Caesars Entertainment Corporation
HARRAHS ENTERTAINMENT INC (Form: 10-Q, Received: 11/05/2010 07:08:52)
Table of Contents

 

 

UNITED STATES

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, 2010

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 3, 2010, the Registrant had 10 shares of voting Common Stock and 60,539,388 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, 2010 and December 31, 2009

     4   
  

Consolidated Condensed Statements of Operations for the quarters and nine months ended September  30, 2010 and 2009

     5   
  

Consolidated Condensed Statements of Cash Flows for the nine months ended September  30, 2010 and 2009

     6   
  

Consolidated Condensed Statements of Stockholders’ Equity/(Deficit) and Comprehensive Loss as of and for the nine month period ended September 30, 2010

     7   
  

Notes to Consolidated Condensed Financial Statements

     8   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      42   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      68   

Item 4.

   Controls and Procedures      68   

Item 4T.

   Controls and Procedures      68   

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      69   

Item 1A.

   Risk Factors      70   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      80   

Item 3.

   Defaults Upon Senior Securities      80   

Item 4.

   Removed and Reserved      80   

Item 5.

   Other Information      80   

Item 6.

   Exhibits      81   
SIGNATURES      94   

 

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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 Article 10 of Regulation S-X 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 financial position, operating results and cash flows.

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, 2009.

 

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HARRAH’S ENTERTAINMENT, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

 

(in millions, except share amounts)

   September 30, 2010     December 31, 2009  

Assets

    

Current assets

    

Cash and cash equivalents

   $ 1,323.7      $ 918.1   

Receivables, less allowance for doubtful accounts of $215.6 and $207.1

     334.4        323.5   

Deferred income taxes

     154.2        148.2   

Prepayments and other

     172.3        156.4   

Federal income tax receivable

     233.3        —     

Inventories

     48.5        52.7   
                

Total current assets

     2,266.4        1,598.9   
                

Land, buildings, riverboats and equipment

     19,732.3        19,206.0   

Less: accumulated depreciation

     (1,815.4     (1,281.2
                
     17,916.9        17,924.8   

Assets held for sale

     2.9        16.7   

Goodwill

     3,413.7        3,456.9   

Intangible assets other than goodwill

     4,799.2        4,951.3   

Investments in and advances to non-consolidated affiliates

     36.2        94.0   

Deferred charges and other

     852.6        936.6   
                
   $ 29,287.9      $ 28,979.2   
                

Liabilities and Stockholders’ Equity/(Deficit)

    

Current liabilities

    

Accounts payable

   $ 261.5      $ 260.8   

Interest payable

     429.7        195.6   

Accrued expenses and other current liabilities

     1,198.4        1,074.8   

Current portion of long-term debt

     255.1        74.3   
                

Total current liabilities

     2,144.7        1,605.5   

Long-term debt

     19,462.0        18,868.8   

Deferred credits and other

     970.9        872.5   

Deferred income taxes

     5,647.7        5,856.9   
                
     28,225.3        27,203.7   
                

Commitments and contingencies

    

Preferred stock; $0.01 par value; 40,000,000 shares authorized, zero and 19,893,515 shares issued and outstanding (net of zero and 42,020 shares held in treasury) as of September 30, 2010 and December 31, 2009, respectively

     —          2,642.5   
                

Stockholders’ equity/(deficit)

    

Common stock, non-voting and voting; $0.01 par value; 80,000,020 shares authorized; 60,543,317 and 40,672,302 shares issued and outstanding (net of 150,427 and 85,907 shares held in treasury) as of September 30, 2010 and December 31, 2009, respectively

     0.6        0.4   

Additional paid-in capital

     6,137.2        3,480.0   

Accumulated deficit

     (4,903.7     (4,269.3

Accumulated other comprehensive loss

     (215.7     (134.0
                

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

     1,018.4        (922.9

Non-controlling interests

     44.2        55.9   
                

Total stockholders’ equity/(deficit)

     1,062.6        (867.0
                
   $ 29,287.9      $ 28,979.2   
                

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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HARRAH’S ENTERTAINMENT, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    Quarter Ended September 30     Nine Months Ended September 30,  

(In millions, except share and per share data))

  2010     2009     2010     2009  

Revenues

       

Casino

  $ 1,784.3      $ 1,822.0      $ 5,251.3      $ 5,444.8   

Food and beverage

    395.0        381.5        1,157.8        1,129.3   

Rooms

    296.0        271.5        858.5        817.8   

Management fees

    9.1        14.9        31.2        43.5   

Other

    155.5        159.5        439.9        447.9   

Less: casino promotional allowances

    (351.4     (367.2     (1,041.1     (1,075.0
                               

Net revenues

    2,288.5        2,282.2        6,697.6        6,808.3   
                               

Operating expenses

       

Direct

       

Casino

    1,010.9        997.6        2,982.9        2,968.0   

Food and beverage

    164.0        152.9        469.7        451.1   

Rooms

    67.2        54.3        195.5        160.4   

Property general, administrative and other

    540.8        513.7        1,580.0        1,518.3   

Depreciation and amortization

    181.4        175.6        548.1        516.8   

Project opening costs

    1.7        0.3        4.0        2.9   

Write-downs, reserves and recoveries

    28.7        24.3        136.3        78.6   

Impairment of intangible assets

    44.0        1,328.6        144.0        1,625.7   

Loss on interests in nonconsolidated affiliates

    1.7        1.2        2.1        1.3   

Corporate expense

    32.4        39.7        103.8        111.7   

Acquisition and integration costs

    0.7        —          8.3        0.3   

Amortization of intangible assets

    39.3        44.2        121.7        131.7   
                               

Total operating expenses

    2,112.8        3,332.4        6,296.4        7,566.8   
                               

Income/(loss) from continuing operations

    175.7        (1,050.2     401.2        (758.5

Interest expense, net of interest capitalized

    (523.6     (444.5     (1,471.9     (1,404.7

Gains/(losses) on early extinguishments of debt

    77.4        (1.5     48.7        4,279.2   

Other income, including interest income

    9.8        4.1        28.2        23.2   
                               

(Loss)/income from continuing operations before income taxes

    (260.7     (1,492.1     (993.8     2,139.2   

Benefit/(provision) for income taxes

    97.5        (128.9     364.5        (1,590.8
                               

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

    (163.2     (1,621.0     (629.3     548.4   
                               

Discontinued operations

       

Loss from discontinued operations

    —          (0.1     —          (0.4

Benefit for income taxes

    —          —          —          0.1   
                               

Loss from discontinued operations, net of tax

    —          (0.1     —          (0.3
                               

Net (loss)/income

    (163.2     (1,621.1     (629.3     548.1   

Less: net income attributable to non-controlling interests

    (1.6     (3.2     (5.1     (16.1
                               

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

    (164.8     (1,624.3     (634.4     532.0   

Preferred stock dividends

    —          (82.0     —          (259.3
                               

Net (loss)/income attributable to common stockholders

  $ (164.8   $ (1,706.3   $ (634.4   $ 272.7   
                               

Earnings per share - basic

       

(Loss)/income from continuing operations

  $ (2.72   $ (41.95   $ (11.70   $ 6.71   

Discontinued operations, net

    —          —          —          (0.01
                               

Net (loss)/income

  $ (2.72   $ (41.95   $ (11.70   $ 6.70   
                               

Earnings per share - diluted

       

(Loss)/income from continuing operations

  $ (2.72   $ (41.95   $ (11.70   $ 4.53   

Discontinued operations, net

    —          —          —          —     
                               

Net (loss)/income

  $ (2.72   $ (41.95   $ (11.70   $ 4.53   
                               

Basic weighted-average common shares outstanding

    60,551,645        40,678,117        54,218,369        40,687,765   
                               

Diluted weighted-average common shares outstanding

    60,551,645        40,678,117        54,218,369        117,351,685   
                               

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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HARRAH’S ENTERTAINMENT, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Nine months ended September 30,  

(in millions)

   2010     2009  

Cash flows provided by/(used in) operating activities

    

Net (loss)/income

   $ (629.3   $ 548.1   

Adjustments to reconcile net (loss)/income to cash flows provided by operating activities:

    

Loss from discontinued operations, before income taxes

     —          0.4   

Gains on early extinguishments of debt

     (48.7     (4,279.2

Depreciation and amortization

     889.9        873.4   

Non-cash write-downs, reserves and recoveries, net

     102.0        17.6   

Impairment of intangible assets

     144.0        1,625.7   

Share-based compensation expense

     16.5        12.4   

Deferred income taxes

     (176.7     1,490.6   

Gain on adjustment of investment

     (7.1     —     

Change in federal income tax receivable

     (233.3     —     

Net change in long-term accounts

     (38.1     142.4   

Net change in working capital accounts

     263.9        (5.6

Other

     25.3        (28.2
                

Cash flows provided by operating activities

     308.4        397.6   
                

Cash flows provided by/(used in) investing activities

    

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

     (124.6     (411.9

Investments in subsidiaries

     (63.2     —     

Payment made for partnership interest

     (19.5     —     

Payment made for Pennsylvania gaming rights

     (16.5     —     

Cash acquired in business acquisition

     33.0        —     

Investments in and advances to non-consolidated affiliates

     (5.0     (12.8

Proceeds from asset sales

     14.3        20.0   

Other

     (14.4     (12.3
                

Cash flows used in investing activities

     (195.9     (417.0
                

Cash flows provided by/(used in) financing activities

    

Proceeds from the issuance of long-term debt

     1,292.2        2,259.6   

Debt issuance costs

     (20.1     (54.1

Discount on debt

     (38.8     —     

Borrowings under lending agreements

     1,175.0        1,651.6   

Repayments under lending agreements

     (1,605.0     (2,707.1

Cash paid in connection with early extinguishments of debt

     (273.5     (680.8

Scheduled debt retirements

     (214.7     (40.5

Purchase of additional interest in subsidiary

     —          (83.7

Non-controlling interests’ distributions, net of contributions

     (5.8     (13.0

Other

     (8.3     (14.5
                

Cash flows provided by financing activities

     301.0        317.5   
                

Cash flows from discontinued operations

    

Cash flows from operating activities

     —          (0.4

Effect of deconsolidation of variable interest entities

     (7.9     —     
                

Net increase in cash and cash equivalents

     405.6        297.7   

Cash and cash equivalents, beginning of period

     918.1        650.5   
                

Cash and cash equivalents, end of period

   $ 1,323.7      $ 948.2   
                

See accompanying notes to Consolidated Condensed Financial Statements.

 

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HARRAH’S ENTERTAINMENT, INC.

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

(UNAUDITED)

 

     Common Stock    

Additional

    Retained
Earnings/
    Accumulated
Other
Comprehensive
Income/(Loss)
    Non-controlling
Interests
    Total     Comprehensive
(Loss)/Income
 

(in millions)

   Shares
Outstanding
     Amount     Paid-in-
Capital
    (Accumulated
Deficit)
         

Balance at December 31, 2009

     40.7       $ 0.4      $ 3,480.0      $ (4,269.3   $ (134.0   $ 55.9      $ (867.0  

Net (loss)/income

            (634.4       5.1        (629.3     (629.3

Share-based compensation

          16.3            0.2        16.5     

Repurchase of treasury shares

     *         *     (1.3           (1.3  

Cumulative preferred stock dividends

          (64.6           (64.6  

Cancellation of cumulative preferred stock dividends in connection with conversion of preferred stock to common stock

          717.2              717.2     

Conversion of non-voting perpetual preferred stock to non-voting common stock

     19.9         0.2        1,989.6              1,989.8     

Pension adjustment, net of tax benefit of $0.0

              (0.7       (0.7     (0.7

Foreign currency translation adjustments, net of tax benefit of $0.0

              9.0        (1.4     7.6        7.6   

Fair market value of swap agreements, net of tax benefit of $29.9

              (73.1       (73.1     (73.1

Fair market value of interest rate cap agreements, net of tax benefit of $0.1

              (0.1      
(0.1

    (0.1

Fair market value of interest rate cap agreements on commercial mortgage backed securities, net of tax benefit of $1.7

              (17.2      
(17.2

    (17.2

Reclassification of loss on interest rate locks from other comprehensive loss to interest expense, net of tax provision of $0.2

              0.4         
0.4
  
    0.4   

Non-controlling distributions, net of contributions

               
(5.8

    (5.8  

Effect of deconsolidation of variable interest entities

               
(9.8

    (9.8  
                       

Comprehensive Loss, nine months ended September 30, 2010

                  $ (712.4
                                                                 

Balance at September 30, 2010

     60.5       $ 0.6      $ 6,137.2      $ (4,903.7   $ (215.7   $ 44.2      $ 1,062.6     
                                                           

 

* Amount rounds to zero but results in a reduction of 0.1 to the rounded total

 

** Amount rounds to zero and does not change rounded total.

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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HARRAH’S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

September 30, 2010

(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, 2010, we owned, operated or managed 52 casinos in seven countries, but primarily in the United States and England. Our casino entertainment facilities operate 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, nine in England, one in Scotland, 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 “Acquisition.” Harrah’s Entertainment continued as the same legal entity after the Acquisition. As a result of the Acquisition, 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 Acquisition, our stock is no longer publicly traded.

We have recast certain amounts for prior periods to conform to our 2010 presentation.

Note 2—Recently Issued Accounting Pronouncements

The following are accounting standards adopted or issued during 2010 that could have an impact on our Company.

On July 21, 2010, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2010-20, “Disclosures About the Credit Quality of Financing receivables and the Allowance for Credit Losses,” (ASC Topic 310, “Receivables”). The amendments in the update require more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The objective of enhancing these disclosures is to improve financial statement users’ understanding of the nature of an entity’s credit risk associated with its financing receivables and the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The amendments in the update are effective for the first interim or annual reporting period ending on or after December 15, 2010. We are currently assessing what impact the adoption of this update will have on our consolidated financial position, results of operations and cash flows.

In September 2010, the FASB ratified the final consensus of Emerging Issues Task Force (“EITF”) Issue 10-C (ASU 2010-25, “Plan Accounting — Defined Contribution Pension Plans (Topic 962): Reporting Loans to Participants by Defined Contribution Pension Plans (a consensus of the FASB Emerging Issues Task Force)”). The Task Force concluded that participant loans should be classified as notes receivables and measured at the unpaid principal balance plus any accrued by unpaid interest. The update also excludes participant loans from the credit quality disclosure requirements in ASU 2010-20, “Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The update is effective for fiscal years ending after December 15, 2010, and should be applied retrospectively to all prior periods presented. We are currently assessing what impact the adoption of the update will have on our consolidated financial position, results of operations and cash flows

In April 2010, the FASB issued ASU 2010-16, “Accruals for Casino Jackpot Liabilities,” (ASC Topic 924, “Entertainment—Casinos”). The amendments in this update clarify that an entity should not accrue jackpot liabilities (or portions thereof) before a jackpot is won if the entity can avoid paying that jackpot. Instead, jackpots should be accrued and charged to revenue when an entity has the obligation to pay the jackpot. This update applies to both base and progressive jackpots. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. We have elected not to adopt early application. Upon adoption of this standard on January 1, 2011, we will adjust our recorded accrual with a corresponding cumulative effect adjustment to Retained Earnings, neither of which are expected to be material to our consolidated balance sheet.

 

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We adopted the provision of ASU No. 2010-06, “Improving Disclosures About Fair Value Measurements,” on February 1, 2010. This update adds new requirements for disclosure about transfers into and out of Level 1 and Level 2 measurements, and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The ASU also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. Further, the ASU amends guidance on employers’ disclosures about postretirement benefit plan assets under ASC 715, “Compensation – Retirement Benefits,” to require that disclosures be provided by classes of assets instead of by major categories of assets. Because ASU No. 2010-06 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 June 2009, the FASB issued ASU 2009-17 (ASC Topic 810), “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which is effective as of January 1, 2010. The new standard amends existing consolidation guidance for variable interest entities and 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. As a result of the adoption of ASU 2009-17, we have two joint ventures which were consolidated within our financial statements for all periods prior to December 31, 2009, and are no longer consolidated beginning in January 2010.

Selected financial information for 2009 related to the two joint ventures that were deconsolidated is as follows:

 

(In millions)

   Quarter Ended
September 30, 2009
    Nine Months Ended
September 30, 2009
 

Net Revenues

   $ 10.3      $ 31.9   

(Loss)/income from operations

     (0.1     1.9   

Note 3—Acquisitions

Planet Hollywood

On February 19, 2010, Harrah’s Operating Company, Inc. (“HOC”), a wholly-owned subsidiary of Harrah’s Entertainment, Inc., acquired 100% of the equity interests of PHW Las Vegas, LLC (“PHW Las Vegas”), which owns and operates the Planet Hollywood Resort and Casino (“Planet Hollywood”) located in Las Vegas, Nevada. PHW Las Vegas is an unrestricted subsidiary of HOC and therefore not a borrower under HOC’s credit facilities.

The Company paid approximately $67.2 million during the second half of 2009 for the combination of i) the Company’s initial debt investment in certain predecessor entities of PHW Las Vegas; and ii) certain interest only participations associated with the debt of certain predecessor entities of PHW Las Vegas. In connection with the cancellation of our debt investment in such predecessor entities of PHW Las Vegas in exchange for the equity of PHW Las Vegas, the Company recognized a gain of $7.1 million to adjust our investments to reflect the estimated fair value of consideration paid for the acquisition. This gain is reflected in Other income, including interest income, in our Statement of Operations for the nine months ended September 30, 2010. Also, as a result of the acquisition, the Company acquired the net cash balance of PHW Las Vegas, resulting in a net positive cash flow of $12.7 million for the nine months ended September 30, 2010.

In connection with this transaction, PHW Las Vegas assumed a $554.3 million, face value, senior secured loan, and a subsidiary of HOC canceled certain debt issued by PHW Las Vegas’ predecessor entities. In connection with the transaction and the assumption of debt, PHW Las Vegas entered into an amended and restated loan agreement (the “Amended and Restated Loan Agreement”) as discussed in Note 5, Debt, below.

 

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Selected financial information related to Planet Hollywood for periods subsequent to our date of acquisition is as follows:

 

(In millions)

   Quarter ended
September 30, 2010
     Acquisition
through
September  30, 2010
 

Net Revenues

   $ 67.7       $ 159.2   

Income from operations

     7.9         23.4   

PHW Las Vegas is not a significant subsidiary of the Company and, as a result, pro forma information for periods prior to the acquisition of PHW Las Vegas is not provided.

Purchase Accounting

The Company accounted for the acquisition of PHW Las Vegas in accordance with ASC 805, “Business Combinations,” under which the purchase price of the acquisition has been allocated based upon preliminary estimated fair values of the assets acquired and liabilities assumed, with the excess of estimated fair value over net tangible and intangible assets acquired recorded as goodwill. The preliminary purchase price allocation includes assets and liabilities of PHW Las Vegas as follows:

 

(In millions)

   February 19, 2010  

Assets

  

Current assets

  

Cash and cash equivalents

   $ 31.5   

Accounts receivable

     14.6   

Prepayments and other

     6.1   

Inventories

     1.8   
        

Total current assets

     54.0   

Land, buildings, riverboats and equipment

     461.0   

Goodwill

     9.2   

Intangible assets other than goodwill

     5.4   

Deferred charges and other

     13.2   
        
     542.8   
        

Liabilities

  

Current liabilities

  

Accounts payable

     (1.9

Interest payable

     (1.1

Accrued expenses

     (28.3

Current portion of long-term debt

     (4.5
        

Total current liabilities

     (35.8
        

Long-term debt, net of discount

     (433.3

Deferred credits and other

     (12.6
        

Total liabilities

     (481.7
        

Net assets acquired

   $ 61.1   
        

During the quarter ended September 30, 2010, the Company continued to review its preliminary purchase price allocation and the supporting valuations and related assumptions. Based upon these reviews, the Company made adjustments to its preliminary purchase price allocation (included in the table above) that resulted in an increase to the recorded goodwill of $0.3 million. The Company has not finalized its review of the purchase price allocation.

 

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Thistledown Racetrack

On September 15, 2009, we announced that the United States Bankruptcy Court for the District of Delaware had approved an agreement for the sale of Thistledown Racetrack in Cleveland, Ohio from Magna Entertainment Corporation to HOC. The closing of the sale was subject to the satisfaction of certain conditions and receipt of all required regulatory approvals. The conditions to closing were never satisfied, and the agreement was never consummated. As a result the agreement was terminated by the seller on May 17, 2010.

On May 25, 2010, HOC entered into a new agreement to purchase the assets of Thistledown Racetrack. The acquisition was completed on July 28, 2010. The results of Thistledown Racetrack for periods subsequent to July 28, 2010 were consolidated with our results. In connection with this acquisition, we paid approximately $42.5 million during July 2010 to acquire the assets of Thistledown Racetrack.

The Company accounted for the acquisition of Thistledown Racetrack in accordance with ASC 805, “Business Combinations,” under which the purchase price of the acquisition has been allocated based upon preliminary estimated fair values of the assets acquired and liabilities assumed, with the excess of estimated fair value over net tangible and intangible assets acquired recorded as goodwill. The preliminary purchase price allocation includes assets, liabilities and net assets acquired of Thistledown Racetrack of $46.8 million, $4.3 million and $42.5 million, respectively.

The Company has not finalized its purchase price allocation. The most significant of the items not finalized is the determination of deferred tax balances associated with differences between the estimated fair values and the tax bases of assets acquired and liabilities assumed.

Thistledown Racetrack is not a significant subsidiary of the Company and, as a result, pro forma information for periods prior to the acquisition of Thistledown Racetrack is not provided.

Note 4—Goodwill and Other Intangible Assets

We account for our goodwill and other intangible assets in accordance with ASC 350, “Intangible Assets – Goodwill and Other,” which provides guidance regarding the recognition and measurement of intangible assets, eliminates the amortization of indefinite-lived intangible assets and requires assessments for impairment of intangible assets that are not subject to amortization at least annually.

The following table sets forth changes in our goodwill and other intangible assets for the nine months ended September 30, 2010:

 

(In millions)

   Amortizing
Intangible Assets
    Non-Amortizing Intangible Assets  
     Goodwill     Other  

Balance at December 31, 2009

   $ 1,391.0      $ 3,456.9      $ 3,560.3   

Impairment charges

     —          (92.0     (52.0

Acquisitions

     5.4        29.3        —     

Amortization Expense

     (121.7     —          —     

Other

     (0.2     19.5        16.4   
                        

Balance at September 30, 2010

   $ 1,274.5      $ 3,413.7      $ 3,524.7   
                        

In March 2010, the Company paid $19.5 million to a former owner of Chester Downs for resolution of the final contingency associated with the Company’s purchase of additional interest in this property. This payment was recorded as goodwill. In June 2010, the Company paid $16.5 million to the State of Pennsylvania for the right to operate table games at Harrah’s Chester. This payment was recorded as a non-amortizing intangible asset.

 

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

 

     September 30, 2010      December 31, 2009  

(In millions)

   Weighted
Average
Remaining
Useful Life
(in years)
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 

Amortizing intangible assets

                  

Customer relationships

     9.2       $ 1,457.0       $ (335.2   $ 1,121.8       $ 1,454.5       $ (240.8   $ 1,213.7   

Contract rights

     4.1         132.8         (81.8     51.0         130.1         (66.5     63.6   

Patented technology

     5.3         93.5         (31.2     62.3         93.5         (22.4     71.1   

Gaming rights

     13.8         42.8         (7.0     35.8         42.8         (5.0     37.8   

Trademarks

     2.3         7.8         (4.2     3.6         7.8         (3.0     4.8   
                                                      
      $ 1,733.9       $ (459.4     1,274.5       $ 1,728.7       $ (337.7     1,391.0   
                                                      

Non-amortizing intangible assets

                  

Trademarks

             1,927.8              1,937.0   

Gaming rights

             1,596.9              1,623.3   
                              
             3,524.7              3,560.3   
                              

Total intangible assets other than goodwill

           $ 4,799.2            $ 4,951.3   
                              

The aggregate amortization of intangible assets for the quarter and nine months ended September 30, 2010 was $39.3 million and $121.7 million, respectively. Estimated annual amortization expense for the years ending December 31, 2010, 2011, 2012, 2013 and 2014 is $160.8 million, $156.2 million, $154.9 million, $152.5 million and $142.3 million, respectively.

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, 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 have completed a preliminary assessment of goodwill and other non-amortizing intangible assets as of September 30, 2010, and as a result of this assessment, recorded a charge of $44.0 million within our Consolidated Statement of Operations in the third quarter which brings the charge recorded for the nine months ended September 30, 2010 to $144.0 million. 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 2011 operating plan and certain other assumptions, which we expect to complete during fourth quarter 2010 in conjunction with our annual assessment for impairment as of September 30, 2010. Changes to the preliminary 2011 operating plan or other assumptions could require us to update our assessment of impairment, which could increase 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.

 

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The table below summarizes the 2010 impairments of goodwill and other non-amortizing intangible assets:

 

(in millions)

   Quarter ended
September 30, 2010
     Nine months ended
September 30, 2010
 

Goodwill

   $ —         $ 92.0   

Trademarks

     9.0         9.0   

Gaming rights and other

     35.0         43.0   
                 

Total impairment of goodwill and other non-amortizing intangible assets

   $ 44.0       $ 144.0   
                 

Note 5—Debt

The following table presents our debt as of September 30, 2010 and December 31, 2009:

 

Detail of Debt (dollars in millions)

   Maturity      Rate(s) at
Sept. 30,  2010
     Face Value at
Sept. 30, 2010
    Book Value at
Sept. 30, 2010
    Book Value at
Dec. 31, 2009
 

Credit Facilities and Secured Debt

            

Term Loans

            

Term Loans B1-B3

     2015         3.50%-3.53%       $ 5,820.1      $ 5,820.1      $ 5,835.3   

Term Loan B4

     2016         9.5%         992.5        970.1        975.3   

Revolving Credit Facility

     2014         3.23%-3.75%         —          —          427.0   

Senior Secured Notes

     2017         11.25%         2,095.0        2,048.4        2,045.2   

CMBS financing

     2015*         3.26%         5,380.9        5,342.9        5,551.2   

Second-Priority Senior Secured Notes

     2018         12.75%         750.0        741.1        —     

Second-Priority Senior Secured Notes

     2018         10.0%         4,553.1        2,012.5        1,959.1   

Second-Priority Senior Secured Notes

     2015         10.0%         214.8        155.6        150.7   

Secured debt

     2010         6.0%         —          —          25.0   

Chester Downs term loan

     2016         12.375%         212.8        201.3        217.2   

PHW Las Vegas senior secured loan

     2015**         3.12%         551.4        441.0        —     

Other, various maturities

     Various         4.25%-6.0%         0.9        0.9        —     

Subsidiary-guaranteed debt

            

Senior Notes

     2016         10.75%         478.6        478.6        478.6   

Senior PIK Toggle Notes

     2018         10.75%/11.5%         10.5        10.5        9.4   

Unsecured Senior Debt

            

5.5%

     2010         5.5%         —          —          186.9   

8.0%

     2011         8.0%         —          —          12.5   

5.375%

     2013         5.375%         125.2        100.0        95.5   

7.0%

     2013         7.0%         0.6        0.7        0.7   

5.625%

     2015         5.625%         784.3        564.4        319.5   

6.5%

     2016         6.5%         568.5        403.6        251.9   

5.75%

     2017         5.75%         532.2        340.9        151.3   

Floating Rate Contingent Convertible Senior Notes

     2024         0.51%         0.2        0.2        0.2   

Unsecured Senior Subordinated Notes

            

7.875%

     2010         7.875%         —          —          142.5   

8.125%

     2011         8.125%         —          —          11.4   

Other Unsecured Borrowings

            

5.3% special improvement district bonds

     2035         5.3%         67.1        67.1        68.4   

Other

     Various         Various         11.6        11.6        18.1   

Capitalized Lease Obligations

            

6.42%-9.8%

     to 2020         6.42%-9.8%         5.6        5.6        10.2   
                              

Total debt

           23,155.9        19,717.1        18,943.1   

Current portion of long-term debt

           (255.1     (255.1     (74.3
                              

Long-term debt

         $ 22,900.8      $ 19,462.0      $ 18,868.8   
                              

 

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* We are permitted to extend the maturity of the CMBS Loans from 2013 to 2015, subject to satisfying certain conditions, in connection with the amendment to the CMBS Facilities

 

** The Planet Hollywood Las Vegas senior secured loan is subject to extension options moving its maturity from 2011 to 2015, subject to certain conditions

Book values of debt as of September 30, 2010 are presented net of unamortized discounts of $3,438.9 million and unamortized premiums of $0.1 million. As of December 31, 2009, book values are presented net of unamortized discounts of $3,108.9 million and unamortized premiums of $0.1 million.

Our current maturities of debt include required interim principal payments on each of our Term Loans, our Chester Downs term loan, and the special improvement district bonds.

Amendment to CMBS Financing

On August 31, 2010, we executed an agreement with the lenders under our commercial mortgage-backed securities (“CMBS”) financing to amend the terms of our CMBS financing to, among other things, (i) provide our subsidiaries that are borrowers under the CMBS mortgage loan and/or related mezzanine loans (“CMBS Loans”) the right to extend the maturity of the CMBS Loans, subject to certain conditions, by up to 2 years until February 2015, (ii) amend certain terms of the CMBS Loans with respect to reserve requirements, collateral rights, property release prices and the payment of management fees, (iii) provide for ongoing mandatory offers to repurchase CMBS Loans using excess cash flow from the CMBS entities at discounted prices, (iv) provide for the amortization of the mortgage loan in certain minimum amounts upon the occurrence of certain conditions and (v) provide for certain limitations with respect to the amount of excess cash flow from the CMBS entities that may be distributed to us. Any CMBS Loan purchased pursuant to the amendments will be canceled.

In the fourth quarter of 2009, we purchased $948.8 million of face value of CMBS Loans for $237.2 million. Pursuant to the terms of the amendment as initially agreed to on March 5, 2010, we have agreed to pay lenders selling CMBS Loans during the fourth quarter 2009 an additional $48.0 million for their loans previously sold, to be paid no later than December 31, 2010. This additional liability was recorded as a loss on early extinguishment of debt during the first quarter of 2010.

In June 2010, we purchased $46.6 million face value of CMBS Loans for $22.6 million, recognizing a net gain on the transaction of approximately $23.3 million during the second quarter of 2010. In September 2010, in connection with the amendment, we purchased $123.8 million face value of CMBS Loans for $37.1 million, of which $31.0 million was paid at the closing of the CMBS amendment, and the remainder of which will be paid prior to December 31, 2010. We recognized a pre-tax gain on the transaction of approximately $77.4 million, net of deferred finance charges.

As part of the CMBS Loan Agreement, in order to extend the maturity of the CMBS Loans under the extension option, we will be required to extend our interest rate cap agreement to cover the two years of extended maturity of the CMBS Loans, with a maximum aggregate purchase price for such extended interest rate cap for $5.0 million. We have funded the $5.0 million obligation in connection with the closing of the CMBS Loan Agreement on September 1, 2010. As part of the amendment, we have also agreed to purchase $191.3 million of face value of CMBS Loans for $95.7 million during fourth quarter 2010.

Issuances and Redemptions

During the second quarter of 2010, HOC completed the offering of $750.0 million aggregate principal amount of 12.75% second-priority senior secured notes due 2018 and used the proceeds of this offering to redeem or repay the following outstanding debt:

 

Debt (dollars in millions)

   Maturity      Interest Rate      Face Value  

5.5% Senior Notes

     2010         5.5%       $ 191.6   

8.0% Senior Notes

     2011         8.0%         13.2   

8.125% Senior Subordinated Notes

     2011         8.125%         12.0   

Revolving Credit Facility

     2014         3.23%-3.25%         525.0   

 

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In connection with the retirement of the outstanding senior and senior subordinated notes above, HOC recorded a pre-tax loss of $4.5 million during the second quarter of 2010.

On June 3, 2010, Harrah’s announced an agreement under which affiliates of each of Apollo, TPG and Paulson & Co. Inc. (“Paulson”) will exchange approximately $1,118.3 million face amount of debt for approximately 15.6% of the common equity of Harrah’s Entertainment, subject to regulatory approvals and certain other conditions. In connection with the transaction, Apollo, TPG, and Paulson purchased approximately $835.4 million, face amount, of HOC notes that were held by another subsidiary of Harrah’s Entertainment for aggregate consideration of approximately $557.0 million, including accrued interest. The exchange of the debt for equity is expected to be completed in the fourth quarter of 2010 or first quarter of 2011. Any notes exchanged for equity will be held by a subsidiary of Harrah’s Entertainment and will remain outstanding for purposes of HOC.

In connection with this debt sale, HOC recorded additional discount reducing the net book value of HOC’s outstanding debt by approximately $27.4 million at the date of the transaction.

Credit Agreement and Incremental Facility Amendment

HOC is party to the senior secured credit facilities (the “Credit Facilities”). This financing is neither secured nor guaranteed by Harrah’s Entertainment’s other direct, wholly-owned subsidiaries, including the subsidiaries that own properties that are security for certain real estate loans (the “CMBS Financing”) and certain of HOC’s subsidiaries that are unrestricted subsidiaries. In late 2009, HOC completed cash tender offers for certain of its outstanding debt, and in connection with these tender offers, HOC borrowed $1,000.0 million of new term loans under its Credit Facilities pursuant to an incremental amendment (the “Incremental Loans”).

As of September 30, 2010, our Credit Facilities provide for senior secured financing of up to $8,442.6 million, consisting of (i) senior secured term loan facilities in an aggregate principal amount of $6,812.6 million with $5,820.1 million maturing on January 28, 2015 and $992.5 million maturing on October 31, 2016, and (ii) a senior secured revolving credit facility in an aggregate principal amount of up to $1,630.0 million, maturing January 28, 2014, including both a letter of credit sub-facility and a swingline loan sub-facility. The term loans under the Credit Facilities currently require scheduled quarterly payments of $7.5 million, with the balance due at maturity. A total of $6,812.6 million face amount of borrowings were outstanding under the Credit Facilities as of September 30, 2010, with $120.0 million of the revolving credit facility committed to outstanding letters of credit. After consideration of these borrowings and letters of credit, $1,510.0 million of additional borrowing capacity was available to the Company under its revolving credit facility as of September 30, 2010.

Interest and Fees

Borrowings under the Credit Facilities, other than borrowings under the Incremental Loans, 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. As of September 30, 2010, the Credit Facilities, other than borrowings under the Incremental Loans, bore interest at LIBOR plus 300 basis points for the term loans and a portion of the revolver loan, 150 basis points over the alternate base rate for the swingline loan and at the alternate base rate plus 200 basis points for the remainder of the revolver loan.

Borrowings under the Incremental Loans bear interest at a rate equal to either the alternate base rate or the greater of (i) the then-current LIBOR rate or (ii) 2.0%; in each case plus an applicable margin. At September 30, 2010, borrowings under the Incremental Loans bore interest at the minimum base rate of 2.0%, plus 750 basis points.

 

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In addition, on a quarterly basis, we are required to pay each lender (i) a commitment fee in respect of any unborrowed amounts 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, 2010, the Credit Facilities bore a commitment fee for unborrowed amounts of 50 basis points.

We make monthly interest payments on our CMBS Financing. Our outstanding notes (secured and unsecured) have semi-annual interest payments, with the majority of those payments on June 15 and December 15.

A change in interest rates on variable-rate debt will impact our financial results. For example, assuming a constant outstanding balance for our variable-rate debt, for the next twelve months, a hypothetical 1% increase in corresponding interest rates would change interest expense for the twelve months following September 30, 2010 by approximately $62.8 million. At September 30, 2010, the three-month USD LIBOR rate was 0.2914%. A hypothetical reduction of this rate to 0% would decrease interest expense for the next twelve months by approximately $18.3 million. These hypothetical interest amounts exclude interest on the $5,810.1 million of variable-rate debt for which our effective interest rate swap agreements are designated as hedging instruments for accounting purposes, through the earlier of the expiration of such swap agreements or twelve months. At September 30, 2010, our variable-rate debt, excluding the aforementioned $5,810.1 million of variable-rate debt hedged against effective interest rate swap agreements, represents approximately 35.2% of our total debt, while our fixed-rate debt is approximately 64.8% of our total debt.

Collateral and Guarantors

HOC’s Credit Facilities are guaranteed by Harrah’s Entertainment, and are secured by a pledge of HOC’s capital stock and by substantially all of the existing and future property and assets of HOC and its material, wholly-owned domestic subsidiaries other than certain unrestricted subsidiaries, including a pledge of the capital stock of HOC’s material, wholly-owned domestic subsidiaries and 65% of the capital stock of the first-tier foreign subsidiaries, in each case subject to exceptions. The following casino properties have mortgages under the Credit Facilities:

 

Las Vegas

  

Atlantic City

  

Louisiana/Mississippi

  

Iowa/Missouri

Caesars Palace    Bally’s Atlantic City   

Harrah’s New Orleans Hotel (only)

   Harrah’s St. Louis
Bally’s Las Vegas    Caesars Atlantic City       Harrah’s Council Bluffs
Imperial Palace    Showboat Atlantic City    Harrah’s Louisiana Downs   

Horseshoe Council Bluffs/ Bluffs Run

Bill’s Gamblin’ Hall & Saloon       Horseshoe Bossier City   
      Harrah’s Tunica   
      Horseshoe Tunica   
     

Tunica Roadhouse Hotel & Casino

  

 

Illinois/Indiana

 

Other Nevada

       
Horseshoe Southern Indiana   Harrah’s Reno    
Harrah’s Metropolis   Harrah’s Lake Tahoe    
Horseshoe Hammond   Harveys Lake Tahoe    

Additionally, certain undeveloped land in Las Vegas also is mortgaged.

Restrictive Covenants and Other Matters

The Credit Facilities require compliance on a quarterly basis with a maximum net senior secured first lien debt leverage test. In addition, the Credit Facilities include negative covenants, subject to certain exceptions, restricting or limiting HOC’s ability and the ability of its restricted subsidiaries to, among other things: (i) incur additional debt; (ii) create liens on certain assets; (iii) enter into sale and lease-back transactions (iv) make certain investments, loans and advances; (v) consolidate, merge, sell or otherwise dispose of all or any part of its assets or to purchase, lease or otherwise acquire all or any substantial part of assets of any other person; (vi) pay dividends or make distributions or make other restricted payments; (vii) enter into certain transactions with its affiliates; (viii) engage in any business other than the business activity conducted at the closing date of the loan or business activities incidental or related thereto; (ix) amend or modify the articles or certificate of incorporation, by-laws and certain agreements or make certain payments or modifications of indebtedness; and (x) designate or permit the designation of any indebtedness as “Designated Senior Debt”.

 

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Harrah’s Entertainment is not bound by any financial or negative covenants contained in HOC’s credit agreement, other than with respect to the incurrence of liens on and the pledge of its stock of HOC.

All borrowings under the senior secured revolving credit facility are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of representations and warranties, and the requirement that such borrowing does not reduce the amount of obligations otherwise permitted to be secured under our new senior secured credit facilities without ratably securing the retained notes.

Certain covenants contained in HOC’s credit agreement require the maintenance of a senior first priority secured debt to last twelve months Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) ratio, as calculated pursuant to the applicable agreement, (“Senior Secured Leverage Ratio”). The June 3, 2009 amendment and waiver to our credit agreement excludes from the Senior Secured Leverage Ratio (a) the $1,375.0 million first lien notes issued June 15, 2009 and the $720.0 million first lien notes issued on September 11, 2009 and (b) up to $250.0 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, and our 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 last twelve months Adjusted EBITDA and consolidated debt to last twelve months Adjusted EBITDA ratios in each case as calculated pursuant to the applicable agreements. The covenants that restrict additional indebtedness and the ability to make future acquisitions require a last twelve months 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.

The indenture governing the 10.75% Senior Notes, 10.75%/11.5% Senior Toggle Notes and the agreements governing the other cash pay debt and PIK toggle debt limit HOC’s (and most of its subsidiaries’) ability to among other things: (i) incur additional debt or issue certain preferred shares; (ii) pay dividends or make distributions in respect of our capital stock or make other restricted payments; (iii) make certain investments; (iv) sell certain assets; (v) with respect to HOC only, engage in any business or own any material asset other than all of the equity interest of HOC so long as certain investors hold a majority of the notes; (vi) create or permit to exist dividend and/or payment restrictions affecting its restricted subsidiaries; (vii) create liens on certain assets to secure debt; (viii) consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; (ix) enter into certain transactions with its affiliates; and (x) designate its subsidiaries as unrestricted subsidiaries. Subject to certain exceptions, the indenture governing the notes and the agreements governing the other cash pay debt and PIK toggle debt will permit us and our restricted subsidiaries to incur additional indebtedness, including secured indebtedness.

The CMBS Financing includes negative covenants, subject to certain exceptions, restricting or limiting the ability of the borrowers and operating companies under the CMBS Financing (collectively, the “CMBS entities”) to, among other things: (i) incur additional debt; (ii) create liens on assets; (iii) make certain investments, loans and advances; (iv) consolidate, merge, sell or otherwise dispose of all or any part of its assets or to purchase, lease or otherwise acquire all or any substantial part of assets of any other person; (v) enter into certain transactions with its affiliates; (vi) engage in any business other than the ownership of the properties and business activities ancillary thereto; and (vi) amend or modify the articles or certificate of incorporation, by-laws and certain agreements. The CMBS Financing also includes affirmative covenants that require the CMBS entities to, among other things, maintain the borrowers as “special purpose entities”, maintain certain reserve funds in respect of FF&E, taxes, and insurance, and comply with other customary obligations for CMBS real estate financings. In addition, the CMBS Financing obligates the CMBS entities to apply excess cash flow from the CMBS properties in certain specified manners, depending on the outstanding principal amount of various tranches of the CMBS loans and other factors. These obligations will limit the amount of excess cash flow from the CMBS entities that may be distributed to Harrah’s Entertainment. For example, the CMBS entities are required to use 100% of excess cash flow to make ongoing mandatory offers on a quarterly basis to purchase CMBS mezzanine loans at discounted prices from the holders thereof. To the extent such offers are accepted, such excess cash flow will need to be so utilized and will not be available for distribution to Harrah’s Entertainment. To the extent such offers are not accepted with respect to any fiscal quarter, the amount of excess cash flow that may be distributed to Harrah’s Entertainment is limited to 85% of excess cash flow with respect to such quarter. In addition, the CMBS Financing provides that once the aggregate principal amount of the CMBS mezzanine loans is less than or equal to $625.0 million, the mortgage loan will begin to amortize on a quarterly basis in an amount equal to the greater of 100% of excess cash flow for such quarter and $31.25 million. If the CMBS mortgage loan begins to amortize, the excess cash flow from the CMBS entities will need to be utilized in connection with such amortization and will not be available for distribution to Harrah’s Entertainment.

 

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Acquisition of Planet Hollywood

On February 19, 2010, HOC acquired 100% of the equity interests of PHW Las Vegas, which owns and operates the Planet Hollywood Resort and Casino located in Las Vegas, Nevada. In connection with this transaction, PHW Las Vegas assumed a $554.3 million, face value, senior secured loan, and a subsidiary of HOC cancelled certain debt issued by PHW Las Vegas’ predecessor entities. The outstanding amount is secured by the assets of PHW Las Vegas, and is non-recourse to other subsidiaries of the Company.

In connection with the transaction and the assumption of debt, PHW Las Vegas entered into the Amended and Restated Loan Agreement with Wells Fargo Bank, N.A., as trustee for The Credit Suisse First Boston Mortgage Securities Corp. Commercial Mortgage Pass-Through Certificates, Series 2007-TFL2 (“Lender”). PHW Las Vegas is an unrestricted subsidiary of HOC and therefore not a borrower under HOC’s Credit Facilities. A subsidiary of HOC manages the property for PHW Las Vegas for a fee. The maturity date for this loan is December 2011, with two extension options, which, if exercised, would extend maturity until April 2015.

Guaranty

In connection with PHW Las Vegas’ Amended and Restated Loan Agreement, Harrah’s Entertainment entered into a Guaranty Agreement (the “Guaranty”) for the benefit of Lender pursuant to which Harrah’s Entertainment guaranteed to Lender certain recourse liabilities of PHW Las Vegas. Harrah’s Entertainment’s maximum aggregate liability for such recourse liabilities is limited to $30.0 million provided that such recourse liabilities of PHW Las Vegas do not arise from (i) events, acts, or circumstances that are actually committed by, or voluntarily or willfully brought about by Harrah’s Entertainment or (ii) event, acts, or circumstances (regardless of the cause of the same) that provide actual benefit (in cash, cash equivalent, or other quantifiable amount) to the Registrant, to the full extent of the actual benefit received by the Registrant. Pursuant to the Guaranty, Harrah’s Entertainment is required to maintain a net worth or liquid assets of at least $100.0 million.

Prepayments

PHW Las Vegas may, at its option, voluntarily prepay the loan in whole or in part upon twenty (20) days prior written notice to Lender.

PHW Las Vegas is required to prepay the loan in (i) the amount of any insurance proceeds received by Lender for which Lender is not obligated to make available to PHW Las Vegas for restoration in accordance with the terms of the Amended and Restated Loan Agreement, (ii) the amount of any proceeds received from the operator of the timeshare property adjacent to the Planet Hollywood Resort and Casino, subject to the limitations set forth in the Amended and Restated Loan Agreement and (iii) the amount of any excess cash remaining after application of the cash management provisions of the Amended and Restated Loan Agreement.

Interest Payments

The amount outstanding under the Amended and Restated Loan Agreement bears interest, payable to third party lenders on a monthly basis, at a rate per annum equal to LIBOR plus 1.533%. Interest only participations of PHW Las Vegas bear interest at a fixed rate equal to $7.3 million per year, payable to a subsidiary of Harrah’s Operating Company, Inc. that owns such participations.

 

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Derivative Instruments – Interest Rate Swap Agreements

We use interest rate swaps to manage the mix of our debt between fixed and variable rate instruments. As of September 30, 2010 we have entered into 13 interest rate swap agreements, three of which have effective dates starting in 2011, subsequent to the expiration of seven of our other swap agreements. As a result of staggering the effective dates, we have a notional amount of $6,500.0 million outstanding through April 25, 2011, and a notional amount of $5,750.0 million outstanding beginning after April 25, 2011. 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 as of September 30, 2010 are as follows:

 

Effective Date

   Notional
Amount
     Fixed Rate
Paid
    Variable Rate
Received as of
Sept 30, 2010
    Next Reset Date    Maturity Date
     (in millions)                        

April 25, 2007

   $ 200         4.898     0.498   October 26, 2010    April 25, 2011

April 25, 2007

     200         4.896     0.498   October 26, 2010    April 25, 2011

April 25, 2007

     200         4.925     0.498   October 26, 2010    April 25, 2011

April 25, 2007

     200         4.917     0.498   October 26, 2010    April 25, 2011

April 25, 2007

     200         4.907     0.498   October 26, 2010    April 25, 2011

September 26, 2007

     250         4.809     0.498   October 26, 2010    April 25, 2011

September 26, 2007

     250         4.775     0.498   October 26, 2010    April 25, 2011

April 25, 2008

     2,000         4.276     0.498   October 26, 2010    April 25, 2013

April 25, 2008

     2,000         4.263     0.498   October 26, 2010    April 25, 2013

April 25, 2008

     1,000         4.172     0.498   October 26, 2010    April 25, 2012

April 26, 2011

     250         1.351     —        April 26, 2011    January 25, 2015

April 26, 2011

     250         1.347     —        April 26, 2011    January 25, 2015

April 26, 2011

     250         1.350     —        April 26, 2011    January 25, 2015

The variable rate on our interest rate swap agreements did not materially change as a result of the October 26, 2010 reset.

Until October 2009, our effective interest rate swap agreements were designated as cash flow hedging instruments for accounting purposes. During October 2009, we borrowed $1,000.0 million under the Incremental Loans and used a majority of the net proceeds to temporarily repay most of our revolving debt under the Credit Facilities. As a result, we no longer had a sufficient amount of outstanding debt under the same terms as our interest rate swap agreements to support hedge accounting treatment for the full $6,500.0 million in interest rate swaps. Thus, as of September 30, 2009, we removed the cash flow hedge designation for the $1,000.0 million swap agreement, freezing the amount of deferred losses recorded in Accumulated Other Comprehensive Loss associated with this swap agreement, and reducing the total notional amount on interest rate swaps designated as cash flow hedging instruments to $5,500.0 million. Beginning October 1, 2009, we began amortizing deferred losses frozen in Accumulated Other Comprehensive Loss into income over the original remaining term of the hedged forecasted transactions that are still considered to be probable of occurring. For the quarter and nine months ended September 30, 2010, we recorded $2.2 million and $6.5 million, respectively, as an increase to interest expense, and we will record an additional $8.7 million as an increase to interest expense and other comprehensive income over the next twelve months, all related to deferred losses on the $1,000.0 million interest rate swap.

During the fourth quarter of 2009, we re-designated approximately $310.1 million of the $1,000.0 million swap as a cash flow hedging instrument. Also, on September 29, 2010, we entered into three forward interest rate swap agreements for notional amounts totaling $750.0 million that have been designated as cash flow hedging instruments. As a result, at September 30, 2010, $6,560.0 million of our total interest rate swap agreements notional amount of $7,250.0 million remained designated as hedging instruments for accounting purposes. Any future changes in fair value of the portion of the interest rate swap agreement not designated as a hedging instrument will be recognized in interest expense during the period in which the changes in value occur.

 

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Derivative Instruments – Interest Rate Cap Agreements

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 $6,500.0 million at a LIBOR cap rate of 4.5%. The interest rate cap was designated as a cash flow hedging instrument for accounting purposes on May 1, 2008.

On November 30, 2009, June 7, 2010, and September 1, 2010, we purchased and extinguished approximately $948.8 million, $46.6 million, and $123.8 million, respectively, of the CMBS Financing. The hedging relationship between the CMBS Financing and the interest rate cap remained effective subsequent to each debt extinguishment. As a result of the extinguishments, in the fourth quarter 2009, second quarter 2010, and third quarter 2010, we reclassified approximately $12.1 million, $0.6 million, and $1.5 million, respectively, of deferred losses out of Accumulated Other Comprehensive Loss and into interest expense associated with hedges for which the forecasted future transactions are no longer probable of occurring.

On January 31, 2010, we removed the cash flow hedge designation for the $6,500.0 million interest rate cap, freezing the amount of deferred losses recorded in Accumulated Other Comprehensive Loss associated with the interest rate cap. Beginning February 1, 2010, we began amortizing deferred losses frozen in Accumulated Other Comprehensive Loss into income over the original remaining term of the hedge forecasted transactions that are still probable of occurring. For the quarter and nine months ended September 30, 2010, we recorded $6.7 million and $16.2 million, respectively, as an increase to interest expense, and we will record an additional $20.9 million as an increase to interest expense and Accumulated Other Comprehensive Loss over the next twelve months, all related to deferred losses on the interest rate cap. In connection with the extinguishment of $46.6 million of the CMBS Financing, on June 7, 2010, we reclassified approximately $1.0 million of deferred losses recorded in Accumulated Other Comprehensive Loss associated with the interest rate cap into interest expense associated with hedges for which the forecasted transactions are no longer probable of occurring.

On January 31, 2010, we re-designated $4,650.2 million of the interest rate cap as a cash flow hedging instrument for accounting purposes. Any future changes in fair value of the portion of the interest rate cap not designated as a hedging instrument will be recognized in interest expense during the period in which the changes in value occur.

On April 5, 2010, as required under the amended and restated loan agreement, we entered into an interest rate cap agreement to partially hedge the risk of future increases in the variable rate of the PHW Las Vegas senior secured loan. The interest rate cap agreement is for a notional amount of $554.3 million at a LIBOR cap rate of 5.0%, and matures on December 9, 2011. To give proper consideration to the prepayment requirements of the PHW Las Vegas senior secured loan, we have designated $525.0 million of the $554.3 million notional amount of the interest rate cap as a cash flow hedging instrument for accounting purposes.

 

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Derivative Instruments – Impact on Financial Statements

The following table represents the fair values of derivative instruments in the Consolidated Condensed Balance Sheets as of September 30, 2010 and December 31, 2009:

 

   

Asset Derivatives

   

Liability Derivatives

 
   

September 30, 2010

    December 31, 2009    

September 30, 2010

   

December 31, 2009

 
   

Balance

Sheet

Location

  Fair
Value
    Balance
Sheet
Location
    Fair
Value
   

Balance

Sheet

Location

  Fair
Value
   

Balance

Sheet

Location

  Fair
Value
 

Derivatives designated as hedging instruments

               

Interest rate swaps

          Accrued expenses   $ (37.9   Accrued expenses   $ —     

Interest rate swaps

    $ —          $ —        Deferred credits and other     (342.7   Deferred credits and other     (337.6

Interest rate cap

  Deferred charges and other     1.0       
 
Deferred charges
and other
  
  
    56.8          —            —     
                                       

Subtotal

      1.0          56.8          (380.6       (337.6

Derivatives not designated as hedging instruments

               

Interest rate swaps

      —            —        Deferred credits and other     (37.5   Deferred credits and other     (37.6

Interest rate cap

  Deferred charges and other     0.3       
 
Deferred charges
and other
  
  
    —            —            —     
                                       

Subtotal

      0.3          —            (37.5       (37.6
                                       

Total Derivatives

    $ 1.3        $ 56.8        $ (418.1     $ (375.2
                                       

The following table represents the effect of derivative instruments in the Consolidated Condensed Statements of Operations for the quarters ended September 30, 2010 and 2009 for amounts transferred into or out of Accumulated Other Comprehensive Loss:

 

     Amount of (Gain) or Loss
Recognized in OCI

(Effective Portion)
     Location of (Gain)
or  Loss Reclassified
From Accumulated
OCI Into Income
(Effective Portion)
     Amount of (Gain)  or
Loss Reclassified from
Accumulated OCI into
Income (Effective
Portion)
     Location of (Gain) or Loss
Recognized in Income
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
     Amount of (Gain) or
Loss Recognized in
Income (Ineffective
Portion and Amount
Excluded from
Effectiveness
Testing)
 

Derivatives designated as
hedging instruments

   Quarter
Ended
Sept 30,
2010
     Quarter
Ended
Sept 30,
2009
            Quarter
Ended
Sept 30,
2010
     Quarter
Ended
Sept 30,
2009
            Quarter
Ended
Sept 30,
2010
    Quarter
Ended
Sept 30,
2009
 

Interest rate contracts

   $ 19.1       $ 94.7         Interest expense       $ 9.1       $ 0.2         Interest expense       $ (6.4   $ —     
                                               Amount of (Gain) or
Loss Recognized in
Income
 

Derivatives not designated
as hedging instruments

                                      Location of (Gain) or Loss
Recognized in Income
     Quarter
Ended
Sept 30,
2010
    Quarter
Ended
Sept 30,
2009
 

Interest rate contracts

                    Interest expense       $ 1.0      $ —     

 

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The following table represents the effect of derivative instruments in the Consolidated Condensed Statements of Operations for the nine months ended September 30, 2010 and 2009 for amounts transferred into or out of accumulated other comprehensive loss:

 

     Amount of (Gain) or
Loss Recognized in
OCI (Effective Portion)
     Location of (Gain) or
Loss Reclassified
From Accumulated
OCI Into Income
(Effective Portion)
     Amount of (Gain) or
Loss Reclassified from
Accumulated
OCI  into

Income (Effective
Portion)
     Location of (Gain) or
Loss Recognized in
Income (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)
       Amount of (Gain) or
Loss Recognized in
Income (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)
 

Derivatives designated as
hedging instruments

   Nine
Months
Ended
Sept 30,
2010
     Nine
Months
Ended
Sept 30,
2009
            Nine
Months
Ended
Sept 30,
2010
     Nine
Months
Ended
Sept 30,
2009
              Nine
Months
Ended
Sept 30,
2010
    Nine
Months
Ended
Sept 30,
2009
 

Interest rate contracts

   $ 143.0       $ 54.7         Interest expense       $ 23.4       $ 0.6         Interest expense         $ (55.1   $ —     
                                                 Amount of (Gain) or
Loss Recognized in
Income
 

Derivatives not designated as
hedging instruments

                                      Location of (Gain) or
Loss Recognized in
Income
       Nine
Months
Ended
Sept 30,
2010
    Nine
Months
Ended
Sept 30,
2009
 

Interest rate contracts

                    Interest expense         $ 10.8      $ —     

In addition to the impact on interest expense from amounts reclassified from accumulated other comprehensive loss, the difference to be paid or received under the terms of the interest rate swap agreements is recognized as interest expense and is paid quarterly. This cash settlement portion of the interest rate swap agreements increased interest expense for the quarters ended September 30, 2010 and 2009 by approximately $64.8 million and $50.0 million, respectively. This cash settlement portion of the interest rate swap agreements increased interest expense for the nine months ended September 30, 2010 and 2009 by approximately $199.3 million and $147.6 million, respectively.

Note 6—Stock-Based Employee Compensation

Our share-based compensation expense consists primarily of time-based and performance-based options that have been granted to management, other personnel and key service providers. As of September 30, 2010, there was approximately $58.8 million of total unrecognized compensation cost related to stock option grants. The Company has recognized compensation expense associated with its stock-based employee compensation programs as follows:

 

     Quarter Ended
September 30,
     Nine Months Ended
September 30,
 

(In millions)

   2010      2009      2010      2009  

Amounts included in:

           

Corporate expense

   $ 1.6       $ 2.6       $ 9.2       $ 5.8   

Property general, administrative and other

     2.3         1.4         7.3         6.6   
                                   

Total stock-based compensation expense

   $ 3.9       $ 4.0       $ 16.5       $ 12.4   
                                   

On February 23, 2010, the Human Resources Committee of the Board of Directors of the Company adopted an amendment to the Harrah’s Entertainment, Inc. Management Equity Incentive Plan (the “Plan”). The amendment provides for an increase in the available number shares of the Registrant’s non-voting common stock for which options may be granted to 4,566,919 shares.

The amendment also revised the vesting hurdles for performance-based options under the Plan. The performance options vest if the return on investment in the Company of TPG, Apollo, and their respective affiliates and co-investors (the “Majority Stockholders”) achieve a specified return. Previously, 50% of the performance-based options vested upon a 2x return and 50% vested upon a 3x return. The triggers have been revised to 1.5x and 2.5x, respectively. In addition, a pro-rata portion of the 2.5x options will vest if the Majority Stockholders achieve a return on their investment that is greater than 2.0x, but less than 2.5x. The pro rata portion will increase on a straight line basis from zero to a participant’s total number of 2.5x options depending upon the level of returns that the Majority Stockholders realize between 2.0x and 2.5x.

 

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The following is a summary of share-based option activity for the nine months ended September 30, 2010:

 

Options

   Shares     Weighted
Average
Exercise
Price
     Weighted Average
Remaining
Contractual Term
(years)
 

Outstanding at December 31, 2009

     3,194,175      $ 91.53         8.0   

Options granted

     1,277,895        57.19      

Canceled

     (109,968     
             

Outstanding at September 30, 2010

     4,362,102        81.48         7.9   
             

Exercisable at September 30, 2010

     811,828        86.14         6.3   

The assumptions used to estimate fair value and the resulting estimated fair value of options granted during the nine months ended September 30, 2010 are as follows:

 

     Nine months ended
September 30,
2010
 

Expected volatility

     71.4

Expected dividend yield

     —     

Expected term (in years)

     6.63   

Risk-free interest rate

     2.36

Weighted-average fair value per share of options granted

   $ 26.83   

Note 7—Preferred and Common Stock

Preferred Stock

At September 30, 2010 and December 31, 2009, the authorized shares of preferred stock were 40,000,000, par value $0.01 per share, stated value $100.00 per share.

On January 28, 2008, our Board of Directors adopted a resolution authorizing the creation and issuance of a series of preferred stock known as the Non-Voting Perpetual Preferred Stock. The number of shares constituting such series was 20,000,000. Each share of non-voting preferred stock accrued dividends at a rate of 15.0% per annum, compounded quarterly, and such dividends were cumulative. As of December 31, 2009, dividends in arrears were $652.6 million.

In February 2010, the Board of Directors approved revisions to the Certificate of Designation for the non-voting perpetual preferred stock to eliminate dividends (including all existing accrued but unpaid dividends totaling $717.2 million at the revision approval date) and to specify that the conversion right of the non-voting perpetual preferred stock be at the original value of the Company’s non-voting common stock. In March 2010, Hamlet Holdings LLC (the holder of all of the Company’s voting common stock) and holders of a majority of our non-voting perpetual preferred stock approved the revisions to the Certificate of Designation. Also in March 2010, the holders of a majority of our non-voting perpetual preferred stock voted to convert all of the non-voting perpetual preferred stock to non-voting common stock.

As a result of the conversion of preferred stock into common stock, the Company has no shares of preferred stock outstanding as of September 30, 2010.

Common Stock

As of December 31, 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.

 

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As disclosed above, in March 2010, the holders of our voting common stock and of a majority of our non-voting preferred stock voted to convert all of the non-voting perpetual preferred stock to non-voting common stock. As a result of this conversion, the Company issued 19,935,534 additional shares of non-voting common stock.

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.

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, if any.

In connection with the debt for equity exchange described earlier and upon receipt of the requisite regulatory approvals, we intend to (i) reclassify Harrah’s Entertainment’s existing non-voting common stock into a new class of voting common stock, which will be the class of stock that Apollo, TPG and Paulson will receive in the debt for equity exchange, and (ii) cancel the existing class of non-voting common stock that is currently held by Hamlet Holdings, LLC. Concurrently with this reclassification, we intend to effect a 4.258 for 1 split of Harrah’s Entertainment’s new voting common stock such that Apollo, TPG and Paulson will each receive 42.58 shares of common stock for each $1,000 principal amount of Notes exchanged rather than 10 shares, and Harrah’s Entertainment’s then existing stockholders, including entities affiliated with Apollo and TPG, their co-investors and members of management, will each receive 4.258 shares of the new voting common stock described above in clause (i) above for each share of non-voting common stock they hold at that time.

Note 8—Write-downs, Reserves and Recoveries

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

 

     Quarter ended
September 30,
    Nine months ended
September 30,
 

(In millions)

   2010     2009     2010     2009  

Remediation costs

   $ 6.9      $ 8.4      $ 38.7      $ 28.2   

Write-down of long-term note receivable

     —          —          52.2        —     

Litigation reserves, awards and settlements

     (6.0     (29.3     21.0        (29.2

Efficiency projects

     0.3        6.0        0.9        27.9   

Impairment of long-lived tangible assets

     —          35.7        —          43.7   

Loss on divested or abandoned assets

     26.9        3.3        27.1        4.8   

Other

     0.6        0.2        (3.6     3.2   
                                

Total write-downs, reserves and recoveries

   $ 28.7      $ 24.3      $ 136.3      $ 78.6   
                                

Remediation costs related to room remediation projects at certain of our Las Vegas properties.

The $52.2 million write-down of long-term note receivable related to land and pre-development costs contributed to a venture for development of a casino project in Philadelphia with which we were involved prior to December 2005. In April 2010, the proposed operator for the project withdrew from the project and the Pennsylvania Gaming Control Board commenced proceedings to revoke the license for the project. As a result, we fully reserved the note during the second quarter 2010. Subsequently, in October 2010, the Company executed a term sheet pursuant to which, upon the occurrence of certain conditions, we intend to convert the note receivable and make an additional equity investment in the holder of the license, assume primary responsibility for design and development of the casino project, and manage the casino upon completion, as more fully discussed in Note 17, “Subsequent Events.”

Litigation reserves, awards and settlements for the quarter ended September 30, 2010 included a $9.0 million settlement received by the Company to settle an outstanding litigation matter. Litigation reserves, awards and settlements for the nine months ended September 30, 2010 also included a $25.0 million charge related to the Hilton matter, which is more fully discussed in Note 11, “Commitments and Contingent Liabilities.”

 

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Efficiency program expenses in 2010 and 2009 represent costs incurred to identify and implement efficiency projects aimed at stream-lining corporate and operating functions to achieve cost savings and efficiencies. In 2009, the majority of the costs incurred related to the closing of the office in Memphis, Tennessee, which previously housed certain corporate functions.

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. The nine months ended September 30, 2009, included impairment charges of $43.7 million, of which $35.7 million was recorded during the third quarter 2009 related to the closing of the office in Memphis, Tennessee.

Loss on divested or abandoned assets for the quarter and nine months ended September 30, 2010 includes charges of $21.2 million to write-off specific assets as a result of the indefinite deferral of certain capital projects in the Las Vegas and Atlantic City regions.

Other write-downs, reserves and recoveries for the nine months ended September 30, 2010 included the first quarter 2010 release of a $4.8 million reserve for excise tax for which the statute of limitations expired.

Note 9—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 “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 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. We reduce deferred tax assets by a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized.

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

 

(In millions, except effective tax rate)

   Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

(Loss)/income from continuing operations before income tax

   $ (260.7   $ (1,492.1   $ (993.8   $ 2,139.2   

Benefit/(provision) for income taxes

   $ 97.5      $ (128.9   $ 364.5      $ (1,590.8

Effective tax rate

     37.4     N/M        36.7     74.4

Our effective tax rate for the quarter was favorably impacted by the effects of state tax benefits and discrete items. Our effective tax rate for the nine months ending September 30, 2010 was favorably impacted by the tax effects of state tax benefits, the reversal of previously accrued taxes and interest related to a state income tax settlement, a state effective rate change on our deferred tax balances, and other discrete items, partially offset by the impact of the goodwill impairment for which we did not receive tax benefit.

We classify reserves for tax uncertainties within “Accrued expenses” and “Deferred credits and other” in our Consolidated 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 (uncertain tax benefits (“UTB”)) resulting from uncertain tax positions as well as potential interest or penalties associated with those liabilities. During the quarter ended September 30, 2010, our UTB, excluding related interest and penalties, increased by $61.1 million as a result of tax positions taken in a prior year related to cancellation of indebtedness income and several accounting method changes for tax purposes. During the nine months ended September 30, 2010, our UTB, excluding related interest and penalties, increased by $120.5 million as a result of tax positions taken during a prior year related to cancellation of indebtedness income and several accounting method changes for tax purposes, partially offset by a state income tax settlement. The change in gross UTB, excluding related interest and penalties, during the quarter and nine months ended September 30, 2010 benefited the effective rate by $0.0 million and $17.6 million, respectively.

 

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We file income tax returns, including returns for our subsidiaries, with federal, state, and foreign jurisdictions. We are under regular and recurring 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. As a result of the expiration of the statute of limitations and closure of IRS audits, our 2004 and 2005 federal income tax years were closed during the year ended December 31, 2009. The IRS audit of our 2006 federal income tax year also concluded during the year ended December 31, 2009. The IRS audit of our 2007 federal income tax year concluded during the quarter ended March 31, 2010. The IRS audit of our 2008 federal income tax year concluded during the quarter ended June 30, 2010. During the quarter ended June 30, 2010, we submitted a protest to the IRS Appeals office regarding several issues from the 2008 IRS audit. We do not believe that it is reasonably possible that these issues will be settled in the next twelve months.

We are also subject to exam by various state and foreign tax authorities. Tax years prior to 2005 are generally closed for foreign and state income tax purposes as the statutes of limitations have lapsed. However, various subsidiaries could be examined by the New Jersey Division of Taxation for tax years beginning with 1999 due to our execution of New Jersey statute of limitation extensions.

Federal Income Tax Receivable

During 2010, in conjunction with filing our 2009 tax return, we implemented several accounting method changes for tax purposes including a method change to deduct currently certain repairs and maintenance expenditures which had been previously capitalized. As a result of the combination of the tax accounting method changes with our net operating loss, we reported a taxable loss for 2009 of $1,248.9 million. Approximately $170.9 million of this loss was carried back to the 2008 tax year to offset federal taxable income recognized and tax payable from that year.

On November 6, 2009, the Worker, Homeownership, and Business Act of 2009 was signed into law which provides an election to carryback a loss to the third, fourth or fifth year that precedes the year of loss. Because of this change in tax law, we elected to extend our U.S. federal 2009 net operating loss carryback period. Approximately $630.3 million of the 2009 taxable loss was carried back to the extended carryback period, resulting in an income tax refund receivable which is recorded in “Federal income tax receivable” as of September 30, 2010. We expect to receive the income tax refund of approximately $220.0 million, net of interest due on the 2008 tax payable, in the fourth quarter 2010. Our remaining 2009 federal net operating loss of approximately $447.7 million is available for carryover to future tax years.

Note 10—Fair Value Measurements

ASC 820 “Fair Value Measurements and Disclosures,” 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. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1:

  Observable inputs such as quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date;

Level 2:

  Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3:

  Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Under ASC 825, “Financial Instruments,” 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. See Note 4, “Goodwill and Other Intangible Assets”, for the application of ASC 820 to goodwill and other intangible assets.

 

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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, 2010 and December 31, 2009.

 

(In millions)

   Balance     Level 1      Level 2     Level 3  

September 30, 2010

         

Assets:

         

Cash equivalents

   $ 685.0      $ 685.0       $ —        $ —     

Investments

     94.9        92.2         2.7        —     

Derivative instruments

     1.3        —           1.3        —     

Liabilities:

         

Derivative instruments

     (418.1     —           (418.1     —     

December 31, 2009

         

Assets:

         

Cash equivalents

   $ 132.7      $ 132.7       $ —        $ —     

Investments

     88.9        73.4         15.5        —     

Derivative instruments

     56.8        —           56.8        —     

Liabilities:

         

Derivative instruments

     (375.2     —           (375.2     —     

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, but not identical, assets or liabilities. Such quotes represent the estimated amounts we would receive or pay to terminate the contracts. Derivative instruments are included in either Deferred charges and other, or Deferred credits and other, in our Consolidated Condensed Balance Sheets. Our derivatives are recorded at their fair values, adjusted for the credit rating of the counterparty if the derivative is an asset, or adjusted for the credit rating of the Company if the derivative is a liability. See Note 5, “Debt,” for more information on our derivative instruments.

Investments – Investments are primarily debt and equity securities, the majority of which are traded in active markets, have readily determined market values and use level 1 inputs. Those debt and equity securities for which there are not active markets or the market values are not readily determinable are valued using Level 2 inputs. All of these investments are included in either Prepayments and other, or Deferred charges and other, in our Consolidated Balance Sheets.

Items to be 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, 2010, for debt with similar terms and maturities and market quotes of our publicly traded debt. As of September 30, 2010, the Company’s outstanding debt had a fair value of $19,870.9 million and a carrying value of $19,717.1 million. The Company’s interest rate swaps used for hedging purposes had fair values equal to their carrying values, in the aggregate a liability of $418.1 million, and our interest rate cap agreements had a fair value equal to their carrying value as an asset of $1.3 million at September 30, 2010. See additional discussion about derivatives in Note 5, “Debt.”

 

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Interest-only Participations – Late in 2009, a subsidiary of HOC acquired certain interest only participations payable by certain predecessor entities of PHW Las Vegas. When the Company assumed the debt in connection with the acquisition of Planet Hollywood, these interest only participations survived the transaction and remain outstanding as an asset of a subsidiary of HOC as of September 30, 2010. In connection with both the initial acquisition of the interest only participations and the acquisition of Planet Hollywood, the fair value of these participations was determined based upon valuations as of each date. As the Company owns 100% of the outstanding participations, there is no active market available to determine a trading fair value at any point in time. As a result, the Company does not have the ability to update the fair value of the interest only participations subsequent to their acquisition and valuation, other than by estimating fair value based upon discounted future cash flows. Since discounted cash flows were used as the primary basis for valuation upon their acquisition, and are also being used as the method to determine the amortization of the value of such participations into earnings, the Company believes that the book value of the interest only participations at September 30, 2010 approximates their fair value.

Note 11—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 51 months from September 30, 2010, 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 $60.0 million of Jazz Casino Company, LLC, our wholly-owned subsidiary and owner of Harrah’s New Orleans, owed to the State of Louisiana. The guarantee currently expires on March 31, 2011.

In addition to the guarantees discussed above, we had total aggregate non-cancelable purchase obligations of $932.5 million as of September 30, 2010, including construction-related commitments.

Contingent Liability - Nevada Sales and Use Tax

The Supreme Court of Nevada decided in early 2008 that food purchased for subsequent use in the provision of complimentary and/or employee meals is exempt from use tax. Previously, such purchases were subject to use tax and the Company has claimed, but not recognized into earnings, a use tax refund totaling $32.2 million, plus interest, as a result of the 2008 decision. In early 2009, the Nevada Department of Taxation audited our refund claim, but has taken the position that those same purchases are now subject to sales tax; therefore, they subsequently issued a sales tax assessment totaling $27.4 million plus interest after application of our refund on use tax. While we have established certain reserves against possible loss on this matter, we believe that the Nevada Department of Taxation’s position has no merit and we moved the matter to a procedural, administrative hearing before a Nevada Department of Taxation administrative law judge.

On October 21, 2010, the administrative law judge issued a decision and ruled in our favor on a number of key issues. Each party may file an appeal with the Nevada Tax Commission and we are contemplating whether to appeal certain rulings.

 

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Contingent Liability - 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 into various agreements, including an Employee Benefits and Other Employment Allocation Agreement dated December 31, 1998 (the Allocation Agreement) whereby Park Place assumed or retained, as applicable, certain 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 classes in the lawsuit against Hilton and others alleging that the Hilton Plan’s benefit formula was backloaded in violation of ERISA, and that Hilton and the other defendants failed to properly calculate Hilton Plan participants’ service for vesting purposes. In May 2009, the Court issued a decision granting summary judgment to the plaintiffs. Thereafter, the Court required the parties to attempt to agree on a remedies determination and further required the parties to submit briefs to the Court in support of their positions. On September 7, 2010, the Court issued an opinion resolving certain of Hilton’s and the plaintiffs’ issues regarding a remedies determination and requiring the parties to confer and take other actions in an effort to resolve the remaining issues. The Court may require the parties to submit additional briefs and schedules to support their positions and intends to hold another hearing before issuing a final judgment. Prior to the Court’s latest opinion, we were advised by counsel for the defendants that the plaintiffs have estimated that the damages are in the range of $180.0 million to $250.0 million. Counsel for the defendants further advised that approximately $50.0 million of the damages relates to questions regarding the proper size of the class and the amount, if any, of damages to any additional class members due to issues with Hilton’s record keeping.

The Company received a letter from Hilton dated October 7, 2009 notifying the Company for the first time of this lawsuit and alleging that the Company has potential liability for the above described claims under the terms of the Allocation Agreement. Based on the terms of the Allocation Agreement, the Company believes its maximum potential exposure is approximately 30% to 33% of the amount ultimately awarded as damages. The Company is not a party to the proceedings between the plaintiffs and the defendants and has not participated in the defense of the litigation or in any discussions between the plaintiffs and the defendants about potential remedies or damages. Further, the Company does not have access to information sufficient to enable the Company to make an independent judgment about the possible range of loss in connection with this matter. Based on conversations between a representative of the Company and a representative of the defendants, the Company believes it is probable that damages will be at least $80.0 million and, accordingly, the Company recorded a charge of $25.0 million in accordance with ASC 450, Contingencies, during the second quarter 2010 in relation to this matter. The Company has not changed its belief respecting the damages which may be awarded in this lawsuit as a result of the aforementioned recent opinion of the Court. The Company also continues to believe that it may have various defenses if a claim under the Allocation Agreement is asserted against the Company, including defenses as to the amount of damages. Because the Company has not had access to sufficient information regarding this matter, we cannot at this time predict the ultimate outcome of this matter or the possible additional loss, if any.

Employment Agreements

We have an employment agreement with one executive that 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, 2010, 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 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 coverage 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.

 

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Note 12—Litigation

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 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 each answered, denying all allegations of wrongdoing. During the quarter ended June 30, 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 entered its written decision on February 1, 2010. On February 18, 2010, Baha Mar Development filed an appeal. CBIC and HOC filed an appellate brief on April 21, 2010. Additionally, in January 2010 CBIC and HOC filed a motion to recover attorney’s fees and in March 2010 Baha Mar Development filed a motion for a stay of fee hearing pending appeal. On April 1, 2010, the state appeals court refused to grant Baha Mar Development’s motion for a stay of the fee hearing.

The fee hearing was heard on June 23, 2010 and was continued until July 2, 2010. On July 1, 2010, in a unanimous opinion, the appeals court affirmed the trial court’s grant of summary judgment in HOC’s favor dismissing Baha Mar’s tort, fraud and breach of contract claims and declaring that HOC properly exercised a valid right to terminate the joint venture. The appeals court also held that HOC was entitled to recover its attorney’s fees and costs incurred in the litigation with the amount to be determined per the trial court fee hearing process. Because the appeals court decision is unanimous, Baha Mar has no right to appeal to the New York Court of Appeals. On July 2, 2010, HOC and Baha Mar had an evidentiary hearing on HOC’s fee claim. On August 10, 2010, a special referee appointed by the court to recommend a fee judgment amount against the plaintiff recommended that the court enter an order awarding the Company nearly $12.2 million in fees. We await the court’s decision.

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 stipulated to the plaintiff’s request to dismiss the lawsuit, without prejudice, which the court entered on June 18, 2009. Plaintiff requested the court to award it attorneys’ fees. On March 31, 2010, the court denied plaintiff’s request for fees and plaintiff filed a notice of appeal with the Third Circuit United States Courts of Appeal.

 

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Note 13—Comprehensive Loss

The following activity affected comprehensive loss:

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 

(In millions)

   2010     2009     2010     2009  

Net (loss)/income

   $ (163.2   $ (1,621.1   $ (629.3   $ 548.1   

Pension adjustments

     (1.1     (1.0     (0.7     (0.7

Reclassification of loss on derivative instruments from other comprehensive loss to net loss, net of tax

     0.1        0.1        0.4        0.4   

Foreign current translation adjustment, net of tax

     9.0        11.2        7.6        33.5   

Fair market value of swap agreements, net of tax

     (9.9     (54.9     (73.1     (50.2

Fair market value of interest rate cap agreements, net of tax

     —          —          (0.1     —     

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

     4.6        (5.8     (17.2     15.5   
                                

Total comprehensive (loss)/income

   $ (160.5   $ (1,671.5   $ (712.4   $ 546.6   
                                

Note 14—Earnings Per Share

The following table reconciles net (loss)/income attributable to Harrah's Entertainment, Inc. to net (loss)/income available to common stockholders used in our calculation of basic earnings per share and to net (loss)/income available to common stockholders used in our calculation of diluted earnings per share. It also reconciles the weighted-average number of common and common equivalent shares used in the calculations of basic and diluted earnings per share.

 

     Quarter ended
September 30,
    Nine months ended
September 30,
 

(in millions, except share and per share amounts)

   2010     2009     2010     2009  

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

   $ (164.8   $ (1,624.3 )        $ (634.4   $ 532.0   

Preferred stock dividends

     —          (82.0     —          (259.3
                                

Net (loss)/income available to common stockholders used to calculate basic earnings per share

     (164.8     (1,706.3     (634.4     272.7   

Effect of dilutive securities on net (loss)/income available to common stockholders

     —          —          —          259.3   
                                

Net (loss)/income available to common stockholders used to calculate diluted earnings per share

   $ (164.8   $ (1,706.3   $ (634.4   $ 532.0   
                                

Weighted-average common shares outstanding used in the calculation of basic earnings per share

     60,551,645        40,678,117        54,218,369        40,687,765   

Potential dilution from stock options and warrants

     —          —          —          33,063   

Potential dilution from convertible preferred shares

     —          —          —          76,630,857   
                                

Weighted-average common and common equivalent shares used in the calculation of diluted earnings per share

     60,551,645        40,678,117        54,218,369        117,351,685   
                                

Antidilutive stock options, warrants, and convertible preferred shares excluded from the calculation of diluted earnings per share

     4,364,199        79,579,564        22,899,789        2,998,941   
                                

Earnings per share on net (loss)/income – basic

   $ (2.72   $ (41.95   $ (11.70   $ 6.70   
                                

Earnings per share on net (loss)/income – diluted

   $ (2.72   $ (41.95   $ (11.70   $ 4.53   
                                
        

 

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HARRAH’S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

 

 

Note 15—Supplemental Cash Flow Disclosures

Cash Paid for Interest and Taxes

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

 

     Nine months ended September 30,  

(In millions)

   2010     2009  

Interest expense, net of interest capitalized

   $ 1,471.9      $ 1,404.7   

Adjustments to reconcile to cash paid for interest:

    

Net change in accruals

     (237.8     104.1   

Amortization of deferred finance charges

     (59.9     (106.7

Net amortization of discounts and premiums

     (120.2     (105.7

Amortization of other comprehensive income

     (31.4     (2.2

Rollover of Paid-in-Kind (“PIK”) interest into principal

     (1.1     (79.1

Change in accrual (related to PIK interest)

     —          (40.1

Change in fair value of derivative instruments

     54.1        —     
                

Cash paid for interest, net of amount capitalized

   $ 1,075.6      $ 1,175.0   
                

Cash payments of income taxes, net

   $ 25.9      $ 29.2   
                

Significant 2010 non-cash transactions include the acquisition of Planet Hollywood discussed in Note 3, “Acquisitions,” the impairment of goodwill and other non-amortizing intangible assets discussed in Note 4, “Goodwill and Other Intangible Assets,” the first quarter 2010 conversion of preferred shares into common shares and the elimination of cumulative dividends on such preferred shares discussed in Note 7, “Preferred and Common Stock,” the second quarter 2010 write-down of long-term note receivable and litigation charge discussed in Note 8, “Write-downs, Reserves and Recoveries,” and the recording of a federal income tax receivable discussed in Note 9, “Income Taxes.”

Note 16—Related Party Transactions

In connection with the Acquisition, 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. In addition, we pay a monitoring fee for management services and advice. Fees, which are included in Corporate expense in our Consolidated Statements of Operations, for the quarter and nine months ended September 30, 2010, were $7.1 million and $21.4 million, respectively. For the quarter and nine months ended September 30, 2009, fees paid to Apollo and TPG totaled approximately $7.2 million and $21.5 million, respectively. We also reimburse Apollo and TPG for expenses that they incur related to their management services.

Note 17—Subsequent Events

On October 15, 2010, Harrah’s Entertainment filed a registration statement with the Securities and Exchange Commission relating to an initial public offering of its common stock as an amendment to a previously filed registration statement. Harrah’s Entertainment intends to sell up to $575.0 million of its common stock in this offering and anticipates using the net proceeds from this offering to fund growth projects and for general corporate purposes. We refer to this equity offering as the “IPO.”

On October 28, 2010, Chester Downs and Marina, LLC, a majority-owned subsidiary of HOC and owner of Harrah’s Chester, amended its existing senior secured term loan facility to obtain an additional $40.0 million of term loans. The additional loans have substantially the same terms as the existing term loans including with respect to interest rate, maturity and security. The proceeds of the additional loans will be used for general corporate purposes, including the repayment of indebtedness and capital expenditures.

 

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HARRAH’S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

 

Also in October 2010, the Company executed a term sheet pursuant to which it may acquire a minority interest in Philadelphia Entertainment and Development Partners, L.P., the holder of a license to develop and operate a casino project in Philadelphia, Pennsylvania. In addition to acquiring a minority interest, the Company would be primarily responsible for design and development of the project and enter into a management agreement to manage the project upon opening. The casino project is expected to open during 2012. Completion of the transaction is subject to a number of conditions, including without limitation the negotiation of definitive documentation, receipt of required regulatory approvals, receipt of acceptable financing, and other terms and conditions.

Note 18—Consolidating Financial Information of Guarantors and Issuers

As of September 30, 2010, 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 include PHW Las Vegas and the CMBS properties, as of September 30, 2010, and December 31, 2009, and for the quarters and nine months ended September 30, 2010 and 2009.

In lieu of providing separate unaudited financial statements for the guarantor subsidiaries, we have included the accompanying consolidating condensed financial statements based on the Securities and Exchange Commission’s interpretation and application of ASC 470-10-S99, (Rule 3-10 of the Securities and Exchange Commission’s Regulation S-X). 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.

 

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HARRAH’S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

 

CONDENSED CONSOLIDATING BALANCE SHEET

SEPTEMBER 30, 2010

 

(in millions)

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

Assets

              

Current assets

              

Cash and cash equivalents

   $ 316.7      $ 380.5      $ 262.1       $ 364.4       $ —        $ 1,323.7   

Receivables, net of allowance for doubtful accounts

     —          9.7        225.5         99.2         —          334.4   

Deferred income taxes

     —          71.6        64.5         18.1         —          154.2   

Prepayments and other

     —          15.4        86.0         70.9         —          172.3   

Federal income tax receivable

     —          233.3        —           —           —          233.3   

Inventories

     —          0.4        32.5         15.6         —          48.5   

Intercompany receivables

     2.2        266.5        324.7         295.1         (888.5     —     
                                                  

Total current assets

     318.9        977.4        995.3         863.3         (888.5     2,266.4   

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

     —          227.6        10,557.3         7,132.0         —          17,916.9   

Assets held for sale

     —          —          2.9         —           —          2.9   

Goodwill

     —          —          1,646.1         1,767.6         —          3,413.7   

Intangible assets other than goodwill

     —          5.8        4,124.5         668.9         —          4,799.2   

Investments in and advances to nonconsolidated affiliates

     501.1        13,784.2        7.6         62.1         (14,318.8     36.2   

Deferred charges and other

     —          414.2        195.0         243.4         —          852.6   

Intercompany receivables

     210.0        1,108.3        1,187.7         706.6         (3,212.6     —     
                                                  
   $ 1,030.0      $ 16,517.5      $ 18,716.4       $ 11,443.9       $ (18,419.9   $ 29,287.9   
                                                  

Liabilities and Stockholders’ Equity/ (Deficit)

              

Current liabilities

              

Accounts payable

   $ 4.2      $ 105.2      $ 86.5       $ 65.6       $ —        $ 261.5   

Interest payable

     —          418.0        1.9         9.8         —          429.7   

Accrued expenses and other current liabilities

     3.6        234.8        459.4         500.6         —          1,198.4   

Current portion of long-term debt

     —          30.0        5.7         219.4         —          255.1   

Intercompany payables

     —          37.7        477.4         373.4         (888.5     —     
                                                  

Total current liabilities

     7.8        825.7        1,030.9         1,168.8         (888.5     2,144.7   

Long-term debt

     —          13,629.8        68.6         5,776.7         (13.1     19,462.0   

Deferred credits and other

     —          737.8        134.1         99.0         —          970.9   

Deferred income taxes

     (0.2     1,226.0        2,536.9         1,885.0         —          5,647.7   

Intercompany notes

     4.0        298.1        1,473.4         1,437.1         (3,212.6     —     
                                                  
     11.6        16,717.4        5,243.9         10,366.6         (4,114.2     28,225.3   
                                                  

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

     1,018.4        (199.9     13,472.5         1,033.1         (14,305.7     1,018.4   

Non-controlling interests

     —          —          —           44.2         —          44.2   
                                                  

Total Stockholders’ equity/(deficit)

     1,018.4        (199.9     13,472.5         1,077.3         (14,305.7     1,062.6   
                                                  
   $ 1,030.0      $ 16,517.5      $ 18,716.4       $ 11,443.9       $ (18,419.9   $ 29,287.9   
                                                  

 

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HARRAH’S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

 

 

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2009

 

(in millions)

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

Assets

              

Current assets

              

Cash and cash equivalents

   $ 122.7      $ (15.6   $ 445.2       $ 365.8       $ —        $ 918.1   

Receivables, net of allowance for doubtful accounts

     —          10.2        237.5         75.8         —          323.5   

Deferred income taxes

     —          60.0        68.4         19.8         —          148.2   

Prepayments and other

     —          12.5        79.8         64.1         —          156.4   

Inventories

     —          0.6        33.5         18.6         —          52.7   

Intercompany receivables

     0.2        478.4        261.3         232.5         (972.4     —     
                                                  

Total current assets

     122.9        546.1        1,125.7         776.6         (972.4     1,598.9   

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

     —          240.3        10,500.2         7,184.3         —          17,924.8   

Assets held for sale

     —          —          16.7         —           —          16.7   

Goodwill

     —          —          1,753.0         1,703.9         —          3,456.9   

Intangible assets other than goodwill

     —          6.3        4,230.2         714.8         —          4,951.3   

Investments in and advances to nonconsolidated affiliates

     1,846.1        15,056.8        70.2         627.3         (17,506.4     94.0   

Deferred charges and other

     —          399.0        246.4         291.2         —          936.6   

Intercompany receivables

     —          1,348.7        1,687.8         706.9         (3,743.4     —     
                                                  
   $ 1,969.0      $ 17,597.2      $ 19,630.2       $ 12,005.0       $ (22,222.2   $ 28,979.2   
                                                  

Liabilities and Stockholders’ (Deficit)/Equity

              

Current liabilities

              

Accounts payable

   $ —        $ 97.7      $ 104.6       $ 58.5       $ —        $ 260.8   

Interest payable

     —          184.8        1.9         8.9         —          195.6   

Accrued expenses and other current liabilities

     8.6        205.2        449.7         411.3         —          1,074.8   

Current portion of long-term debt

     —          30.0        6.3         38.0         —          74.3   

Intercompany payables

     1.8        34.1        412.0         524.5         (972.4     —     
                                                  

Total current liabilities

     10.4        551.8        974.5         1,041.2         (972.4     1,605.5   

Long-term debt

     —          13,601.0        98.1         5,747.8         (578.1     18,868.8   

Deferred credits and other

     —          642.9        147.8         81.8         —          872.5   

Deferred income taxes

     —          1,520.1        2,446.5         1,890.3         —          5,856.9   

Intercompany notes

     239.0        98.1        1,973.5         1,432.8         (3,743.4     —     
                                                  
     249.4        16,413.9        5,640.4         10,193.9         (5,293.9     27,203.7   
                                                  

Preferred stock

     2,642.5        —          —           —           —          2,642.5   
                                                  

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

     (922.9     1,183.3        13,989.8         1,755.2         (16,928.3     (922.9

Non-controlling interests

     —          —          —           55.9         —          55.9   
                                                  

Total Stockholders’ (deficit)/equity

     (922.9     1,183.3        13,989.8         1,811.1         (16,928.3     (867.0
                                                  
   $ 1,969.0      $ 17,597.2      $ 19,630.2       $ 12,005.0       $ (22,222.2   $ 28,979.2   
                                                  

 

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HARRAH’S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

QUARTER ENDED SEPTEMBER 30, 2010

 

(In millions)

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

Revenues

            

Casino

   $ —        $ 19.9      $ 1,161.9      $ 602.5      $ —        $ 1,784.3   

Food and beverage

     —          5.1        223.3        166.6        —          395.0   

Rooms

     —          5.4        155.4        135.2        —          296.0   

Management fees

     —          —          14.5        0.5        (5.9     9.1   

Other

     —          18.5        95.3        82.9        (41.2     155.5   

Less: casino promotional allowances

     —          (7.0     (217.8     (126.6     —          (351.4
                                                

Net revenues

     —          41.9        1,432.6        861.1        (47.1     2,288.5   
                                                

Operating expenses

            

Direct

            

Casino

     —          12.8        644.8        353.3        —          1,010.9   

Food and beverage

     —