SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
Commission File No. 1-10410
HARRAH'S ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware I.R.S. No. 62-1411755
(State of Incorporation) (I.R.S. Employer
Identification No.)
1023 Cherry Road
Memphis, Tennessee 38117
(Address of principal executive offices)
(901) 762-8600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
------- -------
At June 30, 1996, there were outstanding 102,899,533 shares of the
Company's Common Stock.
Page 1 of 49
Exhibit Index Page 41
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
----------------------------
The accompanying unaudited Consolidated Condensed Financial Statements
of Harrah's Entertainment, Inc. (the Company), a Delaware corporation, have
been prepared in accordance with the instructions to Form 10-Q, and
therefore do not include all information and notes necessary for complete
financial statements in conformity with generally accepted accounting
principles. The results for the periods indicated are unaudited, but
reflect all adjustments (consisting only of normal recurring adjustments)
which management considers necessary for a fair presentation of operating
results. Results of operations for interim periods are not necessarily
indicative of a full year of operations. These Consolidated Condensed
Financial Statements should be read in conjunction with the Consolidated
Financial Statements and notes thereto included in the Company's 1995
Annual Report to Stockholders.
-2-
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share amounts)
June 30, December 31,
1996 1995
---------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 93,246 $ 96,345
Receivables, including notes receivable of
$5,316 and $1,390, less allowance for
doubtful accounts of $14,213 and $10,910 39,580 37,751
Deferred income tax benefits 26,221 21,425
Prepayments and other 22,101 21,275
Supplies 11,297 12,040
---------- ----------
Total current assets 192,445 188,836
---------- ----------
Land, buildings, riverboats and equipment 1,854,749 1,723,714
Less: accumulated depreciation (551,253) (518,824)
---------- ----------
1,303,496 1,204,890
Investments in and advances to nonconsolidated
affiliates 170,671 71,939
Deferred income tax benefits - 4,532
Deferred costs and other 164,722 166,537
---------- ----------
$1,831,334 $1,636,734
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 43,637 $ 46,178
Construction payables 10,162 4,718
Accrued expenses 150,690 148,632
Current portion of long-term debt 1,830 2,038
---------- ----------
Total current liabilities 206,319 201,566
Long-term debt 810,514 753,705
Deferred credits and other 78,854 72,006
Deferred income taxes 26,717 -
---------- ----------
1,122,404 1,027,277
---------- ----------
Minority interests 23,059 23,908
---------- ----------
Commitments and contingencies (Notes 6, 7 and 8)
Stockholders' equity
Common stock, $0.10 par value, authorized
360,000,000 shares, outstanding 102,899,533
and 102,673,828 shares (net of 8,012 and 19,026
shares held in treasury) 10,290 10,267
Capital surplus 368,827 362,783
Unrealized gains on marketable equity securities 42,816 10,552
Retained earnings 266,225 204,838
Deferred compensation related to restricted stock (2,287) (2,891)
---------- ----------
685,871 585,549
---------- ----------
$1,831,334 $1,636,734
========== ==========
See accompanying Notes to Consolidated Condensed Financial Statements.
-3-
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
Revenues
Casino $335,531 $328,439 $656,677 $626,971
Food and beverage 46,921 45,391 90,835 87,276
Rooms 29,448 27,852 56,298 52,506
Management fees 4,501 3,834 8,110 6,811
Other 17,078 22,821 38,027 46,211
Less: casino promotional allowances (32,264) (39,000) (65,625) (73,957)
-------- -------- -------- --------
Total revenues 401,215 389,337 784,322 745,818
-------- -------- -------- --------
Operating expenses
Direct
Casino 169,168 150,566 328,101 295,116
Food and beverage 23,179 23,804 45,613 42,746
Rooms 8,917 8,530 17,403 16,170
Depreciation of buildings, riverboats and
equipment 23,572 19,768 43,643 38,017
Development costs 2,111 4,409 5,439 8,657
Preopening costs 4,802 - 5,016 -
Other 85,963 89,701 173,502 174,750
-------- -------- -------- --------
Total operating expenses 317,712 296,778 618,717 575,456
-------- -------- -------- --------
Operating profit before corporate expense and
project reorganization costs 83,503 92,559 165,605 170,362
Corporate expense (8,442) (8,799) (15,713) (14,181)
Project reorganization costs (6,099) - (8,500) -
-------- -------- -------- --------
Operating income 68,962 83,760 141,392 156,181
Interest expense, net of interest capitalized (17,016) (18,667) (33,595) (36,995)
Interest expense, net, from nonconsolidated
affiliates - (4,898) - (8,634)
Other income, including interest income 831 813 1,360 2,846
-------- -------- -------- --------
Income before income taxes and minority
interests 52,777 61,008 109,157 113,398
Provision for income taxes (20,400) (23,239) (41,783) (43,596)
Minority interests (2,400) (2,418) (5,987) (5,755)
-------- -------- -------- --------
Income from continuing operations 29,977 35,351 61,387 64,047
Discontinued operations (Note 2)
Earnings from hotel operations, net of tax
provisions of $8,451 and $15,434 - 11,626 - 21,230
Spin-off transaction expenses, net of tax
benefits of $1,582 and $5,134 - (5,996) - (21,194)
-------- -------- -------- --------
Net income $ 29,977 $ 40,981 $ 61,387 $ 64,083
======== ======== ======== ========
Earnings (loss) per share
Continuing operations $ 0.29 $ 0.35 $ 0.59 $ 0.62
Discontinued operations
Earnings from hotel operations, net - 0.11 - 0.21
Spin-off transaction expenses, net - (0.06) - (0.21)
-------- -------- -------- --------
Earnings per share $ 0.29 $ 0.40 $ 0.59 $ 0.62
======== ======== ======== ========
Average common shares outstanding 103,841 103,211 103,596 103,088
======== ======== ======== ========
See accompanying Notes to Consolidated Condensed Financial Statements.
-4-
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
June 30, June 30,
1996 1995
--------- --------
Cash flows from operating activities
Net income $ 61,387 $ 64,083
Adjustments to reconcile net income
to cash flows from operating activities
Discontinued operations
Earnings from hotel operations - (21,230)
Spin-off transaction expenses, before
income taxes - 26,328
Depreciation and amortization 48,569 44,897
Other noncash items 17,884 8,835
Minority interests share of net income 5,987 5,755
Equity in losses (income)
of nonconsolidated affiliates (234) 20,413
Net gains from asset sales - (1,650)
Net change in long-term accounts (1,081) 323
Net change in working capital accounts (4,416) (20,600)
Net change in accrued litigation
settlement and related costs - (42,228)
Tax indemnification payments to Bass - (28,000)
--------- --------
Cash flows provided by operating
activities 128,096 56,926
--------- --------
Cash flows from investing activities
Land, buildings, riverboats and equipment
additions (143,385) (62,833)
Increase (decrease) in construction
payables 5,444 (6,605)
Proceeds from asset sales 908 9,331
Investments in and advances to
nonconsolidated affiliates (42,066) (7,910)
Other (1,350) (6,802)
--------- --------
Cash flows used in investing
activities (180,449) (74,819)
--------- --------
Cash flows from financing activities
Net borrowings under Revolving
Credit Facility 57,500 51,450
Debt retirements (1,409) (19,038)
Minority interests distributions, net of
contributions (6,837) (3,774)
Other - (543)
--------- --------
Cash flows provided by
financing activities 49,254 28,095
--------- --------
Cash flows from discontinued hotel operations
Net transfers to discontinued hotel operations - (14,840)
Payment of spin-off transaction expenses - (7,273)
--------- --------
Cash flows used in
discontinued operations - (22,113)
--------- --------
Net decrease in cash and cash equivalents (3,099) (11,911)
Cash and cash equivalents, beginning of period 96,345 84,968
--------- --------
Cash and cash equivalents, end of period $ 93,246 $ 73,057
========= ========
See accompanying Notes to Consolidated Condensed Financial Statements.
-5-
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
Note 1 - Basis of Presentation and Organization
- -----------------------------------------------
Harrah's Entertainment, Inc. (Harrah's or the Company and including
its subsidiaries where the context requires), a Delaware corporation, is
one of America's leading casino companies and currently operates casino
entertainment facilities in nine states and New Zealand. Harrah's casino
entertainment facilities include casino hotels in all five major Nevada and
New Jersey gaming markets: Reno, Lake Tahoe, Las Vegas and Laughlin,
Nevada; and Atlantic City, New Jersey. Harrah's riverboat casinos are in
Joliet, Illinois; Shreveport, Louisiana; Tunica and Vicksburg, Mississippi;
and North Kansas City, Missouri. In addition, Harrah's has a minority
ownership interest in and manages a casino in Auckland, New Zealand and two
limited stakes casinos in Colorado. Harrah's also manages casinos on
Indian lands near Phoenix, Arizona and Seattle, Washington.
The Consolidated Condensed Financial Statements include the accounts
of Harrah's and its majority-owned subsidiaries after elimination of all
significant intercompany accounts and transactions. Harrah's investments
in 20% to 50% owned companies and joint ventures over which Harrah's has
the ability to exercise significant influence are accounted for using the
equity method. Harrah's reflects its share of income before interest
expense of these nonconsolidated affiliates as revenues. Harrah's
proportionate share of interest expense of such nonconsolidated affiliates
is reported as Interest expense, net, from nonconsolidated affiliates (see
Note 8).
Certain amounts for the prior year second quarter and six months ended
June 30, 1995, have been reclassified to conform with the presentation for the
second quarter and six months ended June 30, 1996.
Note 2 - Discontinued Operations
- --------------------------------
On June 30, 1995, Harrah's, formerly The Promus Companies
Incorporated (Promus), completed a spin-off that split the Company into two
independent public corporations, one for conducting its casino
entertainment business and one for conducting its hotel business. Harrah's
retained ownership of the casino entertainment business. The Company's
hotel operations were transferred to a new entity, Promus Hotel Corporation
(PHC), the stock of which was distributed to Promus' stockholders on a one-
for-two basis (the PHC Spin-off). As a result of the PHC Spin-off, results
of operations and cash flows of the Company's hotel business for second
quarter and the six months ended June 30, 1995 are reported as discontinued
operations in the Consolidated Condensed Financial Statements.
Earnings from discontinued operations for the prior year periods were as
follows:
-6-
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1996
(UNAUDITED)
Note 2 - Discontinued Operations (Continued)
- -------------------------------------------
Second Quarter Six Months
Ended Ended
June 30, June 30,
1995 1995
-------------- ----------
(In thousands)
Revenues $ 69,567 $132,785
Costs and expenses (41,377) (79,652)
-------- --------
Operating income 28,190 53,133
Interest expense (8,335) (16,742)
Other expense 222 273
-------- --------
Income before income taxes 20,077 36,664
Provision for income taxes (8,451) (15,434)
-------- --------
Earnings from discontinued hotel operations $ 11,626 $ 21,230
======== ========
In addition to the earnings of its discontinued hotel operations,
Harrah's operating results for the second quarter and six months ended June
30, 1995, included charges of $6.0 million and $21.2 million, respectively,
net of tax, for expenses of the PHC Spin-off transaction.
Note 3 - Stockholders' Equity
- -----------------------------
In addition to its common stock, Harrah's has the following classes of
stock authorized but unissued:
Preferred stock, $100 par value, 150,000 shares authorized
Special stock, 2,000,000 shares authorized -
Series A, $1.125 par value
Special stock, 5,000,000 shares authorized -
Series B, $1.125 par value
In July 1996, Harrah's Board of Directors adopted a shareholder rights
plan to replace the existing rights plan which expires on October 5, 1996. The
new plan provides for a dividend distribution of one special stock purchase
right (a "Right") for each outstanding share of common stock, payable to
stockholders of record on October 5, 1996. The Rights will be exercisable only
if a person or group acquires 15% or more of the Company's common stock or
announces a tender offer for 15% or more of the common stock. Each Right will
entitle stockhlders to buy one two-hundredth of a share of newly created Series
A Special Stock of the Company at an initial exercise price of $130 per Right.
If a person acquires 15% or more of the Company's outstanding common stock, each
Right will entitle its holder to purchase common stock of the Company having a
market value at that time of twice the Right's exercise price. Under certain
conditions, each Right will entitle its holder to purchase stock of an acquiring
company at a discount. Rights held by the 15% holder will become void. The
Rights will expire on October 5, 2006, unless earlier redeemed by the Board at
one cent per Right.
Note 4 - Long-Term Debt - Interest Rate Agreements
- --------------------------------------------------
To manage the relative mix of its debt between fixed and variable rate
instruments, Harrah's enters into interest rate swap agreements to modify
the interest characteristics of its outstanding debt without an exchange of
the underlying principal amount. At June 30, 1996, Harrah's was a party to
the following interest rate swap agreements pursuant to which it pays a
variable interest rate in exchange for receiving a fixed interest rate.
The average variable rate paid by Harrah's was 5.6% at June 30, 1996, and
the average fixed interest rate received was 5.9%. The impact of these
interest rate swap agreements on the effective interest rates of the
associated debt was as follows:
-7-
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1996
(UNAUDITED)
Note 4 - Long-Term Debt - Interest Rate Agreements (Continued)
- -------------------------------------------------------------
Effective Next Semi-
Swap Rate at Annual Rate
Associated Rate June 30, Adjustment
Debt (LIBOR+) 1996 Date Swap Maturity
- -------------- ------ --------- ----------- -------------
10 7/8% Notes
$200 million 4.73% 10.45% October 15 October 1997
8 3/4% Notes
$50 million 3.42% 9.14% November 15 May 1998
$50 million 3.22% 8.72% July 15 July 1998
In accordance with the terms of the interest rate swap agreements, the
effective interest rate on $50 million of the 8 3/4% Notes was adjusted on
July 15, 1996 to 9.25%.
Harrah's has seven interest rate swap agreements to effectively
convert a total of $350 million in variable rate debt to a fixed rate. The
fixed rates to be paid by Harrah's and variable rates to be received by
Harrah's are summarized in the following table:
Swap Rate
Swap Rate Received
Paid (Variable) at Swap
Notional Amount (Fixed) June 30, 1996 Maturity
- --------------- --------- ------------- ------------
$50 million 7.910% 5.481% January 1998
$50 million 6.985% 5.563% March 2000
$50 million 6.951% 5.563% March 2000
$50 million 6.945% 5.563% March 2000
$50 million 6.651% 5.500% May 2000
$50 million 5.788% 5.535% June 2000
$50 million 5.785% 5.535% June 2000
The differences to be paid or received under the terms of the interest
rate swap agreements are accrued as interest rates change and recognized as
an adjustment to interest expense for the related debt. Changes in the
variable interest rates to be paid or received by Harrah's pursuant to the
terms of its interest rate agreements will have a corresponding effect on its
future cash flows. These agreements contain a credit risk that the
counterparties may be unable to meet the terms of the agreements. Harrah's
minimizes that risk by evaluating the creditworthiness of its counterparties,
which are limited to major banks and financial institutions, and does not
anticipate nonperformance by the counterparties.
-8-
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1996
(UNAUDITED)
Note 5 - Supplemental Disclosure of Cash Paid for Interest and Taxes
- --------------------------------------------------------------------
The following table reconciles Harrah's interest expense, net of
interest capitalized, per the Consolidated Condensed Statements of Income,
to cash paid for interest:
Six Months Ended
June 30, June 30,
1996 1995
(In thousands) ------- -------
Interest expense, net of amount
capitalized $33,595 $36,995
Adjustments to reconcile to cash paid
for interest:
Net change in interest accruals (5,009) 14,262
Amortization of deferred finance
charges (1,574) (1,440)
Amortization of discounts (10) (31)
------- -------
Cash paid for interest, net of amount
capitalized $27,002 $49,786
======= =======
Cash payments for income taxes, net of
refunds $25,173 $51,636
======= =======
Note 6 - Commitments and Contingent Liabilities
- -----------------------------------------------
Contractual Commitments
- -----------------------
Harrah's is pursuing additional casino development opportunities that
may require, individually and in the aggregate, significant commitments of
capital, up-front payments to third parties, guarantees by Harrah's of
third party debt and development completion guarantees. As of June 30,
1996, Harrah's has guaranteed third party loans and leases of $33 million,
which are secured by certain assets, has construction-related contractual
commitments of $266 million and has other commitments of $13 million,
excluding amounts previously recorded. Harrah's has also committed to
guarantee an additional $119 million in financing for new developments,
subject to the receipt of certain required regulatory approvals.
The agreements under which Harrah's manages casinos on Indian lands
contain provisions required by law which provide that a minimum monthly
payment be made to the tribe which payment has priority over the retirement
of development costs. In the event that insufficient cash is generated by
the operations to fund this payment, Harrah's must pay the shortfall to the
tribe.
-9-
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1996
(UNAUDITED)
Note 6 - Commitments and Contingent Liabilities (Continued)
- ----------------------------------------------------------
Such advances, if any, will be repaid to Harrah's in a future period or
periods in which operations generate cash in excess of the required minimum
payment. These commitments will terminate upon the occurrence of certain
defined events, including termination of the management contract. As of
June 30, 1996, the aggregate monthly commitment pursuant to these contracts,
which extend for periods of up to 60 months from opening date, was $1.1 million,
including a commitment for a project with a contract approved by the National
Indian Gaming Commission that is under development but not yet open.
As part of a transaction whereby Harrah's effectively secured an
option to a site for a potential casino, Harrah's has guaranteed an additional
$24.7 million third-party variable rate bank loan. Harrah's also has entered
into an interest rate swap agreement in which Harrah's receives a fixed
interest rate of 7% from the third party and pays the variable interest
rate of the subject debt, which is currently LIBOR plus 1.0%. The interest
rate swap is marked to market by Harrah's with the adjustment recorded in
interest expense. The market value of the swap was a positive $0.1 million
and a positive $0.3 million at June 30, 1996 and December 31, 1995,
respectively. The interest rate swap agreement expires December 1, 1996
and is also subject to earlier termination upon the occurrence of certain
events. The underlying guaranty contains an element of risk that the
borrower may be unable to retire the loan when it matures in December 1996.
If that occurs, the Company could become responsible for repayment of at
least a portion of the obligation. Harrah's has reduced this exposure by
obtaining a security interest in certain assets of the third party.
See Note 8 for discussion of the proposed completion guarantees issued
by Harrah's related to development of the New Orleans' casino.
Guarantee of Insurance Contract
- -------------------------------
Harrah's has guaranteed the value of a guaranteed investment contract
with an insurance company held by Harrah's defined contribution savings
plan. Harrah's has also agreed to provide non-interest-bearing loans to
the plan to fund, on an interim basis, withdrawals from this contract by
retired or terminated employees. Harrah's maximum exposure on this
guarantee as of June 30, 1996, was $6.5 million.
-10-
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1996
(UNAUDITED)
Note 6 - Commitments and Contingent Liabilities (Continued)
- ----------------------------------------------------------
Self-Insurance
- --------------
Harrah's is self-insured for various levels of general liability,
workers' compensation and employee medical coverage. Insurance claims and
reserves include accruals of estimated settlements for known claims, as
well as accruals of actuarial estimates of incurred but not reported
claims.
Severance Agreements
- --------------------
At June 30, 1996, Harrah's had severance agreements with 28 of its
executives, which provide for payments to the executives in the event of
their termination after a change in control, as defined, of Harrah's.
These agreements provide, among other things, for a compensation payment
ranging from 1.5 times to 2.99 times the average annual compensation paid
to the executive for the five preceding calendar years, as well as for
accelerated payment or accelerated vesting of any compensation or awards
payable to the executive under any of Harrah's incentive plans. The
estimated amount, computed as of June 30, 1996, that would have been payable
under the agreements to these executives based on earnings and stock options
aggregated approximately $38.5 million.
Tax Sharing Agreements
- ----------------------
In connection with the PHC Spin-off, Harrah's entered into a tax
sharing agreement with PHC wherein each company is obligated for those
taxes associated with their respective businesses. Additionally, Harrah's
is obligated for all taxes of Promus for periods prior to the PHC Spin-off
date which are not specifically related to PHC operations and/or PHC hotel
locations. Harrah's obligations under this agreement are not expected to
have a material adverse effect on its consolidated financial position or
results of operations.
Note 7 - Litigation
- -------------------
Harrah's is involved in various inquiries, administrative proceedings
and litigation relating to contracts, sales of property and other matters
arising in the normal course of business. While any proceeding or
litigation has an element of uncertainty, management believes that the final
outcome of these matters will not have a material adverse effect upon Harrah's
consolidated financial position or its results of operations.
-11-
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1996
(UNAUDITED)
Note 7 - Litigation (Continued)
- ------------------------------
In addition to the matters described above, Harrah's and certain of its
subsidiaries have been named as defendants in a number of lawsuits arising
from the suspension of development of a land-based casino, and the closing
of the temporary gaming facility, in New Orleans, Louisiana, by Harrah's
Jazz Company, a partnership in which a subsidiary of the Company owns an
approximate 47% interest and which has filed for protection under Chapter
11 of the U.S. Bankruptcy Code (see Note 8). The ultimate outcomes of
these lawsuits cannot be predicted at this time, and no provisions for the
claims are included in the accompanying financial statements. The Company
intends to defend these actions vigorously.
Note 8 - Nonconsolidated Affiliates
- -----------------------------------
Harrah's Jazz Company
- ---------------------
A Harrah's subsidiary owns an approximate 47% interest in Harrah's
Jazz Company (Harrah's Jazz), a partnership formed for purposes of
developing, owning and operating the exclusive land-based casino
entertainment facility in New Orleans, Louisiana, on the site of the
former Rivergate Convention Center (the Rivergate). On November 22, 1995,
Harrah's Jazz and its wholly-owned subsidiary, Harrah's Jazz Finance Corp.,
filed petitions for relief under Chapter 11 of the Bankruptcy Code. Prior
to the filing, Harrah's Jazz was operating a temporary casino in the New
Orleans, Louisiana Municipal Auditorium (the Basin Street Casino) and
constructing a new permanent casino facility on the Rivergate site (the
Rivergate Casino). Harrah's Jazz ceased operation of the Basin Street
Casino and construction of the Rivergate Casino on November 22, 1995 prior
to the bankruptcy filings.
In August 1996, Harrah's Jazz negotiated a proposed agreement (the
proposed City Agreement) with the City of New Orleans (the City) and the
Rivergate Development Corporation which would provide for
amendments to the lease agreement and related documentation between Harrah's
Jazz and the City. The proposed City Agreement contemplates the completion
of definitive lease documentation and the receipt of all requisite City
approvals by October 1996.
Under the proposed City Agreement (and a prior agreement with the City),
Harrah's Jazz paid approximately $4.3 million to the City and made payments
into escrow of approximately $5.8 million. A subsidiary of the Company
funded $2.5 million and approximately $4.4 million of the $4.3 million and
$5.8 million payments, respectively, in the form of debtor-in-possession
loans to Harrah's Jazz. As of July 31, 1996, a subsidiary of the Company had
also made an additional $3.0 million of debtor-in-possession loans to
Harrah's Jazz to fund its other cash requirements. Although the debtor-in-
possession loans are administrative priority claims in the bankruptcy, and
are secured by a first lien on most Harrah's Jazz assets, there can be no
assurance that the loans will be repaid.
-12-
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1996
(UNAUDITED)
Note 8 - Nonconsolidated Affiliates (Continued)
- ----------------------------------------------
The Company's share of the escrowed funds will be released to the City in
monthly increments upon the satisfaction of certain conditions and the balance
will be returned to the Company if the Harrah's Jazz plan of reorganization does
not become effective by December 31, 1996.
The proposed City Agreement has not yet been signed and there is no
assurance it will become effective or that it will not be modified or delayed.
Harrah's Jazz filed a plan of reorganization with the Bankruptcy Court
on April 3, 1996 and an amended plan of reorganization on June 17, 1996
(the Plan). Under the Plan, the assets and business of Harrah's Jazz would
vest in Jazz Casino Corporation, a newly formed corporation (JCC), on the
effective date of the Plan. JCC would complete construction of the
Rivergate Casino. Under the Plan, Harrah's Jazz's existing public debt
would be cancelled, the holders of that debt would receive 37.1% of the
equity in JCC's indirect parent (JCC Holding), 15% of the equity would be
allocated to debtholders who execute releases and an affiliate of the Company
would receive the remaining 47.9% of the equity in JCC Holding, a portion of
which may be assigned to certain partners of Harrah's Jazz, in exchange for
equity investments and other consideration to be provided under the Plan. In
addition, holders of the public debt would receive (i) $187.5 million in
aggregate principal amount of 8% Senior Subordinated Notes of JCC due 2006 with
contingent payments, and (ii) a pro rata share of Senior Subordinated Contingent
Notes of JCC due 2006.
As part of the Plan, Harrah's has proposed to invest an additional
$75 million in the project and deliver a new form of completion guaranty if
a reorganization plan approved by Harrah's is consummated. Harrah's has
also proposed to invest, prior to plan consummation, up to $18.0 million in
the form of debtor-in-possession financing, including the approximately
$9.9 million in financing already advanced and discussed above (such
financing would be repaid or converted into equity (and count toward the
$75 million investment referred to above) upon consummation of a
reorganization plan approved by Harrah's). JCC is also seeking to obtain a
$175 million secured term loan and revolving credit facility to finance
construction of the Rivergate Casino, and Harrah's may be required to guarantee
or provide credit support for this financing.
The Plan also contemplates the opening of a temporary casino in two
phases at the Rivergate Casino site followed by the opening of a permanent
casino at such site. Assuming timely consummation of the Plan, the first
phase of the temporary casino is scheduled to open on or about May 31,
1997. Under the Plan, the Basin Street Casino would not reopen.
On April 19, 1996, the Louisiana State Legislature enacted legislation
which required, among other things, the holding of an election of the
voters
-13-
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1996
(UNAUDITED)
Note 8 - Nonconsolidated Affiliates (Continued)
- ----------------------------------------------
of Orleans Parish in November 1996 purportedly to determine whether to
approve or disapprove gaming at the Rivergate Casino. Although there
purport to be no provisions in the legislation to protect the Harrah's
Jazz Casino Operating Contract against an adverse election outcome, the
Company believes the legislation could be challenged on legal grounds.
As a consequence of this legislative action, it is expected that the
Plan cannot be consummated until, among other things, there is a favorable
election outcome. The present status of the Plan's consummation and the
election outcome is uncertain.
In addition to the matters discussed above, the Plan is subject to
other amendments, and such other amendments may be material. There can be no
assurance that definitive agreements necessary to consummate the Plan, including
agreements with the City and other necessary parties, will be reached or that
the amended Plan will be approved, or, if approved, that the conditions to
consummation of the Plan (including the favorable election outcome) will be met.
Other
- -----
Summarized balance sheet and income statement information of
nonconsolidated gaming affiliates, including Harrah's Jazz, which Harrah's
accounted for using the equity method, as of June 30, 1996 and December 31,
1995, and for the second quarters and six months ended June 30, 1996 and
1995 is included in the following tables. Summarized balance sheet
information as of December 31, 1995, has been updated to reflect adjustments
made by Harrah's Jazz Company in connection with its petition for relief under
Chapter 11 of the U.S. Bankruptcy Code.
June 30, Dec. 31,
1996 1995
(In thousands) -------- --------
Combined Summarized Balance Sheet Information
Current assets $ 67,503 $ 63,216
Land, buildings, and equipment, net 313,397 266,602
Other assets 175,850 169,033
-------- --------
Total assets 556,750 498,851
-------- --------
Current liabilities 117,004 130,816
Long-term debt 476,790 465,386
-------- --------
Total liabilities 593,794 596,202
-------- --------
Net assets $(37,044) $(97,351)
======== ========
-14-
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1996
(UNAUDITED)
Note 8 - Nonconsolidated Affiliates (Continued)
- ----------------------------------------------
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
------- ------- ------- ---------
(In thousands)
Combined Summarized Statements of Operations
Revenues $ 7,838 $ 25,500 $14,633 $ 25,540
======= ======== ======= ========
Operating loss $(4,675) $(25,774) $(7,954) $(33,967)
======= ======== ======= ========
Net loss $(5,843) $(38,395) $(8,967) $(56,336)
======= ======== ======= ========
Harrah's share of nonconsolidated affiliates' combined net operating
results, including Harrah's Jazz operations during the second quarter and
the six months ended June 30, 1995, are reflected in the accompanying
Consolidated Condensed Statements of Income as follows:
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
(In thousands) --------- -------- ------- --------
Pre-interest operating income (loss)
(included in Revenue-other) $ 80 $(9,267) $ 241 $(12,070)
========= ======= ======== ========
Harrah's share of nonconsolidated affiliates' combined interest expense
is reflected as Interest expense from nonconsolidated affiliates in the
accompanying Consolidated Condensed Statements of Income. Harrah's
investments in and advances to nonconsolidated affiliates are reflected in
the accompanying Consolidated Condensed Balance Sheets as follows:
June 30, Dec. 31,
1996 1995
(In thousands) -------- -------
Harrah's investments in and advances to
nonconsolidated affiliates
Accounted for under
the equity method $ 67,422 $22,374
Accounted for at
historical cost - 16,642
Available for sale and
recorded at market value 103,249 32,923
-------- -------
$170,671 $71,939
======== =======
-15-
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1996
(UNAUDITED)
Note 8 - Nonconsolidated Affiliates (Continued)
- ----------------------------------------------
The Company has adjusted the carrying value of investments in equity
securities available for sale to include their unrealized gains in
accordance with the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". A corresponding increase has been recorded in the combination
of Harrah's stockholders' equity and deferred income tax accounts.
Condensed financial information relating to a restaurant affiliate has
not been presented since its operating results and financial position are
not material to Harrah's.
Note 9 - Summarized Financial Information
- -----------------------------------------
Harrah's Operating Company, Inc., (HOC) is a wholly owned subsidiary and the
principal asset of Harrah's. Summarized financial information of HOC as of
June 30, 1996 and December 31, 1995 and for the second quarters and six
months ended June 30, 1996 and 1995, prepared on the same basis as Harrah's,
was as follows:
June 30, Dec. 31,
1996 1995
---------- ----------
(In thousands)
Current assets $ 191,439 $ 185,950
Land, buildings, riverboats
and equipment, net 1,303,496 1,204,890
Other assets 335,357 242,773
---------- ----------
1,830,292 1,633,613
---------- ----------
Current liabilities 193,028 184,454
Long-term debt 810,514 753,705
Other liabilities 106,767 73,216
Minority interests 23,059 23,908
---------- ----------
1,133,368 1,035,283
---------- ----------
Net assets $ 696,924 $ 598,330
========== ==========
-16-
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1996
(UNAUDITED)
Note 9 - Summarized Financial Information (Continued)
- ----------------------------------------------------
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- ------- ------- -------
(In thousands)
Revenues $401,176 $388,910 $784,238 $745,107
======== ======== ======== ========
Operating income $ 68,183 $ 83,166 $140,013 $155,031
======== ======== ======== ========
Income from continuing operations $ 29,471 $ 34,965 $ 60,491 $ 63,299
======== ======== ======== ========
Net income $ 29,471 $ 40,595 $ 60,491 $ 63,335
======== ======== ======== ========
The agreements governing the terms of Harrah's debt contain certain
covenants which, among other things, place limitations on HOC's ability to
pay dividends and make other restricted payments, as defined, to Harrah's.
The amount of HOC's restricted net assets, as defined, computed in
accordance with the most restrictive of these covenants regarding
restricted payments, was approximately $687.8 million at June 30, 1996.
-17-
Item 2. Management's Discussion and Analysis
---------------------------------------------
of Financial Condition and Results of Operations
------------------------------------------------
The following discussion and analysis of Harrah's Entertainment, Inc.'s
(Harrah's or the Company) financial position and operating results for second
quarter and the first six months of 1996 and 1995 complements and updates the
Management's Discussion and Analysis of Financial Position and Results of
Operations (MD&A) presented in Harrah's 1995 Annual Report. The following
information should be read in conjunction with Harrah's 1995 MD&A
disclosure. References to Harrah's or the Company include its consolidated
subsidiaries where the context requires.
Harrah's is one of the world's premier names in casino entertainment,
currently operating casino entertainment facilities in nine states and New
Zealand.
RESULTS OF OPERATIONS
- ---------------------
Overall
- -------
Second Quarter Percentage First Six Months Percentage
(in millions, except --------------- Increase/ ---------------- Increase/
earnings per share) 1996 1995 (Decrease) 1996 1995 (Decrease)
------ ------ ---------- ------ ------ ----------
Revenues $401.2 $389.3 3.1 % $784.3 $745.8 5.2 %
Operating income 69.0 83.8 (17.7)% 141.4 156.2 (9.5)%
Income from continuing
operations 30.0 35.4 (15.3)% 61.4 64.0 (4.1)%
Earnings from discontinued
hotel operations - 11.6 N/A - 21.2 N/A
Net income 30.0 41.0 (26.8)% 61.4 64.1 (4.2)%
Earnings per share
Continuing operations 0.29 0.35 (17.1)% 0.59 0.62 (4.8)%
Discontinued operations - 0.11 N/A - 0.21 N/A
Net income 0.29 0.40 (27.5)% 0.59 0.62 (4.8)%
Operating margin 17.2% 21.5% (4.3)pts 18.0% 20.9% (2.9)pts
The revenue increase during second quarter 1996 as compared with second
quarter 1995 is due primarily to revenue growth within the riverboat
division and to the inclusion in 1995 of Harrah's share of operating losses
for Harrah's Jazz Company, partially offset by lower revenues in
traditional land-based markets. Operating income decreased from second
quarter 1995, and the overall operating margin decreased 4.3 points, as
these higher revenues were offset by the effects of increased competition
in several of the Company's markets, project reorganization costs related
to Harrah's Jazz Company and preopening costs related to new and expanded
properties. These factors also impacted operations for the first six
months of 1996, as the overall operating margin decreased 2.9 points from
the comparable prior year period.
-18-
The following table summarizes operating profit before project write-
downs and reorganization costs, preopening costs and corporate expense for
the twelve month periods ended June 30, 1996, 1995 and 1994 in millions of
dollars and as a percent of the total for each of Harrah's divisions:
Contribution for Twelve Months Ended June 30,
---------------------------------------------
In Millions of Dollars Percent of Total
---------------------- ----------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
Riverboat $168 $142 $ 95 48% 43% 33%
Atlantic City 80 83 68 23 25 23
Southern Nevada 74 74 77 21 23 26
Northern Nevada 61 73 76 17 22 26
Indian/Limited Stakes 5 6 1 1 2 -
New Orleans (16) (16) (5) (4) (5) (2)
Development costs (13) (23) (13) (4) (7) (4)
Other (7) (10) (6) (2) (3) (2)
---- ---- ---- --- --- ---
Total $352 $329 $293 100% 100% 100%
==== ==== ==== === === ===
Riverboat Division
- ------------------
Second Quarter Percentage Six Months Ended Percentage
-------------- Increase/ ---------------- Increase/
(in millions) 1996 1995 (Decrease) 1996 1995 (Decrease)
------ ------ ---------- ------ ------ ----------
Casino revenues $157.9 $136.7 15.5 % $303.2 $264.5 14.6 %
Total revenues 165.8 146.4 13.3 % 317.9 284.2 11.9 %
Operating profit 40.2 44.2 (9.1)% 81.2 85.1 (4.6)%
Operating margin 24.2% 30.2% (6.0)pts 25.5% 29.9% (4.4)pts
Revenue growth for second quarter and the six months ended June 30,
1996 came from the addition of Harrah's Tunica Mardi Gras casino, which
opened in April, and strong performance at Harrah's Shreveport. Operating
profit and margins decreased for both periods compared to the 1995 periods
due primarily to intense competition in North Kansas City and Tunica. In
North Kansas City, though revenues remain strong, competitive adjustments,
including the decision to eliminate admission charges, have negatively
impacted operating profits and margins. In Tunica, a major new competitor
opened in June 1996 and several existing participants, including Harrah's,
have expanded their offerings in an effort to capture a greater market
share. These efforts have included aggressive marketing programs which
have increased operating costs and reduced operating margins at both
Harrah's Tunica facilities.
-19-
Despite the Division's lower operating margins in 1996, the overall
operating margin for the Riverboat Division generally remains high compared
to other divisions due to some of the operational differences between a
riverboat facility and a conventional land-based property and lesser levels
of competition in some of the riverboat markets.
Atlantic City
- -------------
Second Quarter Percentage Six Months Ended Percentage
-------------- Increase/ ---------------- Increase/
(in millions) 1996 1995 (Decrease) 1996 1995 (Decrease)
----- ----- ---------- ------ ------ ----------
Casino revenues $74.4 $78.1 (4.7)% $147.1 $149.9 (1.9)%
Total revenues 81.0 84.7 (4.4)% 159.5 162.0 (1.5)%
Operating profit 17.7 22.0 (19.6)% 32.4 37.9 (14.5)%
Operating margin 21.9% 26.0% (4.1)pts 20.3% 23.4% (3.1)pts
Casino revenues for the second quarter and six months ended June 30,
1996 decreased from the prior year periods due to lower overall win
percentages, despite higher gaming volume in both periods. An increase in
nongaming revenues for both 1996 periods partially offset the declines in
casino revenue. In the past several months, competitors in Atlantic City
have opened both additional casino space and hotel rooms and supported that
new supply with increased promotions and marketing, thereby increasing the
level of competition and causing a decline in Harrah's casino revenues and
operating profit for both the second quarter and the six months ended June
30, 1996. On June 28, Harrah's Atlantic City completed an expansion of its
casino, adding 500 slot machines in 13,500 square feet of new gaming space.
To support the opening of this expansion and in response to the competitive
market conditions, Harrah's is increasing its spending on direct marketing.
Southern Nevada
- ---------------
Second Quarter Percentage Six Months Ended Percentage
-------------- Increase/ ---------------- Increase/
(in millions) 1996 1995 (Decrease) 1996 1995 (Decrease)
----- ----- ---------- ------ ------ ----------
Casino revenues $48.1 $49.6 (3.0)% $ 98.4 $ 99.2 (0.8)%
Total revenues 75.1 76.9 (2.3)% 150.7 149.2 1.0 %
Operating profit 18.9 19.4 (2.6)% 38.4 37.4 2.7 %
Operating margin 25.2% 25.2% - 25.5% 25.1% 0.4 pts
Casino revenues and total revenues decreased in second quarter 1996 due
primarily to a decline in gaming volume at Laughlin. Total revenues
increased slightly for the 1996 six month period due to higher nongaming
revenues at both properties and strong table games performance in Las
Vegas. Second quarter operating profit decreased in 1996 due to a
-20-
lower gaming margin in Laughlin, but increased for the six month period due
to higher nongaming margins, particularly lodging. The improved nongaming
margins also resulted in higher overall margins for the six month period.
Northern Nevada
- ---------------
Second Quarter Percentage Six Months Ended Percentage
-------------- Increase/ ---------------- Increase/
(in millions) 1996 1995 (Decrease) 1996 1995 (Decrease)
----- ----- ---------- ------ ------ ----------
Casino revenues $55.1 $64.0 (13.9)% $108.0 $113.4 (4.8)%
Total revenues 71.9 81.5 (11.8)% 142.3 146.5 (2.9)%
Operating profit 12.5 20.5 (39.0)% 22.9 28.2 (18.8)%
Operating margin 17.4% 25.2% (7.8)pts 16.1% 19.2% (3.1)pts
Casino revenues decreased in second quarter 1996 from second quarter
1995 due primarily to a decline in gaming volume at Harrah's Reno, where a
competitor opened a major new property in July 1995. Also contributing to
the second quarter decline were lower win percentages at Harrah's Lake
Tahoe. For the six month period, both casino and total revenues decreased
in 1996 due primarily to the lower casino revenue at Harrah's Reno. These
lower casino revenues, combined with higher complimentary costs and
overhead costs at both properties, led to declines in the Division's
operating profit and margin for both 1996 periods.
Harrah's New Orleans
- --------------------
Operating income for second quarter and the six months ended June 30,
1995 included losses of $9.9 million and $12.7 million, respectively,
representing Harrah's subsidiary's pro rata share of pre-interest losses
incurred by Harrah's Jazz Company (Harrah's Jazz), the partnership which
holds the right to develop the sole land-based casino in Orleans Parish,
Louisiana. No equity pick-up was included for the 1996 periods for
Harrah's subsidiary's interest in Harrah's Jazz as the book value of this
investment had been reduced to zero in fourth quarter 1995. (See Other
Factors Affecting Income per Share and Harrah's Jazz Company sections for
further discussion.)
Other
- -----
Other revenues include management fees from Harrah's-managed casino
entertainment facilities. Since second quarter 1995, Harrah's has opened
two additional managed casino facilities, Harrah's Sky City in Auckland,
New Zealand, and Harrah's Skagit Valley near Seattle, Washington.
Management fee income increased for the second quarter and six months ended
June 30, 1996 over the respective prior year periods, due primarily to the
addition of New Zealand management fees; the increase was partially offset
-21-
by the loss of New Orleans' management fees, which were included in 1995
revenues. Operating profit derived from the Company's managed properties
has declined from prior year levels, however, due to nonrecurring current
year costs related to Harrah's partial ownership and management of two
Colorado casinos.
Development costs for the second quarter and six months ended June 30,
1996 declined from 1995 levels, due to lower levels of development
activity.
Other Factors Affecting Income Per Share
- ----------------------------------------
Second Quarter Percentage First Six Months Percentage
(Income)/Expense --------------- Increase/ ---------------- Increase/
(in millions) 1996 1995 (Decrease) 1996 1995 (Decrease)
----- ------ ---------- ----- ----- ----------
Preopening costs $ 4.8 $ - N/M $ 5.0 $ - N/M
Corporate expense 8.4 8.8 (4.6)% 15.7 14.2 10.6 %
Project reorganization costs 6.1 - N/M 8.5 - N/M
Interest expense, net 17.0 18.7 (9.1)% 33.6 37.0 (9.2)%
Interest expense, net, from
nonconsolidated affiliates - 4.9 N/M - 8.6 N/M
Other income (0.8) (0.8) - (1.4) (2.8) (50.0)%
Effective tax rate 38.7% 38.1% 0.6 pts 38.3% 38.5% (0.2)pts
Minority interests $ 2.4 $ 2.4 - $ 6.0 $ 5.8 3.5 %
Discontinued operations
Hotel earnings, net of
income taxes - (11.6) N/M - (21.2) N/M
Spin-off transaction costs,
net of tax - 6.0 N/M - 21.2 N/M
Preopening costs incurred in connection with the opening of Harrah's
Tunica Mardi Gras were charged to expense during second quarter 1996.
Preopening costs related to the North Kansas City casino expansion project
were expensed as incurred during the first six months of 1996 (see Capital
Spending and Development). Corporate expense decreased in second quarter
1996 over second quarter 1995, but increased for the 1996 six month period,
due primarily to the timing of expenses. Project reorganization costs
incurred during the 1996 periods represent Harrah's costs associated with
the development of a reorganization plan, including legal fees, for the New
Orleans casino (see Harrah's Jazz Company section).
Interest expense decreased in both second quarter 1996 and the six
month period ended June 30, 1996 from the comparable prior year periods as
a result of decreased borrowing costs associated with Harrah's variable
rate debt (see Debt and Liquidity) and higher levels of capitalized
interest costs. 1995 interest expense from nonconsolidated affiliates
reflected Harrah's pro rata share of interest expense from the Harrah's Jazz
partnership. No comparable amount is recorded in the current year due to
the fourth quarter 1995 write-down of the book value of this investment to
zero. (See Harrah's Jazz Company section.)
-22-
Other income in second quarter 1996 remained fairly consistent with
second quarter 1995, but decreased for the six month period compared with
1995, due primarily to the inclusion in the prior year's results of a
$1.6 million gain on the sale of nonoperating property.
The effective tax rates for both periods are higher than the federal
statutory rate due to state income taxes. Minority interests reflect joint
venture partners' shares of income at joint venture riverboat casinos and
remained consistent for all periods presented.
As a result of the June 30, 1995 spin-off of the Company's hotel
operations (the PHC Spin-off), the operating results of the hotel business
prior to July 1, 1995 have been segregated and reported as discontinued
operations in the accompanying Consolidated Condensed Statements of Income.
Prior year operating results include the earnings of discontinued
operations, as well as a charge of $21.2 million, or $0.21 per share, net
of tax, representing the costs to complete the PHC Spin-off transaction.
HARRAH'S JAZZ COMPANY
- ---------------------
A Harrah's subsidiary owns an approximate 47% interest in Harrah's Jazz
Company (Harrah's Jazz), a partnership formed for purposes of developing,
owning and operating the exclusive land-based casino entertainment facility
in New Orleans, Louisiana, on the site of the former Rivergate Convention
Center (the Rivergate). On November 22, 1995, Harrah's Jazz and its
wholly-owned subsidiary, Harrah's Jazz Finance Corp., filed petitions for
relief under Chapter 11 of the Bankruptcy Code. Prior to the filing,
Harrah's Jazz was operating a temporary casino in the New Orleans,
Louisiana Municipal Auditorium (the Basin Street Casino) and constructing a
new permanent casino facility on the Rivergate site (the Rivergate Casino).
Harrah's Jazz ceased operation of the Basin Street Casino and construction
of the Rivergate Casino on November 22, 1995 prior to the bankruptcy
filings.
In August 1996, Harrah's Jazz negotiated a proposed agreement (the proposed
City Agreement) with the City of New Orleans (the City) and the Rivergate
Development Corporation which would provide for amendments to the lease
agreement and related documentation between Harrah's Jazz and the City.
The proposed City Agreement contemplates the completion of definitive lease
documentation and the receipt of all requisite City approvals by October 1996.
Under the proposed City Agreement (and a prior agreement with the City),
Harrah's Jazz paid approximately $4.3 million to the City and made payments
into escrow of approximately $5.8 million. A subsidiary of the Company
funded $2.5 million and approximately $4.4 million of the $4.3 million and
$5.8 million payments, respectively, in the form of debtor-in-possession
loans to Harrah's Jazz. As of July 31, 1996, a subsidiary of the Company had
also made an
-23-
additional $3.0 million of debtor-in-possession loans to Harrah's Jazz to
fund its other cash requirements. Although the debtor-in-possession loans
are administrative priority claims in the bankruptcy, and are secured by a
first lien on most Harrah's Jazz assets, there can be no assurance that the
loans will be repaid.
The Company's share of the escrowed funds will be released to the City in
monthly increments upon the satisfaction of certain conditions and the balance
will be returned to the Company if the Harrah's Jazz plan of reorganization
does not become effective by December 31, 1996.
The proposed City Agreement has not yet been signed and there is no
assurance it will become effective or that it will not be modified or delayed.
Harrah's Jazz filed a plan of reorganization with the Bankruptcy Court
on April 3, 1996 and an amended plan of reorganization on June 17, 1996
(the Plan). Under the Plan, the assets and business of Harrah's Jazz would
vest in Jazz Casino Corporation, a newly formed corporation (JCC), on the
effective date of the Plan. JCC would complete construction of the
Rivergate Casino. Under the Plan, Harrah's Jazz's existing public debt
would be cancelled, the holders of that debt would receive 37.1% of the
equity in JCC's indirect parent (JCC Holding), 15% of the equity would be
allocated to debtholders who execute releases and an affiliate of the Company
would receive the remaining 47.9% of the equity in JCC Holding, a portion of
which may be assigned to certain partners of Harrah's Jazz, in exchange for
equity investments and other consideration to be provided under the Plan. In
addition, holders of the public debt would receive (i) $187.5 million in
aggregate principal amount of 8% Senior Subordinated Notes of JCC due 2006 with
contingent payments, and (ii) a pro rata share of Senior Subordinated
Contingent Notes of JCC due 2006.
As part of the Plan, Harrah's has proposed to invest an additional
$75 million in the project and deliver a new form of completion guaranty if
a reorganization plan approved by Harrah's is consummated. Harrah's has also
proposed to invest, prior to plan consummation, up to $18.0 million in the
form of debtor-in-possession financing, including the approximately
$9.9 million in financing already advanced and discussed above (such financing
would be repaid or converted into equity (and count toward the $75 million
investment referred to above) upon consummation of a reorganization plan
approved by Harrah's). JCC is also seeking to obtain a $175 million secured
term loan and revolving credit facility to finance construction of the Rivergate
Casino, and Harrah's may be required to guarantee or provide credit support for
this financing.
The Plan also contemplates the opening of a temporary casino in two
phases at the Rivergate Casino site followed by the opening of a permanent
casino at such site. Assuming timely consummation of the Plan, the first
phase of the temporary casino is scheduled to open on or about May 31,
1997. Under the Plan, the Basin Street Casino would not reopen.
-24-
On April 19, 1996, the Louisiana State Legislature enacted legislation
which required, among other things, the holding of an election of the
voters of Orleans Parish in November 1996 purportedly to determine whether
to approve or disapprove gaming at the Rivergate Casino. Although there
purport to be no provisions in the legislation to protect the Harrah's
Jazz Casino Operating Contract against an adverse election outcome, the
Company believes the legislation could be challenged on legal grounds.
As a consequence of this legislative action, it is expected that the
Plan cannot be consummated until, among other things, there is a favorable
election outcome. The present status of the Plan's consummation and the
election outcome is uncertain.
In addition to the matters discussed above, the Plan is subject to
other amendments, and such other amendments may be material. There can be
no assurance that definitive agreements necessary to consummate the Plan,
including agreements with the City and other necessary parties, will be
reached or that the amended Plan will be approved, or, if approved,
that the conditions to consummation of the Plan (including the favorable
election outcome) will be met. Additionally, ongoing litigation costs
related to the Harrah's Jazz bankruptcy, which could be significant, will
have a corresponding impact on Harrah's future earnings and cash flows.
CAPITAL SPENDING AND DEVELOPMENT
- --------------------------------
Existing Land-Based Properties
- ------------------------------
Harrah's recently announced revised development plans for major
expansions at its Las Vegas and Atlantic City casino properties. The
revised plans complement projects recently completed or currently underway
at both properties to add an additional hotel tower and more casino space,
with the current status of projects approved by regulatory authorities as
follows:
Costs Projected
Estimated Incurred Additional Opening Dates
Project at June Casino Additional ------------------------
Cost 30,1996 Square Hotel Casino Hotel
Location (millions) (millions) Feet Rooms Expansion Addition
- -------- -------- -------- ---------- ---------- --------- -------------
Las Vegas $200.0 $18.2 27,000 976 Oct 96 Oct 97-Apr 98
Atlantic City 80.7 17.4 13,500 416 Open Jul 97
The above table reflects $50 million in additional approved spending at
Harrah's Las Vegas, which increased the scope of Harrah's previously
announced expansion project. The project includes not only the additional
casino space and guest rooms reflected above, but significant additions and
improvements to nongaming amenities. In addition to this expansion of its
current Las Vegas property, Harrah's has also announced its intention to
construct or acquire a second Las Vegas casino property.
-25-
In Atlantic City, Harrah's plans to invest an additional $325 million
in its current property, pending appropriate regulatory approvals and
adequate resolution of road and access improvements that have been the
subject of discussions between the state, city and developers. This
investment would position Harrah's Atlantic City as one of the largest
casino resorts in that market. The proposed project, which is in addition
to the $80.7 million project reflected above, includes an additional 1,500
guest rooms and 30,000 square feet of casino space, as well as significant
enhancements in convention facilities, restaurant offerings, parking
facilities and other nongaming amenities. As noted in the above table, the
current casino expansion at Harrah's Atlantic City was completed on June
28, 1996, adding 13,500 square feet of gaming space and 500 slot machines
to the property. Scheduled to open in the fall are several nongaming
amenities, including a new marine-themed buffet restaurant.
Riverboat Casino Development
- ----------------------------
Construction continues on the joint venture riverboat casino
entertainment complex in Maryland Heights, Missouri, a suburb of St. Louis,
which is expected to open during first quarter 1997, subject to receipt of
all regulatory approvals. The facility will include four riverboat
casinos, two of which will be owned and operated by Harrah's, and jointly-
owned shoreside facilities, including a 291-room Harrah's-managed hotel and
an entertainment mall. Harrah's investment in the Maryland Heights
development project is expected to total $175 million, of which
approximately $86 million had been invested at June 30, 1996, including
approximately $58 million in contributions to the joint venture.
On April 8, 1996, Harrah's opened its Tunica Mardi Gras casino
entertainment facility, the Company's second casino facility in Tunica,
Mississippi, featuring 1,189 slot machines and 64 table games within 50,000
square feet of casino space. In June 1996, the Company opened a 200-room
hotel which is adjacent to the casino. Harrah's continues to operate its
original Harrah's Tunica property, which is operated in conjunction with
Harrah's Mardi Gras using certain common management elements.
On May 15, 1996, Harrah's opened a second riverboat casino at its North
Kansas City property, which added approximately 30,000 square feet of
gaming space and 80% more gaming positions. The $78 million expansion
project also includes the addition of a 1,060-car parking garage, which
opened in March 1996, a 200-room hotel, scheduled for completion in late
1996, and other shoreside improvements. At June 30, 1996, approximately
$40 million had been incurred on the project.
-26-
Harrah's recently announced plans to spend approximately
$95 million on expansion projects in Shreveport and Joliet. In Shreveport,
Harrah's has proposed a $50 million expansion to include a 400-room hotel
as well as additional parking and restaurant and meeting facilities.
Planning and design work for this project is underway and, subject to
reaching agreement with the City of Shreveport, construction is expected to
begin in late 1996 assuming a successful November election on riverboat
casinos in that market. In Joliet, Harrah's expects to spend $45 million,
subject to regulatory approval, to add a 300-room hotel, new restaurants
and meeting facilities. Planning for this project is nearing completion
and completion of construction is targeted for fourth quarter 1997.
Indian Lands
- ------------
Harrah's has received approval from the National Indian Gaming
Commission (NIGC) of development and management agreements with the Eastern
Band of Cherokees for a casino development at Cherokee, North Carolina.
The groundbreaking for the $82 million facility took place on July 30, 1996,
and the facility is expected to open during third quarter 1997. Though
Harrah's does not expect to fund this development, it has committed to
guarantee the related bank financing, which is expected to close during
third quarter 1996.
Harrah's is awaiting NIGC approval of development and management
agreements with the Prairie Band of Potawatomi Indians for a development
near Topeka, Kansas. The Prairie Band's current plans call for the
renovation of its current bingo hall as a temporary casino in fourth
quarter 1996. Harrah's has committed to loan the tribe $1 million for this
purpose. Current plans also call for the construction of a $37 million
permanent casino. This facility, which is expected to be completed by
third quarter 1997, assuming NIGC approval is timely received, will be
managed by a Harrah's subsidiary and financed by loans which Harrah's will
guarantee.
Harrah's has also signed definitive development and management
agreements with the Pokagon Band of Potawatomi Indians for future casino
developments in Michigan and Indiana and has previously announced
agreements with other Indian tribes. These proposed developments are in
various stages of negotiation and are subject to certain conditions,
including approval from appropriate government agencies. The Michigan
legislature recently declined to concur with the Governor's execution of
the compact for a Michigan casino development by the Pokagon Band, but
efforts to gain alternative approvals continue. Upon the receipt of
necessary approvals, Harrah's would likely guarantee the related bank
financing for the projects, which could be significant.
-27-
For all existing guarantees of Indian debt, Harrah's has obtained a
first lien on the personal property (tangible and intangible) of the casino
enterprise. There can be no assurance, however, the value of such property
would satisfy Harrah's obligations in the event these guarantees were
enforced. Additionally, Harrah's has received limited waivers from the
Indian tribes of their sovereign immunity to allow Harrah's to pursue its
rights under the contracts between the parties and to enforce collection
efforts as to any assets in which a security interest is taken.
International
- -------------
Construction continues on certain nongaming amenities at Harrah's Sky
City, the Company's first casino facility outside the United States, which
opened in February 1996 in Auckland, New Zealand. The facility, containing
45,000 square feet of casino space, 1,048 slot machines and 97 table games,
is owned by a corporation in which Harrah's owns a 12.5% equity interest,
and is managed by Harrah's for a fee. During second quarter 1996, a 344-
room Harrah's hotel was completed, and construction continues on a 700-seat
theater, expected to open in third quarter 1996, and a 1,066-foot sky
tower, expected to open by mid-year 1997.
Overall
- -------
In addition to the specific projects discussed above, the Company
continues to perform on-going refurbishment and maintenance at its existing
casino entertainment facilities in order to maintain Harrah's quality
standards. Harrah's also continues to pursue casino entertainment
development opportunities in possible jurisdictions across the United
States and in foreign jurisdictions. Until necessary approvals to proceed
with development of a project are obtained from the relevant regulatory
bodies, the costs of pursuing casino entertainment projects are expensed as
incurred. Construction-related costs incurred after the receipt of
necessary approvals are capitalized and depreciated over the estimated
useful life of the resulting asset. Preopening costs incurred during the
construction period are deferred and expensed at the respective property's
opening.
A number of these projects, if they go forward, will most likely
require, individually and in the aggregate, significant capital commitments
and, if completed, may result in significant additional revenues. The
commitment of capital, the timing of completion and the commencement of
operations of casino entertainment development projects are contingent
upon, among other things, negotiation of final agreements and receipt of
approvals from the appropriate political and regulatory bodies. Cash
needed to finance projects currently under development as well as
additional projects being pursued by Harrah's will be made
-28-
available from operating cash flows, the Bank Facility (see Debt and
Liquidity section), Harrah's existing shelf registration (see Debt and
Liquidity section), joint venture partners, specific project financing,
guarantees by Harrah's of third party debt and, if necessary, additional
Harrah's debt and/or equity offerings. Harrah's capital spending for the
six months ended June 30, 1996 totalled approximately $185 million.
Estimated total 1996 capital expenditures are $425 million to $475 million,
including the projects discussed in this Capital Spending and Development
section, refurbishment of existing facilities and other projects.
DEBT AND LIQUIDITY
- ------------------
Harrah's bank credit facility consists of a $600 million reducing
revolving and letter of credit facility maturing in 2000 and a separate
$150 million revolving credit facility which is renewable annually, at the
lenders' option, through 2000 (collectively, the Facility). Scheduled
reductions of the borrowing capacity under the $600 million facility are as
follows: $50 million, July 1998; $75 million, January 1999;
$75 million, July 1999; $100 million, January 2000; and
$300 million, July 2000. As of June 30, 1996, $404.0 million in borrowings
were outstanding under the Facility, with an additional $26.5 million
committed to back letters of credit, resulting in $319.5 million of
available Facility capacity as of June 30, 1996.
Prior to the PHC Spin-off, Harrah's corporate debt was not specifically
related to either its casino entertainment or hotel segment. However,
corporate debt service requirements were met using cash flows provided by
both segments. Therefore, for all periods prior to the PHC Spin-off, a
portion of the Company's interest expense was allocated to discontinued
hotel operations based on the percentage of Harrah's existing corporate
debt which was expected to be retired using proceeds from the new PHC bank
facility. Interest expense of $5.5 million and $10.5 million for the
second quarter and six months ended June 30, 1995, was allocated to
discontinued hotel operations.
Interest Rate Agreements
- ------------------------
To manage the relative mix of its debt between fixed and variable rate
instruments, Harrah's enters into interest rate swap agreements to modify
the interest characteristics of its outstanding debt without an exchange of
the underlying principal
-29-
amount. As of June 30, 1996, Harrah's was a party to the following
interest rate swap agreements on certain fixed rate debt:
Effective Next Semi-
Swap Rate at Annual Rate
Associated Rate June 30, Adjustment
Debt (LIBOR+) 1996 Date Swap Maturity
- -------------- ------ --------- ----------- -------------
10 7/8% Notes
$200 million 4.73% 10.45% October 15 October 1997
8 3/4% Notes
$50 million 3.42% 9.14% November 15 May 1998
$50 million 3.22% 8.72% July 15 July 1998
In accordance with the terms of the interest rate swap agreements, the
effective interest rate on $50 million of the 8 3/4% Notes was adjusted on
July 15, 1996, to 9.25%.
Harrah's maintains seven additional interest rate swap agreements which
effectively convert variable rate debt to a fixed rate. The following
table summarizes the terms of these swap agreements, all of which reset on
a quarterly basis, as of June 30, 1996:
Swap Rate
Received
Swap Rate (Variable) at Swap
Notional Amount Paid (Fixed) June 30, 1996 Maturity
- --------------- ----------- ------------- ------------
$50 million 7.910% 5.481% January 1998
$50 million 6.985% 5.563% March 2000
$50 million 6.951% 5.563% March 2000
$50 million 6.945% 5.563% March 2000
$50 million 6.651% 5.500% May 2000
$50 million 5.788% 5.535% June 2000
$50 million 5.785% 5.535% June 2000
The differences to be paid or received by Harrah's under the terms of
its interest rate swap agreements are accrued as interest rates change and
recognized as an adjustment to interest expense for the related debt.
Changes in the variable interest rates to be paid or received by Harrah's
pursuant to the terms of its interest rate agreements will have a
corresponding effect on its future cash flows. These agreements contain a
credit risk that the counterparties may be unable to meet the terms of the
agreements. Harrah's minimizes that risk by evaluating the
creditworthiness of its counterparties, which are limited to major banks
and financial institutions, and does not anticipate nonperformance by the
counterparties.
As part of a transaction whereby Harrah's effectively secured an option
to a site for a potential casino, Harrah's has guaranteed a third party's
$24.7 million variable rate bank loan. Harrah's also entered into an
interest rate swap agreement in
-30-
which Harrah's receives a fixed interest rate of 7% from the third party
and pays the variable interest rate of the subject debt (LIBOR plus 1% at
June 30, 1996) to the bank. The interest rate swap is marked to market by
Harrah's, with the adjustment recorded in interest expense. The market
value of the swap was a positive $0.1 million at June 30, 1996. Harrah's
swap agreement expires December 1, 1996, and is also subject to earlier
termination upon the occurrence of certain events. The underlying guaranty
contains an element of risk that the borrower may be unable to retire the
loan when it matures in December 1996. If that occurs, the Company could
become responsible for repayment of at least a portion of the obligation.
Harrah's has reduced this exposure by obtaining a security interest in
certain assets of the third party.
Shelf Registration
- ------------------
To provide for additional financing flexibility, Harrah's, together
with its wholly-owned subsidiary Harrah's Operating Company, Inc. (HOC),
has registered up to $200 million of Harrah's common stock or HOC preferred
stock or debt securities pursuant to a shelf registration declared
effective by the Securities and Exchange Commission. The terms and
conditions of the HOC preferred stock or debt securities, which will be
unconditionally guaranteed by Harrah's, will be determined by market
conditions at the time of issuance. The shelf registration is available
until October 1997.
INCOME TAX MATTERS
- ------------------
In connection with the PHC Spin-off, Harrah's entered into a tax
sharing agreement with PHC wherein each company is obligated for those
taxes associated with their respective businesses. Additionally, Harrah's
is obligated for all taxes of Promus for periods prior to the PHC Spin-off
date which are not specifically related to PHC operations and/or PHC hotel
locations. Harrah's obligations under this agreement are not expected to
have a material adverse effect on its consolidated financial position or
results of operations.
EFFECTS OF CURRENT ECONOMIC AND POLITICAL CONDITIONS
- ----------------------------------------------------
The casino entertainment industry has experienced widespread expansion
in new jurisdictions over the past several years as governments seeking
additional tax revenues and employment have legalized casino gaming.
Growth in the casino industry has also been furthered by the Indian Gaming
Regulatory Act of 1988. Although a number of states are considering
legislation in additional jurisdictions, the rapid growth which existed
during the early 1990's has slowed and future new market potential is
difficult to predict.
-31-
Of those new markets which have opened to the gaming industry, certain
jurisdictions have restricted market entry, which limits capacity and
competition within those markets. Other jurisdictions have no limits on
market entry, other than restrictions on locations, which can impact
operating performance and cash flows. One such market is Tunica,
Mississippi, where Harrah's currently operates two casino entertainment
facilities. In Tunica, a major new development opened in June 1996 and the
ultimate impact that this market entrant will have on Harrah's properties
remains uncertain at this time. In Indiana, several new riverboat casinos
opened in June and the extent of their impact on operations at Harrah's
Joliet is also unknown at this time. In other riverboat markets, new
projects have also been proposed which could, if completed, increase the
levels of competition in those markets.
In addition to growth in new markets, significant development has
occurred in recent years in the traditional gaming markets of Nevada and
New Jersey, resulting in increased competition in these markets. Several
large properties have opened in Las Vegas in recent years, other large
projects are both planned and under development and several existing
properties, including Harrah's Las Vegas, have begun significant expansion
projects. In July 1995, a major new casino property opened in Reno,
Nevada, representing the first major entry to that market in years. New
developments and expansions, including the major expansion plans discussed
above at Harrah's Atlantic City, are also either planned or underway in
Atlantic City, New Jersey. Over the last several years, the Laughlin,
Nevada market has been impacted by increasing competition from markets in
and around Las Vegas and by neighboring Indian properties. Though the
traditional casino markets saw little overall impact from the recent spread
of gaming to new riverboat markets, competition within traditional markets
has become more intense in recent months. As opportunities in new markets
have become more limited, casino operators, including Harrah's, are
investing significant amounts in traditional markets in efforts to gain
market share. As a result, increased competition could follow and have a
negative effect on the operations and cash flows of all properties,
including Harrah's, operating in these markets.
The casino industry's market focus has also undergone a transformation
over the past several years as a result of the spread of gaming. Whereas
traditional markets were limited, drawing primarily long-distance
travelers, the newer casino properties are geographically dispersed,
resulting in casino entertainment being within a reasonable driving
distance for many Americans. Harrah's has participated in this industry
transformation, developing casinos in many new markets. As a result,
Harrah's is an extremely diverse gaming company, both geographically and
categorically, with properties in nine states and New Zealand as of June
30, 1996, representing a mix of traditional land-based, riverboat, Indian
and limited stakes facilities.
-32-
Harrah's is not able to determine the long-term impact, whether
favorable or unfavorable, that these events will have on its current or
future markets. However, management believes that the diversity of its
operations, its multi-market customer base and its continuing efforts to
establish Harrah's as a premier brand name have well-positioned Harrah's to
face the challenges present within the industry.
In early 1996, the U.S. Supreme Court ruled in the Seminole Tribe of
Florida vs. Florida et al., that an Indian tribe cannot sue a state in
federal court if that state, in the opinion of the tribe, fails to
negotiate a compact in good faith. While this ruling does not affect
Harrah's management of those casinos located on Indian lands already in
operation or those in development where compacts with states have already
been issued, there is substantial uncertainty as to the impact of the
decision on the timing and nature of future Class III gaming compacts.
In April 1996, the Louisiana State Legislature approved a local option
bill which purports to give voters in each Parish the right to decide
during the November 1996 general elections what forms of gaming they want
to continue in their Parish. Under the legislation, existing riverboat
licensees in Parishes which do not approve continuing that form of gaming
under the local option measure can continue their operations until the
existing licenses expire. At that point, subject to required regulatory
approvals and possibly another election in the Parish if the voters approve
another piece of legislation in September, licensees potentially could move
their operations to a Parish which does allow that form of gaming under the
local option measure. As discussed above, there purports to be no similar
provision in the legislation for the continuance of any operations of the
New Orleans land-based casino. It is not possible at this time to
determine the ultimate impact of this legislation on Harrah's Jazz's
efforts to develop a successful plan of reorganization or on the Harrah's
Shreveport riverboat casino operations.
The gaming industry represents a significant source of tax revenues to
the various jurisdictions in which casinos operate. From time to time,
various state and federal legislators and officials have proposed changes
in tax law, or in the administration of such law, which would affect the
gaming industry. It is not possible to determine with certainty the scope
or likelihood of possible changes in tax law or in the administration of
such law. If adopted, such changes could have a material adverse effect on
Harrah's financial results.
INTERCOMPANY DIVIDEND RESTRICTION
- ---------------------------------
Agreements governing the terms of its debt require Harrah's to abide by
covenants which, among other things, limit HOC's ability to pay dividends
and make other restricted payments, as defined, to Harrah's. The amount of
HOC's restricted net assets, as
-33-
defined, computed in accordance with the most restrictive of these
covenants regarding restricted payments, was approximately $687.8 million
at June 30, 1996. Harrah's principal asset is the stock of HOC, a wholly-
owned subsidiary. HOC holds, directly and through subsidiaries, the
principal assets of Harrah's businesses. Given this ownership structure,
these restrictions should not impair Harrah's ability to conduct its
business through its subsidiaries or to pursue its development plans.
PRIVATE SECURITIES LITIGATION REFORM ACT
- ----------------------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. Certain information included in this
Form 10-Q and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contains statements that are forward looking, such as statements relating to
plans for future expansion and other business development activities as well as
other capital spending, financing sources, and the effects of regulation
(including gaming and tax regulation) and competition. Such forward looking
statements involve important risks and uncertainties that could significantly
affect anticipated results in the future, and accordingly, actual results may
differ materially from those expressed in any forward looking statements made
by or on behalf of the Company. These risks and uncertainties include, but are
not limited to, those related to construction and development activities,
economic conditions, changes in tax laws, changes in laws or regulations
affecting gaming and factors related to applications for gaming licenses,
changes in competition, and factors affecting leverage and debt service
including sensitivity to fluctuation in interest rates, and other factors
described from time to time in the Company's reports filed with the Securities
and Exchange Commission. Any forward looking statements are made pursuant to
the Private Securities Litigation Reform Act of 1995 and, as such, speak only as
of the date made.
-34-
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
--------------------------
On September 26, 1995, Harrah's New Orleans Investment Company
("HNOIC"), an indirect subsidiary of the Company, filed in the United
States District Court for the Eastern District of Louisiana a suit styled
Harrah's New Orleans Investment Company v. New Orleans Louisiana
Development Corporation, Civil No. 95-3166. At issue in the suit is the
percentage of ownership that New Orleans/Louisiana Development Corporation
("NOLDC") holds in Harrah's Jazz Company ("HJC"), a Louisiana partnership
whose general partners are HNOIC, NOLDC and Grand Palais Casino, Inc. This
declaratory judgment action seeks to confirm that, as of September 26,
1995, NOLDC's percentage interest in the Harrah's Jazz Company partnership
was only 13.73% and, therefore, NOLDC is not a "Material Partner" in HJC.
This case was put on "administrative hold" after the filing by NOLDC of a
Chapter 11 bankruptcy petition on November 21, 1995. Should it be put back
on the active list, HNOIC or the appropriate post-bankruptcy entity would
vigorously prosecute it. At the time the case was put on "administrative
hold," no discovery on the merits had been taken and no answer had been
filed by NOLDC.
On September 28, 1995, NOLDC filed suit against the Company and
various of its corporate affiliates in New Orleans Louisiana Development
Corporation v. Harrah's Entertainment, formerly d/b/a The Promus Companies,
Harrah's New Orleans Investment Company, Harrah's New Orleans Management
Company, Harrah's Jazz Company, and Promus Hotels, formerly d/b/a Embassy
Suites, Inc., Civil No. 95-14653, filed in the Civil District Court for the
Parish of Orleans. The case was subsequently removed by defendants to the
United States District Court for the Eastern District of Louisiana. In
this suit, NOLDC seeks to realign ownership interests in HJC among HNOIC
and NOLDC. NOLDC also seeks an unspecified dollar amount of damages
sufficient to compensate it for the losses it alleges it has suffered as a
result of actions of defendants. NOLDC has indicated that it intends to
seek to remand the suit to the Civil District Court. The case was also put
on "administrative hold" by the District Court Judge as a result of NOLDC's
bankruptcy filing. The Company and other defendants intend to vigorously
defend the action should it be put back on the active case list. At the
time it was put on "administrative hold," no answer had been filed by any
defendant and no discovery had been taken.
Beginning on November 28, 1995, eight separate class action suits were
filed against the Company and various of its corporate affiliates, officers
and directors in the United States District Court for the Eastern District
of Louisiana. They are Ben F. D'Angelo, Trustee for Ben F. D'Angelo
Revocable Trust v. Harrah's Entertainment Corp., Michael D. Rose, Philip G.
Satre and Ron Lenczycki; Max Fenster v. Harrah's Entertainment, Inc.,
Harrah's New Orleans Investment Company, Grand Palais Casino, Inc., Philip
G. Satre, Colin V. Reed, Michael N. Regan, Christopher B. Hemmeter,
Donaldson, Lufkin & Jenrette Securities Corporation, Salomon Brothers,
Inc., and BT Securities
-35-
Corp.; Goldie Rosenbloom v. Harrah's Entertainment Corp., Michael D. Rose,
Philip G. Satre and Ron Lenczycki; Barry Ross v. Harrah's New Orleans
Investment Company, Philip G. Satre, Colin V. Reed, Lawrence L. Fowler,
Michael N. Regan, Cezar M. Froelich, Ulric Haynes, Jr., Wendell Gauthier,
T. George Solomon, Jr., Duplain W. Rhodes, III, Harrah's Entertainment,
Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Salomon Brothers
Inc., and BT Securities Corp.; Louis Silverman v. Harrah's Entertainment,
Inc., Harrah's New Orleans Investment Company, Grand Palais Casino, Inc.,
Philip G. Satre, Colin V. Reed, Michael N. Regan, Christopher B. Hemmeter,
and Donaldson, Lufkin & Jenrette Securities Corporation; Florence Kessler
v. Philip G. Satre, Colin V. Reed, Charles A. Ledsinger, Jr., Michael N.
Regan, Lawrence L. Fowler, Christopher B. Hemmeter, Cezar M. Froelich,
Ulric Haynes, Jr., Wendell H. Gauthier, T. George Solomon, Jr., Duplain W.
Rhodes, III, Donaldson, Lufkin & Jenrette Securities Corporation, Salomon
Brothers Inc., and BT Securities Corporation; Warren Zeiller and Judith
M.R. Zeiller v. Harrah's Entertainment Corp., Michael D. Rose, Philip G.
Satre, and Ron Lenczycki; and Charles Zwerving and Helene Zwerving v.
Harrah's Entertainment Corp., Philip G. Satre, Colin V. Reed, Christopher
B. Hemmeter, and Donaldson, Lufkin & Jenrette Securities Corporation. Per
Court Order of January 26, 1996, the above plaintiffs filed a consolidated
complaint in the action numbered 95-3925 In Re Harrah's Entertainment, Inc.
Securities Litigation. The consolidated complaint alleges that various
misstatements and omissions were made in connection with the sale of
Harrah's Jazz Company 14.25% First Mortgage Notes and thereafter, and seeks
unspecified damages, as well as costs of legal proceedings. A motion to
dismiss has been filed by defendants, discovery has commenced, and
plaintiffs have sought class certification. No rulings have been made on
any of the parties' motions. The Company and the other defendants intend
to vigorously defend the suits.
On December 6, 1995 Centex Landis, the general contractor for the
permanent casino being developed by HJC, filed suit against the Company,
among others, in the Civil District Court for The Parish of Orleans in
Centex Landis Construction Co., Inc. v. Harrah's Entertainment, Inc.
formally d/b/a The Promus Companies, Inc.; and Ronald A. Lenczycki, Civil
No. 95-18101. Defendants removed the case to the United States District
Court for the Eastern District of Louisiana and it was subsequently
transferred to the Bankruptcy Court handling the HJC bankruptcy. A motion
for withdrawal of the Bankruptcy Court reference and for remand had been
filed by Centex Landis and opposed by Harrah's Entertainment, Inc. No
ruling has yet been made. This suit seeks to collect more than $40 million
allegedly owed to Centex Landis by HJC from the Company under guarantee,
fraud, fraudulent advertising and unfair trade practice theories. The
Company and the other defendant intend to vigorously defend the action and
have filed an answer denying all of plaintiff's allegations. No discovery
has been taken in the action.
Russell M. Swody, et al. v. Harrah's New Orleans Management Company
and Harrah's Entertainment, Inc., Civil No. 95-4118, was filed against the
Company on December 13, 1995 in the United States District Court for the
Eastern District of Louisiana, and subsequently amended. Swody is a class
action lawsuit under the Worker Adjustment and Retraining Notification Act
("WARN Act") and seeks damages for alleged failure to timely notify workers
-36-
terminated by Harrah's New Orleans Management Company at the time of the
HJC bankruptcy. Plaintiffs seek unspecified damages, as well as costs of
legal proceedings, for themselves and all members of the class. An answer
has been filed denying all of plaintiffs' allegations. A class has been
certified and the Company and the other defendant intend to vigorously
defend the action.
Swody was consolidated with Susan N. Poirier, Darlene A. Moss, et al.
v. Harrah's Entertainment, Inc., Harrah's New Orleans Management Company,
and Harrah's Operating Company, Civil No. 96-0215, which was filed in the
United States District Court for the Eastern District of Louisiana on
January 17, 1996, and subsequently amended. Poirier seeks not only damages
under the WARN Act, but also under the Employee Retirement Income Security
Act ("ERISA") for the alleged wrongful failure to provide severance to
those terminated. Similar complaints and proofs of claims were filed by
Ms. Poirier in the Bankruptcy Court for the Eastern District of Louisiana
in the HJC, HNOIC and Harrah's Jazz Finance Corp. bankruptcy cases,
Adversary Nos. 96-1015, 96-1014, and 96-1013. The similar complaints were
subsequently dismissed.
On December 29, 1995 in the Civil District Court for The Parish of
Orleans, the City of New Orleans filed suit against the Company and others
in City of New Orleans and Rivergate Development Corporation v. Harrah's
Entertainment, Inc. (f/k/a The Promus Companies, Inc.), Grand Palais
Casino, Inc., Embassy Suites, Inc., First National Bank of Commerce and
Ronald A. Lenczycki, Civil No. 95-19285. This suit seeks to require the
Company, among others, to complete construction of the permanent casino
being developed by HJC under theories of breach of completion guarantee
contract, breach of implied duty of good faith, detrimental reliance,
misrepresentation, and false advertising. Plaintiff seeks unspecified
damages, as well as costs of legal proceedings. Defendants have removed
the suit to the United States District Court for the Eastern District of
Louisiana and it was then transferred to the Bankruptcy Court handling the
HJC bankruptcy. A motion for withdrawal of the Bankruptcy Court reference
and for remand has been filed by the City. No ruling on these motions has
yet been made. The Company and the other defendants have filed an answer
denying all of plaintiffs' allegations and intend to vigorously defend the
action.
Louisiana Economic Development and Gaming Corporation v. Harrah's
Entertainment, Inc. and Harrah's Operating Company, Inc., Civil No. 424328,
was filed on January 23, 1996 in the Nineteenth Judicial Court of the State
of Louisiana, Parish of East Baton Rouge. On February 21, 1996, the
Company and the other defendants removed the case to the Federal District
Court for the Middle District of Louisiana and asked that it be transferred
to the Bankruptcy Court handling the HJC bankruptcy. That motion was
granted and the case has been transferred to the Bankruptcy Court. In this
suit LEDGC seeks to require the Company and Harrah's Operating Company to
complete construction of the permanent casino being developed by HJC under
theories of breach of completion guarantee contract, breach of implied duty
of good faith, detrimental reliance, misrepresentation and, in the
alternative, seeks damages. The Company has filed an answer and
counterclaim against LEDGC. LEDGC has moved to have that counterclaim
dismissed and/or for summary judgment. No ruling has yet been made by the
court. The defendants intend to vigorously defend the action and prosecute
their counterclaim.
-37-
Item 4. Submission of Matters To a Vote of Security Holders
----------------------------------------------------
The Company held its annual stockholders meeting on April 26, 1996.
The following matters were voted upon at the meeting:
1. Election of Class I Directors
-----------------------------
Votes Cast
-------------------------------
Against or
Name of Director Elected For Withheld
------------------------ --- --------
James L. Barksdale 88,856,924 3,747,424
Susan Clark-Johnson 91,956,135 648,213
James B. Farley 91,959,035 645,313
Walter J. Salmon 91,957,678 646,670
Name of Each Other Director Whose Term of
Office as Director Continued After the Meeting
----------------------------------------------
Joe M. Henson
Ralph Horn
Michael D. Rose
Philip G. Satre
Boake A. Sells
Eddie N. Williams
Shirley Young
2. Ratification of Arthur Andersen Against or
& Co. as the Company's independent For Withheld Abstentions
public accountants for the 1996 --- -------- ---------
calendar year. 92,400,065 110,142 94,141
---------------------------------
There were no broker nonvotes with regard to the matters voted upon at the
meeting.
-38-
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------------------------
(a) Exhibits
*EX-4.1 Rights Agreement, dated as of October 5, 1996, between
Harrah's Entertainment, Inc. and The Bank of New York,
which includes the form of Certificate of Designations of
Series A Special Stock of Harrah's Entertainment, Inc. as
Exhibit A, the form of Right Certificate as Exhibit B and the
Summary of Rights to Purchase Special Shares as Exhibit C.
**EX-10.1 Consent dated April 17, 1996 to the Credit Agreement, dated
as of June 9, 1995, among Harrah's Entertainment, Inc.
Harrah's Operating Company, Inc., Marina Associates, various
banks, Bankers Trust Company, The Bank of New York, CIBC,
Inc., Credit Lyonnais, Atlanta Agency, First Interstate Bank
of Nevada, N.A., The Long-Term Credit Bank of Japan,
Limited, New York Branch, NationsBank of Georgia, N.A.,
Societe Generale and The Sumitomo Bank, Limited, New York
Branch, as Agents, and Bankers Trust Company, as
Administrative Agent.
**EX-11 Computation of per share earnings.
**EX-27 Financial Data Schedule
* Incorporated by reference from the Company's Current Report on Form 8-K
filed August 9, 1996, File No. 1-10410.
** Filed herewith
(b) No reports on Form 8-K were filed during the quarter ended June 30,
1996. A report on Form 8-K was filed on August 9, 1996, reporting
the declaration of a dividend of one special stock purchase right (the
"Rights") on each outstanding share of the Company's common stock,
payable to stockholders of record on October 5, 1996.
-39-
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HARRAH'S ENTERTAINMENT, INC.
August 13, 1996 BY: MICHAEL N. REGAN
------------------------------
Michael N. Regan
Vice President and Controller
(Chief Accounting Officer)
-40-
Exhibit Index
-------------
Exhibit No. Description Sequential Page
- ----------- ------------ ------------------
EX-4.1 Rights Agreement, dated as of *
October 5, 1996, between Harrah's
Entertainment, Inc. and The Bank of
New York, which includes the form of
Certificate of Designations of Series
A Special Stock of Harrah's Entertainment,
Inc. as Exhibit A, the form of Right
Certificate as Exhibit B and the
Summary of Rights to Purchase Special
Shares as Exhibit C.
EX-10.1 Consent dated April 17, 1996 42
to the Credit Agreement, dated
as of June 9, 1995, among Harrah's
Entertainment, Inc. Harrah's
Operating Company, Inc.,
Marina Associates, various banks,
Bankers Trust Company, The
Bank of New York, CIBC, Inc.,
Credit Lyonnais, Atlanta Agency,
First Interstate Bank of Nevada,
N.A., The Long-Term Credit Bank of
Japan, Limited, New York Branch,
NationsBank of Georgia, N.A.,
Societe Generale and The Sumitomo
Bank, Limited, New York Branch, as
Agents, and Bankers Trust Company,
as Administrative Agent.
EX-11 Computation of per share earnings. 49
EX-27 Financial Data Schedule.
* Incorporated by reference from the Company's Current Report on Form
8-K filed August 9, 1996, File No. 1-10410.
-41-
Exhibit 10.1
CONSENT
-------
April 17, 1996
Reference is hereby made to the Credit Agreement, dated as of June 9,
1995, among Harrah's Entertainment, Inc. ("Parent"), Harrah's Operating
Company, Inc. (the "Company"), Marina Associates ("Marina"), the lenders
from time to time party thereto (the "Banks"), Bankers Trust Company, The
Bank of New York, CIBC Inc., Credit Lyonnais, Atlanta Agency, First
Interstate Bank of Nevada, N.A., The Long-Term Credit Bank of Japan,
Limited, New York Branch, NationsBank of Georgia, N.A., Societe Generale
and The Sumitomo Bank, Limited, New York Branch, as Agents (the "Agents"),
and Bankers Trust Company, as Administrative Agent (the "Administrative
Agent") (as amended, modified or supplemented from time to time, the "364-
Day Credit Agreement"). Unless otherwise defined herein, capitalized terms
used herein shall have the respective meanings provided in the 364-Day
Credit Agreement.
Pursuant to Section 2.04(a) of the 364-Day Credit Agreement, the
Company has submitted to the Administrative Agent the attached written
request (and accompanied officer's certificate) to extend the Final
Maturity Date of the 364-Day Credit Agreement to June 12, 1997. In
connection therewith, each of the undersigned Banks hereby agrees to extend
its Maturity Date (and the Final Maturity Date) to June 12, 1997.
This Consent may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which
counterparts when executed shall be an original, but all of which shall
together constitute one and the same instrument. A complete set of
counterparts shall be lodged with Parent and the Administrative Agent.
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Consent to be duly executed and delivered.
HARRAH'S ENTERTAINMENT, INC.
By: /s/William S. McCalmont
------------------------------
Title: Vice President & Treasurer
HARRAH'S OPERATING COMPANY, INC.
By: /s/William S. McCalmont
------------------------------
Title: Vice President & Treasurer
-42-
MARINA ASSOCIATES
By: HARRAH'S ATLANTIC CITY, INC.,
a general partner
By: /s/ William S. McCalmont
------------------------------
Title: Assistant Secretary
By: HARRAH'S NEW JERSEY, INC.,
a general partner
By: /s/ William S. McCalmont
------------------------------
Title: Assistant Secretary
BANKERS TRUST COMPANY,
Individually and as
Administrative Agent
and as an Agent
By: /s/ Mary Kay Coyle
------------------------------
Title: Managing Director
THE BANK OF NEW YORK,
Individually and as an
Agent
By: /s/ Gregory L. Batson
------------------------------
Title: Vice President
CIBC INC., Individually and
as an Agent
By: /s/ Paul Chakmak
------------------------------
Title: Director
-43-
CREDIT LYONNAIS, ATLANTA AGENCY,
Individually and as an Agent
By: /s/ David M. Cawrse
------------------------------
Title: Vice President & Manager
CREDIT LYONNAIS CAYMAN ISLAND
BRANCH
By: /s/ David M. Cawrse
------------------------------
Title: Authorized Signature
FIRST INTERSTATE BANK OF
NEVADA, N.A., Individually and
as Agent
By: /s/ Maureen Klippenstein
------------------------------
Title: Vice President
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED, NEW YORK BRANCH,
Individually and as an Agent
By: /s/ John Sullivan
------------------------------
Title: Joint General Manager
NATIONSBANK, N.A. (South),
Individually and as an Agent
By: /s/ Steve Dalton
------------------------------
Title: Vice President
-44-
SOCIETE GENERALE, Individually and
as an Agent
By: /s/ Donald Schubert
------------------------------
Title: Vice President
THE SUMITOMO BANK, LIMITED,
ATLANTA AGENCY, Individually
and as an Agent
By: /s/ Masayuki Fukushima
------------------------------
Title: Joint General Manager
BANK OF AMERICA NATIONAL TRUST
AND SAVING ASSOCIATION
By: /s/ Scott L. Faber
------------------------------
Title: Vice President
THE NIPPON CREDIT BANK, LTD.,
LOS ANGELES AGENCY
By: /s/ Bernardo E. Correa-Henschke
-------------------------------
Title: Vice President &
Senior Manager
THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. Ashby
------------------------------
Title: Senior Manager Loan
Operations
-45-
GIROCREDIT BANK A. G. DER
SPARKASSEN, GRAND CAYMAN
ISLAND BRANCH
By: /s/John Redding
------------------------------
Title:
By: /s/Richard Stone
------------------------------
Title:
THE TOKAI BANK, LIMITED,
NEW YORK BRANCH
By: /s/Stuart M. Schulman
------------------------------
Title: Senior Vice President
THE BOATMEN'S NATIONAL BANK
OF ST. LOUIS
By: /s/David Wilsdorf
------------------------------
Title: Vice President
FIRST AMERICAN NATIONAL BANK
By: /s/Elizabeth H. Vaughn
------------------------------
Title: Senior Vice President
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION
By: /s/James H. Moore, Jr.
------------------------------
Title: Vice President
-46-
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
By: /s/Junya Fujiwara
------------------------------
Title: Senior Vice President and
Deputy General Manager
MIDLANTIC BANK, N.A.
(formerly known as Midlantic
National Bank)
By: /s/Lori A. Osmulski
------------------------------
Title: Banking Officer
THE SANWA BANK, LIMITED,
ATLANTA AGENCY
By: /s/William M. Plough
------------------------------
Title: Vice President
UNITED STATES NATIONAL BANK
OF OREGON
By: /s/Fiza Noordin
------------------------------
Title: Corporate Banking Officer
DEPOSIT GUARANTY NATIONAL BANK
By: /s/Larry C. Ratzlaff
------------------------------
Title: Senior Vice President
THE MITSUBISHI TRUST & BANKING
CORP.
By: /s/Patricia Loret de Mola
------------------------------
Title: Senior Vice President
-47-
WESTDEUTSCHE LANDESBANK
GIROZENTRALE, NEW YORK BRANCH
By: /s/ Salvatore Battinelli
------------------------------
Title: Vice President
By: /s/ Lucie L. Guernsey
------------------------------
Title: Vice President
ABN AMRO BANK N.V., SAN FRANCISO
BRANCH
By: ABN AMRO NORTH AMERICA,
INC., AS AGENT
By: /s/ Jeffrey A. French
------------------------------
Title: Vice President & Director
By: /s/ Bradford H. Leahy
------------------------------
Title: Officer
SUNTRUST BANK, NASHVILLE, N.A.
By: /s/ Anneliese H. Tyler
------------------------------
Title: Vice President
FIRST NATIONAL BANK OF COMMERCE
By: /s/ Stephen M. Valdes
------------------------------
Title: Vice President
FLEET BANK N.A. Formerly
NATWEST BANK N.A.
By: /s/ John T. Harrison
------------------------------
Title: Vice President
-48-
Exhibit 11
HARRAH'S ENTERTAINMENT, INC.
COMPUTATIONS OF PER SHARE EARNINGS
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Income from continuing operations $29,977,000 $35,351,000 $61,387,000 $64,047,000
Discontinued operations
Earnings from hotel operations, net - 11,626,000 - 21,230,000
Spin-off transaction expenses, net - (5,996,000) - (21,194,000)
----------- ----------- ----------- -----------
Net income $29,977,000 $40,981,000 $61,387,000 $64,083,000
=========== =========== =========== ===========
Primary Earnings Per Share
Weighted average number of common
shares outstanding 102,720,947 102,349,378 102,656,047 102,231,919
Common stock equivalents
Additional shares based on
average market price for
period applicable to:
Restricted stock 47,349 77,943 52,981 151,525
Stock options 1,072,222 783,205 886,961 704,075
----------- ----------- ----------- -----------
Average number of primary common
and common equivalent shares
outstanding 103,840,518 103,210,526 103,595,989 103,087,519
=========== =========== =========== ===========
Primary earnings per common and
common equivalent share
Income from continuing operations $ 0.29 $ 0.35 $ 0.59 $ 0.62
Discontinued operations
Earnings from hotel operations, net - 0.11 - 0.21
Spin-off transaction expenses, net - (0.06) - (0.21)
----------- ----------- ----------- -----------
Net income $ 0.29 $ 0.40 $ 0.59 $ 0.62
=========== =========== =========== ===========
Fully Diluted Earnings Per Share
Average number of primary common and
common equivalent shares outstanding 103,840,518 103,210,526 103,595,989 103,087,519
Additional shares based on
period-end price applicable to:
Restricted stock - - - 1,375
Stock options - - - 29,879
----------- ----------- ----------- -----------
Average number of fully diluted
common and common equivalent
shares outstanding 103,840,518 103,210,526 103,595,989 103,118,773
=========== =========== =========== ===========
Fully diluted earnings per common and
common equivalent share
Income from continuing operations $ 0.29 $ 0.35 $ 0.59 $ 0.62
Discontinued operations
Earnings from hotel operations, net - 0.11 - 0.21
Spin-off transaction expenses, net - (0.06) - (0.21)
----------- ----------- ----------- -----------
Net income $ 0.29 $ 0.40 $ 0.59 $ 0.62
=========== =========== =========== ===========
-49-
5
1
6-MOS
DEC-31-1996
JUN-30-1996
93,246
0
53,793
14,213
11,297
192,445
1,854,749
551,253
1,831,334
206,319
810,514
0
0
10,290
675,581
1,831,334
0
784,322
0
614,153
24,213
4,564
33,595
109,157
41,783
61,387
0
0
0
61,387
0.59
0.59
