<Page>
EXHIBIT 13
FINANCIAL AND STATISTICAL HIGHLIGHTS
(SEE NOTES 1 AND 2 TO THE CONSOLIDATED FINANCIAL STATEMENTS)
<Table>
<Caption>
COMPOUND
(IN MILLIONS, EXCEPT COMMON STOCK DATA AND FINANCIAL GROWTH
PERCENTAGES AND RATIOS) 2001(a) 2000(b) 1999(c) 1998(d) 1997(e) RATE
------- ------- ------- ------- ------- ---------
OPERATING DATA
Revenues(f) $3,709.0 $3,329.8 $2,894.1 $1,907.9 $1,561.7 24.1%
Income from operations 581.0 282.7 481.0 287.8 213.5 28.4%
Income before income taxes and minority interest 348.3 17.8 359.6 203.3 183.6 17.4%
Income (loss) before extraordinary losses 209.0 (11.3) 219.5 121.7 107.5 18.1%
Net income (loss) 209.0 (12.1) 208.5 102.0 99.4 20.4%
COMMON STOCK DATA
Earnings (loss) per share-diluted
Before extraordinary losses 1.81 (0.09) 1.71 1.19 1.06 14.3%
Net income (loss) 1.81 (0.10) 1.62 1.00 0.98 16.6%
FINANCIAL POSITION
Total assets 6,128.6 5,166.1 4,766.8 3,286.3 2,005.5 32.2%
Long-term debt 3,719.4 2,835.8 2,540.3 1,999.4 924.4 41.6%
Stockholders' equity 1,374.1 1,269.7 1,486.3 851.4 735.5 16.9%
CASH FLOWS
Provided by operating activities 773.9 547.6 490.1 297.9 255.1 32.0%
Property EBITDA(g) 982.8 886.5 792.9 512.6 402.9 25.0%
Investments in land, buildings, riverboats and equipment
additions 529.8 421.4 340.5 140.4 229.5 23.3%
FINANCIAL PERCENTAGES AND RATIOS
Return on revenues-continuing(f) 5.6% (0.3)% 7.6% 6.4% 6.9%
Return on average invested capital(h) 7.3% 2.9% 8.1% 8.0% 8.6%
Return on average equity(h) 15.5% (0.8)% 15.5% 15.3% 14.9%
Ratio of earnings to fixed charges 2.1 2.2 2.7 2.4 2.8
</Table>
(a) 2001 includes $22.5 million in pretax charges for write-downs, reserves and
recoveries (see Note 7) and $26.2 million of income from dispositions of
nonstrategic assets and the settlement of a contingency related to a former
affiliate. 2001 also includes the financial results of Harveys Casino
Resorts from its July 31, 2001, date of acquisition.
(b) 2000 includes $220.0 million in pretax reserves for receivables not
expected to be recovered from JCC Holding Company and its subsidiary, Jazz
Casino Company LLC, $6.1 million in pretax charges for other write-downs,
reserves and recoveries (see Note 7) and $39.4 million in pretax write-offs
and reserves for our investment in, loans to and net estimated exposure
under letters of credit issued on behalf of National Airlines, Inc. 2000
also includes the financial results of Players International, Inc. from its
March 22, 2000, date of acquisition.
(c) 1999 includes $2.2 million in pretax charges for write-downs, reserves and
recoveries (see Note 7) and $59.8 million of gains from sales of our equity
interests in nonconsolidated affiliates. 1999 also includes financial
results of Rio Hotel & Casino, Inc. from its January 1,1999, date of
acquisition.
(d) 1998 includes $7.5 million in pretax charges for write-downs and reserves
and a $13.2 million gain on the sale of equity interests in a
nonconsolidated restaurant subsidiary. 1998 also includes the financial
results of Showboat, Inc. from its June 1,1998, date of acquisition.
(e) 1997 includes $13.8 million in pretax charges for write-downs and reserves
and a $37.4 million gain on the sale of equity in a New Zealand subsidiary.
(f) Revenues for years 1997 through 2000 have been restated to reflect the
impact of implementing new accounting guidance issued in and effective for
first quarter 2001, which requires the cost of the cash-back component of
the Company's Total Rewards program to be treated as a reduction of
revenues. Previously, these costs had been treated as a casino expense.
(g) EBITDA consists of earnings before interest, taxes, depreciation and
amortization. Property EBITDA consists of Operating profit before
depreciation and amortization, write-downs, reserves and recoveries and
project opening costs. See Exhibit 12 to our 2001 Form10-K for the
computation of Property EBITDA. Property EBITDA is a supplemental financial
measure used by management, as well as industry analysts, to evaluate our
operations. However, Property EBITDA should not be construed as an
alternative to Income from operations (as an indicator of our operating
performance) or to Cash flows from operating activities (as a measure of
liquidity) as determined in accordance with generally accepted accounting
principles and presented in the accompanying Consolidated Financial
Statements. All companies do not calculate EBITDA in the same manner. As a
result, Property EBITDA as presented by our Company may not be comparable
to similarly titled measures presented by other companies.
(h) Ratio computed based on Income before extraordinary items.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Harrah's Entertainment, Inc., a Delaware corporation, operates casinos in more
markets in the United States than any other casino company. We were incorporated
on November 2,1989, and prior to such date operated under predecessor companies.
We conduct our business through a wholly-owned subsidiary, Harrah's
Operating Company, Inc. ("HOC"), 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 One Harrah's Court, Las Vegas, Nevada 89119,
telephone (702) 407-6000.
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.
Our Company achieved record revenues, operating income and net income
in 2001, attesting to the success of our strategy to improve our results through
same-store sales growth, geographic diversity and targeted capital investments.
Some significant items that affected our 2001 results are listed below. These
items are discussed in greater detail in our discussion of our operating results
and debt and liquidity.
o Same-store sales for owned and managed properties grew 5.7% in 2001.
o On July 31, 2001, we completed our acquisition of Harveys Casino Resorts
("Harveys"), which expanded our geographic distribution to 25 casinos in 12
states.
o Several properties completed upgrades and additions in 2001 and other
expansions were begun or announced. We believe that our strategic expansion
projects ultimately generate additional customer demand and higher cash flow.
o In January 2001, and again in June 2001, HOC completed private placement debt
offerings of $500 million each. The private placement notes were subsequently
exchanged for public notes. We currently have the highest credit rating of
any company in the casino industry.
o The plan of reorganization of JCC Holding Company and its subsidiary, Jazz
Casino Company, LLC (collectively, "JCC") was approved by the bankruptcy
court on March 19, 2001, and was effective March 29, 2001. JCC owns and
operates a land-based casino in New Orleans, Louisiana, which is managed by a
subsidiary of Harrah's Entertainment. We also hold 49% of the common stock of
JCC.
o Our Company, like most in our industry, was affected by reduced travel as a
result of the September 11, 2001, terrorist attacks; however, we believe that
our unique consumer marketing approach to our business and our geographic
diversity helped mitigate the impact of the attacks and the subsequent
disruptions in airline service and reluctance of many people to fly to resort
destinations.
<Table>
<Caption>
OVERALL OPERATING RESULTS
(IN MILLIONS, EXCEPT EARNINGS PER SHARE) 2001 2000 1999
-------- -------- --------
Casino revenues $3,235.8 $2,852.0 $2,424.2
Total revenues 3,709.0 3,329.8 2,894.1
Income from operations 581.0 282.7 481.0
Income (loss) before extraordinary items 209.0 (11.3) 219.5
Net income (loss) 209.0 (12.1) 208.5
Earnings (loss) per share-diluted
Before extraordinary items 1.81 (0.09) 1.71
Net income (loss) 1.81 (0.10) 1.62
Operating margin 15.7% 8.5% 16.6%
</Table>
Total revenues grew 11.4% in 2001 as a result of our acquisition of Harveys
and revenue growth at most of our properties, despite the impact on travel of
the September 11, 2001, terrorist attacks. In the week following September
11, gaming revenues and hotel occupancy dropped at our properties and we felt
the immediate impact of reduced travel, particularly in resort destinations.
However, by the fourth quarter, revenues rebounded to near-normal levels at
many of our properties, particularly in drive-in markets. We attribute our
Company's quick recovery from September 11 and our improved results in 2001
to our consumer-marketing strategy, geographic diversity and disciplined
capital improvement projects. This continues the trends we reported for 2000
and 1999 and confirms the success of our strategy of growing same-store sales
through customer loyalty. Although strategic acquisitions contributed to our
revenue growth over the three years, "same-store" revenue growth of 5.7% was
achieved in 2001. We define "same-store" revenue growth as the increase in
gaming revenue contributed by properties that were included in our results in
each of the year-over-year periods that are being compared.
In 2001, our income from operations, net income and diluted
earnings per share increased significantly over our 2000 results, due
primarily to 2000 charges for reserves of $220 million for receivables not
expected to be recovered in JCC's reorganization plan and write-offs and
reserves of $39.4 million for our investment in and loans to National
Airlines, Inc. ("NAI"). Comparison of our year-over-year results is
complicated by these unusual charges in 2000. The table below presents a pro
forma comparison of our operating results, which have been adjusted to
exclude 2001 gains from the condemnation and sale of nonstrategic real estate;
2000 charges for JCC and NAI; 2001 loss and 1999 gains from sales of equity
interests in subsidiaries, and the estimated tax effects of those events in
each year.
<Table>
<Caption>
PERCENTAGE
INCREASE/(DECREASE)
(IN MILLIONS, EXCEPT EARNINGS PER SHARE) 2001 2000 1999 01 VS 00 00 VS 99
-------- -------- ------- --------------------
Total revenues $3,709.0 $3,329.8 $2,894.1 11.4% 15.1%
Income from operations 581.0 502.7 481.0 15.6% 4.5%
Income before extraordinary items 200.3 164.0 181.8 22.1% (9.8)%
Net income 200.3 163.3 170.8 22.7% (4.4)%
Earnings per share-diluted
Before extraordinary items 1.73 1.38 1.41 25.4% (2.1)%
Net income 1.73 1.37 1.33 26.3% 3.0%
Operating margin 15.7% 15.1% 16.6% 0.6pts (1.5)pts
</Table>
STRATEGIC ACQUISITIONS
As part of our growth strategy and to further enhance our geographic
distribution, strengthen our access to target customers and leverage our
technological and centralized services infrastructure, we have acquired four
casino companies in the past four years. All four acquisition transactions were
accounted for as purchases. The following provides a brief review of our
acquisition activities.
<Table>
<Caption>
NUMBER
TOTAL GOODWILL OF
COMPANY DATE ACQUIRED PURCHASE PRICE(a) ASSIGNED CASINOS GEOGRAPHIC LOCATION
- ---------------- ------------- ----------------- --------- ------- -----------------------
Showboat, Inc. June 1998 $ 1,045 million $322 million 2(b) Atlantic City, New Jersey
East Chicago, Indiana
Rio Hotel & January 1999 $ 987 million $ 93 million 1 Las Vegas, Nevada
Casino, Inc.
Players March 2000 $ 439 million $204 million 3 Lake Charles, Louisiana
International, Metropolis, Illinois
Inc. St. Louis, Missouri
Harveys Casino July 2001 $ 661 million $266 million 4 Central City, Colorado
Resorts Council Bluffs, Iowa (2)
Lake Tahoe, Nevada
</Table>
(a) Total purchase price includes the market value of debt assumed.
(b) Interests in two other casinos that were included in the acquisition were
subsequently sold (see discussion below).
SHOWBOAT, INC. Our June 1, 1998, acquisition of Showboat, Inc. ("Showboat")
has given us a stronger presence in the two key markets of Atlantic City and
Chicago. In Atlantic City, Showboat provides us with a strong additional
brand in a strategic Boardwalk location that complements our Harrah's brand
location in the Marina district. In the Chicago market, the combination of
Showboat's riverboat casino complex southeast of Chicago in neighboring
Indiana, which has been re-branded as a Harrah's casino, and Harrah's in
Joliet, Illinois, southwest of Chicago, makes it possible for us to seek the
loyalty of a broader share of visitors from the Chicago area.
Also included in the Showboat acquisition was a 24.6% equity
ownership interest in the Star City casino in Sydney, Australia and an
agreement to manage that casino. In the fourth quarter of 1999, we sold our
ownership interest in the Star City casino, and in the first quarter of 2000,
we completed the sale of our management interests in that property. We
received net proceeds of approximately $200 million from these sales. (See
Other Factors Affecting Net Income.)
During the first quarter of 2000, we completed the sale for cash of
the Showboat Las Vegas property, which was also acquired in our purchase of
Showboat, Inc. At the time of the Showboat acquisition, the Showboat Las Vegas
property was determined to be a nonstrategic asset for us and was reported as an
asset-held-for-sale in our financial statements. No gain or loss resulted from
the sale of this asset.
RIO HOTEL & CASINO, INC. We completed our merger with Rio on January 1,1999,
issuing approximately 25 million shares of our common stock to acquire all of
Rio's outstanding shares. The addition of the Rio to the family of Harrah's
Entertainment properties provides our customers who frequent Las Vegas a choice
between two distinct, high-quality experiences: a high-quality Las Vegas strip
destination and a high-quality resort experience. In addition to the Rio
property, our acquisition also included Rio Secco, an 18-hole championship golf
course, and approximately 35 acres adjacent to the Rio, which is available for
further development.
PLAYERS INTERNATIONAL, INC. On March 22, 2000, we completed our acquisition of
Players, which operated 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. Players and Harrah's Entertainment jointly
operated a landside hotel and entertainment facility at the Maryland Heights
property, a suburb of St. Louis. The operations of the Players facility in
Maryland Heights were consolidated with the adjacent Harrah's operation
immediately after the acquisition, and the Lake Charles and Metropolis
facilities were subsequently converted to the Harrah's brand.
HARVEYS CASINO RESORTS. On July 31, 2001, we completed our acquisition of
Harveys. We paid approximately $294 million for the equity interests in Harveys,
assumed approximately $350 million in outstanding debt and paid approximately
$17 million in acquisition costs. We also assumed a $50 million contingent
liability. This liability is contingent on the results of a referendum to be
decided by the voters in Pottawattamie County, Iowa, in November 2002. If the
referendum passes, we will pay an additional $50 million in acquisition costs.
If the referendum does not pass, the excursion gambling boat license may remain
valid until January 26, 2004; however, the Bluffs Run Casino would have to cease
gaming operations in a relatively short time after the referendum date.
Management believes that the referendum will pass; however, in the event the
referendum does not pass and gaming operations cease in Pottawattamie County, we
would likely have a significant impairment related to the carrying value of our
assets in Iowa. We financed the acquisition, and retired Harveys assumed debt,
with borrowings under our bank credit facility. The purchase included the
Harveys Resort & Casino in Lake Tahoe, Nevada, the Harveys Casino Hotel and the
Bluffs Run Casino, both in Council Bluffs, Iowa and the Harveys Wagon Wheel
Hotel/Casino in Central City, Colorado. The addition of the Harveys properties
expanded our geographic distribution to 25 casinos in 12 states, increased our
nationwide casino square footage by almost 15% and added 1,109 hotel rooms,149
table games and 5,768 slot machines to serve our customers. The transaction will
introduce Harrah's and our Total Rewards customer-loyalty program to 1.7 million
potential new customers within 150 miles of Council Bluffs and will strengthen
our relationships with customers throughout the Nevada-Northern California
gaming market.
REGIONAL RESULTS AND DEVELOPMENT PLANS
In the following discussions of the operating results for our properties, we
define operating profit as revenues less direct operating expenses and
depreciation and amortization, excluding amortization of intangible assets.
<Table>
<Caption>
WESTERN REGION PERCENTAGE
INCREASE/(DECREASE)
(IN MILLIONS) 2001 2000 1999 01 VS 00 00 VS 99
-------- -------- -------- -------- --------
Casino revenues $ 786.3 $ 726.8 $ 730.1 8.2% (0.5)%
Total revenues 1,203.5 1,129.7 1,136.5 6.5% (0.6)%
Operating profit 130.8 127.9 182.4 2.3% (29.9)%
Operating margin 10.9% 11.3% 16.0% (0.4)pts (4.7)pts
</Table>
Because many of our Western Region properties are located in resort destination
markets, our Western Region felt an ongoing impact of the September 11, 2001,
terrorist attacks and the subsequent effect on air travel. While occupancy
levels and gaming revenues improved at these properties as compared to our
operating levels immediately following the terrorist attacks, this was achieved
at a higher cost as properties spent more to induce customers to visit the
casinos.
Western Region results include results for five months from Harveys
Lake Tahoe, which is included in the Northern Nevada discussion, and Harveys
Wagon Wheel Hotel/Casino in Central City, Colorado, which contributed $19.3
million in revenues and $1.3 million in operating profit in 2001.
SOUTHERN NEVADA. Revenues increased in Southern Nevada in 2001 due to record
revenues at Harrah's Las Vegas, which achieved a 6.6% increase over 2000
revenues despite travel disruptions to this resort destination following the
September 11, 2001, terrorist attacks. Revenues at Harrah's Laughlin matched
those reported in 2000, and Rio's revenues declined 0.5% from the prior year.
The increase in operating income in Southern Nevada was due to improved
performance at the Rio, despite $13 million in nonrecurring charges recorded by
the Rio in 2001 to focus its operations. The focus of Rio's operations to
de-emphasize international high-end table game play, which generated losses in
2000, resulted in improved results at this property.
Revenue and operating profit decreases in Southern Nevada in 2000
from 1999 were due to Rio's table games hold percentage, which ran well below
historical average throughout much of 2000. In addition to the revenue
shortfalls, Rio's operating margin was impacted by increased entertainment
costs. Our Harrah's-brand Southern Nevada properties posted a 10.2% increase
in revenues in 2000 over 1999 while operating profits for these properties
were up 24.3% over 1999. These increases were driven by growth in
cross-market play, more effective marketing programs and improved margins.
NORTHERN NEVADA. The increase in Northern Nevada revenues in 2001 was due to the
inclusion of operating results for Harveys Lake Tahoe for the five months
subsequent to our acquisition of Harveys. Excluding revenues contributed by
Harveys, Northern Nevada revenues were down 6.4%, as a result of the
interruption in airline service and the ensuing reduction in air travel
following the events of September 11 and lower than normal retail, especially
nontracked, walk-in business in northern Nevada due to the weak economy in
the area's major California feeder market. Operating profit dropped 18.1% in
Northern Nevada from 2000 due to increased costs associated with efforts to
return revenue levels to normal levels.
Northern Nevada posted record revenues in 2000, up 7.2% from 1999
revenues, and operating profit increased 14.3% over 1999. These increases
were due to property enhancements in Reno and Lake Tahoe and to execution of
our consumer marketing strategy.
<Table>
<Caption>
CENTRAL REGION PERCENTAGE
INCREASE/(DECREASE)
(IN MILLIONS) 2001 2000 1999 01 VS 00 00 VS 99
-------- -------- ------ -------- --------
Casino revenues $1,698.0 $1,381.6 $970.9 22.9% 42.3%
Total revenues 1,707.6 1,392.8 974.2 22.6% 43.0%
Operating profit 361.4 304.8 201.8 18.6% 51.0%
Operating margin 21.2% 21.9% 20.7% (0.7)pts 1.2pts
</Table>
The addition of the Harveys properties in Iowa, a full year of operations of the
properties acquired in the Players acquisition and record performance at several
of our Central Region properties combined to give the Central Region impressive
increases in revenue and operating profit in 2001. Our growth was also enhanced
by recent capital investments that generated strong customer demand and higher
cash flow.
The revenue and operating profit increases reported by the Central
Region for 2000 versus 1999 were due to the acquisition of Players in late March
2000, and to record performances at several of our properties in the region.
Excluding the impact of the Players acquisition, Central Region gaming revenues
increased 13.9% in 2000 over the prior year and drove correlating increases in
net revenues and operating profit.
CHICAGOLAND/ILLINOIS. For the third straight year, our Chicagoland properties
achieved record revenues and operating profit. Revenues at Harrah's Joliet
increased 6.1%, however, operating profit at that property decreased 3.8% due to
the accelerated depreciation on riverboats that were removed from service in
late September 2001, when the property was converted from riverboats to barges.
Following the decision in mid-2000 to remove the two riverboats from service,
depreciation was accelerated to reduce the riverboats to their estimated salvage
values during their expected remaining service life. Revenues at Harrah's East
Chicago increased 7.2% and operating profit increased 8.6%. In late
December, 10 floors of East Chicago's new 15-floor hotel opened. The
remaining floors are expected to open in first quarter 2002.
Year 2000 revenues and operating income for our Chicagoland properties
were higher by 25.4% and 36.3%, respectively, from 1999. Harrah's Joliet
benefited from the mid-1999 elimination of cruise scheduling and ticketing and
the fourth quarter 1999 opening of the hotel at that property. Excluding the
accelerated depreciation on the riverboats that were taken out of service in
2001, Harrah's Joliet's operating profit increased 43.5% in 2000. Harrah's
East Chicago's revenues increased 19.4% and operating profit increased 37.9%
in 2000 over 1999. We believe that these results were driven by the March
1999 re-branding of this property to the Harrah's brand and the successful
execution of the Company's customer-loyalty strategy in East Chicago.
Harrah's Metropolis, which was acquired in the Players transaction in
March 2000, contributed $118.0 million in revenues and $31.6 million in
operating profit in 2001 compared to $85.3 million in revenues and $27.2 million
in operating income for the period subsequent to its acquisition in 2000.
Construction was completed in September 2001 to renovate the Metropolis
facility, including replacing the existing riverboat with a larger,
refurbished riverboat that had previously been used at our North Kansas City
property. As a component of this project, the property was converted from the
Players to the Harrah's brand.
LOUISIANA. Revenues at Harrah's Shreveport increased 32.1% in 2001. These
revenue gains were aided by the new 514-room hotel and player amenities that
opened in the first quarter of 2001. Increased promotional expenses, cost
inefficiencies associated with the staggered opening of the hotel, increased
depreciation associated with the newly constructed assets and a one
percentage point increase in gaming taxes that was effective in second
quarter 2001 combined to cause margins to decline, resulting in only a 1.4%
increase in operating profit. The gaming tax rate at this property will
increase another one percentage point in 2002 and another one percentage
point in 2003.
Harrah's Shreveport's 2000 revenues declined 0.7% and its operating
profit declined 16.4% from 1999 levels. These declines were the result of
construction disruptions and costs of promotions mounted to sustain business
during construction activities.
The Lake Charles property, which was acquired in the Players
acquisition in March 2000 and was re-branded to the Harrah's brand in fourth
quarter 2000, contributed $164.3 million in revenues and $28.7 million in
operating profit in 2001 compared to $123.1 million in revenues and $21.2
million in operating profit for the slightly more than nine months that we
owned the property in 2000. A major refurbishment of the hotel at this
property, which was conducted in 2001, created construction disruptions and
loss of available rooms during the construction period. Also affecting
operating profit was an increase in gaming taxes from 18.5% to 21.5% of
gaming revenues, which was effective in the second quarter of 2001. No
further gaming tax rate increases are expected at this time.
MISSISSIPPI. Combined revenues from our Mississippi operations increased 2.8% in
2001 compared to 2000. This follows a 1.3% decrease in 2000 from 1999. Operating
profit from our Mississippi properties increased 47.3% in 2001 over 2000 as a
result of the higher revenues and increased cost efficiency efforts. In 2000,
operating profit fell 13.5% from 1999 levels.
In March 1999, we consummated the sale of our original Tunica property
to another casino company. Our gain from this disposition is reported in
Write-downs, reserves and recoveries in the Consolidated Statements of
Operations.
MISSOURI. For the second consecutive year, record revenues and operating profit
were achieved by our Harrah's North Kansas City property. Revenues and operating
profit at Harrah's North Kansas City increased 4.7% and 4.7%, respectively, over
2000 due to effective marketing, cost management efforts and facilities
enhancements at the property. Construction was completed at the end of the
second quarter of 2001 on the new casino space at North Kansas City, which
consolidated all of the gaming space into a single facility. The riverboat that
had been used since 1994 was refurbished and moved to our Metropolis property.
Year 2001 revenues at Harrah's St. Louis were 21.2% higher than 2000
revenues, and operating profit was up 32.8% compared to 2000. These increases
reflect the March 22, 2000, acquisition of Players and operational synergies
achieved with the combination of the Harrah's and Players operations. Year 2000
revenues at Harrah's St. Louis were 75.0% higher than in 1999 and operating
profit was up 54.6% due principally to the acquisition of Players in March 2000
and the integration of Players St. Louis and the Harrah's/Players jointly-owned
shore-side facilities into our operations.
The St. Louis shore-side facilities were owned jointly with Players
prior to our March 2000, acquisition of that company. Our pro rata share of
operating losses of the joint venture in 2000 up to the date of the Players
acquisition was $2.4 million. Our pro rata share of the operating losses of the
shore-side facilities was $10.4 million for 1999. These operating losses are
included in Equity in (income) losses of nonconsolidated affiliates in our
Consolidated Statements of Operations (see Other Factors Affecting Net Income
(Loss)). Subsequent to the Players acquisition, results of the shore-side
facilities, as well as for Players St. Louis operations, are combined with
Harrah's St. Louis' operating results.
IOWA. The two properties in Iowa contributed $103.6 million in revenues and
$21.2 million in operating profit for the five months since our acquisition of
Harveys.
<Table>
<Caption>
EASTERN REGION PERCENTAGE
INCREASE/(DECREASE)
(IN MILLIONS) 2001 2000 1999 01 VS 00 00 VS 99
------ ------ ------ -------- --------
Casino revenues $751.0 $743.3 $723.3 1.0% 2.8%
Total revenues 724.0 723.5 702.8 0.1% 2.9%
Operating profit 183.0 182.3 173.8 0.4% 4.9%
Operating margin 25.3% 25.2% 24.7% 0.1pts 0.5pts
</Table>
Our Eastern Region is comprised of the operating results of Harrah's Atlantic
City and the Atlantic City Showboat property. Harrah's Atlantic City achieved
record revenues for the fifth consecutive year in 2001, and its operating
profit, which was at a record level for the third consecutive year, increased
5.9% compared to 2000. These records were achieved despite construction
disruptions during most of the year and disruptions to business due to the
September 11 terrorist attacks. Construction is underway at Harrah's Atlantic
City on a 452-room expansion, which will increase the hotel's capacity to
more than 1,600 rooms, and on a project to create an additional 28,000 square
feet of casino floor space and expand a buffet area. The hotel expansion and
the first phase of the casino expansion project are expected to be completed
in the second quarter of 2002. Harrah's Atlantic City's 2000 revenues and
operating profit increased 5.8% and 16.6%, respectively, over 1999 levels.
Showboat Atlantic City's revenues decreased 0.7% in 2001 and
operating profit declined 12.8% from last year. This property, which is more
reliant on customers who travel to Atlantic City by bus, was impacted by the
September 11 terrorist attacks and construction disruptions related to
reconfiguration of the casino floor. The reconfiguration of Showboat's casino
floor was completed in the second quarter of 2001, a new buffet and coffee
shop opened in the fourth quarter of 2001 and our tiered Total Rewards
customer-loyalty program was implemented during 2001 at this property.
Showboat Atlantic City's 2000 revenues were down 0.3% from 1999 levels and
its operating profit was down 9.8% for the same period. In November 2001, we
announced plans to construct a $90 million, 544-room hotel tower at this
property, which is expected to open in the third quarter of 2003.
<Table>
<Caption>
MANAGED CASINOS AND OTHER PERCENTAGE
INCREASE/(DECREASE)
(IN MILLIONS) 2001 2000 1999 01 VS 00 00 VS 99
----- ----- ----- -------- --------
Revenues $69.0 $78.5 $77.9 (12.1)% 0.8%
Operating profit 30.8 40.4 43.3 (23.8)% (6.7)%
</Table>
Our Managed Casinos and Other revenues and operating profit were lower in
2001 than in 2000. Fees from Harrah's New Orleans and the Star City casino in
Sydney, Australia, were less in 2001 than in 2000 due to changes in the
management agreements. No management fees were recorded from Harrah's New
Orleans in the first quarter of 2001 due to the bankruptcy filing of JCC.
Pursuant to JCC's reorganization plan, which was effective at the end of March
2001, an amended management agreement changed the base management fee to an
incentive management fee based on earnings of the business before interest
expense, income taxes, depreciation, amortization and management fees.
Management fees from Indian-owned casinos increased 13.5% over fees earned in
2000 due to strong performances at those properties. We have recently extended
the management agreement for three Indian properties that we currently manage.
Those properties and the expiration date of the current management contract are:
Harrah's Cherokee, North Carolina, November 2004; Harrah's Ak-Chin, near
Phoenix, Arizona, December 2004 and Harrah's Prairie Band near Topeka, Kansas,
January 2008.
Managed Casinos and Other results for 2000 reflected a full year of
management fees from Harrah's New Orleans, which opened in the fourth quarter
of 1999 and which essentially offset lower management fee percentages as a
result of renewal and extension agreements for two of the Indian-owned
facilities that we manage.
In the third quarter of 2000, the Eastern Band of Cherokee Indians
broke ground on a new $63 million hotel and conference center at Harrah's
Cherokee Smoky Mountain Casino in Cherokee, North Carolina. Construction of the
252-room hotel and 30,000-square foot conference center is slated for completion
in second quarter 2002.
During first quarter 2000, we signed a definitive agreement with
the Rincon San Luiseno Band of Mission Indians ("Rincon") to act as developer
and manager for the Tribe's $125 million casino and hotel on Rincon tribal
land less than 50 miles north of San Diego, California. This location
provides convenient access to metropolitan San Diego, La Jolla, Del Mar,
Escondido and Orange County, California. Rincon opened a temporary casino
facility in January 2001. We are providing Rincon technical services related
to the development and operation of the temporary casino, but we do not
manage the temporary facility. Construction of the permanent facility is
underway and is expected to be completed in fourth quarter of 2002. Rincon
has secured third-party financing, which we have guaranteed, for its
permanent casino. We will manage the permanent facility for a fee.
An expansion to the Harrah's Ak-Chin casino opened in first quarter
2001 and includes a new 146-room hotel, an additional restaurant, meeting and
banquet room facilities, a resort pool and a landscaped courtyard.
See Debt and Liquidity for further discussion of our guarantees of
debt related to Indian projects.
We ceased management of the Star City casino in Sydney, Australia in
January 2000, upon the completion of the buy-out of our management contract by
another company. Their acquisition of the management contract followed their
buy-out of our equity ownership in the casino in fourth quarter1999. (See Other
Factors Affecting Net Income (Loss).)
Also included in Managed Casinos and Other are our brand marketing
costs. In 1998, we launched the first national brand advertising campaign by a
casino company.
<Table>
<Caption>
OTHER FACTORS AFFECTING NET INCOME (LOSS) PERCENTAGE
(INCOME)/EXPENSE INCREASE/(DECREASE)
(IN MILLIONS) 2001 2000 1999 01 VS 00 00 VS 99
- -----------------------------------------------------------------------------------------------------
Development costs $ 6.4 $ 6.4 $ 6.5 0.0% (1.5)%
Write-downs, reserves and recoveries:
Reserves for New Orleans Casino 2.3 220.0 -- N/M N/M
Other 20.2 6.1 2.2 N/M N/M
Project opening costs 13.1 8.3 2.3 57.8% N/M
Corporate expense 52.7 50.5 42.7 4.4% 18.3%
Headquarters relocation and
reorganization costs -- 3.0 10.3 N/M (70.9)%
Equity in (income) losses of
nonconsolidated affiliates (0.1) 57.9 43.5 N/M 33.1%
Venture restructuring costs 2.5 0.4 (0.3) N/M N/M
Amortization of goodwill and
other intangible assets 25.3 21.5 17.6 17.7% 22.2%
Interest expense, net 255.8 227.1 193.4 12.6% 17.4%
Loss/(gain) on interests in
nonconsolidated affiliates 5.0 41.6 (59.8) (88.0)% N/M
Other income (28.2) (3.9) (12.1) N/M (67.8)%
Effective tax rate 36.4% 86.4% 35.9% N/M N/M
Minority interests $ 12.6 $ 13.8 $ 11.2 (8.7)% 23.2%
Extraordinary losses,
net of income taxes -- 0.7 11.0 N/M (93.6)%
</Table>
N/M = Not meaningful
Write-downs, reserves and recoveries include various pretax charges to record
asset impairments, contingent liability reserves, project write-offs and
recoveries at time of sale of previously recorded reserves for asset impairment.
The components of Write-downs, reserves and recoveries were as follows:
<Table>
<Caption>
(IN THOUSANDS) 2001 2000 1999
------- -------- -------
Reserves for New Orleans casino $ 2,322 $220,000 $ --
Impairment of long-lived assets 8,203 5,813 3,367
Termination of contracts 4,060 2,505 --
Write-off of abandoned assets and other costs 8,484 2,800 569
Recoveries from previously impaired assets (571) (5,012) (1,701)
------- -------- -------
$22,498 $226,106 $ 2,235
======= ======== =======
</Table>
Year 2001 Project opening costs included costs incurred in connection with the
integration of acquired properties into the Harrah's systems and technology and
costs incurred in connection with expansion and renovation projects at various
properties. Year 2000 Project opening costs included costs incurred in
connection with the integration of the Players properties into the Harrah's
systems and technology and costs incurred in connection with expansions at
various casinos. Year 1999 Project opening costs included a fee paid in
connection with the renewal of a management contract and costs related to
expansions at various properties.
Corporate expense increased 4.4% in 2001 over 2000, but represented
only 1.4% of revenues in 2001, which is basically level with the 1.5% of
revenues reported in 2000 and 1.5% in 1999.
During 1999, we relocated our corporate headquarters and moved our
senior corporate executives and their support staffs to Las Vegas, Nevada.
The Company's national services headquarters remains in Memphis, Tennessee.
$10.3 million of costs related to the relocation of the Company's
headquarters was expensed in 1999. The final phase of the relocation was
completed in 2000, and an additional $3.0 million was expensed in that year.
Equity in nonconsolidated affiliates in 2001 improved significantly
over 2000 losses, which reflected our share of operating losses for 2000 from
JCC ($46.0 million) and NAI ($9.3 million). NAI and JCC filed voluntary
petitions for reorganization relief in December 2000 and January 2001,
respectively, triggering write-offs of our remaining investments and reserves
for receivables and contingent liabilities, and our equity pick-up of the
operating losses of both JCC and NAI ceased as of the end of 2000. With the
implementation of JCC's reorganization plan, we resumed recording our share
of JCC's results in second quarter 2001, however, our ownership interest has
increased to 49% from approximately 42% last year. Our share of 1999 losses
from JCC was $23.2 million, including $14.9 million of project opening costs.
Our share of NAI's 1999 losses was $8.8 million, including $2.7 million of
their project opening costs. With the acquisition of Rio, our ownership
interest in NAI increased from 23.9% to 47.8%. During 1999, we accounted for
Rio's investment in the airline as an asset-held-for-sale. Although the Rio
ownership interest was still for sale during 2000, our equity pick-up
percentage increased to reflect our full ownership interest. With the
write-off of our remaining investment in NAI at the end of 2000 and the
subsequent abandonment of all rights to our shares of NAI stock and stock
purchase warrants, we ceased recording our share of NAI's results in 2001.
Since the acquisition of Players in March of 2000, the St. Louis shore-side
facilities are included in our St. Louis operations; therefore, Equity in
losses of nonconsolidated affiliates for 2000 included our pro rata share of
these facilities' losses only up to the date of the Players acquisition. Year
1999 losses from the joint venture portion of the St. Louis development were
$10.4 million.
Venture restructuring costs represent our costs, including legal fees,
associated with the development of reorganization plans for the New Orleans
casino.
Amortization of goodwill and other intangible assets increased in 2000
with the acquisition of Players and again in 2001 with the acquisition of
Harveys. Because the acquisition of Harveys occurred after June 30, 2001, it is
subject to Statement of Financial Accounting Standards ("SFAS") No.142,
"Goodwill and Other Intangible Assets," whereby goodwill and other intangible
assets with indefinite lives will not be amortized. However, certain other
intangible assets with defined lives related to the Harveys acquisition are
being amortized. (See Note 2 to our Consolidated Financial Statements.)
Interest expense increased in 2000 over 1999 and again in 2001 over
2000 due to debt incurred and assumed in connection with our acquisitions and
stock repurchase activities.
The 2001 Gains (losses) on interests in nonconsolidated affiliates
reflects the write-off of an investment in Zoho Corporation. The 2000 Gains
(losses) on interests in nonconsolidated affiliates reflects the charges for
reserves related to NAI and the loss on an investment. In 1999, we sold our
shares of Star City casino and recorded a pretax gain of $43.5 million. We also
sold our interest in Sodak Gaming, Inc. to a gaming equipment manufacturing
company and recorded a pretax gain of $16.3 million.
The increase in Other income in 2001 was primarily due to a gain on
the settlement on the 1998 condemnation of land in Atlantic City, the sale of
nonstrategic land in Nevada and resolution of a contingency related to a
former affiliate. The decrease in Other income in 2000 was primarily due to
lower interest income on the cash-surrender-value of life insurance policies.
The effective tax rate for 2001, as well as for 2000 and 1999, is
higher than the federal statutory rate primarily due to state income taxes and
that portion of our goodwill amortization that is not deductible for tax
purposes.
Minority interests reflect joint venture partners' shares of income at
joint venture casinos.
Extraordinary losses reported in all three years are due to early
extinguishments of debt and include the premium paid to holders of the debt
retired and the write-off of related unamortized deferred finance charges.
(See Debt and Liquidity-Extinguishments of Debt.)
CAPITAL SPENDING AND DEVELOPMENT
Part of our plan for growth and stability includes disciplined capital
improvement projects, and 2001 has been a year of significant capital
reinvestment in our properties.
In addition to the specific development and expansion projects
discussed in Regional Results and Development Plans, we perform ongoing
refurbishment and maintenance at our casino entertainment facilities to
maintain our quality standards. We also continue to pursue development and
acquisition opportunities for additional casino entertainment facilities that
meet our strategic and return on investment criteria. Prior to the receipt of
necessary regulatory approvals, the costs of pursuing development projects are
expensed as incurred. Construction-related costs incurred after the receipt of
necessary approvals are capitalized and depreciated over the estimated useful
life of the resulting asset. Project opening costs are expensed as incurred.
Our capital spending for 2001 totaled approximately $550.5 million,
excluding the costs of our acquisition of Harveys. For the year 2000, our
capital spending, excluding the costs of our acquisition of Players and the
purchase of JCC's debt, was $568.3 million. For the year 1999, our capital
spending totaled $430.1 million, excluding the costs of our merger with Rio
and our acquisition of the additional ownership interest in the East Chicago
partnership. Estimated total capital expenditures for 2002 are expected to be
between $400 million and $500 million. Our planned development projects, if
they go forward, will require, individually and in the aggregate, significant
capital commitments and, if completed, may result in significant additional
revenues. The commitment of capital, the timing of completion and the
commencement of operations of casino entertainment development projects are
contingent upon, among other things, negotiation of final agreements and
receipt of approvals from the appropriate political and regulatory bodies.
Cash needed to finance projects currently under development as well as
additional projects being pursued is expected to be made available from
operating cash flows, the Bank Facility (see Debt and Liquidity), joint
venture partners, specific project financing, guarantees of third-party debt
and, if necessary, additional debt and/or equity offerings.
DEBT AND LIQUIDITY
BANK FACILITY
The Company has revolving credit and letter of credit facilities (the "Bank
Facility"), which provide us with borrowing capacity of $1.853 billion. The
Bank Facility consists of a five-year $1.525 billion revolving credit and
letter of credit facility maturing in 2004 and a separate $328 million
revolving credit facility, which is renewable annually at the borrower's and
lenders' options. As of December 31, 2001, the Bank Facility bears interest
based upon 87.5 basis points over LIBOR for current borrowings under the
five-year facility and 92.5 basis points over LIBOR for the 364-day facility.
In addition, there is a facility fee for borrowed and unborrowed amounts,
which is currently 20 basis points on the five-year facility and 15 basis
points on the 364-day facility. The interest rate and facility fee are based
on our current debt ratings and leverage ratio and may change as our debt
ratings and leverage ratio change. There is an option on each facility to
borrow at the prime rate. As of December 31, 2001, $1.38 billion in
borrowings were outstanding under the Bank Facility, with an additional $85.4
million committed to back letters of credit. After consideration of these
borrowings, $387.6 million of additional borrowing capacity was available to
the Company as of December 31, 2001.
<Page>
The majority of our debt is due in the year 2004 and beyond. Payments
of short-term debt obligations and other commitments are expected to be made
from operating cash flows. Long-term obligations are expected to be paid through
operating cash flows, refinancing of debt, joint venture partners or, if
necessary, additional debt and/or equity offerings.
ISSUANCE OF NEW DEBT
In addition to our Bank Facility, we have issued debt and entered into credit
agreements to provide for short-term borrowings at lower interest rates than the
rates paid under our Bank Facility, to provide the Company with cost-effective
borrowing flexibility and to replace short-term, floating-rate debt with
long-term, fixed-rate debt. The table below summarizes debt obligations
outstanding at December 31, 2001, that we have entered into during the last
three years.
<Table>
<Caption>
(IN THOUSANDS) OUTSTANDING AT
DECEMBER 31,
DEBT ISSUED MATURES 2001
- ------------------------------------ ------------ ------- ------------
7.5% Senior Notes January 1999 2009 $500,000
Uncommitted Line of Credit Agreement 2001 2002 31,000
8.0% Senior Notes January 2001 2011 500,000
7.125% Senior Notes June 2001 2007 500,000
</Table>
EXTINGUISHMENTS OF DEBT
Funds from the new debt discussed above, as well as proceeds from our Bank
Facility, were used to retire certain of our outstanding debt, in particular
those debt obligations assumed in our acquisition transactions, to reduce our
effective interest rate and/or lengthen maturities. The following table
summarizes the debt obligations that we have retired over the last three years.
<Table>
<Caption>
(IN THOUSANDS)
ISSUER DATE RETIRED DEBT EXTINGUISHED FACE VALUE RETIRED
- --------- ------------- ----------------- ------------------
Harveys September 2001 10.625% Senior Subordinated Notes due 2006 $150,000
Showboat August 2001 13% Senior Subordinated Notes due 2009 2,100
Harveys July 2001 Credit facility due 2004 192,000
Players June 2000 10.875% Senior Notes due 2005 150,000
Showboat June 2000 9.25% First Mortgage Bonds due 2008 56,445
SMCP March 1999 13.5% First Mortgage Notes due 2003 140,000
Rio May 1999 10.625% Senior Subordinated Notes due 2005 100,000
Rio May 1999 9.5% Senior Subordinated Notes due 2007 125,000
SMCP July 1999 Capital lease obligations 9,210
</Table>
SHORT-TERM DEBT
In June 2000, we entered into a 364-day credit agreement (the "Credit
Agreement") with a lender whereby we borrowed $150 million to redeem the Players
Notes. Interest rates, facility fees and covenants in the Credit Agreement were
identical to those provisions contained in our Bank Facility. The Credit
Agreement was paid off in January 2001, using proceeds from the 8% Notes.
In a program designed for short-term borrowings at lower interest
rates than the rates paid under our Bank Facility, we have entered into an
uncommitted line of credit agreement with a lender whereby we can borrow up to
$35 million for periods of ninety days or less. At December 31, 2001, we had
borrowed $31 million under this agreement. Borrowings bear interest at current
market rates. Interest rates on amounts borrowed under these agreements during
2001 ranged from 2.4% to 7.6%. This agreement does not decrease our borrowing
capacity under our Bank Facility.
EQUITY REPURCHASE PROGRAMS
During the past three years, our Board of Directors has authorized three plans
whereby we have purchased shares of the Company's common stock in the open
market from time to time as market conditions and other factors warranted. The
table below summarizes the three plans.
<Table>
<Caption>
PLAN NUMBER OF NUMBER OF AVERAGE PRICE
AUTHORIZED SHARES AUTHORIZED SHARES PURCHASED PER SHARE
- ---------- ----------------- ---------------- -------------
July 1999 10.0 million 10.0 million $23.44
April 2000 12.5 million 12.5 million 25.08
July 2001 6.0 million 2.1 million 25.46
</Table>
The July 2001 authorization expires December 31, 2002. The repurchases were
funded through available operating cash flows and borrowings from our Bank
Facility.
SHORT-TERM FINANCING NEEDS
Our cash and marketable securities totaled approximately $361.5 million at
December 31, 2001. We believe that our cash and marketable securities balance,
our cash flow from operations and the financing sources discussed herein, will
be sufficient to meet our normal operating requirements during the next twelve
months. We continue to review additional opportunities to acquire or invest in
companies, properties and other investments that are compatible with our
existing business. We could use cash, the financing sources discussed herein and
financing sources that subsequently become available, to fund additional
acquisitions or investments. In addition, we may consider issuing additional
debt or equity securities in the future to fund potential acquisitions or growth
or to refinance existing debt. If a material acquisition or investment is
completed, our operating results and financial condition could change materially
in future periods.
<Page>
GUARANTEES OF THIRD-PARTY DEBT AND OTHER COMMITMENTS
The Company has guaranteed an annual payment obligation of JCC owed to the State
of Louisiana of $50 million in the first year ($12.3 million remained at
December 31, 2001) and $60 million for three subsequent years. We receive a fee
of 2% of the average amount at risk for providing this guarantee. We also hold
approximately $51 million of the new debt of JCC, which replaced $81.6 million
owed to us prior to the JCC reorganization. We are also providing a $35 million
revolving credit facility to JCC at market terms. At December 31, 2001, no funds
were outstanding from JCC under the revolving credit facility.
As of December 31, 2001, we are exposed to up to $12 million of
liability under a letter of credit on behalf of NAI, which expires on
February 19, 2002. We have an agreement with another investor of NAI whereby
that investor is obligated to reimburse us for approximately 56% of amounts
that we may pay under the letter of credit and that we funded under another
letter of credit. During second quarter 2001, a subsidiary of the Company
filed a lawsuit against the other investor for breach of contract due to the
investor's failure to reimburse the Company for his share of the $8.6 million
we have paid against the second letter of credit. As contractually permitted,
the guarantor elected to submit the issue to arbitration. A ruling from the
arbitrator is pending. If we are required to fund under the remaining letter
of credit and are unsuccessful in collecting from the other investor, we
would record additional losses of up to $12 million for NAI.
In addition to guarantees and commitments related to JCC and NAI, the
agreements pursuant to which we manage casinos on Indian lands contain
provisions required by law that provide that a minimum monthly payment be made
to the tribe. That obligation has priority over scheduled repayments of
borrowings for development costs. In the event that insufficient cash flow is
generated by the operations to fund this payment, we must pay the shortfall to
the tribe. Such advances, if any, would be repaid to us in future periods in
which operations generate cash flow in excess of the required minimum payment.
These commitments will terminate upon the occurrence of certain defined events,
including termination of the management contract. Our aggregate monthly
commitment pursuant to the contracts for the three managed Indian-owned
facilities now open, which extend for periods of up to 73 months from December
31, 2001, is $1.1 million.
We may guarantee all or part of the debt incurred by Indian tribes
with which we have entered a management contract to fund development of casinos
on the Indian lands. For all existing guarantees of Indian debt, we have
obtained a first lien on certain personal property (tangible and intangible) of
the casino enterprise. There can be no assurance, however, that the value of
such property would satisfy our obligations in the event these guarantees were
enforced. Additionally, we have received limited waivers from the Indian tribes
of their sovereign immunity to allow us to pursue our rights under the contracts
between the parties and to enforce collection efforts as to any assets in which
a security interest is taken. The aggregate outstanding balance of such debt as
of December 31, 2001, was $130.2 million.
With the Harveys acquisition in July 2001, we assumed a $50 million
contingent liability that may become due as part of the consideration paid for
the net assets of Harveys. The contingent payment depends on the results of a
referendum to be decided by the voters of Pottawattamie County, Iowa, in
November 2002.
EFFECTS OF CURRENT ECONOMIC AND POLITICAL CONDITIONS
AFTERMATH OF THE SEPTEMBER 11, 2001 ATTACKS
We cannot predict the length or severity of the economic downturn that was
precipitated by the September 11, 2001, terrorist attacks. A significant
period of reduced discretionary spending and disruptions in airline travel
and business conventions could have a material adverse impact on our results
of operations. In addition, the September 11, 2001 attacks, the potential for
future terrorist attacks, the national and international responses to
terrorist attacks and other acts of war or hostility have created many
economic and political uncertainties, which could adversely affect our
business and results of operations in ways that cannot presently be
predicted. We will be predominantly uninsured for losses and interruptions
caused by terrorist acts and acts of war.
COMPETITIVE PRESSURES
Due to the limited number of new markets opening for development in recent
years, most casino operators have been reinvesting in existing markets to
attract new customers, thereby increasing competition in those markets. As
companies have completed expansion projects, supply has grown at a faster pace
than demand in some markets and competition has increased significantly.
Furthermore, several operators, including Harrah's Entertainment, have announced
plans for additional developments or expansions in some markets.
In October 2001, the legislature of the State of New York approved a
bill authorizing six new tribal casinos in that state and video lottery
terminals at tracks. The measure allows the governor of New York to negotiate
gaming compacts with American Indian tribes to operate three casinos in the
Catskills and three casinos in western New York.
In September 1999, the State of California and approximately 60 Indian
tribes executed Class III Gaming Compacts, which other California tribes can
join. The Compacts, when effective, will allow each tribe to operate, on tribal
trust lands, two casinos with up to 2,000 slot machines per tribe and unlimited
house-banked card games. Our own agreements with the Rincon Tribe are a result
of these events (see Operating Results and Development Plans, Managed Casinos
and Other).
At this time, the ultimate impacts that the New York Compacts or the
California Compacts may have on the industry or on our Company are uncertain.
Other states are also considering legislation enabling the development and
operation of casinos or casino-like operations.
<Page>
Although, historically, the short-term effect of such competitive
developments on our Company has been negative, we are not able to determine the
long-term impact, whether favorable or unfavorable, that these trends and events
will have on current or future markets. We believe that the geographic diversity
of our operations; our focus on multi-market customer relationships; our service
training, measurements and rewards programs; and our continuing efforts to
establish our brands as premier brands upon which we have built strong customer
loyalty have well-positioned us to face the challenges present within our
industry. We utilize the unique capabilities of WINet, a sophisticated
nationwide customer database, and Total Rewards, a nationwide reward and
recognition program. Total Rewards provides our customers with a simple
understanding of how to earn cash, comps and other benefits for playing at
Harrah's Entertainment casinos. We believe both of these marketing tools provide
us with competitive advantages, particularly with players who visit more than
one market. All of our properties, with the exception of the Colorado property
acquired in the Harveys acquisition, are integrated into both WINet and Total
Rewards.
POLITICAL UNCERTAINTIES
The casino entertainment industry is subject to political and regulatory
uncertainty. From time to time, individual jurisdictions have also considered
legislation or referendums, which could adversely impact our operations. The
likelihood or outcome of similar legislation and referendums in the future is
difficult to predict.
The casino entertainment industry represents a significant source of
tax revenues to the various jurisdictions in which casinos operate. From time to
time, various state and federal legislators and officials have proposed changes
in tax laws, or in the administration of such laws, which would affect the
industry. It is not possible to determine with certainty the scope or likelihood
of possible future changes in tax laws or in the administration of such laws. If
adopted, such changes could have a material adverse effect on our financial
results.
EFFECTS OF INFLATION
Inflation has had little effect on our historical operations over the past three
fiscal years. Generally, we have not experienced any significant negative impact
on gaming volume or on wagering propensity of our customers as a result of
inflationary pressures. Further, we have been successful in increasing the
amount of wagers and playing time of our casino customers through effective
marketing programs. We have also, from time to time, adjusted our required
minimum bets at table games and changed the relative mix of slot machines in
favor of machines with higher average bets. These strategies, supplemented by
effective cost management programs, have offset the impact of inflation on our
operations over the past three fiscal years. In addition, inflation tends to
increase the value of our casino entertainment properties.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
We prepare our Consolidated Financial Statements in conformity with accounting
principles generally accepted in the United States. Certain of our accounting
policies, including the estimated lives assigned to our assets, the
determination of bad debt, asset impairment and self insurance reserves, the
purchase price allocations made in connection with our acquisitions and the
calculation of our income tax liabilities, require that we apply significant
judgment in defining the appropriate assumptions for calculating financial
estimates. By their nature, these judgments are subject to an inherent degree of
uncertainty. Our judgments are based on our historical experience, terms of
existing contracts, our observance of trends in the industry, information
provided by our customers and information available from other outside sources,
as appropriate. There can be no assurance that actual results will not differ
from our estimates. To provide an understanding of the methodology we apply, our
significant accounting policies are discussed where appropriate in this
discussion and analysis and in the notes to our Consolidated Financial
Statements.
RECENTLY ISSUED AND PROPOSED ACCOUNTING STANDARDS
During first quarter 2001, the Emerging Issues Task Force reached a consensus on
the portion of Issue 00-22, "Accounting for `Points' and Certain Other
Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products
or Services to be Delivered in the Future," which addresses the income statement
classification of the value of the points redeemable for cash awarded under
point programs like our Total Rewards program. Per the consensus, which for our
Company was effective retroactively to January 1, 2001, with prior year
restatement also required, the cost of these programs should be reported as a
contra-revenue, rather than as an expense. Debate continues on a number of other
facets of Issue 00-22 which could have an impact on our financial statements. We
historically reported the costs of such points as an expense, so we have
reclassified these costs to be contra-revenues in our Consolidated Statements of
Operations to comply with the consensus. The amounts of expense reclassified for
2000 and 1999 were $141.4 million and $130.3 million, respectively. These
reclassifications had no impact on Income from operations, Net income (loss) or
Earnings (loss) per share.
<Page>
The Financial Accounting Standards Board ("FASB") has issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires all business combinations initiated after June
30, 2001, including our acquisition of Harveys, to be accounted for using the
purchase method. SFAS No.142 provides new guidance on the recognition and
amortization of intangible assets, eliminates the amortization of goodwill and
requires annual assessments for impairment of goodwill by applying a
fair-value-based test. We have not yet completed our analysis to determine the
effect SFAS No. 142 may have on our financial statements; however, it is likely
that an impairment charge will be necessary for a portion of the goodwill
recorded on our books related to prior acquisitions. Upon adoption of SFAS No.
142, our net income will no longer reflect amortization of goodwill or other
intangible assets with indefinite lives, however, certain other intangible
assets will continue to be amortized. Net income could also be impacted by any
charge for impairment of goodwill. SFAS No. 142 is effective for years beginning
after December 15, 2001. Early adoption is not permitted.
During third quarter 2001, the FASB also issued SFAS No. 143,
"Accounting for Asset Retirement Obligations" and SFAS No.144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." For our Company, SFAS No. 143
will be effective in 2003 and SFAS No. 144 will be effective in 2002. We are
currently evaluating the provisions of these two recently issued accounting
pronouncements and have not yet determined the impact that their adoption will
have on our results of operations or financial position.
PRIVATE SECURITIES LITIGATION REFORM ACT
This Annual Report includes "forward-looking statements" intended to qualify for
the safe harbor from liability established by the Private Securities Litigation
Reform Act of 1995. You can identify these statements by the fact that they do
not relate strictly to historical or current facts. These statements contain
words such as "may," "will," "project," "might," "expect," "believe,"
"anticipate," "intend," "could," "would," "estimate," "continue" or "pursue," or
the negative or other variations thereof or comparable terminology. In
particular, they include statements relating to, among other things, future
actions, new projects, strategies, future performance, the outcome of
contingencies such as legal proceedings and future financial results. We have
based these forward-looking statements on our current expectations and
projections about future events.
We caution the reader that forward-looking statements involve risks
and uncertainties that cannot be predicted or quantified and, consequently,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, but are not
limited to, the following factors as well as other factors described from time
to time in our reports filed with the Securities and Exchange Commission
("SEC"):
o the effect of economic, credit and capital market conditions on the economy
in general, and on gaming and hotel companies in particular;
o construction factors, including zoning issues, environmental restrictions,
soil and water conditions, weather and other hazards, site access matters
and building permit issues;
o our ability to timely and cost effectively integrate into our operations
the companies that we acquire;
o access to available and feasible financing;
o changes in laws or regulations, third-party relations and approvals, and
decisions of courts, regulators and governmental bodies;
o litigation outcomes and judicial actions, including gaming legislative
action, referenda and taxation;
o abnormal gaming holds; and
o the effects of competition, including locations of competitors and
operating and market 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. We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or
otherwise.
<Page>
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<Table>
<Caption>
DECEMBER 31,
-------------------------------
2001 2000
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 361,470 $ 299,202
Receivables, less allowance for doubtful accounts of $61,150 and $49,357 110,781 122,050
Deferred income taxes (Note 9) 45,319 35,126
Income tax refunds receivable 28,326 56,132
Prepayments and other 48,927 48,107
Inventories 22,875 22,816
----------- -----------
Total current assets 617,698 583,433
----------- -----------
Land, buildings, riverboats and equipment
Land and land improvements 766,401 705,393
Buildings, riverboats and improvements 3,200,493 2,652,867
Furniture, fixtures and equipment 1,208,706 974,233
Construction in progress 164,294 248,760
----------- -----------
5,339,894 4,581,253
Less: accumulated depreciation (1,280,564) (1,084,884)
----------- -----------
4,059,330 3,496,369
Goodwill, net of accumulated amortization of $92,046 and $72,465 (Note 2) 947,678 685,393
Investments in and advances to nonconsolidated affiliates (Note 15) 79,464 86,681
Deferred costs, trademarks and other (Note 4) 424,412 314,209
----------- -----------
$ 6,128,582 $ 5,166,085
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 123,428 $ 89,051
Accrued expenses (Note 4) 412,897 343,524
Short-term debt (Note 5) 31,000 215,000
Current portion of long-term debt (Note 5) 1,583 130,928
----------- -----------
Total current liabilities 568,908 778,503
Long-term debt (Note 5) 3,719,443 2,835,846
Deferred credits and other 173,677 177,654
Deferred income taxes (Note 9) 261,119 85,650
----------- -----------
4,723,147 3,877,653
----------- -----------
Minority interests 31,322 18,714
----------- -----------
Commitments and contingencies (Notes 2, 6 and 12 through 15)
Stockholders' equity (Notes 3,14 and 15)
Common stock, $0.10 par value, authorized-360,000,000 shares,
outstanding-112,322,143 and 115,952,394 shares (net of 28,977,890 and
22,030,805 shares held in treasury) 11,232 11,595
Capital surplus 1,143,125 1,075,313
Retained earnings 248,098 224,251
Accumulated other comprehensive loss (1,449) (1,036)
Deferred compensation related to restricted stock (26,893) (40,405)
----------- -----------
1,374,113 1,269,718
----------- -----------
$ 6,128,582 $ 5,166,085
=========== ===========
</Table>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE CONSOLIDATED BALANCE SHEETS.
<Page>
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2001 2000 1999
----------- ----------- -----------
Revenues
Casino $ 3,235,761 $ 2,852,048 $ 2,424,237
Food and beverage 532,115 480,757 429,684
Rooms 301,846 270,313 253,629
Management fees 64,842 66,398 75,890
Other 140,234 142,072 127,527
Less: casino promotional allowances (565,758) (481,792) (416,842)
----------- ----------- ----------
Total revenues 3,709,040 3,329,796 2,894,125
----------- ----------- ----------
Operating expenses
Direct
Casino 1,528,106 1,354,268 1,124,254
Food and beverage 234,938 228,002 218,580
Rooms 78,085 67,800 66,818
Depreciation and amortization 285,773 236,082 193,599
Write-downs, reserves and recoveries (Note 7):
Reserves for New Orleans casino 2,322 220,000 --
Other 20,176 6,106 2,235
Project opening costs 13,136 8,258 2,276
Corporate expense 52,746 50,472 42,748
Headquarters relocation and reorganization costs (Note 8) -- 2,983 10,274
Equity in (income) losses of nonconsolidated affiliates (Note 15) (148) 57,935 43,467
Venture restructuring costs 2,524 400 (322)
Amortization of intangible assets 25,288 21,540 17,617
Other 885,129 793,212 691,542
----------- ----------- -----------
Total operating expenses 3,128,075 3,047,058 2,413,088
----------- ----------- -----------
Income from operations 580,965 282,738 481,037
Interest expense, net of interest capitalized (Note 1) (255,801) (227,139) (193,407)
(Losses) gains on interests in nonconsolidated affiliates (Note 15) (5,040) (41,626) 59,824
Other income, including interest income 28,219 3,866 12,129
----------- ----------- -----------
Income before income taxes and minority interests 348,343 17,839 359,583
Provision for income taxes (Note 9) (126,737) (15,415) (128,914)
Minority interests (12,616) (13,768) (11,166)
----------- ----------- -----------
Income (loss) before extraordinary losses 208,990 (11,344) 219,503
Extraordinary losses, net of tax benefit of $13, $388 and $5,990 (Note 10) (23) (716) (11,033)
----------- ----------- -----------
Net income (loss) $ 208,967 $ (12,060) $ 208,470
=========== =========== ===========
Earnings (loss) per share-basic
Before extraordinary losses $ 1.84 $ (0.09) $ 1.74
Extraordinary losses, net -- (0.01) (0.09)
----------- ----------- -----------
Net income (loss) $ 1.84 $ (0.10) $ 1.65
=========== =========== ===========
Earnings (loss) per share-diluted
Before extraordinary losses $ 1.81 $ (0.09) $ 1.71
Extraordinary losses, net -- (0.01) (0.09)
----------- ----------- -----------
Net income (loss) $ 1.81 $ (0.10) $ 1.62
=========== =========== ===========
Weighted average common shares outstanding 113,540 117,190 126,072
Dilutive effect of stock compensation programs 2,168 -- 2,676
----------- ----------- ----------
Weighted average common and common equivalent shares outstanding 115,708 117,190 128,748
=========== =========== ==========
</Table>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE CONSOLIDATED STATEMENTS.
<Page>
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(NOTES 3,14 AND 15)
(In thousands)
<Table>
<Caption>
DEFERRED
COMMON STOCK ACCUMULATED COMPENSATION
------------------ OTHER RELATED TO
SHARES CAPITAL RETAINED COMPREHENSIVE RESTRICTED COMPREHENSIVE
OUTSTANDING AMOUNT SURPLUS EARNINGS INCOME (LOSS) STOCK TOTAL INCOME (LOSS)
----------- -------- --------- ---------- ------------- ------------ --------- -------------
Balance-December 31, 1998 102,188 $10,219 $ 407,691 $ 451,410 $ 6,567 $ (24,480) $ 851,407
Net income -- -- -- 208,470 -- -- 208,470 $ 208,470
Unrealized gain on available-for-
sale securities, less deferred tax
provision of $2,118 -- -- -- -- 3,606 -- 3,606 3,606
Realization of gain due to sale
of equity interest in
nonconsolidated affiliate, net of
tax provision of $6,031 -- -- -- -- (10,269) -- (10,269) (10,269)
Foreign currency adjustment -- -- -- -- (397) -- (397) (397)
Treasury stock purchases (6,108) (611) -- (147,341) -- -- (147,952)
Net shares issued in acquisition
of Rio and minority interest in
subsidiary 25,392 2,539 529,492 -- -- -- 532,031
Net shares issued under incentive
compensation plans, including
income tax benefit of $2,625 2,908 291 50,139 -- -- (1,049) 49,381 ---------
1999 Comprehensive Income -- -- -- -- -- -- -- $ 201,410
-------- ------- --------- ---------- --------- ----------- --------- ---------
Balance-December 31,1999 124,380 12,438 987,322 512,539 (493) (25,529) 1,486,277
Net loss -- -- -- (12,060) -- -- (12,060) $ (12,060)
Unrealized loss on available-for-
sale securities, less deferred
tax benefit of $505 -- -- -- -- (824) -- (824) (824)
Realization of loss due to sale of
equity interest in foreign subsidiary,
net of tax benefit of $148 -- -- -- -- 191 -- 191 191
Foreign currency adjustment 90 -- 90 90 90 90 90
Treasury stock purchases (12,397) (1,240) -- (276,367) -- -- (277,607)
Net shares issued under incentive
compensation plans, including income
tax benefit of $15,739 3,969 397 87,991 139 -- (14,876) 73,651 ---------
2000 Comprehensive Loss -- -- -- -- -- -- -- $ (12,603)
-------- ------- ---------- ---------- --------- ---------- ---------- ---------
Balance-December 31, 2000 115,952 11,595 1,075,313 224,251 (1,036) (40,405) 1,269,718
Net income -- -- -- 208,967 -- -- 208,967 $ 208,967
Unrealized gain on available-for-sale
securities, less deferred tax
provision of $772 -- -- -- -- 1,289 -- 1,289 1,289
Realization of gain on available-for-
sale securities, net of tax
provision of $123 -- -- -- -- (226) -- (226) (226)
Other -- -- -- -- (1,476) -- (1,476) (1,476)
Treasury stock purchases (6,618) (662) -- (185,120) -- -- (185,782)
Net shares issued under incentive
compensation plans, including income
tax benefit of $18,013 2,988 299 67,812 -- -- 13,512 81,623 ---------
2001 Comprehensive Income -- -- -- -- -- -- -- $ 208,554
-------- ------- ---------- ---------- --------- ---------- ---------- =========
Balance-December 31, 2001 112,322 $11,232 $1,143,125 $ 248,098 $ (1,449) $ (26,893) $1,374,113
======== ======= ========== ========== ========= ========== ==========
</Table>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE CONSOLIDATED STATEMENTS.
<Page>
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTES 11)
(In thousands)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities
Net income (loss) $ 208,967 $ (12,060) $ 208,470
Adjustments to reconcile net income (loss) to cash flows from
operating activities
Extraordinary losses, before income taxes 36 1,104 17,023
Depreciation and amortization 332,672 282,110 218,299
Write-downs, reserves and recoveries 22,498 226,106 1,570
Deferred income taxes 102,476 (118,125) 34,052
Other noncash items 46,337 133,841 52,924
Minority interests' share of net income 12,616 13,768 11,166
Equity in (income) losses of nonconsolidated affiliates (148) 57,935 43,467
Realized losses (gains) from interests in nonconsolidated affiliates 5,040 41,626 (59,824)
Net losses (gains) from asset sales (18,503) 1,213 878
Net change in long-term accounts (22,063) (44,772) 32,213
Net change in working capital accounts 83,924 (35,178) (70,161)
----------- ----------- -----------
Cash flows provided by operating activities 773,852 547,568 490,077
----------- ----------- -----------
Cash flows from investing activities
Land, buildings, riverboats and equipment additions (529,822) (421,381) (340,468)
Payments for businesses acquired, net of cash acquired (270,798) (260,185) --
Investments in and advances to nonconsolidated affiliates (5,735) (314,921) (70,181)
Proceeds from other asset sales 28,933 86,664 26,359
Decrease (increase) in construction payables 5,780 (1,703) 1,871
Sale of marketable equity securities for defeasance of debt 2,182 58,091 --
Proceeds from sales of interests in subsidiaries 1,883 131,475 172,576
Collection of notes receivable -- 14,285 13,618
Purchase of minority interest in subsidiary (8,512) -- (26,000)
Cash acquired in acquisitions -- -- 50,226
Other (14,920) (11,907) (12,365)
----------- ----------- -----------
Cash flows used in investing activities (791,009) (719,582) (184,364)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from issuance of senior notes, net of discount and
issue costs of $15,328 for 2001 and $5,980 for 1999 984,672 -- 494,020
Proceeds from exercises of stock options 55,303 45,150 24,329
Early extinguishments of debt (344,811) (213,063) (620,493)
Gross borrowings under lending agreements, net of financing costs of
$529, $1,444 and $4,556 2,732,416 1,950,859 4,029,473
Gross repayments under lending agreements (2,967,814) (1,447,434) (2,924,029)
Net short-term borrowings (repayments), net of financing costs of $450 in 2000 (184,000) 193,550 21,000
Purchases of treasury stock (185,782) (277,607) (147,952)
Premiums paid on early extinguishments of debt (7,970) (1,104) (9,278)
Scheduled debt retirements (2,707) (3,472) (5,075)
Minority interests' distributions, net of contributions (8) (14,003) (7,122)
Net repayments under retired facility -- -- (1,086,000)
Other 126 4,759 --
----------- ----------- -----------
Cash flows provided by (used in) financing activities 79,425 237,635 (231,127)
----------- ----------- -----------
Net increase in cash and cash equivalents 62,268 65,621 74,586
Cash and cash equivalents, beginning of year 299,202 233,581 158,995
----------- ----------- -----------
Cash and cash equivalents, end of year $ 361,470 $ 299,202 $ 233,581
=========== =========== ===========
</Table>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE CONSOLIDATED STATEMENTS.
<Page>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
In these footnotes, the words "Company," "Harrah's Entertainment," "we," "our"
and "us" refer to Harrah's Entertainment, Inc., a Delaware corporation, and its
wholly-owned subsidiaries, unless otherwise stated or the context requires
otherwise.
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND ORGANIZATION. We operate in more markets than any
other casino company in the United States. As of December 31, 2001, our U.S.
operations included 12 land-based casinos, 10 riverboat or dockside casinos and
three casinos on Indian reservations.
PRINCIPLES OF CONSOLIDATION. Our Consolidated Financial Statements include the
accounts of Harrah's Entertainment and its subsidiaries after elimination of all
significant intercompany accounts and transactions. We follow the equity method
of accounting for our investments in 20% to 50% owned companies and joint
ventures (see Note 15).
CASH AND CASH EQUIVALENTS. Cash includes the minimum cash balances required
to be main- tained by a state gaming commission or local and state
governments, which totaled approximately $27.0 million and $22.9 million at
December 31, 2001 and 2000, respectively. Cash equivalents are highly liquid
investments with a maturity of less than three months and are stated at the
lower of cost or market value.
INVENTORIES. Inventories, which consist primarily of food, beverage and
operating supplies, are stated at average cost.
LAND, BUILDINGS, RIVERBOATS AND EQUIPMENT. Land, buildings, riverboats and
equipment are stated at cost. Land includes land held for future development
or disposition, which totaled $129.8 million and $109.9 million at December
31, 2001 and 2000, respectively. We capitalize the costs of improvements and
extraordinary repairs that extend the life of the asset. We expense
maintenance and repairs costs as incurred. Interest expense is capitalized on
internally constructed assets at our overall weighted average borrowing rate
of interest. Capitalized interest amounted to $9.3 million, $8.0 million and
$13.1 million in 2001, 2000 and 1999, respectively.
We depreciate our buildings, riverboats and equipment using the
straight-line method over the shorter of the estimated useful life of the asset
or the related lease term, as follows:
Buildings and improvements 10 to 40 years
Riverboats and barges 30 years
Furniture, fixtures and equipment 2 to 15 years
We review the carrying value of land, buildings, riverboats and
equipment for impairment whenever events and circumstances indicate that the
carrying value of an asset may not be recoverable from the estimated future
cash flows expected to result from its use and eventual disposition. In cases
where undiscounted expected future cash flows are less than the carrying
value, an impairment loss is recognized equal to an amount by which the
carrying value exceeds the fair value of the asset. The factors considered by
management in performing this assessment include current operating results,
trends and prospects, as well as the effect of obsolescence, demand,
competition and other economic factors. In estimating expected future cash
flows for determining whether an asset is impaired, assets are grouped at the
operating unit level, which for most of our assets is the individual casino.
TREASURY STOCK. The shares of Harrah's Entertainment common stock we hold in
treasury are reflected in our Consolidated Balance Sheets and our Consolidated
Statements of Stockholders' Equity and Comprehensive Income (Loss) as if those
shares were retired.
REVENUE RECOGNITION. Casino revenues consist of net gaming wins. Food and
beverage and rooms revenues include the aggregate amounts generated by those
departments at all consolidated casinos and casino hotels.
During first quarter 2001, the Emerging Issues Task Force reached a
consensus on the portion of Issue 00-22, "Accounting for `Points' and Certain
Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free
Products or Services to be Delivered in the Future," which addressed the
income statement classification of the value of the points redeemable for
cash awarded under point programs like our Total Rewards program. Per the
consensus, which for our Company was effective retroactively to January 1,
2001, with prior year restatement also required, the cost of these programs
should be reported as a contrarevenue, rather than as an expense. Debate
continues on a number of other facets of Issue 00-22 which could have an
impact on our financial statements. We historically reported the costs of
such points as an expense, so we have reclassified these costs to be
contra-revenues in our Consolidated Statements of Operations to comply with
the consensus. The amounts of expense reclassified for 2000 and 1999 were
$141.4 million and $130.3 million, respectively.
<Page>
Casino promotional allowances consist principally of the retail value of
complimentary food and beverages, accommodations, admissions and entertainment
provided to casino patrons. The estimated costs of providing such complimentary
services, which we classify as casino expenses through interdepartmental
allocations, were as follows:
<Table>
<Caption>
2001 2000 1999
------- ------- ------
Food and beverage $190,823 $172,560 $144,841
Rooms 64,976 51,927 43,773
Other 24,085 22,178 14,450
-------- -------- --------
$279,884 $246,665 $203,064
======== ======== ========
</Table>
AMORTIZATION. We amortize goodwill and other intangibles, including trademarks,
on a straight-line basis over periods up to 40 years. We use the interest method
to amortize deferred financing charges over the term of the related debt
agreement. With the adoption of Statement of Financial Accounting Standards
("SFAS") No.142, "Goodwill and Other Intangible Assets," in 2002, we will no
longer amortize goodwill or other intangible assets that are determined to have
an indefinite life. Under the provisions of SFAS No.142, goodwill acquired in a
business combination for which the acquisition date is after June 30, 2001,
shall not be amortized; therefore, no goodwill related to the acquisition of
Harveys Casino Resorts ("Harveys") has been amortized.
EARNINGS PER SHARE. In accordance with the provisions of SFAS No.128, "Earnings
Per Share," we compute our basic earnings per share by dividing Net income
(loss) by the number of weighted average common shares outstanding during the
year. Our Diluted earnings per share is computed by dividing Net income (loss)
by the number of weighted average common shares and dilutive common stock
equivalents outstanding during the year. Due to our net loss in 2000, Weighted
average common and common equivalent shares at December 31, 2000, exclude common
stock equivalents of 481,338 and 1,407,362 related to restricted stock and stock
options, respectively, because of their antidilutive effect. For each of the
three years ended December 31, 2001, common stock equivalents consisted solely
of net restricted shares of 697,130, 481,338 and 789,690, respectively, and
stock options outstanding of 1,471,400, 1,407,362 and 1,886,469, respectively,
under our employee stock benefit plans. (See Note 14.)
RECLASSIFICATIONS. We have reclassified certain amounts for prior years to
conform with our presentation for 2001.
USE OF ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires that we
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the amounts of revenues and expenses during the
reporting period. Our actual results could differ from those estimates.
NOTE 2--ACQUISITIONS
We are accounting for each of the transactions described below as a purchase.
Accordingly, the purchase price is allocated to the underlying assets acquired
and liabilities assumed based upon their estimated fair values at the date of
acquisition. We determine the estimated fair values based on independent
appraisals, discounted cash flows, quoted market prices and estimates made by
management. For each transaction, the allocation of the purchase price was, or
will be, completed within one year from the date of the acquisition. To the
extent that the purchase price exceeds the fair value of the net identifiable
tangible and intangible assets acquired, such excess is allocated to goodwill.
For acquisitions completed prior to June 30, 2001, goodwill was amortized for
periods of up to 40 years. With the adoption of SFAS No.142 in 2002, we will no
longer amortize goodwill or intangible assets that are determined to have an
indefinite life.
Under the provisions of SFAS No.142, goodwill acquired in a business
combination for which the acquisition date is after June 30, 2001, shall not be
amortized; therefore, no goodwill related to the Harveys acquisition has been
amortized. We are accounting for the Harveys acquisition under the provisions of
SFAS No. 141, "Business Combinations."
<Table>
<Caption>
NUMBER
TOTAL GOODWILL OF
COMPANY DATE ACQUIRED PURCHASE PRICE(a) ASSIGNED CASINOS GEOGRAPHIC LOCATION
- --------------- ------------- ----------------- ----------- -------- -------------------------
Showboat, Inc. June 1998 $1,045 million $322 million 2(b) Atlantic City, New Jersey
East Chicago, Indiana
Rio Hotel & January 1999 $ 987 million $ 93 million 1 Las Vegas, Nevada
Casino, Inc.
Players March 2000 $ 439 million $204 million 3 Lake Charles, Louisiana
International, Metropolis, Illinois
Inc. St. Louis, Missouri
Harveys Casino July 2001 $ 661 million $266 million 4 Central City, Colorado
Resorts Council Bluffs, Iowa (2)
Lake Tahoe, Nevada
</Table>
(a) TOTAL PURCHASE PRICE INCLUDES THE MARKET VALUE OF DEBT ASSUMED.
(b) INTERESTS IN TWO OTHER CASINOS THAT WERE INCLUDED IN THE ACQUISITION WERE
SUBSEQUENTLY SOLD (SEE DISCUSSION BELOW).
SHOWBOAT, INC. On June 1,1998, we completed our acquisition of Showboat, Inc.
("Showboat") for $30.75 per share in an all-cash transaction and assumed
approximately $635 million of Showboat debt. Subsequent to the closing of the
Showboat acquisition, all public debt assumed in the acquisition, including
the debt of the partnership owning the East Chicago property, was retired
using proceeds from our bank facility. The operating results for Showboat are
included in the Consolidated Financial Statements from the date of
acquisition.
<Page>
As a result of this transaction, we now own and operate the Showboat
casino in Atlantic City, New Jersey. Also acquired in this transaction was a
55% noncontrolling interest in Showboat Marina Casino Partnership ("SMCP"),
which owns and operates the East Chicago casino. In first quarter 1999, we
increased our ownership interest of SMCP to 99.55% and began consolidating
this partnership with the financial results of our other businesses. The East
Chicago property was re-branded as a Harrah's casino during first quarter
1999.
Included in the assets we acquired in the Showboat transaction was a
24.6% equity ownership interest in the Star City casino in Sydney, Australia,
and an agreement to manage that casino. In fourth quarter 1999, we sold the
ownership interest and in first quarter 2000, we completed the sale of our
management interests in that property. (See Note15.) During first quarter
2000, we sold the Showboat Las Vegas property. At the time of the Showboat
acquisition, this property was determined to be a nonstrategic asset for us
and was reported as an asset-held-for-sale in our Consolidated Financial
Statements. No gain or loss resulted from the sale of this asset.
RIO HOTEL & CASINO, INC. We completed our merger with Rio Hotel & Casino,
Inc. ("Rio"), on January 1, 1999, issuing approximately 25 million shares of
common stock to acquire all of Rio's outstanding shares and assuming Rio's
outstanding debt of approximately $432 million. In second quarter 1999, we
retired Rio's revolving credit facility scheduled to mature in 2003 and Rio's
10 5/8% Senior Subordinated Notes due 2005 and 9 1/2% Senior Subordinated
Notes due 2007 using proceeds from our bank facility.
In addition to the Rio property, our acquisition also included Rio
Secco, an 18-hole championship golf course located in nearby Hendersen,
Nevada, and approximately 35 acres adjacent to the Rio, which is available
for further development.
PLAYERS INTERNATIONAL, INC. On March 22, 2000, we completed our acquisition
of Players International, Inc. ("Players"), paying $8.50 in cash for each
outstanding share and assuming $150 million of Players 10 7/8% Senior Notes
due 2005 (the "Players Notes"). Players operated 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. Players and Harrah's
jointly operated a landside hotel and entertainment facility at the property
in Maryland Heights, a suburb of St. Louis. The operations of the Players
facility in Maryland Heights were consolidated with the adjacent Harrah's
operations in second quarter 2000, and the Lake Charles and Metropolis
facilities were subsequently converted to the Harrah's brand.
Approximately $2.3 million of the Players Notes were retired on April
28, 2000, in connection with a change of control offer. On June 5, 2000, we
purchased approximately $13.1 million of the Players Notes in the open market
for the face amount plus accrued interest and a premium. The remaining
Players Notes were redeemed on June 30, 2000, for the face amount plus
accrued interest and a premium. We retired the Players Notes using proceeds
from a $150 million credit agreement and our bank facility. (See Note 5.)
HARVEYS CASINO RESORTS. On July 31, 2001, we completed our acquisition of
Harveys. We paid approximately $294 million for the equity interests in Harveys,
assumed approximately $350 million in outstanding debt and paid approximately
$17 million in acquisition costs. We also assumed a $50 million contingent
liability. This liability is contingent on the results of a referendum to be
decided by the voters in Pottawattamie County, Iowa, in November 2002. If the
referendum passes, we will pay an additional $50 million in acquisition costs.
If the referendum does not pass, the excursion gambling boat license may
remain valid until January 26, 2004; however, the Bluffs Run Casino would have
to cease gaming operations in a relatively short time after the referendum date.
Management believes that the referendum will pass; however, in the event the
referendum does not pass and gaming operations cease in Pottawattamie County, we
would likely have a significant impairment related to the carrying value of our
assets in Iowa. We financed the acquisition, and retired Harveys assumed debt,
with borrowings under our bank facility (see Note 5). The purchase included the
Harveys Resort & Casino in Lake Tahoe, Nevada, the Harveys Casino Hotel and the
Bluffs Run Casino, both in Council Bluffs, Iowa and the Harveys Wagon Wheel
Hotel/Casino in Central City, Colorado.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. We are in the
process of finalizing the valuations of certain intangible assets and the
Colorado assets; thus, the allocation of the purchase price is subject to
refinement.
<Table>
<Caption>
(IN MILLIONS) AT JULY 31,
2001
-----------
Current assets $ 60.0
Property, plant and equipment 360.1
Notes receivable and other assets 10.9
Intangible assets 102.6
Goodwill 265.7
------
Total assets acquired 799.3
------
Current liabilities 48.1
Long-term debt 350.4
Other long-term liabilities 90.2
------
Total liabilities assumed 488.7
------
Net assets acquired $310.6
======
</Table>
<Page>
We acquired Harveys to further enhance our geographic distribution and to
strengthen our access to target customers. The results of Harveys' operations
have been included in our Consolidated Financial Statements since the date of
acquisition.
The intangible assets acquired include registered trademarks, certain
gaming rights and development rights, which are not subject to amortization.
Other intangible assets, including customer relationships and certain contract
rights, are subject to amortization. The values to be assigned to these assets
have not yet been finalized. We estimate useful lives of four to 10 years for
the assets subject to amortization and have recorded estimated amortization
expense of $2.6 million in 2001.
Of the estimated goodwill related to the Harveys acquisition, none is
expected to be deductible for tax purposes. Through the acquisition of Harveys
we acquired approximately $80.0 million of goodwill related to a previous
acquisition by Harveys that is deductible for tax purposes.
The following unaudited pro forma consolidated financial information
for the Company has been prepared assuming that the Harveys acquisition, the
Players acquisition and the extinguishments of debt assumed in those
acquisitions had occurred on the first day of the period. The information
also assumes that SFAS No.142 was effective for the Harveys acquisition on
the first day of the period.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2001 2000
-------- -------
Revenues $3,949.1 $3,852.2
Income before extraordinary losses 216.9 11.8
Net income 216.9 11.0
Earnings per share-diluted
Income before extraordinary losses 1.87 0.09
Net income 1.87 0.10
</Table>
These unaudited pro forma results are presented for comparative purposes only.
The pro forma results are not necessarily indicative of what our actual results
would have been had the Harveys and Players acquisitions and the debt
extinguishments been completed as of the beginning of the period, or of future
results.
NOTE 3--STOCKHOLDERS' EQUITY
In addition to its common stock, Harrah's Entertainment has the following
classes of stock authorized but unissued:
Preferred stock, $100 par value,150,000 shares authorized
Special stock, $1.125 par value, 5,000,000 shares authorized-
Series A Special Stock, 2,000,000 shares designated
Harrah's Entertainment's Board of Directors has authorized that one special
stock purchase right (a "Right") be attached to each outstanding share of common
stock. The Rights are not separable from the shares. These Rights are
exercisable only if a person or group acquires 15% or more of Harrah's
Entertainment common stock or announces a tender offer for 15% or more of the
common stock. Each Right entitles stockholders to buy one two-hundredth of a
share of Series A Special Stock of the Company at an initial price of $130 per
Right. If a person acquires 15% or more of the Company's outstanding common
stock, each Right entitles its holder to purchase common stock of the Company
having a market value at that time of twice the Right's exercise price. Under
certain conditions, each Right entitles its holder to purchase stock of an
acquiring company at a discount. Rights held by the 15% holder will become void.
The Rights will expire on October 5, 2006, unless earlier redeemed by the Board
at one cent per Right.
During the past three years, our Board of Directors has authorized
three plans whereby we have purchased shares of the Company's common stock in
the open market from time to time as market conditions and other factors
warranted. The table below summarizes the three plans.
<Table>
<Caption>
PLAN NUMBER OF NUMBER OF AVERAGE PRICE
AUTHORIZED SHARES AUTHORIZED SHARES PURCHASED PER SHARE
- ---------- ----------------- ---------------- -------------
July 1999 10.0 million 10.0 million $23.44
April 2000 12.5 million 12.5 million 25.08
July 2001 6.0 million 2.1 million 25.46
</Table>
The July 2001 authorization expires December 31, 2002. The repurchases were
funded through available operating cash flows and borrowings from our bank
facility.
Under the terms of our employee stock benefit programs, we have
reserved shares of Harrah's Entertainment common stock for issuance under the
2001Executive Stock Incentive and 2001 Broad-based Incentive Plans. (See
Note14 for a description of the plans.) The 2001 Executive Stock Incentive
Plan is an equity compensation plan approved by our stockholders and the 2001
Broad-based Incentive Plan is an equity compensation plan not approved by our
stockholders. The shares held in reserve for issuance or grant under the
Harrah's Entertainment, Inc. 1990 Stock Option Plan and Harrah's
Entertainment, Inc.1990 Restricted Stock Plan (collectively, "Harrah's Former
Plans") were transferred to the 2001 Executive Stock Incentive Plan in 2001.
As of December 31, 2001, 7,219,214 shares were authorized and unissued under
the 2001 Executive Stock Incentive Plan and 200,000 shares were authorized
and unissued under the Broad-based Incentive Plan. Of the 7,219,214 shares
available for grant under the 2001 Executive Stock Incentive Plan, 259,479
shares were available for grants as an award other than an option.
NOTE 4--DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Deferred costs, trademarks and other consisted of the following:
<Table>
<Caption>
2001 2000
-------- --------
Trademarks, net of amortization of $10,221 and $7,141 $137,579 $116,059
Other intangible assets 78,011 --
Cash surrender value of life insurance (Note14) 62,143 60,122
Deferred finance charges, net of amortization of $4,769 and $4,185 22,452 19,216
Other 124,227 118,812
-------- --------
$424,412 $314,209
======== ========
</Table>
<Page>
Accrued expenses consisted of the following:
<Table>
<Caption>
2001 2000
-------- --------
Payroll and other compensation $123,940 $105,210
Insurance claims and reserves 67,516 57,718
Accrued interest payable 50,456 31,245
Accrued taxes 39,715 24,923
Other accruals 131,270 124,428
-------- --------
$412,897 $343,524
======== ========
</Table>
NOTE 5-DEBT
Long-term debt consisted of the following:
<Table>
<Caption>
2001 2000
---------- ----------
Bank Facility
2.8%-4.8% at December 31, 2001, maturities to 2004 $1,380,000 $1,574,600
Secured Debt
7.1%, maturity 2028 96,173 97,273
13.0%, repaid 2001 -- 2,358
6.4%-8.4%, maturities to 2031 1,943 1,903
Unsecured Senior Notes
7.5%, maturity 2009 498,499 498,285
8.0%, maturity 2011 494,971 --
7.125%, maturity 2007 498,070 --
Unsecured Senior Subordinated Notes
7.875%, maturity 2005 750,000 750,000
Other Unsecured Borrowings
5.5%-15.2%, repaid 2001 -- 41,366
Capitalized Lease Obligations
7.6%-10.0%, maturities to 2006 1,370 989
---------- ----------
3,721,026 2,966,774
Current portion of long-term debt (1,583) (130,928)
---------- ----------
$3,719,443 $2,835,846
========== ==========
</Table>
As of December 31, 2001, aggregate annual principal maturities for the four
years subsequent to 2002 were: 2003, $1.7 million; 2004, $1.4 billion; 2005,
$751.7 million and 2006, $1.7 million.
REVOLVING CREDIT FACILITIES. The Company has revolving credit and letter of
credit facilities (the "Bank Facility"), which provide us with borrowing
capacity of $1.853 billion. The Bank Facility consists of a five-year $1.525
billion revolving credit and letter of credit facility maturing in 2004 and a
separate $328 million revolving credit facility, which is renewable annually at
the borrower's and lenders' options. As of December 31, 2001, the Bank Facility
bore interest based upon 87.5 basis points over LIBOR for current borrowings
under the five-year facility and 92.5 basis points over LIBOR for the 364-day
facility. In addition, there is a facility fee for borrowed and unborrowed
amounts, which is currently 20 basis points on the five-year facility and 15
basis points on the 364-day facility. The interest rate and facility fee are
based on our current debt ratings and leverage ratio and may change as our debt
ratings and leverage ratio change. There is an option on each facility to borrow
at the prime rate. As of December 31, 2001, $1.38 billion in borrowings were
outstanding under the Bank Facility, with an additional $85.4 million committed
to back letters of credit. After consideration of these borrowings, $387.6
million of additional borrowing capacity was available to the Company as of
December 31, 2001.
ISSUANCE OF NEW DEBT. In addition to our Bank Facility, we have issued debt and
entered into credit agreements to provide for short-term borrowings at lower
interest rates than the rates paid under our Bank Facility, to provide the
Company with cost-effective borrowing flexibility and to replace short-term,
floating-rate debt with long-term, fixed-rate debt. The table below summarizes
the face value of debt obligations outstanding at December 31, 2001, that we
have entered into in the last three years:
<Table>
<Caption>
FACE VALUE
OUTSTANDING AT
DECEMBER 31,
DEBT ISSUED MATURE 2001
- ------------------------------------ ------------ ------ --------------
7.5% Senior Notes January 1999 2009 $500,000
Uncommitted Line of Credit Agreement 2001 2002 31,000
8.0% Senior Notes January 2001 2011 500,000
7.125% Senior Notes June 2001 2007 500,000
</Table>
<Page>
EXTINGUISHMENTS OF DEBT. We have used the funds from the new debt discussed
above, as well as proceeds from our Bank Facility, to retire certain of our
outstanding debt, in particular those debt obligations assumed in our
acquisition transactions, to reduce our effective interest rate and/or lengthen
maturities. The following table summarizes the debt obligations that we have
retired over the last three years:
<Table>
<Caption>
FACE VALUE
ISSUER DATE RETIRED DEBT EXTINGUISHED RETIRED
- ------ -------------- ------------------------------------------ ----------
Harveys September 2001 10.625% Senior Subordinated Notes due 2006 $150,000
Showboat August 2001 13% Senior Subordinated Notes due 2009 2,100
Harveys July 2001 Credit facility due 2004 192,000
Players June 2000 10.875% Senior Notes due 2005 150,000
Showboat June 2000 9.25% First Mortgage Bonds due 2008 56,445
SMCP March 1999 13.5% First Mortgage Notes due 2003 140,000
Rio May 1999 10.625% Senior Subordinated Notes due 2005 100,000
Rio May 1999 9.5% Senior Subordinated Notes due 2007 125,000
SMCP July 1999 Capital lease obligations 9,210
</Table>
The premiums paid to the holders of the debts retired and the write-off of
the related unamortized deferred finance charges are reported on the
Consolidated Statements of Operations as Extraordinary losses (see Note 10).
We recorded the liabilities assumed in acquisition transactions at their fair
value at the date of consummation of the acquisition. The premium charged to
Extraordinary losses as a result of the retirement of these assumed debts
equaled the difference between the consideration paid to the holders of the
notes and the carrying value we assigned to the notes at the time of purchase.
SHORT-TERM DEBT. In June 2000, we entered into a 364-day credit agreement (the
"Credit Agreement") with a lender whereby we borrowed $150 million to redeem the
Players Notes. Interest rates, facility fees and covenants in the Credit
Agreement were identical to those provisions contained in our Bank Facility. The
Credit Agreement was paid off in January 2001, using funds from the 8% Notes.
In a program designed for short-term borrowings at lower interest
rates than the rates paid under our Bank Facility, we have entered into an
uncommitted line of credit agreement with a lender whereby we can borrow up
to $35 million for periods of 90 days or less. At December 31, 2001, we had
borrowed $31 million under this agreement. Borrowings bear interest at
current market rates. Interest rates on amounts borrowed under these
agreements during 2001 ranged from 2.4% to 7.6%. This agreement does not
decrease our borrowing capacity under our Bank Facility.
PARENT COMPANY GUARANTEE OF SUBSIDIARY DEBT. Harrah's Operating Company, Inc.
("HOC"), the principal asset of Harrah's Entertainment, is the issuer of
certain debt securities that have been guaranteed by Harrah's Entertainment.
Due to the comparability of HOC's consolidated financial information with
that of Harrah's Entertainment, complete separate financial statements and
other disclosures regarding HOC have not been presented. Management has
determined that such information is not material to holders of HOC's debt
securities. Harrah's Entertainment has no independent assets or operations,
its guarantee of HOC's debt securities is full and unconditional and its only
other subsidiary is minor.
FAIR MARKET VALUE. Based on the borrowing rates available as of December 31,
2001, for debt with similar terms and maturities and market quotes of our
publicly traded debt, the fair value of our long-term debt at December 31,
2001 and 2000, was as follows:
<Table>
<Caption>
DECEMBER 31,
-----------------------------------------------------
2001 2000
---------------------- ------------------------
CARRYING MARKET CARRYING MARKET
(IN MILLIONS) VALUE VALUE VALUE VALUE
--------- --------- --------- ----------
Outstanding debt $(3,721.0) $(3,826.1) $(2,966.8) $(2,937.4)
</Table>
NOTE 6-LEASES
We lease both real estate and equipment used in our operations and classify
those leases as either operating or capital leases following the provisions of
SFAS No.13, "Accounting for Leases." At December 31, 2001, the remaining lives
of our real estate operating leases ranged from one to 45 years, with various
automatic extensions totaling up to 76 years. The average remaining term for
other operating leases, which generally contain renewal options, extends
approximately 17 years.
Rental expense associated with operating leases is charged to expense
in the year incurred and was included in the Consolidated Statements of
Operations as follows:
<Table>
<Caption>
2001 2000 1999
------- ------- -------
Noncancelable
Minimum $22,658 $21,872 $16,385
Contingent 5,601 4,867 4,666
Sublease (602) (571) (385)
Other 34,921 18,678 6,859
------- ------- -------
$62,578 $44,846 $27,525
======= ======= =======
<Caption>
Our future minimum rental commitments as of December 31, 2001, were as follows:
NONCANCELABLE
OPERATING
LEASES
-------------
2002 $ 25,042
2003 21,567
2004 20,626
2005 50,346
2006 17,186
Thereafter 288,468
--------
Total minimum lease payments $423,235
========
</Table>
<Page>
In addition to these minimum rental commitments, certain of these operating
leases provide for contingent rentals based on a percentage of revenues in
excess of specified amounts. Included in the future minimum rental commitment
amounts presented above are our obligations under a June 2000 agreement in which
we sold and leased-back corporate aircraft. Pursuant to its terms, the agreement
is accounted for as an operating lease. The aggregate time period of the initial
lease term plus annual renewal options will not exceed five years. At the end of
the initial term, or any renewal term, we can, at our option, (a) renew the
lease; (b) purchase the aircraft subject to the lease; or (c) sell the equipment
on behalf of the lessor under the terms provided for in the agreement. At
December 31, 2001, our exposure under the agreement, which approximates the fair
value of the aircraft being leased, was approximately $35 million. The next
scheduled renewal date of the agreement is in March, 2002.
NOTE 7-WRITE-DOWNS, RESERVES AND RECOVERIES
Our operating results include various pretax charges to record asset
impairments, contingent liability reserves, project write-offs and recoveries at
time of sale of previously recorded reserves for asset impairment. The
components of Write-downs, reserves and recoveries were as follows:
<Table>
<Caption>
2001 2000 1999
------ -------- --------
Reserves for New Orleans casino $2,322 $220,000 $ --
Impairment of long-lived assets 8,203 5,813 3,367
Termination of contracts 4,060 2,505 --
Write-off of abandoned assets and other costs 8,484 2,800 569
Recoveries from previously impaired assets (571) (5,012) (1,701)
------- -------- -------
$22,498 $226,106 $ 2,235
======= ======== =======
</Table>
We account for the impairment of long-lived assets to be held and used by
evaluating the carrying value of the long-lived assets in relation to the
operating performance and future undiscounted cash flows of the underlying
operating unit when indications of impairment are present. Long-lived assets to
be disposed of are evaluated in relation to the estimated fair value of such
assets less costs to sell.
NOTE 8-HEADQUARTERS RELOCATION AND REORGANIZATION COSTS
During August 1999, we began the move of our corporate headquarters to Las
Vegas, Nevada, from Memphis, Tennessee. The move was completed in 2000 and
the costs of the relocation were expensed as incurred. Certain headquarters
employees elected not to accept an offer to move, and the positions of other
employees were eliminated as part of a staff reorganization conducted in
advance of the move. The expenses for the severance payable to these
employees were accrued when the employees became eligible for the severance
payments.
NOTE 9-INCOME TAXES
Our federal and state income tax provision (benefit) allocable to Consolidated
Statements of Operations and Balance Sheet line items was as follows:
<Table>
<Caption>
2001 2000 1999
-------- --------- --------
Income before income taxes and minority interests $126,737 $ 15,415 $128,914
Extraordinary losses (13) (388) (5,990)
Stockholders' equity
Unrealized gain (loss) on available-for-sale securities 772 (505) 2,118
Other (800) -- --
Compensation expense for tax purposes in excess of
amounts recognized for financial reporting purposes (18,013) (15,739) (2,625)
-------- --------- --------
$108,683 $ (1,217) $122,417
======== ========= ========
<Caption>
Income tax expense attributable to Income before income taxes and minority
interests consisted of the following:
2001 2000 1999
-------- --------- --------
United States
Current
Federal $ 16,379 $ 128,643 $ 69,567
State 7,882 4,897 7,429
Deferred 102,476 (118,125) 34,052
Other countries
Current -- -- 17,866
-------- --------- --------
$126,737 $ 15,415 $128,914
======== ========= ========
</Table>
<Page>
The differences between the statutory federal income tax rate and the effective
tax rate expressed as a percentage of Income before income taxes and minority
interests were as follows:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
Statutory tax rate 35.0% 35.0% 35.0%
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit 1.5 10.7 1.4
Goodwill amortization 1.8 33.8 1.3
Foreign taxes -- 29.6 --
Tax credits (0.5) (11.2) (0.6)
Political contributions 0.1 2.0 --
Officers' life insurance 0.3 8.0 (0.8)
Meals and entertainment 0.3 5.9 0.4
Federal income tax settlement (0.8) (3.3) 0.3
Minority interests in partnership earnings (1.3) (27.0) (1.1)
Other -- 2.9 --
---- ---- ----
Effective tax rate 36.4% 86.4% 35.9%
==== ==== ====
<Caption>
The components of our net deferred tax balance included in the Consolidated
Balance Sheets were as follows:
2001 2000
--------- ---------
Deferred tax assets
Investments in nonconsolidated affiliates $ -- $ 108,825
Compensation programs 59,538 44,163
Bad debt reserve 21,759 17,115
Self-insurance reserves 8,111 3,736
Deferred income 111 1,962
Project opening expenses 3,788 545
Debt costs -- 124
Other 19,692 1,184
--------- ---------
112,999 177,654
--------- ---------
Deferred tax liabilities
Property (247,929) (187,291)
Intangibles (74,773) (40,887)
Investments in nonconsolidated affiliates (6,097) --
--------- ---------
(328,799) (228,178)
--------- ---------
Net deferred tax liability $(215,800) $ (50,524)
========= =========
</Table>
NOTE 10--EXTRAORDINARY ITEMS
The components of our net extraordinary losses were as follows:
<Table>
<Caption>
2001 2000 1999
---- ------ -------
Losses on early extinguishments of debt $(36) $(1,104) $(17,023)
Income tax benefit 13 388 5,990
---- ------- --------
Extraordinary losses, net of income taxes $(23) $ (716) $(11,033)
==== ======= ========
</Table>
The extraordinary losses on early extinguishments of debt are due to the
premiums paid to the holders of the debt retired and the write-off of related
unamortized deferred finance charges. See Note 5 for information regarding the
specific debt issues retired in each period.
NOTE 11--SUPPLEMENTAL CASH FLOW INFORMATION
The increase (decrease) in cash and cash equivalents due to the changes in
long-term and working capital accounts was as follows:
<Table>
2001 2000 1999
--------- -------- --------
Long-term accounts
Deferred costs and other assets $ (15,683) $(40,504) $ 51,717
Deferred credits and other long-term liabilities (6,380) (4,268) (19,504)
--------- -------- --------
Net change in long-term accounts $ (22,063) $(44,772) $ 32,213
========= ======== ========
Working capital accounts
Receivables $ 12,758 $(39,072) $(53,620)
Inventories 3,171 2,524 (307)
Prepayments and other 27,126 (10,710) 75,986
Accounts payable (16,015) 11,887 (1,849)
Accrued expenses 56,884 193 (90,371)
--------- -------- --------
Net change in working capital accounts $ 83,924 $(35,178) $(70,161)
========= ======== ========
</Table>
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR INTEREST AND TAXES
The following table reconciles our Interest expense, net of interest
capitalized, as reported in the Consolidated Statements of Operations, to
cash paid for interest:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Interest expense, net of amount capitalized $255,801 $227,139 $193,407
Adjustments to reconcile to cash paid for interest
Net change in accruals (33,869) (17,988) (2,011)
Amortization of deferred finance charges (4,769) (4,185) (4,459)
Net amortization of discounts and premiums (913) 70 543
-------- -------- --------
Cash paid for interest, net of amount capitalized $216,250 $205,036 $187,480
======== ======== ========
Cash payments for income taxes, net of refunds
(Note 9) $(27,974) $ 90,220 $ 77,534
======== ======== ========
</Table>
<Page>
NOTE 12--COMMITMENTS AND CONTINGENCIES
CONTRACTUAL COMMITMENTS. We continue to pursue additional casino development
opportunities that may require, individually and in the aggregate, significant
commitments of capital, up-front payments to third parties, guarantees by
Harrah's Entertainment of third-party debt and development completion
guarantees. Excluding guarantees and commitments for New Orleans (see Note 15),
as of December 31, 2001, we had guaranteed third-party loans and leases of
$147.0 million, which are secured by certain assets, and had commitments and
contingencies of $258.0 million, including construction-related commitments.
The agreements under which we manage casinos on Indian lands contain
provisions required by law which provide that a minimum monthly payment be made
to the tribe. That obligation has priority over scheduled payments of borrowings
for development costs. In the event that insufficient cash flow is generated by
the operations of the Indian-owned properties to fund this payment, we must pay
the shortfall to the tribe. Such advances, if any, would be repaid to us in
future periods in which operations generate cash flow in excess of the required
minimum payment. These commitments will terminate upon the occurrence of certain
defined events, including termination of the management contract. As of December
31, 2001, the aggregate monthly commitment pursuant to these contracts, which
extend for periods of up to 73 months from December 31, 2001, was $1.1 million.
SEVERANCE AGREEMENTS. As of December 31, 2001, the Company has severance
agreements with 33 of its senior executives, which provide for payments to
the executives in the event of their termination after a change in control,
as defined. These agreements provide, among other things, for a compensation
payment of 1.5 to 3.0 times the executive's average annual compensation, as
defined, as well as for accelerated payment or accelerated vesting of any
compensation or awards payable to the executive under any of Harrah's
Entertainment's incentive plans. The estimated amount, computed as of
December 31, 2001, that would be payable under the agreements to these
executives based on earnings and stock options aggregated approximately
$115.5 million.
TAX SHARING AGREEMENTS. In connection with the 1995 spin-off of certain hotel
operations (the "PHC Spin-off") to Promus Hotel Corporation ("PHC"), Harrah's
Entertainment entered into a Tax Sharing Agreement with PHC wherein each
company is obligated for those taxes associated with their respective
businesses. Additionally, Harrah's Entertainment is obligated for all taxes
for periods prior to the PHC Spin-off date which are not specifically related
to PHC operations and/or PHC hotel locations. Our obligations under this
agreement are not expected to have a material adverse effect on our
consolidated financial position or results of operations.
SELF-INSURANCE. We are self-insured for various levels of general liability,
workers' compensation and employee medical coverage. Insurance claims and
reserves include accruals of estimated settlements for known claims, as well
as accruals of actuarial estimates of incurred but not reported claims.
NOTE 13--LITIGATION
We are 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 on our consolidated financial position or our
results of operations.
NOTE 14--EMPLOYEE BENEFIT PLANS
We have established a number of employee benefit programs for purposes of
attracting, retaining and motivating our employees. The following is a
description of the basic components of these programs.
STOCK OPTION PLANS. Our employees may be granted options to purchase shares
of common stock under the Harrah's Entertainment 2001 Executive Stock
Incentive Plan or the 2001 Broad-based Incentive Plan (collectively, "SOP").
Beginning with the adoption of the SOP, grants will typically vest in equal
installments over a three-year period. Previously, pursuant to the 1990 Stock
Option Plan and the 1990 Restricted Stock Plan, grants typically vested in
equal installments over a four-year period and collectively grants allow the
option holder to purchase stock over specified periods of time, generally 7
to 10 years from the date of grant, at a fixed price equal to the market
value at the date of grant. No options may be granted under the SOP after May
2011. All outstanding stock options under Rio's stock option plans at the
date of our merger were fully vested and converted, at the same terms and
conditions as originally granted, into options for Harrah's Entertainment
common stock. No options for additional shares may be granted under the Rio
plans, and any options cancelled under the Rio plans may not be re-issued.
<Page>
A summary of activity of the 2001 Executive Stock Incentive Plan and
Harrah's Former Plans, which are equity compensation plans approved by our
stockholders, for 1999, 2000 and 2001 is as follows:
<Table>
<Caption>
NUMBER OF COMMON SHARES
WEIGHTED AVG. ---------------------------
EXERCISE PRICE OPTIONS AVAILABLE
(PER SHARE) OUTSTANDING FOR GRANT
--------------- ----------- ---------
Balance-December 31,1998 $16.99 10,313,154 1,589,722
Additional shares authorized N/A - 2,500,000
Rio acquisition 14.74 3,442,955 -
Granted 23.20 3,133,783 (3,133,783)
Exercised 14.95 (2,444,747) -
Canceled 18.17 (725,346) 725,346
Rio plans cancellations 18.24 (14,500) -
------ ---------- ----------
Balance-December 31,1999 18.14 13,705,299 1,681,285
Additional shares authorized N/A - 1,800,000
Granted 28.10 3,109,602 (3,109,602)
Exercised 15.27 (2,968,539) -
Canceled 20.04 (1,070,064) 1,070,064
Rio plans cancellations 18.35 (20,500) -
------ ---------- ----------
Balance-December 31, 2000 21.08 12,755,798 1,441,747
Additional shares authorized N/A - 3,900,000
Restricted shares transferred from
Harrah's Former Plans N/A - 766,509
Restricted shares issued N/A - (40,521)
Restricted shares canceled N/A - 328,685
Granted 26.39 774,075 (774,075)
Exercised 17.07 (3,240,426) -
Canceled 23.29 (1,596,869) 1,596,869
Rio plans cancellations 17.16 (8,800) -
------ ---------- ----------
Balance-December 31, 2001 $22.65 8,683,778 7,219,214
====== ========== ==========
</Table>
Of the 7,219,214 shares available for grant at December 31, 2001, up to 259,479
of these shares are available for grant as awards other than as stock options.
200,000 shares have been authorized for issuance under the 2001
Broad-based Incentive Plan, which was established in 2001 and is an equity
compensation plan not approved by stock- holders. No grants had been issued
under this plan at December 31, 2001.
<Table>
<Caption>
2001 2000 1999
--------- --------- ---------
Options exercisable at December 31 2,955,787 3,925,509 4,727,341
Weighted average fair value per share
of options granted per year $12.33 $14.30 $11.74
<Caption>
The following table summarizes additional information regarding the options
outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACT EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------- --------- -------- ----------- --------
$ 6.40-$24.04 4,310,104 6.2 years $17.33 2,455,927 $17.99
25.63- 28.90 4,318,006 8.4 years 27.83 499,372 26.78
31.22- 35.59 55,668 9.2 years 32.09 488 35.35
--------- ---------
8,683,778 2,955,787
========= =========
</Table>
As allowed under the provisions of SFAS No.123, "Accounting for Stock-Based
Compensation," we apply the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
to account for the SOP and, accordingly, do not recognize compensation expense.
Had compensation expense for the SOP been determined in accordance with SFAS
No.123, our pro forma Net income (loss) and Earnings (loss) per share for the
indicated periods would have been:
<Table>
<Caption>
2001 2000 1999
---------------------- ----------------------- -----------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- ------- -------- -------- -------- --------
Net income
(loss) $208,967 $200,978 $(12,060) $(27,834) $208,470 $193,631
Earnings (loss)
per share
Basic 1.84 1.77 (0.10) (0.24) 1.65 1.54
Diluted 1.81 1.74 (0.10) (0.24) 1.62 1.50
</Table>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 42.0% 42.0% 40.0%
Risk-free interest rate 4.3% 5.8% 5.9%
Expected average life of options (years) 6 6 6
</Table>
<Page>
RESTRICTED STOCK. Employees may be granted shares of common stock under the
SOP. Restricted shares granted under the SOP are restricted as to transfer
and subject to forfeiture during a specified period or periods prior to
vesting. The shares generally vest in equal installments over a period of
four years. No awards of restricted shares may be made under the current plan
after May 2011. The compensation arising from a restricted stock grant is
based upon the market price at the grant date. Such expense is deferred and
amortized to expense over the vesting period.
The Company has issued time accelerated restricted stock ("TARSAP")
awards to certain key executives. The initial TARSAP awards fully vested on
January 1, 2002, if the executive continued in active employment until that
date. However, the vesting of some of these shares accelerated into 2000. During
2000 and 2001, additional TARSAP awards were issued to certain key executives,
which will vest on January1, 2007, if the executive continues in active
employment until that date. These shares are eligible for earlier annual vesting
beginning in 2003 over five years based on the Company's financial performance
in each of the years 2002 through 2005. The expense arising from TARSAP awards
is being amortized to expense over the periods in which the restrictions lapse.
The number and weighted average grant-date fair value of restricted
shares granted, and the amortization expense recognized, during 2001, 2000
and 1999, including the TARSAP awards, were as follows:
<Table>
<Caption>
2001 2000 1999
--------- --------- ---------
Number of shares granted 72,876 1,306,398 560,085
Weighted average grant price per share $31.00 $25.17 $23.62
Amortization expense (in millions) 8.2 12.3 9.7
Unvested shares as of December 31 1,783,535 2,298,803 2,158,302
</Table>
SAVINGS AND RETIREMENT PLAN. We maintain a defined contribution savings and
retirement plan, which, among other things, allows pretax and after-tax
contributions to be made by employees to the plan. Under the plan,
participating employees may elect to contribute up to 16 percent, increasing to
20 percent in 2002, of their eligible earnings, the first six percent of which
is fully matched. Amounts contributed to the plan are invested, at the
participant's direction, in up to 14 separate funds, including a Harrah's
company stock fund. Participants become vested in the matching contribution over
five years of credited service. Our contribution expense for this plan was $26.6
million, $25.3 million and $22.2 million in 2001, 2000 and 1999, respectively.
DEFERRED COMPENSATION PLANS. Harrah's maintains deferred compensation plans
(collectively, "DCP") and an Executive Supplemental Savings Plan ("ESSP")
under which certain employees may defer a portion of their compensation.
Amounts deposited into these plans are unsecured liabilities of the Company.
Amounts deposited into DCP earn interest at rates approved by the Human
Resources Committee of the Board of Directors. The ESSP is a variable
investment plan which allows the employee to direct their investments by
choosing from several investment alternatives. The total liability included
in Deferred credits and other liabilities for these plans at December 31,
2001 and 2000 was $82.1 million and $67.6 million, respectively. In
connection with the administration of one of these plans, we have purchased
company-owned life insurance policies insuring the lives of certain
directors, officers and key employees.
MULTI-EMPLOYER PENSION PLAN. Approximately 4,300 of our employees are covered
by union sponsored, collectively bargained multi-employer pension plans. We
contributed and charged to expense $4.5 million, $4.0 million and $4.2
million in 2001, 2000 and 1999, respectively, for such plans. The plans'
administrators do not provide sufficient information to enable us to
determine our share, if any, of unfunded vested benefits.
NOTE 15--NONCONSOLIDATED AFFILIATES JCC HOLDING COMPANY. JCC Holding Company
and its subsidiary, Jazz Casino Company, LLC (collectively, "JCC"), own and
operate a land-based casino in New Orleans, Louisiana (the "Casino"). The
Company has a minority ownership interest (and noncontrolling board
representation) in JCC, and a subsidiary of the Company manages the Casino.
On January 4, 2001, JCC filed a voluntary petition for relief under Chapter
11 of the U.S. Bankruptcy Code to restructure its obligations to the State of
Louisiana and the City of New Orleans, long-term debt, bank credit facilities
and trade and other obligations. JCC's plan of reorganization was approved by
the bankruptcy court on March 19, 2001, and was effective on March 29, 2001.
Pursuant to the reorganization plan, the Company is guaranteeing an
annual payment obligation of JCC owed to the State of Louisiana of $50 million
in the first year ($12.3 million remained at December 31, 2001) and $60 million
for three subsequent years. We receive a fee of 2% of the
<Page>
average amount at risk for providing this guarantee. Also pursuant to the
reorganization plan, we received 49% of the new common stock of JCC and hold
approximately $51 million of the new debt of JCC, which replaced $81.6
million owed to us prior to JCC's reorganization. We are also providing a $35
million revolving credit facility to JCC at market terms. At December 31,
2001, no funds were outstanding from JCC under the revolving credit facility.
A subsidiary of the Company continues to manage the Casino pursuant to an
amended management agreement, which, among other things: (i) changes the base
management fee to an incentive management fee based on earnings of the
business before interest expense, income taxes, depreciation, amortization
and management fees, (ii) requires the Company to provide certain
administrative services to JCC as part of its management fee without any
reimbursement from JCC and (iii) provides for termination of management
services if minimum performance thresholds are not met.
Due to the filing of bankruptcy by JCC, in fourth quarter 2000 we
recorded reserves of $220 million for receivables not expected to be
recovered in JCC's reorganization plan. In first quarter 2001, an additional
$2.3 million was recorded to reserve for additional advances made to JCC
during first quarter 2001 and to adjust the reserves for modifications to the
approved reorganization plan. We did not record our share of JCC's operating
results in first quarter 2001, however, with the implementation of JCC's
reorganization plan, we resumed recording our share of JCC's results in
second quarter 2001.
NATIONAL AIRLINES, INC. We had an approximate 48% ownership interest in
National Airlines, Inc. ("NAI"), which filed a voluntary petition for
reorganization relief under Chapter 11 of the U.S. Bankruptcy Code in
December 2000. In June 2001, we abandoned all rights to our shares of NAI
stock and stock purchase warrants. In fourth quarter 2000, we recorded
write-offs and reserves totaling $39.4 million for our investment in and
loans to NAI and our estimated net exposure under letters of credit on behalf
of NAI.
As of December 31, 2001, we are exposed to up to $12 million of
liability under a letter of credit on behalf of NAI, which expires on
February 19, 2002. We have an agreement with another investor of NAI whereby
that investor is obligated to reimburse us for approximately 56% of amounts
that we may pay under the letter of credit and that we funded under another
letter of credit. During second quarter 2001, a subsidiary of the Company
filed a lawsuit against the other investor for breach of contract due to the
investor's failure to reimburse the Company for his share of the $8.6 million
we have paid against the second letter of credit. As contractually permitted,
the guarantor elected to submit the issue to arbitration. A ruling from the
arbitrator is pending. If we are required to fund under the remaining letter
of credit and are unsuccessful in collecting from the other investor, we
would record additional losses of up to $12 million for NAI.
DISPOSITIONS OF EQUITY INTERESTS. In 1999, we sold our shares of Star City
casino and recorded a pretax gain of $43.5 million. We also sold our interest
in Sodak Gaming, Inc. to a gaming equipment manufacturing company and
recorded a pretax gain of $16.3 million.
COMBINED FINANCIAL INFORMATION. The following summarized balance sheet and
statement of operations information has been compiled from financial reports for
the periods and dates indicated submitted to us by our nonconsolidated
affiliates which we accounted for using the equity method:
<Table>
<Caption>
2000
---------------------------------------------
NATIONAL
2001* JCC AIRLINES OTHER TOTAL 2000 1999
-------- --------- -------- -------- ---------- ---------
Combined Summarized
Balance Sheet
Information
Current assets $ 50,273 $ 42,092 $ 48,007 $ 3,077 $ 93,176 $ 73,560
Land, buildings and
equipment, net 167,617 333,931 35,597 34,549 404,077 570,204
Other assets 50,022 101,334 19,860 8,520 129,714 130,889
-------- ---------- --------- -------- --------- ---------
Total assets 267,912 477,357 103,464 46,146 626,967 774,653
-------- ---------- --------- -------- --------- ---------
Current liabilities 34,224 110,117 105,695 6,543 222,355 100,336
Long-term debt 122,896 396,412 11,609 18,000 426,021 399,126
Other liabilities 3,607 61,647 2,203 813 64,663 38,630
-------- ---------- --------- -------- --------- ---------
Total liabilities 160,727 568,176 119,507 25,356 713,039 538,092
-------- ---------- --------- -------- --------- ---------
Net assets $107,185 $ (90,819) $ (16,043) $ 20,790 $ (86,072) $ 236,561
======== ========== ========= ======== ========= =========
Combined Summarized
Statements of Operations
Revenues $270,229 $ 261,105 $ 231,319 $22,405 $ 514,829 $ 116,236
======== ========== ========= ======== ========== =========
Operating loss (15,403) (90,335) (18,472) (3,222) (112,029) (77,595)
======== ========== ========= ======== ========== =========
Extraordinary items 213,448 - - - - -
======== ========== ========= ======== ========== =========
Net income (loss) 90,640 (136,589) (22,107) (1,943) (160,639) (108,082)
======== ========== ========= ======== ========== =========
</Table>
*2001 IS COMPRISED PRIMARILY OF JCC. DUE TO THE CHARGES WE RECORDED IN FOURTH
QUARTER 2000, WE DID NOT RECORD OUR SHARE OF JCC'S OPERATING RESULTS IN FIRST
QUARTER 2001, WHICH INCLUDED AN EXTRAORDINARY GAIN ARISING FROM THE
CONSUMMATION OF THAT ENTITY'S BANKRUPTCY REORGANIZATION PLAN.
Our Investments in and advances to nonconsolidated affiliates are reflected in
the accompanying Consolidated Balance Sheets as follows:
<Table>
<Caption>
2001 2000
------- -------
Investments in and advances to nonconsolidated affiliates
Accounted for under the equity method $78,222 $80,439
Accounted for at historical cost 177 5,167
Available-for-sale and recorded at market value 1,065 1,075
------- -------
$79,464 $86,681
======= =======
</Table>
In accordance with the provisions of SFAS No.115, "Accounting for Certain
Investments in Debt and Equity Securities," we adjust the carrying value of our
available-for-sale equity investments to include unrealized gains or losses. A
corresponding adjustment is recorded in the combination of our stockholders'
equity and deferred income tax accounts.
<Page>
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
Harrah's Entertainment is responsible for preparing the financial statements and
related information appearing in this report. Management believes that the
financial statements present fairly its financial position, its results of
operations and its cash flows in conformity with accounting principles generally
accepted in the United States. In preparing its financial statements, Harrah's
Entertainment is required to include amounts based on estimates and judgments
that it believes are reasonable under the circumstances.
Harrah's Entertainment maintains accounting and other control systems
designed to provide reasonable assurance that financial records are reliable for
purposes of preparing financial statements and that assets are properly
accounted for and safeguarded. Compliance with these systems and controls is
reviewed through a program of audits by an internal auditing staff. Limitations
exist in any internal control system, recognizing that the system's cost should
not exceed the benefits derived.
The Board of Directors pursues its responsibility for Harrah's
Entertainment's financial statements through its Audit Committee, which is
composed solely of directors who are not Harrah's Entertainment officers or
employees. The Audit Committee meets from time to time with the independent
public accountants, management and the internal auditors. Harrah's
Entertainment's internal auditors report directly to the Audit Committee
pursuant to gaming regulations. The independent public accountants have direct
access to the Audit Committee, with and without the presence of management
representatives.
/s/ Philip G. Satre
Philip G. Satre
Chairman of the Board and
Chief Executive Officer
/s/ Anthony D. McDuffie
Anthony D. McDuffie
Vice President, Controller and
Chief Accounting Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF HARRAH'S ENTERTAINMENT, INC.: We
have audited the accompanying consolidated balance sheets of Harrah's
Entertainment, Inc. (a Delaware corporation) and subsidiaries ("Harrah's
Entertainment") as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and comprehensive income (loss)
and cash flows for each of the three years in the period ended December 31,
2001. These financial statements are the responsibility of Harrah's
Entertainment's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Harrah's
Entertainment as of December 31, 2001 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Las Vegas, Nevada
February 6, 2002
<Page>
QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
(IN THOUSANDS, EXCEPT FIRST SECOND THIRD FOURTH
PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- ---------- --------- ----------
2001(1)
Revenues $867,176 $873,445 $1,007,778 $ 960,641 $3,709,040
Income from operations 144,526 141,732 160,592 134,115 580,965
Net income 44,080 47,863 61,923 55,101 208,967
Earnings per share(3)
Basic 0.38 0.41 0.55 0.50 1.84
Diluted 0.38 0.40 0.54 0.49 1.81
2000(2)
Revenues $751,970 $841,614 $ 914,192 $ 822,020 $3,329,796
Income (loss) from operations 100,100 136,338 176,103 (129,803) 282,738
Net income (loss) 30,748 46,498 71,980 (161,286) (12,060)
Earnings (loss) per share(3)
Basic 0.25 0.39 0.63 (1.41) (0.10)
Diluted 0.25 0.39 0.61 (1.41) (0.10)
</Table>
(1) 2001 INCLUDES $22.5 MILLION IN PRETAX CHARGES FOR WRITE-DOWNS, RESERVES
AND RECOVERIES AND $26.2 MILLION OF INCOME FROM DISPOSITIONS OF NONSTRATEGIC
ASSETS AND THE SETTLEMENT OF A CONTINGENCY RELATED TO A FORMER AFFILIATE.
2001 ALSO INCLUDES OPERATING RESULTS FOR HARVEYS CASINO RESORTS FOR PERIODS
AFTER ITS JULY 31, 2001, DATE OF ACQUISITION.
(2) 2000 REVENUES HAVE BEEN RESTATED TO REFLECT THE IMPACT OF IMPLEMENTING
ACCOUNTING GUIDANCE ISSUED IN AND EFFECTIVE FOR FIRST QUARTER 2001 WHICH
REQUIRES THE COST OF THE CASH-BACK COMPONENT OF THE COMPANY'S TOTAL REWARDS
PROGRAM TO BE TREATED AS A REDUCTION OF REVENUES. PREVIOUSLY, THESE COSTS HAD
BEEN TREATED AS A CASINO EXPENSE. 2000 INCLUDED RECOGNITION IN FOURTH QUARTER OF
$220.0 MILLION IN PRETAX RESERVES FOR RECEIVABLES NOT EXPECTED TO BE RECOVERED
FROM JCC HOLDING COMPANY AND ITS SUBSIDIARY, JAZZ CASINO COMPANY LLC, AND $39.4
MILLION IN PRETAX WRITE-OFFS AND RESERVES FOR OUR INVESTMENT IN, LOANS TO AND
NET ESTIMATED EXPOSURE UNDER LETTERS OF CREDIT ISSUED ON BEHALF NATIONAL
AIRLINES, INC. 2000 ALSO INCLUDED OPERATING RESULTS FOR PLAYERS INTERNATIONAL,
INC. FOR PERIODS AFTER ITS MARCH 22, 2000, DATE OF ACQUISITION.
(3) THE SUM OF THE QUARTERLY PER SHARE AMOUNTS MAY NOT EQUAL THE ANNUAL AMOUNT
REPORTED, AS PER SHARE AMOUNTS ARE COMPUTED INDEPENDENTLY FOR EACH QUARTER AND
FOR THE FULL YEAR.