EXHIBIT 13
Harrah's Entertainment, Inc.
Financial and Statistical Highlights
(in millions, except stock data and statistical data)
(See Notes 1 and 2)
Compound
Growth
1995(a) 1994(b) 1993 1992 1991 Rate
-------- -------- -------- -------- -------- --------
Operating Data
Continuing operations
Revenues..................... $ 1,550.1 $ 1,339.4 $ 1,020.6 $ 894.4 $ 863.4 15.8%
Operating income............. 229.9 269.2 210.0 161.0 142.2 12.8%
Income before income taxes
and minority interest...... 151.6 139.3 139.0 85.1 59.1 26.6%
Income from continuing
operations................. 78.8 50.0 74.9 49.6 34.5 22.9%
Net income (c)................. 78.8 78.4 86.3 52.5 30.0 27.3%
Earnings before interest,
taxes, depreciation and
amortization (EBITDA)(d)..... 356.3 297.8 274.1 221.8 213.0 13.7%
Common Stock Data
Earnings (loss) per share
Continuing operations........ $ 0.76 $ 0.49 $ 0.73 $ 0.49 $ 0.39 18.2%
Discontinued hotel operations 0.21 0.35 0.16 0.02 (0.06) N/M
Net income (c)............... 0.76 0.76 0.84 0.52 0.33 23.2%
Market price of common stock
at December 31 (c)........... 24.25 30.88 45.75 18.33 7.33 34.9%
Common shares outstanding at
year-end (in thousands)...... 102,674 102,403 102,258 101,882 101,368 0.3%
Financial Position
Total assets (c)............... $ 1,636.7 $ 1,738.0 $ 1,528.0 $1,297.3 $1,226.0 7.5%
Total assets of continuing
operations................... 1,636.7 1,595.0 1,347.5 1,085.1 1,034.3 12.2%
Current portion of long-term
debt......................... 2.0 1.0 1.0 2.2 40.7 N/M
Long-term debt................. 753.7 727.5 665.2 660.7 614.5 5.2%
Stockholders' equity (c)....... 585.5 623.4 536.0 427.9 365.5 12.5%
Cash Flows
Provided by (used in)
Operating activities......... $ 213.7 $ 227.3 $ 198.2 $ 108.8 $ 81.9 27.1%
Investing activities......... (209.2) (331.4) (225.8) (99.3) (40.5) 50.8%
Financing activities......... 47.7 69.8 (7.0) (2.2) (47.6) N/M
Capital expenditures........... 231.8 301.8 234.5 101.9 46.8 49.2%
Financial Percentages and Ratios
Return on revenues-continuing.. 5.1% 3.7% 7.3% 5.5% 4.0%
Return on average invested
capital...................... 9.8% 7.9% 11.2% 10.6% 10.4%
Return on average equity (e)... 12.7% 14.2% 19.3% 13.0% 10.4%
Ratio of earnings to fixed
charges...................... 1.3 2.0 2.6 2.0 1.6
Current ratio.................. 0.9 0.6 0.7 0.9 0.5
Ratio of book equity to total
debt (f)..................... 0.8 0.7 0.6 0.5 0.4
Ratio market equity to total
debt (f)..................... 3.3 3.4 5.6 2.1 0.8
Ratio of EBITDA to interest
paid......................... 4.8 3.9 3.8 3.0 2.4
Ratio of debt to EBITDA........ 2.1 2.4 2.4 3.0 3.1
Selected Statistical Data as
of Year end
Casino square footage.......... 547,200 521,400 436,400 333,100 330,500
Number of slot machines........ 15,335 14,808 12,504 9,100 9,090
Number of table games.......... 801 789 641 465 512
Number of hotel rooms.......... 5,736 5,367 5,348 5,242 4,542
Gaming volume (in millions)(g). $20,649.0 $14,726.0 $10,810.1 $9,336.0 $8,529.8
Overall win percentage (g)..... 7.3% 7.8% 7.6% 7.6% 8.0%
(a) 1995 includes $93.3 million in pre-tax charges for project write-downs (see
Note 8).
(b) 1994 includes a $53.4 million provision for settlement of litigation and
related costs (see Note 13).
(c) 1995 amounts reflect the impact of the June 30, 1995 dividend of PHC common
stock to the Company's stockholders.
(d) EBITDA, consisting of Income from continuing operations plus interest,
taxes, depreciation, amortization and net losses of/distributions from
nonconsolidated affiliates, is a supplemental financial measurement used
by management, as well as by industry analysts, to evaluate Harrah's
operations. However, EBITDA should not be construed as an alternative to
Operating income (as an indicator of Harrah's 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. EBITDA,
excluding project write-downs, preopening costs and the provision for
settlement of litigation and related costs in both 1994 and 1995, rose
22.8% to $450.1 million in 1995.
(e) Ratio computed based on Income before extraordinary items and cumulative
effect of change in accounting policy.
(f) For purposes of computing these ratios, total debt includes debt
allocated to discontinued hotel operations for periods prior to the PHC
Spin-off.
(g) Gaming volume and overall win percentage calculations include both owned
and managed properties.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Harrah's Entertainment, Inc. (referred to herein, together with its
subsidiaries where the context requires, as "Harrah's" or the "Company"),
is one of the world's premier names in casino entertainment, currently
operating casino entertainment facilities in 14 markets. On June 30, 1995,
the Company, formerly known as The Promus Companies Incorporated (Promus),
completed a spin-off that split Promus into two independent public
corporations, one for conducting its casino entertainment business and one
for conducting its hotel business. Promus was renamed Harrah's
Entertainment, Inc. and retained ownership of the casino entertainment
business. Promus' hotel operations were transferred to a new entity, Promus
Hotel Corporation (PHC), the stock of which was distributed to Promus'
stockholders on a one-for-two basis (the PHC Spin-off). As a result of the
PHC Spin-off, Harrah's financial statements reflect the hotel business as
discontinued operations.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OVERALL
- -------
Percentage
(in millions, except Increase/(Decrease)
-------------------
earnings per share) 1995 1994 1993 95 vs 94 94 vs 93
--------------------------------------------------
Revenues............... $ 1,550.1 $ 1,339.4 $ 1,020.6 15.7% 31.2%
Operating income....... 229.9 269.2 210.0 (14.6)% 28.2%
Income from
continuing
operations........... 78.8 50.0 74.9 57.6% (33.2)%
Earnings from
discontinued
hotel operations.... 21.2 36.3 16.9 (41.6)% 114.8%
Net income............. 78.8 78.4 86.3 0.5% (9.2)%
Earnings per share
Continuing
operations......... 0.76 0.49 0.73 55.1% (32.9)%
Discontinued
operations......... 0.21 0.35 0.16 (40.0)% 118.8%
Net income.......... 0.76 0.76 0.84 -- (9.5)%
Operating margin....... 14.8% 20.1% 20.6% (5.3)pts (0.5)pts
In 1995 Harrah's achieved record revenues, as several casino properties
completed their first full year of operations and existing properties saw
continued growth. A major component of this revenue growth resulted from slot
revenue growth over 1994. Total slot revenue grew 36% in 1995 over 1994;
year-over-year slot revenue at properties open both years grew 6%. This growth
in slot revenue can be attributed to customer preference and focused marketing
efforts made possible by player tracking technology. This popularity has
resulted in slot revenue now accounting for over 71% of Harrah's total casino
revenue. Because slot revenues typically have fewer direct costs, property
operating margins have improved. Harrah' s overall operating margin, exclusive
of project write-downs, increased 0.8 points to 20.9% in 1995 as compared to
1994.
The following table summarizes operating profit before project
write-downs, preopening costs and corporate expense for 1995, 1994, and 1993 in
millions of dollars and as a percent of the total for each of Harrah's
divisions:
Contribution for Year Ended December 31,
---------------------------------------------
In Millions of Dollars Percent of Total
----------------------- -----------------------
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
Riverboat.......... $172 $127 $ 28 49% 40% 12%
Atlantic City...... 86 74 68 24 24 28
Southern Nevada.... 73 75 79 21 24 33
Northern Nevada.... 66 76 77 18 24 33
New Orleans........ (28) (9) - (8) (3) -
Development costs.. (17) (22) (10) (5) (7) (4)
Other.............. 2 (8) (5) 1 (2) (2)
---- ---- ---- ---- ---- ----
Total Harrah's $354 $313 $237 100% 100% 100%
==== ==== ==== ==== ==== ====
RIVERBOAT DIVISION
- ------------------
Percentage
Increase/(Decrease)
-------------------
(in millions) 1995 1994 1993 95 vs 94 94 vs 93
------------------------------------------------------
Casino revenues..... $ 557.2 $ 388.8 $ 82.3 43.3% 372.4%
Total revenues ..... 593.5 415.0 90.8 43.0% 357.0%
Operating profit.... 172.2 126.8 28.0 35.8% 352.9%
Operating margin.... 29.0% 30.6% 30.8% (1.6)pts (0.2)pts
1993 represented Harrah's first year with riverboat casino operations, as
Harrah's Joliet opened in May 1993, followed by Harrah's Vicksburg and Harrah's
Tunica in November 1993. 1994 included the operating results of Harrah's second
Joliet riverboat, added in January 1994, and operating results for Harrah's
Shreveport and Harrah's North Kansas City from April 1994 and September 1994,
their respective opening dates. 1995 included a full year of operations for all
six riverboat facilities.
[GRAPH]
GAMING REVENUE BY TYPE
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1995 casino revenues increased 43.3% over 1994, resulting from the full
year's operations for all six operating casinos within the Division. Operating
income increased in 1995 over 1994, due to the increased revenues. The
Division's 1995 operating margin declined to 29.0% from 1994's margin of 30.6%,
due to decreased operating margins at the Company's Mississippi casinos,
particularly Tunica, where competition increased. Harrah's Mississippi casinos
operated initially in markets of limited competition and, as a result, achieved
unusually high operating margins. Though management believes Harrah's
Mississippi properties have now stabilized at appropriate performance levels,
operating margins at the Mississippi properties are not expected to return to
the levels achieved during their startup periods.
Generally, the overall operating margin for the Riverboat Division is
higher than margins for other divisions due to some of the operational
differences between a riverboat facility and a conventional land-based property
and lesser levels of competition in some of the riverboat markets.
ATLANTIC CITY
- -------------
Percentage
Increase/(Decrease)
-------------------
(in millions) 1995 1994 1993 95 vs 94 94 vs 93
---------------------------------------------
Casino revenues .... $314.7 $287.8 $281.2 9.3% 2.3%
Total revenues .... 341.5 316.6 312.1 7.9% 1.4%
Operating profit ... 85.6 74.5 68.0 14.9% 9.6%
Operating margin ... 25.1% 23.5% 21.8% 1.6pts 1.7pts
Harrah's Atlantic City's 1995 casino revenues increased primarily due to a
12% growth in slot revenues over 1994. This increase in casino revenues, along
with modest increases in nongaming revenues, led to record 1995 revenues which,
combined with improved nongaming margins and lower incremental expenses,
resulted in near record operating income for the year and higher operating
margins.
Atlantic City's revenue increase in 1994 over 1993 was also a result of
slot volume growth, resulting from highly focused marketing efforts, as well as
to a casino renovation substantially completed during the year. Cost management
initiatives kept 1994 operating expenses consistent with those of 1993,
resulting in improved 1994 operating margins.
SOUTHERN NEVADA DIVISION
- ------------------------
Percentage
Increase/(Decrease)
-------------------
(in millions) 1995 1994 1993 95 vs 94 94 vs 93
----------------------------------------------
Casino revenues .... $198.3 $198.5 $200.5 (0.1)% (1.0)%
Total revenues .... 297.2 293.8 294.3 1.2% (0.2)%
Operating profit ... 72.8 74.9 79.4 (2.8)% (5.7)%
Operating margin ... 24.5% 25.5% 27.0% (1.0)pts (1.5)pts
Total revenues for the Division grew 1.2% in 1995 over prior year levels,
with casino revenues remaining consistent and nongaming revenues, particularly
lodging in Las Vegas, growing 8% over 1994. Operating income and margins
declined in 1995 at both properties versus the prior year as revenues shifted to
nongaming sources, which have lower margins, and due to continued intense
competition, which increased marketing costs.
As a result of capacity increases in both the Las Vegas and Laughlin
markets, 1994 casino revenue for the Division decreased from 1993 levels. The
decreased casino revenue was offset by higher Las Vegas nongaming revenue,
particularly lodging. Operating income and margins decreased from 1993 due to
higher promotional costs and the lower margins inherent in nongaming revenue.
NORTHERN NEVADA DIVISION
- ------------------------
Percentage
Increase/(Decrease)
-------------------
(in millions) 1995 1994 1993 95 vs 94 94 vs 93
-----------------------------------------------
Casino revenues.... $243.6 $243.0 $248.1 0.2% (2.1)%
Total revenues .... 315.6 310.3 315.6 1.7% (1.7)%
Operating profit... 66.4 75.7 76.6 (12.3)% (1.2)%
Operating margin... 21.0% 24.4% 24.3% (3.4)pts 0.1pt
1995 casino revenue for the Division remained consistent with that of 1994,
despite severe weather conditions during first quarter 1995 and increased
competition during the last half of the year. The increase in 1995 revenues over
1994 was primarily due to nongaming sources. 1995 operating income and margins
decreased from 1994 due to increasing costs and competitive adjustments at
Harrah's Reno in response to the July 1995 market entry of a major new
competitor and to the lower margins inherent in nongaming revenues.
1994 casino revenues and operating income declined slightly from 1993 due
primarily to the trial by traditional Northern Nevada customers of the new
"mega" properties in the Las Vegas market, which opened in the fall of 1993, and
severe weather experienced during fourth quarter 1994. Despite lower gaming
volume in 1994, the Division achieved a slight improvement in its operating
margin over 1993 by continuing its emphasis on cost savings and operating
efficiencies.
26
[GRAPH]
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS
HARRAH'S NEW ORLEANS
- --------------------
Operating income includes losses of $27.7 million and $8.5 million in 1995 and
1994, respectively, representing Harrah's share of pre-interest losses incurred
by Harrah's Jazz Company, the partnership which holds the right to develop the
sole land-based casino in Orleans Parish, Louisiana. During fourth quarter 1995,
Harrah's also recorded a one-time pre-tax charge of $75.5 million, representing
Harrah's write-off of its remaining investment in Harrah's Jazz, Harrah's
advances to Harrah's Jazz in its role as manager of the temporary New Orleans
casino and other related costs (see Other Factors Affecting Income Per Share).
OTHER
- -----
1995 operating results include management fee income from Harrah's Phoenix
Ak-Chin, the Company's first managed Indian property, which opened in late
December 1994. Operations at Harrah's Skagit Valley, the Company's second
managed Indian facility, began on December 17, 1995, and 1995 fees from this
property were not significant.
Development costs decreased in 1995 from 1994 levels, as a decrease in the
number of jurisdictions currently considering gaming has limited the number of
development opportunities. 1994 development costs were significantly higher than
1993 costs due to several costly ballot initiatives which accompanied the
November 1994 elections. Other support costs remained level in 1994 as the
number of operating properties stabilized. These costs had increased in 1994
over 1993 due to growth within the Company and the support needed by additional
riverboat properties.
OTHER FACTORS AFFECTING INCOME PER SHARE
- ----------------------------------------
Percentage
(income)/expense (Increase/(Decrease)
--------------------
(in millions) 1995 1994 1993 95 vs 94 94 vs 93
------------------------------------------------
Project write-downs ... $ 93.3 $ - $ - N/M N/M
Preopening costs ...... 0.5 15.3 - (96.7)% N/M
Corporate expense ..... 30.3 28.9 26.7 4.8% 8.2%
Interest expense, net.. 73.9 76.4 73.1 (3.3)% 4.5%
Interest expense, net,
from nonconsolidated
affiliates .......... 20.5 2.0 - N/M N/M
Provision for settlement
of litigation and
related costs ....... - 53.4 0.4 N/M N/M
Other income .......... (16.1) (1.9) (2.5) N/M (24.0)%
Effective tax rate..... 40.0% 54.1% 42.7% (14.1)pts 11.4pts
Minority interests .... $ 12.1 $ 13.9 $ 4.8 (12.9)% 189.6%
Discontinued operations
Hotel earnings, net
of tax ............ (21.2) (36.3) (16.9) (41.6)% 114.8%
Spin-off transaction
costs, net of tax.. 21.2 - - N/M N/M
Cumulative effect of
change in accounting
policy, net of tax... - 7.9 - N/M N/M
Extraordinary loss,
net of tax .......... - - 5.4 N/M N/M
Project write-downs in 1995 relate to Harrah's write-offs of investments in
and advances to nonconsolidated affiliates, including Harrah's investment in
Harrah's Jazz Company, and the write-down of impaired and abandoned assets.
Preopening costs for 1995 represent those costs charged to expense upon the
opening of a Hampton Inn hotel in Reno during October 1995. 1994 amounts
represented those costs charged to expense upon the opening of Harrah's
Shreveport and Harrah's North Kansas City, as well as the write-off of costs
related to Harrah's Maryland Heights project (see Capital Spending and
Development section).
Corporate expense increased slightly in 1995 over 1994, due to higher
information technology costs; 1994 costs exceeded 1993 levels due to higher
legal fees. Interest expense fluctuations for the three year period were
primarily attributable to the overall interest rate environment, as rates on
Harrah's variable rate debt rose slightly during 1994 and declined in 1995.
Interest expense from nonconsolidated affiliates primarily reflects Harrah's
share of interest expense from the Harrah's Jazz partnership.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The provision for settlement of litigation and related costs includes the
fourth quarter 1994 charge of $49.2 million to record the settlement of certain
litigation associated with the 1990 Spin-off of Promus and the acquisition of
the Holiday Inn business by Bass PLC, along with related legal fees and other
expenses of $4.3 million and $0.4 million in 1994 and 1993, respectively.
Other income in 1995 increased primarily as a result of an $11.7 million
gain on the sale of a portion of Harrah's investment in the corporation which
owns a casino entertainment facility in Auckland, New Zealand, along with a gain
on the 1995 sale of certain nonoperating property.
The effective tax rates for all years are higher than the federal statutory
rate due to state income taxes. Additionally, the 1994 tax rate is higher due to
the inclusion in Harrah's 1994 operating results of the provision for settlement
of litigation, which is not deductible for federal income tax purposes. Minority
interests reflect joint venture partners' shares of income at joint venture
riverboat casinos. Minority interests fell slightly in 1995 from 1994, due to
the impact of increased competition in Tunica and Harrah's purchase of an
additional ownership percentage in its Shreveport joint venture. Minority
interests increased in 1994 over 1993 as additional joint venture casinos
opened.
As a result of the PHC Spin-off, the operating results of the Company's
hotel business prior to July 1, 1995 have been segregated and reported as
discontinued operations in the accompanying consolidated financial statements.
1995 operating results include the earnings of discontinued operations through
June 30, 1995. 1995 also includes a one-time charge of $21.2 million, or $0.21
per share, net of tax, representing costs to complete the PHC Spin-off
transaction.
Operating results for 1994 reflect a net cumulative charge against earnings
of $7.9 million, or $0.08 per share, associated with Harrah's change in its
accounting policy related to preopening costs (see Note 10 to the accompanying
consolidated financial statements). The extraordinary loss recorded in 1993
represents write-offs of unamortized deferred finance charges due to early
retirements of debt.
HARRAH'S JAZZ COMPANY
- --------------------------------------------------------------------------------
A Harrah's subsidiary owns an approximate 47% interest in a partnership named
Harrah's Jazz Company (Harrah's Jazz). On November 22, 1995, Harrah's Jazz and
its wholly-owned subsidiary, Harrah's Jazz Finance Corp., filed for
reorganization under Chapter 11 of the Bankruptcy Code. Prior to the filing,
Harrah's Jazz was operating a temporary casino in the New Orleans, Louisiana
Municipal Auditorium (the Temporary Casino) and constructing a new permanent
casino facility on the site of the former Rivergate Convention Center in
downtown New Orleans (the Permanent Casino). Harrah's Jazz ceased operation of
the Temporary Casino and construction of the Permanent Casino on November 22,
1995 prior to the bankruptcy filings.
On November 19, 1995, representatives of the Harrah's Jazz bank syndicate
informed Harrah's Jazz that the bank syndicate would not disburse funds to
Harrah's Jazz under the terms of Harrah's Jazz's $175 million bank credit
facility (the Jazz Credit Facility). Faced with an absence of funding, on
November 21, 1995, Harrah's Jazz decided to cease Temporary Casino operations
and construction on the Permanent Casino, as well as to file for bankruptcy
protection. The Jazz Credit Facility was accelerated and terminated by the
bank lenders on November 21, 1995. Thereafter, on November 22, 1995, the
bankruptcy filings were made.
In connection with the closing in November 1994 of the 14.25% First
Mortgage Notes due 2001 of Harrah's Jazz (the Public Debt) and the Jazz Credit
Facility, the Company delivered completion guaranties to the trustee under the
Public Debt (under which the City of New Orleans (the City) was an express
third-party beneficiary), the bank lenders under the Jazz Credit Facility and
the Louisiana Economic Development and Gaming Corporation (the state agency
regulating Harrah's Jazz (LEDGC)). Each completion guaranty was subject to
certain conditions, exceptions and qualifications. The Company believes that
the failure of Harrah's Jazz to obtain the funds under the Jazz Credit Facility
and the acceleration of the loan by the bank syndicate terminated the Company's
obligations under the completion guaranties.
The Company made total capital contributions to the project of
approximately $90 million and has outstanding advances to the project of
approximately $25 million. In addition, in December 1995, the Company acquired
from a commercial bank a $16 million loan to a Harrah's Jazz partner in
satisfaction of the Company's obligations under a preexisting agreement with
the bank. The Company has written off these investments and other related costs
in the project.
The Company currently owns approximately 47% of the general partnership
interests of Harrah's Jazz. Harrah's Jazz is not consolidated into the Company's
financial statements for accounting purposes.
Harrah's Jazz has until March 21, 1996, which date may be extended by the
Bankruptcy Court, the exclusive right under the bankruptcy laws to submit a
plan of reorganization. Discussions concerning the reorganization plan have
occurred among certain interested parties, but a number of issues remain to be
resolved and there can be no assurance that such discussions will lead to an
agreement among all necessary parties.
The Company has offered to invest an additional $75 million in the project
and deliver a new completion guaranty if a reorganization plan approved by the
Company is consummated. The Company has also offered to invest, prior to plan
consummation, up to $10 million in the form of debtor-in-possession financing
(such financing would be repaid or converted into equity (and count toward the
$75 million investment referred to above) upon consummation of a reorganization
plan approved by the Company) if the Company and other interested parties reach
an agreement in principle as to the key elements of the plan. There can be no
assurance that any agreements will be reached or a reorganization plan
con-
28
summated. Additionally, ongoing litigation costs related to the Harrah's Jazz
bankruptcy, which could be significant, will have a corresponding impact on
Harrah's future earnings and cash flows.
On March 4, 1996, Harrah's Jazz entered into a preliminary agreement with
the City which provides for, among other things, an immediate $4.3 million cash
payment by Harrah's Jazz to the City, of which $2.5 million is being funded
by the Company as debtor-in-possession financing and the balance is being
funded from Harrah's Jazz's assets. Although the $2.5 million loan is
an administrative priority claim in the bankruptcy, there can be no assurance
that the loan will be repaid. In exchange for these agreements by Harrah's
Jazz, the City agreed to waive any requirements to reopen the Temporary Casino
and negotiate in good faith numerous specified issues relating to the lease
of the Permanent Casino site.
CAPITAL SPENDING AND DEVELOPMENT
- --------------------------------------------------------------------------------
Harrah's continues to pursue development opportunities
within the casino entertainment industry. These opportunities include
traditional land-based casinos, riverboat casinos, Indian gaming projects and
international casino projects.
EXISTING LAND-BASED PROPERTIES
- ------------------------------
During August 1995, Harrah's announced plans for major expansions at its
Las Vegas and Atlantic City casino properties. Each project includes the
addition of a hotel tower and casino space, as follows:
Projected
Estimated Incurred Additional Opening Dates
Project as of Casino Additional ------------------
Cost Dec. 31 Square Hotel Casino Hotel
Location (millions) (millions) Feet Rooms Expansion Addition
- -------------- ---------- ---------- ------ ----- --------- --------
Las Vegas $150.0 $0.9 17,000 688 Sept 96 Oct 97
Atlantic City 80.7 4.8 13,500 416 July 96 July 97
[GRAPH]
GAMING VOLUME BY STATE
On October 1, 1995, the Company opened a 408-room, 26-story Hampton Inn
hotel on the site of Harrah's Reno. The hotel, which was completed on schedule
and on budget, is company-owned and is being operated under a license agreement
with Promus Hotels, Inc.
RIVERBOAT CASINO DEVELOPMENT
- ----------------------------
In March 1995, Harrah's announced plans to form a joint venture with Players
International, Inc., to jointly develop a riverboat casino entertainment complex
in Maryland Heights, Missouri, a suburb of St. Louis. Formation of the
partnership was completed in November 1995 upon execution of the definitive
agreements. Pursuant to the agreements, each company will operate two separately
branded riverboat casinos and Harrah's, in partnership with Players, will
develop the shoreside facility which will include a 291-room Harrah's hotel.
Construction has begun on the project, which is expected to open during first
quarter 1997, subject to receipt of all regulatory approvals.
Harrah's investment in the Maryland Heights development project is expected
to total approximately $166 million, of which approximately $58 million had been
spent at December 31, 1995. In connection with the formation of the joint
venture in November 1995, Harrah's contributed certain assets from its original
Maryland Heights project and an additional $20 million in cash.
In July 1995, a Harrah's affiliate purchased at a bankruptcy auction the
former Southern Belle casino property, located near the existing Harrah's casino
in Tunica County, Mississippi, for $34.2 million. In addition to the purchase
price, the Harrah's affiliate is spending up to $53 million to renovate the
facility, including the addition of a hotel with approximately 200 rooms. The
renovated facility will feature 50,000 square feet of casino space and is
expected to open during second quarter 1996. Harrah's currently operates 27,000
square feet of casino space in its present Harrah's Tunica property which, under
current plans, will remain open and be operated with certain common management
elements.
During fourth quarter 1995, Harrah's began construction of a $78 million
expansion of Harrah's North Kansas City to include, a 200-room hotel, parking
garage, additional shoreside amenities and, subject to regulatory approval, a
second riverboat casino. The facility, to be completed in second quarter 1996,
is expected to result in 77% more gaming positions.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In February 1995, a 30,000 square foot riverboat casino was moved to
Shreveport, Louisiana, replacing the Shreveport Rose, which contained 19,500
square feet. This exchange resulted in approximately 27% more gaming positions
at Harrah's Shreveport. The Shreveport Rose was then refurbished at a cost of
approximately $5 million, and transferred in November 1995 to Joliet as a
replacement for the Southern Star. The Southern Star has been moved to a
dockyard for storage, where it will be maintained for future use. The costs
associated with exchanging boats and with maintaining them until returned to
service are not material.
In addition to the replacement of the Joliet Southern Star during 1995,
Harrah's began a project to expand Joliet's shoreside facilities. The $8 million
project will be completed during second quarter 1996.
INDIAN LANDS
- ------------
Harrah's opened a second gaming facility on Native American lands on December
17, 1995. The facility, which is owned by the Upper Skagit tribe and operated by
Harrah's for a fee under terms of a five-year management contract, is located
approximately 70 miles north of Seattle, Washington. 1995 represented the first
full year of operations for Harrah's first Indian facility, Harrah's Ak-Chin
Phoenix, which opened on December 27, 1994. Though Harrah's did not fund these
developments, it has guaranteed the related bank financing.
Harrah's is awaiting approval from the National Indian Gaming Commission of
development and management agreements with the Eastern Band of Cherokees for a
proposed casino development at Cherokee, North Carolina. Harrah's has also
signed definitive development and management agreements with the Pokagon Band of
Potawatomi Indians for future casino developments in Michigan and Indiana.
Harrah's has previously announced agreements with other Indian tribes, which are
in various stages of negotiation and are subject to certain conditions,
including approval from appropriate government agencies. Upon the receipt of
necessary approvals, Harrah's will likely guarantee the related bank financing
for the projects, which could be significant.
For all existing guarantees of Indian debt, Harrah's has obtained a first
lien on the personal property (tangible and intangible) of the casino
enterprise. Additionally, Harrah's has received limited waivers from the Indian
tribes of their sovereign immunity to allow Harrah's to pursue its rights under
the contracts between the parties and to enforce collection efforts as to any
assets in which a security interest is taken.
INTERNATIONAL
- -------------
Harrah's opened its first international casino entertainment facility in
Auckland, New Zealand, on February 2, 1996. The facility, containing 45,000
square feet of casino space, 1,042 slot machines and 97 table games, is owned by
a corporation in which Harrah's owns a 12.5% equity interest, and is managed by
Harrah's for a fee. Construction of the US$340 million facility was funded
through a combination of equity contributions and non-recourse debt. In July
1995, Harrah's sold a portion of its interest, resulting in a pre-tax gain of
$11.7 million.
OVERALL
- -------
In addition to the specific projects discussed above, the Company continues to
perform on-going refurbishment and maintenance at its existing casino
entertainment facilities in order to maintain Harrah's quality standards.
Harrah's also continues to pursue casino entertainment development opportunities
in possible jurisdictions across the United States and abroad. Until necessary
approvals to proceed with development of a project are obtained from the
relevant regulatory bodies, the costs of pursuing casino entertainment 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. Preopening costs incurred during the construction
period are deferred and expensed at the respective property's opening.
A number of these projects, if they go forward, may require, individually
and in the aggregate, a significant capital commitment 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 by Harrah's will be made available
from operating cash flows, the Facility (see Debt and Liquidity section), joint
venture partners, specific project financing, guaranties by Harrah's of third
party debt and, if necessary, Harrah's debt and/or equity offerings. Harrah's
capital spending totalled $232 million and $302 million during 1995 and 1994,
respectively. Anticipated 1996 capital expenditures are estimated at $375
million to $425 million, including the projects discussed in this Capital
Spending and Development section, refurbishment of existing facilities and other
projects.
30
DEBT AND LIQUIDITY
- --------------------------------------------------------------------------------
BANK FACILITY
- -------------
In connection with the PHC Spin-off, Harrah's negotiated changes to its reducing
revolving and letter of credit facility (the Facility), which became effective
June 30, 1995. Among the modifications were an increase in total capacity from
$650 million to $750 million, an extension of the maturity to July 31, 2000,
reduced borrowing costs and favorable modifications to certain financial
covenants. The amended credit facility consists of a five-year $600 million
reducing revolving and letter of credit facility and a separate $150 million
revolving credit facility which is renewable annually, at the lenders' option,
for a five-year period. Reductions of the borrowing capacity under the $600
million facility are as follows: $50 million, July 1998; $75 million, January
1999; $75 million, July 1999; $100 million, January 2000; and $300 million, July
2000. As of December 31, 1995, $346.5 million in borrowings were outstanding
under the Facility, with an additional $25.1 million committed to back letters
of credit, resulting in $378.4 million of available Facility capacity as of
December 31, 1995. During October 1995, Harrah's senior implied debt rating was
upgraded by Standard and Poor's and, in accordance with the Facility agreement,
borrowing costs under the Facility were reduced to the Eurodollar rate plus 50
basis points.
[GRAPH]
SCHEDULED DEBT MATURITIES
As part of the PHC Spin-off, the Company obtained a new $350 million bank
facility (the PHC Facility), which was assumed by PHC at the time of the PHC
Spin-off. Immediately prior to the PHC Spin-off, approximately $218 million was
drawn on the PHC Facility and used to retire a portion of the Company's existing
outstanding debt. Prior to the PHC Spin-off, Harrah's corporate debt was not
specifically related to either its casino entertainment or hotel segment.
However, corporate debt service requirements were met using cash flows provided
by both segments. Therefore, for all periods prior to the PHC Spin-off, a
portion of the Company's corporate debt balance, unamortized deferred finance
charges and interest expense were allocated to discontinued hotel operations
based on the percentage of Harrah's existing corporate debt which was expected
to be retired using proceeds from the new PHC bank facility. Net assets of
discontinued hotel operations at December 31, 1994, included allocations to
discontinued hotel operations of corporate debt and unamortized deferred finance
charges of $187.9 million and $3.2 million, respectively, together with debt
specifically related to PHC of $3.3 million. Interest expense of $9.5 million,
$17.2 million and $17.0 million for 1995, 1994 and 1993, respectively, was
allocated to discontinued hotel operations.
In February 1995, Harrah's 9% Notes, previously backed by a letter of
credit issued under the Facility, matured and were retired using Facility funds.
In May 1995, Harrah's redeemed the $18.1 million principal amount outstanding of
the 11% Subordinated Debentures due 1999. The cost of this redemption was not
material.
INTEREST RATE AGREEMENTS
- ------------------------
To manage the relative mix of its debt between fixed and variable rate
instruments, Harrah's enters into interest rate swap agreements to modify the
interest characteristics of its outstanding debt without an exchange of the
underlying principal amount. As of December 31, 1995, Harrah's was a party to
the following interest rate swap agreements on certain fixed rate debt:
Effective Next Semi-
Swap Rate at Annual Rate
Associated Rate December 31, Adjustment
------------
Debt (LIBOR+) 1995 1994 Date Swap Maturity
- -------------------------------------------------------------------------------
10 7/8% Notes
$200 million 4.73% 10.74% 10.68% April 16 Oct 1997
8 3/4% Notes
$50 million 3.42% 9.23% 9.58% May 15 May 1998
$50 million 3.22% 9.10% 8.71% January 16 July 1998
In accordance with the terms of the interest rate swap agreements, the
effective interest rate on $50 million of the 8 3/4% Notes was adjusted on
January 16, 1996, to 8.72%.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During 1995, Harrah's entered into nine additional interest rate swap
agreements to effectively convert variable rate debt to a fixed rate. Two of
these swap agreements, with a combined notional amount of $100 million, were
transferred to PHC at the time of the PHC Spin-off. The following table
summarizes the terms of the remaining seven swap agreements, all of which reset
on a quarterly basis, as of December 31, 1995:
Swap Rate
Received
Swap Rate (Variable) at Swap
Notional Amount Paid (Fixed) Dec. 31, 1995 Maturity
- --------------- ------------ ------------- -------------
$50 million 7.910% 5.938% January 1998
$50 million 6.985% 5.813% March 2000
$50 million 6.951% 5.668% March 2000
$50 million 6.945% 5.668% March 2000
$50 million 6.651% 5.875% May 2000
$50 million 5.788% 5.813% June 2000
$50 million 5.785% 5.813% June 2000
In accordance with the terms of the above $50 million swap which matures in
January 1998, the variable rate was adjusted on January 26, 1996 to 5.500%.
During fourth quarter 1995, the Company replaced two swap agreements it had
entered into earlier in the year with new agreements which have longer terms and
lower fixed interest rates. The replacement swaps were entered into at no cost
to the Company and will reduce the Company's future cash requirements for
interest payments. The effect on the current year's consolidated financial
statements was immaterial. The table above reflects the terms of the new swap
agreements. An interest rate collar on $140 million of Harrah's variable rate
bank debt expired in June 1995 and was not renewed.
The differences to be paid or received by Harrah's under the terms of the
interest rate swap agreements are accrued as interest rates change and
recognized as an adjustment to interest expense for the related debt. Changes in
the variable interest rates to be paid or received by Harrah's pursuant to the
terms of its interest rate agreements will have a corresponding effect on its
future cash flows. These agreements contain a credit risk that the
counterparties may be unable to meet the terms of the agreements. Harrah's
minimizes that risk by evaluating the creditworthiness of its counterparties,
which are limited to major banks and financial institutions, and does not
anticipate nonperformance by the counterparties.
As part of a transaction whereby Harrah's effectively secured an option to
a site for a potential casino, Harrah's has guaranteed a third party's $24.7
million variable rate bank loan. Harrah's also has entered into an interest rate
swap agreement in which Harrah's receives a fixed interest rate of 7% from the
third party and pays the variable interest rate of the subject debt (LIBOR plus
1% at December 31, 1995) to the bank. The interest rate swap is marked to market
by Harrah's, with the adjustment recorded in interest expense. The market value
of the swap was a positive $0.3 million and a negative $1.1 million at December
31, 1995 and 1994, respectively. Harrah's swap agreement expires December 1,
1996, and is also subject to earlier termination upon the occurrence of certain
events. The underlying guaranty contains an element of risk that the borrower
may be unable to retire the loan when it matures in December 1996. If that
occurs, the Company could become responsible for repayment of at least a portion
of the obligation. Harrah's has reduced this exposure by obtaining a security
interest in certain assets of the third party.
SHELF REGISTRATION
- ------------------
To provide for additional financing flexibility, Harrah's, together with its
wholly-owned subsidiary Harrah's Operating Company, Inc. (HOC), has registered
up to $200 million of Harrah's common stock or HOC preferred stock or debt
securities pursuant to a shelf registration declared effective by the Securities
and Exchange Commission on October 11, 1995. The terms and conditions of the HOC
preferred stock or debt securities, which will be unconditionally guaranteed by
Harrah's, will be determined by market conditions at the time of issuance. The
shelf registration is available until October 1997.
INCOME TAX MATTERS
- --------------------------------------------------------------------------------
In connection with the PHC Spin-off, Harrah's entered into a Tax Sharing
Agreement with PHC wherein each company is obligated for those taxes associated
with their respective businesses. Additionally, Harrah's is obligated for all
taxes of the Company for periods prior to the PHC Spin-off date which are not
specifically related to PHC operations and/or PHC hotel locations. Harrah's
obligations under this agreement are not expected to have a material adverse
effect on its consolidated financial position or results of operations.
EQUITY TRANSACTIONS
- --------------------------------------------------------------------------------
As a component of the PHC Spin-off, the Company distributed to its stockholders
the stock of PHC as a dividend. To reflect this distribution, the $139.6 million
book value of the net assets of discontinued operations as of the spin-off date
has been charged against Harrah's retained earnings. The final allocations
related to the PHC Spin-off were recorded in fourth quarter 1995. The amount of
such adjustments was not material.
EFFECTS OF CURRENT ECONOMIC AND POLITICAL CONDITIONS
- --------------------------------------------------------------------------------
The casino entertainment industry has experienced widespread expansion in new
jurisdictions over the past several years as governments seeking additional tax
revenues and employment have legalized casino gaming. The number of states which
allow legalized gaming has grown from two in 1990 to ten today. Growth in the
casino industry has also been furthered by the Indian Gaming Regulatory Act of
1988. Although a
32
number of states are considering legislation in additional jurisdictions,
the rapid growth which existed during the early 1990's has slowed and, as a
result, future new market potential is difficult to predict. Of those new
markets which have opened to the gaming industry, certain jurisdictions have
restricted market entry, which limits capacity and competition within those
markets. Other jurisdictions have no limits on market entry, other than
restrictions on locations, which can impact operating performance and cash
flows.
In addition to growth in new markets, significant development has occurred
in recent years in the traditional gaming markets of Nevada and New Jersey,
resulting in increased competition in these markets. Several large properties
have opened in Las Vegas in recent years, and others are both planned and under
development. In July 1995, a major new development opened in Reno, Nevada,
representing the first major entry to that market in years. New developments and
expansions are also planned for Atlantic City, New Jersey. Over the last
several years, the Laughlin, Nevada market has been impacted by increasing
competition from markets in and around Las Vegas and neighboring Indian
properties. Though the traditional casino markets have seen little overall
impact from the recent spread of gaming to other markets, continuing
growth within the industry could ultimately cause decreased market share for
these markets, which would have a corresponding effect on the cash flow provided
by these facilities.
The casino industry's market focus has also undergone a transformation over
the past several years as a result of the spread of gaming. Whereas traditional
markets were limited, drawing primarily long-distance travelers, the newer
casino properties are geographically dispersed, resulting in casino
entertainment being within a reasonable driving distance for many Americans.
Harrah's has participated in this industry transformation, developing casinos in
many new markets. As a result, Harrah's is an extremely diverse gaming company,
both geographically and categorically, with properties in nine states as of
December 31, 1995, representing a mix of traditional land-based, riverboat,
Indian and limited stakes facilities. Furthering its diversification, Harrah's
opened its first international casino facility in Auckland, New Zealand on
February 2, 1996.
Harrah's is not able to determine the long-term impact, whether favorable
or unfavorable, that these events will have on the markets in which it currently
operates. However, management believes that the current mix of its operations
among its divisions as discussed above, combined with the further geographic
diversification and the continuing pursuit of the Harrah's national brand
strategy, has well-positioned the Company to face the challenges present within
the industry.
EFFECTS OF INFLATION
- --------------------------------------------------------------------------------
Inflation has had little effect on Harrah's historical operations. Generally,
Harrah's has not experienced any significant negative impact on gaming volume or
on the wagering propensity of its customers as a result of inflationary
pressures. Further, Harrah's has been successful in increasing the amount of
wagers and playing time of its casino customers through effective marketing
programs. Casino management has also, from time to time, adjusted its required
minimum bets at table games and changed the relative mix of slot machines in
favor of machines with higher denominations. These strategies supplemented by
effective cost management programs have offset the impact of inflation on
Harrah's operations. Inflation tends to increase the underlying value of
Harrah's casino entertainment properties.
INTERCOMPANY DIVIDEND RESTRICTION
- --------------------------------------------------------------------------------
Agreements governing the terms of its debt require Harrah's to abide by
covenants which, among other things, limit HOC's ability to pay dividends and
make other restricted payments, as defined, to Harrah's. The amount of HOC's
restricted net assets, as defined, computed in accordance with the most
restrictive of these covenants regarding restricted payments, was approximately
$591.4 million at December 31, 1995. Harrah's principal asset is the stock of
HOC, a wholly-owned subsidiary. HOC holds, directly and through subsidiaries,
the principal assets of Harrah's businesses. Given this ownership structure,
these restrictions should not impair Harrah's ability to conduct its business
through its subsidiaries or to pursue its development plans.
RECENT PRONOUNCEMENTS
- --------------------------------------------------------------------------------
During 1996, Harrah's will adopt the provisions of two Statements of Financial
Accounting Standards (SFAS) recently issued by the Financial Accounting
Standards Board. SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment periodically.
The implementation of SFAS 121 is not expected to have a material impact on
Harrah's financial statements.
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of measuring compensation costs for employee stock compensation
programs. This new standard permits companies to follow the intrinsic value
based method presently required by Accounting Principles Board Opinion No. 25,
with pro forma footnote disclosure of the effect that the fair value based
method would have had on net income and earnings per share, had that method of
implementation been adopted. Management intends to adopt the disclosure
alternative; accordingly, Harrah's will include the pro forma effects of this
statement in its notes to financial statements for the year ending December 31,
1996.
33
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
----------------------------
1995 1994
----------- -----------
ASSETS
- ------
Current assets
Cash and cash equivalents ................... $ 96,345 $ 84,968
Receivables, less allowance for
doubtful accounts of $10,910 and $9,551 .... 37,751 33,051
Deferred income tax benefits (Note 9) ....... 21,425 18,979
Prepayments and other ....................... 21,275 23,374
Supplies .................................... 12,040 11,463
----------- -----------
Total current assets ....................... 188,836 171,835
----------- -----------
Land, buildings, riverboats and equipment
Land and land improvements .................. 236,540 228,232
Buildings, riverboats and improvements ...... 1,054,758 981,647
Furniture, fixtures and equipment ........... 432,416 392,741
----------- -----------
1,723,714 1,602,620
Less: accumulated depreciation .............. (518,824) (472,779)
----------- -----------
1,204,890 1,129,841
Net assets of discontinued hotel operations
(Notes 1 and 2) ............................. -- 143,008
Investments in and advances to non-
consolidated affiliates (Note 15) ........... 71,939 116,932
Deferred income tax benefits (Note 9) ........ 4,532 --
Deferred costs and other (Note 5) ............ 166,537 176,349
----------- -----------
$ 1,636,734 $ 1,737,965
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Accounts payable ............................ $ 46,178 $ 54,621
Construction payables ....................... 4,718 10,879
Accrued expenses (Note 5) ................... 148,632 156,446
Current portion of long-term debt (Note 6) .. 2,038 1,036
Accrued litigation settlement and related
costs (Note 13) ........................... -- 72,101
----------- -----------
Total current liabilities .................. 201,566 295,083
Long-term debt (Note 6) ...................... 753,705 727,493
Deferred credits and other ................... 72,006 66,735
Deferred income taxes (Note 9) ............... -- 7,138
----------- -----------
1,027,277 1,096,449
----------- -----------
Minority interests ........................... 23,908 18,079
----------- -----------
Commitments and contingencies (Notes 7 and 12
through 15)
Stockholders' equity (Notes 4, 14 and 15)
Common stock, $0.10 par value, authorized
360,000,000 shares, outstanding - 102,673,828
and 102,402,619 shares (net of 19,026 and
37,172 shares held in treasury) ............ 10,267 10,240
Capital surplus ............................. 362,783 350,196
Unrealized gain on marketable equity
securities ................................ 10,552 --
Retained earnings ........................... 204,838 265,574
Deferred compensation related to
restricted stock .......................... (2,891) (2,573)
----------- -----------
585,549 623,437
----------- -----------
$ 1,636,734 $ 1,737,965
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated balance sheets.
34
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended December 31,
---------------------------------------------
1995 1994 1993
----------- ----------- -----------
Revenues
Casino ................................. $ 1,313,910 $ 1,118,107 $ 812,081
Food and beverage ...................... 181,312 162,413 139,522
Rooms .................................. 109,036 105,642 102,024
Management fees ........................ 12,762 914 150
Other .................................. 87,158 80,151 67,588
Less: casino promotional allowances .... (154,102) (127,821) (100,720)
----------- ----------- -----------
Total revenues ...................... 1,550,076 1,339,406 1,020,645
----------- ----------- -----------
Operating expenses
Direct
Casino ................................ 620,438 497,686 369,335
Food and beverage ..................... 91,495 82,825 76,498
Rooms ................................. 32,915 33,430 33,124
Depreciation of buildings,
riverboats and equipment ............. 80,416 70,632 54,631
Development costs ...................... 17,428 22,015 10,175
Project write-downs (Note 8) ........... 93,348 -- --
Preopening costs ....................... 450 15,313 --
Other .................................. 353,318 319,411 240,113
----------- ----------- -----------
Total operating expenses ............ 1,289,808 1,041,312 783,876
----------- ----------- -----------
Operating profit before
corporate expense ...................... 260,268 298,094 236,769
Corporate expense ........................ (30,347) (28,907) (26,736)
----------- ----------- -----------
Operating income ......................... 229,921 269,187 210,033
Interest expense, net of interest
capitalized (Note 3) ................... (73,890) (76,363) (73,080)
Interest expense, net, from
nonconsolidated affiliates ............. (20,526) (1,959) --
Provision for settlement of
litigation and related costs (Note 13) . -- (53,449) (400)
Other income, including interest income .. 16,078 1,867 2,462
----------- ----------- -----------
Income before income taxes and
minority interests ..................... 151,583 139,283 139,015
Provision for income taxes (Note 9) ...... (60,677) (75,391) (59,394)
Minority interests ....................... (12,096) (13,908) (4,754)
----------- ----------- -----------
Income from continuing operations ........ 78,810 49,984 74,867
Discontinued operations (Note 2)
Earnings from hotel operations, net
of tax provisions of $15,434, $26,798
and $13,869 ............................ 21,230 36,319 16,926
Spin-off transaction expenses,
net of tax benefit of $5,134 ........... (21,194) -- --
----------- ----------- -----------
Income before extraordinary loss and
cumulative effect of change in
accounting policy ...................... 78,846 86,303 91,793
Extraordinary loss on early extinguishment
of debt, net of tax benefit of $3,415 .. -- -- (5,447)
Cumulative effect of change in accounting
policy, net of tax benefit
of $4,317 (Note 10) .................... -- (7,932) --
----------- ----------- -----------
Net income ............................... $ 78,846 $ 78,371 $ 86,346
=========== =========== ===========
Earnings (loss) per share
Continuing operations .................... $ 0.76 $ 0.49 $ 0.73
Discontinued operations
Earnings from hotel operations, net ... 0.21 0.35 0.16
Spin-off transaction expenses, net .... (0.21) -- --
Extraordinary loss, net ................ -- -- (0.05)
Cumulative effect of change in
accounting policy, net ................ -- (0.08) --
----------- ----------- -----------
Net income ........................... $ 0.76 $ 0.76 $ 0.84
=========== =========== ===========
Average common shares outstanding ........ 103,188 102,810 102,562
=========== =========== ===========
The acompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated statements.
35
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Notes 4, 14 and 15)
(In thousands)
Unrealized Deferred
Common Stock Gain on Compensation
------------------- Marketable Related to
Shares Capital Equity Retained Restricted
Outstanding Amount Surplus Securities Earnings Stock Total
----------- ------ ------- ---------- -------- ---------- -----
Balance - December 31, 1992 ............... 101,882 $10,188 $321,607 $ - $ 100,857 $(4,722) $ 427,930
Net income ............................... 86,346 86,346
Pro rata share of proceeds from equity
investee's initial public offering,
less tax provision of $2,662 ............ 3,752 3,752
Net shares issued under incentive
compensation plans, including
income tax benefit of $10,467 ........... 376 38 18,838 (867) 18,009
------- ------- -------- ------- --------- -------- ---------
Balance - December 31, 1993 ............... 102,258 10,226 344,197 - 187,203 (5,589) 536,037
Net income ............................... 78,371 78,371
Net shares issued under incentive
compensation plans, including
income tax benefit of $3,252 ............ 145 14 5,999 3,016 9,029
------- ------- -------- ------- --------- -------- ---------
Balance - December 31, 1994 ............... 102,403 10,240 350,196 - 265,574 (2,573) 623,437
Net income ............................... 78,846 78,846
Spin-off of Promus Hotel
Corporation (Notes 1 and 2).............. (139,582) (139,582)
Unrealized gain on available-
for-sale securities, less tax
provision of $6,746. .................... 10,552 10,552
Net shares issued under incentive
compensation plans, including
income tax benefit of $6,616 ............ 271 27 12,587 (318) 12,296
------- ------- -------- ------- --------- -------- ---------
Balance - December 31, 1995 ............... 102,674 $10,267 $362,783 $10,552 $ 204,838 $ (2,891) $ 585,549
======= ======= ======== ======= ========= ======== =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated statements.
36
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Note 11)
(In thousands)
Year Ended December 31,
-----------------------------
1995 1994 1993
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net income ................................... $ 78,846 $ 78,371 $ 86,346
Adjustments to reconcile net income
to cash flows from operating activities
Discontinued operations
Earnings from hotel operations ............ (21,230) (36,319) (16,926)
Spin-off transaction expenses,
before income taxes ...................... 26,328 -- --
Project write-downs ........................ 93,348 -- --
Extraordinary loss, before income taxes .... -- -- 8,862
Cumulative effect of change in accounting
policy, before income taxes ............... -- 12,249 --
Depreciation and amortization .............. 95,388 86,644 70,207
Provision for settlement of litigation and
related costs ............................. -- 49,158 --
Other noncash items ........................ 17,088 10,348 23,945
Minority interests share of net income ..... 12,096 13,908 4,754
Equity in losses (income) of
nonconsolidated affiliates ................ 51,182 12,398 (37)
Net (gains) losses from asset sales ........ (13,156) 570 196
Net change in long-term accounts ........... (18,144) (4,447) 595
Net change in working capital accounts ..... (36,576) 30,883 28,718
Net change in accrued litigation settlement
and related costs ......................... (43,438) -- --
Tax indemnification payments to Bass ....... (28,000) (26,466) (8,459)
-------- -------- --------
Cash flows provided by operating
activities ................................ 213,732 227,297 198,201
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Land, buildings, riverboats and equipment
additions ................................... (186,233) (219,139) (219,042)
(Decrease) increase in construction
payables .................................... (6,161) (15,466) 26,345
Proceeds from sale of equity investments ..... 20,745 -- --
Proceeds from asset sales .................... 10,850 4,192 8,248
Investments in and advances to
nonconsolidated affiliates .................. (45,603) (82,705) (15,463)
Other ........................................ (2,844) (18,291) (25,909)
-------- -------- --------
Cash flows used in investing activities .... (209,246) (331,409) (225,821)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Net borrowings under Revolving Credit
Facility, net of financing costs of $2,322
in 1995 and $11,547 in 1993 ................. 274,172 118,550 158,453
Debt retirements ............................. (219,614) (40,320) (366,134)
Minority interests contributions, net
of distributions ............................ (6,360) (8,434) 4,548
Other ........................................ (543) -- --
Proceeds from issuance of senior subordinated
notes, net of issue costs of $3,819 ......... -- -- 196,181
-------- -------- --------
Cash flows provided by (used in)
financing activities ..................... 47,655 69,796 (6,952)
-------- -------- --------
CASH FLOWS FROM DISCONTINUED HOTEL OPERATIONS
- ---------------------------------------------
Net transfers (to) from discontinued
hotel operations ........................... (14,840) 60,975 51,367
Payment of spin-off transaction expenses .... (25,924) -- --
-------- -------- --------
Cash flows provided by (used in)
discontinued operations .................. (40,764) 60,975 51,367
-------- -------- --------
Net increase in cash and cash equivalents .... 11,377 26,659 16,795
Cash and cash equivalents, beginning of year . 84,968 58,309 41,514
-------- -------- --------
Cash and cash equivalents, end of year ....... $ 96,345 $ 84,968 $ 58,309
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated statements.
37
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise stated)
1. BASIS OF PRESENTATION AND ORGANIZATION
- --------------------------------------------------------------------------------
Harrah's Entertainment, Inc. (Harrah's or the Company, together with its
subsidiaries where the context requires), a Delaware corporation, is one of
America's leading casino companies and currently operates casino entertainment
facilities in 14 markets. On June 30, 1995, Harrah's, formerly The Promus
Companies Incorporated (Promus), completed a spin-off that split the Company
into two independent public corporations, one for conducting its casino
entertainment business and one for conducting its hotel business. Harrah's
retained ownership of the casino entertainment business. The Company's hotel
operations were transferred to a new entity, Promus Hotel Corporation (PHC), the
stock of which was distributed to Promus' stockholders on a one-for-two basis
(the PHC Spin-off). As a result of the PHC Spin-off, Harrah's financial
statements reflect the hotel business as discontinued operations (see Note 2).
Harrah's operates casino entertainment facilities in nine states, including
casino hotels in all five major Nevada and New Jersey gaming markets: Reno, Lake
Tahoe, Las Vegas and Laughlin, Nevada; and Atlantic City, New Jersey. Harrah's
riverboat casinos are in Joliet, Illinois; Shreveport, Louisiana; Tunica and
Vicksburg, Mississippi; and North Kansas City, Missouri. In addition, Harrah's
has a minority ownership interest in and manages two limited stakes casinos in
Black Hawk and Central City, Colorado, and manages casinos on Indian lands near
Phoenix, Arizona and Seattle, Washington. Subsequent to December 31, 1995,
Harrah's began managing a casino in Auckland, New Zealand in which the Company
has a 12.5% ownership interest.
2. DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
As discussed in Note 1, on June 30, 1995, Harrah's completed a spin-off of its
hotel operations. Accordingly, results of operations and cash flows of the
Company's hotel business have been reported as discontinued operations for all
periods presented in the Consolidated Financial Statements. The Consolidated
Balance Sheet as of December 31, 1994, also reflects the Company's hotel
business as discontinued operations. Summarized financial information of the
discontinued operations is presented in the following tables:
Net assets of discontinued hotel operations:
December 31,
1994
-----------
Current assets ................................................ $ 25,565
Current liabilities ........................................... (34,461)
---------
Net current liabilities ..................................... (8,896)
Land, buildings and equipment, net ............................ 322,140
Other assets .................................................. 72,860
Long-term debt, including allocated debt (Note 6) ............. (189,943)
Other liabilities and deferred taxes .......................... (53,153)
---------
Net assets of discontinued hotel operations ................. $ 143,008
=========
As of the date of the PHC Spin-off, the net assets of discontinued hotel
operations were $139.6 million. This amount has been charged against the
Company's retained earnings in the accompanying December 31, 1995 Consolidated
Balance Sheet to reflect the distribution of PHC's stock to Promus stockholders
on June 30, 1995.
Earnings from discontinued hotel operations:
Six months
Ended Year Ended December 31,
June 30, ------------------------
1995 1994 1993
--------- --------- ---------
Revenues .......................... $ 132,785 $ 242,724 $ 231,210
Costs and expenses ................ (79,652) (148,470) (163,758)
--------- --------- ---------
Operating income .................. 53,133 94,254 67,452
Interest expense .................. (16,742) (31,148) (33,482)
Other income (expense) ............ 273 11 (3,175)
--------- --------- ---------
Income before income taxes ........ 36,664 63,117 30,795
Provision for income taxes ........ (15,434) (26,798) (13,869)
--------- --------- ---------
Earnings from discontinued
hotel operations ................ $ 21,230 $ 36,319 $ 16,926
========= ========= =========
In addition to the earnings of its discontinued hotel operations, Harrah's
operating results for the year ended December 31, 1995, include a charge of
$21.2 million, net of tax, for expenses of the PHC Spin-off transaction.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION. The Consolidated Financial Statements include the
accounts of Harrah's and its majority-owned subsidiaries after elimination of
all significant intercompany accounts and transactions. Harrah's investments in
20% to 50% owned companies and joint ventures over which Harrah's has the
ability to exercise significant influence are accounted for using the equity
method. Harrah's reflects its share of income before interest expense of these
nonconsolidated affiliates in revenues. Harrah's proportionate share of interest
expense of such nonconsolidated affiliates is reported as Interest expense, net,
from nonconsolidated affiliates. (See Note 15.)
CASH EQUIVALENTS. 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.
SUPPLIES. Supplies 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 $32.0 million and $45.9 million at December 31, 1995
and 1994, respectively. Improvements and extraordinary repairs that extend the
life of the asset are capitalized. Maintenance and repairs are expensed as
incurred. Interest expense is capitalized.
38
on internally constructed assets at Harrah's overall weighted average borrowing
rate of interest. Capitalized interest amounted to $3.6 million, $3.8 million
and $3.1 million in 1995, 1994 and 1993, respectively.
Depreciation of buildings, riverboats and equipment is calculated using the
straight-line method over the estimated useful life of the asset or over the
related lease term, as follows:
Buildings and improvements ..................................... 10 to 40 years
Riverboats ..................................................... 30 years
Furniture, fixtures and equipment .............................. 2 to 15 years
TREASURY STOCK. Shares of Harrah's common stock held in treasury are reflected
in the Consolidated Balance Sheets and Consolidated Statements of Stockholders'
Equity as if they 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 company-owned casinos and casino hotels.
Casino promotional allowances consist principally of the retail value of
complimentary food and beverages, accommodations, admission and entertainment
provided to casino patrons. The estimated costs of providing such complimentary
services, classified as casino expenses through interdepartmental allocations,
were as follows:
1995 1994 1993
------- ------- -------
Food and beverage .............. $72,400 $63,414 $52,057
Rooms .......................... 15,098 13,875 13,140
Other .......................... 10,856 2,634 1,541
------- ------- -------
$98,354 $79,923 $66,738
======= ======= =======
AMORTIZATION. The excess of costs over net assets of businesses acquired and
other intangibles are amortized on a straight-line basis over periods up to 40
years. Deferred financing charges are amortized using the interest method over
the terms of the related debt agreements.
PREOPENING COSTS. Preopening costs, representing primarily direct salaries and
other operating costs incurred prior to the opening of new facilities, are
deferred as incurred and expensed upon the opening of the related facility (see
Note 10).
EARNINGS PER SHARE. Earnings per share is computed by dividing Net income by the
number of weighted average common shares outstanding during the year, including
common stock equivalents.
RECLASSIFICATIONS. Certain amounts for prior years have been reclassified to
conform with the presentation for 1995.
OTHER. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
4. STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
In addition to its common stock, Harrah's has the following classes of stock
authorized but unissued:
Preferred stock, $100 par value, 150,000 shares authorized
Special stock, 5,000,000 shares authorized -
Series B, $1.125 par value
On June 30, 1995, the PHC Spin-off was completed and the Company
distributed to its stockholders the stock of PHC as a dividend. To reflect this
distribution, the $139.6 million book value of the net assets of discontinued
operations as of the Spin-off date has been charged against the Company's
retained earnings. (See Notes 1 and 2.)
On April 29, 1994, Harrah's stockholders approved an amendment to the
Certificate of Incorporation which increased the number of authorized common
shares from 120 million to 360 million and reduced the par value per common
share from $1.50 to $0.10. As a result, amounts reported in the Consolidated
Statements of Stockholders' Equity for periods prior to this amendment have been
restated to reclassify amounts from common stock to capital surplus to
retroactively reflect the impact of the change in par value.
Under the terms of employee compensation programs previously approved by
the stockholders, Harrah's has reserved shares of its common stock for issuance
under the Restricted Stock and Stock Option Plans. (See Note 14 for a
description of the plans.) The following table summarizes the total number of
shares authorized for issuance under each of these plans and the remaining
unissued shares as of December 31, 1995:
Restricted Stock
Stock Plan Option Plan
---------- -----------
Total shares authorized for issuance
under the plans ................................ 5,300,000 10,350,000
Shares issued and options granted ................ (4,361,462) (6,702,126)
---------- -----------
Shares held in reserve for issuance
or grant under the plans
as of December 31, 1995 ........................ 938,538 3,647,874
========== ==========
Harrah's Board of Directors has authorized that one-third of a special
right be attached to each outstanding share of common stock. These rights
entitle the holders to purchase, under certain conditions, units consisting of
fractional shares of special stock - series B at a purchase price of $125 per
unit, subject to adjustment. The rights also, under certain conditions, entitle
the holders to purchase $250 worth of common stock for $125. These rights expire
on October 5, 1996, unless Harrah's decides to redeem them earlier at $0.05 per
right or upon the occurrence of certain other events.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise stated)
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
- --------------------------------------------------------------------------------
Deferred costs and other consisted of the following:
1995 1994
-------- --------
Excess of cost over net assets of businesses
acquired ........................................... $ 47,041 $ 48,880
Cash surrender value of life insurance
(Note 14) .......................................... 41,061 44,243
Deposits ............................................. 15,944 15,642
Deferred finance charges ............................. 14,153 12,265
Other ................................................ 48,338 55,319
-------- --------
$166,537 $176,349
======== ========
Accrued expenses consisted of the following:
1995 1994
-------- --------
Insurance claims and reserves ........................ $ 49,821 $ 49,448
Payroll and other compensation ....................... 46,251 41,937
Accrued interest payable ............................. 12,543 12,884
Deposits and customer funds .......................... 6,765 6,179
Taxes, including income taxes ........................ (2,411) (4,419)
Other accruals ....................................... 35,663 50,417
-------- --------
$148,632 $156,446
======== ========
6. LONG-TERM DEBT
- -------------------------------------------------------------------------------
Long-term debt consisted of the following:
1995 1994
--------- ---------
Secured Bank Facilities
Revolving Credit Facility, 6.06%-8.50%
at December 31, 1995, maturity 2000 .............. $ 346,500 $ 288,550
9% Notes, backed by letter of credit ............... -- 199,977
Unsecured Senior Subordinated Notes
8 3/4%, maturity 2000 .............................. 200,000 200,000
10 7/8%, maturity 2002 ............................. 200,000 200,000
Unsecured Notes Payable
8.38%-12.67%, maturities to 2001 ................... 8,489 27,862
Capitalized lease obligations, 4.9%-5.2%,
maturities to 1998 ............................... 754 --
Debt allocated to discontinued hotel
operations ......................................... -- (187,860)
--------- ---------
755,743 728,529
Current portion of long-term debt .................... (2,038) (1,036)
--------- ---------
$ 753,705 $ 727,493
========= =========
Harrah's outstanding corporate debt, comprised primarily of the Secured
Bank Facilities and Unsecured Senior Subordinated Notes, has been issued by its
wholly-owned subsidiary, Harrah's Operating Company, Inc. (HOC). Prior to the
PHC Spin-off, the Company's corporate debt was not specifically related to
either its casino entertainment or hotel segment. However, corporate debt
service requirements had been met using cash flows provided by both segments.
Therefore, in anticipation of the PHC Spin-off, HOC (formerly Embassy Suites,
Inc.) obtained a new $350 million bank facility (Hotel Facility), secured by the
stock of PHC's material subsidiaries. Immediately prior to the PHC Spin-off, HOC
drew approximately $218 million on the Hotel Facility, $215 million of which was
used to retire a portion of the Company's existing corporate debt. Upon
consummation of the PHC Spin-off, HOC was released from liability under the
Hotel Facility. Therefore, in anticipation of the PHC Spin-off, a portion of the
Company's corporate debt balance, unamortized deferred finance charges and
interest expense were allocated to discontinued hotel operations for periods
prior to the PHC Spin-off, based on the percentage of the Company's outstanding
corporate debt expected to be retired using proceeds from the Hotel Facility.
Net assets of discontinued hotel operations at December 31, 1994, included
allocations to discontinued hotel operations of corporate debt and unamortized
deferred finance charges of $187.9 million and $3.2 million, respectively,
together with debt specifically related to PHC of $3.3 million. Interest expense
of $9.5 million, $17.2 million and $17.0 million for 1995, 1994 and 1993,
respectively, was allocated to discontinued hotel operations.
As of December 31, 1995, annual principal requirements for the four years
subsequent to 1996 were: 1997, $1.8 million; 1998, $1.8 million; 1999, $1.3
million; and 2000, $548.0 million.
REVOLVING CREDIT FACILITY. In connection with the PHC Spin-off, Harrah's
negotiated changes to its reducing revolving and letter of credit facility which
became effective June 30, 1995. Among the modifications were an increase in
total capacity from $650 million to $750 million, an extension of the maturity
to July 31, 2000, reduced borrowing costs and modifications to certain financial
covenants. The amended credit facility consists of a five-year $600 million
reducing revolving and letter of credit facility and a separate $150 million
revolving credit facility which is renewable annually, at the lenders' option,
for a five-year period (collectively, the Facility). Reductions of the borrowing
capacity available under the $600 million facility are as follows: $50 million,
July 1998; $75 million, January 1999; $75 million, July 1999; $100 million,
January 2000; and $300 million, July 2000. Of the $750 million available under
the Facility, there is a sub-limit of $50 million for letters of credit. At
December 31, 1995, the Facility provided for
40
borrowings at a base rate of either Eurodollar plus 50 basis points or the prime
lending rate. The weighted-average annual fees on letters of credit and
commitment fees on the unutilized portion under the Facility, at December 31,
1995, were 0.63% and 0.14%, respectively.
The Facility is secured by the assets of Harrah's Nevada and New Jersey
casino properties, the stock of its principal subsidiary, HOC, and certain other
subsidiaries and certain casino entertainment trademarks. The Facility agreement
contains financial covenants requiring Harrah's to maintain a specific tangible
net worth and to meet other financial ratios. Its covenants limit Harrah's
ability to pay dividends and to repurchase its outstanding shares.
As of December 31, 1995, Harrah's borrowings under the Facility were $346.5
million and an additional $25.1 million was committed to back certain letters of
credit. After consideration of these borrowings, $378.4 million of the Facility
was available to Harrah's at December 31, 1995.
INTEREST RATE AGREEMENTS. To manage the relative mix of its debt between fixed
and variable rate instruments, Harrah's enters into interest rate swap
agreements to modify the interest characteristics of its outstanding debt
without an exchange of the underlying principal amount. At December 31, 1995 and
1994, Harrah's was a party to the following interest rate swap agreements
pursuant to which it pays a variable interest rate in exchange for receiving a
fixed interest rate. The average variable rate paid by Harrah's was 5.9% and
5.8% at December 31, 1995 and 1994, respectively, and the average fixed interest
rate received was 5.9% at both dates. The impact of these interest rate swap
agreements on the effective interest rates of the associated debt was as
follows:
Effective
Rate at Next Semi-
Swap December 31, Annual Rate
Rate ---------------- Adjustment
Associated Debt (LIBOR+) 1995 1994 Date Swap Maturity
- --------------- ------- ------ ------ ----------- -------------
10 7/8% Notes
$200 million 4.73% 10.74% 10.68% April 16 Oct 1997
8 3/4% Notes
$50 million 3.42% 9.23% 9.58% May 15 May 1998
$50 million 3.22% 9.10% 8.71% January 16 July 1998
In accordance with the terms of the interest rate swap agreements, the
effective interest rate on $50 million of the 8 3/4% Notes was adjusted on
January 16, 1996 to 8.72%.
During 1995, Harrah's entered into nine additional interest rate swap
agreements to effectively convert variable rate debt to a fixed rate. Two of
these swap agreements, with a combined notional amount of $100 million, were
transferred to PHC at the time of the PHC Spin-off. Pursuant to the terms of
these swaps, Harrah's receives variable payments tied to LIBOR in exchange for
its payments at a fixed interest rate.
The fixed rates to be paid by Harrah's and variable rates to be received by
Harrah's are summarized in the following table:
Swap Rate
Received
Swap Rate (Variable) at
Notional Amount Paid (Fixed) Dec. 31, 1995 Swap Maturity
- --------------- ------------ ------------- -------------
$50 million 7.910% 5.938% January 1998
$50 million 6.985% 5.813% March 2000
$50 million 6.951% 5.668% March 2000
$50 million 6.945% 5.668% March 2000
$50 million 6.651% 5.875% May 2000
$50 million 5.788% 5.813% June 2000
$50 million 5.785% 5.813% June 2000
In accordance with the terms of the above $50 million swap which matures in
January 1998, the variable interest rate was adjusted on January 26, 1996 to
5.500%. During fourth quarter 1995, the Company replaced two swap agreements it
had entered into earlier in the year with new agreements which have longer terms
and lower fixed interest rates. The replacement swaps were entered into at no
cost to the Company and will reduce the Company's future cash requirements for
interest payments. The effect on the current year's consolidated financial
statements was immaterial. The table above reflects the terms of the new swap
agreements. An interest rate collar on $140 million of Harrah's variable rate
bank debt expired in June 1995 and was not renewed.
The differences to be paid or received under the terms of the interest rate
swap agreements are accrued as interest rates change and recognized as an
adjustment to interest expense for the related debt. Changes in the variable
interest rates to be paid or received by Harrah's pursuant to the terms of its
interest rate agreements will have a corresponding effect on its future cash
flows. These agreements contain a credit risk that the counterparties may be
unable to meet the terms of the agreements. Harrah's minimizes that risk by
evaluating the creditworthiness of its counterparties, which are limited to
major banks and financial institutions, and does not anticipate nonperformance
by the counterparties.
SHELF REGISTRATION. To provide for additional financing flexibility, Harrah's,
together with its wholly-owned subsidiary HOC, has registered up to $200 million
of Harrah's common stock or HOC preferred stock or debt securities pursuant to a
shelf registration declared effective by the Securities and Exchange Commission
on October 11, 1995. The terms and conditions of the HOC preferred stock or debt
securities, which will be unconditionally guaranteed by Harrah's, will be
determined by market conditions at the time of issuance. The shelf registration
is available until October 1997.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise stated)
FAIR MARKET VALUE. Based on the borrowing rates currently available for debt
with similar terms and maturities and market quotes of its publicly traded debt,
the fair value of Harrah's long-term debt, including the interest rate
agreements and excluding debt allocated to the discontinued hotel operations, at
December 31, 1995 and 1994, was as follows:
December 31,
-----------------------------------------
1995 1994
------------------- -------------------
Carrying Market Carrying Market
Value Value Value Value
-------- ------ -------- ------
(in millions)
Outstanding debt ................... $ (755.7) $ (782.7) $ (728.5) $ (723.0)
Interest rate agreements
(used for hedging purposes)
Interest rate swaps ............ (0.3) (12.2) -- (17.9)
Interest rate collar ........... -- -- (0.3) (0.8)
The amounts reflected as the "carrying value" of the interest rate
agreements represent the accrual balance as of the date reported. The "market
value" of the interest rate agreements represents the estimated amount,
considering the prevailing interest rates, that Harrah's would pay to terminate
the agreements as of the date reported.
7. LEASES
- --------------------------------------------------------------------------------
Harrah's leases both real estate and equipment used in its operations through
operating and capital leases. Leases which transfer substantially all benefits
and risks incidental to the ownership of property are capitalized. In addition
to minimum rentals, some leases provide for contingent rents based on
percentages of revenue. Real estate operating leases range from five to 10 years
with various automatic extensions totalling up to 30 years. The average
remaining term for other operating leases, which generally contain renewal
options, extends approximately five years. The costs of leased assets are
amortized over periods not in excess of the lease terms.
Rental expense associated with operating leases included in the
Consolidated Statements of Income was as follows:
1995 1994 1993
-------- -------- --------
Noncancelable
Minimum ................... $ 17,097 $ 9,919 $ 9,052
Contingent ................ -- -- 122
Sublease .................. (53) (11) (4)
Other ....................... 2,001 2,195 5,297
-------- -------- --------
$ 19,045 $ 12,103 $ 14,467
======== ======== ========
The future minimum rental commitments as of December 31, 1995, were as
follows:
Noncancelable
Operating
Leases
-------------
1996 .................................................. $ 14,028
1997 .................................................. 10,196
1998 .................................................. 8,672
1999 .................................................. 8,312
2000 .................................................. 8,139
Thereafter ............................................ 86,185
--------
Total minimum lease payments........................... $135,532
========
Minimum rental commitments exclude contingent rentals, which may be paid
under certain leases based on a percentage of revenues in excess of specified
amounts.
8. PROJECT WRITE-DOWNS
- --------------------------------------------------------------------------------
Included in Harrah's 1995 operating results are one-time charges related to
write-offs of various projects as follows:
Harrah's Jazz-related
Write-off of investment in and advances to
affiliate ................................................... $54,349
Acquisition of partner loan ................................... 16,000
Estimated legal and severance costs ........................... 5,100
-------
75,449
Write-off of investment in and advances to
nonconsolidated affiliate ..................................... 9,638
Write-off of abandoned design and related costs ................. 8,261
-------
$93,348
=======
9. INCOME TAXES
- --------------------------------------------------------------------------------
Harrah's federal and state income tax provision (benefit) allocable to
identified income statement and balance sheet line items was as follows:
1995 1994 1993
-------- -------- --------
Income before income taxes and
minority interests .................... $ 60,677 $ 75,391 $ 59,394
Discontinued operations
Earnings from hotel operations ........ 15,434 26,798 13,869
Spin-off transaction costs,
including $3,956 of deferred
tax benefit ......................... (5,134) -- --
Extraordinary loss ...................... -- -- (3,415)
Cumulative effect of change in
accounting policy ..................... -- (4,317) --
Stockholders' equity
Compensation expense for tax
purposes in excess of amounts
recognized for financial
reporting purposes .................. (6,616) (3,252) (10,467)
Unrealized gain on marketable
equity securities ................... 6,746 -- --
Pro rata share of proceeds from
equity investee's initial
public offering ....................... -- -- 2,662
-------- -------- --------
$ 71,107 $ 94,620 $ 62,043
======== ======== ========
42
Income tax expense attributable to Income before income taxes and minority
interests consisted of the following:
1995 1994 1993
--------- --------- ---------
Current
Federal ............................... $ 60,850 $ 103,264 $ 44,557
State ................................. 9,987 4,992 4,424
Deferred ................................ (10,160) (32,865) 10,413
--------- --------- ---------
$ 60,677 $ 75,391 $ 59,394
========= ========= =========
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:
1995 1994 1993
---- ---- ----
Statutory tax rate ...................... 35.0% 35.0% 35.0%
Increases (decreases) in tax resulting
from:
State taxes, net of federal tax
benefit ............................. 4.3 3.2 2.4
Provision for settlement of
litigation and related costs
(Note 13) ........................... -- 13.3 0.1
Minority interests in partnership
earnings ............................ (2.8) (3.5) (1.2)
Adjustment of valuation of
deferred tax assets and
liabilities due to change in
tax rate ............................ -- -- 0.7
Employee wage related credit .......... (0.9) (1.0) (0.6)
Goodwill amortization ................. 0.4 0.5 0.4
Other ................................. 4.0 6.6 5.9
---- ---- ----
40.0% 54.1% 42.7%
==== ==== ====
The components of Harrah's net deferred tax balance included in the
Consolidated Balance Sheets were as follows:
1995 1994
-------- --------
Deferred tax assets
Compensation ..................................... $ 21,067 $ 19,478
Investments in nonconsolidated affiliates ........ 15,978 4,967
Self-insurance reserves .......................... 9,231 10,346
Preopening expenses .............................. 8,994 8,136
Bad debt reserve ................................. 4,163 4,051
Debt consent costs ............................... 3,956 --
Deferred income .................................. 1,474 908
Other ............................................ 10,595 2,346
-------- --------
75,458 50,232
-------- --------
Deferred tax liabilities
Property ......................................... (45,334) (38,391)
Other ............................................ (4,167) --
-------- --------
(49,501) (38,391)
-------- --------
Net deferred tax asset ......................... $ 25,957 $ 11,841
======== ========
10. CHANGE IN ACCOUNTING POLICY
- --------------------------------------------------------------------------------
Effective January 1, 1994, Harrah's changed its accounting policy for its
consolidated casinos relating to preopening costs to capitalize such costs as
incurred prior to opening and to expense them upon opening of each project.
Previously, the Company had capitalized preopening costs and amortized them to
expense over 36 months from the date of opening. As a result of this change,
operating results for the year ended December 31, 1994, reflect the cumulative
charge against earnings, net of income taxes, of $7.9 million, or $0.08 per
share, to write-off the unamortized preopening costs balances related to
projects opened in prior years.
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:
1995 1994 1993
-------- -------- --------
Long-term accounts
Deferred costs and other assets ....... $ (4,746) $ 1,413 $ (2,534)
Deferred credits and other
long-term liabilities ............... (13,398) (5,860) 3,129
-------- -------- --------
Net change in long-term
accounts ........................ $(18,144) $ (4,447) $ 595
======== ======== ========
Working capital accounts
Receivables ........................... $(27,616) $(15,256) $ (5,185)
Supplies .............................. (565) 369 (1,319)
Prepayments and other ................. (94) (1,868) (885)
Other current assets .................. -- (798) (7,545)
Accounts payable ...................... (10,279) 22,552 7,988
Accrued expenses ...................... 1,978 25,884 35,664
-------- -------- --------
Net change in working capital
accounts ........................ $(36,576) $ 30,883 $ 28,718
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR INTEREST AND TAXES. The following table
reconciles Harrah's Interest expense, net of interest capitalized, per the
Consolidated Statements of Income, to cash paid for interest:
1995 1994 1993
-------- -------- --------
Interest expense, net of amount
capitalized (Note 3) .................. $ 73,890 $ 76,363 $ 73,080
Adjustments to reconcile to cash
paid for interest:
Net change in accruals .............. 10,739 (4,923) (10,708)
Amortization of deferred finance
charges ........................... (3,626) (2,844) (3,261)
Net amortization of discounts
and premiums ...................... (53) (176) (172)
-------- -------- --------
Cash paid for interest, net of
amount capitalized .................... $ 80,950 $ 68,420 $ 58,939
======== ======== ========
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise stated)
Cash payments, net of refunds, for income taxes, including amounts paid on
behalf of the discontinued hotel operations, amounted to $85,001, $116,093 and
$49,771 for 1995, 1994 and 1993, respectively (see Note 9).
12. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
CONTRACTUAL COMMITMENTS. Harrah's is pursuing additional casino development
opportunities that may require, individually and in the aggregate, significant
commitments of capital, up-front payments to third parties, guaranties by
Harrah's of third party debt and development completion guaranties. As of
December 31, 1995, Harrah's has guaranteed third party loans and leases of $48
million, which are secured by certain assets, and has other contractual
commitments, primarily construction-related, of $180 million, excluding amounts
previously recorded.
In addition, as part of a transaction whereby Harrah's effectively secured
an option to a site for a potential casino, Harrah's has guaranteed a third
party's $24.7 million variable rate bank loan. Harrah's also has entered into an
interest rate swap agreement in which Harrah's receives a fixed interest rate of
7% from the third party and pays the variable interest rate of the subject debt,
which is currently LIBOR plus 1.0%. The interest rate swap is marked to market
by Harrah's with the adjustment recorded in interest expense. The market value
of the swap was a positive $0.3 million and a negative $1.1 million at December
31, 1995 and 1994, respectively. The interest rate swap agreement expires
December 1, 1996 and is also subject to earlier termination upon the occurrence
of certain events. The underlying guaranty contains an element of risk that the
borrower may be unable to retire the loan when it matures in December 1996. If
that occurs, the Company could become responsible for repayment of at least a
portion of the obligation. Harrah's has reduced this exposure by obtaining a
security interest in certain assets of the third party.
See Note 15 for discussion of the completion guaranties issued by Harrah's
related to development of the New Orleans' casino.
GUARANTEE OF INSURANCE CONTRACT. Harrah's has guaranteed the value of a
guaranteed investment contract with an insurance company held by Harrah's
defined contribution savings plan. Harrah's has also agreed to provide
non-interest-bearing loans to the plan to fund, on an interim basis, withdrawals
from this contract by retired or terminated employees. Harrah's maximum exposure
on this guarantee as of December 31, 1995, was $6.7 million.
SELF-INSURANCE. Harrah's is 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.
SEVERANCE AGREEMENTS. At December 31, 1995, Harrah's had severance agreements
with 16 of its senior executives, which provide for payments to the executives
in the event of their termination after a change in control, as defined, of
Harrah's. These agreements provide, among other things, for a compensation
payment equal to 2.99 times the average annual compensation paid to the
executive for the five preceding calendar years, as well as for accelerated
payment or accelerated vesting of any compensation or awards payable to the
executive under any of Harrah's incentive plans. The estimated amount, computed
as of December 31, 1995, that would have been payable under the agreements to
these executives based on earnings and stock options aggregated approximately
$28.0 million.
TAX SHARING AGREEMENTS. In connection with the PHC Spin-off, Harrah's entered
into a Tax Sharing Agreement with PHC wherein each Company is obligated for
those taxes associated with their respective businesses. Additionally, Harrah's
is obligated for all taxes of the Company for periods prior to the PHC Spin-off
date which are not specifically related to PHC operations and/or PHC hotel
locations. Harrah's obligations under this agreement are not expected to have a
material adverse effect on its consolidated financial position or results of
operations.
13. LITIGATION
- --------------------------------------------------------------------------------
Harrah's is involved in various inquiries, administrative proceedings and
litigation relating to contracts, sales of property and other matters arising in
the normal course of business. While any proceeding or litigation has an element
of uncertainty, management believes that the final outcome of these matters will
not have a material adverse effect upon Harrah's consolidated financial position
or its results of operations.
In addition to the matters described above, Harrah's and certain of its
subsidiaries have been named as defendants in a number of lawsuits arising from
the suspension of development of a land-based casino, and the closing of the
temporary gaming facility, in New Orleans, Louisiana, by Harrah's Jazz Company,
a partnership in which the Company owns an approximate 47% interest and which
has filed for protection under Chapter 11 of the U.S. Bankruptcy Code (see Note
15). The ultimate outcomes of these lawsuits cannot be predicted at this time,
and no provisions for the claims are included in the accompanying consolidated
financial statements. The Company intends to defend these actions vigorously.
44
In March 1995, the Company entered into a settlement agreement (the
Settlement) with Bass PLC (Bass) of all claims related to the Merger Agreement
and Tax Sharing Agreement arising from the 1990 Spin-off of Promus and
acquisition of the Holiday Inn business by Bass. As a result of the Settlement,
a charge of $49.2 million was recorded in 1994 to accrue for the cost of the
Settlement, related legal fees and other associated expenses. In addition to
these costs, legal fees and other expenses incurred related to the Company's
defense of this litigation were included in the Provision for settlement of
litigation and related costs in the Consolidated Statements of Income. Such
costs amounted to $4.3 million and $0.4 million in 1994 and 1993, respectively.
All amounts due under the Settlement were paid in 1995.
14. EMPLOYEE BENEFIT PLANS
- --------------------------------------------------------------------------------
SAVINGS AND RETIREMENT PLAN. Harrah's maintains a defined contribution savings
and retirement plan, which, among other things, allows pre-tax 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 of their eligible earnings,
the first six percent of which Harrah's will match fully. Amounts contributed to
the plan are invested, at the participant's option, in a Harrah's company stock
fund, a diversified stock fund, an aggressive stock fund, a long-term bond fund,
an income fund and a treasury fund. Participants become vested in Harrah's
matching contribution over seven years of credited service. Harrah's
contribution expense for this plan was $12.9 million, $11.4 million and $10.2
million in 1995, 1994 and 1993, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN. Harrah's has an employee stock ownership plan,
which is a noncontributory stock bonus plan covering employees of Harrah's and
its affiliates. Harrah's contributions to the plan are discretionary and are
made only if approved by the Human Resources Committee of Harrah's Board of
Directors. Contributions were approved for each of the plan years 1995, 1994 and
1993. The expense recognized in each year as a result of these contributions was
not material.
DEFERRED COMPENSATION PLANS. Harrah's maintains deferred compensation plans
under which certain employees and members of its Board of Directors may defer a
portion of their compensation. Amounts deposited into these plans are unsecured
liabilities of Harrah's and earn interest at rates approved by the Human
Resources Committee of the Board of Directors. The total liability included in
Deferred credits and other liabilities for these plans at December 31, 1995 and
1994 was $38.7 million and $35.9 million, respectively. In connection with the
administration of one of these plans, Harrah's has purchased company-owned life
insurance policies insuring the lives of certain directors, officers and key
employees.
RESTRICTED STOCK AND STOCK OPTION PLANS. As a component of Harrah's retention
and long-term compensation packages, key employees may be granted shares of
common stock under the Harrah's Restricted Stock Plan (RSP) and/or options to
purchase shares of Harrah's common stock under the Harrah's Stock Option Plan
(SOP). Shares granted under the RSP are restricted as to transfer and subject to
forfeiture during a specified period or periods prior to vesting. The shares
generally vest over a period of four years. No awards of RSP shares may be made
under the current plan after November 1999. The deferred compensation related to
the RSP shares is generally amortized to expense over the vesting period. This
expense totaled $1.2 million, $4.4 million and $4.8 million in 1995, 1994 and
1993, respectively.
Harrah's SOP allows an option holder to purchase Harrah's common stock over
specified periods of time, generally ten years, at a fixed price equal to the
market value at the date of grant. No options may be granted under the SOP after
November 1999. In connection with the PHC Spin-off, the option price and number
of shares of all outstanding stock options were adjusted as of June 30, 1995, to
preserve their approximate value to the employee immediately before the PHC
Spin-off. A summary of stock option transactions during 1995 follows:
Number of
Common Shares
Option Price ----------------------
Range Options Available
(Per Share) Outstanding for Grant
------------- ----------- ---------
Balance - January 1, 1995 ............ $ 3.94-$50.00 2,268,294 2,491,965
Granted .............................. $31.69-$41.75 1,473,290 (1,473,290)
Exercised ............................ $ 3.94-$37.33 (111,807) --
Canceled ............................. $ 3.94-$50.00 (843,700) 843,700
--------- ---------
Balance - June 30, 1995 .............. $ 3.94-$50.00 2,786,077 1,862,375
Adjustment to reflect PHC
Spin-off ........................... N/A 1,136,463 (1,136,463)
--------- ---------
Adjusted balance -
June 30, 1995 ...................... $ 2.80-$35.59 3,922,540 725,912
Additional shares authorized ......... N/A -- 4,500,000
Granted .............................. $24.75-$26.81 1,836,563 (1,836,563)
Exercised ............................ $ 2.80-$26.57 (81,752) --
Canceled ............................. $ 2.80-$35.59 (258,525) 258,525
--------- ---------
Balance - December 31, 1995 .......... $ 2.80-$35.59 5,418,826 3,647,874
========= =========
Exercisable at
December 31, 1995 .................. $ 2.80-$35.59 725,961
=========
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise stated)
MULTI-EMPLOYER PENSION PLAN. Approximately 2,500 of Harrah's employees are
covered by union sponsored, collectively bargained multi-employer pension plans.
Harrah's contributed and charged to expense $1.9 million, $1.9 million and $2.0
million in 1995, 1994 and 1993, respectively, for such plans. The plans'
administrators do not provide sufficient information to enable Harrah's to
determine its share, if any, of unfunded vested benefits.
15. NONCONSOLIDATED AFFILIATES
- --------------------------------------------------------------------------------
HARRAH'S JAZZ COMPANY. A Harrah's subsidiary owns an approximate 47% interest in
a partnership named Harrah's Jazz Company (Harrah's Jazz). On November 22, 1995,
Harrah's Jazz and its wholly-owned subsidiary, Harrah's Jazz Finance Corp.,
filed for reorganization under Chapter 11 of the Bankruptcy Code. Prior to the
filing, Harrah's Jazz was operating a temporary casino in the New Orleans,
Louisiana Municipal Auditorium (the Temporary Casino) and constructing a new
permanent casino facility on the site of the former Rivergate Convention Center
in downtown New Orleans (the Permanent Casino). Harrah's Jazz ceased operation
of the Temporary Casino and construction of the Permanent Casino on November 22,
1995 prior to the bankruptcy filings.
On November 19, 1995, representatives of the Harrah's Jazz bank syndicate
informed Harrah's Jazz that the bank syndicate would not disburse funds to
Harrah's Jazz under the terms of Harrah's Jazz's $175 millon bank credit
facility (the Jazz Credit Facility). Faced with an absence of funding, on
November 21, 1995, Harrah's Jazz decided to cease Temporary Casino operations
and construction on the Permanent Casino, as well as to file for bankruptcy
protection. The Jazz Credit Facility was accelerated and terminated by the
bank lenders on November 21, 1995. Thereafter, on November 22, 1995, the
bankruptcy filings were made.
In connection with the closing in November 1994 of the 14.25% First
Mortgage Notes due 2001 of Harrah's Jazz (the Public Debt) and the Jazz Credit
Facility, the Company delivered completion guaranties to the trustee under the
Public Debt (under which the City of New Orleans (the City) was an express
third-party beneficiary), the bank lenders under the Jazz Credit Facility and
the Louisiana Economic Development and Gaming Corporation (the state agency
regulating Harrah's Jazz (LEDGC)). Each completion guaranty was subject to
certain conditions, exceptions and qualifications. The Company believes that
the failure of Harrah's Jazz to obtain the funds under the Jazz Credit Facility
and the acceleration of the loan by the bank syndicate terminated the Company's
obligations under the completion guaranties.
The Company made total capital contributions to the project of
approximately $90 million and has outstanding advances to the project of
approximately $25 million. In addition, in December 1995, the Company acquired
from a commercial bank a $16 million loan to a Harrah's Jazz partner in
satisfaction of the Company's obligations under a preexisting agreement with
the bank. The Company has written off these investments and other related costs
in the project.
The Company currently owns approximately 47% of the general partnership
interests of Harrah's Jazz. Harrah's Jazz is not consolidated into the Company's
financial statements for accounting purposes.
Harrah's Jazz has until March 21, 1996, which date may be extended by the
Bankruptcy Court, the exclusive right under the bankruptcy laws to submit a
plan of reorganization. Discussions concerning the reorganization plan have
occurred among certain interested parties, but a number of issues remain to be
resolved and there can be no assurance that such discussions will lead to an
agreement among all necessary parties.
The Company has offered to invest an additional $75 million in the project
and deliver a new completion guaranty if a reorganization plan approved by the
Company is consummated. The Company has also offered to invest, prior to plan
consummation, up to $10 million in the form of debtor-in-possession financing
(such financing would be repaid or converted into equity (and count toward the
$75 million investment referred to above) upon consummation of a reorganization
plan approved by the Company) if the Company and other interested parties reach
an agreement in principle as to the key elements of the plan. There can be no
assurance that any agreements will be reached or a reorganization plan
consummated.
On March 4, 1996, Harrah's Jazz entered into a preliminary agreement with
the City which provides for, among other things, an immediate $4.3 milllion
cash payment by Harrah's Jazz to the City, of which $2.5 million is being funded
by the Company as debtor-in-possession financing and the balance is being
funded from Harrah's Jazz's assets. Although the $2.5 million loan is an
administrative priority claim in the bankruptcy, there can be no assurance
that the loan will be repaid. In exchange for these agreements by Harrah's
Jazz, the City agreed to waive any requirements to reopen the Temporary Casino
and negotiate in good faith numerous specified issues relating to the lease
of the Permanent Casino site.
46
OTHER. Summarized balance sheet and income statement information of
nonconsolidated gaming affiliates, including Harrah's Jazz, which Harrah's
accounted for using the equity method, as of December 31, 1995 and 1994, and for
the three years ended December 31, 1995, were as follows:
1995 1994 1993
--------- --------- ---------
Combined Summarized Balance
Sheet Information
Current assets .................... $ 82,091 $ 454,295
Land, buildings and equipment,
net ............................. 292,080 69,608
Other assets ...................... 270,146 141,488
--------- ---------
Total assets .................... 644,317 665,391
--------- ---------
Current liabilities ............... 106,999 23,894
Long-term debt .................... 465,386 510,000
--------- ---------
Total liabilities ............... 572,385 533,894
--------- ---------
Net assets .................... $ 71,932 $ 131,497
========= =========
Combined Summarized Statements
of Operations
Revenues .......................... $ 118,798 $ 291 $ 19,678
========= ========= =========
Operating income (loss) ........... $ (30,296) $ (23,891) $ 1,802
========= ========= =========
Net income (loss) ................. $(139,200) $ (29,201) $ 1,105
========= ========= =========
Condensed financial information relating to a restaurant subsidiary has not
been presented since its operating results and financial position are not
material to Harrah's.
Harrah's share of nonconsolidated affiliates' net income (losses),
including Harrah's Jazz operations through November 21, 1995, is reflected in
the accompanying Consolidated Statements of Income as follows:
1995 1994 1993
-------- -------- ------
Pre-interest operating income (loss)
(included in Revenue-other) .............. $(28,719) $(10,535) $89
======== ======== ===
Harrah's share of nonconsolidated affiliates' combined interest expense is
reflected as Interest expense from nonconsolidated affiliates in the
Consolidated Statements of Income.
Harrah's investments in and advances to nonconsolidated affiliates are
reflected in the accompanying Consolidated Balance Sheets as follows:
1995 1994
-------- --------
Harrah's Jazz (at equity) ...................... $ -- $ 74,385
Other nonconsolidated affiliates
At equity .................................... 22,374 18,320
At cost ...................................... 49,565 24,227
-------- --------
$ 71,939 $116,932
======== ========
During 1995, Harrah's sold a portion of its investment in a New Zealand
casino property, reducing its ownership percentage from 20.0% to 12.5% and
resulting in a pre-tax gain of approximately $11.7 million. As a result of this
sale, this investment is now recorded using the cost method.
Due to continued appreciation in the market value of the stock of an equity
investee, during 1995 the Company adjusted the carrying value of the investment
to include the unrealized gain in accordance with the provisions of Statement of
Finanial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The amount of such unrealized gain in prior years
was not material. A corresponding increase was recorded in the combination of
Harrah's stockholders' equity and deferred income tax accounts.
During 1993, an equity investee of Harrah's completed an initial public
offering of its common stock. As required by equity accounting rules, Harrah's
increased the carrying value of its investment by an amount equal to its pro
rata share of the proceeds of the investee's offering, approximately $6.4
million. A corresponding increase was recorded in the combination of Harrah's
capital surplus and deferred income tax liability accounts. As a result of this
offering, Harrah's ownership interest fell below 20% and, accordingly, the
investment is no longer accounted for under the equity method.
16. SUMMARIZED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
HOC is a wholly-owned subsidiary and the principal asset of Harrah's. Summarized
financial information of HOC as of December 31, 1995 and 1994 and for each of
the three years ended December 31, 1995, prepared on the same basis as Harrah's,
was as follows:
1995 1994 1993
---------- ---------- ----------
Current assets .................... $ 185,950 $ 171,445
Land, buildings, riverboats
and equipment, net .............. 1,204,890 1,129,841
Net assets of discontinued
hotel operations ................ -- 143,008
Other assets ...................... 242,773 293,015
---------- ----------
1,633,613 1,737,309
---------- ----------
Current liabilities ............... 184,454 280,295
Long-term debt .................... 753,705 727,492
Other liabilities ................. 73,216 74,043
Minority interests ................ 23,908 18,267
---------- ----------
1,035,283 1,100,097
---------- ----------
Net assets .................... $ 598,330 $ 637,212
========== ==========
Revenues .......................... $1,549,198 $1,337,110 $1,018,776
========== ========== ==========
Operating income .................. $ 226,169 $ 267,742 $ 207,931
========== ========== ==========
Income from continuing
operations ...................... $ 76,370 $ 49,044 $ 74,867
========== ========== ==========
Net income ........................ $ 76,406 $ 77,430 $ 85,167
========== ========== ==========
The agreements governing the terms of Harrah's debt contain certain
covenants which, among other things, place limitations on HOC's ability to pay
dividends and make other restricted payments, as defined, to Harrah's. The
amount of HOC's restricted net assets, as defined, computed in accordance with
the most restrictive of these covenants regarding restricted payments, was
approximately $591.4 million at December 31, 1995.
47
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
Harrah's 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 generally accepted accounting principles. In
preparing its financial statements, Harrah's is required to include amounts
based on estimates and judgments which it believes are reasonable under the
circumstances.
Harrah's 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 financial
statements through its Audit Committee, which is composed solely of directors
who are not Harrah's officers or employees. The Audit Committee meets from time
to time with the independent public accountants, management and the internal
auditors. Harrah'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/ Michael D. Rose /s/ Michael N. Regan
Michael D. Rose Michael N. Regan
Chairman of the Board 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) as of
December 31, 1995 and 1994, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years ended December
31, 1995. These financial statements are the responsibility of Harrah's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Harrah's as of December 31,
1995 and 1994 and the results of its operations and its cash flows for each of
the three years ended December 31, 1995, in conformity with generally accepted
accounting principles.
As explained in Note 10 to the consolidated financial statements, effective
January 1, 1994, Harrah's changed its method of accounting for preopening costs.
/s/ Arthur Andersen LLP
Memphis, Tennessee,
March 5, 1996.
48
HARRAH'S ENTERTAINMENT, INC.
QUARTERLY RESULTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- ----------
1995
- ----
Revenues .............................. $356,481 $389,337 $425,824 $378,434 $1,550,076
Operating income (loss) ............... 72,421 83,760 103,771 (30,031)(1) 229,921(1)
Income (loss) from continuing
operations .......................... 28,696 35,351 51,310 (36,547)(1) 78,810(1)
Income from discontinued hotel
operations .......................... 9,604 11,626 -- -- 21,230
Net income (loss) ..................... 23,102 40,981 51,310 (36,547)(1) 78,846(1)
Earnings (loss) per share(3)
Continuing operations ............... 0.28 0.35 0.50 (0.35)(1) 0.76(1)
Discontinued operations ............. 0.09 0.11 -- -- 0.21
Net income (loss) ................... 0.22 0.40 0.50 (0.35)(1) 0.76(1)
1994
- ----
Revenues .............................. $290,232 $338,805 $366,811 $343,558 $1,339,406
Operating income ...................... 62,038 77,227 75,851 54,071 269,187
Income (loss) from continuing
operations .......................... 22,085 29,669 30,591 (32,361)(2) 49,984(2)
Income from discontinued hotel
operations .......................... 6,131 10,207 13,592 6,389 36,319
Net income (loss) ..................... 20,284 39,876 44,183 (25,972)(2) 78,371(2)
Earnings (loss) per share(3)
Continuing operations ............... 0.22 0.29 0.30 (0.31)(2) 0.49(2)
Discontinued operations ............. 0.06 0.10 0.13 0.06 0.35
Net income (loss) ................... 0.20 0.39 0.43 (0.25)(2) 0.76(2)
<FN>
(1) Fourth quarter 1995 includes $93.3 million in pre-tax charges for project
write-downs (see Note 8).
(2) 1994 includes a $53.4 million provision for settlement of litigation and
related costs, of which $50.9 million was recorded in fourth quarter 1994 (see
Note 13).
(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 while
the full year is based on the annual weighted average common and common
equivalent shares outstanding.
49
APPENDIX TO MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ("MDA")
Page 25 of the MD&A contains a graph entitled "Gaming Revenue by Type" showing
the following information:
Slots Tables Other
----- ------ -----
1993 68.6% 28.4% 3.0%
1994 69.4% 28.1% 2.5%
1995 71.8% 25.9% 2.3%
Page 27 of the MD&A contains a graph entitled "Income Before Income Taxes and
Minority Interests" (before preopening costs, project write-downs and
provision for settlement of litigation) showing the following information
(in millions of dollars):
1993 1994 1995
----- ----- -----
First Quarter $12.8 $44.4 $52.4
Second Quarter 34.2 63.3 61.0
Third Quarter 57.6 67.8 89.8
Fourth Quarter 34.9 32.6 42.2
Page 29 of the MD&A contains a graph entitled "Gaming Volume by State"
(for owned and managed properties) showing the following information
(in millions of dollars):
1993 1994 1995
----- ----- -----
Nevada $6,826 $6,709 $6,728
New Jersey 2,991 3,225 3,619
Illinois 658 1,953 2,711
Mississippi 164 1,508 1,468
Colorado 171 341 381
Louisiana - 818 2,878
Missouri - 172 1,760
Arizona - - 1,100
Washington - - 4
Page 31 of the MD&A contains a graph entitled "Scheduled Debt Maturities"
showing the following (in millions of dollars):
Due
Due in Due in Due in Due in Due in After
Year 1 Year 2 Years 3 Years 4 Years 5 Years 5 Years
- ---- ------ ------- ------- ------- ------- -------
1994 $1.0 $1.6 $1.6 $302.7 $19.4 $402.2
1995 2.0 1.8 1.8 1.3 548.0 200.8