of the material differences
between the rights of holders of Grand capital stock and Park Place capital
stock beginning on page 206.
COMPARATIVE MARKET PRICE INFORMATION (SEE PAGE 202)
Shares of Hilton and Grand common stock are listed on the New York Stock
Exchange. On June 29, 1998, the last full trading day prior to the public
announcement of the proposed Transactions, Hilton common stock closed at $31.50
per share and Grand common stock closed at $18.50 per share.
On October 22, 1998, the most recent practicable date prior to the printing
of this Joint Proxy Statement/Prospectus, the last sale price as reported by the
New York Stock Exchange for Hilton common stock was $18.69 per share and for
Grand common stock with $8.38 per share. We urge you to obtain current market
quotations.
LISTING OF PARK PLACE COMMON STOCK AND LAKES COMMON STOCK (SEE PAGE 27)
Park Place has applied with the New York Stock Exchange to list its shares
of common stock to be distributed in the Hilton distribution and issued in the
merger. Lakes intends to file an application with the Nasdaq National Market to
list its shares of common stock to be distributed in the Lakes distribution.
THE STOCK INCENTIVE PLANS (SEE PAGES 224 AND 242)
Hilton stockholders will vote on the Park Place Entertainment Corporation
1998 Stock Incentive Plan and grant of stock options thereunder, as described in
this Joint Proxy Statement/ Prospectus and the Park Place Entertainment
Corporation 1998 Independent Director Stock Option Plan. The plans authorize the
grant of stock options and stock appreciation rights to officers and employees
and the grant of stock options to non-employee directors of Park Place. In
addition, Hilton stockholders will vote on an amendment and restatement of the
Hilton Hotels Corporation 1996 Stock Incentive Plan and grant of stock options
thereunder, as described in this Joint Proxy Statement/Prospectus. The amendment
will, among other things, increase the number of shares of stock subject to
awards under such plan. The Park Place stock option plans and the amended Hilton
plan are attached as Annexes D, E and F to this Joint Proxy Statement/Prospectus
and we encourage you to read each in its entirety.
Grand shareholders will vote on the Lakes Gaming, Inc. 1998 Stock Option and
Compensation Plan and the Lakes Gaming, Inc. 1998 Director Stock Option Plan
which will be used to grant stock options and other benefits to directors and
officers of Lakes. The Lakes option plans are attached as Annexes G and H to
this Joint Proxy Statement/Prospectus and we encourage you to read them in their
entirety.
The purpose of the plans is to assist the companies in attracting and
retaining officers, employees and directors and to align the interests of these
persons with the stockholders' interests.
In addition to the plans discussed above, it is anticipated that Park Place
will adopt an incentive compensation plan and an executive deferred compensation
plan and that officers and employees of Park Place will be eligible to
participate in these incentive plans. Lakes also intends to adopt an incentive
compensation plan in which the officers and employees will be eligible to
participate.
RISK FACTORS
This Joint Proxy Statement/Prospectus includes, or incorporates by
reference, certain additional factors related to the operations and strategies
of Hilton, Grand, Park Place and Lakes generally, the Transactions and their
effects on the companies specifically. Stockholders should read carefully the
section entitled "Risk Factors" beginning on page 27.
15
<PAGE>
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Each of Hilton, Park Place, Grand and Lakes has made forward-looking
statements in this document (and in documents that are incorporated by
reference) that are subject to risks and uncertainties. Forward-looking
statements include the information concerning strategies, objectives,
expectations and intentions of the companies regarding completion of the
Transactions, the ownership, management and operation of hotels and casinos
following completion of the Transactions and trends affecting the financial
condition, future results of operation and the adequacy of resources of the
companies. Also, when we use words such as "believes," "expects," "anticipates"
or similar expressions, we are making forward-looking statements. Shareholders
should note that many factors could affect the future financial results of
Hilton, Park Place, Grand and Lakes, and could cause these results to differ
materially from those expressed in our forward-looking statements.
16
<PAGE>
STRUCTURE OF THE TRANSACTIONS
The following chart shows the corporate structure of Hilton, Park Place,
Grand and Lakes before and after the Transactions are completed:
HILTON AND GRAND IMMEDIATELY BEFORE THE DISTRIBUTIONS
[CHART]
HILTON, PARK PLACE, GRAND AND LAKES AFTER THE DISTRIBUTIONS AND BEFORE THE
MERGER
[CHART]
HILTON, PARK PLACE, GRAND AND LAKES AFTER THE MERGER
[CHART]
17
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
In the following tables, we are providing certain summary financial
information to aid you in your analysis of the financial aspects of the
Transactions. These tables include (i) unaudited pro forma financial information
of New Park Place after giving effect to the Transactions, (ii) selected
historical financial information of Hilton and unaudited pro forma financial
information of Hilton after giving effect to the Hilton distribution, (iii)
selected historical financial information and unaudited pro forma financial
information of Park Place after giving effect to the Hilton distribution (but
prior to the merger), (iv) selected historical financial information of Grand
and unaudited pro forma financial information of Grand after giving effect to
the Grand distribution, and (v) selected historical financial information of
Lakes after giving effect to the Grand distribution. References herein to "New
Park Place" refer to Park Place following the Hilton distribution and the
merger.
NEW PARK PLACE SUMMARY SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
In the table below, we attempt to illustrate the financial results of New
Park Place that might have occurred if the Transactions had been completed at
earlier periods. It is important to remember that this information is
hypothetical, and does not necessarily reflect the financial performance that
would have
actually resulted if the Transactions had been completed on the dates assumed.
It is also important to remember that this information does not necessarily
reflect future financial performance if the Transactions actually occur. Please
see "Unaudited Pro Forma Condensed Financial Statements" beginning on page 103
for a more detailed explanation of this analysis and the dates upon which the
Transactions were assumed to have occurred.
<TABLE>
<CAPTION>
PARK PLACE GRAND NEW PARK PLACE
PRO FORMA PRO FORMA PRO FORMA
----------- ----------- --------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
TWELVE MONTHS ENDED OR AS OF JUNE 30, 1998
RESULTS OF OPERATIONS:
Total revenue.......................................................... $ 2,249 $ 561 $ 2,810
Total operating income................................................. 225 75 300
Income from continuing operations...................................... 78(1) 23 101(1)
Income from continuing operations per share--Basic..................... .30 .55 .33
Income from continuing operations per share--Diluted................... .29 .53 .33
OTHER OPERATING DATA:
EBITDA(2).............................................................. $ 549 $ 124 $ 673
BALANCE SHEET:
Cash, cash equivalents and temporary investments....................... $ 132 $ 60 $ 192
Total assets........................................................... 5,785 1,160 6,959
Total debt............................................................. 1,591 566 2,209
Total stockholders' equity............................................. 3,286 422 3,644
YEAR ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS:
Total revenue.......................................................... $ 2,145 $ 529 $ 2,674
Total operating income................................................. 191 71 262
Income from continuing operations...................................... 61(1) 21 82(1)
Income from continuing operations per share--Basic..................... .23 .50 .27
Income from continuing operations per share--Diluted................... .23 .49 .26
OTHER OPERATING DATA:
EBITDA(2).............................................................. $ 502 $ 117 $ 619
SIX MONTHS ENDED JUNE 30, 1998
RESULTS OF OPERATIONS:
Total revenue.......................................................... $ 1,144 $ 286 $ 1,430
Total operating income................................................. 182 39 221
Income from continuing operations...................................... 77 12 89
Income from continuing operations per share--Basic..................... .30 .29 .29
Income from continuing operations per share--Diluted................... .29 .28 .29
OTHER OPERATING DATA:
EBITDA(1).............................................................. $ 294 $ 64 $ 358
</TABLE>
18
<PAGE>
- ------------------------
(1) Includes after-tax non-recurring charges totaling $59 million related to the
recognition of an impairment loss on the Flamingo Casino-Kansas City and an
impairment loss and other costs associated with the closure of the Flamingo
Casino-New Orleans.
(2) EBITDA is earnings before interest, taxes, depreciation, amortization and
non-cash items, which can be computed by adding depreciation, amortization
and non-cash items to operating income. EBITDA is presented supplementally
because management believes it allows for a more complete analysis of
results of operations. Non-cash items, such as asset write-downs and
impairment losses are excluded from EBITDA as these items do not impact
operating results on a recurring basis. Pre-tax non-cash charges for Park
Place and New Park Place totaled $96 million for the twelve months ended
June 30, 1998 and the year ended December 31, 1997 and relate to the
recognition of an impairment loss on the Flamingo Casino-Kansas City and an
impairment loss and other costs associated with the closure of the Flamingo
Casino-New Orleans. 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 income from
continuing operations) nor should it be considered as an indicator of the
overall financial performance of the companies. The calculations of EBITDA
may be different from the calculations used by other companies and therefore
comparability may be limited. Pro forma depreciation, amortization and
non-cash items for Park Place, Grand, and New Park Place totaled $311
million, $46 million and $365 million, respectively, for the year ended
December 31, 1997 and $112 million, $25 million and $141 million,
respectively, for the six months ended June 30, 1998.
19
<PAGE>
HILTON SUMMARY SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL INFORMATION
We derived the historical information under the heading "Hilton Historical"
from the Hilton audited financial statements for 1993 through 1997 and unaudited
financial statements for the six months ended June 30, 1997 and 1998. The
information is only a summary and you should read it in conjunction with
Hilton's historical financial statements (and related notes) contained in the
annual reports and other information Hilton has filed with the Securities and
Exchange Commission (the "SEC"). See "Where You Can Find More Information" on
page 251.
In the table below under the heading "Hilton Pro Forma", we also attempt to
illustrate the financial results that might have occurred if the Hilton
Distribution had been completed as of January 1, 1995 for purposes of the
Results of Operations and Other Operating Data and at June 30, 1998 for the
Balance Sheet. It is important to remember that this information is
hypothetical, and does not necessarily reflect the financial performance that
would have actually resulted if the Hilton distribution had been completed on
the dates assumed. It is also important to remember that this information does
not necessarily reflect future financial performance if the Hilton distribution
actually occurs. Please see "Unaudited Pro Forma Condensed Financial Statements"
beginning on page 103 for a more detailed explanation of this analysis.
<TABLE>
<CAPTION>
SIX MONTHS ENDED OR
AS OF JUNE 30, FISCAL YEARS ENDED OR AS OF DECEMBER 31,
-------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- ----------- ----------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
HILTON HISTORICAL
RESULTS OF OPERATIONS:
Total revenue(1)................................ $ 1,967 $ 1,760 $ 3,620 $ 1,905 $ 1,649 $ 1,514 $ 1,394
Total operating income.......................... 423 360 596 329 355 286 235
Income from continuing operations............... 183 161 250(2) 156(3) 173 122 103
Income from continuing operations per
share--Basic.................................. .71 .62 .95 .79 .90 .64 .54
Income from continuing operations per share--
Diluted....................................... .68 .60 .94 .79 .89 .63 .53
Cash dividends declared per common share........ .16 .16 .32 .305 .30 .30 .30
OTHER OPERATING DATA:
EBITDA(3)....................................... $ 594 $ 509 $ 1,009 $ 577 $ 543 $ 461 $ 411
BALANCE SHEET:
Cash, cash equivalents and temporary
investments(1)................................ $ 235 $ 182 $ 240 $ 298 $ 409 $ 393 $ 479
Total assets(1)................................. 8,724 7,383 7,527 7,273 3,060 2,926 2,675
Total debt...................................... 3,828 2,775 2,774 2,707 1,287 1,289 1,142
Total stockholders' equity...................... 3,451 3,354 3,383 3,211 1,254 1,128 1,057
HILTON PRO FORMA
RESULTS OF OPERATIONS:
Total revenue................................... $ 823 $ 720 $ 1,475 $ 947 $ 715
Total operating income.......................... 236 207 395 237 190
Income from continuing operations............... 103 98 183(5) 120(6) 88
Income from continuing operations per
share--Basic.................................. .40 .37 .69 .61 .46
Income from continuing operations per share--
Diluted....................................... .38 .36 .67 .60 .45
Weighted average common and equivalent shares--
Basic......................................... 261 263 263 198 193
Weighted average common and equivalent shares--
Diluted....................................... 291 293 293 217 195
OTHER OPERATING DATA:
EBITDA(4)....................................... $ 295 $ 257 $ 497 $ 361 $ 290
BALANCE SHEET:
Cash, cash equivalents and temporary
investments................................... $ 103
Total assets.................................... 3,562
Total debt...................................... 2,860
Total stockholders' equity...................... 151
</TABLE>
- ------------------------
(1) On November 20, 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus in EITF 97-2 "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice
Management Entities and Certain Other Entities with Contractual Management
Arrangements." EITF 97-2 addresses the circumstances in which a management
entity may include the revenues and expenses of a managed entity in its
financial statements.
20
<PAGE>
Upon adoption of EITF 97-2, which is expected to be in the fourth quarter of
1998, Hilton will no longer include in its financial statements the revenues,
operating expenses and working capital of its managed properties. The
revenues presented assume application of EITF 97-2 to Hilton's financial
statements which have reduced historical revenues by $842 million, $903
million, $1,696 million, $2,035 million, $1,906 million, $1,787 million and
$1,507 million for the six month periods ended June 30, 1998 and 1997 and the
years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
Application of the standard reduces historical cash, cash equivalents and
temporary investments by $113 million, $143 million, $133 million, $140
million, $125 million, $117 million and $89 million for the six month periods
ended June 30, 1998 and 1997 and the years ended December 31, 1997, 1996,
1995, 1994 and 1993, respectively and reduces historical total assets by $281
million, $293 million, $299 million, $314 million, $383 million, $335 million
and $277 million for the six month periods ended June 30, 1998 and 1997 and
the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
(2) Includes after-tax non-recurring charges totaling $69 million, primarily
related to the recognition of an impairment loss on the Flamingo
Casino-Kansas City, an impairment loss and other costs associated with the
closure of the Flamingo Casino-New Orleans and the write-off of the net
costs related to Hilton's efforts to acquire ITT Corporation.
(3) Includes after-tax non-recurring charges totaling $47 million, primarily
related to the write-off of pre-opening expenses for the Flamingo
Casino-Kansas City, losses associated with a planned relocation of the
Flamingo Casino-New Orleans and the write-down of certain investments and
notes receivable to estimated fair market value.
(4) EBITDA is earnings before interest, taxes, depreciation, amortization and
non-cash items, which can be computed by adding depreciation, amortization
and non-cash items to operating income. EBITDA is presented supplementally
because management believes it allows for a more complete analysis of
results of operations. Non-cash items, such as asset write-downs and
impairment losses are excluded from EBITDA as these items do not impact
operating results on a recurring basis. Hilton historical pre-tax non-cash
items for the year ended December 31, 1997 totaled $94 million and relate to
the recognition of an impairment loss on the Flamingo Casino-Kansas City, an
impairment loss and other costs associated with the closure of the Flamingo
Casino-New Orleans and a non-cash credit from the reversal of a 1996
non-cash write-down. Hilton historical pre-tax non-cash items for the year
ended December 31, 1996 totaled $23 million, primarily related to the
write-down of certain investments and notes receivable to estimated fair
market value. Hilton pro forma pre-tax non-cash items for the year ended
December 31, 1997 totaled a credit of $2 million, primarily from the
reversal of a 1996 non-cash write-down. Hilton pro forma pre-tax non-cash
items for the year ended December 31, 1996 totaled $22 million and relate to
the write-down of certain investments and notes receivable to estimated fair
market value. 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 income from continuing
operations) nor should it be considered as an indicator of the overall
financial performance of Hilton. The calculations of EBITDA may be different
from the calculations used by other companies and therefore comparability
may be limited. Historical depreciation, amortization and non-cash items for
Hilton for the six months ended June 30, 1998 and 1997 and the years ended
December 31 1997, 1996, 1995, 1994 and 1993 totaled $171 million, $149
million, $413 million, $248 million, $188 million, $175 million and $176
million, respectively. Pro forma depreciation, amortization and non-cash
items for Hilton for the six months ended June 30, 1998 and 1997 and the
years ended December 31, 1997, 1996 and 1995 totaled $59 million, $50
million, $102 million, $124 million and $100 million, respectively.
(5) Includes after-tax non-recurring charges totaling $10 million, primarily
related to the write-off of net costs related to Hilton's efforts to acquire
ITT Corporation.
(6) Includes after-tax non-recurring charges totaling $24 million, primarily
related to the write-down of certain investments and notes receivable to
estimated fair market value.
21
<PAGE>
PARK PLACE SUMMARY SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL
INFORMATION
We derived the following historical information under the heading "Park
Place Historical" from the Park Place audited financial statements for 1995
through 1997 and unaudited financial statements for 1993, 1994 and the six
months ended June 30, 1997 and 1998. The information is only a summary and you
should read it in conjunction with Park Place's historical financial statements
(and related notes) beginning on page F-2.
In the table below under the heading "Park Place Pro Forma", we also attempt
to illustrate the financial results that might have occurred if the Hilton
distribution had been completed as of January 1, 1997 for purposes of the
Results of Operations and Other Operating Data and at June 30, 1998 for the
Balance Sheet. It is important to remember that this information is
hypothetical, and does not necessarily reflect the financial performance that
would have actually resulted if the Hilton distribution had been completed on
the dates assumed. It is also important to remember that this information does
not necessarily reflect future financial performance if the Hilton distribution
actually occurs. Please see "Unaudited Pro Forma Condensed Financial Statements"
beginning on page 103 for a more detailed explanation of this analysis.
<TABLE>
<CAPTION>
SIX MONTHS ENDED OR
AS OF JUNE 30, FISCAL YEARS ENDED OR AS OF DECEMBER 31,
-------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- ----------- ----------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
PARK PLACE HISTORICAL
RESULTS OF OPERATIONS:
Total revenue(1)................................ $ 1,144 $ 1,040 $ 2,145 $ 958 $ 934 $ 896 $ 874
Total operating income.......................... 187 153 201 92 165 162 163
Income from continuing operations............... 80 63 67(2) 36(3) 85 79 86
Income from continuing operations per
share--Basic.................................. .31 .24 .25 .18 .44 .41 .45
Income from continuing operations per share--
Diluted....................................... .30 .24 .25 .18 .44 .41 .44
OTHER OPERATING DATA:
EBITDA(3)....................................... $ 299 $ 252 $ 512 $ 216 $ 253 $ 240 $ 231
BALANCE SHEET:
Cash, cash equivalents and temporary
investments(1)................................ $ 132 $ 152 $ 235 $ 232 $ 38 $ 26 $ 33
Total assets(1)................................. 5,785 5,465 5,630 5,364 1,350 1,248 1,135
Total debt...................................... 1,591 1,311 1,306 1,278 549 549 530
Division equity................................. 3,293 3,317 3,381 3,157 592 510 424
PARK PLACE PRO FORMA
RESULTS OF OPERATIONS:
Total revenue................................... $ 1,144 $ 1,040 $ 2,145
Total operating income.......................... 182 148 191
Income from continuing operations............... 77 60 61(2)
Income from continuing operations per
share--Basic.................................. .30 .23 .23
Income from continuing operations per share--
Diluted....................................... .29 .23 .23
Weighted average common and equivalent shares--
Basic......................................... 261 263 263
Weighted average common and equivalent shares--
Diluted....................................... 264 265 266
OTHER OPERATING DATA:
EBITDA(4)....................................... 294 247 502
BALANCE SHEET:
Cash, cash equivalents and temporary
investments................................... $ 132
Total assets.................................... 5,785
Total debt...................................... 1,591
Total stockholders' equity...................... 3,286
</TABLE>
22
<PAGE>
- ------------------------
(1) On November 20, 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus in EITF 97-2 "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice
Management Entities and Certain Other Entities with Contractual Management
Arrangements." EITF 97-2 addresses the circumstances in which a management
entity may include the revenues and expenses of a managed entity in its
financial statements.
Upon adoption of EITF 97-2, which is expected to be in the fourth quarter of
1998, Park Place will no longer include in its financial statements the
revenues, operating expenses and working capital of its managed properties.
The revenues presented assume application of EITF 97-2 to Park Place's
financial statements which have reduced historical revenues by $211 million,
$228 million, $427 million, $457 million, $350 million, $292 million and $183
million for the six month periods ended June 30, 1998 and 1997 and the years
ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. Application
of the standard reduces historical cash, cash equivalents and temporary
investments by $18 million, $32 million, $29 million, $28 million, $26
million, $18 million and $9 million for the six month periods ended June 30,
1998 and 1997 and the years ended December 31, 1997, 1996, 1995, 1994 and
1993, respectively and reduces historical total assets by $49 million, $55
million, $59 million, $83 million, $48 million, $35 million and $22 million
for the six month periods ended June 30, 1998 and 1997 and the years ended
December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
(2) Includes after-tax non-recurring charges totaling $59 million related to the
recognition of an impairment loss on the Flamingo Casino-Kansas City and an
impairment loss and other costs associated with the closure of the Flamingo
Casino-New Orleans.
(3) Includes after-tax non-recurring charges totaling $23 million, primarily
related to the write-off of pre-opening expenses for the Flamingo
Casino-Kansas City and losses associated with a planned relocation of the
Flamingo Casino-New Orleans.
(4) EBITDA is earnings before interest, taxes, depreciation, amortization and
non-cash items, which can be computed by adding depreciation, amortization
and non-cash items to operating income. EBITDA is presented supplementally
because management believes it allows for a more complete analysis of
results of operations. Non-cash items, such as asset write-downs and
impairment losses are excluded from EBITDA as these items do not impact
operating results on a recurring basis. Pre-tax non-cash charges for Park
Place historical and Park Place pro forma totaled $96 million for the year
ended December 31, 1997 and relate to the recognition of an impairment loss
on the Flamingo Casino-Kansas City and an impairment loss and other costs
associated with the closure of the Flamingo Casino-New Orleans. Pre-tax
non-cash charges for Park Place historical totaled $1 million for the year
ended December 31, 1996 and relate to the write-down of an asset to
estimated fair market value. 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 income from
continuing operations) nor should it be considered as an indicator of the
overall financial performance of Park Place. The calculations of EBITDA may
be different from the calculations used by other companies and therefore
comparability may be limited. Historical depreciation, amortization and
non-cash items for Park Place for the six months ended June 30, 1998 and
1997 and the years ended December 31 1997, 1996, 1995, 1994 and 1993 totaled
$112 million, $99 million, $311 million, $124 million, $88 million, $78
million and $68 million, respectively. Pro forma depreciation, amortization
and non-cash items for Park Place for the six months ended June 30, 1998 and
1997 and the year ended December 31, 1997 totaled $112 million, $99 million
and $311 million, respectively.
23
<PAGE>
GRAND SUMMARY SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL INFORMATION
We derived the following historical information under the heading "Grand
Historical" from the Grand audited financial statements for 1993 through 1997
and unaudited financial statements for the six months ended June 29, 1997 and
June 28, 1998. The information is only a summary and you should read it in
conjunction with Grand's historical financial statements (and related notes)
contained in the annual reports and other information Grand has filed with the
SEC. See "Where You Can Find More Information" on page 251.
In the table below under the heading "Grand Pro Forma", we also attempt to
illustrate the financial results that might have occurred if the Grand
distribution had been completed as of January 2, 1995 for purposes of the
Results of Operations and Other Operating Data and at June 28, 1998 for the
Balance Sheet. It is important to remember that this information is
hypothetical, and does not necessarily reflect the financial performance that
would have actually resulted if the Grand distribution had been completed on
such date. It is also important to remember that this information does not
necessarily reflect future financial performance if the Grand distribution
actually occurs. Please see "Unaudited Pro Forma Condensed Financial Statements"
beginning on page 103 for a more detailed explanation of this analysis.
<TABLE>
<CAPTION>
SIX MONTHS ENDED OR AS
OF FISCAL YEARS ENDED OR AS OF
------------------------ ------------------------------------------------------------------
JUNE 28, JUNE 29, DECEMBER 28, DECEMBER 29, DECEMBER 31, JANUARY 1,
1998 1997 1997 1996 1995 1995
----------- ----------- --------------- --------------- --------------- ---------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
GRAND HISTORICAL
RESULTS OF OPERATIONS:
Total revenue............... $ 329 $ 293 $ 607 $ 490 $ 373 $ 286
Total operating income(1)... 75 71 141 96 118 53
Income (loss) from
continuing operations..... 36 33 66 (101) 70 29
Income (loss) from
continuing operations per
share--Basic.............. .86 .79 1.58 (2.43) 2.05 .87
Income (loss) from
continuing operations per
share--Diluted............ .84 .77 1.54 (2.43) 1.98 .84
OTHER OPERATING DATA:
EBITDA(2)................... $ 101 $ 94 $ 187 $ 139 $ 140 $ 69
BALANCE SHEET:
Cash, cash equivalents and
temporary investments..... $ 93 $ 133 $ 239 $ 147 $ 335 $ 30
Total assets................ 1,293 1,187 1,334 1,123 1,128 484
Total debt.................. 567 566 667 531 471 137
Total stockholders'
equity.................... 542 471 503 440 526 277
GRAND PRO FORMA
RESULTS OF OPERATIONS:
Total revenue............... $ 286 $ 254 $ 529 $ 413 $ 304
Total operating income...... 39 35 71 36 60
Income from continuing
operations................ 12 10 21 8 29
Income from continuing
operations per
share--Basic.............. .29 .23 .50 .19 .84
Income from continuing
operations per
share--Diluted............ .28 .23 .49 .19 .81
Weighted average common and
equivalent
shares--Basic............. 42 42 42 42 34
Weighted average common and
equivalent
shares--Diluted........... 43 43 43 43 35
OTHER OPERATING DATA:
EBITDA(2)................... $ 64 $ 57 $ 117 $ 78 $ 80
BALANCE SHEET:
Cash, cash equivalents and
temporary investments..... $ 60
Total assets................ 1,160
Total debt.................. 566
Total stockholders'
equity.................... 422
<CAPTION>
JANUARY 2,
1994
---------------
<S> <C>
GRAND HISTORICAL
RESULTS OF OPERATIONS:
Total revenue............... $ 117
Total operating income(1)... 30
Income (loss) from
continuing operations..... 19
Income (loss) from
continuing operations per
share--Basic.............. .71
Income (loss) from
continuing operations per
share--Diluted............ .69
OTHER OPERATING DATA:
EBITDA(2)................... $ 38
BALANCE SHEET:
Cash, cash equivalents and
temporary investments..... $ 158
Total assets................ 427
Total debt.................. 124
Total stockholders'
equity.................... 248
GRAND PRO FORMA
RESULTS OF OPERATIONS:
Total revenue...............
Total operating income......
Income from continuing
operations................
Income from continuing
operations per
share--Basic..............
Income from continuing
operations per
share--Diluted............
Weighted average common and
equivalent
shares--Basic.............
Weighted average common and
equivalent
shares--Diluted...........
OTHER OPERATING DATA:
EBITDA(2)...................
BALANCE SHEET:
Cash, cash equivalents and
temporary investments.....
Total assets................
Total debt..................
Total stockholders'
equity....................
</TABLE>
24
<PAGE>
- ------------------------
(1) Total operating income for the six months ended June 28, 1998 and June 29,
1997 and the fiscal years ended 1997, 1996, 1995, 1994 and 1993 exclude
amortization of debt issuance costs of $2 million, $1 million, $3 million,
$3 million, $2 million, $1 million and $1 million, respectively, which has
been reclassified to interest expense to conform to the financial
presentation of Park Place.
(2) EBITDA is earnings before interest, taxes, depreciation and amortization,
which can be computed by adding depreciation and amortization to operating
income. EBITDA is presented supplementally 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 income from continuing operations) nor should
it be considered as an indicator of the overall financial performance of
Grand. The calculations of EBITDA may be different from the calculations
used by other companies and therefore comparability may be limited.
Historical depreciation and amortization for Grand for the six months ended
June 28, 1998 and June 29, 1997 and the fiscal years ended 1997, 1996, 1995,
1994 and 1993 totaled $26 million, $23 million, $46 million, $43 million,
$22 million, $16 million and $8 million, respectively. Pro forma
depreciation and amortization for Grand for the six months ended June 28,
1998 and June 29, 1997 and the fiscal years ended 1997, 1996 and 1995
totaled $25 million, $22 million, $46 million, $42 million and $20 million,
respectively.
25
<PAGE>
LAKES SUMMARY SELECTED HISTORICAL FINANCIAL INFORMATION
We derived the following historical information from the Lakes audited
financial statements for 1993 through 1997 and unaudited financial statements
for the six months ended June 29, 1997 and June 28, 1998. The information is
only a summary and you should read it in conjunction with Lakes' historical
financial statements (and related notes) beginning on page F-18. No pro forma
Lakes financial statements have been prepared as there are no material
differences between the Lakes historical financial results and the financial
results that might have occurred if the Grand distribution had been completed as
of the beginning of each period presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED OR AS
OF FISCAL YEARS ENDED OR AS OF
------------------------ -----------------------------------------------------------------------------------
JUNE 28, JUNE 29, DECEMBER 28, DECEMBER 29, DECEMBER 31, JANUARY 1, JANUARY 2,
1998 1997 1997 1996 1995 1995 1994
----------- ----------- --------------- ------------- --------------- ----------------- ---------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
LAKES HISTORICAL
RESULTS OF
OPERATIONS:
Total revenue..... $ 43 $ 39 $ 78 $ 77 $ 69 $ 23 $ 11
Total operating
income.......... 36 36 70 60 58 16 8
Income (loss) from
continuing
operations...... 24 23 45 (109)(2) 41 13 8
Income (loss) from
continuing
operations per
share--Basic(3).. 2.28 2.21 4.32 (10.46)(2) 4.81 1.60 1.28
Income (loss) from
continuing
operations per
share--
Diluted(3)...... 2.22 2.17 4.20 (10.46)(2) 4.65 1.60 1.28
OTHER OPERATING
DATA:
EBITDA(1)......... 37 37 71 61 60 16 8
BALANCE SHEET:
Cash and cash
equivalents..... $ 33 $ 33 $ 33 $ 34 $ 33 $ 4 $ 22
Total assets...... 133 115 132 114 233 171 64
Total debt........ 1 1 1 1 1 4 1
Division equity... 120 103 119 104 229 142 60
</TABLE>
- ------------------------
(1) EBITDA is earnings before interest, taxes, depreciation and amortization,
which can be computed by adding depreciation and amortization to operating
income. EBITDA also excludes the $161 million write-off of Grand's
investment in Stratosphere Corporation. EBITDA is presented supplementally
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 income from
continuing operations) nor should it be considered as an indicator of the
overall financial performance of Lakes. The calculations of EBITDA may be
different from the calculations used by other companies and therefore
comparability may be limited. Historical depreciation and amortization for
Lakes for the six months ended June 28, 1998 and June 29, 1997 and the
fiscal years ended December 31 1997, 1996, 1995, 1994 and 1993 totaled $1
million, $1 million, $1 million, $1 million, $2 million, $0.2 million, and
$0.2 million, respectively.
(2) Includes a non-recurring non-cash $161 million charge related to the
write-off of Lakes' investment in Stratosphere Corporation.
(3) Earnings per share gives effect to the distribution of one share of Lakes
common stock for every four shares of Grand Common Stock in the Grand
distribution.
26
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED
OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS (INCLUDING
UNDER THE HEADING "THE TRANSACTIONS--CAUTIONARY STATEMENTS CONCERNING FORWARD
LOOKING STATEMENTS" ON PAGE 101), SHOULD BE CAREFULLY CONSIDERED BEFORE YOU
DECIDE WHETHER OR NOT YOU WISH TO VOTE IN FAVOR OF THE HILTON PROPOSALS OR THE
GRAND PROPOSALS, AS THE CASE MAY BE.
RISKS RELATING TO THE TRANSACTIONS
CERTAIN FINANCIAL AND OPERATING CONDITIONS
While the Hilton Gaming Business and Grand's Non-Mississippi Business have
substantial operating histories, Park Place and Lakes do not have operating
histories as separate stand-alone companies. Prior to the distribution of the
Park Place common stock, par value $.01 per share (the "Park Place Common
Stock") to stockholders of Hilton (the "Hilton Distribution"), Hilton had access
to the cash flow and assets of the Hilton Gaming Business and Park Place had
access to the cash flow and assets of the Hilton Lodging Business (as defined
herein), and prior to the distribution of the Lakes common stock, par value $.01
per share (the "Lakes Common Stock"), to shareholders of Grand (the "Grand
Distribution"), Grand had access to the cash flow and assets of the
Non-Mississippi Business and Lakes had access to the cash flow and assets of
Grand's Mississippi Business.
Subsequent to the Hilton Distribution, Hilton will not have the benefit of
either the cash flow generated by, or the assets of, the Hilton Gaming Business
and Park Place will not have the benefit of either the cash flow generated by,
or the assets of, Hilton's Lodging Business. Net cash provided by operating
activities of Hilton's Lodging Business totaled $222 million, $297 million and
$213 million for the fiscal years ended December 31, 1997, 1996 and 1995,
respectively. Total assets of Hilton's Lodging Business were $3.8 billion at
June 30, 1998.
Subsequent to the Grand Distribution and the merger of Gaming Acquisition
Corporation, a wholly owned subsidiary of Park Place, with and into Grand, with
Grand as the surviving corporation (the "Merger"), Grand, as a wholly owned
subsidiary of Park Place, will not have the benefit of either the cash flow
generated by, or the assets of, Grand's Non-Mississippi Business, and Lakes will
not have the benefit of either the cash flow generated by, or the assets of,
Grand's Mississippi Business. Net cash provided by operating activities of
Grand's Mississippi Business totaled $35.7 million, $62.5 million and $34.3
million for the fiscal years ended December 28, 1997, December 29, 1996 and
December 31, 1995, respectively. Total assets of Grand's Mississippi Business
were $132.8 million at June 28, 1998.
Subsequent to the Hilton Distribution and the Grand Distribution
(collectively, the "Distributions"), each of Park Place and Lakes, respectively,
will be a smaller, more focused company than Hilton and Grand, respectively,
prior to the Distributions. Consequently, the results of operations of each
entity will be more susceptible to competitive and market factors specific to
its core business. In addition, the division of each of Hilton and Grand may
result in some temporary dislocation and inefficiencies to the business
operations, as well as the organization and personnel structure of each company.
Nevertheless, the Board of Directors of Hilton (the "Hilton Board") and the
Board of Directors of Grand (the "Grand Board") each believe that separation of
their respective companies will result in long-term operating efficiencies by
allowing each of the companies to focus on its respective business.
NO CURRENT MARKET FOR COMMON STOCK
There is currently no public market for the shares of Park Place or Lakes.
While Park Place has applied to list the Park Place Common Stock, together with
the associated stockholders' rights, on the New York Stock Exchange (the "NYSE")
and Lakes intends to apply to list the Lakes Common Stock on the Nasdaq National
Market, there can be no assurance (i) that applicable listing criteria will be
satisfied, (ii) as to the volume of trading and liquidity that will develop or
(iii) as to the prices at which the Park Place Common Stock or Lakes Common
Stock will trade after the Transactions. Moreover, until the Park Place Common
Stock and Lakes Common Stock are fully distributed and an orderly market
develops, the
27
<PAGE>
prices at which trading in these securities occurs may fluctuate significantly.
The prices at which the Park Place Common Stock and the Lakes Common Stock trade
will be determined by the marketplace and may be influenced by many factors,
including, among others, the depth and liquidity of the market for such stock,
investor perception of Park Place and Lakes and the businesses in which each
company participates, each company's dividend policy and general economic and
market conditions. Finally, the combined trading prices of the Hilton common
stock, par value $2.50 per share (the "Hilton Common Stock") and the Park Place
Common Stock held by Hilton stockholders after the Transactions may be less
than, equal to or greater than the trading price of the Hilton Common Stock
prior to the Transactions, and the combined trading prices of the Park Place
Common Stock and the Lakes Common Stock held by Grand shareholders after the
Transactions may be less than, equal to or greater than the trading price of
Grand common stock, par value $.01 per share (the "Grand Common Stock"), prior
to the Transactions.
STRUCTURE OF THE TRANSACTIONS; INDEMNIFICATION OBLIGATIONS
As a result of the Grand Distribution and the Merger, the shareholders of
Grand will become shareholders of Lakes, whose business will be subject to the
risks of the Non-Mississippi Business, and will also become stockholders of Park
Place, whose business will be subject to the risks of the Hilton Gaming Business
and the Mississippi Business. Under the distribution agreement to be entered
into between Grand and Lakes (the "Grand Distribution Agreement"), Lakes and
Grand will agree to indemnify each other for liabilities retained by them in the
Grand Distribution. Additionally, under the Merger Agreement, Lakes agreed to
indemnify Grand for (i) Grand's ongoing indemnification obligations to current
and former directors and officers of Grand and (ii) contingent liabilities
related to Stratosphere Corporation ("Stratosphere"). The availability of such
indemnities will be dependent upon the financial strength and creditworthiness
of Grand and Lakes, respectively. No assurance can be given that such entities
will be in a position to fund such indemnities should they be obligated to do so
in the future. See "The Transactions-- Indemnification Obligations" and
"Business and Properties of Lakes--Legal Proceedings."
LAKES FUNDING OBLIGATION
As security to support Lakes' indemnification obligations to Grand under
each of the Grand Distribution Agreement and the Merger Agreement, and as a
condition to the consummation of the Merger, Lakes has agreed to irrevocably
deposit, in trust for the benefit of Grand, as a wholly owned subsidiary of Park
Place, an aggregate of $30 million, consisting of four annual installments of
$7.5 million, during the four year period subsequent to the effective date of
the Merger. Lakes' ability to satisfy this funding obligation is materially
dependent upon the continued success of its operations and the general risks
inherent in its business. In the event Lakes is unable to satisfy its funding
obligation, it would be in breach of its agreement with Grand, possibly
subjecting itself to additional liability for contract damages, which could have
a material adverse effect on Lakes' business and results of operations.
Additionally, in the event of Lakes' failure to fund such trust, or otherwise
satisfy its indemnification obligations to Grand, Grand would be required to
satisfy any such liabilities, which could, either individually or in the
aggregate, have a material adverse effect on the business of Park Place and its
results of operations. See "Business and Properties of Lakes--Legal
Proceedings."
STATEWIDE GAMING REFERENDA
Park Place anticipates that gaming referenda will be voted upon in several
states which, depending upon the result, could materially adversely affect Park
Place. In California, Proposition Five, which was proposed by Indian tribes, has
qualified for inclusion on the California ballot for the November 3, 1998
election. If approved, this referendum would legalize games currently operated
by certain tribes in contravention of California and Federal law and could lead
to the expansion of gaming operations by California Indian tribes, which could
have a material adverse effect on Park Place's Nevada operations. A legal action
has been filed in California State court challenging the validity of Proposition
Five under the California constitution.
28
<PAGE>
In Missouri, Park Place and other operators of riverboat casinos in man-made
basins have filed a referendum which has qualified for inclusion on the Missouri
ballot for the November 3, 1998 election. This referendum, known as
Constitutional Amendment 9, is in response to a recent decision of the Missouri
Supreme Court that riverboat casinos must meet certain requirements as to
contiguity with the river in order to operate games of chance (particularly slot
machines) in compliance with the Missouri constitution. If approved, this
referendum would permit Park Place to continue to operate games of chance on its
riverboat casino at the present location. Failure of passage of such referendum
is likely to have a material adverse effect upon the operation of Park Place's
Missouri Casino. The assets of Park Place's Missouri casino have been written
down to their net realizable value. See "Business and Properties of Park
Place--Missouri Casino."
In Mississippi, two referenda have been proposed which would repeal
legalized gaming in Mississippi and impose a two-year period for all gaming
operations to terminate. In order for a referendum to be included on the
November 1999 ballot, it needed to be approved by the Mississippi Secretary of
State and the signatures of approximately 98,000 registered voters were required
to be gathered and certified by October 7, 1998. Neither of the proposed
referenda met this October 7, 1998 deadline. Proponents could attempt to place
such a referendum on the November 2000 ballot. If any such referendum proposal
is ultimately adopted, it could have a material adverse effect on Park Place.
USE OF TRADEMARKS
Hilton has agreed to grant Park Place a non-exclusive license to use the
"Hilton" name in certain limited respects for a specified period of time after
the Hilton Distribution and the "Conrad" name for the duration of the license
agreement applicable to each Conrad property. Park Place will not have the right
to use the "Hilton" and "Conrad" names after the expiration of such periods.
Furthermore, to the extent that Park Place fails to perform its obligations
under the license agreement relating to the use of the "Hilton" and "Conrad"
names, Hilton could prevent Park Place from using such names. Park Place may
have to make additional expenditures to position its new name in markets and
cannot predict with certainty the extent to which the substitution of a new name
may adversely affect its ability to retain and attract patrons. See "The
Transactions--Arrangements Between Hilton and Park Place--Trademark Assignment
and License Agreement."
Following the Grand Distribution and the Merger, all trademarks of Grand
will be owned by Grand, as a wholly owned subsidiary of Park Place, subject to
certain preexisting rights of the Mille Lacs Band of Chippewa Indians (the
"Minnesota Tribe") with respect to Grand Casino Mille Lacs and Grand Casino
Hinckley in Minnesota. However, Grand has agreed to grant Lakes a non-exclusive
license to use the names used in its Minnesota and Louisiana Indian gaming
business in certain limited respects for a specified period of years after the
Grand Distribution. Lakes will not have the right to use these names after the
expiration of this period, although the Minnesota Tribe retains this right
indefinitely on a limited use basis. Furthermore, to the extent that Lakes fails
to perform its obligations under the license agreement relating to Lakes' use of
such names, Grand could prevent Lakes from using these names. Lakes may have to
make additional expenditures to position its new name in markets and cannot
predict with certainty the extent to which the substitution of a new name may
adversely affect its ability to retain and attract patrons. See "The
Transactions--Arrangements Between Grand and Lakes--Intellectual Property
License Agreement."
ONGOING RELATIONSHIPS
Hilton and Park Place are entering into certain arrangements at the
Effective Date pursuant to which Hilton may be providing Park Place with certain
consulting and advisory services and other assistance. This may have the effect
of causing Park Place to be somewhat reliant on its relationship with Hilton.
Each of these arrangements has a maximum term of eighteen months, and Park Place
must develop the capacity to perform these corporate services itself or obtain
them from third parties. Should Hilton encounter
29
<PAGE>
financial or other difficulties that could prevent it from providing such
services or assistance to Park Place, the results of operations of Park Place
could be materially and adversely affected.
CERTAIN ANTITAKEOVER FEATURES
If the Hilton Proposals are approved and the Hilton Distribution is
consummated, the certificate of incorporation and bylaws of Park Place will
contain several provisions, all of which are now in effect with respect to
Hilton, that may make the acquisition of control of Park Place difficult or
expensive or increase the likelihood that incumbent management will retain their
positions or hinder a transaction that may be attractive to stockholders. See
"Description of Park Place Capital Stock" and "Certain Antitakeover Provisions
Applicable to Park Place."
The Lakes' Board of Directors (the "Lakes Board"), without any action by
Lakes' shareholders, is authorized to designate and issue shares of capital
stock in such classes or series (including preferred stock) as it deems
appropriate and to establish the right, preferences and privileges of such
shares. No class other than the Lakes Common Stock is currently designated and
there is no current plan to designate or issue any such securities. The rights
of holders of other classes of capital stock that may be issued may be superior
to the rights granted to the holders of the existing common stock. Further, the
ability of the Lakes Board to designate and issue undesignated shares could
impede or deter an unsolicited tender offer or takeover proposal, and the
issuance of additional shares having preferential rights could adversely affect
the voting power and other rights of holders of Lakes Common Stock. See
"Description of Lakes Capital Stock" and "Certain Anti-Takeover Provisions
Applicable to Lakes."
CERTAIN TAX CONSIDERATIONS TO HILTON, HILTON STOCKHOLDERS, AND GRAND
SHAREHOLDERS RELATING TO THE HILTON DISTRIBUTION AND THE GRAND DISTRIBUTION
Hilton has conditioned the Hilton Distribution on the receipt of a
satisfactory ruling from the Internal Revenue Service (the "IRS") to the effect
that the Hilton Distribution will qualify as a tax-free transaction such that
none of Hilton stockholders, Hilton or Park Place will recognize any income,
gain or loss as a result of such transactions. See "Material Federal Income Tax
Consequences of the Transactions-- Consequences of the Hilton Distribution and
the Grand Distribution--Consequences of the Hilton Distribution to Hilton and
Hilton Stockholders." However, the Hilton Board has reserved the right to waive
receipt of the ruling as a condition to consummation of the Hilton Distribution.
The Hilton Board will not provide stockholders with notice if receipt of the tax
ruling is waived as a condition to consummation of the Hilton Distribution,
however, (i) the Hilton Board will waive such condition only if the Hilton Board
believes that the distribution and receipt of the shares of Park Place will be
tax-free to Hilton and its stockholders, respectively, and (ii) the closing of
the Transactions will be conditioned on the receipt of opinions of counsel
mutually satisfactory to both Hilton and Grand to the effect that, while not
free from doubt, the Hilton Distribution and, solely with respect to Grand
shareholders, the Grand Distribution, will be tax-free distributions under
Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"). If
delivered pursuant to the closing of the Transactions, such opinions will not be
free from doubt because of the inherently factual nature of certain of the
analysis and requirements necessary to qualify the Hilton Distribution and Grand
Distribution under Section 355 of the Code. Hilton and Park Place have made
certain representations and agreed to certain restrictions on their future
actions to provide further assurances that the Hilton Distribution will qualify
as tax-free. See "The Transactions-- Arrangements Between Hilton and Park
Place--Tax Allocation and Indemnity Agreement."
If either (i) Hilton fails to receive a satisfactory ruling from the IRS
regarding the Hilton Distribution or (ii) Hilton receives a satisfactory ruling
from the IRS regarding the Hilton Distribution, but any of the facts,
representations, and warranties on which such ruling would be based are not true
and correct and the IRS challenged the tax-free nature of the Hilton
Distribution, it is possible that the Hilton Distribution would be held to be a
taxable distribution by Hilton of Park Place Common Stock to Hilton
stockholders.
If the Hilton Distribution were not to qualify under Section 355 of the
Code, then in general a corporate level tax would be payable by the consolidated
group of which Hilton is the common parent
30
<PAGE>
based upon the difference between (i) the fair market value of the Park Place
Common Stock and (ii) the adjusted basis of the Park Place Common Stock
immediately prior to the Hilton Distribution. Under the consolidated return
rules, each member of the consolidated group (including Park Place) is severally
liable for such tax liability, and such liability could have a material adverse
effect on Hilton, Park Place, or both. Pursuant to the Hilton Tax Agreement (as
defined herein) that Hilton and Park Place will enter into in connection with
the Hilton Distribution, depending on the facts pursuant to which there is a
final determination that the Hilton Distribution is a taxable transaction,
either Hilton or Park Place could be contractually liable for the full amount,
or a portion of, such corporate level tax. In addition, each holder of Hilton
Common Stock who receives shares of Park Place Common Stock in the Hilton
Distribution would be treated as if such stockholder received a taxable
distribution in an amount equal to the fair market value of the Park Place
Common Stock received, which would result in (i) a dividend to the extent of
such stockholder's pro rata share of Hilton's current and accumulated earnings
and profits, (ii) a reduction in such stockholder's basis in Hilton Common Stock
to the extent the amount received exceeds such stockholder's share of earnings
and profits and (iii) gain from the exchange of Hilton Common Stock to the
extent the amount received exceeds both such stockholder's share of earnings and
profits and such stockholder's basis in Hilton Common Stock. See "The
Transactions--Arrangements between Hilton and Park Place--Tax Allocation and
Indemnity Agreement" and "Material Federal Income Tax Consequences of the
Transactions--Consequences of the Hilton Distribution and the Grand
Distribution--Consequences of the Hilton Distribution to Hilton and Hilton
Stockholders."
Grand has conditioned the Grand Distribution on the receipt of a
satisfactory ruling from the IRS to the effect that the Grand Distribution will
qualify as a tax-free transaction, solely with respect to the Grand shareholders
except to the extent that Grand shareholders receive cash in lieu of fractional
shares of Lakes Common Stock in the Grand Distribution. See "Material Federal
Income Tax Consequences of the Transactions--Consequences of the Hilton
Distribution and the Grand Distribution--Consequences of the Grand Distribution
to Grand and Grand Shareholders." However, the Grand Board has reserved the
right to waive receipt of the ruling as a condition to consummation of the Grand
Distribution. The Grand Board will not provide shareholders with notice if
receipt of the tax ruling is waived as a condition to consummation of the Grand
Distribution; however, (i) the Grand Board will waive such condition only if the
Grand Board believes that the receipt of the shares of Lakes will be tax-free to
the Grand shareholders and (ii) the closing of the Transactions will be further
conditioned on the receipt of opinions of counsel mutually satisfactory to both
Hilton and Grand to the effect that, while not free from doubt, the Hilton
Distribution and, solely with respect to Grand shareholders, the Grand
Distribution, will be tax-free distributions under Section 355 of the Code. If
delivered pursuant to the closing of the Transactions, such opinions will not be
free from doubt because of the inherently factual nature of certain of the
analysis and requirements necessary to qualify the Hilton Distribution and Grand
Distribution under Section 355 of the Code. Grand and Lakes have made certain
representations and agreed to certain restrictions on their future actions to
provide further assurances that the Grand Distribution will qualify as tax-free,
solely with respect to the shareholders of Grand. See "The
Transactions--Arrangements Between Grand and Lakes-- Tax Allocation and
Indemnity Agreement."
If either (i) Grand fails to receive a satisfactory ruling from the IRS
regarding the Grand Distribution or (ii) Grand receives a satisfactory ruling
from the IRS regarding the Grand Distribution, but any of the facts,
representations and warranties on which such ruling would be based are not true
and correct and the IRS challenged the tax-free nature of the Grand Distribution
it is possible that the Grand Distribution would be held to be a taxable
distribution by Grand of Lakes Common Stock to Grand shareholders. See "Material
Federal Income Tax Consequences of the Transactions--Consequences of the Hilton
Distribution and the Grand Distribution--Consequences of the Grand Distribution
to Grand and Grand Shareholders."
If the Grand Distribution were not to qualify under Section 355 of the Code
with respect to the shareholders of Grand, each holder of Grand Common Stock who
receives shares of Lakes Common Stock in the Grand Distribution would be treated
as if such shareholder received a taxable distribution in an
31
<PAGE>
amount equal to the fair market value of the Lakes Common Stock received, which
would result in (i) a dividend to the extent of such shareholder's pro rata
share of Grand's current and accumulated earnings and profits, (ii) a reduction
in such shareholder's basis in Grand Common Stock to the extent the amound
received exceeds such shareholder's share of earnings and profits and (iii) gain
from the exchange of Grand Common Stock to the extent the amount received
exceeds both such stockholder's share of earnings and profits and such
stockholder's basis in Grand Common Stock. See "The Transactions--Arrangements
between Grand and Lakes--Tax Allocation and Indemnity Agreement" and "Material
Federal Income Tax Consequences of the Transactions--Consequences of the Hilton
Distribution and the Grand Distribution--Consequences of the Grand Distribution
to Grand and Grand Shareholders."
CERTAIN TAX CONSIDERATIONS TO GRAND AND PARK PLACE RELATING TO THE GRAND
DISTRIBUTION
As a result of the Merger, the Grand Distribution will be fully taxable to
Grand under Section 355(e) of the Code. Accordingly, Grand will recognize
taxable gain equal to the excess of the fair market value of the Lakes Common
Stock over Grand's basis in such stock (the "Section 355(e) Gain"). As discussed
in "Material Tax Consequences of the Transactions--Consequences of the
Merger--Consequences of the Merger to Grand and Grand Shareholders," Grand
anticipates that certain tax losses and deductions relating to Stratosphere will
offset the Section 355(e) Gain. However, there can be no assurance that the
amount of tax losses and deductions available to offset the Section 355(e) Gain
will be allowed by the IRS or that such tax losses and deductions will fully
offset the Section 355(e) Gain (even if allowed by the IRS). If such tax losses
and deductions are not allowed or fail to fully offset the Section 355(e) Gain,
Grand would have a right to indemnification from Lakes for the amount of such
Section 355(e) Gain. If Lakes is unable to satisfy its indemnification
obligation, any such loss would be borne by Grand. See "The
Transactions--Arrangements Between Grand and Lakes--Grand Tax Allocation and
Indemnity Agreement" and "Material Tax Consequences of the
Transactions--Consequences of the Merger--Consequences of the Merger to Grand
and Grand Shareholders."
CERTAIN TAX CONSIDERATIONS RELATING TO THE MERGER
As discussed under "Material Federal Income Tax Consequences of the
Transactions--Consequences of the Merger," the Merger is intended to qualify as
a reorganization within the meaning of Section 368(a)(1) of the Code. The
obligation of Park Place to consummate the Merger is subject to the condition
that it shall have received an opinion of its counsel, dated the effective date
of the Merger, to the effect that (i) the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a)(1)
of the Code, (ii) each of Park Place and Grand will be parties to the
reorganization within the meaning of Section 368(b) of the Code and (iii) no
gain or loss will be recognized by Grand, Hilton, or Park Place as a result of
the Merger, except for any gain which may be recognized by Grand from the Grand
Distribution as a result of the Merger. See "Material Federal Income Tax
Consequences of the Transactions--Consequences of the Merger--Consequences of
the Merger to Park Place and Park Place Stockholders."
The obligation of Grand to consummate the Merger is subject to the condition
that it shall have received an opinion of its counsel, dated the closing date of
the Merger, to the effect that (i) the Merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section 368(a)(1) of the
Code, (ii) each of Park Place and Grand will be parties to the reorganization
within the meaning of Section 368(b) of the Code and (iii) no gain or loss will
be recognized by Grand as a result of the Merger, except for any gain which may
be recognized by Grand from the Grand Distribution as a result of the Merger.
Assuming the Merger is so treated for federal income tax purposes, the Merger
will not result in the recognition of gain or loss by Park Place, Gaming
Acquisition Corporation, Grand (except as a result of the Grand Distribution) or
the holders of Grand Common Stock, except with respect to cash received by such
holders in lieu of fractional shares of Park Place Common Stock. See "Material
Federal Income Tax Consequences of the Transactions--Consequences of the
Merger--Consequences of the Merger to Grand and Grand Shareholders." However, an
opinion of counsel is not binding on the IRS, and no ruling from
32
<PAGE>
the IRS regarding the tax treatment of the Merger has been sought. Accordingly,
there is no assurance that the IRS will not take a position contrary to one or
more of the positions reflected in such counsels' opinions or that these
positions will be upheld by the courts if challenged by the IRS. If the Merger
does not constitute a reorganization within the meaning of Section 368(a)(1) of
the Code, holders of Grand Common Stock will recognize gain or (subject to
certain limitations) loss in an amount equal to the difference between (i) the
fair market value of the consideration received by such holders in the Merger
and (ii) their adjusted tax basis in the shares of Grand Common Stock being
exchanged.
HIGHLY REGULATED INDUSTRY
The ownership, management and operation of gaming facilities are subject to
extensive federal, state, provincial, tribal and/or local laws, regulations, and
ordinances, which are administered by the relevant regulatory agency or agencies
in each jurisdiction. These laws, regulations and ordinances vary from
jurisdiction to jurisdiction, but generally concern the responsibility,
financial stability and character of the owners and managers of gaming
operations as well as persons financially interested or involved in gaming
operations. In connection with the Transactions, regulatory approval will need
to be secured in jurisdictions in which Park Place, Grand and Lakes own, manage
or operate gaming facilities. Park Place has filed the requisite applications or
notifications with each of the applicable gaming regulatory authorities. Grand
and Lakes will request that the National Indian Gaming Commission (the "NIGC")
either approve the Transactions or acknowledge that their approval is not
required. When such request is made there can be no assurance the NIGC approval
or any other required approvals will be secured on a timely basis, if at all.
See "Business and Properties of Park Place--Regulation and Licensing" and
"Business and Properties of Lakes--Regulation."
ASIAN ECONOMIC CRISIS
Hilton's and Park Place's revenues are dependent in part upon the patronage
of international travelers. Various countries in Asia have recently experienced
severe economic and financial disruptions, including significant devaluations of
their currencies and low or negative growth rates in their economies. Sustained
recessionary periods abroad affect international travel and could unfavorably
impact future results of hotel and gaming companies. In the first six months of
1998, revenue at the Hilton Hawaiian Village was negatively impacted by
approximately $10 million due to the Asian economic crisis. Park Place has not
been significantly affected through June 1998. As reported in Hilton's third
quarter earnings release incorporated by reference herein, Hilton's Hawaii and
San Francisco operations were adversely affected by the Asian economic crisis.
See "Recent Developments-- Third Quarter Earnings."
RISKS RELATING TO THE BUSINESS OF LAKES
STRATOSPHERE CORPORATION; PENDING LITIGATION
Grand and certain of its current and former directors and officers are
defendants in several lawsuits related to Grand's investment in Stratosphere.
Stratosphere owns and operates the Stratosphere Tower, Casino & Hotel, a
casino/hotel and entertainment complex in Las Vegas which filed for
reorganization under Chapter 11 of the Bankruptcy Code on January 27, 1997. On
November 7, 1997, Stratosphere filed a second amended proposed plan of
reorganization with the Bankruptcy Court which has been confirmed by the
Bankruptcy Court and which became effective on October 14, 1998 (the "Second
Amended Plan"). Under the Second Amended Plan, the secured portion of
Stratosphere's outstanding first mortgage notes were converted into 100% of the
equity of the reorganized Stratosphere and all of the common stock of
Stratosphere outstanding prior to the effective date of the Second Amended Plan
was canceled. Grand beneficially owned approximately 37% of the issued and
outstanding common stock of Stratosphere prior to its cancellation as a result
of the Second Amended Plan becoming effective.
Pursuant to the terms of the Grand Distribution Agreement, any future
liabilities arising out of the various Stratosphere-related lawsuits will be
assumed by Lakes. In addition other contingent liabilities related to or arising
out of the Non-Mississippi Business (such as tribal loan guarantees, real
property lease
33
<PAGE>
guarantees for Lakes subsidiaries, and director and officer indemnity
obligations (see below)) will also be assumed by Lakes. Although potential costs
associated with these various commitments and contingencies will not increase
solely as a result of the Grand Distribution, given the numerous uncertainties
associated with litigation and the contingent nature of Lakes' various financial
commitments, Lakes is unable to quantify, within any reasonable range, its total
exposure if all or any of the pending litigation were to be resolved adversely
to Lakes' interests, nor is Lakes able to assess the likelihood that it will be
required to perform on some or all of its contingent financial obligations. See
"Business and Properties of Lakes-- Legal Proceedings" and "Note 8--Commitments
and Contingencies--Lakes Gaming, Inc. Notes to Combined Financial Statements."
Under Minnesota corporate law, Lakes is required, subject to certain
limitations and exclusions, to indemnify its current and former officers and
directors. Although Lakes has agreed to assume the liabilities related to
Stratosphere and the Stratosphere lawsuits, Lakes has agreed under the Merger
Agreement to indemnify Grand for such liabilities and certain other pending
litigation. Accordingly, Lakes will bear the cost of defending itself, its
current and former directors and officers, and Grand and its current and former
officers and directors for any settlement or judgment of such matters. Although
these lawsuits are in their early stages and Lakes plans to defend itself
vigorously, there can be no assurance that the costs of defense and any
settlement or judgment will not have a material adverse effect on Lakes or, if
Lakes does not satisfy its indemnification obligations to Grand, on Grand. See
"Risk Factors--Risks Relating to the Transactions--Structure of the
Transactions; Indemnification Obligations" and "Business and Properties of
Lakes--Legal Proceedings."
OPERATING COVENANTS; DIVIDEND RESTRICTIONS
So long as Lakes is required to indemnify Grand for certain specified
liabilities, including (i) contingent liabilities assumed by Lakes under the
Grand Distribution Agreement, (ii) ongoing director and officer indemnification
obligations and (iii) contingent liabilities related to Stratosphere, Lakes has
agreed that it will not declare or pay any dividends, make any distribution on
account of Lakes' equity interests, or otherwise purchase, redeem, defease or
retire for value any equity interest in Lakes, without the written consent of
Park Place, which consent can be given or withheld in Park Place's sole and
absolute discretion.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
Lakes anticipates that the cash it receives in the Grand Distribution,
interest expected to be earned thereon and its anticipated revenues will be
sufficient to finance its operations. There can be no assurance, however, that
Lakes will not seek or require additional capital at some point in the future
through either public or private financings. Such financings may not be
available when needed on terms acceptable to Lakes or at all. Moreover, any
additional equity financings may be dilutive to Lakes shareholders, and any debt
financing may involve additional restrictive covenants. An inability to raise
such funds when needed might require Lakes to delay, scale back or eliminate
some of its expansion and development goals, and might require Lakes to cease
its operations entirely. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Lakes--Capital Resources, Capital
Spending and Liquidity."
COMPETITION
The gaming industry is highly competitive. Gaming activities include
traditional land-based casinos; riverboat and dockside gaming; casino gaming on
Indian land; state-sponsored lotteries and video poker in restaurants, bars and
hotels; pari-mutuel betting on horse racing, dog racing and jai alai; sports
bookmaking; and card rooms. The Indian-owned casinos to be managed by Lakes
compete, and will in the future compete, with all these forms of gaming, and
will compete with any new forms of gaming that may be legalized in additional
jurisdictions, as well as with other types of entertainment. In Minnesota, Grand
Casino Hinckley's principal competitors include Grand Casino Mille Lacs, which
was previously managed
34
<PAGE>
by Grand, and Mystic Lake Casino & Hotel, a wholly owned enterprise of the
Shakopee Mdewakanton Sioux Community.
In Louisiana, there are presently 14 licensed riverboats in operation that
compete with Grand Casino Coushatta and Grand Casino Avoyelles, including
"Casino America" and "Players Lake Charles" and, to a lesser extent, "Binion's
Horseshoe Casino," "Casino Magic" and "Harrah's Shreveport." Although Lakes is
materially dependent on the revenue it derives from its Indian management
contracts, Lakes does not believe that either the Grand Distribution or the
Merger will impact the existing competitive positions of any of its managed
casinos.
Lakes will also compete with other gaming companies for opportunities to
acquire legal gaming sites in emerging and established gaming jurisdictions and
for the opportunity to manage casinos on Indian land. Because the Grand
Distribution will result in the unavailability of historical cash flows and
assets represented by the Mississippi Business, Lakes' ability to compete for
and develop future gaming or other business opportunities will be restricted,
both in the size and number of development projects it can pursue. Many of
Lakes' competitors have more personnel and most have greater financial and other
resources than Lakes. Such competition in the gaming industry could adversely
affect Lakes' ability to attract customers and thus, adversely affect its
operating results. In addition, further expansion of gaming into new
jurisdictions could also adversely affect Lakes' business by diverting customers
from its managed casinos to competitors in such jurisdictions.
MANAGEMENT CONTRACTS OF LIMITED DURATION
Lakes is prohibited under the Indian Gaming Regulatory Act of 1988 (the
"IGRA") from having an ownership interest in any casino it manages for Indian
tribes. The management contracts for the various Indian-owned casinos that Lakes
manages for Indian tribes generally have a term of seven years. The management
contract for Grand Casino Hinckley expires May 15, 1999, and the management
contracts for Grand Casino Avoyelles and Grand Casino Coushatta expire June 3,
2001 and January 16, 2002, respectively. There can be no assurance that any of
these management contracts will be renewed upon expiration or approved by the
NIGC upon any such renewal. Lakes anticipates that its management contract for
Grand Casino Hinckley will not be renewed upon expiration in May 1999 and
further anticipates that any renewal of the Grand Casino Coushatta and Grand
Casino Avoyelles management contracts will be upon terms less favorable to
Lakes. The failure to renew Lakes' management contracts would result in the loss
of revenues to Lakes derived from such contracts, which would have a material
adverse effect on Lakes' results of operations. For the fiscal year ended
December 28, 1997, aggregate revenue derived from Lakes' management contract at
Grand Casino Hinckley was approximately $18.5 million and for the six months
ended June 28, 1998, was approximately $11.1 million.
The Coushatta Tribe and the Tunica-Biloxi Tribe each entered into
tribal-state compacts with the State of Louisiana on September 29, 1992. These
compacts were approved in November, 1992 by the Secretary of the Interior. Each
compact expires in November, 1999, but will automatically renew for an
additional seven year terms unless either the tribe or the State of Louisiana
delivers to the other written notice of non-renewal at least 180 days prior to
the applicable expiration date. Lakes' management agreements with the
Tunica-Biloxi Tribe and the Coushatta Tribe expire after November 1999. In the
event the compacts are not renewed, gaming will not be permitted at Grand Casino
Avoyelles or Grand Casino Coushatta. In the event that the compacts are renewed,
but Lakes' management contracts are not, Lakes will not operate the casinos at
those locations. The non-renewal of either the compacts or the management
contracts would result in the loss of revenues to Lakes derived from such
contracts, which would have a material adverse effect on Lakes' results of
operations. Currently, the management contracts for Grand Casino Hinckley, Grand
Casino Coushatta and Grand Casino Avoyelles generate all of Lakes' operating
revenues. Without the renewal of some or all of the existing management
contracts or the realization of new business opportunities or new management
contracts, the non-renewal of the Louisiana management contracts would have a
material adverse impact on Lakes' results of operations and financial condition.
There can be
35
<PAGE>
no assurance that these compacts will be renewed on terms and conditions
acceptable to either of the tribes.
MANAGEMENT CONTRACTS SUBJECT TO GOVERNMENTAL MODIFICATION
NIGC has the power to require modifications to Indian management contracts
under certain circumstances or to void such contracts or ancillary agreements
including loan agreements if the management company fails to obtain requisite
approvals or to comply with applicable laws and regulations. While Lakes
believes that its management contracts meet the requirements of the IGRA, NIGC
has the right to review each contract and has the authority to reduce the term
of a management contract or the management fee or otherwise require modification
of the contract, which could have an adverse effect on Lakes. Currently, the
management contracts (i) have not been reviewed or approved by NIGC and (ii)
NIGC could call them for review at any time, in which case NIGC may not approve
the contracts at all or may require modification prior to granting approval. In
addition, Lakes has made loans to Indian tribes in excess of the loan ceilings
set forth in each of the Indian management contracts. Under certain
circumstances, these loans may not be enforceable by Lakes. As of June 28, 1998
loan balances outstanding to such tribes were approximately $32.7 million.
LIMITED RECOURSE AGAINST TRIBAL ASSETS
Grand has made, and Lakes will make, substantial loans to tribes for the
construction, development, equipment and operations of casinos managed by Lakes.
Lakes' only recourse for collection of indebtedness from a tribe or money
damages for breach or wrongful termination of a management contract is from
revenues, if any, from casino operations. Grand has subordinated, and Lakes may
in the future subordinate, the repayment of these loans to a tribe and other
distributions due from a tribe (including management fees) in favor of other
obligations of the tribe to other parties related to the casino operations.
Accordingly, in the event of a default by a tribe under such obligations, Lakes'
loans and other claims against the tribe will not be repaid until such default
has been cured or the tribe's senior casino-related creditors have been repaid
in full.
DEPENDENCE ON KEY PERSONNEL
Lakes's future success will depend largely on the efforts and abilities of
its senior corporate management, particularly Lyle Berman, its Chairman and
Chief Executive Officer and Thomas J. Brosig, its President. Mr. Brosig will
also be the senior executive of Park Place in charge of Mississippi, New Orleans
and Missouri operations. The loss of the services of either Mr. Berman or Mr.
Brosig, or other members of senior corporate management could have a material
adverse effect on Lakes. Lakes does not have an employment agreement with either
Mr. Berman or Mr. Brosig, and has not obtained life insurance policies on any of
its officers.
LIMITED BASE OF OPERATIONS
Lakes' principal operations will consist of the management of three
Indian-owned casinos. The combination of the relatively small number of managed
casinos and the potentially significant investment associated with any new
managed casino may cause the operating results of Lakes to fluctuate
significantly and adversely affect the profitability of Lakes. Due to this
relatively small number of current locations, poor operating results at any one
casino or a delay in the opening or non-opening of any future casinos could
materially affect the profitability of Lakes. Future growth in revenues and
profits will depend to a substantial extent on Lakes' ability to continue to
increase the number of its managed casinos. See "Business and Properties of
Lakes."
36
<PAGE>
RECENT DEVELOPMENTS
THIRD QUARTER EARNINGS
HILTON
On October 20, 1998, Hilton announced net income for the third quarter
ending September 30, 1998 of $79 million, or $.30 per diluted share, compared to
$94 million, or $.35 per diluted share, for the comparable 1997 period. On
September 14, 1998, Hilton announced that net income per diluted share for the
third quarter was expected to be in the low-30 cent range.
Third quarter EBITDA (earnings before interest, taxes, depreciation,
amortization and non-cash items) totaled $297 million, up 8 percent from $276
million for the comparable 1997 period. The increase was attributable primarily
to continued strength at many of Hilton's owned and equity hotel properties and
EBITDA from newly acquired hotels. Net income for the quarter was impacted by an
increase in net interest expense due primarily to higher average debt levels
resulting from acquisition spending and increased depreciation expense also
related to acquisitions.
EBITDA for Hilton's lodging division was $159 million for the third quarter,
an increase of 16 percent from $137 million one year ago. EBITDA for Hilton's
gaming division was $151 million for the third quarter, comparable with last
year's $153 million.
Factors impacting the hotel division's EBITDA were softness at Hilton's
Honolulu and San Francisco hotels as a result of adverse economic conditions in
Asia and lower-than-expected management fee income from the Conrad International
Hong Kong, which is also being negatively affected by the Asian economic
situation. The flat performance of the gaming division's EBITDA was attributable
primarily to comparatively low table game hold percentage at Bally's Park Place
in Atlantic City and lower-than-expected revenue per available room at Hilton's
Las Vegas properties as a result of a generally sluggish Las Vegas market.
Results were also impacted by a soft quarter at Hilton's Reno properties due to
continued difficult market conditions.
For additional information regarding third quarter earnings release
information, see Hilton's Form 8-K filed on October 21, 1998 and incorporated
herein by reference. See "Where You Can Find More Information."
GRAND
On October 20, 1998, Grand announced basic and diluted earnings of $0.78 per
share and $0.76 per share, respectively, for the third quarter of 1998, compared
with basic and diluted earnings per share of $0.53 and $0.51, respectively, for
the third quarter of 1997. Financial highlights for the three-month period ended
September 27, 1998, include net revenues of $182.2 million, nine percent higher
than the $167.6 million of revenue earned in the third quarter of 1997. EBITDA
(earnings before interest, taxes, depreciation, and amortization) for the
quarter was $61.4 million, compared with $56.8 million a year ago, an eight
percent increase. Net earnings increased 48 percent during the quarter to $32.9
million, compared with $22.2 million a year ago. Earnings per share from
operations before the impact of charges described below were $0.57.
Net earnings for the quarter were positively impacted by a tax benefit
recognized in the quarter from the previous write-off of a note receivable from
Stratosphere. The result of the recognition of the tax benefit was a reduction
in tax expense or an increase in net earnings of $13.1 million, or $0.31 per
share. Net earnings from operations were negatively impacted by an increase in
corporate expenses of approximately $2.6 million, or $0.06 per share. Those
expenses include costs associated with the Transactions, the write-off of
expenses associated with development projects, and an insurance deductible
related to Hurricane Georges. Net earnings from operations for the quarter were
also negatively impacted by
37
<PAGE>
$2.5 million, or $0.06 per share, related primarily to change in estimates to
depreciation for recently completed construction projects.
For additional information regarding third quarter earnings release
information, see Grand's Form 8-K filed on October 21, 1998 and incorporated
herein by reference. See "Where You Can Find More Information."
POSSIBLE STOCK REPURCHASES BY HILTON
Hilton may repurchase shares of its common stock pursuant to its existing
stock repurchase program following the date of this Joint Proxy
Statement/Prospectus, although as of the date of this Joint Proxy
Statement/Prospectus, Hilton does not have an immediate plan to do so. Hilton
may repurchase up to 15.7 million shares of common stock remaining for
repurchase pursuant to such program. The timing of stock repurchases is made at
the discretion of Hilton's management, subject to certain business and market
conditions. Hilton management anticipates that any such repurchases prior to the
consummation of the Merger would be limited to an amount not to exceed 3% of
Hilton's outstanding common stock, which as of September 15, 1998, equaled
approximately 7.5 million shares. There can be no assurance, however, that any
such repurchases will occur. If Hilton decides to repurchase any of its shares,
the trading price of Hilton Common Stock could increase, although there can be
no assurance that this would occur.
Such repurchases would impact the calculation of the Exchange Ratio. In
summary, a portion of the debt used to fund such repurchases would be allocated
to Park Place in connection with the Hilton Distribution which would reduce its
net enterprise value. The repurchases would also have the effect of reducing the
number of Park Place shares outstanding for purposes of the calculation,
although this factor alone would not alter the overall ownership percentages
that Grand shareholders and Hilton stockholders would have in Park Place. Taken
together, these factors would impact the calculation of the Park Place valuation
factor which would impact the calculation of the Exchange Ratio. See "Examples
of What Grand Shareholders Could Receive in the Merger" on page 5 for an
illustrative example.
EFFECTS OF HURRICANE GEORGES ON GRAND'S MISSISSIPPI CASINOS
On September 28, 1998, Grand announced that its two casino resorts on the
Mississippi Gulf Coast, Grand Casino Gulfport and Grand Casino Biloxi,
temporarily closed as a result of Hurricane Georges. These closings were based
on a mandate by the Mississippi Gaming Commission and also impacted the other
nine casinos on the Mississippi Gulf Coast. Grand is insured for the full
replacement value of its Gulf Coast properties, inclusive of all real and
personal property. Additionally, Grand Casino Gulfport and Grand Casino Biloxi
have full business interruption insurance, including coverage for wind and
flood, covering continuing expenses, as well as lost revenues during the period
the casinos are affected by the storm. Each of the two casinos has a $500,000
deductible on its insurance coverage. Grand Casino Gulfport reopened on October
2, 1998, suffering only minimal damage as a result of the hurricane, principally
to its hotel. Grand Casino Biloxi was more substantially damaged in the storm
but reopened on October 15, 1998.
CHAPTER 11 REORGANIZATION OF STRATOSPHERE CORPORATION BECOMES EFFECTIVE
On October 14, 1998, the Second Amended Plan of Stratosphere and its
subsidiary, Stratosphere Gaming Corp., became effective. Under the Second
Amended Plan, the secured portion of Stratosphere's first mortgage notes that
were outstanding prior to the effective date of the Second Amended Plan have
been exchanged for a total of 2,030,000 shares of new common stock, and
Stratosphere common stock that was outstanding prior to the effective date of
the Second Amended Plan was canceled. Under the Second Amended Plan, holders of
the first mortgage notes are the only persons who received new stock of
Stratosphere.
38
<PAGE>
Prior to the effectiveness of the Second Amended Plan, Grand owned
approximately 37% of the issued and outstanding common stock of Stratosphere.
Under the terms of the Grand Distribution Agreement, Lakes has agreed to assume
any future liabilities arising out of Grand's investment in Stratosphere. See
"Risk Factors--Risks Relating to the Business of Lakes--Stratosphere
Corporation; Pending Litigation"--"Business and Properties of Lakes--Legal
Proceedings."
THE SPECIAL MEETINGS
THE HILTON SPECIAL MEETING
DATE, TIME AND PLACE OF THE HILTON SPECIAL MEETING
This Joint Proxy Statement/Prospectus is being furnished to Hilton
stockholders in connection with the solicitation of proxies by Hilton from
holders of shares of Hilton Common Stock, for use at a special meeting to be
held at The Beverly Hilton, 9876 Wilshire Boulevard, Beverly Hills, California
90210 at 2:00 p.m. local time on November 24, 1998 and at any and all
adjournments or postponements thereof (the "Hilton Special Meeting").
MATTERS FOR CONSIDERATION AT THE HILTON SPECIAL MEETING
At the Hilton Special Meeting, Hilton stockholders will be asked to consider
and vote upon the following five related proposals (collectively, the "Hilton
Proposals"):
- PROPOSAL ONE: Ratification of a special dividend consisting of the
distribution to the holders of the outstanding shares of Hilton Common
Stock, on a one-for-one basis, of all the outstanding shares of Park Place
Common Stock, and the associated stockholders' rights to be effected in
accordance with the terms of a distribution agreement to be entered into
between Hilton and Park Place (the "Hilton Distribution Proposal");
- PROPOSAL TWO: Approval of the Park Place Entertainment Corporation 1998
Stock Incentive Plan including the grant of options thereunder, as
described herein;
- PROPOSAL THREE: Approval of the Park Place Entertainment Corporation 1998
Independent Director Stock Option Plan;
- PROPOSAL FOUR: Approval of the amendment and restatement of the Hilton
Hotels Corporation 1996 Stock Incentive Plan including the grant of
options thereunder, as described herein; and
- PROPOSAL FIVE: Ratification of the election of ten directors of Park
Place specified in this Joint Proxy Statement/Prospectus, who will be
divided into three classes, the initial terms of which will expire in
2000, 2001 and 2002.
Stockholders will consider and vote upon such other business as may properly
come before the Hilton Special Meeting and any adjournment thereof.
THE EFFECTIVENESS OF EACH OF THE HILTON PROPOSALS IS CONDITIONED UPON THE
APPROVAL OF ALL OF THE HILTON PROPOSALS. ACCORDINGLY, FAILURE OF THE
STOCKHOLDERS TO APPROVE ANY ONE OR MORE OF THE HILTON PROPOSALS WILL RESULT IN
THE INEFFECTIVENESS OF ALL OF THE HILTON PROPOSALS. See "The Hilton Proposals."
THE HILTON BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR ALL OF
THE HILTON PROPOSALS. Certain members of the Hilton Board, however, may be
deemed to have interests in the Hilton Distribution that are different from or
in addition to the interests of Hilton stockholders generally. See "Certain
Relationships and Related Transactions," "The Transactions" and "Management of
Park Place."
Hilton has conditioned the effectiveness of each of its proposals on the
approval by its stockholders of all of the proposals because Hilton believes all
of the proposals are important components of the Transactions and approval of
the incentive plans is integral to successfully attracting management.
39
<PAGE>
RECORD DATE; QUORUMS
The Hilton Board has fixed the close of business on October 20, 1998 as the
record date (the "Hilton Record Date") for the determination of the holders of
Hilton Common Stock entitled to receive notice of and to vote at the Hilton
Special Meeting. The presence, in person or by properly executed proxy, of the
holders of a majority of the outstanding shares of Hilton Common Stock entitled
to vote at the meeting will constitute a quorum for the transaction of business
at the meeting.
VOTES REQUIRED
Each Hilton stockholder of record as of the Hilton Record Date is entitled
to one vote for each share of Hilton Common Stock held at the Hilton Special
Meeting. The affirmative vote of a majority of the shares represented at the
Hilton Special Meeting and entitled to vote is required to approve each of the
Hilton Proposals.
On October 3, 1998 Hilton redeemed its Preferred Redeemable Increased
Dividend Equity Securities, 8% PRIDES-SM-, Convertible Preferred Stock, par
value $1.00 per share (the "PRIDES"). At the time this Joint Proxy
Statement/Prospectus is first mailed to Hilton stockholders, no shares of PRIDES
are issued or outstanding.
On the Hilton Record Date, there were 260,588,141 shares of Hilton Common
Stock outstanding and entitled to vote at the Hilton Special Meeting and 11,957
record holders of Hilton Common Stock. Executive officers and directors of
Hilton who owned, in the aggregate, as of September 15, 1998, approximately 12%
of the outstanding shares of Hilton Common Stock have indicated an intention to
vote in favor of the Hilton Proposals.
Although Hilton does not believe that stockholder approval of the Hilton
Distribution is required under Delaware law, the Hilton Board has made
stockholder ratification of the Hilton Distribution a condition to the Hilton
Distribution because of the importance of the Hilton Distribution to Hilton and
its stockholders.
In the event its stockholders fail to ratify the Hilton Distribution and
related matters, Hilton currently intends to continue to operate the Hilton
Gaming Business and the Hilton Lodging Business and may consider alternative
restructuring options.
The Hilton Board has further retained discretion, even if stockholder
approval of the Hilton Distribution is obtained and the other conditions to the
Hilton Distribution are satisfied, to abandon, defer or modify the Hilton
Distribution or any other element contained in the Hilton Proposals, provided
that following stockholder approval or ratification, as applicable, the Hilton
Board will not make any changes in the terms of the Hilton Distribution or the
other elements of the Hilton Proposals unless the Hilton Board determines that
such changes would not be materially adverse to Hilton's stockholders.
VOTING AND REVOCATION OF PROXIES
Shares of Hilton Common Stock represented by a proxy properly signed and
received at or prior to the Hilton Special Meeting, unless subsequently revoked,
will be voted in accordance with the instructions thereon. IF A PROXY FOR THE
HILTON SPECIAL MEETING IS PROPERLY EXECUTED AND RETURNED WITHOUT INDICATING ANY
VOTING INSTRUCTIONS, SHARES OF HILTON COMMON STOCK REPRESENTED BY SUCH PROXY
WILL BE VOTED FOR APPROVAL OF THE HILTON PROPOSALS AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
For voting purposes at the Hilton Special Meeting, only shares affirmatively
voted in favor of a proposal (including properly executed proxies not containing
voting instructions) will be counted as favorable votes for such proposal. The
failure to submit a proxy (or to vote in person) or the abstention from voting
will have the same effect as a vote against such proposal. Under Delaware law,
shares
40
<PAGE>
represented by proxies that reflect abstentions or "broker non-votes" (i.e.,
shares held by a broker or nominee which are represented at the Hilton Special
Meeting, but with respect to which such broker or nominee is not empowered to
vote on a particular proposal) will be counted as shares that are present and
entitled to vote for purposes of determining the presence of a quorum for the
transaction of all business. Because shares with respect to which stockholders
abstain are deemed to be present and entitled to vote, abstentions as to any of
the Hilton Proposals will have the same effect as votes against such proposals.
Broker non-votes, however, will be treated as unvoted for purposes of
determining approval of the Hilton Proposals and will not be counted as votes
for or against such proposals.
Hilton proxy holders may, in their discretion, vote shares to adjourn the
Hilton Special Meeting to solicit additional proxies in favor of such proposals.
However, shares of Hilton Common Stock with respect to which a proxy is signed
and returned indicating a vote against any proposal will not be so voted to
adjourn.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the proxy is voted by (i) filing with Hilton, at or
before the taking of the vote at the Hilton Special Meeting, a written notice of
revocation bearing a later date than the proxy, (ii) duly executing a later
dated proxy and delivering it to Hilton at or before the taking of the vote at
the Hilton Special Meeting, or (iii) voting in person at the Hilton Special
Meeting. Telephonic votes may be revoked in the same manner as indicated in the
foregoing sentence and may also be revoked by subsequent telephonic votes at any
time before midnight on November 23, 1998. All written notices of revocation and
other communications with respect to revocation of Hilton proxies should be
addressed to Hilton Hotels Corporation, c/o ChaseMellon Shareholder Services,
L.L.C., 600 Willow Tree Road Leonia, NJ 07605, fax number (201) 296-4142
(ChaseMellon Shareholder Services, L.L.C. is referred to herein as the "Hilton
Transfer Agent"). Attendance at the Hilton Special Meeting will not in and of
itself constitute a revocation of a proxy.
The Hilton Board is not currently aware of any business to be acted upon at
the Hilton Special Meeting other than as described herein. If, however, other
matters are properly brought before the Hilton Special Meeting, the persons
appointed as proxies will have discretion to vote or act thereon according to
their best judgment and subject to applicable rules of the Securities Exchange
Commission (the "SEC") or Delaware law.
SOLICITATION OF PROXIES
Hilton will bear its own costs of solicitation of proxies, except that the
cost of preparing, printing and mailing this Joint Proxy Statement/Prospectus
will be borne ratably by Hilton and Grand. Brokers, nominees, fiduciaries and
other custodians will be requested to forward soliciting materials to beneficial
owners and will be reimbursed for their reasonable expenses incurred in sending
proxy materials to beneficial owners. In addition to solicitation by mail,
directors, officers and employees of Hilton, who will not be specifically
compensated for such services, may solicit proxies from the stockholders of
Hilton, personally or by telephone, telecopy or telegram or other forms of
communication. In addition, Hilton has retained D.F. King & Co., Inc. to assist
in the solicitation of proxies. The fees to be paid to such firm for such
services by Hilton are not expected to exceed $14,000, plus reasonable
out-of-pocket costs and expenses.
NO APPRAISAL RIGHTS
Hilton stockholders will not be entitled to appraisal rights under Delaware
law in connection with the Hilton Proposals.
41
<PAGE>
THE GRAND SPECIAL MEETING
DATE, TIME AND PLACE OF THE GRAND SPECIAL MEETING
This Joint Proxy Statement/Prospectus is being furnished to Grand
shareholders, in connection with the solicitation of proxies by Grand from
holders of shares of Grand Common Stock for use at a special meeting to be held
at the Radisson Hotel & Conference Center, 3131 Campus Drive, Plymouth,
Minnesota, at 2:00 p.m. on November 24, 1998 and at any adjournments or
postponements thereof (the "Grand Special Meeting" and together with the Hilton
Special Meeting, the "Special Meetings").
MATTERS FOR CONSIDERATION
At the Grand Special Meeting, Grand shareholders will be asked to consider
and vote on the following five related proposals (collectively, the "Grand
Proposals"):
- PROPOSAL ONE: Ratification of a special dividend, consisting of the
distribution (the "Grand Distribution") to the holders of the outstanding
shares of Grand Common Stock of all outstanding shares of Lakes Common
Stock to be effected in accordance with the terms of a distribution
agreement to be entered into between Grand and Lakes (the "Grand
Distribution Proposal");
- PROPOSAL TWO: The approval and adoption of the Merger Agreement, pursuant
to which, after consummation of the Grand Distribution, a wholly owned
subsidiary of Park Place will merge with and into Grand (the "Merger"),
and each share of Grand Common Stock outstanding immediately prior to the
effective time of the Merger (other than shares of Grand Common Stock as
to which appraisal rights have been properly perfected) will be converted
into Park Place common stock pursuant to a formula described in the Merger
Agreement (the "Grand Merger Proposal");
- PROPOSAL THREE: Approval of the Lakes Gaming, Inc. 1998 Stock Option and
Compensation Plan;
- PROPOSAL FOUR: Approval of the Lakes Gaming, Inc. 1998 Director Stock
Option Plan; and
- PROPOSAL FIVE: Ratification of the election by Grand, as the sole
shareholder of Lakes, of eight directors of Lakes specified in this Joint
Proxy Statement/Prospectus.
THE EFFECTIVENESS OF PROPOSAL ONE IS CONDITIONED UPON THE APPROVAL OF
PROPOSAL TWO AND THE EFFECTIVENESS OF PROPOSAL TWO IS CONDITIONED UPON THE
RATIFICATION OF PROPOSAL ONE. ACCORDINGLY, FAILURE OF THE SHAREHOLDERS TO VOTE
IN FAVOR OF EITHER OF THESE PROPOSALS WILL RESULT IN THE INEFFECTIVENESS OF BOTH
OF THE PROPOSALS. See "The Grand Proposals."
THE GRAND BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR ALL OF
THE GRAND PROPOSALS. Certain members of the Grand Board, however, may be deemed
to have interests in the Transactions that are different from or in addition to
the interests of Grand shareholders generally. See "Certain Relationships and
Related Transactions," "The Transactions" and "Management of Lakes."
RECORD DATE; QUORUMS
The Grand Board has fixed the close of business on October 20, 1998 as the
record date (the "Grand Record Date") for the determination of the holders of
Grand Common Stock entitled to receive notice of and to vote at the Grand
Special Meeting. The presence, in person or by properly executed proxy, of the
holders of a majority of the votes entitled to be cast by all the outstanding
shares of Grand Common Stock entitled to vote at the Grand Special Meeting is
necessary to constitute a quorum at the Grand Special Meeting.
42
<PAGE>
VOTES REQUIRED
Each Grand shareholder of record as of the Grand Record Date is entitled to
one vote for each share of Grand Common Stock held at the Grand Special Meeting.
The affirmative vote of the holders of at least a majority of the shares of
Grand Common Stock present in person or represented by proxy at the Grand
Special Meeting is required to approve each Grand Proposal, other than the Grand
Merger Proposal. The affirmative vote of the holders of a majority of the
outstanding shares of Grand Common Stock is required to approve the Grand Merger
Proposal.
On the Grand Record Date, there were 42,295,539 shares of Grand Common Stock
outstanding and entitled to vote at the Grand Special Meeting and 1,368 record
holders of Grand Common Stock. Each of Messrs. Lyle Berman (including various
trusts established for the benefit of Mr. Berman's children), Thomas J. Brosig
and Stanley M. Taube (and a corporation controlled by Mr. Taube) who
collectively owned, as of September 15, 1998, approximately 16.4% of the
outstanding shares of Grand Common Stock, have agreed to vote in favor of the
Grand Proposals pursuant to shareholder support agreements. Mr. Berman and Mr.
Brosig, each a director and executive officer of Grand, beneficially owned 10.1%
and 1.2%, respectively, of the outstanding shares of Grand Common Stock on such
date. Additionally, other executive officers and directors of Grand not subject
to shareholder support agreements who owned, in the aggregate, as of September
15, 1998 less than 1% of the outstanding shares of Grand Common Stock have
indicated an intention to vote for the Grand Proposals. See "The
Transactions--Arrangements Relating to the Merger Agreement--Shareholder Support
Agreement."
VOTING AND REVOCATION OF PROXIES
Shares of Grand Common Stock represented by a proxy properly signed and
received at or prior to the Grand Special Meeting, unless subsequently revoked,
will be voted in accordance with the instructions thereon. IF A PROXY IS SIGNED
AND RETURNED WITHOUT INDICATING ANY VOTING INSTRUCTIONS, SHARES OF GRAND COMMON
STOCK REPRESENTED BY THE PROXY WILL BE VOTED FOR THE GRAND PROPOSALS AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
Abstentions may be specified on all Grand Proposals. Shares of Grand Common
Stock represented at the Grand Special Meeting for which proxies have been
received, but with respect to which holders of shares have abstained on any
matter, will be treated as present at the Grand Special Meeting for purposes of
determining the presence or absence of a quorum for the transaction of all
business.
For voting purposes at the Grand Special Meeting, only shares affirmatively
voted in favor of a proposal (including properly executed proxies not containing
voting instructions) will be counted as favorable votes for such proposal. The
failure to submit a proxy (or to vote in person) or the abstention from voting
will have the same effect as a vote against such proposal. In addition, under
the applicable rules of the NYSE, brokers who hold shares in street name for
customers who are the beneficial owners of such shares are prohibited from
giving a proxy to vote such customers' shares in the absence of specific
instructions from such customers ("broker non-votes").
Grand proxy holders may, in their discretion, vote shares to adjourn the
Grand Special Meeting to solicit additional proxies in favor of such proposals.
However, shares of Grand Common Stock with respect to which a proxy is signed
and returned indicating a vote against any proposal will not be so voted to
adjourn.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the proxy is voted by the filing of an instrument
revoking it or of a duly executed proxy bearing a later date with the Secretary
of Grand, prior to or at the Grand Special Meeting, or by voting in person at
the Grand Special Meeting. All written notices of revocation and other
communications with respect to revocation of Grand proxies should be addressed
to Grand Casinos, Inc., c/o Norwest Bank Minnesota, N.A., Stock Transfer, 161
North Concord Exchange, South St. Paul, MN 55075 (Norwest Bank Minnesota, N.A.
is
43
<PAGE>
referred to herein as the "Grand Transfer Agent"). Attendance at the Grand
Special Meeting will not in and of itself constitute a revocation of a proxy.
The Grand Board is not currently aware of any business to be acted upon at
the Grand Special Meeting other than as described herein. If, however, other
matters are properly brought before the Grand Special Meeting, the persons
appointed as proxies will have discretion to vote or act thereon according to
their best judgment subject to applicable SEC rules.
SOLICITATION OF PROXIES
Grand will bear its own costs of solicitation of proxies, except that the
cost of preparing, printing and mailing this Joint Proxy Statement/Prospectus
will be borne ratably by Grand and Hilton. Brokers, nominees, fiduciaries and
other custodians will be requested to forward soliciting materials to beneficial
owners and will be reimbursed for their reasonable expenses incurred in sending
proxy materials to beneficial owners. In addition to solicitation by mail,
directors, officers and employees of Grand, who will not be specifically
compensated for such services, may solicit proxies from the shareholders of
Grand, personally or by telephone, telecopy or telegram or other forms of
communication. In addition, Grand has retained D.F. King & Co., Inc. to assist
in the solicitation of proxies. The fees to be paid to such firm for such
services by Grand are not expected to exceed $8,000, plus reasonable
out-of-pocket costs and expenses. Furthermore, Ladenburg Thalmann & Co. Inc.
("Ladenburg"), financial advisor to Grand, may solicit proxies from shareholders
of Grand or may assist Grand in its solicitation efforts. No separate or
additional compensation, above that to be paid to Ladenburg in connection with
its rendering its fairness opinion and providing other financial advisory
services to Grand, will be paid to Ladenburg for its solicitation of proxies,
other than reasonable out-of-pocket costs and expenses, including reasonable
attorney's fees, incurred by Ladenburg in connection with such services. Grand
has agreed to indemnify Ladenburg and certain related persons against certain
liabilities, including certain liabilities under the Federal securities laws,
arising in connection with Ladenburg's activities as financial advisor to Grand,
which would include any solicitation of proxies by Ladenburg. See--"Summary--The
Transactions-- Opinions of Financial Advisors."
44
<PAGE>
BACKGROUND AND REASONS
Hilton, directly and indirectly through its subsidiaries, currently engages
in the Hilton Gaming Business (consisting of the ownership, operation and
development of gaming facilities) and the Hilton Lodging Business (consisting of
the ownership, operation and development of lodging properties and vacation
ownership resorts and the franchising of lodging properties). Hilton has
decided, for the reasons set forth below, (i) to spin off to Hilton's
stockholders all of the outstanding stock of its indirect, wholly owned
subsidiary Park Place, which will conduct the Hilton Gaming Business and (ii)
immediately thereafter to cause a wholly owned subsidiary of Park Place to merge
with and into Grand following the Grand Distribution.
Grand, directly and indirectly through its subsidiaries, currently engages
in the Mississippi Business (consisting of the ownership, operation and
development of certain gaming facilities within the State of Mississippi) and
the Non-Mississippi Business (consisting principally of the management of
certain gaming facilities outside the State of Mississippi, including Grand's
Indian casino management business). Grand has decided, for the reasons set forth
below, (i) to spin off to Grand's shareholders all of the outstanding stock of
its wholly owned subsidiary Lakes, which will conduct the Non-Mississippi
Business and (ii) immediately thereafter, to merge with a wholly owned
subsidiary of Park Place with Grand as the surviving corporation in the Merger.
BACKGROUND OF THE TRANSACTIONS
GENERAL BACKGROUND--HILTON
Hilton is continually reviewing its position in the gaming and hotel
industries and its potential strategic alternatives in light of continued
consolidation of such industries, opportunities with respect to existing or
planned operations and potential opportunities to expand its operations into new
markets. For most of 1997, the principal strategic focus of Hilton was its
effort to acquire ITT Corporation. In November 1997, ITT shareholders voted in
favor of a competing proposal by Starwood Hotels & Resorts Worldwide Inc. From
time to time during 1997, Hilton considered other potential acquisitions of
gaming or lodging companies. None progressed to formal negotiations, in part
because of the pendency of Hilton's offer for ITT. In the first quarter of 1998
Hilton management and the Hilton Board began to evaluate the possibility of
spinning off the Hilton Gaming Business in order to facilitate the consummation
of attractive acquisition opportunities in both the hotel and gaming industries.
On March 13, 1998, Hilton announced that it was engaged in discussions with
Circus Circus regarding the possible spin-off of Hilton's lodging business
followed by a merger between Hilton's gaming business and Circus Circus. No
definitive agreement was reached and on March 23, 1998, Hilton announced that
negotiations had ended. In addition, at various times during 1998, Hilton has
considered other possible acquisitions of or combinations with other gaming or
lodging companies, in most cases premised upon a spin-off by Hilton of either
its gaming or lodging business, followed by a transaction between the target and
the relevant part of Hilton. In each such instance, following such
consideration, Hilton determined not to proceed with the particular transaction,
but is continuing to evaluate opportunities as they arise.
GENERAL BACKGROUND--GRAND
The Grand Board has reviewed its position in the gaming entertainment
industry with the goal of diversifying its business, which is largely focused on
Grand's Mississippi Business, and has considered various alternative strategies,
including the Merger. To facilitate the Merger with Hilton and to achieve such
diversification, the Grand Board concluded that it was necessary for Grand to
reorganize and spin off its Non-Mississippi Business.
NEGOTIATIONS BETWEEN HILTON AND GRAND AND OTHER PARTIES
In early June 1997, representatives of Ladenburg, Grand's financial advisor,
contacted Hilton senior executives regarding a possible business combination
transaction between Grand and Hilton. On June 11,
45
<PAGE>
1997, senior management of both Hilton and Grand held an initial meeting in
Beverly Hills, at which representatives from Ladenburg were also present on
behalf of Grand. At the meeting, the parties discussed the primary benefits of a
proposed business combination, which included the expanded presence by Hilton in
Mississippi, the third largest domestic gaming market, diversified gaming
cashflow and an acquisition expected to be accretive to earnings per share.
Following such meeting, the parties executed a confidentiality agreement.
Discussions continued between the parties concerning a possible business
combination until mid-July, during which period the companies exchanged certain
financial and operating information and representatives of Hilton's and Grand's
senior management continued their internal consideration of a transaction. In
mid-July, 1997, Hilton terminated negotiations for the following reasons: (a)
certain of Grand's management contracts for the operation of Indian gaming
facilities, as well as certain regulatory compacts relating to such facilities,
were set to expire in 1998 and 1999 and the possibility of renewal of such
contracts and compacts was subject to uncertainty, as was the timing and degree
of difficulty in obtaining approvals from regulatory agencies and the Indian
tribes for such an acquisition; (b) while Grand had taken a write-off of its
investment in the Stratosphere project in Las Vegas following bankruptcy
proceedings for Stratosphere, Grand had contingent liability exposure remaining
at that time with respect to a $60 million Standby Equity Agreement and was a
party to other class action shareholder litigation related to Stratosphere; and
(c) Hilton had concern over excess supply in the Gulf Coast and Tunica,
Mississippi markets.
In December 1997 senior management from Grand and representatives of
Ladenburg again contacted senior management of Hilton with a proposal that
included the acquisition by Hilton of Grand's Mississippi Business but excluded
Grand's Non-Mississippi Business.
On January 22, 1998, at a regularly scheduled meeting of the Hilton Board,
management updated the Hilton Board as to a potential transaction with Grand and
reviewed in detail with the Hilton Board information concerning Grand, the
Mississippi market, the Indian contracts and the Stratosphere reorganization.
Hilton management informed the Board that it would continue with its diligence
on the project.
Discussions between Hilton and Grand continued until early February 1998
during which period the parties discussed a variety of potential transactions.
However, Hilton declined to pursue negotiations due to the parties'
disagreements over valuation and the concerns regarding potential complications
and delay in obtaining regulatory approvals associated with approval of any
transfer of Grand's Non-Mississippi Business. On February 23, 1998, at a
regularly scheduled meeting of the Grand Board, management updated the Grand
Board as to the status of discussions between Hilton and Grand.
In early May 1998, Ladenburg contacted senior management of Hilton in order
to resume discussions concerning a possible business combination. On May 13,
1998, Grand and its financial and legal advisors met with Hilton and its legal
advisors to commence preliminary discussions regarding a possible business
combination. During those preliminary discussions, Grand agreed to spin-off its
assets related to the Indian management contracts and other assets unrelated to
the Mississippi Business in a tax-free transaction, thus facilitating a
subsequent tax-free business combination with Hilton. Market conditions strongly
indicated that expansion of Hilton's gaming business could be most efficiently
conducted only by a separation of Hilton's gaming business and lodging business.
Such separation would also make possible further expansion of Hilton's lodging
business on an economically efficient basis. Subsequent to such meeting, the
parties executed a new confidentiality agreement effective as of June 1, 1998
(the "Confidentiality Agreement") and exchanged additional financial and other
information.
On June 15, 1998, the Grand Board met to consider the revised terms of the
potential transaction with Hilton and generally discussed the terms of the
proposed merger agreement, distribution agreement and certain related ancillary
agreements. During the week of June 15-20, 1998, Grand and its financial and
legal advisors met with Hilton and its legal advisors to negotiate the terms of
a proposed merger agreement, distribution agreements and related ancillary
agreements. The consideration to be paid in the Merger was determined based upon
arms-length negotiations between Hilton and Grand.
46
<PAGE>
On June 26, 1998, the Grand Board (other than one director who participated
telephonically) met in person to consider the proposed merger agreement,
distribution agreement and other ancillary agreements. At this meeting,
representatives of Ladenburg made presentations to the Grand Board.
Representatives of Maslon Edelman Borman & Brand, LLP, Grand's legal counsel,
and certain Grand directors and officers who participated in the negotiations
with Hilton, discussed the terms of the proposed transaction and Ladenburg
rendered its oral opinion that, as of such date, the consideration to be
received by Grand shareholders in the Merger and the Grand Distribution, taken
together and considered as a single transaction, is fair to the holders of Grand
Common Stock from a financial point of view. Ladenburg subsequently confirmed
its oral opinion by delivering to the Grand Board a written opinion dated as of
June 30, 1998 that based on and subject to the assumptions, factors and
limitations set forth therein, the consideration to be received by the holders
of Grand Common Stock pursuant to the Merger and the Grand Distribution, taken
together and considered as a single transaction, is fair, from a financial point
of view to such holders. After further discussion, the members of the Grand
Board present at the meeting, with Ronald J. Kramer, Chairman and Chief
Executive Officer of Ladenburg abstaining, approved the terms of the merger
agreement, the Grand distribution agreement and the transactions contemplated
thereby.
On June 29, 1998, the entire Hilton Board, other than Peter George, met
telephonically to consider the proposed merger agreement, distribution agreement
and other ancillary agreements. At this meeting, representatives of Latham &
Watkins, legal counsel to Hilton, and Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), Hilton's financial advisor, made presentations to the
Hilton Board and discussed the terms of the proposed transactions. The Hilton
Board further discussed the terms of the proposed transactions, and DLJ rendered
its written opinion that as of such date, the Hilton Distribution and the
consideration to be paid by Park Place pursuant to the merger agreement, after
giving effect to the Grand Distribution, taken as a whole, were fair to the
stockholders of Hilton from a financial point of view. After further
deliberation, the members of the Hilton Board present at the meeting approved
the terms of the merger agreement, the distribution agreement and the
transactions contemplated thereby.
On June 30, 1998, Grand, Hilton and Park Place executed the Merger Agreement
and publicly announced their agreement.
REASONS FOR THE RECOMMENDATION OF THE HILTON BOARD
The Hilton Board believes that the Hilton Distribution must be accomplished
to permit the Merger to occur on an economically efficient basis. The Hilton
Board believes that the Hilton Distribution will significantly enhance
stockholder value by providing stockholders with ongoing stakes in two strong,
well focused companies. In light of the limited number of jurisdictions in which
gaming is authorized, the Hilton Board believes the Hilton Gaming Business will
benefit from its alignment with Grand's operations in Mississippi, the third
largest gaming market in the U.S.
The Hilton Board believes that the ability of Hilton and Park Place to raise
additional equity and debt financing may be enhanced by better comprehension on
the part of potential investors and lenders of the nature and strength of the
business and assets of each individual company, and the Hilton Distribution is
expected to result in reduced cost of capital to Hilton, as the cost of capital
for the hotel industry has historically generally been lower than that of the
gaming industry. Hilton's cost of capital has historically been in excess of
that of the hotel industry generally.
The separation of Hilton's gaming and lodging operations will accomplish a
number of important business objectives. Separation of the gaming business and
the hotel business into independent companies will allow each company to
concentrate exclusively on its own business objectives without concern for the
other company's strategic business objectives. The Hilton Board believes that
the ability of each of the lodging and the gaming businesses to expand and
increase its profitability may be significantly enhanced in the future if they
are separate entities. The Hilton Distribution is expected to enhance the
ability of the separate corporations to attract, motivate and retain key
personnel through the provision of more effective
47
<PAGE>
incentive compensation programs that are based on the performance of the
respective businesses in which such individuals are employed without being
influenced by the results of the businesses in which they have no involvement.
The Hilton Board believes that the Hilton Distribution will afford each of
the lodging and the gaming businesses greater flexibility to pursue business
opportunities, including acquisitions, joint ventures or business combinations.
The Hilton Board also believes that the Hilton Distribution will allow financial
markets to better recognize and evaluate the different merits of the gaming
business and hotel business, enhancing the likelihood that each will achieve
appropriate market recognition for its own performance.
Subsequent to the Hilton Distribution, Gaming Acquisition Corporation, a
wholly owned subsidiary of Park Place, will merge with and into Grand, with
Grand as the surviving corporation in the Merger. The Hilton Board considered
that by entering into the Merger Agreement, it could seek to capitalize on
certain strategic elements that may not have been available in other alternative
transactions. For example, the Hilton Board considered that the Merger will
create the largest gaming company, as measured by revenues and casino square
footage, which will have a significant presence in the three largest gaming
markets in the United States (Nevada, New Jersey and Mississippi) and in
Australia and Uruguay. As a result of the acquisition of Grand, Park Place will
become the leading gaming concern in the Mississippi market. Hilton previously
had a single property operation in the Mississippi market and the Hilton Board
believes the acquisition of the Mississippi Business will complement the Hilton
Gaming Business' existing leadership positions in Las Vegas and Atlantic City.
In addition, the Hilton Board considered that the Merger will further diversify
its revenues. The Board also found it significant that the Grand transaction
consisted of stock consideration and not cash.
The Hilton Board believes the newly merged company, with a leading presence
and strategic locations in major gaming markets, will offer significant
advantages over its competitors and that the merged company will benefit from
potential cost savings by combining insurance, human resources, development,
purchasing, and legal and public reporting functions and refinancing outstanding
debt at a lower cost of capital. There can be no assurance that any of the
anticipated benefits of the Transactions described above will be realized.
In addition to the foregoing factors, the Hilton Board considered:
(a) the financial condition, results of operation, cash flows and business
of Hilton and Grand and the operational, financial and legal due
diligence provided by Hilton's management advisors;
(b) the terms and condition of the Merger Agreement, including the Exchange
Ratio and the termination fee payable to Hilton;
(c) the historical market prices and trading information with respect to
Hilton Common Stock and Grand Common Stock;
(d) the tax-free structure of the Transactions;
(e) the stockholder support agreement entered into by certain holders of
Grand Common Stock;
(f) the indemnification arrangements entered into with Grand and Lakes,
including Lakes' obligation to deposit up to $30 million in a security
agreement over a four-year period to secure its indemnification
obligations to Grand as a subsidiary of Park Place; and
(g) the economic and market conditions relating to the ownership and
management of hotel properties and gaming properties.
The Hilton Board also considered certain factors which may be characterized
as countervailing considerations, including:
(a) the fact that the formula used to determine the exchange ratio for
calculating the number of shares Park Place will issue to Grand
shareholders is subject to fluctuation based on certain
48
<PAGE>
variable factors, primarily each company's net indebtedness and the
total number of shares outstanding on the date of determination;
(b) the risk that certain indemnification arrangements between the parties
may not fully protect Park Place in the event Lakes is unable to satisfy
its indemnification obligations;
(c) the risks inherent in attempting to integrate successfully the
management of Grand and Park Place and any difficulty that may be
encountered in achieving the anticipated synergies and cost savings from
the Merger;
(d) the severance arrangements of executive officers of Grand and other
employee benefit provisions of the Transactions described below under
"The Transactions--Interests of Certain Persons in the Merger." Hilton
was aware that such arrangements would give certain individuals
interests in the Merger that were in addition to their interests as
stockholders of Grand generally;
(e) the attendant diversion of management and Hilton's resources in
consummating the Transactions; and
(f) the fact that Grand is more leveraged than Park Place.
The Hilton Board considered all of the factors discussed above, as well as
the opinion of DLJ, its financial advisor, referred to below, which are believed
to include all of the principal factors considered by the Hilton Board, in
connection with its decision to proceed with the Transactions and recommends
that its stockholders vote in favor of the Hilton Distribution and related
matters. In this regard, the Hilton Board did not assign any particular weight
to specific factors, and individual directors may have assigned different
weights to different factors. While the Hilton Board did not specifically adopt
the conclusions set forth in DLJ's opinion based on its financial analysis of
the Transactions, the Hilton Board did, however, take into account, and placed
reliance on, the analyses performed by, and the opinion rendered by, DLJ.
In the event that its stockholders fail to ratify the Hilton Distribution
and related matters, Hilton currently intends to continue to operate the Hilton
Gaming Business and the Hilton Lodging Business and may consider alternative
restructuring options.
THE HILTON BOARD RECOMMENDS THAT THE HILTON STOCKHOLDERS VOTE FOR THE HILTON
DISTRIBUTION PROPOSAL AND EACH OF THE OTHER HILTON PROPOSALS. See "The Hilton
Proposals." Certain members of the Hilton Board, however, may be deemed to have
interests in the Hilton Distribution that are different from or in addition to
the interests of Hilton stockholders generally. See "Certain Relationships and
Related Transactions," "The Transactions" and "Management of Park Place."
REASONS FOR THE RECOMMENDATION OF THE GRAND BOARD
During the course of its negotiations with Hilton, the Grand Board
periodically considered certain other strategic alternatives for Grand,
including growth through selected acquisitions, as well as the possible spin-off
of Grand's casino management business, coupled with the formation of a real
estate investment trust (a "REIT") comprised of Grand's owned casino properties.
The Grand Board determined to proceed with the Hilton negotiations rather than
these other strategic alternatives in recognition of Grand's relatively high
cost of capital and evaluation of the availability and suitability of various
acquisition candidates required to provide Grand with the same level of market
diversification as is afforded by the Hilton transaction. The Grand Board also
preferred the Hilton transaction over the REIT alternative because of various
valuation issues associated with the publicly traded REIT market.
The Grand Board believes the Merger offers its shareholders a unique
opportunity to participate in the growth of a preeminent operator of casinos in
the United States. The Grand Board approved the proposed Transactions primarily
because of the opportunity for increased long-term value which it believes would
be provided to Grand shareholders by the Transactions, and based upon the
potential for future
49
<PAGE>
appreciation of Park Place Common Stock due to its anticipated greater market
presence and the financial resources of the combined entity.
The Grand Board also gave consideration to the character and market position
of Grand, the current risks associated with and operations of Grand and its
future prospects, and the likely prospects of Grand as an independent company,
believing the better future opportunity would be available for Grand
shareholders in combination with Park Place because of the greater capital and
other resources of the combined company.
The Grand Board considered and agreed to the spin-off of its Non-Mississippi
Business as a means to facilitate the Merger, and in response to Hilton's
expressed interest in acquiring the Mississippi Business and unwillingness to
acquire Grand's Indian gaming management contracts and concerns with respect to
Grand's potential contingent liability stemming from the Stratosphere
investment.
The Grand Board believes that the Grand Distribution will enhance the
development and expansion of the Mississippi Business by facilitating the Merger
and will also enhance the development and expansion of the Non-Mississippi
Business. Management of tribal casinos involves complex regulatory oversight by
three separate regulatory authorities (federal, state and tribal) which, when
coupled with reconciling the strategic goals and directions of a sovereign
tribal nation with the commercial objectives of a business enterprise, presents
unique management challenges in certain circumstances. The conflicting demands
made by these two distinct lines of business on Grand management's time and
attention should be reconciled as a result of the Grand Distribution. As a
result, the Grand Board believes that in effecting the Grand Distribution, it
will be able to maximize the prospects for expansion of both the Mississippi
Business and Non-Mississippi Business.
The decision of the Grand Board to approve the Merger Agreement and to
recommend approval of the Merger by the shareholders of Grand was based upon a
number of factors, including without limitation, the factors set forth below:
(i) the Grand Board's understanding of the present and anticipated
environment of the gaming industry and the potential for further
consolidation within the industry that could adversely affect Grand's
competitive position;
(ii) the Grand Board's understanding of the business, assets,
management, competitive position and prospects of Grand and Park Place,
including the prospects of Grand if it were to continue as an independent
company;
(iii) the market price of Grand Common Stock recently and during the past
several years;
(iv) the improved access to capital which will result from the Merger
not presently available to Grand;
(v) an opportunity to acquire shares, in a tax-free exchange, of a
company which offers an opportunity to participate in the consolidation of
an increasingly competitive gaming market or, if Grand shareholders so
choose, to liquidate their holdings, and realize a taxable gain or loss;
(vi) the Grand Board's consideration of, among other things, information
concerning the financial condition, results of operations, prospects and
businesses of Grand and Park Place;
(vii) the Grand Board's consideration of, among other things, current
industry, economic and market conditions;
(viii) the Grand Board's understanding of the strategic benefits of
significantly expanding Grand's gaming operations and the ability of the
Merger to aid in the diversification of Grand's properties beyond the
Mississippi gaming market;
(ix) the terms of the Merger Agreement, including Grand's
"no-solicitation" covenant which prohibits Grand from soliciting any
acquisition proposal or, subject to the fiduciary duties of the Grand Board,
from negotiating with any other parties with respect to an acquisition
proposal, and the
50
<PAGE>
obligation of Grand to pay a termination fee to Hilton if an acquisition
proposal were consummated or an agreement were entered into with respect
thereto in the 18 months following termination of the Merger Agreement; and
(x) the oral opinion of Ladenburg delivered to the Grand Board on June
26, 1998, confirmed in Ladenburg's written opinion dated June 30, 1998, to
the effect that the consideration to be received by the holders of Grand
Common Stock pursuant to the Merger and the Grand Distribution, taken
together and considered as a single transaction, is fair from a financial
point of view to such holders. While the Grand Board did not specifically
adopt the conclusions set forth in the Ladenburg opinion, it did, however,
take into account, and placed reliance on, the analyses performed by, and
the opinion rendered by, Ladenburg. See "--Opinion of Financial Advisor to
Grand."
In reaching its decision to recommend the Merger and Grand Distribution to
Grand shareholders, the Grand Board also considered and discussed certain
potentially countervailing considerations, including the following factors:
(i) the Grand Board's recognition that the formula for determining the
exchange ratio for calculating the number of Park Place shares that Grand
shareholders will receive included certain variables that may fluctuate
between the date Grand executed the Merger Agreement and the date such ratio
would be calculated, principally the calculation of each company's net
indebtedness, and the total number of shares of common stock outstanding on
the date of such determination;
(ii) the Grand Board's recognition that the shares of Park Place have no
trading history, and therefore no readily ascertainable value, in addition
to the related uncertainty as to the prices at which the Park Place Common
Stock would trade after the Hilton Distribution and the Merger;
(iii) the Grand Board's recognition that while the Merger might
significantly aid in the diversification of Grand's properties beyond the
Mississippi gaming market, Grand shareholders who would receive Park Place
Common Stock would thereafter be subject to those additional competitive
pressures associated with the additional gaming markets, such as Las Vegas;
(iv) the Grand Board's recognition of the relative maturity of the
Hilton Gaming Business, and the Board's assessment of the challenges
associated with future capital appreciation in light of Hilton's significant
market presence;
(v) the Grand Board's consideration of certain pending and historical
regulatory inquiries; and
(vi) the Grand Board's consideration of the construction risks
associated with Hilton's Paris Casino-Resort development project, and
related concerns over potential market saturation in Las Vegas.
The Grand Board considered all of these factors, which are believed to
include all of the principal factors considered by the Grand Board. In view of
the number and disparate nature of the factors considered by the Grand Board,
the Grand Board did not assign relative weight to the factors considered in
reaching its conclusions. Rather, the Grand Board viewed its conclusions and
recommendations to Grand shareholders as being based on the totality of the
information being presented to and considered by it.
THE GRAND BOARD RECOMMENDS THAT GRAND SHAREHOLDERS VOTE FOR THE GRAND
DISTRIBUTION PROPOSAL, THE GRAND MERGER PROPOSAL AND EACH OF THE OTHER GRAND
PROPOSALS. See "The Grand Proposals." Certain members of the Grand Board,
however, may be deemed to have interests in the Transactions that are different
from or in addition to the interests of Grand shareholders generally. See
"Certain Relationships and Related Transactions," "The Transactions" and
"Management of Lakes."
51
<PAGE>
OPINION OF FINANCIAL ADVISOR TO HILTON
DLJ was engaged by Hilton to render an opinion to the Hilton Board as to the
fairness from a financial point of view to the stockholders of Hilton of (i) the
Hilton Distribution and (ii) the consideration to be paid by Park Place pursuant
to the Merger Agreement, taken as a whole. On June 29, 1998, DLJ delivered its
written opinion (the "DLJ Opinion") addressed to the Hilton Board to the effect
that, as of the date of such opinion, and based upon and subject to the
assumptions, limitations and qualifications set forth in the DLJ Opinion, the
Hilton Distribution and the consideration to be paid by Park Place pursuant to
the Merger Agreement, after giving effect to the Grand Distribution, taken as a
whole, were fair to the stockholders of Hilton from a financial point of view.
A COPY OF THE DLJ OPINION IS ATTACHED HERETO AS ANNEX B. HILTON STOCKHOLDERS
ARE URGED TO READ THE DLJ OPINION IN ITS ENTIRETY FOR ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITATIONS OF THE REVIEW BY
DLJ. THE DLJ OPINION WAS PREPARED FOR THE HILTON BOARD AND IS DIRECTED ONLY TO
THE FAIRNESS OF THE HILTON DISTRIBUTION AND THE CONSIDERATION TO BE PAID BY PARK
PLACE PURSUANT TO THE MERGER AGREEMENT, AFTER GIVING EFFECT TO THE GRAND
DISTRIBUTION, TAKEN AS A WHOLE, TO THE STOCKHOLDERS OF HILTON FROM A FINANCIAL
POINT OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HILTON STOCKHOLDER
AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE HILTON SPECIAL MEETING. THE
SUMMARY OF THE DLJ OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
The DLJ Opinion does not constitute an opinion as to the (i) price at which
shares of Hilton Common Stock or Park Place Common Stock will trade at any time
or (ii) effects of the litigation retained by Lakes pursuant to the Grand
Distribution Agreement. See "Risk Factors--Risks Relating to the Transactions--
Structure of the Transactions; Indemnification Obligations" and "Risk
Factors--Risks Relating to the Business of Lakes--Stratosphere Corporation;
Pending Litigation." The consideration to be paid by Park Place was determined
in arm's-length negotiations between Hilton and Grand. No restrictions or
limitations were imposed by the Hilton Board upon DLJ with respect to the
investigations made or the procedures followed by DLJ in rendering its opinion.
In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources, that was provided to it by each of Hilton and Grand or
their respective representatives or that was otherwise reviewed by it. Among the
financial and other information reviewed by DLJ were (i) drafts of the Merger
Agreement and the Hilton Distribution Agreement, including, in each case, the
exhibits thereto, (ii) Grand's and Hilton's Annual Reports on Form 10-K and
related financial information for the years ended December 1997, (iii) Grand's
and Hilton's Quarterly Reports on Form 10-Q for the quarter ended March 1998,
(iv) certain pro forma financial information giving effect to each of the Hilton
Distribution and the Grand Distribution, (v) certain projected financial
information for each of Hilton, Park Place, Grand and Lakes and (vi) other
financial market and transaction data as DLJ deemed necessary. DLJ did not make
any independent evaluation of the assets or liabilities of Hilton or Grand, nor
did DLJ independently verify the information reviewed by it. DLJ also assumed
that the financial projections supplied to it were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
respective managements of Hilton and Grand as to the future operating and
financial performance of each of Hilton, after giving effect to the transactions
contemplated by the distribution agreement (the "Hilton Distribution Agreement")
to be entered into between Hilton and Park Place in connection with the Hilton
Distribution ("Post Spin Hilton"); Park Place, after giving effect to the
transactions contemplated by the Hilton Distribution Agreement ("Post Spin Park
Place"); and Grand, after giving effect to the Grand Distribution ("Post Spin
Grand"). DLJ also noted that although the Merger Agreement sets forth gross
enterprise values, the Exchange Ratio (as defined) fluctuates based upon the
modified net debt of the companies and assumed that the modified net debt of
Post Spin Park Place and of Post Spin Grand, as of the assumed closing date of
the Merger of December 31, 1998, will be $1,896.8 million and $549.9 million,
respectively, as projected
52
<PAGE>
by the management of Hilton and Grand, respectively. Such financial projections
were provided to DLJ solely for the purpose of DLJ's analyses in arriving at the
DLJ Opinion. DLJ used the projected modified net debt levels set forth above for
purposes of rendering the DLJ Opinion, however the range of exchange ratios
illustrated in the table, prepared by Hilton and Grand, under "Examples of What
Grand Shareholders Could Receive in the Merger" on page 5 is consistent with the
range of potential exchange ratios contemplated by the Merger Agreement and
therefore considered by DLJ in arriving at its opinion. See "Examples of What
Grand Shareholders Could Receive in the Merger."
The DLJ Opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to it
as of, the date of the DLJ Opinion. It should be understood that, although
subsequent developments may affect its opinion, DLJ does not have any obligation
to update, revise or reaffirm its opinion. No provision has been made in the
Merger Agreement for Hilton to seek, and Hilton does not intend to seek, an
updated DLJ Opinion. If the Merger Agreement were amended in a manner which
affects the relevant factors considered by DLJ in rendering the DLJ Opinion, the
Hilton Board would consider engaging DLJ to provide a supplemental opinion.
Hilton stockholders should note that the Merger Agreement does not provide
Hilton with any opportunity to terminate the Merger Agreement or fail to
consummate the transactions contemplated thereby based solely upon changes in
financial market conditions from those that existed on the date of the DLJ
Opinion. The DLJ Opinion does not address additional data arising subsequent to
the data considered by DLJ in reaching its opinion, including market prices of
securities, reported results of operations, publicly announced transactions and
factors that may affect the estimates of future earnings, which could affect
DLJ's Opinion if such an opinion were rendered as of a subsequent date. The
following is a summary of the material analyses presented by DLJ to the Hilton
Board in connection with the presentation of the DLJ Opinion.
SENSITIVITY ANALYSIS OF THE PURCHASE PRICE BASED UPON PUBLIC VALUATIONS OF
SELECTED GAMING COMPANIES.
DLJ analyzed the purchase price to be paid by Park Place pursuant to the
Merger Agreement by reference to the market valuation of four public traded
gaming companies selected by DLJ in its subjective judgment (the "Large Cap
Gaming Companies"). The Large Cap Gaming Companies were Mirage Resorts, Inc.,
Circus Circus Enterprises, Inc., Harrah's Entertainment, Inc. and MGM Grand,
Inc. DLJ computed the current Enterprise Value (as defined) of each of the Large
Cap Gaming Companies as a multiple of their respective latest twelve month
("LTM") earnings before interest, taxes, depreciation and amortization
("EBITDA") and projected 1998 EBITDA. The projected EBITDA amounts were derived
from published research analysts' reports prepared by investment banking firms,
including DLJ. "Enterprise Value" is defined as the market value of common
equity plus book value of total indebtedness plus liquidation value of preferred
stock less cash. DLJ noted that the then current Enterprise Value as a multiple
of EBITDA of the Large Cap Gaming Companies ranged from 7.0x to 12.0x LTM EBITDA
and from 6.1x to 9.5x projected 1998 EBITDA. DLJ applied multiples ranging from
7.0x to 10x to Post Spin Park Place's 1998 EBITDA, as projected by Hilton's
management, to derive an implied valuation of the shares of Park Place Common
Stock to be issued pursuant to the Merger Agreement. Such methodology implied a
net purchase price ranging from $1.0656 billion to $1.403 billion for Post Spin
Grand. DLJ compared such ranges of implied purchase price to the projected
financial results for the companies and noted that the range of implied purchase
price represented multiples ranging from (x) 7.4x to 9.8x pro forma LTM EBITDA
of Post Spin Grand, (y) 6.3x to 8.3x Grand's management's projected 1998 EBITDA
for Post Spin Grand and (z) 6.2x to 8.1x Grand's management's projected 1999
EBITDA for Post Spin Grand.
None of the Large Cap Gaming Companies is identical to Post Spin Park Place
or Post Spin Grand. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning differences
in the financial and operating characteristics of the Large Cap Gaming
Companies, Post Spin Park Place and Post Spin Grand and other factors that could
affect the public trading value of the Large Cap Gaming Companies. Mathematical
analysis, such as determining the mean, is not in itself a meaningful method of
using such comparable data.
53
<PAGE>
SENSITIVITY ANALYSIS OF THE PURCHASE PRICE BASED UPON PUBLIC VALUATIONS OF
SELECTED HOTEL COMPANIES.
DLJ analyzed the purchase price to be paid by Park Place pursuant to the
Merger Agreement by reference to the valuation of a share of Park Place Common
Stock implied by the then current market price of Hilton Common Stock and the
valuation of Post Spin Hilton. The valuation of Post Spin Hilton was performed
by reference to the market valuation of four publicly traded hotel companies
(the "Large Cap Hotel Companies") selected by DLJ in its subjective judgment.
The Large Cap Hotel Companies were Host Marriott, Inc., Marriott International,
Inc., Promus Hotel Corporation and Prime Hospitality, Inc. DLJ computed the
current Enterprise Value of each of the Large Cap Hotel Companies as a multiple
of their respective LTM EBITDA and projected 1998 EBITDA, calculated based upon
estimates contained in published research analysts' reports prepared by
investment banking firms, including DLJ. DLJ noted that the then current
Enterprise Value as a multiple of EBITDA of the Large Cap Hotel Companies ranged
from 9.9x to 12.5x LTM EBITDA and from 8.3x to 10.5x projected 1998 EBITDA. DLJ
applied multiples ranging from 10.0x to 13.0x to Post Spin Hilton's 1998 EBITDA,
as projected by Hilton's management, to derive implied valuations of Post Spin
Hilton. Such implied valuations were subtracted from then current market price
of a share of Hilton Common Stock to derive an implied valuation of a share of
Park Place Common Stock, which ranged from $7.05 to $14.50. DLJ then computed an
implied Enterprise Value of Post Spin Grand based upon an assumed Exchange Ratio
and Grand's management's projection of Post Spin Grand's modified net debt of
$549.9 million. The assumed Exchange Ratio was calculated based on the relative
Enterprise Values of $6,024.6 million for Post Spin Gaming and $1,200 million
for Post Spin Grand and the projected modified net debt of Post Spin Gaming and
Post Spin Grand of $1,896.8 million and $549.9 million, respectively, as
provided to DLJ by their respective managements. Such implied Enterprise Values
of Post Spin Grand ranged from $880.1 million to $1.197 billion and represented
multiples ranging from (x) 6.1x to 8.4x pro forma LTM EBITDA of Post Spin Grand,
(y) 5.2x to 7.0x Grand's management's projected 1998 EBITDA of Post Spin Grand
and (z) 5.1x to 6.9x Grand's management's projected 1999 EBITDA of Post Spin
Grand.
None of the Large Cap Hotel Companies is identical to Post Spin Hilton.
Accordingly, an analysis of the foregoing necessarily involves complex
considerations and judgments concerning differences in the financial and
operating characteristics of the Large Cap Hotel Companies and Post Spin Hilton
and other factors that could affect the public trading value of the Large Cap
Hotel Companies. Mathematical analysis, such as determining the mean, is not in
itself a meaningful method of using such comparable data.
PUBLIC COMPANY ANALYSIS.
DLJ compared the multiples implied by the $1,200 million Enterprise Value of
Post Spin Grand negotiated by the parties and set forth in the Merger Agreement
to the multiples implied by the then current market valuation of seven public
traded gaming companies (the "Gaming Companies") selected in DLJ's subjective
judgment. The Gaming Companies were each of the Large Cap Gaming Companies, Rio
Hotel and Casino Corporation, Boyd Gaming Corp. and Aztar Corp. DLJ compared the
2.3x ratio of Enterprise Value to LTM revenue of Post Spin Grand implied by the
valuations set forth in the Merger Agreement to the then current ratios of the
Gaming Companies, which ranged from 1.0x to 3.4x, with a mean of 2.0x. DLJ
compared the 8.4x ratio of Enterprise Value to LTM EBITDA of Post Spin Grand
implied by the valuation in the Merger Agreement to the then current ratios of
the Gaming Companies, which ranged from 5.9x to 12.0x, with a mean of 8.0x. DLJ
compared the 13.2x ratio of Enterprise Value to LTM earnings before interest and
taxes ("EBIT") of Post Spin Grand implied by the valuation in the Merger
Agreement to the then current ratios of the Gaming Companies, which ranged from
9.2x to 16.0x, with a mean of 13.2x. DLJ compared the 7.1x ratio of Enterprise
Value to 1998 projected EBITDA of Post Spin Grand implied by the valuations in
the Merger Agreement and Grand's managements projected 1998 EBITDA for Post Spin
Grand to the then current ratios of the Gaming Companies, which ranged from 5.4x
to 9.5x, with a mean of 6.8x. DLJ also compared the 14.2x ratio of implied price
per share of Grand Common Stock, after giving effect to the Grand Distribution,
implied by the valuation set forth in the Merger Agreement to calendar year 1998
projected earnings per share ("EPS"), as projected by Grand's management for
Post Spin Grand, to the current ratios of the Gaming Companies, which ranged
from
54
<PAGE>
10.7x to 43.3x, with a mean of 20.1x. The EPS projections for the Gaming
Companies were obtained from Institutional Broker's Estimation Service
("I/B/E/S"), a third party service that collects and summarizes earnings
estimates of research analysts employed by investment banks, including DLJ. DLJ
also compared the 14.3x ratio of price per share of Grand Common Stock implied
by the valuation set forth in the Merger Agreement, to calendar year 1999
projected EPS, as projected by Grand's management for Post Spin Grand, to the
then current ratios of the Gaming Companies, which ranged from 9.6x to 40.6x,
with a mean of 17.1x.
None of the Gaming Companies is identical to Post Spin Park Place or Post
Spin Grand. Accordingly, an analysis of the foregoing necessarily involves
complex considerations and judgments concerning differences in the financial and
operating characteristics of the Gaming Companies, Post Spin Park Place and Post
Spin Grand and other factors that could affect the public trading value of the
Gaming Companies. Mathematical analysis, such as determining the mean, is not in
itself a meaningful method of using such data.
MERGER AND ACQUISITION TRANSACTIONS.
DLJ compared the ratio of Net Purchase Price (as defined) to LTM EBITDA and
projected EBITDA in the year subsequent to the transaction with respect to a
sample of five publicly announced or consummated merger and acquisition
transactions in the gaming industry which were selected in DLJ's subjective
judgment (the "Gaming Precedent Transactions") and the Merger Agreement. The
Gaming Precedent Transactions were Crescent Operating Company and Crescent Real
Estate Equities, Inc./Station Casinos, Inc., Hilton/Bally Entertainment
Corporation, ITT Corporation/Caesar's World, Inc., Colony Capital
Corporation/Harvey's Casino Resorts, Inc. and Harrah's Entertainment,
Inc./Showboat Casinos, Inc. Net Purchase Price was defined for purposes of DLJ's
analyses as the purchase price of the acquired company's equity securities plus
the net debt of the acquired company. The Net Purchase Price for Post Spin Grand
set forth in the Merger Agreement is $1,200 million, implying ratios of 8.4x LTM
EBITDA of Post Spin Grand and 7.1x projected 1998 EBITDA, as projected by
Grand's management for Post Spin Grand. The ratio of Net Purchase Price to LTM
EBITDA for the Gaming Precedent Transactions ranged from 7.2x to 10.9x, with a
mean of 9.5x. The ratio of Net Purchase Price to projected EBITDA for the
subsequent year (derived from published research analysts' reports prepared by
investment banking firms, including DLJ) for the Gaming Precedent Transactions
ranged from 6.7x to 9.9x, with a mean of 8.7x.
None of the Gaming Precedent Transactions is identical to the Merger.
Accordingly, an analysis of the results of the foregoing necessarily involves
complex considerations and judgments concerning differences in financial and
operating characteristics of each of Post Spin Gaming and Post Spin Grand and
the companies involved in the Gaming Precedent Transactions and other factors
that could affect the acquisition value of the companies to which the Merger was
compared. Mathematical analysis, such as determining the mean, is not in itself
a meaningful method of using comparable transactions data.
CONTRIBUTION ANALYSIS.
DLJ compared EBITDA and EBIT of Post Spin Park Place, as projected by
Hilton's management, and of Post Spin Grand, as projected by Grand's management,
to pro forma projected New Park Place, as prepared by Hilton's management, for
each of 1998, 1999 and 2000. DLJ noted that Post Spin Grand was projected to
contribute 21.3%, 20.3% and 18.8% of Post Merger Park Place's pro forma
projected EBITDA in 1998, 1999 and 2000, respectively. DLJ also noted that Post
Spin Grand was projected to contribute 21.0%, 19.4% and 18.0% of New Park
Place's pro forma projected EBIT in 1998, 1999 and 2000, respectively. DLJ noted
that the valuations in the Merger Agreement implied a 16.6% contribution by Post
Spin Grand to New Park Place's Enterprise Value.
DLJ also compared net income of Post Spin Park Place, as projected by
Hilton's management, and Post Spin Grand, as projected by Grand's management, to
pro forma projected New Park Place, as prepared by Hilton's management, for each
of 1998, 1999 and 2000. DLJ noted that Post Spin Grand was projected to
contribute 21.1%, 19.8% and 18.5% of New Park Place's pro forma projected net
income in
55
<PAGE>
1998, 1999 and 2000, respectively. DLJ noted that the valuations in the Merger
Agreement implied a 13.6% equity interest will be held by the former holders of
Grand Common Stock.
DLJ also compared discounted cash flow valuations, at discount rates ranging
from 10% to 14%, which were selected in DLJ's subjective judgment, and terminal
exit multiples ranging from 7.5x to 9.5x for Post Spin Park Place and 7.0x to
9.0x for Post Spin Grand, which were selected in DLJ's subjective judgment, of
Post Spin Park Place, using projections made by Hilton's management, and of Post
Spin Grand, using projections made by Grand's management. DLJ noted that in such
analysis Post Spin Grand contributed from 18.7% to 18.8% of the pro forma
discounted cash flow valuations of New Park Place. DLJ noted that the valuations
in the Merger Agreement implied a 16.6% contribution by Post Spin Grand to New
Park Place's Enterprise Value.
IMPLIED THEORETICAL VALUATIONS.
DLJ compared (i) the implied theoretical market valuations of Hilton Common
Stock computed by adding various implied theoretical market prices of a share of
New Park Place Common Stock, after giving effect to the Merger, to various
implied theoretical market prices of a share of Post Spin Hilton Common Stock to
(ii) the then current market price of Hilton Common Stock of $30.69. DLJ used
Hilton's management's projection of 1998 EBITDA for New Park Place and valued
such EBITDA projection at multiples ranging from 7.0x to 10.0x. Such multiples
were selected in DLJ's subjective judgment. DLJ used Hilton's management's
projection of 1998 EBITDA for Post Spin Hilton and valued such EBITDA projection
at multiples ranging from 10.0x to 13.0x. Such multiples were selected in DLJ's
subjective judgment. The implied theoretical valuation of one share of Park
Place Common Stock, after giving effect to the Merger, together with one share
of Hilton Common Stock, after giving effect to the Hilton Distribution, ranged
from $27.94 (a discount of 8.9%) to $43.94 (a premium of 43.2%) based on 1998
EBITDA. DLJ noted that the then current market price of a share of Hilton Common
Stock implied a multiple of 8.8x 1998 projected EBITDA. DLJ also used Hilton's
management's projections of 1999 and 2000 EPS for New Park Place and valued such
EPS projections at multiples ranging from 14.0x to 18.0x for 1999 and 11.0x to
15.0x for 2000. Such multiples were selected in DLJ's subjective judgment. DLJ
then computed the implied theoretical value of Post Spin Hilton using Hilton's
management's projections of 1999 and 2000 EPS for Post Spin Hilton at multiples
ranging from 16.0x to 20.0x in 1999 and 14.0x to 18.0x in 2000. Such multiples
were selected in DLJ's subjective judgment. The implied theoretical valuation of
one share of Park Place Common Stock, after giving effect to the Merger,
together with one share of Hilton Common Stock, after giving effect to the
Hilton Distribution, ranged from $28.40 (a discount of 7.4%) to $35.86 (a
premium of 16.9%) based on 1999 EPS and from $29.27 (a discount of 4.6%) to
$38.39 (a premium of 25.1%) based on 2000 EPS. DLJ noted that a share of Hilton
Common Stock was valued at 21.9x and 18.3x based upon the then current market
price of $30.69 and estimated 1999 and 2000 EPS, respectively, as reported for
each year by I/B/E/S.
DISCOUNTED CASH FLOW ANALYSIS.
DLJ also performed a discounted cash flow analysis to compare (i) the sum of
the theoretical valuations per share of Post Spin Hilton and New Park Place to
(ii) the theoretical valuation per share of Stand Alone Hilton (as defined). In
conducting its analysis, DLJ relied on certain assumptions, financial
projections and other information provided by Hilton's and Grand's respective
managements. DLJ used the information set forth in the projections of Hilton's
management for each of Hilton, without giving effect to the transactions
contemplated by the Distribution Agreement and the Merger Agreement ("Stand
Alone Hilton"), Post Spin Hilton and Post Spin Park Place and the information
set forth in the projections of Grand's management for Post Spin Grand. DLJ
performed its analysis using Hilton management's five year projections of Stand
Alone Hilton's, Post Spin Hilton's and Post Spin Park Place's respective
unlevered free cash flows and Grand's management's five year projections of Post
Spin Grand's unlevered free cash flows. Unlevered free cash flows were
calculated as the projected after-tax operating earnings of the respective
entities plus their respective projected depreciation, amortization, and other
projected non-cash items minus projected capital expenditures. DLJ selected, in
its subjective judgment, (i) terminal exit multiples of 9.0x, 11.0x and 8.0x
projected EBITDA for 2003 for each of Stand Alone Hilton, Post Spin
56
<PAGE>
Hilton and New Park Place, respectively, and (ii) discount rates ranging from
10% to 14%. The terminal exit multiple is utilized to estimate the value of each
company's unlevered free cash flows in perpetuity beyond the five year period
covered by Hilton's and Grand's managements' respective estimates of each
company's stand-alone projections. This analysis implied a range of (i) $35.48
to $44.72 for the sum of the theoretical valuations per share of Post Spin
Hilton and New Park Place, and (ii) $33.29 to $41.28 for the theoretical
valuation per share of Stand Alone Hilton.
EPS ACCRETION/DILUTION ANALYSIS.
DLJ calculated the projected EPS for each of Stand Alone Hilton, Post Spin
Hilton and New Park Place for each of 1998, 1999, 2000 and 2001, based on
projections provided by Hilton's management and Grand's management. The
projections prepared by Hilton's management and Grand's management were provided
to DLJ solely for the purpose of DLJ's analyses in arriving at the DLJ Opinion.
The sum of the projected EPS for Post Spin Hilton and New Park Place, taken
together, were higher than Hilton management's projected EPS for Stand Alone
Hilton by 2.3%, 4.3%, 5.1% and 6.5% for 1998, 1999, 2000 and 2001, respectively.
The summary set forth above does not purport to be a complete description of
the analyses performed by DLJ but discloses the material basis for and methods
used to arrive at DLJ's opinion. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Each of the analyses conducted by DLJ was carried out in
order to provide a different perspective on the transactions and to add to the
total mix of information available. DLJ formed its conclusion as to fairness
after consideration of the factors and analyses referred to above, taken as a
whole, and did not, as part of that process, conclude as to whether any
individual analysis or factor, considered in isolation rather than as part of
the total mix of information available, supported or failed to support its
ultimate conclusion with respect to fairness, from a financial point of view.
Accordingly, notwithstanding the separate factors summarized above, DLJ believes
that its analyses must be considered as a whole and that consideration of
selected portions of its analysis and the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying its opinion. Furthermore, in arriving at its
opinion, DLJ did not attribute any particular weight to any analysis or factor
considered by it, but rather made subjective and qualitative judgments as to the
significance and relevance of each analysis and factor and concluded that its
analysis, taken as a whole, supported its determination. The analyses performed
by DLJ are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses.
Pursuant to the terms of an engagement letter, dated June 29, 1998, by which
Hilton retained DLJ to render an opinion to the Hilton Board, Hilton paid DLJ a
fee of $1.5 million for rendering the DLJ Opinion. Hilton also agreed to
reimburse DLJ promptly for all out-of-pocket expenses (including the reasonable
fees and expenses of counsel) incurred by DLJ in connection with its engagement,
and to indemnify DLJ and certain related persons against certain liabilities in
connection with its engagement, including liabilities under Federal securities
laws, or to contribute to otherwise indemnifiable losses incurred by DLJ and
certain related person.
Hilton selected DLJ as its financial advisor based upon DLJ's international
reputation and its expertise in advising clients in the hotel and gaming
industries. As part of its investment banking business, DLJ is regularly engaged
in the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes.
In the ordinary course of business, DLJ may actively trade the securities of
each of Hilton and Grand for its own account and for the accounts of its
customers and, accordingly, may at any time hold a net long or short position in
such securities. The Hilton Board was aware of the fact that DLJ has acted as
lead manager of a $500 million offering of convertible notes for Hilton in May
1996, acted as exclusive financial advisor to Hilton in connection with its 1996
acquisition of Bally and dealer manager with respect to the
57
<PAGE>
tender offer for certain debt securities of Bally, acted as an underwriter of
four separate offerings of senior notes by Hilton, acted as exclusive financial
advisor to Hilton in connection with its attempt to acquire ITT Corporation and
in May 1998 acted as sole underwriter of a $773 million secondary offering of
shares of Hilton Common Stock, in each case receiving customary fees therefor,
and that DLJ has acted as financial advisor to, underwriter and placement agent
for, Grand and certain of its predecessors. DLJ will also act as dealer manager
for Park Place's tender offer for certain debt securities of Grand.
OPINION OF FINANCIAL ADVISOR TO GRAND
On June 26, 1998, Ladenburg delivered its oral opinion to the Grand Board of
Directors that, as of such date, based on and subject to the assumptions,
factors and limitations set forth therein, the consideration to be received by
the holders of Grand Common Stock pursuant to the Merger and the Grand
Distribution, taken together and considered as a single transaction, is fair,
from a financial point of view to such holders. Ladenburg subsequently confirmed
its oral opinion by delivering to the Grand Board a written opinion dated as of
June 30, 1998 that based on and subject to the assumptions, factors and
limitations set forth therein, the consideration to be received by Grand
shareholders pursuant to the Merger and the Grand Distribution, taken together
and considered as a single transaction, is fair, from a financial point of view
to such holders.
A COPY OF LADENBURG'S WRITTEN OPINION IS ATTACHED AS ANNEX C TO THIS JOINT
PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. GRAND
SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY FOR ASSUMPTIONS MADE,
PROCEDURES FOLLOWED AND OTHER MATTERS CONSIDERED BY LADENBURG. THE SUMMARY OF
LADENBURG'S OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
Ladenburg's opinion was delivered pursuant to its engagement by the Grand
Board and was addressed to the Grand Board for its benefit and use in
considering the Transactions. Ladenburg's opinion was not rendered with a view
toward serving as or constituting a recommendation to any shareholder of Grand
with respect to whether to vote in favor of the approval and adoption of the
Merger Agreement, and should not be relied upon by any shareholder of Grand as
such.
The Ladenburg opinion does not constitute an opinion as to (i) the price at
which shares of Grand Common Stock or Lakes Common Stock will trade at any time
or (ii) the effects of the litigation retained by Lakes pursuant to the Grand
Distribution Agreement. See "Risk Factors--Risk Relating to the
Transactions--Structure of the Transactions; Indemnification Obligations" and
"Risk Factors--Risks Relating to the Business of Lakes--Stratosphere
Corporation; Pending Litigation." The consideration to be paid by Park Place was
determined in arm's-length negotiations between Hilton and Grand. No
restrictions or limitations were imposed by the Grand Board upon Ladenburg with
respect to the investigations made or the procedures followed by Ladenburg in
rendering its opinion.
In connection with rendering its opinion, Ladenburg reviewed such
information that it deemed necessary or appropriate for the purpose of stating
the opinion expressed herein, including but not limited to the following: (i)
the Merger Agreement, and the exhibits thereto; (ii) the form of the Hilton
Distribution Agreement, and the exhibits thereto; (iii) the form of the Grand
Distribution Agreement, and the exhibits thereto; (iv) Grand's and Hilton's
Annual Reports on Form 10-K and related financial information for the five
fiscal years ended December 28, 1997 and December 31, 1997, respectively, and
the Quarterly Report on Form 10-Q and related financial information for the
three months ended March 29, 1998 and March 31, 1998, respectively; (v) certain
information, including selected historical financial information, pro forma
financial information (giving effect to the Hilton Distribution and the Grand
Distribution as if they occurred as of December 31, 1997) and pro forma
financial forecasts and projections relating to the business, earnings, cash
flow, assets and prospects of Grand, Lakes and Park Place, furnished to it by
Grand and Hilton; (vi) historical market prices and trading activity for Grand
Common Stock, the Hilton Common Stock and shares of certain other publicly
traded companies which
58
<PAGE>
Ladenburg deemed to be comparable to Grand, Hilton and/or Park Place; (vii)
financial terms of certain other mergers and acquisitions which Ladenburg deemed
to be relevant; (viii) certain publicly available information regarding the
gaming industry, Grand, Hilton and certain other companies as Ladenburg deemed
necessary and relevant; and (ix) such other accepted financial and investment
banking procedures and analyses as Ladenburg deemed necessary or appropriate,
including Ladenburg's assessment of general economic, financial and monetary
conditions. In addition, Ladenburg met with members of the senior management of
Grand and Park Place to discuss the conditions of the gaming industry generally
and the historical and prospective operating results of Grand, Lakes and Park
Place.
In rendering its opinion, Ladenburg assumed and relied upon the accuracy and
completeness, without assuming any responsibility for the independent
verification of, all financial and other information that was available to it
from public sources, that was provided to it by Grand, Hilton or Park Place, or
that was otherwise reviewed by it. With respect to financial forecasts and
projections furnished to it by the senior management of Grand, Park Place and
Hilton, Ladenburg assumed that they had been reasonably prepared on bases
reflecting the best then currently available estimates of results and judgments
of such senior managements and Ladenburg made no independent verification of the
bases, assumptions, calculations or other information contained therein.
Ladenburg did not make or receive an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise, and including pending or
threatened litigation) of Grand, Hilton, Park Place or Lakes.
Ladenburg's opinion was based on economic, market, financial and other
conditions as they existed and could be evaluated by it on, and on the
information made available to it as of, the date of its opinion. Although
subsequent developments could affect its opinion, Ladenburg has no obligation to
update, revise or reaffirm its opinion, and will do so only if and when
requested by the Grand Board. The Merger Agreement provides that, upon the
occurrence of certain events described immediately below, the receipt by Grand
of a revised fairness opinion from Ladenburg will be a condition to the
obligation of Grand to effect the Merger, and, in addition, failure by Ladenburg
to deliver such revised opinion upon the occurrence of such events will give
Grand the right to terminate the Merger Agreement. Such events described in the
Merger Agreement relate to (i) the consummation of the Hilton Distribution
following approval by the Grand shareholders of the Merger and the Merger
Agreement, with the failure of the Closing to occur within 20 business days of
such distribution, provided that Grand has not received nor has knowledge of an
acquisition proposal involving Grand, and (ii) the acquisition by Park Place
after June 30, 1998 of, individually or in the aggregate, any entities,
properties, assets or businesses with a net equity value in excess of $300
million. See "The Transactions--The Merger Agreement--Conditions to the Merger"
and "--Termination." Upon the occurrence of such events, Ladenburg will
undertake to issue a revised fairness opinion if requested by Grand.
Additionally, if the Merger Agreement were amended in a manner which effects the
factors considered by Ladenburg in rendering the Ladenburg opinion, the Grand
Board would consider engaging Ladenburg to provide a supplemental opinion. Grand
shareholders should note that the Merger Agreement does not provide Grand with
any opportunity to terminate the Merger Agreement or fail to consummate the
transactions contemplated thereby based solely upon changes in financial market
conditions from those that existed on the date of the Ladenburg opinion. The
Ladenburg opinion does not address additional data arising subsequent to the
data considered by Ladenburg in reaching its opinion, including market prices of
securities, reported results of operations, publicly announced transactions, and
factors that may affect the estimates of future earnings, which could affect the
Ladenburg opinion if such an opinion were rendered as of a subsequent date.
Ladenburg expressed no opinion as to the price at which the Common Stocks of
Hilton, Park Place or Lakes would trade following the Transactions, or of the
Common Stocks of Hilton and Grand at any time prior to the consummation of the
Transactions.
59
<PAGE>
Insofar as Ladenburg's opinion related to the consideration to be received
by Grand's shareholders in the Merger, Ladenburg noted in its opinion that the
amount of such consideration would be determined by the application of the
Exchange Ratio formula (which is based upon, in part, the "Total Debt of Grand"
and the "Total Debt of Park Place" (each, as defined in "The Transactions--The
Merger Agreement-- Conversion of Shares")) as of the earlier of the closing date
of the Merger and December 31, 1998, and accordingly, such amount could not be
determined until such time. For purposes of rendering the opinion set forth in
its written opinion, Ladenburg assumed the Total Debt of Grand and the Total
Debt of Park Place, as of the relevant date, would be in amounts substantially
consistent with those reflected in Grand's and Park Place's forecasts of results
of operations and cash flow for the year ending December 31, 1998, which were
furnished to Ladenburg by the senior managements of Grand and Park Place.
Ladenburg expressed no opinion as to the reasonableness or achievability of such
forecasts.
In rendering its opinion, Ladenburg assumed that the Transaction would
comply with applicable United States, foreign, federal and state laws,
including, without limitation, laws relating to the payment of dividends,
bankruptcy, insolvency, reorganization, fraudulent conveyance, fraudulent
transfer or other similar laws then or thereafter in effect affecting creditors'
rights generally. Ladenburg also assumed that receipt of Lakes Common Stock by
Grand's shareholders in connection with the Grand Distribution would be tax-free
for federal income tax purposes to such shareholders.
In arriving at its opinion, Ladenburg performed a variety of financial and
comparative analyses. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of those methods to particular circumstances and,
therefore, such an opinion is not readily susceptible to summary description.
Each of the analyses conducted by Ladenburg was carried out in order to provide
a different perspective on the Transactions and to supplement the other
information reviewed and considered by Ladenburg. Ladenburg formed its
conclusion as to fairness after consideration of the factors and analyses
referred to below, taken as a whole, and did not, as part of that process,
conclude as to whether any individual analysis or factor considered in isolation
supported or failed to support its ultimate determination. Accordingly,
notwithstanding the separate factors summarized below, Ladenburg believes that
its analyses must be considered as a whole and that consideration of selected
portions of its analysis and the factors considered by it, without considering
all analyses and factors, could create an incomplete view of the evaluation
process underlying its opinion. Furthermore, in arriving at its opinion,
Ladenburg did not attribute any particular weight to any analysis or factor
considered by it, but rather made subjective and qualitative judgments as to the
significance and relevance of each analysis and factor and concluded that its
analysis, taken as a whole, supported its determination. The analyses performed
by Ladenburg are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by such
analyses.
Although each analysis employed by Ladenburg in rendering its opinion is
summarized below, the summary does not purport to be a complete description of
Ladenburg's analyses but discloses the material bases for and methods used to
arrive at Ladenburg's opinion. In its analyses, Ladenburg made numerous
assumptions with respect to industry performance, general business, economic,
market and financial conditions and other matters, based on, among other things,
information provided to (and relied upon by) Ladenburg by Grand, Park Place and
Hilton, many of which are beyond the control of Grand, Park Place and Hilton.
Any estimates contained in Ladenburg's analyses are not necessarily indicative
of actual values, which may be significantly more or less favorable than as set
forth therein. Additionally, estimates of the value of businesses do not purport
to be appraisals or necessarily to reflect the prices at which businesses
actually may be sold. Because such estimates are inherently subject to
uncertainty since the assumptions upon which such estimates are based may not
materialize, neither Grand, Park Place, Hilton, Ladenburg nor any other person
assumes responsibility for the accuracy of such estimates. Ladenburg's analysis
does not reflect, among other things, changes since the date of the opinion with
respect to Grand's business or prospects, general business and economic
conditions, or any other transaction or event that has occurred or that may
occur and that was not anticipated at the time Ladenburg prepared such
materials.
60
<PAGE>
The following is a summary of analyses performed by Ladenburg in connection
with its opinion.
The Merger Agreement provides for the determination of the Exchange Ratio
based upon the relative implied per share equity values of Grand's Mississippi
Business and Park Place, which equity values will be determined by taking a
specified enterprise value for each of Grand's Mississippi Business and Park
Place (which enterprise values were arrived at by negotiation between Grand and
Hilton), subtracting the Total Debt of Grand and Total Debt of Park Place as of
the earlier of the closing date of the Merger and December 31, 1998,
respectively, and dividing by the relevant number of shares outstanding. See
"The Transactions--The Merger Agreement" and "Examples of What Grand
Shareholders Could Receive in the Merger." Assuming that the Total Debt of Grand
and the Total Debt of Park Place, as of the relevant dates, will be in amounts
consistent with those reflected in Grand's and Park Place's forecasts of results
of operations and cash flow for the year ending December 31, 1998 which were
furnished to Ladenburg, the implied per share equity value of Grand's
Mississippi Business and Park Place will be approximately $15.37 and $15.84,
respectively, resulting in an exchange ratio of .9699 of a share of Park Place
stock for each share of Grand Common Stock. To the extent that the Total Debt of
Grand or the Total Debt of Park Place are higher or lower than the amounts
reflected in such forecasts, such implied per share equity values will differ,
resulting in a different exchange ratio, subject to certain limitations. See
"The Transactions--The Merger Agreement" and "Examples of What Grand
Shareholders Could Receive in the Merger." The range of exchange ratios
illustrated in examples 2 through 6 in the table, prepared by Hilton and Grand,
under "Examples of What Grand Shareholders Could Receive in the Merger" on page
5 is consistent with the range of potential exchange ratios considered by
Ladenburg in arriving at its opinion. See "Examples of What Grand Shareholders
Could Receive in the Merger." In arriving at its opinion, Ladenburg noted that
the implied per share equity values referred to above are relevant only in
relation to each other and only for purposes of determining the Exchange Ratio.
ANALYSIS WITH RESPECT TO THE MISSISSIPPI BUSINESS
(a) COMPARABLE PUBLIC COMPANY ANALYSIS. Ladenburg conducted a comparable
public company analysis with respect to the Mississippi Business based on an
analysis of the trading multiples of certain selected public companies similar
to the Mississippi Business. Ladenburg selected the following group of public
companies for use in such analysis: Ameristar Casinos, Inc.; Aztar Corp.; Boyd
Gaming Corp.; Harrah's Entertainment, Inc.; Hollywood Park Inc.; and Players
International, Inc. (the "Mississippi Business Comparable Companies"). Ladenburg
selected these companies based on a variety of factors, including that they were
deemed to be comparable to the Mississippi Business in terms of size, geographic
market, strategy and growth prospects. Ladenburg derived common stock trading
multiples for each of the Mississippi Business Comparable Companies based on
each company's market value and total enterprise value (defined as the market
value of common stock, plus total debt, less cash and cash equivalents ("net
debt")). Ladenburg developed multiples based on market value by analyzing each
company's latest fiscal year net income, projected current fiscal year net
income, projected fiscal year plus one net income, and current book value.
Ladenburg developed multiples based on enterprise value by analyzing latest
fiscal year EBITDA, projected current fiscal year EBITDA, and projected fiscal
year plus one EBITDA. When deriving multiples based on projected measures of
financial performance, Ladenburg referenced estimates of financial performance
as published by various research analysts and as available through the First
Call Research Network (a composite of research analysts' estimates). Ladenburg
arrived at a range of implied valuations for the Mississippi Business by (i)
multiplying the Mississippi Business' 1997 EBITDA, projected 1998 EBITDA and
projected 1999 EBITDA by the mean multiple of enterprise value to latest fiscal
year EBITDA, projected current fiscal year EBITDA and projected fiscal year plus
one EBITDA, respectively, for the Mississippi Business Comparable Companies;
and, (ii) multiplying the Mississippi Business' 1997 net income, projected 1998
net income, projected 1999 net income, and current book value by the mean
multiple of market value to latest fiscal year net income, projected current
fiscal year net income, projected fiscal year plus one net income, and current
book value, respectively, for the Mississippi Business Comparable Companies. The
mean market multiples for the Mississippi Business Comparable
61
<PAGE>
Companies were as follows: (i) 7.5x as a multiple of enterprise value to latest
fiscal year EBITDA; (ii) 6.0x as a multiple of enterprise value to projected
current fiscal year EBITDA; (iii) 5.5x as a multiple of enterprise value to
projected fiscal year plus one EBITDA; (iv) 19.9x as a multiple of market value
to latest fiscal year net income; (v) 16.7x as a multiple of market value to
projected current fiscal year net income; (vi) 13.1x as a multiple of market
value to projected fiscal year plus one net income; and, (vii) 1.6x as a
multiple of market value to book value.
(b) COMPARABLE ACQUISITION ANALYSIS. Ladenburg conducted an acquisition
multiples analysis with respect to the Mississippi Business based on an analysis
of certain merger and acquisition transactions in the gaming industry. For
purposes of this analysis, the purchase price, or equity price, was equal to the
amount paid for the target's equity and the transaction value, or enterprise
value, was equal to the purchase price, plus the target's net debt. Ladenburg
developed multiples from the following selected merger and acquisition
transactions in the gaming industry: the pending acquisition of Casino Magic
Corp. by Hollywood Park Inc.; the pending acquisition of Harvey's Casino Resorts
by Colony Capital; the pending acquisition of Station Casinos, Inc. by Crescent
Real Estate Equities; the acquisition of Showboat by Harrah's Entertainment,
Inc.; the acquisition of Bally Entertainment Corporation by Hilton; and, the
acquisition of Caesar's World by ITT Corp. (the "Comparable Gaming
Acquisitions"). Ladenburg developed multiples based on market value by analyzing
each target company's latest fiscal year net income and projected current fiscal
year net income. Ladenburg developed multiples based on enterprise value by
analyzing each target company's latest fiscal year EBITDA, latest fiscal year
EBIT, and projected current fiscal year EBITDA. When deriving multiples based on
projected measures of financial performance, Ladenburg referenced estimates
published by various research analysts available at the time of the Comparable
Gaming Acquisition being analyzed. Ladenburg arrived at a range of implied
valuations for the Mississippi Business by (i) multiplying the Mississippi
Business' 1997 EBITDA and EBIT, and projected 1998 EBITDA by the appropriate
mean multiple of enterprise for the Comparable Gaming Acquisitions and (ii)
multiplying the Mississippi Business' 1997 net income and projected 1998 net
income by the appropriate mean multiple of market value for the Comparable
Gaming Acquisitions. The mean multiples for the Comparable Gaming Acquisitions
were as follows: 9.4x as a multiple of enterprise value to latest fiscal year
EBITDA; (ii) 16.0x as a multiple of enterprise value to latest fiscal year EBIT;
(iii) 7.9x as a multiple of enterprise value to projected current fiscal year
EBITDA; (iv) 22.1x as a multiple of market value to latest fiscal year net
income; and (v) 18.3x as a multiple of market value to projected current fiscal
year net income.
(c) DISCOUNTED CASH FLOW ANALYSIS. Ladenburg conducted a discounted cash
flow analysis with respect to the Mississippi Business based on an analysis of
the net present value of its delevered free cash flows for the fiscal years 1999
to 2002, plus a hypothetical "terminal" value developed assuming the Mississippi
Business was sold at the end of the fiscal year 2002. For purposes of the
discounted cash flow analysis, free cash flow equaled net income before interest
expense and interest income, plus depreciation and amortization, less capital
expenditures, adjusted for changes in working capital. The free cash flows were
discounted using a range of discount rates of 11.0% to 13.0% based upon the
estimated weighted average cost of capital for Grand. Ladenburg applied exit
multiples of 8.9x to 9.9x EBITDA, which range was arrived at based on the
multiplies in the Comparable Gaming Acquisitions.
SUMMARY OF ANALYSES REGARDING THE MISSISSIPPI BUSINESS
In examining each of the Comparable Public Company Analysis, the Comparable
Acquisition Analysis and the Discounted Cash Flow Analysis thoroughly, Ladenburg
concluded that no particular analysis was more relevant, represented more direct
comparability or provided a higher degree of certainty than others. Accordingly,
Ladenburg did not ascribe different weightings to each analysis, and instead
averaged the valuation range developed from each analysis to produce mean
implied valuation ranges for the Mississippi Business. The Comparable Public
Company Analysis produced a range of implied equity values for the Mississippi
Business from $5.08 to $14.43 per share. The Comparable Acquisition Analysis
produced a
62
<PAGE>
range of implied equity values for the Mississippi Business from $10.74 to
$13.26 per share. The Discounted Cash Flow Analysis produced a range of implied
equity values for the Mississippi Business from $19.26 to $24.84. The mean of
these valuation ranges is $11.69 to $17.51, representing a discount and premium
of (23.9%) and 13.9%, respectively, to the assumed implied equity value of
$15.37 per share to be utilized for purposes of determining the Exchange Ratio.
ANALYSIS WITH RESPECT TO PARK PLACE
(a) COMPARABLE PUBLIC COMPANY ANALYSIS. Ladenburg conducted a comparable
public company analysis with respect to Park Place based on an analysis of the
trading multiples of certain selected public companies. Ladenburg selected the
following group of public companies for use in such analysis: Circus Circus
Enterprises, Inc.; Harrah's Entertainment, Inc.; MGM Grand Inc.; and, Mirage
Resorts, Inc. (the "Park Place Comparable Companies"). Ladenburg selected these
companies based on a variety of factors including that they were deemed to be
the most comparable to Park Place in terms of size, strategy and growth
prospects. Ladenburg derived common stock trading multiples for each of the Park
Place Comparable Companies based on the market value of each company's common
stock and total enterprise value. Ladenburg developed multiples based on market
value by analyzing each of such company's latest fiscal year net income,
projected current fiscal year net income, projected fiscal year plus one net
income, and current book value. Ladenburg developed multiples based on
enterprise value by analyzing latest fiscal year EBITDA, latest fiscal year
EBIT, projected current fiscal year EBITDA, and projected fiscal year plus one
EBITDA. When deriving multiples based on projected measures of financial
performance Ladenburg referenced estimates of financial performance as published
by various research analysts and as available through the First Call Research
Network. Ladenburg arrived at a range of implied equity valuations for Park
Place by (i) adjusting the Park Place Comparable Company multiples by applying a
10% premium that reflects Park Place's geographically diversified operations,
low cost of capital, size and position as an industry consolidator relative to
the Park Place Comparable Companies, (ii) multiplying Park Place's 1997 EBITDA,
1997 EBIT, projected 1998 EBITDA and projected 1999 EBITDA by the appropriate
adjusted mean multiple of enterprise value for the Park Place Comparable
Companies; and, (iii) multiplying Park Place's 1997 net income, projected 1998
net income, projected 1999 net income, and current book value by the appropriate
adjusted mean multiple of market value for the Park Place Comparable Companies.
The adjusted mean market multiples for the Park Place Comparable Companies were
as follows: (i) 10.7x as a multiple of enterprise value to latest fiscal year
EBITDA; (ii) 15.1x as a multiple of enterprise value to latest fiscal year EBIT;
(iii) 9.4x as a multiple of enterprise value to projected current fiscal year
EBITDA; (iv) 7.4x as a multiple of enterprise value to projected fiscal year
plus one EBITDA; (v) 20.4x as a multiple of market value to latest fiscal year
net income; (vi) 21.2x as a multiple of market value to projected current fiscal
year net income; (vii) 16.7x as a multiple of market value to projected fiscal
year plus one net income; and, (vii) 2.4x as a multiple of market value to book
value.
(b) COMPARABLE ACQUISITION ANALYSIS. Ladenburg conducted an acquisition
multiples analysis with respect to Park Place based on an analysis of certain
merger and acquisition transactions in the gaming industry. Ladenburg analyzed
the valuation multiples derived from the Comparable Gaming Acquisitions to
develop an implied enterprise value range and market value range for Park Place.
Ladenburg developed multiples based on market value by analyzing each target
company's latest fiscal year net income and projected current fiscal year net
income. Ladenburg developed multiples based on enterprise value by analyzing
each target company's latest fiscal year EBITDA, latest fiscal year EBIT, and
projected current fiscal year EBITDA. When deriving multiples based on projected
measures of financial performance, Ladenburg referenced estimates published by
various research analysts available at the time of the Comparable Gaming
Acquisition being analyzed. Ladenburg arrived at a range of implied equity
valuations for Park Place by (i) multiplying Park Place's 1997 EBITDA and EBIT,
and projected 1998 EBITDA by the appropriate mean multiple of enterprise value
for the Comparable Gaming Acquisitions, and (ii) multiplying Park Place's 1997
net income and projected 1998 net income by the appropriate mean multiple of
market value for the Comparable Gaming Acquisitions.
63
<PAGE>
(c) DISCOUNTED CASH FLOW ANALYSIS. Ladenburg conducted a discounted cash
flow analysis with respect to Park Place based on an analysis of the net present
value of its free cash flows for the fiscal years 1999 to 2002, plus a
hypothetical "terminal" value developed assuming it was sold at the end of the
fiscal year 2002, less estimated net debt at December 31, 1998. The free cash
flows were discounted using a range of discount rates of 9.0% to 11.0% based
upon the estimated weighted average cost of capital for Park Place. Ladenburg
applied exit multiples of 8.9x to 9.9x EBITDA developed with reference to
Comparable Gaming Acquisitions.
SUMMARY OF ANALYSES REGARDING PARK PLACE
In examining each of the Comparable Public Company Analysis, the Comparable
Acquisition Analysis and the Discounted Cash Flow Analysis thoroughly, Ladenburg
concluded that no particular analysis was more relevant, represented more direct
comparability or provided a higher degree of certainty than others. Accordingly,
Ladenburg did not ascribe different weightings to each analysis, and instead
averaged the valuation range developed from each analysis to produce mean
implied valuation ranges for Park Place. The Comparable Public Company Analysis
produced a range of implied equity values for Park Place from $11.90 to $18.06
per share. The Comparable Acquisition Analysis produced a range of implied
equity values for Park Place from $8.88 to $14.53 per share. The Discounted Cash
Flow Analysis produced a range of implied equity values for Park Place from
$14.87 to $19.07. The mean of these valuation ranges is $11.88 to $17.22,
representing a discount and premium of (25.1%) and 8.6%, respectively, to the
assumed implied equity value of $15.85 per share to be utilized for purposes of
determining the Exchange Ratio.
ANALYSIS WITH RESPECT TO LAKES
Pursuant to the Grand Distribution and in addition to the consideration to
be received by Grand's shareholders in the Merger, Grand's shareholders will
receive a pro rata distribution of Lakes Common Stock. Although the distribution
ratio to be used in the Grand Distribution is one share of Lakes Common Stock
for every four shares of Grand Common Stock, Ladenburg did not give effect to
such distribution ratio in its analysis with respect to Lakes described herein.
Ladenburg conducted a discounted cash flow analysis to arrive at a range of
net present value of projected cash distributions from Grand's Avoyelles,
Coushatta and Hinckley Indian contracts (the "Indian Contracts"), adjusted for
loan repayments, interest expense and an allocation of Grand's corporate
overhead. Ladenburg assumed for purposes of the discounted cash flow analysis
that none of the Indian Contracts were extended beyond their existing
termination dates, and consequently Ladenburg did not incorporate any Indian
Contract terminal value into the analysis. The Indian Contracts' cash
distributions were discounted using a range of discount rates based upon on an
estimated weighted average cost of capital for Lakes ranging between 11.0% to
13.0%.
Ladenburg conducted analyses of the other assets and liabilities to be
included in Lakes using various techniques. These assets included $33.0 million
in cash, $22.9 million of land in Las Vegas valued at cost, selected
receivables, reserves and borrowing and outside equity investments. Ladenburg
estimated a value of Lakes' investments in New Horizon Kids Quest, Inc. and
Innovative Gaming Corporation of America based on the low and high trading
prices of each investments' common stock for the thirty day trading period prior
to June 26, 1998. Ladenburg estimated a value of Lakes' investments in Casino
Magic Corp. based on Hollywood Park Inc.'s offer to acquire Casino Magic Corp.
for $2.27 per share. Ladenburg did not make or receive an independent evaluation
or appraisal of the assets or liabilities (contingent or otherwise, and
including pending or threatened litigation) of Lakes.
The range of equity values per share derived by the discounted cash flow
analysis plus the range of equity values per share derived by the other assets
and liabilities valuation produced a range of implied equity values for Lakes
from $3.61 to $3.74 per share. The mean of these valuation ranges is $3.67 per
share.
64
<PAGE>
OTHER ANALYSES
(a) PREMIUMS PAID ANALYSIS. Ladenburg conducted a premiums paid analysis
that compared premiums paid by public companies acquiring 100% of another public
company with enterprise values ranging from $1.0 billion to $1.5 billion. A
total of 45 transactions were analyzed. The ranges of premiums paid were between
(13.9%) and 84.2% as measured by the target company's stock price one day before
announcement of the transaction, (9.8%) and 87.5% as measured by the target
company's stock price one week before announcement of the transaction, and
(9.7%) and 102.7% as measured by the target company's stock price four weeks
before announcement of the transaction. Based on an assumed combined valuation
of Lakes and the consideration to be received for the Mississippi Business of
$19.04 per share (comprised of the mean valuation of $3.67 per share for Lakes
and an implied equity value of $15.37 per share for the Mississippi Business
used for purposes of determining the Exchange Ratio), the premiums received by
Grand's shareholders in the Transaction were 7.6%, 9.6% and 8.4% based on
Grand's stock price one day, one week and four weeks before the Transaction was
announced, respectively.
(b) HISTORICAL MARKET PRICE ANALYSIS. Ladenburg examined the closing
market prices of Grand Common Stock over the 30-day, 60-day and 90-day trading
period prior to June 26, 1998 during which time the average of the closing price
was $17.48, $17.61 and $17.13, respectively. Grand's closing price on June 25,
1998, the day prior to the date that Ladenburg's oral opinion was delivered to
the Grand Board, was $17.69.
(c) PRO FORMA ANALYSIS OF PARK PLACE. Ladenburg conducted several pro
forma analyses to evaluate the: (a) implied value of a Grand shareholders'
ownership in Park Place at a range of valuations for Park Place after the
Merger; (b) potential impact of the Merger on Park Place's earnings per share
("EPS") for the years 1998 through 2001; (c) pro forma Park Place financial
growth rates, operating margins, capital structure and credit statistics; and
(d) effect differences between the actual Total Debt of Grand and the projected
Total Debt of Grand has on Grand shareholders' ownership of Park Place.
Ladenburg developed its analysis to measure the value of a Grand
shareholders' ownership in Park Place at various valuations for Park Place by
applying a range of EBITDA multiples to Park Place's pro forma post-Merger 1998
EBITDA. Based on this analysis, public trading multiples for Park Place of 8.0,
8.5 and 9.0 times EBITDA implied a per share value to Grand shareholders of
$13.67, $15.04 and $16.42 per share, or a discount of (11.1%) and (2.1%) and a
premium of 6.8% to $15.37, the estimated consideration to be received by Grand
shareholders for the Mississippi Business based on the Exchange Ratio formula
and projected Total Debt of Grand and Total Debt of Park Place.
As part of its investment banking services, Ladenburg is regularly engaged
in the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for estate, corporate or other
purposes. Ladenburg has acted as financial advisor to Grand in connection with
the Transactions and will receive a fee of approximately $6.5 million from Grand
for its services, payable upon consummation of the Transactions. Pursuant to
Ladenburg's engagement, Grand has also agreed to indemnify Ladenburg, and
certain related persons, against certain liabilities relating to or arising out
of its engagement and the services rendered, including certain liabilities under
the Federal securities laws. Ladenburg has, in the past, provided financial
advisory and financing services to Grand and has received fees for the providing
of such services. In addition, in the ordinary course of business, Ladenburg
actively trades securities for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in the
debt or equity securities of Grand and Hilton, and, in the future, of Lakes and
Park Place. Mr. Ronald J. Kramer, Chairman and Chief Executive Officer of
Ladenburg, serves as a director of Grand and abstained from voting on the Merger
Agreement and the Merger.
65
<PAGE>
THE TRANSACTIONS
The following discussion summarizes the material aspects of the proposed
Transactions, which will be consummated in accordance with the terms of (i) the
Hilton Distribution Agreement, (ii) the Grand Distribution Agreement and (iii)
the Merger Agreement. The Hilton Distribution Agreement, the Grand Distribution
Agreement, the Merger Agreement and the other agreements described in this Joint
Proxy Statement/Prospectus that are being entered into in connection with the
Transactions are hereinafter referred to as the "Transaction Documents." The
summaries set forth below of certain provisions of the Transaction Documents do
not purport to be complete and are qualified in their entirety by reference to
such agreements, which are attached hereto or are incorporated herein by
reference. ALL STOCKHOLDERS ARE URGED TO READ IN THEIR ENTIRETY THE DOCUMENTS
THAT ARE ATTACHED HERETO.
OVERVIEW
The principal components of the Transactions to be effected are the Hilton
Distribution, the Grand Distribution, the Merger and the refinancing
transactions described below.
THE HILTON DISTRIBUTION
The Hilton Distribution will separate the Hilton Lodging Business from the
Hilton Gaming Business. Following the Hilton Distribution, Park Place and its
subsidiaries will operate the Hilton Gaming Business and Hilton and its
subsidiaries will operate the Hilton Lodging Business. On the date of the Hilton
Distribution (the "Hilton Distribution Date"), Hilton will transfer all of the
assets and liabilities of the Hilton Gaming Business (except its interest in the
management operations of the Casino Windsor property) to Park Place. Each holder
of Hilton Common Stock on the record date for the Hilton Distribution will
receive one share of Park Place Common Stock and the associated stockholders'
rights for each share of Hilton Common Stock held, and will continue to hold its
shares of Hilton Common Stock. In addition, effective as of the Hilton
Distribution Date, all outstanding options under Hilton's stock option plans,
other than options held by Arthur M. Goldberg, will be adjusted to represent
options to purchase an equivalent number of shares of Hilton Common Stock and
shares of Park Place Common Stock and the exercise prices of such options will
be adjusted to preserve the intrinsic value of such options on the date of the
Hilton Distribution. All outstanding options held by Mr. Goldberg under such
plans will be adjusted to represent options to purchase shares of Park Place
Common Stock. Pursuant to such adjustment, the number of shares subject to and
the exercise price of Mr. Goldberg's options will be adjusted to preserve the
intrinsic value of such options on the date of the Hilton Distribution, and such
adjustment will based on the relative values of the Hilton Common Stock and the
Park Place Common Stock on the date of the Hilton Distribution, all as
determined by Hilton. See "--Arrangements Between Hilton and Park Place-- Hilton
Employee Benefits Allocation Agreement."
THE GRAND DISTRIBUTION
The Grand Distribution will separate Grand's Mississippi Business (which
includes the Grand Casino Biloxi, Grand Casino Gulfport and Grand Casino Tunica
properties) from its Non-Mississippi Business (comprised primarily of the
management of three Indian-owned casinos, an interest in the development of the
Polo Plaza in Las Vegas, up to $33 million in cash and certain other assets and
liabilities). Following the Grand Distribution, Lakes and its subsidiaries will
operate the Non-Mississippi Business and, upon consummation of the Merger, Park
Place and its subsidiaries will operate the Mississippi Business.
On the date of the Grand Distribution (the "Grand Distribution Date"), Grand
will transfer all of the assets and liabilities of the Non-Mississippi Business
to Lakes. Each holder of Grand Common Stock on the record date for the Grand
Distribution will receive one share of Lakes Common Stock for every four shares
of Grand Common Stock held (and cash in lieu of fractional shares of Lakes
Common Stock) and,
66
<PAGE>
following the Merger, as more fully described below, will hold shares of Park
Place Common Stock. In addition, effective as of the Grand Distribution Date,
all outstanding options under Grand's stock option plans will be adjusted to
represent options to purchase shares of Lakes Common Stock and Grand Common
Stock, and as a result of the Merger, the resulting options to purchase Grand
Common Stock will become options to purchase shares of Park Place Common Stock.
See "--Arrangements Between Grand and Lakes--Grand Employee Benefits Allocation
Agreement" and "The Merger Agreement--Treatment of Stock Options."
THE MERGER
Following the Hilton Distribution and immediately after the Grand
Distribution, Gaming Acquisition Corporation, a wholly owned subsidiary of Park
Place, will merge with and into Grand, with Grand as the surviving corporation.
In the Merger, Grand shareholders will receive Park Place common stock in
exchange for their Grand Common Stock. The exact number of Park Place shares
that Grand shareholders will receive in the Merger will be determined by an
exchange ratio based upon a "valuation factor" for each of the Mississippi
Business and the Hilton Gaming Business. Based on the assumptions under one of
the examples included on page 5 under "Examples of What Grand Shareholders Could
Receive in the Merger" following the Merger, Hilton stockholders would own 86.4%
and Grand shareholders would own 13.6% of Park Place, respectively. However, the
actual percentages are likely to differ based upon changes in any of the factors
used to determine the exchange ratio. A detailed description of the exchange
ratio is set forth below under "--The Merger Agreement--Conversion of Shares."
Following the Merger, Grand will be a wholly owned subsidiary of Park Place.
THE REFINANCING
It is anticipated that concurrently with the consummation of the Merger,
Park Place will enter into a new credit facility (the "New Credit Facility").
The New Credit Facility would be available to satisfy Park Place's assumption of
its allocated portion of Hilton's outstanding obligations under Hilton's bank
revolving credit facility and ongoing financing requirements of Park Place and
to provide funds for the refinancing of Grand's $450 million aggregate principal
amount of 10 1/8% First Mortgage Notes due 2003 and $115 million aggregate
principal amount of 9% Senior Notes due 2004 (collectively, the "Grand Notes").
It is currently anticipated that Park Place will offer to purchase all of the
Grand Notes at a premium to their stated principal amount and solicit consents
from holders of the Grand Notes to certain amendments to the indentures
governing the Grand Notes to delete or modify restrictive covenants in the
indentures which will provide sufficient operating flexibility to permit Grand
to operate as a subsidiary of Park Place following the Merger (the "Grand Tender
Offer"). Consummation of the Grand Tender Offer will be subject to the tender
of, and receipt of consents from, the holders of no less than a majority of the
outstanding aggregate principal amount of the Grand Notes and certain other
conditions. The Grand Tender Offer is expected to close on the same date the
Merger is consummated.
In addition to the New Credit Facility, Park Place will assume payment
obligations under certain indebtedness in connection with the Hilton
Distribution. See "Arrangements Between Hilton and Park Place--Hilton
Distribution," "--Assumption Agreement Relating to Certain Indebtedness,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Park Place--Financing" and "Unaudited Pro Forma Condensed Financial
Statements."
CLOSING OF THE TRANSACTIONS
Each of Hilton's and Grand's Distribution Agreement provides that their
respective Distributions are conditioned on stockholder ratification of their
respective Board's decision to effect the Distributions, and the Merger
Agreement provides that the Merger is conditioned upon consummation of the
Distributions. It is intended that the Transactions be consummated as soon as
possible following the Special Meetings, subject to the satisfaction or waiver
of all conditions to closing, or such other time and place as the parties
67
<PAGE>
to the Merger Agreement may agree. There can be no assurance, however, as to
whether or when the Transactions will be consummated. See "The Merger
Agreement--Conditions to the Merger" and "--Effect of Hilton Distribution in
Advance of Merger."
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, which is attached as Annex A to this Joint Proxy Statement/Prospectus
and is incorporated herein by reference. Such summary is qualified in its
entirety by reference to the Merger Agreement.
TERMS OF THE MERGER
The Merger Agreement provides that, following the approval of the Merger
Agreement and the Merger by the shareholders of Grand and the satisfaction or
waiver of the other conditions to the Merger, Gaming Acquisition Corporation, a
wholly owned subsidiary of Park Place, will be merged with and into Grand, and
Grand shall continue as the surviving corporation (the "Surviving Corporation").
As a result of the Merger, Grand will become a wholly owned subsidiary of Park
Place.
EFFECTIVE TIME
The Merger Agreement provides that, subject to the requisite approval of the
shareholders of Grand, and subject to the satisfaction or waiver of certain
other conditions, the Merger will be consummated by the filing of Articles of
Merger with the Secretary of State of the State of Minnesota. The Merger will
become effective at the time of filing, or at such a time thereafter as is
provided in the Articles of Merger (the "Effective Time").
CONVERSION OF SHARES
Each issued and outstanding share of Grand Common Stock (other than shares
to be canceled in accordance with the Merger Agreement and shares of Grand
Common Stock held by a Grand stockholder who properly dissents from the Merger
(the "Dissenting Shares")) will be converted into the right to receive Park
Place Common Stock equal to the Grand Valuation Factor (as defined below)
divided by the Park Place Valuation Factor (as defined below), rounded to the
fourth decimal (the "Exchange Ratio").
The "Grand Valuation Factor" will be equal to (1) $1,200,000,000 minus the
dollar amount of the Total Debt of Grand (the resulting difference being
referred to as the "Grand Net Equity Value"), divided by (2) the Total Number of
Grand Shares Outstanding (as defined below); provided, however, that if the
Grand Net Equity Value is less than $617,600,000 but more than $585,100,000,
then it will be deemed to be equal to $617,600,000, and if the Grand Net Equity
Value is less than $585,100,000, then Hilton will be entitled to terminate the
Merger Agreement.
The "Total Debt of Grand" will be (x) determined as of the earlier of (i)
the closing date of the Merger (the "Closing Date") and (ii) December 31, 1998
(the earlier of such dates, the "Determination Date") and (y) equal to the total
indebtedness for borrowed money (both long-term and current maturities) of Grand
and its subsidiaries as of the Determination Date, plus the increase (if any)
between (A) total current liabilities (excluding (i) maturities of long-term
indebtedness, (ii) payables relating to unfunded expenditures under Grand's
Capital Expenditure Plan 1998 - 1999, dated June 3, 1998 (such plan, as in
existence on June 30, 1998, the "Grand Capital Plan"), (iii) amounts accrued for
performance bonuses (but including amounts accrued for retention and relocation
bonuses) and (iv) liabilities that constitute transaction costs) of Grand and
its subsidiaries as of the Determination Date and (B) the total current
liabilities (excluding (i) maturities of long-term indebtedness, (ii) payables
relating to unfunded expenditures under the Grand Capital Plan, (iii) amounts
accrued for performance bonuses (but including amounts accrued for retention and
relocation bonuses) and (iv) liabilities that constitute transaction costs) of
Grand and its subsidiaries on a pro forma basis at December 28, 1997, plus the
total amount of 1998
68
<PAGE>
capital expenditures under the Grand Capital Plan that remain unfunded as of the
Determination Date (excluding up to $25 million in Lady Luck-Biloxi acquisition
and improvement costs and any additional capital expenditures approved in
writing by Hilton), plus that percentage of the total transaction costs that is
equal to Grand's shareholders' pro forma ownership of Park Place determined
pursuant to the foregoing formula as of the Determination Date but without
giving effect to the aggregate transaction costs, less (i) the total amount of
unrestricted cash of Grand and its subsidiaries as of the Determination Date,
(ii) $8 million and (iii) so long as Grand has not consummated any sale,
transfer or other disposition involving its Gulfport headquarters prior to the
Determination Date, an amount equal to the sum of (X) the 1998 increase in book
value of Grand's Gulfport headquarters plus (Y) the dollar value of any
depreciation expense accrued by Grand in connection therewith from and after
December 27, 1997 and through the Determination Date. The elements of the Total
Debt of Grand and its subsidiaries will be as set on a "Grand Closing Schedule"
to be prepared and finally determined as set forth in the Merger Agreement.
The "Total Number of Grand Shares Outstanding" is equal to 42,293,145, plus
any additional shares of Grand Common Stock issued in accordance with the terms
of the Merger Agreement after June 30, 1998 and prior to the Effective Time
(excluding any such issuances relating to exercises or conversions of Grand's
stock options).
Subject to the last paragraph of this section, the "Park Place Valuation
Factor" will be equal to (1) $6,024,600,000 minus the dollar amount of the Total
Debt of Park Place, divided by (2) the Total Number of Park Place Shares
Outstanding.
The "Total Debt of Park Place" will be (x) determined as of the
Determination Date and (y) equal to the total indebtedness for borrowed money
(both long-term and current maturities) of Park Place and its subsidiaries as of
the Determination Date, plus the increase (if any) between (A) total current
liabilities (excluding (i) maturities of long-term indebtedness, (ii) payables
relating to unfunded expenditures relating to Park Place's Paris Casino-Resort,
(iii) amounts accrued for performance bonuses (but including amounts accrued for
retention and relocation bonuses) and (iv) liabilities that constitute
transaction costs) of Park Place and its subsidiaries as of the Determination
Date and (B) the total current liabilities (excluding (i) maturities of
long-term indebtedness, (ii) payables relating to unfunded expenditures relating
to Park Place's Paris Casino-Resort, (iii) amounts accrued for performance
bonuses (but including amounts accrued for retention and relocation bonuses) and
(iv) liabilities that constitute transaction costs) of Park Place and its
subsidiaries on a pro forma basis at December 31, 1997, plus the total amount of
capital expenditures that remain unfunded with respect to Park Place's Paris
Casino-Resort as of the Determination Date (excluding any additional capital
expenditures approved in writing by Grand), plus that percentage of the total
transaction costs that is equal to 100% minus that percentage that is equal to
Grand's shareholders' pro forma ownership of Park Place determined pursuant to
the foregoing formula as of the Determination Date but without giving effect to
the aggregate transaction costs, less the total amount of unrestricted cash of
Park Place and its subsidiaries as of the Determination Date. The elements of
the Total Debt of Park Place and its subsidiaries will be as set on a "Park
Place Closing Schedule" to be prepared and finally determined as set forth in
the Merger Agreement.
The "Total Number of Park Place Shares Outstanding" is equal to 260,450,202,
plus any additional shares of Park Place Common Stock issued in accordance with
the terms of the Merger Agreement after June 30, 1998 and prior to the Effective
Time (excluding any such issuances relating to exercises or conversions of
Hilton's preferred stock or stock options or Park Place stock options in
substitution thereof, and excluding any such issuances pursuant to Hilton's
employee stock purchase plan).
If, between June 30, 1998 and the Effective Time, the outstanding shares of
Grand Common Stock or Park Place Common Stock will have been changed into a
different number of shares or a different class, by reason of any stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares, or in the event that Park Place shares are distributed to
Hilton stockholders in the Hilton
69
<PAGE>
Distribution on less than a one for one basis (a "non-equal distribution"), the
Exchange Ratio correspondingly will be appropriately adjusted to reflect such
stock dividend, subdivision, reclassification, recapitalization, split,
combination, exchange of shares or non-equal distribution.
In the event Park Place or any of its subsidiaries, in compliance with the
provisions of the Merger Agreement, acquires any entity, properties, assets or
businesses prior to the Effective Time, the Park Place Valuation Factor will be
adjusted to reflect (i) the increase in the gross value of Park Place resulting
from such acquisition (I.E., adjust the $6,024,600,000 figure upwards by the
amount of the total consideration paid for the subject entity, properties,
assets or businesses), (ii) the change (if any) in the Total Debt of Park Place
as a result of such acquisition and (iii) the change (if any) in the Total
Number of Park Place shares outstanding as a result of such acquisitions.
TREATMENT OF STOCK OPTIONS
At the Effective Time and following the Grand Distribution, each outstanding
Grand stock option under Grand's stock option plans, whether vested or unvested,
will be deemed to constitute an option to acquire, on the same terms and
conditions as were applicable under such Grand stock option, the same number of
shares of Park Place Common Stock as the holder of such Grand stock option would
have been entitled to receive pursuant to the Merger had such holder exercised
such option in full immediately prior to the Effective Time (but following the
Grand Distribution) (rounded to the nearest whole number), at a price per share
(rounded to the nearest whole cent) equal to (y) the aggregate exercise price
for the shares of Grand Common Stock purchasable pursuant to such Grand stock
option immediately prior to the Effective Time divided by (z) the number of full
shares of Park Place Common Stock deemed purchasable pursuant to such Grand
stock option in accordance with the foregoing. Each Grand stock option will, to
the extent provided in the applicable option or agreement, become fully vested
at the Effective Time as a result of the Merger. See "--Arrangements Between
Grand and Lakes--Stock Option Plans," "Security Ownership of Park Place" and
"Certain Relationships and Related Transactions--Interests of Certain Persons in
the Transactions--Grand Interests."
EXCHANGE PROCEDURES
Promptly after the Effective Time, transmittal forms and instructions will
be mailed to each holder of record of certificates that, immediately prior to
the Effective Time, represented shares of Grand Common Stock (other than shares
of Grand Common Stock as to which appraisal rights have been properly
perfected). After receipt of such transmittal form, each holder of such
certificates should surrender the certificates to ChaseMellon Shareholder
Services, L.L.C. (the "Exchange Agent"), together with such letter of
transmittal duly executed and completed in accordance with the instructions
thereto. In exchange therefor, each such holder will be entitled to receive: (i)
certificates of Park Place Common Stock evidencing the whole number of shares of
Park Place Common Stock to which such holder is entitled, (ii) cash in lieu of
any fractional shares and (iii) any dividends or other distributions to which
such holder is entitled (collectively, the "Merger Consideration"). If the
certificate for shares of Park Place Common Stock is to be issued in a name
other than the one in which the certificate for shares of the Grand Common Stock
surrendered in exchange therefor is registered, documents evidencing such
transfer and establishing that applicable stock transfer taxes have been paid or
are not applicable must be presented to the Exchange Agent.
After the Effective Time, no holder of a certificate which immediately prior
to the Effective Time represented shares of Grand Common Stock will be entitled
to receive any dividend or other distribution from Park Place until the holder
surrenders the certificate for a certificate representing shares of Park Place
Common Stock. Upon such surrender, there will be paid to the holder the amount
of any dividends or other distributions (without interest) which theretofore
became payable with respect to the number of whole shares of Park Place Common
Stock. Until such surrender, the certificates shall be deemed to evidence only
the right to receive the appropriate Merger Consideration.
70
<PAGE>
No fractional shares of Park Place Common Stock will be issued in the
Merger. A holder of Grand Common Stock who would otherwise be entitled to
receive fractional shares of Park Place Common Stock as a result of the Merger
shall receive cash in lieu thereof.
Neither Park Place nor Grand will be liable to any holder of shares of Grand
Common Stock for any shares of Park Place Common Stock which have been delivered
to a public official pursuant to any applicable abandoned property, escheat or
similar law.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties relating to, among other things: (a) the organization, standing and
similar corporate matters of Grand and Hilton, (b) the capital structure of
Grand and Hilton, (c) the authorization, execution, delivery, performance, and
enforceability of the Transaction Documents with respect to Grand and Hilton,
(d) the absence of certain conflicts with, violations of, or defaults under, the
organizational and certain other documents of Grand, Hilton or their respective
subsidiaries, or any judgment, order or law applicable to Grand, Hilton or their
respective subsidiaries, in each case, as a result of the execution and delivery
of the Transaction Documents or the consummation of the transactions
contemplated thereby, (e) that, except as otherwise provided, no consent of or
filing with any governmental authority is required by Grand or Hilton in
connection with the execution or delivery of the Transaction Documents or the
consummation of the transactions contemplated thereby, (f) the vote required of
Grand's stockholders to approve the Transaction Documents and the
inapplicability of state takeover statutes, (g) overall compliance by Grand and
Hilton in all material respects with all applicable laws, (h) documents filed by
Grand and Hilton with the SEC and the accuracy of information contained therein,
(i) the absence of undisclosed material changes since December 31, 1997 with
respect to the business of either Grand or Hilton, (j) the absence of any
undisclosed pending or threatened litigation that could reasonably be expected
to have a material adverse effect with respect to Grand or Hilton, or prevent or
significantly delay the consummation of the transactions contemplated by the
Transaction Documents, (k) the timely filing of all Federal tax returns and all
other requisite material tax returns, and the payment of all taxes, by Grand and
Hilton, (l) the employee benefit plans of Grand and Hilton, (m) the absence of
unidentified brokers and intermediaries of Grand and Hilton, (n) the receipt of
a fairness opinion from Grand's and Hilton's financial advisors, (o) title to
the real property of Grand, (p) the insurance coverage of Grand, (q) the absence
of unidentified transactions with affiliates of Grand and Hilton, (r) certain
matters relating to Stratosphere and Lakes, (s) the manner in which the pro
forma financial data of Grand and Hilton were prepared, (t) the accuracy of the
Grand Capital Plan and (u) the absence of illegal payments by Grand or Hilton.
CERTAIN COVENANTS
The Merger Agreement contains various customary covenants, including
covenants of each of Grand and Hilton that, during the period from June 30, 1998
until the Effective Time, except as permitted by or contemplated in the Merger
Agreement, each of Grand and Hilton (and each of their respective subsidiaries),
will, among other things: (i) conduct its operations in the ordinary course of
business; and (ii) use its reasonable best efforts to preserve intact its
business organizations and goodwill in all material respects and keep available
the services of its respective officers and employees as a group.
Grand has further agreed that, among other things, and subject to certain
conditions and exceptions, it will not (and will cause its subsidiaries not to),
without the written consent of Hilton, which consent shall not be unreasonably
withheld:
(a) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock;
71
<PAGE>
(b) split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock or other equity interest;
(c) purchase, redeem or otherwise acquire or amend any shares of capital
stock or other equity interests of Grand or any of its subsidiaries or any
other securities thereof or any rights, warrants or options to acquire any
such shares, interests or other securities;
(d) issue, deliver, sell, pledge or otherwise encumber or amend any
shares of its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, interests, voting securities or convertible securities, including
pursuant to Grand's stock plans;
(e) amend its articles of incorporation, bylaws or other comparable
charter or organization documents;
(f) acquire or agree to acquire (1) by merging or consolidating with, or
by purchasing a substantial portion of the assets of, or by any other
manner, any business or any entity or other business organization or
division thereof or (2) any other material assets;
(g) sell, lease, license, mortgage or otherwise encumber or subject to
any lien or otherwise dispose of any of its properties or assets;
(h) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person or entity, issue or sell any debt securities
or warrants or other rights to acquire any debt securities of Grand or any
of its subsidiaries, guarantee any debt securities of another person or
entity, enter into any "keep well" or other agreement to maintain any
financial statement condition of another person or entity or enter into any
arrangement having the economic effect of any of the foregoing or make any
loans, advances or capital contributions to, or investments in, any other
person or entity;
(i) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise);
(j) except as required to comply with Applicable Laws (as defined in the
Merger Agreement), (1) adopt, enter into, terminate, amend or allow to be
extended or renewed, any employee benefit plan of Grand for the benefit or
welfare of any director, officer or current or former employee, (2) increase
in any manner the compensation or fringe benefits of, or pay any bonus to,
any director, officer or employee, (3) pay any benefit not provided for
under any employee benefit plan of Grand, (4) grant any awards under any
bonus, incentive, performance or other compensation plan or arrangement or
employee benefit plan of Grand (including the grant of stock options, stock
appreciation rights, stock based or stock related awards, performance units
or restricted stock, or the removal of existing restrictions in any employee
benefit plans of Grand or agreements or awards made thereunder) or (5) take
any action to fund or in any other way secure the payment of compensation or
benefits under any employee benefit plan other than in the ordinary course
of business consistent with past practice;
(k) waive the benefits of, or agree to modify in any manner, any
confidentiality, standstill or similar agreement to which Grand or any of
its subsidiaries is a party, or modify, amend or terminate any contract or
agreement set forth in the documents filed by Grand with the SEC to which
Grand or any subsidiary is a party or waive, release or assign any material
rights or claims;
(l) take or agree to take any action that would prevent (1) the Merger
from constituting a reorganization qualifying under the provisions of
Section 368(a)(1)(B) of the Code, (2) the Hilton Distribution from
qualifying as a tax-free transaction to Hilton and its stockholders within
the meaning of Section 355 of the Code or (3) the Grand Distribution from
qualifying as a tax-free
72
<PAGE>
transaction, solely with respect to Grand's shareholders, within the meaning
of Section 355 of the Code;
(m) conduct its business in a manner or take, or cause to be taken, any
other action that would or might reasonably be expected to prevent or
materially delay Grand, Hilton, Park Place or Lakes from consummating the
transactions contemplated by the Transaction Documents in accordance with
their respective terms (regardless of whether such action would otherwise be
permitted or not prohibited by the Merger Agreement), including any action
which may materially limit the ability of Grand, Hilton, Park Place or Lakes
to consummate the transactions contemplated thereby as a result of
antitrust, gaming or other regulatory concerns;
(n) adopt or enter into any arrangement, contract or agreement that
obligates, or otherwise creates a liability of, Grand or any of its
subsidiaries (except for Lakes and its subsidiaries) for more than 12
months; or
(o) authorize any of, or commit or agree to take any of, the foregoing
actions.
Hilton has agreed that, among other things, and subject to certain
conditions and exceptions, it will not (and will cause its gaming subsidiaries
not to), without the written consent of Grand, which consent shall not be
unreasonably withheld:
(a) declare, set aside or pay any dividends on, or make any other
distributions in respect of Park Place Common Stock;
(b) split, combine or reclassify any of the capital stock of Park Place,
or issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of the capital stock of Park Place or
other equity interest of Park Place;
(c) amend Park Place's certificate of incorporation or bylaws or other
comparable charter or organization documents in any manner adverse to the
holders of Park Place Common Stock;
(d) sell any substantial portion of the properties and assets included
in the Park Place business, or merge, amalgamate or consolidate Park Place
with any other entity;
(e) take or agree to take any action that would prevent (1) the Merger
from constituting a reorganization qualifying under the provisions of
Section 368(a)(1)(B) of the Code, (2) the Hilton Distribution from
qualifying as a tax-free transaction to Hilton and its stockholders within
the meaning of Section 355 of the Code or (3) the Grand Distribution from
qualifying as a tax-free transaction, solely with respect to Grand's
shareholders, within the meaning of Section 355 of the Code;
(f) conduct the Park Place business in any manner or take, or cause to
be taken, any other action that would or might reasonably be expected to
prevent or materially delay Hilton, Grand, Park Place or Lakes from
consummating the transactions contemplated by the Transaction Documents in
accordance with their respective terms (regardless of whether such action
would otherwise be permitted or not prohibited under the Merger Agreement),
including any action which may materially limit the ability of Hilton,
Grand, Park Place or Lakes to consummate the transactions contemplated
thereby as a result of antitrust, gaming or other regulatory concerns; or
(g) authorize any of, or commit or agree to take any of, the foregoing
actions.
Nothing contained in the conduct of business covenants (other than
subsection (e) above) will prohibit Hilton from acquiring or disposing of or
agreeing to acquire or dispose of, whether by merger or consolidation or by
purchase of assets, any assets, business or any entity or other business
organization or division thereof which do not and will not constitute part of
the Park Place business.
73
<PAGE>
Grand has further agreed to: (i) take all action necessary to convene and
hold a meeting of its shareholders for the purpose of obtaining the approval of
the Merger Agreement and the Merger, (ii) recommend to its shareholders the
adoption of the Merger Agreement and the transactions contemplated thereby so
long as no third party offer has been received which would give rise to the
right to terminate the Merger Agreement and (iii) use its reasonable best
efforts to solicit from its shareholders proxies in favor of adoption of the
Merger Agreement and the transactions contemplated thereby, and to take all
other lawful action necessary to secure the approval of the Merger Agreement and
the Merger; subject to, in the case of subsections (ii) and (iii), any action
(including any withdrawal or change of its recommendation) taken by, or upon
authority of, the Grand Board which the Board determines, based on the written
advice of outside legal counsel to Grand, is required in the exercise of its
fiduciary duties to Grand's shareholders under applicable laws.
CONDITIONS TO THE MERGER
The respective obligations of Grand and Hilton to consummate the Merger are
subject to the satisfaction of certain conditions, or waiver thereof, including
the conditions that: (i) the Merger Agreement and Merger shall have been
approved by the shareholders of Grand, (ii) the applicable waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act") shall have
expired or been earlier terminated, (iii) the registration statement, which
includes this Joint Proxy Statement/ Prospectus, shall have been declared
effective by the SEC and shall not be subject to a stop order or proceeding
seeking a stop order, (iv) Grand and Hilton shall have received private letter
rulings (or, if mutually agreed to, legal opinions in lieu thereof)
substantially to the effect that the Hilton Distribution will not be taxable to
Hilton and its stockholders and that the Grand Distribution will not be taxable
to Grand's shareholders, (v) there shall be in effect no order, executive order,
stay, decree, judgment or injunction or statute, rule, regulation which is in
effect and which has the effect of making the Merger or the Distributions
illegal or otherwise prohibiting consummation of the Merger or the
Distributions, (vi) each of the Hilton Distribution and the Grand Distribution
shall have become effective in accordance with the terms of the applicable
distribution agreement and the applicable ancillary agreements, (vii) the shares
of Park Place Common Stock to be issued in the Merger and upon exercise or
conversion of Grand's stock options shall have been approved for listing on a
national securities exchange, subject to official notice of issuance, (viii)
Lakes and its subsidiaries will have been released from all obligations relating
to the Grand Notes and the $100 million Capital Lease Facility dated as of
September 29, 1997 between Grand, BA Leasing and Capital Corporation and the
other parties listed therein (the "Grand Revolving Credit Facility") and (ix)
the closing of the Merger will not take place before December 1, 1998. In the
event Grand or Hilton waives any of the aforementioned conditions following
stockholder approval and such waiver would have a material adverse effect on
Grand or Hilton stockholders, then the consent of the subject stockholders will
be resolicited.
The obligation of Park Place to effect the Merger is further subject to
satisfaction of the following conditions, among others, which may be waived by
Park Place on or prior to the Closing Date: (i) the representations and
warranties of Grand shall be true and correct in all material respects, (ii)
Grand shall have performed, in all material respects, all requisite obligations,
(iii) Park Place shall have received an opinion from Latham & Watkins to the
effect that, among other things and subject to certain conditions, the Merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a)(1) of the Code, (iv) all necessary approvals or
authorizations of any governmental authority required or necessary under
applicable gaming laws in connection with the Merger and the Distributions will
have been obtained, (v) Lakes will have executed each of the Security Agreements
(as defined below), each of which will be in full force and effect and legally
binding against Lakes and no material breach by Lakes will have occurred
thereunder as of the Closing Date, (vi) each of Lyle Berman, Thomas J. Brosig
and Stanley M. Taube will have executed a non-competition agreement, each of
which will be in full force and effect and legally binding against each of Lyle
Berman, Thomas J. Brosig and Stanley M. Taube and no material breach by either
Lyle Berman, Thomas J. Brosig or Stanley M. Taube will have occurred
74
<PAGE>
thereunder as of the Closing Date, (vii) the settlement agreement with the IRS
relating to certain tax matters will be in full force and effect and be legally
binding on the parties thereto, and no material breach by any of the parties
thereto will have occurred as of the Closing Date, (viii) Grand and Park Place
will have received from Arthur Andersen LLP (1) a letter dated the date of the
Closing Date addressed to Grand and Park Place setting out the computation of
the basis in the stock of Lakes immediately before the Grand Distribution,
together with the amount of the Stratosphere Loss (as defined in the Tax
Allocation and Indemnity Agreement attached to the Grand Distribution Agreement)
and (2) an opinion dated the date of the Closing Date regarding the tax
treatment of certain aspects of the Base Stratosphere Loss (as defined in the
Tax Allocation and Indemnity Agreement attached to the Grand Distribution
Agreement) and (ix) the Grand Net Equity Value will be equal to or greater than
$585,100,000. In the event Park Place waives any of the aforementioned
conditions following stockholder approval and such waiver would have a material
adverse effect on Grand or Hilton stockholders, then the consent of the subject
stockholders will be resolicited.
The obligations of Grand to effect the Merger are further subject to
satisfaction of the following conditions, among others, which may be waived by
Grand on or prior to the Closing Date: (i) Hilton and Park Place shall have
performed, in all material respects, all requisite obligations, (ii) the
representations and warranties of Hilton shall be true and correct in all
material respects, (iii) Grand shall have received an opinion from Maslon
Edelman Borman & Brand, LLP to the effect that, among other things and subject
to certain conditions, the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code
and (iv) in the event: (a) (1) Hilton consummates the Hilton Distribution after
Grand's shareholders have approved the Merger Agreement and the Merger, (2) the
Closing Date has not occurred within 20 business days of the date that the
Hilton Distribution is consummated, and (3) an acquisition proposal involving
Grand has not been received by or made known to Grand, then Ladenburg shall have
reissued to Grand its fairness opinion as of a date at least 21 or more business
days after the date that the Hilton Distribution is consummated, after having
been requested by Grand to reissue such opinion following the consummation of
the Hilton Distribution; or (b) Park Place acquires after June 30, 1998, either
individually or in the aggregate, any entity, properties, assets or businesses
with a net equity value in excess of $300 million, then Ladenburg shall have
reissued to Grand its fairness opinion dated as of a date after the date any
such acquisition is consummated, after having been requested by Grand to reissue
such opinion following the consummation of any such acquisition. In the event
Grand waives any of the aforementioned conditions following stockholder approval
and such waiver would have a material adverse effect on Grand or Hilton
stockholders, then the consent of the subject stockholders will be resolicited.
The foregoing conditions, all of which may be waived by the parties
identified above, include all of the principal conditions to the Transactions.
EFFECT OF HILTON DISTRIBUTION IN ADVANCE OF THE MERGER
Hilton may effect the Hilton Distribution in advance of the Effective Time.
In such a case, from and after the effectiveness of the Hilton Distribution: (i)
the rights and obligations of Hilton contained in each of the Transaction
Documents will become the rights and obligations solely of Park Place, and
Hilton will have no further obligations under each of the Transaction Documents,
(ii) all covenants under each of the Transaction Documents to be performed by
Hilton will be performed by (and appropriately construed as covenants of) Park
Place, (iii) all covenants under each of the Transaction Documents to be
performed for the benefit of Hilton will be performed (and appropriately
construed as covenants) for the benefit of Park Place and all payments to be
made to Hilton will instead be paid to Park Place, and (iv) the representations
and warranties of Hilton will be representations and warranties of Park Place,
unless by their context such representations and warranties are not appropriate
to Park Place, appropriately modified to give effect to the transactions
contemplated by the Merger Agreement and the Hilton Distribution Agreement.
75
<PAGE>
ADDITIONAL AGREEMENTS
Each of Grand and Hilton has also agreed to, among other things, and subject
to certain exceptions and conditions: (a) use its reasonable best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other party in doing, all things necessary, proper
or advisable to consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated by the Merger
Agreement and (b) as promptly as practicable, file or submit those filings and
other submissions under applicable gaming laws in connection with the
Transaction Documents and the transactions contemplated thereby, and to respond
as promptly as practicable in order to obtain as soon as practicable those
approvals and consents required or necessary in connection with the Transaction
Documents or the transactions contemplated thereby.
In addition, Hilton has agreed to, among other things: (i) enter into, and
to cause each of its subsidiaries that is a party thereto, to enter into the
Hilton Distribution Agreement and such ancillary agreements as are reasonably
required to effect the Hilton Distribution and to govern the relationships
between Hilton and Park Place following the Hilton Distribution and (ii) use its
reasonable best efforts to take all action necessary to effect the Hilton
Distribution prior to the Effective Time, pursuant to the terms of the Hilton
Distribution Agreement and the related ancillary agreements.
In addition, Park Place has agreed to, among other things: (i) use its
reasonable efforts to cause the shares of Park Place Common Stock to be issued
in the Merger to be approved for listing on the NYSE (or such other securities
exchange or market comprising the principal securities exchange on which the
Park Place Common Stock is listed), subject to notice of official issuance,
prior to the Effective Time, (ii) maintain, or cause the Surviving Corporation
to maintain, in effect employee benefit plans and arrangements which provide
benefits which have a value which is substantially comparable, in the aggregate,
to the benefits provided by Grand's employee benefit plans for a period of one
year after the Effective Time, (iii) honor, or cause the Surviving Corporation
to honor, all employment, severance and termination agreements (including change
in control provisions) of the employees of Grand and its subsidiaries in effect
on June 30, 1998, (iv) cause the Surviving Corporation to comply with any
"change of control offer" that the Surviving Corporation is required to make
under any of the Indentures relating to the Grand Notes (the "Grand Indentures")
and (v) maintain and observe, and cause the Surviving Corporation to maintain
and observe, Grand's marketing agreements with each of the Coushatta Tribe of
Louisiana and the Tunica-Biloxi Tribe of Louisiana.
In addition, Grand has agreed to, among other things: (i) enter into, and to
cause each of its subsidiaries that is a party thereto, to enter into the Grand
Distribution Agreement and such ancillary agreements as are reasonably required
to effect the Grand Distribution and to govern the relationships between Grand
and Lakes following the Grand Distribution and (ii) use its reasonable best
efforts to take all action necessary to effect the Grand Distribution prior to
the Effective Time, pursuant to the terms of the Grand Distribution Agreement
and the related ancillary agreements.
In addition, Grand has further agreed that it will not, and will not permit
or cause any of its subsidiaries or any of the officers and directors of it or
its subsidiaries to, and will direct its and its subsidiaries' employees, agents
and representatives (including any investment banker, attorney or accountant
retained by it or any of its subsidiaries) not to, directly or indirectly: (i)
initiate, solicit, or otherwise encourage any inquiries or the making of any
proposal or offer with respect to a merger, reorganization, share exchange,
tender offer, consolidation or similar transaction involving, or any purchase
of, 15% or more of the assets or any equity securities of Grand or any of its
subsidiaries (any such proposal or offer being hereinafter referred to as an
"Acquisition Proposal") or (ii) engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person or entity relating to an Acquisition Proposal, whether made before or
after June 30, 1998, or otherwise facilitate any effort or attempt to make or
implement or consummate an Acquisition Proposal; provided, however, that nothing
in the Merger Agreement will prevent Grand or its Board of Directors from (1)
complying with
76
<PAGE>
Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition
Proposal or (2) at any time after 180 days from June 30, 1998 if the Merger has
not by such date been approved by Grand's shareholders: (x) providing
information in response to a request therefor by a person or entity who has made
an unsolicited bona fide written Acquisition Proposal if the Grand Board
receives from the person or entity so requesting such information an executed
confidentiality agreement on terms substantially equivalent to those contained
in the Confidentiality Agreement; (y) engaging in any negotiations or
discussions with any person or entity who has made an unsolicited bona fide
written Acquisition Proposal; or (z) recommending such an Acquisition Proposal
to the shareholders of Grand, if, and only to the extent that, (i) in each such
case referred to in clause (x), (y) or (z) above, the Grand Board determines in
good faith after consultation with outside legal counsel that such action is
necessary in order for its directors to comply with their respective fiduciary
duties under applicable law and (ii) in each case referred to in clause (y) or
(z) above, the Grand Board determines in good faith (after consultation with its
financial advisor) that such Acquisition Proposal, if accepted, is reasonably
likely to be consummated, taking into account all legal, financial and
regulatory aspects of the proposal and the person or entity making the proposal,
and would, if consummated, result in a more favorable transaction than the
transaction contemplated by the Merger Agreement, taking into account the
long-term prospects and interests of Grand and its shareholders.
Following the Grand Distribution, a subsidiary of Lakes will lease two
parcels of land in Las Vegas comprising part of the Polo Plaza development
project. One parcel is leased pursuant to a ground lease (the "Shark Club
Lease") that, among other provisions, (i) is guaranteed by Grand; (ii) includes
a purchase option pursuant to which Lakes could acquire the parcel at any time
after August 1, 1999 at a formula purchase price set forth in the Shark Club
Lease; and (iii) includes a landlord "put" option pursuant to which the landlord
could require Lakes to purchase the subject real estate at any time from and
after August 1, 2000.
Under the Merger Agreement, Lakes has also agreed with Park Place that Lakes
will either exercise or cause one of its subsidiaries to exercise the Shark Club
Lease purchase option prior to the earliest time when the landlord could require
Lakes (or Grand as the guarantor) to purchase the subject real estate. See
"Business and Properties of Lakes--Polo Plaza" and "--Leased Properties."
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time:
(a) by mutual written consent of Hilton and Grand;
(b) by either Hilton or Grand, if the Merger has not been consummated by
December 31, 1998, provided that (1) either Hilton or Grand may extend such date
to March 1, 1999 by providing written notice thereof to the other party on or
prior to December 31, 1998 (such date, as so extended, the "Outside Date") and
(2) the right to terminate the Merger Agreement under this clause (b) will not
be available to any party whose failure to fulfill any obligation under the
Merger Agreement has been the cause of or resulted in the failure of the Merger
to occur on or before such date;
(c) by either Hilton or Grand, if a court of competent jurisdiction or other
governmental authority has issued a nonappealable final order, decree or ruling
or taken any other nonappealable final action, in each case having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger or the
Distributions;
(d) by either Hilton or Grand, if prior to the Effective Time, the Code is
amended so as to alter in any materially adverse respect any of the tax
consequences provided by the private letter rulings or opinions of counsel
described under "--Conditions to the Merger" above;
(e) by Hilton, if, at the Grand Special Meeting (including any adjournment
or postponement), Grand's shareholders do not approve of the Merger Agreement
and the Merger;
77
<PAGE>
(f) by Grand, if the Hilton stockholders do not ratify the Hilton
Distribution;
(g) by Hilton, if (1) the Grand Board has withdrawn or modified its
recommendation of the Merger Agreement or the Merger; (2) after the receipt by
Grand of an Acquisition Proposal, Hilton requests in writing that the Grand
Board reconfirm its recommendation of the Merger Agreement and the Merger to the
shareholders of Grand and the Grand Board fails to do so within 20 business days
after its receipt of Hilton's request; (3) the Grand Board has recommended to
the shareholders of Grand an Acquisition Proposal; (4) a tender offer or
exchange offer for 15% or more of the outstanding shares of Grand Common Stock
is commenced (other than by Hilton or an affiliate of Hilton) and the Grand
Board recommends that the shareholders of Grand tender their shares in such
tender or exchange offer; or (5) for any reason Grand fails to call and hold the
Grand Special Meeting by the Outside Date, provided that Hilton's right to
terminate the Merger Agreement under such clause (5) will not be available if
(A) at such time Grand would be entitled to terminate the Merger Agreement under
clause (h) below or (2) Grand failed to call and hold such meeting because the
Registration Statement of which this Joint Proxy Statement/Prospectus is a part
has not become effective under the Securities Act, provided that Grand has
complied with all of its obligations under the Merger Agreement;
(h) by Hilton or Grand, if there has been a breach of any representation,
warranty, covenant or agreement on the part of the other party set forth in the
Merger Agreement, which breach (1) will cause the conditions set forth in the
second paragraph under "--Conditions to the Merger" above (in the case of
termination by Hilton) or in the third paragraph under "--Conditions to the
Merger" above (in the case of termination by Grand) not to be satisfied, and (2)
has not been cured within 20 business days following receipt by the breaching
party of written notice of such breach from the other party;
(i) by Hilton, if the Grand Net Equity Value is less than $585,100,000;
(j) by Grand, if (1) Hilton consummates the Hilton Distribution before the
Grand Special Meeting, (2) an Acquisition Proposal involving Grand has not been
received by or made known to Grand prior to the Grand Special Meeting, and (3)
Grand's shareholders do not approve the Merger Agreement and the Merger;
(k) by Grand, if (1) Hilton consummates the Hilton Distribution after
Grand's shareholder's have approved the Merger Agreement and the Merger, (2) the
Closing Date has not occurred within 20 business days of the date that the
Hilton Distribution is consummated, (3) an Acquisition Proposal involving Grand
has not been received or made known to Grand and (4) Ladenburg has not reissued
to Grand its fairness opinion as of a date at least 21 or more business days
after the date that the Hilton Distribution is consummated after having been
requested by Grand to reissue such opinion following the consummation of the
Hilton Distribution; or
(l) by Grand, if Park Place acquires after June 30, 1998, either
individually or in the aggregate, any entity, properties, assets or businesses
with a net equity value in excess of $300 million and Ladenburg has not reissued
to Grand its fairness opinion as of a date after any such acquisition is
consummated, after having been requested by Grand to reissue such opinion
following the consummation of any such acquisition.
FEES AND EXPENSES
The Merger Agreement generally provides that all transaction costs will be
paid by the party incurring such expenses, whether or not the Merger is
consummated; provided, however, that if the Merger is consummated, all
transaction costs of Grand will be paid by the Surviving Corporation.
The Merger Agreement further provides that Grand will pay Hilton a
termination fee of $30 million upon the earliest to occur of the following
events: (i) the termination of the Merger Agreement by Hilton pursuant to clause
(e) under "--Termination" above, if any Acquisition Proposal involving Grand has
been received or made known to Grand prior to the Grand Special Meeting and
either a binding agreement with
78
<PAGE>
respect to any such Acquisition Proposal is entered into, or the transactions
constituting any such Acquisition Proposal are consummated, within 18 months of
such termination; provided, however, that no termination fee will be payable in
such an event if Grand would be entitled to terminate the Merger Agreement
pursuant to either clauses (j) or (k) under "--Termination" above or (ii) the
termination of the Merger Agreement by Hilton pursuant to clause (g) under
"--Termination" above, whether or not Grand is entitled to terminate the Merger
Agreement pursuant to either clauses (j) or (k) under "--Termination" above.
AMENDMENT AND MODIFICATION
Subject to applicable law, the Merger Agreement may be amended by Hilton and
Grand, by action taken or authorized by their respective Boards of Directors, at
any time before or after approval of the matters presented in connection with
the Merger by the shareholders of Grand, but, after any such approval, no
amendment will be made which by law requires further approval by such
shareholders without such further approval. The Merger Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties thereto.
ARRANGEMENTS BETWEEN HILTON AND PARK PLACE
Pursuant to the Hilton Distribution Agreement, Hilton and Park Place will
allocate the assets, liabilities and operations relating to the Hilton Lodging
Business and the Hilton Gaming Business. In connection with the Hilton
Distribution, Hilton and Park Place will also enter into a number of other
Transaction Documents governing their relationship after the Hilton Distribution
Date. These Transaction Documents, including the Hilton Distribution Agreement,
are described below.
HILTON DISTRIBUTION AGREEMENT
Prior to the date of the Hilton Distribution, Hilton and Park Place will
enter into the Hilton Distribution Agreement which will provide for, among other
things, (i) the transfer of assets related to the Hilton Gaming Business to Park
Place, (ii) the Hilton Distribution, (iii) the division of certain liabilities
between Hilton and Park Place and (iv) certain other agreements governing the
relationship between Hilton and Park Place following the Hilton Distribution. In
general, in order to effectuate the Hilton Distribution, subject to certain
conditions provided for in the Hilton Distribution Agreement (x) Hilton will
effect a series of mergers and asset and stock transfers that will result in the
transfer to Park Place of all of the operations, assets and liabilities of
Hilton and its subsidiaries comprising the Hilton Gaming Business (the "Hilton
Restructuring"), (y) the assets and liabilities of the Hilton Lodging Business
will be allocated to Hilton and (z) the assets and liabilities of the Hilton
Gaming Business will be allocated to Park Place.
The "Hilton Lodging Business" consists of: (a) the ownership and operation
of (i) hotels, resorts and other lodging facilities (other than casino hotels)
and (ii) timeshare and vacation ownership facilities (including facilities
located at casino hotels); and (b) Hilton's strategic alliance with Ladbroke
Group PLC and its affiliates. The "Hilton Gaming Business" refers to the
business conducted by Hilton and its subsidiaries relating to: the management,
ownership, operation and development of casino hotels and gaming facilities
(except its interest in the Casino Windsor property and small gaming facilities
which are included as an adjunct to hotel operations).
The Hilton Distribution Agreement provides that all debt secured by or
specifically associated with assets of the Hilton Lodging Business will be
retained by Hilton and all debt secured by or specifically associated with
assets of the Hilton Gaming Business will be assumed by Park Place. The
remaining debt of Hilton at the time of the Hilton Distribution will be
allocated between Hilton and Park Place so as to approximately equalize the
total debt between the two companies, pro forma for the Merger. See
"--Assumption Agreement Relating to Certain Indebtedness."
79
<PAGE>
In connection with such allocation of assets and liabilities, the Hilton
Distribution Agreement also contains general indemnities and the procedures by
which indemnification may be claimed. Hilton has agreed generally to indemnify
Park Place against liabilities that relate to the Hilton Lodging Business, and
Park Place has agreed generally to indemnify Hilton against liabilities that
relate to the Hilton Gaming Business. In each instance, indemnities are offset
by insurance proceeds recovered by the indemnified party that reduce the amount
of loss, liability or damage. The Hilton Distribution Agreement also includes
provisions governing the administration of certain insurance programs and the
procedures for making such claims.
With respect to corporate governance issues, the Hilton Distribution
Agreement provides that effective as of the Hilton Distribution Date, Hilton
shall cause all of its directors and the Hilton Employees (as defined below) to
resign from all governing bodies or positions as officers or employees, as
applicable, of Park Place or any of the gaming subsidiaries and Park Place shall
cause all of its directors and the Park Place Employees (as defined below) to
resign, from all governing bodies or positions as officers or employees, as
applicable, of Hilton or any of the Hilton Lodging subsidiaries, except as
otherwise set forth in the Hilton Distribution Agreement. However, Stephen F.
Bollenbach will continue as President, Chief Executive Officer and a Director of
Hilton and will be Chairman of the Board of Directors of Park Place, Arthur
Goldberg will continue as a Director of Hilton and will be President and Chief
Executive Officer and a Director of Park Place, Barron Hilton and A. Steven
Crown will each continue as Directors of Hilton and will be Directors of Park
Place and Eric Hilton will resign as a Director of Hilton and will be a Director
of Park Place.
The Hilton Distribution Agreement provides that Hilton and Park Place will
enter into the other agreements described below.
MANNER OF EFFECTING THE HILTON DISTRIBUTION
If the Hilton Board declares the Hilton Distribution, the Hilton
Distribution will be effected on the record date for the Hilton Distribution
(the "Hilton Distribution Record Date"). As a result of the Hilton Distribution,
the stockholders of record of Hilton on the Hilton Distribution Record Date will
own all of the outstanding shares of Park Place Common Stock. The Hilton
Distribution Date and the Hilton Distribution Record Date will be established by
the Hilton Board following the Hilton Special Meeting. On the Hilton
Distribution Date, the shares of Park Place Common Stock will be delivered by
Hilton to ChaseMellon Shareholder Services, L.L.C. (the "Hilton Distribution
Agent"). As soon as practicable thereafter, account statements reflecting
ownership of shares of Park Place Common Stock will be mailed by the Hilton
Distribution Agent to holders of record of Hilton Common Stock as of the Hilton
Distribution Record Date on the basis of one share of Park Place Common Stock
for every share of Hilton Common Stock held on that date. Following the Hilton
Distribution, stockholders may request and receive physical stock certificates
for their shares of Park Place Common Stock. All such shares will be fully paid
and nonassessable and the holders thereof will not be entitled to preemptive
rights. See "Description of Park Place Capital Stock."
No holder of Hilton Common Stock will be required to pay any cash or other
consideration for the shares of Park Place Common Stock received in the Hilton
Distribution or to surrender or exchange shares of Hilton Common Stock in order
to receive Park Place Common Stock.
No certificates or scrip representing fractional shares of Park Place Common
Stock will be issued to Hilton stockholders as part of the Hilton Distribution.
TAX ALLOCATION AND INDEMNITY AGREEMENT
Hilton and Park Place will enter into the Tax Allocation and Indemnity
Agreement (the "Hilton Tax Agreement") which will define the parties' rights and
obligations with respect to (a) the preparation and filing of tax returns on a
basis consistent with prior practice and the payment of taxes with respect
thereto,
80
<PAGE>
(b) the allocation of, and indemnification against, certain liabilities for
taxes of the parties and (c) certain other related matters.
Pursuant to the Hilton Tax Agreement, Hilton is responsible for preparing
and filing (a) all tax and information returns of the Hilton Group (as defined
in the Hilton Tax Agreement) prior to the Hilton Distribution and any members
thereof for all Pre-Distribution Taxable Periods (as defined below) with certain
exceptions and (b) all tax and information returns of the Hilton Group
subsequent to the Hilton Distribution and any members thereof for all Straddle
Periods (as defined below) and Post-Distribution Taxable Periods (as defined
below). Park Place is responsible for (i) all tax and information returns that
relate solely to any member of the Park Place Group (as defined in the Hilton
Tax Agreement) for all Pre-Distribution Taxable Periods, and are not required to
be filed on or before the Hilton Distribution Date and (ii) all tax and
information returns of the Park Place Group and any members thereof for all
Straddle Periods and Post-Distribution Taxable Periods. The Tax Agreement also
provides mechanisms for cooperation in preparing returns, including a
requirement that the party responsible for preparing and filing the returns
shall allow the other party to review and comment on the tax returns to the
extent they pertain to the business operations of the other party or the other
party is indemnifying for taxes for a period covered by the tax return. As used
herein, "Pre-Distribution Taxable Period" means a taxable year that ends on or
before the Hilton Distribution Date, "Post-Distribution Taxable Period" means a
taxable year that begins after the close of business on the Hilton Distribution
Date, and "Straddle Period" means any taxable year beginning before and ending
after the close of business on the Hilton Distribution Date.
The Hilton Tax Agreement also provides that Hilton will be liable for all
taxes payable on all tax returns it is responsible for filing and all tax
returns that Park Place is responsible for filing if such taxes are allocable to
a Pre-Distribution Taxable Period or the Pre-Distribution portion of any
Straddle Period. However, with respect to the 1998 Hilton consolidated federal
income tax return and any other 1998 tax return filed on a combined basis, Park
Place will reimburse 50% of Hilton's costs for any additional payment of income
taxes required to be made by Hilton with any request for extension or the filing
of any such tax return. If tax payments previously made with respect to such
returns and requests for extensions exceed the tax shown to be due on such
returns, Hilton will refund 50% of any excess to Park Place. With respect to any
such tax returns that relate solely to Park Place, Park Place will reimburse
Hilton 100% of any such additional payments. The Hilton Tax Agreement also
contains indemnification provisions that effectuate the payment obligations
described above.
Under the Hilton Tax Agreement, if there is a final determination that the
Hilton Distribution is a taxable transaction and there has been no material
breach of certain specified covenants contained in the Hilton Distribution
Agreement by either party and neither party has taken actions after the Hilton
Distribution which result in such determination (or both parties have either
breached such covenants or taken such actions), then any such tax liability
incurred by Hilton shall be divided between Hilton and Park Place equally. If
any member of the Park Place Group (and no member of the Hilton Group) has
either materially breached such covenants or has taken any action after the
Hilton Distribution which results in a final determination that the Hilton
Distribution is a taxable event, then Park Place will indemnify Hilton for the
resulting tax liability which would not otherwise have been incurred (including
interest and penalties). A reciprocal indemnity is to be given by Hilton to Park
Place with respect to its actions. The Hilton Tax Agreement also provides for
various means of cooperation regarding document retention and confidentiality,
as well as customary and appropriate procedures for controlling and settling
audits.
HILTON EMPLOYEE BENEFITS ALLOCATION AGREEMENT
The Employee Benefits and Other Employment Matters Allocation Agreement (the
"Hilton Employee Benefits Agreement") to be entered into between Hilton and Park
Place provides for the allocation of employees of Hilton and its subsidiaries
and obligations and responsibilities regarding compensation, benefits, labor and
other employment matters. Under the Hilton Employee Benefits Agreement,
effective as of the Hilton Distribution Date, Hilton and Park Place will
allocate all employees
81
<PAGE>
of Hilton and its subsidiaries as of the Hilton Distribution Date to either Park
Place (the "Park Place Employees") or Hilton (the "Hilton Employees"), based
upon whether each employee's employment duties before the Hilton Distribution
Date relate to the Hilton Gaming Business or the Hilton Lodging Business and
upon various other factors as applicable.
Subject to the exceptions discussed below, the Hilton Employee Benefits
Agreement provides that Hilton will be responsible for historical liabilities
and obligations under Hilton employee benefit plans and agreements with respect
to Hilton Employees and Hilton Terminees (as defined below) whose employment
related to the Hilton Lodging Business, and that Park Place will be responsible
for historical liabilities and obligations under such plans and agreements with
respect to Park Place Employees and Hilton Terminees whose employment related to
the Hilton Gaming Business. "Hilton Terminees" refers to employees who terminate
employment with Hilton prior to the Hilton Distribution Date. Park Place and
Hilton will generally assume or retain, as the case may be, benefit plans
maintained at the division level by the Hilton Gaming Business (in the case of
Park Place) or the Hilton Lodging Business (in the case of Hilton) before the
Hilton Distribution Date. Hilton and Park Place will diligently work to
substitute the appropriate employer for Hilton in collective bargaining
agreements with respect to Park Place Employees. Except as expressly provided in
the Hilton Employee Benefits Agreement, Hilton and Park Place may amend and/or
terminate any of the benefit plans covering their employees at any time.
Specific provisions of the Hilton Employee Benefits Agreement include the
following:
401(K) PLAN AND RETIREMENT PLANS. Hilton will maintain sponsorship of the
Hilton 401(k) Plan (the "Hilton 401(k) Plan") as of the Hilton Distribution
Date, and Park Place will establish and administer a separate 401(k) plan (the
"Park Place 401(k) Plan"). Plan accounts of Hilton Employees and Hilton
Terminees whose employment related to the Hilton Lodging Business will remain in
the Hilton 401(k) Plan, and plan accounts of Park Place Employees and Hilton
Terminees whose employment related to the Hilton Gaming Business will be
transferred from the Hilton 401(k) Plan to the Park Place 401(k) Plan. Matching
and discretionary contributions under the Hilton 401(k) Plan with respect to
Hilton Employees will be made solely by Hilton pursuant to the terms of the
Hilton 401(k) Plan, and matching and discretionary contributions under the Park
Place 401(k) Plan with respect to Park Place Employees will be made solely by
Park Place pursuant to the terms of the Park Place 401(k) Plan.
Hilton will retain and be responsible for the administration of each of the
Retirement Plan of Hilton (as amended, the "Hilton Retirement Plan"), the
Supplemental Executive Retirement Plan ("SERP") and the Retirement Benefit
Replacement Plan of Hilton (as amended, the "Hilton Replacement Plan").
Employees who were participants in each of the Hilton Retirement Plan, SERP and
the Hilton Replacement Plan ceased accruing additional benefits thereunder
effective as of January 1, 1997. Each of Hilton and Park Place will retain or
assume, as applicable, all liabilities and excess assets, if any, relating to or
arising under each of the Hilton Retirement Plan, SERP and the Hilton
Replacement Plan in a proportion based upon the ratios of the accrued benefits
of Hilton Employees and Hilton Terminees whose employment related to the Lodging
Business, on the one hand, and Park Place Employees and Hilton Terminees whose
employment related to the Gaming Business, on the other hand.
Hilton will be responsible for all liabilities incurred by Hilton or Park
Place as a result of any failure of the Hilton 401(k) Plan or the Hilton
Retirement Plan to be qualified under the Code, or any other liability which
might be incurred with respect to such plans (including, without limitation, all
liabilities relating to or arising out of claims made by or on behalf of
participants therein for, or with respect to, benefits under such plan), with
respect to Hilton Individuals (as defined in the Hilton Employee Benefits
Agreement), and Park Place will be responsible for all such liabilities incurred
by Hilton or Park Place with respect to Park Place Individuals (as defined in
the Hilton Employee Benefits Agreement). To the extent that any such liabilities
incurred by Hilton or Park Place are not directly or indirectly attributable to
either Hilton Individuals or Park Place Individuals, then each of Hilton and
Park Place will be responsible for such
82
<PAGE>
liabilities in a proportion based upon the ratios of the accrued benefits of
Hilton Individuals and of Park Place Individuals, respectively, under each such
plan, as of December 31, 1997.
STOCK OPTION PLANS. Hilton has outstanding awards in the form of stock
options (the "Hilton Options") under the 1984 Stock Option and Stock
Appreciation Rights Plan of Hilton, the 1990 Stock Option and Stock Appreciation
Rights Plan of Hilton, the 1996 Stock Incentive Plan of Hilton, the 1996 Chief
Executive Stock Incentive Plan of Hilton and the 1997 Independent Director Stock
Option Plan of Hilton (collectively, the "Hilton Stock Option Plans"). Pursuant
to the Hilton Employee Benefits Agreement, Hilton will continue the Hilton Stock
Option Plans. Effective as of the Hilton Distribution Date, all outstanding
options under such plans, other than options held by Mr. Goldberg, will be
adjusted to represent options to purchase an equivalent number of shares of
Hilton Common Stock and shares of Park Place Common Stock. Pursuant to such
adjustment, the intrinsic value of the Hilton Options immediately prior to the
Hilton Distribution will be preserved immediately after the Hilton Distribution
and the exercise price of the Hilton Options shall be allocated between Hilton
Options, as adjusted, and options to purchase shares of Park Place Common Stock
("Park Place Options") based upon the relative values of Hilton Common Stock and
Park Place Common Stock on the date of the Hilton Distribution, all as
determined by Hilton. All outstanding options held by Mr. Goldberg under such
plans will be adjusted to represent Park Place Options. Pursuant to such
adjustment, the intrinsic value of Mr. Goldberg's outstanding options
immediately prior to the Hilton Distribution will be preserved immediately after
the Hilton Distribution, and the number of shares subject to and the exercise
price of such options will be adjusted based on the relative values of the
Hilton Common Stock and the Park Place Common Stock on the date of the Hilton
Distribution, all as determined by Hilton.
Park Place will adopt, effective as of the Hilton Distribution Date, stock
option plans in substantially the same form as the Hilton Stock Option Plans,
with such changes as may be necessary to reflect Park Place as the issuer
thereunder and such other changes as Park Place shall determine (such plans as
adopted, the "Park Place Stock Option Plans"). The Park Place Options will be
issued under the Park Place 1998 Stock Incentive Plan or the Park Place 1998
Independent Director Stock Option Plan.
The conversion of awards under the Hilton Stock Option Plans will involve
adjustments pursuant to formulas designed to preserve the value of the awards.
Pursuant to such formulas, the number of shares subject to options and the
exercise price of options under the Hilton Stock Option Plans and the Park Place
Stock Option Plans following the Hilton Distribution will be adjusted so that
the aggregate value of the awards remains the same before and after the
conversion of the awards. For options, the per share value of the awards is the
"spread" (i.e., the difference between the exercise price of the option and the
value of the stock underlying the option). The exercise price of an adjusted
option will bear the same ratio to the per share value of the shares underlying
the option after the conversion as the exercise price bears to the per share
value of the shares underlying the option before the conversion. Using these
formulas, it is anticipated that, except with respect to options held by Mr.
Goldberg, the number of shares subject to awards following the conversion will
remain the same and the exercise price of options will be decreased as a result
of the Hilton Distribution. With respect to options held by Mr. Goldberg, it is
anticipated that the number of shares subject to such options following the
conversion will be increased and the exercise price of such options will be
decreased as a result of the Hilton Distribution. See "Interests of Certain
Persons in the Transactions--Adjustment of Hilton Options."
STOCK PURCHASE PLANS. As of the Effective Date, the Employee Stock Purchase
Plan of Hilton (the "Hilton Stock Purchase Plan") will be administered and
amended, if necessary, to provide that all contributions withheld from the
compensation of participants through the day before the Effective Date (the
"Hilton Purchase Date") shall be used on the Hilton Purchase Date to purchase
Hilton Common Stock under the Hilton Stock Purchase Plan.
Park Place will adopt, effective as of the Hilton Distribution Date, a plan
substantially similar to the Hilton Stock Purchase Plan, with such changes as
may be necessary to reflect Park Place as the issuer of
83
<PAGE>
awards thereunder and such other changes as Park Place shall determine (such
plan as adopted, the "Park Place Stock Purchase Plan").
COMPENSATION PLANS. Hilton will pay all compensation earned by each Hilton
Individual (as defined below) who, on the Hilton Distribution Date, is a
participant in the Incentive Compensation Plan of Hilton, the Executive Deferred
Compensation Plan of Hilton or any other incentive or bonus compensation plan of
Hilton (collectively, the "Hilton Compensation Plans"), for the period prior to
the Hilton Distribution Date. From and after the Hilton Distribution Date,
Hilton shall retain all liabilities relating to or arising under the Hilton
Compensation Plans with respect to any Hilton Individuals. "Hilton Individual"
refers to any individual who (a) is a Hilton Employee, (b) is, as of the Hilton
Distribution Date, a Hilton Terminee whose last employment with Hilton or any of
its subsidiaries was with the Lodging Business or (c) is a dependent or
beneficiary of any individual specified in (a) or (b).
Park Place will assume all obligations to pay all compensation earned by
each Park Place Individual (as defined below) who, on the Hilton Distribution
Date, is a participant under the Hilton Compensation Plans. Park Place will
adopt, effective as of the Hilton Distribution Date, compensation plans in
substantially the same form as the Hilton Compensation Plans which cover Park
Place Individuals, with such changes as may be necessary to reflect the change
in the issuer of awards thereunder and such other changes as Park Place shall
determine (such plan as adopted, the "Park Place Compensation Plans"). From and
after the Hilton Distribution Date, the Park Place Compensation Plans will
provide future compensation benefits to Park Place Individuals. The terms and
conditions of the Park Place Compensation Plans will be substantially similar to
the terms and conditions of the Hilton Compensation Plans. "Park Place
Individual" refers to any individual who (a) is a Park Place Employee, (b) is,
as of the Hilton Distribution Date, a Hilton Terminee whose last employment with
Hilton or a subsidiary of Hilton was with a Gaming Business, or (c) is a
dependent or beneficiary of any individual described in (a) or (b).
In addition, Park Place will pay all compensation earned by Arthur M.
Goldberg under the Deferred Compensation Agreement, dated as of January 16,
1997, between Hilton and Arthur M. Goldberg, which is expected to amount to
approximately $2,200,000 on December 31, 1998. As of the Hilton Distribution
Date, Park Place will be solely responsible for all liabilities and obligations
under such agreement.
MEDICAL AND OTHER WELFARE BENEFITS PLANS. On the Hilton Distribution Date,
Hilton will assume or retain sponsorship of Hilton's medical, health, dental,
disability, accident, death, vacation and group term life insurance plans and be
responsible for all claims under Hilton's plans incurred before the Hilton
Distribution Date by Hilton Employees and Hilton Terminees. Park Place will
maintain separate medical, heath, dental, disability, accident, death, vacation
and group term life insurance plans for Park Place Employees following the
Hilton Distribution Date. On the Hilton Distribution Date, Park Place will
assume sponsorship of Hilton's long-term disability plan to cover Park Place
Employees and Hilton Terminees whose employment related to the Hilton Gaming
Business, and Hilton will establish a long-term disability plan to cover Hilton
Employees and Hilton Terminees whose employment related to the Hilton Lodging
Business. On the Hilton Distribution Date, Park Place will assume and be
responsible for providing post-retirement benefits with respect to those former
employees who became entitled to the benefits before the Hilton Distribution
Date.
TRADEMARK ASSIGNMENT AND LICENSE AGREEMENT
Pursuant to the terms of the Assignment and License Agreement (the "Hilton
Trademark Agreement") to be entered into by and among Hilton, Park Place and
Conrad International Royalty Corporation ("CIRC"), Hilton will transfer and
assign to Park Place all of Hilton's right, title and interest in certain
trademarks used in the Hilton Gaming Business, including the trademarks
"Flamingo's," "Bally's" and any other marks obtained by Hilton or its
subsidiaries as a result of the acquisition of Bally Entertainment Corporation
by Hilton (collectively, the "Assigned Marks"). Hilton will also grant to Park
Place (with respect to the "Hilton" mark and certain variations thereof) and
CIRC will grant to Park Place (with
84
<PAGE>
respect to the "Conrad" mark and certain variations thereof) a limited
nonexclusive right to use (a) the "Hilton" mark solely in connection with the
operation of the Hilton Casino Hotels (as defined in the Hilton Trademark
Agreement) in the United States and in connection with the advertising and
promotion of such hotels worldwide and the participation of certain other hotels
(E.G., Bally's Las Vegas, Bally's Park Place, Paris-Las Vegas and other hotels
now or hereafter owned, operated, managed or acquired by Park Place) in Hilton
Reservations Worldwide and/or the Hilton HHonors-Registered Trademark- Program
and (b) the "Conrad" mark solely in connection with the operation of Conrad
Properties (as defined in the Hilton Trademark Agreement) and in connection with
the advertising and promotion of such properties worldwide. Park Place's license
with respect to the "Hilton" mark will be for a term of five years following the
Hilton Distribution Date, except with respect to the Las Vegas Hilton and the
Reno Hilton, in which case, the term will be 10 years from the Hilton
Distribution Date. Park Place's license with respect to the "Conrad" mark is for
the duration of the respective Conrad License Agreements (as defined in the
Hilton Trademark Agreement).
During the initial two-year term of the license, Park Place will pay no
royalty fees to Hilton; thereafter, Park Place will pay a license fee of 3% of
the "Net Room Revenues" of each hotel that is branded with the "Hilton" mark;
PROVIDED, THAT, with respect to the Las Vegas Hilton and the Reno Hilton, Park
Place will pay a fixed fee of $5 million per year (in the aggregate) after the
initial two-year term of the license. Park Place will pay no royalty fees to
CIRC with respect to the license to use the "Conrad" mark. So long as Park Place
licenses the "Hilton" or "Conrad" mark, Park Place will cause each of the Hilton
Casino Hotels and Conrad Properties to participate in Hilton Reservations
Worldwide and in the Hilton HHonors-Registered Trademark- Program and pay the
applicable fees in connection therewith. Park Place is also subject to certain
limitations on use and quality control restrictions. During the initial two-year
term, Park Place will be required to use the "Hilton" mark at each of the Hilton
Casino Hotels. Thereafter, Park Place may terminate such use upon six months'
written notice; PROVIDED, HOWEVER, that with respect to the Las Vegas Hilton and
the Reno Hilton, Park Place will be required to use the "Hilton" mark for the
10-year term, except that such license may be terminated upon payment of the
present value of the yearly fee due under the remainder of such term (a) if the
Las Vegas Hilton and the Reno Hilton are sold by Park Place or (b) upon six
months' written notice (after the fifth anniversary of the Hilton Distribution
Date). Either party may terminate the Hilton Trademark Agreement prior to the
expiration of its term if any party materially breaches any term of the Hilton
Trademark Agreement and such breach is not cured within 10 days.
CORPORATE SERVICES AGREEMENTS
In connection with the Hilton Distribution Agreement, Hilton and Park Place
will enter into corporate services agreements for the delivery of certain
transitional and other services from Hilton to Park Place and from Park Place to
Hilton substantially in accordance with the scope of such services as currently
provided. The terms and conditions of the Hilton Hotels Corporation Corporate
Services Agreement (the "Hilton Services Agreement") and the Park Place
Corporate Services Agreement (the "Park Place Services Agreement"), including
the fees to be paid in connection with such services, will be negotiated by the
parties bargaining at arm's length. These agreements are summarized below.
HILTON SERVICES AGREEMENT. Pursuant to the Hilton Services Agreement,
Hilton will provide, at Park Place's request, certain services, including cash
management, accounting, payroll, accounts payable and tax preparation and
assistance, for an initial period of 12 months from the Hilton Distribution
Date, with an option by Park Place to extend the term not to exceed 18 months
from the Hilton Distribution Date on the same terms and conditions, subject to
certain adjustments. During the initial term, Park Place will pay a fee based on
the fair value of such services based on an arm's length negotiation between
Hilton and Park Place. Fees for work performed by outside consultants or
contractors retained by Hilton outside the ordinary course of business will be
paid directly by Park Place and fees during any extension of the initial
12-month term will be based on mutual agreement of the parties. Park Place may
terminate the Hilton Services Agreement at any time for any or no reason upon 60
days' prior written notice to Hilton and
85
<PAGE>
either party may terminate the Hilton Services Agreement at any time in the
event of a material default of such agreement by the other party.
PARK PLACE SERVICES AGREEMENT. Pursuant to the Park Place Services
Agreement, Park Place will provide, at Hilton's request, certain services,
including aviation, food and beverage purchasing and procurement and retail
management and administration. Park Place will provide such services for an
initial period of 12 months from the Hilton Distribution Date, with an option by
Hilton to extend the term not to exceed 18 months from the Hilton Distribution
Date on the same terms and conditions, subject to certain adjustments. During
the initial term, Hilton will pay a fee based on the fair value of such services
based on an arm's length negotiation between Hilton and Park Place. Fees for
work performed by outside consultants or contractors retained by Park Place
outside the ordinary course of business will be paid directly by Hilton and fees
during any extension of the initial 12-month term will be based on mutual
agreement of the parties. Hilton may terminate the Park Place Services Agreement
at any time for any or no reason upon 60 days' prior written notice to Park
Place and either party may terminate the Park Place Services Agreement at any
time in the event of a material default of such agreement by the other party.
ASSUMPTION AGREEMENT RELATING TO CERTAIN INDEBTEDNESS
In order to equalize the indebtedness between Hilton and Park Place at the
time of the Hilton Distribution, pro forma for the Merger, Hilton and Park Place
will enter into a Debt Assumption Agreement, pursuant to which Park Place will
assume and agree to pay 100% of the amount of each payment required to be made
by Hilton under the terms of the indentures governing Hilton's $300 million
aggregate principal amount of 7.375% Senior Notes due 2002 and $325 million
aggregate principal amount of 7% Senior Notes due 2004. In the event of an
increase in the interest rate on these Notes pursuant to their terms as a result
of certain actions taken by Hilton, and certain other limited circumstances,
Hilton will be required to reimburse Park Place for any such increase.
Hilton will be obligated to make any payment Park Place fails to make and in
such event Park Place shall pay to Hilton the amount of such payment together
with interest, at the rate per annum borne by the applicable notes plus 2% per
annum, to the date of such reimbursement.
ARRANGEMENTS BETWEEN GRAND AND LAKES
Pursuant to the Grand Distribution Agreement, Grand and Lakes will allocate
between them Grand's assets and liabilities related to the Mississippi Business
and the Non-Mississippi Business. Grand and Lakes will also enter into certain
other Transaction Documents governing their relationship after the Effective
Date. These Transaction Documents, including the Grand Distribution Agreement,
are described below.
GRAND DISTRIBUTION AGREEMENT
Grand and Lakes will enter into the Grand Distribution Agreement providing
for, among other things, certain corporate transactions required to effect the
restructuring of Grand, the Grand Distribution and other arrangements among
Grand and Lakes subsequent to the Grand Distribution.
In particular, the Grand Distribution Agreement defines the assets and
liabilities which are being retained by Grand and those which are being
contributed by Grand to Lakes. The Grand Distribution Agreement provides that
(i) Grand will retain the assets and liabilities associated with the Mississippi
Business, which includes the Mississippi-based operations of Grand Casino
Tunica, Grand Casino Biloxi and Grand Casino Gulfport and (ii) Lakes will assume
the assets and liabilities associated with the Non-Mississippi Business which
includes the Indian management contracts associated with Grand Casino Hinckley
located in Minnesota and Grand Casino Avoyelles and Grand Casino Coushatta, both
located in Louisiana, an interest in the development of the Polo Plaza in Las
Vegas and up to $33 million in cash, in addition to certain other assets and
liabilities.
86
<PAGE>
GRAND RESTRUCTURING
In order to effectuate the Grand Distribution, Grand will effect a series of
mergers, asset and stock transfers and liability assumptions among its
subsidiaries, including Lakes (the "Grand Restructuring"). The purpose and
effect of the Grand Restructuring is to separate substantially all of Grand's
Non-Mississippi Business from its Mississippi Business. In connection with the
Grand Restructuring, Lakes will assume, or will cause one of its subsidiaries to
assume, all liabilities associated with the Non-Mississippi Business and Grand
will retain, or will cause one of its subsidiaries to retain, all liabilities
associated with the Mississippi Business.
Substantially all of Grand's assets are currently held indirectly by and
operated through various wholly owned subsidiaries of Grand. The subsidiaries
that relate to the Non-Mississippi Business will be transferred by Grand through
a series of transactions to Lakes. With the transfer of such subsidiaries, Lakes
would assume, unless otherwise provided for in the Grand Distribution Agreement,
all assets and liabilities associated with such subsidiaries. The interests of
the subsidiaries that relate to the Mississippi Business, and the assets and
liabilities associated with such subsidiaries, will, unless otherwise provided
for in the Grand Distribution Agreement, be retained by Grand. Certain other
assets, such as stock in publicly-traded companies and leases related to the
Grand Minnetonka, Minnesota headquarters (the "Assigned Lakes Assets"), will be
assigned to Lakes. Finally, the Grand Distribution Agreement provides that Grand
will contribute up to $33 million in cash to Lakes in order to provide necessary
and needed levels of working capital and appropriate reserves, provided that
such amount will be decreased by amounts paid by Grand prior to the Grand
Distribution Date with respect to Stratosphere litigation to a maximum reduction
of $8 million and increased by the proceeds of any sale of any Assigned Lakes
Assets.
Prior to the Grand Distribution, Grand and Lakes will effectuate the
following transactions subject to certain conditions provided for in the Grand
Distribution Agreement:
(1) Certain Non-Mississippi subsidiaries will form limited liability
companies and contribute their respective assets and liabilities to such
limited liability companies;
(2) One Non-Mississippi subsidiary will form a limited liability company
and will then form a partnership with such limited liability company. Such
Non-Mississippi subsidiary will then contribute its assests and liabilities
to such partnership;
(3) Grand will contribute all of its other assets and liabilities not
related to the Mississippi Business, other than the stock of the
Non-Mississippi subsidiaries which organized the limited liability
companies, to Lakes;
(4) Grand will transfer $33 million of cash to Lakes provided that such
amount will be DECREASED by any amount paid by Grand prior to the Grand
Distribution Date in connection with Stratosphere up to a maximum of $8
million and INCREASED by the proceeds of any sale of any Assigned Lakes
Assets prior to the Grand Distribution Date; and
(5) The Non-Mississippi subsidiaries which organized the limited
liability companies will merge with and into Lakes.
MANNER OF EFFECTING THE GRAND DISTRIBUTION
If the Grand Board declares the Grand Distribution, the Grand Distribution
will be effected following the Grand Restructuring, on the record date for the
Grand Distribution (the "Grand Distribution Record Date"). As a result of the
Grand Distribution, the shareholders of record of Grand on the Grand
Distribution Record Date will own all of the outstanding shares of Lakes Common
Stock. The Grand Distribution Date and the Grand Distribution Record Date will
be established by the Grand Board following the Grand Special Meeting. On the
Grand Distribution Date, the shares of Lakes Common Stock will be delivered by
Grand to Norwest Bank Minnesota, N.A., (the "Grand Distribution Agent"). As
87
<PAGE>
soon as practicable thereafter, account statements reflecting ownership of
shares of Lakes Common Stock will be mailed by the Grand Distribution Agent to
holders of record of Grand Common Stock as of the Grand Distribution Record Date
on the basis of one share of Lakes Common Stock for every four shares of Grand
Common Stock held on that date. All such shares will be fully paid and
nonassessable and the holders thereof will not be entitled to preemptive rights.
See "Description of Lakes Capital Stock."
No holder of Grand Common Stock will be required to pay any cash or other
consideration for the shares of Lakes Common Stock received in the Grand
Distribution in order to receive Lakes Common Stock. No certificates or scrip
representing fractional shares of Lakes Common Stock will be issued to Lakes
shareholders as part of the Grand Distribution. The Lakes Distribution Agent
will aggregate fractional shares into whole shares and sell them in the open
market at then prevailing prices on behalf of holders who would otherwise be
entitled to receive fractional share interests, and such persons will receive
instead a cash payment in the amount of their pro rata share of the total sale
proceeds. Such sales are expected to be made as soon as practicable after the
mailing of the certificates evidencing shares of Lakes Common Stock to Lakes
shareholders. Lakes will bear the cost of commissions incurred in connection
with such sales.
Pursuant to the Grand Distribution Agreement, Grand is obligated to transfer
or cause to be transferred all its right, title and interest in the assets and
liabilities comprising the Non-Mississippi Business to Lakes. All assets are
being transferred without any representation or warranty, "as is-where is." Each
party also agrees to exercise its respective commercially reasonable efforts
promptly to obtain any necessary consents and approvals and to take such actions
as may be reasonably necessary or desirable to carry out the purposes of the
Grand Distribution Agreement and the other agreements summarized below.
The Grand Distribution Agreement also provides for, among other things,
allocation of the liabilities arising out of or in connection with contingent
corporate-level liabilities that cannot otherwise be allocated in good faith
between Grand and Lakes. The Grand Distribution Agreement provides that the
allocation of the financial responsibility for such corporate-level liabilities
will be shared by Grand and Lakes at a level equal to the percentage allocation
of transaction costs as shared by Grand and Park Place under the Merger
Agreement.
The Grand Distribution Agreement includes provisions governing the
administration of certain insurance programs and the procedures for making
claims. The Grand Distribution Agreement also allocates the right to proceeds
and the obligation to incur deductibles under certain insurance policies.
In the event that any transfers contemplated by the Grand Distribution
Agreement are not effected on or prior to the Grand Distribution Date, the
parties will be required to cooperate to effect such transfers as promptly as
practicable following the Grand Distribution Date, and pending any such
transfers, to hold any asset not so transferred in trust for the use and benefit
of the party entitled thereto (at the expense of the party entitled thereto),
and to retain any liability not so transferred for the account of the party by
whom such liability is to be assumed.
GRAND TAX ALLOCATION AND INDEMNITY AGREEMENT
Grand and Lakes will enter into the Tax Allocation and Indemnity Agreement
(the "Grand Tax Agreement") which will define the parties' rights and
obligations with respect to (a) the preparation and filing of tax returns on a
basis consistent with prior practice and the payment of taxes with respect
thereto, (b) the allocation of, and indemnification against, certain liabilities
for taxes of the parties and (c) certain other related matters.
Pursuant to the Grand Tax Agreement, Grand is responsible for preparing and
filing (a) all tax and information returns of the Grand Group (as defined in the
Grand Tax Agreement) prior to the Grand Distribution and of any members thereof
for all Pre-Distribution Taxable Periods (as defined below) with certain
exceptions and (b) all tax and information returns of the Grand Group subsequent
to the Grand
88
<PAGE>
Distribution and of any members thereof for all Straddle Periods (as defined
below) and Post-Distribution Taxable Periods (as defined below). Lakes is
responsible for (i) all tax and information returns that relate solely to any
member of the Lakes Group (as defined in the Grand Tax Agreement) for all
Pre-Distribution Taxable Periods, and are not required to be filed on or before
the Grand Distribution Date and (ii) all tax and information returns of the
Lakes Group and any members thereof for all Straddle Periods and Post-
Distribution Taxable Periods. The Tax Agreement also provides mechanisms for
cooperation in preparing returns, including a requirement that the party
responsible for preparing and filing the returns to allow the other party to
review and comment on the tax returns to the extent they pertain to the business
operations of the other party or the other party is indemnifying for taxes for a
period covered by the tax return. As used herein, "Pre-Distribution Taxable
Period" means a taxable year that ends on or before the Grand Distribution Date,
"Post-Distribution Taxable Period" means a taxable year that begins after the
close of business on the Grand Distribution Date, and "Straddle Period" means
any taxable year beginning before and ending after the close of business on the
Grand Distribution Date.
The Grand Tax Agreement, which generally provides that Grand will be liable
for all taxes and entitled to all refunds shown on tax returns of Grand and its
subsidiaries for all taxable periods, except as follows or as provided in the
next paragraph. Taxes and refunds on returns to be filed only by Lakes or any of
its post-Distribution subsidiaries after the Grand Distribution Date are
allocated only to them. Taxes and refunds shown on consolidated, combined or
unitary returns filed after the Grand Distribution Date for periods beginning
before or including the Grand Distribution Date are allocated between Grand and
Lakes by allocating to each the amounts traceable to the assets and business
allocated to each under the Grand Distribution Agreement, except that income
taxes are first allocated among Grand and its pre-Distribution subsidiaries
based on the ratios of taxable income of the corporations with taxable income
included in the return, and then re-allocated under the asset and business
tracing method above. If any taxes or refunds on such returns cannot be traced,
or any transaction taxes (such as sales and transfer taxes, but not income
taxes) are caused by the Grand Distribution or the Merger, they are allocated
between Grand and Lakes at a level equal to the percentage allocation of
transaction costs as calculated under the Merger Agreement. Any taxes and
refunds resulting from any final tax determinations made by taxing authorities,
or any amended returns filed, after the Grand Distribution Date are allocated by
tracing the tax or refund to the assets and business allocated to Grand or Lakes
under the Grand Distribution Agreement.
The Grand Tax Agreement provides that the economic benefit of the
Stratosphere Losses and the economic burden of the Section 355(e) Gain will be
allocated between Grand and Lakes as follows: (i) all Stratosphere Losses will
be first applied to reduce the Section 355(e) Gain, (ii) Stratosphere Losses in
excess of the amount required to eliminate the Section 355(e) Gain will be
allocated to Lakes in an amount not to exceed $50 million of the Stratosphere
Losses, and (iii) any remaining Stratosphere Losses will be allocated equally
between Grand and Lakes. If the Stratosphere Losses allocable to Lakes in (ii)
above provide economic benefits to Lakes, such losses will be escrowed to secure
Lakes' obligation to indemnify Grand against any liability resulting from the
Section 355(e) Gain not offset by the Stratosphere Losses. The escrow account
would be created pursuant to an escrow agreement to be entered into by an escrow
agent, Lakes, Grand and Park Place when the first such deposit is made, in the
form attached to the Grand Tax Agreement. The Grand Tax Agreement also includes
procedures for cooperation in preparing returns, sharing and retaining tax
information and responding to and controlling audit adjustments.
The Grand Tax Agreement will not be binding on the IRS or any other taxing
authority and will not affect the several liability of Grand, Lakes and their
respective subsidiaries for all federal and certain state income taxes of
Grand's consolidated group relating to the taxable periods ending on or before
the Grand Distribution Date (including any tax liability resulting from the
Section 355 Gain described above).
89
<PAGE>
INTELLECTUAL PROPERTY LICENSE AGREEMENT
In the Grand Distribution, Grand, as a wholly owned subsidiary of Park
Place, will retain all of its right, title, and interest in certain trademarks,
including the trademarks "Grand Casinos," "Grand Advantage Players Club," "Grand
Casino Kid Quest," "Marketplace Buffet," "Rapid Change," "Show & Tell
Blackjack," and "There's More Than One Reason To Call Us Grand." Pursuant to the
terms of an Intellectual Property License Agreement (the "License"), to be
entered into between Grand and Lakes prior to such assignment, Grand will grant
to Lakes a world-wide, royalty-free and non-exclusive right and license to use
the Intellectual Property (as defined in the License) solely in connection with
Lakes' management of certain Facilities (as defined in the License) for the
Minnesota Tribe and the Coushatta Tribe of Louisiana and the Tunica-Biloxi Tribe
of Louisiana. The Minnesota Tribe retains the right to certain of these
trademarks indefinitely. While the Minnesota Tribe's rights to certain
trademarks are perpetual, the rights of the Tunica-Biloxi Tribe of Louisiana and
the Coushatta Tribe of Louisiana will expire upon termination of the "Louisiana
Management Agreements," as defined in such agreement. Upon termination of its
management agreement with the Minnesota Tribe, Lakes may sublicense the
Intellectual Property to the Minnesota Tribe for use solely in connection with
the operation of the Minnesota Tribe's Facilities. For so long as the applicable
License remains in effect, Grand will not itself (nor will authorize any other
person or entity to) use the Intellectual Property in connection with the
operation of any hotel, restaurant, retail, gaming, or other facility of a
similar type or nature within a twenty mile radius of a facility owned by the
Minnesota Tribe.
The Intellectual Property may only be used in a manner consistent with its
use during the year preceding execution of the License. The License also
provides for certain limitations governing use of the Intellectual Property,
including certain quality control restrictions. Finally, Lakes is required to
indemnify Grand against certain claims relating to the use of the Intellectual
Property by Lakes, its assignees or sublicensees.
Grand may terminate the License prior to the expiration of its term: (a) if
Lakes makes an assignment of assets or business for the benefit of creditors, or
if a trustee or receiver is appointed to administer or conduct Lakes' business
or affairs, or if Lakes is adjudged in any legal proceeding to be either a
voluntary or involuntary bankrupt without prior notice or legal action by Grand;
or (b) upon 30 days' advance written notice in the event of Lakes' material
breach of the License. Lakes also may terminate the License upon 90 days' prior
written notice to Grand.
GRAND EMPLOYEE BENEFITS ALLOCATION AGREEMENT
As of the Grand Distribution Date, Grand and Lakes will enter into an
Employee Benefits and Other Employment Matters Allocation Agreement (the "Grand
Employee Benefits Agreement"), which generally provides for the allocation of
current employees of Grand and its subsidiaries and the respective obligations
of Grand and Lakes regarding compensation, benefits and labor matters affecting
such employees and those former employees who have terminated employment with
Grand and its subsidiaries prior to the Grand Distribution Date ("Former Grand
Employees"). Under the Grand Employee Benefits Agreement, Grand and Lakes will
allocate such employees as of the Grand Distribution Date to either Grand and
its post-Distribution subsidiaries (the "Grand Retained Employees") or Lakes and
its post-Distribution subsidiaries (the "Lakes Employees"), based upon whether
each employee's employment duties before the Grand Distribution Date primarily
relate to the Mississippi Business (being retained by Grand and its
post-Distribution subsidiaries) or the Non-Mississippi Business (to be operated
by Lakes and its post-Distribution subsidiaries), and upon various other factors
as may apply. The Grand Employee Benefits Agreement also allocates certain
obligations and responsibilities of Grand and Lakes regarding any benefits of
eligible dependents and beneficiaries of current employees and Former Grand
Employees.
Subject to the exceptions discussed below, the Grand Employee Benefits
Agreement provides that Grand will be responsible for any employment contract
obligations with respect to all Grand Retained
90
<PAGE>
Employees and for all historical obligations under the Grand employee benefit
plans on behalf of all Grand Retained Employees, those Former Grand Employees
whose employment related to the Mississippi Business, and their respective
dependents and beneficiaries (collectively, the "Grand Retained Individuals");
and that Lakes will be responsible for any employment contract obligations with
respect to all Lakes Employees and for historical obligations under the Grand
employee benefit plans on behalf of all Lakes Employees, those Former Grand
Employees whose employment related to the Non-Mississippi Business, and their
respective dependents and beneficiaries (collectively, the "Lakes Individuals").
Grand or Lakes may amend and/or terminate any compensation or benefit plans
covering its employees at any time or create new compensation or employee
benefit plans.
Specific provisions of the Grand Employee Benefits Agreement include the
following:
COMPENSATION PLANS. Grand shall be responsible for payment of all
compensation and bonuses payable for periods ending on or before the Grand
Distribution Date to each Grand Retained Individual or Lakes individuals who, on
the Grand Distribution Date, is a participant under any of Grand's cash
compensation plans, in accordance with the terms of each applicable plan. Lakes
shall adopt, as of the Grand Distribution Date, any of Grand's cash compensation
plans that cover Lakes Individuals, and shall amend such plans to reflect the
new issuer of awards thereunder and any other changes Lakes may choose to make.
SEVERANCE BENEFITS. The Grand Employee Benefits Agreement provides that no
Lakes Employee who is transferred to Lakes or any of its subsidiaries from Grand
or any of its other subsidiaries in connection with the Grand Distribution will
thereby become entitled to any severance pay or similar benefits under any plan
or contract. Grand and Lakes will each assume any risk that its employees may
claim such benefits as a result of the Grand Distribution or otherwise,
including any benefits under change in control agreements.
401(K) SAVINGS PLANS. As of the Grand Distribution Date, Lakes will assume
sponsorship of the Grand Casinos 401(k) Savings Plan (the "401(k) Savings Plan")
from Grand. After the Grand Distribution Date, the 401(k) Savings Plan will
provide additional benefits only for eligible Lakes Individuals, according to
its terms; and the Grand Retained Employees will not be eligible to participate,
except that the 401(k) Savings Plan will continue to hold the previously accrued
benefits of Grand Retained Individuals until completion of the transfer
described at the end of this paragraph. For periods on or before the Grand
Distribution Date, any employer contributions under the 401(k) Savings Plan with
respect to Grand Retained Individuals will be made by Grand; and any employer
contributions under the 401(k) Savings Plan with respect to Lakes Individuals
will be made by Lakes. As soon as practical after the Merger, Lakes will
separate the portion of the 401(k) Savings Plan held for Grand Retained
Individuals and transfer that portion to a similar plan sponsored by Park Place
and covering the Grand Retained Employees.
STOCK OPTION PLANS. Grand has awarded stock options under the 1991 Grand
Casinos, Inc. Stock Option and Compensation Plan, and amendments thereto (the
"1991 Option Plan"); options to certain non-employee directors not pursuant to a
plan (the "Non-Plan Director Options") and options under the 1995 Director Stock
Option Plan (the "1995 Option Plan" and, together with the 1991 Option Plan, the
"Grand Option Plans"). Grand, as a subsidiary of Park Place, will maintain the
Grand Option Plans on and after the Effective Date until it chooses to amend or
terminate them.
As of the Grand Distribution Date, all of the options to purchase Grand
Common Stock that remain outstanding under the Grand Option Plans, including the
Non-Plan Director Options, will be adjusted and converted into options to
purchase shares of Grand Common Stock ("Grand Options") and shares of Lakes
Common Stock ("Lakes Options"). Pursuant to such adjustment, the value of the
Grand Options immediately prior to the Grand Distribution will be preserved
immediately after the Grand Distribution and the exercise prices of the Grand
Options shall be allocated between Grand Options and the Lakes Options, based
upon the relative values of Grand Common Stock and Lakes Common Stock
immediately
91
<PAGE>
after the Grand Distribution, all as agreed by Grand and Lakes (the
"Adjustment"). The vesting of all Grand Options and Lakes Options will
accelerate as of the Effective Date in connection with the Merger and will be
amended to permit exercises after the Effective Date so long as such optionee is
either an employee or board member of either entity. With respect to Lakes
Individuals holding Grand Options after the Effective Date, Grand will amend the
Grand Option Plans and their Grand Options to change all references to their
employment or termination of employment with Grand and its affiliates to
substitute their employment by or termination of employment with Lakes and its
affiliates. Following the Adjustment, the Grand Options will become options to
purchase shares of Park Place. See "The Transactions-- The Merger
Agreement--Treatment of Stock Options."
As of the Grand Distribution Date, Lakes will adopt new option plans
substantially identical to the Grand Option Plans which Grand shareholders will
be asked to approve at the Grand Special Meeting. For a description of the Lakes
Option Plans, see "The Grand Proposals." All awards under the Lakes Option Plans
will relate to Lakes Common Stock.
All Lakes Options issued pursuant to the conversion of the Grand Options
under the preceding paragraph, in addition to the Non-Plan Director Options that
are converted into Lakes options in the Grand Distribution, will be treated as
awards outside of the Lakes Option Plans, pursuant to assumed option plans under
which Lakes will make no new grants (the "Lakes Assumed Option Plans"). The
Lakes Assumed Option Plans will otherwise be identical in all material respects
to the Grand Options from which they are converted (including the amendment to
permit exercises so long as such optionee is either an employee or board member
of either entity). As of the Effective Date, options to purchase an aggregate of
1,113,249 shares of Lakes Common Stock will be issued under the Lakes Assumed
Option Plans, assuming no exercise by any optionee prior to the Effective Date.
With respect to Grand Retained Individuals receiving any Lakes options as a
result of such conversion, all provisions in the Lakes assumed Option Plans and
option agreements that would otherwise refer to their employment by or
termination of employment with Lakes and its affiliates shall instead reflect
their employment by or termination of employment with Grand and its affiliates.
After the Effective Date, Lakes shall assume all obligations with respect to the
Lakes Options converted from Grand Options, and shall administer such options
under the terms of the Lakes Assumed Option Plans governing such options.
STOCK PURCHASE PLANS. As of the Effective Date, the Grand Casinos, Inc.
Associate Stock Purchase Plan established by Grand as of March 1, 1997 (the
"Grand Stock Purchase Plan") will be amended to provide that all contributions
withheld from the compensation of participants through the day before the
Effective Date (the "Purchase Date") shall be used on the Purchase Date to
purchase Grand Common Stock under the Grand Stock Purchase Plan.
MEDICAL AND OTHER WELFARE BENEFIT PLANS. As of the Grand Distribution Date,
Grand will remain responsible, or cause its insurance carriers or HMOs to be
responsible, for all obligations under Grand's medical, dental, "cafeteria,"
disability, sick leave, vacation and group term life insurance plans ("Welfare
Plans") with respect to Grand Retained Individuals. On and after the Grand
Distribution Date, Grand will maintain its sick leave and vacation plans for
eligible Grand Retained Individuals, including all accrued benefits thereunder
(vested and unvested); and Grand may continue or adopt other Welfare Plans for
Grand Retained Individuals as Grand may choose or as may be required by
applicable laws. As of the Grand Distribution Date, Lakes will remain
responsible, or cause its insurance carriers or HMOs to be responsible, for all
obligations under Grand's Welfare Plans with respect to Lakes Individuals. As of
the Grand Distribution Date, Lakes will adopt sick leave and vacation plans
(including all accrued benefits thereunder, whether vested or unvested) and
medical, dental and "cafeteria" plans for eligible Lakes Individuals following
the Grand Distribution Date, that are substantially comparable to the applicable
Grand Welfare Plans. After the Grand Distribution Date, Lakes may adopt other
Welfare Plans for Lakes Individuals as Lakes may choose or as may be required by
applicable laws.
92
<PAGE>
However, if a Grand Retained Employee is hired by Lakes (or a Lakes
subsidiary) or a Lakes Employee is hired by Grand (or a Grand subsidiary) within
90 days after the Grand Distribution Date, the employee will be credited by the
successor employer with the same vacation and sick leave benefits (vested and
unvested) the employee had accrued with the former employer. The former employer
shall also pay to the successor employer the vested balance of vacation and sick
leave accrued by the employee with the former employer, based on the employee's
final rate of pay.
PLAN SERVICE CREDITS. In connection with the Grand Distribution and for
purposes of determining length of service or plan participation to satisfy
eligibility, vesting, benefit accrual and similar requirements under any
employee benefit or compensation plan, Grand will credit each Grand Retained
Employee and Lakes will credit each Lakes Employee with such employee's service
and original hire date as reflected in the records of Grand or any of its
subsidiaries as of the Grand Distribution Date. This credited service and hire
date shall be maintained until the employee terminates employment or as may be
otherwise required by applicable law or such a plan.
ADMINISTRATIVE COOPERATION. Grand and Lakes will also cooperate in the
transition of such employee-related matters as payroll deductions, unemployment
tax experience and benefit elections made by employees.
ARRANGEMENTS RELATING TO THE MERGER AGREEMENT
SHAREHOLDER SUPPORT AGREEMENT
On June 30, 1998, Stanley Taube, S.M. Taube & Co., Inc. (the "Taube
Shareholders"), Lyle Berman, and Neil I. Sell, as trustee of Amy Berman
Irrevocable Trust dated August 9, 1989, Bradley Berman Irrevocable Trust dated
August 9, 1989, Jessie Lynn Berman Irrevocable Trust dated August 9, 1989 and
Julie Berman Irrevocable Trust dated August 9, 1989 (the "Berman Shareholders"
and together with the Taube Shareholders, the "Taube and Berman Shareholders")
and Hilton, entered into a Shareholder Support Agreement (the "Shareholder
Support Agreement") to and for the benefit of Grand and Hilton. The Taube and
Berman Shareholders owned as of September 15, 1998, in the aggregate,
approximately 15.3% of the outstanding shares of Grand. The Taube and Berman
Shareholders agreed that they will vote or cause to be voted all of their
respective shares of Grand Common Stock (a) in favor of adoption of the Merger
Agreement and approval of the Merger, the Grand Distribution and the other
transactions contemplated therein, (b) against any Acquisition Proposal (as
defined in the Merger Agreement) or any other action or agreement that would
result in a breach of any representation, warranty, covenant, agreement or other
obligation of Grand under the Merger Agreement and (c) in favor of any other
matter necessary for the consummation of transactions contemplated by the Merger
Agreement. Except for limited sales by the Berman trusts, the Berman
Shareholders also agreed that they will not, directly or indirectly, sell,
assign, transfer, pledge, encumber or otherwise dispose of any of their shares,
enter into a voting agreement or grant a proxy or power of attorney with respect
to such shares, or enter into any contract, option or other arrangement with
respect to the sale, assignment, transfer or other disposition of such shares.
The Taube and Berman Shareholders further agreed that neither they nor any of
their officers, directors, employees, trustees, agents or representatives will,
directly or indirectly, initiate or solicit any inquiries or the making of any
Acquisition Proposal and will notify Hilton and Grand within 48 hours if any
such inquiries or proposals are received by, or any negotiations or discussions
are initiated with, them or any of their respective affiliates. No separate or
additional consideration was received by either the Taube or the Berman
Shareholders related to the Shareholder Support Agreement. The Shareholder
Support Agreement terminates upon the earliest of the consummation of the Merger
or any termination of the Merger Agreement in accordance with the terms thereof.
On October 13, 1998, Thomas Brosig, President and Chief Executive Officer of
Grand, signed a shareholder support agreement identical in all material respects
to the Berman Shareholder Support Agreement described above. No separate or
additional consideration was received by Mr. Brosig related to
93
<PAGE>
such agreement. As of September 15, 1998, Mr. Brosig owned an aggregate of 1.2%
of the outstanding shares of Grand.
NONCOMPETITION AGREEMENT
In connection with the Merger Agreement and the transactions contemplated
therein, Park Place and each of Lyle Berman, Chairman of the Board of Grand, Tom
Brosig, President and Chief Executive Officer of Grand, and Stanley Taube, an
officer of a subsidiary of Grand (the "Grand Executives") will each enter into a
Noncompetition Agreement (each, a "Noncompetition Agreement") for a term of two
years after the Closing Date. Each of the Noncompetition Agreements will
prohibit the Grand Executives, without the prior written consent of Park Place,
from owning any interest in, managing, operating, joining, controlling,
rendering financial assistance to, participating or being connected with (as an
officer, employee, partner, stockholder, consultant or otherwise) any entity
whose products or services are offered in the State of Mississippi and could be
considered part of the gaming industry. Nothing in the Noncompetition Agreements
will prevent the Grand Executives from holding less than 5% of the outstanding
capital stock of any public company whose products or services are offered in
such state and could be considered part of the gaming industry. The
Noncompetition Agreements will also prohibit the Grand Executives from
soliciting for employment away from Park Place or any of its subsidiaries or
affiliates, or otherwise interfering with the relationship of Park Place or any
of its subsidiaries or affiliates with any employee of Park Place or any of its
subsidiaries or affiliates.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
In considering the Transactions, stockholders should be aware that certain
directors and members of management of Grand and Hilton have interests in the
Transactions different from, or in addition to, the interests of Grand and
Hilton stockholders generally.
BOARD OF DIRECTORS AND MANAGEMENT OF PARK PLACE
Upon consummation of the Transactions, the Park Place Board will consist of
10 directors, five of whom are currently directors and/or officers of Hilton and
one of whom is a director and officer of Grand. Stephen F. Bollenbach, the
current President and Chief Executive Officer of Hilton, will also become
Chairman of the Board of Park Place; Arthur M. Goldberg, the current
President--Gaming Operations and a director of Hilton, will become President,
Chief Executive Officer and a director of Park Place and remain a director of
Hilton; Lyle Berman, the current Chairman of the Board of Grand, will become a
director of Park Place; and Barron Hilton, the current Chairman of the Board of
Hilton and Eric A. Hilton and A. Steven Crown, current directors of Hilton, will
become directors of Park Place and, except for Eric Hilton, will retain their
positions at Hilton.
Barron Hilton, Eric Hilton and Steve Crown, who are currently directors of
Hilton, will become directors of Park Place and will each receive an annual
directors fee of $30,000. For additional information concerning the directors
and executive officers of Park Place, see "Management of Park Place."
PARK PLACE CEO AGREEMENT
Park Place and Arthur M. Goldberg anticipate that they will enter into an
employment agreement (the "Park Place CEO Agreement") for the period beginning
on the Hilton Distribution Date and ending on January 1, 2004, subject to
renewal, providing for the employment of Mr. Goldberg as the President and Chief
Executive Officer of Park Place. It is anticipated that the Park Place CEO
Agreement will provide for a minimum annual base salary of $2,000,000 and an
annual bonus opportunity of $1,000,000, the payment of which may be deferred
under certain circumstances. In addition, the Park Place CEO Agreement will
provide that if the Hilton Distribution occurs, Mr. Goldberg shall, subject to
approval of the Park Place 1998 Plan by the Hilton stockholders, be granted an
option to purchase up to 6,000,000
94
<PAGE>
shares of Park Place Common Stock in tranches of 4,000,000 and 2,000,000 shares.
It is anticipated that Mr. Goldberg will be eligible for certain additional
benefits under the Park Place CEO Agreement upon a change of control. The Park
Place CEO Agreement will also provide that, as a result of the Hilton
Distribution and effective as of the Hilton Distribution Date, all outstanding
options held by Mr. Goldberg to purchase shares of Hilton Common Stock will
become options to purchase shares of Park Place Common Stock, and the number of
shares subject to and the exercise price of such options will be adjusted to
preserve the intrinsic value of such options on the Hilton Distribution Date.
Except as provided therein, the Park Place CEO Agreement will supersede Mr.
Goldberg's current employment agreement and change of control agreement with
Hilton. Park Place will assume Hilton's obligations under Mr. Goldberg's
Deferred Compensation Agreement, which are expected to amount to approximately
$2,200,000 on December 31, 1998. For a more detailed discussion of the Park
Place CEO Agreement, see "Management of Park Place--Park Place CEO and Chairman
Employment Agreements--Park Place CEO Agreement."
PARK PLACE CHAIRMAN AGREEMENT
Park Place and Stephen F. Bollenbach, President and Chief Executive Officer
of Hilton, anticipate that they will enter into an employment agreement (the
"Park Place Chairman Agreement") pursuant to which Mr. Bollenbach will agree to
serve as Chairman of, and advisor to, the Park Place Board for the period
beginning on the Hilton Distribution Date and ending on July 1, 2005. It is
anticipated that Mr. Bollenbach will receive an annual base salary of $100,000
per year and shall, subject to approval of the Park Place 1998 Plan by Hilton
stockholders, be granted an option to purchase 3,000,000 shares of Park Place
Common Stock in tranches of 2,000,000 and 1,000,000 shares. For a more detailed
discussion of the Park Place Chairman Agreement, see "Management of Park
Place--Park Place CEO and Chairman Employment Agreements--Park Place Chairman
Agreement."
HILTON CEO AGREEMENT
Mr. Bollenbach has entered into an employment agreement (the "Hilton CEO
Agreement") with Hilton for the period beginning on the earlier of (i) the
Hilton Distribution Date and (ii) January 1, 1999 and ending on July 1, 2005,
subject to renewal, providing for the employment of Mr. Bollenbach as the
President and Chief Executive Officer of Hilton. The Hilton CEO Agreement
provides for a minimum annual base salary of $620,000 and an annual bonus
opportunity of up to $380,000. In addition, the Hilton CEO Agreement provides
that if the Hilton Distribution occurs, Mr. Bollenbach shall, subject to
approval of the Amended Hilton Plan by Hilton stockholders, be granted an option
to purchase up to 6,000,000 shares of Hilton Common Stock in tranches of
4,000,000 and 2,000,000 shares. Mr. Bollenbach will be eligible for certain
additional benefits under the Hilton CEO Agreement upon a change of control. The
Hilton CEO Agreement will supersede Mr. Bollenbach's current employment
agreement and change of control agreement with Hilton. In connection with the
Hilton Distribution, Mr. Bollenbach has agreed to waive rights under his current
employment agreement with Hilton with respect to the accelerated vesting of
Hilton stock options currently owned by Mr. Bollenbach. For a more detailed
discussion of the Hilton CEO Agreement, see "Certain Relationships and Related
Transactions--Interests of Certain Persons in the Transactions--Hilton
Interests."
ADJUSTMENTS OF HILTON OPTIONS
As a result of the Hilton Distribution and effective as of the Hilton
Distribution Date, each outstanding stock option to purchase shares of Hilton
Common Stock, other than options held by Mr. Goldberg, will become an option to
purchase one share of Hilton Common Stock and an option to purchase one share of
Park Place Common Stock pursuant to either the Park Place 1998 Stock Incentive
Plan or the Park Place 1998 Independent Director Stock Option Plan, as
applicable. The exercise prices of such options will be adjusted to preserve the
intrinsic value of the options on the date of the Hilton Distribution.
95
<PAGE>
As a result of the Hilton Distribution and effective as of the Hilton
Distribution Date, all outstanding options held by Mr. Goldberg to purchase
shares of Hilton Common Stock will become options to purchase shares of Park
Place Common Stock, and the number of shares subject to and the exercise price
of such options will be adjusted to preserve the intrinsic value of such options
on the date of the Hilton Distribution. The number of shares of Park Place
Common Stock which will be subject to Mr. Goldberg's options following the
adjustment to his options is not currently determinable because such number will
depend on the prices at which the Hilton Common Stock and the Park Place Common
Stock will trade following the Hilton Distribution. If, for example, the value
of the Park Place common stock on the date of the Hilton distribution is equal
to 45% of the value of the Hilton common stock prior to the Hilton distribution,
each of Mr. Goldberg's options will be exercisable for approximately 2.22 shares
of Park Place common stock and the exercise price will be equal to 45% of the
exercise price of Mr. Goldberg's options prior to the Hilton distribution. Based
on Mr. Goldberg's 1,800,000 options (including the option to be granted to him
on December 18, 1998 pursuant to his existing 1996 Hilton employment agreement),
this would result in options to purchase approximately 4,000,000 shares of Park
Place common stock.
As of September 15, 1998 the executive officers of Hilton owned the
following options: Mr. Bollenbach held options to purchase 6,000,000 shares; Mr.
Goldberg held options to purchase 1,200,000 shares; Dieter Huckestein held
options to purchase 287,600 shares; Thomas E. Gallagher held options to purchase
312,600 shares and Matthew J. Hart held options to purchase 316,100 shares. In
addition, under his 1996 employment agreement with Hilton, Mr. Goldberg is
entitled to receive an option to purchase 600,000 shares of Hilton Common Stock
on December 18, 1998, which will also be subject to the adjustment described
above. Directors and executive officers of Hilton collectively held options to
purchase, in the aggregate, 8,140,300 shares of Hilton Common Stock. As of
September 15, 1998, the exercise price of outstanding Hilton options held by
executive officers and directors of Hilton exceeded the market price of the
Hilton Common Stock except as follows: Mr. Bollenbach and Mr. Huckestein held
options with aggregate values of approximately $468,750 and $676,063,
respectively. See "The Transactions--Arrangements Between Hilton and Park
Place--Stock Option Plans."
GRAND CHANGE OF CONTROL AGREEMENTS
The executive officers of Grand, including Messrs. Berman, Brosig, Cope and
Galvin, have employment agreements containing change of control payments
provisions which could be triggered if these officers are terminated after the
Merger. Under their respective agreements, in the event of a termination of
employment not for "cause" or such employee's resignation following a "change of
control" (as defined therein), Grand must immediately pay to those individuals
up to two and one-half years of current base salary in addition to any
outstanding incentive compensation to which they would otherwise be entitled in
the absence of such termination or resignation, in addition to the continuation
of certain employee benefits to which such individual would otherwise be
entitled for an additional year. The "change of control" provisions also provide
for a two year period in which the individual may exercise any outstanding
options to purchase Common Stock. For purposes of these agreements, a "change of
control" will occur by reason of the Merger. If a qualifying termination occurs,
each executive officer would be entitled to the following amounts: Mr.
Berman--$1,625,000; Mr. Brosig--$1,125,000; Mr. Cope--$630,000; and Mr.
Galvin--$645,000. See "Certain Relationships and Related Transactions--Grand
Interests."
ACCELERATED VESTING OF GRAND OPTIONS
As a result of the Merger, all outstanding options to purchase Grand common
stock held by Grand's directors, officers and employees will vest and become
fully exercisable options to purchase shares of Park Place common stock and
Lakes common stock following the Grand Distribution. The exercise prices of
these options will be adjusted to preserve the value of these awards immediately
prior to the Effective Date of the Transactions. As of the date hereof, Mr.
Berman holds options to acquire an aggregate of 1,000,000 shares, Mr. Brosig
holds options to acquire an aggregate of 450,000, Mr. Cope holds options to
acquire an
96
<PAGE>
aggregate of 138,000 shares, and Mr. Galvin holds options to acquire an
aggregate of 140,100. Grand officers and directors collectively hold options to
acquire an aggregate of 1,588,000 shares. As of October 22, 1998, the latest
practicable date prior to the printing of this Joint Proxy Statement/Prospectus,
the closing market price of Grand common stock was $8.38 per share and the
exercise price of the unvested portion of the foregoing stock options exceeded
the price of Grand common stock on that date. See "The Transactions--The Merger
Agreement--Treatment of Stock Options."
PARK PLACE BOARD AND EMPLOYMENT ARRANGEMENTS
Upon consummation of the Transactions, Mr. Berman will also serve as a
director of Park Place, and will receive an annual director fee from Park Place
of $30,000. Upon consummation of the Transactions, Mr. Brosig will become the
senior executive of Park Place in charge of Mississippi, New Orleans and
Missouri operations, will be employed by Park Place to manage and develop its
Mississippi business interests and will receive an as yet undetermined annual
compensation package for his services in this capacity. See "Management of Park
Place."
BOARD OF DIRECTORS AND MANAGEMENT OF LAKES
Upon consummation of the Transactions, the Lakes Board of Directors will
consist of eight (8) directors, each of whom is a current member of the Grand
Board. Additionally, Mr. Berman will serve as Chairman and Chief Executive
Officer of Lakes, Mr. Brosig will serve as President, and Mr. Cope will serve as
Chief Financial Officer. Each individual will receive annual compensation for
services rendered in their respective capacity at a level which is currently
undetermined. See "Management of Lakes."
INDEMNIFICATION OF DIRECTORS AND OFFICERS OF GRAND
The Merger Agreement provides current and former directors and officers with
certain rights to indemnification as described immediately below. See
"--Indemnification Obligations."
INDEMNIFICATION OBLIGATIONS
All indemnification obligations existing as of June 30, 1998 (including
indemnification obligations relating to or arising out of the transactions
contemplated by the Merger Agreement) relating to acts or omissions occurring at
or prior to the Effective Time in favor of the current or former directors or
officers of Grand or any of its subsidiaries (the "Indemnified Persons") in the
articles of incorporation or bylaws (or comparable organizational documents) or
indemnity contracts of Grand or its subsidiaries (i) will be assumed by each of
Grand, as the surviving corporation in the Merger and Lakes, each of whom will
be jointly and severally liable for such indemnification, without further
action, as of the Effective Time and (ii) will continue in full force and effect
in accordance with their respective terms for a period not less than six years
from the Effective Time. If the Surviving Corporation is required to indemnify
any Indemnified Person for any act or omission relating to any of the
Non-Mississippi Group Liabilities (as defined in the Grand Distribution
Agreement), including those relating to Stratosphere or the Non-Mississippi
Business, then as a condition to such indemnification, such Indemnified Person
will enter into a subrogation agreement pursuant to which the Surviving
Corporation will be subrogated to, and will stand in the place of, such
Indemnified Person as to any events or circumstances in respect of which such
Indemnified Person may have any right or claim relating to such Non-Mississippi
Group Liabilities against any claimant or plaintiff asserting such liabilities
against the Indemnified Person, or against any other party (other than an
Indemnified Person) that may be liable.
In addition, Lakes will indemnify, defend and hold harmless the Surviving
Corporation and its affiliates from and against any and all losses, liabilities,
damages and expenses (including the reasonable costs and expenses of
investigation and reasonable attorneys' fees and expenses in connection with any
or all such investigations or any and all actions or threatened actions)
incurred or suffered by the Surviving
97
<PAGE>
Corporation or any of its affiliates relating to the Non-Mississippi Group
Liabilities, including those relating to the Stratosphere Corporation and the
Non-Mississippi Business.
Prior to the Effective Time, Lakes and Grand will enter into a trust
agreement (the "Trust Agreement") and a pledge and security agreement (the
"Pledge and Security Agreement," and together with the Trust Agreement, the
"Security Agreements"), pursuant to which Lakes will deposit and make available
$7.5 million in cash on each of the first four anniversaries of the Effective
Date (for a total sum of $30 million) to secure and satisfy any and all
indemnification claims made or asserted against it pursuant to any of the
Transaction Documents. The Trust Agreement will terminate on the date after (i)
the Surviving Corporation determines that all known material indemnification
obligations with respect to the Polo Plaza development project, Stratosphere and
tax liabilities relating to the Grand Distribution have been completely settled
(and with respect to any settlement subject to court approval, such settlement
shall have become final and non-appealable) and satisfied, (ii) the Surviving
Corporation determines that no additional material indemnification obligations
are reasonably likely to arise out of, or be asserted with respect to, Polo
Plaza or Stratosphere and (iii) the Surviving Corporation and Lakes determine
that no material indemnification obligations are likely to arise out of, or be
asserted with respect to, any tax liabilities relating to the Grand
Distribution. See "Risk Factors--Structure of the Transactions; Indemnification
Obligations."
For so long as the Surviving Corporation is required to provide
indemnification to any of the Indemnified Persons, Lakes will not, and will not
permit any of its subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or any other distribution on account of Lakes' or any of its
subsidiaries' equity interests or (ii) purchase, redeem, defease or otherwise
acquire or retire for value any equity interests of Lakes, without the written
consent of Park Place which consent can be given or withheld in Park Place's
sole and absolute discretion. If Lakes is unable, within 15 days of request, to
pay in full any claim made for indemnification by the Surviving Corporation or
any of its affiliates pursuant to the Merger Agreement or the Grand Distribution
Agreement, then for so long as any such claim or any other claim for
indemnification made by the Surviving Corporation or any of its affiliates
remains unpaid, Lakes will not, and will not permit any of its subsidiaries to,
directly or indirectly, create, incur, issue, assume, guaranty or otherwise
become directly or indirectly liable with respect to any indebtedness.
For so long as the Surviving Corporation is required to provide
indemnification to any Indemnified Person, Park Place's ability to transfer any
material Mississippi Group Assets (as defined in the Grand Distribution
Agreement) out of the Surviving Corporation will be limited as follows. In
connection with the transfer of any material Mississippi Group Asset out of the
Surviving Corporation, Park Place will determine the net equity value of such
asset at the time of such transfer (i.e., the fair market value of such asset
less any indebtedness and known liabilities relating thereto). So long as the
net equity value of the asset being transferred, together with the aggregate net
equity values of all assets previously transferred, is equal to or less than the
total indebtedness of Grand as of the Determination Date under the Grand
Indentures and the Grand Revolving Credit Facility (collectively, the "Threshold
Debt"), the subject asset can be transferred without restriction. If, however,
the net equity value of the asset being transferred, together with the aggregate
net equity values of all assets previously transferred, is more than the
Threshold Debt (such excess being referred to as the "Required Credit Support"),
then Park Place will either (i) contribute to the Surviving Corporation assets
with a net equity value at least equal to the Required Credit Support or (ii)
guaranty the indemnification obligations to the Indemnified Persons in an amount
at least equal to the Required Credit Support. Once Park Place is required to
provide any Required Credit Support, it will only be entitled to transfer
additional material Mississippi Group Assets out of the Surviving Corporation if
it concurrently with such transfer either (x) contributes to the Surviving
Corporation other assets with a net equity value at least equal to the net
equity value of the assets to be transferred out of the Surviving Corporation or
(ii) guarantees the indemnification obligations of the Surviving Corporation to
the Indemnified Persons in an amount at least equal to the net equity value of
the assets to be transferred out of the Surviving Corporation.
98
<PAGE>
ACCOUNTING TREATMENT
Upon receipt of stockholder approval of the Hilton Distribution, Hilton will
restate its consolidated financial statements to reflect the Hilton Gaming
Business as discontinued operations. In the separate financial statements of
Park Place, the assets and liabilities contributed by Hilton will be recorded at
Hilton's historical basis. In the separate financial statements of Lakes, the
assets and liabilities contributed by Grand will be recorded at Grand's
historical basis. The Merger will be accounted for using the purchase method of
accounting with Park Place as the acquiror.
APPRAISAL RIGHTS
HILTON STOCKHOLDERS
Hilton stockholders will not be entitled to appraisal rights under the DGCL
in connection with the Hilton Distribution.
GRAND SHAREHOLDERS
Under Minnesota law, Grand shareholders do not have the right to an
appraisal of the value of their shares in connection with the Grand
Distribution, but such shareholders do have the right to an appraisal of the
value of their shares in connection with the Merger.
Sections 302A.471 and 302A.473 of the MBCA entitle any Grand shareholder who
objects to the Merger and who follows the procedures prescribed by Section
302A.473, in lieu of receiving the consideration proposed under the Merger, to
receive cash equal to the "fair value" of such shareholder's shares of Grand
Common Stock. Set forth below is a summary of the procedures relating to the
exercise of such dissenters' rights. This summary does not purport to be a
complete statement of dissenters' rights and is qualified in its entirety by
reference to Sections 302A.471 and 302A.473 of the MBCA, which are reproduced in
full as Annex K attached to this Joint Proxy Statement/Prospectus and to any
amendments to such provisions as may be adopted after the date of this Joint
Proxy Statement/Prospectus. Grand shareholders do not have any rights to dissent
from and seek appraisal for their shares of Grand Common Stock solely in
connection with the Grand Distribution.
ANY GRAND SHAREHOLDER CONTEMPLATING THE POSSIBILITY OF DISSENTING FROM THE
MERGER SHOULD CAREFULLY REVIEW THE TEXT OF ANNEX K (PARTICULARLY THE SPECIFIED
PROCEDURAL STEPS REQUIRED TO PERFECT THE DISSENTERS' RIGHTS, WHICH ARE COMPLEX)
AND SHOULD ALSO CONSULT SUCH SHAREHOLDER'S LEGAL COUNSEL. SUCH RIGHTS WILL BE
LOST IF THE PROCEDURAL REQUIREMENTS OF SECTION 302A.473 OF THE MBCA ARE NOT
FULLY AND PRECISELY SATISFIED.
The MBCA provides dissenters' rights for any Grand shareholder who objects
to the Merger who meets the requisite statutory requirements contained in the
MBCA. Under the MBCA, any Grand shareholder who (i) files with Grand a written
notice of his, her or its intent to demand the fair value of such shareholder's
Grand Common Stock if the Merger is consummated and becomes effective, which
notice is filed with Grand on or before the vote is taken at the Grand Special
Meeting and (ii) does not vote such shares of Grand Common Stock at the Grand
Special Meeting in favor of the proposal to approve the Merger, shall be
entitled, if the Merger is approved and effected, to receive a cash payment of
the fair value of such shareholder's shares of Grand Common Stock upon
compliance with the applicable statutory procedural requirements. A failure by
any Grand shareholder to vote against the proposal to approve the Merger will
not in and of itself constitute a waiver of the dissenters' rights of such
shareholder under the MBCA. In addition, a Grand shareholder's vote against the
proposal to approve the Merger will not satisfy the notice requirement referred
to in clause (i) above.
Any written notice of a Grand shareholder's intent to demand payment for
such shareholder's shares of Grand Common Stock if the Merger is consummated
must be filed with Grand Casinos at 130 Cheshire
99
<PAGE>
Lane, Minnetonka, MN 55305-1062, Attention: Timothy J. Cope, prior to the vote
on the Merger at the Grand Special Meeting. A shareholder who votes for the
Merger will have no dissenters' rights. A shareholder who does not satisfy each
of the requirements of Sections 302A.471 and 302A.473 of the MBCA is not
entitled to payment for such shareholder's shares of Grand Common Stock under
the dissenters' rights provisions of the MBCA and will be bound by the terms of
the Merger Agreement.
After the proposed Merger has been approved, Grand must send written notice
to all shareholders who have given written notice of their intent to demand the
fair value of their shares of Grand Common Stock and who have not voted in favor
of the Merger as described above. The notice will contain: (i) the address where
the demand for payment and Certificates must be sent and the date by which they
must be received, (ii) any restrictions on transfer of uncertificated shares
that will apply after the demand for payment is received, (iii) a form to be
used to certify the date on which the shareholder, or the beneficial owner on
whose behalf the shareholder dissents, acquired the shares (or an interest in
them) and to demand payment, and (iv) a copy of the provisions of the MBCA set
forth in Annex K with a brief description of the procedures to be followed under
those provisions. A Grand shareholder who is sent a notice and who wishes to
assert dissenters' rights must demand payment and deposit his or her Certificate
within 30 days after such notice is given by Grand. Prior to the Effective Time,
a Grand shareholder exercising dissenters' rights retains all other rights of a
Grand shareholder. From and after the Effective Time of the Merger, dissenting
shareholders will no longer be entitled to any rights of a Grand shareholder,
including, but not limited to, the right to receive notice of meetings, to vote
at any meetings or to receive dividends, and will only be entitled to any rights
to appraisal as provided by the MBCA. If any such holder of Grand Common Stock
shall have failed to perfect or shall have effectively withdrawn or lost such
right, his or her shares of Grand Common Stock shall thereupon be deemed to have
been converted into the right to receive Park Place Common Stock and cash for
any fractional shares pursuant to the Merger Agreement.
After the Effective Time or upon receipt of a valid demand for payment,
whichever is later, Grand must remit to each dissenting shareholder who complied
with the requirements of the MBCA the amount Grand estimates to be the fair
value of such shareholder's shares of Grand Common Stock, plus interest accrued
from the Effective Time of the Merger to the date of payment. The payment also
must be accompanied by certain financial data relating to Grand, Grand's
estimate of the fair value of the shares and a description of the method used to
reach such estimate, and a copy of the applicable provisions of the MBCA with a
brief description of the procedures to be followed in demanding supplemental
payment. The dissenting shareholder may decline the offer and demand payment for
the fair value of the Grand Common Stock. Failure to make such demand on a
timely basis entitles the dissenting shareholder only to the amount offered. If
Grand fails to remit payment within 60 days of the deposit of the Certificates
or the imposition of transfer restrictions on uncertificated shares, it shall
return all deposited Certificates and cancel all transfer restrictions; however,
Grand may again give notice regarding the procedure to exercise dissenters'
rights and require deposit or restrict transfer at a later time. If a dissenting
shareholder believes that the amount remitted is less than the fair value of the
Grand Common Stock plus interest, such dissenting shareholder may give written
notice to Grand of his or her own estimate of the fair value of the shares, plus
interest, within 30 days after Grand mails its remittance, and demand payment of
the difference.
If Grand receives a demand from a dissenting shareholder to pay such
difference, it shall, within 60 days after receiving the demand, either pay to
the dissenting shareholder the amount demanded or agreed to by the dissenting
shareholder after discussion with Grand or file in court a petition requesting
that the court determine the fair value of the Grand Common Stock.
The court may appoint one or more appraisers to receive evidence and make
recommendations to the court on the amount of the fair value of the shares. The
court shall determine whether the dissenting shareholder has complied with the
requirements of Section 302A.473 of the MBCA and shall determine the fair value
of the shares, taking into account any and all factors the court finds relevant,
computed by
100
<PAGE>
any method or combination of methods that the court, in its discretion, sees fit
to use. The fair value of the shares as determined by the court is binding on
all dissenting shareholders and may be less than, equal to or greater than the
market price of the Park Place Common Stock to be issued to non-dissenting
shareholders for their shares of Grand Common Stock if the Merger is completed.
If the court determines that the fair value of the shares is in excess of the
amount, if any, remitted by Grand, then the court will enter a judgment for cash
in favor of the dissenting shareholders in an amount by which the value
determined by the court, plus interest, exceeds such amount previously remitted.
A dissenting shareholder will not be liable to Grand if the amount, if any,
remitted to such shareholder exceeds the fair value of the shares, as determined
by the court, plus interest.
Costs of the court proceeding shall be determined by the court and assessed
against Grand, except that part or all of the costs may be assessed against any
dissenting shareholders whose actions in demanding supplemental payments are
found by the court to be arbitrary, vexatious or not in good faith.
If the court finds that Grand did not substantially comply with the relevant
provisions of the MBCA, the court may assess the fees and expenses, if any, of
attorneys or experts as the court deems equitable against Grand. Such fees and
expenses may also be assessed against any party in bringing the proceedings if
the court finds that such party has acted arbitrarily, vexatiously or not in
good faith, and may be awarded to a party injured by those actions. The court
may award, in its discretion, fees and expenses of an attorney for the
dissenting shareholders out of the amount awarded to such shareholders, if any.
A shareholder of record may assert dissenters' rights as to fewer than all
of the shares registered in such shareholder's name only if he or she dissents
with respect to all shares beneficially owned by any one beneficial shareholder
and notifies Grand in writing of the name and address of each person on whose
behalf he or she asserts dissenters' rights. The rights of such a partial
dissenting shareholder are determined as if the shares as to which he or she
dissents and his or her other shares were registered in the names of different
shareholders.
Under Subdivision 4 of Section 302A.471 of the MBCA, a Grand shareholder has
no right, at law or in equity, to set aside the approval of the Merger Agreement
or the consummation of the Merger except if such adoption or consummation was
fraudulent with respect to such shareholder or Grand.
CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus and the documents incorporated by
reference in this Joint Proxy Statement/Prospectus contain forward-looking
statements with respect to Hilton, Park Place, Grand and Lakes (collectively,
the "Companies"), that are subject to risks and uncertainties. These statements
are based on the Companies' respective management's beliefs and assumptions,
based on information currently available to management. Forward-looking
statements include the information concerning plans, strategies, objectives,
expectations and intentions of the Companies with respect to the consummation of
the Transactions, the ownership, management and operation of hotels and casinos
following consummation of the Transactions, supply and customer demand and
trends affecting the financial condition, results of operation and the adequacy
of resources of the Companies set forth (i) under "Summary," "Recent
Developments," "The Transactions," "Unaudited Pro Forma Financial Information,"
"Background and Reasons," "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Park Place," "Management's Discussion and
Analysis of Financial Condition and Results of Operations-- Lakes," "Business
and Properties of Park Place" and "Business and Properties of Lakes" in this
Joint Proxy Statement/Prospectus (ii) under "General Information," "Hotel
Operations," "Gaming Operations" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--Fiscal
1997 Compared with Fiscal 1996," in Hilton's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Hilton's Quarterly
Reports on Form 10-Q incorporated by
101
<PAGE>
reference into this document, (iii) under "Mississippi Casinos," "Minnesota
Casinos," "Louisiana Casinos," "Indian Gaming," "Competition" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Grand's Annual Report on Form 10-K for the fiscal year ended December 28, 1997
and under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Grand's Quarterly Reports on Form 10-Q incorporated
herein by reference, and (iv) in this document and the documents incorporated
herein by reference and preceded by, followed by or that include the words
"believes," "expects," "anticipates," "intends," "plans," "estimates" or similar
expressions.
The future results and stockholder values of the Companies may differ
materially from those expressed in these forward-looking statements. Many of the
factors that will determine these results and values are beyond the Companies'
ability to control or predict. Shareholders are cautioned not to put undue
reliance on any forward-looking statements.
Stockholders of the Companies should understand that the following important
factors, in addition to those discussed under (i) "Risk Factors" in this Joint
Proxy Statement/Prospectus, (ii) those identified in Hilton's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 under the captions
"Additional Information--Business Risks," "Competition," "Gaming Operations" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Fiscal 1997 compared with Fiscal 1996," and
(iii) those identified in Grand's Annual Report on Form 10-K for the fiscal year
ended December 28, 1997 under the captions "Indian Gaming," "Competition,"
"Regulation," "Indian Gaming," Certain Factors," "Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" could affect the future results of the Companies and could cause
results to differ materially from those expressed in such forward-looking
statements: (a) the effect of economic conditions; (b) the ability of Park Place
and Grand to integrate successfully their operations; (c) the impact of
competition and (d) customer demand.
102
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
HILTON HOTELS CORPORATION
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma statements of income and balance sheet of Hilton
illustrate the estimated effects of the Hilton Distribution. The unaudited pro
forma balance sheet of Hilton as of June 30, 1998 presents the financial
position of Hilton as if the Hilton Distribution had been completed as of such
date. The unaudited pro forma income statements of Hilton for the six month
periods ended June 30, 1998 and 1997 and the years ended December 31, 1997, 1996
and 1995 present the results of operations of Hilton as if the Hilton
Distribution had been completed as of January 1, 1995.
The unaudited pro forma financial statements of Hilton and Notes thereto
should be read in conjunction with the Hilton consolidated financial statements
contained in the Hilton Hotels Corporation Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and the Hilton Hotels Corporation Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1998, each of which
are incorporated herein by reference. See "Where You Can Find More Information."
The pro forma financial data of Hilton does not purport to represent what
the financial position or results of operations would have been if the Hilton
Distribution had in fact been consummated on such date or at the beginning of
the period indicated or to project the financial position or results of
operations for any future date or period. The pro forma adjustments are based
upon available information and upon certain assumptions that Hilton's management
believes are reasonable in the circumstances.
103
<PAGE>
HILTON HOTELS CORPORATION
UNAUDITED PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTED PRO FORMA PRO FORMA
HILTON HOTELS PRESENTATION HILTON HOTELS SPIN-OFF HILTON HOTELS
CORPORATION ADJUSTMENT(1) CORPORATION ADJUSTMENTS(2) CORPORATION
------------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue
Rooms................................ $ 1,905 $ (814) $ 1,091 $ (312) $ 779
Food and beverage.................... 988 (466) 522 (216) 306
Casino............................... 1,832 (382) 1,450 (1,450) --
Other products and services.......... 591 (34) 557 (167) 390
------ ------ ------ ------ ------
5,316 (1,696) 3,620 (2,145) 1,475
------ ------ ------ ------ ------
Expenses
Rooms................................ 524 (209) 315 (110) 205
Food and beverage.................... 776 (346) 430 (191) 239
Casino............................... 1,000 (230) 770 (770) --
Other expenses....................... 2,340 (911) 1,429 (858) 571
Corporate expense.................... 80 -- 80 (15) 65
------ ------ ------ ------ ------
4,720 (1,696) 3,024 (1,944) 1,080
------ ------ ------ ------ ------
Operating income....................... 596 -- 596 (201) 395
Interest and dividend income......... 42 -- 42 (25) 17
Interest expense..................... (172) -- (172) 82(3) (90)
Interest expense, net, from equity
investments........................ (18) -- (18) 10 (8)
------ ------ ------ ------ ------
Income from continuing operations
before income tax and minority
interest............................. 448 -- 448 (134) 314
Provision for income taxes........... (187) -- (187) 63 (124)
Minority interest, net............... (11) -- (11) 4 (7)
------ ------ ------ ------ ------
Income from continuing operations...... $ 250 $ -- $ 250 $ (67) $ 183
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Income from continuing operations per
share:
Basic................................ $ .95 $ .95 $ .69
------ ------ ------
------ ------ ------
Diluted.............................. $ .94 $ .94 $ .67
------ ------ ------
------ ------ ------
Weighted average common and equivalent
shares(4):
Basic................................ 250 250 263
------ ------ ------
------ ------ ------
Diluted.............................. 281 281 293(5)
------ ------ ------
------ ------ ------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
104
<PAGE>
HILTON HOTELS CORPORATION
UNAUDITED PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTED PRO FORMA PRO FORMA
HILTON HOTELS PRESENTATION HILTON HOTELS SPIN-OFF HILTON HOTELS
CORPORATION ADJUSTMENT(1) CORPORATION ADJUSTMENTS(2) CORPORATION
------------- -------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue
Rooms.............................. $ 1,734 $ (1,061) $ 673 $ (232) $ 441
Food and beverage.................. 857 (551) 306 (138) 168
Casino............................. 857 (371) 486 (486) --
Other products and services........ 492 (52) 440 (102) 338
------ ------- ------ ------ ------
3,940 (2,035) 1,905 (958) 947
------ ------- ------ ------ ------
Expenses
Rooms.............................. 508 (300) 208 (81) 127
Food and beverage.................. 674 (417) 257 (123) 134
Casino............................. 466 (207) 259 (259) --
Other expenses..................... 1,911 (1,111) 800 (394) 406
Corporate expense.................. 52 -- 52 (9) 43
------ ------- ------ ------ ------
3,611 (2,035) 1,576 (866) 710
------ ------- ------ ------ ------
Operating income..................... 329 -- 329 (92) 237
Interest and dividend income....... 38 -- 38 (12) 26
Interest expense................... (88) -- (88) 36(3) (52)
Interest expense, net, from equity
investments...................... (12) -- (12) 5 (7)
------ ------- ------ ------ ------
Income from continuing operations
before income tax and minority
interest........................... 267 -- 267 (63) 204
Provision for income taxes......... (106) -- (106) 27 (79)
Minority interest, net............. (5) -- (5) -- (5)
------ ------- ------ ------ ------
Income from continuing operations.... $ 156 $ -- $ 156 $ (36) $ 120
------ ------- ------ ------ ------
------ ------- ------ ------ ------
Income from continuing operations per
share:
Basic.............................. $ .79 $ .79 $ .61
------ ------ ------
------ ------ ------
Diluted............................ $ .79 $ .79 $ .60
------ ------ ------
------ ------ ------
Weighted average common and
equivalent shares(4):
Basic.............................. 197 197 198
------ ------ ------
------ ------ ------
Diluted............................ 209 209 217(5)
------ ------ ------
------ ------ ------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
105
<PAGE>
HILTON HOTELS CORPORATION
UNAUDITED PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTED PRO FORMA PRO FORMA
HILTON HOTELS PRESENTATION HILTON HOTELS SPIN-OFF HILTON HOTELS
CORPORATION ADJUSTMENT(1) CORPORATION ADJUSTMENTS(2) CORPORATION
------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue
Rooms.............................. $ 1,562 $ (975) $ 587 $ (215) $ 372
Food and beverage.................. 782 (516) 266 (124) 142
Casino............................. 791 (280) 511 (511) --
Other products and services........ 420 (135) 285 (84) 201
------ ------ ------ ------ ------
3,555 (1,906) 1,649 (934) 715
------ ------ ------ ------ ------
Expenses
Rooms.............................. 484 (298) 186 (76) 110
Food and beverage.................. 625 (396) 229 (114) 115
Casino............................. 400 (165) 235 (235) --
Other expenses..................... 1,659 (1,047) 612 (336) 276
Corporate expense.................. 32 -- 32 (8) 24
------ ------ ------ ------ ------
3,200 (1,906) 1,294 (769) 525
------ ------ ------ ------ ------
Operating income..................... 355 -- 355 (165) 190
Interest and dividend income....... 35 -- 35 (7) 28
Interest expense................... (93) -- (93) 39(3) (54)
Interest expense, net, from equity
investments...................... (17) -- (17) 2 (15)
------ ------ ------ ------ ------
Income from continuing operations
before income tax and minority
interest........................... 280 -- 280 (131) 149
Provision for income taxes......... (102) -- (102) 46 (56)
Minority interest, net............. (5) -- (5) -- (5)
------ ------ ------ ------ ------
Income from continuing operations.... $ 173 $ -- $ 173 $ (85) $ 88
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Income from continuing operations per
share:
Basic.............................. $ .90 $ .90 $ .46
------ ------ ------
------ ------ ------
Diluted............................ $ .89 $ .89 $ .45
------ ------ ------
------ ------ ------
Weighted average common and
equivalent shares:
Basic.............................. 193 193 193
------ ------ ------
------ ------ ------
Diluted............................ 195 195 195
------ ------ ------
------ ------ ------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
106
<PAGE>
HILTON HOTELS CORPORATION
UNAUDITED PRO FORMA STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTED PRO FORMA PRO FORMA
HILTON HOTELS PRESENTATION HILTON HOTELS SPIN-OFF HILTON HOTELS
CORPORATION ADJUSTMENT(1) CORPORATION ADJUSTMENTS(2) CORPORATION
------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue
Rooms.............................. $ 992 $ (408) $ 584 $ (156) $ 428
Food and beverage.................. 543 (234) 309 (115) 194
Casino............................. 975 (198) 777 (777) --
Other products and services........ 299 (2) 297 (96) 201
------ ------ ------ ------ ------
2,809 (842) 1,967 (1,144) 823
------ ------ ------ ------ ------
Expenses
Rooms.............................. 258 (99) 159 (54) 105
Food and beverage.................. 416 (168) 248 (103) 145
Casino............................. 521 (108) 413 (413) --
Other expenses..................... 1,160 (467) 693 (383) 310
Corporate expense.................. 31 -- 31 (4) 27
------ ------ ------ ------ ------
2,386 (842) 1,544 (957) 587
------ ------ ------ ------ ------
Operating income..................... 423 -- 423 (187) 236
Interest and dividend income....... 18 -- 18 (14) 4
Interest expense................... (103) -- (103) 43(3) (60)
Interest expense, net, from equity
investments...................... (9) -- (9) 6 (3)
------ ------ ------ ------ ------
Income from continuing operations
before income tax and minority
interest........................... 329 -- 329 (152) 177
Provision for income taxes......... (141) -- (141) 70 (71)
Minority interest, net............. (5) -- (5) 2 (3)
------ ------ ------ ------ ------
Income from continuing operations.... $ 183 $ -- $ 183 $ (80) $ 103
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Income from continuing operations per
share:
Basic.............................. $ .71 $ .71 $ .40
------ ------ ------
------ ------ ------
Diluted............................ $ .68 $ .68 $ .38
------ ------ ------
------ ------ ------
Weighted average common and
equivalent shares(4):
Basic.............................. 247 247 261
------ ------ ------
------ ------ ------
Diluted............................ 279 279 291(5)
------ ------ ------
------ ------ ------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
107
<PAGE>
HILTON HOTELS CORPORATION
UNAUDITED PRO FORMA STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTED PRO FORMA PRO FORMA
HILTON HOTELS PRESENTATION HILTON HOTELS SPIN-OFF HILTON HOTELS
CORPORATION ADJUSTMENT(1) CORPORATION ADJUSTMENTS(2) CORPORATION
------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue
Rooms.............................. $ 962 $ (428) $ 534 $ (159) $ 375
Food and beverage.................. 513 (258) 255 (104) 151
Casino............................. 898 (208) 690 (690) --
Other products and services........ 290 (9) 281 (87) 194
------ ------ ------ ------ ------
2,663 (903) 1,760 (1,040) 720
------ ------ ------ ------ ------
Expenses
Rooms.............................. 260 (106) 154 (55) 99
Food and beverage.................. 394 (186) 208 (91) 117
Casino............................. 484 (116) 368 (368) --
Other expenses..................... 1,130 (495) 635 (362) 273
Corporate expense.................. 35 -- 35 (11) 24
------ ------ ------ ------ ------
2,303 (903) 1,400 (887) 513
------ ------ ------ ------ ------
Operating income..................... 360 -- 360 (153) 207
Interest and dividend income....... 23 -- 23 (10) 13
Interest expense................... (88) -- (88) 46(3) (42)
Interest expense, net, from equity
investments...................... (9) -- (9) 5 (4)
------ ------ ------ ------ ------
Income from continuing operations
before income tax and minority
interest........................... 286 -- 286 (112) 174
Provision for income taxes......... (118) -- (118) 46 (72)
Minority interest, net............. (7) -- (7) 3 (4)
------ ------ ------ ------ ------
Income from continuing operations.... $ 161 $ -- $ 161 $ (63) $ 98
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Income from continuing operations per
share:
Basic.............................. $ .62 $ .62 $ .37
------ ------ ------
------ ------ ------
Diluted............................ $ .60 $ .60 $ .36
------ ------ ------
------ ------ ------
Weighted average common and
equivalent shares(4):
Basic.............................. 249 249 263
------ ------ ------
------ ------ ------
Diluted............................ 280 280 293(5)
------ ------ ------
------ ------ ------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
108
<PAGE>
HILTON HOTELS CORPORATION
UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
ADJUSTED PRO FORMA
PRO FORMA HILTON PRO FORMA HILTON
HILTON HOTELS PRESENTATION HOTELS SPIN-OFF HOTELS
CORPORATION ADJUSTMENT(1) CORPORATION ADJUSTMENTS(2) CORPORATION
------------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents............... $ 316 $ (81) $ 235 $ (132) $ 103
Temporary investments.............. 32 (32) -- -- --
Accounts receivable, net........... 429 (113) 316 (114) 202
Other current assets............... 257 (55) 202 (99) 103
------ ------- ------------ ------- ------------
Total current assets............... 1,034 (281) 753 (345) 408
Investments.......................... 712 -- 712 436(3) 1,148
Property and equipment, net.......... 5,815 -- 5,815 (3,875) 1,940
Goodwill............................. 1,326 -- 1,326 (1,317) 9
Other assets......................... 118 -- 118 (61) 57
------ ------- ------------ ------- ------------
Total investments, property and
other assets..................... 7,971 -- 7,971 (4,817) 3,154
------ ------- ------------ ------- ------------
Total assets......................... $ 9,005 $ (281) $ 8,724 $ (5,162) $ 3,562
------ ------- ------------ ------- ------------
------ ------- ------------ ------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
expenses........................... $ 845 $ (281) $ 564 $ (267)(7) $ 297
Current maturities of long-term
debt............................... 65 -- 65 (34) 31
Income taxes payable................. 44 -- 44 (9)(7) 35
------ ------- ------------ ------- ------------
Total current liabilities.......... 954 (281) 673 (310) 363
Long-term debt....................... 3,763 -- 3,763 (934)(3) 2,829
Deferred income taxes................ 612 -- 612 (565) 47
Insurance reserves and other......... 225 -- 225 (53) 172
------ ------- ------------ ------- ------------
Total liabilities.................. 5,554 (281) 5,273 (1,862) 3,411
Stockholders' equity................. 3,451 -- 3,451 (3,300)(7) 151
------ ------- ------------ ------- ------------
Total liabilities and stockholders'
equity............................. $ 9,005 $ (281) $ 8,724 $ (5,162) $ 3,562
------ ------- ------------ ------- ------------
------ ------- ------------ ------- ------------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
109
<PAGE>
HILTON HOTELS CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENTS
(1) On November 20, 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus in EITF 97-2 "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice
Management Entities and Certain Other Entities with Contractual Management
Arrangements." EITF 97-2 addresses the circumstances in which a management
entity may include the revenues and expenses of a managed entity in its
financial statements.
Upon the adoption of EITF 97-2, which is expected to be in the fourth quarter
of 1998, Hilton will no longer include in its financial statements the
revenues, operating expenses and working capital of its managed properties.
This pro forma adjustment reflects the application of EITF 97-2 to Hilton's
historical financial statements. Application of EITF 97-2 has no impact on
pro forma operating income, net income, earnings per share or stockholders'
equity.
(2) Represents the results of Park Place which will be reflected as discontinued
operations after the Hilton Distribution.
(3) A pro-rata portion of Hilton's public and corporate bank debt balance and
related interest expense has been allocated to Park Place. The amounts
allocated to Park Place are based on the estimate that approximately 50% of
Hilton's public and corporate bank debt balance will be allocated to Park
Place at the time of the Hilton Distribution. Hilton will be obligated to
make any payment Park Place fails to make with respect to $623 million, net
of discount, of senior notes which Park Place will assume pursuant to a debt
assumption agreement. Park Place will be obligated to reimburse Hilton for
any payments made on its behalf. As a result, these notes have been included
in the pro forma Hilton long-term debt balance and a related receivable from
Park Place has been included in Hilton's pro forma investments balance.
(4) Pro forma weighted average common and equivalent shares assume the
conversion of Hilton's Preferred Redeemable Increased Dividend Equity
Securities-SM- , 8% PRIDES-SM- , Convertible Preferred Stock ("PRIDES") as
of the date of original issuance in December 1996.
(5) The Hilton Distribution will result in an adjustment to the conversion price
of Hilton's 5% Convertible Subordinated Notes due 2006, which will
effectively increase the number of shares of Hilton Common Stock issuable
upon conversion. This increase has been reflected in the pro forma diluted
common and equivalent shares.
(6) Represents the removal of the assets and liabilities of Park Place as a
result of the Hilton Distribution.
(7) Includes the portion of the estimated costs of the Hilton Distribution to be
paid by Hilton totaling $12 million (before tax benefit of $5 million).
110
<PAGE>
NEW PARK PLACE
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma statements of income and balance sheet of Park Place
illustrate the estimated effects of the Hilton Distribution. The unaudited pro
forma balance sheet of Park Place as of June 30, 1998 presents the financial
position of Park Place as if the Hilton Distribution had been completed as of
such date. The unaudited pro forma income statements of Park Place for the six
month periods ended June 30, 1998 and 1997 and the year ended December 31, 1997
present the results of operations of Park Place as if the Hilton Distribution
had been completed as of January 1, 1997. The unaudited pro forma financial data
of Park Place and notes thereto should be read in conjunction with the audited
Park Place consolidated financial statements and notes thereto which are
included elsewhere in this Joint Proxy Statement/Prospectus.
The unaudited pro forma statements of income and balance sheet of New Park
Place are based upon the pro forma financial statements of Park Place and the
pro forma financial statements of Grand, which are included elsewhere in this
Joint Proxy Statement/Prospectus, and should be read in conjunction with those
pro forma financial statements and related notes.
The unaudited pro forma statements of income of New Park Place for the six
month periods ended June 30, 1998 and 1997 and the year ended December 31, 1997
give effect to (i) the acquisition of Grand applying the purchase method of
accounting; and (ii) certain adjustments that are directly attributable to the
Merger as if such transactions were consummated as of January 1, 1997.
The unaudited pro forma balance sheet of New Park Place presents the
combined financial position of Park Place and Grand as of June 30, 1998. The
unaudited pro forma balance sheet reflects (i) the acquisition of Grand applying
the purchase method of accounting; and (ii) certain adjustments that are
directly attributable to the Merger. Such data further assume that the
transactions described above were consummated as of June 30, 1998.
The pro forma financial data of Park Place and New Park Place do not purport
to represent what the financial position or results of operations of Park Place
and New Park Place would have been if the Hilton Distribution, Grand
Distribution and Merger had in fact been consummated on such date or at the
beginning of the period indicated or to project the financial position or
results of operations for any future date or period. The pro forma adjustments
are based upon available information and upon certain assumptions that Park
Place and Grand management believe are reasonable in the circumstances. In the
opinion of management, all adjustments necessary to present fairly the unaudited
pro forma financial information have been made.
For the purposes of preparing the financial statements of New Park Place,
management of Park Place will undertake a study to establish the fair value of
the acquired assets and liabilities of Grand. The allocation of the purchase
price to the assets and liabilities acquired reflected in this pro forma
financial data is preliminary. Accordingly, the actual financial position and
results of operations may differ from these pro forma amounts.
111
<PAGE>
NEW PARK PLACE
UNAUDITED PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO PRO FORMA
HISTORICAL PRO FORMA PRO FORMA FORMA NEW PARK
PARK PLACE ADJUSTMENTS PARK PLACE GRAND(2) PLACE(1)
---------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Revenue
Casino........................... $1,832 $ (382)(3) $1,450 $463 $1,913
Rooms............................ 325 (13)(3) 312 26 338
Food and beverage................ 267 (51)(3) 216 28 244
Other products and services...... 148 19(3) 167 12 179
---------- ----------- ---------- -------- ----------
2,572 (427) 2,145 529 2,674
---------- ----------- ---------- -------- ----------
Expenses
Casino........................... 1,000 (230)(3) 770 161 931
Rooms............................ 115 (5)(3) 110 8 118
Food and beverage................ 231 (40)(3) 191 33 224
Other expenses................... 1,010 (152)(3) 858 238 1,096
Corporate expense................ 15 10(4) 25 18 43
---------- ----------- ---------- -------- ----------
2,371 (417) 1,954 458 2,412
---------- ----------- ---------- -------- ----------
Operating income................... 201 (10) 191 71 262
Interest and dividend income..... 25 -- 25 7 32
Interest expense................. (82) -- (82) (46) (128)
Interest expense, net, from
equity investments............. (10) -- (10) -- (10)
---------- ----------- ---------- -------- ----------
Income from continuing operations
before income tax and minority
interest......................... 134 (10) 124 32 156
Provision for income taxes....... (63) 4(5) (59) (11) (70)
Minority interest, net........... (4) -- (4) -- (4)
---------- ----------- ---------- -------- ----------
Income from continuing
operations....................... $ 67 $ (6) $ 61 $ 21 $ 82
---------- ----------- ---------- -------- ----------
---------- ----------- ---------- -------- ----------
Income from continuing operations
per share:
Basic............................ $ .23 $ .27
---------- ----------
---------- ----------
Diluted.......................... $ .23 $ .26
---------- ----------
---------- ----------
Weighted average common and
equivalent shares(6):
Basic............................ 263 307
---------- ----------
---------- ----------
Diluted.......................... 266 310
---------- ----------
---------- ----------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
112
<PAGE>
NEW PARK PLACE
UNAUDITED PRO FORMA STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL PRO FORMA PARK PRO FORMA NEW PARK
PARK PLACE ADJUSTMENTS PLACE GRAND(2) PLACE(1)
---------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
Revenue
Casino................................ $ 975 $ (198)(3) $ 777 $247 $1,024
Rooms................................. 165 (9)(3) 156 16 172
Food and beverage..................... 138 (23)(3) 115 17 132
Other products and services........... 77 19(3) 96 6 102
---------- ----------- --------- --------- ------
1,355 (211) 1,144 286 1,430
---------- ----------- --------- --------- ------
Expenses
Casino................................ 521 (108)(3) 413 82 495
Rooms................................. 57 (3)(3) 54 7 61
Food and beverage..................... 121 (18)(3) 103 19 122
Other expenses........................ 465 (82)(3) 383 125 508
Corporate expense..................... 4 5(4) 9 14 23
---------- ----------- --------- --------- ------
1,168 (206) 962 247 1,209
---------- ----------- --------- --------- ------
Operating income........................ 187 (5) 182 39 221
Interest and dividend income.......... 14 -- 14 3 17
Interest expense...................... (43) -- (43) (24) (67)
Interest expense, net, from equity
investments......................... (6) -- (6) -- (6)
---------- ----------- --------- --------- ------
Income from continuing operations before
income tax and minority interest...... 152 (5) 147 18 165
Provision for income taxes............ (70) 2(5) (68) (6) (74)
Minority interest, net................ (2) -- (2) -- (2)
---------- ----------- --------- --------- ------
Income from continuing operations....... $ 80 $ (3) $ 77 $ 12 $ 89
---------- ----------- --------- --------- ------
---------- ----------- --------- --------- ------
Income from continuing operations per
share:
Basic................................. $ .30 $ .29
--------- ------
--------- ------
Diluted............................... $ .29 $ .29
--------- ------
--------- ------
Weighted average common and equivalent
shares(6):
Basic................................. 261 304
--------- ------
--------- ------
Diluted............................... 264 308
--------- ------
--------- ------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
113
<PAGE>
NEW PARK PLACE
UNAUDITED PRO FORMA STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL PRO FORMA PARK PRO FORMA NEW PARK
PARK PLACE ADJUSTMENTS PLACE GRAND(2) PLACE(1)
---------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
Revenue
Casino........................... $ 898 $ (208)(3) $ 690 $222 $ 912
Rooms............................ 165 (6)(3) 159 12 171
Food and beverage................ 129 (25)(3) 104 14 118
Other products and services...... 76 11(3) 87 6 93
---------- ----------- --------- --------- ------
1,268 (228) 1,040 254 1,294
---------- ----------- --------- --------- ------
Expenses
Casino........................... 484 (116)(3) 368 78 446
Rooms............................ 57 (2)(3) 55 4 59
Food and beverage................ 111 (20)(3) 91 17 108
Other expenses................... 452 (90)(3) 362 113 475
Corporate expense................ 11 5(4) 16 7 23
---------- ----------- --------- --------- ------
1,115 (223) 892 219 1,111
---------- ----------- --------- --------- ------
Operating income................... 153 (5) 148 35 183
Interest and dividend income..... 10 -- 10 3 13
Interest expense................. (46) -- (46) (23) (69)
Interest expense, net, from
equity investments............. (5) -- (5) -- (5)
---------- ----------- --------- --------- ------
Income from continuing operations
before income tax and minority
interest......................... 112 (5) 107 15 122
Provision for income taxes....... (46) 2(5) (44) (5) (49)
Minority interest, net........... (3) -- (3) -- (3)
---------- ----------- --------- --------- ------
Income from continuing
operations....................... $ 63 $ (3) $ 60 $ 10 $ 70
---------- ----------- --------- --------- ------
---------- ----------- --------- --------- ------
Income from continuing operations
per share:
Basic............................ $ .23 $ .23
--------- ------
--------- ------
Diluted.......................... $ .23 $ .23
--------- ------
--------- ------
Weighted average common and
equivalent shares(6):
Basic............................ 263 307
--------- ------
--------- ------
Diluted.......................... 265 309
--------- ------
--------- ------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
114
<PAGE>
NEW PARK PLACE
UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL PRO FORMA PRO FORMA PRO FORMA MERGER PRO FORMA
PARK PLACE ADJUSTMENTS PARK PLACE GRAND(2) ADJUSTMENTS NEW PARK PLACE
----------- ------------- ----------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents...... $ 148 $ (16)(3) $ 132 $ 60 $ -- $ 192
Temporary investments..... 2 (2)(3) -- -- -- --
Accounts receivable,
net..................... 133 (19)(3) 114 11 -- 125
Other current assets...... 111 (12)(3) 99 23 36(9) 158
----------- ------------- ----------- ----------- ----- ------
Total current assets...... 394 (49) 345 94 36 475
Investments................. 187 -- 187 -- -- 187
Property and equipment,
net....................... 3,875 -- 3,875 1,031 -- 4,906
Goodwill.................... 1,317 -- 1,317 -- -- 1,317
Other assets................ 61 -- 61 35 (22)(10) 74
----------- ------------- ----------- ----------- ----- ------
Total investments,
property and other
assets.................. 5,440 -- 5,440 1,066 (22) 6,484
----------- ------------- ----------- ----------- ----- ------
Total assets................ $ 5,834 $ (49) $ 5,785 $ 1,160 $ 14 $ 6,959
----------- ------------- ----------- ----------- ----- ------
----------- ------------- ----------- ----------- ----- ------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable and accrued
expenses.................. $ 328 $ (37)(3 (7) $ 291 $ 76 $ 26 (11 $ 393
Current maturities of
long-term debt............ 34 -- 34 -- -- 34
Income taxes payable........ 4 (5)(7) (1) -- -- (1)
----------- ------------- ----------- ----------- ----- ------
Total current
liabilities............. 366 (42) 324 76 26 426
Long-term debt.............. 1,557 -- 1,557 566 52 (12 2,175
Deferred income taxes....... 565 -- 565 96 -- 661
Insurance reserves and
other..................... 53 -- 53 -- -- 53
----------- ------------- ----------- ----------- ----- ------
Total liabilities......... 2,541 (42) 2,499 738 78 3,315
Division equity............. 3,293 (3,293)(8) -- -- -- --
Stockholders' equity........ -- 3,286(8) 3,286 422 (64) 13) 3,644
----------- ------------- ----------- ----------- ----- ------
Total liabilities and
stockholders' equity...... $ 5,834 $ (49) $ 5,785 $ 1,160 $ 14 $ 6,959
----------- ------------- ----------- ----------- ----- ------
----------- ------------- ----------- ----------- ----- ------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
115
<PAGE>
NEW PARK PLACE
NOTES TO UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENTS
The following table sets forth the determination and allocation of the
purchase price of Grand's Mississippi Business. The number of shares of Park
Place to be issued to Grand shareholders will be determined by an exchange ratio
based upon a valuation factor for Grand's Mississippi Business and Park Place.
For purposes of the pro forma financial statements, the exchange ratio is .9699.
The value of the Park Place shares to be issued to Grand shareholders will be
based on the trading value of those shares immediately prior to the merger. For
purposes of the pro forma financial statements, the value of Park Place shares
to be issued to Grand shareholders is based on an estimated allocation
percentage of the average trading value of Hilton's common stock for the month
of September 1998.
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Net equity purchase price............... $ 358
Assumption of Mississippi Business
debt.................................. 566
Transaction costs and expenses.......... 11
------
Pro forma purchase price................ $ 935
------
------
</TABLE>
The preliminary allocation of the pro forma purchase price is as follows:
<TABLE>
<CAPTION>
<S> <C>
Property and equipment.................. $1,031
Other, net.............................. (96)
------
$ 935
------
------
</TABLE>
(1) Pro forma results of New Park Place do not reflect any cost savings or
operating efficiencies which may be achievable to the combined company. Park
Place expects to realize annual pretax cost savings of approximately $8
million, primarily due to the elimination of duplicative corporate office
and operational support functions and greater purchasing economies of scale.
However, there can be no assurance as to the amount and timing of these
savings, which could be adversely impacted by difficulties in integrating
the two companies or the inability to realize anticipated purchasing
economies.
In addition, pro forma results do not reflect the anticipated refinancing of
the Grand debt. Park Place expects to achieve annual pretax interest expense
savings of approximately $14 million by refinancing the Grand debt with a
combination of fixed and floating rate debt at an average rate of
approximately 6.7%. There can be no assurance, however, that Park Place will
be able to obtain such financing.
(2) There are no significant adjustments required to the historical financial
data of Pro Forma Grand to conform to the accounting policies of Park Place.
Certain reclassifications have been made to the historical balances of Grand
to conform the financial presentation of the two entities. Specifically,
casino allowances have been reclassified as reductions of the appropriate
revenue categories, selling, general and administrative expenses have been
reclassified to other expenses and corporate expense, and amortization of
debt issuance costs has been reclassified to interest expense.
(3) On November 20, 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus in EITF 97-2 "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice
Management Entities and Certain Other Entities with Contractual Management
Arrangements." EITF 97-2 addresses the circumstances in which a management
entity may include the revenues and expenses of a managed entity in its
financial statements.
116
<PAGE>
NEW PARK PLACE
NOTES TO UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Upon the adoption of EITF 97-2, which is expected to be in the fourth quarter
of 1998, Park Place will no longer include in its financial statements the
revenues, operating expenses and working capital of its managed properties.
This pro forma adjustment reflects the application of EITF 97-2 to Park
Place's historical financial statements. Application of EITF 97-2 has no
impact on pro forma operating income, net income, earnings per share or
stockholders' equity.
(4)Represents additional corporate expense expected to be incurred by Park Place
to operate as a separate public company. These costs include, among other
things, an accounting, tax and financial reporting group, a treasury and
investor relations department, a general counsel, an expanded human resources
group and a separate Board of Directors.
(5) To record the tax effect of the pro forma adjustment for additional
corporate expenses.
(6) Weighted average common and equivalent shares assume the conversion of the
PRIDES as of the date of original issuance.
(7) Includes the portion of the estimated costs of the Hilton Distribution to be
paid by Park Place totaling $12 million (before tax benefit of $5 million).
(8) Reflects the issuance of approximately 260 million shares of Park Place
Common Stock at the time of the Hilton Distribution and the after tax impact
of the estimated costs of the Hilton Distribution to be paid by Park Place.
(9) To record the deferred tax effect of the pro forma balance sheet
adjustments, primarily related to debt and estimated severance costs.
(10) Reflects deferred financing costs and other deferred costs of Grand not
valued in purchase accounting.
(11) Reflects the accrual of severance costs relating to certain Grand employees
and direct merger costs of Park Place and Grand. Severance costs include
change of control benefits for certain Grand executives and termination
benefits related to the elimination of duplicative corporate office and
operational support functions.
(12) To adjust the Grand debt to estimated fair market value based on quoted
market prices at June 30, 1998.
(13) The net increase in stockholders' equity results from (i) the issuance of
an estimated $358 million in Park Place equity consideration in connection
with the Merger and (ii) the elimination of Grand's historical net assets.
117
<PAGE>
GRAND CASINOS, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma statements of income and balance sheet of Grand
illustrate the estimated effects of the Grand Distribution. The unaudited pro
forma balance sheet of Grand as of June 28, 1998 presents the financial position
of Grand as if the Grand Distribution had been completed as of such date. The
unaudited pro forma income statements of Grand for the six month periods ended
June 29, 1998 and June 27, 1997 and the years ended December 28, 1997, December
29, 1996 and December 31, 1995 present the results of operations of Grand as if
the Grand Distribution had been completed as of January 2, 1995.
The unaudited pro forma financial data of Grand and notes thereto should be
read in conjunction with the Grand consolidated financial statements contained
in the Grand Casinos, Inc. Annual Report on Form 10-K for the fiscal year ended
December 28, 1997 and the Grand Casinos, Inc. Quarterly Report on Form 10-Q for
the fiscal quarter ended June 28, 1998, each of which are incorporated herein by
reference.
The pro forma financial data of Grand does not purport to represent what the
financial position or results of operations of Grand would have been if the
Grand Distribution had in fact been consummated on such date or at the beginning
of the period indicated or to project the financial position or results of
operations for any future date or period. The pro forma adjustments are based
upon available information and upon certain assumptions that Grand's management
believes are reasonable in the circumstances.
118
<PAGE>
GRAND CASINOS, INC.
UNAUDITED PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 28, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
GRAND SPIN-OFF GRAND
CASINOS, INC.(1) ADJUSTMENTS(2) CASINOS, INC.
---------------- -------------- -------------
<S> <C> <C> <C>
Revenue
Casino................................ $ 463 $ -- $463
Rooms................................. 26 -- 26
Food and beverage..................... 28 -- 28
Other products and services........... 90 (78) 12
------ ----- -----
607 (78) 529
------ ----- -----
Expenses
Casino................................ 161 -- 161
Rooms................................. 8 -- 8
Food and beverage..................... 33 -- 33
Other expenses........................ 238 -- 238
Corporate expense..................... 26 (8) 18
------ ----- -----
466 (8) 458
------ ----- -----
Operating income........................ 141 (70) 71
Interest and dividend income.......... 12 (5) 7
Interest expense...................... (46) -- (46)
------ ----- -----
Income from continuing operations before
income tax............................ 107 (75) 32
Provision for income taxes............ (41) 30 (11)
------ ----- -----
Income from continuing operations....... $ 66 $ (45) $ 21
------ ----- -----
------ ----- -----
Income from continuing operations per
share:
Basic................................. $ 1.58 $.50
------ -----
------ -----
Diluted............................... $ 1.54 $.49
------ -----
------ -----
Weighted average common and equivalent
shares:
Basic................................. 42 42
------ -----
------ -----
Diluted............................... 43 43
------ -----
------ -----
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
119
<PAGE>
GRAND CASINOS, INC.
UNAUDITED PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 29, 1996
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
GRAND SPIN-OFF GRAND
CASINOS, INC.(1) ADJUSTMENTS(2) CASINOS, INC.
---------------- -------------- -------------
<S> <C> <C> <C>
Revenue
Casino................................ $ 362 $ -- $362
Rooms................................. 20 -- 20
Food and beverage..................... 22 -- 22
Other products and services........... 86 (77) 9
------ ----- -----
490 (77) 413
------ ----- -----
Expenses
Casino................................ 126 -- 126
Rooms................................. 6 -- 6
Food and beverage..................... 26 -- 26
Other expenses........................ 195 (1) 194
Corporate expense..................... 41 (16) 25
------ ----- -----
394 (17) 377
------ ----- -----
Operating income........................ 96 (60) 36
Interest and dividend income.......... 17 (6) 11
Interest expense...................... (35) -- (35)
Stratosphere write-down............... (161) 161 --
------ ----- -----
Income (loss) from continuing operations
before income tax..................... (83) 95 12
Provision for income taxes............ (18) 14 (4)
------ ----- -----
Income (loss) from continuing
operations............................ $ (101) $ 109 $ 8
------ ----- -----
------ ----- -----
Income (loss) from continuing operations
per share:
Basic................................. $(2.43) $.19
------ -----
------ -----
Diluted............................... $(2.43) $.19
------ -----
------ -----
Weighted average common and equivalent
shares:
Basic................................. 42 42
------ -----
------ -----
Diluted............................... 42 43
------ -----
------ -----
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
120
<PAGE>
GRAND CASINOS, INC.
UNAUDITED PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
GRAND SPIN-OFF GRAND
CASINOS, INC.(1) ADJUSTMENTS(2) CASINOS, INC.
---------------- -------------- -------------
<S> <C> <C> <C>
Revenue
Casino................................ $ 271 $ -- $271
Rooms................................. 8 -- 8
Food and beverage..................... 19 -- 19
Other products and services........... 75 (69) 6
----- ----- -----
373 (69) 304
----- ----- -----
Expenses
Casino................................ 82 -- 82
Rooms................................. 4 -- 4
Food and beverage..................... 20 -- 20
Other expenses........................ 123 (3) 120
Corporate expense..................... 26 (8) 18
----- ----- -----
255 (11) 244
----- ----- -----
Operating income........................ 118 (58) 60
Interest and dividend income.......... 20 (18) 2
Interest expense...................... (28) 10 (18)
----- ----- -----
Income from continuing operations before
income tax and minority interest...... 110 (66) 44
Provision for income taxes............ (43) 28 (15)
Minority interest, net................ 3 (3) --
----- ----- -----
Income from continuing operations....... $ 70 $ (41) $ 29
----- ----- -----
----- ----- -----
Income from continuing operations per
share:
Basic................................. $2.05 $.84
----- -----
----- -----
Diluted............................... $1.98 $.81
----- -----
----- -----
Weighted average common and equivalent
shares:
Basic................................. 34 34
----- -----
----- -----
Diluted............................... 35 35
----- -----
----- -----
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
121
<PAGE>
GRAND CASINOS, INC.
UNAUDITED PRO FORMA STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 28, 1998
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
GRAND SPIN-OFF GRAND
CASINOS, INC.(1) ADJUSTMENTS(2) CASINOS, INC.
---------------- -------------- -------------
<S> <C> <C> <C>
Revenue
Casino................................ $247 $ -- $247
Rooms................................. 16 -- 16
Food and beverage..................... 17 -- 17
Other products and services........... 49 (43) 6
----- ----- -----
329 (43) 286
----- ----- -----
Expenses
Casino................................ 82 -- 82
Rooms................................. 7 -- 7
Food and beverage..................... 19 -- 19
Other expenses........................ 126 (1) 125
Corporate expense..................... 20 (6) 14
----- ----- -----
254 (7) 247
----- ----- -----
Operating income........................ 75 (36) 39
Interest and dividend income.......... 6 (3) 3
Interest expense...................... (24) -- (24)
----- ----- -----
Income from continuing operations before
income tax............................ 57 (39) 18
Provision for income taxes............ (21) 15 (6)
----- ----- -----
Income from continuing operations....... $ 36 $ (24) $ 12
----- ----- -----
----- ----- -----
Income from continuing operations per
share:
Basic................................. $.86 $.29
----- -----
----- -----
Diluted............................... $.84 $.28
----- -----
----- -----
Weighted average common and equivalent
shares:
Basic................................. 42 42
----- -----
----- -----
Diluted............................... 43 43
----- -----
----- -----
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
122
<PAGE>
GRAND CASINOS, INC.
UNAUDITED PRO FORMA STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 29, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
GRAND SPIN-OFF GRAND
CASINOS, INC.(1) ADJUSTMENTS(2) CASINOS, INC.
---------------- -------------- -------------
<S> <C> <C> <C>
Revenue
Casino................................ $222 $ -- $222
Rooms................................. 12 -- 12
Food and beverage..................... 14 -- 14
Other products and services........... 45 (39) 6
----- ----- -----
293 (39) 254
----- ----- -----
Expenses
Casino................................ 78 -- 78
Rooms................................. 4 -- 4
Food and beverage..................... 17 -- 17
Other expenses........................ 114 (1) 113
Corporate expense..................... 9 (2) 7
----- ----- -----
222 (3) 219
----- ----- -----
Operating income........................ 71 (36) 35
Interest and dividend income.......... 6 (3) 3
Interest expense...................... (23) -- (23)
----- ----- -----
Income from continuing operations before
income tax............................ 54 (39) 15
Provision for income taxes............ (21) 16 (5)
----- ----- -----
Income from continuing operations....... $ 33 $ (23) $ 10
----- ----- -----
----- ----- -----
Income from continuing operations per
share:
Basic................................. $.79 $.23
----- -----
----- -----
Diluted............................... $.77 $.23
----- -----
----- -----
Weighted average common and equivalent
shares:
Basic................................. 42 42
----- -----
----- -----
Diluted............................... 43 43
----- -----
----- -----
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
123
<PAGE>
GRAND CASINOS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 28, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
GRAND SPIN-OFF GRAND
CASINOS, INC. ADJUSTMENTS(3) CASINOS, INC.
------------- -------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents.................. $ 93 $ (33) $ 60
Accounts receivable, net.............. 21 (10) 11
Other current assets.................. 36 (13) 23
------ -------------- ------
Total current assets.................... 150 (56) 94
Property and equipment, net............. 1,034 (3) 1,031
Other assets............................ 109 (74) 35
------ -------------- ------
Total property and other assets....... 1,143 (77) 1,066
------ -------------- ------
Total assets............................ $1,293 $ (133) $1,160
------ -------------- ------
------ -------------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses... $ 87 $ (11) $ 76
Long-term debt.......................... 567 (1) 566
Deferred income taxes................... 97 (1) 96
------ -------------- ------
Total liabilities..................... 751 (13) 738
Stockholders' equity.................... 542 (120) 422
------ -------------- ------
Total liabilities and stockholders'
equity................................ $1,293 $ (133) $1,160
------ -------------- ------
------ -------------- ------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
124
<PAGE>
GRAND CASINOS, INC.
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
(1) There are no significant adjustments required to the historical financial
data of Grand to conform to the accounting policies of Park Place. Certain
reclassifications have been made to the historical balances of Grand to
conform the financial presentation of the two entities. Specifically, casino
allowances have been reclassified as reductions of the appropriate revenue
categories, selling, general and administrative expenses have been
reclassified to other costs and expenses and corporate expense, and
amortization of debt issuance costs has been reclassified to interest
expense.
(2) Represents the results of Lakes, which will be distributed to Grand
shareholders upon consummation of the Transactions.
(3) Represents the removal of the assets and liabilities of Lakes as a result of
the Grand Distribution.
125
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--PARK PLACE
STRATEGY
Park Place expects to expand its gaming business through acquisitions of
quality assets in established markets and selective new development. The pending
merger with Grand's Mississippi Business exemplifies Park Place's continued
execution of this strategy which began with the December 1996 merger (the "Bally
Merger") with Bally Entertainment Corporation ("Bally"). Park Place's new
development efforts are currently concentrated on the construction of the
2,900-room Paris Casino-Resort on the Las Vegas Strip which is expected to open
in the fall of 1999. Park Place intends to seek additional expansion and new
development opportunities, both domestically and internationally, where superior
returns can be demonstrated. Park Place believes that in addition to its cash
flow from operations, it will have access to financial resources sufficient to
finance its future growth. The following discussion should be read in
conjunction with the audited financial statements of Park Place for the six
months ended June 30, 1998 and the years ended December 31, 1997, 1996 and 1995
included elsewhere in this Joint Proxy/Statement Prospectus.
FINANCIAL CONDITION
LIQUIDITY
Net cash provided by operating activities was $376 million, $141 million and
$167 million in 1997, 1996, and 1995, respectively. The decline in operating
cash flow from 1995 to 1996 reflects the decrease in earnings at the Las Vegas
Hilton due to lower than normal drop and a significant reduction in the win
percentage on its premium play baccarat business. The increase in operating cash
flow from 1996 to 1997 reflects the Bally Merger and a return to more normalized
results at the Las Vegas Hilton. Net cash provided by operating activities for
the six months ended June 30, 1998 increased $24 million to $144 million from
the prior year due primarily to improved results at the Las Vegas Hilton, a
significant increase in operating results at Bally's Park Place due to the July
1, 1997 opening of The Wild Wild West casino and improvements at many of Park
Place's other facilities.
ACQUISITIONS AND CAPITAL SPENDING
Cash used in investing activities was $579 million, $63 million and $161
million in 1997, 1996 and 1995, respectively, and $361 million and $301 million
for the six months ended June 30, 1998 and 1997, respectively. Investing
activities cash flows include expenditures for normal capital replacements, new
construction, and improvement projects at existing facilities that are evaluated
on an ROI basis. Investing activities also include acquisitions and investments
in and loans to affiliates.
Capital expenditures in 1995 include costs to complete a $125 million
expansion and enhancement project at the Flamingo Hilton-Las Vegas, including
the addition of a new 600-room tower. 1995 expenditures also include costs
associated with construction of the $103 million Flamingo Casino-Kansas City, a
30,000 square foot casino on a continuously docked barge in Kansas City, which
opened in October 1996.
Capital expenditures in 1996 include the completion of construction of the
Flamingo Casino-Kansas City and the start of construction on "Star Trek: The
Experience at the Las Vegas Hilton", an adult-oriented attraction which was
developed in collaboration with Paramount Parks, Inc. Park Place's share of the
"Star Trek" project costs and the construction costs of an adjacent 22,000
square foot themed casino totaled approximately $70 million. The casino, called
SpaceQuest, opened in November 1997, and the "Star Trek" attraction opened in
January 1998.
Acquisitions and new investments in 1996 relate to Park Place's additional
equity investment in and partial project financing of the $200 million Conrad
International Punta del Este Resort and Casino in Punta del Este, Uruguay. This
property, which is 43% owned by Park Place, includes a 38,000 square foot
126
<PAGE>
casino and a 300-room luxury hotel. The casino opened in January 1997, while the
hotel opened in stages in the latter half of 1997.
Capital expenditures in 1997 include the addition of normal replacement
capital expenditures at the Bally properties acquired in the December 1996 Bally
Merger and costs to complete Bally projects already underway at the time of such
merger. These projects include the $110 million, 75,000 square foot Wild Wild
West Casino adjacent to Bally's Park Place in Atlantic City, New Jersey which
opened on July 1, 1997, and the $50 million 300-room hotel tower addition at The
Atlantic City Hilton. Capital expenditures in this period also include costs
relating to the construction (which began in April 1997) of the $760 million,
2,900-room Paris Casino-Resort. 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, thirteen restaurants, 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 with the majority of
expenditures occurring in the 1998 and 1999 periods.
Acquisitions and new investments in 1997 include the completion of Park
Place's financing commitment to the Punta del Este project and the acquisition
of an additional 11% interest in Bally's Grand, Inc., a majority owned
subsidiary of Park Place which owns Bally's Las Vegas. This $55 million
investment increased Park Place's indirect ownership of Bally's Grand, Inc. to
95% in 1997.
Capital expenditures for the six month period ended June 30, 1998 include
the continued construction activity at the Paris Casino-Resort. Acquisitions and
new investments in the 1998 period include the acquisition of the remaining 5%
interest in Bally's Grand, Inc. for $44 million and the $15 million acquisition
of the Atlantic City Country Club.
In addition to an estimated $550 million in 1998 expenditures related to
acquisitions and new construction, Park Place anticipates spending approximately
$180 million in the gaming segment in 1998 on normal capital replacements,
ADA/safety compliance projects, structural and technology upgrades and
improvement projects that are evaluated on a ROI basis.
FINANCING
Concurrently with the Hilton Distribution, Park Place will assume primary
liability for $625 million of Hilton's fixed rate debt. The payment terms of
this debt assumption will mirror the terms of Hilton's existing $300 million
7 3/8% Notes due 2002 and its $325 million 7% Notes due 2004. Hilton and Park
Place will enter into supplemental indentures with the Trustee providing for the
assumption by Park Place of the payment obligations under the existing
indentures. See "The Transactions--Arrangements Between Hilton and Park
Place--Assumption Agreement Relating to Certain Indebtedness." In addition, Park
Place will be allocated a majority of Hilton's outstanding obligations under its
$1.75 billion bank revolving credit facility at the time of the Hilton
Distribution. Park Place expects to enter into a new bank credit facility on
commercially competitive terms. The new bank facility will, among other things,
facilitate the refinancing of the Hilton allocated bank debt and allow Park
Place to pursue its acquisition and development strategy.
Park Place's expected pro rata portion of Hilton's public and corporate bank
debt balances at the time of the Hilton Distribution is estimated to be 50%. As
such, the pro rata portion of Hilton's historical outstanding public debt and
corporate bank debt balances and related interest expense has been allocated to
Park Place for all periods presented.
RESULTS OF OPERATIONS
OVERVIEW
Results of operations include the consolidated results of Park Place's owned
properties and affiliates operated under long-term management agreements.
Operating results are reduced by the portion of earnings of non-controlled
affiliates applicable to other ownership interests. On December 18, 1996,
127
<PAGE>
Hilton consummated its acquisition of Bally through a merger with and into
Hilton. Aggregate consideration totaled $3.1 billion consisting of $1.9 billion
of Hilton Common Stock and the assumption of Bally subsidiary debt which totaled
$1.2 billion. Prior to the Bally Merger, Park Place operated its gaming business
under the Hilton, Flamingo and Conrad brand names with five wholly owned Nevada
casino hotels; one partially owned and managed riverboat operation in New
Orleans, Louisiana (which ceased operations on October 1, 1997); one wholly
owned riverboat gaming operation in Kansas City, Missouri (which opened in
October 1996); two partially owned and managed casino hotels in Australia; and a
partially owned and managed casino hotel in Punta del Este, Uruguay (which
opened its casino in January 1997 and its hotel in the latter half of 1997). As
a result of the Bally Merger, Park Place also operates two wholly owned casino
hotels in Atlantic City, New Jersey; a wholly owned casino hotel in Las Vegas,
Nevada (84% owned at the time of the Bally Merger); a wholly owned and managed
riverboat casino in Robinsonville, Mississippi (50% owned at the time of the
Bally Merger) and a 49.9% owned and managed riverboat casino in New Orleans. The
operating results of the Bally properties from December 18, 1996 through
December 31, 1996 were not significant to Park Place's 1996 results.
Park Place's Nevada operations offer a diversified product and service mix
which appeal to a broad spectrum of customers. The Flamingo Hilton-Las Vegas
caters to the broad Las Vegas middle market, while Bally's Las Vegas caters to
convention groups and the mid- to upper mid-market. The Las Vegas Hilton
primarily caters to premium players and the convention market; however, the
property has implemented strategies to broaden its customer base. The Flamingo
Hilton-Reno focuses on middle market activity, while the Reno Hilton targets
both convention and middle market activity. The Flamingo Hilton-Laughlin targets
the budget market segment.
In Atlantic City, Bally's Park Place focuses on high-end players and the
mid-market segment, including the mid- to upper mid-market slot player segment.
The Atlantic City Hilton primarily focuses on high-end and mid-market casino
customers.
The following discussion presents an analysis of results of operations of
Park Place for fiscal years ended December 31, 1997, 1996 and 1995 and for the
six months ended June 30, 1998 and 1997. EBITDA (earnings before interest,
taxes, depreciation, amortization and non-cash items) is presented supplementary
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. Non-cash items, such as asset write-downs and impairment losses, are
excluded from EBITDA as these items do not impact operating results on a
recurring basis. 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 income from continuing operations), nor
should it be considered as an indicator of the overall financial performance of
Park Place. Park Place's calculation of EBITDA may be different from the
calculation used by other companies and therefore comparability may be limited.
FISCAL 1997 COMPARED WITH FISCAL 1996
A summary of Park Place's consolidated revenue and earnings for fiscal 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996 % CHANGE
------ ------ ---------
(IN MILLIONS)
<S> <C> <C> <C>
Revenue........................................... $2,572 $1,415 82%
Operating income.................................. 201 92 118%
Income before extraordinary item.................. 67 36 86%
Other Operating Data
EBITDA............................................ $ 512 $ 216 137%
</TABLE>
OPERATIONS. Total revenue increased 82 percent in 1997 to $2.6 billion from
$1.4 billion in 1996. Casino revenue, a component of gaming revenue, increased
114 percent to $1.8 billion in 1997 compared
128
<PAGE>
to $857 million in the prior year. EBITDA increased 137 percent to $512 million
from $216 million in the prior year and operating income increased 118 percent
to $201 million from $92 million in 1996. In 1997, Park Place benefited from the
addition of the Bally properties in Las Vegas, Atlantic City, Mississippi and
New Orleans, the July 1 addition of The Wild Wild West casino in Atlantic City,
improved international results and a return to a normal baccarat win percentage
at the Las Vegas Hilton. Revenue, casino revenue and EBITDA increased $1.2
billion, $923 million and $298 million, respectively, as a result of the Bally
Merger.
The completion of a number of room expansion projects and the opening of new
hotel casinos led to a six percent increase in room supply in Las Vegas compared
to the prior year. At the Las Vegas Hilton, though the average rate increased
six percent to $104.27, the additional market capacity contributed to a 5.4
point decline in occupancy to 83.2 percent. However, a 28 percent increase in
the property's premium play baccarat volume combined with an eight point
increase in the baccarat win percentage resulted in 1997 EBITDA of $45 million,
a $16 million increase from the prior year. Results at the Las Vegas Hilton are
more volatile than Park Place'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, Park Place believes that its 1998 implementation of new
casino marketing and entertainment strategies and the opening of the "Star Trek"
attraction and SpaceQuest casino has broadened the Las Vegas Hilton's customer
base and increased non-premium play volume.
EBITDA from the Flamingo Hilton-Las Vegas declined $5 million to $109
million. New capacity additions also affected this property, which posted
occupancy of 91.0 percent, a 4.5 point decrease from the prior year. The lower
occupancy contributed to a four percent decrease in slot handle and a seven
percent decrease in table game volume. Bally's Las Vegas generated EBITDA of $93
million in 1997, an increase of seven percent from 1996. Though occupancy
declined 1.7 points, average room rate increased six percent, and slot revenue
increased by seven percent on higher walk-in volume. Due to the completion of
the Bally Merger on December 18, 1996, this property's contribution to overall
1996 Park Place results was not significant.
Occupancy for the Nevada casino hotels was 86.5 percent in 1997 compared to
90.5 percent in the prior period. The average room rate for the Nevada
properties was $76.53 compared to $73.57 in 1996. The 1996 statistical
information includes the results of Bally's Las Vegas for comparison.
In Atlantic City, Bally's Park Place and The Atlantic City Hilton generated
EBITDA of $155 million and $29 million, respectively, in 1997. The properties'
results were not significant to Park Place in 1996 since the Bally Merger did
not close until mid-December; however, full year 1996 EBITDA at these properties
totaled $131 million and $38 million, respectively. The results of Bally's Park
Place include a new casino, The Wild Wild West, which opened on July 1, 1997.
Revenue from The Wild Wild West casino was almost entirely incremental,
resulting in strong margin gains. The Atlantic City Hilton's EBITDA was impacted
by a lower table game win percentage and the effects of its tower construction
on casino volume.
Occupancy and average room rate for the Atlantic City casino hotels were
91.3 percent and $90.35, respectively, in 1997. Although not included in Park
Place's 1996 period, occupancy and average room rate were 92.7 percent and
$91.33, respectively.
Park Place also benefited from the opening of the 43% owned Conrad
International Punta del Este Resort and Casino which contributed EBITDA of $9
million in 1997.
Depreciation and amortization, including Park Place's proportionate share of
depreciation and amortization from its equity investments, increased $91 million
to $214 million in 1997. This increase primarily resulted from the addition of
the Bally properties.
Park Place results were adversely effected by non-recurring charges totaling
$102 million ($96 million non-cash) in 1997 and $38 million ($29 million
non-cash) in 1996. The 1997 charges include an impairment loss relating to the
Flamingo Casino-Kansas City and an impairment loss and other costs associated
with
129
<PAGE>
the closure of the Flamingo Casino-New Orleans. The 1996 charges included the
write-off of pre-opening expenses for the Flamingo Casino-Kansas City and losses
associated with the planned relocation of the Flamingo Casino-New Orleans.
CORPORATE ACTIVITY. Corporate expense increased $6 million to $15 million
due to a non-recurring accrual for certain litigation costs in the 1997 period.
Interest income increased $13 million to $25 million due to interest earned on
restricted cash balances acquired in the Bally Merger and incremental interest
from investment securities. Interest expense reflects the pro rata allocation of
the period costs of Hilton's public and bank debt borrowings and the interest
costs on debt secured by certain Park Place assets. Interest expense, net of
amounts capitalized, was $82 million and $36 million in 1997 and 1996,
respectively. Interest expense, net, from equity investments increased $5
million over 1996. The effective income tax rate in 1997 increased to 47.0% from
42.9% in 1996 primarily due to the amortization of non-deductible goodwill
recorded as a result of the Bally Merger. Park Place's effective income tax rate
is determined by the level and composition of pretax income and the mix of
income subject to varying foreign, state and local taxes.
FISCAL 1996 COMPARED WITH FISCAL 1995
A summary of Park Place's consolidated revenue and earnings for fiscal 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995 % CHANGE
------ ------ ---------
(IN MILLIONS)
<S> <C> <C> <C>
Revenue........................................... $1,415 $1,284 10%
Operating income.................................. 92 165 (44)%
Income before extraordinary item.................. 36 85 (58)%
Other Operating Data
EBITDA............................................ $ 216 $ 253 (15)%
</TABLE>
OPERATIONS. Total revenue increased ten percent to $1.4 billion in 1996
compared to $1.3 billion in 1995. Casino revenue was $857 million in 1996
compared to $791 million in 1995. Total EBITDA was $216 million in 1996, a 15
percent decrease from $253 million in 1995 and operating income was $92 million
in 1996, a 44 percent decrease from $165 million in 1995.
EBITDA at the Las Vegas Hilton was $29 million, a decrease of $61 million
from the prior year. The decline was due primarily to lower than normal drop
combined with a significant reduction in the win percentage on its premium play
baccarat business. The baccarat win percentage decreased 13 points from a more
normalized win percentage in 1995.
Benefiting from a significant renovation and expansion effort completed in
1995, the Flamingo Hilton-Las Vegas posted outstanding results in 1996. EBITDA
was $114 million, $26 million above the prior year. Occupancy increased 6.1
points to 95.5 percent and the average rate increased eight percent to $79.17. A
generally soft market affected 1996 EBITDA at the Flamingo Hilton-Laughlin which
decreased $3 million from the prior year. Combined EBITDA from the Reno Hilton
and the Flamingo Hilton-Reno decreased $11 million from the prior year primarily
due to increased competition and adverse weather conditions resulting in lower
occupancy and average room rates.
Occupancy for the Nevada casino hotels was 90.2 percent and 88.4 percent in
1996 and 1995, respectively. Average room rates increased four percent in 1996.
The EBITDA contribution from the properties acquired in the Bally Merger on
December 18, 1996 were not significant to the 1996 results.
EBITDA from the 19.9% owned Conrad Jupiters, Gold Coast hotel casino in
Australia increased $7 million from 1995, primarily due to increased table game
win and double-digit REVPAR growth.
130
<PAGE>
Benefiting from a full year of operations, EBITDA from the 19.9% owned Conrad
International Treasury Casino, Brisbane increased $4 million.
Depreciation and amortization, including Park Place's proportionate share of
depreciation and amortization from its equity investments, increased $35 million
to $123 million in 1996.
CORPORATE ACTIVITY. Corporate expense was $9 million in 1996 compared to $8
million in 1995. Interest income increased $5 million to $12 million. Interest
expense, net of amounts capitalized, was $36 million and $39 million in 1996 and
1995, respectively. Interest expense, net, from equity investments increased $3
million to $5 million. The effective tax rate was 42.9% in 1996 versus 35.1% in
the 1995 period. The 1995 effective income tax rate benefited from credits
resulting from the favorable resolution of Federal tax issues for prior years
and higher utilization of foreign tax credits.
EXTRAORDINARY LOSS. The costs and expenses incurred in connection with the
extinguishment of debt, including tender and defeasance premiums, resulted in an
extraordinary loss in 1996 totaling $74 million, net of a tax benefit of $52
million.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
A summary of Park Place's consolidated revenue and earnings for the six
months ended June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997 % CHANGE
----- ----- ---------
(IN
MILLIONS)
<S> <C> <C> <C>
Revenue........................................... $1,355 $1,268 7%
Operating income.................................. 187 153 22%
Income from continuing operations................. 80 63 27%
Other Operating Data
EBITDA............................................ $ 299 $ 252 19%
</TABLE>
Total revenue increased seven percent in the six month period to $1.4
billion. Casino revenue, a component of gaming revenue, increased nine percent
to $975 million in 1998 compared to $898 million in the prior year. Total EBITDA
was $299 million, a 19 percent increase from $252 million in the 1997 period,
and operating income increased 22 percent to $187 million from $153 million in
1997. Park Place's 1998 six month results benefited from the July 1997 opening
of The Wild Wild West casino at Bally's Park Place in Atlantic City,
significantly improved operations at the Las Vegas Hilton and the introduction
of 300 hotel rooms at the Conrad International Punta del Este in late 1997.
EBITDA at the Las Vegas Hilton increased $9 million over the prior year to
$39 million. Total casino revenue increased 16 percent due to significantly
higher volumes both in non-baccarat table games and slots. Overall table game
and slot win increased 18% and 29%, respectively, in the six month period. While
the average rate was flat at $106.07, a 2.5 point increase in occupancy to 88.4
percent positively impacted non-casino revenues.
EBITDA from the Flamingo Hilton-Las Vegas declined $1 million from the prior
year to $55 million due to lower table game volume and win and a decline in
non-casino revenues. Occupancy declined 1.2 points to 91.6 percent, and the
average rate fell four percent to $79.86. Bally's Las Vegas generated EBITDA of
$47 million for the six month period, a decrease of $3 million from the prior
year. The decline was due to a three point decrease in table game win percentage
combined with lower overall volume. Occupancy declined 1.6 points, while the
average rate was flat at $94.12.
Combined EBITDA from the Reno Hilton and the Flamingo Hilton-Reno increased
$5 million from 1997. Six month occupancy and casino volume increased
substantially over the 1997 period.
131
<PAGE>
Occupancy and average rate for the Nevada casino hotels was 88.4 percent and
$77.50, respectively, each comparable to the prior period.
In Atlantic City, Bally's Park Place generated EBITDA of $78 million, an
increase of 20 percent from last year's $65 million, due primarily attributable
to the opening of The Wild Wild West casino in July 1997. The Atlantic City
Hilton reported EBITDA of $12 million, $1 million above last year. The
improvement was due to higher table game drop and win as well as increased
revenues as a result of the property's new 300-room tower.
Occupancy for the Atlantic City casino hotels was 93.6 percent in the 1998
period compared to 92.0 percent last year. The average room rate for the
Atlantic City properties was $78.12, down nine percent from $85.90 last year.
Combined EBITDA from Park Place's riverboat properties in Mississippi,
Louisiana, and Missouri increased $8 million over last year, while EBITDA
contribution from Park Place's two casino hotels in Australia decreased nearly
$1 million due to adverse conditions in Asia and weakness of the Australian
dollar.
The opening of 300 hotel rooms in the latter half of 1997 resulted in
significant growth in casino volume of the Conrad International Punta del Este
Resort and Casino in Uruguay. EBITDA totaled $16 million in the six month
period, an $11 million increase over the prior year. Results from this property
are highly seasonal, with the peak season falling in the first quarter.
Depreciation and amortization, including Park Place's proportionate share of
equity investments, increased $13 million to $112 million in the 1998 period
primarily due to the Las Vegas and Atlantic City expansion projects completed in
1997.
CORPORATE ACTIVITY. Corporate expense decreased $7 million to $4 million
due primarily to the aforementioned non-recurring accrual for litigation costs
in the 1997 period. Interest income increased $4 million to $14 million.
Interest expense, net of amounts capitalized, was $43 million and $46 million in
the 1998 and 1997 six month periods, respectively. Interest expense, net, from
equity investments increased $1 million to $6 million. The effective tax rate
was 46.1% in 1998 versus 41.1% in the 1997 period. Minority interest decreased
due to the purchase of the remaining interest in Bally Grand, Inc.
YEAR 2000
Park Place 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 Park Place'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.
Park Place 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. Park Place'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. Park Place expects to be fully Year 2000
compliant with respect to all significant business systems prior to December 31,
1999.
Park Place'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 Park Place. 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
132
<PAGE>
has been identified. The appropriate vendors and suppliers have been contacted
as to their Year 2000 compliance and their deliverables have been factored into
Park Place'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 Park Place's plans.
SUPPLIERS
Park Place 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 Park Place. To date, no significant supplier has
informed Park Place that a material Year 2000 issue exists which will have a
material effect on Park Place.
During the remainder of 1998 and in 1999, Park Place 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 Park Place's current assessment, the costs of addressing potential
problems are expected to be less than $2 million. However, if Park Place is
unable to resolve its Year 2000 issues, contingency plans to update existing
systems (i.e., reservation, payroll, etc.) are in place for which Park Place
expects the cost to be an additional $2 million. If Park Place'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, Park Place plans to devote the necessary resources to resolve
all significant Year 2000 issues in a timely manner.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-Up Activities." This SOP requires that all nongovernmental
entities expense costs of start-up activities (pre-opening, pre-operating and
organizational costs) as those costs are incurred and requires the write-off of
any unamortized balances upon implementation. SOP 98-5 is effective for
financial statements issued for periods beginning after December 15, 1998. Park
Place expects to adopt SOP 98-5 in the first quarter of 1999. Adoption of the
SOP is not expected to have a material impact on 1999 results of operations.
On November 20, 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus in EITF 97-2 "Application of FASB
Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
EITF 97-2 addresses the circumstances in which a management entity may include
the revenues and expenses of a managed entity in its financial statements.
Upon the adoption of EITF 97-2, which is expected to be in the fourth
quarter of 1998, Park Place will no longer include in its financial statements
the revenues, operating expenses and working capital of its managed properties.
Application of EITF 97-2 to Park Place's financial statements would have reduced
each of revenues and operating expenses by $427 million, $457 million and $348
million for the years ended December 31, 1997, 1996 and 1995, respectively and
$211 million and $228 million for the six month periods ended June 30, 1998 and
1997, respectively. Application of the standard would have reduced each of
current assets and current liabilities by $59 million and $84 million at
December 31, 1997 and 1996, respectively, and $49 million at June 30, 1998.
Application of EITF 97-2 would have no impact on reported operating income, net
income, earnings per share or stockholders' equity.
133
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LAKES
OVERVIEW
Lakes develops, constructs and manages casinos and related hotel and
entertainment facilities in emerging and established gaming jurisdictions.
Lakes's revenues are derived from management fee income from Grand Casino
Avoyelles, Grand Casino Coushatta and Grand Casino Hinckley. Lakes commenced
operations in September 1990, and opened its first casino, Grand Casino Mille
Lacs, in April 1991. Grand Casino Hinckley commenced operations in May 1992,
Grand Casino Avoyelles commenced operations in June 1994 and Grand Casino
Coushatta commenced operations in January 1995.
Pursuant to the Avoyelles, Coushatta and Hinckley management contracts,
Lakes receives a fee based on the net distributable profits (as defined in the
contracts) generated by Grand Casino Avoyelles, Grand Casino Coushatta and Grand
Casino Hinckley. The management agreement for Grand Casino Mille Lacs expired on
April 2, 1998. Lakes believes that the management agreement for Grand Casino
Hinckley, which expires in May 1999, will not be renewed.
Lakes's limited operating history may not be indicative of Lakes's future
performance. In addition, a comparison of results from year to year may not be
meaningful due to the opening of new facilities during each year. Lakes's growth
strategy contemplates the expansion of existing operations and the pursuit of
opportunities to develop and manage additional gaming facilities. The successful
implementation of this growth strategy is contingent upon the satisfaction of
various conditions, including obtaining governmental approvals, the impact of
increased competition, and the occurrence of certain events, many of which are
beyond the control of Lakes.
Earlier this year, the Louisiana legislature considered various proposals
for state constitutional amendments and/or legislation that would impose certain
taxes, including excise taxes, on certain activities conducted on Indian
reservations. Some of the proposals were to become effective after the
expiration dates of the existing compacts between the State of Louisiana and the
Indian tribes that own and operate casinos in the State of Louisiana. None of
the proposals was adopted.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto for the six months ended
June 28, 1998 and June 29, 1997 and the years ended December 28, 1997, December
29, 1996 and December 31, 1995.
RESULTS OF OPERATIONS
MANAGEMENT CONTRACTS
Lakes is prohibited by the IGRA from having an ownership interest in any
casino it manages for Indian tribes. The management contracts for the various
Indian-owned casinos that the Company manages for Indian tribes generally have a
term of seven years. As noted above, the management contract for Grand Casino
Hinckley expires May 15, 1999 and the management contacts for Grand Casino
Avoyelles and Grand Casino Coushatta expire June 3, 2001 and January 16, 2002,
respectively. There can be no assurance that any of these management contracts
will be renewed upon expiration or approved by NIGC upon any such renewal. The
failure to renew the Lakes management contracts would result in the loss of
revenues to Lakes derived from such contracts, which would have an adverse
effect on Lakes' results of operations. The Coushatta Tribe and the
Tunica-Biloxi Tribe each entered into tribal-state compacts with the State of
Louisiana on September 29, 1992. These compacts were approved in November, 1992
by the Secretary of the Interior. Each compact expires in November, 1999, but
will automatically renew for an additional seven year terms unless either the
tribe or the State of Louisiana delivers to the other written notice of
non-renewal at least 180 days prior to the applicable expiration date. Lakes'
management agreements with the Tunica-Biloxi Tribe and the Coushatta Tribe
expire after November 1999. In the event the compacts are not renewed, gaming
will not be permitted at Grand Casino Avoyelles of Grand Casino Coushatta. There
can be no assurance that these compacts will be renewed on terms and conditions
acceptable to either of the tribes.
Revenues are calculated in accordance with generally accepted accounting
principles and are presented in a manner consistent with industry practice. Net
distributable profits from Grand Casino
134
<PAGE>
Avoyelles, Grand Casino Coushatta and Grand Casino Hinckley, are computed using
a modified cash basis of accounting in accordance with the management contracts.
The effect of the use of the modified cash basis of accounting is to accelerate
the write-off of capital equipment and leased assets, which thereby impacts the
timing of net distributable profits.
COMPARISON OF SIX MONTHS ENDED JUNE 28, 1998 TO THE SIX MONTHS ENDED JUNE
29, 1997
EARNINGS PER COMMON SHARE AND NET EARNINGS. Basic and diluted earnings per
common share were $2.28 and $2.22 respectively, for the six months ended June
28, 1998. This compares to basic and diluted earnings of $2.21 and $2.17 per
share for the prior year's comparable period. Earnings increased $0.9 million to
$24.0 million for the six months ended June 28, 1998 compared to the same period
in the prior year, primarily due to increased management fee income from each of
the casino operations.
REVENUES. Grand Casino Mille Lacs, Grand Casino Hinckley, Grand Casino
Avoyelles and Grand Casino Coushatta generated $42.7 million in management fee
income during the six months ended June 28, 1998 as compared to $38.9 million
for the prior year's comparable period. Gross revenue increases at Grand Casino
Hinckley, Grand Casino Avoyelles and Grand Casino Coushatta offset the fact that
the management contract for Grand Casino Mille Lacs expired at the end of the
first quarter. Contributing to the increases were a 378-room hotel at Grand
Casino Hinckley, which opened in November of 1997, and a special events center
and RV resort at Grand Casino Avoyelles, which opened during the first quarter
of 1998.
COSTS AND EXPENSES. Total costs and expenses were $6.6 million for the
six-month period ended June 28, 1998 compared to $2.7 million for the same
period in the prior year. Selling, general, and administrative expenses
increased in the amount of $3.9 million from $2.1 million for the six months
ended June 29, 1997 to $6.0 million for the six months ended June 28, 1998 due
primarily to an increase in reserves for Stratosphere litigation.
OTHER. Interest income was constant at $2.6 million for the six months
ended June 28, 1998 and June 29, 1997. Interest expense was $0.1 million for
both periods.
FISCAL YEAR ENDED DECEMBER 28, 1997 COMPARED TO DECEMBER 29, 1996
EARNINGS PER COMMON SHARE AND NET EARNINGS. For the year ended December 28,
1997, basic and diluted earnings per common share were $4.32 and $4.20,
respectively. For the year ended December 29, 1996 basic and diluted loss per
common share was $(10.46) per share. This includes a charge of $15.48 per
weighted average common share outstanding related to the write-down of Lakes's
investment in Stratosphere. Earnings for the year ended December 28, 1997 were
$45.2 million compared to a loss of $(108.7) million (which includes a $161
million write-down of Lakes's investment in Stratosphere) for the prior year's
comparable period.
REVENUES. For the year ended December 28, 1997 management fee income
totaled $78.5 million. This represents an increase of $1.2 million from
management fee income of $77.3 million for the year ending December 29, 1996.
COSTS AND EXPENSES. For the year ended December 28, 1997 selling, general,
and administrative expenses decreased $8.3 million from $16.3 million to $7.9
million. The $7.9 million includes approximately $3.2 million in Stratosphere
litigation reserves. Of the $16.3 million incurred for the year ended December
29, 1996, approximately $11.4 million is related to litigation accruals and
projects write-downs.
OTHER. Interest income for the year ended December 28, 1997 remained
approximately the same at $5.9 million compared to the same period in the prior
year.
FISCAL YEAR ENDED DECEMBER 29, 1996 COMPARED TO DECEMBER 31, 1995
EARNINGS PER COMMON SHARE AND NET EARNINGS. For the year ended December 29,
1996 basic and diluted loss per common share was $10.46. This includes a charge
of $15.48 per share outstanding relating
135
<PAGE>
to the write-down of Lakes's investment in Stratosphere Corporation. For the
year ended December 31, 1995, basic and diluted earnings per common share were
$4.81 and $4.65, respectively. Earnings (loss) for the years ended December 29,
1996 and December 31, 1995 earnings were, $(108.7) million (which includes a
$161 million write-down of Lakes's investment in Stratosphere) and $41.2
million, respectively.
REVENUES. Management fee income of $77.3 million for year ending December
29, 1996 represents an increase of $8.1 million over the prior year's comparable
period management fee income of $69.2 million. This increase is primarily
attributable to the full years benefit from a casino floor expansion during the
third quarter of 1995 at Grand Casino Coushatta.
COSTS AND EXPENSES. For the year ended December 29, 1996, selling, general
and administrative expenses totaled $16.3 million. Approximately $11.4 million
relates to litigation accruals and miscellaneous write-downs. For the year ended
December 31, 1995 selling, general and administrative expenses totaled $8.7
million. Included in this amount is a write-down of approximately $3.1 million
related to costs written off on abandoned projects or proposed contracts.
OTHER. The year ended December 29, 1996 includes a write-down of $161
million related to Lakes' investment in Stratosphere. For a portion of the year
ended December 31, 1995 Lakes owned more than 50% of Stratosphere and
consolidated the financial statements. Interest income for 1996 was $5.9
million. Interest income for 1995 of $13.6 million included $6.2 million related
to Stratosphere interest income.
Interest expense was $0.1 million in 1996 and was $10.2 million in 1995. The
1995 interest was incurred by Stratosphere.
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY
At June 28, 1998, Lakes had $33.1 million in cash and cash equivalents. The
cash balances are planned to be used for loans to current tribal partners to
help develop existing operations, the pursuit of additional gaming
opportunities, and settlement of pending litigation matters.
For the six months ended June 28, 1998 and June 29, 1997 and the years ended
December 28, 1997, December 29, 1996 and December 31, 1995 net cash provided by
operating activities totaled $35.7, $24.9, $35.8, $62.5 and $34.3 million
respectively. For the six months ended June 28, 1998 and June 29, 1997 and the
years ended December 28, 1997, December 29, 1996 and December 31, 1995, proceeds
from repayment of notes receivable amounted to $3.1, $3.2, $6.1, $10.6 and $14.1
million, respectively. Also during these periods, payments for land held for
development amounted to $6.6, $5.4, $13.2, $2.3 and $0.0 million, respectively.
As security to support Lakes' indemnification obligations to Grand under
each of the Grand Distribution Agreement and the Merger Agreement, and as a
condition to the consummation of the Merger, Lakes has agreed to irrevocably
deposit, in trust for the benefit of Grand, as a wholly owned subsidiary of Park
Place, an aggregate of $30 million, consisting of four annual installments of
$7.5 million, during the four year period subsequent to the Effective Date.
Lakes' ability to satisfy this funding obligation is materially dependent upon
the continued success of its operations and the general risks inherent in its
business. In the event Lakes is unable to satisfy its funding obligation, it
would be in breach of its agreement with Grand, possibly subjecting itself to
additional liability for contract damages, which could have a material adverse
effect on Lakes' business and results of operations. See "Business and
Properties of Lakes--Legal Proceedings."
Prior to the effectiveness of the Second Amended Plan, Grand owned
approximately 37% of the issued and outstanding common stock of Stratosphere.
Stratosphere and its wholly owned operating subsidiary developed and operate the
Stratosphere Tower, Hotel and Casino in Las Vegas, Nevada. In January 1997,
Stratosphere and its wholly owned operating subsidiary filed for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. In October 1997, Grand announced
that Grand had not been able to reach an agreement with holders of a significant
portion of Stratosphere's first mortgage notes for a consensual reorganization
of Stratosphere that would involve Grand's participation. Grand announced
136
<PAGE>
that it had no intention of participating in any plan of reorganization for
Stratosphere and terminated the Amended Investment Agreement.
The Second Amended Plan has been confirmed by the Bankruptcy Court and as of
October 14, 1998 has been declared effective. Pursuant to the Second Amended
Plan, all of the Stratosphere common stock outstanding prior to the effective
date has been canceled, including all Stratosphere common stock which Lakes
would have owned.
Under the terms of the Grand Distribution Agreement, Lakes has agreed to
assume any future liabilities arising out of Grand's investment in Stratosphere.
See "Risk Factors--Risks Relating to the Business of Lakes--Stratosphere
Corporation; Pending Litigation"--"Business and Properties of Lakes-- Legal
Proceedings."
In September 1997, the successor trustee (the "Stratosphere Trustee") under
the indenture pursuant to which Stratosphere Corporation issued Stratosphere
Corporation's first mortgage notes filed a complaint in the U.S. District Court
for the District of Nevada--IBJ SCHROEDER BANK & TRUST COMPANY, INC. V. GRAND
CASINOS, INC.--File No. CV-S-97-01252-DWH (RJJ)--naming Grand as defendant.
The complaint alleges that Grand failed to perform under the Standby Equity
Commitment entered into between Stratosphere Corporation and Grand in connection
with Stratosphere Corporation's issuance of such first mortgage notes in March
1995. The complaint seeks an order compelling specific performance of what the
Committee claims are Grand's obligations under the Standby Equity Commitment.
The Stratosphere Trustee filed the complaint in its alleged capacity as a third
party beneficiary under the Standby Equity Commitment.
In November, 1997, Grand submitted a motion requesting, among other things,
that the court dismiss the complaint. Grand's request that the court dismiss the
complaint has been denied. Discovery is pending. See "Legal Proceedings--Standby
Equity Commitment Litigation."
YEAR 2000
Lakes is currently working to fully determine and 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 Lakes' 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.
Lakes 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. Pursuant to the Lakes Year 2000 program, the
Company has hired a Year 2000 consulting firm and established an internal review
team to monitor and facilitate efficient Year 2000 compliance. Lakes is
currently in the process of upgrading its financial reporting systems, IT based
and otherwise, to ensure that they are Year 2000 compliant. Lakes' vendors and
consultants have represented to management that the new systems meet Year 2000
requirements. Lakes' 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. Between now and the Year 2000, Lakes will proceed through its various
phases of assessment, detailed planning, implementation, testing and management.
Lakes expects to be fully Year 2000 compliant by mid-1999.
Generally, Lakes is confident that the implementation of its Year 2000
program in conjunction with the engagement of a consulting firm and the
replacement of all of Lakes' financial reporting systems will resolve any IT
system compliance issues. Lakes has not currently identified any material non-IT
system Year 2000 issues.
During the remainder of 1998 and in 1999, Lakes will continually review its
progress against its Year 2000 plans and determine what contingency plans are
feasible and appropriate to reduce its exposure to Year 2000 related issues.
137
<PAGE>
Based on Lakes' current assessment, the costs of addressing potential
problems are not currently expected to have a material adverse impact on Lakes'
financial position, results of operations or cash flows in future periods.
However, the historical and estimated costs relating to the resolution of Lakes'
Year 2000 compliance issues cannot be fully and finally determined at this time.
If significant customers or vendors identify 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. Lakes plans to initiate formal communications with all
of its material suppliers to determine the extent to which Lakes' interface
systems are vulnerable to those third parties' failures to resolve their own
Year 2000 issues. Lakes plans to devote the necessary resources to resolve all
significant Year 2000 issues in a timely manner.
While Lakes fully anticipates achieving Year 2000 compliance well in advance
of Jan. 1, 2000 there are certain risks which exist with respect to Lakes'
business and the Year 2000. Those risks range from slight delays and
inefficiencies in processing data and carrying out accounting and financial
functions to, in a most reasonably likely worst case scenario, extensive and
costly inability to process data, provide vital accounting functions and
communicate with customers and suppliers. As of the date of this filing, Lakes
has not finalized a contingency plan to address the failure to be Year 2000
compliant.
ACCOUNTING PRONOUNCEMENTS
Lakes adopted Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
effective December 29, 1997. SFAS 130 requires minimum pension liability
adjustments, unrealized gains or losses on Lakes' available-for-sale securities
and foreign currency translation adjustments, which prior to adoption were
reported separately in division equity, to be included in other comprehensive
earnings. Total comprehensive earnings (loss) for the six months ended June 28,
1998 and June 29, 1997 were $1.4 million and $(1.9) million. Differences between
comprehensive earnings for these periods were due to unrealized holding gains
and losses on securities available for sale.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants (AICPA) has issued Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires
companies to expense as incurred all start-up and preopening costs that are not
otherwise capitalizable as long-lived assets. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. Lakes
does not believe the adoption of this pronouncement will be material to the
combined financial statements.
138
<PAGE>
BUSINESS AND PROPERTIES OF PARK PLACE
GENERAL
Park Place is a newly formed, indirect wholly owned subsidiary of Hilton,
established to conduct Hilton's Gaming Business subsequent to the Hilton
Distribution. Following the Hilton Distribution and upon consummation of the
Merger, Park Place will operate the Hilton Gaming Business and Grand's
Mississippi Business as previously operated by Hilton and Grand, respectively.
Park Place considers its casino hotels and riverboat casinos to be leading
establishments with respect to location, size, facilities, physical condition,
quality and variety of services offered in the areas in which they are located.
Upon completion of the Merger, Park Place will be the largest gaming company, as
measured by casino square footage and revenues, with 1.4 million square feet of
gaming space in 1999 and 1997 revenues of $2.7 billion. Park Place will be the
only gaming company with a significant presence in the three largest gaming
markets in the United States (Nevada, New Jersey and Mississippi) Park Place
will also have properties in Louisiana, Missouri, Australia and Uruguay. UNLESS
THE CONTEXT OTHERWISE REQUIRES, THE FOLLOWING DISCUSSION ASSUMES THE
TRANSACTIONS HAVE OCCURRED AND THAT PARK PLACE OWNS THE HILTON GAMING BUSINESS
AND THE MISSISSIPPI BUSINESS.
On September 15, 1998, pro forma for the consummation of the Transactions,
Park Place operated 17 casinos: six in Nevada, two in Atlantic City, New Jersey,
four in Mississippi, one in Louisiana, one in Missouri, two in Australia and one
in Uruguay. Park Place's domestic gaming operations will be conducted under the
Bally, Flamingo, Grand and, subject to certain limitations, Hilton brand names.
See "The Transactions--Arrangements between Hilton and Park Place--Trademark
Assignment and License Agreement."
Hilton is continually evaluating attractive acquisition opportunities and
may at any time be negotiating to engage in a business combination transaction
or other acquisition. Therefore, prior to the consummation of the Transactions,
it is possible that additional gaming properties may be acquired that will
become properties of Park Place. There can be no assurance that any additional
properties will be acquired.
PROPERTIES
Park Place plans to continuously evaluate its property portfolio and intends
to dispose of its interests in properties that, in its opinion, no longer yield
an adequate return on investment or conform to Park Place's long range plans. In
doing so, Park Place expects to maintain a balanced mix of sources of revenue
and a favorable return on stockholders' equity.
On September 15, 1998, the following casino hotels and riverboat casinos
were wholly or partially owned and operated by Park Place, pro forma for the
consummation of the Transactions.
<TABLE>
<CAPTION>
NUMBER OF APPROXIMATE
ROOMS/ CASINO
NAME AND LOCATION SUITES YEAR ACQUIRED SQUARE FOOTAGE
- ----------------------------------------------------------------------- ----------- --------------- --------------
<S> <C> <C> <C>
DOMESTIC CASINOS
Bally's Park Place Casino-Resort ...................................... 1,265 1996 155,000
Atlantic City, New Jersey(1)(2)
The Atlantic City Hilton Casino Resort ................................ 805 1996 60,000
Atlantic City, New Jersey(1)(3)
Bally's Las Vegas ..................................................... 2,814 1996 68,000
Las Vegas, Nevada(1)(4)
Flamingo Hilton-Las Vegas ............................................. 3,642 1971 93,000
Las Vegas, Nevada(5)
Las Vegas Hilton ...................................................... 3,174 1971 100,000
Las Vegas, Nevada(6)
</TABLE>
139
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF APPROXIMATE
ROOMS/ CASINO
NAME AND LOCATION SUITES YEAR ACQUIRED SQUARE FOOTAGE
- ----------------------------------------------------------------------- ----------- --------------- --------------
<S> <C> <C> <C>
Flamingo Hilton-Laughlin .............................................. 2,000 1990 58,000
Laughlin, Nevada(7)
Flamingo Hilton-Reno .................................................. 604 1981 46,000
Reno, Nevada(8)
Reno Hilton ........................................................... 2001 1992 114,000
Reno, Nevada(9)
Grand Casino Biloxi ................................................... 1,000 1994 115,000
Biloxi, Mississippi(10)
Grand Casino Gulfport ................................................. 400 1993 110,000
Gulfport, Mississippi(11)
Grand Casino Tunica ................................................... 756 1996 140,000
Tunica County, Mississippi(12)
Bally's Saloon-Gambling Hall-Hotel .................................... 238 1996 40,000
Robinsonville, Mississippi(1)
Flamingo Casino-Kansas City ........................................... -- 1996 30,000
Kansas City, Missouri
Bally's Casino-Lakeshore Resort ....................................... -- 1996 30,000
New Orleans, Louisiana(1)(13)(14)
INTERNATIONAL CASINOS
Conrad International Treasury Casino, Brisbane ........................ 136 1995 65,000
Brisbane, Queensland, Australia(15)
Conrad Jupiters, Gold Coast ........................................... 609 1985 70,000
Gold Coast, Queensland, Australia(15)
Conrad International Punta del Este
Resort and Casino ...................................................
Punta del Este, Uruguay(14)(16) 300 1997 38,000
</TABLE>
- ------------------------
(1) The referenced properties were acquired as a result of the Bally Merger.
(2) Casino square footage includes 75,000 square feet attributable to The Wild
Wild West casino and 8,500 square feet attributable to the race book.
(3) Casino square footage includes 1,500 square feet attributable to the race
book.
(4) Casino square footage includes 5,000 square feet attributable to the race
and sports book.
(5) Casino square footage includes 20,000 square feet attributable to O'Sheas
Irish theme casino adjacent to the hotel.
(6) Casino square footage includes 29,0000 square feet attributable to the race
and sport book and 22,000 square feet attributable to the SpaceQuest casino.
(7) Casino square footage includes 3,000 square feet attributable to the race
and sport book.
(8) An extension of the Flamingo Hilton-Reno casino operation is contained in a
structure located on an adjacent block with a skywalk connecting it to the
main building. This structure is held under four long-term leases or
subleases, expiring on various dates from January 2001 to August 2034,
including renewal options, all of which may not necessarily be exercised.
Casino square footage includes 2,500 square feet attributable to the race
and sport book.
140
<PAGE>
(9) Casino square footage includes 12,000 square feet attributable to the race
and sport book.
(10) Includes two 500-room hotels located adjacent to the casino.
(11) A new resort hotel at Grand Casino Gulfport is currently under construction
and is expected to be completed during 1999.
(12) A new resort hotel at Grand Casino Tunica is currently under construction
and is expected to be completed during 1999. Number of rooms/suites reflects
room availability at two hotels.
(13) Park Place has a 49.9% ownership interest in this property.
(14) The owners of these properties are parties to loans under which they are
obligated to make payments to Park Place.
(15) Park Place has a 19.9% ownership interest in these properties.
(16) Park Place has a 43% ownership interest in this property. The casino opened
in January 1997 and the hotel opened in stages over the latter half of 1997.
NEVADA CASINOS
Park Place owns and operates six casino hotels in the State of Nevada: the
Las Vegas Hilton, the Flamingo Hilton-Las Vegas, Bally's Las Vegas, the Flamingo
Hilton-Laughlin, the Reno Hilton and the Flamingo Hilton-Reno.
Park Place's Nevada gaming operations reach diverse markets by offering
gaming alternatives for premium players, convention visitors, mid-market
gamblers and budget-conscious customers. The Las Vegas Hilton is located
adjacent to the Las Vegas Convention Center and focuses on upscale individual
leisure guests and convention groups. Bally's Las Vegas is located at the "Four
Corners" on the Strip in Las Vegas and caters to convention groups and the
mid-to upper mid-market, including the group tour and travel segment. Bally's
Las Vegas is also serviced by a public monorail which connects to the MGM Grand
Hotel and Casino. The Flamingo Hilton-Las Vegas and the Flamingo Hilton-Reno
focus primarily on the mid-market, in particular the group tour and travel
segment. The Flamingo Hilton-Laughlin targets the budget and mid-market
segments. The Reno Hilton focuses primarily on the mid-market, in particular
convention groups. Each of these casino hotels has gaming, convention, dining,
shopping, entertainment and, with the exception of the Flamingo Hilton-Reno,
indoor and outdoor recreational facilities. A variety of popular entertainment
is featured in theaters and lounges at each hotel.
In January 1998, Park Place's "Star Trek: The Experience at the Las Vegas
Hilton" opened, which was developed in collaboration with Paramount Parks Inc.
("Paramount"). This 65,000 square foot attraction features a motion based
simulation ride, interactive video and virtual reality stations, dining and
souvenir shops. The building housing the Star Trek attraction is owned by Park
Place and leased to Paramount. The attraction is also managed by Paramount. In
conjunction with the Star Trek attraction, in November 1997, SpaceQuest casino,
a themed 22,000 square foot addition, opened at the Las Vegas Hilton.
In 1997, continued refurbishment and expansion of existing facilities in
Nevada took place in order to maintain their presence as premier properties in
the market. The Las Vegas Hilton renovated approximately 850 guest rooms,
remodeled the lobby in conjunction with the Star Trek attraction, rebuilt a new
marquee sign, opened new retail stores and a parking garage and upgraded its
slot machines and life safety system. The Flamingo Hilton-Las Vegas opened a new
restaurant, renovated the casino and showroom entrance, enlarged its casino bar
and added a pool bar. Bally's Las Vegas renovated its showroom and upgraded the
Jubilee Show and also continued to renovate its life safety and building
management systems. The Flamingo Hilton-Laughlin renovated 1,000 guestrooms,
installed a riverside dock to accommodate a new boat operation and continued its
slot machine replacement program. At the Reno Hilton, the bowling center, guest
room suites and restaurant areas were renovated. The Flamingo Hilton-Reno
renovated the casino, guest rooms and the gift shop and upgraded slot machines.
141
<PAGE>
Each of the casino hotels is open 24 hours a day, seven days a week, for
gaming activities. Games operated in these casinos include "blackjack," craps,
roulette, "big 6," baccarat, poker, keno and slot and other coin machines. The
Las Vegas Hilton's race and sports book is linked by satellite or modem to the
casinos at the Flamingo Hilton-Las Vegas, the Flamingo Hilton-Laughlin, the Reno
Hilton and the Flamingo Hilton-Reno. Bally's Las Vegas also operates a race and
sport book.
It is impracticable for Park Place's casino hotels to record the total
amount bet in the casinos, although the amount of chips issued for cash and
credit is determined regularly. The amount of gaming activity varies
significantly from time to time primarily due to general economic conditions,
popularity of entertainment in the hotels, and occupancy rates in the hotels and
in the Las Vegas, Laughlin and Reno markets. The amount of revenue from gaming
operations varies depending upon the amount of gaming activity as well as
variations in the odds for different games and the factor of chance. Casino
activities are conducted by experienced personnel who are supervised at all
times.
As is the case of any business that extensively involves the handling of
cash, gaming operations at Park Place's casino hotels are subject to risk of
substantial loss as a result of dishonesty. However, Park Place believes that it
has reduced such risk, by means of procedures for supervision of employees and
other controls, to the fullest extent practicable without impediment to play and
within the limits of reasonable costs. Substantially all table games and slot
machines can be monitored by remote control television and substantially all
slot machines at all six Nevada properties are monitored by computers.
The Las Vegas Hilton and, to a lesser extent, the Flamingo Hilton-Las Vegas,
Bally's Las Vegas, the Flamingo Hilton-Laughlin, the Flamingo Hilton-Reno and
the Reno Hilton invite VIP customers to their casinos and may pay for or
reimburse the cost of their air transportation and provide them with
complimentary rooms, food and beverage. In addition, the Las Vegas Hilton has a
special flight program, pursuant to which free air transportation on Park Place
owned or chartered aircraft and complimentary rooms, food and beverage are
provided to groups or selected persons. These persons either have established
casino credit limits or cash on deposit in the casino and have previously
evidenced a willingness to put substantial amounts at risk at the casino. The
Las Vegas Hilton hosted 37 special flight programs in 1997, compared to 18 such
programs in 1996.
NEW JERSEY CASINOS
Park Place owns and operates two casino hotels in Atlantic City, New Jersey:
the 1,265-room Bally's Park Place Casino-Resort, which includes The Wild Wild
West casino ("Bally's Park Place") and the 805-room Atlantic City Hilton Casino
Resort ("The Atlantic City Hilton").
Bally's Park Place, currently the largest four-star hotel in New Jersey, is
located on an eight-acre site with ocean frontage at the intersection of Park
Place and the Boardwalk. With its strategic location on the Boardwalk, over
2,800 parking spaces and a new bus terminal, Bally's Park Place is strongly
positioned to attract significant walk-in and drive-in business. The Atlantic
City Hilton is located on approximately three acres at the intersection of
Boston and Pacific Avenues at the southern end of the Boardwalk in proximity to
one of the major highways leading into Atlantic City. This location gives The
Atlantic City Hilton an advantage in attraction destination oriented customers
arriving by automobile or bus.
In July 1997, Park Place's new 75,000 square foot western-themed casino, The
Wild Wild West, opened. It is located on approximately four acres of boardwalk
property adjacent to Bally's Park Place. Also in July 1997, The Atlantic City
Hilton completed a new 300-room hotel tower, which includes meeting rooms,
restaurants and other related amenities. In January 1998, the Atlantic City
Country Club in Northfield, New Jersey was acquired, which features an 18-hole
golf course.
Park Place's Atlantic City properties have gaming, dining, shopping,
entertainment, convention and meeting facilities, recreational facilities and
parking. A variety of popular entertainment, sports events and production shows
are featured at both properties. The Atlantic City casinos are open 24 hours a
day, seven days a week, for gaming activities, and feature table games and slot
machines similar to those offered at
142
<PAGE>
Park Place's Nevada casino hotels. Atlantic City casinos do not contain sports
books, however, Park Place's Atlantic City casinos feature simulcast horse
racing. Revenue and earnings for Park Place's Atlantic City casinos peak during
the summer, with less favorable operating results in the winter.
Bally's Park Place focuses on high-end players and the mid-market segment,
including the mid- to upper mid-market slot player segment. The Atlantic City
Hilton primarily focuses on personalized service for high-end and mid-market
casino customers.
MISSISSIPPI CASINOS
Upon consummation of the Merger, Park Place will own and operate four casino
hotels in the State of Mississippi: the Grand Casino Biloxi, the Grand Casino
Gulfport, the Grand Casino Tunica and the Bally's Saloon-Gambling Hall-Hotel,
each of which are dockside casinos.
GRAND CASINO BILOXI
Grand Casino Biloxi opened on January 17, 1994, and is the largest dockside
casino on the Mississippi Gulf Coast. Grand Casino Biloxi is a three-story
building built upon a moored steel barge with approximately 250,000 square feet
of interior space. The Grand Casino Biloxi location is one of a few sites on the
Mississippi Gulf Coast that permits east-west orientation of the casino, thus
maximizing visibility from the highway. A pedestrian walkway connects the casino
to 3,500 parking spaces available for guests.
The casino area features approximately 115,000 square feet of gaming space
and six restaurants. In 1995, Grand Casino Biloxi opened a twelve-story,
500-room hotel adjacent to the casino, together with a Grand Casino Kids
Quest-SM- child care entertainment center located on the first floor. Grand
Casino Biloxi also operates a 1,600-seat show theater adjacent to the casino
that features a production/variety show with matinee and evening performances,
boxing events, and other professional entertainment. In February 1998, a second
hotel was opened with 500 rooms and a 60,000 square-foot convention center.
GRAND CASINO GULFPORT
Grand Casino Gulfport, which opened in May 1993, is a three story building
set upon moored steel linked barges consisting of approximately 225,000 square
feet of interior space. There are 3,500 parking spaces available for guests.
Grand Casino Gulfport also offers a nightclub/entertainment complex adjacent to
the casino that contains separately themed nightclubs.
The casino area consists of approximately 110,000 square feet of gaming area
and is decorated in a "carnival" Mardi Gras theme. Other amenities include four
restaurants, a Grand Casino Kids Quest-SM-, a Grand Arcade, a multi-venue
entertainment complex and America Live, a nightclub/entertainment complex
containing separately-themed nightclubs. Grand Casino Gulfport has a
seventeen-story, 400-room hotel adjacent to the casino.
GRAND CASINO TUNICA
Grand Casino Tunica opened in June 1996 and is the largest dockside casino
in Mississippi and one of the largest casinos in the United States. Grand Casino
Tunica is being developed into a destination gaming resort featuring a
multi-themed casino and currently features two hotels with an aggregate of 756
rooms. Recent additions include an 18-hole professionally designed championship
golf course and driving range.
Grand Casino Tunica is located in Tunica County, Mississippi, approximately
15 miles south of the Memphis metropolitan area. Located directly on the
northern border of Tunica County, Grand Casino Tunica is currently the closest
legal gaming site to Memphis, Tennessee, and the only casino property in Tunica
County that has direct frontage on U.S. Highway 61, the most direct route from
Memphis to Tunica County gaming sites.
Grand Casino Tunica is a 400,000-square-foot, three-story, multi-themed
casino complex containing approximately 140,000 square feet of gaming space.
Grand Casino Tunica features four unique themes of
143
<PAGE>
Americana: Gold Rush Era San Francisco, an 1890s Mississippi Riverboat Town, New
Orleans Mardi Gras and the Great American West of the 1870s. Grand Casino Tunica
offers its guests a choice of six restaurants, as well as an entertainment
lounge and Player's Club.
BALLY'S SALOON-GAMBLING HALL-HOTEL
Park Place owns and manages Bally's Saloon-Gambling Hall-Hotel, a casino and
hotel complex located in Robinsonville, Mississippi, near Memphis, Tennessee.
The complex features a dockside casino and an adjacent 30,000 square foot
land-based facility which includes entertainment facilities and a restaurant.
Park Place also owns and operates a 238-room hotel at this complex.
MISSOURI CASINO
Park Place owns and manages the Flamingo Casino-Kansas City, a casino
complex in Kansas City, Missouri. This wholly-owned complex features a dockside
casino and concession and entertainment facilities. An agreement between Park
Place and the Port Authority of Kansas City could require, under certain
circumstances, Park Place to sell 10% of its ownership interest in the complex
to locally-based minorities.
In November 1997, the Missouri Supreme Court ruled that riverboat casinos
operating in man-made basins must meet certain requirements as to contiguity
with the Mississippi or Missouri rivers in order to comply with the Missouri
constitution. In response to this decision, Park Place and other operators of
riverboat casinos in man-made basins have filed a referendum which has qualified
for inclusion on the Missouri ballot for the November 3, 1998 election which, if
approved, would permit Park Place to continue to operate games of chance on its
riverboat casino at the present location. Failure of passage of such referendum
is likely to have a material adverse effect upon the operation of Park Place's
Missouri casino. See "Risk Factors--Statewide Gaming Referenda" and
"--Regulation and Licensing--Missouri Gaming Laws." The assets of the Flamingo
Casino-Kansas City have been written down to their net realizable value.
On August 12, 1998 the Missouri Gaming Commission announced that it would
reopen the licensing investigation of a subsidiary of Park Place that operates
the Missouri casino regarding alleged actions in 1993 by a former employee of
another Park Place subsidiary to influence an official of the Kansas City Port
Authority. This investigation arises out of a diversion agreement executed on
August 12, 1998 between such two Park Place subsidiaries and the United States
Attorney in Kansas City relating to such alleged actions. Pursuant to the
diversion agreement, such subsidiaries accepted responsibility for whatever
actions may have been taken by any former employees and paid the sum of $655,000
to settle the matter, and the government confirmed that no current employees,
officers or directors of Hilton and such two subsidiaries were in any way
involved. Hilton has advised the MGC that it will cooperate fully in such
investigation. A prior investigation of the same matter by the MGC in 1996
concluded in the grant of a license to operate the Missouri casino. While no
assurance can be given as to outcome of the reopened investigation, Park Place
believes that there is no basis for any change in the licensing status of its
Missouri casino.
LOUISIANA CASINO
Park Place has a 49.9% ownership interest in the Belle of Orleans, L.L.C.
(the "Belle") which owns Bally's Casino-Lakeshore Resort, a riverboat casino
facility that operates out of South Shore Harbor on Lake Pontchartrian in
Orleans Parish, which is approximately eight miles from the French Quarter of
New Orleans.
Park Place's subsidiary (the "Louisiana Subsidiary") and Metro Riverboat
Associates, Inc. ("Metro"), which owns the remaining 50.1% interest in the
Belle, are engaged in certain litigation. The Louisiana Subsidiary and Metro
entered into an operating agreement defining the rights and obligations of the
members of Belle, along with a management agreement providing for the Louisiana
Subsidiary to manage the riverboat casino. In early 1997, Metro filed suit in
Louisiana state court seeking contractual and
144
<PAGE>
injunctive relief under the terms of the operating and management agreements
based on non-competition and change of control provisions which were allegedly
triggered as a result of the Bally Merger. Preliminary injunctive relief was
granted to Metro by the trial court. On appeal, such ruling was affirmed in
part, vacated in part and remanded to the trial court for further proceedings.
In June 1998, Metro filed a second, related suit for damages in an unspecified
amount against the Louisiana Subsidiary and certain of its affiliates. The two
suits filed by Metro were consolidated by the trial court and are currently in
the discovery stage. Park Place will vigorously defend the claim for damages
under such suits. The Lousiana Subsidiary has filed an action in Illinois state
court seeking judgment against Metro based upon Metro's default under certain
agreements between the parties relating to a $4 million loan to Metro.
OTHER DOMESTIC ASSETS
Park Place also owns two riverboats not currently in operation. These
riverboats, which have 25,000 and 20,000 square feet of casino space,
respectively, are being held for sale in Louisiana and Ontario, Canada.
INTERNATIONAL CASINOS
Park Place, through its subsidiaries, manages three international casino
hotels which feature table games and slot machines similar to those offered at
Park Place's casino hotels in Nevada and New Jersey.
In January 1997, casino operations commenced at the 43% owned Conrad
International Punta del Este Resort and Casino in Uruguay. The hotel opened in
stages over the latter half of 1997, and features convention facilities,
restaurants and related amenities.
Park Place has 19.9% ownership interests in the Conrad Jupiters, Gold Coast
and the Conrad International Treasury Casino, Brisbane, both of which are
located in Queensland, Australia. The Conrad International Treasury Casino,
Brisbane has the exclusive right to conduct casino gaming in Brisbane until
2005.
EXPANSION PROGRAM
NEVADA
Park Place continues to expand its domestic gaming operations through the
development of the 2,900-room Paris Casino-Resort, a new casino resort adjacent
to Bally's Las Vegas which will feature an 85,000 square foot casino, 13
restaurants, 130,000 square feet of convention space and a retail shopping
complex with a French influence. In addition to a 50-story replica of the Eiffel
Tower, the resort will also feature replications of some of Paris' most
recognized landmarks, including the Arc de Triomphe, the Paris Opera House, The
Louvre and rue de la Paix. The Paris Casino-Resort is scheduled to be completed
in the fall of 1999.
In 1998, Park Place's Nevada casino hotels are scheduled to complete
additional expansion and renovation programs. The Las Vegas Hilton plans to
renovate an additional 850 guest rooms and the casino and sportsbook, expand
valet parking and renovate the pool and spa. The Flamingo Hilton-Las Vegas plans
to renovate guest rooms, and casino areas, upgrade slots and enhance signage and
the cooling and information systems. Bally's Las Vegas plans to continue its
participation in a joint venture to erect pedestrian bridges over the Strip and
Flamingo Road connecting the property to other hotel casinos, and also plans to
remodel the ballroom and events center and upgrade elevators. The Flamingo
Hilton-Laughlin plans to renovate an additional 1,000 guest rooms, along with
the casino and the main level of the property, and continue its slot machine
replacement program. At the Reno Hilton, planned improvements include renovation
of guest rooms suites, slot upgrades, additional signage and enhancement of the
cooling and information systems. The Flaming Hilton-Reno plans to continue to
renovate guest rooms and upgrade slot machines.
145
<PAGE>
NEW JERSEY
Park Place's Atlantic City, New Jersey casino hotels are also commencing
renovation projects in 1998. Bally's Park Place plans to renovate 500 guest
rooms and restaurant areas. The Atlantic City Hilton plans to renovate the
property's previously existing guest rooms to be consistent with the standard of
the guest rooms in the new 300-room tower addition.
MISSISSIPPI
The Gulfport Oasis, a new resort hotel, is currently under construction at
Grand Casino Gulfport and is expected to be completed during 1999. Also under
development is an approximately 1,750-acre recreation area between Gulfport and
Biloxi. Park Place intends to build an 18-hole championship golf course on the
property, together with a clubhouse and sporting clay shooting facility. These
projects are expected to be completed in mid-1999.
The 2,000 acre site for Grand Casino Tunica is conducive to significant
long-term development of the site. Grand Casino Tunica's master plan
contemplates additional entertainment amenities, including additional hotels, a
second championship golf course, a village center containing additional hotel
sites, restaurants, retail shopping and other attractions, and residential
properties on the golf course. Such future developments are expected to be
funded primarily from cash flow. Such future developments, if completed, are
expected to further enhance Grand Casino Tunica's status as a premier
destination gaming resort and to encourage repeat visits. Any such additional
development, however, will be dependent upon the operating results of Grand
Casino Tunica and other future conditions, and no assurance can be given that
any such additions will be completed.
EMPLOYEES
At September 15, 1998, pro forma for the Transactions, Park Place had
approximately 41,000 employees, of which approximately 12,000 were covered by
various collective bargaining agreements providing, generally, for basic pay
rates, working hours, other conditions of employment and orderly settlement of
labor disputes. Park Place believes that the aggregate compensation benefits and
working conditions afforded its employees compare favorably with those received
by employees in the gaming industry generally. Although strikes of short
duration have from time to time occurred at certain of Park Place's facilities,
Park Place believes its employee relations are satisfactory.
COMPETITION
Park Place will seek to maintain the diversity of its gaming businesses
while expanding both domestically and internationally. Park Place intends to
improve and expand its core business by leveraging its strong brand names,
maximizing operating efficiencies, expanding and enhancing properties and
acquiring or developing properties as appropriate.
To the extent that the casino hotel capacity is expanded by others in a city
where Park Place casino hotels are located, competition will increase. The
completion of a number of room expansion projects and the opening of new casino
hotels led to a 6% increase in hotel capacity in Las Vegas in 1997 compared to
1996, thereby increasing competition in all segments of the Las Vegas market.
Certain of Park Place's competitors have also announced, or are developing, new
casino projects in Las Vegas and Atlantic City which, if completed, will add
significant casino space and hotel rooms to these markets. Such new capacity
additions to the Las Vegas and Atlantic City markets could adversely impact Park
Place's future operating results. The business of Park Place's Nevada casino
hotels might also be adversely affected if gaming operations of the type
conducted in Nevada were to be permitted under the laws of other states,
particularly California. Similarly, legalization of gaming operations in any
jurisdiction located near Atlantic City, New Jersey, or the establishment of new
large scale gaming operations on nearby Indian tribal lands, could adversely
affect Park Place's Atlantic City casino hotels. The expansion of riverboat
gaming or casino gaming on Indian tribal lands could also impact Park Place's
gaming operations. Gaming related referenda
146
<PAGE>
will be voted upon or are being proposed in several states which could, if
passed, materially affect Park Place. See "Risk Factors--Statewide Gaming
Referenda."
STATISTICAL DATA
The following table sets forth certain statistical information as of and for
the year ended December 31, 1997, with respect to Park Place's properties:
<TABLE>
<CAPTION>
AVERAGE
PROPERTIES ROOMS OCCUPANCY ROOM RATE REVPAR(1)
---------- ------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OWNED & MANAGED HOTEL CASINOS
Western Region................ 6 14,235 86.5% $76.53 $66.20
Eastern Region................ 3 2,308 88.1 87.01 76.63
International................. 3 1,047 68.9 99.86 68.84
---- ------ ---- ------ ------
Total......................... 12 17,590 85.8% $78.81 $67.62
---- ------ ---- ------ ------
---- ------ ---- ------ ------
</TABLE>
- ------------------------
(1) RevPar is equal to rooms revenue divided by available rooms.
LITIGATION
Hilton or its subsidiaries are parties to legal proceedings relating to the
Hilton Gaming Business that will be assumed by Park Place pursuant to the Hilton
Distribution Agreement. In the opinion of management, the resolution of these
matters will not have a material effect on Park Place's financial position or
results of operation. In addition, Grand and its subsidiaries are parties to
various lawsuits and any liability with respect thereto will be an obligation of
the Park Place consolidated group. Pursuant to the Grand Distribution Agreement
and the Merger Agreement, Grand will be indemnified by Lakes for certain
liabilities. If Lakes is unable to satisfy its indemnification obligations,
Grand will be responsible for such liabilities which could have a material
adverse effect on Park Place. See "The Transactions-- Indemnification
Obligations" and "Business and Properties of Lakes--Legal Proceedings."
ENVIRONMENTAL MATTERS
Park Place, like others in its industry, is subject to various federal,
state, local and, in some cases, foreign laws, ordinances and regulations that
(i) govern activities or operations that may have adverse environmental effects,
such as discharges to air and water, as well as handling and disposal practices
for solid and hazardous or toxic wastes, or (ii) may impose liability for the
costs of cleaning up, and certain damages resulting from, sites of past spills,
disposals or other releases of hazardous or toxic substances or wastes
(together, "Environmental Laws").
Park Place endeavors to maintain compliance with Environmental Laws, but,
from time to time, Park Place's operations may have resulted or may result in
noncompliance or liability for cleanup pursuant to Environmental Laws. In that
regard, Park Place received notice from the current landowner of a prior Park
Place facility in Chicago, Illinois that the landowner may seek to recover past
and future costs of investigating and remediating alleged soil and groundwater
contamination at the facility. Park Place does not believe that Park Place's
prior operations at the site have contributed to the alleged contamination; as a
result, if the current landlower pursues its claim, Park Place expects to
vigorously defend against the claim. Park Place cannot at this time estimate the
potential costs of investigation or cleanup, if any, however, based on currently
available information, Park Place believes that any such costs would be shared
by several parties and, in any event, the cost estimates provided to date
indicate that any such liability would not have a material adverse effect on
Park Place's results of operations or financial condition.
147
<PAGE>
REGULATION AND LICENSING
Each of Park Place's casinos will be subject to extensive regulation under
laws, rules and supervisory procedures primarily in the jurisdiction where
located or docked. Some jurisdictions, however, empower their regulators to
investigate participation by licensees in gaming outside their jurisdiction and
require access to and periodic reports respecting such gaming activities.
Violations of laws in one jurisdiction could result in disciplinary action in
other jurisdictions.
In connection with the Transactions, Park Place must be found suitable as
the parent holding company of subsidiaries which hold gaming licenses in all
domestic jurisdictions in which such licenses are held. In addition, in certain
jurisdictions, certain indirectly owned subsidiaries of Park Place will also
need to be registered, licensed or found suitable in connection with the
Transactions. To the extent required, applications relating to such findings of
suitability are being prepared and filed in each jurisdiction in which gaming
activities are conducted. See "Risk Factors--Risks Related to the
Transactions--Highly Regulated Industry." UNLESS THE CONTEXT OTHERWISE REQUIRES,
THE FOLLOWING DISCUSSION ASSUMES THE TRANSACTIONS HAVE OCCURRED.
Under provisions of Nevada, New Jersey, Louisiana, Mississippi, Missouri and
other gaming laws and Park Place's Certificate of Incorporation, certain
securities of Park Place are subject to restrictions on ownership which may be
imposed by specified governmental authorities. Such restrictions may require the
holder to dispose of the securities or, if the holder refuses to make such
disposition, Park Place may be obligated to repurchase the securities.
NEVADA GAMING LAWS
The ownership and operation of casino gaming facilities in the State of
Nevada, such as those at the Las Vegas Hilton, the Flamingo Hilton-Las Vegas,
Bally's Las Vegas, the Flamingo Hilton-Laughlin, the Reno Hilton and the
Flamingo Hilton-Reno, are subject to the Nevada Gaming Control Act and the
regulations promulgated thereunder (the "Nevada Act") and various local
regulations. Hilton's Nevada gaming operations are, and Park Place's Nevada
gaming operations will be, subject to the licensing and regulatory control of
the Nevada Gaming Commission (the "Nevada Commission"), the Nevada State Gaming
Control Board (the "Nevada Board") and, depending on the facility's location,
the Clark County Liquor and Gaming Licensing Board (the "CCB") and the City of
Reno. The Nevada Commission, the Nevada Board, the CCB and the City of Reno are
collectively referred to as the "Nevada Gaming Authorities." The following
regulatory requirements are currently applicable to Hilton and will be
applicable to Park Place upon consummation of the Transactions.
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy that are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment and maintenance of
effective controls over the financial practices of licensees, including the
establishment of minimum procedures for internal fiscal affairs and the
safeguarding of assets and revenues, providing reliable record keeping and
requiring the filing of periodic reports with the Nevada Gaming Authorities;
(iv) the prevention of cheating and fraudulent practices; and (v) providing a
source of state and local revenues through taxation and licensing fees. Changes
in such laws, regulations and procedures could have an adverse effect on Park
Place's gaming operations.
Each subsidiary of Hilton (that will become a subsidiary of Park Place) that
currently operates a casino in Nevada, or that will operate a casino in Nevada
upon consummation of the Transactions (individually, a "Corporate Licensee" and
collectively, the "Corporate Licensees"), is required to be licensed by the
Nevada Gaming Authorities. The gaming license requires the periodic payment of
fees and taxes and is not transferable. Hilton is, and Park Place will be,
required to be registered by the Nevada Commission as a publicly-traded
corporation ("Registered Corporation") and as such, will be required
148
<PAGE>
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information that the Nevada Commission may
require. No person may become a stockholder of, or receive any percentage of
profits from, a Corporate Licensee without first obtaining licenses and
approvals from the Nevada Gaming Authorities. Hilton and the Corporate Licensees
have obtained from the Nevada Gaming Authorities the various registrations,
findings of suitability, approvals, permits and licenses (individually, a
"Gaming License" and collectively, "Gaming Licenses") required in order to
engage in gaming activities in Nevada. In connection with the Transactions, Park
Place has applied to the Nevada Gaming Authorities for substantially similar
Gaming Licenses. No assurance can be given that such Gaming Licenses will be
granted or that if granted, they will be granted on a timely basis.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, Park Place or any of its
Corporate Licensees in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors and certain key employees of Park Place and the Corporate Licensees
must file applications with the Nevada Gaming Authorities and may be required to
be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause which
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. An applicant for licensing or an applicant for a
finding of suitability must pay for all the costs of the investigation. Changes
in licensed positions must be reported to the Nevada Gaming Authorities and, in
addition to their authority to deny an application for a finding of suitability
or licensing, the Nevada Gaming Authorities have the jurisdiction to disapprove
a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with Park Place or any Corporate Licensee, Park Place and the
Corporate Licensee would have to sever all relationships with such person. In
addition, the Nevada Commission may require Park Place or a Corporate Licensee
to terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or questions pertaining to licensing
are not subject to judicial review in Nevada.
Hilton and all Corporate Licensees are, and Park Place and its Corporate
Licensees will be, required to submit detailed financial and operating reports
to the Nevada Commission. Substantially all material loans, leases, sales of
securities and similar financing transactions of a Corporate Licensee must be
reported to, or approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by Park Place or a
Corporate Licensee, the Gaming Licenses it holds could be limited, conditioned,
suspended or revoked, subject to compliance with certain statutory and
regulatory procedures. In addition, the Corporate Licensee, Park Place and the
persons involved could be subject to substantial fines for each separate
violation of the Nevada Act at the discretion of the Nevada Commission. Further
a supervisor could be appointed by the Nevada Commission to operate a Corporate
Licensee's gaming establishment and, under certain circumstances, earnings
generated during the supervisor's appointment (except for the reasonable rental
value of the gaming establishment) could be forfeited to the State of Nevada.
Limitation, conditioning or suspension of any Gaming License of a Corporate
Licensee or the appointment of a supervisor could (and revocation of any Gaming
License would) have a material adverse effect on Park Place's gaming operations.
Any beneficial holder of Park Place's Common Stock, or any other voting
security of Park Place ("Park Place Voting Securities"), regardless of the
number of shares owned, may be required to file an application, be investigated,
and have such person's suitability as a beneficial holder of Park Place Voting
Securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of the investigation incurred
by the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires a beneficial ownership of
more than 5% of Park Place Voting Securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of Park Place Voting Securities apply to the Nevada Commission for a finding
of suitability within thirty days after the Chairman of the Nevada Board mails
the written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires
beneficial ownership of more than 10%, but not more than 15%, of Park Place
Voting Securities may apply to the Nevada Commission for a waiver of such
finding of suitability if such institutional investor holds Park Place Voting
Securities for investment purposes only. An institutional investor shall not be
deemed to hold Park Place Voting Securities for investment purposes unless Park
Place Voting Securities were acquired and are held in the ordinary course of
business as an institutional
149
<PAGE>
investor and not for the purpose of causing, directly or indirectly, the
election of a majority of the members of the Park Place Board, any change in
Park Place's corporate charter, bylaws, management, policies or operations, or
any of its gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding Park Place Voting Securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial holder
of Park Place Voting Securities who must be found suitable is a corporation,
partnership, limited partnership, limited liability company or trust, it must
submit detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
by the Chairman of the Nevada Board may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of Park Place Voting
Securities beyond such period of time as may be prescribed by the Nevada
Commission may be guilty of a criminal offense. Park Place will be subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with Park Place or a
Corporate Licensee, Park Place (i) pays that person any dividend or interest
upon any Park Place Voting Securities; (ii) allows that person to exercise,
directly or indirectly, any voting right conferred through securities held by
that person; (iii) pays remuneration in any form to that person for services
rendered or otherwise; or (iv) fails to pursue all lawful efforts to require
such unsuitable person to relinquish the voting securities including, if
necessary, the immediate purchase of such voting securities for cash at fair
market value. Additionally, the CCB has the authority to approve all persons
owning or controlling the stock of any corporation controlling a gaming
licensee.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own such debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it (i) pays to the unsuitable person any dividend, interest or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation or similar
transaction.
150
<PAGE>
Hilton is, and Park Place will be, required to maintain a current stock
ledger in Nevada which may be examined by the Nevada Gaming Authorities at any
time. If any securities are held in trust by an agent or by a nominee, the
record holder may be required to disclose the identity of the beneficial owner
to the Nevada Gaming Authorities. A failure to make such disclosure may be
grounds for finding the record holder unsuitable. Park Place will also be
required to render maximum assistance in determining the identity of the
beneficial owner of any Park Place Voting Securities. The Nevada Commission has
the power to require Hilton's and Park Place's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act. To date,
the Nevada Commission has not imposed such a requirement on Hilton and it is not
known at this time whether such a requirement will be imposed on Park Place.
Hilton is not, and Park Place will not be, permitted to make a public
offering of their securities without the prior approval of the Nevada Commission
if the securities or the proceeds therefrom are intended to be used to
construct, acquire or finance gaming facilities in Nevada, or to retire or
extend obligations incurred for such purposes. On September 25, 1997, the Nevada
Commission granted Hilton prior approval to make public offerings for a period
of two years, subject to certain conditions (the "Shelf Approval"). The Shelf
Approval also applies to any affiliated company wholly owned by Hilton (an
"Affiliate") which is a publicly-traded corporation or would thereby become a
publicly-traded corporation pursuant to a public offering. The Shelf Approval
also includes approval for the Corporate Licensees to guarantee any security
issued by, or to hypothecate their assets to secure the payment or performance
of any obligations issued by, Hilton or an Affiliate in a public offering under
the Shelf Registration. The Shelf Approval, however, may be rescinded for good
cause without prior notice upon the issuance of an interlocutory stop order by
the Chairman of the Nevada Board. The Shelf Approval does not constitute a
finding, recommendation or approval of the Nevada Gaming Authorities as to the
accuracy or adequacy of the prospectus or the investment merits of the
securities offered thereby. Any representation to the contrary is unlawful. The
Hilton Distribution will be made pusuant to the Shelf Approval. Park Place has
applied to the Nevada Commission for a Shelf Approval substantially similar to
the current Hilton Shelf Approval.
Changes in control of Park Place through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby such person obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and Nevada Commission in a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licenses, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before Park Place can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by Park Place's
Board in response to a tender offer made directly to its stockholders for the
purpose of acquiring control of Park Place.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Corporate
151
<PAGE>
Licensees' respective operations are conducted. Depending upon the particular
fee or tax involved, these fees and taxes are payable either monthly, quarterly
or annually and are based upon either: (i) a percentage of the gross revenues
received; (ii) the number of gaming devices operated; or (iii) the number of
table games operated. A casino entertainment tax is also paid by casino
operations where entertainment is furnished in connection with the selling or
serving of food or refreshments or the selling of merchandise. Nevada Corporate
Licensees that hold a license as an operator of a slot route, or a
manufacturer's or distributor's license also pay certain fees and taxes to the
State of Nevada. The Corporate Licensees currently pay monthly fees to the
Nevada Commission equal to a maximum of 6.25% of gross revenues.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation of
the Nevada Board of the Licensee's participation in such foreign gaming. The
revolving fund is subject to increase or decrease in the discretion of the
Nevada Commission. Thereafter, Licensees are required to comply with certain
reporting requirements imposed by the Nevada Act. A Licensee is also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities or
enters into associations that are harmful to the State of Nevada or its ability
to collect gaming taxes and fees, or employs, contracts with or associates with
a person in the foreign operation who has been denied a license or finding of
suitability in Nevada on the ground of personal unsuitability.
The sale of alcoholic beverages at establishments operated by a Corporate
Licensee is subject to licensing, control and regulation by applicable local
regulatory agencies. All licenses are revocable and are not transferable. The
agencies involved have full power to limit, condition, suspend or revoke any
such license, and any such disciplinary action could (and revocation would) have
a material adverse effect upon the operations of the Corporate Licensee.
NEW JERSEY GAMING LAWS
The ownership and operation of casino gaming facilities in Atlantic City are
subject to the New Jersey Casino Control Act (the "New Jersey Act"), regulations
of the New Jersey Casino Control Commission (the "New Jersey Commission") and
other applicable laws. No casino may operate unless the required permits or
licenses and approvals are obtained from the New Jersey Commission. The New
Jersey Commission is authorized under the New Jersey Act to adopt regulations
covering a broad spectrum of gaming and gaming related activities and to
prescribe the methods and forms of applications from all classes of licensees.
These laws and regulations concern primarily: (i) the financial stability,
integrity, responsibility, good character, honesty and business ability of
casino service suppliers and casino operators, their directors, officers and
employees, their security holders and others financially interested in casino
operations; (ii) the nature of casino hotel facilities; and (iii) the operating
methods and financial and accounting practices used in connection with the
casino operations.
Taxes are imposed by the State of New Jersey on gaming operations at the
rate of 8% of gross gaming revenues. In addition, the New Jersey Act provides
for an investment alternative tax of 2.5% of gross gaming revenues. This
investment alternative tax may be offset by investment tax credits equal to
1.25% of gross gaming revenues, which are obtained by purchasing bonds issued
by, or investing in housing or other development projects approved by, the
Casino Reinvestment Development Authority ("CRDA").
The New Jersey Commission has broad discretion with regard to the issuance,
renewal and revocation or suspension of casino licenses. A casino license is not
transferable, is issued for a term of up to one year for the first two renewals
and thereafter for a term of up to four years (subject to discretionary
reopening of the licensing hearing by the New Jersey Commission at any time),
and must be renewed by filing an
152
<PAGE>
application which shall be acted on by the New Jersey Commission prior to the
expiration of the license in force. At any time, upon a finding of
disqualification or noncompliance, the New Jersey Commission may revoke or
suspend a license or impose fines or other penalties.
The New Jersey Act imposes certain restrictions on the ownership and
transfer of securities issued by a corporation that holds a casino license or is
deemed a holding company, intermediary company, subsidiary or entity qualifier
(each, an "affiliate") of a casino licensee. "Security" is defined by the New
Jersey Act to include instruments that evidence either a beneficial ownership in
an entity (such as common stock or preferred stock) or a creditor interest in an
entity (such as a bond, note or mortgage). Pursuant to the New Jersey Act, the
corporate charter of a publicly-traded affiliate of a casino licensee must
require that a holder of the company's securities dispose of such securities if
the holder's continued interest would result in the company or any other
affiliate being no longer qualified to continue as a casino licensee under the
New Jersey Act. The corporate charter of a casino licensee or any privately held
affiliate of the licensee must: (i) establish the right of prior approval by the
New Jersey Commission with regard to a transfer of any security in the company
and (ii) create the absolute right of the company to repurchase at the market
price or purchase price, whichever is less, any security in the company in the
event the New Jersey Commission disapproves a transfer of such security under
the New Jersey Act. Hilton's corporate charter has been approved by the New
Jersey Commission. Park Place has applied to have its corporate charter approved
by the New Jersey Commission. The corporate charters of Park Place's
subsidiaries that operate Bally's Park Place and The Atlantic City Hilton and
their privately held affiliates will conform to the New Jersey Act's
requirements described above for privately held companies.
If the New Jersey Commission finds that an individual owner or holder of
securities of a corporate licensee or an affiliate of such corporate licensee is
not qualified under the New Jersey Act, the New Jersey Commission may propose
remedial action. The New Jersey Commission may require divestiture of the
securities held by any disqualified holder who is required to be qualified under
the New Jersey Act (e.g., officers, directors, security holders and key casino
and other employees). In the event that disqualified persons fail to divest
themselves of such securities, the New Jersey Commission may revoke or suspend
the license. However, if an affiliate of a casino licensee is a publicly-traded
company and the New Jersey Commission makes a finding of disqualification with
respect to any holder of any security thereof who is required to be qualified,
and the New Jersey Commission also finds that: (i) such company has complied
with aforesaid charter provisions; (ii) such company has made a good faith
effort, including the prosecution of all legal remedies, to comply with any
order of the New Jersey Commission requiring the divestiture of the security
interest held by the disqualified holder; and (iii) such disqualified holder
does not have the ability to control the corporate licensee or the affiliate, or
to elect one or more members of the board of directors of such affiliate, the
New Jersey Commission will not take action against the casino licensee or its
affiliate with respect to the continued ownership of the security interest by
the disqualified holder.
For purposes of the New Jersey Act, a security holder is presumed to have
the ability to control a publicly-traded corporation, or to elect one or more
members of its board of directors, and thus require qualification, if such
holder owns or beneficially holds 5% or more of any class of the equity
securities of such corporation, unless such presumption of control or ability to
elect is rebutted by clear and convincing evidence. An "institutional investor,"
as that term is defined under the New Jersey Act, is entitled to a waiver of
qualification if it holds less than 10% of any class of the equity securities of
a publicly-traded holding or intermediary company of a casino licensee and: (i)
the holdings were purchased for investment purposes only; (ii) there is no cause
to believe the institutional investor may be found unqualified; and (iii) upon
request by the New Jersey Commission, the institutional investor files a
certified statement to the effect that it has no intention of influencing or
affecting the affairs of the issuer, the casino licensee or its other
affiliates. The New Jersey Commission may grant a waiver of qualification to an
institutional investor holding 10% or more of such securities upon a showing of
good cause and if the conditions specified above are met.
153
<PAGE>
With respect to debt securities, the New Jersey Commission generally
requires a person holding 15% or more of a debt issue of a publicly-traded
affiliate of a casino licensee to qualify as a "financial source" where the use
of the proceeds from the debt issue is related in any way to the financing of
the casino licensee. There can be no assurance that the New Jersey Commission
will continue to apply the 15% threshold, and the New Jersey Commission could at
any time establish a lower threshold for qualification. An exception to the
qualification requirement is made for institutional investors, in which case the
institutional holder is entitled to a waiver of qualification if the holder's
position in the aggregate is less than 20% of the total outstanding debt of the
affiliate and less than 50% of any outstanding publicly-traded issue of such
debt, and if the conditions specified in the above paragraph are met. As with
equity securities, a waiver of qualification may be granted to institutional
investors holding larger positions upon a showing of good cause and if all
conditions specified in the above paragraph are met.
Generally, the New Jersey Commission would require each institutional holder
seeking a waiver of qualification to execute a certificate to the effect that:
(i) the holder has reviewed the definition of institutional investor under the
New Jersey Act and believes that it meets the definition of institutional
investor; (ii) the holder purchased the securities for investment purposes only
and holds them in the ordinary course of business; (iii) the holder has no
involvement in the business activities of, and no intention of influencing or
affecting the affairs of, the issuer, the casino licensee or any affiliate; and
(iv) if the holder subsequently determines to influence or affect the affairs of
the issuer, the casino licensee or any affiliate, it shall provide not less than
30 days' notice of such intent and shall file with the New Jersey Commission an
application for qualification before taking any such action.
Commencing on the date the New Jersey Commission serves notice on a
corporate licensee or an affiliate of such corporate licensee that a security
holder of such corporation has been found disqualified, it will be unlawful for
the security holder to: (i) receive any dividends or interest upon any such
securities; (ii) exercise, directly or through any trustee or nominee, any right
conferred by such securities; or (iii) receive any remuneration in any form from
the corporate licensee for services rendered or otherwise.
Persons who are required to qualify under the New Jersey Act by reason of
holding debt or equity securities, and are not otherwise previously qualified,
are required to place the securities into an Interim Casino Authorization
("ICA") trust pending qualification. Unless and until the New Jersey Commission
has reason to believe that the investor may not qualify, the investor will
retain the ability to direct the trustee how to vote, or whether to dispose of,
the securities. If at any time the New Jersey Commission finds reasonable cause
to believe that the investor may be found unqualified, it can order the trust to
become "operative," in which case the investor will lose voting power, if any,
over the securities but will retain the right to petition the New Jersey
Commission to order the trustee to dispose of the securities.
Once an ICA trust is created and funded, and regardless of whether it
becomes operative, the investor has no right to receive a return on the
investment until the investor becomes qualified. Should an investor ultimately
be found unqualified, the trustee would dispose of the trust property, and the
proceeds would be distributed to the unqualified applicant only in an amount not
exceeding the actual cost of the trust property. Any excess proceeds would be
paid to the State of New Jersey. If the securities were sold by the trustee
pending qualification, the investor would receive only actual cost, with
disposition of the remainder of the proceeds, if any, to await the investor's
qualification hearing.
In the event it is determined that a licensee has violated the New Jersey
Act or its regulations, then under certain circumstances, the licensee could be
subject to fines or have its license suspended or revoked. In addition, if a
person who is required to qualify under the New Jersey Act fails to qualify, or
if a security holder who is required to qualify fails to qualify and does not
dispose of the related securities in the licensee or in any affiliate of the
licensee, as may be required by the New Jersey Act, then, under certain
circumstances, the licensee could have its license suspended or revoked.
If a casino license was not renewed, was suspended for more than 120 days or
was revoked, the New Jersey Commission could appoint a conservator. The
conservator would be charged with the duty of
154
<PAGE>
conserving and preserving the assets so acquired and continuing the operation of
the casino hotel casino of a suspended licensee or with operating and disposing
of the casino hotel facilities of a former licensee. Such suspended licensee or
former licensee, however, would be entitled only to a fair return on its
investment, to be determined under New Jersey law, with any excess to go to the
State of New Jersey, if so directed by the New Jersey Commission. Suspension or
revocation of any licenses or the appointment of a conservator by the New Jersey
Commission would have a material adverse effect on the businesses of Park
Place's Atlantic City casino hotels.
In November 1996, the New Jersey Commission found Hilton qualified as a
holding company for New Jersey casino licensees, Bally's Park Place and The
Atlantic City Hilton. Park Place has applied to the New Jersey Commission for
qualification as a holding company of the New Jersey casino licensees.
Inasmuch as the Hilton Distribution will involve the transfer of ownership
of securities of privately held affiliates of Bally's Park Place and The
Atlantic City Hilton, the New Jersey Act requires that approval of the Hilton
Distribution by the New Jersey Commission be obtained before the Hilton
Distribution occurs.
MISSISSIPPI GAMING LAWS
The ownership and operation of casino facilities in Mississippi are subject
to extensive state and local regulation, but primarily the licensing and
regulatory control of the Mississippi Gaming Commission (the "Mississippi
Commission") and the Mississippi State Tax Commission.
The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized
dockside casino gaming in Mississippi, was enacted on June 29, 1990. Although
not identical, the Mississippi Act is similar to the Nevada Gaming Control Act.
The Mississippi Commission has adopted regulations which are also similar in
many respects to the Nevada gaming regulations.
Park Place has filed an application with the Mississippi Commission for
approval of the Transactions. On September 15, 1998, the Mississippi Commission
found Gaming Acquisition Corporation suitable to be associated with a gaming
license granted under the Mississippi Act and granted Gaming Acquisition
Corporation authority to acquire control of Grand. Gaming Acquisition
Corporation is a wholly owned subsidiary of Park Place that will be merged with
and into Grand pursuant to the Merger Agreement, subject to satisfaction of the
conditions to the Merger described under "The Transactions--The Merger
Agreement--Conditions to the Merger." Further approvals from the Mississippi
Commission are pending, including final approval of the Transactions.
The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Commission seek to: (i) prevent unsavory or unsuitable persons from
having any direct or indirect involvement with gaming at any time or in any
capacity; (ii) establish and maintain responsible accounting practices and
procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and safeguarding of assets and revenues, providing reliable record keeping and
making periodic reports to the Mississippi Commission; (iv) prevent cheating and
fraudulent practices; (v) provide a source of state and local revenues through
taxation and licensing fees; and (vi) ensure that gaming licensees, to the
extent practicable, employ Mississippi residents. The regulations are subject to
amendment and interpretation by the Mississippi Commission. Management believes
that compliance by Park Place with the licensing procedures and regulatory
requirements of the Mississippi Commission will not affect the marketability of
Park Place's securities. Changes in Mississippi law or regulations may limit or
otherwise materially affect the types of gaming that may be conducted and could
have an adverse effect on Park Place and Park Place's Mississippi gaming
operations.
The Mississippi Act provides for legalized dockside gaming at the discretion
of the 14 counties that either border the Gulf Coast or the Mississippi River,
but only if the voters in such counties have not voted to prohibit gaming in
that county. Certain amendments to the Mississippi Constitution have been
proposed for adoption through the initiative and referendum process which, if a
sufficient number of signatures are
155
<PAGE>
gathered to place the matter on the ballot and if adopted by the voters of the
state, would prohibit gaming in Mississippi. See "Risk Factors--Statewide Gaming
Referenda." As of July 1998, dockside gaming was permissible in nine of the 14
eligible counties in the state and gaming operations had commenced in Adams,
Coahoma, Hancock, Harrison, Tunica, Warren and Washington counties. Under
Mississippi law, gaming vessels must be located on the Mississippi River or on
navigable waters in eligible counties along the Mississippi River, or in the
waters of the State of Mississippi lying south of the state in eligible counties
along the Mississippi Gulf Coast. The law permits unlimited stakes gaming on
permanently moored vessels on a 24-hour basis and does not restrict the
percentage of space which may be utilized for gaming. There are no limitations
on the number of gaming licenses which may be issued in Mississippi.
Park Place and each of its Mississippi licensee affiliates are subject to
the licensing and regulatory control of the Mississippi Commission. Park Place
must be registered under the Mississippi Act as a publicly traded holding
company of its Mississippi licensee affiliates and will be required periodically
to submit detailed financial and operating reports to the Mississippi Commission
and furnish any other information which the Mississippi Commission may require.
If Park Place is unable to satisfy the registration requirements of the
Mississippi Act, Park Place and its affiliates cannot own or operate gaming
facilities in Mississippi. Each of Park Place's Mississippi licensee affiliates
must maintain a gaming license from the Mississippi Commission to operate a
casino in Mississippi. Such licenses are issued by the Mississippi Commission
subject to certain conditions, including continued compliance with all
applicable state laws and regulations.
Gaming licenses are not transferable, are issued for a two-year period and
must be renewed periodically thereafter. No person may become a stockholder of
or receive any percentage of profits from a licensed subsidiary of a holding
company without first obtaining licenses and approvals from the Mississippi
Commission. Park Place has applied to the Mississippi Commission for such
approvals.
Certain officers and employees of Park Place and the officers, directors and
certain key employees of Park Place's licensed Mississippi subsidiaries must be
found suitable or be licensed by the Mississippi Commission. Park Place believes
it has applied for or is in the process of applying for all necessary findings
of suitability with respect to such persons, although the Mississippi
Commission, in its discretion, may require additional persons to file
applications for findings of suitability. In addition, any person having a
material relationship or involvement with Park Place may be required to be found
suitable, in which case those persons must pay the costs and fees associated
with such investigation. The Mississippi Commission may deny an application for
a finding of suitability for any cause that it deems reasonable. Changes in
certain licensed positions must be reported to the Mississippi Commission. In
addition to its authority to deny an application for a finding of suitability,
the Mississippi Commission has jurisdiction to disapprove a change in a licensed
position. The Mississippi Commission has the power to require Park Place and its
registered or licensed subsidiaries to suspend or dismiss officers, directors
and other key employees or sever relationships with other persons who refuse to
file appropriate applications or whom the authorities find unsuitable to act in
such capacities.
Employees associated with gaming must obtain work permits that are subject
to immediate suspension under certain circumstances. The Mississippi Commission
shall refuse to issue a work permit to a person convicted of a felony and it may
refuse to issue a work permit to a gaming employee if the employee has committed
certain misdemeanors or knowingly violated the Mississippi Act or for any other
reasonable cause.
At any time, the Mississippi Commission has the power to investigate and
require a finding of suitability of any record or beneficial stockholder of Park
Place. Mississippi law requires any person who acquires more than 5% of the
common stock of a publicly traded corporation registered with the Mississippi
Commission to report the acquisition to the Mississippi Commission, and such
person may be required to be found suitable. Also, any person who becomes a
beneficial owner of more than 10% of the common stock of such a company, as
reported to the SEC, must apply for a finding of suitability by the Mississippi
Commission and must pay the costs and fees that the Mississippi Commission
incurs in
156
<PAGE>
conducting the investigation. The Mississippi Commission has generally exercised
its discretion to require a finding of suitability of any beneficial owner of
more than 5% of a public company's common stock. However, the Mississippi
Commission has adopted a policy that permits certain institutional investors to
own beneficially up to 10% of a registered public company's common stock without
a finding of suitability. If a stockholder who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Mississippi
Commission may be found unsuitable. Any person found unsuitable and who holds,
directly or indirectly, any beneficial ownership of the securities of Park Place
beyond such time as the Mississippi Commission prescribes, may be guilty of a
misdemeanor. Park Place is subject to disciplinary action if, after receiving
notice that a person is unsuitable to be a stockholder or to have any other
relationship with Park Place or its licensed subsidiaries, Park Place: (i) pays
the unsuitable person any dividend or other distribution upon the voting
securities of Park Place; (ii) recognizes the exercise, directly or indirectly,
of any voting rights conferred by securities held by the unsuitable person;
(iii) pays the unsuitable person any remuneration in any form for services
rendered or otherwise, except in certain limited and specific circumstances; or
(iv) fails to pursue all lawful efforts to require the unsuitable person to
divest himself of the securities, including, if necessary, the immediate
purchase of the securities for cash at a fair market value.
Park Place may be required to disclose to the Mississippi Commission upon
request the identities of the holders of any debt or other securities. In
addition, under the Mississippi Act the Mississippi Commission may, in its
discretion, (i) require holders of debt securities of registered corporations to
file applications, (ii) investigate such holders, and (iii) require such holders
to be found suitable to own such debt securities. Although the Mississippi
Commission generally does not require the individual holders of obligations such
as notes to be investigated and found suitable, the Mississippi Commission
retains the discretion to do so for any reason, including but not limited to a
default, or where the holder of the debt instrument exercises a material
influence over the gaming operations of the entity in question. Any holder of
debt or equity securities required to apply for a finding of suitability must
pay all investigative fees and costs of the Mississippi Commission in connection
with such an investigation.
Each of Park Place's Mississippi licensed subsidiaries must maintain in
Mississippi a current ledger with respect to the ownership of their equity
securities and Park Place must maintain in Mississippi a current list of
stockholders of Park Place which must reflect the record ownership of each
outstanding share of any equity security issued by Park Place. The ledger and
stockholder lists must be available for inspection by the Mississippi Commission
at any time. If any securities of Park Place are held in trust by an agent or by
a nominee, the record holder may be required to disclose the identity of the
beneficial owner to the Mississippi Commission. A failure to make such
disclosure may be grounds for finding the record holder unsuitable. Park Place
must also render maximum assistance in determining the identity of the
beneficial owner.
The Mississippi Act requires that the certificates representing securities
of a registered publicly traded corporation bear a legend to the general effect
that such securities are subject to the Mississippi Act and the regulations of
the Mississippi Commission. Park Place will request from the Mississippi
Commission an exemption from this legend requirement. The Mississippi Commission
has the power to impose additional restrictions on the holders of Park Place's
securities at any time.
Substantially all loans, leases, sales of securities and similar financing
transactions by a licensed gaming subsidiary must be reported to or approved by
the Mississippi Commission. A licensed gaming subsidiary may not make a public
offering of its securities, but may pledge or mortgage casino facilities if it
obtains the prior approval of the Mississippi Commission. Park Place may not
make a public offering of its securities without the prior approval of the
Mississippi Commission if any part of the proceeds of the offering is to be used
to finance the construction, acquisition or operation of gaming facilities in
Mississippi
157
<PAGE>
or to retire or extend obligations incurred for one or more such purposes. Such
approval, if given, does not constitute a recommendation or approval of the
investment merits of the securities subject to the offering.
Changes in control of Park Place through merger, consolidation, acquisition
of assets, management or consulting agreements or any form of takeover cannot
occur without the prior approval of the Mississippi Commission. The Mississippi
Commission may also require controlling stockholders, officers, directors, and
other persons having a material relationship or involvement with the entity
proposing to acquire control, to be investigated and licensed as part of the
approval process relating to the transaction.
The Mississippi legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other corporate
defense tactics that affect corporate gaming licensees in Mississippi and
corporations whose stock is publicly traded that are affiliated with those
licensees, may be injurious to stable and productive corporate gaming. The
Mississippi Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Mississippi's
gaming industry and to further Mississippi's policy to: (i) assure the financial
stability of corporate gaming operators and their affiliates; (ii) preserve the
beneficial aspects of conducting business in the corporate form; and (iii)
promote a neutral environment for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Mississippi
Commission before Park Place may make exceptional repurchases of voting
securities in excess of the current market price of its common stock (commonly
called "greenmail") or before a corporate acquisition opposed by management may
be consummated. Mississippi's gaming regulations will also require prior
approval by the Mississippi Commission if Park Place adopts a plan of
recapitalization proposed by its Board of Directors opposing a tender offer made
directly to the stockholders for the purpose of acquiring control of Park Place.
Neither Park Place nor any subsidiary may engage in gaming activities in
Mississippi while also conducting gaming operations outside of Mississippi
without approval of the Mississippi Commission. The Mississippi Commission may
require determinations that, among other things, there are means for the
Mississippi Commission to have access to information concerning the out-of-state
gaming operations of Park Place and its affiliates. Park Place has requested a
waiver of foreign gaming approval from the Mississippi Commission for operations
in other states and will be required to obtain the approval or a waiver of such
approval from the Mississippi Commission prior to engaging in any additional
future gaming operations outside of Mississippi.
If the Mississippi Commission decides that a licensed gaming subsidiary
violated a gaming law or regulation, the Mississippi Commission could limit,
condition, suspend or revoke the license of the subsidiary. In addition, the
licensed subsidiary, Park Place and the persons involved could be subject to
substantial fines for each separate violation. Because of such a violation, the
Mississippi Commission could attempt to appoint a supervisor to operate the
casino facilities. Limitation, conditioning or suspension of any gaming license
or the appointment of a supervisor could (and revocation of any gaming license
would) materially adversely affect Park Place's Mississippi gaming operations.
License fees and taxes, computed in various ways depending on the type of
gaming involved, are payable to the State of Mississippi and to the county or
city in which a licensed gaming subsidiary's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon (i) a
percentage of the gross gaming revenues received by the casino operation, (ii)
the number of slot machines operated by the casino or (iii) the number of table
games operated by the casino. The license fee payable to the State of
Mississippi is based upon "gaming receipts" (generally defined as gross receipts
less payouts to customers as winnings) and equals 4% of gaming receipts of
$50,000 or less per month, 6% of gaming receipts over $50,000 and less than
$134,000 per month, and 8% of gaming receipts over $134,000. The foregoing
license fees are allowed as a credit against Park Place's Mississippi income tax
liability for the year paid. The gross revenue fee imposed by the Mississippi
cities and counties in which Park Place's casino operations will be located,
equals approximately 4% of the gaming receipts.
158
<PAGE>
The Mississippi Commission has adopted a regulation requiring as a condition
of licensure or license renewal that a gaming establishment's plan include a
500-car parking facility in close proximity to the casino complex and
infrastructure facilities which will amount to at least 25% of the casino cost.
Management of Park Place believes it is in compliance with this requirement.
The sale of alcoholic beverages by Park Place's subsidiaries is subject to
the licensing, control and regulation by both the local jurisdiction and the
Alcoholic Beverage Control Division (the "ABC") of the Mississippi State Tax
Commission. All of Park Place's Mississippi casinos are in areas designated as
special resort areas, which allows the casinos to serve alcoholic beverages on a
24-hour basis. The ABC has the full power to limit, condition, suspend or revoke
any license for the serving of alcoholic beverages or to place such a licensee
on probation with or without conditions. Any such disciplinary action could (and
revocation would) have a material adverse effect upon the casino's operations.
Certain officers and managers of Park Place and its Mississippi casinos must be
investigated by the ABC in connection with its liquor permits and changes in
certain positions must be approved by the ABC.
LOUISIANA GAMING LAWS
The ownership and operation of a riverboat gaming vessel in the State of
Louisiana is subject to the Louisiana Riverboat Economic Development and Gaming
Control Act (the "Act"). Gaming activities are regulated by the Louisiana Gaming
Control Board (the "Louisiana Board"). The Louisiana Board is responsible for
investigating the background of all applicants seeking a riverboat gaming
license, issuing the license and enforcing the laws, rules and regulations
relating to riverboat gaming activities.
The applicant, its officers, directors, key personnel, partners and persons
holding a 5% or greater interest in the holder of a gaming license are required
to be found suitable by the Louisiana Board. The Louisiana Board may, in its
discretion, also review the suitability of other security holders of, or persons
affiliated with, a licensee. This finding of suitability requires the filing of
an extensive application to the Louisiana Board disclosing personal, financial,
criminal, business and other information. Park Place has filed the required
notice with the Louisiana Board with respect to such finding of suitability.
On March 24, 1994, the Louisiana Board's predecessor issued a riverboat
gaming license to Belle of Orleans, L.L.C., a limited liability company in which
Park Place will own a 49.9% interest. Belle of Orleans, L.L.C. commenced
riverboat gaming operations in New Orleans on July 9, 1995. Park Place is
engaged in litigation with its 50.1% partner in the Belle of Orleans, L.L.C. See
"Business and Properties of Park Place--Louisiana Casino."
On October 13, 1993, the Louisiana Board's predecessor issued a riverboat
gaming license to the Queen of New Orleans, a joint venture of which Park Place
owns a 50% interest. The Queen of New Orleans joint venture conducted riverboat
gaming operations in New Orleans from February 10, 1994 until October 1, 1997.
The transfer of a Louisiana gaming license is prohibited under the Act. The
sale, assignment, transfer, pledge or disposition of securities which represent
5% or more of the total outstanding shares issued by a holder of a license is
subject to Louisiana Board approval and the transferee must be found suitable.
In addition, all contracts and leases entered into by a licensee are subject to
approval and certain enterprises which transact business with the licensee must
be licensed.
If a security holder of a licensee is found unsuitable, it will be unlawful
for the security holder to (i) receive any dividend or interest with regard to
the securities; (ii) exercise, directly or indirectly, any rights conferred by
the securities; or (iii) receive any remuneration from the licensee for services
rendered or otherwise. The Louisiana Board may impose similar approval
requirements on holders of securities of any intermediary or holding company of
the licensee, but may waive those requirements with respect to holders of
publicly-traded securities of intermediary and holding companies if such holders
do not have the ability to control the publicly-traded corporation or elect one
or more directors thereof. Taxes are imposed by the State of Louisiana on gaming
operations at the rate of 18.5% of net gaming proceeds.
159
<PAGE>
On April 19, 1996, the Louisiana legislature approved legislation mandating
statewide local elections on a parish-by-parish basis to determine whether to
prohibit or continue to permit three individual types of gaming. On November 5,
1996, Louisiana voters determined whether each of the following types of gaming
would be prohibited or permitted in the following described Louisiana parishes:
(i) the operation of video draw poker devices in each parish; (ii) the conduct
of riverboat gaming in each parish that is contiguous to a statutorily
designated river or waterway; or (iii) the conduct of land-based casino gaming
operations in Orleans Parish. In Orleans Parish, where Hilton's riverboat casino
currently operates, a majority of the voters elected to continue to permit the
three types of gaming described above. The current legislation does not provide
for any moratorium on future local elections on gaming. Further, the current
legislation does not provide for any moratorium that must expire before future
local elections on gaming could be mandated or allowed. In addition, a change of
berth by a licensee would require voter approval in the parish in which the new
berth is located.
On October 11, 1996, the Louisiana Board granted Hilton's petition to
relocate the Queen of New Orleans riverboat casino from New Orleans to the City
of Shreveport by October 1, 1997. Hilton subsequently abandoned its plans to
relocate the facility and, on October 1, 1997, the riverboat casino ceased
operations. On September 14, 1998, the Louisiana Board approved Hilton's request
to transfer its interest in the Queen of New Orleans joint venture.
MISSOURI GAMING LAWS
Missouri has enacted the Missouri Gaming Law (the "MGL") and established the
Missouri Gaming Commission (the "MGC"), which is responsible for licensing and
regulating riverboat gaming in Missouri. The MGL does not specifically limit the
number of licenses that the MGC may grant, but generally authorizes the MGC to
limit the number of licenses granted. The MGL grants specific powers and duties
to the MGC to supervise riverboat gaming, implement the MGL and take other
action as may be reasonable or appropriate to enforce the MGL. The MGC may
approve permanently moored ("dockside") riverboat casinos subject to specific
criteria.
The MGL extensively regulates owning and operating riverboat gaming
facilities in Missouri. Generally, a licensed company and its officers,
directors, employees, related subsidiaries and significant shareholders are
subject to such extensive regulation. The initial license and first subsequent
license renewal for an excursion gambling boat operator generally is for a
period of one year. The MGC, however, may reopen license hearings and may
terminate a license or impose additional regulations upon a licensee at any time
during the term of a license. In addition to the owner's license and operator's
license for the riverboat, individuals participating in gaming operations are
required to obtain an occupational license from the MGC. Applicants and
licensees are responsible for keeping the application and any requested
materials current, and this responsibility continues throughout any period of
licensure. In addition, Missouri has extensive licensing disclosure
requirements. In October 1996, the MGC granted a riverboat gaming license to the
Flamingo Hilton Riverboat Casino, L.P., a limited partnership which will be
wholly owned by Park Place. In September 1998, the MGC approved Hilton's license
renewal application extending the riverboat gaming license for an additional two
year period, subject to certain conditions. Park Place will apply to the MGC for
all required regulatory approvals in connection with the Transactions.
In November 1997, the Missouri Supreme Court ruled in AKIN, ET AL V.
MISSOURI GAMING COMMISSION, ET AL. that riverboat casinos operating games of
chance (particularly slot machines) in man-made basins must meet certain
requirements as to contiguity with the Mississippi or Missouri rivers in order
to comply with the Missouri constitution. Hilton was not a party to AKIN, which
has been dismissed. Hilton and other similarly situated riverboat casinos have
filed lawsuits against the MGC relating to these requirements as to contiguity.
In January 1998, the Missouri Circuit Court in Cole County issued a writ
prohibiting the MGC from initiating a proposed disciplinary proceeding against
riverboat casinos operating in man-made basins. The MGC appealed this ruling to
the Missouri Supreme Court, which reversed the decision of the Circuit Court in
May 1998. Park Place has requested a hearing on the disciplinary order. Park
Place and
160
<PAGE>
the other operators of riverboats in man-made basins have filed a referendum
which has qualified for inclusion on the Missouri ballot for the November 1998
election which, if approved, would permit Park Place to continue to operate the
games of chance on its riverboat casino at the present location. Failure of
passage of such referendum is likely to have a material adverse effect upon the
operation of Park Place's Missouri casino.
On August 12, 1998 the MGC announced that it would reopen the licensing
investigation of Park Place's Missouri casino regarding alleged actions in 1993
by a former employee to influence an official of the Kansas City Port Authority.
See "Business and Properties of Park Place--Missouri Casino."
Pursuant to its rulemaking authority, the MGC has adopted certain
regulations which provide, among other things, that: (i) upon a change in
control of the license held by the gambling licensee, the license of such
licensee shall become null and void and of no legal effect unless the MGC has
approved such change in control (effective October of 1998); (ii) no gaming
licensee or occupational licensee may pledge, hypothecate or transfer in any way
any license, or any interest in a license, issued by the MGC; (iii) no ownership
interest in a gaming licensee or a holding company that is not a publicly held
entity may be pledged or hypothecated in any way; (iv) at least 60 days prior to
consummation, a party must notify the MGC of its intention to transfer or issue
an ownership interest in a gaming licensee or a holding company that is not a
publicly held entity (and during such period the MGC may disapprove the
transaction or require the transaction be delayed pending further
investigation); (v) at least 15 days prior to consummation, a party must notify
the MGC of its intention to: (a) issue an ownership interest in a publicly held
gaming licensee or holding company if such issuance would involve, directly or
indirectly, 5% or greater of the ownership interest in the gaming licensee or
holding company, (b) incur any private debt equal to or exceeding $1,000,000 by
a gaming licensee or any holding company affiliated with a gaming licensee or
(c) issue any public debt and, before or after consummation, the MGC may reopen
the gaming licensee's licensing hearing to consider the effect of the
transaction on the licensee's suitability; (vi) not later than seven days after
consummation, the following transactions must be reported to the MGC: (a) the
transfer or issuance of an ownership interest in a publicly held gaming licensee
or holding company, if such transfer or issuance would result in an entity or
group of entities acting in concert owning, directly or indirectly, a total
amount of ownership interest equaling 5% or greater of the ownership interest in
the gaming licensee or holding company and (b) any pledge or hypothecation of 5%
or more of the ownership interest in a publicly held gaming licensee or holding
company; (vii) no withdrawals of capital, loans, advances or distribution of any
type of assets in excess of 5% of accumulated earnings of a licensee to anyone
with an ownership interest in the licensee may occur without prior MGC approval;
and (viii) the MGC may take appropriate action against a licensee or other
person who has been disciplined in another jurisdiction for gaming related
activity.
Taxes are imposed by the State of Missouri on gaming operations at the rate
of 20% of adjusted gross gaming revenues. An additional admission fee is imposed
by the State of Missouri at the rate of $2 per passenger admitted onto a
riverboat casino. Park Place's Kansas City riverboat casino currently charges
customers no admission fee.
QUEENSLAND GAMING LAWS
Queensland, Australia, like the jurisdictions discussed above, has
comprehensive laws and regulations governing the conduct of casino gaming. All
persons connected with the ownership and operation of a casino, including Park
Place, its subsidiary that manages the Conrad Jupiters, Gold Coast and the
Conrad International Treasury Casino, Brisbane and certain of their principal
stockholders, directors and officers, must be found suitable and licensed. A
casino license once issued remains in force until surrendered or canceled.
Queensland law defines the grounds for cancellation and, in such event, an
administrator may be appointed to assume control of the casino hotel complex.
The Queensland authorities have conducted an investigation of, and have found
suitable, Hilton and its subsidiary. The Queensland authorities will conduct a
similar investigation of Park Place.
161
<PAGE>
Taxes are imposed by Queensland on gaming operations at the rate of 20% of
gross gaming revenues, except that gaming revenues arising from persons or
groups participating in special flight programs or "junkets" are taxed at a 10%
rate. A casino community benefit levy of 1% of gross gaming revenues is also
imposed.
URUGUAY GAMING LAWS
Uruguay also has laws and regulations governing the establishment and
operation of casino gaming. The Internal Auditors Bureau of Uruguay, under the
authority of the Ministry of Economy and Finance, is responsible for
establishing the terms under which casino operations are conducted, including
suitability requirements of persons associated with gaming operations,
authorized games, specifications for gaming equipment, security, surveillance
and compliance. The Conrad International Punta del Este Resort and Casino has
been authorized to conduct casino operations by the Ministry of Economy and
Finance of Uruguay. Such authorization has been granted based on the expertise
and financial suitability of Hilton and its subsidiary that manages the
property. Park Place must be found suitable as the parent company of the
subsidiary manager.
A casino concession fee is imposed by Uruguay on gaming operations conducted
by Conrad International Punta del Este Resort and Casino at a fixed amount per
fiscal year. For the years ending December 31, 1997, 1998 and 1999, the casino
concession fee imposed is $3.2 million, $3.3 million and $3.3 million,
respectively.
IRS REGULATIONS
The Internal Revenue Service ("IRS") requires operators of casinos located
in the United States to file information returns for U.S. citizens (including
names and addresses of winners) for keno and slot machine winnings in excess of
stipulated amounts. The IRS also requires operators to withhold taxes on certain
keno, bingo and slot machine winnings of nonresident aliens. Management is
unable to predict the extent, if any, to which such requirements, if extended,
might impede or otherwise adversely affect operations of, and/or income from,
such other games.
Regulations adopted by the Financial Crimes Enforcement Network of the
Treasury Department and the gaming regulatory authorities in certain domestic
jurisdictions in which Park Place operates casinos, or in which Park Place has
applied for licensing to operate a casino, require the reporting of currency
transactions in excess of $10,000 occurring within a gaming day, including
identification of the patron by name and social security number. This reporting
obligation commenced in May 1985 and may have resulted in the loss of gaming
revenues to jurisdictions outside the United States which are exempt from the
ambit of such regulations.
OTHER LAWS AND REGULATIONS
Each of the casino hotels and riverboat casinos operated by Park Place is
subject to extensive state and local regulations and, on a periodic basis, must
obtain various licenses and permits, including those required to sell alcoholic
beverages. Management believes that Park Place has obtained all required
licenses and permits and its businesses are conducted in substantial compliance
with applicable laws except for certain regulatory approvals in connection with
the Transactions as described above, which are currently in progress.
HEADQUARTERS
Park Place's principal executive offices are located at 3930 Howard Hughes
Parkway, Las Vegas, Nevada 89109. The telephone number is (702) 699-5000.
162
<PAGE>
MANAGEMENT OF PARK PLACE
PARK PLACE BOARD OF DIRECTORS
The business of Park Place will be managed under the direction of the Park
Place Board of Directors (the "Park Place Board"). The following table sets
forth information concerning the persons who are expected to serve as the
directors of Park Place following the consummation of the Transactions. Each of
Stephen Bollenbach, A. Steven Crown, Arthur M. Goldberg, Barron Hilton and Eric
Hilton is currently a director of Hilton and, except for Eric Hilton, will
remain a director of Hilton after the Hilton Distribution.
The Park Place Board will be divided into three classes. Directors for each
class will be elected at the annual meeting of stockholders held in the year in
which the term for such class expires and will serve thereafter for three years.
<TABLE>
<CAPTION>
INITIAL TERM
NAME, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS AGE EXPIRES
- --------------------------------------------------------------------------------------------- --- -------------
<S> <C> <C>
Lyle Berman ................................................................................. 57 2000
Chairman of the Board of Grand Casinos, Inc. since October 1991. Mr. Berman is also a
director of G-III Apparel Group Ltd., Innovative Gaming Corporation of America, New Horizon
Kids Quest, Inc. and Wilsons The Leather Experts Inc. and Chairman of the Board and Chief
Executive Officer of Rainforest Cafe, Inc.
Stephen F. Bollenbach ....................................................................... 56 2002
Chief Financial Officer, Marriott Corporation until October 1993, President and Chief
Executive Officer, Host Marriott Corporation, until April 1995, Senior Executive Vice
President and Chief Financial Officer, The Walt Disney Co. until February 1996 and,
thereafter, President and Chief Executive Officer, Hilton Hotels Corporation. Mr.
Bollenbach is a director of Hilton Hotels Corporation, Kmart Corporation, Ladbroke Group
PLC, Spring Group PLC and Time Warner, Inc.
A. Steven Crown ............................................................................. 46 2001
General Partner, Henry Crown and Company, a holding company which includes diversified
manufacturing operations, marine operations and real estate ventures. Mr. Crown is a
director of the Hilton Hotels Corporation.
Clive S. Cummis ............................................................................. 69 2000
Chairman of the law firm of Sills Cummis Zuckerman Radin Tischman Epstein & Gross, which
provided legal services to Hilton and is expected to provide such services to Park Place.
Arthur M. Goldberg .......................................................................... 56 2002
Chairman and Chief Executive Officer of Bally Entertainment Corporation until December 1996
and, thereafter, Executive Vice President and President--Gaming Operations of Hilton Hotels
Corporation. Mr. Goldberg is a director of Hilton Hotels Corporation, Bally Total Fitness
Holding Corporation and First Union Corporation.
Barron Hilton ............................................................................... 70 2002
Chairman of the Board and Chief Executive Officer, Hilton Hotels Corporation until February
1996 and, thereafter, Chairman of the Board, Hilton Hotels Corporation.
</TABLE>
163
<PAGE>
<TABLE>
<CAPTION>
INITIAL TERM
NAME, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS AGE EXPIRES
- --------------------------------------------------------------------------------------------- --- -------------
<S> <C> <C>
Eric M. Hilton .............................................................................. 65 2000
Director of Hilton Hotels Corporation, and Vice Chairman of the Board of Hilton Hotels
Corporation until March 1997. Barron Hilton and Eric Hilton are brothers.
J. Kenneth Looloian ......................................................................... 76 2001
Executive Vice President of DiGiorgio Corporation and a consultant. Mr. Looloian is also a
director of Bally Total Fitness Holdings and ContinuCare.
Gilbert L. Shelton .......................................................................... 62 2001
Private investor.
Rocco J. Marano ............................................................................. 70 2001
Retired Executive. Mr. Marano is a director of Computer Horizons Corporation.
</TABLE>
Ratification of the above named persons as directors of Park Place is
subject to the affirmative vote of a majority of the shares present in person or
represented by proxy and entitled to vote at the Hilton Special Meeting. See
"The Hilton Proposals--Proposal Five."
COMMITTEES OF THE PARK PLACE BOARD
The Park Place Board is expected to have four standing committees: (i) the
Audit Committee, (ii) the Compliance Committee, (iii) the Personnel and
Compensation Committee and (iv) the Nominating Committee.
AUDIT COMMITTEE. The functions of the Audit Committee will include
reviewing the independence of the independent auditors, recommending to the Park
Place Board the engagement and discharge of independent auditors, reviewing with
the independent auditors the plan and results of auditing engagements, approving
or ratifying each professional service provided by independent auditors which is
estimated by management to cost more than 10% of the previous year's audit fee,
considering the range of audit and nonaudit fees, reviewing the scope and
results of Park Place procedures for internal auditing and the adequacy of
internal accounting controls and directing and supervising special
investigations.
COMPLIANCE COMMITTEE. The Compliance Committee will supervise Park Place's
efforts to assure that its business and operations are conducted in compliance
with the highest standards applicable to it as a matter of legal and regulatory
requirements as well as ethical business practices. In particular, the
Compliance Committee will be responsible for the establishment and
implementation of Park Place's internal reporting system regarding compliance by
Park Place with regulatory matters associated with its gaming operations. The
committee supervises the activities of Bally's Compliance Officer and
communicates on a periodic basis with gaming regulatory agencies on compliance
matters. It reviews information and reports regarding the suitability of
potential key employees of Park Place as well as persons and entities proposed
to be involved in material transactions or relationships with Park Place.
PERSONNEL AND COMPENSATION COMMITTEE. The Personnel and Compensation
Committee will review and establish the general employment and compensation
practices and policies of Park Place and approve procedures for the
administration thereof, including such matters as the total salary and fringe
benefit programs.
NOMINATING COMMITTEE. The functions of the Nominating Committee include
recommending nominees to the Park Place Board to fill vacancies on the Board,
reviewing on a continuing basis, and at least once a year, the structure of the
Board to assure its continuity and to assure that the proper skills and
experience are represented on the Board, and reviewing any potential conflicts
of Board members individually whenever a prospective Board member is being
considered for election to the Board.
164
<PAGE>
COMPENSATION OF PARK PLACE DIRECTORS
Directors who are not officers of Park Place will receive an annual fee of
$30,000, and a fee of $1,000 for attendance at Board and Committee meetings.
Directors will also be reimbursed for travel expenses and other out-of-pocket
costs when incurred in attending meetings.
EXECUTIVE OFFICERS OF PARK PLACE
Set forth below is certain information with respect to the persons who are
expected to serve as executive officers of Park Place immediately following
consummation of the Hilton Distribution. Effective on the Hilton Distribution
Date, those persons named below who are currently officers of Hilton and its
subsidiaries (except for Stephen Bollenbach) will relinquish their positions as
officers of Hilton.
<TABLE>
<CAPTION>
NAME AGE BACKGROUND
- ------------------------------ --- ----------------------------------------------------------------------
<S> <C> <C>
Stephen F. Bollenbach ........ 56 See "Management of Park Place--Park Place Board of Directors" above.
Chairman of the Board
Arthur M. Goldberg ........... 56 See "Management of Park Place--Park Place Board of Directors" above.
President and Chief
Executive Officer
Wallace R. Barr .............. 52 Executive Vice President-Eastern Region, Hilton Gaming Corporation
Executive Vice President since December 1996, and President, Chief Operating Officer and a
director of Bally's Park Place and The Atlantic City Hilton since
February 1993, and President and Chief Operating Officer of Bally's
Saloon - Gambling Hall - Hotel and Bally's Casino - Lakeshore Resort
since April 1993 and June 1993, respectively, and Executive Vice
President and Chief Operating Officer of Bally's Casino Holdings,
Inc. from June 1993 until December 1996.
Clive S. Cummis .............. 69 See "Management of Park Place--Park Place Board of Directors" above.
Executive Vice President--
Law & Corporate Affairs, and
Secretary
Mark Dodson .................. 36 Executive Vice President and Treasurer, Hilton Gaming Corporation
Executive Vice President since January 1998, Senior Vice President-- Gaming Operations and
Treasurer, Hilton Gaming Corporation from December 1996 until
January 1998, Senior Vice President, Bally's Park Place from January
1996 until December 1996, Vice President--Development, Bally's
Casino Holdings, Inc. from December 1994 until January 1996, and
Director of Corporate Development, Bally Entertainment Corporation
from February 1993 until December 1994.
Scott A. LaPorta ............. 36 Senior Vice President and Treasurer, Hilton Hotels Corporation since
Executive Vice President and May 1996, and prior thereto, Senior Vice President and Treasurer,
Chief Financial Officer Host Marriott Corporation.
</TABLE>
EXECUTIVE OFFICER COMPENSATION
Park Place is a newly formed corporation that has not paid any compensation
to its executive officers to date and will not pay any such compensation prior
to the time of the Hilton Distribution. Compensation of the Park Place executive
officers will be determined by the Personnel and Compensation Committee of the
Park Place Board. Stephen Bollenbach, who will be Chairman of the Board of Park
Place, and Arthur
165
<PAGE>
Goldberg, who will be the President and Chief Executive Officer of Park Place,
will be parties to employment agreements with Park Place. See "--Park Place CEO
and Chairman Agreements" for a description of such compensation arrangements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Park Place was formed in June 1998. Compensation for Park Place executives
will be determined by the Personnel and Compensation Committee of the Park Place
Board, the members of which have yet to be determined.
PARK PLACE CEO AND CHAIRMAN EMPLOYMENT AGREEMENTS
PARK PLACE CEO AGREEMENT
Park Place and Mr. Goldberg anticipate that they will enter into the Park
Place CEO Agreement for the period beginning on the Hilton Distribution Date and
ending on January 1, 2004, subject thereafter to automatic renewal for periods
of one year unless either Park Place or Mr. Goldberg gives notice of nonrenewal
pursuant to the terms of the Park Place CEO Agreement. It is anticipated that
the Park Place CEO Agreement will provide for the employment of Mr. Goldberg as
the President and Chief Executive Officer of Park Place.
The Park Place CEO Agreement establishes a minimum annual base salary of
$2,000,000 and provides for an annual bonus opportunity of $1,000,000, provided,
however, that the payment of any portion of such salary and bonus which would
not be deductible by Park Place on a current basis because of the application of
the $1 million limitation on deductible compensation of Section 162(m) of the
Code will be deferred and paid to Mr. Goldberg, with interest, within 30 days
after Park Place's deduction with respect to the compensation is not limited by
Section 162(m). The Park Place CEO Agreement provides that Mr. Goldberg (and his
family, if applicable) is entitled to fringe benefits and participation in Park
Place's employee benefits plans, in each case at least to the same extent as
Park Place's other senior executives. Mr. Goldberg is also entitled to the
unrestricted, but not exclusive, use of Park Place's aircraft, provided that he
shall reimburse Park Place for the cost of such use if such use is for personal
purposes. During the term of the Park Place Agreement, Mr. Goldberg is entitled
to four weeks of paid vacation annually.
In addition, the Park Place CEO Agreement provides that if the Hilton
Distribution occurs, Mr. Goldberg shall, subject to approval by the Hilton
stockholders of the Park Place 1998 Plan, be granted an option (the "Park Place
CEO Special Option" and, together with the Chairman Special Option (as defined
below), the "Park Place Special Options") to purchase 6,000,000 shares of Common
Stock under the Park Place 1998 Plan in tranches of 4,000,000 shares (the
"Tranche A Option") and 2,000,000 shares (the "Tranche B Option"). The per share
exercise price of the Tranche A Option is equal to the closing price of the Park
Place Common Stock on the NYSE on the Hilton Distribution Date, and the exercise
price of the Tranche B Option is equal to the greater of (i) 150% of the closing
price of the Hilton Common Stock on the NYSE on July 9, 1998 (which was $26.94),
ratably reduced after the Hilton Distribution so as to reflect the July 9, 1998
closing price as if only the post-Hilton Distribution shares of Park Place
Common Stock existed on that date (the "Park Place July 9, 1998 Adjusted Price")
and (ii) the closing price of the Park Place Common Stock on the NYSE on the
Hilton Distribution Date. If the Hilton stockholders do not approve the Park
Place 1998 Plan, Mr. Goldberg shall have the right to terminate the Park Place
CEO Agreement. The Park Place CEO Special Option is exercisable for 10 years
after the Hilton Distribution Date, except as otherwise specifically provided in
the Park Place CEO Agreement.
The Tranche A Option vests cumulatively in four equal annual installments
which begin on the first anniversary of the Hilton Distribution Date, provided
that Mr. Goldberg is employed by Park Place as of the applicable vesting date
(except as otherwise provided in the Park Place CEO Agreement), subject to
acceleration as provided in the Park Place CEO Agreement. The Tranche B Option
will become fully vested and exercisable on the date that is nine years and nine
months after the Hilton Distribution Date if
166
<PAGE>
Mr. Goldberg is employed by Park Place on such date; provided, however, that if
at any time prior to the fifth anniversary of the Hilton Distribution Date, the
closing price of the Park Place Common Stock on the NYSE on each of any seven
consecutive trading days equals or exceeds 200% of the Park Place July 9, 1998
Adjusted Price, the Tranche B Option will immediately become fully vested and
exercisable if Mr. Goldberg is employed by Park Place as of the applicable
vesting date (except as otherwise provided in the Park Place CEO Agreement). In
addition, the Park Place CEO Special Option will become fully vested and
exercisable upon the occurrence of any of the following events (each, a
"Triggering Event"): (i) the termination of Mr. Goldberg's employment by Park
Place other than for Cause (as defined in the Park Place CEO Agreement), (ii)
the termination of Mr. Goldberg's employment by reason of death or Disability
(as defined in the Park Place CEO Agreement), or (iii) the termination of Mr.
Goldberg's employment by Mr. Goldberg for Good Reason (as defined in the Park
Place CEO Agreement); provided, however, that the Tranche B Option will only
become fully vested and exercisable upon a Triggering Event if Mr. Goldberg does
not breach certain covenants described below. If a Triggering Event occurs, the
vested portion of the Park Place CEO Special Option will remain exercisable
until the earlier to occur of (i) the fifth anniversary of the date of
termination, and (ii) the tenth anniversary of the Hilton Distribution Date, and
any non-vested portion of the Park Place CEO Special Option will thereupon
terminate. To the extent not described in the Park Place CEO Agreement, the Park
Place CEO Special Option will be subject to the terms and conditions of the Park
Place 1998 Plan.
The Park Place CEO Agreement also provides that, as a result of the Hilton
Distribution and effective as of the Hilton Distribution Date, all outstanding
options held by Mr. Goldberg to purchase shares of Hilton Common Stock will
become options to purchase shares of Park Place Common Stock, and the number of
shares subject to and the exercise price of such options will be adjusted to
preserve the intrinsic value of such options on the Hilton Distribution Date.
The Park Place CEO Agreement provides that if, during the term of the Park
Place CEO Agreement, Mr. Goldberg's employment with Park Place is terminated by
Park Place other than for Cause or Disability, or by reason of Mr. Goldberg's
death, or by Mr. Goldberg for Good Reason, then Park Place will be required to
pay Mr. Goldberg his base salary for the balance of the term of the Park Place
CEO Agreement and his accrued but unpaid cash compensation through the
termination date. In addition, Park Place shall provide Mr. Goldberg with all
benefits due in accordance with the terms of any applicable employee benefits
plans of Park Place. Park Place's obligation to make such payments, to the
extent that such payments shall not have accrued as of the day before the
termination date, will be conditioned upon Mr. Goldberg's execution of a written
release of certain claims against Park Place (the "Release"). In the event that
such a termination occurs following a Change of Control (as defined in the Park
Place CEO Agreement) of Park Place and provided that Mr. Goldberg has executed
the Release, then, in lieu of the payment of Mr. Goldberg's base salary for the
balance of the term of the Park Place CEO Agreement, Mr. Goldberg shall receive
a lump-sum cash payment equal to 2.99 times the sum of his annual base salary
and his annual bonus for the last full fiscal year ending during the term of the
Park Place CEO Agreement (or, if higher, his annual bonus for the last full
fiscal year prior to the Change of Control). In addition, Mr. Goldberg will be
entitled to receive a lump-sum payment of all compensation previously deferred
by him and not yet paid by Park Place. For the remainder of the term of the Park
Place CEO Agreement (or such longer period as any plan may provide), Park Place
will also be required to provide Mr. Goldberg (and his family, if applicable)
with continued benefits under Park Place's employee benefits plans at least
equal to those which would have been provided had Mr. Goldberg's employment not
terminated.
If Mr. Goldberg's employment with Park Place is terminated by reason of his
death or Disability during the term of the Park Place CEO Agreement, then Park
Place will be required to pay Mr. Goldberg (or his estate or legal
representative) his base salary for the balance of the term of the Park Place
CEO Agreement and his accrued but unpaid cash compensation through the
termination date. In addition, Park Place shall provide Mr. Goldberg (or his
estate or legal representative) with all benefits accrued by Mr. Goldberg under
the terms of any applicable employee benefits plans of Park Place.
167
<PAGE>
If Park Place terminates Mr. Goldberg's employment for Cause during the term
of the Park Place CEO Agreement, Park Place must pay Mr. Goldberg his unpaid
annual base salary through the date of termination, the amount of any unpaid
compensation deferred by Mr. Goldberg, and the amount of any earned but unpaid
annual bonuses and vacation pay. Park Place shall also provide Mr. Goldberg with
any benefits accrued by Mr. Goldberg under the terms of any applicable employee
benefits plans of Park Place. If Mr. Goldberg terminates employment with Park
Place other than for Good Reason during the term of the Park Place CEO
Agreement, Park Place must pay Mr. Goldberg his accrued but unpaid cash
compensation through the termination date and must provide Mr. Goldberg with any
benefits accrued by Mr. Goldberg under the terms of any applicable employee
benefits plans of Park Place.
Under the Park Place CEO Agreement, Mr. Goldberg covenants not to disclose
confidential information of Park Place. In addition, Mr. Goldberg covenants
that, for a period of two years following his termination of employment, he will
not compete with Park Place or employ or solicit certain of its employees and
agents.
The Park Place CEO Agreement also provides that upon a Change of Control of
Park Place, the Park Place CEO Special Option will become fully vested and
exercisable; provided, however that the Tranche B Option will only become fully
vested and exercisable upon a Change of Control if Mr. Goldberg does not breach
the covenants described above. In addition, Park Place will pay Mr. Goldberg any
excise tax incurred by him under Section 4999 of the Code on any payments or
benefits paid or payable by Park Place to Mr. Goldberg under the Park Place CEO
Agreement or otherwise, which constitute "parachute payments" under Code Section
280G, and Park Place will bear the cost of all income, excise and employment
taxes imposed on such gross-up payment.
Effective upon the Hilton Distribution, the Park Place CEO Agreement will
supersede Mr. Goldberg's employment agreement with Hilton dated as of November
12, 1996 and his Change of Control Agreement with Hilton dated as of April 1,
1997. However, the Park Place CEO Agreement provides for Park Place to assume
Hilton's obligations to Mr. Goldberg with respect to certain excise tax gross-up
payments, certain indemnification obligations, certain income tax indemnities,
certain compensation deferred by Mr. Goldberg, and certain health and life
insurance benefits which Mr. Goldberg is entitled to receive, under his
superseded employment agreement with Hilton. In addition, Park Place has agreed
to assume Hilton's obligations to Mr. Goldberg under Hilton's Deferred
Compensation Agreement, dated as of January 16, 1997, with Mr. Goldberg.
PARK PLACE CHAIRMAN AGREEMENT
Park Place and Mr. Bollenbach anticipate that they will enter into the Park
Place Chairman Agreement pursuant to which Mr. Bollenbach will agree to serve as
Chairman of, and advisor to, the Park Place Board for the period beginning on
the Hilton Distribution Date and ending on July 1, 2005. Under the Park Place
Chairman Agreement, Mr. Bollenbach will be paid an annual base salary of
$100,000 per year, will not be entitled to receive a bonus and will not be
entitled to receive any benefits provided to Park Place employees other than an
annual vacation and reimbursement of expenses he may incur in providing his
services under the Park Place Chairman Agreement. In addition, the Park Place
Chairman Agreement provides that if the Hilton Distribution occurs, Mr.
Bollenbach shall, subject to approval of the Park Place 1998 Plan by the Hilton
stockholders, be granted an option (the "Chairman Special Option") to purchase
3,000,000 shares of Park Place Common Stock under the Park Place 1998 Plan in
tranches of 2,000,000 shares (the "Tranche A Option") and 1,000,000 shares (the
"Tranche B Option"). The per share exercise prices, vesting provisions,
termination provisions and other terms of Mr. Bollenbach's Tranche A Option and
Tranche B Option under the Park Place Chairman Agreement are substantially
identical to those which apply to Mr. Goldberg's Tranche A Option and Tranche B
Option, respectively, as set forth above. Except as set forth above, the other
terms of the Park Place Chairman Agreement are substantially identical to those
of Mr. Bollenbach's CEO Employment Agreement with Hilton. See "Certain
Relationships and Related Transactions--Interests of Certain Persons in the
Transactions--Hilton Interests."
168
<PAGE>
SECURITY OWNERSHIP OF PARK PLACE
Hilton currently owns all of the outstanding shares of Park Place Common
Stock. The following table sets forth information as to the shares of Park Place
Common Stock that would have been beneficially owned (or deemed to be owned
pursuant to the rules of the SEC) as of September 15, 1998, by each person who
is expected to be a director or an executive officer of Park Place, all
directors and executive officers of Park Place as a group, and each person known
to be the beneficial owner of more than 5% of the outstanding Park Place Common
Stock, in each case based on beneficial ownership of Hilton Common Stock as of
September 15, 1998, after giving effect to the issuance of one share of Park
Place Common Stock for each share of Hilton Common Stock as a result of the
consummation of the Hilton Distribution and assuming (i) that pursuant to the
agreements entered into in connection with the Hilton Distribution, each Hilton
Option held by any executive officer or director upon consummation of the Hilton
Distribution, other than Hilton Options held by Arthur M. Goldberg, would be
adjusted (the "Adjustment") to be one Hilton Option and one Park Place Option,
and (ii) each outstanding share of Grand is exchanged for .9699 of a share of
Park Place Common Stock pursuant to the Merger. Except as otherwise noted, each
stockholder has sole voting and investment power with respect to the shares
beneficially owned.
<TABLE>
<CAPTION>
APPROXIMATE PERCENT
NAME AND ADDRESS OF OWNER COMMON STOCK OF COMMON STOCK
- ---------------------------------------- ------------ -------------------
<S> <C> <C>
Barron Hilton .......................... 22,946,938(1) 7.6
9336 Civic Center Drive
Beverly Hills, California 90210
Conrad N. Hilton Fund .................. 16,498,736(1) 5.5
100 West Liberty Street
Reno, Nevada 89501
The Prudential Insurance Company of 16,247,133(2) 5.4
America ..............................
751 Broad Street
Newark, New Jersey 07102
Stephen F. Bollenbach .................. 3,040,000(3) 1.0
A. Steven Crown ........................ 3,673,500(3)(4) 1.2
Arthur M. Goldberg ..................... 3,504,738(5) 1.2
Eric M. Hilton ......................... 9,400(1) *
Lyle M. Berman ......................... 5,123,830(6) 1.7
J. Kenneth Looloian..................... 5,500 *
Clive S. Cummis......................... -- --
Gilbert L. Shelton...................... 20,000 *
Rocco J. Marano......................... 5,000 *
Wallace R. Barr......................... 37,401(3) *
Mark R. Dodson.......................... 8,473(3) *
Scott A. LaPorta........................ 58,500(3) *
All Directors and Executive Officers as 38,433,280(5)(7) 12.5
a Group (13 persons)..................
</TABLE>
- ------------------------
* The securities owned do not exceed 1% of the applicable class.
(1) Barron and Eric Hilton are two of the 11 directors of the Conrad N. Hilton
Fund (the "Fund"). They disclaim beneficial ownership of the 16,498,736
shares owned by the Fund.
(2) The amount of Park Place Common Stock beneficially owned by The Prudential
Insurance Company of America ("Prudential") is reported on the basis of an
amended Schedule 13G filed with the SEC on February 13, 1998.
(3) Includes options to acquire 3,000,000, 4,000, 8,000, 5,000, and 57,500
shares of Park Place Common Stock, exercisable within the next 60 days, held
by Messrs. Bollenbach, Crown, Barr, Dodson and
169
<PAGE>
LaPorta, respectively. See "The Transactions--Arrangements Between Hilton
and Park Place--Stock Option Plans." Does not include options granted in
connection with the Transactions. See also "Management of Park Place--Park
Place CEO and Chairman Employment Agreements."
(4) Mr. Crown is a partner of The Crown Fund, which owns 239,888 shares of Park
Place Common Stock. In addition, Arie and Ida Crown Memorial, of which Mr.
Crown is a director, owns 894,272 shares of Park Place Common Stock; Pines
Trailer Limited Partnership, of which a corporation of which Mr. Crown is a
director, officer and shareholder and a partnership of which Mr. Crown is a
partner, are partners, owns 600,000 shares of Park Place Common Stock; and
Areljay, L.P., of which a corporation of which Mr. Crown is a director,
officer and shareholder and a trust of which Mr. Crown is a beneficiary are
partners, owns 1,935,340 shares of Park Place Common Stock. Mr. Crown
disclaims beneficial ownership of the shares held by The Crown Fund, Arie
and Ida Crown Memorial, Pines Trailer Limited Partnership and Areljay, L.P.,
except to the extent of his beneficial interest therein.
(5) The amount set forth in the table for Mr. Goldberg includes options to
purchase 1,200,000 shares of Hilton Common Stock currently exercisable
within 60 days. Such options will be adjusted and the number of shares
exercisable thereunder will be increased in connection with the
Transactions. The number of shares of Park Place Common Stock which will be
subject to such options upon adjustment is not currently determinable. Does
not include options granted in connection with the Transactions. See "The
Transactions--Interests of Certain Persons in the Transactions--Adjustments
of Hilton Options."
(6) Share amounts in the table and this footnote assume consummation of the
Merger as of September 15, 1998 at an assumed exchange ratio of .9699 of a
share of Park Place Common Stock for each share of Grand Common Stock.
Includes 80,016 shares of Park Place Common Stock beneficially owned by Mr.
Berman's spouse. Also includes 44,240 shares of Park Place Common Stock to
be held by Berman Consulting Corporation, a corporation wholly owned by Mr.
Berman. Also includes options to purchase 969,900 shares of Park Place
Common Stock which will vest as a result of the consummation of the Merger.
See "The Transactions--The Merger Agreement--Treatment of Stock Options."
(7) Includes 5,244,400 shares issuable upon exercise of employee stock options
granted to executive officers and directors, exercisable within 60 days, but
excludes the shares owned by the Fund (see note (1) above).
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Park Place's reporting officers and directors, and persons who beneficially own
more than 10% of Park Place's Common Stock, to file reports of ownership and
changes in ownership on Forms 3, 4 and 5 with the SEC, the NYSE and Park Place.
No Section 16(a) reporting is yet required with respect to Park Place.
170
<PAGE>
BUSINESS AND PROPERTIES OF LAKES
GENERAL
Lakes is a newly formed wholly owned subsidiary of Grand, established to
conduct Grand's Non-Mississippi Business subsequent to the Grand Distribution.
Lakes's strategy is to distinguish itself within its markets by managing
superior facilities with extensive nongaming amenities, combined with
experienced corporate and casino management and comprehensive marketing
programs. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE FOLLOWING DISCUSSION
ASSUMES THE TRANSACTIONS HAVE OCCURRED AND THAT LAKES OWNS THE NON-MISSISSIPPI
BUSINESS.
Lakes manages two land-based, Indian-owned casinos in Louisiana: Grand
Casino Avoyelles, in Marksville, Louisiana, for the Tunica-Biloxi Tribe of
Louisiana ("Tunica-Biloxi Tribe") and Grand Casino Coushatta, in Kinder,
Louisiana, for the Coushatta Tribe of Louisiana ("Coushatta Tribe"). Lakes also
manages Grand Casino Hinckley in Hinckley, Minnesota for the Minnesota Tribe
which ranks among Minnesota's largest Indian gaming enterprises. Lakes's
management contract for Grand Casinos Hinckley will expire in May, 1999, and
Lakes does not anticipate that it will be renewed.
BUSINESS STRATEGY
Lakes develops and manages Indian-owned casino properties that offer the
opportunity for long-term development of related entertainment amenities. Lakes'
strategy is to develop and manage hotels, theaters, recreational vehicle parks,
and other complementary amenities designed to enhance the customers' total
entertainment experience and differentiate facilities managed by Lakes from most
of its competitors.
Lakes is dedicated to providing high quality, comprehensive entertainment,
with focused attention to customer service. Facilities managed by Lakes, staffed
with well trained local casino employees, offer a casual environment designed to
appeal to the family-oriented, middle income customer. Lakes strives to offer
its casino customers creative gaming selections in a pleasant, festive, and
smoke- and climate-controlled setting. Lakes' casinos also offer reasonably
priced, high-quality food, video arcades and Grand Casino Kids Quest-SM-, a
professionally supervised entertainment and child care center.
GROWTH STRATEGY
The primary focus in Lakes' growth strategy is to continue managing casino
resorts under existing Indian management contracts and attempt to obtain the
renewal of those same contracts. Lakes also intends to pursue new casino resort
management and development opportunities with other Indian tribes.
Lakes intends to use Grand's reputation prior to the Transactions as an
experienced, established and successful casino management company, along with
Lakes' available capital and considerable management and development skills and
expertise, to secure new development and management opportunities in Indian
gaming.
A central element of Lakes' growth strategy is to manage casinos located
within driving distance of populations of three to four million people and, by
itself or with Indian tribal partners, to develop destination, entertainment
resorts consisting of hotels and recreation facilities as amenities to the
casinos. Lakes also seeks to operate modern facilities staffed with
well-trained, local employees that offer the entertainment and recreational
opportunities that customers have come to expect in destination resorts.
Lakes will continue to search for attractive opportunities to expand and
grow its business and anticipates an ability to continue to do so in the future
consistent with the goals and plan outlined herein.
171
<PAGE>
MARKETING
Lakes targets its marketing strategy to attract and retain the repeat
customer. Management believes that Lakes' emphasis on enhancing the
entertainment value coupled with marketing programs, contributes to attracting
the repeat customer.
Lakes's strategy seeks to combine retail, gaming, and entertainment
marketing techniques. Lakes profiles its casino customers utilizing available
demographic data, regularly conducted customer surveys, and other sources. Based
upon this data, Lakes uses a variety of initial special promotions to attract
the first-time customer and, thereafter, seeks to leverage initial customer
satisfaction through a mix of marketing programs dedicated to developing a
repeat customer.
A variety of other events, facilities and entertainment media provide the
patron with a total entertainment experience. Lakes markets these programs
through a variety of direct and media marketing techniques.
MANAGED PROPERTIES
GRAND CASINO AVOYELLES
Grand Casino Avoyelles opened in June 1994 and consists of an approximately
50,000 square foot casino gaming room containing approximately 1,600 slot
machines and 58 table games. The facility also has a Grand Casino Kids Quest-SM-
child entertainment center, a video arcade, a full service restaurant, a buffet
restaurant, a gift shop and parking for approximately 2,250 vehicles.
Grand Casino Avoyelles is located approximately 50 miles west of Natchez,
Mississippi, and within approximately 200 miles of the Louisiana cities of Baton
Rouge, Lafayette, New Orleans, and Shreveport. Lakes purchased approximately 64
acres of land adjacent to the Tunica-Biloxi reservation for $1.0 million. Lakes
donated approximately 21 acres of this land to the Tunica-Biloxi Tribe. This
land has been placed in trust, has been approved for gaming, and is the site
upon which Grand Casino Avoyelles has been constructed.
Lakes leases land to the Tunica-Biloxi Tribe of Louisiana (the
"Tunica-Biloxi Tribe") for a 220 room hotel which opened during 1996 and is
located in proximity to Grand Casino Avoyelles. The Tunica-Biloxi Tribe operates
the hotel as a part of the Grand Casino Avoyelles enterprise. Lakes guarantees
$16.5 million of Tunica-Biloxi Tribal indebtedness incurred in connection with
the purchase of the hotel and has subordinated payment of Lakes's management fee
and any loan amounts owed by the Tunica-Biloxi Tribe to Lakes to the repayment
of such indebtedness. The indebtedness is scheduled to be fully repaid by April
2000.
The term of Lakes's development and management agreement with the
Tunica-Biloxi Tribe (the "Tunica-Biloxi Agreement") expires on June 3, 2001. As
manager, Lakes oversees the deduction, on a monthly basis, by employees of the
tribal casino of the operating expenses and a cash contingency reserve from the
gross receipts of the casino. The net distributable profits, if any, are
distributed 60% to the Tunica-Biloxi Tribe and 40% to Lakes.
Lakes loaned the Tunica-Biloxi Tribe an aggregate of approximately $23.5
million to construct and open Grand Casino Avoyelles, of which amount
approximately $3.5 million was not, but may need to be, approved by the BIA
and/or the NIGC. Approximately $10.5 million of such loans remained outstanding
at June 28, 1998. The loans bear interest at 1% over the prime rate and are
payable over the remaining term of the Tunica-Biloxi Agreement.
The Tunica-Biloxi Agreement was approved by the BIA on February 27, 1992.
The Tunica-Biloxi Tribe and the State of Louisiana entered into a tribal-state
compact on September 29, 1992, which was approved by the Secretary of the
Interior on November 18, 1992. The compact expires on November 18, 1999 but will
automatically renew for an additional seven year period unless either the
Tunica-Biloxi Tribe or the State of Louisiana delivers to the other prior
written notice of non-renewal not less than 180 days prior to November 18, 1999.
In the event the compact is not renewed, legal gaming will not be permitted at
Grand Casino Avoyelles. There can be no assurance that the compact with be
renewed. In connection with the
172
<PAGE>
Grand Distribution, Lakes and any appropriate subsidiaries will make application
to the Tribal gaming regulatory authority for a license and, once licensed by
the Tribe, pursuant to Louisiana Tribal compact, will work with the the Tribe to
obtain certification and licensure by the Louisiana State Police.
GRAND CASINO COUSHATTA
Grand Casino Coushatta opened in January 1995 and consists of an
approximately 71,000 square foot casino gaming room containing approximately
2,300 slot machines and 71 table games. The facility also has a Grand Casino
Kids Quest-SM-, a full service restaurant, a buffet restaurant, a snack bar, a
gift shop, and parking for approximately 1,600 vehicles.
On February 25, 1992, Lakes entered into a construction agreement and
management contract (the "Coushatta Agreement") with the Coushatta Tribe for the
development, construction, and management of a casino facility in Elton,
Louisiana, on Highway 165. Grand Casino Coushatta is located approximately 60
miles south of Alexandria, Louisiana, and within 200 miles of Houston, Texas.
Grand purchased approximately 688 acres of land adjacent to the Coushatta
reservation for approximately $3.6 million. Grand has donated approximately 530
acres to the Coushatta Tribe. This land has been placed in trust for the
Coushatta Tribe.
Grand loaned the Coushatta Tribe an aggregate of approximately $38.3 million
to construct and open Grand Casino Coushatta, of which amount up to
approximately $20.3 million was not, but may need to be, approved by the BIA
and/or NIGC. The loans bear interest at 1% over the prime rate and are payable
over the remaining term of the Coushatta Agreement. Approximately $22.2 million
of such loans remained outstanding as of June 28, 1998.
The Coushatta Tribe is constructing a hotel on trust land located adjacent
to the casino. Grand guaranteed, and, pursuant to the Grand Distribution, Lakes
will guarantee $25.0 million of indebtedness incurred by the Tribe in connection
therewith. Such indebtedness has a repayment term of approximately four years.
Grand has, and Lakes will, subordinate payment of its management fee and
repayment of any loans outstanding from the Coushatta Tribe to the repayment of
such indebtedness. Advances of $11.3 million have been made to the Tribe as of
June 28, 1998.
The Coushatta Agreement was approved by the BIA on February 27, 1992. The
Coushatta Tribe and the State of Louisiana entered into a tribal-state compact
on September 15, 1992, which was approved by the Secretary of the Interior on
November 4, 1992. The compact expires on November 4, 1999, and will
automatically renew for an additional seven year period unless either the
Coushatta Tribe or the State of Louisiana delivers to the other prior written
notice of non-renewal not less than 180 days prior to November 4, 1999. In the
event the compact is not renewed, legal gaming will not be permitted at Grand
Casino Coushatta. There can be no assurance that the compact will be renewed. In
connection with the Grand Distribution, Lakes has made application to be
certified by the Louisiana State Police to manage the casino.
The term of the Coushatta Agreement expires on January 16, 2002. As manager,
Lakes oversees the deduction on a monthly basis, by employees of the tribal
casino, of the operating expenses and a cash contingency reserve from the gross
receipts of the casino. The net distributable profits, if any, are distributed
60% to the Coushatta Tribe and 40% to Lakes.
GRAND CASINO HINCKLEY
Grand Casino Hinckley is located on a 20 acre parcel of land held by the
United States in trust for the Minnesota Tribe near the intersection of
Interstate Highway 35 and Minnesota State Highway 48, adjacent to Hinckley,
Minnesota. Hinckley is within 90 miles of the Minnesota cities of
Minneapolis/St. Paul and Duluth. Interstate 35 links Minneapolis/St. Paul and
Duluth, Minnesota's two largest population centers, and the Highway 48
intersection is a traditional rest stop for travelers.
Grand Casino Hinckley opened in May 1992 and consists of an approximately
58,000 square foot casino gaming room containing approximately 2,000 slot
machines and 46 blackjack tables. The facility also
173
<PAGE>
has a Grand Casino Kids Quest-SM- child entertainment center, a video arcade, a
sports bar that serves alcoholic beverages, five restaurants, a gift shop, a
222-space recreational vehicle park, 50 fully furnished rental chalets, an
11,000 square-foot ballroom, and parking for approximately 2,300 cars.
The Minnesota Tribe Corporate Commission owns and operates a 150 room hotel
in proximity to Grand Casino Hinckley. During 1997, the Minnesota Tribe opened a
281 room hotel adjacent to Grand Casino Hinckley. The property also features an
18-hole golf course with a driving range, clubhouse, pro shop and snack bar.
On September 10, 1990, a subsidiary of Grand and the Minnesota Tribe entered
into a construction agreement and management contract (the "Hinckley Management
Agreement") for the development, construction and management of Grand Casino
Hinckley. The term of the Hinckley Management Agreement expires on May 15, 1999.
In October 1996, a subsidiary of Grand and the Minnesota Tribe entered into a
restated management agreement (the "Restated Hinckley Agreement") with respect
to the Grand Casino Hinckley facility. In accordance with its terms, the
Restated Hinckley Agreement will not be effective until such time as it is
approved by the NIGC. Lakes believes the Restated Hinckley Agreement, which also
expires on May 15, 1999, is consistent with the terms and conditions of the
Hinckley Management Agreement and conforms to NIGC requirements. Although Lakes
believes the Restated Hinckley Agreement satisfies all the requirements of the
IGRA, there can be no assurance that the NIGC will not seek to reduce the
management fee payable to a subsidiary of Lakes thereunder or demand other
revisions to the Restated Hinckley Agreement. Furthermore, Lakes does not
believe that the Restated Hinckley Agreement will be renewed upon its expiration
in May 1999.
Lakes provides assistance to the Minnesota Tribe for certain equipment
leases that provide that in the event of default by the Minnesota Tribe, Lakes
may not receive payments under the Hinckley Management Agreement until such
default has been cured.
The Restated Hinckley Agreement provides that net distributable gaming
profits, if any, are distributed 70% to the Minnesota Tribe and 30% to Lakes,
and that Lakes receives an additional fee, determined pursuant to a sliding
scale formula, with respect to non-gaming revenues.
FUNDING AGREEMENTS
Pursuant to the terms of the Grand Distribution Agreement, Lakes has assumed
Grand's obligations under various agreements (the "Funding Agreements") with
each of the Tunica-Biloxi and Coushatta Tribes to provide temporary funding, if
necessary, for the construction of certain additional amenities on Grand Casino
Avoyelles and Grand Casino Coushatta. The terms of the Funding Agreements
require each party to advance money for the payment of construction costs if and
when the casino operating funds designated for such purpose are insufficient.
Any funds advanced are to be repaid, together with interest at the prime rate
plus 1 percent, over the remaining term of the respective management agreement.
Advances of $1.2 million and $3.3 million have been made to Tunica-Biloxi and
Coushatta Tribes, respectively, as of June 28, 1998.
POLO PLAZA
Following the Grand Distribution, a subsidiary of Lakes will own certain
interests in four contiguous parcels of land in Las Vegas, Nevada including the
Polo Plaza Shopping Center. All or any combination of these interests may be
sold, held for sale or held for future development. Lakes is currently
evaluating the potential sale of these interests and in connection therewith has
entered into a 90 day exclusive listing agreement with a real estate broker for
the active marketing of these parcels. Each interest is summarized as follows:
SHARK CLUB PARCEL
A subsidiary of Lakes is the tenant under the Shark Club Lease which has a
term through July 31, 2046 unless sooner terminated in accordance with the
provisions thereof. The Shark Club Lease provides for base rent in the initial
amount of $65,000 per month, subject to adjustment each lease year based on a
174
<PAGE>
cost of living formula and additional rent in the amount of $6,500 per month if
the parcel is used for a casino/hotel. In addition to the base rent, Lakes must
pay all taxes on and bear all costs of maintaining the property.
The Shark Club Lease also includes a purchase option pursuant to which Lakes
can acquire the parcel at any time after August 1, 1999 at a formula purchase
price set forth in the Shark Club Lease, roughly equal to 120 times the adjusted
base monthly rent in effect at the time of the purchase. The Shark Club lease
also includes a landlord put option pursuant to which the landlord could require
the tenant to purchase the subject real property at any time from and after
August 1, 2000. Under the Merger Agreement, Lakes has also agreed with Park
Place that Lakes will either exercise or cause one of its subsidiaries to
exercise the Shark Club Lease purchase option prior to the earliest time when
the landlord could require Lakes (or Grand as the guarantor) to purchase the
subject real estate.
Under the Shark Club Lease, Lakes is required to maintain the leased
property, including the building located thereon. Lakes has received a notice of
violation from the Clark County Department of Administrative Services for
alleged failure to remove debris from certain real property included within the
Polo Plaza development project. The same parcel of leased real property has been
damaged as a result of a fire on the premises. Pursuant to the Shark Club Lease,
Lakes is required to restore, replace or possibly demolish the leased facilities
on this real property. The Shark Club Lease allows tenant to demolish that
building, but requires that the security deposit required by the lease in the
initial amount of $500,000 be increased by $2,500,000 prior to such demolition.
Lakes is currently evaluating its alternatives with respect to the property.
TRAVELODGE PARCEL
Following the Grand Distribution, Lakes will be the tenant under a ground
lease (the "Travelodge Lease") which commenced on June 17, 1996, and will
(unless sooner terminated in accordance with the provisions thereof) remain in
effect until June 16, 2095. The Travelodge Lease provides for a base rent (in
the initial amount of $166,667 per month) that is adjusted each lease year based
on a cost of living formula. In addition to the base rent, the tenant must pay
all taxes on and costs of maintaining the leased property.
Lakes has the option to purchase the leased property during the 20th lease
year for the purchase price of $30,000,000.
Lakes has engaged a third party to manage the hotel building located on the
leased property. That third party previously claimed a sublease interest in the
leased property. That claimed interest was terminated pursuant to an agreement
between the third party and Lakes that provides for payments by tenant in the
amount of $150,000 per quarter for a period of ten years after the third party
surrendered possession of the leased property to tenant.
A portion of the building located on the leased property is subleased, which
Lakes has the right to terminate after January 1, 1999 by making certain
prescribed payments, and complying with certain other conditions stated, in the
sublease.
POLO PLAZA SHOPPING CENTER PARCEL
Nevada Resort Properties Polo Plaza Limited Partnership (the "Partnership")
owns and operates the Polo Plaza Shopping Center. Lakes has a 49% limited
partnership interest in the Partnership.
Lakes has the right to purchase the remaining 51% interest in the
Partnership at any time prior to October 3, 1999 for approximately $3.3 million.
In June 1997, Lakes entered into an agreement with the Partnership that
granted Lakes the right to negotiate, on behalf of the Partnership, agreements
for the termination of then existing leases for the shopping center property.
The Partnership also agreed that each new lease for the shopping center property
would include a provision allowing the landlord to terminate such lease on not
less than 90 days notice, with no termination fee. Lakes assumed responsibility
for termination and relocation costs to be
175
<PAGE>
paid by the Partnership under tenant termination agreements, and agreed to
reimburse the Partnership for certain rents and certain other amounts lost as a
result of such termination agreements.
The holder of the first deed of trust that currently encumbers the shopping
center property has asserted that the loan secured by that deed of trust is in
default because the Partnership has permitted the termination of tenant leases
pursuant to tenant termination agreements negotiated by the Lakes subsidiary.
The Partnership has in turn asserted that Lakes is responsible for curing the
alleged default. Lakes is discussing the assertions with the holder of the first
deed of trust and the Partnership. Lakes is currently negotiating with the
Partnership to purchase the shopping center land and building in lieu of
exercising Lakes' right to purchase the remaining 51% interest in the
Partnership.
CABLE PARCEL
Pursuant to a November 1, 1997 Option Agreement, Lakes acquired an option to
purchase approximately 4.5 acres of land located near the Polo Plaza Shopping
Center anytime prior to October 31, 2000. As consideration for the option, Lakes
pays the landowner a nonrefundable monthly option payment of $80,000. The option
agreement states that the purchase price for the land is $18,000,000.
EMPLOYEES
At June 28, 1998, pro forma for the Transactions, Lakes had approximately 30
employees, some of whom may be "shared employees" between Grand and Lakes. Lakes
believes its relations with employees are positive.
REGULATION
GENERAL
The ownership, management, and operation of gaming facilities are subject to
extensive federal, state, provincial, tribal and/or local laws, regulations, and
ordinances, which are administered by the relevant regulatory agency or agencies
in each jurisdiction (the "Regulatory Authorities"). These laws, regulations,
and ordinances vary from jurisdiction to jurisdiction, but generally concern the
responsibility, financial stability and character of the owners and managers of
gaming operations as well as persons financially interested or involved in
gaming operations. Certain common basic provisions that are currently applicable
to Lakes are described below.
Neither Lakes nor any subsidiary may own, manage or operate a gaming
facility unless proper licenses, permits and approvals are obtained. An
application for a license, permit or approval may be denied for any cause that
the Regulatory Authorities deem reasonable. Most Regulatory Authorities also
have the right to license, investigate, and determine the suitability of any
person who has a material relationship with Lakes or any of its subsidiaries,
including officers, directors, employees, and security holders of Lakes or its
subsidiaries. In the event a Regulatory Authority were to find a security holder
to be unsuitable, Lakes may be sanctioned, and may lose its licenses and
approvals if Lakes recognizes any rights in such unsuitable person in connection
with such securities. Lakes may be required to repurchase its securities at fair
market value from security holders that the Regulatory Authorities deem
unsuitable. Lakes's Articles of Incorporation authorize Lakes to redeem
securities held by persons whose status as a security holder, in the opinion of
the Lakes' Board, jeopardizes gaming licenses or approvals of Lakes or its
subsidiaries.
Once obtained, licenses, permits, and approvals must be periodically renewed
and generally are not transferable. The Regulatory Authorities may at any time
revoke, suspend, condition, limit, or restrict a license for any cause they deem
reasonable. Fines for violations may be levied against the holder of a license,
and in certain jurisdictions, gaming operation revenues can be forfeited to the
State under certain circumstances. No assurance can be given that any licenses,
permits, or approvals will be obtained by Lakes or its subsidiaries, or if
obtained, will be renewed or not revoked in the future. In addition, the
rejection or termination of a license, permit, or approval of Lakes or any of
its employees or security holders in any jurisdiction may have adverse
consequences in other jurisdictions. Certain jurisdictions require gaming
176
<PAGE>
operators licensed therein to seek approval from the state before conducting
gaming in other jurisdictions. Lakes and its subsidiaries may be required to
submit detailed financial and operating reports to Regulatory Authorities.
The political and regulatory environment for gaming is dynamic and rapidly
changing. The laws, regulations, and procedures pertaining to gaming are subject
to the interpretation of the Regulatory Authorities and may be amended. Any
changes in such laws, regulations, or their interpretations could have a
material adverse effect on Lakes.
Certain specific provisions to which Lakes is currently subject are
described below.
INDIAN GAMING
The terms and conditions of management contracts for the operation of
Indian-owned casinos, and of all gaming on Indian land in the United States, are
subject to the IGRA, which is administered by the NIGC, and also are subject to
the provisions of statutes relating to contracts with Indian tribes, which are
administered by the Secretary of the Interior (the "Secretary") and the BIA. The
regulations and guidelines under which NIGC will administer IGRA are evolving.
IGRA and those regulations and guidelines are subject to interpretation by the
Secretary and NIGC and may be subject to judicial and legislative clarification
or amendment.
Lakes may need to provide the BIA or NIGC with background information on
each of its directors and each shareholder who holds five percent or more of
Lakes's stock ("5% Shareholders"), including a complete financial statement, a
description of such person's gaming experience, and a list of jurisdictions in
which such person holds gaming licenses. Background investigations of key
employees also may be required. Lakes's Articles of Incorporation contain
provisions requiring directors and 5% shareholders to provide such information.
IGRA requires NIGC to approve management contracts and certain collateral
agreements for Indian-owned casinos. Prior to NIGC assuming its management
contract approval responsibility, management contracts and other agreements were
approved by the BIA. All of Lakes's current management contracts and collateral
agreements (except the Restated Hinckley Agreement) were approved by the BIA;
however, the NIGC may review such management contracts and collateral agreements
for compliance with IGRA in the future. The NIGC will not approve a management
contract if a director or a 5% Shareholder of the management company (i) is an
elected member of the Indian tribal government that owns the facility purchasing
or leasing the games; (ii) has been or is convicted of a felony gaming offense;
(iii) has knowingly and willfully provided materially false information to the
NIGC or the tribe; (iv) has refused to respond to questions from the NIGC; or
(v) is a person whose prior history, reputation and associations pose a threat
to the public interest or to effective gaming regulation and control, or create
or enhance the chance of unsuitable activities in gaming or the business and
financial arrangements incidental thereto. In addition, the NIGC will not
approve a management contract if the management company or any of its agents
have attempted to unduly influence any decision or process of tribal government
relating to gaming, or if the management company has materially breached the
terms of the management contract or the tribe's gaming ordinance, or a trustee,
exercising due diligence, would not approve such management contract.
A management contract can be approved only after NIGC determines that the
contract provides, among other things, for (i) adequate accounting procedures
and verifiable financial reports, which must be furnished to the tribe; (ii)
tribal access to the daily operations of the gaming enterprise, including the
right to verify daily gross revenues and income; (iii) minimum guaranteed
payments to the tribe, which must have priority over the retirement of
development and construction costs; (iv) a ceiling on the repayment of such
development and construction costs; and (v) a contract term not exceeding five
years and a management fee not exceeding 30% of profits; provided that the NIGC
may approve up to a seven year term and a management fee not to exceed 40% of
profits if NIGC is satisfied that the capital investment required, and the
income projections for the particular gaming activity justify, the larger profit
allocation and longer term. While Lakes believes that its management contracts
meet all requirements of IGRA,
177
<PAGE>
there is a risk that the NIGC may reduce the term or the management fee provided
for in any such contracts. Currently, the management contracts (i) have not been
reviewed or approved by NIGC, and (ii) NIGC could call them for review at any
time and may not approve the contracts at all or may require modification prior
to granting approval.
Grand and Lakes will request that the NIGC either approve the Transactions
or acknowledge that their approval is not required. Such request has not yet
been made and when such request is made there can be no assurance that the NIGC
will respond favorably or will respond in a timely manner. The failure of the
NIGC to respond to the request in a timely manner could cause significant delays
to the completion of the Transactions. NIGC also could disapprove certain key
elements of the Transactions which could have the effect of preventing the
consummation of the Transactions. See "Risk Factors--Risks Relating to the
Transactions--Highly Regulated Industry."
IGRA established three separate classes of tribal gaming--Class I, Class II,
and Class III. Class I includes all traditional or social games played by a
tribe in connection with celebrations or ceremonies. Class II gaming includes
games such as bingo, pulltabs, punchboards, instant bingo and card games that
are not played against the house. Class III gaming includes casino-style gaming
and includes table games such as blackjack, craps and roulette, as well as
gaming machines such as slots, video poker, lotteries, and pari-mutuel wagering.
IGRA prohibits substantially all forms of Class III gaming unless the tribe
has entered into a written agreement with the state in which the casino is
located that specifically authorizes the types of commercial gaming the tribe
may offer (a "tribal-state compact"). IGRA requires states to negotiate in good
faith with tribes that seek tribal-state compacts, and grants Indian tribes the
right to seek a federal court order to compel such negotiations. Many states
have refused to enter into such negotiations. Tribes in several states have
sought federal court orders to compel such negotiations under IGRA; however, the
Supreme Court of the United States held in 1996 that the Eleventh Amendment to
the United States Constitution immunizes states from suit by Indian tribes in
federal court without the state's consent. Because Indian tribes are currently
unable to compel states to negotiate tribal-state compacts, Lakes may not be
able to develop and manage casinos in states that refuse to enter into, or
renew, tribal-state compacts.
The State of Minnesota has entered into a tribal-state compact with the
Minnesota Tribe and the State of Louisiana has entered into tribal-state
compacts with the Coushatta Tribe and the Tunica-Biloxi Tribe. The Minnesota
compact does not provide for an expiration date. Each of the Louisiana compacts
expires in November 1999 but will automatically renew for additional terms
unless either party delivers to the other prior written notice of non-renewal at
least 180 days prior to the applicable expiration date. In the event either of
the Louisiana compacts is not renewed, legal gaming will not be permitted at the
applicable casino location. There can be no assurance that either of the
Louisiana compacts will be renewed.
In addition to IGRA, tribal-owned gaming facilities on Indian land are
subject to a number of other federal statutes. The operation of gaming on Indian
land is dependent upon whether the law of the state in which the casino is
located permits gaming by non-Indian entities, which may change over time. Any
such changes in state law may have a material adverse effect on the casinos
managed by Lakes.
Title 25, Section 81 of the United States Code states that "no agreement
shall be made by any person with any tribe of Indians, or individual Indians not
citizens of the United States, for the payment or delivery of any money or other
thing of value ... in consideration of services for said Indians relative to
their lands ... unless such contract or agreement be executed and approved" by
the Secretary or his or her designee. An agreement or contract for services
relative to Indian lands that fails to conform with the requirements of Section
81 will be void and unenforceable. Any money or other thing of value paid to any
person by any Indian or tribe for or on his or their behalf, on account of such
services, in excess of any amount approved by the Secretary or his or her
authorized representative will be subject to forfeiture. Lakes believes that it
has complied with the requirements of Section 81 with respect to its management
contracts for Grand Casino Hinckley, Grand Casino Avoyelles and Grand Casino
Coushatta.
178
<PAGE>
The Indian Trader Licensing Act, Title 25, Section 261-64 of the United
States Code ("ITLA") states that "any person other than an Indian of the full
blood who shall attempt to reside in the Indian country, or on any Indian
reservation, as a trader, or to introduce goods, or to trade therein, without
such license, shall forfeit all merchandise offered for sale to the Indians or
found in his possession, and shall moreover be liable to a penalty of $500 ...."
No such licenses have been issued to Lakes to date. The applicability of ITLA to
Indian gaming management contracts is unclear. Lakes believes that ITLA is not
applicable to its management contracts, under which Lakes provides services
rather than goods to Indian tribes. Lakes further believes that ITLA has been
superseded by IGRA.
Indian tribes are sovereign nations with their own governmental systems,
which have primary regulatory authority over gaming on land within the tribe's
jurisdiction. Because of their sovereign status, Indian tribes possess immunity
from lawsuits to which the tribes have not otherwise consented or otherwise
waived their sovereign immunity defense. Therefore, no contractual obligations
undertaken by tribes to Lakes would be enforceable by Lakes unless the tribe has
expressly waived its sovereign immunity as to such obligations. Courts strictly
construe such waivers. Lakes has obtained immunity waivers from each of the
tribes to enforce the terms of its management agreements, however, the scope of
those waivers has never been tested in court, and may be subject to dispute.
Additionally, persons engaged in gaming activities, including Lakes, are subject
to the provisions of tribal ordinances and regulations on gaming. These
ordinances are subject to review by NIGC under certain standards established by
IGRA. The possession of valid licenses from the Minnesota Tribe is an ongoing
condition of the Hinckley Management Agreement; the possession of valid licenses
from the Coushatta Tribe and Tunica-Biloxi Tribe are conditions of the Coushatta
Agreement and the Tunica-Biloxi Agreement, respectively.
LEASED PROPERTIES
Following the Grand Distribution, and pursuant to the terms of the Grand
Distribution Agreement, Grand will assign to Lakes, and Lakes will assume a
lease agreement dated February 1, 1996 covering Grand's current corporate office
space of approximately 65,000 square feet with a lease term of fifteen years.
The lease commenced on October 14, 1996 and the annual base rent is $768,300
plus building operating costs. See also "--Polo Plaza."
COMPETITION
GENERAL
The gaming industry is highly competitive. Gaming activities include
traditional land-based casinos; riverboat and dockside gaming; casino gaming on
Indian land; state-sponsored video lottery and video poker in restaurants, bars
and hotels; pari-mutuel betting on horse racing, dog racing, and jai-alai;
sports bookmaking; and card rooms. The casinos managed by Lakes compete with all
these forms of gaming, and will compete with any new forms of gaming that may be
legalized in additional jurisdictions, as well as with other types of
entertainment. Lakes also competes with other gaming companies for opportunities
to acquire legal gaming sites in emerging gaming jurisdictions and for the
opportunity to manage casinos on Indian land. Some of the competitors of Lakes
have more personnel and greater financial and other resources than Lakes.
Further expansion of gaming could also significantly affect Lakes's business.
LOUISIANA
The Louisiana markets are highly competitive and numerous Louisiana casinos
along with others in Mississippi compete with Coushatta and Grand Casinos
Avoyelles. A single large land-based casino is currently planned for downtown
New Orleans but the project is presently in bankruptcy reorganization. If the
land-based project opens, it will compete with the casinos managed by Lakes.
Louisiana has also legalized riverboat gaming. There are presently 14 licensed
riverboats in operation in Louisiana, four of which are presently operating in
the vicinity of Lake Charles, Louisiana, within approximately 50 miles of Grand
Casino Coushatta, drawing players from the Houston market. The Louisiana Gaming
Control Board has indicated it will not award the remaining authorized license
until after the 1999 legislative
179
<PAGE>
session. The riverboats compete with Louisiana casinos managed by Lakes.
Moreover, the legalization of casino gaming in Texas could have a material
adverse effect on the casinos managed by Lakes. Louisiana has also enacted
legislation which would allow racetracks in certain parishes to install slot
machines, subject to approval in local referenda. If such local approvals are
obtained, the slot machine operations could also have a material effect on the
casinos managed by Lakes. Video poker machines may be located in facilities that
serve liquor, at truck stops, and at pari-mutuel racetracks and off-track
betting facilities.
MINNESOTA
There are seventeen Indian gaming casinos operating in Minnesota, including
Grand Casinos Hinckley. At least two Indian gaming casinos located in western
Wisconsin also compete with Grand Casino Hinckley. Grand Casino Hinckley
competes with Grand Casino Mille Lacs which was previously managed by Grand.
Because of their locations, Lakes does not believe that the remaining Minnesota
Indian gaming casinos will have a significant competitive impact on Grand Casino
Hinckley. Lakes anticipates that its management contract with the Minnesota
Tribe will not be renewed upon expiration in May 1999.
LEGAL PROCEEDINGS
In January 1997, Stratosphere and its wholly owned operating subsidiary
filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On
November 7, 1997, Stratosphere filed its Second Amended Plan which has been
approved by the Bankruptcy Court and was declared effective on October 14, 1998.
Prior to the effectiveness of the Second Amended Plan, Grand owned approximately
37% of the issued and outstanding common stock of Stratosphere. Under the Second
Amended Plan, all shares of Stratosphere common stock that were outstanding
prior to the effective date of the Second Amended Plan have been canceled. In
addition, the secured portion of Stratosphere's first mortgage notes that were
outstanding prior to the effective date have been exchanged for a total of
2,030,000 shares of new common stock. Pursuant to the terms of the Grand
Distribution Agreement, Lakes has agreed to assume certain known and contingent
liabilities associated with the Non-Mississippi Business, including all pending,
threatened or future litigation related thereto, including the Stratosphere
litigation described below. Although Lakes has agreed to assume such
liabilities, because Grand will remain liable for claims by plaintiffs in such
litigation and for indemnifying Grand's former officers and directors with
respect to such litigation, Lakes has agreed, under the term of the Merger
Agreement, to indemnify Grand and Grand's current and former officers and
directors against such liabilities. See "Risk Factors--Structure of the
Transactions; Indemnification Obligations," "--Risks Relating to the Business of
Lakes" and "-- Stratosphere Corporation; Pending Litigation."
The following summaries describe certain known legal proceedings to which
Grand is a party and with respect to which Lakes will assume, and/or indemnify
Grand, in connection with the Grand Distribution.
STRATOSPHERE SHAREHOLDERS LITIGATION--FEDERAL COURT
In August 1996, a complaint was filed in the U.S. District Court for the
District of Nevada--MICHAEL CEASAR, ET AL V. STRATOSPHERE CORPORATION, ET
AL--against Stratosphere and others, including Grand. The complaint was filed as
a class action, and sought relief on behalf of Stratosphere shareholders who
purchased their stock between December 19, 1995 and July 22, 1996. The complaint
included allegations of misrepresentations, federal securities law violations
and various state law claims.
In August through October 1996, several other nearly identical complaints
were filed by various plaintiffs in the U.S. District Court for the District of
Nevada.
The defendants in the actions submitted motions requesting that all of the
actions be consolidated. Those motions were granted in January 1997, and the
consolidated action is entitled IN RE: STRATOSPHERE CORPORATION SECURITIES
LITIGATION--Master File No. CV-S-96-00708 PMP (RLH).
In February 1997, the plaintiffs filed a consolidated and amended complaint
naming various defendants, including Grand and certain current and former
officers and directors of Grand. The amended
180
<PAGE>
complaint includes claims under federal securities laws and Nevada laws based on
acts alleged to have occurred between December 19, 1995 and July 22, 1996.
In February 1997, various defendants, including Grand and Grand's officers
and directors named as defendants, submitted motions to dismiss the amended
complaint. Those motions were made on various grounds, including Grand's claim
that the amended complaint failed to state a valid cause of action against Grand
and Grand's officers and directors.
In May 1997, the court dismissed the amended complaint. The dismissal order
did not allow the plaintiffs to further amend their complaint in an attempt to
state a valid cause of action.
In June 1997, the plaintiffs asked the court to reconsider its dismissal
order, and to allow the plaintiffs to submit a second amended complaint in an
attempt to state a valid cause of action. In July 1997, the court allowed the
plaintiffs to submit a second amended complaint.
In August 1997, the plaintiffs filed a second amended complaint. In
September 1997, certain of the defendants, including Grand and Grand's officers
and directors named as defendants, submitted a motion to dismiss the second
amended complaint. The motion was based on various grounds, including Grand's
claim that the second amended complaint failed to state a valid cause of action
against Grand and those officers and directors.
In April 1998, the Court granted Grand's motion to dismiss, in part, and
denied the motion in part. Thus, the plaintiffs are pursuing the claims in the
second amended complaint that survived the motion to dismiss.
In June 1998, certain of the defendants, including Grand and Grand's
officers and directors named as defendants, submitted a motion for summary
judgment seeking an order that such defendants are entitled to judgment as a
matter of law. As of September 1998, the plaintiffs are engaged in discovery
related to the issues raised by the summary judgment motion. The Court will not
decide the motion until after such discovery is completed and the parties have
submitted their respective arguments regarding the motion.
STRATOSPHERE SHAREHOLDERS LITIGATION--NEVADA STATE COURT
In August 1996, a complaint was filed in the District Court for Clark
County, Nevada--VICTOR M. OPITZ, ET AL V. ROBERT E. STUPAK, ET AL--Case No.
A363019--against various defendants, including Grand. The complaint seeks relief
on behalf of Stratosphere Corporation shareholders who purchased stock between
December 19, 1995 and July 22, 1996. The complaint alleges misrepresentations,
state securities law violations and other state claims.
Grand and certain defendants submitted motions to dismiss or stay the state
court action pending resolution of the federal court action described above. The
court has stayed further proceedings pending the resolution of IN RE:
STRATOSPHERE SECURITIES LITIGATION.
GRAND CASINOS, INC. SHAREHOLDERS LITIGATION
In September and October 1996, two actions were filed by Grand shareholders
in the U.S. District Court for the District of Minnesota against Grand and
certain of Grand's current and former directors and officers.
The complaints allege misrepresentations, federal securities law violations
and other claims in connection with the Stratosphere project.
The actions have been consolidated as IN RE: GRAND CASINOS, INC. SECURITIES
LITIGATION--Master File No. 4-96-890--and the plaintiffs filed a consolidated
complaint. The defendants submitted a motion to dismiss the consolidated
complaint, based in part on Grand's claim that the consolidated complaint failed
to properly state a cause of action.
In December 1997, the court granted Grand's motion to dismiss in part, and
denied the motion in part. Thus, the plaintiffs are pursuing the claims in the
consolidated complaint that survived Grand's motion to dismiss. Discovery in the
action has begun.
181
<PAGE>
The defendants have submitted a motion for summary judgment seeking an order
that the defendants are entitled to judgment as a matter of law. The plaintiffs
are currently engaged in discovery related to the issues raised by the summary
judgment motion. The court will not decide the motion until after such discovery
is complete and the parties have submitted their respective arguments regarding
the motion.
DERIVATIVE LITIGATION
In February 1997, certain shareholders of Grand brought an action in the
Hennepin County, Minnesota District Court--LLOYD DRILLING, ET AL V. LYLE BERMAN,
ET AL--Court File No. MC97-002807-- against certain current and former officers
and directors of Grand. The plaintiffs allege that those officers and directors
breached certain fiduciary duties to the shareholders of Grand as a result of
certain transactions involving the Stratosphere project. Pursuant to Minnesota
law, Grand's Board of Directors appointed an independent special litigation
committee to evaluate whether Grand should pursue the claims made in the action
against the officers and directors. The special litigation committee completed
its evaluation in December 1997, and filed a report with the court recommending
that such claims not be pursued.
Grand provided the defense for Grand's current and former officers and
directors who are defendants
in the action pursuant to Grand's indemnification obligations to such
defendants.
In January 1998, Grand submitted a motion for summary judgment based on the
special litigation committee's report. In May 1998, the court granted the
motion, thereby dismissing the plaintiff's claims. In August 1998, the
plaintiffs appealed the Court's ruling. As of the date hereof that appeal is
pending.
SLOT MACHINE LITIGATION
In April 1994, William H. Poulos brought an action in the U.S. District
Court for the Middle District of Florida, Orlando Division--WILLIAM H. POULOS,
ET AL V. CAESARS WORLD, INC. ET AL--Case No. 39-478-CIV-ORL-22--in which various
parties (including Grand) alleged to operate casinos or be slot machine
manufacturers were named as defendants. The plaintiff sought to have the action
certified as a class action.
A subsequently filed action--WILLIAM AHEARN, ET AL V. CAESARS WORLD, INC. ET
AL--Case No. 94-532-CIV-ORL-22--made similar allegations and was consolidated
with the Poulos action.
Both actions included claims under the federal Racketeering-Influenced and
Corrupt Organizations Act and under state law, and sought compensatory and
punitive damages. The plaintiffs claimed that the defendants are involved in a
scheme to induce people to play electronic video poker and slot machines based
on false beliefs regarding how such machines operate and the extent to which a
player is likely to win on any given play.
In December 1994, the consolidated actions were transferred to the U.S.
District Court for the District of Nevada.
In September 1995, Larry Schreier brought an action in the U.S. District
Court for the District of Nevada--LARRY SCHREIER, ET AL V. CAESARS WORLD, INC.
ET AL--Case No. CV-95-00923-DWH (RJJ).
The plaintiffs' allegations in the Schreier action were similar to those
made by the plaintiffs in the Poulos and Ahearn actions, except that Schreier
claimed to represent a more precisely defined class of plaintiffs than Poulos or
Ahearn.
In December 1996, the court ordered the Poulos, Ahearn and Schreier actions
consolidated under the title WILLIAM H. POULOS, ET AL V. CAESARS WORLD, INC., ET
AL--Case No. CV-S-94-11236-DAE (RJJ)--(Base File), and required the plaintiffs
to file a consolidated and amended complaint. In February 1997, the plaintiffs
filed a consolidated and amended complaint.
In March 1997, various defendants (including Grand) filed motions to dismiss
or stay the consolidated action until the plaintiffs submitted their claims to
gaming authorities and those authorities considered the claims submitted by the
plaintiffs.
182
<PAGE>
In December 1997, the court denied all of the motions submitted by the
defendants, and ordered the plaintiffs to file a new consolidated and amended
complaint. That complaint has been filed. Grand has filed its answer to the new
complaint.
The plaintiffs have filed a motion seeking an order certifying the action as
a class action. Grand and certain of the defendants have opposed the motion. The
Court has not ruled on the motion.
STRATOSPHERE NOTEHOLDER COMMITTEE BANKRUPTCY COURT ACTION
In June 1997, the Official Committee of Noteholders (the "Committee") in the
Chapter 11 bankruptcy proceeding for Stratosphere filed a motion with the U.S.
Bankruptcy Court for the District of Nevada (the "Bankruptcy Court") by which
the Committee sought Bankruptcy Court approval for assumption (on behalf of
Stratosphere's bankruptcy estate) of the March 1995 Standby Equity Commitment
(the "Standby Equity Commitment") between Stratosphere and Grand.
In the motion, the Committee sought Bankruptcy Court authorization to compel
Grand to fund up to $60 million in "capital contributions" to Stratosphere over
three years, based on the Committee's claim that such "contributions" are
required by the Standby Equity Commitment.
Grand opposed the Committee's motion. Grand asserted, in its opposition to
the Committee's motion, that the Standby Equity Commitment is not enforceable in
the Stratosphere bankruptcy proceeding as a matter of law.
The Bankruptcy Court held a preliminary hearing on the Committee's motion in
June 1997, and an evidentiary hearing in February 1998 on the issues raised by
the Committee's motion and Grand's opposition to that motion. In February 1998,
the Bankruptcy Court denied the Committee's motion, and determined that the
Standby Equity Commitment cannot be assumed (or enforced) by Stratosphere under
applicable bankruptcy law. The Official Committee has stated that it will appeal
the Bankruptcy Court's determination.
STANDBY EQUITY COMMITMENT LITIGATION
In September 1997, the Stratosphere Trustee under the indenture pursuant to
which Stratosphere issued its first mortgage notes filed a complaint in the U.S.
District Court for the District of Nevada--IBJ SCHROEDER BANK & TRUST COMPANY,
INC. V. GRAND CASINOS, INC.--File No. CV-S-97-01252-DWH (RJJ)-- naming Grand as
defendant.
The complaint alleges that Grand failed to perform under the Standby Equity
Commitment entered into between Stratosphere and Grand in connection with
Stratosphere's issuance of such first mortgage notes in March 1995. The
complaint seeks an order compelling specific performance of what the Committee
claims are Grand's obligations under the Standby Equity Commitment. The
Stratosphere Trustee filed the complaint in its alleged capacity as a third
party beneficiary under the Standby Equity Commitment.
In November 1997, Grand submitted a motion requesting, among other things,
that the court dismiss the complaint. Grand's request that the court dismiss the
complaint has been denied. Discovery is pending.
STRATOSPHERE PLAN OF REORGANIZATION
The Second Amended Plan contemplates the formation of a new limited
liability company which will own and pursue certain alleged claims and causes of
action that Stratosphere and other persons may have against numerous
third-parties, including Grand and/or officers and/or directors of Grand. The
Second Amended Plan contemplates capitalizing this new limited liability company
with an investment of $5 million. As of September 15, 1998, Grand has not been
served with any such litigation.
183
<PAGE>
STRATOSPHERE PREFERENCE ACTION
In April 1998, Stratosphere served on Grand and Grand Media & Electronics
Distributing, Inc., a wholly owned subsidiary of Grand ("Grand Media"), a
complaint in the Stratosphere bankruptcy case seeking recovery of certain
amounts paid by Stratosphere to (i) Grand as management fees and for costs and
expenses under a management agreement between Stratosphere and Grand, and (ii)
Grand Media for electronic equipment purchased by Stratosphere from Grand Media.
Stratosphere claims in its complaint that such amounts are recoverable by
Stratosphere as preferential payments under bankruptcy law.
In May 1998, Grand responded to Stratosphere's complaint. That response
denies that Stratosphere is entitled to recover the amounts described in the
complaint. Discovery is proceeding.
TULALIP TRIBES LITIGATION
In 1995, Grand entered into discussions with Seven Arrows, L.L.C. ("Seven
Arrows"), a Delaware limited liability company, regarding possible participation
by Grand in a proposed casino resort development on land in the State of
Washington held in trust by the United States for the Tulalip Tribes. Grand and
Seven Arrows entered into a letter of intent providing for the negotiation of a
revision to the Seven Arrows limited liability company agreement by which Grand
(or a subsidiary of Grand ) would become a member of Seven Arrows. Those
negotiations were not completed, and no revision to the limited liability
company agreement was signed.
During the negotiations, Grand entered into an agreement (the "Advance
Agreement") with Seven Arrows and the Tulalip Tribes. The Advance Agreement
provided for the loan by Grand and Seven Arrows of certain amounts to the
Tulalip Tribes upon the satisfaction of certain conditions. Grand contends that
those conditions were never satisfied. Neither Grand nor Seven Arrows advanced
any amount under the Advance Agreement.
In April 1996, the Tulalip Tribes brought a legal action in Tulalip Tribal
Court--TULALIP TRIBES OF WASHINGTON V. SEVEN ARROWS LLC, ET AL.--Case No.
TUL-Ci4/96-499--against Seven Arrows and Grand. The action sought various
remedies, including (i) a declaration that a lease and sublease between the
Tulalip Tribes and Seven Arrows for the land on which the casino resort was
proposed were rightfully terminated; (ii) damages for breach of the lease, the
sublease, and the Advance Agreement; and (iii) a declaration that the lease,
sublease, and Advance Agreement are void.
Because Grand was not a party to the lease or the sublease, Grand contended
in the tribal court action that the only claim against Grand was for breach of
the Advance Agreement; that Grand did not breach the Advance Agreement; and that
any damages sustained by the Tulalip Tribes as a result of any such breach are
not material.
In May 1996, Seven Arrows and Grand brought a legal action in the U.S.
District Court for the Western District of Washington--SEVEN ARROWS LLC, ET AL.
V. TULALIP TRIBES OF WASHINGTON--Case No. C96-0709Z--against the Tulalip Tribes.
Seven Arrows sought in that action certain remedies against the Tulalip Tribes,
including damages, and Grand sought rescission of the Advance Agreement.
Since June 1996, Seven Arrows, Grand and the Tulalip Tribes have been
engaged in disputes in both the tribal court and the federal court regarding
which court has jurisdiction over the various claims made in the two legal
actions. Seven Arrows, Grand, and the Tulalip Tribes recently entered into a
partial settlement that resolved the jurisdictional dispute. However, all claims
between the parties must now be submitted to and decided by the federal court.
Pursuant to the partial settlement agreement, Seven Arrows filed a second
amended complaint in the federal action. Among other things, Seven Arrows seeks
damages from the Tulalip Tribes for lost profits of
184
<PAGE>
up to $15 million and for recovery of sums paid to the Tribes between $2 million
and $3 million. Grand is not a party to the second amended complaint.
On September 30, 1998, the Tulalip Tribes answered, counterclaimed against
Seven Arrows, and filed and served a complaint in the pending federal action
against Grand. The complaint against Grand contains several counts, including
(i) a request for judgment declaring that the tribe's termination of the
agreements was effective and quieting title in the land; (ii) a claim for breach
of contract and breach of the implied covenant of good faith that alleges that
Grand is liable on the lease, sublease, and Advance Agreement based upon (a)
Grand's alleged status as a partner of Seven Arrows; (b) Grand's alleged status
as managing and operating agent of Seven Arrows; and (c) Grand's execution of
the Advance Agreement; (iii) a claim for negligent misrepresentation claiming,
in essence, that representations of Grand personnel induced the Tribes to
continue to honor the lease, sublease, and Advance Agreement and thereby to
incur expenses they would not have incurred otherwise; (iv) a claim that Grand,
by purporting to act for and with the authority of Seven Arrows, stands as
warrantor and surety of Seven Arrows's obligations; and (v) a claim for
estoppel. Each claim for damages seeks the sum of $856,000 for out-of-pocket
expenses and for "lost profits damages" in an amount to be proved at trial.
Grand's answer has not yet been filed. Grand does not oppose the tribe's
effort to quiet title to its land (the first claim). Grand denies that it is
factually or legally liable for the obligations or liabilities of Seven Arrows
under the lease and sublease. Grand continues to contend that, as to the tribe,
its obligations, if any, are limited to those stated in the Advance Agreement;
that it did not breach the Advance Agreement; and that the tribe's damages for
such breach, if any, are minimal. Grand denies that it is liable for negligent
misrepresentation.
Seven Arrows has, on previous occasions, threatened unpleaded claims against
Grand. Grand does not know the nature or extent of any such additional claims
and, as of the date hereof, has not received any pleading in any action stating
such a claim. However, Grand expects to receive a claim by Seven Arrows in the
near future. Such a claim, if made, could be in amounts material to Lakes.
Grand's liability for damages to all parties in the aggregate cannot exceed
$15 million under the partial settlement agreement. Discovery has commenced and
as of the date hereof, no trial date has been set.
HEADQUARTERS
Lakes' principal executive offices are located at 130 Cheshire Lane,
Minnetonka, Minnesota 55305. The telephone number is (612) 449-9092.
185
<PAGE>
MANAGEMENT OF LAKES
LAKES BOARD OF DIRECTORS
The business of Lakes will be managed under the direction of its Board of
Directors (the "Lakes Board"). The current directors of Lakes are Lyle Berman
and Thomas Brosig. Prior to the Effective Date, Grand, as sole shareholder of
Lakes, plans to reconstitute the Lakes Board so that the eight persons
identified below will constitute the entire Lakes Board effective as of the
Effective Date. Each individual listed below is currently a director of Grand
and will resign from the Grand Board effective as of the Effective Date.
<TABLE>
<CAPTION>
NAME, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS AGE
- ---------------------------------------------------------------------- ---
<S> <C>
LYLE BERMAN .......................................................... 57
Chairman of the Board and Chief Executive Officer of Lakes and
Chairman of the Board of Directors of Grand since October 1991. Mr.
Berman is also a director of G-III Apparel Group Ltd ("G-III"),
Innovative Gaming Corporation of America ("IGCA"), New Horizon Kids
Quest, Inc. ("Kids Quest") and Wilsons The Leather Experts Inc.
("Wilsons"). Mr. Berman is Chairman of the Board and Chief Executive
Officer of Rainforest Cafe, Inc. ("Rainforest"). Mr. Berman was a
member of the Board of Directors of Stratosphere from July 1994 to
July 1997, and served as the Chairman of the Board of Directors of
Stratosphere from July, 1996 to July, 1997. From July, 1994 through
October 1996, Mr. Berman was Stratosphere's Chief Executive Officer.
Stratosphere filed for reorganization under Chapter 11 of the
Bankruptcy Code on January 27, 1997.
THOMAS J. BROSIG ..................................................... 48
President of Lakes and President and Chief Executive Officer and a
director of Grand since September 1996. Mr. Brosig was Executive
Vice President of Grand from August 1994 through September 1996 and
President of Grand from May 1993 through August 1994. Mr. Brosig
also served as Grand's Chief Operating Officer from October 1991 to
May 1993 and as Grand's Chief Financial Officer from October 1991 to
January 1992. Mr. Brosig is a director of Famous Daves of America,
Inc., G-III and Wilsons.
TIMOTHY J. COPE ...................................................... 46
Chief Financial Officer of Lakes and Chief Financial Officer of
Grand since January 20, 1994 and an Executive Vice President since
April of 1997 and a director of Grand since February, 1998. Mr. Cope
was Grand's Vice President of Finance from August 1993 through
January 1994. From May 1986 through August 1992, Mr. Cope was the
Vice President-finance and administration of Bally's Grand, Reno and
after the sale of Bally's Grand, Reno to Hilton in August 1992
served as the Vice President-Finance of The Reno Hilton until August
1993. From January 1984 through May 1986, Mr. Cope was the Vice
President of Finance of MGM Grand Reno.
MORRIS GOLDFARB ...................................................... 47
Director of Grand since December 1992. Mr. Goldfarb is a director
and the President and Chief Executive Officer of G-III. Mr. Goldfarb
has served as either the President or Vice President of G-III and
its predecessors since their formation in 1974. Mr. Goldfarb is a
director of Wilsons.
RONALD J. KRAMER ..................................................... 39
Director of Grand since March 1995. Mr. Kramer is the Chairman of
the Board and Chief Executive Officer of Ladenburg Thalmann Group
Inc., an investment banking firm where he has been employed for over
five years. Mr. Kramer is also a Director of Griffon Corporation and
New Valley Corporation. Ladenburg has periodically provided
investment banking services to Grand.
</TABLE>
186
<PAGE>
<TABLE>
<CAPTION>
NAME, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS AGE
- ---------------------------------------------------------------------- ---
DAVID L. ROGERS ...................................................... 55
Director of Grand since October 1991. Mr. Rogers has been President
of Wilsons since March 1992. From November 1988 through March 1992,
Mr. Rogers was Executive Vice President and chief operating officer
of Wilsons. Mr. Rogers is a director of Wilsons and Rainforest.
<S> <C>
NEIL I. SELL ......................................................... 57
Director of Grand since October 1991. Mr. Sell is also a director of
U S Foodservice and, until July 31, 1997, was a director of
Stratosphere. Since 1968, Mr. Sell has been engaged in the practice
of law in Minneapolis, Minnesota with the firm of Maslon Edelman
Borman & Brand, LLP, which has rendered legal services to Grand.
JOEL N. WALLER ....................................................... 58
Director of Grand since October 1991. Mr. Waller has been Chairman
and Chief Executive Officer of Wilsons since March 1992. Mr. Waller
was President of Wilsons from 1983 through March 1992. Mr. Waller is
also a director of Damark International, Inc. and Rainforest.
</TABLE>
COMMITTEES OF THE LAKES BOARD
The Lakes Board is expected to have two standing committees: (i) Audit
Committee; and (ii) Compensation Committee.
Lakes' Audit Committee will comprise certain directors who are not employees
of Lakes or any of its subsidiaries. The Lakes Audit Committee is expected to
consist of Messrs. David L. Rogers, Neil I. Sell and Joel N. Waller. The audit
committee recommends to the full Board the engagement of the independent
accountants, reviews the audit plan and results of the audit engagement, reviews
the independence of the auditors, and reviews the adequacy of Lakes' system of
internal accounting controls.
Lakes' Compensation Committee, is expected to consist of Messrs. David L.
Rogers and Joel N. Waller. The Compensation Committee will review Lakes'
remuneration policies and practices, and make recommendations to the Lakes Board
in connection with all compensation matters affecting Lakes.
COMPENSATION OF LAKES DIRECTORS
Lakes will pay each director who is not otherwise employed by Lakes an
annual fee of $7,500. Lakes will also pay each director not otherwise employed
by it $1,000 for each meeting of the Board of Directors and $1,000 for each
committee meeting of the Board of Directors attended.
Grand is also seeks shareholder approval with respect to Lakes' adoption of
the Lakes Gaming, Inc. 1998 Director Stock Option Plan (the "Lakes Director
Plan"). See "The Grand Proposals--Approval of the Lakes Gaming, Inc. 1998
Director Stock Option Plan."
Assuming Grand shareholder approval, the Lakes Director Plan will provide
that each director who is not an employee of Lakes or one of its subsidiaries (a
"Non-Employee Director") in office at the time of the Grand Distribution, and
each subsequent Non-Employee Director at the time of his or her initial election
to the Lakes Board will receive a non-qualified stock option to purchase up to
12,500 shares of Lakes Common Stock at an option exercise price equal to 100% of
the fair market value of the shares on such grant date. Each option under the
1998 Lakes Director Plan will have a ten-year term and will generally become
exercisable in five equal installments commencing on the first anniversary of
the grant date. Options to be issued pursuant to the Lakes Director Plan will be
in addition to options assumed by Lakes under the Lakes Assumed Option Plans.
EXECUTIVE OFFICERS OF LAKES
Set forth below is certain information with respect to the four persons who
are expected to serve as executive officers of Lakes immediately following the
Grand Distribution. Those persons named below
187
<PAGE>
who are currently officers of Grand will relinquish their positions with Grand
effective on the Effective Date. However, Mr. Berman will continue as chairman
of the Lakes Board, and Mr. Berman will serve as an officer of Park Place's
Grand subsidiary.
<TABLE>
<CAPTION>
NAME AGE
- ---------------------------------------- ---
<S> <C> <C>
Lyle Berman............................. 57 See "Management of Lakes--Lakes Board of Directors" above.
Thomas J. Brosig........................ 48 See "Management of Lakes--Lakes Board of Directors" above.
Timothy J. Cope......................... 46 See "Management of Lakes--Lakes Board of Directors" above.
Joseph Galvin........................... 58 Chief Administrative Officer of Grand since November 1996, and prior
thereto, Vice President of Security of Grand.
</TABLE>
EXECUTIVE OFFICER COMPENSATION
Lakes is a newly formed corporation that has not paid any compensation to
its executive officers to date and will not pay any such compensation prior to
the time of the Grand Distribution. Compensation of the Lakes executive officers
will be determined by the Compensation Committees of the Lakes Board. None of
Lakes' executive officers currently have an employment agreement with Lakes. See
"Risk Factors--Risks Relating to the Business of Lakes--Dependence on Key
Personnel."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Lakes was formed in June 1998. Compensation for Lakes executives will be
determined by the Lakes Compensation and Stock Option Committee, the members of
which have yet to be determined.
188
<PAGE>
SECURITY OWNERSHIP OF LAKES
Grand currently owns all of the outstanding shares of Lakes Common Stock.
The following table sets forth information as to the shares of Lakes Common
Stock that would have been beneficially owned (or deemed to be owned pursuant to
the rules of the SEC) as of September 15, 1998, by each director of Lakes, each
of the executive officers of Lakes named in the Lakes Summary Compensation Table
included elsewhere herein (the "Lakes Named Executive Officers"), all directors
and executive officers of Lakes as a group and each person known to Lakes to be
the beneficial owner of more than 5% of the outstanding shares of Lakes Common
Stock, in each case based upon beneficial ownership reporting of Grand Common
Stock as of September 15, 1998 and after giving effect to the issuance of one
share of Lakes Common Stock for four shares of Grand Common Stock as a result of
the Grand Distribution and assuming that each Grand Option would be adjusted to
be one Lakes Option. Except as otherwise noted, each shareholder has sole voting
and investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
SHARES OF LAKES
COMMON STOCK PERCENT COMMON
NAME BENEFICIALLY OWNED STOCK OUTSTANDING(1)
- ---------------------------------------- ------------------------ --------------------
<S> <C> <C>
Lyle Berman(2).......................... 1,320,711(3) 12.2
Neil I. Sell, as sole trustee of four
irrevocable trusts for the benefit of
Lyle Berman's children................ 310,500(4) 2.9
Neil I. Sell............................ 19,949(5) *
Thomas J. Brosig........................ 237,060(6) 2.2
Timothy J. Cope......................... 34,500(7) *
Ronald J. Kramer........................ 8,000(8) *
Morris Goldfarb......................... 27,830(9) *
David L. Rogers......................... 24,514(10) *
Joel N. Waller.......................... 18,808(11) *
Joseph Galvin .......................... 35,025(12) *
All Lakes Directors and Executive
Officers as a Group (9 people
including the foregoing).............. 1,726,398(13) 15.6
</TABLE>
- ------------------------
* Less than one percent.
(1) Includes shares issuable upon the exercise of all outstanding option awards
which will vest immediately as a result of the consummation of the
Transactions. Share amounts assume consummation of the Transactions.
(2) The address of such person is 130 Cheshire Lane, Minnetonka, Minnesota,
55305.
(3) Includes 20,625 shares beneficially owned by Mr. Berman's spouse. Also
includes 11,403 shares held by Berman Consulting Corporation, a corporation
wholly owned by Mr. Berman. Also includes options to purchase 250,000 shares
which will vest immediately as a result of the consummation of the
Transactions.
(4) Mr. Sell has disclaimed beneficial ownership of such shares.
(5) Includes options to purchase 15,750 shares which will vest immediately as a
result of the consummation of the Transactions.
(6) Includes 22,450 shares beneficially owned by Mr. Brosig's spouse. Also
includes options to purchase 112,500 shares which will vest immediately as a
result of the consummation of the Transactions.
(7) Includes options to purchase 34,500 shares which will vest immediately as a
result of the consummation of the Transactions.
189
<PAGE>
(8) Includes 500 shares beneficially owned by a partnership in which the general
partner is a corporation wholly owned by Mr. Kramer. Also includes options
to purchase 7,500 shares which will vest immediately as a result of the
consummation of the Transactions.
(9) Includes 500 shares held by Mr. Goldfarb's adult children who reside in his
household. Also includes options to purchase 20,625 shares which will vest
immediately as a result of the consummation of the Transactions.
(10) Includes 8,250 shares beneficially owned by Mr. Rogers' spouse. Also
includes options to purchase 15,750 shares which will vest immediately as a
result of the consummation of the Transactions.
(11) Includes 513 shares beneficially owned by Mr. Waller's spouse. Also
includes options to purchase 15,750 shares which will vest immediately as a
result of the consummation of the Transactions.
(12) Includes options to purchase 35,025 shares which will vest immediately as a
result of the consummation of the Transactions.
(13) Includes shares held by corporations controlled by such officers and
directors. Also includes options to purchase 507,400 shares which will vest
immediately as a result of the consummation of the Transactions.
(14) Based on the most recent Schedule 13G filed by the security holder on
February 13, 1998. Includes 11,625 shares as to which the holder has sole
dispositive, but not sole voting power.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Lakes's
officers and directors, and persons who own more than ten percent of a
registered class of Lakes's equity securities, to file reports of ownership and
changes in ownership with the SEC and the Nasdaq National Market. Officers,
directors and greater than ten percent shareholders are required by SEC
regulation to furnish Lakes with copies of all Section 16(a) forms they file. No
Section 16(a) reporting is yet required with respect to Lakes.
190
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In general, see "The Transactions" for a discussion of certain arrangements
between Hilton, Park Place, Grand and Lakes and the officers and directors of
such entities in addition to the information set forth below. Also see
"Management of Park Place" for a discussion of certain employment arrangements,
of Park Place and "The Hilton Proposals" and "The Grand Proposals" for a
discussion of stock incentive plans to be adopted by Hilton, Park Place and
Lakes.
PARK PLACE
Park Place's casinos in Las Vegas and Reno, Nevada, regularly send and pay
for their guests to visit certain conference facilities in Yerington, Nevada,
which are owned by Barron Hilton. In this regard, Mr. Hilton received payments
in excess of $100,000 in 1997. Management believes that the rates paid were
comparable to those which would have been paid to unaffiliated parties providing
similar services.
LAKES
NEW HORIZON KIDS QUEST, INC.
Kids Quest owns and operates Kids Quest-SM- child care entertainment centers
in casinos owned or managed by Lakes. Lakes beneficially owns approximately 28%
of Kids Quest common stock. Lyle Berman, Chairman of the Board and a principal
shareholder of Lakes, is a director of Kids Quest. The agreements also typically
provide for a minimum guaranteed management fee to be paid to Kids Quest by
Lakes, which also varies by location, as well as a child care rate subsidy from
Lakes against Kids Quest operating losses at Lakes' locations. Under the subsidy
provisions, Grand paid $472,503 in 1997 to New Horizon. Under the guaranty
provisions, Lakes paid nothing in 1997.
OTHER MATTERS
Neil I. Sell is a partner in the law firm of Maslon Edelman Borman & Brand,
LLP, which rendered legal services to Lakes during the last fiscal year.
Ronald J. Kramer is Chairman of the Board and Chief Executive Officer of
Ladenburg Thalmann & Co. Inc. Pursuant to the engagement letter between Grand
and Ladenburg, upon consummation of the Merger, Grand has agreed to pay
Ladenburg a transaction fee of approximately $6.5 million. Grand has also agreed
to reimburse Ladenburg for its reasonable expenses, including attorneys' fees,
and to indemnify Ladenburg against certain liabilities in connection with its
engagement. Mr. Kramer abstained from voting on the Merger at the June 26, 1998
meeting of the Grand Board.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
GENERAL
In considering the recommendation of the Hilton Board with respect to the
Hilton Distribution, and the recommendation of the Grand Board with respect to
the Grand Distribution and the Merger, the holders of Hilton Common Stock and
Grand Common Stock should be aware that certain members of management and of the
Hilton Board and the Grand Board have interests in the Transactions that are
different from, or in addition to, the interests of the holders of Hilton and
Grand Common Stock, generally. The Boards were aware of such interests and
considered them, among other matters, in approving the Transactions. See "The
Transactions--Arrangements between Hilton and Park Place and-- Arrangements
between Grand and Lakes" and "--Indemnification Obligations" for a discussion of
certain arrangements that will be entered into if the Transactions are
consummated. Also see "Management of Park Place," "Management of Lakes," "The
Hilton Proposals" and "The Grand Proposals" for a discussion of certain
employment agreements and option plans that will become effective in connection
with the Transactions.
191
<PAGE>
HILTON INTERESTS
Stephen F. Bollenbach, who will be Chairman of the Park Place Board, will
continue to serve as a director and the President and Chief Executive Officer of
Hilton and Arthur M. Goldberg, who will become President and Chief Executive
Officer of Park Place and will serve on the Park Place Board, will continue to
be a director of Hilton. In connection with the Transactions, each of Mr.
Bollenbach and Mr. Goldberg anticipates that he will enter into an employment
agreement with Park Place. See "Management of Park Place--Park Place CEO and
Chairman Employment Agreements." In addition, Mr. Bollenbach has entered into a
new employment agreement with Hilton, the material terms of which are described
below, which will, upon its commencement date, supersede his current agreement
to the extent described below. See "--Hilton CEO Employment Agreement" below.
In connection with the Hilton Distribution and related transactions, Mr.
Bollenbach has agreed to waive any rights he has under Section 3(h)(i) of his
current employment agreement with Hilton dated February 1, 1996. Such section
provides for accelerated vesting of the Incentive Options granted to him in the
event of a "Qualified Transaction," which is defined as "a disposition (whether
by sale, spin-off, merger or otherwise) of substantially all of the assets
comprising either Hilton's hotel business or Hilton's gaming business occurring
(i) on or before June 30, 1998 or (ii) on or before December 31, 1998, pursuant
to a binding written contract entered into on or before June 30, 1998." The
Transactions would constitute such a "Qualified Transaction" if they were to
close on or before December 31, 1998, but Mr. Bollenbach has agreed to waive
this provision such that no acceleration of vesting will occur by reason of that
provision.
HILTON CEO AGREEMENT Hilton has entered into the Hilton CEO Agreement with
Mr. Bollenbach for the period beginning on the earlier of (i) the Hilton
Distribution Date and (ii) January 1, 1999, and ending on July 1, 2005, subject
thereafter to automatic renewal for periods of one year unless either Hilton or
Mr. Bollenbach gives notice of nonrenewal pursuant to the terms of the Hilton
CEO Agreement. In addition, if the Hilton Distribution has not occurred on or
before June 30, 1999, Mr. Bollenbach shall have the right to terminate the
Hilton CEO Agreement. The Hilton CEO Agreement provides for the employment of
Mr. Bollenbach as the President and Chief Executive Officer of Hilton. In
addition, if, during the term of the Hilton CEO Agreement, Barron Hilton shall
cease to serve as Chairman of the Hilton Board, Hilton shall cause Mr.
Bollenbach to be elected as Chairman of the Hilton Board in addition to his
current position as President and Chief Executive Officer of Hilton.
The Hilton CEO Agreement establishes a minimum annual base salary of
$620,000 and provides for an annual bonus opportunity, the amount of which,
together with Mr. Bollenbach's annual base salary, shall not exceed $1,000,000.
The Hilton CEO Agreement provides that Mr. Bollenbach (and his family, if
applicable) is entitled to fringe benefits and participation in Hilton's
employee benefits plans, in each case at least to the same extent as Hilton's
other senior executives. Mr. Bollenbach is also entitled to the unrestricted,
but not exclusive, use of Hilton's aircraft, provided that he shall reimburse
Hilton for the cost of such use if such use is for personal purposes. During the
term of the Hilton CEO Agreement, Mr. Bollenbach is entitled to four weeks of
paid vacation annually.
In addition, the Hilton CEO Agreement provides that if the Hilton
Distribution occurs, Mr. Bollenbach shall, subject to approval of the Amended
Hilton Plan by the Hilton stockholders, be granted an option (the "Hilton
Special Options") to purchase 6,000,000 shares of Hilton Common Stock under the
Amended Hilton Plan in tranches of 4,000,000 shares (the "Tranche A Option") and
2,000,000 shares (the "Tranche B Option"). The per share exercise price of the
Tranche A Option is equal to the closing price of the Hilton Common Stock on the
NYSE on the Hilton Distribution Date, and the per share exercise price of the
Tranche B Option is equal to the greater of (i) 150% of the closing price of the
Hilton Common Stock on the NYSE on July 9, 1998 (which was $26.94), ratably
reduced after the Hilton Distribution so as to reflect the July 9, 1998 closing
price as if only the post-Hilton Distribution shares of Hilton Common Stock
existed on that date (the "Hilton July 9, 1998 Adjusted Price") and (ii) the
closing price of the Hilton Common Stock on the NYSE on the Hilton Distribution
Date. If the Hilton stockholders do not approve
192
<PAGE>
the Amended Hilton Plan, Mr. Bollenbach shall have the right to terminate the
Hilton CEO Agreement. The Hilton Special Option is exercisable for 10 years
after the Hilton Distribution Date, except as otherwise specifically provided in
the Hilton CEO Agreement.
The Tranche A Option vests cumulatively in four equal annual installments
which begin on the first anniversary of the Hilton Distribution Date, provided
that Mr. Bollenbach is employed by Hilton as of the applicable vesting date
(except as otherwise provided in the Hilton CEO Agreement), subject to
acceleration as provided in the Hilton CEO Agreement. The Tranche B Option will
become fully vested and exercisable on the date that is nine years and nine
months after the Hilton Distribution Date if Mr. Bollenbach is employed by
Hilton on such date; provided, however, that if at any time prior to the fifth
anniversary of the Hilton Distribution Date, the closing price of the Hilton
Common Stock on the NYSE on each of any seven consecutive trading days equals or
exceeds 200% of the Hilton July 9, 1998 Adjusted Price, the Tranche B Option
will immediately become fully vested and exercisable if Mr. Bollenbach is
employed by Hilton as of the applicable vesting date (except as otherwise
provided in the Hilton CEO Agreement). In addition, the Hilton Special Option
will become fully vested and exercisable upon the occurrence of any of the
following events (each, a "Triggering Event"): (i) the termination of Mr.
Bollenbach's employment by Hilton other than for Cause (as defined in the Hilton
CEO Agreement), (ii) the termination of Mr. Bollenbach's employment by reason of
death or Disability (as defined in the Hilton CEO Agreement), or (iii) the
termination of Mr. Bollenbach's employment by Mr. Bollenbach for Good Reason (as
defined in the Hilton CEO Agreement); provided, however, that the Tranche B
Option will only become fully vested and exercisable upon a Triggering Event if
Mr. Bollenbach does not breach certain covenants described below. If a
Triggering Event occurs, the vested portion of the Hilton Special Option will
remain exercisable until the earlier to occur of (i) the fifth anniversary of
the date of termination, and (ii) the tenth anniversary of the Hilton
Distribution Date, and any non-vested portion of the Hilton Special Option will
thereupon terminate. To the extent not described in the Hilton CEO Agreement,
the Hilton Special Option will be subject to the terms and conditions of the
Amended Hilton Plan.
The Hilton CEO Agreement provides that if, during the term of the Hilton CEO
Agreement, Mr. Bollenbach's employment with Hilton is terminated by Hilton other
than for Cause or Disability, or by reason of Mr. Bollenbach's death, or by Mr.
Bollenbach for Good Reason, then Hilton will be required to pay Mr. Bollenbach
his base salary for the balance of the term of the Hilton CEO Agreement and his
accrued but unpaid cash compensation through the termination date. In addition,
Hilton shall provide Mr. Bollenbach with all benefits due in accordance with the
terms of any applicable employee benefits plans of Hilton. Hilton's obligation
to make such payments, to the extent that such payments shall not have accrued
as of the day before the termination date, will be conditioned upon Mr.
Bollenbach's execution of a written release of certain claims against Hilton
(the "Release"). In the event that such a termination occurs following a Change
of Control (as defined in the Hilton CEO Agreement) of Hilton and provided that
Mr. Bollenbach has executed the Release, then, in lieu of the payment of Mr.
Bollenbach's base salary for the balance of the term of the Hilton CEO
Agreement, Mr. Bollenbach shall receive a lump-sum cash payment equal to 2.99
times the sum of his annual base salary and his annual bonus for the last full
fiscal year ending during the term of the Hilton CEO Agreement (or, if higher,
his annual bonus for the last full fiscal year prior to the Change of Control).
In addition, Mr. Bollenbach will be entitled to receive a lump-sum payment of
all compensation previously deferred by him and not yet paid by Hilton, and a
retirement benefit calculated in accordance with the Hilton CEO Agreement. For
the remainder of the term of the Hilton CEO Agreement (or such longer period as
any plan may provide), Hilton will also be required to provide Mr. Bollenbach
(and his family, if applicable) with continued benefits under Hilton's employee
benefits plans at least equal to those which would have been provided had Mr.
Bollenbach's employment not terminated.
If Mr. Bollenbach's employment with Hilton is terminated by reason of his
death or Disability during the term of the Hilton CEO Agreement, then Hilton
will be required to pay Mr. Bollenbach (or his estate
193
<PAGE>
or legal representative) his base salary for the balance of the term of the
Hilton CEO Agreement and his accrued but unpaid cash compensation through the
termination date. In addition, Hilton shall provide Mr. Bollenbach (or his
estate or legal representative) with all benefits accrued by Mr. Bollenbach
under the terms of any applicable employee benefits plans of Hilton.
If Hilton terminates Mr. Bollenbach's employment for Cause during the term
of the Hilton CEO Agreement, Hilton must pay Mr. Bollenbach his unpaid annual
base salary through the date of termination, the amount of any unpaid
compensation deferred by Mr. Bollenbach, and the amount of any earned but unpaid
annual bonuses and vacation pay. Hilton shall also provide Mr. Bollenbach with
any benefits accrued by Mr. Bollenbach under the terms of any applicable
employee benefits plans of Hilton. If Mr. Bollenbach terminates employment with
Hilton other than for Good Reason during the term of the Hilton CEO Agreement,
Hilton must pay Mr. Bollenbach his accrued but unpaid cash compensation through
the termination date and must provide Mr. Bollenbach with any benefits accrued
by Mr. Bollenbach under the terms of any applicable employee benefits plans of
Hilton.
Under the Hilton CEO Agreement, Mr. Bollenbach covenants not to disclose
confidential information of Hilton. In addition, Mr. Bollenbach covenants that,
for a period of two years following his termination of employment, he will not
compete with Hilton or employ or solicit certain of its employees and agents.
The Hilton CEO Agreement also provides that upon a Change of Control of
Hilton, the Hilton Special Option will become fully vested and exercisable;
provided, however that the Tranche B Option will only become fully vested and
exercisable upon a Change of Control if Mr. Bollenbach does not breach the
covenants described above. In addition, Hilton will pay Mr. Bollenbach any
excise tax incurred by him under Section 4999 of the Code on any payments or
benefits paid or payable by Hilton to Mr. Bollenbach under the Hilton CEO
Agreement or otherwise, which constitute "parachute payments" under Code Section
280G, and Hilton will bear the cost of all income, excise and employment taxes
imposed on such gross-up payment.
Upon commencement of the Hilton CEO Agreement, it will supersede Mr.
Bollenbach's current employment agreement with Hilton dated as of February 1,
1996 and his Change of Control Agreement with Hilton dated as of January 30,
1996, except with respect to certain provisions of such employment agreement
relating to (i) the acceleration of stock options granted to Mr. Bollenbach
pursuant to such agreement, (ii) Mr. Bollenbach's entitlement to receive from
Hilton the "substitute payment" with respect to such stock options described
therein in the event that his employment is terminated under certain
circumstances, and (iii) a loan made by Hilton to Mr. Bollenbach.
GRAND INTERESTS
Lyle Berman, who will be a director of Park Place, will serve as Chairman of
the Board and Chief Executive Officer of Lakes.
Messrs. Berman and Brosig, in addition to Mr. Timothy J. Cope, Chief
Financial Officer and Mr. Joseph Galvin, Chief Administrative Officer, have
entered into employment agreements with Grand which contain certain "change of
control" provisions which may be triggered as a result of the Merger. Under
their respective agreements, in the event of a termination of employment not for
"cause" or such employee's resignation following a "change of control" (as
defined therein), Grand must immediately pay to those individuals up to two and
one-half years of current base salary in addition to any outstanding incentive
compensation to which they would otherwise be entitled in the absence of such
termination or resignation, in addition to the continuation of certain employee
benefits to which such individual would otherwise be entitled for an additional
year. The "change of control" provisions also provide for a two year period in
which the individual may exercise any outstanding options to purchase Common
Stock. For purposes of these agreements, a "change of control" will occur by
reason of the Merger. If a qualifying
194
<PAGE>
termination occurs, each executive officer would be entitled to the following
amounts: Mr. Berman-- $1,625,000; Mr. Brosig--$1,125,000; Mr. Cope--$630,000;
and Mr. Galvin--$645,000.
Upon consummation of the Merger, Park Place shall honor all employment,
severance and termination agreements of employees of Grand and its subsidiaries
currently in effect provided that, to the extent that such agreement would
unjustly or inequitably enrich such employee, the foregoing commitment shall not
apply to any persons who become employees of Lakes and shall instead become a
commitment of Lakes.
Additionally, upon consummation of the Merger, all outstanding options to
purchase Grand Common Stock will vest, including options to acquire an aggregate
of 1,000,000 shares with respect to Mr. Berman, options to acquire an aggregate
of 450,000 shares with respect to Mr. Brosig, options to acquire an aggregate of
138,000 shares with respect to Mr. Cope and options to acquire an aggregate of
140,100 shares with respect to Mr. Galvin. As of October 22, 1998, the latest
practicable date prior to the printing of this Joint Proxy Statement/Prospectus,
the closing market price of Grand Common Stock was $8.38 per share, and the
exercise price of the unvested portion of each of the foregoing stock options
exceeded the price of Grand Common Stock on that date.
195
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTIONS
The following summary of the material federal income tax consequences to the
holders of Hilton Common Stock and Grand Common Stock, as the case may be, in
connection with the Transactions is based upon current provisions of the Code,
currently applicable Treasury regulations and judicial and administrative
rulings and decisions as of the date hereof. Legislative, judicial or
administrative changes may be forthcoming that could alter or modify the
statements set forth herein, possibly on a retroactive basis. The summary does
not purport to deal with all aspects of federal income taxation that may affect
particular holders of Hilton Common Stock or Grand Common Stock in light of
their individual circumstances, nor with certain types of holders subject to
special treatment under the federal income tax laws (E.G., life insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
holders owning stock as part of a "straddle," "hedge" or "conversion
transaction," holders who acquired their Hilton Common Stock or Grand Common
Stock pursuant to the exercise of an employee stock option or otherwise as
compensation, and holders of Hilton Common Stock or Grand Common Stock who are
neither citizens nor residents of the United States, or that are foreign
corporations, foreign partnerships or foreign estates or trusts for U.S. federal
income tax purposes). In addition, the summary assumes that each Hilton
stockholder and each Grand shareholder holds his or her shares of Hilton Common
Stock and Grand Common Stock, respectively, as capital assets. CONSEQUENTLY,
EACH HILTON STOCKHOLDER AND GRAND SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX
ADVISOR REGARDING THE TAX CONSEQUENCES OF THE TRANSACTIONS IN LIGHT OF EACH SUCH
HOLDER'S OWN SITUATION, INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL
OR FOREIGN INCOME AND OTHER TAX LAWS.
CONSEQUENCES OF THE HILTON DISTRIBUTION AND THE GRAND DISTRIBUTION
CONSEQUENCES OF THE HILTON DISTRIBUTION TO HILTON AND HILTON
STOCKHOLDERS. Hilton and Park Place have conditioned the Hilton Distribution,
which itself is a condition to the Merger, on the receipt of a satisfactory
private letter ruling from the IRS. See "Risk Factors--Certain Tax
Considerations to Hilton, Hilton Stockholders and Grand Shareholders Relating to
the Hilton Distribution and the Grand Distribution." Hilton has requested such a
ruling from the IRS to the effect that the Hilton Distribution will qualify as a
tax-free distribution under Sections 355 and 368(a)(1)(D) of the Code, and
therefore that, among other things:
(1) No gain or loss will be recognized by (and no amount will be included in
the income of) a holder of Hilton Common Stock upon the stockholder's receipt of
Park Place Common Stock in the Hilton Distribution;
(2) No gain or loss will be recognized by Hilton with respect to the
distribution of Park Place Common Stock in the Hilton Distribution;
(3) The aggregate bases of the Hilton Common Stock and the Park Place Common
Stock received by a stockholder of Hilton in the Hilton Distribution will be the
same as the aggregate basis of the Hilton Common Stock held by the stockholder
immediately before the Hilton Distribution, allocated in proportion to the fair
market value of the Hilton Common Stock and the Park Place Common Stock; and
(4) The holding period of the Park Place Common Stock each stockholder of
Hilton receives in the Hilton Distribution will include the holding period of
the stockholder's Hilton Common Stock with respect to which the Park Place
Common Stock was received in the Hilton Distribution.
Hilton has also requested other related rulings from the IRS, including
rulings to the effect that certain of the transactions included in the Hilton
Restructuring will be tax-free to Hilton and its subsidiaries for federal income
tax purposes. The Hilton Restructuring, which must occur before the Hilton
Distribution, is intended to divide the hotel and gaming businesses of Hilton
between Hilton and
196
<PAGE>
Park Place, all as described in "The Transactions--Arrangements Between Hilton
and Park Place--Hilton Distribution Agreement."
Even if such rulings are obtained, it should be noted that private letter
rulings, while generally binding upon the IRS, are subject to certain factual
representations and assumptions. If such factual representations and assumptions
were incorrect in any material respect, the ability to rely on such a ruling
would be jeopardized. Hilton is not aware of any facts or circumstances that
would cause such representations and assumptions to be untrue. Hilton and Park
Place have agreed to certain restrictions on their future actions to provide
further assurances that the Hilton Distribution will have tax-free status. See
"The Transactions--Arrangements Between Hilton and Park Place--Tax Allocation
and Indemnity Agreement."
Although Hilton believes that the rulings it has requested are consistent
with the Code and the authorities thereunder, it is not certain whether the IRS
will issue a tax ruling that is satisfactory to Hilton and Park Place. Pursuant
to Section 8.1(e) of the Merger Agreement, the Hilton Board and the Grand Board
have the mutual discretion to waive the requirements for the receipt of the tax
ruling as a condition to Hilton's and Grand's respective obligations to proceed
with the Transactions on the basis of a tax opinion to Hilton and Grand,
respectively, dated and effective as of the Closing Date. In connection with the
mailing of this Joint Proxy Statement/Prospectus, Latham & Watkins, counsel for
Hilton, has delivered an opinion to Hilton substantially to the effect that, as
of the date of such opinion, and based on the facts as set forth in (i) the
Registration Statement of which this Joint Proxy Statement/Prospectus is a part,
together with all of the exhibits and amendments thereto, (ii) the ruling
request that Hilton has filed with the IRS regarding the Hilton Distribution and
all exhibits and supplemental submissions thereto, and (iii) such other
representations and certificates as counsel may reasonably request, and assuming
that the transactions described in the foregoing documents are consummated in
accordance with the terms and conditions of such documents and that each of the
facts set forth in such representations and certificates is accurate, the
federal income tax consequences of the Hilton Distribution to Hilton and Hilton
stockholders will be, although not free from doubt, as described in
subparagraphs (1), (2), (3), and (4) above. The opinion of Latham & Watkins is
not free from doubt because of the inherently factual nature of certain of the
analysis and requirements necessary to qualify the Hilton Distribution under
Section 355 of the Code. Moreover, it should be noted that counsel's opinion is
not binding on the IRS or any court, and, accordingly, there is no assurance
that the IRS will not take a position contrary to such opinion or that such
opinion will be upheld by the courts if challenged by the IRS. Finally, it
should be noted that Section 8.1(e) of the Merger Agreement requires that should
Hilton and Grand decide to proceed with the transaction in the absence of a
private letter ruling from the IRS, legal counsel must deliver an opinion to
Hilton dated and effective as of the Closing Date. Counsel's ability to deliver
such opinion will be based on its analysis of the facts and law as they may
exist at the Closing Date. The foregoing opinion of Latham & Watkins has been
filed as an exhibit to the Registration Statement of which this Joint Proxy
Statement/ Prospectus is a part. In this regard, each of Hilton and Latham &
Watkins believes that all facts which both are material to investors and
underlie such tax opinion are set forth in the Registration Statement of which
this Joint Proxy Statement/Prospectus is a part, together with all exhibits and
amendments thereto.
If the Hilton Distribution were not to qualify for tax-free treatment under
Sections 355 and 368(a)(1)(D) of the Code, Hilton would recognize gain equal to
the excess of the fair market value of the Park Place Common Stock distributed
to Hilton stockholders over Hilton's basis in such stock. Any resulting
corporate income tax on such gain would be payable by Hilton and could be
substantial. In addition, each Hilton stockholder who received shares of Park
Place Common Stock would be treated as if such stockholder had received a
taxable distribution in an amount equal to the fair market value of the Park
Place Common Stock received, which would generally result in (i) a taxable
dividend to the extent of such stockholder's pro rata share of Hilton's current
and accumulated earnings and profits, (ii) a reduction in such stockholder's
basis (but not below zero) in shares of Hilton Common Stock to the extent the
amount received exceeds such stockholder's share of Hilton's earnings and
profits and (iii) taxable gain
197
<PAGE>
from the exchange of Hilton Common Stock to the extent the amount received
exceeds both such stockholder's share of Hilton's earnings and profits and such
stockholder's basis in Hilton Common Stock.
For a description of the Tax Allocation and Indemnity Agreement pursuant to
which Hilton and Park Place have provided for various tax matters, see "The
Transactions--Arrangements Between Hilton and Park Place--Tax Allocation and
Indemnity Agreement."
CONSEQUENCES OF THE GRAND DISTRIBUTION TO GRAND AND GRAND
SHAREHOLDERS. Grand and Lakes have conditioned the Grand Distribution, which
itself is a condition to the Merger, on the receipt of a satisfactory private
letter ruling from the IRS. See "Risk Factors--Certain Tax Considerations to
Hilton, Hilton Stockholders, and Grand Shareholders Relating to the Hilton
Distribution and the Grand Distribution." Grand has requested such a ruling from
the IRS to the effect that the Grand Distribution will qualify as a tax-free
distribution under Sections 355 and 368(a)(1)(D) of the Code, solely with
respect to the shareholders of Grand, and therefore that, among other things:
(1) No gain or loss will be recognized by (and no amount will be included in
the income of) a holder of Grand Common Stock upon the shareholder's receipt of
Lakes Common Stock in the Grand Distribution, except to the extent of any cash
received by the shareholder in lieu of fractional shares of Lakes Common Stock.
Any cash received by the shareholder in lieu of fractional shares will result in
the tax consequences described below;
(2) The aggregate bases of the Grand Common Stock and the Lakes Common Stock
(including any fractional shares) to which a shareholder of Grand is entitled
immediately after the Grand Distribution will be the same as the aggregate basis
of the Grand Common Stock held by the shareholder immediately before the Grand
Distribution, allocated in proportion to the fair market value of the Grand
Common Stock and the Lakes Common Stock; and
(3) The holding period of the Lakes Common Stock (including any fractional
shares) each shareholder of Grand is entitled to receive in the Grand
Distribution will include the holding period of the shareholder's Grand Common
Stock with respect to which the Grand Distribution will be made.
Grand has also requested other related rulings from the IRS, including
rulings to the effect that certain of the transactions included in the Grand
Restructuring will be tax-free to Grand and its subsidiaries for federal income
tax purposes. The Grand Restructuring, which must occur before the Grand
Distribution, is intended to divide the businesses of Grand between Grand and
Lakes, all as described in "The Transactions--Arrangements Between Grand and
Lakes--Grand Distribution Agreement."
Even if such rulings are obtained, it should be noted that private letter
rulings, while generally binding upon the IRS, are subject to certain factual
representations and assumptions. If such factual representations and assumptions
were incorrect in any material respect, the ability to rely on such a ruling
would be jeopardized. Grand is not aware of any facts or circumstances that
would cause such representations and assumptions to be untrue. Grand and Lakes
have agreed to restrict their future actions to ensure that such representations
and assumptions will be correct in all material respects. See "The
Transactions--Arrangements Between Grand and Lakes--Grand Distribution
Agreement."
Although Grand believes that the rulings it has requested are consistent
with the Code and the authorities thereunder, it is not certain whether the IRS
will issue a tax ruling that is satisfactory to Grand and Lakes. Pursuant to
Section 8.1(e) of the Merger Agreement, the Grand Board and the Hilton Board
have the mutual discretion to waive the requirements for the receipt of the tax
ruling as a condition to Grand's and Hilton's respective obligations to proceed
with the Transactions on the basis of a tax opinion to Grand and Hilton,
respectively, dated and effective as of the Closing Date. In connection with the
mailing of this Joint Proxy Statement/Prospectus, Arthur Andersen LLP,
independent public accountants for Grand, has delivered an opinion to Grand,
substantially to the effect that, as of the date of such opinion, and based on
the facts as set forth in (i) the Registration Statement of which this Joint
Proxy
198
<PAGE>
Statement/Prospectus is a part, together with all of the exhibits and amendments
thereto, (ii) the ruling request that Grand has filed with the IRS regarding the
Grand Distribution and all exhibits and supplemental submissions thereto, and
(iii) such other representations and certificates as Arthur Andersen LLP may
reasonably request, and assuming that the transactions described in the
foregoing documents are consummated in accordance with the terms and conditions
of such documents and that each of the facts set forth in such representations
and certificates is accurate, the federal income tax consequences of the Grand
Distribution solely with respect to the shareholders of Grand, will be, although
not free from doubt, as described in subparagraphs (1), (2), and (3) above. The
opinion of Arthur Andersen LLP is not free from doubt because of the inherently
factual nature of certain of the analysis and requirements necessary to qualify
the Grand Distribution under Section 355 of the Code. Moreover, it should be
noted that the opinion of Arthur Andersen LLP is not binding on the IRS or any
court, and, accordingly, there is no assurance that the IRS will not take a
position contrary to such opinion or that such opinion will be upheld by the
courts if challenged by the IRS. Finally, it should be noted that Section 8.1(e)
of the Merger Agreement requires that should Hilton and Grand decide to proceed
with the transaction in the absence of a private letter ruling from the IRS,
legal counsel must deliver an opinion to Grand dated and effective as of the
Closing Date. Counsel's ability to deliver such opinion will be based on its
analysis of the facts and law as they may exist at the Closing Date. The opinion
of Arthur Andersen LLP has been filed as an exhibit to the Registration
Statement of which this Joint Proxy Statement/Prospectus is a part. In this
regard, each of Grand and Arthur Andersen, LLP believes that all facts which
both are material to investors and underlie such tax opinion are set forth in
the Registration Statement of which this Joint Proxy Statement/Prospectus is a
part, together with all exhibits and amendments thereto.
The receipt by a Grand shareholder of any cash in lieu of a fractional share
of Lakes Common Stock pursuant to the Grand Distribution will be a taxable
transaction under the Code for federal income tax purposes. The receipt of cash
in lieu of any fractional share of Lakes Common Stock will generally result in
gain or loss (rather than dividend income), measured by the difference between
the amount of cash received and the adjusted basis of the fractional share, and
assuming (as Grand believes) that such cash distribution is made solely for the
purpose of saving Grand the expense and inconvenience of issuing and
transferring fractional shares of Lakes Common Stock. Grand shareholders who
anticipate receiving fractional shares of Lakes Common Stock should consult
their own tax advisors about the treatment of capital gain or loss from such
receipt.
If the Grand Distribution were not to qualify for tax-free treatment under
Sections 368(a)(1)(D) and 355 of the Code with respect to the shareholders of
Grand, each Grand shareholder who received shares of Lakes Common Stock would be
treated as if such stockholder had received a taxable distribution in an amount
equal to the fair market value of the Lakes Common Stock (including fractional
shares) received, which would generally result in (i) a taxable dividend to the
extent of such shareholder's pro rata share of Grand's current and accumulated
earnings and profits, (ii) a reduction in such shareholder's basis (but not
below zero) in shares of Grand Common Stock to the extent the amount received
exceeds such shareholder's share of Grand's earnings and profits and (iii)
taxable gain from the exchange of Grand Common Stock to the extent the amount
received exceeds both such shareholder's share of Grand's earnings and profits
and such shareholder's basis in Grand Common Stock.
For a description of the Grand Tax Agreement pursuant to which Grand and
Lakes have provided for various tax matters, see "The Transactions--Arrangements
Between Hilton and Park Place--Tax Allocation and Indemnity Agreement."
CONSEQUENCES OF THE MERGER
CONSEQUENCES OF THE MERGER TO GRAND AND GRAND SHAREHOLDERS. After the
Hilton Distribution and the Grand Distribution, and pursuant to the Merger
Agreement, (i) a wholly-owned subsidiary of Park Place will be merged with and
into Grand, with Grand as the surviving corporation and (ii) the Grand
shareholders will receive shares of Park Place Common Stock (and cash in lieu of
any fractional shares of
199
<PAGE>
Park Place Common Stock) in exchange for their shares of Grand Common Stock. It
is a condition of Grand's obligation to consummate the Merger that it shall have
received an opinion of its tax counsel, dated as of the Effective Date of the
Merger, to the effect that (i) the Merger will be treated as a tax-free
reorganization under Section 368(a)(1) of the Code, (ii) each of Park Place and
Grand will be parties to the reorganization within the meaning of Section 368(b)
of the Code and (iii) no gain or loss will be recognized by Grand as a result of
the Merger, except for any gain that may be recognized by Grand from the Grand
Distribution as a result of the Merger. Assuming the Merger is so treated, for
federal income tax purposes, no gain or loss will be recognized by Grand
shareholders as a result of the Merger (unless such shareholders receive cash in
lieu of fractional shares of Park Place Common Stock, in which case the amount
of gain (or loss) recognized will be treated in the manner described in the
following paragraph) but the Merger will cause the Grand Distribution to be
taxable to Grand. However, although the amount of both (i) Grand's taxable
income so recognized and (ii) Grand's income tax losses and deductions arising
from its pre-Grand-Distribution transactions with Stratosphere are not presently
ascertainable, Grand expects that such taxable income, net of losses and
deductions available to be offset against such income, will not result in
Grand's being required to pay an amount of federal income taxes that would have
a material adverse effect on its financial condition.
The receipt by a Grand shareholder of any cash in lieu of a fractional share
of Park Place Common Stock pursuant to the Merger will be a taxable transaction
under the Code for federal income tax purposes. The receipt of cash in lieu of
fractional shares of Park Place Common Stock will result in gain or loss (rather
than dividend income), measured by the difference between the amount of cash
received and the adjusted basis of the fractional share. Grand shareholders who
anticipate receiving fractional shares of Park Place Common Stock should consult
their own tax advisors about the treatment of capital gain or loss arising from
such receipt.
In connection with the mailing of this Joint Proxy Statement/Prospectus,
Maslon Edelman Borman & Brand, LLP ("Maslon"), counsel for Grand, has delivered
an opinion to Grand substantially to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion, the federal income
tax consequences of the Merger to Grand and Grand shareholders will be as set
forth in the preceding two paragraphs. This opinion has been filed as an exhibit
to the Registration Statement, of which this Joint Proxy Statement/Prospectus is
a part. In this regard, each of Grand and Maslon believes that all facts which
both are material to investors and underlie such tax opinion are set forth in
the Registration of which this Joint Proxy Statement/Prospectus Statement is a
part, together with all exhibits and amendments thereto.
An opinion of counsel is not binding on the IRS or any court, and no ruling
has been sought from the IRS as to the federal income tax consequences of any
aspect of the Merger, Grand's potential income tax liability, or its ability to
use its Stratosphere-related losses and deductions to offset such liability.
Accordingly, there is no assurance that the IRS will not take a position
contrary to one or more positions reflected in such an opinion or that such an
opinion will be upheld by the courts if challenged by the IRS.
CONSEQUENCES OF THE MERGER TO PARK PLACE AND PARK PLACE
STOCKHOLDERS. Pursuant to the Merger Agreement, Park Place will acquire Grand
in exchange for approximately 13.6% of the outstanding common stock of Park
Place. For federal income tax purposes, no gain or loss will be recognized by
Park Place or Park Place stockholders as a result of the Merger. In connection
with the mailing of this Joint Proxy Statement/Prospectus, Latham & Watkins,
counsel for Park Place, has delivered an opinion to Park Place, substantially to
the effect that, on the basis of facts, representations and assumptions set
forth in such opinion, the federal income tax consequences of the Merger to Park
Place and Park Place stockholders will be as set forth in the preceding
sentence. This opinion has been filed as an exhibit to the Registration
Statement, of which this Joint Proxy Statement/Prospectus is a part. In this
regard, each of Park Place and Latham & Watkins believes that all facts which
both are material to investors and underlie such tax opinion are set forth in
the Registration Statement of which this Joint Proxy Statement/Prospectus is a
part, together with all exhibits and amendments thereto. In addition, it is a
condition of Park Place's obligation to consummate the Merger that it shall have
received an opinion of its tax counsel to the effect
200
<PAGE>
that (i) the Merger will be treated as a tax-free reorganization under Section
368(a)(1) of the Code, (ii) each of Park Place and Grand will be parties to the
reorganization within the meaning of Section 368(b) of the Code and (iii) no
gain or loss will be recognized by Grand, Hilton or Park Place as a result of
the Merger, except for any gain which may be recognized by Grand from the Grand
Distribution as a result of the Merger.
An opinion of counsel is not binding on the IRS, and no ruling has been
sought from the IRS as to the federal income tax consequences of any aspect of
the Merger. Accordingly, there is no assurance that the IRS will not take a
position contrary to one or more positions reflected in such an opinion or that
such an opinion will be upheld by the courts if challenged by the IRS.
BACKUP WITHHOLDING. In order to avoid "backup withholding" of federal
income tax on payments of cash to a Grand shareholder who exchanges his or her
Grand Common Stock in the Merger, a Grand shareholder must, unless an exception
applies under the applicable law and regulations, provide Park Place with such
shareholder's correct taxpayer identification number ("TIN") on a Form W-9 and
certify under penalties of perjury that such number is correct and that such
shareholder is not subject to backup withholding. A Form W-9 is included as part
of the letter of transmittal to be sent to Grand shareholders by the exchange
agent. If the correct TIN and certifications are not provided, a penalty may be
imposed on a Grand shareholder by the IRS, and the cash payments received by a
Grand shareholder in consideration for shares of Grand Common Stock in the
Merger may be subject to backup withholding tax at a rate of 31%.
201
<PAGE>
MARKETS AND MARKET PRICES
Hilton Common Stock and Grand Common Stock are each listed on the NYSE under
the symbols "HLT" and "GND," respectively. Hilton Common Stock is also listed on
the Pacific Stock Exchange. On the Hilton and Grand Record Date, there were
11,957 holders of record of Hilton Common Stock and 1,368 holders of record of
Grand Common Stock. On June 29, 1998, the last trading date prior to the joint
public announcement by Hilton and Grand of the execution of the Merger
Agreement, the last reported sale price on the NYSE Composite Tape for Hilton
Common Stock and Grand Common Stock was $31.50 and $18.50 per share,
respectively.
The following table set forth, for the fiscal quarters indicated, the range
of high and low sale prices of Hilton Common Stock and Grand Common Stock, each
as reported on the NYSE Composite Tape. Hilton has a calendar-based fiscal year
ending December 31. Grand has a 52 or 53-week fiscal year ending the Sunday
closest to December 31.
<TABLE>
<CAPTION>
HILTON GRAND
COMMON STOCK COMMON STOCK
-------------- --------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
Calendar Year 1996
First Quarter......................... $24.94 $15.28 $35.63 $23.00
Second Quarter........................ $30.50 $23.50 $35.75 $25.00
Third Quarter......................... $28.63 $23.34 $26.63 $13.50
Fourth Quarter........................ $31.75 $25.63 $18.13 $12.00
Calendar Year 1997
First Quarter......................... $30.00 $24.00 $14.33 $ 9.00
Second Quarter........................ $30.13 $24.25 $16.13 $ 9.13
Third Quarter......................... $34.06 $26.75 $17.19 $13.81
Fourth Quarter........................ $35.81 $26.06 $15.31 $12.00
Calendar Year 1998
First Quarter......................... $35.50 $27.50 $17.31 $12.50
Second Quarter........................ $34.00 $28.13 $19.13 $15.81
Third Quarter......................... $29.38 $16.56 $17.13 $ 7.19
Fourth Quarter through October 22,
1998................................ $20.44 $12.50 $ 9.88 $ 5.63
</TABLE>
Hilton paid dividends of $.075 per share for the first three quarters of
1996 (as adjusted for the four-for-one stock split in September, 1996) and $.08
per share for each quarter thereafter. Grand has never paid any dividends.
On October 22, 1998, the most recent practicable date prior to the printing
of this Joint Proxy Statement/Prospectus, the last sale price as reported by the
NYSE was $18.69 per share of Hilton Common Stock and $8.38 per share of Grand
Common Stock.
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR HILTON COMMON
STOCK AND GRAND COMMON STOCK.
202
<PAGE>
DESCRIPTION OF PARK PLACE CAPITAL STOCK
GENERAL
Park Place's authorized capital stock consists of 400,000,000 shares of
common stock, par value $.01 per share and 100,000,000 shares of preferred
stock, par value $.01 per share ("Park Place Preferred Stock"). After the Hilton
Distribution, the only class of shares outstanding will be the Park Place Common
Stock. Based on the number of shares of Hilton Common Stock outstanding at June
30, 1998, 246,814,203 shares of Park Place Common Stock will be distributed to
the stockholders of Hilton in the Hilton Distribution. Based on an assumed
Merger exchange ratio of .9699 described on page 5, 41,020,121 shares of Park
Place Common Stock would be distributed to Grand shareholders. All of the shares
of Park Place Common Stock issued in the Hilton Distribution and the Merger will
be validly issued, fully paid and non-assessable.
COMMON STOCK
VOTING RIGHTS
Holders of Park Place Common Stock will be entitled to one vote per share on
all matters voted on generally by the stockholders, including the election of
directors, and except as otherwise required by law or except as provided with
respect to any series of Park Place Preferred Stock, the holders of such shares
will possess all voting power. Because the Park Place Certificate will not
provide for cumulative voting rights, the holders of a plurality of the voting
power of the then outstanding shares of capital stock entitled to be voted
generally in the election of directors represented at a meeting will be able to
elect all the directors standing for election at such meeting. Matters submitted
for stockholder approval generally require a majority vote of the shares of
common stock present and voting thereon.
DIVIDEND RIGHTS
Subject to any preferential rights of holders of any Park Place Preferred
Stock that may be outstanding, holders of shares of Park Place Common Stock will
be entitled to receive dividends on such stock out of assets legally available
for distribution when, as and if authorized and declared by the Park Place Board
and to share ratably in the assets of Park Place legally available for
distribution to its stockholders in the event of its liquidation, dissolution or
winding-up.
MISCELLANEOUS
Holders of Park Place Common Stock will have no preferences or preemptive,
conversion or exchange rights. Shares of Park Place Common Stock will not be
liable for further calls or assessments by Park Place, and the holders of Park
Place Common Stock will not be liable for any liabilities of Park Place.
ChaseMellon Shareholder Services, L.L.C. will act as Transfer Agent and
registrar for the Park Place Common Stock.
The Park Place Certificate provides that if any holder of any securities of
Park Place is requested pursuant to any gaming authority to appear before, or
submit to the jurisdiction of, or provide information to, any gaming authority,
and either refuses to do so or otherwise fails to comply with such request
within a reasonable time, or is determined by any gaming authority not to be
suitable or qualified with respect to the beneficial ownership of such
securities of Park Place, then, at the election of Park Place, (i) it may
repurchase any or all of such securities at the fair market value (or the lesser
of the fair market value and the purchase price if the person has acquired
beneficial ownership of the securities within 24 months of the date of the
repurchase notice) or (ii) the owner of such securities shall dispose of such
interests within the 120 day period commencing on the date on which Park Place
receives notice from a gaming authority of such holder's unsuitability or
disqualification (or an earlier time if so required by a gaming authority or any
gaming law) without any obligation on Park Place to repurchase such securities.
The Park Place Bylaws
203
<PAGE>
also provide that all securities of Park Place are held subject to the relevant
gaming laws, and if a holder thereof is found to be disqualified by any gaming
authority, then such holder shall dispose of his or her interest in Park Place
as provided in the Park Place Certificate and pursuant to the gaming laws and
orders of any gaming authorities. These restrictions will be contained in a
legend on each certificate issued evidencing shares of Park Place Common Stock.
PREFERRED STOCK
The Park Place Certificate will specify that the Park Place Board is
authorized to provide for the issuance of shares of preferred stock, from time
to time, in one or more series, and to fix any voting powers, full or limited or
none, and the designations, preferences and relative, participating, optional or
other special rights, applicable to the shares to be included in any such series
and any qualifications, limitations or restrictions thereon. No shares of Park
Place Preferred Stock will be outstanding immediately following the Hilton
Distribution. However, as of the Effective Date, shares of Park Place Series A
Junior Participating Preferred Stock (the "Park Place Junior Preferred Stock")
will have been authorized and reserved for issuance in connection with the Park
Place stockholder rights plan described in "--Rights Agreement and Preferred
Share Purchase Rights."
RIGHTS AGREEMENT AND PREFERRED SHARE PURCHASE RIGHTS
If the Hilton Distribution is consummated, the Park Place Board will, prior
to the Effective Date, adopt a stockholder rights plan and cause to be issued,
with each share of Park Place Common Stock to be issued, one preferred share
purchase right (the "Park Place Rights"). The Park Place Rights will be governed
by a rights agreement (the "Rights Agreement") to be entered into between Park
Place and an independent third party acting as rights agent. The following is a
summary of the anticipated material terms of the Rights Agreement.
Generally, the Park Place Rights will become exercisable ten days after a
person or group, subject to certain exceptions, acquires a specified percentage
or more of the issued and outstanding shares of Park Place Common Stock or
announces a tender offer, the consummation of which would result in ownership by
a person or group of a specified percentage or more of the issued and
outstanding shares of Park Place Common Stock. Each Park Place Right will
entitle the holder, until the tenth anniversary of the Rights Agreement, to buy
one one-hundredth of a share of Park Place Junior Preferred Stock, at an
exercise price to be determined by the Park Place Board prior to the time Park
Place enters the Rights Agreement.
If a person or group, subject to certain exceptions, acquires a specified
percentage or more of the issued and outstanding shares of Park Place Common
Stock or if Park Place is the surviving corporation in a merger or other
business combination, each Park Place Right will entitle its holder (other than
such person or members of such group) to purchase, at the Right's then current
exercise price, shares of Park Place Common Stock having a market value of twice
the Right's exercise price. If Park Place is not the surviving corporation in a
merger or other business combination, each Park Place Right will entitle its
holder to purchase, at the Right's then current exercise price, a number of the
acquiring company's common shares having a then current market value of twice
the Rights' exercise price.
Following the acquisition by a person or group of beneficial ownership of a
specified percentage or more of the issued and outstanding shares of Park Place
Common Stock, the Park Place Board may exchange the Park Place Rights (other
than Rights owned by such person or group), in whole or in part, for shares of
Park Place Common Stock at an exchange rate based on the value of the Park Place
Common Stock at that time.
Prior to the time that a person or group has acquired beneficial ownership
of a specified percentage or more of the issued and outstanding shares of Park
Place Common Stock, the Park Place Rights will be redeemable in whole, not in
part, at a price to be determined by the Park Place Board. ChaseMellon
Shareholder Services, L.L.C. is expected to be the Rights Agent under the Rights
Agreement.
204
<PAGE>
CERTAIN EFFECTS OF PREFERRED SHARE PURCHASE RIGHTS
The issuance of the Park Place Rights to purchase shares of Park Place
Junior Preferred Stock will have certain anti-takeover effects. The Rights will
cause substantial dilution to a person or group that attempts to acquire Park
Place on terms not approved by the Park Place Board. The Park Place Rights
should not interfere with any merger or other business combination approved by
the Park Place Board prior to the time that a person or group has acquired
beneficial ownership of a specified percentage or more of the Park Place Common
Stock, as the Rights will be redeemable by Park Place prior to such time.
DESCRIPTION OF LAKES CAPITAL STOCK
Lakes' authorized capital stock consists of 100,000,000 shares, $.01 par
value per share in the case of Common Stock, and a par value as determined by
the Lakes Board in the case of preferred stock. After the Grand Distribution,
the only class of shares outstanding will be the $.01 par value per share Lakes
Common Stock. Based upon the number of shares of Grand Common Stock outstanding
as of September 15, 1998, and giving effect to the one-for-four distribution
ratio in the Grand Distribution, approximately 10,573,885 shares of Lakes Common
Stock, constituting approximately 10.1% of the authorized Lakes Common Stock
will be distributed to the shareholders of Grand in the Grand Distribution all
of which will be fully paid and non-assessable. There are no preemptive,
subscription, conversion or redemption rights pertaining to the shares. The
absence of preemptive rights could result in a dilution of the interest of
existing shareholders should additional shares of Lakes Common Stock be issued.
Holders of the shares are entitled to receive such dividends as may be declared
by the Lakes' Board out of assets legally available therefore, and to share
ratably in the assets of Lakes available upon liquidation.
Each share of Lakes Common Stock is entitled to one vote for all purposes
and cumulative voting is not permitted in the election of directors.
Accordingly, the holders of more than 50% of all of the outstanding shares of
Lakes Common Stock can elect all of the directors. Significant corporate
transactions such as amendments to the articles of incorporation, mergers, sales
of assets and dissolution or liquidation require approval by the affirmative
vote of the majority of the outstanding shares of Lakes Common Stock. Other
matters to be voted upon by the holders of Lakes Common Stock normally require
the affirmative vote of a majority of the shares present at the particular
shareholders meeting. After the closing of the Transactions, Lakes's directors,
executive officers, and their relatives as a group will beneficially own
approximately 19.4% of the outstanding shares of Lakes Common Stock.
The rights of holders of the shares of Lakes Common Stock may become subject
in the future to prior and superior rights and preferences in the event the
Lakes Board establishes one or more additional classes of Lakes Common Stock, or
one or more series of preferred stock. The Lakes Board has no present plan to
establish any such class or series.
Lakes' Articles of Incorporation provide that no person or entity may become
the beneficial owner of 5% or more of Lakes' shares unless such person or entity
agrees to provide personal background and financial information to gaming
authorities, consent to a background investigation, and respond to questions
from gaming authorities. Lakes' Articles of Incorporation also provide that
Lakes may redeem, at fair market value, shares held by any person or entity
whose status as a shareholder, in the opinion of the Lakes Board, jeopardizes
the approval, continued existence, or renewal by any gaming regulatory
authority, of a contract to manage gaming operations, or any other tribal,
federal, or state license or franchise held by Lakes or any of its subsidiaries.
These restrictions will be contained in a legend on each certificate issued
evidencing shares of Lakes Common Stock.
205
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF GRAND CAPITAL STOCK
AND PARK PLACE CAPITAL STOCK
GENERAL
As a result of the Merger, holders of Grand Common Stock, whose rights are
presently governed by the MBCA and the Grand Articles and Bylaws, will become
stockholders of a Delaware corporation. Accordingly, their rights will be
governed by the DGCL, the Park Place Certificate and the Park Place Bylaws.
Certain differences in the rights of stockholders arise from distinctions
between the MBCA, DGCL and the Grand Articles and the Grand Bylaws as compared
to the Park Place Certificate and the Park Place Bylaws. The following is a
brief description of those differences. The discussion herein is not intended to
be a complete statement of the differences but rather summarizes the more
significant differences affecting the rights of such stockholders and certain
important similarities. The following summary is qualified in its entirety by
reference to the MBCA, the DGCL, the Grand Articles and the Grand Bylaws, and
the Park Place Certificate and the Park Place Bylaws.
Each Grand shareholder should carefully consider these differences,
including but not limited to, provisions of the Park Place Certificate and the
Park Place Bylaws that may have an anti-takeover effect, in connection with the
decision to vote for or against the adoption and approval of the Merger
Agreement.
AUTHORIZED CAPITAL STOCK
The Grand Articles authorize the issuance of up to 100,000,000 shares of
capital stock, $.01 par value per share in the case of common stock, and a par
value as determined by the Grand Board in the case of preferred stock. As of
September 15, 1998, 42,295,539 shares of Grand Common Stock were issued and
outstanding. The Grand Common Stock is the only class or series of Grand capital
stock issued and outstanding.
The Park Place Certificate authorizes the issuance of up to 400,000,000
shares of Park Place Common Stock, par value $.01 per share, of which 100 shares
were issued and outstanding as of September 15, 1998, and up to 100,000,000
shares of Preferred Stock, par value $.0l per share, of which no shares were
issued and outstanding as of September 15, 1998. The Park Place Preferred Stock
is issuable in series, each series having such rights and preferences as Park
Place's Board may fix and determine by resolution. Although Park Place does not
currently contemplate taking such action, it is possible that additional shares
of Park Place Common Stock or Park Place Preferred Stock would be issued for the
purpose of making an acquisition by an unwanted suitor of a controlling interest
in Park Place more difficult, time consuming or costly or to otherwise
discourage an attempt to acquire control of Park Place.
The MBCA does not allow treasury shares. Under the DGCL, Park Place may hold
treasury shares. Treasury shares under Delaware Law may be held, sold, lent,
pledged or exchanged by Park Place. Such shares, however, are not outstanding
shares and therefore do not receive any dividends and do not have voting rights.
AMENDMENT OF GOVERNING INSTRUMENTS
Under the MBCA and the Grand Bylaws, significant amendments to the Grand
Articles and significant corporate transactions require the affirmative vote of
the holders of a majority of the outstanding shares of common stock entitled to
vote on the amendment or transaction. Prior to submitting such a resolution for
a shareholder vote, the resolution must be approved by a majority of directors
present at a meeting where the resolution is considered, unless the resolution
is proposed by a shareholder or shareholders holding three percent or more of
the voting power of the outstanding shares entitled to vote. Other matters to be
voted upon by the holders of common stock normally require the affirmative vote
of the holders of the greater of (a) a majority of the shares present and
entitled to vote on an item of
206
<PAGE>
business, or (b) a majority of the voting power of the minimum number of shares
that would constitute a quorum for the transaction of business at the meeting.
Under the MBCA and the Grand Bylaws, the power to adopt, amend or repeal the
Grand Bylaws is vested in the board and is subject to the power of the
stockholders to adopt, amend or repeal bylaws adopted, amended or repealed by
the board. The board shall not, without stockholder approval, amend, or repeal a
bylaw fixing a quorum for meetings of stockholders, prescribing procedures for
removing directors or filling vacancies on the board, or fixing the number of
directors or their classifications, qualifications, or terms of office, but may
adopt or amend a bylaw to increase the number of directors. A stockholder or
stockholders holding three percent or more of the voting power of the shares
entitled to vote may propose a resolution for action by the stockholders to
adopt, amend, or repeal bylaws adopted, amended or repealed by the board. The
Grand Bylaws may be amended by a majority vote of those directors present at a
meeting at which a quorum is present.
The DGCL generally provides that the affirmative vote of a majority of a
corporation's outstanding voting shares is required to amend its certificate of
incorporation, unless the certificate of incorporation requires a greater vote.
Pursuant to the Park Place Certificate, the provisions of the Certificate may
not be altered, amended or repealed without the affirmative vote of at least 75%
of the outstanding voting power of Park Place shares entitled to vote generally
in the election of directors, voting together as a single class.
Under the DGCL and the Park Place Bylaws, the power to adopt, amend or
repeal the Park Place Bylaws is vested in the board and is subject to the power
of the stockholders to adopt, amend or repeal bylaws adopted, amended, or
repealed by the board. Under the Park Place Certificate and the Park Place
Bylaws, the provisions of the Bylaws may not be altered, amended or repealed
without the affirmative vote of at least 75% of the outstanding voting power of
Park Place shares entitled to vote generally in the election of directors,
voting together as a single class.
CLASSIFIED BOARD AND CUMULATIVE VOTING
The MBCA requires that a corporation shall have at least one director and
permits the board of directors to be divided into classes without regard to the
size of the board of directors. The Grand Bylaws require that its Board of
Directors shall consist of three directors. The Grand Board is not classified.
In addition, the Grand Articles prohibit cumulative voting for the election of
directors.
The DGCL requires that a corporation shall have at least one director. The
number of directors shall be fixed by, or in the manner provided in, the bylaws,
unless the certificate of incorporation fixes the number of directors. The Park
Place Certificate provides for its Board of Directors to consist of one to
twenty members divided into three classes of as nearly equal size as possible.
Within such limits, the exact number of directors shall be fixed from time to
time pursuant to a resolution adopted by a majority of the total number of
directors which the corporation would have if there were no vacancies (the
"Entire Board"). The terms of the directors are staggered such that the terms of
approximately one-third of the directors expire at each annual election of
directors. Park Place's Certificate does not permit cumulative voting.
REMOVAL OF DIRECTORS AND VACANCIES
Under the MBCA, any director may be removed by the board at any time, with
or without cause, if the director was named by the board to fill a vacancy, the
stockholders have not elected directors in the interval between the time of the
appointment to fill a vacancy and the time of the removal of such director and a
majority of the remaining directors affirmatively vote for the removal of such
director. Stockholders may remove directors at any time, with or without cause,
by an affirmative vote of the stockholders. Under the MBCA, unless the articles
or bylaws provide otherwise, (i) a vacancy on a corporation's board of directors
may be filled by the vote of a majority of directors then in office, although
less than a quorum, (ii) a newly created directorship resulting from an increase
in the number of directors may be filled by the
207
<PAGE>
board, and (iii) any director so elected pursuant to (i) or (ii) above shall
hold office only until a qualified successor is elected at the next regular or
special meeting of stockholders. The Grand Bylaws follow these provisions.
Under the Park Place Certificate and the Park Place Bylaws, any director may
be removed, but only for cause, by the affirmative vote of the holders of at
least 75% of the outstanding voting power of all the Park Place shares entitled
to vote generally in the election of directors, voting together as a single
class. Except as otherwise provided in the Park Place Certificate and subject to
applicable law and the rights of the holders of any series of Park Place
Preferred Stock, vacancies in Park Place's Board resulting from the death,
resignation, retirement, disqualification, removal from or other cause, and
including vacancies created by newly created directorships resulting from an
increase in the number of directors, shall only be filled by Park Place's Board,
acting by a vote of at least a majority of the directors then in office, even if
less than a quorum, and any director so chosen shall serve for the remainder of
the term of the class of directors in which the vacancy occurred.
LIMITATION OF DIRECTOR LIABILITY
Both the MBCA and DGCL allow a corporation to include in its charter a
provision that eliminates or limits the ability of the corporation and its
stockholders to recover monetary damages from a director for a breach of
fiduciary duty, except for (a) any breach of the director's duty of loyalty, (b)
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (c) distributions that are illegal under applicable
law or (d) any transaction from which the director derived an improper personal
benefit. Both the Park Place Certificate and the Grand Articles include such a
provision.
INDEMNIFICATION
The MBCA requires indemnification for all directors, officers and employees
if such person (a) acted in good faith, (b) reasonably believed that such
conduct was in or not opposed to the corporation's best interests, and (c) in
the case of any criminal proceeding, had no reasonable cause to believe such
conduct was unlawful, and the person being indemnified received no improper
personal benefit and has not been indemnified from another source. The Grand
Bylaws require Grand to indemnify its directors, officers and employees to the
fullest extent permissible under the MBCA.
The Park Place Certificate provides that Park Place shall indemnify (i) its
directors and officers, whether serving Park Place or at its request, any other
entity, to the fullest extent required or now or hereafter permitted by the
DGCL, including the advance of expenses and to the fullest extent permitted by
law and (ii) other employees and agents to such extent as is authorized by the
Park Place Board or the Park Place Bylaws and as permitted by law. The Park
Place Certificate also provides that such indemnification rights are not
exclusive of any other indemnification rights and that the Park Place Board may
take such action as is necessary to carry out such provisions. No amendment of
the Park Place Certificate or repeal of any of its provisions shall limit or
eliminate such right to indemnification for any acts or omissions occurring
prior to such amendment or repeal.
The Park Place Bylaws provide that any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed judicial
action or suit by reason of the fact that such person is or was a director,
officer or employee of Park Place (an "Agent"), shall be indemnified and held
harmless, to the fullest extent authorized by applicable law against all costs,
charges, judgments, fines, amounts paid in settlement and expenses (including
reasonable attorneys' fees, retainers, court costs, expert fees, witness fees,
travel expenses and all other expenses customarily incurred in connection with
suits) actually and reasonably incurred by an Agent in connection with such
action, suit or proceeding, and any appeal therefrom.
Under the DGCL as currently in effect, other than in actions brought by or
in the right of Park Place, such indemnification would apply if it was
determined in the specific case that the proposed indemnitee
208
<PAGE>
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of Park Place and, with respect to any criminal
proceeding, if he had no reasonable cause to believe that his conduct was
unlawful. In actions brought by or in the right of Park Place, such
indemnification would probably be limited to reasonable expenses (including
attorneys' fees), and would apply if it were determined in the specific case
that the proposed indemnitee acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of Park Place, except
that no indemnification may be made with respect to any claim, issue or matter
as to which such person is adjudged liable for gross negligence or willful
misconduct in the performance of the Agent's duties to Park Place unless, and
only to the extent that, a court determines upon application that, in view of
all the circumstances of the case, the proposed indemnitee is fairly and
reasonably entitled to indemnity for such costs, charges and expenses as the
court deems proper. To the extent that any Agent of Park Place has been
successful on the merits or otherwise in defense of any proceeding, he must be
indemnified against reasonable costs, charges and expenses incurred by him in
connection therewith.
The Park Place Bylaws provide that the right of such Agents to
indemnification includes the right to advancement by Park Place of expenses
incurred in defending any such proceeding in advance of its final disposition
upon delivery to Park Place of an undertaking by such indemnitee to repay any
amount so advanced if it is ultimately determined by final judicial decision
that the proposed indemnitee is not entitled to be indemnified for such
expenses. However, no advance shall be made by Park Place if a determination is
reasonably and promptly made (i) by the Park Place Board by a majority vote of a
quorum of Disinterested Directors (as defined in the Park Place Bylaws), (ii) if
such a quorum is not obtainable or, even if obtainable, if a quorum of
Disinterested Directors so directs, by Independent Counsel (as defined in the
Park Place Bylaws) in a written opinion, that, based upon the facts known to the
Park Place Board or counsel at the time such determination is made, the Agent
acted in bad faith and in a manner that such person did not believe to be in the
best interests of Park Place, or (iii) with respect to any criminal proceeding,
that such person believed or had reasonable cause to believe his or her conduct
was unlawful.
The Park Place Bylaws further provide that Park Place may, to the extent
authorized from time to time by Park Place's Board of Directors, grant rights to
indemnification, and to the advancement of expenses, to any person who is or was
an Agent of Park Place or a subsidiary thereof or is or was serving at the
request of Park Place as an Agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans.
The Park Place Certificate provides that a director of Park Place, to the
fullest extent now or hereafter permitted by the DGCL or any successor provision
or provisions, will not be personally liable to Park Place or its stockholders
for monetary damages for breach of fiduciary duty, and that no amendment of the
Park Place Certificate or repeal of any of its provisions shall limit or
eliminate any right or protection of a director of Park Place for any acts or
omissions occurring prior to such amendment or repeal. The Grand Articles do not
contain such a liability limitation provision for its directors.
SPECIAL MEETINGS OF STOCKHOLDERS
Pursuant to the MBCA and the Grand Bylaws, special meetings of stockholders
of Grand may be called for any purpose at any time by the chief executive
officer, the chief financial officer, two or more directors or a stockholder or
stockholders holding 10% or more of the voting power of all shares entitled to
vote.
Under the DGCL and the Park Place Certificate, special meetings of
stockholders of Park Place may be called only by the Chairman of the Board or by
the Park Place Board pursuant to a resolution adopted by a majority of the
Entire Board. As a result, stockholders of Park Place do not have any right to
call special meetings of stockholders or to require Park Place's Board of
Directors to call such meetings.
209
<PAGE>
ACTIONS BY STOCKHOLDERS WITHOUT A MEETING
Under the MBCA and DGCL, an action required or permitted to be taken at a
meeting of the stockholders may be taken without a meeting by written action
signed by all of the stockholders entitled to vote on that action.
The Park Place Certificate and the Park Place Bylaws provide that
stockholder action can be taken only at an annual or special meeting of
stockholders and prohibit stockholder action by written consent in lieu of a
meeting.
STOCKHOLDER NOMINATIONS AND PROPOSALS
The Grand Bylaws do not specifically provide for stockholder nominations of
persons for election to the Board of Directors or to make proposals, except
proposals to amend the Bylaws (see "Amendment of Governing Instruments").
The Park Place Bylaws provide that all nominations for election to the Board
of Directors, other than those made by or pursuant to Park Place's notice of
meeting, or at the direction of, a majority of the directors then in office, be
made by a stockholder who was a stockholder of record at the time of giving of
notice, who is entitled to vote at the meeting and who has complied with the
notice provisions set forth in the Park Place Bylaws. The Park Place Bylaws
require that any director nominations made by a stockholder be delivered to to
the Secretary and received at the principal executive offices of Park Place not
later than the close of business on the 70th day nor earlier than the close of
business on the 90th day prior to the first anniversary of the preceding year's
scheduled annual meeting; provided, however, that if the date of the annual
meeting is more than 30 days before or more than 60 days after such anniversary
date, notice by the stockholder, to be timely, must be so delivered not earlier
than the close of business on the 90th day prior to such annual meeting and not
later than the close of business on the later of the 70th day prior to such
annual meeting or the 10th day following the day on which public announcement of
the date of such meeting is made. Each such notice shall include, among other
things: (i) as to each person whom the stockholder proposes to nominate for
election as a director, all information relating to such person that would be
required to be disclosed pursuant to Regulation 14A under the Exchange Act in
connection with the solicitation of proxies with respect to nominees for
election as directors, including, but not limited to, information required to be
disclosed by Items 4(b) and 6 of Schedule 14A under the Exchange Act and
information which would be required to be filed on Schedule 14B under the
Exchange Act with the Commission, and Rule 14a-11 (including such person's
written consent to being named in the proxy statement as a nominee to serve as
director if elected); and (ii) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination is being made (A) the
name and address, as they appear on Park Place's books, of such stockholder and
any other stockholders known by such stockholder to be supporting such nominees,
and of such beneficial owner, if any, (B) the class and number of shares of Park
Place Common Stock which are owned beneficially and of record by such
stockholder on the date of such stockholder notice and, to the extent known, by
any other stockholders known by such stockholder to be supporting such nominees
on the date of such stockholder notice, and of such beneficial owner, if any,
(C) a representation that the stockholder is a holder of record of stock of Park
Place entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to propose such nomination, and (D) a representation
whether the stockholder or the beneficial owner, if any, intends or is part of a
group which intends to (i) deliver a proxy statement and form of proxy to
holders of at least the percentage of Park Place's outstanding common stock
required to elect the nominee and/or (ii) otherwise solicit proxies from
stockholders in support of such nomination. The presiding officer of the meeting
may refuse to acknowledge the nomination of any person not made in compliance
with the foregoing procedures.
The Park Place Bylaws also provide that only such business as shall have
been properly brought before an annual meeting of stockholders shall be
conducted at the annual meeting. To be properly brought
210
<PAGE>
before an annual meeting, such stockholder's notice shall set forth: (i) as to
any other business that the stockholder proposes to bring before the meeting,
(A) a brief description of the business desired to be brought before the
meeting, (B) the reasons for conducting such business at the meeting and (C) any
material interest in such business of such stockholder and the beneficial owner,
if any, on whose behalf the proposal is made; and (ii) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the proposal
is made, (A) the name and address, as they appear on Park Place's books, of the
stockholder proposing such business and any other stockholders known by such
stockholder to be supporting such proposal, and of such beneficial owner, (B)
the class and number of shares of Park Place Common Stock which are owned
beneficially and of record by the stockholder and any other stockholders known
by such stockholder to be supporting such proposal, on the date of such
stockholder notice and of such beneficial owner, if any, (C) a representation
that the stockholder is a holder of record of stock of Park Place entitled to
vote at such meeting and intends to appear in person or by proxy at the meeting
to propose such business, and (D) a representation whether the stockholder or
the beneficial owner, if any, intends or is part of a group which intends to (i)
deliver a proxy statement and form of proxy to holders of at least the
percentage of the Park Place's outstanding common stock required to approve or
adopt the proposal and/or (ii) otherwise solicit proxies from stockholders in
support of such proposal. For business to be properly brought before an annual
meeting by a stockholder, notice must be delivered to the Secretary and received
at the principal executive offices of Park Place not later than the close of
business on the 70th day nor earlier than the close of business on the 90th day
prior to the first anniversary of the preceding year's scheduled annual meeting,
subject to the same proviso as for notice for the nomination for election of
directors.
The presiding officer of the meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the Park Place Bylaws, and if he should so determine,
he shall so declare to the meeting that any such business not properly brought
before the meeting shall not be transacted.
MERGERS, SHARE EXCHANGES, SALES OF ASSETS, BUSINESS COMBINATIONS WITH CERTAIN
PERSONS AND ACQUISITIONS OF SHARES
The MBCA generally requires the affirmative vote of the holders of a
majority of the voting power of all shares entitled to vote for approval of
mergers and consolidations or the sale or exchange of all or substantially, all
of a corporation's assets. Under the MBCA, stockholder approval is not required
for a merger or consolidation if the articles of incorporation will not be
amended in the transaction, if stockholders will, before the transaction,
continue to hold the same number of shares with identical rights in the
transaction, and if the number of shares issuable with voting power and the
number of participating shares (i.e., shares that entitle the holder to
participate without limitation in distributions) immediately after the
transaction, plus those issuable upon conversion or exercise of other securities
or obligations issued in the transaction, will not exceed by more than 20% the
number of shares with voting power and the numbers of participating shares, as
the case may be, immediately before the transaction.
The DGCL requires the approval of the Board of Directors and the holders of
a majority of the outstanding Park Place Common Stock entitled to vote thereon
for mergers or consolidations, and for sales, leases or exchanges of
substantially all of Park Place's property and assets. The DGCL does not provide
explicitly for share exchanges. The DGCL permits Park Place to merge with
another corporation without obtaining the approval of Park Place's stockholders
if: (i) Park Place is the surviving corporation of the merger; (ii) the merger
agreement does not amend the Park Place Certificate; (iii) each share of Park
Place Common Stock outstanding immediately prior to the effective date of the
merger is to be an identical outstanding or treasury share of Park Place Common
Stock after the merger; and (iv) any authorized but unissued shares or treasury
shares of Park Place Common Stock to be issued or delivered under the plan of
merger plus those initially issuable upon conversion of any other securities or
obligations
211
<PAGE>
to be issued or delivered under such plan do not exceed 20% of the shares of
Park Place Common Stock outstanding immediately prior to the effective date of
the merger.
The MBCA contains provisions intended to protect stockholders from
individuals or companies attempting a takeover of a corporation in certain
circumstances. The Minnesota control share acquisition statute establishes
various disclosure and stockholder approval requirements to be met by
individuals or companies attempting a takeover. Delaware has no comparable
provision. The Minnesota control share acquisition statute applies to an
"issuing public corporation." An "issuing public corporation" is one which is
incorporated under or governed by the MBCA and has at least 50 shareholders.
Grand is subject to the Minnesota control share acquisition statute; Park Place,
because it is a Delaware corporation, is not subject to such statute.
The Minnesota control share acquisition statute requires disinterested
stockholder approval for any acquisition of shares of an "issuing public
corporation" which results in the "acquiring person" owning more than a
designated percentage of the outstanding shares of such corporation.
Stockholders which exceed certain share ownership thresholds whose shares are
acquired without stockholder approval lose their voting rights and are subject
to certain redemption privileges of the corporation. Such shares regain their
voting rights only if the acquiring person discloses certain information to the
corporation and such voting rights are granted by the stockholders at a special
or annual meeting of the stockholders. The Minnesota control share acquisition
statute applies unless the "issuing public corporation" opts out of the statute
in its articles of incorporation or bylaws. Grand has not opted out of such
provisions. Under Minnesota law, control share acquisitions do not include,
among other things:
(i) mergers or consolidations if the issuing public corporation is a
party to the transaction;
(ii) an acquisition from the issuing public corporation; and
(iii) an acquisition pursuant to an offer to purchase, for cash, pursuant
to a tender offer all shares of the voting stock of the issuing public
corporation which has been approved by a majority vote of the members of a
committee comprised of the disinterested members of the board of directors
of the issuing public corporation formed before the commencement of, or the
public announcement of the intent to commence, the tender offer and pursuant
to acquisitions in which the acquiring person will become the owner of over
50% of the voting stock of the issuing public corporation outstanding at the
time of the transaction.
Park Place is subject to the provisions of Section 203 of the DGCL ("Section
203") which prohibits a "business combination" (defined in Section 203 as
generally including mergers, sales and leases of assets, issuances of
securities, and similar transactions) by Park Place or a subsidiary with an
"interested stockholder" (defined in Section 203 as generally the beneficial
owner of 15% or more of a corporation's outstanding voting stock) within three
years after the person or entity becomes an interested stockholder, unless (i)
prior to the person or entity becoming an interested stockholder, the business
combination or the transaction pursuant to which such person or entity became an
interested stockholder shall have been approved by Park Place's Board of
Directors, (ii) upon consummation of the transaction in which he became an
interested stockholder, the interested stockholder holds at least 85% of the
Park Place Common Stock outstanding at the time the transaction commenced
(excluding shares held by persons who are both officers and directors and shares
held by certain employee benefit plans), or (iii) following the transaction in
which such person became an interested stockholder, the business combination is
approved by Park Place's Board of Directors and by the holders of at least
two-thirds of the outstanding Park Place Common Stock, excluding shares owned by
the interested stockholder. The restrictions imposed on interested stockholders
under Section 203 do not apply under certain limited circumstances set forth
therein, including certain business combinations proposed by an interested
stockholder following the announcement or notification of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors.
212
<PAGE>
Section 203 provides that during such three-year period, the corporation may
not merge or consolidate with an interested stockholder or any affiliate or
associate thereof, and also may not engage in certain other transactions with an
interested stockholder or any affiliate or associate thereof, including, without
limitation, (i) any merger or consolidation of the corporation or a direct or
indirect majority-owned subsidiary of the corporation with (A) the interested
stockholder, or (B) with any other corporation if the merger or consolidation is
caused by the interested stockholder and as a result of such merger or
consolidation the above limitations of Section 203 are not applicable to the
surviving corporation; (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (except proportionately as a stockholder of the
corporation) to or with the interested stockholder of assets having an aggregate
market value equal to 10% or more of the aggregate market value of all assets of
the corporation determined on a consolidated basis or the aggregate market value
of all the outstanding stock of a corporation; (iii) any transaction which
results in the issuance or transfer by the corporation or by any majority owned
subsidiary thereof of any stock of the corporation of such subsidiary to the
interested stockholder, except, among other things, pursuant to a transaction
which affects a pro rata distribution to all stockholders of the corporation;
(iv) any transaction involving the corporation or any majority owned subsidiary
thereof which has the effect of increasing the proportionate share of the stock
of any class or series, or securities convertible into the stock of any class or
series, of the corporation or any such subsidiary which is owned by the
interested stockholder (except, among other things, as a result of immaterial
changes due to fractional share adjustments); or (v) any receipt by the
interested stockholder of the benefit (except proportionately as a stockholder
of such corporation) of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the corporation.
The Merger is not a "business combination" as defined in Section 203 of the
DGCL and, therefore, the provision of Section 203 is not applicable to the
transaction contemplated by the Merger Agreement.
ANTI-GREENMAIL PROVISIONS
The MBCA contains a provision which limits the ability of a corporation to
pay greenmail. Pursuant to the statute, a publicly held corporation is
prohibited from purchasing or agreeing to purchase any shares from a person (or
two or more persons who act as a partnership, limited partnership, syndicate, or
other group pursuant to any written or oral agreement, arrangement,
relationship, understanding, or otherwise for the purpose of acquiring, owning
or voting shares of the publicly held corporation) who beneficially owns more
than 5% of the voting power of the corporation if the shares had been
beneficially owned by that person for less than two years, and if the purchase
price would exceed the market value of those shares. However, such a purchase
would not violate the statute if the purchase is approved at a meeting of the
stockholders by a majority of the voting power of all shares entitled to vote or
if the corporation's offer is at least of equal value per share and is made to
all holders of any class or series into which the securities may be converted.
There is no provision of the DGCL which is analogous to the MBCA with
respect to greenmail and the Park Place Certificate does not contain an
anti-greenmail provision.
STOCKHOLDER RIGHTS PLAN
The Park Place Board intends to declare a dividend distribution of one Right
for each outstanding share of Park Place Common Stock. For discussion of the
Park Place Rights, see "Description of Park Place Capital Stock--Rights
Agreement and Preferred Share Purchase Rights." Grand has not adopted a
stockholder rights plan.
DISSENTERS' RIGHTS OF APPRAISAL
Under the MBCA and DGCL, stockholders have the right, under certain
circumstances, to dissent from certain corporate transactions, principally
mergers and consolidations, by demanding payment in cash
213
<PAGE>
for their shares equal to the fair value (excluding, under the DGCL, any
appreciation or depreciation as a consequence or in expectation of the
transaction), as determined by the corporation or by an independent appraiser
appointed by a court in an action timely brought by the dissenters. Under the
MBCA, Grand stockholders would have dissenters' rights if Grand amends its
articles in such a way that materially and adversely affects the rights or
preferences of the shares of the dissenting stockholder, enters into a sale,
lease, transfer, or other disposition of all or substantially all of the
property and assets of the corporation, a plan of merger, a plan of exchange or
any other action taken pursuant to a stockholder vote if the articles, the
bylaws or a resolution approved by the board directs that dissenting
stockholders may obtain payment their shares. For a discussion of Grand
stockholders' dissenters' rights of appraisal in connection with the Merger, see
"The Transactions--Appraisal Rights."
Under the DGCL, no dissenters' rights exist for shares of stock of a
constituent corporation in a merger or consolidation that are either listed on a
national securities exchange or held of record by more than 2,000 stockholders.
However, dissenters' rights will exist if the stockholders receive anything
other than: (i) shares of stock of the corporation surviving or resulting from
such merger or consolidation; (ii) shares of stock of any other corporation
which at the effective date of the merger or consolidation will be either listed
on a national securities exchange or held of record by more than 2,000
stockholders; (iii) cash in lieu of fractional shares of the corporation
described in the foregoing clauses (i) and (ii); or (iv) any combination of
clause (i), (ii) or (iii). THE PARK PLACE CERTIFICATE DOES NOT PROVIDE FOR ANY
DISSENTERS' RIGHTS IN ADDITION TO THOSE PROVIDED BY THE DGCL. PARK PLACE
STOCKHOLDERS WILL NOT HAVE ANY DISSENTERS' RIGHTS OF APPRAISAL IN CONNECTION
WITH THE HILTON DISTRIBUTION.
STOCKHOLDER'S RIGHT TO EXAMINE BOOKS AND RECORDS
The MBCA provides that any stockholder or group of stockholders of a
publicly held corporation have the right, upon written demand stating the
purpose, to examine and copy the corporation's share register and other
corporate records upon demonstrating a proper purpose. The DGCL provides that a
stockholder of a Delaware corporation may inspect books and records of the
corporation upon written demand under oath stating the purpose of the
inspection, if such purpose is reasonably related to such person's interest as a
stockholder.
PAYMENT OF DIVIDENDS
Under the MBCA, Grand may declare a dividend to its stockholders if the
board determines that Grand will be able to pay its debts in the ordinary course
of business after making the distribution and the board does not know before the
dividend is made that the determination was or has become erroneous. A dividend
may be made to the holders of a class or series of shares only if all amounts
payable to the holders of shares having a preference for the payment are paid
and the distribution does not reduce the remaining net assets of Grand below the
aggregate preferential amount payable in the event of liquidation to the holders
of shares having preferential rights, unless the distribution is made to those
stockholders in the order and to the extent of their respective priorities.
Park Place is not subject to advance notice requirements and regulatory
limitations relating to the payment of dividends or making other forms of
capital distributions. The DGCL provides that, subject to any restrictions in
the corporation's certificate of incorporation, dividends may be declared from
the corporation's surplus or, if there is no surplus, from its net profits for
the, fiscal year in which the dividend is declared and the preceding fiscal
year. However, if the corporation's capital (generally defined in the DGCL as
the sum of the aggregate par value of all shares of the corporation's capital
stock, where all such shares have a par value and the board of directors has not
established a higher level of capital) has been diminished to an amount less
than the aggregate amount of the capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets, dividends may not be declared and paid out of such net profits until the
deficiency in such capital has been repaired.
214
<PAGE>
DISSOLUTION
Under the DGCL, voluntary dissolution of a corporation requires the adoption
of a resolution by a majority of the members of the board of directors and the
affirmative vote of the holders of the majority of the outstanding shares
entitled to vote thereon. Under Minnesota law, voluntary dissolution may be
approved by the affirmative vote of the holders of a majority of the voting
power of all shares entitled to vote.
CERTAIN ANTITAKEOVER PROVISIONS APPLICABLE TO PARK PLACE
Certain provisions of the Park Place Certificate and Park Place Bylaws, as
well as the Park Place Rights Agreement and certain provisions of the DGCL, may
have an antitakeover effect with respect to Park Place. The Park Place Preferred
Stock, if issued, could also have an antitakeover effect. See "Description of
the Park Place Capital Stock--Preferred Stock."
PARK PLACE CERTIFICATE AND BYLAWS
The Park Place Certificate will contain several provisions that will make
difficult an acquisition of control of Park Place, by means of a tender offer,
open market purchases, a proxy contest or otherwise, that is not approved by the
Park Place Board. The Park Place Bylaws will also contain provisions that could
have an antitakeover effect.
The purposes of the relevant provisions of the Park Place Certificate and
the Park Place Bylaws are to discourage certain types of transactions, described
below, which may involve an actual or threatened change of control of Park Place
and to encourage persons or entities seeking to acquire control of Park Place to
consult first with the Park Place Board to negotiate the terms of any proposed
business combination or offer. The provisions are designed to reduce the
vulnerability of Park Place to an unsolicited proposal for a takeover that does
not contemplate the acquisition of all outstanding shares or is otherwise unfair
to stockholders of Park Place or an unsolicited proposal for the restructuring
or sale of all or part of Park Place. Hilton and Park Place believe that, as a
general rule, such proposals would not be in the best interests of Park Place
and its stockholders.
There has been a history of the accumulation of substantial stock holdings
in public companies by third parties as a prelude to proposing a takeover or a
restructuring or sale of all or part of the target company or another similar
extraordinary corporate action. Such actions are often undertaken by the third
party without advance notice to, or consultation with, the management or board
of directors of the target company. In many cases, the purchaser seeks
representation on the company's board of directors in order to increase the
likelihood that its proposal will be implemented by the company. If the company
resists the efforts of the purchaser to obtain representation on the company's
board, the purchaser may commence a proxy contest to have its nominees elected
to the board in place of certain directors or the entire board. In some cases,
the purchaser may not truly be interested in taking over the company, but may
use the threat of a proxy fight and/or a bid to take over the company as a means
of forcing the company to repurchase its equity position at a substantial
premium over market price.
Hilton and Park Place believe that the imminent threat of removal of Park
Place's management or the Park Place Board in such situations would severely
curtail the ability of management or the Park Place Board to negotiate
effectively with such persons or entities. The management or the Park Place
Board would be deprived of the time and information necessary to evaluate the
takeover proposal, to study alternative proposals and to help ensure that the
best price is obtained in any transaction involving Park Place which may
ultimately be undertaken. If the real purpose of a takeover bid were to force
Park Place to repurchase an accumulated stock interest at a premium price,
management or the Park Place Board would face the risk that, if it did not
repurchase the stock interest of such person or entity, Park Place's business
and management would be disrupted, perhaps irreparably.
215
<PAGE>
Certain provisions of the Park Place Certificate and Bylaws, in the view of
Hilton and Park Place, together with the Park Place Rights Agreement, will help
ensure that the Park Place Board, if confronted by a surprise proposal from a
third party that has acquired or proposes to acquire a block of stock, will have
sufficient time to review the proposal and appropriate alternatives to the
proposal and to act in what it believes to be the best interests of the
stockholders. In addition, certain other provisions of the Park Place
Certificate are designed to prevent a purchaser from utilizing two-tier pricing
and similar inequitable tactics in the event of an attempt to take over Park
Place.
These provisions, individually and collectively, will make difficult and may
discourage a merger, tender offer or proxy fight, even if such transaction or
occurrence may be favorable to the interest of the stockholders and may delay or
frustrate the assumption of control by a holder of a large block of Park Place
Common Stock and the removal of incumbent management, even if such removal might
be beneficial to the stockholders. Furthermore, these provisions may deter or
could be utilized to frustrate a future takeover attempt which is not approved
by the incumbent Park Place Board, but which the holders of a majority of the
shares may deem to be in their best interest or in which stockholders may
receive a substantial premium for their stock over prevailing market prices of
such stock. By discouraging takeover attempts, these provisions might have the
incidental effect of inhibiting certain changes in management (some or all of
the members of which might be replaced in the course of a change of control) and
also the temporary fluctuations in the market price of the stock which often
result from actual or rumored takeover attempts.
Set forth below is a description of such provisions in the Park Place
Certificate and Bylaws. Such description is intended as a summary only and is
qualified in its entirety by reference to the Park Place Certificate and Park
Place Bylaws, the forms of which are attached to this Joint Proxy Statement/
Prospectus as Annex I and Annex J, respectively.
CLASSIFIED BOARD OF DIRECTORS
The Park Place Certificate provides for the Park Place Board to be divided
into three classes serving staggered terms so that directors' initial terms will
expire either at the 2000, 2001 or 2002 annual meeting of stockholders. Starting
with the annual meeting in 2000, one class of directors will be elected each
year for three-year terms. See "Management of Park Place--Park Place Board of
Directors."
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Park Place Board in
a relatively short period of time. At least two annual meetings of stockholders,
instead of one, will generally be required to effect a change in a majority of
the Park Place Board. Such a delay may help ensure that the Park Place Board, if
confronted by a holder attempting to force a stock repurchase at a premium above
prices, a proxy contest, or an extraordinary corporate transaction, will have
sufficient time to review the proposal and appropriate alternatives to the
proposal and to act in what it believes are the best interest of the
stockholders.
The classified board provision could have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
Park Place, even though such an attempt might be beneficial to Park Place and
its stockholders. The classified board provision could thus increase the
likelihood that incumbent directors will retain their positions. In addition,
since the classified board provision is designed to discourage accumulations of
large blocks of Park Place's stock by purchasers whose objective is to have such
stock repurchased by Park Place at a premium, the classified board provision
could tend to reduce the temporary fluctuations in the market price of Park
Place's stock that could be caused by accumulations of large blocks of such
stock. Accordingly, stockholders could be deprived of certain opportunities to
sell their stock at a temporarily higher market price.
216
<PAGE>
Hilton and Park Place believe that a classified board of directors will help
to assure the continuity and stability of the Park Place's business strategies
and policies as determined by the Board, because generally a majority of the
directors at any given time will have had prior experience as directors of Park
Place. The classified board provision will also help assure that the Park Place
Board, if confronted with an unsolicited proposal from a third party that has
acquired a block of the voting stock of Park Place, will have sufficient time to
review the proposal and appropriate alternatives and to seek the best available
result for all stockholders.
REMOVAL; FILLING VACANCIES; NUMBER OF DIRECTORS
The Park Place Certificate and the Park Place Bylaws provide that, subject
to the rights of the holders of any series of Park Place Preferred Stock, and
unless the Park Place Board otherwise determines, only a majority of the Park
Place Board then in office will have the authority to fill any vacancies on the
Park Place Board, including vacancies created by an increase in the number of
directors. In addition, the Park Place Certificate and the Park Place Bylaws
provide that a new director elected to fill a vacancy on the Park Place Board
will serve for the remainder of the full term of his or her class and that no
decrease in the number of directors will shorten the term of an incumbent.
Moreover, the Park Place Certificate and the Park Place Bylaws provide that
directors may be removed, but only for cause, and only by the affirmative vote
of holders of at least 75% of the voting power of the shares entitled to vote in
the election of directors, voting together as a single class. These provisions
relating to removal and filing of vacancies on the Park Place Board will
preclude stockholders from enlarging the Park Place Board or removing incumbent
directors and filing the vacancies with their own nominees.
In addition, the Park Place Certificate provides that the number of
directors which shall constitute the entire Park Place Board shall be not less
than one nor more than 20, and that within such limits, the exact number of
directors constituting the Entire Board shall be fixed from time to time
exclusively pursuant to a resolution adopted by a majority of the Entire Board.
The Park Place Bylaws further provide that the number of directors which shall
constitute the entire Park Place Board shall be fixed from time to time as
provided in the Park Place Certificate. These provisions limiting the number of
directors which shall constitute the entire Park Place Board will help to assure
that any significant change in the number of directors constituting the entire
Park Place Board will require the affirmative vote of holders of at least 75% of
the voting power of the shares entitled to vote in the election of directors,
voting together as a single class.
LIMITATIONS ON STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Park Place Certificate and the Park Place Bylaws provide that
stockholder action can be taken only at an annual or special meeting of
stockholders and prohibit stockholder action by written consent in lieu of a
meeting. The Park Place Certificate and the Park Place Bylaws provide that,
subject to the rights of the holders of any series of Park Place Preferred
Stock, special meetings of stockholders can be called only by the Chairman of
the Board or a majority of the Entire Board. Stockholders are not permitted to
call a special meeting or to require that the Park Place Board call a special
meeting of stockholders. Moreover, the business permitted to be conducted at any
special meeting of stockholders is limited to the business brought before the
meeting pursuant to Park Place's notice of meeting as set forth in the Park
Place Bylaws.
The provisions of the Park Place Certificate and the Park Place Bylaws
restricting stockholder action by written consent may have the effect of
delaying consideration of a stockholder proposal until the next annual meeting
unless a special meeting is called by the Chairman of the Board or pursuant to a
resolution adopted by a majority of the Entire Board. These provisions would
also prevent the holders of a majority of the voting power of the voting stock
from using the written consent procedure to take stockholder action and from
taking action by consent without giving all the stockholders of Park Place
entitled to vote on a
217
<PAGE>
proposed action the opportunity to participate in determining such proposed
action. Moreover, a stockholder could not force stockholder consideration of a
proposal over the opposition of the Park Place Board by calling a special
meeting of stockholders prior to the time the Park Place Board believed such
consideration to be appropriate.
Hilton and Park Place believe that such limitations on stockholder action
will help to assure the continuity and stability of the Park Place Board and
Park Place's business strategies and policies as determined by the Park Place
Board, to the benefit of all of Park Place's stockholders. If conformed with an
unsolicited proposal from stockholders in Park Place, the Park Place Board will
have sufficient time to review such proposal and to seek the best available
result for all stockholders, before such proposal is approved by such
stockholders through a special meeting of stockholders.
NOMINATIONS OF DIRECTORS AND STOCKHOLDER PROPOSALS
The Park Place Certificate and the Park Place Bylaws establish an advance
notice procedure with regard to the nomination other than by or at the direction
of the Park Place Board of candidates for election as directors and with regard
to stockholder proposals to be brought before an annual or special meeting of
stockholders. Specifically, Park Place's Bylaws require that stockholders
desiring to bring any business, including nominations for directors, before an
annual meeting of stockholders deliver advance written notice thereof to the
Secretary of Park Place. The Park Place Bylaws further require that the notice
by the stockholder set forth a description of the business to be brought before
the meeting and information concerning the stockholder proposing such business,
any other stockholders known by such stockholder on the date of such stockholder
notice to be supporting such proposal, and the beneficial owner, if any, on
whose behalf the proposal is made, including their names and addresses, the
class and number of shares of Park Place that are owned beneficially and of
record by each of them, and any material interest of any of them in the business
proposed to be brought before the meeting. The Park Place Bylaws also require
that such notice include a representation that the stockholder is a holder of
record of stock of Park Place entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to propose such business or
nomination, and a representation whether the stockholder or the beneficial
owner, if any, intends or is part of a group which intends to deliver a proxy
statement and form of proxy to holders of at least the percentage of Park
Place's outstanding common stock required to approve or adopt the proposal or
elect the nominee and/or otherwise solicit proxies from stockholders in support
of such proposal or nomination.
The purpose of the advance notice provision is to provide the Park Place
Board the opportunity to inform stockholders, prior to an annual meeting of
stockholders, of any business propose to be conducted at such meeting (including
any recommendation as to the Board's position with respect to any action to be
taken). In the case of the advance notice nomination procedures, the Park Place
Board is afforded a meaningful opportunity to consider and inform directors and
stockholders of the qualifications of the proposed nominees.
Although the Park Place Bylaws do not give the Park Place Board any power to
approve or disapprove stockholder nominations for the election of directors or
any other proposal submitted by stockholders, the Park Place Bylaws may have the
effect of precluding a nomination for the election of directors or precluding
the conducting of business at a particular stockholder meeting if the proper
procedures are not followed, and may discourage or deter a third party from
conducting a solicitation of proxies to elect its own slate of directors or
otherwise attempting to obtain control of Park Place, even if the conduct of
such solicitation or such attempt might be beneficial to Park Place and its
stockholders.
SUPERMAJORITY VOTE FOR BUSINESS COMBINATIONS
The Park Place Certificate requires the approval by the holders of at least
75% of the voting power of the then outstanding capital stock of Park Place
entitled to vote generally in the election of directors (the "Park Place Voting
Stock") as a condition for mergers and certain other business combinations
involving
218
<PAGE>
Park Place and any holder of more than 10% of such voting power (a "Substantial
Park Place Stockholder") unless (i) the transaction is approved by a majority of
the members of the Park Place Board who are not affiliated with the Substantial
Park Place Stockholder and who were directors before the Substantial Park Place
Stockholder became a Substantial Park Place Stockholder, or were thereafter
appointed or elected pursuant to action or nomination by a majority of
Disinterested Directors then in office (the "Disinterested Directors") or (ii)
certain minimum price and procedural requirements are met. Although an effective
impediment to unwanted takeovers, this provisions may also make desired
alliances with other business more difficult and time consuming to implement.
AMENDMENT OF THE PARK PLACE CERTIFICATE AND BYLAWS
The Park Place Certificate contains provisions requiring the affirmative
vote of the holders of at least 75% of the voting power of the then outstanding
shares of stock entitled to vote generally in the election of directors, voting
together as a single class, to amend certain provisions of the Park Place
Certificate. The Park Place Certificate and the Park Place Bylaws also contain
provisions providing that the Park Place Bylaws may be amended by the Board of
Directors and, in the case of amendments by stockholders, requiring the
affirmative vote of the holders of at least 75% of the voting power of the then
outstanding shares of stock entitled to vote generally in the election of
directors, voting together as a single class. These provisions will make it more
difficult for stockholders to make changes in the Park Place Certificate or Park
Place Bylaws, including changes designed to facilitate the exercise of control
over Park Place. In addition, the requirement for approval by at least a 75%
stockholder vote will enable the holders of a minority of Park Place's capital
stock to prevent holders of a less-than-75% majority from amending certain
provisions of the Park Place Certificate or the Park Place Bylaws.
PARK PLACE RIGHTS AGREEMENT
The Park Place Rights Agreement has certain antitakeover effects that are
described in "Description of Park Place Capital Stock--Rights Agreement and
Preferred Share Purchase Rights."
SECTION 203 OF THE DGCL
As a corporation organized under the laws of the State of Delaware, Park
Place is subject to Section 203 of the DGCL, which restricts certain business
combinations between Park Place and an "interested stockholder" (in general, a
stockholder owning 15% or more of the outstanding voting stock of Park Place) or
such stockholder's affiliates or associates for a period of three years
following the date on which the stockholder becomes an "interested stockholder."
The restrictions do not apply if: (i) prior to an interested stockholder
becoming such, the Park Place Board approves either the business combination or
the transaction by which such person became an interested stockholder; (ii) upon
consummation of the transaction, the interested stockholder owns at least 85% of
the voting stock of Park Place outstanding at the time the transaction commenced
(excluding shares owned by certain employee stock plans and persons who are both
directors and officers of Park Place); or (iii) at or subsequent to the time an
interested stockholder becomes such, the business combination is both approved
by the Park Place Board and authorized at an annual or special meeting of Park
Place's stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock of Park Place not owned by the interested stockholder.
Park Place's Certificate also prohibits business combinations with "Interested
Stockholders" and defines them to be anyone who is the beneficial owner of 10%
or more of the voting stock of Park Place. Unless approved by a majority of
Disinterested Directors (as defined in the Park Place Certificate) or the
Interested Stockholder satisfies a number of criteria relating to, among other
things, the consideration to be received by Park Place stockholders and the
public disclosure of the business combination, a proposed business combination
with an Interested Stockholder requires the affirmative vote of 75% of all the
votes entitled to be cast by holders of Park Place voting stock and not less
than a majority of votes entitled to be cast by holders of Park Place voting
stock, excluding the votes of the Interested Stockholder.
219
<PAGE>
CERTAIN ANTITAKEOVER PROVISIONS APPLICABLE TO LAKES
Lakes will be governed by the provisions of Sections 302A.671 and 302A.673
of the Minnesota Business Corporation Act. In general, Section 302A.671 provides
that the shares of a corporation acquired in a "control share acquisition" have
no voting rights unless voting rights are approved in a prescribed manner. A
"control share acquisition" is an acquisition, directly or indirectly, of
beneficial ownership of shares that would, when added to all other shares
beneficially owned by the acquiring person, entitle the acquiring person to have
voting power of 20% or more in the election of directors. In general, Section
302A.673 prohibits a public Minnesota corporation from engaging in a "business
combination" with an "interested shareholder" for a period of four years after
the date of the transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who is the beneficial owner, directly or indirectly, of
10% or more of the corporation's voting stock or who is an affiliate or
associate of the corporation and at any time within four years prior to the date
in question was the beneficial owner, directly or indirectly, of 10% or more of
the corporation's voting stock.
Lakes' authorized capital consists of 100,000,000 shares of capital stock.
The Lakes Board, without any action by the Lakes shareholders, is authorized to
designate and issue shares in such classes or series (including classes or
series of preferred stock) as it deems appropriate and to establish the rights,
preferences and privileges of such shares, including dividends, liquidation and
voting rights. No class other than the Lakes Common Stock is currently
designated and there is no current plan to designate or issue any such
securities. The rights of holders of preferred stock and other classes of common
stock that may be issued may be superior to the rights granted to the initial
holders of the Lakes Common Stock. Further, the ability of the Lakes Board to
designate and issue such undesignated shares could impede or deter an
unsolicited tender offer or takeover proposal regarding Lakes and the issuance
of additional shares having preferential rights could adversely affect the
voting power and other rights of holders of Common Stock. Furthermore, as a
Minnesota corporation, Lakes is subject to various Minnesota statutes which may
hinder or delay a change in control including: (i) a fair price statute; (ii) a
greenmail statute; and (iii) a non-monetary factors statute. See also
"Description of Lakes Capital Stock."
220
<PAGE>
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF PARK PLACE
Section 11.1 of the Park Place Certificate (the "Park Place Director
Liability Provision") limits the personal liability of Park Place directors to
the company or its stockholders for monetary damages for breaches of such
directors' fiduciary duty of care. Article VI of the Park Place Bylaws and
Section 11.2 of the Park Place Certificate (the "Park Place Indemnification
Provisions") set forth the indemnification rights and procedures for Park Place
directors, officers and employees. The Park Place Director Liability and
Indemnification Provisions are substantially similar to comparable provisions
contained in the Hilton Certificate and the Hilton Bylaws.
The Park Place Indemnification Provisions define and clarify the rights of
certain individuals, including Park Place directors, officers and employees, to
indemnification by Park Place in the event of personal liability or expenses
incurred by them as a result of certain litigation against them. Such provisions
are consistent with Section 102(b)(7) of the DGCL, which is designed, among
other things, to encourage qualified individuals to serve as directors of
Delaware corporations by permitting Delaware corporations to include in their
certificates of incorporation a provision limiting or eliminating directors'
liability for monetary damages and with other existing DGCL provisions
permitting indemnification of certain individuals, including directors and
officers. The limitations of liability in the Park Place Director Liability
Provision may not affect claims arising under the federal securities laws.
In performing their duties, directors of a Delaware corporation are
obligated as fiduciaries to exercise their business judgment and act in what
they reasonably determine in good faith, after appropriate consideration, to be
the best interests of the corporation and its stockholders. Decisions made on
that basis are protected by the so-called "business judgment rule." The business
judgment rule is designed to protect directors from personal liability to the
corporation or its stockholders when business decisions are subsequently
challenged. However, the expense of defending lawsuits, the frequency with which
unwarranted litigation is brought against directors and the inevitable
uncertainties with respect to the outcome of applying the business judgment rule
to particular facts and circumstances mean that, as a practical matter,
directors and officers of a corporation rely on indemnity from, and insurance
procured by, the corporation that serves as a financial backstop in the event of
such expenses or unforeseen liability. The Delaware legislature has recognized
that adequate insurance and indemnity provisions are often a condition of an
individual's willingness to serve as director of a Delaware corporation. The
DGCL has for some time specifically permitted corporations to provide indemnity
and procure insurance for its directors and officers.
Hilton maintains directors' and officers' insurance coverage which it
believes to be comparable to that maintained by companies of similar size in
similar lines of business.
The Park Place Director Liability Provision and the Park Place
Indemnification Provisions will be approved, along with the rest of the Park
Place Certificate and the Park Place Bylaws, by Hilton Hotels, U.S.A., Inc., a
wholly owned subsidiary of Hilton and the sole stockholder of Park Place, before
the Effective Date.
Set forth below is a description of the Park Place Director Liability
Provision and the Park Place Indemnification Provisions. Such description is
intended as a summary only and is qualified in its entirety by reference to the
Park Place Certificate and the Park Place Bylaws.
LIMITATION OF LIABILITY FOR DIRECTORS
Section 11.1 of the Park Place Certificate protects directors against
monetary damages for breaches of their fiduciary duty of care, to the fullest
extent permitted by the DGCL. Under the DGCL, absent Section 11.1, directors
could generally be held liable for gross negligence for decisions made in the
performance of their duty of care but not for simple negligence. Section 11.1
eliminates director liability for negligence in the performance of their duties,
including gross negligence. In a context not involving a decision by the
directors (i.e., a suit alleging loss to the company due to the directors'
inattention to a
221
<PAGE>
particular matter) a simple negligence standard might apply. Directors remain
liable for breaches of their duty of loyalty to the company and its
stockholders, as well as acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law and transactions from which
a director derives improper personal benefit.
While Section 11.1 provides directors with protection from awards of
monetary damages for breaches of the duty of care, it does not eliminate the
directors' duty of care. Accordingly, Section 11.1 will have no effect on the
availability of equitable remedies such as an injunction or rescission based
upon a director's breach of the duty of care. The provisions of Section 11.1
that eliminate liability as described above will apply to officers of Park Place
only if they are directors of Park Place and are acting in their capacity as
directors, and will not apply to officers of the Park Place who are not
directors. The elimination of liability of directors for monetary damages in the
circumstances described above may deter persons from bringing third party or
derivative actions against directors to the extent those actions seek monetary
damages.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the DGCL, directors and officers as well as other
employees and individuals may be indemnified against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement in connection
with specified actions, suits or proceedings, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation--a "derivative action") if they acted in good faith and in a manner
they reasonably believed to be in or not opposed to the best interests of Park
Place, and with respect to any criminal action or proceeding, had no reasonable
cause to believe their conduct was unlawful. A similar standard of care is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with
defense or settlement of such an action and the DGCL requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to Park Place.
Section 11.2 of the Park Place Certificate and Sections 6.1 and 6.2 of the
Park Place Bylaws provide that Park Place will indemnify any person to whom, and
to the extent, indemnification may be granted pursuant to Section 145 of the
DGCL.
Section 6.2 of the Park Place Bylaws provides that each person who was or is
made a party to, or is otherwise involved in any action, suit or proceeding by
reason of the fact that he or she is or was an Agent of Park Place or is or was
serving at the request of Park Place as an Agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (an "indemnitee"), whether the basis of such
proceeding is alleged activity in an official capacity as a director, officer or
employee or in any other capacity while serving as a director, officer or
employee, shall be indemnified and held harmless by Park Place to the fullest
extent authorized by the DGCL, as the same exists or may be amended (but, in the
case of any such amendment, only to the extent that such amendment permits Park
Place to provide broader indemnification rights than permitted prior thereto),
against all liabilities, charges, judgments, fines, amounts paid in settlement
and expenses (including reasonable attorneys' fees, retainers, court costs,
expert fees, witness fees, travel expenses and other expenses customarily
incurred in connection with suits) reasonably incurred or suffered by such
indemnitee in connection therewith and such indemnification shall continue as to
an indemnitee who has ceased to be an Agent and shall inure to the benefit of
the indemnitee's heirs, executors and administrators. Section 6.7 of the Park
Place Bylaws also provides that the right of indemnification will be in addition
to and not exclusive of all other rights to which that an Agent may be entitled.
222
<PAGE>
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF LAKES
Lakes is governed by Minnesota Statutes Chapter 302A. Minnesota Statutes
Section 302A.521 provides that a corporation shall indemnify any person made or
threatened to be made a party to any proceeding by reason of the former or
present official capacity of such person against judgments, penalties, fines,
including, without limitation, excise taxes assessed against such person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorney's fees and disbursements, incurred by such person in
connection with the proceeding, if, with respect to the acts or omissions of
such person complained of in the proceeding, such person has not been
indemnified by another organization or employee benefit plan for the same
expenses with respect to the same acts or omissions; acted in good faith;
received no improper personal benefit and Section 302A.255, if applicable, has
been satisfied; in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful; and in the case of acts or omissions by
persons in their official capacity for the corporation, reasonably believed that
the conduct was in the best interests of the corporation, or in the case of acts
or omissions by persons in their capacity for other organizations, reasonably
believed that the conduct was not opposed to the best interests of the
corporation.
As permitted by Section 302A.251 of the Minnesota Statutes, the Lakes
Articles and Bylaws provide that a director shall have no personal liability to
Lakes and its shareholders for breach of his fiduciary duty as a director, to
the fullest extent permitted by law.
A policy of directors' and officers' insurance will be maintained by Lakes
under which the directors and officers of Lakes will be insured, within the
limits and subject to the limitations of the policy, against certain expenses in
connection with the defense of actions, suits or proceedings to which they are
parties by reason of being or having been such directors or officers. See "The
Merger Agreement--Indemnification" for a discussion of the indemnification
provisions contained therein.
223
<PAGE>
THE HILTON PROPOSALS
PROPOSAL ONE: RATIFICATION OF THE HILTON DISTRIBUTION
At the Hilton Special Meeting, Hilton stockholders are being asked to
consider and vote upon the ratification of a special dividend to the holders of
the outstanding shares of Hilton Common Stock, on a one-for-one basis, of all
the outstanding shares of Park Place Common Stock to be effected in accordance
with the terms of a Distribution Agreement to be entered into between Park Place
and Hilton (the "Hilton Distribution Proposal"). See "Background and
Reasons--Reasons for Recommendation of the Hilton Board", "The Transactions" and
"The Special Meetings--The Hilton Special Meeting--Votes Required."
The affirmative vote of a majority of the shares of Hilton Common Stock
represented and entitled to vote at the Hilton Special Meeting is required for
ratification of the Hilton Distribution Proposal. Proxies will be voted for or
against the Hilton Distribution Proposal in accordance with specifications
marked thereon and will be voted in favor of the Hilton Distribution Proposal if
no specification is made.
The effectiveness of each of the Hilton Proposals is conditioned upon the
approval or ratification, as applicable, of all of the other Hilton Proposals.
Accordingly, failure of Hilton stockholders to ratify the Hilton Distribution
Proposal will result in the ineffectiveness of all of the Hilton Proposals, and
failure of Hilton stockholders to approve or ratify, as applicable, the other
Hilton Proposals will result in the ineffectiveness of the Hilton Distribution
Proposal.
Hilton has conditioned the effectiveness of its proposals on the approval by
the stockholders of all of the proposals because Hilton believes each of the
proposals is an important component of the Transactions and approval of the
incentive plans is integral to successfully attracting management.
THE HILTON BOARD RECOMMENDS THAT HILTON STOCKHOLDERS VOTE FOR THE HILTON
DISTRIBUTION PROPOSAL AND EACH OF THE OTHER HILTON PROPOSALS
PROPOSAL TWO: APPROVAL OF THE PARK PLACE ENTERTAINMENT CORPORATION 1998 STOCK
INCENTIVE PLAN
In connection with the Hilton Distribution, Hilton stockholders are being
asked to consider and vote upon the Park Place Entertainment Corporation 1998
Stock Incentive Plan (the "Park Place 1998 Plan") and the grant of options
thereunder as discussed below and elsewhere in this Joint Proxy Statement/
Prospectus. Certain material features of the Park Place 1998 Plan are summarized
below. Certain material features of the Park Place Special Options (as defined
below) are summarized under the caption "Management of Park Place--Park Place
CEO and Chairman Employment Agreements." The following summary is subject to the
full statement of the Park Place 1998 Plan, a copy of which is attached as Annex
D to this Joint Proxy Statement/Prospectus.
The affirmative vote of a majority of the shares of Hilton Common Stock
represented and entitled to vote at the Hilton Special Meeting is required for
approval of Proposal Two. Proxies will be voted for or against Proposal Two in
accordance with specifications marked thereon and will be voted in favor of
Proposal Two if no specification is made.
The effectiveness of each of the Hilton Proposals is conditioned upon the
approval or ratification, as applicable, of all of the other Hilton Proposals.
Accordingly, failure of Hilton stockholders to approve Proposal Two will result
in the ineffectiveness of all of the Hilton Proposals and failure of Hilton
stockholders to approve or ratify, as applicable, the other Hilton Proposals
will result in the ineffectiveness of Proposal Two.
THE HILTON BOARD RECOMMENDS THAT HILTON STOCKHOLDERS VOTE FOR PROPOSAL TWO
AND EACH OF THE OTHER HILTON PROPOSALS.
224
<PAGE>
GENERAL
The Hilton Board adopted the Park Place 1998 Plan in October 1998, subject
to approval by Hilton's stockholders. The Park Place 1998 Plan authorizes the
grant to officers and key employees of stock options and stock appreciation
rights with respect to Park Place Common Stock and the grant of nonqualified
stock options (the "Park Place Special Options") to the Chief Executive Officer
of Park Place (the "Park Place CEO") and the Chairman of the Park Place Board
(the "Park Place Chairman"). See "Management of Park Place--Park Place CEO and
Chairman Employment Agreements."
The purpose of the Park Place 1998 Plan is to provide Park Place with a
competitive advantage in attracting, retaining and motivating officers and
employees and to provide Park Place and its subsidiaries with a stock plan which
provides incentives more directly linked to the profitability of Park Place's
business and increases in shareholder value. With respect to the Park Place
Special Options, the Park Place 1998 Plan is also intended to provide an
additional incentive for the Park Place CEO and Park Place Chairman to use their
best efforts to maximize the performance and success of Park Place.
In the opinion of the Hilton Board, Park Place and its stockholders will
benefit substantially from having certain officers, key employees, and the Park
Place CEO and Park Place Chairman acquire shares of Park Place Common Stock
pursuant to options granted under the Park Place 1998 Plan. Such options and
stock appreciation rights, in the opinion of the Hilton Board, will secure the
benefits of the incentives resulting from stock ownership by those persons who
will largely be responsible for Park Place's growth and success. The Hilton
Board believes that it is in the best interests of Hilton's stockholders to
approve the Park Place 1998 Plan.
NEW PLAN BENEFITS
PARK PLACE ENTERTAINMENT CORPORATION
1998 STOCK INCENTIVE PLAN
The following table sets forth, as of September 15, 1998, the Park Place
Options to be received by the persons and groups identified below under the Park
Place 1998 Plan upon adjustment of the Hilton Options to represent options to
purchase shares of Hilton Common Stock and shares of Park Place Common Stock.
The following amounts assume conversion of each Hilton Option into one Park
Place Option. See "The Transactions--Arrangements Between Hilton and Park
Place--Hilton Employee Benefits Allocation Agreement--Stock Option Plans." The
table does not include the Park Place Special Options described below or the
Hilton Special Options. In addition to the Park Place Options set forth in the
table below, Hilton Options held by Arthur M. Goldberg, President and Chief
Executive Officer of Park Place, will be adjusted to represent Park Place
Options. The number of shares of Park Place Common Stock which will be subject
to Mr. Goldberg's Park Place Options following such adjustment is not currently
determinable because such number will depend on the prices at which the Hilton
Common Stock and the Park Place Common Stock will trade following the Hilton
Distribution. If, for example, the value of the Park Place common stock on the
date of the Hilton Distribution is equal to 45% of the value of the Hilton
Common Stock prior to the Hilton Distribution, each of Mr. Goldberg's options
will be exercisable for approximately 2.22 shares of Park Place Common Stock and
the exercise price will be equal to 45% of the exercise price of Mr. Goldberg's
options prior to the Hilton Distribution. Based on Mr. Goldberg's 1,800,000
options (including the option to be granted to him on December 18, 1998 pursuant
to his existing 1996 Hilton employment agreement), this would result in options
to purchase approximately 4,000,000 shares of Park Place Common Stock. See "The
Transactions--Arrangements Between Hilton and Park Place--Hilton Employee
Benefits Allocation Agreement--Stock Option Plans" and "The Transactions--
Interests of Certain Persons in the Transactions--Adjustments of Hilton
Options." Hilton Options held by Mr. Goldberg as of September 15, 1998 to
purchase 1,200,000 shares of Hilton Common Stock will be subject to such
adjustment. In addition, under his employment agreement with Hilton, Mr.
Goldberg is entitled to receive an option to purchase 600,000 shares of Hilton
Common Stock on December 18, 1998 which will also be subject to such adjustment.
225
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF UNITS
(OPTIONS TO PURCHASE
NAME AND POSITION DOLLAR VALUE($)(1) COMMON STOCK)(2)
- ------------------------------------------------------------------- --------------------------- ---------------------
<S> <C> <C>
Stephen F. Bollenbach.............................................. -- 6,000,000
Chairman of the Board
Wallace R. Barr.................................................... -- 72,000
Executive Vice President
Mark Dodson........................................................ -- 55,000
Executive Vice President
Scott La Porta..................................................... -- 160,000
Executive Vice President
and Chief Financial Officer
Executive Group.................................................... -- 6,287,000
Non-Executive Director Group....................................... -- --
Non-Executive Officer Employee Group............................... -- --
</TABLE>
- ------------------------------
(1) The market value of Park Place Common Stock is not determinable and will be
based on the trading price of the Park Place Common Stock following the
Hilton Distribution and therefore there is no determinable market value for
these shares.
(2) The table does not reflect options held by Mr. Goldberg which will be
adjusted to represent options to purchase Park Place Common Stock, as
described in the foregoing paragraph.
Amendments can be made to the Park Place 1998 Plan that can increase the
cost of the plan to Park Place.
PURPOSE.
The purpose of the Park Place 1998 Plan is to provide additional incentives
to officers and key employees and the Park Place CEO and Park Place Chairman
through investment in the Park Place Common Stock. Under the Park Place 1998
Plan, either incentive stock options or non-incentive stock options (with or
without stock appreciation rights in tandem therewith) are available for grant,
except that with respect to the Park Place Special Options, only non-incentive
stock options are available for grant.
ADMINISTRATION.
The Park Place 1998 Plan is administered by a Committee appointed by the
Park Place Board, which will be composed of not less than two directors, each of
whom will be an outside director and a non-employee director (the "Committee").
The Committee makes recommendations as to the granting of stock options to key
employees of Park Place and its subsidiaries. Subject to orders or resolutions
not inconsistent with the provisions of Park Place 1998 Plan issued or adopted
from time to time by the Park Place Board, the Committee has the power to
administer, construe and interpret the Park Place 1998 Plan and to make rules to
implement the provisions thereof.
SHARES SUBJECT TO THE PARK PLACE 1998 PLAN.
A maximum of 45,000,000 shares of Park Place Common Stock (subject to
adjustment) are subject to the Park Place 1998 Plan. Of that amount, (a) a
maximum of 9,000,000 shares of Park Place Common Stock (subject to adjustment)
are available for grants of the Park Place Special Options, and the Park Place
CEO may not be granted Park Place Special Options covering more than 6,000,000
shares of Park Place Common Stock in the aggregate, and the Park Place Chairman
may not be granted Park Place Special Options covering more than 3,000,000
shares of Park Place Common Stock in the aggregate, (b) approximately 14,913,000
shares of Park Place Common Stock will be used for the Adjusted Park Place
Options other than Adjusted Park Place Options issued to Mr. Goldberg, and (c)
an additional number of shares of Park Place Common Stock will be used for
Adjusted Park Place Options issued to Mr. Goldberg (which number is not
currently determinable). See "The Transactions--Interests of Certain Persons in
the Transactions--Hilton Options" for an example of the number of shares of Park
Place Common Stock issuable upon exercise of Mr. Goldberg's options. Except with
respect to the Park Place Special Options and Adjusted Park Place Options issued
pursuant to the Hilton Option Adjustment, no participant may be
226
<PAGE>
granted awards under the Park Place 1998 Plan covering more than 2,000,000
shares of Park Place Common Stock in any calendar year. Adjusted Park Place
Options issued pursuant to the Hilton Option Adjustment will not count toward
such limit. With respect to the Adjusted Park Place Options, no participant may
be granted awards in any calendar year covering in excess of the number of
shares of Park Place Common Stock required to make the option adjustment
described below with respect to such participant.
If an option expires or terminates for any reason during the term of the
Park Place 1998 Plan and prior to the exercise thereof in full, the shares of
Park Place Common Stock subject to, but not delivered under, such option shall
be available for options thereafter granted under the Park Place 1998 Plan.
In the event of any change in corporate capitalization, such as a stock
split or a corporate transaction, any merger, consolidation, separation,
including a spin-off, or other distribution of stock or property of Park Place,
any reorganization, or any partial or complete liquidation of Park Place, the
number, exercise price and kind of shares that are subject to outstanding
options will be adjusted in such manner and to such extent, if any, as the
Committee or the Park Place Board in their absolute discretion may deem
appropriate in the circumstances.
ELIGIBILITY.
Except with respect to the Park Place Special Options, full-time officers
and key employees of Park Place and its subsidiaries (whether or not directors)
are eligible to receive options under the Park Place 1998 Plan. In addition,
only the Park Place CEO and Park Place Chairman are eligible to receive the Park
Place Special Options, and all such Park Place Special Options will be granted,
subject to approval by Hilton's stockholders, upon the Hilton Distribution. See
"Management of Park Place--Park Place CEO and Chairman Employment Agreements."
Except with respect to the Park Place Special Options, directors who are not
officers or salaried employees are ineligible to receive options or stock
appreciation rights under the Park Place 1998 Plan.
OPTION PRICE.
The purchase price of the stock subject to an option granted under the Park
Place 1998 Plan shall be determined by the Committee and shall not be less than
100% of the fair market value of such stock at the time the option is granted.
With respect to the purchase price of the stock subject to Park Place Special
Options, see "Management of Park Place--Park Place CEO and Chairman Employment
Agreements."
TERM AND EXERCISE OF OPTIONS.
The term of options granted under the Park Place 1998 Plan shall be fixed by
the Committee, but no incentive stock option shall be exercisable more than ten
years after the date of grant thereof and no nonqualified stock option shall be
exercisable more than ten years and one day after the date of grant thereof. The
term may be reduced with respect to any option and/or stock appreciation right
in the event of termination of employment, retirement or death of an optionee.
Options granted under the Park Place 1998 Plan shall be exercisable at such
times and subject to such conditions as the Committee shall determine. In
addition, the Committee may accelerate the exercisability of any option granted
under the Park Place 1998 Plan. With respect to the term and exercisability of
the Park Place Special Options, see "Management of Park Place--Park Place CEO
and Chairman Employment Agreements."
Each stock option agreement evidencing options granted under the Park Place
1998 Plan shall contain an explicit reference as to whether any or all of the
options granted thereunder are intended to be incentive stock options.
227
<PAGE>
STOCK APPRECIATION RIGHTS.
Stock appreciation rights ("SARs") may be granted, in the sole discretion of
the Committee, in connection with options granted under the Park Place 1998
Plan. Each SAR relates to the same shares of Park Place Common Stock covered by
the companion option (or such lesser number of shares as the Committee may
determine) and is subject to the same terms and conditions contained in the
option except for such additional limitations as are required by the Park Place
1998 Plan or as may be included by the Committee in SARs granted. Each SAR
entitles an optionee to surrender to Park Place the unexercised related option,
or any portion thereof, and to receive in exchange cash or shares of Park Place
Common Stock, or a combination thereof, as the Committee shall determine, with a
value equal to the Fair Market Value (as defined in the Park Place 1998 Plan) on
the exercise date of Park Place Common Stock over the option exercise price for
the number of shares covered by the option, or portion thereof, which is
surrendered. The Park Place 1998 Plan requires the Committee to impose a
requirement that an optionee partially exercise an option concurrently with the
exercise of the related SAR. Each optionee is required to pay to Park Place any
amount Park Place is obligated to withhold for income taxes as a result of the
exercise of a stock option or an SAR. SARs are not available with respect to the
Park Place Special Options.
NONTRANSFERABILITY OF STOCK OPTIONS.
Neither stock options nor stock appreciation rights are transferable
otherwise than (i) by will or by the laws of descent and distribution, or (ii)
in the case of a non-qualified stock option, pursuant to a qualified domestic
relations order, or (iii) in the case of the Park Place Special Options,
pursuant to a transfer to certain of the optionee's family members, a trust for
the benefit of such family members, certain entities in which such family
members hold interests, or certain tax-exempt entities. During the lifetime of
an optionee, a stock option and/or stock appreciation right is exercisable only
by the optionee.
DEATH, DISABILITY, RETIREMENT OR TERMINATION OF EMPLOYMENT.
If an optionee dies while employed by Park Place or a subsidiary or a
disabled optionee dies within six months from the termination of employment,
options may thereafter be exercised only to the extent they were exercisable at
the time of death and may only be exercised within 12 months from the date of
death, but in no event after the date of expiration of the option.
If an optionee ceases to be an employee of Park Place or a subsidiary due to
disability, options may thereafter be exercised only to the extent they were
exercisable at the time of such cessation of employment and only within six
months from the date of cessation of employment, but in no event after the date
of expiration of the option.
If an optionee ceases to be an employee of Park Place or a subsidiary due to
retirement, options may thereafter be exercised only to the extent they were
exercisable at the time of such cessation of employment and only within 24
months from the date of cessation of employment, but in no event after the date
of expiration of the option.
If an optionee incurs a termination of employment for any reason other than
death, disability or retirement, options may thereafter be exercised only to the
extent they were exercisable at the time of cessation of employment, and only
within three months from the date of cessation of employment, but in no event
after the date of expiration of the option.
If an optionee incurs a termination of employment at or after a Change in
Control (as defined below) of Park Place, other than by reason of death,
disability or retirement, any option held by such optionee shall be exercisable
for the lesser of (1) six months and one day from the date of such termination
of employment, and (2) the balance of such option's term.
228
<PAGE>
With respect to the effect of terminations of employment or directorship
under the Park Place Special Options, see "Management of Park Place--Park Place
CEO and Chairman Employment Agreements."
Stock appreciation rights shall terminate and no longer be exercisable upon
the termination or exercise of the related stock option.
CHANGE IN CONTROL CASH-OUT.
Unless the Committee provides otherwise at the time of grant, during the
60-day period following a Change in Control of Park Place, the optionee shall
have the right to surrender all or part of the option, regardless of whether the
option is fully exercisable, in exchange for a cash payment by Park Place equal
to the excess of the Change in Control Price (as defined in the Park Place 1998
Plan) per share of Park Place Common Stock over the exercise price per share,
multiplied by the number of shares which the optionee has elected to cash out;
provided, however, under certain circumstances, the Committee may elect to
substitute for such cash payment Park Place Common Stock with a Fair Market
Value equal to the cash that would otherwise be payable. With respect to the
Park Place Special Options, see "Management of Park Place--Park Place CEO and
Chairman Employment Agreements."
CHANGE IN CONTROL PROVISIONS. The Park Place 1998 Plan provides that in the
event of a Change in Control of Park Place, all outstanding stock options and
stock appreciation rights granted thereunder shall become fully vested and
exercisable for the aggregate number of shares covered thereby. "Change in
Control" is defined in the Park Place 1998 Plan as the occurrence of any of the
following events:
(i) An acquisition by any individual, entity or group (a "Person") of
beneficial ownership of 20% or more of either (1) the then outstanding
shares of common stock of Park Place (the "Outstanding Park Place Common
Stock") or (2) the combined voting power of the then outstanding voting
securities of Park Place entitled to vote generally in the election of
directors (the "Outstanding Park Place Voting Securities"); excluding,
however, the following: (1) Any acquisition directly from Park Place, other
than an acquisition by virtue of the exercise of a conversion privilege
unless the security being so converted was itself acquired directly from
Park Place, (2) Any acquisition by Park Place, (3) Any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by Park
Place or any corporation controlled by Park Place, (4) Any acquisition by
any corporation pursuant to a transaction which complies with clauses (1),
(2) and (3) of (iii) below, or (5) Any acquisition by Barron Hilton, the
Charitable Remainder Unitrust or the Conrad N. Hilton Fund; or
(ii) A change in the composition of the Park Place Board such that the
individuals who, as of the effective date of the Park Place 1998 Plan,
constitute the Park Place Board (such Park Place Board shall be hereinafter
referred to as the "Incumbent Board") cease for any reason to constitute at
least a majority of the Park Place Board; PROVIDED, HOWEVER, for purposes of
this definition, that any individual who becomes a member of the Park Place
Board subsequent to the effective date of the Park Place 1998 Plan, whose
election, or nomination for election by Park Place's shareholders, was
approved by a vote of at least a majority of those individuals who are
members of the Park Place Board and who were also members of the Incumbent
Board (or deemed to be such pursuant to this proviso) shall be considered as
though such individual were a member of the Incumbent Board; but, PROVIDED
FURTHER, that any such individual whose initial assumption of office occurs
as a result of either an actual or threatened election contest or other
actual or threatened solicitation of proxies or consents by or on behalf of
a Person other than the Park Place Board shall not be so considered as a
member of the Incumbent Board; or
(iii) The approval by the shareholders of Park Place of a reorganization,
merger or consolidation or sale or other disposition of all or substantially
all of the assets of Park Place ("Corporate Transaction"); excluding
however, such a Corporate Transaction pursuant to which (1) all or
substantially all of the individuals and entities who are the beneficial
owners, respectively, of the Outstanding Park Place Common Stock and
Outstanding Park Place Voting Securities immediately prior to such
229
<PAGE>
Corporate Transaction will beneficially own, directly or indirectly, more
than 60% of, respectively, the outstanding shares of common stock, and the
combined voting power of the then outstanding voting securities entitled to
vote generally in the election of directors, as the case may be, of the
corporation resulting from such Corporate Transaction (including, without
limitation, a corporation which as a result of such transaction owns Park
Place or all or substantially all of Park Place's assets either directly or
through one or more subsidiaries) in substantially the same proportions as
their ownership, immediately prior to such Corporate Transaction, of the
Outstanding Park Place Common Stock and Outstanding Park Place Voting
Securities, as the case may be, (2) no Person (other than Park Place, any
employee benefit plan (or related trust) of Park Place or such corporation
resulting from such Corporate Transaction) will beneficially own, directly
or indirectly, 20% or more of, respectively, the outstanding shares of
common stock of the corporation resulting from such Corporate Transaction or
the combined voting power of the outstanding voting securities of such
corporation entitled to vote generally in the election of directors except
to the extent that such ownership existed prior to the Corporate
Transaction, and (3) individuals who were members of the Incumbent Board
will constitute at least a majority of the members of the board of directors
of the corporation resulting from such Corporate Transaction; or
(iv) The approval by stockholders of Park Place of a complete
liquidation or dissolution of Park Place.
TERMINATION.
The term during which options and stock appreciation rights may be granted
under the Park Place 1998 Plan expires ten years after the effective date of the
Park Place 1998 Plan, unless sooner terminated by the Park Place Board. Such
termination has no effect on options or stock appreciation rights then in
effect.
EFFECTIVE DATE.
Subject to approval by the Hilton stockholders, the Park Place 1998 Plan
shall be effective as of July 9, 1998.
PROVISIONS REGARDING THE HILTON DISTRIBUTION.
On the Hilton Distribution Date, all outstanding options to purchase Hilton
Common Stock under Hilton's stock option plans (each such option, a "Hilton
Option"), other than Hilton Options held by Mr. Goldberg, will be adjusted (the
"Hilton Option Adjustment") to represent options to purchase an equivalent
number of shares of Hilton Common Stock (each adjusted option to purchase shares
of Hilton Common Stock, an "Adjusted Hilton Option") and shares of Park Place
Common Stock (each adjusted option to purchase shares of Park Place Common
Stock, an "Adjusted Park Place Option"). Pursuant to the Hilton Option
Adjustment, the intrinsic value of the Hilton Options immediately prior to the
Hilton Distribution will be preserved immediately after the Hilton Distribution
and the exercise price of the Hilton Options will be allocated between the
Adjusted Hilton Options and the Adjusted Park Place Options based upon the
relative values of Hilton Common Stock and Park Place Common Stock on the date
of the Hilton Distribution, all as determined by Hilton. All outstanding Hilton
Options held by Mr. Goldberg under such plans will be adjusted to represent
Adjusted Park Place Options. Pursuant to such adjustment, the intrinsic value of
Mr. Goldberg's outstanding Hilton Options immediately prior to the Hilton
Distribution will be preserved immediately after the Hilton Distribution, and
the number of shares subject to and the exercise price of such options will be
adjusted based on the relative values of the Hilton Common Stock and the Park
Place Common Stock on the date of the Hilton Distribution, all as determined by
Hilton.
230
<PAGE>
Following the date of the Hilton Option Adjustment, all Adjusted Park Place
Options which were issued as a result of Hilton Options granted under any of the
Hilton 1984 Stock Option and Stock Appreciation Rights Plan, the Hilton 1990
Stock Option and Stock Appreciation Rights Plan, or the Hilton 1996 Stock
Incentive Plan will be subject to the terms of the Park Place 1998 Plan and the
applicable option agreement, and all Adjusted Hilton Options will be subject to
the terms of the applicable Hilton stock option plan, and any applicable option
agreement. The aggregate amount of Adjusted Park Place Options is estimated to
be 14,913,000 (excluding Adjusted Park Place Options issued to Mr. Goldberg). An
additional number of shares of Park Place Common Stock will be used for Adjusted
Park Place Options issued to Mr. Goldberg (which number is not currently
determinable). For purposes of the Park Place 1998 Plan, with respect to
Adjusted Park Place options held by Hilton Individuals (as defined in the Hilton
Employee Benefits Agreement) as a result of the Hilton Option Adjustment,
references to employment or termination of employment in the Park Place 1998
Plan and in the applicable option agreement shall be deemed to refer to
employment by or termination of employment with Hilton and its subsidiaries or
affiliates.
PARK PLACE SPECIAL OPTIONS.
Under the Park Place 1998 Plan, the Committee has the authority to grant the
Park Place Special Options to the Park Place CEO and/or the Park Place Chairman
on such terms and conditions as it shall determine in its sole discretion. The
terms of Park Place Special Options to be granted to the Park Place CEO are set
forth in the Park Place CEO Agreement, and the terms of Park Place Special
Options to be granted to the Park Place Chairman are set forth in the Park Place
Chairman Agreement. See "Management of Park Place--Park Place CEO and Chairman
Employment Agreements." To the extent that certain terms and conditions of the
Park Place Special Options are not set forth in such agreements, the terms of
the Park Place 1998 Plan shall apply to the Park Place Special Options. Adjusted
Park Place Options issued to the Park Place CEO and the Park Place Chairman as a
result of Hilton Options held by such individuals are not Park Place Special
Options.
TAX CONSEQUENCES
The Federal income tax consequences of participation in the Park Place 1998
Plan are complex and subject to change. The following discussion is only a
summary of the general rules applicable to remuneration-related options and
stock appreciation rights. Participants should consult their own tax advisors
since a taxpayer's particular situation may be such that some variation of the
rules described below will apply.
INCENTIVE STOCK OPTIONS.
If an option granted under the Park Place 1998 Plan is treated as an
incentive stock option, the optionee will not recognize any income upon either
the grant or the exercise of the option and Park Place will not be allowed a
deduction for Federal income tax purposes. Upon a sale of the shares, the tax
treatment to the optionee and Park Place will depend primarily upon whether the
optionee has met certain holding period requirements at the time he or she sells
the shares. In addition, as discussed below, the exercise of an incentive stock
option may subject the optionee to alternative minimum tax liability.
If the optionee disposes of the shares either within two years after the
date the option is granted or within one year after the transfer of the shares
to the optionee, such disposition will be treated as a disqualifying disposition
and an amount equal to the lesser of (i) the fair market value of the shares on
the date of exercise minus the purchase price, or (ii) the amount realized on
the disposition minus the purchase price, will be taxed as ordinary income to
the optionee in the taxable year in which the disposition occurs. The excess, if
any, of the amount realized upon disposition over the fair market value at the
time of the exercise of the option will be treated as long-term capital gain if
the shares have been held for more than one year following the exercise of the
option. In the event of a disqualifying disposition, Park Place
231
<PAGE>
may withhold income taxes from the optionee's compensation with respect to the
ordinary income realized by the optionee as a result of the disqualifying
disposition.
The exercise of an incentive stock option may subject an optionee to
alternative minimum tax liability because the excess of the fair market value of
the shares at the time an incentive stock option is exercised over the purchase
price of the shares is included in income for purposes of the alternative
minimum tax. Consequently, an optionee may be obligated to pay alternative
minimum tax in the year he or she exercises an incentive stock option.
In general, there will be no Federal income tax consequences to Park Place
upon the grant, exercise or termination of an incentive stock option. However,
in the event an optionee sells or disposes of stock received upon the exercise
of an incentive stock option in a disqualifying disposition, Park Place will be
entitled to a deduction for Federal income tax purposes in an amount equal to
the ordinary income, if any, recognized by the optionee upon disposition of the
shares.
NONQUALIFIED STOCK OPTIONS.
Nonqualified stock options granted under the Park Place 1998 Plan do not
qualify as "incentive stock options" and will not qualify for any special tax
benefits to the optionee. An optionee generally will not recognize any taxable
income at the time he or she is granted a nonqualified option. However, upon
exercise, the optionee will recognize ordinary income for Federal and State, if
any, income tax purposes measured by the excess of the then fair market value of
the shares over the option price. The income realized by the optionee will be
subject to income tax withholding.
The optionee's basis for determination of gain or loss upon the subsequent
disposition of shares acquired upon the exercise of a nonqualified stock option
will be the amount paid for such shares plus any ordinary income recognized as a
result of the exercise of such option. Upon disposition of any shares acquired
pursuant to the exercise of a nonqualified stock option, the difference between
the sale price and the optionee's basis in the shares will be treated as a
capital gain or loss and will be characterized as long-term capital gain or loss
if the shares have been held for more than one year at the date of their
disposition.
In general, there will be no Federal income tax consequences to Park Place
upon the grant or termination of a nonqualified stock option or a sale or
disposition of the shares acquired upon the exercise of a nonqualified stock
option. However, upon the exercise of a nonqualified stock option, Park Place
will be entitled to a deduction for Federal income tax purposes equal to the
amount of ordinary income that an optionee is required to recognize as a result
of the exercise.
TAXATION OF STOCK APPRECIATION RIGHTS.
No income will be realized by an optionee upon the granting of a stock
appreciation right. Upon the exercise of a stock appreciation right, an optionee
will recognize income in an amount equal to the fair market value on the
exercise date of the Park Place Common Stock or cash, or both, received, less
any amount paid by the optionee for such rights, and Park Place will be entitled
to a deduction in an equal amount.
The foregoing does not purport to be a complete description of the Federal
income tax aspects of the options. The above discussion is very general in
nature and may omit certain information that may affect the tax computations of
certain optionees. Optionees should, therefore, consult their tax advisors with
respect to any questions they may have regarding the above described matters, as
well as any state and local tax consequences.
232
<PAGE>
PROPOSAL THREE: APPROVAL OF THE PARK PLACE ENTERTAINMENT CORPORATION 1998
INDEPENDENT DIRECTOR STOCK OPTION PLAN
In connection with the Hilton Distribution, Hilton stockholders are also
being asked to consider and vote upon the Park Place Entertainment Corporation
1998 Independent Director Stock Option Plan (the "Director Plan"). Certain
material features of the Director Plan are summarized below. The following
summary is subject to the full statement of the Director Plan, a copy of which
is attached as Annex E to this Joint Proxy Statement/Prospectus.
The affirmative vote of a majority of the shares of Hilton Common Stock
represented and entitled to vote at the Hilton Special Meeting is required for
approval of Proposal Three. Proxies will be voted for or against Proposal Three
in accordance with specifications marked thereon and will be voted in favor of
Proposal Three if no specification is made.
The effectiveness of each of the Hilton Proposals is conditioned upon the
approval or ratification, as applicable, of all of the other Hilton Proposals.
Accordingly, failure of Hilton stockholders to approve Proposal Three will
result in the ineffectiveness of all of the Hilton Proposals, and failure of
Hilton stockholders to approve or ratify, as applicable, the other Hilton
Proposals will result in the ineffectiveness of Proposal Three.
THE HILTON BOARD RECOMMENDS THAT HILTON STOCKHOLDERS VOTE FOR PROPOSAL THREE
AND EACH OF THE OTHER HILTON PROPOSALS.
GENERAL
The Hilton Board adopted the Director Plan in October 1998 subject to
approval by Hilton's stockholders. The Director Plan provides for the grant of
stock options to purchase shares of Park Place Common Stock to Park Place's
Independent Directors (as defined in the Director Plan). The Director Plan will
be administered by the full Park Place Board, acting by a majority of its
members.
The purpose of the Director Plan is to provide Park Place's Independent
Directors with a plan of stock ownership that will further ensure that the
compensation of its Directors is closely aligned with stockholder interests and
the performance of Park Place, and to assist Park Place in attracting and
retaining well-qualified individuals to serve as Independent Directors. The
Hilton Board believes it is in the best interests of Park Place and its
stockholders to approve the Director Plan.
NEW PLAN BENEFITS
PARK PLACE ENTERTAINMENT CORPORATION
1998 INDEPENDENT DIRECTOR STOCK OPTION PLAN
The following table sets forth the number of Park Place Options to be
granted to the persons and groups identified below under the Director Plan.
<TABLE>
<CAPTION>
NUMBER OF UNITS
(OPTIONS TO PURCHASE
NAME AND POSITION DOLLAR VALUE($)(1) COMMON STOCK)
- --------------------------------------------------------------------- --------------------------- ---------------------
<S> <C> <C>
Steve Crown.......................................................... -- 6,000(2)
Eric Hilton.......................................................... -- 2,000
Lyle M. Berman....................................................... -- 2,000
J. Kenneth Looloian.................................................. -- 2,000
Gilbert Shelton...................................................... -- 2,000
Rocco J. Marano...................................................... -- 2,000
Executive Group...................................................... -- --
Non-Executive Director Group......................................... -- 16,000
Non-Executive Officer Employee Group................................. -- --
</TABLE>
- ------------------------------
(1) The market value of Park Place Common Stock is not determinable and will be
based on the trading price of the Park Place Common Stock following the
Hilton Distribution and therefore there is no determinable market value for
these shares.
233
<PAGE>
(2) Includes 4,000 options previously granted by Hilton that will be adjusted to
equal the same number of Park Place Options in the Hilton Distribution.
Amendments can be made to the Director Plan that can increase the cost of
the plan to Park Place.
PURPOSE.
The purpose of the Director Plan is to give Park Place a competitive
advantage in attracting, retaining and motivating non-employee directors and to
provide Park Place and its subsidiaries with a stock plan providing incentives
more directly linked to the profitability of Park Place's business and increases
in shareholder value. Under the Director Plan, only non-incentive stock options
are made available for grant.
ADMINISTRATION.
The Director Plan is administered by the full Park Place Board, acting by a
majority of its members.
SHARES SUBJECT TO THE DIRECTOR PLAN.
Subject to adjustment as set forth in the Director Plan, the total number of
shares of Park Place Common Stock reserved and available for grant under the
Director Plan is 65,000.
If an option expires or terminates for any reason during the term of the
Director Plan and prior to the exercise thereof in full, the shares of Park
Place Common Stock subject to, but not delivered under, such option shall be
available for options thereafter granted under the Director Plan.
In the event of any change in corporate capitalization, such as a stock
split or a corporate transaction, any merger, consolidation, separation,
including a spin-off, or other distribution of stock or property of Park Place,
any reorganization, or any partial or complete liquidation of Park Place, the
number, exercise price and kind of shares that are subject to outstanding
options will be adjusted in such manner and to such extent, if any, as the Park
Place Board in its absolute discretion may deem appropriate in the
circumstances.
ELIGIBILITY.
Participation in the Director Plan is limited to Independent Directors of
Park Place who are not employees or former employees of Park Place or any
subsidiary thereof.
OPTION PRICE.
The option price per share of Park Place Common Stock will equal 100% of the
fair market value of the Park Place Common Stock on the date of grant.
OPTION GRANTS.
Each person who is an Independent Director as of the effective date of the
Hilton Distribution shall automatically be granted (i) a stock option to
purchase 2,000 shares of Park Place Common Stock on such effective date, and
(ii) a stock option to purchase 2,000 shares of Park Place Common Stock on the
date of each annual meeting of stockholders of Park Place after such effective
date, for so long as such person remains an Independent Director. In addition,
during the term of the Director Plan, each person who is initially elected to
the Park Place Board after the effective date of the Hilton Distribution and who
is an Independent Director at the time of such initial election automatically
shall be granted (i) a stock option to purchase 2,000 shares of Park Place
Common Stock on the date of such initial election, and (ii) a stock option to
purchase 2,000 shares of Park Place Common Stock on the date of each annual
meeting of stockholders after such initial election for so long as such person
remains an Independent Director; all of the foregoing being subject to
stockholder approval of the Director Plan by Hilton stockholders.
234
<PAGE>
TERM AND EXERCISE OF OPTIONS.
The term of each stock option shall be ten years from the date of grant,
subject to earlier termination in the event that the optionee's service as a
director terminates. Each option will be exercisable immediately upon the grant
of such option.
NONTRANSFERABILITY OF STOCK OPTIONS.
Stock options are not transferable otherwise than by will or by the laws of
descent and distribution, or pursuant to a qualified domestic relations order.
During the lifetime of an optionee, a stock option and/or stock appreciation
right is exercisable only by the optionee.
DEATH, DISABILITY, RETIREMENT OR TERMINATION OF DIRECTORSHIP.
If an optionee's directorship terminates by reason of death, options may
thereafter be exercised only to the extent they were exercisable at the time of
death and may only be exercised within 12 months from the date of death, but in
no event after the date of expiration of the option.
If an optionee's directorship terminates by reason of disability, options
may thereafter be exercised only to the extent they were exercisable at the time
of such termination of directorship and only within 12 months from the date of
such termination of directorship, but in no event after the date of expiration
of the option.
If an optionee's directorship terminates by reason of retirement, options
may thereafter be exercised only to the extent they were exercisable at the time
of such termination of directorship and only within 24 months from the date of
such termination of directorship, but in no event after the date of expiration
of the option.
If an optionee incurs a termination of directorship for any reason other
than death, disability or retirement, options may thereafter be exercised only
to the extent they were exercisable at the time of such termination of
directorship, and only within three months from the date of such termination of
directorship, but in no event after the date of expiration of the option.
If an optionee incurs a termination of directorship at or after a Change in
Control of Park Place, other than by reason of death, disability or retirement,
any option held by such optionee shall be exercisable for the lesser of (1) six
months and one day from the date of such termination of directorship, and (2)
the balance of such option's term. The definition of "Change in Control" in the
Director Plan is the same as the definition of such term in the Park Place 1998
Plan, except that references in such definition are to the Director Plan, rather
than the Park Place 1998 Plan.
CHANGE IN CONTROL CASH-OUT.
Unless the Park Place Board provides otherwise at the time of grant, during
the 60-day period following a Change in Control of Park Place, the optionee
shall have the right to surrender all or part of the option, regardless of
whether the option is fully exercisable, in exchange for a cash payment by Park
Place equal to the excess of the Change in Control Price (as defined in the
Director Plan) per share of Park Place Common Stock over the exercise price per
share, multiplied by the number of shares which the optionee has elected to cash
out; provided, however, under certain circumstances, the Park Place Board may
elect to substitute for such cash payment Park Place Common Stock with a Fair
Market Value (as defined in the Director Plan) equal to the cash that would
otherwise be payable.
TERMINATION.
The term during which options may be granted under the Director Plan expires
ten years after the effective date of the Director Plan, unless sooner
terminated by the Park Place Board. Such termination has no effect on options or
stock appreciation rights then in effect.
235
<PAGE>
EFFECTIVE DATE.
Subject to approval by the Hilton stockholders, the Director Plan shall be
effective as of the date of the Hilton Distribution.
PROVISIONS REGARDING THE HILTON DISTRIBUTION.
Following the date of the Hilton Option Adjustment, all Adjusted Park Place
Options which were issued as a result of Hilton Options granted under the Hilton
1997 Independent Director Stock Option Plan will be subject to the terms of the
Director Plan and the applicable option agreement, and all Adjusted Hilton
Options will be subject to the terms of the applicable Hilton stock option plan,
and any applicable option agreement. For purposes of the Director Plan, with
respect to Adjusted Park Place Options held by members of the Hilton Board as a
result of the Option Adjustment, references to directorship or termination of of
directorship in the Director Plan and in the applicable option agreement shall
be deemed to refer to directorship or termination of directorship on the Hilton
Board.
TAX CONSEQUENCES.
The Federal income tax consequences of participation in the Director Plan
are complex and subject to change. In general, the summary discussion above with
respect to the tax consequences of nonqualified stock options under the Park
Place 1998 Plan applies to options granted under the Director Plan. See
"--Proposal Two: Approval of the Park Place Entertainment Corporation 1998 Stock
Incentive Plan--Tax Consequences." Participants in the Director Plan should
consult their own tax advisors since a taxpayer's particular situation may be
such that some variation of the rules described above will apply.
PROPOSAL FOUR: APPROVAL OF AN AMENDMENT AND RESTATEMENT OF THE HILTON HOTELS
CORPORATION 1996 STOCK INCENTIVE PLAN
In connection with the Hilton Distribution, Hilton stockholders are also
being asked to consider and vote upon an amendment and restatement of the Hilton
1996 Stock Incentive Plan (as amended and restated, the "Amended Hilton Plan")
and the grant of options thereunder as described below and elsewhere in this
Joint Proxy Statement/Prospectus. Certain material features of the Amended
Hilton Plan are summarized below. Certain material features of the Hilton
Special Options to be issued under the Amended Hilton Plan are summarized under
the caption "Certain Relationships and Related Transactions--Interests of
Certain Persons in the Transactions--Hilton Interests." The following summary is
subject to the full statement of the Amended Hilton Plan, a copy of which is
attached as Annex F to this Joint Proxy Statement/Prospectus.
The affirmative vote of a majority of the shares of Hilton Common Stock
represented and entitled to vote at the Hilton Special Meeting is required for
approval of Proposal Four. Proxies will be voted for or against Proposal Four in
accordance with specifications marked thereon and will be voted in favor of
Proposal Four if no specification is made.
The effectiveness of each of the Hilton Proposals is conditioned upon the
approval or ratification, as applicable, of all of the other Hilton Proposals.
Accordingly, failure of Hilton stockholders to approve Proposal Four will result
in the ineffectiveness of all of the Hilton Proposals, and failure of Hilton
stockholders to approve or ratify, as applicable, the other Hilton Proposals
will result in the ineffectiveness of Proposal Four.
THE HILTON BOARD RECOMMENDS THAT HILTON STOCKHOLDERS VOTE FOR PROPOSAL FOUR
AND EACH OF THE OTHER HILTON PROPOSALS.
GENERAL
The Hilton Board adopted the Amended Hilton Plan in October 1998. The
Amended Hilton Plan authorizes the grant to officers and key employees of stock
options and stock appreciation rights with
236
<PAGE>
respect to Hilton Common Stock and the grant of Hilton Special Options to the
Chief Executive Officer of Hilton (the "Hilton CEO") in accordance with the
terms of the Hilton CEO Agreement. See "Certain Relationships and Related
Transactions--Interest of Certain Persons in the Transactions--Hilton
Interests." Except with respect to the provisions of the Amended Hilton Plan
relating to the Hilton Special Options and the proposed increase in the number
of shares of Hilton Common Stock available for issuance thereunder, the terms of
the Amended Hilton Plan are substantially similar to the terms of such plan
prior to amendment and restatement.
The purpose of the Amended Hilton Plan is to provide Hilton with a
competitive advantage in attracting, retaining and motivating officers and
employees and to provide Hilton and its subsidiaries with a stock plan which
provides incentives more directly linked to the profitability of Hilton's
business and increases in stockholder value. With respect to the Hilton Special
Options, the Amended Hilton Plan is also intended to provide an additional
incentive for the Hilton CEO to use his best efforts to maximize the performance
and success of Hilton.
In the opinion of the Hilton Board, Hilton and its stockholders will benefit
substantially from having certain officers, key employees, and the Hilton CEO
acquire shares of Hilton Common Stock pursuant to options granted under the
Amended Hilton Plan. Such options and stock appreciation rights, in the opinion
of the Hilton Board, will secure the benefits of the incentives resulting from
stock ownership by those persons who will largely be responsible for Hilton's
growth and success. The Hilton Board believes that it is in the best interests
of Hilton's stockholders to approve the Amended Hilton Plan.
PURPOSE.
The purpose of the Amended Hilton Plan is to provide additional incentives
to officers and key employees and the Hilton CEO through investment in Hilton
Common Stock. Under the Amended Hilton Plan, either incentive stock options or
non-incentive stock options (with or without stock appreciation rights in tandem
therewith) are available for grant, except that with respect to the Hilton
Special Options, only non-incentive stock options are available for grant.
ADMINISTRATION.
The Amended Hilton Plan is administered by a Committee appointed by the
Hilton Board, which will be composed of not less than two directors, each of
whom will be an outside director and a non-employee director (the "Committee").
The Committee makes recommendations as to the granting of stock options to key
employees of Hilton and its subsidiaries. Subject to orders or resolutions not
inconsistent with the provisions of the Amended Hilton Plan issued or adopted
from time to time by the Hilton Board, the Committee has the power to
administer, construe and interpret the Amended Hilton Plan and to make rules to
implement the provisions thereof.
SHARES SUBJECT TO THE AMENDED HILTON PLAN.
A maximum of 24,000,000 shares of Hilton Common Stock (subject to
adjustment) are subject to the Amended Hilton Plan. Of that amount, 12,000,000
shares were reserved and available for grant under the Amended Hilton Plan prior
to this amendment and restatement. Under the Amended Hilton Plan, a maximum of
6,000,000 shares of Hilton Common Stock (subject to adjustment) are available
for grants of the Hilton Special Options, and the Hilton CEO may not be granted
Hilton Special Options covering more than 6,000,000 shares of Hilton Common
Stock in the aggregate. Except with respect to the Hilton Special Options and
Adjusted Hilton Options issued pursuant to the Hilton Option Adjustment, no
participant may be granted awards under the Amended Hilton Plan covering more
than 1,200,000 shares of Hilton Common Stock in any calendar year. Adjusted
Hilton Options issued pursuant to the Hilton Option Adjustment will not count
toward such limit. With respect to the Adjusted Hilton Options, no participant
may be granted awards in any calendar year covering in excess of the number of
shares of Hilton Common Stock required to make the option adjustment described
below with respect to such participant.
237
<PAGE>
If an option expires or terminates for any reason during the term of the
Amended Hilton Plan and prior to the exercise thereof in full, the shares of
Hilton Common Stock subject to, but not delivered under, such option shall be
available for options thereafter granted under the Amended Hilton Plan.
In the event of any change in corporate capitalization, such as a stock
split or a corporate transaction, any merger, consolidation, separation,
including a spin-off, or other distribution of stock or property of Hilton, any
reorganization, or any partial or complete liquidation of Hilton, the number,
exercise price and kind of shares that are subject to outstanding options will
be adjusted in such manner and to such extent, if any, as the Committee or the
Hilton Board in their absolute discretion may deem appropriate in the
circumstances.
ELIGIBILITY.
Except with respect to the Hilton Special Options, full-time officers and
key employees of Hilton and its subsidiaries (whether or not directors) are
eligible to receive options under the Amended Hilton Plan. In addition, only the
Hilton CEO is eligible to receive the Hilton Special Options, and all such
Hilton Special Options will be granted, subject to approval by Hilton's
stockholders, upon the Hilton Distribution. See "Certain Relationships and
Related Transactions--Interests of Certain Persons in the Transactions-- Hilton
Interests." Directors who are not officers or salaried employees are ineligible
to receive options or stock appreciation rights under the Amended Hilton Plan.
OPTION PRICE.
The purchase price of the stock subject to an option granted under the
Hilton Plan shall be determined by the Committee and shall not be less than 100%
of the fair market value of such stock at the time the option is granted. With
respect to the purchase price of the stock subject to Hilton Special Options,
see "Certain Relationships and Related Transactions--Interests of Certain
Persons in the Transactions--Hilton Interests."
TERM AND EXERCISE OF OPTIONS.
The term of options granted under the Amended Hilton Plan shall be fixed by
the Committee, but no incentive stock option shall be exercisable more than ten
years after the date of grant thereof and no nonqualified stock option shall be
exercisable more than ten years and one day after the date of grant thereof. The
term may be reduced with respect to any option and/or stock appreciation right
in the event of termination of employment, retirement or death of an optionee.
Options granted under the Amended Hilton Plan shall be exercisable at such times
and subject to such conditions as the Committee shall determine. In addition,
the Committee may accelerate the exercisability of any option granted under the
Amended Hilton Plan. With respect to the term and exercisability of the Hilton
Special Options, see "Certain Relationships and Related Transactions--Interests
of Certain Persons in the Transactions-- Hilton Interests."
Each stock option agreement evidencing options granted under the Amended
Hilton Plan shall contain an explicit reference as to whether any or all of the
options granted thereunder are intended to be incentive stock options.
STOCK APPRECIATION RIGHTS.
Stock appreciation rights ("SARs") may be granted, in the sole discretion of
the Committee, in connection with options granted under the Amended Hilton Plan.
Each SAR relates to the same shares of Hilton Common Stock covered by the
companion option (or such lesser number of shares as the Committee may
determine) and is subject to the same terms and conditions contained in the
option except for such additional limitations as are required by the Amended
Hilton Plan or as may be included by the Committee in SARs granted. Each SAR
entitles an optionee to surrender to Hilton the unexercised related option, or
any portion thereof, and to receive in exchange cash or shares of Hilton Common
Stock,
238
<PAGE>
or a combination thereof, as the Committee shall determine, with a value equal
to the Fair Market Value (as defined in the Amended Hilton Plan) on the exercise
date of Hilton Common Stock over the option exercise price for the number of
shares covered by the option, or portion thereof, which is surrendered. The
Amended Hilton Plan requires the Committee to impose a requirement that an
optionee partially exercise an option concurrently with the exercise of the
related SAR. Each optionee is required to pay to Hilton any amount Hilton is
obligated to withhold for income taxes as a result of the exercise of a stock
option or an SAR. SARs are not available with respect to the Hilton Special
Options.
NONTRANSFERABILITY OF STOCK OPTIONS.
Neither stock options nor stock appreciation rights are transferable
otherwise than (i) by will or by the laws of descent and distribution, or (ii)
in the case of a non-qualified stock option, pursuant to a qualified domestic
relations order, or (iii) in the case of the Hilton Special Options, pursuant to
a transfer to certain of the optionee's family members, a trust for the benefit
of such family members, certain entities in which such family members hold
interests, or certain tax-exempt entities. During the lifetime of an optionee, a
stock option and/or stock appreciation right is exercisable only by the
optionee.
DEATH, DISABILITY, RETIREMENT OR TERMINATION OF EMPLOYMENT.
If an optionee dies while employed by Hilton or a subsidiary or a disabled
optionee dies within six months from the termination of employment, options may
thereafter be exercised only to the extent they were exercisable at the time of
death and may only be exercised within 12 months from the date of death, but in
no event after the date of expiration of the option.
If an optionee ceases to be an employee of Hilton or a subsidiary due to
disability, options may thereafter be exercised only to the extent they were
exercisable at the time of such cessation of employment and only within six
months from the date of cessation of employment, but in no event after the date
of expiration of the option.
If an optionee ceases to be an employee of Hilton or a subsidiary due to
retirement, options may thereafter be exercised only to the extent they were
exercisable at the time of such cessation of employment and only within 24
months from the date of cessation of employment, but in no event after the date
of expiration of the option.
If an optionee incurs a termination of employment for any reason other than
death, disability or retirement, options may thereafter be exercised only to the
extent they were exercisable at the time of cessation of employment, and only
within three months from the date of cessation of employment, but in no event
after the date of expiration of the option.
If an optionee incurs a termination of employment at or after a Change in
Control (as defined below) of Hilton, other than by reason of death, disability
or retirement, any option held by such optionee shall be exercisable for the
lesser of (1) six months and one day from the date of such termination of
employment, and (2) the balance of such option's term.
With respect to the effect of terminations of employment under the Hilton
Special Options, see "Certain Relationships and Related Transactions--Interests
of Certain Persons in the Transactions-- Hilton Interests."
Stock appreciation rights shall terminate and no longer be exercisable upon
the termination or exercise of the related stock option.
CHANGE IN CONTROL CASH-OUT.
Unless the Committee provides otherwise at the time of grant, during the
60-day period following a Change in Control of Hilton, the optionee shall have
the right to surrender all or part of the option, regardless of whether the
option is fully exercisable, in exchange for a cash payment by Hilton equal to
the
239
<PAGE>
excess of the Change in Control Price (as defined in the Amended Hilton Plan)
per share of Hilton Common Stock over the exercise price per share, multiplied
by the number of shares which the optionee has elected to cash out; provided,
however, under certain circumstances, the Committee may elect to substitute for
such cash payment Hilton Common Stock with a Fair Market Value equal to the cash
that would otherwise be payable. With respect to the Hilton Special Options, see
"Certain Relationships and Related Transactions--Interests of Certain Persons in
the Transactions--Hilton Interests."
CHANGE IN CONTROL PROVISIONS.
The Amended Hilton Plan provides that in the event of a Change in Control of
Hilton, all outstanding stock options and stock appreciation rights granted
thereunder shall become fully vested and exercisable for the aggregate number of
shares covered thereby. The definition of "Change in Control" in the Amended
Hilton Plan is the same as the definition of such term in the Park Place 1998
Plan, except that, in the Amended Hilton Plan, references in such definition are
to Hilton (and its Board, Common Stock and securities) and the Amended Hilton
Plan, rather than to Park Place (and its Board, Common Stock and securities) and
the Park Place 1998 Plan.
TERMINATION.
The term during which options and stock appreciation rights may be granted
under the Amended Hilton Plan expires ten years after the effective date of the
Amended Hilton Plan, unless sooner terminated by the Hilton Board. Such
termination has no effect on options or stock appreciation rights then in
effect.
EFFECTIVE DATE.
Subject to approval by the Hilton stockholders, the Amended Hilton Plan
shall be effective as of July 9, 1998.
PROVISIONS REGARDING THE HILTON DISTRIBUTION.
Following the date of the Hilton Option Adjustment, all Adjusted Hilton
Options will be subject to the terms of the Amended Hilton Plan or other
applicable Hilton stock option plan, and any applicable option agreement, and
all Adjusted Park Place Options will be subject to the terms of the Park Place
1998 Plan or the Director Plan, as the case may be, and the applicable option
agreement. For purposes of the Amended Hilton Plan, with respect to Adjusted
Hilton Options held by Park Place Individuals (as defined in the Hilton Employee
Benefits Agreement) as a result of the Hilton Option Adjustment, references to
employment or termination of employment in the Amended Hilton Plan and in the
applicable option agreement shall be deemed to refer to employment by or
termination of employment with Park Place and its subsidiaries or affiliates.
HILTON SPECIAL OPTIONS.
Under the Amended Hilton Plan, the Committee has the authority to grant the
Hilton Special Options to the Hilton CEO on such terms and conditions as it
shall determine in its sole discretion. The terms of Hilton Special Options to
be granted to the Hilton CEO are set forth in the Hilton CEO Agreement. See
"Certain Relationships and Related Transactions--Interests of Certain Persons in
the Transactions--Hilton Interests." To the extent that certain terms and
conditions of the Hilton Special Options are not set forth in such agreement,
the terms of the Amended Hilton Plan shall apply to the Hilton Special Options.
Adjusted Hilton Options issued to the Hilton CEO as a result of Hilton Options
held by the Hilton CEO are not Hilton Special Options.
240
<PAGE>
TAX CONSEQUENCES
The Federal income tax consequences of participation in the Amended Hilton
Plan are complex and subject to change. The summary discussion above with
respect to the tax consequences of participation in the Park Place 1998 Plan
applies to Hilton and to options and stock appreciation rights granted under the
Amended Hilton Plan. See "--Proposal Two: Approval of the Park Place
Entertainment Corporation 1998 Stock Incentive Plan--Tax Consequences."
Participants in the Amended Hilton Plan should consult their own tax advisors
since a taxpayer's particular situation may be such that some variation of the
rules described above will apply.
PROPOSAL FIVE: RATIFICATION OF THE PARK PLACE BOARD OF DIRECTORS
In connection with the Hilton Distribution, Hilton stockholders are being
asked to consider and vote upon the ratification of the election of ten
directors of Park Place, who will be divided into three classes, the initial
terms of which will expire in 2000, 2001 and 2002. Certain information with
respect to the Park Place Board and the Park Place directors is set forth in
"Management of Park Place--Park Place Board of Directors," "--Park Place CEO and
Chairman Employment Agreements" and "Certain Relationships and Related
Transactions--Interests of Certain Persons in the Transactions--Hilton
Interests."
Each Park Place director will be elected to the Park Place Board prior to
the Hilton Distribution and will hold office as a director for the term
indicated for such person in "Management of Park Place--Park Place Board of
Directors."
The affirmative vote of a majority of the shares of Hilton Common Stock
represented and entitled to vote at the Hilton Special Meeting is required for
ratification of Proposal Five. Proxies will be voted for or against Proposal
Five in accordance with specifications marked thereon and will be voted in favor
of Proposal Five if no specification is made.
The effectiveness of each of the Hilton Proposals is conditioned upon the
approval or ratification, as applicable, of all of the other Hilton Proposals.
Accordingly, failure of Hilton stockholders to ratify Proposal Five will result
in the ineffectiveness of all of the Hilton Proposals, and failure of Hilton
stockholders to approve or ratify, as applicable, the other Hilton Proposals
will result in the ineffectiveness of Proposal Five.
THE HILTON BOARD RECOMMENDS THAT HILTON STOCKHOLDERS VOTE FOR PROPOSAL FIVE
AND EACH OF THE OTHER HILTON PROPOSALS.
241
<PAGE>
THE GRAND PROPOSALS
PROPOSAL ONE: RATIFICATION OF THE GRAND DISTRIBUTION
At the Grand Special Meeting, Grand shareholders are being asked to consider
and vote upon the ratification of the Grand Distribution, in the form of a
special dividend to the holders of the outstanding shares of Grand Common Stock,
on a one-for-four basis, of all the outstanding shares of Lakes Common Stock
(the "Grand Distribution Proposal"). See "Background and Reasons--Reasons for
Recommendation of the Grand Board" and "The Transactions."
The affirmative vote of the holders of the greater of (a) a majority of the
outstanding shares of Grand Common Stock present and entitled to vote on the
ratification of the Grand Distribution Proposal or (b) a majority of the voting
power of the minimum number of shares entitled to vote that would constitute a
quorum for the transaction of business at the meeting, is required for
ratification of Proposal One. Proxies will be voted for or against Proposal One
in accordance with specifications marked thereon and will be voted in favor of
Proposal One if no specification is made.
The effectiveness of Proposal One is conditioned upon the approval of
Proposal Two. Accordingly, failure of Grand shareholders to ratify Proposal One
will result in the ineffectiveness of both Proposal Two and Proposal One.
THE GRAND BOARD RECOMMENDS THAT GRAND SHAREHOLDERS VOTE FOR PROPOSAL ONE AND
EACH OF THE OTHER GRAND PROPOSALS.
PROPOSAL TWO: APPROVAL OF THE MERGER
At the Grand Special Meeting, Grand Shareholders are being asked to consider
and vote upon approval and adoption of the Merger. Pursuant to the Merger
Agreement and upon consummation of the Grand Distribution, Gaming Acquisition
Corporation will merge with and into Grand and each share of Grand Common Stock
outstanding immediately prior to the effective time of the Merger will be
converted into Park Place Common Stock pursuant to the formula described in the
Merger Agreement.
The affirmative vote of the holders of a majority of the outstanding shares
of Grand Common Stock outstanding on the Grand Record Date is required for the
approval of Proposal Two. Proxies will be voted for or against the approval and
adoption of Proposal Two in accordance with specifications marked thereon and
will be voted in favor of the approval and adoption of Proposal Two if no
specification is made.
The effectiveness of Proposal Two is conditioned upon the ratification of
Proposal One. Accordingly, failure of Grand shareholders to approve Proposal Two
will result in the ineffectiveness of both Proposal One and Proposal Two.
THE GRAND BOARD RECOMMENDS THAT GRAND SHAREHOLDERS VOTE FOR PROPOSAL TWO AND
EACH OF THE OTHER GRAND PROPOSALS.
PROPOSAL THREE: APPROVAL OF THE LAKES GAMING, INC. 1998 STOCK OPTION AND
COMPENSATION PLAN
In connection with the Grand Distribution, Grand shareholders are being
asked to consider and vote upon the Lakes Option Plan. Certain of the material
features of the Lakes Option Plan are summarized below. The following summary is
subject to the full statement and description of the Lakes Option Plan, a copy
of which is attached to this Joint Proxy Statement/Prospectus as Annex G.
The affirmative vote of the holders of the greater of (a) a majority of the
outstanding shares of Grand Common Stock present and entitled to vote on the
approval of the Lakes Option Plan or (b) a majority of the voting power of the
minimum number of shares entitled to vote that would constitute a quorum for the
transaction of business at the meeting, is required for the approval of the
Lakes Option Plan. Proxies will
242
<PAGE>
be voted for or against Proposal Three in accordance with specifications marked
thereon and will be voted in favor of the approval of Proposal Three if no
specification is made.
THE GRAND BOARD RECOMMENDS THAT GRAND SHAREHOLDERS VOTE FOR PROPOSAL THREE
AND EACH OF THE OTHER GRAND PROPOSALS.
GENERAL
The purpose of the Lakes Option Plan is to increase shareholder value and to
advance the interests of Lakes by furnishing a variety of economic incentives
("Incentives") designed to attract, retain and motivate employees of Lakes.
The Lakes Option Plan provides that a committee (the "Committee") composed
of at least two members of the board of directors of Lakes who have not received
Incentives under the Lakes Option Plan or any other plan of Lakes for at least
one year may grant Incentives to employees in the following forms: (a) stock
options; (b) stock appreciation rights; (c) stock awards; (d) restricted stock;
(e) performance shares; and (f) cash awards. Incentives may be granted only to
employees of Lakes (including officers and directors of Lakes, but excluding
directors of Lakes who are not also employees of or consultants to Lakes)
selected from time to time by the Committee.
The number of shares of Lakes Common Stock which may be issued under the
Lakes Option Plan if this proposal is approved may not exceed 1,500,000 shares,
subject to adjustment in the event of a merger, recapitalization or other
corporate restructuring. This represents approximately 14.2% of the outstanding
shares of Lakes Common Stock pro forma for the Grand Distribution as of
September 15, 1998.
STOCK OPTIONS
Under the Lakes Option Plan, the Committee may grant non-qualified and
incentive stock options to eligible employees to purchase shares of Common Stock
from Lakes. The Lakes Option Plan confers on the Committee discretion, with
respect to any such stock option, to determine the number and purchase price of
the shares subject to the option, the term of each option and the time or times
during its term when the option becomes exercisable. The purchase price for
incentive stock options may not be less than the fair market value of the shares
subject to the option on the date of grant. The number of shares subject to an
option will be reduced proportionately to the extent that the optionee exercises
a related Stock Appreciation Right ("SAR"). The term of a non-qualified option
may not exceed 10 years and one day from the date of grant and the term of an
incentive stock option may not exceed 10 years from the date of grant. Any
option shall become immediately exercisable in the event of specified changes in
corporate ownership or control. The Committee may accelerate the exercisability
of any option or may determine to cancel stock options in order to make a
participant eligible for the grant of an option at a lower price. The Committee
may approve the purchase by Lakes of an unexercised stock option for the
difference between the exercise price and the fair market value of the shares
covered by such option.
The option price may be paid in cash, check, bank draft or by delivery of
shares of Common Stock valued at their fair market value at the time of exercise
or by withholding from the shares issuable upon exercise of the option shares of
Common Stock valued at their fair market value or as otherwise authorized by the
Committee.
In the event that an optionee ceases to be an employee of Lakes for any
reason, including death, any stock option or unexercised portion thereof which
was otherwise exercisable on the date of termination of employment shall expire
at the time or times established by the Committee.
STOCK APPRECIATION RIGHTS
A stock appreciation right or SAR is a right to receive, without payment to
Lakes, a number of shares, cash or any combination thereof, the amount of which
is determined pursuant to the formula described
243
<PAGE>
below. An SAR may be granted with respect to any stock option granted under the
Lakes Option Plan, or alone, without reference to any stock option. An SAR
granted with respect to any stock option may be granted concurrently with the
grant of such option or at such later time as determined by the Committee and as
to all or any portion of the shares subject to the option.
The Lakes Option Plan confers on the Committee discretion to determine the
number of shares as to which an SAR will relate as well as the duration and
exercisability of an SAR. In the case of an SAR granted with respect to a stock
option, the number of shares of Common Stock to which the SAR pertains will be
reduced in the same proportion that the holder exercises the related option. The
term of an SAR may not exceed ten years and one day from the date of grant.
Unless otherwise provided by the Committee, an SAR will be exercisable for the
same time period as the stock option to which it relates is exercisable. Any SAR
shall become immediately exercisable in the event of specified changes in
corporate ownership or control. The Committee may accelerate the exercisability
of any SAR.
Upon exercise of an SAR, the holder is entitled to receive an amount which
is equal to the aggregate amount of the appreciation in the shares of Common
Stock as to which the SAR is exercised. For this purpose, the "appreciation" in
the shares consists of the amount by which the fair market value of the shares
of Common Stock on the exercise date exceeds (a) in the case of an SAR related
to a stock option, the exercise price of the shares under the option or (b) in
the case of an SAR granted alone, without reference to a related stock option,
an amount determined by the Committee at the time of grant. The Committee may
pay the amount of this appreciation to the holder of the SAR by the delivery of
Common Stock, cash, or any combination of Common Stock and cash.
RESTRICTED STOCK
Restricted stock consists of the sale or transfer by Lakes to an eligible
employee of one or more shares of Common Stock which are subject to restrictions
on their sale or other transfer by the employee. The price at which restricted
stock will be sold will be determined by the Committee, and it may vary from
time to time and among employees and may be less than the fair market value of
the shares at the date of sale. All shares of restricted stock will be subject
to such restrictions as the Committee may determine. Subject to these
restrictions and the other requirements of the Lakes Option Plan, a participant
receiving restricted stock shall have all of the rights of a shareholder as to
those shares.
STOCK AWARDS
Stock awards consist of the transfer by Lakes to an eligible employee of
shares of Common Stock, without payment, as additional compensation for services
to Lakes. The number of shares transferred pursuant to any stock award will be
determined by the Committee.
PERFORMANCE SHARES
Performance shares consist of the grant by Lakes to an eligible employee of
a contingent right to receive cash or payment of shares of Common Stock. The
performance shares shall be paid in shares of Common Stock to the extent
performance objectives set forth in the grant are achieved. The number of shares
granted and the performance criteria will be determined by the Committee.
CASH AWARDS
A cash award consists of a monetary payment made by Lakes to an eligible
employee as additional compensation for his services to Lakes. Payment may
depend on the achievement of specified performance objectives. The amount of any
monetary payment constituting a cash award shall be determined by the Committee.
244
<PAGE>
NON-TRANSFERABILITY OF MOST INCENTIVES
No stock option, SAR, performance share or restricted stock granted under
the Lakes Option Plan will be transferable by its holder, except in the event of
the holder's death, by will or the laws of descent and distribution. During an
employee's lifetime, an Incentive may be exercised only by him or her or by his
or her guardian or legal representative.
AMENDMENT OF THE LAKES OPTION PLAN
The Lakes Board may amend or discontinue the Lakes Option Plan at any time.
However, no such amendment or discontinuance may, subject to adjustment in the
event of a merger, recapitalization, or other corporate restructuring, (a)
change or impair, without the consent of the recipient thereof, an Incentive
previously granted, (b) materially increase the maximum number of shares of
Lakes Common Stock which may be issued to all employees under the Lakes Option
Plan, (c) materially change or expand the types of Incentives that may be
granted under the Lakes Option Plan, (d) materially modify the requirements as
to eligibility for participation in the Lakes Option Plan, or (e) materially
increase the benefits accruing to participants. Certain Lakes Option Plan
amendments require shareholder approval, including amendments which would
materially increase benefits accruing to participants, increase the number of
securities issuable under the Lakes Option Plan, or change the requirements for
eligibility under the Lakes Option Plan.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth certain United States income tax
considerations in connection with any Incentives granted under the Lakes Option
Plan. These tax considerations are stated in general terms and are based on the
Code and judicial and administrative interpretations thereof. This discussion
does not address state or local tax considerations with respect to the receipt,
exercise or ownership of such Incentives. Moreover, the tax considerations
relevant to receipt, exercise or ownership of such Incentives Common Stock may
vary depending on a holder's particular status.
Under existing Federal income tax provisions, an employee who receives a
stock option or performance shares or an SAR under the Lakes Option Plan or who
purchases or receives shares of restricted stock under the Lakes Option Plan
which are subject to restrictions which create a "substantial risk of
forfeiture" (within the meaning of section 83 of the Code) will not normally
realize any income, nor will Lakes normally receive any deduction for federal
income tax purposes in the year such Incentive is granted. An employee who
receives a stock award under the Lakes Option Plan consisting of shares of
Common Stock will realize ordinary income in the year of the award in an amount
equal to the fair market value of the shares of Common Stock covered by the
award on the date it is made, and Lakes will be entitled to a deduction equal to
the amount the employee is required to treat as ordinary income. An employee who
receives a cash award will realize ordinary income in the year the award is paid
equal to the amount thereof, and the amount of the cash will be deductible by
Lakes.
When a non-qualified stock option granted pursuant to the Lakes Option Plan
is exercised, the employee will realize ordinary income measured by the
difference between the aggregate purchase price of the shares of Common Stock as
to which the option is exercised and the aggregate fair market value of shares
of the Common Stock on the exercise date, and Lakes will be entitled to a
deduction in the year the option is exercised equal to the amount the employee
is required to treat as ordinary income.
Options which qualify as incentive stock options are entitled to special tax
treatment. Under existing federal income tax law, if shares purchased pursuant
to the exercise of such an option are not disposed of by the optionee within two
years from the date of granting of the option or within one year after the
transfer of the shares to the optionee, whichever is longer, then (i) no income
will be recognized to the optionee upon the exercise of the option; (ii) any
gain or loss will be recognized to the optionee only upon ultimate disposition
of the shares and, assuming the shares constitute capital assets in the
optionee's hands,
245
<PAGE>
will be treated as long-term capital gain or loss; (iii) the optionee's basis in
the shares purchased will be equal to the amount of cash paid for such shares;
and (iv) Lakes will not be entitled to a federal income tax deduction in
connection with the exercise of the option. Lakes understands that the
difference between the option price and the fair market value of the shares
acquired upon exercise of an incentive stock option will be treated as an "item
of tax preference" for purposes of the alternative minimum tax. In addition,
incentive stock options exercised more than three months after retirement are
treated as non-qualified options.
Lakes further understands that if the optionee disposes of the shares
acquired by exercise of an incentive stock option before the expiration of the
holding period described above, the optionee must treat as ordinary income in
the year of that disposition an amount equal to the difference between the
optionee's basis in the shares and the lesser of the fair market value of the
shares on the date of exercise or the selling price. In addition, Lakes will be
entitled to a deduction equal to the amount the employee is required to treat as
ordinary income.
If the exercise price of an option is paid by surrender of previously owned
shares, the basis of the shares received in replacement of the previously owned
shares is carried over. If the option is a non-qualified option, the gain
recognized on exercise is added to the basis. If the option is an incentive
stock option, the optionee will recognize gain if the shares surrendered were
acquired through the exercise of an incentive stock option and have not been
held for the applicable holding period. This gain will be added to the basis of
the shares received in replacement of the previously owned shares.
When a stock appreciation right granted pursuant to the Lakes Option Plan is
exercised, the employee will realize ordinary income in the year the right is
exercised equal to the value of the appreciation which he is entitled to receive
pursuant to the formula described above, and Lakes will be entitled to a
deduction in the same year and in the same amount.
An employee who receives restricted stock or performance shares subject to
restrictions which create a "substantial risk of forfeiture" (within the meaning
of section 83 of the Code) will normally realize taxable income on the date the
shares become transferable or no longer subject to substantial risk of
forfeiture or on the date of their earlier disposition. The amount of such
taxable income will be equal to the amount by which the fair market value of the
shares of Common Stock on the date such restrictions lapse (or any earlier date
on which the shares are disposed of) exceeds their purchase price, if any. An
employee may elect, however, to include in income in the year of purchase or
grant the excess of the fair market value of the shares of Common Stock (without
regard to any restrictions) on the date of purchase or grant over its purchase
price. Lakes will be entitled to a deduction for compensation paid in the same
year and in the same amount as income is realized by the employee.
The foregoing does not purport to be a complete description of the Federal
income tax aspects or consequences of the Incentives. The above discussion is
very general in nature and may omit certain information that may affect the tax
computations of certain persons receiving such Incentives. Such persons should,
therefore, consult their tax advisors with respect to any questions they may
have regarding the above described matters, as well as any state and local tax
consequences.
246
<PAGE>
1998 NEW PLAN BENEFITS
The following table sets forth the benefits or amounts which would have been
received by or allocated to each of the persons and groups set forth below if
the Lakes Option Plan had been in effect during fiscal 1997 based upon
historical option grants under the Grand option plans, after giving effect to
the 1-for-4 distribution ratio in the Grand Distribution and assuming conversion
of each Grand Option into one Lakes Option.
<TABLE>
<CAPTION>
LAKES 1998 STOCK OPTION AND
COMPENSATION PLAN
--------------------------------------
NUMBER OF UNITS
(OPTIONS TO
DOLLAR PURCHASE SHARES OF
NAME AND POSITION VALUE($)(1) COMMON STOCK)
- -------------------------------------------------------------------------- ----------------- -------------------
<S> <C> <C>
1. Lyle Berman -- --
Chairman & Chief Executive Officer
2. Thomas J. Brosig --
President
3. Timothy J. Cope -- 18,750
Executive Vice President, Chief Financial Officer and Secretary
4. Joseph Galvin -- 21,750
Executive Vice President, Chief Administrative Officer and Assistant
Secretary
5. Executive Officer Group 40,500
6. Non-Executive Director Group -- --
7. Non-Executive Officer Employee Group(2) -- --
</TABLE>
- ------------------------
(1) There currently is no public market for the shares of Lakes Common Stock and
as such, there is no determinable market value for these shares.
(2) As of the date of this filing, the employees of Lakes have not been finally
determined other than with respect to the executive officers identified
above. Although it is currently anticipated that Lakes will have
approximately 30 employees, until that group is definitively identified, the
number of options granted to that group in fiscal year 1997 is not
determinable.
PROPOSAL FOUR: APPROVAL OF THE LAKES GAMING, INC. 1998 DIRECTOR STOCK OPTION
PLAN
In connection with the Grand Distribution, Grand shareholders are being
asked to consider and vote upon the Lakes Director Plan. Certain of the material
features of the Lakes Director Plan are summarized below. The following summary
is subject to the full statement and description of the Lakes Director Plan, a
copy of which is attached to this Joint Proxy Statement/Prospectus as Annex H.
The affirmative vote of the holders of the greater of (a) a majority of the
outstanding shares of Grand Common Stock present and entitled to vote on the
approval of the Lakes Director Plan or (b) a majority of the voting power of the
minimum number of shares entitled to vote that would constitute a quorum for the
transaction of business at the meeting, is required for the approval of the
Lakes Director Plan. Proxies will be voted for or against Proposal Four in
accordance with specifications marked thereon and will be voted in favor of the
approval of Proposal Four if no specification is made.
THE GRAND BOARD RECOMMENDS THAT GRAND SHAREHOLDERS VOTE FOR PROPOSAL FOUR
AND EACH OF THE OTHER GRAND PROPOSALS.
247
<PAGE>
GENERAL
The Lakes Board of Directors has adopted, subject to shareholder approval,
the Lakes Director Plan. The Board of Directors believes that the grant of stock
options is a desirable and useful means to strengthen further the non-employee
directors' linkage with Lakes shareholder interests.
The Lakes Director Plan provides that each director who is not an employee
of Lakes or one of its subsidiaries (a "Non-Employee Director") in office at the
time of the Lakes Director Plan's initial adoption by the Board, and each
subsequent Non-Employee Director at the time of his or her initial election to
the Board will receive a non-qualified stock option to purchase up to 12,500
shares of Lakes Common Stock at an option exercise price equal to 100% of the
fair market value of the shares on such grant date. The Lakes Director Plan
provides that the number of shares subject to stock options by Non-Employee
Directors be initially set at 200,000 shares. Each option under the Lakes
Director Plan will have a ten-year term and will generally become exercisable in
five equal installments commencing on the first anniversary of the grant date.
In addition to the initial option grant, non-employee directors and former
non-employee directors may be granted, at the discretion of the Lakes Board,
additional options to purchase shares of Lakes Common Stock. Such options shall
contain such terms and provisions as the Board determines at the time of each
grant. Provided, however that the option price shall be the Fair Market Value
(as defined in the Lakes Director Plan) on the date the option is granted.
Lakes will receive no consideration upon the grant of options under the
Lakes Director Plan. The exercise price of an option must be paid in full upon
exercise. Payment may be made in cash, check or, in whole or in part, in the
Common Stock of Lakes already owned by the person exercising the option, valued
at fair market value.
Under current law, the federal income tax consequences to Non-Employee
Directors and Lakes under the proposed Lakes Director Plan should generally be
as follows: A director to whom a non-qualified stock option is granted will not
recognize income at the time of grant of such option. When a director exercises
the stock option, the director will recognize ordinary compensation income equal
to the difference, if any, between the exercise price paid and the fair market
value, as of the date of option exercise, of the shares the director receives.
The tax basis of such shares to the director will equal the exercise price paid
plus the amount includable in the director's gross income as compensation, and
the director's holding period for such shares will commence on the day on which
the director recognizes taxable income in respect of such shares. Subject to
applicable provisions of the Code, Lakes will generally be entitled to a federal
income tax deduction in respect of non-qualified stock options in an amount
equal to the ordinary compensation income recognized by the director as
described above.
The discussion set forth above does not purport to be a complete analysis of
the potential tax consequences relevant to recipients of options or to Lakes or
to describe tax consequences based on particular circumstances. It is based on
federal income tax law and interpretational authorities as of the date of this
Joint Proxy Statement/Prospectus, which are subject to change at any time.
The total number of shares of Common Stock that may be subject to options
issued pursuant to the Lakes Director Plan is 200,000. The number and the terms
of outstanding options are subject to automatic adjustment in the event of
reorganization, merger, consolidation, recapitalization, stock splits,
combination or exchange of shares, stock dividends or other similar events. The
Lakes Director Plan will have a ten-year term and will be administered by the
Lakes Board of Directors.
The Lakes Director Plan may be amended at any time, and from time to time,
by the Lakes Board as the Board shall deem advisable; provided, however, that no
amendment shall become effective without shareholder approval if such
shareholder approval is required by law, rule or regulation, and in no event
shall the Lakes Director Plan be amended more than once every six months, other
than to comport with changes in the Code, the Employee Retirement Income
Security Act or the rules thereunder. No amendment of the Lakes Director
248
<PAGE>
Plan shall materially affect any right of any participant with respect to any
option theretofore granted without such optionee's or participant's written
consent.
1998 NEW PLAN BENEFITS
The following table sets forth the benefits or amounts that will be received
by or allocated to each of the persons and groups set forth below under the
Lakes 1998 Director Stock Option Plan.
<TABLE>
<CAPTION>
LAKES 1998 DIRECTOR STOCK OPTION AND
PLAN
-------------------------------------
NUMBER OF UNITS
(OPTIONS TO
DOLLAR PURCHASE SHARES OF
NAME AND POSITION VALUE($)(1) COMMON STOCK)
- ------------------------------------------------------------------------ ---------------- -------------------
<S> <C> <C>
1. Non-Executive Director Group (2) -- 62,500
</TABLE>
- ------------------------
(1) There currently is no public market for the shares of Lakes Common Stock and
as such, there is no determinable market value for these shares.
(2) The only group of individuals eligible to receive option grants to purchase
shares of Lakes Common Stock pursuant to the Lakes Director Plan are the
non-employee directors of Lakes. There are, currently, expected to be five
(5) non-employee directors of Lakes.
PROPOSAL FIVE: RATIFICATION OF THE LAKES BOARD OF DIRECTORS
In connection with the Grand Distribution, Grand shareholders are being
asked to consider and vote upon the ratification of the election by Grand, as
the sole shareholder of Lakes, of eight directors of Lakes. Certain information
with respect to the Lakes Board and the Lakes directors is set forth in
"Management of Lakes-- Lakes Board of Directors" and "Certain Relationships and
Related Transactions--Interest of Certain Persons in the Transactions--Lakes
Interests."
Each Lakes director will be elected to the Lakes Board by Grand prior to the
Grand Distribution and will hold office as a director for the term indicated in
"Management of Lakes--Lakes Board of Directors."
The affirmative vote of the holders of the greater of (a) majority of the
outstanding shares of Grand Common Stock present and entitled to vote on the
election of directors of (b) a majority of the voting power of the minimum
number of shares entitled to vote that would constitute a quorum for the
transaction of business is required for the ratification of the election of the
Lakes Board of Directors. Proxies will be voted for or against the ratification
of Proposal Five in accordance with specifications marked thereon and will be
voted in favor of Proposal Five if no specification is made.
THE GRAND BOARD RECOMMENDS THAT GRAND SHAREHOLDERS VOTE FOR PROPOSAL FIVE
AND EACH OF THE OTHER GRAND PROPOSALS.
249
<PAGE>
SUBMISSION OF STOCKHOLDER PROPOSALS
If the Transactions are consummated, Park Place will convene its first
annual meeting of stockholders in 2000 and will publicly announce the date of
such meeting once it has been set. Under the rules of the SEC relating to when a
company must include a stockholder's proposal in its proxy statement,
stockholder proposals intended to be included in the Park Place 2000 Proxy
Statement must be received at Park Place's principal executive offices no later
than the 10th day following the date on which Park Place publicly announces the
date of such meeting. Additionally, under the provisions of the Park Place
By-laws relating to nominations of persons for election to the Park Place Board
and the proposal of business, stockholder nominations and proposals eligible to
be considered at the Park Place 2000 meeting must be received at Park Place's
principal executive offices no later than the 10th day following the date on
which Park Place publicly announces the date of such meeting.
If the Transactions are consummated, Lakes will convene an annual meeting of
shareholders currently expected to be held in May 2000. Stockholder proposals
intended to be included in the Proxy Statement for the 2000 Lakes Annual Meeting
must have been received at Lakes' principal executive offices no later than
November 27, 1999 in order to be considered for inclusion in the Lakes' 2000
Proxy Statement.
In the event the Transactions are not consummated, the only stockholder
proposals eligible to be considered for inclusion in the proxy materials for the
next annual meetings of Hilton and Grand under the aforementioned rules of the
SEC will be those which were duly submitted to the Secretary of Hilton or Grand,
as the case may be, by December 2, 1998 and November 27, 1998, respectively.
Additionally, in such event, the only stockholder nominations or proposals
eligible to be considered at such meeting under Hilton's By-laws will be those
which were duly submitted to the Secretary of Hilton by March 7, 1999.
LEGAL MATTERS
The validity of the shares of Park Place Common Stock to be issued in
connection with the Merger will be passed upon by Latham & Watkins, Los Angeles,
California.
Latham & Watkins, Los Angeles, California, counsel for Park Place, has
passed and will pass on certain federal income tax consequences of the Merger
for Park Place and the stockholders of Park Place, and Maslon Edelman Borman &
Brand, LLP, counsel for Grand, has passed and will pass on certain federal
income tax consequences of the Merger for Grand and the shareholders of Grand.
EXPERTS
The audited financial statements and schedules of Hilton Hotels Corporation
and Park Place Entertainment Corporation included and incorporated by reference
in this prospectus and elsewhere in the registration statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority as said firm as experts in giving said reports.
The audited financial statements of Grand Casinos, Inc., and Lakes Gaming,
Inc. included and incorporated by reference in this prospectus and elsewhere in
the registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
OTHER MATTERS
As of the date of this Joint Proxy Statement/Prospectus, the Hilton Board
and the Grand Board know of no matters that will be presented for consideration
at the Hilton Special Meeting or the Grand Special Meeting other than as
described in this Joint Proxy Statement/Prospectus. If any other matters shall
properly come before either stockholder meeting or any adjournments or
postponements thereof and be voted upon, the enclosed proxies will be deemed to
confer discretionary authority on the individuals named as proxies therein
250
<PAGE>
to vote the shares represented by such proxies as to any such matters. The
persons named as proxies intend to vote or not to vote in accordance with the
recommendation of the respective managements of Hilton and Grand.
WHERE YOU CAN FIND MORE INFORMATION
Hilton and Grand are subject to the Exchange Act and file annual, quarterly
and special reports, proxy statements and other information with the SEC. You
may read and copy any reports, statements or other information we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public
from commercial document retrieval services and at the web site maintained by
the SEC at "http://www.sec.gov." You can also access information regarding
Hilton and Grand at their respective web sites, "http://www.hilton.com" and
"http://www.grandcasinos.com." You may inspect information Hilton and Grand file
with the NYSE at the offices of the NYSE at 20 Broad Street, New York, New York
10005.
Park Place filed a Registration Statement on Form S-4 to register with the
SEC the Park Place Common Stock to be issued to stockholders of Grand in the
Merger. This Joint Proxy Statement/Prospectus is a part of that Registration
Statement and constitutes a prospectus of Park Place in addition to being a
proxy statement of Hilton and Grand for the Special Meetings. As allowed by SEC
rules, this Joint Proxy Statement/Prospectus does not contain all the
information you can find in the Registration Statement or the exhibits to the
Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" information into this Joint
Proxy Statement/ Prospectus, which means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
Joint Proxy Statement/Prospectus, except for any information superseded by
information in this Joint Proxy Statement/ Prospectus. This Joint Proxy
Statement/Prospectus incorporates by reference the documents set forth below
that we have previously filed with the SEC. These documents contain important
information about our companies and their finances.
<TABLE>
<S> <C>
HILTON SEC FILINGS (FILE NO. 1-3427) PERIOD
Annual Report on Form 10-K, as amended Year ended December 31, 1997
Quarterly Reports on Form 10-Q Quarters ended March 30 and June 30, 1998
Current Reports on Form 8-K Filed on March 13, March 24, April 2, April
23, July 1, July 10, July 22, August 21,
September 14, and October 21, 1998
GRAND SEC FILINGS (FILE NO. 0-19565) PERIOD
Annual Report on Form 10-K, as amended Year ended December 28, 1997
Quarterly Reports on Form 10-Q Quarters ended March 29 and June 28, 1998
Current Reports on Form 8-K Filed on July 2, July 23, and October 21,
1998
</TABLE>
We are also incorporating by reference additional documents that we may file
with the SEC between the date of this Joint Proxy Statement/Prospectus and the
dates of the Special Meetings.
Hilton has supplied all information contained or incorporated by reference
in this Joint Proxy Statement/ Prospectus relating to Hilton and Park Place and
Grand has supplied all such information relating to Grand and Lakes. If you are
a holder of Hilton or Grand Common Stock, we may have sent you some of the
documents incorporated by reference, but you can obtain any of them through us
or the SEC. Documents incorporated by reference are available from us without
charge, excluding all exhibits unless we have
251
<PAGE>
specifically incorporated by reference an exhibit in this Joint Proxy
Statement/Prospectus. Holders of Hilton and Grand Common Stock may obtain
documents incorporated by reference in this Joint Proxy Statement/ Prospectus by
requesting them in writing or by telephone from the appropriate party at the
following addresses:
<TABLE>
<S> <C>
Hilton Hotels Corporation Grand Casinos, Inc.
Attention: Secretary Attention: Secretary
9336 Civic Center Drive 130 Cheshire Lane
Beverly Hills, California 90210 Minnetonka, Minnesota 55305
Telephone: (310) 278-4321 Telephone: (612) 449-9092
Telecopy: (310) 205-7694 Telecopy: (612) 449-9353
</TABLE>
If you would like to request documents from us, please do so by November 17,
1998 to receive them before the Special Meetings.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS TO VOTE ON THE TRANSACTIONS.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT
FROM WHAT IS CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS JOINT
PROXY STATEMENT/PROSPECTUS IS DATED OCTOBER 23, 1998. YOU SHOULD NOT ASSUME THAT
THE INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE
AS OF ANY DATE OTHER THAN OCTOBER 23, 1998, AND NEITHER THE MAILING OF THE JOINT
PROXY STATEMENT/PROSPECTUS TO HOLDERS OF HILTON COMMON STOCK OR GRAND COMMON
STOCK NOR THE ISSUANCE OF PARK PLACE COMMON STOCK OR LAKES COMMON STOCK IN THE
TRANSACTIONS SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
252
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PARK PLACE ENTERTAINMENT CORPORATION
Report of Independent Public Accountants.............................. F-2
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995................................................. F-3
Consolidated Statements of Income for the Six Months Ended June 30,
1998 and 1997 (unaudited)........................................... F-4
Consolidated Balance Sheets as of June 30, 1998 (unaudited), December
31, 1997 and 1996................................................... F-5
Consolidated Statements of Cash Flow for the Years Ended December 31,
1997, 1996 and 1995................................................. F-6
Consolidated Statements of Cash Flow for the Six Months Ended June 30,
1998 and 1997 (unaudited)........................................... F-7
Notes to Consolidated Financial Statements............................ F-8
LAKES GAMING, INC.
Report of Independent Public Accountants.............................. F-18
Combined Statements of Earnings for the Six Months ended June 28, 1998
(unaudited) and June 29, 1997 (unaudited) and for the Years Ended
1997, 1996 and 1995................................................. F-19
Combined Balance Sheets as of June 28, 1998 (unaudited), December 28,
1997 and December 29, 1996.......................................... F-20
Combined Statements of Division Equity for the Six Months Ended June
28, 1998 (unaudited) and for the Years Ended 1997, 1996 and 1995.... F-21
Combined Statements of Cash Flows for the Six Months Ended June 28,
1998 (unaudited) and June 29, 1997 (unaudited) and for the Years
Ended 1997, 1996 and 1995........................................... F-22
Notes to Combined Financial Statements................................ F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Hilton Hotels Corporation:
We have audited the accompanying consolidated balance sheets of Park Place
Entertainment Corporation (Park Place) and subsidiaries (presented on the basis
as described in Notes to Consolidated Financial Statements) as of December 31,
1997 and 1996, and the related consolidated statements of income and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of Park Place's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statement referred to above present fairly, in
all material respects, the financial position of Park Place and subsidiaries as
of December 31, 1997 and 1996 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
August 7, 1998
F-2
<PAGE>
PARK PLACE ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenue
Casino............................................................................. $ 1,832 $ 857 $ 791
Rooms.............................................................................. 325 261 238
Food and beverage.................................................................. 267 196 170
Other products and services........................................................ 148 101 85
--------- --------- ---------
2,572 1,415 1,284
--------- --------- ---------
Expenses
Casino............................................................................. 1,000 466 400
Rooms.............................................................................. 115 88 83
Food and beverage.................................................................. 231 167 150
Other expenses..................................................................... 1,010 593 478
Corporate, net..................................................................... 15 9 8
--------- --------- ---------
2,371 1,323 1,119
--------- --------- ---------
Operating Income..................................................................... 201 92 165
Interest and dividend income....................................................... 25 12 7
Interest expense................................................................... (82) (36) (39)
Interest expense, net, from equity investments..................................... (10) (5) (2)
--------- --------- ---------
Income Before Income Taxes and Minority Interest..................................... 134 63 131
Provision for income taxes......................................................... (63) (27) (46)
Minority interest, net............................................................. (4) -- --
--------- --------- ---------
Income Before Extraordinary Item..................................................... 67 36 85
Extraordinary loss on extinguishment of debt
net of tax benefit of $52.......................................................... -- (74) --
--------- --------- ---------
Net Income (Loss).................................................................... $ 67 $ (38) $ 85
--------- --------- ---------
--------- --------- ---------
Basic Earnings Per Share--Pro Forma
Income before extraordinary item................................................... $ .25 $ .18 $ .44
Extraordinary loss................................................................. -- (.37) --
--------- --------- ---------
Net income (loss) per share........................................................ $ .25 (.19) $ .44
--------- --------- ---------
--------- --------- ---------
Diluted Earnings Per Share--Pro Forma
Income before extraordinary item................................................... $ .25 $ .18 $ .44
Extraordinary loss................................................................. -- (.37) --
--------- --------- ---------
Net income (loss) per share........................................................ $ .25 $ (.19) $ .44
--------- --------- ---------
--------- --------- ---------
Weighted Average Common and Equivalent Shares--Pro Forma
Basic.............................................................................. 263 198 193
--------- --------- ---------
--------- --------- ---------
Diluted............................................................................ 266 199 195
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
PARK PLACE ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Revenue
Casino....................................................................................... $ 975 $ 898
Rooms........................................................................................ 165 165
Food and beverage............................................................................ 138 129
Other products and services.................................................................. 77 76
--------- ---------
1,355 1,268
--------- ---------
Expenses
Casino....................................................................................... 521 484
Rooms........................................................................................ 57 57
Food and beverage............................................................................ 121 111
Other expenses............................................................................... 465 452
Corporate, net............................................................................... 4 11
--------- ---------
1,168 1,115
--------- ---------
Operating Income............................................................................... 187 153
Interest and dividend income................................................................. 14 10
Interest expense............................................................................. (43) (46)
Interest expense, net, from equity investments............................................... (6) (5)
--------- ---------
Income Before Income Taxes and Minority Interest............................................... 152 112
Provision for income taxes................................................................... (70) (46)
Minority interest, net....................................................................... (2) (3)
--------- ---------
Net Income..................................................................................... $ 80 $ 63
--------- ---------
--------- ---------
Basic Earnings Per Share--Pro Forma............................................................ $ .31 $ .24
--------- ---------
--------- ---------
Diluted Earnings Per Share--Pro Forma.......................................................... $ .30 $ .24
--------- ---------
--------- ---------
Weighted Average Common and Equivalent Shares--Pro Forma
Basic........................................................................................ 261 263
--------- ---------
--------- ---------
Diluted...................................................................................... 264 265
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
PARK PLACE ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Assets
Cash and equivalents.................. $ 148 $ 224 $ 252
Temporary investments................. 2 40 8
Accounts receivable, net.............. 133 159 152
Other current assets.................. 111 86 149
----------- ------ ------
Total current assets................ 394 509 561
Investments........................... 187 176 150
Property and equipment, net........... 3,875 3,621 3,405
Goodwill.............................. 1,317 1,303 1,295
Other assets.......................... 61 80 36
----------- ------ ------
Total investments, property and
other assets...................... 5,440 5,180 4,886
----------- ------ ------
Total Assets.......................... $5,834 $5,689 $5,447
----------- ------ ------
----------- ------ ------
Liabilities and Division Equity
Accounts payable and accrued
expenses............................ $ 328 $ 357 $ 371
Current maturities of long-term
debt................................ 34 34 53
Income taxes payable.................. 4 2 --
----------- ------ ------
Total current liabilities........... 366 393 424
Long-term debt........................ 1,557 1,272 1,225
Deferred income taxes and other
liabilities......................... 618 643 641
Division equity....................... 3,293 3,381 3,157
----------- ------ ------
Total Liabilities and Division
Equity.............................. $5,834 $5,689 $5,447
----------- ------ ------
----------- ------ ------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
PARK PLACE ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Net income (loss)..................................................................... $ 67 $ (38) $ 85
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary loss on extinguishment of debt........................................ -- 74 --
Depreciation and amortization....................................................... 207 111 78
Non-cash items...................................................................... 96 1 --
Amortization of loan costs.......................................................... 2 -- --
Change in working capital components................................................ 38 (32) (10)
Change in deferred income taxes..................................................... 39 (11) 6
Change in other liabilities......................................................... (36) 30 2
Other............................................................................... (37) 6 6
--------- --------- ---------
Net cash provided by operating activities............................................. 376 141 167
--------- --------- ---------
Investing Activities
Capital expenditures.................................................................. (438) (193) (128)
Additional investments................................................................ (57) (51) (45)
Payments on notes and other........................................................... (14) 37 12
Acquisitions, net of cash acquired.................................................... (70) 144 --
--------- --------- ---------
Net cash used in investing activities................................................. (579) (63) (161)
--------- --------- ---------
Financing Activities
Payments on debt...................................................................... (16) -- --
Advances from Parent.................................................................. 191 110 14
--------- --------- ---------
Net cash provided by financing activities............................................. 175 110 14
--------- --------- ---------
(Decrease) Increase in Cash and Equivalents............................................. (28) 188 20
Cash and Equivalents at Beginning of Year............................................... 252 64 44
--------- --------- ---------
Cash and Equivalents at End of Period................................................... $ 224 $ 252 $ 64
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
PARK PLACE ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Operating Activities
Net income..................................................................................... $ 80 $ 63
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................................ 107 95
Amortization of loan costs................................................................... 1 --
Change in working capital components......................................................... (27) 38
Change in deferred income taxes.............................................................. (9) 11
Change in other liabilities.................................................................. (23) (72)
Other........................................................................................ 15 (15)
--------- ---------
Net cash provided by operating activities...................................................... 144 120
--------- ---------
Investing Activities
Capital expenditures........................................................................... (311) (243)
Additional investments......................................................................... (2) (40)
Payments on notes and other.................................................................... 10 (18)
Acquisitions, net of cash acquired............................................................. (58) --
--------- ---------
Net cash used in investing activities.......................................................... (361) (301)
--------- ---------
Financing Activities
Payments on debt............................................................................... (6) (4)
Advances from Parent........................................................................... 147 111
--------- ---------
Net cash provided by financing activities...................................................... 141 107
--------- ---------
Decrease in Cash and Equivalents................................................................. (76) (74)
Cash and Equivalents at Beginning of Year........................................................ 224 252
--------- ---------
Cash and Equivalents at End of Period............................................................ $ 148 $ 178
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
PARK PLACE ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
DECEMBER 31, 1997
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
On June 30, 1998, Hilton Hotels Corporation (Parent) announced that it will
separate its gaming and lodging operations (the Spin-Off), thereby creating a
new publicly held gaming company which will be renamed Park Place Entertainment
Corporation (Park Place). As part of the Spin-Off, Parent will contribute to
Park Place, at book value, substantially all of its gaming assets and
operations. During the period covered by these financial statements, these
businesses were under common control operating as a division of Parent. These
financial statements have been prepared from Parent's historical accounting
records and present substantially all of the operations of businesses that will
be owned and operated by Park Place as if Park Place had been a separate entity
for all periods presented. The separation will be accomplished through a tax
free distribution (the Hilton Distribution) to Parent shareholders of the shares
of Park Place. Following completion of the Hilton Distribution, the Company will
merge with the Mississippi gaming operations of Grand Casinos, Inc. (Grand) in a
transaction comprised entirely of Park Place stock.
Both transactions are subject to shareholder and regulatory approvals and
are expected to be completed by year-end 1998. Parent plans to obtain a ruling
from the Internal Revenue Service that the distribution will not be taxable to
Park Place or its shareholders. The Boards of Directors of both Parent and Grand
have approved the transactions.
In anticipation of the Spin-Off, a pro-rata portion of Parent's historical
public and corporate bank debt balance and related interest expense has been
allocated to Park Place for all periods presented. The amounts of these balances
allocated to Park Place were based on the estimate that approximately 50 percent
of Parent's public and corporate bank debt will be assumed by Park Place at the
time of the Hilton Distribution.
The Spin-Off will result in the division of certain of Parent's existing
corporate support functions between the two resulting entities. Corporate
expense included in Park Place's financial results represents an allocation of
Parent's consolidated corporate expense to the entities comprising Park Place.
The allocation of corporate expense is based on a specific review to identify
costs incurred for the benefit of the lodging business, the gaming business or
both, and in management's judgment results in a reasonable allocation of such
costs. Incremental costs, estimated to be approximately $10 million annually,
will be incurred by Park Place to support its operations as a stand-alone entity
after the Hilton Distribution.
Park Place is primarily engaged in the ownership and management of casinos
and casino hotel properties. Park Place operates in select markets throughout
the world, predominately in the United States.
F-8
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Park Place,
its majority owned and controlled subsidiaries and the gaming division
contributed as described above. Park Place also consolidates the operating
results and working capital of affiliates operated under long-term management
agreements, including such affiliates in which Park Place has investments of 50%
or less. These agreements effectively convey to Park Place the right to use the
properties in exchange for payments to the property owners, which are based
primarily on the properties' profitability. The consolidated financial
statements include the following amounts related to managed casinos:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenue......................................... $ 235 $ 246 $ 459 $ 476 $ 364
Operating expenses, including remittances to
owners........................................ 211 228 427 457 348
Current assets and current liabilities(1)....... 49 59 84
</TABLE>
- ------------------------
(1) Including cash and equivalents of $16 million, $25 million and $20 million,
respectively.
All material intercompany transactions are eliminated and net earnings are
reduced by the portion of the earnings of affiliates applicable to other
ownership interests. There are no significant restrictions on the transfer of
funds from Park Place's wholly owned subsidiaries to Park Place.
On November 20, 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus in EITF 97-2 "Application of FASB
Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
EITF 97-2 addresses the circumstances in which a management entity may include
the revenues and expenses of a managed entity in its financial statements.
Upon adoption of EITF 97-2, which is expected to be in the fourth quarter of
1998, Park Place will no longer include in its financial statements the
revenues, operating expenses and working capital of its managed properties.
Application of EITF 97-2 will have no impact on reported operating income, net
income, earnings per share or stockholders' equity.
CASH AND EQUIVALENTS
Cash and equivalents include investments with initial maturities of three
months or less.
CASINO REVENUE AND PROMOTIONAL ALLOWANCES
Casino revenue is the aggregate of gaming wins and losses. The revenue
components presented in the consolidated financial statements and the notes
thereto exclude the retail value of rooms, food and beverage provided to
customers on a complimentary basis. The estimated cost of providing these
F-9
<PAGE>
promotional allowances, primarily classified as casino expenses through
interdepartmental allocations, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Rooms................................................................... $ 33 $ 14 $ 11
Food and beverage....................................................... 119 40 37
--------- --- ---
Total cost of promotional allowances.................................... $ 152 $ 54 $ 48
--------- --- ---
--------- --- ---
</TABLE>
CURRENCY TRANSLATION
Gains and losses from foreign currency transactions and translation of
balance sheets in highly inflationary economies are included in earnings.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Interest incurred during
construction of facilities is capitalized and amortized over the life of the
asset. Costs of improvements are capitalized. Costs of normal repairs and
maintenance are charged to expense as incurred. Upon the sale or retirement of
property and equipment, the cost and related accumulated depreciation are
removed from the respective accounts, and the resulting gain or loss, if any, is
included in income.
Depreciation is provided on a straight-line basis over the estimated useful
life of the assets. Leasehold improvements are amortized over the shorter of the
asset life or lease term. The service lives of assets are generally 40 years for
buildings, 30 years for riverboats and eight years for building improvements and
furniture and equipment.
The carrying value of Park Place's assets are reviewed when events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If it is determined that an impairment loss has occurred based
on expected future cash flows, then a loss is recognized in the income statement
using a fair-value based model.
GOODWILL
The excess of purchase price over the fair value of net assets of businesses
acquired (goodwill) is amortized using the straight-line method over 40 years.
Park Place periodically evaluates the carrying value of goodwill and measures
the amount of impairment, if any, by assessing current and future levels of
income and cash flows as well as other factors.
PRE-OPENING COSTS
Costs associated with the opening of new properties or major additions to
properties are deferred and amortized over the shorter of the period benefited
or one year.
UNAMORTIZED LOAN COSTS
Debt discount and issuance costs incurred in connection with the placement
of long-term debt are capitalized and amortized to interest expense, principally
on the bonds outstanding method.
SELF-INSURANCE
Park Place is self-insured for various levels of general liability, workers'
compensation and employee medical and life insurance coverage. Insurance
reserves include the present values of projected settlements for claims.
F-10
<PAGE>
PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share (EPS) is calculated for all periods presented
based on the expected Hilton Distribution. Basic EPS is calculated by dividing
net income by the weighted average number of common shares outstanding. Diluted
EPS reflects the effect of assumed stock option exercises.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
ACCOUNTING CHANGES
In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-Up Activities." This SOP requires that all nongovernmental
entities expense costs of start-up activities (pre-opening, pre-operating and
organizational costs) as those costs are incurred and requires the write-off of
any unamoritized balances upon implementation. SOP 98-5 is effective for
financial statements issued for periods beginning after December 15, 1998.
Adoption of the SOP is not expected to have a material impact on 1999 results of
operations.
RECLASSIFICATIONS
The consolidated financial statements for prior years reflect certain
reclassifications to conform with classifications adopted in 1997. These
reclassifications have no effect on net income.
INTERIM PERIOD FINANCIAL STATEMENTS
The consolidated interim financial statements have been prepared without
audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principals have been condensed or omitted. Park Place believes the disclosures
made are adequate to make the interim financial information presented not
misleading.
In the opinion of management, the accompanying consolidated interim
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of
Park Place as of June 30, 1998, and the results of operations and cash flows for
the six months ended June 30, 1998 and June 30, 1997.
ACQUISITIONS
In December 18, 1996, the Parent completed the merger of Bally Entertainment
Corporation (Bally) with and into the Parent pursuant to an agreement dated June
6, 1996. Aggregate consideration consisted of approximately 53 million shares of
the Parent's common stock and approximately 15 million shares of the Parent's
newly authorized Preferred Redeemable Increased Dividend Equity Securities, 8%
PRIDES, Convertible Preferred Stock (PRIDES) for a combined equity value of $1.9
billion and assumption of Bally subsidiary debt totaling $1.2 billion.
The acquisition has been accounted for using the purchase method of
accounting, and accordingly, the acquisition cost of $3.1 billion has been
allocated to the assets acquired and liabilities assumed based on estimates of
their fair value. A total of $1.3 billion, representing the excess of
acquisition cost over the fair value of Bally's tangible net assets, has been
allocated to goodwill and is being amortized over 40 years.
Park Place's consolidated results of operations have incorporated Bally's
activity from the effective date of the merger. The following unaudited pro
forma information has been prepared assuming that this acquisition had taken
place at the beginning of the respective periods. This pro forma information
does not
F-11
<PAGE>
purport to be indicative of future results or what would have occurred had the
acquisition been made as of those dates.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Revenue.................................................................... $ 2,516 $ 2,294
Operating income........................................................... 288 360
Income before extraordinary item........................................... 123 190
Net income................................................................. 49 190
</TABLE>
EXTRAORDINARY ITEM
In December 1996, the Parent completed cash tender offers and consent
solicitations for substantially all of the outstanding notes of certain wholly
owned subsidiaries including the 9 1/4% Bally's Park Place Funding, Inc. First
Mortgage Notes due 2004; 10 5/8% GNF, Corp. First Mortgage Notes due 2003 and
Bally's Casino Holdings, Inc. Senior Discount Notes. The remaining untendered
notes were defeased. The Parent also purchased 99.1% of the outstanding 10 3/8%
First Mortgage Notes due 2003 of Bally Grand, Inc. Cash consideration for the
repurchase and defeasance, including premiums, totaled $1.2 billion, which
resulted in an after tax extraordinary loss of $74 million, net of a tax benefit
of $52 million.
ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Casino accounts receivable.................................................... $ 129 $ 106
Less allowance for doubtful accounts.......................................... 24 30
--------- ---------
105 76
Other accounts receivable..................................................... 54 76
--------- ---------
$ 159 $ 152
--------- ---------
--------- ---------
</TABLE>
The allowance provided for estimated uncollectible casino receivables, net
of recoveries, is included in casino expenses in the amount of $29 million, $25
million and $19 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
INVESTMENTS
Investments at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Equity investments
Hotel casinos (three in 1997 and four in 1996).............................. $ 76 $ 86
Notes receivable............................................................ 94 55
Other......................................................................... 6 9
--------- ---------
$ 176 $ 150
--------- ---------
--------- ---------
</TABLE>
F-12
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Land....................................................................... $ 597 $ 549
Buildings and leasehold improvements....................................... 2,616 2,358
Riverboats................................................................. 53 128
Furniture and equipment.................................................... 558 550
Construction in progress................................................... 178 101
--------- ---------
4,002 3,686
Less accumulated depreciation.............................................. 381 281
--------- ---------
$ 3,621 $ 3,405
--------- ---------
--------- ---------
</TABLE>
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Accounts and notes payable................................................. $ 77 $ 83
Accrued salaries and wages................................................. 47 44
Remittances to owners...................................................... -- 28
Other accrued expenses..................................................... 233 216
--------- ---------
$ 357 $ 371
--------- ---------
--------- ---------
</TABLE>
LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Debt allocated by Parent................................................... $ 1,284 $ 1,241
Other...................................................................... 22 37
--------- ---------
1,306 1,278
Less current maturities.................................................... 34 53
--------- ---------
Net long-term debt......................................................... $ 1,272 $ 1,225
--------- ---------
--------- ---------
</TABLE>
Interest paid, net of amounts capitalized, was $81 million, $33 million and
$41 million in 1997, 1996 and 1995, respectively. Capitalized interest amounted
to $9 million, $6 million and $2 million, respectively.
Debt maturities during the next five years are as follows:
<TABLE>
<CAPTION>
(IN
MILLIONS)
<S> <C>
1998............................................................................. $ 34
1999............................................................................. 175
2000............................................................................. 5
2001............................................................................. 5
2002............................................................................. 283
</TABLE>
F-13
<PAGE>
A pro-rata portion of Parent's historical corporate debt balance and
interest expense has been allocated to Park Place and included in these
consolidated financial statements for all periods presented based on an estimate
of Parent's corporate debt that will be assumed by Park Place at the time of the
Hilton Distribution. The amounts of Parent's corporate interest expense
allocated to Park Place for fiscal 1997, 1996, 1995 were $78 million, $35
million and $39 million, respectively.
FINANCIAL INSTRUMENTS
CASH EQUIVALENTS, TEMPORARY INVESTMENTS AND LONG-TERM MARKETABLE SECURITIES
The fair value of cash equivalents and temporary investments is estimated
based on the quoted market price of the investments.
LONG-TERM DEBT
The estimated fair value of long-term debt is based on the quoted market
prices for the same or similar issues or on the current rates offered to the
Parent for debt of the same remaining maturities.
The estimated fair values of Park Place's financial instruments at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- --------- ----------- ---------
(IN MILLIONS)
Cash and equivalents and temporary investments....... $ 264 $ 264 $ 260 $ 260
Long-term debt (including current maturities)........ 1,306 1,353 1,278 1,291
</TABLE>
INCOME TAXES
The provisions for income taxes for the three years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Current
Federal............................... $ 23 $42 $50
State, foreign and local.............. 1 4 2
---- ---- ----
24 46 52
Deferred................................ 39 (19) (6)
---- ---- ----
$ 63 $27 $46
---- ---- ----
---- ---- ----
</TABLE>
No income taxes were paid by Park Place as these payments were the
responsibility of the Parent.
F-14
<PAGE>
The income tax effects of temporary differences between financial and income
tax reporting that gave rise to deferred income tax assets and liabilities at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets
Accrued expenses........................................................... $ 21 $ 17
Bad debt reserves.......................................................... 6 13
Investments................................................................ 16 --
Benefit plans.............................................................. 2 1
Net operating losses....................................................... 8 29
AMT credits................................................................ 12 10
Other asset reserves....................................................... 30 37
Foreign tax credit carryovers (expire beginning in 2000)................... 11 5
Equity Investments......................................................... 30 27
--------- ---------
136 139
Valuation allowance.......................................................... (35) (12)
--------- ---------
101 127
--------- ---------
Deferred tax liabilities
Fixed assets, primarily depreciation....................................... (621) (600)
Unrealized losses.......................................................... (15) --
Other...................................................................... (5) (28)
--------- ---------
(641) (628)
--------- ---------
Net deferred tax liability................................................... $ (540) $ (501)
--------- ---------
--------- ---------
</TABLE>
Reconciliation of the Federal income tax rate to Park Place's effective tax
rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate................. 35.0% 35.0% 35.0%
Increase (reduction) in taxes:
State and local income taxes, net of
Federal tax benefits................ 1.0 .5 --
Foreign taxes, net.................... .6 3.0 (.4)
Goodwill amortization................. 8.6 -- --
Other................................. 1.8 4.4 .5
---- ---- ----
Effective tax rate...................... 47.0% 42.9% 35.1%
---- ---- ----
---- ---- ----
</TABLE>
As part of the Spin-Off, Parent will enter into a tax sharing agreement
which reflects each party's rights and obligations with respect to deficiencies
and refunds, if any, of Federal, state or other taxes relating to the business
for Park Place and Parent prior to the Spin-Off. The tax sharing agreement also
will express each party's intention with respect to certain tax attributes of
Park Place after the Spin-Off.
Park Place has been included in the consolidated Federal income tax return
of Parent. The income tax provision reflect the portion of Parent's historical
income tax provision attributable to the operations of Park Place. Management
believes the income tax provision, as reflected, is comparable to what the
income tax provision would have been if Park Place had filed a separate return
during the periods presented.
F-15
<PAGE>
DIVISION EQUITY
Changes in division equity consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
SIX MONTHS ENDED --------------------
JUNE 30, 1998 1997 1996 1995
---------------- ------ ------ ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Beginning Balance.................. $3,381 $3,157 $ 592 $510
Net income (loss).................. 80 67 (38) 85
Intercompany activity with
Parent........................... (168) 157 2,603 (3)
------ ------ ------ ----
Ending balance..................... $3,293 $3,381 $3,157 $592
------ ------ ------ ----
------ ------ ------ ----
</TABLE>
STOCK OPTION PLANS
Parent has stock-based compensation plans (SBCP) under which options may be
granted to directors, salaried officers and other key employees of Park Place to
purchase common stock of Parent at not less than the fair market value at the
date of grant. Two of Parent's SBCP's permit the granting of Stock Appreciation
Rights (SARs). No SARs have been granted as of December 31, 1997.
Park Place applied APB Opinion 25 and related interpretations in accounting
for its stock-based compensation plans. Accordingly, compensation expense
recognized was different than what would have otherwise been recognized under
the fair value based method defined in SFAS No. 123, "Accounting for Stock-Based
Compensation." Had compensation cost for Park Place's stock-based compensation
plans been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of SFAS No. 123, Park Place's net
income (loss) would have been reduced from $67 million in 1997 to $61 million
and from $(38) million in 1996 to $(41) million.
The fair value of each option grant is estimated on the date of grant using
Black-Scholes option-pricing model with the following weighted average
assumption used for grants in 1997, 1996 and 1995, respectively: dividend yield
of one percent for each of the three years; expected volatility of 32, 27 and 18
percent; risk-free interest rates of 6.49, 6.33 and 7.58 percent and expected
lives of 6 years for each of the three years.
Effective January 1, 1997, Parent adopted the 1997 Employee Stock Purchase
Plan by which the Parent is authorized to issue up to two million shares of
common stock to its full-time employees. Under the terms of the Plan, employees
can elect to have a percentage of the earnings withheld to purchase Parent's
common stock.
Under provisions of Nevada, New Jersey and other gaming laws, and Parent's
restated certificate of incorporation as amended, certain securities of Parent
are subject to restrictions on ownership which may be imposed by specified
governmental authorities. Such restrictions may require the holder to dispose of
the securities or, if the holder refuses to make such disposition, Parent may be
obligated to repurchase the securities.
EMPLOYEE BENEFIT PLANS
Parent has a noncontributory retirement plan (Basic Plan) in which
substantially all regular full-time, nonunion employees of Park Place may
participate. Parent also has plans covering qualifying employees and non-officer
directors (Supplemental Plans). Benefits for all plans are based upon years of
service and compensation, as defined.
Parent's funding policy is to contribute not less than the minimum amount
required under Federal law but not more than the maximum deductible for Federal
income tax purposes. After December 31, 1996, employees will not accrue
additional benefits for future service under either the Basic or Supplemental
Plans. Plan assets will be used to pay benefits due employees for service
through that date.
F-16
<PAGE>
Included in plan assets at fair value are equity securities of the Parent of
$35 million and $36 million at December 31, 1997 and 1996, respectively. The
discount rate used in determining the actuarial present values of the projected
benefit obligations were seven percent in 1997 and 1996, with the rate of
increase in future compensation projected at five percent in 1996. The expected
long-term rate of return on assets is eight percent.
A significant number of Park Place's employees are covered by union
sponsored, collectively bargained multi-employer pension plans. Park Place
contributed and charged to expense $12 million, $7 million and $6 million in
1997, 1996 and 1995, respectively, for such plans. Information from the plans'
administrators is not sufficient to permit Park Place to determine its share, if
any, of unfunded vested benefits.
The Parent also has an employee investment plan whereby the Parent
contributes certain percentages of employee contributions. The cost of the plan
is not significant.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Park Place provides life insurance benefits to certain retired employees.
Under terms of the plan covering such life insurance benefits, Park Place
reserves the right to change, modify or discontinue these benefits. Park Place
does not provide postretirement health care benefits to its employees. The cost
of these benefits is not significant.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The Company has adopted SFAS No. 130 beginning
January 1, 1998. The statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements or in the footnotes to the interim financial
statements. Comprehensive income for the six months ended June 30, 1998 and 1997
is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
----------
<S> <C> <C>
1998 1997
---- ----
Net income.............................. $ 80 $63
Change in unrealized holding gains on
securities............................ (4) 1
---- ----
Comprehensive income.................... $ 76 $64
---- ----
---- ----
</TABLE>
LEASES
Minimum lease commitments under noncancelable operating leases approximate
$5 million annually through 2002 with an aggregate commitment of $41 million
through 2033.
COMMITMENTS AND CONTINGENT LIABILITIES
At December 31, 1997, Park Place had contractual commitments for major
expansion and rehabilitation projects of approximately $420 million.
Various lawsuits are pending against Park Place. In management's opinion,
disposition of these lawsuits is not expected to have a material effect on Park
Place's financial position or results of operations.
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Grand Casinos, Inc.:
We have audited the accompanying combined balance sheets of Lakes (a
division of Grand
Casinos, Inc., as defined in Note 1) as of December 28, 1997 and December 29,
1996, and the related combined statements of earnings, division equity and cash
flows for each of the three years in the period ended December 28, 1997. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Lakes as of December
28, 1997 and December 29, 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 28, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
July 31, 1998
F-18
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------- YEAR ENDED
JUNE 28, JUNE 29, -------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $ 42,748 $ 38,868 $ 78,515 $ 77,273 $ 69,172
------------ ------------ ------------- ------------- -------------
Costs and Expenses:
Selling, general, and administrative............ 5,988 2,051 7,916 16,258 8,693
Depreciation and amortization................... 649 675 890 1,343 2,864
------------ ------------ ------------- ------------- -------------
Total costs and expenses.................... 6,637 2,726 8,806 17,601 11,557
------------ ------------ ------------- ------------- -------------
Earnings from operations.................... 36,111 36,142 69,709 59,672 57,615
------------ ------------ ------------- ------------- -------------
Other Income (Expense):
Interest income................................. 2,600 2,618 5,940 5,862 13,616
Interest expense................................ (49) (49) (98) (98) (10,216)
Stratosphere write-down......................... -- -- -- (160,923) --
Gain on sale of securities...................... -- -- -- -- 3,866
Other........................................... 3 (193) (825) 312 1,135
------------ ------------ ------------- ------------- -------------
Total other income (expense), net........... 2,554 2,376 5,017 (154,847) 8,401
------------ ------------ ------------- ------------- -------------
Earnings (Loss) Before Income Taxes and Minority
Interest........................................ 38,665 38,518 74,726 (95,175) 66,016
Provision for Income Taxes........................ 14,643 15,418 29,523 13,562 27,410
------------ ------------ ------------- ------------- -------------
Earnings (Loss) Before Minority Interest.......... 24,022 23,100 45,203 (108,737) 38,606
Minority Interest................................. -- -- -- -- 2,594
------------ ------------ ------------- ------------- -------------
Net earnings (loss)......................... $ 24,022 $ 23,100 $ 45,203 $ (108,737) $ 41,200
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
Earnings (Loss) per share:
Basic........................................... $ 2.28 $ 2.21 $ 4.32 $ (10.46) $ 4.81
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
Diluted......................................... $ 2.22 $ 2.17 $ 4.20 $ (10.46) $ 4.65
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
Weighted average share outstanding.............. 10,525 10,465 10,475 10,395 8,561
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
Weighted average common and diluted shares
outstanding................................... 10,807 10,652 10,759 10,395 8,869
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
</TABLE>
See accompanying notes to combined financial statements.
F-19
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
JUNE 28, 1998 1997 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 33,112 $ 33,208 $ 33,852
Accounts receivable............................. 9,615 6,425 7,996
Income taxes receivable......................... -- 14,785 --
Current installments of notes receivable........ 7,280 6,654 6,202
Deferred income taxes........................... 4,919 4,988 1,567
Other current assets............................ 623 551 594
------------- ------------- -------------
Total current assets........................ 55,549 66,611 50,211
NOTES RECEIVABLE, less current installments....... 25,452 26,477 30,157
LAND HELD FOR DEVELOPMENT......................... 22,028 15,418 2,265
OTHER ASSETS:
Cash and cash equivalents--restricted........... 5,242 1,225 1,225
Securities available for sale................... 7,140 4,842 11,273
Property and equipment, net..................... 3,065 3,071 3,451
Investments in unconsolidated affiliates........ 7,936 8,180 8,824
Casino development costs........................ 3,556 4,144 6,009
Other long-term assets.......................... 2,825 2,125 304
------------- ------------- -------------
Total other assets.......................... 29,764 23,587 31,086
------------- ------------- -------------
Total assets................................ $ 132,793 $ 132,093 $ 113,719
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND DIVISION EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ -- $ 77 $ 32
Current installments of long-term debt.......... 7 13 12
Litigation and claims accrual................... 8,839 8,736 7,798
Income taxes payable............................ 2,000 2,000 402
Other accrued expenses.......................... 85 103 4
------------- ------------- -------------
Total current liabilities................... 10,931 10,929 8,248
------------- ------------- -------------
LONG-TERM DEBT, less current installments......... 975 975 987
DEFERRED INCOME TAXES............................. 1,498 1,391 900
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 6, 7
and 8)
DIVISION EQUITY:
Division equity................................. 120,937 121,745 102,224
Net unrealized gains (losses) on securities
available for sale............................ (1,548) (2,947) 1,360
------------- ------------- -------------
Total division equity....................... 119,389 118,798 103,584
------------- ------------- -------------
Total liabilities and division equity....... $ 132,793 $ 132,093 $ 113,719
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to combined financial statements.
F-20
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF DIVISION EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, DECEMBER 29, 1996, DECEMBER 28, 1997 AND
THE SIX MONTHS ENDED JUNE 28, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET
UNREALIZED
GAINS
(LOSSES) ON
SECURITIES TOTAL
DIVISION AVAILABLE FOR DIVISION
EQUITY SALE EQUITY
------------ ------------- -------------
<S> <C> <C> <C>
BALANCE, January 1, 1995.......................... $ 141,597 $ -- $ 141,597
Distribution to Grand Casinos, Inc.............. 42,880 -- 42,880
Unrealized gain on securities available for
sale--net of income taxes..................... -- 3,166 3,166
Net earnings.................................... 41,200 -- 41,200
------------ ------------- -------------
BALANCE, December 31, 1995........................ 225,677 3,166 228,843
Distribution from Grand Casinos, Inc............ (14,716) -- (14,716)
Unrealized loss on securities available for
sale--net of income taxes..................... -- (1,806) (1,806)
Net loss........................................ (108,737) -- (108,737)
------------ ------------- -------------
BALANCE, December 29, 1996........................ 102,224 1,360 103,584
Distribution to Grand Casinos, Inc.............. (25,682) -- (25,682)
Unrealized loss on securities available for
sale--net of income taxes..................... -- (4,307) (4,307)
Net earnings.................................... 45,203 -- 45,203
------------ ------------- -------------
BALANCE, December 28, 1997........................ 121,745 (2,947) 118,798
Distribution to Grand Casinos, Inc.
(unaudited)................................... (24,830) -- (24,830)
Unrealized gain on securities available for
sale--net of income taxes (unaudited)......... -- 1,399 1,399
Net earnings (unaudited)........................ 24,022 -- 24,022
------------ ------------- -------------
BALANCE, June 28, 1998 (unaudited)................ $ 120,937 $ (1,548) $ 119,389
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See accompanying notes to combined financial statements.
F-21
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------- YEAR ENDED
JUNE 28, JUNE 29, -------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)............................. $ 24,022 $ 23,100 $ 45,203 $ (108,737) $ 41,200
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities--...
Depreciation and amortization................. 649 675 890 1,343 2,864
Gain on sale of securities.................... -- -- -- -- (3,866)
Stratosphere write-down....................... -- -- -- 160,923 --
Deferred income taxes......................... (728) -- (2,930) (11,375) (1,100)
Minority interest............................. -- -- -- -- (2,594)
Changes in operating assets and liabilities:
Accounts receivable......................... (3,190) (494) 1,571 (744) 2,170
Income taxes................................ 14,785 2,716 (9,357) 3,417 (3,585)
Other current assets........................ (72) (172) (1,650) (239) (1,747)
Accounts payable............................ (77) (29) 45 (30) (1,683)
Accrued expenses............................ 85 (1,114) 1,037 17,813 2,758
Other....................................... 225 200 942 124 (147)
------------ ------------ ------------- ------------- -------------
Net cash provided by operating
activities.............................. 35,699 24,882 35,751 62,495 34,270
------------ ------------ ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment............. (36) (122) (99) (795) (65,037)
Proceeds from sale of property and equipment.... -- -- 398 2,814 --
Payments for notes receivable................... (2,727) -- (1,825) (50,000) (2,552)
Proceeds from repayment of notes receivable..... 3,125 3,161 6,144 10,579 14,085
Increase in restricted cash..................... (4,017) -- -- (250) (118,308)
Investment in and notes receivable from
unconsolidated affiliates..................... -- -- (336) (7,170) (76,700)
Decrease in cash due to deconsolidation of
Stratosphere Corporation...................... -- -- -- -- (107,184)
Purchases of securities available for sale...... -- -- -- -- (9,297)
Proceeds from sale of investments............... -- -- -- -- 3,866
Payments for land held for development.......... (6,610) (5,436) (13,153) (2,264) (50)
Increase in other long-term assets.............. (694) (1,275) (1,833) 369 (6,404)
------------ ------------ ------------- ------------- -------------
Net cash used for investing activities.... $ (10,959) $ (3,672) $ (10,704) $ (46,717) $ (367,581)
------------ ------------ ------------- ------------- -------------
</TABLE>
F-22
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------- YEAR ENDED
JUNE 28, JUNE 29, -------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution (to) from parent................... $ (24,830) $ (21,584) $ (25,682) $ (14,716) $ 42,880
Proceeds from issuance of long-term debt........ -- -- -- 24 203,375
Proceeds from Stratosphere warrants............. -- -- -- -- 113,604
Increase in accounts payable construction....... -- -- -- -- 16,277
Debt issuance costs............................. -- -- -- -- (10,379)
Payments on long-term debt...................... (6) (6) (9) (375) (3,334)
------------ ------------ ------------- ------------- -------------
Net cash used for financing activities........ (24,836) (21,590) (25,691) (15,067) 362,423
------------ ------------ ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... (96) (380) (644) 711 29,112
CASH AND CASH EQUIVALENTS, beginning of year...... 33,208 33,852 33,852 33,141 4,029
------------ ------------ ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year............ $ 33,112 $ 33,472 $ 33,208 $ 33,852 $ 33,141
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-..................
Interest $ 49 $ 25 $ 98 $ 98 $ 99
Income taxes.................................. -- 9,294 41,504 11,189 31,234
Noncash investing and financing activities-
Notes issued in exchange for property and
casino development costs.................... -- -- -- -- 2,875
Increase in noncash assets through stock
issued for merger........................... -- -- -- -- 150,852
Decrease in various accounts upon
deconsolidating Stratosphere Corporation:
Property and equipment...................... -- -- -- -- (163,691)
Cash and cash equivalents, restricted (other
assets)................................... -- -- -- -- (118,366)
Other long-term assets...................... -- -- -- -- (28,611)
Other liabilities........................... -- -- -- -- (40,631)
Long-term debt.............................. -- -- -- -- (203,000)
</TABLE>
See accompanying notes to combined financial statements.
F-23
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Lakes (the Company or Lakes), a division of Grand Casinos, Inc. (Grand),
represents all the assets and liabilities of the subsidiaries and operating
units owned and held by Grand, which exist primarily to manage Indian-owned
casinos under management contracts with Grand and manage certain other assets
related to potential development outside of the state of Mississippi. The
Company manages one Indian-owned casino in Minnesota and two Indian-owned
casinos in Louisiana. Additionally, Lakes' assets include approximately 37% of
the common stock of Stratosphere Corporation (Stratosphere), which owns the
Stratosphere Tower, Casino and Hotel in Las Vegas, Nevada. Stratosphere is the
subject of Chapter 11 bankruptcy proceedings. See Note 8 for further discussion.
The Stratosphere stock may be sold prior to the Grand Distribution or canceled
as a result of the bankruptcy proceeding.
On June 30, 1998, Grand announced that it will separate its Mississippi
gaming operations and its managed Indian-owned casino operations, and create a
new publicly held company, expected to be named Lakes Gaming, Inc. The
separation will be accomplished through a tax-free distribution to Lakes Gaming,
Inc. of all of the assets and liabilities of its non-Mississippi business
(Lakes). Grand will then spin off all the common stock of Lakes Gaming, Inc. to
the Grand shareholders. Each Grand shareholder will receive one share of Lakes
Gaming, Inc. for every four owned shares of Grand. Grand's Mississippi gaming
operations will be merged with the gaming operations of Hilton Hotels
Corporation (Park Place). Both transactions are hereinafter referred to as the
Transaction.
The Transaction is subject to shareholder and regulatory approvals and is
expected to be completed by year-end 1998. Grand plans to obtain a ruling from
the Internal Revenue Service (IRS) that notes that the transaction is tax-free
to Grand shareholders. The boards of directors of both Grand and Hilton have
approved the Transaction.
MANAGEMENT CONTRACTS OF LIMITED DURATION
The Company is prohibited by the Indian Gaming Regulatory Act from having an
ownership interest in any casino it manages for Indian tribes. The management
contracts for the various Indian-owned casinos that the Company manages for
Indian tribes generally have a term of seven years. The management contract for
Grand Casino Hinckley expires May 15, 1999, and the management contacts for
Grand Casino Avoyelles and Grand Casino Coushatta expire June 3, 2001 and
January 16, 2002, respectively. There can be no assurance that any of these
management contracts will be renewed upon expiration or approved by the National
Indian Gaming Commission ("NIGC") upon any such renewal. The failure to renew
the Company's management contracts would result in the loss of revenues to the
Company derived from such contracts, which would have an adverse effect on the
Company's results of operations. The Coushatta Tribe and the Tunica-Biloxi Tribe
each entered into tribal-state compacts with the State of Louisiana on September
29, 1992. These compacts were approved in November, 1992 by the Secretary of the
Interior. Each compact expires in November, 1999, but will automatically renew
for an additional seven year terms unless either the tribe or the State of
Louisiana delivers to the other written notice of non-renewal at least 180 days
prior to the applicable expiration date. The Company's management agreements
with the Tunica-Biloxi Tribe and the Coushatta Tribe expire after November 1999.
In the event the compacts are not renewed, legal gaming will not be permitted at
Grand Casino Avoyelles of Grand Casino Coushatta. There can be no assurance that
these compacts will be renewed on terms and conditions acceptable to either of
the tribes.
F-24
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
BASIS OF PRESENTATION
The accompanying financial statements include the operating results of
Stratosphere from the date the Company owned greater than 50% of the outstanding
common stock of Stratosphere (October 4, 1994) through December 20, 1995, the
date on which the Company owned less than 50% of the voting interests of
Stratosphere.
The Company made total capital contributions to the Stratosphere project of
approximately $107.6 million and has outstanding loan advances to Stratosphere
of $50.0 million. The Company had written off or reserved for these investments
and other related costs in the Stratosphere project during 1996, in the amount
of $160.9 million and included this amount as a project write-down on the
accompanying combined statement of earnings. The Company has not recorded any
results of Stratosphere's operations in 1997 or 1998.
All other subsidiaries and affiliates are presented on a combined basis. All
material intercompany transactions and balances have been eliminated in the
accompanying combined financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.
YEAR-END
The Company has a 52- or 53-week accounting period ending on the Sunday
closest to December 31 of each year. The Company's fiscal years for the periods
shown on the accompanying combined statements of earnings ended on December 28,
1997 (1997), December 29, 1996 (1996) and December 31, 1995 (1995).
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements and footnote data as of June 28, 1998
and for the six-month periods ended June 28, 1998 and June 29, 1997 are
unaudited. In the opinion of management, these financial statements reflect all
adjustments, consisting only of normal and recurring adjustments, necessary for
a fair presentation of the financial statements. The results of operations for
the six-month periods are not necessarily indicative of the results that may be
expected for the full year.
REVENUE RECOGNITION
Revenue from the management of Indian-owned casino gaming facilities is
recognized when earned according to the terms of the management contracts.
F-25
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
OPERATING EXPENSES
The operating expenses of the Company include the costs associated with the
management of all gaming operations for which the Company has a management
contract. Such amounts represent the direct cost of providing assistance in the
areas of casino operations, marketing and promotion, customer service,
accounting and legal and other administrative functions. Historically, certain
employees of Grand provided service to both Company and non-Company operations.
In these instances, costs were allocated based on estimated time spent on each
business group.
INCOME TAXES
The Company files a consolidated federal tax return with Grand. Under a
tax-sharing agreement with Grand, the Company reports income taxes substantially
on a separate-company basis.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company classifies
deferred tax liabilities and assets into current and noncurrent amounts based on
the classification of the related assets and liabilities.
INTEREST INCOME
Interest income represents interest on the notes receivable from Indian
tribes and interest on cash, cash equivalents and short-term investments.
Interest on the notes receivable is recorded as earned based on contractual
rates of interest. Interest on cash, cash equivalents and short-term investments
reflects the Company's portion of interest income realized from Grand's
investments in savings and money market accounts and other short-term liquid
investments.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share (EPS) is calculated for all periods based on the
expected exchange of one Lakes share for every four owned Grand shares. Basic
EPS is calculated by dividing earnings by the weighted average common shares
outstanding. Diluted EPS reflects the potential dilutive effect of all common
stock equivalents outstanding by dividing net income by the weighted average of
all common and dilutive shares outstanding.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and in banks,
interest-bearing deposits and money market funds and other instruments with
original maturities of three months or less.
SECURITIES AVAILABLE FOR SALE
The Company records all securities available for sale at fair market value
at each period-end. The ending balance of division equity as of December 28,
1997 includes $2.9 million of net unrealized loss (net of income taxes) on
securities classified as available-for-sale.
F-26
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
CASINO DEVELOPMENT COSTS
Casino development costs consists of direct costs to obtain management
contracts. Casino development costs are amortized over the lives of the related
management contracts as each becomes effective.
LAND HELD FOR DEVELOPMENT
Land held for development consists of amounts related to an approximately
15-acre site in Las Vegas, Nevada, which the Company controls. Upon consummation
of site construction, such amounts are reclassified to construction in progress.
Upon completion of construction, amounts are classified as property and
depreciation expense commences.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for additions,
renewals and improvements are capitalized. Costs of repairs and maintenance are
expensed when incurred. Depreciation and amortization of property and equipment
is computed using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Leasehold improvements............................ 15 years
Furniture and equipment........................... 3-10 years
</TABLE>
The Company periodically evaluates whether events and circumstances have
occurred that may affect the recoverability of the net book value of its
long-lived assets. If such events or circumstances indicate that the carrying
amount of an asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset. If the sum of the expected
future undiscounted cash flows does not exceed the carrying value of the asset,
the Company will recognize an impairment loss.
ACCOUNTING PRONOUNCEMENTS
The Company adopted Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
effective December 29, 1997. SFAS 130 requires minimum pension liability
adjustments, unrealized gains or losses on the Company's available-for-sale
securities and foreign currency translation adjustments, which prior to adoption
were reported separately in division equity, to be included in other
comprehensive earnings. Total comprehensive earnings (loss) for the six months
ended June 28, 1998 and June 29, 1997 were $1.4 million and ($1.9) million.
Differences between comprehensive earnings for these periods were due to
unrealized holding gains and losses on securities available for sale.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants (AICPA) has issued Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires
companies to expense as incurred all start-up and preopening costs that are not
otherwise capitalizable as long-lived assets. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company does not believe the adoption of this pronouncement will be material to
the combined financial statements.
F-27
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
2. MANAGEMENT CONTRACTS FOR INDIAN-OWNED CASINOS:
The Company had contracts with the Mille Lacs Band for the management of two
gaming facilities in Onamia and Hinckley, Minnesota. The management contract for
the gaming facility in Onamia expired on April 2, 1998. The contract for the
gaming facility in Hinckley expires on May 15, 1999. While no decision has been
made with respect to renewal of the management contract for the Hinckley
facility, the Company believes that the management agreement will not be
renewed. The Mille Lacs Band has an option to purchase the Company's interest in
the management contract of the Hinckley facility. The purchase price is equal to
the Company's share of distributable profits during the 12-month period
preceding the date of purchase, multiplied by the years remaining under the
initial term of the management contract (or portion thereof).
In addition, the Company holds a contract with the Tunica-Biloxi Tribe of
Louisiana for a gaming facility in Marksville, Louisiana, that expires on June
3, 2001 and a management contract with the Coushatta Tribe of Louisiana for a
gaming facility in Kinder, Louisiana, that expires on January 16, 2002.
The management contracts govern the relationship between the Company and the
tribes with respect to the construction and management of the casinos. The
construction or remodeling portion of the agreements commenced with the signing
of the respective contracts and continued until the casinos opened for business;
thereafter, the management portion of the respective management contracts
continues for a period of seven years.
Under terms of the contracts, the Company as manager of the casino receives
a percentage of the distributable profits (as defined in the contract) of the
operations as a management fee after payment of certain priority distributions,
a cash contingency reserve, and guaranteed minimum payments to the tribes. In
the event the management contracts are not renewed upon expiration of their
initial term, the Company will be entitled to payments equal to a percentage of
the fair value of certain leased gaming equipment.
The management contracts for the Tunica-Biloxi Tribe of Louisiana and the
Coushatta Tribe of Louisiana have been approved by the Bureau of Indian Affairs
(BIA). In October 1996, the Company entered into restated management contract
with the Mille Lacs Band for the facility in Hinckley, Minnesota, which the
Company believes restate the terms and conditions of the original management
contract consistent with NIGC requirements.
The restated management contract for the Hinckley, Minnesota, casino has not
been approved by the NIGC and the Company believes the NIGC will not approve the
contract prior to expiration. While the Company believes that all of its
management contracts meet all requirements of the Indian Gaming Regulatory Act
of 1988 (IGRA), the BIA or the NIGC may attempt to reduce the terms or the
management fees payable under the management contracts or require other changes
to the contracts.
F-28
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
3. NOTES RECEIVABLE:
Notes receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
--------- ------------ ------------
<S> <C> <C> <C>
Notes from the Coushatta Tribe with interest at a defined reference rate
plus 1% (not to exceed 16%), receivable in 84 monthly installments
through January 2002.................................................... $ 22,235 $ 22,722 $ 23,801
Notes from the Tunica-Biloxi Tribe with interest at a defined reference
rate plus 1% (not to exceed 16%), receivable in 84 monthly installments
through June 2001....................................................... 10,497 10,409 12,558
--------- ------------ ------------
Total notes receivable................................................ 32,732 33,131 36,359
Less--Current installments of notes receivable.......................... (7,280) (6,654) (6,202)
--------- ------------ ------------
Notes receivable, less current installments............................. $ 25,452 $ 26,477 $ 30,157
--------- ------------ ------------
--------- ------------ ------------
</TABLE>
Repayments of the aforementioned notes receivable form the Coushatta Tribe
and the Tunica-Biloxi Tribe is required to be made only if distributable profits
are available from the operation of the related casinos and are subject of
certain distribution priorities specified in the management contracts.
The notes receivable are generally advances made to Indian Tribes for the
development of gaming properties managed by the Company. The repayment terms are
specific to each tribe and are largely dependent upon the operating performance
of each gaming property. In addition, repayment of the notes receivable and the
manager's fees under the management contracts are subordinated to certain other
financial obligations of the tribe or band. Through December 28, 1997, no
amounts have been withheld under these provisions.
Management periodically evaluates the recoverability of such notes
receivable based on the current and projected operating results of the
underlying facility and historical collection experience. No impairment losses
on such notes receivable have been recognized through December 28, 1997.
The Company believes the costs and complexities of assembling the relevant
facts and comparables needed to appraise the fair market values of these notes
based on estimates of net present value of discounted cash flows or using other
valuation techniques are excessive and the process exceedingly time consuming.
It further believes that the determined results would not reasonably differ from
the carrying values, which are believed to be reasonable estimates of fair
market value based on past experience with similar receivables.
4. LONG-TERM DEBT:
The Company has a ten-year secured note payable with a third party with $1.0
million outstanding at December 28, 1997. Interest is compounded on quarterly
basis at 10%. The principal and interest are due March 22, 2003.
F-29
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
5. INCOME TAXES:
The provisions for income taxes attributable to earnings (loss) for 1997,
1996 and 1995 consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal....................................................... 30,307 21,601 25,180
State......................................................... 2,146 3,336 3,330
--------- --------- ---------
32,453 24,937 28,510
Deferred........................................................ (2,930) (11,375) (1,100)
--------- --------- ---------
$ 29,523 $ 13,562 $ 27,410
--------- --------- ---------
--------- --------- ---------
</TABLE>
Reconciliations of the statutory federal income tax rate to the Company's
actual rate based on earnings (loss) before income taxes for 1997, 1996 and 1995
are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------
1997 1996 1995
----- ------- -----
<S> <C> <C> <C>
Statutory federal tax rate........................ 35.0% (35.0)% 35.0%
State income taxes, net of federal income tax
benefit......................................... 1.9 2.3 3.3
Valuation allowance on Stratosphere net operating
loss carryforward and write-down of Stratosphere
investment...................................... -- 42.9 --
Other, net........................................ 2.6 4.0 3.2
----- ------- -----
39.5% 14.2% 41.5%
----- ------- -----
----- ------- -----
</TABLE>
The Company's deferred income tax liabilities and assets are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Noncurrent deferred taxes:
Losses related to Stratosphere investment............................... $ 44,450 $ 44,450
Other temporary differences............................................. (1,391) (900)
--------- ---------
Net noncurrent deferred taxes............................................. 43,059 43,550
Less--Valuation allowance................................................. (44,450) (44,450)
--------- ---------
Net noncurrent deferred liability......................................... ($ 1,391) ($ 900)
--------- ---------
--------- ---------
Current deferred taxes:
Accruals, reserves and other............................................ $ 4,988 $ 1,567
--------- ---------
Net deferred tax asset................................................ $ 3,597 $ 667
--------- ---------
--------- ---------
</TABLE>
Management has determined that the deferred tax asset relative to the
investment write-down related to Stratosphere did not satisfy the recognition
criteria set forth in SFAS No. 109. Accordingly, a valuation allowance was
recorded for the applicable deferred tax assets. However, if the Transaction is
consumated, it is expected that approximately $25.0 million of the deferred tax
asset will be utilized to offset a gain on Grand's distribution of Lakes. At
December 28, 1997, the Company had loss carryforwards of approximately $127.0
million, certain of which expire in 2002.
F-30
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
6. STOCK OPTIONS:
Grand has a Stock Option and Compensation Plan and a Director Stock Option
Plan whereby incentive and nonqualified stock options and other awards to
acquire up to an aggregate of 6,451,500 shares of Grand's common stock were
granted to officers, directors, and employees. Information with respect to the
stock option plans is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES
-----------------------------
OPTION PRICE
OPTIONS RANGE PER
OUTSTANDING SHARE
----------- ----------------
<S> <C> <C>
Balance at January 1, 1995.................................... 1,905,210 (3.03-12.25)
Granted..................................................... 734,100 (9.50-27.33)
Assumed upon merger......................................... 221,234 (8.81-28.63)
Canceled.................................................... (4,759) (12.25-27.33)
Exercised................................................... (238,107) (3.03-12.25)
----------- ----------------
Balance at December 31, 1995.................................. 2,617,678 (3.03-28.63)
Granted..................................................... 1,997,522 (14.75-32.125)
Canceled.................................................... (9,096) (8.08-10.42)
Exercised................................................... (411,827) (3.03-15.10)
----------- ----------------
Balance at December 29, 1996 4,194,277 (3.03-32.125)
Granted..................................................... 1,431,050 9.25-15.63)
Canceled.................................................... (483,980) (8.08-32.125)
Exercised................................................... (170,421) (3.03-11.00)
----------- ----------------
Balance at December 28, 1997.................................. 4,970,926 (3.03-32.125)
Granted (unaudited)......................................... 32,500 (17.19)
Canceled (unaudited)........................................ (193,400) (8.08-15.06)
Exercised (unaudited)....................................... (325,338) (7.20-11.00)
----------- ----------------
Balance at June 28, 1998 (unaudited).......................... 4,484,688 (3.03-32.125)
----------- ----------------
----------- ----------------
Exercisable at June 28, 1998 (unaudited)...................... 1,972,779
-----------
-----------
</TABLE>
Upon the consummation of the Transaction, the holders of outstanding Grand
stock options will receive one new option for one share of the Company's stock
for each option previously held. The new options will be priced in the same
relationship to the estimated fair market value of each respective company at
the date the Transaction is consummated.
The following SFAS No. 123 information reflects the relationship of stock
options held by Company employees (40%) as compared to stock options held by
Park Place employees (60%).
F-31
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
6. STOCK OPTIONS: (CONTINUED)
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS Statement No. 123, the Company's net
earnings (loss) would have been as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- ----------- ---------
<S> <C> <C> <C>
Net earnings (loss):
As reported.............................................. $ 45,203 $ (108,737) $ 41,200
Pro forma................................................ 44,570 (109,255) 41,088
Net earnings (loss) per share:
As reported--Basic....................................... $ 4.32 $ (10.46) $ 4.81
Pro forma--Basic......................................... 4.25 (10.51) 4.80
As reported--Diluted..................................... 4.20 (10.46) 4.65
Pro forma--Diluted....................................... 4.14 (10.51) 4.63
</TABLE>
The SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, thus the resulting pro forma compensation cost
may not be representative of that to be expected in future years. The fair value
of each award under the option plans is estimated on the date of grant using the
Black-Scholes option pricing model. The fair value of the options issued in 1997
range from $1.36 per share to $2.24 per share. The following assumptions were
used to estimate the fair value of options:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Risk-free interest rate....... 6.04% - 6.98% 5.68% - 6.95% 5.96% - 7.58%
Expected life................. 10 years 10 years 10 years
Expected volatility........... 0.563 - 0.629 0.528 - 0.613 0.625 - 0.665
Expected dividend yield....... -- -- --
</TABLE>
7. EMPLOYEE RETIREMENT PLAN:
Grand has a section 401(k) employee savings plan for all full-time
employees. The employees are not part of a bargaining unit and, as such, all
employees who are eligible can participate. The savings plan allows participants
to defer, on a pretax basis, a portion of their salary and accumulate
tax-deferred earnings as a retirement fund. Eligibility is based on years of
service and minimum age requirements. Contributions are invested, at the
direction of the employee, in one or more funds available. Grand matches
employee contributions up to a maximum of 1% of participating employees' gross
wages. Contributions are vested over a period of five years. The 401(k) plan
commenced on September 1, 1995.
Upon consummation of the Transaction, the Company will provide a new plan to
its employees similar to the plan noted above.
F-32
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
8. COMMITMENTS AND CONTINGENCIES:
LEASES
Rent expense, under noncancelable operating leases, exclusive of real estate
taxes, insurance, and maintenance expense for 1997 and 1996 was approximately
$0.2 million and for 1995 was approximately $0.3 million.
The Company leases certain property and equipment under noncancelable
operating leases. Future minimum lease payments, excluding contingent rentals,
due under noncancelable operating leases as of December 28, 1997 are as follows
(in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
1998.............................................................................. $ 3,548
1999.............................................................................. 3,548
2000.............................................................................. 3,548
2001.............................................................................. 3,561
2002.............................................................................. 3,626
Thereafter........................................................................ 226,861
----------
$ 244,692
----------
----------
</TABLE>
As a part of the Transaction, the Company has agreed to exercise its call
option to purchase the Shark Club property in Las Vegas, Nevada. At July 31,
2000, the earliest date the landlord could require the Company to purchase the
property, the option purchase price would be approximately $9.3 million.
LOAN GUARANTY AGREEMENTS
The Company has guaranteed two loan and security agreements entered into by
the Tunica-Biloxi Tribe of Louisiana for $14.1 million for the purpose of
financing casino equipment and for $16.5 million for the purpose of purchasing a
hotel and additional casino equipment. The agreements extend through 1998 and
2000, respectively, and as of December 28, 1997, the amounts outstanding were
$3.0 million and $12.7 million, respectively.
The Company also has guaranteed loan and security agreements entered into by
the Coushatta Tribe of Louisiana for $22.3 million for the purpose of financing
casino equipment. The agreements are for three years and have various maturity
dates through 1998; as of December 28, 1997, the amounts outstanding were $3.7
million. In addition, on May 1, 1997, the Company entered into a guaranty
agreement related to a loan agreement entered into by the Coushatta Tribe of
Louisiana in the amount of $25.0 million, for the purpose of constructing a
hotel and acquiring additional casino equipment. The guaranty will remain in
effect until the loan is paid. The loan term is approximately five years. No
advances had been made relating to this loan at December 28, 1997.
The Company has provided a limited guaranty for the purpose of financing
Stratosphere Corporation Hotel and Casino equipment subject to a maximum
limitation amount of $8.7 million.
F-33
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
INDEMNIFICATION AGREEMENT
As a part of the Transaction, the Company has agreed to indemnify Grand
against all costs, expenses and liabilities incurred in connection with or
arising out of certain pending and threatened claims and legal proceedings to
which Grand and certain of its subsidiaries are likely to be parties. The
Company's indemnification obligations include the obligation to provide the
defense of all claims made in proceedings against Grand and to pay all related
settlements and judgments.
As security to support Lakes' indemnification obligations to Grand under
each of the Grand Distribution Agreement and the Merger Agreement, and as a
condition to the consummation of the Merger, Lakes has agreed to irrevocably
deposit, in trust for the benefit of Grand, as a wholly owned subsidiary of Park
Place, an aggregate of $30 million, consisting of four annual installments of
$7.5 million, during the four year period subsequent to the Effective Date.
As a part of the indemnification agreement, Lakes has agreed that it will
not declare or pay any dividends, make any distribution of Lakes' equity
interests, or otherwise purchase, redeem, defease or retire for value any equity
interests in Lakes without the written consent of Park Place.
The following descriptions are summaries and the status of certain pending
or threatened claims and legal proceedings for which the Company is obligated to
provide such indemnification.
STRATOSPHERE CORPORATION
As of June 28, 1998, Grand owned approximately 37% of the common stock
issued by Stratosphere. Stratosphere and its wholly-owned operating subsidiary
developed and operate the Stratosphere Tower, Hotel and Casino in Las Vegas,
Nevada. In January 1997, Stratosphere and its wholly-owned operating subsidiary
filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The
Stratosphere stock may be sold prior to the Grand Distribution or canceled as a
result of the bankruptcy proceeding.
In October 1997, Grand announced that it had not been able to reach an
agreement with holders of a significant portion of Stratosphere's First Mortgage
Notes for a consensual reorganization of Stratosphere that would involve the
Company's participation. Grand also announced that it had no intention of
participating in any plan of reorganization for Stratosphere.
In March 1995, in connection with Stratosphere's issuance of its First
Mortgage Notes, the Company entered into a Standby Equity Commitment Agreement
between Stratosphere and Grand (the Standby Equity Commitment). Grand agreed in
the Standby Equity Commitment, subject to the terms and conditions stated in the
Standby Equity Commitment, to purchase up to $20.0 million of additional equity
in Stratosphere during each of the first three years Stratosphere is operating
(as defined in the Standby Equity Commitment) to the extent Stratosphere's
consolidated cash flow (as defined in the Standby Equity Commitment) during each
of such years did not exceed $50.0 million.
Based on provisions of the U.S. Bankruptcy Code that Grand contends apply to
the Standby Equity Commitment, Grand has asserted that the enforceability of the
Standby Equity Commitment is in question. Both the Official Committee of
Noteholders in the Stratosphere Bankruptcy case (the Official Committee) and the
current trustee under the indenture (the Trustee) pursuant to which Stratosphere
issued its First Mortgage Notes claim that the Standby Equity Commitment is
enforceable.
F-34
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The enforceability of the Standby Equity Commitment is the subject of
litigation to which Grand is a party in the Stratosphere Bankruptcy case (as a
result of a motion brought by the Official Committee), and the U.S. District
Court for the District of Nevada (as a result of an action brought by the
Trustee). On February 19, 1998, the bankruptcy court ruled that the Standby
Equity Commitment is not enforceable in the Stratosphere bankruptcy proceeding
as a matter of law. The Official Committee has stated that it intends to appeal
the bankruptcy court's decision.
STRATOSPHERE SECURITIES LITIGATION
Grand and certain persons who have been indemnified by Grand (including
certain Grand officers and directors) are defendants in legal actions pending in
the state court and in the federal court in Nevada. These actions arise out of
Grand's involvement in the Stratosphere Tower, Casino and Hotel project in Las
Vegas, Nevada.
The plaintiffs in the actions who are current and/or former Stratosphere
Corporation shareholders, seek to pursue the actions as class actions, and make
various claims against Grand and Grand-related defendants, including securities
fraud. Grand and Grand-related defendants have submitted a motion to dismiss the
federal action. As of June 28, 1998, the motion has not been decided. The state
court action has been stayed pending resolution of the federal court action.
Grand intends to vigorously defend itself and the other Grand-related
defendants against the claims made in both the state and the federal action.
SECURITIES LITIGATION
Grand and certain of Grand's current and former officers and directors are
defendants in a legal action pending in the federal court in Minnesota. This
action arises out of Grand's involvement in Stratosphere.
The plaintiffs in the action who are current and/or former Stratosphere
Corporation shareholders, seek to pursue the action as a class action and make
various claims against Grand and the other Grand-related defendants, including
securities fraud. Grand and Grand-related defendants submitted a motion to
dismiss the plaintiffs claims. That motion was granted in part and denied in
part. The plaintiffs and Grand and the other defendants are engaged in discovery
in the action.
Grand intends to vigorously defend itself and the other Grand-related
defendants against the claims that survived Grand's motion to dismiss.
DERIVATIVE ACTION
Certain of Grand's officers and directors are defendants in a legal action
pending in the state court of Minnesota. This action arises out of Grand's
involvement in Stratosphere.
The plaintiffs in the action who are current and/or former Grand
shareholders, seek to pursue the action against the defendants on behalf of
Grand and make various claims that the defendants failed to fulfill claimed
duties to Grand. Grand is providing the defense for the defendants pursuant to
Grand's indemnification obligations to the defendants.
F-35
<PAGE>
LAKES
(A DIVISION OF GRAND CASINOS, INC. AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Grand's board of directors appointed an independent special litigation
committee under Minnesota law to evaluate whether Grand should pursue the claims
made by the plaintiffs. That committee has completed its evaluation and has
recommended to the court that the plaintiffs' claims not be pursued.
The defendants in the action have asked that the court dismiss the action
based on the recommendation of the independent special litigation committee. As
of June 28, 1998, that motion has not been decided.
Grand believes that the action should be dismissed under applicable
Minnesota law.
OTHER LITIGATION
Grand is involved in various other inquiries, administrative proceedings,
and litigation relating to contracts and other matters arising in the normal
course of business. While any proceeding or litigation has an element of
uncertainty, management currently believes that the final outcome of these
matters are not likely to have a material adverse effect upon Grand's or the
Company's consolidated financial position or results of operations.
F-36
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
HILTON HOTELS CORPORATION,
GAMING CO., INC.,
GAMING ACQUISITION CORPORATION,
LAKES GAMING, INC.
AND
GRAND CASINOS, INC.
---------------------
DATED AS OF JUNE 30, 1998
---------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE I. DEFINITIONS................................................................................... A-2
ARTICLE II. THE MERGER................................................................................... A-12
Section 2.1. The Merger...................................................................... A-12
Section 2.2. Effective Time of the Merger.................................................... A-12
Section 2.3. Closing......................................................................... A-12
Section 2.4. Effects of the Merger........................................................... A-12
Section 2.5. Articles of Incorporation and Bylaws of the Surviving Corporation............... A-12
Section 2.6. Directors and Officers of the Surviving Corporation............................. A-12
Section 2.7. Directors of Gaming Co.......................................................... A-12
ARTICLE III. CONVERSION OF SECURITIES.................................................................... A-12
Section 3.1. Conversion of Capital Stock..................................................... A-12
Section 3.2. Exchange of Certificates........................................................ A-16
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF COMPANY.................................................... A-19
Section 4.1. Organization, Standing and Corporate Power...................................... A-19
Section 4.2. Subsidiaries.................................................................... A-19
Section 4.3. Capitalization.................................................................. A-19
Section 4.4. Authority; Enforceability; No Conflict; Consents................................ A-20
Section 4.5. Vote Required; Ownership of Hilton Capital Stock; State Takeover Statutes....... A-21
Section 4.6. Compliance with Applicable Laws................................................. A-22
Section 4.7. Company SEC Documents; Undisclosed Liabilities.................................. A-22
Section 4.8. Absence of Changes or Events.................................................... A-23
Section 4.9. Litigation...................................................................... A-23
Section 4.10. Taxes........................................................................... A-24
Section 4.11. Employee Benefits............................................................... A-25
Section 4.12. Brokers and Intermediaries...................................................... A-26
Section 4.13. Opinion of Financial Advisor.................................................... A-26
Section 4.14. Title to Properties............................................................. A-26
Section 4.15. Indian Gaming and Debt Agreements and Lakes Agreements.......................... A-26
Section 4.16. Insurance....................................................................... A-27
Section 4.17. Transactions with Company Affiliates............................................ A-27
Section 4.18. Certain Matters Relating to Stratosphere and the Lakes Group.................... A-27
Section 4.19. Pro Forma Financial Information of Company Retained Business.................... A-27
Section 4.20. Capital Expenditure Plan........................................................ A-28
Section 4.21. Prohibited Payments............................................................. A-28
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF HILTON...................................................... A-28
Section 5.1. Organization, Standing and Corporate Power...................................... A-28
Section 5.2. Ownership of Gaming Co.......................................................... A-28
Section 5.3. Capitalization.................................................................. A-29
Section 5.4. Authority; Enforceability; No Conflict; Consents................................ A-30
Section 5.5. Ownership of Company Capital Stock.............................................. A-32
Section 5.6. Compliance with Applicable Laws................................................. A-32
Section 5.7. Hilton SEC Documents; Undisclosed Liabilities................................... A-32
Section 5.8. Absence of Changes or Events.................................................... A-33
Section 5.9. Litigation...................................................................... A-33
Section 5.10. Taxes........................................................................... A-33
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
Section 5.11. Employee Benefits............................................................... A-33
Section 5.12. Brokers and Intermediaries...................................................... A-34
Section 5.13. Opinion of Financial Advisor.................................................... A-34
Section 5.14. Pro Forma Financial Information of Gaming Co. Business.......................... A-34
Section 5.15. Transactions with Hilton Affiliates............................................. A-34
Section 5.16. Ownership of Merger Sub: No Prior Activities; Assets of Merger Sub.............. A-34
Section 5.17. Prohibited Payments............................................................. A-35
ARTICLE VI. COVENANTS RELATING TO CONDUCT OF BUSINESS.................................................... A-35
Section 6.1. Conduct of Company.............................................................. A-35
Section 6.2. Conduct of Hilton with Respect to the Gaming Co. Business....................... A-37
Section 6.3. Access to Information........................................................... A-38
Section 6.4. Indian Gaming and Other Guarantees Release...................................... A-38
Section 6.5. Dissenters' Rights.............................................................. A-38
ARTICLE VII. ADDITIONAL AGREEMENTS....................................................................... A-39
Section 7.1. Preparation of Form S-4, Forms 10 and the Joint Proxy Statement/ Prospectus;
Shareholders Meeting.......................................................... A-39
Section 7.2. Letter of Company's Accountants................................................. A-40
Section 7.3. Letter of Hilton's Accountants.................................................. A-40
Section 7.4. Reasonable Best Efforts; Notification........................................... A-40
Section 7.5. Approval of Gaming Commissions; Regulatory Matters.............................. A-41
Section 7.6. Supplemental Disclosure......................................................... A-41
Section 7.7. Announcements................................................................... A-41
Section 7.8. No Solicitation................................................................. A-41
Section 7.9. Indemnification................................................................. A-42
Section 7.10. Distributions................................................................... A-44
Section 7.11. Private Letter Ruling and Tax Opinions.......................................... A-44
Section 7.12. NYSE Listing.................................................................... A-45
Section 7.13. Affiliate Agreements............................................................ A-45
Section 7.14. Stock Plans..................................................................... A-45
Section 7.15. Indian Gaming and Debt Agreements and Lakes Agreements.......................... A-46
Section 7.16. Conveyance Taxes................................................................ A-46
Section 7.17. Stockholder or Shareholder Litigation........................................... A-46
Section 7.18. Employee Benefits............................................................... A-46
Section 7.19. Indentures and Company Notes.................................................... A-47
Section 7.20. Post-Closing Marketing Activities............................................... A-47
Section 7.21. Shark Club Ground Lease......................................................... A-47
ARTICLE VIII. CONDITIONS TO MERGER....................................................................... A-47
Section 8.1. Conditions to Each Party's Obligation to Effect the Merger...................... A-47
Section 8.2. Additional Conditions to Obligations of Gaming Co............................... A-48
Section 8.3. Additional Conditions to Obligations of Company................................. A-50
ARTICLE IX. TERMINATION AND AMENDMENT.................................................................... A-50
Section 9.1. Termination..................................................................... A-50
Section 9.2. Effect of Termination........................................................... A-52
Section 9.3. Fees and Expenses............................................................... A-52
Section 9.4. Amendment....................................................................... A-52
Section 9.5. Extension; Waiver............................................................... A-52
ARTICLE X. MISCELLANEOUS................................................................................. A-53
Section 10.1. Nonsurvival of Representations, Warranties and Agreements....................... A-53
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
Section 10.2. Notices......................................................................... A-53
Section 10.3. Interpretation.................................................................. A-54
Section 10.4. Counterparts.................................................................... A-54
Section 10.5. Entire Agreement; No Third Party Beneficiaries.................................. A-54
Section 10.6. Governing Law................................................................... A-54
Section 10.7. Assignment...................................................................... A-54
Section 10.8. Headings; References............................................................ A-54
Section 10.9. Severability; Enforcement....................................................... A-54
Section 10.10. Specific Performance............................................................ A-55
Section 10.11. Effect of Hilton Distribution................................................... A-55
Section 10.12. Approvals, Consent and Waivers.................................................. A-55
</TABLE>
iii
<PAGE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Form of Hilton Distribution Agreement
Exhibit B Form of Company Distribution Agreement
Exhibit C Form of Affiliate Agreement
Exhibit D Company Retained Business Financial Statements
Exhibit E Lakes Balance Sheet
Exhibit F Company's Capital Expenditure Plans 1998 - 1999
Exhibit G Gaming Co. Business Financial Statements
Exhibit H Form of Opinion of Latham & Watkins
Exhibit I Form of Certificate of Company
Exhibit J Form of Certificate of Gaming Co.
Exhibit K Form of Opinion of Maslon, Edelman, Borman & Brand, LLP
Exhibit L Form of Non-Competition Agreement
Exhibit M Trust Agreement
Exhibit N Pledge and Security Agreement
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "AGREEMENT"), dated as of June 30,
1998, is by and among HILTON HOTELS CORPORATION, a Delaware corporation
("HILTON"), GAMING CO., INC., a Delaware corporation and wholly-owned subsidiary
of Hilton ("GAMING CO."), Gaming Acquisition Corporation, a Minnesota
corporation and wholly-owned subsidiary of Gaming Co. ("MERGER SUB"), GRAND
CASINOS, INC., a Minnesota corporation ("COMPANY"), and LAKES GAMING, INC., a
Minnesota corporation and wholly-owned subsidiary of Company ("LAKES").
WHEREAS, subject to shareholder ratification and certain other conditions
set forth herein, the Board of Directors of Hilton has approved the transactions
described in the Hilton Distribution Agreement attached hereto as Exhibit A (the
"HILTON DISTRIBUTION AGREEMENT"), pursuant to which (a) all of the operations,
assets and liabilities of Hilton and its Subsidiaries comprising the Gaming
Business (as defined in the Hilton Distribution Agreement) will be contributed
to Gaming Co. and (b) all of the shares of Gaming Co. will be distributed on a
pro rata basis to Hilton's stockholders (the "HILTON DISTRIBUTION");
WHEREAS, following the Hilton Distribution, Hilton will retain the Hilton
Retained Business, consisting principally of Hilton's existing lodging
operations;
WHEREAS, subject to shareholder ratification and certain other conditions
set forth herein, the Board of Directors of Company has approved certain
transactions, described in the Company Distribution Agreement attached hereto as
Exhibit B (the "COMPANY DISTRIBUTION AGREEMENT") pursuant to which (a) all of
the operations, assets and liabilities of Company and its Subsidiaries
comprising the Non-Mississippi Business (as defined in the Company Distribution
Agreement) will be contributed to Lakes and (b) all of the shares of Lakes will
be distributed on a pro rata basis to Company's shareholders (the "COMPANY
DISTRIBUTION," and together with the Hilton Distribution, the "DISTRIBUTIONS");
WHEREAS, following the Company Distribution, Company will retain the Company
Retained Business, consisting principally of Company's existing Mississippi
gaming operations;
WHEREAS, the respective Boards of Directors of Hilton and Company have
determined that, following the Distributions, the merger of Merger Sub with and
into Company (the "MERGER") with Company as the surviving corporation (the
"SURVIVING CORPORATION") would be advantageous and beneficial to their
respective corporations and stockholders, and that the consummation of the
Merger would not be approved unless both Distributions occur prior to the
Merger;
WHEREAS, the consummation of the Distributions is a condition to each of
Hilton's and Company's respective obligations to effect the Merger;
WHEREAS, for federal income tax purposes, it is intended that (a) (i) the
Hilton Distribution shall qualify as a tax-free distribution within the meaning
of Section 355 of the Internal Revenue Code of 1986, as amended (the "CODE") to
Hilton and its stockholders and (ii) the Company Distribution shall qualify as a
tax-free distribution within the meaning of Section 355 of the Code solely with
respect to Company's shareholders and (b) the Merger shall qualify as a
reorganization under Section 368(a) of the Code, and this Agreement is intended
to be and is adopted as a plan of reorganization; and
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to Hilton's willingness to enter into this
Agreement, certain shareholders of Company have entered into the Shareholder
Support Agreement, pursuant to which such shareholders have agreed, among other
things, to vote all voting securities of Company beneficially owned by them in
favor of approval and adoption of the Agreement and the Merger.
A-1
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
For purposes of this Agreement, the following terms shall have the meanings
set forth or as referenced below:
"ACQUISITION PROPOSAL" shall have the meaning set forth in Section 7.8(a).
"AFFILIATE" shall have the meaning set forth in Section 7.13.
"AFFILIATE AGREEMENT" shall have the meaning set forth in Section 7.13.
"AGREEMENT" shall mean this Agreement and Plan of Merger dated June 30,
1998, including all Exhibits and Schedules hereto.
"ANCILLARY AGREEMENTS" shall have the meaning set forth in Section 7.10(b).
"APPLICABLE LAWS" shall mean, with respect to a Person, any and all
statutes, laws, ordinances, rules, orders and regulations of any Governmental
Authority applicable to such Person and such Person's business, properties and
assets.
"ARTICLES OF INCORPORATION" shall mean the Second Amended and Restated
Articles of Incorporation, as amended, of Company.
"ARTICLES OF MERGER" shall have the meaning set forth in Section 2.2.
"BANKRUPTCY AND EQUITY EXCEPTION" shall mean the effect of any bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and of general
equity principles.
"CERTIFICATE OF INCORPORATION" shall mean the Restated Certificate of
Incorporation, as amended, of Hilton.
"CERTIFICATES" shall have the meaning set forth in Section 3.2(b).
"CLOSING" shall have the meaning set forth in Section 2.3.
"CLOSING DATE" shall have the meaning set forth in Section 2.3.
"CODE" shall have the meaning set forth in the Recitals.
"COMPANY" shall have the meaning set forth in the Preamble.
"COMPANY ANCILLARY AGREEMENTS" shall have the meaning set forth in Section
7.10(b).
"COMPANY BYLAWS" shall mean the Amended and Restated Bylaws of Company.
"COMPANY CAPITAL PLAN" shall have the meaning set forth in Section 4.20.
"COMPANY COMMON STOCK" shall have the meaning set forth in Section 3.1.
"COMPANY CLOSING SCHEDULE" shall have the meaning set forth in Section
3.1(c)(i)(A)(1).
"COMPANY DISCLOSURE SCHEDULE" shall mean the disclosure schedule delivered
by Company to Hilton on or before the date of this Agreement.
A-2
<PAGE>
"COMPANY DISTRIBUTION" shall have the meaning set forth in the Recitals.
"COMPANY DISTRIBUTION AGREEMENT" shall have the meaning set forth in the
Recitals.
"COMPANY NET EQUITY VALUE" shall have the meaning set forth in Section
3.1(c)(i)(A).
"COMPANY NOTES" shall mean, collectively, the First Mortgage Notes and the
Senior Notes.
"COMPANY RETAINED BUSINESS" means the operations, assets and liabilities to
be retained by Company and its Subsidiaries following the Company Distribution,
as set forth in the Company Distribution Agreement.
"COMPANY RETAINED BUSINESS BALANCE SHEET" shall have the meaning set forth
in Section 4.19(a).
"COMPANY RETAINED BUSINESS FINANCIAL STATEMENTS" shall have the meaning set
forth in Section 4.19(a).
"COMPANY RETAINED BUSINESS INCOME STATEMENT" shall have the meaning set
forth in Section 4.19(a).
"COMPANY SEC DOCUMENTS" shall have the meaning set forth in Section 4.7(a).
"COMPANY SHAREHOLDER APPROVAL" shall have the meaning set forth in Section
4.4(a).
"COMPANY SHAREHOLDERS MEETING" shall have the meaning set forth in Section
7.1(d).
"COMPANY STOCK OPTIONS" shall have the meaning set forth in Section 4.3.
"COMPANY STOCK PLANS" shall have the meaning set forth in Section 4.3.
"COMPANY VALUATION FACTOR" shall have the meaning set forth in Section
3.1(c)(i)(A).
"COMPANY'S 1997 10-K" shall mean Company's Annual Report on Form 10-K for
the fiscal year ended December 28, 1997.
"COMPANY'S 1998 PROXY" shall mean Company's Proxy Statement dated March 27,
1998.
"CONFIDENTIALITY AGREEMENT" shall have the meaning set forth in Section 6.3.
"CONTAMINATION" shall mean the introduction into the environment (including
the land, surface water and ground water underlying or in proximity to any Real
Property and the ambient air above or in the proximity of any Real Property) of
any contaminant, pollutant or other toxic or hazardous substance or waste as
those terms are defined in applicable Environmental Laws (whether or not upon
the Real Property or other property used by Company or any of its Subsidiaries
and whether or not such pollution, when it occurred, violated any Environmental
Law) as a result of any actual or threatened spill, discharge, leak, emission,
escape, injection, dumping or release of any kind of any substance, in violation
of any Environmental Law, or as a result of which Company or any of its
Subsidiaries has or is reasonably likely to become liable to any Person or
entity or by reason of which the Real Property or any other assets of Company or
any of its Subsidiaries is reasonably likely to suffer or be subjected to any
Encumbrance or claim.
"DETERMINATION DATE" shall have the meaning set forth in Section
3.1(c)(i)(A)(1)(ii).
"DISSENTING SHARES" shall have the meaning set forth in Section 3.2(k).
"DISTRIBUTION AGREEMENTS" shall mean collectively, the Hilton Distribution
Agreement and the Company Distribution Agreement.
"DISTRIBUTIONS" shall have the meaning set forth in the Recitals.
A-3
<PAGE>
"EFFECTIVE TIME" shall have the meaning set forth in Section 2.2.
"EMPLOYEE BENEFIT PLANS" shall have the meaning set forth in Section
4.11(a).
"EMPLOYEE STOCK PURCHASE PLAN" shall have the meaning set forth in Section
5.3(a).
"ENCUMBRANCES" shall have the meaning set forth in Section 4.2.
"ENVIRONMENTAL LAWS" shall mean any and all applicable federal, state, local
or foreign statutes, ordinances, rules, regulations, Permits, judgments, orders,
decrees, injunctions or other legally binding authorizations, relating to: (a)
Releases (as defined in 42 U.S.C. Section 9601(22)) or threatened Releases of
Hazardous Material into the environment; or (b) the generation, treatment,
storage, disposal, use, handling, manufacturing, transportation or shipment of,
or exposure to, a Hazardous Material.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA AFFILIATE" shall mean, with respect to a Person, any other Person
that, together with such Person, as of the relevant measuring date under ERISA,
is or was required to be treated as a single employer under Section 414 of the
Code.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended.
"EXCHANGE AGENT" shall have the meaning set forth in Section 3.2(a).
"EXCHANGE FUND" shall have the meaning set forth in Section 3.2(a).
"EXCHANGE RATIO" shall have the meaning set forth in Section 3.1(c).
"EXTRAORDINARY ACQUISITION" shall have the meaning set forth in Section 6.2.
"FAIRNESS OPINION" shall have the meaning set forth in Section 4.13.
"FIRST MORTGAGE NOTES" shall mean Company's outstanding $450 million 10.125%
First Mortgage Notes, due December 1, 2003 issued pursuant to the First Mortgage
Notes Indenture.
"FIRST MORTGAGE NOTES INDENTURE" shall mean that certain Indenture, dated as
of November 30, 1995, as amended from time to time, by and among Company, the
Guarantors (as defined in the First Mortgage Notes Indenture) and Firstar Bank
of Minnesota, N.A., as trustee.
"FOREIGN GAMING LAWS" shall mean the laws, rules and regulations promulgated
by the applicable Governmental Authorities of Australia or Uruguay or any
political subdivisions thereof relating to casino gaming.
"FORM 10S" shall mean collectively, the Gaming Co. Form 10 and the Lakes
Form 10.
"FORM S-4" shall mean the Registration Statement on Form S-4 to be prepared
and filed in connection with the issuance of Gaming Co. Common Stock in the
Merger.
"GAAP" shall have the meaning set forth in Section 4.7(a).
"GAMING CO." shall have the meaning set forth in the Preamble.
"GAMING CO. BUSINESS" means the operations, assets and liabilities of Gaming
Co. as of the time of the Hilton Distribution, as set forth in the Hilton
Distribution Agreement.
"GAMING CO. BUSINESS BALANCE SHEET" shall have the meaning set forth in
Section 5.14.
"GAMING CO. BUSINESS FINANCIAL STATEMENTS" shall have the meaning set forth
in Section 5.14.
A-4
<PAGE>
"GAMING CO. BUSINESS INCOME STATEMENT" shall have the meaning set forth in
Section 5.14.
"GAMING CO. CLOSING SCHEDULE" shall have the meaning set forth in Section
3.1(c)(i)(B)(1).
"GAMING CO. COMMON STOCK" shall mean the shares of common stock, par value
$.01 per share, of Gaming Co.
"GAMING CO. FORM 10" shall have the meaning set forth in Section 5.4(c).
"GAMING CO. PREFERRED STOCK" shall have the meaning set forth in Section
5.3(b).
"GAMING CO. RIGHTS" shall mean the rights issued under the Gaming Co. Rights
Agreement to purchase shares of Gaming Co. Common Stock.
"GAMING CO. RIGHTS AGREEMENT" shall mean the shareholder rights plan to be
entered into by Gaming Co. prior to the Hilton Distribution, the terms of which
shall be substantially similar to the Hilton shareholder rights plan in effect
at the Effective Time.
"GAMING CO. VALUATION FACTOR" shall have the meaning set forth in Section
3.1(c)(i)(B).
"GAMING COMMISSIONS" shall mean, with respect to Company or Hilton, as
applicable, the Louisiana Gaming Control Board, the Minnesota Gambling Control
Board, the Mississippi Gaming Commission, Missouri Gaming Commission, the
National Indian Gaming Commission and any similar commission that regulates or
enforces the Indian Gaming Laws, the Nevada Gaming Commission, the Nevada State
Gaming Control Board, the New Jersey Casino Control Commission, and the Ontario
Gaming Commission, and any similar commission that regulates or enforces the
Foreign Gaming Laws.
"GAMING LAWS" shall mean, with respect to Company or Hilton, as applicable,
Foreign Gaming Laws, Indian Gaming Laws, Louisiana Gaming Laws, Minnesota Gaming
Laws, Mississippi Gaming Laws, Missouri Gaming Laws, Nevada Gaming Laws, the New
Jersey Gaming Laws, and Ontario Gaming Laws.
"GOVERNMENTAL AUTHORITY" shall mean any court, administrative agency or
commission, Gaming Commission or other governmental authority or
instrumentality.
"HAZARDOUS MATERIAL" shall mean (i) hazardous substances (as defined in 42
U.S.C. Section 9601(14)), (ii) petroleum, including crude oil and any fractions
thereof, (iii) natural gas, synthetic gas and any mixtures thereof, (iv)
asbestos and/or asbestos-containing material, (v) PCBs, or materials containing
PCBs in excess of 50 ppm and (vi) any material regulated as a medical waste or
infectious waste.
"HILTON" shall have the meaning set forth in the Preamble.
"HILTON ANCILLARY AGREEMENTS" shall have the meaning set forth in Section
7.10(a).
"HILTON BYLAWS" shall mean the Bylaws, as amended, of Hilton.
"HILTON COMMON STOCK" shall mean the shares of common stock, par value $2.50
per share, of Hilton.
"HILTON CONVERTIBLE NOTES" shall have the meaning set forth in Section
5.3(a).
"HILTON DISCLOSURE SCHEDULE" shall mean the disclosure schedule delivered by
Hilton to Company on or before the date of this Agreement.
"HILTON DISTRIBUTION" shall have the meaning set forth in the Recitals.
"HILTON DISTRIBUTION AGREEMENT" shall have the meaning set forth in the
Recitals.
"HILTON PREFERRED STOCK" shall have the meaning set forth in Section 5.3(a).
A-5
<PAGE>
"HILTON RETAINED BUSINESS" means the operations, assets and liabilities to
be retained by Hilton and its subsidiaries following the Hilton Distribution, as
set forth in the Hilton Distribution Agreement.
"HILTON RIGHTS AGREEMENT" shall mean the Rights Agreement, dated as of July
14, 1988 between Hilton and the First National Bank of Chicago, as rights agent,
as amended from time to time.
"HILTON SEC DOCUMENTS" shall have the meaning set forth in Section 5.7(a).
"HILTON STOCK OPTIONS" shall have the meaning set forth in Section 5.3(a).
"HILTON'S 1997 10-K" shall mean Hilton's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"IMPROVEMENTS" shall mean, with respect to any Real Property, all buildings,
fixtures, improvements and facilities located on or attached to such Real
Property or owned or leased by Company or any of its Subsidiaries and used in or
at such Real Property, together with any and all loading docks, parking lots,
garages and other facilities serving any such buildings and any landscaping and
site improvements.
"INCENTIVE POOL AGREEMENT" shall mean that certain Management and Consultant
Incentive Compensation Pool Agreement, dated as of July 31, 1991, by and among
Company, Lyle Berman, S.M. Taube & Co., Inc. and David Anderson, as amended.
"INDEMNIFIED PARTIES" shall have the meaning set forth in Section 7.9(b).
"INDEMNIFIED PERSONS" shall have the meaning set forth in Section 7.9(a).
"INDENTURES" shall mean, collectively, the First Mortgage Notes Indenture
and the Senior Notes Indenture.
"INDIAN GAMING LAWS" shall mean (a) the Indian Gaming Regulatory Act of 1988
and the rules and regulations promulgated thereunder, (b) any state laws and
regulations governing gaming operations and facilities on Indian land and (c)
any tribal ordinances and regulations governing gaming on land within such
tribe's jurisdiction.
"INDIAN GAMING AND DEBT AGREEMENTS" shall mean the management agreements,
loan agreements, leases, guaranty agreements, promissory notes and related
collateral and other agreements of the Indian tribes, or of Company or any of
its Subsidiaries, each as amended to date, relating to (a) Grand Casino
Avoyelles, (b) Grand Casino Coushatta, (c) Grand Casino Hinckley and (d) any
other Indian gaming operations, including, without limitation, (i) the
guarantees of Company and Grand Casinos of Louisiana, Inc.--Tunica-Biloxi
pursuant to that certain Guaranty Agreement, dated as of August 7, 1994 in favor
of Pitney Bowes Credit Corporation guaranteeing the debt obligations of the
Tunica-Biloxi Tribe of Louisiana, (ii) the guarantees of Company and Grand
Casinos of Louisiana, Inc.--Coushatta pursuant to that certain Guaranty
Agreement, dated as of January 31, 1995 in favor of PB Funding Corporation,
guaranteeing the lease obligations of the Coushatta Tribe of Louisiana, (iii) to
the extent such guarantees are in effect, the guarantees of Company and Grand
Casinos of Louisiana, Inc.--Coushatta pursuant to that certain Guaranty
Agreement, dated as of January 31, 1995 in favor of Sentry Corporation,
guaranteeing the lease obligations of the Coushatta Tribe of Louisiana, (iv) the
guarantees of Company and Grand Casinos of Louisiana, Inc. - Tunica-Biloxi
pursuant to that certain Commercial Guaranty Agreement, dated as of April 7,
1997 in favor of Cottonport Bank, guaranteeing the loan obligations of the
Tunica-Biloxi Tribe of Louisiana and (v) the guarantees of Company and Grand
Casinos of Louisiana, Inc.--Coushatta pursuant to that certain Commercial
Guaranty Agreement, dated as of May 1, 1997 in favor of Hibernia National Bank,
guaranteeing the loan obligations of the Coushatta Tribe of Louisiana.
A-6
<PAGE>
"JOINT PROXY STATEMENT/PROSPECTUS" shall mean the joint proxy
statement/prospectus to be mailed to shareholders of Company in connection with
the Company Shareholder Approval.
"LAKES" shall have the meaning set forth in the Preamble.
"LAKES AGREEMENTS" shall mean the contracts, loan agreements, leases,
guaranty agreements and related collateral and other agreements relating to the
Lakes Business, under which Company and/or its Subsidiaries has guaranteed
payments or has obligated itself in any way, including, without limitation, (a)
the Shark Club Ground Lease and the assignment of lease and guaranty relating
thereto, (b) the Lease, dated as of June 17, 1996, by and among Grand Casinos
Nevada I, Inc., Cloobeck Enterprises, Brooks Family Trust and Nevada Brooks Cook
and the assignment of lease and guaranty relating thereto, (c) the
Indemnification Agreement, dated as of December 31, 1997, by and between Company
and Lyle Berman relating to New Horizon's Kid Quest, Inc. and Innovative Gaming
Corporation of America, (d) the Office Lease, dated as of February 1, 1996, by
and between Company and Carlson Real Estate Company, (e) the Lease Agreement,
dated as of September 29, 1993, by and between Company and the Estate of James
Cambell, (f) the Lease Agreement, dated as of October 29, 1993, by and between
Company and the Estate of James Campbell and (g) the Joint Contribution
Agreement, dated as of March 16, 1998, by and among Company, Digital Biometrics,
Inc. and Trak 21 Development, L.L.C., and the Membership Control Agreement of
Trak 21 Development, L.L.C. relating thereto, but excluding the Indian Gaming
and Debt Agreements.
"LAKES BALANCE SHEET" shall have the meaning set forth in Section 4.19(b).
"LAKES BUSINESS" means the operations, assets and liabilities of the Lakes
Group as of the time of the Company Distribution, as set forth in the Company
Distribution Agreement.
"LAKES FORM 10" shall have the meaning set forth in Section 4.4(c).
"LAKES GROUP" means Lakes and any Person in which Lakes will own, directly
or indirectly, any interest as of the Company Distribution.
"LOUISIANA GAMING LAWS" shall mean the Louisiana Riverboat Economic
Development and Gaming Control Act and the rules and regulations promulgated
thereunder.
"LOUISIANA INDIAN MANAGEMENT CONTRACTS" shall mean the Amended and Restated
Management & Construction Agreement by and between the Coushatta Tribe of
Louisiana and Grand Casinos of Louisiana, Inc.--Coushatta, dated February 25,
1992 and the Amended and Restated Management & Construction Agreement by and
between the Tunica-Biloxi Tribe of Louisiana and Grand Casino of Louisiana,
Inc.--Tunica-Biloxi, dated November 1, 1992.
"MATERIAL ADVERSE EFFECT" shall mean, with respect to a Person, any change,
occurrence or effect that is or is reasonably likely to be materially adverse to
the assets, business, results of operations or condition (financial or
otherwise) of such Person and its Subsidiaries, taken as a whole; PROVIDED,
HOWEVER, that with respect to (a) the Gaming Co. Business, a "Material Adverse
Effect" shall mean a Material Adverse Effect with respect to Gaming Co. and its
Subsidiaries, after giving effect to the Hilton Distribution and the other
transactions contemplated by the Hilton Distribution Agreement and (b) with
respect to the Company Retained Business, a "Material Adverse Effect" shall mean
a Material Adverse Effect with respect to Company and its Subsidiaries, after
giving effect to the Company Distribution and the other transactions
contemplated by the Company Distribution Agreement, but taking into account any
contingent liabilities of Company with respect to liabilities assumed by the
Lakes Group.
"MBCA" shall mean the Minnesota Business Corporation Act, as amended from
time to time.
"MERGER" shall have the meaning set forth in the Recitals.
A-7
<PAGE>
"MERGER SUB" shall have the meaning set forth in the Preamble.
"MINNESOTA GAMING LAWS" shall mean the Minnesota Lawful Gambling and
Gambling Devices Act and the rules and regulations promulgated thereunder.
"MISSISSIPPI CASINOS" shall mean Company's existing casino properties
located in Tunica, Mississippi, Gulfport, Mississippi, and Biloxi, Mississippi.
"MISSISSIPPI GAMING LAWS" shall mean the Mississippi Gaming Control Act and
the rules and regulations promulgated thereunder.
"MISSOURI GAMING LAWS" shall mean the Missouri Gaming Law and the rules and
regulations promulgated thereunder.
"MULTIEMPLOYER PLANS" shall mean employee benefit plans within the meaning
of Section 3(37) of ERISA or Section 4001(a)(3) of ERISA.
"NEVADA GAMING LAWS" shall mean the Nevada Gaming Control Act and the rules
and regulations promulgated thereunder, the Clark County, Nevada Code and the
rules and regulations promulgated thereunder, the City of Reno, Nevada Code and
other applicable local regulations.
"NEW JERSEY GAMING LAWS" shall mean the New Jersey Casino Control Act and
the rules and regulations promulgated thereunder.
"NON-COMPETITION AGREEMENT" shall mean the Non-Competition Agreement to be
entered into by each of Lyle Berman, Thomas J. Brosig and Stanley M. Taube,
substantially in the form attached hereto as Exhibit L.
"NON-PLAN DIRECTOR OPTION AGREEMENTS" shall mean (a) the Option Agreement,
dated as of April 12, 1994, by and between Company and Morris Goldfarb, (b) the
Option Agreement, dated as of July 9, 1992, by and between Company and David L.
Rogers, (c) the Option Agreement, dated as of July 9, 1992, by and between
Company and Joel N. Waller and (d) the Option Agreement, dated as of July 9,
1992, by and between Company and Neil I. Sell, each as amended as of June 15,
1998.
"ONTARIO GAMING LAWS" shall mean the Ontario Gaming Control Act, 1992 and
the rules and regulations promulgated thereunder.
"OTHER TRANSACTIONS" shall have the meaning set forth in Section 7.11.
"OUTSIDE DATE" shall have the meaning set forth in Section 9.1(b).
"PENSION PLANS" shall mean employee pension benefit plans within the meaning
of Section 3(2) of ERISA.
"PERMITS" shall mean any and all federal, state, local and foreign
governmental approvals, authorizations, certificates, filings, franchises,
licenses, notices, permits and rights, including all authorizations under
Environmental Laws and Gaming Laws.
"PERMITTED ENCUMBRANCES" shall mean the following title exceptions: (a)
liens with respect to Taxes either not delinquent or being diligently contested
in appropriate proceedings; (b) mechanics', materialmen's or similar statutory
liens for amounts not yet due or being diligently contested in appropriate
proceedings; (c) other exceptions with respect to title to Real Property
(including easements of public record) that do not and would not materially
interfere with the current and intended use of such Real Property; and (d)
Encumbrances related to indebtedness which Encumbrances are disclosed in the
Company SEC Documents filed and publicly available prior to the date of this
Agreement.
A-8
<PAGE>
"PERSON" shall mean any individual, corporation, limited liability entity,
partnership, firm, joint venture, association, joint-stock company, trust,
estate, unincorporated organization, governmental or regulatory body or other
entity.
"PLEDGE AND SECURITY AGREEMENT" shall have the meaning set forth in Section
7.9.
"PRIVATE LETTER RULING" shall have the meaning set forth in Section
8.1(d)(i).
"REAL PROPERTY" shall have the meaning set forth in Section 4.14(a).
"REQUIRED CREDIT SUPPORT" shall have the meaning set forth in Section 7.9.
"RESTRICTED ACTIVITIES" shall mean any of the following with respect to the
Mississippi Casinos: (a) billboard advertising; (b) newspaper or other print
media advertising; (c) television or radio advertising; or (d) other similar
indirect marketing activities.
"RESTRICTED PAYMENT" shall mean: (i) the declaration or payment of any
dividend or any distribution on account of Lakes' or any of its Subsidiaries'
equity interests; or (ii) the purchase, redemption, defeasance or other
acquisition or retirement for value of any equity interests of Lakes, without
the written consent of Gaming Co. which consent can be given or withheld in
Gaming Co.'s sole and absolute discretion.
"REVOLVING CREDIT FACILITY" shall mean that certain $100 million Capital
Lease Facility, dated as of September 29, 1997, entered into by Company, BA
Leasing & Capital Corporation and the other parties listed therein.
"RULE 145" shall have the meaning set forth in Section 7.13.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"SECURITY AGREEMENTS" shall have the meaning set forth in Section 7.9.
"SENIOR NOTES" shall mean Company's outstanding $115 million Series B Senior
Notes due 2004, issued pursuant to the Senior Notes Indenture.
"SENIOR NOTES INDENTURE" shall mean that certain Series A and Series B 9%
Senior Notes due 2004 Indenture, dated as of October 16, 1997, by and among
Company, the Guarantors (as defined in the Senior Notes Indenture) and Firstar
Bank of Minnesota N.A., as trustee.
"SERVICE" shall mean the United States Internal Revenue Service.
"SETTLEMENT AGREEMENT" shall have the meaning set forth in Section 4.10(h).
"SHAREHOLDER SUPPORT AGREEMENT" shall mean the Shareholder Support
Agreement, dated as of the date hereof, by and among Stanley M. Taube, S.M.
Taube & Co., Inc., a Nevada corporation, Lyle Berman and Neil I. Sell, as
trustee of the Amy Berman Irrevocable Trust dated August 9, 1989, Bradley Berman
Irrevocable Trust dated August 9, 1989, Jessie Lynn Berman Irrevocable Trust
dated August 9, 1989 and Julie Berman Irrevocable Trust dated August 9, 1989.
"SHARK CLUB GROUND LEASE" shall mean that certain Ground Lease, dated as of
July 1997, by and between Cloobeck Enterprises and MacGregor Income Properties
West I, Inc.
"STRATOSPHERE" shall mean Stratosphere Corporation and any of its
Subsidiaries or Affiliates, including Stratosphere Gaming Corp., and any
business or operations conducted by or related to such entities, including the
Stratosphere Tower, Casino & Hotel and adjoining retail-entertainment center.
A-9
<PAGE>
"STRATOSPHERE CONTRACTS" shall mean any and all contracts, loan agreements,
leases, guaranty agreements, notes, mortgages, indentures, obligations and other
agreements relating to Stratosphere, including, without limitation, (a) the
Standby Equity Commitment, dated as of March 9, 1995, by and between Company and
Stratosphere, (b) the Limited Guaranty, dated as of March 28, 1997, by Company
for the benefit of each of the beneficiaries listed therein, (c) the
Indemnification Agreement, dated as of May 1, 1997, by and between Company and
Thomas G. Bell, (d) the Indemnification Agreement, dated as of May 1, 1997, by
and between Company and Andrew S. Blumen, (e) the Indemnification Agreement,
dated as of May 1, 1997, by and between Company and Robert A. Maheu, (f) the
Indemnification Agreement, dated as of May 1, 1997, by and between Company and
David R. Wirshing and (g) the indemnification arrangement described in the
Minutes of Company's Board of Directors, dated May 3, 1995, relating to the
indemnification of Lyle Berman, Neil I. Seil and Stanley M. Taube in connection
with their service on the Stratosphere Board of Directors.
"STRATOSPHERE LITIGATION" shall mean any and all actions, suits,
proceedings, claims, arbitrations or investigations relating to Stratosphere,
including the Stratosphere shareholders litigation in the U.S. District Court
for the District of Nevada (In re Stratosphere Corporation Securities
Litigation--Master File No. CV-5-96-00708PMP), Grand Casinos, Inc. shareholders
litigation in the U.S. District Court for the District of Minnesota (In Re:
Grand Casinos, Inc. Securities Litigation--Master Filed No. 4-96-890), the
Stratosphere shareholders litigation in the Nevada State Court (Victor M. Opitz,
et. al. v. Robert E. Stupak, et. al.--Case No. A363019), the Cohen litigation in
the U.S. District Court for the District of Nevada (Henry Cohen, et al. v.
Stratosphere Corporation, et. al.--Case No. A349985), the Stratosphere vacation
club litigation in the District Court in Clark County, Nevada (Richard Duncan,
et al. v. Bob and Jane Doe Stupak, et al.--Case No. A370127), the Standby Equity
Commitment litigation in the U.S. District Court for the District of Nevada (IBJ
Schroeder Bank & Trust Company, Inc. v. Grand Casinos, Inc.--File No.
CV-S-97-01252-DWH), the Stratosphere Noteholder Committee bankruptcy court
action in the U.S. Bankruptcy Court for the District of Nevada, Stratosphere
Plan of Reorganization in the U.S. Bankruptcy Court for the District of Nevada,
the Las Vegas Downtown Redevelopment Agency litigations in the Nevada Supreme
Court (City of Las Vegas Downtown Redevelopment Agency v. Crockett, et al. and
City of Las Vegas Downtown Redevelopment Agency v. Mouldo, et. al.), a
derivative litigation in Hennepin County, Minnesota District Court (Lloyd
Drilling, et al. v. Lyle Berman, et al.-- Court File No. MC97-002807), and a
Stratosphere action for Recovery of Preferential Transfers Pursuant to Sections
547 and 550 of the Bankruptcy Court filed with the Bankruptcy Court against
Company, and including any actions, suits, proceedings, claims, arbitrations or
investigations relating to the Litigation LLC described in Stratosphere
Corporation's Restated Second Amended Plan of Reorganization dated February 26,
1998.
"SUBSIDIARY" shall mean, with respect to any Person, (a) each corporation,
partnership, joint venture, limited liability company or other legal entity of
which such Person owns, either directly or indirectly, 50% or more of the stock
or other equity interests the holders of which are generally entitled to vote
for the election of the board of directors or similar governing body of such
corporation, partnership, joint venture or other legal entity and (b) each
partnership or limited liability company in which such Person or another
Subsidiary of such Person is the general partner, managing partner or other
otherwise controls; PROVIDED that with respect to Hilton, "Subsidiary" shall
mean only those Subsidiaries that, in addition to satisfying clauses (a) and (b)
above, comprise part of the Gaming Co. Business.
"SUBSIDIARIES NOTE PLEDGE" shall mean the pledge of the outstanding capital
stock of certain Subsidiaries of Company which will become part of the Lakes
Group as a result the Company Distribution, pursuant to that certain Company
Security and Pledge Agreement, dated as of November 30, 1995, relating to the
First Mortgage Notes.
"SURVIVING CORPORATION" shall have the meaning set forth in the Recitals.
A-10
<PAGE>
"TAX" or "TAXES" shall mean any federal, state, local or foreign income,
gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental, customs duties, capital
stock, franchise, profits, withholding, social security, unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated, or other
tax of any kind whatsoever, including any interest, penalty or addition thereto,
whether disputed or not, and shall include any transferee liability in respect
of Taxes and any liability in respect of Taxes imposed by contract, tax sharing
agreement, tax indemnity agreement or any similar agreement.
"TAX RETURN" shall mean any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"TOTAL DEBT OF COMPANY" shall have the meaning set forth in Section
3.1(c)(i)(A)(1).
"TOTAL DEBT OF GAMING CO." shall have the meaning set forth in Section
3.1(c)(i)(B)(1).
"TOTAL NUMBER OF COMPANY SHARES OUTSTANDING" shall have the meaning set
forth in Section 3.1(c)(i)(A)(4).
"TOTAL NUMBER OF GAMING CO. SHARES OUTSTANDING" shall have the meaning set
forth in Section 3.1(c)(i)(B)(4).
"TRANSACTION COSTS" shall mean any and all costs and expenses which are
incurred (or which are reasonably expected to be incurred) by the parties hereto
in connection with the consummation of the transactions contemplated by this
Agreement and the Distribution Agreements.
"TRANSACTION DOCUMENTS" means, collectively, this Agreement, the
Distribution Agreements, the Ancillary Agreements, the Shareholder Support
Agreement, the Trust Agreement and the Pledge and Security Agreement.
"TRANSFERRED ASSETS" shall have the meaning set forth in Section 7.9(d).
"TRUST AGREEMENT" shall have the meaning set forth in Section 7.9.
"UNRESTRICTED CASH" shall mean, with respect to any Person, as of any date
of determination, the total amount of cash and cash equivalents of such Person
as of such date of determination, less the Working Capital Cash of such Person
as of such date of determination.
"WORKING CAPITAL CASH" shall mean, as of any date of determination, with
respect to Company and its Subsidiaries, $15 million and, with respect to Gaming
Co. and its Subsidiaries, the total amount of Gaming Field Cash (as defined in
the Hilton Distribution Agreement) as of such date of determination.
A-11
<PAGE>
ARTICLE II.
THE MERGER
Section 2.1. THE MERGER. Upon the terms and subject to the provisions of
this Agreement, and in accordance with the MBCA, Merger Sub will merge with and
into Company at the Effective Time. Following the Merger, the separate corporate
existence of Merger Sub shall cease and Company shall continue as the Surviving
Corporation and shall succeed to and assume all the rights and obligations of
Merger Sub in accordance with the MBCA.
Section 2.2. EFFECTIVE TIME OF THE MERGER. Subject to the provisions of
this Agreement, articles of merger in such form as is required by the relevant
provisions of the MBCA (the "ARTICLES OF MERGER") shall be duly prepared,
executed and acknowledged and thereafter delivered to the Secretary of State of
the State of Minnesota for filing, as provided in the MBCA, as early as
practicable on the Closing Date. The Merger shall become effective immediately
after the Distributions and upon the filing of the Articles of Merger with the
Secretary of State of the State of Minnesota or at such time thereafter as
provided in the Articles of Merger (the " EFFECTIVE TIME").
Section 2.3. CLOSING. The closing of the Merger (the "CLOSING") will take
place at 10:00 a.m., California time, on a date to be specified by the parties,
which shall be no later than the second business day after satisfaction or, if
permissible, waiver of the conditions set forth in Section 8.1 (the "CLOSING
DATE"), at the offices of Latham & Watkins, 633 West Fifth Street, Suite 4000,
Los Angeles, California 90071, unless another date, place or time is agreed to
in writing by the parties hereto.
Section 2.4. EFFECTS OF THE MERGER. The Merger shall have the effects set
forth in the MBCA. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all properties, rights, privileges, powers and
franchises of Merger Sub and Company shall vest in the Surviving Corporation,
and all debts, liabilities and duties of Merger Sub and Company shall become the
debts, liabilities and duties of the Surviving Corporation.
Section 2.5. ARTICLES OF INCORPORATION AND BYLAWS OF THE SURVIVING
CORPORATION. At the Effective Time, the Articles of Incorporation and Company
Bylaws, as in effect immediately prior to the Effective Time, shall be the
articles of incorporation and bylaws, respectively, of the Surviving
Corporation, in each case until duly amended in accordance with Applicable Law.
Section 2.6. DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The
directors of Merger Sub immediately prior to the Effective Time shall be the
initial directors of the Surviving Corporation, each to hold office in
accordance with the articles of incorporation and bylaws of the Surviving
Corporation and until his or her successor is duly elected and qualified. The
officers of Merger Sub immediately prior to the Effective Time shall be the
initial officers of the Surviving Corporation, each to hold office in accordance
with the articles of incorporation and bylaws of the Surviving Corporation and
until his or her successor is duly appointed and qualified.
Section 2.7. DIRECTORS OF GAMING CO. At the Effective Time, Gaming Co.
shall take all action necessary to increase the size of its Board of Directors
by one member and to elect Lyle Berman as a director of Gaming Co. and in the
event of his incapacity to so serve, another person selected by the Board of
Directors of Company (as constituted prior to the Effective Time); provided that
such other Person is not an employee of the Surviving Corporation and is
reasonably acceptable to Gaming Co.
ARTICLE III.
CONVERSION OF SECURITIES
Section 3.1. CONVERSION OF CAPITAL STOCK. At the Effective Time, by virtue
of the Merger and without any action on the part of any of the parties hereto or
the holders of any shares of Common Stock, par value $.01 per share, of Company
(the "COMPANY COMMON STOCK"):
A-12
<PAGE>
(a) CAPITAL STOCK OF MERGER SUB. Each share of the capital stock of Merger
Sub issued and outstanding immediately prior to the Effective Time shall remain
an issued and outstanding share of the same class of capital stock of the
Surviving Corporation.
(b) CANCELLATION OF TREASURY STOCK AND GAMING CO. OWNED STOCK. All shares
of Company Common Stock that are owned by Company or any wholly-owned Subsidiary
of Company (but not any Employee Benefit Plans of Company or any of its
Subsidiaries) and any shares of Company Common Stock owned by Gaming Co. or any
wholly-owned Subsidiary of Gaming Co. shall be canceled and retired and shall
cease to exist and no stock of Company or any other consideration shall be
delivered in exchange therefor.
(c) CONVERSION OF COMPANY STOCK.
(i) Subject to Section 3.2(e), each issued and outstanding share of Company
Common Stock (other than shares to be canceled in accordance with Section 3.1(b)
and Dissenting Shares (as defined in Section 3.2(k)) shall be converted into the
right to receive the number of shares of Gaming Co. Common Stock equal to the
Company Valuation Factor divided by the Gaming Co. Valuation Factor, rounded to
the fourth decimal (the "EXCHANGE RATIO").
(A) For purposes of the foregoing, the "COMPANY VALUATION FACTOR" shall
be equal to (1) $1,200,000,000 MINUS the dollar amount of the Total Debt of
Company (the resulting difference being referred to as the "COMPANY NET
EQUITY VALUE"), DIVIDED BY (2) the Total Number of Company Shares
Outstanding; PROVIDED, HOWEVER, that if the Company Net Equity Value is less
than $617,600,000 but more than $585,100,000, then it shall be deemed to be
equal to $617,600,000; and provided, further, however, that if the Company
Net Equity Value is less than $585,100,000, then Hilton shall be entitled to
terminate this Agreement pursuant to Section 9.1(i).
(1) For purposes of the foregoing, the "TOTAL DEBT OF COMPANY" shall
be (x) determined as of the earlier of (i) the Closing Date and (ii)
December 31, 1998 (the earlier of such dates, the "DETERMINATION DATE")
and (y) equal to the total indebtedness for borrowed money (both long-
term and current maturities) of Company and its Subsidiaries as of the
Determination Date, plus the increase (if any) between (A) total current
liabilities (excluding (i) maturities of long-term indebtedness, (ii)
payables relating to unfunded expenditures under the Company Capital
Plan, (iii) amounts accrued for performance bonuses (but including
amounts accrued for retention and relocation bonuses) and (iv)
liabilities that constitute Transaction Costs) of Company and its
Subsidiaries as of the Determination Date and (B) the total current
liabilities (excluding (i) maturities of long-term indebtedness, (ii)
payables relating to unfunded expenditures under the Company Capital
Plan, (iii) amounts accrued for performance bonuses (but including
amounts accrued for retention and relocation bonuses) and (iv)
liabilities that constitute Transaction Costs) of Company and its
Subsidiaries on a pro forma basis at December 28, 1997, plus the total
amount of 1998 capital expenditures under the Company Capital Plan that
remain unfunded as of the Determination Date (excluding up to $25 million
in Lady Luck-Biloxi acquisition and improvement costs and any additional
capital expenditures approved in writing by Hilton pursuant to Section
6.1), plus that percentage of the total Transaction Costs that is equal
to Company's shareholders' pro forma ownership of Gaming Co. determined
pursuant to the foregoing formula as of the Determination Date but
without giving effect to the aggregate Transaction Costs, less (i) the
total amount of Unrestricted Cash of Company and its Subsidiaries as of
the Determination Date, (ii) $8 million and (iii) so long as Company has
not consummated any sale, transfer or other disposition involving its
Gulfport headquarters prior to the Determination Date, an amount equal to
the sum of (X) the 1998 increase in book value of Company's Gulfport
headquarters plus (Y) the dollar value of any depreciation expense
accrued by Company in connection therewith from and after December 27,
1997 and through the Determination Date. The elements of the Total Debt
of Company and its Subsidiaries shall be as set on a
A-13
<PAGE>
"COMPANY CLOSING SCHEDULE" to be prepared and finally determined as set
forth in clause (2) below.
(2) No later than the 10th business day before the day that Company
and Hilton reasonably estimate to be the Closing Date, Company shall
deliver the Company Closing Schedule to Hilton, together with all
supporting documentation reasonably necessary to Hilton's review and
verification of the Company Closing Schedule. The Company Closing
Schedule shall set forth all of the elements of the Total Debt of
Company, as set forth in clause (1) above. In the event the Determination
Date is prior to December 31, 1998, the elements of the Total Debt of
Company set forth on the Company Closing Schedule shall reflect Company's
best estimates of the applicable amounts as of the Closing Date, based on
actual amounts as of the most recent month-end for which a Company
balance sheet is available (but in no event shall such balance sheet be
as of a date more than 60 days prior to the Closing Date), rolled forward
to the Closing Date based on reasonable assumptions and methodologies;
and the details of such assumptions and roll-forward methodologies shall
be clearly stated in the supporting materials delivered to Hilton. In the
event that the Determination Date is December 31, 1998, then the Company
Closing Schedule shall to the greatest extent possible reflect the actual
amounts as of such date and shall utilize estimates only to the extent
necessary under the circumstances. In each case, the elements of the
Total Debt of Company shall be (i) set forth in accordance with generally
accepted accounting principles, applied on a basis consistent with that
used by Company in preparing the Company Retained Business Balance Sheet
and (ii) pro forma for the Company Distribution (I.E., shall reflect the
elements of the Total Debt of Company as if the Company Distribution had
already occurred). The Company Closing Schedule shall be accompanied by a
certification of Company's chief financial officer that the Company
Closing Schedule has been prepared in accordance with the requirements of
this Section 3.1(c)(i)(A)(2). Unless Hilton, within five business days
after receipt of such schedule, notifies Company that it objects to any
elements of the Company Closing Schedule, specifying the basis for any
such objection, the amounts set forth on such schedule shall be binding
upon the parties hereto for purposes of calculating the Exchange Ratio.
If Hilton does make an objection in the manner specified above, then
Company and Hilton shall use all reasonable efforts to resolve such
objection as promptly as possible. If Company and Hilton are unable to
resolve such objections within two business days after such notification
has been given by Hilton, the controversy shall be referred to the
Manhattan, New York office of Arthur Andersen LLP (or another nationally
recognized accounting firm reasonably acceptable to the parties hereto)
for a final determination thereof, which determination shall be made as
promptly as practicable. Such determination shall be binding upon the
parties hereto for purposes of calculating the Exchange Ratio, absent
manifest error.
(3) Upon delivery of the Company Closing Schedule, Company shall
provide to Hilton and its representatives such access to records,
workpapers and other documents, and to the personnel involved in
preparation of the Company Closing Schedule, as Hilton shall reasonably
request for purposes of reviewing and verifying the Company Closing
Schedule.
(4) For purposes of the foregoing, the "TOTAL NUMBER OF COMPANY
SHARES OUTSTANDING" is equal to 42,293,145, plus any additional shares of
Company Common Stock issued in accordance with the terms of Section 6.1
after the date hereof and prior to the Effective Time (excluding any such
issuances relating to exercises or conversions of Company Stock Options
(as defined in Section 4.3)).
(B) Subject to the last paragraph of Section 6.2, for purposes of the
foregoing, the "GAMING CO. VALUATION FACTOR" shall be equal to (1)
$6,024,600,000 MINUS the dollar amount of the Total Debt of Gaming Co.,
DIVIDED BY (2) the Total Number of Gaming Co. Shares Outstanding.
A-14
<PAGE>
(1) For purposes of the foregoing, the "TOTAL DEBT OF GAMING CO."
shall be (x) determined as of the Determination Date and (y) equal to the
total indebtedness for borrowed money (both long-term and current
maturities) of Gaming Co. and its Subsidiaries as of the Determination
Date, plus the increase (if any) between (A) total current liabilities
(excluding (i) maturities of long-term indebtedness, (ii) payables
relating to unfunded expenditures relating to Gaming Co.'s Paris
Casino-Resort, (iii) amounts accrued for performance bonuses (but
including amounts accrued for retention and relocation bonuses) and (iv)
liabilities that constitute Transaction Costs) of Gaming Co. and its
Subsidiaries as of the Determination Date and (B) the total current
liabilities (excluding (i) maturities of long-term indebtedness, (ii)
payables relating to unfunded expenditures relating to Gaming Co.'s Paris
Casino-Resort, (iii) amounts accrued for performance bonuses (but
including amounts accrued for retention and relocation bonuses) and (iv)
liabilities that constitute Transaction Costs) of Gaming Co. and its
Subsidiaries on a pro forma basis at December 31, 1997, plus the total
amount of capital expenditures that remain unfunded with respect to
Gaming Co.'s Paris Casino-Resort as of the Determination Date (excluding
any additional capital expenditures approved in writing by Company), plus
that percentage of the total Transaction Costs that is equal to 100%
minus that percentage that is equal to Company's shareholders' pro forma
ownership of Gaming Co. determined pursuant to the foregoing formula as
of the Determination Date but without giving effect to the aggregate
Transaction Costs, less the total amount of Unrestricted Cash of Gaming
Co. and its Subsidiaries as of the Determination Date. The elements of
the Total Debt of Gaming Co. and its Subsidiaries shall be as set on a
"GAMING CO. CLOSING SCHEDULE" to be prepared and finally determined as
set forth in clause (2) below.
(2) No later than the 10th business day before the day that Company
and Hilton reasonably estimate to be the Closing Date, Hilton shall
deliver the Gaming Co. Closing Schedule to Company, together with all
supporting documentation reasonably necessary to Company's review and
verification of the Gaming Co. Closing Schedule. The Gaming Co. Closing
Schedule shall set forth all of the elements of the Total Debt of Gaming
Co., as set forth in clause (1) above. In the event the Determination
Date is prior to December 31, 1998, the elements of the Total Debt of
Gaming Co. set forth on the Gaming Co. Closing Schedule shall reflect
Gaming Co.'s best estimates of the applicable amounts as of the Closing
Date, based on actual amounts as of the most recent month-end for which a
Gaming Co. balance sheet is available (but in no event shall such balance
sheet be as of a date more than 60 days prior to the Closing Date),
rolled forward to the Closing Date based on reasonable assumptions and
methodologies; and the details of such assumptions and roll-forward
methodologies shall be clearly stated in the supporting materials
delivered to Company. In the event that the Determination Date is
December 31, 1998, then the Gaming Co. Closing Schedule shall to the
greatest extent possible reflect the actual amounts as of such date and
shall utilize estimates only to the extent necessary under the
circumstances. In each case, the elements of the Total Debt of Gaming Co.
shall be (i) set forth in accordance with generally accepted accounting
principles, applied on a basis consistent with those used by Hilton in
preparing the Gaming Co. Business Balance Sheet and (ii) pro forma for
the Hilton Distribution (I.E., shall reflect the elements of the Total
Debt of Gaming Co. as if the Hilton Distribution had already occurred).
The Gaming Co. Closing Schedule shall be accompanied by a certification
of Gaming Co.'s chief financial officer that the Gaming Co. Closing
Schedule has been prepared in accordance with the requirements of this
Section 3.1(c)(i)(B)(2). Unless Company, within five business days after
receipt of such schedule, notifies Hilton that it objects to any elements
of the Gaming Co. Closing Schedule, specifying the basis for any such
objection, the amounts set forth on such schedule shall be binding upon
the parties hereto for purposes of calculating the Exchange Ratio. If
Company does make an objection in the manner specified above, then Hilton
and Company shall use all reasonable efforts to resolve such objection as
promptly as possible. If Hilton and Company are unable to resolve such
objections within two business days after such
A-15
<PAGE>
notification has been given by Company, the controversy shall be referred
to the Manhattan, New York office of Arthur Andersen LLP (or another
nationally recognized accounting firm reasonably acceptable to the
parties hereto) for a final determination thereof, which determination
shall be made as promptly as practicable. Such determination shall be
binding upon the parties hereto for purposes of calculating the Exchange
Ratio, absent manifest error.
(3) Upon delivery of the Gaming Co. Closing Schedule, Hilton shall
provide to Company and its representatives such access to records,
workpapers and other documents, and to the personnel involved in
preparation of the Gaming Co. Closing Schedule, as Company shall
reasonably request for purposes of reviewing and verifying the Gaming Co.
Closing Schedule.
(4) For purposes of the foregoing, the "TOTAL NUMBER OF GAMING CO.
SHARES OUTSTANDING" is equal to 260,450,202, plus any additional shares
of Gaming Co. Common Stock issued in accordance with the terms of Section
6.2 after the date hereof and prior to the Effective Time (excluding any
such issuances relating to exercises or conversions of Hilton Preferred
Stock or Hilton Stock Options (as defined in Section 5.3) or Gaming Co.
options in substitution thereof, and excluding any such issuances
pursuant to the Employee Stock Purchase Plan.
(ii) If, between the date of this Agreement and the Effective Time, the
outstanding shares of Company Common Stock or Gaming Co. Common Stock shall have
been changed into a different number of shares or a different class, by reason
of any stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares, or in the event that Gaming Co. shares are
distributed to Hilton Stockholders in the Hilton Distribution on less than a 1
for 1 basis (a "non-equal distribution"), the Exchange Ratio correspondingly
shall be appropriately adjusted to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination, exchange of shares or
non-equal distribution.
(iii) All such shares of Company Common Stock, when so converted, shall no
longer be outstanding and shall automatically be canceled and retired and shall
cease to exist, and each holder of a certificate representing any such shares
shall cease to have any rights with respect thereto, except the right to receive
the shares of Gaming Co. Common Stock and any cash in lieu of fractional shares
of Gaming Co. Common Stock to be issued or paid in consideration therefor upon
the surrender of such certificate in accordance with Section 3.2, and any
dividends or other distributions to which such holder is entitled pursuant to
Section 3.2(c), in each case without interest.
(iv) Pursuant to the Gaming Co. Rights Agreement, one Gaming Co. Right will
be attached to each share of Gaming Co. Common Stock issued upon conversion of
Company Common Stock in accordance with this Section 3.1(c) and all references
in this Agreement to Gaming Co. Common Stock shall be deemed to include the
Gaming Co. Rights.
Section 3.2. EXCHANGE OF CERTIFICATES. The procedures for exchanging
shares of Company Common Stock for Gaming Co. Common Stock pursuant to the
Merger are as follows:
(a) EXCHANGE AGENT. As of the Effective Time, Gaming Co. shall deposit
with a bank or trust company designated by it and reasonably acceptable to
Company (the "EXCHANGE AGENT"), for the benefit of the holders of shares of
Company Common Stock outstanding immediately prior to the Effective Time, for
exchange in accordance with this Section 3.2, through the Exchange Agent,
certificates representing the shares of Gaming Co. Common Stock issuable
pursuant to Section 3.1 in exchange for outstanding shares of Company Common
Stock (such shares of Gaming Co. Common Stock, together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"EXCHANGE FUND").
(b) EXCHANGE PROCEDURES. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock (the "CERTIFICATES"),
which shares were converted pursuant to Section 3.1 into the right to receive
shares of Gaming Co. Common Stock, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title
A-16
<PAGE>
to the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
Gaming Co. and Company may reasonably specify) and (ii) instructions for
effecting the surrender of the Certificates in exchange for certificates
representing shares of Gaming Co. Common Stock (plus cash in lieu of fractional
shares, if any, of Gaming Co. Common Stock as provided below). Upon surrender of
a Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by Gaming Co. and reasonably acceptable to Company,
together with such letter of transmittal, duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor a certificate
representing that number of whole shares of Gaming Co. Common Stock which such
holder has the right to receive pursuant to the provisions of this Article III,
and the Certificate so surrendered shall immediately be canceled. In the event
of a transfer of ownership of Company Common Stock prior to the Effective Time
which is not registered in the transfer records of Company, a certificate
representing the proper number of shares of Gaming Co. Common Stock may be
issued to a transferee if the Certificate representing such Company Common Stock
is presented to the Exchange Agent accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. After the Effective Time, each outstanding
Certificate which theretofore represented shares of Company Common Stock shall
represent only the right to receive shares of Gaming Co. Common Stock (and cash
in lieu of fractional shares, if any) pursuant to the terms hereof and shall not
be deemed to evidence ownership of the number of shares of Gaming Co. Common
Stock into which such shares of Company Common Stock were converted until the
Certificate therefor shall have been surrendered in accordance with this Section
3.2.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions declared or made after the Effective Time with respect to
Gaming Co. Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Certificate with respect to the shares
of Gaming Co. Common Stock the holder thereof is entitled to receive in exchange
therefor and no cash payment in lieu of fractional shares shall be paid to any
such holder pursuant to subsection (e) below until the holder of record of such
Certificate surrenders such Certificate. Subject to the effect of Applicable
Laws, following surrender of any such Certificate there shall be paid to the
record holder of the certificates representing whole shares of Gaming Co. Common
Stock issued in exchange therefor, without interest, (i) at the time of such
surrender, the amount of any cash payable in lieu of a fractional share of
Gaming Co. Common Stock to which such holder is entitled pursuant to subsection
(e) below and the amount of dividends or other distributions with a record date
after the Effective Time previously paid with respect to such whole shares of
Gaming Co. Common Stock and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time but
prior to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of Gaming Co. Common Stock.
(d) NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All shares of
Gaming Co. Common Stock issued upon the surrender for exchange of Certificates
in accordance with the terms hereof (and any cash paid pursuant to subsection
(c) or (e) of this Section 3.2) shall be deemed to have been issued in full
satisfaction of all rights pertaining to the shares of Company Common Stock
theretofore represented by such Certificates, subject, however, to the Surviving
Corporation's obligation to pay any dividends or make any other distributions
with a record date prior to the Effective Time which may have been declared or
made by Company on such shares of Company Common Stock in accordance with the
terms of this Agreement (to the extent permitted under Section 6.1) or prior to
the date hereof and which remain unpaid at the time of such surrender; and from
and after the Effective Time there shall be no further registration of transfers
on the stock transfer books of the Surviving Corporation of the shares of
Company Common Stock which were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates are presented to the Surviving
Corporation or Gaming Co. for any reason, such Certificates shall be canceled
and exchanged as provided in this Section 3.2.
A-17
<PAGE>
(e) NO FRACTIONAL SHARES. No certificate or scrip representing fractional
shares of Gaming Co. Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests will not entitle
the owner thereof to vote or to any other rights of a stockholder of Gaming Co.
Notwithstanding any other provision of this Agreement, each holder of shares of
Company Common Stock outstanding immediately prior to the Effective Time
exchanged pursuant to the Merger who would otherwise have been entitled to
receive a fraction of a share of Gaming Co. Common Stock (after taking into
account all Certificates held by such holder) shall receive, in lieu thereof,
cash (without interest) in an amount equal to such fractional part of a share of
Gaming Co. Common Stock multiplied by the per share closing sales price of
Gaming Co. Common Stock (as reported on the New York Stock Exchange Composite
Tape) on the first day of trading of Gaming Co. Common Stock on the NYSE after
the Effective Time.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund which
remains undistributed to the shareholders of Company for 180 days after the
Effective Time shall be delivered to Gaming Co. upon demand, and any shareholder
of Company who has not previously complied with this Section 3.2 shall
thereafter look only to Gaming Co. for payment of such shareholder's claim for
Gaming Co. Common Stock, any cash in lieu of fractional shares of Gaming Co.
Common Stock and any dividends or distributions with respect to Gaming Co.
Common Stock.
(g) NO LIABILITY. Neither Hilton, Gaming Co. nor Company shall be liable
to any holder of shares of Company Common Stock for any shares of Gaming Co.
Common Stock (or dividends or distributions with respect thereto) or cash in
lieu of fractional shares delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
(h) WITHHOLDING RIGHTS. Gaming Co. and the Surviving Corporation shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of Company Common Stock such
amounts as it is required to deduct and withhold with respect to such
consideration under the Code or any provision of federal, state, local or
foreign tax law. To the extent that amounts are so withheld by Gaming Co. or the
Surviving Corporation, such withheld amounts shall be treated for all purposes
of this Agreement as having been paid to the holder of the shares of Company
Common Stock in respect of which such deduction and withholding was made.
(i) LOST CERTIFICATES. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person claiming
such Certificate to be lost, stolen or destroyed and, if required by Gaming Co.
or the Surviving Corporation, the posting by such Person of a bond in such
reasonable amount as Gaming Co. or the Surviving Corporation may direct as
indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of Gaming Co. Common Stock and any cash in lieu
of fractional shares and unpaid dividends and distributions on shares of Gaming
Co. Common Stock deliverable in respect thereof pursuant to this Agreement.
(j) AFFILIATES. Notwithstanding anything herein to the contrary,
Certificates surrendered for exchange by any Affiliate of Company shall not be
exchanged until Gaming Co. has received an Affiliate Agreement from such
Affiliate.
(k) DISSENTING SHARES. Any shares of Common Stock held by a holder who
dissents from the Merger and becomes entitled to obtain payment for the value of
such Common Stock pursuant to the applicable provisions of Minnesota law shall
be herein called "DISSENTING SHARES." Any Dissenting Shares shall not, after the
Effective Time, be entitled to vote for any purpose or receive any dividends or
other distributions and shall not be converted into Gaming Co. Common Stock;
provided, however, that the Common Stock held by a dissenting shareholder who
subsequently withdraws a demand for payment, fails to comply fully with the
requirements of Minnesota law, or otherwise fails to establish the right of such
shareholder to be paid the value of such shareholder's shares under Minnesota
law shall be deemed to be have been converted into Gaming Co. Common Stock
pursuant to the terms and conditions referred to above.
A-18
<PAGE>
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents and warrants to Hilton that the statements contained in
this Article IV are true and correct, except as set forth in the Company
Disclosure Schedule. The Company Disclosure Schedule shall be arranged in
paragraphs corresponding to the numbered and lettered paragraphs contained in
this Article IV, and the disclosure in any paragraph shall not qualify other
paragraphs in this Article IV unless such disclosure is specifically referred to
in such other paragraphs.
Section 4.1. ORGANIZATION, STANDING AND CORPORATE POWER. Each of Company
and its Subsidiaries is a corporation, limited liability entity or partnership
duly incorporated or organized, validly existing and in good standing under the
laws of the jurisdiction in which it is incorporated or organized and has the
requisite corporate, limited liability company or partnership power and
authority to carry on its business as now being conducted. Each of Company and
its Subsidiaries is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualifications or licensing
necessary, other than in such jurisdictions where the failure to be so qualified
or licensed would not, individually or in the aggregate, have a Material Adverse
Effect with respect to Company or the Company Retained Business. Company has
made available to Hilton complete and correct copies of its Articles of
Incorporation and Company Bylaws and the comparable charter or organizational
documents of its Subsidiaries, in each case, as amended to the date of this
Agreement.
Section 4.2. SUBSIDIARIES. The Company Disclosure Schedule sets forth all
the Subsidiaries of Company and each other Person in which Company owns,
directly or indirectly, any interest. All the outstanding shares of capital
stock or other equity interests of each Subsidiary of Company are duly
authorized, validly issued, fully paid and non-assessable and are owned by
Company, by another wholly-owned Subsidiary of Company or by Company and another
wholly-owned Subsidiary of Company, free and clear of any and all mortgages,
security interests, liens, claims, pledges, restrictions, leases, title
exceptions, rights of others, charges or other encumbrances ("ENCUMBRANCES").
Subject to compliance with applicable Gaming Laws, the respective articles of
incorporation and bylaws or other organizational documents of Company's
Subsidiaries do not contain any provision limiting or otherwise restricting the
ability of Gaming Co., following the Effective Time, from controlling such
Subsidiaries on the same basis as Company.
Section 4.3. CAPITALIZATION. The authorized capital stock of Company
consists of 100,000,000 shares of Common Stock, $.01 par value per share. As of
June 17, 1998, (i) 42,293,145 shares of Company Common Stock were issued and
outstanding, all of which are validly issued, fully paid and nonassessable, (ii)
1,788 shares of Company Common Stock were owned by Company and held in street
name by Company, (iii) 100,000 shares of Company Common Stock were reserved for
issuance pursuant to that certain stock purchase warrant issued to the Corporate
Commission of the Mille Lacs Band of Ojibwe Indians, (iv) 4,224,108 shares of
Company Common Stock were reserved for issuance upon exercise of outstanding
options to purchase shares of Company Common Stock under Company's 1991 Stock
Option and Compensation Plan, (v) 150,000 shares of Company Common Stock were
reserved for issuance upon exercise of outstanding options to purchase shares of
Company Common Stock under Company's Director Option Plan and (vi) 151,500
shares of Company Common Stock were reserved for issuance upon exercise of
outstanding options to purchase Shares of Company Common Stock under Company's
Non-Plan Director Option Agreements (collectively, the plans or agreements
described in clauses (iv) and (vi), the "COMPANY STOCK PLANS" and the options
issued thereunder are referred to as the " COMPANY STOCK OPTIONS"). Except as
set forth above, as of June 17, 1998, no shares of capital stock or other voting
or equity securities of Company were issued, reserved for issuance or
outstanding. No change in such capitalization has occurred between June 17, 1998
and the date of this Agreement other than the issuance of Common Stock upon the
exercise of Company Stock Options. There are no other outstanding contractual
rights the value of which is derived from the financial performance of Company
or the value of
A-19
<PAGE>
shares of Company Common Stock. All outstanding shares of capital stock of
Company are, and all shares which may be issued as contemplated by this
Agreement will be, when issued, duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. As of the date of this
Agreement, there are no bonds, debentures, notes or other indebtedness of
Company or any other Person having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
shareholders of Company may vote. Except as set forth above, as of the date of
this Agreement, there are no outstanding securities, options, warrants, calls,
rights, commitments, agreements, arrangements or undertakings of any kind to
which Company or any of its Subsidiaries is a party, or by which any of them is
bound, obligating Company or any of its Subsidiaries to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock or
other voting or equity securities of Company or any of its Subsidiaries or
obligating Company or any of its Subsidiaries to issue, grant, extend or enter
into any such security, option, warrant, call, right, commitment, agreement,
arrangement or undertaking. Other than redemptions, purchases and other
acquisitions required by applicable provisions under Gaming Laws or similar
provisions contained in the terms of the capital stock of Company or any of its
Subsidiaries, as of the date of this Agreement, there are not any outstanding
contractual obligations of Company or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any shares of capital stock of Company or any of its
Subsidiaries. As of the time of the Company Distribution, (i) the issued and
outstanding shares of common stock of Lakes will be equal to the shares of
Company Common Stock that are then issued and outstanding, (ii) Lakes will have
issued options as described in the Company Distribution Agreement and (iii) all
outstanding shares of capital stock of Lakes will be duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive rights.
Section 4.4. AUTHORITY; ENFORCEABILITY; NO CONFLICT; CONSENTS.
(a) Each of Company and Lakes has the requisite corporate power and
authority to enter into each of the Transaction Documents to which it is a party
and to consummate the transactions contemplated thereby, subject to, with
respect to the Merger, the approval of this Agreement and the Merger by the
affirmative vote of the holders of at least a majority of the voting power of
all shares of Company Common Stock entitled to vote (the "COMPANY SHAREHOLDER
APPROVAL") and, with respect to the Company Distribution, the declaration of the
Company Distribution by Company's Board of Directors and the ratification of the
Company Distribution by the affirmative vote of holders of at least a majority
of the outstanding shares of Company Common Stock. The execution and delivery by
each of Company and Lakes of each of the Transaction Documents to which it is a
party and the consummation by each of Company and Lakes of the transactions
contemplated thereby have been duly authorized by all necessary corporate action
on the part of Company and Lakes, subject to, with respect to the Merger, the
Company Shareholder Approval and, with respect to the Company Distribution, the
declaration of the Company Distribution by Company's Board of Directors and the
ratification of the Company Distribution by the affirmative vote of holders of
at least a majority of the outstanding shares of Company Common Stock. Each of
the Transaction Documents to which it is a party (other than the Company
Distribution Agreement and the Company Ancillary Agreements) has been duly
executed and delivered by each of Company and Lakes and constitutes the valid
and binding obligation of Company and Lakes (as applicable), enforceable in
accordance with its terms, subject to the Bankruptcy and Equity Exception. Prior
to the Company Distribution, the Company Distribution Agreement and the Company
Ancillary Agreements will be duly executed and delivered by each of Company and
Lakes and upon such execution and delivery, will constitute the valid and
binding obligations of each of Company and Lakes, enforceable against each of
them in accordance with its terms, subject to the Bankruptcy and Equity
Exception.
(b) The execution and delivery by each of Company and Lakes of each of the
Transaction Documents to which it is a party does not, and the consummation of
the transactions contemplated thereby will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or cause loss of a material benefit under, or result in the
creation or maturation of any lien, liability or purchase right upon
A-20
<PAGE>
any of the properties or assets of Company or any of its Subsidiaries under, (i)
the Articles of Incorporation or Company Bylaws or the comparable charter or
organizational documents of its Subsidiaries, (ii) any loan or credit agreement,
note, bond, mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise or license applicable to Company or any of its
Subsidiaries or their respective properties or assets or (iii) subject to the
governmental filings and other matters referred to in Section 4.4(c), any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to Company or any of its Subsidiaries or their respective properties or assets,
other than, in the case of clauses (ii) or (iii), any such conflicts,
violations, defaults, rights, liabilities or liens that would not, individually
or in the aggregate, (x) have a Material Adverse Effect with respect to Company
or the Company Retained Business, (y) impair, in any material respect, the
ability of Company or Lakes to perform its obligations under each of the
Transaction Documents to which it is a party or (z) prevent or significantly
delay the consummation of any of the transactions contemplated by the
Transaction Documents.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Authority is required by Company or
any of its Subsidiaries in connection with the execution and delivery of each of
the Transaction Documents to which Company is a party or the consummation of the
transactions contemplated thereby, except for (i) the filing of a pre-merger
notification and report form under the HSR Act, (ii) the filing with the SEC of
(x) the Joint Proxy Statement/ Prospectus Prospectus and the Form S-4 and the
obtaining of any related orders as may be so required, (y) a registration
statement on Form 10 (the "LAKES FORM 10") under the Exchange Act relating to
the equity securities of Lakes, and (z) such reports and filings under Section
13 and Section 16 of the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated by this Agreement, (iii) the filing
of Articles of Merger with the Minnesota Secretary of State, (iv) the filing of
notices with and the approval by (A) the Mississippi Gaming Commission under the
Mississippi Gaming Laws, (B) the Minnesota Gambling Control Board under the
Minnesota Gaming Laws, (C) the Louisiana Gaming Control Board under the
Louisiana Gaming Laws and (D) the National Indian Gaming Commission and any
other appropriate Governmental Authorities as may be required under the Indian
Gaming Laws, (v) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required by any applicable
state securities or "blue sky" laws and (vi) such other consents, approvals,
orders, authorizations, registrations, declarations and filings which, if not
obtained or made, would not, individually or in the aggregate: (1) have a
Material Adverse Effect with respect to Company or the Company Retained
Business; (2) impair, in any material respect, the ability of Company or Lakes
to perform its obligations under the Transaction Documents to which it is a
party; or (3) prevent or significantly delay the consummation of the
transactions contemplated by the Transaction Documents.
Section 4.5. VOTE REQUIRED; OWNERSHIP OF HILTON CAPITAL STOCK; STATE
TAKEOVER STATUTES.
(a) The Company Shareholder Approval is the only vote of the holders of any
class or series of Company's capital stock necessary to approve the Transaction
Documents to which Company is a party and the transactions contemplated
thereunder.
(b) Neither Company nor any of its Subsidiaries beneficially owns, either
directly or indirectly, any shares of Hilton capital stock.
(c) The Board of Directors of Company has taken all actions necessary under
the MBCA, including approving the transactions contemplated by the Agreement and
each of the Transaction Documents to which Company is a party, to ensure that
Section 302A.673 of the MBCA applicable to a "business combination" does not,
and will not, apply to the transactions contemplated hereunder and thereunder.
The restrictions contained in Section 302A.671 of the MBCA applicable to
"control share acquisitions" will not apply to the authorization, execution,
delivery and performance of this Agreement or each of the Transaction Documents
by Company to which it is a party or the consummation of the Merger by Company.
No other "fair price," "moratorium," or other similar anti-takeover statute or
regulation is
A-21
<PAGE>
applicable to Company or (by reason of Company's participation therein) the
Merger or the other transactions contemplated by this Agreement or the other
Transaction Documents to which it is a party.
Section 4.6. COMPLIANCE WITH APPLICABLE LAWS.
(a) Each of Company and its Subsidiaries has in effect all Permits necessary
for it to own, lease or operate its properties and assets and to carry on its
business as now conducted, other than such Permits the absence of which would
not, individually or in the aggregate, have a Material Adverse Effect with
respect to Company or the Company Retained Business, and there has occurred no
default under any such Permit other than such defaults which, individually or in
the aggregate, would not have a Material Adverse Effect with respect to Company
or the Company Retained Business. Company and its Subsidiaries are in compliance
with all Applicable Laws, except for such noncompliance which, individually or
in the aggregate, would not have Material Adverse Effect with respect to Company
or the Company Retained Business.
(b) Each of Company and its Subsidiaries is, and has been, and each entity
formerly owned by Company or its Subsidiaries, while so owned, was in compliance
in all respects with all applicable Environmental Laws, except for such
noncompliance which, individually or in the aggregate, would not have Material
Adverse Effect with respect to Company or the Company Retained Business.
(c) During the period of ownership or operation by Company and its
Subsidiaries of any of their owned or leased properties, there has been no
Release of Hazardous Material in, on, under or affecting such properties and
none of Company or its Subsidiaries has disposed of any Hazardous Material or
any other substance in a manner that has led to, or could reasonably be
anticipated to lead to, a Release except in each case for those which are not,
individually or in the aggregate, reasonably likely to have a Material Adverse
Effect with respect to Company or the Company Retained Business.
Section 4.7. COMPANY SEC DOCUMENTS; UNDISCLOSED LIABILITIES.
(a) Each of Company and its Subsidiaries has filed all required reports,
registration statements, proxy statements, forms and other documents with the
SEC since January 1, 1995 (as such documents since the time of their filing have
been amended or supplemented, collectively, the "COMPANY SEC DOCUMENTS"). As of
their respective dates, (i) the Company SEC Documents (including any financial
statements filed as a part thereof or incorporated by reference therein)
complied in all material respects with the applicable requirements of the
Securities Act or the Exchange Act, as applicable, and the rules and regulations
of the SEC promulgated thereunder applicable to such Company SEC Documents and
(ii) none of the Company SEC Documents contained at the time they were filed or
declared effective any untrue statement of a material fact or omitted at the
time they were filed or declared effective to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances in which they were made, not misleading. At their
respective dates, the financial statements of Company included in the Company
SEC Documents complied as to form in all material respects with the applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, were prepared in accordance with generally accepted
accounting principles ("GAAP") (except, in the case of unaudited statements, as
permitted by Form 10-Q of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
presented (subject, in the case of unaudited financial statements, to normal,
year-end audit adjustments) the consolidated financial position of Company and
its consolidated Subsidiaries as of and at the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended.
(b) Except as disclosed in the Company SEC Documents filed and publicly
available prior to the date of this Agreement and except for liabilities and
obligations incurred in the ordinary course of business consistent with past
practice since March 29, 1998, Company and its Subsidiaries do not have any
indebtedness, obligations or liabilities of any kind (whether accrued, absolute,
contingent or otherwise) (i) required by GAAP to be reflected on a consolidated
balance sheet of Company and its consolidated
A-22
<PAGE>
Subsidiaries or in the notes, exhibits or schedules thereto or (ii) which
reasonably could be expected to have a Material Adverse Effect with respect to
Company or the Company Retained Business. Except as set forth under the "Legal
Proceedings" section of Company's 1997 10-K, neither Company nor any of its
Subsidiaries have any indebtedness, obligation or liabilities of any kind
(whether accrued, absolute, contingent or otherwise) relating to Stratosphere or
Stratosphere's assets, liabilities, operations or businesses. Except for
liabilities and obligations incurred in the ordinary course of business,
consistent with past practices since March 29, 1998, neither Company nor any of
its Subsidiaries have any indebtedness, obligation or liabilities of any kind
(whether accrued, absolute, contingent or otherwise) relating to the Lakes Group
or its assets, liabilities, operations or businesses (i) required by GAAP to be
reflected on a consolidated balance sheet of Lakes and its consolidated
Subsidiaries or in the notes, exhibits or schedules thereto (assuming the
Company Distribution had been effected) or (ii) which reasonably could be
expected to have a Material Adverse Effect with respect to Lakes or the Lakes
Business.
Section 4.8. ABSENCE OF CHANGES OR EVENTS. Except as disclosed in the
Company SEC Documents filed and publicly available prior to the date hereof, and
except for the Company Distribution and the other transactions contemplated by
the Company Distribution Agreement, (a) since December 31, 1997, there has not
been any change or occurrence which resulted in or is reasonably likely to have
a Material Adverse Effect with respect to the Company Retained Business and (b)
from December 31, 1997 to the date of this Agreement, Company and its
Subsidiaries have conducted the Company Retained Business only in the ordinary
course and there has not been (i) any declaration, setting aside or payment of
any dividend or other distribution with respect to the capital stock of Company,
(ii) any issuance of any shares of Company Common Stock or other capital stock
of Company or any securities convertible into or exchangeable or exercisable for
capital stock of Company that is not reflected in Section 4.3, (iii) any split,
combination or reclassification of any of the capital stock of Company or any
issuance or the authorization of any issuance of any other securities in respect
of, in lieu of or in substitution for shares of capital stock of Company, (iv)
(x) any granting by Company or any of its Subsidiaries to any director or
officer of Company or any of its Subsidiaries of any increase in compensation,
(y) any granting by Company or any of its Subsidiaries to any such Person of any
increase in severance or termination pay, or (z) except for employment,
severance or termination arrangements in the ordinary course of business
consistent with past practice with employees other than any officer of Company
or any of its Subsidiaries, any entry by Company or any of its Subsidiaries into
any employment, severance or termination agreement with any such Person, (v) any
acquisition of or commitment to purchase or build any property or project
involving an expenditure in excess of $2 million in the aggregate, except to the
extent reflected in the Company's Capital Expenditure Plan attached hereto as
Exhibit F or as set forth on the Company Disclosure Schedule, (vi) any damage,
destruction or loss that has or reasonably could be expected to have a Material
Adverse Effect with respect to Company or the Company Retained Business or (vii)
any change in accounting methods, principles or practices by Company materially
affecting its assets, liabilities or business, except insofar as may have been
required by a change in GAAP.
Section 4.9. LITIGATION. Except as described in the Company SEC Documents
filed and publicly available prior to the date hereof, there is no action, suit
or proceeding, claim, arbitration or investigation pending or, to the knowledge
of Company, threatened against Company or any of its Subsidiaries or any member
of the Lakes Group that, individually or in the aggregate, could reasonably be
expected to (a) have a Material Adverse Effect with respect to Company or the
Company Retained Business or (b) prevent or significantly delay the consummation
of the transactions contemplated by the Transaction Documents. Except as
disclosed in the Company SEC Documents filed and publicly available prior to the
date hereof, there is no judgment, order, injunction or decree of any
Governmental Authority outstanding against Company or any of its Subsidiaries or
any member of the Lake Group that, individually or in the aggregate, could
reasonably be expected to have any effect referred to in the foregoing clauses
(a) and (b).
A-23
<PAGE>
Section 4.10. TAXES.
(a) Company and each of its Subsidiaries, and each affiliated group (within
the meaning of Section 1504 of the Code) of which Company or any of its
Subsidiaries is or has ever been a member, has timely filed all federal income
Tax Returns and all other material Tax Returns required to be filed by them. All
such Tax Returns are complete and correct in all material respects. Company and
each of its Subsidiaries has paid (or Company has paid on its Subsidiaries'
behalf) all Taxes shown as due on such Tax Returns. The most recent consolidated
financial statements contained in Company SEC Documents reflect an adequate
reserve for all Taxes payable by Company and its Subsidiaries for all taxable
periods and portions thereof through the date of such financial statements.
(b) No material deficiencies for any Taxes have been proposed, asserted or
assessed against Company or any of its Subsidiaries that have not been fully
paid or adequately provided for in the appropriate financial statements of
Company and its Subsidiaries, no requests for waivers of the time to assess any
Taxes are pending, and none of Company or any of its Subsidiaries has waived any
statute of limitations in respect of Taxes or agreed to any extension of time
with respect to a Tax assessment or deficiency. There is no dispute or claim
concerning any material Tax Liability of any of Company and its Subsidiaries
either (i) claimed or raised by any authority in writing or (ii) as to which any
of the officers or employees responsible for Tax matters of any of Company and
its Subsidiaries has knowledge based upon personal contact with any agent of
such authority. The statute of limitations for the federal income Tax Returns of
Company and each of its Subsidiaries consolidated in such Tax Returns have
expired for all years through July 31, 1992.
(c) No material liens for Taxes exist with respect to any assets or
properties of Company or any of its Subsidiaries, except for statutory liens for
Taxes not yet due.
(d) Except as contemplated by the Company Distribution Agreement, none of
Company or any of its Subsidiaries is a party to or is bound by any tax sharing
agreement, tax indemnity obligation or similar agreement, arrangement or
practice with respect to Taxes (including any advance pricing agreement, closing
agreement or other agreement relating to Taxes with any taxing authority).
(e) None of Company or any of its Subsidiaries has taken or agreed to take
any action that would prevent (i) the Merger from constituting a reorganization
qualifying under the provisions of Section 368(a)(1)(B) of the Code or (ii) the
Company Distribution from constituting a tax-free transaction, solely with
respect to Company's shareholders, within the meaning of Section 355 of the
Code.
(f) There is not any employment, severance or termination agreement or other
compensation arrangement or employee benefit plan (as defined in Section 3(3) of
ERISA) currently in effect which provides for the payment of any amount (whether
in cash or property or the vesting of property) as a result of any of the
transactions contemplated by the Transaction Documents to any employee, officer
or director of Company or any of its affiliates who is a "disqualified
individual" (as such term is defined in proposed Treasury Regulation Section
1.280G-1) that would be characterized as an "excess parachute payment" (as such
term is defined in Section 280G(b)(1) of the Code).
(g) Company and its Subsidiaries have complied in all material respects with
all applicable laws, rules and regulations relating to the payment and
withholding of Taxes.
(h) There are no federal, state, local or foreign audits or other
administrative proceedings or court proceedings presently pending with regard to
any federal or state, local or foreign Taxes or Tax Returns of Company or its
Subsidiaries and neither Company nor any of its Subsidiaries has received a
written notice of any pending audit or proceeding. To the Company's knowledge,
Company has settled the audit of its federal Tax Return relating to the
depreciation of its dockside casinos. The terms of such settlement are set forth
on the Company Disclosure Schedule (the "SETTLEMENT AGREEMENT").
A-24
<PAGE>
(i) Neither Company nor any of its Subsidiaries has agreed to or is required
to make any adjustments under Section 481(a) of the Code.
(j) Neither Company nor any of its Subsidiaries has, with regard to any
assets or property held or acquired by any of them, filed a consent to the
application of Section 341(f) of the Code or agreed to have Section 341(f)(2) of
the Code apply to any disposition of a subsection (f) asset (as such term is
defined in Section 341(f)(4) of the Code) owned by Company or any of its
Subsidiaries.
(k) No property owned by Company or any of its Subsidiaries: (i) is property
required to be treated as being owned by another Person pursuant to the
provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended
and in effect immediately prior to the enactment of the Tax Reform Act of 1986;
(ii) constitutes "tax exempt use property" within the meaning of Section
168(h)(1) of the Code; or (iii) is tax exempt bond financed property within the
meaning of Section 168(g) of the Code.
Section 4.11. EMPLOYEE BENEFITS.
(a) The Company Disclosure Schedule lists all employee benefit plans (as
defined in Section 3(3) of ERISA) and all other employee benefit plans,
agreements, contracts or other benefit arrangements, including executive
compensation and directors' benefit plans, and payroll practices which Company,
any ERISA Affiliate of Company or any of its Subsidiaries maintains, contributes
to or has any obligation to or liability for (collectively, the "EMPLOYEE
BENEFIT PLANS").
(b) With respect to each Employee Benefit Plan, Company has made available
to Hilton a true and correct copy of (i) the most recent annual report (Form
5500) filed with the Service, (ii) such Employee Benefit Plan and all amendments
thereto, (iii) each trust agreement and group annuity contract, if any, and all
amendments thereto relating to such Employee Benefit Plan, (iv) the most recent
actuarial report or valuation relating to any such Employee Benefit Plan subject
to Title IV of ERISA, (v) the most recent determination letter with respect to
any such Employee Benefit Plan which is intended to be "qualified" within the
meaning of Section 401(a) of the Code and (vi) the most recent summary plan
descriptions.
(c) As of the date hereof, (i) all material payments required to be made by
or under any Employee Benefit Plan, any related trusts, or any related
collective bargaining agreement have been made or are being processed in
accordance with normal operating procedures, and except as set forth in
Company's financial statements, all material amounts required to be reflected
thereon have been properly accrued to date as liabilities under or with respect
to each Employee Benefit Plan for the current year; (ii) Company and its
Subsidiaries have performed all material obligations required to be performed by
them under any Employee Benefit Plan; (iii) the Employee Benefit Plans have been
administered in material compliance with their terms and the requirements of
ERISA, the Code and other Applicable Laws; (iv) there are no material actions,
suits, arbitrations or claims (other than routine claims for benefits) pending
or, to Company's knowledge, threatened with respect to any Employee Benefit
Plan; (v) Company and its Subsidiaries have no liability as a result of any
"prohibited transaction" (as defined in Section 406 of ERISA and Section 4975 of
the Code) for any material excise tax or civil penalty and (vi) neither Company
nor any Subsidiary of Company has any liabilities or obligations with respect to
any Employee Benefit Plan, whether accrued, contingent or otherwise, except
liabilities or obligations (A) incurred in the ordinary course of business
consistent with past practice or (B) which are fully funded or reserved for on
the most recent financial statements of Company included in the Company SEC
Documents.
(d) None of the Employee Benefit Plans, other than Multiemployer Plans, is
subject to Title IV of ERISA.
(e) Company and its Subsidiaries have not, with respect to any Multiemployer
Plan, suffered or otherwise caused a "complete withdrawal" or "partial
withdrawal," as such terms are respectively defined in Sections 4023 and 4025 of
ERISA, which has resulted in any material liability to Company or any of its
Subsidiaries which has not been fully satisfied or which is not set forth in
Company's financial statements filed with the Company SEC Documents.
A-25
<PAGE>
(f) Each of the Pension Plans which is intended to be "qualified" within the
meaning of Section 401(a) of the Code has been determined by the Service to be
so "qualified" and Company knows of no fact which would adversely affect the
qualified status of any such Pension Plan.
(g) Neither the execution and delivery of the Transaction Documents to which
Company is a party, nor the consummation of the transactions contemplated
thereby will: (i) result in any material payment becoming due, or materially
increase the amount of compensation due, to any current or former employee of
Company or any of its Subsidiaries; (ii) materially increase any benefits
otherwise payable under any Employee Benefit Plan; or (iii) result in the
acceleration of the time of payment or vesting of any such material benefits.
(h) The Incentive Pool Agreement has been terminated and there are no
amounts due or payable thereunder.
Section 4.12. BROKERS AND INTERMEDIARIES. No broker, investment banker,
financial advisor or other Person, other than Ladenburg Thalmann & Co. Inc.
(whose fee arrangements have been disclosed to Hilton in writing and will not be
modified subsequent to the date of this Agreement), the fees and expenses of
which will be paid by Company, is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Company.
Section 4.13. OPINION OF FINANCIAL ADVISOR. Company has received the
opinion of Ladenburg Thalmann & Co. Inc. to the effect that, as of the date of
this Agreement, the consideration to be received by Company's shareholders in
the Merger and the Company Distribution, considered as a unitary transaction, is
in the aggregate fair to Company's shareholders from a financial point of view
(the "FAIRNESS OPINION").
Section 4.14. TITLE TO PROPERTIES.
(a) The Company Disclosure Schedule sets forth a complete list of all
material real property owned in fee by Company or any of its Subsidiaries and
sets forth all material real property leased by Company or any of its
Subsidiaries as lessee as of the date hereof (such owned and leased material
real property, including all Improvements thereon, referred to collectively as
the "REAL PROPERTY"). The Real Property set forth on the Company Disclosure
Schedule comprises all of the material real property necessary and/or currently
used in the operations of the business of Company and its Subsidiaries. Company
and its Subsidiaries have good and valid title to, or (as to Real Property
designated as leased) a valid leasehold interest in, all of the Real Property.
The Real Property is free of Encumbrances, except for Permitted Encumbrances and
Encumbrances created under the First Mortgage Notes Indenture, and the
consummation of the transactions contemplated by the Transaction Documents will
not create any Encumbrance (other than Permitted Encumbrances) on any of the
Real Property. Each of Company and its Subsidiaries enjoys peaceful and
undisturbed possession under all leases of Real Property, except for such
breaches of the right to peaceful and undisturbed possession that do not
materially interfere with the ability of Company and its Subsidiaries to conduct
their business on such property.
(b) No toxic or hazardous wastes, substances or materials are stored or
otherwise held on the Real Property in violation of Environmental Laws, and to
the knowledge of Company, no Contamination exists at, on or under the Real
Property at levels that contravene those allowed by Environmental Laws.
Section 4.15. INDIAN GAMING AND DEBT AGREEMENTS AND LAKES AGREEMENTS. The
execution and delivery by each of Company and Lakes of this Agreement and each
of the Transaction Documents to which it is a party does not, and the
consummation of the transactions contemplated hereby and thereby will not,
conflict with, or result in any violation of, or default (with or without notice
of lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or cause loss of a material
benefit under, or result in the creation or maturation of any lien, liability or
purchase right upon any of the properties or assets of Company or any Subsidiary
under any of the Indian Gaming
A-26
<PAGE>
and Debt Agreements or the Lakes Agreements and in each case, to which Company
or any of its Affiliates or Subsidiaries is a party or subject to, or to
Company's knowledge, to which any other Person is a party or subject to, or have
or result in a Material Adverse Effect to Company with respect to any of the
Indian Gaming and Debt Agreements or Lakes Agreements to which Company or any of
its Affiliates or Subsidiaries is a party or subject to, or to Company's
knowledge, to which any other Person is a party or subject to.
Section 4.16. INSURANCE. Company and its Subsidiaries have insurance
coverage with insurance companies or associations in such amounts, on such terms
and covering such risks, including fire and other risks insured against by
extended coverage, as is reasonably prudent, and each has public liability
insurance, insurance against claims for personal injury or death or property
damage occurring in connection with any of activities of Company or any of its
Subsidiaries or of any properties owned, occupied or controlled by Company or
any of its Subsidiaries, in such amount as is reasonably prudent.
Section 4.17. TRANSACTIONS WITH COMPANY AFFILIATES. Except as disclosed in
the "Certain Transactions" section of Company's 1998 Proxy, from January 1, 1995
through the date of this Agreement, there have been no transactions, agreements,
arrangements or understandings between Company or its Subsidiaries, on the one
hand, and Company's affiliates or other Persons, on the other hand, that would
be required to be disclosed under Item 404 of Regulation S-K under the
Securities Act.
Section 4.18. CERTAIN MATTERS RELATING TO STRATOSPHERE AND THE LAKES GROUP.
(a) Neither Company nor any of its Subsidiaries has any obligation to make
contributions or advances to, or otherwise fund or guarantee indebtedness or
operations of, or undertake any liabilities pertaining to, Stratosphere.
(b) Company has settled the Stratosphere vacation club litigation in the
District Court in Clark County, Nevada (Richard Duncan, et al. v. Bob and Jane
Doe Stupak, et al.--Case No. A370127) and the terms of such settlement are set
forth on the Company Disclosure Schedule.
(c) A description of the Stratosphere action for Recovery of Preferential
Transfers Pursuant to Sections 547 and 550 of the Bankruptcy Court filed with
the U.S. Bankruptcy Court for the District of Nevada against Company is set
forth on the Company Disclosure Schedule.
(d) Neither Company nor any of its Subsidiaries has any obligation to
provide indemnification to any of Company's current or former officers or
directors with respect to such officer's or director's employment or service
with any Person except for (i) Company or its Subsidiaries, (ii) Stratosphere
Corporation, (iii) New Horizons Kid Quest, Inc. and (iv) Innovative Gaming
Corporation of American (in the case of clauses (iii) and (iv), only pursuant to
the Indemnification Agreement, dated as of December 31, 1997, by and between
Company and Lyle Berman).
(e) The Company Disclosure Schedule lists all of the material liabilities of
Company and its Mississippi Subsidiaries (as defined in the Company Distribution
Agreement) that arise out of, or are specifically associated with, either the
Lakes Business or any member of the Lakes Group.
(f) The Company Disclosure Schedule lists and describes all of Company's
oral marketing agreements with any Indian tribe relating to any of the Indian
Gaming and Debt Agreements.
Section 4.19. PRO FORMA FINANCIAL INFORMATION OF COMPANY RETAINED BUSINESS.
(a) Attached hereto as Exhibit D is an unaudited pro forma consolidated
balance sheet of the Company Retained Business of Company and its Subsidiaries
at December 28, 1997 (including certain explanatory notes thereto, the "COMPANY
RETAINED BUSINESS BALANCE SHEET") and an unaudited pro forma consolidated
statement of operations for the Company Retained Business of Company and its
Subsidiaries for the period ended December 28, 1997 (including certain
explanatory notes thereto, the "COMPANY RETAINED BUSINESS INCOME STATEMENT" and
together with the Company Retained Business Balance Sheet, the "COMPANY RETAINED
BUSINESS FINANCIAL STATEMENTS"). The Company Retained Business Financial
A-27
<PAGE>
Statements have been derived from Company's financial statements, and prepared
in accordance with the principles set forth in the notes thereto. The Company
Retained Business Financial Statements fairly present in all material respects
(on the basis indicated in the notes thereto) the consolidated financial
position of Company and its Subsidiaries at the date thereof, after giving pro
forma effect to the Company Distribution (assuming the Company Distribution
occurred on December 28, 1997), and the consolidated results of their operations
for the one-year period then ended, after giving pro forma effect to the Company
Distribution (assuming the Company Distribution occurred on December 29, 1996)
At the Effective Time, except as contemplated by this Agreement or the Company
Distribution Agreement, neither Lakes nor any of its Subsidiaries will own or
have rights to use any of the assets or properties, whether tangible, intangible
or mixed, which are necessary for the conduct of the Company Retained Business
as conducted on the date hereof or be a party to any material agreement or
arrangement with the Surviving Corporation or any of its Subsidiaries, other
than as described in the Transaction Documents.
(b) Attached hereto as Exhibit E is an unaudited pro forma consolidated
balance sheet of Lakes and its Subsidiaries at December 28, 1997 (including
certain explanatory notes thereto, the "LAKES BALANCE SHEET"), after giving pro
forma effect to the Company Distribution (assuming the Company Distribution
occurred on December 28, 1997).
Section 4.20. CAPITAL EXPENDITURE PLAN. Attached hereto as Exhibit F is a
true and correct copy of Company's Capital Expenditure Plan 1998 - 1999, dated
June 3, 1998 (such plan, as it is in existence on the date hereof, the "COMPANY
CAPITAL PLAN").
Section 4.21. PROHIBITED PAYMENTS. Company has not entered into any
understanding, agreement or arrangement, written or oral, under or pursuant to
which bribes, kickbacks, illegal rebates, payoffs or other forms of illegal
payments have been or will be made, provided or suffered.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF HILTON
Hilton represents and warrants to Company that the statements contained in
this Article V are true and correct, except as set forth in the Hilton
Disclosure Schedule. The Hilton Disclosure Schedule shall be arranged in
paragraphs corresponding to the numbered and lettered paragraphs contained in
this Article V, and the disclosure in any paragraph shall not qualify other
paragraphs in this Article V unless such disclosure is specifically referred to
in such other paragraphs. As used in this Agreement, any reference to Hilton and
its Subsidiaries shall be a reference to Hilton and each of its Subsidiaries.
Section 5.1. ORGANIZATION, STANDING AND CORPORATE POWER. Each of Hilton
and its Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of the jurisdiction in which it is
organized and has the requisite corporate or partnership power and authority to
carry on its business as now being conducted. Each of Hilton and its
Subsidiaries is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualifications or licensing
necessary, other than in such jurisdictions where the failure to be so qualified
or licensed would not, individually or in the aggregate, have a Material Adverse
Effect with respect to the Gaming Co. Business. Hilton has made available to
Company complete and correct copies of its Certificate of Incorporation and
Hilton Bylaws and the comparable charter or organizational documents of its
Subsidiaries, in each case, as amended to the date of this Agreement.
Section 5.2. OWNERSHIP OF GAMING CO. As of the date hereof, all of the
outstanding shares of capital stock of Gaming Co. are owned by Hilton, free and
clear of any Encumbrances except for any Encumbrance that would not have a
Material Adverse Effect with respect to the Gaming Co. Business. Subject to
compliance with applicable Gaming Laws, the articles of incorporation and bylaws
of Gaming Co. do not contain any provision limiting or otherwise restricting the
ability of Gaming Co., following the Effective Time, from owning the Surviving
Corporation.
A-28
<PAGE>
Section 5.3. CAPITALIZATION.
(a) The authorized capital stock of Hilton consists of 400,000,000 shares of
Hilton Common Stock, par value $2.50 per share, and 24,832,700 shares of
preferred stock, par value $1.00 per share (the "HILTON PREFERRED STOCK"). As of
May 31, 1998, (i) 246,804,578 shares of Hilton Common Stock and 14,832,200
shares of Hilton Preferred Stock, designated as "Preferred Redeemable Increased
Dividend Equity Securities-SM-, 8% PRIDES-SM-, Convertible Preferred Stock,"
were issued and outstanding, (ii) 4,414,827 shares of Hilton Common Stock, and
no shares of Hilton Preferred Stock, were held in the treasury of Hilton or by
any Subsidiary of Hilton, (iii) 24,000 shares of Hilton Common Stock were
reserved for issuance upon the exercise of options issued under Hilton's 1997
Independent Director Stock Option Plan, (iv) 7,100,417 shares of Hilton Common
Stock were reserved for issuance upon the exercise of outstanding options issued
under Hilton's 1996 Stock Incentive Plan, as amended, (v) 6,000,000 shares of
Hilton Common Stock were reserved for issuance upon the exercise of outstanding
options issued under Hilton's 1996 Chief Executive Stock Incentive Plan, (vi)
2,937,701 shares of Hilton Common Stock were reserved for issuance upon the
exercise of outstanding options issued under Hilton's 1990 Stock Option and
Stock Appreciation Rights Plan, as amended, (vii) 397,200 shares of Hilton
Common Stock were reserved for issuance upon the exercise of outstanding options
issued under Hilton's 1984 Stock Option and Stock Appreciation Rights Plan, as
amended (the options issued pursuant to the stock option plans referred to in
clauses (iii) through (vii) being collectively referred to as the "HILTON STOCK
OPTIONS"), (viii) 1,707,956 shares of Hilton Common Stock were reserved for
issuance under the Hilton Employee Stock Purchase Plan (the "EMPLOYEE STOCK
PURCHASE PLAN", (ix) 15,488,867 shares were reserved for issuance upon
conversion of Hilton's outstanding Convertible Subordinated Notes due 2006,
which were as of such date convertible into 15,488,867 shares of Hilton Common
Stock ("HILTON CONVERTIBLE NOTES"), and (x) 2,468,046 shares of Hilton Preferred
Stock, denominated as Series A Junior Participating Preferred Stock, were
reserved for issuance in connection with the Hilton Rights Agreement. Except as
set forth above, as of May 31, 1998, no shares of capital stock or other voting
securities of Hilton were issued, reserved for issuance or outstanding. No
change in such capitalization has occurred between May 31, 1998 and the date of
this Agreement other than the issuance of Hilton Common Stock upon the exercise
of Hilton Stock Options or the conversion of Hilton Convertible Notes or Hilton
Preferred Stock. Except as set forth above, as of the date of this Agreement,
there are no other outstanding contractual rights the value of which is derived
from the financial performance of Hilton or the value of shares of Hilton Common
Stock. All outstanding shares of capital stock of Hilton are when issued, duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. Except as set forth above, as of the date of this agreement,
there are no bonds, debentures, notes or other indebtedness of Hilton or any of
its Subsidiaries having the right to vote (or convertible into, or exchangeable
for, securities having the right to vote) on any matters on which stockholders
of Hilton may vote. Except as set forth above and except for the transactions
contemplated by the Hilton Distribution Agreement, as of the date of this
Agreement, there are no outstanding securities, options, warrants, calls,
rights, commitments, agreements, arrangements or undertakings of any kind to
which Hilton or any of its Subsidiaries is a party or by which any of them is
bound, obligating Hilton or any of its Subsidiaries to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock or
other voting securities of Hilton or of any of its Subsidiaries or obligating
Hilton or any of its Subsidiaries to issue, grant, extend or enter into any such
security, option, warrant, call, right, commitment, agreement, arrangement or
undertaking. Except as set forth above and other than redemptions, purchases and
other acquisitions required by applicable provisions under Gaming Laws or
similar provisions contained in the terms of the capital stock of Hilton or any
of its Subsidiaries, as of the date of this agreement, there are not any
outstanding contractual obligations of Hilton or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of capital stock of Hilton or
any of its Subsidiaries.
(b) The authorized capital stock of Gaming Co. consists of 900 shares of
Gaming Co. Common Stock, par value $.01 per share, and 100 shares of preferred
stock, par value $.01 per share (the "GAMING CO. PREFERRED STOCK"). As of June
10, 1998, 100 shares of Gaming Co. Common Stock and no shares of
A-29
<PAGE>
Gaming Co. Preferred Stock were outstanding. Except as set forth above, as of
June 10, 1998, no shares of capital stock or other voting securities of Gaming
Co. were issued, reserved for issuance or outstanding. No change in such
capitalization has occurred between June 10, 1998 and the date of this
Agreement. Except as set forth above, as of the date of this Agreement, there
are no other outstanding contractual rights the value of which is derived from
the financial performance of Gaming Co. or the value of shares of Gaming Co.
Common Stock. All outstanding shares of capital stock of Gaming Co. are, and all
shares which may be issued as contemplated by this Agreement and the Hilton
Distribution Agreement will be, when issued, duly authorized, validly issued,
fully paid and nonassessable and not subject to preemptive rights. As of the
date of this Agreement, there are no bonds, debentures, notes or other
indebtedness of Gaming Co. or any of its Subsidiaries having the right to vote
(or convertible into, or exchangeable for, securities having the right to vote)
on any matters on which stockholders of Gaming Co. may vote. Except for the
transactions contemplated by the Hilton Distribution Agreement, as of the date
of this Agreement, there are no outstanding securities, options, warrants,
calls, rights, commitments, agreements, arrangements or undertakings of any kind
to which Gaming Co. or any of its Subsidiaries is a party or by which any of
them is bound, obligating Gaming Co. or any of its Subsidiaries to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares of
capital stock or other voting securities of Gaming Co. or of any of its
Subsidiaries or obligating Gaming Co. or any of its Subsidiaries to issue,
grant, extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or undertaking. Other than redemptions,
purchases and other acquisitions required by applicable provisions under Gaming
Laws or similar provisions contained in the terms of the capital stock of Gaming
Co. or any of its Subsidiaries, as of the date of this Agreement, there are not
any outstanding contractual obligations of Gaming Co. or any of its Subsidiaries
to repurchase, redeem or otherwise acquire any shares of capital stock of Gaming
Co. or any of its Subsidiaries. As of the time of the Hilton Distribution, (i)
the issued and outstanding shares of common stock of Gaming Co. will be equal to
the shares of Hilton Common Stock that are then issued and outstanding as of the
record date for the Hilton Distribution, (ii) Gaming Co. will have issued
options as described in the Hilton Distribution Agreement and (iii) all
outstanding shares of capital stock of Gaming Co. will be duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights.
Section 5.4. AUTHORITY; ENFORCEABILITY; NO CONFLICT; CONSENTS.
(a) Each of Hilton and Gaming Co. has the requisite corporate power and
authority to enter into each of the Transaction Documents to which it is a party
and to consummate the transactions contemplated thereby, subject to, with
respect to the Hilton Distribution, the declaration of the Hilton Distribution
by Hilton's Board of Directors and the ratification of the Hilton Distribution
by the affirmative vote of holders of at least a majority of the outstanding
shares of Hilton Common Stock and Hilton Preferred Stock, voting together as a
class, with the holders of the Hilton Preferred Stock entitled to 4/5 of a vote
for each share held. The execution and delivery by each of Hilton and Gaming Co.
of each of the Transaction Documents to which it is a party and the consummation
by each of Hilton and Gaming Co. of the transactions contemplated thereby have
been duly authorized by all necessary corporate action on the part of Hilton and
Gaming Co., subject to, with respect to the Hilton Distribution, the declaration
of the Hilton Distribution by Hilton's Board of Directors and the ratification
of the Hilton Distribution by the affirmative vote of holders of at least a
majority of the outstanding shares of Hilton Common Stock and Hilton Preferred
Stock, voting together as a class, with the holders of the Hilton Preferred
Stock entitled to 4/5 of a vote for each share held. Each of the Transaction
Documents to which it is a party (other than the Hilton Distribution Agreement
and the Hilton Ancillary Agreements) has been duly executed and delivered by
each of Hilton and Gaming Co. and constitutes the valid and binding obligation
of Hilton and Gaming Co. (as applicable), enforceable in accordance with its
terms, subject to the Bankruptcy and Equity Exception. Prior to the Hilton
Distribution, the Hilton Distribution Agreement and the Hilton Ancillary
Agreements will be duly executed and delivered by each of Hilton and Gaming Co.
and upon such execution and delivery, will constitute the valid and binding
obligations of each of Hilton and Gaming
A-30
<PAGE>
Co., enforceable against each of them in accordance with its terms, subject to
the Bankruptcy and Equity Exception.
(b) The execution and delivery of each of the Transaction Documents to which
it is a party by each of Hilton and Gaming Co. does not, and the consummation of
the transactions contemplated thereby will not, conflict with, or result in any
violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or cause loss of any material benefit under, or result in the
creation or maturation of any lien, liability or purchase right upon any of the
properties or assets of Hilton or any of its Subsidiaries under, (i) the
Certificate of Incorporation or Hilton Bylaws or the comparable charter or
organizational documents of Gaming Co. or any of its Subsidiaries, (ii) any loan
or credit agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to Hilton or
Gaming Co. or any of its Subsidiaries or their respective properties or assets
or (iii) subject to the governmental filings and other matters referred to in
Section 5.4(c), any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Hilton or Gaming Co. or any of its Subsidiaries or
their respective properties or assets, other than, in the case of clauses (ii)
or (iii), any such conflicts, violations, defaults, rights, liabilities or liens
that would not, individually or in the aggregate, (x) have a Material Adverse
Effect with respect to the Gaming Co. Business, (y) impair, in any material
respect, the ability of Hilton or Gaming Co. (to the extent applicable) to
perform its obligations under each of the Transaction Documents to which it is a
party or (z) prevent or significantly delay the consummation of any of the
transactions contemplated by the Transaction Documents.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Authority is required by Hilton or
Gaming Co. or any of its Subsidiaries in connection with the execution and
delivery of each of the Transaction Documents to which it is a party or the
consummation of the transactions contemplated thereby, except for (i) the filing
of a pre-merger notification and report form under the HSR Act, (ii) the filing
with the SEC of (x) the Joint Proxy Statement/Prospectus and the Form S-4 and
the obtaining of any related orders as may be so required, (y) a registration
statement on Form 10 (the "GAMING CO. FORM 10") under the Exchange Act relating
to the equity securities of Gaming Co., and (z) such reports and filings under
Section 13 and Section 16 of the Exchange Act as may be required in connection
with this Agreement and the transactions contemplated by this Agreement, (iii)
the filing of the Articles of Merger with the Minnesota Secretary of State, (iv)
the filing of notices with and the approval by (A) the New Jersey Casino Control
Commission under the New Jersey Gaming Laws, (B) the Nevada State Gaming Control
Board, the Nevada Gaming Commission, the Clark County Liquor and Gaming
Licensing Board, and the City of Reno under the Nevada Gaming Laws, (C) the
Mississippi Gaming Commission under the Mississippi Gaming Laws, (D) the
Louisiana Gaming Control Board under the Louisiana Gaming Laws, (E) the Ontario
Gaming Control Commission under the Ontario Gaming Laws, (F) the Missouri Gaming
Commission under the Missouri Gaming Laws and (G) the appropriate Governmental
Authorities as may be required under the applicable Gaming Laws of the countries
of Australia and Uruguay, (v) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
state securities or "blue sky" laws and (vi) such other consents, approvals,
orders, authorizations, registrations, declarations and filings which, if not
obtained or made, would not, individually or in the aggregate, be reasonably
likely to: (1) have a Material Adverse Effect on the Gaming Co. Business; (2)
impair, in any material respect, the ability of Hilton or Gaming Co. to perform
its obligations under each of the Transaction Documents to which it is a party;
or (3) prevent or significantly delay the consummation of the transactions
contemplated by the Transaction Documents.
(d) No approval or consent for the Merger by holders of securities of Gaming
Co. is required under the MBCA, Gaming Co.'s certificate of incorporation or
bylaws, its NYSE listing agreement or any other agreement to which Gaming Co. is
a party thereto.
A-31
<PAGE>
Section 5.5. OWNERSHIP OF COMPANY CAPITAL STOCK. Neither Hilton nor any of
its Subsidiaries beneficially owns, either directly or indirectly, any shares of
Company capital stock.
Section 5.6. COMPLIANCE WITH APPLICABLE LAWS.
(a) Each of Hilton and its Subsidiaries has in effect all Permits necessary
for it to own, lease or operate its properties and assets and to carry on its
business as now conducted, other than such Permits the absence of which would
not, individually or in the aggregate, have a Material Adverse Effect with
respect to the Gaming Co. Business, and there has occurred no default under any
such Permit other than such defaults which, individually or in the aggregate,
would not have a Material Adverse Effect with respect to the Gaming Co.
Business. Hilton and its Subsidiaries are in compliance with all Applicable
Laws, except for such noncompliance which, individually or in the aggregate,
would not have a Material Adverse Effect with respect to the Gaming Co.
Business.
(b) Except as set forth in Hilton's 1997 -0-K, each of Hilton and its
Subsidiaries is, and has been, and each entity formerly owned by Hilton's
Subsidiaries, while so owned, was in compliance in all respects with all
applicable Environmental Laws, except for such noncompliance which, individually
or in the aggregate, would not have a Material Adverse Effect with respect to
the Gaming Co. Business.
(c) Except as set forth in Hilton's 1997 -0-K, during the period of
ownership or operation by Hilton and its Subsidiaries of any of their owned or
leased properties, there has been no Release of Hazardous Material in, on, under
or affecting such properties and none of Hilton or its Subsidiaries has disposed
of any Hazardous Material or any other substance in a manner that has led to, or
could reasonably be anticipated to lead to, a Release except in each case for
those which are not, individually and in the aggregate, reasonably likely to
have a Material Adverse Effect with respect to the Gaming Co. Business.
Section 5.7. HILTON SEC DOCUMENTS; UNDISCLOSED LIABILITIES.
(a) Each of Hilton and its Subsidiaries has filed all required reports,
registration statements, proxy statements, forms and other documents with the
SEC since January 1, 1995 (as such documents have since the time of their filing
been amended or supplemented, the "HILTON SEC DOCUMENTS"). As of their
respective dates, (i) the Hilton SEC Documents (including any financial
statements filed as a part thereof or incorporated by reference therein)
complied in all material respects with the requirements of the Securities Act or
the Exchange Act, as applicable, and the rules and regulations of the SEC
promulgated thereunder applicable to such Hilton SEC Documents, and (ii) none of
Hilton SEC Documents contained at the time they were filed or declared effective
any untrue statement of a material fact or omitted at the time they were filed
or declared effective to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. At their respective dates, the
financial statements of Hilton included in Hilton SEC Documents complied as to
form in all material respects with the applicable accounting requirements and
with the published rules and regulations of the SEC with respect thereto, were
prepared in accordance with GAAP (except, in the case of unaudited statements,
as permitted by Form 10-Q of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
presented (subject, in the case of unaudited statements, to normal year-end
audit adjustments) the consolidated financial position of Hilton and its
consolidated subsidiaries as of and at the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended.
(b) Except as disclosed in the Hilton SEC Documents filed and publicly
available prior to the date of this Agreement and except for liabilities and
obligations incurred in the ordinary course of business consistent with past
practice since March 31, 1998, Hilton and its Subsidiaries do not have any
indebtedness, obligations or liabilities of any kind (whether accrued, absolute,
contingent or otherwise) (i) required by GAAP to be reflected on a consolidated
balance sheet of Hilton and its consolidated Subsidiaries or in the notes,
exhibits or schedules thereto or (ii) which reasonably could be expected to have
a Material Adverse Effect with respect to the Gaming Co. Business.
A-32
<PAGE>
Section 5.8. ABSENCE OF CHANGES OR EVENTS. Except as disclosed in the
Hilton SEC Documents filed and publicly available prior to the date hereof and
as set forth in the Hilton Disclosure Schedule, and except for the Hilton
Distribution and the other transactions contemplated by the Hilton Distribution
Agreement, (a) since December 31, 1997, there has not been any change or
occurrence which resulted in or is reasonably likely to have a Material Adverse
Effect with respect to the Gaming Co. Business, and (b) from December 31, 1997
to the date of this Agreement, Hilton and its Subsidiaries have conducted the
Gaming Co. Business only in the ordinary course and there has not been (i) any
declaration, setting aside or payment of any dividend or other distribution with
respect to the capital stock of Hilton, other than regular dividends on Hilton
Common Stock and Hilton Preferred Stock, (ii) any split, combination or
reclassification of any of the capital stock of Hilton or any issuance or the
authorization of any issuance of any other securities in respect of, in lieu of
or in substitution for shares of its capital stock of Hilton, (iii) any damage,
destruction or loss that has or reasonably could be expected to have a Material
Adverse Effect with respect to the Gaming Co. Business or (iv) any change in
accounting methods, principles or practices by Hilton materially affecting its
assets, liabilities or business, except insofar as may have been required by a
change in GAAP.
Section 5.9. LITIGATION. Except as described in the Hilton SEC Documents
filed and publicly available prior to the date hereof, there is no action, suit
or proceeding, claim, arbitration or investigation pending or, to the knowledge
of Hilton, threatened against Hilton or any of its Subsidiaries that,
individually or in the aggregate, could reasonably be expected to (i) have a
Material Adverse Effect with respect to the Gaming Co. Business or (ii) prevent
or significantly delay the consummation of the transactions contemplated by the
Transaction Documents. Except as disclosed in the Hilton SEC Documents filed and
publicly available prior to the date hereof, there is no judgment, order,
injunction or decree of any Governmental Authority outstanding against Hilton or
any of its Subsidiaries that, individually or in the aggregate, could reasonably
be expected to have any effect referred to in the foregoing clauses (i) and
(ii).
Section 5.10. TAXES.
(a) Hilton and each of its Subsidiaries, and each affiliated group (within
the meaning of Section 1504 of the Code) of which Hilton or any of its
Subsidiaries is a member, has timely filed all federal income Tax Returns and
all other material Tax Returns required to be filed by it. All such Tax Returns
are complete and correct in all material respects. Hilton and each of its
Subsidiaries has paid (or Hilton has paid on its Subsidiaries' behalf) all Taxes
shown as due on such Tax Returns. The most recent consolidated financial
statements contained in the Hilton SEC Documents reflect an adequate reserve for
all Taxes payable by Hilton and its Subsidiaries for all taxable periods and
portions thereof through the date of such financial statements.
(b) None of Hilton or any of its Subsidiaries has taken or agreed to take
any action that would prevent (i) the Merger from constituting a reorganization
qualifying under the provisions of Section 368(a)(1)(B) of the Code or (ii) the
Hilton Distribution from constituting a tax-free transaction to Hilton and its
stockholders within the meaning of Section 355 of the Code.
Section 5.11. EMPLOYEE BENEFITS. Except as disclosed in the Hilton SEC
Documents filed and publicly available prior to the date hereof or as set forth
on the Hilton Disclosure Schedule or as would not have a Material Adverse Effect
with respect to Hilton, (i) all employee benefit plans or programs maintained
for the benefit of the current or former employees of Hilton or any Subsidiary
of Hilton in the Gaming Co. Business that are sponsored, maintained or
contributed to by Hilton or any Subsidiary of Hilton, or with respect to which
Hilton or any Subsidiary of Hilton has any liability, including any such plan
that is an "employee benefit plan" as defined in Section 3(3) of ERISA, are in
compliance in all material respects with all applicable requirements of law,
including ERISA and the Code, and (ii) neither Hilton nor any Subsidiary of
Hilton has any material liabilities or obligations with respect to any such
employee benefit plans or programs, whether accrued, contingent or otherwise,
except liabilities or obligations (x)
A-33
<PAGE>
incurred in the ordinary course of business consistent with past practice or (y)
which are fully funded or reserved for on the most recent financial statements
of Hilton included in the Hilton SEC Documents.
Section 5.12. BROKERS AND INTERMEDIARIES. No broker, investment banker,
financial advisor or other Person, other than Donaldson, Lufkin & Jenrette
Securities Corporation, the fees and expenses of which will be paid by Hilton or
Gaming Co., is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Hilton or Gaming
Co.
Section 5.13. OPINION OF FINANCIAL ADVISOR. The financial advisor of
Hilton, Donaldson, Lufkin & Jenrette Securities Corporation, has delivered to
Hilton an opinion dated June 29, 1998 to the effect that the Hilton Distribution
and the consideration to be paid by Gaming Co. pursuant to this Agreement, after
giving effect to the Company Distribution, taken as a whole, are fair to the
stockholders of Hilton from a financial point of view.
Section 5.14. PRO FORMA FINANCIAL INFORMATION OF GAMING CO.
BUSINESS. Attached hereto as Exhibit G is an unaudited pro forma consolidated
balance sheet of the Gaming Co. Business of Hilton and its Subsidiaries at
December 31, 1997 (including certain explanatory notes thereto, the "GAMING CO.
BUSINESS BALANCE SHEET") and an unaudited pro forma consolidated statement of
operations for the Gaming Co. Business of Hilton and its Subsidiaries for the
period ended December 31, 1997 (including certain explanatory notes thereto, the
"GAMING CO. BUSINESS INCOME STATEMENT" and together with the Gaming Co. Business
Balance Sheet, the "GAMING CO. BUSINESS FINANCIAL STATEMENTS"). The Gaming Co.
Business Financial Statements have been derived from Hilton's financial
statements, and prepared in accordance with the principles set forth in the
notes thereto. The Gaming Co. Business Financial Statements fairly present in
all material respects (on the basis indicated in the notes thereto) the
consolidated financial position of the Gaming Co. Business of Hilton and its
Subsidiaries at the date thereof, after giving pro forma effect to the Hilton
Distribution (assuming the Hilton Distribution occurred on December 31, 1997),
and the consolidated results of their operations for the one-year period then
ended, after giving pro forma effect to the Hilton Distribution (assuming the
Hilton Distribution occurred on January 1, 1997). At the Effective Time, except
as contemplated by this Agreement or the Hilton Distribution Agreement, neither
Hilton nor any of its Subsidiaries will own or have rights to use any of the
assets or properties whether tangible, intangible or mixed, which are necessary
for the conduct of the Gaming Co. Business as conducted on the date hereof or be
a party to any material agreement or arrangement with the Surviving Corporation
or any of its Subsidiaries, other than as described in the Transaction
Documents.
Section 5.15. TRANSACTIONS WITH HILTON AFFILIATES. Other than matters
included in the Hilton SEC Documents filed and publicly available prior to the
date of this Agreement, from January 1, 1995 through the date of this Agreement,
and only with respect to the Gaming Co. Business, there have been no
transactions, agreements, arrangements or understandings between Hilton or its
Subsidiaries, on the one hand, and Hilton's affiliates or other Persons, on the
other hand, that would be required to be disclosed under Item 404 of Regulation
S-K under the Securities Act.
Section 5.16. OWNERSHIP OF MERGER SUB: NO PRIOR ACTIVITIES; ASSETS OF
MERGER SUB. Merger Sub was formed by Gaming Co. solely for the purposes of
engaging in the transactions contemplated hereby. All of the capital stock of
Merger Sub is directly owned by Gaming Co. Except for this Agreement and the
Hilton Distribution Agreement, there are no outstanding or authorized options,
warrants, calls, rights, commitments or any other agreements to which Merger Sub
is a party, or by which it is bound, requiring it to issue, transfer, sell,
purchase, redeem or acquire any shares of capital stock or any securities or
rights convertible into, exchangeable for, or evidencing the right to subscribe
for or acquire, any shares of capital stock of Merger Sub. Except for
obligations or liabilities incurred in connection with its incorporation or
organization and except for the transactions contemplated by this Agreement and
the Hilton Distribution Agreement, Merger Sub has not incurred, directly or
indirectly through any Subsidiary or Affiliate, any
A-34
<PAGE>
obligations or liabilities, and has not engaged in any business or activities or
entered into any arrangements with any Person.
Section 5.17. PROHIBITED PAYMENTS. Hilton has not entered into any
understanding, agreement or arrangement, written or oral, under or pursuant to
which bribes, kickbacks, illegal rebates, payoffs or other forms of illegal
payments have been or will be made, provided or suffered.
ARTICLE VI.
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 6.1. CONDUCT OF COMPANY. Except as otherwise provided by the terms
of this Agreement, and except for the Company Distribution and the other
transactions, actions or events provided for in the Company Distribution
Agreement, from and after the date hereof to the Effective Time, Company shall,
and shall cause each of its Subsidiaries to, carry on their respective
businesses in the ordinary course and use their reasonable efforts to (a)
preserve intact their current business organizations, (b) keep available the
services of their current officers and key employees and (c) preserve their
relationship consistent with past practice with desirable customers, suppliers
and others having business dealings with them to the end that their goodwill and
ongoing businesses shall be unimpaired in all material respects at the Effective
Time it being understood however, that between the date hereof and the Closing
Date, (i) the employees of the Company Retained Business may also be engaged in
activities for Lakes and its Subsidiaries and certain officers of Company may
resign at the time of the Company Distribution and may serve as officers of
Lakes and (ii) the failure of any employee of Company to remain an employee of
Company shall not constitute a breach of this covenant. Without limiting the
generality of the foregoing, prior to the Effective Time, except as otherwise
provided by the terms of this Agreement, and except for the Company Distribution
and the other transactions, actions or events otherwise provided for in the
Company Distribution Agreement and except as to those matters set forth in
paragraph 6.1 of the Company Disclosure Schedule (for which Hilton hereby
consents), Company shall not and shall cause its Subsidiaries not to, without
the written consent of Hilton, which consent may not be unreasonably withheld:
(a) (i) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock, other than dividends and
distributions by any direct or indirect wholly-owned Subsidiary of Company to
Company, (ii) split, combine or reclassify any of its capital stock or, except
pursuant to the exercise of options, warrants, conversion rights, exchange
rights and other contractual rights existing on the date hereof, issue or
authorize the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock or other equity interest or (iii)
purchase, redeem or otherwise acquire or amend any shares of capital stock or
other equity interests of Company or any of its Subsidiaries or any other
securities thereof or any rights, warrants or options to acquire any such
shares, interests or other securities (other than (x) redemptions, purchases or
other acquisitions required by applicable provisions under Gaming Laws or
pursuant to the terms of such capital stock or equity interest or other
contractual rights existing on the date hereof and (y) issuances or redemptions
of capital stock of wholly-owned Subsidiaries occurring between Company and any
of its wholly-owned Subsidiaries);
(b) issue, deliver, sell, pledge or otherwise encumber or amend any shares
of its capital stock, any other voting securities or any securities convertible
into, or any rights, warrants or options to acquire, any such shares, interests,
voting securities or convertible securities, including pursuant to the Company
Stock Plans (other than the issuance of Company Common Stock upon the exercise
of Company Stock Options outstanding on the date of this Agreement in accordance
with their present terms and issuances described in subclause (y) of paragraph
(a) above);
(c) amend its Articles of Incorporation, Company Bylaws or other comparable
charter or organization documents;
A-35
<PAGE>
(d) acquire or agree to acquire (i) by merging or consolidating with, or by
purchasing a substantial portion of the assets of, or by any other manner, any
business or any Person or other business organization or division thereof or
(ii) any other material assets, except (x) mergers and consolidations and other
reasonable tax planning transactions between or among Company and one or more
wholly-owned Subsidiaries of Company (including liquidations of Subsidiaries)
that will not create adverse tax consequences to Company or its Subsidiaries or
(y) purchases of inventory, furnishings and equipment in the ordinary course of
business consistent with past practice;
(e) sell, lease, license, mortgage or otherwise encumber or subject to any
lien or otherwise dispose of any of its properties or assets, except in the
ordinary course of business consistent with past practice;
(f) (i) other than (x) ordinary course working capital borrowings (including
indebtedness incurred under the Revolving Credit Facility to fund capital
expenditures made pursuant to the Company Capital Plan) and (y) other
incurrences of indebtedness which, in the aggregate, do not exceed $2 million,
incur any indebtedness for borrowed money or guarantee any such indebtedness of
another Person, issue or sell any debt securities or warrants or other rights to
acquire any debt securities of Company or any of its Subsidiaries, guarantee any
debt securities of another Person, enter into any "keep well" or other agreement
to maintain any financial statement condition of another Person or enter into
any arrangement having the economic effect of any of the foregoing or (ii) make
any loans, advances or capital contributions to, or investments in, any other
Person other than (x) loans, advances or capital contributions to Company or any
direct or indirect wholly-owned Subsidiary of Company or (y) advances to
employees, suppliers or customers in the ordinary course of business consistent
with past practice;
(g) pay, discharge, settle or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge, settlement or satisfaction, (i) in the ordinary course
of business consistent with past practice, (ii) in accordance with their terms
of liabilities reflected or reserved against in the most recent consolidated
financial statements (or the notes thereto) of Company included in the Company
SEC Documents filed and publicly available prior to the date of this Agreement
or incurred in the ordinary course of business consistent with past practice
since the date of such financial statements or (iii) involving an amount not to
exceed $2 million in the aggregate;
(h) except as required to comply with Applicable Laws, (i) adopt, enter
into, terminate, amend or allow to be extended or renewed, any Employee Benefit
Plan for the benefit or welfare of any director, officer or current or former
employee, (ii) increase in any manner the compensation or fringe benefits of, or
pay any bonus to, any director, officer or employee (except for normal increases
or bonuses as contractually required pursuant to agreements disclosed in Company
SEC Documents filed and publicly available prior to the date of this Agreement
or in the ordinary course of business consistent with past practice to employees
other than directors and officers of Company or any of its Subsidiaries and
that, in the aggregate, do not result in a significant increase in benefits or
compensation expenses to employees of Company and its Subsidiaries relative to
the level in effect prior to such action), (iii) pay any benefit not provided
for under any Employee Benefit Plan, (iv) except for payments or awards in cash
permitted by clause (ii), grant any awards under any bonus, incentive,
performance or other compensation plan or arrangement or Employee Benefit Plan
(including the grant of stock options, stock appreciation rights, stock based or
stock related awards, performance units or restricted stock, or the removal of
existing restrictions in any Employee Benefit Plans or agreements or awards made
thereunder) or (v) take any action to fund or in any other way secure the
payment of compensation or benefits under any Employee Benefit Plan other than
in the ordinary course of business consistent with past practice;
(i) waive the benefits of, or agree to modify in any manner, any
confidentiality, standstill or similar agreement to which Company or any of its
Subsidiaries is a party, or except in the ordinary course of business, modify,
amend or terminate any contract or agreement set forth in the Company SEC
Documents to which Company or any Subsidiary is a party or waive, release or
assign any material rights or claims;
A-36
<PAGE>
(j) take or agree to take any action that would prevent (i) the Merger from
constituting a reorganization qualifying under the provisions of Section
368(a)(1)(B) of the Code, (ii) the Hilton Distribution from qualifying as a
tax-free transaction to Hilton and its stockholders within the meaning of
Section 355 of the Code or (iii) the Company Distribution from qualifying as a
tax-free transaction, solely with respect to Company's shareholders, within the
meaning of Section 355 of the Code;
(k) conduct its business in a manner or take, or cause to be taken, any
other action that would or might reasonably be expected to prevent or materially
delay Company, Hilton, Gaming Co. or Lakes from consummating the transactions
contemplated by the Transaction Documents in accordance with their respective
terms (regardless of whether such action would otherwise be permitted or not
prohibited hereunder or thereunder), including any action which may materially
limit the ability of Company, Hilton, Gaming Co. or Lakes to consummate the
transactions contemplated thereby as a result of antitrust, gaming or other
regulatory concerns;
(l) adopt or enter into any arrangement, contract or agreement that
obligates, or otherwise creates a liability of, Company or any of its
Subsidiaries (except for the Non-Mississippi Subsidiaries (as defined in the
Company Distribution Agreement)) for more than 12 months; or
(m) authorize any of, or commit or agree to take any of, the foregoing
actions.
Section 6.2. CONDUCT OF HILTON WITH RESPECT TO THE GAMING CO.
BUSINESS. Except as otherwise provided by the terms of this Agreement, and
except for the Hilton Distribution and the other transactions, actions or events
provided for in the Hilton Distribution Agreement, from and after the date
hereof to the Effective Time, Hilton shall, and shall cause each of its
Subsidiaries to (a) carry on the Gaming Co. Business in the ordinary course and
use their reasonable efforts to preserve intact the Gaming Co. Business, (b)
keep available the services of their key employees engaged in the Gaming Co.
Business and (c) preserve their relationships consistent with past practice with
desirable customers, suppliers and others having business dealings with respect
to the Gaming Co. Business to the end that their goodwill and the Gaming Co.
Business shall be unimpaired in all material respects at the Effective Time, it
being understood, however, that (i) certain employees of the Gaming Co. Business
may also be engaged in activities for Hilton and its Subsidiaries and certain
officers of Gaming Co. may resign at the time of the Hilton Distribution and may
serve as officers of Hilton and (ii) the failure of any employee in the Gaming
Co. Business to remain an employee in the Gaming Co. Business shall not
constitute a breach of this covenant. Without limiting the generality of the
foregoing, prior to the Effective Time, except as otherwise provided by the
terms of this Agreement, and except for the Hilton Distribution and the other
transactions, actions or events provided for in the Hilton Distribution
Agreement, Hilton shall not and shall cause its Subsidiaries not to, without the
written consent of Company, which consent may not be unreasonably withheld:
(a) (i) declare, set aside or pay any dividends on, or make any other
distributions in respect of Gaming Co. Common Stock, other than regular
quarterly dividends and the issuance of the Gaming Co. Rights with respect to
the Gaming Co. Common Stock or (ii) split, combine or reclassify any of the
capital stock of Gaming Co. or, except pursuant to the exercise of options,
warrants, convertible debt, conversion rights, exchange rights and other
contractual rights of Hilton or Gaming Co. existing on the date hereof, issue or
authorize the issuance of any other securities in respect of, in lieu of or in
substitution for shares of the capital stock of Gaming Co. or other equity
interest of Gaming Co., except for any such issuance (or authorization for such
issuance) of Gaming Co. Common Stock that shall not exceed 20% of the number of
shares then outstanding after giving pro forma effect to such issuance;
(b) amend Gaming Co.'s certificate of incorporation or bylaws or other
comparable charter or organization documents in any manner adverse to the
holders of Gaming Co. Common Stock (other than the filing of a Certificate of
Designations for the issuance of any series of preferred stock of Gaming Co.);
A-37
<PAGE>
(c) sell any substantial portion of the properties and assets included in
the Gaming Co. Business, except in the ordinary course consistent with past
practice, or merge, amalgamate or consolidate Gaming Co. with any other entity
except where Gaming Co. is the surviving corporation;
(d) take or agree to take any action that would prevent (i) the Merger from
constituting a reorganization qualifying under the provisions of Section
368(a)(1)(B) of the Code, (ii) the Hilton Distribution from qualifying as a
tax-free transaction to Hilton and its stockholders within the meaning of
Section 355 of the Code or (iii) the Company Distribution from qualifying as a
tax-free transaction, solely with respect to Company's shareholders, within the
meaning of Section 355 of the Code;
(e) conduct the Gaming Co. Business in any manner or take, or cause to be
taken, any other action that would or might reasonably be expected to prevent or
materially delay Hilton, Company, Gaming Co. or Lakes from consummating the
transactions contemplated by the Transaction Documents in accordance with their
respective terms (regardless of whether such action would otherwise be permitted
or not prohibited hereunder or thereunder), including any action which may
materially limit the ability of Hilton, Company, Gaming Co. or Lakes to
consummate the transactions contemplated thereby as a result of antitrust,
gaming or other regulatory concerns;
(f) authorize any of, or commit or agree to take any of, the foregoing
actions.
Nothing contained in this Section 6.2 (other than subsection (d)) shall
prohibit Hilton from acquiring or disposing of or agreeing to acquire or dispose
of, whether by merger or consolidation or by purchase of assets, any assets,
business or any Person or other business organization or division thereof which
do not and will not constitute part of the Gaming Co. Business.
Each of the parties hereto acknowledges and agrees, that in the event Gaming
Co. or any of its Subsidiaries, in compliance with the provisions of this
Section 6.2, acquires any Person, properties, assets or businesses prior to the
Effective Time, the Gaming Co. Valuation Factor shall be adjusted to reflect (i)
the increase in the gross value of Gaming Co. resulting from such acquisition
(I.E., adjust the $6,024,600,000 figure upwards by the amount of the total
consideration paid for the subject Person, properties, assets or businesses),
(ii) the change (if any) in the Total Debt of Gaming Co. as a result of such
acquisition and (iii) the change (if any) in the Total Number of Gaming Co.
shares outstanding as a result of such acquisitions.
Section 6.3. ACCESS TO INFORMATION. Each of Company and Hilton shall, and
shall cause each of its respective Subsidiaries to, afford to the other party
and to the officers, employees, accountants, counsel, financial advisors and
other representatives of such other party, reasonable access during normal
business hours during the period prior to the Effective Time to all their
respective properties, books, contracts, commitments, personnel and records and,
during such period, each of Company and Hilton shall, and shall cause each of
its respective Subsidiaries to, furnish promptly to the other party (a) a copy
of each report, schedule, registration statement and other document filed by it
during such period pursuant to the requirements of federal or state securities
laws and (b) all other information concerning its business, properties and
personnel as such other party may reasonably request. Except as required by
Applicable Laws, each of Company and Hilton will hold, and will cause its
respective officers, employees, accountants, counsel, financial advisors and
other representatives and affiliates to hold, any nonpublic information in
confidence to the extent required by, and in accordance with, the provisions of,
the letter dated June 1, 1998, between Company and Hilton (the "CONFIDENTIALITY
AGREEMENT").
Section 6.4. INDIAN GAMING AND OTHER GUARANTEES RELEASE. Company and each
member of the Lakes Group shall use their reasonable best efforts to have the
Surviving Corporation and its Subsidiaries be released from any and all
liabilities or obligations under or relating to the Indian Gaming and Debt
Agreements and Lakes Agreements.
Section 6.5. DISSENTERS' RIGHTS. The Surviving Corporation shall be
responsible for any payments that are required to be made to its shareholders
pursuant to any applicable provisions of Minnesota law.
A-38
<PAGE>
Hilton shall be entitled to jointly direct and control with Company any and all
actions or proceedings relating to any of the foregoing claims for payment to
the extent such actions or proceedings are made or commence prior to the Closing
Date.
ARTICLE VII.
ADDITIONAL AGREEMENTS
Section 7.1. PREPARATION OF FORM S-4, FORM 10 AND THE JOINT PROXY
STATEMENT/PROSPECTUS; SHAREHOLDERS MEETING.
(a) As promptly as practicable following the date of this Agreement, Hilton
and Company shall prepare and file with the SEC the Joint Proxy
Statement/Prospectus, the Form S-4, in which the Joint Proxy
Statement/Prospectus shall be included, and the Forms 10. Each of Hilton and
Company shall use all reasonable efforts to have the Form S-4 declared effective
under the Securities Act and the Forms 10 declared effective under the Exchange
Act as promptly as practicable after such filing. Company shall use its
reasonable best efforts to cause the Joint Proxy Statement/Prospectus to be
mailed to its shareholders as promptly as practicable after the Form S-4 is
declared effective. Gaming Co. shall also take any action (other than qualifying
to do business in any jurisdiction in which it is not now so qualified or
consenting to service of process in any jurisdiction in any action other than
one arising out of the offering of Gaming Co. Common Stock in such jurisdiction)
required to be taken under any applicable state securities or "blue sky" laws in
connection with the issuance of Gaming Co. Common Stock in the Merger, and
Gaming Co. shall furnish all information concerning Gaming Co. as may be
reasonably requested in connection with any such action.
(b) Each of Company, Hilton, Gaming Co. and Lakes covenants that none of the
information supplied or to be supplied by it for inclusion or incorporation by
reference in (i) the Form S-4 will, at the time the Form S-4 is filed with the
SEC, at any time it is amended or supplemented or at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and (ii) the Joint Proxy
Statement/Prospectus will, at the date it is first mailed to the shareholders of
Company, or at the time of the Company Shareholders Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Joint Proxy
Statement/Prospectus and the Form S-4 will comply as to Form in all material
respects with the requirements of the Exchange Act and the Securities Act, as
applicable. Notwithstanding the foregoing, (i) no representation or covenant is
made by Company or Lakes with respect to statements made or incorporated by
reference based on information supplied in writing by Hilton or Gaming Co.
specifically for inclusion or incorporation by reference in the Joint Proxy
Statement/Prospectus and (ii) no representation or covenant is made by Hilton or
Gaming Co. with respect to statements made or incorporated by reference based on
information supplied in writing by Company or Lakes for inclusion or
incorporation by reference in the Joint Proxy Statement/Prospectus. If at any
time prior to the Effective Time there shall occur (i) any event with respect to
Company or any of its Subsidiaries, or with respect to other information
supplied by Company or Lakes for inclusion in the Joint Proxy
Statement/Prospectus or (ii) any event with respect to Hilton or Gaming Co., or
with respect to information supplied by Hilton or Gaming Co. for inclusion in
the Joint Proxy Statement/Prospectus, in either case, which event is required to
be described in an amendment of, or a supplement to the Joint Proxy
Statement/Prospectus or the Form S-4, such event shall be so described, and such
amendment or supplement shall be promptly filed with the SEC and, as required by
law, disseminated to the shareholders of Company.
(c) Each of Company, Lakes, Hilton and Gaming Co. shall promptly notify the
other of the receipt of any comments from the SEC or its staff or any other
appropriate government official and of any requests by the SEC or its staff or
any other appropriate government official for amendments or supplements to any
A-39
<PAGE>
of the filings with the SEC in connection with the Merger and other transactions
contemplated hereby or for additional information and shall supply the other
with copies of all correspondence between Company or any of its representatives,
or Hilton or any of its representatives, as the case may be, on the one hand,
and the SEC or its staff or any other appropriate government official, on the
other hand, with respect thereto. Company, Lakes, Hilton and Gaming Co. shall
use their respective reasonable efforts to respond to any comments of the SEC
with respect to the Form S-4 as promptly as practicable. Company and Hilton
shall cooperate with each other and provide to each other all information
necessary in order to prepare the Form S-4, the Joint Proxy Statement/Prospectus
and the Forms 10, and shall provide promptly to the other party any information
such party may obtain that could necessitate amending any such document.
(d) Company shall take all action necessary in accordance with Applicable
Laws and its Articles of Incorporation and Company Bylaws to convene and hold a
meeting of its shareholders (the "COMPANY SHAREHOLDERS MEETING") as promptly as
practicable for the purpose of obtaining the Company Shareholder Approval.
Company shall, through its Board of Directors, recommend to its shareholders the
adoption of this Agreement and the transactions contemplated hereby and shall
use its reasonable best efforts to solicit from its shareholders proxies in
favor of adoption of this Agreement and the transactions contemplated hereby and
to take all other lawful action necessary to secure the Company Shareholder
Approval. Notwithstanding the foregoing, Company's obligation to recommend the
adoption of this Agreement and the transactions contemplated hereby and to
solicit proxies from its shareholders (but not its obligations to convene and
hold the Company Shareholders Meeting) shall be subject to any action (including
any withdrawal or change of its recommendation) taken by, or upon authority of,
the Board of Directors of Company which the Board of Directors determines, based
on the written advice of outside legal counsel to Company, is required in the
exercise of its fiduciary duties to Company's shareholders under Applicable
Laws.
(e) Company shall coordinate and cooperate with Hilton with respect to the
timing of the Company Shareholders Meeting.
Section 7.2. LETTER OF COMPANY'S ACCOUNTANTS. Company shall use all
reasonable efforts to cause to be delivered to Hilton and Company a letter of
Arthur Andersen LLP, Company's independent auditors, dated a date within two
business days before the date on which the Form S-4 shall become effective and
addressed to Hilton, in form reasonably satisfactory to Hilton and customary in
scope and substance for letters delivered by independent public accountants in
connection with registration statements similar to the Form S-4.
Section 7.3. LETTER OF HILTON'S ACCOUNTANTS. Hilton shall use all
reasonable efforts to cause to be delivered to Company and Hilton a letter of
Arthur Andersen LLP, Hilton's independent auditors, dated a date within two
business days before the date on which the Form S-4 shall become effective and
addressed to Company, in form reasonably satisfactory to Company and customary
in scope and substance for letters delivered by independent public accountants
in connection with registration statements similar to the Form S-4.
Section 7.4. REASONABLE BEST EFFORTS; NOTIFICATION. Upon the terms and
subject to the conditions set forth in this Agreement, each of the parties
hereto agrees to use all reasonable best efforts to take, or cause to be taken,
all actions, and to do, or cause to be done, and to assist and cooperate with
the other party in doing, all things necessary, proper or advisable to
consummate and make effective, in the most expeditious manner practicable, the
Merger and the other transactions contemplated by this Agreement, including (i)
the obtaining of all necessary action or nonactions, waivers, consents and
approvals from Governmental Authorities and the making of all necessary
registrations and filings (including filings with Governmental Authorities, if
any) and the taking of all steps as may be reasonably necessary to obtain an
approval or waiver from, or to avoid an action or proceeding by, any
Governmental Authority (including in respect of any Gaming Law), (ii) the
obtaining of all necessary consents, approvals or waivers from third parties,
(iii) the defending of any lawsuits or other legal proceedings, whether judicial
or administrative,
A-40
<PAGE>
challenging any of the Transaction Documents or the consummation of any of the
transactions contemplated thereby, including seeking to have any stay or
temporary restraining order entered by any court or other Governmental Authority
vacated or reversed and (iv) the execution and delivery of any additional
instruments necessary to consummate the transactions contemplated by, and to
fully carry out the purposes of, the Transaction Documents.
Section 7.5. APPROVAL OF GAMING COMMISSIONS; REGULATORY MATTERS. Hilton
and Company shall as promptly as practicable, but in no event later than 30 days
following the execution and delivery of this Agreement, file or submit those
filings and other submissions under applicable Gaming Laws in connection with
the Transaction Documents and the transactions contemplated thereby, and to
respond as promptly as practicable in order to obtain as soon as practicable
those approvals and consents required or necessary in connection with the
Transaction Documents or the transactions contemplated thereby. In addition,
each of Hilton and Company shall, and shall cause each of its Subsidiaries to
(and shall use its reasonable efforts to cause each of its affiliates other than
each of its Subsidiaries to), if it is necessary to obtain any regulatory
approval for the Merger or the Distributions, disassociate themselves from any
Person or Persons deemed, or reasonably likely to be deemed, unsuitable by any
Gaming Commission. Hilton and Company shall keep each other apprised of the
status of any communications with, and any inquiries or requests for additional
information from, the Gaming Commissions and shall comply promptly with any such
inquiry or request.
Section 7.6. SUPPLEMENTAL DISCLOSURE. Subject to compliance with
applicable Gaming Laws, Company shall confer on a regular and frequent basis
with Hilton, report on operational matters and promptly notify Hilton of, and
furnish Hilton with, any information it may reasonably request with respect to,
any event or condition or the existence of any fact that could reasonably be
expected to cause any of the conditions to Hilton's obligation to consummate the
Merger and the Hilton Distribution not to be completed, and Hilton shall
promptly notify Company of, and furnish Company any information it may
reasonably request with respect to, any event or condition or the existence of
any fact that could reasonably be expected to cause any of the conditions to
Company's obligation to consummate the Merger and the Company Distribution not
to be completed.
Section 7.7. ANNOUNCEMENTS. Prior to the Closing, none of the parties
hereto shall issue any press release or make any public announcement with
respect to this Agreement and the Merger without the prior consent of the other
(which consent shall not be unreasonably withheld), except as may be required by
Applicable Laws or applicable stock exchange regulations, in which event the
party required to make the release shall, if possible, allow the other party
reasonable time to comment on such release in advance of such issuance. The
parties hereto agree that the initial press release to be issued with respect to
the transactions contemplated hereby shall be in a form heretofore agreed to by
the parties hereto.
Section 7.8. NO SOLICITATION.
(a) Company shall not, and shall not permit or cause any of its Subsidiaries
or any of the officers and directors of it or its Subsidiaries to, and shall
direct its and its Subsidiaries' employees, agents and representatives
(including any investment banker, attorney or accountant retained by it or any
of its Subsidiaries) not to, directly or indirectly, initiate, solicit, or
otherwise encourage any inquiries or the making of any proposal or offer with
respect to a merger, reorganization, share exchange, tender offer, consolidation
or similar transaction involving, or any purchase of, 15% or more of the assets
or any equity securities of Company or any of its Subsidiaries (any such
proposal or offer being hereinafter referred to as an "ACQUISITION PROPOSAL").
Company shall not, and shall not permit or cause any of its Subsidiaries or any
of the officers and directors of it or its Subsidiaries to, and shall direct its
and its Subsidiaries' employees, agents and representatives (including any
investment banker, attorney or accountant retained by it or any of its
Subsidiaries) not to, directly or indirectly, engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any Person relating to an Acquisition Proposal, whether made
before or after the date of this Agreement, or otherwise facilitate any effort
or
A-41
<PAGE>
attempt to make or implement or consummate an Acquisition Proposal; PROVIDED,
HOWEVER, that nothing contained in this Agreement shall prevent Company or its
Board of Directors from (i) complying with Rule 14e-2 promulgated under the
Exchange Act with regard to an Acquisition Proposal or (ii) at any time after
180 days from the date hereof if the Merger shall not by such date have received
the Company Shareholder Approval: (x) providing information in response to a
request therefor by a Person who has made an unsolicited bona fide written
Acquisition Proposal if the Board of Directors receives from the Person so
requesting such information an executed confidentiality agreement on terms
substantially equivalent to those contained in the Confidentiality Agreement;
(y) engaging in any negotiations or discussions with any Person who has made an
unsolicited bona fide written Acquisition Proposal; or (z) recommending such an
Acquisition Proposal to the shareholders of Company, if, and only to the extent
that, (i) in each such case referred to in clause (x), (y) or (z) above, the
Board of Directors of Company determines in good faith after consultation with
outside legal counsel that such action is necessary in order for its directors
to comply with their respective fiduciary duties under applicable law and (ii)
in each case referred to in clause (y) or (z) above, the Board of Directors of
Company determines in good faith (after consultation with its financial advisor)
that such Acquisition Proposal, if accepted, is reasonably likely to be
consummated, taking into account all legal, financial and regulatory aspects of
the proposal and the Person making the proposal, and would, if consummated,
result in a more favorable transaction than the transaction contemplated by this
Agreement, taking into account the long-term prospects and interests of Company
and its shareholders. Company shall immediately cease and cause to be terminated
any existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing. Company agrees that it will
take the necessary steps to promptly inform the individuals or entities referred
to in the first sentence hereof of the obligations undertaken in this Section
7.8 and in the Confidentiality Agreement. Company also shall promptly request
each Person that has heretofore executed a confidentiality agreement in
connection with its consideration of an Acquisition Proposal to return all
confidential information heretofore furnished to such Person by or on behalf of
it or any of its Subsidiaries.
(b) Company shall notify Hilton immediately if any Acquisition Proposal or
inquiries regarding a potential Acquisition Proposal are received by, any
information with respect to an Acquisition Proposal or a potential Acquisition
Proposal is requested from, or any discussions or negotiations with respect to
an Acquisition Proposal or a potential Acquisition Proposal are sought to be
initiated or continued with, it or any of its representatives indicating, in
connection with such notice, the name of the Person involved and the material
terms and conditions of any such Acquisition Proposal, and thereafter shall keep
Hilton informed, on a current basis, on the status and terms of any such
inquiries or Acquisition Proposals and the status of any such negotiations or
discussions. Nothing in this Section 7.8(b), however, shall be construed as
authorizing Company, its Subsidiaries or their respective employees, agents or
representatives to engage in any activities prohibited by Section 7.8(a) hereof.
Section 7.9. INDEMNIFICATION.
(a) All indemnification obligations existing as of the date hereof
(including indemnification obligations relating to or arising out of the
transactions contemplated by this Agreement) relating to acts or omissions
occurring at or prior to the Effective Time in favor of the current or former
directors or officers of Company or any of its Subsidiaries (the "INDEMNIFIED
PERSONS") in the articles of incorporation or bylaws (or comparable
organizational documents) or indemnity contracts of Company or its Subsidiaries
(i) will be assumed by each of the Surviving Corporation and Lakes, each of whom
shall be jointly and severally liable for such indemnification, without further
action, as of the Effective Time and (ii) shall continue in full force and
effect in accordance with their respective terms for a period not less than six
years from the Effective Time. The parties hereto acknowledge and agree that
nothing in the preceding sentence modifies or in any way limits Company's
ability or rights to seek indemnification from Lakes pursuant to Section 7.9(b)
with respect to any of the foregoing obligations. If the Surviving Corporation
is required to indemnify any Indemnified Person for any act or omission relating
to any of the Non-Mississippi Group
A-42
<PAGE>
Liabilities (as defined in the Company Distribution Agreement), including those
relating to (A) Stratosphere, the Stratosphere Litigation and/or the
Stratosphere Contracts or (B) the Lakes Business, including the Lakes Contracts
and/or any member of the Lakes Group, then as a condition to such
indemnification, such Indemnified Person shall enter into a subrogation
agreement pursuant to which the Surviving Corporation shall be subrogated to,
and shall stand in the place of, such Indemnified Person as to any events or
circumstances in respect of which such Indemnified Person may have any right or
claim relating to such Non-Mississippi Group Liabilities against any claimant or
plaintiff asserting such liabilities against the Indemnified Person, or against
any other party (other than an Indemnified Person) that may be liable.
(b) Lakes shall indemnify, defend and hold harmless the Surviving
Corporation and its Affiliates from and against any and all losses, liabilities,
damages and expenses (including the reasonable costs and expenses of
investigation and reasonable attorneys' fees and expenses in connection with any
or all such investigations or any and all Actions or threatened Actions)
incurred or suffered by the Surviving Corporation or any of its Affiliates
relating to the Non-Mississippi Group Liabilities, including those relating to
(A) the Stratosphere, the Stratosphere Litigation and/or the Stratosphere
Contracts and (B) the Lakes Business, including the Lakes Contracts and/or any
member of the Lakes Group.
(c) Prior to the Effective Time, Lakes and Company shall enter into the
Trust Agreement in the form of Exhibit M attached hereto (the "TRUST AGREEMENT")
and the Pledge and Security Agreement in the form of Exhibit N attached hereto
(the "PLEDGE AND SECURITY AGREEMENT," and together with the Trust Agreement, the
"SECURITY AGREEMENTS"), in each case, with such changes thereto as the trustee
thereunder may reasonably request, pursuant to which Lakes shall deposit and
make available the amounts set forth in such Security Agreements for the time
periods specified therein to secure and satisfy any and all indemnification
claims made or asserted against it pursuant to any of the Transaction Documents.
(d) For so long as the Surviving Corporation is required to provide
indemnification to any of the Indemnified Persons, Lakes shall not, and shall
not permit any of its Subsidiaries to, directly or indirectly, make any
Restricted Payment. If Lakes is unable, within 15 days of request, to pay in
full any claim made for indemnification by the Surviving Corporation or any of
its Affiliates pursuant to this Agreement or the Company Distribution Agreement,
then for so long as any such claim or any other claim for indemnification made
by the Surviving Corporation or any of its Affiliates remains unpaid, Lakes
shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly, create, incur, issue, assume, guaranty or otherwise become directly
or indirectly liable with respect to any indebtedness.
(e) For so long as the Surviving Corporation is required to provide
indemnification to any Indemnified Person, Gaming Co.'s ability to transfer any
material Mississippi Group Assets (as defined in the Company Distribution
Agreement) out of the Surviving Corporation shall be limited as follows. In
connection with the transfer of any material Mississippi Group Asset out of the
Surviving Corporation, Gaming Co. shall determine the net equity value of such
asset at the time of such transfer (i.e., the fair market value of such asset
less any indebtedness and known liabilities relating thereto). So long as the
net equity value of the asset being transferred, together with the aggregate net
equity values of all assets previously transferred, is equal to or less than the
total indebtedness of Company as of the Determination Date under the Indentures
and the Revolving Credit Facility (collectively, the "THRESHOLD DEBT"), the
subject asset can be transferred without restriction. If, however, the net
equity value of the asset being transferred, together with the aggregate net
equity values of all assets previously transferred, is more than the Threshold
Debt (such excess being referred to as the "REQUIRED CREDIT SUPPORT"), then
Gaming Co. shall either (i) contribute to the Surviving Corporation assets with
a net equity value at least equal to the Required Credit Support or (ii)
guaranty the indemnification obligations to the Indemnified Persons in an amount
at least equal to the Required Credit Support. Once Gaming Co. is required to
provide any Required Credit Support, it shall only be entitled to transfer
additional material Mississippi Group Assets out of the Surviving Corporation if
it concurrently with such transfer either (x) contributes to the Surviving
Corporation other assets with a net equity value at least equal to the net
equity value of the assets to be
A-43
<PAGE>
transferred out of the Surviving Corporation or (ii) guarantees the
indemnification obligations of the Surviving Corporation to the Indemnified
Persons in an amount at least equal to the net equity value of the assets to be
transferred out of the Surviving Corporation.
(f) The provisions of this Section 7.9 are intended to be for the benefit
of, and shall be enforceable by, the Surviving Corporation and each Indemnified
Person (including such Person's heirs and representatives) and shall be binding
on all successors and assigns of the Surviving Corporation, Gaming Co. and
Lakes.
Section 7.10. DISTRIBUTIONS. (a) Prior to the Closing, Hilton will, and
will cause each of its Subsidiaries that is a party thereto, to enter into the
Hilton Distribution Agreement and such ancillary agreements (the "HILTON
ANCILLARY AGREEMENTS") as are reasonably required to effect the Hilton
Distribution and to govern the relationships between Hilton and Gaming Co.
following the Hilton Distribution. The Hilton Distribution Agreement and the
Hilton Ancillary Agreements will conform in all material respects to the terms
of the subject forms attached hereto as Exhibit A, with such changes thereto as
Hilton and Gaming Co. deem reasonably necessary and appropriate, provided that
such changes are not materially adverse to the interests of either Gaming Co.,
Company or Lakes. Hilton shall use its reasonable best efforts to take all
action necessary to effect the Hilton Distribution prior to the Effective Time,
pursuant to the terms of the Hilton Distribution Agreement and the Hilton
Ancillary Agreements. Prior to the Effective Time and subject to the second
preceding sentence, Hilton will not agree to or permit any material modification
of the terms of the Hilton Distribution Agreement or the Hilton Ancillary
Agreements that relate to the Gaming Co. Business without the prior written
consent of Company, which consent will not be unreasonably withheld.
(b) Prior to the Closing, Company will, and will cause each of its
Subsidiaries that is a party thereto, to enter into the Company Distribution
Agreement and such ancillary agreements (the "COMPANY ANCILLARY AGREEMENTS," and
together with the Hilton Ancillary Agreements, the "ANCILLARY AGREEMENTS") as
are reasonably required to effect the Company Distribution and to govern the
relationships between Company and Lakes following the Company Distribution. The
Company Distribution Agreement and the Company Ancillary Agreements will conform
in all material respects to the terms of the subject forms attached hereto as
Exhibit B, with such changes thereto as Company and Lakes deem reasonably
necessary and appropriate, provided that such changes are not materially adverse
to the interests of either Company, Hilton or Gaming Co. Company shall use its
reasonable best efforts to take all action necessary to effect the Company
Distribution prior to the Effective Time, pursuant to the terms of the Company
Distribution Agreement and the Company Ancillary Agreements. Prior to the
Effective Time and subject to the second preceding sentence, Company will not
agree to or permit any material modification of the terms of the Company
Distribution Agreement or the Company Ancillary Agreements without the prior
written consent of Hilton, which consent will not be unreasonably withheld.
Section 7.11. PRIVATE LETTER RULING AND TAX OPINIONS. Each of Hilton and
Company shall use its reasonable best efforts and cooperate with the other party
and to obtain from the Service or tax counsel, as the case may be, the Private
Letter Rulings or tax opinions, as the case may be, contemplated by Section
8.1(d) and 8.1(e) of this Agreement. Each party hereto shall also use its
reasonable best efforts to cause (a) the Merger to qualify as a reorganization
under the provisions of Sections 368(a)(1)(B) of the Code, (b) the Hilton
Distribution to qualify as a tax-free transaction to Hilton and its stockholders
within the meaning of Section 355 of the Code and (c) the Company Distribution
to qualify as a tax-free transaction, solely with respect to Company's
shareholders, within the meaning of Section 355 of the Code. Company
acknowledges, however, that (i) the Private Letter Ruling requested by Hilton
will also seek rulings with respect to the tax-free nature of certain other
transactions in which Hilton intends to engage after the Hilton Distribution
(the "OTHER TRANSACTIONS") and (ii) Hilton will also be entitled to seek a
Private Letter Ruling that covers (and assumes the consummation of) such Other
Transactions in the Private Letter Ruling referred to above.
A-44
<PAGE>
Section 7.12. NYSE LISTING. Gaming Co. shall use its reasonable efforts to
cause the shares of Gaming Co. Common Stock to be issued in the Merger to be
approved for listing on the NYSE (or such other securities exchange or market
comprising the principal securities exchange on which the Gaming Co. Common
Stock is listed), subject to notice of official issuance, prior to the Effective
Time.
Section 7.13. AFFILIATE AGREEMENTS. Upon the execution of this Agreement,
Company will provide Hilton with a list of those Persons who are, in Company's
reasonable judgment, "affiliates" of Company within the meaning of Rule 145
(each such Person who is an "affiliate" of Company within the meaning of Rule
145 is referred to as an "AFFILIATE") promulgated under the Securities Act
("RULE 145"). Company shall provide Hilton such information and documents as
Hilton shall reasonably request for purposes of reviewing such list and shall
notify Hilton in writing regarding any change in the identity of its Affiliates
prior to the Closing Date. Company shall each use all reasonable efforts to
deliver or cause to be delivered to Hilton by July 31, 1998 (and in any case
prior to the Effective Time) from each of its Affiliate, an executed Affiliate
Agreement, substantially in the form attached hereto as Exhibit C (an "AFFILIATE
AGREEMENT"). Gaming Co. may be entitled to place appropriate legends on the
certificates evidencing any Gaming Co. Common Stock to be received by such
Affiliates of Company pursuant to the terms of this Agreement, and to issue
appropriate stop transfer instructions to the transfer agent for Gaming Co.
Common Stock, consistent with the terms of the Affiliate Agreements (PROVIDED
that such legends or stop transfer instructions shall be removed when such
shares of Gaming Co. Common Stock are generally transferable without any
restrictions imposed by Rule 145, upon the request of any shareholder that is
not then an Affiliate of Company).
Section 7.14. STOCK PLANS.
(a) At the Effective Time, each outstanding Company Stock Option under the
Company Stock Plans, whether vested or unvested, shall be deemed to constitute
an option to acquire, on the same terms and conditions as were applicable under
such Company Stock Option the same number of shares of Gaming Co. Common Stock
as the holder of such Company Stock Option would have been entitled to receive
pursuant to the Merger had such holder exercised such option in full immediately
prior to the Effective Time (rounded to the nearest whole number), at a price
per share (rounded to the nearest whole cent) equal to (y) the aggregate
exercise price for the shares of Company Common Stock purchasable pursuant to
such Company Stock Option immediately prior to the Effective Time divided by (z)
the number of full shares of Gaming Co. Common Stock deemed purchasable pursuant
to such Company Stock Option in accordance with the foregoing, it being
acknowledged by Hilton that each such Company Stock Option will, to the extent
provided for in the applicable option or agreement, become fully vested at the
Effective Time as a result of the Merger.
(b) Promptly after the Effective Time, Gaming Co. shall deliver to the
participants in the Company Stock Plans appropriate notice setting forth such
participants' rights pursuant thereto and the grants pursuant to Company Stock
Plans shall continue in effect on the same terms and conditions (subject to the
adjustments required by this Section 7.14 after giving effect to the Merger).
(c) Gaming Co. shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Gaming Co. Common Stock for delivery
under Company Stock Plans assumed in accordance with this Section 7.14. Promptly
after the Effective Time, Gaming Co. shall file a registration statement on Form
S-8 (or any successor or other appropriate forms), or another appropriate form
with respect to the shares of Gaming Co. Common Stock subject to such options
and shall use its reasonable best efforts to maintain the effectiveness of such
registration statement or registration statements (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as such
options remain outstanding.
(d) The Board of Directors of Company shall, prior to or as of the Effective
Time, take all necessary actions, pursuant to and in accordance with the terms
of the Company Stock Plans and the instruments evidencing the Company Stock
Options, to provide for the conversion of the Company Stock Options into
A-45
<PAGE>
options to acquire Gaming Co. Common Stock in accordance with this Section 7.14;
and Company represents and warrants that no consent of the holders of the
Company Stock Options is required in connection with such conversion.
(e) The Board of Directors of Company shall, prior to or as of the Effective
Time, take appropriate action to approve the deemed cancellation of the Company
Stock Options for purposes of Section 16(b) of the Exchange Act. The Board of
Directors of Gaming Co. shall, prior to or as of the Effective Time, take
appropriate action to approve the deemed grant of options to purchase Gaming Co.
Common Stock under the Company Stock Options (as converted pursuant to this
Section 7.14) for purposes of Section 16(b) of the Exchange Act.
Section 7.15. INDIAN GAMING AND DEBT AGREEMENTS AND LAKES
AGREEMENTS. Subject to Lakes' obligations to indemnify the Surviving
Corporation with respect to such obligations pursuant to Section 7.9 hereof and
Article V of the Company Distribution Agreement, the Surviving Corporation shall
comply with all of Company's obligations under any Indian Gaming and Debt
Agreements or Lakes Agreements to which it is a party or subject to and for
which it has not been released.
Section 7.16. CONVEYANCE TAXES. Hilton and Company shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any transfer, recording,
registration and other fees or any similar taxes which become payable in
connection with the transactions contemplated by this Agreement that are
required or permitted to be filed on or before the Effective Time. Company shall
pay, without deduction or withholding from any amount payable to the holders of
Company Common Stock, any such taxes or fees imposed by any Governmental
Authority (and any penalties and interest with respect to such taxes and fees)
which become payable in connection with the transactions contemplated by this
Agreement on behalf of its shareholders.
Section 7.17. STOCKHOLDER OR SHAREHOLDER LITIGATION. Each of Hilton and
Company shall give the other the reasonable opportunity to participate in the
defense of any stockholder or shareholder litigation against Hilton or Company,
as applicable, and its directors relating to the transactions contemplated
hereby.
Section 7.18. EMPLOYEE BENEFITS.
(a) Gaming Co. shall or shall cause the Surviving Corporation to maintain in
effect employee benefit plans and arrangements which provide benefits which have
a value which is substantially comparable, in the aggregate, to the benefits
provided by the Employee Benefit Plans (not taking into account the value of any
benefits under any such plans which are equity based) for a period of one year
after the Effective Time.
(b) Gaming Co. shall or shall cause the Surviving Corporation to honor all
employment, severance and termination agreements (including change in control
provisions) of the employees of Company and its Subsidiaries in effect on the
date hereof; PROVIDED that (x) all such agreements are set forth or summarized
on the Company Disclosure Schedule, (y) such agreements will not be amended,
modified or extended after the date hereof without the written consent of Hilton
and (z) to the extent such agreement would unjustly or inequitably enrich such
employee, the foregoing commitment shall not apply to any Persons who become
employees of any member of the Lakes Group and shall instead become a commitment
of Lakes who shall honor any such agreement.
(c) For purposes of determining eligibility to participate and vesting,
including accrual or entitlement to benefits where length of service is relevant
under any employee benefit plan or arrangement of Gaming Co. or the Surviving
Corporation, employees of Company and its Subsidiaries as of the Effective Time
shall receive service credit for service with Company and any of its
Subsidiaries to the same extent such service was granted under the Employee
Benefit Plans.
A-46
<PAGE>
Section 7.19. INDENTURES AND COMPANY NOTES. Gaming Co. shall cause the
Surviving Corporation to comply with any "Change of Control Offer" (as defined
in the Indentures) that the Surviving Corporation is required to make under any
of the Indentures or the Company Notes. Upon the terms and subject to the
conditions set forth in this Agreement, each of the parties hereto agrees to use
all reasonable best efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, and to assist and cooperate with the other party in
doing, all things necessary, proper or advisable to satisfy the conditions set
forth in Section 8.1(j) below.
Section 7.20. POST-CLOSING MARKETING ACTIVITIES. Gaming Co. shall, and
shall cause the Surviving Corporation to, maintain and observe Company's
marketing agreements with each of the Coushatta Tribe of Louisiana and the
Tunica-Biloxi Tribe of Louisiana as follows:
For as long as the current Louisiana Indian Management Contracts (the
management contract relating to the Avoyelles casino expires June 2001 and the
management contract relating to the Coushatta casino expires January 2002) are
existing, neither Gaming Co. nor Surviving Corporation shall directly or
indirectly engage in Restricted Activities in the following markets: (i) greater
Houston, Texas; (ii) greater Alexandria, Louisiana; (iii) greater Baton Rouge,
Louisiana; or (iv) greater Lafayette, Louisiana; PROVIDED, HOWEVER, that nothing
herein shall prevent the Surviving Corporation from directly mailing any
marketing material relating to the Mississippi Casinos in such markets to
individuals or entitles that are included in the Surviving Corporation's patron
database; and PROVIDED FURTHER, HOWEVER, that nothing herein shall prevent
Gaming Co. from marketing or advertising its casinos (or employing its related
databases) other than Mississippi Casinos in such markets.
Section 7.21. SHARK CLUB GROUND LEASE. Subject to the terms of the Shark
Club Ground Lease, Lakes shall, and shall cause its Subsidiaries to, exercise
the "call" option to purchase the leased premises (as described in the Shark
Club Ground Lease) prior to the commencement of the period during which the
landlord under the lease has the right to exercise a "put" option to sell such
leased premises to a Subsidiary of Lakes.
ARTICLE VIII.
CONDITIONS TO MERGER
Section 8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligations of each party to this Agreement to effect
the Merger shall be subject to the satisfaction or waiver prior to the Effective
Time of the following conditions:
(a) SHAREHOLDER APPROVAL. Company shall have obtained the Company
Shareholder Approval.
(b) HSR ACT. The waiting period (and any extension thereof) applicable to
the Merger under the HSR Act shall have expired or been earlier terminated.
(c) REGISTRATION STATEMENT. The Form S-4 shall have become effective under
the Securities Act and shall not be the subject of any stop order or proceeding
seeking a stop order.
(d) PRIVATE LETTER RULINGS. Unless otherwise agreed upon by Hilton and
Company as set forth in paragraph (e) below, (i) Hilton shall have received from
the Service a private letter ruling (the "PRIVATE LETTER RULING"), reasonably
satisfactory in form and substance to Hilton and Company, substantially to the
effect that, on the basis of the facts, representations, and Applicable Law
existing at the date of the issuance of such Private Letter Ruling, including
the intended consummation of the Other Transactions, the pro rata distribution
of the stock of Gaming Co. to the holders of Hilton Common Stock in the Hilton
Distribution will be non-taxable for federal income tax purposes to both Hilton
and its stockholders under Section 355 of the Code and (ii) Company shall have
received from the Service a Private Letter Ruling, reasonably satisfactory in
form and substance to Hilton and Company, substantially to the effect that, on
the basis of the facts, representations, and Applicable Law existing at the date
of the issuance of such
A-47
<PAGE>
Private Letter Ruling, the pro rata distribution of the stock of Lakes to the
holders of Company Common Stock in the Company Distribution will be non-taxable
for federal income tax purposes to Company's shareholders under Section 355 of
the Code.
(e) TAX OPINIONS IN LIEU OF PRIVATE LETTER RULING. In the event that
Hilton and Company agree to complete the transactions contemplated by this
Agreement without obtaining the Private Letter Rulings, (i) Hilton shall have
received an opinion of Latham & Watkins, counsel to Hilton, reasonably
satisfactory in form and substance to each of Hilton and Company, substantially
to the effect that, on the basis of the facts, representations, and Applicable
Law existing at the date of such opinion, including the intended consummation of
the Other Transactions, the pro rata distribution of the stock of Gaming Co. to
the holders of Hilton Common Stock in the Hilton Distribution will be, although
not free from doubt, non-taxable for federal income tax purposes to both Hilton
and its stockholders under Section 355 of the Code and (ii) Company shall have
received an opinion of Maslon, Edelman, Borman & Brand, LLP counsel to Company,
reasonably satisfactory in form and substance to each of Hilton and Company,
substantially to the effect that, on the basis of the facts, representations,
and Applicable Law existing at the date of such opinion, the pro rata
distribution of the stock of Lakes to the holders of Company Common Stock in the
Company Distribution will be, although not free from doubt, non-taxable for
federal income tax purposes to Company's shareholders under Section 355 of the
Code.
(f) NO INJUNCTIONS OR RESTRAINTS. No Governmental Authority shall have
enacted, issued, promulgated, enforced or entered any order, executive order,
stay, decree, judgment or injunction or statute, rule, regulation which is in
effect and which has the effect of making the Merger or the Distributions
illegal or otherwise prohibiting consummation of the Merger or the
Distributions.
(g) CONSUMMATION OF THE DISTRIBUTIONS. Each of the Hilton Distribution and
the Company Distribution shall have become effective in accordance with the
terms of the applicable Distribution Agreement and the applicable Ancillary
Agreements.
(h) TAX LEGISLATION. There shall be no proposed legislation introduced in
bill form and pending congressional action which, if passed, would have the
effect of amending the Code so as to alter in any materially adverse respect any
of the tax consequences prescribed by the Private Letter Ruling or the tax
opinions in lieu thereof.
(i) NATIONAL LISTING. The shares of Gaming Co. Common Stock to be issued
in the Merger and upon exercise or conversion of the Company Stock Options shall
have been approved for listing on a national securities exchange, subject to
official notice of issuance.
(j) INDENTURES. Each member of the Lakes Group shall have been released
from all obligations relating to (x) the Company Notes, including the release of
the capital stock of each member of the Lakes Group from the obligations and
Encumbrances under the Subsidiaries Notes Pledge and (y) the Revolving Credit
Facility.
(k) CLOSING DATE. The Closing of the Merger shall not take place before
December 1, 1998.
Section 8.2. ADDITIONAL CONDITIONS TO OBLIGATIONS OF GAMING CO. The
obligation of Gaming Co. to effect the Merger is subject to the satisfaction of
each of the following conditions prior to the Effective Time, any of which may
be waived in writing exclusively by Gaming Co.:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Company set forth in this Agreement that are qualified as to materiality shall
be true and correct in all respects, and the representations and warranties of
Company set forth in this Agreement that are not so qualified shall be true and
correct in all material respects, in each case, as of the date of this Agreement
and (except to the extent such representations and warranties speak as of an
earlier date, in which case they shall be true and correct as of such date) as
of the Closing Date as though made on and as of the Closing Date, except for
changes contemplated or permitted by this Agreement; and Gaming Co. shall have
received a certificate
A-48
<PAGE>
signed on behalf of Company by the chief executive officer and the chief
financial officer of Company to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF COMPANY AND LAKES. Company and Lakes
shall have performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing Date, and
Gaming Co. shall have received a certificate signed on behalf of Company by the
chief executive officer and the chief financial officer of Company to such
effect.
(c) TAX OPINION. Gaming Co. shall have received an opinion of Latham &
Watkins, substantially in the form of Exhibit H, dated the Closing Date and to
the effect that: (i) the Merger will be treated for federal income tax purposes
as a reorganization within the meaning of Section 368(a)(1) of the Code; (ii)
each of Gaming Co. and Company will be a party to the reorganization within the
meaning of Section 368(b) of the Code; and (iii) no gain or loss will be
recognized by Company, Hilton, or Gaming Co. as a result of the Merger, except
for any gain which may be recognized by Company from the Company Distribution as
a result of the Merger. In rendering such opinion, Latham & Watkins shall
receive and may rely upon representations contained in certificates of Company
and Gaming Co. substantially in the forms of Exhibits I and J attached hereto.
(d) CONSENTS. All necessary approvals or authorizations of any
Governmental Authority required or necessary under applicable Gaming Laws in
connection with the Merger and the Distributions shall have been obtained.
(e) LETTERS FROM AFFILIATES. Gaming Co. shall have received from each
Person referred to in Section 7.13 an executed Affiliate Agreement.
(f) SECURITY AGREEMENTS. Lakes shall have executed each of the Security
Agreements, each of which shall be in full force and effect and legally binding
against Lakes and no material breach by Lakes shall have occurred thereunder as
of the Closing Date.
(g) NON-COMPETITION AGREEMENTS. Each of Lyle Berman, Thomas J. Brosig and
Stanley M. Taube shall have executed a Non-Competition Agreement, each of which
shall be in full force and effect and legally binding against each of Lyle
Berman, Thomas J. Brosig and Stanley M. Taube and no material breach by either
Lyle Berman, Thomas J. Brosig or Stanley M. Taube shall have occurred thereunder
as of the Closing Date.
(h) SETTLEMENT AGREEMENT. The Settlement Agreement shall be in full force
and effect and be legally binding on the parties thereto, and no material breach
by any of the parties thereto shall have occurred as of the Closing Date.
(i) ACCOUNTANT'S LETTER AND TAX OPINION. Company and Gaming Co. shall have
received from Company's representative Arthur Andersen LLP a letter dated the
date of the Closing Date addressed to Company and Gaming Co. at a level of
detail reasonably satisfactory to Company and Gaming Co., setting out, based on
a reasonable estimate, the computation of the basis in the stock of Lakes
immediately before the Company Distribution, together with the amount of the
Stratosphere Loss (as defined in the Tax Allocation and Indemnity Agreement
attached to the Company Distribution Agreement). Company and Gaming Co. also
shall have received as of the same date an opinion of Arthur Andersen LLP at a
level of detail reasonably satisfactory to Company and Gaming Co., indicating
that there is at least a "reasonable basis" (as defined in Code section 6662)
for filing the Tax Returns reporting the Base Stratosphere Loss (as defined in
the Tax Allocation and Indemnity Agreement attached to the Company Distribution
Agreement) in the manner recommended by Lakes and its representatives.
(j) NET EQUITY VALUE. The Company Net Equity Value shall be equal to or
greater than $585,100,000.
A-49
<PAGE>
Section 8.3. ADDITIONAL CONDITIONS TO OBLIGATIONS OF COMPANY. The
obligations of Company to effect the Merger are subject to the satisfaction of
each of the following conditions prior to the Effective Time, any of which may
be waived in writing exclusively by Company:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Hilton set forth in this Agreement that are qualified as to materiality shall be
true and correct in all respects, and the representations and warranties of
Hilton set forth in this Agreement that are not so qualified shall be true and
correct in all material respects, in each case, as of the date of this Agreement
and (except to the extent such representations and warranties speak as of an
earlier date, in which case they shall be true and correct as of such date) as
of the Closing Date as though made on and as of the Closing Date, except for
changes contemplated or permitted by this Agreement; and Company shall have
received a certificate signed on behalf of Gaming Co. by the chief executive
officer and the chief financial officer of Gaming Co. to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF HILTON AND GAMING CO. Hilton and Gaming
Co. shall have performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing Date; and
Company shall have received a certificate signed on behalf of Gaming Co. by the
chief executive officer and the chief financial officer of Gaming Co. to such
effect.
(c) TAX OPINION. Company shall have received an opinion of Maslon,
Edelman, Borman & Brand, LLP, substantially in the form of Exhibit K, dated the
Closing Date and to the effect that: (i) the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a)(1)
of the Code; (ii) each of Gaming Co. and Company will be a party to the
reorganization within the meaning of Section 368(b) of the Code; and (iii) no
gain or loss will be recognized by Company as a result of the Merger, except for
any gain which may be recognized by Company from the Company Distribution as a
result of the Merger. In rendering such opinion, Maslon, Edelman, Borman &
Brand, LLP shall receive and may rely upon representations contained in
certificates of Company and Gaming Co. substantially in the forms of Exhibits I
and J attached hereto.
(d) RECEIPT OF AN UPDATED FAIRNESS OPINION. In the event: (a) (i) Hilton
consummates the Hilton Distribution after the Company Shareholder Approval has
been obtained; (ii) the Closing Date shall not have occurred within 20 business
days of the date that the Hilton Distribution is consummated; and (iii) an
Acquisition Proposal involving Company shall not have been received by or made
known to Company, then Ladenburg Thalmann & Co. Inc. shall have reissued to
Company the Fairness Opinion as of a date at least 21 or more business days
after the date that the Hilton Distribution is consummated, after having been
requested by Company to reissue such opinion following the consummation of the
Henry Distribution; or (b) Gaming Co. acquires after the date hereof, either
individually or in the aggregate, any Person, properties, assets or businesses
with a net equity value in excess of $300 million, then Ladenburg Thalmann & Co.
Inc. shall have reissued to Company the Fairness Opinion dated as of a date
after the date any such acquisition is consummated, after having been requested
by Company to reissue such opinion following the Consummation of any such
acquisition.
ARTICLE IX.
TERMINATION AND AMENDMENT
Section 9.1. TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time (with respect to Sections 9.1(b) through 9.1(l), by
written notice by the terminating party to the other party), whether before or
after approval of the matters presented in connection with the Merger by the
shareholders of Company:
(a) by mutual written consent of Hilton and Company; or
(b) by either Hilton or Company, if the Merger shall not have been
consummated by December 31, 1998 (PROVIDED that (i) either Hilton or Company may
extend such date to March 1, 1999 by providing
A-50
<PAGE>
written notice thereof to the other party on or prior to December 31, 1998, such
date, as it may be so extended, shall be referred to herein as the "OUTSIDE
DATE") and (ii) the right to terminate this Agreement under this Section 9.1(b)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of or resulted in the failure of the
Merger to occur on or before such date); or
(c) by either Hilton or Company, if a court of competent jurisdiction or
other Governmental Authority shall have issued a nonappealable final order,
decree or ruling or taken any other nonappealable final action, in each case
having the effect of permanently restraining, enjoining or otherwise prohibiting
the Merger or the Distributions; or
(d) by either Hilton or Company, if prior to the Effective Time, the Code is
amended so as to alter in any materially adverse respect any of the tax
consequences provided by the Private Letter Rulings described in Section 8.1(d)
or the opinions of counsel described in Section 8.1(e); or
(e) by Hilton, if, at the Company Shareholders Meeting (including any
adjournment or postponement), the Company Shareholder Approval shall not have
been obtained; or
(f) by Company, if the Hilton stockholders do not ratify the Hilton
Distribution; or
(g) by Hilton, if (i) the Board of Directors of Company shall have withdrawn
or modified its recommendation of this Agreement or the Merger; (ii) after the
receipt by Company of an Acquisition Proposal, Hilton requests in writing that
the Board of Directors of Company reconfirm its recommendation of this Agreement
and the Merger to the shareholders of Company and the Board of Directors of
Company fails to do so within 20 business days after its receipt of Hilton's
request; (iii) the Board of Directors of Company shall have recommended to the
shareholders of Company an Acquisition Proposal; (iv) a tender offer or exchange
offer for 15% or more of the outstanding shares of Company Common Stock is
commenced (other than by Hilton or an Affiliate of Hilton) and the Board of
Directors of Company recommends that the shareholders of Company tender their
shares in such tender or exchange offer; or (v) for any reason Company fails to
call and hold the Company Shareholders Meeting by the Outside Date (PROVIDED
that Hilton's right to terminate this Agreement under such clause (v) shall not
be available if (1) at such time Company would be entitled to terminate this
Agreement under Section 9.1(h) or (2) Company failed to call and hold such
meeting because the Form S-4 shall not have become effective under the
Securities Act, provided that Company shall have complied with all of its
obligations under this Agreement); or
(h) by Hilton or Company, if there has been a breach of any representation,
warranty, covenant or agreement on the part of the other party set forth in this
Agreement, which breach (i) will cause the conditions set forth in Section
8.2(a) or (b) (in the case of termination by Hilton) or 8.3(a) or (b) (in the
case of termination by Company) not to be satisfied, and (ii) shall not have
been cured within 20 business days following receipt by the breaching party of
written notice of such breach from the other party; or
(i) by Hilton, if the Company Net Equity Value is less than $585,100,000; or
(j) by Company, if (i) Hilton consummates the Hilton Distribution before the
Company Shareholders Meeting, (ii) an Acquisition Proposal involving Company
shall not have been received by or made known to Company prior to the Company
Shareholders Meeting, and (iii) the Company Shareholder Approval is not
obtained; or
(k) by Company, if (i) Hilton consummates the Hilton Distribution after the
Company Shareholder Approval has been obtained, (ii) the Closing Date shall not
have occurred within 20 business days of the date that the Hilton Distribution
is consummated, (iii) an Acquisition Proposal involving Company shall not have
been received or made known to Company and (iv) Ladenburg Thalmann & Co. Inc.
shall not have reissued to Company the Fairness Opinion as of a date at least 21
or more business days after the date that the Hilton Distribution is consummated
after having been requested by Company to reissue such opinion following the
consummation of the Hilton Distribution; or
A-51
<PAGE>
(l) by Company, if Gaming Co. acquires after the date hereof, either
individually or in the aggregate, any Person, properties, assets or businesses
with a net equity value in excess of $300 million and Ladenburg Thalmann & Co.
Inc. shall not have reissued to Company the Fairness Opinion as of a date after
any such acquisition is consummated, after having been requested by Company to
reissue such opinion following the consummation of any such acquisition.
Section 9.2. EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided in Section 9.1, this Agreement shall immediately become
void and there shall be no liability or obligation on the part of Hilton or
Company or any of their respective officers, directors, stockholders or
Affiliates, except as set forth in Section 9.3 and except that such termination
shall not limit liability for a willful breach of this Agreement; PROVIDED, that
the provisions of Section 9.3 of this Agreement and the Confidentiality
Agreement shall remain in full force and effect and survive any termination of
this Agreement.
Section 9.3. FEES AND EXPENSES.
(a) Except as set forth in Section 7.16 or in this Section 9.3, all
Transaction Costs shall be paid by the party incurring such expenses, whether or
not the Merger is consummated; PROVIDED, HOWEVER, that if the Merger is
consummated, all Transaction Costs of Company shall be paid by the Surviving
Corporation.
(b) Company shall pay Hilton a termination fee of $30 million upon the
earliest to occur of the following events:
(i) the termination of this Agreement by Hilton pursuant to Section
9.1(e), if any Acquisition Proposal involving Company shall have been
received or made known to Company prior to the Company Shareholders Meeting
and either a binding agreement with respect to any such Acquisition Proposal
is entered into, or the transactions constituting any such Acquisition
Proposal are consummated, within 18 months of such termination; PROVIDED,
HOWEVER, that no termination fee shall be payable in such an event if
Company would be entitled to terminate this Agreement pursuant to either
Section 9.1(j) or 9.1(k); or
(ii) the termination of this Agreement by Hilton pursuant to Section
9.1(g), whether or not Company is entitled to terminate this Agreement
pursuant to Section 9.1(j) or 9.1(k).
Company's payment of a termination fee pursuant to this subsection shall be the
sole and exclusive remedy of Hilton against Company and any of its Subsidiaries
and their respective directors, officers, employees, agents, advisors or other
representatives with respect to the occurrences giving rise to such payment;
PROVIDED that, this limitation shall not apply in the event of a willful breach
of this Agreement by Company.
(c) The expenses and fees, if applicable, payable pursuant to Section 9.3(b)
shall be paid concurrently with the first to occur of the events described in
Section 9.3(b)(i) or (ii).
Section 9.4. AMENDMENT. This Agreement may be amended by Hilton and
Company, by action taken or authorized by their respective Boards of Directors,
at any time before or after approval of the matters presented in connection with
the Merger by the shareholders of Company, but, after any such approval, no
amendment shall be made which by law requires further approval by such
shareholders without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
Section 9.5. EXTENSION; WAIVER. At any time prior to the Effective Time,
the parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions contained here. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
A-52
<PAGE>
ARTICLE X.
MISCELLANEOUS
Section 10.1. NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. None of the representations, warranties and agreements in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time, except for the agreements contained in Sections 2.4,
2.5, 2.6, 3.1, 3.2, 6.5, 7.4(iii) and (iv), 7.9, 7.14, 7.15, 7.16, 7.18, 7.20
and 7.21 hereof, this Article X and the Security Agreements delivered pursuant
to Section 7.9(c) and the agreements of the Affiliates delivered pursuant to
Section 7.13. The Confidentiality Agreement shall survive the execution and
delivery of this Agreement.
Section 10.2. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if to Hilton, to
Hilton Hotels Corporation
9336 Civic Center Drive
Beverly Hills, CA 90210
Attn: General Counsel
Telecopy: (310) 205-7677
with a copy to:
Latham & Watkins
1001 Pennsylvania, N.W., Suite 1300
Washington, D.C. 20004
Attn: Bruce E. Rosenblum, Esq.
Telecopy: (202) 637-2201
(b) if to Gaming Co. or Merger Sub, to
Gaming Co., Inc.
3930 Howard Hughes Parkway, 4th Floor
Las Vegas, Nevada 89109
Attn: General Counsel
Telecopy: (702) 699-5179
(c) if to Company or Lakes, to
Grand Casinos, Inc.
130 Cheshire Lane
Minnetonka, Minnesota 55305
Attn: General Counsel
Telecopy: (612) 449-8509
with a copy to:
Maslon, Edelman, Borman & Brand, LLP
3300 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Attn: Neil I. Sell, Esq.
Telecopy: (612) 672-8397
A-53
<PAGE>
Section 10.3. INTERPRETATION. Whenever the words "include," "includes" or
"including" are used in this Agreement they shall be deemed to be followed by
the words "without limitation." The phrase "made available" in this Agreement
shall mean that the information referred to has been made available if requested
by the party to whom such information is to be made available. The phrases "the
date of this Agreement," "the date hereof," and terms of similar import, unless
the context otherwise requires, shall be deemed to refer to June 30, 1998.
Section 10.4. COUNTERPARTS. This Agreement and any amendments hereto may
be executed in two or more counterparts, all of which shall be considered one
and the same agreement and shall become effective when two or more counterparts
have been signed by each of the parties and delivered to the other parties, it
being understood that all parties need not sign the same counterpart.
Section 10.5. ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This
Agreement and all documents and instruments referred to herein (a) constitute
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, and (b) except as provided in Section 7.9 are not intended to confer
upon any Person other than the parties hereto any rights or remedies hereunder;
PROVIDED that, the Confidentiality Agreement shall remain in full force and
effect until the Effective Time. Each party hereto agrees that, except for the
representations and warranties contained in this Agreement, neither Hilton nor
Company has made or shall be deemed to have made any other representations or
warranties, express or implied, and each hereby disclaims any other
representations and warranties made by itself or any of its officers, directors,
employees, agents, financial and legal advisors or other representatives, with
respect to (i) the execution and delivery of this Agreement, (ii) any financial
projections or schedules (other than the financial schedules, budgets or pro
formas described or referred to in Sections 3.1(c), 4.19, 4.20 or 5.14 of this
Agreement) heretofore or hereafter delivered to or made available to any such
Persons or their counsel, accountants, advisors, representatives or Affiliates
or (iii) the transactions contemplated hereby, notwithstanding the delivery or
disclosure to the other or the other's representatives of any documentation or
other information with respect to any one or more of the foregoing; it being
understood that each party hereto has not and will not rely on any financial
projections or schedules (other than the financial projections or schedules
described or referred to in Sections 3.1(c), 4.19, 4.20 or 5.14 of this
Agreement) in connection with its evaluation of any other party hereto or the
Merger.
Section 10.6. GOVERNING LAW. This Agreement shall be governed and
construed in accordance with the laws of the State of New York without regard to
any applicable conflicts of law, including all matters of construction,
validity, and performance, except to the extent that the provisions of the DGCL
or the MBCA and applicable Gaming Laws shall be mandatorily applicable to the
Merger or this Agreement.
Section 10.7. ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
Section 10.8. HEADINGS; REFERENCES. The article, section and paragraph
headings and table of contents contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. All references herein to "Article," "Sections" or "Exhibits"
shall be deemed to be references to Articles or Sections hereof or Exhibits
hereto unless otherwise indicated.
Section 10.9. SEVERABILITY; ENFORCEMENT. Except to the extent that the
application of this Section 10.9 would have a Material Adverse Effect with
respect to Hilton, Gaming Co. or Company, the invalidity of any portion hereof
shall not affect the validity, force or effect of the remaining portions hereof.
If it is ever held that any covenant hereunder is too broad to permit
enforcement of such covenant to its fullest extent, each party agrees that a
court of competent jurisdiction may enforce such covenant to
A-54
<PAGE>
the maximum extent permitted by law, and each party hereby consents and agrees
that such scope may be judicially modified accordingly in any proceeding brought
to enforce such covenant.
Section 10.10. SPECIFIC PERFORMANCE. The parties hereto agree that the
remedy at law for any breach of this Agreement will be inadequate and that any
party by whom this Agreement is enforceable shall be entitled to specific
performance in addition to any other appropriate relief or remedy. Such party
may, in its sole discretion, apply to a court of competent jurisdiction for
specific performance or injunctive or such other relief as such court may deem
just and proper in order to enforce this Agreement or prevent any violation
hereof and, to the extent permitted by Applicable Laws, each party hereto waives
any objection to the imposition of such relief.
Section 10.11. EFFECT OF HILTON DISTRIBUTION. The parties acknowledge that
Hilton may effect the Hilton Distribution in advance of the Effective Time. From
and after the effectiveness of the Hilton Distribution: (i) the rights and
obligations of Hilton contained in each of the Transaction Documents shall
become the rights and obligations solely of Gaming Co., and Hilton shall have no
further obligations under each of the Transaction Documents; (ii) all covenants
under each of the Transaction Documents to be performed by Hilton will be
performed by (and appropriately construed as covenants of) Gaming Co.; (iii) all
covenants under each of the Transaction Documents to be performed for the
benefit of Hilton will be performed (and appropriately construed as covenants)
for the benefit of Gaming Co. and all payments to be made to Hilton shall
instead be paid to Gaming Co.; and (iv) the representations and warranties of
Hilton shall be representations and warranties of Gaming Co., unless by their
context such representations and warranties are not appropriate to Gaming Co.,
appropriately modified to give effect to the transactions contemplated by this
Agreement and the Hilton Distribution Agreement.
Section 10.12. APPROVALS, CONSENT AND WAIVERS. Any approval, consent or
waiver required or authorized by any provision of this Agreement to be given or
made by any of the parties hereto shall only be valid to the extent such
approval, consent or waiver is in writing and signed by, with respect to either
Hilton, Gaming Co. or Merger Sub, the Executive Vice President & Chief Financial
Officer, the Executive Vice President & General Counsel, the Senior Vice
President & Treasurer or the Senior Vice President & Controller, and with
respect to either Company or Lakes, the Chairman of the Board of Directors, the
President and Chief Executive Officer or the Chief Financial Officer, of the
party to be bound by such approval, consent or waiver.
[Signature Page to Follow]
A-55
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective duly authorized officers as of the date first written
above.
HILTON HOTELS CORPORATION,
a Delaware corporation
/s/ MATTHEW J. HART
------------------------------------------
By: Matthew J. Hart
Its: EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
GRAND CASINOS, INC.,
a Minnesota corporation
/s/ LYLE BERMAN
------------------------------------------
By: Lyle Berman
Its: CHAIRMAN OF THE BOARD
GAMING CO., INC.,
a Delaware corporation
/s/ MATTHEW J. HART
------------------------------------------
By: Matthew J. Hart
Its: EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
GCI LAKES, INC.,
a Minnesota corporation
/s/ LYLE BERMAN
------------------------------------------
By: Lyle Berman
Its: CHAIRMAN OF THE BOARD
GAMING ACQUISITION CORPORATION,
a Minnesota corporation
/s/ MATTHEW J. HART
------------------------------------------
By: Matthew J. Hart
Its: EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
S-1
<PAGE>
[LOGO]
ANNEX B
June 29, 1998
Board of Directors
Hilton Hotels Corporation
9336 Civic Center Drive
Beverly Hills, California 90210
Dear Sirs and Madam:
You have requested our opinion as to the fairness from a financial point of
view to the stockholders of Hilton Hotels Corporation ("Hilton") of (i) the
distribution (the "Hilton Distribution") of shares of common stock, par value
$.01 per share ("Gaming Common Stock"), of Gaming Co., Inc. ("Gaming"), pursuant
to the form of the Distribution Agreement attached to the Merger Agreement (as
defined below), by and between Hilton and Gaming (the "Distribution Agreement");
and (ii) the consideration to be paid by Gaming pursuant to the Agreement and
Plan of Merger, to be dated as of June 30, 1998 (the "Merger Agreement"), by and
among Hilton, Gaming, Gaming Acquisition Corporation, a wholly owned subsidiary
of Gaming ("Merger Sub"), Lakes Gaming, Inc. ("Lakes") and Grand Casinos, Inc.
("Grand"), pursuant to which Merger Sub will be merged (the "Merger") with and
into Grand.
Pursuant to the distribution Agreement, holders of shares of common stock,
par value $2.50 per share, of Hilton ("Hilton Common Stock"), will receive one
share of Gaming Common Stock, for each share of Hilton Common Stock held
immediately prior to the consummation of the Hilton Distribution. The Merger
Agreement contemplates that, prior to the Merger, Grand will distribute (the
"Grand Distribution") all of the outstanding shares of capital stock of Lakes to
its shareholders pursuant to the form of the Grand Distribution Agreement
attached to the Merger Agreement, by and between Grand and Lakes (the "Grand
Distribution Agreement"). Concurrently with, or subsequent to, the Hilton
Distribution, pursuant to the Merger Agreement, each share of Common Stock, par
value $.01 per share, of Grand (the "Grand Common Stock"), will be converted
into the right to receive a number of shares of Gaming Common Stock determined
by dividing (i) the quotient obtained by dividing (a) the difference between
$1.2 billion and the modified net debt of Grand, after giving effect to the
Grand Distribution; by (ii) the quotient obtained by dividing (a) the difference
between $6.0246 billion and the modified net debt of Gaming, after giving effect
to the transactions contemplated by the Distribution Agreement; by (b) the
adjusted number of shares of Gaming Common Stock then outstanding.
In arriving at our opinion, we have reviewed the draft of the Merger
Agreement, dated June 23, 1998, including the exhibits thereto. We also have
reviewed financial and other information that was publicly available or
furnished to us by each of Hilton and Grand, including information provided
during discussions with their respective management. Included in the information
provided during discussions with their respective managements were certain
financial projections of each of Hilton, after giving effect to the transactions
contemplated by the Distribution Agreement; Gaming, after giving effect to the
transactions contemplated by the Distribution Agreement; and Grand, after giving
effect to the Grand Distribution; for the period beginning 1998 and ending 2001
prepared by the respective managements of Hilton and Grand (including certain
adjustments made by management of Hilton). In addition, we have compared certain
projected financial information of each of Hilton, Gaming and Grand with various
other companies whose securities are traded in public markets, reviewed the
historical stock price and trading volumes of shares of Hilton Common Stock and
Grand Common Stock, reviewed prices and premiums paid in certain other business
combinations and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion.
B-1
<PAGE>
Board of Directors
Hilton Hotels Corporation
June 29, 1998
Page 2
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by Hilton and Grand or their
respective representatives, or that was otherwise reviewed by us. With respect
to the financial projections supplied to us, we have assumed that they have been
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the respective managements of Hilton and Grand as to
the future operating and financial performance of each of Hilton, after giving
effect to the transactions contemplated by the Distribution Agreement; Gaming,
after giving effect to the transactions contemplated by the Distribution
Agreement; and Grand, after giving effect to the transactions contemplated by
the Distribution Agreement; and Grand, after giving effect to the Grand
Distribution. We have assumed that the modified net debt of Gaming, after giving
effect to the transactions contemplated by the Distribution Agreement, and of
Grand, after giving effect to the Grand Distribution, will be $1.8968 billion
and $549.9 million, respectively, as projected by the management of Hilton and
Grand, respectively. We have not assumed any responsibility for making any
independent verification of any of the information reviewed by us. We have
relied as to certain legal matters on advice of counsel to Hilton.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
(i) prices at which the Hilton Common Stock or the Gaming Common Stock will
trade at any time or (ii) effects of the litigation referred to in the Merger
Agreement. Our opinion does not address the relative merits of the Hilton
Distribution, the Merger or the other business strategies being considered by
Hilton's Board of Directors, nor does it address Hilton's Board of Directors'
decision to proceed with the Hilton Distribution or the Merger. Our opinion does
not constitute a recommendation to any stockholder as to how such stockholder
should vote on the proposed transactions.
Donaldson, Lufkin & Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. DLJ has performed investment
banking and other services for each of Hilton and Grand and for certain of their
affiliates in the past and has been compensated for such services and may, at
any time, hold a net long or short position in the securities of each of Hilton
and Grand.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Hilton Distribution and the consideration to be paid by
Gaming pursuant to the Merger Agreement, after giving effect to the Grand
Distribution, taken as a whole, are fair to the stockholders of Hilton from a
financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By /s/ Warren C. Woo
------------------------------------
Warren C. Woo
Managing Director
B-2
<PAGE>
[LOGO]
ANNEX C
June 30, 1998
The Board of Directors
Grand Casinos, Inc.
130 Cheshire Lane
Minnetonka, MN 55305
Ladies and Gentlemen:
You have requested our opinion as to whether or not the consideration to be
received by the holders (the "Company Shareholders") of shares of common stock,
par value $.01 per share ("Company Shares"), of Grand Casinos, Inc., a Minnesota
corporation ("Company"), pursuant to the Merger and the Lakes Distribution
(each, as defined below), taken together and considered as a single transaction,
is fair, from a financial point of view, to the Company Shareholders.
The Agreement and Plan of Merger by and among Hilton Hotels Corporation, a
Delaware corporation ("Hilton"), Gaming Co., Inc., a Delaware corporation
("Gaming Co."), Merger Sub, a Minnesota corporation ("Merger Sub"), GCI Lakes,
Inc., a Minnesota corporation ("Lakes"), and Company, dated as of June 30, 1998
(the "Merger Agreement"); the form of Distribution Agreement by and between
Company and Lakes attached as Exhibit B to the Merger Agreement (the "Lakes
Agreement"); and the form of Distribution Agreement by and between Hilton and
Gaming Co. attached as Exhibit A to the Merger Agreement (the "Gaming Co.
Agreement", and together with the Merger Agreement and the Lakes Agreement, the
"Agreements"); provide for, among other things: (i) the contribution of all of
the operations, assets and liabilities of Hilton and its subsidiaries comprising
the Gaming Co. Business (as defined in the Gaming Co. Agreement) to Gaming Co.,
the distribution on a pro-rata basis of all of the shares of Gaming Co. to
Hilton's stockholders, and the retention by Hilton of the Hilton Retained
Business (as defined in the Gaming Co. Agreement), consisting principally of
Hilton's existing lodging operations (taken together, the "Hilton
Distribution"); (ii) the contribution of all of the operations, assets and
liabilities of Company and its subsidiaries comprising the Non-Mississippi
Business (as defined in the Lakes Agreement) to Lakes, the distribution on a
pro-rata basis of all of the shares of Lakes to the Company Shareholders, and
the retention by Company of the Company Retained Business (as defined in the
Lakes Agreement), consisting principally of Company's existing Mississippi
gaming operations (taken together, the "Lakes Distribution", and together with
the Hilton Distribution, the "Distributions"); and (iii) following the
Distributions, the merger of Merger Sub with and into Company with Company to
continue as the surviving corporation (the "Merger"). In the Merger, each
outstanding Company Share will be converted into the right to receive a number
of shares of common stock, par value $.01 per share, of Gaming Co., which number
will be computed pursuant to an exchange ratio formula set forth in the Merger
Agreement (the "Exchange Ratio Formula"). The transactions described in clauses
(i)-(iii) above are hereinafter referred to as the "Transaction". (All
references herein to Gaming Co. prior to the Hilton Distribution are intended to
refer to the Gaming Co. Business, and all references herein to Lakes prior to
the Lakes Distribution are intended to refer to the Non-Mississippi Business).
C-1
<PAGE>
[LOGO]
In connection with rendering our opinion, we have reviewed such information
that we deemed necessary or appropriate for the purpose of stating the opinion
expressed herein, including but not limited to the following:
(i) The Agreements and the exhibits thereto;
(ii) Company's and Hilton's Annual Reports on Form 10-K and related
financial information for the five fiscal years ended December 31, 1997 and the
Quarterly Report on Form 10-Q and related financial information for the three
months ended March 31, 1998;
(iii) Certain information, including selected historical financial
information, pro forma financial information (giving effect to the Distributions
as if they occurred as of December 31, 1997) and pro forma financial forecasts
and projections relating to the business, earnings, cash flow, assets and
prospects of Company, Lakes and Gaming Co., furnished to us by Company, Gaming
Co. and Hilton;
(iv) Historical market prices and trading activity for Company Shares, the
common stock of Hilton and shares of certain other publicly traded companies
which we deemed to be comparable to Company, Hilton and/or Gaming Co.;
(v) Financial terms of certain other mergers and acquisitions which we
deemed to be relevant;
(vi) Certain publicly available information regarding the gaming industry,
Company, Hilton and certain other companies as we deemed necessary and relevant;
and
(vii) Such other accepted financial and investment banking procedures and
analyses as we deemed necessary or appropriate, including our assessment of
general economic, financial and monetary conditions.
In addition, we met with members of the senior management of Company and
Gaming Co. to discuss the conditions of the gaming industry generally and the
historical and prospective operating results of Company, Lakes and Gaming Co.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness, without assuming any responsibility for the independent
verification of, all financial and other information that was available to us
from public sources, that was provided to us by Company, Hilton or Gaming Co.,
or that was otherwise reviewed by us. With respect to financial forecasts and
projections furnished to us by the senior management of Company, Gaming Co. and
Hilton, we have assumed that they have been reasonably prepared on bases
reflecting the best then currently available estimates of results and judgements
of such senior management and we have made no independent verification of the
bases, assumptions, calculations or other information contained therein. We have
not made or been provided with an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise, and including pending or
threatened litigation) of Company, Hilton, Gaming Co. or Lakes.
Insofar as our opinion relates to the consideration to be received by the
Company Shareholders in the Merger, we note that the amount of such
consideration will be determined by the application of the Exchange Ratio
Formula (which is based upon, in part, the Total Debt of Company and the Total
Debt of Gaming Co. (each, as defined in the Merger Agreement) as of the earlier
of the Closing Date (as defined in the Merger Agreement) and December 31, 1998),
and accordingly, such amount can not be determined until such time. For purposes
of rendering the opinion set forth herein, we have assumed the Total Debt of
Company and the Total Debt of Gaming Co., as of the relevant date, will be in
amounts substantially consistent with those reflected in Company's and Gaming
Co.'s forecasts of results of operations and cash
C-2
<PAGE>
[LOGO]
flow for the year ending December 31, 1998 which were furnished to us by the
senior management of Company and Gaming Co. We express no opinion as to the
reasonableness or achievability of such forecasts.
Our opinion is based on economic, market, financial and other conditions as
they exist and can be evaluated by us on, and on the information made available
to us as of, the date of this letter. It should be understood that, although
subsequent developments may affect this opinion, we do not have any obligation
to update, revise or reaffirm this opinion, and will do so only if and when
requested by the Company. We are expressing no opinion herein as to the price at
which the common stocks of Hilton, Gaming Co. or Lakes will trade following the
Transaction, or of the common stocks of Hilton and Company between the
announcement and consummation of the Transaction.
Ladenburg Thalmann & Co. Inc. ("Ladenburg"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and
securities in connection with mergers, acquisitions, underwritings, sales and
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate or other purposes. We have acted as financial
advisor to Company in connection with the Transaction and will receive a fee
from Company for our services, a significant portion of which is contingent on
the consummation of the Transaction. Pursuant to this engagement, we have also
received indemnification against certain liabilities for the services rendered.
We have, in the past, provided financial advisory and financing services to
Company and have received fees for the providing of such services. In addition,
in the ordinary course of business, we actively trade securities for our own
account and for the accounts of our customers and, accordingly, may at any time
hold a long or short position in the debt or equity securities of Company and
Hilton, and, in the future, of Lakes and Gaming Co. Mr. Ronald J. Kramer,
Chairman and Chief Executive Officer of Ladenburg, serves as a director of
Company.
It is understood that this letter is solely for the benefit and use of the
Board of Directors of Company in its consideration of the Merger Agreement and
may not be relied upon by any other person, used for any other purpose or
reproduced, disseminated, quoted or referred to at any time, in any manner or
for any purpose without our prior written consent. This letter does not
constitute a recommendation to any Company Shareholder with respect to whether
to vote in favor of the approval and adoption of the Merger Agreement, and
should not be relied upon by any Company Shareholder as such.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the consideration to be received by the holders of Company
Shares pursuant to the Merger and the Lakes Distribution, taken together and
considered as a single transaction, is fair, from a financial point of view, to
such holders.
Very truly yours,
/s/ LADENBURG THALMANN & CO. INC.
C-3
<PAGE>
ANNEX D
FORM OF
PARK PLACE ENTERTAINMENT CORPORATION
1998 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE; DEFINITIONS
The purpose of the Plan is to give the Corporation a competitive advantage
in attracting, retaining and motivating officers, employees, and the CEO and
Chairman and to provide the Corporation and its subsidiaries with a stock plan
providing incentives more directly linked to the profitability of the
Corporation's businesses and increases in shareholder value.
For purposes of the Plan, the following terms are defined as set forth
below:
a. "AFFILIATE" means a corporation or other entity controlled by the
Corporation and designated by the Committee from time to time as such.
b. "AWARD" means a Stock Appreciation Right or a Stock Option.
c. "BOARD" means the Board of Directors of the Corporation.
d. "CEO" means the Chief Executive Officer of the Corporation.
e. "CHAIRMAN" means the Chairman of the Board.
f. "CHAIRMAN AGREEMENT" means the Employment Agreement by and between the
Corporation and its initial Chairman, which sets forth certain terms of such
Chairman's employment with the Corporation.
g. "CHANGE IN CONTROL" and "CHANGE IN CONTROL PRICE" have the meanings set
forth in Sections 7(b) and (c), respectively.
h. "CODE" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
i. "COMMISSION" means the Securities and Exchange Commission or any
successor agency.
j. "COMMITTEE" means the Committee referred to in Section 2.
k. "COMMON STOCK" means common stock, par value $.01 per share, of the
Corporation.
l. "CORPORATION" means Park Place Entertainment Corporation, a Delaware
corporation.
m. "DISABILITY" means permanent and total disability as determined under
procedures established by the Committee for purposes of the Plan.
n. "DISTRIBUTION" means the distribution to the holders of the outstanding
shares of Hilton Common Stock, on a one-for-one basis, of all of the outstanding
shares of Common Stock.
o. "EMPLOYMENT AGREEMENT" means the Employment Agreement by and between the
Corporation and its initial CEO, which sets forth the terms of such CEO's
employment with the Corporation.
p. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
q. "FAIR MARKET VALUE" means, except as provided in Section 6(b)(ii)(2), as
of any given date, the mean between the highest and lowest reported sales prices
of the Common Stock on the New York Stock Exchange Composite Tape or, if not
listed on such exchange, on any other national securities exchange on which the
Common Stock is listed or on NASDAQ. If there is no regular public trading
market for such Common Stock, the Fair Market Value of the Common Stock shall be
determined by the Committee in good faith.
D-1
<PAGE>
r. "HILTON" means Hilton Hotels Corporation, a Delaware corporation.
s. "HILTON COMMON STOCK" means common stock, par value $2.50 per share, of
Hilton.
t. "INCENTIVE STOCK OPTION" means any Stock Option designated as, and
qualified as, an "incentive stock option" within the meaning of Section 422 of
the Code.
u. "NONQUALIFIED STOCK OPTION" means any Stock Option that is not an
Incentive Stock Option.
v. "PLAN" means the Park Place Entertainment Corporation 1998 Stock
Incentive Plan, as set forth herein and as hereinafter amended from time to
time.
w. "RETIREMENT" means retirement from active employment with the
Corporation, a subsidiary or Affiliate at or after age 62.
x. "RULE 16B-3" means Rule 16b-3, as promulgated by the Commission under
Section 16(b) of the Exchange Act, as amended from time to time.
y. "SPECIAL OPTION" means a Nonqualified Stock Option granted to the CEO or
Chairman pursuant to Section 13.
z. "STOCK APPRECIATION RIGHT" means a right granted under Section 6.
aa. "STOCK OPTION" means an option granted under the Plan.
bb. "TERMINATION OF EMPLOYMENT" means the termination of the participant's
employment with the Corporation and any subsidiary or Affiliate. A participant
employed by a subsidiary or an Affiliate shall also be deemed to incur a
Termination of Employment if the subsidiary or Affiliate ceases to be such a
subsidiary or an Affiliate, as the case may be, and the participant does not
immediately thereafter become an employee of the Corporation or another
subsidiary or Affiliate. Temporary absences from employment because of illness,
vacation or leave of absence and transfers among the Corporation and its
subsidiaries and Affiliates shall not be considered Terminations of Employment.
In addition, certain other terms used herein have definitions given to them
in the first place in which they are used.
SECTION 2. ADMINISTRATION
The Plan shall be administered by the Stock Option Committee or such other
committee of the Board as the Board may from time to time designate (the
"Committee"), which shall be composed of not less than two members of the Board,
each of whom shall be an "outside director" for purposes of Section 162(m)(4) of
the Code and a "non-employee director" within the meaning of Rule 16b-3, and
shall be appointed by and serve at the pleasure of the Board.
The Committee shall have authority to grant Awards pursuant to the terms of
the Plan to officers and employees of the Corporation and its subsidiaries and
Affiliates.
Among other things, the Committee shall have the authority, subject to the
terms of the Plan:
(a) To select the officers and employees to whom Awards may from time to
time be granted;
(b) Determine whether and to what extent Incentive Stock Options,
Nonqualified Stock Options and Stock Appreciation Rights or any combination
thereof are to be granted hereunder;
(c) Determine the number of shares of Common Stock to be covered by each
Award granted hereunder;
(d) Determine the terms and conditions of any Award granted hereunder
(including, but not limited to, the option price (subject to Section 5(a)), any
vesting condition, restriction or limitation (which may be related to the
performance of the participant, the Corporation or any subsidiary or Affiliate)
and any vesting acceleration or forfeiture waiver regarding any Award and the
shares of Common Stock relating thereto, based on such factors as the Committee
shall determine;
D-2
<PAGE>
(e) Modify, amend or adjust the terms and conditions of any Award, at any
time or from time to time; and
(f) Determine to what extent and under what circumstances Common Stock and
other amounts payable with respect to an Award shall be deferred.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
from time to time deem advisable, to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any agreement relating thereto)
and to otherwise supervise the administration of the Plan.
The Committee may act only by a majority of its members then in office,
except that the members thereof may (i) delegate to an officer of the
Corporation the authority to make decisions pursuant to paragraphs (c), (f),
(g), (h) and (i) of Section 5 (provided that no such delegation may be made that
would cause Awards or other transactions under the Plan to cease to be exempt
from Section 16(b) of the Exchange Act) and (ii) authorize any one or more of
their number or any officer of the Corporation to execute and deliver documents
on behalf of the Committee.
Any determination made by the Committee or pursuant to delegated authority
pursuant to the provisions of the Plan with respect to any Award shall be made
in the sole discretion of the Committee or such delegate at the time of the
grant of the Award or, unless in contravention of any express term of the Plan,
at any time thereafter. All decisions made by the Committee or any appropriately
delegated officer pursuant to the provisions of the Plan shall be final and
binding on all persons, including the Corporation and Plan participants.
SECTION 3. COMMON STOCK SUBJECT TO PLAN
The total number of shares of Common Stock reserved and available for grant
under the Plan shall be 45,000,000. Of that amount, a maximum of 9,000,000
shares of Common Stock are reserved and available for the grant of Special
Options. Except with respect to the Special Options and Adjusted Park Place
Options issued pursuant to the Option Adjustment, no participant may be granted
Awards covering in excess of 2,000,000 shares of Common Stock in any calendar
year; provided, however, that Adjusted Park Place Options issued pursuant to the
Option Adjustment under Section 12 hereof shall not count toward such limit.
With respect to the Adjusted Park Place Options, no participant may be granted
Awards in any calendar year covering in excess of the number of shares of Common
Stock required to make the option adjustment with respect to such participant
prescribed by Section 12(a) hereof. With respect to the Special Options, the CEO
may not be granted Special Options covering in excess of 6,000,000 shares of
Common Stock in the aggregate, and the Chairman may not be granted Special
Options covering in excess of 3,000,000 shares of Common Stock in the aggregate.
Shares subject to an Award under the Plan may be authorized and unissued shares
or may be treasury shares.
If any Stock Option (and related Stock Appreciation Right, if any)
terminates without being exercised, shares subject to such Awards shall again be
available for distribution in connection with Awards under the Plan.
In the event of any change in corporate capitalization, such as a stock
split or a corporate transaction, any merger, consolidation, separation,
including a spin-off, or other distribution of stock or property of the
Corporation, any reorganization (whether or not such reorganization comes within
the definition of such term in Section 368 of the Code) or any partial or
complete liquidation of the Corporation, the Committee or Board may make such
substitution or adjustments in the aggregate number and kind of shares reserved
for issuance under the Plan, in the number, kind and option price of shares
subject to outstanding Stock Options and Stock Appreciation Rights, in the
number and kind of shares subject to other outstanding Awards granted under the
Plan and/or such other equitable substitution or adjustments as it may determine
to be appropriate in its sole discretion; PROVIDED, HOWEVER, that the number of
shares subject to any Award shall always be a whole number. Such adjusted option
price shall also be used to determine the
D-3
<PAGE>
amount payable by the Corporation upon the exercise of any Stock Appreciation
Right associated with any Stock Option.
SECTION 4. ELIGIBILITY
Except with respect to the Special Options and as provided in Section 12,
full-time (30 hours per week) officers and employees of the Corporation, its
subsidiaries and Affiliates who are responsible for or contribute to the
management, growth and profitability of the business of the Corporation, its
subsidiaries and Affiliates are eligible to be granted Awards under the Plan.
Except with respect to the Special Options, no grant shall be made under this
Plan to a director who is not an officer or a salaried employee of the
Corporation, its subsidiaries or Affiliates. Only the CEO and the Chairman are
eligible to be granted Special Options under the Plan.
SECTION 5. STOCK OPTIONS
Stock Options may be granted alone or in addition to other Awards granted
under the Plan and, except with respect to the Special Options, may be of two
types: Incentive Stock Options and Nonqualified Stock Options. Special Options
may only be Nonqualified Stock Options. Any Stock Option granted under the Plan
shall be in such form as the Committee may from time to time approve.
Except with respect to the Special Options, the Committee shall have the
authority to grant any optionee Incentive Stock Options, Nonqualified Stock
Options or both types of Stock Options (in each case with or without Stock
Appreciation Rights); PROVIDED, HOWEVER, that grants hereunder are subject to
the aggregate limit on grants to individual participants set forth in Section 3.
Incentive Stock Options may be granted only to employees of the Corporation and
its subsidiaries (within the meaning of Section 424(f) of the Code). To the
extent that any Stock Option is not designated as an Incentive Stock Option or
even if so designated does not qualify as an Incentive Stock Option, it shall
constitute a Nonqualified Stock Option.
Stock Options shall be evidenced by option agreements, the terms and
provisions of which may differ. An option agreement shall indicate on its face
whether it is intended to be an agreement for an Incentive Stock Option or a
Nonqualified Stock Option. The grant of a Stock Option shall occur on the date a
majority of the independent directors of the Corporation ratify by resolution
the Committee's recommendation with respect to the individuals to be
participants in any grant of a Stock Option, the number of shares of Common
Stock to be subject to such Stock Option to be granted to such individual and
specifies the terms and provisions of the Stock Option. The Corporation shall
notify a participant of any grant of a Stock Option, and a written option
agreement or agreements shall be duly executed and delivered by the Corporation
to the participant. Such agreement or agreements shall become effective upon
execution by the Corporation and the participant.
Anything in the Plan to the contrary notwithstanding, no term of the Plan
relating to Incentive Stock Options shall be interpreted, amended or altered nor
shall any discretion or authority granted under the Plan be exercised so as to
disqualify the Plan under Section 422 of the Code or, without the consent of the
optionee affected, to disqualify any Incentive Stock Option under such Section
422.
Stock Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions as the
Committee shall deem desirable:
(a) OPTION PRICE. The option price per share of Common Stock purchasable
under a Stock Option shall be determined by the Committee and set forth in the
option agreement, and shall not be less than the Fair Market Value of the Common
Stock subject to the Stock Option on the date of grant.
(b) OPTION TERM. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date the Stock Option is granted and no Nonqualified Stock
Option shall be exercisable more than ten years and one day after the date the
Stock Option is granted.
D-4
<PAGE>
(c) EXERCISABILITY. Except as otherwise provided herein, Stock Options
shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee. If the Committee provides
that any Stock Option is exercisable only in installments, the Committee may at
any time waive such installment exercise provisions, in whole or in part, based
on such factors as the Committee may determine. In addition, the Committee may
at any time accelerate the exercisability of any Stock Option.
(d) METHOD OF EXERCISE. Subject to the provisions of this Section 5, Stock
Options may be exercised, in whole or in part, at any time during the option
term by giving written notice of exercise to the Corporation specifying the
number of shares of Common Stock subject to the Stock Option to be purchased.
Such notice shall be accompanied by payment in full of the purchase price by
certified or bank check or such other instrument as the Committee may accept.
Payment, in full or in part, may also be made in the form of unrestricted Common
Stock already owned by the optionee of the same class as the Common Stock
subject to the Stock Option (based on the Fair Market Value of the Common Stock
on the date the Stock Option is exercised).
Payment for any shares subject to a Stock Option may also be made by
delivering a properly executed exercise notice to the Corporation, together with
a copy of irrevocable instructions to a broker to deliver promptly to the
Corporation the amount of sale or loan proceeds to pay the purchase price, and,
if requested, by the amount of any federal, state, local or foreign withholding
taxes. To facilitate the foregoing, the Corporation may enter into agreements
for coordinated procedures with one or more brokerage firms.
No shares of Common Stock shall be issued until full payment therefor has
been made. An optionee shall have all of the rights of a shareholder of the
Corporation holding the class or series of Common Stock that is subject to such
Stock Option (including, if applicable, the right to vote the shares and the
right to receive dividends), when the optionee has given written notice of
exercise, has paid in full for such shares and, if requested, has given the
representation described in Section 11(a).
(e) NONTRANSFERABILITY OF STOCK OPTIONS. No Stock Option shall be
transferable by the optionee other than (i) by will or by the laws of descent
and distribution; or (ii) in the case of a Nonqualified Stock Option, pursuant
to a qualified domestic relations order (as defined in the Code or Title I of
the Em-ployee Retirement Income Security Act of 1974, as amended, or the rules
thereunder); or (iii) in the case of the Special Options, subject to such terms
as the Committee deems appropriate, pursuant to a transfer to the optionee's
spouse, children, grandchildren or parents ("Family Members"), to trusts for the
benefit of Family Members, to partnerships or limited liability companies in
which Family Members are the only partners or shareholders, or to entities
exempt from federal income tax pursuant to Section 501(c)(3) of the Code. All
Stock Options shall be exercisable, subject to the terms of this Plan, during
the optionee's lifetime, only by the optionee or by the guardian or legal
representative of the optionee or, in the case of a Nonqualified Stock Option,
its alternative payee pursuant to such qualified domestic relations order, it
being understood that the terms "holder" and "optionee" include the guardian and
legal representative of the optionee named in the option agreement and any
person to whom an option is transferred by will or the laws of descent and
distribution or, in the case of a Nonqualified Stock Option, pursuant to a
qualified domestic relations order.
(f) TERMINATION BY DEATH. Except with respect to the Special Options,
unless otherwise determined by the Committee, if an optionee's employment
terminates by reason of death, any Stock Option held by such optionee may
thereafter be exercised, to the extent then exercisable, or on such accelerated
basis as the Committee may determine, for a period of one year (or such other
period as the Committee may specify in the option agreement) from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter.
D-5
<PAGE>
(g) TERMINATION BY REASON OF DISABILITY. Except with respect to the
Special Options, unless otherwise determined by the Committee, if an optionee's
employment terminates by reason of Disability, any Stock Option held by such
optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of termination, or on such accelerated basis as the
Committee may determine, for a period of six months (or such other period as the
Committee may specify in the option agreement) from the date of such termination
of employment or until the expiration of the stated term of such Stock Option,
whichever period is the shorter; PROVIDED, HOWEVER, that if the optionee dies
within such period, any unexercised Stock Option held by such optionee shall,
notwithstanding the expiration of such period, continue to be exercisable to the
extent to which it was exercisable at the time of death for a period of 12
months from the date of such death or until the expiration of the stated term of
such Stock Option, whichever period is the shorter. In the event of termination
of employment by reason of Disability, if an Incentive Stock Option is exercised
after the expiration of the exercise periods that apply for purposes of Section
422 of the Code, such Stock Option will thereafter be treated as a Nonqualified
Stock Option.
(h) TERMINATION BY REASON OF RETIREMENT. Except with respect to the
Special Options, unless otherwise determined by the Committee, if an optionee's
employment terminates by reason of Retirement, any Stock Option held by such
optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of such Retirement, or on such accelerated basis as the
Committee may determine, for a period of two years (or such other period as the
Committee may specify in the option agreement) from the date of such termination
of employment or until the expiration of the stated term of such Stock Option,
whichever period is the shorter; PROVIDED, HOWEVER, that if the optionee dies
within such period any unexercised Stock Option held by such optionee shall,
notwithstanding the expiration of such period, continue to be exercisable to the
extent to which it was exercisable at the time of death for a period of 12
months from the date of such death or until the expiration of the stated term of
such Stock Option, whichever period is the shorter. In the event of termination
of employment by reason of Retirement, if an Incentive Stock Option is exercised
after the expiration of the exercise periods that apply for purposes of Section
422 of the Code, such Stock Option will thereafter be treated as a Nonqualified
Stock Option.
(i) OTHER TERMINATION. Except with respect to the Special Options, unless
otherwise determined by the Committee: (A) if an optionee incurs a Termination
of Employment, all Stock Options held by such optionee shall thereupon
terminate; and (B) if an optionee incurs a Termination of Employment for any
reason other than death, Disability or Retirement, any Stock Option held by such
optionee, to the extent then exercisable, or on such accelerated basis as the
Committee may determine, may be exercised for the lesser of three months from
the date of such Termination of Employment or the balance of such Stock Option's
term; PROVIDED, HOWEVER, that if the optionee dies within such three-month
period, any unexercised Stock Option held by such optionee shall,
notwithstanding the expiration of such three-month period, continue to be
exercisable to the extent to which it was exercisable at the time of death for a
period of 12 months from the date of such death or until the expiration of the
stated term of such Stock Option, whichever period is the shorter.
Notwithstanding the foregoing, if an optionee incurs a Termination of Employment
at or after a Change in Control (as defined Section 7(b)), other than by reason
of death, Disability or Retirement, any Stock Option held by such optionee shall
be exercisable for the lesser of (1) six months and one day from the date of
such Termination of Employment, and (2) the balance of such Stock Option's term.
In the event of Termination of Employment, if an Incentive Stock Option is
exercised after the expiration of the exercise periods that apply for purposes
of Section 422 of the Code, such Stock Option will thereafter be treated as a
Nonqualified Stock Option.
(j) CHANGE IN CONTROL CASH-OUT. Notwithstanding any other provision of the
Plan, during the 60-day period from and after a Change in Control (the "Exercise
Period"), unless the Committee shall determine otherwise at the time of grant,
an optionee shall have the right, whether or not the Stock Option is fully
exercisable and in lieu of the payment of the exercise price for the shares of
Common Stock being purchased under the Stock Option and by giving notice to the
Corporation, to elect (within the Exercise Period) to surrender all or part of
the Stock Option to the Corporation and to receive cash, within 30 days
D-6
<PAGE>
of such notice, in an amount equal to the amount by which the Change in Control
Price per share of Common Stock on the date of such election shall exceed the
exercise price per share of Common Stock under the Stock Option (the "Spread")
multiplied by the number of shares of Common Stock granted under the Stock
Option as to which the right granted under this Section 5(j) shall have been
exercised; PROVIDED, HOWEVER, that if the Change in Control is within six months
of the date of grant of a particular Stock Option held by an optionee who is an
officer or director of the Corporation and is subject to Section 16(b) of the
Exchange Act no such election shall be made by such optionee with respect to
such Stock Option prior to six months from the date of grant. However, if the
end of such 60-day period from and after a Change in Control is within six
months of the date of grant of a Stock Option held by an optionee who is an
officer or director of the Corporation and is subject to Section 16(b) of the
Exchange Act, such Stock Option shall be cancelled in exchange for a cash
payment to the optionee, effected on the day which is six months and one day
after the date of grant of such Option, equal to the Spread multiplied by the
number of shares of Common Stock granted under the Stock Option. Notwithstanding
the foregoing, if any right granted pursuant to this Section 5(j) would make a
Change in Control transaction ineligible for pooling of interests accounting
under APB No. 16 that but for this Section 5(j) would otherwise be eligible for
such accounting treatment, the Committee shall have the ability to substitute
the cash payable pursuant to this Section 5(j) with Stock with a Fair Market
Value equal to the cash that would otherwise be payable hereunder.
SECTION 6. STOCK APPRECIATION RIGHTS
(a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a Nonqualified Stock Option, such rights may be granted either at or
after the time of grant of such Stock Option. In the case of an Incentive Stock
Option, such rights may be granted only at the time of grant of such Stock
Option. A Stock Appreciation Right shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option.
A Stock Appreciation Right may be exercised by an optionee in accordance
with Section 6(b) by surrendering the applicable portion of the related Stock
Option in accordance with procedures established by the Committee. Upon such
exercise and surrender, the optionee shall be entitled to receive an amount
determined in the manner prescribed in Section 6(b). Stock Options which have
been so surrendered shall no longer be exercisable to the extent the related
Stock Appreciation Rights have been exercised.
(b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to
such terms and conditions as shall be determined by the Committee, including the
following:
(i) Stock Appreciation Rights shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate are
exercisable in accordance with the provisions of Section 5 and this Section
6; PROVIDED, HOWEVER, that a Stock Appreciation Right shall not be
exercisable during the first six months of its term by an optionee who is
actually or potentially subject to Section 16(b) of the Exchange Act, except
that this limitation shall not apply in the event of death or Disability of
the optionee prior to the expiration of the six-month period.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee shall
be entitled to receive an amount in cash, shares of Common Stock or both,
equal in value to the excess of the Fair Market Value of one share of Common
Stock over the option price per share specified in the related Stock Option
multiplied by the number of shares in respect of which the Stock
Appreciation Right shall have been exercised, with the Committee having the
right to determine the form of payment.
(iii) Stock Appreciation Rights shall be transferable only to permitted
transferees of the underlying Stock Option in accordance with Section 5(e).
(iv) Upon the exercise of a Stock Appreciation Right, the Stock Option
or part thereof to which such Stock Appreciation Right is related shall be
deemed to have been exercised for the purpose of
D-7
<PAGE>
the limitation set forth in Section 3 on the number of shares of Common
Stock to be issued under the Plan, but only to the extent of the number of
shares covered by the Stock Appreciation Right at the time of exercise based
on the value of the Stock Appreciation Right at such time.
SECTION 7. CHANGE IN CONTROL PROVISIONS
(a) IMPACT OF EVENT. Notwithstanding any other provision of the Plan to
the contrary, in the event of a Change in Control, any Stock Options and Stock
Appreciation Rights outstanding as of the date such Change in Control is
de-termined to have occurred, and which are not then exercisable and vested,
shall become fully exercisable and vested to the full extent of the original
grant; PROVIDED, HOWEVER, that in the case of the holder of Stock Appreciation
Rights who is actually subject to Section 16(b) of the Exchange Act, such Stock
Appreciation Rights shall have been outstanding for at least six months at the
date such Change in control is determined to have occurred.
(b) DEFINITION OF CHANGE IN CONTROL. For purposes of the Plan, a "Change
in Control" shall mean the happening of any of the following events:
(i) An acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (1) the then outstanding shares of
common stock of the Corporation (the "Outstanding Corporation Common Stock")
or (2) the combined voting power of the then outstanding voting securities
of the Corporation entitled to vote generally in the election of directors
(the "Outstanding Corporation Voting Securities")(a "Control Purchase");
excluding, however, the following: (1) Any acquisition directly from the
Corporation, other than an acquisition by virtue of the exercise of a
conversion privilege unless the security being so converted was itself
acquired directly from the Corporation, (2) Any acquisition by the
Corporation, (3) Any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Corporation or any corporation
controlled by the Corporation, (4) Any acquisition by any corporation
pursuant to a transaction which complies with clauses (1), (2) and (3) of
subsection (iii) of this Section 7(b), or (5) Any acquisition by Barron
Hilton, the Charitable Remainder Unitrust created by Barron Hilton to
receive shares from the Estate of Conrad N. Hilton, or the Conrad N. Hilton
Fund; or
(ii) A change in the composition of the Board such that the individuals
who, as of the effective date of the Plan, constitute the Board (such Board
shall be hereinafter referred to as the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board; PROVIDED, HOWEVER,
for purposes of this Section 7(b), that any individual who becomes a member
of the Board subsequent to the effective date of the Plan, whose election,
or nomination for election by the Corporation's shareholders, was approved
by a vote of at least a majority of those individuals who are members of the
Board and who were also members of the Incumbent Board (or deemed to be such
pursuant to this proviso) shall be considered as though such individual were
a member of the Incumbent Board; but, PROVIDED FURTHER, that any such
individual whose initial assumption of office occurs as a result of either
an actual or threatened election contest (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual
or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board shall not be so considered as a member of the
Incumbent Board (a "Board Change"); or
(iii) The approval by the shareholders of the Corporation of a
reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the assets of the Corporation ("Corporate
Transaction"); excluding however, such a Corporate Transaction pursuant to
which (1) all or substantially all of the individuals and entities who are
the beneficial owners, respectively, of the Outstanding Corporation Common
Stock and Outstanding Corporation Voting Securities immediately prior to
such Corporate Transaction will beneficially own, directly or indirectly,
more than 60%
D-8
<PAGE>
of, respectively, the outstanding shares of common stock, and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the
corporation resulting from such Corporate Transaction (including, without
limitation, a corporation which as a result of such transaction owns the
Corporation or all or substantially all of the Corporation's assets either
directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Corporate
Transaction, of the Outstanding Corporation Common Stock and Outstanding
Corporation Voting Securities, as the case may be, (2) no Person (other than
the Corporation, any employee benefit plan (or related trust) of the
Corporation or such corporation resulting from such Corporate Transaction)
will beneficially own, directly or indirectly, 20% or more of, respectively,
the outstanding shares of common stock of the corporation resulting from
such Corporate Transaction or the combined voting power of the outstanding
voting securities of such corporation entitled to vote generally in the
election of directors except to the extent that such ownership existed prior
to the Corporate Transaction, and (3) individuals who were members of the
Incumbent Board will constitute at least a majority of the members of the
board of directors of the corporation resulting from such Corporate
Transaction; or
(iv) The approval by the stockholders of the Corporation of a complete
liquidation or dissolution of the Corporation.
(c) CHANGE IN CONTROL PRICE. For purposes of the Plan, "Change in Control
Price" means the higher of (i) the highest reported sales price, regular way, of
a share of Common Stock in any transaction reported on the New York Stock
Exchange Composite Tape or other national exchange on which such shares are
listed or on NASDAQ during the 60-day period prior to and including the date of
a Change in Control or (ii) if the Change in Control is the result of a tender
or exchange offer or a Corporate Transaction, the highest price per share of
Common Stock paid in such tender or exchange offer or Corporate Transaction;
PROVIDED, HOWEVER, that (x) in the case of a Stock Option which (A) is held by
an optionee who is an officer or director of the Corporation and is subject to
Section 16(b) of the Exchange Act and (B) was granted within 240 days of the
Change in Control, then the Change in Control Price for such Stock Option shall
be the Fair Market Value of the Common Stock on the date such Stock Option is
exercised or deemed exercised and (y) in the case of Incentive Stock Options and
Stock Appreciation Rights relating to Incentive Stock Options, the Change in
Control Price shall be in all cases the Fair Market Value of the Common Stock on
the date such Incentive Stock Option or Stock Appreciation Right is exercised.
To the extent that the consideration paid in any such transaction described
above consists all or in part of securities or other noncash consideration, the
value of such securities or other noncash consideration shall be determined in
the sole discretion of the Board.
SECTION 8. TERM, AMENDMENT AND TERMINATION
The Plan will terminate ten years after the effective date of the Plan.
Under the Plan, Awards outstanding as of such date shall not be affected or
impaired by the termination of the Plan.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would (i) impair the rights of
an optionee under a Stock Option or a recipient of a Stock Appreciation Right
theretofore granted without the optionee's or recipient's consent, except such
an amendment made to cause the Plan to qualify for the exemption provided by
Rule 16b-3, or (ii) disqualify the Plan from the exemption provided by Rule
16b-3. In addition, no such amendment shall be made without the approval of the
Corporation's shareholders to the extent such approval is required by law or
agreement.
The Committee may amend the terms of any Stock Option or other Award
theretofore granted, prospectively or retroactively, but no such amendment shall
impair the rights of any holder without the holder's consent except such an
amendment made to cause the Plan or Award to qualify for the exemption provided
by Rule 16b-3.
D-9
<PAGE>
Subject to the above provisions, the Board shall have authority to amend the
Plan to take into account changes in law and tax and accounting rules as well as
other developments, and to grant Awards which qualify for beneficial treatment
under such rules without stockholder approval.
SECTION 9. UNFUNDED STATUS OF PLAN
It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation. The Committee may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver Common Stock or make payments; PROVIDED, HOWEVER, that unless the
Committee otherwise determines, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
SECTION 10. GENERAL PROVISIONS
(a) The Committee may require each person purchasing or receiving shares
pursuant to an Award to represent to and agree with the Corporation in writing
that such person is acquiring the shares without a view to the distribution
thereof. The certificates for such shares may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer.
Notwithstanding any other provision of the Plan or agreements made pursuant
thereto, the Corporation shall not be required to issue or deliver any
certificate or certificates for shares of Common Stock under the Plan prior to
fulfillment of all of the following conditions:
(1) Listing or approval for listing upon notice of issuance, of such
shares on the New York Stock Exchange, Inc., or such other securities
exchange as may at the time be the principal market for the Common Stock;
(2) Any registration or other qualification of such shares of the
Corporation under any state or federal law or regulation, or the maintaining
in effect of any such registration or other qualification which the
Committee shall, in its absolute discretion upon the advice of counsel, deem
necessary or advisable; and
(3) Obtaining any other consent, approval, or permit from any state or
federal governmental agency which the Committee shall, in its absolute
discretion after receiving the advice of counsel, determine to be necessary
or advisable.
(b) Nothing contained in the Plan shall prevent the Corporation or any
subsidiary or Affiliate from adopting other or additional compensation
arrangements for its employees.
(c) Adoption of the Plan shall not confer upon any employee any right to
continued employment, nor shall it interfere in any way with the right of the
Corporation or any subsidiary or Affiliate to terminate the employment of any
employee at any time.
(d) No later than the date as of which an amount first becomes includible in
the gross income of the participant for federal income tax purposes with respect
to any Award under the Plan, the participant shall pay to the Corporation, or
make arrangements satisfactory to the Committee regarding the payment of, any
federal, state, local or foreign taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the
Corporation, withholding obligations may be settled with Common Stock, including
Common Stock that is part of the Award that gives rise to the withholding
requirement. The obligations of the Corporation under the Plan shall be
conditional on such payment or arrangements, and the Corporation and its
Affiliates shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment otherwise due to the participant. The Committee may
establish such procedures as it deems appropriate, including making irrevocable
elections, for the settlement of withholding obligations with Common Stock.
D-10
<PAGE>
(e) The Committee shall establish such procedures as it deems appropriate
for a participant to designate a beneficiary to whom any amounts payable in the
event of the participant's death are to be paid or by whom any rights of the
participant, after the participant's death, may be exercised.
(f) In the case of a grant of an Award to any employee of a subsidiary of
the Corporation, the Corporation may, if the Committee so directs, issue or
transfer the shares of Common Stock, if any, covered by the Award to the
subsidiary, for such lawful consideration as the Committee may specify, upon the
condition or understanding that the subsidiary will transfer the shares of
Common Stock to the employee in accordance with the terms of the Award specified
by the Committee pursuant to the provisions of the Plan.
(g) The Plan and all Awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware,
without reference to principles of conflict of laws.
SECTION 11. EFFECTIVE DATE OF PLAN
The Plan shall be effective as of July 9, 1998, provided that it is approved
by at least a majority of the shares voted of Hilton Common Stock at the special
meeting of Hilton stockholders with respect to the Distribution and other
related matters.
SECTION 12. PROVISIONS REGARDING THE DISTRIBUTION
(a) In connection with the Distribution, the Corporation and Hilton have
entered into that certain Employee Benefits and Other Employment Matters
Allocation Agreement, dated as of [ ], 1998 (the "Benefits Allocation
Agreement"), pursuant to which the Corporation and Hilton have agreed to
allocate the responsibilities with respect to certain matters relating to
employees and employee compensation, benefits, labor and other employment
matters. Concurrently with the Distribution and pursuant to the terms of the
Benefits Allocation Agreement, all outstanding options to purchase Hilton Common
Stock (each, a "Hilton Option"), other than Hilton Options held by Arthur M.
Goldberg, shall be adjusted (the "Option Adjustment") to represent options to
purchase an equivalent number of shares of Hilton Common Stock (each adjusted
option to purchase Hilton Common Stock, an "Adjusted Hilton Option") and shares
of the Corporation's Common Stock (each adjusted option to purchase the
Corporation's Common Stock, an "Adjusted Park Place Option"). Pursuant to the
Option Adjustment, the intrinsic value of the Hilton Options immediately prior
to the Distribution shall be preserved immediately after the Distribution, and
the exercise price of the Hilton Options will be allocated between the Adjusted
Hilton Options and the Adjusted Park Place Options based upon the relative
values of Hilton Common Stock and the Corporation's Common Stock on the date of
the Distribution, all as determined by Hilton. Concurrently with the
Distribution and pursuant to the terms of the Benefits Allocation Agreement, all
outstanding Hilton Options held by Arthur M. Goldberg shall be adjusted to
represent Adjusted Park Place Options. Pursuant to such adjustment, the
intrinsic value of Mr. Goldberg's outstanding Hilton Options immediately prior
to the Distribution shall be preserved immediately after the Distribution, and
the number of shares subject to and the exercise price of such options shall be
adjusted based on the relative values of the Hilton Common Stock and the
Corporation's Common Stock on the date of the Distribution, all as determined by
Hilton.
(b) Following the date of the Option Adjustment, all Adjusted Park Place
Options which were issued as a result of Hilton Options granted under any of the
Hilton 1984 Stock Option and Stock Appreciation Rights Plan, the Hilton 1990
Stock Option and Stock Appreciation Rights Plan, or the Hilton 1996 Stock
Incentive Plan shall be subject to the terms of this Plan and the applicable
option agreement, and all Adjusted Hilton Options shall be subject to the terms
of the applicable Hilton stock option plan and any applicable option agreement.
(c) For purposes of this Plan, with respect to Adjusted Park Place Options
held by Hilton Individuals (as defined in the Benefits Allocation Agreement) as
a result of the Option Adjustment, references to
D-11
<PAGE>
employment or termination of employment in this Plan and in the applicable
option agreement shall be deemed to refer to employment by or termination of
employment with Hilton and its subsidiaries or affiliates.
SECTION 13. SPECIAL OPTIONS
The Committee shall have the authority to grant Special Options to the CEO
and/or the Chairman on such terms and conditions as it shall determine in its
sole discretion. The terms and conditions of such Special Options granted to the
Corporation's initial CEO shall be set forth in the Employment Agreement, and
the terms and conditions of such Special Options granted to the Corporation's
initial Chairman shall be set forth in the Chairman Agreement. To the extent
that certain terms and conditions of the Special Options are not set forth in
the Employment Agreement or the Chairman Agreement, as the case may be, the
terms of the Plan shall apply to the Special Options.
D-12
<PAGE>
ANNEX E
FORM OF
PARK PLACE ENTERTAINMENT CORPORATION
1998 INDEPENDENT DIRECTOR STOCK OPTION PLAN
SECTION 1. PURPOSE; DEFINITIONS
The purpose of the Plan is to give the Corporation a competitive advantage
in attracting, retaining and motivating non-employee directors and to provide
the Corporation and its subsidiaries with a stock plan providing incentives more
directly linked to the profitability of the Corporation's businesses and
increases in shareholder value.
For purposes of the Plan, the following terms are defined as set forth
below:
(a) "AFFILIATE" means a corporation or other entity controlled by the
Corporation and designated by the Board from time to time as such.
(b) "BOARD" means the Board of Directors of the Corporation.
(c) "CHANGE IN CONTROL" means the happening of any of the following events:
(i) An acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (1) the then outstanding shares of
common stock of the Corporation (the "Outstanding Corporation Common Stock")
or (2) the combined voting power of the then outstanding voting securities
of the Corporation entitled to vote generally in the election of directors
(the "Outstanding Corporation Voting Securities") (a "Control Purchase");
excluding, however, the following: (1) Any acquisition directly from the
Corporation, other than an acquisition by virtue of the exercise of a
conversion privilege unless the security being so converted was itself
acquired directly from the Corporation, (2) Any acquisition by the
Corporation, (3) Any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Corporation or any corporation
controlled by the Corporation, (4) Any acquisition by any corporation
pursuant to a transaction which complies with clauses (1), (2) and (3) of
subparagraph (iii) of this definition, or (5) Any acquisition by Barron
Hilton, the Charitable Remainder Unitrust created by Barron Hilton to
receive shares from the Estate of Conrad N. Hilton, or the Conrad N. Hilton
Fund; or
(ii) A change in the composition of the Board such that the individuals
who, as of the effective date of the Plan, constitute the Board (such Board
shall be hereinafter referred to as the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board; provided, however,
for purposes of this definition, that any individual who becomes a member of
the Board subsequent to the effective date of the Plan, whose election, or
nomination for election by the Corporation's shareholders, was approved by a
vote of at least a majority of those individuals who are members of the
Board and who were also members of the Incumbent Board (or deemed to be such
pursuant to this proviso) shall be considered as though such individual were
a member of the Incumbent Board; but, provided further, that any such
individual whose initial assumption of office occurs as a result of either
an actual or threatened election contest (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual
or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board shall not be so considered as a member of the
Incumbent Board (a "Board Change"); or
(iii) The approval by the shareholders of the Corporation of a
reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the assets of the Corporation
E-1
<PAGE>
("Corporate Transaction"); excluding however, such a Corporate Transaction
pursuant to which (1) all or substantially all of the individuals and
entities who are the beneficial owners, respectively, of the Outstanding
Corporation Common Stock and Outstanding Corporation Voting Securities
immediately prior to such Corporate Transaction will beneficially own,
directly or indirectly, more than 60% of, respectively, the outstanding
shares of common stock, and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such
Corporate Transaction (including, without limitation, a corporation which as
a result of such transaction owns the Corporation or all or substantially
all of the Corporation's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Corporate Transaction, of the Outstanding
Corporation Common Stock and Outstanding Corporation Voting Securities, as
the case may be, (2) no Person (other than the Corporation, any employee
benefit plan (or related trust) of the Corporation or such corporation
resulting from such Corporate Transaction) will beneficially own, directly
or indirectly, 20% or more of, respectively, the outstanding shares of
common stock of the corporation resulting from such Corporate Transaction or
the combined voting power of the outstanding voting securities of such
corporation entitled to vote generally in the election of directors except
to the extent that such ownership existed prior to the Corporate
Transaction, and (3) individuals who were members of the Incumbent Board
will constitute at least a majority of the members of the board of directors
of the corporation resulting from such Corporate Transaction; or
(iv) The approval by the stockholders of the Corporation of a complete
liquidation or dissolution of the Corporation.
(d) "CHANGE IN CONTROL PRICE" means the higher of (i) the highest reported
sales price, regular way, of a share of Common Stock in any transaction reported
on the New York Stock Exchange Composite Tape or other national exchange on
which such shares are listed or on NASDAQ during the 60-day period prior to and
including the date of a Change in Control or (ii) if the Change in Control is
the result of a tender or exchange offer or a Corporate Transaction, the highest
price per share of Common Stock paid in such tender or exchange offer or
Corporate Transaction; provided, however, that in the case of a Stock Option
which (A) is subject to Section 16(b) of the Exchange Act and (B) was granted
within 240 days of the Change in Control, then the Change in Control Price for
such Stock Option shall be the Fair Market Value of the Common Stock on the date
such Stock Option is exercised or deemed exercised. To the extent that the
consideration paid in any such transaction described above consists all or in
part of securities or other noncash consideration, the value of such securities
or other noncash consideration shall be determined in the sole discretion of the
Board.
(e) "CODE" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
(f) "COMMISSION" means the Securities and Exchange Commission or any
successor agency.
(g) "COMMON STOCK" means common stock, par value $.01 per share, of the
Corporation.
(h) "CORPORATION" means Park Place Entertainment Corporation, a Delaware
corporation.
(i) "DIRECTOR" means a member of the Board.
(j) "DISABILITY" means permanent and total disability as determined under
procedures established by the Board for purposes of the Plan.
(k) "DISTRIBUTION" means the distribution to the holders of the outstanding
shares of Hilton Common Stock, on a one-for-one basis, of all of the outstanding
shares of Common Stock.
(l) "EMPLOYEE" means any officer or other employee (as defined in accordance
with Section 3401(c) of the Code) of the Corporation or of any corporation which
is a subsidiary of the Corporation.
E-2
<PAGE>
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
(n) "FAIR MARKET VALUE" means, as of any given date, the mean between the
highest and lowest reported sales prices of the Common Stock on the New York
Stock Exchange Composite Tape or, if not listed on such exchange, on any other
national securities exchange on which the Common Stock is listed or on NASDAQ.
If there is no regular public trading market for such Common Stock, the Fair
Market Value of the Common Stock shall be determined by the Board in good faith.
(o) "HILTON" means Hilton Hotels Corporation, a Delaware corporation.
(p) "HILTON COMMON STOCK" means common stock, par value $2.50 per share, of
Hilton.
(q) "INDEPENDENT DIRECTOR" means a member of the Board who is not an
Employee.
(r) "PLAN" means the Park Place Entertainment Corporation 1998 Independent
Director Stock Option Plan, as set forth herein and as hereinafter amended from
time to time.
(s) "RETIREMENT" means retirement from service as a Director at or after age
65.
(t) "RULE 16B-3" means Rule 16b-3, as promulgated by the Commission under
Section 16(b) of the Exchange Act, as amended from time to time.
(u) "STOCK OPTION" means a non-qualified option to purchase Common Stock
granted under Section 5.
(v) "TERMINATION OF DIRECTORSHIP" means the time when an optionee who is an
Independent Director ceases to be a Director for any reason, including, but not
by way of limitation, a termination by resignation, failure to be elected, death
or Retirement. The Board, in its sole and absolute discretion, shall determine
the effect of all matters and questions relating to Termination of Directorship
with respect to Independent Directors.
In addition, certain other terms used herein have definitions given to them
in the first place in which they are used.
SECTION 2. ADMINISTRATION
The Plan shall be administered by the full Board, acting by a majority of
its members then in office.
The Board shall have plenary authority to grant Stock Options pursuant to
the terms of the Plan to Independent Directors.
Among other things, the Board shall have the authority, subject to the terms
of the Plan to:
(a) Determine the terms and conditions of any Stock Option granted hereunder
(subject to the terms and conditions of the Plan), any vesting condition,
restriction or limitation (which may be related to the performance of the
participant, the Corporation or any subsidiary or Affiliate) and any forfeiture
waiver regarding any Stock Option and the shares of Common Stock relating
thereto, in accordance with the terms of the Plan;
(b) Modify, amend or adjust the terms and conditions of any Stock Option, at
any time or from time to time;
(c) Determine to what extent and under what circumstances Common Stock and
other amounts payable with respect to a Stock Option shall be deferred; and
The Board shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
from time to time deem advisable, to interpret the terms and provisions of the
Plan and any Stock Option issued under the Plan (and any agreement relating
thereto) and to otherwise supervise the administration of the Plan.
E-3
<PAGE>
The Board may act only by a majority of its members then in office, except
that the members thereof may (i) delegate to an officer of the Corporation the
authority to make decisions pursuant to paragraphs (c), (f), (g), (h) and (i) of
Section 5 (provided that no such delegation may be made that would cause Stock
Options or other transactions under the Plan to cease to be exempt from Section
16(b) of the Exchange Act) and (ii) authorize any one or more of their number or
any officer of the Corporation to execute and deliver documents on behalf of the
Board.
Any determination made by the Board or pursuant to delegated authority
pursuant to the provisions of the Plan with respect to any Stock Option shall be
made in the sole discretion of the Board or such delegate at the time of the
grant of the Stock Option or, unless in contravention of any express term of the
Plan, at any time thereafter. All decisions made by the Board or any
appropriately delegated officer pursuant to the provisions of the Plan shall be
final and binding on all persons, including the Corporation and Plan
participants.
SECTION 3. COMMON STOCK SUBJECT TO PLAN
The total number of shares of Common Stock reserved and available for grant
under the Plan shall be 65,000. Shares subject to a Stock Option under the Plan
may be authorized and unissued shares or may be treasury shares.
If any Stock Option terminates without being exercised, shares subject to
such Stock Option shall again be available for distribution in connection with
Stock Options under the Plan.
In the event of any change in corporate capitalization, such as a stock
split or a corporate transaction, such as any merger, consolidation, separation,
including a spin-off, or other distribution of stock or property of the
Corporation, any reorganization (whether or not such reorganization comes within
the definition of such term in Section 368 of the Code) or any partial or
complete liquidation of the Corporation, the Board may make such substitution or
adjustments in the aggregate number and kind of shares reserved for issuance
under the Plan, in the number, kind and option price of shares subject to
outstanding Stock Options, in the number and kind of shares subject to other
outstanding Stock Options granted under the Plan and/or such other equitable
substitution or adjustments as it may determine to be appropriate in its sole
discretion; provided, however, that the number of shares subject to any Stock
Option shall always be a whole number.
SECTION 4. ELIGIBILITY
Except as provided in Section 10, Independent Directors are eligible to be
granted Stock Options under the Plan.
SECTION 5. STOCK OPTIONS
No Stock Option granted under the Plan shall constitute an "incentive stock
option" under Section 422 of the Code. Any Stock Option granted under the Plan
shall be in such form as the Board may from time to time approve.
During the term of the Plan, each person who is an Independent Director as
of the effective date of the Distribution automatically shall be granted (i) a
Stock Option to purchase two thousand (2,000) shares of Common Stock (subject to
adjustment as provided herein) on such effective date, and (ii) a Stock Option
to purchase two thousand (2,000) shares of Common Stock (subject to adjustment
as provided herein) on the date of each annual meeting of stockholders after
such effective date, for so long as such person remains an Independent Director.
During the term of the Plan, each person who is initially elected to the Board
after the effective date of the Distribution and who is an Independent Director
at the time of such initial election automatically shall be granted (i) a Stock
Option to purchase two thousand (2,000) shares of Common Stock (subject to
adjustment as provided herein) on the date of such initial election,
E-4
<PAGE>
and (ii) a Stock Option to purchase two thousand (2,000) shares of Common Stock
(subject to adjustment as provided herein) on the date of each annual meeting of
stockholders after such initial election for so long as such person remains an
Independent Director. All of the foregoing Stock Option grants authorized by
this Section 5 are subject to approval of the Plan by the Hilton stockholders in
accordance with Section 9.
Stock Options shall be evidenced by option agreements, the terms and
provisions of which may differ. The grant of a Stock Option shall occur on the
dates specified above. The Corporation shall notify a participant of any grant
of a Stock Option, and a written option agreement or agreements shall be duly
executed and delivered by the Corporation to the participant. Such agreement or
agreements shall become effective upon execution by the Corporation and the
participant.
Stock Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions as the
Board shall deem desirable:
(a) OPTION PRICE. The option price per share of Common Stock purchasable
under a Stock Option shall equal 100% of the Fair Market Value of the Common
Stock subject to the Stock Option on the date of grant.
(b) OPTION TERM. The term of each Stock Option shall be 10 years from the
date such Stock Option is granted, without variation or acceleration hereunder,
but subject to paragraphs (f), (g), (h) and (i) of this Section 5, and no Stock
Option shall be exercisable more than ten years after the date the Stock Option
is granted.
(c) EXERCISABILITY. Except as otherwise provided herein, Stock Options
shall be exercisable from and after the date on which such Stock Option is
granted.
(d) METHOD OF EXERCISE. Subject to the provisions of this Section 5, Stock
Options may be exercised, in whole or in part, at any time during the option
term by giving written notice of exercise to the Corporation specifying the
number of shares of Common Stock subject to the Stock Option to be purchased.
Such notice shall be accompanied by payment in full of the purchase price by
certified or bank check or such other instrument as the Board may accept.
Payment, in full or in part, may also be made in the form of unrestricted Common
Stock already owned by the optionee of the same class as the Common Stock
subject to the Stock Option (based on the Fair Market Value of the Common Stock
on the date the Stock Option is exercised).
Payment for any shares subject to a Stock Option may also be made by
delivering a properly executed exercise notice to the Corporation, together with
a copy of irrevocable instructions to a broker to deliver promptly to the
Corporation the amount of sale or loan proceeds to pay the purchase price, and,
if requested, by the amount of any Federal, state, local or foreign withholding
taxes. To facilitate the foregoing, the Corporation may enter into agreements
for coordinated procedures with one or more brokerage firms.
No shares of Common Stock shall be issued until full payment therefor has
been made. An optionee shall have all of the rights of a shareholder of the
Corporation holding the class or series of Common Stock that is subject to such
Stock Option (including, if applicable, the right to vote the shares and the
right to receive dividends), when the optionee has given written notice of
exercise, has paid in full for such shares and, if requested, has given the
representation described in Section 8(a).
(e) NONTRANSFERABILITY OF STOCK OPTIONS. No Stock Option shall be
transferable by the optionee other than (i) by will or by the laws of descent
and distribution; or (ii) pursuant to a qualified domestic relations order (as
defined in the Code or Title I of the Employee Retirement Income Security Act of
1974, as amended) whether directly or indirectly or by means of a trust or
partnership or otherwise, under the applicable option agreement. All Stock
Options shall be exercisable, subject to the terms of this Plan,
E-5
<PAGE>
during the optionee's lifetime, only by the optionee or by the guardian or legal
representative of the optionee or its alternative payee pursuant to such
qualified domestic relations order, it being understood that the terms "holder"
and "optionee" include the guardian and legal representative of the optionee
named in the option agreement and any person to whom an option is transferred by
will or the laws of descent and distribution or pursuant to a qualified domestic
relations order.
(f) TERMINATION BY DEATH. Unless otherwise determined by the Board, if an
optionee's directorship terminates by reason of death, any Stock Option held by
such optionee may thereafter be exercised, to the extent then exercisable, for a
period of one year (or such other period as the Board may specify in the option
agreement) from the date of such death or until the expiration of the stated
term of such Stock Option, whichever period is the shorter.
(g) TERMINATION BY REASON OF DISABILITY. Unless otherwise determined by
the Board, if an optionee's directorship terminates by reason of Disability, any
Stock Option held by such optionee may thereafter be exercised by the optionee,
to the extent it was exercisable at the time of termination, for a period of one
year (or such other period as the Board may specify in the option agreement)
from the date of such termination of directorship or until the expiration of the
stated term of such Stock Option, whichever period is the shorter; PROVIDED,
HOWEVER, that if the optionee dies within such period, any unexercised Stock
Option held by such optionee shall, notwithstanding the expiration of such
period, continue to be exercisable to the extent to which it was exercisable at
the time of death for a period of 12 months from the date of such death or until
the expiration of the stated term of such Stock Option, whichever period is the
shorter.
(h) TERMINATION BY REASON OF RETIREMENT. Unless otherwise determined by
the Board, if an optionee's directorship terminates by reason of Retirement, any
Stock Option held by such optionee may thereafter be exercised by the optionee,
to the extent it was exercisable at the time of such Retirement, for a period of
two years (or such other period as the Board may specify in the option
agreement) from the date of such termination of directorship or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter; PROVIDED, HOWEVER, that if the optionee dies within such period any
unexercised Stock Option held by such optionee shall, notwithstanding the
expiration of such period, continue to be exercisable to the extent to which it
was exercisable at the time of death for a period of 12 months from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter.
(i) OTHER TERMINATION. Unless otherwise determined by the Board: (A) if an
optionee incurs a Termination of Directorship, other than by death, Disability
or Retirement, all Stock Options held by such optionee shall thereupon
terminate; and (B) if an optionee incurs a Termination of Directorship for any
reason other than death, Disability or Retirement, any Stock Option held by such
optionee, to the extent then exercisable, may be exercised, for the lesser of
three months from the date of such Termination of Directorship or the balance of
such Stock Option's term; PROVIDED, HOWEVER, that if the optionee dies within
such three-month period, any unexercised Stock Option held by such optionee
shall, notwithstanding the expiration of such three- month period, continue to
be exercisable to the extent to which it was exercisable at the time of death
for a period of 12 months from the date of such death or until the expiration of
the stated term of such Stock Option, whichever period is the shorter.
Notwithstanding the foregoing, if an optionee incurs a Termination of
Directorship at or after a Change in Control, other than by reason of death,
Disability or Retirement, any Stock Option held by such optionee shall be
exercisable for the lesser of (1) six months and one day from the date of such
Termination of Directorship, and (2) the balance of such Stock Option's term.
(j) CHANGE IN CONTROL CASH-OUT. Notwithstanding any other provision of the
Plan, during the 60-day period from and after a Change in Control (the "Exercise
Period"), unless the Board shall determine otherwise at the time of grant, an
optionee shall have the right, whether or not the Stock Option is fully
exercisable and in lieu of the payment of the exercise price for the shares of
Common Stock being
E-6
<PAGE>
purchased under the Stock Option and by giving notice to the Corporation, to
elect (within the Exercise Period) to surrender all or part of the Stock Option
to the Corporation and to receive cash, within 30 days of such notice, in an
amount equal to the amount by which the Change in Control Price per share of
Common Stock on the date of such election shall exceed the exercise price per
share of Common Stock under the Stock Option (the "Spread") multiplied by the
number of shares of Common Stock granted under the Stock Option as to which the
right granted under this Section 5(j) shall have been exercised; PROVIDED,
HOWEVER, that if the Change in Control is within six months of the date of grant
of a particular Stock Option and is subject to Section 16(b) of the Exchange Act
no such election shall be made by such optionee with respect to such Stock
Option prior to six months from the date of grant. However, if the end of such
60-day period from and after a Change in Control is within six months of the
date of grant of a Stock Option and is subject to Section 16(b) of the Exchange
Act, such Stock Option shall be canceled in exchange for a cash payment to the
optionee, effected on the day which is six months and one day after the date of
grant of such Option, equal to the Spread multiplied by the number of shares of
Common Stock granted under the Stock Option. Notwithstanding the foregoing, if
any right granted pursuant to this Section 5(j) would make a Change in Control
transaction ineligible for pooling of interests accounting under APB No. 16 that
but for this Section 5(j) would otherwise be eligible for such accounting
treatment, the Board shall have the ability to substitute the cash payable
pursuant to this Section 5(j) with Stock with a Fair Market Value equal to the
cash that would otherwise be payable hereunder.
SECTION 6. TERM, AMENDMENT AND TERMINATION
The Plan will terminate 10 years after the effective date of the Plan. Under
the Plan, Stock Options outstanding as of such date shall not be affected or
impaired by the termination of the Plan.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would (i) impair the rights of
an optionee under a Stock Option theretofore granted without the optionee's
consent, except such an amendment made to cause the Plan to qualify for the
exemption provided by Rule 16b-3, or (ii) disqualify the Plan from the exemption
provided by Rule 16b-3. In addition, no such amendment shall be made without the
approval of the Corporation's shareholders (i) if such amendment would increase
the limit imposed under Section 3 on the maximum number of shares of Common
Stock reserved and available for grant under the Plan, or (ii) to the extent
such approval is required by law or agreement.
The Board may amend the terms of any Stock Option theretofore granted,
prospectively or retroactively, but no such amendment shall impair the rights of
any holder without the holder's consent except such an amendment made to cause
the Plan or Stock Option to qualify for the exemption provided by Rule 16b-3.
Subject to the above provisions, the Board shall have authority to amend the
Plan to take into account changes in law and tax and accounting rules as well as
other developments, and to grant Stock Options which qualify for beneficial
treatment under such rules without stockholder approval.
SECTION 7. UNFUNDED STATUS OF PLAN
It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation. The Board may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver Common Stock or make payments; PROVIDED, HOWEVER, that unless the Board
otherwise determines, the existence of such trusts or other arrangements is
consistent with the "unfunded" status of the Plan.
SECTION 8. GENERAL PROVISIONS
(a) The Board may require each person purchasing or receiving shares
pursuant to a Stock Option to represent to and agree with the Corporation in
writing that such person is acquiring the shares without a
E-7
<PAGE>
view to the distribution thereof. The certificates for such shares may include
any legend which the Board deems appropriate to reflect any restrictions on
transfer.
Notwithstanding any other provision of the Plan or agreements made pursuant
thereto, the Corporation shall not be required to issue or deliver any
certificate or certificates for shares of Common Stock under the Plan prior to
fulfillment of all of the following conditions:
(i) Listing or approval for listing upon notice of issuance, of such
shares on the New York Stock Exchange, Inc., or such other securities
exchange as may at the time be the principal market for the Common Stock;
(ii) Any registration or other qualification of such shares of the
Corporation under any state or Federal law or regulation, or the maintaining
in effect of any such registration or other qualification which the Board
shall, in its absolute discretion upon the advice of counsel, deem necessary
or advisable; and
(iii) Obtaining any other consent, approval, or permit from any state or
Federal governmental agency which the Board shall, in its absolute
discretion after receiving the advice of counsel, determine to be necessary
or advisable.
(b) Nothing contained in the Plan shall prevent the Corporation or any
subsidiary or Affiliate from adopting other or additional compensation
arrangements for its employees or Directors.
(c) Adoption of the Plan shall not confer upon any Independent Director any
right to continue to serve as a Director, nor shall it interfere in any way with
the right of the Corporation to terminate the directorship of any Independent
Director at any time.
(d) No later than the date as of which an amount first becomes includible in
the gross income of the participant for Federal income tax purposes with respect
to any Stock Option under the Plan, the participant shall pay to the
Corporation, or make arrangements satisfactory to the Board regarding the
payment of, any Federal, state, local or foreign taxes of any kind required by
law to be withheld with respect to such amount. The obligations of the
Corporation under the Plan shall be conditional on such payment or arrangements,
and the Corporation and its Affiliates shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment otherwise due to the
participant. The Board may establish such procedures as it deems appropriate,
including making irrevocable elections, for the settlement of withholding
obligations with Common Stock.
(e) The Board shall establish such procedures as it deems appropriate for a
participant to designate a beneficiary to whom any amounts payable in the event
of the participant's death are to be paid or by whom any rights of the
participant, after the participant's death, may be exercised.
(f) The Plan and all Stock Options granted and actions taken thereunder
shall be governed by and construed in accordance with the laws of the State of
Delaware, without reference to principles of conflict of laws.
SECTION 9. EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the effective date of the Distribution,
provided that it is approved by at least a majority of the shares voted of
Hilton Common Stock at the special meeting of Hilton stockholders with respect
to the Distribution and other related matters.
SECTION 10. PROVISIONS REGARDING THE DISTRIBUTION
(a) In connection with the Distribution, the Corporation and Hilton have
entered into that certain Employee Benefits and Other Employment Matters
Allocation Agreement, dated as of [ ], 1998 (the "Benefits Allocation
Agreement"), pursuant to which the Corporation and Hilton have agreed
E-8
<PAGE>
to allocate the responsibilities with respect to certain matters relating to
employees and employee compensation, benefits, labor and other employment
matters. Concurrently with the Distribution and pursuant to the terms of the
Benefits Allocation Agreement, all outstanding options to purchase Hilton Common
Stock granted under the Hilton 1997 Independent Director Stock Option Plan
(each, a "Hilton Director Option") shall be adjusted (the "Option Adjustment")
to represent options to purchase an equivalent number of shares of Hilton Common
Stock (each adjusted option to purchase Hilton Common Stock, an "Adjusted Hilton
Option") and shares of the Corporation's Common Stock (each adjusted option to
purchase the Corporation's Common Stock, an "Adjusted Park Place Option").
Pursuant to the Option Adjustment, the intrinsic value of the Hilton Director
Options immediately prior to the Distribution shall be preserved immediately
after the Distribution, and the exercise price of the Hilton Director Options
will be allocated between the Adjusted Hilton Options and the Adjusted Park
Place Options based upon the relative values of Hilton Common Stock and the
Corporation's Common Stock on the date of the Distribution, all as determined by
Hilton.
(b) Following the date of the Option Adjustment, all Adjusted Park Place
Options which were issued as a result of Hilton Director Options shall be
subject to the terms of this Plan and the applicable option agreement, and all
Adjusted Hilton Options which were issued as a result of Hilton Director Options
shall be subject to the terms of the Hilton 1997 Independent Director Stock
Option Plan and any applicable option agreement.
(c) For purposes of this Plan, with respect to Adjusted Park Place Options
held by members of the Board of Directors of Hilton (the "Hilton Board") as a
result of the Option Adjustment, references to directorship or termination of
directorship in this Plan and in the applicable option agreement shall be deemed
to refer to directorship or termination of directorship on the Hilton Board.
E-9
<PAGE>
ANNEX F
FORM OF
HILTON HOTELS CORPORATION
AMENDED AND RESTATED
1996 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE; DEFINITIONS
The purpose of the Plan is to give the Corporation a competitive advantage
in attracting, retaining and motivating officers, employees, and the CEO and to
provide the Corporation and its subsidiaries with a stock plan providing
incentives more directly linked to the profitability of the Corporation's
businesses and increases in shareholder value.
For purposes of the Plan, the following terms are defined as set forth
below:
a. "AFFILIATE" means a corporation or other entity controlled by the
Corporation and designated by the Committee from time to time as such.
b. "AWARD" means a Stock Appreciation Right or a Stock Option.
c. "BOARD" means the Board of Directors of the Corporation.
d. "CEO" means the Chief Executive Officer of the Corporation.
e. "CHANGE IN CONTROL" and "CHANGE IN CONTROL PRICE" have the meanings set
forth in Sections 7(b) and (c), respectively.
f. "CODE" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
g. "COMMISSION" means the Securities and Exchange Commission or any
successor agency.
h. "COMMITTEE" means the Committee referred to in Section 2.
i. "COMMON STOCK" means common stock, par value $2.50 per share, of the
Corporation.
j. "CORPORATION" means Hilton Hotels Corporation, a Delaware corporation.
k. "DISABILITY" means permanent and total disability as determined under
procedures established by the Committee for purposes of the Plan.
l. "DISTRIBUTION" means the distribution to the holders of the outstanding
shares of Common Stock, on a one-for-one basis, of all of the outstanding shares
of Park Place Common Stock.
m. "EMPLOYMENT AGREEMENT" means the Employment Agreement by and between the
Corporation and its initial CEO, which sets forth the terms of such CEO's
employment with the Corporation.
n. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
o. "FAIR MARKET VALUE" means, except as provided in Section 6(b)(ii)(2), as
of any given date, the mean between the highest and lowest reported sales prices
of the Common Stock on the New York Stock Exchange Composite Tape or, if not
listed on such exchange, on any other national securities exchange on which the
Common Stock is listed or on NASDAQ. If there is no regular public trading
market for such Common Stock, the Fair Market Value of the Common Stock shall be
determined by the Committee in good faith.
F-1
<PAGE>
p. "INCENTIVE STOCK OPTION" means any Stock Option designated as, and
qualified as, an "INCENTIVE STOCK OPTION" within the meaning of Section 422 of
the Code.
q. "NONQUALIFIED STOCK OPTION" means any Stock Option that is not an
Incentive Stock Option.
r. "PARK PLACE" means Park Place Entertainment Corporation, a Delaware
corporation.
s. "PARK PLACE COMMON STOCK" means common stock, par value $.01 per share,
of Park Place.
t. "PLAN" means the Hilton Hotels Corporation Amended and Restated 1996
Stock Incentive Plan, as set forth herein and as hereinafter amended from time
to time.
u. "RETIREMENT" means retirement from active employment with the
Corporation, a subsidiary or Affiliate at or after age 62.
v. "RULE 16B-3" means Rule 16b-3, as promulgated by the Commission under
Section 16(b) of the Exchange Act, as amended from time to time.
w. "SPECIAL OPTION" means a Nonqualified Stock Option granted to the CEO
pursuant to Section 13.
x. "STOCK APPRECIATION RIGHT" means a right granted under Section 6.
y. "STOCK OPTION" means an option granted under the Plan.
z. "TERMINATION OF EMPLOYMENT" means the termination of the participant's
employment with the Corporation and any subsidiary or Affiliate. A participant
employed by a subsidiary or an Affiliate shall also be deemed to incur a
Termination of Employment if the subsidiary or Affiliate ceases to be such a
subsidiary or an Affiliate, as the case may be, and the participant does not
immediately thereafter become an employee of the Corporation or another
subsidiary or Affiliate. Temporary absences from employment because of illness,
vacation or leave of absence and transfers among the Corporation and its
subsidiaries and Affiliates shall not be considered Terminations of Employment.
In addition, certain other terms used herein have definitions given to them
in the first place in which they are used.
SECTION 2. ADMINISTRATION
The Plan shall be administered by the Stock Option Committee or such other
committee of the Board as the Board may from time to time designate (the
"Committee"), which shall be composed of not less than two members of the Board,
each of whom shall be an "outside director" for purposes of Section 162(m)(4) of
the Code and a "non-employee director" within the meaning of Rule 16b-3, and
shall be appointed by and serve at the pleasure of the Board.
The Committee shall have authority to grant Awards pursuant to the terms of
the Plan to officers and employees of the Corporation and its subsidiaries and
Affiliates.
Among other things, the Committee shall have the authority, subject to the
terms of the Plan:
(a) To select the officers and employees to whom Awards may from time to
time be granted;
(b) Determine whether and to what extent Incentive Stock Options,
Nonqualified Stock Options and Stock Appreciation Rights or any combination
thereof are to be granted hereunder;
(c) Determine the number of shares of Common Stock to be covered by each
Award granted hereunder;
(d) Determine the terms and conditions of any Award granted hereunder
(including, but not limited to, the option price (subject to Section 5(a)), any
vesting condition, restriction or limitation (which may be related to the
performance of the participant, the Corporation or any subsidiary or Affiliate)
and any
F-2
<PAGE>
vesting acceleration or forfeiture waiver regarding any Award and the shares of
Common Stock relating thereto, based on such factors as the Committee shall
determine;
(e) Modify, amend or adjust the terms and conditions of any Award, at any
time or from time to time; and
(f) Determine to what extent and under what circumstances Common Stock and
other amounts payable with respect to an Award shall be deferred.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
from time to time deem advisable, to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any agreement relating thereto)
and to otherwise supervise the administration of the Plan.
The Committee may act only by a majority of its members then in office,
except that the members thereof may (i) delegate to an officer of the
Corporation the authority to make decisions pursuant to paragraphs (c), (f),
(g), (h) and (i) of Section 5 (provided that no such delegation may be made that
would cause Awards or other transactions under the Plan to cease to be exempt
from Section 16(b) of the Exchange Act) and (ii) authorize any one or more of
their number or any officer of the Corporation to execute and deliver documents
on behalf of the Committee.
Any determination made by the Committee or pursuant to delegated authority
pursuant to the provisions of the Plan with respect to any Award shall be made
in the sole discretion of the Committee or such delegate at the time of the
grant of the Award or, unless in contravention of any express term of the Plan,
at any time thereafter. All decisions made by the Committee or any appropriately
delegated officer pursuant to the provisions of the Plan shall be final and
binding on all persons, including the Corporation and Plan participants.
SECTION 3. COMMON STOCK SUBJECT TO PLAN
The total number of shares of Common Stock reserved and available for grant
under the Plan shall be 24,000,000. Of that amount, a maximum of 6,000,000
shares of Common Stock are reserved and available for the grant of Special
Options. Except with respect to the Special Options and Adjusted Hilton Options
issued pursuant to the Option Adjustment, no participant may be granted Awards
covering in excess of 1,200,000 shares of Common Stock in any calendar year;
provided, however, that Adjusted Hilton Options issued pursuant to the Option
Adjustment under Section 12 hereof shall not count towards such limit. With
respect to the Adjusted Hilton Options, no participant may be granted Awards in
any calendar year covering in excess of the number of shares of Common Stock
required to make the option adjustment with respect to such participant
prescribed by Section 12 hereof. With respect to the Special Options, the CEO
may not be granted Special Options covering in excess of 6,000,000 shares of
Common Stock in the aggregate. Shares subject to an Award under the Plan may be
authorized and unissued shares or may be treasury shares.
If any Stock Option (and related Stock Appreciation Right, if any)
terminates without being exercised, shares subject to such Awards shall again be
available for distribution in connection with Awards under the Plan.
In the event of any change in corporate capitalization, such as a stock
split or a corporate transaction, any merger, consolidation, separation,
including a spin-off, or other distribution of stock or property of the
Corporation, any reorganization (whether or not such reorganization comes within
the definition of such term in Section 368 of the Code) or any partial or
complete liquidation of the Corporation, the Committee or Board may make such
substitution or adjustments in the aggregate number and kind of shares reserved
for issuance under the Plan, in the number, kind and option price of shares
subject to outstanding Stock Options and Stock Appreciation Rights, in the
number and kind of shares subject to other outstanding Awards granted under the
Plan and/or such other equitable substitution or adjustments as it may
F-3
<PAGE>
determine to be appropriate in its sole discretion; PROVIDED, HOWEVER, that the
number of shares subject to any Award shall always be a whole number. Such
adjusted option price shall also be used to determine the amount payable by the
Corporation upon the exercise of any Stock Appreciation Right associated with
any Stock Option.
SECTION 4. ELIGIBILITY
Except with respect to the Special Options and as provided in Section 12,
full-time (30 hours per week) officers and employees of the Corporation, its
subsidiaries and Affiliates who are responsible for or contribute to the
management, growth and profitability of the business of the Corporation, its
subsidiaries and Affiliates are eligible to be granted Awards under the Plan. No
grant shall be made under this Plan to a director who is not an officer or a
salaried employee of the Corporation, its subsidiaries or Affiliates. Only the
CEO is eligible to be granted Special Options under the Plan.
SECTION 5. STOCK OPTIONS
Stock Options may be granted alone or in addition to other Awards granted
under the Plan and, except with respect to the Special Options, may be of two
types: Incentive Stock Options and Nonqualified Stock Options. Special Options
may only be Nonqualified Stock Options. Any Stock Option granted under the Plan
shall be in such form as the Committee may from time to time approve.
Except with respect to the Special Options, the Committee shall have the
authority to grant any optionee Incentive Stock Options, Nonqualified Stock
Options or both types of Stock Options (in each case with or without Stock
Appreciation Rights); PROVIDED, HOWEVER, that grants hereunder are subject to
the aggregate limit on grants to individual participants set forth in Section 3.
Incentive Stock Options may be granted only to employees of the Corporation and
its subsidiaries (within the meaning of Section 424(f) of the Code). To the
extent that any Stock Option is not designated as an Incentive Stock Option or
even if so designated does not qualify as an Incentive Stock Option, it shall
constitute a Nonqualified Stock Option.
Stock Options shall be evidenced by option agreements, the terms and
provisions of which may differ. An option agreement shall indicate on its face
whether it is intended to be an agreement for an Incentive Stock Option or a
Nonqualified Stock Option. The grant of a Stock Option shall occur on the date a
majority of the independent directors of the Corporation ratify by resolution
the Committee's recommendation with respect to the individuals to be
participants in any grant of a Stock Option, the number of shares of Common
Stock to be subject to such Stock Option to be granted to such individual and
specifies the terms and provisions of the Stock Option. The Corporation shall
notify a participant of any grant of a Stock Option, and a written option
agreement or agreements shall be duly executed and delivered by the Corporation
to the participant. Such agreement or agreements shall become effective upon
execution by the Corporation and the participant.
Anything in the Plan to the contrary notwithstanding, no term of the Plan
relating to Incentive Stock Options shall be interpreted, amended or altered nor
shall any discretion or authority granted under the Plan be exercised so as to
disqualify the Plan under Section 422 of the Code or, without the consent of the
optionee affected, to disqualify any Incentive Stock Option under such Section
422.
Stock Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions as the
Committee shall deem desirable:
(a) OPTION PRICE. The option price per share of Common Stock purchasable
under a Stock Option shall be determined by the Committee and set forth in the
option agreement, and shall not be less than the Fair Market Value of the Common
Stock subject to the Stock Option on the date of grant.
(b) OPTION TERM. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date the Stock Option is granted and no
F-4
<PAGE>
Nonqualified Stock Option shall be exercisable more than ten years and one day
after the date the Stock Option is granted.
(c) EXERCISABILITY. Except as otherwise provided herein, Stock Options
shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee. If the Committee provides
that any Stock Option is exercisable only in installments, the Committee may at
any time waive such installment exercise provisions, in whole or in part, based
on such factors as the Committee may determine. In addition, the Committee may
at any time accelerate the exercisability of any Stock Option.
(d) METHOD OF EXERCISE. Subject to the provisions of this Section 5, Stock
Options may be exercised, in whole or in part, at any time during the option
term by giving written notice of exercise to the Corporation specifying the
number of shares of Common Stock subject to the Stock Option to be purchased.
Such notice shall be accompanied by payment in full of the purchase price by
certified or bank check or such other instrument as the Committee may accept.
Payment, in full or in part, may also be made in the form of unrestricted Common
Stock already owned by the optionee of the same class as the Common Stock
subject to the Stock Option (based on the Fair Market Value of the Common Stock
on the date the Stock Option is exercised).
Payment for any shares subject to a Stock Option may also be made by
delivering a properly executed exercise notice to the Corporation, together with
a copy of irrevocable instructions to a broker to deliver promptly to the
Corporation the amount of sale or loan proceeds to pay the purchase price, and,
if requested, by the amount of any federal, state, local or foreign withholding
taxes. To facilitate the foregoing, the Corporation may enter into agreements
for coordinated procedures with one or more brokerage firms.
No shares of Common Stock shall be issued until full payment therefor has
been made. An optionee shall have all of the rights of a shareholder of the
Corporation holding the class or series of Common Stock that is subject to such
Stock Option (including, if applicable, the right to vote the shares and the
right to receive dividends), when the optionee has given written notice of
exercise, has paid in full for such shares and, if requested, has given the
representation described in Section 11(a).
(e) NONTRANSFERABILITY OF STOCK OPTIONS. No Stock Option shall be
transferable by the optionee other than (i) by will or by the laws of descent
and distribution; or (ii) in the case of a Nonqualified Stock Option, pursuant
to a qualified domestic relations order (as defined in the Code or Title I of
the Em-ployee Retirement Income Security Act of 1974, as amended, or the rules
thereunder); or (iii) in the case of the Special Options, subject to such terms
as the Committee deems appropriate, pursuant to a transfer to the optionee's
spouse, children, grandchildren or parents ("Family Members"), to trusts for the
benefit of Family Members, to partnerships or limited liability companies in
which Family Members are the only partners or shareholders, or to entities
exempt from federal income tax pursuant to Section 501(c)(3) of the Code. All
Stock Options shall be exercisable, subject to the terms of this Plan, during
the optionee's lifetime, only by the optionee or by the guardian or legal
representative of the optionee or, in the case of a Nonqualified Stock Option,
its alternative payee pursuant to such qualified domestic relations order, it
being understood that the terms "holder" and "optionee" include the guardian and
legal representative of the optionee named in the option agreement and any
person to whom an option is transferred by will or the laws of descent and
distribution or, in the case of a Nonqualified Stock Option, pursuant to a
qualified domestic relations order.
(f) TERMINATION BY DEATH. Except with respect to the Special Options,
unless otherwise determined by the Committee, if an optionee's employment
terminates by reason of death, any Stock Option held by such optionee may
thereafter be exercised, to the extent then exercisable, or on such accelerated
basis as the Committee may determine, for a period of one year (or such other
period as the Committee may
F-5
<PAGE>
specify in the option agreement) from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter.
(g) TERMINATION BY REASON OF DISABILITY. Except with respect to the
Special Options, unless otherwise determined by the Committee, if an optionee's
employment terminates by reason of Disability, any Stock Option held by such
optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of termination, or on such accelerated basis as the
Committee may determine, for a period of six months (or such other period as the
Committee may specify in the option agreement) from the date of such termination
of employment or until the expiration of the stated term of such Stock Option,
whichever period is the shorter; PROVIDED, HOWEVER, that if the optionee dies
within such period, any unexercised Stock Option held by such optionee shall,
notwithstanding the expiration of such period, continue to be exercisable to the
extent to which it was exercisable at the time of death for a period of 12
months from the date of such death or until the expiration of the stated term of
such Stock Option, whichever period is the shorter. In the event of termination
of employment by reason of Disability, if an Incentive Stock Option is exercised
after the expiration of the exercise periods that apply for purposes of Section
422 of the Code, such Stock Option will thereafter be treated as a Nonqualified
Stock Option.
(h) TERMINATION BY REASON OF RETIREMENT. Except with respect to the
Special Options, unless otherwise determined by the Committee, if an optionee's
employment terminates by reason of Retirement, any Stock Option held by such
optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of such Retirement, or on such accelerated basis as the
Committee may determine, for a period of two years (or such other period as the
Committee may specify in the option agreement) from the date of such termination
of employment or until the expiration of the stated term of such Stock Option,
whichever period is the shorter; PROVIDED, HOWEVER, that if the optionee dies
within such period any unexercised Stock Option held by such optionee shall,
notwithstanding the expiration of such period, continue to be exercisable to the
extent to which it was exercisable at the time of death for a period of 12
months from the date of such death or until the expiration of the stated term of
such Stock Option, whichever period is the shorter. In the event of termination
of employment by reason of Retirement, if an Incentive Stock Option is exercised
after the expiration of the exercise periods that apply for purposes of Section
422 of the Code, such Stock Option will thereafter be treated as a Nonqualified
Stock Option.
(i) OTHER TERMINATION. Except with respect to the Special Options, unless
otherwise determined by the Committee: (A) if an optionee incurs a Termination
of Employment, all Stock Options held by such optionee shall thereupon
terminate; and (B) if an optionee incurs a Termination of Employment for any
reason other than death, Disability or Retirement, any Stock Option held by such
optionee, to the extent then exercisable, or on such accelerated basis as the
Committee may determine, may be exercised for the lesser of three months from
the date of such Termination of Employment or the balance of such Stock Option's
term; PROVIDED, HOWEVER, that if the optionee dies within such three-month
period, any unexercised Stock Option held by such optionee shall,
notwithstanding the expiration of such three-month period, continue to be
exercisable to the extent to which it was exercisable at the time of death for a
period of 12 months from the date of such death or until the expiration of the
stated term of such Stock Option, whichever period is the shorter.
Notwithstanding the foregoing, if an optionee incurs a Termination of Employment
at or after a Change in Control (as defined Section 7(b)), other than by reason
of death, Disability or Retirement, any Stock Option held by such optionee shall
be exercisable for the lesser of (1) six months and one day from the date of
such Termination of Employment, and (2) the balance of such Stock Option's term.
In the event of Termination of Employment, if an Incentive Stock Option is
exercised after the expiration of the exercise periods that apply for purposes
of Section 422 of the Code, such Stock Option will thereafter be treated as a
Nonqualified Stock Option.
(j) CHANGE IN CONTROL CASH-OUT. Notwithstanding any other provision of the
Plan, during the 60-day period from and after a Change in Control (the "Exercise
Period"), unless the Committee shall determine otherwise at the time of grant,
an optionee shall have the right, whether or not the Stock Option is fully
exercisable and in lieu of the payment of the exercise price for the shares of
Common Stock being
F-6
<PAGE>
purchased under the Stock Option and by giving notice to the Corporation, to
elect (within the Exercise Period) to surrender all or part of the Stock Option
to the Corporation and to receive cash, within 30 days of such notice, in an
amount equal to the amount by which the Change in Control Price per share of
Common Stock on the date of such election shall exceed the exercise price per
share of Common Stock under the Stock Option (the "Spread") multiplied by the
number of shares of Common Stock granted under the Stock Option as to which the
right granted under this Section 5(j) shall have been exercised; PROVIDED,
HOWEVER, that if the Change in Control is within six months of the date of grant
of a particular Stock Option held by an optionee who is an officer or director
of the Corporation and is subject to Section 16(b) of the Exchange Act no such
election shall be made by such optionee with respect to such Stock Option prior
to six months from the date of grant. However, if the end of such 60-day period
from and after a Change in Control is within six months of the date of grant of
a Stock Option held by an optionee who is an officer or director of the
Corporation and is subject to Section 16(b) of the Exchange Act, such Stock
Option shall be cancelled in exchange for a cash payment to the optionee,
effected on the day which is six months and one day after the date of grant of
such Option, equal to the Spread multiplied by the number of shares of Common
Stock granted under the Stock Option. Notwithstanding the foregoing, if any
right granted pursuant to this Section 5(j) would make a Change in Control
transaction ineligible for pooling of interests accounting under APB No. 16 that
but for this Section 5(j) would otherwise be eligible for such accounting
treatment, the Committee shall have the ability to substitute the cash payable
pursuant to this Section 5(j) with Stock with a Fair Market Value equal to the
cash that would otherwise be payable hereunder.
SECTION 6. STOCK APPRECIATION RIGHTS
(a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a Nonqualified Stock Option, such rights may be granted either at or
after the time of grant of such Stock Option. In the case of an Incentive Stock
Option, such rights may be granted only at the time of grant of such Stock
Option. A Stock Appreciation Right shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option.
A Stock Appreciation Right may be exercised by an optionee in accordance
with Section 6(b) by surrendering the applicable portion of the related Stock
Option in accordance with procedures established by the Committee. Upon such
exercise and surrender, the optionee shall be entitled to receive an amount
determined in the manner prescribed in Section 6(b). Stock Options which have
been so surrendered shall no longer be exercisable to the extent the related
Stock Appreciation Rights have been exercised.
(b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to
such terms and conditions as shall be determined by the Committee, including the
following:
(i) Stock Appreciation Rights shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate are
exercisable in accordance with the provisions of Section 5 and this Section
6; PROVIDED, HOWEVER, that a Stock Appreciation Right shall not be
exercisable during the first six months of its term by an optionee who is
actually or potentially subject to Section 16(b) of the Exchange Act, except
that this limitation shall not apply in the event of death or Disability of
the optionee prior to the expiration of the six-month period.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee shall
be entitled to receive an amount in cash, shares of Common Stock or both,
equal in value to the excess of the Fair Market Value of one share of Common
Stock over the option price per share specified in the related Stock Option
multiplied by the number of shares in respect of which the Stock
Appreciation Right shall have been exercised, with the Committee having the
right to determine the form of payment.
(iii) Stock Appreciation Rights shall be transferable only to permitted
transferees of the underlying Stock Option in accordance with Section 5(e).
F-7
<PAGE>
(iv) Upon the exercise of a Stock Appreciation Right, the Stock Option
or part thereof to which such Stock Appreciation Right is related shall be
deemed to have been exercised for the purpose of the limitation set forth in
Section 3 on the number of shares of Common Stock to be issued under the
Plan, but only to the extent of the number of shares covered by the Stock
Appreciation Right at the time of exercise based on the value of the Stock
Appreciation Right at such time.
SECTION 7. CHANGE IN CONTROL PROVISIONS
(a) IMPACT OF EVENT. Notwithstanding any other provision of the Plan to
the contrary, in the event of a Change in Control, any Stock Options and Stock
Appreciation Rights outstanding as of the date such Change in Control is
de-termined to have occurred, and which are not then exercisable and vested,
shall become fully exercisable and vested to the full extent of the original
grant; PROVIDED, HOWEVER, that in the case of the holder of Stock Appreciation
Rights who is actually subject to Section 16(b) of the Exchange Act, such Stock
Appreciation Rights shall have been outstanding for at least six months at the
date such Change in control is determined to have occurred.
(b) DEFINITION OF CHANGE IN CONTROL. For purposes of the Plan, a "Change
in Control" shall mean the happening of any of the following events:
(i) An acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (1) the then outstanding shares of
common stock of the Corporation (the "Outstanding Corporation Common Stock")
or (2) the combined voting power of the then outstanding voting securities
of the Corporation entitled to vote generally in the election of directors
(the "Outstanding Corporation Voting Securities")(a "Control Purchase");
excluding, however, the following: (1) Any acquisition directly from the
Corporation, other than an acquisition by virtue of the exercise of a
conversion privilege unless the security being so converted was itself
acquired directly from the Corporation, (2) Any acquisition by the
Corporation, (3) Any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Corporation or any corporation
controlled by the Corporation, (4) Any acquisition by any corporation
pursuant to a transaction which complies with clauses (1), (2) and (3) of
subsection (iii) of this Section 7(b), or (5) Any acquisition by Barron
Hilton, the Charitable Remainder Unitrust created by Barron Hilton to
receive shares from the Estate of Conrad N. Hilton, or the Conrad N. Hilton
Fund; or
(ii) A change in the composition of the Board such that the individuals
who, as of the effective date of the Plan, constitute the Board (such Board
shall be hereinafter referred to as the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board; PROVIDED, HOWEVER,
for purposes of this Section 7(b), that any individual who becomes a member
of the Board subsequent to the effective date of the Plan, whose election,
or nomination for election by the Corporation's shareholders, was approved
by a vote of at least a majority of those individuals who are members of the
Board and who were also members of the Incumbent Board (or deemed to be such
pursuant to this proviso) shall be considered as though such individual were
a member of the Incumbent Board; but, PROVIDED FURTHER, that any such
individual whose initial assumption of office occurs as a result of either
an actual or threatened election contest (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual
or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board shall not be so considered as a member of the
Incumbent Board (a "Board Change"); or
(iii) The approval by the shareholders of the Corporation of a
reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the assets of the Corporation ("Corporate
Transaction"); excluding however, such a Corporate Transaction pursuant to
which (1) all or substantially all of the individuals and entities who are
the beneficial owners, respectively, of the
F-8
<PAGE>
Outstanding Corporation Common Stock and Outstanding Corporation Voting
Securities immediately prior to such Corporate Transaction will beneficially
own, directly or indirectly, more than 60% of, respectively, the outstanding
shares of common stock, and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such
Corporate Transaction (including, without limitation, a corporation which as
a result of such transaction owns the Corporation or all or substantially
all of the Corporation's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Corporate Transaction, of the Outstanding
Corporation Common Stock and Outstanding Corporation Voting Securities, as
the case may be, (2) no Person (other than the Corporation, any employee
benefit plan (or related trust) of the Corporation or such corporation
resulting from such Corporate Transaction) will beneficially own, directly
or indirectly, 20% or more of, respectively, the outstanding shares of
common stock of the corporation resulting from such Corporate Transaction or
the combined voting power of the outstanding voting securities of such
corporation entitled to vote generally in the election of directors except
to the extent that such ownership existed prior to the Corporate
Transaction, and (3) individuals who were members of the Incumbent Board
will constitute at least a majority of the members of the board of directors
of the corporation resulting from such Corporate Transaction; or
(iv) The approval by the stockholders of the Corporation of a complete
liquidation or dissolution of the Corporation.
(c) CHANGE IN CONTROL PRICE. For purposes of the Plan, "Change in Control
Price" means the higher of (i) the highest reported sales price, regular way, of
a share of Common Stock in any transaction reported on the New York Stock
Exchange Composite Tape or other national exchange on which such shares are
listed or on NASDAQ during the 60-day period prior to and including the date of
a Change in Control or (ii) if the Change in Control is the result of a tender
or exchange offer or a Corporate Transaction, the highest price per share of
Common Stock paid in such tender or exchange offer or Corporate Transaction;
PROVIDED, HOWEVER, that (x) in the case of a Stock Option which (A) is held by
an optionee who is an officer or director of the Corporation and is subject to
Section 16(b) of the Exchange Act and (B) was granted within 240 days of the
Change in Control, then the Change in Control Price for such Stock Option shall
be the Fair Market Value of the Common Stock on the date such Stock Option is
exercised or deemed exercised and (y) in the case of Incentive Stock Options and
Stock Appreciation Rights relating to Incentive Stock Options, the Change in
Control Price shall be in all cases the Fair Market Value of the Common Stock on
the date such Incentive Stock Option or Stock Appreciation Right is exercised.
To the extent that the consideration paid in any such transaction described
above consists all or in part of securities or other noncash consideration, the
value of such securities or other noncash consideration shall be determined in
the sole discretion of the Board.
SECTION 8. TERM, AMENDMENT AND TERMINATION
The Plan will terminate ten years after the effective date of the Plan.
Under the Plan, Awards outstanding as of such date shall not be affected or
impaired by the termination of the Plan.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would (i) impair the rights of
an optionee under a Stock Option or a recipient of a Stock Appreciation Right
theretofore granted without the optionee's or recipient's consent, except such
an amendment made to cause the Plan to qualify for the exemption provided by
Rule 16b-3, or (ii) disqualify the Plan from the exemption provided by Rule
16b-3. In addition, no such amendment shall be made without the approval of the
Corporation's shareholders to the extent such approval is required by law or
agreement.
The Committee may amend the terms of any Stock Option or other Award
theretofore granted, prospectively or retroactively, but no such amendment shall
impair the rights of any holder without the
F-9
<PAGE>
holder's consent except such an amendment made to cause the Plan or Award to
qualify for the exemption provided by Rule 16b-3.
Subject to the above provisions, the Board shall have authority to amend the
Plan to take into account changes in law and tax and accounting rules as well as
other developments, and to grant Awards which qualify for beneficial treatment
under such rules without stockholder approval.
SECTION 9. UNFUNDED STATUS OF PLAN
It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation. The Committee may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver Common Stock or make payments; PROVIDED, HOWEVER, that unless the
Committee otherwise determines, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
SECTION 10. GENERAL PROVISIONS
(a) The Committee may require each person purchasing or receiving shares
pursuant to an Award to represent to and agree with the Corporation in writing
that such person is acquiring the shares without a view to the distribution
thereof. The certificates for such shares may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer.
Notwithstanding any other provision of the Plan or agreements made pursuant
thereto, the Corporation shall not be required to issue or deliver any
certificate or certificates for shares of Common Stock under the Plan prior to
fulfillment of all of the following conditions:
(1) Listing or approval for listing upon notice of issuance, of such
shares on the New York Stock Exchange, Inc., or such other securities
exchange as may at the time be the principal market for the Common Stock;
(2) Any registration or other qualification of such shares of the
Corporation under any state or federal law or regulation, or the maintaining
in effect of any such registration or other qualification which the
Committee shall, in its absolute discretion upon the advice of counsel, deem
necessary or advisable; and
(3) Obtaining any other consent, approval, or permit from any state or
federal governmental agency which the Committee shall, in its absolute
discretion after receiving the advice of counsel, determine to be necessary
or advisable.
(b) Nothing contained in the Plan shall prevent the Corporation or any
subsidiary or Affiliate from adopting other or additional compensation
arrangements for its employees.
(c) Adoption of the Plan shall not confer upon any employee any right to
continued employment, nor shall it interfere in any way with the right of the
Corporation or any subsidiary or Affiliate to terminate the employment of any
employee at any time.
(d) No later than the date as of which an amount first becomes includible in
the gross income of the participant for federal income tax purposes with respect
to any Award under the Plan, the participant shall pay to the Corporation, or
make arrangements satisfactory to the Committee regarding the payment of, any
federal, state, local or foreign taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the
Corporation, withholding obligations may be settled with Common Stock, including
Common Stock that is part of the Award that gives rise to the withholding
requirement. The obligations of the Corporation under the Plan shall be
conditional on such payment or arrangements, and the Corporation and its
Affiliates shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment otherwise due to the participant. The Committee may
establish
F-10
<PAGE>
such procedures as it deems appropriate, including making irrevocable elections,
for the settlement of withholding obligations with Common Stock.
(e) The Committee shall establish such procedures as it deems appropriate
for a participant to designate a beneficiary to whom any amounts payable in the
event of the participant's death are to be paid or by whom any rights of the
participant, after the participant's death, may be exercised.
(f) In the case of a grant of an Award to any employee of a subsidiary of
the Corporation, the Corporation may, if the Committee so directs, issue or
transfer the shares of Common Stock, if any, covered by the Award to the
subsidiary, for such lawful consideration as the Committee may specify, upon the
condition or understanding that the subsidiary will transfer the shares of
Common Stock to the employee in accordance with the terms of the Award specified
by the Committee pursuant to the provisions of the Plan.
(g) The Plan and all Awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware,
without reference to principles of conflict of laws.
SECTION 11. EFFECTIVE DATE OF PLAN
The Plan (as amended and restated) shall be effective as of July 9, 1998,
provided that it is approved by at least a majority of the shares voted of
Common Stock at the special meeting of the Corporation's stockholders with
respect to the Distribution and other related matters.
SECTION 12. PROVISIONS REGARDING THE DISTRIBUTION
(a) In connection with the Distribution, the Corporation and Park Place have
entered into that certain Employee Benefits and Other Employment Matters
Allocation Agreement, dated as of [ ], 1998 (the "Benefits Allocation
Agreement"), pursuant to which the Corporation and Park Place have agreed to
allocate the responsibilities with respect to certain matters relating to
employees and employee compensation, benefits, labor and other employment
matters. Concurrently with the Distribution and pursuant to the terms of the
Benefits Allocation Agreement, all outstanding options to purchase the
Corporation's Common Stock (each, a "Hilton Option"), other than Hilton Options
held by Arthur M. Goldberg, shall be adjusted (the "Option Adjustment") to
represent options to purchase an equivalent number of shares of the
Corporation's Common Stock (each adjusted option to purchase the Corporation's
Common Stock, an "Adjusted Hilton Option") and shares of Park Place Common Stock
(each adjusted option to purchase Park Place Common Stock, an "Adjusted Park
Place Option"). Pursuant to the Option Adjustment, the intrinsic value of the
Hilton Options immediately prior to the Distribution shall be preserved
immediately after the Distribution, and the exercise price of the Hilton Options
will be allocated between the Adjusted Hilton Options and the Adjusted Park
Place Options based upon the relative values of the Corporation's Common Stock
and Park Place Common Stock on the date of the Distribution, all as determined
by the Corporation. Concurrently with the Distribution and pursuant to the terms
of the Benefits Allocation Agreement, all outstanding Hilton Options held by
Arthur M. Goldberg shall be adjusted to represent Adjusted Park Place Options.
Pursuant to such adjustment, the intrinsic value of Mr. Goldberg's outstanding
Hilton Options immediately prior to the Distribution shall be preserved
immediately after the Distribution, and the number of shares subject to and the
exercise price of such options shall be adjusted based on the relative values of
the Corporation's Common Stock and the Park Place Common Stock on the date of
the Distribution, all as determined by the Corporation.
(b) Following the date of the Option Adjustment, all Adjusted Hilton Options
shall be subject to the terms of the Hilton Hotels Corporation 1984 Stock Option
and Stock Appreciation Rights Plan, the Hilton Hotels Corporation 1990 Stock
Option and Stock Appreciation Rights Plan, the Hilton Hotels Corporation 1997
Independent Director Stock Option Plan or this Plan, as applicable, and any
applicable option agreement. Following the date of the Option Adjustment, all
Adjusted Park Place Options which were issued as a result of Hilton Options
granted under any of the Hilton Hotels Corporation 1984 Stock
F-11
<PAGE>
Option and Stock Appreciation Rights Plan, the Hilton Hotels Corporation 1990
Stock Option and Stock Appreciation Rights Plan, or the Hilton Hotels
Corporation 1996 Stock Incentive Plan shall be subject to the terms of the Park
Place 1998 Stock Incentive Plan and the applicable option agreement, and all
Adjusted Park Place Options which were issued as a result of Hilton Options
granted under the Hilton Hotels Corporation 1997 Independent Director Stock
Option Plan shall be subject to the terms of the Park Place 1998 Independent
Director Stock Option Plan and the applicable option agreement.
(c) For purposes of this Plan, with respect to Adjusted Hilton Options held
by Park Place Individuals (as defined in the Benefits Allocation Agreement) as a
result of the Option Adjustment, references to employment or termination of
employment in this Plan and in the applicable option agreement shall be deemed
to refer to employment by or termination of employment with Park Place and its
subsidiaries or affiliates.
SECTION 13. SPECIAL OPTIONS
The Committee shall have the authority to grant Special Options to the CEO
on such terms and conditions as it shall determine in its sole discretion. The
terms and conditions of such Special Options granted to the Corporation's
initial CEO shall be set forth in the Employment Agreement. To the extent that
certain terms and conditions of the Special Options are not set forth in the
Employment Agreement, the terms of the Plan shall apply to the Special Options.
F-12
<PAGE>
ANNEX G
FORM OF
LAKES GAMING, INC.
1998 STOCK OPTION AND
COMPENSATION PLAN
1. PURPOSE. The purpose of this Lakes Gaming, Inc. (the "Company") 1998
Stock Option and Compensation Plan (the "Plan") is to increase stockholder value
and to advance the interests of the Company by furnishing a variety of economic
incentives ("Incentives") designed to attract, retain and motivate employees and
certain key consultants. Incentives may consist of opportunities to purchase or
receive shares of Common Stock, $.01 par value, of the Company ("Common Stock"),
monetary payments, or both, on terms determined under this Plan.
2. ADMINISTRATION. The Plan shall be administered by the stock option
committee (the "Committee") of the board of directors of the Company (the
"Board"). Subject to any provisions of state law which may require that the
Committee consist of a larger number of members, if the Company stock is
privately held, the Committee shall consist of one or more directors of the
Company as shall be appointed from time to time by the Chairman of the Board. If
the Company stock becomes the subject of a public offering, the Committee shall
then consist of not less than two directors who shall be appointed from time to
time by the Board, each of which such appointees shall be a "non-employee
director" within the meaning of Rule 16b-3 of the Securities Exchange Act of
1934, and the regulations promulgated thereunder (the "1934 Act"), and the Board
may from time to time appoint members of the Committee in substitution for, or
in addition to, members previously appointed, and may fill vacancies, however
caused, in the Committee. If more than one person is on the Committee, the
following shall apply: (a) the Committee shall select one of its members as its
chairman and shall hold its meetings at such times and places as it shall deem
advisable; (b) a majority of the Committee's members shall constitute a quorum;
(c) all action of the Committee shall be taken by the majority of its members;
and (d) any action may be taken by a written instrument signed by majority of
the members and actions so taken shall be fully effective as if they had been
made by a majority vote at a meeting duly called and held. The Committee may
appoint a secretary, shall keep minutes of its meetings and shall make such
rules and regulations for the conduct of its business as it shall deem
advisable. The Committee shall have complete authority to award Incentives under
the Plan, to interpret the Plan, and to make any other determination which it
believes necessary and advisable for the proper administration of the Plan. The
Committee's decisions and matters relating to the Plan shall be final and
conclusive on the Company and its participants.
3. ELIGIBLE PARTICIPANTS. Employees of or consultants to the Company or
its subsidiaries or affiliates (including officers and directors, but excluding
directors who are not also employees of or consultants to the Company or its
subsidiaries or affiliates), shall become eligible to receive Incentives under
the Plan when designated by the Committee. Participants may be designated
individually or by groups or categories (for example, by pay grade) as the
Committee deems appropriate. Participation by officers of the Company or its
subsidiaries or affiliates and any performance objectives relating to such
officers must be approved by the Committee. Participation by others and any
performance objectives relating to others may be approved by groups or
categories (for example, by pay grade) and authority to designate participants
who are not officers and to set or modify such targets may be delegated.
4. TYPES OF INCENTIVES. Incentives under the Plan may be granted in any
one or a combination of the following forms: (a) incentive stock options and
non-statutory stock options (section 6); (b) stock appreciation rights ("SARs")
(section 7); (c) stock awards (section 8); (d) restricted stock (section 8); (e)
performance shares (section 9); and (f) cash awards (section 10).
G-1
<PAGE>
5. SHARES SUBJECT TO THE PLAN.
5.1 NUMBER OF SHARES. Subject to adjustment as provided in Section
11.6, the number of shares of Common Stock which may be issued under the
Plan shall not exceed 1,500,000 shares of Common Stock.
5.2 CANCELLATION. To the extent that cash in lieu of shares of Common
Stock is delivered upon the exercise of a SAR pursuant to Section 7.4, the
Company shall be deemed, for purposes of applying the limitation on the
number of shares, to have issued the greater of the number of shares of
Common Stock which it was entitled to issue upon such exercise or on the
exercise of any related option. In the event that a stock option or SAR
granted hereunder expires or is terminated or canceled unexercised as to any
shares of Common Stock, such shares may again be issued under the Plan
either pursuant to stock options, SARs or otherwise. In the event that
shares of Common Stock are issued as restricted stock or pursuant to a stock
award and thereafter are forfeited or reacquired by the Company pursuant to
rights reserved upon issuance thereof, such forfeited and reacquired shares
may again be issued under the Plan, either as restricted stock, pursuant to
stock awards or otherwise. The Committee may also determine to cancel, and
agree to the cancellation of, stock options in order to make a participant
eligible for the grant of a stock option at a lower price than the option to
be canceled.
5.3 TYPE OF COMMON STOCK. Common Stock issued under the Plan in
connection with stock options, SARs, performance shares, restricted stock or
stock awards, may be authorized and unissued shares.
6. STOCK OPTIONS. A stock option is a right to purchase shares of Common
Stock from the Company. Each stock option granted by the Committee under this
Plan shall be subject to the following terms and conditions:
6.1 PRICE. The option price per share shall be determined by the
Committee, provided that such price shall not be below the Fair Market Value
of the Common Stock subject to the adjustment under Section 11.6.
6.2 NUMBER. The number of shares of Common Stock subject to the option
shall be determined by the Committee, subject to adjustment as provided in
Section 11.6. The number of shares of Common Stock subject to a stock option
shall be reduced in the same proportion that the holder thereof exercises a
SAR if any SAR is granted in conjunction with or related to the stock
option.
6.3 DURATION AND TIME FOR EXERCISE. Subject to earlier termination as
provided in Section 11.4, the term of each stock option shall be determined
by the Committee but shall not exceed ten years and one day from the date of
grant. Each stock option shall become exercisable at such time or times
during its term as shall be determined by the Committee at the time of
grant. The Committee may accelerate the exercisability of any stock option.
Subject to the foregoing and with the approval of the Committee, all or any
part of the shares of Common Stock with respect to which the right to
purchase has accrued may be purchased by the Company at the time of such
accrual or at any time or times thereafter during the term of the option.
6.4 MANNER OF EXERCISE. A stock option may be exercised, in whole or
in part, by giving written notice to the Company, specifying the number of
shares of Common Stock to be purchased and accompanied by the full purchase
price for such shares. The option price shall be payable in United States
dollars upon exercise of the option and may be paid by cash; uncertified or
certified check; bank draft; by delivery of shares of Common Stock in
payment of all or any part of the option price, which shares shall be valued
for this purpose at the Fair Market Value on the date such option is
exercised; by instructing the Company to withhold from the shares of Common
Stock issuable upon exercise of the stock option shares of Common Stock in
payment of all or any part of the option price, which shares shall be valued
for this purpose at the Fair Market Value or in such other manner as may
G-2
<PAGE>
be authorized from time to time by the Committee. Prior to the issuance of
shares of Common Stock upon the exercise of a stock option, a participant
shall have no rights as a stockholder.
6.5 INCENTIVE STOCK OPTIONS. Notwithstanding anything in the Plan to
the contrary, the following additional provisions shall apply to the grant
of stock options which are intended to qualify as Incentive Stock Options,
as such term is defined in Section 422A of the Internal Revenue Code of
1986, as amended (the "Code"):
a) The aggregate Fair Market Value (determined as of the time the
option is granted) of the shares of Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by any
participant during any calendar year (under all of the Company's plans)
shall not exceed $100,000.
b) Any Incentive Stock Option certificate authorized under the Plan
shall contain such other provisions as the Committee shall deem
advisable, but shall in all events be consistent with and contain all
provisions required in order to qualify the options as Incentive Stock
Options.
c) All Incentive Stock Options must be granted within ten years
from the earlier of the date on which this Plan was adopted by the Board
or the date this Plan was approved by the stockholders.
d) Unless sooner exercised, all Incentive Stock Options shall
expire no later than 10 years after the date of grant.
e) The option price for Incentive Stock Options shall be not less
than the Fair Market Value of the Common Stock subject to the option on
the date of grant.
f) No Incentive Stock Options shall be granted to any participant
who, at the time such option is granted, would own (within the meaning of
Section 422A of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the employer
corporation or of its parent or subsidiary corporation.
7. STOCK APPRECIATION RIGHTS. A SAR is a right to receive, without payment
to the Company, a number of shares of Common Stock, cash or any combination
thereof, the amount of which is determined pursuant to the formula set forth in
Section 7.4. A SAR may be granted (a) with respect to any stock option granted
under this Plan, either concurrently with the grant of such stock option or at
such later time as determined by the Committee (as to all or any portion of the
shares of Common Stock subject to the stock option), or (b) alone, without
reference to any related stock option. Each SAR granted by the Committee under
this Plan shall be subject to the following terms and conditions:
7.1 NUMBER. Each SAR granted to any participant shall relate to such
number of shares of Common Stock as shall be determined by the Committee,
subject to adjustment as provided in Section 11.6. In the case of a SAR
granted with respect to a stock option, the number of shares of Common Stock
to which the SAR pertains shall be reduced in the same proportion that the
holder of the option exercises the related stock option.
7.2 DURATION. Subject to earlier termination as provided in Section
11.4, the term of each SAR shall be determined by the Committee but shall
not exceed ten years and one day from the date of grant. Unless otherwise
provided by the Committee, each SAR shall become exercisable at such time or
times, to such extent and upon such conditions as the stock option, if any,
to which it relates is exercisable. The Committee may in its discretion
accelerate the exercisability of any SAR.
7.3 EXERCISE. A SAR may be exercised, in whole or in part, by giving
written notice to the Company, specifying the number of SARs which the
holder wishes to exercise. Upon receipt of such written notice, the Company
shall, within ninety (90) days thereafter, deliver to the exercising holder
G-3
<PAGE>
certificates for the shares of Common Stock or cash or both, as determined
by the Committee, to which the holder is entitled pursuant to Section 7.4.
7.4 PAYMENT. Subject to the right of the Committee to deliver cash in
lieu of shares of Common Stock (which, as it pertains to officers and
directors of the Company, shall comply with all requirements of the 1934
Act), the number of shares of Common Stock which shall be issuable upon the
exercise of a SAR shall be determined by dividing:
a) the number of shares of Common Stock as to which the SAR is
exercised multiplied by the amount of the appreciation in such shares
(for this purpose, the "appreciation" shall be the amount by which the
Fair Market Value of the shares of Common Stock subject to the SAR on the
exercise date exceeds (1) in the case of a SAR related to a stock option,
the purchase price of the shares of Common Stock under the stock option
or (2) in the case of a SAR granted alone, without reference to a related
stock option, an amount which shall be determined by the Committee at the
time of grant, subject to adjustment under Section 11.6); by
b) the Fair Market Value of a share of Common Stock on the exercise
date.
In lieu of issuing shares of Common Stock upon the exercise of a SAR,
the Committee may elect to pay the holder of the SAR cash equal to the Fair
Market Value on the exercise date of any or all of the shares which would
otherwise be issuable. No fractional shares of Common Stock shall be issued
upon the exercise of a SAR; instead, the holder of the SAR shall be entitled
to receive a cash adjustment equal to the same fraction of the Fair Market
Value of a share of Common Stock on the exercise date or to purchase the
portion necessary to make a whole share at its Fair Market Value on the date
of exercise.
8. STOCK AWARDS AND RESTRICTED STOCK. A stock award consists of the
transfer by the Company to a participant of shares of Common Stock, without
other payment therefor, as additional compensation for services to the Company.
A share of restricted stock consists of shares of Common Stock which are sold or
transferred by the Company to a participant at a price determined by the
Committee (which price shall be at least equal to the minimum price required by
applicable law for the issuance of a share of Common Stock) and subject to
restrictions on their sale or other transfer by the participant. The transfer of
Common Stock pursuant to stock awards and the transfer and sale of restricted
stock shall be subject to the following terms and conditions:
8.1 NUMBER OF SHARES. The number of shares to be transferred or sold
by the Company to a participant pursuant to a stock award or as restricted
stock shall be determined by the Committee.
8.2 SALE PRICE. The Committee shall determine the price, if any, at
which shares of restricted stock shall be sold to a participant, which may
vary from time to time and among participants and which may be below the
Fair Market Value of such shares of Common Stock at the date of sale.
8.3 RESTRICTIONS. All shares of restricted stock transferred or sold
hereunder shall be subject to such restrictions as the Committee may
determine, including, without limitation any or all of the following:
a) a prohibition against the sale, transfer, pledge or other
encumbrance of the shares of restricted stock, such prohibition to lapse
at such time or times as the Committee shall determine (whether in annual
or more frequent installments, at the time of the death, disability or
retirement of the holder of such shares, or otherwise);
b) a requirement that the holder of shares of restricted stock
forfeit, or (in the case of shares sold to a participant) resell back to
the Company at his or her cost, all or a part of such shares in the event
of termination of his or her employment or consulting engagement during
any period in which such shares are subject to restrictions;
G-4
<PAGE>
c) such other conditions or restrictions as the Committee may deem
advisable.
8.4 ESCROW. In order to enforce the restrictions imposed by the
Committee pursuant to Section 8.3, the participant receiving restricted
stock shall enter into an agreement with the Company setting forth the
conditions of the grant. Shares of restricted stock shall be registered in
the name of the participant and deposited, together with a stock power
endorsed in blank, with the Company. Each such certificate shall bear a
legend in substantially the following form:
The transferability of this certificate and the shares of
Common Stock represented by it are subject to the terms and
conditions (including conditions of forfeiture) contained in the
1998 Stock Option and Compensation Plan of Lakes Gaming, Inc. (the
"Company"), and an agreement entered into between the registered
owner and the Company. A copy of the Plan and the agreement is on
file at the office of the secretary of the Company.
8.5 END OF RESTRICTIONS. Subject to Section 11.5, at the end of any
time period during which the shares of restricted stock are subject to
forfeiture and restrictions on transfer, such shares will be delivered free
of all restrictions to the participant or to the participant's legal
representative, beneficiary or heir.
8.6 STOCKHOLDER. Subject to the terms and conditions of the Plan, each
participant receiving restricted stock shall have all the rights of a
stockholder with respect to shares of stock during any period in which such
shares are subject to forfeiture and restrictions on transfer, including
without limitation, the right to vote such shares. Dividends paid in cash or
property other than Common Stock with respect to shares of restricted stock
shall be paid to the participant currently.
9. PERFORMANCE SHARES. A performance share consists of an award which
shall be paid in shares of Common Stock, as described below. The grant of
performance share shall be subject to such terms and conditions as the Committee
deems appropriate, including the following:
9.1 PERFORMANCE OBJECTIVES. Each performance share will be subject to
performance objectives for the Company or one of its operating units to be
achieved by the end of a specified period. The number of performance shares
granted shall be determined by the Committee and may be subject to such
terms and conditions, as the Committee shall determine. If the performance
objectives are achieved, each participant will be paid in shares of Common
Stock or cash. If such objectives are not met, each grant of performance
shares may provide for lesser payments in accordance with formulas
established in the award.
9.2 NOT STOCKHOLDER. The grant of performance shares to a participant
shall not create any rights in such participant as a stockholder of the
Company, until the payment of shares of Common Stock with respect to an
award.
9.3 NO ADJUSTMENTS. No adjustment shall be made in performance shares
granted on account of cash dividends which may be paid or other rights which
may be issued to the holders of Common Stock prior to the end of any period
for which performance objectives were established.
9.4 EXPIRATION OF PERFORMANCE SHARE. If any participant's employment
or consulting engagement with the Company is terminated for any reason other
than normal retirement, death or disability prior to the achievement of the
participant's stated performance objectives, all the participant's rights on
the performance shares shall expire and terminate unless otherwise
determined by the Committee. In the event of termination by reason of death,
disability, or normal retirement, the Committee, in its own discretion may
determine what portions, if any, of the performance shares should be paid to
the participant.
10. CASH AWARDS. A cash award consists of a monetary payment made by the
Company to a participant as additional compensation for his or her services to
the Company. Payment of a cash award
G-5
<PAGE>
will normally depend on achievement of performance objectives by the Company or
by individuals. The amount of any monetary payment constituting a cash award
shall be determined by the Committee in its sole discretion. Cash awards may be
subject to other terms and conditions, which may vary from time to time and
among participants, as the Committee determines to be appropriate.
11. GENERAL.
11.1 EFFECTIVE DATE. The Plan will become effective upon its adoption
by the Board.
11.2 DURATION. The Plan shall remain in effect until all Incentives
granted under the Plan have either been satisfied by the issuance of shares
of Common Stock or the payment of cash or been terminated under the terms of
the Plan and all restrictions imposed on shares of Common Stock in
connection with their issuance under the Plan have lapsed. No Incentives may
be granted under the Plan after the tenth anniversary of the date the Plan
is approved by the stockholders of the Company.
11.3 NON-TRANSFERABILITY OF INCENTIVES. No stock option, SAR,
restricted stock or performance award may be transferred, pledged or
assigned by the holder thereof except, in the event of the holder's death,
by will or the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined by the Code or Title I of the Employee
Retirement Income Security Act, or the rules thereunder, and the Company
shall not be required to recognize any attempted assignment of such rights
by any participant.
11.4 EFFECT OF TERMINATION OR DEATH. In the event that a participant
ceases to be an employee of or consultant to the Company for any reason,
including death, any Incentives may be exercised or shall expire at such
times as may be determined by the Committee.
11.5 ADDITIONAL CONDITION. Notwithstanding anything in this Plan to
the contrary: (a) the Company may, if it shall determine it necessary or
desirable for any reason, at the time of award of any Incentive or the
issuance of any shares of Common Stock pursuant to any Incentive, require
the recipient of the Incentive, as a condition to the receipt thereof or to
the receipt of shares of Common Stock issued pursuant thereto, to deliver to
the Company a written representation of present intention to acquire the
Incentive or the shares of Common Stock issued pursuant thereto for his or
her own account for investment and not for distribution; and (b) if at any
time the Company further determines, in its sole discretion, that the
listing, registration or qualification (or any updating of any such
document) of any Incentive or the shares of Common Stock issuable pursuant
thereto is necessary on any securities exchange or under any federal or
state securities or blue sky law, or that the consent or approval of any
governmental regulatory body is necessary or desirable as a condition of, or
in connection with the award of any Incentive, the issuance of shares of
Common Stock pursuant thereto, or the removal of any restrictions imposed on
such shares, such Incentive shall not be awarded or such shares of Common
Stock shall not be issued or such restrictions shall not be removed, as the
case may be, in whole or in part, unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free
of any conditions not acceptable to the Company.
11.6 ADJUSTMENT. In the event of any merger, consolidation or
reorganization of the Company with any other corporation or corporations,
there shall be substituted for each of the shares of Common Stock then
subject to the Plan, including shares subject to restrictions, options, or
achievement of performance share objectives, the number and kind of shares
of stock or other securities to which the holders of the shares of Common
Stock will be entitled pursuant to the transaction. In the event of any
recapitalization, stock dividend, stock split, combination of shares or
other change in the Common Stock, the number of shares of Common Stock then
subject to the Plan, including shares subject to restrictions, options or
achievements of performance shares, shall be adjusted in proportion to the
change in outstanding shares of Common Stock. In the event of any such
adjustments, the purchase price of any option, the performance objectives of
any Incentive, and the shares of Common
G-6
<PAGE>
Stock issuable pursuant to any Incentive shall be adjusted as and to the
extent appropriate, in the discretion of the Committee, to provide
participants with the same relative rights before and after such adjustment.
11.7 INCENTIVE PLANS AND AGREEMENTS. Except in the case of stock
awards or cash awards, the terms of each Incentive shall be stated in a plan
or agreement approved by the Committee. The Committee may also determine to
enter into agreements with holders of options to reclassify or convert
certain outstanding options, within the terms of the Plan, as Incentive
Stock Options or as non-statutory stock options and in order to eliminate
SARs with respect to all or part of such options and any other previously
issued options.
11.8 WITHHOLDING.
a) The Company shall have the right to withhold from any payments
made under the Plan or to collect as a condition of payment, any taxes
required by law to be withheld. At any time when a participant is
required to pay to the Company an amount required to be withheld under
applicable income tax laws in connection with a distribution of Common
Stock or upon exercise of an option or SAR, the participant may satisfy
this obligation in whole or in part by electing (the "Election") to have
the Company withhold from the distribution shares of Common Stock having
a value up to the amount required to be withheld. The value of the shares
to be withheld shall be based on the Fair Market Value of the Common
Stock on the date that the amount of tax to be withheld shall be
determined ("Tax Date").
b) Each Election must be made prior to the Tax Date. The Committee
may disapprove of any Election, may suspend or terminate the right to
make Elections, or may provide with respect to any Incentive that the
right to make Elections shall not apply to such Incentive. An Election is
irrevocable.
c) If a participant is an officer or director of the Company within
the meaning of Section 16 of the 1934 Act, then an Election must comply
with all of the requirements of the 1934 Act.
11.9 NO CONTINUED EMPLOYMENT. Engagement or Right to Corporate Assets.
No participant under the Plan shall have any right, because of his or her
participation, to continue in the employ of, or to continue his or her
consulting engagement for, the Company for any period of time or to any
right to continue his or her present or any other rate of compensation.
Nothing contained in the Plan shall be construed as giving an employee, a
consultant, such persons' beneficiaries, or any other person, any equity or
interests of any kind in the assets of the Company or creating a trust of
any kind or a fiduciary relationship of any kind between the Company and any
such person.
11.10 DEFERRAL PERMITTED. Payment of cash or distribution of any
shares of Common Stock to which a participant is entitled under any
Incentive shall be made as provided in the Incentive. Payment may be
deferred at the option of the participant if provided in the Incentive.
11.11 AMENDMENT OF THE PLAN. The Board may amend or discontinue the
Plan at any time. However, no such amendment or discontinuance shall,
subject to adjustment under Section 11.6, (a) change or impair, without the
consent of the recipient, an Incentive previously granted, (b) materially
increase the maximum number of shares of Common Stock which may be issued to
all participants under the Plan, (c) materially increase the benefits that
may be granted under the Plan, (d) materially modify the requirements as to
eligibility for participation in the Plan, or (e) materially increase the
benefits accruing to participants under the Plan. 11.12 Immediate
Acceleration of Incentives. Notwithstanding any provision in this Plan or in
any Incentive to the contrary, (a) the restrictions on all shares of
restricted stock award shall lapse immediately, (b) all outstanding options
and SARs will become exercisable immediately, and (c) all performance shares
shall be deemed to be met and payment made immediately, if subsequent to the
date that the Plan is approved by the Board
G-7
<PAGE>
of Directors of the Company, any of the following events occur unless
otherwise determined by the Board and a majority of the Continuing Directors
(as defined below).
a) any person or group of persons becomes the beneficial owner of
thirty percent (30%) or more of any equity security of the Company
entitled to vote for the election of directors;
b) a majority of the members of the Board is replaced within the
period of less than two (2) years by directors not nominated and approved
by the Board; or
c) the stockholders of the Company approve an agreement to merge or
consolidate with or into another corporation or an agreement to sell or
otherwise dispose of all or substantially all of the Company's assets
(including a plan of liquidation).
For purposes of this Section 11.12, beneficial ownership by a person or
group of persons shall be determined in accordance with Regulation 13D (or any
similar successor regulation) promulgated by the Securities and Exchange
Commission pursuant to the 1934 Act. Beneficial ownership of more than thirty
percent (30%) of an equity security may be established by any reasonable method,
but shall be presumed conclusively as to any person who files a Schedule 13D
report with the Securities and Exchange Commission reporting such ownership. If
the restrictions and forfeitability periods are eliminated by reason of
provision (1), the limitations of this Plan shall not become applicable again
should the person cease to own thirty percent (30%) or more of any equity
security of the Company.
For purposes of this Section 11.12, "Continuing Directors" are directors (a)
who were in office prior to the time any of provisions (1), (2) or (3) occurred
or any person publicly announced an intention to acquire twenty percent (20%) or
more of any equity security of the Company, (b) directors in office for a period
of more than two years, and (c) directors nominated and approved by the
Continuing Directors.
11.13 DEFINITION OF FAIR MARKET VALUE. Whenever "Fair Market Value" of
Common Stock shall be determined for purposes of this Plan, it shall be
determined by reference to the last sale price of a share of Common Stock on
the principal United States Securities Exchange registered under the 1934
Act on which the Common Stock is listed (the "Exchange"), or, on the
National Association of Securities Dealers, Inc. Automatic Quotation System
(including the National Market System) ("NASDAQ") on the applicable date. If
the Exchange or NASDAQ is closed for trading on such date, or if the Common
Stock does not trade on such date, then the last sale price used shall be
the one on the date the Common Stock last traded on the Exchange or NASDAQ.
If the Common Stock is not listed on an Exchange or on NASDAQ, "Fair Market
Value" shall be determined by the Board of Directors of the Company, which
such valuation determination shall be conclusive.
G-8
<PAGE>
ANNEX H
FORM OF
LAKES GAMING, INC.
1998 DIRECTOR STOCK OPTION PLAN
1. PURPOSE. The purpose of the Lakes Gaming, Inc. 1998 Director Stock
Option Plan (the "Plan") is to advance the interests of Lakes Gaming, Inc. (the
"Company") and its shareholders by encouraging increased share ownership by
members of the Board of Directors of the Company (the "Board") who are not
employees of the Company or any of its subsidiaries, in order to promote
long-term shareholder value through continuing ownership of the Company's Common
Stock.
2. ADMINISTRATION. The plan shall be administered by the Board. The Board
shall have all the powers vested in it by the terms of the Plan, such powers to
include authority (within the limitations described herein) to prescribe the
form of the agreement embodying awards of nonqualified stock options made under
the Plan ("Options"). The Board shall, subject to the provisions of the Plan,
grant Options under the Plan and shall have the power to construe the Plan, to
determine all questions arising thereunder and to adopt and amend such rules and
regulations for the administration of the Plan as it may deem desirable. Any
decisions of the Board in the administration of the Plan, as described herein,
shall be final and conclusive. The Board may act only by a majority of its
members in office, except that the members thereof may authorize any one or more
of their number or any other officer of the Company to execute and deliver
documents on behalf of the Board. No member of the Board shall be liable for
anything done or omitted to be done by him or by any other member of the Board
in connection with the Plan, except for his own willful misconduct or as
expressly provided by statute.
3. PARTICIPATION. Each member of the Board who is a non-employee director
(a "Non-Employee Director") as such term is defined in Rule 16b-3 of the
Securities Exchange Act of 1934, as amended, shall be eligible to receive an
Option in accordance with Paragraph 5 below.
4. AWARDS UNDER THE PLAN.
(a) Awards under the Plan shall include only Options, which are rights
to purchase common stock of the Company having a par value of $0.01 per
share (the "Common Stock"). Such Options are subject to the terms,
conditions and restrictions specified in Paragraph 5 below.
(b) There may be issued under the Plan pursuant to the exercise of
Options an aggregate of not more than 200,000 shares of Common Stock,
subject to adjustment as provided in Paragraph 6 below. If any Option is
canceled, terminates or expires unexercised, in whole or in part, any shares
of Common Stock that would otherwise have been issuable pursuant thereto
will be available for issuance under new Options.
(c) A Non-Employee Director to whom an Option is granted (and any person
succeeding to such a Non-Employee Director's rights pursuant to the Plan)
shall have no rights as a shareholder with respect to any Common Stock
issuable pursuant to any such Option until the date of the issuance of a
stock certificate to him for such shares. Except as provided in Paragraph 6
below, no adjustment shall be made for dividends, distributions or other
rights (whether ordinary or extraordinary, and whether in cash, securities
or other property) for which the record date is prior to the date such stock
certificate is issued.
5. NONQUALIFIED STOCK OPTIONS. Each Option granted under the Plan shall be
evidenced by an agreement in such form as the Board shall prescribe from time to
time in accordance with the Plan and shall comply with the following terms and
conditions:
H-1
<PAGE>
(a) The Option exercise price shall be the "Fair Market Value" (as
herein defined) of the Common Stock subject to such Option on the date the
Option is granted. Fair Market Value shall be the closing sales price of a
share of Common Stock on the date of grant as reported on the Nasdaq
National Market (the "Market") or, if the Market is closed on that date, on
the last preceding date on which the Market was open for trading, but in no
event will such Option exercise price be less than the par value of the
Common Stock.
(b) The Option shall not be transferable by the optionee otherwise than
by will or the laws of descent and distribution, and shall be exercisable
during his lifetime only by him.
(c) Options shall not be exercisable:
(i) before the expiration of one year from the date they are granted
and after the expiration of ten years from the date they are granted, and
may be exercised during such period as follows: twenty (20%) of the total
number of shares covered by the Option shall become exercisable each year
beginning with the first anniversary of the date they are granted,
provided, however, that the Board of Directors can approve an accelerated
vesting schedule based upon the length of time that a Non-Employee
Director has served in such capacity prior to the adoption of this Plan.
Notwithstanding anything to the contrary herein, an Option shall
automatically become immediately exercisable in full (i) in the event of
the death of a Non-Employee Director; (ii) upon the removal of the
Non-Employee Director from the Board without cause; (iii) in the event
the Non-Employee Director is not re-nominated or re-elected as a
Director; (iv) in the event of a "change in control" of the Company, as
defined in any existing agreements between the Company and its senior
officers; or (v) in the event the Non-Employee Director voluntarily
resigns from the Board, if a majority of the Board (excluding the
Non-Employee Director) agrees to accelerate the vesting of the Option and
determines in good faith that such acceleration is in the best interest
of the Company;
(ii) unless payment in full is made for the shares of Common Stock
being acquired thereunder at the time of exercise. Such payment shall be
made in United States dollars by cash or check, or in lieu thereof, by
tendering to the Company Common Stock owned by the person exercising the
Option and having a Fair Market Value equal to the cash exercise price
applicable to such Option, or by a combination of United States dollars
and Common Stock as aforesaid; and
(iii) unless the person exercising the Option has been at all times
during the period beginning with the date of grant of the Option and
ending on the date of such exercise, a Non-Employee Director of the
Company, except that
(A) if such person shall cease to be such a Non-Employee Director
for reasons other than death, while holding an Option that has not
expired and has not been fully exercised, such person may, at any
time within three years of the date he ceased to be a Non-Employee
Director (but in no event after the Option has expired under the
provisions of subparagraph 5(c)(i) above), exercise the Option with
respect to any Common Stock as to which he could have exercised on
the date he ceased to be such a Non-Employee Director; or
(B) if any person to whom an Option has been granted shall die
holding an Option that has not expired and has not been fully
exercised, his executors, administrators, heirs or distributees, as
the case may be, may, at any time within one year after the date of
such death (but in no event after the Option has expired under the
provisions of subparagraph 5(c)(i) above), exercise the Option with
respect to any shares subject to the Option.
(d) Each Non-Employee Director shall receive an Option to purchase
12,500 shares of Common Stock upon becoming a director of the Company.
H-2
<PAGE>
(e) In addition to the initial option grants provided for in paragraph
5(d) above, non-employee directors and former non-employee directors may be
granted, at the discretion of the Board, additional options to purchase
Common Stock of Company. Such options shall contain such terms and
provisions as the Board determines at the time of the grant.
6. DILUTION AND OTHER ADJUSTMENTS. In the event of any change in the
outstanding Common Stock of the Company by reason of any stock split, stock
dividend, split-up, split-off, spin-off, recapitalization, merger,
consolidation, rights offering, reorganization, combination or exchange of
shares, a sale by the Company of all or part of its assets, any distribution to
shareholders other than a normal cash dividend, or other extraordinary or
unusual event, the number or kind of shares that may be issued under the Plan
pursuant to subparagraph 4(b) above, and the number or kind of shares subject
to, and the Option price per share under, all outstanding Options shall be
automatically adjusted so that the proportionate interest of the participant
shall be maintained as before the occurrence of such event; such adjustment in
outstanding Options shall be made without change in the total Option exercise
price applicable to the unexercised portion of such Options and with a
corresponding adjustment in the Option exercise price per share, and such
adjustment shall be conclusive and binding for all purposes of the Plan.
7. MISCELLANEOUS PROVISIONS.
(a) Except as expressly provided for in the Plan, no Non-Employee
Director or other person shall have any claim or right to be granted an
Option under the Plan. Neither the Plan nor any action taken hereunder shall
be construed as giving any Non-Employee Director any right to be retained in
the service of the Company.
(b) A participant's rights and interest under the Plan may not be
assigned or transferred, hypothecated or encumbered in whole or in part
either directly or by operation of law or otherwise (except in the event of
a participant's death, by will or the laws of descent and distribution),
including, but not by way of limitation, execution, levy, garnishment,
attachment, pledge, bankruptcy or in any other manner, and no such right or
interest of any participant in the Plan shall be subject to any obligation
or liability of such participant.
(c) Common Stock shall not be issued hereunder unless counsel for the
Company shall be satisfied that such issuance will be in compliance with
applicable federal, state, local and foreign securities, securities exchange
and other applicable laws and requirements.
(d) It shall be a condition to the obligation of the Company to issue
Common Stock upon exercise of an Option, that the participant (or any
beneficiary or person entitled to act under subparagraph 5(c)(iii)(B) above)
pay to the Company, upon its demand, such amount as may be requested by the
Company for the purpose of satisfying any liability to withhold federal,
state, local or foreign income or other taxes. If the amount requested is
not paid, the Company may refuse to issue such Common Stock.
(e) The expenses of the Plan shall be borne by the Company.
(f) By accepting any Option or other benefit under the Plan, each
participant and each person claiming under or through him shall be
conclusively deemed to have indicated his acceptance and ratification of,
and consent to, any action taken under the Plan by the Company or the Board.
(g) The appropriate officers of the Company shall cause to be filed any
reports, returns or other information regarding Options hereunder or any
Common Stock issued pursuant hereto as may be required by Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended, or any other
applicable statute, rule or regulation.
8. AMENDMENT OR DISCONTINUANCE. The Plan may be amended at any time and
from time to time by the Board as the Board shall deem advisable; provided,
however, that no amendment shall become effective without shareholder approval
if such shareholder approval is required by law, rule or regulation,
H-3
<PAGE>
and in no event shall the Plan be amended more than once every six months, other
than to comport with changes in the Internal Revenue Code of 1986, as amended,
the Employee Retirement Income Security Act or the rules thereunder. No
amendment of the Plan shall materially and adversely affect any right of any
participant with respect to any Option theretofore granted without such
participant's written consent.
9. TERMINATION. This Plan shall terminate upon the earlier of the
following dates or events to occur upon the adoption of a resolution of the
Board terminating the Plan or ten years from the date the Plan is initially
approved and adopted by the shareholders of the Company. No termination of the
Plan shall materially and adversely affect any of the rights or obligations of
any person, without his consent, under any Option theretofore granted under the
Plan.
10. EFFECTIVE DATE OF PLAN. The Plan will become effective as of the
effective date of the "Grand Distribution" as such term is defined with
reference to the Agreement and Plan of Merger by and among Hilton Hotels
Corporation, Park Place Entertainment Corporation, Gaming Acquisition
Corporation, Lakes Gaming, Inc. and Grand Casinos, Inc. Dated as of June 30,
1998 and Distribution Agreement by and between Grand Casinos, Inc. and Lakes
Gaming, Inc.
H-4
<PAGE>
ANNEX I
FORM OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PARK PLACE ENTERTAINMENT CORPORATION
The Corporation was incorporated under the name "Gaming Co., Inc." by the
filing of its original Certificate of Incorporation with the Secretary of State
of the State of Delaware on June 10, 1998. This Amended and Restated Certificate
of Incorporation of the Corporation, which both restates and amends the
provisions of the Corporation's Certificate of Incorporation (as amended, this
"Certificate of Incorporation"), was duly adopted in accordance with the
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware (the "DGCL") and by the unanimous written consent of the
Corporation's stockholders in accordance with Section 228 of the DGCL. The
Certificate of Incorporation of the Corporation is hereby amended and restated
to read in its entirety as follows:
ARTICLE I.
The name of the corporation (which is hereinafter referred to as "the
Corporation") is Park Place Entertainment Corporation.
ARTICLE II.
The address of the registered office of the Corporation in the State of
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle,
State of Delaware 19805. The name of the Corporation's registered agent is
Corporation Service Company.
ARTICLE III.
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the DGCL.
ARTICLE IV.
SECTION 4.1. CAPITAL STOCK. The total number of shares of all classes of
stock which the Corporation shall have the authority to issue is Five Hundred
Million (500,000,000) shares consisting of Four Hundred Million (400,000,000)
shares of common stock, par value $.01 per share (the "Common Stock"), and One
Hundred Million (100,000,000) shares of preferred stock, par value $.01 per
share (the "Preferred Stock").
SECTION 4.2. COMMON STOCK. The shares of authorized Common Stock of the
Corporation shall be identical in all respects and shall have equal rights and
privileges.
SECTION 4.3. PREFERRED STOCK. The Board of Directors shall have authority
to issue the shares of Preferred Stock from time to time on such terms as it may
determine, and to divide the Preferred Stock into one or more series and in
connection with the creation of any such series to fix by the resolution or
resolutions providing for the issue of shares thereof the voting powers, full or
limited, or no voting powers, the designations, powers and relative,
participating, optional, or other special rights of such series, and
qualifications, limitations, or restrictions thereof, to the full extent now or
hereafter permitted by law.
SECTION 4.4. VOTING POWER FOR HOLDERS OF COMMON AND PREFERRED
STOCK. Except as otherwise provided in this Certificate of Incorporation, each
holder of Common Stock shall be entitled to one vote for each share of Common
Stock held by him or her on all matters submitted to stockholders for a vote and
each holder of any series of Preferred Stock shall be entitled to such number of
votes for each share held by him or her as may be specified herein or in the
Certificate of Designation in respect thereof.
I-1
<PAGE>
ARTICLE V.
The amount of the authorized stock of the Corporation of any class or
classes may be increased or decreased by the affirmative vote of the holders of
a majority of the stock of the Corporation entitled to vote generally in the
election of Directors, voting together as a single class.
ARTICLE VI.
SECTION 6.1. NUMBER, ELECTION AND TERMS OF DIRECTORS. Subject to the
rights of the holders of any series of Preferred Stock to elect additional
directors under specified circumstances, the number of the directors of the
Corporation (each, a "Director" and collectively, the "Directors") which shall
constitute the entire board shall be not less than one nor more than 20. Within
such limits, the exact number of directors constituting the entire board shall
be fixed from time to time exclusively pursuant to a resolution adopted by a
majority of the total number of Directors which the Corporation would have if
there were no vacancies (the "Whole Board"). The Directors, other than those who
may be elected by the holders of any series of Preferred Stock, shall be
divided, with respect to the time for which they severally hold office, into
three classes, as nearly equal in number as reasonably possible, with the term
of office of the first class to expire at the 2000 annual meeting of
stockholders, the term of office of the second class to expire at the 2001
annual meeting of stockholders and the term of office of the third class to
expire at the 2002 annual meeting of stockholders, with each Director to hold
office, subject to any qualifications or approvals required under any Gaming
Laws (as hereinafter defined in Article X), until his or her successor shall
have been duly elected and qualified. At each annual meeting of stockholders of
the Corporation, (i) Directors elected to succeed those Directors whose terms
then expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election, with each
Director to hold office until his or her successor shall have been duly elected
and qualified, and (ii) if authorized by a resolution of the Board of Directors,
Directors may be elected to fill any vacancy on the Board of Directors,
regardless of how such vacancy shall have been created.
SECTION 6.2. STOCKHOLDER NOMINATION OF DIRECTOR CANDIDATES AND INTRODUCTION
OF BUSINESS. Advance notice of stockholder nominations for the election of
Directors and advance notice of business to be brought by stockholders before an
annual or special meeting of the stockholders shall be given in the manner
provided in the By-Laws of the Corporation.
SECTION 6.3. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Subject to
applicable law and the rights of the holders of any series of Preferred Stock to
elect additional directors under specified circumstances, and unless the Board
of Directors otherwise determines, vacancies resulting from death, resignation,
retirement, disqualification, removal from office or other cause, and newly
created directorships resulting from any increase in the authorized number of
Directors, may be filled only by the affirmative vote of a majority of the
remaining Directors, though less than a quorum of the Board of Directors.
Subject to the obtaining of approval by any Gaming Authority required before
such person can become, or serve as, a Director, any Director so chosen pursuant
to the preceding sentence shall hold office for the remainder of the full term
expiring at the annual meeting of the stockholders at which the term of office
of the class to which such Director has been elected expires and until such
Director's successor shall have been duly elected and qualified. No decrease in
the number of authorized Directors constituting the Board of Directors shall
shorten the term of any incumbent Director. For purposes of this Certificate of
Incorporation, an individual shall be qualified to serve as a Director only for
so long as such individual is determined to be, and continues to be, qualified
by all applicable Gaming Authorities (as hereinafter defined in Article X) and
under all applicable Gaming Laws, as required, and in the event such individual
does not continue to be so qualified, such individual shall be disqualified and
shall cease to be a Director.
SECTION 6.4. REMOVAL. Subject to the rights of the holders of any series
of Preferred Stock to elect Directors under specified circumstances, any
Director may be removed from office, but only "for cause," and only by the
affirmative vote of the holders of at least 75% of the voting power of all
shares of the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together
I-2
<PAGE>
as a single class. For the purposes of this Section 6.4, "for cause" shall mean
(i) the willful and continuous failure of a Director to substantially perform or
observe his or her duties to the Corporation (other than any such failure
resulting from physical or mental incapacity of such Director), or (ii) the
willful engagement by a Director in gross misconduct which is materially and
demonstrably injurious to the Corporation.
SECTION 6.5. ELECTION BY BALLOTS. Election of Directors need not be by
ballot unless the By-Laws of the Corporation shall so provide.
SECTION 6.6. CONSIDERATION. Directors and officers, in exercising their
respective powers with a view to the interests of the Corporation, may consider:
(A) the interests of the Corporation's employees, suppliers, creditors and
customers;
(B) the economy of the state and nation;
(C) the interests of the community and of society; and
(D) the long-term as well as short-term interests of the Corporation and its
stockholders, including the possibility that these interests may be best served
by the continued independence of the Corporation.
This Section 6.6 does not create or authorize any causes of action against
the Corporation or its Directors or officers.
ARTICLE VII.
Subject to the rights of the holders of any series of Preferred Stock, any
action required or permitted to be taken by the stockholders of the Corporation
must be effected at a duly called annual or special meeting of such holders and
may not be effected by any consent in writing by such holders. Subject to the
rights of the holders of any series of Preferred Stock, special meetings of
stockholders of the Corporation may be called only by the Chairman of the Board
or by the Board of Directors pursuant to a resolution adopted by a majority of
the Whole Board.
ARTICLE VIII.
The Board of Directors shall have power to make, alter, amend and repeal the
By-Laws of the Corporation. Any By-Laws made by the Directors under the powers
conferred hereby may be altered, amended or repealed by the Directors or by the
stockholders. Notwithstanding the foregoing and anything contained in this
Certificate of Incorporation to the contrary, none of the provisions of the
By-Laws shall be altered, amended or repealed by the stockholders without the
affirmative vote of the holders of at least 75% of the voting power of all the
shares of the Corporation entitled to vote generally in the election of
Directors, voting together as a single class.
ARTICLE IX.
SECTION 9.1. VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS.
(A) HIGHER VOTE FOR CERTAIN BUSINESS COMBINATIONS. In addition to any
affirmative vote required by law or this Certificate of Incorporation, and
except as otherwise expressly provided in Section 9.2:
(i) any merger or consolidation of the Corporation or any Subsidiary (as
hereinafter defined) with (a) any Interested Stockholder (as hereinafter
defined) or (b) any other corporation (whether or not itself an Interested
Stockholder) which is, or after such merger or consolidation would be, an
Affiliate (as hereinafter defined) of an Interested Stockholder; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder or any Affiliate of any Interested
I-3
<PAGE>
Stockholder of any assets of the Corporation or any Subsidiary having an
aggregate Fair Market Value (as hereinafter defined) of $20,000,000 or more;
or
(iii) the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested Stockholder or any Affiliate
of any Interested Stockholder in exchange for cash, securities or other
property (or a combination thereof) having an aggregate Fair Market Value of
$20,000,000 or more; or
(iv) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Stockholder or any Affiliate of any Interested Stockholder; or
(v) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an
Interested Stockholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any class of
equity or convertible securities of the Corporation or any Subsidiary which
is directly or indirectly owned by any Interested Stockholder or any
Affiliate of any Interested Stockholder; shall require the affirmative vote
of the holders of at least 75% of the voting power of the then outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors (for the purposes of this Article IX, the "Voting
Stock"), voting together as a single class. Such affirmative vote shall be
required notwithstanding the fact that no vote may be required, or that a
lesser percentage may be specified, by law or in any agreement with any
national securities exchange or otherwise.
(B) DEFINITION OF "BUSINESS COMBINATION." The term "Business Combination" as
used in this Article IX shall mean any transaction which is referred to in any
one or more of clauses (i) through (v) of paragraph (A) of this Section 9.1.
SECTION 9.2. WHEN HIGHER VOTE IS NOT REQUIRED. The provisions of Section
9.1 shall not be applicable to any particular Business Combination, and such
Business Combination shall require only such affirmative vote as is required by
law or in any agreement with any national securities exchange or otherwise and
any other provision of this Certificate of Incorporation, if all of the
conditions specified in either of the following paragraphs (A) and (B) are met:
(A) APPROVAL BY DISINTERESTED DIRECTORS. The Business Combination shall have
been approved by a majority of the Disinterested Directors (as hereinafter
defined).
(B) PRICE AND PROCEDURE REQUIREMENTS. All of the following conditions shall
have been met:
(i) The aggregate amount of the cash and the Fair Market Value as of the
date of the consummation of the Business Combination of consideration other
than cash to be received per share by holders of Common Stock in such
Business Combination shall be at least equal to the higher of the following:
(a) if applicable, the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid
by the Interested Stockholder for any shares of Common Stock acquired by
it (1) within the two-year period immediately prior to the first public
announcement of the proposal of the Business Combination (the
"Announcement Date") or (2) in the transaction in which it became an
Interested Stockholder, whichever is higher; and
(b) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested Stockholder
became an Interested Stockholder (such later date is referred to in this
Article IX as the "Determination Date"), whichever is higher.
(ii) The aggregate amount of the cash and the Fair Market Value as of
the date of the consummation of the Business Combination of consideration
other than cash to be received per share
I-4
<PAGE>
by holders of shares of any other class of outstanding Voting Stock, (other
than Excluded Preferred Stock, as hereinafter defined) shall be at least
equal to the highest of the following (it being intended that the provisions
of this paragraph (B) (ii) shall be required to be met with respect to every
class of outstanding Voting Stock (other than Excluded Preferred Stock),
whether or not the Interested Stockholder has previously acquired any shares
of a particular class of Voting Stock):
(a) if applicable, the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid
by the Interested Stockholder for any shares of such class of Voting
Stock acquired by it (1) within the two-year period immediately prior to
the Announcement Date or (2) in the transaction in which it became an
Interested Stockholder, whichever is higher;
(b) if applicable, the highest preferential amount per share to which
the holders of shares of such class of Voting Stock are entitled in the
event of any voluntary or involuntary liquidation, dissolution or winding
up of the Corporation; and
(c) the Fair Market Value per share of such class of Voting Stock on
the Announcement Date or on the Determination Date, whichever is higher.
(iii) The consideration to be received by holders of a particular class
of outstanding Voting Stock (including Common Stock and other than Excluded
Preferred Stock) shall be in cash or in the same form as the Interested
Stockholder has previously paid for shares of such class of Voting Stock. If
the Interested Stockholder has paid for shares of any class of Voting Stock
with varying forms of consideration, the form of consideration for such
class of Voting Stock shall be either cash or the form used to acquire the
largest number of shares of such class of Voting Stock previously acquired
by it. The price determined in accordance with paragraphs (B)(i) and (B)(ii)
of this Section 9.2 shall be subject to appropriate adjustment in the event
of any stock dividend, stock split, combination of shares or similar event.
(iv) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination: (a)
except as approved by a majority of the Disinterested Directors, there shall
have been no failure to declare and pay at the regular date therefor any
full quarterly dividends (whether or not cumulative) on any outstanding
Preferred Stock; (b) there shall have been (1) no reduction in the annual
rate of dividends paid on the Common Stock (except as necessary to reflect
any subdivision of the Common Stock), except as approved by a majority of
the Disinterested Directors, and (2) an increase in such annual rate of
dividends as necessary to reflect any reclassification (including any
reverse stock split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of outstanding
shares of the Common Stock, unless the failure so to increase such annual
rate is approved by a majority of the Disinterested Directors; and (c) such
Interested Stockholder shall have not become the beneficial owner of any
additional shares of Voting Stock except as part of the transaction which
results in such Interested Stockholder becoming an Interested Stockholder.
(v) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the benefit
directly or indirectly (except proportionately as a stockholder or in the
ordinary course of the Corporation's business) of any loans, advances,
guarantees, pledges or other financial assistance or any tax credits or
other tax advantages provided by the Corporation, whether in anticipation of
or in connection with such Business Combination or otherwise.
(vi) A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the rules and regulations
thereunder (or any subsequent provisions replacing such act, rules or
regulations) shall be mailed to public stockholders of the Corporation at
least 30 days prior to
I-5
<PAGE>
the consummation of such Business Combination (whether or not such proxy or
information statement is required to be mailed pursuant to such Act or
subsequent provisions).
SECTION 9.3. CERTAIN DEFINITIONS. For the purposes of this Article IX:
(A) "Affiliate" or "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the rules and regulations under the Exchange Act.
(B) A person shall be a "beneficial owner" of any Voting Stock:
(i) which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; or
(ii) which such person or any of its Affiliates or Associates has (a)
the right to acquire (whether such right is exercisable immediately or only
after the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (b) the right to vote pursuant to any
agreement, arrangement or understanding; or
(iii) which are beneficially owned, directly or indirectly, by any other
person with which such person or any of its Affiliates or Associates has any
agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of Voting Stock.
(C) In the event of any Business Combination in which the Corporation
survives, the phrase "consideration other than cash to be received" as used in
paragraphs (B)(i) and (B)(ii) of Section 9.2 shall include the shares of Common
Stock and/or the shares of any other class of outstanding Voting Stock retained
by the holders of such shares.
(D) "Disinterested Director" means any member of the Board of Directors of
the Corporation who is unaffiliated with the Interested Stockholder and was a
member of the Board of Directors prior to the time that the Interested
Stockholder became an Interested Stockholder, and any Director who is thereafter
appointed to fill any vacancy on such Board or who is elected and, in either
event, who is unaffiliated with the Interested Stockholder and in connection
with his or her initial assumption of office is recommended for appointment or
election by a majority of Disinterested Directors then on the Board of
Directors.
(E) "Excluded Preferred Stock" means any series of Preferred Stock with
respect to which the Certificate of Designation creating such series expressly
provides that the provisions of this Article IX shall not apply.
(F) "Fair Market Value" means: (i) in the case of stock, the highest closing
sale price during the 30-day period immediately preceding the date in question
of a share of such stock on the Composite Tape for New York Stock Exchange
Listed Stocks, or if such stock is not quoted on the Composite Tape, on the New
York Stock Exchange, or, if such stock is not listed on such exchange, on the
principal United States securities exchange registered under the Exchange Act on
which such stock is listed, or, if such stock is not listed on any such
exchange, the highest closing bid quotation with respect to a share of such
stock during the 30-day period preceding the date in question on the Nasdaq
National Market or any system then in use, or if no such quotations are
available, the fair market value on the date in question of a share of such
stock as determined by the Board of Directors in good faith; and (ii) in the
case of property other than cash or stock, the fair market value of such
property on the date in question as determined by the Board of Directors in good
faith.
(G) "Interested Stockholder" means any person (other than the Corporation or
any Subsidiary, as hereinafter defined) who or which:
(i) is the beneficial owner, directly or indirectly, of more than 10% of
the voting power of the outstanding Voting Stock; or
I-6
<PAGE>
(ii) is an Affiliate of the Corporation and at any time within the
two-year period immediately prior to the date in question was the beneficial
owner, directly or indirectly, of 10% or more of the voting power of the
then outstanding Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares of
Voting Stock which were at any time within the two-year period immediately
prior to the date in question beneficially owned by any Interested
Stockholder, if such assignment or succession shall have occurred in the
course of a transaction or series of transactions not involving a public
offering within the meaning of the Securities Act of 1933, as amended.
For the purposes of determining whether a person is an Interested
Stockholder pursuant to paragraph (G) of this Section 9.3, the number of shares
of Voting Stock deemed to be outstanding shall include shares deemed owned by
such person through application of paragraph (B) of this Section 9.3 but shall
not include any other shares of Voting Stock owned by any other person which may
be issuable pursuant to any agreement, arrangement or understanding, or upon
exercise of conversion rights, warrants or options, or otherwise.
(H) A "person" means any individual, firm, corporation, limited liability
company, trust or other entity.
(I) "Subsidiary" means any corporation of which a majority of any class of
equity security is owned, directly or indirectly, by the Corporation; PROVIDED,
HOWEVER, that for the purposes of the definition of Interested Stockholder set
forth in paragraph (G) of this Section 9.3, the term "Subsidiary" shall mean
only a corporation of which a majority of each class of equity security is
owned, directly or indirectly, by the Corporation.
SECTION 9.4. POWERS OF THE BOARD OF DIRECTORS. A majority of the Whole
Board shall have the power and duty to determine for the purposes of this
Article IX, on the basis of information known to them after reasonable inquiry,
(A) whether a person is an Interested Stockholder, (B) the number of shares of
Voting Stock beneficially owned by any person, (C) whether a person is an
Affiliate or Associate of another, and (D) whether the assets which are the
subject of any Business Combination have, or the consideration to be received
for the issuance or transfer of securities by the Corporation or any Subsidiary
in any Business Combination has, an aggregate Fair Market Value of $20,000,000
or more. A majority of the Whole Board shall have the further power to interpret
all of the terms and provisions of this Article IX.
SECTION 9.5. NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED
STOCKHOLDERS. Nothing contained in this Article IX shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by law.
ARTICLE X.
(A) If the Corporation becomes, and so long as it remains, either a holding
company or an intermediary holding company subject to regulation under any
Gaming Laws, all Securities (as hereinafter defined) of the Corporation shall be
held subject to the applicable provisions of such Gaming Laws. If any person (as
hereinafter defined) which beneficially owns Securities of the Corporation (i)
is requested or required pursuant to any Gaming Law to appear before, or submit
to the jurisdiction of, or provide information to, any Gaming Authority and
either refuses to do so or otherwise fails to comply with such request or
requirement within a reasonable period of time or (ii) is determined or shall
have been determined by any Gaming Authority not to be suitable or qualified
with respect to the beneficial ownership of Securities of the Corporation, then
at the election of the Corporation (unless otherwise required by any Gaming
Authority or Gaming Law): (a) each such person owning such Securities in the
Corporation hereby agrees to sell to the Corporation and the Corporation shall
have the absolute right in its sole discretion to repurchase, any or all of the
Securities of the Corporation beneficially owned by such person at a price
determined pursuant to paragraph (C) hereof; or (b) each such person owning such
I-7
<PAGE>
Securities in the Corporation hereby agrees to otherwise dispose of his or her
interest in the Corporation within the 120 day period commencing on the date
which the Corporation receives notice from a Gaming Authority of such holder's
unsuitability or disqualification (or an earlier time if so required by a Gaming
Authority or any Gaming Law) and the Corporation shall have no obligation to
repurchase, any or all of the Securities of the Corporation beneficially owned
by such person. The operation of this Article X shall not be stayed by an appeal
from a determination of any Gaming Authority.
(B) If the Corporation intends to repurchase Securities beneficially owned
by any person referred to in clause (i) or (ii) of paragraph (A) hereof, it
shall notify the person in writing of such intention, specifying the Securities
to be repurchased, the date, time and place when such repurchase will be
consummated (the "Repurchase Date"), which date in no event will be earlier than
three business days after the date of such notice, and the price at which such
Securities will be repurchased (it being sufficient for the purposes of this
Article X for the Corporation to indicate generally that the price will be
determined in accordance with paragraph (C) hereof). If the Corporation gives
the notice provided for by the preceding sentence (the "Repurchase Notice"),
such notice shall be deemed to constitute a binding agreement on the part of the
Corporation to repurchase, and on the part of the person notified to sell, the
Securities referred to in such Notice in accordance with this Article X.
Following the Repurchase Date (or an earlier date if required by any Gaming
Authority or Gaming Law), no dividends will be payable on and no voting rights
will be available to the holders of any Securities covered by such Repurchase
Notice which has not been duly delivered by the holder thereof for repurchase by
the Corporation. If, following such Repurchase Date, any Securities with respect
to which a Repurchase Notice has been given have not been duly delivered by the
holder thereof for repurchase by the Corporation, the Corporation shall deposit
in escrow or otherwise hold in trust for the benefit of such holder an amount
equal to the aggregate Market Price (as hereinafter defined) of the stock to be
repurchased except that to the extent New Shares (as hereinafter defined) are to
be repurchased and the Purchase Price (as hereinafter defined) thereof shall
have been publicly disclosed or otherwise made available to the Corporation, the
amount deposited in escrow or otherwise segregated with respect to such New
Shares may be the lesser of the Market Price thereof on the date of the
Repurchase Notice and the Purchase Price thereof. The establishment of such an
account shall in no way alter the amount otherwise payable to any person
pursuant to this Article X. No interest shall be paid on or accrue with respect
to any amount so deposited or held.
(C) (i) In the event that the person to whom a Repurchase Notice is directed
pursuant to paragraph (B) hereof has acquired beneficial ownership of Securities
within the 24-month period terminating on the date of such Notice ("New
Shares"), the price at which the Corporation shall repurchase such New Shares as
are covered by the Repurchase Notice shall be the lesser of the Market Price
thereof on the date of such Notice and the Purchase Price thereof.
(ii) In the event that the person to whom a Repurchase Notice is
directed pursuant to paragraph (B) hereof has acquired beneficial ownership
of any or all of his or her Securities prior to the 24-month period
terminating on the date of such Notice ("Old Shares"), the price at which
the Corporation shall repurchase such Old Shares as are covered by the
Repurchase Notice shall be the Market Price thereof on the date of the
Repurchase Notice.
(iii) The Corporation shall have the option in its sole discretion of
designating which of the Securities beneficially owned by any person
referred to in clause (i) or (ii) of paragraph (iv) (A) hereof are subject
to the Repurchase Notice and, for purposes hereof, it shall be sufficient
for the Corporation to indicate generally that Securities shall be
repurchased based on the order in which they were purchased or based on the
reverse of such order.
(iv) Any person to whom a Repurchase Notice is given pursuant to the
provisions of this Article shall have the burden of establishing to the
satisfaction of the Corporation the dates on which and prices at which such
person acquired the Securities subject to such Notice.
(D) For the purposes of this Article X:
I-8
<PAGE>
(1) "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the rules and regulations under the
Exchange Act.
(2) "Gaming Authority" means any government, court, or federal, state,
local, international or foreign governmental, administrative or regulatory
or licensing body, agency, authority or official, which regulates, has
authority over, or otherwise asserts jurisdiction over gaming activities (or
proposed gaming activities), gaming operations or facilities conducted by
the Corporation or any of its subsidiaries or Affiliates, within any gaming
jurisdictions (domestic and foreign and the political subdivisions thereof),
whether now or hereafter existing, including, without limitation, the Nevada
Gaming Control Board, the Nevada Gaming Commission, the Clark County Liquor
and Gaming Licensing Board, the New Jersey Casino Control Commission, the
Louisiana Gaming Control Board, the Mississippi Gaming Commission and the
Missouri Gaming Commission.
(3) "Gaming Law" means any federal, state, local, international or
foreign law, statute, order, ordinance or interpretation pursuant to which
any Gaming Authority possesses or asserts regulatory or licensing authority
over gaming activities, operations or facilities within any gaming
jurisdictions (domestic and foreign and the political subdivisions thereof),
including any rules and regulations promulgated by such Gaming Authority
thereunder, including, without limitation, the Nevada Gaming Control Act,
the Clark County Code, the New Jersey Casino Control Act, the Louisiana
Riverboat Economic Development and Gaming Control Act, the Mississippi
Gaming Control Act and the Missouri Gaming Law.
(4) "Market Price" means the average of the last sale prices of a
Security on the Composite Tape for New York Stock Exchange Listed Stocks for
each of the 15 consecutive trading days (the "Valuation Period") commencing
16 trading days prior to the date in question; provided that if such
Security is not quoted on the Composite Tape, such average last sale price
shall be derived from the average last sale prices on the New York Stock
Exchange, or, if such Security is not listed on such exchange, on the
principal United States securities exchange registered under the Exchange
Act on which such Security is listed, or, if such Security is not listed on
any such exchange, the average of the closing bid quotations with respect to
such a Security during the Valuation Period on the Nasdaq National Market or
any system then in use, or if no such quotations are available, the fair
market value of such a Security on the date in question as determined by the
Board of Directors in good faith.
(5) A "person" means any individual, firm, corporation, limited
liability company, trust or other entity.
(6) A person shall be a "beneficial owner" of any Securities:
(i) which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; or
(ii) which such person or any of its Affiliates or Associates has (a)
the right to acquire (whether such right is exercisable immediately or only
after the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (b) the right to vote pursuant to any
agreement, arrangement or understanding; or
(iii) which are beneficially owned, directly or indirectly, by any other
Person with which such person or any of its Affiliates or Associates has any
agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any Securities.
(7) "Purchase Price" means the price paid to acquire a share of
Securities, exclusive of commissions, taxes and other fees and expenses,
adjusted for any stock split, stock dividend, combination of shares or
similar event.
I-9
<PAGE>
(8) "Securities" means any shares of capital stock, bonds, notes,
convertible debentures, warrants or other instruments that represent a share
in the Corporation or a debt owed by the Corporation.
(E) A majority of the Whole Board shall have the power and duty to determine
for the purposes of this Article X on the basis of information known to them
after reasonable inquiry, whether clause (i) or (ii) of paragraph (A) hereof
applies to any person who beneficially owns Securities of the Corporation such
that the Corporation shall have the right to repurchase shares of Securities
held by such person or require the disposition of such person's interest in the
Corporation pursuant to this Article X.
ARTICLE XI.
SECTION 11.1. ELIMINATION OF CERTAIN LIABILITY OF DIRECTORS. To the
fullest extent permitted by the DGCL, as the same exists or may hereafter be
amended, no Director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director. No amendment of this Certificate of Incorporation or repeal
of any of its provisions shall limit or eliminate any right or protection of a
Director of this Corporation under this Section 11.1 for or with respect to any
acts or omissions of such Director occurring prior to such amendment or repeal.
Section 11.2. INDEMNIFICATION. The Corporation shall indemnify (A) its
Directors and officers, whether serving the Corporation or at its request, any
other entity, to the full extent required or permitted by the DGCL now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (B) other employees and agents to such
extent as shall be expressly authorized by the Board of Directors or the By-Laws
and as permitted by law. The foregoing rights of indemnification shall not be
exclusive of any other rights to which those seeking indemnification may be
entitled. The Board of Directors may take such action as is necessary to carry
out these indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time such by-laws, resolutions or contracts
implementing such provisions or such further indemnification arrangements as may
be permitted by law. No amendment of this Certificate of Incorporation or repeal
of any of its provisions shall limit or eliminate the right to indemnification
provided under this Section 11.2 with respect to any acts or omissions occurring
prior to such amendment or repeal.
ARTICLE XII.
Subject to the following sentence and applicable Gaming Laws, the
Corporation reserves the right at any time and from time to time to amend,
alter, change or repeal any provision contained in this Certificate of
Incorporation or the By-Laws, and other provisions authorized by the laws of the
State of Delaware at the time in force may be added or inserted, in the manner
now or hereafter prescribed by law; and all rights, preferences and privileges
of whatsoever nature conferred upon stockholders, directors or any other persons
whomsoever by and pursuant to this Certificate of Incorporation in its present
form or as hereafter amended are granted subject to the right reserved in this
Article. Notwithstanding anything contained in this Certificate of Incorporation
to the contrary, the affirmative vote of the holders of at least 75% of the
voting power of all the then outstanding shares of the Corporation entitled to
vote generally in the election of Directors, voting together as a single class,
shall be required to alter, amend or repeal any provision under Article VI, VII,
VIII, IX, XI or XII contained in this Certificate of Incorporation.
I-10
<PAGE>
CERTIFICATE
IT IS CERTIFIED that the foregoing Amended and Restated Certificate of
Incorporation, which restates and further amends the Certificate of
Incorporation of Park Place Entertainment Corporation, was adopted by the Board
of Directors of Park Place Entertainment Corporation in a resolution and
declaring its advisability, in accordance with the provisions of Section 245 of
the DGCL, without a vote of the stockholders.
IN WITNESS WHEREOF, Park Place Entertainment Corporation has caused this
Amended and Restated Certificate of Incorporation to be signed by its
[ ] on this [ ] day of [ ], 1998.
Park Place Entertainment Corporation
/s/
----------------------------------------
Name:
Title:
I-11
<PAGE>
ANNEX J
FORM OF AMENDED AND RESTATED BY-LAWS
OF
PARK PLACE ENTERTAINMENT CORPORATION
ARTICLE I.
OFFICES AND RECORDS
SECTION 1.1. DELAWARE OFFICE. The principal office of Park Place
Entertainment Corporation (the "Corporation") in the State of Delaware shall be
located in the City of Wilmington, County of New Castle, and the name and
address of its registered agent is Corporation Service Company, 1013 Centre
Road, Wilmington, Delaware.
SECTION 1.2. OTHER OFFICES. The Corporation may have such other offices,
either within or without the State of Delaware, as the Board of Directors may
designate or as the business of the Corporation may from time to time require.
SECTION 1.3. BOOKS AND RECORDS. The books and records of the Corporation
may be kept outside the State of Delaware at such place or places as may from
time to time be designated by the Board of Directors.
ARTICLE II.
STOCKHOLDERS
SECTION 2.1. ANNUAL MEETING. The annual meeting of the stockholders of the
Corporation shall be held on such date and at such place and time as may be
fixed by resolution of the Board of Directors.
SECTION 2.2. SPECIAL MEETING. Subject to the rights of the holders of any
class or series of preferred stock, par value $.01 per share, of the Corporation
(any such stock being referred to herein as, the "Preferred Stock"), special
meetings of the stockholders of the Corporation may be called only by the
Chairman of the Board or by the Board of Directors pursuant to a resolution
adopted by a majority of the total number of directors which the Corporation
would have if there were no vacancies (the "Whole Board").
SECTION 2.3. PLACE OF MEETING. The Board of Directors or the Chairman of
the Board, as the case may be, may designate the place of meeting for any annual
meeting or for any special meeting of the stockholders called by the Board of
Directors or the Chairman of the Board. If no designation is so made, the place
of meeting shall be the principal office of the Corporation.
SECTION 2.4. NOTICE OF MEETING.
(A) Written or printed notice, stating the place, day and hour of the
meeting and the purpose or purposes for which the meeting is called, shall be
delivered by the Corporation not less than 10 days nor more than 60 days before
the date of the meeting, either personally or by mail, to each stockholder of
record entitled to vote at such meeting. If mailed, such notice shall be deemed
to be delivered when deposited in the United States mail with postage thereon
prepaid, addressed to the stockholder at his address as it appears on the stock
books of the Corporation. Such further notice shall be given as may be required
by law. Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting. Meetings may be held without notice if all
stockholders entitled to vote are present, or if notice is waived by those not
present in accordance with Section 7.4 of these By-Laws. Any previously
scheduled meeting of the stockholders may be postponed, and (unless the Amended
and Restated Certificate of Incorporation of the Corporation (as
J-1
<PAGE>
amended from time to time, the "Certificate of Incorporation") otherwise
provides) any special meeting of the stockholders may be canceled, by resolution
of the Board of Directors upon public notice given prior to the date previously
scheduled for such meeting of stockholders.
(B) A complete list of the stockholders entitled to vote at the ensuing
election arranged in alphabetical order, with the residence of each and the
number of voting shares held by each, shall be prepared by the Secretary and
filed in the office where the election is to be held, at least ten days before
every election, and shall at all times be open to the examination of any
stockholder during the usual hours for business for a purpose germane to the
meeting and during the whole time of said election.
SECTION 2.5. QUORUM AND ADJOURNMENT. Except as otherwise provided by law
or by the Certificate of Incorporation, the holders of a majority of the
outstanding shares of the Corporation entitled to vote generally in the election
of directors (the "Voting Stock"), represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders, except that when specified
business is to be voted on by a class or series of stock voting as a class, the
holders of a majority of the shares of such class or series shall constitute a
quorum of such class or series for the transaction of such business. The
Chairman of the meeting may adjourn the meeting from time to time, whether or
not there is such a quorum. No notice of the time and place of adjourned
meetings need be given except as required by law. The stockholders present at a
duly called meeting at which a quorum is present may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
SECTION 2.6. PROXIES. At all meetings of stockholders, a stockholder may
vote by proxy executed in writing (or in such manner prescribed by the General
Corporation Law of the State of Delaware (the "DGCL")) by the stockholder, or by
his duly authorized attorney in fact.
SECTION 2.7. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(A) ANNUAL MEETINGS OF STOCKHOLDERS.
(1) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (a) pursuant
to the Corporation's notice of meeting (or any supplement thereto), (b) by
or at the direction of a majority of the Whole Board or (c) by any
stockholder of the Corporation who was a stockholder of record at the time
the notice provided for in this By-Law is delivered to the Secretary of the
Corporation, who is entitled to vote at the meeting and who complies with
the notice procedures set forth in this By-Law.
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1)
of this By-Law, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on
the 70th day nor earlier than the close of business on the 90th day prior to
the first anniversary of the preceding year's annual meeting; PROVIDED,
HOWEVER, that in the event that the date of the annual meeting is more than
30 days before or more than 60 days after such anniversary date, notice by
the stockholder to be timely must be so delivered not earlier than the close
of business on the 90th day prior to such annual meeting and not later than
the close of business on the later of the 70th day prior to such annual
meeting or the 10th day following the day on which public announcement of
the date of such meeting is first made by the Corporation. In no event shall
the public announcement of an adjournment of an annual meeting commence a
new time period for the giving of a stockholder's notice as described above.
Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or re-election as a director
all information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest,
or is otherwise required, in each case pursuant to
J-2
<PAGE>
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), including, but not limited to, information required to be
disclosed by Items 4(b) and 6 of Schedule 14A under the Exchange Act and
information which would be required to be filed on Schedule 14B under the
Exchange Act, and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as
a director if elected); (b) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal
is made; and (c) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made (i) the
name and address, as they appear on the Corporation's books, of such
stockholder and any other stockholders known by such stockholder to be
supporting such nominees or proposal, and of such beneficial owner, (ii) the
class and number of shares of the Corporation which are owned beneficially
and of record by such stockholder and, to the extent known, by any other
stockholders known by such stockholder to be supporting such nominees or
proposal, and such beneficial owner, (iii) a representation that the
stockholder is a holder of record of stock of the Corporation entitled to
vote at such meeting and intends to appear in person or by proxy at the
meeting to propose such business or nomination, and (iv) a representation
whether the stockholder or the beneficial owner, if any, intends or is part
of a group which intends to (a) deliver a proxy statement and form of proxy
to holders of at least the percentage of the Corporation's outstanding
common stock required to approve or adopt the proposal or elect the nominee
and/or (b) otherwise solicit proxies from stockholders in support of such
proposal or nomination.
(3) Notwithstanding anything in the second sentence of paragraph (A)(2)
of this By-Law to the contrary, in the event that the number of directors to
be elected to the Board of Directors of the Corporation is increased and
there is no public announcement by the Corporation naming all of the
nominees for director or specifying the size of the increased Board of
Directors at least 70 days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by this By-Law shall
also be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the
Secretary at the principal executive offices of the Corporation not later
than the close of business on the 10th day following the day on which such
public announcement is first made by the Corporation.
(B) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be conducted
at a special meeting of stockholders as shall have been brought before the
meeting pursuant to the Corporation's notice of meeting. Nominations of persons
for election to the Board of Directors may be made at a special meeting of
stockholders at which directors are to be elected pursuant to the Corporation's
notice of meeting (a) by or at the direction of the Board of Directors or (b)
provided that the Board of Directors has determined that directors shall be
elected at such meeting, by any stockholder of the Corporation who is a
stockholder of record at the time of giving of notice provided for in this
By-Law, who shall be entitled to vote at the meeting and who complies with the
notice procedures set forth in this By-Law. In the event the Corporation calls a
special meeting of stockholders for the purpose of electing one or more
directors to the Board of Directors, any such stockholder may nominate a person
or persons (as the case may be), for election to such position(s) as specified
in the Corporation's notice of meeting, if the stockholder's notice required by
paragraph (A)(2) of this By-Law shall be delivered to the Secretary at the
principal executive offices of the Corporation not earlier than the close of
business on the 90th day prior to such special meeting and not later than the
close of business on the later of the 70th day prior to such special meeting or
the 10th day following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment of a special meeting commence a new time period
for the giving of a stockholder's notice as described above.
J-3
<PAGE>
(C) GENERAL.
(1) Only such persons who are nominated in accordance with the
procedures set forth in this By-Law shall be eligible to be elected at an
annual or special meeting of stockholders of the Corporation to serve as
directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance
with the procedures set forth in this By-Law. Except as otherwise provided
by law, the Chairman of the meeting shall have the exclusive power and duty
to (i) determine whether a nomination or any business proposed to be brought
before the meeting was made or proposed, as the case may be, in accordance
with the procedures set forth in this By-Law and (ii) if any proposed
nomination or business is not in compliance with this By-Law, including if
the stockholder solicits or is part of a group which solicits proxies in
support of such stockholder's proposal without such stockholder having made
the representation required by either clause (c)(iii) or (c)(iv) of
paragraph (A)(2) of this By-Law, to declare that such defective proposal or
nomination shall be disregarded or that such proposed business shall not be
transacted.
(2) For the purposes of this By-Law, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document
publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-Law, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this By-Law. Nothing in this By-Law shall be deemed to
affect any rights (i) of stockholders to request inclusion of proposals in
the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange
Act or (ii) of the holders of any series of Preferred Stock to elect
directors under specified circumstances.
SECTION 2.8. PROCEDURE FOR ELECTION OF DIRECTORS; REQUIRED VOTE. Election
of directors at all meetings of the stockholders at which directors are to be
elected shall be by ballot, and, subject to the rights of the holders of any
series of Preferred Stock to elect directors under specified circumstances, a
plurality of the votes cast thereat shall elect directors. Except as otherwise
provided by law, the Certificate of Incorporation, or these By-Laws, in all
matters other than the election of directors, the affirmative vote of a majority
of the shares present in person or represented by proxy at the meeting and
entitled to vote on the matter shall be the act of the stockholders.
SECTION 2.9. INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS. The
Board of Directors by resolution shall appoint one or more inspectors, which
inspector or inspectors may include individuals who serve the Corporation in
other capacities, including, without limitation, as officers, employees, agents
or representatives, to act at the meetings of stockholders and make a written
report thereof. One or more persons may be designated as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate has been
appointed to act, or if any such inspector or alternate fails to attend or is
unable to act at a meeting of stockholders, then the Chairman of the meeting
shall appoint one or more inspectors to act at the meeting. Each inspector,
before discharging his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability. The inspectors shall have the duties prescribed by
law.
The Chairman of the meeting shall fix and announce at the meeting the date
and time of the opening and the closing of the polls for each matter upon which
the stockholders will vote at a meeting.
SECTION 2.10. NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Subject to the
rights of the holders of any series of Preferred Stock, any action required or
permitted to be taken by the stockholders of the Corporation must be effected at
a duly called annual or special meeting of such holders and may not be effected
by any consent in writing by such holders.
J-4
<PAGE>
ARTICLE III.
BOARD OF DIRECTORS
SECTION 3.1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed under the direction of the Board of Directors. In addition to
the powers and authorities by these By-Laws expressly conferred upon them, the
Board of Directors may exercise all such powers of the Corporation and do all
such lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these By-Laws required to be exercised or done by the
stockholders.
SECTION 3.2. NUMBER, TENURE AND QUALIFICATIONS. Subject to the rights of
the holders of any series of Preferred Stock to elect directors under specified
circumstances, the number of directors of the Corporation which shall constitute
the entire board shall be fixed from time to time as provided in the Certificate
of Incorporation. Directors need not be stockholders. The directors, other than
those who may be elected by the holders of any series of Preferred Stock under
specified circumstances, shall be divided, with respect to the time for which
they severally hold office, into three classes, as nearly equal in number as is
reasonably possible, with the term of office of the first class to expire at the
2000 annual meeting of stockholders, the term of office of the second class to
expire at the 2001 annual meeting of stockholders and the term of office of the
third class to expire at the 2002 annual meeting of stockholders, with each
director to hold office until his or her successor shall have been duly elected
and qualified. At each annual meeting of stockholders, commencing with the 2000
annual meeting, (i) directors elected to succeed those directors whose terms
then expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election, with each
director to hold office, subject to any qualifications or approvals required
under any Gaming Laws (as hereinafter defined in Section 7.7(C)) until his or
her successor shall have been duly elected and qualified, and (ii) if authorized
by a resolution of the Board of Directors, directors may be elected to fill any
vacancy on the Board of Directors, regardless of how such vacancy shall have
been created. For purposes of these By-Laws, an individual shall be qualified to
serve as a director for so long as such individual is determined to be, and
continues to be, qualified by all applicable Gaming Authorities (as hereinafter
defined in Section 7.7(B)) and under all applicable Gaming Laws, as required,
and in the event such individual does not continue to be so qualified, such
individual shall be disqualified and shall cease to be a director of the
Corporation.
SECTION 3.3. REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held without other notice than this By-Law immediately after, and at
the same place as, the Annual Meeting of Stockholders. The Board of Directors
may, by resolution, provide the time and place for the holding of additional
regular meetings without other notice than such resolution.
SECTION 3.4. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called at the request of the Chairman of the Board, the President or a
majority of the Board of Directors then in office. The person or persons
authorized to call special meetings of the Board of Directors may fix the place
and time of the meetings.
SECTION 3.5. NOTICE. Notice of any special meeting of directors shall be
given to each director at his business or residence in writing by hand delivery,
first class or overnight mail or courier service, telegram or facsimile
transmission, or orally by telephone. If mailed by first-class mail, such notice
shall be deemed adequately delivered when deposited in the United States mails
so addressed, with postage thereon prepaid, at least five days before such
meeting. If by telegram, overnight mail or courier service, such notice shall be
deemed adequately delivered when the telegram is delivered to the telegraph
company or the notice is delivered to the overnight mail or courier service
company at least 24 hours before such meeting. If by facsimile transmission,
such notice shall be deemed adequately delivered when the notice is transmitted
at least 12 hours before such meeting. If by telephone or by hand delivery, the
notice shall be given at least 12 hours prior to the time set for the meeting.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the Board of Directors need be specified in the notice of
J-5
<PAGE>
such meeting, except for amendments to these By-Laws, as provided under Section
9.1. A meeting may be held at any time without notice if all the directors are
present or if those not present waive notice of the meeting in accordance with
Section 7.4 of these By-Laws.
SECTION 3.6. ACTION BY CONSENT OF BOARD OF DIRECTORS. Any action required
or permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee, as
applicable.
SECTION 3.7. CONFERENCE TELEPHONIC MEETINGS. Members of the Board of
Directors, or any committee thereof, may participate in a meeting of the Board
of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
SECTION 3.8. QUORUM. Subject to Section 3.9, a whole number of directors
equal to at least a majority of the Whole Board shall constitute a quorum for
the transaction of business, but if at any meeting of the Board of Directors
there shall be less than a quorum present, a majority of the directors present
may adjourn the meeting from time to time without further notice. Except as
otherwise provided in the Certificate of Incorporation or in these By-Laws, the
act of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors. The directors present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough directors to leave less than a quorum.
SECTION 3.9. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Except as
otherwise provided in the Certificate of Incorporation and subject to applicable
law and the rights of the holders of any series of Preferred Stock, and unless
the Board of Directors otherwise determines, vacancies resulting from death,
resignation, retirement, disqualification, removal from office or other cause,
and newly created directorships resulting from any increase in the authorized
number of directors, may be filled only by the affirmative vote of a majority of
the remaining directors, though less than a quorum of the Board of Directors.
Subject to the obtaining of approval by any Gaming Authority required before
such person can become, or serve as, a director, any director so chosen pursuant
to the foregoing sentence shall hold office for the remainder of the full term
expiring at the annual meeting of stockholders at which the term of office of
the class to which they have been elected expires and until such director's
successor shall have been duly elected and qualified. No decrease in the number
of authorized directors constituting the Board of Directors shall shorten the
term of any incumbent director.
SECTION 3.10. EXECUTIVE AND OTHER COMMITTEES. The Board of Directors may,
by resolution adopted by a majority of the Whole Board in favor thereof,
designate an Executive Committee to exercise, subject to applicable provisions
of law, all the powers of the Board in the management of the business and
affairs of the Corporation when the Board is not in session, including without
limitation the power to declare dividends, to authorize the issuance of the
Corporation's capital stock and to adopt a certificate of ownership and merger
pursuant to Section 253 of the DGCL, and may, by resolution similarly adopted,
designate one or more other committees. The Executive Committee and each such
other committee shall consist of two or more directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. Any such committee, other than the Executive Committee (the powers of
which are expressly provided for herein), may to the extent permitted by law
exercise such powers and shall have such responsibilities as shall be specified
in the designating resolution. In the absence or disqualification of any member
of such committee or committees, the member or members thereof present at any
meeting and not disqualified from voting, whether or not constituting a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified
J-6
<PAGE>
member. Each committee shall keep written minutes of its proceedings and shall
report such proceedings to the Board when required.
A majority of any committee may determine its action and fix the time and
place of its meetings, unless the Board of Directors shall otherwise provide.
Notice of such meetings shall be given to each member of the committee in the
manner provided for in Section 3.5 of these By-Laws. The Board shall have power
at any time to fill vacancies in, to change the membership of, or to dissolve
any such committee. Nothing herein shall be deemed to prevent the Board of
Directors from appointing one or more committees consisting in whole or in part
of persons who are not directors of the Corporation; PROVIDED, HOWEVER, that no
such committee shall have or may exercise any authority of the Board.
SECTION 3.11. REMOVAL. Subject to the rights of the holders of any series
of Preferred Stock to elect directors under specified circumstances, any
director may be removed from office, but only "for cause," and only by the
affirmative vote of the holders of at least 75% of the voting power of all the
then outstanding shares of Voting Stock, voting together as a single class. For
the purposes of this Section 3.11, "for cause" shall mean (i) the willful and
continuous failure of a director to substantially perform or observe his or her
duties to the Corporation (other than any such failure resulting from physical
or mental incapacity of such director), or (ii) the willful engagement by a
director in gross misconduct which is materially and demonstrably injurious to
the Corporation.
SECTION 3.12. RECORDS. The Board of Directors shall cause to be kept a
record containing the minutes of the proceedings of the meetings of the Board
and of the stockholders, appropriate stock books and registers and such books of
records and accounts as may be necessary for the proper conduct of the business
of the Corporation.
SECTION 3.13. COMPENSATION OF DIRECTORS. Each director who is not also an
officer of the Corporation shall receive such stated annual stipend and such
allowance for attendance at each regular or special meeting of the Board or any
special or standing committee as shall be fixed from time to time by resolution
of the Board of Directors, and the expenses of attendance at any such meeting by
each director shall be borne by the Corporation.
SECTION 3.14. INTERESTED DIRECTORS. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if: (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested Directors, even though the
disinterested Directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof or the stockholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract or
transaction.
ARTICLE IV.
OFFICERS
SECTION 4.1. ELECTED OFFICERS. The elected officers of the Corporation
shall be a Chairman of the Board, a President, one or more Executive Vice
Presidents, one or more Senior Vice Presidents, one or
J-7
<PAGE>
more Vice Presidents, a Secretary, a Treasurer, and such other officers
(including, without limitation, a Chief Financial Officer) or agents to hold
such offices, with such titles, for such period and have such authority and
perform such duties as the Board of Directors may provide by resolution from
time to time. The Chairman of the Board shall be chosen from among the
directors. All officers shall each have such powers and duties as generally
pertain to their respective offices, subject to the specific provisions of this
Article IV. Such officers shall also have such powers and duties as from time to
time may be conferred by the Board of Directors or by any committee thereof. The
Board or any committee thereof may from time to time elect, or the Chairman of
the Board or President may appoint, such other officers (including one or more
Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers, and
Assistant Controllers) and such agents, as may be necessary or desirable for the
conduct of the business of the Corporation. Such other officers and agents shall
have such duties and shall hold their offices for such terms as shall be
provided in these By-Laws or as may be prescribed by the Board or such committee
or by the Chairman of the Board or President, as the case may be.
SECTION 4.2. ELECTION AND TERM OF OFFICE. The elected officers of the
Corporation shall be elected annually by the Board of Directors at the regular
meeting of the Board of Directors held after the annual meeting of the
stockholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as convenient. Subject to the
obtaining of any Gaming Authority approval required before such person can
become, or serve as, an officer, each officer shall hold office until his
successor shall have been duly elected and shall have qualified or until his
death or until he shall resign. Any officer may be removed from office at any
time by the affirmative vote of a majority of the Whole Board. Such removal
shall be without prejudice to the contractual rights, if any, of the person so
removed.
SECTION 4.3. CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside at all meetings of the Board of Directors and the stockholders. In the
absence or incapacity of the Chairman of the Board, the President shall preside
at all meetings of the Board of Directors and the stockholders.
SECTION 4.4. PRESIDENT. The President shall be the Chief Executive Officer
of the Corporation. Subject to the authority of the Board of Directors, the
President shall be responsible for the general management of the business of the
Corporation and shall be responsible for implementing the policies and programs
of the Board of Directors. The President shall have the power to appoint such
agents and employees as in the President's judgment may be necessary or proper
for the transaction of the business of the Corporation, and shall determine
their duties and recommend their compensation. The President shall execute
bonds, mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required by law to be otherwise signed and executed
and except where the signing and execution thereof shall be expressly delegated
by the Board of Directors to some other officer or agent of the Corporation. The
President shall report to the Board of Directors through the Chairman of the
Board. The President shall, in the absence of or incapacity of the Chairman of
the Board, perform all duties of the Chairman of the Board and preside at all
meetings of the Board of Directors and the stockholders.
SECTION 4.5. EXECUTIVE VICE PRESIDENTS AND SENIOR VICE PRESIDENTS. The
Executive Vice Presidents and the Senior Vice Presidents shall perform such
duties as may be delegated or prescribed by the President, the Board of
Directors or the Executive Committee of the Corporation.
SECTION 4.6. VICE PRESIDENTS. Each Vice President shall have such powers
and shall perform such duties as are from time to time presented by the Board of
Directors or Executive Committee or as delegated by the President.
SECTION 4.7. CHIEF FINANCIAL OFFICER. The Chief Financial Officer (if any)
shall be an Executive Vice President, a Senior Vice President or a Vice
President and act in an executive financial capacity. He shall assist the
Chairman of the Board and the President in the general supervision of the
Corporation's financial policies and affairs.
J-8
<PAGE>
SECTION 4.8. TREASURER AND ASSISTANT TREASURERS. The Treasurer shall have
the custody of the corporate funds and securities and shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation and shall deposit all monies and other valuable effects in the name
and to the credit of the Corporation in such depositories as may be designated
by the Board of Directors. The Treasurer shall disburse the funds of the
Corporation as may be ordered by the Board, taking proper vouchers for such
disbursements, and shall render to the President and Directors, at regular
meetings of the Board, or whenever they may require an account of all the
Treasurer's transactions as Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Treasurer shall give the
Corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board for the faithful
performance of the duties of this office and for the restoration to the
Corporation, in case of the Treasurer's death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in the Treasurer's possession or under the Treasurer's control
belonging to the Corporation.
The Assistant Treasurers in the order of their seniority shall, in the
absence or disability of the Treasurer, perform the duties and exercise the
powers of the Treasurer and shall perform such other duties as the Board of
Directors shall prescribe.
SECTION 4.9. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall
attend all sessions of the Board and all meetings of the stockholders and record
all votes and the minutes of all proceedings in a book to be kept for that
purpose and shall perform like duties for the standing committees when required.
The Secretary shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors, the Chairman
of the Board or President, who shall supervise the Secretary. The Secretary
shall keep in safe custody the seal of the Corporation and, when authorized by
the Board, affix the same to any instrument requiring it and, when so affixed,
it shall be attested by the Secretary's signature or by the signature of the
Treasurer or the Assistant Corporate Secretary or any Assistant Secretary.
The Assistant Corporate Secretary, or the Assistant Secretaries in order of
their seniority, shall, in the absence or disability of the Secretary, perform
the duties and exercise the powers of the Secretary and shall perform such other
duties as the Board of Directors shall prescribe.
SECTION 4.10. REMOVAL. Any officer elected, or agent appointed, by the
Board of Directors, or any officer or agent appointed by the Chairman of the
Board or the President may be removed by the affirmative vote of a majority of
the Whole Board whenever, in their judgment, the best interests of the
Corporation would be served thereby. Any officer or agent appointed by the
Chairman of the Board or the President may be removed by him whenever, in his
judgment, the best interests of the Corporation would be served thereby. No
elected officer shall have any contractual rights against the Corporation for
compensation by virtue of such election beyond the date of the election of his
successor, his death, his resignation or his removal, whichever event shall
first occur, except as otherwise provided in an employment contract or under an
employee deferred compensation plan.
SECTION 4.11. VACANCIES. A newly created elected office and a vacancy in
any elected office because of death, resignation, or removal may be filled by
the Board of Directors for the unexpired portion of the term at any meeting of
the Board of Directors. Any vacancy in an office appointed by the Chairman of
the Board or the President because of death, resignation, or removal may be
filled by the Chairman of the Board or the President. To the extent that any
prior approval is required by any Gaming Authority or under any Gaming Law to
fill a newly created elected office or a vacancy in any elected office, such
approval shall be obtained prior to filing any such office or vacancy.
J-9
<PAGE>
ARTICLE V.
STOCK CERTIFICATES AND TRANSFERS
SECTION 5.1. STOCK CERTIFICATES AND TRANSFERS. The interest of each
stockholder of the Corporation shall be evidenced by certificates for shares of
stock or shall be uncertificated. Absent specific request for such a certificate
by the registered owner or transferee thereof, all shares shall be
uncertificated upon the original issuance thereof by the Corporation or upon the
surrender for transfer of the certificate representing such shares to the
Corporation or its transfer agent. The shares of the stock of the Corporation
shall be transferred on the books of the Corporation by the holder thereof in
person or by his attorney, if applicable, upon surrender for cancellation of
certificates for at least the same number of shares, with an assignment and
power of transfer endorsed thereon or attached thereto, duly executed, with such
proof of the authenticity of the signature as the Corporation or its agents may
reasonably require. Except as otherwise provided herein, all certificates
surrendered to the Corporation for transfer shall be canceled and no new
certificates or uncertificated shares shall be issued until such former
certificates have been surrendered and canceled. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto (and upon specific request by such
person), cancel the old certificate and record the transaction upon its books.
The certificate for shares of stock of the Corporation shall be in such
form, not inconsistent with the Certificate of Incorporation, as the appropriate
officers of the Corporation may from time to time prescribe. The certificates of
stock shall be signed, countersigned and registered in such manner as the Board
of Directors may by resolution prescribe, which resolution may permit all or any
of the signatures on such certificates to be in facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate has ceased to be such officer, transfer agent or
registrar of the Corporation, whether because of death, resignation, or
otherwise, before such certificate or certificates shall have been delivered by
the Corporation, such certificate or certificates may nevertheless be issued and
delivered with the same effect as if such person or persons were such officer,
transfer agent or registrar of the Corporation at the date of issue.
All certificates for shares of stock shall be consecutively numbered as the
same are issued. The name of the person owning the shares represented thereby
with the number of such shares and the date of issue thereof shall be entered on
the books of the Corporation.
SECTION 5.2. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of
Directors may direct new certificate(s) to be issued in place of any
certificate(s) theretofore issued by the Corporation alleged to have been lost,
destroyed or stolen, upon making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, destroyed or stolen. When
authorizing such issue of a new certificate(s), the Board of Directors may, in
its discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, destroyed or stolen certificate(s), or his or her legal
representative, to advertise the same in such manner as it shall require and
give the Corporation a bond in such sum as it may direct as indemnity against
any claim that may be made against the Corporation with respect to the
certificate(s) alleged to have been lost, destroyed or stolen.
ARTICLE VI.
INDEMNIFICATION AND INSURANCE
SECTION 6.1. ACTION OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify and hold harmless, to the fullest extent permitted
by applicable law as it presently exists or may hereafter be amended, an Agent
(as hereinafter defined) against costs, charges and Expenses (as
J-10
<PAGE>
hereinafter defined), judgments, fines and amounts paid in settlement actually
and reasonably incurred by an Agent in connection with an action, suit or
proceeding (of the type referenced in the definition of "Agent"), and any appeal
therefrom, if the Agent acted in good faith and in a manner the Agent reasonably
believed to be in or not opposed to the best interests of the Corporation, and
with respect to any criminal action or proceeding, had no reasonable cause to
believe such conduct was unlawful. The termination of any action, suit or
proceeding (whether by judgment, order, settlement, conviction, or upon a plea
of NOLO CONTENDERE or its equivalent) shall not, of itself, create a presumption
that the Agent did not act in good faith and in a manner which the Agent
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, that such
person had reasonable cause to believe that the Agent's conduct was unlawful.
SECTION 6.2. ACTION BY OR IN THE RIGHT OF THE CORPORATION. The Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed judicial action or suit brought by
or in the right of the Corporation to procure a judgment in its favor by reason
of the fact that such person is or was an Agent, against costs, charges and
Expenses actually and reasonably incurred by an Agent in connection with the
defense or settlement of such action or suit and any appeal therefrom if the
Agent acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for gross negligence or
willful misconduct in the performance of the Agent's duty to the Corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such costs,
charges and Expenses which the Court of Chancery or other such court shall deem
proper.
SECTION 6.3. DETERMINATION OF RIGHT OF INDEMNIFICATION. Any
indemnification under Section 6.1 or 6.2 (unless ordered by a court) shall be
paid by the Corporation unless a determination is reasonably and promptly made
(i) by the Board of Directors by a majority vote of a quorum consisting of
Disinterested Directors, or (ii) if such a quorum is not obtainable, or, even if
obtainable, if a quorum of Disinterested Directors so directs, by Independent
Counsel in a written opinion, or (iii) by the stockholders, that such person
acted in bad faith and in a manner that such person did not believe to be in or
not opposed to the best interests of the Corporation, or, with respect to any
criminal proceeding, that such person believed or had reasonable cause to
believe that his conduct was unlawful.
SECTION 6.4. INDEMNIFICATION AGAINST EXPENSES OF SUCCESSFUL
PARTY. Notwithstanding the other provisions of this Article, to the extent that
an Agent has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, the settlement of an
action without admission of liability, or the defense of any claim, issue or
matter therein, or on appeal from any such proceeding, action, claim or matter,
such Agent shall be indemnified against all costs, charges and Expenses incurred
in connection therewith.
SECTION 6.5. ADVANCES OF EXPENSES. Except as limited by Section 6.6,
costs, charges, and Expenses incurred by an Agent in any action, suit,
proceeding or investigation or any appeal therefrom shall be paid by the
Corporation in advance of the final disposition of such matter, if the Agent
shall undertake to repay such amount in the event that it is ultimately
determined, as provided herein, that such person is not entitled to
indemnification. Notwithstanding the foregoing, no advance shall be made by the
Corporation if a determination is reasonably and promptly made (i) by the Board
of Directors by a majority vote of a quorum of Disinterested Directors, (ii) if
such a quorum is not obtainable or, even if obtainable, a quorum of
Disinterested Directors so directs, by Independent Counsel in a written opinion,
that, based upon the facts known to the Board of Directors or counsel at the
time such determination is made, the Agent acted in bad faith and in a manner
that such person did not believe to be in the best interests of the Corporation,
or (iii) with respect to any criminal proceeding, that such person believed or
had reasonable cause to believe his or her conduct was unlawful. In no event
shall any advance be made in
J-11
<PAGE>
instances where the Board of Directors or Independent Counsel reasonably
determines that the Agent deliberately breached such person's duty to the
Corporation or its stockholders.
SECTION 6.6. RIGHT OF AGENT TO INDEMNIFICATION UPON APPLICATION; PROCEDURE
UPON APPLICATION. Any indemnification under Section 6.1, 6.2 or 6.4 or advance
under Section 6.5, shall be made promptly, and in any event within 60 days, upon
the written request of the Agent, unless with respect to applications under
Section 6.1, 6.2 or 6.5, a determination is reasonably and promptly made by the
Board of Directors by a majority vote of a quorum of Disinterested Directors
that such Agent acted in a manner set forth in such Sections as to justify the
Corporation's not indemnifying or making an advance to the Agent. In the event
no quorum of Disinterested Directors is obtainable, the Board of Directors shall
promptly direct that Independent Counsel shall decide whether the Agent acted in
the manner set forth in such Sections as to justify the Corporation's not
indemnifying or making an advance to the Agent. The right to indemnification or
advances as granted by this Article shall be enforceable by the Agent in any
court of competent jurisdiction, if the Board of Directors or Independent
Counsel denies the claim in whole or in part, or if no disposition of such claim
is made within 60 days. The Agent's costs, charges and Expenses incurred in
connection with successfully establishing such person's right to
indemnification, in whole or in part, in any such proceeding shall also be
indemnified by the Corporation.
SECTION 6.7. OTHER RIGHTS AND REMEDIES. The indemnification provided by
this Article shall not be deemed exclusive of, and shall not affect, any other
rights to which an Agent seeking indemnification may be entitled under any law,
By-Law, or charter provision, agreement, vote of stockholders or Disinterested
Directors or otherwise, both as to action in such person's official capacity and
as to action in another capacity while holding such office, and shall continue
as to a person who has ceased to be an Agent and shall inure to the benefit of
the heirs, executors and administrators of such a person. All rights to
indemnification under this Article shall be deemed to be a contract between the
Corporation and the Agent who serves in such capacity at any time while the
Certificate of Incorporation and other relevant provisions of the DGCL and other
applicable law, if any, are in effect. Any repeal or modification thereof shall
not affect any rights or obligations then existing.
SECTION 6.8. INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person who is or was an Agent against any liability
asserted against such person and incurred by him or her in any such capacity, or
arising out of such person's status as such, whether or not the Corporation
would have the power to indemnify such person against such liability under the
provisions of this Article. The Corporation may create a trust fund, grant a
security interest or use other means (including, without limitation, a letter of
credit) to ensure the payment of such sums as may become necessary to effect
indemnification as provided herein.
SECTION 6.9. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS.
(A) If a Change of Control (as hereinafter defined) shall have occurred,
in making a determination with respect to entitlement to indemnification
hereunder, the person, persons or entity making such determination shall
presume that the Agent is entitled to indemnification under this Article if
the Agent has submitted a request for indemnification in accordance with
Section 6.6, and the Corporation shall have the burden of proof to overcome
that presumption in connection with the making by any person, persons or
entity of any determination contrary to that presumption.
(B) If the person, persons or entity empowered or selected under Section
6.6 to determine whether the Agent is entitled to indemnification shall not
have made such determination within 60 days after receipt by the Corporation
of the request therefor, the requisite determination of entitlement to
indemnification shall be deemed to have been made and the Agent shall be
entitled to such indemnification, absent (i) a misstatement by the Agent of
a material fact, or an omission of a material fact necessary to make the
Agent's statement not materially misleading, in connection with the request
for indemnification, or (ii) a prohibition of such indemnification under
applicable law; PROVIDED, HOWEVER, that such 60-day period may be extended
for a reasonable time, not to exceed an
J-12
<PAGE>
additional 30 days, if the person, persons or entity making the
determination with respect to entitlement to indemnification in good faith
requires such additional time for the obtaining or evaluating of
documentation and/or information relating thereto; and PROVIDED, FURTHER,
that the foregoing provisions of this Section 6.9 shall not apply (a) if the
determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 6.6 and if (A) within 15 days after receipt
by the Corporation of the request for such determination the Board of
Directors has resolved to submit such determination to the stockholders for
their consideration at an annual meeting thereof to be held within 75 days
after such receipt and such determination is made thereat, or (B) a special
meeting of the stockholders is called within 15 days after such receipt for
the purpose of making such determination, such meeting is held for such
purpose within 60 days after having been so called and such determination is
made thereat, or (b) if the determination of entitlement to indemnification
is to be made by Independent Counsel pursuant to Section 6.5.
(C) The termination of any proceeding or of any claim, issue or matter
therein by judgment, order, settlement or conviction, or upon a plea of NOLO
CONTENDERE or its equivalent, shall not (except as otherwise expressly
provided in this Article) of itself adversely affect the right of the Agent
to indemnification or create a presumption that the Agent did not act in
good faith and in a manner which such person reasonably believed to be in or
not opposed to the best interests of the Corporation, or, with respect to
any criminal proceeding, that the Agent had reasonable cause to believe that
such person's conduct was unlawful.
SECTION 6.10. OTHER ENTERPRISES, FINES, AND SERVING AT CORPORATION'S
REQUEST. For the purposes of this Article, references to "other enterprise" in
Section 6.12(A) below shall include employee benefit plans; references to
"fines" shall include any excise taxes assessed on a person with respect to any
employee benefit plan; and references to "serving at the request of the
Corporation" shall include any service by the Agent as a director, officer or
employee of the Corporation which imposes duties on, or involves services by,
such Agent with respect to any employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Article.
SECTION 6.11. SAVINGS CLAUSE. If this Article or any portion thereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Agent as to costs, charges and
Expenses, judgments, fines and amounts paid in settlement with respect to any
action, suit, proceeding or investigation, and any appeal therefrom, whether
civil, criminal or administrative, and whether internal or external, including a
grand jury proceeding and an action or suit brought by or in the right of the
Corporation, to the full extent permitted by any applicable portion of this
Article that shall not have been invalidated, and to the fullest extent
permitted by applicable law.
SECTION 6.12. CERTAIN DEFINITIONS. For the purposes of this Article VI:
(A) "Agent" means any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding or investigation, whether civil, criminal or administrative, and
whether external or internal to the Corporation (other than a judicial
action or suit brought by or in the right of the Corporation) by reason of
the fact that he or she is or was or has agreed to be a Director, officer or
employee of the Corporation, or that, being or having been such a Director,
officer or employee, he or she is or was serving at the request of the
Corporation as a Director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise.
(B) "Change of Control" means a change in control of the Corporation of
a nature that would be required to be reported in response to Item 5(f) of
Schedule 14A of Regulation 14A (or in response to any similar item on any
similar schedule or form) promulgated under the Exchange Act, whether or not
the Corporation is then subject to such reporting requirement; PROVIDED,
HOWEVER, that,
J-13
<PAGE>
without limitation, such a Change in Control shall be deemed to have
occurred if: (i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities
of the Corporation representing 25% or more of the combined voting power of
the Corporation's then outstanding securities without the prior approval of
at least two-thirds of the members of the Board of Directors in office
immediately prior to such person attaining such percentage interest; (ii)
the Corporation is a party to a merger, consolidation, sale of assets or
other reorganization, or a proxy contest, as a consequence of which members
of the Board of Directors in office immediately prior to such transaction or
event constitute less than a majority of the Board of Directors thereafter;
or (iii) during any period of three consecutive years, individuals who at
the beginning of such period constituted the Board of Directors (including
for this purpose any new director whose election or nomination for election
by the Corporation's stockholders was approved by a vote of at least two-
thirds of the directors then still in office who were directors at the
beginning of such period) cease for any reason to constitute at least a
majority of the Board of Directors.
(C) "Disinterested Director" means a director of the Corporation who is
not and was not a party to the matter in respect of which indemnification is
sought by the claimant.
(D) "Expenses" shall include all reasonable attorneys' fees, retainers,
court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of
the types customarily incurred in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, or being or preparing to be
a witness in a proceeding.
(E) "Independent Counsel" means a law firm, a member of a law firm, or
an independent practitioner, that is experienced in matters of corporation
law and shall include any person who, under the applicable standards of
professional conduct then prevailing, would not have a conflict of interest
in representing either the Corporation or the claimant in an action to
determine the claimant's rights under this Article VI.
ARTICLE VII.
MISCELLANEOUS PROVISIONS
SECTION 7.1. FISCAL YEAR. The fiscal year of the Corporation shall begin
on the first day of January and end on the thirty-first day of December of each
year.
SECTION 7.2. DIVIDENDS. The Board of Directors may from time to time
declare, and the Corporation may pay, dividends on its outstanding shares in the
manner and upon the terms and conditions provided by law and the Certificate of
Incorporation. Dividends may be paid in cash, in property, or in shares of the
capital stock of the Corporation. Before payment of any dividend, there may be
set aside out of any funds of the Corporation available for dividends, such sum
or sums as the directors may, from time to time in their absolute discretion,
think proper as a reserve fund to meeting contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the directors shall think conducive to the interest of
the Corporation, and the directors may abolish any such reserve in the manner in
which it was created.
SECTION 7.3. SEAL. The corporate seal shall have inscribed thereon the
name of the Corporation, the year of incorporation and the words "Corporation
Seal, Delaware." Said seal may be used by causing it or a facsimile thereof to
be impressed or affixed or reproduced or otherwise.
SECTION 7.4. WAIVER OF NOTICE. Whenever any notice is required to be given
to any stockholder or director of the Corporation under the provisions of the
DGCL or these By-Laws, a waiver thereof in writing, signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice. Neither the
business to be transacted at,
J-14
<PAGE>
nor the purpose of, any annual or special meeting of the stockholders or the
Board of Directors or committee thereof need be specified in any waiver of
notice of such meeting.
SECTION 7.5. AUDITS. The accounts, books and records of the Corporation
shall be audited upon the conclusion of each fiscal year by an independent
certified public accountant selected by the Board of Directors, and it shall be
the duty of the Board of Directors to cause such audit to be done annually.
SECTION 7.6. RESIGNATIONS. Any director or any officer, whether elected or
appointed, may resign at any time by giving written notice of such resignation
to the Chairman of the Board, the President, or the Secretary, and such
resignation shall be deemed to be effective as of the close of business on the
date said notice is received by the Chairman of the Board, the President, or the
Secretary, or at such later time as is specified therein. No formal action shall
be required of the Board of Directors or the stockholders to make any such
resignation effective.
SECTION 7.7. COMPLIANCE WITH APPLICABLE GAMING LAWS.
(A) If the Corporation becomes, and so long as it remains, either a holding
company or an intermediary holding company subject to regulation under any
Gaming Laws, all securities of the Corporation shall be held subject to the
applicable provisions of such Gaming Laws. If a holder thereof is found to be
disqualified by any Gaming Authorities, then such holder shall dispose of his or
her interest in the Corporation as provided in the Certificate of Incorporation
and pursuant to the applicable provisions of any Gaming Laws, and orders or
rulings of any Gaming Authorities.
(B) For the purposes of these By-Laws, "Gaming Authority" means any
government, court, or federal, state, local, international or foreign
governmental, administrative, regulatory or licensing body, agency, authority or
official which regulates, has authority or otherwise asserts jurisdiction over
gaming activities (or proposed gaming activities), gaming operations or
facilities conducted by the Corporation or any of its subsidiaries or
affiliates, within any gaming jurisdictions (domestic and foreign and the
political subdivisions thereof), whether now or hereafter existing, including
without limitation, the Nevada Gaming Control Board, the Nevada Gaming
Commission, the Clark County Liquor and Gaming Licensing Board, the New Jersey
Casino Control Commission, the Louisiana Gaming Control Board, the Mississippi
Gaming Commission and the Missouri Gaming Commission.
(C) For the purposes of these By-Laws, "Gaming Law" means any federal,
state, local, international or foreign law, statute, order, ordinance or
interpretation pursuant to which any Gaming Authority possesses regulatory and
licensing authority over gaming activities, operations or facilities within any
gaming jurisdictions (domestic and foreign and the political subdivisions
thereof), including any rules and regulations promulgated by such Gaming
Authority thereunder, including, without limitation, the Nevada Gaming Control
Act, the Clark County Code, the New Jersey Casino Control Act, the Louisiana
Riverboat Economic Development and Gaming Control Act, the Mississippi Gaming
Control Act and the Missouri Gaming Law.
ARTICLE VIII.
CONTRACTS, PROXIES, ETC.
SECTION 8.1. CONTRACTS. Except as otherwise required by law, the
Certificate of Incorporation or these By-Laws, any contracts or other
instruments may be executed and delivered in the name and on the behalf of the
Corporation by such officer or officers of the Corporation as the Board of
Directors may from time to time direct. Such authority may be general or
confined to specific instances as the Board may determine. The Chairman of the
Board, the President or any Executive Vice President, Senior Vice President or
Vice President may execute bonds, contracts, deeds, leases and other instruments
to be made or executed for or on behalf of the Corporation. Subject to any
restrictions imposed by the Board of Directors or the Chairman of the Board, the
President or any Executive Vice President, Senior Vice
J-15
<PAGE>
President or Vice President of the Corporation may delegate contractual powers
to others under his jurisdiction, it being understood, however, that any such
delegation of power shall not relieve such officer of responsibility with
respect to the exercise of such delegated power.
SECTION 8.2. PROXIES. Unless otherwise provided by resolution adopted by
the Board of Directors, the Chairman of the Board, the President, any Executive
Vice President, Senior Vice President or Vice President may from time to time
appoint an attorney or attorneys or agent or agents of the Corporation, in the
name and on behalf of the Corporation, to cast the votes which the Corporation
may be entitled to cast as the holder of stock or other securities in any other
corporation, any of whose stock or other securities may be held by the
Corporation, at meetings of the holders of the stock or other securities of such
other corporation, or to consent in writing, in the name of the Corporation as
such holder, to any action by such other corporation, and may instruct the
person or persons so appointed as to the manner of casting such votes or giving
such consent, and may execute or cause to be executed in the name and on behalf
of the Corporation and under its corporate seal or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in the premises.
ARTICLE IX.
AMENDMENTS
SECTION 9.1. AMENDMENTS. These-By-Laws may be altered, amended, or
repealed at any meeting of the Board of Directors or of the stockholders,
provided that notice of the proposed change was given in the notice of the
meeting and, in the case of a meeting of the Board of Directors, in a notice
given not less than two days prior to the meeting; PROVIDED, HOWEVER, that, in
the case of amendments by stockholders, notwithstanding any other provisions of
these By-Laws or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the capital stock of the Corporation required by
law, the Certificate of Incorporation or these By-Laws, the affirmative vote of
the holders of at least 75% of the voting power of all the then outstanding
shares of the Voting Stock, voting together as a single class, shall be required
to alter, amend or repeal any provision of these By-Laws.
J-16
<PAGE>
ANNEX K
SECTIONS 302A.471 AND 302A.473 OF THE MINNESOTA BUSINESS
CORPORATION ACT
Set forth below are Sections 302A.471 and 302A.473 of the Minnesota Business
Corporation Act, which provide that shareholders may dissent from, and obtain
payment for the fair value of their shares in the event of, certain corporate
actions, and establish procedures for the exercise of such dissenters' rights.
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption
of the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares
to acquire shares, securities other than shares, or rights to purchase
shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter,
or to cumulate votes, except as the right may be excluded or limited through
the authorization or issuance of securities of an existing or new class or
series with similar or different voting rights; except that an amendment to
the articles of an issuing public corporation that provides that section
302A.671 does not apply to a control share acquisition does not give rise to
the right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in section 302A.661,
subdivision 1, or a disposition in dissolution described in Section 302A.725,
subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B, to
which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the board
directs that dissenting shareholders may obtain payment for their shares.
SUBD. 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
K-1
<PAGE>
(b) The beneficial owner of shares who is not the shareholder may assert
dissenters; rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
SUBD. 3. RIGHTS NOT TO APPLY. (a) Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
(b) If a date is fixed according to section 302A.445, subdivision 1, for the
determination of shareholders entitled to receive notice of and to vote on an
action described in subdivision 1, only shareholders as of the date fixed, and
beneficial owners as of the date fixed who hold through shareholders, as
provided in subdivision 2, may exercise dissenters' rights.
SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
SUBDIVISION 1. DEFINITIONS. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1, up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. NOTICE OF DISSENT. If the proposed action must be approved by the
shareholders, a shareholder who is entitled to dissent under section 302A.471
and who wishes to exercise dissenters' rights must file with the corporation
before the vote on the proposed action a written notice of intent to demand the
fair value of the shares owned by the shareholder and must not vote the shares
in favor of the proposed action.
SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
K-2
<PAGE>
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
SUBD. 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income for
a fiscal year ending not more than 16 months before the effective date of
the corporate action, together with the latest available interim financial
statements;
(2) An estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief description
of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissent the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision 4
and require deposit or restrict transfer at a later time.
SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached
K-3
<PAGE>
agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by registered
or certificated mail or by publication as provided by law. Except as otherwise
provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgment in cash
for the amount by which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
SUBD. 8. COSTS; FEES; EXPENSES. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an attorney
for the dissenters out of the amount awarded to the dissenters, if any.
K-4
