May 12, 2000
The following discussion and analysis of the financial position and operating results of Harrah's Entertainment,
Inc., (referred to in this discussion, together with its consolidated subsidiaries where appropriate, as "Harrah's
Entertainment", "Company", "we", "our" and "us") for first quarter
2000 and 1999, updates, and should be read in conjunction with, Management's Discussion and Analysis of Financial
Position and Results of Operations presented in our 1999 Annual Report.
We are the leading consumer marketing company in the gaming industry, operating casinos in more markets than any
other casino company. We seek to differentiate ourselves through a unique strategy aimed at building loyalty to
our brands from our guests. To accomplish this objective, we focus on continued investment and emphasis on marketing,
technology and database programs, a commitment to service and a broadened national appeal. We begin our review
with a discussion of two first quarter 2000 transactions that position our Company to continue its progress toward
achieving our strategic objectives.
PLAYERS ACQUISITION
On March 22, 2000, we completed our acquisition of Players International, Inc. ("Players"). Players operates
a dockside riverboat casino on the Ohio River in Metropolis, Illinois; two cruising riverboat casinos in Lake Charles,
Louisiana; two dockside riverboat casinos in Maryland Heights, Missouri, a suburb of St. Louis; and a horse racetrack
in Paducah, Kentucky. Players and the Company jointly operate a landside hotel and entertainment facility at the
Maryland Heights property.
The Lake Charles and Metropolis casino operations will be converted to the Harrah's brand name after capital improvement
projects are completed. We are in the process of consolidating the operations of the Players facility in Maryland
Heights with the adjacent Harrah's operation and expect to complete this consolidation in second quarter 2000.
We paid approximately $293 million in cash and assumed $150 million in Players' 10 7/8% Senior Notes due 2005,
(the "Players' Notes"). The acquisition was funded by our Bank Facility (see Debt & Liquidity section)
and is being accounted for as a purchase. The purchase price is being allocated to the underlying assets and liabilities
based upon their estimated fair values at the date of acquisition. We are determining the estimated fair values
based on independent appraisals, discounted cash flows, quoted market prices and estimates made by management.
The allocation of the purchase price 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 assets acquired, such excess
will be allocated to goodwill and amortized over 40 years. Until we complete the purchase price allocation, our
financial statements will include estimated goodwill amortization expense.
RINCON DEVELOPMENT
During first quarter 2000, we signed a definitive agreement with the Rincon San Luiseno Band of Mission Indians
to build and manage a $110 million casino and hotel on Rincon tribal land 25 miles north of San Diego. This location
provides convenient access to metropolitan San Diego, La Jolla, Del Mar, Escondido and Orange County, California.
The Tribe expects to begin operations of a temporary casino in fourth quarter 2000. We have committed to provide
up to $14.6 million to finance this development and to provide the Tribe technical service related to the development
and operation of the temporary casino, but we will not manage the temporary facility. The permanent facility, the
cost of which is to be funded by a third-party loan that we expect to guarantee, is expected to open in fourth
quarter 2001. We will manage the
permanent facility for a fee. The operation of the temporary casino and the permanent casino project are subject
to various approvals, including approvals of the National Indian Gaming Commission.
OPERATING RESULTS AND DEVELOPMENT PLANS
OVERALL
First quarter 2000 revenues increased 10.1% over first quarter 1999, however, net income declined 9.8% from the
same period last year. The primary factors contributing to the decline in net income were low table games hold
percentage at the Rio Hotel & Casino ("Rio") in Las Vegas, Nevada, and our pro rata share of operating
losses at our 43 percent-owned Harrah's New Orleans casino, which opened last October, and at our 48 percent-owned
National Airlines, Inc. ("NAI"), which began operations in May 1999.
First quarter gaming revenues at owned and managed properties, which were in our system during first quarter 2000
and first quarter 1999, grew 11.7% over the same period last year. Excluding properties acquired or opened since
June 1998, company-owned and managed properties generated same-store gaming revenue growth of 15.6% over first
quarter 1999.
Operating results for first quarter 2000 include ten days of operations for the properties acquired in the Players
acquisition, which were not material to our overall operating results.
WESTERN REGION
FIRST QUARTER PERCENTAGE
------------------- INCREASE/
2000 1999 (DECREASE)
(IN MILLIONS) -------- -------- ----------
Casino revenues................................... $171.9 $177.0 (2.9)%
Total revenues.................................... 275.3 282.4 (2.5)%
Operating profit.................................. 23.7 44.9 (47.2)%
Operating margin.................................. 8.6% 15.9% (7.3)pts
The declines in first quarter 2000 revenues and operating income from the same period last year were primarily
due to well-below-average table games hold percentage at the Rio, where first quarter revenues were 11.9% below
first quarter 1999 and an operating loss of $1.3 million was reported compared to operating income of $22.2 million
for the same period last year. In addition to the revenue shortfalls, operating margin at the Rio declined due
to the increased marketing and promotional costs incurred by the property in an effort to maintain its competitive
position in the market following the opening of several competitors over the last 18 months. First quarter revenues
at our southern Nevada Harrah's properties increased 7.2%, operating income increased 9.8% and operating margin
increased 0.4 points over the same period last year. Revenues at our northern Nevada properties were basically
flat compared to first quarter 1999, due primarily to renovation disruptions at Harrah's Lake Tahoe, however, operating
income was 11.7% higher than during the same period last year due to successful marketing programs and cost savings
efforts at Harrah's Reno.
Subsequent to first quarter, Rio opened its new showroom complex which includes a 1,500 seat, state-of-the-art
theater with balcony; a three-level lobby with hospitality center; and a theater promenade with approximately 10,000
square feet of retail space. The showroom complex is located adjacent to the Pavilion, Rio's 110,000 square foot
entertainment/convention complex, which opened in March 1999. The showroom complex is expected to cost approximately
$35 million, of which $30.2 million had been spent through March 31, 2000.
During first quarter 2000, we completed the sale for cash of the Showboat Las Vegas property, which was acquired
in our June 1998 acquisition of Showboat, Inc. No gain or loss resulted from the sale of this nonstrategic asset.
EASTERN REGION
FIRST QUARTER PERCENTAGE
------------------- INCREASE/
2000 1999 (DECREASE)
(IN MILLIONS) -------- -------- ----------
Casino revenues................................... $174.3 $167.9 3.8%
Total revenues.................................... 185.4 179.0 3.6%
Operating profit.................................. 38.1 36.1 5.5%
Operating margin.................................. 20.6% 20.2% 0.4pts
Harrah's Atlantic City's revenues increased 8.3% in first quarter 2000 and operating profit increased 30.3% over
the same period last year. While Showboat Atlantic City's revenues were basically flat compared to first quarter
1999, operating income declined 19.5% due to increased marketing and promotional costs incurred in an effort to
maintain the property's competitive position in the market. We believe that the above-market growth achieved by
Harrah's Atlantic City is due to the successful execution by the property of strategic marketing programs utilizing
the available technological tools offered by our WINet customer database and Total Rewards program. Showboat Atlantic
City is scheduled to be fully integrated into the WINet and Total Rewards program later this year.
In April 2000, we announced plans for a 450-room expansion at Harrah's Atlantic City, increasing the hotel's capacity
to more that 1,600 rooms. The expansion is expected to cost approximately $110 million and is scheduled to be completed
in first quarter 2002. The expansion is subject to regulatory approvals.
CENTRAL REGION
FIRST QUARTER PERCENTAGE
------------------- INCREASE/
2000 1999 (DECREASE)
(IN MILLIONS) -------- -------- ----------
Casino revenues................................... $287.6 $221.1 30.1%
Total revenues.................................... 301.5 233.0 29.4%
Operating profit.................................. 68.9 41.2 67.2%
Operating margin.................................. 22.9% 17.7% 5.2pts
ChicagolandRevenues increased 60.1% at Harrah's Joliet compared to first quarter 1999 and operating profit increased
120.5% compared to the same period last year. These results are attributable to the mid-1999 elimination of cruise
scheduling and ticketing and the fourth quarter opening of the new hotel at this property. Harrah's East Chicago
revenues increased 40.0% over first quarter 1999, and operating income increased 144.0%. We believe that these
results were driven by the March 1999 re-branding of this property to the Harrah's brand and the successful execution
of the Company's loyalty strategy in East Chicago.
LouisianaHarrah's Shreveport's revenues were basically the same compared to first quarter 1999, but operating profit
declined due to costs of promotions mounted to sustain business during construction activities. Construction began
in May 1999 on a 514-room hotel with almost 18,000 square feet of convention center space. The new hotel and amenity
expansion is expected to cost $146.6 million, of which $41.6 million had been spent through March 31, 2000. The
expansion is scheduled to open in fourth quarter 2000.
MississippiCombined first quarter revenues by our Mississippi properties increased 9.1% over first quarter 1999.
Increases in operating profit at Harrah's Tunica offset declines at Harrah's Vicksburg, for a net increase in operating
profit at our Mississippi properties of 15.5% over first quarter 1999.
MissouriFirst quarter revenues at our Missouri properties increased 14.7% and operating profit increased 45.3%
over the same period in 1999. Revenue increases are primarily attributable to Harrah's St. Louis, where revenues
were 35.4% higher than in first quarter last year. Harrah's St. Louis and Harrah's North Kansas City increased
operating profit 70.0% and 27.9%, respectively, over the same period last year. The Missouri properties' revenues
have benefited from the elimination in third and fourth quarters of 1999 of restricted boarding schedules, but
operating profit was affected by higher admission taxes.
The St. Louis shoreside facilities were owned jointly with Players prior to our March 22, 2000, acquisition of
that company. Our pro rata share of the operating losses of the joint venture through the date of the Players acquisition
was $2.4 million for first quarter 2000. These losses are included in Equity in losses of nonconsolidated affiliates
in the Consolidated Condensed Statements of Income (see Other Factors Affecting Net Income). Subsequent to the
Players acquisition, results of the shoreside facilities, as well as for Players St. Louis operations, are combined
with Harrah's St. Louis' operating results.
In May 2000, we announced plans for facilities enhancements to Harrah's North Kansas City, including approximately
28,000 square feet of additional gaming space. The enhancements are expected to cost approximately $40.1 million
and are expected to be completed in second quarter 2001. The expansion is subject to regulatory approvals.
MANAGED AND OTHER CASINOS
Increases in our managed and other results were led by the addition of fees from Harrah's New Orleans, which opened
in fourth quarter 1999. Management fees from Indian-owned casinos declined slightly from first quarter last year
due to the impact on our management fee percentages of recent renewal and extension agreements for two of these
facilities.
See DEBT and LIQUIDITY section for further discussion of Harrah's guarantees of debt related to Indian projects.
We ceased management of the Star City casino in Sydney, Australia, in January 2000, upon the completion of the
buy-out of our management contract by another company. No material gain or loss was recognized on the sale of this
management contract.
OTHER FACTORS AFFECTING NET INCOME
FIRST QUARTER PERCENTAGE
--------------------- INCREASE/
2000 1999 (DECREASE)
(IN MILLIONS) -------- -------- ----------
(Income)/Expense
Development costs........................................... $ 2.2 $ 0.8 N/M
Project opening costs....................................... 0.3 0.4 (25.0)%
Corporate expense........................................... 11.0 7.9 39.2 %
Headquarters relocation expense............................. 1.8 3.1 (41.9)%
Equity in losses of nonconsolidated affiliates.............. 23.7 6.7 N/M
Write-downs, reserves and recoveries........................ -- 0.1 N/M
Venture restructuring costs................................. -- (0.4) N/M
Amortization of goodwill and trademarks..................... 4.5 4.6 (2.2)%
Interest expense, net....................................... 50.5 50.9 (0.8)%
Other income................................................ (3.6) (2.2) 63.6 %
Effective tax rate.......................................... 35.0% 38.6% (3.6)pts
Minority interests.......................................... $ 3.9 $ 1.8 N/M
Extraordinary losses, net of income taxes................... -- 3.2 N/M
Development costs for first quarter 2000 increased from the same period last year. However, development activities
were limited in both periods due to the limited number of new markets opening for development.
Corporate expense increased 39.2% in first quarter 2000 from the prior year level due to timing of certain expenses
and increases in other costs. Costs related to the relocation of the Company's headquarters to Las Vegas, Nevada,
declined 41.9% from first quarter 1999, as relocation activity began to subside.
The increase in Equity in losses of nonconsolidated affiliates reflects the increase in losses from Harrah's New
Orleans and NAI, both of which began operations subsequent to first quarter 1999. Equity in losses of nonconsolidated
affiliates also includes our pro rata share of the losses from the St. Louis shoreside facilities through the date
of the Players acquisition.
Amortization of goodwill decreased slightly from the same period last year due to the use of estimates for goodwill
amortization during first quarter last year. Goodwill based on the final purchase price allocations completed subsequent
to first quarter 1999 for Showboat and Rio was slightly less than estimated amounts.
Interest expense decreased in first quarter 2000 from 1999, primarily due to replacement of the debt assumed in
connection with the acquisitions of Rio and East Chicago with lower-rate borrowings from our Bank Facility.
Other income increased in first quarter 2000 due to higher income earned on the cash surrender value of company
owned life insurance policies.
The effective tax rates for both periods are higher than the federal statutory rate primarily due to state income
taxes.
Minority interests reflects joint venture partners' share of income which increased in 2000 from the prior year
as a result of higher earnings from those ventures.
The extraordinary losses reported in 1999 were due to the early extinguishment(s) of debt and include premiums
paid to the holders of the debt retired and the write-off of related unamortized deferred finance charges. (See
Debt and LiquidityExtinguishment of Debt.)
CAPITAL SPENDING AND DEVELOPMENT
In addition to the specific development and expansion projects discussed in the Operating Results and Development
Plans section, we perform on-going refurbishment and maintenance at our casino entertainment facilities in order
to maintain the Company's 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 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
pursued is expected to be made available from operating cash flows, bank borrowings (see Debt and Liquidity section),
joint venture partners, specific project financing, guarantees of third party debt and, if necessary, additional
debt and/or equity offerings. Our capital spending for the first three months of 2000 totaled approximately $109.5
million. Estimated total capital expenditures for 2000 are expected to be between $370 million and $470 million,
excluding the acquisition of Players.
DEBT AND LIQUIDITY
BANK FACILITY
Subsequent to first quarter 2000, our revolving credit and letter of credit facilities (collectively, the "Bank
Facility") were amended to expand our borrowing capacity from $1.6 billion to $1.9 billion. The five-year
$1.3 billion revolving credit and letter of credit facility maturing in 2004 was expanded to $1.525 billion, and
the $300 million revolving credit facility, which is renewable annually at the borrower's and lenders' options,
was expanded to $375 million. The amended Bank Facility provides the Company with increased financial flexibility
without changing any of the other terms of the agreement. After considering the additional $300.0 million in borrowing
capacity available to us as a result of this amendment, we had $674.0 million in capacity at March 31, 2000.
Currently, the Bank Facility bears interest based upon 80 basis points over LIBOR for current borrowings under
the five-year facility and 85 basis points over LIBOR for the 364-day facility. In addition, there is a facility
fee for borrowed and unborrowed amounts which is currently 20 basis points on the five-year facility and 15 basis
points on the 364-day facility. The interest rate and facility fee are based on our current debt ratings and leverage
ratio and may change as our debt ratings and leverage ratio change.
SHORT-TERM BORROWINGS
In a program designed for short-term borrowings at lower interest rates than the rates paid under our Bank Facility,
we have entered into uncommitted line of credit agreements with two lenders whereby we can borrow up to $65 million
for periods of ninety days or less. At March 31, 2000, we had borrowed $65 million under these agreements. These
agreements have no impact on our Bank Facility and do not decrease our borrowing capacity under those agreements.
INTEREST RATE AGREEMENTS
To manage the relative mix of our debt between fixed and variable rate instruments, we entered into interest rate
swap agreements to modify the interest characteristics of our outstanding debt without an exchange of the underlying
principal amount. The differences to be paid or received under the terms of our interest rate swap agreements are
accrued as interest rates change and recognized as an adjustment to interest expense for the related debt. Changes
in the variable interest rates to be paid or received pursuant to the terms of our interest rate swap agreements
will have a corresponding effect on our future cash flows.
These agreements 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 do not anticipate nonperformance by the counterparties.
As of March 31, 2000, we were a party to three interest rate swaps for a total notional amount of $150 million.
All of these swaps will expire in second quarter 2000, and we do not expect to enter into new swap agreements.
For more information regarding the Company's interest rate swap agreements as of March 31, 2000, please see Note
4 to the accompanying Consolidated Condensed Financial Statements.
GUARANTEES OF THIRD PARTY DEBT AND OTHER COMMITMENTS
The Company has an approximate 43% beneficial ownership interest in JCC Holding Company and its subsidiary, Jazz
Casino Company, LLC ("JCC"). JCC owns and operates an exclusive land-based casino in New Orleans, Louisiana
(the "Casino"), which is managed by a subsidiary of the Company. The Company has (i) guaranteed a $100.0
million annual payment obligation of JCC owed to the State of Louisiana gaming board (the "State Obligation"),
(ii) guaranteed $166.5 million of a $236.5 million JCC bank credit facility, (iii) made $23.9 million, as of March
31, 2000, in subordinated
loans to JCC to finance construction and completion of the Casino, and (iv) agreed to purchase, on certain conditions,
certain shares of JCC Holding Company stock owned by former co-investors in the pre-bankruptcy predecessor of JCC
for $13.5 million.
Initially, the Company guaranteed the State Obligation for the period from October 28, 1999 to October 28, 2000
(the "Initial State Guarantee"). The Initial State Guarantee was replaced with a new guarantee (the "Current
State Guarantee"), pursuant to which the Company has guaranteed the State Obligation for the period from April
1, 2000 to March 31, 2001. JCC is required to make daily payments of approximately $273,973 to satisfy the State
Obligation. The Current State Guarantee obligation is reduced to the extent JCC makes such daily payments. Payments
made to the State by the Company pursuant to the Initial State Guarantee and the Current State Guarantee are secured
by a first priority collateral security interest in JCC's assets.
Subject to the satisfaction of certain cash flow tests and other conditions each year, the Company is required
to provide a new guarantee to the State for each of the 12-month periods ending March 31, 2002, 2003 and 2004.
For the period ending March 31, 2002, the requirement to provide a new guarantee is conditioned upon, among other
things, JCC producing net cash flow of at least $15 million for the 12-month period ending November 30, 2000. Based
on results to date, it appears unlikely that JCC will satisfy this cash flow test. In the event that JCC does not
in fact satisfy this cash flow test, the Company will not be required to guarantee the State Obligation for the
12-month period ending March 31, 2002. If in such event the Company elects not to voluntarily guarantee the State
Obligation and JCC cannot find a substitute guarantor, JCC could lose its State gaming license.
Commencing February 28, 2000, JCC ceased making its daily payment in respect of the State Obligation. On February
29, 2000, the State made a demand to the Company pursuant to the Initial State Guarantee and the Company began
making the daily payment to the State on that date. The Company paid $9.6 million to the State pursuant to the
Initial State Guarantee. The Company's remaining obligations pursuant to the Initial State Guarantee expired when
the Company provided the Current State Guarantee. The Company's obligations pursuant to the Current State Guarantee
for the 12-month period ending March 31, 2001 are limited to $100 million. The Company commenced making payments
in respect of the State Obligation pursuant to the Current State Guarantee on April 1, 2000, which payments totaled
$11.0 million as of May 10, 2000.
Subject to certain conditions, which are presently being satisfied, JCC's bank credit facility permits the Company
to pay up to an aggregate of $40 million pursuant to the Initial State Guarantee and Current State Guarantee without
a default under that facility. The Company has agreed until March 31, 2001, to defer the collection from JCC of
amounts paid pursuant to the Initial State Guarantee and Current State Guarantee to the extent that such payments
do not exceed $40 million in the aggregate.
Separately, the Company and certain Company affiliates have agreed, until August 1, 2000, to defer the collection
of certain fees, lease payments and reimbursable costs arising from existing agreements with JCC. Such deferred
collections totaled approximately $10.5 as of March 31, 2000. In addition, JCC has exercised its right, pursuant
to agreements entered into at the time of its emergence from bankruptcy in October 1998, to defer the payment of
certain management fees, credit support fees, guarantee obligations, and interest on subordinated debt due to the
Company. Such deferred payments totaled approximately $5.7 as of March 31, 2000.
The agreements under which we manage casinos on Indian lands contain provisions required by law which provide that
a minimum monthly payment be made to the tribe. That obligation has priority over scheduled repayments of borrowings
for development costs. In the event that insufficient cash flow is generated by the operations to fund this payment,
we must pay the shortfall to the tribe. Such advances, if any, would be repaid to us in future periods in which
operations generate cash flow in excess of the required minimum payment. These commitments will terminate upon
the occurrence of certain defined events, including termination of the management contract. Our aggregate monthly
commitment pursuant to the contracts for the three Indian-owned facilities now open, which extend for periods of
up to 57 months from March 31, 2000, is $1.1 million.
We may guarantee all or part of the debt incurred by Indian tribes with which we have entered a management contract
to fund development of casinos on the Indian lands. For all existing guarantees of Indian debt, we have obtained
a first lien on certain personal property (tangible and intangible) of the casino enterprise. There can be no assurance,
however, the value of such property would satisfy our obligations in the event these guarantees were enforced.
Additionally, we have received limited waivers from the Indian tribes of their sovereign immunity to allow us to
pursue our rights under the contracts between the parties and to enforce collection efforts as to any assets in
which a security interest is taken. The aggregate outstanding balance of such debt as of March 31, 2000, was $69.8
million.
We have agreed to provide up to $10 million in loans to NAI, $5 million of which had been advanced at March 31,
2000. In addition, we have provided letters of credit on behalf of NAI totaling $17 million dollars. $12 million
in letters of credit serve as collateral to credit card processors in order to enable NAI to receive proceeds from
the credit card processors for advance ticket sales. The remaining $5 million serves as collateral to enable NAI
to secure space in airport terminals. Subsequent to first quarter, we entered into an agreement with another investor
of NAI whereby that investor will reimburse to us fifty percent of any amount that we might pay in response to
demands on the letters of credit.
EFFECTS OF CURRENT ECONOMIC AND POLITICAL CONDITIONS
COMPETITIVE PRESSURES
Due to the limited number of new markets opening for development, many casino operators are investing in existing
markets in an effort to attract new customers, thereby increasing competition in those markets. With the exception
of the additional supply being added in Las Vegas, the amount of supply change in the long-established gaming markets
of Nevada and New Jersey has represented a smaller percentage change than that experienced in some riverboat markets.
In riverboat markets, the additions to supply had a more noticeable impact, due to the fact that competition was
limited in the early stages of many of these markets. As companies have completed expansion projects, supply has
typically grown at a faster pace than demand in some markets and competition has increased significantly. Furthermore,
several operators, including Harrah's, have announced plans for additional developments or expansions in some markets.
In the Las Vegas market, four new "mega" facilities have opened since October 1998, and others are planned
and under development. The impact that the additional supply will have on our operations cannot be determined at
this time.
Although the short-term effect of these competitive developments on the Company has been negative, we are not able
to determine the long-term impact, whether favorable or unfavorable, that these trends and events will have on
our current or future markets. We believe that the geographic diversity of our operations; our focus on multi-market
customer relationships; our service training, measurements and rewards programs; and our continuing efforts to
establish our brands as premier brands have well-positioned us to face the challenges present within the industry.
In 1997, we introduced WINet, a sophisticated nationwide customer database, and our Total Gold Card, a nationwide
reward and recognition card, both of which we believe provide competitive advantages, particularly with players
who visit more than one market. During 1999, we implemented the next stage of our strategy with the launch of the
tiered customer loyalty card program - Total Diamond, Total Platinum and Total Gold - to reward customers for choosing
Harrah's entertainment casinos. Subsequent to first quarter 2000, we launched our new customer loyalty program
- Total Rewards - which offers significant enhancements to Total Gold and provides our customers with a simpler
understanding of exactly how to earn the cash, comps and other benefits they want. The Rio and Showboat properties
are expected to be integrated into the Total Rewards program during 2000.
INDUSTRY CONSOLIDATION
As evidenced by the number of recent public announcements by casino entertainment companies of plans to acquire
or be acquired by other companies, including our acquisitions of Showboat, Rio and Players, consolidation in the
gaming industry continues. We believe we are well-positioned to, and may from time to time, pursue additional strategic
acquisitions to further enhance our distribution, strengthen our access to target customers and leverage our technological
and centralized services infrastructure.
POLITICAL UNCERTAINTIES
The casino entertainment industry is subject to political and regulatory uncertainty. In 1996, the U.S. government
formed a federal commission to study gambling in the United States, including the casino gaming industry. The commission
issued its report in June 1999. In September 1999, the State of California and approximately 60 Indian tribes executed
Class III Gaming Compacts, which other California tribes can join. The Compacts, when effective, will allow each
tribe to operate, on tribal trust lands, two casinos with up to 2,000 slot machines per tribe and unlimited house-banked
card games. At this time, the ultimate impacts that the National Gaming Impact Study Commission report and the
California Compacts may have on the industry or on our Company are uncertain. From time to time, individual jurisdictions
have also considered legislation or referendums which could adversely impact our operations, and the likelihood
or outcome of similar legislation and referendums in the future is difficult to predict.
The casino entertainment industry represents a significant source of tax revenues to the various jurisdictions
in which casinos operate. From time to time, various state and federal legislators and officials have proposed
changes in tax laws, or in the administration of such laws, which would affect the industry. It is not possible
to determine with certainty the scope or likelihood of possible future changes in tax laws or in the administration
of such laws. If adopted, such changes could have a material adverse effect on our financial results.
INTERCOMPANY DIVIDEND RESTRICTIONS
Certain of our debt guarantees require us to abide by covenants which, among other things, limit HOC's ability
to pay dividends and make other restricted payments, as defined, to Harrah's Entertainment. The amount of HOC's
restricted net assets, as defined, computed in accordance with these covenants regarding restricted payments was
approximately $1.47 billion at March 31, 2000. Harrah's Entertainment's principal asset is the stock of HOC, a
wholly-owned subsidiary which holds, directly and through subsidiaries, the principal assets of our businesses.
Given this ownership structure, these restrictions should not impair our ability to conduct our business through
our subsidiaries or to pursue our development plans.
With the assumption of the Players' Notes, we are required to abide by covenants that, among other things, restrict
the payment of dividends or the ability to make other restricted payments, as defined, to HOC and Harrah's Entertainment.
These restricted payments include intercompany loans, advances or other upstream payments to HOC or Harrah's Entertainment.
These restrictions should not impair our ability to conduct our business through our subsidiaries or to pursue
our development plans.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements.
Certain information included in this Form 10-Q and other materials filed or to be filed by the Company with the
Securities and Exchange Commission ("SEC") (as well as information included in oral statements or other
written statements made or to be made by the Company) contains statements that are forward looking. These include
statements relating to the following activities, among others: (A) operations and expansions of existing properties,
including future performance, anticipated scope and opening dates of expansions; (B) planned development of casinos
and hotels that would be owned or managed by the Company and the pursuit of strategic acquisitions; (C) planned
capital expenditures for 2000 and beyond; (D) the impact of the WINet, Total Gold Card and Total Rewards Programs;
and (E) any future impact of the Showboat or Players acquisitions, the Rio merger or the Rincon development. These
activities involve important factors that could cause actual results to differ materially from those expressed
in any forward looking statements made by or on behalf of the Company. These include, but are not limited to, the
following factors as well as other factors described from time to time in the Company's reports filed with the
SEC: construction factors, including zoning issues, environmental restrictions, soil conditions, weather and other
hazards, site access matters and building permit issues; access to available and feasible financing; regulatory,
licensing and other government approvals, third party consents and approvals, and relations with partners, owners
and other third parties; conditions of credit markets and other business and economic conditions, including international
and national economic problems; litigation, judicial actions and political uncertainties, including gaming legislative
action, referenda, and taxation; and the effects of competition including locations of competitors and operating
and marketing competition. Any forward-looking statements are made pursuant to the Private Securities Litigation
Reform Act of 1995 and, as such, speak only as of the date made.