-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NdhYF/ejT3k/m2nAGvmeGMzmweTfbMM25kLUxJgR7AIzVNMEhZ5lKpbpKYR2m2kz mY74Jz11drwxEn5PsBKmrA== 0000912057-99-006271.txt : 19991117 0000912057-99-006271.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-006271 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARRAHS ENTERTAINMENT INC CENTRAL INDEX KEY: 0000858339 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 621411755 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-10410 FILM NUMBER: 99756683 BUSINESS ADDRESS: STREET 1: 1023 CHERRY ROAD CITY: MEMPHIS STATE: TN ZIP: 38117 BUSINESS PHONE: 9017628600 MAIL ADDRESS: STREET 1: 1023 CHERRY ROAD CITY: MEMPHIS STATE: TN ZIP: 38117 FORMER COMPANY: FORMER CONFORMED NAME: PROMUS COMPANIES INC DATE OF NAME CHANGE: 19920703 10-Q/A 1 10-Q/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Amendment No. 1) (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . Commission File No. 1-10410 HARRAH'S ENTERTAINMENT, INC. (Exact name of registrant as specified in its charter) Delaware I.R.S. No. 62-1411755 (State of Incorporation) (I.R.S. Employer Identification No.) 5100 W. Sahara Blvd. Las Vegas, Nevada 89146 (Current address of principal executive offices) (702) 579-2300 (Registrant's telephone number, including area code) 1023 Cherry Road Memphis, Tennessee 38117 (Former address of principal executive offices) 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, 1999, there were outstanding 128,592,981 shares of the Company's Common Stock. Page 1 of 20 PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements ---------------------------- The accompanying unaudited Consolidated Condensed Financial Statements of Harrah's Entertainment, Inc., a Delaware corporation, have been prepared in accordance with the instructions to Form 10-Q, and therefore do not include all information and notes necessary for complete financial statements in conformity with generally accepted accounting principles. The results for the periods indicated are unaudited, but reflect all adjustments (consisting only of normal recurring adjustments) which management considers necessary for a fair presentation of operating results. Results of operations for interim periods are not necessarily indicative of a full year of operations. See Note 2 to these Consolidated Condensed Financial Statements regarding the completion of our merger with Rio Hotel & Casino, Inc. on January 1, 1999. These Consolidated Condensed Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our 1998 Annual Report to Stockholders. -2- HARRAH'S ENTERTAINMENT, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(In thousands, except share amounts) Sept. 30, Dec. 31, 1999 1998 ----------- ----------- ASSETS Current assets Cash and cash equivalents $ 189,990 $ 158,995 Receivables, less allowance for doubtful accounts of $42,447 and $14,356 94,643 55,043 Deferred income tax benefits 30,578 22,478 Prepayments and other 44,981 27,521 Inventories 32,257 15,306 ----------- ----------- Total current assets 392,449 279,343 ----------- ----------- Land, buildings, riverboats and equipment 3,894,844 2,660,004 Less: accumulated depreciation (904,363) (789,847) ----------- ----------- 2,990,481 1,870,157 Excess of purchase price over net assets of business acquired, net of amortization of $51,040 and $40,051 (Note 2) 532,896 383,450 Investments in and advances to nonconsolidated affiliates 262,438 273,508 Deferred costs, trademarks, notes receivable and other assets 574,877 479,874 ----------- ----------- $ 4,753,141 $ 3,286,332 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 54,964 $ 57,864 Construction payables 7,172 629 Accrued expenses 303,233 172,021 Current portion of long-term debt 2,939 2,332 ----------- ----------- Total current liabilities 368,308 232,846 Long-term debt 2,514,881 1,999,354 Deferred credits and other 111,076 112,362 Deferred income taxes 199,655 75,457 ----------- ----------- 3,193,920 2,420,019 ----------- ----------- Minority interests 15,343 14,906 ----------- ----------- Commitments and contingencies (Notes 2, 4, 6, 7 and 8) Stockholders' equity Common stock, $0.10 par value, authorized 360,000,000 shares, outstanding 128,592,981 and 102,188,018 shares (net of 3,970,397 and 3,036,562 shares held in treasury) 12,859 10,219 Capital surplus 965,896 407,691 Retained earnings 584,319 451,410 Accumulated other comprehensive income 538 6,567 Deferred compensation related to restricted stock (19,734) (24,480) ----------- ----------- 1,543,878 851,407 ----------- ----------- $ 4,753,141 $ 3,286,332 =========== ===========
See accompanying Notes to Consolidated Condensed Financial Statements. -3- HARRAH'S ENTERTAINMENT, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share Third Quarter Ended Nine Months Ended amounts) Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Revenues Casino $ 658,996 $ 489,872 $ 1,824,558 $ 1,220,275 Food and beverage 113,135 67,549 321,675 171,807 Rooms 65,656 44,771 192,094 114,539 Management fees 21,737 16,309 56,732 48,646 Other 33,140 23,632 97,109 60,701 Less: casino promotional allowances (78,610) (55,891) (215,309) (136,645) ----------- ----------- ----------- ----------- Total revenues 814,054 586,242 2,276,859 1,479,323 ----------- ----------- ----------- ----------- Operating expenses Direct Casino 332,988 255,660 948,911 651,245 Food and beverage 58,922 32,936 171,165 86,829 Rooms 17,182 11,253 50,776 31,673 Depreciation of buildings, riverboats and equipment 47,381 33,810 141,136 94,883 Development costs 1,890 2,701 4,160 6,621 Write-downs, reserves and recoveries 208 -- (1,267) 1,847 Project opening costs 183 1,161 580 7,157 Other 169,730 123,289 492,539 317,042 ----------- ----------- ----------- ----------- Total operating expenses 628,484 460,810 1,808,000 1,197,297 ----------- ----------- ----------- ----------- Operating profit 185,570 125,432 468,859 282,026 Corporate expense (11,894) (9,443) (33,317) (25,029) Relocation of corporate offices (3,030) -- (7,522) -- Equity in losses of nonconsolidated affiliates (10,228) (2,404) (23,049) (8,706) Venture restructuring costs -- (1,062) 397 (3,521) Amortization of goodwill and trademarks (4,497) (3,321) (13,460) (5,647) ----------- ----------- ----------- ----------- Income from operations 155,921 109,202 391,908 239,123 Interest expense, net of interest capitalized (48,162) (36,409) (147,749) (81,358) Gains on sales of equity interests in nonconsolidated affiliates 16,300 -- 16,300 13,155 Other (expense) income, net, including interest income (644) 273 5,926 5,798 ----------- ----------- ----------- ----------- Income before income taxes and minority interests 123,415 73,066 266,385 176,718 Provision for income taxes (44,875) (27,091) (98,255) (65,043) Minority interests (3,496) (1,773) (7,818) (5,551) ----------- ----------- ----------- ----------- Income before extraordinary losses 75,044 44,202 160,312 106,124 Extraordinary losses on early extinguishments of debt, net of income tax benefit of $222, $5,990 and $9,755 (410) -- (11,033) (18,280) ----------- ----------- ----------- ----------- Net income $ 74,634 $ 44,202 $ 149,279 $ 87,844 =========== =========== =========== ===========
-4- HARRAH'S ENTERTAINMENT, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Continued) (UNAUDITED)
(In thousands, except per share Third Quarter Ended Nine Months Ended amounts) Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1999 1998 1999 1998 --------- --------- ---------- ---------- Earnings per share-basic Income before extraordinary losses $ 0.59 $ 0.44 $ 1.27 $ 1.06 Extraordinary losses, net - - (0.09) (0.18) --------- --------- ---------- ---------- Net income $ 0.59 $ 0.44 $ 1.18 $ 0.88 ========= ========= ========== ========== Earnings per share-diluted Income before extraordinary losses $ 0.58 $ 0.44 $ 1.25 $ 1.05 Extraordinary losses, net - - (0.09) (0.18) --------- --------- ---------- ---------- Net income $ 0.58 $ 0.44 $ 1.16 $ 0.87 ========= ========= ========== ========== Average common shares outstanding 126,338 100,271 126,001 100,204 ========= ========= ========== ========== Average common and common equivalent shares outstanding 129,355 100,911 128,269 101,278 ========= ========= ========== ==========
See accompanying Notes to Consolidated Condensed Financial Statements. -5- HARRAH'S ENTERTAINMENT, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands) Nine Months Ended Sept. 30, Sept. 30, 1999 1998 ----------- ----------- Cash flows from operating activities Net income $ 149,279 $ 87,844 Adjustments to reconcile net income to cash flows from operating activities Extraordinary losses, before income taxes 17,023 27,311 Depreciation and amortization 172,029 114,595 Other noncash items 34,644 30,766 Minority interests' share of income 7,818 5,551 Equity in losses of nonconsolidated affiliates 23,049 8,706 Realized gains on sales of equity interests in nonconsolidated affiliates (16,300) (13,155) Net (gains) losses from asset sales (1,752) 19 Net change in long-term accounts 24,309 14,314 Net change in working capital accounts (13,472) (30,606) ----------- ----------- Cash flows provided by operating activities 396,627 245,345 ----------- ----------- Cash flows from investing activities Land, buildings, riverboats and equipment additions (256,446) (101,527) Investments in and advances to nonconsolidated affiliates (37,231) (51,847) Purchase of minority interest in subsidiary (26,000) -- Proceeds from sales of equity interests in nonconsolidated affiliates 31,924 17,000 Cash acquired in acquisitions 50,226 -- Proceeds from asset sales 11,587 229 Decrease in construction payables (6,543) (6,628) Acquisition of Showboat, Inc., net of cash acquired -- (477,952) Purchase of marketable equity securities -- (65,898) Decrease (Increase) in notes receivable 13,618 (22,908) Other (4,682) (4,276) ----------- ----------- Cash flows used in investing activities (223,547) (713,807) ----------- ----------- Cash flows from financing activities Net borrowings under Bank Facility 898,596 1,073,300 Net repayments under retired revolving credit facility (1,086,000) -- Proceeds from issuance of senior notes, net of discount and issue costs of $5,980 494,020 -- Early extinguishments of debt (418,114) (560,708) Scheduled debt retirements (4,457) (2,121) Premiums paid on early extinguishments of debt (2,379) (24,569) Purchases of treasury stock (16,370) -- Minority interests' distributions, net of contributions (7,381) (5,138) ----------- ----------- Cash flows (used in) provided by financing activities (142,085) 480,764 ----------- ----------- Net increase in cash and cash equivalents 30,995 12,302 Cash and cash equivalents, beginning of period 158,995 116,443 ----------- ----------- Cash and cash equivalents, end of period $ 189,990 $ 128,745 =========== ===========
See accompanying Notes to Consolidated Condensed Financial Statements. -6- HARRAH'S ENTERTAINMENT, INC. CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands) Third Quarter Ended Nine Months Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1999 1998 1999 1998 --------- --------- --------- --------- Net income $ 74,634 $ 44,202 $ 149,279 $ 87,844 --------- --------- --------- --------- Other comprehensive income Foreign currency translation adjustment, net of tax (benefit) provision of $(1,344), $(1,700), $445 and $(2,051) (1,561) (2,202) 727 (2,774) Unrealized gains (losses) on available-for-sale securities: Unrealized holding gains (losses) arising during period, net of tax provision (benefit) of $471, $(167), $1,750 and $(322) 768 (272) 2,855 (515) Less: reclassification adjustment, net of tax provision of $5,890, for realized gain included in income (9,611) -- (9,611) -- --------- --------- --------- --------- Other comprehensive income (10,404) (2,474) (6,029) (3,289) --------- --------- --------- --------- Comprehensive income $ 64,230 $ 41,728 $ 143,250 $ 84,555 ========= ========= ========= =========
See accompanying notes to Consolidated Condensed Financial Statements. -7- HARRAH'S ENTERTAINMENT, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) Note 1 - Basis of Presentation and Organization - ----------------------------------------------- Harrah's Entertainment, Inc. ("Harrah's Entertainment", the "Company", "we", "our" or "us", and including our subsidiaries where the context requires), a Delaware corporation, is one of America's leading casino companies. Our casino entertainment facilities, operating under the Harrah's, Rio and Showboat brand names, include casino hotels in Reno, Lake Tahoe, Las Vegas and Laughlin, Nevada; two casino hotel properties in Atlantic City, New Jersey; and riverboat and dockside casinos in Joliet, Illinois; East Chicago, Indiana; Shreveport, Louisiana; Tunica and Vicksburg, Mississippi; and North Kansas City and St. Louis, Missouri. We also manage casinos on Indian lands near Phoenix, Arizona; Cherokee, North Carolina; and Topeka, Kansas. We also manage the Star City casino in Sydney, Australia, and the Harrah's casino in New Orleans, Louisiana. We discontinued management of a casino in Auckland, New Zealand, as of the end of second quarter 1998, and an Indian casino near Seattle, Washington during fourth quarter 1998. Certain amounts for the prior year third quarter and first nine months have been reclassified to conform with the current year presentation. Note 2 - Acquisitions - --------------------- We are accounting for each of the transactions described below as a purchase. Accordingly, the purchase price is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values determined by a variety of sources, including independent appraisals, discounted cash flows, quoted market prices and estimates made by management. For the Showboat transaction, the allocation of the purchase price was completed in second quarter 1999. For the Rio transaction, the allocation of the purchase price will be completed within one year from the date of the acquisition. To the extent that the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired, such excess will be allocated to goodwill and amortized over a period of 40 years. For periods prior to the finalization of the purchase price allocation, our financial statements include estimated goodwill amortization expense. -8- Showboat, Inc. - On June 1, 1998, we completed our acquisition of Showboat, Inc. ("Showboat") for $520 million in cash and assumption of approximately $635 million of Showboat debt. The operating results for Showboat are included in the Consolidated Condensed Financial Statements from the date of acquisition. Subsequent to the closing of the acquisition, we completed tender offers and consent solicitations for Showboat's 9 1/4% First Mortgage Bonds due 2008 (the "Bonds") and 13% Senior Subordinated Notes due 2009 (the "Notes"). As a result of these tender offers, $128.6 million face amount of the Bonds and $117.9 million face amount of the Notes were retired on June 15, 1998. During first quarter 1999, we consummated an agreement with our partners owning the other 45% ownership interest in the East Chicago Showboat property to increase our ownership interest to 99.55%, and partnership agreements were amended to give us greater flexibility in operating this property. Consequently, we began consolidating this partnership with the financial results of our other businesses in first quarter 1999. The consideration for this increase in ownership was cash and stock. In March 1999, we redeemed all $140 million face amount of 13 1/2% First Mortgage Notes of this partnership and recorded an extraordinary loss of $2.0 million, net of tax. Also during first quarter 1999, this property was rebranded as a "Harrah's" property. In April 1999, we announced plans to sell certain of our interests in Star City casino in Sydney, Australia to TABCORP Holdings Limited, ("TABCORP"), an Australia-based company, in connection with that company's intention to offer to acquire the issued and outstanding shares of Star City Holdings Ltd., ("SCHL"). At that time we owned 135 million shares of Star City Holdings Ltd. and 37 million options to purchase additional ordinary shares. Subsequent to third quarter 1999, we engaged in a series of transactions to divest our outstanding shares and options of SCHL and received pretax proceeds of approximately US$141.5 million. A pretax gain on the sale of these shares and options of approximately $47.0 million will be recognized in fourth quarter 1999. The sale of our remaining interests, consisting primarily of our management contract for the Star City casino, is expected to close in first quarter 2000. -9- At the time of the Showboat acquisition, the Las Vegas Showboat property was determined to be a non-strategic asset and is being reported as an asset-held-for-sale in our financial statements. In July 1999 we announced that we have reached an agreement to sell Showboat Las Vegas. The sale is expected to close in first quarter 2000, subject to certain conditions, including regulatory approval. At September 30, 1999, the estimated net realizable value of this property, net of estimated selling expenses, carrying costs and interest costs through the assumed date of sale, is included in Deferred costs, trademarks, notes receivable and other assets in the Consolidated Condensed Balance Sheets. Rio Hotel & Casino, Inc. - On January 1, 1999, we completed our merger with Rio Hotel & Casino, Inc. ("Rio"). In connection with the merger, we issued approximately 25 million shares of our common stock and assumed Rio's outstanding debt of $435 million face amount. In connection with the Rio merger, our equity interest in a new airline based in Las Vegas, Nevada, increased to approximately 47.8%, but our voting power is limited by contract to 25%. Our initial investment of $15 million in this new airline was carried at cost. The increase in our ownership interest requires us to account for the investment by the equity method, whereby we include our share of this nonconsolidated affiliate's profits or losses in our financial results. Operation of the airline began in May 1999. Rio's investment in the new airline is reported as an asset-held-for-sale in our financial statements. During second quarter 1999 we completed tender offers and consent solicitations for Rio's 10 5/8% Senior Subordinated Notes due 2005 and 9 1/2% Senior Subordinated Notes due 2007 (collectively, the "Rio Notes"). As a result of these tender offers, we redeemed all $225 million face amount of the Rio Notes. We recorded liabilities assumed in the Rio merger, including these notes, at their fair value as of the date of the consummation of the merger. The difference between the consideration paid to the holders of the Rio Notes pursuant to the tender offers and the carrying value of the notes on the date of the redemption was recorded in the second quarter as an extraordinary loss of $4.5 million, net of tax. The following unaudited pro forma consolidated financial information for the Company has been prepared assuming that the acquisitions and the Showboat and Rio debt extinguishments discussed above had occurred on the first day of the period: -10-
Quarter Ended Nine Months Ended Sept 30, 1998 Sept 30, 1998 ------------- ------------- (In millions, except per share amounts) Revenues $ 693.3 $2,018.1 ======== ======== Income from operations $ 126.0 $ 314.8 ======== ======== Income before extraordinary losses $ 50.2 $ 111.6 ======== ======== Net income $ 50.2 $ 92.3 ======== ======== Earnings per share - diluted Income before extraordinary losses $ 0.40 $ 0.88 ======== ======== Net income $ 0.40 $ 0.74 ======== ========
These unaudited pro forma results are presented for comparative purposes only. The pro forma results are not necessarily indicative of what our actual results would have been had the acquisitions been completed as of the beginning of the period, or of future results. Players International, Inc.- In August 1999, we announced the signing of a definitive agreement to acquire Players International, Inc. (Players). Players operates 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, and a horse racetrack in Paducah, Kentucky. Players and Harrah's jointly operate a landside hotel and entertainment facility at the Maryland Heights property, a suburb of St. Louis. Under the terms of the agreement, Players' shareholders will receive $8.50 in cash for each share outstanding and we will assume approximately $150 million of Players' debt. We expect to fund the acquisition through our Bank Facility. The acquisition will be accounted for as a purchase, and the purchase price will be allocated to the underlying assets and liabilities based upon their estimated values at the date of acquisition. Players stockholders approved the proposed merger at a special stockholders meeting held October 28, 1999, however, the transaction is subject to various conditions, including regulatory approvals and other third party approvals. Prior to entering into the agreement with us, Players terminated a previously announced merger agreement with another gaming company. As a result of this termination of that agreement, Players paid a $13.5 million break-up fee pursuant to that agreement's terms. In connection with our agreement with Players, we agreed to provide the funds necessary to make this payment. Players must reimburse us for this advance, plus pay an additional termination fee, should certain events occur resulting in the termination of our agreement with Players. The funds we have advanced are a component of the total purchase price we will pay for Players. Pending the completion of the transaction, this $13.5 million is included in Deferred costs, trademarks, notes receivable and other assets in the Consolidated Condensed Balance Sheets. -11- Note 3 - Stockholders' Equity - ----------------------------- In addition to its common stock, Harrah's Entertainment has the following classes of stock authorized but unissued: Preferred stock, $100 par value, 150,000 shares authorized Special stock, $1.125 par value, 5,000,000 shares authorized - Series A Special Stock, 2,000,000 shares designated In July 1999, our Board of Directors authorized the repurchase in open market and other transactions of up to 10 million shares of the Company's common stock. We expect to acquire our shares from time to time at prevailing market prices through the December 31, 2000, expiration of the approved plan. At September 30, 1999, we had repurchased 0.3 million shares under the provisions of this plan. These repurchases are in addition to 0.5 million shares repurchased earlier this year in connection with the increase of our ownership interest in the East Chicago property. Note 4 - Long-Term Debt - ----------------------- Revolving Credit Facilities - --------------------------- On April 30, 1999, we consummated new revolving credit and letter of credit facilities (the "Bank Facility") in the amount of $1.6 billion. This Bank Facility consists of a five-year $1.3 billion revolving credit and letter of credit facility maturing in 2004 and a separate $300 million revolving credit facility which is renewable annually, at the borrower's and lenders' options. 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, $1.3 billion facility and 15 basis points on the 364-day, $300 million facility. The interest rate and facility fee are based on our current debt ratings and leverage ratio and may change as our debt ratings and leverage ratio change. Proceeds from the Bank Facility were used to retire our previous revolving credit facility scheduled to mature in 2000 (the "Previous Facility") and to retire Rio's revolving credit facility scheduled to mature in 2003 and Rio's 10 5/8% Senior Subordinated Notes due 2005 and 9 1/2% Senior Subordinated Notes due 2007. -12- Issuance of Senior Notes - ------------------------ In keeping with our strategy to refinance a portion of our short-term, floating-rate borrowings with debt that has fixed rates and longer maturities, in January 1999 we issued $500 million of 7 1/2% Senior Notes due 2009 and used the proceeds to reduce amounts outstanding under our Previous Facility. The corresponding reduction in our available borrowing capacity under the Previous Facility resulted in the write-off of related unamortized deferred finance charges, recorded as an extraordinary loss of $1.2 million in first quarter. Interest Rate Agreements - ------------------------ To manage the relative mix of our debt between fixed and variable rate instruments, we have entered into interest rate swap agreements to modify the interest characteristics of our outstanding debt without an exchange of the underlying principal amount. We have six interest rate swap agreements which effectively convert a total of $300 million in variable rate debt to a fixed rate. Pursuant to the terms of these swaps, all of which reset quarterly, we receive variable payments tied to LIBOR in exchange for our payments at a fixed interest rate. The fixed rates to be paid by us and variable rates to be received by us are summarized in the following table:
Swap Rate Swap Rate Received Paid (Variable) at Swap Notional Amount (Fixed) Sept. 30, 1999 Maturity - --------------- --------- -------------- ------------ $50 million 6.985% 5.513% March 2000 $50 million 6.951% 5.513% March 2000 $50 million 6.945% 5.511% March 2000 $50 million 6.651% 5.370% May 2000 $50 million 5.788% 5.528% June 2000 $50 million 5.785% 5.528% June 2000
The differences to be paid or received under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense for the related debt. Changes in the variable interest rates to be paid or received pursuant to the terms of our interest rate agreements will have a corresponding effect on our future cash flows. These agreements contain a credit risk that the counterparties may be unable to meet the terms of the agreements. We minimize that risk by evaluating the creditworthiness of our counterparties, which are limited to major banks and financial institutions, and do not anticipate nonperformance by the counterparties. -13- Note 5 - Supplemental Cash Flow Disclosures - ------------------------------------------- Cash Paid for Interest and Taxes - -------------------------------- The following table reconciles our interest expense, net of interest capitalized, per the Consolidated Condensed Statements of Income, to cash paid for interest:
Nine Months Ended Sept. 30, Sept. 30, (In thousands) 1999 1998 --------- --------- Interest expense, net of amount capitalized $ 147,749 $ 81,358 Adjustments to reconcile to cash paid for interest: Net change in accruals (12,824) (12,368) Amortization of deferred finance charges (3,537) (3,307) Net amortization of discounts and premiums (2,757) 1,091 --------- --------- Cash paid for interest, net of amount capitalized $ 128,631 $ 66,774 ========= ========= Cash payments of income taxes, net of refunds $ 13,782 $ 32,952 ========= =========
Note 6 - Commitments and Contingent Liabilities - ----------------------------------------------- New Orleans Casino Development - ------------------------------ We have an approximate 43% ownership interest in Jazz Casino Company, L.L.C. ("JCC"), the company which owns and operates the exclusive land-based casino (the "Casino") in New Orleans, Louisiana. We manage that Casino pursuant to a management agreement between JCC and a subsidiary of our Company. We have (i) guaranteed JCC's initial $100 million annual payment under the Casino operating contract to the State of Louisiana gaming board (the "State Guarantee"); (ii) guaranteed $166.5 million of a $236.5 million JCC bank credit facility; and (iii) made a $22.5 million subordinated loan to JCC to finance construction of the Casino. With respect to the State Guarantee, we are obligated to guarantee JCC's first $100 million annual payment obligation commencing upon the October 28, 1999, opening of the Casino, and, if certain cash flow tests (for the renewal periods beginning April 1, 2001) and other conditions are satisfied each year, to renew the guarantee beginning April 1, 2000, for each 12 month period ending March 31, 2004. Our obligations under the guarantee for the first year of operations or any succeeding 12 month period is limited to a guarantee of the $100 million payment obligation of -14- JCC for the 12 month period in which the guarantee is in effect and is secured by a first priority lien on JCC's assets. JCC's payment obligation (and therefore the amount we have guaranteed) is $100 million at the commencement of each 12 month period under the Casino operating contract and declines on a daily basis by 1/365 of $100 million to the extent payments are made each day by JCC to Louisiana's gaming board. Rio - --- Rio has entered into an agreement with Clark County, Nevada, to construct a road across certain of its recently acquired properties that will provide an additional east/west conduit for Las Vegas residents and tourists and allow for additional access to the Rio from the Las Vegas Strip. Upon completion, we will deed the roadway acreage to Clark County in exchange for deeding other Clark County acreage to the Company and reimbursing us for a majority of our construction costs. 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 project discussed above, as of September 30, 1999, we had guaranteed third party loans and leases of $107 million, which are secured by certain assets, and had commitments of $252 million, primarily construction-related. During second quarter 1999, we performed under our guarantee of the Upper Skagit Tribe's development financing and purchased their receivable from the lender for $11.4 million. Under the terms of our agreement with the Tribe, they have agreed to fund the retirement of this debt. The Tribe is attempting to secure new financing; however, there is no assurance that their efforts will be successful and that the receivable will be retired. The agreements under which we manage casinos on Indian lands contain provisions required by law which provide that a minimum monthly payment be made to the tribe. That obligation has priority over scheduled payments of borrowings for development costs. In the event that insufficient cash flow is generated by the operations to fund this payment, we must pay the shortfall to the tribe. Such advances, if any, would be repaid to us in future periods in which operations generate cash flow in excess -15- 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, 1999, the aggregate monthly commitment pursuant to these contracts, which extend for periods of up to 39 months from September 30, 1999, was $1.2 million. Severance Agreements - -------------------- As of September 30, 1999, we have severance agreements with 44 of our senior executives, which provide for payments to the executives in the event of their termination after a change in control, as defined. These agreements provide, among other things, for a compensation payment of 1.5 to 3.0 times the executive's average annual compensation, as defined, as well as for accelerated payment or accelerated vesting of any compensation or awards payable to the executive under any of our incentive plans. The estimated amount, computed as of September 30, 1999, that would be payable under the agreements to these executives based on earnings and stock options aggregated approximately $101.9 million. Tax Sharing Agreements - ---------------------- In connection with the 1995 spin-off of certain hotel operations (the "PHC Spin-off") to Promus Hotel Corporation ("PHC"), we entered into a Tax Sharing Agreement with PHC wherein each company is obligated for those taxes associated with their respective businesses. Additionally, we are obligated for all taxes for periods prior to the PHC Spin-off date which are not specifically related to PHC operations and/or PHC hotel locations. Our obligations under this agreement are not expected to have a material adverse effect on our consolidated financial position or results of operations. Self-Insurance - -------------- We are self-insured for various levels of general liability, workers' compensation and employee medical coverage. We also have stop loss coverage to protect against unexpected claims. Insurance claims and reserves include accruals of estimated settlements for known claims, as well as accruals of actuarial estimates of incurred but not reported claims. -16- Note 7 - Litigation - -------------------- We are involved in various inquiries, administrative proceedings and litigation relating to contracts, sales of property and other matters arising in the normal course of business. While any proceeding or litigation has an element of uncertainty, we believe that the final outcome of these matters will not have a material adverse effect upon our consolidated financial position or our results of operations. Note 8 - Nonconsolidated Affiliates - ----------------------------------- Summarized balance sheet and income statement information of nonconsolidated affiliates as of September 30, 1999 and December 31, 1998, and for the third quarters and first nine months ended September 30, 1999 and 1998 is included in the following tables.
(In thousands) Sept. 30, Dec. 31, 1999 1998 ---------- ---------- Combined Summarized Balance Sheet Information Current assets $ 78,697 $ 111,218 Land, buildings and equipment, net 1,114,416 1,094,195 Other assets 370,807 355,505 ---------- ---------- Total assets 1,563,920 1,560,918 ---------- ---------- Current liabilities 74,963 96,095 Long-term debt 844,938 808,334 ---------- ---------- Total liabilities 919,901 904,429 ---------- ---------- Net assets $ 644,019 $ 656,489 ========== ==========
Third Quarter Ended Nine Months Ended (In thousands) Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1999 1998 1999 1998 --------- --------- --------- --------- Combined Summarized Statements of Operations Revenues $ 131,646 $ 142,581 $ 319,302 $ 161,664 ========= ========= ========= ========= Operating loss $ 760 $ (10,295) $ (15,252) $ (26,102) ========= ========= ========= ========= Net loss $ (25,027) $ (20,042) $ (52,314) $ (35,311) ========= ========= ========= =========
-17- Our share of nonconsolidated affiliates' combined net operating results are reflected in the accompanying Consolidated Condensed Statements of Income as Equity in losses of nonconsolidated affiliates. Our investments in and advances to nonconsolidated affiliates are reflected in the accompanying Consolidated Condensed Balance Sheets as follows:
(In thousands) Sept. 30, Dec. 31, 1999 1998 -------- -------- Investments in and advances to nonconsolidated affiliates Accounted for under the equity method $261,904 $231,366 Accounted for at historical cost -- 15,087 Equity securities available-for-sale and recorded at market value 534 27,055 -------- -------- $262,438 $273,508 ======== ========
In first quarter 1999, a gaming equipment manufacturing company announced its plans to acquire all of the outstanding shares of Sodak Gaming, Inc. ("Sodak") for $10 per share. We owned approximately 3 million shares of Sodak's common stock. The acquisition of Sodak was completed during third quarter 1999, generating approximately $32 million in pretax proceeds and a pretax gain of $16 million for our company. In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities", we adjust the carrying value of certain marketable equity securities to include unrealized gains and losses. A corresponding adjustment is recorded in our stockholders' equity and deferred income tax accounts. Note 9 - Summarized Financial Information - ------------------------------------------ Harrah's Operating Company, Inc. ("HOC") is a wholly-owned subsidiary and the principal asset of Harrah's Entertainment. HOC is the issuer of certain debt securities which have been guaranteed by Harrah's Entertainment. Due to the comparability of HOC's consolidated financial information with that of Harrah's Entertainment, complete separate financial statements and other disclosures regarding HOC have not been presented. Management has determined that such information is not material to holders of HOC's debt securities. Summarized financial information of HOC as of September 30, 1999 and December 31, 1998, and for the third quarters and first nine months ended September 30, 1999 and 1998, prepared on the same basis as Harrah's Entertainment, was as follows: -18-
Sept. 30, Dec. 31, 1999 1998 ---------- ---------- (In thousands) Current assets $ 393,805 $ 271,247 Land, buildings, riverboats and equipment, net 2,990,481 1,870,157 Other assets 1,370,129 1,136,750 ---------- ---------- 4,754,415 3,278,154 ---------- ---------- Current liabilities 354,872 209,651 Long-term debt 2,514,881 1,999,354 Other liabilities 310,731 187,247 Minority interests 15,343 14,906 ---------- ---------- 3,195,827 2,411,158 ---------- ---------- Net assets $1,558,588 $ 866,996 ========== ==========
Third Quarter Ended Nine Months Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, (In thousands) 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Revenues $ 813,921 $ 579,149 $2,276,518 $1,479,261 ========== ========== ========== ========== Income from operations $ 154,934 $ 100,100 $ 391,790 $ 239,229 ========== ========== ========== ========== Income before extraordinary losses $ 74,401 $ 38,286 $ 160,235 $ 106,193 ========== ========== ========== ========== Net income $ 73,991 $ 38,286 $ 149,202 $ 87,913 ========== ========== ========== ==========
Certain of our debt guarantees contain covenants which, among other things, place limitations on HOC's ability to pay dividends and make other restricted payments, as defined, to Harrah's Entertainment. The amount of HOC's restricted net assets, as defined, computed in accordance with the most restrictive of these covenants regarding restricted payments, was approximately $1.5 billion at September 30, 1999. -19- Signature --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HARRAH'S ENTERTAINMENT, INC. November 15, 1999 BY: /s/ JUDY T. WORMSER ----------------------- Judy T. Wormser Vice President and Controller (Chief Accounting Officer) -20- -----END PRIVACY-ENHANCED MESSAGE-----