<PAGE>
--------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 1-10410
------------------------
HARRAH'S ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE I.R.S. NO. 62-1411755
(State of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
5100 W. SAHARA AVENUE, SUITE 200
LAS VEGAS, NEVADA 89146
(Current address of principal executive offices)
(702) 579-2300
(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, 2000, there were outstanding 116,731,588 shares of the
Company's Common Stock.
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Page 1 of 32
Exhibit Index Page 33
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited Consolidated Condensed Financial Statements of
Harrah's Entertainment, Inc., a Delaware corporation, have been prepared in
accordance with the instructions to Form 10-Q, and therefore, do not include all
information and notes necessary for complete financial statements in conformity
with generally accepted accounting principles. The results for the periods
indicated are unaudited, but reflect all adjustments (consisting only of normal
recurring adjustments) that management considers necessary for a fair
presentation of operating results. Results of operations for interim periods are
not necessarily indicative of a full year of operations. See Note 2 to these
Consolidated Condensed Financial Statements regarding the completion of our
acquisition of Players International, Inc. on March 22, 2000. These Consolidated
Condensed Financial Statements should be read in conjunction with the
Consolidated Financial Statements and notes thereto included in our 1999 Annual
Report to Stockholders.
2
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31,
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2000 1999
------------------------------------ ---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 241,382 $ 233,581
Receivables, less allowance for doubtful accounts of
$45,842 and $44,086..................................... 107,694 121,186
Deferred income taxes..................................... 33,196 33,208
Prepayments and other..................................... 86,320 68,028
Inventories............................................... 28,671 30,666
---------- ----------
Total current assets.................................... 497,263 486,669
---------- ----------
Land, buildings, riverboats and equipment................... 4,530,803 3,983,754
Less: accumulated depreciation.............................. (1,058,061) (922,524)
---------- ----------
3,472,742 3,061,230
Goodwill, net of amortization of $67,367 and $54,346 (Note
2)........................................................ 671,119 505,217
Investments in and advances to nonconsolidated affiliates... 293,659 168,511
Deferred costs, trademarks and other........................ 310,374 545,220
---------- ----------
$5,245,157 $4,766,847
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 72,262 $ 81,200
Accrued expenses.......................................... 412,272 287,494
Short-term debt........................................... 185,000 --
Current portion of long-term debt......................... 3,036 2,877
---------- ----------
Total current liabilities............................... 672,570 371,571
Long-term debt.............................................. 2,750,025 2,540,268
Deferred credits and other.................................. 156,604 120,827
Deferred income taxes....................................... 193,111 228,955
---------- ----------
3,772,310 3,261,621
---------- ----------
Minority interests.......................................... 20,329 18,949
---------- ----------
Commitments and contingencies (Notes 5 and 7 through 9)
Stockholders' equity
Common stock, $0.10 par value, authorized-360,000,000
shares, outstanding-116,731,588 and 124,379,760 shares
(net of 20,711,298 and 9,286,772 shares held in
treasury)............................................... 11,673 12,438
Capital surplus........................................... 1,056,831 987,322
Retained earnings......................................... 418,695 512,539
Accumulated other comprehensive income.................... (10) (493)
Deferred compensation related to restricted stock......... (34,671) (25,529)
---------- ----------
1,452,518 1,486,277
---------- ----------
$5,245,157 $4,766,847
========== ==========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THIRD QUARTER
ENDED NINE MONTHS ENDED
--------------------- -----------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2000 1999 2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues
Casino.................................................... $789,717 $658,996 $2,144,531 $1,824,558
Food and beverage......................................... 126,942 113,135 358,087 321,675
Rooms..................................................... 72,116 65,656 205,134 192,094
Management fees........................................... 17,988 21,737 51,478 56,732
Other..................................................... 38,730 33,140 109,848 97,109
Less: casino promotional allowances....................... (92,068) (78,610) (252,858) (215,309)
-------- -------- ---------- ----------
Total revenues........................................ 953,425 814,054 2,616,220 2,276,859
-------- -------- ---------- ----------
Operating expenses
Direct
Casino.................................................. 398,288 332,988 1,109,916 948,911
Food and beverage....................................... 59,968 58,922 172,997 171,165
Rooms................................................... 17,534 17,182 51,840 50,776
Depreciation and amortization............................. 62,306 52,371 174,811 148,572
Development costs......................................... 1,072 1,890 4,937 4,160
Write-downs, reserves and recoveries...................... (929) 208 (289) (1,267)
Project opening costs..................................... 2,647 183 4,391 580
Other..................................................... 208,731 164,740 584,895 485,103
-------- -------- ---------- ----------
Total operating expenses.............................. 749,617 628,484 2,103,498 1,808,000
-------- -------- ---------- ----------
Operating profit.................................... 203,808 185,570 512,722 468,859
Corporate expense......................................... (11,883) (11,894) (37,476) (33,317)
Headquarters relocation and reorganization costs.......... (677) (3,030) (3,390) (7,522)
Equity in losses of nonconsolidated affiliates............ (9,567) (10,228) (43,863) (23,049)
Venture restructuring costs............................... -- -- -- 397
Amortization of goodwill and trademarks................... (5,578) (4,497) (15,452) (13,460)
-------- -------- ---------- ----------
Income from operations...................................... 176,103 155,921 412,541 391,908
Interest expense, net of interest capitalized............... (59,257) (48,162) (167,842) (147,749)
Gain on sale of equity interest in nonconsolidated
affiliate................................................. -- 16,300 -- 16,300
Other income, including interest income..................... 2,887 (644) 7,681 5,926
-------- -------- ---------- ----------
Income before income taxes and minority interests........... 119,733 123,415 252,380 266,385
Provision for income taxes.................................. (43,651) (44,875) (90,929) (98,255)
Minority interests.......................................... (4,102) (3,496) (11,509) (7,818)
-------- -------- ---------- ----------
Income before extraordinary losses.......................... 71,980 75,044 149,942 160,312
Extraordinary losses on early extinguishments of debt, net
of income tax benefit of $222, $388 and $5,990............ -- (410) (716) (11,033)
-------- -------- ---------- ----------
Net income.................................................. $ 71,980 $ 74,634 $ 149,226 $ 149,279
======== ======== ========== ==========
Earnings per share--basic
Income before extraordinary losses........................ $ 0.63 $ 0.59 $ 1.27 $ 1.27
Extraordinary losses, net................................. -- -- (0.01) (0.09)
-------- -------- ---------- ----------
Net income.............................................. $ 0.63 $ 0.59 $ 1.26 $ 1.18
======== ======== ========== ==========
Earnings per share--diluted
Income before extraordinary losses........................ $ 0.61 $ 0.58 $ 1.25 $ 1.25
Extraordinary losses, net................................. -- -- (0.01) (0.09)
-------- -------- ---------- ----------
Net income.............................................. $ 0.61 $ 0.58 $ 1.24 $ 1.16
======== ======== ========== ==========
Average common shares outstanding........................... 115,042 126,338 118,276 126,001
======== ======== ========== ==========
Average common and common equivalent shares outstanding..... 117,354 129,355 119,988 128,269
======== ======== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------
SEPT. 30, SEPT. 30,
2000 1999
(IN THOUSANDS) --------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 149,226 $ 149,279
Adjustments to reconcile net income to cash flows from
operating activities
Extraordinary losses, before income taxes............... 1,104 17,023
Depreciation and amortization........................... 204,823 172,029
Write-downs, reserves and recoveries.................... 289 1,267
Other noncash items..................................... (1,528) 34,644
Minority interests' share of net income................. 11,509 7,818
Equity in losses of nonconsolidated affiliates.......... 43,863 23,049
Realized gain from sale of equity interest in
nonconsolidated affiliate............................. -- (16,300)
Net losses (gains) from asset sales..................... 1,169 (1,752)
Net change in long-term accounts........................ (14,366) 12,832
Net change in working capital accounts.................. 74,130 (14,739)
--------- -----------
Cash flows provided by operating activities........... 470,219 385,150
--------- -----------
Cash flows from investing activities
Land, buildings, riverboats and equipment additions....... (267,715) (256,446)
Payment for purchase of acquisitions, net of cash
acquired................................................ (259,672) 50,226
Investments in and advances to nonconsolidated
affiliates.............................................. (243,162) (37,231)
Purchase of minority interest in subsidiary............... -- (26,000)
Decrease in construction payables......................... (1,698) (6,543)
Proceeds from sales of equity interests in subsidiaries... 131,475 31,924
Proceeds from other asset sales........................... 85,948 11,587
Sale of marketable equity securities for defeasance of
debt.................................................... 58,091 --
Collection of notes receivable............................ 12,500 13,618
Other..................................................... (4,926) (4,682)
--------- -----------
Cash flows used in investing activities............... (489,159) (223,547)
--------- -----------
Cash flows from financing activities
Net borrowings under lending agreements, net of deferred
financing costs of $1,497 and $4,413.................... 281,257 898,596
Net short-term borrowings, net of deferred financing costs
of $460................................................. 173,540 --
Net repayments under retired revolving credit facility.... -- (1,086,000)
Proceeds from exercise of stock options................... 42,152 11,477
Proceeds from issuance of new debt, net of discount and
issue costs of $5,980................................... -- 494,020
Purchases of treasury stock............................... (244,325) (16,370)
Early extinguishments of debt............................. (213,063) (418,114)
Minority interests' distributions, net of contributions... (9,575) (7,381)
Scheduled debt retirements................................ (2,141) (4,457)
Premiums paid on early extinguishments of debt............ (1,104) (2,379)
--------- -----------
Cash flows provided by (used in) financing
activities.......................................... 26,741 (130,608)
--------- -----------
Net increase in cash and cash equivalents................... 7,801 30,995
Cash and cash equivalents, beginning of period.............. 233,581 158,995
--------- -----------
Cash and cash equivalents, end of period.................... $ 241,382 $ 189,990
========= ===========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
--------------------- ---------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2000 1999 2000 1999
(IN THOUSANDS) --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income........................................... $71,980 $ 74,634 $149,226 $149,279
------- -------- -------- --------
Other comprehensive income
Foreign currency translation adjustment, net of tax
(benefit) provision of $(1,344), $56 and $445.... -- (1,561) 90 727
Realization of foreign currency adjustments, net of
tax provision of $148............................ -- -- 191 --
Unrealized gains (losses) on available-for-sale
securities:
Unrealized holding gains (losses) arising during
period, net of tax (benefit) provision of
$(19), $471, $123 and $1,750................... (31) 768 202 2,855
Less: reclassification adjustment, net of tax
provision of $5,890, for realized gain included
in income...................................... -- (9,611) -- (9,611)
------- -------- -------- --------
Other comprehensive income......................... (31) (10,404) 483 (6,029)
------- -------- -------- --------
Comprehensive income................................. $71,949 $ 64,230 $149,709 $143,250
======= ======== ======== ========
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
6
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION AND ORGANIZATION
Harrah's Entertainment, Inc. ("Harrah's Entertainment", the "Company", "we",
"our" or "us", and including our subsidiaries where the context requires), a
Delaware corporation, is one of America's leading casino companies. Our casino
entertainment facilities, operating under the Harrah's, Rio, Showboat and
Players brand names, include casino hotels in Reno, Lake Tahoe, Las Vegas and
Laughlin, Nevada; two casino hotel properties in Atlantic City, New Jersey; and
riverboat and dockside casinos in Joliet and Metropolis, Illinois; East Chicago,
Indiana; Shreveport and Lake Charles, Louisiana; Tunica and Vicksburg,
Mississippi; and North Kansas City and St. Louis, Missouri. We also manage the
land-based casino in New Orleans, Louisiana, and casinos on Indian lands near
Phoenix, Arizona; Cherokee, North Carolina; and Topeka, Kansas. We discontinued
management of the Star City casino in Sydney, Australia, during first quarter
2000.
NOTE 2--PLAYERS ACQUISITION
On March 22, 2000, we completed our acquisition of Players
International, Inc. ("Players"). Players operated a dockside riverboat casino on
the Ohio River in Metropolis, Illinois; two cruising riverboat casinos in Lake
Charles, Louisiana; two dockside riverboat casinos in Maryland Heights,
Missouri, a suburb of St. Louis; and a horse racetrack in Paducah, Kentucky.
Players and the Company jointly operated a land-side hotel and entertainment
facility at the Maryland Heights property.
The operations of the Players facility in Maryland Heights were consolidated
with the adjacent Harrah's operation in second quarter 2000. The Lake Charles
and Metropolis casino operations will be converted to the Harrah's brand name
after integration of Harrah's systems and technology, including Total Rewards,
which we anticipate will be integrated into Players Lake Charles in fourth
quarter 2000 and into Players Metropolis in the second half of 2001.
We paid approximately $297 million in cash and assumed $150 million in
Players 10 7/8% Senior Notes due 2005 (the "Players Notes"). The acquisition was
funded by our Bank Facility (see Note 4) and is being accounted for as a
purchase. The purchase price is being allocated to the underlying assets and
liabilities based upon their estimated fair values at the date of acquisition.
We are determining the estimated fair values based on independent appraisals,
discounted cash flows, quoted market prices and estimates made by management.
The allocation of the purchase price will be completed within one year from the
date of the acquisition. To the extent that the purchase price exceeds the fair
value of the net identifiable tangible assets acquired, such excess will be
allocated to goodwill and amortized over 40 years. Until we complete the
purchase price allocation, our financial statements will include estimated
goodwill amortization expense. See Note 4 for a discussion of the retirement of
the Players Notes.
NOTE 3--STOCKHOLDERS' EQUITY
In addition to its common stock, Harrah's Entertainment has the following
classes of authorized but unissued stock:
Preferred stock, $100 par value, 150,000 shares authorized
Special stock, $1.125 par value, 5,000,000 shares authorized--
Series A Special Stock, 2,000,000 shares designated
7
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 3--STOCKHOLDERS' EQUITY (CONTINUED)
In July 1999, our Board of Directors authorized the repurchase in open
market and other transactions of up to 10 million shares of the Company's common
stock. We acquired our shares from time to time at prevailing market prices and
had repurchased all 10 million shares authorized under the provisions of this
plan prior to the end of second quarter 2000.
In April 2000, our Board of Directors authorized the repurchase of an
additional 12.5 million shares of our common stock in the open market and other
transactions as market conditions warrant. This plan will expire on December 31,
2001. At September 30, 2000, we had repurchased approximately 6.7 million shares
under the provisions of this plan.
NOTE 4--DEBT
BANK FACILITY
In second quarter 2000, our revolving credit and letter of credit facilities
(collectively, the "Bank Facility") were amended to increase our borrowing
capacity from $1.6 billion to $1.9 billion. The five-year $1.3 billion revolving
credit and letter of credit facility maturing in 2004 was increased to
$1.525 billion, and the $300 million revolving credit facility, which is
renewable annually at the borrower's and lenders' options, was increased to
$375 million. The amended Bank Facility provides the Company with increased
financial flexibility without changing any of the other terms of the agreement.
At September 30, 2000, after considering borrowings under our Commercial Paper
program, we had $457.8 million of borrowing capacity available to us.
Currently, the Bank Facility bears interest based upon 80 basis points over
LIBOR for current borrowings under the five-year facility and 85 basis points
over LIBOR for the 364-day facility. In addition, there is a facility fee for
borrowed and unborrowed amounts, which is currently 20 basis points on the
five-year facility and 15 basis points on the 364-day facility. The interest
rate and facility fee are based on our current debt ratings and leverage ratio
and may change as our debt ratings and leverage ratio change.
CREDIT AGREEMENT
In June 2000, we entered into a 364-day credit agreement (the "Credit
Agreement") with a lender whereby we borrowed $150 million to redeem the Players
Notes. Interest rates, facility fees and covenants in the Credit Agreement are
identical to those provisions contained in our Bank Facility.
COMMERCIAL PAPER
To provide the Company with cost-effective borrowing flexibility, we
established a $200 million Commercial Paper program that will be used to borrow
funds for general corporate purposes. Although the debt instruments are
short-term in tenor, they are classified in long-term debt because the
Commercial Paper is backed by our Bank Facility and we have committed to keep
available capacity under our Bank Facility in an amount equal to or greater than
amounts borrowed under this program. At September 30, 2000, $87.7 million was
outstanding under this program.
8
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 4--DEBT (CONTINUED)
LINE OF CREDIT AGREEMENT
In a program designed for short-term borrowings at lower interest rates than
the rates paid under our Bank Facility, we have entered into uncommitted line of
credit agreements with two lenders whereby we can borrow up to $50 million for
periods of ninety days or less. At September 30, 2000, we had borrowed
$35 million under these agreements. These agreements have no impact on and do
not decrease our borrowing capacity under our Bank Facility.
INTEREST RATE AGREEMENTS
Our interest rate swap agreements, which were entered into to manage the
relative mix of our debt between fixed and variable rate instruments, have
expired and were not renewed. We have no immediate plans to enter into new swap
agreements.
EARLY EXTINGUISHMENTS OF DEBT
Approximately $2.3 million of the Players Notes were retired on April 28,
2000, in connection with a change of control offer. On June 5, 2000, we
purchased approximately $13.1 million of the Players Notes in the open market
for the face amount plus accrued interest and a premium. The remaining Players
Notes were redeemed on June 30, 2000, for the face amount plus accrued interest
and a premium. We recorded liabilities assumed in the Players acquisition,
including the notes, at their fair value as of the date of consummation of the
acquisition. The difference between the consideration paid to the holders of the
Players Notes and the carrying value of the Notes on the dates of the
redemptions was recorded in the second quarter as an extraordinary loss of
$0.7 million, net of tax. We retired the Players Notes using proceeds from our
new $150 million Credit Agreement and our Bank Facility.
We redeemed the Showboat, Inc. 9 1/4% First Mortgage Bonds on May 1, 2000,
the first call date. These bonds were defeased in 1998 by purchasing treasury
securities, which were deposited with trustees to pay the scheduled interest
payments to the first call date and principal on the securities outstanding on
such date.
In third quarter 1999, we retired outstanding debt for capital lease
obligations of our 99.55% owned subsidiary, Showboat Marina Casino Partnership
("SMCP"). Approximately $9.2 million of debt was retired, and an extraordinary
loss of $0.4 million, net of tax, was recorded. In second quarter 1999, we
redeemed all $100 million of Rio Hotel & Casino, Inc.'s ("Rio") 10 5/8% Senior
Subordinated Notes due 2005 and all $125 million of Rio's 9 1/2% Senior
Subordinated Notes due 2007. An extraordinary loss of $4.5 million, net of tax,
was recorded. In first quarter 1999, we redeemed all $140 million of SMCP's,
13 1/2% First Mortgage Notes due 2003 and recorded an extraordinary loss of
$2.0 million, net of tax.
NOTE 5--LEASES
In June 2000, we sold and leased back our corporate aircraft. The lease
agreement consists of an interim term of six months, a base term of one year and
annual renewal options. The aggregate of the
9
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 5--LEASES (CONTINUED)
interim term, the base term and the renewal options will not exceed a total of
five years. Our future minimum rental commitments under the lease agreement as
of September 30, 2000, were $0.8 million and $6.6 million payable in the years
ending December 31, 2000, and 2001, respectively. At the end of the base term,
or any renewal term, we can, at our option, (a) renew the lease; (b) purchase
the equipment subject to the lease; or (c) sell the equipment on behalf of the
Lessor under the terms provided for in the lease agreement.
NOTE 6--SUPPLEMENTAL CASH FLOW DISCLOSURES
CASH PAID FOR INTEREST AND TAXES
The following table reconciles our interest expense, net of interest
capitalized, per the Consolidated Condensed Statements of Income, to cash paid
for interest:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------
SEPT. 30, SEPT. 30,
2000 1999
(IN THOUSANDS) --------- ---------
<S> <C> <C>
Interest expense, net of amount capitalized................. $167,842 $147,749
Adjustments to reconcile to cash paid for interest:
Net change in accruals.................................... (20,253) (12,824)
Amortization of deferred finance charges.................. (3,058) (3,537)
Net amortization of discounts and premiums................ 119 (2,757)
-------- --------
Cash paid for interest, net of amount capitalized........... $144,650 $128,631
======== ========
Cash payments of income taxes, net of refunds............... $ 14,750 $ 13,782
======== ========
</TABLE>
NOTE 7--COMMITMENTS AND CONTINGENT LIABILITIES
NEW ORLEANS CASINO
The Company has an approximate 43% beneficial ownership interest in JCC
Holding Company and its subsidiary, Jazz Casino Company, LLC (collectively,
"JCC"). JCC owns and operates an exclusive land-based casino in New Orleans,
Louisiana (the "Casino"), which is managed by a subsidiary of the Company. The
Company has guaranteed certain obligations, made certain commitments, advanced
funds and agreed to defer collection of fees and other receivables relative to
JCC, as summarized below.
- Guarantee of $100 million annual payment obligation of JCC owed to the
State of Louisiana gaming board (the "State Obligation")
- Guaranteed $166.5 million of a $236.5 million JCC bank credit facility
- Made $29.1 million, as of September 30, 2000, in subordinated loans to JCC
to finance construction and completion of the Casino
10
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 7--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
- Agreed to certain other contractual commitments and guarantees totaling
less than $20 million
- Agreed to defer collection of certain fees under certain circumstances
- Agreed to forbear from collection of certain payments and reimbursables
arising from existing agreements with JCC
Initially, the Company guaranteed the State Obligation for the period from
October 28, 1999, to October 28, 2000 (the "Initial State Guarantee"). In
accordance with an existing agreement, the Initial State Guarantee was replaced
with a new guarantee (the "Current State Guarantee"), pursuant to which the
Company has guaranteed the State Obligation for the period from April 1, 2000,
to March 31, 2001. JCC is required to make daily payments of approximately
$273,973 to satisfy the State Obligation. The Current State Guarantee obligation
is reduced to the extent JCC makes such daily payments. Payments made to the
State by the Company pursuant to the Initial State Guarantee and the Current
State Guarantee are secured by a first priority collateral security interest in
JCC's assets.
Subject to the satisfaction of certain cash flow tests and other conditions
each year, the Company is required to provide a new guarantee to the State for
each of the 12-month periods ending March 31, 2002, 2003 and 2004. For the
period ending March 31, 2002, the requirement to provide a new guarantee is
conditioned upon, among other things, JCC producing net cash flow, as defined,
of at least $15 million for the 12-month period ending November 30, 2000. Based
on results to date, it appears that JCC will not satisfy this cash flow test.
The Company is participating with JCC in discussions relating to a restructuring
of JCC's obligations. Absent a restructuring which fundamentally changes the
economics of the Casino, the Company anticipates that it will not renew the
State Guarantee for the 12-month period ending March 31, 2002. In this event and
if JCC cannot find a substitute guarantor, JCC's agreements with the State of
Louisiana provide for the loss of JCC's State gaming license. The Company must
formally advise JCC by December 31, 2000, as to whether or not we intend to
renew the State Guarantee.
Commencing February 28, 2000, JCC ceased making its daily payment in respect
of the State Obligation. On February 29, 2000, the State made a demand to the
Company pursuant to the Initial State Guarantee and the Company began making the
daily payment to the State on that date. The Company paid $9.6 million to the
State pursuant to the Initial State Guarantee. The Company's remaining
obligations pursuant to the Initial State Guarantee expired when the Company
provided the Current State Guarantee. The Company's obligations pursuant to the
Current State Guarantee for the 12-month period ending March 31, 2001, are
limited to $100 million. The Company commenced making payments in respect of the
State Obligation pursuant to the Current State Guarantee on April 1, 2000, made
payments totaling $30.4 million through July 20, 2000, and ceased making
payments on July 21, 2000, at which time JCC resumed making the payments.
Subject to certain conditions, which are presently being satisfied, JCC's
bank credit facility permits the Company to pay up to an aggregate of
$50 million pursuant to the Initial State Guarantee and the Current State
Guarantee without a default under that facility. The Company has agreed until
April 1, 2001, to defer the collection from JCC of amounts paid pursuant to the
Initial State Guarantee and Current State Guarantee.
11
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 7--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Following a default by JCC under its bank credit agreement, JCC's banks
demanded that the Company perform on its guarantee of JCC's bank credit
facility. On September 1, 2000, Harrah's performed under its guarantee of JCC's
bank credit facility and purchased $145.5 million of JCC's outstanding debt from
the lender. The guaranteed debt purchased by the Company includes a $25 million
revolving credit facility and the Company now is obligated, subject to the terms
and conditions of the loan agreement, to fund additional revolver draws.
Subsequent to the Company's September 1, 2000, performance under the guarantee,
we funded an additional $2.5 million of JCC's revolver draws leaving, as of
September 30, 2000, $19.5 million available to JCC under its revolving credit
facility.
In September 2000, the State of Louisiana gaming board declared JCC to be in
default of certain financial stability provisions under the Operating Contract.
JCC has a six-month cure period, which expires in March 2001.
JCC has exercised its right, pursuant to agreements entered into at the time
of its emergence from bankruptcy in October 1998, to defer the payment of
certain management fees, credit support fees, guarantee obligations, and
interest on subordinated debt due to the Company. Such deferred payments totaled
approximately $17.6 million as of September 30, 2000. Separately, the Company
and certain Company affiliates have agreed, until April 1, 2001, to forbear from
the collection of certain fees, lease payments and reimbursable costs arising
from existing agreements with JCC that accrue and become due and payable through
April 1, 2001. These amounts totaled approximately $14.0 million as of
September 30, 2000.
As discussed above, given liquidity issues facing JCC, JCC is exploring
alternatives to restructure its obligations. Possible alternatives include
requesting a reduction of the State Obligation, seeking relaxation of certain
operational restrictions, and pursuing adjustments to its debt and capital
structures. A reduction of the State Obligation and/or a relaxation of
operational restrictions require action by the State of Louisiana. There is no
assurance that the State will consider or take such action. Similarly, there is
no assurance that JCC will successfully restructure any or all of its
obligations in a timely and sufficient manner. Management believes that a
failure by JCC to successfully restructure its obligations in a timely and
sufficient fashion would have a material adverse effect on JCC and could result
in the loss by JCC of its State gaming license. Such failure, whether total or
in part, to timely and sufficiently restructure any or all of its obligations,
and/or such loss by JCC of its State gaming license, could result in (i) an
impairment of the Company's investment in JCC; (ii) the inability of the Company
to collect all or any of the advances made to and/or fees, rents, and
assessments owed by JCC; and/or (iii) the requirement that the Company perform
under one or more of its contractual commitments related to the Company's
investment in JCC.
Given the actions being undertaken by JCC described above and the many
variables involved in bringing these matters to a resolution, management is
currently unable to estimate the losses the Company would incur, individually or
in the aggregate, if JCC is partially or totally unsuccessful in such efforts.
At September 30, 2000, the Company's total investment in JCC was approximately
$258 million consisting of its net equity investment and various receivables,
and its total potential liability for contingent obligations was approximately
$86 million, which includes approximately $50 million of
12
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 7--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
unfunded amounts under the Current State Guarantee as of September 30, 2000.
This unfunded sum is presently being reduced as described above.
CONTRACTUAL COMMITMENTS
We continue to pursue additional casino development opportunities that may
require, individually and in the aggregate, significant commitments of capital,
up-front payments to third parties, guarantees by the Company of third party
debt and development completion guarantees. Excluding guarantees and commitments
for the New Orleans casino discussed above, as of September 30, 2000, we had
guaranteed third party loans and leases of $62.2 million, which are secured by
certain assets, and had commitments of $197.3 million for construction-related
and other obligations.
During second quarter 1999, we performed under our guarantee of the Upper
Skagit Tribe's development financing and purchased their receivable from the
lender for $11.4 million. During third quarter 2000, the Tribe secured new
financing and retired the debt owed to us.
The agreements under which we manage casinos on Indian lands contain
provisions required by law, which provide that a minimum monthly payment be made
to the tribe. That obligation has priority over scheduled payments of borrowings
for development costs. In the event that insufficient cash flow is generated by
the operations to fund this payment, we must pay the shortfall to the tribe.
Such advances, if any, would be repaid to us in future periods in which
operations generate cash flow in excess of the required minimum payment. These
commitments will terminate upon the occurrence of certain defined events,
including termination of the management contract. As of September 30, 2000, the
aggregate monthly commitment pursuant to these contracts, which extend for
periods of up to 51 months from September 30, 2000, was $1.1 million.
SEVERANCE AGREEMENTS
As of September 30, 2000, we have severance agreements with 36 of our senior
executives, which provide for payments to the executives in the event of their
termination after a change in control, as defined. These agreements provide,
among other things, for a compensation payment of 1.5 to 3.0 times the
executive's average annual compensation, as defined, as well as for accelerated
payment or accelerated vesting of any compensation or awards payable to the
executive under any of our incentive plans. The estimated amount, computed as of
September 30, 2000, that would be payable under the agreements to these
executives based on earnings and stock options aggregated approximately
$83.6 million.
TAX SHARING AGREEMENTS
In connection with the 1995 spin-off of certain hotel operations (the "PHC
Spin-off") to Promus Hotel Corporation ("PHC"), we entered into a Tax Sharing
Agreement with PHC wherein each company is obligated for those taxes associated
with their respective businesses. Additionally, we are obligated for all taxes
for periods prior to the PHC Spin-off date which are not specifically related to
PHC operations and/or PHC hotel locations. Our obligations under this agreement
are not expected to have a material adverse effect on our consolidated financial
position or results of operations.
13
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 7--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
SELF-INSURANCE
We are self-insured for various levels of general liability, workers'
compensation and employee medical coverage. We also have stop loss coverage to
protect against unexpected claims. Insurance claims and reserves include
accruals of estimated settlements for known claims, as well as accruals of
actuarial estimates of incurred but not reported claims.
NOTE 8--LITIGATION
We are involved in various inquiries, administrative proceedings and
litigation relating to contracts, sales of property and other matters arising in
the normal course of business. While any proceeding or litigation has an element
of uncertainty, we believe that the final outcome of these matters will not have
a material adverse effect upon our consolidated financial position or our
results of operations.
NOTE 9--NONCONSOLIDATED AFFILIATES
Summarized balance sheet and income statement information of nonconsolidated
affiliates as of September 30, 2000, and December 31, 1999, and for the third
quarters and nine months ended September 30, 2000, and 1999 is included in the
following tables.
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31,
2000 1999
(IN THOUSANDS) --------- --------
<S> <C> <C>
Combined Summarized Balance Sheet Information
Current assets............................................ $ 85,870 $ 73,560
Land, buildings and equipment, net........................ 395,112 570,204
Other assets.............................................. 127,420 130,889
-------- --------
Total assets............................................ 608,402 774,653
-------- --------
Current liabilities....................................... 149,897 100,336
Long-term debt............................................ 511,423 437,756
-------- --------
Total liabilities....................................... 661,320 538,092
-------- --------
Net assets............................................ $(52,918) $236,561
======== ========
</TABLE>
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
--------------------- ---------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2000 1999 2000 1999
(IN THOUSANDS) --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Combined Summarized Statements of Operations
Revenues......................................... $148,458 $131,646 $ 394,844 $319,302
======== ======== ========= ========
Operating income (loss).......................... $(13,745) $ 760 $ (72,549) $(15,252)
======== ======== ========= ========
Net loss......................................... $(30,668) $(25,027) $(114,509) $(52,314)
======== ======== ========= ========
</TABLE>
14
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 9--NONCONSOLIDATED AFFILIATES (CONTINUED)
Our share of nonconsolidated affiliates' combined net operating results are
reflected in the accompanying Consolidated Condensed Statements of Income as
Equity in losses of nonconsolidated affiliates.
Our investments in and advances to nonconsolidated affiliates are reflected
in the accompanying Consolidated Condensed Balance Sheets as follows:
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31,
2000 1999
(IN THOUSANDS) --------- --------
<S> <C> <C>
Investments in and advances to nonconsolidated affiliates
Accounted for under the equity method..................... $282,484 $167,828
Accounted for at historical cost.......................... 10,167 --
Equity securities available-for-sale and recorded at
market value............................................ 1,008 683
-------- --------
$293,659 $168,511
======== ========
</TABLE>
With the acquisition of Players in March 2000, we increased our ownership
interest in the St. Louis shore-side facilities joint venture to 100% and began
consolidating that operation with our St. Louis operations upon the closing of
the acquisition.
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", we adjust the carrying value of certain marketable equity
securities to include unrealized gains and losses. A corresponding adjustment is
recorded in our stockholders' equity and deferred income tax accounts.
NOTE 10--SUMMARIZED FINANCIAL INFORMATION
Harrah's Operating Company, Inc. ("HOC") is a wholly-owned subsidiary and
the principal asset of Harrah's Entertainment. HOC is the issuer of certain debt
securities that have been guaranteed by Harrah's Entertainment. Due to the
comparability of HOC's consolidated financial information with that of Harrah's
Entertainment, complete separate financial statements and other disclosures
regarding HOC have not been presented. Management has determined that such
information is not material to holders of HOC's debt securities. Harrah's
Entertainment has no independent assets or operations, its guarantee of HOC's
debt securities is full and unconditional and its only other subsidiary is
minor.
15
<PAGE>
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 10--SUMMARIZED FINANCIAL INFORMATION (CONTINUED)
Summarized financial information of HOC as of September 30, 2000, and
December 31, 1999, and for the third quarters ended September 30, 2000 and 1999,
prepared on the same basis as Harrah's Entertainment, was as follows:
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31,
2000 1999
(IN THOUSANDS) ---------- ----------
<S> <C> <C>
Current assets.............................................. $ 497,315 $ 481,437
Land, buildings, riverboats and equipment, net.............. 3,472,742 3,061,230
Goodwill.................................................... 671,119 505,217
Other assets................................................ 603,951 713,649
---------- ----------
5,245,127 4,761,533
---------- ----------
Current liabilities......................................... 656,314 353,534
Long-term debt.............................................. 2,750,025 2,540,268
Other liabilities........................................... 354,001 349,782
Minority interests.......................................... 20,329 18,949
---------- ----------
3,780,669 3,262,533
---------- ----------
Net assets................................................ $1,464,458 $1,499,000
========== ==========
</TABLE>
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
--------------------- -----------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2000 1999 2000 1999
(IN THOUSANDS) --------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues......................................... $953,307 $813,921 $2,615,902 $2,276,518
======== ======== ========== ==========
Income from operations........................... $176,102 $154,934 $ 411,018 $ 391,790
======== ======== ========== ==========
Income before extraordinary losses............... $ 71,979 $ 74,401 $ 148,952 $ 160,235
======== ======== ========== ==========
Net income....................................... $ 71,979 $ 73,991 $ 148,236 $ 149,202
======== ======== ========== ==========
</TABLE>
Certain of our debt guarantees contain covenants, which, among other things,
place limitations on HOC's ability to pay dividends and make other restricted
payments, as defined, to Harrah's Entertainment. The amount of HOC's restricted
net assets, as defined, computed in accordance with the most restrictive of
these covenants regarding restricted payments, was approximately $1.4 billion at
September 30, 2000.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial position and
operating results of Harrah's Entertainment, Inc., (referred to in this
discussion, together with its consolidated subsidiaries where appropriate, as
"Harrah's Entertainment," "Company," "we," "our" and "us") for the third quarter
and first nine months of 2000 and 1999, updates, and should be read in
conjunction with, Management's Discussion and Analysis of Financial Condition
and Results of Operations presented in our 1999 Annual Report.
We are the leading consumer marketing company in the gaming industry,
operating casinos in more markets than any other casino company. We seek to
differentiate ourselves through a unique strategy aimed at building loyalty to
our brands from our guests. To accomplish this objective, we focus on continued
investment and emphasis on marketing, technology and database programs, a
commitment to service and a broadened national appeal. We begin our review with
a discussion of an acquisition that positions our Company to continue its
progress toward achieving our strategic objectives.
PLAYERS ACQUISITION
On March 22, 2000, we completed our acquisition of Players International,
Inc. ("Players"). Players operated a dockside riverboat casino on the Ohio River
in Metropolis, Illinois; two cruising riverboat casinos in Lake Charles,
Louisiana; two dockside riverboat casinos in Maryland Heights, Missouri, a
suburb of St. Louis; and a horse racetrack in Paducah, Kentucky. Players and the
Company jointly operated a land-side hotel and entertainment facility at the
Maryland Heights property.
The operations of the Players facility in Maryland Heights were consolidated
with the adjacent Harrah's operation in second quarter 2000. The Lake Charles
and Metropolis casino operations will be converted to the Harrah's brand name
after integration of Harrah's systems and technology, including Total Rewards,
which we anticipate will be integrated into Players Lake Charles in fourth
quarter 2000 and into Players Metropolis in the second half of 2001.
We paid approximately $297 million in cash and assumed $150 million in
Players' 10 7/8% Senior Notes due 2005 (the "Players Notes"). The acquisition
was funded by our Bank Facility (see DEBT AND LIQUIDITY) and is being accounted
for as a purchase. The purchase price is being allocated to the underlying
assets and liabilities based upon their estimated fair values at the date of
acquisition. We are determining the estimated fair values based on independent
appraisals, discounted cash flows, quoted market prices and estimates made by
management. The allocation of the purchase price will be completed within one
year from the date of the acquisition. To the extent that the purchase price
exceeds the fair value of the net identifiable tangible assets acquired, such
excess will be allocated to goodwill and amortized over 40 years. Until we
complete the purchase price allocation, our financial statements will include
estimated goodwill amortization expense. See DEBT AND LIQUIDITY for discussion
of the retirement of the Players Notes.
17
<PAGE>
OPERATING RESULTS AND DEVELOPMENT PLANS
OVERALL
<TABLE>
<CAPTION>
THIRD QUARTER PERCENTAGE FIRST NINE MONTHS PERCENTAGE
------------------- INCREASE/ ------------------- INCREASE/
2000 1999 (DECREASE) 2000 1999 (DECREASE)
(IN MILLIONS, EXCEPT EARNINGS PER SHARE) -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues.......................... $953.4 $814.1 17.1% $2,616.2 $2,276.9 14.9%
Operating Profit...................... 203.8 185.6 9.8% 512.7 468.9 9.3%
Income from Operations................ 176.1 155.9 13.0% 412.5 391.9 5.3%
Income before extraordinary losses.... 72.0 75.0 (4.0)% 149.9 160.3 (6.5)%
Net Income............................ 72.0 74.6 (3.5)% 149.2 149.3 --
Earnings per share--diluted
Before extraordinary losses......... 0.61 0.58 5.2% 1.25 1.25 --
Net income.......................... 0.61 0.58 5.2% 1.24 1.16 6.9%
Operating margin...................... 18.5% 19.1% (0.6)pts 15.8% 17.2% (1.4)pts
</TABLE>
Third quarter 2000 revenues increased 17.1% over third quarter 1999, while
net income decreased 3.5% from the same period last year when a gain of $16.3
million on the sale of an equity investment was realized. Excluding this
nonrecurring pretax gain in 1999, third quarter net income increased 11.7% in
2000. The primary factors contributing to the increase in revenues and net
income were inclusion of the Players properties in 2000 and improved
performances at most of our Harrah's brand properties. Partially offsetting
these increases was the impact of a low table games hold percentage at the Rio
Hotel & Casino ("Rio") in Las Vegas, Nevada.
Third quarter gaming revenues at owned and managed properties, which were in
our system during third quarter 2000 and third quarter 1999, grew 7.1% over the
same period last year. Excluding properties acquired or opened since June 1998,
company-owned and managed properties generated same-store gaming revenue growth
of 11.1% over third quarter 1999.
Revenues for the nine months ended September 30, 2000, were up 14.9% over
revenues for the same period last year and net income was level compared to the
first nine months of 1999. These results reflect the impact of the March 2000
Players acquisition, the low table-games hold percentage experienced by Rio
during the first nine months of 2000 and the one-time gain on the sale of an
equity investment in 1999.
WESTERN REGION
<TABLE>
<CAPTION>
THIRD QUARTER PERCENTAGE FIRST NINE MONTHS PERCENTAGE
------------------- INCREASE/ ------------------- INCREASE/
2000 1999 (DECREASE) 2000 1999 (DECREASE)
(IN MILLIONS) -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Casino revenues......................... $200.7 $195.1 2.9% $540.6 $547.9 (1.3)%
Net revenues............................ 308.3 300.4 2.6% 857.2 865.8 (1.0)%
Operating profit........................ 48.9 57.6 (15.1)% 97.6 146.4 (33.3)%
Operating margin........................ 15.9% 19.2% (3.3)pts 11.4% 16.9% (5.5)pts
</TABLE>
The increase in third quarter revenues in our Western Region reflects record
revenues in Northern Nevada and at our Southern Nevada Harrah's properties
partially offset by declines in Rio's third quarter 2000 revenues from the same
quarter last year. Third quarter operating profit increased at all Western
Region properties, except Rio, where operating profit declined $19.5 million
from the same quarter last year.
Harrah's Southern Nevada properties increased third quarter revenues 13.9%
and increased operating profit 46.7% over the same quarter last year. These
increases were driven by growth in cross-
18
<PAGE>
market play, more effective marketing programs and improved margins. Northern
Nevada revenues were up 11.1% over the same quarter last year and operating
profit increased 18.9% due to property enhancements in Reno and Lake Tahoe and
execution of our consumer-marketing strategy.
Although Rio's table games hold percentage improved during third quarter as
compared to the first two quarters of 2000, it is still well below historical
average and is the primary contributor to Rio's 13.5% decline in revenues. In
addition to the revenue shortfalls, Rio's operating margin declined due to
increased entertainment costs.
In second quarter 2000, Rio opened its new $32 million showroom complex,
which includes a 1,500 seat, state-of-the-art theater with balcony; a
three-level lobby with hospitality center; and a theater promenade with
approximately 10,000 square feet of retail space. The showroom complex is
located adjacent to the Pavilion, Rio's 110,000 square foot
entertainment/convention complex, which opened in March 1999. The new theater at
Rio has not yet attracted a significant increase in entertainment revenues.
For the nine months ended September 30, 2000, revenues increased 7.5% in
Northern Nevada and 9.3% at Harrah's Southern Nevada properties, but declined
15.0% at the Rio. The impact of the low table-games hold percentage and
increased costs at the Rio during the first nine months of 2000 more than offset
improved operating profit at the Harrah's properties, causing Western Region
operating profit to decline 33.3% from the same nine month period last year.
During first quarter 2000, we completed the sale for cash of the Showboat
Las Vegas property, which was acquired in our June 1998 acquisition of Showboat,
Inc. No gain or loss resulted from the sale of this nonstrategic asset.
EASTERN REGION
<TABLE>
<CAPTION>
THIRD QUARTER PERCENTAGE FIRST NINE MONTHS PERCENTAGE
------------------- INCREASE/ ------------------- INCREASE/
2000 1999 (DECREASE) 2000 1999 (DECREASE)
(IN MILLIONS) -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Casino revenues......................... $211.3 $203.7 3.7% $575.9 $554.7 3.8%
Net revenues............................ 225.9 219.0 3.2% 613.7 594.7 3.2%
Operating profit........................ 62.8 57.5 9.2% 150.3 139.0 8.1%
Operating margin........................ 27.8% 26.3% 1.5pts 24.5% 23.4% 1.1pts
</TABLE>
Eastern Region results were driven by Harrah's Atlantic City's record
revenues and operating profit for the quarter, up 6.3% and 14.5%, respectively,
over third quarter 1999. Showboat Atlantic City's revenues and operating profit
were basically level compared to third quarter 1999. We believe that the
above-market growth achieved by Harrah's Atlantic City is due to the successful
execution by the property of strategic marketing programs utilizing the
available technological tools offered by our WINet customer database and Total
Rewards program. Showboat Atlantic City was integrated into the Total Rewards
customer-loyalty program in late June 2000.
For the first nine months of 2000, the Eastern Region's increases in
revenues and operating profits were due to the strength of Harrah's Atlantic
City's operations, where revenues increased 6.5% and operating profit increased
20.1%.
In April 2000, we announced plans for a 450-room expansion at Harrah's
Atlantic City, increasing the hotel's capacity to more than 1,600 rooms. The
expansion is expected to cost approximately $110 million and is scheduled to be
completed in first quarter 2002. The expansion is subject to regulatory
approvals.
19
<PAGE>
CENTRAL REGION
<TABLE>
<CAPTION>
THIRD QUARTER PERCENTAGE FIRST NINE MONTHS PERCENTAGE
------------------- INCREASE/ ------------------- INCREASE/
2000 1999 (DECREASE) 2000 1999 (DECREASE)
(IN MILLIONS) -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Casino revenues........................ $377.6 $260.1 45.2% $1,027.8 $722.0 42.4%
Net revenues........................... 397.0 272.5 45.7% 1,080.5 758.1 42.5%
Operating profit....................... 83.2 58.2 43.0% 235.1 150.2 56.5%
Operating margin....................... 21.0% 21.4% (0.4)pts 21.8% 19.8% 2.0pts
</TABLE>
Chicagoland/Illinois--Third quarter revenues increased 23.5% at Harrah's
Joliet and operating profit increased 12.8% compared to the same period last
year. These results are attributable to the mid-1999 elimination of cruise
scheduling and ticketing and the fourth quarter 1999 opening of the new hotel at
this property. Subject to regulatory approvals, we plan to convert the casino in
Joliet from cruising riverboats to barges. It is anticipated that the two
cruising riverboats will be removed from service in third quarter 2001;
therefore, depreciation has been accelerated by $2.4 million per quarter,
beginning in third quarter 2000, to reflect the revised estimates of the boats'
useful lives. Excluding this accelerated depreciation, Harrah's Joliet's
operating profit increased 26.0%. Harrah's East Chicago revenues increased 16.2%
over third quarter 1999 and operating profit increased 13.3%. We believe that
these results were driven by the March 1999 re-branding of this property to the
Harrah's brand and the successful execution of the Company's loyalty strategy in
East Chicago. On August 1, 2000, we announced plans to construct a 292-room
hotel at the East Chicago property. This project is expected to cost
approximately $47.0 million and is estimated to be completed in fourth quarter
2001.
For the nine months ended September 30, 2000, Harrah's Joliet's revenues
increased 40.4% and operating profit increased 56.4%. Revenues at Harrah's East
Chicago increased 23.9% over the comparable nine-month period last year and
operating profit increased 46.7% compared to the first nine months of 1999.
Players Metropolis contributed $29.7 million in revenues and $9.0 million in
operating profit for third quarter 2000. Operations of this property have also
benefited from the mid-1999 change in regulations to allow dockside gaming in
Illinois. Metropolis is expected to be converted to the Harrah's brand in the
second half of 2001.
Louisiana--Harrah's Shreveport's revenues and operating profit for third
quarter and first nine months decreased from the same period last year due to an
on-going construction program and costs of promotions mounted to sustain
business during construction activities. Construction began in May 1999 on a
514-room hotel with almost 18,000 square feet of convention center space. The
new hotel and amenity expansion is expected to cost $146.6 million, of which
$93.8 million had been spent through September 30, 2000. Weather related delays
have pushed the expected completion date on the expansion to first quarter 2001.
Players Lake Charles contributed $41.2 million in revenues and $7.4 million
in operating profit during third quarter 2000. We are currently investing
approximately $40 million to upgrade the slot product and infrastructure of the
Lake Charles property. This capital expenditure includes the cost of replacing
one of the existing Players boats with a renovated riverboat that we purchased
in 1998. We plan to rebrand this property to the Harrah's brand in fourth
quarter 2000.
Mississippi--Combined third quarter revenues by our Mississippi properties
decreased 2.8% from third quarter 1999 and operating profit decreased 35.7% from
$2.3 million in third quarter 1999 to $1.5 million in third quarter 2000. For
the first nine months of 2000, revenues increased 3.2% and operating profit
decreased 2.7% compared with the comparable period last year.
20
<PAGE>
Missouri--Third quarter revenues at our Missouri properties increased 37.5%
and operating profit increased 39.0% over the comparable period in 1999. Revenue
increases are primarily attributable to Harrah's St. Louis, where revenues were
83.4% higher than in third quarter last year due principally to the integration
of Players St. Louis and the Harrah's/Players jointly-owned shore-side
facilities into the Harrah's St. Louis operations. Harrah's North Kansas City
posted record third quarter revenues and increased operating profit by 30.8%
over the same quarter last year. Missouri properties' revenues increased 30.4%
and operating profit increased 39.4% for the first nine months of 2000 compared
to the same period last year. The Missouri properties' revenues have benefited
from the elimination in the second half of 1999 of restricted boarding
schedules, but operating profit was affected by higher admission taxes.
The St. Louis shore-side facilities were owned jointly with Players prior to
our March 22, 2000, acquisition of that company. Our pro rata share of the 2000
operating losses of the joint venture through the date of the Players
acquisition was $2.4 million. These losses are included in Equity in losses of
nonconsolidated affiliates in the Consolidated Condensed Statements of Income
(see Other Factors Affecting Net Income). Subsequent to the Players acquisition,
results of the shore-side facilities, as well as for Players St. Louis
operations, are combined with Harrah's St. Louis' operating results.
In May 2000, we announced plans for facilities enhancements to Harrah's
North Kansas City, including approximately 28,000 square feet of additional
gaming space. The enhancements are expected to cost approximately $44.8 million
and are expected to be completed in second quarter 2001. Upon completion of this
project, the North Star riverboat may be deployed to another property.
MANAGED AND OTHER CASINOS
Our managed and other casinos results reflect the addition of fees from
Harrah's New Orleans, which opened in fourth quarter 1999, and the impact on our
management fee percentages of recent renewal and extension agreements for two of
the Indian-owned facilities that we manage. See DEBT AND LIQUIDITY--Guarantees
of Third Party Debt and Other Commitments, for discussion of our agreements to
defer collection of fees from New Orleans.
In late third quarter, the Eastern Band of Cherokee broke ground on a new
$63 million hotel and conference at Harrah's Cherokee Casino in Cherokee, North
Carolina. Construction of the 250-room hotel and 30,000 square foot conference
center is slated for completion by the end of 2001.
In November 1998, we ceased management of a casino owned by the Upper Skagit
Tribe, located on Indian lands near Seattle, Washington. We had guaranteed the
Skagit Tribe's development financing and during second quarter 1999 we performed
under our guarantee and purchased the Tribe's debt from the lender for $11.4
million. The Tribe secured new financing and paid the debt owed to us in third
quarter 2000.
During first quarter 2000, we signed a definitive agreement with the Rincon
San Luiseno Band of Mission Indians to act as developer and manager for the
Tribe's $125 million casino and hotel on Rincon tribal land less than 50 miles
north of San Diego. This location provides convenient access to metropolitan San
Diego, La Jolla, Del Mar, Escondido and Orange County, California.
The Tribe is constructing a temporary casino facility, which is expected to
begin operations in first quarter 2001. We provided $14.6 million to finance
this development and are providing the Tribe technical service related to the
development and operation of the temporary casino, but we will not manage the
temporary facility. The permanent facility, the cost of which is to be funded by
a third-party loan that we expect to guarantee, is expected to open in first
quarter 2002. We expect to manage the permanent facility for a fee. The
operation of the permanent casino project is subject to various approvals,
including approvals of the National Indian Gaming Commission.
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See DEBT AND LIQUIDITY for further discussion of Harrah's guarantees of debt
related to Indian projects.
We ceased management of the Star City casino in Sydney, Australia, in
January 2000 upon the completion of the buy-out of our management contract by
another company. No material gain or loss was recognized on the sale of this
management contract.
OTHER FACTORS AFFECTING NET INCOME
<TABLE>
<CAPTION>
THIRD QUARTER PERCENTAGE FIRST NINE MONTHS PERCENTAGE
------------------- INCREASE/ ------------------- INCREASE/
(IN MILLIONS) 2000 1999 (DECREASE) 2000 1999 (DECREASE)
(INCOME)/EXPENSE -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Development costs......................... $ 1.1 $ 1.9 (42.1)% $ 4.9 $ 4.2 16.7%
Write-downs, reserves and recoveries...... (0.9) 0.2 N/M (0.3) (1.3) (76.9)%
Project opening costs..................... 2.6 0.2 N/M 4.4 0.6 N/M
Corporate expense......................... 11.9 11.9 --% 37.5 33.3 12.6%
Headquarters relocation and reorganization
expense................................. 0.7 3.0 (76.7)% 3.4 7.5 (54.7)%
Equity in losses of nonconsolidated
affiliates.............................. 9.6 10.2 (5.9)% 43.9 23.0 90.9%
Venture restructuring costs............... -- -- -- -- (0.4) N/M
Amortization of goodwill and trademarks... 5.6 4.5 24.4% 15.5 13.5 14.8%
Interest expense, net..................... 59.3 48.2 23.0% 167.8 147.7 13.6%
Other income, including interest income... (2.9) 0.6 N/M (7.7) (5.9) 30.5%
Gains on sales of equity interests in
subsidiaries............................ -- (16.3) N/M -- (16.3) N/M
Effective tax rate........................ 36.5% 36.4% 0.1pts 36.0% 36.9% (0.9)pts
Minority interests........................ $ 4.1 $ 3.5 17.1% $ 11.5 $ 7.8 47.4%
Extraordinary loss, net of income taxes... -- 0.4 N/M 0.7 11.0 (93.6)%
</TABLE>
Development costs for third quarter 2000 decreased from the same period last
year. However, development activities were limited in both periods due to the
limited number of new markets opening for development.
Corporate expense was basically the same in third quarter 2000 as in third
quarter 1999, but was only 1.2% of revenues in third quarter 2000 compared to
1.5% for the same quarter last year. For the first nine months of 2000,
corporate expense increased 12.6% over the same period last year, but was only
1.4% of revenues compared to 1.5% for the same period last year. Costs related
to the relocation of the Company's headquarters to Las Vegas, Nevada, declined
in 2000 as relocation activity nears completion.
Equity in losses of nonconsolidated affiliates for third quarter 1999
reflected losses from our share of National Airlines, Inc. ("NAI"), our share of
Harrah's New Orleans project opening costs and our pro rata share of the losses
from the St. Louis shore-side facilities. In third quarter 2000, NAI reported
net income, of which our pro rata share was $0.8 million. With the acquisition
of Players in March 2000, the St. Louis shore-side facilities are included in
our St. Louis operations. Our share of Harrah's New Orleans losses was $9.7
million in third quarter 2000. For the nine months ended September 30, 2000, the
increase in Equity in losses of nonconsolidated affiliates reflects the increase
in losses from Harrah's New Orleans and NAI and our pro rata share of the losses
from the St. Louis shore-side facilities through the date of the Players
acquisition.
Amortization of goodwill and trademarks increased for the third quarter and
nine months from the same periods last year due to the Players acquisition in
March 2000. Until such time as the Players
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purchase price allocation is finalized, amortization expense includes estimates
for amortization related to the Players acquisition.
Interest expense increased for the third quarter and the first nine months
of 2000 due to increased borrowings for the Players acquisition and our stock
repurchase program.
Other income increased in third quarter and the first nine months of 2000
due to higher interest income and a 1999 write-off of non-operating assets.
The effective tax rates for both periods are higher than the federal
statutory rate primarily due to state income taxes and that portion of our
goodwill amortization that is not deductible for tax purposes.
Minority interests reflects joint venture partners' share of income, which
increased in 2000 from the prior year as a result of higher earnings from those
ventures.
The extraordinary losses reported in both years were due to the early
extinguishments of debt and include premiums paid to the holders of the debt
retired and the write-off of related unamortized deferred finance charges. (See
DEBT AND LIQUIDITY--Extinguishments of Debt.)
CAPITAL SPENDING AND DEVELOPMENT
In addition to the specific development and expansion projects discussed in
OPERATING RESULTS AND DEVELOPMENT PLANS, we perform on-going refurbishment and
maintenance at our casino entertainment facilities in order to maintain the
Company's quality standards. We also continue to pursue development and
acquisition opportunities for additional casino entertainment facilities that
meet our strategic and return on investment criteria. Prior to the receipt of
necessary regulatory approvals, the costs of pursuing development projects are
expensed as incurred. Construction-related costs incurred after the receipt of
necessary approvals are capitalized and depreciated over the estimated useful
life of the resulting asset. Project opening costs are expensed as incurred.
Our planned development projects, if they go forward, will require,
individually and in the aggregate, significant capital commitments and, if
completed, may result in significant additional revenues. The commitment of
capital, the timing of completion and the commencement of operations of casino
entertainment development projects are contingent upon, among other things,
negotiation of final agreements and receipt of approvals from the appropriate
political and regulatory bodies. Cash needed to finance projects currently under
development, as well as additional projects pursued, is expected to be made
available from operating cash flows, bank borrowings (see DEBT AND LIQUIDITY),
joint venture partners, specific project financing, guarantees of third party
debt and, if necessary, additional debt and/or equity offerings. Our capital
spending for the first nine months of 2000 totaled approximately $370.3 million,
excluding the purchase of JCC debt. Estimated total capital expenditures for
2000 are expected to be between $430 million and $500 million, excluding the
acquisition of Players, and estimated capital expenditures for 2001 are expected
to be between $475 million and $525 million.
DEBT AND LIQUIDITY
FINANCING ACTIVITIES
Bank Facility--In second quarter 2000, our revolving credit and letter of
credit facilities (collectively, the "Bank Facility") were amended to increase
our borrowing capacity from $1.6 billion to $1.9 billion. The five-year $1.3
billion revolving credit and letter of credit facility maturing in 2004 was
increased to $1.525 billion, and the $300 million revolving credit facility,
which is renewable annually at the borrower's and lenders' options, was
increased to $375 million. The amended Bank Facility provides the Company with
increased financial flexibility without changing any of the other terms of the
agreement. At September 30, 2000, after considering borrowings under our
Commercial Paper program, we had $457.8 million of borrowing capacity available
to us.
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<PAGE>
Currently, the Bank Facility bears interest based upon 80 basis points over
LIBOR for current borrowings under the five-year facility and 85 basis points
over LIBOR for the 364-day facility. In addition, there is a facility fee for
borrowed and unborrowed amounts, which is currently 20 basis points on the
five-year facility and 15 basis points on the 364-day facility. The interest
rate and facility fee are based on our current debt ratings and leverage ratio
and may change as our debt ratings and leverage ratio change.
Credit Agreement--On June 25, 2000, we entered into a 364-day credit
agreement with a lender whereby we borrowed $150 million to redeem the Players
Notes. Interest rates, facility fees and covenants in the Credit Agreement are
identical to those provisions contained in our Bank Facility.
Commercial Paper--To provide the Company with cost-effective borrowing
flexibility, we established a $200 million Commercial Paper program that will be
used to borrow funds for general corporate purposes. Although the debt
instruments are short-term in tenor, they are classified in long-term debt
because the Commercial Paper is backed by our Bank Facility and we have
committed to keep available capacity under our Bank Facility in an amount equal
to or greater than amounts borrowed under this program. At September 30, 2000,
we had borrowed $87.7 million under this program.
Line of Credit Agreement--In a program designed for short-term borrowings at
lower interest rates than the rates paid under our Bank Facility, we have
entered into uncommitted line of credit agreements with two lenders whereby we
can borrow up to $50 million for periods of ninety days or less. At September
30, 2000, we had borrowed $35 million under these agreements. These agreements
have no impact on and do not decrease our borrowing capacity under our Bank
Facility.
LEASE AGREEMENTS
In June 2000, we sold and leased back our corporate aircraft. The agreement
consists of an interim term of six months, a base term of one year and annual
renewal options. The aggregate of the interim term, the base term and the
renewal options will not exceed a total of five years. At the end of the base
term, or any renewal term, we can, at our option, (a) renew the lease; (b)
purchase the equipment subject to the lease; or (c) sell the equipment on behalf
of the Lessor under the terms provided for in the lease agreement.
EQUITY REPURCHASE PROGRAM
Under plans authorized by our Board of Directors in July 1999 and April
2000, we have repurchased 11.2 million shares of the Company's stock in the open
market this year. Spending for these repurchases has totaled approximately
$244.3 million for the nine months ended September 30, 2000. The repurchases
were funded through available operating cash flows and borrowings from our Bank
Facility. Shares purchased during second quarter 2000 completed the plan
approved by our Board of Directors in July 1999 for the repurchase of 10 million
shares. Another 5.8 million shares may be purchased under the April 2000 plan,
which will expire December 31, 2001.
INTEREST RATE AGREEMENTS
Our interest rate swap agreements, which were entered into to manage the
relative mix of our debt between fixed and variable rate instruments, have
expired and were not renewed. We have no immediate plans to enter into new swap
agreements.
RETIREMENT OF DEBT
Approximately $2.3 million of the Players Notes were retired on April 28,
2000, in connection with a change of control offer. On June 5, 2000, we
purchased approximately $13.1 million of the Players Notes in the open market
for the face amount plus accrued interest and a premium. The remaining
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<PAGE>
Players Notes were redeemed on June 30, 2000, for the face amount plus accrued
interest and a premium. We recorded liabilities assumed in the Players
acquisition, including the notes, at their fair value as of the date of
consummation of the acquisition. The difference between the consideration paid
to the holders of the Players Notes and the carrying value of the Notes on the
dates of the redemptions was recorded in the second quarter as an extraordinary
loss of $0.7 million, net of tax. We retired the Players Notes using proceeds
from our new $150 million credit agreement and our Bank Facility.
We redeemed Showboat's 9 1/4% First Mortgage Bonds on May 1, 2000, the first
call date. These bonds were defeased in 1998 by purchasing treasury securities
which were deposited with trustees to pay the scheduled interest payments to the
first call date and principal on the securities outstanding on such date.
In third quarter 1999, we retired outstanding debt for capital lease
obligations of our 99.55% owned subsidiary, Showboat Marina Casino Partnership
("SMCP"). Approximately $9.2 million of debt was retired, and an extraordinary
loss of $0.4 million, net of tax, was recorded. In second quarter 1999, we
redeemed all $100 million of Rio's 10 5/8% Senior Subordinated Notes due 2005
and all $125 million of Rio's 9 1/2% Senior Subordinated Notes due 2007. An
extraordinary loss of $4.5 million, net of tax, was recorded. In first quarter
1999, we redeemed all $140 million of SMCP's 13 1/2% First Mortgage Notes due
2003 and recorded an extraordinary loss of $2.0 million, net of tax.
GUARANTEES OF THIRD PARTY DEBT AND OTHER COMMITMENTS
JCC Holding Company--The Company has an approximate 43% beneficial ownership
interest in JCC Holding Company and its subsidiary, Jazz Casino Company, LLC
(collectively, "JCC"). JCC owns and operates an exclusive land-based casino in
New Orleans, Louisiana (the "Casino"), which is managed by a subsidiary of the
Company. The Company has guaranteed certain obligations, made certain
commitments, advanced funds and agreed to defer collection of fees and other
receivables relative to JCC, as summarized below.
- Guarantee of $100 million annual payment obligation of JCC owed to the
State of Louisiana gaming board (the "State Obligation")
- Guaranteed $166.5 million of a $236.5 million JCC bank credit facility
- Made $29.1 million, as of September 30, 2000, in subordinated loans to JCC
to finance construction and completion of the Casino
- Agreed to certain other contractual commitments and guarantees totaling
less than $20 million
- Agreed to defer collection of certain fees under certain circumstances
- Agreed to forbear from collection of certain payments and reimbursables
arising from existing agreements with JCC
Initially, the Company guaranteed the State Obligation for the period from
October 28, 1999, to October 28, 2000 (the "Initial State Guarantee"). In
accordance with an existing agreement, the Initial State Guarantee was replaced
with a new guarantee (the "Current State Guarantee"), pursuant to which the
Company has guaranteed the State Obligation for the period from April 1, 2000,
to March 31, 2001. JCC is required to make daily payments of approximately
$273,973 to satisfy the State Obligation. The Current State Guarantee obligation
is reduced to the extent JCC makes such daily payments. Payments made to the
State by the Company pursuant to the Initial State Guarantee and the Current
State Guarantee are secured by a first priority collateral security interest in
JCC's assets.
Subject to the satisfaction of certain cash flow tests and other conditions
each year, the Company is required to provide a new guarantee to the State for
each of the 12-month periods ending March 31, 2002, 2003 and 2004. For the
period ending March 31, 2002, the requirement to provide a
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<PAGE>
new guarantee is conditioned upon, among other things, JCC producing net cash
flow, as defined, of at least $15 million for the 12-month period ending
November 30, 2000. Based on results to date, it appears that JCC will not
satisfy this cash flow test. The Company is participating with JCC in
discussions relating to a restructuring of JCC's obligations. Absent a
restructuring which fundamentally changes the economics of the Casino, the
Company anticipates that it will not renew the State Guarantee for the 12-month
period ending March 31, 2002. In this event and if JCC cannot find a substitute
guarantor, JCC's agreements with the State of Louisiana provide for the loss of
JCC's State gaming license. The Company must formally advise JCC by
December 31, 2000, as to whether or not we intend to renew the State Guarantee.
Commencing February 28, 2000, JCC ceased making its daily payment in respect
of the State Obligation. On February 29, 2000, the State made a demand to the
Company pursuant to the Initial State Guarantee and the Company began making the
daily payment to the State on that date. The Company paid $9.6 million to the
State pursuant to the Initial State Guarantee. The Company's remaining
obligations pursuant to the Initial State Guarantee expired when the Company
provided the Current State Guarantee. The Company's obligations pursuant to the
Current State Guarantee for the 12-month period ending March 31, 2001, are
limited to $100 million. The Company commenced making payments in respect of the
State Obligation pursuant to the Current State Guarantee on April 1, 2000, made
payments totaling $30.4 million through July 20, 2000, and ceased making
payments on July 21, 2000, at which time JCC resumed making the payments.
Subject to certain conditions, which are presently being satisfied, JCC's
bank credit facility permits the Company to pay up to an aggregate of $50
million pursuant to the Initial State Guarantee and the Current State Guarantee
without a default under that facility. The Company has agreed until
April 1, 2001, to defer the collection from JCC of amounts paid pursuant to the
Initial State Guarantee and Current State Guarantee.
Following a default by JCC under its bank credit agreement, JCC's banks
demanded that the Company perform on its guarantee of JCC's bank credit
facility. On September 1, 2000, Harrah's performed under its guarantee of JCC's
bank credit facility and purchased $145.5 million of JCC's outstanding debt from
the lender. The guaranteed debt purchased by the Company includes a $25 million
revolving credit facility and the Company now is obligated, subject to the terms
and conditions of the loan agreement, to fund additional revolver draws.
Subsequent to the Company's September 1, 2000, performance under the guarantee,
we funded an additional $2.5 million of JCC's revolver draws, leaving, as of
September 30, 2000, $19.5 million available to JCC under its revolving credit
facility.
In September 2000, the State of Louisiana gaming board declared JCC to be in
default of certain financial stability provisions under the Operating Contract.
JCC has a six-month cure period, which expires in March 2001.
JCC has exercised its right, pursuant to agreements entered into at the time
of its emergence from bankruptcy in October 1998, to defer the payment of
certain management fees, credit support fees, guarantee obligations, and
interest on subordinated debt due to the Company. Such deferred payments totaled
approximately $17.6 million as of September 30, 2000. Separately, the Company
and certain Company affiliates have agreed, until April 1, 2001, to forbear from
the collection of certain fees, lease payments and reimbursable costs arising
from existing agreements with JCC that accrue and become due and payable through
April 1, 2001. These amounts totaled approximately $14.0 million as of
September 30, 2000.
As discussed above, given liquidity issues facing JCC, JCC is exploring
alternatives to restructure its obligations. Possible alternatives include
requesting a reduction of the State Obligation, seeking relaxation of certain
operational restrictions, and pursuing adjustments to its debt and capital
structures. A reduction of the State Obligation and/or a relaxation of
operational restrictions require
26
<PAGE>
action by the State of Louisiana. There is no assurance that the State will
consider or take such action. Similarly, there is no assurance that JCC will
successfully restructure any or all of its obligations in a timely and
sufficient manner. Management believes that a failure by JCC to successfully
restructure its obligations in a timely and sufficient fashion would have a
material adverse effect on JCC and could result in the loss by JCC of its State
gaming license. Such failure, whether total or in part, to timely and
sufficiently restructure any or all of its obligations, and/or such loss by JCC
of its State gaming license, could result in (i) an impairment of the Company's
investment in JCC; (ii) the inability of the Company to collect all or any of
the advances made to and/or fees, rents, and assessments owed by JCC; and/or
(iii) the requirement that the Company perform under one or more of its
contractual commitments related to the Company's investment in JCC.
Given the actions being undertaken by JCC described above and the many
variables involved in bringing these matters to a resolution, management is
currently unable to estimate the losses the Company would incur, individually or
in the aggregate, if JCC is partially or totally unsuccessful in such efforts.
At September 30, 2000, the Company's total investment in JCC was approximately
$258 million consisting of its net equity investment and various receivables,
and its total potential liability for contingent obligations was approximately
$86 million, which includes approximately $50 million of unfunded amounts under
the Current State Guarantee as of September 30, 2000. This unfunded sum is
presently being reduced as described above.
Indian Agreements--The agreements under which we manage casinos on Indian
lands contain provisions required by law, which provide that a minimum monthly
payment be made to the tribe. That obligation has priority over scheduled
repayments of borrowings for development costs. In the event that insufficient
cash flow is generated by the operations to fund this payment, we must pay the
shortfall to the tribe. Such advances, if any, would be repaid to us in future
periods in which operations generate cash flow in excess of the required minimum
payment. These commitments will terminate upon the occurrence of certain defined
events, including termination of the management contract. Our aggregate monthly
commitment pursuant to the contracts for the three Indian-owned facilities now
open, which extend for periods of up to 51 months from September 30, 2000, is
$1.1 million.
We may guarantee all or part of the debt incurred by Indian tribes with
which we have entered a management contract to fund development of casinos on
the Indian lands. For all existing guarantees of Indian debt, we have obtained a
first lien on certain personal property (tangible and intangible) of the casino
enterprise. There can be no assurance, however, the value of such property would
satisfy our obligations in the event these guarantees were enforced.
Additionally, we have received limited waivers from the Indian tribes of their
sovereign immunity to allow us to pursue our rights under the contracts between
the parties and to enforce collection efforts as to any assets in which a
security interest is taken. The aggregate outstanding balance of such debt as of
September 30, 2000, was $57.7 million.
NAI--Including amounts provided subsequent to September 30, 2000, we have
provided $17 million in loans to NAI and letters of credit on behalf of NAI
totaling $24.6 million dollars. $16.0 million in letters of credit serve as
collateral to credit card processors in order to enable NAI to receive proceeds
from the credit card processors for advance ticket sales. The remaining $8.6
million serves as collateral to enable NAI to secure space in airport terminals.
We entered into an agreement with another investor of NAI whereby that investor
is obligated to reimburse us for approximately fifty-six percent of any amount
that we might pay in response to demands on the letters of credit.
EFFECTS OF CURRENT ECONOMIC AND POLITICAL CONDITIONS
COMPETITIVE PRESSURES
Due to the limited number of new markets opening for development, many
casino operators are investing in existing markets in an effort to attract new
customers, thereby increasing competition in those markets. With the exception
of the additional supply being added in Las Vegas, the amount of supply change
in the long-established gaming markets of Nevada and New Jersey has represented
a
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<PAGE>
smaller percentage change than that experienced in some riverboat markets. In
riverboat markets, the additions to supply had a more noticeable impact, due to
the fact that competition was limited in the early stages of many of these
markets. As companies have completed expansion projects, supply has typically
grown at a faster pace than demand in some markets and competition has increased
significantly. Furthermore, several operators, including Harrah's, have
announced plans for additional developments or expansions in some markets. In
the Las Vegas market, five new "mega" facilities have opened since October 1998,
and others are planned and under development. The impact that the additional
supply will have on our operations cannot be determined at this time.
Although the short-term effect of these competitive developments on the
Company has been negative, we are not able to determine the long-term impact,
whether favorable or unfavorable, that these trends and events will have on our
current or future markets. We believe that the geographic diversity of our
operations; our focus on multi-market customer relationships; our service
training, measurements and rewards programs; and our continuing efforts to
establish our brands as premier brands have well-positioned us to face the
challenges present within the industry. In 1997, we introduced WINet, a
sophisticated nationwide customer database, and our Total Gold Card, a
nationwide reward and recognition card, both of which we believe provide
competitive advantages, particularly with players who visit more than one
market. During 1999, we implemented the next stage of our strategy with the
launch of the tiered customer loyalty card program--Total Diamond, Total
Platinum and Total Gold--to reward customers for choosing Harrah's Entertainment
casinos. During second quarter 2000, we launched our new customer loyalty
program--Total Rewards--which offers significant enhancements to Total Gold and
provides our customers with a simpler understanding of exactly how to earn the
cash, comps and other benefits they want. The Rio and Players Lake Charles
properties are expected to be integrated into the Total Rewards program during
2000.
INDUSTRY CONSOLIDATION
As evidenced by the number of recent public announcements by casino
entertainment companies of plans to acquire or be acquired by other companies,
including our acquisitions of Showboat, Rio and Players, consolidation in the
gaming industry continues. We believe we are well-positioned to, and may from
time to time, pursue additional strategic acquisitions to further enhance our
distribution, strengthen our access to target customers and leverage our
technological and centralized services infrastructure.
POLITICAL UNCERTAINTIES
The casino entertainment industry is subject to political and regulatory
uncertainty. In 1996, the U.S. government formed a federal commission to study
gambling in the United States, including the casino gaming industry. The
commission issued its report in June 1999. In September 1999, the State of
California and approximately 60 Indian tribes executed Class III Gaming
Compacts, which other California tribes can join. The Compacts, when effective,
will allow each tribe to operate, on tribal trust lands, two casinos with up to
2,000 slot machines per tribe and unlimited house-banked card games. At this
time, the ultimate impacts that the National Gaming Impact Study Commission
report and the California Compacts may have on the industry or on our Company
are uncertain. From time to time, individual jurisdictions have also considered
legislation or referenda which could adversely impact our operations, and the
likelihood or outcome of similar legislation and referenda in the future is
difficult to predict.
The casino entertainment industry represents a significant source of tax
revenues to the various jurisdictions in which casinos operate. From time to
time, various state and federal legislators and officials have proposed changes
in tax laws, or in the administration of such laws, which would affect the
industry. It is not possible to determine with certainty the scope or likelihood
of possible future
28
<PAGE>
changes in tax laws or in the administration of such laws. If adopted, such
changes could have a material adverse effect on our financial results.
INTERCOMPANY DIVIDEND RESTRICTION
Certain of our debt guarantees require us to abide by covenants which, among
other things, limit Harrah's Operating Company, Inc.'s (HOC) ability to pay
dividends and make other restricted payments, as defined, to Harrah's
Entertainment. The amount of HOC's restricted net assets, as defined, computed
in accordance with these covenants regarding restricted payments was
approximately $1.4 billion at September 30, 2000. Harrah's Entertainment's
principal asset is the stock of HOC, a wholly-owned subsidiary, which holds,
directly and through subsidiaries, the principal assets of our businesses. Given
this ownership structure, these restrictions should not impair our ability to
conduct our business through our subsidiaries or to pursue our development
plans.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-Q and other materials filed or to be filed by the Company with the
Securities and Exchange Commission ("SEC") (as well as information included in
oral statements or other written statements made or to be made by or on behalf
of the Company) includes statements that are forward-looking. These
forward-looking statements generally can be identified by phrases such as the
Company "believes," "expects," "anticipates," "foresees," "forecasts,"
"estimates," "intends," "plans," "seeks," or other words or phrases of similar
import. These include statements relating to the following activities, among
others: (A) operations and expansions of existing properties, including future
performance, anticipated scope and opening dates of expansions; (B) planned
development of casinos and hotels that would be owned or managed by the Company
and the pursuit of strategic acquisitions; (C) planned capital expenditures for
2000 and beyond; (D) the impact of the WINet, Total Gold Card, and Total Rewards
Programs; and (E) any future impact of the Showboat or Players acquisitions, the
Rio merger or the Rincon development. Similarly, such statements herein that
describe, generally or specifically, the Company's business strategy, outlook,
objectives, plans, intentions or goals are also forward-looking statements. All
such forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company. These include,
but are not limited to, the following factors as well as other factors described
from time to time in the Company's reports filed with the SEC: construction
factors, including zoning issues, environmental restrictions, soil conditions,
weather and other hazards, site access matters and building permit issues;
access to available and feasible financing; regulatory, licensing and other
government approvals, third party consents and approvals, and relations with
partners, owners and other third parties; conditions of credit markets and other
business and economic conditions, including international and national economic
problems; litigation, judicial actions and political uncertainties, including
gaming legislative action, referenda, and taxation; abnormal gaming holds; and
the effects of competition including locations of competitors and operating and
marketing competition. Any forward-looking statements are made pursuant to the
Private Securities Litigation Reform Act of 1995, speak only as of the date
made, and are qualified in their entirety by this and other cautionary
statements herein, in our Annual Report on Form 10-K, and in our other filings
with the Securities and Exchange Commission.
29
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates
and prices, such as interest rates, foreign currency exchange rates and
commodity prices. Our primary exposure to market risk is interest rate risk
associated with our debt. We attempt to limit our exposure to interest rate risk
by managing the mix of our debt between fixed rate and variable rate
obligations. We do not currently utilize derivative transactions to hedge our
exposure to interest rate changes. We do not hold or issue derivative financial
instruments for trading purposes and do not enter into derivative transactions
that would be considered speculative positions.
We sold our management contract for a casino in a foreign country in January
2000. As a result, we no longer have any ownership interest in businesses in
foreign countries and, therefore, are not subject to material foreign currency
exchange rate risk.
We hold investments in various available-for-sale equity securities,
however, our exposure to price risk arising from the ownership of these
investments is not material to our consolidated financial position, results of
operations or cash flows.
30
<PAGE>
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
*EX-10.1 Description of amendment to Time Accelerated Restricted
Stock Award Program (TARSAP II) approved by the Human
Resources Committee of the Board of Directors on July 26,
2000.
*EX-10.2 Amendment to Employment Agreement, dated August 2, 2000,
between Harrah's Operating Company, Inc. and John M. Boushy.
*EX-10.3 Amendment to Employment Agreement, dated August 2, 2000,
between Harrah's Operating Company, Inc. and Stephen H.
Brammell.
*EX-10.4 Amendment to Employment Agreement, dated August 2, 2000,
between Harrah's Operating Company, Inc. and Janis L. Jones.
*EX-10.5 Amendment to Employment Agreement, dated August 2, 2000,
between Harrah's Operating Company, Inc. and Marilyn G.
Winn.
*EX-10.6 Employment Agreement, dated August 25, 2000, between
Harrah's Operating Company, Inc. and Richard E. Mirman.
*EX-10.7 Letter Agreement with Wells Fargo Bank Minnesota, N.A.,
dated August 31, 2000, concerning appointment as Escrow
Agent under Escrow Agreement for deferred compensation
plans.
*EX-10.8 Amendment to Escrow Agreement, dated April 26, 2000, between
Harrah's Entertainment, Inc. and Wells Fargo Bank Minnesota,
N.A., Successor to Bank of America, N.A.
*EX-11 Computation of per share earnings.
*EX-27 Financial Data Schedule.
</TABLE>
------------------------
* Filed herewith.
(b) No reports on Form 8-K were filed by the Company during third quarter
2000.
31
<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.
<TABLE>
<S> <C> <C>
HARRAH'S ENTERTAINMENT, INC.
By: /s/ JUDY T. WORMSER
-----------------------------------------
Judy T. Wormser
VICE PRESIDENT AND CONTROLLER
November 13, 2000 (CHIEF ACCOUNTING OFFICER)
</TABLE>
32
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
--------------------- ----------- ----------
<C> <S> <C>
EX-10.1 Description of amendment to Time Accelerated Restricted
Stock Award Program (TARSAP II) approved by the Human
Resources Committee of the Board of Directors on July 26,
2000.
EX-10.2 Amendment to Employment Agreement, dated August 2, 2000,
between Harrah's Operating Company, Inc. and John M. Boushy.
EX-10.3 Amendment to Employment Agreement, dated August 2, 2000,
between Harrah's Operating Company, Inc. and Stephen H.
Brammell.
EX-10.4 Amendment to Employment Agreement, dated August 2, 2000,
between Harrah's Operating Company, Inc. and Janis L. Jones.
EX-10.5 Amendment to Employment Agreement, dated August 2, 2000,
between Harrah's Operating Company, Inc. and Marilyn G.
Winn.
EX-10.6 Employment Agreement, dated August 25, 2000 between Harrah's
Operating Company, Inc. and Richard E. Mirman.
EX-10.7 Letter Agreement with Wells Fargo Bank Minnesota, N.A.,
dated August 31, 2000, concerning appointment as Escrow
Agent under Escrow Agreement for deferred compensation
plans.
EX-10.8 Amendment to Escrow Agreement, dated April 26, 2000, between
Harrah's Entertainment, Inc. and Wells Fargo Bank Minnesota,
N.A., Successor to Bank of America, N.A.
EX-11 Computation of per share earnings.
EX-27 Financial Data Schedule.
</TABLE>
33
