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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
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DELAWARE 88-0400631
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification
Number)
3930 HOWARD HUGHES PARKWAY 89109
LAS VEGAS, NEVADA (Zip Code)
(Address of principal executive
offices)
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Registrant's telephone number, including area code: (702) 699-5000
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $0.01 per share New York
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Securities registered pursuant to Section 12(g) of the Act:
None
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 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Based upon the March 15, 1999 New York Stock Exchange closing price of $8.38
per share, the aggregate market value of the Registrant's outstanding Common
Stock held by non-affiliates of the Registrant was approximately $2.3 billion.
On that date, there were 303,370,936 shares of Common Stock outstanding.
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ITEM 1. BUSINESS
GENERAL
Park Place Entertainment Corporation ("Park Place" or "the Company") was
formed when Hilton Hotels Corporation ("Hilton") split its lodging and gaming
operations into two separate companies on December 31, 1998. Hilton accomplished
the separation through a tax free distribution of Hilton's gaming division to
its shareholders. Subsequent to the distribution Park Place merged with the
Mississippi gaming operations of Grand Casinos, Inc. ("Grand"). 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. Park Place
is the largest gaming company, as measured by casino square footage and
revenues, with approximately 1.4 million square feet of gaming space in 1999 and
approximately $2.9 billion in revenues in 1998 including the Grand operations.
Park Place is the only gaming company with a significant presence in Nevada, New
Jersey and Mississippi, the three largest gaming markets in the United States.
Park Place's current operations include twelve U.S. land-based casinos and
an interest in one U.S. riverboat casino, two land-based casinos in Australia
and one land-based casino in Uruguay. Park Place's domestic gaming operations
are conducted under the Bally, Flamingo, Grand and, subject to certain
limitations, Hilton brand names. See "Arrangements between Hilton and Park
Place--Trademark Assignment and License Agreement" and "Arrangements between
Grand and Lakes--Intellectual Property License Agreement."
PROPERTIES
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APPROXIMATE
NUMBER OF YEAR CASINO
NAME AND LOCATION ROOMS/SUITES ACQUIRED SQUARE FOOTAGE
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DOMESTIC CASINOS
NEW JERSEY
Bally's Park Place Casino-Resort(1)(2)................................ 1,265 1996 155,000
The Atlantic City Hilton Casino Resort(1)(3).......................... 805 1996 60,000
NEVADA
Flamingo Hilton-Las Vegas(4).......................................... 3,642 1971 93,000
Las Vegas Hilton(5)................................................... 3,174 1971 100,000
Bally's Las Vegas(1)(6)............................................... 2,814 1996 68,000
Reno Hilton(7)........................................................ 2,001 1992 114,000
Flamingo Hilton-Laughlin(8)........................................... 2,000 1990 58,000
Flamingo Hilton-Reno(9)............................................... 604 1981 46,000
MISSISSIPPI
Grand Casino Biloxi(10)............................................... 1,000 1998 110,000
Grand Casino Tunica(11)............................................... 1,356 1998 140,000
Grand Casino Gulfport(12)............................................. 400 1998 110,000
Bally's Saloon-Gambling Hall-Hotel(1)................................. 238 1996 40,000
LOUISIANA
Bally's Casino-Lakeshore Resort(1)(13)(14)............................ -- 1996 30,000
INTERNATIONAL CASINOS
AUSTRALIA(15)
Conrad International Treasury Casino, Brisbane........................ 136 1995 65,000
Conrad Jupiters, Gold Coast........................................... 609 1985 70,000
URUGUAY
Conrad International Punta del Este Resort and Casino(14)(16)......... 300 1997 38,000
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(FOOTNOTES ON FOLLOWING PAGE)
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(1) The referenced properties were acquired as a result of Hilton's merger with
Bally Entertainment Corporation in 1996.
(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 20,000 square feet attributable to O'Sheas
Irish theme casino adjacent to the hotel.
(5) Casino square footage includes 29,000 square feet attributable to the race
and sport book and 22,000 square feet attributable to the SpaceQuest
casino.
(6) Casino square footage includes 5,000 square feet attributable to the race
and sports book.
(7) Casino square footage includes 12,000 square feet attributable to the race
and sport book.
(8) Casino square footage includes 3,000 square feet attributable to the race
and sport book.
(9) 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.
(10) Includes two 500-room hotels located adjacent to the casino.
(11) A new resort hotel at Grand Casino Tunica opened in March 1999. Number of
rooms/suites reflects room availability at three hotels.
(12) A new resort hotel at Grand Casino Gulfport is currently under
construction and is expected to be completed during 1999.
(13) Park Place currently 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.
Park Place is continually evaluating attractive acquisition opportunities
and may at any time be negotiating to engage in a business combination
transaction or other acquisition. 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.
Park Place operates in only one industry segment.
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
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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.
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.
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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 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 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
Park Place owns and operates 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, all 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 4,300 parking spaces available for guests.
The casino area features approximately 110,000 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, a world-class spa, and a 60,000 square-foot
convention center.
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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 2,850 parking spaces available for guests.
Grand Casino Gulfport also offers a 500-seat theater adjacent to the casino.
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 five
restaurants, a Grand Casino Kids Quest(sm), and the Grand Arcade. 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 three hotels with an aggregate of
1,356 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 Americana: an 1890s Gold Rush
Era San Francisco, New Orleans Mardi Gras, the Great American West of the 1870s
and a Mississippi Riverboat Town. 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 operates 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.
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.
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, New Jersey and Mississippi.
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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.
MISSOURI CASINO
Prior to and in connection with the Hilton distribution, Park Place applied
to the Missouri Gaming Commission (the "MGC") for approval to own and operate
the Flamingo Casino--Kansas City, which features a dockside casino and
concession and entertainment facilities, which approval was not received prior
to the Hilton distribution. Hilton has retained ownership of this property. On
January 13, 1999, Hilton entered into an agreement to sell this property to a
third party and upon such sale, the proceeds of the sale will be allocated
between Park Place and Hilton pursuant to an agreement entered into in
connection with the Hilton distribution.
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 1999, Park Place's Nevada casino hotels are scheduled to complete
additional expansion and renovation programs. The Las Vegas Hilton plans to
renovate the casino and sportsbook 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.
NEW JERSEY
Park Place's Atlantic City, New Jersey casino hotels are also continuing
renovation projects in 1999. Bally's Park Place is renovating 500 guest rooms
and restaurant areas and plans to complete these projects by mid-1999.
MISSISSIPPI
The Gulfport Oasis, a new resort hotel, is currently under construction at
Grand Casino Gulfport and is expected to be completed during the summer of 1999.
Also under development is an approximately 1,750-acre recreation area between
Gulfport and Biloxi. Park Place is building an 18-hole championship
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golf course on the property, together with a clubhouse and sporting clay
shooting facility. Park Place expects these projects 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.
CREDIT POLICY
Park Place has extended credit on a discretionary basis to qualified patrons
especially at the Las Vegas Hilton and to a much lesser extent at its other
properties. The Company maintains strong controls over the extension of credit
and performs extensive credit checks to determine each individual patron's
creditworthiness. The untimate collectibility of customer receivables is
impacted by many factors including changes in economic conditions in the
patrons' home countries as well as changes in currency exchange rates.
COMPETITION
Park Place seeks 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. Obsolescence arising from age and
condition of facilities is a factor in the gaming industry. Accordingly, Park
Place expends, and intends to continue to expend, substantial funds to maintain
its facilities in first-class condition in order to remain competitive.
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 an approximate 3.8% increase in hotel capacity in Las Vegas in
1998 compared to 1997, thereby increasing competition in all segments of the Las
Vegas market. In addition, several of Park Place's competitors in Las Vegas will
be opening new mega resorts during 1999, one of which opened in March 1999.
Projects under development are expected to increase hotel capacity by nearly 10%
in 1999 as compared to 1998. Other projects have been announced 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 have been voted upon or are being proposed in several states which
could, if passed, materially affect Park Place.
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
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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, current or historical operations at Park Place's properties
may have resulted or may result in noncompliance or liability for cleanup
pursuant to Environmental Laws. In that regard, Park Place may incur costs for
cleaning up contamination relating to historical uses of certain of its
properties. In addition, 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 landowner 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.
ARRANGEMENTS BETWEEN HILTON AND PARK PLACE
Pursuant to the Hilton distribution agreement, the assets, liabilities and
operations relating to the Hilton lodging business and the Hilton gaming
business, subject to certain exceptions identified below, were allocated to
Hilton and Park Place, respectively. In connection with the Hilton distribution,
Hilton and Park Place also entered into a number of other transaction documents
governing their relationship after the Hilton distribution. These transaction
documents, including the Hilton distribution agreement, are described below. The
Hilton distribution agreement and related agreements are filed as exhibits to
this Annual Report.
HILTON DISTRIBUTION AGREEMENT
On December 31, 1998, Hilton and Park Place entered into the Hilton
distribution agreement which provided 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, (x) Hilton effected a series of mergers
and asset and stock transfers that resulted 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 were allocated to
Hilton and (z) the assets and liabilities of the Hilton gaming business were
allocated to Park Place.
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The "Hilton lodging business" refers to the business conducted by Hilton and
its subsidiaries relating to:
(a) the management, ownership, operation and development 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 and legal title to the Kansas City, Missouri
riverboat).
Transfers relating to the Kansas City, Missouri riverboat gaming facility
and related assets are governed by a disposition agreement among Hilton, Park
Place and the subsidiary owning these assets. On January 13, 1999, Hilton
entered into an agreement to sell these assets to a third party. Upon such sale,
the net proceeds will be allocated between Park Place and Hilton pursuant to an
agreement entered into in connection with the Hilton distribution.
Under the Hilton distribution agreement, Hilton retained all debt secured by
or specifically associated with assets of the Hilton lodging business and Park
Place assumed all debt secured by or specifically associated with assets of the
Hilton gaming business was assumed by Park Place. Generally, the remaining debt
of Hilton at the time of the Hilton distribution was allocated between Hilton
and Park Place so as to approximately equalize the total debt between the two
companies, pro forma for the Hilton distribution and the Grand merger. See
"--Assumption Agreement Relating to Certain Indebtedness" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In connection with such allocation of assets and liabilities, the Hilton
distribution agreement also contained general indemnities and the procedures by
which indemnification may be claimed. Hilton agreed generally to indemnify Park
Place against liabilities that relate to the Hilton lodging business, and Park
Place 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 included
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 provided for the resignation of all of Hilton's directors and the
Hilton Employees (as defined below) from all governing bodies or positions as
officers or employees, as applicable, of Park Place or any of the gaming
subsidiaries and the resignation of all of Park Place's directors and the Park
Place Employees (as defined below) from all governing bodies or positions as
officers or employees, as applicable, of Hilton or any of the Hilton lodging
subsidiaries, effective as of the date of the Hilton distribution, except as
otherwise set forth in the Hilton distribution agreement. However, Stephen F.
Bollenbach continued as President, Chief Executive Officer and a Director of
Hilton and is Chairman of the Board of Directors of Park Place, Arthur Goldberg
continued as a Director of Hilton and is President and Chief Executive Officer
and a Director of Park Place, Barron Hilton and A. Steven Crown each continued
as Directors of Hilton and are Directors of Park Place and Eric Hilton resigned
as a Director of Hilton and is a Director of Park Place.
The Hilton distribution agreement also provided that Hilton and Park Place
enter into the other agreements described below.
TAX ALLOCATION AND INDEMNITY AGREEMENT
Hilton and Park Place have entered into the Tax Allocation and Indemnity
Agreement (the "Hilton Tax Agreement") which defines the parties' rights and
obligations with respect to (a) the preparation and
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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 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, which were not required
to be filed on or before December 31, 1998 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 Hilton 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 has an indemnity obligation with respect
to taxes for a period covered by such tax return. As used herein,
"Pre-Distribution Taxable Period" means a taxable year that ends on or before
December 31, 1998, "Post-Distribution Taxable Period" means a taxable year that
begins after the close of business on December 31, 1998, and "Straddle Period"
means any taxable year beginning before and ending after the close of business
on December 31, 1998.
The Hilton Tax Agreement also provides that Hilton is 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). Hilton has given a reciprocal indemnity 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") entered into between Hilton and Park Place
provides for the allocation of employees of Hilton and its subsidiaries and
obligations and responsibilities regarding compensation,
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benefits, labor and other employment matters. Under the Hilton Employee Benefits
Agreement, effective as of December 31, 1998, Hilton and Park Place agreed to
allocate all employees of Hilton and its subsidiaries as of December 31, 1998 to
either Park Place (the "Park Place Employees") or Hilton (the "Hilton
Employees"), based upon whether each employee's employment duties before
December 31, 1998 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 is 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 is 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
terminated employment with Hilton prior to December 31, 1998. 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
December 31, 1998. 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 is to maintain sponsorship of the
Hilton 401(k) Plan (the "Hilton 401(k) Plan") as of December 31, 1998, and Park
Place is to 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 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 are to 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 are
to 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 are made solely by Park Place pursuant to the
terms of the Park Place 401(k) Plan.
Hilton retains and is responsible for the administration of each of the
Retirement Plans 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 retains or
assumes, 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 Hilton
lodging business, on the one hand, and Park Place Employees and Hilton Terminees
whose employment related to the Hilton gaming business, on the other hand.
Hilton is 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 is 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
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Individuals or Park Place Individuals, then each of Hilton and Park Place is
responsible for such 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 December 31, 1998, all outstanding options under
such plans, other than options held by Mr. Goldberg, were 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 prior to the Hilton distribution was preserved after
the Hilton Distribution and the exercise price of the Hilton Options was
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 December 21, 1998, all as
determined by Hilton. All outstanding options held by Mr. Goldberg under such
plans were adjusted to represent Park Place Options. Pursuant to such
adjustment, the intrinsic value of Mr. Goldberg's outstanding options prior to
the Hilton distribution was preserved after the Hilton Distribution, and the
number of shares subject to and the exercise price of such options was adjusted
based on the relative values of the Hilton common stock and the Park Place
common stock on December 21, 1998, all as determined by Hilton.
Park Place adopted, effective no later than December 31, 1998, stock option
plans in substantially the same form as the Hilton Stock Option Plans, with such
changes as were necessary to reflect Park Place as the issuer thereunder and
such other changes as Park Place determined to be necessary (such plans as
adopted, the "Park Place Stock Option Plans"). Park Place Options are to 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 involved
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 were adjusted so that the
aggregate value of the awards remained 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 bears
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, except with
respect to options held by Mr. Goldberg, the number of shares subject to awards
following the conversion remained the same and the exercise price of options
decreased as a result of the Hilton Distribution. With respect to options held
by Mr. Goldberg, the number of shares subject to such options following the
conversion increased and the exercise price of such options decreased as a
result of the Hilton Distribution.
STOCK PURCHASE PLANS. As of the Effective Date, the Employee Stock Purchase
Plan of Hilton (the "Hilton Stock Purchase Plan") was amended and will be
administered to provide that all contributions withheld from the compensation of
participants through December 31, 1998 shall be used on such date to purchase
Hilton Common Stock under the Hilton Stock Purchase Plan.
Park Place adopted, effective as of December 31, 1998, a plan substantially
similar to the Hilton Stock Purchase Plan, with such changes as were necessary
to reflect Park Place as the issuer of awards thereunder and such other changes
as Park Place determined to be necessary (such plan as adopted, the "Park Place
Stock Purchase Plan").
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COMPENSATION PLANS. Hilton will pay all compensation earned by each Hilton
Individual (as defined below) who, on December 31, 1998, was 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
December 31, 1998. From and after December 31, 1998, Hilton retains all
liabilities relating to or arising under the Hilton Compensation Plans with
respect to any Hilton Individuals. "Hilton Individual" refers to any individual
who
(i) is a Hilton Employee,
(ii) was, as of December 31, 1998, a Hilton Terminee whose last
employment with Hilton or any of its subsidiaries was with the Hilton
lodging business or
(iii) is a dependent or beneficiary of any individual specified in (i) or
(ii).
Park Place assumed all obligations to pay all compensation earned by each
Park Place Individual (as defined below) who, on December 31, 1998, is a
participant under the Hilton Compensation Plans. Park Place adopted, effective
as of December 31, 1998, 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 December 31, 1998,
the Park Place Compensation Plans are to provide future compensation benefits to
Park Place Individuals. The terms and conditions of the Park Place Compensation
Plans are to be substantially similar to the terms and conditions of the Hilton
Compensation Plans. "Park Place Individual" refers to any individual who
(i) is a Park Place Employee,
(ii) is, as of December 31, 1998, a Hilton Terminee whose last
employment with Hilton or a subsidiary of Hilton was with a Hilton gaming
business, or
(iii) is a dependent or beneficiary of any individual described in (i) or
(ii).
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 amounted to approximately
$2,200,000 on December 31, 1998. As of December 31, 1998, Park Place is solely
responsible for all liabilities and obligations under such agreement.
MEDICAL AND OTHER WELFARE BENEFITS PLANS. On December 31, 1998, Hilton
assumed or retained 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 December 31, 1998 by Hilton
Employees and Hilton Terminees. Park Place maintains separate medical, heath,
dental, disability, accident, death, vacation and group term life insurance
plans for Park Place Employees following December 31, 1998. On December 31,
1998, Park Place assumed 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 established a long-term disability plan to
cover Hilton Employees and Hilton Terminees whose employment related to the
Hilton lodging business. On December 31, 1998, Park Place assumed and became
responsible for providing post-retirement benefits with respect to those former
employees who became entitled to the benefits before December 31, 1998.
TRADEMARK ASSIGNMENT AND LICENSE AGREEMENT
Pursuant to the terms of the Assignment and License Agreement (the "Hilton
Trademark Agreement") entered into by and among Hilton, Park Place and Conrad
International Royalty Corporation ("CIRC"), Hilton agreed to 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 by Hilton
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(collectively, the "Assigned Marks"). Hilton also granted to Park Place (with
respect to the "Hilton" mark and certain variations thereof) and CIRC granted to
Park Place (with respect to the "Conrad" mark and certain variations thereof) a
limited nonexclusive right to use
(i) 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--Program and
(ii) 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 is for a term of five
years following December 31, 1998, except with respect to the Atlantic City
Hilton, Las Vegas Hilton and the Reno Hilton, in which case, the term is 10
years from December 31, 1998. 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, the Reno Hilton and the
Atlantic City 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
agreed to cause each of the Hilton Casino Hotels and Conrad Properties to
participate in Hilton Reservations Worldwide and in the Hilton HHonors--Program
and pay the applicable fees in connection therewith.
Park Place is also subject to certain limitations on use and certain quality
control restrictions. During the initial two-year term, Park Place is 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 Atlantic City Hilton, 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
(i) if the Atlantic City Hilton, the Las Vegas Hilton and the Reno
Hilton are sold by Park Place or
(ii) upon six months' written notice (after the fifth anniversary of
December 31, 1998).
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.
OTHER AGREEMENTS
CORPORATE SERVICES AGREEMENTS. In connection with the Hilton distribution
agreement, on December 31, 1998, Hilton and Park Place entered 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"), the Park Place
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Corporate Services Agreement (the "Park Place Services Agreement"), and the
Architecture and Construction Services Agreement (the "A&C 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 agreed to 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 December 31, 1998, with an
option by Park Place to extend the term not to exceed 18 months from December
31, 1998 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 30 days' prior written notice to
Hilton and 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 agreed to 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 December 31, 1998, with an option by Hilton to
extend the term not to exceed 18 months from December 31, 1998 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 30 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.
ARCHITECTURE AND CONSTRUCTION SERVICES AGREEMENT. The scope and cost of
services relating to architecture and construction management services are
governed by a separate agreement entered into by Hilton and Park Place on
December 31, 1998. Pursuant to the A&C Agreement, Park Place agreed to provide,
at Hilton's request, design, construction and financial management services as
specified in a work order. Hilton agreed to provide the services of its Senior
Vice President of Architecture and Construction to operate Park Place's
Architecture and Construction group ("A&C"), including supervision and
management of A&C employees, the establishment of A&C policies, goals and
budgets and the development of A&C strategies, all subject to Park Place's
approval. The term of the A&C Agreement and the fees to be paid in connection
with the services provided thereunder are substantially similar as under the
Hilton Services Agreement and the Park Place Services Agreement, except that
either party may terminate the A&C Agreement at any time for any or no reason
upon 90 days' prior written notice to the other party, or effective 90 days
thereafter in the event of a material default by the other party.
ASSUMPTION AGREEMENT RELATING TO CERTAIN INDEBTEDNESS
Hilton and Park Place entered into a debt assumption agreement, pursuant to
which Park Place assumed and agreed 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
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Hilton, and certain other limited circumstances, Hilton is required to reimburse
Park Place for any such increase.
Hilton is 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
On December 31, 1998, Grand Casinos, Inc. completed a tax free spin-off of
its non-Mississippi assets with a distribution to the holders of its common
stock shares of Lakes (a wholly owned subsidiary of Grand Casinos, Inc.). Upon
completion of the Grand distribution, Lakes Gaming, Inc. a new publicly held
company (Lakes) conducts the former Grand gaming business located outside the
state of Mississippi.
Pursuant to the Grand distribution agreement, Grand and Lakes allocated
between them Grand's assets and liabilities related to the Mississippi business
and the non-Mississippi business. Grand and Lakes have also entered into certain
other transaction documents governing their relationship following consummation
of the Grand distribution. These documents, including the Grand distribution
agreement, are described below.
GRAND DISTRIBUTION AGREEMENT
On December 31, 1998, Grand and Lakes entered into the Grand distribution
agreement which provided 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 were retained by Grand and those which are being contributed
by Grand to Lakes. Pursuant to the Grand distribution agreement,
(i) Grand retained 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 assumed the assets and liabilities associated with the
non-Mississippi business which includes the Indian management contracts
associated with 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.
The Grand distribution agreement may be amended upon the written consent of
both Grand and Lakes.
GRAND RESTRUCTURING
In order to effectuate the Grand distribution, Grand consummated 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 was to separate substantially all of Grand's
non-Mississippi business from its Mississippi business. In connection with the
Grand Restructuring, Lakes, or one of its subsidiaries, has assumed, all
liabilities associated with the non-Mississippi business and Grand, or one of
its subsidiaries, has retained, all liabilities associated with the Mississippi
business.
Prior to the Grand Restructuring, all of Grand's assets were held indirectly
by and operated through various wholly owned subsidiaries of Grand. The
subsidiaries that relate to the non-Mississippi business were transferred by
Grand through a series of transactions to Lakes. With the transfer of such
subsidiaries, Lakes assumed, 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,
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and the assets and liabilities associated with such subsidiaries, were, unless
otherwise provided for in the Grand distribution agreement, 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"), were assigned to Lakes. Finally, the Grand distribution agreement
provided that Grand contribute up to $33 million in cash to Lakes in order to
provide necessary and needed levels of working capital and appropriate reserves.
Prior to the Grand distribution, Grand and Lakes consummated the following
transactions subject to certain conditions provided for in the Grand
distribution agreement:
(i) Certain non-Mississippi subsidiaries formed limited liability
companies and contributed their respective assets and liabilities to such
limited liability companies;
(ii) One non-Mississippi subsidiary formed a limited liability company
and then formed a partnership with such limited liability company. Such
non-Mississippi subsidiary contributed its assets and liabilities to such
partnership;
(iii) Grand contributed 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;
(iv) Grand transfered $39 million of cash to Lakes which amount
represents the $33 million in cash required for necessary working capital
and appropriate reserves less amounts paid by Grand prior to December 31,
1998 in connection with Stratosphere Corporation and increased by the
proceeds of any sale of any Assigned Lakes Assets prior to December 31,
1998; and
(v) The non-Mississippi subsidiaries which organized the limited
liability companies merged with and into Lakes.
GRAND TAX ALLOCATION AND INDEMNITY AGREEMENT
Grand and Lakes have entered into the Tax Allocation and Indemnity Agreement
(the "Grand Tax Agreement") which defines the parties' rights and obligations
with respect to:
(i) the preparation and filing of tax returns on a basis consistent with
prior practice and the payment of taxes with respect thereto;
(ii) the allocation of, and indemnification against, certain liabilities
for taxes of the parties; and
(iii) certain other related matters.
Pursuant to the Grand Tax Agreement, Grand is responsible for preparing and
filing:
(i) 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
(ii) all tax and information returns of the Grand Group subsequent to
the Grand 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.
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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 December 31, 1998, "Post-Distribution Taxable Period"
means a taxable year that begins after the close of business on December 31,
1998, and "Straddle Period" means any taxable year beginning before and ending
after the close of business on December 31, 1998.
The Grand Tax Agreement 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 December 31, 1998 are allocated only to
them. Taxes and refunds shown on consolidated, combined or unitary returns filed
after December 31, 1998 for periods beginning before or including December 31,
1998 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 Grand 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
December 31, 1998 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 as
defined be allocated between Grand and Lakes as follows:
(i) all Stratosphere Losses as defined 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. Because the Stratosphere Losses allocable to Lakes in (ii)
above provided economic benefits to Lakes, such losses were 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 was created pursuant to an escrow agreement to be entered
into by an escrow agent, Lakes, Grand and Park Place, 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 is not binding on the IRS or any other taxing
authority and does 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
December 31, 1998 (including any tax liability resulting from the Section 355
Gain described above).
INTELLECTUAL PROPERTY LICENSE AGREEMENT
In the Grand distribution, Grand, as a wholly owned subsidiary of Park
Place, retained 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"), entered
into between Grand and Lakes, Grand
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granted 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
Mille Lacs Band of Chippewa Indians (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
Grand and Lakes have entered 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 December 31, 1998 ("Former Grand Employees"). Under the Grand Employee
Benefits Agreement, Grand and Lakes allocated such employees as of December 31,
1998 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
December 31, 1998 primarily related 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 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
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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 is responsible for payment of all compensation
and bonuses payable for periods ending on or before December 31, 1998 to each
Grand Retained Individual or Lakes individuals who, on the Grand distribution
date, was a participant under any of Grand's cash compensation plans, in
accordance with the terms of each applicable plan. Lakes adopted, as of December
31, 1998, all of Grand's cash compensation plans that covered Lakes Individuals,
and amended such plans to reflect the new issuer of awards thereunder.
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 December 31, 1998, Lakes assumed sponsorship of
the Grand Casinos 401(k) Savings Plan (the "401(k) Savings Plan") from Grand.
The 401(k) Savings Plan now provides additional benefits only for eligible Lakes
Individuals, according to its terms; and the Grand Retained Employees are not
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 December 31, 1998, any employer contributions under the 401(k)
Savings Plan with respect to Grand Retained Individuals were made by Grand; and
any employer contributions under the 401(k) Savings Plan with respect to Lakes
Individuals were made by Lakes. Lakes is in the process of separating the
portion of the 401(k) Savings Plan held for Grand Retained Individuals and
transferring 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 December 31, 1998 until it chooses to amend or
terminate them.
As of December 31, 1998, all of the options to purchase Grand common stock
that were outstanding under the Grand Option Plans, including the Non-Plan
Director Options, were 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 was preserved immediately after the
Grand distribution and the exercise prices of the Grand Options were allocated
between Grand Options and the Lakes Options, based upon the relative values of
Grand common stock and Lakes common stock immediately after the Grand
distribution, all as agreed by Grand and Lakes (the "Adjustment"). The vesting
of all Grand Options and Lakes Options accelerated as of December 31, 1998 in
connection with the Grand merger and were amended to permit exercises after
December 31, 1998 so long as such optionee is either an employee or board member
of either entity. With respect to Lakes Individuals holding Grand Options after
December 31, 1998, Grand has amended 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 became options to purchase shares of Park Place.
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As of December 31, 1998, Lakes adopted new option plans substantially
identical to the Grand Option Plans which Grand shareholders approved at the
Grand Special Meeting. All awards under the Lakes Option Plans 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
were converted into Lakes options in the Grand distribution, are 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 are identical in all material respects to the Grand
Options from which they were converted (including the amendment to permit
exercises so long as such optionee is either an employee or board member of
either entity). 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 December 31, 1998, Lakes assumed all obligations with
respect to the Lakes Options converted from Grand Options, and administers such
options under the terms of the Lakes Assumed Option Plans governing such
options.
STOCK PURCHASE PLANS. As of December 31, 1998, the Grand Casinos, Inc.
Associate Stock Purchase Plan established by Grand as of March 1, 1997 (the
"Grand Stock Purchase Plan") was amended to provide that all contributions
withheld from the compensation of participants through the day before December
31, 1998 (the "Purchase Date") be used on the Purchase Date to purchase Grand
Common Stock under the Grand Stock Purchase Plan.
MEDICAL AND OTHER WELFARE BENEFIT PLANS. Grand is 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 December 31, 1998, Grand is to 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. Lakes is responsible for
all obligations under Grand's Welfare Plans with respect to Lakes Individuals.
As of December 31, 1998, Lakes adopted 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 December 31,
1998, that are substantially comparable to the applicable Grand Welfare Plans.
After December 31, 1998, Lakes may adopt other Welfare Plans for Lakes
Individuals as Lakes may choose or as may be required by applicable laws.
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 December 31, 1998, 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 credited each Grand Retained
Employee and Lakes credited 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 December 31, 1998. 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.
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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.
REGULATION AND LICENSING
Each of Park Place's casinos are 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 Hilton distribution and the Grand merger, Park Place
was 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 were registered, licensed or found suitable in connection with the
Hilton distribution and the Grand merger.
Under provisions of gaming laws in which Park Place has operations 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. Park Place's Nevada gaming operations are 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 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.
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Each subsidiary of Park Place that currently operates a casino in Nevada
(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. Park Place is required to be registered by the Nevada Commission
as a publicly traded corporation ("Registered Corporation") and as such, is
required 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. Park Place 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.
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.
Park Place and all Corporate Licensees are 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 Park Place or 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 premises) 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
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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 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
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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.
Park Place is 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 is also 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 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 Park Place.
Park Place may not make a public offering of its 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 December 17, 1998, the Nevada Commission granted Park Place 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 Park Place (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, and to
hypothecate their assets to secure the payment or performance of any obligations
issued by, Park Place or an Affiliate in a public offering under the Shelf
Registration. The Shelf Approval also includes approval to place restrictions
upon the transfer of and enter into agreements not to encumber the equity
securities of the Corporate Licensees. 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.
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;
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(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 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 machine 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
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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 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 who is found to be
disqualified by the New Jersey Commission shall dispose of such securities. 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.
The corporate charter of Park Place has been 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 likewise 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, including divestiture of the securities held. 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
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Jersey Commission makes a finding of disqualification with respect to any owner
or holder of any security thereof, and the New Jersey Commission also finds
that:
(i) such company has adopted the 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 owner or holder; and
(iii) such disqualified owner or 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 owner or 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.
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 under the New Jersey Act. 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
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(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 already 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,
including a security holder who fails to qualify and does not dispose of
securities as may be required by the New Jersey Act, then, under certain
circumstances and with the exception discussed above for publicly traded
affiliates, the licensee could have its license suspended or revoked.
If a casino license is not renewed, is suspended for more than 120 days or
is revoked, the New Jersey Commission can appoint a conservator. The conservator
would be charged with the duty of conserving and preserving the assets so
acquired and continuing the operation of the casino hotel of a suspended
licensee or with operating and disposing of the casino hotel of a former
licensee. Such suspended licensee or former licensee 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.
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.
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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.
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. As of March 1, 1999, 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
is 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.
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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 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 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 registered 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.
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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 its 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. The Mississippi Commission has granted Park Place 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 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;
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(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 received a waiver
of foreign gaming approval from the Mississippi Commission for operations in
other states, but may 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 are located, equals approximately 4% of the gaming
receipts.
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.
Recently, the Mississippi Commission adopted a regulation which increased the
infrastructure requirement to 100% from the existing 25%; however, the
regulation grandfathers existing licensees and applies only to new casino
projects and casinos that are not operating at the time of acquisition or
purchase.
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
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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's Louisiana affiliate,
Bally's Louisiana, Inc., have filed the required forms with the Louisiana
Regulatory Authorities 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 has 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 "Item 3.
Legal Proceedings."
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.
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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 Park Place'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.
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. Prior to and in connection with the Hilton
distribution, Park Place applied to the MGC for approval to own and operate the
Flamingo Casino--Kansas City, which approval was not received prior to the
Hilton distribution. On January 13, 1999, Hilton entered into an agreement to
sell this property to a third party. The sale is subject to approval by the MGC.
See "Business--Missouri Casino."
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 also conducted an investigation of, and have
found suitable, Park Place and its subsidiary BI Gaming Corporation (which will
hold the Australian gaming assets of Park Place).
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.
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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 Executive Power of the Oriental Republic of Uruguay, 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. Baluma S.A., a corporation duly organized and
existing under the laws of the Oriental Republic of Uruguay, as owner of the
Conrad International Punta del Este Resort & Casino (the "Complex") has been
authorized to conduct casino operations by the Executive Power of the Oriental
Republic of Uruguay. Such authorization was granted based on the expertise and
financial suitability of Hilton and its subsidiary Conrad International Hotels
Corporation, which acted as manager of the Complex. By resolution dated December
29, 1998, the Executive Power of the Oriental Republic of Uruguay authorized the
replacement of Conrad International Hotels Corporation by B I Gaming
Corporation, a subsidiary of Park Place, as manager of the Complex, subject to
the fullfilment of certain formal requirements set forth in such resolution.
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 described in Items 1 and 2
of this Report 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.
EMPLOYEES
At December 31, 1998, Park Place had approximately 42,000 employees, of
which approximately 10,000 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
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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.
FORWARD-LOOKING STATEMENTS
Certain information included in this Annual Report on Form 10-K and other
materials filed or to be filed by the Company with the Securities and Exchange
Commission (as well as information in oral statements or other written
statements made or to be made by the Company) contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for
forward-looking statements so long as those statements are identified as
forward-looking and are accompanied by meaningful cautionary language noting
important factors that could cause actual results to differ materially from
those projected in such statements. Such forward-looking statements include
information relating to plans for future expansion and other business
development activities as well as other capital spending, financing sources and
the effects of regulation (including gaming and tax regulation) and competition.
Park Place has based its forward-looking statements on current expectations and
projections about future events.
When used in this Annual Report on Form 10-K and in other statements made by
or on behalf of the Company, the words "believes," "anticipates," "expects,"
"plans," "intends," "hopes," "estimates," "projects" and other similar
expressions, which are predictions of or indicative of future events and trends,
identify forward-looking statements. Such forward-looking statements are subject
to a number of important risks, uncertainties and assumptions that could
significantly affect anticipated results in the future. These risks,
uncertainties and assumptions about Park Place and its subsidiaries include, but
are not limited to, the following:
- the effect of economic, credit and capital market conditions in general
and on gaming companies in particular;
- construction and development activities;
- ability to successfully integrate Park Place operations with Grand;
- the impact of competition including the information set forth under
"Business--Competition", particularly from other gaming and hotel/gaming
operations;
- changes in laws or regulations, third party relations and approvals,
decisions of courts, regulators and governmental bodies; and
- changes in customer demand.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Annual Report on Form 10-K might not occur.
ITEM 2. PROPERTIES
Hotel casinos owned and operated, leased and managed by Park Place are
listed and described in Item 1 of this Report.
ITEM 3. LEGAL PROCEEDINGS
Park Place and its subsidiaries are parties to legal proceedings relating to
the Hilton gaming business that were assumed 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
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respect thereto is 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.
BELLE OF ORLEANS
The subsidiary which holds the Belle of Orleans, L.L.C. (the "Belle") (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. On March 27, 1997, Metro filed suit in the Civil District
Court for the Parish of Orleans, State of Louisiana seeking contractual and
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 Hilton's merger with Bally Entertainment Corporation in
1996. Preliminary injunctive relief was granted to Metro by the trial court.
After various hearings and appeals by the Louisiana Subsidiary, the injunctive
relief granted by the trial court has been suspended while on appeal. On June
16, 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. The Louisiana
Subsidiary filed certain exceptions which were denied, but, pursuant to a writ
application subsequently filed, the Court of Appeals reversed and remanded for
determination of which disputes are arbitrable. On November 23, 1998, Metro
filed a third suit in the Civil District Court for the Parish of Orleans, State
of Louisiana against the Louisiana Subsidiary, seeking a temporary restraining
order and preliminary injunction to prevent the Louisiana Subsidiary from
continuing as manager of the riverboat casino. On December 23, 1998, judgment
was rendered in favor of the Louisiana Subsidiary dismissing the suit in its
entirety. Metro has appealed. An affiliate of the Louisiana Subsidiary, Bally's
Intermediate Holdings, Inc., which due to a merger subsequently became Bally's
Midwest Casinos, Inc., filed an action on September 23, 1998, in the Circuit
Court of Cook County, Illinois, which action has since been removed to the U.S.
District Court for the Northern District of Illinois, Eastern Division, seeking
judgment against Metro based upon Metro's default under certain agreements
between the parties relating to a $4 million loan to a shareholder of Metro.
Plaintiff filed a motion for summary judgment which is currently under
advisement by the court. Metro filed a fourth suit on December 28, 1998 in the
Civil District Court for the Parish of Orleans, State of Louisiana seeking a
temporary restraining order and permanent injunctive relief to prevent the
spinoff of Hilton's gaming operations to Park Place. A temporary restraining
order was issued by the trial court, dissolved by the Court of Appeals and
affirmed by the Supreme Court. The motion for preliminary injunction was denied.
Park Place will vigorously defend all claims under such suits and vigorously
pursue its claim against Metro.
BALLY MERGER LITIGATION
A purported class action against Bally Entertainment Corporation ("Bally"),
its directors and Hilton was commenced on September 4, 1996, under the caption
PARNES V. BALLY ENTERTAINMENT CORPORATION, ET AL. in the Court of Chancery of
the State of Delaware, New Castle County. The plaintiff alleges breaches of
fiduciary duty in connection with the merger of Bally with and into Hilton in
December 1996 (the "Bally Merger"), including allegedly illegal payments to
Arthur M. Goldberg that purportedly denied Bally shareholders other than Mr.
Goldberg an opportunity to sell their shares to Hilton or any other bidder at
the best possible price. In the complaint, the plaintiff seeks, among other
things:
(i) an order enjoining the Bally Merger;
(ii) an award of damages in an unspecified amount;
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(iii) an order requiring Mr. Goldberg to disgorge his profits; and
(iv) an award of attorneys' fees and expenses.
In orders dated May 13, 1997 and February 3, 1998, the Court dismissed this
litigation. Plaintiff appealed this dismissal and, on January 25, 1999, the
Delaware Supreme Court reversed the dismissal order and remanded the case to the
Court of Chancery.
ATLANTIC CITY LITIGATION
On September 9, 1997, an action was commenced in the United States District
Court for the Southern District of New York by Mirage Resorts, Inc. ("Mirage").
Named as defendants are the Company, Trump Hotel & Casino Resorts ("THCR"), and
the allegedly controlling shareholder of THCR. The complaint alleges, among
other things, that the defendants violated the Sherman Antitrust Act, committed
tortious interference with prospective economic advantage, and induced a breach
of fiduciary duty, in connection with Mirage's efforts to develop a casino
resort in Atlantic City, New Jersey. Injunctive relief and compensatory and
punitive damages in unspecified amounts are sought.
The Company has denied all allegations of wrongdoing asserted against it in
this litigation and believes that it has substantial defenses to these claims.
SLOT MACHINE LITIGATION
On April 26, 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 Park Place and 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.
An action subsequently filed on May 10, 1994 in the United States District
Court for the Middle District of Florida--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.
On September 26, 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. On February 14, 1997,
the plaintiffs filed a consolidated and amended complaint.
In March 1997, various defendants 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.
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On or about December 19, 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 was filed on or about February 13, 1998.
The plaintiffs have filed a motion seeking an order certifying the action as
a class action. Certain of the defendants have opposed the motion. The Court has
not ruled on the motion.
LEGAL PROCEEDINGS--GRAND
STRATOSPHERE CORPORATION
Grand previously owned approximately 37% of the common stock issued by
Stratosphere Corporation ("Stratosphere"). Stratosphere and its wholly owned
operating subsidiary developed and operated the Stratosphere Tower, Hotel and
Casino in Las Vegas, Nevada. On January 27, 1997, in the United States
Bankruptcy Court in and for the District of Nevada, 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 was
approved by the Bankruptcy Court and declared effective on October 14, 1998.
Pursuant to the Second Amended Plan, Stratosphere common stock that was
outstanding prior to the effective date of the Second Amended Plan was
cancelled.
In March 1995, in connection with Stratosphere's issuance of its First
Mortgage Notes, Grand entered into a Standby Equity Commitment Agreement (the
"Standby Equity Commitment") between Stratosphere and Grand. Grand agreed in the
Standby Equity Commitment, subject to the terms and conditions stated in the
Standby Equity Commitment, to purchase up to $20 million of additional equity in
Stratosphere during each of the first three years Stratosphere is operating (as
defined in the Standby Equity Commitment) to the extent Stratosphere's
consolidated cash flow (as defined in the Standby Equity Commitment) during each
of such years does not exceed $50 million.
The enforceability of the Standby Equity Commitment is the subject of
litigation to which Grand is a party in (i) the Stratosphere Bankruptcy case (as
a result of a motion brought by the Official Committee), and (ii) the U.S.
District Court for the District of Nevada (as a result of an action brought by
the Trustee). On February 19, 1998, the Bankruptcy Court ruled that the Standby
Equity Commitment is not enforceable in the Stratosphere bankruptcy proceeding
as a matter of law. The Official Committee has stated that it intends to appeal
the Bankruptcy Court's decision.
The Second Amended Plan contemplates the formation of a new limited
liability company which will own and pursue certain alleged claims and causes of
action that Stratosphere and other persons may have against numerous third
parties, including Grand and/or officers and/or directors of Grand. The Second
Amended Plan contemplates capitalizing this new limited liability company with
an investment of $5 million. Currently, Grand has not been served with any such
litigation.
STRATOSPHERE SECURITIES LITIGATION
Grand and certain persons who have been indemnified by Grand (including
certain former and current Grand officers and directors) are defendants in legal
actions filed on August 16, 1996 in the District Court, Clark County, Nevada and
on August 5, 1996 in the United States District Court, District of Nevada. These
actions arise out of Grand's involvement in the Stratosphere Tower, Casino and
Hotel project (the "Stratosphere Project") in Las Vegas, Nevada.
The plaintiffs in the actions, who are current and/or former Stratosphere
Corporation shareholders, seek to pursue the actions as class actions, and make
various claims against Grand and the Grand-related defendants, including
securities fraud. In September 1997, Grand and the Grand-related defendants
submitted a motion to dismiss the federal action. In April 1998, this motion was
granted, in part, and
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denied, in part. The plaintiffs are pursuing the claims that survived the motion
to dismiss. Grand and the Grand-related defendants have also submitted a motion
for summary judgment seeking an order that such defendants are entitled to
judgment as a matter of law. Currently, the plaintiffs are engaged in discovery
related to the issues raised by the summary judgment motion. The court will not
decide the motion until after such discovery is completed and the parties have
submitted their respective arguments. The state court action has been stayed
pending resolution of the federal court action.
Grand intends to vigorously defend itself and the other Grand-related
defendants against the claims made in both the state and the federal action.
GRAND SECURITIES LITIGATION
Grand and certain of Grand's current and former officers and directors are
defendants in a legal action filed on September 9, 1996 in the United States
District Court in Minnesota. This action arises out of Grand's involvement in
the Stratosphere Project.
The plaintiffs in the action who are current and/or former Grand
shareholders, seek to pursue the action as a class action, and make various
claims against Grand and the other defendants, including securities fraud. Grand
and the Grand-related defendants submitted a motion to dismiss the plaintiffs'
claims. In December 1997, that motion was granted, in part and denied, in part.
Grand and the Grand-related defendants have also submitted a motion for summary
judgment. Currently, the plaintiffs and Grand and the other defendants are
engaged in discovery in the action. On March 10, 1999, plaintiffs were granted
leave to amend their complaint to include Park Place and Lakes.
Grand intends to vigorously defend itself and the other defendants against
the claims that survived Grand's motion to dismiss.
DERIVATIVE ACTION
Certain of Grand's current and former officers and directors are defendants
in a legal action originally filed on February 6, 1997 in the District Court,
Hennepin County, state of Minnesota. This action arises out of Grand's
investment 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.
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. The committee has completed its evaluation and has
recommended to the court that the plaintiffs' claims not be pursued.
In May 1998, the Court granted a motion for summary judgment submitted by
Grand, thereby dismissing the plaintiffs' claims. On March 9, 1999 the court of
appeals affirmed the summary judgement. It is uncertain whether plaintiffs will
seek further review.
STRATOSPHERE PREFERENCE ACTION
On February 12, 1998, Stratosphere filed a complaint in the United States
Bankruptcy Court in and for the District of Nevada against Grand and Grand Media
& Electronics Distributing, Inc., a wholly owned subsidiary of Grand (Grand
Media), a complaint in the Stratosphere bankruptcy case seeking recovery of
certain amounts paid by Stratosphere to Grand as management fees and for costs
and expenses under a management agreement between Stratosphere and Grand, and to
Grand Media for electronic equipment purchased by Stratosphere from Grand Media.
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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 remains in process.
INDEMNIFICATION AGREEMENT
As part of the merger and the Lakes distribution, Lakes agreed to indemnify
Grand against all costs, expenses and liabilities incurred or suffered by Grand
and certain of its subsidiaries and their respective current and former
directors and officers in connection with or arising out of the Stratosphere
litigation described above. Lakes' indemnification obligations include the
obligation to provide the defense of all claims made in such proceedings against
Grand and to pay all related settlements and judgments.
As security to support Lakes' indemnification obligations to Grand under
each of the Grand distribution agreement and the merger agreement, and as a
condition to the consummation of the merger, Lakes has agreed to 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 December 31, 1998.
OTHER LITIGATION
Park Place 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 the Company's
consolidated financial position or its results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The common stock of the Company began trading on December 21, 1998 on a
"when issued" basis, prior to the Hilton distribution on December 31, 1998. The
common stock trades on the New York Stock Exchange under the symbol PPE. As of
March 15, 1999, there were approximately 12,641 holders of record of the
Company's common stock.
Pursuant to the Amended and Restated Certificate of Incorporation, the
Company's authorized capital stock consisted of 400,000,000 shares of common
stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par
value $0.01 per share. At January 1, 1999, the Company had outstanding
approximately 303,000,000 shares of common stock and no shares of preferred
stock.
DIVIDENDS
The Company does not currently anticipate paying cash dividends. In March
1999, the Board of Directors approved a stock repurchase plan which authorized
the repurchase of up to 8 million shares of the Company's common stock.
PREFERRED STOCK PURCHASE RIGHTS
On December 29, 1998, the Board of Directors adopted a Preferred Share
Purchase Rights Plan ("Rights Plan") and declared a dividend distribution of one
Right on each outstanding share of the Company's common stock and one Right on
each share of common stock issued between such date and the earliest of the
Distribution Date and the Expiration Date (as these terms are defined in the
Rights Plan). Stockholders may transfer the Rights with the common stock only
until they become exercisable.
Generally, the Rights become exercisable only if a person or group (other
than Exempt Persons, as defined below) acquires 15% or more of the then
outstanding shares of common stock or announces a tender offer which would
result in ownership by a person or group of 15% or more of the then outstanding
shares of common stock. Each Right entitles stockholders to buy one
one-hundredth of a share of a new series of junior participating preferred stock
at an exercise price of $40.
If a person or group (other than Exempt Persons) acquires 15% or more of the
Company's shares of common stock, each holder of a Right will be entitled to
receive upon exercise a number of shares of the Company's common stock having a
market value equal to two times the then current purchase price of the Right.
If, after a person or group acquires 15% or more of the Company's shares of
common stock, the Company is acquired in a merger or engage in certain other
business combination transactions or transfers of assets, each Right entitles
its holder to purchase, at the Right's then current price, a number of the
acquiring company's common shares having a then current market value of twice
the Right's exercise price.
Following the acquisition by a person or group of beneficial ownership of
15% or more of the Company's common stock (other than Exempt Persons) and prior
to an acquisition of 50% or more of the Company's common stock, the board of
directors may exchange the Rights (other than Rights owned by the person or
group), in whole or in part, at an exchange ratio described in the Rights Plan.
Prior to the acquisition by a person or group of beneficial ownership of 15%
or more of the Company's common stock, the Rights are redeemable for $.001 per
Right at the option of the board of directors.
"Exempt Person" means:
- the Company or any of its subsidiaries;
- any of the Company or its subsidiaries' employee benefit plans;
- any entity or trustee holding shares of the Company's capital stock for or
pursuant to the terms of any such plan or for the purpose of funding other
employee benefits for the Company or its subsidiaries' employees; or
- Barron Hilton or the Conrad N. Hilton Fund.
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ITEM 6. SELECTED FINANCIAL DATA
Park Place has derived the following historical information from the Park
Place audited financial statements for 1995 through 1998 and unaudited financial
statements for 1994. Because the merger with Grand occurred on December 31,
1998, results of operations do not reflect the operations of Grand. The balance
sheet information does reflect the merger with Grand as of December 31, 1998.
The information is only a summary and should be read in conjunction with
Management's Discussion and Analysis in Item 7 and the historical financial
statements and related notes in Item 8.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OR AS OF DECEMBER 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------- ------- ------ ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Total revenue(1)............................................... $2,305 $ 2,153 $ 970 $ 942 $ 899
Total operating income......................................... 302 201 92 165 162
Income before extraordinary item............................... 109 67(2) 36(3) 85 79
Income before extraordinary item per share--Basic.............. $ .42 $ .25 $ .18 $ .44 $ .41
Income before extraordinary item per share--Diluted............ .42 $ .25 $ .18 $ .44 $ .41
OTHER OPERATING DATA:
EBITDA(4)...................................................... $ 556 $ 512 $ 216 $ 253 $ 240
BALANCE SHEET:
Cash and equivalents, restricted cash and temporary
investments(1)(5)............................................ $ 382 $ 234 $ 232 $ 38 $ 26
Total assets(1)................................................ 7,174 5,630 5,364 1,350 1,248
Total debt(5).................................................. 2,472 1,306 1,278 549 549
Stockholders'/Division equity.................................. 3,608 3,381 3,157 592 510
</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.
Upon adoption of EITF 97-2, which was in the fourth quarter of 1998, Park
Place no longer includes 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 $427 million, $457
million, $350 million, $292 million and $183 million for the years ended
December 31, 1997, 1996, 1995 and 1994, respectively. Application of the
standard reduced historical cash, cash equivalents and temporary investments
by $29 million, $28 million, $26 million and $18 million for the years ended
December 31, 1997, 1996, 1995 and 1994, respectively, and reduced historical
total assets by $59 million, $83 million, $48 million and $35 million for
the years ended December 31, 1997, 1996, 1995 and 1994, 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,
non-cash items and transaction costs in 1998, which can be computed by
adding depreciation, amortization, non-cash items and transaction costs 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 totaled $16
million for the year ended December 31, 1998, $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 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 before
extraordinary item) 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,
non-cash items and transaction costs in 1998 for Park Place for the years
ended December 31, 1998, 1997, 1996, 1995 and 1994 totaled $254 million,
$311 million, $124 million, $88 million and $78 million, respectively.
(5) On December 31, 1998, the Company completed a covenant defeasance of the
Grand 9% Senior Unsecured Notes by depositing $135 million in an irrevocable
trust. The amount deposited in trust, as well as the obligation, have been
reflected in the consolidated balance sheet in restricted cash and long-term
debt, respectively, as of December 31, 1998.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STRATEGY
Park Place Entertainment Corporation ("Park Place" or "the Company") expects
to expand its gaming business through acquisitions of quality assets in
established markets and selective new development. The merger with Grand's
Mississippi business on December 31, 1998 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 financial statements of Park Place for the years ended
December 31, 1998, 1997, and 1996 included in this Annual Report on Form 10-K.
FINANCIAL CONDITION
LIQUIDITY
Net cash provided by operating activities was $318 million, $375 million,
and $139 million in 1998, 1997 and 1996, respectively. 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 year ended December 31, 1998 decreased $57 million from the
prior year due primarily to transaction costs incurred in association with the
split from Hilton and the merger with Grand. Interest expense also increased
over the prior year.
ACQUISITIONS AND CAPITAL SPENDING
Cash used in investing activities was $584 million, $583 million and $55
million in 1998, 1997 and 1996, 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.
On December 31, 1998, the Company completed its acquisition of Grand through
the merger with and into the Company. As a result of the Grand merger, the
Company now includes the operations of Grand Casino Tunica, Grand Casino
Gulfport and Grand Casino Biloxi. The results of operations for the Grand
properties are not included in the Company's statement of operations for 1998 as
the merger was completed at the end of the year. Aggregate consideration
consisted of approximately 42 million shares of the Company's common stock for
an equity value of approximately $270 million and the assumption of
approximately $625 million of Grand's debt at fair market value.
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
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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.
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 in 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 March 1998, the Company acquired the remaining
interest in Bally's Grand, Inc. for $44 million, increasing the Company's
ownership to 100%.
In addition to an estimated $350 million in 1999 expenditures related to
construction, Park Place intends to spend approximately $160 million in 1999 on
normal capital replacements, ADA/safety compliance projects, structural and
technology upgrades and $60 million on improvement projects that were evaluated
on a ROI basis.
FINANCING
Concurrently with the Hilton distribution, Park Place assumed primary
liability for $625 million of Hilton's fixed rate debt. The payment terms of
this debt assumption 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
entered 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 was allocated a portion of Hilton's
outstanding obligations under Hilton's $1.75 billion bank revolving credit
facility at the time of the Hilton distribution.
Park Place's portion of Hilton's public and corporate bank debt balances at
the time of the Hilton distribution was approximately 50%. As such, the portion
of Hilton's historical outstanding public debt and corporate bank debt balances
and related interest expense had been allocated to Park Place.
In order to finalize the transfer of the debt balance in connection with the
Hilton distribution, Park Place entered into a long-term credit facility and
completed a senior subordinated note offering (see below). The Company used the
proceeds from these offerings to repay $1,066 million of Hilton's commercial
paper borrowings representing an estimation of Park Place's share of Hilton's
debt as a part of the distribution. A final reconciliation of the debt and cash
allocation between Park Place and Hilton was completed in February resulting in
a $73 million cash transfer to Hilton in February 1999. This payable is
reflected in current liabilities in the accompanying consolidated balance sheet.
SENIOR CREDIT FACILITY. In December 1998, Park Place entered into a senior
credit facility with a syndicate of financial institutions. The senior credit
facility (which is governed by two separate loan agreements) provides for
borrowings of up to $2.15 billion, consisting of (i) a 364-day senior unsecured
revolving credit facility of up to $650 million ("364-day Revolver"); and (ii) a
five-year senior unsecured revolving credit facility of up to $1.5 billion
("Five-year Revolver") (collectively the "Senior Credit Facility"). At December
31, 1998, $810 million of the aggregate commitment was outstanding, leaving
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approximately $1.3 billion of the Senior Credit Facility available to the
Company at such date. In January 1999, the Company borrowed approximately $490
million under the Senior Credit Facility in connection with the tender offer of
the debt assumed from the Grand merger (See Grand's Debt below).
The 364-day Revolver matures December 1999 and the Five-year Revolver
matures December 2004. Both the 364-day Revolver and the Five-year Revolver may
be extended in one year increments at the request of Park Place with the prior
written consent of the lenders.
The borrowings under the Senior Credit Facility bear interest at a floating
rate and may be obtained at Park Place's option as LIBOR advances for one week
or 1, 2, 3, or 6 months, or as base rate advances, each adjusted for an
applicable margin (as further described in the Senior Credit Facility), or as
competitive bid loans. LIBOR advances will bear interest initially at LIBOR plus
112.5 basis points. Base rate advances will bear interest at the base rate
(defined as the higher of (i) the federal funds rate plus 0.50%, or (ii) the
reference rate as publicly announced by Bank of America in San Francisco) plus a
margin equal to the applicable margin for LIBOR loans in effect from time to
time minus 1.25. Competitive bid loans shall bear interest either on an absolute
rate bid basis or on the basis of a spread above or below LIBOR. The maximum
applicable margin for LIBOR loans is 1.65 under the 364-day Revolver and 1.90
under the Five-year Revolver and are based on a maximum of 1.75 plus or minus
pre-determined discounts based on Park Place's leverage ratios and credit
ratings received from specified rating agencies. The Five-year Revolver provides
for a $250 million commitment for the issuance of letters of credit.
The Senior Credit Facility contains certain customary affirmative and
negative covenants, including, without limitation, covenants that restrict,
subject to specified exceptions, (i) the incurrence of additional liens, (ii)
consolidations, mergers and sales of assets, and (iii) hostile tender offers for
securities of other companies. In addition, the Senior Credit Facility requires
that Park Place maintain certain specified financial covenants, including a
maximum total debt/EBITDA ratio of 4.75x reducing to 4.5x two years from closing
and a minimum consolidated interest coverage ratio of not less than 3.0x. The
Senior Credit Facility contains customary events of default, including without
limitation, payment defaults, breaches of representations and warranties,
covenant defaults, certain events of bankruptcy and insolvency and cross
defaults to other material indebtedness.
SENIOR SUBORDINATED NOTES. In December 1998, Park Place issued $400 million
of 7 7/8% Senior Subordinated Notes (the "Notes") due December 2005 through a
private placement offering. The Notes are redeemable at any time prior to their
maturity at the redemption prices described in the indenture governing such
Notes. The Notes are Unsecured Senior Subordinated obligations and are
subordinated to all of the Company's senior debt.
In February 1999, Park Place made an offer to all beneficial holders of the
Notes to exchange the Notes for new 7 7/8% Senior Subordinated Notes due
December 2005 that have been registered under the Securities Act of 1933, as
amended.
GRAND'S DEBT. As part of the acquisition of Grand, the Company assumed
certain Grand indebtedness as of December 31, 1998. This indebtedness included
10 1/8% First Mortgage Notes due 2003 and 9% Senior Unsecured Notes due 2004,
both of which were marked to fair market value as of the date of acquisition. In
January 1999, the Company settled a cash tender offer and consent solicitation
for substantially all of the Grand 10 1/8% First Mortgage Notes due 2003. The
remaining untendered notes of $5.5 million were defeased. The covenant
defeasance was completed in January 1999 by depositing $6.1 million in an
irrevocable trust. The $6.1 million has been invested in United States Treasury
Securities in a sufficient amount to pay and discharge all principal and
interest on the outstanding 10 1/8% Notes. Cash consideration for the repurchase
and defeasance, including premiums, totaled approximately $490 million.
On December 31, 1998, the Company completed a covenant defeasance of the
Grand 9% Senior Unsecured Notes. This defeasance was completed by depositing
$135 million in an irrevocable trust. The $135 million was invested in United
States Treasury Securities in a sufficient amount to pay and discharge
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all principal and interest on the outstanding 9% Notes. In accordance with SFAS
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" the obligation as well as the amount deposited
in trust have been reflected in the accompanying consolidated balance sheet in
restricted cash and long-term debt, respectively. On February 1, 1999 the
Company exercised its rights to redeem the Grand 9% Notes and all amounts were
retired as of that date.
In January 1999, the Company filed a shelf registration statement (the
"Shelf") with the Securities and Exchange Commission registering up to $1
billion in debt or equity securities. The terms of any securities offered
pursuant to the Shelf will be determined by market conditions at the time of
issuance.
Park Place has established a $1 billion commercial paper program as of
December 31, 1998. No amounts were outstanding at year end. Interest under the
program will be at market rates, for varying periods.
RESULTS OF OPERATIONS
OVERVIEW
Results of operations include the results of Park Place's owned properties
and its majority owned and controlled subsidiaries operated under long-term
management agreements. Operating results are reduced by the portion of earnings
of non-controlled affiliates applicable to other ownership interests. Prior to
the Bally Merger, the Company operated 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, the Company includes 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. On December 18, 1996, 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. The operating results of the
Bally properties from December 18, 1996 through December 31, 1996 were not
significant to Park Place's 1996 results. On December 31, 1998, the Company
completed its acquisition of Grand through a merger with and into the Company.
As a result of the Grand merger, the Company now includes the operations of
Grand Casino Tunica, Grand Casino Gulfport and Grand Casino Biloxi. The results
of operations for the Grand properties are not included in the Company's
statement of operations for 1998 as the merger was completed at the end of the
year. Aggregate consideration consisted of approximately 42 million shares of
the Company's common stock for an equity value of approximately $270 million and
the assumption of approximately $625 million of Grand's debt at fair market
value.
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.
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The following discussion presents an analysis of results of operations of
Park Place for fiscal years ended December 31, 1998, 1997 and 1996. 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 1998 COMPARED WITH FISCAL 1997
A summary of Park Place's consolidated revenue and earnings for fiscal 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997 % CHANGE
--------- --------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Revenue........................................................ $ 2,305 $ 2,153 7%
Operating income............................................... 302 201 50%
Net income..................................................... 109 67 63%
Other Operating Data
EBITDA......................................................... $ 556 $ 512 9%
</TABLE>
OPERATIONS. Total revenue increased seven percent for fiscal 1998 to $2.3
billion. Casino revenue increased nine percent to $1.6 billion in 1998, compared
to $1.5 billion in the prior year. Total EBITDA was $556 million, a nine percent
increase from $512 million in the 1997 period, and operating income increased 50
percent to $302 million from $201 million in 1997. Park Place's 1998 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 in July 1997.
EBITDA at the Las Vegas Hilton increased $13 million over the prior year to
$58 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 42
percent and slot revenue increased 23 percent on higher volume and comparable
win percentages. Baccarat volume decreased 21 percent from the prior year,
however baccarat win increased eight percent on a significantly increased win
percentage. 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 $3 million from the prior
year to $106 million due to lower table game volume and win, and a decline in
non-casino revenues. Occupancy declined one point to 90 percent, and the average
room rate fell four percent to $78. Bally's Las Vegas generated EBITDA of $84
million for the year, a decrease of $9 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. Combined EBITDA from the Reno Hilton and the
Flamingo Hilton-Reno remained flat at $26 million.
Occupancy for the Nevada properties was 88 percent in 1998 compared to 86
percent last year. The average room rate for the Nevada properties was $75
compared to $77 in the prior year period.
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In Atlantic City, Bally's Park Place generated EBITDA of $157 million, an
increase of one percent from last year's $155 million. The Atlantic City Hilton
reported EBITDA of $37 million, $8 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 properties was 94 percent in 1998 compared
to 91 percent last year. The average room rate for the Atlantic City properties
was $84, down seven percent from $90 last year.
Combined EBITDA from Park Place's riverboat properties increased $20 million
over last year, while EBITDA contribution from Park Place's two hotel-casinos in
Australia was flat at $25 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. Park Place's share of EBITDA totaled $22
million for 1998, 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 $10 million to $225 million in 1998 due primarily
to the Las Vegas and Atlantic City expansion projects completed in 1997.
Park Place results were adversely affected by non-recurring charges totaling
$29 million ($16 million non-cash) in 1998 and $108 million ($96 million
non-cash) in 1997. The 1998 charges include an impairment loss related to
certain riverboat casino assets as well as approximately $13 million of costs
associated with the split from Hilton and merger with Grand. The 1997 charges
include an impairment loss relating to the Flamingo Casino-Kansas City and an
impairment loss and other costs associated with the closure of the Flamingo
Casino-New Orleans as well as the settlement costs of outstanding litigation.
CORPORATE ACTIVITY. Corporate expense decreased $2 million to $7 million.
Interest and dividend income decreased $4 million to $21 million. Interest
expense, net of amounts capitalized, was $87 million and $82 million in 1998 and
1997, respectively. Interest expense, net, from unconsolidated affiliates
increased $3 million to $13 million. The effective tax rate was 50% in 1998
versus 47% in 1997. Minority interest decreased due to the purchase of the
remaining interest in Bally Grand, Inc.
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........................................................ $ 2,153 $ 970 122%
Operating income............................................... 201 92 118%
Income before extraordinary item............................... 67 36 86%
Other Operating Data
EBITDA......................................................... $ 512 $ 216 137%
</TABLE>
OPERATIONS. Total revenue increased 122 percent in 1997 to $2.2 billion
from $1.0 billion in 1996. Casino revenue increased 198 percent to $1.5 billion
in 1997 compared to $486 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 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.
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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, the additional market capacity contributed to a five point
decline in occupancy to 83 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.
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 percent, a five 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 properties was 86 percent in 1997 compared to 91
percent in the prior period. The average room rate for the Nevada properties was
$77 compared to $74 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 properties were 91
percent and $90, respectively, in 1997. Although not included in Park Place's
1996 period, occupancy and average room rate were 93 percent and $91,
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 $92 million
to $215 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
$108 million ($96 million non-cash) in 1997 and $38 million ($1 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 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 remained flat at $9 million. Interest
and dividend income increased $13 million to $25 million due to interest earned
on 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 unconsolidated affiliates equity investments
increased $5 million over 1996. The effective income tax rate in 1997 increased
to 47% from 43% in 1996 primarily due to the amortization of non-deductible
goodwill recorded as a result of the Bally Merger. Park Place's
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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.
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 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 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 $4 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.
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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 will adopt SOP 98-5 in the first quarter of 1999. Adoption of the SOP is
expected to result in an expense of approximately $4 million accounted for as a
cumulative effect of a change in accounting principle.
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.
Park Place adopted EITF 97-2 in the fourth quarter of 1998. Park Place no
longer includes 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 reduced each of revenues and operating expenses by
$427 million and $457 million for the years ended December 31, 1997 and 1996,
respectively. Application of the standard reduced each of current assets and
current liabilities by $59 million at December 31, 1997. Application of EITF
97-2 had no impact on reported operating income, net income, earnings per share
or stockholders' equity.
ITEM 7A. QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk of loss arising from changes in market rates and
prices, such as interest rates, foreign currency exchange rates and commodity
process. The Company is exposed to market risk in the form of changes in
interest rates and the potential impact such change may have on the Company's
variable rate debt. The Company attempts to limit the impact of changes in
interest rates by balancing the mix of short term borrowings pursuant to its
bank credit facility and commercial paper program and its long term fixed rate
debt. The Company has not invested in derivative based financial instruments.
The Company's fixed rate borrowings consist of $400 million 7 7/8% senior
subordinated notes due 2005, $300 million 7 3/8% senior notes due 2002 and $325
million 7% senior notes due 2004. The Company's variable rate debt provides for
borrowings of up to $2.15 billion consisting of a 364-day senior unsecured
revolving credit facility of up to $650 million and a five year senior unsecured
revolving credit facility of up to $1.5 billion (collectively the Senior Credit
Facility). The 364-day revolver matures December 1999 and the five year revolver
matures in December 2004. Borrowings under the Senior Credit Facility bear
interest at a floating rate and may be obtained at the Company's option as
London Interbank Offered Rate ("LIBOR") advances, or as base rate advances, each
adjusted for an applicable margin, or as competitive bid loans.
54
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Public Accountants.................................................................. 56
Consolidated Balance Sheets............................................................................... 57
Consolidated Statements of Operations..................................................................... 58
Consolidated Statements of Stockholders' Equity........................................................... 59
Consolidated Statements of Cash Flows..................................................................... 60
Notes to Consolidated Financial Statements................................................................ 61
</TABLE>
55
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Park Place Entertainment
Corporation:
We have audited the accompanying consolidated balance sheets of Park Place
Entertainment Corporation (a Delaware corporation) and subsidiaries (the
"Company") as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedules 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 financial statements referred to above present fairly,
in all material respects, the financial position of Park Place Entertainment
Corporation and subsidiaries as of December 31, 1998 and 1997 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule listed
in Item 14(a)(1) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
February 5, 1999
56
<PAGE>
PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER DECEMBER
31, 31,
1998 1997
----------- -----------
<S> <C> <C>
Assets
Cash and equivalents.............................................. $ 247 $ 199
Restricted cash................................................... 135 --
Temporary investments............................................. -- 35
Accounts receivable, net.......................................... 119 143
Other current assets.............................................. 133 73
----------- -----------
Total current assets............................................ 634 450
Investments....................................................... 169 176
Property and equipment, net....................................... 4,991 3,621
Goodwill.......................................................... 1,296 1,303
Other assets...................................................... 84 80
----------- -----------
Total assets...................................................... $ 7,174 $ 5,630
----------- -----------
----------- -----------
Liabilities and stockholders' equity
Accounts payable and accrued expenses............................. $ 434 $ 298
Current maturities of long-term debt.............................. 6 34
Income taxes payable.............................................. -- 2
----------- -----------
Total current liabilities....................................... 440 334
Long-term debt, net of current maturities......................... 2,466 1,272
Deferred income taxes, net........................................ 609 567
Other liabilities................................................. 51 76
----------- -----------
Total liabilities............................................... 3,566 2,249
Commitments and contingencies
Stockholders' equity
Common stock, 303 million shares outstanding...................... 3 --
Additional paid-in capital........................................ 3,613 --
Other............................................................. (8) --
Hilton investment................................................. -- 3,381
----------- -----------
Total stockholders' equity...................................... 3,608 3,381
----------- -----------
Total liabilities and stockholders' equity........................ $ 7,174 $ 5,630
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements
57
<PAGE>
PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Casino............................................................ $ 1,587 $ 1,450 $ 486
Rooms............................................................. 306 312 232
Food and beverage................................................. 230 216 138
Other revenue..................................................... 182 175 114
--------- --------- ---------
2,305 2,153 970
--------- --------- ---------
Expenses
Casino............................................................ 845 770 259
Rooms............................................................. 112 110 81
Food and beverage................................................. 230 191 123
Other............................................................. 555 549 273
Depreciation and amortization..................................... 225 215 123
Impairment losses and other....................................... 29 108 10
Corporate expense................................................. 7 9 9
--------- --------- ---------
2,003 1,952 878
--------- --------- ---------
Operating income.................................................... 302 201 92
Interest and dividend income...................................... 21 25 12
Interest expense.................................................. (87) (82) (36)
Interest expense, net from unconsolidated affiliates.............. (13) (10) (5)
--------- --------- ---------
Income before income taxes, minority interest and extraordinary
item.............................................................. 223 134 63
Provision for income taxes........................................ 111 63 27
Minority interest, net............................................ 3 4 --
--------- --------- ---------
Income before extraordinary item.................................... 109 67 36
Extraordinary item--loss on extinguishment of debt, net of tax
benefit of $52.................................................... -- -- (74)
--------- --------- ---------
Net income (loss)................................................... $ 109 $ 67 $ (38)
--------- --------- ---------
--------- --------- ---------
Basic earnings (loss) per share--pro forma
Income before extraordinary item.................................. $ .42 $ .25 $ .18
Extraordinary loss................................................ -- -- (.37)
--------- --------- ---------
Net income (loss) per share--pro forma............................ $ .42 $ .25 $ (.19)
--------- --------- ---------
--------- --------- ---------
Diluted earnings (loss) per share
Income before extraordinary item.................................. $ .42 $ .25 $ .18
Extraordinary loss................................................ -- -- (.37)
--------- --------- ---------
Net income (loss) per share....................................... $ .42 $ .25 $ (.19)
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements
58
<PAGE>
PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL
HILTON COMMON PAID-IN
INVESTMENT STOCK CAPITAL OTHER TOTAL
---------- ------ ---------- ----- ------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995.................... $ 592 $-- $-- $-- $ 592
Net loss...................................... (38) -- -- -- (38)
Intercompany activity with Hilton............. 2,603 -- -- -- 2,603
---------- ------ ---------- ----- ------
Balance, December 31, 1996.................... 3,157 -- -- -- 3,157
Net income.................................... 67 -- -- -- 67
Intercompany activity with Hilton............. 157 -- -- -- 157
---------- ------ ---------- ----- ------
Balance, December 31, 1997.................... 3,381 -- -- -- 3,381
Net income.................................... 109 -- -- -- 109
Intercompany activity with Hilton............. (152) -- -- -- (152)
Spin-off of the Company....................... (3,338) 3 3,343 (8) --
Acquisition of Grand Casinos, Inc. ........... -- -- 270 -- 270
---------- ------ ---------- ----- ------
Balance, December 31, 1998.................... $ -- $ 3 $3,613 $ (8) $3,608
---------- ------ ---------- ----- ------
---------- ------ ---------- ----- ------
</TABLE>
See notes to consolidated financial statements
59
<PAGE>
PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income (loss)...................................................................... $ 109 $ 67 $ (38)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Extraordinary loss on extinguishment................................................. -- -- 74
Depreciation and amortization........................................................ 225 215 123
Non-cash items....................................................................... 16 96 1
Amortization of loan costs........................................................... 2 2 --
Change in working capital components:
Inventories........................................................................ -- (3) 2
Accounts receivable................................................................ 36 (21) 15
Other current assets............................................................... (30) 48 (15)
Accounts payable and accrued expenses.............................................. (18) 12 (87)
Income taxes payable............................................................... (1) 1 51
Change in deferred income taxes...................................................... 35 39 (11)
Change in other liabilities.......................................................... (24) (36) 30
Distributions from equity investments (less than) in excess of earnings.............. (12) (1) (16)
Other................................................................................ (20) (44) 10
--------- --------- ---------
Net cash provided by operating activities.............................................. 318 375 139
--------- --------- ---------
Investing activities
Capital expenditures................................................................... (608) (438) (193)
Additional investments................................................................. -- (57) (51)
Change in temporary investments........................................................ 36 (25) 25
Payments on notes and other............................................................ 3 7 20
Acquisitions, net of cash acquired..................................................... (15) (70) 144
--------- --------- ---------
Net cash used in investing activities.................................................. (584) (583) (55)
--------- --------- ---------
Financing activities
Change in commercial paper borrowings and revolving loans.............................. 810 -- --
Payments on debt....................................................................... (9) (16) --
Advances (to) from Hilton.............................................................. (352) 191 110
--------- --------- ---------
Net cash provided by financing activities.............................................. 449 175 110
--------- --------- ---------
Increase (decrease) in cash and equivalents.............................................. 183 (33) 194
Cash and equivalents at beginning of year................................................ 199 232 38
--------- --------- ---------
Cash and equivalents at end of year...................................................... $ 382 $ 199 $ 232
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financials statements
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1. BASIS OF PRESENTATION AND ORGANIZATION
On December 31, 1998, Hilton Hotels Corporation ("Hilton") completed the
distribution of the operations, assets and liabilities of its gaming business to
a new publicly traded corporation, Park Place Entertainment Corporation ("Park
Place" or "the Company"), a Delaware corporation. The stock of Park Place was
distributed to Hilton's shareholders tax free on a one-for-one basis. Also on
December 31, 1998, immediately following the Hilton distribution, Park Place
acquired, by means of a merger, the Mississippi gaming business of Grand
Casinos, Inc. ("Grand") which includes the Grand Casino Biloxi, Grand Casino
Gulfport and Grand Casino Tunica properties, in exchange for the assumption of
debt and the issuance of Park Place common stock on a one-for-one basis.
NATURE OF OPERATIONS
Park Place is primarily engaged in the ownership, operation and development
of gaming facilities. The operations of Park Place currently include twelve U.S.
land-based casinos, an interest in one U.S. riverboat casino, two land-based
casinos in Australia and one land-based casino in Uruguay.
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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the assets,
liabilities, stockholders' equity, revenues, expenses and cash flows of Hilton's
gaming business on a stand-alone basis including an allocation of corporate
expenses relating to the Park Place entities as of December 31, 1997 and for
each of the three years ending December 31, 1998. The balance sheet as of
December 31, 1998 reflects the distribution by Hilton and the merger with Grand.
The consolidated financial statements include the accounts of Park Place and
its majority owned and controlled subsidiaries. Park Place adopted 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" in the fourth quarter of 1998, and, as a result, no
longer consolidates the operating results and working capital of affiliates
operated under long-term management agreements. Application of EITF 97-2 reduced
each of revenues and operating expenses by $427 million and $457 million for the
years ended December 31, 1997 and 1996, respectively. Application of the
standard reduced each of current assets and current liabilities by $59 million
at December 31, 1997. Application of EITF 97-2 had no impact on reported
operating income, net income, earnings per share or stockholders' equity.
Investments in unconsolidated affiliates which are 50% or less owned are
accounted for under the equity method.
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 the Company's wholly owned subsidiaries to Park Place Entertainment
Corporation.
61
<PAGE>
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 the
customer on a complimentary basis. The estimated cost of providing these
promotional allowances, primarily classified as casino expenses through
interdepartmental allocations, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -----
(IN MILLIONS)
<S> <C> <C> <C>
Rooms.................................................... $ 32 $ 30 $ 11
Food and beverage........................................ 108 106 32
--------- --------- ---
Total cost of promotional allowances..................... $ 140 $ 136 $ 43
--------- --------- ---
--------- --------- ---
</TABLE>
CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated into
U.S. dollars at year-end exchange rates and related gains and losses, net of
applicable deferred income taxes, are reflected in stockholders' equity. Gains
and losses from foreign currency transactions and translation of balance sheets
in highly inflationary economies are included in earnings.
INVENTORIES
Included in other current assets at December 31, 1998 and 1997, are
inventories of $25 million and $17 million, respectively. Inventories are stated
at the lower of cost or market. Cost is determined by the first-in first-out
method.
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 30 to 40
years for buildings and riverboats and eight years for building improvements and
furniture and equipment.
The carrying value of the Company'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.
62
<PAGE>
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
The Company 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. 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. The Company will to adopt SOP 98-5 in the first quarter of 1999.
Adoption of the SOP is expected to result in an expense of approximately $4
million accounted for as a cumulative effect of a change in accounting
principle.
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 based on the
related debt agreements using the effective interest method or a method which
approximates the effective interest method.
SELF-INSURANCE
The Company 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.
EARNINGS PER SHARE ("EPS")
Pro forma earning per share (EPS) is calculated for all periods presented
based on the Hilton distribution date. Basic EPS is calculated by dividing net
income by the weighted average number of common shares outstanding for the
period. The pro forma weighted average number of shares outstanding for 1998,
1997 and 1996 were 261 million, 263 million and 198 million, respectively.
Diluted EPS reflects the effect of assumed stock option exercises. The dilutive
effect of the assumed exercise of stock options increased the weighted average
number of common shares by 2 million, 3 million and 1 million for 1998, 1997 and
1996, respectively.
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.
63
<PAGE>
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
The consolidated financial statements for prior years reflect certain
reclassifications to conform with classifications adopted in 1998. These
classifications have no effect on net income.
NOTE 3. ACQUISITIONS
BALLY ACQUISITION
Effective December 18, 1996, Hilton completed a merger of Bally
Entertainment Corporation (Bally) with and into Hilton pursuant to an agreement
dated June 6, 1996. Aggregate consideration consisted of approximately 53
million shares of Hilton's common stock and approximately 15 million shares of
Hilton'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 and Bally subsidiary debt
totaling $1.2 billion.
The acquisition was accounted for using the purchase method of accounting,
and accordingly, the acquisition cost of $3.1 billion was 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, was allocated to goodwill and is
being amortized over 40 years. Accumulated amortization as of December 31, 1998
is $68 million.
GRAND ACQUISITION
Effective December 31, 1998, the Company completed the acquisition of Grand
pursuant to an agreement dated June 30, 1998. Aggregate consideration consisted
of approximately 42 million shares of the Company's common stock with an equity
value of $270 million and assumption of Grand's debt at fair market value
totaling $625 million at December 31, 1998.
The acquisition has been accounted for using the purchase method of
accounting. The purchase price has been preliminarily allocated based on
estimated fair values at the date of acquisition, pending final determination of
certain acquired balances. A total of $244 million, representing the excess of
the fair value of Grand's tangible net assets over the acquisition cost, has
reduced, by a proportionate share, the book value of non-current assets
acquired.
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 purport to be indicative of future
results or what would have occurred had this acquisition been made as of those
dates.
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(UNAUDITED)
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenue.................................................................... $ 2,900 $ 2,682
Operating income........................................................... 383 262
Net income................................................................. 139 82
Basic EPS.................................................................. .46 .27
Diluted EPS................................................................ .45 .26
</TABLE>
NOTE 4. IMPAIRMENT LOSSES AND OTHER
In 1998, impairment losses and other expenses include an impairment loss
related to certain riverboat assets as well as transaction costs associated with
the distribution from Hilton and the merger with Grand.
64
<PAGE>
NOTE 4. IMPAIRMENT LOSSES AND OTHER (CONTINUED)
The 1997 charges included an impairment loss relating to the Flamingo
Casino-Kansas City and an impairment loss and other costs associated with 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.
NOTE 5. EXTRAORDINARY ITEM
In December 1996, the Company 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 Casino Holdings, Inc. Senior Discount Notes. The remaining untendered
notes were defeased. The Company also purchased 99.1% of the outstanding 10 3/8%
First Mortgage Notes due 2003 of Bally's 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.
NOTE 6. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Casino accounts receivable..................................... $ 127 $ 117
Less allowance for doubtful accounts........................... (34) (21)
--------- ---------
93 96
Other accounts receivable...................................... 26 47
--------- ---------
Total.......................................................... $ 119 $ 143
--------- ---------
--------- ---------
</TABLE>
The allowance provided for estimated uncollectible receivables, net of
recoveries, is included in casino expenses in the amount of $37 million, $26
million and $20 million in 1998, 1997 and 1996, respectively.
NOTE 7. INVESTMENTS
Investments in and notes from affiliates at December 31, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Equity investments
Casino hotels (three in 1998 and 1997)....................... $ 63 $ 76
Notes receivable............................................. 97 94
Other.......................................................... 9 6
--------- ---------
Total.......................................................... $ 169 $ 176
--------- ---------
--------- ---------
</TABLE>
65
<PAGE>
NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Land........................................................ $ 756 $ 597
Buildings, riverboats and leasehold improvements............ 3,232 2,669
Furniture and equipment..................................... 697 558
Property held for sale or development....................... 6 --
Construction in progress.................................... 767 178
--------- ---------
5,458 4,002
Less accumulated depreciation............................. (467) (381)
--------- ---------
Total....................................................... $ 4,991 $ 3,621
--------- ---------
--------- ---------
</TABLE>
NOTE 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Accounts and notes payable..................................... $ 34 $ 60
Payable to Hilton.............................................. 73 --
Compensation and benefits...................................... 95 65
Accrued expenses............................................... 232 173
--------- ---------
Total.......................................................... $ 434 $ 298
--------- ---------
--------- ---------
</TABLE>
NOTE 10. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Senior notes, with an average rate of 7.5%, due 2002 to
2005...................................................... $ 1,023 $ --
10 1/8% First Mortgage Notes due 2003....................... 490 --
9% Senior Unsecured Notes due 2004.......................... 135 --
Revolving loans............................................. 810 --
Capital leases and other.................................... 14 --
Debt allocated by Hilton.................................... -- 1,306
--------- ---------
2,472 1,306
Less current maturities................................... (6) (34)
--------- ---------
Net long-term debt.......................................... $ 2,466 $ 1,272
--------- ---------
--------- ---------
</TABLE>
Interest paid, net of amounts capitalized, was $81 million, $74 million and
$33 million in 1998, 1997 and 1996, respectively. Capitalized interest amounted
to $25 million, $16 million and $6 million, respectively.
66
<PAGE>
NOTE 10. LONG-TERM DEBT (CONTINUED)
Debt maturities during the next five years are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
1999............................................................................. $ 6
2000............................................................................. 4
2001............................................................................. --
2002............................................................................. 300
2003............................................................................. 810
Thereafter....................................................................... 1,352
------
$ 2,472
------
------
</TABLE>
In order to equalize the indebtedness between Park Place and Hilton at the
time of the distribution, Park Place and Hilton agreed to an allocation of
pre-distribution debt balances and entered into a debt assumption agreement.
Pursuant to the debt assumption agreement, Park Place assumed and agreed 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% Notes due 2002 and its $325 million aggregate principal amount of 7%
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 is 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.
In order to facilitate the transfer of debt balances in connection with the
distribution, in December 1998 Park Place entered into a $2.15 billion long-term
credit facility and completed a $400 million senior subordinated note offering.
Park Place used the proceeds from the new facility and the offering to repay
$1,066 million of Hilton's commercial paper borrowings representing an estimate
of Park Place's share of the obligation. The distribution agreement entered into
between Park Place and Hilton calls for a final reconciliation and allocation of
certain debt and cash balances, as defined. The reconciliation resulted in an
additional amount due Hilton from Park Place of $73 million. This balance is
reflected in current liabilities in the accompanying consolidated balance
sheets.
The long-term credit facility has an aggregate commitment of $2.15 billion
consisting of a 364-day $650 million facility and a five year $1.5 billion
facility. At December 31, 1998, $810 million was outstanding, leaving
approximately $1.3 billion of the revolving bank debt facility available to the
Company at such date. In January 1999, the Company borrowed approximately $490
million under this facility in connection with the tender offer of the debt
assumed from the Grand merger (see below). The $400 million 7 7/8% Senior
Subordinated Notes due 2005 may be redeemed in whole but not in part, by the
Company at any time at a make whole premium.
As part of the acquisition of Grand, the Company assumed certain Grand
indebtedness as of December 31, 1998. This indebtedness included 10 1/8% First
Mortgage Notes due 2003 and 9% Senior Unsecured Notes due 2004, both of which
were marked to fair market value as of the date of acquisition. In January 1999,
the Company settled a cash tender offer and consent solicitation for
substantially all of the Grand 10 1/8% First Mortgage Notes due 2003. The
remaining untendered notes of $5.5 million were defeased. The defeasance was
completed by depositing $6.1 million in an irrevocable trust. The $6.1 million
has been invested in United States Treasury Securities in a sufficient amount to
pay and discharge all principal and interest on the outstanding 10 1/8% Notes.
Cash consideration for the repurchase and defeasance, including premiums,
totaled approximately $490 million.
67
<PAGE>
NOTE 10. LONG-TERM DEBT (CONTINUED)
On December 31, 1998, the Company completed a covenant defeasance of the
Grand 9% Senior Unsecured Notes. This defeasance was completed by depositing
$135 million in an irrevocable trust. The $135 million was invested in United
States Treasury Securities in a sufficient amount to pay and discharge all
principal and interest on the outstanding 9% Notes. In accordance with SFAS No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" the obligation as well as the amount deposited
in trust have been reflected in the accompanying consolidated balance sheet in
restricted cash and long-term debt, respectively. On February 1, 1999 the
Company exercised its rights to redeem the Grand 9% Notes and all amounts were
retired as of that date.
The Company has established a $1 billion commercial paper program as of
December 31, 1998. No amounts were outstanding at year end. Interest under the
program will be at a market rate for varying periods.
Provisions under various loan agreements require the Company to comply with
certain financial covenants which include limiting the amount of outstanding
indebtedness.
NOTE 11. FINANCIAL INSTRUMENTS
CASH AND EQUIVALENTS AND TEMPORARY INVESTMENTS
The fair value of cash and 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
Company for debt of the same remaining maturities.
The estimated fair values of the Company's financial instruments at December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- --------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Cash and equivalents and temporary
investments.............................. $ 247 $ 247 $ 234 $ 234
Long-term debt (including current
maturities).............................. 2,472 2,466 1,306 1,353
</TABLE>
NOTE 12. INCOME TAXES
The provision (benefit) for income taxes for the three years ended December
31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ----- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Current
Federal................................................. $ 74 $ 23 $ 42
State, foreign and local................................ 20 1 4
--------- --- ---
94 24 46
Deferred.................................................. 17 39 (19)
--------- --- ---
Total..................................................... $ 111 $ 63 $ 27
--------- --- ---
--------- --- ---
</TABLE>
68
<PAGE>
NOTE 12. INCOME TAXES (CONTINUED)
No income taxes were paid by the Company as these payments were the
responsibility of Hilton.
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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets
Accrued expenses........................................... $ 37 $ 15
Insurance and other reserves............................... 7 11
Benefit plans.............................................. 6 14
Pre-opening costs.......................................... 13 8
Foreign tax credit carryovers (expire beginning in 2000)... 5 11
Equity investments......................................... 3 46
Capital loss carryover (expires in 2002)................... 23 --
Other...................................................... 64 25
--------- ---------
158 130
Valuation allowance.......................................... (31) (7)
--------- ---------
127 123
--------- ---------
Deferred tax liabilities
Fixed assets, primarily depreciation....................... (633) (621)
Other...................................................... (69) (42)
--------- ---------
(702) (663)
--------- ---------
Net deferred tax liability................................... $ (575) $ (540)
--------- ---------
--------- ---------
</TABLE>
Reconciliation of the Federal income tax rate to the Company's effective tax
rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate..................................... 35.0% 35.0% 35.0%
Increase in taxes:
State and local income taxes, net of Federal tax
benefits................................................ 3.4 1.0 .5
Foreign taxes, net........................................ .4 .6 3.0
Goodwill amortization..................................... 5.2 8.6 --
Distribution costs........................................ 1.2 -- --
Other..................................................... 4.6 1.8 4.4
---- ---- ----
Effective tax rate.......................................... 49.8% 47.0% 42.9%
---- ---- ----
---- ---- ----
</TABLE>
69
<PAGE>
NOTE 13. STOCKHOLDERS' EQUITY
Four hundred million shares of common stock with a par value of $0.01 per
share are authorized, of which 303 million were issued at December 31, 1998. One
hundred million shares of preferred stock with a par value of $0.01 per share
are authorized, of which no amounts have been issued.
The Company has a Share Purchase Rights Plan under which a right is attached
to each share of the Company's common stock. The rights may only become
exercisable under certain circumstances involving actual or potential
acquisitions of the Company's common stock by a specified person or affiliated
group. Depending on the circumstances, if the rights become exercisable, the
holder may be entitled to purchase units of the Company's junior participating
preferred stock, shares of the Company's common stock or shares of common stock
of the acquiror. The rights remain in existence until 2008 unless they are
terminated, exercised or redeemed.
The Company applies 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 the Company'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 123, the Company's net
income and net income per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net income (loss)
As reported............................................ $ 109 $ 67 $ (38)
Pro forma.............................................. 92 61 (41)
Pro forma basic EPS
As reported............................................ $ .42 $ .25 $ (.19)
Pro forma.............................................. .35 .23 (.21)
Pro forma diluted EPS
As reported............................................ $ .42 $ .25 $ (.19)
Pro forma.............................................. .35 .23 (.21)
</TABLE>
At December 31, 1998, 45 million shares of common stock were reserved for
the exercise of options under the Company's Stock Incentive Plans. Options may
be granted to salaried officers, directors and other key employees of the
Company to purchase common stock at not less than the fair market value at the
date of grant. Generally, options may be exercised in installments commencing
one year after the date of grant. The Stock Incentive Plans also permit the
granting of Stock Appreciation Rights (SARs). No SARs have been granted as of
December 31, 1998.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield
of one percent for each of the three years; expected volatility of 34, 32 and 27
percent; risk-free interest rates of 5.51, 6.49 and 6.33 percent and expected
lives of six years for each of the three years. As a result of the distribution,
the fair values of the Hilton options were adjusted and prior periods were
restated based on the relative values of Hilton and Park Place common stock at
December 31, 1998.
As a result of the Hilton distribution, effective December 31, 1998, a total
of 14.6 million Park Place stock options were issued, representing the
adjustment of existing Hilton stock options to represent
70
<PAGE>
NOTE 13. STOCKHOLDERS' EQUITY (CONTINUED)
options in both Park Place and Hilton. The exercise price for options to
purchase Park Place common stock were adjusted based on the relative values of
Park Place and Hilton common stock on the date the Company's stock began trading
on a "when issued" basis. Also on December 31, 1998, 18.2 million options were
granted representing the conversion of existing options to purchase Grand common
stock in connection with the Grand merger and the grant of additional Park Place
stock options.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ------------------------
RANGE OF WEIGHTED-AVE WEIGHTED-AVE WEIGHTED-AVE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ----------- --------- ----------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
$2.25-6.62 8,759,470 8.28 $ 6.13 2,627,620 $ 5.59
6.79-8.37 12,372,792 4.36 7.28 8,623,692 7.36
9.11-23.85 11,698,477 7.42 10.82 4,478,687 9.79
--------- ---------
2.25-23.85 32,830,739 6.50 8.24 15,729,999 7.76
--------- ---------
--------- ---------
</TABLE>
The Company adopted an Employee Stock Purchase Plan by which the Company is
authorized to issue up to five million shares of common stock to its full-time
employees. Under the terms of the Plan, employees can elect to have a percentage
of their earnings withheld to purchase the Company's common stock.
NOTE 14. EMPLOYEE BENEFIT PLANS AND POSTRETIREMENT BENEFITS
A significant number of the Company's employees are covered by union
sponsored, collectively bargained multi-employer pension plans. The Company
contributed and charged to expense $12 million, $12 million and $7 million in
1998, 1997 and 1996, respectively, for such plans. Information from the plans'
administrators is not sufficient to permit the Company to determine its share,
if any, of unfunded vested benefits.
The Company also has other employee investment plans including a 401K plan
and a deferred compensation plan whereby the Company contributes certain
percentages of employee contributions. The cost of these plans is not
significant.
The Company provides life insurance benefits to certain retired employees.
Under terms of the plan covering such life insurance benefits, the Company
reserves the right to change, modify or discontinue these benefits. The cost of
these benefits is not significant.
NOTE 15. LEASES
The Company has entered into various operating leases for land adjacent to
its dockside casinos in Mississippi. The lease for land adjacent to the
Company's Gulfport Casino is for the period from July 1, 1997, through June 30,
2002, and contains renewal options totaling 40 years. The Company is required to
make annual rental payments of $1,200,000, subject to adjustment as defined,
plus 5% of gross annual gaming revenues in excess of $25 million and 3% of all
non-gaming revenues. The lessor of the Gulfport Casino site has the right to
cancel the lease at any time for reason of port expansion, in which case the
lessor will be liable to the Company for the depreciated value of improvements
and other structures placed on the leased premises, as defined.
The lease for land adjacent to the Company's Biloxi Casino has an initial
term of 99 years, and the Company is required to make annual rental payments of
$2.5 million, subject to adjustment as defined. The Company also entered into a
15-year lease for submerged land adjacent to the Biloxi Casino with an
71
<PAGE>
NOTE 15. LEASES (CONTINUED)
option to extend the lease for five years after the expiration of the initial
15-year term. The lease provides for annual rental payments of $900,000 for the
next five years, and subsequent increases as defined in the agreement.
The land lease in connection with the operation of Grand Casino Tunica
provides for annual rental payments of $2.5 million, subject to adjustment as
defined. The term of the lease is, initially, for six years with nine six-year
renewal options, for a total of 60 years.
Minimum lease commitments under noncancelable operating leases approximate
$10 million annually through 2003 with an aggregate commitment of $453 million
through 2042.
NOTE 16. COMMITMENTS AND CONTINGENCIES
At December 31, 1998 the Company had contractual commitments at its wholly
owned or leased properties for major expansion and rehabilitation projects of
approximately $146 million.
LITIGATION
Park Place and its subsidiaries are parties to legal proceedings relating to
the Hilton gaming business that were assumed 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 is 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 below for a discussion of certain litigation to which Grand is a
party.
BELLE OF ORLEANS
The subsidiary which holds the Belle of Orleans, L.L.C. (the "Belle") (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. On March 27, 1997, Metro filed suit in the Civil District
Court for the Parish of Orleans, State of Louisiana seeking contractual and
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 Hilton's merger with Bally in 1996. Preliminary
injunctive relief was granted to Metro by the trial court. After various
hearings and appeals by the Louisiana Subsidiary, the injunctive relief granted
by the trial court has been suspended while on appeal. On June 16, 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. The Louisiana Subsidiary filed certain
exceptions which were denied, but, pursuant to a writ application subsequently
filed, the Court of Appeals reversed and remanded for determination of which
disputes are arbitrable. On November 23, 1998, Metro filed a third suit in the
Civil District Court for the Parish of Orleans, State of Louisiana against the
Louisiana Subsidiary, seeking a temporary restraining order and preliminary
injunction to prevent the Louisiana Subsidiary from continuing as manager of the
riverboat casino. On December 23, 1998, judgment was rendered in favor of the
Louisiana Subsidiary dismissing the suit in its entirety. Metro has appealed. An
affiliate of the Louisiana Subsidiary, Bally's Intermediate Holdings, Inc.,
which due to a merger subsequently became Bally's Midwest Casinos, Inc., filed
an action on September 23, 1998, in the Circuit Court of Cook County, Illinois,
which action has since
72
<PAGE>
NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
been removed to the U.S. District Court for the Northern District of Illinois,
Eastern Division, seeking judgment against Metro based upon Metro's default
under certain agreements between the parties relating to a $4 million loan to a
shareholder of Metro. Plaintiff filed a motion for summary judgment which is
currently under advisement by the court. Metro filed a fourth suit on December
28, 1998 in the Civil District Court for the Parish of Orleans, State of
Louisiana seeking a temporary restraining order and permanent injunctive relief
to prevent the spinoff of Hilton's gaming operations to Park Place. A temporary
restraining order was issued by the trial court, dissolved by the Court of
Appeals and affirmed by the Supreme Court. The motion for preliminary injunction
was denied.
Park Place will vigorously defend all claims under such suits and vigorously
pursue its claim against Metro.
BALLY MERGER LITIGATION
A purported class action against Bally Entertainment Corporation ("Bally"),
its directors and Hilton was commenced on September 4, 1996, under the caption
PARNES V. BALLY ENTERTAINMENT CORPORATION, ET AL. in the Court of Chancery of
the State of Delaware, New Castle County. The plaintiff alleges breaches of
fiduciary duty in connection with the merger of Bally with and into Hilton in
December 1996 (the "Bally Merger"), including allegedly illegal payments to
Arthur M. Goldberg that purportedly denied Bally shareholders other than Mr.
Goldberg an opportunity to sell their shares to Hilton or any other bidder at
the best possible price. In the complaint, the plaintiff seeks, among other
things:
(i) an order enjoining the Bally Merger;
(ii) an award of damages in an unspecified amount;
(iii) an order requiring Mr. Goldberg to disgorge his profits; and
(iv) an award of attorneys' fees and expenses.
In orders dated May 13, 1997 and February 3, 1998, the Court dismissed this
litigation. Plaintiff appealed this dismissal and, on January 25, 1999, the
Delaware Supreme Court reversed the dismissal order and remanded the case to the
Court of Chancery.
ATLANTIC CITY LITIGATION
On September 9, 1997, an action was commenced in the United States District
Court for the Southern District of New York by Mirage Resorts, Inc. ("Mirage").
Named as defendants are the Company, Trump Hotel & Casino Resorts ("THCR"), and
the allegedly controlling shareholder of THCR. The complaint alleges, among
other things, that the defendants violated the Sherman Antitrust Act, committed
tortious interference with prospective economic advantage, and induced a breach
of fiduciary duty, in connection with Mirage's efforts to develop a casino
resort in Atlantic City, New Jersey. Injunctive relief and compensatory and
punitive damages in unspecified amounts are sought.
The Company has denied all allegations of wrongdoing asserted against it in
this litigation and believes that it has substantial defenses to these claims.
SLOT MACHINE LITIGATION
On April 26, 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 Park Place and Grand) alleged to operate
73
<PAGE>
NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
casinos or be slot machine manufacturers were named as defendants. The plaintiff
sought to have the action certified as a class action.
An action subsequently filed on May 10, 1994 in the United States District
Court for the Middle District of Florida--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.
On September 26, 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. On February 14, 1997,
the plaintiffs filed a consolidated and amended complaint.
In March 1997, various defendants 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.
On or about December 19, 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 was filed on or about February 13, 1998.
The plaintiffs have filed a motion seeking an order certifying the action as
a class action. Certain of the defendants have opposed the motion. The Court has
not ruled on the motion.
LEGAL PROCEEDINGS--GRAND
STRATOSPHERE CORPORATION
Grand previously owned approximately 41% of the common stock issued by
Stratosphere Corporation ("Stratosphere"). Stratosphere and its wholly owned
operating subsidiary developed and operated the Stratosphere Tower, Hotel and
Casino in Las Vegas, Nevada. On January 27, 1997, in the United States
Bankruptcy Court in and for the District of Nevada, 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 was
approved by the Bankruptcy Court and declared effective on October 14, 1998.
Pursuant to the Second Amended Plan, Stratosphere common stock that was
outstanding prior to the effective date of the Second Amended Plan was
cancelled.
74
<PAGE>
NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In March 1995, in connection with Stratosphere's issuance of its First
Mortgage Notes, Grand entered into a Standby Equity Commitment Agreement (the
"Standby Equity Commitment") between Stratosphere and Grand. Grand agreed in the
Standby Equity Commitment, subject to the terms and conditions stated in the
Standby Equity Commitment, to purchase up to $20 million of additional equity in
Stratosphere during each of the first three years Stratosphere is operating (as
defined in the Standby Equity Commitment) to the extent Stratosphere's
consolidated cash flow (as defined in the Standby Equity Commitment) during each
of such years does not exceed $50 million.
The enforceability of the Standby Equity Commitment is the subject of
litigation to which Grand is a party in (i) the Stratosphere Bankruptcy case (as
a result of a motion brought by the Official Committee), and (ii) the U.S.
District Court for the District of Nevada (as a result of an action brought by
the Trustee). On February 19, 1998, the Bankruptcy Court ruled that the Standby
Equity Commitment is not enforceable in the Stratosphere bankruptcy proceeding
as a matter of law. The Official Committee has stated that it intends to appeal
the Bankruptcy Court's decision.
The Second Amended Plan contemplates the formation of a new limited
liability company which will own and pursue certain alleged claims and causes of
action that Stratosphere and other persons may have against numerous third
parties, including Grand and/or officers and/or directors of Grand. The Second
Amended Plan contemplates capitalizing this new limited liability company with
an investment of $5 million. Currently, Grand has not been served with any such
litigation.
STRATOSPHERE SECURITIES LITIGATION
Grand and certain persons who have been indemnified by Grand (including
certain former and current Grand officers and directors) are defendants in legal
actions filed on August 16, 1996, in the District Court, Clark County, Nevada
and on August 5, 1996 in the United States District Court, District of Nevada.
These actions arise out of Grand's involvement in the Stratosphere Tower, Casino
and Hotel project (the "Stratosphere Project") in Las Vegas, Nevada.
The plaintiffs in the actions, who are current and/or former Stratosphere
Corporation shareholders, seek to pursue the actions as class actions, and make
various claims against Grand and the Grand-related defendants, including
securities fraud. In September 1997, Grand and the Grand-related defendants
submitted a motion to dismiss the federal action. In April 1998, this motion was
granted, in part, and denied, in part. The plaintiffs are pursuing the claims
that survived the motion to dismiss. Grand and the Grand-related defendants have
also submitted a motion for summary judgment seeking an order that such
defendants are entitled to judgment as a matter of law. Currently, the
plaintiffs are engaged in discovery related to the issues raised by the summary
judgment motion. The court will not decide the motion until after such discovery
is completed and the parties have submitted their respective arguments. The
state court action has been stayed pending resolution of the federal court
action.
Grand intends to vigorously defend itself and the other Grand-related
defendants against the claims made in both the state and the federal action.
GRAND SECURITIES LITIGATION
Grand and certain of Grand's current and former officers and directors are
defendants in a legal action filed on September 9, 1996 in the United States
District Court in Minnesota. This action arises out of Grand's involvement in
the Stratosphere Project.
The plaintiffs in the action who are current and/or former Grand
shareholders, seek to pursue the action as a class action, and make various
claims against Grand and the other defendants, including securities fraud. Grand
and the Grand-related defendants submitted a motion to dismiss the plaintiffs'
75
<PAGE>
NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
claims. In December 1997, that motion was granted, in part and denied, in part.
Grand and the Grand-related defendants have also submitted a motion for summary
judgment. Currently, the plaintiffs and Grand and the other defendants are
engaged in discovery in the action. On March 10, 1999, plaintiffs were granted
leave to amend their complaint to include Park Place and Lakes.
Grand intends to vigorously defend itself and the other defendants against
the claims that survived Grand's motion to dismiss.
DERIVATIVE ACTION
Certain of Grand's current and former officers and directors are defendants
in a legal action originally filed on February 6, 1997 in the District Court,
Hennepin County, state of Minnesota. This action arises out of Grand's
investment 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.
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. The committee has completed its evaluation and has
recommended to the court that the plaintiffs' claims not be pursued.
In May 1998, the Court granted a motion for summary judgment submitted by
Grand, thereby dismissing the plaintiffs' claims. On March 9, 1999 the court of
appeals affirmed the summary judgement. It is uncertain whether plaintiffs will
seek further review.
STRATOSPHERE PREFERENCE ACTION
On February 12, 1998, Stratosphere filed a complaint in the United States
Bankruptcy Court in and for the District of Nevada against Grand and Grand Media
& Electronics Distributing, Inc., a wholly owned subsidiary of Grand (Grand
Media), a complaint in the Stratosphere bankruptcy case seeking recovery of
certain amounts paid by Stratosphere to Grand as management fees and for costs
and expenses under a management agreement between Stratosphere and Grand, and to
Grand Media for electronic equipment purchased by Stratosphere from Grand Media.
Stratosphere claims in its complaint that such amounts are recoverable by
Stratosphere as preferential payments under bankruptcy law.
In May 1998, Grand responded to Stratosphere's complaint. That response
denies that Stratosphere is entitled to recover the amounts described in the
complaint. Discovery remains in process.
INDEMNIFICATION AGREEMENT
As part of the merger and the Lakes distribution, Lakes Gaming, Inc. (Lakes)
agreed to indemnify Grand against all costs, expenses and liabilities incurred
or suffered by Grand and certain of its subsidiaries and their respective
current and former directors and officers in connection with or arising out of
the Stratosphere litigation and the Tulalip Tribes litigation described above.
Lakes' indemnification obligations include the obligation to provide the defense
of all claims made in such proceedings against Grand and to pay all related
settlements and judgments.
As security to support Lakes' indemnification obligations to Grand under
each of the Grand distribution agreement and the merger agreement, and as a
condition to the consummation of the merger,
76
<PAGE>
NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 December 31, 1998.
OTHER LITIGATION
The Company is involved in various other inquiries, administrative
proceedings, and litigation relating to contracts and other matters arising in
the normal course of business. While any proceeding or litigation has an element
of uncertainty, management currently believes that the final outcome of these
matters are not likely to have a material adverse effect upon the Company's
consolidated financial position or its results of operations.
NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
1(ST) 2(ND) 3(RD) 4(TH)
1998 QUARTER QUARTER QUARTER QUARTER TOTAL
- ----------------------------------------------------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................................. 575 574 591 565 2,305
Operating income..................................... 92 95 92 23 302
Net income (loss).................................... 39 41 38 (9) 109
Basic EPS (1)........................................ .15 .16 .15 (.03) .42
Diluted EPS (1)...................................... .15 .16 .15 (.03) .42
1997
- -----------------------------------------------------
Revenues............................................. 524 520 554 555 2,153
Operating income..................................... 81 72 93 (45) 201
Net income (loss).................................... 37 26 50 (46) 67
Basic EPS (1)........................................ .14 .10 .19 (.17) .25
Diluted EPS (1)...................................... .14 .10 .19 (.17) .25
</TABLE>
- ------------------------
(1)The sum of Basic and Diluted EPS for the four quarters may differ from the
annual EPS due to the required method of computing weighted average number
of shares in the respective periods.
77
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTOR AND EXECUTIVE OFFICERS
PARK PLACE BOARD OF DIRECTORS
The business of Park Place is managed under the direction of the Park Place
Board of Directors. The Park Place Board is divided into three classes.
Directors for each class are elected at the annual meeting of stockholders held
in the year in which the term for such class expires and serve thereafter for
three years. The following table sets forth information concerning the persons
who are directors of Park Place.
<TABLE>
<CAPTION>
INITIAL
NAME, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS AGE TERM 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 has served as Chairman of
the Board of Park Place since January 1999. Mr. Bollenbach is a director of
Hilton Hotels Corporation, Kmart Corporation, Ladbroke Group PLC, Spring Group
PLC and Time Warner, Inc.
Barbara Bell Coleman............................................................ 48 2000
President of BBC Associates LLC, an executive consulting firm serving
businesses and non-profit organizations.
A. Steven Crown................................................................. 47 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 Hilton Hotels Corporation.
Clive S. Cummis................................................................. 70 2000
Chairman of the law firm of Sills Cummis Radin Tischman Epstein & Gross, which
provided legal services to Hilton and continues to provide such services to
Park Place.
Arthur M. Goldberg.............................................................. 57 2002
Chairman and Chief Executive Officer of Bally Entertainment Corporation until
December 1996, Executive Vice President and President--Gaming Operations of
Hilton Hotels Corporation until December 31, 1998, and thereafter, President
and Chief Executive Officer of Park Place. Mr. Goldberg is a director of
Hilton Hotels Corporation, Bally Total Fitness Holding Corporation and First
Union Corporation.
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
INITIAL
NAME, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS AGE TERM EXPIRES
- -------------------------------------------------------------------------------- --- ------------
<S> <C> <C>
Barron Hilton................................................................... 71 2002
Chairman of the Board and Chief Executive Officer, Hilton Hotels Corporation
until February 1996 and, thereafter, Chairman of the Board, Hilton Hotels
Corporation.
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................................................................. 71 2001
Retired Executive. Mr. Marano is a director of Computer Horizons Corporation.
</TABLE>
COMMITTEES OF THE PARK PLACE BOARD
The Park Place Board has 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 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. The members of the Audit Committee are Gilbert L. Shelton
(Chair), Eric M. Hilton, Barron Hilton, A. Steven Crown, J. Kenneth Looloian and
Rocco J. Marano.
COMPLIANCE COMMITTEE. The Compliance Committee supervises 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 is 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. The members of the Compliance
Committee are A. Steven Crown (Chair), Lyle Berman, Eric M. Hilton, Gilbert L.
Shelton and Rocco J. Marano.
COMPENSATION COMMITTEE. The Compensation Committee reviews and establishes
the general employment and compensation practices and policies of Park Place and
approves procedures for the administration thereof, including such matters as
the total salary and fringe benefit programs. The members of the Compensation
Committee are J. Kenneth Looloian (Chair), Barbara Bell Coleman, A. Steven
Crown, Barron Hilton, Eric M. Hilton and Rocco J. Marano.
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
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<PAGE>
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. The
members of the Nominating Committee are J. Kenneth Looloian and Gilbert L.
Shelton.
COMPENSATION OF PARK PLACE DIRECTORS
Directors who are not officers of Park Place receive an annual fee of
$30,000, and a fee of $1,000 for attendance at Board and Committee meetings.
Directors are also 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 serve
as executive officers of Park Place. Effective December 31, 1998, those persons
named below who were officers of Hilton and its subsidiaries as of such date
(except for Stephen Bollenbach) relinquished their positions as officers of
Hilton.
<TABLE>
<CAPTION>
NAME AGE BACKGROUND
- ---------------------------------------- --- --------------------------------------------------------------------------------
<S> <C> <C>
Stephen F. Bollenbach .................. 56 See "Park Place Board of Directors" above.
Chairman of the Board
Arthur M. Goldberg ..................... 57 See "Park Place Board of Directors" above.
President and Chief Executive Officer
53 Executive Vice President--Eastern Region, Hilton Gaming Corporation since
December 1996, and Executive Vice 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.
Wallace R. Barr ........................
Executive Vice President
Clive S. Cummis ........................ 70 See "Park Place Board of Directors" above.
Executive Vice President-- Law &
Corporate Affairs, and Secretary
36 Executive Vice President and Treasurer, Hilton Gaming Corporation 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.
Mark R. Dodson .........................
Executive Vice President
36 Senior Vice President and Treasurer, Hilton Hotels Corporation since May 1996,
and prior thereto, Senior Vice President and Treasurer, Host Marriott
Corporation.
Scott A. LaPorta .......................
Executive Vice President and Chief
Financial Officer
</TABLE>
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Prior to the Hilton distribution on December 31, 1998, Park Place had not
paid any compensation to its executive officers and therefore no such
information is available with respect to the year ended December 31, 1998.
Compensation of the Park Place executive officers will be determined by the
Personnel and Compensation Committee of the Park Place Board. Stephen
Bollenbach, who is Chairman of the Board of Park Place, and Arthur Goldberg, who
is the President and Chief Executive Officer of Park Place, are parties to
employment agreements with Park Place. See "--Park Place CEO and Chairman
Agreements" below 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. See "--Committees of the Park Place Board."
PARK PLACE CEO AND CHAIRMAN EMPLOYMENT AGREEMENTS
PARK PLACE CEO AGREEMENT
Park Place and Mr. Goldberg have entered into an employment agreement (the
"Park Place CEO Agreement") for the period beginning on December 31, 1998 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. The Park Place CEO
Agreement provides 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
Internal Revenue Code of 1986, as amended (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 Mr. Goldberg shall,
pursuant to the Park Place 1998 Stock Incentive Plan (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 $6.375 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
December 31, 1998 (which was $6.375).
The computation resulted in an exercise price of $12.880 per share for the
Tranche B Option.
81
<PAGE>
The Park Place CEO Special Option is exercisable for 10 years after the
Hilton distribution on December 31, 1998, 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 December 31, 1998, 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 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
December 31, 1998, 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 December 31, 1998, 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 December 31, 1998.
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
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<PAGE>
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.
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
superseded 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 have entered into the Park Place Chairman
Agreement pursuant to which Mr. Bollenbach has agreed to serve as Chairman of,
and advisor to, the Park Place Board for the period beginning on December 31,
1998 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 Mr.
Bollenbach shall, pursuant to the Park Place 1998 Plan, 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
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<PAGE>
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.
The following table sets forth certain information regarding grants of stock
options to the CEO during 1998.
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF SECURITIES UNDERLYING OPTIONS GRANTED
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES OF
TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM (B)
GRANTED EMPLOYEES IN PRICE PER EXPIRATION ----------------------------
NAME (A) FISCAL YEAR SHARE DATE 5% 10%
- -------------------------------- ---------- ------------- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Arthur M. Goldberg.............. 4,000,000 44% $ 6.375 12/31/08 $ 16,036,863 $ 40,640,433
2,000,000 22% $ 12.880 12/31/08 $ 16,200,326 $ 41,054,806
</TABLE>
The Company commenced operations upon the distribution from Hilton on
December 31, 1998. The only options granted were pursuant to employment
contracts entered into on December 31, 1998.
The following table sets forth option exercises and year-end value tables
for the CEO.
AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR END OPTIONS VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE- MONEY OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998
SHARES ACQUIRED --------------------------- ---------------------------
NAME ON EXERCISE (#) VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------ --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Arthur M. Goldberg.................. -- -$- 4,950,000 6,000,000 $0 $0
</TABLE>
84
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as to the shares of Park Place
common stock beneficially owned (or deemed to be owned pursuant to the rules of
the Commission) as of February 26, 1999, by each person who is 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. 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................................................................... 22,935,230(1)(2) 7.6
9336 Civic Center Drive
Beverly Hills, California 90210
Conrad N. Hilton Fund........................................................... 16,498,736(1) 5.4
100 West Liberty Street
Reno, Nevada 89501
Stephen F. Bollenbach........................................................... 4,540,000(2) 1.5
A. Steven Crown................................................................. 3,675,500(2)(3) 1.2
Arthur M. Goldberg.............................................................. 7,254,738(2) 2.4
Eric M. Hilton.................................................................. 11,400(1)(2) *
Lyle M. Berman.................................................................. 5,297,844(2)(4) 1.7
J. Kenneth Looloian............................................................. 12,500(2) *
Clive S. Cummis................................................................. 12,600 *
Gilbert L. Shelton.............................................................. 22,000(2)(5) *
Rocco J. Marano................................................................. 12,000(2) *
Wallace R. Barr................................................................. 55,401(2) *
Mark R. Dodson.................................................................. 32,911(2) *
Scott A. LaPorta................................................................ 73,500(2) *
Barbara Bell Coleman............................................................ 2,000(2) *
All Directors and Executive Officers 43,937,624(6) 14.0
as a Group (14 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) Includes options to acquire 4,500,000, 6,000, 4,950,000, 2,000, 2,000,
1,000,000, 2,000, 2,000, 2,000, 26,000, 18,750, 72,500 and 2,000 shares of
Park Place common stock, exercisable within the next 60 days, held by
Messrs. Bollenbach, Crown, Goldberg, B. Hilton, E. Hilton, Berman, Looloian,
Shelton, Marano, Barr, Dodson, LaPorta and Ms. Coleman, respectively. See
"Arrangements Between Hilton and Park Place--Stock Option Plans." See also
"Management--Park Place CEO and Chairman Employment Agreements."
(3) Mr. Crown is a partner of The Crown Fund, which owns 239,888 shares of Park
Place Common Stock. The 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
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<PAGE>
is a partner, are partners, owns 600,000 shares of Park Place Common Stock.
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, The
Arie and Ida Crown Memorial, Pines Trailer Limited Partnership and Areljay,
L.P., except to the extent of his beneficial interest therein.
(4) Includes 82,500 shares of Park Place common stock beneficially owned by Mr.
Berman's spouse. Also includes 45,615 shares of Park Place common stock held
by Berman Consulting Corporation, a corporation wholly owned by Mr. Berman.
Also includes 15,000 shares of Park Place Common Stock beneficially owned by
a general partnership whose general partners include trusts for the benefit
of the reporting person's children (the "general partnersip"). The reporting
person is not a trustee of such trusts. Mr. Berman disclaims beneficial
ownership of the shares held by his spouse and by the general partnership.
(5) Includes 20,000 shares owned jointly by Mr. Shelton and his spouse. Dr. Judy
Shelton, a director of Hilton Hotels Corporation, over which shares Mr.
Shelton shares voting and investment powers.
(6) Includes 10,635,250 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 BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based upon a review of filings with the Commission and written
representations that no other reports were required, the Company believes that
all of the Company's directors and executive officers complied during fiscal
1998 with the reporting requirements of Section 16(a) of the Securities Exchange
Act of 1934, with the exception of Messrs. Barr, Berman, Bollenbach, Crown,
Dodson and LaPorta, all of whom inadvertantly neglected to disclose holdings on
their initial Section 16(a) filings due to ministerial error on the Company's
part. These inadvertant omissions will be corrected by the late filing of Form
5s.
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Clive Cummis is Chairman of the law firm Sills Cummis Radin Tischman Epstein
& Gross which has and continues to provide legal services to Park Place.
CHANGE IN CONTROL AND EMPLOYMENT ARRANGEMENTS
Lyle Berman, the former Chairman of the Board of Grand had an employment
agreement with Grand which contained certain "change of control" provisions
which were triggered as a result of the Grand merger. Under his agreement, in
the event of a termination of employment not for "cause" or his resignation
following a "change of control" (as defined therein), Grand was required to pay
Mr. Berman up to three years of his then current base salary in addition to any
outstanding incentive compensation to which he would otherwise be entitled in
the absence of such termination or resignation, in addition to the continuation
of certain employee benefits to which he would otherwise be entitled for an
additional year. The "change of control" provisions also provide for a two year
period in which Mr. Berman may exercise any outstanding options to purchase
common stock. For purposes of Mr. Berman's agreement, a "change of control"
occurred by reason of the Merger and Mr. Berman was paid $1,895,833 on January
4, 1999 in connection therewith (which amount did not include payments for
outstanding incentive compensation).
For additional employment agreement arrangements, see "--Park Place CEO and
Chairman Employment Agreements--Park Place CEO Agreement" and "--Park Place
Chairman Agreement."
OTHER INTERESTS
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 1998. Management believes that the rates paid were
comparable to those which would have been paid to unaffiliated parties providing
similar services.
87
<PAGE>
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENT SCHEDULES.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT CHARGED TO (CREDITED)
BEGINNING COSTS AND TO OTHER
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OTHER
--------------- --------------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
- ---------------------------------------------------
Allowance for doubtful accounts.................. 21 37 -- 25 1(A)
YEAR ENDED DECEMBER 31, 1997
- ---------------------------------------------------
Allowance for doubtful accounts.................. 21 26 -- 26 --
YEAR ENDED DECEMBER 31, 1996
- ---------------------------------------------------
Allowance for doubtful accounts.................. 14 20 -- 26 13(A)
<CAPTION>
BALANCE AT
END OF
PERIOD
---------------
<S> <C>
YEAR ENDED DECEMBER 31, 1998
- ---------------------------------------------------
Allowance for doubtful accounts.................. 34
YEAR ENDED DECEMBER 31, 1997
- ---------------------------------------------------
Allowance for doubtful accounts.................. 21
YEAR ENDED DECEMBER 31, 1996
- ---------------------------------------------------
Allowance for doubtful accounts.................. 21
</TABLE>
(A) Represents balances acquired during the period.
- ------------------------
(A)(2) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------
<C> <S>
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 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference from Exhibit 4.1 to the Registration
Statement on Form S-8 of the Registrant filed with the Commission on
December 22, 1998).
3.2 Amended and Restated Bylaws of the Registrant (incorporated by
reference from Exhibit 4.2 to the Registration Statement on Form S-8
of the Registrant filed with the Commission on December 22, 1998).
4.1 Rights Agreement dated as of December 29, 1998 by and among the
Registrant and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent (incorporated by reference from Exhibit 1 to the Registrant's
Form 8-A filed with the Commission on December 30, 1998).
4.2 Indenture dated as of December 21, 1998 by and among the Registrant
and First Union National Bank, as trustee, with respect to $400
million aggregate principal amount of 7 7/8% Senior Subordinated
Notes due 2005 (incorporated by reference to Exhibit 4.5 to the
Current Report on Form 8-K of the Registrant filed with the
Commission on January 8, 1999).
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------
<C> <S>
4.3 First Supplemental Indenture dated as of December 31, 1998 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 to Exhibit 4.4 to the
Current Report on Form 8-K of the Registrant filed with the
Commission on January 8, 1999).
4.4 Five Year Credit Agreement dated as of December 31, 1998 among the
Registrant, Bank of America National Trust Association, as
Administrative Agent, and NationsBanc Montgomery Securities, LLC, as
Lead Arranger (incorporated by reference to Exhibit 99.10 to the
Current Report on Form 8-K of the Registrant filed with the
Commission on January 8, 1999).
4.5 Short Term Credit Agreement dated as of December 31, 1998 among the
Registrant, Bank of America National Trust and Savings Association,
as Administrative Agent, and NationsBanc Montgomery Securities, LLC,
as Lead Arranger (incorporated by reference to Exhibit 99.9 to the
Current Report on Form 8-K of the Registrant filed with the
Commission on January 8, 1999).
4.6 Indenture dated as of November 30, 1995 by and among Grand Casinos,
Inc., Grand Casinos Resorts, Inc., Grand Casinos of Mississippi,
Inc.--Gulfport, Grand Casinos of Mississippi, Inc. Biloxi, Grand
Casinos Biloxi Theater, Inc., GCI Biloxi South Hotel Corporation,
GCI Biloxi Hotel Acquisition Corporation, GCI Gulfport South Hotel
Corporation, GCI Gulfport Hotel Acquisition Corporation, Mille Lacs
Gaming Corporation, Grand Casinos of Louisiana, Inc. Tunica-Biloxi,
Grand Casinos of Louisiana, Inc.--Coushatta, GCA Acquisition
Subsidiary, Inc., BL Development Corp. and American Bank National
Association (incorporated by reference to Exhibit 10.30 to the Grand
Casinos, Inc.'s Report on Form 10-K for the fiscal year ended
December 31, 1995).
4.7 Second Amendment to Indenture dated as of September 16, 1997, by and
among Grand Casinos, Inc., Grand Casinos Resorts, Inc., Grand
Casinos of Mississippi, Inc.-- Gulfport, Grand Casinos of
Mississippi, Inc.--Biloxi, Grand Casinos Biloxi Theater, Inc., Mille
Lacs Gaming Corporation, Grand Casinos of Louisiana,
Inc.--Tunica-Biloxi, Grand Casinos of Louisiana, Inc.--Coushatta,
GCA Acquisition Subsidiary, Inc., BL Development Corp., BL Resorts
I, Inc., GCG Resorts I, Inc., Grand Casinos Nevada I, Inc. and
Firstar Bank of Minnesota, N.A. (incorporated by reference to
Exhibit 4.3 of Grand Casinos, Inc.'s Report on Form 10-K for the
fiscal year ended December 28, 1998).
4.8 Third Amendment to Indenture dated as of September 25, 1997, by and
among Grand Casinos, Inc., Grand Casinos Resorts, Inc., Grand
Casinos of Mississippi, Inc.-- Gulfport, Grand Casinos of
Mississippi, Inc.--Biloxi, Grand Casinos Biloxi Theater, Inc., Mille
Lacs Gaming Corporation, Grand Casinos of Louisiana,
Inc.--Tunica-Biloxi, Grand Casinos of Louisiana, Inc.--Coushatta,
GCA Acquisition Subsidiary, Inc., BL Development Corp., BL Resorts
I, Inc., GCG Resorts I, Inc., Grand Casinos Nevada I, Inc., BL
Resorts I, LLC, GCG Resorts I, LLC and Firstar Bank of Minnesota,
N.A. (incorporated by reference to Exhibit 4.3 of Grand Casinos,
Inc.'s Report on Form 10-K for the fiscal year ended December 28,
1998).
4.9 Indenture dated as of October 16, 1997, between Grand Casinos, Inc.,
the Guarantors, listed on Schedule I thereto, and Firstar Bank of
Minnesota, N.A. (incorporated by reference to Exhibit 4.1 to Grand
Casinos, Inc.'s Registration Statement on Form S-4, as amended, File
No. 333-39009).
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------
<C> <S>
10.1 Lease Agreement between the Mississippi Department of Economic and
Community Development and the Mississippi State Port Authority at
Gulfport, as lessor, and Grand Casinos, Inc., as lessee, dated as of
May 20, 1992 (incorporated by reference to Exhibit 10VV to Grand
Casinos, Inc.'s Report on Form 10-K for the fiscal year ended August
2, 1992 (File No. 0-19565)).
10.2 Ground Lease between Mavar, Inc., a Mississippi Corporation, as lessor
and Grand Casinos of Mississippi, Inc., a Minnesota corporation, as
lessee, dated as of June 23, 1992 (incorporated by reference to
Exhibit 10XX to Grand Casinos, Inc.'s Report on Form 10-K for the
fiscal year ended August 2, 1992 (File No. 0-19565)).
10.3 Fifth Lease Amendment between the State of Mississippi through its
duly authorized agencies. The Mississippi Department of Economic and
Community Development and the Mississippi State Port Authority at
Gulfport and Grand Casinos of Mississippi, Inc. dated July 8, 1996
(incorporated by reference to Exhibit 10.13 to Grand Casinos, Inc.'s
Report on Form 10-K for the fiscal year ended December 29, 1996).
10.4 First Amendment to Ground Lease with Mavar, Inc. and Grand Casinos,
Inc., dated November 9, 1992 (incorporated by reference to Exhibit
10MMM to Grand Casinos, Inc.'s Report on Form 10-Q for the quarter
ended November 1, 1992 (File No. 0-19565)).
10.5 Application for Standard Lease of Public Trust Tidelands, dated
December 7, 1992 (incorporated by reference to Exhibit 10NNN to
Grand Casinos, Inc.'s Report on Form 10-Q for the quarter ended
November 1, 1992 (File No. 0-19565)).
10.6 Second Lease Amendment with consent to Assignment between the State of
Mississippi and Grand Casinos, Inc. (incorporated by reference to
Exhibit 10.9 to Grand Casinos, Inc.'s Report on Form 10-Q for the
quarter ended January 31, 1993 (File No. 0-19565)).
10.7 Second Amendment to Lease Agreement dated as of February 1, 1993
between Mavar, Inc. and Grand Casinos of Mississippi, Inc.--Biloxi
(incorporated by reference to Exhibit 10.10 to Grand Casinos, Inc.'s
Report on Form 10-Q for the quarter ended January 31, 1993 (File No.
0-19565)).
10.8 Public Trust Tidelands lease dated January 28, 1993 by and between the
Secretary of State of the State of Mississippi, on behalf of the
State of Mississippi and Grand Casinos of Mississippi, Inc. Biloxi
(incorporated by reference to Exhibit 10.11 to the Grand Casinos,
Inc.'s Report on Form 10-Q for the quarter ended January 31, 1993
(File No. 0-19565)).
10.9 Agreement among the Company, Bob Stupak, Bob Stupak Enterprises, Inc.
and Grand Casinos Resorts, Inc. dated November 15, 1993 and First
and Second Amendments thereto dated December 22, 1993 and January
25, 1994 (incorporated by reference to Exhibit 10.46 to Grand
Casinos, Inc.'s Report on Form 10-K for the fiscal year ended
January 1, 1995 (File No. 0-19565)).
10.10 Letter Agreement dated as of June 1, 1994 between Stratosphere
Corporation, Grand Casinos, Inc., Grand Casinos Resorts, Inc., Bob
Stupak Enterprises, Inc. and Bob Stupak (incorporated by reference
to Exhibit 10.80 to Grand Casinos, Inc.'s Report on Form 10-Q for
the quarter ended July 3, 1994 (File No. 0-19565)).
10.11 Amendment to June 1, 1994 Letter Agreement dated November 16, 1994
between Stratosphere Corporation, Grand Casinos Resorts, Inc., Grand
Casinos, Inc., Bob Stupak Enterprises, Inc. and Bob Stupak
(incorporated by reference to Exhibit 10.48 to Grand Casinos, Inc.'s
Report on Form 10-K for the fiscal year ended January 1, 1995 (File
No. 0-19565)).
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------
<C> <S>
10.12 Management and Development Agreement dated July 1, 1994, by and
between Stratosphere Corporation and Grand Casinos, Inc.
(incorporated by reference to Exhibit 10.49 to Grand Casinos, Inc.'s
Report on Form 10-K for the fiscal year ended January 1, 1995 (File
No. 0-19565)).
10.13 Memorandum of Agreement dated as of February 16, 1995 by and among
Stratosphere Corporation and Grand Casinos, Inc. (incorporated by
reference to Exhibit 10.50 to Grand Casinos, Inc.'s Report on Form
10-K for the fiscal year ended January 1, 1995 (File No. 0-19565)).
10.14 Standby Equity Commitment dated March 9, 1995 by and between Grand
Casinos, Inc. and Stratosphere Corporation (incorporated by
reference to Exhibit 10.51 to Grand Casinos, Inc.'s Report on Form
10-K for the fiscal year ended January 1, 1995 (File No. 0-19565)).
10.15 Notes Completion Guarantee dated March 9, 1995 by and between Grand
Casinos, Inc. and American Bank National Association (incorporated
by reference to Exhibit 10.52 to Grand Casinos, Inc.'s Report on
Form 10-K for the fiscal year ended January 1, 1995 (File No.
0-19565)).
10.16 Completion Guarantor Subordination Agreement dated March 9, 1995
between Grand Casinos, Inc. and American Bank National Association
(incorporated by reference to Exhibit 10.53 to Grand Casinos, Inc.'s
Report on Form 10-K for the fiscal year ended January 1, 1995 (File
No. 0-19565)).
10.17 First Amendment to Port Authority Ground Lease dated as of December
14, 1992, between the Mississippi Department of Economic and
Community Development, the Mississippi State Port Authority at
Gulfport, and Grand Casinos, Inc. (incorporated by reference to
Exhibit 10.31 to Grand Casinos, Inc.'s Report on Form 10-K for the
fiscal year ended December 31, 1995).
10.18 Third Amendment to Port Authority Ground Lease dated as of February 9,
1994, between the Mississippi Department of Economic and Community
Development, the Mississippi State Port Authority at Gulfport, and
Grand Casinos of Mississippi, Inc.--Gulfport (incorporated by
reference to Exhibit 10.32 to Grand Casinos, Inc.'s Report on Form
10-K for the fiscal year ended December 31, 1995).
10.19 Fourth Amendment to Port Authority Ground Lease dated as of June 3,
1994, between the Mississippi Department of Economic and Community
Development, the Mississippi State Port Authority at Gulfport, and
Grand Casinos of Mississippi, Inc.--Gulfport (incorporated by
reference to Exhibit 10.33 to Grand Casinos, Inc.'s Report on Form
10-K for the fiscal year ended December 31, 1995).
10.20 Fifth Amendment to Port Authority Ground Lease dated as of November
30, 1995, between the Mississippi Department of Economic and
Community Development, the Mississippi State Port Authority at
Gulfport, and Grand Casinos of Mississippi, Inc.-- Gulfport
(incorporated by reference to Exhibit 10.34 to Grand Casinos, Inc.'s
Report on Form 10-K for the fiscal year ended December 31, 1995).
10.21 Ground Sublease Agreement between Grand Casinos of Mississippi,
Inc.--Gulfport and CHC/GCI Gulfport Limited Partnership dated as of
April 1, 1994 (incorporated by reference to Exhibit 10.35 to Grand
Casinos, Inc.'s Report on Form 10-K for the fiscal year ended
December 31, 1995).
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------
<C> <S>
10.22 First Amendment to Ground Sublease Agreement dated as of February 3,
1995 by and between Grand Casinos of Mississippi, Inc.--Gulfport and
CHC/GCI Gulfport Limited Partnership (incorporated by reference to
Exhibit 10.36 to Grand Casinos, Inc.'s Report on Form 10-K for the
fiscal year ended December 31, 1995).
10.23 Ground Sublease Agreement between Grand Casinos of Mississippi,
Inc.--Biloxi and CHC/GCI Gulfport Limited Partnership dated as of
September 1, 1994 (incorporated by reference to Exhibit 10.37 to
Grand Casinos, Inc.'s Report on Form 10-K for the fiscal year ended
December 31, 1995).
10.24 First Amendment to Ground Sublease Agreement dated as of February 3,
1995 by and between Grand Casinos of Mississippi, Inc.--Biloxi and
CHC/GCI Biloxi Limited Partnership (incorporated by reference to
Exhibit 10.38 to Grand Casinos, Inc.'s Report on Form 10-K for the
fiscal year ended December 31, 1995).
10.25 Public Trust Tidelands Lease dated as of June 20, 1994 by and between
the State of Mississippi and CHC/GCI Biloxi Limited Partnership
(incorporated by reference to Exhibit 10.39 to Grand Casinos, Inc.'s
Report on Form 10-K for the fiscal year ended December 31, 1995).
10.26 First Amendment to Public Trust Tidelands Lease dated as of November
30, 1995 by and between the State of Mississippi and Grand Casinos
Biloxi Theater, Inc. (incorporated by reference to Exhibit 10.40 to
Grand Casinos, Inc.'s Report on Form 10-K for the fiscal year ended
December 31, 1995).
10.27 Memorandum of Lease dated as of January 20, 1995 by and between the
Board of Levy Commissioners for the Yazoo-Mississippi delta and BL
Development Corp. (incorporated by reference to Exhibit 10.41 to
Grand Casinos, Inc.'s Report on Form 10-K for the fiscal year ended
December 31, 1995).
10.28 First Amendment to Lease dated as of November 30, 1995 by and between
the Board of Levee Commissioners for the Yazoo-Mississippi Delta and
BL Development Corp. (incorporated by reference to Exhibit 10.42 to
Grand Casinos, Inc.'s Report on Form 10-K for the fiscal year ended
December 31, 1995).
10.29 Distribution Agreement dated as of December 31, 1998 between Hilton
Hotels Corporation and the Registrant (incorporated by reference to
Exhibit 99.1 to the Current Report on Form 8-K of the Registrant
filed with the Commission on January 8, 1999).
10.30 Debt Assumption Agreement dated as of December 31, 1998 between Hilton
Hotels Corporation and the Registrant (incorporated by reference to
Exhibit 99.2 to the Current Report on Form 8-K of the Registrant
filed with the Commission on January 8, 1999).
10.31 Assignment and License Agreement dated as of December 31, 1998 by and
between Hilton Hotels Corporation, Conrad International Royalty
Corporation and the Registrant (incorporated by reference to Exhibit
99.3 to the Current Report on Form 8-K of the Registrant filed with
the Commission on January 8, 1999).
10.32 Hilton Hotels Corporation Corporate Services Agreement dated as of
December 31, 1998 by and between Hilton Hotels Corporation and the
Registrant (incorporated by reference to Exhibit 99.4 to the Current
Report on Form 8-K of the Registrant filed with the Commission on
January 8, 1999).
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------
<C> <S>
10.33 Park Place Entertainment Corporation Corporate Services Agreement
dated as of December 31, 1998 by and between Hilton Hotels
Corporation and the Registrant (incorporated by reference to Exhibit
99.5 to the Current Report on Form 8-K of the Registrant filed with
the Commission on January 8, 1999).
10.34 Employee Benefits and Other Employment Matters Allocation Agreement
dated as of December 31, 1998 by and between Hilton Hotels
Corporation and the Registrant (incorporated by reference to Exhibit
99.6 to the Current Report on Form 8-K of the Registrant filed with
the Commission on January 8, 1999).
10.35 Tax Allocation and Indemnity Agreement dated as of December 31, 1998
by and between Hilton Hotels Corporation and the Registrant
(incorporated by reference to Exhibit 99.7 to the Current Report on
Form 8-K of the Registrant filed with the Commission on January 8,
1999).
10.36 Non-Competition Agreements dated as of December 31, 1998 by and
between Lyle Berman, Thomas J. Brosig, Stanley M. Taube and the
Registrant (incorporated by reference to Exhibit 99.8 to the Current
Report on Form 8-K of the Registrant filed with the Commission on
January 8, 1999).
10.37 Employment Agreement between the Registrant and Arthur M. Goldberg
(incorporated by reference to Exhibit 99.11 to the Current Report on
Form 8-K of the Registrant filed with the Commission on January 8,
1999).
10.38 Employment Agreement between the Registrant and Stephen F. Bollenbach
(incorporated by reference to Exhibit 99.12 to the Current Report on
Form 8-K of the Registrant filed with the Commission on January 8,
1999).
10.39 1991 Grand Casinos, Inc. Stock Option and Compensation Plan, as
amended. (Incorporated by reference to Exhibit 4.3 to the
Registrants Form S-8 dated January 8, 1999).
10.40 Park Place Entertainment Corporation 1998 Independent Director Stock
Option Plan (incorporated by reference to Exhibit 4.3 to the
Registrants Form S-8 dated December 22, 1998).
10.41 Park Place Entertainment Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 4.3 to the Registrants Form
S-8 dated December 22, 1998).
10.42 Park Place Entertainment Corporation 1998 Stock Incentive Plan
(incorporated by reference to Exhibit 4.3 to the Registrants Form
S-8 dated December 22, 1998).
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule--Year ended December 31, 1998
</TABLE>
- ------------------------
+ To be filed by amendment.
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated November 24, 1998 under
the caption "Item 5 Other Events", a press release issued by Hilton Hotels
Corporation announcing the Hilton shareholders had approved the separation of
the hotel and gaming business of Hilton. The gaming business will be renamed
Park Place Entertainment Corporation.
The Company filed a Current Report on Form 8-K dated December 16, 1998 under
the caption "Item 5 Other Events", a press release announcing the pricing of its
Senior Subordinated Notes.
93
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ CLIVE S. CUMMIS
-----------------------------------------
Clive S. Cummis
EXECUTIVE VICE PRESIDENT--LAW
& CORPORATE AFFAIRS AND SECRETARY
DATED: MARCH 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in their capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ LYLE BERMAN
- ------------------------------ Director March 30, 1999
Lyle Berman
/s/ STEPHEN F. BOLLENBACH
- ------------------------------ Chairman of the Board and March 30, 1999
Stephen F. Bollenbach Director
/s/ A. STEVEN CROWN
- ------------------------------ Director March 30, 1999
A. Steven Crown
/s/ BARBARA BELL COLEMAN
- ------------------------------ Director March 30, 1999
Barbara Bell Coleman
Executive Vice President--
/s/ CLIVE S. CUMMIS Law & Corporate Affairs
- ------------------------------ and Secretary and March 30, 1999
Clive S. Cummis Director
President and Chief
/s/ ARTHUR M. GOLDBERG Executive Officer
- ------------------------------ (Principal Executive March 30, 1999
Arthur M. Goldberg Officer) and Director
/s/ BARRON HILTON
- ------------------------------ Director March 30, 1999
Barron Hilton
</TABLE>
94
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ ERIC M. HILTON
- ------------------------------ Director March 30, 1999
Eric M. Hilton
Executive Vice President
/s/ SCOTT A. LAPORTA and Chief Financial
- ------------------------------ Officer (Principal March 30, 1999
Scott A. LaPorta Financial and Accounting
Officer)
/s/ J. KENNETH LOOLOIAN
- ------------------------------ Director March 30, 1999
J. Kenneth Looloian
/s/ ROCCO J. MARANO
- ------------------------------ Director March 30, 1999
Rocco J. Marano
/s/ GILBERT L. SHELTON
- ------------------------------ Director March 30, 1999
Gilbert L. Shelton
</TABLE>
95
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF PARK PLACE ENTERTAINMENT CORPORATION
- --------------------------------------------------------------------------------
PARBALL CORPORATION
a Nevada corporation
dba Flamingo Hilton-Las Vegas and Bally's Las Vegas
FLAMINGO HILTON-LAUGHLIN, INC.
a Nevada corporation
FHR CORPORATION
a Nevada corporation
dba Reno Hilton and Flamingo Hilton-Reno
LVH CORPORATION
a Nevada corporation
dba Las Vegas Hilton
BALLY'S PARK PLACE, INC (NJ)
a New Jersey corporation
GNOC, CORP.
a New Jersey corporation
dba Atlantic City Hilton
BALLY'S MARYLAND, INC.
A Maryland corporation
dba Ocean Downs Racetrack
ATLANTIC CITY COUNTRY CLUB, INC.
A New Jersey corporation
BI GAMING CORPORATION
a Nevada corporation
BALLY'S LOUISIANA, INC.
a Louisiana corporation
BALLY'S OLYMPIA LIMITED PARTNERSHIP
a Delaware partnership
dba Bally's Saloon-Gaming Hall-Hotel
GULFPORT LLC
a Minnesota corporation
dba Grand Casino Gulfport
GRAND CASINO OF MISSISSIPPI, INC.-BILOXI
a Minnesota corporation
dba Grand Casino Biloxi
BL DEVELOPMENT CORP.
a Minnesota corporation
dba Grand Casino Tunica
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (File No. 333-69507, 333-69513, 333-69514,
and 333-70303).
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE
RELATED CONSOLIDATED STATEMENT OF OPERATION FOR THE YEAR ENDED DECEMBER 31,
1998 AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT AND NOTES.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1998
<CASH> 382
<SECURITIES> 0
<RECEIVABLES> 153
<ALLOWANCES> (34)
<INVENTORY> 25
<CURRENT-ASSETS> 634
<PP&E> 5,458
<DEPRECIATION> (467)
<TOTAL-ASSETS> 7,174
<CURRENT-LIABILITIES> 440
<BONDS> 2,472
0
0
<COMMON> 3
<OTHER-SE> 3,605
<TOTAL-LIABILITY-AND-EQUITY> 7,174
<SALES> 0
<TOTAL-REVENUES> 2,305
<CGS> 0
<TOTAL-COSTS> 1,742
<OTHER-EXPENSES> 225
<LOSS-PROVISION> 37
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> 223
<INCOME-TAX> 111
<INCOME-CONTINUING> 109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42
</TABLE>
