10-K 1 a06-2584_110k.htm ANNUAL REPORT PURSUANT TO SECTION 13 AND 15(D)

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K

(Mark One)

 

 

x

 

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

or

o

 

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

 

Commission File No. 1-10410


HARRAH’S ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State of incorporation)

 

62-1411755
(I.R.S. Employer Identification No.)

One Harrah’s Court
Las Vegas, Nevada
(Address of principal executive offices)

 


89119

(Zip code)

 

Registrant’s telephone number, including area code:

(702) 407-6000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class

 

Name of each exchange on which registered

 

Common Stock, Par Value $0.10 per share
Special Stock Purchase Rights

 

NEW YORK STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
PACIFIC EXCHANGE
PHILADELPHIA STOCK EXCHANGE

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x  No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer x

 

Accelerated filer  o

 

Non-accelerated filer  o

 

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2005, based upon the closing price of $72.07 for the Common Stock on the New York Stock Exchange on that date, was $12,775,815,532.

As of January 31, 2006, the Registrant had 184,092,919 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the 2006 Annual Meeting of Stockholders, which will be filed within 120 days after the end of the fiscal year, are incorporated by reference into Part III hereof.

 




PART I

ITEM 1. Business.

Overview

Harrah’s Entertainment, Inc., a Delaware corporation, is one of the largest casino entertainment providers in the world. Our business is conducted through a wholly-owned subsidiary, Harrah’s Operating Company, Inc., which, as of December 31, 2005, owns or manages through various subsidiaries 39 casinos, primarily in the United States. Our principal asset is the stock of Harrah’s Operating Company, Inc., which together with its direct and indirect subsidiaries hold substantially all of the assets of our businesses. Our casino entertainment facilities operate primarily under the Harrah’s, Caesars and Horseshoe brand names, and, as of December 31, 2005, included 20 land-based casinos, 11 riverboat or dockside casinos, four casinos on Indian reservations, two casinos on cruise ships, a combination greyhound racing facility and casino and a combination thoroughbred racetrack and casino. In addition, four of our casinos in Mississippi and Louisiana were closed as of December 31, 2005 due to damage suffered from Hurricanes Katrina and Rita. Our facilities have an aggregate of approximately 3 million square feet of gaming space and approximately 40,000 hotel rooms. We have a customer loyalty program, Total Rewards, that we use for marketing promotions and to generate play by our customers when they travel among our markets. We also operate the World Series of Poker tournament circuit at our casinos.

We were incorporated on November 2, 1989, and prior to such date operated under predecessor companies. Our principal executive offices are located at One Harrah’s Court, Las Vegas, Nevada 89119, telephone (702) 407-6000. Our common stock is traded on the New York Stock Exchange under the symbol “HET.”

2005 Business Development

This is a summary of material business developments in 2005. For more information about business developments in 2005, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this report.

Acquisitions

On June 13, 2005, we completed the acquisition of Caesars Entertainment, Inc. in a cash and stock transaction. As a result, we issued an aggregate of approximately 67.9 million shares of our common stock and paid approximately $1.9 billion in cash. The acquisition of Caesars added 15 casinos with about 1.6 million square feet of gaming space and approximately 24,000 hotel rooms and gave us significant additional presence in Las Vegas, Atlantic City and Mississippi.

On December 23, 2005, we completed the acquisition of the Imperial Palace Hotel & Casino in Las Vegas for approximately $370 million. The Imperial Palace, featuring a 52,000 square-foot casino and 2,640 hotel rooms, occupies an 18.5 acre site on the Las Vegas strip, situated between Harrah’s Las Vegas and the Flamingo, and across the street from Caesars Palace.

Construction

Harrah’s Chester Casino & Racetrack is a harness racetrack and casino now under construction in Chester, Pennsylvania, approximately six miles south of Philadelphia International Airport. Plans for the facility include a 1,500 seat grandstand and simulcast facility, a slot casino with approximately 2,000 games and variety of food and beverage offerings. Racing and simulcasting is scheduled to begin in the second half of 2006 and the casino is tentatively scheduled to open in 2007, subject to receipt of a gaming license and all other regulatory approvals. We own a 50% interest in Harrah’s Chester.

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In November 2005, we announced an upgrade and expansion of Harrah’s Atlantic City. The expansion will include a 172,000 square-foot retail and entertainment complex and a 964 room hotel tower. The entertainment and retail center is expected to open in early 2007, and the new hotel tower in the second quarter of 2008.

Developments

In 2005, we announced planned developments in several markets. Each of these developments is subject to regulatory approvals and other requirements.

During 2005, we acquired several businesses, including the Imperial Palace, and parcels of land adjacent to our properties on the Las Vegas Strip. This land permits a concept-development and master-planning opportunity for entertainment options in Las Vegas. Master planning is underway, and preliminary plans are expected to be announced in mid-2006.

We are also at work on a master plan for our Atlantic City properties that will be designed to create a cross-property entertainment experience there, with preliminary plans expected to be announced in mid-2006.

With the closure of our properties on the Mississippi Gulf Coast due to Hurricane Katrina in late August 2005, we decided to concentrate our rebuilding efforts in the Mississippi Gulf on a resort casino at the former location of the Grand Casino Biloxi. We intend to announce preliminary plans for our new Biloxi project in mid-2006.

In November 2005, we signed a definitive agreement with El Reino de Don Quijote de La Mancha, S.A. to develop a Caesars casino resort in Ciudad Real, Spain, 118 miles south of Madrid, Spain.

In November 2005, we announced that we had executed a letter of intent to form a joint venture with Baha Mar Resorts, Ltd. and Starwood Hotels & Resorts Worldwide, Inc. to create a mixed-use property in Nassau, Bahamas. The proposal includes a Caesars Resort Hotel and Casino.

In November 2005, we signed a memorandum of understanding with the Hit Group to form a joint venture to develop a casino resort and hotel in Nova Gorica, Slovenia on the border of Italy. The proposed project is contingent on legislative approvals being enacted.

We have entered into a memorandum of understanding to form a joint venture with Keppel Land Investment Pte. Ltd. and together we continue to work towards making a proposal for an integrated resort in the Republic of Singapore. We and Keppel Land have reached preliminary agreements with third parties for the management and operation of convention facilities, management of the non-gaming entertainment ventures, and creating a cultural center. The proposal is to be submitted to the Republic of Singapore in March 2006.

Dispositions

In April 2005, we completed the sale of Harrah’s East Chicago and Harrah’s Tunica for a sales price of approximately $627 million, and Caesars sold its Atlantic City Hilton and Bally’s Tunica properties for a sales price of approximately $612 million.

In May 2005, Caesars agreed to sell the Reno Hilton for $150 million. The sale is expected to close in the second quarter of 2006.

In November 2005, we agreed to sell the Flamingo Laughlin hotel and an undeveloped land parcel in Atlantic City for $170 million. The sale is expected to close in mid-2006.

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Description of Business

Our casino business commenced operations in 1937. We own or manage casino entertainment facilities in more areas throughout the United States than any other participant in the casino industry. In addition to casinos, our facilities typically include hotel and convention space, restaurants and non-gaming entertainment facilities. Two of our properties are racetracks at which we have installed slot machines. The descriptions below are as of December 31, 2005, except where otherwise noted.

In southern Nevada, Harrah’s Las Vegas, Rio All-Suite Hotel & Casino, Caesars Palace, Bally’s Las Vegas, Flamingo Las Vegas, Paris Las Vegas and Imperial Palace Hotel & Casino are located in Las Vegas, and draw customers from throughout the United States. Harrah’s Laughlin and Flamingo Laughlin are located near both the Arizona and California borders and draw customers primarily from the southern California and Phoenix metropolitan areas and, to a lesser extent, from throughout the U.S. via charter aircraft. In November 2005, we entered into an agreement to sell the Flamingo Laughlin, and the transaction is expected to close in mid-2006.

In northern Nevada, Harrah’s Lake Tahoe, Harveys Resort & Casino and Bill’s Casino are located near Lake Tahoe and draw customers primarily from California. Harrah’s Reno, located in downtown Reno, and the Reno Hilton, located near downtown Reno, draw customers primarily from Northern California, the Pacific Northwest and Canada. Caesars entered into an agreement to sell the Reno Hilton in May 2005, and the transaction is expected to close during the second quarter 2006.

Our Atlantic City casinos, Harrah’s Atlantic City, Showboat Atlantic City, Caesars Atlantic City and Bally’s Atlantic City, draw customers primarily from Philadelphia, New York and New Jersey.

Our Chicagoland dockside casinos, Harrah’s Joliet in Joliet, Illinois, and Horseshoe Hammond in Hammond, Indiana, draw customers primarily from the greater Chicago metropolitan area. In southern Indiana, we own Caesars Indiana, a dockside casino complex located in Elizabeth, Indiana, which draws customers primarily from Northern Kentucky, including the Louisville metropolitan area, and Southern Indiana, including Indianapolis.

In Louisiana, we own Harrah’s New Orleans, a land-based casino located in downtown New Orleans, which attracts customers from the New Orleans metropolitan area and from throughout the United States. Harrah’s New Orleans was closed as of December 31, 2005, due to the damage sustained by Hurricane Katrina, but reopened on February 17, 2006. In the southwest part of the state, Harrah’s Lake Charles, a dockside casino, serves southwestern Louisiana and eastern Texas, including the Houston metropolitan area. Harrah’s Lake Charles is currently closed due to the damage sustained in Hurricane Rita. In the northwest part of the state, Horseshoe Bossier City, a dockside casino, and Harrah’s Louisiana Downs, a thoroughbred racetrack with slot machines, located in Bossier City, cater to customers in northwestern Louisiana and east Texas, including the Dallas/Fort Worth metropolitan area.

On the Mississippi gulf coast, we own the Grand Casino Biloxi, located in Biloxi, Mississippi, and Grand Casino Gulfport, located in Gulfport, Mississippi. These casinos catered to customers in Southern Mississippi, Southern Alabama and Northern Florida. Grand Casino Gulfport and Grand Casino Biloxi are currently closed due to the damage sustained from Hurricane Katrina. In December 2005, we agreed to sell Grand Casino Gulfport.

Harrah’s North Kansas City and Harrah’s St. Louis, both dockside casinos, draw customers from the Kansas City and St. Louis metropolitan areas. Harrah’s Metropolis is a dockside casino located in Metropolis, Illinois, on the Ohio River, drawing customers from southern Illinois, western Kentucky and central Tennessee. Horseshoe Tunica, Grand Casino Tunica and Sheraton Casino & Hotel Tunica, dockside casino complexes located in Tunica, Mississippi, are approximately 30 miles from Memphis, Tennessee and draw customers primarily from the Memphis area.

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Harrah’s Council Bluffs Casino Hotel, a dockside casino facility, and Bluffs Run Casino, a combination greyhound racing facility and land-based casino, are located in Council Bluffs, Iowa, across the Missouri River from Omaha, Nebraska. At Bluffs Run, we own the assets other than gaming equipment, and lease these assets to the Iowa West Racing Association, or IWRA, a nonprofit corporation, and we manage the facility for the IWRA under a management agreement expiring in October 2024. Iowa law requires that a qualified nonprofit corporation hold Bluffs Run’s gaming and pari-mutuel licenses and its gaming equipment. We are rebranding the casino at Bluffs Run to the Horseshoe brand with a target completion date of first quarter 2006.

Casino Windsor, located in Windsor, Ontario, draws customers primarily from the Detroit Metropolitan area and the Conrad Resort & Casino located in Punta Del Este, Uruguay, draws customers primarily from Argentina and Uruguay.

In addition to the casinos that we own or manage, we also earn fees through our management of four casinos for Indian tribes:

·       Harrah’s Phoenix Ak-Chin, located near Phoenix, Arizona, which we manage for the Ak-Chin Indian Community under a management agreement that expires December 2009. Harrah’s Phoenix Ak-Chin draws customers from the Phoenix metropolitan area;

·       Harrah’s Rincon Casino and Resort, located near San Diego, California, which we manage for the Rincon San Luiseno Band of Mission Indians under a management agreement that expires in November 2011. Harrah’s Rincon draws customers from the San Diego metropolitan area and Orange County, California;

·       Harrah’s Cherokee Casino and Hotel, which we manage for the Eastern Band of Cherokee Indians on their reservation in Cherokee, North Carolina under a management contract that expires November 2011. Harrah’s Cherokee draws customers from eastern Tennessee, western North Carolina, northern Georgia and South Carolina; and

·       Harrah’s Prairie Band Casino-Topeka, located near Topeka, Kansas, which we manage for the Prairie Band Potawatomi Nation under a management contract expiring in January 2008. Harrah’s Prairie Band draws customers from the Topeka and Wichita, Kansas areas. We will not renew the management agreement for this property when it expires in January 2008.

We own and operate Bluegrass Downs, a harness racetrack located in Paducah, Kentucky, and own a one-half interest in Turfway Park LLC, which is the owner of the Turfway Park thoroughbred racetrack in Boone County, Kentucky. Turfway Park LLC owns a minority interest in Kentucky Downs LLC, which is the owner of the Kentucky Downs racetrack located in Simpson County, Kentucky.

We operate two Caesars Palace at Sea casinos on cruise ships owned by Crystal Cruises, Inc.

We also operate the World Series of Poker tournament circuit and license trademarks for merchandise related to this brand.

Additional information about our casino entertainment properties as of December 31, 2005 is set forth below in Item 2, “Properties.”

Sales and Marketing

We believe that our distribution system of 39 casino entertainment facilities provides us the ability to generate play by our customers when they travel among markets, which we refer to as cross-market play. We believe our customer loyalty program, Total Rewards, in conjunction with this distribution system, allows us to capture a growing share of our customers’ gaming budget and generate increased same-store sales.

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By April 2006, our Total Rewards customers will be able to earn reward credits and redeem those credits at all of our U.S. casino entertainment facilities. Since December 2005, we have been converting the systems to support the transition of Caesars Entertainment Inc.’s Connection Card to Total Rewards at all of the U.S. properties we acquired in the Caesars acquisition. We integrated the Horseshoe properties into our Total Rewards database in 2005, and by April 2006, the Winners Circle card will be transitioned to Total Rewards. Total Rewards is structured in tiers, providing customers an incentive to consolidate their play at our casinos. Depending on their level of play with us in a calendar year, customers may be designated as either Gold, Platinum, Diamond, or Seven Stars customers. Customers who do not participate in Total Rewards are encouraged to join, and those with a Total Rewards card are encouraged to consolidate their play through targeted promotional offers and rewards.

We have developed a database containing information for our customers and aspects of their casino gaming play. We use this information for marketing promotions, including through direct mail campaigns and the use of electronic mail and our website.

Patents and Trademarks

We own the following trademarks used in this document: Harrah’s®, Caesars®, Grand CasinoSM, Bally’s®, Flamingo®, Paris®, Caesars Palace at Sea®, LuckyMesm, Fast Cash®, Rio®, Showboat®, Bill’s®, Harveys®, Total Rewards®, Bluffs Run®, Louisiana Downs®, Reward Credits®, Horseshoe®, Seven Stars Club®, Connection CardSM, Winners Circle®, and World Series of Poker®. Trademark rights are perpetual provided that the mark remains in use by us. We consider all of these marks, and the associated name recognition, to be valuable to our business.

We have been issued five U.S. patents covering some of the technology associated with our Total Rewards program-U.S. Patent No. 5,613,912 issued March 25, 1997, expiring April 5, 2015 (which is the subject of a license agreement with Mikohn Gaming Corporation); U.S. Patent No. 5,761,647 issued June 2, 1998, expiring May 24, 2016; U.S. Patent No. 5,809,482 issued September 15, 1998, expiring September 15, 2015; U.S. Patent No. 6,003,013 issued December 14, 1999, expiring May 24, 2016; and U.S. Patent No. 6,183,362, issued February 6, 2001, expiring May 24, 2016. In 2001, we sued a competitor casino company in Federal Court seeking to enforce three of these patents. In June 2004, the trial court ruled against us on the competitor’s motion for summary judgment, holding that the claims of Patent Nos. 5,761,647 and 6,183,362 and portions of the claims of Patent No. 6,003,013 were invalid. The appeals court affirmed the trial court’s motion for summary judgment and we elected to not appeal this decision. We do not believe that the ruling will adversely affect our business or operations.

Competition

We own or manage land-based, dockside, riverboat and Indian casino facilities in most U.S. casino entertainment jurisdictions. We also own or manage properties in Canada and Uruguay. We compete with numerous casinos and casino hotels of varying quality and size in the market areas where our properties are located. We also compete with other non-gaming resorts and vacation areas, and with various other casino and other entertainment businesses. The casino entertainment business is characterized by competitors that vary considerably by their size, quality of facilities, number of operations, brand identities, marketing and growth strategies, financial strength and capabilities, level of amenities, management talent and geographic diversity.

In most markets, we compete directly with other casino facilities operating in the immediate and surrounding market areas. In some markets, we face competition from nearby markets in addition to direct competition within our market areas.

In recent years, with fewer new markets opening for development, competition in existing markets has intensified. Many casino operators, including us, have invested in expanding existing facilities, developing

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new facilities, and acquiring established facilities in existing markets, such as our acquisition of the casinos owned by Rio, Showboat, Players, Harveys, Horseshoe, Caesars and Imperial Palace. This expansion of existing casino entertainment properties, the increase in the number of properties and the aggressive marketing strategies of many of our competitors has increased competition in many markets in which we compete, and this intense competition can be expected to continue.

We believe we are well-positioned to take advantage of any further legalization of casino gaming in the U.S. and abroad, the continued positive consumer acceptance of casino gaming as an entertainment activity, and increased visitation to casino facilities. However, the expansion of casino entertainment into new markets, such as the recent expansion of tribal casino opportunities in New York and California and the approval of gaming facilities in Pennsylvania and Florida, could also present competitive issues for us. At this time, the ultimate impact that these events may have on the industry and on us is uncertain.

The casino entertainment industry is also subject to political and regulatory uncertainty. See also Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Effects of Current Economic and Political Conditions” and portions of “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overall Operating Results” and “—Regional Results and Development Plans.”

Governmental Regulation

The gaming industry is highly regulated, and we must maintain our licenses and pay gaming taxes to continue our operations. Each of our casinos is subject to extensive regulation under the laws, rules and regulations of the jurisdiction where it is located. These laws, rules and regulations generally concern the responsibility, financial stability and character of the owners, managers, and persons with financial interests in the gaming operations. Violations of laws in one jurisdiction could result in disciplinary action in other jurisdictions. A more detailed description of the regulations to which we are subject is contained in Exhibit 99 to this Annual Report on Form 10-K, which Exhibit is incorporated herein by reference.

Our businesses are subject to various foreign, federal, state and local laws and regulations in addition to gaming regulations. These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, environmental matters, employees, currency transactions, taxation, zoning and building codes, and marketing and advertising. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted. Material changes, new laws or regulations, or material differences in interpretations by courts or governmental authorities could adversely affect our operating results.

Employee Relations

We have approximately 85,000 employees through our various subsidiaries. Despite a strike in Atlantic City in 2004 that was settled, we consider our labor relations with employees to be good. Approximately 30,440 employees are covered by collective bargaining agreements with certain of our subsidiaries, relating to certain casino, hotel and restaurant employees at certain of our properties. Most of our employees covered by collective bargaining agreements are located at our properties in Las Vegas and Atlantic City. Our collective bargaining agreements with employees located at our Las Vegas properties expires in May 2007 and at our Atlantic City properties in September 2009.

Available Information

Our internet address is www.harrahs.com. We make available free of charge on or through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we

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electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC. We also make available through our website all filings of our executive officers and directors on Forms 3, 4 and 5 under Section 16 of the Exchange Act. These filings are also available on the SEC’s website at www.sec.gov. Our Corporate Governance Guidelines, the charters of our Audit Committee, Human Resources Committee, and Nominating/Corporate Governance Committee, our Code of Conduct and our Code of Business Conduct and Ethics for Principal Officers are available on our website under the “Investor Relations” link. We will provide a copy of these documents without charge to any stockholder upon receipt of a written request addressed to Harrah’s Entertainment, Inc., Attn: Corporate Secretary, One Harrah’s Court, Las Vegas, Nevada 89119. Reference in this document to our website address does not constitute incorporation by reference of the information contained on the website.

Item 1A. Risk Factors.

We are subject to extensive governmental regulation and taxation policies, the enforcement of which could adversely impact our business, financial condition and results of operations.

We are subject to extensive gaming regulations and political and regulatory uncertainty. Regulatory authorities in the foreign countries that we operate, as well as at the U.S. federal, state and local levels have broad powers with respect to the licensing of casino operations and may revoke, suspend, condition or limit our gaming or other licenses, impose substantial fines and take other actions, any one of which could adversely impact our business, financial condition and results of operations. From time to time, individual jurisdictions have also considered legislation or referendums, such as bans on smoking in casinos and other entertainment and dining facilities, which could adversely impact our operations. The likelihood or outcome of similar legislation and referendums in the future cannot be predicted.

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, including increases in tax rates, which would affect the industry. If adopted, such changes could adversely impact our business, financial condition and results of operations.

The development and construction of new hotels, casinos and gaming venues and the expansion of existing ones are susceptible to delays, cost overruns and other uncertainties, which could have an adverse effect on our business, financial condition and results of operations.

We may decide to develop, construct and open new hotels, casinos and other gaming venues in response to opportunities that may arise, including developments in Singapore, Slovenia, Spain, Pennsylvania and the Bahamas previously disclosed. Future development projects and acquisitions may require significant capital commitments and could result in potentially dilutive issuances of equity securities, the incurrence of additional debt, guarantees of third party-debt, the incurrence of contingent liabilities and an increase in amortization expense related to intangible assets, which could have an adverse effect upon our business, financial condition and results of operations. The development and construction of new hotels, casinos and gaming venues and the expansion of existing ones, such as our expansions at our Harrah’s Atlantic City and Harrah’s New Orleans properties, are susceptible to various risks and uncertainties, such as:

·       the existence of acceptable market conditions and demand for the completed project;

·       general construction risks, including cost overruns, change orders and plan or specification modification, shortages of equipment, materials or skilled labor, labor disputes, unforeseen environmental, engineering or geological problems, work stoppages, fire and other natural disasters, construction scheduling problems and weather interferences;

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·       changes and concessions required by governmental or regulatory authorities;

·       delays in obtaining, or inability to obtain, all licenses, permits and authorizations required to complete and/or operate the project; and

·       disruption of our existing operations and facilities.

Our failure to complete any new development or expansion project as planned, on schedule, within budget or in a manner that generates anticipated profits, could have an adverse effect on our business, financial condition and results of operations.

Servicing our indebtedness will require a significant amount of cash, and our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. Harrah’s Entertainment, Inc. is a holding company and Harrah’s Operating Company, Inc. conducts substantially all of its operations through its subsidiaries. As a result, our ability to meet our debt service obligations substantially depends upon our subsidiaries’ cash flows and payments of funds to us by our subsidiaries. This ability, to some extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. An economic downturn in a region in which we operate may adversely impact our business, results of operations and financial condition.

Based on our current level of operations and recent acquisitions, including the acquisition of Caesars, we believe our cash flow from operations, available cash and available borrowings under our credit facility will be adequate to meet our liquidity needs for the foreseeable future. There can be no assurances, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. There can be no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

Acts of terrorism and war and natural disasters may negatively impact our future profits.

Terrorist attacks and other acts of war or hostility have created many economic and political uncertainties. We cannot predict the extent to which terrorism, security alerts or war, or hostilities in Iraq will continue to directly or indirectly impact our business and operating results. As a consequence of the threat of terrorist attacks and other acts of war or hostility in the future, premiums for a variety of insurance products have increased, and some types of insurance are no longer available. Given current conditions in the global insurance markets, we are predominately uninsured for losses and interruptions caused by terrorist acts and acts of war. If any such event were to affect our properties, we would likely be adversely impacted.

In addition, natural disasters such as major fires, floods, hurricanes and earthquakes could also adversely impact our business and operating results. For example, four of our properties were closed due to the damage sustained from Hurricanes Katrina and Rita in August and September 2005. Such events could lead to the loss of use of one or more of our properties for an extended period of time and disrupt our ability to attract customers to certain of our gaming facilities. If any such event were to affect our properties, we would likely be adversely impacted.

In most cases, we have insurance that covers portions of any losses from a natural disaster, but it is subject to deductibles and maximum payouts in many cases. Although we may be covered by insurance from a natural disaster, the timing of our receipt of insurance proceeds, if any, is out of our control. Additionally, a natural disaster affecting one or more of our properties may affect the level and cost of

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insurance coverage we may be able to obtain in the future, which may adversely affect our financial position.

Work stoppages and other labor problems could negatively impact our future profits.

Some of our employees are represented by labor unions. A lengthy strike or other work stoppage at one of our casino properties or construction projects could have an adverse effect on our business and results of operations. From time to time, we have also experienced attempts to unionize certain of our non-union employees. While these efforts have achieved only limited success to date, we cannot provide any assurance that we will not experience additional and more successful union activity in the future.

We may not realize all of the anticipated benefits of our acquisition of Caesars.

Our ability to realize the anticipated benefits of our acquisition of Caesars will depend, in part, on our ability to integrate the businesses of Caesars with our businesses. The combination of two independent companies is a complex, costly and time-consuming process. This process may disrupt the business of either or both of the companies, and may not result in the full benefits expected. The difficulties of combining the operations of the companies include, among others:

·       coordinating marketing functions;

·       unanticipated issues in integrating information, communications and other systems;

·       unanticipated incompatibility of purchasing, logistics, marketing and administration methods;

·       retaining key employees;

·       consolidating corporate and administrative infrastructures;

·       the diversion of management’s attention from ongoing business concerns; and

·       coordinating geographically separate organizations.

There is no assurance that our acquisition of Caesars will realize the full benefits anticipated.

The risks associated with our international operations could reduce our profits.

Some of our properties are located in countries outside the United States. Additionally, we have announced intentions to build additional facilities outside the United States. International operations are subject to inherent risks including:

·       variation in local economies;

·       currency fluctuation;

·       greater difficulty in accounts receivable collection;

·       trade barriers;

·       burden of complying with a variety of international laws; and

·       political and economic instability.

If we are unable to effectively compete against our competitors, our profits will decline.

The gaming industry is highly competitive and our competitors vary considerably by their size, quality of facilities, number of operations, brand identities, marketing and growth strategies, financial strength and capabilities, level of amenities, management talent and geographic diversity. We also compete with other non-gaming resorts and vacation areas, and with various other entertainment businesses.

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In recent years, with fewer new markets opening for development, competition in existing markets has intensified. The expansion of existing casino entertainment properties, the increase in the number of properties and the aggressive marketing strategies of many of our competitors have increased competition in many markets in which we operate, and this intense competition is expected to continue. These competitive pressures have and are expected to continue to adversely affect our financial performance in certain markets.

In particular, our business may be adversely impacted by the additional gaming and room capacity in Nevada, New Jersey, Mississippi, Missouri, Michigan, Indiana, Iowa, Illinois, Pennsylvania, Louisiana, Canada, Spain, Uruguay, Singapore, Slovenia, Bahamas and/or other projects not yet announced in any of the other markets in which we operate or intend to operate. In addition, our operations located in New Jersey and Nevada may be adversely impacted by the expansion of Native American gaming in New York and California.

PRIVATE SECURITIES LITIGATION REFORM ACT

This Annual Report on Form 10-K contains or may contain “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on our current expectations about future events. Further, statements that include words such as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue” or “pursue,” or the negative of these words or other words or expressions of similar meaning may identify forward-looking statements. These forward-looking statements are found at various places throughout the report. These forward-looking statements, including, without limitation, those relating to future actions, new projects, strategies, future performance, the outcome of contingencies such as legal proceedings and future financial results, wherever they occur in this report, are necessarily estimates reflecting the best judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors set forth above and from time to time in our filings with the Securities and Exchange Commission.

In addition to the risk factors set forth above, important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include without limitation:

·       the effects of local and national economic, credit and capital market conditions on the economy in general, and on the gaming and hotel industry in particular;

·       construction factors, including delays, increased costs for labor and materials, availability of labor and materials, zoning issues, environmental restrictions, soil and water conditions, weather and other hazards, site access matters and building permit issues;

·       the effects of environmental and structural building conditions relating to our properties;

·       our ability to timely and cost-effectively integrate Caesars into our operations;

·       access to available and reasonable financing on a timely basis;

·       the ability of purchasers of any of our assets subject to sale agreements to close the purchases on a timely basis;

·       changes in laws, including increased tax rates, regulations or accounting standards, third-party relations and approvals, and decisions of courts, regulators and governmental bodies;

11




·       litigation outcomes and judicial actions, including gaming legislative action, referenda and taxation;

·       the ability of our customer-tracking, customer loyalty and yield-management programs to continue to increase customer loyalty and same store or hotel sales;

·       the ability to recoup costs of capital investments through higher revenues;

·       acts of war or terrorist incidents or natural disasters;

·       access to insurance on reasonable terms for our assets;

·       abnormal gaming holds; and

·       the effects of competition, including locations of competitors and operating and market competition.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect the occurrence of unanticipated events, except as required by law.

Item 1B. Unresolved Staff Comments.

None.

12




ITEM 2. Properties.

The following table sets forth information about our casino entertainment facilities:

Summary of Property Information*

Property

 

 

 

Type of Casino

 

Casino
Space–
Sq. Ft.(a)

 

Slot
Machines(a)

 

Table
Games(a)

 

Hotel
Rooms &
Suites(a)

 

Atlantic City, New Jersey

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s Atlantic City

 

Land-based

 

 

142,100

 

 

 

3,920

 

 

 

110

 

 

 

1,630

 

 

Showboat Atlantic City

 

Land-based

 

 

124,400

 

 

 

3,860

 

 

 

100

 

 

 

1,310

 

 

Bally’s Atlantic City

 

Land-based

 

 

225,800

 

 

 

5,570

 

 

 

220

 

 

 

1,740

 

 

Caesars Atlantic City

 

Land-based

 

 

130,900

 

 

 

3,160

 

 

 

120

 

 

 

1,220

 

 

Las Vegas, Nevada

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s Las Vegas

 

Land-based

 

 

88,400

 

 

 

1,380

 

 

 

100

 

 

 

2,530

 

 

Rio

 

Land-based

 

 

107,000

 

 

 

1,230

 

 

 

110

 

 

 

2,520

 

 

Caesars Palace

 

Land-based

 

 

129,000

 

 

 

1,520

 

 

 

150

 

 

 

3,350

 

 

Paris Las Vegas

 

Land-based

 

 

180,700

 

 

 

1,240

 

 

 

100

 

 

 

2,920

 

 

Bally’s Las Vegas

 

Land-based

 

 

66,400

 

 

 

1,320

 

 

 

60

 

 

 

2,810

 

 

Flamingo Las Vegas(b)

 

Land-based

 

 

76,800

 

 

 

1,670

 

 

 

110

 

 

 

3,550

 

 

Imperial Palace

 

Land-based

 

 

75,000

 

 

 

1,070

 

 

 

70

 

 

 

2,640

 

 

Laughlin, Nevada

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s Laughlin

 

Land-based

 

 

47,000

 

 

 

930

 

 

 

40

 

 

 

1,550

 

 

Flamingo Laughlin(c)

 

Land-based

 

 

57,100

 

 

 

1,420

 

 

 

50

 

 

 

1,910

 

 

Reno, Nevada

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s Reno

 

Land-based

 

 

57,000

 

 

 

980

 

 

 

60

 

 

 

930

 

 

Reno Hilton(d)

 

Land-based

 

 

107,000

 

 

 

1,120

 

 

 

50

 

 

 

2,000

 

 

Lake Tahoe, Nevada

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s Lake Tahoe

 

Land-based

 

 

57,600

 

 

 

870

 

 

 

70

 

 

 

530

 

 

Harveys Lake Tahoe

 

Land-based

 

 

63,300

 

 

 

910

 

 

 

90

 

 

 

740

 

 

Bill’s Lake Tahoe

 

Land-based

 

 

18,000

 

 

 

330

 

 

 

20

 

 

 

 

 

Chicago, Illinois area

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s Joliet (Illinois)(e)

 

Dockside

 

 

39,200

 

 

 

1,190

 

 

 

20

 

 

 

200

 

 

Horseshoe Hammond (Indiana) 

 

Dockside

 

 

48,300

 

 

 

2,020

 

 

 

60

 

 

 

 

 

Metropolis, Illinois

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s Metropolis

 

Dockside

 

 

29,800

 

 

 

1,190

 

 

 

30

 

 

 

120

(f)

 

Southern Indiana

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Caesars Indiana

 

Dockside

 

 

87,000

 

 

 

1,910

 

 

 

140

 

 

 

500

 

 

Council Bluffs, Iowa

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s Council Bluffs

 

Dockside

 

 

28,000

 

 

 

1,160

 

 

 

40

 

 

 

250

 

 

Bluffs Run Casino(g)

 

Greyhound racing
facility and land-based
casino

 

 

41,600

 

 

 

1,730

 

 

 

 

 

 

 

 

13




 

Tunica, Mississippi

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Horseshoe Tunica

 

Dockside

 

 

63,000

 

 

 

2,030

 

 

 

90

 

 

 

510

 

 

Grand Casino Tunica

 

Dockside

 

 

136,000

 

 

 

2,320

 

 

 

100

 

 

 

1,360

 

 

Sheraton Casino & Hotel

 

Dockside

 

 

31,000

 

 

 

1,320

 

 

 

40

 

 

 

130

 

 

Mississippi Gulf Coast

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Casino Biloxi(h)

 

Dockside

 

 

134,000

 

 

 

2,630

 

 

 

100

 

 

 

980

 

 

Grand Casino Gulfport(h)(i)

 

Dockside

 

 

105,000

 

 

 

2,080

 

 

 

90

 

 

 

1,000

 

 

St. Louis, Missouri

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s St. Louis

 

Dockside

 

 

120,000

 

 

 

2,880

 

 

 

90

 

 

 

500

 

 

North Kansas City, Missouri

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s North Kansas City

 

Dockside

 

 

60,100

 

 

 

1,840

 

 

 

60

 

 

 

390

 

 

New Orleans, Louisiana

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s New Orleans(j)

 

Land-based

 

 

125,100

 

 

 

2,020

 

 

 

120

 

 

 

(j)

 

Lake Charles, Louisiana

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s Lake Charles(k)

 

Dockside

 

 

60,000

 

 

 

1,250

 

 

 

70

 

 

 

260

 

 

Bossier City, Louisiana

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Louisiana Downs

 

Thoroughbred racing
facility and land-based
casino

 

 

14,900

 

 

 

1,400

 

 

 

 

 

 

 

 

Horseshoe Bossier City

 

Dockside

 

 

29,900

 

 

 

1,630

 

 

 

60

 

 

 

610

 

 

Phoenix, Arizona

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s Ak-Chin(l)

 

Indian Reservation

 

 

48,000

 

 

 

900

 

 

 

20

 

 

 

150

 

 

Topeka, Kansas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s Prairie Band(l)(m)

 

Indian Reservation

 

 

34,900

 

 

 

1,180

 

 

 

30

 

 

 

300

 

 

Cherokee, North Carolina

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s Cherokee(l)

 

Indian Reservation

 

 

88,000

 

 

 

3,350

 

 

 

40

 

 

 

580

 

 

San Diego, California

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrah’s Rincon(l)

 

Indian Reservation

 

 

69,900

 

 

 

1,600

 

 

 

60

 

 

 

650

 

 

Punta del Este, Uruguay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conrad Punta del Este Resort and Casino(n)

 

Land-based

 

 

44,500

 

 

 

500

 

 

 

70

 

 

 

300

 

 

Ontario, Canada

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino Windsor(o)

 

Land-based

 

 

100,000

 

 

 

3,270

 

 

 

85

 

 

 

390

 

 

Cruise Ships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

S.S. Crystal Symphony(p)

 

Cruise ship

 

 

4,000

 

 

 

120

 

 

 

8

 

 

 

 

 

S.S. Crystal Serenity(q)

 

Cruise ship

 

 

4,000

 

 

 

90

 

 

 

8

 

 

 

 

 


*                    As of December 31, 2005, unless otherwise noted.

(a)           Approximate.

(b)   Information includes O’Shea’s Casino which is adjacent to this property.

(c)           In November 2005, we entered into an agreement to sell this property. The transaction is expected to close in mid-2006.

14




(d)          In May 2005, Caesars entered into an agreement to sell this property. The transaction is expected to close in the second quarter of 2006.

(e)           We have an 80 percent ownership interest in and manage this property.

(f)             A hotel, in which we own a 12.5% special limited partnership interest, is adjacent to the Metropolis facility. A new 258-room hotel to be owned by us is under construction and is expected to be completed in the second quarter of 2006.

(g)           The property is owned by the Company, leased to the operator, and managed by the Company for the operator for a fee pursuant to an agreement that expires in October 2024. The Bluffs Run Casino will be rebranded as a Horseshoe Casino in connection with a renovation and expansion scheduled for completion in the first quarter of 2006. The greyhound racetrack will retain the Bluff’s Run brand.

(h)          Grand Casino Biloxi and Grand Casino Gulfport are closed due to significant damage by Hurricane Katrina.

(i)             In December 2005, we entered into an agreement to sell this property. The transaction is expected to close during the first quarter of 2006.

(j)              Harrah’s New Orleans reopened on February 17, 2006, after being closed as a result of damages caused by Hurricane Katrina in August 2005. Construction of a 450-room hotel tower is expected to be completed in the third quarter of 2006.

(k)          Harrah’s Lake Charles is closed as a result of significant damage caused by Hurricane Rita in September 2005.

(l)             Managed.

(m)      We will not renew the management agreement for this property when it expires in January 2008.

(n)          We have an 89 percent ownership interest in and manage this property.

(o)          We have a 50 percent interest in Windsor Casino Limited, which manages this property. The province of Ontario owns the complex.

(p)   The agreement to operate the Caesars Palace at Sea casino on this cruise ship owned by Crystal Cruises, Inc. expires in April 2006.

(q)          The agreement to operate the Caesars Palace at Sea casino on this cruise ship owned by Crystal Cruises, Inc. expires in May 2006.

ITEM 3. Legal Proceedings.

In April 2000, the Saint Regis Mohawk Tribe (the “Tribe”) granted Caesars the exclusive rights to develop a casino project in the State of New York.

On April 26, 2000, certain individual members of the Tribe purported to commence a class action proceeding in a “Tribal Court” in Hogansburg, New York, against Caesars seeking to nullify Caesars’ agreement with the Tribe. On March 20, 2001, the “Tribal Court” purported to render a default judgment against Caesars in the amount of $1.787 billion. Three cases resulted from this “Tribal Court” judgment:

·       On June 2, 2000, Caesars filed an action captioned Park Place Entertainment Corporation, et al. vs. Arquette, et al., in the United States District Court for the Northern District of New York seeking to enjoin the dissident Tribal members from proceeding in the “Tribal Court”, and to challenge the judgment. The District Court entered an Order on July 29, 2002 (and a subsequent order on February 11, 2004), affirming that the purported “Tribal Court” is without authority to adjudicate matters of Tribal law.

15




·       On March 29, 2001, Caesars sued the dissident Tribal members in the Supreme Court of the State of New York (subsequently moved to Franklin County, New York) in the case of Park Place Entertainment Corporation, et al. vs. Marlene Arquette, et al., alleging malicious defamation and prima facie tort in connection with the “Tribal Court” proceedings seeking compensatory and punitive damages. Defendants asserted a counterclaim alleging the action was commenced in violation of New York’s Civil Rights Law.

·       On June 27, 2001, certain individual members of the Tribe commenced an action in United States District Court for the Northern District of New York against Caesars, seeking recognition and enforcement of the purported March 20, 2001, $1.787 billion “Tribal Court” default judgment. Caesars has taken the position that the purported “Tribal Court” in which the proceeding has been invoked is an invalid forum and is not recognized by the lawful government of the Saint Regis Mohawk Tribe.

Prior to our acquisition of Caesars in June 2005, each of the above matters was settled, pending final court approval and execution of documents and mutual releases.

On November 13, 2000, Catskill Development, LLC, Mohawk Management, LLC and Monticello Raceway Development Company, LLC (collectively, “Catskill Development”) filed an action captioned Catskill Development LLC, et al. vs. Park Place Entertainment Corporation, et al., against Caesars in the United States District Court for the Southern District of New York. Catskill Development alleges tortious interference with contract and prospective business relationships, unfair competition and state anti-trust violations pertaining to a proposed gaming facility to be developed by Catskill Development and the Tribe, and seeks over $2 billion in compensatory damages and over $2 billion in punitive damages. The District Court granted summary judgment to Caesars and dismissed the complaint in its entirety. The plaintiffs appealed the District Court’s decision to the United States Court of Appeals for the Second Circuit, where it is currently waiting a decision. The Company believes this matter to be without merit and will continue to vigorously contest the case.

On October 15, 2001, Scutti Enterprises, LLC (“Scutti”) filed an action against Caesars in the Supreme Court of the State of New York, County of Monroe (subsequently removed to United States District Court for the Western District of New York). The action arises out of Scutti’s efforts to redevelop and manage the Tribe’s Mohawk Bingo Palace. Scutti alleges tortious interference with contract and prospective business relationships, unfair competition and state anti-trust violations and seeks over $500 million in compensatory damages and unspecified punitive damages. The District Court entered summary judgment, in Caesars favor, on all of the claims. Currently, the matter is before the United States Court of Appeals for the Second Circuit related solely to the claim for tortuous interference with prospective business relations. The Company believes this matter to be without merit and will continue to vigorously contest this matter.

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

ITEM 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

16




PART II

ITEM 5. Market for the Company’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed on the New York Stock Exchange and traded under the ticker symbol “HET.” Our common stock is also listed on the Chicago Stock Exchange, the Pacific Exchange and the Philadelphia Stock Exchange.

The following table sets forth the high and low sales prices per share of our common stock, as reported by the New York Stock Exchange, for the last two fiscal years:

 

 

High

 

Low

 

2005

 

 

 

 

 

First Quarter

 

$

70.20

 

$

61.72

 

Second Quarter

 

75.05

 

63.36

 

Third Quarter

 

79.69

 

62.90

 

Fourth Quarter

 

72.32

 

57.29

 

2004

 

 

 

 

 

First Quarter

 

$

56.40

 

$

48.90

 

Second Quarter

 

57.50

 

50.86

 

Third Quarter

 

55.21

 

43.94

 

Fourth Quarter

 

67.25

 

52.78

 

 

The approximate number of holders of record of our common stock as of February 27, 2006, was 9,634.

The following table sets forth the dates and amounts of cash dividends per share paid by the Company during the last two fiscal years:

 

 

Record Date

 

Paid On

 

2005

 

 

 

 

 

$0.33

 

February 9, 2005

 

February 23, 2005

 

  0.33

 

May 11, 2005

 

May 25, 2005

 

  0.3625

 

August 10, 2005

 

August 24, 2005

 

  0.3625

 

November 9, 2005

 

November 23, 2005

 

2004

 

 

 

 

 

$0.30

 

February 11, 2004

 

February 25, 2004

 

  0.30

 

May 12, 2004

 

May 26, 2004

 

  0.33

 

August 11, 2004

 

August 25, 2004

 

  0.33

 

November 10, 2004

 

November 24, 2004

 

 

We did not repurchase any shares of our common stock in 2005.

17




ITEM 6. Selected Financial Data.

The selected financial data set forth below for the five years ended December 31, 2005, should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto.

(In millions, except common stock data
and financial percentages and ratios)

 

 

 

2005(a)

 

2004(b)

 

2003(c)

 

2002(d)

 

2001(e)

 

Compound
Growth
Rate

 

OPERATING DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

7,111.0

 

$

4,548.3

 

$

3,948.9

 

$

3,747.9

 

$

3,317.4

 

 

21.0

  %

 

Income from operations

 

979.7

 

791.1

 

678.8

 

708.7

 

521.8

 

 

17.1

  %

 

Income from continuing operations

 

263.5

 

329.5

 

261.1

 

282.2

 

173.8

 

 

11.0

  %

 

Net income

 

236.4

 

367.7

 

292.6

 

235.0

 

209.0

 

 

3.1

  %

 

COMMON STOCK DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share–diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From continuing operations

 

1.75

 

2.92

 

2.36

 

2.48

 

1.50

 

 

3.9

  %

 

Net income

 

1.57

 

3.26

 

2.65

 

2.07

 

1.81

 

 

(3.5

)%

 

Cash dividends declared per share

 

1.39

 

1.26

 

0.60

 

 

 

 

N/M

 

 

FINANCIAL POSITION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

20,517.6

 

8,585.6

 

6,578.8

 

6,350.0

 

6,128.6

 

 

35.3

  %

 

Long-term debt

 

11,038.8

 

5,151.1

 

3,671.9

 

3,763.1

 

3,719.4

 

 

31.3

  %

 

Stockholders’ equity

 

5,665.1

 

2,035.2

 

1,738.4

 

1,471.0

 

1,374.1

 

 

42.5

  %

 

FINANCIAL PERCENTAGES AND RATIOS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on revenues–continuing

 

3.7

%

7.2

%

6.6

%

7.5

%

5.2

%

 

 

 

 

Return on average invested capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

3.9

%

8.2

%

8.0

%

8.9

%

7.5

%

 

 

 

 

Net income

 

3.7

%

8.0

%

7.6

%

6.9

%

7.3

%

 

 

 

 

Return on average equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

6.4

%

17.5

%

16.0

%

19.3

%

12.9

%

 

 

 

 

Net income

 

5.7

%

19.5

%

18.0

%

16.1

%

15.5

%

 

 

 

 

Ratio of earnings to fixed charges(f)

 

1.9

 

2.7

 

2.6

 

2.7

 

2.0

 

 

 

 

 


N/M                           =Not Meaningful

Note references are to our Notes to Consolidated Financial Statements. See Item 8.

(a)           2005 includes $248.8 million in pretax charges for write-downs, reserves and recoveries (see Note 10), $55.0 million in pretax charges related to our acquisition of Caesars Entertainment, Inc., and $3.3 million in pretax charges for premiums paid for, and write-offs associated with, debt retired before maturity. 2005 also includes the financial results of Caesars Entertainment, Inc., from its June 13, 2005, date of acquisition.

(b)          2004 includes $9.6 million in pretax charges for write-downs, reserves and recoveries (see Note 10) and $2.3 million in pretax charges related to our pending acquisition of Caesars Entertainment, Inc. 2004 also includes the financial results of Horseshoe Gaming Holding Corp. from its July 1, 2004, date of acquisition.

(c)           2003 includes $10.5 million in pretax charges for write-downs, reserves and recoveries (see Note 10) and $19.1 million in pretax charges for premiums paid for, and write-offs associated with, debt retired before maturity.

18




(d)          2002 includes $4.5 million in pretax charges for write-downs, reserves and recoveries, a $6.1 million pretax charge for our exposure under a letter of credit issued on behalf of National Airlines, Inc., and a charge of $91.2 million, net of tax benefits of $2.8 million, related to a change in accounting principle. 2002 also includes the financial results of Jazz Casino Company LLC from the date of our acquisition of a majority ownership interest on June 7, 2002.

(e)           2001 includes $17.2 million in pretax charges for write-downs, reserves and recoveries and $26.2 million of pretax income from dispositions of nonstrategic assets and the settlement of a contingency related to a former affiliate. 2001 also includes the financial results of Harveys Casino Resorts from its July 31, 2001, date of acquisition.

(f)             Ratio computed based on Income from continuing operations. For details of the computation of this ratio, see Exhibit 12 to our Form 10-K for the year ended December 31, 2005.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Harrah’s Entertainment, Inc., a Delaware corporation, was incorporated on November 2, 1989, and prior to such date operated under predecessor companies. As of December 31, 2005, we operated 39 casinos primarily under the Harrah’s, Caesars and Horseshoe brand names. Our casinos include land-based casinos and casino hotels, dockside and riverboat casinos, a greyhound racetrack, a thoroughbred racetrack, managed casinos and casinos on cruise ships. We also own four casinos that were closed as of December 31, 2005, due to damage from hurricanes in third quarter 2005.

In this discussion, the words “Harrah’s Entertainment,” “Company,” “we,” “our,” and “us” refer to Harrah’s Entertainment, Inc., together with its subsidiaries where appropriate.

OVERVIEW

2005 was a transformational year for Harrah’s Entertainment as we consummated our acquisition of Caesars Entertainment, Inc. (“Caesars”) on June 13, 2005, and became the world’s largest provider of branded casino entertainment. As a larger company, our strategy is to focus on exploiting the value of our five major brands–Harrah’s, Caesars, Horseshoe, Total Rewards and the World Series of Poker. As we study markets in which we operate, or may operate, we will brand casinos tailored to customers in each market. We are already using our most internationally recognized brand, Caesars, in development plans for several integrated resorts in international jurisdictions. We believe that the customer-relationship marketing and business-intelligence capabilities fueled by Total Rewards, our customer loyalty program, are constantly bringing us closer to our customers so we better understand their preferences, and from that understanding, we are able to improve entertainment experiences we offer accordingly.

Certain events that affected our 2005 results, or that may affect future results, are listed below. These items are discussed in greater detail elsewhere in our discussion of operating results and in the Debt and Liquidity section.

·       On June 13, 2005, we completed our acquisition of Caesars, adding 15 properties to our portfolio. The purchase price allocation process began in June 2005 and will be completed within one year of the date of the acquisition. The results of the Caesars properties are included with our operating results subsequent to their acquisition. We immediately began the integration and conversion of systems, customer databases and operations in order to achieve synergies and increase market share and visitation.

·       On August 29, 2005, Hurricane Katrina hit the Gulf Coast, causing significant damage to our assets in Biloxi and Gulfport, Mississippi. Our assets in New Orleans also sustained damage, and we suffered various losses as a result of Hurricane Katrina. Then on September 24, 2005, Hurricane

19




Rita hit the Gulf Coast, causing significant damage to our assets in Lake Charles, Louisiana. At December 31, 2005, all four properties remained closed.

·       On April 26, 2005, we sold the assets and certain related liabilities of Harrah’s East Chicago and Harrah’s Tunica to an unrelated third party. Results for Harrah’s East Chicago and Harrah’s Tunica are presented as discontinued operations for all periods presented. We reported a pretax gain of approximately $119.6 million on the sale of these two properties in the second quarter of 2005.

·       Charges of $287.9 million were taken in fourth quarter 2005 to write off the goodwill and other intangible assets for Harrah’s Lake Charles, Harrah’s Louisiana Downs, Grand Casino Biloxi and Grand Casino Gulfport. Of the total charges, $194.7 million are reported in Write-downs, reserves and recoveries. Charges for Grand Casino Gulfport of $78.6 million, after taxes, are reported in Discontinued operations.

·       During 2005, we issued $1.0 billion of 5.625% Senior Notes, $750 million of 5.75% Senior Notes and $250 million of Senior Floating Rate Notes to finance our acquisitions, to reduce our effective interest rate and/or lengthen debt maturities.

·       We retired $990.5 million of our 7.875% Senior Notes. Charges of $3.3 million for premiums paid and the write-off of unamortized deferred financing costs related to the 7.875% Senior Notes were charged to Income from continuing operations.

·       On December 23, 2005, we acquired the assets of the Imperial Palace Hotel & Casino (“Imperial Palace”) in Las Vegas, Nevada. The Imperial Palace occupies an 18.5 acre site on the Las Vegas Strip that is situated between Harrah’s Las Vegas and the Flamingo and is across the Strip from Caesars Palace. This acquisition is one of a number of moves designed to strategically position the Company for development in Las Vegas.

·       We announced intentions to pursue development opportunities for international resorts in Singapore, the Bahamas, Spain and Slovenia, each in cooperation with local developers and operators.

OVERALL OPERATING RESULTS

The results of Harrah’s East Chicago and Harrah’s Tunica, through the date of their sale in April 2005, are presented in Discontinued operations for all periods presented, and beginning June 13, 2005, the operating results of Reno Hilton, Flamingo Laughlin, Grand Casino Gulfport and a hotel in Halifax, Nova Scotia, through its sale in November 2005, are also presented in Discontinued operations. The discussion that follows is related to our continuing operations.

 

 

 

 

 

 

 

 

Percentage
Increase/(Decrease)

 

(In millions, except earnings per share)

 

2005

 

2004

 

2003

 

05 vs 04

 

04 vs 03

 

Casino revenues

 

$

6,071.5

 

$

4,077.7

 

$

3,458.4

 

 

48.9

  %

 

 

17.9

  %

 

Total revenues

 

7,111.0

 

4,548.3

 

3,948.9

 

 

56.3

  %

 

 

15.2

  %

 

Income from operations

 

979.7

 

791.1

 

678.8

 

 

23.8

  %

 

 

16.5

  %

 

Income from continuing operations

 

263.5

 

329.5

 

261.1

 

 

(20.0

)%

 

 

26.2

  %

 

Net income

 

236.4

 

367.7

 

292.6

 

 

(35.7

)%

 

 

25.7

  %

 

Earnings per share—diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From continuing operations

 

1.75

 

2.92

 

2.36

 

 

(40.1

)%

 

 

23.7

  %

 

Net income

 

1.57

 

3.26

 

2.65

 

 

(51.8

)%

 

 

23.0

  %

 

Operating margin

 

13.8

%

17.4

%

17.2

%

 

(3.6

)pts

 

 

0.2

  pt

 

 

20




2005 included results from properties acquired in the Caesars acquisition subsequent to June 13, 2005, and a full year’s results from properties acquired from Horseshoe Gaming Holding Corp. (“Horseshoe Gaming”) on July 1, 2004. Caesars properties contributed $2.1 billion in revenues and $321.4 million in income from operations in the approximate six months that we owned them in 2005. The properties acquired from Horseshoe Gaming contributed $882.2 million in revenues and $169.6 million in income from operations in 2005 vs. $416.6 million in revenues and $79.1 million in income from operations in the six months that we owned them in 2004. 2005 results were also affected by the loss of revenues and income from operations from four properties closed due to hurricane damage. Excluding results from properties acquired from Caesars and Horseshoe Gaming and from properties closed due to hurricane damage, revenues were 4.3% higher than in 2004; however, income from operations and net income were lower due to a charge in 2005 for impairment of intangible assets.

In 2004, total revenues increased for the seventh consecutive year and were 15.2% higher than in 2003, primarily as a result of the acquisition of Horseshoe Gaming on July 1, 2004, strong results from our properties in Southern Nevada and organic growth at most of our properties. We define organic growth as year-over-year increase in gaming revenues for properties that we have owned and operated for both periods. Our 2004 income from operations was 16.5% higher than in 2003, driven by increased revenues and lower gaming taxes at our Bluffs Run property as a result of legislation that settled an issue related to gaming taxes for casinos at racetracks. Net income increased 25.7% and diluted earnings per share increased 23.0% over our 2003 results.

HURRICANE DAMAGE

Grand Casino Biloxi and Grand Casino Gulfport

On August 29, 2005, Hurricane Katrina hit the Gulf Coast, causing significant damage to our assets in Biloxi and Gulfport, Mississippi. We plan to rebuild in Biloxi, but at this time we are unable to determine the amount of time needed to reconstruct the damaged assets. In December 2005, we reached an agreement to sell the Gulfport assets in their “as is” condition. Harrah’s Entertainment will retain all insurance proceeds related to the Gulfport property. Insurance covers the repair or replacement of our assets that suffered loss or damages. The deductible under these policies is $15 million. We are working closely with our insurance carriers and claims adjusters to ascertain the full amount of insurance proceeds due to us as a result of the damages and losses. Based on current estimates, insurance proceeds are expected to equal or exceed the net book value of the impacted assets; therefore, we do not expect to record a loss after insurance recoveries. Our insurance policies also provide coverage for interruption to our business, including lost profits, and reimbursement for other expenses and costs we have incurred relating to the damages and losses suffered. Due to our expectation that the costs incurred in the aftermath of the storm will be less than the anticipated business interruption insurance proceeds, post-storm costs are being offset by the expected recovery, and there is no current income statement impact. To the extent that business interruption proceeds ultimately exceed the costs incurred, the excess is expected to be recorded as income in the line item, “Write-downs, reserves and recoveries.”  We have written off property and inventories that were destroyed by Hurricane Katrina and recorded receivables in anticipation of insurance proceeds that will reimburse us for those losses and for expenses that we expect to recover under our insurance programs. As of December 31, 2005, we had received approximately $69.5 million in advances from our insurance carriers related to the Mississippi Gulf Coast properties and had net receivables of $174.5 million for which we believe collection is probable. Intangible assets of $88.7 million related to Grand Casino Biloxi and $93.2 million related to Grand Casino Gulfport were written off in the fourth quarter of 2005.

21




Harrah’s New Orleans

Our assets in New Orleans sustained damage, and we suffered various losses as a result of Hurricane Katrina. At December 31, 2005, the casino remained closed, but the property reopened on February 17, 2006. Insurance covers the repair or replacement of our assets that suffered loss or damage, and we are working closely with our insurance carriers and claims adjusters to ascertain the full amount of insurance proceeds due to us as a result of the damages and the loss the Company suffered. Our insurance policies also provide coverage for interruption to our business, including lost profits, and reimbursement for other expenses and costs that we have incurred relating to the damages and loss we have suffered. The combined property damage and business interruption deductible under the policies insuring the New Orleans assets is $10 million. Based on loss estimates and expenses incurred, we have recorded $22.8 million in charges in the line item, “Write-downs, reserves and recoveries.”  As of December 31, 2005, approximately $16.9 million in advances had been received from our insurance carriers, and we had net receivables of $21.3 million for which we believe collection is probable.

A 450-room luxury hotel that is under construction adjacent to the casino facility also sustained damage due to Hurricane Katrina. We have a separate Builders’ Risk insurance policy that covers costs associated with repairing any damage. The deductible under this policy is $250,000. We recorded a charge of $250,000 in the third quarter in the line item, “Write-downs, reserves and recoveries.”  The time required to resume construction, as well as the increased demands for construction labor and materials in the market, could cause the cost of the construction to increase and the time to complete the construction to be extended. Construction resumed in fourth quarter 2005, and we expect the hotel to open in third quarter 2006.

Harrah’s Lake Charles

On September 24, 2005, Hurricane Rita hit the Gulf Coast, causing significant damage to our assets in Lake Charles, Louisiana. Insurance covers the repair or replacement of our assets that suffered loss or damage and provides coverage for interruption to our business, including lost profits. The deductible of $10 million under the policies that cover our damages and losses in Lake Charles applies both to physical damage and to business interruption. Based on estimates to date, losses have exceeded the deductible under this insurance policy, and we recorded $16.9 million in charges related to Lake Charles in the line item, “Write-downs, reserves and recoveries.” We have written off property and inventories that were destroyed by Hurricane Rita and recorded receivables in anticipation of insurance proceeds that will reimburse us for those losses and for expenses that we expect to recover under our insurance programs. As of December 31, 2005, approximately $14.7 million in advances had been received from our insurance carriers, and we had net receivables of $42.9 million for which we believe collection is probable. In our review of goodwill and other intangible assets completed during fourth quarter 2005, we determined that the entire $56 million of goodwill carried at Lake Charles was impaired, and it was written off.

22




REGIONAL RESULTS AND DEVELOPMENT PLANS

The executive decision makers of our Company review operating results, assess performance and make decisions related to the allocation of resources on a property-by-property basis. We, therefore, consider each property to be an operating segment and that it is appropriate to aggregate and present the operations of our Company as one reportable segment. In order to provide more detail in a more understandable manner than would be possible on a consolidated basis, our properties have been grouped as follows to facilitate discussion of our operating results:

West

 

East

 

North Central

 

South Central

 

Managed/Other

Harrah’s Reno

 

Harrah’s Atlantic City

 

Harrah’s Joliet

 

Harrah’s Lake Charles(2)

 

Harrah’s Ak-Chin

Harrah’s/Harveys
Lake Tahoe

 

Showboat Atlantic
City

 

Harrah’s North Kansas
City

 

Harrah’s New
Orleans(2)

 

Harrah’s Cherokee
Harrah’s Prairie

Bill’s
Harrah’s Las Vegas

 

Caesars Atlantic City(1)
Bally’s Atlantic City(1)

 

Harrah’s Council Bluffs
Bluffs Run

 

Harrah’s Louisiana
Downs

 

Band
Harrah’s Rincon

Rio

 

 

 

Harrah’s St. Louis

 

Horseshoe Bossier City

 

Punta del Este

Harrah’s Laughlin

 

 

 

Harrah’s Metropolis

 

Horseshoe Tunica

 

(Uruguay)(1)

Caesars Palace(1)

 

 

 

Horseshoe Hammond

 

Grand Tunica(1)

 

Windsor(1)

Paris(1)
Bally’s Las Vegas(1)

 

 

 

Caesars Indiana(1)

 

Sheraton Tunica(1)
Grand Biloxi(1)(2)

 

S.S. Crystal
Symphony(1)(4)

Flamingo Las Vegas(1)
Reno Hilton(1)(3)

 

 

 

 

 

Grand Gulfport(1)(2)(3)

 

S.S. Crystal
Serenity(1)(4)

Flamingo Laughlin(1)(3)

 

 

 

 

 

 

 

 

Imperial Palace

 

 

 

 

 

 

 

 

 


(1)             Acquired from Caesars.

(2)             Closed due to hurricanes as of December 31, 2005.

(3)             Included in Discontinued operations.

(4)             Agreements to operate the Caesars Palace at Sea casinos on cruise ships owned by Crystal Cruises, Inc. expire in the second quarter of 2006.

West Results

 

 

 

 

 

 

 

 

Percentage
Increase/(Decrease)

 

(In millions)

 

 

 

2005

 

2004

 

2003

 

05 vs 04

 

04 vs 03

 

Casino revenues

 

$

1,544.3

 

$

1,040.8

 

$

904.7

 

 

48.4

%

 

 

15.0

%

 

Total revenues

 

2,565.7

 

1,514.9

 

1,346.7

 

 

69.4

%

 

 

12.5

%

 

Income from operations

 

544.5

 

306.0

 

220.8

 

 

77.9

%

 

 

38.6

%

 

Operating margin

 

21.3

%

20.2

%

16.4

%

 

1.1

 pts

 

 

3.8

 pts

 

 

Southern Nevada

The increases in 2005 revenues and income from operations over 2004 were due primarily to the inclusion of results from properties acquired in our Caesars acquisition. Caesars properties contributed $975.5 million in revenues and $192.7 million in income from operations to our Southern Nevada results in 2005. Excluding the properties acquired from Caesars, our Southern Nevada properties revenues and income from operations increased 6.2% and 15.0%, respectively, driven by strong cross-market play and increased customer traffic at the Rio from the World Series of Poker. We define cross-market play as gaming by customers at Harrah’s Entertainment properties other than their “home” casino. On March 10, 2005, we terminated our operating agreement with MTR Gaming Group, Inc. for operation of the Las Vegas Horseshoe. Operating results for the Las Vegas Horseshoe were consolidated with our results from April 1, 2004, until March 10, 2005; however, those results were not material to our operating results.

23




Construction was completed in August 2005 on a 949-room, 26-story hotel tower and convention center at Caesars Palace. This project also included a fourth swimming pool, the upgrade and expansion of existing hotel registration areas, a VIP lounge, wedding chapels, new retail space and new dining and restaurant facilities.

The increases in revenues and income from operations in 2004 were driven by strong cross-market play at, and cross-property play between, Harrah’s Las Vegas and the Rio, room pricing trends in Las Vegas, record revenues at Harrah’s Laughlin and revenues from Las Vegas Horseshoe, which opened under our management on April 1, 2004. 2004 income from operations for our Southern Nevada properties was 48.7% higher than in 2003 as a result of the higher revenues and improved operating margins.

Northern Nevada

Combined 2005 revenues from our Northern Nevada properties were 0.9% higher in 2005 than in 2004, and income from operations was 11.8% higher than in 2004. Strong visitation to the market, an effective summer concert series and a celebrity golf tournament contributed to the higher results.

In 2004, revenues from our Northern Nevada properties were 1.2% higher than in 2003, and income from operations was 8.3% higher than in 2003.

In our 2003 annual assessment of goodwill and other nonamortizing intangible assets, we determined that the remaining goodwill associated with our Reno property was impaired. A charge of approximately $6.3 million, representing the remaining unamortized goodwill at Reno, was taken in the fourth quarter of 2003 for this impairment.

East Results

 

 

 

 

 

 

 

 

Percentage
Increase/(Decrease)

 

(In millions)

 

 

 

2005

 

2004

 

2003

 

05 vs 04

 

04 vs 03

 

Casino revenues

 

$

1,540.4

 

$

832.6

 

$

817.1

 

 

85.0

  %

 

 

1.9

  %

 

Total revenues

 

1,485.7

 

780.9

 

781.3

 

 

90.3

  %

 

 

(0.1

)%

 

Income from operations

 

355.5

 

199.8

 

217.3

 

 

77.9

  %

 

 

(8.1

)%

 

Operating margin

 

23.9

%

25.6

%

27.8

%

 

(1.7

)pts

 

 

(2.2

)pts

 

 

Caesars properties in the East contributed $651.2 million in revenues and $140.1 million in income from operations in 2005. Excluding results from the properties acquired from Caesars, 2005 revenues for our Atlantic City properties increased 6.9% over last year, and income from operations was up 7.8% over 2004. Effective marketing programs and recent capital investments at the Showboat drove the 2005 increases.

Construction was completed in July 2005 on a House of Blues Club at our Showboat property in Atlantic City. This project added a range of amenities to the property, including a concert hall, nightclub and restaurant, and a private member “Foundation Room.”

At Caesars Atlantic City, a new parking garage adjacent to the casino opened July 1, 2005.

2004 revenues at our East properties were level with 2003 and income from operations was down by 8.1% from 2003. Showboat’s revenues and income from operations, which were 2.8% and 7.7%, respectively, higher than in 2003, were aided by a new hotel tower that opened in second quarter 2003 and 450 slot machines that were added in third quarter 2003. Harrah’s Atlantic City’s revenues and income from operations were 2.4% and 18.0%, respectively, lower than in 2003. Harrah’s Atlantic City was more

24




directly affected than Showboat by a new competitor in the Atlantic City market. In addition, results at our Atlantic City properties were impacted by a month-long labor strike during fourth quarter 2004.

North Central Results

 

 

 

 

 

 

 

 

Percentage
Increase/(Decrease)

 

(In millions)

 

 

 

2005

 

2004

 

2003

 

05 vs 04

 

04 vs 03

 

Casino revenues

 

$

1,774.6

 

$

1,323.0

 

$

1,089.2

 

 

34.1

  %

 

 

21.5

%

 

Total revenues

 

1,734.4

 

1,299.9

 

1,070.4

 

 

33.4

  %

 

 

21.4

%

 

Income from operations

 

296.1

 

249.3

 

189.6

 

 

18.8

  %

 

 

31.5

%

 

Operating margin

 

17.1

%

19.2

%

17.7

%

 

(2.1

)pts

 

 

1.5

 pts

 

 

Harrah’s East Chicago was sold in April 2005. Due to the sale of this property, results of Harrah’s East Chicago through the date of its sale are classified as discontinued operations, and the property is not included in our North Central grouping.

Increases in revenues and income from operations in 2005 were driven by results from Caesars Indiana subsequent to its acquisition on June 13, 2005, and a full year’s results from Horseshoe Hammond, which was acquired on July 1, 2004. Caesars Indiana contributed $174.1 in revenues and $28.6 million in income from operations to 2005 North Central results.

In 2004, the increases in revenues and income from operations at our North Central properties were driven by the acquisition of Horseshoe Hammond and lower gaming taxes at our Bluffs Run property as a result of legislation that settled an issue related to gaming taxes for casinos at racetracks.

Chicagoland/Illinois

Combined 2005 revenues and income from operations at Harrah’s Joliet, Harrah’s Metropolis and Horseshoe Hammond were 40.4% and 44.1% higher, respectively, than 2004 levels due to Horseshoe Hammond, which was acquired on July 1, 2004. Horseshoe Hammond contributed $392.7 million in revenues and $79.0 million in income from operations in 2005 and $184.8 million in revenues and $36.8 in income from operations for the six months of 2004.

Construction is underway on a 258-room hotel and event center at Harrah’s Metropolis. This project is expected to cost approximately $70 million and completion is targeted for second quarter 2006. As of December 31, 2005, $32.2 million had been spent on this project.

Combined revenues for 2004 were 50.4% higher than combined revenues for 2003, and combined income from operations was 38.3% higher than 2003 due to results from Horseshoe Hammond subsequent to its acquisition. Excluding results of Horseshoe Hammond, combined 2004 revenues were up 3.1% and income from operations was down 11.1% from 2003 as a result of increases in state gaming taxes, admission taxes and increased marketing costs.

Missouri

Combined 2005 revenues at our Missouri properties increased 6.1%, but income from operations was 6.6% lower than in 2004. The increase in revenues was driven by gains at Harrah’s St. Louis, where a 210-room hotel tower opened in third quarter 2004. This expansion project also included a redesigned hotel lobby, new valet parking areas, the addition of parking garage express ramps and expansion of two restaurants and other amenities. Revenue gains were seen in the second half of 2005 at our North Kansas City property due to recent capital investments, including a $126 million expansion and property enhancement project that added a 206-room hotel addition in August 2005 and new restaurants and other amenities in the fourth quarter of 2005. Income from operations was affected by the competitive

25




promotional environment in the St. Louis market and construction disruptions at Harrah’s North Kansas City.

2004 revenues at our Missouri properties were 3.9% higher than in 2003, due to higher revenues at our St. Louis property, but income from operations was 5.8% below 2003. Gains at our St. Louis property, driven by recent capital investments including a new hotel tower, our Total Rewards program and improvements made to the slot floor, were more than offset by declines at our North Kansas City property where recent capital improvements by two competitors impacted results.

Iowa

Revenues for 2005 from our Iowa properties were 2.0% below 2004 revenues, and income from operations was down 32.3% due to construction disruptions at the Bluffs Run Casino and a favorable gaming tax accrual adjustment in 2004, partially offset by lower gaming taxes in 2005 following the resolution of the gaming tax rate issues discussed below. Approximately $20.3 million had been accrued for state gaming taxes that we did not have to pay, and in first quarter 2004, $3.7 million, representing the adjustment for 2004, was credited to the property’s income from operations and $16.6 million, representing the adjustment for prior periods, was credited to Write-downs, reserves and recoveries.

Casinos at racetracks in Iowa historically had been taxed at a higher rate (36% in 2004) than the casinos on riverboats operating in Iowa (20%). The Iowa Supreme Court issued an opinion in June 2002 that this disparity was unconstitutional. The State appealed the Iowa Supreme Court’s decision to the United States Supreme Court and in June 2003, the United States Supreme Court overturned the ruling and remanded the case back to the Iowa Supreme Court for further consideration. In February 2004, the Iowa Supreme Court ruled that the disparity violates the Iowa Constitution, a ruling the State appealed to the United States Supreme Court in April 2004. The United States Supreme Court declined to hear this case.

In April 2004, the Iowa legislature passed legislation to effectively settle the issues regarding the gaming tax rates. The new legislation provides for a tax rate of 22% for both riverboats and racetracks effective July 1, 2004. However, racetracks have the option to conduct table games and video games that simulate table games by paying a $10 million fee to the State and a gaming tax rate of 24%. Twenty percent of the $10 million fee could be used to offset wagering taxes for each of the five fiscal years beginning July 1, 2008. We plan to add table games to the Bluffs Run facility in conjunction with the rebranding, renovation and expansion of that facility (see discussion below), and in second quarter 2005, we paid the $10 million fee to the State.

In accordance with previous agreements and as additional purchase price consideration, a payment of approximately $73 million was made to Iowa West Racing Association (“Iowa West”), the entity holding the pari-mutuel and gaming license for the Bluffs Run Casino and with whom we have a management agreement to operate that property. The additional payment to Iowa West increased goodwill attributed to the Bluffs Run property. The payment to Iowa West assumed we will operate table games at Bluffs Run and pay a 24% tax rate; however, Iowa West took the position that the purchase price adjustment should be based on a tax rate of 20%, which would result in an additional $19.6 million payment to Iowa West. The dispute was resolved by arbitration in third quarter 2005, and the arbitrators decided on a 22% tax rate. We paid an additional $7.9 million to Iowa West, which increased goodwill attributed to this property.

Combined 2004 revenues for our Iowa properties were 6.4% higher than in 2003, and income from operations more than doubled in 2003 due to lower gaming taxes in 2004 following the resolution of the gaming tax rate issues discussed above.

In fourth quarter 2004, we announced plans to rebrand the Bluffs Run Casino under the Horseshoe brand as part of an $87 million renovation and expansion of that property. The property’s greyhound

26




racetrack will remain in operation and retain the Bluffs Run brand. Construction began in February 2005 with completion scheduled for the first quarter of 2006. As of December 31, 2005, $51.1 million had been spent on this project.

South Central Results

 

 

 

 

 

 

 

 

Percentage
Increase/(Decrease)

 

(In millions)

 

 

 

2005

 

2004

 

2003

 

05 vs 04

 

04 vs 03

 

Casino revenues

 

$

1,174.2

 

$

880.7

 

$

647.0

 

 

33.3

  %

 

 

36.1

%

 

Total revenues

 

1,168.3

 

875.9

 

659.9

 

 

33.4

  %

 

 

32.7

%

 

Income from operations

 

(28.2

)

123.1

 

92.3

 

 

N/M

 

 

 

33.4

%

 

Operating margin

 

(2.4

)%

14.1

%

14.0

%

 

(16.5

)pts

 

 

0.1

 pt

 


N/M = Not meaningful

Harrah’s Tunica was sold in April 2005. Due to the sale of this property, results of Harrah’s Tunica through the date of its sale are classified as discontinued operations, and the property is not included in our South Central grouping. Grand Gulfport is also included in our discontinued operations and, therefore, not included in our South Central grouping.

On August 29, 2005, Hurricane Katrina hit the Gulf Coast, causing significant damage to our assets in Biloxi and Gulfport, Mississippi. Our assets in New Orleans also sustained damage, and we suffered various losses there as a result of Hurricane Katrina. On September 24, 2005, Hurricane Rita hit the Gulf Coast, causing significant damage to our assets in Lake Charles, Louisiana. As of December 31, 2005, all four properties remained closed. See HURRICANE DAMAGE for further discussion of damage and expected insurance recoveries related to property damage and business interruption.

South Central Caesars properties contributed $221.7 million in revenues and losses from operations of $48.0 million in 2005. Excluding results from the properties acquired from Caesars, 2005 revenues for our South Central properties increased 8.1% from last year, but income from operations was 67.9% below last year driven by fourth quarter 2005 charges for the impairment of goodwill, the effects of Hurricanes Katrina and Rita on our Louisiana properties and loss of results of Harrah’s Shreveport, which was sold in second quarter 2004. Partially offsetting these declines were a full year’s results from Horseshoe Bossier City and Horseshoe Tunica, which were acquired on July 1, 2004, and higher results from Harrah’s Louisiana Downs, where the permanent facility opened in second quarter 2004 with 1,400 slot machines compared to the 900 that were in service prior to that time.

Construction began in second quarter 2004 on a 26-story, 450-room, $150 million hotel tower at Harrah’s New Orleans, which also sustained damage due to Hurricane Katrina. The property does not currently operate a hotel, although it does utilize rooms at third-party hotels. The additional time required to complete construction, as well as the increased demands for construction labor and materials in the market, could cause the cost of the construction to increase. Construction resumed in fourth quarter 2005, and we expect the hotel to open in third quarter 2006. At this time, we are unable to estimate the additional costs, if any, to complete construction. As of December 31, 2005, $90.7 million had been spent on this project.

Combined 2004 revenues and income from operations were higher by 32.7% and 33.4%, respectively, than in 2003 due to results from Horseshoe Bossier City and Horseshoe Tunica subsequent to their July 1, 2004, acquisition and increased revenues from Harrah’s Louisiana Downs, Harrah’s New Orleans and Harrah’s Lake Charles and partially offset by the loss of revenues in 2004 due to the sale of Harrah’s Shreveport. The permanent facility at Harrah’s Louisiana Downs opened in second quarter 2004 with 1,400

27




slot machines. 900 slot machines had been in service since second quarter 2003 at Harrah’s Louisiana Downs.

We perform annual assessments for impairment of goodwill and other intangible assets that are not subject to amortization as of September 30 each year. Based on the historical performance and projected performance of Harrah’s Louisiana Downs, a thoroughbred racetrack that was expanded to include slot machines in 2003, our 2005 analysis indicated that the entire $49.9 million of goodwill associated with this property was impaired, and a charge was recorded to our Consolidated Statement of Income in fourth quarter 2005. Harrah’s Louisiana Downs’ tangible assets were assessed for impairment applying the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and our analysis indicated that the carrying value of the tangible assets was not impaired.

Since our acquisition of the Lake Charles property, competition had intensified in the market and the operating performance was declining. As a result of the operating trends, compounded by the impact of hurricane damage in September 2005, our annual assessment for the impairment of goodwill and other intangible assets indicated that the entire $56.1 million of goodwill was impaired. A charge was recorded to our Consolidated Statement of Income in fourth quarter 2005. (See Note 3 to our Consolidated Financial Statements for a discussion of the recoverability of their tangible assets.)

A charge of $88.7 million was recorded to our Consolidated Statement of Income in fourth quarter 2005 as a result of impairment of intangible assets at Grand Casino Biloxi, which was damaged by Hurricane Katrina.

Due to a decision to sell Harrah’s Shreveport, which was completed in second quarter 2004, we classified that property in Assets held for sale on our Consolidated Balance Sheets and ceased depreciating its assets. Since the Horseshoe Gaming acquisition gave us a continued presence in the Shreveport-Bossier City market, Harrah’s Shreveport’s operating results were not classified as discontinued operations. No gain or loss was recorded on this sale.

On October 27, 2003, we sold Harrah’s Vicksburg and 2003 results for Harrah’s Vicksburg through the date of sale, were included in discontinued operations. A loss of $0.5 million, net of tax, resulted from this sale.

Managed Casinos and Other

 

 

 

 

 

 

 

 

Percentage
Increase/(Decrease)

 

(In millions)

 

 

 

2005

 

2004

 

2003

 

05 vs 04

 

04 vs 03

 

Revenues

 

$

156.9

 

$

76.7

 

$

90.6

 

 

N/M

 

 

 

(15.3

)%

 

(Loss)/income from operations

 

(26.8

)

(16.7

)

11.4

 

 

60.5

%

 

 

N/M

 

 

 


N/M = Not meaningful

In addition to results from our managed casinos, Managed Casinos and Other includes results from Punta del Este and casino operations on three cruise ships, both included in the Caesars acquisition, results from World Series of Poker marketing, our development expenses, brand marketing costs, losses from nonconsolidated subsidiaries and other costs that are directly related to our casino operations and development but are not property specific. The loss from operations in 2005 was primarily due to development costs, which were 75.4% higher than in 2004 due to increased development activities in many jurisdictions, including international jurisdictions, considering allowing development and operation of casinos or casino-like operations. In 2005, we dissolved the joint venture formed in 2003 with Gala Group, a United Kingdom (“UK”) based gaming operator, to develop regional casinos in the UK in response to the UK government’s proposal to restrict development of regional casinos. We will focus on opportunities to develop large-scale destination casino resorts with more than 50,000 square feet of gaming space, as well as

28




hotel rooms, restaurants and entertainment venues (see our discussion below of DEVELOPMENT OF NEW PROJECTS). Development costs for 2004 were 5.6% lower than in 2003 due to changes in or timing of development activities in jurisdictions, including Rhode Island, Pennsylvania and the United Kingdom, that are considering allowing development and operation of casinos or casino-like operations.

In fourth quarter 2004, we suspended operation of LuckyMe, our on-line gaming initiative in the United Kingdom. No material charges were recorded as a result of this action. Losses related to LuckyMe were approximately $9.3 million for 2004.

We manage four tribal casinos. The table below gives the location and expiration date of the current management contracts for our Indian properties as of December 31, 2005.

Casino

 

 

 

Location

 

Expiration of
Management Agreement

Harrah’s Prairie Band

 

near Topeka, Kansas

 

January 2008

Harrah’s Ak-Chin

 

near Phoenix, Arizona

 

December 2009

Harrah’s Rincon

 

near San Diego, California

 

November 2011

Harrah’s Cherokee

 

Cherokee, North Carolina

 

November 2011

 

Revenues from our managed casinos were higher in 2005 primarily due to increased business volume at Harrah’s Rincon following the completion of an expansion project there at the end of 2004 and to management consultant fees from an Australian gaming company pursuant to an agreement assumed in the Caesars acquisition.

In second quarter 2005, we announced that we will not seek to renew the management contract for Harrah’s Prairie Band Casino when it expires in January 2008.

Our 2004 managed casinos and other results were lower than in 2003 due to lower fee structures at some of our managed casinos where management agreements were extended.

A $60 million expansion of Harrah’s Cherokee Smoky Mountains Casino in Cherokee, North Carolina, that included a 15-story hotel tower with approximately 320 rooms opened in July 2005.

A $165 million expansion of the Harrah’s Rincon property was completed in December 2004. The expansion added a 21-story hotel tower with approximately 460 rooms, a spa, a new hotel lobby, additional meeting space, additional casino space and a 1,200-space parking structure.

Construction was completed in August 2004 on a $55 million expansion project at Harrah’s Prairie Band. The expansion includes the addition of approximately 200 hotel rooms, a 12,000-square-foot convention center and a new restaurant.

Construction costs of Indian casinos and hotels have been funded by the tribes or by the tribes’ debt, some of which we guarantee. See DEBT AND LIQUIDITY for further discussion of our guarantees of debt related to Indian projects.

29




Other Factors Affecting Net Income

 

 

 

 

 

 

 

 

Percentage
Increase/(Decrease)

 

(Income)/Expense

 

 

 

2005

 

2004

 

2003

 

05 vs 04

 

04 vs 03

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

Write-downs, reserves and recoveries

 

$

248.8

 

$

9.6

 

$

10.5

 

 

N/M

 

 

 

(8.6

)%

 

Project opening costs

 

16.4

 

9.5

 

7.4

 

 

72.6

%

 

 

28.4

%

 

Corporate expense

 

97.7

 

66.8

 

52.6

 

 

46.3

%

 

 

27.0

%

 

Merger and integration costs for Caesars acquisition

 

55.0

 

2.3

 

 

 

N/M

 

 

 

N/M

 

 

Amortization of intangible assets

 

49.9

 

9.4

 

4.8

 

 

N/M

 

 

 

95.8

%

 

Interest expense, net

 

481.2

 

271.8

 

234.4

 

 

77.0

%

 

 

16.0

%

 

Losses on early extinguishments of debt

 

3.3

 

 

19.1

 

 

N/M

 

 

 

N/M

 

 

Other income

 

(8.0

)

(9.5

)

(2.9

)

 

(15.8

)%

 

 

N/M

 

 

Effective tax rate

 

45.3

%

36.1

%

36.3

%

 

9.2

pts

 

 

(0.2

)pt

 

Minority interests

 

$

11.9

 

$

8.6

 

$

11.6

 

 

38.4

%

 

 

(25.9

)%

 

Discontinued operations, net of income taxes

 

27.1

 

(38.2

)

(31.5

)

 

N/M

 

 

 

20.9

%

 


N/M = Not meaningful

Write-downs, reserves and recoveries include various pretax charges to record asset impairments, contingent liability reserves, project write-offs, demolition costs and recoveries of previously recorded reserves and other non-routine transactions. In 2004, we began tracking demolition costs separate from project opening costs. The components of Write-downs, reserves and recoveries were as follows:

(Income)/Expense

 

 

 

2005

 

2004

 

2003

 

(In millions)

 

 

 

 

 

 

 

Impairment of goodwill and other intangible assets

 

$

194.7

 

$

 

$

6.3

 

Hurricane expense

 

41.5

 

 

 

Contribution to The Harrah’s Foundation

 

10.0

 

10.0

 

 

Write-off of abandoned assets and other costs

 

8.6

 

4.9

 

2.6

 

Demolition costs

 

6.0

 

5.8

 

 

Loss on sale of non-operating assets

 

4.5

 

 

 

Settlement of litigation

 

2.6

 

3.5

 

 

Impairment of long-lived assets

 

1.6

 

 

2.5

 

Recoveries from previously impaired assets and reserved amounts

 

(4.4

)

 

(0.9

)

Termination of contracts

 

(16.3

)

2.0

 

 

Reversal of prior year Iowa gaming tax accrual

 

 

(16.6

)

 

 

 

$

248.8

 

$

9.6

 

$

10.5

 

 

A discussion of the charges for impairment of goodwill and other intangible assets is included in the discussion of our South Central Results.

Hurricane expense includes insurance deductibles on policies for Harrah’s New Orleans and Harrah’s Lake Charles and payroll and benefits that we believe are not reimbursable under our insurance plans.

The Harrah’s Foundation is a 501(c)(3) non-profit corporation that provides charitable contributions to qualifying organizations in the communities where employees of Harrah’s Entertainment and its subsidiaries work. The Harrah’s Foundation was formed in order to centralize all of the various charitable contributions made by the Company and its subsidiaries. The Harrah’s Foundation is governed by a Board of Trustees that is comprised of officers of the Company and its subsidiaries. Larger discretionary donations to The Harrah’s Foundation, which are approved by our Board of Directors, are based on the financial performance of Harrah’s Entertainment.

30




Project opening costs for each of the three years presented include costs incurred in connection with the integration of acquired properties into Harrah’s Entertainment’s systems and technology and costs incurred in connection with expansion and renovation projects at various properties.

Corporate expense increased in 2005 due primarily to increased costs associated with our acquisition of Caesars and higher incentive compensation and aviation expenses. Corporate expense increased 27.0% in 2004 from 2003, primarily due to higher incentive compensation plan expenses, on-going costs related to Sarbanes-Oxley compliance and increased depreciation expense.

Merger and integration costs for the Caesars acquisition include costs for consultants and dedicated internal resources to plan for and execute the merger and integration of Caesars into Harrah’s Entertainment.

Amortization of intangible assets was higher in 2005 due to estimated amortization for intangible assets identified in our preliminary purchase price allocation for the Caesars acquisition. The purchase price allocation will be finalized within one year of the date of the acquisition and estimated amounts are subject to adjustments, which could be material, during that period. Amortization of intangible assets acquired from Horseshoe Gaming on July 1, 2004, also contributed to the increases for 2005 and 2004.

Interest expense increased in 2005 from 2004 due to increased borrowings related to our acquisitions of Caesars and Horseshoe Gaming and to higher interest rates on our variable rate debt. The average interest rate on our variable-rate debt, excluding the impact of our swap agreements, was 5.0% at December 31, 2005, compared to 3.2% at December 31, 2004. A change in interest rates will impact our financial results. For example, assuming a constant outstanding balance for our variable-rate debt for the next twelve months, a hypothetical 1% change in corresponding interest rates would change interest expense for the next twelve months by approximately $39.9 million. Our variable-rate debt, including $500 million of fixed-rate debt for which we have entered into interest rate swap agreements, represents approximately 36% of our total debt, while our fixed-rate debt is approximately 64% of our total debt. (For discussion of our interest rate swap agreements, see DEBT AND LIQUIDITY, Derivative Instruments, Interest Rate Swap Agreements.)  Interest expense was higher in 2004 than in 2003 due to additional debt related to our acquisition of Horseshoe Gaming on July 1, 2004.

The 2005 Losses on early extinguishments of debt represent premiums paid and the write-off of unamortized deferred financing costs associated with the portions of our 7.875% Senior Subordinated Notes due in December 2005 that were retired in February 2005 and in November 2005.

Other income in 2005 includes interest income on the cash surrender value of life insurance policies, receipt of a death benefit and collection of a previously reserved investment. 2004 Other income included interest income on the cash surrender value of life insurance policies, benefits from a life insurance policy, interest income related to the sale of land and other miscellaneous non-operating items. 2003 Other income included interest income on the cash surrender value of life insurance policies and settlement of a litigation claim, partially offset by benefits from a life insurance policy.

Our effective tax rate for 2005 was affected by non-deductible goodwill impairment charges, the change in the mix of taxable income among various states and the addition of foreign income subsequent to our acquisition of Caesars.

Minority interests reflect minority owners’ shares of income from our majority-owned subsidiaries.

Discontinued operations reflect the results of Harrah’s East Chicago and Harrah’s Tunica through the date of their sale in April 2005, including the gain on the sale, and beginning June 13, 2005, the operating results of Reno Hilton, Flamingo Laughlin, Grand Casino Gulfport and a hotel in Halifax, Nova Scotia through its sale in November 2005. Results for Grand Casino Gulfport include the write-off of $78.6 million, after taxes, for the impairment of intangible assets. (See Notes 3 and  4 to our Consolidated Financial Statements.)

31




STRATEGIC ACQUISITIONS

In the three-year period ended December 31, 2005, we acquired two casino companies, a casino in Las Vegas, Nevada, and certain intellectual property rights. For each of these acquisitions, the purchase price is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. We determine the estimated fair values based on independent appraisals, discounted cash flows, quoted market prices and estimates made by management. For each transaction, the allocation of the purchase price was, or will be, completed within one year from the date of the acquisition. To the extent that the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired, such excess is allocated to goodwill. Goodwill and intangible assets that are determined to have an indefinite life are not amortized.

The table below summarizes our acquisition transactions completed in the three-year period ending December 31, 2005.  Following the table is a brief review of our acquisitions. All of our acquisition transactions were accounted for as purchases.

Company

 

 

 

Date
Acquired

 

Total
Purchase
Price(a)

 

Goodwill
Assigned

 

Number
of
Casinos

 

Geographic
Location

Imperial Palace

 

December 2005

 

$373 million

 

 

 

1

 

 

Las Vegas, Nevada

Caesars

 

June 2005

 

$9.3 billion

 

$2.0 billion

 

 

15

 

 

Atlantic City, New Jersey(2)

 

 

 

 

 

 

 

 

 

 

 

 

Las Vegas, Nevada(4)

 

 

 

 

 

 

 

 

 

 

 

 

Reno, Nevada

 

 

 

 

 

 

 

 

 

 

 

 

Laughlin, Nevada

 

 

 

 

 

 

 

 

 

 

 

 

Biloxi, Mississippi(b)

 

 

 

 

 

 

 

 

 

 

 

 

Gulfport, Mississippi(c)

 

 

 

 

 

 

 

 

 

 

 

 

Tunica, Mississippi(2)

 

 

 

 

 

 

 

 

 

 

 

 

Southern Indiana

 

 

 

 

 

 

 

 

 

 

 

 

Punta del Este, Uruguay(d)

 

 

 

 

 

 

 

 

 

 

 

 

Ontario, Canada(e)

Horseshoe Gaming

 

July 2004

 

$1.6 billion

 

$584 million

 

 

3

 

 

Bossier City, Louisiana

 

 

 

 

 

 

 

 

 

 

 

Hammond, Indiana

 

 

 

 

 

 

 

 

 

 

 

Tunica, Mississippi

Horseshoe Club Operating Company

 

March 2004

 

$37 million

 

 

 

 

 

 

(f)


(a)           Total purchase price includes the market value of debt assumed determined as of the acquisition date.

(b)           Closed due to hurricane damage in August 2005.

(c)            Closed due to hurricane damage in August 2005. Remaining assets to be sold.

(d)   We have an approximate 89% ownership interest in the company that owns Conrad Punta del Este and we manage the property.

(e)           We have a 50% interest in the company that manages Casino Windsor. The province of Ontario owns the complex.

(f)             This acquisition was for certain intellectual property assets, including the rights to the Horseshoe brand in Nevada and to the World Series of Poker brand and tournament.

32




Imperial Palace Hotel & Casino

On December 23, 2005, we acquired the assets of the Imperial Palace Hotel & Casino (“Imperial Palace”) in Las Vegas, Nevada, for approximately $373.1 million, including acquisition costs of $3.1 million. No debt was assumed in the transaction. The Imperial Palace occupies an 18.5 acre site on the Las Vegas Strip that is situated between Harrah’s Las Vegas and the Flamingo and is across the Strip from Caesars Palace. This acquisition is one of a number of moves designed to strategically position the Company for development in Las Vegas.

The results for Imperial Palace are included in our operating results subsequent to its acquisition on December 23, 2005. At December 31, 2005, we assumed that the excess of the purchase price over the net book value of the assets acquired is incremental land cost. Values assigned to assets will be revised upon the finalization of valuation reports from independent appraisals. The purchase price allocation will be completed within one year of the acquisition.

Caesars Entertainment

On June 13, 2005, we completed our acquisition of 100 percent of the outstanding shares of Caesars. Under the terms of the agreement, Caesars stockholders were to receive either $17.75 in cash or 0.3247 shares of Harrah’s Entertainment’s common stock for each outstanding share of Caesars common stock, subject to limitations on the aggregate amount of cash to be paid and shares of stock to be issued. Caesars stockholders were able to elect to receive solely shares of Harrah’s Entertainment’s common stock or cash, to the extent available pursuant to the terms of the agreement. Of the 314.8 million Caesars shares outstanding at the transaction date, 307.1 million elected to receive Harrah’s Entertainment’s common stock. The consideration paid to those stockholders was prorated, resulting in each holder of one share of Caesars stock receiving $5.66 in cash and 0.2211 of a share of our common stock. Each of the remaining 7.7 million Caesars shares received $17.75 per share in cash consideration. We financed the acquisition with borrowings from established debt programs. The aggregate estimated purchase price was approximately $9.3 billion, which consisted of $1.9 billion of cash, $3.3 billion of Harrah’s Entertainment’s common stock, assumption of Caesars debt with a fair value of approximately $4.0 billion (including value assigned to conversion rights of contingent convertible notes), assumption of employee stock grants valued at $98 million and acquisition costs of approximately $59 million. We issued approximately 67.9 million shares of our common stock, the fair value of which was based on a five-day average of the closing price two days before and two days after the terms of the acquisition were agreed to and announced. The acquisition of Caesars added 15 casinos with about 1.6 million square feet of gaming space and approximately 24,000 hotel rooms and gave us significant additional presence in Las Vegas, Atlantic City and Mississippi. See HURRICANE DAMAGE for a discussion of recent hurricanes at two of the properties acquired from Caesars.

The results of the Caesars properties are included with our operating results subsequent to their acquisition on June 13, 2005. Depreciation and amortization related to the Caesars acquisition is estimated based on our preliminary purchase price allocation. Estimated useful lives and amortization periods of property, equipment and intangible assets are being determined during the purchase price allocation and will be adjusted accordingly.

In May 2005, Caesars reached an agreement to sell the Reno Hilton, and that sale, which is subject to regulatory approvals, is expected to close in second quarter 2006. Also included in the Caesars acquisition were the Flamingo Laughlin Casino and a hotel in Halifax, Nova Scotia, that we determined to classify as assets held for sale in our financial statements. We sold the Halifax hotel in November 2005, and recognized no gain or loss on the sale. We reached an agreement in November 2005, to sell Flamingo Laughlin. The sale of Flamingo Laughlin is subject to regulatory approvals and is expected to close by mid-2006. No gain or loss is expected on these sales.

33




In preparation for the Caesars acquisition, we engaged consultants and dedicated internal resources to plan for and execute the merger and integration of Caesars into Harrah’s Entertainment. These costs are reflected in Merger and integration costs for Caesars acquisition in our Consolidated Statements of Income.

The purchase price allocation is in process and will be completed within one year of the acquisition; thus, the allocation of the purchase price is subject to refinement. We are continuing our review of the information provided to us by the third parties engaged to perform the valuation studies and have asked for additional information that is necessary for us to finalize the purchase price allocation. This information includes additional support for the valuation of land in the Las Vegas market and for the values assigned to acquired customer relationships. We are also working with internal and external legal counsel to finalize the assessments of the exposures we assumed for certain contingent liabilities. Our preliminary purchase price allocation also assumes that certain assets, identified for probable replacement prior to the consummation of the acquisition, will be removed from service, which impacts the fair value and useful lives assigned to these assets. The decision to remove these assets from service is subject to final approval by the Board of Directors. Should the determination be made prior to the finalization of the purchase price allocation that these assets will remain in service, the purchase price allocation will be adjusted accordingly. For purposes of these financial statements, the purchase price allocation is based on the best estimates available of fair values and useful lives for the affected assets.

Horseshoe Gaming

On July 1, 2004, we acquired 100 percent of the equity interests of Horseshoe Gaming for approximately $1.62 billion, including assumption of debt valued at approximately $558 million and acquisition costs. A $75 million escrow payment made in 2003 was applied to the purchase price. We issued a redemption notice on July 1, 2004, for all $558 million of Horseshoe Gaming’s outstanding 8.625% Senior Subordinated Notes due July 2009 and retired that debt on August 2, 2004. We financed the acquisition and the debt retirement through working capital and established debt programs. We purchased Horseshoe Gaming to acquire casinos in Hammond, Indiana; Tunica, Mississippi; and Bossier City, Louisiana and with the intention of growing and developing the Horseshoe brand.

In anticipation of our acquisition of Horseshoe Gaming, we sold our Harrah’s brand casino in Shreveport, Louisiana. After consideration of the sale of Harrah’s Shreveport, the Horseshoe Gaming acquisition added a net 113,300 square feet of casino space and approximately 4,580 slot machines and 150 table games to our existing portfolio. Taken together with our acquisition of intellectual property rights from Horseshoe Club Operating Company (“Horseshoe Club”) (see discussion below), this acquisition gave us rights to the Horseshoe brand in all of the United States. The results of the Horseshoe Gaming properties are included with our operating results subsequent to their acquisition on July 1, 2004.

Las Vegas Horseshoe Hotel and Casino

In March 2004, we acquired certain intellectual property assets, including the rights to the Horseshoe brand in Nevada and to the World Series of Poker brand and tournament, from Horseshoe Club. MTR Gaming Group, Inc. (“MTR Gaming”) acquired the assets of the Binion’s Horseshoe Hotel and Casino (“Las Vegas Horseshoe”) in Las Vegas, Nevada, including the right to use the name “Binion’s” at the property, from Horseshoe Club. We operated Las Vegas Horseshoe jointly with a subsidiary of MTR Gaming for one year, which ended March 10, 2005. Operating results for Las Vegas Horseshoe were consolidated with our results from April 1, 2004 until the operating agreement was terminated on March 10, 2005. Las Vegas Horseshoe’s results were not material to our operating results.

We paid approximately $37.5 million for the intellectual property assets, including assumption and subsequent payment of certain liabilities of Las Vegas Horseshoe (which included certain amounts payable

34




to a principal of Horseshoe Gaming) and approximately $5.2 million of acquisition costs. The intangible assets acquired in this transaction have been deemed to have indefinite lives and, therefore, are not being amortized. We financed the acquisition with funds from various sources, including cash flows from operations and borrowings from established debt programs.

Harrah’s Shreveport and Louisiana Downs—Buyout of Minority Partners

In the first quarter of 2004, we paid approximately $37.5 million to the minority owners of the company that owned Louisiana Downs and Harrah’s Shreveport to purchase their ownership interest in that company. The excess of the cost to purchase the minority ownership above the capital balances was assigned to goodwill. As a result of this transaction, Harrah’s Shreveport and Louisiana Downs became wholly owned by the Company. Harrah’s Shreveport was subsequently sold in the second quarter of 2004.

Harrah’s East Chicago—Buyout of Minority Partners

In the second quarter of 2003, we paid approximately $28.8 million to former partners in the Harrah’s East Chicago property to settle outstanding litigation with the partners relating to a buyout in 1999 of the partners’ interest in the property and to terminate the contractual rights of the partners to repurchase an 8.55% interest in the property. The two remaining minority partners in our East Chicago property owned, in aggregate, 0.45% of this property. In December 2003 and January 2004, we acquired these ownership interests for aggregate consideration of approximately $0.8 million. As a result of these transactions, the East Chicago property was wholly owned. Harrah’s East Chicago was sold in the second quarter of 2005.

CAPITAL SPENDING AND DEVELOPMENT

Part of our plan for growth and stability includes disciplined capital improvement projects, and 2005, 2004 and 2003 were all years of significant capital reinvestment.

In addition to the specific development and expansion projects discussed in REGIONAL RESULTS AND DEVELOPMENT PLANS, we perform on-going refurbishment and maintenance at our casino entertainment facilities to maintain our quality standards. We also continue to pursue development and acquisition opportunities for additional casino entertainment facilities that meet our 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.

Our capital spending for 2005 totaled approximately $1.2 billion, excluding the cost of our acquisitions of Caesars and Imperial Palace. Capital spending in 2004 was approximately $702.9 million, excluding the cost of our acquisitions of Horseshoe Gaming and the intangible assets from Horseshoe Club and the purchase of partnership interests. 2003 capital spending was approximately $427.0 million. Estimated total capital expenditures for 2006 are expected to be between $1.4 billion and $1.5 billion and do not include estimated expenditures for development opportunities.

Our 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 is expected to be made available from operating cash flows, established debt programs (see DEBT AND LIQUIDITY), joint venture partners, specific project financing, guarantees of third-party debt and additional debt and/or equity offerings.

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DEBT AND LIQUIDITY

We generate substantial cash flows from operating activities, as reflected on the Consolidated Statements of Cash Flows. These cash flows reflect the impact on our consolidated operations of the success of our marketing programs, our strategic acquisitions, on-going cost containment focus and favorable variable interest rates. For 2005, we reported cash flows from operating activities of $614.9 million, a 22.3% decrease from the $791.0 million reported in 2004. The decrease is due to the use of funds for payment of current liabilities assumed in our acquisition of Caesars, including income taxes of approximately $160 million and interest of approximately $67 million. The 2004 amount reflected an 18.6% increase over the 2003 level.

We use the cash flows generated by our operations to fund reinvestment in existing properties for both refurbishment and expansion projects, to pursue additional growth opportunities via strategic acquisitions of existing companies and new development opportunities and to return capital to our stockholders in the form of stock repurchase programs and dividends. When necessary, we supplement the cash flows generated by our operations with funds provided by financing activities to balance our cash requirements.

Our cash and cash equivalents totaled approximately $724.4 million at December 31, 2005, compared to $489.0 million at December 31, 2004. The following provides a summary of our cash flows for the years ended December 31.

(In millions)

 

 

 

2005

 

2004

 

2003

 

Cash provided by operating activities

 

$

614.9

 

$

791.0

 

$

666.8

 

Capital investments

 

(1,118.5

)

(619.0

)

(381.8

)

Payments for business acquisitions

 

(1,942.5

)

(1,616.9

)

(75.0

)

Proceeds from sales of discontinued operations

 

649.5

 

197.6

 

48.6

 

Insurance proceeds for hurricane losses for discontinued operations

 

17.4

 

 

 

Insurance proceeds for hurricane losses for continuing operations

 

83.7

 

 

 

Other investing activities

 

11.4

 

(60.7

)

(14.4

)

 

 

(1,684.1

)

(1,308.0

)

244.2

 

Cash provided by/(used in) financing activities

 

1,956.1

 

1,356.5

 

(248.0

)

Cash (used in)/ provided by discontinued operations

 

(36.6

)

42.6

 

17.3

 

Net increase in cash and cash equivalents

 

$

235.4

 

$

91.1

 

$

13.5

 

 

We believe that our cash and cash equivalents balance, our cash flows from operations and the financing sources discussed herein, will be sufficient to meet our normal operating requirements during the next twelve months and to fund additional investments. In addition, we may consider issuing additional debt or equity securities in the future to fund potential acquisitions or growth or to refinance existing debt. We continue to review additional opportunities to acquire or invest in companies, properties and other investments that meet our strategic and return on investment criteria. If a material acquisition or investment is completed, our operating results and financial condition could change significantly in future periods.

The majority of our debt is due in November 2006 and beyond. Payments of short-term debt obligations and other commitments are expected to be made from operating cash flows. Long-term obligations are expected to be paid through operating cash flows, refinancing of debt, joint venture partners or, if necessary, additional debt and/or equity offerings.

 

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Debt Assumed in Acquisition of Caesars

The following debt was assumed in our acquisition of Caesars.

(In millions)

 

 

 

Face Amount

 

7.875% Senior Subordinated Notes, due 2005

 

 

$

400.0

 

 

8.5% Senior Notes, due 2006

 

 

400.0

 

 

7.5% Senior Notes, due 2009

 

 

425.0

 

 

7.0% Senior Notes, due 2013

 

 

300.0

 

 

9.375% Senior Subordinated Notes, due 2007

 

 

500.0

 

 

8.875% Senior Subordinated Notes, due 2008

 

 

400.0

 

 

7.875% Senior Subordinated Notes, due 2010

 

 

375.0

 

 

8.125% Senior Subordinated Notes, due 2011

 

 

350.0

 

 

Floating Rate Contingent Convertible Senior Notes, due 2024

 

 

375.0

 

 

Other

 

 

50.3

 

 

Total

 

 

$

3,575.3

 

 

 

We recorded the above debt at its market value, which, at June 13, 2005, was $3,842.2 million, including interest rate swap agreements, which are discussed below. The premium recorded is being amortized as a credit to interest expense using the effective interest method. The debt was assumed by Harrah’s Operating Company, Inc., a wholly-owned subsidiary of Harrah’s Entertainment, and is guaranteed by Harrah’s Entertainment. In fourth quarter 2005, the 7.875% Senior Subordinated Notes, due 2005, were retired.

Credit Agreement

As of December 31, 2005, our credit facilities (the “Credit Agreement”) provided for up to $4.0 billion in borrowings, maturing on April 23, 2009. The Credit Agreement also contains a provision that will allow a further increase in the borrowing capacity to $5.0 billion, if mutually acceptable to the Company and the lenders. Interest on the Credit Agreement is based on our debt ratings and leverage ratio and is subject to change. As of December 31, 2005, the Credit Agreement bore interest based upon 70 basis points over LIBOR and bore a facility fee for borrowed and unborrowed amounts of 17.5 basis points, a combined 87.5 basis points. At our option, we may borrow at the prime rate under the Credit Agreement. As of December 31, 2005, $2.7 billion in borrowings was outstanding under the Credit Agreement with an additional $92.7 million committed to back letters of credit. After consideration of these borrowings, but before consideration of amounts borrowed under the commercial paper program, $1.2 billion of additional borrowing capacity was available to the Company as of December 31, 2005.

Contingent Convertible Senior Notes

Included in the debt assumed in the Caesars acquisition is $375 million Floating Rate Contingent Convertible Senior Notes due 2024. The notes bear interest at an annual rate equal to the three month LIBOR, adjusted quarterly. The interest rate on these notes was 4.2% at December 31, 2005. The notes are convertible into cash and shares of common stock in the following circumstances:

·       during any fiscal quarter, if the closing sale price of the Company’s common stock for 20 out of the last 30 consecutive trading days during the previous quarter is more than 120% of the Conversion Price of the notes;

·       the Company has called the notes for redemption and the redemption has not yet occurred;

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·       during the five trading day period immediately after any five consecutive trading day period in which the trading price of the notes per $1,000 principal amount for each day of such period was less than 95% of the product of the closing sale price of the Company’s common stock on such day multiplied by the number of shares issuable upon conversion; provided that, if on such date, the common stock price is between the Conversion Price and 120% of the Conversion Price, as defined, then the holders will receive the principal amount of the notes surrendered plus accrued but unpaid interest; or

·       upon the occurrence of specified corporate transactions as defined in the indenture covering these notes.

Holders may convert any outstanding notes into cash and shares of the Company’s common stock at a conversion price per share of $67.92 (the “Conversion Price”) at December 31, 2005. This represents a conversion rate of approximately 14.7232 shares of common stock per $1,000 principal amount of notes (the “Conversion Rate”). Subject to certain exceptions described in the indenture covering these notes, at the time the notes are tendered for conversion the value (the “Conversion Value”) of the cash and shares of the Company’s common stock, if any, to be received by a holder converting $1,000 principal amount of the notes will be determined by multiplying the Conversion Rate by the “Ten Day Average Closing Stock Price,” which equals the average of the closing per share prices of the Company’s common stock on the New York Stock Exchange on the ten consecutive trading days beginning on the second trading day following the day the notes are submitted for conversion. The Conversion Value will be delivered to holders as follows: (1) an amount in cash (the “Principal Return”) equal to the lesser of (a) the aggregate Conversion Value of the notes to be converted and (b) the aggregate principal amount of the notes to be converted, and (2) if the aggregate Conversion Value of the notes to be converted is greater than the Principal Return, any amount in shares (the “Net Shares”) equal to the aggregate Conversion Value less the Principal Return (the “Net Share Amount”). The Company will pay the Principal Return and deliver the Net Shares, if any, as promptly as practicable after determination of the Net Share Amount. The number of Net Shares to be paid will be determined by dividing the Net Share Amount by the Ten Day Average Closing Stock Price.

The Conversion Price will decrease when cash dividends are declared so that the Conversion Price will equal the price determined by multiplying the Conversion Price in effect immediately prior to the record date for such dividend by a fraction, (i) the numerator of which shall be the average of the pre-dividend sale price, as defined in the agreement, minus the amount of the cash dividend, and (ii) the denominator of which shall be the pre-dividend sale price. As a result of the third and fourth quarter 2005 cash dividends, the Conversion Price had been adjusted from $68.65 at the time of our acquisition of Caesars to $67.92 at December 31, 2005.

The notes are redeemable by the Company at any time on or after April 20, 2009, at 100 percent of the principal amount of the notes plus accrued and unpaid interest. Holders may require the Company to purchase all or a portion of these notes on April 15, 2009, 2014, or 2019 at 100 percent of the principal amount of the notes plus accrued and unpaid interest. The notes are unsecured obligations, rank equal with our other senior indebtedness and are senior to all of our subordinated indebtedness.

Derivative Instruments

We account for derivative instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and all amendments thereto. SFAS No. 133 requires that all derivative instruments be recognized in the financial statements at fair value. Any changes in fair value are recorded in the income statement or in other comprehensive income, depending on whether the derivative is designated and qualifies for hedge accounting, the type of hedge transaction and the effectiveness of the hedge. The estimated fair values of our derivative instruments are based on market prices obtained from

38




dealer quotes. Such quotes represent the estimated amounts we would receive or pay to terminate the contracts.

Our derivative instruments contain a credit risk that the counterparties may be unable to meet the terms of the agreements. We minimize that risk by evaluating the creditworthiness of our counterparties, which are limited to major banks and financial institutions, and we do not anticipate nonperformance by the counterparties.

Interest Rate Swap Agreements

We use interest rate swaps to manage the mix of our debt between fixed and variable rate instruments. As of December 31, 2005, we were a party to five interest rate swaps, including four assumed in the Caesars acquisition, for a total notional amount of $500 million. These interest rate swaps serve to manage the mix of our debt between fixed and variable rate instruments by effectively converting fixed rates associated with long-term debt obligations to floating rates. The major terms of the interest rate swaps are as follows.

Swap Effective Date