<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from.................. to .......................
Commission file number 1-14573
PARK PLACE ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 88-0400631
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3930 HOWARD HUGHES PARKWAY, LAS VEGAS, NEVADA 89109
(Address of principal executive offices) (Zip code)
(702) 699-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 1998 --- Common stock, $.01 par value --- 100
shares.
<PAGE>
PART I FINANCIAL INFORMATION
- - ------------------------------------
Company or group of companies for which report is filed:
PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30,
1998 1997 1998 1997
- - ------------------------------------------------------------------------------------------ ----------------
<S> <C> <C> <C> <C> <C>
Revenue Casino $ 493 471 1,468 1,369
Rooms 74 78 239 243
Food and beverage 65 66 203 195
Other products and services 36 42 113 118
----------------------------------------------------------------- ----------------
668 657 2,023 1,925
- - ------------------------------------------------------------------------------------------ ----------------
Expenses Casino 264 259 785 743
Rooms 29 29 86 86
Food and beverage 61 57 182 168
Other expenses, including
remittances to owners 220 216 685 668
Corporate, net 2 3 6 14
----------------------------------------------------------------- ----------------
576 564 1,744 1,679
- - ------------------------------------------------------------------------------------------ ----------------
Operating income 92 93 279 246
Interest and dividend income 3 12 17 22
Interest expense (23) (13) (66) (59)
Interest expense, net, from equity
investments (3) (1) (9) (6)
- - ------------------------------------------------------------------------------------------ ----------------
Income before income taxes
and minority interest 69 91 221 203
Provision for income taxes 31 38 101 84
Minority interest, net - - 2 3
- - ------------------------------------------------------------------------------------------ ----------------
Net income $ 38 53 118 116
- - ------------------------------------------------------------------------------------------ ----------------
- - ------------------------------------------------------------------------------------------ ----------------
Basis Earnings Per Share - Pro Forma $ .15 .20 .45 .44
- - ------------------------------------------------------------------------------------------ ----------------
- - ------------------------------------------------------------------------------------------ ----------------
Diluted Earnings Per Share - Pro Forma $ .15 .20 .45 .44
- - ------------------------------------------------------------------------------------------ ----------------
- - ------------------------------------------------------------------------------------------ ----------------
Weighted Average Common and Equivalent Shares - Pro Forma
Basic 261 264 261 263
- - ------------------------------------------------------------------------------------------ ----------------
- - ------------------------------------------------------------------------------------------ ----------------
Diluted 262 266 263 265
- - ------------------------------------------------------------------------------------------ ----------------
- - ------------------------------------------------------------------------------------------ ----------------
</TABLE>
1
<PAGE>
PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and equivalents $ 119 224
Temporary investments 2 40
Accounts receivable, net 130 159
Other current assets 104 86
- - ------------------------------------------------------------------------------------------------------------------------
Total current assets 355 509
Investments 187 176
Property and equipment, net 3,990 3,621
Goodwill 1,309 1,303
Other assets 60 80
- - ------------------------------------------------------------------------------------------------------------------------
Total investments, property and other assets 5,546 5,180
- - ------------------------------------------------------------------------------------------------------------------------
Total Assets $5,901 5,689
- - ------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------
Liabilities and Division Equity
Accounts payable and accrued expenses $ 321 357
Current maturities of long-term debt 46 34
Income taxes payable 2 2
- - ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 369 393
Long-term debt 1,564 1,272
Deferred income taxes and other liabilities 637 643
Division equity 3,331 3,381
- - ------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Division Equity $5,901 5,689
- - ------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in millions)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 118 116
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 161 149
Amortization of loan costs 1 1
Change in working capital components (26) 36
Change in deferred income taxes 14 12
Change in other liabilities (26) (71)
Other 15 (42)
- - -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 257 201
- - -----------------------------------------------------------------------------------------------------------------------
Investing Activities
Capital expenditures (469) (304)
Additional investments (8) (51)
Payments on notes and other 11 9
Acquisitions, net of cash acquired (58) (55)
- - -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (524) (401)
- - -----------------------------------------------------------------------------------------------------------------------
Financing Activities
Payments on debt (7) (7)
Advances from Parent 169 169
- - -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 162 162
- - -----------------------------------------------------------------------------------------------------------------------
Decrease in Cash and Equivalents (105) (38)
Cash and Equivalents at Beginning of Year 224 252
- - -----------------------------------------------------------------------------------------------------------------------
Cash and Equivalents at End of Period $ 119 214
- - -----------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
4
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
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 and the
results of operations for the unaudited periods.
The consolidated financial statements for prior years reflect certain
reclassifications to conform with classifications adopted in 1998. These
reclassifications have no effect on net income.
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>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1998 1997 1998 1997
------- ------- --------- ---------
(in millions)
<S> <C> <C> <C> <C>
Revenue $88 109 323 355
Operating expenses, including remittances to owners 79 104 290 332
<CAPTION>
At September 30, 1998 At December 31, 1997
--------------------- --------------------
<S> <C> <C>
Current assets and current liabilities(1) $31 59
</TABLE>
- - ------------------------
(1) Including cash and equivalents of $9 million and $25 million,
respectively.
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.
5
<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. The sum of the quarterly EPS may differ from the nine month EPS
due to the required method of computing the weighted average number of shares
in the respective periods.
LONG-TERM DEBT
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 were $64 million and $54 million for the nine months
ended September 30, 1998 and 1997, respectively.
DIVISION EQUITY
Changes in division equity consisted of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
-------------------
<S> <C>
Beginning balance $3,381
Net income 118
Intercompany activity with Parent (168)
------
Ending balance $3,331
------
------
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized, was $65 million and $55
million for the nine months ended September 30, 1998 and 1997, respectively.
These amounts assume that interest expense allocated by Parent is paid in the
period allocated. No income taxes were paid by Park Place as these payments
were the responsibility of the Parent.
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 nine months
ended September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
---- ---- ---- ----
Net income $38 53 118 116
Change in unrealized holding
gains/losses on securities 1 3 (3) 4
---- ---- ---- ----
Comprehensive income $39 56 115 120
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
6
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 with Bally Entertainment Corporation. 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.
FINANCIAL CONDITION
LIQUIDITY
Net cash provided by operating activities for the nine months ended September
30, 1998 increased $56 million to $257 million from the prior year due
primarily to significantly improved results at the Las Vegas Hilton, the
addition of 300 hotel rooms at the Conrad International Punta del Este Resort
and Casino in late 1997 and the opening of "The Wild Wild West" Casino in
Atlantic City.
ACQUISITIONS AND CAPITAL SPENDING
Cash used in investing activities was $524 million and $401 million for the
nine months ended September 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 for the nine month period ended September 30, 1998
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.
In June 1997, Bally's Grand, Inc., a majority owned subsidiary which owns
Bally's Las Vegas, agreed to settle pending shareholder litigation and
pursuant thereto repurchased certain outstanding shares of common stock and
warrants. As a result, the indirect ownership of Bally's Grand, Inc.
increased from 84% to 95% at a cost of $55 million. Under the terms of the
settlement, Park Place acquired the remaining interest in March 1998.
Acquisitions 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 $170 million in 1998 on normal capital replacements, ADA/safety
compliance projects, structural and technology upgrades and $50 million on
improvement projects that are evaluated on an ROI basis.
7
<PAGE>
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. 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
The following discussion presents an analysis of results of operations of
Park Place for the three and nine months ended September 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.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
A summary of Park Place's consolidated revenue and earnings for the three months
ended September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997 % CHANGE
---- ---- --------
(in millions)
<S> <C> <C> <C>
Revenue $668 657 2 %
Operating income 92 93 (1)%
Income from continuing operations 38 53 (28)%
Other Operating Data
EBITDA $147 148 (1)%
</TABLE>
Total revenue increased two percent in the 1998 third quarter to $668 million
from $657 million in 1997. Casino revenue, a component of gaming revenue,
increased five percent to $493 million in 1998 compared to $471 million in
the prior year quarter. EBITDA from the gaming division was $147 million, a
one percent decrease from $148 million in the prior year quarter, and gaming
operating income decreased one percent to $92 million from $93 million last
year. Park Place was impacted by difficult market conditions in Reno, lower
than expected REVPAR due to sluggish market conditions in Las Vegas and a
comparatively low table game hold percentage combined with lower margins at
Bally's Park Place in Atlantic City.
8
<PAGE>
EBITDA at the Las Vegas Hilton increased $6 million over the prior year
quarter, more than doubling last year's results. Total casino revenue
increased significantly due to higher volumes both in non-baccarat table
games and slots. Park Place's efforts to broaden the property's domestic
customer base have resulted in significant increases in non-baccarat table
game and slot volume and a decrease in baccarat play. Table game (excluding
baccarat) and slot win increased 66 percent and 11 percent, respectively.
Baccarat volume decreased 26 percent, however total baccarat win increased 69
percent due to a significantly higher win percentage in the 1998 quarter.
Despite third quarter occupancy growth of three points to 83.2 percent, the
property's non-casino revenue decreased $1 million as a result of an 11
percent drop in the average room rate. 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 implementation of new
casino marketing and entertainment strategies has broadened the Las Vegas
Hilton's domestic customer base and increased non-premium play volume.
EBITDA from the Flamingo Hilton - Las Vegas decreased $3 million from the
prior year quarter, primarily due to a decline in the property's non-casino
revenue. Occupancy decreased two points to 87.6 percent and average rate
declined seven percent to $69.02. An 18 percent increase in slot win was
partially offset by a 13 percent decrease in table game win. Bally's Las
Vegas generated EBITDA of $20 million in the 1998 third quarter, an increase
of $1 million from last year. A decrease in non-casino revenues softened the
impact of the property's increases in table game and slot win. Occupancy was
up fractionally while average rate decreased six percent to $81.19
Combined EBITDA from the Reno Hilton and the Flamingo Hilton - Reno decreased
$6 million from the 1997 quarter. Both Reno properties recorded lower
occupancy and lower average rate compared to the 1997 period due to difficult
conditions that are continuing to challenge the market.
Occupancy for the Nevada hotel-casinos was 87.5 percent in the 1998 third
quarter compared to 86.6 percent last year. The average room rate for the
Nevada properties was $67.88 compared to $72.46 in the prior year period.
In Atlantic City, Bally's Park Place generated EBITDA of $52 million, a
decrease of 12 percent from last year's $59 million. The decrease was
primarily attributable to lower margins and low table game hold and slot win
combined with a difficult comparison due to the impact of the successful
grand opening of "The Wild Wild West" casino in the 1997 third quarter. The
Atlantic City Hilton reported EBITDA of $19 million,
9
<PAGE>
$6 million above the third quarter last year. The improvement was due to
higher table game drop and win and the impact of the property's 300-room
tower construction on pedestrian traffic, which reduced gaming volume in the
1997 quarter.
Occupancy for the Atlantic City hotel-casinos was 96.8 percent in the 1998
third quarter compared to 95.1 percent last year. The average room rate for
the Atlantic City properties was $94.76 compared to $103.13 in the 1997
quarter. New hotel room supply in the Atlantic City market has put downward
pressure on room rates.
Combined EBITDA from Park Place's riverboat properties in Mississippi,
Louisiana, and Missouri increased $3 million over last year's quarter, while
EBITDA contribution from Park Place's two hotel-casinos in Australia was
comparable to the prior year quarter in spite of adverse conditions in Asia
and continued weakness of the Australian dollar.
Depreciation and amortization for Park Place, including Park Place's
proportionate share of equity investments, was $54 million in the third
quarters of 1998 and 1997.
The gaming industry continues to experience growth primarily in existing
markets. The Las Vegas and Atlantic City markets are becoming increasingly
competitive due to new developments and expansion projects which challenge
Park Place's existing market share. These projects could adversely impact
Park Place's future gaming income.
CORPORATE ACTIVITY
Interest and dividend income decreased $9 million in the 1998 period to $3
million. The 1997 period includes interest income of Park Place's investment
in mortgage notes of Claridge Hotel and Casino Corporation. Consolidated
interest expense increased $10 million to $23 million due primarily to a
higher allocated debt balance resulting from acquisition spending.
The effective income tax rate for the 1998 period increased to 44.9 percent
compared to 41.8 percent for 1997. The Company's effective income tax rate is
determined by the level and composition of pretax income subject to varying
foreign, state and local taxes.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
A summary of Park Place's consolidated revenue and earnings for the nine
months ended September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997 % CHANGE
----- ----- ---------
(in millions)
<S> <C> <C> <C>
Revenue $2,023 1,925 5%
Operating income 279 246 13%
Income from continuing operations 118 116 2%
Other Operating Data
EBITDA $ 446 400 12%
</TABLE>
Total revenue increased five percent in the nine month period to $2.0
billion. Casino revenue, a component of gaming revenue, increased seven
percent to $1.5 billion in 1998 compared to $1.4 billion in the prior year.
Total EBITDA was $446 million, a 12 percent increase from $400 million in the
1997 period, and operating income increased 13 percent to $279 million from
$246 million in 1997. Park Place's 1998 nine month results benefited from
significantly improved operations at the Las Vegas Hilton, the addition of
300 hotel rooms at the Conrad International Punta del Este in late 1997 and
the opening of The Wild Wild West casino in Atlantic City.
10
<PAGE>
EBITDA at the Las Vegas Hilton increased $15 million over the prior year to
$50 million. Park Place's efforts to broaden the property's domestic
customer base have resulted in significant increases in non-baccarat table
game and slot volume and a decrease in baccarat play. Non-baccarat table game
win increased 50 percent and slot revenue increased 22 percent on higher
volume and comparable win percentages. Baccarat volume decreased 18 percent
from the prior year, however baccarat win increased 20 percent on a
significantly increased win percentage.
EBITDA from the Flamingo Hilton - Las Vegas declined $4 million from the
prior year to $77 million due to lower table game volume and win and a
decline in non-casino revenues. Occupancy declined one point to 90.3 percent,
and the average rate fell five percent to $76.31. Bally's Las Vegas generated
EBITDA of $67 million for the nine month period, a decrease of $2 million
from the prior year. The decline was due to a one point decrease in table
game win percentage combined with lower drop and lower rooms revenue
resulting from a one point decline in occupancy and a two percent decrease in
the average rate to $89.76. Combined EBITDA from the Reno Hilton and the
Flamingo Hilton - Reno decreased $1 million from 1997.
Occupancy for the Nevada hotel-casinos was 88.1 percent in the 1998 period
compared to 87.8 percent last year. The average room rate for the Nevada
properties was $74.28 compared to $75.68 in the prior year period.
In Atlantic City, Bally's Park Place generated EBITDA of $130 million, an
increase of five percent from last year's $124 million, due primarily to the
opening of "The Wild Wild West" casino in July 1997. The Atlantic City Hilton
reported EBITDA of $31 million, $7 million above last year. The improvement
was due to higher table game drop and win as well as increased non-casino
revenues from the property's new 300-room tower.
Occupancy for the Atlantic City hotel-casinos was 94.7 percent in the 1998
period compared to 93.1 percent last year. The average room rate for the
Atlantic City properties was $83.93, down nine percent from $92.34 last year.
Combined EBITDA from Park Place's riverboat properties in Mississippi,
Louisiana, and Missouri increased $7 million over last year, while EBITDA
contribution from Park Place's two hotel-casinos in Australia was flat at
$19 million.
The opening of 300 hotel rooms in the latter half of 1997 resulted in
significant growth in casino volume at the 43% owned Conrad International
Punta del Este Resort and Casino in Uruguay. EBITDA totaled $18 million in
the nine month period, a $13 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 $166 million in the 1998 period
due primarily to the Las Vegas and Atlantic City expansion projects completed
in 1997.
CORPORATE ACTIVITY. Corporate expense decreased $8 million to $6 million due
primarily to a non-recurring accrual for litigation costs in the 1997 period.
Interest income decreased $5 million to $17 million. Interest expense, net of
amounts capitalized, was $66 million and $59 million in the 1998 and 1997
nine month periods, respectively. Interest expense, net, from equity
investments increased $3 million to $9 million. The effective tax rate was
45.7% in 1998 versus 41.4% in the 1997 period. Minority interest decreased
due to the purchase of the remaining interest in Bally Grand, Inc.
OTHER MATTERS
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
11
<PAGE>
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 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.
12
<PAGE>
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 for the three and nine months
ended September 30, 1998 by $79 million and $290 million, respectively, and
would have reduced each of revenues and operating expenses for the three and
nine months ended September 30, 1997 by $104 million and $332 million,
respectively. Application of the standard would have reduced each of current
assets and current liabilities by $59 million at December 31, 1997 and $31
million at September 30, 1998. Application of EITF 97-2 would have no impact
on reported operating income, net income, earnings per share or stockholders'
equity.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this report, including without limitation,
those set forth under the captions "Strategy," "Financial Condition,"
"Results of Operations," and "Other Matters," and statements relating to Park
Place's plans, strategies, objectives, expectations, intentions and adequacy
of resources, are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The words "believes,"
"anticipates," "expects," "continues" and similar expressions are intended to
identify forward-looking statements. These forward-looking statements reflect
Park Place's current views with respect to future events and financial
performance, and are subject to certain risks and uncertainties, including
those identified above under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and those set forth under the
caption "Risk Factors" in Park Place's Registration Statement on Form S-4
(file No. 333-65645) and (i) the effect of economic conditions, (ii) the
impact of competition and (iii) customer demand, which could cause actual
results to differ materially from historical results or those anticipated.
Although Park Place believes the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give
no assurance that its expectations will be attained.
13
<PAGE>
PART II OTHER INFORMATION
- - --------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of June 30, 1998, by and among
Hilton Hotels Corporation, Park Place Entertainment Corporation,
Gaming Acquisition Corporation, Lakes Gaming, Inc. and Grand Casinos,
Inc. (incorporated by reference to Exhibit 2.1 to the Form S-4
Registration Statement filed with the Commission on October 14, 1998)
3.1 Form of Amended and Restated Certificate of Incorporation of Park
Place Entertainment Corporation (incorporated by reference to Exhibit
3.1 to Park Place's Form S-4 Registration Statement filed with the
Commission on October 14, 1998)
3.2 Form of Amended and Restated Bylaws of Park Place Entertainment
Corporation (incorporated by reference to Exhibit 3.2 to Park
Place's Form S-4 Registration Statement filed with the Commission
on October 14, 1998)
4.1 Form of First Supplemental Indenture by and among Hilton Hotels
Corporation, BNY Western Trust Company, as Trustee, and Park Place
Entertainment Corporation, to the Indenture dated as of April 15, 1997
between Hilton Hotels Corporation and BNY Western Trust Company, as
Trustee (incorporated by reference to Exhibit 4.1 to Park Place's
Form S-4 Registration Statement filed with the Commission on
October 14, 1998)
4.2 Form of Rights Agreement of Park Place Entertainment Corporation
(incorporated by reference to Exhibit 4.2 to Park Place's Form S-4
Registration Statement filed with the Commission on October 14, 1998)
10.1 Form of 1998 Stock Incentive Plan of Park Place Entertainment
Corporation (incorporated by reference to Exhibit 10.1 to Park
Place's Form S-4 Registration Statement filed with the Commission
on October 14, 1998)
10.2 Form of 1998 Independent Director Stock Option Plan of Park Place
Entertainment Corporation (incorporated by reference to Exhibit 10.2
to Park Place's Form S-4 Registration Statement filed with the
Commission on October 14, 1998)
10.3 Form of Distribution Agreement between Hilton Hotels Corporation
and Park Place Entertainment Corporation (incorporated by reference
to Exhibit 10.3 to Park Place'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 Park Place Entertainment Corporation (incorporated by reference to
Exhibit 10.4 to Park Place's Form S-4 Registration Statement filed
with the Commission on October 14, 1998)
10.5 Employment Agreement between Park Place Entertainment Corporation
and Arthur M. Goldberg (incorporated by reference to Exhibit 10.5
to Park Place's Form S-4 Registration Statement filed with the
Commission on October 14, 1998)
10.6 Employment Agreement between Park Place Entertainment Corporation
and Stephen F. Bollenbach (incorporated by reference to Exhibit 10.6
to Park Place'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
Park Place Entertainment Corporation (incorporated by reference to
Exhibit 10.7 to Park Place'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 Park Place Entertainment
Corporation (incorporated by reference to Exhibit 10.8 to Park
Place'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 Park Place Entertainment
Corporation (incorporated by reference to Exhibit 10.9 to Park
Place'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 Park Place
Entertainment Corporation (incorporated by reference to Exhibit
10.10 to Park Place'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 Park Place Entertainment Corporation
(incorporated by reference to Exhibit 10.11 to Park Place'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 Park Place Entertainment
Corporation (incorporated by reference to Exhibit 10.12 to Park
Place's Form S-4 Registration Statement filed with the Commission
on October 14, 1998)
27 Financial data schedule for the nine month period ended September 30,
1998.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
14
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARK PLACE ENTERTAINMENT CORPORATION
(Registrant)
Date: November 6, 1998 /s/ SCOTT A. LAPORTA
----------------------------
Scott A. LaPorta
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 119
<SECURITIES> 2
<RECEIVABLES> 185
<ALLOWANCES> 55
<INVENTORY> 19
<CURRENT-ASSETS> 355
<PP&E> 4,479
<DEPRECIATION> 489
<TOTAL-ASSETS> 5,901
<CURRENT-LIABILITIES> 369
<BONDS> 1,564
0
0
<COMMON> 0
<OTHER-SE> 3,331
<TOTAL-LIABILITY-AND-EQUITY> 5,901
<SALES> 2,023
<TOTAL-REVENUES> 2,023
<CGS> 0
<TOTAL-COSTS> 1,713
<OTHER-EXPENSES> 6
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 221
<INCOME-TAX> 101
<INCOME-CONTINUING> 118
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 118
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</TABLE>
