**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, 2003**                                                                                                                                                     |
|                                                                                                                                                                                                   |   |   |
| **OR**                                                                                                                                                                                                 |
|                                                                                                                                                                                                   |   |   |
| **o**                                                                                                                                                                                                  |   | **Transition Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|                                                                                                                                                                                                   |   |   |
| **For the transition period from                 to               ** |

 

**Commissionfile number 1-14573**

 

**PARK PLACE ENTERTAINMENTCORPORATION**

(Exact name of registrantas specified in its charter)

 

| **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) |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding twelve months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes   ý      No   o

 

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

 

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

 

| **Title of Each Class**                  |   | **Outstanding at May 1, 2003** |
|------------------------------------------|--------|--------------------------------|
| Common Stock, par value  $0.01 per share |   | 301,138,712                    |

 

 

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**PARKPLACE ENTERTAINMENT CORPORATION**

**INDEX**

 
|         |                                                                                         |   | **Page** |
|--------------|----------------------------------------------------------------------------------------------|--------|----------|
|         |                                                                                         |   |     |
| **PART I.**  | **FINANCIAL INFORMATION**                                                                    |   |     |
|         |                                                                                         |   |     |
| Item 1.      | Unaudited Condensed  Consolidated Financial Statements                                       |   |     |
|         |                                                                                         |   |     |
|         | Condensed  Consolidated Balance Sheets  March 31, 2003 and December 31, 2002                 |   | 3        |
|         |                                                                                         |   |     |
|         | Condensed  Consolidated Statements of Operations  Three months ended March 31, 2003 and 2002 |   | 4        |
|         |                                                                                         |   |     |
|         | Condensed  Consolidated Statements of Cash Flows  Three months ended March 31, 2003 and 2002 |   | 5        |
|         |                                                                                         |   |     |
|         | Notes  to Condensed Consolidated Financial Statements                                        |   | 6        |
|         |                                                                                         |   |     |
| Item  2.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations  |   | 11       |
|         |                                                                                         |   |     |
| Item  3.     | Quantitative  and Qualitative Disclosures About Market Risk                                  |   | 19       |
|         |                                                                                         |   |     |
| Item  4.     | Controls  and Procedures                                                                     |   | 19       |
|         |                                                                                         |   |     |
| **PART II.** | **OTHER INFORMATION**                                                                        |   |     |
|         |                                                                                         |   |     |
| Item  6.     | Exhibits  and Reports on Form 8-K                                                            |   | 20       |
|         |                                                                                         |   |     |
|         | Signatures                                                                                   |   | 21       |
|         |                                                                                         |   |     |
|         | Certifications                                                                               |   | 22       |

 

2

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**PART I.    FINANCIAL INFORMATION**

**ITEM 1.    FINANCIAL STATEMENTS**

 

**PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(dollarsin millions, except par value)**

**(unaudited)**

 
|                                                                                                                                                                  |   | **March 31,  2003** |       | **December 31,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|------------|
|                                                                                                                                                                  |   |                | ** ** |                   | ** ** |
| Assets                                                                                                                                                                |   |                | ** ** |                   | ** ** |
| Cash and  equivalents                                                                                                                                                 |   | $                   | 323        |                   | $          | 351 |   |
| Accounts  receivable, net                                                                                                                                             |   | 179                 |       | 185                    |       |
| Inventory,  prepaids, and other                                                                                                                                       |   | 136                 |       | 138                    |       |
| Income taxes  receivable                                                                                                                                              |   | —              |       | 3                      |       |
| Deferred income  taxes                                                                                                                                                |   | 104                 |       | 100                    |       |
| Total current  assets                                                                                                                                                 |   | 742                 |       | 777                    |       |
|                                                                                                                                                                  |   |                |       |                   |       |
| Investments                                                                                                                                                           |   | 147                 |       | 143                    |       |
| Property and  equipment, net                                                                                                                                          |   | 7,609               |       | 7,649                  |       |
| Goodwill                                                                                                                                                              |   | 834                 |       | 834                    |       |
| Other assets                                                                                                                                                          |   | 276                 |       | 271                    |       |
| Total assets                                                                                                                                                          |   | $                   | 9,608      |                   | $          | 9,674 |   |
|                                                                                                                                                                  |   |                |       |                   |       |
| Liabilities and  stockholders’ equity                                                                                                                            |   |                |       |                   |       |
| Accounts payable  and accrued expenses                                                                                                                                |   | $                   | 577        |                   | $          | 690 |   |
| Current  maturities of long-term debt                                                                                                                                 |   | 1                   |       | 325                    |       |
| Total current  liabilities                                                                                                                                            |   | 578                 |       | 1,015                  |       |
|                                                                                                                                                                  |   |                |       |                   |       |
| Long-term debt,  net of current maturities                                                                                                                            |   | 4,859               |       | 4,585                  |       |
| Deferred income  taxes, net                                                                                                                                           |   | 1,050               |       | 1,023                  |       |
| Other  liabilities                                                                                                                                                    |   | 113                 |       | 94                     |       |
| Total  liabilities                                                                                                                                                    |   | 6,600               |       | 6,717                  |       |
|                                                                                                                                                                  |   |                |       |                   |       |
| Commitments and  contingencies                                                                                                                                        |   |                |       |                   |       |
|                                                                                                                                                                  |   |                |       |                   |       |
| Stockholders’  equity                                                                                                                                            |   |                |       |                   |       |
| Common stock,  $0.01 par value, 400.0 million shares authorized, 323.9 million and 323.7  million shares issued at March 31, 2003 and December 31, 2002, respectively |   | 3                   |       | 3                      |       |
| Additional  paid-in capital                                                                                                                                           |   | 3,803               |       | 3,801                  |       |
| Accumulated  deficit                                                                                                                                                  |   | (528                | )          | (569                   | )          |
| Accumulated  other comprehensive loss                                                                                                                                 |   | (8                  | )          | (16                    | )          |
| Common stock in  treasury at cost, 23.1 million shares at March 31, 2003 and December 31, 2002                                                                        |   | (262                | )          | (262                   | )          |
| Total  stockholders’ equity                                                                                                                                      |   | 3,008               |       | 2,957                  |       |
| Total  liabilities and stockholders’ equity                                                                                                                      |   | $                   | 9,608      |                   | $          | 9,674 |   |

 

See notes to condensedconsolidated financial statements

 

3

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**PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(inmillions, except per share amounts)**

**(unaudited)**

 
|                                                                                      |   | **Three months ended  March 31,** |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                      |   | **2003**                          |   | **2002** |   |
| Revenues                                                                                  |   |                              |   |   |   |
| Casino                                                                                    |   | $                                 | 805    |   | $ | 819 |   |
| Rooms                                                                                     |   | 148                               |   | 136 |   |
| Food and  beverage                                                                        |   | 119                               |   | 114 |   |
| Other revenue                                                                             |   | 71                                |   | 74 |   |
|                                                                                      |   | 1,143                             |   | 1,143 |   |
| Expenses                                                                                  |   |                              |   |   |   |
| Casino                                                                                    |   | 426                               |   | 443 |   |
| Rooms                                                                                     |   | 47                                |   | 43 |   |
| Food and  beverage                                                                        |   | 108                               |   | 98 |   |
| Other expense                                                                             |   | 282                               |   | 278 |   |
| Depreciation and  amortization                                                            |   | 115                               |   | 117 |   |
| Pre-opening  expense                                                                      |   | 1                                 |   | — |   |
| Corporate  expense                                                                        |   | 17                                |   | 17 |   |
|                                                                                      |   | 996                               |   | 996 |   |
|                                                                                      |   |                              |   |   |   |
| Equity in  earnings of unconsolidated affiliates                                          |   | 9                                 |   | 12 |   |
|                                                                                      |   |                              |   |   |   |
| Operating income                                                                          |   | 156                               |   | 159 |   |
|                                                                                      |   |                              |   |   |   |
| Interest income                                                                           |   | 2                                 |   | 1 |   |
| Interest  expense, net of interest capitalized                                            |   | (83                               | )      | (88 | ) |
| Interest  expense, net from unconsolidated affiliates                                     |   | (2                                | )      | (2 | ) |
|                                                                                      |   |                              |   |   |   |
| Income before  income taxes, minority interest and cumulative effect of accounting change |   | 73                                |   | 70 |   |
| Provision for  income taxes                                                               |   | 31                                |   | 28 |   |
| Minority  interest, net                                                                   |   | 1                                 |   | 2 |   |
|                                                                                      |   |                              |   |   |   |
| Income before  cumulative effect of accounting change                                     |   | 41                                |   | 40 |   |
|                                                                                      |   |                              |   |   |   |
| Cumulative  effect of accounting change                                                   |   | —                            |   | (979 | ) |
|                                                                                      |   |                              |   |   |   |
| Net income  (loss)                                                                        |   | $                                 | 41     |   | $ | (939 | ) |
|                                                                                      |   |                              |   |   |   |
| Basic earnings  (loss) per share                                                          |   |                              |   |   |   |
| Income before  cumulative effect of accounting change                                     |   | $                                 | 0.14   |   | $ | 0.13 |   |
| Cumulative  effect of accounting change                                                   |   | —                            |   | (3.24 | ) |
| Net income  (loss) per share                                                              |   | $                                 | 0.14   |   | $ | (3.11 | ) |
|                                                                                      |   |                              |   |   |   |
| Diluted earnings  (loss) per share                                                        |   |                              |   |   |   |
| Income before  cumulative effect of accounting change                                     |   | $                                 | 0.14   |   | $ | 0.13 |   |
| Cumulative  effect of accounting change                                                   |   | —                            |   | (3.22 | ) |
| Net income  (loss) per share                                                              |   | $                                 | 0.14   |   | $ | (3.09 | ) |

 

See notes to condensedconsolidated financial statements

 

4

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**PARK PLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inmillions)**

**(unaudited)**

 
|                                                                                      |   | **Three months ended  March 31,** |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                      |   | **2003**                          |   | **2002** |   |
| Operating  activities                                                                     |   |                              |   |   |   |
| Net income  (loss)                                                                        |   | $                                 | 41     |   | $ | (939 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |   |                              |   |   |   |
| Depreciation and  amortization                                                            |   | 115                               |   | 117 |   |
| Cumulative  effect of accounting change                                                   |   | —                            |   | 979 |   |
| Change in  working capital components                                                     |   | (99                               | )      | (5 | ) |
| Change in  deferred income taxes                                                          |   | 23                                |   | 10 |   |
| Other                                                                                     |   | 18                                |   | (1 | ) |
| Net cash  provided by operating activities                                                |   | 98                                |   | 161 |   |
|                                                                                      |   |                              |   |   |   |
| Investing  activities                                                                     |   |                              |   |   |   |
| Capital  expenditures                                                                     |   | (68                               | )      | (64 | ) |
| Other                                                                                     |   | (2                                | )      | — |   |
| Net cash used in  investing activities                                                    |   | (70                               | )      | (64 | ) |
|                                                                                      |   |                              |   |   |   |
| Financing  activities                                                                     |   |                              |   |   |   |
| Reduction in  Credit Facilities                                                           |   | (50                               | )      | (469 | ) |
| Proceeds from  issuance of notes                                                          |   | —                            |   | 375 |   |
| Proceeds from  exercise of stock options                                                  |   | 2                                 |   | 4 |   |
| Other                                                                                     |   | (8                                | )      | (7 | ) |
| Net cash used in  financing activities                                                    |   | (56                               | )      | (97 | ) |
|                                                                                      |   |                              |   |   |   |
| Decrease in cash  and equivalents                                                         |   | (28                               | )      | — |   |
| Cash and  equivalents at beginning of period                                              |   | 351                               |   | 328 |   |
|                                                                                      |   |                              |   |   |   |
| Cash and  equivalents at end of period                                                    |   | $                                 | 323    |   | $ | 328 |   |
|                                                                                      |   |                              |   |   |   |
| Supplemental  Disclosures of Cash Flow Information                                        |   |                              |   |   |   |
| Cash paid for:                                                                            |   |                              |   |   |   |
| Interest, net of  amounts capitalized                                                     |   | $                                 | 108    |   | $ | 97 |   |
| Income taxes,  net of refunds                                                             |   | $                                 | 4      |   | $ | 1 |   |

 

See notes to condensedconsolidated financial statements

 

5

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**PARKPLACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**Note 1.  The Company**

 

Park PlaceEntertainment Corporation (“Park Place” or the “Company”), a Delawarecorporation, was formed in June 1998. The Company is primarily engaged,through subsidiaries, in the ownership, operation, and development of gamingfacilities. The operations of the Company currently are conducted under theCaesars, Bally’s, Paris, Flamingo, Grand, Hilton, and Conrad brands. TheCompany operates and consolidates seventeen wholly owned casino hotels locatedin the United States; of which eight are located in Nevada; three are locatedin Atlantic City, New Jersey; five are located in Mississippi; and one is inNew Orleans, Louisiana. Additionally, the Company manages and consolidates an82 percent owned riverboat casino in Harrison County, Indiana; manages thecasino operations of Caesars Palace at Sea on two cruise ships; and manages twopartially owned casinos in Nova Scotia, Canada and owns and consolidates ahotel operation at one of those casinos. The Company partially owns and managestwo casinos internationally, one located in Johannesburg, South Africa and onelocated in Punta del Este, Uruguay which are accounted for under the equitymethod. 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 and theslot operations at the Dover Downs racetrack in Delaware. The Company viewseach casino property as an operating segment and all such operating segmentshave been aggregated into one reporting segment. Each casino property derivesits revenues primarily from casino operations, room rental and food andbeverage sales.

 

**Note 2.  Basis of Presentation**

 

The condensedconsolidated financial statements include the accounts of the Company, itssubsidiaries, and investments in unconsolidated affiliates, which are 50percent or less owned, that are accounted for under the equity method.  The Company exercises significant influenceover those investments accounted for under the equity method due to ownershippercentages, board representation, and management agreements. All materialintercompany accounts and transactions are eliminated.

 

The condensedconsolidated financial statements included herein are unaudited and have beenprepared by the Company pursuant to the rules and regulations of the UnitedStates Securities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to such rules and regulations, althoughthe Company believes that the disclosures are adequate to make the informationpresented not misleading.  In theopinion of management, all adjustments (which include normal recurring adjustments)necessary for a fair presentation of results for the interim periods have beenmade. The results for the three month period ended March 31, 2003 are notnecessarily indicative of results to be expected for the full fiscal year.These condensed consolidated financial statements should be read in conjunctionwith the consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

*Reclassifications*

 

The condensedconsolidated financial statements for prior periods reflect certainreclassifications

 

6

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to conform toclassifications adopted in the current period. These reclassifications have noeffect on previously reported net income.

 

*Stock-Based Compensation*

 

At March 31, 2003,the Company has Stock Incentive Plans and applies Accounting Principles BoardOpinion No. 25 and related interpretations in accounting for itsstock-based compensation plans using the intrinsic value method. Accordingly,no compensation expense is reflected in net income for stock options, as alloptions granted had an exercise price equal to the market value of theunderlying common stock on the date of grant. Had compensation cost for the Company’s Stock Incentive Plans beendetermined based on the fair value at the grant dates for awards under thoseplans consistent with the method of Statement of Financial Accounting Standards(“SFAS”) No. 123 “Accounting for Stock-Based Compensation,” the Company’snet income (loss) and net income (loss) per share would have been reduced tothe pro forma amounts indicated below:

 
|                                                                                                                   |   | **Three  months ended   March 31,** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                                                   |   | **2003**                            |   | **2002** |   |
|                                                                                                                   |   |                                |   |   |   |
| Net income  (loss), as reported                                                                                        |   | $                                   | 41     |   | $ | (939 | ) |
| Deduct: Total  stock-based employee compensation expense determined under the fair value  method, net of related taxes |   | (3                                  | )      | (3 | ) |
| Pro forma net  income (loss)                                                                                           |   | $                                   | 38     |   | $ | (942 | ) |
|                                                                                                                   |   |                                |   |   |   |
| Earnings (loss)  per share:                                                                                            |   |                                |   |   |   |
| Basic, as  reported                                                                                                    |   | $                                   | 0.14   |   | $ | (3.11 | ) |
| Basic, pro forma                                                                                                       |   | $                                   | 0.13   |   | $ | (3.12 | ) |
|                                                                                                                   |   |                                |   |   |   |
| Diluted, as  reported                                                                                                  |   | $                                   | 0.14   |   | $ | (3.09 | ) |
| Diluted, pro  forma                                                                                                    |   | $                                   | 0.13   |   | $ | (3.10 | ) |

 

The fair value ofeach option grant is estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions used forgrants in the three months ended March 31, 2003 and 2002, respectively:dividend yield of zero percent for each period; expected volatility of40 percent for each period; risk-free interest rates of 3.29 and4.64 percent and expected life of six years for each of the optionsgranted

 

**Note 3.  Goodwill and Other Intangible Assets – Adoption of Statement ofFinancial Accounting Standards (“SFAS”) No. 142**

 

On January 1,2002, the Company adopted the provisions of SFAS No. 142, “Goodwill and OtherIntangible Assets.”  Under SFAS No. 142,goodwill and indefinite-lived intangible assets are no longer amortized but arereviewed at least annually for impairment. Separable intangible assets that are not deemed to have an indefinitelife will continue to be amortized over their useful lives (but with no maximumlife).  In accordance with the initialadoption of SFAS No. 142, each property with assigned goodwill was valued as anoperating entity.

 

The Companyengaged an independent company to assist in the valuation of properties with asignificant amount of assigned goodwill. The fair value of the operating entities was determined using acombination of a discounted cash flow model, a guideline company method usingvaluation multiples and

 

7

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similar transactionsmethod.  Based on this analysis and thetests noted above, the Company completed its implementation analysis ofgoodwill arising from prior acquisitions and recorded an impairment charge of$979 million as a cumulative effect of accounting change in the first quarterof 2002.

 

**Note 4.  Earnings (Loss) Per Share**

 

Basic earnings(loss) per share (“EPS”) is calculated by dividing net income (loss) by theweighted-average number of common shares outstanding for the period.  The basic weighted-average number of commonshares outstanding for the three months ended March 31, 2003 and 2002 was301 million and 302 million, respectively.  Diluted EPS reflects the effect of assumed stock optionexercises.  The dilutive effect of theassumed exercise of stock options increased the weighted-average number ofcommon shares by 1 million and 2 million for the three months ended March 31,2003 and 2002, respectively.

 

**Note 5.  Comprehensive Income (Loss)**

 

Comprehensiveincome (loss) is the total of net income (loss) and all other non-stockholderchanges in equity.  Comprehensive income(loss) for the three months ended March 31, 2003 and 2002 is as follows (inmillions):

 
|                             |   | **Three  months ended  March 31,** |   |
|----------------------------------|--------|------------------------------------|--------|
|                             |   | **2003**                           |   | **2002** |   |
| Net income  (loss)               |   | $                                  | 41     |   | $ | (939 | ) |
| Currency  translation adjustment |   | 8                                  |   | — |   |
| Comprehensive  income (loss)     |   | $                                  | 49     |   | $ | (939 | ) |

 

**Note 6.  Long-Term Debt**

 

Long-term debt isas follows (in millions):

 
|                                                                                                                             |   | **March 31,  2003** |   | **December  31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| Senior and  senior subordinated notes, net of unamortized discount of $4 million and $5  million for 2003 and 2002, respectively |   | $                   | 3,471  |                    | $      | 3,470 |   |
| Credit  facilities                                                                                                               |   | 1,385               |   | 1,435                   |   |
| Other                                                                                                                            |   | 4                   |   | 5                       |   |
|                                                                                                                             |   | 4,860               |   | 4,910                   |   |
| Less current  maturities                                                                                                         |   | (1                  | )      | (325                    | )      |
| Net long-term  debt                                                                                                              |   | $                   | 4,859  |                    | $      | 4,585 |   |

 

The Company hastwo principal credit facilities, collectively known as the “Credit Facilities.”The first is a 364-day revolving facility expiring in August 2003 with totalavailability of $700 million.  Noamounts were outstanding under the 364-day facility at March 31, 2003.  The second facility is a $2.0 billionfive-year facility, which matures December 2003, with a $1.4 billiontwo-year extension upon expiration or voluntary termination of the existingfive-year facility.

 

The CreditFacilities contain financial covenants including a maximum leverage ratio(total debt to ebitda, as defined in the Credit Facilities) of 4.75 to 1.00 anda minimum interest coverage ratio (ebitda, as

 

8

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defined in the CreditFacilities, to interest expense) of 2.75 to 1.00 as of March 31, 2003. 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 theCompany is not in compliance with the required covenant ratios, an event ofdefault would occur, which if not cured could cause the entire outstandingborrowings under the Credit Facilities to become immediately due and payable aswell as trigger the cross default provisions of other debt issues. The maximumleverage ratio covenant adjusts to 4.50 to 1.00 for each of the quarterlytesting periods ending September 30, 2003 and thereafter.  The minimum interest coverage ratio willremain 2.75 to 1.00 for subsequent quarterly testing periods. As ofMarch 31, 2003, the Company was in compliance with the applicablecovenants.

 

In April 2003, theCompany pre-funded its $300 million 7.95 percent senior notes which will beredeemed in August 2003 (the “7.95 percent Notes”) with the issuance of $300million 7.0 percent senior notes due April 2013.  Because the Company has both the intent and the ability torefinance the 7.95 percent Notes, it has classified the 7.95 percent Notes aslong-term as of March 31, 2003 in the accompanying condensed consolidatedbalance sheets.

 

The Company issuedthe $300 million of 7.0 percent senior notes due 2013 through a privateplacement offering to institutional investors in April 2003.  The Company intends to exchange these notesfor notes registered under the Securities Act of 1933, as amended.  The notes are redeemable at any time priorto their maturity at the redemption prices described in the indenture governingsuch notes.  The notes are unsecuredobligations, rank equal with the Company’s other senior indebtedness and aresenior to all the Company’s junior indebtedness.  Pending the payoff of the 7.95 percent Notes in August 2003,proceeds from this offering were used to reduce borrowings under the CreditFacilities.

 

**Note 7.  Commitments and Contingencies**

 

*Litigation*

 

The Company andits subsidiaries are involved in various legal proceedings relating to itsbusinesses. The Company believes that all the actions brought against it or itssubsidiaries are without merit and will continue to vigorously defend againstthem. While any proceeding or litigation has an element of uncertainty, theCompany believes that the final outcome of these matters is not likely to havea material adverse effect upon its results of operations or financial position.

 

Saint Regis Mohawk Tribe

 

The Companyentered into an agreement in April 2000 with the Saint Regis Mohawk Tribe inHogansburg, New York.  The Company paid$3 million for the exclusive rights to develop a Class II or Class III casinoproject with the Tribe in the State of New York.  In November 2001, the parties entered into a seven-yeardefinitive management agreement for Park Place to manage a casino to be locatedat Kutsher’s Country Club in Thompson, New York in return for a management feeequal to 30 percent of ebitda, as defined in the agreement.  The management agreement is subject to theapproval of the National Indian Gaming Commission (the “NIGC”).

 

The Company hasentered into a definitive agreement, as amended, to acquire approximately66 acres of the Kutsher’s Resort Hotel and Country Club in SullivanCounty, New York, for approximately $10 million, with an option to purchase theremaining 1,400 acres for $40 million. Upon approval of the Bureau of Indian Affairs (the “BIA”), approximately66 acres will be transferred to be held in trust for the Saint Regis MohawkTribe.

 

9

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All of theagreements and plans relating to the development and management of this projectare contingent upon various regulatory and governmental approvals, includingexecution of a compact between the Saint Regis Mohawk Tribe and the State ofNew York, and receipt of approvals from the BIA, NIGC and local planning andzoning boards.  There is no guaranteethat the requisite regulatory approvals will be received.

 

On May 12, 2003,the Saint Regis Mohawk Tribe and the Governor of the State of New York signed amemorandum of understanding which outlined the terms under which the Tribe isauthorized to proceed with the casino development.

 

The Company isparty to numerous lawsuits regarding its involvement in the Saint Regis Mohawkproject, which lawsuits seek various monetary and other damages against theCompany.  Additionally, there are twolawsuits challenging the constitutionality of the legislation that, among otherthings, authorized the Governor of the State of New York to execute tribalstate gaming compacts and approved the use of slot machines as “games ofchance.”  While the Company believesthat it will prevail on these various litigations, there can be no assurancethat it will and, if it does not prevail, there can be no assurance that thedamages assessed against the Company would be immaterial to the Company.

 

These lawsuits aredetailed in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002, and such summaries will be updated as warranted.

 

Other

 

For certain of theCompany’s legal proceedings arising out of the ordinary course of its business,verdicts have been returned against the Company. The Company believes that ithas a valid basis to appeal the verdicts and does not believe that the ultimatefinancial impact of these matters is currently both probable and estimable, andaccordingly, no accruals for these matters have been recorded in the financialstatements as of March 31, 2003.  TheCompany may at any time consider it advantageous to negotiate a settlement ofany of these matters, and will record any financial impact of such settlementswhen the amount is probable and estimable.

 

*Baluma Holdings, S.A.*

 

Over the pastseveral years, the Company has provided capital (in the form of loans) toBaluma Holdings, S.A. (“Holdings”), the ultimate parent of Baluma, S.A.(“Baluma,” the entity that owns the Conrad Punta del Este (the “Resort”), inPunta del Este, Uruguay). Two promissory notes (the “Baluma Loans”),aggregating $80 million in principal, matured on July 31, 2002. The principal,together with certain accrued and unpaid interest, was not repaid. The BalumaLoans are secured by a first priority lien on all the assets comprising theResort and on the stock of Baluma. Baluma is heavily indebted, and a restructuring of its debts isneeded.  The Company has not recordedany impairment losses against its investments in Baluma and Holdings. Onlyafter a restructuring is completed will the Company be able to compare thevalue of its reorganized investments to their historical cost. Although theCompany enjoys a very senior position as creditor, it is nevertheless possiblethat the Company will have to recognize an impairment loss upon reorganization.The Company intends to continue to operate the Resort pursuant to themanagement agreement.

 

10

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| **ITEM 2****.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-----------------|-------------------------------------------------------------------------------------------------|

 

**RESULTS OF OPERATIONS**

 

Our results ofoperations include the following properties whose operations are fullyconsolidated except as noted:

 
| **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       |   | Grand Casino Tunica        |   | Conrad Punta del Este (2)  |
| Flamingo Las Vegas     |   | Dover Downs (1)            |   | Sheraton Casino Hotel      |   | Casino Windsor (3)         |
| Las Vegas Hilton       |   |                       |   | Bally’s Casino Tunica |   | Caesars Gauteng (2)        |
| Caesars Tahoe          |   |                       |   | Caesars Indiana            |   | Conrad Jupiters (1)        |
| Reno Hilton            |   |                       |   | Bally’s New Orleans   |   | Conrad Treasury (1)        |
| Flamingo Laughlin      |   |                       |   |                       |   | Caesars Palace at Sea      |

 

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| (1)    |   | These are properties from which our sole source of  income is management fees.                                                                                                                                                                                                                              |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                        |
| (2)    |   | These are properties which we manage and in which we  have a 50 percent or less ownership interest.  They are accounted for under the equity method.  We exercise significant influence over  these properties due to our ownership percentages, board representation and management  agreements. |
|   |   |                                                                                                                                                                                                                                                                                                        |
| (3)    |   | This is a property in which we own 50 percent of a  company that manages the casino hotel complex and our investment in that  management company is accounted for under the equity method.                                                                                                                  |

 

*Comparison of Three Months EndedMarch 31, 2003 and 2002*

 

A summary of ourconsolidated net revenue and earnings for the three months ended March 31, 2003and 2002 is as follows (in millions, except per share amounts):

 
|                                                                                |   | **Three  months ended  March 31,** |   |
|-------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                |   | **2003**                           |   | **2002** |   |
| Net revenue                                                                         |   | $                                  | 1,143  |   | $ | 1,143 |   |
| Operating income                                                                    |   | 156                                |   | 159 |   |
| Income before  cumulative effect of accounting change                               |   | 41                                 |   | 40 |   |
| Cumulative  effect of accounting change – goodwill                             |   | —                             |   | (979 | )  |
| Net income  (loss)                                                                  |   | 41                                 |   | (939 | ) |
| Basic and  diluted earnings per share before cumulative effect of accounting change |   | 0.14                               |   | 0.13 |   |
| Basic earnings  (loss) per share                                                    |   | 0.14                               |   | (3.11 | ) |
| Diluted earnings  (loss) per share                                                  |   | 0.14                               |   | (3.09 | ) |
|                                                                                |   |                               |   |   |   |
| Other operating  data:                                                              |   |                               |   |   |   |
| Cash provided by  operating activities                                              |   | $                                  | 98     |   | $ | 161 |   |
| Cash used in  investing activities                                                  |   | (70                                | )      | (64 | ) |
| Cash used in  financing activities                                                  |   | (56                                | )      | (97 | )  |

 

We are in thebusiness of operating casino hotels. Our primary sources of revenue consist of casino operations, roomrentals, and food and beverage sales.

 

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Casino revenue isderived primarily from patrons wagering on slot machines, table games and othergaming activities.  Table gamesgenerally include Blackjack (or Twenty One), Craps, Baccarat and Roulette.  Other gaming activities include Keno, Pokerand Race and Sports.  Casino revenue isdefined as the win from gaming activities, computed as the difference betweengaming wins and losses, not the total amounts wagered. “Table game volume,”“table game drop” (terms which are used interchangeably), and “slot handle” arecasino industry specific terms that are used to identify the amount wagered bypatrons on a casino table game or slot machine.  “Table game hold” and “slot hold” represent the percentage of thetotal amount wagered by patrons that the casino has won.  Hold is derived by dividing the amount wonby the casino by the amount wagered by patrons.  Casino revenue is recognized at the end of each gaming day.

 

Room revenues arederived from rooms and suites rented to guests.  “Average daily rate” is an industry specific term used to definethe average amount of revenue per rented room per day.  “Occupancy percentage” defines the totalpercentage of rooms occupied, and is computed by dividing the number of roomsoccupied by the total number of rooms available.  Room revenue is recognized at the time the room is provided tothe guest.

 

Food and beveragerevenues are derived from food and beverage sales in the food outlets of ourcasino hotels, including restaurants, room service and banquets.  Food and beverage revenue is recognized atthe time the food and/or beverage are provided to the guest.

 

We recorded netincome of $41 million and diluted earnings per share of $0.14 for the threemonths ended March 31, 2003, compared with net income before a cumulativeeffect of accounting change of $40 million and diluted earnings per shareof $0.13 for the three months ended March 31, 2002.  The adoption of SFAS No. 142 “Accounting for Goodwill and OtherIntangible Assets,” on January 1, 2002 required that we no longer amortizegoodwill and that we compare the fair value of our operating entities withgoodwill to the book value of those entities in order to determine if animpairment of our goodwill existed. Based on this analysis, we recognized an impairment charge of $979 millionas a cumulative effect of an accounting change in the first quarter of2002.  Including this cumulative effectof accounting change, we reported a net loss of $939 million or a dilutedloss per share of $3.09 for the first quarter ended March 31, 2002.  Our results for the first quarter of 2003reflect a strong performance in the Western Region offset by the effects ofpoor weather during February in the Eastern Region and poor weather coupledwith higher gaming taxes at Caesars Indiana.

 

*Casino*

 

Consolidatedcasino revenues decreased $14 million to $805 million for the threemonths ended March 31, 2003, compared to $819 million recorded for thethree months ended March 31, 2002. Casino revenue in the Western Regionincreased $3 million for the quarter, which was comprised of an $8 millionincrease at Caesars Palace and a $5 million decrease at our other WesternRegion properties. The improvement at Caesars Palace was a result of increasedtable volumes and a more normalized table hold percentage as compared to the2002 period. Casino revenue in the Eastern Region decreased $8 million onlower gaming volumes as a result of severe winter storms during the month ofFebruary. In the Mid-South Region, casino revenue was down $8 million comparedto the prior year due to continued competition at our Mississippi properties.

 

Our consolidatedcasino operating margin increased to 47 percent for the three months endedMarch 31, 2003 compared to 46 percent for the three months endedMarch 31, 2002.

 

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*Rooms*

 
|             |   | **Average  Daily Rate**            |   | **Occupancy  Percentage**          |   |
|------------------|--------|------------------------------------|--------|------------------------------------|--------|
|             |   | **Three  months ended  March 31,** |   | **Three  months ended  March 31,** |   |
|             |   | **2003**                           |   | **2002**                           |   | **2003** |   | **2002** |   |
| Western Region   |   | $                                  | 99     |                               | $      | 94 |   | 90 | % | 89 | % |
| Eastern Region   |   | $                                  | 78     |                               | $      | 80 |   | 95 | % | 96 | % |
| Mid-South Region |   | $                                  | 55     |                               | $      | 57 |   | 89 | % | 90 | % |

 

Consolidated roomrevenues increased nine percent to $148 million for the three months endedMarch 31, 2003 compared to $136 million recorded for the three monthsended March 31, 2002.  The increase ismainly attributable to increased occupancy and average daily rates in theWestern Region, particularly in Las Vegas. The average daily rate in theWestern Region increased $5 to $99 for the three months ended March 31,2003, when compared to the same period of last year.  Additionally, the Western Region benefited from an increase inoccupancy percentage from 89 percent to 90 percent for the three months endedMarch 31, 2003.

 

The consolidatedroom operating margin for the quarter ended March 31, 2003 was68 percent, the same as the quarter ended March 31, 2002.

 

*Food and Beverage*

 

Consolidated foodand beverage revenues increased $5 million to $119 million for the three monthsended March 31, 2003. The increase is primarily attributable to theWestern Region where banquet revenues increased over the prior year’s firstquarter.

 

The consolidatedfood and beverage operating margin for the quarter ended March 31, 2003was 9 percent compared to 14 percent for the quarter endedMarch 31, 2002.  The decrease ispartially attributable to increased salaries and benefits and new unionbenefits effective in 2003.

 

*Other*

 

Consolidated otherrevenues include retail sales, entertainment sales, telephone, management feeincome and other miscellaneous income at our casino hotels.

 

Consolidated otherrevenues decreased slightly to $71 million for the three months endedMarch 31, 2003 as compared to $74 million for the three months endedMarch 31, 2002.  The decrease isprincipally due to decreases in entertainment revenues.

 

Consolidated otherexpenses include costs associated with selling, general, administrative,property operations, retail, entertainment, telephone and other miscellaneouscosts at our casino hotels. Consolidated other expenses increased $4 million for the three monthsended March 31, 2003 compared to the three months ended March 31,2002.

 

*Pre-opening Expense*

 

Pre-openingexpense of $1 million for the three months ended March 31, 2003 was related tothe opening of, and advertising for, “A New Day...,” a show featuring Celine Dionwhich opened in The

 

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Colosseum at CaesarsPalace in March 2003.

 

*Corporate Expense*

 

Corporate expenseremained consistent at $17 million for the three months ended March 31,2003 as compared to the three months ended March 31, 2002.

 

*Depreciation and Amortization*

 

Consolidateddepreciation and amortization expense decreased to $115 million for the threemonths ended March 31, 2003 compared to $117 million for comparable period of2002.  The reduction was due to thewrite-down of the value of our New Orleans property as well as certainshort-lived equipment becoming fully depreciated before it was replaced.

 

*Net Interest Expense*

 

Consolidated netinterest expense decreased $6 million to $83 million for the three monthsended March 31, 2003 compared to the three months ended March 31,2002. The decrease in net interest expense was attributable to lower debtbalances and lower average interest rates on our borrowings. Capitalizedinterest was $2 million for the three months ended March 31, 2003 and2002.

 

*Equity in Earnings of UnconsolidatedAffiliates*

 

The decrease inequity in earnings of unconsolidated affiliates for the quarter ended March 31,2003, primarily relates to the sale of our equity interest in Jupiters Limitedin April 2002.  Prior to the salewe recognized equity in earnings of Jupiters Limited.

 

*Income Taxes*

 

The effectiveincome tax rates for the three months ended March 31, 2003 and 2002 were42.5 percent and 40.0 percent, respectively.  The increase in our effective income taxrate is primarily due to increases in permanent book-tax differences and stateincome taxes.  Our effective income taxrate is determined by the level and composition of pretax income subject tovarying foreign, state, and local taxes.

 

*Other Operating Developments*

 

We believe thatour operating results reflect the impact of weakened consumer spending and, toa lesser extent, the military operations in Iraq which began in the firstquarter of 2003.  Our property managersresponded to the lower gaming volumes by reducing costs and increasing revenuein other segments of our business, primarily hotel.  Additionally, we continued to closely examine our cost structurethough our Work Smart program, which in the first quarter achieved anadditional $15 million in operational savings, which were offset byincreased expenses in other areas.  Weare hoping for economic improvement, but we are not expecting a recovery inconsumer sentiment this year. Substantial risks still exist related to the economy, consumerconfidence, as well as concerns over Severe Acute Respiratory Syndrome (“SARS”)and proposed increased taxation in certain jurisdictions.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

*Liquidity*

 

As of March 31,2003, we had cash and cash equivalents of $323 million, which is primarilycash in our casinos used to fund our daily operations.  In addition, at March 31, 2003,approximately $1.3 billion was undrawn under our credit facilities.  We expect to finance our operations andcapital expenditures through cash flows from operations, existing cashbalances, borrowings under our credit facilities, and capital markettransactions.

 

*Investing Activities*

 

For the threemonths ended March 31, 2003, net cash used in investing activities was$70 million, consisting principally of $68 million of capitalexpenditures. Our capital expenditures include maintenance capital expenditureswhich are those long-lived assets required to maintain our properties in goodoperating condition.  Such capital itemsinclude new gaming equipment, room and restaurant refurbishments, computerhardware, furniture and office equipment, and other similar items.  Additionally, our capital expendituresinclude expansion projects funded during the period, which include a newrestaurant and nightclub at Paris/Bally’s, and additional attractions andamenities at Caesars.

 

The Companydiscusses its capital expenditure program in terms of a capital expenditure“backlog,” which is defined as all capital expenditures approved by theCompany’s Board of Directors less amounts that have actually been spent onthose projects.  At December 31, 2002,the capital expenditure backlog was $623 million.  Of this amount, approximately$60 million associated with the Saint Regis Mohawk Casino project inSullivan County, New York will not be spent unless the New York State Court ofAppeals rules favorably in the pending case challenging the constitutionalityof New York State’s casino statute.  Asof March 31, 2003, our current backlog of capital expenditures was $552million.  Notwithstanding the amount ofthe capital backlog, we expect to spend $450 to $500 million of the backlogthis year, largely on maintenance projects throughout the Company and on thecompletion of projects underway at Caesars Palace.

 

*Financing Activities*

 

During the threemonths ended March 31, 2003, we reduced our aggregate debt by $50 million.

 

The Company hastwo principal credit facilities, collectively known as the “Credit Facilities.”The first is a 364-day revolving facility expiring in August 2003 with totalavailability of $700 million.  Noamounts were outstanding under the 364-day facility at March 31, 2003.  The second facility is a $2.0 billionfive-year facility, which matures December 2003, with a $1.4 billion two-yearextension upon expiration or voluntary termination of the existing five-yearfacility.

 

The CreditFacilities contain financial covenants including a maximum leverage ratio(total debt to ebitda, as defined in the Credit Facilities) of 4.75 to 1.00 anda minimum interest coverage ratio (ebitda, as defined in the Credit Facilities,to interest expense) of 2.75 to 1.00 as of March 31, 2003. The Company isrequired to compute its actual leverage and interest coverage ratios on arolling twelve-month basis as of the end of each calendar quarter. If theCompany is not in compliance with the required covenant ratios, an event ofdefault would occur, which if not cured could cause the entire outstandingborrowings under the Credit Facilities to become immediately due and payable aswell as trigger the cross default provisions of other debt issues. The maximumleverage ratio covenant adjusts to 4.50 to 1.00 for each of the quarterlytesting periods ending September 30, 2003 and thereafter.  The minimum interest coverage ratio will

 

15

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remain 2.75 to 1.00 forsubsequent quarterly testing periods. As of March 31, 2003, the Company was incompliance with the applicable covenants.

 

Borrowings underthe Credit Facilities bear interest at a floating rate and may be obtained, atour option, as LIBOR advances for varying periods, or as base rate advances,each adjusted for an applicable margin (as further described in the CreditFacilities), or as competitive bid loans. We have historically borrowed usingLIBOR advances and expect to continue doing so for the foreseeable future.  We pay a margin over LIBOR which is afunction of both our leverage ratio and our credit rating; this margin isadjusted quarterly.  At March 31, 2003,our effective all-in borrowing cost of LIBOR advances under the five-yearcredit facility was LIBOR plus 127.5 basis points.

 

In April 2003, wepre-funded our $300 million 7.95 percent senior notes which will be redeemed inAugust 2003 (the “7.95 percent Notes”) with the issuance of $300 million 7.0percent senior notes due April 2013. Because we have both the intent and the ability to refinance the 7.95percent Notes, we have classified the 7.95 percent Notes as long-term as ofMarch 31, 2003 in the accompanying condensed consolidated balance sheets.

 

We issued the $300million of 7.0 percent senior notes due 2013 through a private placementoffering to institutional investors in April 2003.  We intend to exchange these notes for notes registered under theSecurities Act of 1933, as amended.  Thenotes are redeemable at any time prior to their maturity at the redemptionprices described in the indenture governing such notes.  The notes are unsecured obligations, rankequal with our other senior indebtedness and are senior to all the Company’sjunior indebtedness.  Pending the payoffof the 7.95 percent Notes in August 2003, proceeds from this offering were usedto reduce borrowings under the Credit Facilities.

 

**SAINT REGIS MOHAWK TRIBE**

 

We entered into anagreement in April 2000 with the Saint Regis Mohawk Tribe in Hogansburg, NewYork.  We paid $3 million for theexclusive rights to develop a Class II or Class III casino project with theTribe in the State of New York.  InNovember 2001, the parties entered into a seven-year definitive managementagreement for Park Place to manage a casino to be located at Kutsher’s CountryClub in Thompson, New York in return for a management fee equal to 30 percentof ebitda, as defined in the agreement. The management agreement is subject to the approval of the NationalIndian Gaming Commission (the “NIGC”).

 

We have enteredinto a definitive agreement, as amended, to acquire approximately 66 acres ofthe Kutsher’s Resort Hotel and Country Club in Sullivan County, New York, forapproximately $10 million, with an option to purchase the remaining 1,400 acresfor $40 million.  Upon approval of theBureau of Indian Affairs (the “BIA”), approximately 66 acres will betransferred to be held in trust for the Saint Regis Mohawk Tribe.

 

All of theagreements and plans relating to the development and management of this projectare contingent upon various regulatory and governmental approvals, includingexecution of a compact between the Saint Regis Mohawk Tribe and the State ofNew York, and receipt of approvals from the BIA, NIGC and local planning andzoning boards.  There is no guaranteethat the requisite regulatory approvals will be received.

 

On May 12, 2003,the Saint Regis Mohawk Tribe and the Governor of the State of New York signed amemorandum of understanding which outlined the terms under which the Tribe isauthorized to

 

16

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proceed with the casinodevelopment.

 

The Company isparty to numerous lawsuits regarding its involvement in the Saint Regis Mohawkproject, which lawsuits seek various monetary and other damages against theCompany.  Additionally, there are twolawsuits challenging the constitutionality of the legislation that, among otherthings, authorized the Governor of the State of New York to execute tribalstate gaming compacts and approved the use of slot machines as “games ofchance.”  While the Company believesthat it will prevail on these various litigations, there can be no assurancethat it will and, if it does not prevail, there can be no assurance that thedamages assessed against the Company would be immaterial to the Company.

 

These lawsuits aredetailed in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002, and such summaries will be updated as warranted.

 

**BALUMA HOLDINGS, S.A.**

 

Over the pastseveral years, we have provided capital (in the form of loans) to BalumaHoldings, S.A. (“Holdings”), the ultimate parent of Baluma, S.A. (“Baluma,” theentity that owns the Conrad Punta del Este Resort & Casino (the“Resort”), in Punta del Este, Uruguay). Two promissory notes (the “Baluma Loans”), aggregating $80 millionin principal, matured on July 31, 2002. The principal, together with certain accrued and unpaid interest, wasnot repaid. The Baluma Loans are secured by a first priority lien on all of theassets comprising the Resort and on the stock of Baluma.  Baluma is heavily indebted, and arestructuring of its debts is needed. We have not recorded any impairment losses against our investments inBaluma and Holdings.  Only after arestructuring is completed will we be able to compare the value of ourreorganized investments to their historical cost.  Although we enjoy a very senior position as creditor, it isnevertheless possible that we will have to recognize an impairment loss uponreorganization. We intend to continue to operate the Resort pursuant to amanagement agreement.

 

**SIGNIFICANT ACCOUNTING POLICIES**

 

A description ofthe Company's significant accounting policies and estimates can be found inItem 7 of the Company's Annual Report on Form 10-K for the year ended December31, 2002. There have been no material changes to those policies or estimates asof March 31, 2003.

 

**FORWARD-LOOKING STATEMENTS**

 

**Factors that May Affect FutureResults**

(Cautionary Statements Under the Private Securities Litigation ReformAct of 1995)

 

Certaininformation included in this Form 10-Q and other materials filed or to be filedby the Company with the United States Securities and Exchange Commission (aswell as information included in oral statements or other written statementsmade or to be made by the Company or its representatives) contains or maycontain forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended.  Thesestatements can be identified by the fact that they do not relate strictly tohistorical or current facts.  We havebased these forward-looking statements on our current expectations about futureevents.  The forward-looking statementsinclude statements that reflect management’s beliefs, plans, objectives, goals,expectations, anticipations, and intentions with respect to the financialcondition, results of operations, future performance and business of theCompany including:

 

•        statements relating to our businessstrategy; and

 

•        our current and future developmentplans.

 

Further,statements that include the words “may,” “could,” “should,” “would,” “believe,”“expect,” “anticipate,” “estimate,” “intend,” “plan,” or other words orexpressions of similar meaning may identify forward-looking statements.  These statements reflect our judgment on thedate they are made and

 

17

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we undertake no duty toupdate such statements in the 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.  Fromtime to time, oral or written forward-looking statements are included in theCompany’s periodic reports on Forms 10-K, 10-Q and 8-K, press releases and othermaterials released to the public.

 

Although webelieve that the expectations in these forward-looking statements arereasonable, any or all of the forward-looking statements in this report and inany other public statements that are made may prove to be incorrect.  This may occur as a result of inaccurateassumptions or as a consequence of known or unknown risks and uncertainties.Many factors will be important in determining the Company’s future performance.  Consequently, actual results may differmaterially from those that might be anticipated from forward-lookingstatements.  In light of these and otheruncertainties, you should not regard the inclusion of a forward-lookingstatement in this report or other public communications that we might make as arepresentation by us that our plans and objectives will be achieved, and youshould not place undue reliance on such forward-looking statements.

 

We undertake noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise.  However, any further disclosures made onrelated subjects in our subsequent reports filed with the Securities andExchange Commission on Forms 10-K, 10-Q and 8-K should be consulted. Thefollowing discussion of risks, uncertainties and possible inaccurateassumptions relevant to the Company’s business includes factors that managementbelieves could cause Park Place’s actual results to differ materially fromexpected and historical results. This discussion is provided as permitted bythe Private Securities Litigation 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 to meetour debt service obligations will depend on our future performance, which willbe subject to many factors that are beyond our control.

 

•             Our Nevada propertiesare adversely affected by disruptions in air travel.

 

•             The Company operatesin very competitive environments, particularly Las Vegas, Atlantic City andMississippi. To the extent that hotel and/or casinos are expanded by others inmarkets in which the Company operates, competition will increase and theincreased competition could adversely impact our future operations.Additionally, the establishment of new large-scale gaming operations onNative American lands in the states of New York and California could adverselyaffect the operations of the Company’s properties in Atlantic City and Nevada.

 

•             The Company’s gamingoperations are highly regulated by governmental authorities. We will alsobecome subject to regulation in any other jurisdiction where the Companyconducts gaming in the future.

 

•             Our properties face avariety of risks which may result in loss. Specifically, several of our properties are located in areas that aresubject to adverse weather.  Inaddition, all of our properties could be considered at risk for terrorist orother hostile acts.

 

•             Changes in applicablelaws or regulations could have a significant effect on our operations. Ourability to comply with gaming regulatory requirements, as well as possiblechanges in governmental and public acceptance of gaming could materiallyadversely affect our business.

 

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•             The gaming industryrepresents a significant source of tax revenues to the state, county and localjurisdictions in which gaming is conducted. From time to time, various stateand federal legislators and officials have proposed changes in tax laws, or inthe administration of the laws affecting the gaming industry. If enacted, suchtaxes will impact our cash flows and could impact our ability to meet debtservice requirements and, depending on the level of taxation, would materiallyadversely affect our business.

 

•             Claims have beenbrought against us in various legal proceedings, and additional legal and/orregulatory claims may arise from time to time. While we believe that theultimate disposition of current matters will not have a material impact on ourfinancial condition or results of operations, it is possible that our cashflows and results of operations could be affected from time to time by theresolution of one or more of these contingencies.

 

•             While Park Place fromtime to time communicates with securities analysts, it is against our policy todisclose to them any material non-public information or other confidentialbusiness information. It should not be assumed that we agree with any statementor report issued by any analysts, irrespective of the content of the statementor report.

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

 

Market risk is therisk of loss arising from changes in market rates and prices, such as interestrates, foreign currency exchange rates, and commodity prices.  We are exposed to market risk in the form ofchanges in interest rates and the potential impact such change may have on ourvariable-rate debt.  We attempt to limitthe impact of changes in interest rates by balancing the mix of our borrowingspursuant to our credit facilities and our long-term fixed-rate debt.  We have not invested in derivative-basedfinancial instruments.

 
| **ITEM 4****.** | **CONTROLS AND PROCEDURES** |
|-----------------|-----------------------------|

 

(a)  Evaluation of Disclosure Controls andProcedures.  The Company’s ChiefExecutive Officer and Chief Financial Officer have evaluated the effectivenessof the Company’s disclosure controls and procedures (as such term is defined inRules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”)) as of a date within 90 days prior to the filingdate of this quarterly report (the “Evaluation Date”).  Based on such evaluation, such officers haveconcluded that, as of the Evaluation Date, the Company’s disclosure controlsand procedures are effective in alerting them on a timely basis to materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in the Company’s reports filed or submitted under theExchange Act.

 

(b)  Changes in Internal Controls.  Since the Evaluation Date, there have notbeen any significant changes in the Company’s internal controls or in otherfactors that could significantly affect such controls.

 

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| **PART II****.** | **OTHER INFORMATION** |
|------------------|-----------------------|

 
| **ITEM 6****.** | **EXHIBITS AND REPORTS ON FORM 8-K** |
|-----------------|--------------------------------------|

 
| **(a)** | **Exhibits**                                                                                                                                                                      |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                                              |   |
|    | 99.1                                                                                                                                                                              | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the  Chief Executive Officer of Park Place Entertainment Corporation. |
|    |                                                                                                                                                                              |   |
|    | 99.2                                                                                                                                                                              | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the  Chief Financial Officer of Park Place Entertainment Corporation. |
|    |                                                                                                                                                                              |   |
| **(b)** | **Reports  on Form 8-K**                                                                                                                                                          |
|    |                                                                                                                                                                              |   |
|    | On February 6, 2003, the Company filed a Form 8-K,  dated February 6, 2003.  This Form 8-K  contains our earnings release for the quarter and year ended December 31,  2003. |

 

20

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this Report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| **PARK PLACE ENTERTAINMENT  CORPORATION**   |
|---------------------------------------------|
| (Registrant)                                |
|                                        |
| Date: May 15, 2003                          |
|                                        |
|    /s/ HARRY C. HAGERTY, III |   |
| Harry C. Hagerty, III                       |
| Executive Vice President,                   |
| Chief Financial Officer                     |
| (Principal Accounting Officer)              |

 

21

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**CERTIFICATIONOF PRINCIPAL EXECUTIVE OFFICER**

Section 302 Certification

 

I, Wallace R. Barr, certify that:

 
| 1.     | I have reviewed this quarterly report on Form 10-Q  of Park Place Entertainment Corporation;                                                                                                                                                                                                                                                                                                       |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 2.     | Based on my knowledge, this quarterly report does  not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this quarterly report;                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 3.     | Based on my knowledge, the financial statements, and  other financial information included in this quarterly report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  quarterly report;                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 4.     | The registrant’s other certifying officer and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                 | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this quarterly report is  being prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                 | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this quarterly report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | c)                                                                                                                                                                                                                                                                                                                                                                                                 | presented in this quarterly report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 5.     | The registrant’s other certifying officer and I have  disclosed, based on our most recent evaluation, to the registrant’s auditors  and the audit committee of registrant’s board of directors (or persons  performing the equivalent function):                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                 | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                 | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 6.     | The registrant’s other certifying officer and I have  indicated in this quarterly report whether or not there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent  evaluation, including any corrective actions with regard to significant  deficiencies and material weaknesses. |

 

 
| Date: May 15, 2003 | /s/ WALLACE R. BARR                   |   |
|--------------------|---------------------------------------|--------|
|               | Wallace R. Barr                       |
|               | President and Chief Executive Officer |

 

22

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**CERTIFICATIONOF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER**

Section 302 Certification

 

I, Harry C. Hagerty, III, certify that:

 
| 1.     | I have reviewed this quarterly report on Form 10-Q  of Park Place Entertainment Corporation;                                                                                                                                                                                                                                                                                                       |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 2.     | Based on my knowledge, this quarterly report does  not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this quarterly report;                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 3.     | Based on my knowledge, the financial statements, and  other financial information included in this quarterly report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  quarterly report;                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 4.     | The registrant’s other certifying officer and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                 | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this quarterly report is  being prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                 | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this quarterly report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | c)                                                                                                                                                                                                                                                                                                                                                                                                 | presented in this quarterly report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 5.     | The registrant’s other certifying officer and I have  disclosed, based on our most recent evaluation, to the registrant’s auditors  and the audit committee of registrant’s board of directors (or persons  performing the equivalent function):                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                 | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                 | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 6.     | The registrant’s other certifying officer and I have  indicated in this quarterly report whether or not there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent  evaluation, including any corrective actions with regard to significant  deficiencies and material weaknesses. |

 

 
| Date: May 15, 2003 | /S/ HARRY C. HAGERTY, III                            |   |
|--------------------|------------------------------------------------------|--------|
|               | Harry C. Hagerty, III                                |
|               | Executive Vice President and Chief Financial Officer |
|               | (Principal Accounting Officer)                       |

 

23

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