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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
COMMISSION FILE NO. 1-10410
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HARRAH'S ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE I.R.S. NO. 62-1411755
(State of Incorporation) (I.R.S. Employer Identification No.)
5100 WEST SAHARA AVENUE, SUITE 200
LAS VEGAS, NEVADA 89146
(Address of principal executive offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (702) 579-2300
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Capital Stock, Par Value $0.10 per share* NEW YORK STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
PACIFIC EXCHANGE
PHILADELPHIA STOCK EXCHANGE
7 7/8% Senior Subordinated Notes Due 2005 of Harrah's NEW YORK STOCK EXCHANGE
Operating Company, Inc.**
7 1/2% Senior Notes Due 2009 of Harrah's Operating NEW YORK STOCK EXCHANGE
Company, Inc.**
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* Common Capital Stock also has special stock purchase rights listed on each
of the same exchanges
** Securities guaranteed by Registrant
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of January 31, 2000, based upon the
closing price of $19 15/16 for the Common Stock on the New York Stock Exchange
on that date, was $2,436,362,400.
As of January 31, 2000, the Registrant had 123,423,321 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders, which will be filed within 120 days after the end of the fiscal
year, are incorporated by reference into Part III hereof and portions of the
Company's Annual Report to Stockholders for the year ended December 31, 1999
(the "Annual Report") are incorporated by reference into Parts I and II hereof.
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
Harrah's Entertainment, Inc., a Delaware corporation, is the leading
consumer marketing company in the gaming industry, and operates casinos in more
markets than any other casino company. (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.) Formerly
named The Promus Companies Incorporated ("Promus"), we were incorporated on
November 2, 1989 and on June 30, 1995, changed our name to Harrah's
Entertainment, Inc., after the spin-off of our hotel business into a separate
public company.
We conduct our business through a wholly-owned subsidiary, Harrah's
Operating Company, Inc. ("HOC") (formerly named Embassy Suites, Inc.
("Embassy")), and through HOC's subsidiaries. Our principal asset is the stock
of HOC, which holds, directly or indirectly through subsidiaries, substantially
all of the assets of our businesses. Our principal executive offices are located
at 5100 West Sahara Avenue, Suite 200, Las Vegas, Nevada 89146, telephone
(702) 579-2300.
On January 1, 1999, we completed our merger with Rio Hotel & Casino, Inc.
("Rio"). Rio owns and operates the Rio Hotel & Casino, an all-suite hotel and
casino located in Las Vegas, Nevada, as well as the Rio Secco Golf Club in
nearby Seven Hills, Nevada. In connection with the merger, we issued
approximately 25 million shares of our common stock and assumed Rio's
outstanding debt of $435 million face amount. During second quarter 1999, we
redeemed all $225 million face amount of Rio's 10 5/8% Senior Subordinated Notes
due 2005 and 9 1/2% Senior Subordinated Notes due 2007, and we retired Rio's
revolving credit facility scheduled to mature in 2003 (collectively, the "Rio
Debt").
In January 1999, we issued $500 million of 7 1/2% Senior Notes due 2009 and
used the net proceeds to reduce amounts outstanding under our revolving credit
facility scheduled to mature in 2000 (the "Previous Facility"). In April 1999,
we consummated new revolving credit and letter of credit facilities (the "Bank
Facility") in the amount of $1.6 billion. See "Management's Discussion and
Analysis--Debt and Liquidity" on page 29 of the Annual Report. This page is
incorporated into this document by reference. Proceeds from the Bank Facility
were used to retire the Previous Facility and the Rio Debt.
In February 1999, we consummated an agreement with our partners owning the
other 45% interest in Showboat Marina Casino Partnership ("SMCP"), which owns
our East Chicago casino property, to increase our ownership interest in SMCP to
99.55%. Partnership agreements were amended to give us greater flexibility in
operating this property, and in March 1999 it was rebranded from a "Showboat" to
a "Harrah's" casino. Also in March 1999, we redeemed all $150 million of SMCP's
13 1/2% First Mortgage Notes due 2009.
In April 1999, we announced plans to sell our interests in the Star City
casino in Sydney, Australia to TABCORP Holdings Limited ("TABCORP"), an
Australia-based company, in connection with that company's intention to offer to
acquire the issued and outstanding shares of Star City Holdings Ltd ("SCHL"). In
fourth quarter 1999, we engaged in a series of transactions in which we divested
our outstanding shares and options of SCHL, and the disposition of our
management contract for the Star City casino was completed in January 2000.
In July 1999, we announced that we had reached an agreement to sell the
Showboat Las Vegas casino. We expect the sale to close by the end of first
quarter 2000, subject to certain conditions, including regulatory approval. This
property was determined to be a non-strategic asset at the time of the Showboat
acquisition.
In August 1999, we relocated our corporate headquarters and moved our senior
corporate executives and their support staffs to Las Vegas, Nevada. Our national
service headquarters remains in Memphis, Tennessee. We believe that the
relocation of our corporate headquarters to the epicenter of
1
the casino industry will improve our business by expanding our knowledge base of
the gaming market, enhancing our product and service innovation, fueling our
corporate development and increasing our visibility and accessibility to
important industry, political and customer constituencies. We further believe
that expanding our presence in the world's largest casino marketplace will
benefit our entire national distribution network and will enhance our ability to
attract and retain the highest quality gaming industry executives.
In August 1999, we announced the signing of a definitive agreement to
acquire Players International, Inc. ("Players"). Under the terms of the
agreement, Players' shareholders will receive $8.50 in cash for each share
outstanding and we will assume approximately $150 million of Players' debt. We
expect to fund the acquisition through our Bank Facility. Players stockholders
approved the proposed merger at a special stockholders meeting held October 28,
1999, however, the transaction is subject to various conditions, including
regulatory approvals. In January 2000 we successfully completed a consent
solicitation to an amendment to the Indenture governing Players' 10 7/8% Senior
Notes due 2005, conditioned upon closing of the Players acquisition, which will
allow the merger to take place without creating a default under the Indenture.
Players operates a dockside riverboat casino on the Ohio River in
Metropolis, Illinois, two cruising riverboat casinos in Lake Charles, Louisiana,
two dockside riverboat casinos in Maryland Heights, Missouri, and a horse
racetrack in Paducah, Kentucky. Since March 1997, Players and Harrah's have
jointly operated a landside hotel and entertainment facility at our St.
Louis-Riverport property in Maryland Heights.
Prior to entering into the agreement with us, Players terminated a
previously announced merger agreement with another gaming company. As a result
of the termination of that agreement, Players paid a $13.5 million break-up fee
pursuant to that agreement's terms. In connection with our agreement with
Players, we agreed to provide the funds necessary to make this payment. Players
must reimburse us for this advance, plus pay an additional termination fee
should certain events occur resulting in the termination of our agreement with
Players. The funds we have advanced are a component of the total purchase price
we will pay for Players.
We expect our acquisition of Players to close by the end of March 2000.
In September 1999, we announced that we had signed a contract with the Ak
Chin Indian Community to continue management of the Harrah's Ak Chin Casino near
Phoenix, Arizona for another five years after the expiration of our original
management agreement at the end of 1999. The new agreement is subject to various
regulatory approvals, and contemplates an extension of the Community's compact
with the state of Arizona, which expires in 2003. The existing management
agreement has been temporarily extended through July 1, 2000 (on the new
financial terms) while regulatory approvals are obtained. In addition, the Tribe
announced a planned expansion of the facility to include a new 150-room hotel,
an additional restaurant, meeting and banquet room facilities, a resort pool and
a landscaped courtyard.
In October 1999, the new Harrah's New Orleans Casino, the exclusive
land-based casino entertainment facility in New Orleans, Louisiana opened. One
of our subsidiaries owns approximately 43% of the equity in JCC Holding Company,
a publicly-traded company which owns the casino, and another of our subsidiaries
manages the casino pursuant to a management agreement. JCC Holding is the
successor to the operations of Harrah's Jazz Company pursuant to a plan of
reorganization under Chapter 11 of the Bankruptcy Code. In November 1995,
Harrah's Jazz Company and its wholly-owned subsidiary, Harrah's Jazz Finance
Corp., filed petitions for relief under Chapter 11. In April 1996, Harrah's Jazz
Company filed a plan of reorganization and later filed several subsequent
amendments to the plan (the "Plan"). The Bankruptcy Court confirmed the Plan as
modified on October 13, 1998, and the Plan was consummated on October 30, 1998.
See "Casino Entertainment--Land-Based Casinos--New Orleans" on pages 6 through 8
for recent developments concerning the New Orleans casino.
2
In November 1999, we announced an agreement with the Eastern Band of
Cherokee Indians to extend our management contract for the Harrah's Cherokee
Smoky Mountains casino for another two years after its expiration in November
2002.
Operating data for the three most recent fiscal years is set forth on page
23 of the Annual Report. This page of the Annual Report is incorporated into
this document by reference.
For information on operating results and a discussion of those results, see
"Management's Discussion and Analysis--Operating Results and Development Plans"
on pages 23 through 28 of the Annual Report. These pages are incorporated into
this document by reference.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. Certain information included in this
Annual Report on Form 10-K and other materials filed or to be filed by the
Company with the Securities and Exchange Commission ("SEC") (as well as
information included in oral statements or other written statements made or to
be made by the Company) contains statements that are forward looking. These
include statements relating to the following activities, among others: (A)
operations and expansions of existing properties, including future performance,
anticipated scope and opening dates of expansions; (B) planned construction or
development of casinos and hotels that would be owned or managed by the Company
and the pursuit of strategic acquisitions; (C) planned capital expenditures for
2000 and beyond; (D) the impact of the WINet and Total Gold Programs; and (E)
any future impact of the Showboat acquisition, the Rio merger or the planned
acquisition of Players. These activities involve important factors that could
cause actual results to differ materially from those expressed in any forward
looking statements made by or on behalf of the Company. These include, but are
not limited to, the following factors as well as other factors described from
time to time in the Company's reports filed with the SEC: construction factors,
including zoning issues, environmental restrictions, soil and water conditions,
weather and other hazards, site access matters and building permit issues;
access to available and feasible financing; regulatory, licensing and other
governmental approvals, third party consents and approvals, and relations with
partners, owners and other third parties; conditions of credit markets and other
business and economic conditions, including international and national economic
problems; litigation, judicial actions and political uncertainties, including
gaming legislative action, referenda and taxation; and effects of competition,
including locations of competitors and operating and marketing competition. Any
forward looking statements are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
3
CASINO ENTERTAINMENT
GENERAL
Our casino business commenced operations in 1937 and is unique among casino
entertainment companies in its broad geographic diversification. At year end, we
operated casino hotels in the five traditional U.S. gaming markets of Reno, Lake
Tahoe, Las Vegas and Laughlin, Nevada and Atlantic City, New Jersey. We also
operated a riverboat casino in East Chicago, Indiana; dockside casinos in
Joliet, Illinois, Vicksburg and Tunica, Mississippi, Shreveport, Louisiana, and
St. Louis and North Kansas City, Missouri; and casinos on three Indian
reservations, one near Phoenix, Arizona, one near Topeka, Kansas and one in
Cherokee, North Carolina. We also operated the Rio Hotel & Casino in Las Vegas,
Nevada and Showboat casinos in Las Vegas, Nevada (which we have reached
agreement to sell) and Atlantic City, New Jersey. In November 1999, we completed
the sale of our equity interests in the Star City casino in Sydney, Australia to
a third party, and in January 2000 we sold our management contract for the
casino.
As of December 31, 1999, we operated a total of approximately 1,180,000
square feet of casino space, 33,794 slot machines, 1,044 table games, 11,760
hotel rooms or suites, approximately 281,286 square feet of convention space, 86
restaurants, 34 snack bars, ten showrooms and five cabarets.
We continued in 1999 to implement our Total Gold program, a fully integrated
national player recognition and rewards program that connects player activity
and provides rewards across all Harrah's properties. During 1999, we embarked on
the next stage of our strategy with the launch of the tiered customer loyalty
card program--Total Diamond, Total Platinum and Total Gold--to reward customers
for choosing our casinos. We have obtained four U.S. patents covering the
technology associated with the Total Gold program. Underpinning Harrah's Total
Gold program is a database management system exclusive to the Company, The
Winners Information Network system, or WINet (U.S. Patent Pending), which
enhances the advantages of our geographic distribution and links all of our
domestic Harrah's brand locations.
The Company's marketing strategy is currently designed to appeal primarily
to those customers who are avid, experienced players, especially those who play
in more than one market. Our strategic direction is focused on establishing
well-defined brand identities that communicate and deliver a consistent message
of high quality and excellent service.
LAND-BASED CASINOS
ATLANTIC CITY
The Harrah's Atlantic City casino hotel is situated on 35.8 acres in the
Marina area of Atlantic City and at year end had approximately 86,100 square
feet of casino space with 2,826 slot machines and 83 table games. It consists of
three 16-story hotel towers with 278 suites and 896 rooms and adjoining low rise
buildings which house the casino space and the 26,100 square foot convention
center. The facilities include seven restaurants, an 800-seat showroom, a health
club with swimming pool, customer parking for 3,085 cars, including a
substantial portion in a parking garage, and a 1,600-space employee/ valet
parking lot. The property also has a 63-slip marina. We also own 174 acres of
wetlands in the Brigantine area and parcels totaling 6.2 acres in Atlantic City
outside the Marina area.
The Mardi Gras-themed Atlantic City Showboat is located on 21 acres of land
on the Boardwalk next to the Trump Taj Mahal and currently has approximately
102,000 square feet of casino gaming space containing 3,744 slot machines and 75
table games. The hotel and casino also has seven restaurants, two lounges and
snack bars, a shopping center, a 60-lane bowling center, a 346-seat showroom and
a total of 800 hotel rooms (including 69 suites). There are 3,046 parking spaces
available.
4
Most of Harrah's Atlantic City's and Atlantic City Showboat's customers
arrive by car or bus from within a 150-mile radius which includes Philadelphia,
New York and northern New Jersey, the casinos' primary feeder markets.
LAS VEGAS
Harrah's Las Vegas is located on approximately 17.7 acres on the Las Vegas
Strip and consists of a 15-floor hotel tower, a 23-floor hotel tower, two
35-floor hotel towers, and adjacent low-rise buildings which house a 25,000
square foot convention center and the casino. The hotel has 2,467 regular rooms
and 146 suites. The Harrah's Las Vegas complex has approximately 86,700 square
feet of casino space, with 1,819 slot machines and 75 table games. Also included
are six restaurants, four snack bars, the 525-seat Commander's Theatre, a
367-seat cabaret, an arcade, a health club and a heated pool. There are 2,720
parking spaces available, including a substantial portion in a self-park garage.
The Rio Hotel & Casino is situated adjacent to Interstate 15 near the heart
of the Las Vegas Strip and has approximately 110,000 square feet of casino
gaming space containing 2,368 slot machines, 106 table games including a premium
gaming area, poker, keno and race and sports book. The carnival and Mardi
Gras-themed hotel and casino also has 2,548 hotel suites, including
approximately 1,500 suites contained in the three interconnected 21-story
"Ipanema Towers," approximately 1,000 suites in the 41-story "Masquerade Tower"
and nine luxury Palazzo Suites in a complex adjoining the casino. In addition,
the facility contains 13 restaurants, four coffee bars, a 737-seat entertainment
complex, a 32,000 square-foot shopping area, and a 108,000 square foot outdoor
entertainment area featuring a landscaped sand beach and three swimming pools.
There are 6,293 parking spaces available, including self-parking and valet. Rio
also owns the Rio Secco Golf Club in nearby Seven Hills, Nevada.
In October 1997, Rio, having acquired or contracted to acquire 43 acres of
land adjacent to the Rio, announced the New Rio Master Plan. Most of the first
phase of the New Rio Master Plan is completed, including a state-of-the-art
convention and entertainment center, a complex of nine luxury Palazzo Suites, a
restaurant serving authentic Chinese food, a valet parking structure, an
expanded outdoor area with an additional swimming pool; additional exhibition
space in the Masquerade Village; an expansion of the Shutters premium gaming
lounge; the creation of a concierge suite level in the Ipanema and Masquerade
Towers; an expansion of the Rio's spa; and additional parking. Subsequent phases
of the New Rio Master Plan are in the conceptual stage. The timetable, theme and
cost of the subsequent phases have not yet been established and there can be no
assurance that the balance of the New Rio Master Plan will be implemented.
In first quarter 1999, Rio began construction of a showroom complex as an
addition to its existing entertainment venues. The showroom will include a 1,500
seat, state-of-the-art theater with a balcony, a three-level lobby with
hospitality center, and a theater promenade with approximately 10,000 square
feet of retail space. Completion is scheduled for second quarter 2000. Rio also
is constructing a road across some of its recently acquired properties that will
provide an additional east/west conduit for Las Vegas residents and tourists.
Rio has agreed with Clark County, Nevada to deed the roadway acreage to Clark
County upon its completion in exchange for other Clark County acreage and
reimbursement of a portion of the construction costs.
The primary feeder markets for Harrah's Las Vegas are the Midwest,
California and Canada. For Rio, the primary feeder markets are Southern
California, the Southwest and Asia.
We have entered into an agreement to sell the Showboat Las Vegas casino,
which was determined to be a non-strategic asset at the time of the Showboat
acquisition. We expect the sale to close by the end of first quarter 2000,
subject to certain conditions, including regulatory approval.
5
LAKE TAHOE
Harrah's Lake Tahoe is situated on 23 acres near Lake Tahoe and consists of
an 18-story tower and adjoining low-rise building which house approximately
66,500 square feet of casino space, with 1,668 slot machines and 84 table games,
and an 18,000 square foot convention center. The casino hotel, with 78 suites
and 453 luxury rooms, has seven restaurants, two snack bars, the 688-seat South
Shore Showroom, a 50-seat cabaret, a health club, retail shops, a heated pool
and an arcade. The facility has customer parking for 854 cars in a garage and
1,098 additional spaces in an adjoining lot.
We also operate Bill's Lake Tahoe Casino, which is located on a 2.1 acre
site adjacent to Harrah's Lake Tahoe. The casino includes approximately 18,000
square feet of casino space, with 579 slot machines and 18 table games, and one
restaurant.
The primary feeder market for both casinos is California.
RENO
Harrah's Reno, situated on approximately five acres, consists of a casino
hotel complex with a 24-story structure, an approximate 15,450 square foot
convention center and 57,000 square feet of casino space, with 1,536 slot
machines and 70 table games. The facilities include two hotel towers, with 934
rooms and 24 suites, the 420-seat Sammy's Showroom, a pool, a health club and an
arcade. The property has six restaurants, including a Planet Hollywood
restaurant and lounge owned and operated by a non-affiliated restaurant company.
The complex can accommodate guest parking for 1,661 cars, including a valet
parking garage, a self-park garage and off-site valet parking. In June 1999, we
purchased properties adjacent to Harrah's Reno and are demolishing the existing
buildings on the site, where we plan to develop a plaza area. Other long-term
plans for the site are being considered.
The primary feeder markets for Harrah's Reno are northern California, the
Pacific Northwest and Canada.
LAUGHLIN
Harrah's Laughlin is located in Laughlin, Nevada on a 44.9 acre site in a
natural cove on the Colorado River and features a hotel with 1,480 standard
rooms and 99 suites, a 378-seat showroom, a 3,164-seat outdoor amphitheater,
five restaurants and two snack bars, including a McDonald's and a Baskin Robbins
which are operated by non-affiliated companies. Harrah's Laughlin has
approximately 47,000 square feet of casino space, with 1,170 slot machines and
41 table games, and approximately 5,000 square feet of convention center space.
The facility has customer parking for 2,604 cars, including a covered parking
garage, and a park for recreational vehicles. Other amenities include a health
club, swimming pools, an arcade and retail shops. It is the only property in
Laughlin with a developed beachfront on the River.
The casino's primary feeder markets are the Los Angeles and Phoenix
metropolitan areas.
NEW ORLEANS
On October 28, 1999, the new Harrah's New Orleans Casino opened. A
subsidiary of the Company owns approximately 43% of the equity in JCC Holding
Company, a publicly-traded company which owns the casino, and another subsidiary
manages the casino pursuant to a management agreement. The casino includes
100,000 square feet of gaming space with approximately 2,900 slot machines and
120 table games including live poker, a 250-seat buffet, two parking garages,
and approximately 10,000 square feet of multi-function, special event, food
service and meeting-room space on the first floor of the premises. The casino
contains five themed areas intended to evoke the atmosphere of New Orleans.
Parking for approximately 300 cars and approximately 145,000 square feet of
back-of-house and support areas are provided underneath the main gaming floor.
Two parking facilities which contain
6
approximately 1,550 parking spaces are located across Poydras Street and are
connected to the casino by an underground tunnel. The second floor of the casino
premises contains approximately 150,000 square feet of unfinished multipurpose
non-gaming entertainment space.
A subsidiary of the Company owned an approximate 47% interest in Harrah's
Jazz Company ("Harrah's Jazz"), a partnership formed for purposes of developing,
owning and operating the exclusive land-based casino entertainment facility in
New Orleans, Louisiana, on the site of the former Rivergate Convention Center.
In November 1995, Harrah's Jazz and its wholly-owned subsidiary, Harrah's Jazz
Finance Corp., filed petitions for relief under Chapter 11 of the Bankruptcy
Code. Harrah's Jazz filed a plan of reorganization with the Bankruptcy Court in
April 1996 and filed several subsequent amendments to the plan (the "Plan"). The
Bankruptcy Court confirmed the Plan as modified on October 13, 1998 and the Plan
was consummated on October 30, 1998.
In accordance with the terms of the plan, a newly formed limited liability
company, Jazz Casino Company, L.L.C. ("JCC"), was responsible for completing
construction of the Harrah's New Orleans Casino. In exchange for an equity
investment of $75 million (including $60 million in debtor-in possession loans
to Harrah's Jazz which were converted to equity upon consummation of the Plan),
one of our subsidiaries acquired, at the time of Plan consummation,
approximately 44% of the equity in JCC Holding Company. This ownership interest
has been reduced to approximately 43% due to the exercise by an unrelated party
of an option to acquire a portion of the subsidiary's interest, and the
ownership interest may be reduced in the future to approximately 40% in the
event other unrelated parties exercise additional options to acquire portions of
the interest. We also own a warrant which entitles us to acquire additional
shares in JCC Holding Company sufficient to increase our ownership in JCC
Holding Company to 50% for a predetermined price.
Another subsidiary of the Company (the "Manager") manages the Casino
pursuant to a management agreement under which it earns a base management fee of
3% of Casino revenues and 7% of Casino EBITDA in excess of $75 million. We are
obligated to defer receipt of management fees under certain circumstances, and
these fees are currently being deferred by JCC. We have also entered into
settlements with former partners of Jazz whereby such partners (or their
creditors) are entitled to future payments from us based on management fees
actually received by the Manager.
We (i) guaranteed JCC's initial $100 million twelve-month payment under the
casino operating contract to the State of Louisiana gaming board (the "State
Guarantee"), (ii) guaranteed $166.5 million of a $236.5 million JCC bank credit
facility, including a $25 million working capital loan, (iii) guaranteed to the
State of Louisiana gaming board, City of New Orleans, banks under the JCC bank
credit facility and JCC bondholders, completion and opening of the Casino on or
before October 30, 1999 (subject to force majeure) and (iv) made a $22.5 million
subordinated loan to JCC to finance construction of the Casino in 1999. Since
the Casino opened on October 28, 1999, our obligations under the completion
guarantees have been performed except that we remain responsible to ensure that
JCC has sufficient funds to pay any remaining unpaid completion bills. The
amount of the funding necessary to pay these bills is not expected to be
material to us.
With respect to the State Guarantee, we guaranteed JCC's first $100 million
twelve-month payment obligation commencing upon the opening of the Casino
(October 28, 1999). Additionally, if certain cash flow tests and other
conditions are satisfied each year, we are obligated to repost the guarantee
beginning April 1, 2000, for each 12 month period ending March 31, up to the 12
month period ending March 31, 2004. There are no cash flow conditions for the
first reposting period of April 1, 2000 to March 31, 2001, but reposting is
subject to other conditions. If we repost the guarantee for the twelve-month
period from April 1, 2000 to March 31, 2001, any unfunded portion of our initial
guarantee for the period ending October 27, 2000 is extinguished. Our obligation
under the guarantee for the first year of operations or any succeeding 12 month
period is limited to a guarantee of the $100 million payment obligation of JCC
for the 12 month period in which the guarantee is in effect
7
and is secured by a first priority lien on JCC's assets. JCC's payment
obligation (and therefore the amount guaranteed by the Company) is $100 million
at the commencement of each 12 month period under the casino operating contract
and declines on a daily basis by 1/365 of $100 million to the extent payments
are made each day by JCC to Louisiana's gaming board.
On February 28, 2000 JCC notified us that it was suspending its daily
minimum payments to the State of Louisiana gaming board until such time as JCC
is able to generate sufficient cash flow to pay its operating expenses and make
the daily payments. On February 29, 2000 the State made a demand on us under the
State Guarantee. We began funding the daily payment to the State on February 29,
2000.
The funding of the State Guarantee creates a demand obligation from JCC to
us which is the most senior of the project debt, senior to the bank and bond
financing, and secured by a first priority lien on all assets of the casino
project. JCC's bank credit facility permits funding of up to $5 million under
the State Guarantee without a default under the bank loan documents. JCC has
obtained a waiver from its bank syndicate to permit funding of up to $40 million
under the State Guarantee on certain conditions, including (1) reposting by the
Company of the State Guarantee for the one-year period ending March 31, 2001,
subject to certain conditions set forth in our agreement with JCC concerning the
State Guarantee, and (2) forbearance until at the earliest March 31, 2001 by the
Company of collection of up to $40 million principal on the demand obligation
from JCC to us which arises when we fund under the State Guarantee, and also
deferral until March 31, 2000 of any interest on such principal up to $40
million.
On February 29, 2000, we notified JCC that if certain conditions are met, we
will issue a new State Guarantee for the daily payments due from April 1, 2000
through March 31, 2001. We also agreed to forbear from collecting principal and
interest on up to $40 million in loans under the State Guarantee until
March 31, 2001.
For providing the State Guarantee, we earn fees from JCC of $6 million for
the first and second years of operations (or the prorated amounts thereof) and
$5 million for each renewal year thereafter. We also earn fees for guaranteeing
the JCC bank credit facility of approximately 2.75% of up to $156.5 million of
guaranteed debt, payable for periods during which such debt is outstanding. Our
credit support fees may be reduced in the event our borrowing costs under our
Bank Facility increase after Plan consummation. We are obligated to defer
receipt of State Guarantee fees and a portion of the credit support fees under
certain circumstances, and the fees are currently being deferred by JCC.
We have executed a forbearance agreement with JCC whereby we have agreed to
forbear until August 1, 2000, or to such later date as we in our sole discretion
may determine, from collecting from JCC slot machine rental, certain
reimbursable items pursuant to the Management Agreement and certain service fees
pursuant to an Administrative Services Agreement with JCC.
AUSTRALIA
We sold our interests in the Star City casino in Sydney, Australia during
fourth quarter 1999 and first quarter 2000 by divesting our outstanding shares
and options of Star City Holdings Ltd. and selling our management contract for
the casino. In connection with the sale of our management contract, we entered
into a three-year casino services agreement whereby we provide consulting and
advisory services to the purchaser for a fee.
8
RIVERBOAT CASINOS
JOLIET
Harrah's Joliet is located in downtown Joliet, Illinois, on the Des Plaines
River. The two riverboat casinos, the Harrah's Northern Star, a modern 210-foot
mega-yacht, and the 210-foot Southern Star II, a re-creation of a Mississippi
riverboat, offer a combined total of 37,160 square feet of casino space with 43
table games and 1,066 slot machines. Harrah's Joliet has operated as a dockside
casino entertainment facility since the Illinois Riverboat Gambling Act was
amended to allow dockside gaming in June 1999.
The dockside facilities, which are situated on 6.8 acres, include a pavilion
with three restaurants, two snack bars, a lounge, approximately 4,700 square
feet of meeting space and a retail shop. Parking is available for 1,229 cars,
including a portion in a 4-story parking garage. In 1999 Harrah's Joliet
acquired 1.14 acres of additional land adjacent to the facility as a site for
future development.
On November 8, 1999, Harrah's Joliet opened a $29 million development
project located in Joliet's City Center. The 11-story project includes a
204-room hotel (including four suites), 8,000 square feet of new and renovated
office space and a fitness center. The hotel is located adjacent to Harrah's
pavilion. We are now considering further modifications to the property to take
advantage of the dockside operating environment.
A partnership, in which an indirect subsidiary of the Company is the 80
percent general partner, owns the dockside facilities and underlying real
property, the Harrah's Northern Star and the Southern Star II vessels, and the
riverboat businesses. The businesses are operated by Harrah's, as general
partner in the partnership. The partnership also holds long-term rights to the
boat basin/berth.
The Chicago metropolitan area is the primary feeder market for Harrah's
Joliet, with Joliet being only 30 miles from downtown Chicago.
EAST CHICAGO
The Harrah's East Chicago Casino (formerly operated as Showboat Mardi Gras
Casino) is a riverboat casino in East Chicago, Indiana, which contains 49,210
square feet of gaming space on four levels containing 66 table games and
approximately 1,800 slot machines. The shoreside facilities include a 105,000
square foot pavilion located on approximately 27 acres of land. The property has
three restaurants and two snack bars. There is a parking garage with the
capacity to hold approximately 1,800 cars, and other surface parking available
for approximately 800 cars.
The Harrah's East Chicago Casino is owned by the Showboat Marina Casino
Partnership ("SMCP"), an Indiana general partnership, in which the Company now
has an almost 100% ownership interest. We acquired a 55% interest in SMCP in
connection with our acquisition of Showboat in June 1998 and in February 1999
increased our ownership interest by buying out substantially all of the minority
partners in SMCP. Some of the minority partners have retained the right to
repurchase shares of SMCP at the original purchase price plus interest. If this
occurs, it would reduce our interest to no less than 91%. On March 15, 1999, we
converted the facility to the Harrah's brand name.
In March 1999, we redeemed the $140 million of 13 1/2% First Mortgage Notes
due 2009 issued by SMCP and its subsidiary.
The casino's primary feeder market is the Chicago metropolitan area.
TUNICA
Harrah's Tunica is a riverboat casino complex located in Tunica,
Mississippi, approximately 30 miles south of downtown Memphis, Tennessee. The
facilities include a casino constructed on a floating
9
stationary barge with approximately 50,000 square feet of casino space, 1,437
slot machines and 23 table games. Shoreside facilities, which are situated on 88
acres of land, include a Harrah's hotel, which features 182 rooms, 18 suites,
exercise facilities, four restaurants, a snack bar, a 250-seat showroom, a child
care facility, an arcade, retail shop, approximately 13,500 square feet of
convention area/meeting room space and customer parking for approximately 2,700
cars.
The dockside casino facilities are owned by a partnership which is 100%
owned by the Company. The underlying land is held under a long-term lease to the
partnership. The partnership which owns Harrah's Tunica, along with two nearby
competitors, owns a golf course and related facilities adjacent to Harrah's
Tunica.
The primary feeder market for Harrah's Tunica is the Memphis metropolitan
area.
We also operated another dockside casino in Tunica which closed in May 1997.
In March 1999, this property was sold to another casino company.
VICKSBURG
Harrah's Vicksburg is the Company's dockside casino entertainment complex on
approximately 10.3 acres in Vicksburg, Mississippi. The complex, which is
located in downtown Vicksburg on the Yazoo Diversion Canal of the Mississippi
River, includes a 297-foot stationary riverboat casino designed in the spirit of
a traditional 1800's riverboat with approximately 21,000 square feet of casino
space, 696 slot machines and 26 table games. The casino is docked next to the
Company's shoreside complex which features three restaurants, child care
facilities, an arcade, a retail outlet and an approximate 8,500 square foot
meeting room/convention area. Adjacent to the riverboat is a Harrah's hotel,
with 109 rooms and eight suites, which is operated by the Company. Two covered
parking garages are across the street with combined parking for 996 cars and
additional parking is available for 429 cars. The Company owns the riverboat and
hotel and owns or holds long-term rights to all real property pertaining to the
project.
The casino's primary feeder markets are western and central Mississippi and
eastern Louisiana.
SHREVEPORT
Harrah's Shreveport is the Company's dockside riverboat casino in downtown
Shreveport, Louisiana, which includes a 254-foot 19th-century design
paddlewheeler riverboat, the ShreveStar, with 22,550 square feet of gaming space
with 1,153 slot machines and 32 table games. A pavilion, on 11.2 acres of land,
adjoins the casino on the banks of the Red River and includes two restaurants
and a 5,000 square foot area for private parties and group functions. Parking is
available for 1,461 cars, including 1,365 spaces in a parking garage.
We have begun construction to expand our Shreveport facilities to include a
514 room hotel as well as four restaurants (including a 156-seat steakhouse, a
198-seat coffee shop, a 446-seat buffet and a coffee/snack bar) as well as a new
convention center, health spa and 437-space valet parking garage. We expect the
expansion to be completed in fourth quarter 2000 at a cost of approximately $147
million.
The casino and related facilities are owned by a partnership which is 100%
owned by the Company. The underlying land is held by the partnership under a
long-term lease from the City of Shreveport.
The primary feeder markets for the casino are northwestern Louisiana and
east Texas, including the Dallas/Fort Worth metropolitan area.
10
NORTH KANSAS CITY
We own and operate dockside riverboat casino facilities in North Kansas
City, Missouri, which include two riverboat casinos, the North Star, a 295-foot
classic sternwheeler-designed stationary riverboat, and the other, the Mardi
Gras, which is constructed on a floating stationary barge. The facilities offer
a combined total of approximately 62,100 square feet of casino space, 2,239 slot
machines and 65 table games.
Shoreside facilities, which are situated on 55 acres of land that is under a
long-term lease, include a Harrah's hotel which features 181 rooms and 17
suites, a pavilion that houses four restaurants and 10,000 square feet of
meeting space. Additional property amenities include two snack bars, an arcade,
swimming pool and exercise room. The property also has a three-story 1,048-car
parking garage as well as surface parking. Total on-site parking, including
valet parking, is available for 2,942 cars.
The casino's primary feeder market is the Kansas City metropolitan area.
ST. LOUIS-RIVERPORT
Harrah's St. Louis-Riverport is part of a dockside riverboat casino complex
owned and operated by the Company and Players in Maryland Heights, Missouri, in
northwest St. Louis County, 16 miles from downtown St. Louis. The partnership
formed by the Company and Players leases space both to us and to Players in
which we each operate our separately branded casinos and specialty restaurants.
Upon completion of our acquisition of Players, we will own 100% of the
partnership and the operations at this property.
Currently, each company operates two riverboat casinos. Harrah's two
riverboats offer a combined total of approximately 60,000 square feet of gaming
space, with a total of 1,664 slot machines and 48 table games.
A shoreside pavilion includes five restaurants (one of which is owned and
managed by Players), a snack bar, an arcade, an entertainment lounge and retail
space. Additional amenities include a 10,000 square foot convention/special
events center and child care facilities. Also included in the shoreside
facilities is an 8-story Harrah's hotel with 277 rooms and 14 suites. Parking is
available for 4,071 cars, including a portion in a parking garage. We manage the
shoreside pavilion, hotel and parking areas for the partnership for a fee.
The complex is located on a site comprised of approximately 74 acres which
is owned by the Company and leased to the partnership, and approximately 140
acres of additional land which is included in the development and owned by the
partnership.
The primary feeder market for Harrah's St. Louis-Riverport is the St. Louis
metropolitan area.
INDIAN GAMING
AK-CHIN
Harrah's Phoenix Ak-Chin casino is owned by the Ak-Chin Indian Community and
is located on approximately 20 acres of land on the Community's reservation,
approximately 25 miles south of Phoenix, Arizona. The casino includes 38,000
square feet of casino space with 475 slot machines, 13 poker tables, bingo,
keno, two restaurants, one snack bar, an entertainment lounge, 3,250 square feet
of meeting room space and a retail shop. The complex has customer parking for
approximately 1,100 cars and has valet parking available. We manage the casino
for a fee under a management contract. The original contract expired in December
1999, and we have signed a contract with the Ak Chin Indian Community to
continue management of the Casino for another five years after that date. The
new agreement is subject to various regulatory approvals, and contemplates an
extension of the Community's compact with the state of Arizona, which expires in
2003. The existing management
11
agreement has been temporarily extended through July 1, 2000 (on the new
financial terms) while regulatory approvals are obtained.
The primary feeder markets for the casino are Phoenix and Tucson.
CHEROKEE
We developed the Harrah's Cherokee Smoky Mountains Casino for the Eastern
Band of Cherokee Indians on approximately 39 acres of land on their reservation
in Cherokee, North Carolina. The casino includes 60,000 square feet of casino
space, with 2,518 video gaming machines. Additional facilities consist of a
multi-purpose entertainment room with approximately 1,500 theater-style seats,
three restaurants, a gift shop and child care facilities. Parking is available
for approximately 1,985 cars. We manage the casino for a fee under a management
contract expiring in November 2002. In November 1999, we announced an agreement
with the Tribe to extend our management contract for the casino for another two
years after its expiration in November 2002.
The Company has guaranteed the Tribe's repayment of an $82 million bank
loan, the proceeds of which were used to construct the Cherokee facility. At
year end 1999, $65.6 million of the loan was outstanding. In connection with the
extension of the management contract, we have agreed to guarantee up to an
additional $60 million in project financing to expand the facility.
The casino's primary feeder markets are eastern Tennessee, western North
Carolina, as well as northern Georgia and South Carolina.
PRAIRIE BAND
Harrah's Prairie Band Casino-Topeka, located approximately 17 miles north of
Topeka, Kansas, was developed by the Company for the Prairie Band of Potawatomi
Indians ("Prairie Band") on approximately 80 acres of land owned by the tribe.
The casino facilities include 25,478 square feet of casino space with 702 slot
machines and 31 table games. The complex also includes a 100-room hotel, a
restaurant, two snack bars, an entertainment lounge, a gift shop and parking for
approximately 820 vehicles. The facilities are managed by the Company for a fee
under a management contract expiring in January 2003. Renewal of the contract
would require mutual agreement between us and the Prairie Band and approval by
the NIGC.
We have guaranteed the Tribe's repayment of a $37 million bank loan, the
proceeds of which were used to construct the Prairie facility. At year end 1999,
$14.8 million of the loan was outstanding.
Topeka and Wichita are the primary feeder markets for the casino.
OTHER
NATIONAL AIRLINES, INC.
We own approximately 47.8% of the stock of National Airlines, Inc., a new
airline based in Las Vegas and presently offering nonstop flights between Las
Vegas and New York, Chicago, Philadelphia, Miami, Dallas, Los Angeles and San
Francisco. Up to six additional routes are expected to be added during 2000. We
originally invested $15 million in National Airlines, and prior to our
acquisition of Rio, Rio also invested $15 million. The consummation of the
merger with Rio increased our equity interest to approximately 47.8%; however,
our voting power is limited to 25% Our investment in the airline allows us to
offer additional valued services and conveniences to customers. We have entered
into marketing agreements with National Airlines to support joint promotions
involving the airline, Harrah's Las Vegas and the Rio Hotel & Casino, and, we
have provided two letters of credit totaling $15 million as collateral for
financial accommodations extended to National Airlines by two lenders, for
12
which we receive fees and warrants to purchase additional stock in the airline.
Rio's interest in the airline is reported as an asset-held-for-sale in our
financial statements.
OTHER
In September 1999, we sold our interest in Sodak Gaming, Inc. ("Sodak") to a
gaming equipment manufacturing company which acquired all of Sodak's outstanding
shares. Sodak is a leading distributor of electronic gaming machines and
gaming-related products and systems.
We own a minority interest in Interactive Entertainment Limited ("IEL"), a
publicly-owned corporation. IEL pioneered the development of sophisticated
remote control gaming entertainment software for use in the international
long-haul airline industry, called "Sky Games." However, due to an inability to
obtain sufficient financing for the project, IEL has ceased all operations
related to its Sky Games business and is making efforts to conduct an orderly
disposition of all the assets related to the Sky Games inflight gaming product
line. In the fourth quarter of 1998, we wrote off our investment in IEL.
We own a one-third interest in Turfway Park LLC, which is the owner of the
Turfway Park race course located on 197 acres in Boone County, Kentucky. We also
own 47 acres of undeveloped land in the vicinity of the race track, which are
currently listed for sale.
In addition to the above, we are actively pursuing a variety of casino
entertainment opportunities in various jurisdictions both domestically and
abroad, including land-based, riverboat and dockside casino and Indian gaming
projects in the United States. A number of these projects, if they go forward,
could require significant capital investments.
PATENTS AND TRADEMARKS
We own the following trademarks used in this document:
Harrah's-Registered Trademark-; Rio-Registered Trademark-;
Showboat-Registered Trademark-; Bill's-Registered Trademark-; Total
Gold-Registered Trademark-; WINet-Registered Trademark-; Harrah's Northern
Star(sm); North Star(sm); Harrah's Southern Star II(sm); ShreveStar(sm); Mardi
Gras(sm); Masquerade Village(sm); Palazzo Suites(sm); Sammy's Showroom(sm);
South Shore Showroom(sm) and Rio Secco Golf Club(sm). We consider all of these
marks, and the associated name recognition, to be valuable to our business. We
hold four U.S. patents covering the technology associated with our Total Gold
program--U.S. Patent No. 5,613,912 issued March 25, 1997 (which is the subject
of a license agreement with Mikohn Gaming Corporation), U.S. Patent No.
5,761,647 issued June 2, 1998, U.S. patent No. 5,809,482 issued September 15,
1998, and U.S. patent No. 6,003,013 issued December 14, 1999. We consider these
patents to be valuable to our business.
13
COMPETITION
We operate land-based, dockside, riverboat and Indian casino facilities in
all of the traditional, and most of the new, U.S. casino entertainment
jurisdictions. We compete with numerous casinos and casino hotels of varying
quality and size in the market areas where our properties are located. We also
compete with other non-gaming resorts and vacation areas, and with various other
casino and other entertainment businesses. The casino entertainment business is
characterized by competitors which vary considerably by their size, quality of
facilities, number of operations, brand identities, marketing and growth
strategies, financial strength and capabilities, level of amenities, management
talent and geographic diversity. In certain areas such as Las Vegas, we compete
with a wide range of casinos, some of which are significantly larger and offer
substantially more non-gaming activities to attract customers.
In most markets, we compete directly with other casino facilities operating
in the immediate and surrounding market areas. In major casino destinations,
such as Las Vegas and Atlantic City, we face competition from other markets in
addition to direct competition in our market areas.
In recent years, with fewer new markets open for development, competition in
existing markets has intensified. Many casino operators, including Harrah's
Entertainment, have invested in expanding existing facilities, in the
development of new facilities in existing markets, such as Las Vegas, and in the
acquisition of established facilities in existing markets, such as our
acquisition of the casinos owned by Rio and Showboat and our planned acquisition
of Players. This expansion of existing casino entertainment properties, the
increase in the number of properties and the aggressive marketing strategies of
many of our competitors has increased competition in many markets in which we
compete, and this intense competition can be expected to continue. These
competitive pressures have adversely affected our financial performance in
certain markets and, we believe, have also adversely affected the financial
performance of certain competitors operating in these markets.
We believe we are well positioned to take advantage of any further
legalization of casino gaming, the continued positive consumer acceptance of
casino gaming as an entertainment activity, and increased visitation to casino
facilities. However, the expansion of casino entertainment into new markets also
presents competitive issues for us. For example, 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, which 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, were the subject of an
amendment to the state's constitution approved in a statewide referendum on
March 7, 2000. At this time, the ultimate impact that the compacts and the
California referendum may have on the industry or on our Company are uncertain.
Moreover, the casino entertainment industry is subject to political and
regulatory uncertainty. In 1996, the U.S. government formed the National
Gambling Impact Study Commission to study gambling in the United States,
including the casino gaming industry. The commission issued its report in June
1999. At this time, we are not sure of the ultimate impact of the commission's
report on the casino industry or on the Company. See also "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Effects of Current Economic and Political Conditions" on pages 31
and 32 and portions of "Management's Discussion and Analysis--Operating Results
and Development Plans" on pages 25 and 26 of the Annual Report. These pages are
incorporated into this document by reference.
14
GOVERNMENTAL REGULATION
GAMING--NEW JERSEY
As a holding company of Marina Associates ("Marina"), which holds a license
to operate Harrah's Atlantic City, and of Atlantic City Showboat, Inc.
("Showboat"), which holds a license to operate Showboat Casino Hotel, Harrah's
Entertainment is subject to the provisions of the New Jersey Casino Control Act
(the "New Jersey Act"). The ownership and operation of casino hotel facilities
in Atlantic City, New Jersey are the subject of pervasive state regulation under
the New Jersey Act and the regulations adopted thereunder by the New Jersey
Casino Control Commission (the "New Jersey Commission"). The New Jersey
Commission is empowered to regulate a wide spectrum of gaming and non-gaming
related activities and to approve the form of ownership and financial structure
of not only the casino licensees, Marina and Showboat, but also their
intermediary and ultimate holding companies, including Harrah's Entertainment
and HOC. In addition to taxes imposed by the State of New Jersey on all
businesses, the New Jersey Act imposes certain fees and taxes on casino
licensees, including an 8% gross gaming revenue tax, an investment alternative
obligation of 1.25% (or an investment alternative tax of 2.5%) of gross gaming
revenue (generally defined as gross receipts less payments to customers as
winnings) and various license fees.
No casino hotel facility may operate unless the appropriate licenses and
approvals are obtained from the New Jersey Commission, which has broad
discretion with regard to the issuance, renewal and revocation or suspension of
the non-transferable casino licenses (which licenses are issued initially for a
one-year period and renewable for one-year periods for the first two renewals
and four-year periods thereafter), including the power to impose conditions
which are necessary to effectuate the purposes of the New Jersey Act. Each
applicant for a casino license must demonstrate, among other things, its
financial stability (including establishing ability to maintain adequate casino
bankroll, meet ongoing operating expenses, pay all local, state and federal
taxes, make necessary capital improvements and pay, exchange, refinance, or
extend all long and short term debt due and payable during the license term),
its financial integrity and responsibility, its reputation for good character,
honesty and integrity, the suitability of the casino and related facilities and
that it has sufficient business ability and casino experience to establish the
likelihood of creation or maintenance of a successful, efficient casino
operation. With the exception of licensed lending institutions and certain
"institutional investors" waived from the qualification requirements under the
New Jersey Act, each applicant is also required to establish the reputation of
its financial sources including, but not limited to, its financial backers,
investors, mortgagees and bond holders.
The New Jersey Act requires that all officers, directors and principal
employees of the casino licensees be licensed. In addition, each person who
directly or indirectly holds any beneficial interest or ownership of the casino
licensees and any person who in the opinion of the New Jersey Commission has the
ability to control the casino licensees must obtain qualification approval. Each
holding and intermediary company having an interest in the casino licensees must
also obtain qualification approval by meeting essentially the same standards as
that required of the casino licensees. All directors, officers and persons who
directly or indirectly hold any beneficial interest, ownership or control in any
of the intermediary or ultimate holding companies of the casino licensees may
have to seek qualification from the New Jersey Commission. Lenders,
underwriters, agents, employees and security holders of both equity and debt of
the intermediary and holding companies of the casino licensees and any other
person whom the New Jersey Commission deems appropriate may also have to seek
qualification from the New Jersey Commission. Since Harrah's Entertainment and
HOC are publicly-traded holding companies (as defined by the New Jersey Act),
however, the persons described in the two previous sentences may be waived from
compliance with the qualification process if the New Jersey Commission, with the
concurrence of the Director of the New Jersey Division of Gaming Enforcement,
determines that they are not significantly involved in the activities of Marina
and/or Showboat and, in the case of security holders, that they do not have the
ability to control Harrah's Entertainment (or its subsidiaries)
15
or elect one or more of its directors. Any person holding 5% or more of a
security in an intermediary or ultimate holding company, or having the ability
to elect one or more of the directors of a company, is presumed to have the
ability to control the company and thus may be required to seek qualification
unless the presumption is rebutted. Notwithstanding this presumption of control,
the New Jersey Act permits the waiver of the qualification requirements for
passive "institutional investors" (as defined by the New Jersey Act), when such
institutional holdings are for investment purposes only and where such
securities represent less than 10% of the equity securities of a casino
licensee's holding or intermediary companies or debt securities of a casino
licensee's holding or intermediary companies not exceeding 20% of a company's
total outstanding debt or 50% of an individual debt issue. The waiver, which is
subject to certain specified conditions including, upon request, the filing of a
certified statement that the investor has no intention of influencing the
affairs of the issuer, may be granted to an "institutional investor" holding a
higher percentage of such securities upon a showing of good cause. If an
"institutional investor" is granted a waiver of the qualification requirements
and subsequently changes its investment intent, the New Jersey Act provides that
no action other than divestiture may be taken by the investor without compliance
with the Interim Casino Authorization Act (the "Interim Act") described below.
In the event a security holder of either equity or debt is required to
qualify under the New Jersey Act, the provisions of the Interim Act may be
triggered requiring, among other things, either: (i) the filing of a completed
application for qualification within 30 days after being ordered to do so, which
application must include an approved Trust Agreement pursuant to which all
securities of Harrah's Entertainment (or its respective subsidiaries) held by
the security holder must be placed in trust with a trustee who has been approved
by the New Jersey Commission; or (ii) the divestiture of all securities of
Harrah's Entertainment (or its respective subsidiaries) within 120 days after
the New Jersey Commission determines that qualification is required or declines
to waive qualification, provided the security holder files a notice of intent to
divest within 30 days after the determination of qualification. If a security
holder files an application under the Interim Act, during the period the Trust
Agreement remains in place, such holder may, through the approved trustee,
continue to exercise all rights incident to the ownership of the securities with
the exception that: (i) the security holder may only receive a return on its
investment in an amount not to exceed the actual cost of the investment (as
defined by the New Jersey Act) until the New Jersey Commission finds such holder
qualified; and (ii) in the event the New Jersey Commission finds there is
reasonable cause to believe that the security holder may be found unqualified,
the Trust Agreement will become fully operative vesting the trustee with all
rights incident to ownership of the securities pending a determination on such
holder's qualifications; provided, however, that during the period the
securities remain in trust, the security holder may petition the New Jersey
Commission to: (a) direct the trustee to dispose of the trust property; and (b)
direct the trustee to distribute proceeds thereof to the security holder in an
amount not to exceed the lower of the actual cost of the investment or the value
of the securities on the date the Trust became operative. If the security holder
is ultimately not found to be qualified, the trustee is required to sell the
securities and to distribute the proceeds of the sale to the applicant in an
amount not exceeding the lower of the actual cost of the investment or the value
of the securities on the date the Trust became operative (if not already sold
and distributed at the direction of the security holder) and to distribute the
remaining proceeds to the Casino Revenue Fund. If the security holder is found
qualified, the Trust Agreement will be terminated.
The New Jersey Commission can find that any holder of the equity or debt
securities issued by Harrah's Entertainment or its subsidiaries is not qualified
to own such securities. If a security holder of Harrah's Entertainment or its
subsidiaries is found disqualified, the New Jersey Act provides that it is
unlawful for the security holder to: (i) receive any dividends or interest
payment on such securities; (ii) exercise, directly or indirectly, any rights
conferred by the securities; or (iii) receive any remuneration from the company
in which the security holder holds an interest. To implement these provisions,
the New Jersey Act requires, among other things, casino licensees and their
holding companies to adopt
16
provisions in their certificate of incorporation providing for certain remedial
action in the event that a holder of any security of such company is found
disqualified. The required certificate of incorporation provisions vary
depending on whether such company is a publicly or privately traded company as
defined by the New Jersey Act. The Certificates of Incorporation of Harrah's
Entertainment and HOC (both "publicly-traded companies" as defined by the New
Jersey Act) contain provisions which provide Harrah's Entertainment and HOC,
respectively, with the right to redeem the securities of disqualified holders,
if necessary, to avoid any regulatory sanctions, to prevent the loss or to
secure the reinstatement of any license or franchise held by Harrah's
Entertainment or HOC or their affiliates, or if such holder is determined by any
gaming regulatory agency to be unsuitable, has an application for a license or
permit rejected, or has a previously issued license or permit rescinded,
suspended, revoked or not renewed. The Certificates of Incorporation of Harrah's
Entertainment and HOC also contain provisions defining the redemption price and
the rights of a disqualified security holder. In the event a security holder is
disqualified, the New Jersey Commission is empowered to propose any necessary
action to protect the public interest, including the suspension or revocation of
the casino license of Marina and/or Showboat. The New Jersey Act provides,
however, that the New Jersey Commission shall not take action against a casino
licensee or its parent companies with respect to the continued ownership of the
security interest by the disqualified holder, if the New Jersey Commission finds
that: (i) such company has a certificate of incorporation provision providing
for the disposition of such securities as discussed above; (ii) such company has
made a good faith effort to comply with any order requiring the divestiture of
the security interest held by the disqualified holder; and (iii) the
disqualified holder does not have the ability to control the casino licensee or
its parent companies or to elect one or more members to the board of directors
of such company. The Certificate of Incorporation of HOC further provides that
debt securities issued by HOC are held subject to the condition that if a holder
is found unsuitable by any governmental agency the corporation shall have the
right to redeem the securities.
If, at any time, it is determined that Marina, Showboat or their holding
companies have violated the New Jersey Act or regulations promulgated thereunder
or that such companies cannot meet the qualification requirements of the New
Jersey Act, Marina and/or Showboat could be subject to fines, or their licenses
could be suspended or revoked. If Marina's or Showboat's license is suspended or
revoked, the New Jersey Commission could appoint a Conservator to operate and
dispose of the casino hotel facilities of Marina and/or Showboat. A Conservator
would be vested with title to the assets of Marina and/or Showboat, subject to
valid liens, claims and encumbrances. The Conservator would be required to act
under the general supervision of the New Jersey Commission and would be charged
with the duty of conserving, preserving and, if permitted, continuing the
operation of the casino hotel. During the period of any such conservatorship,
the Conservator may not make any distributions of net earnings without the prior
approval of the New Jersey Commission. The New Jersey Commission may direct that
all or part of such net earnings be paid to the Casino Revenue Fund, provided,
however, that a suspended or former licensee is entitled to a fair rate of
return.
The New Jersey Commission granted Marina a plenary casino license in
connection with Harrah's Atlantic City in November 1981, and granted Showboat a
plenary casino license in connection with Showboat Casino Hotel in March 1987.
Each of Marina's and Showboat's licenses has been renewed since then. In April
1996, the New Jersey Commission renewed Marina's license for a four-year period
and also found Harrah's Entertainment and HOC to be qualified as holding
companies of Marina. The New Jersey Commission has begun the renewal process for
Marina's license, which we expect to result in the granting of an additional
four-year license for Marina in April 2000. In January 1997, the New Jersey
Commission renewed Showboat's license for a four-year period and, in April 1998,
found Harrah's Entertainment and HOC to be qualified as holding companies of
Showboat following the acquisition of Showboat, Inc. by Harrah's.
17
GAMING--NEVADA
The ownership and operation of casino gaming facilities in Nevada are
subject to: (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (collectively, "Nevada Act"); and (ii) various local ordinances and
regulations. The Company's gaming operations are subject to the licensing and
regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the
Nevada State Gaming Control Board ("Nevada Board"), the City of Las Vegas, the
Clark County Liquor and Gaming Licensing Board ("CCLGLB"), the City of Reno, and
the Douglas County Sheriff's Department ("Douglas County"). The Nevada
Commission, the Nevada Board, the City of Las Vegas, the CCLGLB, the City of
Reno, and Douglas County are collectively referred to as the "Nevada Gaming
Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) providing a source of state and local revenues
through taxation and licensing fees. Changes in such laws, regulations and
procedures could have an adverse effect on the Company's Nevada gaming
operations.
Harrah's Entertainment is registered by the Nevada Commission as a publicly
traded corporation (a "Registered Corporation") and has been found suitable to
own the stock of HOC which is also a Registered Corporation by virtue of its
outstanding debt securities. HOC has been found suitable to own the stock of (I)
Rio Hotel & Casino, Inc. ("Rio"), (ii) Showboat, Inc. ("Showboat"), (iii)
Harrah's Las Vegas, Inc. ("HLVI") and (iv) Harrah's Laughlin, Inc. ("HLI"). Rio
has been registered as an intermediary company and found suitable to own the
stock of Rio Properties, Inc. ("RPI") and Rio Leasing, Inc. ("RLI"). Showboat
also has been registered as an intermediary company and has been found suitable
to own the stock of Showboat Operating Company ("SBOC"). HOC, Rio, Showboat,
HLVI, HLI, RPI, SBOC and RLI (collectively, the "Gaming Subsidiaries") are
required to be registered or licensed by the Nevada Gaming Authorities to enable
Harrah's Entertainment to conduct gaming operations at Harrah's Lake Tahoe,
Bill's Lake Tahoe Casino, Harrah's Reno, Harrah's Las Vegas, Harrah's Laughlin,
Rio Suite Hotel & Casino and Las Vegas Showboat and to engage in manufacturing
and distribution of gaming devices. The gaming licenses held by the Gaming
Subsidiaries require the periodic payment of fees and taxes and are not
transferable. HOC is also licensed as a manufacturer and distributor of gaming
devices. SBOC and RLI are each licensed as a distributor of gaming devices. Such
manufacturer's and distributor's licenses also require the annual payment of
fees and are not transferable.
As Registered Corporations, Harrah's Entertainment and HOC are required
periodically to submit detailed financial and operating reports and furnish any
other information which the Nevada Commission may require. No person may become
a stockholder of, or receive any percentage of profits from, the Gaming
Subsidiaries without first obtaining licenses and approvals from the Nevada
Gaming Authorities and Harrah's Entertainment may not sell or transfer
beneficial ownership of any of HOC's equity securities without the prior
approval of the Nevada Commission. Harrah's Entertainment and the Gaming
Subsidiaries have obtained from the Nevada Gaming Authorities the various
registrations, findings of suitability, approvals, permits and licenses required
in order to engage in gaming, manufacturing and distribution activities in
Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, Harrah's Entertainment
or the Gaming Subsidiaries in order to
18
determine whether such individual is suitable or should be licensed as a
business associate of a gaming licensee. Officers, directors and certain key
employees of the Gaming Subsidiaries must file applications with the Nevada
Gaming Authorities and may be required to be licensed or found suitable by the
Nevada Gaming Authorities. Officers, directors and key employees of Harrah's
Entertainment, HOC, Rio or Showboat who are actively and directly involved in
gaming activities of the Gaming Subsidiaries may be required to be licensed or
found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities
may deny an application for licensing for any cause which they deem reasonable.
A finding of suitability is comparable to licensing, and both require submission
of detailed personal and financial information followed by a thorough
investigation. The applicant for licensing or a finding of suitability must pay
all the costs of the investigation. Changes in licensed positions must be
reported to the Nevada Gaming Authorities and in addition to their authority to
deny an application for a finding of suitability or licensure, the Nevada Gaming
Authorities have jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with Harrah's Entertainment or the Gaming Subsidiaries, the
companies involved would have to sever all relationships with such person. In
addition, the Nevada Commission may require Harrah's Entertainment or the Gaming
Subsidiaries to terminate the employment of any person who refuses to file
appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
Harrah's Entertainment and the Gaming Subsidiaries are required to submit
detailed financial and operating reports to the Nevada Commission. Substantially
all material loans, leases, sales of securities and similar financing
transactions by the Gaming Subsidiaries must be reported to, or approved by, the
Nevada Commission.
If it were determined that the Nevada Act was violated by the Gaming
Subsidiaries, the gaming licenses they hold could be limited, conditioned,
suspended or revoked, subject to compliance with certain statutory and
regulatory procedures. In addition, the Gaming Subsidiaries, Harrah's
Entertainment and the persons involved could be subject to substantial fines for
each separate violation of the Nevada Act at the discretion of the Nevada
Commission. Further, a supervisor could be appointed by the Nevada Commission to
operate Harrah's Entertainment's gaming properties and, under certain
circumstances, earnings generated during the supervisor's appointment (except
for the reasonable rental value of the gaming properties) could be forfeited to
the State of Nevada. Limitation, conditioning or suspension of any gaming
license or the appointment of a supervisor could (and revocation of any gaming
license would) materially adversely affect Harrah's Entertainment's gaming
operations.
Any beneficial holder of Harrah's Entertainment voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated, and have his suitability as a beneficial holder of
Harrah's Entertainment voting securities determined if the Nevada Commission has
reason to believe that such ownership would otherwise be inconsistent with the
declared policies of the state of Nevada. The applicant must pay all costs of
investigation incurred by the Nevada Gaming Authorities in conducting any such
investigation.
The Nevada Act requires any person who acquires beneficial ownership of more
than 5% of Harrah's Entertainment voting securities to report the acquisition to
the Nevada Commission. The Nevada Act requires that beneficial owners of more
than 10% of Harrah's Entertainment voting securities apply to the Nevada
Commission for a finding of suitability within thirty days after the Chairman of
the Nevada Board mails the written notice requiring such filing. Under certain
circumstances, an "institutional investor," as defined in the Nevada Act, which
acquires more than 10%, but not more than 15%, of Harrah's Entertainment voting
securities may apply to the Nevada Commission for a waiver of such finding of
suitability if such institutional investor holds the voting
19
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of Harrah's Entertainment, any change in the Company's corporate charter,
bylaws, management, policies or operations of Harrah's Entertainment, or any of
its gaming affiliates, or any other action which the Nevada Commission finds to
be inconsistent with holding Harrah's Entertainment voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial holder
of voting securities who must be found suitable is a corporation, partnership or
trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of
investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the voting securities
of a Registered Corporation beyond such period of time as may be prescribed by
the Nevada Commission may be guilty of a criminal offense. Harrah's
Entertainment is subject to disciplinary action if, after it receives notice
that a person is unsuitable to be a stockholder or to have any other
relationship with Harrah's Entertainment or the Gaming Subsidiaries, it: (i)
pays that person any dividend or interest upon voting securities of Harrah's
Entertainment; (ii) allows that person to exercise, directly or indirectly, any
voting right conferred through securities held by that person; (iii) pays
remuneration in any form to that person for services rendered or otherwise; or
(iv) fails to pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities including, if necessary, the immediate purchase
of said voting securities for cash at fair market value. Additionally, the
CCLGLB has the authority to approve all persons owning or controlling the stock
of any corporation controlling a gaming licensee.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
Harrah's Entertainment is required to maintain a current stock ledger at its
corporate headquarters in Las Vegas, Nevada which may be examined by the Nevada
Gaming Authorities at any time. If any securities are held in trust by an agent
or by a nominee, the record holder may be required to disclose the identity of
the beneficial owner to the Nevada Gaming Authorities. A failure to make such
disclosure may be grounds for finding the record holder unsuitable. Harrah's
Entertainment also is required to render maximum assistance in determining the
identity of the beneficial owner. The Nevada Commission has the power to require
Harrah's Entertainment's stock certificates to bear a legend indicating that the
securities are subject to the Nevada Act. However, to date, the Nevada
Commission has not imposed such a requirement on Harrah's Entertainment.
20
Harrah's Entertainment and HOC may not make a public offering of their
securities without the prior approval of the Nevada Commission if the securities
or the proceeds therefrom are intended to be used to construct, acquire or
finance gaming facilities in Nevada, or to retire or extend obligations incurred
for such purposes. On November 19, 1998, the Nevada Commission granted Harrah's
Entertainment and HOC prior approval to make public offerings for a period of
two years, subject to certain conditions ("Shelf Approval"). On November 18,
1999 the Nevada Commission amended the Shelf Approval. The Shelf Approval also
applies to any affiliated company wholly owned by Harrah's Entertainment (an
"Affiliate") which is a publicly traded corporation or would thereby become a
publicly traded corporation pursuant to a public offering. The Shelf Approval
also includes approval for the Gaming Subsidiaries to guarantee any security
issued by, or to hypothecate their assets to secure the payment or performance
of any obligations evidenced by a security issued by, Harrah's Entertainment or
an Affiliate in a public offering under the Shelf Approval. The Shelf Approval,
however, may be rescinded for good cause without prior notice upon the issuance
of an interlocutory stop order by the Chairman of the Nevada Board. The Shelf
Approval does not constitute a finding, recommendation or approval by the Nevada
Commission or the Nevada Board as to the accuracy or adequacy of the prospectus
or the investment merits of the securities offered. Any representation to the
contrary is unlawful.
Changes in control of Harrah's Entertainment through merger, consolidation,
stock or asset acquisitions, management or consulting agreements, or any act or
conduct by a person whereby he obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and Nevada Commission in a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Gaming Subsidiaries' respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon
either: (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; or (iii) the number of table games operated. A casino
entertainment tax is also paid by casino operations where entertainment is
furnished in connection with the selling or serving of food or refreshments or
the selling of merchandise. Nevada licensees that hold a license as an operator
of a slot route, or a manufacturer's or distributor's license, also pay certain
fees and taxes to the State of Nevada.
21
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees") and who proposes to become involved in a gaming venture outside of
Nevada is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation of
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities or
enter into associations that are harmful to the State of Nevada or its ability
to collect gaming taxes and fees, or employ, contract with or associate with a
person in the foreign operation who has been denied a license or finding of
suitability in Nevada on the ground of unsuitability.
GAMING--INDIANA
In 1993, the State of Indiana passed a Riverboat Gambling Act which created
the Indiana Gaming Commission ("Indiana Commission"). The Indiana Commission is
given extensive powers and duties for the purposes of administering, regulating
and enforcing the system of riverboat gaming. It is authorized to award no more
than 11 gaming licenses (five to counties contiguous to Lake Michigan, five to
counties contiguous to the Ohio River and one to a county contiguous to Patoka
Lake).
The Indiana Commission has jurisdiction and supervision over all riverboat
gaming operations in Indiana and all persons on riverboats where gaming
operations are conducted. These powers and duties include authority to: (1)
investigate all applicants for riverboat gaming licenses; (2) select among
competing applicants those that promote the most economic development in a home
dock area and that best serve the interest of the citizens of Indiana; (3)
establish fees for licenses; and (4) prescribe all forms used by applicants. The
Indiana Commission shall adopt rules pursuant to statute for administering the
gaming statute and the conditions under which riverboat gaming in Indiana may be
conducted. The Indiana Commission has promulgated certain final rules and has
proposed additional rules governing the application procedure and all other
aspects of riverboat gaming in Indiana. The Indiana Commission may suspend or
revoke the license of a licensee or a certificate of suitability or impose civil
penalties, in some cases without notice or hearing for any act in violation of
the Riverboat Gambling Act or for any other fraudulent act or if the licensee or
holder of such certificate of suitability has not begun regular riverboat
excursions prior to the end of the twelve month period following the Indiana
Commission's approval of the application for an owner's license. In addition,
the Indiana Commission may revoke an owner's license if it is determined by the
Indiana Commission that revocation is in the best interests of the state of
Indiana. The Indiana Commission will: (1) authorize the route of the riverboat
and stops that the riverboat may make; (2) establish minimum amounts of
insurance; and (3) after consulting with the Corps of Engineers, determine which
waterways are navigable waterways for purposes of the Riverboat Gambling Act and
determine which navigable waterways are suitable for the operation of
riverboats.
The Riverboat Gambling Act requires an extensive disclosure of records and
other information concerning an applicant, including disclosure of all
directors, officers and persons holding one percent (1%) or more direct or
indirect beneficial interest.
In determining whether to grant an owner's license to an applicant, the
Indiana Commission shall consider: (1) the character, reputation, experience and
financial integrity of the applicant and any person who (a) directly or
indirectly controls the applicant, or (b) is directly or indirectly controlled
by either the applicant or a person who directly or indirectly controls the
applicant; (2) the facilities or proposed facilities for the conduct of
riverboat gaming; (3) the highest total prospective revenue to be collected by
the state from the conduct of riverboat gaming; (4) the good faith affirmative
action plan
22
to recruit, train and upgrade minorities in all employment classifications;
(5) the financial ability of the applicant to purchase and maintain adequate
liability and casualty insurance; (6) whether the applicant has adequate
capitalization to provide and maintain the riverboat for the duration of the
license; and (7) the extent to which the applicant meets or exceeds other
standards adopted by the Indiana Commission. The Indiana Commission may also
give favorable consideration to applicants for economically depressed areas and
applicants who provide for significant development of a large geographic area.
Each applicant must pay an application fee of $50,000 and additional fees may be
assessed for the background investigation. If the applicant is selected, the
applicant must pay an initial license fee of $25,000 and post a bond, and
thereafter, pay an annual license renewal fee of $5,000. The Indiana Commission
has issued nine of these eleven licenses--four in Lake County Indiana; one in
LaPorte County; one in Vanderburgh County; one in Ohio County; one in Dearborn
County; and one in Harrison County. The Indiana Commission has selected
Switzerland County, on the Ohio River, for the tenth license. Additionally, the
Indiana Commission has not considered applicants for the eleventh license since
the Patoka Lake site has been determined by the U.S. Army Corp. of Engineers as
an unsuitable site for development of a casino vessel project.
A person holding an owner's gaming license issued by the Indiana Commission
may not own more than a 10% interest in another such license. An owner's license
expires five years after the effective date of the license; however, after three
years the holder of an owner's license will undergo a reinvestigation to ensure
continued suitability for licensure. Unless the license has been terminated,
expired or revoked, the gaming license may be renewed if the Indiana Commission
determines that the licensee has satisfied all statutory and regulatory
requirements. In connection with the issuance of the license to Showboat Marina
Casino Partnership ("SMCP"), Showboat Marina Partnership, an Indiana general
partnership ("SMP"), Waterfront Entertainment and Development, Inc.
("Waterfront") and Showboat, Inc. and its affiliates declared to the Indiana
Commission that if SMCP received a riverboat owner's license, they shall not
commence more than one other casino gaming operation within a fifty-mile radius
of East Chicago Showboat for a period of five years beginning on the date of
issuance of an owner's license by the Indiana Commission to SMCP. Harrah's
Joliet is within said fifty-mile radius. Adherence to the non-competition
declaration is a condition of the owner's license. A gaming license is a
revocable privilege and is not a property right.
Minimum and maximum wagers on games are not established by regulation but
are left to the discretion of the licensee. Wagering may not be conducted with
money or other negotiable currency. Riverboat gaming excursions shall be at
least two hours, but not more than four hours in duration unless expressly
approved by the Indiana Commission. No gaming may be conducted while the boat is
docked except: (1) for 30-minute time periods at the beginning and end of a
cruise while the passengers are embarking and disembarking; (2) if the master of
the riverboat reasonably determines that specific weather or water conditions
present a danger to the riverboat; (3) if either the vessel or the docking
facility is undergoing mechanical or structural repair; (4) if water traffic
conditions present a danger to (A) the riverboat, riverboat passengers, and
crew, or (B) other vessels on the water; or (5) if the master has been notified
that a condition exists that would cause a violation of federal law if the
riverboat were to cruise. The Indiana Commission has adopted rules governing
cruising on Lake Michigan by a riverboat casino. The period of time during which
passengers embark and disembark constitutes a portion of the gambling excursion
if gambling is allowed. At the conclusion of the thirty-minute embarkation
period, the gangway or its equivalent must be closed. However, a riverboat
licensee must allow patrons to disembark at anytime the riverboat remains at the
dock and gambling continues. A standard excursion schedule for a casino vessel
on Lake Michigan must include at least one full excursion (a cruise into the
open water on Lake Michigan, not more than three statute miles from the dock
site July through September and not more than one statute mile October through
June) and one intermediate excursion during which the vessel cruises in
protected navigable water on or accessible to Lake Michigan. An intermediate
excursion is to be conducted if the statutory conditions that permit dockside
gaming are not present and if sea conditions or weather conditions, or both, do
23
not permit a full excursion. If a casino vessel remains dockside because of
statutory conditions, the embarkation and disembarkation rules still apply.
An admission tax of $3.00 for each person admitted to the gaming excursion
is imposed upon the license owner. The admissions tax is paid by the riverboat
licensee for each excursion or part of an excursion the patron remains on board.
An additional 20% tax is imposed on the adjusted gross receipts received from
gaming operations, which is defined as the total of all cash and property
(including checks received by the licensee whether collected or not) received,
less the total of all cash paid out as winnings to patrons and uncollectible
gaming receivables (not to exceed 2%). The gaming license owner shall remit the
admission and wagering taxes before the close of business on the day following
the day on which the taxes were incurred. Riverboats are assessed for property
tax purposes as real property and are taxed at rates to be determined by local
taxing authorities of the jurisdiction in which a riverboat operates. The
Riverboat Gambling Act requires a riverboat owner licensee to directly reimburse
the Indiana Commission for the costs of inspectors and agents required to be
present during the conduct of gaming operations. Pursuant to agreements with the
City, and as reflected in the owner's license, SMCP has agreed to: (1) provide
certain fixed incentives of approximately $16.4 million to the City of East
Chicago and its agencies for transportation, job training, home buyer assistance
and discrete economic development initiatives; (2) pay 3% of adjusted gross
receipts divided equally among the City and two not-for-profit foundations for
infrastructure improvements, education and community development; and (3) pay
0.75% of adjusted gross receipts for community development projects to East
Chicago Second Century, Inc. ("Second Century"), a for-profit corporation owned
by former owners of Waterfront but, in terms of expenditures, controlled by the
City. Funding for the projects will be derived from contributions to Second
Century from SMCP as well as funds from other third-party sources.
The Indiana Commission is authorized to license suppliers and certain
occupations related to riverboat gaming. Gaming equipment and supplies
customarily used in conducting riverboat gaming may be purchased or leased only
from licensed suppliers. The Indiana Commission has adopted a rule requiring
employees working on the riverboat to have a valid merchant marine document
issued by the United States Coast Guard.
The Indiana Riverboat Gambling Act places special emphasis upon minority and
women's business enterprise participation in the riverboat industry. Any person
issued a riverboat owner's license must establish goals of expending at least
10% of the total dollar value of the licensee's contracts for goods and services
with minority business enterprises and 5% of the total dollar value of the
licensee's contracts for goods and services with women's business enterprises.
The Indiana Commission may suspend, limit or revoke the gaming owner's license
or impose a fine for failure to comply with statutory requirements.
An institutional investor which acquires 5% or more of any class of voting
securities of a holding company of a licensee is required to notify the Indiana
Commission and to provide additional information, and may be subject to a
finding of suitability. A person who acquires 5% or more of any class of voting
securities of a holding company of a licensee is required to apply to the
Indiana Commission for a finding of suitability. Harrah's Entertainment filed
the necessary application for a transfer of 100% of Showboat's and 99% of
Waterfront's beneficial interests in SMCP, including an investigatory fee of
$50,000. The Indiana Commission completed its investigation of the key persons
and substantial owners of Harrah's Entertainment, and Harrah's Entertainment was
found to meet the criteria for licensing and suitability of riverboat owner
licensees at the Indiana Commission's meeting on February 26, 1999.
A riverboat owner licensee may not enter into or perform any contract or
transaction in which it transfers or receives consideration which is not
commercially reasonable or which does not reflect the fair market value of the
goods or services rendered or received. All contracts are subject to disapproval
by the Indiana Commission.
24
A riverboat owner licensee or an affiliate may not enter into a debt
transaction of $1 million or more without the prior approval of the Indiana
Commission. A riverboat owner licensee or any other person may not lease,
hypothecate, borrow money against or loan money against a riverboat owner's
license.
The Indiana Commission has a rule requiring the reporting of certain
currency transactions which is similar to that required by federal authorities.
The Riverboat Gambling Act prohibits contributions to a candidate for a
state, legislative, or local office, or to a candidate's committee or to a
regular party committee by the holder of a riverboat owner's license or a
supplier's license, by an officer of a licensee, by an officer of a person
holding at least a 1% interest in the licensee. The Indiana Commission has
promulgated a rule requiring quarterly reporting by the holder of a riverboat
owner's license or a supplier's license of officers of the licensee, officers of
persons that hold at least a 1% interest in the licensee, and of persons who
directly or indirectly own a 1% interest in the licensee.
The Indiana Commission adopted a rule that prohibits a distribution by a
riverboat licensee to its partners, shareholders, itself, or any affiliated
entity, if the distribution would impair the financial viability of the
riverboat gambling operation. The Indiana Commission has proposed another rule,
which would, if adopted, require riverboat licensees to maintain on a quarterly
basis a cash reserve in the amount of the actual payout for three days, and the
cash reserve would include cash in the casino cage, cash in a bank account in
Indiana, or cash equivalents not committed or obligated.
The Governor of Indiana has appointed a Gaming Impact Study Commission
chaired by the Attorney General to review the impact of all forms of gaming in
Indiana, which issued its final report on December 31, 1999. The effect of the
report on gaming in Indiana, if any, cannot be determined at this time.
A lawsuit was filed on October 25, 1996, in Harrison County, Indiana by
three individuals residing in counties abutting the Ohio River, which challenges
the constitutionality of the Riverboat Gambling Act on grounds that: (i) it
creates an unequal privilege because under the Act supporters of riverboat
casino gambling, having lost a county-wide vote, are allowed to resubmit a
proposal to county voters for approval of riverboat casino gambling while
opponents of riverboat casino gambling, having lost a county-wide vote, do not
have a converse opportunity; and (ii) it was enacted as a provision attached to
a state budget bill allegedly in violation of an Indiana constitutional
provision requiring legislative acts to be confined to one subject and matters
properly connected with the subject. The Indiana Supreme Court previously has
upheld the constitutionality of the Riverboat Gambling Act, although the prior
challenge was on different grounds than those contained in the current lawsuit.
The Attorney General of the State of Indiana, on behalf of the Indiana
Commission, filed a motion for summary judgment, which was granted, upholding
the constitutionality of the Riverboat Gambling Act. The plaintiffs have filed
an appeal, which is pending. If the Riverboat Gambling Act ultimately was held
unconstitutional it would, absent timely corrective legislation, have a material
adverse effect on SMCP's operations.
GAMING--LOUISIANA (NEW ORLEANS)
On October 30, 1998, the plan of reorganization of Harrah's Jazz Company, a
partnership formed for the purposes of developing, owning and operating the
exclusive land-based casino in New Orleans, was consummated (the "Plan").
Pursuant to the Plan, a newly formed entity, Jazz Casino Company, L.L.C.
("JCC"), assumed responsibility for, among other things, operating the casino
(the "New Orleans Casino") in accordance with a casino operating contract (the
"Casino Contract") with the Louisiana Gaming Control Bord ("LGCB"). In exchange
for an equity investment, a subsidiary of the Company acquired, at the time of
consummation of the Plan, approximately a 43% equity interest in the parent of
JCC (which is subject to certain options). A subsidiary of the Company, Harrah's
New Orleans Management Company ("HNOMC") manages the New Orleans Casino pursuant
to a management agreement with JCC.
25
The ownership, management and operation of the New Orleans Casino are
subject to pervasive governmental regulation, including regulation by the
Louisiana Gaming Control Board ("LGCB") in accordance with the terms of the
Louisiana Economic Development and Gaming Act (the "Gaming Act"), the rules and
regulations promulgated thereunder from time to time ("the Rules and
Regulations"), and the Casino Contract. The LGCB is empowered to regulate a wide
spectrum of gaming and nongaming related activities.
The Gaming Act and the Rules and Regulations, all of which are subject to
amendment or revision from time to time, establish significant regulatory
requirements with respect to gaming activities, JCC, HNOMC and affiliated
entities, including, without limitation, suitability standards for direct and
indirect investors, requirements with respect to minimum accounting and
financial practices, standards for gaming devices and surveillance, licensure
requirements for vendors and employees, and permissible food services. Failure
to comply with the Gaming Act and the Rules and Regulations could result in
disciplinary action, including fines and suspension or revocation of a license
or suitability. Certain regulatory violations could also constitute an event of
default under the Amended and Renegotiated Casino Operating Contract.
The license to own and operate the casino derives from the Casino Contract.
Subject to the terms and conditions of the Casino Contract, the term of the
authorization for gaming runs to July 2014, with a ten-year renewal period.
The Gaming Act and the Rules and Regulations require suitability findings
for, among others, HNOMC and the Company, anyone with a direct ownership
interest (regardless of percentage interest) or the ability to control JCC,
HNOMC and the Company as well as certain officers and directors of such
companies, certain employees and certain specified debt holders and lenders
loaning funds related to the Casino project. Suitability of an applicant
requires that the applicant demonstrate by clear and convincing evidence that,
among other things, (i) the applicant is a person of good character, honesty and
integrity; (ii) the applicant's prior activities, criminal record, if any,
reputation, habits and associations do not pose a threat to the public interest
of the State or the regulation and control of casino gaming or create or enhance
the dangers of unsuitable, unfair or illegal prctices, methods and activities in
the conduct of gaming or the carrying on of the business and financial
arrangements incidental thereto; and (iii) the applicant is capable of and is
likely to conduct the activities for which a license or contract is sought. In
addition, to be found suitable for purposes of the Casino Contract, JCC must
demonstrate by clear and convincing evidence that: (i) it has or guarantees
acquisition of adequate business competence and experience in the operation of
casino gaming operations; (ii) the proposed financing is adequate for the
proposed operation and is from suitable sources; and (iii) it has or is capable
of and guarantees the obtaining of a bond or satisfactory financial guarantee of
a sufficient amount, as determined by the LGCB, to guarantee successful
completion of and compliance with the Casino Contract or such other projects
that are regulated by the LGCB.
Under the Gaming Act and Rules and Regulations, any person holding or
controlling a direct or beneficial 5% or more equity interest (either alone or
in combination with others) in a direct or indirect holding company of JCC or
HNOMC is presumed to have the ability to control JCC or HNOMC (or their holdings
companies, as the case may be), requiring a finding of suitability, unless,
among other things: (i) the presumption is rebutted by clear and convincing
evidence; or (ii) the holder is one of several specified passive institutional
investors and, upon request, such institution files necessary documentation
demonstrating that it does not have the ability to control such entity and that
it does not intend to influence the affairs of JCC or HNOMC. To the extent any
holder of such securities fails to satisfy such requirement, such holder may be
required to obtain certain qualifications or approvals (including a finding of
suitability) from the LGCB to continue to hold such securities. Any failure to
obtain such qualifications or approvals may subject such security holders to
certain requirements, limitations or prohibitions, including a requirement that
such security holders liquidate their securities at a time or at a cost that is
otherwise unfavorable to such security holders.
26
Under the Gaming Act and Rules and Regulations, the LGCB has the authority
to deny, revoke, suspend, limit, condition, or restrict any finding of
suitability. Under the Rules and Regulations, the LGCB also has the authority to
take further action against JCC or HNOMC on the grounds that a person found
suitable as required by the Gaming Act is associated with, or controls, or is
controlled by, or is under common control with, an unsuitable or disqualified
person. Under the Rules and Regulations and the Casino Contract, if at any time
the LGCB finds that any person required to be and remain suitable has failed to
demonstrate suitability, the LGCB may, consistent with the Gaming Act and the
Casino Contract, take any action that the LGCB deems necessary to protect the
public interest. Under the Rules and Regulations, however, if a person
associated with JCC, HNOMC or their affiliate, intermediary or holding
companies, as the case may be, has failed to be found or remain suitable, the
LGCB wil not declare such companies unsuitable as a result if such companies
comply with the conditional licensing provisions, take immediate good faith
action and comply with any order of the LGCB to cause such person to dispose of
its interest, and, before such dispostion, ensure that the disqualified person
does not receive any ownership benefits. The above safe harbor protections do
not apply if JCC, HNOMC or their affiliate, intermediary, or holding companies,
as the case may be: (i) fail to remain suitable, (ii) had actual or constructive
knowledge of the facts that are the basis of the LGCB regulatory action and
failed to take appropriate action, or (iii) are so tainted by such person that
it affects the suitability of such entity under the standards of the Gaming Act.
Under the Gaming Act, the LGCB and the its investigatory arm, the State
Police, are also required to issue licenses or permits to certain persons
associated with gaming operations, including: (i) certain employees of JCC and
HNOMC; (ii) certain manufacturers, distributors and suppliers of gaming devices;
(iii) certain suppliers of non-gaming goods or services; (iv) any person who
furnishes services or property to JCC under an arrangement pursuant to which the
person receives payments based on earnings, profits or receipts from gaming
operations; and (v) any other persons deemed necessary by the LGCB. The securing
of the requisite licenses and permits under the Gaming Act are a prerequisite
for conducting, operating or performing any activity regulated by the LGCB or
the Gaming Act. The Gaming Act provides that the LGCB has full and absolute
power to deny an application, or to limit, condition, restrict, revoke or
suspend any license, permit or approval, or to find unsuitable any person
licensed, permitted or approved for any cause specified in the Gaming Act or
rules promulgated by the LGCB. The Rules and Regulations provide that the LGCB
may take any of the foregoing actions with respect to any person licensed,
permitted, or approved, or any person registered, found suitable, or holding a
contract, for any cause deemed reasonable.
The Gaming Act provides that it is the express intent, desire and policy of
the legislature that no holder of the Casino Contract, applicant for a license,
permit, contract or other thing existing, issued or let as a result of the
Gaming Act shall have any right or action to obtain any license, permit,
contract or the granting of the approval sought except as provided for and
authorized by the Gaming Act. Any license, permit, contract, approval or thing
obtained or issued pursuant to the provisions of the Gaming Act has been
expressly declared by the legislature to be a pure and absolute revocable
privilege and not a right, property or otherwise, under the constitutions of the
United States or of the State. The Gaming Act also provides that no holder
acquires any vested right therein or thereunder.
Under the Gaming Act, the gaming activities that may be conducted at the
official gaming establishment, subject to the rule-making authority of the LGCB,
include any banking or percentage game that is played with cards, dice or any
electronic, electrical or mechanical device or machine for money, property or
any thing of value, but exclude lottery, bingo, charitable games, raffles,
electronic video bingo, pull tabs, cable television bingo, wagering on dog or
horse races, sports betting or wagering on any type of sports contest or event.
Under the Casino Contract, for each fiscal year of the Casino's operation,
JCC is required to pay to LGCB the greater of (i) $100 million; and (ii) the sum
of a sliding scale of gross gaming revenue that begins with a percentage of
18.5% of such revenues up to $600 million and escalates in differing
27
percentages to a high of 25% for such revenues in excess of $900 million. JCC is
required to make such payments in daily increments, with an end of year
settlement for gross gaming revenues in excess of $100 million. At least one day
prior to the beginning of each fiscal year (no later than March 31(st) of each
year), JCC is required to post with LGCB an unconditional guaranty of the
minimum $100 million payments to LGCB in a form acceptable to LGCB and issued by
a lender or third party with resources suitable to cover this payment (as
determined by LGCB). The failure to post such a guaranty will result in the
automatic termination of the Casino Contract with no cure period. The Casino
Contract also imposes certain financial stability requirements on JCC relating
to its ability to meet ongoing operating expenses, casino bankroll requirements,
project debt payments and capital maintenance requirements. If JCC fails to
clearly and convincingly demonstrate compliance with such requirements, LGCB may
impose certain regulatory conditions, including, without limitation, placing
restrictions on certain distributions by JCC to affiliates or entities in a
control relationship with any of them and appointing a fiscal agent. The failure
to cure a financial stability default within the specified period of time is an
Event of Default under the Casino Contract that could lead to the closure of the
Casino, the termination of the Casino Contract, and/or the appointment of a
conservator.
The sale, transfer, assignment, or alienation of a casino operating
contract, or an interest therein, in violation of the Gaming Act is prohibited.
The LGCB may approve the sale, transfer, assignment, or may grant the approval
subject to conditions imposed by the LGCB. Further, under the Gaming Act, the
sale, transfer, assignment, pledge, alienation, disposition, public offering, or
acquisition of securities that results in one person's owning 5% or more of the
total outstanding shares issued by JCC is void as to such person without prior
approval of the LGCB. Failure to obtain prior approval by the of LGCB of a
person acquiring 5% or more of the total outstanding shares of a licensee or 5%
or more economic interest in JCC is grounds for cancellation of the Casino
Contract or license suspension or revocation.
The Gaming Act obligates JCC to give preference and priority to Louisiana
residents, laborers, vendors and suppliers, except when not reasonably possible
to do so without added expense, substantial inconvenience or sacrifice in
operational efficiency. The Gaming Act further obligates JCC to give preference
and priority to Louisiana residents in considering applicants for employment and
requires that no less than 80% of the persons employed by JCC be Louisiana
residents for at least one year immediately prior to employment. The Gaming Act
provides that if any contract or other agreement to which the casino operator is
a party contains a provision or clause establishing a different percentage or
requiring more than 50% of the persons employed to be residents of any one
parish, any such provision or clause shall be null and void and unenforceable as
against public policy.
The Gaming Act requires that JCC adopt written policies, procedures, and
regulations to allow the participation of businesses owned by minorities in all
design, engineering, and construction contracts and/or projects to the maximum
extent practicable. The Rules and Regulations provide that JCC and HNOMC must
take the foregoing actions with respect to all design, engineering,
construction, banking and maintenance contracts and any other projects initiated
by JCC and HNOMC. The Gaming Act further requires JCC, as nearly as practicable,
to employ minorities consistent with the population of the State. The Rules and
Regulations extend this obligation to HNOMC as well.
The Gaming Act provides that JCC shall not: (i) offer seated restaurant
facilities with table food service for patrons, but may offer limited cafeteria
style food services for employees and patrons as provided by rule of the LGCB,
provided, however, that no food may be given away or subsidized within the New
Orleans Casino by JCC or any licensee, and no facility for food service shall
exceed seating for 250 persons (by rule and regulation, LGCB is empowered to
allow JCC to contract with local food preparers to provide certain limited food
offerings at the New Orleans Casino); (ii) offer lodging in the Casino, nor
engage in any practice or enter into any business relationships to give any
hotel, whether or not affiliated with JCC, any advantage or preference not
available to all similarly situated hotels; (iii) engage in such activities as
are prohibited by the Casino Contract; (iv) engage in the sale of
28
products that are not directly related to gaming; or (v) cash or accept in
exchange for the purchase of tokens, chips or electronic cards an identifiable
employee payroll check. Any contract between JCC and any hotel or lodging
facilities must be submitted to the LGCB for approval prior to entering into the
contract.
The Gaming Act provides that the LGCB shall annually enter into a casino
support services contract with the City of New Orleans in order to compensate it
for the cost to it for providing support services resulting from the operation
of the official gaming establishment and the activities therein. The amount of
the contract is to be determined by negotiation and agreement on an annual basis
between the LGCB and the City of New Orleans, subject to approval by the State
legislature.
The Gaming Act, the Casino Contract and the Rules and Regulations have
extensive prior approval requirements relating to certain borrowings and
security interests related to the casino project. The Gaming Act authorizes the
LGCB to provide for the protection of the rights of holders of security
interests in both immovable property and movable property used in or related to
casino gaming operations ("Gaming Collateral") and to provide for the continued
operation of the New Orleans Casino during the period of time that a lender, as
a holder of a security interest, seeks to enforce its security interest in such
property. In connection therewith, the Gaming Act provides that the holder of a
security interest in Gaming Collateral may receive payments from the owner or
lessee of such property out of the proceeds of casino gaming operations received
by the owner or lessee, and, the holder of the security interest may be exempt
from the licensing requirements of the Gaming Act with respect to such payments
if the transaction(s) giving rise to such payments have been approved in advance
by the LGCB and complies with all rules and regulations of the LGCB and the LGCB
determines the holder to be suitable.
Under the Gaming Act, a holder of a security interest in a gaming device who
asserts the right to ownership or possession of the encumbered property may be
granted a one-time, nonrenewable, provisional contract for a maximum of 90 days
for the sole purpose of acquiring ownership or possession for resale to a
licensed or approved person, all in accordance with rules and regulations to be
promulgated by the LGCB. The Rules and Regulations do not yet include a rule and
regulation on this provision.
If the holder of a security interest in immovable property comprising the
New Orleans Casino wished to continue the operation during and after the filing
of a suit to enforce the security interest, the Gaming Act provides that the
holder of the security interest must name the LGCB as a nominal defendant in
such suit and request the appointment of a receiver from among the persons on a
list maintained by the LGCB. Upon proof of the debtor's default under the
security instrument and the holder's right to enforce the security interest, the
court shall appoint a person from the LGCB's list as a receiver of the official
gaming establishment. Upon appointment of the receiver, the Gaming Act requires
the receiver to furnish a fidelity bond in favor of the security interest
holder, the owner or lessee of the official gaming establishment and the LGCB in
an amount to be set by the court after consultation with the LGCB and all
parties. The Gaming Act requires the LGCB to issue to the receiver a one-time,
nonrenewable, provisional contact to continue gaming operations until the
receivership is terminated. The receiver is considered to have all the rights
and obligations of the casino operator under the casino operating contract. The
holder of the security interest provoking the appointment of a receiver under
the Gaming Act is required to pay the cost of the receiver's bond and the cost
of operating the official gaming establishment or gaming operator during the
term of the receivership to the extent that such costs exceed available
revenues, in accordance with the rules and regulations of the LGCB. The Gaming
Act further provides that the fees of the receiver and the authority for
expenditures of the receiver are to be established by rules and regulations of
the LGCB.
The Gaming Act provides that a receivership must terminate upon: (i) the
sale of the property subject to receivership to a duly approved or authorized
person; (ii) the payment in full of all
29
obligations due to the holder of the security interest in the property subject
to the receivership; (iii) an agreement for termination of the receivership
signed by the holder of the security interest and the debtor, and approved by
the LGCB and the court; or (iv) the lapse of five years from the date of the
initial appointment of the receiver. Under the Gaming Act, a receivership may
also be terminated by notice from the holder of the security interest who
provoked the receivership addressed to the court and the LGCB of its intention
to withdraw its financial support of the receivership at a specified time not
less than 90 days from the date of the notice. In the event of such notice, the
Gaming Act provides that the holder of the security interest giving the notice
will not be responsible for any costs or expenses of the receivership after the
date specified in the notice; except for reasonable costs and fees of the
receiver in concluding the receivership, and the costs of a final accounting.
The Gaming Act purports to provide that LGCB, the Governor by Executive
Order, subject to legislative approval or the State legislature by act or
resolution, may set aside or renegotiate the provisions of Casino operating
contract when the casino operator is either voluntarily or involuntarily placed
in bankruptcy, receivership or similar status.
The Gaming Act provides that no rule or regulation and no provision in a
contract executed by the LGCB pursuant to its authority to protect the holders
of security interests in Gaming Collateral shall be the basis for any cause of
action in contract or in tort against the State or the LGCB, its board of
directors or its agents, attorneys or employees.
Because legalized gaming is a relatively new industry in the State, there
has been significant attention by the Louisiana legislature over the past few
years to gaming related bills dealing with a wide range of subjects that could
impact the New Orleans Casino project. At various times, bills have been
introduced to, among other things, constitutionally and/or legislatively repeal
all forms of gaming (including the land-based casino), increase taxes on
casinos, limit credit that may be extended by casinos, limit days and hours of
operation and alter the regulatory oversight structure. There can be no
assurances that legislation having a material detrimental impact on the New
Orleans Casino will not be enacted.
GAMING--ILLINOIS
The ownership and operation of a gaming riverboat in Illinois is subject to
extensive regulation under the Illinois Riverboat Gambling Act and the rules and
regulations promulgated thereunder. A five-member Illinois Gaming Board is
charged with such regulatory authority, including the issuance of riverboat
gaming licenses not to exceed 10 in number. The granting of an owner's license
involves a preliminary approval procedure in which the Illinois Gaming Board
issues a finding of preliminary suitability to a license applicant and
effectively reserves a gaming license for such applicant. The Board has issued
all 10 licenses. Des Plaines Development Limited Partnership, of which 80% is
owned by Harrah's Illinois Corporation, an indirect subsidiary of Harrah's,
received an owner's license in 1993.
To obtain an owner's license (and a finding of preliminary suitability),
applicants must submit comprehensive application forms, be fingerprinted and
undergo an extensive background investigation by the Illinois Gaming Board. Each
license granted entitles a licensee to own and operate up to two riverboats
(with a combined maximum of 1,200 gaming positions) and equipment thereon from a
specific location.
An applicant is ineligible to receive an owner's license if the applicant,
any of its officers, directors or managerial employees or any person who
participates in the management or operation of gaming operations: (i) has been
convicted of a felony; (ii) has been convicted of any violation under Article 28
of the Illinois Criminal Code or any similar statutes in any other jurisdiction;
(iii) has submitted an application which contains false information; or (iv) is
a member of the Illinois Gaming Board. In addition, an applicant is ineligible
to receive an owners' license if a license of the applicant issued
30
under the Illinois legislation or a license to own or operate gaming facilities
in any other jurisdiction has been revoked.
In determining whether to grant a license, the Illinois Gaming Board
considers: (i) the character, reputation, experience and financial integrity of
the applicants; (ii) the type of facilities (including riverboat and docking
facilities) proposed by the applicant; (iii) the highest prospective total
revenue to be derived by the state from the conduct of riverboat gaming; (iv)
affirmative action plans of the applicant, including minority training and
employment; and (v) the financial ability of the applicant to purchase and
maintain adequate liability and casualty insurance. Municipal (or county, if an
operation is located outside of a municipality) approval of a proposed applicant
is required, and all documents, resolutions, and letters of support must be
submitted with the initial application.
A holder of a license is subject to the imposition of fines, suspension or
revocation of its license for any act that is injurious to the public health,
safety, morals, good order, and general welfare of the people of the state of
Illinois, or that would discredit or tend to discredit the Illinois gaming
industry or the state of Illinois, including without limitation: (i) failing to
comply with or make provision for compliance with the legislation, the rules
promulgated thereunder or any federal, state or local law or regulation; (ii)
failing to comply with any rule, order or ruling of the Illinois Gaming Board or
its agents pertaining to gaming; (iii) receiving goods or services from a person
or business entity who does not hold a supplier's license but who is required to
hold such license by the rules; (iv) being suspended or ruled ineligible or
having a license revoked or suspended in any state or gaming jurisdiction;
(v) associating with, either socially or in business affairs, or employing
persons of, notorious or unsavory reputation or who have extensive police
records, or who have failed to cooperate with any official constituted
investigatory or administrative body and would adversely affect public
confidence and trust in gaming; and (vi) employing in any Illinois riverboat's
gaming operation any person known to have been found guilty of cheating or using
any improper device in connection with any game. Fines may be made of up to
$5,000 against individuals and up to the greater of $10,000 or an amount equal
to the daily gross receipts against licensees for each violation.
An ownership interest in a license or in a business entity, other than a
publicly held business entity which holds an owner's license, may not be
transferred without approval of the Illinois Gaming Board. In addition, an
ownership interest in a license or in a business entity, other than a publicly
held business entity, which holds either directly or indirectly an owner's
license, may not be pledged as collateral without approval of the Illinois
Gaming Board.
A person employed at a riverboat gaming operation must hold an occupational
license which permits the holder to perform only activities included within such
holder's level of occupation license or any lower level of occupation license.
In addition, the Illinois Gaming Board issues suppliers licenses which authorize
the supplier licensee to sell or lease gaming equipment and supplies to any
licensee involved in the ownership and management of gaming operations.
Minimum and maximum wagers on games are set by the licensee and wagering may
be conducted only with a cashless wagering system, whereby money is converted to
tokens, electronic cards or chips which can only be used for wagering. No person
under the age of 21 is permitted to wager, and wagers may only be taken from a
person present on a licensed riverboat. With respect to electronic gaming
devices, the payout percentage may not be less than 80% nor more than 100%.
The legislation, as amended, imposes an annual graduated wagering tax on
adjusted receipts (generally defined as gross receipts less payments to
customers as winnings) from gambling games, effective January 1, 1998. The
graduated tax rate is as follows: up to $25 million--15%; $25 to $50
million--20%; $50 to $75 million--25%; $75 to $100 million--30%; in excess of
$100 million--35%. The tax imposed is to be paid by the licensed owner to the
Illinois Gaming Board on the day after the day when the wagers were made. Of the
proceeds of that tax, 25% goes to the local government where
31
the home dock is located, a small portion goes to the Illinois Gaming Board for
administration and enforcement expenses, and the remainder goes to the state
education assistance fund.
The legislation also requires that licensees pay a $2.00 admission tax for
each person admitted to a gaming cruise. Of this admission tax, the host
municipality or county receives $1.00. The licensed owner is required to
maintain public books and records clearly showing amounts received from
admission fees, the total amount of gross receipts and the total amount of
adjusted gross receipts.
All use, occupancy and excise taxes which apply to food and beverages and
all taxes imposed on the sale or use of tangible property apply to sales aboard
riverboats.
In 1999, the Riverboat Gambling Act was amended, INTER ALIA, to allow
dockside gaming, the ownership of multiple casino licenses, and the movement of
a riverboat gaming license from one location to another. Subsequently, a lawsuit
was filed challenging the constitutionality of certain aspects of the amendment.
If the lawsuit is successful, it may result in a finding that the entire
amendment is unconstitutional. Such a finding could have a material adverse
effect on the Company's ownership of multiple casino licenses and the operating
results of the Company's riverboats.
GAMING--MISSISSIPPI
The ownership and operation of a gaming business in the State of Mississippi
is subject to extensive laws and regulations, including the Mississippi Gaming
Control Act (the "Mississippi Act") and the regulations (the "Mississippi
Regulations") promulgated thereunder by the Mississippi Gaming Commission (the
"Mississippi Commission"), which is empowered to oversee and enforce the
Mississippi Act. Gaming in Mississippi can be legally conducted only on vessels
of a certain minimum size in navigable waters within any county bordering the
Mississippi River or in waters of the State of Mississippi which lie adjacent
and to the south (principally in the Gulf of Mexico) of the Counties of Hancock,
Harrison and Jackson, provided that the county in question has not voted by
referendum not to permit gaming in that county. The underlying policy of the
Mississippi Act is to ensure that gaming operations in Mississippi are
conducted: (i) honestly and competitively; (ii) free of criminal and corruptive
influences; and (iii) in a manner which protects the rights of the creditors of
gaming operations.
The Mississippi Act requires that a person (including any corporation or
other entity) be licensed to conduct gaming activities in the State of
Mississippi. A license will be issued only for a specified location which has
been approved in advance as a gaming site by the Mississippi Commission.
Harrah's Vicksburg Corporation, an indirect subsidiary of Harrah's, is licensed
to operate a riverboat casino in Vicksburg, Mississippi. Harrah's Tunica
Corporation, another indirect subsidiary, is the general partner of Tunica
Partners L.P. and Tunica Partners II L.P., each of which is the licensed
operator of a riverboat casino in Tunica, Mississippi. (Harrah's Vicksburg
Corporation is the limited partner of both partnerships.) As stated above, the
casino operated by Tunica Partners L.P. closed in May 1997, and on March 1,
1999, that casino was sold to a subsidiary of Casino America, Inc. In addition,
a parent company of a company holding a license must register under the
Mississippi Act. Harrah's Entertainment and HOC are registered with the
Mississippi Commission.
The Mississippi Act also requires that each officer or director of a gaming
licensee, or other person who exercises a material degree of control over the
licensee, either directly or indirectly, be found suitable by the Mississippi
Commission. In addition, any employee of a licensee who is directly involved in
gaming must obtain a work permit from the Mississippi Commission. The
Mississippi Commission will not issue a license or make a finding of suitability
unless it is satisfied, after an investigation paid for by the applicant, that
the persons associated with the gaming licensee or applicant for a license are
of good character, honesty and integrity, with no relevant or material criminal
record. In addition, the Mississippi Commission will not issue a license unless
it is satisfied that the licensee is adequately financed or has a reasonable
plan to finance its proposed operations
32
from acceptable sources, and that persons associated with the applicant have
sufficient business probity, competence and experience to engage in the proposed
gaming enterprise. The Mississippi Commission may refuse to issue a work permit
to a gaming employee: (i) if the employee has committed larceny, embezzlement or
any crime of moral turpitude, or has knowingly violated the Mississippi Act or
Mississippi Regulations; or (ii) for any other reasonable cause.
There can be no assurance that such persons will be found suitable by the
Mississippi Commission. An application for licensing, finding of suitability or
registration may be denied for any cause deemed reasonable by the issuing
agency. Changes in licensed positions must be reported to the issuing agency. In
addition to its authority to deny an application for a license, finding of
suitability or registration, the Mississippi Commission has jurisdiction to
disapprove a change in corporate position. If the Mississippi Commission were to
find a director, officer or key employee unsuitable for licensing or unsuitable
to continue having a relationship with the licensee, such entity would be
required to suspend, dismiss and sever all relationships with such person. The
licensee would have similar obligations with regard to any person who refuses to
file appropriate applications. Each gaming employee must obtain a work permit
which may be revoked upon the occurrence of certain specified events.
Any individual who is found to have a material relationship to, or material
involvement with, Harrah's Entertainment may be required to submit to an
investigation in order to be found suitable or be licensed as a business
associate of any subsidiary holding a gaming license. Key employees, controlling
persons or others who exercise significant influence upon the management or
affairs of Harrah's Entertainment may be deemed to have such a relationship or
involvement.
The Mississippi Commission has the power to deny, limit, condition, revoke
and suspend any license, finding of suitability or registration, or to fine any
person, as it deems reasonable and in the public interest, subject to an
opportunity for a hearing. The Mississippi Commission may fine any licensee or
person who was found suitable up to $100,000 for each violation of the
Mississippi Act or the Mississippi Regulations which is the subject of an
initial complaint, and up to $250,000 for each such violation which is the
subject of any subsequent complaint. The Mississippi Act provides for judicial
review of any final decision of the Mississippi Commission by petition to a
Mississippi Circuit Court, but the filing of such petition does not necessarily
stay any action taken by the Mississippi Commission pending a decision by the
Circuit Court.
Each gaming licensee must pay a license fee to the State of Mississippi
based upon "gaming receipts" (generally defined as gross receipts less payouts
to customers as winnings). The license fee equals four percent of gaming
receipts of $50,000 or less per month, six percent of gaming receipts over
$50,000 and up to $134,000 per month, and eight percent of gaming receipts over
$134,000. The foregoing license fees are allowed as a credit against Mississippi
state income tax liability for the year paid. An additional license fee, based
upon the number of games conducted or planned to be conducted on the gaming
premises, is payable to the State of Mississippi annually in advance. Also, up
to a four percent additional tax on gaming revenues may be imposed at the local
level of government.
The Company also is subject to certain audit and record-keeping
requirements, primarily intended to ensure compliance with the Mississippi Act,
including compliance with the provisions relating to the payment of license
fees.
Under the Mississippi Regulations, a person is prohibited from acquiring
control of Harrah's Entertainment without prior approval of the Mississippi
Commission. Harrah's Entertainment also is prohibited from consummating a plan
of recapitalization proposed by management in opposition to an attempted
acquisition of control of Harrah's Entertainment and which involves the issuance
of a significant dividend to Common Stock holders, where such dividend is
financed by borrowings from financial institutions or the issuance of debt
securities. In addition, Harrah's Entertainment is prohibited from repurchasing
any of its voting securities under circumstances (subject to certain exemptions)
where the repurchase involves more than one percent of Harrah's Entertainment
33
outstanding Common Stock at a price in excess of 110 percent of the then-current
market value of Harrah's Entertainment Common Stock from a person who owns and
has for less than one year owned more than three percent of Harrah's
Entertainment outstanding Common Stock, unless the repurchase has been approved
by a majority of Harrah's Entertainment shareholders voting on the issue
(excluding the person from whom the repurchase is being made) or the offer is
made to all other shareholders of Harrah's.
Under the Mississippi Regulations, a gaming license may not be held by a
publicly held corporation, although an affiliated corporation, such as Harrah's,
may be publicly held so long as Harrah's Entertainment registers with and gets
the approval of the Mississippi Commission. Harrah's Entertainment must obtain
prior approval from the Mississippi Commission for any subsequent public
offering of the securities of Harrah's Entertainment if any part of the proceeds
from that offering are intended to be used to pay for or reduce debt used to pay
for the construction, acquisition or operation of any gaming facility in
Mississippi. In addition, in order to register with the Mississippi Commission
as a publicly held holding corporation, Harrah's Entertainment must provide
further documentation which is satisfactory to the Mississippi Commission, which
includes all documents filed with the Securities and Exchange Commission.
Any person who, directly or indirectly, or in association with others,
acquires beneficial ownership of more than five percent of the Common Stock of
Harrah's Entertainment must notify the Mississippi Commission of this
acquisition. Regardless of the amount of securities owned, any person who has
any beneficial ownership in the Common Stock of Harrah's Entertainment may be
required to be found suitable if the Mississippi Commission has reason to
believe that such ownership would be inconsistent with the declared policies of
the State of Mississippi. Any person who is required to be found suitable must
apply for a finding of suitability from the Mississippi Commission within 30
days after being requested to do so, and must deposit a sum of money which is
adequate to pay the anticipated investigatory costs associated with such
finding. Any person who is found not to be suitable by the Mississippi
Commission shall not be permitted to have any direct or indirect ownership in
Harrah's Entertainment Common Stock. Any person who is required to apply for a
finding of suitability and fails to do so, or who fails to dispose of his or her
interest in Harrah's Entertainment Common Stock if found unsuitable, is guilty
of a misdemeanor. If a finding of suitability with respect to any person is not
applied for where required, or if it is denied or revoked by the Mississippi
Commission, Harrah's Entertainment is not permitted to pay such person for
services rendered, or to employ or enter into any contract with such person.
Harrah's Entertainment is required to maintain current stock ledgers in the
State of Mississippi which may be examined by a representative of the
Mississippi Commission at any time. If any securities are held in trust by an
agent or by a nominee, the record holder may be required to disclose the
identity of the beneficial owner to the Mississippi Commission. A failure to
make such disclosure may be grounds for finding the record holder unsuitable.
Harrah's Entertainment also is required to render maximum assistance in
determining the identity of the beneficial owner.
Because Harrah's Entertainment is licensed to conduct gaming in the State of
Mississippi, neither Harrah's Entertainment nor any subsidiary may engage in
gaming activities in Mississippi while also conducting gaming operations outside
of Mississippi without approval of the Mississippi Commission. The Mississippi
Commission has approved the conduct of gaming in all jurisdictions in which
Harrah's Entertainment has ongoing operations or approved projects. There can be
no assurance that any future approvals will be obtained. The failure to obtain
such approvals could have a materially adverse effect on Harrah's.
34
GAMING--LOUISIANA (RIVERBOAT)
The ownership and operation of a gaming riverboat in Louisiana is subject to
extensive regulation under Louisiana Riverboat Economic Development and Gaming
Control Act and the rules and regulations promulgated thereunder. A seven-member
Louisiana Gaming Control Board ("LGCB") and the Riverboat Gaming Enforcement
Division ("Division"), a part of the Louisiana State Police, are charged with
such regulatory authority, including the issuance of riverboat gaming licenses.
The number of licenses to conduct gaming on a riverboat is limited by statute to
15. No more than six licenses may be granted for the operation of gaming
activities on riverboats in any one parish (county). In general, riverboat
gaming in Louisiana can be conducted legally only on approved riverboats that
cruise with certain exceptions including exceptions for certain portions of the
Red River where riverboats can be continuously docked. Harrah's Shreveport
Investment Company, Inc. an indirect subsidiary of Harrah's, is the general
partner of, and owns 99% of, Red River Entertainment of Shreveport Partnership
in Commendam ("Red River"), a Louisiana partnership which was granted a gaming
license in April 1994, to operate a continuously docked gaming riverboat.
Harrah's Shreveport Management Company, Inc., another subsidiary, owns the
remaining one percent of the Partnership and manages the riverboat, pursuant to
an agreement with the Partnership.
To obtain a gaming license, applicants must obtain certain Certificates of
Approval from the LGCB and submit comprehensive application forms, be
fingerprinted and undergo an extensive background investigation by the Division.
An applicant is ineligible to receive a gaming license if the applicant has not
established good character, honesty and integrity. Each license granted entitles
a licensee to operate a riverboat and equipment thereon from a specific
location. The duration of the license initially runs for five years. Red River
received a one-year renewal in July, 1999. Subsequent renewals will be for
two-year terms. In determining whether to grant a license, the Division
considers: (i) the good character, honesty and integrity of the applicant; (ii)
the applicant's ability to conduct gaming operations; (iii) the adequacy and
source of the applicant's financing; (iv) the adequacy of the design documents
submitted; (v) the docking facilities to be used; (vi) applicant's plan to
recruit, train, and upgrade minorities in employment and to provide for
minority-owned business participation.
A holder of a license is subject to the imposition of penalties, suspension
or revocation of its license for any act that is injurious to the public health,
safety, morals, good order, and general welfare of the people of the state of
Louisiana, or that violates the gaming laws and regulations.
The transfer of a license or an interest in a license is prohibited. In
addition, an ownership interest of five percent or more in a business entity
which holds a gaming license may not be sold, assigned, transferred or pledged
without the Division's approval.
No person may be employed as a gaming employee unless such person holds a
gaming employee permit issued by the Division. In addition, the Division issues
suppliers licenses which authorize the supplier licensee to sell or lease gaming
equipment and supplies to any licensee.
Minimum and maximum wagers on games are set by the licensee and wagering may
be conducted only with a cashless wagering system, whereby all money is
converted to tokens, electronic cards, or chips used only for wagering in the
gaming establishment. No person under the age of 21 is permitted to wager, and
wagers may only be taken from a person present on a licensed riverboat.
The legislation imposes a franchise fee for the right to operate on
Louisiana waterways of 15% of net gaming proceeds and a license fee of $50,000
(first year) and $100,000 (subsequent years) plus three and one-half percent of
net gaming proceeds. All fees are paid to the Division. In addition, the
legislation authorizes local governing authorities the power to levy an
admission fee for each person boarding the riverboat. Currently that amount is
paid by the license holder. The Company's operation is currently making a
payment in lieu of such admission fee of 4.75% of net gaming proceeds.
35
GAMING--MISSOURI
The ownership and operation of a gaming riverboat in Missouri is subject to
extensive regulation under the Missouri Riverboat Gambling Act and the rules and
regulations promulgated thereunder. A five-member Missouri Gaming Commission
("Commission") is charged with such regulatory authority, including the issuance
of riverboat gaming licenses. Harrah's-North Kansas City Corporation, an
indirect subsidiary of Harrah's, has been issued two licenses by the Commission
to conduct riverboat gaming at its North Kansas City location. Harrah's Maryland
Heights LLC, also an indirect subsidiary of the Company, has been issued two
licenses by the Commission to conduct riverboat gaming at its Maryland Heights
location. Gaming in Missouri can be conducted legally only on either excursion
gambling boats or floating facilities approved by the Commission on the
Mississippi and Missouri Rivers. Unless permitted to be continuously docked by
the Commission for certain stated reasons, including safety, excursion gambling
boats must cruise. The Commission has approved dockside gaming for the Company's
riverboats in North Kansas City and Maryland Heights.
To obtain a gaming license, applicants must submit comprehensive application
forms, be fingerprinted and undergo an extensive background investigation by the
Commission. An applicant is ineligible to receive an owner's license if the
applicant has not established good reputation and moral character or if the
applicant, any of its officers, directors or managerial employees or any person
who participates in the management or operation of gaming operations has been
convicted of a felony. There are separate licenses for owners and operators of
riverboat gambling operations, which can be applied for and held concurrently.
Each license granted entitles a licensee to own and/or operate an excursion
gambling boat and equipment thereon from a specific location. The duration of
the license initially runs for two one-year terms followed by two-year terms.
The Commission also licenses the serving of alcoholic beverages on riverboats
and adjacent facilities. All local income, earnings, use, property and sales
taxes are applicable to licensees.
In determining whether to grant a license, the Commission considers: (i) the
integrity of the applicants; (ii) the types and variety of games to be offered;
(iii) the quality of the physical facility, together with improvements and
equipment, and how soon the project will be completed; (iv) the financial
ability of the applicant to develop and operate the facility successfully; (v)
the status of governmental actions required for the facility; (vi) management
ability of the applicant; (vii) compliance with applicable laws, rules,
charters, and ordinances; (viii) the economic, ecological and social impact of
the facility as well as the cost of public improvements; (ix) the extent of
public support or opposition; (x) the plan adopted by the home dock city or
county; and (xi) effects on competition.
A holder of a license is subject to the imposition of penalties, suspension
or revocation of its license for any act that is injurious to the public health,
safety, morals, good order, and general welfare of the people of the state of
Missouri, or that would discredit or tend to discredit the Missouri gaming
industry or the state of Missouri, including without limitation: (i) failing to
comply with or make provision for compliance with the legislation, the rules
promulgated thereunder or any federal, state or local law or regulation; (ii)
failing to comply with any rules, order or ruling of the Commission or its
agents pertaining to gaming; (iii) receiving goods or services from a person or
business entity who does not hold a supplier's license but who is required to
hold such license by the legislation or the rules; (iv) being suspended or ruled
ineligible or having a license revoked or suspended in any state or gaming
jurisdiction; (v) associating with, either socially or in business affairs, or
employing persons of notorious or unsavory reputation or who have extensive
police records, or who have failed to cooperate with any official constituted
investigatory or administrative body and would adversely affect public
confidence and trust in gaming; (vi) employing in any Missouri gaming operation
any person known to have been found guilty of cheating or using any improper
device in connection with any game; (vii) use of fraud, deception,
misrepresentation or bribery in securing any license or permit issued pursuant
to the legislation; (viii) obtaining any fee, charge, or other compensation by
fraud, deception or
36
misrepresentation; and (ix) incompetence, misconduct, gross negligence, fraud,
misrepresentation or dishonesty in the performance of the functions or duties
regulated by the legislation.
An ownership interest in a license or in a business entity, other than a
publicly held business entity which holds a license, may not be transferred
without the approval of the Commission. In addition, an ownership interest in a
license or in a business entity, other than a publicly held business entity,
which holds either directly or indirectly a license, may not be pledged as
collateral to other than a regulated bank or saving and loan association without
the Commission's approval.
Every employee participating in a riverboat gaming operation must hold an
occupational license which permits the holder to perform only activities
included within such holder's level of occupation license or any lower level of
occupation license. In addition, the Commission will issue suppliers licenses
which authorize the supplier licensee to sell or lease gaming equipment and
supplies to any licensee involved in the ownership and management of gaming
operations.
Even if continuously docked, licensed riverboats must establish and abide by
a cruise schedule. Riverboat cruises are required to be a minimum of two hours
and a maximum of four hours. For the Company's riverboats in North Kansas City
and Maryland Heights, which are continuously docked, passengers may board the
riverboats for a 45-minute period at the beginning of a cruise. They may
disembark at any time. There is a maximum loss per person per cruise of $500.
Minimum and maximum wagers on games are set by the licensee and wagering may be
conducted only with a cashless wagering system, whereby money is converted to
tokens, electronic cards or chips which can only be used for wagering. No person
under the age of 21 is permitted to wager, and wagers may only be taken from a
person present on a licensed excursion gambling boat.
The legislation imposes a 20% wagering tax on adjusted gross receipts
(generally defined as gross receipts less payments to customers as winnings)
from gambling games. The tax imposed is to be paid by the licensed owner to the
Commission on the day after the day when the wagers were made. Of the proceeds
of that tax, 10% goes to the local government where the home dock is located,
and the remainder goes to the state education assistance fund.
The legislation also requires that licensees pay a $2.00 admission tax for
each person admitted to a gaming cruise. The licensed owner is required to
maintain public books and records clearly showing amounts received from
admission fees, the total amount of gross receipts and the total amount of
adjusted gross receipts.
INDIAN GAMING
The terms and conditions of management contracts and the operation of
casinos and all gaming on Indian land in the United States are subject to the
Indian Gaming Regulatory Act of 1988 ("IGRA"), which is administered by the NIGC
and the gaming regulatory agencies of tribal governments. IGRA is subject to
interpretation by the NIGC and may be subject to judicial and legislative
clarification or amendment.
IGRA requires NIGC approval of management contracts for Class II and Class
III gaming as well as the review of all agreements collateral to the management
contracts. The management contracts relating to the Harrah's managed casinos for
the Ak-Chin Indian Community, the Eastern Band of Cherokee Indians and the
Prairie Band of Potawatomi Nation were approved by the NIGC. The NIGC will not
approve a management contract if a director or a 10% shareholder of the
management company: (i) is an elected member of the Indian tribal government
which owns the facility purchasing or leasing the games; (ii) has been or is
convicted of a felony gaming offense; (iii) has knowingly and willfully provided
materially false information to the NIGC or the tribe; (iv) has refused to
respond to questions from the NIGC; or (v) is a person whose prior history,
reputation and associations pose a threat to the public interest or to effective
gaming regulation and control, or create or enhance the
37
chance of unsuitable activities in gaming or the business and financial
arrangements incidental thereto. In addition, the NIGC will not approve a
management contract if the management company or any of its agents have
attempted to unduly influence any decision or process of tribal government
relating to gaming, or if the management company has materially breached the
terms of the management contract or the tribe's gaming ordinance, or a trustee,
exercising due diligence, would not approve such management contract. A
management contract can be approved only after NIGC determines that the contract
provides, among other things, for: (i) adequate accounting procedures and
verifiable financial reports, which must be furnished to the tribe; (ii) tribal
access to the daily operations of the gaming enterprise, including the right to
verify daily gross revenues and income; (iii) minimum guaranteed payments to the
tribe, which must have priority over the retirement of development and
construction costs; (iv) a ceiling on the repayment of such development and
construction costs and (v) a contract term not exceeding five years and a
management fee not exceeding 30% of net revenues (as determined by the NIGC);
provided that the NIGC may approve up to a seven year term and a management fee
not to exceed 40% of net revenues if NIGC is satisfied that the capital
investment required, and the income projections for the particular gaming
activity require the larger fee and longer term. There is no periodic or ongoing
review of approved contracts by the NIGC. The only post-approval action which
could result in possible modification or cancellation of a contract would be as
the result of an enforcement action taken by the NIGC based on a violation of
the law or an issue affecting suitability.
IGRA established three separate classes of tribal gaming--Class I, Class II
and Class III. Class I includes all traditional or social games solely for
prizes of minimal value played by a tribe in connection with celebrations or
ceremonies. Class II gaming includes games such as bingo, pulltabs, punchboards,
instant bingo and non-banked card games (those that are not played against the
house), such as poker. Class III gaming is casino-style gaming and includes
banked table games such as blackjack, craps and roulette, and gaming machines
such as slots, video poker, lotteries and pari-mutuel wagering. Harrah's Phoenix
Ak-Chin provides Class II gaming and, as limited by the tribal-state compact,
Class III gaming. The Cherokee and Prairie Band casinos provide only Class III
gaming.
IGRA prohibits all forms of Class III gaming unless the tribe has entered
into a written agreement with the state that specifically authorizes the types
of Class III gaming the tribe may offer (a "tribal-state compact"). These
compacts provide among other things the manner and extent to which each state
will conduct background investigations and certify the suitability of the
manager, its officers, directors, and key employees to conduct gaming on tribal
lands. The Company has received its permanent certification from the Arizona
Department of Gaming as management contractor for the Ak-Chin Indian Community's
casino and has been licensed by the relevant tribal gaming authorities to manage
the Prairie Band of Potawatomi Indians' casino and the Eastern Band of Cherokee
Indians' casino, respectively.
Title 25, Section 81 of the United States Code states that "no agreement
shall be made by any person with any tribe of Indians, or individual Indians not
citizens of the United States, for the payment or delivery of any money or other
thing of value . . . in consideration of services for said Indians relative to
their lands . . . unless such contract or agreement be executed and approved" by
the Secretary or his or her designee. An agreement or contract for services
relative to Indian lands which fails to conform with the requirements of Section
81 is void and unenforceable. All money or other thing of value paid to any
person by any Indian or tribe for or on his or their behalf, on account of such
services, in excess of any amount approved by the Secretary or his or her
authorized representative will be subject to forfeiture. We believe that we have
complied with the requirements of section 81 with respect to our management
contracts for Harrah's Phoenix Ak-Chin, Harrah's Cherokee and Harrah's Prairie
Band and intend to comply with Section 81 with respect to any other contract to
manage casinos located on Indian land in the United States.
38
Indian tribes are sovereign with their own governmental systems, which have
primary regulatory authority over gaming on land within the tribes'
jurisdiction. Therefore, persons engaged in gaming activities, including
Harrah's Entertainment, are subject to the provisions of tribal ordinances and
regulations on gaming. These ordinances are subject to review by the NIGC under
certain standards established by IGRA. The NIGC may determine that some or all
of the ordinances require amendment, and that additional requirements, including
additional licensing requirements, may be imposed on us. We have received no
such notification regarding the Ak-Chin, Cherokee and/or Prairie Band casinos.
The possession of valid licenses from the Ak-Chin Indian Community, the Eastern
Band of Cherokee Indians and the Prairie Band of Potawatomi Nation are ongoing
conditions of our agreements with these tribes.
OTHER REGULATIONS
Our businesses are subject to various federal, state and local laws and
regulations in addition to gaming laws. These laws and regulations include, but
are not limited to, restrictions and conditions concerning alcoholic beverages,
environmental matters, employees, currency transactions, taxation, zoning and
building codes, and marketing and advertising. Such laws and regulations could
change or could be interpreted differently in the future, or new laws and
regulations could be enacted. Material changes, new laws or regulations, or
material differences in interpretations by courts or governmental authorities
could adversely affect our operating results.
FUEL SHORTAGES AND COSTS; WEATHER
Although gasoline supplies are now in relative abundance, gasoline shortages
and price increases may have adverse effects on our casino business. Access to
several of our casino entertainment facilities, including the Lake Tahoe and
Reno areas of northern Nevada and Atlantic City, New Jersey, may be restricted
from time to time during the winter months by bad weather which can cause road
closures. Such closures have at times adversely affected operating results at
Harrah's Lake Tahoe, Harrah's Reno, Bill's Lake Tahoe Casino, Harrah's Atlantic
City, Atlantic City Showboat, Harrah's Joliet and Harrah's East Chicago.
EMPLOYEE RELATIONS
Harrah's Entertainment, through its subsidiaries, has approximately 36,100
employees. Labor relations with employees are good.
Our subsidiaries have collective bargaining agreements covering
approximately 5,400 employees. These agreements relate to certain casino, hotel
and restaurant employees at Harrah's Atlantic City, Harrah's Las Vegas, Harrah's
East Chicago and both Showboat facilities.
ITEM 3. LEGAL PROCEEDINGS.
The Company is party to routine litigation incidental to our business. We do
not expect the outcome of any pending litigation to have a material adverse
effect on our consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
39
EXECUTIVE OFFICERS OF THE REGISTRANT
POSITIONS AND OFFICES HELD AND PRINCIPAL
NAME AND AGE OCCUPATIONS OR EMPLOYMENT DURING PAST 5 YEARS
- ------------ ------------------------------------------------------------
Philip G. Satre (50).......... Director since 1989, member of the three-executive Office of
the President since May, 1999, Chairman of the Board since
January 1997, and Chief Executive Officer since April 1994
of Harrah's Entertainment. President (1991-1999), Chief
Operating Officer of Harrah's Entertainment (1991-1994).
President (1984-1995) of Harrah's Gaming Group. He was a
member of the Executive Committee of Harrah's Jazz Company
and was a director and President of Harrah's Jazz Finance
Corp., both of which filed petitions under Chapter 11 of the
United States Bankruptcy Code in November 1995. On October
30, 1998, the Plan of Reorganization for both Companies was
consummated. He is also a director of TABCORP Holdings
Limited, an Australia public company, JDN Realty Corporation
and JCC Holding Company.
Colin V. Reed (52)............ Director since 1998, member of the three-executive Office of
the President since May 1999, Executive Vice President of
Harrah's Entertainment from September 1995 to May 1999.
Chief Financial Officer of Harrah's Entertainment since
April 1997. Senior Vice President, Corporate Development of
Harrah's Entertainment from May 1992 to September 1995. He
was a member of the Executive Committee of Harrah's Jazz
Company and was a director, Senior Vice President and
Secretary of Harrah's Jazz Finance Corp., both of which
filed petitions under Chapter 11 of the United States
Bankruptcy Code in November 1995. On October 30, 1998, the
Plan of Reorganization for both companies was consummated.
He is also a director of National Airlines, Inc., as well as
Chairman of the Board of JCC Holding Company.
Gary W. Loveman (39).......... Director since 2000; Chief Operating Officer since May 1998;
member of the three-executive Office of the President since
May 1999; Executive Vice President of Harrah's Entertainment
from May 1998 to May 1999. Mr. Loveman was Associate
Professor of Business Administration, Harvard University
Graduate School of Business Administration from 1994 to
1998, where his responsibilities included teaching MBA and
executive education students, research and publishing in the
field of service management, and consulting and advising
large service companies. He is also a director of National
Airlines, Inc.
John M. Boushy (44)........... Senior Vice President, Brand Operations and Information
Technology since February 1999; Senior Vice President,
Information Technology and Marketing Services of Harrah's
Entertainment from 1993 to 1999. He is a director of
Interactive Entertainment Limited.
40
POSITIONS AND OFFICES HELD AND PRINCIPAL
NAME AND AGE OCCUPATIONS OR EMPLOYMENT DURING PAST 5 YEARS
- ------------ ------------------------------------------------------------
Stephen H. Brammell (42)...... Senior Vice President and General Counsel since July 1999;
Vice President and Associate General Counsel from 1997 to
1999; Associate General Counsel from 1993 to 1997 of
Harrah's Entertainment.
Janis L. Jones (50)........... Senior Vice President of Communications/Government Relations
of Harrah's Entertainment since October 1999; Mayor of Las
Vegas from 1991 to 1999. She is also a director of the
Community Bank of Nevada and HEALTHSOUTH Corporation.
Marilyn G. Winn (47).......... Senior Vice President, Human Resources of Harrah's
Entertainment since May 1999; Senior Vice President and
General Manager of Harrah's Shreveport from 1997 to 1999;
Director of Slot Operations of Harrah's Las Vegas from 1995
to 1997.
41
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Our Common Stock is listed on the New York Stock Exchange and traded under
the ticker symbol "HET". The stock is also listed on the Chicago Stock Exchange,
the Pacific Exchange and the Philadelphia Stock Exchange.
The following table sets forth the high and low price per share of our
Common Stock for the last two years:
1999 HIGH LOW
- ---- ----------- ----------
First Quarter............................................... 20 1/4 14 3/8
Second Quarter.............................................. 24 9/16 18 7/16
Third Quarter............................................... 27 3/4 19 5/8
Fourth Quarter.............................................. 30 3/4 23 3/8
1998 HIGH LOW
- ---- ----------- ----------
First Quarter............................................... 25 1/8 18 1/8
Second Quarter.............................................. 26 3/16 21 5/8
Third Quarter............................................... 23 1/2 13 5/16
Fourth Quarter.............................................. 17 1/4 11 1/16
The approximate number of holders of record of our Common Stock as of
January 31, 2000, is as follows:
APPROXIMATE
NUMBER OF
TITLE OF CLASS HOLDERS OF RECORD
- -------------- -----------------
Common Stock, Par Value $0.10 per share..................... 11,063
We do not presently intend to declare cash dividends. Our Board of Directors
may reevaluate this dividend policy in the future in light of our results of
operations, financial condition, cash requirements, future prospects and other
factors deemed relevant by the Board.
ITEM 6. SELECTED FINANCIAL DATA.
See the information for the years 1995 through 1999 set forth under
"Financial and Statistical Highlights" on pages 20 and 21 of the Annual Report,
which pages are incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See the information set forth on pages 23 through 33 of the Annual Report,
which pages are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
We are exposed to market risk, primarily changes in interest rates. We have
entered into derivative transactions to hedge our exposure to interest rate
changes. We do not hold or issue derivative financial instruments for trading
purposes and do not enter into derivative transactions that would be considered
speculative positions.
The table below provides information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates, including interest rate swaps and
42
debt obligations. For debt obligations, the table presents notional amounts and
weighted average interest rates by contractual maturity dates.
MATURITY DATE
----------------------------------------------------------------- FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE(1)
---- ---- ---- ---- ---- ---------- ----- --------
(DOLLARS IN MILLIONS)
LIABILITIES
Long-term debt
Fixed rate.......................... $ 2.9 $ 2.7 $ 1.4 $ 1.3 $ 1.3 $1,402.5 $1,412.1 $1,353.8
Average interest rate............. 11.4% 10.5% 7.3% 7.1% 7.1% 7.7% 7.7%
Variable rate....................... $ - $ - $ - $ - $1,131.0 $ - $1,131.0 $1,131.0
Average interest rate(2).......... -% -% -% -% 7.4% -% 7.4%
INTEREST RATE SWAPS
Variable to Fixed................... $300.0 $ - $ - $ - $ - $ - $ 300.0 $ 0.5
Average pay rate.................. 6.5% -% -% -% -% -% 6.5%
Average receive rate.............. 6.1% -% -% -% -% -% 6.1%
- ------------------------------
(1) The fair values are based on the borrowing rates currently available for
debt instruments with similar terms and maturities and market quotes of the
Company's publicly traded debt.
(2) The average interest rates were based on December 31, 1999, variable rates.
Actual rates in future periods could vary.
The interest rate swap agreements contain a credit risk to the Company that
the counterparties may be unable to meet the terms of the agreements. We
minimize this risk by evaluating the creditworthiness of our counterparties,
which are limited to major banks and financial institutions.
Foreign currency translation gains and losses were not material to our
results of operations for the year ended December 31, 1999. We sold our equity
interest in a casino in a foreign country during fourth quarter 1999 and sold
our management contract for that casino in January 2000. As a result of these
transactions, we no longer have any interests in businesses in foreign countries
and, therefore, are not subject to foreign currency exchange rate risk.
Accordingly, we are not currently subject to material foreign currency exchange
rate risk from the effects that exchange rate movements of foreign currencies
would have on our future operating results or cash flows.
We also hold investments in various available-for-sale equity securities.
Our exposure to price risk arising from the ownership of these investments is
not material to our consolidated financial position, results of operations or
cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the information set forth on pages 34 through 51 of the Annual Report,
which pages are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTORS
See the information regarding the names, ages, positions and prior business
experience of our directors set forth in the section entitled "Board of
Directors" of the Proxy Statement, which information is incorporated herein by
reference.
43
EXECUTIVE OFFICERS
See "Executive Officers of the Registrant" on page 40 in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION.
See the information set forth in the sections of the Proxy Statement
entitled "Compensation of Directors," "Summary Compensation Table," "Option
Grants in the Last Fiscal Year," "Aggregated Option Exercises in 1999 and
December 31, 1999 Option Values" and "Certain Employment Arrangements", which
sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information set forth in the sections of the Proxy Statement
entitled "Ownership of Harrah's Entertainment Securities" and "Certain
Stockholders," which sections are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information set forth in the section of the Proxy Statement entitled
"Certain Transactions," which section is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial statements (including related notes to consolidated
financial statements)* filed as part of this report are listed below:
Report of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Consolidated Statements of Income for the Years Ended December 31, 1999,
1998 and 1997.
Consolidated Statements of Stockholders' Equity and Comprehensive Income for
the Years Ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,
1998 and 1997.
2. Schedules for the years ended December 31, 1999, 1998 and 1997, are
as follows:
NO.
---
I -- Condensed financial information of registrant
II.. -- Consolidated valuation and qualifying accounts
Schedules III, IV, and V are not applicable and have therefore been
omitted.
- ------------------------
* Incorporated by reference from pages 34 through 51 of the Annual Report.
3. Exhibits (footnotes appear on pages 51 through 53)
NO.
---
1 Underwriting Agreement, dated as of January 12, 1999,
between Harrah's Entertainment, Inc., Harrah's Operating
Company, Inc. and the Underwriters named therein. (26)
44
NO.
---
2(1) Agreement and Plan of Merger, dated August 9, 1998, and
amended September 4, 1998, by and among Harrah's
Entertainment, Inc., HEI Acquisition Corp. III, and Rio
Hotel & Casino, Inc. (8)
2(2) Agreement and Plan of Merger, dated as of August 19, 1999,
by and among Harrah's Entertainment, Inc., HEI Acquisition
Corp. II and Players International, Inc. (including form of
Stockholder Support Agreement entered into by stockholders
of Players as of the same date). (27)
3(1) Certificate of Incorporation of The Promus Companies
Incorporated; Certificate of Amendment of Certificate of
Incorporation of The Promus Companies Incorporated dated
April 29, 1994; Certificate of Amendment of Certificate of
Incorporation of The Promus Companies Incorporated dated May
26, 1995; and Certificate of Amendment of Certificate of
Incorporation of The Promus Companies Incorporated dated
June 30, 1995, changing its name to Harrah's Entertainment,
Inc. (19)
3(2) Bylaws of Harrah's Entertainment, Inc., as amended May 7,
1999. (28)
4(1) Rights Agreement dated as of October 5, 1996, between
Harrah's Entertainment, Inc. and The Bank of New York, which
includes the form of Certificate of Designations of Series A
Special Stock of Harrah's Entertainment, Inc. as Exhibit A,
the form of Right Certificate as Exhibit B and the Summary
of Rights to Purchase Special Shares as Exhibit C. (3)
4(2) First Amendment, dated as of February 21, 1997, to Rights
Agreement between Harrah's Entertainment, Inc. and The Bank
of New York. (21)
4(3) Second Amendment, dated as of April 25, 1997, to Rights
Agreement, dated as of October 25, 1996, between Harrah's
Entertainment, Inc. and The Bank of New York. (4)
4(4) Letter to Stockholders dated July 23, 1997 regarding Summary
of Rights To Purchase Special Shares As Amended Through
April 25, 1997. (14)
4(5) Certificate of Elimination of Series B Special Stock of
Harrah's Entertainment, Inc., dated February 21, 1997. (21)
4(6) Certificate of Designations of Series A Special Stock of
Harrah's Entertainment, Inc., dated February 21, 1997. (21)
4(7) Interest Swap Agreement between Bank of America National
Trust and Savings Association and Harrah's Operating
Company, Inc. dated December 22, 1995. (19)
4(8) Interest Swap Agreement between Bank of America and Harrah's
Entertainment, Inc. dated December 22, 1995. (19)
4(9) Interest Swap Agreement between Bankers Trust Company and
Embassy Suites, Inc. dated May 10, 1995. (7)
4(10) Interest Swap Agreement between The Sumitomo Bank, Limited
and Embassy Suites, Inc. dated June 6, 1995. (7)
4(11) Interest Swap Agreement between Bankers Trust Company and
Embassy Suites, Inc. dated June 6, 1995. (7)
45
NO.
---
4(12) First Amendment, dated as of September 16, 1998, to the
Credit Agreement dated as of July 22, 1993, amended and
restated as of June 9, 1995 and further amended and restated
as of April 1, 1998 (the "5-Year Credit Agreement") and to
the Credit Agreement dated as of June 9, 1995, amended and
restated as of April 1, 1998 (the "364-Day Credit
Agreement"), among Harrah's Entertainment, Inc., Harrah's
Operating Company, Inc., Marina Associates, the lenders
party to these credit agreements, Canadian Imperial Bank of
Commerce and Societe Generale, as Co-Syndication Agents,
Bank of America National Trust and Savings Association, as
Documentation Agent, and Bankers Trust Company, as
Administrative Agent. (29)
4(13) Second Amendment, dated as of November 30, 1998, to the
5-Year Credit Agreement and to the 364-Day Credit Agreement,
among Harrah's Entertainment, Inc., Harrah's Operating
Company, Inc., Marina Associates, the lenders party to these
credit agreements, Canadian Imperial Bank of Commerce and
Societe Generale, as Co-Syndication Agents, Bank of America
National Trust and Savings Association, as Documentation
Agent, and Bankers Trust Company, as Administrative Agent.
(29)
4(14) Third Amendment, dated as of January 19, 1999, to the 5-Year
Credit Agreement and to the 364-Day Credit Agreement among
Harrah's Entertainment, Inc., Harrah's Operating Company,
Inc., Marina Associates, the lenders party to these credit
agreements, Canadian Imperial Bank of Commerce and Societe
Generale, as Co-Syndication Agents, Bank of America National
Trust and Savings Association, as Documentation Agent, and
Bankers Trust Company, as Administrative Agent. (30)
4(15) Five Year Loan Agreement dated as of April 30, 1999 among
Harrah's Entertainment, Inc., as Guarantor, Harrah's
Operating Company, Inc. and Marina Associates, as Borrowers,
The Lenders, Syndication Agent, Document Agents and
Co-Documentation Agents and Bank of America National Trust
and Savings Association, as Administrative Agent. (28)
4(16) 364-Day Loan Agreement dated as of April 30, 1999 among
Harrah's Entertainment, Inc., as Guarantor, Harrah's
Operating Company, Inc. and Marina Associates, as Borrowers,
The Lenders, Syndication Agent, Document Agents and
Co-Documentation Agents and Bank of America National Trust
and Savings Association, as Administrative Agent. (28)
4(17) Indenture, dated as of December 9, 1998, among Harrah's
Operating Company, Inc. as Issuer, Harrah's Entertainment,
Inc., as Guarantor and IBJ Schroder Bank & Trust Company, as
Trustee relating to the 7 7/8% Senior Subordinated Notes Due
2005. (29)
4(18) Indenture, dated as of December 18, 1998, among Harrah's
Operating Company, Inc. as obligor, Harrah's Entertainment,
Inc., as Guarantor, and IBJ Schroder Bank & Trust Company,
as Trustee relating to the 7 1/2% Senior Notes Due 2009.
(29)
4(19) Press Release dated January 13, 1999--Harrah's to Issue
Senior Notes. (26)
4(20) Press Release dated February 11, 1999--Harrah's Reports
Record Year in 1998 (32)
4(21) Press Release dated April 21, 1999--Harrah's Reports First
Quarter 1999 Results. (33)
4(22) Press Release dated August 19, 1999--Harrah's Signs
Definitive Agreement to Acquire Players International. (27)
46
NO.
---
4(23) Agreement of Purchase and Sale by and between Sun
International and Showboat Land LLC, dated January 29, 1998;
Assignment and Assumption of Lease by and between Sun
International and Showboat Land LLC, dated January 27, 1998;
Landlord Estoppel Certificate by Sun International to
Atlantic City Showboat, Inc. dated January 27, 1998; Tenant
Estoppel Certificate by Atlantic City Showboat, Inc. to Sun
International dated January 27, 1998. (25)
4(24) Mortgage and Security Agreement by and between Column
Financial, Inc. and Showboat Land LLC, dated January 29,
1998; Promissory Note in the principal amount of
$100,000,000 in favor of Column Financial Inc. by Showboat
Land LLC, dated January 29, 1998; Cash Management Agreement
by and between Column Financial, Inc. and Showboat Land LLC
dated January 28, 1998; Guaranty of Lease by and between
Showboat, Inc. and Column Financial, Inc. dated January 29,
1998; Environmental Indemnity Agreement by and between
Column Financial, Inc., Showboat Land LLC and Atlantic City
Showboat, Inc. dated January 29, 1998; Assignment of Leases
and Rents by and between Column Financial Inc. and Showboat
Land LLC, dated January 29, 1998; Tenant Estoppel
Certificate by Atlantic City Showboat, Inc. to Column
Financial, Inc. and Showboat Land LLC, dated January 29,
1998; Promissory Note Clarification Agreement dated January
29, 1998 between Column Financial, Inc. and Showboat Land
LLC; and Lease Clarification Agreement dated February 13,
1998 among Showboat Land LLC and Atlantic City Showboat,
Inc. (25)
**4(25) Purchase and Sale Agreement by and between Harrah's
Operating Company, Inc. and RBM Venture Company dated
September 15, 1999.
**4(26) Agreement of Lease by and between RBM Cherry Road Partners
and Harrah's Operating Company, Inc. dated October 25, 1999
(Building 1); Agreement of Lease by and between RBM Cherry
Road Partners and Harrah's Operating Company, Inc. dated
October 25, 1999 (Building 2).
10(1) Tax Sharing Agreement, dated June 30, 1995, between The
Promus Companies Incorporated and Promus Hotel Corporation.
(7)
+10(2) Form of Indemnification Agreement entered into by The Promus
Companies Incorporated and each of its directors and
executive officers. (1)
+10(3) Financial Counseling Plan of Harrah's Entertainment, Inc. as
amended January 1996. (19)
+10(4) The Promus Companies Incorporated 1996 Non-Management
Director's Stock Incentive Plan dated April 5, 1995. (6)
+10(5) Amendment dated February 20, 1997 to 1996 Non-Management
Director's Stock Incentive Plan. (4)
+10(6) Trust Agreement dated November 7, 1997 between Harrah's
Entertainment, Inc. and NationsBank concerning the
Non-Management Director's Stock Incentive Plan. (23)
+10(7) The Promus Companies Incorporated Key Executive Officer
Annual Incentive Plan dated February 24, 1995. (7)
+10(8) Summary Plan Description of Executive Term Life Insurance
Plan. (21)
+10(9) Form of Harrah's Entertainment, Inc.'s Annual Management
Bonus Plan, as amended 1995. (19)
+10(10) Amendment dated as of December 12, 1997 to Harrah's
Entertainment, Inc.'s Annual Management Bonus Plan. (23)
47
NO.
---
+10(11) Amendment dated December 10, 1998 to Harrah's Entertainment,
Inc.'s Annual Management Bonus Plan. (29)
**+10(12) Description of Amendment to Harrah's Entertainment, Inc.'s
Annual Management Bonus Plan on November 11, 1999.
+10(13) Amended and Restated Severance Agreement dated as of October
31, 1997 entered into with Philip G. Satre. (23)
+10(14) Form of Amended and Restated Severance Agreement dated as of
October 31, 1997 entered into with John M. Boushy and Colin
V. Reed. (23)
+10(15) Severance Agreement dated October 29, 1998 entered into with
Gary W. Loveman. (29)
+10(16) Severance Agreement dated October 29, 1998 entered into with
Philip G. Satre. (29)
+10(17) Form of Severance Agreement dated October 29, 1998 entered
into with John M. Boushy, Colin V. Reed and Judy T. Wormser.
(29)
+10(18) Form of Employment Agreement dated April 1, 1998 entered
into with John M. Boushy and Colin V. Reed. (29)
+10(19) Addendum dated April 1, 1998, to Employment Agreement
between Harrah's Entertainment, Inc. and John M. Boushy.
(29)
+10(20) Employment Agreement and Addendum dated May 4, 1998, between
Harrah's Entertainment, Inc. and Gary W. Loveman. (29)
+10(21) Employment Agreement between Harrah's Entertainment, Inc.
and J. Kell Houssels, III, dated June 1, 1998. (13)
+10(22) Memorandum Agreement Concerning Termination of Employment
and Commencement of Consulting Agreement dated November 25,
1998, among Harrah's Entertainment, Inc. and J. Kell
Houssels, III. (29)
**+10(23) Employment Agreement dated as of January 1, 1999, between
Harrah's Entertainment, Inc. and Philip G. Satre
+10(24) Employment Agreement dated May 7, 1999, between Harrah's
Entertainment, Inc. and Marilyn G. Winn. (28)
+10(25) Severance Agreement dated May 7, 1999, between Harrah's
Entertainment, Inc. and Marilyn G. Winn. (28)
+10(26) Employment Agreement dated July 30, 1999, between Harrah's
Entertainment, Inc. and Stephen H. Brammell. (34)
+10(27) Severance Agreement dated July 30, 1999, between Harrah's
Entertainment, Inc. and Stephen H. Brammell. (34)
**+10(28) Employment Agreement dated November 1, 1999, between
Harrah's Operating Company, Inc. and Janis L. Jones.
**+10(29) Severance Agreement dated November 1, 1999, between Harrah's
Entertainment, Inc. and Janis L. Jones.
+10(30) The Promus Companies Incorporated 1990 Stock Option Plan.
(9)
+10(31) The Promus Companies Incorporated 1990 Stock Option Plan (as
amended as of April 30, 1993). (15)
48
NO.
---
+10(32) The Promus Companies Incorporated 1990 Stock Option Plan, as
amended April 29, 1994. (5)
+10(33) The Promus Companies Incorporated 1990 Stock Option Plan, as
amended July 29, 1994. (16)
+10(34) Amendment, dated April 5, 1995, to The Promus Companies
Incorporated 1990 Stock Option Plan as adjusted on December
12, 1996. (21)
+10(35) Amendment, dated February 26, 1998, to the Harrah's
Entertainment, Inc. 1990 Stock Option Plan. (10)
+10(36) Amendment, dated April 30, 1998, to the Harrah's
Entertainment, Inc. 1990 Stock Option Plan. (13)
+10(37) Amendment, dated October 29, 1998, to the Harrah's
Entertainment, Inc. 1990 Stock Option Plan. (29)
+10(38) Revised Form of Stock Option (1990 Stock Option Plan). (19)
+10(39) Revised Form of Stock Option with attachments (1990 Stock
Option Plan). (21)
+10(40) Form of memorandum agreement dated July 2, 1991, eliminating
stock appreciation rights under stock options held by Philip
G. Satre. (11)
+10(41) The Promus Companies Incorporated 1990 Restricted Stock
Plan. (9)
+10(42) Amendment, dated April 5, 1995, to The Promus Companies
Incorporated 1990 Restricted Stock Plan. (6)
+10(43) Amendment, dated February 26, 1998, to the Harrah's
Entertainment, Inc. 1990 Restricted Stock Plan. (10)
+10(44) Amendment, dated April 30, 1998, to the Harrah's
Entertainment, Inc. 1990 Restricted Stock Plan. (13)
+10(45) Amendment, dated October 29, 1998, to the Harrah's
Entertainment, Inc. 1990 Restricted Stock Plan. (29)
**+10(46) Amendment, dated November 11, 1999, to the Harrah's
Entertainment, Inc. 1990 Restricted Stock Plan.
+10(47) Revised Forms of Restricted Stock Award (1990 Restricted
Stock Plan). (19)
+10(48) Revised Form of Restricted Stock Award (1990 Restricted
Stock Plan). (21)
+10(49) Administrative Regulations, Long Term Compensation Plan
(Restricted Stock Plan and Stock Option Plan) dated October
27, 1995. (19)
+10(50) Amendment to Administrative Regulations, Long Term
Compensation Plan (Restricted Stock Plan and Stock Option
Plan) dated December 12, 1996. (21)
+10(51) Description of Terms of Stock Option and TARSAP grants for
Gary W. Loveman on April 30, 1998. (13)
**+10(52) Description of Terms of Amendment to TARSAP grants for Gary
W. Loveman on November 11, 1999.
+10(53) Deferred Compensation Plan dated October 16, 1991. (12)
49
NO.
---
+10(54) Amendment, dated May 26, 1995, to The Promus Companies
Incorporated Deferred Compensation Plan. (2)
+10(55) Forms of Deferred Compensation Agreement. (19)
+10(56) Amended and Restated Executive Deferred Compensation Plan
dated as of October 27, 1995. (19)
+10(57) Amendment dated April 24, 1997 to Harrah's Entertainment,
Inc.'s Executive Deferred Compensation Plan. (14)
+10(58) Amendment dated April 30, 1998 to the Harrah's
Entertainment, Inc. Executive Deferred Compensation Plan.
(13)
+10(59) Amendment dated October 29, 1998 to the Harrah's
Entertainment, Inc. Executive Deferred Compensation Plan.
(29)
+10(60) Description of Amendments to Executive Deferred Compensation
Plan. (17)
+10(61) Restated Amendment, dated July 18, 1996, to Harrah's
Entertainment, Inc. Executive Deferred Compensation Plan.
(21)
+10(62) Forms of Executive Deferred Compensation Agreement. (19)
+10(63) Amendment dated April 24, 1997, to Harrah's Entertainment,
Inc.'s Deferred Compensation Plan. (14)
+10(64) Escrow Agreement dated February 6, 1990 between The Promus
Companies Incorporated, certain subsidiaries thereof, and
Sovran Bank, as escrow agent. (9)
+10(65) First Amendment to Escrow Agreement dated January 31, 1990
among Holiday Corporation, certain subsidiaries thereof and
Sovran Bank, as escrow agent. (9)
+10(66) Amendment to Escrow Agreement dated as of October 29, 1993
among The Promus Companies Incorporated, certain
subsidiaries thereof, and NationsBank, formerly Sovran Bank.
(18)
+10(67) Amendment, dated as of June 7, 1995, to Escrow Agreement
among The Promus Companies Incorporated, certain
subsidiaries thereof and NationsBank. (2)
+10(68) Amendment, dated as of July 18, 1996, to Escrow Agreement
between Harrah's Entertainment, Inc. and NationsBank. (20)
+10(69) Time Accelerated Restricted Stock Award Plan ("TARSAP")
program dated December 12, 1996. (21)
+10(70) Form of TARSAP Award. (21)
+10(71) Form of Agreement, dated October 30, 1996, regarding
cancellation and reissue of stock options, entered into with
Philip G. Satre, Colin V. Reed, and John M. Boushy; and Form
of Reissued Stock Option. (21)
+10(72) Amendment, dated as of October 30, 1997, to Escrow Agreement
between Harrah's Entertainment, Inc., Harrah's Operating
Company, Inc. and NationsBank. (23)
50
NO.
---
10(73) Intercreditor Agreement among Harrah's Entertainment, Inc.,
Harrah's Operating Company, Inc., Bankers Trust Company, as
Administrative Agent, and Norwest Bank Minnesota, National
Association, as Trustee, and The Bank of New York, as
Collateral Agent, acknowledged and agreed to by JCC Holding
Company, Jazz Casino Company, L.L.C., CP Development,
L.L.C., CP Development, L.L.C., and JCC Development Company,
L.L.C., dated as of October 29, 1998. (24)
10(74) Second Amended and Restated Management Agreement between
Harrah's New Orleans Management Company and Jazz Casino
Company, L.L.C., acknowledged and consented to by Rivergate
Development Corporation, as Landlord, dated as of October
29, 1998. (24)
10(75) HET/JCC Agreement between Harrah's Entertainment, Inc.,
Harrah's Operating Company, Inc. and Jazz Casino Company,
L.L.C., dated October 30, 1998. (24)
10(76) Guaranty and Loan Purchase Agreement by Harrah's
Entertainment, Inc. and Harrah's Operating Company, Inc.,
acknowledged and agreed to by Bankers Trust Company as
Administrative Agent, dated as of October 29, 1998. (24)
10(77) Master Agreement dated April 15, 1999 between TABCORP
Holdings Limited and Harrah's Entertainment, Inc., with
attachments. (28)
10(78) Amendment to Harrah's Entertainment, Inc. 1990 Stock Option
Plan. (28)
10(79) Amendment to Harrah's Entertainment, Inc.'s Annual
Management Bonus Plan. (28)
10(80) TARSAP Deferral Plan dated July 28, 1999. (34)
10(81) TARSAP Deferral Plan--Deferral Agreement dated August 30,
1999, between Harrah's Entertainment, Inc. and Philip G.
Satre. (34)
10(82) TARSAP Deferral Plan--Deferral Agreement dated August 16,
1999, between Harrah's Entertainment, Inc. and Colin V.
Reed. (34)
**11 Computations of per share earnings.
**12 Computations of ratios.
**13 Portions of Annual Report to Stockholders for the year ended
December 31, 1999. (22)
**21 List of subsidiaries of Harrah's Entertainment, Inc.
**27 Financial Data Schedule.
99 Press Release dated January 1, 1999--Harrah's and Rio Hotel
Casino Complete Merger. (31)
- ------------------------
** Filed herewith.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to Item 14(c) of Form 10-K.
FOOTNOTES
(1) Incorporated by reference from the Company's Registration Statement on Form
10, File No. 1-10410, filed on December 13, 1989.
(2) Incorporated by reference from the Company's Current Report on Form 8-K,
filed June 15, 1995, File No. 1-10410.
51
(3) Incorporated by reference from the Company's Current Report on Form 8-K,
filed August 9, 1996, File No. 1-10410.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, filed May 13, 1997, File No. 1-10410.
(5) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994, filed May 12, 1994, File No. 1-10410.
(6) Incorporated by reference from the Company's Proxy Statement for the May 26,
1995 Annual Meeting of Stockholders, filed April 25, 1995.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995, filed August 14, 1995, File No.
1-10410.
(8) Incorporated by reference from the Company's Current Report on Form 8-K,
filed August 14, 1998, and amended on September 4, 1998, File No. 1-10410.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 1989, filed March 28, 1990, File No.
1-10410.
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 30, 1998, filed May 14, 1998, File No. 1-10410.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 27, 1991, filed November 8, 1991, File No.
1-10410.
(12) Incorporated by reference from Amendment No. 2 to the Company's and
Embassy's Registration Statement on Form S-1, File No. 33-43748, filed March
18, 1992.
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, filed August 7, 1998, File No. 1-10410.
(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, filed August 13, 1997, File No.
1-10410.
(15) Incorporated by reference from Post-Effective Amendment No. 1 to the
Company's Form S-8 Registration Statement, File No. 33-32864-01, filed July
22, 1993.
(16) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, filed August 11, 1994, File No.
1-10410.
(17) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, filed November 13, 1997, File No.
1-10410.
(18) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993, filed March 28, 1994, File No.
1-10410.
(19) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, filed March 6, 1996, File No.
1-10410.
(20) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, filed November 12, 1996, File No.
1-10410.
(21) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, filed March 11, 1997, File No.
1-10410.
(22) Filed herewith to the extent portions of such report are specifically
included herein by reference.
(23) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, filed March 10, 1998, File No.
1-10410.
52
(24) Incorporated by reference from JCC Holding Company's Registration Statement
on Form 10/A, filed November 20, 1998.
(25) Incorporated by reference from Showboat, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1997, File No. 1-7123.
(26) Incorporated by reference from the Company's Current Report on Form 8-K
filed January 13, 1999, File No. 1-10410.
(27) Incorporated by reference from the Company's Current Report on Form 8-K
filed August 23, 1999, File No. 1-10410.
(28) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999, filed August 12, 1999, File No.
1-10410.
(29) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, filed March 19, 1999, File No.
1-10410.
(30) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, filed May 13, 1999, File No. 1-10410.)
(31) Incorporated by reference from the Company's Current Report on Form 8-K,
filed January 7, 1999, File No. 1-10410.
(32) Incorporated by reference from the Company's Current Report on Form 8-K
filed February 12, 1999, File No. 1-10410.
(33) Incorporated by reference from the Company's Current Report on Form 8-K
filed April 23, 1999, File No. 1-10410.
(34) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999, filed November 12, 1999, File No.
1-10410.
(b) No reports on Form 8-K were filed by the Company during the fourth
quarter of 1999 and thereafter through March 13, 2000.
53
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
HARRAH'S ENTERTAINMENT, INC.
By: /s/ PHILIP G. SATRE
-----------------------------------------
Philip G. Satre
CHAIRMAN,
CHIEF EXECUTIVE OFFICER,
OFFICE OF THE PRESIDENT
Dated: March 13, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ SUSAN CLARK-JOHNSON
------------------------------------------- Director March 13, 2000
Susan Clark-Johnson
/s/ JAMES B. FARLEY
------------------------------------------- Director March 13, 2000
James B. Farley
/s/ JOE M. HENSON
------------------------------------------- Director March 13, 2000
Joe M. Henson
/s/ RALPH HORN
------------------------------------------- Director March 13, 2000
Ralph Horn
/s/ J. KELL HOUSSELS, III
------------------------------------------- Director March 13, 2000
J. Kell Houssels, III
/s/ GARY W. LOVEMAN Director,
------------------------------------------- Chief Operating Officer March 13, 2000
Gary W. Loveman Office of the President
/s/ R. BRAD MARTIN
------------------------------------------- Director March 13, 2000
R. Brad Martin
54
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT G. MILLER
------------------------------------------- Director March 13, 2000
Robert G. Miller
/s/ COLIN V. REED Director,
------------------------------------------- Chief Financial Officer March 13, 2000
Colin V. Reed Office of the President
/s/ WALTER J. SALMON
------------------------------------------- Director March 13, 2000
Walter J. Salmon
/s/ PHILIP G. SATRE Director, Chairman and
------------------------------------------- Chief Executive Officer March 13, 2000
Philip G. Satre Office of the President
/s/ BOAKE A. SELLS
------------------------------------------- Director March 13, 2000
Boake A. Sells
/s/ EDDIE N. WILLIAMS
------------------------------------------- Director March 13, 2000
Eddie N. Williams
/s/ JUDY T. WORMSER
------------------------------------------- Controller and Principal March 13, 2000
Judy T. Wormser Accounting Officer
55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Harrah's Entertainment, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements included in the Harrah's
Entertainment, Inc. 1999 annual report to stockholders incorporated by reference
in this Form 10-K, and have issued our report hereon dated February 8, 2000
(except with respect to the matter discussed in note 18, as to which the date is
February 29, 2000). Our audits were made for the purpose of forming an opinion
on those statements taken as a whole. The schedules listed under Item 14(a)2 are
the responsibility of the Company's management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements, and
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Memphis, Tennessee
February 8, 2000
SCHEDULE I
HARRAH'S ENTERTAINMENT, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
------------------------
1999 1998
---------- --------
ASSETS
Cash........................................................ $ -- $ --
Investments in and advances to subsidiaries (eliminated in
consolidation)............................................ 1,486,277 851,407
---------- --------
$1,486,277 $851,407
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Commitments and contingencies (Notes 2, 3, 6 through 9)
Stockholders' equity (Note 4)
Common stock, $0.10 par value, authorized--360,000,000
shares outstanding--124,379,760 and 102,188,018 shares
(net of 9,286,772 and 3,036,562 held in treasury)....... $ 12,438 $ 10,219
Capital surplus........................................... 987,322 407,691
Retained earnings......................................... 512,539 451,410
Accumulated other comprehensive income.................... (493) 6,567
Deferred compensation related to restricted stock......... (25,529) (24,480)
---------- --------
$1,486,277 $851,407
========== ========
The accompanying Notes to Financial Statements
are an integral part of these balance sheets.
S-1
SCHEDULE I (CONTINUED)
HARRAH'S ENTERTAINMENT, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Revenues.................................................... $ -- $ -- $ --
Costs and expenses.......................................... 150 165 144
-------- -------- --------
Loss before income taxes and equity in subsidiaries'
earnings.................................................. (150) (165) (144)
Income tax benefit.......................................... 53 58 50
-------- -------- --------
Loss before equity in subsidiaries' earnings................ (97) (107) (94)
Equity in subsidiairies' earnings........................... 219,600 121,824 107,616
-------- -------- --------
Income before extraordinary loss............................ 219,503 121,717 107,522
Extraordinary loss, net of tax benefit of $5,990, $10,522
and $4,477 (Note 3)....................................... (11,033) (19,693) (8,134)
-------- -------- --------
Net income.................................................. $208,470 $102,024 $ 99,388
======== ======== ========
The accompanying Notes to Financial Statements
are an integral part of these statements.
S-2
SCHEDULE I (CONTINUED)
HARRAH'S ENTERTAINMENT, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities
Net income................................................ $ 208,470 $ 102,024 $ 99,388
Adjustment to reconcile net income to cash flows from
operating activities
Equity in undistributed continuing earnings of
subsidiaries........................................ (219,600) (121,824) (107,616)
Extraordinary loss.................................... 17,023 29,491 12,611
Other non-cash activity............................... (5,893) (9,691) (4,383)
--------- --------- ---------
Cash flows from operating activities................ -- -- --
--------- --------- ---------
Cash flows from financing activities
Distributions from subsidiary............................. 147,952 -- 41,022
Treasury stock purchases.................................. (147,952) -- (41,022)
--------- --------- ---------
Cash flows from financing activities................ -- -- --
--------- --------- ---------
Net change in cash.......................................... -- -- --
Cash, beginning of period................................... -- -- --
--------- --------- ---------
Cash, end of period......................................... $ -- $ -- $ --
========= ========= =========
The accompanying Notes to Financial Statements
are an integral part of these statements.
S-3
SCHEDULE I (CONTINUED)
HARRAH'S ENTERTAINMENT, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BASIS OF ORGANIZATION
Harrah's Entertainment, Inc. ("HET" or the "Company,"), a Delaware
corporation, is a holding company, the principal assets of which are the capital
stock of two subsidiaries, Harrah's Operating Company, Inc. ("HOC") and Aster
Insurance Ltd. ("Aster"). HOC holds, directly and through its subsidiaries, the
principal assets of HET's businesses. References to HOC include its subsidiaries
where the context requires. These condensed financial statements should be read
in conjunction with the consolidated financial statements of HET and
subsidiaries.
NOTE 2--INVESTMENT IN ASTER
The value of HET's investment in Aster has been reduced below zero. HET's
negative investment in Aster at December 31, 1999 and 1998 was $7.3 million and
$7.3 million, respectively, and is included in investments in and advances to
subsidiaries on the balance sheet. In addition, HET has guaranteed the payment
by Aster of certain insurance-related liabilities.
NOTE 3--LONG-TERM DEBT
HET has no long-term debt obligations. In addition to entering into new
revolving credit and letter of credit facilities ("the Bank Facility"), HOC
refinanced certain of its outstanding debts, in particular those debt
obligations assumed in our acquisition transactions, to reduce effective
interest rates and/or lengthen maturities. The extraordinary losses reported in
HET's Statements of income for each period are primarily due to HOC's
refinancing activities.
During December 1998, HOC completed a public offering of $750.0 million
principal amount of 7 7/8% Senior Subordinated Notes due 2005 (the "7 7/8%
Notes").
In January 1999, HOC completed a public offering of $500.0 million principal
amount $7 1/2% Senior Notes due 2009 (the "7 1/2% Notes").
HET has guaranteed HOC's Bank Facility, the 7 7/8% Notes and the 7 1/2%
Notes.
NOTE 4--STOCKHOLDERS' EQUITY
In addition to its common stock, Harrah's 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
HET's Board of Directors has authorized that one special stock purchase
right (a "Right") be attached to each outstanding share of common stock. These
Rights are exercisable only if a person or group acquires 15% or more of the
Company's 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.
S-4
HARRAH'S ENTERTAINMENT, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--STOCKHOLDERS' EQUITY (CONTINUED)
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.
In October 1996, the Company's Board of Directors approved a plan, which
expired on December 31, 1997, under which the Company repurchased 2,993,700
shares of its common stock at an average price of $18.05 per share.
In July 1999, the Company's Board of Directors authorized the repurchase in
open market and other transactions of up to 10 million shares of the Company's
common stock. HET expects to acquire our shares from time to time at prevailing
market prices through the December 31, 2000, expiration of the approved plan. At
December 31, 1999, we had repurchased 5.6 million shares under the provisions of
this plan. These repurchases are in addition to 0.5 million shares repurchased
earlier in 1999 in connection with the increase of our ownership interest in the
East Chicago property.
The shares repurchased under these programs are held in treasury and
reflected in HET's balance sheet as if they were retired.
NOTE 5--INCOME TAXES
Harrah's files a consolidated tax return with its subsidiaries.
NOTE 6--COMMITMENTS AND CONTINGENCIES
NEW ORLEANS CASINO. HOC has an approximate 43% ownership interest in the
parent of Jazz Casino Company, L.L.C. ("JCC"), the company which owns and
operates the exclusive land-based casino (the "Casino") in New Orleans,
Louisiana. HOC manages that Casino pursuant to a management agreement between
JCC and an HOC subsidiary. HET has (i) guaranteed JCC's initial $100.0 million
annual tax payment under the Casino operating contract to the State of Louisiana
gaming board (the "State Guarantee"), (ii) guaranteed $166.5 million of a
$236.5 million JCC bank credit facility, and (iii) made a $22.5 million
subordinated loan to JCC to finance construction of the casino.
With respect to the State Guarantee, HET and HOC are obligated to guarantee
JCC's first $100 million annual payment obligation commencing upon the
October 28, 1999, opening of the Casino, and, if certain cash flow tests (for
the renewal periods beginning April 1, 2001) and other conditions are satisfied
each year, to renew the guarantee beginning April 1, 2000, for each 12 month
period ending March 31, 2004. The obligations under the guarantee for the first
year of operations or any succeeding 12 month period is limited to a guarantee
of the $100 million payment obligation of JCC for the 12 month period in which
the guarantee is in effect and is secured by a first priority lien on JCC's
assets. JCC's payment (and therefore the amount we have guaranteed) is
$100 million at commencement of each 12 month period under the Casino operating
contract and declines on a daily basis by 1/365 of $100 million to the extent
payments are made each day by JCC to Louisiana's gaming board. (See Note 9.)
S-5
HARRAH'S ENTERTAINMENT, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LITIGATION
HET is involved in various inquiries, administrative proceedings and
litigation relating to contracts, 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 upon our consolidated financial position or
our results of operations.
NOTE 8--ACQUISITIONS
On June 1, 1998, HOC completed the acquisition of Showboat, Inc.
("Showboat") for $520.0 million in cash and assumption of approximately
$635 million of Showboat debt.
On January 1, 1999, HET completed the merger with Rio Hotel & Casino, Inc.
("Rio"), issuing approximately 25 million shares of HET common stock to acquire
all of Rio's outstanding shares in a one-for-one transaction and assuming Rio's
outstanding debt of approximately $432 million. HET transferred the Rio stock to
HOC upon completion of the merger.
In August 1999, HET announced the signing of a definitive agreement to
acquire Players International, Inc. ("Players"). Players shareholders will
receive $8.50 in cash for each share outstanding, and HET will assume
$150 million of Players' debt. Completion of the transaction is subject to
various conditions, including regulatory approvals and other third party
approvals.
NOTE 9--SUBSEQUENT EVENT
On February 28, 2000, HET and HOC were notified by JCC that is was
suspending payment of the daily payments to the State of Louisiana until JCC is
able to generate sufficient cash flow to pay its operating expenses and make the
daily payments. On February 29, 2000, the State made a demand on the Company
under the State Guarantee, and HOC began funding the daily payment to the State
on that date. HOC has also agreed, subject to certain conditions, to renew the
State Guarantee for the period April 1, 2000, until March 31, 2001. See Note 6
for further discussion of the State Guarantee.
S-6
SCHEDULE II
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------ ---------- -------------------- ---------- ---------
ADDITIONS
--------------------
CHARGED
BALANCE AT TO COSTS CHARGED DEDUCTIONS BALANCE
BEGINNING AND TO OTHER FROM AT CLOSE
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD
- ------------------------------------------------------------ ---------- --------- -------- ---------- ---------
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts
Current................................................... $14,356 $22,774 $25,935 $(18,979)(A) $44,086
======= ======= ======= ======== =======
Long-term................................................. $12,693 $ -- $ 2,639 $ (7,327) $ 8,005
======= ======= ======= ======== =======
Reserve against investments in and advances to
nonconsolidated affiliates (B)............................ $13,000 $ -- $ -- $ -- $13,000
======= ======= ======= ======== =======
Reserve for impairment of long-lived assets (C)............. $36,490 $ 3,367 $ 2,385 $(29,005) $13,237
======= ======= ======= ======== =======
Reserve for contingent liability exposure................... $ 1,041 $ -- $ -- $ (163) $ 878
======= ======= ======= ======== =======
Insurance allowances and reserves........................... $45,771 $68,654 $ 0 $(63,417) $51,008
======= ======= ======= ======== =======
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts
Current................................................... $11,462 $ 9,905 $ -- $ (7,011)(A) $14,356
======= ======= ======= ======== =======
Long-term................................................. $10,421 $ -- $ -- $ 2,272 $12,693
======= ======= ======= ======== =======
Reserve against investments in and advances to
nonconsolidated affiliates (B)............................ $13,000 $ -- $ -- $ -- $13,000
======= ======= ======= ======== =======
Reserve for impairment of long-lived assets................. $33,369 $ 2,740 $ 381 $ -- $36,490
======= ======= ======= ======== =======
Reserve for contingent liability exposure................... $ 4,806 $ -- $ -- $ (3,765) $ 1,041
======= ======= ======= ======== =======
Insurance allowances and reserves........................... $46,870 $62,262 $ -- $(63,361) $45,771
======= ======= ======= ======== =======
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts
Current................................................... $14,064 $ 5,332 $ 27 $ (7,961)(A) $11,462
======= ======= ======= ======== =======
Long-term................................................. $ 4,628 $ 1,118 $ -- $ 4,675 $10,421
======= ======= ======= ======== =======
Reserve for debtor-in-possession loans to nonconsolidated
subsidiary................................................ $ -- $13,000 $ -- $ -- $13,000
======= ======= ======= ======== =======
Reserve for impairment of long-lived assets................. $33,369 $ -- $ -- $ -- $33,369
======= ======= ======= ======== =======
Reserve for contingent liability exposure................... $ 9,481 $ -- $ -- $ (4,675) $ 4,806
======= ======= ======= ======== =======
Insurance allowances and reserves........................... $49,590 $54,198 $ -- $(56,918) $46,870
======= ======= ======= ======== =======
- ------------------------------
(A) Uncollectible accounts written off, net of amounts recovered.
(B) See Note 7 to our Consolidated Financial Statements.
(C) Reduction of reserve due to disposition of property.
S-7
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports dated February 8, 2000 (except with respect to the matter discussed
in note 18, as to which the date is February 29, 2000), included in this
Form 10-K for the year ended December 31, 1999, into the Company's previously
filed Registration Statements File Nos. 333-80899 and 333-77937.
ARTHUR ANDERSEN LLP
Memphis, Tennessee
March 13, 2000