<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): DECEMBER 18, 1996
HILTON HOTELS CORPORATION
(Exact Name of Registrant as
Specified in its Charter)
DELAWARE 1-3427 36-2058176
(State or Other (Commission (IRS Employer
Jurisdiction of File Identification
Incorporation) Number) No.)
9336 CIVIC CENTER DRIVE
BEVERLY HILLS, CALIFORNIA 90210
(Address of Principal
Executive Offices)
(310) 278-4321
(Registrant's telephone
number, including area code)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On December 18, 1996, pursuant to an Agreement and Plan of Merger,
dated as of June 6, 1996, as amended (the "Merger Agreement"), by and between
Hilton Hotels Corporation, a Delaware corporation ("Hilton"), and Bally
Entertainment Corporation, a Delaware corporation ("Bally"), Bally merged with
and into Hilton (the "Merger"), with Hilton surviving the Merger. Upon
consummation of the Merger, each outstanding share of common stock, par value
$.66-2/3 per share, of Bally ("Bally Common Stock") outstanding immediately
prior to the effective time of the Merger was converted into the right to
receive one share of common stock, par value $2.50 per share, of Hilton, and
each share of Preferred Redeemable Increased Dividend Equity Securities, 8%
PRIDES, Convertible Preferred Stock of Bally ("Bally PRIDES"), outstanding
immediately prior to the effective time of the Merger was converted into the
right to receive one share of Preferred Redeemable Increased Dividend Equity
Securities, 8% PRIDES, Convertible Preferred Stock of Hilton. No cash
consideration is payable to Bally shareholders in connection with the Merger.
At the effective time of the Merger, there were 54,692,087 shares of Bally
Common Stock and 14,832,300 shares of Bally PRIDES outstanding.
The Company has retained ChaseMellon Shareholder Services, LLC to
serve as Exchange Agent. Letters of Transmittal and accompanying materials will
be sent to Bally shareholders instructing them on the exchange of their Bally
shares.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED. The financial
statements of Bally required by this Item 7(a) are incorporated herein by
reference to the financial statements of Bally set forth in the Annual Report on
Form 10-K of Bally for the year ended December 31, 1995 and the Quarterly Report
on Form 10-Q of Bally for the quarter ended September 30, 1996, which financial
statements are included herewith as Exhibit 99(a).
(b) PRO FORMA FINANCIAL INFORMATION. The pro forma financial
information required by this Item 7(b) is incorporated herein by reference to
the Unaudited Pro Forma Condensed Financial Statements included herewith as
Exhibit 99(b).
(c) EXHIBITS.
23 Consent of Ernst & Young LLP.
99(a) Financial statements of Bally set forth in the Annual
Report on Form 10-K of Bally for the year ended December 31, 1995 and the
Quarterly Report on Form 10-Q of Bally for the quarter ended September 30, 1996.
99(b) Unaudited Pro Forma Condensed Financial Statements.
2
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HILTON HOTELS CORPORATION
By: /s/ Scott LaPorta
----------------------------------------
Name: Scott LaPorta
Dated: December 20, 1996 Title: Senior Vice President and
Treasurer
S-1
<PAGE>
EXHIBIT INDEX
Exhibit
-------
23 Consent of Ernst & Young LLP.
99(a) Financial Statements of Bally set forth in the Annual Report
on Form 10-K of Bally for the year ended December 31, 1995
and the Quarterly Report on Form 10-Q of Bally for the
quarter ended September 30, 1996.
99(b) Unaudited Pro Forma Condensed Financial Statements.
E-1
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Form 8-K of Hilton
Hotels Corporation of our report dated February 7, 1996 with respect to the
consolidated financial statements of Bally Entertainment Corporation included
in its Annual Report (Form 10-K) for the year ended December 31, 1995 filed
with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Chicago, Illinois
December 18, 1996
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
BALLY ENTERTAINMENT CORPORATION
We have audited the accompanying consolidated balance sheet of Bally
Entertainment Corporation as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Bally Entertainment Corporation at December 31, 1995 and 1994, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in the "Summary of significant accounting policies -- Income
taxes" note to the consolidated financial statements, in 1993 the Company
changed its method of accounting for income taxes.
ERNST & YOUNG LLP
Chicago, Illinois
February 7, 1996
1
<PAGE>
- ------------------------------------------------------------------------------
BALLY ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31
---------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
ASSETS
Current assets:
Cash and equivalents.................................................. $ 285,801 $ 178,427
Marketable securities, at fair value.................................. 18,111 6,031
Receivables, less allowances of $13,094 and $12,196................... 27,497 23,450
Inventories........................................................... 8,358 8,113
Deferred income taxes................................................. 22,450 16,299
Other current assets.................................................. 11,495 16,373
----------- -----------
Total current assets.......................................... 373,712 248,693
Property and equipment, at cost:
Land.................................................................. 224,809 223,590
Buildings, vessels and improvements................................... 1,184,326 1,070,764
Furniture, fixtures and equipment..................................... 359,661 303,454
Construction in progress.............................................. 9,335 34,299
----------- -----------
1,778,131 1,632,107
Accumulated depreciation.............................................. 510,898 445,239
----------- -----------
Net property and equipment.................................... 1,267,233 1,186,868
Investment in and receivables from discontinued operations.............. 15,450 291,012
Intangible assets, less accumulated amortization of $28,867 and
$24,398............................................................... 122,728 123,367
Other assets............................................................ 110,094 86,221
----------- -----------
$ 1,889,217 $ 1,936,161
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
2
<PAGE>
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
----------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 22,209 $ 28,745
Income taxes payable................................................. 3,583 27,707
Accrued liabilities.................................................. 116,548 113,990
Current maturities of long-term debt................................. 11,160 7,200
----------- -----------
Total current liabilities.................................... 153,500 177,642
Long-term debt, less current maturities................................ 1,278,441 1,258,990
Deferred income taxes.................................................. 157,913 152,851
Other liabilities...................................................... 12,626 15,656
Minority interests..................................................... 36,102 37,410
Stockholders' equity:
Preferred stock, $1 par value; 30,000,000 shares authorized --
Series B Junior Participating; 800,000 shares authorized;
none issued..................................................
Series D Convertible Exchangeable; 2,000,000 shares authorized;
694,497 shares issued; liquidation preference of $34,725......... 694 694
8% PRIDES Convertible; 15,525,000 shares authorized and issued;
liquidation preference of $172,716............................... 15,525
Common stock, $.66 2/3 par value; 80,000,000 shares authorized;
47,625,927 and 47,138,498 shares issued........................... 31,751 31,426
Capital in excess of par value....................................... 177,551 295,110
Retained earnings (accumulated deficit).............................. 27,151 (31,581)
Common stock in treasury, 146,956 shares at cost..................... (2,037) (2,037)
----------- -----------
Total stockholders' equity................................... 250,635 293,612
----------- -----------
$ 1,889,217 $ 1,936,161
----------- -----------
----------- -----------
</TABLE>
3
<PAGE>
- ------------------------------------------------------------------------------
BALLY ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands, except per share data)
Revenues:
Casino....................................................................... $ 789,863 $ 722,903 $ 530,250
Rooms........................................................................ 87,487 88,841 33,380
Food and beverage............................................................ 73,637 67,730 34,163
Other........................................................................ 72,873 62,781 30,412
----------- ----------- -----------
1,023,860 942,255 628,205
Costs and expenses:
Casino....................................................................... 386,552 358,195 253,879
Rooms........................................................................ 31,207 33,280 14,301
Food and beverage............................................................ 65,498 65,534 32,483
Other operating expenses..................................................... 147,670 133,955 87,031
Selling, general and administrative.......................................... 119,218 122,921 80,148
Gaming development costs, including amortization of pre-opening costs of
$6,027, $3,330 and $3,052.................................................. 12,325 14,200 4,342
Depreciation and amortization................................................ 74,586 75,964 48,075
Abandonment loss............................................................. 13,100
----------- ----------- -----------
837,056 817,149 520,259
----------- ----------- -----------
Operating income............................................................... 186,804 125,106 107,946
Gain on sales of marketable securities......................................... 2,454 11,806
Interest expense............................................................... (132,361) (130,834) (92,876)
----------- ----------- -----------
Income from continuing operations before income taxes and minority interests... 56,897 6,078 15,070
Income tax benefit (provision)................................................. 18,650 (3,000) (5,335)
Minority interests............................................................. 1,106 (4,981) 484
----------- ----------- -----------
Income (loss) from continuing operations....................................... 76,653 (1,903) 10,219
Discontinued operations:
Loss from operations......................................................... (10,980) (46,091) (26,245)
Gain on sale................................................................. 6,215
----------- ----------- -----------
Income (loss) before extraordinary item and cumulative effect on prior years of
change in accounting for income taxes........................................ 65,673 (47,994) (9,811)
Extraordinary gain (loss) on extinguishment of debt............................ 458 (20,395) (8,490)
Cumulative effect on prior years of change in accounting for income taxes...... (28,197)
----------- ----------- -----------
Net income (loss).............................................................. 66,131 (68,389) (46,498)
Preferred stock dividend requirement........................................... (6,232) (2,778) (2,778)
----------- ----------- -----------
Net income (loss) applicable to common stock................................... $ 59,899 $ (71,167) $ (49,276)
----------- ----------- -----------
----------- ----------- -----------
Per common and common equivalent share:
Income (loss) from continuing operations..................................... $ 1.34 $ (.10) $ .16
Discontinued operations --
Loss from operations....................................................... (.20) (.98) (.56)
Gain on sale............................................................... .13
Extraordinary gain (loss) on extinguishment of debt.......................... .01 (.44) (.18)
Cumulative effect on prior years of change in accounting for income taxes.... (.61)
----------- ----------- -----------
Net income (loss)............................................................ $ 1.15 $ (1.52) $ (1.06)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
4
<PAGE>
- ------------------------------------------------------------------------------
BALLY ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Capital earnings Common Total
in (accumu- Cumulative stock stock-
Preferred Common excess of lated translation in holders'
DOLLAR AMOUNTS stock stock par value deficit) adjustments treasury equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Balance at December 31, 1992............. $ 694 $30,731 $ 289,311 $ 88,783 $ 2,506 $(1,798) $410,227
Net loss............................... (46,498) (46,498)
Issuance of common stock:
In satisfaction of Series D Preferred
Stock dividends, $4.00 per share... 221 2,557 (2,778) --
In satisfaction of other obligations. 180 1,232 1,412
Under stock option plans............. 193 1,313 1,506
Effect of disposal of discontinued
operations............................ (2,506) (2,506)
-------- -------- --------- -------- -------- ------- ---------
Balance at December 31, 1993.............. 694 31,325 294,413 39,507 -- (1,798) 364,141
Net loss................................ (68,389) (68,389)
Change in unrealized gain/loss on
available-
for-sale securities................... 79 79
Series D Preferred Stock dividends,
$4.00 per share....................... (2,778) (2,778)
Issuance of common stock under stock
purchase and option plans............. 101 697 798
Purchases of common stock............... (239) (239)
-------- -------- --------- -------- -------- ------- --------
Balance at December 31, 1994.............. 694 31,426 295,110 (31,581) -- (2,037) 293,612
Net income.............................. 66,131 66,131
Change in unrealized gain/loss on
available-for-sale securities......... (1,167) (1,167)
Issuance of 8% PRIDES Convertible
Preferred Stock....................... 15,525 151,305 166,830
Series D Preferred Stock dividends,
$4.00 per share....................... (2,778) (2,778)
8% PRIDES Convertible Preferred Stock
dividends, $.2225 per share........... (3,454) (3,454)
Issuance of common stock under stock
purchase and option plans............. 325 3,561 3,886
Spin-off of fitness centers segment..... (272,425) (272,425)
-------- -------- --------- -------- -------- ------- --------
Balance at December 31, 1995.............. $16,219 $31,751 $ 177,551 $ 27,151 $ -- $(2,037) $250,635
-------- -------- --------- -------- -------- ------- --------
-------- -------- --------- -------- -------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
Preferred stock Common stock
----------------------- -----------------------
SHARE AMOUNTS Series D 8% PRIDES Issued Treasury
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Balance at December 31, 1992.......................................... 694 46,096 110
Issuance of common stock:
In satisfaction of Series D Preferred Stock dividends............. 332
In satisfaction of other obligations.............................. 269
Under stock option plans.......................................... 289
--------- --------- --------- ---------
Balance at December 31, 1993.......................................... 694 -- 46,986 110
Issuance of common stock under stock purchase and option plans...... 152
Purchases of common stock........................................... 37
--------- --------- --------- ---------
Balance at December 31, 1994.......................................... 694 -- 47,138 147
Issuance of 8% PRIDES Convertible Preferred Stock................... 15,525
Issuance of common stock under stock purchase and option plans...... 488
--------- --------- --------- ---------
Balance at December 31, 1995.......................................... 694 15,525 47,626 147
========= =========== ========= =========
</TABLE>
See accompanying notes.
5
<PAGE>
- ------------------------------------------------------------------------------
BALLY ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING:
Income (loss) from continuing operations...................... $ 76,653 $ (1,903) $ 10,219
Adjustments to reconcile to cash provided --
Depreciation and amortization (including pre-opening
costs)................................................... 80,613 79,294 51,127
Interest accretion on discount notes and other amortization
included in interest expense............................. 20,747 19,867 10,110
Abandonment loss........................................... 13,100
Deferred income taxes...................................... (63) (21,758) (27,061)
Gain on sales of marketable securities..................... (2,454) (11,806)
Provision for doubtful receivables......................... 4,718 6,829 2,201
Minority interests......................................... (1,106) 4,981 (484)
Change in operating assets and liabilities................. (54,007) (26,170) 5,358
Other, net................................................. (5,041) 373 (1,816)
---------- ---------- ---------
Cash provided by operating activities................. 120,060 62,807 49,654
INVESTING:
Purchases and construction of property and equipment.......... (135,346) (95,858) (70,895)
Increase (decrease) in construction-related liabilities....... (2,326) (1,015) 8,558
Acquisitions of Bally's Grand, Inc. common stock, net of cash
acquired upon consolidation................................ (18,004) (14,256) 30,688
Loans to nonconsolidated gaming ventures...................... (13,600)
Purchases of marketable securities............................ (45,442) (16,352)
Net proceeds from sales of marketable securities.............. 27,680 27,168
Other, net.................................................... (9,708) (2,476) (24,351)
---------- ---------- ---------
Cash used in investing activities..................... (196,746) (102,789) (56,000)
FINANCING:
Debt transactions --
Proceeds from long-term borrowings......................... 71,099 434,973 720,181
Repayments of long-term debt............................... (61,562) (389,451) (536,440)
Net repayments under revolving credit agreements........... (2,000) (1,000)
Debt issuance costs........................................ (854) (16,133) (26,659)
---------- ---------- ---------
Cash provided by debt transactions.................... 8,683 27,389 156,082
Equity transactions --
Proceeds from issuance of 8% PRIDES Convertible
Preferred Stock.......................................... 166,830
Proceeds from issuance of common stock under stock purchase
and option plans......................................... 3,253 755 590
Preferred stock dividends.................................. (2,778) (2,778)
Purchases of common stock for treasury..................... (239)
---------- ---------- ---------
Cash provided by financing activities................. 175,988 25,127 156,672
DISCONTINUED OPERATIONS:
Dividends received from discontinued operations............... 15,000
Other, net.................................................... 8,072 1,204 799
---------- ---------- ---------
Cash provided by discontinued operations.............. 8,072 1,204 15,799
---------- ---------- ---------
Increase (decrease) in cash and equivalents..................... 107,374 (13,651) 166,125
Cash and equivalents, beginning of year......................... 178,427 192,078 25,953
---------- ---------- ---------
Cash and equivalents, end of year............................... $ 285,801 $ 178,427 $ 192,078
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes.
6
<PAGE>
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities, net of effects
from acquisitions and dispositions, were as follows:
Increase in receivables............................... $ (6,245) $ (6,048) $ (3,252)
(Increase) decrease in inventories, other current
assets and other assets............................ (1,500) (9,931) 12,033
Increase (decrease) in accounts payable and accrued
liabilities........................................ 7,633 (8,309) (1,731)
Increase (decrease) in income taxes payable........... (53,149) (1,730) 13,791
Decrease in other liabilities......................... (746) (152) (15,483)
---------- ---------- ----------
$ (54,007) $ (26,170) $ 5,358
---------- ---------- ----------
---------- ---------- ----------
Cash was invested in acquisitions of Bally's Grand, Inc.
common stock as follows:
Fair value of assets acquired (including goodwill of
$19,354)........................................... $ $ $ (475,299)
Liabilities assumed (including long-term debt of
$259,950).......................................... 390,305
Minority interests.................................... (19,234) (17,080) 43,280
Unsettled purchases................................... 1,230 2,824
Cash and equivalents acquired upon consolidation...... 72,402
---------- ---------- ----------
$ (18,004) $ (14,256) $ 30,688
---------- ---------- ----------
---------- ---------- ----------
Cash payments for interest and income taxes for continuing
operations were as follows:
Interest paid......................................... $ 114,599 $ 115,551 $ 79,347
Interest capitalized.................................. (2,838) (2,067) (422)
Income taxes paid (net of refunds).................... 35,220 26,485 18,639
Investing and financing activities exclude the following
non-cash activities:
Contribution of net assets into consolidated venture
by minority interest............................... $ 13,079 $ $
Purchases of marketable securities on margin
(including unsettled purchases).................... 4,153 21,620
Sales of margined marketable securities (including
unsettled sales)................................... 11,095 16,764
Accrued preferred stock dividends..................... 3,454
Acquisition of Bally's Grand, Inc. common stock in
exchange for other equity securities............... 10,161 18,838
Reduction of intangible assets resulting from the
settlement of a pre-acquisition contingency........ 3,998
Issuance of common stock in satisfaction of certain
obligations........................................ 4,190
Discontinued operations --
Spin-off of fitness centers segment and capital
contributions (principally forgiveness of
indebtedness) to Bally Total Fitness Holding
Corporation...................................... 272,425 31,400 32,000
Reduction in income taxes receivable from Bally
Total Fitness Holding Corporation................ 5,163 1,084 16,427
Sale of certain fitness-related assets............. 27,621
</TABLE>
7
<PAGE>
- ------------------------------------------------------------------------------
BALLY ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of Bally
Entertainment Corporation ("Bally") and the subsidiaries which it controls
(collectively, the "Company"). The consolidated financial statements have been
presented to reflect Bally Total Fitness Holding Corporation ("BFIT"),
formerly Bally's Health & Tennis Corporation, as a discontinued operation
because of Bally's spin-off of its fitness centers segment (see "Discontinued
operations"). As a result, the Company's continuing operations comprise one
industry segment and all significant revenues arise from two casino hotel
resorts in Atlantic City, New Jersey, a casino hotel resort in Las Vegas,
Nevada, a dockside casino and hotel in Robinsonville, Mississippi (near
Memphis, Tennessee) and a riverboat casino in New Orleans, Louisiana.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which require the
Company's management to make estimates and assumptions that affect the amounts
reported therein. Actual results could vary from such estimates. In addition,
certain reclassifications have been made to prior years' financial statements
to conform with the 1995 presentation.
Cash equivalents
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. The carrying amount of
cash equivalents approximates fair value due to the short maturity of those
instruments.
Marketable securities
Marketable securities consist primarily of common stock of certain publicly
traded gaming companies. These securities are considered available-for-sale
securities and are carried at fair value with the change in unrealized gains
or losses reported net of tax, as a credit or charge to retained earnings. The
cost of securities sold is determined on the specific identification method. A
summary of available-for-sale securities at December 31, 1995 and 1994 and for
the years then ended follows.
1995 1994
- -----------------------------------------------
Cost........................ $19,821 $ 5,846
Gross unrealized gains...... 247 219
Gross unrealized losses..... 1,957 34
Gross realized gains........ 2,844 11,884
Gross realized losses....... 390 78
Inventories
Inventories of provisions and supplies are stated at the lower of cost
(first-in, first-out basis) or market, which approximates replacement cost.
Property and equipment
Depreciation of property and equipment is provided principally on the
straight-line method over the estimated economic lives of the related assets,
and amortization of leasehold improvements is provided on the straight-line
method over the lesser of the estimated economic lives of the improvements or
the lease term. Depreciation expense was $67,894, $68,938 and $44,112 for
1995, 1994 and 1993, respectively.
Deferred finance costs
Deferred finance costs are amortized over the terms of the related debt using
the bonds outstanding method. Included in "Other assets" at December 31, 1995
and 1994 were deferred finance costs of $31,491 and $36,528, respectively, net
of accumulated amortization of $10,959 and $6,105, respectively.
Pre-opening costs
Personnel, marketing and other operating costs that are directly associated
with the opening of new casinos are capitalized as pre-opening costs and
amortized to expense on the straight-line method over the first six months of
operations. Included in "Other assets" at December 31, 1995 and 1994 were
pre-opening costs of $3,362 and $1,740, respectively.
Intangible assets
Intangible assets consist principally of cost in excess of net assets of
acquired businesses (goodwill) and are being amortized on the straight-line
method over periods ranging up to forty years from the dates of acquisition.
The Company evaluates annually whether the remaining estimated useful life of
goodwill may
8
<PAGE>
- ------------------------------------------------------------------------------
BALLY ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
warrant revision or the remaining balance of goodwill may not be recoverable,
generally considering expectations of future profitability and cash flows
(undiscounted and without interest charges) for each subsidiary having
goodwill of significance. If the sum of a subsidiary's expected future cash
flows was less than the carrying value of that subsidiary, an impairment loss
would be recognized equal to the amount by which the carrying value of that
subsidiary exceeded its fair value. The Company believes that no impairment of
goodwill exists at December 31, 1995.
Revenue recognition
Casino revenues consist of the net win from gaming activities, which is the
difference between gaming wins and losses. Revenues exclude the retail value
of complimentary food, beverages and hotel services furnished to customers,
which were $115,803, $99,558 and $71,261 for 1995, 1994 and 1993,
respectively. The estimated costs of providing such complimentary services,
which are classified as casino expenses
through interdepartment allocations from the departments granting the
services, were as follows:
1995 1994 1993
- ------------------------------------------------------
Rooms............. $17,573 $15,601 $ 10,010
Food and
beverage........ 58,119 53,356 40,541
Other............. 7,264 6,958 5,577
------- ------- --------
$82,956 $75,915 $ 56,128
======== ======== ========
Gaming development costs
Gaming development costs include consulting and legal fees, design and
architectural costs, application and licensing fees and salaries incurred in
connection with the pursuit and development of new gaming projects in various
jurisdictions. These costs are expensed as incurred until such time as a
particular opportunity is determined to be viable, generally when the Company
has been selected as the operator of a new gaming facility or a gaming license
has been granted to the Company, at which time such costs are generally
accounted for as pre-opening costs.
Income taxes
Effective January 1, 1993, the Company changed its method of accounting for
income taxes as required by Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." As permitted by SFAS No. 109,
the Company elected to use the cumulative
effect approach rather than to restate the consolidated financial statements
of any prior years to apply the provisions of SFAS No. 109. The cumulative
effect on prior years of this change in accounting for income taxes was a
charge of $28,197.
ABANDONMENT LOSS
On February 9, 1995, the Company entered into a venture agreement with a
subsidiary of Lady Luck Gaming Corporation ("Lady Luck") pursuant to which the
Company relocated its dockside casino from Mhoon Landing to a site in
Robinsonville, Mississippi, where Lady Luck had constructed a 238-room hotel.
Effective April 1, 1995, the Company contributed its dockside casino and
related assets to the venture, and Lady Luck contributed the hotel and related
assets. Through subsidiaries, Bally owns a 58% equity interest in and serves
as general manager of the venture ("Bally's Mississippi").
In connection with the venture agreement, the Company terminated its land
lease at Mhoon Landing, thereby causing the land-based building and related
leaseholds to become property of the lessor. In addition, certain other assets
were not recoverable upon relocation. As a result, the Company recognized a
charge of $13,100 at December 31, 1994, which represented the write-off of the
net book value of assets abandoned.
EXTRAORDINARY ITEMS
In 1995, the Company purchased $20,040 principal amount of the Bally's Casino
Holdings, Inc. ("Casino Holdings") discount notes
for $13,448 in cash, which resulted in an extraordinary gain of $458, net of
income taxes of $247.
In 1994, Bally's Park Place completed a refinancing of its debt which resulted
in an extraordinary loss of $20,735, net of income
taxes of $14,137. Also in 1994, the Company
purchased $7,400 principal amount of the Casino Holdings discount notes for
$4,456 in cash,
9
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BALLY ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
which resulted in an extraordinary gain of $340, net of income taxes of $183.
In 1993, three other subsidiaries of the Company completed refinancings of
their debt which, in the aggregate, resulted in an extraordinary loss
totalling $8,490, net of income taxes of $5,092 and minority interests of
$412.
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Earnings (loss) per common and common equivalent share is computed by dividing
net income (loss) applicable to common stock by the weighted average number of
shares of common stock and common stock equivalents outstanding during each
year (55,452,172 in 1995, 46,897,196 in 1994 and 46,558,856 in 1993). Common
stock equivalents (which primarily represent the dilutive effect of the
assumed conversion of certain convertible/
exchangeable securities and the assumed exercise of certain outstanding stock
options) increased the weighted average number of shares outstanding by
8,297,557 in 1995.
Assumed conversion of convertible/exchangeable
securities was not applicable and assumed exercise of outstanding stock
options was not significant in 1994 or 1993.
ACQUISITION OF BALLY'S GRAND, INC.
On August 20, 1993 (the "Effective Date"), the Fifth Amended Plan of
Reorganization (the "Chapter 11 Plan") of Bally's Grand, Inc. (a company
originally acquired by Bally in 1986 which owns and operates the casino hotel
resort in Las Vegas, Nevada known as "Bally's Las Vegas") became effective and
Bally's Grand, Inc. emerged from bankruptcy. For almost two years prior
thereto, Bally's Grand, Inc. operated its business and managed its properties
as a debtor-in-possession under chapter 11 of title 11 of the United States
Code (the "Bankruptcy Code"). On the Effective Date, Bally relinquished all of
its equity interest in Bally's Grand, Inc. and Bally's net intercompany
receivable from Bally's Grand, Inc. was cancelled and extinguished. Bally's
investment in and advances to Bally's Grand, Inc. were written down to zero in
1990. Also, Bally did not provide any type of guarantee or commitment to
Bally's Grand, Inc. nor did it assume any other obligation of Bally's Grand,
Inc. in connection with the Chapter 11 Plan. Accordingly, the Company did not
reflect any equity in earnings of Bally's Grand, Inc. for the period from
January 1, 1993 through the Effective Date.
During 1993, two subsidiaries of Bally acquired 5,215,678 shares
(approximately 50% of the shares then outstanding) of reorganized Bally's
Grand, Inc. common stock in several transactions in exchange for $41,714 and
1,752,400 shares of Bally Gaming International, Inc. ("Gaming") common stock.
Bally's Grand, Inc. has been consolidated since December 1, 1993 as a result
of Bally's attainment of a controlling interest at that time. From September
29, 1993 (the date a cumulative 20% equity interest in reorganized Bally's
Grand, Inc. was attained) through November 30, 1993, Bally's investment in
Bally's Grand, Inc. was recorded on the equity method of accounting. The
equity in earnings of reorganized Bally's Grand, Inc. recognized during that
period was $786.
During 1994, Bally's Grand, Inc. repurchased 1,439,681 shares of its common
stock in several transactions for $17,080. In addition, a subsidiary of Bally
acquired 752,676 shares of Bally's Grand, Inc. common stock from an executive
officer of Bally in exchange for cumulative exchangeable preferred stock of
that subsidiary. See "Minority interests."
During 1995, Bally's Grand, Inc. repurchased 676,900 shares of its common
stock in several transactions for $7,663. In addition, a subsidiary of Bally
acquired 850,810 shares of Bally's Grand, Inc. common stock in several
transactions for $8,747.
Collectively, as a result of the transactions described above, Bally owned
approximately 81% of the Bally's Grand, Inc. common shares outstanding at
December 31, 1995. The acquisitions of Bally's Grand, Inc. common stock have
been recorded using the purchase method of accounting and the excess of the
purchase price over the estimated fair value of net assets acquired totalling
$29,053 is being amortized using the straight-line method over 20 years.
Certain employees of Bally and certain of its subsidiaries provide various
management, administrative and support services to Bally's Grand, Inc. During
1993, Bally was paid $1,427 for such services provided to Bally's Grand, Inc.
10
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BALLY ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
prior to the Effective Date. Following the Effective Date, such services,
among other things, are provided to reorganized Bally's Grand, Inc. under a
management agreement pursuant to which a subsidiary of Bally receives $3,000
annually.
The following unaudited pro forma summary consolidated results of operations
of the Company for 1993 has been prepared to give effect to the 1993
acquisition of the controlling interest in reorganized Bally's Grand, Inc. as
if such acquisition had occurred as of January 1, 1993. The pro forma results
have been prepared for comparative purposes only and do not purport to present
what the Company's results of operations would actually have been if the
acquisition had in fact occurred at such date or to project the Company's
results of operations for any future year. In addition, the pro forma summary
consolidated results of operations of the Company include adjustments to the
historical results of operations of Bally's Grand, Inc. which principally
reflect: (i) the elimination of the reorganization items of Bally's Grand,
Inc., (ii) the effects of transactions related to the reorganization of
Bally's Grand, Inc. pursuant to the Chapter 11 Plan, (iii) the effects of the
adoption of "fresh-start reporting" and (iv) the income tax effects of the pro
forma adjustments. The pro forma summary consolidated results of operations
for 1993 is based upon available information and upon certain assumptions that
management believes are reasonable.
Revenues........................... $867,952
Operating income................... 143,048
Income from continuing operations.. 11,571
Net loss........................... (46,707)
Per common and common equivalent
share:
Income from continuing
operations.................. $ .19
Net loss...................... (1.06)
ACCRUED LIABILITIES
1995 1994
- ----------------------------------------------
Payroll and
benefit-related........ $ 44,728 $ 40,213
Interest................. 21,094 29,179
Other.................... 50,726 44,598
-------- --------
$116,548 $113,990
-------- --------
-------- --------
LONG-TERM DEBT
The carrying amounts of the Company's long-term debt at December 31, 1995 and
1994 are as follows:
1995 1994
- ---------------------------------------------------------
Bally:
8% Convertible Senior
Subordinated Debentures due
2000....................... $ 13,586 $
10% Convertible Subordinated
Debentures due 2006........ 75,000 80,000
6% Convertible Subordinated
Debentures due 1998........ 1,804 15,715
Casino Holdings:
Senior Discount Notes due
1998, less unamortized
discount of $42,805 and
$63,319.................... 149,755 149,281
Bally's Park Place:
9 1/4% First Mortgage Notes
due 2004................... 425,000 425,000
The Grand:
10 5/8% First Mortgage Notes
due 2003, less unamortized
discount of $1,678 and
$1,824..................... 273,322 273,176
Bally's Las Vegas:
10 3/8% First Mortgage Notes
due 2003................... 315,000 315,000
Bally's Casino Lakeshore
Resort:
Term loan.................. 21,681
Construction loan.......... 4,358
Other secured and unsecured
obligations.................. 14,453 3,660
---------- ----------
Total long-term debt........... 1,289,601 1,266,190
Current maturities of long-term
debt......................... (11,160) (7,200)
---------- ----------
Long-term debt, less current
maturities................... $1,278,441 $1,258,990
---------- ----------
---------- ----------
In July 1995, Bally completed an exchange offer pursuant to which Bally
exchanged $13,586 of 8% Convertible Senior Subordinated Debentures due 2000
(the "8% Debentures") for $13,586 of 6% Convertible Subordinated Debentures
due 1998 (the "6% Debentures"). The exchange eliminated all cash sinking fund
requirements for the 6% Debentures and restrictive dividend covenants,
enabling Bally to proceed with the spin-off of its fitness centers segment.
The 8% Debentures are not subject to any sinking fund requirements or
restrictive dividend covenants and may be redeemed at any time, in whole or in
part, without premium. At any time prior to maturity or redemption, these
debentures are convertible into shares of Bally Common Stock,
11
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- ------------------------------------------------------------------------------
BALLY ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
par value $.66 2/3 per share (the "Common Stock") at a current conversion
price of $12.46 per share (as adjusted for the spin-off of BFIT), subject to
adjustment for certain subsequent changes in the Company's capitalization.
The Bally 10% Convertible Subordinated Debentures due 2006 (the "10%
Debentures") require annual sinking fund payments of $5,000 through 2005. The
Company may redeem these debentures at any time, in whole or in part, with a
premium of 0.62% at December 31, 1995 and zero in December 1996 and
thereafter. At any time prior to maturity or redemption, these debentures are
convertible into Common Stock at a current conversion price of $29.42 per
share (as adjusted for the spin-off of BFIT), subject to adjustment for
certain subsequent changes in the Company's capitalization. The Company
purchased $5,000 principal amount of these debentures in 1995 to satisfy the
annual sinking fund requirement, which resulted in a pre-tax gain of $303
(included in "Other revenues").
The 8% Debentures and 10% Debentures rank pari passu and their payment is
subordinated to the prior payment, in full, of all senior indebtedness of
Bally, as defined (approximately $152,000 at December 31, 1995). In addition,
almost all of the Company's business is conducted through subsidiaries and
claims of creditors of subsidiaries are effectively senior to these
debentures.
The 6% Debentures may be redeemed by the Company at any time, in whole or in
part, without premium. At any time prior to maturity or redemption, these
debentures are convertible into shares of Common Stock at a current conversion
price of $26.10 per share (as adjusted for the spin-off of BFIT), subject to
adjustment for certain subsequent changes in the Company's capitalization. The
6% Debentures are effectively subordinated to all indebtedness of Bally and
all liabilities of the Company's subsidiaries. During 1995, the Company
purchased $325 principal amount of these debentures to partially satisfy
former sinking fund requirements, which resulted in a pre-tax gain of $45
(included in "Other revenues").
The Casino Holdings Senior Discount Notes due 1998 (the "Senior Discount
Notes") were issued at a discount to yield an interest rate of 10 1/2% and are
not subject to any sinking fund requirement, but may be redeemed at any time,
in whole or in part, at their accreted value plus a "make-whole premium," as
defined. The Senior Discount Notes are effectively subordinated to all
liabilities and guarantees of Casino Holdings' subsidiaries, which were
approximately $912,000 at December 31, 1995.
The Bally's Park Place 9 1/4% First Mortgage Notes due 2004 (the "9 1/4%
Notes") are not subject to any sinking fund requirement, but may be redeemed
beginning March 1999, in whole or in part, with premiums ranging from 4.5% in
1999 to zero in 2002 and thereafter. The 9 1/4% Notes are secured by a first
mortgage on and security interest in substantially all property and equipment
at Bally's Park Place, which had a net book value of approximately $467,000 at
December 31, 1995. In February 1996, Bally's Park Place amended its revolving
credit facility to increase the available credit line from $50,000 to $65,000
and extend the expiration date to December 31, 1998. The revolving credit
facility provides for interest on borrowings payable, at Bally's Park Place's
option, at the agent bank's prime rate or the LIBOR rate plus 2%, each of
which increases as the balance outstanding increases. The credit facility is
secured by a pari passu lien on the collateral securing the 9 1/4% Notes.
Bally's Park Place pays a fee of 1/2% on the unused commitment and the entire
credit line was unused at December 31, 1995.
The Grand's 10 5/8% First Mortgage Notes due 2003 (the "10 5/8% Notes") were
issued at a discount to yield an interest rate of 10 3/4%. The 10 5/8% Notes
are not subject to any sinking fund requirement, but may be redeemed beginning
April 1998, in whole or in part, with premiums ranging from 5.25% in 1998 to
zero in 2001 and thereafter. The 10 5/8% Notes are secured by a first mortgage
on and security interest in all property and equipment of The Grand, which had
a net book value of approximately $282,000 at December 31, 1995. The Grand has
a $20,000 revolving credit agreement expiring on December 31, 1996 which
provides for interest on borrowings at the rate of 1% above the agent bank's
prime rate and is secured by a pari passu lien on the collateral securing the
10 5/8% Notes. The Grand pays a fee of 1/2% on the unused commitment and the
entire credit line was unused at December 31, 1995.
The Bally's Las Vegas 10 3/8% First Mortgage Notes due 2003 (the "10 3/8%
Notes") are not
12
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BALLY ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
subject to any sinking fund requirement, but may be redeemed beginning
December 1998, in whole or in part, with premiums ranging from 5.19% in 1998
to zero in 2001 and thereafter. The 10 3/8% Notes are secured by a first
priority lien on the fee interests in the approximately thirty-acre site
comprising Bally's Las Vegas and by a security interest in certain other
personal property, which together had a net book value of approximately
$370,000 at December 31, 1995.
In July 1995, Bally's Casino Lakeshore Resort ("Bally's New Orleans")
replaced its construction loan with a five-year term loan, which is secured by
a first priority preferred mortgage on the riverboat (which had a net book
value of approximately $36,000 at December 31, 1995) and is guaranteed by
Bally. The term loan requires monthly payments of $490, including interest at
9.58%.
Other secured and unsecured obligations are payable through 2018 and are
collateralized by receivables, land, buildings and equipment which have a net
book value of approximately $21,000 at December 31, 1995. In addition, Bally
has guaranteed $11,850 of this indebtedness outstanding at December 31, 1995
for certain of its subsidiaries. Interest rates on these obligations averaged
approximately 10% at December 31, 1995. The weighted average interest rate on
short-term borrowings was 7.9% in 1994 and there were no short-term borrowings
in 1995 or 1993.
Dividend and other restrictions
Each of Bally's principal subsidiaries presently have debt covenants which
limit the payment of dividends to Bally. Dividends received by Casino Holdings
other than from Bally's Park Place are not available to be paid to Bally
unless available pursuant to a net income test (generally limited to 50% of
Casino Holdings' consolidated net income exclusive of income attributable to
Bally's Park Place). At December 31, 1995, no amounts were available for the
payment of dividends to Bally under such net income test. However, any
dividends paid by Bally's Park Place to Casino Holdings pursuant to a separate
net income test (generally limited to 50% of Bally's Park Place's aggregate
consolidated net income, as defined, earned since April 1, 1994) may be
declared as a dividend by Casino Holdings and paid to Bally. At December 31,
1995, $3,090 was available to be paid by Bally's Park Place to Bally (through
Casino Holdings) under this separate net income test. In addition, $2,220 was
available as of December 31, 1995 for the payment of dividends by Bally's Las
Vegas.
The indentures for Bally's debt do not contain cross-default provisions. The
indentures and credit agreements related to the indebtedness of certain of
Bally's subsidiaries require, among other things, that these subsidiaries
maintain certain financial ratios and restrict the amount of additional
indebtedness that can be incurred.
Other than as previously described, Bally has not guaranteed the payment of
principal or interest under the debt securities and credit agreements of its
subsidiaries outstanding at December 31, 1995. However, Bally remains
guarantor of approximately $10,600 of BFIT's long-term debt outstanding at
December 31, 1995.
Annual maturities
Aggregate annual maturities of long-term debt for the five years after
December 31, 1995 are as follows:
1996 1997 1998 1999 2000
- ----------------------------------------------------------------------
Bally............... $ 5,440 $ 9,677 $ 6,804 $ 5,000 $18,586
Casino Holdings..... 192,560
Bally's New
Orleans............ 5,416 5,983 6,136 6,277 3,862
Other............... 304 535 53 55 57
------- ------- -------- ------- -------
$11,160 $16,195 $205,553 $11,332 $22,505
------- ------- -------- ------- -------
------- ------- -------- ------- -------
Fair value
The fair value of the Company's long-term debt at December 31, 1995 and 1994
was $1,288,376 and $1,033,222, respectively. The fair value of publicly held
debt securities is based on quoted market prices. The fair value of borrowings
under revolving credit agreements and of other secured and unsecured
obligations approximates their carrying amount. The fair values are not
necessarily indicative of the amounts the Company could realize in a current
market exchange.
INCOME TAXES
The income tax provision (benefit) applicable to income from continuing
operations before
13
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BALLY ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
income taxes and minority interests consists of the following:
1995 1994 1993
- ----------------------------------------------------
Current:
Federal........ $(25,964) $ 20,426 $ 28,536
State.......... 7,377 4,332 3,860
-------- -------- --------
(18,587) 24,758 32,396
Deferred:
Federal........ (3,291) (22,010) (26,867)
State.......... 3,228 252 (194)
-------- -------- --------
(63) (21,758) (27,061)
-------- -------- --------
$(18,650) $ 3,000 $ 5,335
-------- -------- --------
-------- -------- --------
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. Significant components of the Company's deferred tax
assets and liabilities as of December 31, 1995 and 1994, along with their
classification, are as follows:
1995 1994
---------------------- ----------------------
Assets Liabilities Assets Liabilities
- -------------------------------------------------------------------------
Expenses which are not
currently deductible for
tax purposes:
Bad debts............. $ 6,657 $ $ 7,442 $
Other................. 33,491 35,088
Depreciation and
capitalized costs....... 175,740 169,314
Basis difference of
investments............. 10,287 27,067
Federal and state
carryforwards........... 47,311 119,178
Other, net............... 29,116 31,440
-------- ----------- -------- -----------
87,459 $ 215,143 161,708 $ 227,821
----------- -----------
----------- -----------
Valuation allowance...... (7,779) (70,439)
-------- --------
$ 79,680 $ 91,269
-------- --------
-------- --------
Current.................. $ 22,605 $ 155 $ 16,760 $ 461
Long-term................ 57,075 214,988 74,509 227,360
-------- ----------- -------- -----------
$ 79,680 $ 215,143 $ 91,269 $ 227,821
-------- ----------- -------- -----------
-------- ----------- -------- -----------
Upon consummation of the spin-off of BFIT (see "Discontinued operations"), a
portion of the Company's federal loss and Alternative Minimum Tax ("AMT")
credit carryforwards are allocated to BFIT pursuant to U.S. Treasury
Regulations. Because the distribution of BFIT common stock occurred on January
9, 1996, estimates of
1996 taxable income were used in order to determine the amount of
carryforwards which will be allocated to BFIT under the U.S. Treasury
Regulations. As such, the amount of carryforwards ultimately allocated to BFIT
may be different.
Because of the complex issues involved in the Company's tax situation and the
Company's expectation of the ultimate resolution of such issues, the Company
provided a valuation allowance at December 31, 1994 for a substantial portion
of its federal and state tax loss carryforwards and a portion of its AMT
credits. This valuation allowance was reduced in the fourth quarter of 1995
due to, among other factors, the closing of several Internal Revenue Service
audit cycles and the Company's assessment of its ability to realize its
remaining deferred tax assets. At that time, the Company wrote off
approximately $20,000 of deferred tax assets no longer available against the
valuation allowance. The remainder of the reduction is reflected in the income
tax benefit for 1995.
Based upon the estimates described above, the Company had federal loss and AMT
credit carryforwards at December 31, 1995 of
approximately $87,000 and $9,000, respectively. The Company's federal loss
carryforwards begin to expire in 2006 and fully expire in 2010, and the
Company's AMT credits have no expirations. In addition, the Company had
recorded deferred tax assets for state tax loss carryforwards at December 31,
1995 of approximately $5,000 which begin to expire in 1996 and fully expire in
2010. Based upon present expectations of the Company's future operating
results, the Company has provided a valuation allowance at December 31, 1995
for substantially all of the state tax loss carryforwards and federal credits
which are not presently expected to be realized.
A reconciliation of the income tax provision (benefit) with amounts determined
by applying the U.S. statutory tax rate to income (loss) from continuing
operations before income taxes and minority interests follows.
14
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BALLY ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
1995 1994 1993
---------------------------------------------------------
Provision (benefit) at U.S.
statutory tax rate (35%).... $ 19,914 $ 2,127 $ 5,275
Add (deduct):
State income taxes, net of
related federal income tax
benefit................... 6,893 3,433 2,393
Nondeductible expenses --
Amortization and
depreciation............ 1,562 1,247 1,140
Other..................... 1,926 1,549
Changes in the valuation
allowance................. (42,532) (7,543) 8,100
Prior years' taxes.......... (6,354) 2,216 (13,448)
Effect of change in state
(1994) and U.S. (1993)
statutory tax rates on
deferred tax balances..... (452) 1,492
Other, net.................. (59) 423 383
-------- ------- -------
Income tax provision
(benefit)................... $(18,650) $ 3,000 $ 5,335
-------- ------- -------
-------- ------- -------
MINORITY INTERESTS
At December 31, 1995 and 1994, minority interests represents the share of
equity that Bally does not own in Bally's Grand, Inc., Bally's Mississippi and
Bally's New Orleans. In addition, minority interests includes the $10,161
redemption value/liquidation preference of the preferred stock of a Bally
subsidiary that was issued to an executive officer of Bally in December 1994
in connection with the acquisition of Bally's Grand, Inc. common stock from
that officer. The subsidiary preferred stock has cumulative annual dividend
requirements of $572 and can be exchanged at any time through 2001 (date the
subsidiary must redeem the preferred stock) at the option of the holder for
1,505,405 shares of Common Stock and 376,351 shares of BFIT common stock
(lesser amounts can be exchanged in the same ratio). In addition, at any time
on or after June 30, 1997, the preferred stock may be redeemed for cash at the
option of either the subsidiary or the holder.
STOCKHOLDERS' EQUITY
Preferred stock
The Series B Junior Participating Preferred Stock, par value $1 per share (the
"Series B Junior Stock"), if issued, will have a minimum preferential
quarterly dividend of $5 per share, but will be entitled to an aggregate
dividend of 100 times the dividend declared on shares of Common Stock. Each
share of Series B Junior Stock will have 100 votes, voting together with
Common Stock, except as Delaware law may otherwise provide. In the event of
liquidation, the holders of Series B Junior Stock will receive a preferred
liquidation payment of $100 per share, but will be entitled to receive an
aggregate liquidation payment equal to 100 times the payment made per share of
Common Stock.
The Series D Convertible Exchangeable Preferred Stock, par value $1 per share
(the "Series D Stock"), with an aggregate liquidation value of $34,725 as of
December 31, 1995, bears a dividend rate of 8%. The holders of Series D Stock
do not have voting rights, except that the holders would have the right to
elect two additional directors of Bally if dividends on the Series D Stock are
in arrears in an amount equal to at least six quarterly dividends and except
as Delaware law may otherwise provide. The Series D Stock is redeemable, in
whole or in part, at the option of Bally at $50.80 per share as of December
31, 1995, declining each February 1 in equal annual amounts to $50 per share
on and after February 1, 1997, in each case plus accrued and unpaid dividends.
The Series D Stock is convertible into Common Stock at a current price of
$22.52 per share (as adjusted for the spin-off of BFIT), equivalent to a
conversion rate of 2.22 shares of Common Stock for each share of Series D
Stock (subject to adjustment for certain subsequent changes in the Company's
capitalization). The Series D Stock is exchangeable at the option of Bally, in
whole but not in part, on any dividend payment date for an issue of 8%
Convertible Subordinated Debentures due February 1, 2007 that would be issued
by Bally. In the event of liquidation, the holders of the Series D Stock will
receive a preferred liquidation payment of $50 per share, plus an amount equal
to any dividends accrued and unpaid to the payment date, before any
distribution is made to holders of junior securities.
During 1995, Bally issued 15,525,000 shares of 8% PRIDES Convertible Preferred
Stock, par value $1 per share (the "PRIDES"), which provided proceeds of
$166,830 after expenses. Generally, holders of shares of PRIDES have the right
with holders of Common Stock to vote in the election of Bally's Board of
Directors (the "Board") and upon each other matter coming before any meeting
of the holders of Common Stock, on the basis of 4/5 of a vote for each share
of PRIDES held. On October 3, 1999, each share
15
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BALLY ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
of PRIDES mandatorily converts into 1.12 shares (as adjusted for the spin-off
of BFIT) of Common Stock (subject to adjustment for certain subsequent changes
in the Company's capitalization), and the right to receive an amount in cash
equal to any accrued and unpaid dividends thereon. At any time prior to
October 3, 1999, unless previously redeemed, each share of PRIDES is presently
convertible (at the option of the holder) into .92 of a share of Common Stock,
equivalent to a current conversion price of $12.092 per share of Common Stock
(as adjusted for the spin-off of BFIT), subject to adjustment for certain
subsequent changes in the Company's capitalization. The shares of PRIDES are
not redeemable by Bally prior to October 3, 1998 and rank senior to the Common
Stock but junior to the Series D Stock as to the payment of dividends and
distribution of assets upon liquidation. The PRIDES have an aggregate
liquidation value of $172,716 plus any accrued and unpaid dividends thereon.
Common stock
At December 31, 1995, shares of Common Stock were reserved for future issuance
as follows:
Conversion of preferred stock...... 18,929,339
Stock option and purchase plans.... 7,262,187
Conversion of 10% Debentures, 8%
Debentures and 6% Debentures..... 3,708,774
Other.............................. 1,188
----------
29,901,488
----------
----------
STOCK PLANS, AWARDS AND RIGHTS
Incentive plans
The 1989 Incentive Plan of Bally (the "1989 Plan") for officers and key
employees provides for the grant of stock options, stock appreciation rights
("SARs") and restricted stock (collectively "Awards"). During 1995, the 1989
Plan was amended to increase the aggregate number of shares of Common Stock
which may be sold or delivered under the 1989 Plan to 8,000,000 shares and to
prohibit the future grant of SARs. At December 31, 1995, options to purchase
6,074,686 shares of Common Stock were outstanding and 769,366 shares of Common
Stock were available for future grant under the 1989 Plan. No Awards may be
granted after March 9, 1999.
The 1989 Plan provides for granting incentive as well as non-qualified stock
options. Generally, non-qualified stock options will be granted with an option
price equal to the fair market value of the stock at the date of grant.
Incentive stock options must be granted at not less than the fair market value
of the stock at the date of grant. Option grants generally become exercisable
in three equal annual installments commencing one year after the date of
grant, but the Compensation and Stock Option Committee (the "Compensation
Committee") of the Board in its discretion, may alter such terms.
SARs are rights granted to an officer or key employee to receive shares of
stock and/or cash in an amount equal to the excess of the fair market value of
the stock on the date the SARs are exercised over the fair market value of the
stock on the date the SARs were granted or, at the discretion of the
Compensation Committee, the date the option was granted, if granted in tandem
with an option granted on a different date. Upon exercise of SARs, the
optionee surrenders the related option in exchange for payment, in cash, of
the excess of the fair market value on the date of surrender over the option
price. There have been no SARs granted under this plan since 1990. Stock
options and SARs granted under the 1989 Plan may be exercisable for a term of
not more than ten years after the date of grant.
Restricted stock awards are rights granted to an employee to receive shares of
stock without payment but subject to forfeiture and other restrictions as set
forth in the 1989 Plan. Generally, the restricted stock awarded, and the right
to vote such stock or to receive dividends thereon, may not be sold, exchanged
or otherwise disposed of during the restricted period. Except as otherwise
determined by the Compensation Committee, the restrictions and risks of
forfeiture will, after one year from the date of grant, lapse as to not more
than 20% of the stock originally awarded, after two years lapse as to an
aggregate of not more than 40% of the stock originally awarded, and after
three years shall lapse as to all the stock originally awarded. There have
been no restricted stock awards granted under this plan since 1989 and there
are no shares outstanding with restrictions under this plan at December 31,
1995.
16
<PAGE>
- ------------------------------------------------------------------------------
BALLY ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
The 1993 Non-Employee Directors' Stock Option Plan of Bally (the "1993 Plan")
provides for the grant of non-qualified stock options to purchase an aggregate
of 120,000 shares of Common Stock to directors of the Company who are not
officers or key employees of Bally or any of its subsidiaries. Under this
plan, stock options are granted with an option price equal to the fair market
value of the stock on the date of grant. Option grants generally become
exercisable in three equal annual installments commencing one year after the
date of grant, with such options expiring ten years after the date of grant.
At December 31, 1995, options to purchase 70,000 shares of Common Stock were
outstanding and 50,000 shares of Common Stock were available for future grant
under the 1993 Plan. No options may be granted under this plan after October
13, 1998.
The Company also has a non-qualified and incentive stock option and stock
appreciation rights plan for officers and key employees (the "1985 Plan")
which has been terminated except for options to purchase 36,102 shares of
Common Stock that were outstanding at December 31, 1995, all of which are
vested.
A summary of 1995 stock option activity under the three aforementioned plans
(with option prices adjusted for the spin-off of BFIT) is as follows:
Price Number
per share of shares
- ----------------------------------------------------------
Outstanding at December 31, 1994... $ .55-21.30 5,652,441
Granted............................ 6.30-11.05 1,057,082
Exercised.......................... 3.88- 9.63 (316,907)
Cancelled or expired............... 2.68-12.80 (211,828)
----------
Outstanding at December 31, 1995... .55-21.30 6,180,788
----------
----------
At December 31, 1995, options on 3,422,544 shares were exercisable. Shares
under option at December 31, 1995 include awards to purchase 508,334 shares
that can be deemed SARs by the award recipients. Outstanding options at
December 31, 1995 expire between 1996 and 2005.
Bally's Employee Stock Purchase Plan (the "Stock Purchase Plan") provides for
the purchase of Common Stock by eligible employees (as defined) electing to
participate in the plan. The stock can generally be purchased every six months
at a price equal to the lesser of: (i) 85% of the fair market value of the
stock on the date when a particular offering begins or (ii) 85% of the fair
market value of the stock on the date when a particular offering terminates.
On each offering made under the Stock Purchase Plan, each eligible employee
electing to participate in the Stock Purchase Plan will automatically be
granted shares of Common Stock equal to the number of full shares which may be
purchased from the employee's elected payroll deduction, with a maximum
payroll deduction equal to 10% of eligible compensation, as defined. The first
offering under this plan commenced on July 1, 1994 and the last offering
terminates on June 30, 2004. During 1995 and 1994, employees participating in
the Stock Purchase Plan purchased 170,519 shares and 117,448 shares,
respectively, of Common Stock. At December 31, 1995, 262,033 shares of Common
Stock were available for future purchases under the Stock Purchase Plan. No
expense has been recorded by the Company in connection with this plan because
it is noncompensatory.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its employee stock options and intends to continue to do so.
Awards of subsidiary stock
The Bally's Grand, Inc. Incentive Stock Plan is a general incentive stock
award plan for the benefit of its officers which provides for the grant of
stock awards for no consideration. During 1993, Bally's Grand, Inc. awarded
600,000 shares of its common stock, of which 300,000 shares were awarded
through an outright grant and were subsequently acquired by a subsidiary of
Bally at their fair market value. The remaining 300,000 shares were awarded
subject to certain restrictions and forfeiture if the participant's employment
with Bally's Grand, Inc. terminated before the restrictions lapsed
(forfeitures occurred in 1995, 1994 and 1993). The restrictions applicable to
these 300,000 shares lapsed as to approximately one-third of the shares
awarded on each of December 31, 1993, 1994 and 1995, and Bally's Grand, Inc.
acquired 76,900 and 180,175 of these shares at their fair market value during
1995 and 1994, respectively. The fair value of restricted shares awarded was
amortized to expense over the period the restrictions lapsed. Pursuant to this
stock plan, forfeited shares are available to be
17
<PAGE>
- ------------------------------------------------------------------------------
BALLY ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
awarded again. As of December 31, 1995, there were 42,925 shares of Bally's
Grand, Inc. common stock available for award under this plan.
Rights to purchase preferred stock
One preferred stock purchase right is attributable to each outstanding share
of Common Stock. Under certain conditions, each right may be exercised to
purchase 1/100th of a share of Series B Junior Stock for $60. Unless earlier
redeemed by the Board of Directors, the rights become exercisable upon the
close of business on the day which is the earliest of (i) the tenth day
following the date (the "Stock Acquisition Date") of a public announcement
that a person or group of affiliated or associated persons, with certain
exceptions, has acquired beneficial ownership of 10% or more of the
outstanding Common Stock (an "Acquiring Person"), (ii) the tenth business day
(or such later date as may be determined by the Board of Directors prior to
such time as any person or group of affiliated or associated persons becomes
an Acquiring Person) after the date of the commencement or announcement of a
person's or group's intention to commence a tender or exchange offer (with
certain exceptions) the consummation of which would result in the ownership of
20% or more of the outstanding Common Stock and (iii) the tenth day after the
date on which any person becomes a "Triggering 5% Stockholder". A "Triggering
5% Stockholder" is a person or group of affiliated or associated persons
holding 5% or more of the Common Stock and who have been found to have
violated any state gaming, casino or similar statute or regulation in
connection with the stockholder's interest in the Company, to be unsuited or
unqualified under any such statute or regulation to own 5% or more of the
Common Stock or to have acquired beneficial ownership of a percentage
ownership of the Common Stock in excess of the percentage ownership deemed by
a governmental authority to constitute control of the Company without the
requisite prior approvals from the applicable gaming authorities. An Acquiring
Person does not include (i) the Company, (ii) any subsidiary of the Company,
(iii) any employee benefit plan of the Company or of any subsidiary of the
Company or any person or entity organized, appointed or established by the
Company for or pursuant to the terms of any such plan or (iv) any director of
the Company holding office as of the close of business on November 15, 1995
and any immediate family member of, or person controlled by, any such
director. Unless the rights are earlier redeemed, if a person or group (with
certain exceptions) becomes an Acquiring Person or a Triggering 5%
Stockholder, proper provision will be made so that each holder of record of a
right, other than the Acquiring Person or Triggering 5% Stockholder (whose
rights will thereupon become null and void), will thereafter have the right to
receive, upon payment of the exercise price of the rights, that number of
shares of Common Stock (or other securities or property) having a market value
at the time of the transaction equal to two times the exercise price. In the
event that, at any time following the Stock Acquisition Date, the Company is
acquired in a merger or other business combination transaction (other than a
merger with an Acquiring Person in which the Company is the surviving
corporation and the Common Stock is not changed or exchanged) or 50% or more
of the Company's assets or earning power is sold or transferred, each holder
of a right (except rights which previously have been voided as set forth
above) shall thereafter have the right to receive, upon exercise, common stock
of the acquiring company having a calculated value equal to two times the
purchase price of the right. The rights, which do not have voting privileges,
are subject to adjustment to prevent dilution, expire on December 4, 1996 and
may be redeemed by the Company at a price of five cents per right at any time
until 10 days following the Stock Acquisition Date or the date on which any
person or group first becomes a Triggering 5% Stockholder.
EMPLOYEE BENEFIT PLANS
Bally and certain subsidiaries have defined contribution plans that provide
retirement benefits for eligible non-union employees. Eligible employees may
elect to participate by contributing a percentage of their pre-tax earnings to
the plans. Employee contributions to the plans, up to certain limits, are
matched in various percentages by the Company. The expense applicable to
continuing operations for the Company's defined contribution plans was $6,089,
$5,602 and $4,299 for 1995, 1994 and 1993, respectively.
Certain employees of the Company are covered by union-sponsored, collectively
bargained, multi-employer defined benefit pension plans. The
18
<PAGE>
- ------------------------------------------------------------------------------
BALLY ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
contributions and charges to expense for these plans were $4,256, $4,255 and
$1,314 in 1995, 1994 and 1993, respectively.
In addition, Bally's Park Place had a noncontributory supplemental executive
retirement plan for certain key executives which was terminated during 1995,
whereby Bally's Park Place generally settled its obligations with respect
thereto by making a payment to one of the defined contribution plans described
above. As a result of this settlement, Bally's Park Place recognized a gain of
$1,800 in 1995. The net periodic pension cost for this plan was $949 and
$3,090 for 1994 and 1993, respectively.
DISCONTINUED OPERATIONS
On June 28, 1994, the Board approved a plan to spin-off its fitness centers
segment operated by BFIT (the "Spin-off"). As a result, the Company recorded
an after tax provision in June 1994 of $23,731 for BFIT's estimated operating
losses through disposal. Several unexpected delays in effecting the Spin-off
were encountered, resulting in the Company's recognition of a $10,980
after-tax provision in the third quarter of 1995 for additional BFIT operating
losses. On November 6, 1995, the Board declared a spin-off distribution to
holders of Common Stock at the close of business on November 15, 1995, with
one share of BFIT common stock to be distributed for every four shares of
Common Stock then outstanding. The BFIT common stock was distributed on
January 9, 1996; however, the Spin-off was reflected in the Company's
consolidated financial statements as of the November 15, 1995 record date. In
addition, cash payments were made to holders of Common Stock in lieu of any
fractional shares of BFIT common stock.
In connection with the Spin-off, BFIT issued to the Company a warrant (the
"Warrant") entitling the Company to acquire 2,942,805 shares of BFIT common
stock at an exercise price of $5.26 per share (equal to 110% of the average
trading price of BFIT's common stock for the first 20 trading days after the
stock was distributed). The Warrant is not exercisable until December 31, 1996
(unless certain change in control transactions occur) and is exercisable for a
period of nine years thereafter.
The Company's investment in and receivables from discontinued operations at
December 31, 1995 and 1994 consists of:
1995 1994
- ---------------------------------------------------------
Investment in fitness centers
segment............................. $ -- $229,438
Income taxes receivable from fitness
centers segment..................... 15,200 52,990
Other................................. 250 8,584
-------- --------
$ 15,450 $291,012
-------- --------
-------- --------
Summarized results of operations of the fitness centers segment is as follows:
Period from
January 1,
1995 Years ended
through December 31
November ---------------------
15, 1995 1994 1993
---------------------------------------------------------
Revenues................... $585,351 $661,505 $694,752
Operating income (loss).... 10,265 (36,327) 3,391
Loss before extraordinary
item and cumulative
effect on prior years of
change in accounting for
income taxes............. (10,980) (46,091) (26,245)
Extraordinary loss on
extinguishment of debt... (5,999)
Cumulative effect on prior
years of change in
accounting for income
taxes.................... 20,711
Net loss................... (10,980) (46,091) (11,533)
In 1993, the Company disposed of its remaining 1,752,400 shares of Gaming
common stock pursuant to stock exchange agreements. This disposition,
including the recognition of previously deferred cumulative translation
adjustment credits of $2,506, resulted in a gain of $6,215, including an
income tax benefit of $1,452. The income tax benefit resulted from the
utilization of tax loss carryforwards to offset taxable income arising from
this disposition of Gaming common stock.
19
<PAGE>
BALLY ENTERTAINMENT CORPORATION
SUPPLEMENTARY DATA
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarters ended
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31
---------------- ---------------- ---------------- ----------------
1995 1994 1995 1994 1995 1994 1995 1994
------ ------ ------ ------ ------ ------ ------ ------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . $228.3 $212.3 $245.0 $238.4 $287.1 $261.3 $263.5 $230.3
Operating income . . . . . . . . . . . . . . . . 40.4 19.2 46.0 42.2 58.9 52.2 41.5 11.5
Income (loss) from continuing operations . . . . 4.2 (9.7) 9.3 6.2 17.0 11.8 46.2 (10.2)
Income (loss) from discontinued operations . . . 5.0 (51.1) (11.0)
Income (loss) before extraordinary item. . . . . 4.2 (4.7) 9.3 (44.9) 6.0 11.8 46.2 (10.2)
Extraordinary gain (loss). . . . . . . . . . . . .3 (20.7) .1 .3
Net income (loss). . . . . . . . . . . . . . . . 4.5 (25.4) 9.4 (44.9) 6.0 11.8 46.2 (9.9)
Per common share:
Income (loss) from continuing operations . . . $ .07 $ (.23) $ .17 $ .12 $ .32 $ .24 $ .67 $ (.23)
Income (loss) from discontinued
operations . . . . . . . . . . . . . . . . . .11 (1.09) (.21)
Extraordinary gain (loss). . . . . . . . . . . .01 (.44)
Net income (loss). . . . . . . . . . . . . . . .08 (.56) .17 (.97) .11 .24 .67 (.23)
</TABLE>
- ----------------
NOTES:
1. Casino operations of Bally's New Orleans commenced in July 1995 and
Bally's Mississippi reopened its casino in December 1995. Between 1993 and
February 1995, Bally's Mississippi operated at a different site.
2. Income from continuing operations for the quarters ended March 31, June 30,
September 30 and December 31, 1995 includes charges (net of taxes and
minority interests) of $.3 million ($.01 per share), $.9 million ($.02 per
share), $1.7 million ($.02 per share) and $2.5 million ($.05 per share),
respectively, for costs incurred in the pursuit and development of new
gaming projects and for amortization of pre-opening costs.
3. Income (loss) from continuing operations for the quarters ended March 31,
June 30, September 30 and December 31, 1994 includes charges (net of
taxes) of $2.5 million ($.05 per share), $.1 million, $2.9 million ($.06 per
share) and $5.2 million ($.11 per share), respectively, for costs incurred
in the pursuit and development of new gaming projects and for amortization
of pre-opening costs.
4. Income from continuing operations includes gains from sales of marketable
securities (net of taxes and minority interests) for the quarters ended
June 30, September 30 and December 31, 1995 at $.6 million ($.01 per
share), $.1 million and a $.7 million ($.01 per share), respectively, and
for the quarters ended September 30 and December 31, 1994 of $1.1 million
($.02 per share) and $3.6 million ($.08 per share), respectively.
5. Income from continuing operations for the quarter ended December 31, 1995
includes a credit of $41.0 million ($.65 per share) for certain
adjustments to prior years' income taxes.
6. Loss from continuing operations for the quarter ended December 31, 1994
includes a charge of $8.5 million ($.18 per share) for the write-down of
certain assets abandoned upon the relocation of the Company's casino
closer to Memphis, Tennessee.
7. The quarterly consolidated financial information reflects Bally Total
Fitness Holding Corporation as a discontinued operation due to the
spin-off distribution by Bally of its fitness centers segment. Loss from
discontinued operations for the quarters ended September 30, 1995 and
June 30, 1994 includes charges of $11.0 million ($.21 per share) and
$23.7 million ($.51 per share), respectively, to provide for operating
losses of the Company's fitness centers segment through the spin-off date.
8. The extraordinary gain (loss) for the quarters ended March 31 and June 30,
1995 and March 31 and December 31, 1994 are due to early retirements of
debt.
20
<PAGE>
Bally Entertainment Corporation
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
September 30 December 31
1996 1995
- -------------------------------------------------------------------------------
(In thousands)
ASSETS
Current assets:
Cash and equivalents . . . . . . . . . . . . $ 280,539 $ 285,801
Marketable securities, at fair value . . . . 7,624 18,111
Receivables, less allowances of $13,213
and $13,094. . . . . . . . . . . . . . . . 36,230 27,497
Inventories. . . . . . . . . . . . . . . . . 7,872 8,358
Income taxes receivable. . . . . . . . . . . 4,428
Deferred income taxes. . . . . . . . . . . . 22,283 22,450
Other current assets . . . . . . . . . . . . 22,249 11,495
----------- ----------
Total current assets . . . . . . . . . . . 381,225 373,712
Property and equipment, less accumulated
depreciation of $571,245 and $510,898. . . . 1,255,060 1,267,233
Intangible assets, less accumulated
amortization of $32,485 and $28,867. . . . . 121,654 122,728
Other assets . . . . . . . . . . . . . . . . . 129,813 125,544
----------- ----------
$ 1,887,752 $ 1,889,217
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . $ 17,565 $ 22,209
Income taxes payable . . . . . . . . . . . . 3,583
Accrued liabilities. . . . . . . . . . . . . 113,823 116,548
Current maturities of long-term debt . . . . 13,438 11,160
----------- ----------
Total current liabilities. . . . . . . . . 144,826 153,500
Long-term debt, less current maturities. . . . 1,208,678 1,278,441
Deferred income taxes. . . . . . . . . . . . . 170,590 157,913
Other liabilities. . . . . . . . . . . . . . . 15,006 12,626
Minority interests . . . . . . . . . . . . . . 36,885 36,102
Stockholders' equity . . . . . . . . . . . . . 311,767 250,635
----------- ----------
$ 1,887,752 $ 1,889,217
----------- ----------
----------- ----------
See accompanying notes.
21
<PAGE>
Bally Entertainment Corporation
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Nine months
ended September 30
-----------------------
1996 1995
- --------------------------------------------------------------------------------
(In thousands, except per share data)
Revenues . . . . . . . . . . . . . . . . . . . $ 891,052 $ 760,467
Costs and expenses:
Cost of operations . . . . . . . . . . . . . 530,544 471,885
Selling, general and administrative. . . . . 105,253 82,435
Gaming development costs, including
amortization of pre-opening costs of
$3,281 and $2,492. . . . . . . . . . . . . 5,018 6,373
Depreciation and amortization. . . . . . . . 64,325 54,500
----------- ----------
. . . . . . . . . . . . . . . . . . . . . 705,140 615,193
----------- ----------
Operating income . . . . . . . . . . . . . . . 185,912 145,274
Gain on sales of marketable securities . . . . 2,484 1,346
Interest expense . . . . . . . . . . . . . . . (98,754) (98,188)
----------- ----------
Income from continuing operations before income
taxes and minority interests . . . . . . . . 89,642 48,432
Income tax provision . . . . . . . . . . . . . (31,000) (19,000)
Minority interests . . . . . . . . . . . . . . (4,452) 1,018
----------- ----------
Income from continuing operations. . . . . . . 54,190 30,450
Loss from discontinued operations. . . . . . . (10,980)
----------- ----------
Income before extraordinary item . . . . . . . 54,190 19,470
Extraordinary gain (loss) on extinguishment
of debt. . . . . . . . . . . . . . . . . . . (2,948) 458
----------- ----------
Net income . . . . . . . . . . . . . . . . . . 51,242 19,928
Preferred stock dividend requirement . . . . . (11,414) (2,083)
----------- ----------
Net income applicable to common stock. . . . . $ 39,828 $ 17,845
----------- ----------
----------- ----------
Per common and common equivalent share:
Income from continuing operations. . . . . . $ .77 $ .57
Loss from discontinued operations. . . . . . (.22)
Extraordinary gain (loss) on extinguishment
of debt. . . . . . . . . . . . . . . . . . (.04) .01
----------- ----------
Net income . . . . . . . . . . . . . . . . . $ .73 $ .36
----------- ----------
----------- ----------
See accompanying notes.
22
<PAGE>
Bally Entertainment Corporation
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Three months
ended September 30
-----------------------
1996 1995
- -------------------------------------------------------------------------------
(In thousands, except per share data)
Revenues . . . . . . . . . . . . . . . . . . . $ 306,732 $ 287,127
Costs and expenses:
Cost of operations . . . . . . . . . . . . . 177,538 175,811
Selling, general and administrative. . . . . 35,280 28,600
Gaming development costs, including
amortization of pre-opening costs of
$2,492 in 1995 . . . . . . . . . . . . . . 414 4,194
Depreciation and amortization. . . . . . . . 21,586 19,663
---------- ----------
234,818 228,268
---------- ----------
Operating income . . . . . . . . . . . . . . . 71,914 58,859
Gain on sales of marketable securities . . . . 870 221
Interest expense . . . . . . . . . . . . . . . (31,882) (33,582)
----------- ----------
Income from continuing operations before income
taxes and minority interests . . . . . . . . 40,902 25,498
Income tax provision . . . . . . . . . . . . . (12,700) (10,100)
Minority interests . . . . . . . . . . . . . . (587) 1,615
---------- ----------
Income from continuing operations. . . . . . . 27,615 17,013
Loss from discontinued operations. . . . . . . (10,980)
---------- ----------
Income before extraordinary item . . . . . . . 27,615 6,033
Extraordinary gain (loss) on extinguishment
of debt. . . . . . . . . . . . . . . . . . . (2,300) 13
---------- ----------
Net income . . . . . . . . . . . . . . . . . . 25,315 6,046
Preferred stock dividend requirement . . . . . (3,300) (694)
---------- ----------
Net income applicable to common stock. . . . . $ 22,015 $ 5,352
---------- ----------
---------- ----------
Per common and common equivalent share:
Income from continuing operations. . . . . . $ .39 $ .32
Loss from discontinued operations. . . . . . (.21)
Extraordinary gain (loss) on extinguishment
of debt. . . . . . . . . . . . . . . . . . (.03) --
---------- ----------
Net income . . . . . . . . . . . . . . . . . $ .36 $ .11
---------- ----------
---------- ----------
See accompanying notes.
23
<PAGE>
Bally Entertainment Corporation
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Capital Total
in Common stock stock-
Preferred Common excess of Retained in holders'
DOLLAR AMOUNTS stock stock par value earnings treasury equity
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Balance at December 31, 1995. . . . . . $ 16,219 $ 31,751 $177,551 $ 27,151 $ (2,037) $250,635
Net income. . . . . . . . . . . . . . . 51,242 51,242
Dividends on preferred stock:
Series D - $2.00 per share. . . . . . (1,206) (1,206)
8% PRIDES - $.6675 per share. . . . . (10,208) (10,208)
Change in unrealized gain/loss
on available-for-sale
securities. . . . . . . . . . . . . . (337) (337)
Issuance of common/treasury stock:
Under stock purchase and
option plans. . . . . . . . . . . . 506 7,202 108 7,816
Upon conversion of/in exchange
for preferred stock . . . . . . . . (1,387) 1,452 (1,531) 1,466 --
Upon conversion of debt . . . . . . . 732 13,098 13,830
Redemption of Series D preferred
stock . . . . . . . . . . . . . . . . (5) (5)
-------- -------- -------- -------- ------- --------
Balance at September 30, 1996 . . . . . $ 14,832 $ 34,441 $196,315 $ 66,642 $ (463) $311,767
-------- -------- -------- -------- ------- --------
-------- -------- -------- -------- ------- --------
Preferred stock Common stock
---------------------- ----------------------
Share amounts Series D 8% PRIDES Issued Treasury
- ---------------------------------------------------------------------------------------------------------------------
(In thousands)
Balance at December 31, 1995. . . . . . 694 15,525 47,626 147
Issuance of common/treasury stock:
Under stock purchase and option plans. . . . . . 758 (8)
Upon conversion of/in exchange for
preferred stock. . . . . . . . . . . (694) (693) 2,179 (106)
Upon conversion of debt . . . . . . . 1,097
------- ------- ------- -------
Balance at September 30, 1996 . . . . . -- 14,832 51,660 33
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes.
24
<PAGE>
Bally Entertainment Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Nine months
ended September 30
----------------------
1996 1995
- -------------------------------------------------------------------------------
(In thousands)
OPERATING:
Income from continuing operations . . . . . . $ 54,190 $ 30,450
Adjustments to reconcile to cash provided--
Depreciation and amortization (including
pre-opening costs) . . . . . . . . . . . . 67,606 56,992
Interest accretion on discount notes and other
amortization included in interest expense. 14,139 15,270
Deferred income taxes. . . . . . . . . . . . 14,630 13,111
Minority interests . . . . . . . . . . . . . 4,452 (1,018)
Provision for doubtful receivables . . . . . 1,771 3,360
Gain on sales of marketable securities . . . (2,484) (1,346)
Change in operating assets and liabilities . (31,246) (9,939)
Other, net . . . . . . . . . . . . . . . . . (1,092) (2,859)
---------- ----------
Cash provided by operating activities . . 121,966 104,021
INVESTING:
Purchases and construction of property
and equipment . . . . . . . . . . . . . . . (46,953) (103,942)
Decrease in construction-related liabilities. (2,588) (163)
Acquisitions of Bally's Grand, Inc. common stock (6,995) (15,179)
Purchases of marketable securities. . . . . . (5,711) (9,748)
Net proceeds from sales of marketable securities 19,244 5,335
Loans to nonconsolidated gaming ventures. . . (13,600)
Other, net. . . . . . . . . . . . . . . . . . (8,658) (7,327)
---------- ----------
Cash used in investing activities . . . . (51,661) (144,624)
FINANCING:
Debt transactions --
Proceeds from long-term borrowings . . . . . 10,000 48,316
Repayments of long-term debt . . . . . . . . (77,834) (17,473)
Debt issuance costs. . . . . . . . . . . . . (1,209) (769)
---------- ----------
Cash provided by (used in) debt transactions (69,043) 30,074
Equity transactions --
Preferred stock dividends paid . . . . . . . (11,568) (2,083)
Proceeds from issuance of common stock
under stock purchase and option plans. . . 5,049 1,397
Redemption of Series D preferred stock . . . (5)
---------- ----------
Cash provided by (used in) financing
activities. . . . . . . . . . . . . . . (75,567) 29,388
DISCONTINUED OPERATIONS:
Cash provided by discontinued operations. 7,751
---------- ----------
Decrease in cash and equivalents . . . . . . . (5,262) (3,464)
Cash and equivalents, beginning of period. . . 285,801 178,427
---------- ----------
Cash and equivalents, end of period. . . . . . $ 280,539 $ 174,963
---------- ----------
---------- ----------
(continued)
25
<PAGE>
Bally Entertainment Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS--(CONTINUED)
(unaudited)
Nine months
ended September 30
----------------------
1996 1995
- -------------------------------------------------------------------------------
(In thousands)
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities
were as follows--
Increase in receivables. . . . . . . . . $ (12,414) $ (2,966)
(Increase) decrease in inventories . . . 486 (137)
Increase in income taxes receivable. . . (2,494)
(Increase) decrease in other current assets (10,428) 7,831
Increase in other assets . . . . . . . . (3,203) (2,271)
Decrease in accounts payable and accrued
liabilities. . . . . . . . . . . . . . (1,451) (1,934)
Decrease in income taxes payable . . . . (3,583) (3,928)
Increase (decrease) in other liabilities 1,841 (6,534)
---------- ----------
$ (31,246) $ (9,939)
---------- ----------
---------- ----------
Cash payments for interest and income taxes
were as follows--
Interest paid. . . . . . . . . . . . . . $ 78,174 $ 78,283
Interest capitalized . . . . . . . . . . (589) (2,688)
Income taxes paid (net of refunds) . . . 15,688 9,909
Investing and financing activities exclude
the following non-cash activities--
Issuance of common/treasury stock in
exchange for/upon conversion of other
securities . . . . . . . . . . . . . . $ 81,262 $
Issuance of 8% PRIDES preferred
stock (settled on October 3, 1995) . . 167,530
Contribution of net assets into
consolidated venture by minority
interest . . . . . . . . . . . . . . . 13,166
Purchases of marketable securities on
margin . . . . . . . . . . . . . . . . 13,610
Sales of margined marketable securities
(including unsettled sales). . . . . . 10,221
See accompanying notes.
26
<PAGE>
Bally Entertainment Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands except per share data) (unaudited)
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Bally Entertainment Corporation ("Bally") and the subsidiaries which
it controls (collectively, the "Company"). The Company operates in one industry
segment and all significant revenues arise from two casino hotel resorts in
Atlantic City, New Jersey, a casino hotel resort in Las Vegas, Nevada, a
dockside casino and hotel in Robinsonville, Mississippi (near Memphis,
Tennessee) and a riverboat casino in New Orleans, Louisiana. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
All adjustments have been recorded which are, in the opinion of management,
necessary for a fair presentation of the condensed consolidated balance sheet of
the Company at September 30, 1996, its condensed consolidated statements of
income for the three and nine months ended September 30, 1996 and 1995, its
consolidated statement of stockholders' equity for the nine months ended
September 30, 1996 and its consolidated statement of cash flows for the nine
months ended September 30, 1996 and 1995. All such adjustments were of a normal
recurring nature.
The accompanying condensed consolidated financial statements have been prepared
in conformity with generally accepted accounting principles which require the
Company's management to make estimates and assumptions that affect the amounts
reported therein. Actual results could vary from such estimates. In addition,
certain reclassifications have been made to prior period financial statements to
conform with the 1996 presentation.
ACQUISITION OF BALLY BY HILTON HOTELS CORPORATION
In June 1996, Bally and Hilton Hotels Corporation ("Hilton") entered into an
agreement pursuant to which Bally will merge with and into Hilton (the
"Merger"). If the Merger is consummated, each share of Bally common stock
issued and outstanding immediately prior to the Merger would be converted into
the right to receive one share of Hilton common stock. In the event that the
trading price of Hilton common stock for a specified period of time prior to the
effective time of the Merger is less than $27.00 per share, each holder of Bally
common stock will receive an additional cash payment for each share of Bally
common stock held by such holder, up to a maximum of $3.00 per share, equal to
the excess of $27.00 over such trading price. In addition, upon consummation of
the Merger, each share of 8% PRIDES Convertible Preferred Stock of Bally issued
and outstanding immediately prior to the Merger will be converted into the right
to receive one share of newly authorized 8% PRIDES Convertible Preferred Stock
of Hilton having the same rights and preferences. The Merger, which has been
approved by the Board of Directors and shareholders of Bally and Hilton, is
subject to approval by gaming regulators of several jurisdictions, and is
expected to close before year-end 1996.
SEASONAL FACTORS
The Company's operations are subject to seasonal factors and, therefore, the
results of operations for the three and nine months ended September 30, 1996 and
1995 are not necessarily indicative of the results of operations for the full
year.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent share is computed by dividing net
income applicable to common stock by the weighted average number of shares of
common stock and common stock equivalents outstanding during each period, which
totalled 70,468,967 shares and 51,671,071 shares for the three months ended
September 30, 1996 and 1995, respectively, and 68,460,297 shares and 50,924,758
shares for the nine months ended September 30, 1996 and 1995, respectively.
Common stock equivalents for each of the periods presented
27
<PAGE>
Bally Entertainment Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All dollar amounts in thousands except per share data) (unaudited)
represent the dilutive effect of the assumed exercise of certain outstanding
stock options and the assumed conversion of exchangeable preferred stock of a
subsidiary. In addition, common stock equivalents for the three and nine months
ended September 30, 1996 include the dilutive effect of the assumed conversion
of certain convertible preferred stock (not outstanding during the 1995 periods)
and convertible debentures of Bally. Common stock equivalents increased the
weighted average number of shares outstanding by 19,121,653 shares and 4,445,204
shares for the three months ended September 30, 1996 and 1995, respectively, and
18,916,673 shares and 3,829,216 shares for the nine months ended September 30,
1996 and 1995, respectively.
ACQUISITIONS OF BALLY'S GRAND, INC. COMMON STOCK
Bally's Grand, Inc. owns and operates the casino hotel resort in Las Vegas,
Nevada known as "Bally's Las Vegas." During the nine months ended September 30,
1996, a wholly owned subsidiary of Bally acquired 334,074 shares of Bally's
Grand, Inc. common stock in several transactions for $5,765. As a result,
Bally's ownership of Bally's Grand, Inc. common stock increased to approximately
85% of the shares outstanding at September 30, 1996.
LONG-TERM DEBT
The carrying amounts of the Company's long-term debt at September 30, 1996 and
December 31, 1995 are as follows:
September 30 December 31
1996 1995
------------ -----------
Bally:
10% Convertible Subordinated Debentures
due 2006 . . . . . . . . . . . . . . . . . $ 74,995 $ 75,000
6% Convertible Subordinated Debentures
due 1998 . . . . . . . . . . . . . . . . . 1,505 1,804
8% Convertible Senior Subordinated
Debentures due 2000. . . . . . . . . . . . 13,586
Bally's Casino Holdings, Inc.:
Senior Discount Notes due 1998, less
unamortized discount of $18,206
and $42,805. . . . . . . . . . . . . . . . 96,094 149,755
Bally's Park Place:
9-1/4% First Mortgage Notes due 2004 . . . . 425,000 425,000
The Grand:
10-5/8% First Mortgage Notes due 2003, less
unamortized discount of $1,559 and $1,678. 273,441 273,322
Bally's Las Vegas:
10-3/8% First Mortgage Notes due 2003. . . . 315,000 315,000
Other secured and unsecured obligations. . . . 36,081 36,134
----------- -----------
Total long-term debt . . . . . . . . . . . . . 1,222,116 1,289,601
Current maturities of long-term debt . . . . . (13,438) (11,160)
----------- -----------
Long-term debt, less current maturities. . . . $ 1,208,678 $ 1,278,441
----------- -----------
----------- -----------
In April 1996, Bally announced its intention to redeem all of its outstanding 8%
Convertible Senior Subordinated Debentures due 2000 (the "8% Debentures") on May
23, 1996, at a price equal to the principal amount thereof together with
interest accrued to the redemption date. At May 23, 1996, $13,527 principal
amount of the 8% Debentures had been converted into 1,085,531 shares of Bally
common stock (conversion price of $12.46 per share) and the remaining $59
principal amount of the 8% Debentures was redeemed for $60 in cash.
28
<PAGE>
Bally Entertainment Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All dollar amounts in thousands except per share data) (unaudited)
In October 1996, Hilton announced that upon consummation of the Merger, it
intends to redeem all of Bally's outstanding 10% Convertible Subordinated
Debentures due 2006 and 6% Convertible Subordinated Debentures due 1998 pursuant
to the optional redemption provisions of the respective indentures.
Also in October 1996, Hilton announced offers to purchase any and all of Bally's
Casino Holdings, Inc.'s Senior Discount Notes due 1998 (the "Senior Discount
Notes"), Bally's Park Place's 9-1/4% First Mortgage Notes due 2004, The Grand's
10-5/8% First Mortgage Notes due 2003 and Bally's Las Vegas' 10-3/8% First
Mortgage Notes due 2003 (collectively, with the Senior Discount Notes, the
"Notes") for cash (the "Tender Offers") and solicitations of consents to
proposed amendments to the indentures for the Notes (the "Consent
Solicitations"). Each Tender Offer and Consent Solicitation is subject to
consummation of the Merger, receipt of tenders and consents for at least a
majority of the principal amount of each series of the Notes and the receipt of
any necessary gaming regulatory approvals, as well as certain other conditions
described in each Offer to Purchase and Consent Solicitation.
During the three and nine months ended September 30, 1996, the Company purchased
$60,000 and $78,260 principal amount of the Senior Discount Notes for $52,125
and $67,723 in cash, respectively, which resulted in extraordinary losses of
$2,300 and $2,948, respectively, net of income taxes of $1,239 and $1,588,
respectively.
During the three and nine months ended September 30, 1995, the Company purchased
$5,000 and $20,040 principal amount of the Senior Discount Notes for $3,631 and
$13,448 in cash, respectively, which resulted in extraordinary gains of $13 and
$458, respectively, net of income taxes of $7 and $247, respectively.
PREFERRED STOCK
In March 1996, Bally exchanged 512,948 shares of its common stock for 183,409
shares of its Series D Convertible Exchangeable Preferred Stock (the "Series D
Stock"). In May 1996, Bally announced its intention to redeem all of its
outstanding Series D Stock on June 24, 1996, at a price of $50.40 per share plus
accrued and unpaid dividends to the redemption date. At June 24, 1996, 510,988
shares of the Series D Stock had been converted into 1,134,391 shares of Bally
common stock (conversion price of $22.52 per share) and the remaining 100 shares
of Series D Stock were redeemed for $5 in cash.
During the three months ended September 30, 1996, holders converted 692,700
shares of Bally 8% PRIDES Convertible Preferred Stock into 637,284 shares of
Bally common stock (conversion price of $12.092 per share).
DISCONTINUED OPERATIONS
Financial results for the three and nine months ended September 30, 1995 reflect
the fitness center business operated by Bally Total Fitness Holding Corporation
("BFIT") as a discontinued operation because of Bally's disposal of this segment
through a spin-off distribution completed in January 1996.
29
<PAGE>
HILTON HOTELS CORPORATION
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma condensed financial statements are based upon the
historical consolidated financial statements of Hilton and Bally and should be
read in conjunction with those consolidated financial statements and related
notes.
The unaudited pro forma condensed statements of income for the nine months
ended September 30, 1996 and the year ended December 31, 1995 give effect to (i)
the acquisition of Bally applying the purchase method of accounting, and (ii)
certain adjustments that are directly attributable to the merger and anticipated
to have continuing impact, including certain estimated operational benefits and
an assumed refinancing of Bally's existing indebtedness, as if such
transactions were consummated as of January 1, 1995.
The unaudited pro forma condensed balance sheet presents the combined
financial position of Hilton and Bally as of September 30, 1996. The unaudited
pro forma condensed balance sheet reflects (i) the acquisition of Bally applying
the purchase method of accounting, and (ii) certain adjustments that are
directly attributable to the merger, including the assumed refinancing of
Bally's existing indebtedness. Such data further assume that the transactions
described above were consummated as of September 30, 1996.
The unaudited pro forma condensed financial statements have been prepared
based upon currently available information and assumptions deemed appropriate
by Hilton and may not be indicative of actual results, nor do such data
purport to represent the results for future periods.
1
<PAGE>
HILTON HOTELS CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(in millions, except per share amounts)
<TABLE>
<CAPTION>
BALLY
HILTON HOTELS ENTERTAINMENT PRO FORMA HILTON HOTELS
CORPORATION CORPORATION MERGER CORPORATION
HISTORICAL HISTORICAL (1) ADJUSTMENTS AS ADJUSTED
- ------------------------------------------------------------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenue Casino $ 340.3 697.0 - 1,037.3
Rooms 475.5 70.9 - 546.4
Food and beverage 208.9 57.0 - 265.9
Management and franchise fees 92.7 - - 92.7
Other 165.4 49.5 - 214.9
Operating income from
unconsolidated affiliates 70.6 - - 70.6
------------------------------------------------------- -------------- ----------- -------------
1,353.4 874.4 - 2,227.8
- ------------------------------------------------------------------ -------------- ----------- -------------
Expenses Casino 177.6 341.9 - 519.5
Rooms 146.2 24.0 - 170.2
Food and beverage 177.7 50.3 - 228.0
Other costs and expenses 522.0 274.7 (8.5)(3)(4) 788.2
Corporate expense 37.0 14.2 (11.7)(3) 39.5
------------------------------------------------------- -------------- ----------- -------------
1,060.5 705.1 (20.2) 1,745.4
- ------------------------------------------------------------------ -------------- ----------- -------------
Operating income 292.9 169.3 20.2 482.4
Interest and dividend income 25.4 19.2 - 44.6
Interest expense (55.2) (98.8) 35.1 (5)(6) (118.9)
Interest expense, net, from
unconsolidated affiliates (9.4) - - (9.4)
- ------------------------------------------------------------------ -------------- ----------- -------------
Income from continuing operations before income taxes
and minority interest 253.7 89.7 55.3 398.7
Provision for income taxes 99.9 31.0 29.6 (7) 160.5
Minority interest, net 3.5 4.5 .6 (8) 8.6
- ------------------------------------------------------------------ -------------- ----------- -------------
Income from continuing operations $ 150.3 54.2 25.1 229.6
- ------------------------------------------------------------------ -------------- ----------- -------------
- ------------------------------------------------------------------ -------------- ----------- -------------
Income from continuing operations per share (2) $ .77 .88
- ------------------------------------------------------------------ -------------
- ------------------------------------------------------------------ -------------
Average common and equivalent shares 195.1 261.9
- ------------------------------------------------------------------ -------------
- ------------------------------------------------------------------ -------------
</TABLE>
2
(FOOTNOTES ON FOLLOWING PAGES)
<PAGE>
HILTON HOTELS CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(in millions, except per share amounts)
<TABLE>
<CAPTION>
BALLY
HILTON HOTELS ENTERTAINMENT PRO FORMA HILTON HOTELS
CORPORATION CORPORATION MERGER CORPORATION
HISTORICAL HISTORICAL (1) ADJUSTMENTS AS ADJUSTED
- ------------------------------------------------------------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenue Casino $ 511.0 789.9 - 1,300.9
Rooms 587.2 87.5 - 674.7
Food and beverage 265.7 73.6 - 339.3
Management and franchise fees 100.5 - - 100.5
Other 125.4 59.2 - 184.6
Operating income from
unconsolidated affiliates 59.6 - - 59.6
------------------------------------------------------- -------------- ----------- -------------
1,649.4 1,010.2 - 2,659.6
- ------------------------------------------------------------------ -------------- ----------- -------------
Expenses Casino 234.9 386.6 - 621.5
Rooms 186.4 31.2 - 217.6
Food and beverage 229.4 65.5 - 294.9
Other costs and expenses 613.2 336.7 (10.8)(3)(4) 939.1
Corporate expense 31.9 17.1 (13.9)(3) 35.1
------------------------------------------------------- -------------- ----------- -------------
1,295.8 837.1 (24.7) 2,108.2
- ------------------------------------------------------------------ -------------- ----------- -------------
Operating income 353.6 173.1 24.7 551.4
Interest and dividend income 35.2 16.2 - 51.4
Interest expense (93.5) (132.4) 43.6 (5)(6) (182.3)
Interest expense, net, from
unconsolidated affiliates (16.5) - - (16.5)
Property transactions 1.5 - - 1.5
- ------------------------------------------------------------------ -------------- ----------- -------------
Income from continuing operations before income taxes
and minority interest 280.3 56.9 68.3 405.5
Provision (benefit) for income taxes 102.6 (18.7) 37.3 (7) 121.2
Minority interest, net 4.9 (1.1) .6 (8) 4.4
- ------------------------------------------------------------------ -------------- ----------- -------------
Income from continuing operations $ 172.8 76.7 30.4 279.9
- ------------------------------------------------------------------ -------------- ----------- -------------
- ------------------------------------------------------------------ -------------- ----------- -------------
Income from continuing operations per share (2) $ .89 1.07
- ------------------------------------------------------------------ -------------
- ------------------------------------------------------------------ -------------
Average common and equivalent shares 194.1 260.9
- ------------------------------------------------------------------ -------------
- ------------------------------------------------------------------ -------------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
3
<PAGE>
HILTON HOTELS CORPORATION
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(in millions)
<TABLE>
<CAPTION>
BALLY
HILTON HOTELS ENTERTAINMENT PRO FORMA HILTON HOTELS
CORPORATION CORPORATION MERGER CORPORATION
HISTORICAL HISTORICAL (1) ADJUSTMENTS AS ADJUSTED
- ------------------------------------------------------------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Assets Current assets
Cash and equivalents $ 211.4 280.5 - 491.9
Temporary investments 56.3 7.6 - 63.9
Deferred income taxes 26.4 22.3 114.4 (14) 163.1
Other current assets 315.7 70.8 - 386.5
------------------------------------------------ -------------- ----------- -------------
Total current assets 609.8 381.2 114.4 1,105.4
Investments 590.0 20.9 (9.6)(9) 601.3
Property and equipment, net 1,757.1 1,255.1 967.4 (10) 3,979.6
Goodwill 6.4 121.7 1,151.3 (11) 1,279.4
Other assets 56.1 108.9 (54.7)(12) 110.3
------------------------------------------------ -------------- ----------- -------------
Total investments, property and
other assets 2,409.6 1,506.6 2,054.4 5,970.6
------------------------------------------------ -------------- ----------- -------------
Total assets $ 3,019.4 1,887.8 2,168.8 7,076.0
- ----------------------------------------------------------------- -------------- ----------- -------------
- ----------------------------------------------------------------- -------------- ----------- -------------
Liabilities and Current liabilities $ 355.0 144.8 184.2 (13) 684.0
stockholders' Long-term debt 1,087.2 1,208.7 121.0 (5) 2,416.9
equity Deferred income taxes 125.0 170.6 377.3 (14) 672.9
Insurance reserves and other 60.1 51.9 (10.2)(8) 101.8
------------------------------------------------ -------------- ----------- -------------
Total liabilities 1,627.3 1,576.0 672.3 3,875.6
Stockholders' equity 1,392.1 311.8 1,496.5 (15) 3,200.4
------------------------------------------------ -------------- ----------- -------------
Total liabilities and
stockholders' equity $ 3,019.4 1,887.8 2,168.8 7,076.0
- ----------------------------------------------------------------- -------------- ----------- -------------
- ----------------------------------------------------------------- -------------- ----------- -------------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGES)
4
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENTS
The following table sets forth the determination and allocation of the
purchase price based on a market value of $28.16 per share of Hilton Common
Stock. This market value is based on the average of the quoted market price of
Hilton Common Stock for three day periods both before and after the merger was
announced.
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Merger exchange of share (53.2 million shares of Bally Common Stock
converted to Hilton Common Stock and 14.8 million shares of Bally
PRIDES converted to Hilton PRIDES at a common stock equivalent
ratio of .92 to one)............................................................... $1,882.1
Assumption of Bally debt............................................................. 1,222.1
Transaction costs and expenses....................................................... 30.0
--------
Pro forma purchase price............................................................. $3,134.2
--------
--------
The preliminary allocation of the pro forma purchase price is as follows:
Land................................................................................. $ 462.7
Buildings, vessels and furniture, fixtures and equipment............................. 1,759.8
Goodwill............................................................................. 1,273.0
Other, net........................................................................... (361.3)
--------
$3,134.2
--------
--------
</TABLE>
(1) There are no significant adjustments required to the historical financial
data of Bally to conform to the accounting policies of Hilton. Certain
reclassifications have been made to the historical amounts of Bally to
conform the financial presentation of the two companies. Specifically,
selling, general and administrative expenses and depreciation and
amortization have been reclassified to other costs and expenses, and
interest income has been reclassified from other revenue to interest and
dividend income. Other reclassifications made to conform the financial
presentation are not material to the unaudited pro forma condensed
financial statements.
(2) Historical income from continuing operations per share of Hilton is
presented after giving effect to the 4 for 1 stock split completed in
September 1996. Pro forma income from continuing operations per share is
computed on the basis of the combined weighted average number of shares of
Hilton Common Stock and Hilton Common Stock equivalents after giving
effect to the stock split and the issuance of shares to consummate the
merger.
(3) To record certain estimated operational efficiencies derived from the
historical cost of those items which are expected to be eliminated or
reduced as a result of the merger. The elimination of duplicative
corporate office and operational support functions is estimated to reduce
other costs and expenses and corporate expense by $17.0 million and $11.7
million, respectively, for the nine months ended September 30, 1996, and
to reduce other costs and expenses and corporate expense by $22.3 million
and $13.9 million, respectively, for the year ended December 31, 1995.
(4) To adjust depreciation expense due to the revaluation and change in useful
life of acquired property and equipment and adjust goodwill amortization
resulting from the allocation of the purchase price of Bally. Depreciation
expense is reduced $11.8 million for the nine months ended September 30,
1996 and $15.8 million for the year ended December 31, 1995. Goodwill
amortization is increased $20.3 million for the nine months ended
September 30, 1996 and $27.3 million for the year ended December 31, 1995.
Goodwill is amortized over 40 years.
5
<PAGE>
(5) Pro forma results and financial position are adjusted by an assumed
refinancing of Bally debt as follows:
(i) Bally debt is adjusted to estimated fair market value; and
(ii) Refinancing the balance of Bally debt, including refinancing costs,
with available Hilton debt capacity under its revolving bank
line-of-credit at an average floating rate of 5.94% for the nine
months ended September 30, 1996 and 6.22% for the year ended
December 31, 1995. Each 1/8 percent change in the floating rate on
this refinancing would result in a change in interest expense of
$1.3 million for the nine months ended September 30, 1996 and
$1.8 million for the year ended December 31, 1995.
The refinancing decreases interest expense by $34.7 million for the nine
months ended September 30, 1996 and $42.5 million for the year ended
December 31, 1995 due to lower interest rates.
(6) Interest expense is reduced $.4 million for the nine months ended
September 30, 1996 and $1.1 million for the year ended December 31, 1995
due to the conversion of Bally's 8% Convertible Senior Subordinated
Debentures due 2000.
(7) To record the tax effect of pro forma adjustments to depreciation expense,
interest expense and cost reductions associated with estimated
operational efficiencies. The amortization of goodwill is not deductible
for tax purposes.
(8) Adjustment to minority interest is attributable to the following:
(i) The cancellation and conversion of the Series A Cumulative
Exchangeable Preferred Stock of Bally's Casino, Inc. (the
"Subsidiary Preferred Stock") into the right to receive shares of
Bally Common Stock in connection with the merger of Bally's Casino,
Inc. with and into Bally, and
(ii) The impact of the Bally debt refinancing.
(9) To reduce an investment to the Company's estimate of fair market value.
(10) To increase Bally's property and equipment to estimated fair market value.
(11) To reflect the excess purchase price over fair value of net tangible
assets acquired and liabilities assumed.
(12) The reduction in other assets reflects (i) deferred financing costs of
Bally not valued due to the adjustment of debt to estimated fair market
value (ii) the forgiveness of a tax-sharing receivable of Bally
pursuant to the Merger Agreement and (iii) a reserve to reduce an asset
to the Company's estimate of fair market value.
(13) The net increase in current liabilities reflects the accrual of
severance, option buyout and other direct merger costs of Hilton and
Bally.
(14) To record the deferred tax effect of the pro forma balance sheet
adjustments, primarily related to property and equipment, refinancing
costs, and estimated severance, option buyout and other direct merger
costs.
(15) The net increase in stockholders' equity results from the following:
(i) The issuance of one share of Hilton Common Stock (after giving
effect to the stock split) for each share of Bally Common Stock
outstanding after giving effect to the cancellation and conversion
of the Subsidiary Preferred Stock into Bally Common Stock,
(ii) Hilton PRIDES issued in exchange for Bally PRIDES,
(iii) Costs to refinance Bally's debt, and
(iv) The elimination of Bally's historical net assets.
6