Caesars Entertainment Corporation
HARRAHS ENTERTAINMENT INC (Form: 10-Q, Received: 11/12/2009 16:53:19)
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2009

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 or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One Caesars Palace Drive

Las Vegas, Nevada

  89109
(Address of principal executive offices)   (Zip Code)

(702) 407-6000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

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   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨      Non-accelerated filer   x      Smaller reporting company   ¨
        (Do not check if a smaller reporting company)     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of November 1, 2009, the Registrant had 10 shares of voting Common Stock and 40,675,314 shares of non-voting Common Stock outstanding.

 

 

 


Table of Contents

HARRAH’S ENTERTAINMENT, INC.

INDEX TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

          Page

PART I.

   FINANCIAL INFORMATION   

Item 1.

   Unaudited Consolidated Condensed Financial Statements    3
  

Consolidated Condensed Balance Sheets as of September 30, 2009 and December 31, 2008

   4
  

Consolidated Statements of Operations for the quarter and nine months ended September 30, 2009 and for the quarter ended September 30, 2008 and for the period from January 28, 2008 through September 30, 2008 and from January 1, 2008 through January 27, 2008

   5
  

Consolidated Condensed Statements of Cash Flows for the nine months ended September  30, 2009, for the period from January 28, 2008 through September 30, 2008 and from January 1, 2008 through January 27, 2008

   6
  

Consolidated Condensed Statements of Stockholders’ (Deficit)/Equity and Comprehensive Income as of and for the nine months ended September 30, 2009 and as of and for the period from January 28, 2008 through December 31, 2008

   7
  

Notes to Consolidated condensed Financial Statements

   8

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    35

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    53

Item 4.

   Controls and Procedures    54

Item 4T.

   Controls and Procedures    54

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings    54

Item 1A.

   Risk Factors    55

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    56

Item 3.

   Defaults Upon Senior Securities    56

Item 4.

   Submission of Matters to a Vote of Security Holders    56

Item 5.

   Other Information    56

Item 6.

   Exhibits and Reports on Form 8-K    57
SIGNATURES    67

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

The accompanying unaudited Consolidated Condensed Financial Statements of Harrah’s Entertainment, Inc., a Delaware corporation, have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for complete financial statements in conformity with generally accepted accounting principles in the United States. The results for the periods indicated are unaudited, but reflect all adjustments (consisting only of normal recurring adjustments) that management considers necessary for a fair presentation of operating results.

Results of operations for interim periods are not necessarily indicative of a full year of operations. These Consolidated Condensed Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

3


Table of Contents

HARRAH’S ENTERTAINMENT, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

 

     Successor  

(In millions, except share amounts)

   September 30, 2009     December 31, 2008  

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 948.2      $ 650.5   

Receivables, less allowance for doubtful accounts of $220.2 and $201.4

     332.3        394.0   

Deferred income taxes

     162.0        157.6   

Prepayments and other

     184.2        199.4   

Inventories

     52.7        62.7   
                

Total current assets

     1,679.4        1,464.2   
                

Land, buildings, riverboats and equipment

     19,219.0        18,881.4   

Less: accumulated depreciation

     (1,124.2     (614.3
                
     18,094.8        18,267.1   

Assets held for sale

     7.3        49.3   

Goodwill

     3,458.9        4,902.2   

Intangible assets

     5,004.1        5,307.9   

Investments in and advances to non-consolidated affiliates

     41.7        30.4   

Deferred costs and other

     944.3        1,027.5   
                
   $ 29,230.5      $ 31,048.6   
                

LIABILITIES AND STOCKHOLDERS’ DEFICIT

    

Current liabilities

    

Accounts payable

   $ 271.7      $ 382.3   

Interest payable

     336.4        417.7   

Accrued expenses

     1,141.2        1,115.0   

Current portion of long-term debt

     49.0        85.6   
                

Total current liabilities

     1,798.3        2,000.6   

Long-term debt

     19,293.4        23,123.3   

Deferred credits and other

     850.4        669.1   

Deferred income taxes

     5,822.0        4,327.0   
                
     27,764.1        30,120.0   
                

Commitments and contingencies

    

Preferred stock; $0.01 par value; 40,000,000 shares authorized; 19,895,157 and 19,912,447 shares issued and outstanding (net of 40,377 and 23,088 shares held in treasury)

     2,547.1        2,289.4   
                

Stockholders’ equity/(deficit)

    

Common stock, non-voting and voting; $0.01 par value; 80,000,020 shares authorized; 40,675,660 and 40,711,008 shares issued and outstanding (net of 82,550 and 47,201 shares held in treasury)

     0.4        0.4   

Additional paid-in capital

     3,576.2        3,825.1   

Accumulated deficit

     (4,568.9     (5,096.3

Accumulated other comprehensive loss

     (145.4     (139.6
                

Total Harrah’s Entertainment, Inc. stockholders’ deficit

     (1,137.7     (1,410.4

Non-controlling interests

     57.0        49.6   
                

Total deficit

     (1,080.7     (1,360.8
                
   $ 29,230.5      $ 31,048.6   
                

See accompanying Notes to Consolidated Condensed Financial Statements.

 

4


Table of Contents

HARRAH’S ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    Successor           Predecessor  

(In millions)

  Quarter
Ended
September 30, 2009
    Quarter
Ended
September 30, 2008
    Nine Months
Ended
September 30, 2009
    January 28, 2008
Through
September 30, 2008
          Jan. 1, 2008
Through
Jan. 27, 2008
 

Revenues

             

Casino

  $ 1,822.0      $ 2,130.1      $ 5,444.8      $ 5,653.2          $ 614.6   

Food and beverage

    381.5        427.6        1,129.3        1,160.2            118.4   

Rooms

    271.5        316.7        817.8        894.2            96.4   

Management fees

    14.9        16.6        43.5        45.8            5.0   

Other

    159.5        181.9        447.9        462.4            42.7   

Less: casino promotional allowances

    (367.2     (427.0     (1,075.0     (1,127.3         (117.0
                                           

Net revenues

    2,282.2        2,645.9        6,808.3        7,088.5            760.1   
                                           

Operating expenses

             

Direct

             

Casino

    997.6        1,129.4        2,968.0        3,037.1            340.6   

Food and beverage

    152.9        178.1        451.1        486.1            50.5   

Rooms

    54.3        64.9        160.4        179.4            19.6   

Property general, administrative and other

    513.7        631.8        1,518.3        1,619.0            178.2   

Depreciation and amortization

    175.6        152.0        516.8        452.4            63.5   

Project opening costs

    0.3        16.3        2.9        26.3            0.7   

Write-downs, reserves and recoveries

    24.3        46.8        78.6        (61.8         4.7   

Impairment of intangible assets

    1,328.6        —          1,625.7       —              —     

Losses/(income) on interests in non-consolidated affiliates

    1.2        2.5        1.3        1.3            (0.5

Corporate expense

    39.7        34.7        111.7        95.9            8.5   

Merger and integration costs

    —          1.0        0.3        23.1            125.6   

Amortization of intangible assets

    44.2        38.8        131.7        119.2            5.5   
                                           

Total operating expenses

    3,332.4        2,296.3        7,566.8        5,978.0            796.9   
                                           

(Loss)/income from operations

    (1,050.2     349.6        (758.5     1,110.5            (36.8

Interest expense, net of interest capitalized

    (444.5     (533.4     (1,404.7     (1,469.4         (89.7

(Losses)/gains on early extinguishments of debt

    (1.5     7.4        4,279.2        (203.9         —     

Other income, including interest income

    4.1        7.2        23.2        18.7            1.1   
                                           

(Loss)/income from continuing operations before income taxes

    (1,492.1     (169.2     2,139.2        (544.1         (125.4

(Provision)/benefit for income taxes

    (128.9     46.0        (1,590.8     147.7            26.0   
                                           

(Loss)/income from continuing operations, net of tax

    (1,621.0     (123.2     548.4        (396.4         (99.4
                                           

Discontinued operations

             

(Loss)/income from discontinued operations

    (0.1     0.7        (0.4     141.6            0.1   

Benefit/(provision) for income taxes

    —          —          0.1        (53.2         —     
                                           

(Loss)/income from discontinued operations, net

    (0.1     0.7        (0.3     88.4            0.1   
                                           

Net (loss)/income

    (1,621.1     (122.5     548.1        (308.0         (99.3

Less: net income attributable to non-controlling interests

    (3.2     (7.2     (16.1     (6.2         (1.6
                                           

Net (loss)/income attributable to Harrah’s Entertainment, Inc.

  $ (1,624.3   $ (129.7   $ 532.0      $ (314.2       $ (100.9
                                           

See accompanying Notes to Consolidated Condensed Financial Statements.

 

5


Table of Contents

HARRAH’S ENTERTAINMENT, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    Successor           Predecessor  

(In millions)

  Nine Months
Ended
September 30, 2009
    January 28, 2008
Through
September 30, 2008
          January 1, 2008
Through
January 27, 2008
 

Cash flows from operating activities

         

Net income/(loss) attributable to Harrah’s Entertainment, Inc.

  $ 532.0      $ (314.2       $ (100.9

Adjustments to reconcile net loss to cash flows from operating activities:

         

Loss/(income) from discontinued operations, before income taxes

    0.4        (141.6         (0.1

Income from insurance claims for hurricane damage

    —          (185.5         —     

(Gains)/losses on early extinguishments of debt

    (4,279.2     203.9            —     

Depreciation and amortization

    873.4        744.4            104.9   

Write-downs, reserves and recoveries

    17.6        37.5            (0.1

Impairment of intangible assets

    1,625.7        —              —     

Other non-cash items

    (31.5     91.1            34.4   

Share-based compensation expense

    12.4        11.8            50.9   

Deferred income taxes

    1,490.6        (251.2         (19.0

Tax benefit from stock equity plans

    —          —              42.6   

Non-controlling interests’ share of net income

    16.1        6.2            1.6   

Loss/(income) on interests in non-consolidated affiliates

    1.3        1.3            (0.5

Net change in insurance receivables for hurricane damage

    —          0.9            —     

Returns on investment in non-consolidated affiliates

    1.3        2.5            0.1   

Insurance proceeds for hurricane losses

    —          97.9            —     

Net losses/(gains) from asset sales

    0.7        8.0            (7.4

Net change in long-term accounts

    142.4        (42.6         68.3   

Net change in working capital accounts

    (5.6     390.4            (167.6
                           

Cash flows provided by operating activities

    397.6        660.8            7.2   
                           

Cash flows from investing activities

         

Land, buildings, riverboats and equipment additions, net of change in construction payables

    (411.9     (965.0         (125.6

Insurance proceeds for hurricane losses for discontinued operations

    —          83.3            —     

Insurance proceeds for hurricane losses for continuing operations

    —          98.1            —     

Payment for Merger

    —          (17,490.2         —     

Payments for businesses acquired, net of cash acquired

    —          —              0.1   

Investments in and advances to non-consolidated affiliates

    (12.8     (5.9         —     

Proceeds from other asset sales

    20.0        4.6            3.1   

Other

    (12.3     (31.4         (1.7
                           

Cash flows used in investing activities

    (417.0     (18,306.5         (124.1
                           

Cash flows from financing activities

         

Proceeds from issuance of long-term debt, net of issue costs

    2,259.6        20,764.9            11,316.3   

Deferred financing costs

    (54.1     (663.7         —     

Borrowings under lending agreements

    1,651.6        —              —     

Repayments under lending agreements

    (2,730.2     (5,834.8         (11,288.8

Early extinguishments of debt

    (680.8     (1,941.5         (87.7

Premiums paid on early extinguishments of debt

    —          (225.9         —     

Scheduled debt retirements

    (17.4     (6.5         —     

Equity contribution from buyout

    —          6,007.0            —     

Purchase of additional interest in subsidiary

    (83.7     —              —     

Non-controlling interests’ distributions, net of contributions

    (13.0     (7.6         (1.6

Proceeds from exercises of stock options

    —          —              2.4   

Excess tax benefit from stock equity plans

    —          (50.5         77.5   

Other

    (14.5     (2.3         (0.8
                           

Cash flows provided by financing activities

    317.5        18,039.1            17.3   
                           

Cash flows from discontinued operations

         

Cash flows from operating activities

    (0.4     1.6            0.5   
                           

Cash flows (used in)/provided by discontinued operations

    (0.4     1.6            0.5   
                           

Net increase/(decrease) in cash and cash equivalents

    297.7        395.0            (99.1

Cash and cash equivalents, beginning of period

    650.5        610.9            710.0   
                           

Cash and cash equivalents, end of period

  $ 948.2      $ 1,005.9          $ 610.9   
                           

See accompanying Notes to Consolidated Condensed Financial Statements.

 

6


Table of Contents

HARRAH’S ENTERTAINMENT, INC.

CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY/(DEFICIT) AND COMPREHENSIVE INCOME

 

    

 

Common Stock

    Capital
Surplus
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss
    Non-controlling
interests
    Total     Comprehensive
Income
 

(In millions)

   Shares
Outstanding
    Amount              

Predecessor Balance – January 27, 2008

   188.8      $ 18.9      $ 5,551.4      $ 1,096.3      $ 13.6      $ 53.2      $ 6,733.4      $     

Redemption of Predecessor equity

   (188.8     (18.9     (5,551.4     (1,096.3     (13.6       (6,680.2  

Issuance of Successor common stock

   40.7        0.4        4,085.0              4,085.4     

Net loss

           (5,096.3       12.0        (5,084.3     (5,084.3

Net shares issued under incentive compensation plans, including share-based compensation expense of $15.8

         11.9              11.9     

Debt exchange transaction, net of tax provision of $13.9

         25.7              25.7     

Cumulative preferred stock dividends

         (297.8           (297.8  

Pension adjustment related to acquisition of London Clubs International, net of tax benefit of $3.0

             (6.9       (6.9     (6.9

Reclassification of loss on derivative instrument from other comprehensive income to net income, net of tax provision of $0.3

             0.6          0.6        0.6   

Foreign currency translation adjustments, net of tax benefit of $14.7

             (31.2     1.3        (29.9     (29.9

Fair market value of swap agreements, net of tax benefit of $28.2

             (51.9       (51.9     (51.9

Adjustment for FIN 48 tax implications

         0.3              0.3     

Non-controlling distributions, net of contributions

               (16.9     (16.9  

Fair market value of interest rate cap agreement on commercial mortgage-backed securities, net of tax benefit of $28.4

             (50.2       (50.2     (50.2
                                                              

2008 Successor Comprehensive Loss

                 $ (5,222.6
                      

Successor Balance – December 31, 2008

   40.7      $ 0.4      $ 3,825.1      $ (5,096.3   $ (139.6   $ 49.6      $ (1,360.8  

Net income

           532.0          16.1        548.1        548.1   

Share-based compensation expense

         12.4              12.4     

Stock payouts

         (1.0           (1.0  

Cumulative preferred stock dividends

         (259.3           (259.3  

Debt exchange transaction, net of tax provision of $52.3

         80.0              80.0     

Pension adjustment, net of tax provision of $0.0

             (0.7       (0.7     (0.7

Foreign currency translation adjustments, net of tax provision of $7.2

             29.2        4.3        33.5        33.5   

Fair market value of swap agreements, net of tax benefit of $27.1

             (50.2       (50.2     (50.2

Adjustment for FIN 48 tax implications

         (1.9           (1.9  

Purchase of non-controlling interest in subsidiary

         (83.7           (83.7  

Non-controlling interests’ distributions, net of contributions

               (13.0     (13.0  

Fair market value of interest rate cap agreements on commercial mortgage backed securities, net of tax provision of $8.6

             15.5          15.5        15.5   

Reclassification of loss on derivative instrument from other comprehensive loss to net loss, net of tax provision of $0.2

             0.4          0.4        0.4   

Other

         4.6        (4.6        
                                                              

2009 Comprehensive Income

                 $ 546.6   
                      

Successor Balance – September 30, 2009

   40.7      $ 0.4      $ 3,576.2      $ (4,568.9   $ (145.4   $ 57.0      $ (1,080.7  
                                                        

See accompanying Notes to Consolidated Condensed Financial Statements.

 

7


Table of Contents

HARRAH’S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS –

SEPTEMBER 30, 2009

(UNAUDITED)

Note 1—Basis of Presentation and Organization

Harrah’s Entertainment, Inc. (“Harrah’s Entertainment,” the “Company,” “we,” “our” or “us,” and including our subsidiaries where the context requires) is a Delaware corporation. As of September 30, 2009, we own or manage 52 casinos, primarily under the Harrah’s, Caesars and Horseshoe brand names in the United States. Our casino entertainment facilities include 33 land-based casinos, 12 riverboat or dockside casinos, three managed casinos on Indian lands in the United States, one managed casino in Canada, one combination thoroughbred racetrack and casino, one combination greyhound racetrack and casino, and one combination harness racetrack and casino. Our 33 land-based casinos include one in Uruguay, eleven in the United Kingdom, two in Egypt and one in South Africa. We view each property as an operating segment and aggregate all operating segments into one reporting segment.

On January 28, 2008, Harrah’s Entertainment was acquired by affiliates of Apollo Global Management, LLC (“Apollo”) and TPG Capital, LP (“TPG”) in an all cash transaction, hereinafter referred to as the “Merger.” Although Harrah’s Entertainment continued as the same legal entity after the Merger, the accompanying Consolidated Condensed Statement of Operations, the Consolidated Condensed Statement of Cash Flows and the Consolidated Condensed Statement of Comprehensive Loss for the nine months ended September 30, 2008, are presented as the Predecessor period for the period preceding the Merger and as the Successor period for the period succeeding the Merger. As a result of the application of purchase accounting as of the Merger date, the consolidated condensed financial statements for the Successor period and the Predecessor period are presented on different bases and are, therefore, not comparable.

We have recast certain amounts for prior periods to conform to our 2009 presentation.

Note 2—Recently Issued Accounting Pronouncements

On July 1, 2009 the Financial Accounting Standards Board (“FASB”) launched the Accounting Standards Codification (“ASC”), a structural overhaul to U.S. GAAP that changes from a standards-based model (with thousands of individual standards) to a topical based model. For final consensuses that have been ratified by the FASB, the ASC will be updated with an Accounting Standards Update (“ASU”), which is assigned a number that corresponds to the year and that ASU’s spot in the progression (e.g., 2010—1 will be the first ASU issued in 2010). ASUs will replace accounting changes that historically were issued as Statement of Financial Accounting Standards (“SFAS”), FASB Interpretations (“FIN,”) FASB Staff Positions (“FSPs,”) or other types of FASB Standards.

The following are accounting standards adopted or issued in the first nine months of 2009 that could have an impact on our Company.

We adopted the provisions of ASC 805, (formerly SFAS No. 141(R) (Revised 2007)) on January 1, 2009. This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and non-controlling interest in the acquiree and the goodwill acquired. The revision is intended to simplify existing guidance and converge rulemaking under U.S. GAAP with international accounting rules. ASC 805 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The primary impact to our financial results will be possible charges to income tax expense for changes in deferred tax valuation allowances and income tax uncertainties related to the Merger.

We adopted the provision of ASC 810-10-65-1, (formerly SFAS No. 160 “Non-controlling Interests in Consolidated Financial Statements – An Amendment of Accounting Research Bulletin No. 51,”) on January 1, 2009. This statement requires an entity to classify non-controlling interests in subsidiaries as a separate component of equity. Additionally, transactions between an entity and non-controlling interests are required to be treated as equity transactions. As a result of the adoption of this standard, we have recast certain amounts within our 2008 financial statements to conform to the 2009 presentation.

On January 1, 2009, we adopted the provisions of ASC 815, (formerly SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133,”) which requires disclosures that allow financial statement users to understand (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under ASC 815 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Because ASC 815 applies only to financial statement disclosures, it did not have a material impact on our consolidated financial position, results of operations and cash flows.

In April 2009, the FASB issued ASC 320, (formerly FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,”) which amends the other-than-temporary impairment guidance for debt securities to make the guidance

 

8


Table of Contents

more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This statement is effective for interim and annual reporting periods ending after June 15, 2009, but did not affect our consolidated condensed financial statements upon adoption.

In April 2009, the FASB issued ASC 825, (formerly FSP No. FAS 107-1 and Accounting Principles Board (“APB”) 28-1 , “Interim Disclosures about Fair Value of Financial Instruments,”) which requires disclosures about fair value of financial instruments, whether recognized or not recognized in the statement of financial position, for interim reporting periods of publicly traded companies as well as in annual financial statements. This statement is effective for interim reporting periods ending after June 15, 2009, and have included the required disclosure in our interim financial statements for the period ended September 30, 2009.

In second quarter 2009, we adopted the provisions of ASC 855 (formerly FASB Statement No. 165, “Subsequent Events”). ASC 855 establishes general standards for accounting for and disclosing events that occur after the balance sheet date, but before the financial statements are issued or are available to be issued. We have evaluated subsequent events through November 12, 2009, which represents the date these financial statements are issued. The results of our evaluation are described further in Note 17.

In June 2009, the FASB issued ASC 810, (formerly SFAS No. 167, “Amendments to FASB Interpretation (FIN) No. 46(R),”) which is effective as of January 1, 2010. The new standard, which amends existing consolidation guidance for variable interest entities, requires a company to perform a qualitative analysis when determining whether it must consolidate a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the company that has both the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and either the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. We are currently evaluating the impact of this statement on our consolidated condensed financial statements.

In August 2009, the FASB issued ASU 2009-05 (previously exposed for comments as proposed FSP FAS 157-f) to provide guidance on measuring the fair value of liabilities under ASC 820. The ASU clarifies that the quoted price for the identical liability, when traded as an asset in an active market, is also a Level 1 measurement for that liability when no adjustment to the quoted price is required. In the absence of a Level 1 measurement, an entity must use a valuation technique that uses a quoted price or another valuation technique consistent with the principles of Topic 820 (e.g., a market approach or an income approach). The ASU is effective for the first interim or annual reporting period beginning after ASU’s issuance. We are currently evaluating the impact of this update on our financial statements.

Note 3—The Merger

The Merger was completed on January 28, 2008 and was financed by a combination of borrowings under the Company’s term loan facility due 2015, the issuance of Senior Notes due 2016 and Senior Toggle Notes due 2018, certain real estate term loans and equity investments of Apollo, TPG, co-investors and members of management. See Note 5 for a discussion of our debt.

The purchase price was approximately $30.7 billion, including the assumption of $12.4 billion of debt and the incurrence of approximately $1.0 billion of transaction costs. All of the outstanding shares of Harrah’s Entertainment stock were redeemed, with stockholders receiving $90.00 in cash for each outstanding share of common stock.

As a result of the Merger, the issued and outstanding shares of non-voting common stock and non-voting preferred stock of Harrah’s Entertainment are owned by entities affiliated with Apollo, TPG, certain co-investors and members of management, and the issued and outstanding shares of voting common stock of Harrah’s Entertainment are owned by Hamlet Holdings LLC, which is owned by certain individuals affiliated with Apollo and TPG. As a result of the Merger, our stock is no longer publicly traded.

 

9


Table of Contents

The following unaudited pro forma consolidated financial information assumes that the Merger was completed at the beginning of 2008.

 

(In millions)

   Nine Months
Ended
September 30, 2008
 

Net revenues

   $ 7,848.6   
        

Loss from continuing operations, net of tax

   $ (600.9
        

Net loss attributable to Harrah’s Entertainment, Inc.

   $ (520.2
        

Prior to any pro forma results adjustments, results for the nine months ended September 30, 2008, include non-recurring charges of $82.8 million related to the accelerated vesting of stock options, stock appreciation rights (“SARs”) and restricted stock and $65.9 million of other costs related to the Merger.

The unaudited pro forma results are presented for comparative purposes only. The pro forma results are not necessarily indicative of what our actual results would have been had the Merger been completed at the beginning of the period, or of future results.

Note 4—Goodwill and Other Intangible Assets

The following table sets forth changes in our goodwill for the nine months ended September 30, 2009:

 

(In millions)

      

Balance at December 31, 2008

   $ 4,902.2   

Additions or adjustments

     —     

Impairments

     (1,443.3
        

Balance at September 30, 2009

   $ 3,458.9   
        

The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets other than goodwill:

 

     September 30, 2009    December 31, 2008

(In millions)

   Gross
Carrying
Amount
   Accumulated
Amortization
    Net
Carrying
Amount
   Gross
Carrying
Amount
   Accumulated
Amortization
    Net
Carrying
Amount

Amortizing intangible assets:

               

Trademarks

   $ 7.8    $ (2.6   $ 5.2    $ 7.8    $ (1.4   $ 6.4

Gaming rights

     42.8      (4.3     38.5      42.8      (2.4     40.4

Patented technology

     93.5      (19.5     74.0      93.5      (10.7     82.8

Contract rights

     130.1      (59.1     71.0      128.8      (33.2     95.6

Customer relationships

     1,454.5      (209.4     1,245.1      1,454.5      (115.2     1,339.3
                                           
   $ 1,728.7    $ (294.9   $ 1,433.8    $ 1,727.4    $ (162.9   $ 1,564.5
                                           

Non-amortizing intangible assets:

               

Trademarks

          1,948.6           2,043.1

Gaming rights

          1,621.7           1,700.3
                       
          3,570.3           3,743.4
                       

Total

        $ 5,004.1         $ 5,307.9
                       

The aggregate amortization of intangible assets for the quarter and nine months ended September 30, 2009 was $44.2 million and $131.7 million, respectively. Estimated annual amortization expense for the years ending December 31, 2009, 2010, 2011, 2012 and 2013 is $175.4 million, $159.4 million, $155.8 million, $154.4 million and $152.1 million, respectively. Patented technology, contract rights, and customer relationships were valued and recorded at the time of the leveraged buyout, January 28, 2008.

Patented technology was assigned lives ranging from 1 to 10 years based on the estimated remaining usefulness of that technology for Harrah’s Entertainment. Amortizing contract rights were assigned lives based on the remaining life of the contract,

 

10


Table of Contents

ranging from 3 months to 4 years. Amortizing customer relationships were given lives of 10 to 14 years based upon attrition rates and computations of incremental value derived from existing relationships.

We account for our goodwill and other intangible assets in accordance with ASC 350, which provides guidance regarding the recognition and measurement of intangible assets, eliminates the amortization of certain intangibles and requires assessments for impairment of intangible assets that are not subject to amortization at least annually.

We have completed a preliminary assessment of goodwill and other non-amortizing intangible assets as of September 30, 2009, and as a result of this assessment, recorded a charge of approximately $1.3 billion within our Consolidated Statement of Operations in the third quarter which brings the charge recorded for the nine months ended September 30, 2009 to approximately $1.6 billion. This impairment charge is largely a result of adjustments to our long-term operating plan as a result of the current economic climate. We are not able to finalize our impairment charge until such time as we finalize our 2010 operating plan and certain other assumptions, which we expect to complete during fourth quarter 2009 in conjunction with our annual assessment for impairment as of September 30, 2009. Changes to the preliminary 2010 operating plan or other assumptions could require us to update our assessment of impairment, which could change the required impairment charge.

For our preliminary assessment, we determined the estimated fair value of each reporting unit as a function, or multiple, of earnings before interest, taxes, depreciation and amortization (“EBITDA”), combined with estimated future cash flows discounted at rates commensurate with the Company’s capital structure and the prevailing borrowing rates within the casino industry in general. Both EBITDA multiples and discounted cash flows are common measures used to value and buy or sell cash-intensive businesses such as casinos. A break-down of the impairment charge is highlighted below. We determine the estimated fair values of our non-amortizing intangible assets by using the Relief From Royalty Method under the income approach.

The table below summarizes the 2009 impairments of goodwill and other non-amortizing intangible assets:

 

     Quarter
ended
   Nine months
ended

(In millions)

   September 30, 2009

Goodwill

   $ 1,188.2    $ 1,443.3

Trademarks

     53.0      95.0

Gaming rights and other

     87.4      87.4
             

Total impairment of goodwill and other non-amortizing intangible assets

   $ 1,328.6    $ 1,625.7
             

 

11


Table of Contents

Note 5—Debt

The following table presents our debt as of September 30, 2009 and December 31, 2008:

 

Detail of Debt (dollars in millions)

  Maturity   Rate(s) at
September 30, 2009
    Balance at
September 30, 2009
    Balance at
December 31, 2008
 

Credit Facilities and Secured Debt

       

Term Loans

  2015   3.5%-3.6   $ 5,840.1      $ 7,195.6   

Revolving Credit Facility

  2014   3.25%-3.5     804.9        533.0   

Senior Secured notes

  2017   11.25     2,044.3        —     

CMBS financing

  2013   3.27     6,500.0        6,500.0   

Second-Priority Senior Secured Notes

  2018   10.0     1,943.6        542.7   

Second-Priority Senior Secured Notes

  2015   10.0     149.3        144.0   

6.0% Secured debt

  2010   6.0     25.0        25.0   

Chester Downs term loan

  2016   12.375     216.8        —     

Other, various maturities

  Varied   4.375%-5.75     2.0        1.1   

Subsidiary-guaranteed debt

       

Senior Notes, including senior interim loans  

  2016   10.75     478.6        4,542.7   

Senior PIK Toggle Notes, including senior interim loans 

  2018   10.75     9.4        1,150.0   

Unsecured Senior Debt

       

7.5%

  2009   7.5     —          6.0   

5.5%

  2010   5.5     219.7        321.5   

8.0%

  2011   8.0     30.9        47.4   

5.375%

  2013   5.375     94.1        200.6   

7.0%

  2013   7.0     0.7        0.7   

5.625%

  2015   5.625     315.3        578.1   

6.5%

  2016   6.5     249.3        436.7   

5.75%

  2017   5.75     145.5        372.7   

Floating Rate Contingent Convertible Senior Notes

  2024   0.5     0.2        0.2   

Unsecured Senior Subordinated Notes

       

7.875%

  2010   7.875     159.6        287.0   

8.125%

  2011   8.125     15.2        216.8   

Other Unsecured Borrowings

       

5.3% special improvement district bonds

  2035   5.3     68.4        69.7   

Other, various maturities

  Varied   Varied        18.2        24.9   

Capitalized Lease Obligations

       

6.42%-9.8%

  to 2011   6.42%-9.8     11.3        12.5   
                   

Total debt, net of unamortized discounts of $3,123.9 and premiums of $0.1

        19,342.4        23,208.9   

Current portion of long-term debt

        (49.0     (85.6
                   

Long-term debt

      $ 19,293.4      $ 23,123.3   
                   

At September 30, 2009, $162.0 million, face amount, of our 7.875% Senior Subordinated Notes due March 15, 2010, $228.6 million, face amount, of our 5.5% Senior Notes due July 1, 2010, and $25.0 million, face amount, of our 6.0% Secured Note due July 15, 2010, are classified as long-term in our Consolidated Condensed Balance Sheet because the Company currently has both the intent and the ability to refinance these notes under our revolving credit facility.

Exchange Offers and Open Market Repurchases

From time to time, we may retire portions of our outstanding debt in open market purchases, privately negotiated transactions or otherwise. These repurchases will be funded through available cash from operations and from our established debt programs. Such repurchases are dependent on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors.

As previously disclosed, on April 15, 2009, HOC completed private exchange offers to exchange approximately $3.6 billion aggregate principal amount of new 10.0% Second-Priority Senior Secured Notes due 2018 for approximately $5.4 billion principal amount of its outstanding debt due between 2010 and 2018. The new notes are guaranteed by Harrah’s Entertainment and are secured on a second-priority lien basis by substantially all of HOC’s and its subsidiaries’ assets that secure the senior secured credit facilities.

 

12


Table of Contents

In addition to the exchange offers, a subsidiary of Harrah’s Entertainment paid approximately $97 million to purchase for cash certain notes of HOC with an aggregate principal amount of approximately $523 million maturing between 2015 and 2017. The notes purchased pursuant to this tender offer will remain outstanding for HOC but will reduce Harrah’s Entertainment’s outstanding debt on a consolidated basis. Additionally, HOC paid approximately $4.8 million in cash to purchase notes of approximately $24 million aggregate principal amount from retail holders that were not eligible to participate in the exchange offers.

As a result of the exchange and tender offers, we recorded a pretax gain in the second quarter of 2009 of approximately $4.0 billion arising from this early extinguishment of debt. As a result of the receipt of the requisite consent of lenders having loans made under the Senior Unsecured Interim Loan Agreement (“Interim Loan Agreement”) representing more than 50% of the sum of all loans outstanding under the Interim Loan Agreement, waivers or amendments of certain provisions of the Interim Loan Agreement to permit HOC, from time to time, to buy back loans at prices below par from specific lenders in the form of voluntary prepayments of the loans by HOC on a non-pro rata basis are now operative. Included in the exchanged debt discussed above are approximately $297 million of 10.0% Second-Priority Senior Secured Notes that were exchanged for approximately $442 million principal amount of loans surrendered in the exchange offer for loans outstanding under the Interim Loan Agreement. As a result of these transactions, all loans outstanding under the Interim Loan Agreement have been retired.

The table below summarizes the open market purchase activity and exchange offers for the quarter and nine months ended September 30, 2009:

 

(In millions)

  Quarter ended
September 30, 2009
    Nine months ended
September 30, 2009
 

Face value of HOC Open Market Purchases:

   

5.50% due 7/01/2010

  $ 11.0      $ 31.0   

7.875% due 3/15/2010

    75.9        92.9   

8.00% due 02/01/2011

    0.1        18.1   

8.125% due 05/15/2011

    121.3        174.0   

5.375% due 12/15/2013

    —          87.2   

10.75% due 1/28/2016

    —          265.0   

Face value of other HET Subsidiary Open Market Purchases:

   

5.625% due 06/01/2015

    —        $ 138.0   

5.750% due 06/01/2017

    —          169.0   

6.50% due 06/01/2016

    —          24.0   
               

Total Face Value of open market purchases

    208.3        999.2   

Cash paid for open market purchases

    200.1        579.2   
               

Net cash gain on purchases

    8.2        420.0   

Write-off of unamortized discounts and debt fees

    (9.7     (163.8

Pre-tax gain on debt exchanges

    —          4,023.0   
               

Aggregate (losses)/gains on early extinguishments of debt

  $ (1.5   $ 4,279.2   
               

Under the American Recovery and Reinvestment Act of 2009 (“the Act”), the Company will receive temporary tax relief under the Delayed Recognition of Cancellation of Debt Income (“CODI”) rules. The Act contains a provision that allows for a five-year deferral for tax purposes of CODI for debt reacquired in 2009, followed by recognition of CODI ratably over the succeeding five years. The provision applies for specified types of repurchases including the acquisition of a debt instrument for cash and the exchange of one debt instrument for another.

Note Offering and Credit Facility Amendment

On June 3, 2009, HOC entered into an amendment and waiver to its credit agreement to, among other things: (i) allow for one or more future issuances of additional secured notes or loans which may include, in each case, indebtedness secured on a pari passu basis with the obligations under its senior secured credit facilities, so long as, in each case, among other things, an agreed amount of the net cash proceeds from any such issuance are used to prepay term loans and revolving loans under such senior secured credit

 

13


Table of Contents

facilities at par; (ii) exclude from the maintenance covenant under its senior secured credit facilities (a) notes secured with a first priority lien on the assets of HOC and its subsidiaries that secure the senior secured credit facilities that collectively result in up to $2 billion of net proceeds (provided that the aggregate face amount of all such notes shall not collectively exceed $2.2 billion) and (b) up to $250 million aggregate principal amount of consolidated debt of subsidiaries that are not wholly owned subsidiaries; (iii) subject to specified procedures, allow HOC to buyback loans from individual lenders at negotiated prices, which may be less than par and (iv) subject to the requirement to make such offers on a pro rata basis to all lenders, allow HOC to agree with certain lenders to extend the maturity of their term loans or revolving commitments, and for HOC to pay increased interest rates or otherwise modify the terms of their loans or revolving commitments in connection with such an extension

In June 2009, HOC issued $1.375 billion principal amount of 11.25% senior secured notes due 2017 (“Original First Lien Notes”). On September 11, 2009, HOC issued an additional $720 million principal amount of 11.25% senior secured notes due 2017 (“Additional First Lien Notes”). Both the Original First Lien Notes and the Additional First Lien Notes are secured with a first priority lien on the assets of HOC and the subsidiaries that secure the senior secured credit facilities. HOC used the net proceeds from the September 2009 private offering to repay a portion of its existing term loan and the debt under the revolving credit facility under HOC’s senior secured credit facilities, of which approximately $0.1 billion was used to permanently reduce commitments under the revolving credit facility and approximately $0.5 billion was used to reduce amounts due on the term loan during the third quarter 2009; remaining amounts were used to temporarily reduce amounts under the revolving credit facility.

Credit Agreement and Incremental Facility Amendment

As of September 30, 2009, our senior secured credit facilities (the “Credit Facilities”) provide for senior secured financing of up to $7.47 billion, consisting of (i) senior secured term loan facilities in an aggregate principal amount of up to $5.84 billion maturing on January 28, 2015 and (ii) a senior secured revolving credit facility in an aggregate principal amount of $1.63 billion, maturing January 28, 2014, including both a letter of credit sub-facility and a swingline loan sub-facility. The credit facilities require scheduled quarterly payments on the term loans of $5 million, with the balance paid at maturity. During the third quarter of 2009, the term loan was reduced by approximately $0.5 billion and the revolving credit facility was permanently reduced by approximately $0.1 billion as a result of debt retirements; remaining amounts were used to temporarily reduce amounts under the revolving credit facility . A total of $6.6 billion in borrowings were outstanding under the Credit Facilities as of September 30, 2009, with an additional $162.2 million committed to letters of credit that were issued under the Credit Facilities. After consideration of these borrowings and letters of credit, $663 million of additional borrowing capacity was available to the Company under the Credit Facilities as of September 30, 2009.

The Credit Facilities also allow us to request one or more incremental term loan facilities and/or increase commitments under our revolving facility in an aggregate amount of up to $1.75 billion. On September 26, 2009, HOC entered into an amendment to its senior secured credit facilities to allow for $1.0 billion (of the $1.75 billion available) of incremental term loans under the Credit Facilities (“Incremental Facility Amendment”). On October 15, 2009, HOC borrowed the $1 billion available under the Incremental Facility Amendment, with net proceeds used to temporarily repay most of our revolving debt under the Credit Facility. The additional $1.0 billion borrowed under the Incremental Facility Amendment matures on October 31, 2016 and bears interest at LIBOR plus 750 basis points, subject to a 200 basis point LIBOR floor.

Borrowings under the Credit Facilities bear interest at a rate equal to the then-current LIBOR rate or at a rate equal to the alternate base rate, in each case plus an applicable margin. In addition, on a quarterly basis, we are required to pay each lender (i) a commitment fee in respect of any unused commitments under the revolving credit facility and (ii) a letter of credit fee in respect of the aggregate face amount of outstanding letters of credit under the revolving credit facility. As of September 30, 2009, the Credit Facilities bore interest at LIBOR plus 300 basis points for the term loans and a portion of the revolver loan and at the alternate base rate plus 200 basis points for the remainder of the revolver loan and bore a commitment fee for unborrowed amounts of 50 basis points.

Certain covenants contained in HOC’s credit agreement require the maintenance of a senior first priority secured debt to last twelve months (LTM) Adjusted EBITDA (“Earnings Before Interest, Taxes, Depreciation and Amortization”), as defined in the agreements, ratio (“Senior Secured Leverage Ratio”). The amendment and waiver to our credit agreement excludes from the Senior Secured Leverage Ratio (a) the $1.375 billion Original First Lien Notes issued June 15, 2009 and the $720 million Additional First Lien Notes issued on September 11, 2009 and (b) up to $250 million aggregate principal amount of consolidated debt of subsidiaries that are not wholly owned subsidiaries. Certain covenants contained in HOC’s credit agreement governing its senior secured credit facilities, the indenture and other agreements governing HOC’s 10.0% Second-Priority Senior Secured Notes due 2015 and 2018, Original First Lien Notes and Additional First Lien Notes restrict our ability to take certain actions such as incurring additional debt or making acquisitions if we are unable to meet defined Adjusted EBITDA to Fixed Charges, senior secured debt to LTM Adjusted EBITDA and consolidated debt to LTM Adjusted EBITDA ratios. The covenants that restrict additional indebtedness and the ability to make future acquisitions require an LTM Adjusted EBITDA to Fixed Charges ratio (measured on a trailing four-quarter basis) of 2.0:1.0. Failure to comply with these covenants can result in limiting our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions.

 

14


Table of Contents

Other Financing Transactions

In August 2009, Chester Downs and Marina LLC (“Chester Downs”), a majority-owned subsidiary of HOC, entered into an agreement to borrow under a senior secured term loan in the amount of $230 million and borrowed such amount, net of original issue discount. The proceeds of the term loan were used to pay off intercompany debt due to HOC and to repurchase equity interests from certain minority partners of Chester Downs. HOC currently owns 95.0% of Chester Downs.

Derivative Instruments

We account for derivative instruments in accordance with ASC 815, (formerly SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”). ASC 815 requires that all derivative instruments be recognized in the financial statements at fair value. Any changes in fair value are recorded in the statements of operations or in other comprehensive income/(loss), depending on whether the derivative is designated and qualifies for hedge accounting, the type of hedge transaction and the effectiveness of the hedge. The estimated fair values of our derivative instruments are based on market prices obtained from dealer quotes. Such quotes represent the estimated amounts we would receive or pay to terminate the contracts.

Our derivative instruments contain a credit risk that the counterparties may be unable to meet the terms of the agreements. We minimize that risk by evaluating the creditworthiness of our counterparties, which are limited to major banks and financial institutions. Our derivatives are recorded at their fair values, adjusted for the credit rating of the counterparty, if the derivative is an asset, or the Company, if the derivative is a liability.

We use interest rate swaps to manage the mix of our debt between fixed and variable rate instruments. As of September 30, 2009, we have 10 interest rate swap agreements for notional amounts totaling $6.5 billion. The difference to be paid or received under the terms of the interest rate swap agreements is accrued as interest rates change and recognized as an adjustment to interest expense for the related debt. Changes in the variable interest rates to be paid or received pursuant to the terms of the interest rate swap agreements will have a corresponding effect on future cash flows. The major terms of the interest rate swap agreements are as follows.

 

Effective Date

   Notional
Amount
   Fixed Rate
Paid
    Variable Rate
Received as of
September 30, 2009
    Next Reset Date    Maturity Date
     (In millions)                      

April 25, 2007

   $ 200    4.898   0.504   October 26, 2009    April 25, 2011

April 25, 2007

     200    4.896   0.504   October 26, 2009    April 25, 2011

April 25, 2007

     200    4.925   0.504   October 26, 2009    April 25, 2011

April 25, 2007

     200    4.917   0.504   October 26, 2009    April 25, 2011

April 25, 2007

     200    4.907   0.504   October 26, 2009    April 25, 2011

September 26, 2007

     250    4.809   0.504   October 26, 2009    April 25, 2011

September 26, 2007

     250    4.775   0.504   October 26, 2009    April 25, 2011

April 25, 2008

     2,000    4.276   0.504   October 26, 2009    April 25, 2013

April 25, 2008

     2,000    4.263   0.504   October 26, 2009    April 25, 2013

April 25, 2008

     1,000    4.172   0.504   October 26, 2009    April 25, 2012

Until February 15, 2008, our interest rate swap agreements were not designated as hedging instruments; therefore, gains or losses resulting from changes in the fair value of the swaps were recognized in earnings in the period of the change. On February 15, 2008, eight of our interest rate swap agreements for notional amounts totaling $3.5 billion were designated as cash flow hedging instruments and on April 1, 2008, the remaining swap agreements were designated as cash flow hedging instruments. As of September 30, 2009, we removed the cash flow hedge designation for the $1.0 billion swap, thus reducing the total notional amount on interest rate swaps designated as cash flow hedging instruments to $5.5 billion. Upon designation as cash flow hedging instruments, only any measured ineffectiveness is recognized in earnings in the period of change. There was no measured ineffectiveness recognized in earnings for the quarter and nine months ended September 30, 2009, compared with a credit of $13.9 million and a net charge of $54.6 million, respectively, for the third quarter 2008 and the period from January 28, 2008 through September 30, 2008, due to changes in the fair values of swap agreements. Due to current interest rate levels, interest rates swaps increased interest expense $50.0 million and $147.6 million for the quarter and nine months ended September 30, 2009, respectively, compared to $26.6 million and $50.4 million, respectively, for the quarter ended September 30, 2008, and the period from January 28, 2008 through September 30, 2008. The variable rate did not materially change as a result of the October 26, 2009, reset.

Additionally, on January 28, 2008, we entered into an interest rate cap agreement to partially hedge the risk of future increases in the variable rate of the CMBS financing. The interest rate cap agreement, which was effective January 28, 2008, and terminates February 13, 2013, is for a notional amount of $6.5 billion at a LIBOR cap rate of 4.5%. The interest rate cap was designated as a cash flow hedging instrument on May 1, 2008. The change in the fair value of the interest rate cap did not impact interest expense for the third quarter and nine months ended September 30, 2009, whereas, for the quarter ended and period from January 28, 2008 through September 30, 2008, a credit of $0.1 million and a net charge of $12.2 million, respectively, representing the change in the fair value, are included in Interest expense in our Consolidated Condensed Statement of Operations.

 

15


Table of Contents

Subsequent to the end of the third quarter 2009, on October 15, 2009, we borrowed $1 billion under the Incremental Facility Amendment and used a majority of the net proceeds to temporarily repay most of our revolving debt under the Credit Facility. As a result, we no longer have a sufficient amount of outstanding debt under the same terms as our interest rate swap agreements to support hedge accounting treatment for the full $6.5 billion in interest rate swaps. As previously discussed, we have removed the cash flow hedge designation and discontinued hedge accounting for the last hedge we executed, specifically the $1 billion hedge entered into on April 25, 2008. At September 30, 2009, $22.8 million of existing deferred losses related to this hedge contract is included in accumulated other comprehensive income on our consolidated condensed balance sheet. Beginning October 1, 2009, these deferred losses will be amortized into income over the original remaining term of the hedged forecasted transactions that are still considered to be probable of occurring. Therefore, we will record $8.7 million as an increase to interest expense and other comprehensive income over the next 12 months. Any future changes in fair value of the interest rate swap will be recognized in earnings during the period in which the changes in value occur.

Note 6—Stock-Based Employee Compensation

As of September 30, 2009, there was approximately $50.8 million of total unrecognized compensation cost related to stock option grants. In 2009, our share-based compensation expense consists primarily of time-based options and performance-based options that have been granted to management, other personnel and key service providers.

 

     Successor         Predecessor
     Quarter Ended
Sept. 30,
  

Nine months
ended

Sept. 30,

  

For the

period from

Jan. 28
Through

Sept. 30,

        For the
period from
Jan. 1
Through
Jan. 27,

2008

(In millions)

   2009    2008    2009    2008        

Amounts included in:

                 

Corporate expense

   $ 2.6    $ 3.4    $ 5.8    $ 8.5       $ —  

Property G&A

     1.4      1.5      6.6      3.3         —  

Merger & integration costs

     —        —        —        —           82.8
                                     

Total Compensation Cost

     4.0    $ 4.9    $ 12.4    $ 11.8       $ 82.8
                                     

There was no material stock-based compensation activity during the nine months ended September 30, 2009.

In connection with the Merger, outstanding and unexercised stock options and stock appreciation rights, whether vested or unvested, and unvested restricted stock were cancelled and converted into the right to receive cash, accelerating the recognition of compensation cost of $82.8 million, which was included in Merger and integration costs in the Consolidated Condensed Statement of Operations in the period from January 1, 2008 through January 27, 2008 (Predecessor period).

Note 7—Preferred and Common Stock

Preferred Stock

On January 28, 2008, our Board of Directors adopted a resolution authorizing the creation of a series of preferred stock known as the Non-Voting Perpetual Preferred Stock. The total number of Preferred Stock shares authorized are 40,000,000, par value $0.01 per share, stated value $100.00 per share.

On a quarterly basis, each share of non-voting preferred stock accrues dividends at a rate of 15.0% per annum, compounded quarterly. Dividends will be paid in cash, when, if, and as declared by the Board of Directors, subject to approval by the appropriate

 

16


Table of Contents

regulators. We currently do not expect to pay cash dividends. Dividends on the non-voting perpetual preferred stock are cumulative. As of September 30, 2009, such dividends in arrears are $557.0 million. Shares of the non-voting preferred stock rank prior in right of payment to the non-voting and voting common stock and are entitled to a liquidation preference.

Upon the occurrence of any liquidating event, each holder of non-voting preferred stock shall have the right to require the Company to repurchase each outstanding share of non-voting preferred stock before any payment or distribution shall be made to the holders of non-voting common stock, voting common stock or any other junior stock. After the payment to the holders of non-voting preferred stock of the full preferential amounts, the holders of non-voting preferred stock shall have no right or claim to any of the remaining assets of the Company. Non-voting preferred stock may be converted into non-voting common stock on a pro rata basis with the consent of the holders of a majority of the non-voting preferred stock. Neither the non-voting preferred stock nor the non-voting common stock has any voting rights.

Common Stock

As of September 30, 2009, the authorized common stock of the Company totaled 80,000,020 shares, consisting of 20 shares of voting common stock, par value $0.01 per share and 80,000,000 shares of non-voting common stock, par value $0.01 per share.

The voting common stock has no economic rights or privileges, including rights in liquidation. The holders of voting common stock shall be entitled to one vote per share on all matters to be voted on by the stockholders of the Company.

Subject to the rights of holders of preferred stock, when, if, and as dividends are declared on the common stock, the holders of non-voting common stock shall be entitled to share in dividends equally, share for share.

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, holders of non-voting common stock will receive a pro rata distribution of any remaining assets after payment of or provision for liabilities and the liquidation preference on preferred stock, including the non-voting preferred stock, if any.

Note 8—Acquisition of Non-Controlling Interest

In the third quarter 2009, Chester Downs and Marina LLC (“Chester Downs”), a majority-owned subsidiary of HOC, entered into an agreement to borrow under a senior secured term loan in the amount of approximately $230.0 million, net of original issue discount. The proceeds were used to pay off intercompany debt due to HOC and to purchase interests from other owners of Chester Downs. As a result of this acquisition, HOC increased its ownership interest to approximately 95.0% of Chester Downs. The purchase was accounted for as an equity transaction.

 

17


Table of Contents

Note 9—Write-downs, Reserves and Recoveries

Our operating results include various pretax charges to record tangible asset impairments, contingent liability reserves, project write-offs, demolition costs, recoveries of previously recorded reserves and other non-routine transactions. The components of Write-downs, reserves and recoveries for continuing operations were as follows:

 

     Successor          Predecessor  

(In millions)

   Quarter ended
September 30,
  

Nine months

ended

September 30,

   

For the
period from
Jan. 28, 2008
Through

Sept. 30,

        

For the

period from
Jan. 1, 2008
Through

Jan. 27,

 
     2009     2008    2009     2008          2008  

Impairment of long-lived tangible assets

   $ 35.7      $ —      $ 43.7      $ —           $ —     

Write-off of abandoned assets

     3.3        9.2      4.8        47.6           —     

Litigation-related charges, settlements or reversals

     (29.3     9.3      (29.2     9.4           —     

Remediation costs

     8.4        8.1      28.2        35.2           4.4   

Efficiency programs

     6.0        2.1      27.9        5.0           0.6   

Insurance proceeds in excess of deferred costs

     —          —        —          (185.4        —     

Termination of contracts

     —          12.6      —          14.0           —     

Other

     0.2        5.5      3.2        12.4           (0.3
                                          

Total write-downs, reserves and recoveries

   $ 24.3      $ 46.8    $ 78.6      $ (61.8      $ 4.7   
                                          

We account for long-lived tangible assets to be held and used by evaluating their carrying value in relation to the operating performance and estimated future undiscounted cash flows generated by such assets, when indications of impairment are present. For the quarter and nine months ended September 30, 2009, we recorded impairment charges related to long-lived tangible assets of $35.7 million and $43.7 million, respectively. The third quarter charge was related to the Company’s office building in Memphis, Tennessee due to the relocation to Las Vegas, Nevada of those corporate functions formerly performed at that location. Although the Company is marketing this building for sale, the building does not meet all requirements under generally accepted accounting principles to be classified as held for sale at this time.

Write-off of abandoned assets represents costs associated with various projects that are determined to no longer be viable.

During the third quarter ended September 30, 2009, an approximate $30 million judgment against the Company was vacated. This amount was previously charged to write-downs, reserves and recoveries in 2006 and was reversed accordingly upon the vacated judgment.

Remediation costs relate to property remediation projects at certain of our Las Vegas properties.

Efficiency programs represent costs incurred to identify efficiencies and cost savings. Expenses in 2009 and 2008 represent costs related to additional projects aimed at stream-lining corporate and operations functions to achieve further cost savings and efficiencies.

Insurance proceeds in excess of deferred costs represent proceeds received from our insurance carriers for hurricane damages incurred in 2005. The proceeds included in Write-downs, reserves and recoveries are for those properties that we still own and operate. Proceeds related to properties that were subsequently sold are included in Discontinued operations in our Consolidated Statements of Operations.

Termination of contracts in 2008 represents amounts recognized in connection with abandonment of buildings under long-term lease arrangements.

Note 10—Income Taxes

We are subject to income taxes in the United States as well as various states and foreign jurisdictions in which we operate. We account for income taxes under ASC 740, (formerly FASB Statement No. 109, “Accounting for Income Taxes,”) whereby deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial

 

18


Table of Contents

statements or income tax returns. Deferred tax assets and liabilities are determined based on differences between financial statement carrying amounts of existing assets and their respective tax bases using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The Company’s income tax provision/(benefit) and effective tax rate were as follows:

 

     Successor          Predecessor  

(In millions, except effective tax rate)

   Quarter ended
September 30,
   

Nine months

ended

September 30,

   

For the
period from
Jan. 28, 2008
Through

Sept. 30,

        

For the

period from
Jan. 1, 2008
Through

Jan. 27,

 
     2009     2008     2009     2008          2008  

(Loss)/income from continuing operations before income tax

   (1,492.1   (169.2   2,139.2      (544.1      (125.4

Provision/(benefit) for income taxes

   128.9      (46.0   1,590.8      (147.7      (26.0

Effective tax rate

   8.6   (27.2 )%    74.4   (27.1 )%       (20.7 )% 

(Benefit)/provision for income taxes at 35%

   (522.2   (59.2   748.7      (190.4      (43.9

Difference between tax at effective vs. statutory rate

   651.1      13.2      842.1      42.7         17.9   

For the quarter ended September 30, 2009, the difference between the Company’s recorded provision and the tax benefit that would result from applying the U.S. statutory rate of 35.0% is primarily attributable to: (i) non-deductible goodwill impairments; (ii) a net increase in liability for unrecognized tax benefit (“UTB”); and (iii) Merger-related deferred tax liabilities booked in the quarter.

For the nine months ended September 30, 2009, the difference between the Company’s recorded provision and the provision that would result from applying the U.S. statutory rate of 35.0% is primarily attributable to: (i) non-deductible goodwill impairments; (ii) state income taxes; (iii) a net increase in liability for UTB; and (iv) Merger-related deferred tax liabilities.

For the quarter and nine months ended September 30, 2008, the difference between the Company’s recorded tax benefit and the tax benefit that would result from applying the U.S. statutory rate of 35.0% is primarily attributable to: (i) non-deductible Merger costs; (ii) international income taxes; and (iii) state income taxes.

We file income tax returns, including returns for our subsidiaries, with federal, state, and foreign jurisdictions. As a large taxpayer, we are under continual audit by the Internal Revenue Service (“IRS”) on open tax positions, and it is possible that the amount of the liability for unrecognized tax benefits could change during the next twelve months. Our 2004 federal income tax year was closed and the IRS audit of our 2006 federal income tax year concluded during the quarter ended September 30, 2009. Our 2005 and 2007 federal income tax years have reached the IRS appeals stage of the audit process. Our 2008 federal income tax year is currently under audit by the IRS.

We also are subject to exam by various state and foreign tax authorities, although tax years prior to 2004 are generally closed as the statutes of limitations have lapsed. However, various subsidiaries are still being examined by the New Jersey Division of Taxation for tax years beginning with 1999.

We classify reserves for tax uncertainties within Accrued expenses and Deferred credits and other in our Consolidated Condensed Balance Sheets, separate from any related income tax payable or deferred income taxes. In accordance with ASC 740, reserve amounts relate to any potential income tax liabilities resulting from uncertain tax positions as well as potential interest or penalties associated with those liabilities. For the quarter ended September 30, 2009, we recorded an increase in gross UTB of $60.0 million as a result of tax positions taken during a prior year. The increase in gross UTB related to costs associated with the Merger. Year-to-date we have recorded increases in our gross UTB of $140.0 million. The year-to-date increases relate to costs associated with the Merger, cancellation of indebtedness and other identified uncertain tax positions. Partially offsetting the increase in overall UTB in the quarter ended September 30, 2009, was a decrease of UTB of $29.2 million (yielding a net increase in gross UTB for the quarter of $30.8 million). The $29.2 million of decrease consisted of $19.4 million related to settlements with tax authorities and $9.8 million as a result of the expiration of the 2004 federal income tax statute of limitations. The total amount of the increase in gross UTB during the quarter ended September 30, 2009, which, if recognized, would benefit the effective tax rate, is $60.0 million. Year to date, the total amount of the increase in gross UTB that, if recognized, would benefit the effective tax rate, is $112.0 million. The total amount of decrease in gross UTB during the quarter ended September 30, 2009, which, upon recognition, benefited the effective tax rate, was $3.0 million.

 

19


Table of Contents

Note 11—Fair Value Measurements

We adopted the required provisions of ASC 820, (formerly FASB Statement No. 157, “Fair Value Measurements,”) on January 1, 2008. ASC 820 outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. Level 2 inputs are from other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable and should be used to measure fair value to the extent that observable inputs are not available.

ASC 820, (formerly FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157,”) deferred the effective date of ASC 820 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at estimated fair value in an entity’s financial statements on a recurring basis (at least annually). We adopted the provisions of ASC 820 for non-recurring measurements made for non-financial assets and non-financial liabilities on January 1, 2009. Based on our preliminary assessment for impairment as of September 30, 2009, we determined that, based on the projected performance, which reflects factors impacted by current market conditions and our initial annual budget process, certain of our goodwill and other intangible assets were impaired. We expect to complete the assessment of goodwill and other intangible assets during the fourth quarter 2009. The impairment analysis on goodwill and certain intangible assets includes an assessment using various Level 2 (EBITDA multiples and discount rate) and Level 3 (forecast cash flows) inputs. See Note 4 Goodwill and Other Intangible Assets for more information on the application of ASC 820 to goodwill and other intangible assets.

Under ASC 825, (formerly FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of SFAS No. 115,”) entities are permitted to choose to measure many financial instruments and certain other items at fair value. We did not elect the fair value measurement option under ASC 825 for any of our financial assets or financial liabilities.

Items Measured at Fair Value on a Recurring Basis

The following table shows the fair value of our financial assets and financial liabilities that are required to be measured at fair value as of September 30, 2009.

 

(In millions)

   Balance at
September 30, 2009
    Level 1    Level 2     Level 3

Assets:

         

Cash equivalents

   $ 367.7      $ 367.7    $ —        $ —  

Derivative instruments

     55.0        —        55.0        —  

Investments

     88.9        88.9      —          —  

Liabilities:

         

Derivative instruments

     (412.6     —        (412.6     —  

The following section describes the valuation methodologies used to estimate or measure fair value, key inputs, and significant assumptions:

Cash equivalents – Cash equivalents are investments in money market accounts and utilize Level 1 inputs to determine fair value.

Derivative instruments – The estimated fair values of our derivative instruments are derived from market prices obtained from dealer quotes for similar assets or liabilities. Such quotes represent the estimated amounts we would receive or pay to terminate the contracts. Derivative instruments are included in Deferred costs and other and Deferred credits and other in our Consolidated Condensed Balance Sheets. See Note 5 for more information on our derivative instruments.

Investments – Investments are primarily debt and equity securities that are traded in active markets, have readily determined market values and utilize Level 1 inputs. These investments are included in Prepayments and other in the Consolidated Condensed Balance Sheets.

Items Disclosed at Fair Value

Long-Term Debt – The fair value of the Company’s debt has been calculated based on the borrowing rates available as of September 30, 2009, for debt with similar terms and maturities and market quotes of our publicly traded debt. As of September 30, 2009, the Company’s outstanding debt had a fair value of $21.1 billion and a carrying value of $19.3 billion. The Company’s interest rate swaps used for hedging purposes had a fair value and carrying value of $(412.6) million, and our interest rate cap agreement had a fair value and carrying value of $55.0 million at September 30, 2009.

 

20


Table of Contents

Note 12—Commitments and Contingent Liabilities

Contractual Commitments

We continue to pursue additional casino development opportunities that may require, individually and in the aggregate, significant commitments of capital, up-front payments to third parties and development completion guarantees.

The agreements pursuant to which we manage casinos on Indian lands contain provisions required by law that provide that a minimum monthly payment be made to the tribe. That obligation has priority over scheduled repayments of borrowings for development costs and over the management fee earned and paid to the manager. In the event that insufficient cash flow is generated by the operations to fund this payment, we must pay the shortfall to the tribe. Subject to certain limitations as to time, such advances, if any, would be repaid to us in future periods in which operations generate cash flow in excess of the required minimum payment. These commitments will terminate upon the occurrence of certain defined events, including termination of the management contract. Our aggregate monthly commitment for the minimum guaranteed payments, pursuant to these contracts for the three managed Indian-owned facilities now open, which extend for periods of up to 50 months from September 30, 2009, is $1.2 million. Each of these casinos currently generates sufficient cash flows to cover all of its obligations, including its debt service.

In February 2008, we entered into an agreement with the State of Louisiana whereby we extended our guarantee of an annual payment obligation of JCC Fulton Development, LLC, our wholly-owned subsidiary, of $60 million owed to the State of Louisiana. The guarantee was extended for one year to end March 31, 2011.

In addition to the guarantees discussed above, as of September 30, 2009, we had commitments and contingencies of $1,354.5 million, including construction-related commitments.

Severance Agreements

As of September 30, 2009, we have severance agreements with 13 of our executives that provide for payments to the executives in the event of their termination after a change in control, as defined. These agreements provide, among other things, for a compensation payment of 1.5 to 3.0 times the executives’ average annual compensation, as defined. The estimated amount, computed as of September 30, 2009, that would be payable under the agreements to these executives aggregated approximately $37.8 million. The estimated amount that would be payable to these executives does not include an estimate for the tax gross-up payment, provided for in the agreements, that would be payable to the executive if the executive becomes entitled to severance payments which are subject to federal excise tax imposed on the executive. These severance agreements terminate February 1, 2010.

Employment Agreements

We entered into an employment agreement with one executive that replaced his severance agreement as of January 28, 2008. The employment agreement provides for payments to the executive in the event of his termination after a change in control, as defined, and provides for, among other things, a compensation payment of 3.0 times the executive’s average annual compensation, as defined. The estimated amount, computed as of September 30, 2009, that would be payable under the agreement to the executive based on the compensation payment aggregated approximately $17.3 million. The estimated amount that would be payable to the executive does not include an estimate for the tax gross-up payment, provided for in the agreement, that would be payable to the executive if the executive becomes entitled to severance payments which are subject to federal excise tax.

Self-Insurance

We are self-insured for various levels of general liability, workers’ compensation, employee medical and other 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.

Note 13—Litigation

Litigation Related to Employee Benefit Obligations

In December 1998, Hilton Hotels Corporation (“Hilton”) spun-off its gaming operations as Park Place Entertainment Corporation (“Park Place”). In connection with the spin-off, Hilton and Park Place entered an Employee Benefits and Other Employment Allocation Agreement dated December 31, 1998 (the “Allocation Agreement”) whereby Park Place assumed or retained, as applicable, liabilities and excess assets, if any, related to the Hilton Hotels Retirement Plan (the “Hilton Plan”) based on the accrued benefits of Hilton employees and Park Place employees. Park Place changed its name to Caesars Entertainment, Inc. (“Caesars”) and the Company acquired Caesars in June 2005. In 1999 and 2005, the United States District Court for the District of Columbia certified two nationwide class action lawsuits against Hilton alleging that the Hilton Plan’s benefit formula was back loaded in violation of ERISA, and that Hilton failed to properly calculate Hilton Plan participants’ service for vesting purposes.

 

21


Table of Contents

In May 2009, the Court issued a decision granting summary judgment to the plaintiffs. In November 2009, the plaintiffs and Hilton are scheduled to attend a Court-mandated mediation session in an effort to determine an appropriate remedy.

The Company received a letter from Hilton in October 2009 alleging potential liability under the above described claims and under the terms of the Allocation Agreement. The Company may be responsible for a portion of the liability resulting from the claims noted above. We are monitoring the status of the lawsuit, remedy determination, and our potential liability, if any.

Certain of our legal proceedings are reported in our Annual Report on Form 10-K for the year ended December 31, 2008, with material developments since that report described below.

Litigation Related to Our Operations

In April 2000, the Saint Regis Mohawk Tribe (the “Tribe”) granted Caesars the exclusive rights to develop a casino project in the State of New York. On April 26, 2000, certain individual members of the Tribe purported to commence a class action proceeding in a “Tribal Court” in Hogansburg, New York, against Caesars seeking to nullify Caesars’ agreement with the Tribe. On March 20, 2001, the “Tribal Court” purported to render a default judgment against Caesars in the amount of $1,787 million. Prior to our acquisition of Caesars in June 2005, it was believed that this matter was settled pending execution of final documents and mutual releases. Although fully executed settlement documents were never provided, on March 31, 2003, the United States District Court for the Northern District of New York dismissed litigation concerning the validity of the judgment, without prejudice, while retaining jurisdiction to reopen that litigation, if, within three months thereof, the settlement had not been completed. On June 22, 2007, a lawsuit was filed in the United States District Court for the Northern District of New York against us by certain trustees of the Catskill Litigation Trust alleging the Catskill Litigation Trust had been assigned the “Tribal Court” judgment and seeks to enforce it, with interest. According to a “Tribal Court” order, accrued interest through July 9, 2007, was approximately $1,014 million. On September 28, 2009, the Court entered summary judgment against the Tribe and dismissed the action, ruling that although alternative grounds were presented in the motion, the subject matter of the action was asserted in a prior action and settled by and oral agreement to end that matter with prejudice. On October 27, 2009, the Tribe filed a Notice of Appeal to the United States Court of Appeals for the Second Circuit. We intend to oppose the appeal.

Litigation Related to Development

On March 6, 2008, Caesars Bahamas Investment Corporation (“CBIC”), an indirect subsidiary of HOC terminated its previously announced agreement to enter into a joint venture in the Bahamas with Baha Mar Joint Venture Holdings Ltd. and Baha Mar JV Holding Ltd. (collectively, “Baha Mar”). To enforce its rights, on March 13, 2008, CBIC filed a complaint against Baha Mar, and the Baha Mar Development Company Ltd., in the Supreme Court of the State of New York, seeking a declaratory judgment with respect to CBIC’s rights under the Subscription and Contribution Agreement (the “Subscription Agreement”), between CBIC and Baha Mar, dated January 12, 2007. Pursuant to the Subscription Agreement, CBIC agreed, subject to certain conditions, to subscribe for shares in Baha Mar Joint Venture Holdings Ltd., which was formed to develop and construct a casino, golf course and resort project in the Bahamas. The complaint alleges that (i) the Subscription Agreement grants CBIC the right to terminate the agreement at any time prior to the closing of the transactions contemplated therein, if the closing does not occur on time; (ii) the closing did not occur on time; and, (iii) CBIC exercised its right to terminate the Subscription Agreement, and to abandon the transactions contemplated therein. The complaint seeks a declaratory judgment that the Subscription Agreement has been terminated in accordance with its terms and the transactions contemplated therein have been abandoned.

Baha Mar and Baha Mar Development Company Ltd. (“Baha Mar Development”) filed an Amended Answer and Counterclaims against CBIC and a Third Party Complaint dated June 18, 2008 against HOC in the Supreme Court of the State of New York. Baha Mar and the Baha Mar Development allege that CBIC wrongfully terminated the Subscription Agreement and that CBIC wrongfully failed to make capital contributions under the Joint Venture Investors Agreement, by and between CBIC and Baha Mar, dated January 12, 2007. In addition, Baha Mar and Baha Mar Development allege that HOC wrongfully failed to perform its purported obligations under the Harrah’s Baha Mar Joint Venture Guaranty, dated January 12, 2007. Baha Mar and Baha Mar Development assert claims for breach of contract, breach of fiduciary duty, promissory estoppel, equitable estoppel and negligent misrepresentation. Baha Mar and Baha Mar Development seek (i) declaratory relief; (ii) specific performance; (iii) the recovery of alleged monetary damages; (iv) the recovery of attorneys fees, costs, and expenses and (v) the dismissal with prejudice of CBIC’s Complaint. CBIC and HOC have each answered, denying all allegations of wrongdoing. In the second quarter 2009, both sides filed motions for summary judgment.

At the conclusion of oral argument on October 6, 2009, on cross motions for summary judgment, the Court stated that it was going to grant summary judgment to CBIC and HOC and that Baha Mar Development’s claims are dismissed. The Court stated that it will issue a written opinion, but the opinion has not been issued to date.

 

22


Table of Contents

Litigation Related to the December 2008 Exchange Offer

On January 9, 2009, S. Blake Murchison and Willis Shaw filed a purported class action lawsuit in the United Stated District Court for the District of Delaware, Civil Action No. 09-00020-SLR, against Harrah’s Entertainment, Inc. and its board of directors, and Harrah’s Operating Company, Inc. The lawsuit was amended on March 4, 2009, alleging that the bond exchange offer which closed on December 24, 2008, wrongfully impaired the rights of bondholders. The amended complaint alleges, among others, breach of the bond indentures, violation of the Trust Indenture Act of 1939, equitable rescission, and liability claims against the members of the board. The amended complaint seeks, among other relief, class certification of the lawsuit, declaratory relief that the alleged violations occurred, unspecified damages to the class, and attorneys’ fees. On April 30, 2009, the defendants filed a motion to dismiss the amended complaint. Prior to responding to the motion to dismiss, the defendants stipulated to the plaintiff’s request to dismiss the lawsuit, without prejudice, which the court entered on June 18, 2009. Both sides have reserved the right to request the court to award attorneys fees.

Other

In addition, the Company is party to ordinary and routine litigation incidental to our business. We do not expect the outcome of any pending litigation to have a material adverse effect on our consolidated financial position or results of operations.

Note 14—Supplemental Cash Flow Disclosures

Cash Paid for Interest and Taxes

The following table reconciles our Interest expense, net of interest capitalized, per the Consolidated Statements of Operations, to cash paid for interest:

 

     Successor     Successor            Predecessor  

(In millions)

   Nine months
Ended
September 30, 2009
    January 28, 2008
Through
September 30, 2008
           January 1, 2008
Through
January 27, 2008
 

Interest expense, net of interest capitalized

   $ 1,404.7      $ 1,469.4           $ 89.7   

Adjustments to reconcile to cash paid for interest:

           

Net change in accruals

     104.1        (210.3          8.7   

Amortization of deferred finance charges

     (106.7     (67.4          (0.8

Net amortization of discounts and premiums

     (105.7     (92.8          2.9   

Amortization of other comprehensive income

     (2.2     (0.6          (0.1

Rollover of PIK interest into principal

     (79.1     —               —     

Change in accrual (related to PIK)

     (40.1     (26.9          —     

Change in fair value of interest rate swaps

     —          (27.7          (39.2
                             

Cash paid for interest, net of amount capitalized

   $ 1,175.0      $ 1,043.7           $ 61.2   
                             

Cash payments of income taxes, net

   $ 29.2      $ 5.5           $ 1.0   
                             

Note 15—Insurance Proceeds Related to Hurricane-Damaged Properties

In first quarter 2008, we entered into a settlement agreement with our insurance carriers related to the remaining unsettled claims associated with damages incurred in Mississippi from Hurricane Katrina in 2005, and the final payment of $338.1 million was received. Insurance proceeds exceeded the net book value of the impacted assets and costs and expenses that were reimbursed under our business interruption claims, and the excess is recorded as income in the line item, Write-downs, reserves and recoveries, for properties included in continuing operations and in the line item, (Loss)/income from discontinued operations, for properties included in discontinued operations. We recorded $185.4 million in the Successor period from January 28, 2008 through September 30, 2008, for insurance proceeds included in Write-downs, reserves and recoveries and $141.1 million in the Successor period from January 28, 2008 through September 30, 2008, and $0.1 million in the Predecessor period from January 1, 2008 through January 27, 2008, for insurance proceeds included in Discontinued operations in our Consolidated Statements of Operations.

Note 16—Related Party Transactions

In connection with the Merger, Apollo, TPG and their affiliates entered into a services agreement with Harrah’s Entertainment relating to the provision of financial and strategic advisory services and consulting services. We paid Apollo and TPG a one-time transaction fee of $200 million for structuring the Merger and debt financing negotiations. This amount was included in the overall

 

23


Table of Contents

purchase price of the Merger. In addition, we pay a monitoring fee for management services and advice. Fees for the quarter and nine months ended September 30, 2009 were $7.2 million and $21.5 million, respectively. For the quarter ended September 30, 2008, fees were $7.6 million. For the period from January 28, 2008, through September 30, 2008, these fees totaled $20.4 million, which are included in Corporate expense in our Consolidated Statements of Operations for the applicable Successor periods. We also reimburse Apollo and TPG for expenses that they incur related to their management services.

In connection with our debt exchange in April 2009, certain debt held by Apollo and TPG was exchanged for new debt and the related party gain on that exchange totaling $80.0 million, net of deferred tax of $52.3 million, has been recorded to stockholders’ equity.

During the quarter ended June 30, 2009, our sponsors completed their own tender offer and purchased some of our Second Lien Notes.

Note 17—Subsequent Events

Additional Borrowings Under Credit Facilities

On September 26, 2009, HOC entered into an amendment to its senior secured credit facilities to allow for $1.0 billion (of the $1.75 billion available) of incremental term loans under the Credit Facilities (“Incremental Facility Amendment”). On October 15, 2009, HOC borrowed the $1 billion available under the Incremental Facility Amendment, and used a majority of the proceeds to temporarily repay most of our revolving debt under the Credit Facilities. The additional $1.0 billion borrowed under the Incremental Facility Amendment matures on October 31, 2016 and bears interest at LIBOR plus 750 basis points, subject to a 200 basis point LIBOR floor.

CMBS Repurchases

On October 22, 2009, HET entered into purchase and sale agreements with certain lenders to acquire mezzanine loans (“CMBS Loans”) under its commercial mortgaged-back securities (“CMBS”) financing. HET will purchase CMBS Loans using up to an aggregate amount of $250 million of cash, at a purchase price of between 25 and 30 cents per $1.00 principal amount of CMBS Loans, depending on certain circumstances.

Note 18—Consolidating Financial Information of Guarantors and Issuers

As of September 30, 2009, HOC is the issuer of certain debt securities that have been guaranteed by Harrah’s Entertainment and certain subsidiaries of HOC. The following consolidating schedules present condensed financial information for Harrah’s Entertainment, the parent and guarantor; HOC, the subsidiary issuer; guarantor subsidiaries of HOC; and non-guarantor subsidiaries of Harrah’s Entertainment and HOC, which includes the CMBS properties, as of September 30, 2009, and December 31, 2008, and for the Successor companies for the quarter and nine months ended September 30, 2009, and the quarter ended September 30, 2008, and the period January 28, 2008, through September 30, 2008, and for the Predecessor companies for the period from January 1, 2008, through January 27, 2008.

In connection with the CMBS financing for the Merger, HOC spun off to Harrah’s Entertainment the following casino properties and related operating assets: Harrah’s Las Vegas, Rio, Flamingo Las Vegas, Harrah’s Atlantic City, Showboat Atlantic City, Harrah’s Lake Tahoe, Harvey’s Lake Tahoe and Bill’s Lake Tahoe. Upon receipt of regulatory approvals that were requested prior to the closing of the Merger, in May 2008, Paris Las Vegas and Harrah’s Laughlin and their related operating assets were spun out of HOC to Harrah’s Entertainment and Harrah’s Lake Tahoe, Harvey’s Lake Tahoe, Bill’s Lake Tahoe and Showboat Atlantic City and their related operating assets were transferred to HOC from Harrah’s Entertainment. We refer to the May spin-off and transfer as the “Post-Closing CMBS Transaction.” The financial information included in this section reflects ownership of the CMBS properties pursuant to the spin-off and transfer of the Post-Closing CMBS Transaction.

In lieu of providing separate unaudited financial statements for the guarantor subsidiaries, we have included the accompanying consolidating condensed financial statements based on our understanding of the Securities and Exchange Commission’s interpretation and application of ASC 470-S99, (formerly Rule 3-10 of the Securities and Exchange Commission’s Regulation S-X and Staff Accounting Bulletin No. 53). Management does not believe that separate financial statements of the guarantor subsidiaries are material to our investors. Therefore, separate financial statements and other disclosures concerning the guarantor subsidiaries are not presented.

 

24


Table of Contents

HARRAH’S ENTERTAINMENT, INC.

(SUCCESSOR ENTITY)

CONSOLIDATING CONDENSED BALANCE SHEET

SEPTEMBER 30, 2009

(UNAUDITED)

 

(In millions)

   HET
(Parent)
    Subsidiary
Issuer
   Guarantors    Non-
Guarantors
   Consolidating/
Eliminating
Adjustments
    Total  

Assets

               

Current assets

               

Cash and cash equivalents

   $ 175.3      $ 160.3    $ 301.4    $ 311.2    $ —        $ 948.2   

Receivables, net of allowance for doubtful accounts

     —          15.1      227.7      89.5      —          332.3   

Deferred income taxes

     —          58.4      72.9      30.7      —          162.0   

Prepayments and other

     —          13.5      96.7      74.0      —          184.2   

Inventories

     —          0.6      35.5      16.6      —          52.7   

Intercompany receivables

     0.2        236.6      240.2      279.0      (756.0     —     
                                             

Total current assets

     175.5        484.5      974.4      801.0      (756.0     1,679.4   

Land, buildings, riverboats and equipment, net of accumulated depreciation

     —          242.5      10,984.7      6,867.6      —          18,094.8   

Assets held for sale

     —          —        7.3      —        —          7.3   

Goodwill

     —          —        1,753.0      1,705.9      —          3,458.9   

Intangible assets

     —          6.5      4,273.1      724.5      —          5,004.1   

Investments in and advances to non-consolidated affiliates

     1,249.9        15,097.5      16.6      51.1      (16,373.4     41.7   

Deferred costs and other

     —          384.1      252.1      308.1      —          944.3   

Intercompany receivables

     —          1,111.9      1, 687.7      1,780.1      (4,579.7     —     
                                             
   $ 1,425.4      $ 17,327.0    $ 19,948.9    $ 12,238.3    $ (21,709.1   $ 29,230.5   
                                             

Liabilities and Stockholders’ (Deficit)/Equity

               

Current liabilities

               

Accounts payable

   $ —        $ 94.7    $ 107.3    $ 69.7    $ —        $ 271.7   

Interest payable

     —          323.6      2.2      10.6      —          336.4   

Accrued expenses

     12.0        199.9      497.5      431.8      —          1,141.2   

Current portion of long-term debt

     —          20.0      5.0      24.0      —          49.0   

Intercompany payables

     —          44.2      403.1      308.7      (756.0     —     
                                             

Total current liabilities

     12.0        682.4      1,015.1      844.8      (756.0     1,798.3   

Long-term debt

     —          13,056.3      102.6      6,710.2      (575.7     19,293.4   

Deferred credits and other

     —          655.8      140.7      53.9      —          850.4   

Deferred income taxes

     —          1,824.3      2,463.3      1,534.4      —          5,822.0   

Intercompany notes

     4.0        98.1      1,973.4      1,928.5      (4,004.0     —     
                                             
     16.0        16,316.9      5,695.1      11,071.8      (5,335.7     27,764.1   
                                             

Preferred stock

     2,547.1        —        —        —        —          2,547.1   
                                             

Harrah’s Entertainment, Inc. stockholders’ (deficit)/equity

     (1,137.7     1,010.1      14,253.8      1,109.5      (16,373.4     (1,137.7

Non-controlling interests

     —          —        —        57.0      —          57.0   
                                             

Total (deficit)/equity

     (1,137.7     1,010.1      14,253.8      1,166.5      (16,373.4     (1,080.7
                                             
   $ 1,425.4      $ 17,327.0    $ 19,948.9    $ 12,238.3    $ (21,709.1   $ 29,230.5   
                                             

 

25


Table of Contents

HARRAH’S ENTERTAINMENT, INC.

(SUCCESSOR ENTITY)

CONSOLIDATING CONDENSED BALANCE SHEET

DECEMBER 31, 2008

 

(In millions)

   HET
(Parent)
    Subsidiary
Issuer
    Guarantors    Non-
Guarantors
   Consolidating/
Eliminating
Adjustments
    Total  

Assets

              

Current assets

              

Cash and cash equivalents

   $ 0.1      $ 7.1      $ 318.3    $ 325.0    $ —        $ 650.5   

Receivables, net of allowance for doubtful accounts

     0.1        8.1        271.5      114.3      —          394.0   

Deferred income taxes

     —          56.5        79.4      21.7      —          157.6   

Prepayments and other

     —          12.9        101.6      84.9      —          199.4   

Inventories

     —          1.2        42.0      19.5      —          62.7   

Intercompany receivables

     0.2        261.6        161.5      168.0      (591.3     —     
                                              

Total current assets

     0.4        347.4        974.3      733.4      (591.3     1,464.2   

Land, buildings, riverboats and equipment, net of accumulated depreciation

     —          252.0        10,992.0      6,996.4      26.7        18,267.1   

Assets held for sale

     —          35.0        14.3      —        —          49.3   

Goodwill

     —          —          2,737.2      2,165.0      —          4,902.2   

Intangible assets

     —          7.0        4,506.2      794.7      —          5,307.9   

Investments in and advances to non-consolidated affiliates

     728.2        15,879.1        4.1      26.3      (16,607.3     30.4   

Deferred costs and other

     —          524.1        249.4      254.0      —          1,027.5   

Intercompany receivables

     160.6        1,256.9        1,687.7      1,202.4      (4,307.6     —     
                                              
   $ 889.2      $ 18,301.5      $ 21,165.2    $ 12,172.2    $ (21,479.5   $ 31,048.6   
                                              

Liabilities and Stockholders’ (Deficit)/Equity

              

Current liabilities

              

Accounts payable

   $ 0.5      $ 156.8      $ 153.6    $ 71.4    $ —        $ 382.3   

Interest payable

     —          400.0        1.8      15.9      —          417.7   

Accrued expenses

     7.7        224.4        508.8      374.1      —          1,115.0   

Current portion of long-term debt

     —          72.5        6.3      6.8      —          85.6   

Intercompany payables

     —          18.9        298.2      274.2      (591.3     —     
                                              

Total current liabilities

     8.2        872.6        968.7      742.4      (591.3     2,000.6   

Long-term debt

     —          16,503.2        102.6      6,517.5      —          23,123.3   

Deferred credits and other

     —          480.6        131.5      57.0      —          669.1   

Deferred income taxes

     —          358.5        2,551.8      1,416.7      —          4,327.0   

Intercompany notes

     2.0        258.7        1,973.4      2,073.5      (4,307.6     —     
                                              
     10.2        18,473.6        5,728.0      10,807.1      (4,898.9     30,120.0   
                                              

Preferred stock

     2,289.4        —          —        —        —          2,289.4   
                                              

Harrah’s Entertainment, Inc. stockholders’ (deficit)/equity

     (1,410.4     (172.1     15,437.2      1,315.5      (16,580.6     (1,410.4

Non-controlling interests

     —          —          —        49.6      —          49.6   
                                              

Total (deficit)/equity

     (1,410.4     (172.1     15,437.2      1,365.1      (16,580.6     (1,360.8
                                              
   $ 889.2      $ 18,301.5      $ 21,165.2    $ 12,172.2    $ (21,479.5   $ 31,048.6   
                                              

 

26


Table of Contents

HARRAH’S ENTERTAINMENT, INC.

(SUCCESSOR ENTITY)

CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE QUARTER ENDED SEPTEMBER 30, 2009

(UNAUDITED)

 

(In millions)

   HET
(Parent)
    Subsidiary
Issuer
    Guarantors     Non-
Guarantors
    Consolidating/
Eliminating
Adjustments
    Total  

Revenues

            

Casino

   $ —        $ 22.1      $ 1,218.2      $ 581.7      $ —        $ 1,822.0   

Food and beverage

     —          4.8        219.3        157.4        —          381.5   

Rooms

     —          5.1        154.3        112.1        —          271.5   

Management fees

     —          2.1        23.2        0.4        (10.8     14.9   

Other

     —          11.0        90.3        85.8        (27.6     159.5   

Less: casino promotional allowances

     —          (6.8     (230.9     (129.5     —          (367.2
                                                

Net revenues

     —          38.3        1,474.4        807.9        (38.4     2,282.2   
                                                

Operating expenses

            

Direct

            

Casino

     —          11.7        652.1        333.8        —          997.6   

Food and beverage

     —          2.4        82.5        68.0        —          152.9   

Rooms

     —          0.5        28.9        24.9        —          54.3   

Property general, administrative and other

     —          7.2        340.7        195.1        (29.3     513.7   

Depreciation and amortization

     —          1.8        122.8        51.0        —          175.6   

Project opening costs

     —          —          0.1        0.2        —          0.3   

Write-downs, reserves and recoveries

     —          (28.4     44.1        8.6        —          24.3   

Impairment of intangible assets

     —          —          1,090.2        238.4        —          1,328.6   

Losses/(income) on interests in non-consolidated affiliates

     1,619.1        1,039.2        (6.4     0.5        (2,651.2     1.2   

Corporate expense

     8.0        27.3        4.3        9.2        (9.1     39.7   

Merger and integration costs

     —          —          —          —          —          —     

Amortization of intangible assets

     —          0.2        28.3        15.7        —          44.2   
                                                

Total operating expenses

     1,627.1        1,061.9        2,387.6        945.4        (2,689.6     3,332.4   
                                                

Loss from operations

     (1,627.1     (1,023.6     (913.2     (137.5     2,651.2        (1,050.2

Interest expense, net of interest capitalized

     —          (398.6     (37.1     (99.9     91.1        (444.5

Losses on early extinguishments of debt

     —          (1.5     —          —          —          (1.5

Other income, including interest income

     —          23.2        27.1        44.9        (91.1     4.1   
                                                

Loss from continuing operations before income taxes

     (1,627.1     (1,400.5     (923.2     (192.5     2,651.2        (1,492.1

Benefit/(provision) for income taxes

     2.8        (6.9     (128.3     3.5        —          (128.9
                                                

Loss from continuing operations, net of tax

     (1,624.3     (1,407.4     (1,051.5     (189.0     2,651.2        (1,621.0
                                                

Discontinued operations

            

Loss from discontinued operations

     —          —          (0.1     —          —          (0.1

Benefit for income taxes

     —          —          —          —          —          —     
                                                

Loss from discontinued operations, net

     —          —          (0.1     —          —          (0.1
                                                

Net loss

     (1,624.3     (1,407.4     (1,051.6     (189.0     2,651.2        (1,621.1

Less: net income attributable to non-controlling interests

     —          —          —          (3.2     —          (3.2
                                                

Net loss attributable to Harrah’s Entertainment, Inc.

   $ (1,624.3   $ (1,407.4   $ (1,051.6   $ (192.2   $ 2,651.2      $ (1,624.3
                                                

 

27


Table of Contents

HARRAH’S ENTERTAINMENT, INC.

(SUCCESSOR ENTITY)

CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE QUARTER ENDED SEPTEMBER 30, 2008

(UNAUDITED)

 

(In millions)

   HET
(Parent)
    Subsidiary
Issuer
    Guarantors     Non-
Guarantors
    Consolidating/
Eliminating
Adjustments
    Total  

Revenues

            

Casino

   $ —        $ 27.5      $ 1,415.2      $ 687.4      $ —        $ 2,130.1   

Food and beverage

     —          6.1        247.9        173.6        —          427.6   

Rooms

     —          6.1        177.3        133.3        —          316.7   

Management fees

     —          2.3        17.5        (0.7     (2.5     16.6   

Other

     —          9.2        92.6        81.7        (1.6     181.9   

Less: casino promotional allowances

     —          (8.0     (279.9     (139.1     —          (427.0
                                                

Net revenues

     —          43.2        1,670.6        936.2        (4.1     2,645.9   
                                                

Operating expenses

            

Direct

            

Casino

     —          16.4        756.8        356.2        —          1,129.4   

Food and beverage

     —          2.9        93.9        81.3        —          178.1   

Rooms

     —          0.5        33.7        30.7        —          64.9   

Property general, administrative and other

     —          19.7        377.9        232.3        1.9        631.8   

Depreciation and amortization

     —          2.1        91.0        58.8        0.1       152.0   

Project opening costs

     —          —          15.2        1.1        —          16.3   

Write-downs, reserves and recoveries

     9.0       2.5        20.6        14.7        —          46.8   

Losses/(income) on interests in non-consolidated affiliates

     118.5        (237.1     (40.0     2.1        159.0        2.5   

Corporate expense

     9.9        19.6        7.1        4.1        (6.0     34.7   

Merger and integration costs

     —          1.0        —          —          —          1.0   

Amortization of intangible assets

     —          0.1        25.6        13.1        —          38.8   
                                                

Total operating expenses

     137.4        (172.3     1,381.8        794.4        155.0        2,296.3   
                                                

(Loss)/income from operations

     (137.4     215.5        288.8        141.8        (159.1     349.6   

Interest expense, net of interest capitalized

     —          (429.8     (45.0     (140.2     81.6       (533.4

Gains on early extinguishments of debt

     —          7.4        —          —          —          7.4   

Other income, including interest income

     1.6        30.3        27.0        29.9        (81.6 )     7.2   
                                                

(Loss)/income from continuing operations before income taxes

     (135.8     (176.6     270.8        31.5        (159.1     (169.2

Benefit/(provision) for income taxes

     6.1        142.2        (88.1     (14.2     —          46.0   
                                                

(Loss)/income from continuing operations, net of tax

     (129.7     (34.4     182.7        17.3        (159.1     (123.2
                                                

Discontinued operations