Exhibit 99.1
SELECTED FINANCIAL DATA
The selected financial data set forth below for the five years ended
December 31, 2003, should be read in conjunction with the consolidated financial
statements and accompanying notes thereto.
(IN MILLIONS, EXCEPT COMMON STOCK DATA AND FINANCIAL PERCENTAGES AND RATIOS)
COMPOUND
GROWTH
2003(a) 2002(b) 2001(c) 2000(d) 1999(e) RATE
----------- ---------- ---------- ---------- --------- --------
OPERATING DATA
Revenues ................................. $ 3,948.9 $ 3,747.9 $ 3,317.4 $ 2,977.8 $ 2,579.5 11.2%
Income from operations ................... 678.8 708.7 521.8 188.2 501.3 7.9%
Income/(loss) from continuing operations.. 261.1 282.2 173.8 (46.4) 185.3 9.0%
Net income/(loss) ........................ 292.6 235.0 209.0 (12.1) 208.5 8.8%
COMMON STOCK DATA
Earnings/(loss) per share-diluted
From continuing operations ............. 2.36 2.48 1.50 (0.40) 1.44 13.2%
Net income/(loss) ...................... 2.65 2.07 1.81 (0.10) 1.62 13.1%
Cash dividends declared per share ........ 0.60 - - - - N/M
FINANCIAL POSITION
Total assets ............................. 6,578.8 6,350.0 6,128.6 5,166.1 4,766.8 8.4%
Long-term debt ........................... 3,671.9 3,763.1 3,719.4 2,835.8 2,540.3 9.6%
Stockholders' equity ..................... 1,738.4 1,471.0 1,374.1 1,269.7 1,486.3 4.0%
FINANCIAL PERCENTAGES AND RATIOS
Return on revenues-continuing ............ 6.6% 7.5% 5.2% (1.6)% 7.2%
Return on average invested capital (f) ... 7.1% 7.8% 6.6% 2.1% 7.2%
Return on average equity (f) ............. 16.0% 19.3% 12.9% (3.2)% 13.1%
Ratio of earnings to fixed charges (f) ... 2.6 2.7 2.0 2.0 2.6
N/M = Not Meaningful
- ---------------
Note references are to our Notes to Consolidated Financial Statements.
(a) 2003 includes $10.5 million in pretax charges for write-downs, reserves
and recoveries (see Note 8) and $19.1 million in pretax charges for
premiums paid for, and write-offs associated with, debt retired before
maturity. 2003 results have been reclassified to reflect Harrah's East
Chicago and Harrah's Tunica as discontinued operations.
(b) 2002 includes $4.5 million in pretax charges for write-downs, reserves and
recoveries (see Note 8), a $6.1 million pretax charge for our exposure
under a letter of credit issued on behalf of National Airlines, Inc., and
a charge of $91.2 million, net of tax benefits of $2.8 million, related to
a change in accounting principle (see Note 3). 2002 also includes the
financial results of Jazz Casino Company LLC from the date of our
acquisition of a majority ownership interest on June 7, 2002. 2002 results
have been reclassified to reflect Harrah's Vicksburg, Harrah's East
Chicago and Harrah's Tunica as discontinued operations.
(c) 2001 includes $17.2 million in pretax charges for write-downs, reserves
and recoveries (see Note 8) and $26.2 million of pretax income from
dispositions of nonstrategic assets and the settlement of a contingency
related to a former affiliate. 2001 also includes the financial results of
Harveys Casino Resorts from its July 31, 2001, date of acquisition. 2001
results have been reclassified to reflect Harrah's Vicksburg, Harrah's
East Chicago and Harrah's Tunica as discontinued operations.
(d) 2000 includes $220.0 million in pretax reserves for receivables not
expected to be recovered from JCC Holding Company and its subsidiary, Jazz
Casino Company LLC, $6.1 million in pretax charges for other write-downs,
reserves and recoveries and $39.4 million in pretax write-offs and
reserves for our investment in, loans to and net estimated exposure under
letters of credit issued on behalf of National Airlines, Inc. 2000 also
includes the financial results of Players International, Inc., from its
March 22, 2000, date
of acquisition. 2000 results have been reclassified to reflect Harrah's
Vicksburg, Harrah's East Chicago and Harrah's Tunica as discontinued
operations.
(e) 1999 includes $2.2 million in pretax charges for write-downs, reserves and
recoveries, $59.8 million of pretax gains from sales of our equity
interests in nonconsolidated affiliates and $17.0 million in pretax losses
on debt retired before maturity. 1999 results have been reclassified to
reflect Harrah's Vicksburg, Harrah's East Chicago and Harrah's Tunica as
discontinued operations.
(f) Ratio computed based on Income/(loss) from continuing operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Harrah's Entertainment, Inc., a Delaware corporation, was incorporated on
November 2, 1989, and prior to such date operated under predecessor companies.
As of December 31, 2003, we operated 25 casinos in 12 states under the Harrah's,
Rio, Showboat and Harveys brand names. Our casinos include land-based casinos
and casino hotels, dockside casinos, a greyhound racetrack, a thoroughbred
racetrack and managed casinos on Indian lands.
In this discussion, the words "Harrah's Entertainment," "Company," "we,"
"our," and "us" refer to Harrah's Entertainment, Inc., together with its
subsidiaries where appropriate.
OVERALL OPERATING RESULTS
On September 27, 2004, we reached an agreement to sell the assets and
certain related current liabilities of Harrah's East Chicago and Harrah's Tunica
to another gaming company. The sale, which is subject to regulatory approvals,
is expected to close in the first quarter of 2005. We have restated our
Consolidated Financial Statements to present these properties in
Assets/Liabilities held for sale and as part of our discontinued operations. The
discussion that follows is related to our continuing operations.
In 2003, our revenues increased for the sixth consecutive year, but
income from operations declined 4.2% from 2002. Higher gaming taxes, significant
supply additions and a sluggish economy made for a difficult operating
environment. Organic growth, growth through investment and growth through new
business development remain priorities of our Company, and costs associated with
initiatives to position the Company for another period of sustained growth
contributed to the decline in income from continuing operations in 2003 versus
the prior year.
Percentage
Increase/(Decrease)
-------------------------
2003 2002 2001 03 vs 02 02 vs 01
--------- --------- --------- -------- --------
(In millions, except earnings per share)
Casino revenues $ 3,458.4 $ 3,285.9 $ 2,831.5 5.2% 16.0%
Total revenues 3,948.9 3,747.9 3,317.4 5.4% 13.0%
Income from operations 678.8 708.7 521.8 (4.2)% 35.8%
Income from continuing operations 261.1 282.2 173.8 (7.5)% 62.4%
Net income 292.6 235.0 209.0 24.5% 12.4%
Earnings per share -- diluted
From continuing operations 2.36 2.48 1.50 (4.8)% 65.3%
Net income 2.65 2.07 1.81 28.0% 14.4%
Operating margin 17.2% 18.9% 15.7% (1.7)pts 3.2 pts
Total revenues grew 5.4% in 2003, primarily as a result of a full year of
consolidation of Jazz Casino Company LLC ("JCC") into our financial results
compared to the partial year in 2002 following our acquisition of a controlling
interest in that property, our acquisition of Louisiana Downs, Inc. ("Louisiana
Downs") in December 2002 and the subsequent introduction of slot machines at
that property in mid-2003, and the contributions received from recent targeted
capital investments.
In 2003, our income from operations decreased 4.2% due primarily to
increased gaming taxes in several states and increased development costs. Net
income increased 24.5% and diluted earnings per share increased 28.0% over our
2002 results, due to a $91.2 million net charge recorded in 2002 for the
impairment of intangible assets acquired in our 1999 acquisition of Rio Hotel
and Casino, Inc. ("Rio").
Certain events that affected our 2003 results, or that may affect future
results, are listed below. These items are discussed in greater detail elsewhere
in our discussion of operating results and in the Debt and Liquidity section.
- In December 2002, we acquired a controlling interest in Louisiana
Downs, Inc., a thoroughbred racetrack in Bossier City, Louisiana. In
May 2003, 900 slot machines were placed in service, and we opened a
new, permanent facility with approximately 1,400 slot machines
during second quarter 2004.
- Gaming tax rate changes in several states had a negative effect on
income from operations and on our ability to market profitably to
some customers of our casinos in those states.
- Our customer loyalty program, Total Rewards, was enhanced in 2003 to
give our customers greater flexibility and control over redemption
of their accumulated rewards.
- We entered into an agreement for a new credit facility to provide up
to $1.9625 billion in borrowings, which replaced the $1.857 billion
credit and letter of credit facilities. We also issued $500 million
in 10-year, unsecured senior notes at 5 3/8 %.
- We retired $159.5 million of our 7 7/8 % Senior Subordinated
Notes. Charges of $19.1 million for premiums paid and the write-off
of unamortized deferred financing costs related to the 7 7/8 %
Notes and the retired credit facilities were charged to income from
continuing operations.
- We announced an agreement to acquire Horseshoe Gaming Holding
Corporation ("Horseshoe Gaming"). The acquisition was completed on
July 1, 2004.
- In third and fourth quarters of 2003, the Company declared cash
dividends of 30 cents per share.
- A charge of $6.3 million was taken in fourth quarter 2003 to write
off the remaining goodwill for Harrah's Reno as a result of our
annual analysis for impairment of our nonamortizing intangible
assets.
STRATEGIC ACQUISITIONS
As part of our growth strategy and to further enhance our geographic
distribution, strengthen our access to valued customers and leverage our
technological and centralized services infrastructure, in the past six years we
have acquired four casino companies, the remaining interest in the New Orleans
casino and a thoroughbred racetrack. All of our acquisition transactions were
accounted for as purchases. The following table provides an overview of our
acquisition activities and the discussion following the table provides a brief
review of our acquisitions during the three years ended December 31, 2003.
Total Number
Date Purchase Goodwill of Geographic
Company Acquired Price (a) Assigned Casinos Location
- --------------------- ------------- --------- -------- ------- -------------------------
(Dollars in Millions)
Showboat, Inc. June 1998 $1,045 $322 4(b) Atlantic City, New Jersey
East Chicago, Indiana
Rio Hotel & Casino, Inc. January 1999 987 93(c) 1 Las Vegas, Nevada
Players International, Inc. March 2000 439 204 3 Lake Charles, Louisiana
Metropolis, Illinois
St. Louis, Missouri
Harveys Casino Resorts July 2001 712 265 4 Central City, Colorado(d)
Council Bluffs, Iowa
(2 properties)
Lake Tahoe, Nevada
JCC Holding Company (e) June 2002
December 2002 149 - 1 New Orleans, Louisiana
Louisiana Downs, Inc. December 2002 94 36 1(f) Bossier City, Louisiana
- ---------------------
(a) Total purchase price includes the market value of debt assumed determined as
of the acquisition date and of assets that were subsequently sold.
(b) Interests in two casinos that were included in the acquisition were
subsequently sold, and an agreement was reached in 2004 to sell another casino
that was included in this acquisition.
(c) This goodwill was determined to be impaired and was written off in 2002.
(d) This property was sold in 2003.
(e) Acquired additional 14% interest in June 2002 and remaining 37% interest in
December 2002.
(f) Acquired a thoroughbred racetrack that was expanded to include slot machines
in 2003.
HARVEYS CASINO RESORTS
On July 31, 2001, we completed our acquisition of Harveys Casino Resorts
("Harveys"). We paid approximately $294 million for the equity interests in
Harveys, assumed approximately $350 million in outstanding debt and paid
approximately $18 million in acquisition costs. We financed the acquisition, and
retired Harveys assumed debt, with borrowings under our established debt
programs. The purchase included the Harveys Resort & Casino in Lake Tahoe,
Nevada, the Harveys Casino Hotel and the Bluffs Run Casino, both in Council
Bluffs, Iowa, and the Harveys Wagon Wheel Hotel/Casino in Central City,
Colorado. The addition of the Harveys properties expanded our geographic
distribution, increased our nationwide casino square footage by almost 15% and
added 1,109 hotel rooms, 149 table games and 5,768 slot machines to serve our
customers. The acquisition introduced our Total Rewards customer-loyalty program
to 1.7 million potential new customers within 150 miles of Council Bluffs and
strengthened our relationships with customers throughout the Nevada-Northern
California gaming market.
With our acquisition of Harveys, we assumed a $50 million contingent
liability, which was dependent on the results of a referendum that was decided
by the voters in Pottawattamie County, Iowa, in November 2002. The referendum,
which re-approved gaming at racetracks and on riverboats for another eight
years, passed and we paid an additional $50 million in acquisition costs in
fourth quarter 2002.
In second quarter 2003, we sold Harveys Wagon Wheel Hotel/Casino in
Central City, Colorado, which we had concluded was a nonstrategic asset for us.
A loss of $0.7 million, net of tax, was recorded on this sale. The Colorado
property has been presented in our financial statements as discontinued
operations since 2002, and our 2001 results were reclassified to reflect that
property as discontinued operations.
JAZZ CASINO COMPANY
On June 7, 2002, we acquired additional shares of JCC's common stock,
which increased our ownership from 49% to 63% and required a change in our
accounting treatment for our investment in JCC from the equity method to
consolidation of JCC in our financial statements. We began consolidating JCC in
our financial results on June 7, 2002. On December 10, 2002, we acquired all of
the remaining shares of JCC's stock to increase our ownership to 100%.
We paid $72.4 million ($10.54 per share) for the additional ownership
interest in JCC, acquired approximately $45.8 million of JCC's debt, assumed
approximately $28.2 million of JCC's Senior Notes, which we subsequently
retired, and incurred approximately $2.4 million of acquisition costs. We
financed the acquisition and retired JCC's debt with funds from various sources,
including cash flows from operations and borrowings under our established debt
programs.
LOUISIANA DOWNS
On December 20, 2002, we acquired a controlling interest in Louisiana
Downs, a thoroughbred racetrack in Bossier City, Louisiana. The agreement gave
Harrah's a 95% ownership interest in a company that now owns both Louisiana
Downs and Harrah's Shreveport. In May 2003, approximately 900 slot machines were
put into service and Louisiana Downs became the only land-based gaming facility
in northern Louisiana. We opened a new, permanent facility with approximately
1,400 slot machines during second quarter 2004.
We paid approximately $94.0 million, including $29.3 million in short-term
notes that were paid in full in January 2003 and $15.0 million in equity
interest in Harrah's Shreveport, for the interest in Louisiana Downs and
approximately $0.5 million of acquisition costs. We financed the acquisition
with funds from various sources, including cash flows from operations and
borrowings under our established debt programs.
Subsequent to the end of 2003, we reached an agreement with the minority
owners of the company that owns Louisiana Downs and Harrah's Shreveport to
purchase their ownership interest in that company. The agreement was consummated
during first quarter 2004. The excess of the cost to purchase the minority
ownership above the capital balances was assigned to goodwill.
HARRAH'S EAST CHICAGO -- BUYOUT OF MINORITY PARTNERS
In second quarter 2003, we paid approximately $28.8 million to former
partners in the Harrah's East Chicago property to settle outstanding litigation
with the partners relating to a buyout in 1999 of the partners' interest in the
property and to terminate the contractual rights of the partners to repurchase
an 8.55% interest in the property. The two remaining minority partners in our
East Chicago property owned, in aggregate, 0.45% of this property. In December
2003 and January 2004, we acquired these ownership interests for aggregate
consideration of approximately $0.8 million. As a result of these transactions,
the East Chicago property is now wholly owned.
In September 2004, we entered into an agreement to sell the assets and
certain related liabilities of Harrah's East Chicago to an unrelated third
party. The sale, which is subject to regulatory approvals, is expected to close
in the first quarter of 2005.
In addition to these completed transactions, we have announced the
following planned acquisitions.
HORSESHOE GAMING
On September 11, 2003, we announced that we had signed a definitive
agreement to acquire Horseshoe Gaming. That acquisition was completed on July 1,
2004. A $75 million escrow payment that was made in 2003 was applied to the
purchase price. We paid approximately $1.56 billion for Horseshoe Gaming,
including assumption of debt valued at $558 million and acquisition costs. We
issued a redemption notice on July 1, 2004, for all $558 million of Horseshoe
Gaming's outstanding 8 5/8% Senior Subordinated Notes due July 2009 and retired
that debt on August 2, 2004. We financed the acquisition and the debt retirement
through working capital and established debt programs. The purchase included
casinos in Hammond, Indiana; Tunica, Mississippi; and Bossier City, Louisiana.
In anticipation of our acquisition of Horseshoe gaming, we sold our
Harrah's brand casino in Shreveport, Louisiana, in May 2004. After consideration
of the sale of Harrah's Shreveport, the Horseshoe acquisition added a net
107,100 square feet of casino space, more than 4,360 slot machines and 138 table
games to our existing portfolio. Taken together with our acquisition of the
intellectual property rights from Horseshoe Club Operating Company (see
paragraph below), this acquisition gave us the rights to the Horseshoe brand in
all of the United States.
LAS VEGAS HORSESHOE HOTEL AND CASINO
In March 2004, we acquired certain intellectual property assets, including
the rights to the Horseshoe brand in Nevada and to the World Series of Poker
brand and tournament, from Horseshoe Club Operating Company ("Horseshoe Club"),
while MTR Gaming Group, Inc. ("MTR Gaming") acquired the remaining assets of the
Binion's Horseshoe Hotel and Casino in Las Vegas, Nevada, including the right to
use the name "Binion's" at the property, from Horseshoe Club. We are operating
the hotel and casino jointly with a subsidiary of MTR Gaming under the
provisions of an agreement with an initial term of one year, with options to
extend the agreement for two additional years; however, we have notified MTR
Gaming that we do not intend to extend the agreement.
CAESARS ENTERTAINMENT
On July 14, 2004, we signed a definitive agreement to acquire Caesars
Entertainment, Inc. ("Caesars") in a cash and stock transaction. Under the terms
of the agreement, Caesars' stockholders will receive either $17.75 in cash or
0.3247 shares of Harrah's Entertainment's common stock for each outstanding
share of Caesars' common stock, subject to limitations on the aggregate amount
of cash to be paid and shares of stock to be issued. Caesars' stockholders will
be able to elect to receive solely shares of Harrah's Entertainment's common
stock or cash, to the extent available pursuant to the terms of the agreement.
The aggregate estimated purchase price, calculated as of July 14, 2004, was
approximately $9.4 billion. The purchase price will fluctuate until closing due
to changes in the number of outstanding shares of Caesars' stock and the balance
of Caesars' outstanding debt. Caesars operates 28 casinos with about two million
square feet of gaming space and approximately 26,000 hotel rooms and has
significant presence in Las Vegas, Atlantic City and Mississippi. The
transaction is subject to regulatory and stockholders' approval and is expected
to close during the second quarter of 2005.
REGIONAL RESULTS AND DEVELOPMENT PLANS
The executive decision makers of our Company review operating results,
assess performance and make decisions related to the allocation of resources on
a property-by-property basis. We, therefore, believe that each property is an
operating segment and that it is appropriate to aggregate and present the
operations of our Company as one reportable segment. In order to provide more
detail in a more understandable manner than would be possible on a consolidated
basis, our properties have been grouped as follows to facilitate discussion of
our operating results:
West East North Central South Central Managed
- -------------------------- ---------------------- -------------------------- --------------------- ----------------------
Harrah's Reno Harrah's Atlantic City Harrah's Joliet Harrah's Shreveport Harrah's Ak-Chin
Harrah's/Harveys Lake Tahoe Showboat Atlantic City Harrah's North Kansas City Harrah's Lake Charles Harrah's Cherokee
Bill's Harrah's Council Bluffs Harrah's New Orleans Harrah's Prairie Band
Harrah's Las Vegas Bluffs Run (after June 7, 2002) Harrah's Rincon
Rio Harrah's St. Louis Harrah's Louisiana Downs Harrah's New Orleans
Harrah's Laughlin Harrah's Metropolis (prior to June 7,
2002)
In addition to the properties listed above, our discontinued operations
reflect the results of Harveys Wagon Wheel Hotel/Casino in Central City,
Colorado, Harrah's Vicksburg, Harrah's East Chicago and Harrah's Tunica for all
periods presented. Harveys Wagon Wheel Hotel/Casino in Colorado and Harrah's
Vicksburg were sold in 2003.
WEST RESULTS
PERCENTAGE
INCREASE/(DECREASE)
-------------------
(IN MILLIONS) 2003 2002 2001 03 VS 02 02 VS 01
- ------------ --------- --------- --------- -------- --------
Casino revenues $ 904.7 $ 847.7 $ 766.7 6.7% 10.6%
Total revenues 1,346.7 1,265.5 1,184.2 6.4% 6.9%
Income from operations 220.8 193.9 116.5 13.9% 66.4%
Operating margin 16.4% 15.3% 9.8% 1.1 pts 5.5 pts
SOUTHERN NEVADA
Strong cross-market and retail play, effective marketing and air charter
programs and effective cost control measures drove record revenues and income
from operations in Southern Nevada in 2003. We define cross-market play as
gaming by customers at Harrah's properties other than their "home" casino, and
retail play is defined as Total Rewards customers who typically spend up to $50
per visit. Revenues at Harrah's Las Vegas were 7.3% higher than in 2002, and
income from operations was up 23.8%. Rio's revenues increased 12.2% in 2003, and
income from operations was 30.3% over last year. Revenues and income from
operations were up 4.0% and 11.5%, respectively, at Harrah's Laughlin.
2002 revenues were 1.3% higher than 2001 revenues in Southern Nevada,
where record revenues at Harrah's Las Vegas and Laughlin more than offset the
year-over-year decline in revenues at Rio. Revenues at Harrah's Las Vegas and
Laughlin increased 3.7% and 7.5%, respectively, while revenues at Rio were 2.5%
below 2001 revenues. 2002 income from operations in Southern Nevada increased
94.9% over 2001, driven primarily by improved performance at the Rio due to cost
management measures and the property's decision to exit the high-end
international table games business in third quarter 2001. A charge of $13
million was recorded in 2001 to recognize the cost of this decision. Cost
management measures also contributed to the improved performance in 2002 at
Harrah's Las Vegas and Laughlin where income from operations grew 10.9% and
7.5%, respectively from 2001.
NORTHERN NEVADA
Northern Nevada revenues rose 1.4% in 2003, but income from operations was
down 9.3%. Our Northern Nevada properties faced the challenge of increased
competition from Indian casinos in California and weak retail and unrated play
(play by customers without a Total Rewards card). Increased utilization of air
charter programs and targeted marketing programs helped maintain revenues, but
the costs of these programs resulted in some margin erosion. With the
expectation of continued expansion of Indian gaming in California, we believe
that achieving growth at our Northern Nevada properties, particularly in Reno,
will be a challenge. Our Lake Tahoe properties will be less affected due to the
unique destination qualities of that market and successful execution of our
cross-marketing strategy.
In our annual assessment of goodwill and other nonamortizing intangible
assets, we determined that the remaining goodwill associated with our Reno
property was impaired. A charge of approximately $6.3 million, representing the
remaining unamortized goodwill at Reno, was taken in the fourth quarter of 2003
for this impairment.
Northern Nevada posted record revenues in 2002 due to the inclusion of a
full year's revenues from the Harveys casino, which was acquired on July 31,
2001. This property contributed $136.5 million to Northern Nevada revenues in
2002. Excluding revenues contributed by Harveys from both periods, Northern
Nevada revenues were down from 2001 due to weak market conditions in the Reno
area caused, in part, by heightened levels of competition from Indian casinos in
the Northern California area. Income from operations was 26.3% higher than in
2001, due also to the inclusion of a full year's results from Harveys Lake Tahoe
and to cost synergies associated with the integration of the Harveys property
into Harrah's systems.
EAST RESULTS
PERCENTAGE
INCREASE/(DECREASE)
-------------------
(IN MILLIONS) 2003 2002 2001 03 VS 02 02 VS 01
- ------------- ---- ---- ---- -------- --------
Casino revenues $817.1 $808.7 $751.0 1.0% 7.7%
Total revenues 781.3 777.6 724.0 0.5% 7.4%
Income from operations 217.3 216.9 182.7 0.2% 18.7%
Operating margin 27.8% 27.9% 25.2% (0.1) pt 2.7 pts
Contributions from recent investments at our Atlantic City properties and
execution of a highly targeted marketing program helped offset the impact of a
new competitor in the Atlantic City market in 2003. At Showboat Atlantic City,
where a new hotel tower opened in second quarter 2003 and 450 slot machines were
added in third quarter 2003, revenues were up 2.2% and income from operations
was 10.1% higher than in 2002. Harrah's Atlantic City's revenues and income from
operations declined 0.9% and 5.2%, respectively, from 2002 levels, as that
property was more affected by the opening of the first new competitor in
Atlantic City in more than a decade. An additional 500 slot machines were added
at this property in December 2002.
Revenues at Harrah's Atlantic City increased for the sixth consecutive
year in 2002, and its income from operations, which increased for the fourth
consecutive year, was 16.0% higher than in 2001. These increases were driven by
the opening of the new hotel tower and the addition of approximately 450 slot
machines at this property in second quarter 2002 and by more cost-effective
marketing programs. The 452-room addition increased the hotel's capacity to more
than 1,600 rooms and completed a project that created an additional 28,000
square feet of casino floor space and expanded a buffet area. These capital
improvements cost approximately $180 million.
Revenues at Showboat Atlantic City increased in 2002 and its income from
operations was 24.1% higher than in 2001. Property enhancements and more
cost-effective marketing drove the improved results at this property. This
property, which is more reliant on customers who travel to Atlantic City by bus,
was impacted by the September 11, 2001, terrorist attacks and construction
disruptions related to reconfiguration of the casino floor. A reconfiguration of
Showboat's casino floor was completed in the second quarter of 2001, a new
buffet and coffee shop opened in the fourth quarter of 2001 and our tiered Total
Rewards customer-loyalty program was implemented during 2001 at this property.
NORTH CENTRAL RESULTS
PERCENTAGE
INCREASE/(DECREASE)
-------------------
(IN MILLIONS) 2003 2002 2001 03 VS 02 02 VS 01
- ------------- ---- ---- ---- -------- --------
Casino revenues $1,089.2 $1,150.6 $977.7 (5.3)% 17.7%
Total revenues 1,070.4 1,140.8 993.0 (6.2)% 14.9%
Income from operations 189.6 254.1 232.1 (25.4)% 9.5%
Operating margin 17.7% 22.3% 23.4% (4.6)pts (1.1)pts
An agreement has been reached to sell Harrah's East Chicago; therefore,
this property is no longer included in our North Central grouping. Results of
Harrah's East Chicago have been classified as discontinued operations for all
periods presented.
Higher gaming taxes and competitive pressures in 2003 led to declines in
revenues and income from operations at our North Central properties.
The revenue and income from operations increases reported by the North
Central properties for 2002 versus 2001 were due to inclusion of a full year of
operations of the Harveys properties, which were acquired July 31, 2001. The
year-over-year growth was also enhanced by capital investments that generated
strong customer demand and higher cash flow.
ILLINOIS
Combined 2003 revenues and income from operations at our Illinois
properties were 12.1% and 34.3%, respectively, below 2002. Higher gaming and
admission taxes, heightened competition and winter storms during the first
quarter of 2003 were responsible for the declines. New tax legislation in
Illinois in 2003 raised the maximum gaming tax rate to 70% and impacted our
income from operations by $16.2 million in 2003. In order to sustain
profitability under the higher tax scheme, operational changes were implemented
at Joliet in the third quarter, and revenues declined as a result of these
changes.
2002 combined revenues at our Illinois properties were 8.7% higher than in
2001 and income from operations was up 7.5%. 2001 income from operations was
negatively impacted by accelerated depreciation on riverboats that were removed
from service at Harrah's Joliet in late September 2001, when the property was
converted from riverboats to barges. 2002 income from operations was negatively
impacted by approximately $24.7 million of additional gaming taxes in Illinois
due to state legislations effective July 1, 2002, that raised the maximum
graduated gaming tax rate from 35% to 50%.
MISSOURI
Combined revenues for our Missouri properties declined 4.1% from 2002 and
income from operations was down 20.9% due primarily to heightened competition in
both the St. Louis and North Kansas City markets. Fourth quarter 2003 results
for Harrah's St. Louis were strong, and the rebound from the increased
competition continued in 2004, driven by our Total Rewards program and
improvements made to the slot floor. In the Kansas City market, a competitor
opened its expanded facility in third quarter 2003 and another competitor opened
its new barge facility in fourth quarter 2003.
Construction was completed in 2004 of an $80 million expansion at Harrah's
St. Louis, which includes a second hotel tower, redesign of the hotel lobby, new
valet parking areas, the addition of parking garage express ramps and the
expansion of two restaurants and other amenities. As of December 31, 2003, $29.5
million had been spent on this project.
2002 combined revenues for our Missouri properties were 4.3% below 2001
revenues, and income from operations was 3.7% below 2001 due to increased
competition and intense promotional activity in the St. Louis market.
IOWA
Combined 2003 revenues from our Iowa properties were 0.9% above 2002
revenues, but income from operations was 10.5% below 2002 due, in part, to
higher gaming taxes at our Bluffs Run property, where gaming taxes increased in
accordance with a predetermined rate increase.
On a combined basis, our two Iowa properties contributed $236.7 million in
revenues and $35.8 million in income from operations to our 2002 results
compared to $103.6 million in revenues and $17.6 million in income from
operations for the five months that we owned these properties in 2001.
The Iowa Supreme Court issued an opinion in June 2002 that has the effect
of reducing the gaming tax rate on gaming revenues earned by casinos at
racetracks operating in the state, including our Bluffs Run Casino. Casinos at
racetracks are taxed at a higher rate (34% in 2003) than the casinos on
riverboats operating in Iowa (20%). The Court ruled this disparity was
unconstitutional. The State appealed the Iowa Supreme Court's decision to the
United States Supreme Court and in June 2003, the United States Supreme Court
overturned the ruling by the Iowa Supreme Court on U.S. constitutional grounds;
however, in February 2004, the Iowa Supreme Court ruled that the state law that
permits the disparity violates the Iowa Constitution. We followed the
instructions of the Iowa Racing and Gaming Commission to pay taxes at the 20%
rate for Bluffs Run. However, given the uncertainty of this situation, we
continued to accrue gaming taxes at the higher rate and accrued approximately
$20.3 million in state gaming taxes that we did not have to pay due to
legislation passed in April 2004 by the Iowa legislature that effectively
settled the issue regarding the gaming tax rates. In accordance with previous
agreements and as additional purchase price consideration, an additional payment
of approximately $73 million, based on a multiple of the calculated annual
savings was paid to Iowa West Racing Association ("Iowa West"), the entity
holding the pari-mutuel and gaming license for the Bluffs Run Casino and with
whom we have a management agreement to operate that property. The additional
payment to Iowa West increased goodwill attributed to the Bluffs Run property.
The payment to Iowa West assumed we will operate table games at Bluffs Run and
pay a 24% tax rate; however, Iowa West has taken the position that the purchase
price adjustment should be based on a tax rate of 22%, which would result in an
additional $12 million payment to Iowa West. If an additional payment is
required, it will increase goodwill attributed to this property. We anticipate
that the issue will be resolved by arbitration.
In fourth quarter 2004, we announced plans to rebrand the Bluffs Run
Casino under the Horseshoe brand as part of an $85 million renovation and
expansion of that property. The property's greyhound racetrack will remain in
operation and retain the Bluffs Run brand. Pending regulatory approval,
construction will begin in February 2005 with completion scheduled for the first
quarter of 2006.
SOUTH CENTRAL RESULTS
PERCENTAGE
INCREASE/(DECREASE)
-------------------
(IN MILLIONS) 2003 2002 2001 03 VS 02 02 VS 01
- ------------- ---- ---- ---- -------- --------
Casino revenues $647.0 $478.4 $335.6 35.2% 42.6%
Total revenues 659.9 488.2 342.2 35.2% 42.7%
Income from operations 92.3 78.7 55.3 17.3% 42.3%
Operating margin 14.0% 16.1% 16.2% (2.1)pts (0.1)pt
An agreement has been reached to sell Harrah's Tunica; therefore, this
property is no longer included in our South Central grouping. Results of
Harrah's Tunica have been classified as discontinued operations for all periods
presented.
A full year of consolidation of New Orleans' results subsequent to the
acquisition of a controlling interest in that property in early June 2002 and
results from Louisiana Downs, which was acquired in December 2002, drove
combined 2003 revenues at our South Central properties up 35.2% and combined
income from operations up 17.3%. Harrah's New Orleans contributed $285.4 million
in revenues and $46.8 million in income from operations in 2003 compared to
$154.5 million in revenues and $16.0 million in income
from operations subsequent to its consolidation in 2002. The opening of an
expanded buffet and new steakhouse at Harrah's New Orleans in 2003 attracted new
business to that property. Prior to our acquisition of a controlling interest in
that property, we had limited ability to invest in amenities, and we are now
actively pursuing such opportunities. Construction began in second quarter 2004
on a 26-story, 450-room, $142 million hotel tower at Harrah's New Orleans. The
property does not currently operate a hotel, although it does utilize rooms at
third-party hotels. The hotel is expected to open in the first quarter of 2006.
On December 20, 2002, we completed our acquisition of a controlling
interest in Louisiana Downs, a thoroughbred racetrack in Bossier City,
Louisiana, and in May 2003, 900 slot machines were placed in service there.
Construction was completed during second quarter 2004 on Phase II of the
expansion of Louisiana Downs, which included a new, permanent facility with
approximately 1,400 slot machines. Our renovation and expansion of Louisiana
Downs cost approximately $110 million, $56.8 million of which had been spent as
of December 31, 2003. Louisiana Downs contributed $56.9 million in revenues in
2003, but preopening costs related to the introduction of slot machines at the
facility drove a loss from operations of $1.4 million.
The increases in combined results for our South Central properties in 2002
over 2001 were also due to the consolidation of New Orleans' results subsequent
to the acquisition of a controlling interest in that property in early June
2002. Our growth was also enhanced by capital investments that generated strong
customer demand and higher cash flow at Harrah's Shreveport.
The Lake Charles property continues to contend with increased competition
in the area, including the addition of slot machines at a racetrack located
closer than our property to one of our Texas feeder markets and additional
Indian casino offerings. Approximately $55.4 million of goodwill is allocated to
the Lake Charles property. Should the negative operating trend at our Lake
Charles property continue, it could impact the annual analysis for the
impairment of goodwill for that operating unit.
Due to decision to sell Harrah's Shreveport, which was completed in second
quarter 2004, we classified that property in Assets held for sale on our
Consolidated Balance Sheets and ceased depreciating its assets. Since the
Horseshoe Gaming acquisition gave us a continued presence in the
Shreveport-Bossier City market, Harrah's Shreveport's operating results have not
been classified as discontinued operations. The gain from our sale of Harrah's
Shreveport was not material.
On June 30, 2003, we announced an agreement to sell Harrah's Vicksburg and
that sale was completed on October 27, 2003. 2003 results for Harrah's Vicksburg
are presented as discontinued operations and results for 2002 and 2001 have been
reclassified to conform to the 2003 presentation. A loss of $0.5 million, net of
tax, resulted from this sale.
MANAGED CASINOS AND OTHER
PERCENTAGE
INCREASE/(DECREASE)
(IN MILLIONS) 2003 2002 2001 03 VS 02 02 VS 01
- ---------------------- ---- ---- ---- -------- --------
Revenues $90.6 $75.7 $73.9 19.7% 2.4%
Income from operations 11.4 21.6 (12.1) (47.2)% N/M
N/M = Not meaningful
With the acquisition of the remaining interest in the New Orleans casino
in 2002, our managed casinos now consist of four tribal casinos. The table below
gives the location and expiration date of the current management contracts for
our Indian properties as of December 31, 2003.
EXPIRATION OF
CASINO LOCATION MANAGEMENT AGREEMENT
- --------------------- -------------------------- --------------------
Harrah's Cherokee Cherokee, North Carolina November 2004
Harrah's Ak-Chin near Phoenix, Arizona December 2004
Harrah's Rincon near San Diego, California November 2010
Harrah's Prairie Band near Topeka, Kansas January 2008
In 2004, agreements for the management of Harrah's Cherokee and Harrah's
Ak-Chin were extended through November 2011 and December 2009, respectively.
Revenues from our managed properties were higher in 2003 than in the
previous year due to a full year of management fees from Harrah's Rincon Casino
and Resort, owned by the Rincon San Luiseno Band of Mission Indians ("Rincon")
in Southern California, which opened in August 2002. The increased fees from
Rincon were partially offset by changes in fee structures provided by extended
management agreements and by the elimination of management fees from Harrah's
New Orleans subsequent to its consolidation with our financial results in June
2002.
2002 revenues from our managed properties were higher than 2001 revenues
due to fees from Rincon subsequent to its August 2002 opening and to higher fees
from New Orleans prior to its consolidation in June 2002, partially offset by
changes in fee structures provided by extended management agreements.
In 2003, we extended our contract to manage the tribal casino at Rincon,
and we have also executed an extension for management of the Cherokee property
until November 2011. New contracts may provide for reductions in management
fees; however, expansions at the properties are expected to increase the fee
base and keep the overall income stream stable.
A $165 million expansion of the Harrah's Rincon property began in December
2003. The expansion will add a 21-story, 485-room hotel tower, a spa, a new
hotel lobby, additional meeting space, additional casino space and a 1,200-space
parking structure. The expansion is scheduled to be completed by the end of
2004.
Construction was completed in third quarter 2004 on a $55 million
expansion project at Harrah's Prairie Band. The expansion includes the addition
of 198 hotel rooms, a 12,000 square foot convention center and a new restaurant.
Construction began in January 2004 on a $60 million expansion of Harrah's
Cherokee Smoky Mountains Casino in Cherokee, North Carolina, that will add a
15-story, 324-room hotel tower, which is scheduled for completion in second
quarter 2005. A 252-room hotel and 30,000 square foot conference center opened
at that property in second quarter 2002, and in fourth quarter 2002, an
expansion project was completed that added approximately 22,000 square feet of
casino space.
An expansion to the Harrah's Ak-Chin casino opened in first quarter 2001
and included a new 146-room hotel, an additional restaurant, meeting and banquet
room facilities, a resort pool and a landscaped courtyard. A new twenty-five
year compact between the State of Arizona and the Ak-Chin Indian Community was
approved in February 2003. The new compact increases the number of permitted
machines and adds blackjack and jackpot poker to the scope of gaming at the
Ak-Chin casino.
Construction costs of Indian casinos and hotels have been funded by the
tribes or by the tribes' debt, some of which we guarantee. See Debt and
Liquidity for further discussion of our guarantees of debt related to Indian
projects.
Also included in Managed Casinos and Other are our development expenses,
brand marketing costs, income from nonconsolidating subsidiaries and other costs
that are directly related to our casino operations and development but are not
property specific.
OTHER FACTORS AFFECTING NET INCOME
PERCENTAGE
INCREASE/(DECREASE)
-------------------
(INCOME)/EXPENSE 2003 2002 2001 03 VS 02 02 VS 01
- ---------------- ------ ------- ------ -------- --------
(IN MILLIONS)
- -------------
Development costs $ 19.6 $ 9.5 $ 6.4 N/M 48.4%
Write-downs, reserves and recoveries 10.5 4.5 17.2 N/M (73.8)%
Project opening costs 7.4 1.7 12.4 N/M (86.3)%
Corporate expense 52.6 56.6 52.7 (7.1)% 7.4%
Amortization of intangible assets 4.8 4.5 23.3 6.7% (80.7)%
Interest expense, net 234.4 240.2 255.8 (2.4)% (6.1)%
Losses on early extinguishments of debt 19.1 - - N/M -
Other income (2.9) (2.1) (28.2) 38.1% (92.6)%
Effective tax rate 36.3% 37.1% 36.6% (0.8)pt 0.5 pt
Minority interests $ 11.6 $ 14.0 $ 12.6 (17.1)% 11.1%
Discontinued operations, net of income taxes (31.6) (44.0) (35.2) (28.2)% 25.0%
Change in accounting principle, net of income taxes - 91.2 - N/M N/M
N/M = Not meaningful
Development costs were higher in 2003 due to increased development
activities in many jurisdictions considering casinos or casino-like businesses.
In 2003, we signed a letter of intent, subject to definitive documents, to form
a 50/50 joint venture with Gala
Group, a United Kingdom ("UK") based gaming operator, to develop regional
casinos in the UK. The arrangement also permits us to develop UK destination
resorts outside of the joint venture. As part of this effort, we formed a joint
venture with Gala Group for the purpose of placing options on land in the UK.
Development in the UK is dependent on passage of proposed legislative reform of
the UK gaming laws and regulations. LuckyMe, our new internet gaming operation
based in the UK, began operations in first quarter 2004; however, operations
were suspended in the fourth quarter of 2004.
Write-downs, reserves and recoveries include various pretax charges to
record asset impairments, contingent liabilities, project write-offs and
recoveries at time of sale of previously recorded reserves for asset impairment.
The components of write-downs, reserves and recoveries were as follows:
2003 2002 2001
--------- -------- -------
(IN MILLIONS)
- -------------
Impairment of goodwill $6.3 $- $-
Impairment of long-lived assets 2.5 1.5 8.2
Write-off of abandoned assets and other costs 2.6 6.3 7.3
Settlement of sales tax contingency (0.9) (6.5) -
Charge for structural repairs at Reno - 5.0 -
Termination of contracts - 0.2 -
Recoveries from previously impaired assets and reserved amounts - (2.0) (0.6)
Reserves for New Orleans casino - - 2.3
--------- -------- -------
$10.5 $4.5 $17.2
========= ======== =======
Project opening costs for each of the three years presented include costs
incurred in connection with the integration of acquired properties into the
Harrah's systems and technology and costs incurred in connection with expansion
and renovation projects at various properties.
Corporate expense decreased 7.1% in 2003 from 2002, primarily due to lower
incentive compensation plan expenses.
Amortization of intangible assets in 2003 was basically flat compared to
2002 and both years are considerably lower than in 2001 due to the
implementation of Statement of Financial Standards ("SFAS") No. 142 in first
quarter 2002, whereby we ceased amortization of goodwill and intangible assets
with indefinite lives. Certain other intangible assets with defined lives
related to acquisitions are being amortized. (See Notes 2 and 3 to our
Consolidated Financial Statements.)
The Company's average debt balance was slightly higher in 2003 than in
2002; however, interest expense was lower due to lower interest rates throughout
2003 on variable rate debt. Our average debt balance was also higher in 2002
than in 2001 due to acquisitions and our stock repurchase program, but interest
expense decreased in 2002 from 2001 due to lower rates on variable rate debt.
The average interest rate on our variable-rate debt, excluding the impact of our
swap agreements, was 2.3% at December 31, 2003 and 2002, compared to 4.0% at
December 31, 2001. A change in interest rates will impact our financial results.
Assuming a constant outstanding balance for our variable-rate debt for the next
twelve months, a hypothetical 1% change in corresponding interest rates would
change interest expense for the next twelve months by approximately $11.1
million. Our variable rate debt, including fixed-rate debt for which we have
entered into interest rate swap agreements, represents approximately 33% of our
total debt, while our fixed-rate debt is approximately 67% of our total debt.
(For discussion of our interest rate swap agreements, see Debt and Liquidity,
Interest Rate Swap Agreements.)
Losses on the early extinguishments of debt represent premiums paid and
write-offs of unamortized deferred financing costs associated with debt retired
before maturity. In compliance with SFAS No. 145 (See Note 6 to our Consolidated
Financial Statements) these losses on early extinguishments of debt no longer
qualify for presentation as extraordinary items. (See Debt and Liquidity --
Extinguishments of Debt.)
2003 Other income includes interest income on the cash surrender value of
life insurance policies and settlement of a litigation claim, partially offset
by benefits from a life insurance policy. 2002 Other income included interest
income on the cash surrender value of life insurance policies, net proceeds from
litigation settlements and other miscellaneous items. In 2001, Other income
included a gain on the settlement of the 1998 condemnation of land in Atlantic
City, the sale of nonstrategic land in Nevada and resolution of a contingency
related to a former affiliate.
The effective tax rate for 2003, as well as for 2002 and 2001, is higher
than the federal statutory rate primarily due to state income taxes. The
effective tax rate in 2001 was also affected by that portion of our goodwill
amortization that was not deductible for tax purposes. With the cessation of
goodwill amortization in the first quarter of 2002 as the result of the
implementation of SFAS No. 142, our effective tax rate declined from the 2001
rate; however, our effective tax rate increased in second quarter 2002 due to
the exposure to higher state income taxes enacted in that year.
Minority interests reflect joint venture partners' shares of income at
joint venture casinos.
Discontinued operations reflect the results of Harveys Wagon Wheel
Hotel/Casino in Central City, Colorado, Harrah's Vicksburg, Harrah's East
Chicago and Harrah's Tunica. Colorado and Harrah's Vicksburg were sold in 2003.
2002 and 2001 results for these properties have been reclassified to conform to
the 2003 presentation. (See Note 15.)
The change in accounting principle represents the first quarter 2002
charge for the impairment of Rio's goodwill and trademark recorded in connection
with the implementation of SFAS No. 142. (See Note 3 to our Consolidated
Financial Statements.)
CAPITAL SPENDING AND DEVELOPMENT
Part of our plan for growth and stability includes disciplined capital
improvement projects, and 2003, 2002 and 2001 were all years of significant
capital reinvestment.
In addition to the specific development and expansion projects discussed
in Regional Results and Development Plans, we perform on-going refurbishment and
maintenance at our casino entertainment facilities to maintain our quality
standards. We also continue to pursue development and acquisition opportunities
for additional casino entertainment facilities that meet our strategic and
return on investment criteria. Prior to the receipt of necessary regulatory
approvals, the costs of pursuing development projects are expensed as incurred.
Construction-related costs incurred after the receipt of necessary approvals are
capitalized and depreciated over the estimated useful life of the resulting
asset. Project opening costs are expensed as incurred.
Our capital spending for 2003 totaled approximately $427.0 million. 2002
capital spending was approximately $376.0 million, excluding the costs of our
acquisitions of Louisiana Downs and the remaining interest in JCC, and 2001
capital spending was $550.5 million, excluding the costs of our acquisition of
Harveys. Estimated total capital expenditures for 2004 are expected to be
between $600 million and $625 million and do not include estimated expenditures
for our acquisition of Horseshoe Gaming, our announced acquisition of Caesars or
for unidentified development opportunities.
Our planned development projects, if they go forward, will require,
individually and in the aggregate, significant capital commitments and, if
completed, may result in significant additional revenues. The commitment of
capital, the timing of completion and the commencement of operations of casino
entertainment development projects are contingent upon, among other things,
negotiation of final agreements and receipt of approvals from the appropriate
political and regulatory bodies. Cash needed to finance projects currently under
development as well as additional projects being pursued is expected to be made
available from operating cash flows, established debt programs (see Debt and
Liquidity), joint venture partners, specific project financing, guarantees of
third-party debt and, if necessary, additional debt and/or equity offerings.
DEBT AND LIQUIDITY
We generate substantial cash flows from operating activities, as reflected
on the Consolidated Statements of Cash Flows. These cash flows reflect the
impact on our consolidated operations of the success of our marketing programs,
our strategic acquisitions, on-going cost containment focus and favorable
variable interest rates. For 2003, we reported cash flows from operating
activities of $666.8 million, a 3.2% increase over the $646.2 million reported
in 2002. The 2002 amount reflected a 9.4% decrease over the 2001 level.
We use the cash flows generated by the Company to fund reinvestment in
existing properties for both refurbishment and expansion projects, to pursue
additional growth opportunities via strategic acquisitions of existing companies
and new development opportunities and to return capital to our stockholders in
the form of stock repurchase programs and dividends. When necessary, we
supplement the cash flows generated by our operations with funds provided by
financing activities to balance our cash requirements.
Our cash and cash equivalents totaled approximately $397.9 million at
December 31, 2003, compared to $384.4 million at December 31, 2002. The
following provides a summary of our cash flows for the years ended December 31.
2003 2002 2001
--------- --------- ---------
(IN MILLIONS)
- -------------
Cash provided by operating activities $ 666.8 $ 646.2 $ 713.4
Capital investments (381.8) (355.5) (445.6)
Payments for business acquisitions (75.0) (162.4) (251.9)
Investments in affiliates (4.2) - (5.7)
Proceeds from asset/investment sales 4.8 34.6 30.7
Other investing activities (14.9) (7.2) (12.9)
--------- --------- ---------
Free cash flow 195.7 155.7 28.0
Cash (used in)/provided by financing activities (248.0) (173.3) 79.4
Cash provided by/(used for) assets held for sale 65.9 77.0 (51.9)
--------- --------- ---------
Net increase in cash and cash equivalents $ 13.6 $ 59.4 $ 55.5
========= ========= =========
We believe that our cash equivalents balance, our cash flow from
operations and the financing sources discussed herein, will be sufficient to
meet our normal operating requirements during the next twelve months and, to
fund additional acquisitions, including our announced Horseshoe Gaming
acquisition, or investments. In addition, we may consider issuing additional
debt or equity securities in the future to fund potential acquisitions or growth
or to refinance existing debt. We continue to review additional opportunities to
acquire or invest in companies, properties and other investments that meet our
strategic and return on investment criteria. If a material acquisition or
investment is completed, our operating results and financial condition could
change significantly in future periods.
The majority of our debt is due in December 2005 and beyond. Payments of
short-term debt obligations and other commitments are expected to be made from
operating cash flows. Long-term obligations are expected to be paid through
operating cash flows, refinancing of debt, joint venture partners or, if
necessary, additional debt and/or equity offerings.
CREDIT AGREEMENT
On April 29, 2003, we entered into an agreement for new credit facilities
(the "Credit Agreement") for up to $1.9625 billion in borrowings. This Credit
Agreement replaced the $1.857 billion credit and letter of credit facilities
that were scheduled to mature in April 2003 ($332 million) and April 2004
($1.525 billion). The Credit Agreement matures on April 23, 2008, and consists
of a five-year revolving credit facility for up to $1.0625 billion and a
five-year term reducing facility for up to $900 million. The Credit Agreement
contains a provision that would allow an increase in the borrowing capacity to
$2 billion, if mutually acceptable to us and our lenders. Interest on the Credit
Agreement is based on our debt ratings and leverage ratio and is subject to
change. As of December 31, 2003, the Credit Agreement bore interest based upon
105 points over LIBOR and bore a facility fee for borrowed and unborrowed
amounts of 25 basis points. At our option, we may borrow at the prime rate under
the new Credit Agreement. As of December 31, 2003, $947.8 million in borrowings
were outstanding under the Credit Agreement with an additional $66.5 million
committed to back letters of credit. After consideration of these borrowings,
but before consideration of amounts borrowed under the commercial paper program,
$948.2 million of additional borrowing capacity was available to the Company as
of December 31, 2003.
In June 2004, the Credit Agreement was amended to convert the $1.0625
billion revolving credit facility and $900 million term reducing facility to a
$2.5 billion revolving credit facility, to reduce the interest rate and to
extend the maturity to April 2009. The amendment also contains a provision that
would allow an increase in the borrowing capacity to $3.0 billion, if mutually
acceptable to the Company and the lenders. Interest on the Credit Agreement is
based on our debt ratings and leverage ratio and is subject to change.
INTEREST RATE SWAP AGREEMENTS
To manage the mix of our debt between fixed and variable rate instruments,
we entered into interest rate swap agreements to modify the interest
characteristics of our outstanding debt without an exchange of the underlying
principal amount. The differences to be paid or received under the terms of our
interest rate swap agreements are accrued as interest rates change and
recognized as an adjustment to interest expense for the related debt. Changes in
the variable interest rates to be paid or received pursuant to the terms of our
interest rate swap agreements will have a corresponding effect on our future
cash flows.
These agreements contain a credit risk that the counterparties may be
unable to meet the terms of the agreements. We minimize that risk by evaluating
the creditworthiness of our counterparties, which are limited to major banks and
financial institutions, and do not anticipate nonperformance by the
counterparties.
As of December 31, 2003, we were a party to two interest rate swaps for a
total notional amount of $200 million. These swaps were effective December 29,
2003, and will expire December 15, 2005. Subsequent to the end of 2003, we
entered into two additional swap agreements for a total notional amount of $300
million, $200 million of which will expire in June 2007, and $100 million of
which will expire in December 2005. The following table summarizes the terms of
our swap agreements.
FIXED VARIABLE NEXT SWAP
NOTIONAL RATE RATE RESET EXPIRATION
SWAP EFFECTIVE DATE AMOUNT RECEIVED PAID DATE DATE
(IN MILLIONS)
- ------------------- ------------- --------- ------- ---------------- --------------
Dec. 29, 2003 $ 50 7.875% 6.968% December 15, 2004 Dec. 15, 2005
Dec. 29, 2003 150 7.875% 6.972% December 15, 2004 Dec. 15, 2005
Jan. 30, 2004 200 7.125% 5.399% December 15, 2004 June 1, 2007
Feb. 2, 2004 100 7.875% 6.975% December 15, 2004 Dec. 15, 2005
COMMERCIAL PAPER
To provide the Company with cost-effective borrowing flexibility, we have
a $200 million commercial paper program that is used to borrow funds for general
corporate purposes. Although the debt instruments are short-term in tenor, they
are classified as long-term debt because the commercial paper is backed by our
Credit Agreement, and we have committed to keep available capacity under our
Credit Agreement in an amount equal to or greater than amounts borrowed under
this program. At December 31, 2003, $50 million was outstanding under this
program.
ISSUANCE OF NEW DEBT
In addition to our Credit Agreement, we have issued debt and entered into
credit agreements to provide the Company with cost-effective borrowing
flexibility and to replace short-term. The table below summarizes the face value
of debt obligations entered into during the three years ended December 31, 2003.
FACE VALUE
OUTSTANDING AT
DEBT ISSUED MATURES DECEMBER 31, 2003
- ---- ------ ------- -----------------
(IN MILLIONS)
Commercial Paper 2003 2004 $ 50.0
5.375% Senior Notes December 2003 2013 500.0
8.0% Senior Notes January 2001 2011 500.0
7.125% Senior Notes June 2001 2007 500.0
In June 2004, we issued $750 million of 5.5% Senior Notes due in 2010 in a
Rule 144A private placement. We exchanged the 5.5% Senior Notes with the fully
registered 5.5% Senior Notes in October 2004.
EXTINGUISHMENTS OF DEBT
Funds from the new debt discussed above, as well as proceeds from our
Credit Agreement, were used to retire certain of our outstanding debt, in
particular those debt obligations assumed in our acquisition transactions, to
reduce our effective interest rate and/or lengthen maturities. The following
table summarizes the debt obligations, in addition to our previous credit and
letter of credit facilities, that we retired over the three years ended December
31, 2003.
FACE
DATE VALUE
ISSUER RETIRED DEBT EXTINGUISHED RETIRED
- ------ ------- ----------------- -------
(IN MILLIONS)
Harrah's Operating Company December 2003 Senior Subordinated Notes due 2005 $147.1
Harrah's Operating Company August 2003 Senior Subordinated Notes due 2005 12.4
JCC December 2002 Senior Notes due 2008 28.2
Harveys September 2001 10.625% Senior Subordinated Notes due 2006 150.0
Showboat August 2001 13% Senior Subordinated Notes due 2009 2.1
Harveys July 2001 Credit facility due 2004 192.0
In July 2003, our Board of Directors authorized the Company to retire,
from time to time through cash purchases, portions of our outstanding debt in
open market purchases, privately negotiated transactions or otherwise. These
repurchases will be funded through available cash from operations, borrowings
from our Credit Agreement and our new Senior Notes. Such repurchases will depend
on prevailing market conditions, the Company's liquidity requirements,
contractual restrictions and other factors. As of December 31, 2003, $159.5
million of our 7 7/8% Senior Subordinated Notes had been retired under this
authorization.
Charges of $19.1 million representing premiums paid and write-offs of
unamortized deferred financing costs associated with the early retirement of
portions of our 7 7/8% Senior Subordinated Notes and of our previous credit
and letter of credit facilities were recorded in 2003. In compliance with SFAS
No. 145, these losses no longer qualify for presentation as extraordinary items
and are, therefore, included in income from continuing operations on our
Consolidated Statements of Income.
EQUITY REPURCHASE PROGRAMS
During the past three years, our Board of Directors has authorized plans
whereby we have purchased shares of the Company's common stock in the open
market from time to time as market conditions and other factors warranted. The
table below summarizes the plans in effect during the past three years.
NUMBER NUMBER OF SHARES AVERAGE
OF SHARES PURCHASED AS OF PRICE
PLAN AUTHORIZED AUTHORIZED DECEMBER 31, 2003 PER SHARE
- --------------- ---------- ----------------- ---------
July 2001 6.0 million 6.0 million $37.15
July 2002 2.0 million 1.4 million 39.24
November 2002 3.0 million 0.5 million 35.87
The November 2002 authorization was to expire December 31, 2003, but it
has been extended until December 31, 2004. The repurchases were funded through
available operating cash flows and borrowings from our established debt
programs.
In November 2004, our Board of Directors authorized the purchase of 3.5
million shares of common stock in the open market and negotiated purchases
through the end of 2005. The 3.5 million shares include 1.5 million shares
available to be purchased pursuant to the authorization that was to expire
December 31, 2004, plus an additional 2.0 million shares.
GUARANTEES OF THIRD-PARTY DEBT AND OTHER OBLIGATIONS AND COMMITMENTS
The following tables summarize our contractual obligations and other
commitments as of December 31, 2003.
PAYMENTS DUE BY PERIOD
----------------------------------------------------
LESS THAN 1-3 4-5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS
- ----------------------- ----- ------ ----- ----- -----
(IN MILLIONS)
Debt $3,672.8 $1.3 $1,273.9 $821.6 $1,576.0
Capital lease obligations 0.7 0.3 0.4 - -
Operating lease obligations 628.4 43.0 103.9 58.7 422.8
Purchase orders obligations 45.0 45.0 - - -
Guaranteed payments to State of Louisiana 134.8 60.0 74.8 - -
Community reinvestment 94.3 4.3 12.3 8.4 69.3
Construction commitments 81.5 81.5 - - -
Other contractual obligations 43.1 30.9 8.9 1.5 1.8
-------- ------ -------- ------ --------
$4,700.6 $266.3 $1,474.2 $890.2 $2,069.9
======== ====== ======== ====== ========
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
-------------------------------------------------------
TOTAL AMOUNTS LESS THAN 1-3 4-5 OVER 5
OTHER COMMITMENTS COMMITTED 1 YEAR YEARS YEARS YEARS
- ----------------- --------- ------ ----- ----- -----
(IN MILLIONS)
Guarantees of loans $152.9 $30.9 $103.3 $18.7 $-
Letters of credit 66.5 66.5 - - -
Minimum payments to tribes 26.7 13.4 5.4 2.4 5.5
The agreements pursuant to which we manage casinos on Indian lands contain
provisions required by law that provide that a minimum monthly payment be made
to the tribe. That obligation has priority over scheduled repayments of
borrowings for development costs and over the management fee earned and paid to
the manager. In the event that insufficient cash flow is generated by the
operations to fund this payment, we must pay the shortfall to the tribe. Subject
to certain limitations as to time, such advances, if any, would be repaid to us
in future periods in which operations generate cash flow in excess of the
required minimum payment. These commitments will terminate upon the occurrence
of certain defined events, including termination of the management contract. Our
aggregate monthly commitment for the minimum guaranteed payments pursuant to the
contracts for the four managed Indian-owned facilities now open, which extend
for periods of up to 83 months from December 31, 2003, is $1.2 million. Each of
these casinos currently generates sufficient cash flows to cover all of their
obligations, including their debt service.
We may guarantee all or part of the debt incurred by Indian tribes with
which we have entered a management contract to fund development of casinos on
the Indian lands. For all existing guarantees of Indian debt, we have obtained a
first lien on certain personal property (tangible and intangible) of the casino
enterprise. There can be no assurance, however, that the value of such property
would satisfy our obligations in the event these guarantees were enforced.
Additionally, we have received limited waivers from the Indian tribes of their
sovereign immunity to allow us to pursue our rights under the contracts between
the parties and to enforce collection efforts as to any assets in which a
security interest is taken. The aggregate outstanding balance of such debt as of
December 31, 2003, was $112.9 million. In 2004, we guaranteed additional debt
for a tribe with which we have a management agreement, increasing our maximum
commitment by approximately $140 million.
Some of our guarantees of the debt for casinos on Indian lands were
modified during 2003, triggering the requirements under Financial Accounting
Standards Board Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," to recognize a liability for the estimated fair value of those
guarantees. Liabilities, representing the fair value of our guarantees, and
corresponding assets, representing the portion of our management fee receivable
attributable to our agreements to provide the related guarantees, were recorded
and are being amortized over the lives of the related agreements. We estimate
the fair value of the obligation by considering what premium would have been
required by us or by an unrelated party. The amounts recognized represent the
present value of the premium in interest rates and fees that would have been
charged to the tribes if we had not provided the guarantees. The unamortized
balance of the liability for the guarantees and of the related assets at
December 31, 2003, was $7.0 million.
EFFECTS OF CURRENT ECONOMIC AND POLITICAL CONDITIONS
COMPETITIVE PRESSURES
Due to the limited number of new markets opening for development in recent
years, many casino operators are reinvesting in existing markets to attract new
customers, thereby increasing competition in those markets. As companies have
completed expansion projects, supply has typically grown at a faster pace than
demand in some markets and competition has increased significantly. Furthermore,
several operators, including Harrah's, have announced plans for additional
developments or expansions in some markets.
The Louisiana legislature has authorized the use of slot machines at horse
racing tracks in four parishes in Louisiana. We operate casinos in three of
these markets. In first quarter 2002, a horse racing facility, located in one of
those parishes where the use of slot machines has been authorized and near our
property in Lake Charles, Louisiana, opened with approximately 1,500 machines.
The horse racing facility is approximately twenty-five miles closer to one of
our major feeder markets than our property. Revenues and income from operations
at our Lake Charles property have been negatively impacted by the addition of
this new competitor. In fourth quarter 2002, we acquired a controlling interest
in Louisiana Downs, a thoroughbred racetrack in Bossier City, Louisiana, which
is in another of the parishes where the use of slot machines has been authorized
and is located near our Shreveport property. In Orleans Parish, where Harrah's
New Orleans is located, voters approved the use of slot machines at a racetrack
in October 2003.
In the third quarter of 2001, the State of Louisiana selected a competitor
to receive the fifteenth and final riverboat gaming license to be issued by the
State, under the legislation legalizing riverboat gaming in that State. The
competitor's project is for a riverboat casino in Lake Charles. Construction of
that facility began in September 2003, and it is anticipated to open by
mid-2005. We believe that the new riverboat competition in the Lake Charles area
will have a negative impact on our operations there.
In Atlantic City, a competitor opened a 2,000-room hotel and casino in
July 2003 and in 2004, announced plans to expand gaming and nongaming amenities,
including a new hotel tower, at that property. A competitor in Missouri
completed a large casino expansion in third quarter 2002 that is located near
our St. Louis property, a competitor in the Joliet market completed a new barge
facility in second quarter 2002 and another competitor in the Chicagoland market
replaced its boats with barges in second quarter 2003. In the Kansas City
market, a competitor opened its expanded facility in third quarter 2003 and
another competitor opened its new barge facility in fourth quarter 2003. The
short-term impact of increased competition in these markets has been negative.
In Illinois, we are bidding on the final gaming license to be issued by the
State and, if we are not successful and a competitor location is chosen, it
could have an impact on our Chicagoland operations.
A competitor is scheduled to open a new property in Las Vegas in 2005,
which could impact our properties there.
In October 2001, the legislature of the State of New York approved a bill
authorizing six new tribal casinos in that state and video lottery terminals at
tracks. The measure allows the governor of New York to negotiate gaming compacts
with American Indian tribes to operate three casinos in the Catskills and three
casinos in western New York.
In September 1999, the State of California and approximately 60 Indian
tribes executed Class III Gaming Compacts, which other California tribes can
join. The Compacts will allow each tribe to operate, on tribal trust lands, two
casinos with up to 2,000 slot
machines per tribe and unlimited house-banked card games. Our own agreements
with Rincon are a result of these events (see Regional Results and Development
Plans, Managed Casinos and Other).
Other states are also considering legislation enabling the development and
operation of casinos or casino-like operations.
Although the short-term effect of such competitive developments on our
Company generally has been negative, we are not able to determine the long-term
impact, whether favorable or unfavorable, that these trends and events will have
on current or future markets. We believe that the geographic diversity of our
operations; our focus on multi-market customer relationships; our service
training, our rewards and customer loyalty programs; and our continuing efforts
to establish our brands as premier brands upon which we have built strong
customer loyalty have well-positioned us to face the challenges present within
our industry. We utilize the capabilities of WINet, a sophisticated nationwide
customer database, and Total Rewards, a nationwide loyalty program that allows
our customers to earn cash, comps and other benefits for playing at Harrah's
Entertainment casinos. We believe these sophisticated marketing tools provide us
with competitive advantages, particularly with players who visit more than one
market.
POLITICAL UNCERTAINTIES
The casino entertainment industry is subject to political and regulatory
uncertainty. From time to time, individual jurisdictions have also considered
legislation or referendums, which could adversely impact our operations. The
likelihood or outcome of similar legislation and referendums in the future
cannot be predicted.
The casino entertainment industry represents a significant source of tax
revenues to the various jurisdictions in which casinos operate. From time to
time, various state and federal legislators and officials have proposed changes
in tax laws, or in the administration of such laws, which would affect the
industry. It is not possible to determine the scope or likelihood of possible
future changes in tax laws or in the administration of such laws. If adopted,
such changes could have a material adverse effect on our financial results.
ADDITION OF INTERNATIONAL OPERATIONS
The planned acquisition of Caesars will include certain properties located
in countries outside the United States. International operations are subject to
inherent risks including variation in local economies, currency fluctuation,
greater difficulty in accounts receivable collection, trade barriers, burden of
complying with a variety of international laws and political and economic
instability.
In addition, Caesars has announced plans to develop and operate a casino
in the United Kingdom, partnering with Quintain Estates and Development Group.
Development in the United Kingdom is dependent on passage of proposed
legislative reform of the United Kingdom gaming laws and regulations.
ECONOMIC CONDITIONS
Historically, economic conditions have had little effect on our
operations, but we believe that adverse economic conditions did have some impact
on our 2003 operating results and could affect future results. We feel that our
marketing programs, use of our technology to change the mix of slot machines and
table games and our cost management programs have helped offset the impact of
the sluggish economy.
NATIONAL DEFENSE AND HOMELAND SECURITY MATTERS
The September 11, 2001, terrorist attacks, the potential for future
terrorist attacks, the national and international responses to terrorist attacks
and other acts of war or hostility have created many economic and political
uncertainties, which could adversely affect our business and results of
operations in ways that cannot presently be predicted. For example, the United
States Coast Guard is considering regulations designed to increase homeland
security, which, if passed, could affect some of our properties and require
significant expenditures to bring such properties into compliance. Furthermore,
given current conditions in the global insurance markets, we are predominantly
uninsured for losses and interruptions caused by terrorist acts and acts of war.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
We prepare our Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States. Certain of our
accounting policies, including the estimated lives assigned to our assets, the
determination of bad debt, asset impairment, fair value of guarantees and
self-insurance reserves, the purchase price allocations made in connection with
our acquisitions and the calculation of our income tax liabilities, require that
we apply significant judgment in defining the appropriate assumptions for
calculating financial estimates. By their nature, these judgments are subject to
an inherent degree of uncertainty. Our judgments are based on our historical
experience, terms of existing contracts, our observance of trends in the
industry, information provided by our customers and information available from
other outside sources, as appropriate. There can be no assurance that actual
results will not differ from our estimates. The policies and estimates discussed
below are considered by management to be those in which our policies, estimates
and judgments have a significant impact on issues that are inherently uncertain.
PROPERTY AND EQUIPMENT
We have significant capital invested in our property and equipment, which
represents approximately 58% of our total assets. Judgments are made in
determining the estimated useful lives of assets, salvage values to be assigned
to assets and if or when an asset has been impaired. The accuracy of these
estimates affects the amount of depreciation expense recognized in our financial
results and whether we have a gain or loss on the disposal of the asset. We
assign lives to our assets based on our standard policy, which is established by
management as representative of the useful life of each category of asset. We
review the carrying value of our property and equipment whenever events and
circumstances indicate that the carrying value of an asset may not be
recoverable from the
estimated future cash flows expected to result from its use and eventual
disposition. The factors considered by management in performing this assessment
include current operating results, trends and prospects, as well as the effect
of obsolescence, demand, competition and other economic factors. In estimating
expected future cash flows for determining whether an asset is impaired, assets
are grouped at the operating unit level, which for most of our assets is the
individual casino.
GOODWILL AND OTHER INTANGIBLE ASSETS
We have approximately $1.0 billion in goodwill and other intangible assets
on our Consolidated Balance Sheet resulting from our acquisition of other
businesses. An accounting standard adopted in 2002 requires an annual review of
goodwill and other nonamortizing intangible assets for impairment. We completed
our initial assessment for impairment of goodwill and other nonamortizing
intangible assets and recorded an impairment charge in first quarter 2002. We
complete our annual assessment for impairment in fourth quarter each year, and
in fourth quarter 2003, we determined that, except for the goodwill associated
with Harrah's Reno, goodwill and intangible assets with indefinite lives have
not been impaired. A charge was recorded in fourth quarter for the impairment of
Reno's remaining goodwill. The annual evaluation of goodwill and other
nonamortizing intangible assets requires the use of estimates about future
operating results of each reporting unit to determine their estimated fair
value. Changes in forecasted operations can materially affect these estimates.
Once an impairment of goodwill or other intangible assets has been recorded, it
cannot be reversed.
TOTAL REWARDS POINT LIABILITY PROGRAM
Our customer rewards program, Total Rewards, offers incentives to
customers who gamble at our casinos throughout the United States. Prior to 2003,
customers received cash-back and other offers made in the form of coupons that
were mailed to the customer and were redeemable on a subsequent visit to one of
our properties. The coupons generally expired 30 days after they were issued.
Given the requirement of a return visit to redeem the offer and the short-term
expiration date, with no ability to renew or extend the offer, we recognized the
expense of these offers when the coupons were redeemed.
In fourth quarter 2002, a decision was made to change our Total Rewards
program in 2003 to give our customers greater flexibility and control over the
rewards they receive for playing at our casinos. Under the new program,
customers are able to accumulate, or bank, reward credits over time that they
may redeem at their discretion under the terms of the program. The reward credit
balance will be forfeited if the customer does not earn a reward credit over the
prior six-month period. As a result of the ability of the customer to bank the
reward credits under the revised program, our accounting for the Total Rewards
program changed and we accrue the expense of reward credits, after consideration
of estimated breakage, as they are earned. To implement this change in the
program, an initial bank of reward credits was offered to our existing
customers. The amount of credits offered for this initial bank was calculated
based upon 2002 tracked play at our casinos. As a result of the decision to
extend this initial offer, an accrual of $6.9 million was recorded in 2002 to
recognize our estimate of the expense of this implementation offer. Under the
current program, the value of the cost to provide reward credits is expensed as
the reward credits are earned. To arrive at the estimated cost associated with
reward credits, estimates and assumptions are made regarding incremental
marginal costs of the benefits, breakage rates and the mix of goods and services
for which reward credits will be redeemed. We use historical data to assist in
the determination of estimated accruals. At December 31, 2003, $25.7 million was
accrued for the cost of anticipated Total Rewards credit redemptions. The
Company is planning to integrate the properties acquired from Horseshoe Gaming
in 2004 into our Total Rewards Program.
BAD DEBT RESERVES
We reserve an estimated amount for receivables that may not be collected.
Methodologies for estimating bad debt reserves range from specific reserves to
various percentages applied to aged receivables. Historical collection rates are
considered, as are customer relationships, in determining specific reserves. At
December 31, 2003, we had $51.5 million in our bad debt reserve. As with many
estimates, management must make judgments about potential actions by third
parties in establishing and evaluating our reserves for bad debts.
SELF-INSURANCE ACCRUALS
We are self-insured up to certain limits for costs associated with general
liability, workers' compensation and employee health coverage. Insurance claims
and reserves include accruals of estimated settlements for known claims, as well
as accruals of actuarial estimates of incurred but not reported claims. At
December 31, 2003, we had total self-insurance accruals reflected on our
Consolidated Balance Sheet of $89.3 million. In estimating these costs, we
consider historical loss experience and make judgments about the expected levels
of costs per claim. We also rely on independent consultants to assist in the
determination of estimated accruals. These claims are accounted for based on
actuarial estimates of the undiscounted claims, including those claims incurred
but not reported. We believe the use of actuarial methods to account for these
liabilities provides a consistent and effective way to measure these highly
judgmental accruals; however, changes in health care costs, accident frequency
and severity and other factors can materially affect the estimate for these
liabilities. We continually monitor the potential for changes in estimates,
evaluate our insurance accruals and adjust our recorded provisions.
RECENTLY ISSUED AND PROPOSED ACCOUNTING STANDARDS
The following are accounting standards adopted or issued in 2003 that are
applicable to our Company.
During second quarter 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 establishes accounting standards for
the recognition and measurement of an asset retirement obligation and its
associated asset retirement cost. It also provides accounting guidance for legal
obligations associated with the retirement of tangible long-lived assets. For
our Company, SFAS No. 143 was effective in 2003, and had no effect on our
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which all but eliminates the presentation in income statements of
debt extinguishments as extraordinary items. For our Company, SFAS No. 145 was
effective for our fiscal years beginning after May 15, 2002. We implemented SFAS
No. 145 on January 1, 2003, and have presented 2003 losses on early
extinguishments of debt as a component of our Income from continuing operations.
In accordance with SFAS No. 145, we have also reclassified prior periods.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which generally requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 was effective for exit or disposal activities initiated after
December 31, 2002, and had no effect on our financial results.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45") which requires future guarantee
obligations to be recognized as liabilities at inception of the guarantee
contract and increases disclosure requirements for guarantees. The initial
recognition provisions apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements in the FIN 45 were
implemented in 2002, with the initial recognition provisions adopted beginning
January 1, 2003. (See Debt and Liquidity, Guarantees of Third-Party Debt and
Other Obligations and Commitments.)
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB
Statement No. 123," to provide alternative methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires disclosure in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002, and the annual
disclosure provisions were implemented in our 2002 Annual Report. We implemented
the interim disclosure provisions in first quarter 2003.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which addresses
consolidation by business enterprises where equity investors do not bear the
residual economic risks and rewards. These entities have been commonly referred
to as "special-purpose entities." Companies were required to apply the
provisions of FIN 46 prospectively for all variable interest entities created
after January 31, 2003. In December 2003, the FASB issued a revision to FIN 46
to clarify some of the provisions of the original interpretation and to exempt
certain entities from its requirements. The additional guidance explains how to
identify variable interest entities and how an enterprise should assess its
interest in an entity to decide whether to consolidate that entity. Application
of revised FIN 46 is required for public companies with interests in
"special-purpose entities" for periods ending after December 15, 2003.
Application for public entities for all other types of entities is required in
financial statements for periods ending after March 15, 2004. The adoption of
FIN 46 did not have a significant impact on our results of operations or
financial position.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment". Public companies (other than those filing as small business issuers)
will be required to apply SFAS No. 123(R) as of the first interim or annual
reporting period that begins after June 15, 2005. SFAS No. 123(R) requires that
we recognize an expense for our equity-based compensation programs, including
stock options. We are currently evaluating the provisions of SFAS No. 123(R) to
determine its impact on our future financial statements.
PRIVATE SECURITIES LITIGATION REFORM ACT
This current report on Form 8-K contains or may contain "forward-looking
statements" intended to qualify for the safe harbor from liability established
by the Private Securities Litigation Reform Act of 1995. These statements can be
identified by the fact that they do not relate strictly to historical or current
facts. We have based these forward-looking statements on our current
expectations about future events. Further, statements that include words such as
"may," "will," "project," "might," "expect," "believe," "anticipate," "intend,"
"could," "would," "estimate," "continue" or "pursue," or the negative of these
words or other words or expressions of similar meaning may identify
forward-looking statements. These forward-looking statements are found at
various places throughout the report. These forward-looking statements,
including, without limitation, those relating to future actions, new projects,
strategies, future performance, the outcome of contingencies such as legal
proceedings and future financial results, wherever they occur in this report,
are necessarily estimates reflecting the best judgment of the management of the
Company and involve a number of risks and
uncertainties that could cause actual results to differ materially from those
suggested by the forward-looking statements. These forward-looking statements
should, therefore, be considered in light of various important factors set forth
from time to time in the Company's reports filed with the Securities and
Exchange Commission.
In addition to the risk factors identified elsewhere, important factors
that could cause actual results to differ materially from estimates or
projections contained in the forward-looking statements include without
limitation:
- the effect of local and national economic, credit and capital market
conditions on the economy in general, and on the gaming and hotel
industry in particular;
- construction factors, including delays, increased costs for labor and
materials, zoning issues, environmental restrictions, soil and water
conditions, weather and other hazards, site access matters and building
permit issues;
- the effects of environmental and structural building conditions
relating to our properties;
- the ability of the Company to complete the merger with Caesars and to
timely and cost-effectively integrate Caesars and Horseshoe into the
Company's operations;
- access to available and feasible financing, including financing for the
merger of Caesars into the Company, on a timely basis;
- changes in laws, including increased tax rates, regulations or
accounting standards, third-party relations and approvals, and
decisions of courts, regulators and governmental bodies;
- litigation outcomes and judicial actions, including gaming legislative
action, referenda and taxation;
- the ability of our customer-tracking, customer loyalty and
yield-management programs to continue to increase customer loyalty and
same casino or hotel sales;
- the ability to recoup costs of capital investments through higher
revenues;
- acts of war or terrorist incidents;
- abnormal gaming holds; and
- the effects of competition, including locations of competitors and
operating and market competition.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this current report. The Company
undertakes no obligation to publicly update or release any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this current report or to reflect the occurrence of unanticipated events, except
as required by law.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Harrah's Entertainment, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Harrah's
Entertainment, Inc. and subsidiaries ("Harrah's Entertainment") as of December
31, 2003 and 2002, and the related consolidated statements of income,
stockholders' equity and comprehensive income, and cash flows for each of the
three years in the period ended December 31, 2003. Our audits also included the
financial statement schedule listed in the Index at Item 15(a)(2). These
financial statements and financial statement schedule are the responsibility of
Harrah's Entertainment's management. Our responsibility is to express an opinion
on the financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Harrah's Entertainment as of
December 31, 2003 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 3 to the Consolidated Financial Statements, Harrah's
Entertainment changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," in 2002 and recorded a cumulative effect
of a change in accounting principle in the first quarter of 2002.
Deloitte & Touche LLP
Las Vegas, Nevada
March 3, 2004
(December 16, 2004 as to Notes 15 and 16)
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
-------------------------------
2003 2002
------------ ------------
ASSETS
Current assets
Cash and cash equivalents........................................................ $ 397,942 $ 384,365
Receivables, less allowance for doubtful accounts of $51,466 and $55,860......... 90,991 91,244
Deferred income taxes (Note 9)................................................... 68,323 61,659
Income tax receivable............................................................ 36,166 43,088
Prepayments and other............................................................ 55,929 48,764
Inventories...................................................................... 22,546 21,192
------------ ------------
Total current assets.......................................................... 671,897 650,312
------------ ------------
Land, buildings, riverboats and equipment
Land and land improvements....................................................... 729,441 723,054
Buildings, riverboats and improvements........................................... 3,217,386 3,071,369
Furniture, fixtures and equipment................................................ 1,361,963 1,213,629
Construction in progress......................................................... 111,219 72,527
------------ ------------
5,420,009 5,080,579
Less: accumulated depreciation.................................................. (1,581,134) (1,356,250)
------------ ------------
3,838,875 3,724,329
Assets held for sale (Notes 15 and 16).............................................. 688,106 731,711
Goodwill (Notes 2 and 3)............................................................ 701,133 735,615
Intangible assets (Note 3).......................................................... 315,019 271,227
Investments in and advances to nonconsolidated affiliates (Note 14)................. 6,537 3,333
Escrow deposit for pending acquisition (Notes 2 and 16)............................. 75,000 -
Deferred costs and other (Note 5)................................................... 282,277 233,522
------------ ------------
$ 6,578,844 $ 6,350,049
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................................................. $ 117,941 $ 110,199
Accrued expenses (Note 5)........................................................ 463,466 440,356
Short-term debt (Note 6)......................................................... - 60,250
Current portion of long-term debt (Note 6)....................................... 1,632 1,466
------------ ------------
Total current liabilities..................................................... 583,039 612,271
Liabilities held for sale (Notes 15 and 16)......................................... 10,796 18,083
Long-term debt (Note 6)............................................................. 3,671,889 3,763,066
Deferred credits and other.......................................................... 194,017 181,919
Deferred income taxes (Note 9)...................................................... 330,674 263,661
------------ ------------
4,790,415 4,839,000
------------ ------------
Minority interests.................................................................. 49,989 40,041
------------ ------------
Commitments and contingencies (Notes 2, 7 and 11 through 14)
Stockholders' equity (Notes 4, 13 and 14)
Common stock, $0.10 par value, authorized - 360,000,000 shares,
outstanding - 110,889,294 and 109,708,831 shares (net of 35,078,478
and 34,416,975 shares held in treasury)......................................... 11,089 10,971
Capital surplus.................................................................. 1,277,903 1,224,808
Retained earnings................................................................ 466,662 260,297
Accumulated other comprehensive income/(loss).................................... 151 (415)
Deferred compensation related to restricted stock................................ (17,365) (24,653)
------------ ------------
1,738,440 1,471,008
------------ ------------
$ 6,578,844 $ 6,350,049
============ ============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Revenues
Casino .......................................................... $3,458,396 $3,285,877 $2,831,491
Food and beverage ............................................... 596,772 572,775 492,258
Rooms ........................................................... 339,037 317,914 295,461
Management fees ................................................. 72,149 66,888 64,842
Other ........................................................... 190,092 148,635 134,263
Less: casino promotional allowances ............................. (707,581) (644,223) (500,870)
----------- ----------- -----------
Total revenues ............................................... 3,948,865 3,747,866 3,317,445
----------- ----------- -----------
Operating expenses
Direct
Casino ........................................................ 1,748,698 1,602,544 1,417,317
Food and beverage ............................................. 255,193 240,622 226,848
Rooms ......................................................... 65,340 67,243 76,552
Property general, administrative and other ...................... 830,296 780,788 704,004
Depreciation and amortization ................................... 294,336 278,935 260,616
Write-downs, reserves and recoveries (Note 8) ................... 10,476 4,537 17,225
Project opening costs ........................................... 7,352 1,703 12,421
Corporate expense ............................................... 52,602 56,626 52,746
Losses on interests in nonconsolidated affiliates (Note 14) ..... 999 1,670 4,614
Amortization of intangible assets (Note 3) ...................... 4,798 4,493 23,333
----------- ----------- -----------
Total operating expenses ..................................... 3,270,090 3,039,161 2,795,676
----------- ----------- -----------
Income from operations ............................................. 678,775 708,705 521,769
Interest expense, net of interest capitalized (Note 10) ............ (234,419) (240,220) (255,801)
Losses on early extinguishments of debt (Note 6) ................... (19,074) - (36)
Other income, including interest income ............................ 2,913 2,137 28,219
----------- ----------- -----------
Income from continuing operations before income taxes and
minority interests .............................................. 428,195 470,622 294,151
Provision for income taxes (Note 9) ................................ (155,568) (174,445) (107,747)
Minority interests ................................................. (11,563) (13,965) (12,616)
----------- ----------- -----------
Income from continuing operations .................................. 261,064 282,212 173,788
Discontinued operations, net of income tax expense of $16,993,
$23,684 and $18,977 (Notes 15 and 16) ........................... 31,559 43,986 35,179
----------- ----------- -----------
Income before cumulative effect of change in accounting
principle ........................................................ 292,623 326,198 208,967
Cumulative effect of change in accounting principle, net of
income tax benefit of $2,831 (Note 3) ............................ - (91,169) -
----------- ----------- -----------
Net income ......................................................... $292,623 $235,029 $208,967
=========== =========== ===========
Earnings per share - basic
Income from continuing operations ............................... $2.40 $2.54 $1.53
Discontinued operations, net .................................... 0.29 0.39 0.31
Cumulative effect of change in accounting principle, net ........ - (0.82) -
----------- ----------- -----------
Net income ................................................... $2.69 $2.11 $1.84
=========== =========== ===========
Earnings per share - diluted
Income from continuing operations ............................... $2.36 $2.48 $1.50
Discontinued operations, net .................................... 0.29 0.39 0.31
Cumulative effect of change in accounting principle, net ........ - (0.80) -
----------- ----------- -----------
Net income ................................................... $2.65 $2.07 $1.81
=========== =========== ===========
Dividends declared per share ....................................... $0.60 $- $-
=========== =========== ===========
Weighted average common shares outstanding ......................... 108,972 111,212 113,540
Additional shares based on average market price for period
applicable to:
Restricted stock ............................................. 454 631 697
Stock options ................................................ 977 1,691 1,471
----------- ----------- -----------
Weighted average common and common equivalent shares
outstanding ...................................................... 110,403 113,534 115,708
=========== =========== ===========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands)
(Notes 4, 13 and 14)
Common Stock
-----------------------
Shares Retained
Outstanding Amount Capital Surplus Earnings
----------- ---------- --------------- ----------
Balance - December 31, 2000.............................. 115,952 $11,595 $1,075,313 $224,251
Net income........................................... 208,967
Unrealized gain on available-for-sale
securities, less deferred tax provision of $772.....
Realization of gain on available-for-sale
securities, net of tax provision of $123............
Other................................................
Treasury stock purchases............................. (6,618) (662) (185,120)
Net shares issued under incentive compensation
plans, including income tax benefit of $18,013...... 2,988 299 67,812
2001 Comprehensive Income..............................
------- ---------- ---------- ----------
Balance - December 31, 2001.............................. 112,322 11,232 1,143,125 248,098
Net income........................................... 235,029
Unrealized loss on available-for-sale
securities, less deferred tax benefit of $239.......
Other................................................
Treasury stock purchases............................. (5,275) (527) (222,830)
Net shares issued under incentive compensation
plans, including income tax benefit of $23,970...... 2,662 266 81,683
2002 Comprehensive Income..............................
------- ---------- ---------- ----------
Balance - December 31, 2002.............................. 109,709 10,971 1,224,808 260,297
Net income........................................... 292,623
Unrealized gain on available-for-sale
securities, less deferred tax provision of $215.....
Realization of loss on available-for-sale
securities, net of tax benefit of $10...............
Foreign currency adjustment..........................
Treasury stock purchases............................. (500) (50) (17,887)
Quarterly cash dividends (Note 4).................... (66,219)
Net shares issued under incentive compensation
plans, including income tax benefit of $15,537...... 1,680 168 53,095 (2,152)
2003 Comprehensive Income..............................
------- ---------- ---------- ----------
Balance - December 31, 2003.............................. 110,889 $11,089 $1,277,903 $466,662
======= ========== ========== ==========
Accumulated Deferred
Other Compensation
Comprehensive Related to Comprehensive
Income/(Loss) Restricted Stock Total Income
------------- ---------------- ---------- -------------
Balance - December 31, 2000.............................. $(1,036) $(40,405) $1,269,718
Net income........................................... 208,967 $208,967
Unrealized gain on available-for-sale
securities, less deferred tax provision of $772..... 1,289 1,289 1,289
Realization of gain on available-for-sale
securities, net of tax provision of $123............ (226) (226) (226)
Other................................................ (1,476) (1,476) (1,476)
Treasury stock purchases............................. (185,782)
Net shares issued under incentive compensation
plans, including income tax benefit of $18,013...... 13,512 81,623
----------
2001 Comprehensive Income.............................. $208,554
---------- ---------- ---------- ==========
Balance - December 31, 2001.............................. (1,449) (26,893) 1,374,113
Net income........................................... 235,029 $235,029
Unrealized loss on available-for-sale
securities, less deferred tax benefit of $239....... (442) (442) (442)
Other................................................ 1,476 1,476 1,476
Treasury stock purchases............................. (223,357)
Net shares issued under incentive compensation
plans, including income tax benefit of $23,970...... 2,240 84,189
----------
2002 Comprehensive Income.............................. $236,063
---------- ---------- ---------- ==========
Balance - December 31, 2002.............................. (415) (24,653) 1,471,008
Net income........................................... 292,623 $292,623
Unrealized gain on available-for-sale
securities, less deferred tax provision of $215..... 397 397 397
Realization of loss on available-for-sale
securities, net of tax benefit of $10............... 18 18 18
Foreign currency adjustment.......................... 151 151 151
Treasury stock purchases............................. (17,937)
Quarterly cash dividends (Note 4).................... (66,219)
Net shares issued under incentive compensation
plans, including income tax benefit of $15,537...... 7,288 58,399
----------
2003 Comprehensive Income.............................. $293,189
---------- ---------- ---------- ==========
Balance - December 31, 2003.............................. $151 $(17,365) $1,738,440
========== ========== ==========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Note 10)
Year Ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities
Net income .............................................................. $ 292,623 $ 235,029 $ 208,967
Adjustments to reconcile net income to cash flows from operating
activities
Earnings from discontinued operations, before
income taxes ...................................................... (48,552) (67,670) (54,156)
Cumulative effect of change in accounting principle, before
income taxes ...................................................... - 94,000 -
Losses on early extinguishments of debt ............................ 19,074 - 36
Depreciation and amortization ...................................... 319,694 304,620 305,561
Write-downs, reserves and recoveries ............................... 10,476 4,537 17,225
Deferred income taxes .............................................. 104,287 89,886 102,476
Other noncash items ................................................ 18,825 26,213 46,183
Minority interests' share of net income ............................ 11,563 13,965 12,616
Losses on interests in nonconsolidated affiliates .................. 999 1,670 4,614
Net losses/(gains) from asset sales ................................ 125 1,695 (18,371)
Net change in long-term accounts ................................... (16,636) (3,901) (14,224)
Net change in working capital accounts ............................. (45,696) (53,862) 102,516
----------- ----------- -----------
Cash flows provided by operating activities ....................... 666,782 646,182 713,443
----------- ----------- -----------
Cash flows from investing activities
Land, buildings, riverboats and equipment additions .................... (383,600) (349,102) (451,466)
Escrow payment for pending acquisition (Note 2) ........................ (75,000) - -
Payments for businesses acquired, net of cash acquired ................. - (162,431) (251,873)
Investments in and advances to nonconsolidated affiliates .............. (4,228) - (5,657)
Proceeds from other asset sales ........................................ 3,960 34,601 28,780
Increase/(decrease) in construction payables ........................... 1,764 (6,396) 5,780
Sale of marketable equity securities for defeasance of debt ............ - - 2,182
Proceeds from sales of interests in nonconsolidated affiliates ......... 897 - 1,883
Other .................................................................. (14,948) (7,162) (15,061)
----------- ----------- -----------
Cash flows used in investing activities ........................... (471,155) (490,490) (685,432)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from issuance of senior notes, net of discount and issue
costs of $6,919 in 2003 and $15,328 in 2001 ........................... 493,081 - 984,672
Borrowings under lending agreements, net of financing costs of
$15,342, $655 and $529 ................................................ 3,368,947 2,772,671 2,732,416
Repayments under lending agreements .................................... (2,526,189) (2,728,126) (2,967,814)
Borrowings under retired bank facility ................................. 161,125 - -
Repayments under retired bank facility ................................. (1,446,625) - -
Other short-term repayments ............................................ (60,250) - (184,000)
Early extinguishments of debt .......................................... (159,476) (28,210) (344,811)
Premiums paid on early extinguishments of debt ......................... (16,125) - (7,970)
Scheduled debt retirements ............................................. (1,583) (1,659) (2,707)
Dividends paid ......................................................... (66,219) - -
Proceeds from exercises of stock options ............................... 34,085 48,695 55,303
Purchases of treasury stock ............................................ (17,937) (223,357) (185,782)
Minority interests' distributions, net of contributions ................ (10,639) (12,153) (8)
Other .................................................................. (178) (1,135) 126
----------- ----------- -----------
Cash flows (used in)/provided by financing activities ............. (247,983) (173,274) 79,425
----------- ----------- -----------
Cash flows from assets held for sale
Proceeds from sale of assets held for sale ............................. 48,640 - -
Net transfers from assets held for sale ................................ 17,293 77,018 (51,948)
----------- ----------- -----------
Cash flows provided by/(used in) assets held for sale ............. 65,933 77,018 (51,948)
----------- ----------- -----------
Net increase in cash and cash equivalents .................................. 13,577 59,436 55,488
Cash and cash equivalents, beginning of year ............................... 384,365 324,929 269,441
----------- ----------- -----------
Cash and cash equivalents, end of year ..................................... $ 397,942 $ 384,365 $ 324,929
=========== =========== ===========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise stated)
In these footnotes, the words "Company," "Harrah's Entertainment," "we," "our"
and "us" refer to Harrah's Entertainment, Inc., a Delaware corporation, and its
wholly-owned subsidiaries, unless otherwise stated or the context requires
otherwise.
Note 1 -- Summary of Significant Accounting Policies
BASIS OF PRESENTATION AND ORGANIZATION. As of December 31, 2003, we
operated 25 casinos in 12 states. Our operations included eleven land-based
casinos, ten riverboat or dockside casinos, and four casinos on Indian
reservations. We view each property as an operating segment and aggregate all
operating segments into one reporting segment.
PRINCIPLES OF CONSOLIDATION. Our Consolidated Financial Statements include
the accounts of Harrah's Entertainment and its subsidiaries after elimination of
all significant intercompany accounts and transactions. We follow the equity
method of accounting for our investments in 20% to 50% owned companies and joint
ventures (see Note 14).
CASH AND CASH EQUIVALENTS. Cash includes the minimum cash balances
required to be maintained by a state gaming commission or local and state
governments, which totaled approximately $24.2 million and $25.4 million at
December 31, 2003 and 2002, respectively. Cash equivalents are highly liquid
investments with an original maturity of less than three months and are stated
at the lower of cost or market value.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We reserve an estimated amount for
receivables that may not be collected. Methodologies for estimating the
allowance for doubtful accounts range from specific reserves to various
percentages applied to aged receivables. Historical collection rates are
considered, as are customer relationships, in determining specific reserves.
INVENTORIES. Inventories, which consist primarily of food, beverage,
retail merchandise and operating supplies, are stated at average cost.
LAND, BUILDINGS, RIVERBOATS AND EQUIPMENT. Land, buildings, riverboats and
equipment are stated at cost. Land includes land held for future development or
disposition, which totaled $119.5 million and $127.8 million at December 31,
2003 and 2002, respectively. We capitalize the costs of improvements and repairs
that extend the life of the asset. We expense maintenance and repairs cost as
incurred. Gains or losses on the dispositions of land, buildings, riverboats or
equipment are included in the determination of income. Interest expense is
capitalized on internally constructed assets at our overall weighted average
borrowing rate of interest. Capitalized interest amounted to $2.3 million, $3.5
million and $9.3 million in 2003, 2002 and 2001, respectively.
We depreciate our buildings, riverboats and equipment using the
straight-line method over the shorter of the estimated useful life of the asset
or the related lease term, as follows:
Buildings and improvements......................... 10 to 40 years
Riverboats and barges.............................. 30 years
Furniture, fixtures and equipment.................. 2 to 15 years
We review the carrying value of land, buildings, riverboats and equipment
for impairment whenever events and circumstances indicate that the recoverable
carrying value of an asset may not be from the estimated future cash flows
expected to result from its use and eventual disposition. In cases where
undiscounted expected future cash flows are less than the carrying value, an
impairment loss is recognized equal to an amount by which the carrying value
exceeds the fair value of the asset. The factors considered by management in
performing this assessment
include current operating results, trends and prospects, as well as the effect
of obsolescence, demand, competition and other economic factors. In estimating
expected future cash flows for determining whether an asset is impaired, assets
are grouped at the operating unit level, which for most of our assets is the
individual casino.
GOODWILL AND OTHER INTANGIBLE ASSETS. We have approximately $1.0 billion
in goodwill and other intangible assets on our balance sheet resulting from our
acquisitions of other businesses. Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," adopted on January 1,
2002, requires an annual review of goodwill and other nonamortizing intangible
assets for impairment. We completed our initial assessment for impairment of
goodwill and other nonamortizing intangibles and recorded an impairment charge
in first quarter 2002 (see Note 3). We also completed our annual assessments for
impairment in fourth quarters 2002 and 2003 and determined that, except for the
goodwill associated with Harrah's Reno, goodwill and intangible assets with
indefinite lives have not been further impaired. A charge of $6.3 million was
recorded in fourth quarter 2003 for the impairment of Reno's remaining goodwill.
Once an impairment of goodwill or other nonamortizing intangible assets has been
recorded, it cannot be reversed.
With the adoption of SFAS No. 142, we no longer amortize goodwill or other
intangible assets that are determined to have an indefinite life. Under the
provisions of SFAS No. 142, goodwill acquired in a business combination for
which the acquisition date was after June 30, 2001, should not be amortized;
therefore, no goodwill related to the acquisition of Harveys Casino Resorts
("Harveys") was amortized in 2001. Prior to 2002, we amortized goodwill and
other intangibles, including trademarks, on a straight-line basis over periods
up to forty years. Intangible assets determined to have a finite life are
amortized on a straight-line basis over the determined useful life of the asset
(see Note 3). We use the interest method to amortize deferred financing charges
over the term of the related debt agreement.
TOTAL REWARDS POINT LIABILITY PROGRAM. Our customer rewards program, Total
Rewards, offers incentives to customers who gamble at our casinos throughout the
United States. Prior to 2003, customers received cash-back and other offers made
in the form of coupons that were mailed to the customer and were redeemable on a
subsequent visit to one of our properties. The coupons generally expired thirty
days after they were issued. Given the requirement of a return visit to redeem
the offer and the short-term expiration date, with no ability to renew or extend
the offer, we recognized the expense of these offers when the coupons were
redeemed.
In fourth quarter 2002, a decision was made to change our Total Rewards
program in 2003 to give our customers greater flexibility and control over the
rewards they receive for playing at our casinos. Under the new program,
customers are able to accumulate, or bank, reward credits over time that they
may redeem at their discretion under the terms of the program. The reward credit
balance will be forfeited if the customer does not earn a reward credit over the
prior six-month period. As a result of the ability of the customer to bank the
reward credits under the revised program, our accounting for the Total Rewards
program changed, and we accrue the expense of reward credits, after
consideration of estimated breakage, as they are earned. To implement this
change in the program, an initial bank of reward credits was offered to our
existing customers. The amount of credits offered for this initial bank was
calculated based upon 2002 tracked play at our casinos. As a result of the
decision to extend this initial offer, an accrual of $6.9 million was recorded
in 2002 to recognize our estimate of the expense of this implementation offer.
Under the current program, the value of the cost to provide reward credits is
expensed as the reward credits are earned. To arrive at the estimated cost
associated with reward credits, estimates and assumptions are made regarding
incremental marginal costs of the benefits, breakage rates and the mix of goods
and services for which reward credits will be redeemed. We use historical data
to assist in the determination of estimated accruals. At December 31, 2003,
$25.7 million was accrued for the cost of anticipated Total Rewards credit
redemptions. The Company is planning to integrate the properties acquired from
Horseshoe Gaming in 2004 into our Total Rewards Program.
SELF-INSURANCE ACCRUALS. We are self-insured up to certain limits for
costs associated with general liability, workers' compensation and employee
health coverage. Insurance claims and reserves include accruals of estimated
settlements for known claims, as well as accruals of actuarial estimates of
incurred but not reported claims. At December 31, 2003 and 2002, we had total
self-insurance accruals reflected on our balance sheets of $89.3 million and
$73.8 million, respectively. In estimating those costs, we consider historical
loss experience and make judgments about the expected levels of costs per claim.
We also rely on independent consultants to assist in the determination of
estimated accruals. These claims are accounted for based on actuarial estimates
of the undiscounted claims, including those claims incurred but not reported. We
believe the use of actuarial methods to account for these liabilities provides a
consistent and effective way to measure these highly judgmental accruals;
however, changes in health care costs, accident frequency and severity and other
factors can materially affect the estimate for these liabilities. We continually
monitor the potential for changes in estimates, evaluate our insurance accruals
and adjust our recorded provisions.
TREASURY STOCK. The shares of Harrah's Entertainment common stock we hold
in treasury are reflected in our Consolidated Balance Sheets and our
Consolidated Statements of Stockholders' Equity and Comprehensive Income as if
those shares were retired.
REVENUE RECOGNITION. Casino revenues consist of net gaming wins. Food and
beverage and rooms revenues include the aggregate amounts generated by those
departments at all consolidated casinos and casino hotels.
Casino promotional allowances consist principally of the retail value of
complimentary food and beverages, accommodations, admissions and entertainment
provided to casino patrons. The estimated costs of providing such complimentary
services, which we classify as casino expenses for continuing operations through
interdepartmental allocations, were as follows:
2003 2002 2001
-------- -------- --------
Food and beverage .......... $204,820 $199,972 $169,811
Rooms ...................... 77,436 71,364 62,726
Other ...................... 25,663 20,556 21,839
-------- -------- --------
$307,919 $291,892 $254,376
======== ======== ========
EARNINGS PER SHARE. In accordance with the provisions of SFAS No. 128,
"Earnings Per Share," we compute our basic earnings per share by dividing Net
income by the number of Weighted average common shares outstanding during the
year. Our Diluted earnings per share is computed by dividing Net income by the
number of Weighted average common and common equivalent shares outstanding
during the year. For each of the three years ended December 31, 2003, common
stock equivalents consisted solely of net restricted shares of 453,592, 631,532
and 697,130, respectively, and stock options outstanding of 977,263, 1,691,000
and 1,471,400, respectively, under our employee stock benefit plans. (See Note
13.)
STOCK-BASED EMPLOYEE COMPENSATION. As allowed under the provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," we apply the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations to account for our stock option plans
and, accordingly, do not recognize compensation expense. Furthermore, no
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. Had compensation
expense for the stock option plans been determined in accordance with SFAS No.
123, total stock-based employee compensation expense, net of tax effects, would
have been $23.5 million, $20.2 million, and $8.0 million for the years ended
2003, 2002, and 2001, respectively, and our pro forma Net income and Earnings
per share for the indicated periods would have been:
2003 2002 2001
----------------------- ----------------------- -----------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
Net income.................. $292,623 $269,086 $235,029 $214,828 $208,967 $200,978
Earnings per share
Basic.................... 2.69 2.47 2.11 1.93 1.84 1.77
Diluted.................. 2.65 2.44 2.07 1.89 1.81 1.74
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
2003 2002 2001
---- ---- ----
Expected dividend yield............................... 2.8% 0.0% 0.0%
Expected stock price volatility....................... 37.0% 32.0% 42.0%
Risk-free interest rate............................... 2.5% 3.7% 4.3%
Expected average life of options (years).............. 6 6 6
ADVERTISING. The Company expenses the production costs of advertising the
first time the advertising takes place. Advertising expense for continuing
operations was $116.0 million, $106.0 million and $95.5 million for the years
2003, 2002 and 2001, respectively.
RECLASSIFICATIONS. We have reclassified certain amounts for prior years to
conform with our presentation for 2003.
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires that
we make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the amounts of revenues and expenses during the
reporting period. Our actual results could differ from those estimates.
Note 2 -- Acquisitions
In the three-year period ended December 31, 2003, we acquired one casino
company, a thoroughbred racetrack facility and the remaining interest in a
nonconsolidated subsidiary. We are accounting for each of the acquisitions as a
purchase. Accordingly, the purchase price is allocated to the underlying assets
acquired and liabilities assumed based upon their estimated fair values at the
date of acquisition. We determine the estimated fair values based on independent
appraisals, discounted cash flows, quoted market prices and estimates made by
management. For each transaction, the allocation of the purchase price was
completed within one year from the date of the acquisition. To the extent that
the purchase price exceeded the fair value of the net identifiable tangible and
intangible assets acquired, such excess was allocated to goodwill. For
acquisitions completed prior to June 30, 2001, goodwill was amortized for
periods of up to forty years. With the adoption of SFAS No. 142 in 2002, we no
longer amortize goodwill or intangible assets that are determined to have an
indefinite life.
Under the provisions of SFAS No. 142, goodwill acquired in a business
combination for which the acquisition date was after June 30, 2001, should not
be amortized; therefore, no goodwill related to the Harveys acquisition was
amortized in 2001. We accounted for the Harveys acquisition under the provisions
of SFAS No. 141, "Business Combinations."
The table below summarizes our acquisition transactions completed in the
three-year period ending December 31, 2003.
Total Number
Date Purchase Goodwill of Geographic
Company Acquired Price (a) Assigned Casinos Location
------- -------- --------- -------- ------- ----------
Harveys Casino Resorts........ July 2001 $712 million $265 million 4 Central City, Colorado(b)
Council Bluffs, Iowa
(2 properties)
Lake Tahoe, Nevada
JCC Holding Company (c)....... June 2002 and $149 million - 1 New Orleans, Louisiana
December 2002
Louisiana Downs, Inc.......... December 2002 $94 million $36 million 1(d) Bossier City, Louisiana
- ---------------------
(a) Total purchase price includes the market value of debt assumed determined
as of the acquisition date and assets that were subsequently sold.
(b) This property was sold in 2003.
(c) Acquired additional 14% interest in June 2002 and the remaining 37%
interest in December 2002.
(d) Acquired a thoroughbred racetrack that was expanded to include slot
machines in 2003.
HARVEYS CASINO RESORTS. On July 31, 2001, we completed our acquisition of
Harveys Casino Resorts ("Harveys"). We paid approximately $294 million for the
equity interests in Harveys, assumed approximately $350 million in outstanding
debt and paid approximately $18 million in acquisition costs. We also assumed a
$50 million contingent liability, which was dependent on the results of a
referendum that was decided by the voters in Pottawattamie County, Iowa, in
November 2002. The referendum, which re-approved gaming at racetracks and on
riverboats for another eight years, passed and we paid an additional $50 million
in acquisition costs in fourth quarter 2002. We financed the acquisition, and
retired Harveys assumed debt, with borrowings under our established debt
programs. The purchase included the Harveys Resort & Casino in Lake Tahoe,
Nevada, the Harveys Casino Hotel and the Bluffs Run Casino, both in Council
Bluffs, Iowa, and the Harveys Wagon Wheel Hotel/Casino in Central City, Colorado
("Harveys Colorado").
In June 2002, the Iowa Supreme Court issued an opinion that has the effect
of reducing the gaming tax rate on gaming revenues earned by casinos at
racetracks operating in the state, including our Bluffs Run Casino. Casinos at
racetracks are taxed at a higher rate (34% in 2003) than the casinos on
riverboats operating in Iowa (20%). The Court ruled this disparity was
unconstitutional. The State appealed the Iowa Supreme Court's decision to the
United States Supreme Court and in June 2003, the United States Supreme Court
overturned the ruling by the Iowa Supreme Court on U.S. constitutional grounds;
however, in February 2004, the Iowa Supreme Court ruled that the state law that
permits the disparity violates the Iowa Constitution. We followed the
instructions of the Iowa Racing and Gaming Commission to pay taxes at the 20%
rate for Bluffs Run. However, given the uncertainty of this situation, we
continued to accrue gaming taxes at the higher rate and have accrued
approximately $24.9 million in state gaming taxes that we may not have to pay.
An additional payment based on a multiple of the calculated annual savings may
be due to Iowa West Racing Association ("Iowa West"), the entity holding the
pari-mutuel and gaming license for the Bluffs Run Casino and with whom we have a
management agreement to operate that property. Any additional payment that may
be due to Iowa West would increase goodwill attributed to the Bluffs Run
property. (See Note 16.)
In second quarter 2003, we sold Harveys Colorado. Harveys Colorado has
been presented in our Consolidated Financial Statements as Discontinued
operations since 2002, and our 2001 results were reclassified to reflect that
property as Discontinued operations. See Note 15 for a discussion of our sale of
Harveys Colorado.
We acquired Harveys to further enhance our geographic distribution and to
strengthen our access to target customers. The results of Harveys' operations
have been included in our Consolidated Financial Statements since the date of
acquisition.
JAZZ CASINO COMPANY. On June 7, 2002, we acquired additional shares of the
common stock of JCC Holding Company, which, together with its subsidiary, Jazz
Casino Company LLC (collectively, "JCC"), owns and operates the Harrah's casino
in New Orleans, Louisiana. The acquisition of these shares increased our
ownership in JCC from 49% to 63% and required a change of our accounting
treatment for our investment in JCC from the equity method to consolidation of
JCC in our financial statements. We began consolidating JCC in our financial
results on June 7, 2002. On December 10, 2002, we acquired all remaining shares
of JCC's stock to increase our ownership to 100%.
We paid $72.4 million ($10.54 per share) for the additional ownership
interest in JCC, acquired approximately $45.8 million of JCC's debt, assumed
approximately $28.2 million of JCC's Senior Notes, which we subsequently
retired, and incurred approximately $2.4 million of acquisition costs. We
financed the acquisition and retired JCC's debt with funds from various sources,
including cash flows from operations and borrowings under established debt
programs.
We acquired the remaining ownership interest in JCC in order to streamline
the decision-making process, which has allowed us to take steps to improve
business at the property more quickly.
LOUISIANA DOWNS. On December 20, 2002, we acquired a controlling interest
in Louisiana Downs, Inc. ("Louisiana Downs") a thoroughbred racetrack in Bossier
City, Louisiana. The agreement gave Harrah's a 95% ownership interest in a
company that now owns both Louisiana Downs and Harrah's Shreveport. In May 2003,
approximately 900 slot machines were put into service and Louisiana Downs became
the only land-based gaming facility in northern Louisiana. We expect to open a
new, permanent facility with approximately 1,400 slot machines during second
quarter 2004.
We paid approximately $94.0 million, including $29.3 million in short-term
notes that were paid in full in January 2003 and $15.0 million in equity
interest in Harrah's Shreveport, for the interest in Louisiana Downs and
approximately $0.5 million of acquisition costs. We financed the acquisition
with funds from various sources, including cash flows from operations and
borrowings under established debt programs. The results of Louisiana Downs'
operations were included in our Consolidated Financial Statements since the date
of acquisition.
HARRAH'S EAST CHICAGO -- BUYOUT OF MINORITY PARTNERS. In second quarter
2003, we paid approximately $28.8 million to former partners in the Harrah's
East Chicago property to settle outstanding litigation with the partners
relating to a buyout in 1999 of the partners' interest in the property and to
terminate the contractual rights of the partners to repurchase an 8.55% interest
in the property. The two remaining minority partners in our East Chicago
property owned, in aggregate, 0.45% of this property. In December 2003 and
January 2004, we acquired these ownership interests for aggregate consideration
of approximately $0.8 million. As a result of these transactions, the East
Chicago property is now wholly owned. (See Notes 15 and 16.)
In addition to these completed transactions, we have announced the
following planned acquisitions.
HORSESHOE. On September 11, 2003, we announced that we had signed a
definitive agreement to acquire Horseshoe Gaming Holding Corporation ("Horseshoe
Gaming") for $1.45 billion, including assumption of debt. A $75 million escrow
payment was made in 2003, and under certain circumstances, this amount will be
forfeited if the acquisition does not close. We expect to finance the
acquisition through working capital, existing credit facilities and/or,
depending on market conditions, the issuance of new debt. The purchase includes
casinos in Hammond, Indiana; Tunica, Mississippi; and Bossier City, Louisiana.
We also announced our intention to sell our Harrah's brand casino in Shreveport
to avoid overexposure in that market, and in January 2004, we announced that we
had an agreement, subject to regulatory approvals, to sell that property to
another gaming company. After consideration of the sale of Harrah's Shreveport,
the Horseshoe acquisition will add a net 107,100 square feet of casino space,
more than 4,360 slot machines and 138 table games to our existing portfolio.
This acquisition will give Harrah's rights to the Horseshoe brand in all of the
United States, except in Nevada. The acquisition, which is subject to regulatory
approvals, is expected to close in first half of 2004. (See Note 16.)
LAS VEGAS HORSESHOE HOTEL AND CASINO. Pursuant to two separate
transactions that we announced in January and February 2004, we will acquire
certain intellectual property assets from Horseshoe Club Operating Company
("Horseshoe Club"), to secure the rights to the Horseshoe brand in Nevada and to
the World Series of Poker brand and tournament, while MTR Gaming Group, Inc.
will acquire the remaining assets of the Binion's Horseshoe Hotel and Casino in
Las Vegas, Nevada, including the right to use the name "Binion's" at the
property, from Horseshoe Club Operating Company. We will operate the hotel and
casino jointly with MTR Gaming on an interim basis. We expect to complete each
of these transactions during the first quarter of 2004. (See Note 16.)
HARRAH'S SHREVEPORT AND LOUISIANA DOWNS. Subsequent to the end of 2003, we
reached an agreement with the minority owners of the company that owns Louisiana
Downs and Harrah's Shreveport to purchase their ownership interest in that
company. The agreement is subject to customary approvals and is expected to be
consummated by the end of first quarter 2004. Any excess of the cost to purchase
the minority ownership above the capital balances will be assigned to goodwill.
(See Note 16.)
Note 3 -- Goodwill and Other Intangible Assets
We adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective
January 1, 2002. SFAS No. 142 provides new guidance regarding the recognition
and measurement of intangible assets, eliminates the amortization of certain
intangibles and requires annual assessments for impairment of intangible assets
that are not subject to amortization.
As a result of our implementation review of the goodwill and other
intangible assets arising from our prior acquisitions, we determined that
impairment charges of $91.2 million, net of tax benefits of $2.8 million, were
required. These charges, which were recorded in first quarter 2002 and are
reported in our Consolidated Statements of Income as a change in accounting
principle, relate to goodwill and the trademark acquired in our 1999 acquisition
of Rio Hotel and Casino, Inc. ("Rio"). Since the acquisition of Rio, competition
had intensified in the market and Rio had greatly reduced its emphasis on
international high-end table games play, a significant component of its business
at the time of the acquisition. We determine the fair value of an operating unit
as a function, or multiple, of earnings before interest, taxes, depreciation and
amortization ("EBITDA"), a common measure used to value and buy or sell cash
intensive businesses such as casinos. The calculated multiple for Rio indicated
that the fair value of the property, based on an EBITDA indicator, fell short of
the carrying value, and recognition of an impairment of $86.0 million of
goodwill was appropriate. The fair value of the Rio trademark was assessed by
applying a "relief from royalty" methodology, which ascribed a value to the
trademark derived as the present value of a percentage of forecasted future
revenues. Because the Rio had not sustained the level of revenues assumed in the
original computation to assign a value to the trademark, future revenue
assumptions were reassessed and it was determined that the fair value of the
trademark was $5.2 million, net of tax benefits of $2.8 million, less than the
carrying value. Rio's tangible assets were assessed for impairment applying the
provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," and our analysis indicated that the carrying value of the
tangible assets was not impaired.
Based on our annual assessment for impairment as of September 30, 2002, we
determined that goodwill and intangible assets with indefinite lives had not
been further impaired. However, based on our annual assessment for impairment of
as September 30, 2003, it was determined that the remaining goodwill associated
with Harrah's Reno was impaired, and a fourth quarter 2003 charge of $6.3
million was recorded. Recent operating trends reflected the weak market
conditions in the Reno area and increased levels of competition from Indian
casinos in the Northern California area. We determined the fair value of Reno as
a multiple of EBITDA, and the calculated EBITDA for Reno indicated that the fair
value of that operating unit was less than the carrying value. Reno has no
remaining intangible assets that will be subject to the annual impairment
assessment. Reno's tangible assets were assessed for impairment applying the
provisions of SFAS No. 144, and our analysis indicated that the carrying value
of the tangible assets was not impaired.
The following tables set forth changes in goodwill for the years ended
December 31, 2002 and December 31, 2003.
Balance at December 31, 2001(a)................................ $875,090
Additions or adjustments.................................... (53,430)
Impairment losses........................................... (86,045)
--------
Balance at December 31, 2002(a)................................ 735,615
Additions or adjustments.................................... (28,168)
Impairment losses........................................... (6,314)
--------
Balance at December 31, 2003................................... $701,133
========
- -----------------------------------------------------
(a) Reflects reclassification of Assets held for sale
The following table provides the gross carrying value and accumulated
amortization for each major class of intangible assets.
December 31, 2003 December 31, 2002
------------------------------------- -------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
----------- ------------ ----------- ----------- ------------ -----------
Amortizing intangible assets:
Contract rights................ $ 63,590 $ 6,572 $ 57,018 $ 63,000 $ 3,853 $ 59,147
Customer relationships......... 13,100 5,023 8,077 13,100 2,944 10,156
----------- ----------- ----------- ----------- ----------- -----------
$ 76,690 $ 11,595 65,095 $ 76,100 $ 6,797 69,303
=========== =========== ----------- =========== =========== -----------
Nonamortizing intangible assets:
Trademarks..................... 146,624 139,624
Gaming rights.................. 103,300 62,300
----------- -----------
249,924 201,924
----------- -----------
Total............................. $ 315,019 $ 271,227
=========== ===========
The aggregate amortization expense for the years ended December 31, 2003
and 2002 for those assets that will continue to be amortized under provisions of
SFAS No. 142 was $4.8 million and $4.5 million, respectively. Estimated annual
amortization expense for those assets for the years ending December 31, 2004,
2005, 2006, 2007 and 2008 is $4.9 million, $4.8 million, $4.5 million, $3.8
million and $3.5 million, respectively.
With the adoption of SFAS No. 142 at the beginning of 2002, we ceased
amortization of goodwill and other intangible assets that were determined to
have an indefinite useful life. The information below depicts our results for
the year ended December 31, 2001, on a pro forma basis, as if SFAS No. 142 had
been implemented at the beginning of that period.
(In thousands, except per share amounts)
Net income $208,967
Add back: Goodwill amortization................................. 19,581
Add back: Trademark amortization................................ 3,080
--------
Adjusted net income..................................... $231,628
========
Basic earnings per share:
Net income.................................................. $ 1.84
Goodwill amortization....................................... 0.17
Trademark amortization...................................... 0.03
--------
Adjusted net income..................................... $ 2.04
========
Diluted earnings per share:
Net income.................................................. $ 1.81
Goodwill amortization....................................... 0.17
Trademark amortization...................................... 0.02
--------
Adjusted net income..................................... $ 2.00
========
Note 4 -- Stockholders' Equity
In addition to its common stock, Harrah's Entertainment has the following
classes of stock authorized but unissued:
Preferred stock, $100 par value, 150,000 shares authorized
Special stock, $1.125 par value, 5,000,000 shares authorized -
Series A Special Stock, 2,000,000 shares designated
Harrah's Entertainment's Board of Directors has authorized that one
special stock purchase right (a "Right") be attached to each outstanding share
of common stock. The Rights are not separable from the shares. These Rights are
exercisable only if a person or group acquires 15% or more of Harrah's
Entertainment common stock or announces a tender offer for 15% or more of the
common stock. Each Right entitles stockholders to buy one two-hundredth of a
share of Series A Special Stock of the Company at an initial price of $130 per
Right. If a person acquires 15% or more of the Company's outstanding common
stock, each Right entitles its holder to purchase common stock of the Company
having a market value at that time of twice the Right's exercise price. Under
certain conditions, each Right entitles its holder to purchase stock of an
acquiring company at a discount. Rights held by the 15% holder will become void.
The Rights will expire on October 5, 2006, unless earlier redeemed by the Board
at one cent per Right.
During the past three years, our Board of Directors has authorized plans
whereby we have purchased shares of the Company's common stock in the open
market from time to time as market conditions and other factors warranted. The
table below summarizes the plans in effect during the last three years.
Number Number of Shares Average
of Shares Purchased as of Price
Plan Authorized Authorized December 31, 2003 Per Share
----------- ----------------- ---------
July 2001................................ 6.0 million 6.0 million $37.15
July 2002................................ 2.0 million 1.4 million 39.24
November 2002............................ 3.0 million 0.5 million 35.87
The November 2002 authorization was to expire December 31, 2003, but it
has been extended until December 31, 2004. The repurchases were funded through
available operating cash flows and borrowings from our established debt
programs.
Under the terms of our employee stock benefit programs, we have reserved
shares of Harrah's Entertainment common stock for issuance under the 2001
Executive Stock Incentive and 2001 Broad-based Incentive Plans. (See Note 13 for
a description of the plans.) The 2001 Executive Stock Incentive Plan is an
equity compensation plan approved by our stockholders and the 2001 Broad-based
Incentive Plan is an equity compensation plan not approved by our stockholders.
The shares held in reserve for issuance or grant under the Harrah's
Entertainment, Inc. 1990 Stock Option Plan and Harrah's Entertainment, Inc. 1990
Restricted Stock Plan (collectively, "Harrah's Former Plans") were transferred
to the 2001 Executive Stock Incentive Plan in 2001. As of December 31, 2003,
1,914,884 shares were authorized and unissued under the 2001 Executive Stock
Incentive Plan and 23,772 shares were authorized and unissued under the 2001
Broad-based Incentive Plan. No additional shares will be authorized under the
2001 Broad-based Incentive Plan. Of the 1,914,884 shares available for grant
under the 2001 Executive Stock Incentive Plan, up to 7,487 of these shares are
available for grants as an award other than an option.
In July and November 2003, the Company declared quarterly cash dividends
of 30 cents per share, payable on August 27, 2003, to stockholders of record as
of the close of business on August 13, 2003, and payable on November 26, 2003,
to stockholders of record on November 12, 2003.
Note 5 -- Detail of Certain Balance Sheet Accounts
Deferred costs and other consisted of the following as of December 31:
2003(a) 2002(a)
-------- --------
Cash surrender value of life insurance (Note 13)...................................... $79,642 $65,109
Casino Reinvestment Development Authority investment bonds and funds on deposit....... 38,935 35,384
Deferred finance charges, net of amortization of $6,185 and $5,573.................... 27,180 17,557
Deferred contract costs............................................................... 22,288 23,371
Other................................................................................. 114,232 92,101
-------- --------
$282,277 $233,522
======== ========
(a) Reflects reclassification of Assets held for sale
Accrued expenses consisted of the following as of December 31:
2003(b) 2002(b)
--------- ---------
Payroll and other compensation........................................................ $106,421 $136,582
Insurance claims and reserves......................................................... 89,349 73,783
Accrued interest payable.............................................................. 45,084 44,638
Accrued taxes......................................................................... 67,180 39,696
Other accruals........................................................................ 155,432 145,657
--------- ---------
$463,466 $440,356
========= =========
- ----------------------------------------------------------
(b) Reflects reclassification of Liabilities held for sale
Note 6 -- Debt
Long-term debt consisted of the following as of December 31:
2003 2002
---------- ----------
Credit facilities
2.3%-3.0% at December 31, 2003, maturities to 2008 ....................... $947,800 $1,285,500
Secured Debt
7.1%, maturity 2028 ...................................................... 93,622 94,900
5.5%-7.3%, maturities to 2033 ............................................ 607 785
Unsecured Senior Notes
5.375%, maturity 2013 .................................................... 496,504 -
7.125%, maturity 2007 .................................................... 498,780 498,425
7.5%, maturity 2009 ...................................................... 498,926 498,713
8.0%, maturity 2011 ...................................................... 496,079 495,525
Unsecured Senior Subordinated Notes
7.875%, maturity 2005 .................................................... 590,524 750,000
Other Unsecured Borrowings
Commercial Paper, maturities to 2004 ..................................... 50,000 139,700
Capitalized Lease Obligations
7.6%-10.0%, maturities to 2006 ........................................... 679 984
---------- ----------
3,673,521 3,764,532
Current portion of long-term debt ............................... (1,632) (1,466)
---------- ----------
$3,671,889 $3,763,066
========== ==========
As of December 31, 2003, aggregate annual principal maturities for the
four years subsequent to 2004 were: 2005, $614.6 million; 2006, $54.2 million;
2007, $605.5 million; and 2008, $819.6 million.
CREDIT AGREEMENT. On April 29, 2003, we entered into an agreement for new
credit facilities (the "Credit Agreement") for up to $1.9625 billion in
borrowings. This Credit Agreement replaced the $1.857 billion credit and letter
of credit facilities that were scheduled to mature in April 2003 ($332 million)
and April 2004 ($1.525 billion). The Credit Agreement matures on April 23, 2008,
and consists of a five-year revolving credit facility for up to $1.0625 billion
and a five-year term reducing facility for up to $900 million. The Credit
Agreement contains a provision that would allow an increase in the borrowing
capacity to $2 billion, if mutually acceptable to the Company and the lenders.
Interest on the Credit Agreement is based on our debt ratings and leverage ratio
and is subject to change. As of December 31, 2003, the Credit Agreement bore
interest based upon 105 basis points over LIBOR and bore a facility fee for
borrowed and unborrowed amounts of 25 basis points. At our option, we may borrow
at the prime rate under the new Credit Agreement. As of December 31, 2003,
$947.8 million in borrowings were outstanding under the Credit Agreement with an
additional $66.5 million committed to back letters of credit. After
consideration of these borrowings, but before consideration of amounts borrowed
under the commercial paper program, $948.2 million of additional borrowing
capacity was available to the Company as of December 31, 2003. (See Note 16.)
INTEREST RATE SWAP AGREEMENTS. The Company may use interest rate swaps to
manage the mix of our debt between fixed and variable rate instruments. We
account for these interest rate swaps in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and all
amendments thereto. SFAS No. 133 requires that all derivative instruments be
recognized in the financial statements at fair value. Any changes in fair value
are recorded in the income statement or in other comprehensive income, depending
on whether the derivative is designated and qualifies for hedge accounting, the
type of hedge transaction and the effectiveness of the hedge. The differences to
be paid or received under the terms of interest rate swap agreements are accrued
as interest rates change and recognized as an adjustment to interest expense for
the related debt. Changes in the variable interest rates to be paid or received
pursuant to the terms of interest rate swap agreements will have a corresponding
effect on future cash flows.
Interest rate swap agreements contain a credit risk that the
counterparties may be unable to meet the terms of the agreements. We minimize
that risk by evaluating the creditworthiness of our counterparties, which are
limited to major banks and financial institutions, and we do not anticipate
nonperformance by the counterparties.
As of December 31, 2003, we were a party to two interest rate swaps for a
total notional amount of $200 million. These interest rate swaps serve to manage
the mix of our debt between fixed and variable rate instruments by effectively
converting fixed rates associated with long-term debt obligations to floating
rates. The major terms of the interest rate swaps are as follows.
Notional
Amount
Type Fixed Variable In millions)
of Rate Rate -----------------
Effective Date Hedge Received Received 2003 2002 Maturity Date
- -------------- ----- -------- -------- ---- ---- -------------
Dec. 29, 2003 Fair value 7.875% 6.968% $ 50 $ - Dec. 15, 2005
Dec. 29, 2003 Fair value 7.875% 6.972% 150 - Dec. 15, 2005
The Company's interest rate swaps qualify for the "shortcut" method
allowed under SFAS No. 133, which allows for an assumption of no
ineffectiveness. As such, there is no income statement impact from changes in
the fair value of the hedging instruments. The net effect of the above swaps to
2003 interest expense was immaterial.
Subsequent to the end of 2003, we entered into two additional swap
agreements for a total notional amount of $300 million, $100 million of which
will expire in 2005 and $200 million of which will expire in 2007. These
interest rate swaps also qualify for the "shortcut" method and serve to manage
the mix of our debt between fixed and variable rate instruments by effectively
converting fixed rates associated with long-term debt obligations to floating
rates.
COMMERCIAL PAPER. To provide the Company with cost-effective borrowing
flexibility, we have a $200 million commercial paper program that is used to
borrow funds for general corporate purposes. Although the debt instruments are
short-term in tenor, they are classified as long-term debt because the
commercial paper is backed by our Credit Agreement, and we have committed to
keep available capacity under our Credit Agreement in an amount equal to or
greater than amounts borrowed under this program. At December 31, 2003, $50
million was outstanding under this program.
ISSUANCE OF NEW DEBT. In addition to our Credit Agreement, we have issued
debt and entered into credit agreements to provide the Company with
cost-effective borrowing flexibility and to replace short-term, floating-rate
debt with long-term, fixed-rate debt. The table below summarizes the face value
of debt obligations entered into during the last three years and outstanding at
December 31, 2003.
Face Value
Outstanding at
December 31,
Debt Issued Matures 2003
---- ---------------- ------- -------------
(In millions)
Commercial Paper.......................... 2003 2004 $ 50.0
5.375% Senior Notes....................... December 2003 2013 500.0
8.0% Senior Notes......................... January 2001 2011 500.0
7.125% Senior Notes....................... June 2001 2007 500.0
EXTINGUISHMENTS OF DEBT. Funds from the new debt discussed above, as well
as proceeds from our Credit Agreement, were used to retire certain of our
outstanding debt, in particular those debt obligations assumed in our
acquisition transactions, to reduce our effective interest rate and/or lengthen
maturities. The following table summarizes the debt obligations, in addition to
our previous credit and letter of credit facilities that we have retired over
the last three years:
Face
Date Value
Issuer Retired Debt Extinguished Retired
------ ------- ----------------- -------------
(In millions)
Harrah's Operating Co......... December 2003 Senior Subordinated Notes due 2005 $ 147.1
Harrah's Operating Co......... August 2003 Senior Subordinated Notes due 2005 12.4
JCC........................... December 2002 Senior Notes due 2008 28.2
Harveys....................... September 2001 10.625% Senior Subordinated Notes due 2006 150.0
Showboat...................... August 2001 13% Senior Subordinated Notes due 2009 2.1
Harveys....................... July 2001 Credit facility due 2004 192.0
In July 2003, our Board of Directors authorized the Company to retire,
from time to time through cash purchases, portions of our outstanding debt in
open market purchases, privately negotiated transactions or otherwise. These
repurchases will be funded through available cash from operations, borrowings
from our Credit Agreement and our new Senior Notes. Such repurchases will depend
on prevailing market conditions, the Company's liquidity requirements,
contractual restrictions and other factors. As of December 31, 2003, $159.5
million of our 7 7/8% Senior Subordinated Notes had been retired under this
authorization.
Charges of $19.1 million representing premiums paid and write-offs of
unamortized deferred financing costs associated with the early retirement of
portions of our 7 7/8% Senior Subordinated Notes and of our previous credit and
letter of credit facilities were recorded in 2003. In compliance with SFAS No.
145, these charges no longer qualify for presentation as extraordinary items and
are, therefore, included in income from continuing operations on our
Consolidated Statements of Income.
PARENT COMPANY GUARANTEE OF SUBSIDIARY DEBT. Harrah's Operating Company,
Inc. ("HOC"), a 100% owned subsidiary and the principal asset of Harrah's
Entertainment, is the issuer of certain debt securities that have been
guaranteed by Harrah's Entertainment. Due to the comparability of HOC's
consolidated financial information with that of Harrah's Entertainment, complete
separate financial statements and other disclosures regarding HOC have not been
presented. Management has determined that such information is not material to
holders of HOC's debt securities. Harrah's Entertainment has no independent
assets or operations, its guarantee of HOC's debt securities is full and
unconditional and its only other subsidiary is minor. There are no significant
restrictions on Harrah's Entertainment's ability to obtain funds from its
subsidiaries by dividends or loans. In addition, the amount of consolidated
retained earnings representing undistributed earnings of 50-percent-or-less
owned persons accounted for under the equity method is less than 0.5 percent and
there are no significant restrictions on the payment of dividends by the
Company.
FAIR MARKET VALUE. Based on the borrowing rates available as of December
31, 2003, for debt with similar terms and maturities and market quotes of our
publicly traded debt, the fair value of our long-term debt at December 31 was as
follows:
December 31,
------------------------------------------------------
2003 2002
------------------------ --------------------------
Carrying Market Carrying Market
Value Value Value Value
----------- ----------- ----------- -----------
(In millions)
Outstanding debt $ (3,673.5) $ (3,977.8) $ (3,764.5) $ (4,031.6)
Interest rate swaps (used for hedging purposes) 0.2 0.2 - -
Note 7 -- Leases
We lease both real estate and equipment used in our operations and
classify those leases as either operating or capital leases following the
provisions of SFAS No. 13, "Accounting for Leases." At December 31, 2003, the
remaining lives of our operating leases ranged from one to forty-two years, with
various automatic extensions totaling up to sixty years.
Rental expense associated with operating leases for continuing operations
is charged to expense in the year incurred and was included in the Consolidated
Statements of Income as follows:
2003 2002 2001
-------- -------- --------
Noncancelable
Minimum............... $40,252 $32,866 $20,929
Contingent............ 3,898 4,726 3,510
Sublease.............. (201) (287) (602)
Other.................... 15,643 37,058 30,633
-------- -------- --------
$59,592 $74,363 $54,470
======== ======== ========
Our future minimum rental commitments as of December 31, 2003, were as
follows:
Noncancelable
Operating
Leases
-------------
2004................................................................. $ 42,966
2005................................................................. 36,204
2006................................................................. 34,636
2007................................................................. 33,073
2008................................................................. 30,612
Thereafter........................................................... 450,908
-----------
Total minimum lease payments...................................... $628,399
===========
In addition to these minimum rental commitments, certain of these
operating leases provide for contingent rentals based on a percentage of
revenues in excess of specified amounts.
Note 8 -- Write-downs, Reserves and Recoveries
Our operating results include various pretax charges to record asset
impairments, contingent liability reserves, project write-offs and recoveries at
time of sale of previously recorded reserves for asset impairment. The
components of write-downs, reserves and recoveries for continuing operations
were as follows:
2003 2002 2001
-------- -------- --------
Impairment of goodwill ................................................... $ 6,315 $ - $ -
Impairment of long-lived assets .......................................... 2,469 1,501 8,203
Write-off of abandoned assets and other costs ............................ 2,615 6,300 7,271
Settlement of sales tax contingency ...................................... (923) (6,464) -
Charge for structural repairs at Reno .................................... - 5,000 -
Termination of contracts ................................................. - 168 -
Recoveries from previously impaired assets and reserved amounts .......... - (1,968) (571)
Reserves for New Orleans casino .......................................... - - 2,322
-------- -------- --------
$10,476 $ 4,537 $17,225
======== ======== ========
We account for the impairment of long-lived assets to be held and used by
evaluating the carrying value of the long-lived assets in relation to the
operating performance and future undiscounted cash flows of the underlying
operating unit when indications of impairment are present. Long-lived assets to
be disposed of are evaluated in relation to the estimated fair value of such
assets less costs to sell.
Note 9 -- Income Taxes
Our federal and state income tax provision/(benefit) allocable to our
Consolidated Statements of Income and our Consolidated Balance Sheets line items
was as follows:
2003 2002 2001
--------- --------- ---------
Income from continuing operations before income taxes and
minority interests ............................................ $155,568 $174,445 $107,747
Discontinued operations .......................................... 16,993 23,684 18,977
Cumulative effect of change in accounting principle .............. - (2,831) -
Stockholders' equity
Unrealized gain/(loss) on available-for-sale securities ....... 215 (239) 772
Compensation expense for tax purposes in excess of
amounts recognized for financial reporting purposes ........ (15,537) (23,970) (18,013)
Other ......................................................... - 800 (800)
--------- --------- ---------
$157,239 $171,889 $108,683
========= ========= =========
Income tax expense attributable to Income from continuing operations
before income taxes and minority interests consisted of the following:
2003 2002 2001
--------- -------- ---------
United States
Current
Federal ..... $112,325 $122,923 $(2,589)
State ....... 15,221 23,369 7,860
Deferred ....... 29,715 28,153 102,476
Other countries
Current ........ - - -
Deferred ....... (1,693) - -
--------- -------- ---------
$155,568 $174,445 $107,747
========= ======== =========
The differences between the statutory federal income tax rate and the
effective tax rate expressed as a percentage of Income from continuing
operations before income taxes and minority interests were as follows:
2003 2002 2001
---- ---- ----
Statutory tax rate .............................. 35.0% 35.0% 35.0%
Increases/(decreases) in tax resulting from:
State taxes, net of federal tax benefit ..... 2.7 3.0 1.8
Goodwill amortization ....................... 0.5 - 2.1
Tax credits ................................. (0.5) (0.4) (0.5)
Political contributions ..................... 0.1 0.1 0.1
Officers' life insurance .................... (1.1) 0.2 0.3
Meals and entertainment ..................... 0.1 0.3 0.4
Minority interests in partnership earnings .. (1.0) (1.0) (1.5)
Other ....................................... 0.5 (0.1) (1.1)
---- ---- ----
Effective tax rate ....................... 36.3% 37.1% 36.6%
==== ==== ====
The components of our net deferred tax balance included in our
Consolidated Balance Sheets were as follows:
2003 2003
--------- ---------
Deferred tax assets
Compensation programs ........................ $59,495 $55,566
Bad debt reserve ............................. 18,912 20,094
Self-insurance reserves ...................... 8,758 6,051
Deferred income .............................. 502 468
Project opening costs ........................ 9,750 20,819
Net operating losses ......................... 18,008 16,316
Other ........................................ 41,226 29,074
Valuation allowance .......................... (14,211) (14,211)
--------- ---------
142,440 134,177
========= =========
Deferred tax liabilities
Property ..................................... (283,406) (219,352)
Management contracts ......................... (19,983) (20,947)
Intangibles .................................. (90,519) (75,109)
Investments in nonconsolidated affiliates .... (10,883) (20,771)
--------- ---------
(404,791) (336,179)
--------- ---------
Net deferred tax liability ................ $(262,351) $(202,002)
========= =========
Note 10 -- Supplemental Cash Flow Information
The increase in cash and cash equivalents due to the changes in long-term
and working capital accounts was as follows:
2003 2002 2001
-------- --------- ---------
Long term accounts
Deferred costs and other .................... $(71,068) $ (36,737) $ 69,057
Deferred credits and other .................. 54,432 32,836 (83,281)
-------- --------- ---------
Net change in long-term accounts ........ $(16,636) $ (3,901) $ (14,224)
======== ========= =========
Working capital accounts
Receivables ................................. $ (8,005) $ 14,295 $ 14,853
Inventories ................................. (1,311) 869 3,292
Prepayments and other ....................... 50,355 82,415 28,725
Accounts payable ............................ 5,910 (2,308) (16,988)
Accrued expenses ............................ (92,645) (149,133) 72,634
-------- --------- ---------
Net change in working capital accounts .. $(45,696) $ (53,862) $ 102,516
======== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR INTEREST AND TAXES. The following
table reconciles our Interest expense, net of interest capitalized, as reported
in the Consolidated Statements of Income, to cash paid for interest.
2003 2002 2001
--------- --------- ---------
Interest expense, net of interest capitalized .......... $ 234,419 $ 240,220 $ 255,801
Adjustments to reconcile to cash paid for interest
Net change in accruals ............................. (9,201) (6,825) (33,869)
Amortization of deferred finance charges ........... (6,185) (5,573) (4,769)
Net amortization of discounts and premiums ......... (1,141) (1,596) (913)
--------- --------- ---------
Cash paid for interest, net of amount capitalized ...... $ 217,892 $ 226,226 $ 216,250
========= ========= =========
Cash payments for income taxes, net of refunds ......... $ 114,289 $ 145,873 $ (27,974)
========= ========= =========
Note 11 -- Commitments and Contingencies
CONTRACTUAL COMMITMENTS. We continue to pursue additional casino
development opportunities that may require, individually and in the aggregate,
significant commitments of capital, up-front payments to third parties,
guarantees by Harrah's Entertainment of third-party debt and development
completion guarantees.
We may guarantee all or part of the debt incurred by Indian tribes, with
which we have entered into a management contract, to fund development of casinos
on the Indian lands. For all existing guarantees of Indian debt, we have
obtained a first lien on certain personal property (tangible and intangible) of
the casino enterprise. There can be no assurance, however, that the value of
such property would satisfy our obligations in the event these guarantees were
enforced. Additionally, we have received limited waivers from the Indian tribes
of their sovereign immunity to allow us to pursue our rights under the contracts
between the parties and to enforce collection efforts as to any assets in which
a security interest is taken. The aggregate outstanding balance as of December
31, 2003, of Indian debt that we have guaranteed was $112.9 million. The
outstanding balance of all of our debt guarantees at December 31, 2003 is $120.8
million. Our maximum obligation under all of our debt guarantees is $152.9
million. Our obligations under these debt guarantees extend through January
2008.
Some of our guarantees of the debt for casinos on Indian lands were
modified during 2003, triggering the requirements under Financial Accounting
Standards Board Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," to recognize a liability for the estimated fair value of those
guarantees. Liabilities, representing the fair value of our guarantees, and
corresponding assets, representing the portion of our management fee receivable
attributable to our agreements to provide the related guarantees, were recorded
and are being amortized over the lives of the related agreements. We estimate
the fair value of the obligation by considering what premium would have been
required by us or by an unrelated party. The amounts recognized represent the
present value of the premium in interest rates and fees that would have been
charged to the tribes if we had not provided the guarantees. The unamortized
balance of the liability for the guarantees and of the related assets at
December 31, 2003, was $7.0 million.
Excluding debt guarantees and guarantees related to New Orleans (see Note
14), as of December 31, 2003, we had commitments and contingencies of $285.4
million, including construction-related commitments.
The agreements under which we manage casinos on Indian lands contain
provisions required by law which provide that a minimum monthly payment be made
to the tribe. That obligation has priority over scheduled payments of borrowings
for development costs and over the management fee earned and paid to the
manager. In the event that insufficient cash flow is generated by the operations
of the Indian-owned properties to fund this payment, we must pay the shortfall
to the tribe. Subject to certain limitations as to time, such advances, if any,
would be repaid to us in future periods in which operations generate cash flow
in excess of the required minimum payment. These commitments will terminate upon
the occurrence of certain defined events, including termination of the
management contract. As of December 31, 2003, the aggregate monthly commitment
for the minimum guaranteed payments pursuant to these contracts, which extend
for periods of up to 83 months from December 31, 2003, is $1.2 million. The
maximum exposure for the minimum guaranteed payments to the tribes is unlikely
to exceed $26.7 million as of December 31, 2003.
SEVERANCE AGREEMENTS. As of December 31, 2003, the Company has severance
agreements with 34 of its senior executives, which provide for payments to the
executives in the event of their termination after a change in control, as
defined. These agreements provide, among other things, for a compensation
payment of 1.5 to 3.0 times the executive's average annual compensation, as
defined, as well as for accelerated payment or accelerated vesting of any
compensation or awards payable to the executive under any of Harrah's
Entertainment's incentive plans. The estimated amount, computed as of December
31, 2003, that would be payable under the agreements to these executives based
on the compensation payments and stock awards aggregated approximately $103.7
million. The estimated amount that would be payable to these executives does not
include an estimate for the tax gross-up payment, provided for in the
agreements, that would be payable to the executive if the executive becomes
entitled to severance payments which are subject to a federal excise tax imposed
on the executive.
SELF-INSURANCE. We are self-insured for various levels of general
liability, workers' compensation and employee medical coverage. Insurance claims
and reserves include accruals of estimated settlements for known claims, as well
as accruals of actuarial estimates of incurred but not reported claims.
Note 12 -- Litigation
We are involved in various inquiries, administrative proceedings and
litigation relating to contracts, acquisitions and sales of property and other
matters arising in the normal course of business. While any proceeding or
litigation has an element of uncertainty, management believes that the final
outcome of these matters will not have a material adverse effect on our
consolidated financial position or our results of operations.
Note 13 -- Employee Benefit Plans
We have established a number of employee benefit programs for purposes of
attracting, retaining and motivating our employees. The following is a
description of the basic components of these programs.
STOCK OPTION PLANS. Our employees may be granted options to purchase
shares of common stock under the Harrah's Entertainment 2001 Executive Stock
Incentive Plan or the 2001 Broad-based Incentive Plan (collectively, "SOP").
Grants typically vest in equal installments over a three-year period and allow
the option holder to purchase stock over specified periods of time, generally
seven to ten years from the date of grant, at a fixed price equal to the market
value at the date of grant. No options may be granted under the SOP after May
2011.
A summary of activity of the 2001 Executive Stock Incentive Plan and
Harrah's former plans, which are equity compensation plans approved by our
stockholders, for 2001, 2002 and 2003 is as follows:
Number of Common Shares
-----------------------------
Weighted Avg.
Exercise Price Options Available
(Per Share) Outstanding For Grant
-------------- ----------- ----------
Balance -- December 31, 2000 .................... $21.08 12,755,798 1,441,747
Additional shares authorized ................. N/A - 3,900,000
Restricted shares issued ..................... N/A - (40,521)
Restricted shares transferred from Harrah's
former plans .............................. N/A - 766,509
Restricted shares canceled ................... N/A - 328,685
Granted ...................................... 26.39 774,075 (774,075)
Exercised .................................... 17.07 (3,240,426) -
Canceled ..................................... 23.29 (1,596,869) 1,596,869
Rio plans cancellations ...................... 17.16 (8,800) -
----------- ----------
Balance -- December 31, 2001 .................... 22.65 8,683,778 7,219,214
Restricted shares issued ..................... N/A - (221,931)
Restricted shares canceled ................... N/A - 78,091
Granted ...................................... 46.80 2,910,560 (2,910,560)
Exercised .................................... 19.40 (2,510,678) -
Canceled ..................................... 30.96 (267,063) 267,063
Rio plans cancellations ...................... 18.88 (2,000) -
----------- ----------
Balance -- December 31, 2002 .................... 31.30 8,814,597 4,431,877
Restricted shares issued ..................... N/A - (60,061)
Restricted shares canceled ................... N/A - 101,934
Granted ...................................... 43.18 2,968,175 (2,968,175)
Exercised .................................... 20.65 (1,754,901) -
Canceled ..................................... 40.06 (409,309) 409,309
Rio plans cancellations ...................... 12.44 (3,400) -
----------- ----------
Balance -- December 31, 2003 .................... 36.54 9,615,162 1,914,884
=========== ==========
Of the 1,914,884 shares available for grant at December 31, 2003, up to
7,487 of these shares are available for grant as awards other than as stock
options.
The following tables summarize additional information regarding the
options outstanding at December 31:
2003 2002 2001
--------- --------- ---------
Options exercisable at December 31................ 2,910,617 2,344,106 2,955,787
Weighted average fair value per share of options
granted per year.............................. $ 28.63 $ 17.34 $ 12.33
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contract Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------- ----------- ----- ----- ----------- ------
$13.84 - $28.90 4,075,483 6.0 years $25.27 2,234,272 $23.19
31.22 - 43.50 2,773,971 6.3 years 42.91 24,070 35.14
45.44 - 49.32 2,765,708 5.5 years 46.77 652,275 47.04
--------- ---------
9,615,162 2,910,617
========= =========
150,000 shares were authorized under the 1996 Non-Management Directors
Stock Incentive Plan, whereby the director can receive either 50% or 100% of his
or her director fees in stock. As of December 31, 2003, 17,417 shares were
available for grant under this plan.
200,000 shares were authorized for issuance under the 2001 Broad-based
Incentive Plan, which was established in 2001 and is an equity compensation plan
not approved by stockholders. No additional shares will be authorized under the
2001 Broad-based Incentive Plan. A summary of activity of this plan is as
follows:
Weighted Number of Common Shares
Average --------------------------
Exercise Price Options Available
(Per Share) OUTSTANDING FOR GRANT
----------- ----------- ---------
Balance - December 31, 2001 ..... N/A - 200,000
Granted ...................... $47.03 196,775 (196,775)
Canceled ..................... 47.03 (7,100) 7,100
-------- --------
Balance - December 31, 2002 ..... 47.03 189,675 10,325
Granted ...................... 43.50 22,367 (22,367)
Canceled ..................... 46.73 (35,814) 35,814
-------- --------
Balance - December 31, 2003 ..... 46.64 176,228 23,772
======== ========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contract Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- -------- ----------- ---------- -------- ----------- --------
$37.41 - $44.89 19,336 6.0 years $ 43.50 - -
44.89 - 52.37 156,892 5.2 years 47.03 54,918 $47.03
------- ------
176,228 54,918
======= ======
RESTRICTED STOCK. Employees may be granted shares of common stock under
the SOP. Restricted shares granted under the SOP are restricted as to transfer
and subject to forfeiture during a specified period or periods prior to vesting.
The shares generally vest in equal installments over a period of three years. No
awards of restricted shares may be made under the current plan after May 2011.
The compensation arising from a restricted stock grant is based upon the market
price at the grant date. Such expense is deferred and amortized to expense over
the vesting period.
The Company has issued Time Accelerated Restricted Stock Award Plan
("TARSAP") awards to certain key executives. The initial TARSAP program was
completed in January 2002. During 2001, 2002 and 2003, additional TARSAP awards
were issued to certain key executives, which will vest on January 1, 2007, if
the executive continues in active employment until that date. These shares are
eligible for earlier annual vesting beginning in 2003 over four years (three
years for shares awarded in 2002) based on the Company's financial performance
in each of the years 2002 through 2005, and the remaining unvested shares will
vest on January 1, 2007. The expense arising from TARSAP awards is being
amortized to expense over the periods in which the restrictions lapse.
The number and weighted average grant-date fair value of restricted shares
granted, and the amortization expense recognized, during 2003, 2002 and 2001,
including the TARSAP awards, were as follows:
2003 2002 2001
---------- ---------- ----------
Number of shares granted 60,061 221,931 72,876
Weighted average grant price per share $ 45.29 $ 43.77 $ 31.00
Amortization expense (in millions) $ 8.0 $ 7.8 $ 8.2
Unvested shares as of December 31 1,021,720 1,458,617 1,783,535
SAVINGS AND RETIREMENT PLAN. We maintain a defined contribution savings
and retirement plan, which, among other things, allows pretax and after-tax
contributions to be made by employees to the plan. Under the plan, participating
employees may elect to contribute up to 20% of their eligible earnings. Through
2003, the Company fully matched the first six percent of employees'
contributions; however, effective January 1, 2004, the Company match will be 50%
for the first six percent of employees' contributions. Amounts contributed to
the plan are invested, at the participant's direction, in up to fourteen
separate funds, including a Harrah's company stock fund. Participants become
vested in the matching contribution over five years of credited service. Our
contribution expense for this plan was $30.1 million, $29.2 million and $26.6
million in 2003, 2002 and 2001, respectively.
DEFERRED COMPENSATION PLANS. Harrah's maintains deferred compensation
plans, (collectively, "DCP") and an Executive Supplemental Savings Plan ("ESSP")
under which certain employees may defer a portion of their compensation. Amounts
deposited into these plans are unsecured liabilities of the Company. Amounts
deposited into DCP earn interest at rates approved by the Human Resources
Committee of the Board of Directors. The ESSP is a variable investment plan,
which allows employees to direct their investments by choosing from several
investment alternatives. The total liability included in Deferred credits and
other for these plans at December 31, 2003 and 2002 was $104.3 million and $86.4
million, respectively. In connection with the administration of one of these
plans, we have purchased company-owned life insurance policies insuring the
lives of certain directors, officers and key employees.
MULTI-EMPLOYER PENSION PLAN. We have approximately 6,850 employees covered
under collective bargaining agreements, and the majority of those employees are
covered by union sponsored, collectively bargained multi-employer pension plans.
We contributed and charged to expense $7.2 million, $4.7 million and $4.5
million in 2003, 2002 and 2001, respectively, for such plans. The plans'
administrators do not provide sufficient information to enable us to determine
our share, if any, of unfunded vested benefits.
Note 14 -- Nonconsolidated Affiliates
As of December 31, 2003, our investments in nonconsolidated affiliates
consisted primarily of interests in a horse-racing facility and in our joint
ventures that are pursuing development of casinos in the United Kingdom. We also
own an interest in a golf course near Harrah's Tunica, which is currently held
for sale (see Note 15). In 2003, we contributed $4.3 million to the United
Kingdom ventures.
Previously, we held investments in JCC and National Airlines, Inc.
("NAI"), and these nonconsolidated affiliates are discussed below.
JCC. On June 7, 2002, we acquired additional shares of the common stock of
JCC, which increased our ownership in JCC to 63% and required a change of our
accounting treatment for our investment in JCC from the equity method to
consolidation of JCC in our financial statements. On December 10, 2002, we
acquired all remaining shares of JCC's stock to increase our ownership to 100%.
Prior to June 7, 2002, the Company had a minority ownership interest (and
noncontrolling board representation) in JCC, and a subsidiary of the Company
managed the casino.
The Company has guaranteed an annual payment obligation of JCC owed to the
State of Louisiana of $60 million for the twelve-month period ending March 31,
2004, and for each of the subsequent two twelve-month periods. We expect to
extend this guarantee for an additional year to end March 31, 2007.
As a result of JCC's filing for bankruptcy on January 4, 2001, we assessed
the recoverability of our investment in and advances to JCC, determined that our
investment and advances were impaired and recorded a charge of $220 million to
recognize the impairment in fourth quarter 2000. We did not record our share of
JCC's operating results in first quarter 2001 since we did not have any
contractual obligation to fund JCC's operating losses from December 31, 2000,
until the bankruptcy reorganization plan was consummated effective March 29,
2001. JCC reported income during the period in which we did not record any
equity pick-up, primarily as a result of the forgiveness of debt arising from
the bankruptcy plan, and the charge that we recorded in fourth quarter 2000
included the write-off of receivables that we held from JCC that were forgiven
in the reorganization plan. In the bankruptcy reorganization, we received
ownership of 49 percent of the equity of the reorganization entity and resumed
recording our share of JCC's results in second quarter 2001 and continued until
we began consolidating JCC's results in June 2002.
NATIONAL AIRLINES, INC. Until June 2001, we had an approximate 48%
ownership interest in NAI, which filed a voluntary petition for reorganization
relief under Chapter 11 of the U.S. Bankruptcy Code in December 2000. In June
2001, we abandoned all rights to our shares of NAI stock and stock purchase
warrants.
NAI ceased operations in November 2002, after unsuccessfully attempting to
restructure in bankruptcy court. We had provided a letter of credit on behalf of
NAI, which we were required to fund in January 2003. We had an agreement with
another investor of NAI whereby that investor was obligated to reimburse us for
approximately 56% of amounts that we funded under the letter of credit and that
we had previously funded under another letter of credit. During second quarter
2001, a subsidiary of the Company filed a lawsuit against the other investor for
breach of contract due to the investor's failure to reimburse the Company for
his share of the $8.6 million we paid against the first letter of credit. A
judgment was entered in our favor but was appealed by the investor. In fourth
quarter 2002, we reached a settlement with the investor that also included the
extinguishment of the investor's potential liability on the letter of credit
that was funded in January 2003, as well as the judgment. As a result of our
settlement with the investor and our funding of the letter of credit following
NAI's cessation of operations, we recorded a charge of $6.1 million in fourth
quarter 2002.
COMBINED FINANCIAL INFORMATION. The following summarized balance sheet and
statement of operations information has been compiled from financial reports for
the periods and dates indicated submitted to us by our nonconsolidated
affiliates which we accounted for using the equity method.
2003 2002 2001(a)
-------- -------- ---------
Combined Summarized Balance Sheet Information
Current assets ........................................ $ 11,455 $ 1,865 $ 50,273
Land, buildings and equipment, net .................... 32,648 33,002 167,617
Other assets .......................................... 554 2,005 50,022
-------- -------- ---------
Total assets ........................................ 44,657 36,872 267,912
-------- -------- ---------
Current liabilities ................................... 8,645 6,769 34,224
Long-term debt ........................................ 16,890 17,514 122,896
Other liabilities ..................................... - - 3,607
-------- -------- ---------
Total liabilities ................................... 25,535 24,283 160,727
-------- -------- ---------
Net assets ........................................ $ 19,122 $ 12,589 $ 107,185
======== ======== =========
Combined Summarized Statement of Operations Information
Revenues .............................................. $ 14,330 $135,648 270,229
Operating (loss)/income ............................... (265) 23,517 (15,403)
Extraordinary items ................................... - - 213,448
Net (loss)/income ..................................... (2,309) 9,390 90,640
(a) 2001 is comprised primarily of JCC.
Our Investments in and advances to nonconsolidated affiliates are
reflected in our accompanying Consolidated Balance Sheets as follows:
2003 2002
------ ------
Investments in and advances to nonconsolidated affiliates
Accounted for under the equity method ..................... $6,360 $2,770
Accounted for at historical cost .......................... 177 177
Available-for-sale and recorded at market value ........... - 386
------ ------
$6,537 $3,333
====== ======
In accordance with the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," we adjust the carrying value of our
available-for-sale equity investments to include unrealized gains or losses. A
corresponding adjustment is recorded in the combination of our stockholders'
equity and deferred income tax accounts.
Note 15 -- Dispositions
The following properties were sold during 2003. The operating results of
these properties and the losses recorded on these sales are presented in our
Consolidated Statements of Income as Discontinued operations and prior year
results have been reclassified to conform to the 2003 presentation.
HARVEYS COLORADO. On May 22, 2003, we sold Harveys Colorado, which we had
concluded was a nonstrategic asset for us. The assets sold consisted primarily
of inventories, property and equipment. The buyer also assumed certain accrued
liabilities. We received cash proceeds of $17.6 million and recorded a pretax
loss of $1.0 million on this sale.
Revenues at Harveys Colorado, reported in Discontinued operations for
December 31, 2003, 2002 and 2001 were $12.2 million, $35.7 million and $19.3
million respectively. Harveys Colorado's pretax loss, including the loss on the
sale, for the year ended December 31, 2003, was $1.4 million and its pretax
income for the years ended December 31, 2002 and 2001, was $2.4 million and $1.0
million, respectively.
HARRAH'S VICKSBURG. On June 30, 2003, we announced an agreement to sell
Harrah's Vicksburg, and that sale was completed on October 27, 2003. The assets
sold consisted primarily of land, buildings, equipment and inventories. We
received cash proceeds of $28.6 million and recorded a pretax loss of $0.7
million on this sale.
Revenues at Harrah's Vicksburg, which are reported in Discontinued
operations, were $29.0 million for the year ended December 31, 2003, $37.9
million for the year ended December 31, 2002 and $41.3 million for the year
ended December 31, 2001. Harrah's Vicksburg's pretax income, after consideration
of the loss on the sale, was $2.4 million for the year ended December 31, 2003,
$2.2 million for the year ended December 31, 2002 and $1.7 million for the year
ended December 31, 2001.
In addition to these completed sales, we also have announced the following
planned sales.
HARRAH'S SHREVEPORT. In conjunction with our plans to acquire Horseshoe
Gaming, we announced plans to sell our Harrah's brand casino in Shreveport to
avoid overexposure in that market, and in January 2004, we announced that we
have an agreement, subject to regulatory approvals, to sell that property to
another gaming company. The sale is subject to regulatory approvals and is
expected to close in second quarter 2004. We have classified this property in
Assets held for sale on our Consolidated Balance Sheets and have ceased
depreciating its assets. Shreveport's assets consist primarily of land
improvements, buildings, riverboat and equipment with a
carrying value of approximately $165 million. Since the Horseshoe Gaming
acquisition will give us a continued presence in the Shreveport-Bossier City
market, Harrah's Shreveport's operating results have not been classified as
discontinued operations. We do not anticipate a material gain or loss on this
sale.
HARRAH'S EAST CHICAGO AND HARRAH'S TUNICA. In September 2004, we entered
into an agreement to sell the assets and certain related liabilities of Harrah's
East Chicago and Harrah's Tunica to an unrelated third party. The sale, which is
subject to regulatory approvals, is expected to close in the first quarter of
2005. We believe that the sale of these two properties may help facilitate the
closing of the Caesars transaction (see Note 16).
Harrah's East Chicago and Harrah's Tunica are classified in
Assets/Liabilities held for sale on our Consolidated Balance Sheets, and we
ceased depreciating their assets in September 2004. Results for Harrah's East
Chicago and Harrah's Tunica are classified as discontinued operations for all
periods presented. We expect to report a gain on the sale of these two
properties in the quarter in which the transaction closes.
Summary operating results for the discontinued operations are as follows:
2003 2002 2001
-------- -------- --------
Net revenues .................................. $373,857 $350,661 $331,043
======== ======== ========
Pretax income from discontinued operations .... $ 47,523 $ 63,112 $ 51,509
======== ======== ========
Discontinued operations, net of tax ........... $ 30,890 $ 41,023 $ 33,459
======== ======== ========
Assets held for sale and liabilities related to assets held for sale for
Harrah's East Chicago and Harrah's Tunica are as follows:
2003 2002
--------- ---------
Cash and cash equivalents ................................... $ 12,000 $ 12,000
Inventories ................................................. 741 782
Property and equipment, net ................................. 257,020 258,296
Goodwill .................................................... 206,372 177,218
Investments in and advances to nonconsolidated affiliates ... 1,464 1,560
Deferred costs and other .................................... 198 219
--------- ---------
Total assets held for sale ............................. $ 477,795 $ 450,075
========= =========
Accrued expenses ............................................ $ (76) $ (49)
--------- ---------
Total liabilities related to assets held for sale ...... $ (76) $ (49)
========= =========
Note 16 -- Subsequent Events
ACQUISITIONS
Caesars Entertainment. On July 14, 2004, we signed a definitive agreement to
acquire Caesars Entertainment, Inc. ("Caesars") in a cash and stock transaction.
Under the terms of the agreement, Caesars stockholders will receive either
$17.75 in cash or 0.3247 shares of Harrah's Entertainment's common stock for
each outstanding share of Caesars' common stock, subject to limitations on the
aggregate amount of cash to be paid and shares of stock to be issued. Caesars
stockholders will be able to elect to receive solely shares of Harrah's
Entertainment's common stock or cash, to the extent available pursuant to the
terms of the agreement. The aggregate estimated purchase price, calculated as of
July 14, 2004, was approximately $9.4 billion. The purchase price will fluctuate
until closing due to changes in the number of outstanding shares of Caesars'
stock and the balance of Caesars' outstanding debt. Caesars operates 28 casinos
with about two million square feet of gaming space and approximately 26,000
hotel rooms and has significant presence in Las Vegas, Atlantic City and
Mississippi. The transaction is subject to regulatory and stockholders' approval
and is expected to close during the second quarter of 2005.
Horseshoe Gaming. On July 1, 2004, we acquired 100 percent of the equity
interests of Horseshoe Gaming for approximately $1.56 billion, including
assumption of debt valued at approximately $558 million and acquisition costs. A
$75 million escrow payment that was made in 2003 was applied to the purchase
price. We issued a redemption notice on July 1, 2004, for all $558 million of
Horseshoe's outstanding 8 5/8% Senior Subordinated Notes due July 2009 and
retired that debt August 2, 2004. We financed the acquisition and the debt
retirement through working capital and established debt programs. We purchased
Horseshoe Gaming to acquire three properties and with the intention of growing
and developing the Horseshoe brand. The purchase included casinos in Hammond,
Indiana; Tunica, Mississippi; and Bossier City, Louisiana.
In anticipation of our acquisition of Horseshoe Gaming, we sold our
Harrah's brand casino in Shreveport, Louisiana. After consideration of the sale
of Harrah's Shreveport, the Horseshoe Gaming acquisition added a net 107,100
square feet of casino space and approximately 4,360 slot machines and 140 table
games to our existing portfolio. Taken together with our acquisition of
intellectual property rights from Horseshoe Club, this acquisition gave us
rights to the Horseshoe brand in all of the United States. The results of the
Horseshoe properties have been included with our operating results subsequent to
their acquisition on July 1, 2004.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. The purchase price
allocation is in process and will be completed within one year of the
acquisition; thus, the allocation of the purchase price is subject to
refinement.
(In millions) At July 1, 2004
---------------
Current assets ................................. $ 89.8
Land, buildings, riverboats and equipment ...... 600.0
Long-term assets ............................... 16.9
Intangible assets .............................. 478.0
Goodwill ....................................... 523.9
--------
Total assets acquired ..................... l,708.6
--------
Current liabilities ............................ (85.1)
Long-term debt ................................. (558.1)
--------
Total liabilities assumed ................. (643.2)
--------
Net assets acquired ................... $1,065.4
========
Of the estimated $478 million of acquired intangible assets, $295 million
has been preliminarily assigned to gaming rights and $89 million has been
assigned to trademarks, both of which are not subject to amortization. The
remaining intangible assets include customer relationships estimated at $84
million (15 year weighted-average useful life) and contract rights estimated at
$10 million (four year estimated life). The weighted average useful life of all
the amortizing intangible assets is approximately 14 years.
We anticipate that the goodwill related to the Horseshoe acquisition will
be deductible for tax purposes.
Las Vegas Horseshoe Hotel and Casino. In March 2004, we acquired certain
intellectual property assets, including the rights to the Horseshoe brand in
Nevada and to the World Series of Poker brand and tournament, from Horseshoe
Club. MTR Gaming Group, Inc. ("MTR Gaming") acquired the assets of the Binion's
Horseshoe Hotel and Casino ("Las Vegas Horseshoe") in Las Vegas, Nevada,
including the right to use the name "Binion's" at the property, from Horseshoe
Club. We will operate Las Vegas Horseshoe jointly with a subsidiary of MTR
Gaming for one year, with options to extend the agreement for two additional
years; however, we have notified MTR Gaming that we do not intend to extend the
agreement. The property, which had been closed since January 2004, reopened
April 1, 2004. Since its reopening, the operating results for Las Vegas
Horseshoe have been consolidated with our results and will continue to be
consolidated as long as the operating agreement is in effect.
We paid approximately $43.0 million for the intellectual property assets,
including assumption and subsequent payment of certain liabilities of Las Vegas
Horseshoe (which included certain amounts payable to a
principal of Horseshoe Gaming) and approximately $5.7 million of acquisition
costs. The purchase price allocation is in process and will be completed by the
end of 2004. It is anticipated that the intangible assets acquired in this
transaction will be deemed to have indefinite lives and will, therefore, not be
amortized. We financed the acquisition with funds from various sources,
including cash flows from operations and borrowings from established debt
programs.
Harrah's Shreveport and Louisiana Downs - Buyout of Minority Partners. In first
quarter 2004, we paid approximately $37.5 million to the minority owners of the
company that owned Louisiana Downs and Harrah's Shreveport to purchase their
ownership interest in that company. The excess of the cost to purchase the
minority ownership above the capital balances was assigned to goodwill. As a
result of this transaction, Harrah's Shreveport and Louisiana Downs became
wholly owned by the Company. Harrah's Shreveport was subsequently sold to
another gaming company.
DISPOSITIONS
Harrah's Tunica and Harrah's East Chicago. In September 2004, we entered into an
agreement to sell the assets and certain related liabilities of Harrah's East
Chicago and Harrah's Tunica to an unrelated third party. The sale, which is
subject to regulatory approvals, is expected to close in the first quarter of
2005. We believe that the sale of these two properties may help facilitate the
closing of the Caesars transaction. Harrah's East Chicago and Harrah's Tunica
are classified in Assets/Liabilities held for sale on our Consolidated Balance
Sheets, and we ceased depreciating their assets in September 2004. Results for
Harrah's East Chicago and Harrah's Tunica are classified as discontinued
operations for all periods presented (see Note 15).
Harrah's Shreveport. We completed the sale of Harrah's Shreveport to another
gaming company in May 2004 (see Note 15). The gain from the sale was not
material.
DEBT
Credit Agreement. At December 31, 2003, we had credit facilities (the "Credit
Agreement") that provided for up to $1.9625 billion in borrowings, consisted of
a five-year revolving credit facility for up to $1.0625 billion and a five-year
term reducing facility for up to $900 million and matured on April 23, 2008. In
June 2004, the Credit Agreement was amended to convert the $1.0625 billion
revolving credit facility and $900 million term reducing facility to a $2.5
billion revolving credit facility, to reduce the interest rate and to extend the
maturity to April 2009. The amendment also contains a provision that would allow
an increase in the borrowing capacity to $3.0 billion, if mutually acceptable to
the Company and the lenders. Interest on the Credit Agreement is based on our
debt ratings and leverage ratio and is subject to change.
Registration of Senior Notes. In June 2004, we issued $750 million of 5.5%
Senior Notes due in 2010 in a Rule 144A private placement. We exchanged the 5.5%
Senior Notes with the fully registered 5.5% Senior Notes in October 2004.
During December 2003, we issued $500 million of 5.375% Senior Notes due in 2013
in a Rule 144A private placement. We exchanged the 5.375% Senior Notes with the
fully registered 5.375% Senior Notes in June 2004.
OTHER
In April 2004, the Iowa legislature passed legislation to effectively settle
issues regarding the disparity between gaming tax rates for casinos at
racetracks and casinos on riverboats. The new legislation provides for a tax
rate of 22% for both riverboats and racetracks effective July 1, 2004. However,
racetracks have the option to conduct table games and video games by paying a
$10 million fee to the State and a gaming tax rate of 24%. We are currently
evaluating the timing of when we will add table games to the Bluffs Run
facility. Prior to this legislation and due the uncertainty of this situation,
we continued to accrue gaming taxes at the higher rate and accrued approximately
$20.3 in state gaming taxes that we did not have to pay. Accruals related to
Iowa gaming taxes were adjusted in second quarter 2004.
In accordance with previous agreements and as additional purchase price
consideration, a payment of approximately $73 million, based on a multiple of
the calculated annual savings, was made to Iowa West Racing Association ("Iowa
West"), the entity holding the pari-murual and gaming license for the Bluffs Run
Casino and with whom we have a management agreement to operate that property.
The additional payment to Iowa West increased goodwill attributed to the Bluffs
Run property. The payment to Iowa West assumed we will operate table games at
Bluffs Run and pay a 24% tax rate; however, Iowa West has taken the position
that the purchase price adjustment should be based on a tax rate of 22%, which
would result in an additional $12 million payment to Iowa West. If an additional
payment is required, it will increase goodwill attributed to this property. We
anticipate that the issue will be resolved by arbitration.
Note 17 -- Quarterly Results of Operations (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
(In thousands, except per share amounts)
2003 (1)
Revenues .............................. $ 964,976 $ 990,256 $ 1,043,412 $ 950,221 $ 3,948,865
Income from operations ................ 175,134 176,674 203,228 123,739 678,775
Income from continuing operations ..... 70,323 73,619 89,029 28,093 261,064
Net income ............................ 81,080 76,684 99,483 35,376 292,623
Earnings per share -- basic(3)
From continuing operations ......... 0.65 0.68 0.82 0.25 2.40
Net income ......................... 0.75 0.71 0.91 0.32 2.69
Earnings per share -- diluted(3)
From continuing operations ......... 0.64 0.66 0.80 0.25 2.36
Net income ......................... 0.74 0.69 0.90 0.32 2.65
2002 (2)
Revenues .............................. $ 874,479 $ 925,143 $ 1,025,265 $ 922,979 $ 3,747,866
Income from operations ................ 178,279 186,516 211,722 132,188 708,705
Income from continuing operations ..... 72,161 74,977 89,939 45,135 282,212
Net income/(loss) ..................... (6,008) 86,116 101,042 53,879 235,029
Earnings per share -- basic(3)
From continuing operations ......... 0.67 0.66 0.81 0.41 2.54
Net income/(loss) .................. (0.05) 0.76 0.91 0.49 2.11
Earnings per share -- diluted(3)
From continuing operations ......... 0.66 0.65 0.79 0.40 2.48
Net income/(loss) .................. (0.05) 0.75 0.89 0.48 2.07
(1) 2003 Second Quarter includes $4.1 million in pretax charges for project
opening costs and $2.1 million pretax charges for early retirement of
debt; Third Quarter reflects a reclass of a $0.1 million charge for loss
on sale of ownership interests in a nonconsolidated affiliate to Income
from operations; and Fourth Quarter includes $15.9 million pretax charges
for early retirement of a portion of the 7 7/8% Senior Subordinated Notes
and $6.3 million pretax charge for goodwill impairment at our Reno
property. 2003 results reflect Harrah's Vicksburg, Harveys Colorado,
Harrah's Tunica and Harrah's East Chicago as discontinued operations.
(2) 2002 First Quarter includes a charge of $91.2 million, net of tax benefit
of $2.8 million, related to a change in accounting principle; Second
Quarter includes the financial results of Jazz Casino Company LLC from the
date of our acquisition of a majority ownership interest on June 7, 2002;
and Fourth Quarter includes $5.0 million in pretax charges for
write-downs, reserves and recoveries and a reclass of a $6.1 million
pretax charge for our exposure under a letter of credit issued on behalf
of National Airlines, Inc. to Income from operations. 2002 results have
been reclassified to reflect Harrah's Vicksburg, Harrah's Tunica and
Harrah's East Chicago as discontinued operations.
(3) The sum of the quarterly per share amounts may not equal the annual amount
reported, as per share amounts are computed independently for each quarter
and for the full year.
Schedule II
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<Table>
Additions
---------------------
Charged
Balance at to Costs Charged Deductions Balance
Beginning and to Other from at End
Description of Period Expenses Accounts Reserves of Period
- ----------- ---------- --------- -------- ----------- ----------
YEAR ENDED DECEMBER 31, 2003
Allowance for doubtful accounts
Current................................................... $ 55,860 $ 4,950 $ 81 $ (9,425)(a) $ 51,466
========== ========= ========= ========= =========
Long-term................................................. $ 155 $ -- $ -- $ (75) $ 80
========== ========= ========= ========= =========
Liability to sellers under acquisition agreement(b)............ $ 25,641 $ -- $ -- $ (1,147) $ 24,494
========== ========= ========= ========= =========
Reserve for structural repairs(c).............................. $ 5,000 $ -- $ 147 $ (2,064) $ 3,083
========== ========= ========= ========= =========
YEAR ENDED DECEMBER 31, 2002
Allowance for doubtful accounts
Current(d)................................................ $ 60,149 $ (2,521) $ 8,225(e) $ (9,993)(a) $ 55,860
========== ========= ========= ========= =========
Long-term................................................. $ 24,989 $ -- $ -- $(24,834)(f) $ 155
========== ========= ========= ========= =========
Liability to sellers under acquisition agreement(b)............ $ 26,220 $ -- $ -- $ (579) $ 25,641
========== ========= ========= ========= =========
Reserve for structural repairs(c).............................. $ -- $ 5,000 $ -- $ -- $ 5,000
========== ========= ========= ========= =========
YEAR ENDED DECEMBER 31, 2001
Allowance for doubtful accounts
Current(d)................................................ $ 48,435 $ 4,999 $ 10,937(g) $ (4,222)(a) $ 60,149
========== ========= ========= ========= =========
Long-term................................................. $ 156 $ -- $ 24,833(f) $ -- $ 24,989
========== ========= ========= ========= =========
Reserve against investments in and advances to
nonconsolidated affiliates(h)................................ $ 249,850 $ -- $(24,833)(f) $(225,017) $ --
========== ========= ========= ========= =========
Liability to sellers under acquisition agreement(b)............ $ 25,925 $ -- $ 295(i) $ -- $ 26,220
========== ========= ========= ========= =========
</Table>
- ---------------
(a) Uncollectible accounts written off, net of amounts recovered.
(b) We acquired Players International, Inc., ("Players") in March 2000. In
1995, Players acquired a hotel and land adjacent to its riverboat gaming
facility in Lake Charles, Louisiana, for cash plus future payments to the
seller based on the number of passengers boarding the riverboat casinos
during a defined term. In accordance with the guidance provided by APB 16
regarding the recognition of liabilities assumed in a business combination
accounted for as a purchase, Players estimated the net present value of
the future payments to be made to the sellers and recorded that amount as
a component of the total consideration paid to acquire these assets. Our
recording of this liability in connection with the purchase price
allocation process following the Players acquisition was originally
reported in 2000. The long-term portion of this liability is included in
Deferred credits and other on our Consolidated Balance Sheets; the current
portion of this obligation is included in Accrued expenses on our
Consolidated Balance Sheets.
(c) During 2002, we discovered that water leaks had caused considerable damage
to a hotel tower at our property in Reno, Nevada. Following an initial
assessment of the extent of the damage, our design and construction
department (assisted by third-party experts), estimated that the costs to
repair the damage would total approximately $5 million.
(d) 2001 and 2002 amounts have been restated to reflect Harrah's Vicksburg and
Harrah's Shreveport as assets held for sale. See Note 15 to our
Consolidated Financial Statements.
(e) 2002 Charged to Other Accounts consists primarily of the balance acquired
from our acquisition and consolidation of JCC Holding Company in our
financial statements. 2002 Charged to Other Accounts also includes
re-established accounts that had been previously deemed uncollectible.
(f) In 2000, National Airlines, Inc. ("NAI") filed for Chapter 11 Bankruptcy,
and we recorded write-offs and reserves for our investment in and loans to
NAI and our estimated net exposure under letters of credit issued on
behalf of NAI. In June 2001, we abandoned all rights to our equity
ownership interest in NAI and removed the investment balance and
associated reserves from our balance sheet. Since we no longer held an
equity investment in NAI, we transferred our reserve balance related to
NAI to a long-term receivable and an associated allowance for doubtful
accounts. In 2002, we removed the receivable and associated allowance from
our general ledger.
(g) 2001 Charges to Other Accounts consists primarily of balances acquired
from our acquisition of Harveys Casino Resorts on July 31, 2001.
(h) See Note 14 to our Consolidated Financial Statements.
(i) 2001 Charges to Other Accounts represents the true-up of our liability to
sellers under the Players acquisition agreement. See Note (b) above.