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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
Commission File No. 1-10410
HARRAH'S ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware I.R.S. No. 62-1411755
(State of Incorporation) (I.R.S. Employer Identification No.)
1023 Cherry Road
Memphis, Tennessee 38117
(Address of principal executive offices)
(901) 762-8600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -------
At September 30, 1998, there were outstanding 101,472,081 shares of the
Company's Common Stock.
Page 1 of 57
Exhibit Index Page 44
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
----------------------------
The accompanying unaudited Consolidated Condensed Financial Statements of
Harrah's Entertainment, Inc. ("Harrah's" or the "Company"), a Delaware
corporation, have been prepared in accordance with the instructions to Form
10-Q, and therefore do not include all information and notes necessary for
complete financial statements in conformity with generally accepted accounting
principles. The results for the periods indicated are unaudited, but reflect all
adjustments (consisting only of normal recurring adjustments) which management
considers necessary for a fair presentation of operating results. Results of
operations for interim periods are not necessarily indicative of a full year of
operations. See Note 2 to these Consolidated Condensed Financial Statements
regarding the completion of the Company's acquisition of Showboat, Inc., during
second quarter 1998. These Consolidated Condensed Financial Statements should be
read in conjunction with the Consolidated Financial Statements and notes thereto
included in the Company's 1997 Annual Report to Stockholders.
-2-
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share amounts)
Sept. 30, Dec. 31,
1998 1997
---------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 128,745 $ 116,443
Receivables, less allowance for doubtful
accounts of $17,008 and $11,462 46,680 43,767
Deferred income tax benefits 16,062 17,436
Prepayments and other 29,018 21,653
Inventories 15,563 13,011
---------- ----------
Total current assets 236,068 212,310
---------- ----------
Land, buildings, riverboats and equipment 2,641,645 2,153,340
Less: accumulated depreciation (765,535) (675,286)
---------- ----------
1,876,110 1,478,054
Excess of purchase price over net assets acquired
in Showboat acquisition, including assets held
for sale (Note 2) 521,798 --
Investments in and advances to
nonconsolidated affiliates 284,674 152,401
Deferred costs, notes receivable and other 273,252 162,741
---------- ----------
$3,191,902 $2,005,506
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 38,612 $ 45,233
Construction payables 558 7,186
Accrued expenses 203,133 156,694
Current portion of long-term debt 49,766 1,837
---------- ----------
Total current liabilities 292,069 210,950
Long-term debt 1,914,002 924,397
Deferred credits and other 99,794 98,177
Deferred income taxes 44,142 22,361
---------- ----------
2,350,007 1,255,885
---------- ----------
Minority interests 14,530 14,118
---------- ----------
Commitments and contingencies (Notes 4, 6, 7, 8 and 11)
Stockholders' equity
Common stock, $0.10 par value, authorized 360,000,000 shares, outstanding
101,472,081 and 101,035,898 shares (net of 3,040,983 and
3,001,568 shares held in treasury) 10,147 10,104
Capital surplus 397,978 388,925
Retained earnings 437,230 349,386
Accumulated other comprehensive income (405) 2,884
Deferred compensation related to restricted stock (17,585) (15,796)
---------- ----------
827,365 735,503
---------- ----------
$3,191,902 $2,005,506
---------- ----------
---------- ----------
See accompanying Notes to Consolidated Condensed Financial Statements.
-3-
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share Third Quarter Ended Nine Months Ended
amounts) Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
--------- --------- ---------- ----------
Revenues
Casino $ 489,872 $ 361,369 $1,220,275 $1,012,118
Food and beverage 67,549 53,461 171,807 147,903
Rooms 44,771 36,371 114,539 95,126
Management fees 16,309 4,483 48,646 17,348
Other 23,632 22,469 60,701 58,738
Less: casino promotional allowances (55,891) (39,905) (136,645) (109,993)
--------- --------- ---------- ----------
Total revenues 586,242 438,248 1,479,323 1,221,240
--------- --------- ---------- ----------
Operating expenses
Direct
Casino 255,660 176,966 651,245 514,142
Food and beverage 32,936 27,968 86,829 76,090
Rooms 11,253 10,579 31,673 29,336
Depreciation of buildings,
riverboats and equipment 33,810 26,141 94,883 76,802
Development costs 2,701 2,720 6,621 7,409
Write-downs and reserves -- 12,345 1,847 12,345
Project opening costs 1,161 962 7,157 8,977
Other 126,610 101,942 322,689 285,806
--------- --------- ---------- ----------
Total operating expenses 464,131 359,623 1,202,944 1,010,907
--------- --------- ---------- ----------
Operating profit 122,111 78,625 276,379 210,333
Corporate expense (9,443) (6,563) (25,029) (22,240)
Equity in losses of
nonconsolidated affiliates (2,404) (2,899) (8,706) (8,270)
Venture restructuring costs (1,062) (1,414) (3,521) (5,584)
--------- --------- ---------- ----------
Income from operations 109,202 67,749 239,123 174,239
Interest expense, net of interest
capitalized (36,409) (19,757) (81,358) (57,901)
Gains on sales of equity interests
in subsidiaries -- 37,388 13,155 37,388
Other income, including interest
income 273 2,133 5,798 8,360
--------- --------- ---------- ----------
Income before income taxes and
minority interests 73,066 87,513 176,718 162,086
Provision for income taxes (27,091) (32,654) (65,043) (60,978)
Minority interests (1,773) (1,970) (5,551) (5,735)
--------- --------- ---------- ----------
Income before extraordinary losses 44,202 52,889 106,124 95,373
Extraordinary losses on early
extinguishments of debt, net of
income tax benefit of $9,755 and
$4,477 -- -- (18,280) (8,134)
--------- --------- ---------- ----------
Net income $ 44,202 $ 52,889 $ 87,844 $ 87,239
--------- --------- ---------- ----------
--------- --------- ---------- ----------
-4-
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Continued)
(UNAUDITED)
(In thousands, except per share Third Quarter Ended Nine Months Ended
amounts) Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
--------- --------- ---------- ----------
Earnings per share-basic
Income before extraordinary losses $ 0.44 $ 0.53 $ 1.06 $ 0.95
Extraordinary losses, net -- -- (0.18) (0.08)
--------- --------- ---------- ----------
Net income $ 0.44 $ 0.53 $ 0.88 $ 0.87
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Earnings per share-diluted
Income before extraordinary losses $ 0.44 $ 0.52 $ 1.05 $ 0.94
Extraordinary losses, net -- -- (0.18) (0.08)
--------- --------- ---------- ----------
Net income $ 0.44 $ 0.52 $ 0.87 $ 0.86
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Average common shares outstanding 100,271 100,039 100,204 100,794
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Average common and common
equivalent shares outstanding 100,911 100,835 101,278 100,367
--------- --------- ---------- ----------
--------- --------- ---------- ----------
See accompanying Notes to Consolidated Condensed Financial Statements.
-5-
HARRAH'S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands) Nine Months Ended
Sept. 30, Sept. 30,
1998 1997
---------- ----------
Cash flows from operating activities
Net income $ 87,844 $ 87,239
Adjustments to reconcile net income to cash
flows from operating activities
Extraordinary losses, before income taxes 27,311 12,611
Depreciation and amortization 114,595 89,659
Other noncash items 30,766 21,195
Minority interests' share of income 5,551 5,735
Equity in losses of nonconsolidated
affiliates 8,706 8,270
Realized gains from sales of equity interests
in subsidiaries (13,155) (37,388)
Net gains from asset sales 19 (943)
Net change in long-term accounts 14,314 (1,551)
Net change in working capital accounts (30,606) 34,216
---------- ----------
Cash flows provided by operating activities 245,345 219,043
---------- ----------
Cash flows from investing activities
Acquisition of Showboat, Inc., net of cash
acquired (477,952) --
Land, buildings, riverboats and equipment additions (101,527) (192,734)
Decrease in construction payables (6,628) (9,191)
Proceeds from sales of equity interests in
subsidiaries 17,000 53,755
Proceeds from asset sales 229 2,997
Investments in and advances to nonconsolidated
affiliates (51,847) (45,444)
Purchase of marketable equity securities for
defeasement of debt (65,898) --
Other (27,184) (5,800)
---------- ----------
Cash flows used in investing activities (713,807) (196,417)
---------- ----------
Cash flows from financing activities
Net borrowings under Revolving Credit Facility 1,073,300 229,958
Early extinguishments of debt (560,708) (200,000)
Scheduled debt retirements (2,121) (1,793)
Premiums paid on early extinguishments of debt (24,569) (9,666)
Purchases of treasury stock -- (40,947)
Minority interests' distributions, net of
contributions (5,138) (5,990)
---------- ----------
Cash flows provided by (used in)
financing activities 480,764 (28,438)
---------- ----------
Net increase (decrease) in cash and cash equivalents 12,302 (5,812)
Cash and cash equivalents, beginning of period 116,443 105,594
---------- ----------
Cash and cash equivalents, end of period $ 128,745 $ 99,782
---------- ----------
---------- ----------
See accompanying Notes to Consolidated Condensed Financial Statements.
-6-
HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
Note 1 - Basis of Presentation and Organization
- -----------------------------------------------
Harrah's Entertainment, Inc. ("Harrah's" or the "Company" and including its
subsidiaries where the context requires), a Delaware corporation, is one of
America's leading casino companies. The Company's casino entertainment
facilities, operating under the Harrah's and Showboat brand names, include
casino hotels in Reno, Lake Tahoe, Las Vegas and Laughlin, Nevada; two casino
hotel properties in Atlantic City, New Jersey; and riverboat and dockside
casinos in Joliet, Illinois; East Chicago, Indiana; Shreveport, Louisiana;
Tunica and Vicksburg, Mississippi; and North Kansas City and St. Louis,
Missouri. Harrah's also manages casinos on Indian lands near Phoenix, Arizona;
Cherokee, North Carolina; and Topeka, Kansas, as well as managing the Star City
casino in Sydney, Australia. Harrah's discontinued management of casinos in
Auckland, New Zealand, as of the end of second quarter 1998 and near Seattle,
Washington on November 2, 1998.
Certain amounts for the prior year third quarter and first nine months have
been reclassified to conform with the current year presentation.
Note 2 - Showboat Acquisition
- -----------------------------
On June 1, 1998, Harrah's completed its acquisition of Showboat, Inc.
("Showboat") for $30.75 per share in an all-cash transaction, and assumed
approximately $635 million of Showboat debt. The transaction is being accounted
for as a purchase and, accordingly, the purchase price is being allocated to the
underlying assets acquired and liabilities assumed based upon their estimated
fair values at the date of acquisition. The purchase price allocation process is
currently underway and is expected to be completed by the end of 1998. The
Company's financial statements include an estimate of the amortization expense
arising from the excess of the purchase price over the net assets acquired. The
operating results for Showboat are included in the Consolidated Condensed
Financial Statements from the date of acquisition.
-7-
The Las Vegas Showboat property is a non-strategic asset and is reported
by the Company as an asset held for sale. As such, this property has been
valued at its estimated net realizable value, net of estimated selling
expenses, carrying costs and capitalized interest through the expected date of
sale. The Company owns a 55% non-controlling interest in the partnership which
owns and operates the Showboat East Chicago property. Accordingly, this
investment is accounted for under the equity method. The Company also owns a
24.6% equity ownership interest in and manages the Star City Casino in Sydney,
Australia. The Company accounts for its investment in this entity one month in
arrears.
Subsequent to the closing of the acquisition, the Company completed
tender offers and consent solicitations for Showboat's 9 1/4% First Mortgage
Bonds due 2008 (the "Bonds") and 13% Senior Subordinated Notes due 2009 (the
"Notes"). As a result of these tender offers, $218.6 million face amount of
the Bonds and $117.9 million face amount of the Notes were retired on
June 15, 1998. Due to the early extinguishment of the Bonds and the Notes, the
Company reported extraordinary losses totaling $13.3 million, after income
tax benefit, equaling the excess of the premium paid over fair value as of
the acquisition date of the Bonds and the Notes retired and the related costs
of the tender offers and consent solicitations. As a result of the receipt of
the requisite consents, Harrah's eliminated or modified substantially all of
the negative covenants, certain events of default, and made other changes to
the respective indentures governing the Bonds and the Notes.
During third quarter 1998, Harrah's defeased the remaining balance of
the Showboat Bonds and Notes. Treasury securities were purchased and deposited
with trustees to pay the scheduled interest payments to the first call date and
the premium and principal on the securities outstanding on such date. These
treasury securities are reported as other assets, and the remaining balances of
the Showboat Bonds and Notes are reported in long-term debt in the Consolidated
Condensed Balance Sheet.
-8-
The following unaudited pro forma consolidated financial information
for the Company has been prepared assuming that the acquisition and the debt
extinguishments discussed above had occurred on the first day of the respective
periods:
Quarter
Ended Nine Months Ended
(In millions, except Sept 30, Sept 30, Sept 30,
per share amounts) 1997 1998 1997
------- -------- -------
Revenues $ 542.3 $1,638.7 $1,511.4
------- -------- -------
------- -------- -------
Operating income $ 84.9 $ 256.2 $ 205.9
------- -------- --------
------- -------- --------
Income from continuing
operations $ 52.9 $ 91.6 $ 87.2
------- -------- --------
------- -------- --------
Net income $ 52.9 $ 73.3 $ 79.1
------- -------- --------
------- -------- --------
Earnings per share-diluted
Income from continuing
operations $ 0.52 $ 0.90 $ 0.87
------- -------- --------
------- -------- --------
Net income $ 0.52 $ 0.72 $ 0.79
------- -------- --------
------- -------- --------
These unaudited pro forma results are presented for comparative purposes only.
The pro forma results are not necessarily indicative of what the Company's
actual results would have been had the acquisition been completed as of the
beginning of these periods, or of future results.
Note 3 - Stockholders' Equity
- -----------------------------
In addition to its common stock, Harrah's has the following classes of
stock authorized but unissued:
Preferred stock, $100 par value, 150,000 shares authorized
Special stock, $1.125 par value, 5,000,000 shares authorized -
Series A Special Stock, 2,000,000 shares designated
-9-
Note 4 - Long-Term Debt
- -----------------------
Revolving Credit Facilities
- ---------------------------
On April 1, 1998, Harrah's reducing revolving and letter of credit facility
(the "Facility") was amended and restated to increase the total available
borrowing capacity to $2.1 billion. Pursuant to its terms, $1 billion of the
amended and restated Facility was restricted as to its use: $800 million was
only available to fund the Showboat acquisition and $200 million could only be
used to retire the Company's 8 3/4% Notes. These funds were used for the
designated purposes during second quarter 1998.
As of September 30, 1998, the Facility consisted of a $1.9 billion
reducing revolving and letter of credit facility maturing July 31, 2000, and
a separate $150 million revolving credit facility, renewable annually at the
lenders' option through the July 31, 2000, maturity date. Of the $2.05 billion
total borrowing capacity available to the Company under the Facility, there
is a sub-limit of $50 million for letters of credit. Scheduled reductions in
borrowing capacity available under the $1.9 billion facility are as follows:
$75 million, January 1999; $75 million, July 1999; $100 million, January
2000; and $1.65 billion, July 2000.
As of September 30, 1998, Harrah's borrowings under the Facility were $1.8
billion and an additional $28.6 million was committed to back certain letters of
credit. After consideration of these borrowings and the reduction in borrowing
capacity available, $223.9 million of the Facility was available to Harrah's.
Early Extinguishments of Debt
- -----------------------------
On May 1, 1998, Harrah's principal operating subsidiary, Harrah's Operating
Company, Inc. ("HOC"), redeemed its $200 million 8 3/4% Senior Subordinated
Notes due 2000 (the "8 3/4% Notes"), using proceeds from the Facility.
As a result of the early extinguishment of this debt, the Company recorded a
$3.3 million extraordinary loss, net of income taxes, which includes a premium
paid to holders of the 8 3/4% Notes and the write-off of related unamortized
deferred finance charges.
-10-
See Note 2 for discussion of the early extinguishments in June 1998 of
certain debts assumed in the Showboat acquisition and of the defeasment of the
remaining Showboat Bonds and Notes in August 1998.
On May 27, 1997, HOC redeemed its $200 million in 10 7/8% Senior
Subordinated Notes due 2002 (the "10 7/8% Notes") using proceeds from the
Facility. As a result of the early extinguishment of this debt, the Company
recorded an $8.1 million extraordinary loss, net of tax, in second quarter 1997,
which included a premium paid to holders of the 10 7/8% Notes and the write-off
of related deferred finance charges.
Interest Rate Agreements
- ------------------------
To manage the relative mix of its debt between fixed and variable rate
instruments, Harrah's enters into interest rate swap agreements to modify the
interest characteristics of its outstanding debt without an exchange of the
underlying principal amount.
Harrah's has entered into six interest rate swap agreements which
effectively convert a total of $300 million in variable rate debt to a fixed
rate. Pursuant to the terms of these swaps, all of which reset quarterly,
Harrah's receives variable payments tied to LIBOR in exchange for its payments
at a fixed interest rate. The fixed rates to be paid by Harrah's and variable
rates to be received by Harrah's are summarized in the following table:
Swap Rate
Swap Rate Received
Paid (Variable) at Swap
Notional Amount (Fixed) Sept 30, 1998 Maturity
- --------------- --------- -------------- ------------
$50 million 6.985% 5.500% March 2000
$50 million 6.951% 5.500% March 2000
$50 million 6.945% 5.500% March 2000
$50 million 6.651% 5.688% May 2000
$50 million 5.788% 5.594% June 2000
$50 million 5.785% 5.594% June 2000
The differences to be paid or received under the terms of the interest
rate swap agreements are accrued as interest rates change and recognized as an
adjustment to interest expense for the related debt. Changes in the variable
interest rates to be paid or received by Harrah's pursuant to the terms of its
interest rate agreements will have a corresponding effect on its future cash
flows. These agreements contain a credit risk that
-11-
the counterparties may be unable to meet the terms of the agreements. Harrah's
minimizes that risk by evaluating the creditworthiness of its counterparties,
which are limited to major banks and financial institutions, and does not
anticipate nonperformance by the counterparties.
Note 5 - Supplemental Cash Flow Disclosures
- -------------------------------------------
Cash Paid for Interest and Taxes
- --------------------------------
The following table reconciles Harrah's interest expense, net of interest
capitalized, per the Consolidated Condensed Statements of Income, to cash paid
for interest:
Nine Months Ended
Sept 30, Sept 30,
1998 1997
(In thousands) -------- --------
Interest expense, net of amount capitalized $81,358 $57,901
Adjustments to reconcile to cash paid for interest:
Net change in accruals (12,368) (1,136)
Amortization of deferred finance changes (3,307) (2,194)
Net amortization of discounts and premiums 1,091 (9)
------- -------
Cash paid for interest, net of amount capitalized $66,774 $54,562
------- -------
------- -------
Cash payments of income taxes, net of refunds $32,952 $15,696
------- -------
------- -------
Note 6 - Commitments and Contingent Liabilities
- -----------------------------------------------
Contractual Commitments
- -----------------------
Harrah's is pursuing additional casino development opportunities that may
require, individually and in the aggregate, significant commitments of capital,
up-front payments to third parties, guarantees by Harrah's of third party debt
and development completion guarantees. As of September 30, 1998, Harrah's had
guaranteed third party loans and leases of $127 million, which are secured by
certain assets, and had commitments of $38 million, primarily
construction-related.
-12-
The agreements under which Harrah's manages casinos on Indian lands contain
provisions required by law which provide that a minimum monthly payment be made
to the tribe. That obligation has priority over scheduled payments of borrowings
for development costs. In the event that insufficient cash flow is generated by
the operations to fund this payment, Harrah's must pay the shortfall to the
tribe. Such advances, if any, would be repaid to Harrah's 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. As of September 30, 1998, the
aggregate monthly commitment pursuant to these contracts, which extend for
periods of up to 51 months from September 30, 1998, was $1.2 million.
See Note 8 for discussion of the proposed completion guarantees related to
development of the New Orleans casino.
Equity Commitment
- -----------------
In March 1996, Showboat entered into a standby equity commitment with
its 55% owned subsidiary, Showboat Marina Casino Partnership ("SMCP") which
requires that if, during any of the first three Operating Years (as defined),
SMCP's Combined Cash Flow (as defined) is less than $35.0 million, Showboat will
be required to make additional capital contributions to SMCP equal to the lesser
of (a) $15.0 million, or (b) the difference between the $35.0 million and the
Operating Year's Combined Cash Flow. The Company assumed this obligation in
connection with its acquisition of Showboat. The Company's aggregate potential
obligation under the standby equity commitment is $30.0 million. The Combined
Cash Flow of SMCP for the first Operating Year did not achieve the $35.0 million
threshold, and the Company was required to contribute $14.3 million under the
standby equity commitment. As of September 30, 1998, the remaining potential
obligation under the standby equity commitment is $15.7 million.
There can be no assurance that the Combined Cash Flow for any future
Operating Year will exceed $35.0 million and that the Company will not be
required to make additional capital contributions to SMCP in accordance with
the standby equity commitment. The standby equity commitment is subject to
certain limitations, qualifications and exceptions.
-13-
Severance Agreements
- --------------------
As of September 30, 1998, Harrah's has severance agreements with 47 of its
senior executives, which provide for payments to the executives in the event of
their termination after a change in control, as defined. These agreements
provide, among other things, for a compensation payment of 1.5 to 3.0 times the
executive's average annual compensation, as defined, as well as for accelerated
payment or accelerated vesting of any compensation or awards payable to the
executive under any of Harrah's incentive plans. The estimated amount, computed
as of September 30, 1998, that would be payable under the agreements to these
executives based on earnings and stock options aggregated approximately $35.0
million.
Guarantee of Insurance Contract
- -------------------------------
Harrah's had guaranteed the value of a guaranteed investment contract with
an insurance company held by Harrah's defined contribution savings plan.
Harrah's had also agreed to provide non-interest-bearing loans to the plan to
fund, on an interim basis, withdrawals from this contract by retired or
terminated employees. Settlement of the guaranteed investment contract was
received in third quarter 1998, thereby relieving Harrah's commitment to
guarantee the value of the contract or loan any additional funds.
Tax Sharing Agreements
- ----------------------
In connection with the 1995 spin-off of certain hotel operations (the "PHC
Spin-off") to Promus Hotel Corporation ("PHC"), Harrah's entered into a Tax
Sharing Agreement with PHC wherein each company is obligated for those taxes
associated with their respective businesses. Additionally, Harrah's is obligated
for all taxes for periods prior to the PHC Spin-off date which are not
specifically related to PHC operations and/or PHC hotel locations. Harrah's
obligations under this agreement are not expected to have a material adverse
effect on its consolidated financial position or results of operations.
-14-
Self-Insurance
- --------------
Harrah's is self-insured for various levels of general liability, workers'
compensation and employee medical coverage. Insurance claims and reserves
include accruals of estimated settlements for known claims, as well as accruals
of actuarial estimates of incurred but not reported claims.
Note 7 - Litigation
- -------------------
Harrah's and certain of its subsidiaries had been named as defendants in a
number of lawsuits arising from the suspension of development of a land-based
casino, and the closing of the temporary gaming facility, in New Orleans,
Louisiana, by Harrah's Jazz Company, a partnership in which the Company owned an
approximate 47% interest and which filed for protection under Chapter 11 of the
U.S. Bankruptcy Code (see Note 8). Subsequent to the end of third quarter 1998,
the plan of reorganization of Harrah's Jazz Company was consummated, and these
lawsuits were dismissed or are in the process of being dismissed.
On November 25, 1997, the Missouri Supreme Court issued a ruling in Akin v.
Missouri Gaming Commission that defined the state constitutional requirements
for floating casino facilities in artificial basins. Subsequently, the Missouri
Gaming Commission (the "Commission") attempted to issue disciplinary resolutions
that effectively would have amended the gaming licenses of the Company's
Missouri casinos, and numerous other floating casino facilities in the
Commission's jurisdiction, to preclude games of chance, subject to evidentiary
hearings that were to be held if the licensees filed appeals to prove compliance
with the Supreme Court's ruling. Prior to the Commission's action, Harrah's and
other licensees filed petitions in the Circuit Court of Cole County, Missouri,
and succeeded in having the Court issue an order restraining the Commission from
taking any such disciplinary action. The Commission appealed to the Missouri
Supreme Court which, on May 28, 1998, lifted the lower court's restraining
order. On June 18, 1998, the Commission reissued its proposed disciplinary
resolutions. All affected licensees, including Harrah's, filed timely appeals of
the proposed disciplinary resolutions. Subsequently, all of the parties to the
several disciplinary hearings, including Harrah's and the Commission, agreed
that all of the evidence for the
-15-
hearings would be presented through documents rather than through oral
testimony, so no hearings were held. Harrah's also filed suit seeking
declaratory judgment that its gaming facilities meet the state constitutional
mandates as established by the Missouri Supreme Court. On November 3, 1998, the
people of the State of Missouri voted to amend the State's Constitution to deem
all floating casino facilities in compliance with state law. Once the election
results are certified (30 days), it is expected that the Commission will dismiss
the disciplinary resolutions.
In addition to the matters described above, Harrah's is involved in various
inquiries, administrative proceedings and litigation relating to contracts,
sales of property and other matters arising in the normal course of business.
While any proceeding or litigation has an element of uncertainty, management
believes that the final outcome of these matters will not have a material
adverse effect upon Harrah's consolidated financial position or its results of
operations.
Note 8 - Nonconsolidated Affiliates
- -----------------------------------
Jazz Holding Company
- ---------------------
In November 1995, Harrah's Jazz Company ("Jazz"), a partnership formed
for purposes of developing, owning and operating the exclusive land-based casino
entertainment facility (the "Casino") in New Orleans, Louisiana, and its
wholly-owned subsidiary, Harrah's Jazz Finance Corp., filed petitions for relief
under Chapter 11 of the Bankruptcy Code. On October 30, 1998, the plan of
reorganization (the "Plan") of Jazz was consummated.
Pursuant to the Plan, a newly formed limited liability company, Jazz
Casino Company, L.L.C ("JCC") is responsible for constructing and opening the
Casino. JCC leases the site for the Casino from the City of New Orleans and will
operate the Casino pursuant to a casino operating contract with the State of
Louisiana gaming board.
In exchange for an equity investment in JCC's parent of $75 million
(including $60 million in debtor-in-possession loans to Jazz which were
converted to equity at Plan consummation), a subsidiary of the Company
acquired, at the time of Plan consummation, approximately 44% of the equity
in JCC's parent. This ownership interest has been reduced to approximately
43% due to the exercise by an unrelated party of an option to acquire a
portion of the Company's interest, and the ownership interest may be reduced
in the future to approximately 40% in the event other unrelated parties
exercise additional options to acquire portions
-16-
of the Company's interest. The Company also owns a warrant which entitles the
Company to acquire additional shares in JCC's parent sufficient to increase its
ownership interest in JCC's parent to 50% for a predetermined price.
The Company will manage the Casino pursuant to a management agreement
under which a subsidiary of the Company (the "Manager") will receive a base
management fee of 3% of Casino revenues and 7% of Casino EBITDA in excess
of $75 million. The Company is obligated to defer receipt of management fees
under certain circumstances. The Company has also entered into settlements with
former partners of Jazz whereby such partners (or their creditors) are entitled
to future payments from the Company which are calculated based on management
fees received by the Manager.
The Company (i) guarantees JCC's initial $100 million annual payment
under the casino operating contract to the State of Louisiana gaming board (the
"State Guarantee"), (ii) guarantees $166.5 million of a $236.5 million JCC bank
credit facility, (iii) guarantees to the State of Louisiana gaming board, City
of New Orleans, banks under the JCC bank credit facility and JCC bondholders,
completion and opening of the Casino on or before October 30, 1999 (subject to
force majeure) and (iv) is obligated to make a $22.5 million subordinated
loan to JCC to finance construction of the Casino.
With respect to the State Guarantee, the Company is obligated to
guarantee JCC's first $100 million annual payment obligation commencing upon
the earlier of opening of the Casino or October 30, 1999 (subject to force
majeure), and, if certain cash flow tests and other conditions are satisfied
each year, to renew the guarantee beginning April 1, 2000, each 12 month
period ending March 31 up to the 12 month period ending March 31, 2004. The
Company's obligations under the guarantee for the first year of operations or
any succeeding 12 month period is limited to a guarantee of the $100 million
payment obligation of JCC for the 12 month period in which the guarantee is
in effect and is secured by a first priority lien on JCC's assets. JCC's
payment obligation (and therefore the amount guaranteed by the Company) is
$100 million at the commencement of each 12 month period under the casino
operating contract and declines on a daily basis by 1/365 of $100 million to
the extent payments are made each day by JCC to Louisiana's gaming board.
The Company will receive for providing the State Guarantee fees from JCC
of $6 million for the first and second years of operations (or the prorated
amounts thereof) and $5 million for each renewal year thereafter. The Company
will also receive fees for guaranteeing the JCC bank credit facility of
approximately 2.75% of up to $156.5 million of guaranteed debt, payable for
periods during which such debt is outstanding. The Company's credit support
fees may be reduced in the event the Company's borrowing costs under its bank
credit facility increase after Plan consummation. The Company is obligated to
defer receipt of State Guarantee fees and a portion of the credit support
fees under certain circumstances.
-17-
Other
- -----
Summarized balance sheet and income statement information of
nonconsolidated gaming affiliates as of September 30, 1998 and December 31,
1997, and for the third quarters and nine months ended September 30, 1998 and
1997 is included in the following tables. 1998 information includes Showboat
East Chicago and Star City casino in Sydney, Australia.
(In thousands) Sept. 30, Dec. 31,
1998 1997
-------- --------
Combined Summarized Balance Sheet Information
Current assets $ 84,458 $ 18,937
Land, buildings and equipment, net 1,065,245 379,147
Other assets 445,801 179,976
---------- --------
Total assets 1,595,504 578,060
---------- --------
Current liabilities 175,792 108,406
Long-term debt 1,057,701 467,970
---------- --------
Total liabilities 1,233,493 576,376
---------- --------
Net assets $ 362,011 $ 1,684
---------- --------
---------- --------
Third Quarter Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
-------- --------- -------- --------
(In thousands)
Combined Summarized Statements of
Operations
Revenues $142,581 $ 4,878 $161,664 $ 17,292
-------- --------- -------- --------
-------- --------- -------- --------
Operating loss $(10,295) $ (12,726) $(26,102) $(29,756)
-------- --------- -------- --------
-------- --------- -------- --------
Net loss $(20,042) $ (16,346) $(35,311) $(37,094)
-------- --------- -------- --------
-------- --------- -------- --------
-18-
Harrah's share of nonconsolidated affiliates' combined net operating
results are reflected in the accompanying Consolidated Condensed Statements
of Income as Equity in income (losses) of nonconsolidated affiliates.
Harrah's financial results for the nine months ended September 30, 1998,
include its share of an extraordinary loss recognized by a nonconsolidated
affiliate due to that entity's reorganization and refinancing of its debt.
Harrah's investments in and advances to nonconsolidated affiliates are
reflected in the accompanying Consolidated Condensed Balance Sheets as follows:
Sept. 30, Dec. 31,
1998 1997
-------- --------
(In thousands)
Harrah's investments in and advances to
nonconsolidated affiliates
Accounted for under the equity method $249,117 $132,049
Equity securities available-for-sale and
recorded at market value 35,557 20,352
-------- --------
$284,674 $152,401
-------- --------
-------- --------
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", Harrah's adjusts the carrying value of certain marketable
equity securities to include unrealized gains and losses. A corresponding
adjustment is recorded in the Company's stockholders' equity and deferred income
tax accounts.
Note 9 - Comprehensive Income
- -----------------------------
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
the reporting and display of comprehensive income and its components in the
Company's financial statements. As defined in SFAS No. 130, comprehensive income
consists of all changes, including net income, in the Company's equity during a
period, except those resulting from investments by or distributions to the
Company's stockholders. The provisions of SFAS No. 130 are effective for years
beginning after December 31, 1997, and its provisions must be adopted for
interim periods in the year of adoption.
-19-
Harrah's total comprehensive income for the current and prior years are as
follows:
Third Quarter Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(In thousands) 1998 1997 1998 1997
-------- -------- -------- --------
Net income $ 44,202 $ 52,889 $ 87,844 $ 87,239
-------- -------- -------- --------
Other comprehensive income
Unrealized losses on marketable
equity securities (508) (4,527) (908) (17,211)
Foreign currency translation (3,551) -- (4,474) --
Tax expense 1,586 1,766 2,093 6,712
-------- -------- -------- --------
(2,473) (2,761) (3,289) (10,499)
-------- -------- -------- --------
Total comprehensive income $ 41,729 $ 50,128 $ 84,555 $76,740
-------- -------- -------- --------
-------- -------- -------- --------
Note 10 - Summarized Financial Information
- ------------------------------------------
HOC is a wholly owned subsidiary and the principal asset of Harrah's.
Summarized financial information of HOC as of September 30, 1998 and December
31, 1997, and for the third quarters and nine months ended September 30, 1998
and 1997 prepared on the same basis as Harrah's was as follows:
Sept. 30, Dec. 31,
1998 1997
(In thousands) ---------- ----------
Current assets $ 228,293 $ 212,623
Land, buildings, riverboats and
equipment, net 1,876,110 1,478,054
Other assets 1,079,642 315,059
---------- ----------
3,184,045 2,005,736
---------- ----------
Current liabilities 277,694 203,007
Long-term debt 1,914,002 924,397
Other liabilities 143,363 123,838
Minority interests 14,530 14,118
---------- ----------
2,349,589 1,265,360
---------- ----------
Net assets $ 834,456 $ 740,376
---------- ----------
---------- ----------
-20-
Third Quarter Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
(In thousands) -------- -------- ---------- ----------
Revenues $579,149 $437,561 $1,479,261 $1,220,465
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Income from operations $100,100 $ 67,392 $ 239,229 $ 174,004
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Income before extraordinary
losses $ 38,286 $ 52,657 $ 106,193 $ 95,220
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Net income $ 38,286 $ 52,657 $ 87,913 $ 87,086
-------- -------- ---------- ----------
-------- -------- ---------- ----------
The agreements governing the terms of the Company's debt contain certain
covenants which, among other things, place limitations on HOC's ability to pay
dividends and make other restricted payments, as defined, to Harrah's. The
amount of HOC's restricted net assets, as defined, computed in accordance with
the most restrictive of these covenants regarding restricted payments was
approximately $823.8 million at September 30, 1998.
Note 11 - Rio Acquisition
- -------------------------
In third quarter Harrah's announced the signing of a definitive merger
agreement with Rio Hotel and Casino, Inc. ("Rio"), under which Harrah's will
acquire Rio for stock and the assumption of Rio's outstanding debt. Rio
stockholders will receive one share of Harrah's stock for each share of Rio
stock owned. The combined value of the stock to be issued and the debt to be
assumed by Harrah's is estimated to be approximately $880 million. The
acquisition will be accounted for as a purchase. Accordingly, the purchase price
will be allocated to the underlying assets and liabilities based upon their
estimated fair values at the date of acquisition. The transaction is subject to
various conditions, including regulatory approvals, Rio and Harrah's stockholder
approvals and other third party approvals. Stockholder meetings for Harrah's and
Rio are scheduled for November 18, 1998, and the transaction is expected to be
completed by year-end 1998.
-21-
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
The following discussion and analysis of the financial position and
operating results of Harrah's Entertainment, Inc., (referred to in this
discussion, together with its consolidated subsidiaries where appropriate, as
"Harrah's" or the "Company,") for third quarter and the first nine months of
1998 and 1997, updates, and should be read in conjunction with, Management's
Discussion and Analysis of Financial Position and Results of Operations
presented in Harrah's 1997 Annual Report.
RIO ACQUISITION
- ---------------
In third quarter Harrah's announced the signing of a definitive merger
agreement with Rio Hotel and Casino, Inc. ("Rio"), under which Harrah's will
acquire Rio for stock and the assumption of Rio's outstanding debt. Rio
stockholders will receive one share of Harrah's stock for each share of Rio
stock owned. The combined value of the stock to be issued and the debt to be
assumed by Harrah's is estimated to be approximately $880 million. The
acquisition will be accounted for as a purchase. Accordingly, the purchase
price will be allocated to the underlying assets and liabilities based upon
their estimated fair values at the date of acquisition. The transaction is
subject to various conditions, including regulatory approvals, Rio and
Harrah's stockholder approvals and other third party approvals. Stockholder
meetings for Harrah's and Rio are scheduled for November 18, 1998, and the
transaction is expected to be completed by year-end 1998.
RESULTS OF OPERATIONS
- ---------------------
OVERALL
- -------
Harrah's continues to see results of strategic actions taken in 1997
which led to the June 1, 1998 acquisition of Showboat, Inc. ("Showboat") and
increases in cross-market play from Harrah's customers nationwide. Continued
increases in cross-market play reflect the success of Harrah's
industry-leading Total Gold player reward and recognition card, and, coupled
with enhanced database marketing capabilities, enable the Company to better
target promotions and offers to the appropriate customer segments.
-22-
Third Quarter Percentage Nine Months Ended Percentage
(in millions, except -------------- Increase/ ----------------- Increase/
earnings per share) 1998 1997 (Decrease) 1998 1997 (Decrease)
------ ------ ---------- ------ ------ ----------
Revenues $586.2 $438.2 33.8% $1,479.3 $1,221.2 21.1%
Operating profit 122.1 78.6 55.3% 276.4 210.3 31.4%
Income from operations 109.2 67.7 61.3% 239.1 174.2 37.3%
Income before
extraordinary losses 44.2 52.9 (16.4%) 106.1 95.4 11.2%
Net income 44.2 52.9 (16.4%) 87.8 87.2 0.7%
Earnings per share - diluted
Before extraordinary losses 0.44 0.52 (15.4%) 1.05 0.94 11.7%
Net income 0.44 0.52 (15.4%) 0.87 0.86 1.2%
Operating margin 18.6% 15.4% 3.2pts 19.6% 14.3% 5.3pts
Harrah's posted record revenues for third quarter of $586.2 million, a
33.8% increase over third quarter 1997. Record revenues at Harrah's properties
in Las Vegas, Atlantic City, Lake Tahoe and St. Louis contributed to the overall
record performance, as did the addition of revenues from the Atlantic City
Showboat property and the addition of management fees from two recently opened
Harrah's-brand casinos on Indian lands. These factors also contributed to
increased operating income, however, net income and earnings per share were down
compared to prior year due to a 1997 gain on the sale of the Company's remaining
equity interest in the Sky City Casino in Auckland, New Zealand, and higher
interest expense in 1998 as a result of increased borrowings to finance the
Showboat acquisition. Net income and earnings per share for the nine months
ended September 30, 1998 were even with prior year. Higher operating income in
1998 was offset by increased interest expense and lower gains in 1998 on sales
of equity interests in subsidiaries.
DIVISION OPERATING RESULTS AND DEVELOPMENT PLANS
- ------------------------------------------------
Riverboat Division
- ------------------
Third Quarter Percentage Nine Months Ended Percentage
------------- Increase/ ----------------- Increase/
(in millions) 1998 1997 (Decrease) 1998 1997 (Decrease)
------ ------ ---------- ------- ------ ----------
Casino revenues $171.1 $160.5 6.6% $493.7 $457.3 8.0%
Total revenues 181.3 171.3 5.8% 523.9 498.1 5.2%
Operating profit 29.8 35.5 (16.1)% 98.8 96.9 2.0%
Operating margin 16.4% 20.7% (4.3)pts 18.9% 19.5% (0.6)pts
-23-
Revenues for the Division increased for third quarter 1998 over the
comparable prior year period, however, operating profit was down compared to the
same period in 1997, due in part to the non-recurring costs incurred in
connection with the campaign for a referendum in Missouri seeking approval of
games of chance on riverboats in artificial basins. Subsequent to the end of the
third quarter, Missouri voters approved this referendum. For the nine months
ended September 30, revenues increased 5.2% over the prior year, and operating
income increased 2.0%.
Chicagoland - Revenues increased 6.5% at Harrah's Joliet compared to the third
quarter of 1997, however, operating profit declined 26.5% compared to the same
period last year due to the impact of higher Illinois gaming taxes. Harrah's
began construction in third quarter of a 12 story 204-suite hotel at this
property. Estimated cost of this project is $29.1 million, and completion is
projected for fourth quarter 1999.
Harrah's owns a 55% non-controlling interest in the partnership owning
the East Chicago Showboat property. Harrah's share of income from the
partnership, which totaled $1.0 million for the the third quarter, is reported
separately in the Consolidated Condensed Income Statement and included in Equity
in losses of nonconsolidated subsidiaries (see Other Factors Affecting Net
Income).
Louisiana - Harrah's Shreveport's revenues and operating profit for third
quarter and for the nine months ended September 30, 1998 decreased from the same
period last year due to competitive conditions in the market. Construction was
completed in third quarter on expanded parking facilities at Harrah's
Shreveport, and the Company is evaluating the possible expansion of the
facilities to include a hotel and additional restaurant and meeting facilities.
Any expansion project is subject to the receipt of necessary regulatory
approvals.
Mississippi - Combined third quarter revenues by Harrah's Mississippi properties
remained basically flat compared to the prior year. However, operating profit
declined from the prior year due primarily to the on-going testing of service
initiatives at Harrah's Tunica that have disrupted operations since the
beginning of the year. The Company is taking action which is intended to bring
that property back to profitability.
Revenues for the nine months ended September 30, 1998, declined from
the prior year primarily due to the closure during second quarter 1997 of
Harrah's original property in the Tunica market. The Company continues to
explore its options for the original Tunica property.
-24
Missouri - Harrah's North Kansas City's revenues for third quarter 1998 were
even with the same period in 1997; however, operating profit increased 5.1% over
the same period last year. For the nine months ended September 30, 1998,
revenues increased 1.2% while operating income increased 9.9% over the same
period last year. Harrah's continues to lead the overall Kansas City market in
profitability and most other measures of performance.
During third quarter the Company completed the acquisition for $12.5
million of various assets of a riverboat casino in Kansas City formerly operated
by a third party, including a 28,000 square foot casino riverboat, shoreside
facilities, parking garage, certain land, all gaming equipment and computerized
customer databases. Harrah's does not plan, at this time, to operate a casino at
the acquired location. Long-range plans for the riverboat, land and shoreside
facilities have not been finalized.
Harrah's St. Louis-Riverport casino reported a third quarter 1998
operating profit of $5.3 million. Year-to-date operating profit was $11.4
million compared to a loss of $1.6 million for the same period last year. The
St. Louis-Riverport entertainment complex in Maryland Heights, Missouri, a
suburb of St. Louis, opened on March 11, 1997. The facility includes four
riverboat casinos, two of which are owned and operated by Harrah's, and
shoreside facilities jointly-owned with another casino company. Harrah's
pro-rata share of the operating losses of the shoreside facilities joint venture
was $2.8 million for the quarter and is reported separately in the Consolidated
Condensed Income Statement and included in Equity in losses of nonconsolidated
subsidiaries (see Other Factors Affecting Net Income).
Atlantic City
- -------------
Third Quarter Percentage Nine Months Ended Percentage
------------- Increase/ ----------------- Increase/
(in millions) 1998 1997 (Decrease) 1998 1997 (Decrease)
------ ------ ---------- -------- ------ ----------
Casino revenues $186.6 $87.7 112.8% $378.7 $243.9 55.3%
Total revenues 204.3 99.0 106.4% 414.5 270.0 53.5%
Operating profit 51.6 25.6 101.6% 96.4 60.7 58.8%
Operating margin 25.3% 25.9% (0.6)pts 23.3% 22.5% 0.8pts
Harrah's Atlantic City achieved record revenues in third quarter 1998 and
operating profit increased 4.4% over the same period last year. Operating profit
increased 7.4% for the nine months ended September 30, 1998. The Atlantic City
division's results for third quarter 1998 also include the Atlantic City
Showboat property. In connection
-25-
with its consideration of a further expansion of the Harrah's Atlantic City
property, the Company continues to monitor the progress of efforts by other
companies to develop new casino hotel projects in the Atlantic City Marina area.
Southern Nevada Division
- ------------------------
Third Quarter Percentage Nine Months Ended Percentage
-------------- Increase/ ----------------- Increase/
(in millions) 1998 1997 (Decrease) 1998 1997 (Decrease)
------ ------ ---------- ------ ------ ----------
Casino revenues $56.8 $46.2 22.9% $172.3 $133.9 28.7%
Total revenues 86.9 70.9 22.6% 259.5 204.3 27.0%
Operating profit 9.5 7.3 30.1% 35.7 28.6 24.8%
Operating margin 10.9% 10.3% 0.6pts 13.8% 14.0% (0.2)pts
Record revenues in Southern Nevada for third quarter 1998 were driven by
Harrah's Las Vegas where revenues were 30.5% over last year. Harrah's Las Vegas'
revenues for the nine months ended September 30, 1998, increased 39.9% over the
same period last year. These results were driven by the extensive renovation and
expansion completed in fourth quarter 1997 and the positive impact of customer
loyalty and cross-market customer benefits like Harrah's Total Gold program.
Harrah's Laughlin reported increased revenues of 5.9% over third quarter last
year and operating profit at the same level as the prior year.
Showboat Las Vegas, which the Company has stated is a non-strategic
asset, is reported as an asset held for sale in the Consolidated Condensed
Balance Sheet.
Northern Nevada Division
- ------------------------
Third Quarter Percentage Nine Months Ended Percentage
------------- Increase/ ----------------- Increase/
(in millions) 1998 1997 (Decrease) 1998 1997 (Decrease)
------ ------ ---------- ------- ------ ----------
Casino revenues $75.4 $67.0 12.5% $175.6 $167.1 5.1%
Total revenues 96.7 88.9 8.8% 230.0 221.8 3.7%
Operating profit 28.3 23.0 23.0% 42.0 39.8 5.5%
Operating margin 29.3% 25.9% 3.4pts 18.3% 17.9% 0.4pts
Record revenues in Northern Nevada were driven by Harrah's Lake Tahoe
where third quarter record revenues were 13.2% over the prior year. Operating
profit for third quarter at Lake Tahoe increased 37.9% from the same period last
year and increased 14.2% for the nine months ended September 30, 1998.
-26-
Managed Casinos-Indian Lands
- ----------------------------
Harrah's Indian gaming and other managed results were led by the
addition of management fees from recently opened tribal-owned casinos for the
Eastern Band of Cherokee in Cherokee, North Carolina, which opened in November
1997, and the Prairie Band of Potawatomi north of Topeka, Kansas, which opened
in January 1998.
Harrah's terminated its management agreement with the Upper Skagit
Tribe and turned management of the casino, which is located on Indian lands near
Seattle, Washington, over to the Upper Skagit Tribe and removed the Harrah's
name from the casino on November 2, 1998. The Company has guaranteed the Skagit
Tribe's development financing. Under the terms of the termination agreement the
tribe has agreed to fund the retirement of the mortgage, however, there is no
assurance that payment will be made and Harrah's could have continued exposure
of up to $12.6 million under that guarantee.
The agreements under which Harrah's manages casinos on Indian lands contain
provisions required by law which provide that a minimum monthly payment be made
to the tribe. That obligation has priority over scheduled repayments of
borrowings for development costs. In the event that insufficient cash flow is
generated by the operations to fund this payment, Harrah's must pay the
shortfall to the tribe. Such advances, if any, would be repaid to Harrah's 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. As of
September 30, 1998, the aggregate monthly commitment pursuant to the contracts
for the three Indian-owned facilities currently managed by Harrah's, which
extend for periods of up to 51 months from September 30, 1998, was $1.2 million.
See DEBT and LIQUIDITY section for further discussion of Harrah's
guarantees of debt related to Indian projects.
Other Gaming Operations
- -----------------------
The Company ceased management of the Sky City casino complex in
Auckland, New Zealand on June 30, 1998. Pursuant to a previously announced
agreement with Sky City Limited, owner of the Sky City facility, Harrah's
management contract was bought out and the $10.6 million termination fee was
recorded in revenues in second quarter. The termination fee, net of the change
in foreign currency rates, was received in third quarter.
-27-
With the consummation of the Showboat acquisition on June 1, 1998,
Harrah's assumed management of the Star City casino in Sydney, Australia, and
accounts for management fees, as well as the equity income of the related
investment, one month in arrears.
During first quarter 1998, the Company launched the first brand
advertising campaign by a casino company, committing $30 million in 1998 to
aggressive image advertising. A portion of the planned cost of the brand
advertising campaign is being funded by the displacement of advertising and
marketing dollars spent by the individual properties in the past. Third quarter
1998 costs for the campaign in excess of the amounts contributed to this effort
by the properties totaled approximately $1.6 million.
Other Factors Affecting Net Income
- ----------------------------------
Third Quarter Percentage Nine Months Ended Percentage
(Income)/Expense ------------- Increase/ ----------------- Increase/
(in millions) 1998 1997 (Decrease) 1998 1997 (Decrease)
------ ----- ---------- ------ ------ ----------
Development costs $ 2.7 $ 2.7 0.0 % $ 6.6 $ 7.4 (10.8)%
Project opening costs 1.2 1.0 20.0 % 7.2 9.0 (20.0)%
Corporate expense 9.4 6.6 42.4 % 25.0 22.2 12.6 %
Equity in losses of
nonconsolidated affiliates 2.4 2.9 (17.2)% 8.7 8.3 4.8 %
Write-downs and reserves -- 12.3 N/M 1.8 12.3 (85.4)%
Venture restructuring costs 1.1 1.4 (21.4)% 3.5 5.6 (37.5)%
Interest expense, net 36.4 19.8 83.8 % 81.4 57.9 40.6 %
Gain on sales of equity
interests in subsidiaries -- (37.4) N/M (13.1) (37.4) (65.0)
Other income -- (2.1) N/M (5.8) (8.4) (31.0)%
Effective tax rate 38.0% 38.2% (0.2)pts 38.0% 39.0% (1.0)pts
Minority interests $ 1.8 $ 2.0 (10.0)% $ 5.6 $ 5.7 (1.8)%
Extraordinary losses, net
of income taxes -- -- -- 18.3 8.1 125.9 %
Project opening costs for third quarter 1998 include costs incurred in
connection with an initiative to develop, implement and refine the strategies
and employee training programs designed to better focus the Company on serving
its targeted customers. In addition to similar costs, 1997 project opening costs
also included costs related to the renovation project at Harrah's Las Vegas.
Corporate expense increased 43.9% in third quarter 1998 from the prior year
level and 12.6% for the nine months ended September 30, 1998, compared to that
same period of the prior year. The increase is due to timing of expenses and
increased costs, including the incremental costs related to the Showboat
acquisition.
-28-
Equity in losses of nonconsolidated affiliates consists of losses from the
St. Louis shoreside facilities joint venture, from the Star City Casino in
Australia and from the Company's investment in an in-flight gaming company.
Losses were partially offset by profits from the East Chicago Showboat
partnership.
1997 write-downs and reserves were primarily for reserves against loans
related to debtor-in-possession financing provided to the casino project in New
Orleans in which Harrah's is a minority partner.
Venture restructuring costs represent Harrah's costs, including legal fees,
associated with the development of a reorganization plan for the New Orleans
casino (see Harrah's Jazz Company section).
Interest expense increased in third quarter 1998 over 1997, primarily
as a result of increased borrowings to finance the Showboat acquisition.
In third quarter 1997 the Company sold its remaining equity interest in
the Sky City Casino in Auckland, New Zealand, and recognized a gain on the sale
of $37.4 million. In second quarter 1998 Harrah's sold its equity interest in a
restaurant subsidiary and recorded a gain of $13.1 million
Other income decreased in third quarter 1998 due to lower income earned
by the Company on the cash surrender value of certain life insurance policies.
The effective tax rates for all periods are higher than the federal
statutory rate primarily due to state income taxes.
Minority interests reflects a joint venture partner's share of income
at a riverboat casino and decreased in 1998 from the prior year as a result of
lower earnings from that riverboat.
The extraordinary losses in 1998 and 1997 are due to the early
extinguishments of debt and include premiums paid to the holders of the debt
retired and the write-off of related unamortized deferred finance charges. (See
Debt and Liquidity - Early Extinguishment of Debt.)
HARRAH'S JAZZ COMPANY
- ---------------------
For an update of the status of the reorganization of Harrah's Jazz Company,
which filed a petition for relief under Chapter 11 of the Bankruptcy Code on
November 22, 1995, see Note 8 to the accompanying Consolidated Condensed
Financial Statements.
-29-
CAPITAL SPENDING AND DEVELOPMENT
- --------------------------------
Standby Equity Commitment
- -------------------------
Showboat entered into a standby equity commitment which requires that
if, during any of the first three Operating Years (as defined), the Combined
Cash Flow (as defined) of its 55% owned subsidiary, Showboat Marina Casino
Partnership ("SMCP"), is less than $35.0 million, the Company will be required
to make additional capital contributions to SMCP in the lesser of (a) $15.0
million, or (b) the difference between the $35.0 million and the Operating
Year's Combined Cash Flow. The Company assumed this obligation in connection
with its acquisition of Showboat. The Company's aggregate potential obligation
under the standby equity commitment was $30.0 million. The Combined Cash Flow of
SMCP for the first four full quarters of operation did not achieve the $35.0
million threshold, and the Company was required to contribute $14.3 million
under the standby equity commitment. As of September 30, 1998, the remaining
potential obligation under the standby equity commitment is $15.7 million. There
can be no assurance that the Combined Cash flow for any future Operating Year
will exceed $35.0 million and that the Company will not be required to make
additional capital contributions to SMCP in accordance with the standby equity
commitment. The standby equity commitment is subject to certain limitations,
qualifications, and exceptions.
Year 2000
- ---------
The Company is working to address the potential impact of the Year 2000
("Y2K") on the systems and equipment that are essential to its operations,
including information technology systems, gaming operations and equipment,
facilities, and suppliers. In late 1996, the Company began an assessment of all
technology systems and infrastructure supporting operations and in 1997
developed a strategy and approach for addressing Y2K issues across the Company.
The Company has created a Y2K Task Force and a Y2K Support Office.
Representatives from the Task Force meet periodically with senior management of
the Company to discuss status, accomplishments, issues, and costs. The Y2K
Support Office has three teams: Core Information Technology, responsible
for company-wide, standard systems; Property, responsible for property-specific
systems and equipment, which includes the Company's non-information technology
(i.e. embedded technology) equipment; and Suppliers/Procurement, responsible
for ensuring that external suppliers and new equipment purchases are Y2K ready.
The Y2K Task Force has prioritized its efforts according to the
potential impact to the Company's business if a system is not Y2K ready.
Priorities, in order, are: Business Critical - required to operate the business;
High Priority - significant impact to revenues, operating costs, or customer
services; and Other - used by the business but not considered Business Critical
or High Priority. The major phases of the Company's approach are Awareness,
Assessment, Renovation, Testing and Certification, Implementation, and
Contingency Planning. Each phase is fully in progress, and Awareness and
Assessment are nearly complete. The following table sets forth the expected
date of final completion as of September 30, 1998 with respect to each
priority area:
Business Critical 7/99
High Priority 10/99
Other No date set
Contingency plans have been developed for some Business Critical areas,
including time and attendance and procurement. Contingency plans will be
completed for selected Business Critical and High Priority items, identified
on the basis of risk assessment, by December, 1999.
-30-
The Company has been in the process of identifying and communicating
with Business Critical and High Priority suppliers about their plans and
progress in addressing Y2K problems. Detailed evaluations of the most critical
suppliers have been initiated. These evaluations will be followed by the
development of contingency plans, which are scheduled to be complete by
December, 1999. The process of evaluating suppliers began in October, 1998
and is scheduled for completion by January, 1999, with follow-up reviews
scheduled through June 1999.
The total costs of system replacements and upgrades to address potential
Y2K problems and, as well as enhancing business and operational functionality
in some areas, are currently estimated to be approximately $9.5 million.
The total amount expanded through September 30, 1998 was approximately
$2.3 million, of which approximately $1 million related to the cost to repair,
replace, and improve software and related hardware and equipment,
approximately $1.3 million related to the cost of replacing
embedded-technology equipment (primarily in the Property area), and
approximately $15,000 related to the costs of identifying and communicating
with significant suppliers. The estimated future cost is approximately
$7 million, of which approximately $2 million relates to the cost to repair,
replace, and improve software and related hardware and equipment,
approximately $5 million relates to the cost of replacing embedded-technology
equipment (primarily in the Property area), and approximately $10,000 relates
to the costs of identifying and communicating with significant suppliers.
These costs, along with internal resource hours, are being separately
tracked. The Company continues to evaluate the estimated costs associated
with Y2K issues, and if significant issues are identified in the future,
such costs could increase. Although the Company is devoting considerable
resources to resolve Y2K issues, it continues to support and implement
other systems, operations and initiatives.
In connection with the proposed acquisition of Rio, the Company conducted
a Y2K readiness review and assessment. When the acquisition is completed, the
Rio will be incorporated into the Company's Y2K program, as are the Showboat
properties, which will result in additional estimated costs associated with
Y2K issues of approximately $3 million. Such estimated costs could increase
if significant issues are identified in the future.
Based upon its efforts to date and the status of the plans to address
identified issues, the Company believes that its Business Critical systems are
compliant or will be made compliant by mid-1999. One of the greatest challenges
of the Y2K issue is the potential impact of systems outside of the Company's
control, such as those of utility companies, phone and network systems, and
financial institutions. The Company is assessing the Y2K status of such systems
on an ongoing basis and developing contingency plans for Business Critical
areas. However, should the Company and/or its significant suppliers fail to
timely correct material Y2K issues, such failure could have a significant impact
on the Company's ability to operate as it did before Y2K. In such an event, the
Company will develop contingency plans designed to minimize any impact to the
extent possible. The impact on the Company's operating results of such failures
and of any contingency plans to be designed to address such events cannot be
determined at this time. The Company has not developed a "most likely
reasonable worst case scenario," but is in the process of doing so. Like all
other businesses, the Company's ability to predict the impact of the Y2K
Problem and the efficacy of its solutions with respect thereto is limited by
the unprecedented natue of the problem.
-31-
Airline Investment
- ------------------
During third quarter 1998, Harrah's invested $15 million in a new
airline to be based in Las Vegas. Beginning in mid-1999, the new airline
plans to offer conveniently scheduled nonstop flights between Las Vegas and
New York, Miami, Los Angeles and San Francisco. Nine additional routes are
expected to be added within the first year of operations. All flights will be
nonstop to and from its Las Vegas hub. In addition to obtaining a 19.9%
voting interest in the airline, Harrah's has also entered into a marketing
agreement to support joint promotions involving the airline and Harrah's Las
Vegas. Harrah's investment in the airline allows the Company to offer
additional valued services and conveniences to customers. Harrah's has no
commitment to provide additional funds to the airline. Rio has also made a
$15 million investment in the airline. Upon the closing of the Rio
acquisition, the Company's equity interest in the new airline will increase
to approximately 47.8% but the Company's voting power would be limited to 25%.
Summary
- -------
In addition to the specific development and expansion projects discussed
in the Division Operating Results and Development Plans section, Harrah's
performs on-going refurbishment and maintenance at its casino entertainment
facilities in order to maintain the Company's quality standards. Harrah's also
continues to pursue development and acquisition opportunities for additional
casino entertainment facilities that meet its strategic and return on
investment criteria. Prior to the receipt of necessary regulatory approvals,
the costs of pursuing development projects are expensed as incurred.
Construction-related costs incurred after the receipt of necessary approvals are
capitalized and depreciated over the estimated useful life of the resulting
asset. Project opening costs are expensed as incurred.
The Company's planned development projects, if they go forward, will
require, individually and in the aggregate, significant capital commitments and,
if completed, may result in significant additional revenues. The commitment of
capital, the timing of completion and the commencement of operations of casino
entertainment development projects are contingent upon, among other things,
negotiation of final agreements and receipt of approvals from the appropriate
political and regulatory bodies. Cash needed to finance projects currently under
development as well as additional projects being pursued by Harrah's are
expected to be made available from operating cash flows, the Bank
-32-
Facility (see Debt and Liquidity section), joint venture partners, specific
project financing, guarantees by Harrah's of third party debt and, if necessary,
additional Harrah's debt and/or equity offerings. Harrah's capital spending for
the first nine months of 1998, excluding the Showboat acquisition, totaled
approximately $180.6 million. Estimated total capital expenditures for 1998 are
expected to be between $195 million and $225 million, excluding the acquisition
of Rio and the possible second phase of Harrah's Atlantic City expansion.
DEBT AND LIQUIDITY
- ------------------
Bank Facility
- -------------
On April 1, 1998, the Company's revolving credit facility (the "Bank
Facility") was amended and restated to increase total borrowing capacity to $2.1
billion and to modify the debt covenants. The terms of the Bank Facility provide
for scheduled reductions in borrowing capacity, and the first such scheduled
reduction occurred on July 31, 1998, when borrowing capacity was reduced by $50
million. Reductions in borrowing capacity of $75 million each are scheduled for
January 31, 1999 and July 31, 1999, and a reduction of $100 million is scheduled
for January 31, 2000. As of September 30, 1998, $1.8 billion in borrowings were
outstanding under the Bank Facility, with an additional $28.6 million committed
to back letters of credit. After consideration of these borrowings, $223.9
million of additional borrowing capacity was available to the Company as of
September 30, 1998.
During third quarter of 1998 the borrowing cost on the Bank Facility
increased from a base rate of either Eurodollar plus 50 basis points or the
prime lending rate to a base rate of either Eurodollar plus 75 basis points
or the prime lending rate in accordance with the terms of the Bank Facility
agreement.
It has been the Company's intention to refinance a significant portion
of its short-term, floating-rate borrowings under the Bank Facility with debt
that has fixed rates and longer maturities. In connection with obtaining
consent from its bank lenders for the Rio merger, Harrah's expects that it
will agree to refinance a significant portion of its current short-term
floating-rate debt with longer-term fixed-rate debt. The Company is unable to
determine at this time the terms of the new debt, but it is expected that the
terms will be reflective of prevailing conditions in the debt capital markets
and likely will be higher than the Company's historical interest costs.
Separately, due to current market conditions, any savings from refinancing
Rio's long-term debt may be delayed.
Extinguishments of Debt
- -----------------------
On May 1, 1998, Harrah's principal operating subsidiary, Harrah's
Operating Company, Inc. ("HOC"), redeemed all $200 million of its 8 3/4 Senior
Subordinated Notes due 2002 (the "Notes") at a call price of 102.0%, plus
accrued and unpaid interest through the May 1, 1998, redemption date. The
Company retired the Notes using proceeds from its amended and restated Bank
Facility. Redemption of the 8 3/4% Notes using funds drawn under the Bank
Facility reduced interest costs on this
-33-
$200 million by approximately 2.5 percentage points, based on current rates. An
extraordinary charge, net of tax, of $3.3 million was recorded during second
quarter 1998 in conjunction with this early extinguishment of debt.
On June 15, 1998, Harrah's newly acquired subsidiary, Showboat, Inc.,
redeemed approximately $218.6 million face amount of its 9 1/4% First Mortgage
Bonds due 2008 and approximately $117.9 million face amount of its 13% Senior
Notes due 2009 (collectively, the "Showboat Notes"). Harrah's recorded the
liabilities assumed in the Showboat acquisition, including the Showboat Notes,
at their fair value as of the consummation date of the transaction. The
difference between the consideration paid to the holders of the Showboat Notes
pursuant to this tender offer and the fair value of the Showboat Notes on the
consummation date, together with the cost of conducting the tender offer, were
recorded by Harrah's in the second quarter as an extraordinary loss of $13.3
million, net of tax.
Concurrently with the tender offer, Harrah's solicited consents from the
holders of the Notes to amend the respective Indentures governing each of the
Notes to eliminate or modify substantially all of the negative covenants,
certain events of default, and to make certain other changes to the Indentures.
Tenders and consents were received by a majority in aggregate principal amount
outstanding of each series of Notes, thereby consenting to the amendment of the
respective Indentures.
During third quarter the Company defeased the remaining balance of the
Showboat Notes. Treasury securities were purchased and deposited with trustees
to pay the scheduled interest payments to the first call date and the premium
and principal on the securities outstanding on such date. These treasury
securities are reported as assets and the remaining balance of the Showboat
Notes is reported in long-term debt in the Consolidated Condensed Balance Sheet.
Interest Rate Agreements
- ------------------------
To manage the relative mix of its debt between fixed and variable rate
instruments, Harrah's has entered into interest rate swap agreements to modify
the interest characteristics of its outstanding debt without an exchange of the
underlying principal amount. The differences to be paid or received by the
Company under the terms of its interest rate swap agreements are accrued as
interest rates change and recognized as an adjustment to interest expense for
the related debt. Changes in the variable interest rates to be paid or received
by Harrah's
-34-
pursuant to the terms of its interest rate swap agreements will have a
corresponding effect on its future cash flows.
These agreements contain a credit risk that the counterparties may be
unable to meet the terms of the agreements. Harrah's minimizes that risk by
evaluating the creditworthiness of its counterparties, which are limited to
major banks and financial institutions, and does not anticipate nonperformance
by the counterparties.
For more information regarding the Company's interest rate swap agreements
as of September 30, 1998, please see Note 4 to the accompanying Consolidated
Condensed Financial Statements.
Guarantees of Third Party Debt
- ------------------------------
The Company guaranteed a $25 million bank loan (the "Loan") of Turfway
Park Racing Association, Inc. ("Turfway"). The Loan matured February 28, 1998.
Turfway failed to repay the Loan at maturity. The Company purchased the Loan
from the lending bank pursuant to the Company's guaranty. The balance of the
Loan at the time of purchase was $22.9 million. The Loan was secured by a
first mortgage of real estate and first security interest of 1/3 of the stock
of Turfway. On July 15, 1998, the real estate was transferred to an affiliate
of the Company in lieu of foreclosure of the mortgage for a credit of
$9 million against the Loan. On October 21, 1998, another affiliate of the
Company (to which the Loan had been assigned by the Company) was the
successful bidder at public auction of the stock of Turfway, granting a
credit of $13.6 million against the Loan. As a result, the Company now owns
a one-third interest in Turfway.
As described in the Division Operating Results and Development
Plans--Managed Casino--Indian Lands section, Harrah's may guarantee all or part
of the debt incurred by Indian tribes with which Harrah's has entered a
management contract to fund development of casinos on the Indian lands. For all
existing guarantees of Indian debt, Harrah's has obtained a first lien on
certain personal property (tangible and intangible) of the casino enterprise.
There can be no assurance, however, the value of such property would satisfy
Harrah's obligations in the event these guarantees were enforced. Additionally,
Harrah's has received limited waivers from the Indian tribes of their sovereign
immunity to allow Harrah's to pursue its rights under the contracts between the
parties and to enforce collection efforts as to any assets in which a security
interest is taken. The aggregate outstanding balance of such debt as of
September 30, 1998, was $106.4 million, excluding the $12.6 million guarantee
related to the Skagit Tribe's debt.
Shelf Registration
- ------------------
To provide for additional financing flexibility, Harrah's, together with
its wholly-owned subsidiary, HOC, have available until June 2000 an effective
shelf registration statement with the Securities and Exchange Commission. The
registration allows the issuance of up to $750 million of Harrah's common
stock or HOC preferred stock or debt securities. The issue price of the
Harrah's common stock or the terms and conditions of the HOC preferred stock
or debt securities, which would be unconditionally guaranteed by Harrah's,
would be determined by market conditions at the time of issuance.
-35-
EFFECTS OF CURRENT ECONOMIC AND POLITICAL CONDITIONS
- ----------------------------------------------------
Competitive Pressures
- ---------------------
Due to the limited number of new markets opening for development, the focus
of many casino operators has shifted to investing in existing markets in an
effort to attract new customers, increasing competition in those markets.
Harrah's properties in the long-established gaming markets of Nevada and New
Jersey have generally reacted less significantly to the changing competitive
conditions. With the exception of the additional supply being added in Las
Vegas, the amount of supply change within these markets has represented a
smaller percentage change than that experienced in some riverboat markets. In
riverboat markets, the additions to supply had a more noticeable impact, due to
the fact that competition was limited in the early stages of many of these
markets. As companies have completed expansion projects, supply has typically
grown at a faster pace than demand in some markets and competition has increased
significantly. Furthermore, several operators, including Harrah's, have
announced plans for additional developments or expansions in some markets. In
the Las Vegas market a new "mega" facility opened in October, 1998, and others
are planned and under development. The impact that the additional supply will
have on Harrah's operations cannot be determined at this time.
Over the past several years, there has also been a significant increase
in the number of casinos on Indian lands, made possible by the Indian Gaming
Regulatory Act of 1988. Harrah's manages three such facilities. The future
growth potential from Indian casinos is also uncertain, however. See
"Political Uncertainties" below for information concerning a California
referendum.
Although the short-term effect of these competitive developments on the
Company has been negative, Harrah's is not able to determine the long-term
impact, whether favorable or unfavorable, that these trends and events will have
on its current or future markets. Management believes that the geographic
diversity of Harrah's operations, its multi-market customer base and the
Company's continuing efforts to establish Harrah's as a premier brand name have
well-positioned Harrah's to face the challenges present within the industry.
Harrah's has introduced WINet, a sophisticated nationwide customer database, and
its Total Gold Card, a nationwide reward and recognition card, both of which it
believes provide competitive advantages, particularly with players who visit
more than one market.
-36-
Industry Consolidation
- ----------------------
As evidenced by a number of recent public announcements by casino
entertainment companies of plans to acquire or be acquired by other companies,
including Harrah's acquisition of Showboat and planned acquisition of Rio,
consolidation in the gaming industry is now underway. The Company believes it is
well-positioned to, and may from time to time, pursue additional strategic
acquisitions to further enhance its distribution, strengthen its access to
target customers and leverage its technological and centralized services
infrastructure.
Political Uncertainties
- -----------------------
The casino entertainment industry is subject to political and regulatory
uncertainty. In 1996, the U.S. government formed a federal commission to study
gambling in the United States, including the casino gaming industry. Subsequent
to the end of third quarter 1998, voters in the state of California approved a
referendum that will allow an expansion of gaming offerings on Indian lands in
that state. At this time, the ultimate impacts that the federal commission and
the approval of the California referendum will have on the industry are
uncertain. From time to time, individual jurisdictions have also considered
legislation or referendums which could adversely impact Harrah's operations, and
the likelihood or outcome of similar legislation and referendums in the future
is difficult to predict.
The casino entertainment industry represents a significant source of tax
revenues to the various jurisdictions in which casinos operate. From time to
time, various state and federal legislators and officials have proposed changes
in tax laws, or in the administration of such laws, which would affect the
industry. It is not possible to determine with certainty the scope or likelihood
of possible future changes in tax laws or in the administration of such laws. If
adopted, such changes could have a material adverse effect on Harrah's financial
results.
INTERCOMPANY DIVIDEND RESTRICTION
- ---------------------------------
Agreements governing the terms of its debt require Harrah's to abide by
covenants which, among other things, limit HOC's ability to pay dividends and
make other restricted payments, as defined, to Harrah's. The amount of HOC's net
assets which are restricted by these covenants was approximately $823.8 million
at September 30, 1998. Harrah's principal asset is the stock of HOC, a
wholly-owned subsidiary which holds, directly and through
-37-
subsidiaries, the principal assets of Harrah's businesses. Given this ownership
structure, these restrictions should not impair Harrah's ability to conduct its
business through its subsidiaries or to pursue its development plans.
RECENTLY ISSUED ACCOUNTING STANDARDS
- ------------------------------------
The Company is currently evaluating the provisions of two recently issued
accounting pronouncements. The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative financial instruments. The provisions of
SFAS No. 133 require that a company recognize all derivatives as either assets
or liabilities on its balance sheet and that the instrument be valued at its
fair value. The Statement also defines the criteria and conditions which govern
the recognition of subsequent changes in the fair value of the instrument as
being either balance sheet or income statement events. SFAS No. 133 is effective
for years beginning after June 15, 1999.
The Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants has issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-up Activities." SOP 98-5 requires that the
costs of all start-up activities, as defined in the SOP, be expensed as
incurred. The SOP is effective for years beginning after December 15, 1998.
The Company does not expect the adoption of these pronouncements to
materially impact its results of operations or financial position.
PRIVATE SECURITIES LITIGATION REFORM ACT
- ----------------------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. Certain information included in this
Form 10-Q and other materials filed or to be filed by the Company with the
Securities and Exchange Commission ("SEC") (as well as information included in
oral statements or other written statements made or to be made by the Company)
contains statements that are forward looking. These include statements relating
to the following activities, among others: (A) operations and expansions of
existing properties,
-38-
including future performance, anticipated scope and opening dates of expansions;
(B) planned development of casinos and hotels that would be owned or managed by
the Company and the pursuit of strategic acquisitions; (C) the redevelopment of
the casino in New Orleans; (D) planned capital expenditures for 1998 and beyond;
(E) the planned acquisition of Rio; (F) the impact of the WINet and Total Gold
Card Programs; (G) any future impact of the Showboat acquisition; and (H) Year
2000 compliance plans. These activities involve important factors that could
cause actual results to differ materially from those expressed in any forward
looking statements made by or on behalf of the Company. These include, but are
not limited to, the following factors as well as other factors described from
time to time in the Company's reports filed with the SEC: construction factors,
including zoning issues, environmental restrictions, soil conditions, weather
and other hazards, site access matters and building permit issues; access to
available and feasible financing; regulatory, licensing and other government
approvals, third party consents and approvals, and relations with partners,
owners and other third parties; conditions of credit markets and other business
and economic conditions, including international and national economic problems;
litigation, judicial actions and political uncertainties, including gaming
legislative action, referenda, and taxation; actions or inactions of suppliers
and vendors regarding Year 2000; and the effects of competition including
locations of competitors and operating and marketing competition. Any forward
looking statements are made pursuant to the Private Securities Litigation Reform
Act of 1995 and, as such, speak only as of the date made.
-39-
PART II -- OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings
----------------------------
New Orleans
- -----------
On October 30, 1998, the Plan of Reorganization for Harrah's Jazz Company
was consummated. As a result, the contingencies in the already approved
settlements in the In Re Harrah's Entertainment, Inc. Securities Litigation,
Civil No. 95-3925, and Russell M. Swody, et al v. Harrah's New Orleans
Management Company and Harrah's Entertainment, Inc., Civil No. 95-4118, matters,
both of which were pending in the United States District Court for the Eastern
District of Louisiana, were removed and the settlements are now fully effective.
Also in connection with the consummation of the Plan of Reorganization,
releases of past events in connection with the New Orleans casino project were
obtained by the Company from various parties that had previously been in
litigation with the Company. Among the releases exchanged at closing were
releases from Centex-Landis, the City of New Orleans, the Louisiana Gaming
Control Board, the Louisiana Economic Development and Gaming Corporation, New
Orleans/Louisiana Development Corporation and its shareholders, Eddie Sapir and
the Eddie Sapir Inter Vivos Trust No. 1.
Also in connection with the consummation of the Plan of Reorganization,
motions to dismiss with prejudice and/or notices of dismissal with prejudice
were filed in the following actions involving the Company: Harrah's New Orleans
Investment Company v. New Orleans Louisiana Development Corporation, Civil No.
95-3166, New Orleans Louisiana Development Corporation v. Harrah's
Entertainment, et. al., Civil No. 95-14653, Centex-Landis Construction Co., Inc.
v. Harrah's Entertainment, Inc. et. al., Civil No. 95-18101, City of New Orleans
and Rivergate Development Corporation v. Harrah's Entertainment, Inc. et. al.,
Civil No. 95-19285, Louisiana Economic Development and Gaming Corporation v.
Harrah's Entertainment, Inc. et. al., now Civil No. 96-169, in the In Re
Harrah's Jazz Company bankruptcy proceeding, the adversary proceeding styled
Harrah's Jazz Company v. A&D Maintenance Services, et. al., 97-1174, in the In
Re New Orleans Louisiana Development Corporation bankruptcy proceeding, the
-40-
adversary proceeding styled New Orleans Louisiana Development Corporation v.
Bankers Trust Company, et. al., 97-1176, and Eddie Sapir et. al. v. Bankers
Trust Company, et. al., Civil No. 97-20643, all pending in the United States
District Court for the Eastern District of Louisiana or its Bankruptcy Court. It
is anticipated that the orders effectuating these dismissals will be entered
shortly.
Missouri
- --------
On November 25, 1997, the Missouri Supreme Court issued a ruling in Akin v.
Missouri Gaming Commission that defined the state constitutional requirements
for floating casino facilities in artificial basins. Subsequently, the Missouri
Gaming Commission (the "Commission") attempted to issue disciplinary resolutions
that effectively would have amended the gaming licenses of the Company's
Missouri casinos, and numerous other floating casino facilities in the
Commission's jurisdiction, to preclude games of chance, subject to evidentiary
hearings that were to be held if the licensees filed appeals to prove compliance
with the Supreme Court's ruling. Prior to the Commission's action, Harrah's and
other licensees filed petitions in the Circuit Court of Cole County, Missouri,
and succeeded in having the Court issue an order restraining the Commission from
taking any such disciplinary action. The Commission appealed to the Missouri
Supreme Court which, on May 28, 1998, lifted the lower court's restraining
order. On June 18, 1998, the Commission reissued its proposed disciplinary
resolutions. All affected licensees, including Harrah's, filed timely appeals of
the proposed disciplinary resolutions. Subsequently, all of the parties to the
several disciplinary hearings, including Harrah's and the Commission, agreed
that all of the evidence for the hearings would be presented through documents
rather than through oral testimony, so no hearings were held. Harrah's has also
filed suit seeking declaratory judgment that its gaming facilities meet the
state constitutional mandates as established by the Missouri Supreme Court. On
November 3, 1998, the people of the State of Missouri voted to amend the State's
Constitution to deem all floating casino facilities in compliance with state
law. Once the election results are certified (30 days), it is expected that the
Commission will dismiss the disciplinary resolutions.
In addition to the matters described above, Harrah's is involved in
various inquiries, administrative proceedings and litigation relating to
contracts, sales of property and other matters arising in the normal course of
business. While any proceeding or litigation has an element of uncertainty,
management believes that the final outcome of these matters will not have a
material adverse effect upon Harrah's consolidated financial position or its
results of operations.
-41-
Item 6. Exhibits and Reports on Form 8-K
------------------------------------------
(a) Exhibits
EX-2.1 Agreement and Plan of Merger, dated as of August 9,
1998, by and among Harrah's Entertainment, Inc., HEI
Acquisition Corp. III and Rio Hotel & Casino, Inc.
(Incorporated by reference from the Company's Current
Report on Form 8-K filed August 14, 1998, File No.
001-10410.)
EX-2.2 First Amendment to the Agreement and Plan of Merger,
dated 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 Company's Current Report on Form 8-K filed
September 4, 1998, File No. 001-10410.)
*EX-4.1 First Amendment, dated as of September 16, 1998, to the
Credit Agreement dated as of July 22, 1993, amended and
restated as of June 9, 1995 and further amended and
restated as of April 1, 1998 (the "5-Year Credit
Agreement") and to the Credit Agreement dated as of
June 9, 1995, amended and restated as of April 1, 1998
(the "364-Day Credit Agreement"), among Harrah's
Entertainment, Inc., Harrah's Operating Company, Inc.,
Marina Associates, the lenders party to these credit
agreements, Canadian Imperial Bank of Commerce and
Societe Generale, as Co-Syndication Agents, Bank of
America National Trust and Savings Association, as
Documentation Agent, and Bankers Trust Company, as
Administrative Agent.
*EX-11 Computation of per share earnings.
*EX-27 Financial Data Schedule.
*Filed herewith.
(b) A Form 8-K was filed by the Company on August 14, 1998, reporting the
agreement to acquire Rio Hotel & Casino, Inc.
A Form 8-K/A was filed by the Company on August 14, 1998, reporting the
financial information relating to the 8-K filed June 16, 1998 which announced
the consummation of the acquisition of Showboat, Inc.
A Form 8-K was filed by the Company on September 4, 1998, reporting the
accounting change for the planned acquisition of Rio Hotel & Casino, Inc.
-42-
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARRAH'S ENTERTAINMENT, INC.
November 13, 1998 BY: /s/JUDY T. WORMSER
-----------------------
Judy T. Wormser
Vice President and Controller
(Chief Accounting Officer)
-43-
Exhibit Index
-------------
Sequential
Exhibit No. Description Page No.
- ----------- ------------------------------- ----------
EX-2.1 Agreement and Plan of Merger,
dated as of August 9, 1998, by
and among Harrah's Entertainment,
Inc., HEI Acquisition Corp. III
and Rio Hotel & Casino, Inc.
(Incorporated by reference from
the Company's Current Report
on Form 8-K filed August 14,
1998, File No. 001-10410.)
EX-2.2 First Amendment to the Agreement
and Plan of Merger, dated 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 Company's Current Report on
Form 8-K filed September 4, 1998,
File No. 001-10410.)
EX-4.1 First Amendment, dated as of
September 16, 1998, to the
Credit Agreement dated as of
July 22, 1993, amended and
restated as of June 9, 1995
and further amended and restated
as of April 1, 1998 (the
"5-Year Credit Agreement") and
to the Credit Agreement dated
as of June 9, 1995, amended
and restated as of April 1,
1998 (the "364-Day Credit
Agreement"), among Harrah's
Entertainment, Inc., Harrah's
Operating Company, Inc., Marina
Associates, the lenders party
to these credit agreements,
Canadian Imperial Bank of
Commerce and Societe Generale,
as Co-Syndication Agents, Bank
-44-
Sequential
Exhibit No. Description Page No.
- ----------- ------------------------------- ----------
of America National Trust and
Savings Association, as
Documentation Agent, and Bankers
Trust Company, as Administrative
Agent.
EX-11 Computation of per share earnings.
EX-27 Financial Data Schedule.
-45-
EX-4.1
FIRST AMENDMENT
---------------
FIRST AMENDMENT (this "Amendment"), dated as of September 16, 1998,
among HARRAH'S ENTERTAINMENT, INC. ("Parent"), HARRAH'S OPERATING COMPANY, INC.
(the "Company"), MARINA ASSOCIATES ("Marina"), the lenders party to the Credit
Agreements referred to below (the "Banks"), CANADIAN IMPERIAL BANK OF COMMERCE
and SOCIETE GENERALE, as Co-Syndication Agents (the "Co-Syndication Agents"),
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Documentation Agent
(the "Documentation Agent"), and BANKERS TRUST COMPANY, as Administrative Agent
(the "Administrative Agent"). Unless otherwise defined herein, all capitalized
terms used herein shall have the respective meanings provided such terms in the
5-Year Credit Agreement or the 364-Day Credit Agreement, as the case may be,
referred to below.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Parent, the Company, Marina, the Banks, the Co-Syndication
Agents, the Documentation Agent and the Administrative Agent are parties to a
Credit Agreement, dated as of July 22, 1993 and amended and restated as of June
9, 1995 and further amended and restated as of April 1, 1998 (the "5-Year Credit
Agreement");
WHEREAS, Parent, the Company, Marina, the Banks, the Co-Syndication
Agents, the Documentation Agent and the Administrative Agent are parties to a
Credit Agreement, dated as of June 9, 1995 and amended and restated as of April
1, 1998 (the "364-Day Credit Agreement", and together with the 5-Year Credit
Agreement, the "Credit Agreements"); and
WHEREAS, the parties hereto wish to amend certain provisions of the
Credit Agreements as herein provided;
NOW, THEREFORE, it is agreed:
1. Section 9.05 of the 5-Year Credit Agreement is hereby amended by (i)
deleting the reference to the amount "$180,000,000" appearing in clause (ii)
thereof and inserting the amount "$195,000,000" in lieu thereof and (ii)
deleting the reference to the amount "$180,000,000" appearing in the last
sentence thereof and inserting the amount "$195,000,000" in lieu thereof.
-46-
2. Section 8.05 of 364-Day Credit Agreement is hereby amended by (i)
deleting the reference to the amount "$180,000,000" appearing in clause (ii)
thereof and inserting the amount "$195,000,000" in lieu thereof and (ii)
deleting the reference to the amount "$180,000,000" appearing in the last
sentence thereof and inserting the amount "$195,000,000" in lieu thereof.
3. The definition of "Jazz Casino Loans" appearing in Section 11.01 of
the 5-Year Credit Agreement is hereby amended by deleting the reference to the
amount "$180,000,000" appearing therein and inserting the amount
"$195,000,000" in lieu thereof.
4. The definition of "Jazz Casino Loans" appearing in Section 10.01 of
the 364-Day Credit Agreement is hereby amended by deleting the reference to the
amount "$180,000,000" appearing therein and inserting the amount "$195,000,000"
in lieu thereof.
5. In order to induce the Banks to enter into this Amendment, Parent
and each Borrower hereby represent and warrant that (x) no Default or Event of
Default exists on the First Amendment Effective Date (as defined below), both
before and after giving effect to this Amendment and (y) all of the
representations and warranties contained in each Credit Agreement shall be true
and correct in all material respects on and as of the First Amendment Effective
Date, both before and after giving effect to this Amendment, with the same
effect as though such representations and warranties had been made on and as of
the First Amendment Effective Date (it being understood that any representation
or warranty made as of a specified date shall be required to be true and correct
in all material respects only as of such specific date).
6. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreements or any other Credit Document.
7. This Amendment may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with Parent, the Company and the Administrative
Agent.
8. This Amendment and the rights and obligations of the parties
hereunder shall be construed in accordance with and governed by the law of the
State of New York.
-47-
9. This Amendment shall become effective on the date (the "First
Amendment Effective Date") when Parent, the Borrowers and the Required Banks
under, and as defined in, each Credit Agreement shall have signed a counterpart
hereof (whether the same or different counterparts) and shall have delivered
(including by way of telecopier) the same to the Administrative Agent at the
Notice Office.
10. From and after the First Amendment Effective Date, all references
in the Credit Agreements and the other Credit Documents to each Credit Agreement
shall be deemed to be references to each such Credit Agreement as modified
hereby.
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Amendment to be duly executed and delivered as of the date first above
written.
HARRAH'S ENTERTAINMENT, INC.
By: /s/ Charles L. Atwood
---------------------------
Name: Charles L. Atwood
Title: Vice President/Treasurer
HARRAH'S OPERATING COMPANY, INC.
By: /s/ Charles L. Atwood
---------------------------
Name: Charles L. Atwood
Title: Vice President/Treasurer
MARINA ASSOCIATES
By: HARRAH'S ATLANTIC CITY, INC.,
a general partner
By: /s/ Stephen H. Brammell
---------------------------
Name: Stephen H. Brammell
Title: Assistant Secretary
By: HARRAH'S NEW JERSEY, INC.,
a general partner
By: /s/ Stephen H. Brammell
---------------------------
Name: Stephen H. Brammell
Title: Assistant Secretary
-48-
BANKERS TRUST COMPANY,
Individually and as Administrative Agent
By: /s/ Mary Kay Coyle
---------------------------
Name: Mary Kay Coyle
Title: Managing Director
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
Individually and as Documentation Agent
By: /s/ Scott L. Faber
---------------------------
Name: Scott L. Faber
Title: Vice President
Bank of America NT&SA
SOCIETE GENERALE, Individually and as a
Co-Syndication Agent
By: /s/ J. Blaine Shaum
---------------------------
Name: J. Blaine Shaum
Title: Managing Director
CANADIAN IMPERIAL BANK OF COMMERCE,
Individually and as Co-Syndication Agent
By: /s/ Carter W. Harned
---------------------------
Name: Carter W. Harned
Title: Director
CIBC Oppenheimer Corp.,
AS AGENT
FLEET BANK, N.A.
By: /s/ John T. Harrison
---------------------------
Name: John T. Harrison
Title: Sr. Vice President
-49-
WELLS FARGO BANK, NATIONAL ASSOCIATION
By: /s/ Sue Fuller
---------------------------
Name: Sue Fuller
Title: Vice President
NATIONSBANK, N.A. (SOUTH)
By: /s/ John N. Ellington
---------------------------
Name: John N. Ellington
Title: Vice President
WESTDEUTSCHE LANDESBANK
GIROZENTRALE, NEW YORK BRANCH
By: /s/ Cynthia M. Niesen and
Walter T. Duffy, III
---------------------------
Name: Cynthia M. Niesen
Title: Managing Director
Name: Walter T. Duffy, III
Title: Associate
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By: /s/ Rebecca J. S. Silbert
---------------------------
Name: Rebecca J. S. Silbert
Title: SVP
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Gary W. Wessels
---------------------------
Name: Gary W. Wessels
Title: Vice President
THE BANK OF NEW YORK
By: /s/ Ann Marie Hughes
---------------------------
Name: Ann Marie Hughes
Title: Vice President
-50-
DEUTSCHE BANK AG, acting through its
New York Branch
By: /s/ Stephan A. Wiedemann
---------------------------
Name: Stephan A. Wiedemann
Title: Director
By: /s/ Hans-Josef Thiele
---------------------------
Name: Hans-Josef Thiele
Title: Director
THE MITSUBISHI TRUST & BANKING CORP.
By: /s/ Toshihiro Hayashi
---------------------------
Name: Toshihiro Hayashi
Title: Senior Vice President
UNITED STATES NATIONAL BANK OF OREGON
By: /s/ Dale Parshall
---------------------------
Name: Dale Parshall
Title: Vice President
ABN AMRO BANK N.V., SAN FRANCISO
BRANCH
By: ABN AMRO NORTH AMERICA, INC.,
as its Agent
By: /s/ Jeffrey A. French
---------------------------
Name: Jeffrey A. French
Title: Group Vice President
& Director
By: /s/ Michael M. Tolentino
---------------------------
Name: Michael M. Tolentino
Title: Vice President
-51-
THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. Ashby
---------------------------
Name: F.C.H. Ashby
Title: Senior Manager Loan
Operations
COMMERZBANK AG, LOS ANGELES BRANCH
By: /s/ Christian Jagenberg
---------------------------
Name: Christian Jagenberg
Title: SVP and Manager
By: /s/ Werner Schmidbauer
---------------------------
Name: Werner Schmidbauer
Title: Vice President
FIRST SECURITY BANK, N.A.
By: /s/ David P. Williams
---------------------------
Name: David P. Williams
Title: Vice President
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
ATLANTA AGENCY
By: /s/ Koichi Hasegawa
---------------------------
Name: Koichi Hasegawa
Title: Senior Vice President and
Deputy General Manager
THE TOKAI BANK, LIMITED, NEW YORK BRANCH
By: /s/ Shinichi Nakatani
---------------------------
Name: Shinichi Nakatani
Title: Assistant General Manager
-52-
BANQUE NATIONALE DE PARIS, HOUSTON
AGENCY
By: /s/ Warren G. Parham
---------------------------
Name: Warren G. Parham
Title: Vice President
MICHIGAN NATIONAL BANK
By: /s/ Joseph M. Redoutey
---------------------------
Name: Joseph M. Redoutey
Title: Relationship Manager
FIRST NATIONAL BANK OF COMMERCE
By: /s/ Louis Ballero
---------------------------
Name: Louis Ballero
Title: SVP
WACHOVIA BANK, N.A.
By: /s/ Karin E. Reel
---------------------------
Name: Karin E. Reel
Title: Vice President
FIRST AMERICAN NATIONAL BANK
By: /s/ Elizabeth H. Vaughn
---------------------------
Name: Elizabeth H. Vaughn
Title: Senior Vice President
-53-
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION
By: /s/ James H. Moore, Jr.
---------------------------
Name: James H. Moore, Jr.
Title: Vice President
By:
---------------------------
Name:
Title:
HIBERNIA NATIONAL BANK
By: /s/ Ross S. Wales
---------------------------
Name: Ross S. Wales
Title: Assistant Vice President
First American National Bank, operating
as, and successor in interest by merger
to, Deposit Guaranty National Bank
By: /s/ Larry C. Ratzlaff
---------------------------
Name: Larry C. Ratzlaff
Title: Senior Vice President
ERSTE BANK DER OESTERREICHISCHEN
SPARKASSEN AG
By: /s/ David Manheim
---------------------------
Name: David Manheim
Title: Assistant Vice President
By: /s/ Rima Terradista
---------------------------
Name: Rima Terradista
Title: Vice President
-54-
SUNTRUST BANK, NASHVILLE, N.A.
By: /s/ Renee D. Drake
---------------------------
Name: Renee D. Drake
Title: Vice President
By:
---------------------------
Name:
Title:
NBD BANK, N.A.
By: /s/ William C. Corrigan
---------------------------
Name: William C. Corrigan
Title: Vice President
-55-
Exhibit 11
HARRAH'S ENTERTAINMENT, INC.
COMPUTATIONS OF PER SHARE EARNINGS
Third Quarter Ended Nine Months Ended
---------------------------------- ----------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Income before extraordinary losses $ 44,202,000 $ 52,889,000 $106,124,000 $ 95,373,000
Extraordinary losses, net -- -- (18,280,000) (8,134,000)
------------ ------------ ------------ ------------
Net income $ 44,202,000 $ 52,889,000 $ 87,844,00 $ 87,239,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
BASIC EARNINGS PER SHARE
Weighted average number of common
shares outstanding 100,271,071 100,038,685 100,203,599 100,793,711
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
BASIC EARNINGS PER COMMON SHARE
Income before extraordinary losses $ 0.44 $ 0.53 $ 1.06 $ 0.95
Extraordinary losses, net -- -- (0.18) (0.08)
------------ ------------ ------------ ------------
Net Income $ 0.44 $ 0.53 $ 0.88 $ 0.87
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
DILUTED EARNINGS PER SHARE
Weighted average number of common
shares outstanding 100,271,071 100,038,685 100,203,599 100,793,711
Additional shares based on
average market price for
period applicable to:
Restricted stock 206,668 152,580 259,674 55,551
Stock options 433,187 643,454 815,086 517,570
------------ ------------ ------------ ------------
Average number of common and
common equivalent shares
outstanding 100,910,926 100,834,719 101,278,359 101,366,832
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
DILUTED EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARES
Income before extraordinary
losses $ 0.44 $ 0.52 $ 1.05 $ 0.94
Extraordinary losses, net -- -- (0.18) (0.08)
------------ ------------ ------------ ------------
Net income $ 0.44 $ 0.52 $ 0.87 $ 0.86
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
-56-
5
1,000
9-MOS
DEC-31-1998
SEP-30-1998
128,745
0
63,688
17,008
15,563
236,068
2,641,645
765,535
3,191,902
292,069
1,914,002
0
0
10,147
817,218
3,191,902
0
1,479,323
0
1,202,944
37,256
0
81,358
176,718
65,043
106,124
0
18,280
0
87,844
0.88
0.87
