Financial and Statistical Highlights
(In millions, except stock data and statistical data)
(See Notes 1 and 10)
COMPOUND
GROWTH
1997(a) 1996(b) 1995(c) 1994(d) 1993 RATE
--------- --------- --------- --------- --------- -----------
Operating Data
Continuing operations
Revenues..................................... $ 1,619.2 $ 1,586.0 $ 1,578.8 $ 1,349.9 $ 1,020.6 12.2%
Income from operations....................... 213.5 236.9 209.4 267.2 210.0 0.4%
Income before income taxes and minority
interest................................... 183.6 172.1 151.6 139.3 139.0 7.2%
Income from continuing operations............ 107.5 98.9 78.8 50.0 74.9 9.5%
Net income (e)................................. 99.4 98.9 78.8 78.4 86.3 3.6%
Adjusted EBITDA (f)............................ 377.6 408.0 387.1 354.1 274.5 8.3%
Common Stock Data
Earnings per share-basic
Continuing operations........................ $ 1.07 $ 0.96 $ 0.77 $ 0.49 $ 0.74 9.7%
Discontinued hotel operations................ - - - 0.36 0.17 N/M
Net income (e)............................... 0.99 0.96 0.77 0.77 0.86 3.6%
Earnings per share-diluted
Net income (e)............................... 0.98 0.95 0.76 0.76 0.84 3.9%
Market price of common stock at December 31
(e).......................................... 18.88 19.88 24.25 30.88 45.75 (19.9)%
Common shares outstanding at year-end (in
thousands)................................... 101,036 102,970 102,674 102,403 102,258 (0.3)%
Financial Position
Total assets (e)............................... $ 2,005.5 $ 1,974.1 $ 1,636.7 $ 1,738.0 $ 1,528.0 7.0%
Total assets of continuing operations.......... 2,005.5 1,974.1 1,636.7 1,595.0 1,347.5 10.5%
Current portion of long-term debt.............. 1.8 1.8 2.0 1.0 1.0 15.8%
Long-term debt................................. 924.4 889.5 753.7 727.5 665.2 8.6%
Stockholders' equity (e)....................... 735.5 719.7 585.5 623.4 536.0 8.2%
- ------------------------
(a) 1997 includes $13.8 million in pretax charges for write-downs and reserves
(see Note 8) and a $37.4 million gain on the sale of equity in New Zealand
subsidiary.
(b) 1996 includes $52.2 million in pretax charges for write-downs and reserves
(see Note 8).
(c) 1995 includes $93.3 million in pretax charges for write-downs (see Note 8).
(d) 1994 includes a $53.4 million provision for settlement of all claims and
related costs related to the Merger Agreement and Tax Sharing Agreement
arising from the 1990 spin-off of the Company and acquisition of the Holiday
Inn business by Bass PLC.
(e) Amounts for periods prior to the June 30, 1995, dividend of PHC common stock
to the Company's stockholders reflect the impact of the financial position
and results of operations for the discontinued hotel business in those
periods.
(f) Adjusted EBITDA (earnings before interest, taxes, depreciation and
amortization) consists of Income from continuing operations before
write-downs and reserves, project opening costs, venture restructuring
costs, gains on sales of New Zealand subsidiary equity interests and
provision for settlement of litigation and related costs, plus interest
expense, taxes, depreciation and amortization. EBITDA is a supplemental
financial measurement used by management, as well as by industry
4
COMPOUND
GROWTH
1997(a) 1996(b) 1995(c) 1994(d) 1993 RATE
--------- --------- --------- --------- --------- -----------
Cash Flows
Provided by (used in)
Operating activities......................... $ 255.1 $ 285.7 $ 213.7 $ 227.3 $ 198.2 6.5%
Investing activities......................... (221.0) (383.7) (209.2) (331.4) (225.8) (0.5)%
Financing activities......................... (23.3) 107.2 47.7 69.8 (7.0) 35.1%
Capital expenditures........................... 290.5 390.0 231.8 301.8 234.5 5.5%
Financial Percentages and Ratios
Return on revenues-continuing.................. 6.6% 6.2% 5.0% 3.7% 7.3%
Return on average invested capital (g)......... 8.6% 8.8% 9.8% 7.9% 11.2%
Return on average equity (g)................... 14.9% 14.5% 12.7% 14.2% 19.3%
Ratio of earnings to fixed charges............. 2.8 2.8 1.3 2.0 2.6
Current ratio.................................. 1.0 1.0 0.9 0.6 0.7
Ratio of book equity to total debt (h)......... 0.8 0.8 0.8 0.7 0.6
Ratio of market equity to total debt (h)....... 2.1 2.3 3.3 3.4 5.6
Ratio of Adjusted EBITDA to interest paid...... 4.6 5.2 5.2 4.6 3.8
Ratio of debt to Adjusted EBITDA............... 2.5 2.2 2.0 2.1 2.4
Selected Statistical Data as of Year-end (i)
Casino square footage.......................... 774,500 701,200 547,200 521,400 436,400
Number of slot machines........................ 19,835 19,011 15,335 14,808 12,504
Number of table games.......................... 934 941 801 789 641
Number of hotel rooms (j)...................... 8,197 6,478 5,736 5,367 5,348
Gaming win (in millions)....................... $ 1,609.3 $ 1,572.0 $ 1,498.8 $ 1,145.3 $ 812.1
- ------------------------
analysts, to evaluate Harrah's operations. However, EBITDA should not be
construed as an alternative to Income from operations (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 after write-downs
and reserves, project opening costs, venture restructuring costs and
provision for settlement of litigation and related costs for the years
presented was as follows: 1997, $374.7 million; 1996, $335.3 million;
1995, $305.1 million; 1994, $285.4 million and 1993, $274.1 million.
(g) Ratio computed based on Income before extraordinary items and cumulative
effect of change in accounting policy.
(h) For purposes of computing these ratios, total debt includes debt allocated
to discontinued hotel operations for periods prior to the PHC Spin-off.
(i) Includes both owned and managed properties.
(j) Excludes rooms operated by the Company's discontinued hotel operations for
periods prior to the PHC Spin-off.
5
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Harrah's Entertainment, Inc. (referred to in this discussion, together with
its subsidiaries where appropriate, as "Harrah's" or the "Company") is the most
recognized brand name in the casino entertainment industry. Contributing to this
recognition are the Company's longevity, 1997 being its 60th year of operations,
and its unparalleled geographic distribution of casino offerings, now totaling
16 facilities in ten states.
By most financial measures, 1997 was a disappointing year for the Company.
The continued intensity of industry competition in many markets, the impact of
construction disruptions in certain markets as key properties were enhanced, and
weather-related business interruptions in other markets all contributed to these
financial results. However, the events of 1997 also included numerous strategic
actions which are expected to positively impact the Company's operating results
in future periods.
The common threads of these strategic actions are a more narrow focus on
serving target customers and a better position to build on the foundation of a
recognition program, which is already in place. In September 1997, Harrah's
introduced Total Gold (U.S. Patent Pending), the casino industry's first
national player rewards program. Total Gold allows customers to earn points for
slot play and redeem those points for cash, merchandise, food, lodging or show
tickets at any Harrah's casino across the country. The ability to redeem points
across all properties makes this program uniquely attractive to the multi-market
player.
Underpinning the Total Gold program is Harrah's powerful and proprietary
database management system, which was also introduced in 1997. The Winner's
Information Network, or WINet (U.S. Patent Pending), allows Harrah's to build a
national database of its customers. WINet enables the Company to more
efficiently communicate with its customers and to better target promotions and
offers to the appropriate customer segment.
To further enhance the Company's distribution and access to its target
customers, in December 1997 Harrah's announced an agreement to acquire Showboat,
Inc. (See Capital Spending and Development-Showboat Acquisition.)
OVERALL RESULTS OF OPERATIONS
Percentage
Increase/ (Decrease)
(In millions, except ------------------------
earnings per share) 1997 1996 1995 97 Vs 96 96 Vs 95
- ---------------------------------------------------------- --------- --------- --------- ----------- -----------
Revenues.................................................. $ 1,619.2 $ 1,586.0 $ 1,578.8 2.1 % 0.5 %
Operating profit.......................................... 258.7 284.7 289.0 (9.1)% (1.5)%
Income from operations.................................... 213.5 236.9 209.4 (9.9)% 13.1 %
Income from continuing operations......................... 107.5 98.9 78.8 8.7 % 25.5 %
Net income................................................ 99.4 98.9 78.8 0.5 % 25.5 %
Earnings per share-basic
Continuing operations................................... 1.07 0.96 0.77 11.5 % 24.7 %
Net income.............................................. 0.99 0.96 0.77 3.1 % 24.7 %
Operating margin.......................................... 13.2% 14.9% 13.3% (1.7)pts 1.6 pts
Given the various special charges and credits included in each of the
years presented, comparisons of the financial data contained in the table
above are difficult. The table below reflects pro forma comparisons of the
Company's operating results, adjusted to exclude write-downs and reserves,
project opening costs, equity in income (losses) of nonconsolidated
affiliates, venture restructuring costs, gains on sales of the Company's
ownership interests in a New Zealand subsidiary and discontinued operations.
For the amounts and a discussion of these items, please see the Other Factors
Affecting Net Income section.
Percentage
Increase/(Decrease)
(In millions, except ----------------------
Earnings per share) 1997 1996 1995 97 Vs 96 96 Vs 95
- ----------------------------------------------------------- --------- --------- --------- --------- -----------
Revenues................................................... $ 1,619.2 $ 1,586.0 $ 1,578.8 2.1 % 0.5 %
Operating profit........................................... 290.1 342.8 382.8 (15.4)% (10.4)%
Income from operations..................................... 263.0 308.4 352.4 (14.7)% (12.5)%
Income from continuing operations.......................... 114.9 141.4 153.0 (18.7)% (7.6)%
Earnings per share-basic
Continuing operations.................................... 1.14 1.38 1.49 (17.4)% (7.4)%
Operating margin........................................... 16.2% 19.4% 22.3% (3.2)pts (2.9)pts
The trends depicted by these pro forma results reflect the increasingly
competitive operating environment faced by Harrah's over this three year period
in many of the markets in which it operates and the further impact on 1997
results of construction and weather-related disruptions.
25
DIVISION OPERATING RESULTS AND
DEVELOPMENT PLANS
Riverboat Division
Percentage
Increase/(Decrease)
--------------------
(In millions) 1997 1996 1995 97 VS 96 96 VS 95
- --------------------------------------------------------------- --------- --------- --------- --------- ---------
Casino revenues................................................ $614.8 $596.0 $557.2 3.2 % 7.0 %
Total revenues................................................. 656.2 629.1 593.5 4.3 % 6.0 %
Operating profit............................................... 124.2 141.2 172.2 (12.0)% (18.0)%
Operating margin............................................... 18.9% 22.4% 29.0% (3.5)pts (6.6)pts
Riverboat Division year-over-year revenue increases resulted from new and
expanded casino facilities. 1997 included the March opening of Harrah's St.
Louis-Riverport. During 1996, a larger Tunica facility opened in April, and
both Shreveport and North Kansas City increased gaming capacity. However,
Division operating profit and margin declined over this three year period due to
new and increased competition in all riverboat markets.
Illinois. Revenues, operating profit and margin at Harrah's Joliet in
Illinois declined in 1997 compared to the prior year due to the addition of
riverboat casinos in neighboring Indiana beginning in June 1996, continuing
the trend noted in the 1996 versus 1995 comparison. Although full year 1997
gaming volume at Harrah's Joliet declined 15.5% from the prior year, gaming
volume for the last half of 1997 was down only 0.3% from the last half of
1996. Operating profit and margin at Joliet were further impacted by higher
marketing and promotional expenses that resulted from the increased
competition. Though management believes that the property's operating results
have stabilized, revenues and operating profit at Harrah's Joliet are not
expected to return to the levels achieved prior to the entrance of the
Indiana riverboats into the regional market.
The Company began construction during fourth quarter 1997 on certain
elements of a $29.5 million expansion at the Joliet property. Construction of a
major element of the expansion project, a 204-suite hotel, was delayed for
further study after the passage in December 1997 of a gaming tax increase by the
Illinois State Legislature. A decision regarding this project will be made after
an analysis has been completed of the expected impact of this tax increase on
the property's operations.
The Company believes that its overall position in the Chicago market will
be enhanced with the addition of Showboat's East Chicago, Indiana, property,
located to the southeast of downtown, which will complement Harrah's Joliet's
position on the southwest side of the city. (See Capital Spending and
Development-Showboat Acquisition.)
Louisiana. Although Harrah's Shreveport's 1997 revenues declined 1.9% as
compared to 1996, operating profit increased 2.5%, despite the entrance in
third quarter 1996 of a new competitor into the market. This performance
follows the approximately 12% increases in revenues and operating profit by
Harrah's Shreveport in 1996 versus 1995.
The Company plans to commence construction by second quarter 1998 on
expanded parking facilities at Harrah's Shreveport and is evaluating a
possible further expansion of the facilities to include a hotel as well as
additional restaurant and meeting facilities. Any expansion project is
subject to the receipt of necessary regulatory approvals.
Mississippi. During second quarter 1997, Harrah's closed its original
Tunica property in order to focus its efforts in the market on the newer
Tunica property, which opened in April 1996. Combined Tunica revenues
increased 5.9% in 1997 over 1996, while operating income increased $6.0
million despite construction disruptions at the newer Tunica property during
fourth quarter 1997 as a result of a project to further enhance the
property's offerings to meet the needs of the Company's target customers. For
1996, the combined Tunica properties had posted an operating loss, despite a
51.2% increase in revenues over 1995 due to the opening of the second Tunica
facility.
The Company is continuing to explore its options for the original Tunica
property. A reserve for the impairment of the property was recorded in fourth
quarter 1996 and the Company believes such reserve remains adequate. However,
the Company will continue to periodically review the adequacy of this
reserve. During second quarter 1997, the Company acquired its minority
partner's interest in both Tunica properties. The cost of this acquisition
was not material to Harrah's.
Harrah's Vicksburg reported 1997 revenues and operating profit which were
virtually even with the prior year, despite continued intense competition in
this market. As a result of this competition, 1996 revenues and operating profit
declined 3.6% and 19.9%, respectively, as compared to 1995.
Missouri. Harrah's North Kansas City achieved higher revenues in 1997,
due primarily to the Company's addition of a second riverboat casino in May
1996. However, operating profit for 1997 declined 24.9% from 1996, which
follows a 17.5% decline in 1996 versus 1995, due to increased marketing and
promotional costs as a result of additional competition, including a major
new property that opened in January 1997. Also contributing to the decline
for 1997 and 1996 was the decision during first quarter 1996 to discontinue
the property's admission charge.
The Company's newest riverboat casino, Harrah's St. Louis-Riverport,
reported an operating loss of approximately $1.4 million for 1997 as the Company
slowly builds its market position. The St. Louis-Riverport casino entertainment
complex
26
in Maryland Heights, Missouri, a suburb of St. Louis, opened on March 11,
1997. The facility includes four riverboat casinos, two of which are owned
and operated by Harrah's, and shoreside facilities jointly-owned with another
casino company. Harrah's pro rata share of the operating losses of the
shoreside facilities joint venture is included in Equity in income (losses)
of nonconsolidated affiliates, which is reported separately in the
Consolidated Statements of Income (see Other Factors Affecting Net Income).
Atlantic City
Percentage
Increase/(Decrease)
--------------------
(In millions) 1997 1996 1995 97 Vs 96 96 Vs 95
- ---------------------------------------------------------------- --------- --------- --------- --------- ---------
Casino revenues................................................. $314.9 $310.1 $314.7 1.5 % (1.5)%
Total revenues.................................................. 349.5 338.6 341.5 3.2 % (0.8)%
Operating profit................................................ 73.3 75.0 85.6 (2.3)% (12.4)%
Operating margin................................................ 21.0% 22.2% 25.1% (1.2)pts (2.9)pts
Although Harrah's Atlantic City achieved record revenues in 1997,
operating profit and margin decreased from the prior year as continued
competition in the market resulted in higher than historical complimentary
and promotional expenses. These results continue the trend experienced in
1996, when high complimentary and marketing expenses resulted in
disproportionate declines in operating profit and margin, as compared to
revenues, versus 1995.
A new 416-room hotel tower was opened in late second quarter 1997. The tower
was the final component of an expansion and enhancement project that also added
13,500 square feet of casino space and 500 slot machines in June 1996 and a new
marine-themed buffet restaurant in fourth quarter 1996. No decisions regarding a
possible second phase of the Atlantic City expansion have been made. Such
decisions are dependent, in part, upon substantive progress on development of
new casino hotel projects in the Marina area of Atlantic City by other
companies.
The Atlantic City Showboat, located on the Boardwalk, will provide a strong
additional brand that offers the Company's target customers a second destination
in Atlantic City. The Showboat property's location on the Boardwalk and the
existing Harrah's Atlantic City location in the Marina district well position
the Company in the two strategically critical growth locations in Atlantic City.
(See Capital Spending and Development-Showboat Acquisition.)
Southern Nevada Division
Percentage
Increase/(Decrease)
----------------------
(In millions) 1997 1996 1995 97 Vs 96 96 Vs 95
- ---------------------------------------------------------------- --------- --------- --------- --------- -----------
Casino revenues................................................. $191.0 $190.8 $198.3 0.1 % (3.8)%
Total revenues.................................................. 288.2 289.8 297.2 (0.6)% (2.5)%
Operating profit................................................ 41.9 68.0 72.8 (38.4)% (6.6)%
Operating margin................................................ 14.5% 23.5% 24.5% (9.0)pts (1.0)pt
1997 results in Southern Nevada were impacted by construction disruptions at
Harrah's Las Vegas, where a $200 million expansion and renovation project was
completed in the fourth quarter. The construction activity, which began in
mid-1996, often impeded access to the Las Vegas property, and operating profit
and margin were further impacted due to the difficulty in adjusting certain
operating costs proportionately with the revenue fluctuations, as well as by
higher operating costs associated with the construction disruptions. With
completion of the renovations, Harrah's Las Vegas now offers 86,700 square feet
of casino space and 2,677 hotel rooms. The property's fourth quarter 1997
revenues were at a record high, but were offset by high operating costs
associated with completing construction and reopening the renovated areas.
Harrah's Laughlin continues to be affected by competition from neighboring
Arizona and California Indian casinos and from high profile new Las Vegas area
casino developments. 1997 gaming volume declined 4.9% from the 1996 level, which
follows a 5.1% decline in gaming volume in 1996 as compared to 1995. These
volume declines resulted in lower revenues, operating profit and margin for the
Laughlin property.
No definitive plans have been announced related to Harrah's previously
announced interest in the construction or acquisition of an additional Las Vegas
property, and there is no assurance the Company will construct or acquire such a
property. The Showboat Las Vegas property is a non-strategic asset and will not
fulfill the Company's objectives for this additional property.
Northern Nevada Division
Percentage
Increase/(Decrease)
----------------------
(In millions) 1997 1996 1995 97 vs 96 96 vs 95
- ---------------------------------------------------------------- --------- --------- --------- --------- -----------
Casino revenues................................................. $217.3 $226.5 $243.6 (4.1)% (7.0)%
Total revenues.................................................. 287.8 299.2 315.6 (3.8)% (5.2)%
Operating profit................................................ 44.5 59.8 66.4 (25.6)% (9.9)%
Operating margin................................................ 15.5% 20.0% 21.0% (4.5)pts (1.0)pt
In Northern Nevada, operating results for 1997 were significantly impacted
by weather conditions occurring during first quarter 1997, when flooding in the
region twice closed the primary access road to Lake Tahoe for a combined total
of forty-five days, and closed Harrah's Reno for one day. Additionally, during
September and October, 1997, Route 50, the preferred and most direct route from
California to Lake Tahoe, was closed for repairs on weekdays.
1996 results of the Division declined from 1995 levels due to a 6% decrease
in gaming volume. Although all three properties in the Division experienced
declines, the largest decrease occurred in Reno, where a major new competitor
opened in July 1995.
27
Managed Casinos-Indian Lands
Revenues and operating profit contributions resulting from Harrah's
management of three casinos on Indian lands increased in 1997, due primarily to
higher management fees from Harrah's Phoenix Ak-Chin casino and the addition of
fees from Harrah's Cherokee casino, which opened in November 1997 in Cherokee,
North Carolina.
On January 13, 1998, a fourth Harrah's managed casino on Indian lands opened
near Topeka, Kansas. The casino facility is owned by the Prairie Band of
Potawatomi Indians and includes approximately 26,000 square feet of casino space
and a 100-room hotel.
Harrah's has also 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. If the
necessary approvals for these projects are received, Harrah's would likely
guarantee the related bank financing for the projects, which could be
significant.
The agreements under which Harrah's manages casinos on Indian lands contain
provisions required by law which provide that a minimum monthly payment be made
to the tribe. That obligation has priority over scheduled repayments of
borrowings for development costs. In the event that insufficient cash flow is
generated by the operations to fund this payment, Harrah's must pay the
shortfall to the tribe. Such advances, if any, would be repaid to Harrah's in
future periods in which operations generate cash flow in excess of the required
minimum payment. These commitments will terminate upon the occurrence of certain
defined events, including termination of the management contract. The aggregate
monthly commitment pursuant to the contracts for the four Indian-owned
facilities now open, which extend for periods of up to 60 months from December
31, 1997, is $1.2 million.
See Debt and Liquidity section for further discussion of Harrah's guarantees
of debt related to Indian projects.
Other Gaming Operations
The Company manages for a fee the Sky City casino complex in Auckland, New
Zealand. During second quarter 1997, Harrah's announced that Sky City Limited,
owner of the Sky City facility, will buy-out Harrah's management contract.
Harrah's will continue to manage the facility under its fee agreement until June
1998, when it will receive a termination fee computed in accordance with the
terms of the contract. During third quarter 1997, Harrah's sold its remaining
12.5% equity interest in Sky City Limited (see Other Factors Affecting Net
Income).
During 1997, the Company received $2.3 million in nonrecurring income from
Interactive Entertainment Limited ("IEL") in consideration for the termination
of Harrah's management contract with that entity. The termination of the
management contract occurred in conjunction with IEL's reorganization and
transformation into a publicly-traded company.
On March 31, 1997, Harrah's discontinued its management of two limited
stakes casinos in Colorado. Harrah's also completed the sale of its ownership
interest in these non-strategic assets during 1997. These actions did not have a
material impact on Harrah's 1997 financial statements.
OTHER FACTORS AFFECTING NET INCOME
Percentage
Increase/(Decrease)
----------------------
(In millions) 1997 1996 1995 97 Vs 96 96 Vs 95
- -------------------------------------------------------------------- --------- --------- --------- ----------- ---------
Development costs................................................... $10.5 $12.0 $17.4 (12.5)% (31.0)%
Write-downs and reserves............................................ 13.8 52.2 93.3 N/M N/M
Project opening costs............................................... 17.6 5.9 0.5 N/M N/M
Equity in (income) losses of nonconsolidated affiliates............. 11.1 (1.2) 49.2 N/M N/M
Corporate expense................................................... 27.2 34.3 30.3 (20.7)% 13.2 %
Venture restructuring costs......................................... 6.9 14.6 - (52.7)% N/M
Interest expense, net............................................... 79.1 70.0 73.9 13.0% (5.3)%
Gains on sales of equity interests in New Zealand subsidiary........ (37.4) - (11.8) N/M N/M
Other income........................................................ (11.8) (5.2) (4.3) 126.9% 20.9 %
Effective tax rate.................................................. 37.4% 39.1% 40.0% (1.7)pts (0.9)pts
Minority interests.................................................. $ 7.4 $ 5.9 $ 12.1 25.4% (51.2)%
Discontinued operations
Hotel earnings, net of tax........................................ - - (21.2) - N/M
Spin-off transaction costs, net of tax............................ - - 21.2 - N/M
Extraordinary loss, net of tax...................................... 8.1 - - N/M -
Development costs have decreased over the years presented due to the
decrease in new casino development opportunities. Write-downs and reserves for
1997 were primarily related to a $13 million reserve recorded during third
quarter 1997 against debtor-in-possession financing provided to the casino
project in New Orleans in which Harrah's is a minority partner. 1996 write-downs
and reserves included write-downs for the impairment of certain long-lived
assets, primarily the Company's original Tunica,
28
Mississippi, casino property, as well as the accrual of reserves for certain
contingent obligations. Write-downs and reserves recorded in 1995 related 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.
Project opening costs for 1997 include costs incurred in connection with the
first quarter 1997 opening of Harrah's St. Louis-Riverport casino property,
costs related to expansions at Harrah's Las Vegas and Harrah's Tunica and the
costs incurred in connection with an initiative to develop and implement the
strategies and employee training programs designed to better focus the Company
on serving its targeted customers. 1996 project opening costs related to the
second quarter opening of the newer Tunica property and an expansion at Harrah's
North Kansas City. 1995 project opening costs related to the opening of the
Hampton Inn hotel tower in Reno.
Equity in (income) losses of nonconsolidated affiliates for 1997 consists
primarily of Harrah's pro rata share of the losses incurred by the joint venture
portion of the St. Louis development, including its $1.9 million share of the
joint venture's preopening costs, and Harrah's share of losses incurred by the
reorganized IEL entity, which is 35.5% owned by the Company. These losses are
partially offset by Harrah's share of income from a restaurant affiliate. 1996
included Harrah's pro rata share of income from the restaurant affiliate. 1995
included primarily Harrah's share of losses from the New Orleans joint venture.
In prior years, Harrah's reported its share of joint venture pre-interest
operating results in Revenues-other, and its share of joint venture interest
expense as Interest expense, net, from nonconsolidated affiliates. Prior year
amounts have been restated to conform to the current year's presentation.
Corporate expense decreased in 1997 versus 1996 due primarily to cost
savings efforts. Corporate expense increased in 1996 over 1995 as a result of
higher information technology, legal and corporate relations costs. Venture
restructuring costs for 1997 and 1996 represent Harrah's costs, including
legal fees, associated with the on-going development of a reorganization plan
for the New Orleans casino (see Harrah's Jazz Company). Interest expense
increased in 1997 over 1996, primarily as a result of higher debt levels
incurred to fund a stock repurchase program (see Equity Transactions) and
expansion projects. Other income increased in 1997 due to higher interest
income earned by the Company on the cash surrender value of certain life
insurance policies, the inclusion in 1997 of dividend income from Harrah's
New Zealand subsidiary and gains on sales of nonoperating property.
During third quarter 1997, Harrah's sold its remaining equity interest in
Sky City Limited, and recorded a pretax gain on the sale of $37.4 million. In
1995, Harrah's sold a portion of its interest in Sky City and recognized a
pretax gain on the sale of $11.8 million.
The Company sold its ownership interest in Station Square, an entertainment,
business and retail center in Pittsburgh, Pennsylvania, to its partner for cash
during fourth quarter 1997. Under the terms of the sale agreement, Harrah's
retains certain rights to pursue development of a casino entertainment facility
at the Station Square site if casino gaming is legalized in the jurisdiction. No
gain or loss was recognized by the Company as a result of this transaction.
The effective tax rates for all years are higher than the federal statutory
rate primarily due to state income taxes. Minority interests reflect joint
venture partners' shares of income at joint venture riverboat casinos.
Discontinued operations includes the operating results of the Company's
hotel operations prior to its June 30, 1995, spin-off date. 1995's results also
include the $21.2 million charge, net of taxes, for the expenses to complete the
spin-off. (See Note 10 to the accompanying Consolidated Financial Statements.)
The extraordinary loss reported in second quarter 1997 is due to the early
extinguishment of debt and includes the premium paid to holders of the debt
retired and the write-off of related unamortized deferred finance charges. (See
Debt and Liquidity-Early Extinguishment of Debt.)
Harrah's has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share," which defines the computation
of, and requires the presentation of, "Basic" and "Diluted" earnings per share.
Prior year earnings per share amounts have been restated to conform with the
provisions of SFAS No. 128.
HARRAH'S JAZZ COMPANY
Efforts to reorganize Harrah's Jazz Company ("Harrah's Jazz"), which
filed a petition for relief under Chapter 11 of the Bankruptcy Code on
November 22, 1995, are continuing. If the current reorganization plan, which
has been confirmed by the Bankruptcy Court, is consummated, the Company will
make an additional $75 million equity investment in the project (less any
debtor-in-possession financing previously provided), guarantee the project's
$100 million annual payment to the State of Louisiana Gaming Board, guarantee
up to $154 million of a bank credit facility of up to $224 million, guarantee
timely completion and opening of the casino and make an additional $10
million subordinated loan to the project to finance the casino's completion.
Harrah's will receive various fees for providing the various
29
guarantees and will earn a fee for managing the casino after it opens. Final
consummation of the plan is subject to numerous approvals, including approval
from the Company's Board of Directors, the Louisiana State Legislature, the
City of New Orleans City Council and others.
For additional information regarding the status of the efforts to reorganize
Harrah's Jazz, see Note 15 to the accompanying Consolidated Financial
Statements.
CAPITAL SPENDING AND DEVELOPMENT
Showboat Acquisition
During December 1997, Harrah's announced an agreement to buy Showboat,
Inc. ("Showboat"), creating the world's largest gaming company. Under the
terms of the agreement, Harrah's will acquire Showboat for $30.75 per share
in an all-cash transaction valued at $519 million, net of options proceeds,
and assume $635 million in Showboat debt. The Company intends to finance the
cash portion of the Showboat acquisition using proceeds from an expanded bank
facility of the Company, which is currently being negotiated. Showboat owns
and operates casinos in Atlantic City, New Jersey, and Las Vegas, Nevada. It
manages and is the largest single shareholder of the Star City casino in
Sydney, New South Wales, Australia, and beneficially owns 55% of the Showboat
Mardi Gras Casino in East Chicago, Indiana. The acquisition will strengthen
the Company's presence in the Atlantic City and Chicago gaming markets.
Although not a strategic asset in the context of the Company's target
customer, Star City is a world class casino entertainment facility that can
benefit from the Company's expertise and systems, and can be a major source
of stockholder value creation. The Las Vegas Showboat is a non-strategic
asset to Harrah's and the Company is currently evaluating its fit.
The transaction is expected to be completed in second quarter 1998, subject
to various conditions including regulatory approvals, Showboat stockholder
approval and other third party approvals.
Year 2000
During 1997, Harrah's evaluated its various systems to determine whether or
not those systems were year 2000 compliant. Based upon this review, the Company
has identified those systems which are not compliant and has implemented a plan
to update those systems. The cost to update the affected systems is not expected
to be material.
Summary
In addition to the Showboat acquisition and the specific development and
expansion projects discussed in the Division Operating Results and Development
Plans section, Harrah's performs on-going refurbishment and maintenance at its
casino entertainment facilities in order to maintain the Company's quality
standards. Harrah's also continues to pursue development and acquisition
opportunities for additional casino entertainment facilities that meet its
strategic and return on investment criteria. Prior to the receipt of necessary
regulatory approvals, the costs of pursuing development projects are expensed as
incurred. Construction-related costs incurred after the receipt of necessary
approvals are capitalized and depreciated over the estimated useful life of the
resulting asset. Project opening costs incurred during the construction period
are deferred and expensed at the respective property's opening.
The Company's planned development projects, if they go forward, will
require, individually and in the aggregate, significant capital commitments and,
if completed, may result in significant additional revenues. The commitment of
capital, the timing of completion and the commencement of operations of casino
entertainment development projects are contingent upon, among other things,
negotiation of final agreements and receipt of approvals from the appropriate
political and regulatory bodies. Cash needed to finance projects currently under
development as well as additional projects being pursued by Harrah's are
expected to be made available from operating cash flows, the Bank Facility (see
Debt and Liquidity--Bank Facility), joint venture partners, specific project
financing, guarantees by Harrah's of third party debt and, if necessary,
additional Harrah's debt and/or equity offerings. Harrah's capital spending for
1997 totaled approximately $290.5 million. Estimated total capital expenditures
for 1998 are expected to be $180 million to $200 million, excluding the planned
purchase of Showboat, the possible purchase or construction of an additional Las
Vegas property and the possible second phase of Harrah's Atlantic City
expansion.
DEBT AND LIQUIDITY
Early extinguishment of Debt
On May 27, 1997, Harrah's principal operating subsidiary, Harrah's
Operating Company, Inc. ("HOC"), redeemed its $200 million 10 7/8% Senior
Subordinated Notes due 2002 (the "Notes") at a call price of 104.833%, plus
accrued and unpaid interest through the redemption date. The Company retired
the Notes using proceeds from its revolving credit facility. An extraordinary
charge, net of tax, of approximately $8.1 million was recorded during second
quarter 1997 in conjunction with this early extinguishment of debt.
30
In connection with the early extinguishment of the Notes, the Company
terminated certain interest rate swap agreements which had been associated with
the debt. The gain realized upon the termination of these swap agreements was
not material.
Bank Facility
As of December 31, 1997, $720.5 million in borrowings, including the funds
drawn to retire the Notes, were outstanding under the Company's $1.1 billion
reducing revolving and letter of credit facility (the "Bank Facility"), with an
additional $28.4 million committed to back letters of credit. After
consideration of these borrowings, $351.1 million of additional borrowing
capacity was available to the Company as of December 31, 1997. Pursuant to the
terms of the Bank Facility, the available capacity is scheduled to be reduced by
$50 million in July 1998.
The Company is currently negotiating certain amendments to the Bank Facility
in connection with its planned acquisition of Showboat.
Interest Rate Agreements
To manage the relative mix of its debt between fixed and variable rate
instruments, Harrah's has entered into interest rate swap agreements to modify
the interest characteristics of its outstanding debt without an exchange of the
underlying principal amount. The differences to be paid or received by the
Company under the terms of its 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 swap 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.
For more information regarding the Company's interest rate swap agreements
as of December 31, 1997, please see Note 6 to the accompanying Consolidated
Financial Statements.
Guarantees of Third Party Debt
As part of a transaction whereby Harrah's has retained an option to a site
for a potential casino, Harrah's guaranteed a third party's $22.9 million
variable rate bank loan which matures on February 28, 1998. Harrah's also agreed
to fund the monthly interest payments to the lender on behalf of the third
party, and is to be repaid from the proceeds from the sale of certain assets of
the third party. Discussions with the third party regarding a possible
restructuring of the loan and/or the guarantee are currently underway. The
guaranty contains an element of risk that, should the borrower be unable to
perform, 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.
As described in the Division Operating Results and Development
Plans-Managed Casinos-Indian Lands section, in connection with its
management contracts, Harrah's may guarantee all or part of the debt incurred
by Indian tribes to fund development of casinos on the Indian lands. For all
existing guarantees of Indian debt, Harrah's has obtained a first lien on
certain personal property (tangible and intangible) of the casino enterprise.
There can be no assurance, however, the value of such property would satisfy
Harrah's obligations in the event these guarantees were enforced. 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. The aggregate outstanding balance of such debt as of
December 31, 1997, was $111.1 million.
EQUITY TRANSACTIONS
Pursuant to a plan approved by Harrah's Board of Directors, which expired on
December 31, 1997, the Company purchased 2,993,700 shares of its common shares
at an aggregate cost of approximately $54.0 million. The repurchased shares are
held in treasury.
EFFECTS OF CURRENT ECONOMIC AND
POLITICAL CONDITIONS
Competitive Pressures
As compared to the early 1990s, the number of new markets opening for
development in recent years has been much more limited, and existing markets
have become much more competitive. The focus of many casino operators has
shifted to investing in existing markets, in an effort both to attract new
customers and to gain a greater market share of existing customers. As companies
have completed these expansion projects, supply has grown at a faster pace than
demand in some markets and competition has increased significantly. Furthermore,
several operators, including Harrah's, have announced plans for additional
developments or expansions in some markets. The impact that these projects will
have on Harrah's operations, if they are completed, cannot be determined at this
time.
31
Harrah's properties in the long-established gaming markets of Nevada and New
Jersey have generally reacted less significantly to the changing competitive
conditions, as the amount of supply change within these markets has represented
a smaller percentage change than that experienced in some riverboat markets. In
Las Vegas, several major developments have opened within the past few years and
numerous new developments and property expansions are underway. Historically,
the Las Vegas market has grown sufficiently to absorb these additions to its
supply, but there can be no assurance that such growth will continue. In the
Atlantic City market, additional casino space and hotel rooms have opened within
the past year and several major developments are proposed. This activity has
intensified competition during the last year, increasing promotional costs and
reducing margins.
In riverboat markets, the recent additions to supply have had a more
noticeable impact, due to the fact that competition was limited in the early
stages of many of these markets. In Joliet, the opening in late second quarter
1996 of Indiana riverboats more than doubled the Chicago area capacity and has
resulted in a significant decline in Harrah's gaming volume from 1996 levels. In
Tunica, a major new property opened in June 1996 and several existing
properties, including Harrah's, added hotel rooms and other amenities and more
are planned. In response to competitive pressures in this market and in order to
focus its efforts on Harrah's newer Tunica casino, Harrah's closed its original
Tunica property in May 1997 and continues to evaluate its options for the
property. In October 1996, a fourth casino entered the Shreveport market, and in
January 1998, a competitor completed a major expansion of an existing property.
Thus far, these Shreveport developments have not significantly impacted Harrah's
operating results. In January 1997, a major new development opened in the Kansas
City market. Harrah's North Kansas City's operating profit declined 24.9% in
1997 versus the prior year as a result of the increasing competition in that
market.
Over the past several years, there has also been a significant increase in
the number of casinos on Indian lands, made possible by the Indian Gaming
Regulatory Act of 1988. Harrah's manages four such facilities. The future growth
potential from Indian casinos is uncertain, however.
Although the short-term effect of these competitive developments on the
Company has been negative, Harrah's is not able to determine the long-term
impact, whether favorable or unfavorable, that these trends and events will have
on its current or future markets. Management believes that the geographic
diversity of Harrah's operations, its multi-market customer base and the
Company's continuing efforts to establish Harrah's as a premier brand name have
well-positioned Harrah's to face the challenges present within the industry.
Harrah's has introduced WINet, a sophisticated nationwide customer database, and
its Total Gold Card, a nationwide frequent-player card, both of which it
believes provide competitive advantages, particularly with players who visit
more than one market.
Industry Consolidation
As evidenced by a number of recent public announcements by casino
entertainment companies of plans to acquire or be acquired by other companies,
including Harrah's December 1997 announcement of its plans to acquire Showboat,
consolidation in the gaming industry is now underway. The Company believes it is
well-positioned to pursue additional strategic acquisitions to further enhance
its distribution, strengthen its access to target customers and leverage its
technological and centralized services infrastructure.
Political Uncertainties
The casino entertainment industry is subject to political and regulatory
uncertainty. In 1996, the U.S. government formed a federal commission to study
gambling in the United States, including the casino gaming industry. At this
time, the role of the commission and the ultimate impact that it will have on
the industry is uncertain. From time to time, individual jurisdictions have also
considered legislation which could adversely impact Harrah's operations, and the
likelihood or outcome of similar legislation in the future is difficult to
predict.
The casino entertainment industry represents a significant source of tax
revenues to the various jurisdictions in which casinos operate. From time to
time, various state and federal legislators and officials have proposed changes
in tax laws (such as the recent passage of a gaming tax increase by the Illinois
State Legislature) or in the administration of such laws, which would affect the
industry. It is not possible to determine with certainty the scope or likelihood
of possible future changes in tax laws or in the administration of such laws. If
adopted, such changes could have a material adverse effect on Harrah's financial
results.
32
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 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 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
$729.7 million at December 31, 1997. Harrah's principal asset is the stock of
HOC, a wholly-owned subsidiary which 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.
RECENTLY ISSUED ACCOUNTING
STANDARDS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for the reporting
and display of comprehensive income and its components in a company's financial
statements. It requires that a company classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately in the balance sheet. SFAS No.
130 is effective for years beginning after December 15, 1997.
The FASB has also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is also effective for years beginning
after December 15, 1997, and establishes standards by which a company will
report information about its reportable operating segments in both its annual
and interim financial statements. The Company will adopt these new standards in
1998. However, such adoption will not impact the Company's results of operations
or financial position.
PRIVATE SECURITIES LITIGATION
REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. Certain information included in Harrah's
Annual Report on Form 10-K and other materials filed or to be filed by the
Company with the Securities and Exchange Commission ("SEC") (as well as
information included in oral statements or other written statements made or to
be made by the Company) contains statements that are forward looking. These
include statements relating to the following activities, among others: (A)
operations and expansions of existing properties, including future performance,
anticipated scope and opening dates of expansions; (B) planned development of
casinos that would be owned or managed by the Company and the pursuit of
strategic acquisitions; (C) the proposed plan of reorganization and its various
facets for New Orleans; (D) planned capital expenditures for 1998 and beyond;
(E) the possible acquisition or construction of an additional property in Las
Vegas; (F) the impact of the WINet and Total Gold Card Programs; and (G)
completion of the acquisition of Showboat and any plans or future impact with
respect to the Showboat acquisition. These activities involve important factors
that could cause actual results to differ materially from those expressed in any
forward looking statements made by or on behalf of the Company. These include,
but are not limited to, the following factors as well as other factors described
from time to time in the Company's reports filed with the SEC: construction
factors, including zoning issues, environmental restrictions, soil and water
conditions, weather and other hazards, site access matters and building permit
issues; access to available and feasible financing; regulatory, licensing and
other governmental approvals, third party consents and approvals, and relations
with partners, owners and other third parties; conditions of credit markets and
other business and economic conditions; litigation, judicial actions and
political uncertainties, including gaming legislative action and taxation; and
the effects of competition including locations of competitors and operating and
marketing competition. Any forward looking statements are made pursuant to the
Private Securities Litigation Reform Act of 1995 and, as such, speak only as of
the date made.
33
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
----------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents.......................................................... $ 116,443 $ 105,594
Receivables, less allowance for doubtful accounts of $11,462 and $14,064........... 43,767 41,203
Deferred income taxes (Note 9)..................................................... 17,436 25,551
Prepayments and other.............................................................. 21,653 18,401
Inventories........................................................................ 13,011 10,838
---------- ----------
Total current assets.............................................................. 212,310 201,587
---------- ----------
Land, buildings, riverboats and equipment
Land, and land improvements........................................................ 218,703 232,721
Buildings, riverboats and improvements............................................. 1,334,279 1,248,792
Furniture, fixtures and equipment.................................................. 600,358 496,447
---------- ----------
2,153,340 1,977,960
Less: accumulated depreciation..................................................... (675,286) (588,066)
---------- ----------
1,478,054 1,389,894
Investments in and advances to nonconsolidated affiliates (Note 15)................. 152,401 215,539
Deferred costs and other (Note 5)................................................... 162,741 167,053
---------- ----------
$2,005,506 $1,974,073
---------- ----------
---------- ----------
Liabilities and stockholders' equity
Current liabilities
Accounts payable................................................................... $ 45,233 $ 44,934
Construction payables.............................................................. 7,186 17,975
Accrued expenses (Note 5).......................................................... 156,694 139,892
Current portion of long-term debt (Note 6)......................................... 1,837 1,841
---------- ----------
Total current liabilities........................................................ 210,950 204,642
Long-term debt (Note 6)............................................................. 924,397 889,538
Deferred credits and other.......................................................... 98,177 97,740
Deferred income taxes (Note 9)...................................................... 22,361 45,443
---------- ----------
1,255,885 1,237,363
---------- ----------
Minority interests.................................................................. 14,118 16,964
---------- ----------
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--101,035,898 and 102,969,699 shares
(net of 3,001,568 and 771,571 shares held in treasury)............................ 10,104 10,297
Capital surplus.................................................................... 388,925 385,941
Retained earnings.................................................................. 349,386 290,797
Unrealized gain on marketable equity securities.................................... 2,884 51,394
Deferred compensation related to restriced stock................................... (15,796) (18,683)
---------- ----------
735,503 719,746
---------- ----------
$2,005,506 $1,974,073
---------- ----------
---------- ----------
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,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
Revenues
Casino..................................... $1,338,003 $1,323,466 $1,313,910
Food and beverage.......................... 196,765 188,081 181,312
Rooms...................................... 128,354 115,456 109,036
Management fees............................ 24,566 16,227 12,762
Other...................................... 78,954 78,729 115,877
Less: casino promotional
allowances................................ (147,432) (135,939) (154,102)
---------- ---------- ----------
Total revenues........................... 1,619,210 1,586,020 1,578,795
---------- ---------- ----------
Operating expenses
Direct
Casino.................................... 685,942 649,720 620,438
Food and beverage......................... 103,604 95,909 91,495
Rooms..................................... 39,719 35,460 32,915
Depreciation of buildings,
riverboats and equipment.................. 103,670 92,130 80,416
Development costs.......................... 10,524 12,021 17,428
Write-downs and reserves (Note 8).......... 13,806 52,188 93,348
Project opening costs...................... 17,631 5,907 450
Other...................................... 385,630 358,000 353,318
---------- ---------- ----------
Total operating expenses................. 1,360,526 1,301,335 1,289,808
---------- ---------- ----------
Operating profit........................ 258,684 284,685 288,987
Corporate expense.......................... (27,155) (34,348) (30,347)
Equity in income (losses) of
nonconsolidated affiliates (Note
15)....................................... (11,053) 1,182 (49,245)
Venture restructuring costs................ (6,944) (14,601) -
---------- ---------- ----------
Income from operations...................... 213,532 236,918 209,395
Interest expense, net of interest
capitalized (Note 3)....................... (79,071) (69,968) (73,890)
Gains on sales of equity interests in New
Zealand subsidiary (Note 15)............... 37,388 - 11,773
Other income, including interest income..... 11,799 5,160 4,305
---------- ---------- ----------
Income before income taxes and minority
interests.................................. 183,648 172,110 151,583
Provision for income taxes (Note 9)......... (68,746) (67,316) (60,677)
Minority interests.......................... (7,380) (5,897) (12,096)
---------- ---------- ----------
Income from continuing operations........... 107,522 98,897 78,810
Discontinued operations (Note 10)
Earnings from hotel operations, net of
tax provision of $15,434.................. - - 21,230
Spin-off transaction expenses, net of
tax benefit of $5,134..................... - - (21,194)
---------- ---------- ----------
Income before extraordinary loss............ 107,522 98,897 78,846
Extraordinary loss, net of tax benefit of
$4,477 (Note 6)............................ (8,134) - -
---------- ---------- ----------
Net income.................................. $ 99,388 $ 98,897 $ 78,846
---------- ---------- ----------
---------- ---------- ----------
Earnings (loss) per share-basic
Continuing operations...................... $ 1.07 $ 0.96 $ 0.77
Discontinued operations
Earnings from hotel operations,
net...................................... - - 0.21
Spin-off transaction expenses, net........ - - (0.21)
Extraordinary loss, net..................... (0.08) - -
---------- ---------- ----------
Net income.............................. $ 0.99 $ 0.96 $ 0.77
---------- ---------- ----------
---------- ---------- ----------
Earnings (loss) per share-diluted
Continuing operations...................... $ 1.06 $ 0.95 $ 0.76
Discontinued operations
Earnings from hotel operations,
net...................................... - - 0.21
Spin-off transaction expenses, net. - - (0.21)
Extraordinary loss, net.................... (0.08) -
---------- ---------- ----------
Net income.............................. $ 0.98 $ 0.95 $ 0.76
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding.. 100,618 102,598 102,341
---------- ---------- ----------
---------- ---------- ----------
Weighted average common and common
equivalent shares outstanding........... 101,254 103,736 103,188
---------- ---------- ----------
---------- ---------- ----------
The accompanying 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 Retained Equity Restricted
Outstanding Amount Surplus Earnings Securities Stock Total
------------ ------ ------- -------- ---------- ------------ -----
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 10)..................... (139,582) (139,582)
Unrealized gain on available-for-sale
securities, less deferred 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 10,267 362,783 204,838 10,552 (2,891) 585,549
Net income............................. 98,897 98,897
Unrealized gain on available-for-sale
securities, less deferred tax
provision of $26,112................. 40,842 40,842
Treasury stock purchases............... (759) (76) (12,938) (13,014)
Net shares issued under incentive
compensation plans, including income
tax benefit of $1,576................ 1,055 106 23,158 (15,792) 7,472
--------- ------- -------- -------- -------- --------- ---------
Balance-December 31, 1996................ 102,970 10,297 385,941 290,797 51,394 (18,683) 719,746
Net income............................. 99,388 99,388
Realization of gain due to sale of
equity interest in New Zealand
subsidiary, net of deferred taxes
of $14,653........................... (22,735) (22,735)
Decline in market value of other
available-for-sale securities, less
deferred tax provision of $16,362.... (25,775) (25,775)
Treasury stock purchases............... (2,234) (223) (40,799) (41,022)
Net shares issued under incentive
compensation plans, including income
tax benefit of $702.................. 300 30 2,984 2,887 5,901
--------- ------- -------- -------- -------- --------- ---------
Balance-December 31, 1997................ 101,036 $10,104 $388,925 $ 349,386 $ 2,884 $(15,796) $735,503
--------- ------- -------- -------- -------- --------- ---------
--------- ------- -------- -------- -------- --------- ---------
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
(In thousands)
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities
Net income..................................................................... $ 99,388 $ 98,897 $ 78,846
Adjustments to reconcile net income to cash flows from operating activities
Extraordinary loss, before income taxes...................................... 12,611 - -
Depreciation and amortization................................................ 122,396 102,338 95,388
Write-downs and reserves..................................................... 13,806 52,188 93,348
Other noncash items.......................................................... 27,712 27,985 17,088
Minority interests' share of net income...................................... 7,380 5,897 12,096
Equity in losses (income) of nonconsolidated affiliates...................... 11,053 (1,182) 51,182
Realized gains from sales of equity interests in New Zealand subsidiary...... (37,388) - (11,773)
Net gains from asset sales................................................... (4,117) - (1,383)
Net change in long-term accounts............................................. (1,452) (375) (18,144)
Net change in working capital accounts....................................... 3,713 (14) (36,576)
Net change in accrued litigation settlement and related costs................ - - (43,438)
Tax indemnification payments to Bass......................................... - - (28,000)
Discontinued operations
Earnings from hotel operations............................................. - - (21,230)
Spin-off transaction expenses, before income taxes......................... - - 26,328
----------- ----------- -----------
Cash flows provided by operating activities.............................. 255,102 285,734 213,732
----------- ----------- -----------
Cash flows from investing activities
Land, buildings, riverboats and equipment additions............................ (229,529) (314,465) (186,233)
(Decrease) increase in construction payables................................... (10,789) 13,257 (6,161)
Proceeds from sales of equity interests in New Zealand subsidiary.............. 53,755 - 20,745
Proceeds from other asset sales................................................ 26,570 1,355 10,850
Investments in and advances to nonconsolidated affiliates...................... (54,477) (75,553) (45,603)
Other.......................................................................... (6,483) (8,255) (2,844)
----------- ----------- -----------
Cash flows used in investing activities.................................. (220,953) (383,661) (209,246)
----------- ----------- -----------
Cash flows from financing activities
Net borrowings under Revolving Credit Facilities,
net of financing costs of $982 in 1996 and $2,322 in 1995.................... 239,500 133,518 274,172
Debt retirements............................................................... (202,115) (2,488) (219,614)
Purchases of treasury stock.................................................... (41,022) (13,014) -
Minority interests' distributions, net of contributions........................ (9,952) (10,840) (6,360)
Premium paid on early extinguishment of debt................................... (9,666) - -
Other.......................................................................... (45) - (543)
----------- ----------- -----------
Cash flows (used in) provided by financing activities.................... (23,300) 107,176 47,655
----------- ----------- -----------
Cash flows from discontinued hotel operations
Net transfers to discontinued hotel operations................................. - - (14,840)
Payment of spin-off transaction expenses....................................... - - (25,924)
----------- ----------- -----------
Cash flows used in discontinued operations............................... - - (40,764)
----------- ----------- -----------
Net increase in cash and cash equivalents........................................ 10,849 9,249 11,377
Cash and cash equivalents, beginning of year..................................... 105,594 96,345 84,968
----------- ----------- -----------
Cash and cash equivalents, end of year........................................... $ 106,443 $ 105,594 $ 96,345
----------- ----------- -----------
----------- ----------- -----------
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" and including its
subsidiaries where the context requires), a Delaware corporation, is one of
America's leading casino entertainment companies, operating 15 casinos in nine
states under the Harrah's brand name as of December 31, 1997. Harrah's casino
entertainment facilities include 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 and dockside casinos are in
Joliet, Illinois; Shreveport, Louisiana; Tunica and Vicksburg, Mississippi; and
North Kansas City and St. Louis, Missouri. The Company also manages tribal-owned
casinos on Indian lands near Phoenix, Arizona; Cherokee, North Carolina; and
Seattle, Washington. On January 13, 1998, the Company opened a fourth managed
casino on Indian lands near Topeka, Kansas.
Harrah's also manages a casino in Auckland, New Zealand, under terms of an
agreement expected to be terminated in June 1998 (see Note 15). Harrah's
discontinued management of two limited stakes casinos in Colorado at the end of
first quarter 1997.
During December 1997, Harrah's announced the planned acquisition of
Showboat, Inc. (see Note 2).
On June 30, 1995, Harrah's completed a spin-off (the "PHC Spin-off") that
split the Company into two independent public corporations. Harrah's retained
ownership of the casino entertainment business and the Company's hotel
business was transferred to a new entity, Promus Hotel Corporation ("PHC").
For periods prior to the PHC Spin-off, Harrah's financial statements reflect
the hotel business as discontinued operations (see Note 10).
2) AGREEMENT TO ACQUIRE SHOWBOAT, INC.
During December 1997, Harrah's and Showboat, Inc. ("Showboat") entered into
a definitive agreement whereby Harrah's agreed to acquire Showboat for $30.75
per share in an all-cash transaction valued at $519 million (net of options
proceeds), and assume $635 million in Showboat debt. The acquisition will be
accounted for as a purchase. Accordingly, the purchase price will be allocated
to the underlying assets and liabilities based upon their estimated fair values
at the date of acquisition. The transaction is expected to be completed during
second quarter 1998, subject to various conditions including regulatory
approvals, Showboat stockholder approval and other third party approvals.
Showboat owns and operates casinos in Atlantic City, New Jersey, and Las
Vegas, Nevada. It manages and is the largest single shareholder of the Star City
casino in Sydney, New South Wales, Australia. Showboat also beneficially owns
55% of the Showboat Mardi Gras Casino in East Chicago, Illinois.
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. Investments in 20% to
50% owned companies and joint ventures are accounted for using the equity method
(see Note 15).
CASH AND CASH EQUIVALENTS. Cash includes the minimum cash balances required
to be maintained by certain state gaming commissions, which totaled
approximately $8.3 million and $5.6 million at December 31, 1997 and 1996,
respectively. Cash equivalents are highly liquid investments with a maturity of
less than three months and are stated at the lower of cost or market value.
INVENTORIES. Inventories, which consist primarily of food, beverage and
operating supplies, are stated at average cost.
LAND, BUILDINGS, RIVERBOATS AND EQUIPMENT. Land, buildings, riverboats
and equipment are stated at cost. Land includes land held for future
development or disposition which totaled $31.2 million and $32.5 million at
December 31, 1997 and 1996, 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 on
internally constructed assets at Harrah's overall weighted average borrowing
rate of interest. Capitalized interest amounted to $6.9 million, $11.0
million, and $3.6 million in 1997, 1996 and 1995, respectively.
Depreciation of buildings, riverboats and equipment is calculated using the
straight-line method over the shorter of the estimated useful life of the asset
or the related lease term, as follows:
Buildings and improvements................................................... 10 to 40 years
Riverboats................................................................... 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.
38
Casino promotional allowances consist principally of the retail value of
complimentary food and beverages, accommodations, admissions and entertainment
provided to casino patrons. The estimated costs of providing such complimentary
services, classified as casino expenses through interdepartmental allocations,
were as follows:
1997 1996 1995
---------- ---------- ---------
Food and beverage.............................................................. $ 83,491 $ 81,857 $ 72,400
Rooms.......................................................................... 19,290 15,673 15,098
Other.......................................................................... 3,768 4,491 10,856
---------- ---------- ---------
$ 106,549 $ 102,021 $ 98,354
---------- ---------- ---------
---------- ---------- ---------
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 term of the related debt agreement.
PROJECT OPENING COSTS. Project opening 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. Project opening costs incurred in connection with the expansion of
existing facilities, as well as those costs incurred in connection with an
initiative to develop and implement strategies and employee training programs
designed to better focus the Company on serving its targeted customers, are
expensed as incurred.
EARNINGS PER SHARE. In accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," basic
earnings per share is computed by dividing Net income by the number of weighted
average common shares outstanding during the year. Diluted 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, which for each
of the three years ended December 31, 1997, consisted solely of net restricted
shares and stock options outstanding under the Company's employee stock benefit
plans (see Note 14).
RECLASSIFICATIONS. Certain amounts for prior years have been reclassified
to conform with the presentation for 1997.
USE OF ESTIMATES. 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, $1.125 par value, 5,000,000 shares authorized
Series A Special Stock, 2,000,000 shares authorized
Harrah's Board of Directors has authorized that one special stock purchase
right (a "Right") be attached to each outstanding share of common stock. These
Rights are exercisable only if a person or group acquires 15% or more of the
Company's common stock or announces a tender offer for 15% or more of the common
stock. Each Right entitles stockholders to buy one two-hundredth of a share of
Series A Special Stock of the Company at an initial price of $130 per Right. If
a person acquires 15% or more of the Company's outstanding common stock, each
Right entitles its holder to purchase common stock of the Company having a
market value at that time of twice the Right's exercise price. Under certain
conditions, each Right entitles its holder to purchase stock of an acquiring
company at a discount. Rights held by the 15% holder will become void. The
Rights will expire on October 5, 2006, unless earlier redeemed by the Board at
one cent per Right.
Pursuant to a plan approved by Harrah's Board of Directors in October 1996
and which expired on December 31, 1997, the Company repurchased 2,993,700 shares
of its common stock at an average price of $18.05 per share. The repurchased
shares are held in treasury.
On June 30, 1995, the PHC Spin-off was completed and the Company distributed
to its stockholders the stock of PHC as a dividend on a one-for-two basis. To
reflect this distribution, the $139.6 million value of the net assets of
discontinued operations as of the PHC Spin-off date was charged against the
Company's retained earnings (see Note 10).
Under the terms of employee compensation programs previously approved by its
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, 1997:
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, net of cancellations............................... (5,277,408) (9,030,287)
----------- ------------
Shares held in reserve for issuance or grant under the plans as of December 31,
1997................................................................................ 22,592 1,319,713
----------- ------------
----------- ------------
39
5) DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Deferred costs and other consisted of the following:
1997 1996
---------- ----------
Cash surrender value of life insurance (Note 14)................................ $ 45,835 $ 43,613
Excess of cost over net assets of businesses acquired, net of amortization of
$33,580 and $31,741........................................................... 43,363 45,202
Deposits........................................................................ 15,944 15,944
Deferred finance charges, net of amortization of $11,471 and $11,775............ 6,056 11,983
Other........................................................................... 51,543 50,311
---------- ----------
$ 162,741 $ 167,053
---------- ----------
---------- ----------
Accrued expenses consisted of the following:
1997 1996
---------- ----------
Insurance claims and reserves............................................................. $ 46,870 $ 49,590
Payroll and other compensation............................................................ 45,413 34,243
Accrued interest payable.................................................................. 9,287 11,786
Taxes, including income taxes............................................................. 3,106 2,475
Other accruals............................................................................ 52,018 41,798
---------- ----------
$ 156,694 $ 139,892
---------- ----------
---------- ----------
6) LONG-TERM DEBT
Long-term debt consisted of the following:
1997 1996
---------- ----------
Revolving Credit Facilities 5.41%--8.50% at December 31, 1997, maturities to 2000......... $ 720,500 $ 481,000
Unsecured Senior Subordinated Notes
8 3/4%, maturity 2000................................................................... 200,000 200,000
10 7/8%, redeemed in 1997............................................................... - 200,000
Unsecured Notes Payable...................................................................
10.00%--12.67%, maturities to 2001...................................................... 5,326 6,864
Capitalized Lease Obligations.............................................................
4.9%--7.2%, maturities to 2001.......................................................... 408 3,515
---------- ----------
926,234 891,379
Current portion of long-term debt......................................................... (1,837) (1,841)
---------- ----------
$ 924,397 $ 889,538
---------- ----------
---------- ----------
Harrah's outstanding corporate debt, comprised primarily of the Revolving
Credit Facilities and Unsecured Senior Subordinated Notes, has been issued by
its wholly-owned subsidiary, Harrah's Operating Company, Inc. ("HOC").
As of December 31, 1997, aggregate annual principal maturities for the four
years subsequent to 1997 were: 1998, $1.8 million; 1999, $1.4 million; 2000,
$922.1 million; and 2001, $0.9 million.
REVOLVING CREDIT FACILITIES. Harrah's bank financing consists of a $950
million reducing revolving and letter of credit facility maturing July 31, 2000,
and a separate $150 million revolving credit facility which is renewable
annually, at the lenders' option, through the July 31, 2000, maturity date
(collectively, the "Facility"). Of the $1.1 billion total borrowing capacity
available to the Company under the Facility, there is a sub-limit of $50 million
for letters of credit. Scheduled reductions of the borrowing capacity available
under the $950 million facility are as follows: $50 million, July 1998; $75
million, January 1999; $75 million, July 1999; $100 million, January 2000; and
$650 million, July 2000. At December 31, 1997, the Facility provided for
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,
1997, were 0.63% and 0.13%, respectively.
The Facility is unsecured. 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, 1997, Harrah's borrowings under the Facility were
$720.5 million and an additional $28.4 million was committed to back certain
letters of credit. After consideration of these borrowings, $351.1 million of
the Facility was available to Harrah's at December 31, 1997.
EARLY EXTINGUISHMENT OF 10 7/8% NOTES. During second quarter 1997, the
Company redeemed its $200 million 10 7/8% Senior Subordinated Notes due 2002
(the "Notes") using proceeds from the Facility. As a result of the early
extinguishment of the Notes, the Company recorded an $8.1 million
extraordinary loss, net of tax benefit, which included a premium paid to
holders of the Notes and the write-off of related deferred finance charges.
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, 1997 and
1996, Harrah's was a party to the interest rate swap agreements set forth below
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
5.7% at December 31, 1997 and 1996, respectively. The average fixed interest
rate received was 5.4%
40
and 5.9% at December 31, 1997 and 1996, respectively. 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
ASSOCIATED RATE -------------------- ADJUSTMENT SWAP
DEBT (LIBOR+) 1997 1996 DATE MATURITY
- ------------- ----------- --------- --------- ------------ -----------
8 3/4% Notes
$50 million 3.42% 9.45% 8.99% May 15 May 1998
$50 million 3.22% 9.19% 9.25% January 15 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 15, 1998 to 8.85%.
Harrah's also maintains seven additional interest rate swap agreements to
effectively convert a total of $350 million in variable rate debt to a fixed
rate. 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
SWAP RATE RECEIVED
PAID (VARIABLE) AT SWAP
NOTIONAL AMOUNT (FIXED) DEC. 31, 1997 MATURITY
- ---------------- ----------- ------------- ---------------
$50 million 7.910% 5.813% January 1998
$50 million 6.985% 5.906% March 2000
$50 million 6.951% 5.906% March 2000
$50 million 6.945% 5.906% March 2000
$50 million 6.651% 5.777% May 2000
$50 million 5.788% 5.938% June 2000
$50 million 5.785% 5.938% June 2000
The above $50 million swap which matured in January 1998 was not renewed. In
accordance with the terms of the above $50 million swap which matures in May
2000, the variable interest rate was adjusted on February 10, 1998 to 5.625%.
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.
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
swap agreements, at December 31, 1997 and 1996, was as follows:
DECEMBER 31,
------------------------------------------
1997 1996
-------------------- --------------------
CARRYING MARKET CARRYING MARKET
(In millions) VALUE VALUE VALUE VALUE
- ----------------------------------------------------------------------- --------- --------- --------- ---------
Outstanding debt....................................................... $ (926.2) $ (930.9) $ (891.4) $ (904.7)
Interest rate swap agreements (used for hedging purposes).............. (0.4) (4.6) (0.3) (4.8)
The amounts reflected as the "Carrying Value" of the interest rate swap
agreements represent the accrual balance as of the date reported. The "Market
Value" of the interest rate swap 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 and
classifies those leases as either operating or capital leases following the
provisions of SFAS No. 13, "Accounting for Leases." The remaining lives of the
Company's real estate operating leases range from one to six years with various
automatic extensions totaling up to 45 years. The average remaining term for
other operating leases, which generally contain renewal options, extends
approximately five years.
Rental expense associated with operating leases is charged to expense in the
year incurred and was included in the Consolidated Statements of Income as
follows:
1997 1996 1995
--------- --------- ---------
Noncancelable
Minimum......................................................................... $ 16,455 $ 14,774 $ 17,097
Contingent...................................................................... 2,929 2,032 --
Sublease........................................................................ (294) (313) (53)
Other............................................................................ 3,584 3,435 2,001
--------- --------- ---------
$ 22,674 $ 19,928 $ 19,045
--------- --------- ---------
--------- --------- ---------
41
The future minimum rental commitments as of December 31, 1997, were as
follows:
NONCANCELABLE
OPERATING
LEASES
-------------
1998............................................................................................... $ 12,888
1999............................................................................................... 10,336
2000............................................................................................... 9,630
2001............................................................................................... 9,489
2002............................................................................................... 9,071
Thereafter......................................................................................... 84,283
------------
Total minimum lease payments....................................................................... $ 135,697
------------
------------
In addition to these minimum rental commitments, certain of these operating
leases provide for contingent rentals based on a percentage of revenues in
excess of specified amounts.
8) WRITE-DOWNS AND RESERVES
Harrah's operating results include various pretax charges to record asset
impairments, contingent liability reserves and project write-offs. Included in
the Company's 1997 results was a reserve against the debtor-in-possession
financing provided to Harrah's Jazz Company, reflecting a possible shortfall in
the realizable value of the collateral for the loans. During 1996, in
recognition of changing economic conditions and competitive environments in
which certain long-lived assets are deployed, the Company re-evaluated the
recoverability of its original Tunica, Mississippi, casino facility and of an
idle riverboat casino and recorded write-downs of the carrying values of those
assets in accordance with the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The original Tunica casino facility was closed during 1997. The Company also
recorded a reserve during 1996 pursuant to the provisions of SFAS No. 5,
"Accounting for Contingencies," in recognition of its estimated liability
arising from the guarantee of third party debt. Management believes that the
estimates used to evaluate the amounts of such write-downs and reserves were
reasonable. However, actual results could differ from the estimates made for
purposes of these evaluations. The 1995 charges related primarily to the
Company's New Orleans casino development project. (See Note 15 for additional
discussion regarding Harrah's Jazz Company.)
Write-downs and reserves reported by the Company were as follows:
1997 1996 1995
--------- --------- ---------
Harrah's Jazz-related
Reserve for debtor-in-possession loans.......................................... $ 13,000 $ - $ -
Write-off of investment in and advances to affiliate............................ - - 54,349
Acquisition of partner loan..................................................... - - 16,000
Estimated legal and severance costs............................................. - - 5,100
--------- --------- ---------
13,000 - 75,449
Impairment of long-lived assets.................................................. 806 33,369 -
Reserve for contingent liability exposure........................................ - 14,034 -
Write-off of investment in and advances to nonconsolidated affiliates............ - 2,141 9,638
Write-off of abandoned design and other costs.................................... - 2,644 8,261
--------- --------- ---------
$ 13,806 $ 52,188 $ 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:
1997 1996 1995
--------- --------- ---------
Income before income taxes and minority interests................................ $ 68,746 $ 67,316 $ 60,677
Extraordinary loss............................................................... (4,477) - -
Stockholders' equity
Unrealized gain on marketable equity securities................................. (16,362) 26,112 6,746
Compensation expense for tax purposes in excess of amounts recognized for
financial reporting purposes.................................................. (702) (1,576) (6,616)
Other........................................................................... - 1,045 -
Discontinued operations
Earnings from hotel operations.................................................. - - 15,434
Spin-off transaction costs, including $3,956 of deferred tax benefit............ - - (5,134)
--------- --------- ---------
$ 47,205 $ 92,897 $ 71,107
--------- --------- ---------
--------- --------- ---------
Income tax expense attributable to Income before income taxes and minority
interests consisted of the following:
1997 1996 1995
--------- --------- ---------
Current
Federal......................................................................... $ 78,306 $ 42,003 $ 60,850
State........................................................................... 5,407 6,622 9,987
Deferred......................................................................... (14,967) 18,691 (10,160)
--------- --------- ---------
$ 68,746 $ 67,316 $ 60,677
--------- --------- ---------
--------- --------- ---------
42
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:
1997 1996 1995
--------- --------- ---------
Statutory tax rate.......................................................................... 35.0% 35.0% 35.0%
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit.................................................... 2.2 2.5 4.3
Minority interests in partnership earnings................................................. (1.4) (1.2) (2.8)
Other...................................................................................... 1.6 2.8 3.5
----- ----- ----
37.4% 39.1% 40.0%
----- ----- ----
----- ----- ----
The components of Harrah's net deferred tax balance included in the
Consolidated Balance Sheets were as follows:
1997 1996
--------- ----------
Deferred tax assets
Compensation.............................................................................. $ 10,381 $ 24,858
Self-insurance reserves................................................................... 5,838 7,562
Bad debt reserve.......................................................................... 4,281 5,089
Project opening expenses.................................................................. 2,400 4,699
Deferred income........................................................................... 1,114 1,108
Debt consent costs........................................................................ 902 3,237
Other..................................................................................... 19,865 12,979
--------- ----------
44,781 59,532
--------- ----------
Deferred tax liabilities
Property.................................................................................. (45,806) (53,068)
Investment in nonconsolidated affiliates.................................................. (3,900) (26,356)
--------- ----------
(49,706) (79,424)
--------- ----------
Net deferred tax liability............................................................ $ (4,925) $ (19,892)
--------- ----------
--------- ----------
10) DISCONTINUED OPERATIONS
As discussed in Note 1, on June 30, 1995, Harrah's, formerly The Promus
Companies Incorporated ("Promus"), completed a spin-off of its hotel operations
to PHC. Accordingly, results of operations and cash flows of the Company's hotel
business have been reported as discontinued operations for the period prior to
the PHC Spin-off. Earnings from discontinued operations for the six months ended
June 30, 1995, were as follows:
Revenues.......................................................................... $ 132,785
Costs and expenses................................................................ (79,652)
----------
Operating income.................................................................. 53,133
Interest expense.................................................................. (16,742)
Other income...................................................................... 273
----------
Income before income taxes........................................................ 36,664
Provision for income taxes........................................................ (15,434)
----------
Earnings from discontinued hotel operations....................................... $ 21,230
----------
----------
For periods prior to the PHC Spin-off, interest expense was allocated to
discontinued hotel operations based on the percentage of Promus' existing
corporate debt which was expected to be retired using proceeds from a new PHC
Bank Facility. Interest expense of $9.5 million was allocated to discontinued
hotel operations for the six months ended June 30, 1995.
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:
1997 1996 1995
---------- --------- ----------
Long-term accounts
Deferred costs and other assets................................................ $ (1,746) $ (2,279) $ (4,746)
Deferred credits and other long-term liabilities............................... 294 1,904 (13,398)
---------- --------- ----------
Net change in long-term accounts............................................ $ (1,452) $ (375) $ (18,144)
---------- --------- ----------
---------- --------- ----------
Working capital accounts
Receivables................................................................... $ (12,062) $ 8,088 $ (27,616)
Inventories................................................................... (565) 1,202 (565)
Prepayments and other......................................................... (3,454) 2,888 (94)
Other current assets.......................................................... 27 14 --
Accounts payable.............................................................. 5,606 (18,373) (10,279)
Accrued expenses.............................................................. 14,161 6,167 1,978
---------- --------- ----------
Net change in working capital accounts.......................................... $ 3,713 $ (14) $ (36,576)
---------- --------- ----------
---------- --------- ----------
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:
1997 1996 1995
--------- --------- ---------
Interest expense, net of amount capitalized...................................... $ 79,071 $ 69,968 $ 73,890
Adjustments to reconcile to cash paid for interest
Net change in accruals......................................................... (5,961) (8,664) 10,739
Amortization of deferred finance charges....................................... (3,021) (3,151) (3,626)
Net amortization of discounts and premiums..................................... (12) (21) (53)
--------- --------- ---------
Cash paid for interest, net of amount capitalized................................ $ 70,077 $ 58,132 $ 80,950
--------- --------- ---------
--------- --------- ---------
Cash payments, net of refunds, for income taxes, including amounts paid on
behalf of the discontinued hotel operations, amounted to $36,479, $34,578 and
$85,001 for 1997, 1996 and 1995, respectively (see Note 9).
43
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, guarantees by
Harrah's of third party debt and development completion guarantees. As of
December 31, 1997, Harrah's has guaranteed third party loans and leases of $136
million, which are secured by certain assets, and has contractual commitments,
primarily construction-related, of $60 million.
The agreements under which Harrah's manages casinos on Indian lands contain
provisions required by law which provide that a minimum monthly payment be made
to the tribe which payment has priority over the retirement of development
costs. In the event that insufficient cash is generated by the operations to
fund this payment, Harrah's must pay the shortfall to the tribe. Such advances,
if any, will be repaid to Harrah's in a future period or periods in which
operations generate cash in excess of the required minimum payment. These
commitments will terminate upon the occurrence of certain defined events,
including termination of the management contract. The aggregate monthly
commitment pursuant to these contracts, which extend for periods of up to 60
months from December 31, 1997, was $1.2 million, including the commitment for a
project which opened subsequent to year-end.
In addition to the amounts described above, as part of a transaction whereby
Harrah's effectively secured an option to a site for a potential casino,
Harrah's has guaranteed a $22.9 million third-party variable rate bank loan
pursuant to an agreement which expires February 28, 1998. The guaranty contains
an element of risk that, should the borrower be unable to perform, 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 guarantees issued by Harrah's
related to development of the New Orleans casino.
SEVERANCE AGREEMENTS. Harrah's has severance agreements with 38 of its
senior executives which provide for payments to the executives in the event of
their termination after a change in control, as defined. These agreements
provide, among other things, for a compensation payment of 1.5 times or 3.0
times the executive's annual compensation, as defined, as well as for
accelerated payment or accelerated vesting of any compensation or awards payable
to the executive under any of Harrah's incentive plans.
The estimated amount, computed as of December 31, 1997, that would be
payable under the agreements to these executives based on earnings and stock
options aggregated approximately $34.7 million.
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, 1997, was $6.0 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 Promus 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.
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.
13) LITIGATION
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. In the event a bankruptcy
reorganization plan is not consummated, the Company anticipates that such
lawsuits, which are presently inactive, would become active, and additional
lawsuits would be filed.
On November 25, 1997, the Missouri Supreme Court issued a ruling that
defined the state constitutional requirements for floating casino facilities in
artificial basins. Subsequently, the Missouri Gaming Commission (the
"Commission") attempted to issue disciplinary resolutions that effectively would
have amended the gam-
44
ing licenses of the Company's Missouri casinos, and numerous other floating
casino facilities in the Commission's jurisdiction, to preclude games of
chance, subject to evidentiary hearings that were to be held if the licensees
filed appeals to prove compliance with the Supreme Court's ruling. Prior to
the Commission's action, Harrah's and other licensees filed petitions in the
Circuit Court of Cole County, Missouri, and succeeded in having the Court
issue an order restraining the Commission from taking any such disciplinary
action. The Commission has appealed to the Missouri Supreme Court to permit
it to proceed with its intended actions. The Supreme Court has not indicated
when it will hear the appeal. Harrah's has also filed suit seeking
declaratory judgment that its gaming facilities meet the state constitutional
mandates as established by the Missouri Supreme Court. Management is unable
to predict at this time the final outcome of this matter or whether that
outcome could materially affect the Company's results of operations, cash
flows or financial position of its Missouri casinos.
In addition to the matters described above, 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 other matters will not have a material
adverse effect upon Harrah's consolidated financial position or its results of
operations.
14) EMPLOYEE BENEFIT PLANS
Harrah's has established a number of employee benefit programs for purposes
of attracting, retaining and motivating its employees. The following is a
description of the basic components of these programs.
STOCK OPTION PLAN. Employees may be granted options to purchase shares of
Harrah's common stock under the Harrah's Stock Option Plan ("SOP"). An SOP grant
typically vests in equal installments over a four-year period and allows the
option holder to purchase stock over specified periods of time, generally ten
years from the date of grant, at a fixed price equal to the market value at the
date of grant. No options may be granted under the SOP after November 1999.
A summary of SOP activity for 1995, 1996 and 1997 is as follows:
WEIGHTED NUMBER OF
AVERAGE COMMON SHARES
EXERCISE ------------------------
PRICE OPTIONS AVAILABLE
(PER SHARE) OUTSTANDING FOR GRANT
------------- ----------- -----------
Balance-December 31, 1994.............................................. $ 19.80 2,268,294 2,491,965
Granted............................................................... 36.53 1,473,290 (1,473,290)
Exercised............................................................. 10.43 (111,807) -
Canceled.............................................................. 11.21 (843,700) 843,700
----------- -----------
Balance-June 30, 1995.................................................. 26.74 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........................................................ 19.03 3,922,540 725,912
Additional shares authorized.......................................... N/A - 4,500,000
Granted............................................................... 26.05 1,836,563 (1,836,563)
Exercised............................................................. 8.14 (81,752) -
Canceled.............................................................. 26.54 (258,525) 258,525
- ----------- -----------
Balance-December 31, 1995.............................................. 21.21 5,418,826 3,647,874
Granted............................................................... 18.71 3,706,759 (3,706,759)
Exercised............................................................. 9.97 (225,510) -
Canceled.............................................................. 27.59 (2,927,557) 2,927,557
----------- -----------
Balance-December 31, 1996.............................................. 16.95 5,972,518 2,868,672
Granted............................................................... 18.93 2,495,903 (2,495,903)
Exercised............................................................. 7.70 (196,905) -
Canceled.............................................................. 19.29 (946,944) 946,944
----------- -----------
Balance-December 31, 1997.............................................. 17.57 7,324,572 1,319,713
----------- -----------
----------- -----------
1997 1996 1995
---------- ---------- ---------
Options exercisable at December 31........................................... 1,536,964 1,079,125 725,961
Weighted average fair value per share of options granted during year......... $ 9.98 $ 9.13 $ 10.76
As reflected in the table, the option price and number of shares of all
options outstanding on June 30, 1995, were adjusted in connection with the PHC
Spin-off to preserve their approximate value to the employee immediately before
the PHC Spin-off.
Options granted and canceled during 1996 include the activity resulting from
a special program approved by the Company during that year to restore the
intended incentive offered to employees by SOP grants. Given the competitive
environment in which Harrah's operates and the need to retain and provide
incentives for key management, the Company was concerned by the large number of
outstanding options with an exercise price above the current market price of the
stock. This special program enabled
45
option holders to consent to the cancellation of certain outstanding stock
options, whether vested or unvested, in exchange for a grant of new unvested
stock options with an option price based on the current market price of the
Company's stock. For each three options canceled, the consenting option
holder received two new stock options. The new options vest in four equal
annual installments commencing January 1, 1998. In total, 2,755,291 options
with an average exercise price of $27.71 per share were canceled in exchange
for 1,830,951 new options with an exercise price of $16.875 per share.
The following table summarizes additional information regarding those
options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACT EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ---------- ----------- ---------- -----------
$2.80--$13.34 1,220,053 4.3 years $ 8.76 1,089,399 $ 8.44
15.88--20.50 5,502,378 9.4 years 18.81 145,510 17.27
22.55--29.72 579,756 7.3 years 23.75 281,475 23.60
33.27--35.59 22,385 6.0 years 34.90 20,580 34.87
----------- ----------
7,324,572 1,536,964
----------- ----------
----------- ----------
As allowed under the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," Harrah's applies the provisions of Accounting Principles Board
Opinion No. 25 and related interpretations to account for the SOP and,
accordingly, does not recognize compensation expense. Had compensation expense
for the SOP been determined in accordance with SFAS No. 123, Harrah's Net income
and Earnings per share would have been reduced to the pro forma amounts
indicated in the following table:
1997 1996 1995
-------------------- -------------------- --------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
--------- --------- --------- --------- --------- ---------
Net income............................................... $ 99,388 $ 89,570 $ 98,897 $ 93,787 $ 78,846 $ 76,247
Earnings per share
Basic.................................................. 0.99 0.89 0.96 0.91 0.77 0.75
Diluted................................................ 0.98 0.88 0.95 0.90 0.76 0.74
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1997 1996 1995
--------- --------- ---------
Expected dividend yield..................................................................... 0.0% 0.0% 0.0%
Expected stock price volatility............................................................. 41.0% 39.0% 31.0%
Risk-free interest rate..................................................................... 5.8% 6.2% 5.4%
Expected average life of options (years).................................................... 7 6 6
Because the provisions of SFAS No. 123 have not been applied to options
granted prior to January 1, 1995, and due to the issuance in 1996 of a large
option grant under the special program discussed above, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
RESTRICTED STOCK PLAN. Employees may be granted shares of common stock
under the Harrah's Restricted Stock Plan ("RSP"). 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 in equal
installments over a period of four years. No awards of RSP shares may be made
under the current plan after November 1999. The compensation arising from an RSP
grant is based upon the market price at the grant date. Such expense is deferred
and amortized to expense over the vesting period.
Harrah's has issued time accelerated restricted stock ("TARSAP") awards
to certain key executives which will fully vest on January 1, 2002, if the
executive continues in active employment until that date. However, the
vesting of some or all of these shares can be accelerated into the years
1999, 2000 and 2001 on the basis of the Company's financial performance. The
expense arising from the TARSAP awards is being amortized to expense over the
periods in which the restrictions lapse.
The number and weighted-average grant-date fair value of RSP shares granted,
and the amortization expense recognized, during 1997, 1996 and 1995, including
the TARSAP awards, were as follows:
1997 1996 1995
--------- --------- ---------
Number of shares................................................................. 309,833 825,406 140,070
Weighted-average price per share................................................. $ 19.46 $ 20.52 $ 24.87
Amortization expense (in millions)............................................... 4.5 0.9 1.2
SAVINGS AND RETIREMENT PLAN. Harrah's maintains a defined contribution
savings and retirement plan, which, among other things, allows pretax and
after-tax contributions to be made by employees to the plan. Under the plan,
participating employees may elect to contribute up to 16 percent 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 direction, in
46
a Harrah's company stock fund, a diversified stock fund, an aggressive stock
fund, a long-term bond fund, an income fund and/or 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 $14.6 million, $14.1
million and $12.9 million in 1997, 1996 and 1995, 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. A contribution was approved for the 1995 plan year. The expense
recognized as a result of this contribution was not material.
DEFERRED COMPENSATION PLANS. Harrah's maintains deferred compensation plans
under which certain employees 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, 1997 and 1996 was $46.7 million and
$45.2 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.
MULTI-EMPLOYER PENSION PLAN. Approximately 3,000 of Harrah's employees are
covered by union sponsored, collectively bargained multi-employer pension plans.
Harrah's contributed and charged to expense $2.4 million, $2.1 million and $1.9
million in 1997, 1996 and 1995, 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 Harrah's Jazz Company ("Harrah's Jazz"), a partnership formed for
purposes of developing, owning and operating the exclusive land-based casino
entertainment facility (the "Rivergate Casino") in New Orleans, Louisiana, on
the site of the former Rivergate Convention Center. In November 1995, Harrah's
Jazz and its wholly-owned subsidiary, Harrah's Jazz Finance Corp., filed
petitions for relief under Chapter 11 of the Bankruptcy Code. Harrah's Jazz
filed a plan of reorganization with the Bankruptcy Court in April 1996 and filed
several subsequent amendments to the plan (the "Plan"). In April 1997, the
Bankruptcy Court confirmed and approved the Plan.
The confirmed Plan contemplated, among other things, that a newly formed
corporation, Jazz Casino Corporation, would be responsible for completing
construction of the Rivergate Casino, a subsidiary of the Company would receive
approximately 40% of the equity in the project, and Harrah's would make a $75
million equity investment in the project (less any debtor-in-possession
financing provided to the project), guarantee $120 million of a $180 million
bank credit facility, guarantee timely completion and opening of the Rivergate
Casino and make an additional $20 million subordinated loan to the project to
finance the Rivergate Casino. However, since the Louisiana State Legislature did
not approve a component of the confirmed Plan--a modified casino operating
contract with Louisiana's gaming board--the confirmed Plan was not consummated.
Subsequently, Harrah's Jazz filed a modified plan with the Bankruptcy Court
which contemplated, among other things, the assumption of the existing casino
operating contract and relief from payment of any gaming taxes under the casino
operating contract. This modified plan was withdrawn by Harrah's Jazz.
In November 1997 and again in January 1998, Harrah's Jazz modified the
confirmed Plan. This most recent plan, which is supported by, among others, the
Governor of Louisiana and the Mayor of New Orleans, contemplates that a newly
formed limited liability company, Jazz Casino Company, L.L.C. ("JCC"), would be
responsible for completing construction of the Rivergate Casino, a subsidiary of
the Company would receive approximately 40% of the equity in JCC's parent, and
Harrah's would make a $75 million equity investment in the project (less any
debtor-in-possession financing provided to the project), guarantee JCC's $100
million annual payment under the casino operating contract to the State of
Louisiana gaming board (the "State Guarantee"), guarantee up to $154 million of
a bank credit facility of up to $224 million, guarantee timely completion and
opening of the Rivergate Casino and make an additional $10 million subordinated
loan to JCC to finance the Rivergate Casino. With respect to the State
Guarantee, Harrah's would be obligated to guarantee the first year of JCC's
operations and, if certain cash flow tests and other conditions are satisfied
each year, to renew the guarantee each year for a maximum term of approximately
five years. Harrah's obligations under the guarantee would be limited to a
guarantee of the $100 million payment obligation of JCC for the period in which
the guarantee is in effect and would be secured by a first priority lien on
JCC's assets. JCC's payment obligation would be
47
$100 million at the commencement of each twelve month period under the casino
operating contract and would decline on a daily basis by 1/365 of $100
million as payments are made each day by JCC to Louisiana's gaming board.
Final consummation of the plan is subject to numerous approvals, including
approval from the Company's Board of Directors, the Louisiana State Legislature,
the City of New Orleans City Council and others. The plan was confirmed by the
Bankruptcy Court on January 29, 1998, and it is anticipated that the casino
operating contract will be considered by the Louisiana State Legislature in a
special session commencing in late March 1998. There can be no assurance that
these approvals will be obtained and that such plan will be consummated.
During the course of the bankruptcy of Harrah's Jazz, a subsidiary of the
Company has made debtor-in-possession loans to Harrah's Jazz, totaling
approximately $32.2 million as of December 31, 1997, to fund certain payments to
the City of New Orleans and other cash requirements of Harrah's Jazz. Harrah's
has committed to provide up to $40 million in debtor-in-possession loans to
Harrah's Jazz, conditioned upon Harrah's Jazz meeting certain monthly milestones
in the bankruptcy. There can be no assurance that such committed
debtor-in-possession financing will be sufficient for Harrah's Jazz to
consummate the plan. Should additional debtor-in-possession funding be necessary
for the consummation of the plan, the approval of the Company's Board of
Directors would be necessary for Harrah's to provide any debtor-in-possession
financing in excess of $40 million.
SKY CITY LIMITED. During 1995, Harrah's sold a portion of its equity
interest in Sky City Limited ("Sky City"), a New Zealand publicly-traded
company which owns a casino entertainment facility in Auckland, New Zealand,
reducing its ownership percentage from 20% to 12.5% and resulting in a pretax
gain of approximately $11.8 million. During 1997, Harrah's sold its remaining
12.5% ownership interest in Sky City and recorded a pretax gain of $37.4
million. Harrah's continues to manage the Sky City facility for a fee under a
management contract. However, the Company has been notified by Sky City of
its intent to buy-out and terminate the management contract on June 30, 1998,
for a price based upon an agreed upon formula in the management contract.
COMBINED FINANCIAL INFORMATION. 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, 1997 and 1996, and for the three fiscal years ended December 31,
1997, is included in the following tables:
1997 1996 1995
---------- ---------- -----------
Combined Summarized
Balance Sheet Information
Current assets............................................................. $ 18,937 $ 33,516
Land, buildings and equipment, net......................................... 379,147 391,133
Other assets............................................................... 179,976 171,748
---------- ----------
Total assets............................................................. 578,060 596,397
---------- ----------
Current liabilities........................................................ 108,406 129,114
Long-term debt............................................................. 467,970 486,740
---------- ----------
Total liabilities........................................................ 576,376 615,854
---------- ----------
Net assets................................................................... $ 1,684 $ (19,457)
---------- ----------
---------- ----------
Combined Summarized
Statements of Operations
Revenues................................................................... $ 23,464 $ 30,930 $ 118,798
---------- ---------- -----------
---------- ---------- -----------
Operating loss............................................................. $ (44,115) $ (18,194) $ (30,296)
---------- ---------- -----------
---------- ---------- -----------
Net loss................................................................... $ (39,290) $ (22,080) $ (139,200)
---------- ---------- -----------
---------- ---------- -----------
Condensed financial information relating to a restaurant subsidiary in which
the Company has a passive investment has not been presented since its operating
results and financial position are not material to Harrah's.
The Company's share of its nonconsolidated affiliates' net income (losses)
is reflected in the accompanying Consolidated Statements of Income as Equity in
income (losses) of nonconsolidated affiliates. Harrah's previously reported its
share of the joint venture pre-interest operating results in Revenues-other, and
its share of joint venture interest expense as Interest expense, net, from
nonconsolidated affiliates. Prior year results have been restated to conform
with the revised presentation.
Harrah's investments in and advances to nonconsolidated affiliates are
reflected in the accompanying Consolidated Balance Sheets as follows:
1997 1996
---------- ----------
Harrah's investments in and advances to nonconsolidated affiliates
Accounted for under the equity method................................................... $ 132,049 $ 98,356
Available-for-sale and recorded at market value......................................... 20,352 117,183
---------- ----------
$ 152,401 $ 215,539
---------- ----------
---------- ----------
In accordance with the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," Harrah's adjusts the carrying value
of its available-for-sale equity investments to include unrealized gains or
losses. A corresponding adjustment is recorded in the combination of Harrah's
stockholders' equity and deferred income tax accounts.
48
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/ Philip G. Satre
Philip G. Satre
Chairman of the Board, President
and Chief Executive Officer
/s/ Judy T. Wormser
Judy T. Wormser
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, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years ended December
31, 1997. 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,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Memphis, Tennessee,
February 3, 1998.
49
Quarterly Results of Operations (Unaudited) (In thousands, except per share
amounts)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
---------- ---------- ---------- --------- ------------
1997
Revenues............................................. $ 374,099 $ 408,893 $ 438,248 $ 397,970 $ 1,619,210
Income from operations............................... 45,291 61,199 67,749(1) 39,293 213,532(1)
Net income........................................... 17,111 17,239 52,889(1) 12,149 99,388(1)
Earnings per share (3)
Basic.............................................. 0.17 0.17 0.53(1) 0.12 0.99(1)
Diluted............................................ 0.17 0.17 0.52(1) 0.12 0.98(1)
1996
Revenues............................................. $ 382,883 $ 401,066 $ 428,726 $ 373,345 $ 1,586,020
Income from operations............................... 72,430 68,962 89,890 5,636 (2) 236,918(2)
Net income (loss).................................... 31,410 29,977 42,350 (4,840)(2) 98,897(2)
Earnings (loss) per share (3)
Basic.............................................. 0.31 0.29 0.41 (0.05)(2) 0.96(2)
Diluted............................................ 0.30 0.29 0.41 (0.05)(2) 0.95(2)
- ------------------------
(1) 1997 includes $37.4 million in pretax income from the third quarter sale of
the Company's equity interest in its New Zealand subsidiary (see Note 15),
net of $13.8 million in pretax charges for write-downs and reserves,
including $12.3 million recorded in the third quarter (see Note 8).
(2) 1996 includes $52.2 million in pretax charges for project write-downs and
reserves, of which $50.0 million was recorded in the fourth quarter (see
Note 8).
(3) The sum of the quarterly per share amounts may not equal the annual amount
reported, as per share amounts are computed independently for each quarter
and for the full year.
50