SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): January 1, 1999
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HARRAH'S ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-10410 62-1411755
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation or organization) File Number) Identification No.)
1023 CHERRY ROAD
MEMPHIS, TENNESSEE 38117
(Address of Principal Executive Offices) (Zip Code)
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(901) 762-8600
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(Registrant's telephone number, including area code)
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(Former Name or Former Address, if Changed Since Last Report.)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On January 1, 1999, Harrah's Entertainment, Inc., a Delaware
corporation (the "Registrant"), consummated its acquisition of Rio Hotel &
Casino, Inc., a Nevada corporation ("Rio"), pursuant to that certain Agreement
and Plan of Merger, dated as of August 9, 1998 and amended as of September 4,
1998 (the "Merger Agreement"), by and among the Registrant, HEI Acquisition
Corp. III, a Nevada corporation and a direct, wholly-owned subsidiary of the
Registrant ("Merger Sub"), and Rio. The Registrant's acquisition of Rio was
effected by merging Merger Sub with and into Rio (the "Merger"), with Rio
continuing as the surviving corporation.
A special meeting of the stockholders of Rio was held on November
18, 1998, at which the stockholders of Rio were asked, pursuant to the Joint
Proxy Statement/Prospectus contained within the Registrant's registration
statement on Form S-4 (No. 333-65759) filed with the Securities and Exchange
Commission on October 15, 1998 (the "Joint Proxy Statement/Prospectus"), to
consider and vote upon the Merger Agreement. The stockholders of Rio approved
and adopted the Merger Agreement at such meeting.
A special meeting of the stockholders of the Registrant also was
held on November 18, 1998, at which the stockholders of the Registrant were
asked, pursuant to the Joint Proxy Statement/Prospectus, to consider and vote
upon the issuance of the common stock, par value $0.10 ("HET Common Stock"), of
the Registrant in connection with the Merger. The stockholders of the
Registrant approved the issuance of HET Common Stock at such meeting.
Following receipt of stockholder and regulatory approvals,
the Articles of Merger with respect to the Merger were filed with the
Secretary of State of the State of Nevada. This filing was accepted and
the Merger became effective on January 1, 1999. Immediately following the
Merger, the Registrant contributed the capital stock of Rio to Harrah's
Operating Company, Inc., a Delaware corporation.
The Registrant, through Rio and its subsidiaries, intends to
continue to devote the assets associated with Rio and its subsidiaries to
generally the same purposes as these assets were employed prior to the Merger.
As consideration for the Merger, the Registrant agreed to
issue one share of HET Common Stock in exchange for each share of common
stock, par value $0.01 per share, of Rio, issued and outstanding immediately
prior to the Merger. The Registrant also assumed Rio's outstanding long-term
debt.
HET Common Stock is listed on the New York Stock Exchange and
trades under the symbol "HET." HET Common Stock also is listed on the Chicago
Stock Exchange, the Pacific Exchange and the Philadelphia Stock Exchange.
2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired.
The audited financial statements of Rio for the three previous
fiscal years, and the accountant's report related thereto, set forth in Rio's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and the
unaudited financial statements for the period ended September 30, 1998 set forth
in Rio's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998,
are incorporated herein by reference.
(b) Pro forma financial information.
The required pro forma financial information relating to the
Registrant's acquisition of Rio for the nine months ended September 30, 1998 and
the twelve months ended December 31, 1997 is attached hereto as an exhibit.
(c) Exhibits
2(1) Agreement and Plan of Merger, dated as of August 9, 1998
and amended as of September 4, 1998, by and among
Harrah's Entertainment, Inc., HEI Acquisition Corp. III
and Rio Hotel & Casino, Inc. (incorporated by reference
from the Registrant's Current Reports on Form 8-K, filed
August 14, 1998 and September 4, 1998).
23(1) Consent of Arthur Andersen LLP.
99(1) Text of Press Release, dated January 1, 1999, of the
Registrant.
99(2) Harrah's Entertainment, Inc.'s Unaudited Pro Forma
Condensed Financial Statements for the Nine Months Ended
September 30, 1998 and the Twelve Months Ended December
31, 1997.
3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
HARRAH'S ENTERTAINMENT, INC.
Date: January 4, 1999 By: /s/ E. O. Robinson, Jr.
---------------------------------
Name: E. O. Robinson, Jr.
Title: Senior Vice President and
General Counsel
S-1
Exhibit 23(1)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement on Form 8-K of our report dated
February 24, 1998, included in the Annual Report on Form 10-K of Rio Hotel &
Casino, Inc. for the year ended December 31, 1997, and to all references to our
Firm included in this registration statement on Form 8-K.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
January 7, 1999
Exhibit 99(1)
HARRAH'S ENTERTAINMENT AND RIO HOTEL & CASINO COMPLETE MERGER
Memphis, Tenn., January 4, 1999 -- Harrah's Entertainment, Inc.
(NYSE:HET) and Rio Hotel & Casino, Inc. today confirmed the completion of
their merger announced August 10.
Harrah's Entertainment acquired all Rio outstanding shares in a
one-for-one stock transaction valued at $525 million and assumed Rio's debt.
"This is a great way to ring in the new year," said Harrah's
Entertainment chairman, president and chief executive officer Phil Satre. "I
look forward to working with Rio's extraordinary management team, building
relationships with its loyal customers and adding this terrific Las Vegas
destination to our broad geographic distribution.
"Rio is, by all standards, one of the highest quality and best-managed
companies in our business. We look forward to adding our strong database
management and marketing expertise and connecting Rio's 1.3 million Play Rio
customers to the benefits of the Harrah's Total Gold recognition and reward
program."
Satre went on to explain, "Our goal is to preserve the uniqueness of
the Rio property and capitalize on a number of significant revenue synergy
opportunities between Rio and Harrah's customers. Now, Harrah's loyal players
have two choices in America's most popular gaming destination and Rio
customers have a nationwide network of casinos in which to play."
The merger with Rio brings a third brand under the Harrah's
Entertainment, Inc. umbrella. In June 1998, Harrah's completed the
acquisition of Showboat, Inc. The Rio hotel and casino will operate as a
separate subsidiary of Harrah's Entertainment and no changes are expected to
its operations.
The Rio Hotel & Casino has more than 2,500 suites and approximately
120,000 square feet of gaming space. The property just opened nine luxury
Palazzo Suites and plans to open a state-of-the-art convention center in
March. In addition to its well-deserved reputation for high-quality customer
service, world class accommodations and culinary excellence, Rio has won
numerous industry awards from gaming and travel publications.
Harrah's Entertainment, Inc. was recently named "Company of the Year"
for 1998 by CASINO EXECUTIVE magazine while CASINO JOURNAL named Phil Satre
"Gaming Executive of the Year." Headquartered in Memphis, TN, Harrah's
Entertainment now operates 19 casinos nationwide under the Harrah's, Showboat
and Rio brands, and Star City casino in Sydney, Australia. Founded more than
60 years ago, Harrah's Entertainment is focused on building loyalty and brand
value with its targeted customers through a unique combination of great
service, excellent products, unsurpassed distribution, operational excellence
and technology leadership.
Statements in this release concerning future events, including the
anticipated integration of Rio Hotel & Casino, future performance and
business prospects are forward-looking and are subject to certain risks and
uncertainties. These include, but are not limited to, economic, bank, equity
and debt market conditions, changes in laws or regulations, third party
relations and approvals, decisions of courts, regulators and governmental
bodies, factors affecting leverage, including interest rates, and effects of
competition. These risks and uncertainties could significantly affect
anticipated results or events in the future and actual results may differ
materially from any forward-looking statements. For additional information,
refer to the section entitled "Private Securities Litigation Reform Act" in
the company's Form 10-Q filed with the Securities and Exchange Commission
for the period ended September 30, 1998.
######
EXHIBIT 99(2)
HARRAH'S ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statements are
based upon and should be read in conjunction with the historical consolidated
financial statements and related notes of Harrah's Entertainment, Inc.
("Harrah's"), Rio Hotel & Casino, Inc. ("Rio") and Showboat, Inc. ("Showboat,"
and together with Harrah's and Rio, the "Company"). Harrah's acquired Showboat
in a transaction which was consummated on June 1, 1998. Harrah's merged with
Rio in a transaction which was consummated on January 1, 1999.
The unaudited pro forma condensed statements of income for the nine
months ended September 30, 1998 and the year ended December 31, 1997 give
effect to (i) Harrah's acquisitions of both Showboat and Rio applying the
purchase method of accounting; (ii) Harrah's refinancing of certain amounts
of Showboat's existing indebtedness (on June 15, 1998, Harrah's completed
tender offers and consent solicitations and retired a portion of the debt
assumed in the acquisition of Showboat); (iii) certain adjustments that are
directly attributable to the acquisitions of Showboat and Rio and anticipated
to have continuing impact, including certain estimated operational benefits
arising from the elimination of duplicative corporate office and operational
support functions; (iv) the refinancing of $750.0 million of Harrah's
existing short-term, floating rate bank debt with long-term, fixed rate debt
(the "December Notes Offering") to substantially satisfy the refinancing
requirements of an amendment to Harrah's credit facility which was necessary
to obtain the lenders' consent to the Rio acquisition; (v) de-consolidation
of the Showboat East Chicago property, in which the Company holds a 55%
non-controlling interest; and (vi) the presentation of the Showboat Las Vegas
property as an asset held for sale. The pro forma condensed statements of
income assume that these transactions were consummated on the first day of
each of the periods presented.
The unaudited pro forma condensed balance sheet presents the combined
financial position of Harrah's (including Showboat) and Rio as of September 30,
1998. The unaudited pro forma condensed balance sheet gives effect to (i) the
merger with Rio applying the purchase method of accounting as if the merger was
consummated on September 30, 1998; (ii) certain adjustments that are directly
attributable to the merger with Rio; and (iii) the December Notes Offering.
The unaudited pro forma condensed financial statements have been
prepared based upon currently available information and assumptions that are
deemed appropriate by the Company's management. This pro forma information may
not be indicative of what actual results would have been, nor does such data
purport to represent the combined financial results of Harrah's, Showboat and
Rio for future periods.
HARRAH'S ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED
STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
HARRAH'S AS PRO FORMA
HARRAH'S SHOWBOAT PRO FORMA ADJUSTED RIO ADJUSTMENTS HARRAH'S AS
HISTORICAL HISTORICAL ADJUSTMENTS FOR HISTORICAL FOR RIO ADJUSTED
(NOTE 1) (NOTE 2) (NOTE 3) SHOWBOAT (NOTE 4) (NOTE 5) FOR RIO
---------- ---------- ----------- ----------- ---------- ----------- -----------
(IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)
Revenues
Casino.......................... $1,220.3 $237.6 $(92.7)(a) $1,365.2 $149.0 $ $1,514.2
Food and beverage............... 171.8 25.9 (10.4)(a) 187.3 99.6 286.9
Rooms........................... 114.5 9.7 (2.5)(a) 121.7 59.9 181.6
Management fees................. 48.6 4.4 (0.5)(a) 52.5 - 52.5
Other........................... 60.7 4.1 (1.8)(a) 63.0 21.8 84.8
Less: casino promotional
allowances.................... (136.6) (17.4) 3.0 (a) (151.0) (28.4) (179.4)
-------- ------- ------- -------- ------ ------ --------
Total revenues.............. 1,479.3 264.3 (104.9) 1,638.7 301.9 1,940.6
-------- ------- ------- -------- ------ ------ --------
Operating expenses
Direct
Casino........................ 651.2 100.6 (42.4)(a) 709.4 83.8 793.2
Food and beverage............. 86.8 27.6 (11.7)(a) 102.7 71.5 174.2
Rooms......................... 31.7 6.1 (1.6)(a) 36.2 18.9 55.1
Depreciation - buildings,
riverboats and equipment...... 94.9 19.0 (7.7)(a) 106.2 20.7 (1.0)(h) 125.9
Equity in (income) losses
of nonconsolidated
subsidiaries.................. 8.7 1.2 2.9 (a) 12.8 - 12.8
Project opening costs........... 7.2 - - 7.2 - 7.2
Other........................... 359.7 108.1 (38.8)(a) 409.2 56.5 2.8 (i) 463.2
6.2 (b) (5.3)(j)
(26.0)(c)
-------- ------- ------- -------- ------ ------ --------
Total operating expenses.... 1,240.2 262.6 (119.1) 1,383.7 251.4 (3.5) 1,631.6
-------- ------- ------- -------- ------ ------ --------
Income from operations............. 239.1 1.7 14.2 255.0 50.5 3.5 309.0
Interest expense, net of
interest capitalized............. (81.4) (29.7) 9.1 (a) (111.6) (18.2) (0.6)(k) (140.6)
5.0 (d) (10.2)(l)
(14.6)(e)
Other income, including
interest income................. 19.0 1.8 (0.1)(a) 20.7 (3.2) 17.5
-------- ------- ------- -------- ------ ------ --------
Income before income taxes and
minority interests.............. 176.7 (26.2) 13.6 164.1 29.1 (7.3) 185.9
Provision for income taxes......... (65.0) 4.0 (7.5)(g) (68.5) (10.6) 1.6 (m) (77.5)
Minority interests................. (5.6) - - (5.6) (5.6)
-------- ------- ------- -------- ------ ------ --------
Income from continuing
operations...................... $ 106.1 $ (22.2) $ 6.1 $ 90.0 $ 18.5 $ (5.7) $ 102.8
-------- ------- ------- -------- ------ ------ --------
-------- ------- ------- -------- ------ ------ --------
Income from continuing
operations per share
Basic......................... $ 1.06 $ 0.91 $ 0.82 (n)
Diluted....................... $ 1.05 $ 0.90 $ 0.81 (n)
Average common shares 125.0 (n)
outstanding..................... 100.2 100.2
Average common and common
equivalent shares outstanding... 101.3 101.3 126.7 (n)
See Notes to Unaudited Pro Forma Condensed Financial Statements.
HARRAH'S ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
HARRAH'S AS PRO FORMA HARRAH'S
HARRAH'S SHOWBOAT PRO FORMA ADJUSTED RIO ADJUSTMENTS AS
HISTORICAL HISTORICAL ADJUSTMENTS FOR HISTORICAL FOR RIO ADJUSTED
(NOTE 1) (NOTE 2) (NOTE 3) SHOWBOAT (NOTE 4) (NOTE 5) FOR RIO
---------- ---------- ----------- ----------- ---------- ----------- --------
(IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)
Revenues
Casino..................... $1,338.0 $497.1 $(152.8)(a) $1,682.3 $214.0 $ $1,896.3
Food and beverage.......... 196.8 62.7 (20.9)(a) 238.6 114.8 353.4
Rooms...................... 128.4 25.4 (6.1)(a) 147.7 70.4 218.1
Management fees............ 24.6 5.7 30.3 - 30.3
Other...................... 78.9 10.7 (5.5)(a) 84.1 25.6 109.7
Less: casino promotional
allowances............... (147.5) (44.8) 6.4 (a) (185.9) (32.7) (218.6)
-------- ------ ------- -------- ------ ----- --------
Total revenues..... 1,619.2 556.8 (178.9) 1,997.1 392.1 2,389.2
-------- ------ ------- -------- ------ ----- --------
Operating expenses
Direct
Casino................... 685.9 252.8 (79.0)(a) 859.7 117.6 977.3
Food and beverage........ 103.6 37.4 (18.4)(a) 122.6 89.0 211.6
Rooms.................... 39.7 6.6 (3.7)(a) 42.6 20.6 63.2
Depreciation-buildings,
riverboats and equipment. 103.7 40.8 (14.3)(a) 130.2 23.2 (1.3)(h) 152.1
Equity in (income) losses
of nonconsolidated
subsidiaries............. 11.1 3.5 23.9 (a) 38.5 - 38.5
Project opening costs...... 17.6 9.6 (9.6)(a) 17.6 11.2 28.8
Other...................... 444.1 180.0 (65.2)(a) 552.2 70.4 3.8 (i) 619.4
15.3 (b) (7.0)(j)
(22.0)(c)
-------- ------ ------- -------- ------ ----- --------
Total operating
expenses......... 1,405.7 530.7 (173.0) 1,763.4 332.0 (4.5) 2,090.9
-------- ------ ------- -------- ------ ----- --------
Income from operations........ 213.5 26.1 (5.9) 233.7 60.1 4.5 298.3
Interest expense, net of
interest capitalized........ (79.1) (49.4) 16.6 (a) (134.5) (26.3) (0.8)(k) (174.9)
10.9 (d) (13.3)(l)
(33.5)(e)
Other income, including
interest income............ 49.2 5.1 (1.0)(a) 53.3 - 53.3
-------- ------ ------- -------- ------ ----- --------
Income before income taxes and
minority interests......... 183.6 (18.2) (12.9) 152.5 33.8 (9.6) 176.7
Provision for income taxes.... (68.7) 2.3 (1.9)(g) (68.3) (12.4) 2.0 (m) (78.7)
Minority interests............ (7.4) (2.6) 2.6 (a) (7.4) - (7.4)
-------- ------ ------- -------- ------ ----- --------
Income from continuing
operations.................... $ 107.5 $(18.5) $ (12.2) $ 76.8 $ 21.4 $(7.6) $ 90.6
-------- ------ ------- -------- ------ ----- --------
-------- ------ ------- -------- ------ ----- --------
Income from continuing
operations per share
Basic.................... $ 1.07 $ 0.76 $ 0.74(n)
Diluted.................. $ 1.06 $ 0.76 $ 0.73(n)
Average common shares 122.2(n)
outstanding................ 100.6 100.6
Average common and common
equivalent shares
outstanding................ 101.3 101.3 123.5(n)
See Notes to Unaudited Pro Forma Condensed Financial Statements.
HARRAH'S ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED
BALANCE SHEET
AS OF SEPTEMBER 30, 1998
HARRAH'S RIO PRO FORMA HARRAH'S
HISTORICAL HISTORICAL ADJUSTMENTS AS ADJUSTED
(NOTE 1) (NOTE 4) (NOTE 6) FOR RIO
---------- ---------- ----------- -----------
(IN MILLIONS)
ASSETS
Current assets
Cash and cash equivalents...................................... $ 128.7 $ 21.3 $ $ 150.0
Receivables, less allowance for doubtful accounts.............. 46.7 37.7 84.4
Deferred income tax benefits................................... 16.1 - 16.1
Inventories.................................................... 15.6 13.8 29.4
Prepayments and other.......................................... 29.0 8.4 37.4
--------- ------- ------- ---------
Total current assets......................................... 236.1 81.2 317.3
--------- ------- ------- ---------
Land, buildings, riverboats and equipment......................... 2,641.6 738.5 186.2 (o) 3,465.1
(101.2)(o)
Less: accumulated depreciation................................... (765.5) (101.2) 101.2 (o) (765.5)
--------- ------- ------- ---------
1,876.1 637.3 186.2 2,699.6
Excess of purchase price over net assets acquired in Showboat
acquisition..................................................... 521.8 - 521.8
Goodwill arising from Rio acquisition............................. - - 150.0 (p) 150.0
Investments in and advances to nonconsolidated subsidiaries....... 284.7 - 284.7
Other assets...................................................... 273.2 24.7 (4.3)(q) 305.1
14.1 (r)
(2.6)(s)
--------- ------- ------- ---------
$ 3,191.9 $ 743.2 $ 343.4 $ 4,278.5
--------- ------- ------- ---------
--------- ------- ------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................... $ 39.2 $ 27.6 $ $ 66.8
Accrued expenses............................................... 203.1 36.0 (0.9)(s) 265.1
26.9 (t)
Current portion of long-term debt.............................. 49.8 2.6 52.4
--------- ------- ------- ---------
Total current liabilities.................................... 292.1 66.2 26.0 384.3
Long-term debt.................................................... 1,914.0 367.7 750.0 (r) 2,304.7
(735.9)(r)
8.9 (u)
Deferred credits and other........................................ 99.8 - 99.8
Deferred income taxes............................................. 44.1 17.9 62.1 (v) 124.1
--------- ------- ------- ---------
2,350.0 451.8 111.1 2,912.9
--------- ------- ------- ---------
Minority interests................................................ 14.5 - 14.5
--------- ------- ------- ---------
Commitments and contingencies
Stockholders' equity..............................................
Common stock................................................... 10.1 0.2 2.3 (w) 12.6
Capital surplus................................................ 398.0 182.7 340.2 (w) 920.9
Retained earnings.............................................. 437.3 108.5 (1.7)(s) 435.6
(108.5)(w)
Accumulated other comprehensive income......................... (0.4) - (0.4)
Deferred compensation related to restricted stock.............. (17.6) - (17.6)
--------- ------- ------- ---------
827.4 291.4 232.3 1,351.1
--------- ------- ------- ---------
$ 3,191.9 $ 743.2 $ 343.4 $ 4,278.5
--------- ------- ------- ---------
--------- ------- ------- ---------
See Notes to Unaudited Pro Forma Condensed Financial Statements.
HARRAH'S ENTERTAINMENT, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS
Note 1--Historical financial information for Harrah's for the nine
months ended September 30, 1998 and the year ended December 31, 1997 has been
derived from the Harrah's historical financial statements. Harrah's financial
statements for the nine month period ended September 30, 1998 include Showboat's
operations after its June 1, 1998 acquisition by Harrah's.
Note 2--The Showboat historical financial information for the year
ended December 31, 1997 has been derived from Showboat's historical financial
information. Showboat's historical financial results reflected in the Unaudited
Pro Forma Condensed Statement of Income for the Nine Months Ended September 30,
1998 include only the five months of Showboat's operations prior to its June 1,
1998 acquisition by Harrah's.
Note 3--Following are brief descriptions of the pro forma adjustments
to reflect Harrah's acquisition of Showboat.
(a) Adjusts the historical statements of income to reflect the
operating results of Showboat East Chicago as being accounted for under the
equity method (rather than consolidated) and to remove the operating results of
Showboat Las Vegas. Harrah's owns a 55% non-controlling interest in the
partnership which owns and operates Showboat East Chicago. The agreements which
govern the management of this partnership stipulate that certain actions require
unanimous approval of all partners, or the consent of the minority partner,
before such action can be taken. These actions include, among others, the
approval of the annual operating budget, approval of the annual capital budget,
decisions to buy or sell assets totaling more than $500,000 in any one calendar
year and the incurrence of more than $500,000 of debt in any one calendar year.
Given the significance of the issues requiring the concurrence of the minority
partner, Harrah's has concluded that it does not have control of the partnership
for accounting purposes and, as a result, accounts for this investment under the
equity method of accounting. Under the terms of a transaction announced in
December 1998 and expected to close in the first quarter 1999, Harrah's has
reached an agreement to increase its ownership in the partnership to nearly
100%. Upon closing of this transaction, Harrah's will have accounting control
of the partnership and will commence consolidation of the partnership. Showboat
Las Vegas is being carried by Harrah's as an asset held for sale and, as such,
is carried on Harrah's balance sheet at its estimated realizable value, net of
estimated selling expenses and carrying costs through the expected date of sale.
The net impact on income from continuing operations of the pro forma adjustments
related to Showboat East Chicago is zero. The net impact of the adjustments
related to Showboat Las Vegas is to increase income from continuing operations
by $2.1 million for the nine months ended September 30, 1998 and $3.5 million
for the year ended December 31, 1997.
HARRAH'S ENTERTAINMENT, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
(b) Reflects estimated expense for the amortization of the excess of
the purchase price paid over the net book value of the assets acquired.
Harrah's is currently in the process of allocating the purchase price among the
tangible and intangible assets acquired and the liabilities assumed based on
fair market values, as determined by appraisals, discounted cash flows, quoted
market prices and estimates made by management. The purchase price allocation
process is expected to be completed by the end of 1998. For purposes of these
pro forma statements, it is assumed that the excess purchase price will be
amortized over an average 30 year life for all tangible and intangible assets
acquired. Upon completion of the purchase price allocation process, to the
extent the purchase price exceeds the fair value of the net identifiable
tangible and intangible assets acquired, such excess will be allocated to
goodwill and amortized over 40 years.
(c) Reflects adjustments for transaction costs expensed by Showboat
in pre-transaction periods and estimated administrative costs savings to be
realized as a result of merger efficiencies.
(d) Reflects reduction in interest expense for the impact of Harrah's
retirement of $218.6 million face amount of Showboat's 9-1/4% First Mortgage
Bonds due 2008 and $117.9 million face amount of Showboat's 13% Senior
Subordinated Notes due 2009 using funds drawn under Harrah's credit facility.
See Note (f).
(e) Reflects additional interest expense, including amortization of
related deferred finance charges, arising from the incremental borrowings
incurred by Harrah's to fund the purchase of Showboat's outstanding common
stock. See Note (f).
(f) The funds required to fund the retirement of a portion of
Showboat's outstanding debt (see Note (d)) and the purchase of Showboat's
outstanding common stock (see Note (e)) were borrowed under Harrah's credit
facility, and the pro forma effects of such borrowing on interest expense have
been computed at a historical average floating rate of 6.26% for the nine months
ended September 30, 1998, and 6.29% for the year ended December 31, 1997. Each
1/8 of a percent change in the floating rate on these borrowings would result in
a change in interest expense of $0.8 million for the nine months ended September
30, 1998, and $1.1 million for the year ended December 31, 1997.
(g) Records the estimated tax effect of the pro forma adjustments,
with the exception of the amortization of the unallocated purchase price, which
is assumed to be nondeductible for tax purposes.
Note 4--The Rio historical financial information for the nine months
ended September 30, 1998 and the year ended December 31, 1997 has been derived
from Rio's historical financial information.
HARRAH'S ENTERTAINMENT, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
Note 5--The following table sets forth the determination and
preliminary allocation of the purchase price based on a market value of $19.83
per share of Harrah's common stock, which is the average of the quoted market
price of Harrah's common stock for the period beginning three trading days
before and ending three trading days after the merger with Rio was announced.
(IN MILLIONS)
-------------
Merger exchange of shares (24.8 million shares of Rio
common stock converted to Harrah's common stock on a
one for one exchange basis, and fair market value
assigned to outstanding Rio stock options to be
converted to Harrah's options). . . . . . . . . . . . . . . $ 525.4
Estimated fair market value of Rio debt assumed by Harrah's . 379.2
Transaction costs and expenses. . . . . . . . . . . . . . . . 26.9
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Pro forma purchase price. . . . . . . . . . . . . . . . . . . $ 931.5
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The preliminary allocation of the pro forma purchase price is as follows:
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 185.7
Building, and furniture, fixtures and equipment . . . . . . . 637.8
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . 150.0
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . (42.0)
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$ 931.5
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The final purchase price and its allocation will be based on
independent appraisals, discounted cash flows, quoted market prices and
estimates by management and is expected to be completed by June 30, 1999.
Following are brief descriptions of the pro forma adjustments to the
statements of income to reflect the merger with Rio.
(h) Adjusts depreciation expense due to the revaluation of acquired
buildings and equipment resulting from the allocation of the purchase price of
Rio. Depreciation expense is reduced $1.0 million for the nine months ended
September 30, 1998 and $1.3 million for the year ended December 31, 1997.
(i) Reflects an increase in expense due to amortization of goodwill
arising from Harrah's purchase of Rio. Amortization expense is increased $2.8
million for the nine months ended September 30, 1998 and $3.8 million for the
year ended December 31, 1997. Goodwill is assumed to be amortized over a life
of 40 years.
HARRAH'S ENTERTAINMENT, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
(j) Records the impact on expenses of certain estimated operational
efficiencies for functions which are expected to be eliminated or reduced as a
result of the merger with Rio. The elimination of duplicative corporate office
and operational support functions is estimated to reduce other costs and
expenses and corporate expense by $5.3 million for the nine months ended
September 30, 1998 and to reduce other costs and expenses and corporate expense
by $7.0 million for the year ended December 31, 1997.
(k) Reflects net increase in interest expense comprised of
incremental borrowings incurred by Harrah's to fund transaction costs, which is
partially offset by the amortization of the estimated premium to be recognized
to adjust Rio's outstanding debt to its fair value as of the date of
acquisition. The pro forma interest expense arising from the additional
borrowings has been computed using Harrah's historical average floating rate on
its credit facility of 6.26% for the nine months ended September 30, 1998, and
6.29% for the year ended December 31, 1997. Each 1/8 percent change in the
floating rate on these borrowings would result in a change in interest expense
of $25,000 for the nine months ended September 30, 1998, and $34,000 for the
year ended December 31, 1997.
(l) In connection with obtaining the consent of the lenders under
its credit facility for the merger with Rio, Harrah's agreed to modify
certain terms of the credit facility relating to mandatory principal
reductions and the interest rates charged under such facility. As amended,
the credit facility provides for Harrah's to (i) refinance at least $250.0
million of the amounts available under the credit facility by each of
December 31, 1998, March 31, 1999 and June 30, 1999 (a total of $750.0
million), or (ii) permanently increase the interest rate margin applicable
to all amounts outstanding under the credit facility by 0.50% for each $250.0
million not refinanced by such dates (a total increase of 1.50%). The
December Notes Offering completed in December 1998 substantially satisfied
certain refinancing requirements under Harrah's amended credit facility.
This adjustment reflects the estimated incremental interest expense,
including amortization of deferred finance charges, due to this refinancing.
(m) Records the estimated tax effect of these pro forma adjustments,
with the exception of the amortization of goodwill, which is assumed to be
nondeductible for tax purposes.
HARRAH'S ENTERTAINMENT, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
(n) Pro forma income from continuing operations per share is computed
on the basis of the combined weighted average number of shares of Harrah's
common stock and Harrah's common stock equivalents after giving effect to the
issuance of shares to consummate the merger with Rio.
Note 6--Following are brief descriptions of the pro forma adjustments
to the balance sheet to reflect the merger with Rio.
(o) Reflects the net increase in the carrying value of Rio's land,
buildings and equipment to adjust those assets to their estimated fair market
value.
(p) Reflects as goodwill the excess purchase price over fair value of
net tangible and intangible assets acquired and liabilities assumed.
(q) Reduces other assets to reflect deferred financing costs of Rio
not valued due to the adjustment of debt to estimated fair market value.
(r) Records the December Notes Offering, incurrence of the related
deferred finance charges and retirement of a portion of Harrah's credit facility
to obtain the consent of its lenders for the merger with Rio.
(s) Records the write-off of the unamortized deferred finance charges
related to the early retirement of a portion of Harrah's credit facility as a
result of the December Notes Offering.
(t) Records as current liabilities the accrual of severance and
direct merger costs of Harrah's and Rio.
(u) Reflects the net adjustment to long-term debt to reflect the Rio
debt at its estimated fair market value and incremental borrowings to fund
payment of additional deferred finance charges.
(v) Records the deferred tax effect of the pro forma balance sheet
adjustments, primarily related to land, buildings and equipment.
(w) The net increase in stockholders' equity reflects: (i) the
issuance of one share of Harrah's common stock for each share of Rio common
stock outstanding and (ii) the elimination of Rio's historical retained
earnings.
