CAESARS ENTERTAINMENT INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number 1-14573

CAESARS ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		88-0400631 (I.R.S. Employer Identification No.)
3930 Howard Hughes Parkway Las Vegas, Nevada (Address of principal executive offices)		89109 (Zip code)
(702) 699-5000 (Registrant's telephone number, including area code)
N/A (Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve 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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

Title of Each Class		Outstanding at August 4, 2004
Common Stock, par value $0.01 per share		309,749,357

CAESARS ENTERTAINMENT, INC.
INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets June 30, 2004 and December 31, 2003	3
	Condensed Consolidated Income Statements Three and six months ended June 30, 2004 and 2003	4
	Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2004 and 2003	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 2.	Changes in Securities and Use of Proceeds	37
Item 4.	Submission of Matters to a Vote of Security Holders	38
Item 6.	Exhibits and Reports on Form 8-K	38
SIGNATURES		40

PART I. FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAESARS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
(unaudited)

			June 30, 2004			December 31, 2003
Assets
	Cash and equivalents		$	651		$	313
	Accounts receivable, net			151			161
	Inventory, prepaids, and other			145			125
	Deferred income taxes, net			106			103

		Total current assets		1,053			702
	Assets held for sale			—			230
	Investments			163			181
	Property and equipment, net			7,337			7,335
	Goodwill			796			796
	Other assets			338			298

		Total assets	$	9,687		$	9,542

Liabilities and Stockholders' Equity
	Accounts payable and accrued expenses		$	576		$	623
	Current maturities of long-term debt			325			1
	Income taxes payable			38			5
	Liabilities related to assets held for sale			—			46

		Total current liabilities		939			675
	Long-term debt, net of current maturities			4,218			4,618
	Deferred income taxes, net			993			1,007
	Other liabilities			215			184

		Total liabilities		6,365			6,484

Commitments and contingent liabilities
Stockholders' Equity:
	Common stock, $0.01 par value, 400.0 million shares authorized, 331.6 million and 326.9 million shares issued at June 30, 2004 and December 31, 2003, respectively			3			3
	Preferred stock, $0.01 par value, 100.0 million shares authorized			—			—
	Additional paid-in capital			3,876			3,828
	Accumulated deficit			(304	)		(523	)
	Accumulated other comprehensive income			9			12
	Common stock in treasury at cost, 23.1 million shares at June 30, 2004 and December 31, 2003			(262	)		(262	)

		Total stockholders' equity		3,322			3,058

		Total liabilities and stockholders' equity	$	9,687		$	9,542

See notes to condensed consolidated financial statements

CAESARS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in millions, except per share amounts)
(unaudited)

		Three months ended June 30,						Six months ended June 30,
		2004			2003			2004			2003
Revenues
	Casino	$	806		$	820		$	1,646		$	1,607
	Rooms		145			131			286			258
	Food and beverage		129			115			256			221
	Other revenue		81			70			169			136

			1,161			1,136			2,357			2,222

Expenses
	Casino		412			424			842			837
	Rooms		47			42			91			83
	Food and beverage		111			104			221			199
	Other expense		292			285			591			558
	Depreciation and amortization		112			114			221			225
	Pre-opening expense		3			—			3			1
	Contract termination fee		2			—			2			—
	Corporate expense		11			9			22			17

			990			978			1,993			1,920

	Equity in earnings of unconsolidated affiliates		3			2			11			11

Operating income			174			160			375			313
	Interest expense, net of interest capitalized		(76	)		(85	)		(153	)		(167	)
	Interest expense, net from unconsolidated affiliates		(1	)		(1	)		(3	)		(3	)
	Interest and other income		2			—			3			2
	Investment gain		3			—			3			—

Income from continuing operations before income taxes and minority interest			102			74			225			145
	Provision for income taxes		42			31			100			61
	Minority interest, net		2			—			4			1

Income from continuing operations			58			43			121			83
Discontinued operations
	Income (loss) from discontinued operations (including gain on sale of $87 million), net of taxes		90			(2	)		98			(1	)

Net income		$	148		$	41		$	219		$	82

Basic earnings per share
	Income from continuing operations	$	0.19		$	0.14		$	0.39		$	0.27
	Income (loss) from discontinued operations, net of taxes		0.29			0.00			0.32			0.00

	Net income	$	0.48		$	0.14		$	0.71		$	0.27

Diluted earnings per share
	Income from continuing operations	$	0.19		$	0.14		$	0.39		$	0.27
	Income (loss) from discontinued operations, net of taxes		0.28			0.00			0.31			0.00

	Net income	$	0.47		$	0.14		$	0.70		$	0.27

Weighted average shares outstanding
	Basic shares		308			301			307			301
	Diluted shares		313			302			312			302

See notes to condensed consolidated financial statements

CAESARS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)

				Six months ended June 30,
				2004			2003
Operating activities
	Net income			$	219		$	82
	Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
		Depreciation and amortization			221			225
		(Income) loss from discontinued operations			(98	)		1
		Change in working capital components:
			Accounts receivable, net		10			10
			Inventory, prepaids, and other		(20	)		5
			Accounts payable and accrued expenses		(49	)		(82	)
			Income taxes payable		33			(8	)
		Deferred income taxes			(17	)		3
		Other			28			19

			Net cash provided by operating activities of continuing operations		327			255

Investing activities
	Capital expenditures				(204	)		(153	)
	Proceeds from the sale of discontinued operations				286			—
	Other				(15	)		(15	)

		Net cash provided by (used in) investing activities of continuing operations			67			(168	)

Financing activities
	Change in Credit Facilities				(442	)		(470	)
	Proceeds from issuance of notes				375			300
	Proceeds from exercise of stock options				39			6
	Debt issuance costs				(25	)		(2	)
	Other				1			—

			Net cash used in financing activities of continuing operations		(52	)		(166	)

Cash related to discontinued operations					(4	)		18

Increase (decrease) in cash and equivalents					338			(61	)
Cash and equivalents at beginning of period					313			339

Cash and equivalents at end of period				$	651		$	278

Supplemental Disclosures of Cash Flow Information
Cash paid for:
	Interest, net of amounts capitalized			$	152		$	163

	Income taxes, net of refunds			$	70		$	33

See notes to condensed consolidated financial statements

CAESARS ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1. The Company

Caesars Entertainment, Inc. ("Caesars" or the "Company"), a Delaware corporation, was formed in June 1998. On January 6, 2004, the Company changed its name from Park Place Entertainment Corporation to Caesars Entertainment, Inc. The Company is primarily engaged, through subsidiaries, in the ownership, operation, and development of gaming facilities. The operations of the Company are currently conducted under the Caesars, Bally's, Paris, Flamingo, Grand, Hilton and Conrad brands. The Company, through subsidiaries, operates and consolidates sixteen wholly owned casino hotels located in the United States; of which seven are located in Nevada; three are located in Atlantic City, New Jersey; five are located in Mississippi; and one is in New Orleans, Louisiana. Additionally, the Company manages and consolidates an 82 percent owned riverboat casino in Harrison County, Indiana; manages the casino operations of Caesars Palace at Sea on three cruise ships; and manages and consolidates two majority owned casinos in Nova Scotia, Canada. The Company partially owns and manages two casinos internationally, one located in Johannesburg, South Africa and one located in Punta del Este, Uruguay which are accounted for under the equity method. In Windsor, Canada, the Company has a 50 percent interest in a company that provides management services to the Casino Windsor. The Company also provides management services to two casinos in Queensland, Australia and the slot operations at the Dover Downs racetrack in Delaware. The Company views each casino property as an operating segment and all such operating segments have been aggregated into one reporting segment. Each casino property derives its revenues primarily from casino operations, room rental and food and beverage sales.

Note 2. Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company, its subsidiaries, and investments in unconsolidated affiliates, which are 50 percent or less owned, that are accounted for under the equity method. The Company exercises significant influence over those investments accounted for under the equity method due to ownership percentages, board representation, and management agreements. All material intercompany accounts and transactions are eliminated.

The condensed consolidated financial statements included herein are unaudited and have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim periods have been made. The results for the three and six month periods ended June 30, 2004 are not necessarily indicative of results to be expected for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

Reclassifications

The condensed consolidated financial statements for prior periods reflect certain reclassifications to conform to classifications adopted in the current period. These reclassifications have no effect on previously reported net income.

Note 3. Stock-Based Compensation

The Company has stock incentive plans and applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans using the intrinsic value method. Accordingly, no compensation expense is reflected in net income for stock options, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Compensation expense associated with the Supplemental Retention Plan, which is described in the Company's Annual Report on Form 10-K, for the three months ended June 30, 2004 and 2003 was $0 million and $1 million, respectively; and for the six months ended June 30, 2004 and 2003, the compensation expense was $1 million in each period. Had compensation cost for the Company's stock incentive plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standard ("SFAS") No. 123 "Accounting for Stock-Based Compensation," the Company's net income and net income per share would have been reduced to the pro forma amounts as follows (in millions, except per share amounts, unaudited):

		Three months ended June 30,						Six months ended June 30,
		2004			2003			2004			2003
Net income, as reported		$	148		$	41		$	219		$	82
Add: Total stock-based employee compensation expense included in reported net income, net of related taxes			—			1			1			1
Deduct: Total stock-based employee compensation expense determined under the fair value method, net of related taxes			(2	)		(4	)		(6	)		(7	)

Pro forma net income		$	146		$	38		$	214		$	76

Earnings per share:
	Basic, as reported	$	0.48		$	0.14		$	0.71		$	0.27
	Basic, pro forma	$	0.47		$	0.13		$	0.70		$	0.25
	Diluted, as reported	$	0.47		$	0.14		$	0.70		$	0.27
	Diluted, pro forma	$	0.47		$	0.13		$	0.69		$	0.25

Note 4. Discontinued Operations

In December 2003, the Company entered into a definitive agreement to sell the Las Vegas Hilton to an unrelated third party. This transaction was completed in June 2004 resulting in an after tax gain of $87 million, subject to a final adjustment for changes in working capital, which will be calculated following the closing. The gain is included in income (loss) from discontinued operations for the three and six months ended June 30, 2004. The Company received cash of approximately $286 million for the property, building, and equipment plus the preliminary working capital adjustment.

The results of the Las Vegas Hilton are classified as discontinued operations in each period presented in the accompanying condensed consolidated income statements of the Company. Consolidated interest expense has been allocated to the income (loss) from discontinued operations based on the ratio of Las Vegas Hilton's net assets to the consolidated net assets. In accordance with generally accepted accounting principles, the assets of the Las Vegas Hilton were no longer being depreciated due to their designation of being assets held for sale. The assets and liabilities of the Las Vegas Hilton were classified as assets held for sale and liabilities related to assets held for sale in the accompanying condensed consolidated balance sheet as of December 31, 2003.

Summary operating results for the discontinued operations of the Las Vegas Hilton are as follows (in millions, unaudited):

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
Net revenues	$	51		$	51		$	118		$	108

Operating income (loss)	$	5		$	(2	)	$	19		$	1
Interest expense		(1	)		(2	)		(3	)		(3	)
Income taxes		(1	)		2			(5	)		1
Gain on sale, net of taxes of $47 million		87			—			87			—

Income (loss) from discontinued operations	$	90		$	(2	)	$	98		$	(1	)

Assets held for sale and liabilities related to assets held for sale are as follows (in millions, unaudited):

		December 31, 2003
Cash and equivalents		$	10
Accounts receivable, net			22
Inventory, prepaids, and other			6
Income taxes receivable			13
Deferred income taxes, net			32
Property and equipment, net			147

	Total assets held for sale	$	230

Accounts payable and accrued expenses		$	46

	Total liabilities related to assets held for sale	$	46

Note 5. Earnings Per Share

The weighted-average number of common and common equivalent shares outstanding used in the computation of basic and diluted earnings per share is as follows (in millions, unaudited):

	Three months ended June 30,		Six months ended June 30,
	2004	2003	2004	2003
Weighted average number of common shares outstanding—basic	308	301	307	301
Potential dilution from equity grants	5	1	5	1

Weighted Average number of common shares outstanding—diluted	313	302	312	302

For the three and six months ended June 30, 2004, there were 88,000 shares excluded from the calculation of diluted EPS. The exercise price of those options exceeded the average market price. For the three and six months ended June 30, 2003, 20 million and 23 million shares were excluded from the calculation of diluted EPS. In April 2004, the Company issued $375 million contingent convertible Senior Notes due 2024. The notes are convertible into cash and shares of our common stock upon the

occurrence of certain events described in Note 7. Shares potentially issuable upon conversion are not included in the calculation of diluted EPS because the conditions for conversion have not been met.

Note 6. Comprehensive Income

Comprehensive income is the total of net income and all other non-stockholder changes in equity. Comprehensive income for the three and six months ended June 30, 2004 and 2003 is as follows (in millions, unaudited):

		Three months ended June 30,						Six months ended June 30,
		2004			2003			2004			2003
Net income	</