UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
March 7, 2005
Date of Report (Date of earliest event reported)
HARRAH’S ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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001-10410 |
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62-1411755 |
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(State of Incorporation) |
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(Commission File Number) |
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(IRS Employer |
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One Harrah’s Court |
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(Address of principal executive offices) (Zip Code) |
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(702) 407-6000 |
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(Registrant’s telephone number, including area code) |
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N/A |
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(Former Name or Former Address, if Changed Since Last Report) |
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Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
ý Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 8.01 Other Events.
In connection with the pending acquisition of Caesars Entertainment, Inc. by Harrah’s Entertainment, Inc., this Current Report on Form 8-K discloses the unaudited pro forma condensed combined financial statements of Harrah’s for the year ended December 31, 2004 giving effect to Harrah’s acquisition of Caesars. The unaudited pro formas are attached hereto as Exhibit 99.1 and incorporated by reference herein.
Additional Information about the Acquisition and Where to Find It
In connection with Harrah’s proposed acquisition of Caesars (“Acquisition”), on January 24, 2005, Harrah’s filed definitive materials with the Securities and Exchange Commission (SEC), including a registration statement on Form S-4 that contains a definitive prospectus and joint proxy statement. INVESTORS AND SECURITY HOLDERS OF HARRAH’S AND CAESARS ARE URGED TO READ THE PROSPECTUS AND JOINT PROXY STATEMENT BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT HARRAH’S, CAESARS AND THE ACQUISITION. The definitive materials filed on January 24, 2005, the preliminary versions of these materials filed on October 20, 2004, December 20, 2004, and January 24, 2005 and other relevant materials, and any other documents filed by Harrah’s or Caesars with the SEC, may be obtained free of charge at the SEC’s web site at www.sec.gov. In addition, investors and security holders may obtain free copies of the documents filed with the SEC by Harrah’s by directing a written request to: Harrah’s Entertainment, Inc., One Harrah’s Court, Las Vegas, Nevada 89119, Attention: Investor Relations or Caesars Entertainment, Inc., 3930 Howard Hughes Parkway, Las Vegas, Nevada 89109, Attention: Investor Relations. Investors and security holders are urged to read the proxy statement, prospectus and the other relevant materials before making any voting or investment decision with respect to the Acquisition.
Harrah’s, Caesars and their respective executive officers and directors may be deemed to be participants in the solicitation of proxies from the stockholders of Caesars and Harrah’s in connection with the Acquisition. Information about those executive officers and directors of Harrah’s and their ownership of Harrah’s common stock is set forth in the Harrah’s Form 10-K for the year ended December 31, 2004, which was filed with the SEC on March 1, 2005, and the proxy statement for Harrah’s 2004 Annual Meeting of Stockholders, which was filed with the SEC on March 4, 2004. Information about the executive officers and directors of Caesars and their ownership of Caesars common stock is set forth in the proxy statement for Caesars’ 2004 Annual Meeting of Stockholders, which was filed with the SEC on April 16, 2004. Investors and security holders may obtain additional information regarding the direct and indirect interests of Harrah’s, Caesars and their respective executive officers and directors in the Acquisition by reading the proxy statement and prospectus regarding the Acquisition.
This communication shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.
Item 9.01 Financial Statements and Exhibits.
(c) Exhibits. The following exhibit is being filed herewith:
99.1 Harrah’s Entertainment, Inc.’s Unaudited Pro Forma Condensed Combined Financial Statements for the year ended December 31, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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HARRAH’S ENTERTAINMENT, INC. |
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Date: March 7, 2005 |
By: |
/s/ Stephen H. Brammell |
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Stephen H. Brammell |
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Senior Vice President, General Counsel |
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and Corporate Secretary |
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EXHIBIT 99.1
HARRAH’S ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements are derived from and should be read in conjunction with historical consolidated financial statements and related notes of Harrah’s Entertainment, Inc. (“Harrah’s”), Horseshoe Gaming Holding Corp. (“Horseshoe”) and Caesars Entertainment, Inc. (“Caesars”). Harrah’s, through its wholly-owned subsidiary, Harrah’s Operating Company, Inc. (“Harrah’s Operating Company”), acquired Horseshoe on July 1, 2004.
The unaudited pro forma condensed combined statement of income for the year ended December 31, 2004, gives effect to:
• Harrah’s acquisition of Horseshoe;
• certain adjustments that are directly attributable to the acquisition of Horseshoe and will have continuing impact, including certain operational benefits arising from the elimination of duplicative corporate office and operational support functions;
• Harrah’s financing of the Horseshoe acquisition and refinancing of the existing indebtedness of Horseshoe, including the redemption of all of Horseshoe’s $535 million, face amount, 8 5/8% Senior Subordinated Notes due May 2009;
• Harrah’s sale of all of the outstanding limited and general partnership interests of the partnership that owns Harrah’s Shreveport Hotel and Casino (“Harrah’s Shreveport”), which was completed in May 2004;
• Harrah’s and Caesars agreements to sell the assets and certain related current liabilities of Harrah’s East Chicago and Tunica properties and of Caesars’ Atlantic City Hilton and Bally’s Tunica properties;
• Caesars’ agreement to sell the equity interests of Belle of Orleans, LLC, which does business as Bally’s Casino New Orleans;
• Caesars’ agreement to sell the assets and certain related liabilities of Caesars Tahoe;
• Caesars’ agreement to sell its ownership and management interests in Caesars Gauteng, a casino resort near Johannesburg, South Africa;
• the merger of Caesars with Harrah’s Operating Company, after giving pro forma effect to Harrah’s sale of Harrah’s Shreveport, acquisition of Horseshoe, Harrah’s and Caesars’ proposed sales of Harrah’s East Chicago, Harrah Tunica, Caesars’ Atlantic City Hilton and Bally’s Tunica and Caesars’ proposed sales of Bally’s Casino New Orleans, Caesars Tahoe and Caesars Gauteng; and
• Harrah’s financing of the cash portion of the Caesars merger with $1.9 billion in new debt, including anticipated acquisition costs.
The unaudited pro forma condensed combined statement of income assumes that each of these transactions was consummated on December 31, 2004.
The unaudited pro forma condensed combined balance sheet presents the combined financial position of Harrah’s and Caesars as if Harrah’s merger with Caesars was consummated on January 1, 2004, and gives effect to the merger of Caesars and the estimated incremental debt.
The unaudited pro forma condensed combined financial statements have been prepared based upon currently available information and assumptions that are deemed appropriate by Harrah’s management. The pro forma information is for informational purposes only and is not intended to be indicative of the actual consolidated financial position or consolidated results that would have been reported had the transactions occurred on the date indicated, nor does the information represent a forecast of the consolidated financial position at any future date or the combined financial results of Harrah’s, Horseshoe and Caesars for any future period.
HARRAH’S ENTERTAINMENT, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2004
(unaudited)
(In millions, except per share amounts)
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Harrah’s |
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Shreveport |
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Horseshoe |
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Horseshoe |
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Harrah’s |
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Caesars |
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Proposed |
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Caesars |
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Harrah’s |
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Revenues |
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Casino |
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$ |
4,077.7 |
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$ |
(64.1 |
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$ |
437.2 |
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$ |
— |
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$ |
4,450.8 |
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$ |
2,872.0 |
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$ |
— |
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$ |
— |
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$ |
7,322.8 |
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Food and beverage |
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665.5 |
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(8.4 |
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40.1 |
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— |
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697.2 |
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732.0 |
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— |
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— |
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1,429.2 |
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Rooms |
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390.1 |
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(6.3 |
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15.3 |
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— |
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399.1 |
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712.0 |
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— |
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— |
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1,111.1 |
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Management fees |
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60.6 |
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— |
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— |
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— |
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60.6 |
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25.0 |
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— |
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— |
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85.6 |
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Other |
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217.2 |
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(1.9 |
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9.2 |
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— |
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224.5 |
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333.0 |
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— |
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— |
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557.5 |
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Less: casino promotional allowances |
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(862.8 |
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15.9 |
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(79.4 |
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— |
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(926.3 |
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(468.0 |
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— |
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— |
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(1,394.3 |
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Total revenues |
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4,548.3 |
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(64.8 |
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422.4 |
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— |
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4,905.9 |
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4,206.0 |
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— |
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— |
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9,111.9 |
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Operating expenses |
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Direct |
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Casino |
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2,061.6 |
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(36.2 |
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244.5 |
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— |
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2,269.9 |
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1,442.0 |
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— |
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— |
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3,711.9 |
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Food and beverage |
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278.1 |
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(1.7 |
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12.4 |
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— |
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288.8 |
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418.0 |
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— |
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— |
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706.8 |
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Rooms |
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67.0 |
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(0.5 |
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1.0 |
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— |
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67.5 |
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173.0 |
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— |
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— |
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240.5 |
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Depreciation and amortization |
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327.2 |
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— |
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27.0 |
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(10.4 |
)(a) |
343.8 |
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410.0 |
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— |
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— |
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753.8 |
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Write-downs, reserves and recoveries |
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9.6 |
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(0.3 |
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— |
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— |
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9.3 |
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(1.0 |
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— |
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— |
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8.3 |
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Project opening costs |
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9.5 |
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— |
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— |
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— |
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9.5 |
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7.0 |
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— |
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— |
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16.5 |
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Property general, administrative and other |
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934.2 |
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(12.8 |
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108.8 |
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(45.6 |
)(b) |
989.2 |
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1,070.0 |
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— |
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— |
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2,059.2 |
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4.6 |
(a) |
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— |
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Corporate expense |
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69.1 |
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— |
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31.5 |
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(30.8 |
)(b) |
69.8 |
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70.0 |
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— |
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— |
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139.8 |
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Losses/(income) on interests in nonconsolidated affiliates |
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0.9 |
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— |
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— |
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— |
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0.9 |
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(5.0 |
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— |
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— |
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(4.1 |
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Total operating expenses |
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3,757.2 |
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(51.5 |
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425.2 |
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(82.2 |
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4,048.7 |
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3,584.0 |
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— |
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— |
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7,632.7 |
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Income from operations |
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791.1 |
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(13.3 |
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(2.8 |
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82.2 |
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857.2 |
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622.0 |
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— |
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1,479.2 |
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Interest expense, net of interest capitalized |
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(271.8 |
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2.3 |
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(23.8 |
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(37.9 |
)(c) |
(308.4 |
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(281.0 |
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14.7 |
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(108.1 |
)(g) |
(684.8 |
) |
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(1.0 |
)(d) |
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(2.0 |
)(h) |
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23.8 |
(e) |
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Losses on early extinguishment of debt |
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— |
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— |
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(0.2 |
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— |
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(0.2 |
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— |
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— |
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— |
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(0.2 |
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Other income, including interest income |
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9.5 |
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— |
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0.3 |
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— |
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9.8 |
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8.0 |
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— |
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— |
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17.8 |
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Income before income taxes and minority interests |
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528.8 |
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(11.0 |
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(26.5 |
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67.1 |
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558.4 |
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349.0 |
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14.7 |
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(110.1 |
) |
812.0 |
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Provision for income taxes |
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(190.6 |
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3.9 |
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— |
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(14.9 |
)(f) |
(201.6 |
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(158.0 |
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(4.7 |
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40.3 |
(i) |
(324.0 |
) |
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Minority interests |
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(8.6 |
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0.4 |
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— |
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— |
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(8.2 |
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(7.0 |
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— |
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(15.2 |
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Income from continuing operations |
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$ |
329.6 |
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$ |
(6.7 |
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$ |
(26.5 |
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$ |
52.2 |
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$ |
348.6 |
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$ |
184.0 |
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$ |
10.0 |
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$ |
(69.8 |
) |
$ |
472.8 |
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Earnings per share from continuing operations |
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Basic |
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$ |
2.97 |
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$ |
3.14 |
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$ |
2.64 |
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Diluted |
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$ |
2.92 |
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$ |
3.09 |
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$ |
2.59 |
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Weighted average common shares outstanding |
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111.2 |
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111.2 |
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178.8 |
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Weighted average common and common equivalent shares outstanding |
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112.9 |
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112.9 |
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182.8 |
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See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
HARRAH’S ENTERTAINMENT, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2004
(unaudited)
(In millions)
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Harrah’s |
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Caesars |
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Proposed |
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Caesars |
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Harrah’s |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
489.0 |
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$ |
299.0 |
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$ |
— |
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$ |
1,920.4 |
(j) |
$ |
776.3 |
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(11.7 |
)(k) |
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(1,920.4 |
)(l) |
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Receivables, net of allowance for doubtful accounts |
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130.5 |
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183.0 |
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— |
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— |
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313.5 |
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Deferred income taxes |
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30.1 |
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117.0 |
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— |
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— |
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147.1 |
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Inventories, prepayments and other |
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137.6 |
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138.0 |
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— |
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— |
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275.6 |
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Total current assets |
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787.2 |
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737.0 |
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— |
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(11.7 |
) |
1,512.5 |
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Land, buildings, riverboats and equipment, net of accumulated depreciation |
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4,745.0 |
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7,173.0 |
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— |
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— |
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11,918.0 |
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Assets held for sale |
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502.6 |
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626.0 |
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(1,118.2 |
) |
— |
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10.4 |
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Investments in and advances to nonconsolidated affiliates |
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6.1 |
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35.0 |
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— |
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— |
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41.1 |
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Goodwill and other intangible assets |
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2,216.1 |
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688.0 |
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— |
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1,701.9 |
(l) |
4,966.0 |
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360.0 |
(m) |
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Deferred costs and other |
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328.6 |
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338.0 |
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— |
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11.7 |
(k) |
678.3 |
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$ |
8,585.6 |
|
$ |
9,597.0 |
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$ |
(1,118.2 |
) |
$ |
2,061.9 |
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$ |
19,126.3 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
174.5 |
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$ |
74.0 |
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$ |
— |
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$ |
— |
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$ |
248.5 |
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Accrued expenses |
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577.7 |
|
734.0 |
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— |
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— |
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1,311.7 |
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Current portion of long-term debt |
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1.8 |
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8.0 |
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— |
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— |
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9.8 |
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Total current liabilities |
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754.0 |
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816.0 |
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— |
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— |
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1,570.0 |
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Long-term debt |
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5,151.1 |
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4,143.0 |
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(1,131.8 |
) |
1,920.4 |
(j) |
10,442.7 |
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360.0 |
(m) |
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Liabilities held for sale |
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0.8 |
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14.0 |
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(14.3 |
) |
— |
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0.5 |
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|||||
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Deferred credits and other |
|
198.5 |
|
126.0 |
|
— |
|
— |
|
324.5 |
|
|||||
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Deferred income taxes |
|
413.5 |
|
1,016.0 |
|
(27.4 |
) |
— |
|
1,402.1 |
|
|||||
|
|
|
6,517.9 |
|
6,115.0 |
|
(1,173.5 |
) |
2,280.4 |
|
13,739.8 |
|
|||||
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Minority interests |
|
32.5 |
|
— |
|
— |
|
— |
|
32.5 |
|
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|
|
|||||
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Stockholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Common stock |
|
11.3 |
|
3.0 |
|
— |
|
(3.0 |
)(l) |
18.1 |
|
|||||
|
|
|
|
|
|
|
|
|
6.8 |
(l) |
|
|
|||||
|
Capital surplus |
|
1,394.5 |
|
3,945.0 |
|
— |
|
(3,945.0 |
)(l) |
4,686.2 |
|
|||||
|
|
|
|
|
|
|
|
|
3,291.7 |
(l) |
|
|
|||||
|
Retained earnings |
|
638.4 |
|
(488.0 |
) |
55.3 |
|
453.0 |
(l) |
658.7 |
|
|||||
|
Accumulated other comprehensive income |
|
1.0 |
|
22.0 |
|
— |
|
(22.0 |
)(l) |
1.0 |
|
|||||
|
Deferred compensation related to restricted stock |
|
(10.0 |
) |
— |
|
— |
|
— |
|
(10.0 |
) |
|||||
|
|
|
2,035.2 |
|
3,482.0 |
|
55.3 |
|
(218.5 |
) |
5,354.0 |
|
|||||
|
|
|
$ |
8,585.6 |
|
$ |
9,597.0 |
|
$ |
(1,118.2 |
) |
$ |
2,061.9 |
|
$ |
19,126.3 |
|
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
HARRAH’S ENTERTAINMENT, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
Note 1 – Harrah’s Basis of Presentation
Historical financial information for Harrah’s for the year ended December 31, 2004, has been derived from Harrah’s historical financial statements.
Note 2 – Pro Forma Sale of Harrah’s Shreveport
The operating results of Harrah’s Shreveport, which was sold May 19, 2004, are being eliminated and interest expense is being reduced on the assumption that net proceeds from the sale were used to reduce outstanding debt. The sale of Harrah’s Shreveport avoided over-exposure in that market and facilitated gaining regulatory approval for the acquisition of Horseshoe.
Note 3 – Horseshoe Basis of Presentation
Historical financial information for Horseshoe for the six months ended June 30, 2004, has been derived from Horseshoe’s historical financial statements. Certain reclassifications have been made to the historical Horseshoe financial statements to conform to the presentation used in Harrah’s historical financial statements. Such reclassifications had no effect on Horseshoe’s previously reported income from continuing operations.
Note 4 – Horseshoe Pro Forma Statements of Income Adjustments
Following are brief descriptions of the pro forma adjustments to the statements of income to reflect the July 1, 2004, acquisition of Horseshoe. For purposes of this pro forma financial information, depreciation expense related to property and equipment is based on Harrah’s estimated useful lives of 10 to 40 years for buildings, riverboats and barges and 2 to 15 years for furniture, fixtures and equipment. Most of the intangible assets included in the Horseshoe acquisition are anticipated to have indefinite lives and, therefore, to be non-amortizing. See (a) below for a description of intangible assets to be amortized.
(a) Adjusts depreciation expense based on the fair value and estimated lives assigned to buildings, riverboats, furniture, fixtures and equipment in our preliminary purchase price allocation. Also records amortization of estimated intangible assets for the recognition of customer lists with estimated lives of 15 years and for an agreement to be amortized over four years.
(b) Eliminates acquisition-related costs triggered by “change of control” provisions in certain of Horseshoe’s benefit plans, including a retention bonus plan, employment agreements and executive severance agreements of $21.5 million for the six months ended June 30, 2004, and Horseshoe’s Equity Incentive Plan of $43.4 million for the six months ended June 30, 2004. Also records the impact on expenses of certain operational efficiencies for functions that were eliminated or reduced as a result of the acquisition of Horseshoe. The elimination of duplicative corporate office and operational support functions reduces expenses by $11.5 million for the six months ended June 30, 2004.
(c) Reflects increase in interest expense comprised of incremental borrowings incurred by Harrah’s to fund the acquisition, including transaction costs, and the retirement of Horseshoe’s 8 5/8% Senior Subordinated Notes (see (e) below). The pro forma interest expense arising from the additional borrowings has been computed using the stated rate on $500 million of Harrah’s 5.375% Senior Notes and on $750 million of Harrah’s 5.5% Senior Notes and the current rate on approximately $230 million of Harrah’s revolving credit agreement. The current interest rate on Harrah’s revolving credit agreement is 3.2%. Each 1/8% change in the floating rate on the approximate $230 million borrowed under the revolving credit agreement would result in a change in interest expense of $143,750 for the six months ended June 30, 2004.
(d) Reflects additional interest expense for the amortization of deferred finance charges and the discount arising from the incremental borrowings incurred by Harrah’s, see (c) above, to fund the acquisition of Horseshoe and the retirement of Horseshoe’s 8 5/8% Senior Subordinated Notes (see (e) below).
(e) Reflects reduction in interest expense, including amortization of deferred finance charges and of the discount related to the debt, to reflect the retirement of all $535 million of Horseshoe 8 5/8% Senior Subordinated Notes due 2009, using funds described in (c) above.
(f) Records the estimated tax effect of the pro forma adjustments and on the historical taxable income of Horseshoe. Horseshoe had elected to be taxed as an S Corporation for federal income tax purposes and, accordingly, made no provision in the accounts of Horseshoe for federal income taxes. The estimated tax rate was calculated using the federal statutory rate of 35% plus a state income tax rate of 1.65%.
Note 5 – Caesars Basis of Presentation
Historical financial information for Caesars as of and for the year ended December 31, 2004, has been derived from Caesars’ historical financial statements. Certain reclassifications have been made to the historical Caesars financial statements to conform to the presentation used in Harrah’s historical financial statements. Such reclassifications had no effect on Caesars’ previously reported income from continuing operations.
Note 6 – Pro Forma Sale of Properties
The pro forma adjustment for the sales of properties assumes the sales of the assets and certain related liabilities of Harrah’s East Chicago and Harrah’s Tunica properties and of Caesars’ Atlantic City Hilton, Bally’s Casino Tunica, Bally’s Casino New Orleans and Caesars Tahoe properties and their interests in Caesars Gauteng. These properties are classified as assets and liabilities held for sale and discontinued operations in Harrah’s and Caesars’ respective financial statements. Pro forma adjustments have been made to remove the assets and liabilities being sold, and interest expense is reduced on the assumption that net proceeds from the sales would have been used to reduce outstanding debt.
Note 7 – Caesars Merger
On July 14, 2004, Harrah’s, Harrah’s Operating Company and Caesars entered into an agreement providing for the merger of Caesars with Harrah’s Operating Company.
The following tables set forth the determination of the consideration to be paid for Caesars and the preliminary allocation of the purchase price. The purchase price is based on a market value of $48.74 per share of Harrah’s common stock, which is the average of the quoted market price of Harrah’s common stock for the period beginning two trading days before and ending two trading days after the merger was announced.
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
Estimated cash consideration |
|
$ |
1,870.4 |
|
|
Estimated value of stock consideration |
|
3,298.5 |
|
|
|
Fair market value of Caesars debt assumed by Harrah’s |
|
4,511.0 |
|
|
|
Estimated transaction costs and expenses |
|
50.0 |
|
|
|
Pro forma purchase price |
|
$ |
9,729.9 |
|
The preliminary determination of the consideration to be paid is based on Caesars’ outstanding shares at December 31, 2004. The final determination of the consideration to be paid will be dependent on the number of shares of Caesars’ common stock at the closing of the transaction and the balance of Caesars’ outstanding debt. An increase or decrease in shares outstanding of one million shares would result in an increase or decrease of approximately $6.0 million of estimated cash consideration and approximately $10.5 million increase or decrease in the value of the stock consideration.
The preliminary allocation of the pro forma purchase price is as follows:
|
Land, buildings, riverboats, furniture, fixtures and equipment |
|
$ |
7,173.0 |
|
|
Goodwill and other intangible assets |
|
2,749.9 |
|
|
|
Other, net |
|
(193.0 |
) |
|
|
|
|
$ |
9,729.9 |
|
The final purchase price allocation will be completed after the transaction closes. The preliminary purchase price allocation used for the purpose of this pro forma financial information is based on Caesar’s book value of assets and liabilities at December 31, 2004. The final purchase price and its allocation will be based on independent appraisals, discounted cash flows, quoted market prices and estimates by management and will be completed within one year from closing of the transaction.
Note 8 – Caesars Pro Forma Statements of Income Adjustments
Following are brief descriptions of the pro forma adjustments to the statement of income to reflect the merger of Caesars with Harrah’s Operating Company. For purposes of this pro forma financial information, depreciation expense related to property and equipment is based on Caesars’ estimated useful lives of 30 to 40 years for buildings and riverboats and 3 to 10 years for furniture and equipment. Since most of the intangible assets included in the Caesars merger are anticipated to have indefinite lives and, therefore, to be non-amortizing, no amortization of intangible assets has been included in the pro forma financial information. Estimated useful lives and amortization periods of property, equipment and intangible assets will be determined during the purchase price allocation and adjusted accordingly.
The unaudited pro forma condensed combined financial statements do not reflect any synergistic benefits that may be realized through the combination of the two companies or costs that may be incurred in integrating their operations. We estimate that we will realize approximately $80 million of synergies in the first full year after the merger.
(g) Reflects increase in interest expense comprised of incremental borrowings incurred by Harrah’s to fund the cash portion of the merger, including transaction costs. The pro forma interest expense arising from the additional borrowings has been computed using Harrah’s current average interest rate of 5.6%. Each 1/8% change in the estimated interest rate on the approximate $1.9 billion borrowed to finance the cash portion of the merger would result in a change in interest expense of $2.4 million for the year ended December 31, 2004.
(h) Reflects additional interest expense for the amortization of deferred finance charges arising from the incremental borrowings incurred by Harrah’s (see (g) above) to fund the acquisition of Caesars.
(i) Records the estimated tax effect of the pro forma adjustments and on the historical taxable income of Caesars. The estimated tax rate was calculated using the federal statutory rate of 35% plus a state income tax rate of 1.65%.
Note 9 – Caesars Pro Forma Balance Sheet Adjustments
Following are brief descriptions of the pro forma adjustments to the balance sheet to reflect the merger of Caesars with Harrah’s Operating Company.
(j) Records additional borrowings incurred to fund the merger.
(k) Records deferred financing costs incurred to borrow funds to fund the merger.
(l) Records the acquisition of 100% of the equity of Caesars and reflects as goodwill and other intangible assets the excess of the purchase price over the estimated fair value of net tangible assets acquired and liabilities assumed.
(m) Reflects the adjustment of Caesars’ outstanding debt to fair value.