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 JUNE 30, 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 June 30, 1999, there were outstanding 128,307,805 shares of the
Company's Common Stock.
Page 1 of 648
Exhibit Index Page 42
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) June 30, December 31,
1999 1998
ASSETS ---------- ----------
Current assets
Cash and cash equivalents $ 176,326 $ 158,995
Receivables, less allowance for doubtful
accounts of $41,594 and $14,356 90,694 55,043
Deferred income tax benefits 30,200 22,478
Prepayments and other 46,122 27,521
Inventories 32,741 15,306
---------- ----------
Total current assets 376,083 279,343
---------- ----------
Land, buildings, riverboats and equipment 3,820,964 2,660,004
Less: accumulated depreciation (864,128) (789,847)
---------- ----------
2,956,836 1,870,157
Excess of purchase price over net assets
of businesses acquired, net of amortization
of $47,333 and $40,051 (Note 2) 530,512 383,450
Investments in and advances to
nonconsolidated affiliates 301,447 273,508
Deferred costs, trademarks, notes receivable and
other assets 559,705 479,874
---------- ----------
$4,724,583 $3,286,332
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 53,733 $ 57,864
Construction payables 8,016 629
Accrued expenses 269,836 172,021
Current portion of long-term debt 10,263 2,332
---------- ----------
Total current liabilities 341,848 232,846
Long-term debt 2,582,392 1,999,354
Deferred credits and other 110,098 112,362
Deferred income taxes 200,484 75,457
---------- ----------
3,234,822 2,420,019
---------- ----------
Minority interests 14,828 14,906
---------- ----------
Commitments and contingencies (Notes 4, 6, 7 and 8)
Stockholders' equity
Common stock, $0.10 par value, authorized
360,000,000 shares, outstanding 128,307,805
and 102,188,018 shares (net of 3,292,614 and
3,036,562 shares held in treasury) 12,831 10,219
Capital surplus 951,018 407,691
Retained earnings 522,875 451,410
Accumulated other comprehensive income 10,942 6,567
Deferred compensation related to restricted stock (22,733) (24,480)
---------- ----------
1,474,933 851,407
---------- ----------
$4,724,583 $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 Second Quarter Ended Six Months Ended
amounts) June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------- --------- ---------- ----------
Revenues
Casino $599,603 $387,507 $1,165,562 $ 730,403
Food and beverage 105,387 54,533 208,540 104,258
Rooms 63,802 37,690 126,438 69,768
Management fees 18,275 22,160 34,995 32,337
Other 33,718 19,404 63,969 37,069
Less: casino promotional allowances (69,648) (42,660) (136,699) (80,754)
-------- -------- ---------- ----------
Total revenues 751,137 478,634 1,462,805 893,081
-------- -------- ---------- ----------
Operating expenses
Direct
Casino 314,397 219,347 615,923 395,585
Food and beverage 55,449 28,348 112,243 53,893
Rooms 16,513 10,810 33,594 20,420
Depreciation of buildings,
riverboats and equipment 45,711 31,593 93,755 61,073
Development costs 1,509 2,082 2,270 3,920
Write-downs, reserves and
recoveries (1,598) 1,847 (1,475) 1,847
Project opening costs 45 3,342 397 5,996
Other 170,189 94,970 322,809 195,160
-------- -------- ---------- ----------
Total operating expenses 602,215 392,339 1,179,516 737,894
-------- -------- ---------- ----------
Operating profit 148,922 86,295 283,289 155,187
Corporate expense (13,492) (8,936) (21,423) (15,586)
Relocation of corporate offices (1,422) - (4,492) -
Equity in losses of
nonconsolidated affiliates (6,153) (3,511) (12,821) (6,302)
Venture restructuring costs - (1,533) 397 (2,459)
Amortization of goodwill and
trademarks (4,351) (460) (8,963) (919)
-------- -------- ---------- ----------
Income from operations 123,504 71,855 235,987 129,921
Interest expense, net of interest
capitalized (48,692) (25,623) (99,587) (44,949)
Gain on sale of equity interest
in nonconsolidated affiliate - 13,155 - 13,155
Other income, including interest
income 4,404 1,395 6,570 5,525
-------- -------- ---------- ----------
Income before income taxes and
minority interests 79,216 60,782 142,970 103,652
Provision for income taxes (28,742) (22,031) (53,380) (37,952)
Minority interests (2,551) (1,732) (4,322) (3,778)
-------- -------- ---------- ----------
Income before extraordinary losses 47,923 37,019 85,268 61,922
Extraordinary losses on early
extinguishments of debt, net of
income tax benefit of $4,004,
$9,031, $5,768 and $9,755 (7,375) (16,613) (10,623) (18,280)
-------- -------- ---------- ----------
Net income $ 40,548 $ 20,406 $ 74,645 $ 43,642
======== ======== ========== ==========
-4-
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (CONTINUED)
(UNAUDITED)
(In thousands, except per share
amounts) Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
--------- --------- -------- ---------
Earnings per share-basic
Income before extraordinary losses $ 0.38 $ 0.37 $ 0.67 $ 0.62
Extraordinary losses, net (0.06) (0.17) (0.08) (0.18)
--------- --------- -------- ---------
Net income $ 0.32 $ 0.20 $ 0.59 $ 0.44
========= ========= ======== =========
Earnings per share-diluted
Income before extraordinary losses $ 0.37 $ 0.36 $ 0.66 $ 0.61
Extraordinary losses, net (0.06) (0.16) (0.08) (0.18)
--------- --------- -------- ---------
Net income $ 0.31 $ 0.20 $ 0.58 $ 0.43
========= ========= ======== =========
Average common shares outstanding 126,203 100,207 125,864 100,167
========= ========= ======== =========
Average common and common
equivalent shares outstanding 128,984 101,736 127,866 101,480
========= ========= ======== =========
See accompanying Notes to Consolidated Condensed Financial Statements.
-5-
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands) Six Months Ended
June 30, June 30,
1999 1998
----------- ----------
Cash flows from operating activities
Net income $ 74,645 $ 43,642
Adjustments to reconcile net income to cash
flows from operating activities
Extraordinary losses, before income taxes 16,391 27,311
Depreciation and amortization 110,443 71,825
Other noncash items 23,384 18,227
Minority interests' share of income 4,322 3,778
Equity in losses of nonconsolidated
affiliates 12,821 6,302
Net gains from asset sales (1,714) (13,174)
Net change in long-term accounts 21,655 (15,090)
Net change in working capital accounts (7,827) (29,950)
----------- -----------
Cash flows provided by operating activities 254,120 112,871
----------- -----------
Cash flows from investing activities
Land, buildings, riverboats and equipment additions (172,406) (64,038)
Investments in and advances to nonconsolidated
affiliates (34,381) (15,203)
Purchase of minority interest in subsidiary (26,000) -
Cash acquired in Rio transaction 22,025 -
Proceeds from asset sales 10,789 96
Increase/(iecrease) in construction payables 7,387 (4,484)
Acquisition of Showboat, Inc., net of cash
acquired - (465,388)
Increase in notes receivable - (22,908)
Proceeds from sale of equity interest in
nonconsolidated affiliate - 17,000
Other 10,215 (1,147)
----------- -----------
Cash flows used in investing activities (182,371) (556,072)
----------- -----------
Cash flows from financing activities
Net borrowings under Revolving Credit Facility 960,651 1,068,802
Net repayments under retired revolving credit
facility (1,086,000) -
Proceeds from issuance of senior notes, net of
discount and issue costs of $5,980 494,020 -
Early extinguishments of debt (408,904) (560,708)
Scheduled debt retirements (3,866) (1,303)
Premiums paid on early extinguishments of debt (2,739) (24,569)
Purchases of treasury stock (3,180) -
Minority interests' distributions, net of
contributions (4,400) (3,583)
----------- -----------
Cash flows (used in) provided by financing
activities (54,418) 478,639
----------- -----------
Net increase in cash and cash equivalents 17,331 35,438
Cash and cash equivalents, beginning of period 158,995 116,443
----------- -----------
Cash and cash equivalents, end of period $ 176,326 $ 151,881
=========== ===========
See accompanying Notes to Consolidated Condensed Financial Statements.
-6-
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands) Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
--------- --------- -------- ---------
Net income $ 40,548 $ 20,406 $ 74,645 $ 43,642
--------- --------- -------- ---------
Other comprehensive income
Foreign currency translation
adjustments, net of tax provision of
$2,247, $351, $1,402 and $351 3,035 572 2,288 572
Unrealized gains (losses) on available-for-sale
securities, net of tax provision (benefit) of
$641, $(1,714), $1,279 and $(858) 1,047 (2,726) 2,087 (1,387)
--------- --------- -------- ---------
Other comprehensive income 4,082 (2,154) 4,375 (815)
--------- ---------- -------- ---------
Comprehensive income $ 44,630 $ 18,252 $ 79,020 $ 42,827
========= ========= ======== =========
-7-
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 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 second quarter and first six months 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 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 the Showboat transaction, the allocation of
the purchase price was completed in second quarter 1999. For the Rio
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 40 years. For periods prior to 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. 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 options to purchase additional ordinary shares. We
also intend to sell our remaining shares and any options in Star City not
purchased by the Australian based company for cash or by tendering such
shares and options into the separate tender offer for Star City shares that
will be initiated by that company. 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,
-9-
the Australia-based company has agreed to purchase 27.5 million ordinary shares
of our Star City shares, for which regulatory approval is not required. The
transaction is expected to close in the second half of 1999.
At the time of the Showboat acquisition, the Las Vegas Showboat
property was determined to be a non-strategic asset and is being reported as
an asset-held-for-sale in our financial statements. In July 1999 we announced
that we have reached an agreement to sell Showboat Las Vegas. The sale is
expected to close by the end of 1999, subject to certain conditions,
including regulatory approval. At June 30, 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, notes receivable 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
requires us to account for the investment by the equity method, whereby we
include our share of this nonconsolidated affiliate's profits or losses in our
financial results. Operation of the airline began in May 1999. Rio's investment
in the new airline is reported as an asset-held-for-sale in our financial
statements.
During second quarter 1999 we completed tender offers and consent
solicitations for Rio's 10 5/8% Senior Subordinated Notes due 2005 and 9 1/2%
Senior Subordinated Notes due 2007 (collectively, the "Rio Notes"). As a result
of these tender offers, we redeemed all $225 million face amount of the Rio
Notes. We recorded liabilities assumed in the Rio merger, including these notes,
at their fair value as of the date of the consummation of the merger. The
difference between the consideration paid to the holders of the Rio Notes
pursuant to the tender offers and the carrying value of the notes on the date of
the redemption was recorded in the second quarter as an extraordinary loss of
$4.5 million, net of tax.
The following unaudited pro forma consolidated financial information
for the Company has been prepared assuming that the acquisitions and the
Showboat and Rio debt extinguishments discussed above had occurred on the
first day of the period:
-10-
Quarter Ended Six Months Ended
(In millions, except June 30, 1998 June 30, 1998
per share amounts) ------------- ----------------
Revenues $674.7 $1,324.8
------- ---------
------- ---------
Income from operations $ 90.5 $ 185.5
------- ----------
------- ----------
Income before extraordinary
losses $ 24.2 $ 54.1
------- ----------
------- ----------
Net income $ 7.6 $ 35.8
------- ----------
------- ----------
Earnings per share-diluted
Income before extraordinary losses $ 0.19 $ 0.43
------- ----------
------- ----------
Net income $ 0.03 $ 0.25
------- ----------
------- ----------
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
In July 1999, our Board of Directors authorized the repurchase in open
market and other transactions of up to 10 million shares of the Company's common
stock. We expect to acquire our shares from time to time at prevailing market
prices through the December 31, 2000, expiration of the approved plan.
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
-11-
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, $1.3 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 scheduled to mature in
2000 (the "Previous Facility") and to retire Rio's revolving credit facility
scheduled to mature in 2003 and Rio's 10 5/8% Senior Subordinated Notes due 2005
and 9 1/2% Senior Subordinated Notes due 2007.
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 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) June 30, 1999 Maturity
- --------------- --------- -------------- ------------
$50 million 6.985% 5.174% March 2000
$50 million 6.951% 5.165% March 2000
$50 million 6.945% 5.165% March 2000
$50 million 6.651% 5.000% May 2000
$50 million 5.788% 5.096% June 2000
$50 million 5.785% 5.096% 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:
Six Months Ended
June 30, June 30,
(In thousands) 1999 1998
------- --------
Interest expense, net of amount capitalized $99,587 $44,949
Adjustments to reconcile to cash paid for interest:
Net change in accruals (5,411) (12,905)
Amortization of deferred finance charges (5,553) (1,697)
Net amortization of discounts and premiums 1,313 609
------- -------
Cash paid for interest, net of amount capitalized $89,936 $30,956
======= =======
Cash payments of income taxes, net of refunds $12,743 $15,058
======= =======
-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. We will manage
that Casino pursuant to a management agreement between JCC and a subsidiary
of our Company. We have (i) guaranteed JCC's initial $100 million 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) made a $22.5 million
subordinated loan to JCC to finance construction of the Casino.
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 renewal periods beginning
April 1, 2001) and other conditions are satisfied each year, to renew the
guarantee beginning April 1, 2000, for each 12 month period ending March 31,
2004. 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 has entered into an agreement with Clark County, Nevada, to
construct 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.
-14-
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 June 30,
1999, we had guaranteed third party loans and leases of $112 million, which
are secured by certain assets, and had commitments of $134 million, primarily
construction-related.
During second quarter 1999, we performed under our guarantee of the
Upper Skagit Tribe's development financing and purchased their receivable from
the lender for $11.4 million. Under the terms of our agreement with the Tribe,
they have agreed to fund the retirement of this debt. 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.
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 June 30, 1999, the
aggregate monthly commitment pursuant to these contracts, which extend for
periods of up to 42 months from June 30, 1999, was $1.2 million.
Severance Agreements
- --------------------
As of June 30, 1999, we have severance agreements with 44 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
June 30, 1999, that would be payable under the agreements to these executives
based on earnings and stock options aggregated approximately $61.9 million.
-15-
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.
Note 8 - Nonconsolidated Affiliates
- -----------------------------------
Summarized balance sheet and income statement information of
nonconsolidated affiliates as of June 30, 1999 and December 31, 1998, and for
the second quarters and first six months ended June 30, 1999 and 1998 is
included in the following tables.
-16-
(In thousands) June 30, Dec. 31,
1999 1998
---------- ----------
Combined Summarized Balance Sheet Information
Current assets $ 101,969 $ 111,218
Land, buildings and equipment, net 1,078,516 1,094,195
Other assets 356,763 355,505
---------- ----------
Total assets 1,537,248 1,560,918
---------- ----------
Current liabilities 44,235 96,095
Long-term debt 817,167 808,334
---------- ----------
Total liabilities 861,402 904,429
---------- ----------
Net assets $ 675,846 $ 656,489
========== ==========
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------- --------- -------- --------
(In thousands)
Combined Summarized Statements of
Operations
Revenues $ 99,073 $ 19,083 $187,656 $ 23,802
======== ========= ======== ========
Operating loss $(12,593) $ (15,807) $(16,012) $(24,628)
======== ========= ======== ========
Net loss $(12,997) $ (15,269) $(27,287) $(21,836)
======== ========= ======== ========
Our share of nonconsolidated affiliates' combined net operating results
are reflected in the accompanying Consolidated Condensed Statements of Income as
Equity in losses of nonconsolidated affiliates.
Our investments in and advances to nonconsolidated affiliates are
reflected in the accompanying Consolidated Condensed Balance Sheets as follows:
(In thousands) June 30, Dec. 31,
1999 1998
-------- --------
Investments in and advances to
Nonconsolidated affiliates
Accounted for under the equity method $271,027 $231,366
Accounted for at historical cost - 15,087
Equity securities available-for-sale and
recorded at market value 30,420 27,055
-------- --------
$301,447 $273,508
======== ========
-17-
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 June 30, 1999 and December 31, 1998, and for
the second quarters and first six months ended June 30, 1999 and 1998, prepared
on the same basis as Harrah's Entertainment, was as follows:
(In thousands) June 30, Dec. 31,
1999 1998
---------- ----------
Current assets $ 379,322 $ 271,247
Land, buildings, riverboats and
equipment, net 2,956,836 1,870,157
Other assets 1,391,582 1,136,750
---------- ----------
4,727,740 3,278,154
---------- ----------
Current liabilities 336,714 209,651
Long-term debt 2,582,392 1,999,354
Other liabilities 310,577 187,247
Minority interests 14,828 14,906
---------- ----------
3,244,511 2,411,158
---------- ----------
Net assets $1,483,229 $ 866,996
========== ==========
-18-
(In thousands) Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------- -------- ---------- --------
Revenues $751,012 $481,980 $1,462,597 $900,112
======== ======== ========== ========
Income from operations $124,444 $ 76,520 $ 236,856 $139,129
======== ======== ========== ========
Income before extraordinary
losses $ 48,534 $ 40,051 $ 85,834 $ 67,907
======== ======== ========== ========
Net income $ 41,159 $ 24,438 $ 75,211 $ 49,627
======== ======== ========== ========
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
$1.5 billion at June 30, 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 second 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
requires us to account for the investment by the equity method, whereby we
include our share of this nonconsolidated affiliate's profits or losses in our
financial results. Operation of the airline began in May 1999. Rio's investment
in the new airline is reported as an asset-held-for-sale in our financial
statements.
-20-
OPERATING RESULTS AND DEVELOPMENT PLANS
- ---------------------------------------
Overall
- -------
Second quarter 1999 results reflect the impact of the additions of
Showboat in June 1998 and Rio in January 1999, but even without them we
experienced a 8.1% increase in revenue and a 16.2% 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.
Second Quarter Percentage Six Months Ended Percentage
(in millions, except -------------- Increase/ ---------------- Increase/
earnings per share) 1999 1998 (Decrease) 1999 1998 Decrease)
------ ------ -------- -------- ------ ---------
Revenues $751.1 $478.6 56.9% $1,462.8 $893.1 63.8%
Operating profit 148.9 86.3 72.5% 283.3 155.2 82.5%
Income from operations 123.5 71.9 71.8% 236.0 129.9 81.7%
Income before extraordinary
losses 47.9 37.0 29.5% 85.3 61.9 37.8%
Net income 40.5 20.4 98.5% 74.6 43.6 71.1%
Earnings per share - diluted
Before extraordinary losses 0.37 0.36 2.8% 0.66 0.61 8.2%
Net income 0.31 0.20 55.0% 0.58 0.43 34.9%
Operating margin 16.4% 15.0% 1.4pts 16.1% 14.5% 1.6pts
Revenues for second quarter 1999 increased 56.9% over second 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,
St. Louis and North Kansas City, 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.
Revenues for the six months ended June 30, 1999 were up 63.8% over
revenues for the same period last year. While this increase was driven primarily
by the addition of revenues from the Showboat and Rio properties, revenues
excluding these recently acquired properties were up 9.7%.
-21-
Western Region
- --------------
Second Quarter Percentage Six Months Ended Percentage
-------------- Increase/ ---------------- Increase/
(in millions) 1999 1998 (Decrease) 1999 1998 Decrease)
------ ------ ----------- ------ ------ --------
Casino revenues $175.8 $111.9 57.1% $352.8 $215.7 63.6%
Total revenues 283.0 159.4 77.5% 565.4 305.9 84.8%
Operating profit 43.9 23.0 90.9% 88.8 40.2 120.9%
Operating margin 15.5% 14.4% 1.1pts 15.7% 13.1% 2.6pts
The addition of Rio plus increased second quarter revenues at all Harrah's
properties in the Western region, except Harrah's Reno, resulted in a 77.5%
increase over second quarter 1998 in this region. Although revenues at Harrah's
Reno were down slightly from last year, operating income was 5.1% higher than in
second quarter 1998. Overall, revenues at Northern Nevada properties were 4.9%
higher than in second quarter 1998 and operating profit 12.3% higher. Second
quarter revenues at Southern Nevada properties, excluding Rio which was acquired
January 1, 1999, were up 5.6% over last year and operating income was 26.7%
higher than in the same period last year. These increases were driven by more
effective marketing programs, cross-market visitation and improved margins.
For the six months ended June 30, 1999, revenues increased 8.1% in
Northern Nevada and 7.4% in Southern Nevada, excluding Rio, and operating income
increased 25.7% in Northern Nevada and 25.5% in Southern Nevada over the same
six month period last year. Rio contributed $235.9 million in revenue and
$38.2 million operating profit for the six months ended June 30, 1999.
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
Pavilion, Rio's new 110,000 square foot entertainment/convention complex which
opened in March 1999. The showroom complex is expected to cost approximately $35
million, of which $12.7 million had been spent through June 30, 1999. Completion
is scheduled for first quarter 2000.
At the time of the Showboat acquisition, the Showboat Las Vegas
property was determined to be a nonstrategic asset for us and is being reported
as an asset held-for-sale in our financial statements. In July 1999, we
announced that we have reached an agreement to sell Showboat Las Vegas. The sale
is expected to close by the end of 1999, subject to certain conditions,
including regulatory approval. No gain or loss is expected to be recorded on
this sale.
-22-
In June 1999, we purchased properties adjacent to our casino in Reno,
Nevada. Buildings on these properties will be demolished to give way to possible
expansions in the future.
Eastern Region
- --------------
Second Quarter Percentage Six Months Ended Percentage
-------------- Increase/ ---------------- Increase/
(in millions) 1999 1998 (Decrease) 1999 1998 Decrease)
------ ------ ----------- ------ ----- --------
Casino revenues $183.0 $113.1 61.8% $350.9 $192.1 82.7%
Total revenues 196.8 123.8 59.0% 375.8 210.2 78.8%
Operating profit 45.4 27.7 63.9% 81.5 44.8 81.9%
Operating margin 23.1% 22.4% 0.7pts 21.7% 21.3% 0.4pts
Harrah's Atlantic City's revenues increased 9.9% in second quarter 1999 and
operating profit increased 17.6% over the same period last year. Revenues
increased 8.3% and operating income increased 12.8% over the same six month
period last year at Harrah's Atlantic City. Eastern region results also include
Showboat Atlantic City for 1999 and for one month during the second quarter and
first six months of 1998.
Central Region
- --------------
Second Quarter Percentage Six Months Ended Percentage
-------------- Increase/ ---------------- Increase/
(in millions) 1999 1998 (Decrease) 1999 1998 Decrease)
------ ------ ----------- ------ ----- --------
Casino revenues $240.8 $162.5 48.2% $461.9 $322.6 43.2%
Total revenues 252.6 172.4 46.5% 485.6 342.6 41.7%
Operating profit 50.8 33.4 52.1% 92.0 69.0 33.3%
Operating margin 20.1% 19.4% 0.7pts 19.0% 20.1% (1.1)pts
Chicagoland - Revenues increased 24.2% at Harrah's Joliet compared to the second
quarter of 1998, and operating profit increased 21.1% compared to the same
period last year. For the six months ended June 30, 1999, revenues were 19.6%
above the same six month period last year, while operating income was basically
flat when compared to the same period last year. In late June 1999, cruise
scheduling and ticketing were eliminated at Harrah's Joliet, and business levels
have increased noticeably since going dockside. 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 $11.0 million had been spent through June 30,
1999. Completion is projected for fourth quarter 1999.
-23-
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. Also during first quarter 1999, this property was rebranded
as a "Harrah's" property, and, despite some rebranding-related disruptions,
results subsequent to rebranding have been strong.
Louisiana - Harrah's Shreveport's revenues and operating profit for second
quarter and first six months decreased from the same period last year due to
competitive conditions in the market. Construction began in May 1999 on a
514-room hotel with almost 13,500 square feet of convention center space. The
new hotel and amenity expansion is expected to cost $146.6 million, of which
$5.0 million had been spent through June 30, 1999, and is scheduled to open in
fourth quarter of 2000.
Mississippi - Combined second quarter revenues by Harrah's Mississippi
properties increased 3.5% over second quarter 1998 and 4.0% for the first six
months of 1999. Results from Harrah's Tunica improved significantly over second
quarter 1998, while operating profit at Harrah's Vicksburg declined from 1999.
In March 1999, we consummated the sale of our original Tunica property to
another casino company for cash and a note receivable. The note was collected in
full in April 1999, and a gain was recognized in second quarter. Our gain from
this disposition is not material.
Missouri - Harrah's North Kansas City's revenues for second quarter 1999
increased 14.3% over the same period in 1998, and operating profit increased
7.5% from second quarter last year. For the first six months, revenues were
11.1% higher than in 1998, while operating income remained flat.
Second quarter revenues at Harrah's St. Louis-Riverport casino
increased 38.1% over second quarter 1998. Operating profit increased 103.5% over
the same period last year. Revenues for the first six months of 1999 increased
38.6%, and operating income increased 123.3% 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 $2.6 million for the
quarter and $5.4 million for the first six months of 1999. These losses are
included in Equity in losses of nonconsolidated affiliates in the Consolidated
Condensed Statements of Income (see Other Factors Affecting Net Income).
-24-
Both Harrah's St. Louis and Harrah's North Kansas City were market-share
leaders in their respective markets for the second quarter and first six months.
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
increases in fees from our management of tribal-owned casino properties which
were open in both periods.
See DEBT and LIQUIDITY section for further discussion of Harrah's
guarantees of debt related to Indian projects.
Other Factors Affecting Net Income
- ----------------------------------
Second Quarter Percentage Six Months Ended Percentage
(Income)/Expense -------------- Increase/ ---------------- Increase/
(in millions) 1999 1998 (Decrease) 1999 1998 (Decrease)
------ ------ ---------- ------ ------ ----------
Development costs $ 1.5 $ 2.1 (28.6)% $ 2.3 $ 3.9 (41.0)%
Project opening costs - 3.3 N/M 0.4 6.0 (93.3)%
Corporate expense 13.5 8.9 51.7 % 21.4 15.6 37.2 %
Headquarters relocation expense 1.4 - N/M 4.5 - N/M
Equity in losses of
nonconsolidated affiliates 6.2 3.5 77.1 % 12.8 6.3 103.2 %
Write-downs, reserves and recoveries (1.6) 1.8 N/M (1.5) 1.8 N/M
Venture restructuring costs - 1.5 N/M (0.4) 2.5 N/M
Amortization of goodwill 4.4 1.9 131.6 % 9.0 2.3 N/M
Interest expense, net 48.7 25.6 90.2 % 99.6 44.9 121.8 %
Gain on sale of equity interest
in subsidiary - (13.1) N/M - (13.1) N/M
Other income (4.4) (1.4) N/M (6.6) (5.5) 20.0 %
Effective tax rate 36.3% 36.6% (0.3)pts 37.3% 36.6% 0.7pts
Minority interests $ 2.6 $ 1.7 52.9 % $ 4.3 $ 3.8 13.2 %
Extraordinary losses, net
of income taxes 7.4 16.6 (55.4)% 10.6 18.3 (42.1)%
Average common and common
equivalent shares outstanding 129.0 101.7 26.8 % 127.9 101.5 26.0 %
Development costs for second quarter 1999 decreased 28.6% from the same
period last year, reflecting the continuing decline in development activity due
to the limited number of new markets opening for development.
-25-
Project opening costs for the first six months of 1999 include costs
incurred in connection with expansions, remodeling and conversions at existing
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 51.7% in second quarter 1999 from the prior
year level due to timing of expenses and increased costs. Increased corporate
expense for the quarter included approximately $2.0 million in consultant costs
for a complete review of corporate services and expenses. The review generated
ideas from employees to cut costs through internal department efficiencies,
automation, capturing synergies, outsourcing and streamlining or eliminating
select, underutilized internal products or services. These cost saving measures
will be phased in over the next 12 to 18 months. $1.4 million of costs related
to the relocation of the Company's headquarters to Las Vegas, Nevada, were
expensed in second quarter 1999.
Equity in losses of nonconsolidated affiliates consists of losses from
the St. Louis shoreside facilities joint venture and our investments in Jazz
Casino Company L.L.C. in New Orleans, Star City casino in Australia, an airline
company in Las Vegas, Nevada, a golf course in Tunica, Mississippi, and a
thoroughbred racetrack in Florence, Kentucky.
Second quarter 1999 write-downs, reserves and recoveries include the
gain from the sale of our idle property in Tunica, Mississippi. Second quarter
1998 represents charges accrued in connection with the planned termination of a
development contract.
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 1999 over 1998, primarily as a result of
increases in debt arising from the Showboat and Rio transactions.
Other income increased in second quarter 1999 due to higher 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 six months of 1999 compared to 1998 is due to the
additional goodwill incurred in connection with the Showboat and Rio
acquisitions.
-26-
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.)
The increase in common and common equivalent shares outstanding over
last year is primarily the result of shares issued in the consummation of the
Rio merger.
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. We have 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.
The following table provides an overview of Business Critical items for
Harrah's, Showboat, and Rio branded properties and corporate facilities and our
Y2K progress as of July 1999.
-27-
BUSINESS CRITICAL ITEMS Y2K Y2K READINESS INTERNALLY VENDOR
STRATEGY STATUS(1) TESTED CERTIFIED
Casino Management System (Harrah's and Showboat).............. Renovate/Test Y2K Ready Complete N/A
Casino Management System (Rio)................................ Replace/Test 3rd Qtr `99 Complete N/A
Financial Systems............................................. Renovate/Test Y2K Ready Complete Complete
Fire Alarm/Sprinkler Systems.................................. Test 3rd Qtr `99 Complete Complete
GPS/Navigational Systems...................................... Test Y2K Ready Complete Complete
HVAC.......................................................... Test/Renovate Y2K Ready Complete Complete
Key Lock System............................................... Renovate/Test Y2K Ready 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 Y2K Ready Complete Complete
Phone System-PBX.............................................. Renovate/Test Y2K Ready Complete Complete
Point-of-Sale System (Micros)................................. Renovate/Test Y2K Ready Complete Complete
Procurement and Payables...................................... Replace/Test 3rd Qtr `99 Complete Complete
Slot Data System (Harrah's and Showboat)...................... Renovate/Test Y2K Ready Complete Complete
Slot Data System (Rio)........................................ Replace/Test 3rd Qtr `99 Complete Complete
Slot Devices.................................................. Test Y2K Ready Complete Complete
Surveillance/Security......................................... Test Y2K Ready Complete Complete
Time & Attendance............................................. Replace/Test 3rd 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.
As noted in the table above, the majority of Business Critical items
have been internally tested to verify vendor Y2K compliance claims. Such testing
generally entails creating a test environment to roll the date forward to
simulate the transition from December 31, 1999, to January 1, 2000, test that
the year 2000 is recognized as a Leap year, and perform other tests such as end
of month, quarter and year-end processing.
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 $9.6 million represents capitalizable costs. The
total amount expended through June 30, 1999, was approximately $6.7 million,
of which approximately 80% is related to the cost to repair, replace, and
improve software and related hardware and
-28-
equipment, approximately 20% related to the cost to repair, replace, and improve
embedded technology, and approximately $40,000 related to the costs of
identifying and communicating with significant suppliers. The estimated future
cost is approximately $4.3 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 and High Priority
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 in the event of failures.
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. We are currently developing contingency
plans designed to minimize any impact to the extent possible. The impact on our
operating results of such failures 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
-29-
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 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 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 six months of
1999 totaled approximately $230.0 million. Estimated total capital
expenditures for 1999 are expected to be between $350 million and $430
million.
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, $1.3 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
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change as our debt ratings and leverage ratio change. Proceeds from the Bank
Facility were used to retire our previous revolving credit facility scheduled to
mature in 2000 (the "Previous Facility") and to retire Rio's revolving credit
facility scheduled to mature in 2003 and Rio's 10 5/8% Senior Subordinated Notes
due 2005 and 9 1/2% Senior Subordinated Notes due 2007.
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 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.
On May 17, 1999, we redeemed all $100 million face amount of Rio's 10
5/8% Senior Subordinated Notes due 2005 and all $125 million of Rio's 9 1/2%
Senior Subordinated Notes due 2007. We recorded liabilities assumed in the Rio
merger, including these notes, at their fair value as of the date of
consummation of the merger. The difference between the consideration of $251.8
million paid to the holders of the Rio notes pursuant to the tender offer and
the carrying value of the notes on the date of the redemption was recorded in
the second quarter as an extraordinary loss of $4.5 million, net of tax.
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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 June 30, 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 42 months from June 30, 1999, is
$1.2 million.
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
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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 June 30, 1999, was
$92.0 million, excluding the guarantee related to the Upper Skagit Tribe's
debt.
During second quarter 1999, we performed under our guarantee of the
Upper Skagit Tribe's development financing and purchased their receivable from
the lender for $11.4 million. Under the terms of our agreement with the Tribe,
they have agreed to fund the retirement of this debt. 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.
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 our options to purchase additional ordinary shares.
We also intend to sell our remaining shares and any options in Star City not
purchased by the Australia-based company for cash or by tendering such shares
and options into the separate tender offer for Star City Shares that has been
initiated by that 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
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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 shares, 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 by the end 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. We are now embarking on the next state of our strategy with the launch
of the tiered customer loyalty card program - Total Diamond, Total Platinum and
Total Gold - to reward customers for choosing Harrah's Entertainment casinos.
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 the National
Gambling Impact Study Commission to study gambling in the United States,
including the casino gaming industry. The commission issued its report in
June 1999. During fourth quarter 1998, voters in
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the state of California approved a referendum that will allow an expansion of
gaming offerings on Indian lands in that state. A challenge to the
constitutionality of the initiated act is currently pending before the
California Supreme Count. At this time, the ultimate impacts that the
National Gambling Impact Study Commission report and the approval of the
California referendum will have on the industry are uncertain. From time to
time, individual jurisdictions have also considered legislation 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 and hires large
numbers of employees for the casinos. 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 $1.5 billion at June 30, 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)
contain statements that are forward looking. These
-36-
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 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 4. Submission of Matters To a Vote of Security Holders
-----------------------------------------------------------
The Company held its annual stockholders meeting on May 7, 1999. The
following matters were voted upon at the meeting:
1. Election of Class III Directors
-------------------------------
Votes Cast
------------------------
Against or
Name of Director Elected For Withheld
------------------------- --- ----------
Susan Clark-Johnson 103,955,333 1,911,506
James B. Farley 103,951,915 1,914,924
Walter J. Salmon 103,938,905 1,927,934
Name of Each Other Director Whose Term of
Office as Director Continued After the Meeting
----------------------------------------------
Joe M. Henson
Ralph Horn
J. Kell Houssels III
R. Brad Martin
Colin V. Reed
Philip G. Satre
Boake A. Sells
Eddie N. Williams
2. Ratification of Arthur Against or
Andersen LLP as the For Withheld Abstentions
Company's independent --- -------- -----------
public accountants 105,450,842 152,868 263,129
for the 1999 calendar
year
----------------------
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Item 6. Exhibits and Reports on Form 8-K
------------------------------------------
(a) Exhibits
*EX-3.1 Bylaws of Harrah's Entertainment, Inc., as amended
May 7, 1999.
*EX-3.2 Bylaws of Harrah's Operating Company, Inc., as
amended May 7, 1999.
*EX-4.1 Five Year Loan Agreement Dated as of April 30, 1999 among
Harrah's Entertainment, Inc., as Guarantor, Harrah's Operating
Company, Inc. and Marina Associates, as Borrowers, The
Lenders, Syndication Agent, Document Agents and
Co-Documentation Agents and Bank of America National Trust and
Savings Association, as Administrative Agent.
*EX-4.2 364-Day Loan Agreement Dated as of April 30, 1999 among
Harrah's Entertainment, Inc., as Guarantor, Harrah's Operating
Company, Inc. and Marina Associates, as Borrowers, The
Lenders, Syndication Agent, Document Agents and
Co-Documentation Agents and Bank of America National Trust and
Savings Association, as Administrative Agent.
*EX-10.1 Master Agreement dated April 15, 1999 between TABCORP Holdings
Limited and Harrah's Entertainment, Inc., with attachments.
*EX-10.2 Amendment to Harrah's Entertainment, Inc. 1990 Stock Option
Plan.
*EX-10.3 Amendment to Harrah's Entertainment, Inc.'s Annual Management
Bonus Plan.
*EX-10.4 Employment Agreement dated May 7, 1999, between Harrah's
Entertainment, Inc. and Marilyn G. Winn.
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*EX-10.5 Severance Agreement dated May 7, 1999, between Harrah's
Entertainment, Inc. and Marilyn G. Winn.
*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 second quarter of 1999: April 23, 1999 - reporting the first quarter 1999
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.
August 12, 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-3.1 Bylaws of Harrah's Entertainment, Inc., as
amended May 7, 1999.
EX-3.2 Bylaws of Harrah's Operating Company,
Inc., as amended May 7, 1999.
EX-4.1 Five Year Loan Agreement Dated as of April
30, 1999 among Harrah's Entertainment,
Inc., as Guarantor, Harrah's Operating
Company, Inc. and Marina Associates, as
Borrowers, The Lenders, Syndication Agent,
Document Agents and Co-Documentation
Agents and Bank of America National Trust
and Savings Association, as Administrative
Agent.
EX-4.2 364-Day Loan Agreement Dated as of April
30, 1999 among Harrah's Entertainment,
Inc., as Guarantor, Harrah's Operating
Company, Inc. and Marina Associates, as
Borrowers, The Lenders, Syndication Agent,
Document Agents and Co-Documentation
Agents and Bank of America National Trust
and Savings Association, as Administrative
Agent.
EX-10.1 Master Agreement dated April 15, 1999
between TABCORP Holdings Limited and
Harrah's Entertainment, Inc., with
attachments.
EX-10.2 Amendment to Harrah's Entertainment, Inc.
1990 Stock Option Plan.
EX-10.3 Amendment to Harrah's Entertainment,
Inc.'s Annual Management Bonus Plan.
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Sequential
Exhibit No. Description Page No.
- ----------- ------------------------------- ----------
EX-10.4 Employment Agreement dated May 7, 1999,
between Harrah's Entertainment, Inc. and
Marilyn G. Winn.
EX-10.5 Severance Agreement dated May 7, 1999,
between Harrah's Entertainment, Inc. and
Marilyn G. Winn.
EX-11 Computation of per share earnings.
EX-27 Financial Data Schedule.
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