SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
Commission File No. 1-10410
HARRAH'S ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware I.R.S. No. 62-1411755
(State of Incorporation) (I.R.S. Employer Identification No.)
1023 Cherry Road
Memphis, Tennessee 38117
(Address of principal executive offices)
(901) 762-8600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -------
At March 31, 1999, there were outstanding 127,620,045 shares of the
Company's Common Stock.
Page 1 of 55
Exhibit Index Page 41
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
----------------------------
The accompanying unaudited Consolidated Condensed Financial Statements
of Harrah's Entertainment, Inc., a Delaware corporation, have been prepared
in accordance with the instructions to Form 10-Q, and therefore do not
include all information and notes necessary for complete financial statements
in conformity with generally accepted accounting principles. The results for
the periods indicated are unaudited, but reflect all adjustments (consisting
only of normal recurring adjustments) which management considers necessary
for a fair presentation of operating results. Results of operations for
interim periods are not necessarily indicative of a full year of operations.
See Note 2 to these Consolidated Condensed Financial Statements regarding the
completion of our merger with Rio Hotel & Casino, Inc. on January 1, 1999.
These Consolidated Condensed Financial Statements should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included in our 1998 Annual Report to Stockholders.
-2-
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share amounts)
March 31, Dec. 31,
1999 1998
---------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 166,768 $ 158,995
Receivables, less allowance for doubtful
accounts of $36,579 and $14,356 105,689 55,043
Deferred income tax benefits 30,172 22,478
Prepayments and other 41,611 27,521
Inventories 28,790 15,306
---------- ----------
Total current assets 373,030 279,343
---------- ----------
Land, buildings, riverboats and equipment 3,736,294 2,660,004
Less: accumulated depreciation (821,017) (789,847)
---------- ----------
2,915,277 1,870,157
Excess of purchase price over net assets
of businesses acquired, net of amortization
of $44,663 and $40,051 (Note 2) 524,281 383,450
Investments in and advances to
nonconsolidated affiliates 287,759 273,508
Deferred costs, trademarks and other 546,804 479,874
---------- ----------
$4,647,151 $3,286,332
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 60,524 $ 57,864
Construction payables 5,614 629
Accrued expenses 281,457 172,021
Current portion of long-term debt 11,414 2,332
---------- ----------
Total current liabilities 359,009 232,846
Long-term debt 2,570,070 1,999,354
Deferred credits and other 102,360 112,362
Deferred income taxes 182,192 75,457
---------- ----------
3,213,631 2,420,019
---------- ----------
Minority interests 15,244 14,906
---------- ----------
Commitments and contingencies (Notes 2, 4, 6 and 11)
Stockholders' equity
Common stock, $0.10 par value, authorized 360,000,000 shares, outstanding
127,620,045 and 102,188,018 shares (net of 3,271,802 and
3,036,562 shares held in treasury) 12,762 10,219
Capital surplus 940,346 407,691
Retained earnings 482,327 451,410
Accumulated other comprehensive income 6,860 6,567
Deferred compensation related to restricted stock (24,019) (24,480)
---------- ----------
1,418,276 851,407
---------- ----------
$4,647,151 $3,286,332
========== ==========
See accompanying Notes to Consolidated Condensed Financial Statements.
-3-
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share First Quarter Ended
amounts) March 31, March 31,
1999 1998
---------- ----------
Revenues
Casino $ 565,959 $ 342,896
Food and beverage 103,153 49,725
Rooms 62,636 32,078
Management fees 16,720 10,177
Other 30,251 17,665
Less: casino promotional allowances (67,051) (38,094)
---------- ----------
Total revenues 711,668 414,447
---------- ----------
Operating expenses
Direct
Casino 301,526 176,238
Food and beverage 56,794 25,545
Rooms 17,081 9,610
Depreciation of buildings,
riverboats and equipment 48,044 29,480
Development costs 761 1,838
Write-downs and reserves 123 -
Project opening costs 352 2,654
Other 152,620 100,189
---------- ----------
Total operating expenses 577,301 345,554
---------- ----------
Operating profit 134,367 68,893
Corporate expense (7,931) (6,650)
Equity in losses of
nonconsolidated affiliates (6,668) (2,791)
Relocation of corporate offices (3,070) -
Venture restructuring costs 397 (926)
Amortization of goodwill and
trademarks (4,612) (460)
---------- ----------
Income from operations 112,483 58,066
Interest expense, net of interest
capitalized (50,895) (19,326)
Other income, including interest
2,166 4,130
income
---------- ----------
Income before income taxes and
minority interests 63,754 42,870
Provision for income taxes (24,638) (15,921)
Minority interests (1,771) (2,046)
---------- ----------
Income before extraordinary losses 37,345 24,903
Extraordinary losses, net of income
tax benefit of $1,764 and $724 (3,248) (1,667)
---------- ----------
Net income $ 34,097 $ 23,236
========== ==========
-4-
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Continued)
(UNAUDITED)
First Quarter Ended
March 31, March 31,
1999 1998
--------- ----------
Earnings per share-basic
Income before extraordinary $ 0.30 $ 0.25
losses
Extraordinary losses, net (0.03) (0.02)
--------- ----------
Net income $ 0.27 $ 0.23
========= ==========
Earnings per share-diluted
Income before extraordinary losses $ 0.30 $ 0.25
Extraordinary losses, net (0.03) (0.02)
--------- ----------
Net income $ 0.27 $ 0.23
========= ==========
Average common shares outstanding 125,502 100,133
========= ==========
Average common and common
equivalent shares outstanding 126,773 101,200
========= ==========
See accompanying Notes to Consolidated Condensed Financial Statements.
-5-
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands) First Quarter Ended
March 31, March 31,
1999 1998
--------- ---------
Cash flows from operating activities
Net income $ 34,097 $ 23,236
Adjustments to reconcile net income to cash
flows from operating activities
Extraordinary losses, before income taxes 5,012 2,391
Depreciation and amortization 53,843 33,272
Other noncash items 7,098 7,034
Minority interests' share of income 1,771 2,046
Equity in losses of nonconsolidated
Affiliates 6,667 2,791
Net gains from asset sales 2 (19)
Net change in long-term accounts 22,266 (9,680)
Net change in working capital accounts 12,955 (8,628)
--------- ---------
Cash flows provided by operating
activities 143,711 52,443
--------- ---------
Cash flows from investing activities
Land, buildings, riverboats and equipment additions (85,496) (29,202)
Increase (decrease) in construction payables 4,985 (7,061)
Purchase of minority interest in subsidiary (26,000) -
Investments in and advances to nonconsolidated
affiliates (9,077) (6,316)
Cash acquired in Rio transaction 22,025 -
Proceeds from asset sales 2,614 50
Increase in notes receivable - (22,908)
Other 11,048 144
--------- ---------
Cash flows used in investing activities (79,901) (65,293)
--------- ---------
Cash flows from financing activities
Net (repayments) borrowings under Revolving Credit Facility (383,567) 14,499
Early retirement of debt (157,072) -
Proceeds from issuance of senior notes, net of discount
and issue costs of $5,980 494,020 -
Scheduled debt retirements (2,067) (933)
Purchases of treasury stock (3,180) -
Minority interests' distributions, net of
Contributions (1,432) (1,571)
Premium paid on early extinguishment of debt (2,739) -
--------- ---------
Cash flows (used in) provided by
financing activities (56,037) 11,995
--------- ---------
Net increase (decrease) in cash and cash equivalents 7,773 (855)
Cash and cash equivalents, beginning of period 158,995 116,443
--------- ---------
Cash and cash equivalents, end of period $ 166,768 $ 115,588
========= =========
See accompanying Notes to Consolidated Condensed Financial Statements.
-6-
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands) First Quarter Ended
March 31, March 31,
1999 1998
---------- ----------
Net income $ 34,097 $ 23,236
---------- ----------
Other comprehensive income, net of tax:
Foreign currency translation adjustments (747) -
Unrealized gains on marketable equity securities 1,040 1,339
---------- ----------
Other comprehensive income 293 1,339
---------- ----------
Comprehensive income $ 34,390 $ 24,575
========== ==========
See accompanying Notes to Consolidated Condensed Financial Statements.
-7-
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
Note 1 - Basis of Presentation and Organization
- -----------------------------------------------
Harrah's Entertainment, Inc. ("Harrah's Entertainment", the "Company",
"we", "our" or "us", and including our subsidiaries where the context
requires), a Delaware corporation, is one of America's leading casino
companies. Our casino entertainment facilities, operating under the Harrah's,
Rio and Showboat brand names, include casino hotels in Reno, Lake Tahoe, Las
Vegas and Laughlin, Nevada; two casino hotel properties in Atlantic City, New
Jersey; and riverboat and dockside casinos in Joliet, Illinois; East Chicago,
Indiana; Shreveport, Louisiana; Tunica and Vicksburg, Mississippi; and North
Kansas City and St. Louis, Missouri. We also manage casinos on Indian lands
near Phoenix, Arizona; Cherokee, North Carolina; and Topeka, Kansas, as well
as managing the Star City casino in Sydney, Australia. We discontinued
management of casinos in Auckland, New Zealand, as of the end of second
quarter 1998, and near Seattle, Washington during fourth quarter 1998.
Certain amounts for the prior year first quarter have been reclassified to
conform with the current year presentation.
Note 2 - Acquisitions
- ---------------------
We are accounting for each of the transactions described below as a
purchase. Accordingly, the purchase price is being allocated to the underlying
assets acquired and liabilities assumed based upon their estimated fair values
based on independent appraisals, discounted cash flows, quoted market prices and
estimates made by management. For each transaction, the allocation of the
purchase price will be completed within one year from the date of the
acquisition. To the extent that the purchase price exceeds the fair value of the
net identifiable tangible and intangible assets acquired, such excess will be
allocated to goodwill and amortized over a period of 30 to 40 years. For periods
prior to the completion of the finalization of the purchase price allocation,
our financial statements include estimated goodwill amortization expense.
-8-
Showboat, Inc. - On June 1, 1998, we completed our acquisition of Showboat, Inc.
("Showboat") for $520 million in cash and assumption of approximately $635
million of Showboat debt. The operating results for Showboat are included in the
Consolidated Condensed Financial Statements from the date of acquisition.
Subsequent to the closing of the acquisition, we completed tender offers
and consent solicitations for Showboat's 9 1/4% First Mortgage Bonds due 2008
(the "Bonds") and 13% Senior Subordinated Notes due 2009 (the "Notes"). As a
result of these tender offers, $128.6 million face amount of the Bonds and
$117.9 million face amount of the Notes were retired on June 15, 1998.
During first quarter 1999, we consummated an agreement with our partners
owning the other 45% ownership interest in the East Chicago Showboat property to
increase our ownership interest to 99.55%, and partnership agreements were
amended to give us a greater flexibility in operating this property.
Consequently, we began consolidating this partnership with the financial results
of our other businesses in first quarter 1999. The consideration for this
increase in ownership was cash and stock. (See Item 2 of Part II for information
concerning the stock issued.) In March 1999, we redeemed all $140 million face
amount of 13 1/2% First Mortgage Notes of this partnership and recorded an
extraordinary loss of $2.0 million, net of tax. Also during first quarter 1999,
this property was rebranded as a "Harrah's" property.
In April 1999, we announced plans to sell certain of our interests in Star
City casino in Sydney, Australia to an Australia-based company in connection
with that company's intention to offer to acquire the issued and outstanding
shares of Star City Holdings Ltd. We currently own 135 million shares of Star
City Holdings Ltd. and 37 million options to purchase additional ordinary
shares. We have agreed to sell approximately 110 million ordinary shares of
Star City Holdings, our interest in the Star City management contract, and a
portion of our options to purchase additional ordinary shares. We also intend
to sell our remaining shares and options in Star City for cash or by
tendering such shares and options into the separate tender offer for Star
City Shares that will be initiated by the Australia-based company. Based on
current exchange rates, we expect to realize approximately US$220 million in
after-tax proceeds from the sale of our equity and management contract
interests in Star City, which will be used to reduce our outstanding
indebtedness. The acquisition of these securities and interests is subject to
New South Wales Casino Control Authority regulatory approvals and satisfaction
of closing conditions. Should such regulatory approvals not be obtained, the
Australia-based company has agreed to purchase 27.5 million ordinary shares of
our Star City Holdings, for which regulatory approval is not required.
-9-
The transaction is expected to close in the second half of 1999.
The Las Vegas Showboat property is a non-strategic asset and is
recorded as an asset held-for-sale. We are finalizing the valuation of this
property. At March 31, 1999, the estimated net realizable value of this
property, net of estimated selling expenses, carrying costs and interest costs
through the assumed date of sale, is included in Deferred costs, trademarks and
other assets in the Consolidated Condensed Balance Sheets.
Rio Hotel & Casino, Inc. - On January 1, 1999, we completed our merger with Rio
Hotel & Casino, Inc. ("Rio"). In connection with the merger, we issued
approximately 25 million shares of our common stock and assumed Rio's
outstanding debt of $435 million face amount.
In connection with the Rio merger, our equity interest in a new airline
based in Las Vegas, Nevada, increased to approximately 47.8%, but our voting
power is limited by contract to 25%. Our initial investment of $15 million in
this new airline was carried at cost. The increase in our ownership interest
will require accounting for the investment by the equity method, whereby we will
include our share of this nonconsolidated affiliate's profits or losses in our
financial results. Operation of the airline is expected to begin in mid-1999.
The additional investment in the new airline acquired with the Rio merger is
reported as an asset held-for-sale in our financial statements.
On April 16, 1999, we commenced tender offers and consent solicitations
to purchase Rio's 10 5/8% Senior Subordinated Notes due 2005 and 9 1/2% Senior
Subordinated Notes due 2007 (collectively, the "Rio Notes"). The tender offers
will expire on May 15, 1999, and acceptances of the tender offers and consent
solicitations have been received from all holders of the Rio Notes.
Consequently, in second quarter 1999, the Rio Notes will be retired.
The following unaudited pro forma consolidated financial information
for the Company has been prepared assuming that the acquisitions and the
Showboat debt extinguishments discussed above had occurred on the first day of
the period:
-10-
Quarter Ended
(In millions, except March 31, 1998
per share amounts) --------------
Revenues $ 650.1
========
Income from operations $ 95.1
========
Income before extraordinary losses
$ 28.7
========
Net income $ 27.0
========
Earnings per share-diluted
Income before extraordinary losses $ 0.23
========
Net income $ 0.21
========
These unaudited pro forma results are presented for comparative purposes only.
The pro forma results are not necessarily indicative of what our actual results
would have been had the acquisitions been completed as of the beginning of the
period, or of future results.
Note 3 - Stockholders' Equity
- -----------------------------
In addition to its common stock, Harrah's Entertainment has the
following classes of stock authorized but unissued:
Preferred stock, $100 par value, 150,000 shares authorized
Special stock, $1.125 par value, 5,000,000 shares authorized -
Series A Special Stock, 2,000,000 shares designated
Note 4 - Long-Term Debt
- -----------------------
Revolving Credit Facilities
- ---------------------------
On April 30, 1999, we consummated new revolving credit and letter of
credit facilities (the "Bank Facility")in the amount of $1.6 billion. This Bank
Facility consists of a five-year $1.3 billion revolving credit and letter of
credit facility maturing in 2004 and a separate $300 million revolving credit
facility which is renewable annually at the borrower's and lenders' options.
Initially, the Bank Facility bears interest based upon 87.5 basis points over
LIBOR for current borrowings under the five-year facility and 92.5 basis
points over LIBOR for the 364-day facility.
-11-
In addition, there is a facility fee for borrowed and unborrowed amounts
which is currently 20 basis points on the five-year, $1.6 billion facility and
15 basis points on the 364-day, $300 million facility. The interest rate and
facility fee are based on our current debt ratings and leverage ratio and may
change as our debt ratings and leverage ratio change. Proceeds from the Bank
Facility were used to retire our previous revolving credit facility
(the "Previous Facility") scheduled to mature in 2000 and to retire Rio's
revolving credit facility scheduled to mature in 2003. The Bank Facility also
provides us with the necessary borrowing capacity to fund our tender offers to
purchase Rio's 10 5/8% Senior Subordinated Notes due 2005 and 9 1/2% Senior
Subordinated Notes due 2007.
Issuance of Senior Notes
- ------------------------
In keeping with our strategy to refinance a portion of our short-term,
floating-rate borrowings with debt that has fixed rates and longer maturities,
in January 1999, we issued $500 million of 7 1/2% Senior Notes due 2009 and used
the proceeds to reduce amounts outstanding under our Previous Facility. The
corresponding reduction in our available borrowing capacity under the Previous
Facility resulted in the write-off of related unamortized deferred finance
charges, recorded as an extraordinary loss of $1.2 million in first quarter.
Interest Rate Agreements
- ------------------------
To manage the relative mix of our debt between fixed and variable rate
instruments, we have entered into interest rate swap agreements to modify the
interest characteristics of our outstanding debt without an exchange of the
underlying principal amount.
We have entered into six interest rate swap agreements which effectively
convert a total of $300 million in variable rate debt to a fixed rate. Pursuant
to the terms of these swaps, all of which reset quarterly, we receive variable
payments tied to LIBOR in exchange for our payments at a fixed interest rate.
The fixed rates to be paid by us and variable rates to be received by us are
summarized in the following table:
-12-
Swap Rate
Swap Rate Received
Paid (Variable) at Swap
Notional Amount (Fixed) March 31, 1999 Maturity
- --------------- --------- -------------- ------------
$50 million 6.985% 5.000% March 2000
$50 million 6.951% 5.000% March 2000
$50 million 6.945% 5.000% March 2000
$50 million 6.651% 5.000% May 2000
$50 million 5.788% 5.030% June 2000
$50 million 5.785% 5.030% June 2000
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 pursuant to the terms of our interest rate
agreements will have a corresponding effect on our future cash flows. These
agreements contain a credit risk that the counterparties may be unable to meet
the terms of the agreements. We minimize that risk by evaluating the
creditworthiness of our counterparties, which are limited to major banks and
financial institutions, and do not anticipate nonperformance by the
counterparties.
Note 5 - Supplemental Cash Flow Disclosures
- -------------------------------------------
Cash Paid for Interest and Taxes
- --------------------------------
The following table reconciles our interest expense, net of interest
capitalized, per the Consolidated Condensed Statements of Income, to cash paid
for interest:
First Quarter Ended
March 31, March 31,
1999 1998
(In thousands) -------- --------
Interest expense, net of amount capitalized $50,895 $19,326
Adjustments to reconcile to cash paid for interest:
Net change in accruals (14,181) 4,567
Amortization of deferred finance changes (2,385) (649)
Net amortization of discounts and premiums 591 (2)
------- -------
Cash paid for interest, net of amount capitalized $34,920 $23,242
======= =======
Cash refunds of income taxes, net of payments $ (54) $ (219)
======= =======
-13-
Note 6 - Commitments and Contingent Liabilities
- -----------------------------------------------
New Orleans Casino Development
- ------------------------------
We have an approximate 43% ownership interest in Jazz Casino Company,
L.L.C. ("JCC"), the company which will own and operate the exclusive land-based
casino (the "Casino") in New Orleans, Louisiana, and will manage that Casino
pursuant to a management agreement with a subsidiary of our Company. We have (i)
guaranteed JCC's initial $100 annual payment under the Casino operating contract
to the State of Louisiana gaming board (the "State Guarantee"); (ii) guaranteed
$166.5 million of a $236.5 million JCC bank credit facility; (iii) guaranteed to
the State of Louisiana gaming board, City of New Orleans, banks under the JCC
bank credit facility and JCC bondholders, completion and opening of the Casino
on or before October 30, 1999 (subject to force majeure); and (iv) are obligated
to make a $22.5 million subordinated loan to JCC to finance construction of the
Casino. At March 31, 1999, $4.0 million had been funded under this commitment.
With respect to the State Guarantee, we are obligated to guarantee
JCC's first $100 million annual payment obligation commencing upon the earlier
of opening of the Casino or October 30, 1999 (subject to force majeure), and, if
certain cash flow tests (for the period beginning April 1, 2001) and other
conditions are satisfied each year, to renew the guarantee beginning April 1,
2000, for each 12 month period ending March 31, 2004. Our obligations under the
guarantee for the first year of operations or any succeeding 12 month period is
limited to a guarantee of the $100 million payment obligation of JCC for the 12
month period in which the guarantee is in effect and is secured by a first
priority lien on JCC's assets. JCC's payment obligation (and therefore the
amount we have guaranteed) is $100 million at the commencement of each 12 month
period under the Casino operating contract and declines on a daily basis by
1/365 of $100 million to the extent payments are made each day by JCC to
Louisiana's gaming board.
Rio
- ---
Rio holds options to purchase ten land parcels which total
approximately twenty acres adjacent to the Rio for a combined cost of
approximately $24.5 million, $3.9 million of which was paid as of March 31,
1999.
-14-
Rio has entered into an agreement with Clark County, Nevada, to install
a road across certain of its recently acquired properties that will provide an
additional east/west conduit for Las Vegas residents and tourists and allow for
additional access to the Rio from the Las Vegas Strip. Upon completion, we
will deed the roadway acreage to Clark County in exchange for deeding other
Clark County acreage to the Company and reimbursing us for a majority of our
construction costs.
Contractual Commitments
- -----------------------
We continue to pursue additional casino development opportunities that may
require, individually and in the aggregate, significant commitments of capital,
up-front payments to third parties, guarantees by the Company's of third party
debt and development completion guarantees. Excluding guarantees and commitments
for the New Orleans casino development project discussed above, as of March 31,
1999, we had guaranteed third party loans and leases of $103 million, which are
secured by certain assets, and had commitments of $163 million, primarily
construction-related. The amount of guaranteed third party loans excludes our
guarantee of the balance outstanding under the development loan for a casino
facility owned by the Upper Skigit Tribe that we ceased managing in 1998.
Subsequent to first quarter, we performed under this guarantee and purchased the
tribe's receivable from the lender.
The agreements under which we manage casinos on Indian lands contain
provisions required by law which provide that a minimum monthly payment be made
to the tribe. That obligation has priority over scheduled payments of borrowings
for development costs. In the event that insufficient cash flow is generated by
the operations to fund this payment, we must pay the shortfall to the tribe.
Such advances, if any, would be repaid to us in future periods in which
operations generate cash flow in excess of the required minimum payment. These
commitments will terminate upon the occurrence of certain defined events,
including termination of the management contract. As of March 31, 1999, the
aggregate monthly commitment pursuant to these contracts, which extend for
periods of up to 45 months from March 31, 1999, was $1.2 million.
-15-
Severance Agreements
- --------------------
As of March 31, 1999, we have severance agreements with 45 of our senior
executives, which provide for payments to the executives in the event of their
termination after a change in control, as defined. These agreements provide,
among other things, for a compensation payment of 1.5 to 3.0 times the
executive's average annual compensation, as defined, as well as for accelerated
payment or accelerated vesting of any compensation or awards payable to the
executive under any of our incentive plans. The estimated amount, computed as of
March 31, 1999, that would be payable under the agreements to these executives
based on earnings and stock options aggregated approximately $47.8 million.
Tax Sharing Agreements
- ----------------------
In connection with the 1995 spin-off of certain hotel operations (the "PHC
Spin-off") to Promus Hotel Corporation ("PHC"), we entered into a Tax Sharing
Agreement with PHC wherein each company is obligated for those taxes associated
with their respective businesses. Additionally, we are obligated for all taxes
for periods prior to the PHC Spin-off date which are not specifically related to
PHC operations and/or PHC hotel locations. Our obligations under this agreement
are not expected to have a material adverse effect on our consolidated financial
position or results of operations.
Self-Insurance
- --------------
We are self-insured for various levels of general liability, workers'
compensation and employee medical coverage. We also have stop loss coverage
to protect against unexpected claims. Insurance claims and reserves include
accruals of estimated settlements for known claims, as well as accruals of
actuarial estimates of incurred but not reported claims.
Note 7 - Litigation
- -------------------
We are involved in various inquiries, administrative proceedings and
litigation relating to contracts, sales of property and other matters arising in
the normal course of business. While any proceeding or litigation has an element
of uncertainty, we believe that the final outcome of these matters will
not have a material adverse effect upon our consolidated financial position or
our results of operations.
-16-
Note 8 - Nonconsolidated Affiliates
- -----------------------------------
Summarized balance sheet and income statement information of
nonconsolidated affiliates as of March 31, 1999 and December 31, 1998,
and for the first quarters ended March 31, 1999 and 1998 is included in the
following tables.
(In thousands) March 31, Dec. 31,
1999 1998
---------- ----------
Combined Summarized Balance Sheet Information
Current assets $ 92,961 $ 111,218
Land, buildings and equipment, net 961,078 1,094,195
Other assets 337,278 355,505
---------- ----------
Total assets 1,391,317 1,560,918
---------- -----------
Current liabilities 42,224 96,095
Long-term debt 695,186 808,334
---------- ----------
Total liabilities 737,410 904,429
---------- ----------
Net assets $ 653,907 $ 656,489
========== ==========
First Quarter Ended
March 31, March 31,
1999 1998
-------- ---------
(In thousands)
Combined Summarized Statements of Operations
Revenues $ 88,583 $ 4,719
======== =========
Operating loss $ (3,419) $ (8,821)
======== =========
Net loss $(14,290) $ (6,567)
======== =========
Our share of nonconsolidated affiliates' combined net operating results are
reflected in the accompanying Consolidated Condensed Statements of Income as
Equity in income (losses) of nonconsolidated affiliates.
-17-
Our investments in and advances to nonconsolidated affiliates are reflected
in the accompanying Consolidated Condensed Balance Sheets as follows:
(In thousands) March 31, Dec. 31,
1999 1998
-------- --------
Investments in and advances to
Nonconsolidated affiliates
Accounted for under the equity method $259,027 $231,366
Accounted for at historical cost - 15,087
Equity securities available-for-sale and
recorded at market value 28,732 27,055
-------- --------
$287,759 $273,508
======== ========
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", we adjust the carrying value of certain marketable equity
securities to include unrealized gains and losses. A corresponding adjustment is
recorded in our stockholders' equity and deferred income tax accounts.
Note 9 - Summarized Financial Information
- ------------------------------------------
Harrah's Operating Company, Inc. ("HOC") is a wholly-owned subsidiary
and the principal asset of Harrah's Entertainment. HOC is the issuer of
certain debt securities which have been guaranteed by Harrah's Entertainment.
Due to the comparability of HOC's consolidated financial information with
that of Harrah's Entertainment, complete separate financial statements and
other disclosures regarding HOC have not been presented. Management has
determined that such information is not material to holders of HOC's debt
securities. Summarized financial information of HOC as of March 31, 1999 and
December 31, 1998, and for the first quarters ended March 31, 1999 and 1998,
prepared on the same basis as Harrah's Entertainment, was as follows:
(In thousands) March 31, Dec. 31,
1999 1998
---------- ----------
Current assets $ 362,897 $ 271,247
Land, buildings, riverboats and
equipment, net 2,915,277 1,870,157
Other assets 1,358,762 1,136,750
---------- ----------
4,636,936 3,278,154
---------- ----------
Current liabilities 341,613 209,651
Long-term debt 2,570,070 1,999,354
Other liabilities 284,552 187,247
Minority interests 15,244 14,906
---------- ----------
3,211,479 2,411,158
---------- ----------
Net assets $1,425,457 $ 866,996
========== ==========
-18-
(In thousands) First Quarter Ended
March 31, March 31,
1999 1998
-------- --------
Revenues $711,585 $418,132
======== ========
Income from operations $112,412 $ 62,609
======== ========
Income before extraordinary
losses $ 37,300 $ 27,856
======== ========
Net income $ 34,052 $ 25,189
======== ========
Certain of our debt guarantees contain covenants which, among other
things, place limitations on HOC's ability to pay dividends and make other
restricted payments, as defined, to Harrah's Entertainment. 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 $1.4 billion at March 31, 1999.
-19-
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
The following discussion and analysis of the financial position and
operating results of Harrah's Entertainment, Inc., (referred to in this
discussion, together with its consolidated subsidiaries where appropriate, as
"Harrah's Entertainment", "Company", "we", "our" and "us") for first quarter
1999 and 1998, updates, and should be read in conjunction with, Management's
Discussion and Analysis of Financial Position and Results of Operations
presented in our 1998 Annual Report.
RIO ACQUISITION
- ---------------
On January 1, 1999, we completed our merger with Rio Hotel & Casino,
Inc. ("Rio"). In connection with the merger, we issued approximately 25
million shares of our common stock and assumed Rio's outstanding debt of $435
million face amount. The acquisition is being accounted for as a purchase.
Accordingly, the purchase price is being allocated to the underlying assets
and liabilities based upon their estimated fair values at the date of
acquisition. We determine the estimated fair values based on independent
appraisals, discounted cash flows, quoted market prices and estimates made by
management. The allocation of the purchase price will be completed by the end
of 1999. To the extent that the purchase price exceeds the fair value of the
net identifiable tangible assets acquired, such excess will be allocated to
goodwill and amortized over 40 years. For periods prior to the completion of
the purchase price allocation, our financial statements include estimated
goodwill amortization expense.
In connection with the Rio merger, our equity interest in a new airline
based in Las Vegas, Nevada, increased to approximately 47.8%, but our voting
power is limited by contract to 25%. Our initial investment of $15 million in
this new airline was carried at cost. The increase in our ownership interest
will require accounting for the investment by the equity method, whereby we
will include our share of this nonconsolidated affiliate's profits or losses
in our financial results. Operation of the airline is expected to begin in
mid-1999. The additional investment in the new airline acquired with the Rio
merger is reported as an asset held-for-sale in our financial statements.
-20-
OPERATING RESULTS AND DEVELOPMENT PLANS
- ---------------------------------------
Overall
- -------
First quarter 1999 results show the impact of the additions of Showboat
in June 1998 and Rio in January 1999, but even without them we experienced a
9.5% increase in revenue and a 9.7% increase in income from operations. We
believe this growth in our year-over-year comparable results is due to the
continued execution of our customer loyalty strategy and cost-control
management. Our Harrah's brand benefited from both local repeat business and
cross-market customer visits generated through our marketing programs.
First Quarter Percentage
(in millions, except -------------- Increase
earnings per share) 1999 1998 (Decrease)
------ ----- ---------
Revenues $711.6 $414.4 71.7%
Operating profit 134.4 68.9 95.1%
Income from operations 112.5 58.1 93.6%
Income before extraordinary losses 37.3 24.9 49.8%
Net income 34.1 23.2 47.0%
Earnings per share - diluted
Before extraordinary losses 0.30 0.25 20.0%
Net income 0.27 0.23 17.4%
Operating margin 15.8% 14.0% 1.8pts
Revenues for first quarter 1999 increased 71.7% over first quarter 1998.
This increase was driven by the addition of revenues from the Showboat and
Rio properties, record revenues at Harrah's properties in Las Vegas, Atlantic
City, Laughlin, North Kansas City and St. Louis, and increased management
fees from Harrah's-brand casinos on Indian lands. These factors also
contributed to increased operating income, net income and earnings per share
over prior year.
-21-
Western Region
- --------------
First Quarter Percentage
------------- Increase/
(in millions) 1999 1998 (Decrease)
------ ------ ---------
Casino revenues $177.0 $103.8 70.5%
Total revenues 282.4 146.5 92.8%
Operating profit 44.9 17.2 161.0%
Operating margin 15.9% 11.7% 4.2pts
The addition of Rio plus increased first quarter revenues at all Harrah's
properties in the Western region resulted in a 92.8% increase over first
quarter 1998 in this region. Northern Nevada properties also had a strong
first quarter with revenues 11.9% higher than in first quarter 1998 and
operating profit 59.2% higher. These increases were driven by more effective
marketing programs and fewer weather related access issues in northern Nevada
compared to first quarter 1998.
In first quarter 1999, Rio began construction of a showroom complex as an
addition to Rio's existing entertainment venues. The showroom will include a
1,500 seat, state-of-the-art theater with balcony; a three-level lobby with
hospitality center; and a theater promenade with approximately 10,000 square
feet of retail space. The showroom complex will be located adjacent to the
Rio's new 110,000 square foot entertainment/convention complex, the Pavilion,
which opened in March 1999. The showroom complex is expected to cost
approximately $35 million, and completion is scheduled for first quarter 2000.
At the time of the Showboat acquisition, the Showboat property in Las Vegas
was determined to be a nonstrategic asset for us and is being reported as an
asset held-for-sale in our financial statements.
-22-
Eastern Region
- --------------
First Quarter Percentage
------------- Increase/
(in millions) 1999 1998 (Decrease)
------ ------ ----------
Casino revenues $167.9 $79.0 112.5%
Total revenues 179.0 86.5 106.9%
Operating profit 36.1 17.1 111.7%
Operating margin 20.2% 19.8% 0.4pts
Harrah's Atlantic City's revenues increased 6.5% in first quarter 1999 and
operating profit increased 6.9% over the same period last year. The addition
of Showboat Atlantic City has given us a strong Boardwalk presence.
Central Region
- --------------
First Quarter Percentage
------------- Increase/
(in millions) 1999 1998 (Decrease)
------ ------ ----------
Casino revenues $221.1 $160.1 38.1%
Total revenues 233.0 170.3 36.9%
Operating profit 41.2 35.6 15.8%
Operating margin 17.7% 20.9% (3.2)pts
Chicagoland - Revenues increased 15.0% at Harrah's Joliet compared to the first
quarter of 1998; however, operating profit declined 20.7% compared to the
same period last year. We began construction in third quarter 1998 of an 11
story 204-room hotel at this property. Estimated cost of this project is
$29.1 million, and completion is projected for fourth quarter 1999.
In first quarter 1999, we consummated our agreement with our partners
owning the other 45% ownership interest in the East Chicago Showboat property
to increase our ownership interest to 99.55%, and partnership agreements were
amended to give us greater flexibility in operating this property.
Consequently, we began consolidating this partnership with the financial
results of our other businesses in first quarter. The consideration for this
increase in ownership was cash and stock. (See Item 2 of Part II for
information concerning the stock issued.) Also during first quarter 1999,
this property was rebranded as a "Harrah's" property, and, despite some
rebranding-related disruptions, first quarter results were strong.
-23-
Louisiana - Harrah's Shreveport's revenues and operating profit for first
quarter decreased from the same period last year due to competitive
conditions in the market. Construction is scheduled to begin in May 1999 on a
514-room hotel with almost 17,000 square feet of convention center space. The
new hotel and amenity expansion is expected to cost $123 million and is
scheduled to open in fourth quarter of 2000.
Mississippi - Combined first quarter revenues by Harrah's Mississippi
properties increased 4.6% over first quarter 1998. Harrah's Vicksburg
operating profit increased 7.1%, and results from Harrah's Tunica improved
significantly over first quarter 1998, when construction disruptions impacted
results.
In March 1999, we consummated the sale of our original Tunica property to
another casino company for cash and a note receivable. The transaction is
being accounted for under the cost recovery method. The note was collected in
full in April 1999; therefore, a gain will be recognized in second quarter.
Our gain from the disposition is not material.
Missouri - Harrah's North Kansas City's revenues for first quarter 1999
increased 7.9% over the same period in 1998; however, operating profit
decreased 4.2% from first quarter last year due to higher costs associated
with attracting and retaining customers.
First quarter revenues at Harrah's St. Louis-Riverport casino increased
39.2% over first quarter 1998. Operating profit increased 157.6% over the
same period last year. Our pro-rata share of the operating losses of the
related shoreside facilities, which are owned jointly with another casino
company, was $2.8 million for the quarter and is included in Equity in losses
of nonconsolidated affiliates in the Consolidated Condensed Statements of
Income (see Other Factors Affecting Net Income).
Both Harrah's St. Louis and Harrah's North Kansas City were market-share
leaders in their respective markets.
Managed and Other Casinos
- -------------------------
Increases in our managed and other results were led by the addition of
management fees from the Star City casino in Sydney, Australia, for which we
assumed management with the Showboat acquisition on June 1, 1998, and by
results from our most recently opened tribal-owned casinos for the Eastern
Band of Cherokee in Cherokee, North Carolina, which opened in November 1997,
and the Prairie Band of Potawatomi north of Topeka, Kansas, which opened in
January 1998.
-24-
See DEBT and LIQUIDITY section for further discussion of Harrah's
guarantees of debt related to Indian projects.
Other Factors Affecting Net Income
- ----------------------------------
First Quarter Percentage
(Income)/Expense -------------- Increase/
(in millions) 1999 1998 (Decrease)
------ ------ ----------
Development costs $ 0.9 $ 1.8 (50.0)%
Project opening costs 0.4 2.7 (85.2)%
Corporate expense 7.9 6.7 17.9 %
Headquarters relocation expense 3.1 - N/M
Equity in losses of
nonconsolidated affiliates 6.7 2.8 139.3 %
Write-downs and reserves 0.1 - N/M
Venture restructuring costs (0.4) 0.9 (144.4)%
Amortization of goodwill 4.6 0.5 N/M
Interest expense, net 50.9 19.3 163.7 %
Other income (2.2) (4.1) (46.3)%
Effective tax rate 38.6% 37.1% 1.5pts
Minority interests $ 1.8 $ 2.0 10.0 %
Extraordinary losses, net
of income taxes 3.2 1.7 88.2 %
Development costs for first quarter 1999 decreased 50% from the same period
last year, reflecting the continuing decline in development activity due to
the limited number of new markets opening for development.
Project opening costs for first quarter 1999 include costs incurred in
connection with expansions, remodeling and conversions at Harrah's Joliet and
East Chicago properties. 1998 project opening costs included costs incurred
in connection with an initiative to develop and implement strategies and
employee training programs designed to better focus the Company on serving
our targeted customers.
Corporate expense increased 17.9% in first quarter 1999 from the prior year
level due to timing of expenses and increased costs. $3.1 million of costs
related to the relocation of the Company's headquarters to Las Vegas, Nevada,
were expensed in first quarter 1999.
Equity in losses of nonconsolidated affiliates consists of losses from the
St. Louis shoreside facilities joint venture, our investment in Jazz Casino
Company in New Orleans, Star City Casino in Australia and our investment in a
golf course in Tunica, Mississippi.
-25-
Amortization of goodwill increased significantly in 1999 over the same
period last year due to the acquisitions of Showboat and Rio, both of which
were accounted for as purchases.
Interest expense increased in first quarter 1999 over 1998, primarily as a
result of increases in debt arising from the Showboat and Rio transactions.
Other income decreased in first quarter 1999 due to lower income earned on
the cash surrender value of company owned life insurance policies.
The effective tax rates for all periods are higher than the federal
statutory rate primarily due to state income taxes. The increase in the
effective tax rate for first quarter 1999 compared to first quarter 1998 is
due to the additional goodwill incurred in connection with the Showboat and
Rio acquisitions.
Minority interests reflects joint venture partners' share of income and
decreased in 1999 from the prior year as a result of lower earnings from
those ventures.
The extraordinary losses in 1999 and 1998 are due to the early
extinguishments of debt and include premiums paid to the holders of the debt
retired and the write-off of related unamortized deferred finance charges.
(See Debt and Liquidity - Extinguishment of Debt.)
CAPITAL SPENDING AND DEVELOPMENT
- --------------------------------
Year 2000 Update
- ----------------
We are continuing to address the potential impact of the Year 2000 ("Y2K")
on the systems and equipment that are essential to our operations. Please see
the discussion in our 1998 Form 10-K for a complete description of our
approach to the Y2K issue and the processes underway to address its potential
impact.
-26-
We prioritized our efforts according to the potential impact to our business
if a system is not Y2K ready. Priorities, in order, are: Business
Critical-required to operate the business; High Priority-significant impact
to revenues, operating costs, or customer services; and Other-used by the
business but not considered Business Critical or High Priority. In connection
with the acquisition of Rio, we have conducted a Y2K readiness review and
assessment and Y2K renovation and testing and certification is in process.
Rio is currently incorporated into our Y2K program and costs, as are the
Showboat properties. The following table sets forth the current expected date
of final completion with respect to each priority area:
Business Critical........................................... October 1999
High Priority............................................... October 1999
Other....................................................... No date set
The revision in the expected final completion date for Business Critical
systems from July 1999 is due to the late start of Rio's Y2K assessment and
the need to replace the Rio slot system. The Harrah's and Showboat properties
will complete the majority of their Y2K Readiness efforts for Business
Critical and High Priority items by July 1999.
-27-
The following table provides an overview of Business Critical items for
Harrah's and Showboat brand properties and Memphis-based facilities and our
progress to date.
Business Critical Items Y2K Y2K Readiness Internally Vendor
Strategy Status(1) Tested Certified
- ----------------------- -------- ------------ ---------- ---------
Casino Management System............................. Renovate/Test Y2K Ready Complete N/A
Elevators............................................ Test Y2K Ready Complete Complete
Financial Systems.................................... Renovate/Test Y2K Ready Complete Complete
Fire Alarm/Sprinkler Systems......................... Test 2nd Qtr '99 Complete Complete
GPS/Navigational Systems............................. Test Y2K Ready Complete Complete
HVAC................................................. Test/Renovate 2nd Qtr '99 Complete Complete
Key Lock System...................................... Renovate/Test 2nd Qtr '99 Complete Complete
IBM AS400/OS400...................................... Renovate/Test Y2K Ready Complete Complete
Kiosks............................................... Test Y2K Ready Complete Complete
Lodging Management System............................ Test Y2K Ready Complete Complete
Payroll.............................................. Renovate/Test 3rd Qtr '99 Complete Complete
Phone System-PBX..................................... Renovate/Test 2nd Qtr '99 Complete Complete
Point-of-Sale System (Micros)........................ Renovate/Test 2nd Qtr '99 Complete Complete
Procurement and Payables............................. Replace/Test 2nd Qtr '99 Complete Complete
Slot Data System..................................... Renovate/Test Y2K Ready Complete Complete
Scales/Countroom Equipment........................... Test Y2K Ready Complete Complete
Slot Devices......................................... Test 2nd Qtr '99 2nd Qtr '99 In Progress
Surveillance/Security................................ Test Y2K Ready Complete Complete
Time & Attendance.................................... Replace/Test 4th Qtr '99 Complete Complete
UPS/Generator........................................ Test Y2K Ready Complete Complete
WINet (Customer Database)............................ Renovate/Test Y2K Ready Complete Complete
- -----------
(1) For purposes of this document, "Y2K Ready" means it is anticipated that the
product, process, or mechanism will operate during and after the Year 2000 in a
manner that will not create a material and adverse impact on our operations.
-28-
We currently estimate the total costs of system replacements and upgrades to
address potential Y2K problems, as well as enhancing business and operational
functionality in some areas, to be approximately $11 million. Of this $11
million, approximately $9.5 million represents capitalizable costs. The total
amount expended through April 30, 1999, was approximately $5.8 million, of
which approximately 80% related to the cost to repair, replace, and improve
software and related hardware and equipment, approximately 20% related to the
cost to repair, replace, and improve embedded technology, and approximately
$30,000 related to the costs of identifying and communicating with
significant suppliers. The estimated future cost is approximately $5.2
million, of which approximately 80% relates to the cost to repair, replace,
and improve software and related hardware and equipment, approximately 20%
relates to the cost of replacing, repairing, and improving embedded
technology and approximately $10,000 relates to the costs of identifying and
communicating with significant suppliers. These costs, along with internal
resource hours, are being separately tracked. We continue to evaluate the
estimated costs associated with Y2K issues, and if significant issues are
identified in the future, such costs could increase. Although we are devoting
considerable resources to resolve Y2K issues, we continue to support and
implement other systems, operations and initiatives.
Based upon our efforts to date and the status of the plans to address
identified issues, we believe that our Business Critical systems are
compliant or will be made compliant by December 1999. One of the greatest
challenges of the Y2K issue is the potential impact of items outside of our
control, such as those of utility companies, phone and network systems, and
financial institutions. We are assessing the Y2K status of such items on an
ongoing basis and developing contingency plans for Business Critical areas.
However, should we and/or our significant suppliers fail to timely correct
material Y2K issues, such failure could have a significant impact on our
ability to operate as we did before Y2K. In such an event, we will develop
contingency plans designed to minimize any impact to the extent possible. The
impact on our operating results of such failures
-29-
and of any contingency plans to be designed to address such events cannot be
determined at this time. We believe the "most likely reasonable worst case
scenario" is one in which there are power outages. Although we have backup
power supplies and generators and contingency plans to address this type
scenario, an extended power outage could impact our operating results. Like
all other businesses, our ability to predict the impact of the Y2K Problem
and the efficacy of our solutions with respect thereto is limited by the
unprecedented nature of the problem.
Summary
- -------
In addition to the specific development and expansion projects discussed in
the Operating Results and Development Plans section, we perform on-going
refurbishment and maintenance at our casino entertainment facilities in order
to maintain the Company's quality standards. We also continue to pursue
development and acquisition opportunities for additional casino entertainment
facilities that meet our strategic and return on investment criteria. Prior
to the receipt of necessary regulatory approvals, the costs of pursuing
development projects are expensed as incurred. Construction-related costs
incurred after the receipt of necessary approvals are capitalized and
depreciated over the estimated useful life of the resulting asset. Project
opening costs are expensed as incurred.
Our planned development projcts, 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 pursued is
expected to be made available from operating cash flows, the Bank Facility
(see Debt and Liquidity section), joint venture partners, specific project
financing, guarantees of third party debt and, if necessary, additional debt
and/or equity offerings. Our capital spending for the first three months of
1999 totaled approximately $120.6 million. Estimated total capital
expenditures for 1999 are expected to be between $375 million and $455
million.
-30-
DEBT AND LIQUIDITY
- ------------------
Bank Facility
- -------------
On April 30, 1999 we consummated new revolving credit and letter of credit
facilities (the "Bank Facility")in the amount of $1.6 billion. This Bank
Facility consists of a five-year $1.3 billion revolving credit and letter of
credit facility maturing in 2004 and a separate $300 million revolving credit
facility which is renewable annually, at the borrower's and lenders' options.
Initially, the Bank Facility bears interest based upon 87.5 basis points over
LIBOR for current borrowings under the five-year facility and 92.5 basis
points over LIBOR for the 364-day facility. In addition, there is a facility
fee for borrowed and unborrowed amounts which is currently 20 basis points on
the five-year, $1.6 billion facility and 15 basis points on the 364-day, $300
million facility. The interest rate and facility fee are based on our current
debt ratings and leverage ratio and may change as our debt ratings and
leverage ratio change. Proceeds from the Bank Facility were used to retire
our previous revolving credit facility (the "Previous Facility") scheduled to
mature in 2000 and to retire Rio's revolving credit facility scheduled to
mature in 2003. The Bank Facility also provides us with the necessary
borrowing capacity to fund our tender offers to purchase Rio's 10 5/8% Senior
Subordinated Notes due 2005 and 9 1/2% Senior Subordinated Notes due 2007.
Issuance of Senior Notes
- ------------------------
In keeping with our strategy to refinance a portion of our short-term,
floating-rate borrowings under our Previous Facility with debt that has fixed
rates and longer maturities, in January 1999, we issued $500 million of 7
1/2% Senior Notes due 2009 and used the net proceeds to further reduce
amounts outstanding under our Previous Facility.
Extinguishments of Debt
- -----------------------
On March 15, 1999, we redeemed all $140 million face amount of our 99.55%
owned subsidiary, Showboat Marina Casino Partnership's, 13 1/2% First
Mortgage Notes due 2003 (the "SMCP Notes"). We retired the SMCP Notes using
proceeds from our Previous Facility. We recorded liabilities assumed in the
Showboat acquisition, including the SMCP Notes, at their fair value as of the
consummation date of the transaction. The
-31-
difference between the consideration of $159.8 million paid to the holders of
the SMCP Notes pursuant to this tender offer and the carrying value of the
SMCP notes on the consummation date, was recorded in the first quarter as an
extraordinary loss of $2.0 million, net of tax.
Interest Rate Agreements
- ------------------------
To manage the relative mix of our debt between fixed and variable rate
instruments, we have entered into interest rate swap agreements to modify the
interest characteristics of our outstanding debt without an exchange of the
underlying principal amount. The differences to be paid or received under the
terms of our interest rate swap agreements are accrued as interest rates
change and recognized as an adjustment to interest expense for the related
debt. Changes in the variable interest rates to be paid or received pursuant
to the terms of our interest rate swap agreements will have a corresponding
effect on our future cash flows.
These agreements contain a credit risk that the counterparties may be
unable to meet the terms of the agreements. We minimize that risk by
evaluating the creditworthiness of our counterparties, which are limited to
major banks and financial institutions, and do not anticipate nonperformance
by the counterparties.
For more information regarding the Company's interest rate swap agreements
as of March 31, 1999, please see Note 4 to the accompanying Consolidated
Condensed Financial Statements.
Indian Contract Commitments and Guarantees
- ------------------------------------------
The agreements under which we manage casinos on Indian lands contain
provisions required by law which provide that a minimum monthly payment be
made to the tribe. That obligation has priority over scheduled repayments of
borrowings for development costs. In the event that insufficient cash flow is
generated by the operations to fund this payment, we must pay the shortfall
to the tribe. Such advances, if any, would be repaid to us in future periods
in which operations generate cash flow in excess of the required minimum
payment. These commitments will terminate upon the occurrence of certain
defined events, including termination of the management contract. Our
aggregate monthly commitment pursuant to the contracts for the three
Indian-owned facilities we now manage, which extend for periods of up to 45
months from March 31, 1999, is $1.2 million.
-32-
We may guarantee all or part of the debt incurred by Indian tribes with
which we have entered into a management contract to fund development of
casinos on the Indian lands. For all existing guarantees of Indian debt, we
have obtained a first lien on certain personal property (tangible and
intangible) of the casino enterprise. There can be no assurance, however, the
value of such property would satisfy our obligations in the event these
guarantees were enforced. Additionally, we have received limited waivers from
the Indian tribes of their sovereign immunity to allow us to pursue our
rights under the contracts between the parties and to enforce collection
efforts as to any assets in which a security interest is taken. The aggregate
outstanding balance of such debt as of March 31, 1999, was $97.7 million,
excluding the guarantee related to the Upper Skagit Tribe's debt.
Subsequent to the end of first quarter, we performed under our guarantee of
the Upper Skagit Tribe's development financing and purchased their receivable
from the lender. Under the terms of our agreement with the Tribe, they have
agreed to fund the retirement of this receivable. The Tribe is attempting to
secure new financing; however, there is no assurance that their efforts will
be successful and that the receivable will be retired. Until such time as the
receivable is retired, we have continued exposure of up to $10.4 million.
Our agreement with the Ak Chin tribe for management of their Casino near
Phoenix, Arizona, expires in December 1999. We are presently negotiating with
the tribe for renewal of this management agreement.
Announced Dispositions
- ----------------------
In April 1999, we announced plans to sell certain of our interests in Star
City casino in Sydney, Australia to an Australia-based company in connection
with that company's intention to offer to acquire the issued and outstanding
shares of Star City Holdings Ltd. We currently own 135 million shares of Star
City Holdings Ltd. and 37 million options to purchase additional ordinary
shares. We have agreed to sell approximately 110 million ordinary shares of
Star City Holdings, our interest in the Star City management contract, and a
portion of our options to purchase additional ordinary shares. We also intend
to sell our remaining shares and options in Star City for cash or by
tendering such shares and options into the separate tender offer for Star
City Shares that will be initiated by the Australia-based company. Based on
current exchange rates, we expect to realize approximately US$220 million in
after-tax proceeds from the sale of our equity and management interest in
Star City, which will be used to reduce our outstanding indebtedness. The
acquisition of these securities and interests is subject to New South Wales
Casino Control Authority regulatory approvals and satisfaction of closing
conditions. Should such approvals not
-33-
be obtained, the Australia-based company has agreed to purchase 27.5 million
ordinary shares of our Star City Holdings, for which regulatory approval is
not required. The transaction is expected to close in the second half of 1999.
We own approximately 3 million shares of Sodak Gaming, Inc. ("Sodak"),
a company which distributes casino gaming products and software systems
throughout the U.S. In first quarter 1999, it was announced that the shares
of Sodak will be purchased by a gaming equipment manufacturing company for
$10 a share, with the transaction expected to close in the second half of
1999.
EFFECTS OF CURRENT ECONOMIC AND POLITICAL CONDITIONS
- ----------------------------------------------------
Competitive Pressures
- ---------------------
Due to the limited number of new markets opening for development, the
focus of many casino operators has shifted to investing in existing markets
in an effort to attract new customers, thereby increasing competition in
those markets. Our properties in the long-established gaming markets of
Nevada and New Jersey have generally reacted less significantly to the
changing competitive conditions. With the exception of the additional supply
being added in Las Vegas, the amount of supply change within these markets
has represented a smaller percentage change than that experienced in some
riverboat markets. In riverboat markets, the additions to supply had a more
noticeable impact, due to the fact that competition was limited in the early
stages of many of these markets. As companies have completed expansion
projects, supply has typically grown at a faster pace than demand in some
markets and competition has increased significantly. Furthermore, several
operators, including Harrah's, have announced plans for additional
developments or expansions in some markets. In the Las Vegas market, three
new "mega" facilities have opened since October, 1998, and others are planned
and under development. The impact that the additional supply will have on our
operations cannot be determined at this time.
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Over the last decade, 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. We manage three such facilities. The future growth
potential from Indian casinos is also uncertain, however. See "Political
Uncertainties" below for information concerning a California referendum.
Although the short-term effect of these competitive developments on the
Company has been negative, we are not able to determine the long-term impact,
whether favorable or unfavorable, that these trends and events will have on
our current or future markets. We believe that the geographic diversity of
our operations; our focus on multi-market customer relationships; our service
training, measurements and rewards programs; and our continuing efforts to
establish our brands as premier brands have well-positioned us to face the
challenges present within the industry. We have introduced WINet, a
sophisticated nationwide customer database, and our Total Gold Card, a
nationwide reward and recognition card, both of which we believe 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 our acquisitions of Showboat and Rio, consolidation in
the gaming industry is now underway. We believe we are well-positioned to,
and may from time to time, pursue additional strategic acquisitions to
further enhance our distribution, strengthen our access to target customers
and leverage our 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.
During fourth quarter 1998, voters in the state of California approved a
referendum that will allow an expansion of gaming offerings on Indian lands
in that state. At this time, the ultimate impacts that the federal commission
and the approval of the California referendum will have on the industry are
uncertain. From time to time, individual jurisdictions have also considered
legislation
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or referendums which could adversely impact Harrah's Entertainment's
operations, and the likelihood or outcome of similar legislation and
referendums in the future is difficult to predict.
The casino entertainment industry represents a significant source of tax
revenues to the various jurisdictions in which casinos operate. From time to
time, various state and federal legislators and officials have proposed
changes in tax laws, or in the administration of such laws, which would
affect the industry. It is not possible to determine with certainty the scope
or likelihood of possible future changes in tax laws or in the administration
of such laws. If adopted, such changes could have a material adverse effect
on our financial results.
INTERCOMPANY DIVIDEND RESTRICTION
- ---------------------------------
Certain of our debt guarantees require us 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 Entertainment. The amount of
HOC's restricted net assets, as defined, computed in accordance with these
covenants regarding restricted payments was approximately $1.4 billion at
March 31, 1999. Harrah's Entertainment's principal asset is the stock of HOC,
a wholly-owned subsidiary which holds, directly and through subsidiaries, the
principal assets of our businesses. Given this ownership structure, these
restrictions should not impair our ability to conduct our business through
our subsidiaries or to pursue our development plans.
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 this
Form 10-Q 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 and hotels that would be owned or managed by the Company and the
pursuit of strategic acquisitions; (C) the redevelopment of the casino in
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New Orleans; (D) the sale of our interests in Star City casino and Sodak; (E)
planned capital expenditures for 1999 and beyond; (F) the impact of the WINet
and Total Gold Card Programs; (G) any future impact of the Showboat and Rio
acquisitions; and (H) Year 2000 compliance plans. 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 conditions, weather and other hazards, site access matters
and building permit issues; access to available and feasible financing;
regulatory, licensing and other government approvals, third party consents
and approvals, and relations with partners, owners and other third parties;
conditions of credit markets and other business and economic conditions,
including international and national economic problems; litigation, judicial
actions and political uncertainties, including gaming legislative action,
referenda, and taxation; actions or inactions of suppliers and vendors
regarding Year 2000; 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.
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PART II -OTHER INFORMATION
---------------------------
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
On February 26, 1999, the Company issued 589,165 unregistered shares of
its Common Stock to three of the Company's partners in the East Chicago
Showboat property. The shares were issued as part of the consideration to
increase the Company's ownership in this property from 45% to 99.55%.
Exemption from registration was claimed under Section 4(2) of the Securities
Act of 1933 since the issuance of this stock did not involve a public
offering. On May 6, 1999, the Company filed an S-3 registration statement
that will permit resale of this stock by these partners when the registration
statement becomes effective.
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Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits
*EX-4.1 Third Amendment, dated as of January 19, 1999, to the
5-Year Credit Agreement and to the 364-Day Credit
Agreement, among Harrah's Entertainment, Inc.,
Harrah's Operating Company, Inc., Marina Associates,
the lenders party to these credit agreements,
Canadian Imperial Bank of Commerce and Societe
Generale, as Co-Syndication Agents, Bank of America
National Trust and Savings Association, as
Documentation Agent, and Bankers Trust Company, as
Administrative Agent.
*EX-11 Computation of per share earnings.
*EX-27 Financial Data Schedule.
*Filed herewith.
(b) The following Current Reports on Form 8-K were filed by the Company during
the first quarter of 1999: January 7, 1999 - reporting the consummation of
the merger with Rio Hotel & Casino, Inc.; January 13, 1999 - reporting the
Underwriting Agreement in connection with $500,000,000 7 1/2% Senior Notes
Due 2009; and February 12, 1999 - reporting the Company's year-end results.
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Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARRAH'S ENTERTAINMENT, INC.
May 13, 1999 BY: /s/ JUDY T. WORMSER
-----------------------
Judy T. Wormser
Vice President and Controller
(Chief Accounting Officer)
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Exhibit Index
-------------
Sequential
Exhibit No. Description Page No.
- ----------- ------------------------------- ----------
EX-4.1 Third Amendment, dated as of 42
January 19, 1999, to the 5-Year
Credit Agreement and to the
364-Day Credit Agreement among
Harrah's Entertainment, Inc.,
Harrah's Operating Company, Inc.,
Marina Associates, the lenders
party to these credit agreements,
Canadian Imperial Bank of
Commerce and Societe Generale,
as Co-Syndication Agents, Bank
of America National Trust and
Savings Association, as
Documentation Agent, and Bankers
Trust Company, as Administrative
Agent.
EX-11 Computation of per share earnings. 54
EX-27 Financial Data Schedule. 55
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