<PAGE>
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 SEPTEMBER 30, 1996
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 September 30, 1996, there were outstanding 102,901,074 shares of the
Company's Common Stock.
Page 1 of 49
Exhibit Index Page 43
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
----------------------------
The accompanying unaudited Consolidated Condensed Financial Statements of
Harrah's Entertainment, Inc. (the Company), 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. These Consolidated
Condensed Financial Statements should be read in conjunction with the
Consolidated Financial Statements and notes thereto included in the Company's
1995 Annual Report to Stockholders.
-2-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share amounts)
September 30, December 31,
1996 1995
------------ -----------
ASSETS
Current assets
Cash and cash equivalents $ 85,954 $ 96,345
Receivables, including notes receivable of
$5,873 and $1,390, less allowance for
doubtful accounts of $14,098 and $10,910 47,087 37,751
Deferred income tax benefits 29,073 21,425
Prepayments and other 11,121 21,275
Supplies 22,458 12,040
---------- ----------
Total current assets 195,693 188,836
---------- ----------
Land, buildings, riverboats and equipment 1,918,291 1,723,714
Less: accumulated depreciation (569,566) (518,824)
---------- ----------
1,348,725 1,204,890
Investments in and advances to nonconsolidated
affiliates 210,848 71,939
Deferred income tax benefits - 4,532
Deferred costs and other 164,222 166,537
---------- ----------
$1,919,488 $1,636,734
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 32,230 $ 46,178
Construction payables 10,295 4,718
Accrued expenses 172,999 148,632
Current portion of long-term debt 1,835 2,038
---------- ----------
Total current liabilities 217,359 201,566
Long-term debt 802,360 753,705
Deferred credits and other 83,761 72,006
Deferred income taxes 44,052 -
---------- ----------
1,147,532 1,027,277
---------- ----------
Minority interests 22,227 23,908
---------- ----------
Commitments and contingencies (Notes 6, 7 and 8)
Stockholders' equity
Common stock, $0.10 par value, authorized
360,000,000 shares, outstanding 102,901,074
and 102,673,828 shares (net of 9,411 and 19,026
shares held in treasury) 10,290 10,267
Capital surplus 369,231 362,783
Unrealized gains on marketable equity securities 63,698 10,552
Retained earnings 308,575 204,838
Deferred compensation related to restricted stock (2,065) (2,891)
---------- ----------
749,729 585,549
---------- ----------
$1,919,488 $1,636,734
========== ==========
See accompanying Notes to Consolidated Condensed Financial Statements.
-3-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE><CAPTION>
(In thousands, except per share amounts)
Third Quarter Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
-------- -------- ---------- ----------
Revenues
<S> <C> <C> <C> <C>
Casino $358,331 $363,394 $1,015,008 $ 990,365
Food and beverage 52,609 51,146 143,444 138,422
Rooms 32,778 31,252 89,076 83,758
Management fees 3,937 4,413 12,047 11,224
Other 20,658 19,130 58,685 65,341
Less: casino promotional
allowances (39,112) (43,511) (104,737) (117,468)
-------- -------- ---------- ----------
Total revenues 429,201 425,824 1,213,523 1,171,642
-------- -------- ---------- ----------
Operating expenses
Direct
Casino 176,837 163,916 504,938 459,032
Food and beverage 26,206 27,951 71,819 70,697
Rooms 9,367 8,474 26,770 24,644
Depreciation of buildings,
riverboats and equipment 23,366 19,669 67,009 57,686
Development costs 3,172 3,206 8,611 11,863
Preopening costs 68 - 5,084 -
Other 89,944 91,982 263,446 266,732
-------- -------- ---------- ----------
Total operating expenses 328,960 315,198 947,677 890,654
-------- -------- ---------- ----------
Operating profit before corporate
expense and project
reorganization costs 100,241 110,626 265,846 280,988
Corporate expense (7,661) (6,855) (23,374) (21,036)
Project reorganization costs (2,690) - (11,190) -
-------- -------- ---------- ----------
Operating income 89,890 103,771 231,282 259,952
Interest expense, net of interest
capitalized (18,173) (19,128) (51,768) (56,123)
Interest expense, net, from
nonconsolidated affiliates - (7,345) - (15,979)
Other income, including interest
income 962 12,507 2,322 15,353
-------- -------- ---------- ----------
Income before income taxes and
minority interests 72,679 89,805 181,836 203,203
Provision for income taxes (28,829) (34,924) (70,612) (78,520)
Minority interests (1,500) (3,571) (7,487) (9,326)
-------- -------- ---------- ----------
Income from continuing operations 42,350 51,310 103,737 115,357
Discontinued operations (Note 2)
Earnings from hotel operations,
net of tax provision of $15,434 - - - 21,230
Spin-off transaction expenses,
net of tax benefit of $5,134 - - - (21,194)
-------- -------- ---------- ----------
Net income $ 42,350 $ 51,310 $ 103,737 $ 115,393
======== ======== ========== ==========
Earnings (loss) per share
Continuing operations $ 0.41 $ 0.50 $ 1.00 $ 1.12
Discontinued operations
Earnings from hotel operations,
net - - - 0.21
Spin-off transaction expenses,
net - - - (0.21)
-------- -------- ---------- ----------
Earnings per share $ 0.41 $ 0.50 $ 1.00 $ 1.12
======== ======== ========== ==========
Average common shares outstanding 103,324 103,347 103,450 103,209
======== ======== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
-4-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended
Sept. 30, Sept. 30,
1996 1995
--------- ---------
Cash flows from operating activities
Net income $ 103,737 $ 115,393
Adjustments to reconcile net income
to cash flows from operating activities
Discontinued operations
Earnings from hotel operations - (21,230)
Spin-off transaction expenses, before
income taxes - 26,328
Depreciation and amortization 76,620 68,127
Other noncash items 22,874 17,262
Minority interests share of net income 7,487 9,326
Equity in losses (income)
of nonconsolidated affiliates (638) 39,547
Net gains from asset sales - (13,355)
Net change in long-term accounts 1,539 32,197
Net change in working capital accounts (2,172) (3,317)
Net change in accrued litigation
settlement and related costs - (42,228)
Tax indemnification payments to Bass - (28,000)
--------- ---------
Cash flows provided by operating
activities 209,447 200,050
--------- ---------
Cash flows from investing activities
Land, buildings, riverboats and equipment
additions (211,760) (132,817)
Increase (decrease) in construction
payables 5,577 (7,409)
Proceeds from sale of equity investments - 19,910
Proceeds from asset sales 1,159 9,747
Investments in and advances to
nonconsolidated affiliates (46,655) (25,544)
Other (3,320) (700)
--------- ---------
Cash flows used in investing
activities (254,999) (136,813)
--------- ---------
Cash flows from financing activities
Net borrowings (repayments) under Revolving
Credit Facility 46,500 (9,338)
Debt retirements (2,171) (19,333)
Minority interests distributions, net of
contributions (9,168) (6,587)
Other - (543)
--------- ---------
Cash flows provided by (used in)
financing activities 35,161 (35,801)
--------- ---------
Cash flows from discontinued hotel operations
Net transfers to discontinued hotel
operations - (14,840)
Payment of spin-off transaction expenses - (24,743)
--------- ---------
Cash flows used in discontinued
operations - (39,583)
--------- ---------
Net decrease in cash and cash equivalents (10,391) (12,147)
Cash and cash equivalents, beginning of period 96,345 84,968
--------- ---------
Cash and cash equivalents, end of period $ 85,954 $ 72,821
========= =========
See accompanying Notes to Consolidated Condensed Financial Statements.
-5-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Note 1 - Basis of Presentation and Organization
- -----------------------------------------------
Harrah's Entertainment, Inc. (Harrah's or the Company and including its
subsidiaries where the context requires), a Delaware corporation, is one of
America's leading casino companies and currently operates casino entertainment
facilities in nine states and New Zealand. Harrah's casino entertainment
facilities include casino hotels in all five major Nevada and New Jersey gaming
markets: Reno, Lake Tahoe, Las Vegas and Laughlin, Nevada; and Atlantic City,
New Jersey. Harrah's riverboat casinos are in Joliet, Illinois; Shreveport,
Louisiana; Tunica and Vicksburg, Mississippi; and North Kansas City, Missouri.
In addition, Harrah's owns minority ownership interests in and manages a casino
in Auckland, New Zealand and two limited stakes casinos in Colorado. Harrah's
also manages casinos on Indian lands near Phoenix, Arizona and Seattle,
Washington.
The Consolidated Condensed Financial Statements include the accounts of
Harrah's and its majority-owned subsidiaries after elimination of all
significant intercompany accounts and transactions. Harrah's investments in 20%
to 50% owned companies and joint ventures over which Harrah's has the ability to
exercise significant influence are accounted for using the equity method.
Harrah's reflects its share of income before interest expense of these
nonconsolidated affiliates as revenues. Harrah's proportionate share of interest
expense of such nonconsolidated affiliates is reported as Interest expense, net,
from nonconsolidated affiliates (see Note 8).
Certain amounts for the prior year third quarter and nine months ended
September 30, 1995, have been reclassified to conform with the presentation for
the third quarter and nine months ended September 30, 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
-6-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
Note 2 - Stockholder's Equity
- -----------------------------
In addition to its common stock, Harrah's has the following classes of
stock authorized but unissued:
Preferred stock, $100 par value, 150,000 shares authorized
Special stock, 2,000,000 shares authorized -
Series A, $1.125 par value
Special stock, 5,000,000 shares authorized -
Series B, $1.125 par value
In July 1996, Harrah's Board of Directors adopted a shareholder rights plan
which replaces an existing rights plan that expired on October 5, 1996. The new
plan provided for a dividend distribution of one special stock purchase right (a
"Right") for each outstanding share of common stock, distributed to stockholders
of record on October 5, 1996. The Rights will be exercisable only if a person or
group acquires 15% or more of the Company's common stock or announces a tender
offer for 15% or more of the common stock. Each Right will entitle stockholders
to buy one two-hundredth of a share of newly created Series A Special Stock of
the Company at an initial exercise price of $130 per Right. If a person acquires
15% or more of the Company's outstanding common stock, each Right will entitle
its holder to purchase common stock of the Company having a market value at that
time of twice the Right's exercise price. Under certain conditions, each Right
will entitle its holder to purchase stock of an acquiring company at a discount.
Rights held by the 15% holder will become void. The Rights will expire on
October 5, 2006, unless earlier redeemed by the Board at one cent per Right.
In October 1996, Harrah's Board of Directors approved a plan which
authorizes the purchase of up to 10% of the shares of Harrah's outstanding
common stock. The shares, which may be purchased prior to December 31, 1997,
would be held in treasury.
Note 3 - Long-Term Debt - Interest Rate Agreements
- --------------------------------------------------
To manage the relative mix of its debt between fixed and variable rate
instruments, Harrah's enters into interest rate swap agreements to modify the
interest characteristics of its outstanding debt without an exchange of the
underlying principal amount. At September 30, 1996, Harrah's was a party to the
following interest rate swap agreements pursuant to which it pays a variable
interest rate in exchange for receiving a fixed
-7-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
Note 3 - Long-Term Debt - Interest Rate Agreements (Continued)
- -------------------------------------------------------------
interest rate. The average variable rate paid by Harrah's was 5.7% at September
30, 1996, and the average fixed interest rate received was 5.9%. The impact of
these interest rate swap agreements on the effective interest rates of the
associated debt was as follows:
Effective Next Semi-
Swap Rate at Annual Rate
Associated Rate Sept. 30, Adjustment
Debt (LIBOR+) 1996 Date Swap Maturity
- -------------- ------ --------- ----------- -------------
10 7/8% Notes
$200 million 4.73% 10.45% October 15 October 1997
8 3/4% Notes
$50 million 3.42% 9.14% November 15 May 1998
$50 million 3.22% 9.25% January 15 July 1998
In accordance with the terms of the interest rate swap agreements, the
effective interest rate on the $200 million 10 7/8% notes was adjusted on
October 15, 1996 to 10.46%.
Harrah's has seven interest rate swap agreements to effectively convert a
total of $350 million in variable rate debt to a fixed rate. The fixed rates to
be paid by Harrah's and variable rates to be received by Harrah's are summarized
in the following table:
Swap Rate
Swap Rate Received
Paid (Variable) at Swap
Notional Amount (Fixed) Sept.30, 1996 Maturity
- --------------- --------- ------------- ------------
$50 million 7.910% 5.625% January 1998
$50 million 6.985% 5.625% March 2000
$50 million 6.951% 5.625% March 2000
$50 million 6.945% 5.625% March 2000
$50 million 6.651% 5.539% May 2000
$50 million 5.788% 5.637% June 2000
$50 million 5.785% 5.637% 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 by Harrah's pursuant to the terms of its
interest rate agreements will have a corresponding effect on its
-8-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
Note 3 - Long-Term Debt - Interest Rate Agreements (Continued)
- -------------------------------------------------------------
future cash flows. These agreements contain a credit risk that the
counterparties may be unable to meet the terms of the agreements. Harrah's
minimizes that risk by evaluating the creditworthiness of its counterparties,
which are limited to major banks and financial institutions, and does not
anticipate nonperformance by the counterparties.
Note 4 - Supplemental Disclosure of Cash Paid for Interest and
- --------------------------------------------------------------
Taxes
- -----
The following table reconciles Harrah's interest expense, net of interest
capitalized, per the Consolidated Condensed Statements of Income, to cash paid
for interest:
Nine Months Ended
Sept. 30, Sept. 30,
1996 1995
(In thousands) -------- --------
Interest expense, net of amount
capitalized $51,768 $56,123
Adjustments to reconcile to cash paid
for interest:
Net change in interest accruals (8,270) 11,832
Amortization of deferred finance
charges (2,361) (2,839)
Amortization of discounts (16) (46)
------- -------
Cash paid for interest, net of amount
capitalized $41,121 $65,070
======= =======
Cash payments for income taxes, net of
refunds $32,829 $63,557
======= =======
Note 5 - Discontinued Operations
- --------------------------------
On June 30, 1995, Harrah's, formerly The Promus Companies Incorporated
(Promus), completed a spin-off that split the Company into two independent
public corporations, one for conducting its casino entertainment business and
one for conducting its hotel business. Harrah's retained ownership of the casino
entertainment business. The Company's hotel
-9-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
Note 5 - Discontinued Operations (Continued)
- -------------------------------------------
operations were transferred to a new entity, Promus Hotel Corporation (PHC), the
stock of which was distributed to Promus' stockholders on a one-for-two basis
(the PHC Spin-off). As a result of the PHC Spin-off, results of operations and
cash flows of the Company's hotel business for the period prior to the PHC
Spin-off are reported as discontinued operations in the Consolidated Condensed
Financial Statements for the nine months ended September 30, 1995. Earnings from
discontinued operations for the prior year period were as follows:
Nine Months
Ended
Sept. 30,
1995
-----------
(In thousands)
Revenues $132,785
Costs and expenses (79,652)
--------
Operating income 53,133
Interest expense (16,742)
Other expense 273
--------
Income before income taxes 36,664
Provision for income taxes (15,434)
--------
Earnings from discontinued hotel operations $ 21,230
========
In addition to the earnings of its discontinued hotel operations, Harrah's
operating results for the nine months ended September 30, 1995, included a
charge of $21.2 million, net of tax, for expenses of the PHC Spin-off
transaction.
Note 6 - Commitments and Contingent Liabilities
- -----------------------------------------------
Contractual Commitments
- -----------------------
Harrah's is pursuing additional casino development opportunities that may
require, individually and in the aggregate, significant commitments of capital,
up-front payments to third parties, guarantees by Harrah's of third party debt
and development completion guarantees. As of September 30, 1996, Harrah's has
guaranteed third party loans and leases of $29 million, which are secured by
certain assets, has
-10-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
Note 6 - Commitments and Contingent Liabilities (Continued)
- ----------------------------------------------------------
construction-related contractual commitments of $261 million and has other
commitments of $5 million, excluding amounts previously recorded. Harrah's has
also committed to guarantee an additional $119 million in financing for new
developments, subject to the receipt of certain required regulatory approvals.
The agreements under which Harrah's manages casinos on Indian lands contain
provisions required by law which provide that a minimum monthly payment be made
to the tribe which payment has priority over the retirement of development
costs. In the event that insufficient cash is generated by the operations to
fund this payment, Harrah's must pay the shortfall to the tribe. Such advances,
if any, will be repaid to Harrah's in a future period or periods in which
operations generate cash in excess of the required minimum payment. These
commitments will terminate upon the occurrence of certain defined events,
including termination of the management contract. As of September 30, 1996, the
aggregate monthly commitment pursuant to these contracts, which extend for
periods of up to 60 months from opening date, was $1.1 million, including a
commitment for a project with a contract approved by the National Indian Gaming
Commission that is under development but not yet open.
As part of a transaction whereby Harrah's effectively secured an option
to a site for a potential casino, Harrah's has guaranteed an additional
$24.7 million third-party variable rate bank loan. Harrah's also has
entered into an interest rate swap agreement, which expires December 1,
1996, in which Harrah's receives a fixed interest rate of 7% from the third
party and pays the variable interest rate of the subject debt, which is
currently LIBOR plus 1.0%. The interest rate swap is marked to market by
Harrah's with the adjustment recorded in interest expense. This loan and
the interest rate swap are expected to be extended until February 1,
1997, at which time it is currently expected they will be refinanced and
Harrah's would continue its guaranty. This guaranty contains an element
of risk that, should the borrower be unable to perform, the Company could
become responsible for repayment of at least a portion of the obligation.
Harrah's has reduced this exposure by obtaining a security interest in
certain assets of the third party.
See Note 8 for discussion of the proposed completion guarantees issued by
Harrah's related to development of the New Orleans' casino.
-11-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
Note 6 - Commitments and Contingent Liabilities (Continued)
- ----------------------------------------------------------
Guarantee of Insurance Contract
- -------------------------------
Harrah's has guaranteed the value of a guaranteed investment contract with
an insurance company held by Harrah's defined contribution savings plan.
Harrah's has also agreed to provide non-interest-bearing loans to the plan to
fund, on an interim basis, withdrawals from this contract by retired or
terminated employees. Harrah's maximum exposure on this guarantee as of
September 30, 1996, was $6.3 million.
Self Insurance
- --------------
Harrah's is self-insured for various levels of general liability, workers'
compensation and employee medical coverage. Insurance claims and reserves
include accruals of estimated settlements for known claims, as well as accruals
of actuarial estimates of incurred but not reported claims.
Severance Agreements
- --------------------
At September 30, 1996, Harrah's had severance agreements with 27 of its
executives, which provide for payments to the executives in the event of their
termination after a change in control, as defined, of Harrah's. These agreements
provide, among other things, for a compensation payment ranging from 1.5 times
to 2.99 times the average annual compensation paid to the executive for the five
preceding calendar years, as well as for accelerated payment or accelerated
vesting of any compensation or awards payable to the executive under any of
Harrah's incentive plans. The estimated amount, computed as of September 30,
1996, that would have been payable under the agreements to these executives
based on earnings and stock options aggregated approximately $25.1 million.
Tax Sharing Agreement
- ---------------------
In connection with the PHC Spin-off, Harrah's entered into a tax sharing
agreement with PHC wherein each company is obligated for those taxes associated
with their respective
-12-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
Note 6 - Commitments and Contingent Liabilities (Continued)
- ----------------------------------------------------------
businesses. Additionally, Harrah's is obligated for all taxes of Promus for
periods prior to the PHC Spin-off date which are not specifically related to PHC
operations and/or PHC hotel locations. Harrah's obligations under this agreement
are not expected to have a material adverse effect on its consolidated financial
position or results of operations.
Note 7 - Litigation
- -------------------
Harrah's is involved in various inquiries, administrative proceedings and
litigation relating to contracts, sales of property and other matters arising in
the normal course of business. While any proceeding or litigation has an element
of uncertainty, management believes that the final outcome of these matters will
not have a material adverse effect upon Harrah's consolidated financial position
or its results of operations.
In addition to the matters described above, Harrah's and certain of its
subsidiaries have been named as defendants in a number of lawsuits arising from
the suspension of development of a land-based casino, and the closing of the
temporary gaming facility, in New Orleans, Louisiana, by Harrah's Jazz Company,
a partnership in which a subsidiary of the Company owns an approximate 47%
interest and which has filed for protection under Chapter 11 of the U.S.
Bankruptcy Code (see Note 8). The ultimate outcomes of these lawsuits cannot be
predicted at this time, and no provisions for the claims are included in the
accompanying financial statements. The Company intends to defend these actions
vigorously.
Note 8 - Nonconsolidated Affiliates
- -----------------------------------
Harrah's Jazz Company
- ---------------------
A Harrah's subsidiary owns an approximate 47% interest in Harrah's Jazz
Company (Harrah's Jazz), a partnership formed for purposes of developing, owning
and operating the exclusive land-based casino entertainment facility in New
Orleans, Louisiana, on the site of the former Rivergate Convention Center (the
Rivergate). On November 22, 1995, Harrah's Jazz and its wholly-
-13-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
Note 8 - Nonconsolidated Affiliates (Continued)
- ----------------------------------------------
owned subsidiary, Harrah's Jazz Finance Corp., filed petitions for relief under
Chapter 11 of the Bankruptcy Code. Prior to the filing, Harrah's Jazz was
operating a temporary casino in the New Orleans, Louisiana Municipal Auditorium
(the Basin Street Casino) and constructing a new permanent casino facility on
the Rivergate site (the Rivergate Casino). Harrah's Jazz ceased operation of the
Basin Street Casino and construction of the Rivergate Casino on November 22,
1995 prior to the bankruptcy filings.
Harrah's Jazz filed a plan of reorganization with the Bankruptcy Court on
April 3, 1996 and has filed several subsequent amendments to the plan (the
Plan). Under the Plan, the assets and business of Harrah's Jazz would vest in
Jazz Casino Corporation, a newly formed corporation (JCC), on the effective date
of the Plan. JCC would be responsible for completing construction of the
Rivergate Casino. Under the Plan, Harrah's Jazz's existing public debt would be
cancelled, the holders of that debt would receive 37.1% of the equity in JCC's
indirect parent (JCC Holding), 15% of the equity would be allocated to
debtholders who execute releases and an affiliate of the Company would receive
the remaining 47.9% of the equity in JCC Holding, a portion of which may be
assigned to certain Harrah's Jazz partner-related parties in exchange for equity
investments and other consideration to be provided under the Plan. In addition,
holders of the public debt would receive (i) $187.5 million in aggregate
principal amount of 8% Senior Subordinated Notes of JCC due 2006 with contingent
payments, and (ii) a pro rata share of Senior Subordinated Contingent Notes of
JCC due 2006.
During the course of the bankruptcy of Harrah's Jazz, a subsidiary of the
Company has made debtor-in-possession loans to Harrah's Jazz, totalling
approximately $13.5 million as of October 31, 1996, to fund certain obligations
to the City of New Orleans and other cash requirements of Harrah's Jazz. The
Company has proposed to make up to $18 million in such loans, however, it is
likely that Harrah's Jazz will require debtor-in- possession loans from the
Company in excess of the $18 million currently proposed.
As part of the Plan, Harrah's has proposed to invest an additional
$75 million in the project and deliver a new form of completion guaranty if a
reorganization plan approved by Harrah's is consummated. Any
debtor-in-possession financing, including the approximately $13.5 million in
financing already advanced and discussed above would be repaid or converted
into equity (and count toward the $75 million investment referred to above)
upon
-14-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
Note 8 - Nonconsolidated Affiliates (Continued)
- ----------------------------------------------
consummation of a reorganization plan approved by Harrah's. JCC is also seeking
to obtain a $195 million secured term loan and revolving credit facility to
finance construction of the Rivergate Casino and provide JCC with working
capital availability, and Harrah's may be required to guarantee or provide
credit support for this financing. If a reorganization approved by Harrah's is
consummated, Harrah's may also make an additional $20 million subordinated loan
to JCC to assist in financing construction of the Rivergate Casino.
The Plan also contemplates the opening of a temporary casino in two phases
at the Rivergate Casino site followed by the opening of a permanent casino at
such site. The first phase of the temporary casino is expected to open
approximately seven months after the consummation of the Plan. The Plan is
expected to be consummated in early 1997. Under the Plan, the Basin Street
Casino would not reopen.
On April 19, 1996, the Louisiana State Legislature enacted legislation
which required, among other things, the holding of an election of the voters of
Orleans parish in November 1996 purportedly to determine whether to approve or
disapprove gaming at the Rivergate Casino. On November 5, 1996, residents of
Orleans Parish voted to approve gaming at the Rivergate Casino.
In addition to the matters discussed above, the Plan is subject to other
amendments, and such other amendments may be material. There can be no assurance
that definitive agreements necessary to consummate the Plan will be reached or
that the amended Plan will be approved, or, if approved, that the conditions to
consummation of the Plan will be met.
Other
- -----
Summarized balance sheet and income statement information of
nonconsolidated gaming affiliates, including Harrah's Jazz, which Harrah's
accounted for using the equity method, as of September 30, 1996 and December 31,
1995, and for the third quarters and nine months ended September 30, 1996 and
1995 is included in the following tables. Summarized balance sheet information
as of December 31, 1995, has been updated to reflect adjustments made by
Harrah's Jazz Company in connection with its petition for relief under Chapter
11 of the U.S. Bankruptcy Code.
-15-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
Note 8 - Nonconsolidated Affiliates (Continued)
- ----------------------------------------------
Sept. 30, Dec. 31,
1996 1995
(In thousands) -------- --------
Combined Summarized Balance Sheet Information
Current assets $ 30,353 $ 63,216
Land, buildings, and equipment, net 346,773 266,602
Other assets 173,619 169,033
-------- --------
Total assets 550,745 498,851
-------- --------
Current liabilities 120,621 130,816
Long-term debt 482,093 465,386
-------- --------
Total liabilities 602,714 596,202
-------- --------
Net assets $(51,969) $(97,351)
======== ========
Third Quarter Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
(In thousands) -------- -------- -------- --------
Combined Summarized Statements
of Operations
Revenues $ 7,373 $ 41,215 $ 22,006 $ 66,755
======= ======== ======== ========
Operating loss $(7,429) $(25,243) $(15,383) $(59,210)
======= ======== ======== ========
Net loss $(9,744) $(39,954) $(18,711) $(96,290)
======= ======== ======== ========
Condensed financial information relating to a restaurant affiliate has not
been presented since its operating results and financial position are not
material to Harrah's.
Harrah's share of nonconcolidated affiliates' combined net operating
results, including Harrah's Jazz operations during the third quarter and the
nine months ended September 30, 1995, are reflected in the accompanying
Consolidated Condensed Statements of Income as follows:
Third Quarter Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
(In thousands) --------- -------- -------- --------
Pre-interest operating income
(loss)(included in
Revenue-other) $ 397 $(11,434) $ 638 $(23,504)
========= ======== ======== ========
-16-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
Note 8 - Nonconsolidated Affiliates (Continued)
- ----------------------------------------------
Harrah's share of nonconsolidated affiliates' combined interest expense is
reflected as Interest expense from nonconsolidated affiliates in the
accompanying Consolidated Condensed Statements of Income.
Harrah's investments in and advances to nonconsolidated affiliates are
reflected in the accompanying Consolidated Condensed Balance Sheets as follows:
Sept. 30, Dec. 31,
1996 1995
(In thousands) -------- -------
Harrah's investments in and advances to
nonconsolidated affiliates
Accounted for under the equity method $ 73,494 $22,374
Accounted for at historical cost - 16,642
Available for sale and
recorded at market value 137,354 32,923
-------- -------
$210,848 $71,939
======== =======
The Company adjusts the carrying value of investments in equity securities
available for sale to include their unrealized gains in accordance with the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". A corresponding increase
is recorded in the combination of Harrah's 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. Summarized financial information of HOC as of
September 30, 1996 and December 31, 1995 and for the third quarter and nine
months ended September 30, 1996 and 1995, prepared on the same basis as
Harrah's, was as follows:
-17-
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
Note 9 - Summarized Financial Information (Continued)
- ----------------------------------------------------
Sept. 30, Dec. 31,
1996 1995
(In thousands) ---------- ----------
Current assets $ 195,303 $ 185,950
Land, buildings, riverboats
and equipment, net 1,348,725 1,204,890
Other assets 374,994 242,773
---------- ----------
1,919,022 1,633,613
---------- ----------
Current liabilities 204,386 184,454
Long-term debt 802,360 753,705
Other liabilities 129,486 73,216
Minority interests 22,227 23,908
---------- ----------
1,158,459 1,035,283
---------- ----------
Net assets $ 760,563 $ 598,330
========== ==========
Third Quarter Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
-------- -------- ---------- ----------
(In thousands)
Revenues $429,169 $425,788 $1,213,407 $1,170,895
======== ======== ========== ==========
Operating income $ 89,844 $102,532 $ 229,857 $ 257,563
======== ======== ========== ==========
Income from continuing
operations $ 42,320 $ 50,505 $ 102,811 $ 113,804
======== ======== ========== ==========
Net income $ 42,320 $ 50,505 $ 102,811 $ 113,840
======== ======== ========== ==========
The agreements governing the terms of Harrah's debt contain certain covenants
which, among other things, place limitations on HOC's ability to pay dividends
and make other restricted payments, as defined, to Harrah's. The amount of HOC's
restricted net assets, as defined, computed in accordance with the most
restrictive of these covenants regarding restricted payments, was approximately
$751.5 million at September 30, 1996. Subsequent to September 30, 1996, Harrah's
negotiated changes to this covenant which allow HOC to pay up to $200 million in
dividends to Harrah's for use in repurchasing Company stock (see Note 2).
-18-
<PAGE>
Item 2. Management's Discussion and Analysis
---------------------------------------------
of Financial Condition and Results of Operations
------------------------------------------------
The following discussion and analysis of Harrah's Entertainment, Inc.'s
(Harrah's or the Company) financial position and operating results for third
quarter and the first nine months of 1996 and 1995 complements and updates, and
should be read in conjunction with, the Management's Discussion and Analysis of
Financial Position and Results of Operations presented in Harrah's 1995 Annual
Report. References to Harrah's or the Company include its consolidated
subsidiaries where the context requires.
Harrah's is one of the world's premier names in casino entertainment,
currently operating casino entertainment facilities in nine states and New
Zealand.
RESULTS OF OPERATIONS
- ---------------------
Overall
- -------
<TABLE>
Third Quarter Percentage First Nine Months Percentage
(in millions, except --------------- Increase/ ----------------- Increase/
earnings per share) 1996 1995 (Decrease) 1996 1995 (Decrease)
------ ------ ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $429.2 $425.8 0.8 % $1,213.5 $1,171.6 3.6 %
Operating income 89.9 103.8 (13.4)% 231.3 260.0 (11.0)%
Income from continuing
operations 42.4 51.3 (17.3)% 103.7 115.4 (10.1)%
Earnings from discontinued
hotel operations - - N/A - 21.2 N/A
Net income 42.4 51.3 (17.3)% 103.7 115.4 (10.1)%
Earnings per share
Continuing operations 0.41 0.50 (18.0)% 1.00 1.12 (10.7)%
Discontinued operations - - N/A - 0.21 N/A
Net income 0.41 0.50 (18.0)% 1.00 1.12 (10.7)%
Operating margin 20.9% 24.4% (3.5)pts 19.1% 22.2% (3.1)pts
</TABLE>
Total revenues in third quarter 1996 increased slightly over those of the
prior year period. New and expanded properties within the Riverboat division
helped to increase revenues; also contributing to an improved 1996 revenue
comparison was the inclusion in 1995 revenues of Harrah's share of operating
losses for Harrah's Jazz Company. These increases were partially offset by lower
revenues at Harrah's Joliet and at Harrah's Nevada casinos. Operating income
decreased from third quarter 1995, and the overall operating margin decreased
3.5 points, due to the effects of increased competition in several of the
Company's markets and project reorganization costs related to Harrah's Jazz
Company. These factors also impacted operations for the first nine months of
1996, as the overall operating margin decreased 3.1 points from the comparable
prior year period.
-19-
<PAGE>
The following table summarizes operating profit before project write-downs
and reorganization costs, preopening costs and corporate expense for the twelve
month periods ended September 30, 1996, 1995 and 1994 in millions of dollars and
as a percent of the total for each of Harrah's divisions:
Contribution for the Twelve Months Ended
September 30,
-------------------------------------------
In Millions of Dollars Percent of Total
---------------------- ----------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
Riverboat $153 $163 $114 45% 47% 37%
Atlantic City 77 87 70 23 25 22
Southern Nevada 70 73 75 21 21 24
Northern Nevada 61 68 77 18 20 25
Indian/Limited Stakes 4 7 - 1 2 -
New Orleans (6) (23) (7) (2) (6) (2)
Development costs (14) (19) (17) (4) (6) (5)
Other (4) (10) (4) (2) (3) (1)
---- ---- ---- --- --- ---
Total $341 $346 $308 100% 100% 100%
==== ==== ==== === === ===
Riverboat Division
- ------------------
<TABLE>
Third Quarter Percentage Nine Months Ended Percentage
--------------- Increase/ ----------------- Increase/
(in millions) 1996 1995 (Decrease) 1996 1995 (Decrease)
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Casino revenues $152.1 $151.6 0.3 % $455.3 $416.1 9.4 %
Total revenues 161.0 160.7 0.2 % 478.9 444.9 7.6 %
Operating profit 33.4 49.1 (32.0)% 114.6 134.1 (14.5)%
Operating margin 20.7% 30.6% (9.9)pts 23.9% 30.1% (6.2)pts
</TABLE>
Total revenues for the Division were basically unchanged in third quarter
1996 from the prior year period, but each market's contribution to the total
shifted from the prior year. Increases came from the addition of Harrah's Tunica
Mardi Gras casino, which opened in April, and the addition in May of a second
riverboat casino at Harrah's North Kansas City. Offsetting these revenue
increases were declines at Harrah's Joliet, where that market saw the addition
in June of significant new supply from Indiana riverboats, and at Harrah's other
Mississippi casinos. Operating profit and margins decreased for third quarter
1996 compared to third quarter 1995 period due to intense competition in several
markets. In Joliet, the lower revenue and increased
-20-
<PAGE>
promotional costs resulting from the recently added supply have reduced profits
and margins. In North Kansas City, though revenues improved, competitive
adjustments, including the decision to eliminate admission charges, have
negatively impacted operating profits and margins. In Tunica, a major new
competitor opened in June 1996 and several existing participants, including
Harrah's, have expanded their offerings in an effort to capture a greater market
share. These efforts have included aggressive marketing programs which increased
operating costs and resulted in an overall net operating loss at Harrah's Tunica
properties in third quarter 1996.
Casino revenues for the nine months ended September 30, 1996 increased 9.4%.
This increase came not only from Harrah's new and expanded facilities in Tunica
and North Kansas City, but also from improved performance at Harrah's
Shreveport. The competitive pressures present in North Kansas City, Joliet and
Tunica, however, resulted in lower profits and margins for the Division for the
nine month period.
Atlantic City
- -------------
<TABLE>
Third Quarter Percentage Nine Months Ended Percentage
--------------- Increase/ ----------------- Increase/
(in millions) 1996 1995 (Decrease) 1996 1995 (Decrease)
----- ----- ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Casino revenues $91.7 $89.7 2.2 % $238.7 $239.6 (0.4)%
Total revenues 98.7 97.9 0.8 % 258.2 259.8 (0.6)%
Operating profit 26.9 30.2 (10.9)% 59.3 68.1 (12.9)%
Operating margin 27.3% 30.8% (3.5)pts 23.0% 26.2% (3.2)pts
</TABLE>
Casino revenues improved slightly for the third quarter period following the
opening in late June of additional casino space. This increase offset lower
casino revenues from the first half of 1996 and resulted in revenues for the
nine month period equal to 1995. In the past several months, competitors in
Atlantic City have opened both additional casino space and hotel rooms and
supported that new supply with increased promotions and marketing. Harrah's has
responded to the increased level of competition with additional spending on
marketing and promotional allowances, resulting in a decline in Harrah's
operating profit and margins for both the third quarter and the nine months
ended September 30, 1996. Harrah's continues construction on a new hotel tower
and additional nongaming amenities, designed to enhance the property and
increase market share. (See Capital Spending and Development.)
-21-
<PAGE>
Southern Nevada
---------------
<TABLE>
Third Quarter Percentage Nine Months Ended Percentage
--------------- Increase/ ----------------- Increase/
(in millions) 1996 1995 (Decrease) 1996 1995 (Decrease)
----- ----- ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Casino revenues $46.6 $49.6 (6.0)% $145.0 $148.8 (2.6)%
Total revenues 71.5 75.7 (5.6)% 222.3 224.9 (1.2)%
Operating profit 14.4 18.2 (20.9)% 52.8 55.6 (5.0)%
Operating margin 20.1% 24.0% (3.9)pts 23.8% 24.7% (0.9)pts
</TABLE>
Casino revenues and total revenues decreased in third quarter 1996 compared
to the prior year period as a result of lower gaming volume in both Las Vegas
and Laughlin. At Harrah's Las Vegas, a major expansion project is underway,
which has caused expected disruptions in business volume. It is anticipated that
construction will negatively impact business for the next two quarters, but that
levels of business should then improve as new rooms and amenities are brought
online. The casino and facade phases of this project are expected to be complete
during second quarter 1997, and the entire project is expected to be
substantially completed by third quarter 1997 (see Capital Spending and
Development Section). The Laughlin market as a whole continues to experience
competition from Indian casinos in its feeder markets and from new developments
in and around Las Vegas, but Harrah's Laughlin continues to maintain its share
of gaming revenues in that market.
For the nine month period, both casino and total revenues decreased only
slightly, as declines in gaming volume at Laughlin were offset by higher volume
and hold percentages at Harrah's Las Vegas during the first half of the year and
higher lodging revenue at both properties. Operating profit and margins were
impacted at both properties during the third quarter and nine month period as a
result of the lower revenues and higher promotional costs.
Northern Nevada
- ---------------
<TABLE>
Third Quarter Percentage Nine Months Ended Percentage
--------------- Increase/ ----------------- Increase/
(in millions) 1996 1995 (Decrease) 1996 1995 (Decrease)
----- ----- ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Casino revenues $68.0 $72.6 (6.3)% $176.0 $185.9 (5.3)%
Total revenues 89.8 94.3 (4.8)% 232.1 240.9 (3.6)%
Operating profit 26.3 26.6 (1.1)% 49.2 54.7 (10.1)%
Operating margin 29.3% 28.2% 1.1 pts 21.2% 22.7% (1.5)pts
</TABLE>
Casino revenues and total revenues decreased for both the third quarter and
nine month period due primarily to lower gaming volume at all three Harrah's
properties. Partially offsetting
-22-
<PAGE>
these declines were higher lodging revenues in Reno, where a new Hampton Inn
hotel tower opened in October 1995. For the third quarter, operating profit
decreased slightly and the overall operating margin improved due primarily to
lower overhead costs and improved margins at Harrah's Reno, where prior year
results reflected the impact of the July 1995 opening of a major new competitor.
Operating profit and margin both decreased for the nine month period due to the
lower revenue and to increased overhead costs.
Harrah's New Orleans
- --------------------
Operating income for third quarter and the nine months ended September 30,
1995 included losses of $9.1 million and $20.7 million, respectively,
representing Harrah's pro rata share of pre-interest losses incurred by Harrah's
Jazz Company (Harrah's Jazz), the partnership which holds the right to develop
the sole land-based casino in Orleans Parish, Louisiana. No equity pick-up was
included for the 1996 periods for Harrah's subsidiary's interest in Harrah's
Jazz as the book value of this investment was reduced to zero in fourth quarter
1995. (See Other Factors Affecting Income per Share and Harrah's Jazz Company
sections for further discussion.)
Other
- -----
Other revenues include management fees from Harrah's-managed casino
entertainment facilities. Since third quarter 1995, Harrah's has opened two
additional managed casino facilities, Harrah's Sky City in Auckland, New
Zealand, and Harrah's Skagit Valley near Seattle, Washington. Management fee
income decreased in third quarter 1996 from the prior year, as fees from the new
managed properties were offset by the absence of New Orleans' management fees,
which were included in 1995 revenues. Management fees for the nine month period
increased slightly in 1996, as the inclusion of New Zealand management fees
offset the loss of New Orleans' fees. Operating profit derived from the
Company's managed properties has declined from prior year levels due to
nonrecurring current year costs related to Harrah's partial ownership and
management of two Colorado casinos.
Development costs for third quarter 1996 were consistent with those of the
prior third quarter, but decreased for the nine month period due to lower levels
of development activity.
-23-
<PAGE>
Other Factors Affecting Income Per Share
- ----------------------------------------
<TABLE>
Third Quarter Percentage First Nine Months Percentage
(Income)/Expense --------------- Increase/ ----------------- Increase/
(in millions) 1996 1995 (Decrease) 1996 1995 (Decrease)
----- ------ ---------- ----- ------ ----------
<S> <C> <C> <C> <C>
Preopening costs $ 0.1 $ - N/M $ 5.1 $ - N/M
Corporate expense 7.7 6.9 11.6 % 23.4 21.0 11.4 %
Project reorganization costs 2.7 - N/M 11.2 - N/M
Interest expense, net 18.2 19.1 (4.7)% 51.8 56.1 (7.7)%
Interest expense, net, from
nonconsolidated affiliates - 7.3 N/M - 16.0 N/M
Other income (1.0) (12.5) (92.0)% (2.3) (15.4) (85.1)%
Effective tax rate 39.7% 38.9% 0.8 pts 38.8% 38.6% 0.2 pts
Minority interests $ 1.5 $ 3.6 (58.3)% $ 7.5 $ 9.3 19.4 %
Discontinued operations
Hotel earnings, net of
income taxes - - - - (21.2) N/M
Spin-off transaction costs,
net of tax - - - - 21.2 N/M
</TABLE>
Preopening costs for the nine month period include costs incurred in
connection with the second quarter 1996 opening of Harrah's Tunica Mardi Gras
and the expansion of the North Kansas City property. Corporate expense increased
in both third quarter 1996 and the nine month period over the prior year periods
as a result of higher information technology costs and timing of expenses.
Project reorganization costs incurred during 1996 represent Harrah's costs
associated with the development of a reorganization plan, including legal fees,
for the New Orleans casino (see Harrah's Jazz Company section).
Interest expense decreased in both third quarter 1996 and the nine month
period ended September 30, 1996 from the comparable prior year periods as a
result of decreased borrowing costs associated with Harrah's variable rate debt
(see Debt and Liquidity) and higher levels of capitalized interest costs. 1995
interest expense from nonconsolidated affiliates reflected Harrah's pro rata
share of interest expense from the Harrah's Jazz partnership. No comparable
amount is recorded in the current year due to the fourth quarter 1995 write-down
of the book value of this investment to zero. (See Harrah's Jazz Company
section.)
Other income decreased for the third quarter and nine months ended September
30, 1996 due primarily to the inclusion in the prior year's results of an
$11.7 million gain on the sale of a portion of Harrah's investment in the
corporation which owns the Sky City casino entertainment facility in Auckland,
New Zealand.
The effective tax rates for both periods are higher than the federal
statutory rate due to state income taxes. Minority interests reflect joint
venture partners' shares of income at joint venture riverboat casinos and
decreased for both periods primarily as a result of lower Joliet earnings.
-24-
<PAGE>
As a result of the June 30, 1995 spin-off of the Company's hotel operations
(the PHC Spin-off), the operating results of the hotel business prior to July 1,
1995 have been segregated and reported as discontinued operations in the
accompanying Consolidated Condensed Statements of Income. Prior year operating
results include the earnings of discontinued operations, as well as a charge of
$21.2 million, or $0.21 per share, net of tax, representing the costs to
complete the PHC Spin-off transaction. Harrah's operating results for the nine
months ended September 30, 1995 also reflect the allocation to discontinued
hotel operations of $10.5 million in interest for the period prior to the PHC
Spin-off. Prior to the PHC Spin-off, Harrah's corporate debt was not
specifically related to either its casino entertainment or hotel segment.
However, corporate debt service requirements were met using cash flows provided
by both segments. Therefore, for all periods prior to the PHC Spin-off, a
portion of the Company's interest expense was allocated to discontinued hotel
operations based on the percentage of Harrah's existing corporate debt which was
expected to be retired using proceeds from the new PHC bank facility.
HARRAH'S JAZZ COMPANY
- ---------------------
A Harrah's subsidiary owns an approximate 47% interest in Harrah's Jazz
Company (Harrah's Jazz), a partnership formed for purposes of developing, owning
and operating the exclusive land-based casino entertainment facility in New
Orleans, Louisiana, on the site of the former Rivergate Convention Center (the
Rivergate). On November 22, 1995, Harrah's Jazz and its wholly-owned subsidiary,
Harrah's Jazz Finance Corp., filed petitions for relief under Chapter 11 of the
Bankruptcy Code. Prior to the filing, Harrah's Jazz was operating a temporary
casino in the New Orleans, Louisiana Municipal Auditorium (the Basin Street
Casino) and constructing a new permanent casino facility on the Rivergate site
(the Rivergate Casino). Harrah's Jazz ceased operation of the Basin Street
Casino and construction of the Rivergate Casino on November 22, 1995 prior to
the bankruptcy filings.
Harrah's Jazz filed a plan of reorganization with the Bankruptcy Court on
April 3, 1996 and has filed several subsequent amendments to the plan (the
Plan). Under the Plan, the assets and business of Harrah's Jazz would vest in
Jazz Casino Corporation, a newly formed corporation (JCC), on the effective date
of the Plan. JCC would be responsible for completing construction of the
Rivergate Casino. Under the Plan, Harrah's Jazz's existing public debt would be
cancelled, the holders of that debt would receive 37.1% of the equity in JCC's
indirect parent (JCC Holding), 15% of the equity would be allocated to
debtholders who execute releases and an affiliate of the Company would receive
the remaining 47.9% of the equity in JCC Holding, a portion of which may be
assigned to certain
-25-
<PAGE>
Harrah's Jazz partner-related parties in exchange for equity investments and
other consideration to be provided under the Plan. In addition, holders of the
public debt would receive (i) $187.5 million in aggregate principal amount of 8%
Senior Subordinated Notes of JCC due 2006 with contingent payments, and (ii) a
pro rata share of Senior Subordinated Contingent Notes of JCC due 2006.
During the course of the bankruptcy of Harrah's Jazz, a subsidiary of the
Company has made debtor-in-possession loans to Harrah's Jazz, totalling
approximately $13.5 million as of October 31, 1996, to fund certain obligations
to the City of New Orleans and other cash requirements of Harrah's Jazz. The
Company has proposed to make up to $18 million in such loans, however, it is
likely that Harrah's Jazz will require debtor-in- possession loans from the
Company in excess of the $18 million currently proposed.
As part of the Plan, Harrah's has proposed to invest an additional
$75 million in the project and deliver a new form of completion guaranty if a
reorganization plan approved by Harrah's is consummated. Any
debtor-in-possession financing, including the approximately $13.5 million in
financing already advanced and discussed above would be repaid or converted into
equity (and count toward the $75 million investment referred to above) upon
consummation of a reorganization plan approved by Harrah's. JCC is also seeking
to obtain a $195 million secured term loan and revolving credit facility to
finance construction of the Rivergate Casino and provide JCC with working
capital availability, and Harrah's may be required to guarantee or provide
credit support for this financing. If a reorganization approved by Harrah's is
consummated, Harrah's may also make an additional $20 million subordinated loan
to JCC to assist in financing construction of the Rivergate Casino.
The Plan also contemplates the opening of a temporary casino in two phases
at the Rivergate Casino site followed by the opening of a permanent casino at
such site. The first phase of the temporary casino is expected to open
approximately seven months after the consummation of the Plan. The Plan is
expected to be consummated in early 1997. Under the Plan, the Basin Street
Casino would not reopen.
On April 19, 1996, the Louisiana State Legislature enacted legislation which
required, among other things, the holding of an election of the voters of
Orleans Parish in November 1996 purportedly to determine whether to approve or
disapprove gaming at the Rivergate Casino. On November 5, 1996, residents of
Orleans Parish voted to approve gaming at the Rivergate Casino.
In addition to the matters discussed above, the Plan is subject to other
amendments, and such other amendments may be material. There can be no assurance
that definitive agreements necessary to consummate the Plan will be reached or
that the
-26-
<PAGE>
amended Plan will be approved, or, if approved, that the conditions to
consummation of the Plan will be met. Additionally, ongoing litigation and
reorganization costs related to the Harrah's Jazz bankruptcy, which could be
significant, will have a corresponding impact on Harrah's future earnings and
cash flows.
CAPITAL SPENDING AND DEVELOPMENT
- --------------------------------
Existing Land-Based Properties
- ------------------------------
Harrah's continues work on major expansion projects at its Las Vegas and
Atlantic City casino properties. These projects each include an additional hotel
tower and more casino space, with the current status of projects as follows:
<TABLE><CAPTION>
Costs Projected
Estimated Incurred Additional Completion Dates
Project at Sep. Casino Additional --------------------
Cost 30,1996 Square Hotel Casino Hotel
Location (millions) (millions) Feet Rooms Expansion Addition
- -------- -------- -------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Las Vegas $200.0 $34.2 27,000 976 May 97 Sep 97
Atlantic City 80.7 38.1 13,500 416 Complete Jul 97
</TABLE>
The Las Vegas project includes not only the additional casino space and guest
rooms reflected above, but a complete remodeling of the casino's exterior facade
and entrances and significant additions and improvements to nongaming amenities.
The casino and facade additions and renovation are being opened in phases and
are expected to be completed during second quarter 1997, with the hotel rooms to
be completed by third quarter 1997. In addition to this expansion of its current
Las Vegas property, Harrah's has also announced its interest in constructing or
acquiring a second Las Vegas casino property, subject to location and project
economics. At the present time, no definitive plans have been completed and no
property has been identified, and there is no assurance the Company will
construct or acquire such a location.
In Atlantic City, Harrah's continues construction of a new hotel tower and
nongaming amenities. As noted in the above table, the casino expansion at
Harrah's Atlantic City opened in June 1996 and added 13,500 square feet of
gaming space and 500 slot machines to the property. Harrah's has also completed
and opened a new marine-themed buffet restaurant. The new hotel tower is
expected to open in July 1997.
Harrah's has announced a possible second phase to its Atlantic City
expansion, pending substantive progress on development of new casino hotel
projects in the Marina area of Atlantic City by other companies, appropriate
regulatory
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approvals and adequate resolution of road and access improvements that have
been the subject of discussions between the state, city and developers.
This $325 million investment would position Harrah's Atlantic City as one
of the largest casino resorts in that market. This phase, if completed,
would include an additional 1,500 guest rooms and 30,000 square feet of
casino space, as well as significant enhancements in convention facilities,
restaurant offerings, parking facilities and other nongaming amenities.
At present, because of the uncertainties relating to this project,
there is no assurance this second phase will proceed.
Riverboat Casino Development
- ----------------------------
Construction continues on the joint venture riverboat casino entertainment
complex in Maryland Heights, Missouri, a suburb of St. Louis, which is expected
to open during first quarter 1997, subject to receipt of all regulatory
approvals. The facility will include four riverboat casinos, two of which will
be owned and operated by Harrah's, and jointly-owned shoreside facilities,
including a 291-room Harrah's-managed hotel and an entertainment mall. Harrah's
two riverboats are expected to contain a combined total of approximately 60,000
square feet of casino space, over 1,200 slot machines, and approximately 80
table games. Harrah's investment in the Maryland Heights development project is
expected to total $175 million, of which approximately $87 million had been
invested at September 30, 1996, including approximately $58 million in
contributions to the joint venture.
Harrah's continues construction on a 200-room hotel at its North Kansas City
riverboat casino. The hotel, which is expected to open in December, represents
the final phase of a $78 million expansion project that also included the March
1996 addition of a 1,060-car parking garage, the May 1996 addition of a second
riverboat casino with approximately 30,000 square feet of gaming space, and
other shoreside improvements.
Harrah's has also proposed expansion projects in Joliet and Shreveport. In
Joliet, Harrah's is evaluating a plan to add a 240-suite hotel, a 600-space
parking deck and meeting facilities. Subject to the satisfactory completion of
market assessments and planning and design work, construction is expected to
begin in first quarter 1997, with a projected opening date of first quarter
1998. In Shreveport, Harrah's is evaluating a possible expansion to its current
facility to include hotel rooms as well as additional parking and restaurant and
meeting facilities. Preliminary planning and design work for this project is
underway, but assuming the Company decides to proceed, construction is not
expected to begin until late 1997. Both projects are subject to the receipt of
necessary regulatory approvals.
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Indian Lands
- ------------
Harrah's has received approval from the National Indian Gaming Commission
(NIGC) of development and management agreements with the Eastern Band of
Cherokees for a casino development at Cherokee, North Carolina. Construction on
this project is underway and the facility, which will contain approximately
50,000 square feet of casino space, is expected to open during third quarter
1997. Though Harrah's does not expect to fund this development, it has committed
to guarantee the related bank financing of $82 million, which is expected to
close during fourth quarter 1996. As a temporary source of construction
funding, Harrah's had advanced approximately $6.3 million to the tribe as of
September 30, 1996, which is expected to be repaid upon funding of the bank
loan.
Harrah's is awaiting NIGC approval of development and management agreements
with the Prairie Band of Potawatomi Indians for a development near Topeka,
Kansas. The Prairie Band recently completed the renovation of its current bingo
hall as a temporary casino. Harrah's has committed to loan the tribe $1 million
for this renovation, of which approximately $0.5 million had been funded at
October 31, 1996. Current plans also call for the construction of a $37 million
permanent casino. This facility, which is expected to be completed by the end of
1997, assuming NIGC approval is timely received, will be managed by a Harrah's
subsidiary and financed by loans which Harrah's will guarantee.
Harrah's has also signed definitive development and management agreements
with the Pokagon Band of Potawatomi Indians for future casino developments in
Michigan and Indiana and has previously announced agreements with other Indian
tribes. These proposed developments are in various stages of negotiation and are
subject to certain conditions, including approval from appropriate government
agencies. Earlier in the year, the Michigan legislature declined to concur with
the Governor's execution of the compact for a Michigan casino development by the
Pokagon Band, but efforts to gain alternative approvals continue. If the
necessary approvals are received, Harrah's would likely guarantee the related
bank financing for the projects, which could be significant.
For all existing guarantees of Indian debt, Harrah's has obtained a first
lien on the personal property (tangible and intangible) of the casino
enterprise. There can be no assurance, however, the value of such property would
satisfy Harrah's obligations in the event these guarantees were enforced.
Additionally, Harrah's has received limited waivers from the Indian tribes of
their sovereign immunity to allow Harrah's to pursue its rights under the
contracts between the parties and to enforce collection efforts as to any assets
in which a security interest is taken.
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International
- -------------
Construction continues on a 1,066-foot sky tower at Harrah's Sky City in
Auckland, New Zealand, the Company's first casino facility outside the United
States. The tower, which is the final phase of this project, is expected to open
in mid-1997. During third quarter 1996, a 700-seat theater opened, following the
second quarter opening of a 344-room hotel. The casino portion of the facility
opened in February 1996 and contains 45,000 square feet of casino space, 1,050
slot machines and 100 table games. This facility is owned by a corporation in
which Harrah's owns a 12.5% equity interest, and is managed by Harrah's for a
fee.
Overall
- -------
In addition to the specific projects discussed above, the Company continues
to perform on-going refurbishment and maintenance at its existing casino
entertainment facilities in order to maintain Harrah's quality standards.
Harrah's also continues to pursue casino entertainment development opportunities
in possible jurisdictions across the United States and in foreign jurisdictions.
Until necessary approvals to proceed with development of a project are obtained
from the relevant regulatory bodies, the costs of pursuing casino entertainment
projects are expensed as incurred. Construction-related costs incurred after
the receipt of necessary approvals are capitalized and depreciated over the
estimated useful life of the resulting asset. Preopening costs incurred during
the construction period are deferred and expensed at the respective property's
opening.
A number of these projects, if they go forward, will most likely require,
individually and in the aggregate, significant capital commitments and, if
completed, may result in significant additional revenues. The commitment of
capital, the timing of completion and the commencement of operations of casino
entertainment development projects are contingent upon, among other things,
negotiation of final agreements and receipt of approvals from the appropriate
political and regulatory bodies. Cash needed to finance projects currently under
development as well as additional projects being pursued by Harrah's will be
made available from operating cash flows, the Bank Facility (see Debt and
Liquidity section), Harrah's existing shelf registration (see Debt and Liquidity
section), joint venture partners, specific project financing, guarantees by
Harrah's of third party debt and, if necessary, additional Harrah's debt and/or
equity offerings. Harrah's capital spending for the nine months ended September
30, 1996 totalled approximately $259 million, and total 1996 capital
expenditures are estimated to be $375 million to
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$425 million. Estimated total capital expenditures for 1997 are expected to be
$300 million to $350 million, including the projects discussed in this Capital
Spending and Development section, the refurbishment of existing facilities and
other projects, but excluding the possible purchase or construction of a second
Las Vegas property and the possible second phase of Harrah's Atlantic City
expansion. Excluded from these estimates are additional investments which may
be made in the Harrah's Jazz project (see Harrah's Jazz Company Section).
DEBT AND LIQUIDITY
- ------------------
Harrah's bank credit facility consists of a $600 million reducing revolving
and letter of credit facility maturing in 2000 and a separate $150 million
revolving credit facility which is renewable annually, at the lenders' option,
through 2000 (collectively, the Facility). Scheduled reductions of the borrowing
capacity under the $600 million facility are as follows: $50 million, July 1998;
$75 million, January 1999; $75 million, July 1999; $100 million, January 2000;
and $300 million, July 2000. As of September 30, 1996, $393.0 million in
borrowings were outstanding under the Facility, with an additional $26.5 million
committed to back letters of credit, resulting in $330.5 million of available
Facility capacity as of September 30, 1996. In October 1996, Harrah's Board of
Directors approved a plan to seek an increase in the Bank Facility from
$750 million to $1.1 billion. This plan is subject to receipt of commitments
from banks and certain approvals.
Interest Rate Agreements
- ------------------------
To manage the relative mix of its debt between fixed and variable rate
instruments, Harrah's enters into interest rate swap agreements to modify the
interest characteristics of its outstanding debt without an exchange of the
underlying principal amount. As of September 30, 1996, Harrah's was a party to
the following interest rate swap agreements on certain fixed rate debt:
Effective Next Semi-
Swap Rate at Annual Rate
Associated Rate Sep. 30, Adjustment
Debt (LIBOR+) 1996 Date Swap Maturity
- -------------- ------ --------- ----------- -------------
10 7/8% Notes
$200 million 4.73% 10.45% October 15 October 1997
8 3/4% Notes
$50 million 3.42% 9.14% November 15 May 1998
$50 million 3.22% 9.25% January 15 July 1998
In accordance with the terms of the interest rate swap agreements, the effective
interest rate on the $200 million 10 7/8% Notes was adjusted on October 15,
1996, to 10.46%.
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Harrah's maintains seven additional interest rate swap agreements which
effectively convert variable rate debt to a fixed rate. The following table
summarizes the terms of these swap agreements, all of which reset on a quarterly
basis, as of September 30, 1996:
Swap Rate
Received
Swap Rate (Variable) at Swap
Notional Amount Paid (Fixed) Sep. 30, 1996 Maturity
- --------------- ----------- ------------- ------------
$50 million 7.910% 5.625% January 1998
$50 million 6.985% 5.625% March 2000
$50 million 6.951% 5.625% March 2000
$50 million 6.945% 5.625% March 2000
$50 million 6.651% 5.539% May 2000
$50 million 5.788% 5.637% June 2000
$50 million 5.785% 5.637% June 2000
The differences to be paid or received by Harrah's under the terms of its
interest rate swap agreements are accrued as interest rates change and
recognized as an adjustment to interest expense for the related debt. Changes in
the variable interest rates to be paid or received by Harrah's pursuant to the
terms of its interest rate agreements will have a corresponding effect on its
future cash flows. These agreements contain a credit risk that the
counterparties may be unable to meet the terms of the agreements. Harrah's
minimizes that risk by evaluating the creditworthiness of its counterparties,
which are limited to major banks and financial institutions, and does not
anticipate nonperformance by the counterparties.
As part of a transaction whereby Harrah's effectively secured an option
to a site for a potential casino, Harrah's has guaranteed a third
party's $24.7 million variable rate bank loan. Harrah's also entered into
an interest rate swap agreement, which expires December 1, 1996, in which
Harrah's receives a fixed interest rate of 7% from the third party and pays
the variable interest rate of the subject debt (LIBOR plus 1% at September
30, 1996) to the bank. The interest rate swap is marked to market by
Harrah's, with the adjustment recorded in interest expense. This loan and
the interest rate swap agreement are expected to be extended until
February 1, 1997, at which time it is currently expected they will be
refinanced and Harrah's would continue its guaranty. This guaranty contains
an element of risk that, should the borrower be unable to perform, the
Company could become responsible for repayment of at least a portion of
the obligation. Harrah's has reduced this exposure by obtaining a
security interest in certain assets of the third party.
Shelf Registration
- ------------------
To provide for additional financing flexibility, Harrah's, together with its
wholly-owned subsidiary Harrah's Operating Company, Inc. (HOC), has registered
up to $200 million of
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Harrah's common stock or HOC preferred stock or debt securities pursuant to a
shelf registration declared effective by the Securities and Exchange Commission.
The terms and conditions of the HOC preferred stock or debt securities, which
will be unconditionally guaranteed by Harrah's, will be determined by market
conditions at the time of issuance. The shelf registration is available until
October 1997.
EQUITY TRANSACTIONS
- -------------------
In October 1996, Harrah's Board of Directors approved a plan which
authorizes the purchase of up to ten percent of the shares of Harrah's
outstanding common stock. The shares, which may be purchased prior to December
31, 1997, would be held in treasury.
INCOME TAX MATTERS
- ------------------
In connection with the PHC Spin-off, Harrah's entered into a tax sharing
agreement with PHC wherein each company is obligated for those taxes associated
with their respective businesses. Additionally, Harrah's is obligated for all
taxes for periods prior to the PHC Spin-off date which are not specifically
related to PHC operations and/or PHC hotel locations. Harrah's obligations under
this agreement are not expected to have a material adverse effect on its
consolidated financial position or results of operations.
EFFECTS OF CURRENT ECONOMIC AND POLITICAL CONDITIONS
- ----------------------------------------------------
The casino entertainment industry has experienced widespread expansion in
new jurisdictions over the past several years as governments seeking additional
tax revenues and employment have legalized casino gaming. Growth in the casino
industry has also been furthered by the Indian Gaming Regulatory Act of 1988.
Although a number of states are considering legislation in additional
jurisdictions, the rapid growth which existed during the early 1990's has slowed
significantly and future new market potential is difficult to predict.
Of those new markets which have opened to the gaming industry, certain
jurisdictions have restricted market entry, which limits capacity and
competition within those markets. Other jurisdictions have no limits on market
entry, other than restrictions on locations, which can impact operating
performance and cash flows. One such market is Tunica, Mississippi, where
Harrah's currently operates two casino entertainment facilities. In Tunica, a
major new development opened in June 1996, and its opening has had a significant
impact on both the overall Tunica market and on both Harrah's Tunica properties.
In Indiana, several new riverboat casinos opened in June and have attracted
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customers from the Joliet market. At this time, management cannot predict
whether the Joliet market will grow to fully absorb the recent additional
capacity. The Shreveport and Kansas City markets both saw the addition of new
supply in October. The impact that these competitors will have on Harrah's
operations remains uncertain at this time. In several riverboat markets, other
projects are underway or have been proposed which could, if completed, increase
the levels of competition in those markets.
In addition to growth in new markets, significant development has occurred
in recent years in the traditional gaming markets of Nevada and New Jersey,
resulting in increased competition in these markets. Several large properties
have opened in Las Vegas in recent years, other large projects are both planned
and under development and several existing properties, including Harrah's Las
Vegas, have begun significant expansion projects. In July 1995, a major new
casino property opened in Reno, Nevada, representing the first major entry to
that market in years. New developments and expansions, including the major
expansion plans discussed above at Harrah's Atlantic City, are also either
planned or underway in Atlantic City, New Jersey. Over the last several years,
the Laughlin, Nevada market has been impacted by increasing competition from
markets in and around Las Vegas and by neighboring Indian properties. Though the
traditional casino markets saw little overall impact from the recent spread of
gaming to new riverboat markets, competition within traditional markets has
become more intense in recent months.
The casino industry's market focus has also undergone a transformation over
the past several years as a result of the spread of gaming. Whereas traditional
markets were limited, drawing primarily long-distance travelers, the newer
casino properties are geographically dispersed, resulting in casino
entertainment being within a reasonable driving distance for many Americans.
Harrah's has participated in this industry transformation, developing casinos in
many new markets. As a result, Harrah's is an extremely diverse gaming company,
both geographically and categorically, with properties in nine states and New
Zealand as of September 30, 1996, representing a mix of traditional land-based,
riverboat, Indian and limited stakes facilities.
Harrah's is not able to determine the long-term impact, whether favorable or
unfavorable, that these events will have on its current or future markets.
However, management believes that the diversity of its operations, its
multi-market customer base and its continuing efforts to establish Harrah's as a
premier brand name have well-positioned Harrah's to face the challenges present
within the industry.
In early 1996, the U.S. Supreme Court ruled in the Seminole Tribe of Florida
vs. Florida et al., that an Indian tribe cannot sue a state in federal court if
that state, in the opinion of the tribe, fails to negotiate a compact in good
faith. While this
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ruling does not affect Harrah's management of those casinos located on Indian
lands already in operation or those in development where compacts with states
have already been issued, there is substantial uncertainty as to the impact of
the decision on the timing and nature of future Class III gaming compacts.
In April 1996, the Louisiana State Legislature approved a local option bill
which purported to give voters in each Parish the right to decide during the
November 1996 general elections what forms of gaming they wanted to continue in
their Parish. On November 5, 1996, residents of Orleans Parish voted to approve
gaming at the Rivergate Casino (see Harrah's Jazz Company section), and
residents of Caddo Parish, site of Harrah's Shreveport, voted to continue gaming
in that market.
The gaming 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 law, or in
the administration of such law, which would affect the gaming industry. It is
not possible to determine with certainty the scope or likelihood of possible
changes in tax law or in the administration of such law. If adopted, such
changes could have a material adverse effect on Harrah's financial results.
INTERCOMPANY DIVIDEND RESTRICTION
- ---------------------------------
Harrah's principal asset is the stock of HOC, a wholly-owned subsidiary
which holds, directly and through subsidiaries, the principal assets of Harrah's
businesses. Agreements governing the terms of its debt require Harrah's to abide
by covenants which, among other things, limit HOC's ability to pay dividends and
make other restricted payments, as defined, to Harrah's. The amount of HOC's
restricted net assets, as defined, computed in accordance with the most
restrictive of these covenants regarding restricted payments, was approximately
$751.5 million at September 30, 1996. Subsequent to September 30, 1996, Harrah's
negotiated changes to this covenant which allow HOC to pay up to $200 million in
dividends to Harrah's for use in repurchasing Company stock (see Equity
Transactions section). Given this ownership structure, these restrictions should
not impair Harrah's ability to conduct its business through its subsidiaries or
to pursue its development plans.
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
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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) existing operations and
expansions, including their opening dates, at various properties including
additional facilities; (B) planned openings and development of Indian casinos
that would be managed by the Company; (C) the planned opening of facilities
in Maryland Heights, Missouri; (D) the plan of reorganization and its various
facets for New Orleans, and (E) the planned increase in the Company's Bank
Facility, the planned implementation of the stock repurchase program and
planned capital expenditures for 1997. 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
fled 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 and licensing approvals, third party consents and
approvals, and relations with partners, owners and other third parties;
business and economic conditions; judicial actions and political
uncertainties, including gaming legislation and taxation; and 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 1. Legal Proceedings
--------------------------
On September 26, 1995, Harrah's New Orleans Investment Company ("HNOIC"),
an indirect subsidiary of the Company, filed in the United States District
Court for the Eastern District of Louisiana a suit styled Harrah's
New Orleans Investment Company v. New Orleans Louisiana Development
Corporation, Civil No. 95-3166. At issue in the suit is the percentage
of ownership that New Orleans/Louisiana Development Corporation ("NOLDC")
holds in Harrah's Jazz Company ("HJC"), a Louisiana partnership whose
general partners are HNOIC, NOLDC and Grand Palais Casino, Inc. This
declaratory judgment action seeks to confirm that, as of September 26, 1995,
NOLDC's percentage interest in the Harrah's Jazz Company partnership was
only 13.73% and, therefore, NOLDC is not a "Material Partner" in HJC. This
case was put on "administrative hold" after the filing by NOLDC of a Chapter
11 bankruptcy petition on November 21, 1995. Should it be put back on the
active list, HNOIC or the appropriate post-bankruptcy entity would
vigorously prosecute it. At the time the case was put on "administrative
hold," no discovery on the merits had been taken and no answer had been filed
by NOLDC.
On September 28, 1995, NOLDC filed suit against the Company and various of
its corporate affiliates in New Orleans Louisiana Development Corporation
v. Harrah's Entertainment, formerly d/b/a The Promus Companies,
Harrah's New Orleans Investment Company, Harrah's New Orleans Management
Company, Harrah's Jazz Company, and Promus Hotels, formerly d/b/a Embassy
Suites, Inc., Civil No. 95-14653, filed in the Civil District Court for the
Parish of Orleans. The case was subsequently removed by defendants to the
United States District Court for the Eastern District of Louisiana. In
this suit, NOLDC seeks to realign ownership interests in HJC among
HNOIC and NOLDC. NOLDC also seeks an unspecified dollar amount of
damages sufficient to compensate it for the losses it alleges it has
suffered as a result of actions of defendants. NOLDC has indicated that
it intends to seek to remand the suit to the Civil District Court. The
case was also put on "administrative hold" by the District Court Judge as
a result of NOLDC's bankruptcy filing. The Company and other defendants
intend to vigorously defend the action should it be put back on the active
case list. At the time it was put on "administrative hold," no answer had
been filed by any defendant and no discovery had been taken.
Beginning on November 28, 1995, eight separate class action suits were
filed against the Company and various of its corporate affiliates, officers
and directors in the United States District Court for the Eastern
District of Louisiana. They are Ben F.
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D'Angelo, Trustee for Ben F. D'Angelo Revocable Trust v.
Harrah's Entertainment Corp., Michael D. Rose, Philip G. Satre and Ron
Lenczycki; Max Fenster v. Harrah's Entertainment, Inc., Harrah's New
Orleans Investment Company, Grand Palais Casino, Inc., Philip G. Satre,
Colin V. Reed, Michael N. Regan, Christopher B. Hemmeter, Donaldson,
Lufkin & Jenrette Securities Corporation, Salomon Brothers, Inc., and BT
Securities Corp.; Goldie Rosenbloom v. Harrah's Entertainment Corp.,
Michael D. Rose, Philip G. Satre and Ron Lenczycki; Barry Ross v.
Harrah's New Orleans Investment Company, Philip G. Satre, Colin V. Reed,
Lawrence L. Fowler, Michael N. Regan, Cezar M. Froelich, Ulric Haynes, Jr.,
Wendell Gauthier, T. George Solomon, Jr., Duplain W. Rhodes, III, Harrah's
Entertainment, Inc., Donaldson, Lufkin & Jenrette Securities Corporation,
Salomon Brothers Inc., and BT Securities Corp.; Louis Silverman v. Harrah's
Entertainment, Inc., Harrah's New Orleans Investment Company, Grand Palais
Casino, Inc., Philip G. Satre, Colin V. Reed, Michael N. Regan,
Christopher B. Hemmeter, and Donaldson, Lufkin & Jenrette
Securities Corporation; Florence Kessler v. Philip G. Satre, Colin V.
Reed, Charles A. Ledsinger, Jr., Michael N. Regan, Lawrence L. Fowler,
Christopher B. Hemmeter, Cezar M. Froelich, Ulric Haynes, Jr., Wendell H.
Gauthier, T. George Solomon, Jr., Duplain W. Rhodes, III, Donaldson,
Lufkin & Jenrette Securities Corporation, Salomon Brothers Inc., and
BT Securities Corporation; Warren Zeiller and Judith M.R. Zeiller v.
Harrah's Entertainment Corp., Michael D. Rose, Philip G. Satre, and Ron
Lenczycki; and Charles Zwerving and Helene Zwerving v. Harrah's
Entertainment Corp., Philip G. Satre, Colin V. Reed, Christopher B.
Hemmeter, and Donaldson, Lufkin & Jenrette Securities Corporation.
Per Court Order of January 26, 1996, the above plaintiffs filed a
consolidated complaint in the action numbered 95-3925 In Re
Harrah's Entertainment, Inc. Securities Litigation. The consolidated
complaint alleges that various misstatements and omissions were made in
connection with the sale of Harrah's Jazz Company 14.25% First Mortgage Notes
and thereafter, and seeks unspecified damages, as well as costs of legal
proceedings. Motions to dismiss and to refer the matter to Bankruptcy
Judge Brahney have been filed by defendants, discovery has commenced,
and plaintiffs have sought class certification. No rulings have been
made on any of the parties' motions. The Company and the other defendants
intend to vigorously defend the suits.
On December 6, 1995 Centex Landis, the general contractor for the
permanent casino being developed by HJC, filed suit against the Company,
among others, in the Civil District Court for The Parish of Orleans in
Centex Landis Construction Co., Inc. v. Harrah's Entertainment, Inc.
formally d/b/a The Promus Companies, Inc.; and Ronald A. Lenczycki, Civil
No. 95-18101. Defendants removed the case to the United States District
Court for the Eastern District of Louisiana and it was subsequently
transferred to the Bankruptcy Court handling the HJC bankruptcy. This
suit seeks to collect more than $40 million allegedly owed to Centex Landis
by HJC from the Company under guarantee, fraud,
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fraudulent advertising and unfair trade practice theories. The Company and
the other defendant intend to vigorously defend the action and have filed an
answer denying all of plaintiff's allegations. No discovery has been
taken in the action.
Russell M. Swody, et al. v. Harrah's New Orleans Management Company
and Harrah's Entertainment, Inc., Civil No. 95-4118, was filed against the
Company on December 13, 1995 in the United States District Court for
the Eastern District of Louisiana, and subsequently amended. Swody is a
class action lawsuit under the Worker Adjustment and Retraining
Notification Act ("WARN Act") and seeks damages for alleged failure to
timely notify workers terminated by Harrah's New Orleans Management
Company at the time of the HJC bankruptcy. Plaintiffs seek unspecified
damages, as well as costs of legal proceedings, for themselves and all
members of the class. An answer has been filed denying all of plaintiffs'
allegations.
Swody was consolidated with Susan N. Poirier, Darlene A. Moss, et al.
v. Harrah's Entertainment, Inc., Harrah's New Orleans Management
Company, and Harrah's Operating Company, Civil No. 96-0215, which was
filed in the United States District Court for the Eastern District of
Louisiana on January 17, 1996, and subsequently amended. Poirier seeks not
only damages under the WARN Act, but also under the Employee Retirement
Income Security Act ("ERISA") for the alleged wrongful failure to provide
severance to those terminated. Similar proofs of claims were filed by Ms.
Poirier in the Bankruptcy Court for the Eastern District of Louisiana
in the HJC, HNOIC and Harrah's Jazz Finance Corp. bankruptcy cases.
Harrah's Jazz Company has reached a tentative settlement with
the Swody and Poirier plaintiffs, which calls for a payment to be made by
HJC in exchange for the dismissal of all actions. Hearings will be set
shortly to determine whether this proposed settlement is fair to all class
members.
On December 29, 1995 in the Civil District Court for The Parish of
Orleans, the City of New Orleans filed suit against the Company and others in
City of New Orleans and Rivergate Development Corporation v. Harrah's
Entertainment, Inc. (f/k/a The Promus Companies, Inc.), Grand Palais
Casino, Inc., Embassy Suites, Inc., First National Bank of Commerce and
Ronald A. Lenczycki, Civil No. 95-19285. This suit seeks to require the
Company, among others, to complete construction of the permanent casino
being developed by HJC under theories of breach of completion guarantee
contract, breach of implied duty of good faith, detrimental reliance,
misrepresentation, and false advertising. Plaintiff seeks unspecified
damages, as well as costs of legal proceedings. Defendants have removed
the suit to the United States District Court for the Eastern District of
Louisiana and it was then transferred to the Bankruptcy Court handling the
HJC bankruptcy. The Company and the other defendants have filed an answer
denying all of plaintiffs' allegations and intend to vigorously defend the
action.
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Louisiana Economic Development and Gaming Corporation v.
Harrah's Entertainment, Inc. and Harrah's Operating Company, Inc., Civil No.
424328, was filed on January 23, 1996 in the Nineteenth Judicial Court
of the State of Louisiana, Parish of East Baton Rouge. On February 21, 1996,
the Company and the other defendants removed the case to the Federal
District Court for the Middle District of Louisiana and asked that it be
transferred to the Bankruptcy Court handling the HJC bankruptcy. The
case has been transferred. A motion for reconsideration has been filed
by LEDGC, which motion is set to be heard in early December. In this
suit LEDGC seeks to require the Company and Harrah's Operating Company to
complete construction of the permanent casino being developed by HJC
under theories of breach of completion guarantee contract, breach of
implied duty of good faith, detrimental reliance, misrepresentation and,
in the alternative, seeks damages. The Company has filed an answer and
counterclaim against LEDGC. LEDGC has moved to have that counterclaim
dismissed and/or for summary judgment. No ruling has yet been made by the
court. The defendants intend to vigorously defend the action and
prosecute their counterclaim.
-40-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------------------------
(a) Exhibits
*EX-10.1 Amendment, dated as of July 18, 1996, to Escrow
Agreement between Harrah's Entertainment, Inc. and
NationsBank.
*EX-10.2 Amendment, dated July 18, 1996, to Harrah's
Entertainment, Inc. Executive Deferred
Compensation Plan.
*EX-11 Computation of per share earnings.
*EX-27 Financial Data Schedule
* Filed herewith.
(b) A Form 8-K was filed by the Company on August 9, 1996,
reporting the Special Stock Purchase Rights for Harrah's
Entertainment, Inc., File No. 1-10410.
-41-
<PAGE>
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.
November 12, 1996 BY: MICHAEL N. REGAN
-----------------------
Michael N. Regan
Vice President and Controller
(Chief Accounting Officer)
-42-
<PAGE>
Exhibit Index
-------------
Sequential
Exhibit No. Description Page No.
- ----------- ------------ ----------
EX-10.1 Amendment, dated as of July 18, 44
1996, to Escrow Agreement between
Harrah's Entertainment, Inc. and
NationsBank.
EX-10.2 Amendment, dated July 18, 1996, to 47
Harrah's Entertainment, Inc. Executive
Deferred Compensation Plan.
EX-11 Computation of per share earnings. 49
EX-27 Financial Data Schedule.
-43-
<PAGE>
EX-10.1
AMENDMENT TO ESCROW AGREEMENT
-----------------------------
Amendment dated as of July 18, 1996 to Escrow Agreement dated February
6, 1990, as amended October 29, 1993, and June 7, 1995 (the "Escrow Agreement"),
between Harrah's Entertainment, Inc., formerly The Promus Companies Incorporated
(the "Company"), the subsidiaries listed on the execution page of this Amendment
("Subsidiaries"), and NationsBank (formerly Sovran Bank and formerly Commerce
Union Bank) (the "Escrow Agent").
WHEREAS, pursuant to Section 5.02 of the Escrow Agreement, the Company
maintains the right to amend the Escrow Agreement by an instrument in writing
signed on behalf of the parties to the Escrow Agreement, together with the
written consent of Participants having at least 50% of all amounts being
accounted for in the Escrow Fund with respect to their accounts (which consent
is attached hereto);
WHEREAS, pursuant to Section 5.02 of the Escrow Agreement, the
undersigned parties hereby adopt this Amendment to become effective as of the
date hereof.
NOW THEREFORE, in consideration of the mutual agreements contained
herein and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties agree as follows:
1. Section 1.02 of the Plan is amended to read in its
entirety as follows:
Section 1.02. Participants. The Participants under this Escrow
Agreement are all individuals who have an EDCP account
balance. The Company may add Participants upon written notice
to the Escrow Agent from the Chief Executive Officer of the
Company. The Company will notify the Escrow Agent from time to
time of the names of the Participants under this Escrow
Agreement. For purposes of this Escrow Agreement, the
beneficiary of any Participant who dies shall be deemed a
Participant under this Agreement to the extent such
beneficiary is entitled to the then-accrued benefits under the
Plans covered by this Escrow Agreement.
2. The following sentence is added at the end of Section
3.01(a) of the Escrow Agreement:
Notwithstanding anything in this Escrow Agreement to the
contrary, the Company's Chief Executive Officer and Chief
Financial Officer, jointly, shall have authority to direct the
Escrow Agent in writing, from time to
-44-
<PAGE>
time (the "Payment Notice), to pay directly to any Participant
(or beneficiary if the Participant is deceased) who is
entitled to a payment under the Plans such amount as may be
directed in the Payment Notice for purposes of satisfying
accrued benefits under any of the Plans, including but not
limited to benefits payable by reason of a Participant's or
beneficiary's exercise of a call provision under the EDCP, and
the Escrow Agent shall utilize for such payment such funds or
investments in escrow, including but not limited to, cash
and/or the cash surrender value of any insurance policies or
contracts, as may be directed in the Payment Notice which may
include directions to cash in a policy or borrow against a
policy to obtain the funds for the benefit payments. Such
payment shall be made by the Escrow Agent as soon as
practicable. The Escrow Agent shall act only as an
administrative agent and carry out the directions in the
Payment Notice in accordance with this paragraph and shall not
be responsible for the payment decision. If any Payment Notice
violates any duty or other requirement under this Escrow
Agreement or applicable law, the entire responsibility shall
rest upon the Company. The Escrow Agent shall be fully
protected in acting upon or complying with any restrictions or
directions provided in the Payment Notice in accordance with
this paragraph.
3. The parties understand that the parties to the Escrow
Agreement are Harrah's Entertainment, Inc., Harrah's
Operating Company, Inc., and NationsBank.
Executed as of this 18th day of July, 1996.
HARRAH'S ENTERTAINMENT, INC.
By: NEIL F. BARNHART
-------------------------
Title: VICE PRESIDENT
-------------------------
HARRAH'S OPERATING COMPANY, INC.
By: NEIL F. BARNHART
-------------------------
Title: VICE PRESIDENT
-------------------------
NATIONSBANK
By: R. OTIS GOODIN
-------------------------
Title: VICE PRESIDENT
-------------------------
-45-
<PAGE>
CONSENT
The signatories below, being Participants under the Escrow Agreement
dated as of February 6, 1990, as amended October 29, 1993, and June 7, 1995 (the
"Escrow Agreement"), as the term "Participants" is defined in the Escrow
Agreement, and who together have at least 50% of all amounts accounted for in
the Escrow Agreement applicable to benefits payable to them, hereby consent to
the Amendment, attached hereto and dated as of July 18, 1996, to the Escrow
Agreement.
MICHAEL D. ROSE LAURANCE B. LACAFF
- ------------------------- -------------------------
Michael D. Rose Laurance B. Lacaff
PHILIP G. SATRE J. W. McALLISTER
- ------------------------- -------------------------
Philip G. Satre J. W. McAllister
BEN C. PETERNELL RONALD A. LENCZYCKI
- ------------------------- -------------------------
Ben C. Peternell Ronald A. Lenczycki
COLIN V. REED JAMES B. FARLEY
- ------------------------- -------------------------
Colin V. Reed James B. Farley
CHARLES A. LEDSINGER, JR. BOAKE A. SELLS
- ------------------------- -------------------------
Charles A. Ledsinger, Jr. Boake A. Sells
E. O. ROBINSON, JR. WALTER J. SALMON
- ------------------------- -------------------------
E. O. Robinson, Jr. Walter J. Salmon
-46-
<PAGE>
EX-10.2
Amendment dated July 18, 1996 to the
Harrah's Entertainment, Inc.
Executive Deferred Compensation Plan
Pursuant to approval by the Human Resources Committee of the Harrah's
Entertainment, Inc. Board of Directors, the following subparagraph 5.1(c) is
hereby added to Article V of the Executive Deferred Compensation Plan:
(c) Notwithstanding any other provision of the Plan, at any
time after July 18, 1996, any Participant or
Beneficiary will be entitled to receive, upon written
request signed by the Participant or Beneficiary and
delivered to the Company's Corporate Compensation
Department, a lump sum distribution equal to 90% of all
or a specified percentage or amount, as designated by
the Participant or Beneficiary, of the Participant's or
Beneficiary's vested Account balance as of the
Determination Date immediately preceding the date on
which the Corporate Compensation Department receives
the written request; provided that the second request
for any such withdrawal must designate the entire
vested Account Balance for withdrawal and the Notice
Date for such second request must be at least one year
after the first Notice Date. The date the Corporate
Compensation Department receives a written request for
such withdrawal is referred to as a "Notice Date". The
amount payable under this subsection (c) will be paid
in a lump sum subject to any applicable withholding
taxes within sixty (60) days following the Notice Date.
The remaining 10% of the amount designated for
distribution will be forfeited to the Company by the
Participant or Beneficiary and the Participant or
Beneficiary will have no rights whatsoever thereto.
The request for the distribution and the 10% forfeiture
will become irrevocable on the tenth day after the
Notice Date for the distribution. Notwithstanding any
deferral elections, such Participant will not be
eligible for any deferrals under the Plan for a one
year period starting with the first payroll date that
is administratively feasible for ceasing deferrals that
occurs after a Notice Date. In addition, any deferrals
that may have occurred after the Determination Date
immediately preceding a Notice Date and before such
cessation of deferrals will be reversed and sent to the
Participant as soon as practicable without interest and
subject to applicable withholding taxes. The vested
Account balance of such a Participant or Beneficiary
will be determined as follows:
-47-
<PAGE>
(1) For a director Participant, the vested Account
balance is the Retirement Account balance.
(2) If the Participant is a current employee and would be
eligible for or otherwise entitled to his or her
Retirement Account balance if he or she terminated
employment on the Notice Date for the distribution,
the vested Account balance is the Retirement Account
balance. Otherwise, it will be the Termination
Account balance.
(3) If the Participant has terminated service or with
respect to a Beneficiary, the vested Account balance
is either the Retirement Account balance or the
Termination Account balance, as the case may be,
which the Participant or Beneficiary was vested in
and eligible for as of the Notice Date for the
distribution.
IN WITNESS WHEREOF, this Amendment has been executed as of this 18th
day of July, 1996.
Harrah's Entertainment, Inc.
By: NEIL F. BARNHART
-------------------------
Title: VICE PRESIDENT
-------------------------
-48-
<PAGE>
Exhibit 11
HARRAH'S ENTERTAINMENT, INC.
COMPUTATIONS OF PER SHARE EARNINGS
<TABLE>
Third Quarter Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income from continuing operations $ 42,350,000 $ 51,310,000 $103,737,000 $115,357,000
Discontinued operations
Earnings from hotel operations, net - - - 21,230,000
Spin-off transaction expenses, net - - - (21,194,000)
------------ ------------ ------------ ------------
Net income $ 42,350,000 $ 51,310,000 $103,737,000 $115,393,000
============ ============ ============ ============
Primary Earnings Per Share
Weighted average number of common
shares outstanding 102,762,954 102,428,430 102,688,120 102,298,599
Common stock equivalents
Additional shares based on
average market price for
period applicable to:
Restricted stock 38,327 70,215 48,527 102,439
Stock options 522,961 848,622 713,283 807,558
------------ ------------ ------------ ------------
Average number of primary common
and common equivalent shares
outstanding 103,324,242 103,347,267 103,449,930 103,208,596
============ ============ ============ ============
Primary earnings per common and
common equivalent share
Income from continuing operations $ 0.41 $ 0.50 $ 1.00 $ 1.12
Discontinued operations
Earnings from hotel operations,
net - - - 0.21
Spin-off transaction expenses,
net - - - (0.21)
------------ ------------ ------------ ------------
Net income $ 0.41 $ 0.50 $ 1.00 $ 1.12
============ ============ ============ ============
Fully Diluted Earnings Per Share
Average number of primary common and
common equivalent shares outstanding 103,324,242 103,347,267 103,449,930 103,208,596
Additional shares based on
period-end price applicable to:
Restricted stock - 3,529 - 7,348
Stock options - 10,446 - 51,511
------------ ------------ ------------ ------------
Average number of fully diluted
common and common equivalent
shares outstanding 103,324,242 103,361,242 103,449,930 103,267,455
============ ============ ============ ============
Fully diluted earnings per common and
common equivalent share
Income from continuing operations $ 0.41 $ 0.50 $ 1.00 $ 1.12
Discontinued operations
Earnings from hotel operations,
net - - - 0.21
Spin-off transaction expenses,
net - - - (0.21)
------------ ------------ ------------ ------------
Net income $ 0.41 $ 0.50 $ 1.00 $ 1.12
============ ============ ============ ============
</TABLE>
-49-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 85,954
<SECURITIES> 0
<RECEIVABLES> 61,185
<ALLOWANCES> 14,098
<INVENTORY> 22,458
<CURRENT-ASSETS> 195,693
<PP&E> 1,918,291
<DEPRECIATION> 569,566
<TOTAL-ASSETS> 1,919,488
<CURRENT-LIABILITIES> 217,359
<BONDS> 802,360
0
0
<COMMON> 10,290
<OTHER-SE> 739,439
<TOTAL-LIABILITY-AND-EQUITY> 1,919,488
<SALES> 0
<TOTAL-REVENUES> 1,213,523
<CGS> 0
<TOTAL-COSTS> 941,829
<OTHER-EXPENSES> 34,564
<LOSS-PROVISION> 5,848
<INTEREST-EXPENSE> 51,768
<INCOME-PRETAX> 181,836
<INCOME-TAX> 70,612
<INCOME-CONTINUING> 103,737
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,737
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
</TABLE>
