# ***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 March 31,  2005** |
|                                               |       |                                                                                          |
| **OR**                                             |
| ** **                                         | ** ** | ** **                                                                                    |
| **o**                                              | ** ** | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**For the transitionperiod from        to      **

** **

## **Commission file number 1-14573**

## ** **

# ***CAESARS ENTERTAINMENT, INC.***

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                                                         | ** ** | **88-0400631**      |
|--------------------------------------------------------------------------------------|------------|---------------------|
| (State or other jurisdiction of                                                      |       | (I.R.S. Employer    |
| incorporation or organization)                                                       |       | Identification No.) |
|                                                                                 |       |                |
| **3930 Howard Hughes Parkway**                                                       | ** ** | ** **          |
| **Las Vegas, Nevada**                                                                | ** ** | **89109**           |
| (Address of principal executive offices)                                             |       | (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 markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the precedingtwelve months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  ý        No  o

 

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

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:

 
| **Title of Each Class**                  | ** ** | **Outstanding at May 2, 2005** |
|------------------------------------------|------------|--------------------------------|
| Common  Stock, par value $0.01 per share |       | 314,823,331                    |

 

 

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**CAESARS ENTERTAINMENT, INC.**

**INDEX**

 

 
| **PART I.**    | **FINANCIAL  INFORMATION**                                                                   | ** ** |
|----------------|----------------------------------------------------------------------------------------------|------------|
|           |                                                                                         |       |
| Item 1.        | Unaudited  Condensed Consolidated Financial Statements                                       |       |
|           |                                                                                         |       |
|           | Condensed Consolidated Balance Sheets  March 31, 2005 and December 31, 2004                  |       |
|           |                                                                                         |       |
|           | Condensed Consolidated Income Statements  Three months ended March 31, 2005 and 2004         |       |
|           |                                                                                         |       |
|           | Condensed Consolidated Statements of Cash  Flows  Three months ended March 31, 2005 and 2004 |       |
|           |                                                                                         |       |
|           | Notes to Condensed Consolidated Financial  Statements                                        |       |
|           |                                                                                         |       |
| Item 2.        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations  |       |
|           |                                                                                         |       |
| Item 3.        | Quantitative and Qualitative Disclosures  About Market Risk                                  |       |
|           |                                                                                         |       |
| Item 4.        | Controls  and Procedures                                                                     |       |
|           |                                                                                         |       |
| **PART II.**   | **OTHER INFORMATION**                                                                        | ** ** |
|           |                                                                                         |       |
| Item  1.       | Legal Proceedings                                                                            |       |
|           |                                                                                         |       |
| Item 4.        | Submission of Matters to a Vote of Security  Holders                                         |       |
|           |                                                                                         |       |
| Item 6.        | Exhibits                                                                                     |       |
|           |                                                                                         |       |
| **SIGNATURES** | ** **                                                                                   |
|                |                                                                                              |            |  |

 

2

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**PART I.****                            FINANCIALINFORMATION**

**ITEM 1****.****                             UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**CAESARS ENTERTAINMENT, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(dollars in millions, except par value)**

**(unaudited)**

 
| ** **                                                                                                                                                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2005**      | ** ** | **2004**         | ** ** |
| ** **                                                                                                                                                            | ** ** | ** **    | ** ** | ** **       | ** ** |
| Assets                                                                                                                                                                | ** ** | ** **    | ** ** | ** **       | ** ** |
| Cash and cash equivalents                                                                                                                                             |       | $             | 216        |             | $          | 299 |   |
| Accounts receivable, net                                                                                                                                              |       | 177           |       | 183              |       |
| Inventory, prepaids, and other                                                                                                                                        |       | 147           |       | 137              |       |
| Deferred income taxes, net                                                                                                                                            |       | 107           |       | 117              |       |
| Total current assets                                                                                                                                                  |       | 647           |       | 736              |       |
|                                                                                                                                                                  |       |          |       |             |       |
| Assets held for sale                                                                                                                                                  |       | 578           |       | 626              |       |
| Investments                                                                                                                                                           |       | 86            |       | 35               |       |
| Property and equipment, net                                                                                                                                           |       | 7,185         |       | 7,173            |       |
| Goodwill                                                                                                                                                              |       | 707           |       | 688              |       |
| Other assets                                                                                                                                                          |       | 369           |       | 338              |       |
| Total assets                                                                                                                                                          |       | $             | 9,572      |             | $          | 9,596 |   |
|                                                                                                                                                                  |       |          |       |             |       |
| Liabilities and Stockholders’ Equity                                                                                                                             |       |          |       |             |       |
| Accounts payable and accrued expenses                                                                                                                                 |       | $             | 658        |             | $          | 699 |   |
| Current maturities of long-term debt                                                                                                                                  |       | 8             |       | 8                |       |
| Income taxes payable                                                                                                                                                  |       | 115           |       | 108              |       |
| Liabilities related to assets held for sale                                                                                                                           |       | 14            |       | 14               |       |
| Total current liabilities                                                                                                                                             |       | 795           |       | 829              |       |
|                                                                                                                                                                  |       |          |       |             |       |
| Long-term debt, net of current maturities                                                                                                                             |       | 4,118         |       | 4,143            |       |
| Deferred income taxes, net                                                                                                                                            |       | 989           |       | 1,016            |       |
| Other liabilities                                                                                                                                                     |       | 125           |       | 126              |       |
| Total liabilities                                                                                                                                                     |       | 6,027         |       | 6,114            |       |
|                                                                                                                                                                  |       |          |       |             |       |
| Commitments and contingent liabilities                                                                                                                                |       |          |       |             |       |
|                                                                                                                                                                  |       |          |       |             |       |
| Stockholders’ Equity:                                                                                                                                            |       |          |       |             |       |
| Common stock, $0.01 par value, 400.0  million shares authorized, 337.9 million and 336.9 million shares issued at  March 31, 2005 and December 31, 2004, respectively |       | 3             |       | 3                |       |
| Preferred stock, $0.01 par value, 100.0  million shares authorized                                                                                                    |       | —        |       | —           |       |
| Additional paid-in capital                                                                                                                                            |       | 3,960         |       | 3,945            |       |
| Accumulated deficit                                                                                                                                                   |       | (176          | )          | (226             | )          |
| Accumulated other comprehensive income                                                                                                                                |       | 20            |       | 22               |       |
| Common stock in treasury at cost, 23.1  million shares at March 31, 2005 and December 31, 2004                                                                        |       | (262          | )          | (262             | )          |
| Total stockholders’ equity                                                                                                                                       |       | 3,545         |       | 3,482            |       |
| Total liabilities and stockholders’ equity                                                                                                                       |       | $             | 9,572      |             | $          | 9,596 |   |

 

See notes to condensed consolidated financialstatements

 

3

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**CAESARS ENTERTAINMENT, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED INCOME STATEMENTS**

**(in millions, except per share amounts)**

**(unaudited)**

 
| ** **                                                                          | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                          | ** ** | **March 31,**          | ** ** |
| ** **                                                                          | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Net Revenues                                                                        |       |                   |       |   |   |
| Casino                                                                              |       | $                      | 746        |   | $ | 736 |   |
| Rooms                                                                               |       | 152                    |       | 136 |   |
| Food and beverage                                                                   |       | 124                    |       | 120 |   |
| Other revenue                                                                       |       | 74                     |       | 83 |   |
|                                                                                |       | 1,096                  |       | 1,075 |   |
|                                                                                |       |                   |       |   |   |
| Expenses                                                                            |       |                   |       |   |   |
| Casino                                                                              |       | 361                    |       | 369 |   |
| Rooms                                                                               |       | 44                     |       | 43 |   |
| Food and beverage                                                                   |       | 106                    |       | 103 |   |
| Other expense                                                                       |       | 272                    |       | 264 |   |
| Depreciation and amortization                                                       |       | 97                     |       | 101 |   |
| Pre-opening expense                                                                 |       | 1                      |       | — |   |
| Merger expense                                                                      |       | 155                    |       | — |   |
| Corporate expense                                                                   |       | 12                     |       | 11 |   |
|                                                                                |       | 1,048                  |       | 891 |   |
|                                                                                |       |                   |       |   |   |
| Equity in earnings of unconsolidated  affiliates                                    |       | 1                      |       | 5 |   |
|                                                                                |       |                   |       |   |   |
| Operating income                                                                    |       | 49                     |       | 189 |   |
|                                                                                |       |                   |       |   |   |
| Interest expense, net of interest  capitalized                                      |       | (67                    | )          | (71 | ) |
| Interest expense, net from unconsolidated  affiliates                               |       | —                 |       | (1 | ) |
| Interest and other income                                                           |       | 1                      |       | 1 |   |
|                                                                                |       |                   |       |   |   |
| Income (loss) from continuing operations  before income taxes and minority interest |       | (17                    | )          | 118 |   |
| Provision for income taxes                                                          |       | 3                      |       | 55 |   |
| Minority interest, net                                                              |       | 2                      |       | 2 |   |
| Income (loss) from continuing operations                                            |       | (22                    | )          | 61 |   |
|                                                                                |       |                   |       |   |   |
| Discontinued operations                                                             |       |                   |       |   |   |
| Income from discontinued operations, net of  taxes                                  |       | 72                     |       | 10 |   |
|                                                                                |       |                   |       |   |   |   |   |
| Net income                                                                          |       | $                      | 50         |   | $ | 71 |   |
|                                                                                |       |                   |       |   |   |
| Basic and diluted earnings (loss) per share                                         |       |                   |       |   |   |
| Income (loss) from continuing operations                                            |       | $                      | (0.07      | ) | $ | 0.20 |   |
| Discontinued operations, net of taxes                                               |       | 0.23                   |       | 0.03 |   |
| Net income                                                                          |       | $                      | 0.16       |   | $ | 0.23 |   |
|                                                                                |       |                   |       |   |   |
| Weighted average shares outstanding                                                 |       |                   |       |   |   |
| Basic shares                                                                        |       | 315                    |       | 306 |   |
| Diluted shares                                                                      |       | 315                    |       | 310 |   |

 

See notes to condensed consolidated financialstatements

 

4

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**CAESARS ENTERTAINMENT, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in millions)**

**(unaudited)**

 
| ** **                                                                                                  | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                  | ** ** | **March 31,**          | ** ** |
| ** **                                                                                                  | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Operating activities                                                                                        |       |                   |       |   |   |
| Net income                                                                                                  |       | $                      | 50         |   | $ | 71 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities of continuing operations: |       |                   |       |   |   |
| Depreciation and amortization                                                                               |       | 97                     |       | 101 |   |
| Income from discontinued operations                                                                         |       | (72                    | )          | (10 | ) |
| Amortization of debt issue costs                                                                            |       | 3                      |       | 2 |   |
| Tax benefit from stock option exercises                                                                     |       | 3                      |       | 5 |   |
| Change in working capital components:                                                                       |       |                   |       |   |   |
| Accounts receivable, net                                                                                    |       | 6                      |       | (4 | ) |
| Inventory, prepaids, and other                                                                              |       | (10                    | )          | (12 | ) |
| Accounts payable and accrued expenses                                                                       |       | (41                    | )          | (69 | ) |
| Income taxes payable                                                                                        |       | 7                      |       | 49 |   |
| Change in deferred income taxes                                                                             |       | (17                    | )          | (3 | ) |
| Other                                                                                                       |       | 1                      |       | (3 | ) |
| Net cash provided by operating activities  of continuing operations                                         |       | 27                     |       | 127 |   |
|                                                                                                        |       |                   |       |   |   |
| Investing activities                                                                                        |       |                   |       |   |   |
| Capital expenditures                                                                                        |       | (106                   | )          | (70 | ) |
| Proceeds from sale of interests in Caesars  Gauteng                                                         |       | 102                    |       | — |   |
| Additional investments:                                                                                     |       |                   |       |   |   |
| Caesars Indiana                                                                                             |       | (70                    | )          | — |   |
| Philadelphia                                                                                                |       | (44                    | )          | — |   |
| Other                                                                                                       |       | (2                     | )          | (9 | ) |
| Net cash used in investing activities of  continuing operations                                             |       | (120                   | )          | (79 | ) |
|                                                                                                        |       |                   |       |   |   |
| Financing activities                                                                                        |       |                   |       |   |   |
| Change in credit facilities                                                                                 |       | (18                    | )          | (138 | ) |
| Proceeds from exercise of stock options                                                                     |       | 11                     |       | 20 |   |
| Other                                                                                                       |       | 1                      |       | — |   |
| Net cash used in financing activities of continuing operations                                         |       | (6                     | )          | (118 | ) |
|                                                                                                        |       |                   |       |   |   |
| Cash provided by discontinued operations                                                                    |       | 16                     |       | 15 |   |
|                                                                                                        |       |                   |       |   |   |
| Decrease in cash and equivalents                                                                            |       | (83                    | )          | (55 | ) |
| Cash and equivalents at beginning of period                                                                 |       | 299                    |       | 285 |   |
|                                                                                                        |       |                   |       |   |   |
| Cash and equivalents at end of period                                                                       |       | $                      | 216        |   | $ | 230 |   |
|                                                                                                        |       |                   |       |   |   |
| Supplemental Disclosures of Cash Flow  Information:                                                         |       |                   |       |   |   |
| Cash paid for:                                                                                              |       |                   |       |   |   |
| Interest, net of amounts capitalized                                                                        |       | $                      | 81         |   | $ | 93 |   |
| Income taxes, net of refunds                                                                                |       | $                      | 41         |   | $ | 9 |   |

 

See notes to condensed consolidated financialstatements

 

5

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** **

**CAESARS ENTERTAINMENT, INC. AND SUBSIDIARIES**

## **NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

## **(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 itsname from Park Place Entertainment Corporation to Caesars Entertainment, Inc.  The Company is primarily engaged, throughsubsidiaries, in the ownership, operation, and development of gamingfacilities. The operations of the Company are currently conducted under theCaesars, Bally’s, Paris, Flamingo, Grand, Hilton and Conrad brands. TheCompany, through subsidiaries, operates and consolidates seventeen wholly ownedcasino hotels located in the United States; of which seven are located inNevada; three are located in Atlantic City, New Jersey; five are located inMississippi; one is located in Harrison County, Indiana and one is located inNew Orleans, Louisiana. Additionally, the Company manages the casino operationsof Caesars Palace at Sea on three cruise ships; and manages and consolidatestwo majority owned casinos in Nova Scotia, Canada. The company manages andconsolidates an 86 percent owned international casino in Punta del Este,Uruguay. In Windsor, Canada, the Company has a 50 percent interest in a companythat provides management services to the Casino Windsor. The Company alsoprovides management services to two casinos in Queensland, Australia. TheCompany views each casino property as an operating segment and all suchoperating segments have been aggregated into one reporting segment. Each casinoproperty derives its revenues primarily from casino operations, room rental andfood and beverage sales.

 

On July 14, 2004, the Company, Harrah’s Entertainment, Inc. (“Harrah’s”) and Harrah’s Operating Company, Inc. (“Harrah’s Operating”), a wholly-owned subsidiary of Harrah’s, entered into an Agreement and Plan of Merger (the “Merger Agreement”), providing for the merger of the Company with and into Harrah’s Operating, which will be the surviving corporation.  The Merger Agreement provides that each Company stockholder may elect to receive for each outstanding share of Company common stock either $17.75 in cash or 0.3247 shares of Harrah’s common stock.  However, Harrah’s has limited the total (i) number of Harrah’s shares it will issue to the product of the Company’s outstanding number of shares multiplied by 0.6642 and further multiplied by the 0.3247 fraction referred to above (the “Stock Cap”) and (ii) cash it will issue to the product of the Company’s outstanding number of shares multiplied by 0.3358 and further multiplied by the $17.75 amount referred to above (the “Cash Cap”).  To the extent that the Company’s stockholders elect to receive (i) Harrah’s stock in excess of the Stock Cap or (ii) cash in excess of the Cash Cap, then the merger consideration paid to the Company’s stockholders shall be pro rated between Harrah’s common stock and cash pursuant to the terms of the Merger Agreement.  As of March 31, 2005, the outstanding number of shares of the Company’s common stock was approximately 314.8 million and using such number of shares, the aggregate merger consideration would equal (i) approximately 67.9 million shares of Harrah’s common stock and (ii) approximately $1.876 billion in cash.

 

On March 11, 2005 the stockholders of the Company approved the Merger Agreement at a special stockholders meeting.  The transaction with Harrah’s is subject to a number of other conditions, including, among other things the receipt of all necessary antitrust, gaming and other approvals, and the satisfaction or waiver of all other conditions precedent.

 

### **Note 2. Basis of Presentation**

### ** **

The condensed consolidated financial statements include the accounts ofthe Company, its subsidiaries, and investments in unconsolidated affiliates,which are 50 percent or less owned, that are accounted for under the equitymethod.  The Company exercisessignificant influence over those investments accounted for under the equitymethod due to ownership percentages, board representation, and managementagreements. All material intercompany accounts and transactions are eliminated.

 

6

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The condensed consolidated financial statements included herein areunaudited and have been prepared by the Company pursuant to the rules andregulations of the United States Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to such rulesand regulations, although the Company believes that the disclosures areadequate to make the information presented not misleading.  In the opinion of management, all adjustments(which include normal recurring adjustments) necessary for a fair presentationof results for the interim periods have been made. The results for the threemonth period ended March 31, 2005 are not necessarily indicative of results tobe expected for the full fiscal year. These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.

 

*Reclassifications*

 

The condensed consolidated financial statements for prior periodsreflect certain reclassifications, including discontinued operations asdescribed in Note 6, to conform to classifications adopted in the currentperiod. These reclassifications have no effect on previously reported netincome.

 

*Recently Issued Accounting Standards*

 

InSeptember 2004, the Emerging Issues Task Force (EITF) of the FinancialAccounting Standards Board (FASB) reached a consensus on issue No. 04-08,“The Effect of Contingently Convertible Instruments on Diluted Earnings perShare” (EITF 04-08), which is effective for reporting periods ending afterDecember 15, 2004. EITF 04-08 requires companies to include sharesissuable under convertible instruments in diluted earnings per sharecomputations (if dilutive) regardless of whether the market price trigger (orother contingent feature) has been met. In addition, prior period earnings pershare amounts presented for comparative purposes must be restated. InApril 2004, the Company issued contingent convertible notes with terms asdescribed in the Company’s Annual Report on Form 10-K for the year ended December31, 2004. There will be no impact on the diluted earnings per share calculatedrelated to these notes unless the Company’s common stock price exceeds theconversion price as the principle amount of the notes is convertible into cashonly. In that situation, the Company would reflect the additional common sharesin the calculation of diluted earnings per share using the treasury sharemethod.

 

InDecember 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,”which requires all companies to measure compensation costs for all share-basedpayments (including employee stock options) at fair value. This statement willbe effective for public companies for the first fiscal year beginning afterJune 15, 2005. The Company is currently in the process of determining theimpact this statement will have on its financial condition or results ofoperations.

 

7

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** **

**Note 3.Stock-Based Compensation**

 

The Company has stock incentive plans and appliesAccounting Principles Board Opinion No. 25 and related interpretations inaccounting for stock-based compensation plans using the intrinsic valuemethod.  Had compensation cost for theCompany’s stock incentive plans been determined based on the fair value at thegrant dates for awards under those plans consistent with the method ofStatement of Financial Accounting Standard (“SFAS”) No. 123 “Accountingfor Stock-Based Compensation,” the Company’s net income and net income pershare would have been reduced to the pro forma amounts as follows (in millions,except per share amounts, unaudited):

 
| ** **                                                                                                             | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                             | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                                                                                                                   |       |                              |       |   |   |
| Net income, as reported                                                                                                |       | $                                 | 50         |   | $ | 71 |   |
| Add: Total stock-based employee  compensation expense included in reported net income, net of related taxes            |       | 1                                 |       | 1 |   |
| Deduct: Total stock-based employee  compensation expense determined under the fair value method, net of related  taxes |       | (9                                | )          | (2 | ) |
| Pro forma net income                                                                                                   |       | $                                 | 42         |   | $ | 70 |   |
|                                                                                                                   |       |                              |       |   |   |
| Earnings per share:                                                                                                    |       |                              |       |   |   |
| Basic and diluted, as reported                                                                                         |       | $                                 | 0.16       |   | $ | 0.23 |   |
| Basic and diluted, pro forma                                                                                           |       | $                                 | 0.13       |   | $ | 0.23 |   |

 

### **Note 4. Investment inPhiladelphia**

### ** **

Duringthe first quarter of 2005, the Company, by and through a subsidiary, paid$44 million and applied previously paid deposits to the purchase of approximately30 acres of riverfront land in downtown Philadelphia for casino development.The subsidiary then contributed the land to a partnership, for an11 percent interest, which will develop and operate the casino.Preliminary site planning is underway and the Company plans to apply for agaming license in Philadelphia pending the outcome of litigation challengingPennsylvania’s recently passed gaming legislation.

 

### **Note 5. Purchase ofIndiana Minority Interest**

### ** **

Duringthe first quarter of 2005, the Company, by and through a subsidiary, purchasedRiverboat Development, Inc.’s 18 percent interest in the company that owns andoperates Caesars Indiana for approximately $70 million.  As a result of this transaction, Caesars nowowns 100 percent of Caesars Indiana and fully consolidates their results ofoperations.  In accordance with SFAS No.141, “Business Combinations,” Caesars recorded $38 million in indefinite-livedintangible assets, related to the gaming license and trade name and$19 million in goodwill.

 

### **Note 6. Discontinued Operations**

### ** **

*Las Vegas Hilton*

 

On December 24, 2003, the Company enteredinto a definitive agreement to sell the Las Vegas Hilton to an unrelated thirdparty. This transaction was completed in June 2004.

 

8

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*Atlantic City Hilton and Bally’s Casino Tunica*

 

On September 27, 2004, the Company enteredinto an agreement to sell certain assets and related liabilities of theAtlantic City Hilton and Bally’s Casino Tunica to an unrelated third party for$612 million. This transaction closed in April 2005 and the Companyexpects to record an after-tax gain of approximately $20 million in thesecond quarter of 2005 (see Note 12).

 

*Bally’s Casino New Orleans*

 

On October 22, 2004, the Company enteredinto an agreement to sell its equity interests in Belle of Orleans, LLC, whichoperates Bally’s Casino New Orleans, to an unrelated third party for$24 million. The transaction is scheduled to close by the end of thesecond quarter of 2005 and is subject to customary regulatory approvals andclosing conditions outlined in the purchase agreement. The estimated sellingprice of the assets less the costs to sell this property exceeds its carryingvalue; therefore no loss has been recognized as of March 31, 2005. Any gainrelated to this sale will be recognized when the transaction is completed.

 

*Caesars Tahoe*

 

On November 19, 2004, the Company enteredinto an agreement to sell certain assets and related liabilities of CaesarsTahoe to an unrelated third party for $45 million. The transaction is expectedto close by the end of the second quarter of 2005 and is subject to customaryregulatory approvals and closing conditions outlined in the purchase agreement.The estimated selling price of the assets less the costs to sell this propertyexceeds its carrying value; therefore no loss has been recognized as of March31, 2005.

 

*Caesars Gauteng*

 

On December 24, 2004, the Company enteredinto a definitive agreement to sell its ownership and management interests inCaesars Gauteng for approximately $145 million. The transaction closed onMarch 31, 2005, resulting in an after-tax gain of $68 million which isincluded in income from discontinued operations for the three months endedMarch 31, 2005.

 

The results of the properties discussed aboveare classified as discontinued operations and the condensed consolidatedfinancial statements for all prior periods have been adjusted to reflect thispresentation. Interest expense has been allocated to the income fromdiscontinued operations based on the ratio of the discontinued operations’ netassets to the consolidated net assets. In accordance with generally acceptedaccounting principles, the assets held for sale are no longer depreciated. Theassets and liabilities are classified as assets held for sale and liabilitiesrelated to assets held for sale in the accompanying condensed consolidatedbalance sheets as of March 31, 2005 and December 31, 2004.

 

Summaryoperating results for the discontinued operations are as follows (in millions,unaudited):

 
| ** **                                                    | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                    | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Net revenues                                                  |       | $                                 | 109        |   | $ | 188 |   |
|                                                          |       |                              |       |   |   |
| Operating income                                              |       | $                                 | 12         |   | $ | 26 |   |
| Allocated interest expense                                    |       | (6                                | )          | (8 | ) |
| Interest expense, net from unconsolidated  affiliates         |       | (1                                | )          | (1 | ) |
| Income tax provision                                          |       | (1                                | )          | (7 | ) |
| Gain on sale of Caesars Gauteng, net of  taxes of $32 million |       | 68                                |       | — |   |
| Income from discontinued operations                           |       | $                                 | 72         |   | $ | 10 |   |

 

9

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

 
| ** **                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|---------------|------------|------------------|------------|
| ** **                                         | ** ** | **2005**      | ** ** | **2004**         | ** ** |
| Cash and equivalents                               |       | $             | 24         |             | $          | 27 |   |
| Accounts receivable, net                           |       | 1             |       | 1                |       |
| Inventory, prepaids, and other                     |       | 4             |       | 4                |       |
| Property and equipment, net                        |       | 421           |       | 417              |       |
| Goodwill                                           |       | 108           |       | 108              |       |
| Investments                                        |       | —        |       | 49               |       |
| Other assets                                       |       | 20            |       | 20               |       |
| Total assets held for sale                         |       | $             | 578        |             | $          | 626 |   |
|                                               |       |          |       |             |       |
| Accounts payable and accrued expenses              |       | $             | 7          |             | $          | 7 |   |
| Other liabilities                                  |       | 7             |       | 7                |       |
| Total liabilities related to assets held  for sale |       | $             | 14         |             | $          | 14 |   |

### ** **

### **Note 7. Earnings Per Share**

### ** **

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

 
| ** **                                                           | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                           | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Weighted average number of common shares  outstanding – basic   |       | 315                               |       | 306 |   |
| Potential dilution from equity grants                                |       | —                            |       | 4 |   |
| Weighted average number of common shares  outstanding – diluted |       | 315                               |       | 310 |   |

 

The dilutive effect of the assumed exercise of stockoptions would have increased the weighted-average number of common shares by7 million for the quarter ended March 31, 2005; however, theadditional shares were excluded from the EPS calculation because of the netloss from continuing operations experienced during that period.

 

For the three months endedMarch 31, 2004, there were 5 million shares excluded from the calculationof diluted EPS. The exercise price of those options exceeded the average marketprice.  In April 2004, the Company issued$375 million contingent convertible Senior Notes due 2024 as described in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2004.The notes are convertible into cash and shares of our common stock upon theoccurrence of certain events. Shares potentially issuable upon conversion arenot included in the calculation of diluted EPS because the Company’s commonstock price has not exceeded the conversion price.

 

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### **Note 8. Comprehensive Income**

 

Comprehensive income is the total of net income and all othernon-stockholder changes in equity. Comprehensive income is as follows (in millions, unaudited):

 
| ** **                      | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Net income                      |       | $                                 | 50         |   | $ | 71 |   |
| Currency translation adjustment |       | (2                                | )          | (1 | ) |
| Comprehensive income            |       | $                                 | 48         |   | $ | 70 |   |

 

### **Note 9. Long-Term Debt**

 

Long-termdebt is as follows (in millions, unaudited):

 
| ** **                                                                                                                             | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| Senior and senior subordinated notes, net  of unamortized discount of $3 million as of March 31, 2005 and  December 31, 2004 |       | $                   | 3,522      |                   | $          | 3,522 |   |
| Credit facilities                                                                                                                      |       | 555                 |       | 573                    |       |
| Other                                                                                                                                  |       | 50                  |       | 50                     |       |
|                                                                                                                                   |       | 4,127               |       | 4,145                  |       |
| Less current maturities                                                                                                                |       | (8                  | )          | (8                     | )          |
| Market value of interest rate swaps                                                                                                    |       | (1                  | )          | 6                      |       |
| Net long-term debt                                                                                                                     |       | $                   | 4,118      |                   | $          | 4,143 |   |

 

*Bank Credit Facilities*

 

AtMarch 31, 2005, the Company has a $1.8 billion senior credit facility, whichexpires in April 2009, and is comprised of a $500 million term loan and a $1.3billion revolver (collectively, the “Credit Facility”). The outstanding balanceon the term loan was $500 million, and no amounts were outstanding under therevolver as of March 31, 2005 and December 31, 2004. In April 2005, the Companyused proceeds from the sale of the Atlantic City Hilton and Bally’s Tunica (seeNotes 6 and 12) to completely retire the term loan, thereby reducing overallavailability under the Company’s Credit Facility to $1.3 billion. Oncerepaid, the availability of the term loan component is permanently reduced.Amounts paid down under the revolver may be reborrowed.

 

TheCredit Facility contains financial covenants including a maximum leverage ratio(consolidated debt divided by consolidated ebitda, as defined in the CreditFacility) of 5.00:1.00 and a minimum interest coverage ratio (consolidatedebitda, as defined in the Credit Facility, divided by consolidated interestexpense) of 2.75:1.00.  The maximumleverage ratio is 5.00:1.00 for the quarterly testing periods ended March 31,2005 through and including September 30, 2005, 4.75:1.00 for the quarterlytesting periods ending December 31, 2005 and March 31, 2006, and 4.50:1.00 forthe quarterly testing periods ending June 30, 2006 and thereafter.  The interest coverage ratio remains 2.75:1.00for all quarterly testing periods.  TheCompany is required to compute its actual leverage and interest coverage ratioson a rolling twelve-month basis as of the end of each calendar quarter.  If the Company is not in compliance with therequired covenant ratios, an event of default would occur, which if not cured,could cause the entire outstanding borrowings under the Credit Facility tobecome immediately due and payable as well as trigger the cross defaultprovisions of other debt issues.  As ofMarch 31, 2005, the Company was in compliance with all applicable covenants.

 

Borrowingsunder the Credit Facility bear interest at a floating rate and may be obtained,at the

 

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Company’s option, as LIBOR advances for varying periods, or as baserate advances, each adjusted for an applicable margin (as further described inthe Credit Facility).  The Company hashistorically borrowed using LIBOR advances and expects to continue doing so forthe foreseeable future.  The Company paysa margin over LIBOR which is a function of the Company’s leverage ratio and theCompany’s credit rating.  This margin isadjusted quarterly.  Based on theCompany’s leverage ratio and credit rating as of March 31, 2005, the marginover LIBOR was 115 basis points.

 

Ina program designed for short-term borrowings at lower interest rates, theCompany has entered into an uncommitted line of credit with a lender whereby itcan borrow up to $100 million for periods of ninety days or less.  In April 2005, this agreement was extendedthrough July 2005.  These amounts areclassified as long-term because the Company has both the intent and the abilityto refinance these amounts using availability under the long-term portion ofits Credit Facility.  The Company isrequired to maintain availability under the Credit Facility in an amount equalto the amount outstanding under the short term borrowing program.  At March 31, 2005 and December 31, 2004,there was $55 million and $73 million outstanding under this program,respectively.

 

InApril 2005, after applying the proceeds from the sale of the Atlantic CityHilton and Bally’s Tunica, there are no borrowings outstanding under theCompany’s Credit Facility or the uncommitted line of credit.  The Company also anticipates that there willbe no borrowings outstanding at the close of the pending transaction withHarrah’s. The Credit Facility contains certain provisions that would restrictthe pending merger with Harrah’s unless amended or waived, and there can be noassurance that such amendments or waivers will be obtained.

 

*InterestRate Swaps*

 

Pursuantto the Company’s risk management policy, management may engage in actions tomanage the Company’s interest rate risk position.  During the last half of 2003, the Companyentered into four interest rate swaps representing $300 million notional amountwith members of its bank group to manage interest expense.  The interestrate swaps have converted a portion of the Company’s fixed-rate debt tofloating rate (“fair value hedges”).  Under the agreements, the Companyreceives a fixed interest rate of 7 percent and pays a variable interestrate based on a margin above six month LIBOR on $300 million notionalamount.  The interest rate swaps maturein 2013.  The net effect of the interest rate swaps resulted in a reductionin interest expense of $1 million and $3 million for the three months endedMarch 31, 2005 and 2004, respectively.

 

Theseinterest rate swaps meet the shortcut criteria under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” which permitsthe assumption of no ineffectiveness in the hedging relationship between theswap and the underlying hedged asset or liability.  As such, there is noincome statement impact from changes in the fair value of the hedging instruments. Instead, the fair value of the instrument is recorded as an asset or liabilityon the Company’s balance sheet with an offsetting adjustment to the carryingvalue of the related debt.  In accordance with SFAS No. 133, theCompany recorded other long-term liabilities of $1 million and other long-termassets of $6 million as of March 31, 2005 and December 31, 2004,respectively, representing the fair value of the interest rate swaps and acorresponding decrease or increase in long-term debt, as these interest rateswaps are considered highly effective under the criteria established by SFASNo. 133.

 

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* *

*Other*

 

Asof March 31, 2005 and December 31, 2004, other debt in the table above includes$47 million related to Baluma Holdings, S.A. which the Company beganconsolidating in September 2004 due to an ownership restructuring.

 

Thecondensed consolidated balance sheets as of March 31, 2005 and December 31,2004 exclude from current maturities $400 million of 7.875 percent SeniorSubordinated Notes due December 2005. This amount is classified as long-termbecause the Company has both the intent and the ability to refinance thesenotes using availability under the long-term portion of the Credit Facility.

 

**Note 10.  Commitments andContingent Liabilities**

 

*Litigation*

 

The Company and its subsidiaries are involved invarious legal proceedings relating to its businesses. The Company believes thatall the actions brought against it or its subsidiaries are without merit and willcontinue to vigorously defend against them. While any proceeding or litigationhas an element of uncertainty, the Company believes that the final outcome ofthese matters is not likely to have a material adverse effect upon its resultsof operations or financial position.

 

*Slot Machine Litigation*

 

In April 1994, William H. Poulos brought apurported class action in the United States District Court for the MiddleDistrict of Florida, Orlando Division captioned William H. Poulos, et al. v.Caesars World, Inc., et al. against 41 manufacturers, distributors andcasino operators of video poker and electronic slot machines, including theCompany. In May 1994, another plaintiff filed a class action complaint inthe United States District Court for the Middle District of Florida captionedWilliam Ahern, et al. v. Caesars World, Inc. et al. alleging substantiallythe same allegations against 48 defendants, including the Company. InSeptember 1995, a third action was filed against 45 defendants, includingthe Company, in the United States District Court for the District of Nevadacaptioned Larry Schreier, et al. v. Caesars World, Inc., et al. The courtconsolidated the three actions in the United States District Court for theDistrict of Nevada under the case caption William H. Poulos, et al. v. CaesarsWorld, Inc. et al. The consolidated complaints allege that the defendantsare involved in a scheme to induce people to play electronic video poker andslot machines based on the false beliefs regarding how such machines operateand the extent to which a player is likely to win on any given play. Theactions included claims under the federal Racketeering Influence and CorruptOrganizations Act, fraud, unjust enrichment and negligent misrepresentation andseek unspecific compensatory damages. In July 2002, the United StatesDistrict Court denied the plaintiff’s motion to certify the case as a classaction. On August 10, 2004, the Ninth Circuit Court of Appeals affirmedthe District Court’s denial of the plaintiff’s motion to certify the case as aclass action.

 

At present, both William Ahern and LarrySchreier have dismissed their claims against all defendants and they are nolonger parties to the lawsuit. The only two remaining plaintiffs are William H.Poulos and Brenda McElmore. A number of defendants, other than the Company andits subsidiaries, have recently been dismissed from the case. Motions forsummary judgment filed by the remaining defendants have been briefed and areawaiting adjudication by the court. Although discovery in the case has beenformally closed since April 5, 2005, various defendants are required to producepersons most knowledgeable for deposition no later than May 20, 2005. The trialin this case is set on a stacked trial calendar beginning September 12, 2005.

 

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*Mohawk Litigation*

 

In April 2000, the Company entered into anagreement with the Saint Regis Mohawk Tribe (the “Tribe”) pursuant to which theCompany obtained the exclusive rights to develop a Class II orClass III casino project in the State of New York with the Tribe. Thereare various parties alleging that the grant of rights to the Company infringedupon their rights. Such parties have commenced the various lawsuits discussed below.

 

On April 26, 2000, certain individualmembers of the Saint Regis Mohawk Tribe purported to commence a class actionproceeding in a “Tribal Court” in Hogansburg, New York against the Company andcertain of its executives. The proceeding sought to nullify the Company’sagreement with the Saint Regis Mohawk Tribe to develop and manage gamingfacilities in the State of New York. On March 20, 2001, the “Tribal Court”purported to render a default judgment against the Company and one of itsexecutives in the amount of $1.787 billion, which judgment the Companyrefuses to recognize as valid. On June 2, 2000, the Company and certain ofits executives filed an action captioned Park Place Entertainment Corporation,et al. v. Arquette, et al., in the United States District Court for theNorthern District of New York seeking to enjoin the dissident Tribal membersfrom proceeding in the “Tribal Court” with an action that the Company believeshas been unlawfully convened and is without merit. In September 2000, theDistrict Court dismissed the action on the grounds that the Court lackedjurisdiction. In October 2000, the Company appealed the judgment to theUnited States Court of Appeals for the Second Circuit. In January 2002,the Second Circuit remanded the matter to the District Court for furtherdevelopment of the record. In April 2002, the District Court requested theUnited States Department of the Interior, Bureau of Indian Affairs (“BIA”) toprovide its current position with regard to the legitimacy of the Tribe’s formof government and “Tribal Court”. Following receipt of letters issued by theBIA, dated June 5, 2002, June 26, 2002 and July 12, 2002, thisCourt entered an Order on July 29, 2002, affirming that the BIA recognizesonly the Three Chief system of government for the Saint Regis Mohawk Tribe (the“Tribal Council”), that the Tribal Council has, by Resolution having the forceof law of the Tribe, invalidated the Tribal court system and that the Mohawkpeople have, by popular vote, determined that the purported “Tribal Court” iswithout authority to adjudicate matters of Tribal law. On February 11,2004, the Magistrate Judge issued a decision requiring the Department of theInterior to review its decision to recognize the Three Chief system ofgovernment. On February 16, 2004, the Tribal Council received a letterfrom the Department of the Interior continuing to recognize the Tribal Councilas the official representatives of the Saint Regis Mohawk Tribe.

 

On November 13, 2000, Catskill Development,LLC, Mohawk Management, LLC and Monticello Raceway Development Company, LLC(collectively, “Catskill Development”) filed an action captioned CatskillDevelopment L.L.C., et al. v. Park Place Entertainment Corporation, et al.,against the Company in

 

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the United States District Court for the Southern District of New York.The action arises out of Catskill Development’s efforts to develop land inSullivan County as a Native American gaming facility in conjunction with theSaint Regis Mohawk Tribe. Catskill Development claims that the Companywrongfully interfered with several agreements between itself and the Tribepertaining to the proposed gaming facility. The plaintiffs allege tortiousinterference with contract and prospective business relationships, unfaircompetition and state anti-trust violations and seek over $3 billion indamages. On May 14, 2001, the Court granted the Company’s motion todismiss three of the four claims made by Catskill Development. On May 30,2001, Catskill Development moved for reconsideration of that ruling, and theDistrict Court reinstated one of the dismissed claims, with CatskillDevelopment’s claims for tortious interference with contract and prospectivebusiness relationship remaining after such decision. On or about May 15,2002, the Company filed a motion for summary judgment dismissing the complaint.On or about June 18, 2002, the Company filed a motion for reconsiderationof the Court’s decision reinstating plaintiffs’ tortious interference withcontract claim on the basis of intervening case law from a Federal AppealsCourt. On August 22, 2002, the Court granted the Company’s motion forsummary judgment dismissing plaintiffs’ remaining two claims for tortiousinterference with contractual relations and tortious interference withprospective business relations. On August 26, 2002, the Court grantedjudgment to the Company dismissing plaintiffs’ complaint in its entirety.Plaintiffs have appealed the District Court’s decision to the United StatesCourt of Appeals for the Second Circuit. Subsequent to the filing of theappeal, the Plaintiffs moved on March 14, 2003 to reopen the judgment onthe ground that certain information had not been provided to Plaintiffs indiscovery. In a decision rendered on October 7, 2003, the District Courtgranted Plaintiffs limited discovery for a 30-day period to explore whetherthey had been deprived of relevant information. After the discovery periodended, the Court entered an order on November 18, 2004 reaffirming the summaryjudgment dismissing the complaint in its entirety. The matter is currently onappeal to the Second Circuit Court of Appeals. The Company believes this matterto be without merit and will continue to vigorously contest the case.

 

On December 8, 2003, a group of financialinstitutions filed a complaint in the United States District Court for theEastern District of New York captioned McIntosh County Bank, et al. v. ParkPlace Entertainment Corp., et al. Plaintiffs, who obtained assignments of twoloans from President R.C.-St. Regis Management Company (“President”) in theamount of $12,116,000, allege that two officers of the Company purportedlyconspired with two officers of President to induce government officials of theSaint Regis Mohawk Tribe to terminate a management agreement between the Tribeand President, which, in turn, allegedly resulted in the Tribe’s failure tohonor a separate pledge agreement by which it agreed to escrow funds forpurposes of paying the subject loans. Plaintiffs allege causes of action forinterference with contract, interference with business relations, Donnelly Actviolations and unfair competition. All Defendants moved for dismissal of thecomplaint. After the Defendants moved to dismiss the Complaint, Plaintiffsfiled an Amended Complaint against the same Defendants on March 31, 2004,withdrawing the previous claims for unfair competition and Donnelly Actviolations, removing claim for treble and punitive damages, asserting purportedcauses of action for interference with contract, interference with prospectivebusiness relations, constructive trust and an accounting against the Company,and alleging unspecified damages in the amount of $20 million. On May 14,2004, all of the Defendants moved to dismiss the Amended Complaint. Oppositionto this motion was filed on June 30, 2004, and the Defendants’ replypapers were filed on July 30, 2004. The motion to dismiss the AmendedComplaint was granted in part and denied in part. Three of the four claims againstthe Company in the Amended Complaint were dismissed. The sole remaining claimis for interference with contract against all Defendants. Therefore, since thefiling of the complaint, claims for unfair competition, Donnelly Actviolations, interference with prospective business relations, constructivetrust and an accounting have all been dismissed. The Court sustained theremaining claim based on liberal pleading principles and without anyendorsement of its merit. The Company filed an answer to the remaining claim onApril 22, 2005. An initial conference was held before the Magistrate Judge onApril 13, 2005, at which a discovery schedule was set. The end date for alldiscovery is November 23, 2005. Initial disclosures are to be completed by May18, 2005. A status conference has also been scheduled for August 17, 2005.Deadlines for dispositive motions, a pretrial order

 

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and pretrial conference were also scheduled for December 2005 andJanuary 2006. The Company believes the matter is without merit and willcontinue to vigorously contest the case.

 

On March 29, 2001, the Company and its thengeneral counsel, Clive Cummis, sued thirty individual Tribal members in theSupreme Court of the State of New York in the case of Park Place EntertainmentCorp., et al. vs. Marlene Arquette, et al., alleging malicious defamation andprima facie tort in connection with the individuals’ purported “Tribal Court”proceedings and media publication of their purported “default judgment” againstthe Company, all of which the Company believes has been injurious to the goodname and reputation of the plaintiffs and seeks compensatory damages in anamount to be proved at trial (plus interest, costs and disbursements includingreasonable attorney fees), as well as unspecified punitive damages. Defendantsasserted a counterclaim alleging the action was commenced in violation of NewYork’s Civil Rights Law. Defendant Michael Rhodes-Devey moved to change venueto Franklin County, New York and to dismiss the complaint. By order datedNovember 14, 2001, the Court granted the change of venue motion and deniedwithout prejudice the motion to dismiss. Plaintiffs moved to dismiss thecounterclaim for failure to state a cause of action. In February 2002, defendantscross-moved to dismiss the complaint. By Decision and Order datedSeptember 9, 2002, the Court denied defendants’ motion to dismiss thecomplaint and plaintiffs’ cross-motion to dismiss the counterclaim. This matterhas been settled, pending final court approval for execution of documents inexchange for mutual releases. Several individual defendants were not availableto execute settlement documents. Recent discussions with the Tribe’s counselindicate that all but one have been located and have agreed to sign. The singlehold-out will not prevent consummation of the settlement. The Company isawaiting execution of those documents and has applied to the court to continuethe matter administratively pending final execution.

 

On June 27, 2001, the individual members ofthe Saint Regis Mohawk Tribe that are plaintiffs in the Tribal Court actionreferenced above commenced an action in United States District Court for theNorthern District of New York against the Company and one of its executives, seekingrecognition and enforcement of the purported March 20, 2001$1.787 billion “Tribal Court” default judgment against defendants, whichjudgment the Company refuses to recognize as valid. The Company has taken theposition that the purported “Tribal Court” in which the proceeding has beeninvoked is an invalid forum and is not recognized by the lawful government ofthe Saint Regis Mohawk Tribe or by the BIA. After the parties madecross-motions for summary judgment, the parties agreed to settle the action withdiscontinuance. A settlement agreement has been circulated for signature by allthe plaintiffs. Although a signed settlement agreement has not been exchanged,the Court has discontinued the action without prejudice.

 

On October 15, 2001, Scutti Enterprises,LLC (“Scutti”) filed an action against the Company in the Supreme Court of theState of New York, County of Monroe. The action arises out of Scutti’s effortsto redevelop and manage the Mohawk Bingo Palace owned by the Saint Regis MohawkTribe on the Tribe’s reserve in Akwesasne, New York. Scutti claims that theCompany wrongfully interfered with its relationship with the Tribe pertainingto the proposed redevelopment and management of the Mohawk Bingo Palace. Scuttialleges tortious interference with contract and prospective businessrelationships, unfair competition and state anti-trust violations and seeksover $82 million in damages. The action was removed to United StatesDistrict Court for the Western District of New York. The Company moved to dismissthe action and, in March 2002, the Court dismissed the action withprejudice. Plaintiff has appealed the dismissal and also moved for relief fromjudgment with respect to the Court’s dismissal of plaintiff’s claims fortortious interference with contractual relations. On November 26, 2002,the Court denied plaintiff’s motion for relief from judgment. OnFebruary 28, 2003, the Second Circuit Court of Appeals affirmed in partand reversed in part the District Court’s dismissal of the action, affirming thedismissal of Scutti’s claim for tortious interference with contractualrelations, and vacating the dismissal of Scutti’s claim for tortiousinterference with prospective business relations and remanding the case to theDistrict Court regarding only that claim. Upon remand to the District Court,the parties engaged in discovery, and the Company has moved for summaryjudgment. The Company expects a decision on that motion at any

 

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time. The Company believes this matter to be without merit and willcontinue to vigorously contest this matter.

 

On January 29, 2002, two substantiallyidentical actions were filed in the Supreme Court of the State of New York,County of Albany, challenging legislation that, among other things, authorizedthe Governor of the State of New York to execute tribal-state gaming compacts,approved the use of slot machines as “games of chance,” approved the use ofvideo lottery terminals at racetracks and authorized the participation of NewYork State in a multi-state lottery. The matters are captioned Dalton, et al.v. Pataki, et al. and Karr v. Pataki, et al. Plaintiffs seek a declaratory judgment declaring the legislationunconstitutional and enjoining the implementation thereof. The Companyintervened in the actions and moved to dismiss the first three causes of actionthereof (relating to plaintiffs’ claims to invalidate the Legislature’sauthorization of Indian gaming compacts). The State of New York moved todismiss the actions in their entirety, while other defendants moved to dismisscertain causes of action. On October 30, 2002, the Court denied themotions to dismiss filed by the Company and all other defendants, andconsolidated the two matters. On July 17, 2003, the Supreme Court granteddefendants’ summary judgment motions, upholding the constitutionality of thelegislation and dismissing plaintiffs’ complaints in their entirety. Theplaintiffs appealed this decision and both sides were heard inDecember 2003. On July 7, 2004, the Appellate Division of the NewYork State Supreme Court held that the legislation authorizing six new NativeAmerican casinos in New York State, including three in the Catskills, isconsistent with the New York Constitution as well as applicable state andfederal law. Plaintiffs filed a notice of appeal from the Appellate Division’sdecision to the New York Court of Appeals, the highest court in the state. OnMay 3, 2005, the New York Court of Appeals, by a 6-1 majority, affirmedthe Appellate Division’s decision and upheld the constitutionality of thechallenged legislation authorizing Indian gambling in New York.

 

On January 3, 2005, Murrietta Lee, filed aNotice of Petition and Verified Petition against the Town of Thompson PlanningBoard, The St. Regis Mohawk Tribe, Caesars Entertainment, Inc., MiltonKutsher Associates and Louis Kutsher and Sons in the Supreme Court of the Stateof New York, County of Sullivan requesting judgment annulling the subdivisionand site plan approvals granted by the Town of Thompson Planning Board onDecember 1, 2004 pursuant to the New York State Environmental QualityReview Act. The Petition also requests the Court order the Thompson PlanningBoard to require a Supplemental Environmental Impact Statement to consider thecumulative impacts of up to five casinos in Sullivan County. The Respondentshave filed a Motion to Dismiss and expect a decision imminently. The Companybelieves that this action is without merit and will continue to vigorouslycontest the case.

 

*U.S. Attorney Subpoenas*

 

At various times during 2003, the U.S.Attorney’s Office in Orlando, Florida served grand jury subpoenas on theCompany and Caesars Palace. The subpoenas were served in connection with aninvestigation by the U.S. Attorney’s Office which the Company believes isfocusing on possible money laundering in connection with certain cashtransactions engaged in by a former customer of Caesars Palace. Theinvestigation continues and current and former employees of the Company andCaesars Palace have been interviewed by the U.S. Attorney’s Office. The Companyand Caesars Palace continue to cooperate. Neither the Company nor CaesarsPalace has been advised that either entity is a target of the grand juryinvestigation.

 

*Reno Hilton Litigation*

 

In Verderber vs. Reno Hilton, et al., a classaction lawsuit in Nevada State Court, the plaintiffs sought damages based onthe outbreak of a Norwalk, or Norwalk-like, virus at the Reno Hilton inMay and June of 1996. In 2002, the jury awarded individual judgmentsagainst the Company, its subsidiary FHR Corporation, and Reno Hilton ResortCorporation for (i) compensatory damages to five of the eightrepresentative class plaintiffs ranging from $2,011 to $9,822 each and(ii) punitive damages for the entire

 

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class of plaintiffs in the amount of $25.2 million. The Companybelieves the award of punitive damages, and the amount thereof, is notsupportable in either law or in fact and has filed a special writ in the NevadaSupreme Court seeking relief prior to determination of the unnamed classmembers’ claims.

 

*Development Projects*

 

*Saint Regis Mohawk Tribe*

 

The Company entered into an agreement inApril 2000 with the Saint Regis Mohawk Tribe in Hogansburg, New York inwhich it paid $3 million for the exclusive rights to develop a Class II orClass III casino project with the Tribe in the State of New York. InNovember 2001, the parties entered into a development agreement and amanagement agreement for the Company to develop and manage the Tribe’s planned$500 million casino and resort complex that is to be located at Kutsher’sCountry Club in Thompson, New York, which management agreement was subject tothe approval of the National Indian Gaming Commission (the “NIGC”). In responseto comments from the NIGC, the Company entered into an amended managementagreement (the “Amended Management Agreement”) and a development agreement (the“Amended Development Agreement”) on November 10, 2003, with the Tribe. TheAmended Management Agreement provides, among other things, that the Companywill manage the casino for seven years for a management fee equal to 30 percentof Net Total Revenue, as defined in that agreement, and that the exclusiveright for casino development in the State of New York has been modified toprovide for mutual non-compete protections within a 125 mile zone from theSullivan County location. The Amended Development Agreement provides, amongother things, that the Company will acquire lands for the casino and transferthe lands to the United States to be held in trust for the Tribe, providedevelopment assistance and construction management for the casino and receive a$15 million development fee and provide pre-construction advances of funds upto an aggregate of $20 million. It also provides that, subject to a number ofconditions including, among other things, the Company’s approval of aconstruction budget, having received all necessary federal, state and localgovernmental, tribal and regulatory approvals, and the Amended ManagementAgreement becoming effective, the Company will assist the Tribe in arrangingthe financing necessary for the costs of construction and the initial costs ofoperation and provide credit support, as necessary, for such funding. The Companyalso has the right, but not the obligation, to advance such funds. The Companyhas not finalized or approved any size of construction budget. During 2004, theCompany and the Tribe began to explore third-party financing alternatives. TheCompany and the Tribe have also commenced discussions regarding the form andmagnitude of any credit support that may be necessary. The Company’s ability toprovide various forms of credit support will be subject to the Credit Facilitydescribed in Note 9. The effectiveness of the Amended Management Agreementremains subject to a number of regulatory approvals, including withoutlimitation, final approval by the NIGC.

 

The Company has entered into a definitiveagreement, as amended, to acquire approximately 66 acres of the Kutsher’sResort Hotel and Country Club in Sullivan County, New York, for approximately$10 million, with an option to purchase the remaining 1,400 acres for$40.5 million. Upon approval of the Bureau of Indian Affairs (the “BIA”), the66 acre parcel will be transferred to the United States in trust for the SaintRegis Mohawk Tribe.

 

All of the agreements and plans relating to thedevelopment and management of this project are contingent upon variousregulatory and governmental approvals, including execution of a compact betweenthe Saint Regis Mohawk Tribe and the State of New York, and approvals muststill be received from the BIA and NIGC. On December 1, 2004, the Projectreceived all necessary approvals from the Town of Thompson Planning Board and fromthe Town of Thompson Zoning Board of Appeals. There is no guarantee that therequisite regulatory approvals will be received.

 

The Company is party to numerous lawsuitsregarding its involvement in the Saint Regis Mohawk project, which lawsuitsseek various monetary and other damages against the Company. Additionally,there are two lawsuits challenging the constitutionality of the legislationthat, among other things, authorized the

 

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Governor of the State of New York to execute tribal state gamingcompacts and approved the use of slot machines as “games of chance.” While theCompany believes that it will prevail on these various matters, there can be noassurance that it will and, if it does not prevail, there can be no assurancethat the damages assessed against the Company would be immaterial to theCompany. See “Litigation” above.

 

On May 12, 2003, the Saint Regis MohawkTribe and the Governor of the State of New York signed a memorandum ofunderstanding which outlined the terms under which the Tribe is authorized toproceed with the casino development. The Saint Regis Mohawk Tribe announcedsubsequently that it would withdraw from the memorandum of understanding andcontinue to negotiate with the State of New York to reach an agreement on thesubjects contained in the memorandum of understanding. These negotiations areon-going.

 

As of March 31, 2005, the Company had$44 million invested in the development of this project, which isclassified as other long-term assets on the Company’s consolidated balancesheet. Of that amount, $18 million is to be reimbursed to the Company by theTribe over a five year period commencing with the opening of the gamingfacility. In the event the project is not completed, the total amount investedwould be written off.

 

*Big Sandy Band of Western Mono Indians*

* *

In August 2004, the Company signed formalagreements with the Big Sandy Band of Western Mono Indians that will govern thedevelopment, construction, and management of the planned casino resort nearFresno, California. Preliminary plans for the project call for development of acasino resort on more than 40 acres near Fresno in the San Joaquin Valleyin Central California. The casino resort would become the second to directlyserve the Fresno metropolitan area which has a population of approximately 1.2million. The casino resort would initially include 200 to 250 hotel rooms,approximately 70,000 square feet of gaming space, at least 2,000 slot machines,approximately 40 gaming tables, restaurants, retail shops, and meeting spaceand entertainment facilities. The Big Sandy Tribe currently operates the MonoWind Casino in Auberry, California, about 15 miles northeast of the proposedcasino project site.

 

The management agreement for the casino resortis for an initial term of seven years, renewable upon the consent of bothparties, and requires the approval of the NIGC and other regulatory bodies. Inaddition, the Big Sandy Tribe would have to amend its existing compact with theState of California, or negotiate a new compact for the new casino project. Theproject is also dependent on other regulatory approvals and contingencies. Asof March 31, 2005, the Company has capitalized $1.2 million spent towardsacquiring real estate related to this project and $2.3 million advanced tothe Big Sandy Tribe for development costs approved by the Company and the BigSandy Tribe. Pursuant to the Interim Loan Agreement between the Company and theBig Sandy Tribe, the $2.3 million advance is to be repaid upon the earlierof permanent financing or the casino opening date.

 

*Caesars Wembley*

* *

In October 2004, the Company announcedplans to develop and operate a casino resort in London, adjacent to theredeveloped Wembley National Stadium and the legendary Wembley Arena. TheCompany has since entered into definitive agreements for the pre-constructionphase of the casino resort project. After certain conditions are met, theCompany will enter in the Joint Venture Agreement with its prospective partnerin the casino resort project, Quintain Estates and Development PLC. The partiesanticipate that these conditions, which include obtaining necessary gaminglicenses and consents, will be satisfied within approximately two years. InApril 2005, permissive legislation was passed in the United Kingdom. Bothparties are contemplated to own a 50 percent interest in the joint venturecompany. It is also contemplated that Caesars Wembley would be built on 13acres in the 58-acre redevelopment area and will include a casino, a 400-roomluxury hotel, a full-service spa and swimming pool, shops, convention andmeeting facilities and a variety of restaurants, bars and lounges.

 

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*Philadelphia*

* *

In the first quarter of 2005, the Companypurchased a 30 acre riverfront parcel in downtown Philadelphia. The subsidiarythen contributed the land to a partnership, for an 11 percent interest, whichwill develop and operate a planned casino. Preliminary site planning is underwayfor casino development on 18 upland acres of the site, and the Company intendsto be an applicant for a gaming license in Philadelphia pending the outcome oflitigation challenging Pennsylvania’s recently passed gaming legislation.

 

**Note 11.  Merger Expense**

 

Duringthe first quarter of 2005, the Company expensed $155 million related tothe pending merger of Caesars Entertainment with Harrah’s Operating, including$143 million due to the Cash-Out Option of the 1998 Stock Incentive Plandescribed below. In connection with the pending transaction, the Companyexpects to continue to incur significant fees and expenses, including withoutlimitation, fees and expenses payable to legal and other advisors. Caesars andHarrah’s have also agreed to “stay bonuses” of approximately $19 million intotal which will be paid to select employees who are critical to the continuedoperations of Caesars through the completion of the merger. The stay bonuseswill become payable at either the completion of the merger or on the date themerger has been terminated, provided in either case that the selected employeehas remained in the employment of the Company to the applicable date. The staybonuses were communicated to select employees in October 2004 and will beaccrued over the expected service period which is currently expected to bethrough June 30, 2005.  As of March 31,2005, $12 million in stay bonuses have been accrued.

 

*Effectof the Pending Merger on the 1998 Stock Incentive Plan*

 

Theoccurrence of a “Change in Control” of the Company has two effects on the stockoptions granted pursuant to the Company’s 1998 Stock Incentive Plan (the“Plan”).

 

Underthe Plan, a “Change in Control” occurred on March 11, 2005, when thestockholders of the Company approved the pending merger. As a result, (a) alloutstanding options which were unvested became fully exercisable and vested;and (b) option holders can elect to utilize the Plan’s “Change in ControlCash-Out” provision (the “Cash-Out Option”). The Plan’s Cash-Out Option providesthat during a period of 60 days from the date of a Change in Control, a Planparticipant shall have the right to notify the Company that he or she wishes tosurrender all or part of any Plan stock option to the Company and receive cash,within 30 days of such notice, in an amount equal to: (a) the number ofapplicable options multiplied by (b) the “Spread.” The “Spread” is equal to:(a) the greater of (i) the highest price of the Company’s common stock duringthe 60-day period prior to and including the date of the Change in Controlwhich was $20.89 or (ii) the highest price per share of Company common stockpaid in the proposed merger; less (b) the exercise price of such option.

 

Subsequentto March 11, 2005, and through March 31, 2005, employees elected to surrender12 million options and the Company expensed $143 million related tothis Cash-Out Option.

 

The highest price traded for the Company’s commonstock for the 60 days prior to and including March 11, 2005 was $20.89.  Using such share price and assuming that theCash-Out Option was elected for all remaining outstanding options under thePlan as of March 31, 2005 (for an aggregate of approximately 4 millionshares), the Company will be obligated to pay approximately $45 million,which will be expensed in the Company’s statement of operations as employeeselect the Cash-Out Option which expires May 10, 2005. The actual amount (ifany) that the Company will be obligated to pay in settlement of the Cash-OutOption will depend upon the number of shares subject to outstanding optionswith respect to which Plan participants elect the Cash-Out Option. Uponsettlement of the Cash-Out Option, the

 

20

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underlying options (and related shares) are deemed retired.

 

**Note 12. Subsequent Event**

 

The Company completed the sale of theAtlantic City Hilton and Bally’s Tunica in April 2005.  The Company received approximately $478million in cash proceeds after tax and expects to record an after-tax gain ofapproximately $20 million in the second quarter of 2005.

 

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**ITEM 2.****        ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

### **OVERVIEW**

### ** **

We are one of the largest casino hotel operatorsin the United States. We have a significant presence in Nevada, New Jersey andMississippi, the three largest state gaming markets in the United States. Ourproperties operate under the Caesars, Bally’s, Paris, Flamingo, Grand, Hiltonand Conrad brand names. In order to better leverage what we believe is the bestknown brand name in gaming and to better position our Company throughout ourexisting markets and future development opportunities, we changed our name fromPark Place Entertainment Corporation to Caesars Entertainment, Inc. inJanuary 2004.

 

*Operational Discussion*

* *

Our primary sources of revenue consist of casinooperations, room rentals, and food and beverage sales. We generateapproximately 68% of our net revenues from casino operations. Casino revenue isderived primarily from patrons wagering on slot machines, table games and othergaming activities. Table games generally include Blackjack or Twenty One,Craps, Baccarat and Roulette. Other gaming activities include Keno, Poker andRace and Sports. Casino revenue is defined as the win from gaming activities,computed as the difference between gaming wins and losses, not the totalamounts wagered. “Table game volume,” “table game drop” (terms which are usedinterchangeably), and “slot handle” are casino industry specific terms that areused to identify the amount wagered by patrons for a casino table game or slotmachine, respectively. “Table game hold” and “slot hold” represent thepercentage of the total amount wagered by patrons that the casino has won. Holdis derived by dividing the amount won by the casino by the amount wagered bypatrons. Casino revenue is recognized at the end of each gaming day.

 

Room revenues are derived from rooms andsuites rented to guests. “Average daily rate” is an industry specific term usedto define the average amount of revenue per rented room per day. “Occupancy percentage”defines the total percentage of rooms occupied, and is computed by dividing thenumber of rooms occupied by the total number of rooms available.Room revenue is recognized at the time the room is provided to the guest.

 

Food and beverage revenues are derived from foodand beverage sales in the food outlets of our casino hotels, includingrestaurants, room service and banquets. Food and beverage revenue is recognizedat the time the food and/or beverage is provided to the guest. Due to the additionof new food outlets, including future outlets currently being constructed, weexpect food and beverage revenue to increase over time.

 

Other revenue is derived primarily fromentertainment, retail and management fee services. Like our room revenues and foodand beverage revenues, these revenues are recognized at the time the service isprovided.

 

Casino revenues vary from time to time due tothe popularity of entertainment offerings, table game hold, slot hold, andoccupancy percentages in our hotels. Casino revenues also vary depending uponthe amount of gaming activity as well as variations in the odds for differentgames of chance. We are also using technology to increase revenues and/ordecrease expenses. Some examples of our new technology are cashless wagering onslot machines and business-intelligence software to manage food and beverageoperations and increase yield on hotel rooms. Casino revenues, room revenues,food and beverage revenues, and other revenues also vary due to generaleconomic conditions and competition.

 

We believe that our operating results for thethree months ended March 31, 2005 reflect the impact of increased consumerspending and confidence in the economy. The gaming industry continues to expandwith growth coming from Native American gaming, primarily in California and NewYork; domestic

 

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expansion in existing and new markets, such as Philadelphia; as well asgrowth internationally, such as in the United Kingdom. We are pursuingopportunities in these various markets and will continue to explore newopportunities as warranted.

 

*Financial Strategy*

* *

In the past, collectively, our properties havegenerated substantial positive cash flow, and we expect that they will continueto generate positive cash flow for the foreseeable future. Our first priorityfor the use of that cash flow is to reinvest in our properties through themaintenance and enhancement of existing facilities, to add new amenities tothose facilities, and to invest in new developments in new markets. Our secondpriority is to reduce our debt leverage by using the cash flow in excess ofwhat is reinvested in our properties and new developments to pay down debt. Ourthird priority for the use of cash flow is return of capital to stockholders,through share repurchases or dividends. Only to the extent that we havesufficient excess cash flow after reinvestment in our properties and reductionof debt will we be able to make meaningful returns of capital to stockholders.

 

*Pending Merger withHarrah’s Entertainment, Inc.*

* *

On July 14, 2004, the Company, Harrah’sEntertainment, Inc. (“Harrah’s”) and Harrah’s Operating Company, Inc.(“Harrah’s Operating”), a wholly-owned subsidiary of Harrah’s, entered into anAgreement and Plan of Merger (the “Merger Agreement”), providing for the mergerof the Company with and into Harrah’s Operating, which would be the survivingcorporation. The Merger Agreement provides that each Company stockholder mayelect to receive for each outstanding share of Company common stock either$17.75 in cash or 0.3247 shares of Harrah’s common stock. However, Harrah’s haslimited the total (i) number of Harrah’s shares it will issue to theproduct of the Company’s outstanding number of shares multiplied by 0.6642 andfurther multiplied by the 0.3247 fraction referred to above (the “Stock Cap”)and (ii) cash it will issue to the product of the Company’s outstandingnumber of shares multiplied by 0.3358 and further multiplied by the $17.75amount referred to above (the “Cash Cap”). To the extent that the Company’sstockholders elect to receive (i) Harrah’s stock in excess of the StockCap or (ii) cash in excess of the Cash Cap, then the merger considerationpaid to the Company’s stockholders shall be pro rated between Harrah’s commonstock and cash pursuant to the terms of the Merger Agreement. As of****March 31, 2005, the outstanding number of shares ofthe Company’s common stock was approximately 314.8 million and using suchnumber of shares, the aggregate merger consideration would equal(i) approximately 67.9 million shares of Harrah’s common stock and(ii) approximately $1.876 billion in cash.

 

On March 11, 2005, our stockholders approved theMerger Agreement at a special stockholders meeting.  The transaction with Harrah’s is subject to anumber of conditions, including, among other things, the receipt of allnecessary antitrust, gaming and other approvals, and the satisfaction or waiverof all other conditions precedent.

 

**Results of Operations**

** **

In 2004, we sold the Las Vegas Hilton andentered into agreements to sell the Atlantic City Hilton, Bally’s CasinoTunica, Bally’s Casino New Orleans, Caesars Tahoe and our interests in CaesarsGauteng. Due to the pending sales, the results of these properties are classifiedas discontinued operations in all periods presented. Amounts in the “Results ofOperations” discussions below exclude the results of these properties. Weregularly evaluate all of our assets within our portfolio and have and willcontinue to consider dispositions of assets, which in our opinion, do notrepresent the best use of our capital.

 

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Except as noted in the table below, our resultsof operations include the following properties, owned by subsidiaries, whoseoperations are fully consolidated:

 
| **Western Region**      | ** ** | **Eastern Region**          | ** ** | **Mid-South Region**           | ** ** | **International Region**         | ** ** |
|-------------------------|------------|-----------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| Caesars  Palace         |       | Bally’s  Atlantic City |       | Grand  Casino Biloxi           |       | Casino  Nova Scotia—Halifax |       |
| Paris  Las Vegas        |       | Caesars  Atlantic City      |       | Grand  Casino Gulfport         |       | Casino  Nova Scotia—Sydney  |       |
| Bally’s  Las Vegas |       | Atlantic  City Hilton(1)    |       | Grand  Casino Tunica           |       | Conrad  Punta del Este(3)        |       |
| Flamingo  Las Vegas     |       | Dover  Downs(2)             |       | Sheraton  Casino Hotel         |       | Casino  Windsor(4)               |       |
| Caesars  Tahoe(1)       |       |                        |       | Bally’s  Casino Tunica(1) |       | Caesars  Gauteng(5)              |       |
| Reno  Hilton            |       |                        |       | Caesars  Indiana               |       | Conrad  Jupiters(2)              |       |
| Flamingo  Laughlin      |       |                        |       | Bally’s  Casino New       |       | Conrad  Treasury(2)              |       |
| Las  Vegas Hilton(1)    |       |                        |       | Orleans(1)                     |       | Caesars  Palace at Sea           |       |

 

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(1)    We signeddefinitive agreements to sell these properties to independent third parties.Results of these properties have been classified as Discontinued Operations inthe accompanying results of operations for all applicable periods presented.The sale of the Las Vegas Hilton was completed in June 2004. The sale ofthe Atlantic City Hilton and Bally’s Tunica was completed in April 2005.

 

(2)    These areproperties from which our sole source of income is management fees androyalties. Our management agreement with Dover Downs expired inDecember 2004 and was not renewed.

 

(3)    InSeptember 2004, we reorganized the ownership structure of this property.The reorganization increased our ownership interest from 46 percent to 86percent. As a result, we have consolidated the results of this propertybeginning in September 2004.

 

(4)    This is aproperty in which we own 50 percent of a company that manages the hotel casinocomplex and our investment in that management company is accounted for underthe equity method.

 

(5)    We havea 25 percent interest in a joint venture that owns Caesars Gauteng and a 50percent interest in a joint venture that manages Caesars Gauteng. We accountfor this property using the equity method. In December 2004 we enteredinto an agreement to sell our ownership and management interests in CaesarsGauteng. This transaction was completed in March 2005. The results of CaesarsGauteng have been classified as Discontinued Operations in the accompanyingresults of operations for all periods presented.

 

*Comparison of three months ended March31, 2005 with March 31, 2004*

* *

A summary of our consolidated net revenue andearnings for the three months ended March 31, 2005 and 2004 is as follows(in millions, except per share amounts):

 
| ** **                                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net revenues                                                            |       | $        | 1,096      |     | $          | 1,075 |   |
| Operating income                                                        |       | 49       |       | 189      |       |
| Income (loss) from continuing operations                                |       | (22      | )          | 61       |       |
| Net income                                                              |       | 50       |       | 71       |       |
| Basic and diluted earnings (loss) per share  from continuing operations |       | (0.07    | )          | 0.20     |       |
| Basic and diluted earnings per share                                    |       | 0.16     |       | 0.23     |       |
|                                                                         |            |          |            |          |            |  |  |

 

We recorded a loss from continuing operations of$22 million and a diluted loss per share from continuing operations of $0.07for the three months ended March 31, 2005, which includes $155 million, or$0.33 per share, in costs related to the pending merger with Harrah’s Operatingas discussed under “Merger Expense.” Income from continuing operations was$61 million or $0.20, per diluted share, for the three months ended March31, 2004.

 

Net income for the three months ended March 31,2005 includes income from discontinued operations of $72 million whichincludes the after-tax gain on the sale of Caesars Gauteng of $68 million.Net

 

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income for the three months ended March 31, 2004 includes income fromdiscontinued operations of $10 million.

 

*Casino*

* *

A summary of our consolidated casino revenue forthe three months ended March 31, 2005 and 2004 is as follows (in millions):

 
| ** **           | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
| Western Region       |       | $        | 231        |     | $          | 244 |   |
| Eastern Region       |       | 239      |       | 248      |       |
| Mid-South Region     |       | 228      |       | 231      |       |
| International Region |       | 48       |       | 13       |       |
| Total                |       | $        | 746        |     | $          | 736 |   |

 

Consolidated casino revenues increased onepercent or $10 million to $746 million for the three months ended March 31,2005, compared to $736 million for the three months ended March 31, 2004.This increase consisted of a $35 million increase in the InternationalRegion, offset by a $13 million decrease in the Western Region, a$9 million decline in the Eastern Region and a $3 million decrease inthe Mid-South Region. In our International Region, the consolidation of ConradPunta del Este’s operating results, beginning in September 2004 due to anownership restructuring, contributed $34 million in casino revenues.

 

The decreased results in the Western Region wereprimarily attributable to our Las Vegas Strip properties. At Caesars Palace,casino revenue decreased approximately $5 million due to decreased tablehold as well as decreased volumes in the non-baccarat table play. At Paris LasVegas and Bally’s Las Vegas, a combined $4 million decrease in casinorevenue resulted primarily from decreased gaming volumes at both properties anda decrease in table hold at Paris Las Vegas. Flamingo Las Vegas alsoexperienced a decrease of $3 million in casino revenue due to decreasedgaming volumes as compared to the prior year period.

 

Our Eastern Region properties reported casinorevenue decreases reflecting the increased competition in that market and poorweather during January of this year.  Inthe Mid-South Region, Caesars Indiana reported a $5 million decrease incasino revenue attributable to January flooding along the Ohio River, whichcaused the property to close for nearly ten days. As a result, gaming volumesat Caesars Indiana for were down nine percent as compared to the prior yearperiod.

 

Our consolidated casino operating marginimproved to 51.6 percent for the three months ended March 31, 2005compared to 49.9 percent for the three months ended March 31, 2004 asa result of the increase in revenues in our International Region as noted aboveas well as decreases in promotional spending and bad debt expense.

 

*Rooms*

* *
| ** **       | ** ** | **Average Daily Rate**  | ** ** | **Occupancy Percentage**     | ** ** |
|------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **       | ** ** | **Three months ended  March 31,** | ** ** | **Three months ended  March 31,** | ** ** |
| ** **       | ** ** | **2005**                          | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Western Region   |       | $                                 | 119        |                              | $          | 108 |   | 89 | % | 92 | % |
| Eastern Region   |       | $                                 | 84         |                              | $          | 80 |   | 90 | % | 95 | % |
| Mid-South Region |       | $                                 | 69         |                              | $          | 61 |   | 89 | % | 86 | % |

 

Consolidated room revenues increased 12 percentor $16 million to $152 million for the three months ended March 31,2005 compared to $136 million recorded for the three months ended March 31,

 

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2004. This increase is primarily attributable to our Western Region,where room revenues increased approximately $13 million due to higheraverage daily rates as noted in the table above. The most significantimprovements in room revenues were at our Las Vegas properties driven byincreased room rates from our convention business and increased visits by theleisure/pleasure traveler. Increased room rates in the Mid-South and EasternRegions contributed to a combined $1 million increase in room revenues forthose regions during 2005.  In ourInternational Region, the consolidation of Conrad Punta del Este’s operatingresults, beginning in September 2004 due to an ownership restructuring,contributed $2 million in room revenues.

 

Our consolidated room operating margin for thethree months ended March 31, 2005 was 71.1 percent compared to 68.4percent for the three months ended March 31, 2004. The increased margin was dueto the increased room rates across all of our regions.

 

*Food and Beverage*

* *

Consolidated food and beverage revenuesincreased $4 million to $124 million for the three months ended March 31, 2005,which is primarily attributable to our Western Region. An increase ofapproximately $6 million at Caesars Palace was due to the new food venueswhich opened at that property during the third quarter of 2004.

 

Our consolidated food and beverage operatingmargin increased to 14.5 percent for the three months ended March 31, 2005compared to 14.2 percent for the three months ended March 31, 2004 as a resultof the revenue increase noted above.

 

*Other*

* *

Consolidated other revenues include retailsales, entertainment sales, telephone, management fee income and othermiscellaneous income at our casino/hotels.

 

Consolidated other revenues decreased to $74million for the three months ended March 31, 2005, compared to $83 millionfor the three months ended March 31, 2004. The decrease in other revenues is primarily attributable to a $2 milliondecrease in entertainment revenue at Caesars Palace, and $1 million related toa management agreement with Dover Downs which expired on December 31, 2004,that was not renewed.  Additionally, inour International Region, the consolidation of Conrad Punta del Este's operatingresults, beginning in September 2004 due to an ownership restructuring,resulted in no management fee revenue during 2005 compared to the $2 millionrecognized in the three months ended March 31, 2004.

 

Consolidated other expenses include costs associatedwith selling, general, administrative, property operations, retail,entertainment, telephone and other miscellaneous costs at our casino hotels.Consolidated other expenses increased $8 million for the three months endedMarch 31, 2005 compared to the three months ended March 31, 2004.  The increase includes approximately$5 million in our International Region due to the consolidation of Puntadel Este’s operating results and approximately $2 million at Paris LasVegas related to the musical “We Will Rock You,” which opened in 2004.

 

*Depreciation andAmortization*

* *

Consolidated depreciation and amortizationexpense decreased to $97 million for the three months ended March 31, 2005compared to $101 million for the comparable period of 2004. Depreciationexpense for the current quarter decreased primarily due to certain short-livedequipment becoming fully depreciated before it was replaced.

 

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* *

*Merger Expense*

* *

During the three months ended March 31, 2005, weexpensed $155 million related to the pending merger of the Company withHarrah’s Operating, including $143 million related to the Cash-Out Option underthe 1998 Stock Incentive Plan described below. In connection with the pendingtransaction, we expect to incur significant fees and expenses, includingwithout limitation, fees and expenses payable to legal and other advisors.Caesars and Harrah’s have also agreed to “stay bonuses” of approximately$19 million in total which will be paid to select employees who arecritical to the continued operations of Caesars through the completion of themerger. The stay bonuses will become payable at either the completion of themerger or on the date the merger has been terminated, provided in either casethat the selected employee has remained in our employment to the applicabledate. The stay bonuses were communicated to select employees inOctober 2004 and are being accrued over the expected service period. As ofMarch 31, 2005, $12 million in stay bonuses have been accrued.

 

*Effect of the Pending Merger on the 1998 StockIncentive Plans*

* *

Theoccurrence of a “Change in Control” of the Company has two effects on the stockoptions granted pursuant to the Company’s 1998 Stock Incentive Plan (the“Plan”).

 

Underthe Plan, a “Change in Control” occurred on March 11, 2005, when thestockholders of the Company approved the pending merger.  As a result, (a) all outstanding optionswhich were unvested became fully exercisable and vested; and (b) option holderscan elect to utilize the Plan’s “Change in Control Cash-Out” provision (the“Cash-Out Option”). The Plan’s Cash-Out Option provides that during a period of60 days from the date of a Change in Control, a Plan participant shall have theright to notify the Company that he or she wishes to surrender all or part ofany Plan stock option to the Company and receive cash, within 30 days of suchnotice, in an amount equal to: (a) the number of applicable options multipliedby (b) the “Spread.” The “Spread” is equal to: (a) the greater of (i) thehighest price of the Company’s common stock during the 60-day period prior toand including the date of the Change in Control which was $20.89 or (ii) thehighest price per share of Company common stock paid in the proposed merger;less (b) the exercise price of such option.

 

Subsequentto March 11, 2005, and through March 31, 2005, employees elected to surrender12 million options and we expensed $143 million related to thisCash-Out Option.

 

The highest price traded for our common stock forthe 60 days prior to and including March 11, 2005 was $20.89.  Using such share price and assuming that theCash-Out Option was elected for all remaining outstanding options under thePlan as of March 31, 2005 (for an aggregate of approximately 4 millionshares), we will be obligated to pay approximately $45 million, which will beexpensed in our statement of operations as employees elect the Cash-Out Optionwhich expires May 10, 2005. The actual amount (if any) that we will beobligated to pay in settlement of the Cash-Out Option will depend upon thenumber of shares subject to outstanding options with respect to which Planparticipants elect the Cash-Out Option. Upon settlement of the Cash-Out Option,the underlying options (and related shares) are deemed retired.

 

*Corporate Expense*

* *

Corporate expense increased $1 million to$12 million for the three months ended March 31, 2005 compared to theprior year. The increase primarily relates to charitable contributions madeduring the current period.

 

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*Equity in Earnings ofUnconsolidated Affiliates*

* *

Equity in earnings of unconsolidated affiliatesconsists of earnings from our share of ownership in Conrad Punta del Este inUruguay (through September 2004) and Casino Windsor in Windsor, Canada. For thethree months ended March 31, 2005 and 2004, equity in earnings ofunconsolidated affiliates was $1 million and $5 million,respectively. This decrease is due to the consolidation of Conrad Punta delEste’s operations beginning in September 2004, as a result of an ownershiprestructuring in which we converted our investment balance into equity.

 

*Net Interest Expense*

* *

Consolidated net interest expense decreased $5million to $66 million for the three months ended March 31, 2005, compared tothe three months ended March 31, 2004. The decrease in interest expense is primarily due to an increase incapitalized interest as noted below. During the quarter, we reduced our totaldebt balance, excluding the market value of interest rate swaps, by$18 million. Including the debt subject to the interest rate swaps, atMarch 31, 2005, $1.2 billion of our total debt outstanding is subject to avariable rate interest. A hypothetical 100 basis point (1 percent) change in theinterest rate index on which our floating rate debt is based would result in anannual expense charge of approximately $12 million based on our debtbalance at March 31, 2005. Capitalized interest for the three months endedMarch 31, 2005 and 2004 was approximately $5 million and $1 million,respectively. This related to the construction projects at Caesars Palace andthe parking garage at Caesars Atlantic City. In 2005, capitalized interest willincrease due to the construction costs of the hotel tower and convention centerat Caesars Palace and the new garage at Caesars Atlantic City.

 

*****Income Taxes*****

 

The$3 million in tax expense reported for the first quarter of 2005 was due to theimpact of merger costs on operating income and the non-deductibility of certainmerger-related expenses. Excluding the effect of merger costs, the effectiveincome tax rate on continuing operations for the three months ended March 31,2005, was 38.9 percent compared to 46.6 percent in the prior year’speriod. The effective tax rate for 2004 was impacted by additional state incometax expense of $7 million (after federal income tax benefit) recorded inthe first quarter of 2004 as a result of the Indiana Tax Court’s decision (in acase not involving the Company) that gaming taxes paid to the State based oncasino revenues are not deductible for Indiana income tax purposes. While wepreviously believed that the gaming taxes were deductible, during the secondquarter of 2004, we were assessed additional income taxes related to thisdecision for the fiscal years 2000 through 2002, as a result of thecompetitor’s tax case outcome. The $7 million relates to fiscal years 2000through 2003, inclusive. Our effective income tax rate is determined by thelevel and composition of pretax income subject to varying federal, foreign,state, and local taxes.

 

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* *

*DiscontinuedOperations*

 

Inlate 2003 and during 2004, we have entered into separate agreements to sellcertain of our properties and investments. The following table provides asummary of the operating results of these properties which are now classifiedas discontinued operations for the three months ended March 31, 2005 and 2004(in millions):

 
| ** **                                                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Las Vegas Hilton                                                                         |       | $        | —     |     | $          | 8 |   |
| Atlantic City Hilton                                                                     |       | (1       | )          | 1        |       |
| Bally’s Casino Tunica                                                               |       | 2        |       | 2        |       |
| Bally’s Casino New Orleans                                                          |       | 1        |       | —   |       |
| Caesars Tahoe                                                                            |       | (1       | )          | (2       | )          |
| Caesars Gauteng (including a $68 million  gain, net of taxes, on the sale in March 2005) |       | 71       |       | 1        |       |
| Income from discontinued operations                                                      |       | $        | 72         |     | $          | 10 |   |

* *

*Las Vegas Hilton*

* *

On December 24, 2003, we entered into adefinitive agreement to sell the Las Vegas Hilton to an unrelated third party.This transaction was completed in June 2004.

 

*Atlantic City Hilton and Bally’s Casino Tunica*

* *

On September 27, 2004, we entered into anagreement to sell certain assets and related liabilities of the Atlantic CityHilton and Bally’s Casino Tunica to an unrelated third party for$612 million. The transaction closed in April 2005. We received approximately$478 million in cash proceeds after taxes and expect to record anafter-tax gain of approximately $20 million in the second quarter of 2005.

 

*Bally’s Casino New Orleans*

* *

On October 22, 2004, we entered into anagreement to sell our equity interests in Belle of Orleans, LLC, which operatesBally’s Casino New Orleans, to an unrelated third party for $24 million. Thetransaction is expected to close by the end of the second quarter of 2005 andis subject to customary regulatory approvals and closing conditions outlined inthe purchase agreement. The estimated selling price of the assets less thecosts to sell this property exceeds its carrying value; therefore, no loss hasbeen recognized as of March 31, 2005. Any gain related to this sale willbe recognized when the transaction is completed.

 

*Caesars Tahoe*

* *

On November 19, 2004, we entered into anagreement to sell certain assets and related liabilities of Caesars Tahoe to anunrelated third party for $45 million. The transaction is expected to close bythe end of the second quarter of 2005 and is subject to customary regulatoryapprovals and closing conditions in the purchase agreement. The estimatedselling price of the assets less the costs to sell this property exceeds itscarrying value; therefore, no loss has been recognized as of March 31,2005.

 

*Caesars Gauteng*

* *

On December 24, 2004, we entered into adefinitive agreement to sell our ownership and management interests in CaesarsGauteng for approximately $145 million. The transaction closed onMarch 31, 2005, resulting in an after-tax gain of $68 million which isincluded in income from discontinued operations for the three months endedMarch 31, 2005.

 

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The results of the properties discussed aboveare classified as discontinued operations and the condensed consolidatedfinancial statements for all prior periods have been adjusted to reflect thispresentation. Interest expense has been allocated to the income fromdiscontinued operations based on the ratio of the discontinued operations’ netassets to the total consolidated net assets. In accordance with generallyaccepted accounting principles, the assets held for sale are no longerdepreciated.  The assets and liabilitiesare classified as assets held for sale and liabilities related to assets heldfor sale in our condensed consolidated balance sheets as of March 31, 2005 andDecember 31, 2004.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

*Liquidity*

 

As of March 31, 2005, we had cash and cash equivalents of$216 million, which includes cash in our casinos to fund our dailyoperations. In addition, at March 31, 2005, approximately $1.2 billion wasundrawn under our credit facility. Net cash provided by operating activitiesfor the three months ended March 31, 2005 was $27 million compared to****$127 million in the prior year’s period. The decreasein cash provided by operating activities is due to the decrease in income fromcontinuing operations due to the merger expenses as previously discussed. Cashprovided by operating activities reflect amounts we earned during our normalcourse of operations. We use our cash flows from operating activities to fundour investing and financing activities, including capital expenditures, newdevelopment opportunities, to reduce our outstanding debt balances as well asadditional merger expenses as noted under “Merger Expense” above. We expect tofinance our operations and capital expenditures through cash flows from currentoperations, existing cash balances, borrowings under our credit facility (seebelow) and capital market transactions.

 

*Investing Activities*

 

Forthe three months ended March 31, 2005, net cash used in investing activitieswas $120 million, consisting principally of $106 million of capitalexpenditures, $114 million of additional investments and $102 millionin proceeds from the sale of Caesars Gauteng. The additional investmentsinclude the purchases of the minority interest in Caesars Indiana and land inPhiladelphia that was contributed to a partnership. Our capital expendituresinclude maintenance expenditures of $28 million which are those long-livedassets required to maintain our properties in good operating condition.  Such capital items include new gamingequipment, room and restaurant refurbishments, computer hardware, furniture andoffice equipment, and other similar items. Additionally, our capitalexpenditures for the three months ended March 31, 2005 include new unitprojects of $78** **million. These projectsinclude the new hotel tower and convention facility at Caesars Palace, and aparking garage adjacent to Caesars Atlantic City.

 

For 2005, we currently have a budget to spend$662 million in capital expenditures, including our discontinued operations.This amount is higher than amounts expended in the previous three years, and itis possible that some portion of the $662 million will not be spent until2006.

 

We currently plan to spend $239 million onmaintenance projects in 2005. Significant maintenance projects in 2005 includethe renovation of hotel rooms and public spaces at Caesars Palace, Flamingo LasVegas, Caesars Atlantic City and Bally’s Atlantic City; and upgrades andreplacements to computer equipment. Our 2005 maintenance budget also includesapproximately $11 million of investments in new infrastructure designed toreduce energy utilization.

 

In 2005, our new unit capital budget currentlytotals $292 million. Of this, $215 million relates to the tower and meetingspace addition at Caesars Palace. Other significant planned expenditures in2005 are $33 million for the completion of the garage at Caesars AtlanticCity; $9 million for several other new

 

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projects at Caesars Palace; and $24 million for a connecting skybridgeand other renovations at Caesars Atlantic City in anticipation of the openingof the Pier at Caesars.

 

Our 2005 budget for investments is $131 millionand includes the purchase of land in Philadelphia, the purchase of ourpartners’ interest in Caesars Indiana, both of which we completed in the firstquarter of 2005, and $15 million for the Mohawk project.

 

*Financing Activities*

 

During the three months ended March 31, 2005,we reduced our aggregate debt by $18 million, excluding the$7 million decrease related to the market value of our interest rateswaps.

 

*Bank CreditFacilities*

 

As of March 31, 2005, we have a $1.8 billion senior credit facility, which expires in April2009, and is comprised of a $500 million term loan and a $1.3 billion revolver(collectively, the “Credit Facility”). The outstanding balance on the term loanwas $500 million and no amounts were outstanding under the revolver as of March31, 2005 and December 31, 2004. In April 2005, we used proceeds from the saleof the Atlantic City Hilton and Bally’s Tunica (see Notes 6 and 12 to theCondensed Consolidated Financial Statements) to completely retire the termloan, thereby reducing overall availability under our Credit Facility to $1.3billion. Once repaid, the availability of the term loan component ispermanently reduced. Amounts paid down under the revolver may be reborrowed.

 

TheCredit Facility contains financial covenants including a maximum leverage ratio(consolidated debt divided by consolidated ebitda, as defined in the CreditFacility) of 5.00:1.00 and a minimum interest coverage ratio (consolidatedebitda, as defined in the Credit Facility, divided by consolidated interestexpense) of 2.75:1.00.  The maximumleverage ratio is 5.00:1.00 for the quarterly testing periods ended March 31,2005 through and including September 30, 2005, 4.75:1.00 for the quarterlytesting periods ending December 31, 2005 and March 31, 2006, and 4.50:1.00 forthe quarterly testing periods ending June 30, 2006 and thereafter.  The interest coverage ratio remains 2.75:1.00for all quarterly testing periods.  Weare required to compute its actual leverage and interest coverage ratios on arolling twelve-month basis as of the end of each calendar quarter.  If we are not in compliance with the requiredcovenant ratios, an event of default would occur, which if not cured, couldcause the entire outstanding borrowings under the Credit Facility to becomeimmediately due and payable as well as trigger the cross default provisions ofother debt issues.  As of March 31, 2005,we were in compliance with all applicable covenants.

 

Borrowingsunder the Credit Facility bear interest at a floating rate and may be obtained,at our option, as LIBOR advances for varying periods, or as base rate advances,each adjusted for an applicable margin (as further described in the CreditFacility).  We have historically borrowedusing LIBOR advances and expect to continue doing so for the foreseeablefuture.  We pay a margin over LIBOR whichis a function of both our leverage ratio and our credit rating.  This margin is adjusted quarterly.  Based on our leverage ratio and credit ratingas of March 31, 2005, the margin over LIBOR was 115 basis points.

 

Ina program designed for short-term borrowings at lower interest rates, we haveentered into an uncommitted line of credit with a lender whereby we can borrowup to $100 million for periods of ninety days or less. In April 2005, thisagreement was extended through July 2005. These amounts are classified aslong-term because we have both the intent and the ability to refinance theseamounts using availability under the long-term portion of our Credit Facility.We are required to maintain availability under the Credit Facility in an amountequal to the amount outstanding under the short term borrowing program. AtMarch 31, 2005 and December 31, 2004, there was $55 million and $73million outstanding under this program, respectively.

 

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InApril 2005, after applying the proceeds from the sale of the Atlantic CityHilton and Bally’s Tunica, there are no borrowings outstanding under our CreditFacility or the uncommitted line of credit. We also anticipate that there willbe no borrowings outstanding at the close of the pending transaction withHarrah’s. The Credit Facility contains certain provisions that would restrictthe pending merger with Harrah’s unless amended or waived, and there can be noassurance that such amendments or waivers will be obtained.

 

*Interest Rate Swaps*

 

Pursuantto our risk management policy, management may engage in actions to manage ourinterest rate risk position.  During thelast half of 2003, we entered into four interest rate swaps representing$300 million notional amount with members of our bank group to manageinterest expense.  The interest rate swaps have converted a portion of ourfixed-rate debt to floating rate (“fair value hedges”).  Under theagreements, we receive a fixed interest rate of 7 percent and pay a variableinterest rate based on a margin above six month LIBOR on $300 millionnotional amount.  The interest rate swapsmature in 2013.  The net effect of the interest rate swaps resulted in areduction in interest expense of $1 million and $3 million for the three monthsended March 31, 2005 and 2004, respectively.

 

Theseinterest rate swaps meet the shortcut criteria under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” which permitsthe assumption of no ineffectiveness in the hedging relationship between theswap and the underlying hedged asset or liability.  As such, there is noincome statement impact from changes in the fair value of the hedginginstruments.  Instead, the fair value of the instrument is recorded as anasset or liability on our balance sheet with an offsetting adjustment to thecarrying value of the related debt.  In accordance with SFAS No. 133,we recorded other long-term liabilities of $1 million and other long-termassets of $6 million as of March 31, 2005 and December 31, 2004,respectively, representing the fair value of the interest rate swaps and acorresponding decrease or increase in long-term debt, as these interest rateswaps are considered highly effective under the criteria established by SFASNo. 133.

 

*Other*

 

Asof March 31, 2005 and December 31, 2004, other debt in the table above includes$47 million related to Baluma Holdings, S.A. which we began consolidatingin September 2004 due to an ownership restructuring.

 

The condensed consolidated balance sheets as ofMarch 31, 2005 and December 31, 2004 exclude from current maturities $400 millionof 7.875 percent Senior Subordinated Notes due December 2005. This amount isclassified as long-term because we have both the intent and the ability torefinance these notes using availability under the long-term portion of theCredit Facility.

 

**DEVELOPMENT PROJECTS**

 

*Saint Regis Mohawk Tribe*

* *

We entered into an agreement in April 2000with the Saint Regis Mohawk Tribe in Hogansburg, New York in which we paid $3million for the exclusive rights to develop a Class II or Class IIIcasino project with the Tribe in the State of New York. In November 2001,the parties entered into a development agreement and a management agreement forus to develop and manage the Tribe’s planned $500 million casino and resortcomplex that is to be located at Kutsher’s Country Club in Thompson, New York,which management agreement was subject to the approval of the National IndianGaming Commission (the “NIGC”). In response to comments from the NIGC, theCompany entered into an amended management agreement (the “Amended ManagementAgreement”) and a development agreement (the “Amended Development Agreement”)on November 10, 2003, with the Tribe. The Amended Management Agreementprovides, among other things, that we will manage the casino for seven yearsfor a management fee equal

 

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to 30 percent of Net Total Revenue, as defined in that agreement, andthat the exclusive right for casino development in the State of New York hasbeen modified to provide for mutual non-compete protections within a 125 milezone from the Sullivan County location. The Amended Development Agreementprovides, among other things, that we will acquire lands for the casino andtransfer the lands to the United States to be held in trust for the Tribe, providedevelopment assistance and construction management for the casino and receive a$15 million development fee and provide pre-construction advances of funds upto an aggregate of $20 million. It also provides that, subject to a number ofconditions including, among other things, our approval of a constructionbudget, having received all necessary federal, state and local governmental,tribal and regulatory approvals, and the Amended Management Agreement becomingeffective, we will assist the Tribe in arranging the financing necessary forthe costs of construction and the initial costs of operation and provide creditsupport, as necessary, for such funding. We also have the right, but not theobligation, to advance such funds. We have not finalized or approved any sizeof construction budget. During 2004, Caesars and the Tribe began to explorethird-party financing alternatives. Caesars and the Tribe have also commenceddiscussions regarding the form and magnitude of any credit support that may benecessary. Our ability to provide various forms of credit support will besubject to the Credit Facility described in Note 9 to the CondensedConsolidated Financial Statements. The effectiveness of the Amended ManagementAgreement remains subject to a number of regulatory approvals, includingwithout limitation, final approval by the NIGC.

 

We have entered into a definitive agreement, asamended, to acquire approximately 66 acres of the Kutsher’s Resort Hoteland Country Club in Sullivan County, New York, for approximately$10 million, with an option to purchase the remaining 1,400 acres for$40.5 million. Upon approval of the Bureau of Indian Affairs (the “BIA”), the66 acre parcel will be transferred to the United States in trust for the SaintRegis Mohawk Tribe.

 

All of the agreements and plans relating to thedevelopment and management of this project are contingent upon variousregulatory and governmental approvals, including execution of a compact betweenthe Saint Regis Mohawk Tribe and the State of New York, and approvals muststill be received from the BIA and NIGC. On December 1, 2004, the Projectreceived all necessary approvals from the Town of Thompson Planning Board andfrom the Town of Thompson Zoning Board of Appeals. There is no guarantee thatthe requisite regulatory approvals will be received.

 

We are party to numerous lawsuits regarding itsinvolvement in the Saint Regis Mohawk project, which lawsuits seek variousmonetary and other damages against us. Additionally, there are two lawsuitschallenging the constitutionality of the legislation that, among other things,authorized the Governor of the State of New York to execute tribal state gamingcompacts and approved the use of slot machines as “games of chance.” While webelieve that we will prevail on these various matters, there can be noassurance that we will and, if we do not prevail, there can be no assurancethat the damages assessed against us would be immaterial to Caesars. (For adiscussion of such litigation, see *Mohawk Litigation*in Note 10 to the Condensed Consolidated Financial Statements.)

 

On May 12, 2003, the Saint Regis MohawkTribe and the Governor of the State of New York signed a memorandum ofunderstanding which outlined the terms under which the Tribe is authorized toproceed with the casino development. The Saint Regis Mohawk Tribe announcedsubsequently that it would withdraw from the memorandum of understanding andcontinue to negotiate with the State of New York to reach an agreement on thesubjects contained in the memorandum of understanding. These negotiations areon-going.

 

As of March 31, 2005, we had$44 million invested in the development of this project, which isclassified as other long-term assets on our consolidated balance sheet. Of thatamount, $18 million is to be reimbursed to us by the Tribe over a fiveyear period commencing with the opening of the gaming facility. In the eventthe project is not completed, the total amount invested would be written off.

 

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* *

*Big Sandy Band of Western Mono Indians*

* *

In August 2004, we signed formal agreementswith the Big Sandy Band of Western Mono Indians that will govern thedevelopment, construction, and management of the planned casino resort nearFresno, California. Preliminary plans for the project call for development of acasino resort on more than 40 acres near Fresno in the San Joaquin Valley inCentral California. The casino resort would become the second to directly servethe Fresno metropolitan area which has a population of approximately 1.2million. The casino resort would initially include 200 to 250 hotel rooms,approximately 70,000 square feet of gaming space, at least 2,000 slot machines,approximately 40 gaming tables, restaurants, retail shops, and meeting space andentertainment facilities. The Big Sandy Tribe currently operates the Mono WindCasino in Auberry, California, about 15 miles northeast of the proposed casinoproject site.

 

The management agreement for the casino resortis for an initial term of seven years, renewable upon the consent of bothparties, and requires the approval of the NIGC and other regulatory bodies. Inaddition, the Big Sandy Tribe would have to amend its existing compact with theState of California, or negotiate a new compact for the new casino project. Theproject is also dependent on other regulatory approvals and contingencies. Asof March 31, 2005, we have capitalized $1.2 million spent towardsacquiring real estate related to this project and $2.3 million advanced tothe Big Sandy Tribe for development costs approved by us and the Big SandyTribe. Pursuant to the Interim Loan Agreement with the Big Sandy Tribe, the$2.3 million advance is to be repaid upon the earlier of permanentfinancing or the casino opening date.

 

*Caesars Wembley*

* *

In October 2004, we announced plans todevelop and operate a casino resort in London, adjacent to the redevelopedWembley National Stadium and the legendary Wembley Arena. We have since enteredinto definitive agreements for the pre-construction phase of the casino resortproject. After certain conditions are met, we will enter in the Joint VentureAgreement with its prospective partner in the casino resort project, QuintainEstates and Development PLC. The parties anticipate that these conditions, whichinclude obtaining necessary gaming licenses and consents, will be satisfiedwithin approximately two years. In April 2005, permissive legislation waspassed in the United Kingdom. Both parties are contemplated to own a 50 percentinterest in the joint venture company. It is also contemplated that CaesarsWembley would be built on 13 acres in the 58-acre redevelopment area and willinclude a casino, a 400-room luxury hotel, a full-service spa and swimmingpool, shops, convention and meeting facilities and a variety of restaurants,bars and lounges.

 

*Philadelphia*

* *

In the first quarter of 2005, we purchased a 30 acreriverfront parcel in downtown Philadelphia. We then contributed the land to apartnership, for an 11 percent interest, which will develop and operate aplanned casino.  Preliminary siteplanning is underway for casino development on 18 upland acres of the site, andwe intend to be an applicant for a gaming license in Philadelphia pending theoutcome of litigation challenging Pennsylvania’s recently passed gaminglegislation.

 

**OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS**

 

A description of our off-balance sheet arrangementsand contractual obligations can be found in Item 7 of our Annual Report on Form10-K for the year ended December 31, 2004. In connection with the pending merger with Harrah’s, we have certainobligations under stay bonuses and stock options plans as described inNote 11 to the Condensed Consolidated Financial Statements. There havebeen no other material changes to these disclosures as of March 31, 2005.

 

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** **

**CRITICAL ACCOUNTING POLICIES**

 

A description of our critical accounting policies and estimates can befound in Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2004. There have been no material changes to these policies orestimates as of March 31, 2005.

 

**RECENTLYISSUED ACCOUNTING PRONOUNCEMENT**

 

InSeptember 2004, the Emerging Issues Task Force (“EITF”) of the FinancialAccounting Standards Board (“FASB”) reached a consensus on issue No. 04-08,“The Effect of Contingently Convertible Instruments on Diluted Earnings perShare” (“EITF 04-08”), which is effective for reporting periods ending afterDecember 15, 2004. EITF 04-08 requires companies to include shares issuableunder convertible instruments in diluted earnings per share computations (ifdilutive) regardless of whether the market price trigger (or other contingentfeature) has been met. In addition, prior period earnings per share amountspresented for comparative purposes must be restated. In April 2004, we issuedcontingent convertible notes with terms as described in our Annual Report onForm 10-K for the year ended December 31, 2004. There will be no impact onthe diluted earnings per share calculated related to these notes unless ourcommon stock price exceeds the conversion price as the principle amount of thenotes is convertible into cash. In that situation, we would reflect theadditional common shares in the calculation of diluted earnings per share usingthe treasury share method.

 

InDecember 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,”which requires all companies to measure compensation costs for all share-basedpayments (including employee stock options) at fair value. This statement willbe effective for public companies for the first fiscal year beginning afterJune 15, 2005. The Company is currently in the process of determining theimpact this statement will have on its financial condition or results of operations.

 

**FORWARD-LOOKINGSTATEMENTS**

 

**Factors that MayAffect Future Results**

**(Cautionary Statements Under thePrivate Securities Litigation Reform Act of 1995)**

 

Certain information included in thisForm 10-Q and other materials filed or to be filed by the Company with theSecurities and Exchange Commission (as well as information included in oralstatements or other written statements made or to be made by the Company or itsrepresentatives) contains or may contain forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Thesestatements can be identified by the fact that they do not relate strictly tohistorical or current facts. We have based these forward-looking statements onour current expectations about future events. The forward-looking statementsinclude statements that reflect management’s beliefs, plans, objectives, goals,expectations, anticipations, intentions with respect to the financialcondition, results of operations, future performance and the business of theCompany including statements relating to our business strategy, our current andfuture development plans.

 

Further, statements that include the words“may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,”“estimate,” “intend,” “plan,” or other words or expressions of similar meaning,may identify forward-looking statements. These statements reflect our judgmenton the date they are made and we undertake no duty to update such statements inthe future. Such statements include information relating to plans for futureexpansion and other business development activities as well as capitalspending, financing sources and the effects of regulation (including gaming andtax regulation) and competition. From time to time, oral or writtenforward-looking statements are also included in the Company’s periodic reportson Forms 10-K, 10-Q and 8-K, press releases and other materials released to thepublic.

 

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Although we believe that the expectations inthese forward-looking statements are reasonable, any or all of theforward-looking statements in this report and in any other public statementsthat are made may prove to be incorrect. This may occur as a result ofinaccurate assumptions or as a consequence of known or unknown risks anduncertainties. Many factors discussed in this report, such as the competitiveenvironment and government regulation, will be important in determining theCompany’s future performance. Consequently, actual results may differmaterially from those that might be anticipated from forward-lookingstatements. In light of these and other uncertainties, you should not regardthe inclusion of a forward-looking statement in this report or other publiccommunications that we might make as a representation by us that our plans andobjectives will be achieved, and you should not place undue reliance on suchforward-looking statements.

 

We undertake no obligation to publicly update orrevise any forward-looking statements, whether as a result of new information,future events or otherwise. However, any further disclosures made on relatedsubjects in the Company’s subsequent reports filed with the Securities and ExchangeCommission on Forms 10-K, 10-Q and 8-K should be consulted. The followingdiscussion of risks, uncertainties and possible inaccurate assumptions relevantto the Company’s business includes factors that management believes could causethe Company’s actual results to differ materially from expected and historicalresults. This discussion is provided as permitted by the Private SecuritiesLitigation Reform Act of 1995.

 

•      The Company’soperations are affected by changes in local and national general economic andmarket conditions in the locations where those operations are conducted andwhere customers live.

 

•      Our ability tomeet our debt service obligations and to refinance existing debt will depend onour future performance and other conditions or events, which will be subject tomany factors that are beyond our control.

 

•      Our Nevadaproperties are adversely affected by disruptions in air travel.

 

•      All of our LasVegas properties are in close proximity to each other. Our Atlantic Cityproperties are also in close proximity to each other. If a natural disaster orcalamity occurs in either market that affected these properties, our resultsmay be impacted.

 

•      The Companyoperates in very competitive environments, particularly Las Vegas, AtlanticCity and Mississippi. To the extent that hotel and/or casinos are expanded byothers in markets in which the Company operates, competition will increase andthe increased competition could adversely impact our future operations. Thegrowth in the number of guest rooms and casino capacity in Las Vegas, includinga new resort casino currently under construction and one that has just opened,and Atlantic City, in which a new hotel casino has recently opened, maynegatively affect our operating results. Additionally, the establishment ofgaming operations on Native American lands in the states of New York,California, and Arkansas and any other states near our existing operationscould adversely affect the operations of the Company’s properties. Theexpansion of state-owned or mandated casinos in our existing markets andadjoining states could also adversely affect our properties.

 

•      The Company’sgaming operations are highly regulated by governmental authorities and thegaming operations are subject to periodic reviews and audits by thegovernmental authorities. We will also become subject to regulation in anyother jurisdiction where the Company conducts gaming in the future.

 

•      The pendingmerger of the Company with Harrah’s Operating Company, Inc. (“Harrah’sOperating”), creates a number of uncertainties including risks associated withthe effects of the pendency of the merger on the Company’s operations andcustomers and risks associated with delays or the failure to complete thetransaction.

 

•      We may beunable to complete our proposed merger with Harrah’s Operating and Harrah’sOperating may be unable to timely and cost-effectively integrate us into theiroperations.

 

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•      Our propertiesface a variety of risks which may result in loss. Specifically, several of ourproperties are located in coastal areas and are subject to wind and flooddamage from storms. In addition, all of our properties could be considered atrisk for terrorist or other hostile acts and our properties can be victims ofcriminal acts by patrons and others. Conditions in the insurance marketplacehave made it more difficult to purchase insurance on economically reasonableterms. As a result, we are now subject to significantly higher self-insured retentionson virtually all of our insurance coverages, and we carry only limitedinsurance against terrorist acts. For all these reasons, we are at a greaterrisk of loss than we have been in the past.

 

•      Changes inapplicable laws or regulations could have a significant effect on ouroperations. Our ability to comply with gaming regulatory requirements, as wellas possible changes in governmental and public acceptance of gaming couldmaterially adversely affect our business.

 

•      The terroristattacks of September 11, 2001, and the potential for future terroristattacks or acts of war or hostility, have created economic and politicaluncertainties that could adversely impact our business levels and results ofoperations. Leisure and business travel, especially travel by air to Las Vegas,is sensitive to global geopolitical events.

 

•      The Company’sproperties are large consumers of electricity and other energy. Accordingly,the recent increases in energy costs may continue to have a negative impact onour operating results. Additionally, higher energy and gasoline prices whichaffect our customers may adversely impact the number of customers who visit ourproperties and adversely impact our revenues.

 

•      Any futureconstruction can be affected by a number of factors, including time delays inobtaining necessary governmental permits and approvals, legal challenges andthe ability to obtain at reasonable rates appropriate insurance coverage forsuch projects.  Changes may be made in aproject’s scope, budgets and/or schedules for competitive, aesthetic or otherreasons and these changes may also result from circumstances beyond ourcontrol.  These circumstances includeweather interference, shortages of materials and labor, work stoppages, labordisputes, unforeseen engineering, environmental or geological problems andunanticipated cost increases.  Anycircumstances could give rise to delays in the completion of any project weundertake and/or cost overruns.

 

**ITEM 3.****         ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

#### ** **

Therehave been no material changes in our market risk since the informationdisclosed in our Annual Report on Form 10-K for the year ended December 31,2004. A hypothetical 100 basis point (1 percent) change in the interestrate index on which our floating rate debt is based would result in an annualexpense change of approximately $12 million based on our debt balance at March31, 2005.

 

**ITEM 4****.****         ****CONTROLS AND PROCEDURES**

#### ** **

(a)Disclosure Controls and Procedures.  TheCompany’s management, with the participation of the Company’s Chief ExecutiveOfficer and Interim Chief Financial Officer has evaluated the effectiveness ofthe Company’s disclosure controls and procedures (as such term is defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”)) as of the end of the period covered by thisreport.  Based on such evaluation, suchofficers have concluded that, as of the evaluation date, the Company’sdisclosure controls and procedures are effective in alerting the Company’smanagement on a timely basis to material information relating to the Company(including its subsidiaries) required to be included in the Company’s reportsfiled or submitted under the Exchange Act.

 

(b)Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control overfinancial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act) during the fiscal quarter to which this report relatesthat have materially affected, or are

 

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reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

**PART II****.****        OTHERINFORMATION**

 

**ITEM 1.****          LEGAL PROCEEDINGS**

 

*Slot Machine Litigation*

 

In April 1994, William H. Poulos brought apurported class action in the United States District Court for the MiddleDistrict of Florida, Orlando Division captioned William H. Poulos, et al. v.Caesars World, Inc., et al. against 41 manufacturers, distributors andcasino operators of video poker and electronic slot machines, including theCompany. In May 1994, another plaintiff filed a class action complaint inthe United States District Court for the Middle District of Florida captionedWilliam Ahern, et al. v. Caesars World, Inc. et al. alleging substantiallythe same allegations against 48 defendants, including the Company. InSeptember 1995, a third action was filed against 45 defendants, includingthe Company, in the United States District Court for the District of Nevadacaptioned Larry Schreier, et al. v. Caesars World, Inc., et al. The courtconsolidated the three actions in the United States District Court for theDistrict of Nevada under the case caption William H. Poulos, et al. v. CaesarsWorld, Inc. et al. The consolidated complaints allege that the defendantsare involved in a scheme to induce people to play electronic video poker andslot machines based on the false beliefs regarding how such machines operateand the extent to which a player is likely to win on any given play. Theactions included claims under the federal Racketeering Influence and CorruptOrganizations Act, fraud, unjust enrichment and negligent misrepresentation andseek unspecific compensatory damages. In July 2002, the United StatesDistrict Court denied the plaintiff’s motion to certify the case as a classaction. On August 10, 2004, the Ninth Circuit Court of Appeals affirmedthe District Court’s denial of the plaintiff’s motion to certify the case as aclass action.

 

At present, both William Ahern and LarrySchreier have dismissed their claims against all defendants and they are nolonger parties to the lawsuit. The only two remaining plaintiffs are William H.Poulos and Brenda McElmore. A number of defendants, other than the Company andits subsidiaries, have recently been dismissed from the case. Motions forsummary judgment filed by the remaining defendants have been briefed and areawaiting adjudication by the court. Although discovery in the case has beenformally closed since April 5, 2005, various defendants are required to producepersons most knowledgeable for deposition no later than May 20, 2005. The trialin this case is set on a stacked trial calendar beginning September 12, 2005.

 

*Mohawk Litigation*

 

On January 29, 2002, two substantiallyidentical actions were filed in the Supreme Court of the State of New York,County of Albany, challenging legislation that, among other things, authorizedthe Governor of the State of New York to execute tribal-state gaming compacts,approved the use of slot machines as “games of chance,” approved the use ofvideo lottery terminals at racetracks and authorized the participation of NewYork State in a multi-state lottery. The matters are captioned Dalton, et al.v. Pataki, et al. and Karr v. Pataki, et al. Plaintiffs seek a declaratory judgment declaring the legislationunconstitutional and enjoining the implementation thereof. The Companyintervened in the actions and moved to dismiss the first three causes of actionthereof (relating to plaintiffs’ claims to invalidate the Legislature’sauthorization of Indian gaming compacts). The State of New York moved todismiss the actions in their entirety, while other defendants moved to dismisscertain causes of action. On October 30, 2002, the Court denied themotions to dismiss filed by the Company and all other defendants, andconsolidated the two matters. On July 17, 2003, the Supreme Court granteddefendants’ summary judgment motions, upholding the constitutionality of thelegislation and dismissing plaintiffs’ complaints in their entirety. Theplaintiffs appealed this decision and both sides were heard inDecember 2003. On July 7, 2004, the Appellate Division of the NewYork State Supreme Court held that the legislation authorizing six new NativeAmerican casinos in New York State, including three in the Catskills, isconsistent with the

 

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New York Constitution as well as applicable state and federal law.Plaintiffs filed a notice of appeal from the Appellate Division’s decision tothe New York Court of Appeals, the highest court in the state. On May 3,2005, the New York Court of Appeals, by a 6-1 majority, affirmed the AppellateDivision’s decision and upheld the constitutionality of the challengedlegislation authorizing Indian gambling in New York.

 

On January 3, 2005, Murrietta Lee, filed aNotice of Petition and Verified Petition against the Town of Thompson PlanningBoard, The St. Regis Mohawk Tribe, Caesars Entertainment, Inc., MiltonKutsher Associates and Louis Kutsher and Sons in the Supreme Court of the Stateof New York, County of Sullivan requesting judgment annulling the subdivisionand site plan approvals granted by the Town of Thompson Planning Board onDecember 1, 2004 pursuant to the New York State Environmental QualityReview Act. The Petition also requests the Court order the Thompson PlanningBoard to require a Supplemental Environmental Impact Statement to consider thecumulative impacts of up to five casinos in Sullivan County. The Respondentshave filed a Motion to Dismiss and expect a decision imminently. The Companybelieves that this action is without merit and will continue to vigorouslycontest the case.

 

**ITEM 4.****          SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

On March 11, 2005, the Company held a Special Meeting of Stockholdersto consider a vote upon a proposal to approve and adopt the Agreement and Planof Merger, dated as of July 14, 2004, by and among Harrah’s Entertainment,Inc., Harrah’s Operating Company, Inc., a wholly-owned subsidiary of Harrah’s,and Caesars Entertainment, Inc., and the transactions contemplated by themerger agreement.  Approximately237,238,379 of the eligible 314,021,584 shares of the Company’s common stockwere represented at the meeting.  Of theshares voted, 235,903,820 were for the proposal, 1,090,965 were against theproposal, and 243,594 abstained.

 

**ITEM 6.****          EXHIBITS**

 

**(a)****   Exhibits**

31.1     Certificationof the Chief Executive Officer of Caesars Entertainment, Inc. pursuant to Section 302of the Sarbanes-Oxley Act of 2002

31.2     Certificationof the Chief Financial Officer of Caesars Entertainment, Inc. pursuant toSection 302 of the Sarbanes-Oxley Act of 2002

32.1     Certificationof the Chief Executive Officer of Caesars Entertainment, Inc. pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

32.2     Certificationof the Chief Financial Officer of Caesars Entertainment, Inc. pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

 

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### **SIGNATURES**

### ** **

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this Report to be signed on its behalf by theundersigned thereunto duly authorized.

 
| ** **          | **CAESARS ENTERTAINMENT, INC.** |
|---------------------|---------------------------------|
|                | (Registrant)                    |
|                |                            |
|                |                            |   |
|                |                            | /S/ WESLEY D. ALLISON |   |
|                |                            | Name: | Wesley  D. Allison |   |
|                |                            | Title: | Senior Vice President, Controller and |
|                |                            |   | Interim Chief Financial Officer |
|                |                            |
|                |                            |
| Dated: May 10, 2005 |                            |

 

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