**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark one)**                                                                                                                                        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                            |   | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                  |   |   |
| **For the quarterly period ended June 30, 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           ** |
|                                                                                                                                                  |
| **Commission  file number 1-14573**                                                                                                                   |

 

**PARK PLACE ENTERTAINMENT CORPORATION**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                    |   | **88-0400631**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **3930 Howard Hughes Parkway****Las Vegas, Nevada**             |   | **89109**                             |
| (Address of principal executive offices)                        |   | (Zip code)                            |

 

**(702)699-5000**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding twelve months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  ý      No  o

 

Indicate by check mark whether the registrant is anaccelerated 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 August 1, 2003** |
|-----------------------------------------|--------|------------------------------------|
| Common Stock, par value $0.01 per share |   | 301,973,543                        |

 

 

----

 

**PARK PLACEENTERTAINMENT CORPORATION**

**INDEX**

 
| **PART I.**    | **FINANCIAL INFORMATION**                                                                           | **Page** |
|----------------|-----------------------------------------------------------------------------------------------------|----------|
|           |                                                                                                |
| Item 1.        | Unaudited Condensed Consolidated Financial Statements                                               |
|           |                                                                                                |
|           | Condensed Consolidated Balance Sheets  June 30, 2003 and December 31, 2002                          | 3        |
|           |                                                                                                |
|           | Condensed Consolidated Statements of  Operations  Three and six months ended June 30, 2003 and 2002 | 4        |
|           |                                                                                                |
|           | Condensed Consolidated Statements of Cash  Flows  Six months ended June 30, 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                                         | 21       |
|           |                                                                                                |
| Item 4.        | Controls and Procedures                                                                             | 21       |
|           |                                                                                                |
| **PART II.**   | **OTHER INFORMATION**                                                                               |
|           |                                                                                                |
| Item 4.        | Submission of Matters to a Vote of Security  Holders                                                | 22       |
|           |                                                                                                |
| Item 6.        | Exhibits and Reports on Form 8-K                                                                    | 22       |
|           |                                                                                                |
| **Signatures** |                                                                                                | 23       |

 

2

----

 

**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

 

**PARK PLACEENTERTAINMENT CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(dollars inmillions, except par value)**

**(unaudited)**

 
|                                                                                                                                                                 |   | **June 30,  2003** |   | **December  31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|-------------------------|--------|
|                                                                                                                                                                 |   |               |   |                    |   |
| Assets                                                                                                                                                               |   |               |   |                    |   |
| Cash and equivalents                                                                                                                                                 |   | $                  | 286    |                    | $      | 351 |   |
| Accounts receivable, net                                                                                                                                             |   | 173                |   | 185                     |   |
| Inventory, prepaids, and  other                                                                                                                                      |   | 136                |   | 138                     |   |
| Income taxes receivable                                                                                                                                              |   | —             |   | 3                       |   |
| Deferred income taxes                                                                                                                                                |   | 99                 |   | 100                     |   |
| Total current assets                                                                                                                                                 |   | 694                |   | 777                     |   |
|                                                                                                                                                                 |   |               |   |                    |   |
| Investments                                                                                                                                                          |   | 163                |   | 143                     |   |
| Property and equipment, net                                                                                                                                          |   | 7,588              |   | 7,649                   |   |
| Goodwill                                                                                                                                                             |   | 834                |   | 834                     |   |
| Other assets                                                                                                                                                         |   | 283                |   | 271                     |   |
| Total assets                                                                                                                                                         |   | $                  | 9,562  |                    | $      | 9,674 |   |
|                                                                                                                                                                 |   |               |   |                    |   |
| Liabilities and  stockholders’ equity                                                                                                                           |   |               |   |                    |   |
| Accounts payable and  accrued expenses                                                                                                                               |   | $                  | 605    |                    | $      | 690 |   |
| Current maturities of  long-term debt                                                                                                                                |   | 1                  |   | 325                     |   |
| Total current liabilities                                                                                                                                            |   | 606                |   | 1,015                   |   |
|                                                                                                                                                                 |   |               |   |                    |   |
| Long-term debt, net of  current maturities                                                                                                                           |   | 4,739              |   | 4,585                   |   |
| Deferred income taxes, net                                                                                                                                           |   | 1,042              |   | 1,023                   |   |
| Other liabilities                                                                                                                                                    |   | 113                |   | 94                      |   |
| Total liabilities                                                                                                                                                    |   | 6,500              |   | 6,717                   |   |
|                                                                                                                                                                 |   |               |   |                    |   |
| Commitments and  contingencies                                                                                                                                       |   |               |   |                    |   |
|                                                                                                                                                                 |   |               |   |                    |   |
| Stockholders’ equity                                                                                                                                            |   |               |   |                    |   |
| Common stock, $0.01 par  value, 400.0 million shares authorized, 324.4 million and 323.7 million  shares issued at June 30, 2003 and December 31, 2002, respectively |   | 3                  |   | 3                       |   |
| Additional paid-in capital                                                                                                                                           |   | 3,807              |   | 3,801                   |   |
| Accumulated deficit                                                                                                                                                  |   | (487               | )      | (569                    | )      |
| Accumulated other  comprehensive income (loss)                                                                                                                       |   | 1                  |   | (16                     | )      |
| Common stock in treasury at  cost, 23.1 million shares at June 30, 2003 and December 31, 2002                                                                        |   | (262               | )      | (262                    | )      |
| Total stockholders’ equity                                                                                                                                      |   | 3,062              |   | 2,957                   |   |
| Total liabilities and  stockholders’ equity                                                                                                                     |   | $                  | 9,562  |                    | $      | 9,674 |   |

 

See notes to condensed consolidated financial statements

 

3

----

 

**PARK PLACEENTERTAINMENT CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
|                                                                                      |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                                      |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
| Revenues                                                                                  |   |                              |   |                            |   |   |   |   |   |
| Casino                                                                                    |   | $                                 | 838    |                            | $      | 850 |   | $ | 1,643 |   | $ | 1,669 |   |
| Rooms                                                                                     |   | 149                               |   | 148                             |   | 297 |   | 284 |   |
| Food and beverage                                                                         |   | 126                               |   | 120                             |   | 245 |   | 234 |   |
| Other revenue                                                                             |   | 74                                |   | 74                              |   | 145 |   | 148 |   |
|                                                                                      |   | 1,187                             |   | 1,192                           |   | 2,330 |   | 2,335 |   |
| Expenses                                                                                  |   |                              |   |                            |   |   |   |   |   |
| Casino                                                                                    |   | 436                               |   | 430                             |   | 862 |   | 873 |   |
| Rooms                                                                                     |   | 49                                |   | 46                              |   | 96 |   | 89 |   |
| Food and beverage                                                                         |   | 115                               |   | 105                             |   | 223 |   | 203 |   |
| Other expense                                                                             |   | 296                               |   | 290                             |   | 578 |   | 568 |   |
| Depreciation and  amortization                                                            |   | 118                               |   | 119                             |   | 233 |   | 236 |   |
| Pre-opening expense                                                                       |   | —                            |   | —                          |   | 1 |   | — |   |
| Corporate expense                                                                         |   | 17                                |   | 17                              |   | 34 |   | 34 |   |
|                                                                                      |   | 1,031                             |   | 1,007                           |   | 2,027 |   | 2,003 |   |
| Equity in earnings of  unconsolidated affiliates                                          |   | 2                                 |   | 5                               |   | 11 |   | 17 |   |
|                                                                                      |   |                              |   |                            |   |   |   |   |   |
| Operating income                                                                          |   | 158                               |   | 190                             |   | 314 |   | 349 |   |
| Interest income                                                                           |   | —                            |   | 1                               |   | 2 |   | 2 |   |
| Interest expense, net of  interest capitalized                                            |   | (87                               | )      | (88                             | )      | (170 | ) | (176 | ) |
| Interest expense, net from  unconsolidated affiliates                                     |   | (1                                | )      | (3                              | )      | (3 | ) | (5 | ) |
| Investment gain                                                                           |   | —                            |   | 44                              |   | — |   | 44 |   |
|                                                                                      |   |                              |   |                            |   |   |   |   |   |
| Income before income taxes,  minority interest and cumulative effect of accounting change |   | 70                                |   | 144                             |   | 143 |   | 214 |   |
| Provision for income taxes                                                                |   | 29                                |   | 47                              |   | 60 |   | 75 |   |
| Minority interest, net                                                                    |   | —                            |   | 1                               |   | 1 |   | 3 |   |
| Income before cumulative  effect of accounting change                                     |   | 41                                |   | 96                              |   | 82 |   | 136 |   |
|                                                                                      |   |                              |   |                            |   |   |   |   |   |
| Cumulative effect of  accounting change                                                   |   | —                            |   | —                          |   | — |   | (979 | ) |
| Net income (loss)                                                                         |   | $                                 | 41     |                            | $      | 96 |   | $ | 82 |   | $ | (843 | ) |
|                                                                                      |   |                              |   |                            |   |   |   |   |   |
| Basic earnings (loss) per  share                                                          |   |                              |   |                            |   |   |   |   |   |
| Income before cumulative  effect of accounting change                                     |   | $                                 | 0.14   |                            | $      | 0.32 |   | $ | 0.27 |   | $ | 0.45 |   |
| Cumulative effect of  accounting change                                                   |   | —                            |   | —                          |   | — |   | (3.24 | ) |
| Net income (loss)                                                                         |   | $                                 | 0.14   |                            | $      | 0.32 |   | $ | 0.27 |   | $ | (2.79 | ) |
|                                                                                      |   |                              |   |                            |   |   |   |   |   |
| Diluted earnings (loss) per  share                                                        |   |                              |   |                            |   |   |   |   |   |
| Income before cumulative  effect of accounting change                                     |   | $                                 | 0.14   |                            | $      | 0.31 |   | $ | 0.27 |   | $ | 0.45 |   |
| Cumulative effect of  accounting change                                                   |   | —                            |   | —                          |   | — |   | (3.21 | ) |
| Net income (loss)                                                                         |   | $                                 | 0.14   |                            | $      | 0.31 |   | $ | 0.27 |   | $ | (2.76 | ) |

 

See notes to condensed consolidated financial statements

 

4

----

 

**PARK PLACEENTERTAINMENT CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inmillions)**

**(unaudited)**

 
|                                                                                      |   | **Six months  ended  June 30,** |   |
|-------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                      |   | **2003**                        |   | **2002** |   |
| Operating activities                                                                      |   |                            |   |   |   |
| Net income (loss)                                                                         |   | $                               | 82     |   | $ | (843 | ) |
| Adjustments to reconcile  net income (loss) to net cash provided by operating activities: |   |                            |   |   |   |
| Depreciation and  amortization                                                            |   | 233                             |   | 236 |   |
| Investment gain                                                                           |   | —                          |   | (44 | ) |
| Cumulative effect of  accounting change                                                   |   | —                          |   | 979 |   |
| Change in working capital  components:                                                    |   |                            |   |   |   |
| Accounts receivable, net                                                                  |   | 12                              |   | 30 |   |
| Inventory, prepaids, and  other                                                           |   | 5                               |   | (23 | ) |
| Accounts payable and  accrued expenses                                                    |   | (86                             | )      | (21 | ) |
| Income taxes  payable/receivable                                                          |   | 3                               |   | 50 |   |
| Change in deferred income  taxes                                                          |   | 20                              |   | 13 |   |
| Other                                                                                     |   | 6                               |   | (9 | ) |
| Net cash provided by  operating activities                                                |   | 275                             |   | 368 |   |
|                                                                                      |   |                            |   |   |   |
| Investing activities                                                                      |   |                            |   |   |   |
| Capital expenditures                                                                      |   | (159                            | )      | (162 | ) |
| Proceeds from sale of  investment                                                         |   | —                          |   | 120 |   |
| Change in investments                                                                     |   | (25                             | )      | — |   |
| Other                                                                                     |   | 10                              |   | (5 | ) |
| Net cash used in investing  activities                                                    |   | (174                            | )      | (47 | ) |
|                                                                                      |   |                            |   |   |   |
| Financing activities                                                                      |   |                            |   |   |   |
| Change in Credit  Facilities                                                              |   | (470                            | )      | (424 | ) |
| Payments on notes                                                                         |   | —                          |   | (300 | ) |
| Proceeds from issuance of  notes                                                          |   | 300                             |   | 368 |   |
| Purchases of treasury  stock                                                              |   | —                          |   | (3 | ) |
| Proceeds from exercise of  stock options                                                  |   | 6                               |   | 8 |   |
| Other                                                                                     |   | (2                              | )      | — |   |
| Net cash used in financing  activities                                                    |   | (166                            | )      | (351 | ) |
|                                                                                      |   |                            |   |   |   |
| Decrease in cash and  equivalents                                                         |   | (65                             | )      | (30 | ) |
| Cash and equivalents at  beginning of period                                              |   | 351                             |   | 328 |   |
|                                                                                      |   |                            |   |   |   |
| Cash and equivalents at  end of period                                                    |   | $                               | 286    |   | $ | 298 |   |
|                                                                                      |   |                            |   |   |   |
| Supplemental Disclosures  of Cash Flow Information                                        |   |                            |   |   |   |
| Cash paid for:                                                                            |   |                            |   |   |   |
| Interest, net of amounts  capitalized                                                     |   | $                               | 163    |   | $ | 171 |   |
| Income taxes, net of  refunds                                                             |   | $                               | 33     |   | $ | 13 |   |

 

See notes to condensed consolidated financial statements

 

5

----

 

**PARK PLACEENTERTAINMENT CORPORATION AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

**Note1.  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 three cruise ships; and managesand consolidates two majority owned casinos in Nova Scotia. The Companypartially owns and manages two casinos internationally, one located inJohannesburg, South Africa and one located in Punta del Este, Uruguay which areaccounted for under the equity method. In Windsor, Canada, the Company has a 50percent interest in a company that provides management services to the CasinoWindsor. The Company also provides management services to two casinos inQueensland, Australia and the slot operations at the Dover Downs racetrack inDelaware. The Company views each casino property as an operating segment andall such operating segments have been aggregated into one reporting segment.Each casino property derives its revenues primarily from casino operations,room rental and food and beverage sales.

 

**Note2.  Basis of Presentation**

 

The condensedconsolidated financial statements include the accounts of the Company, itssubsidiaries, and investments in unconsolidated affiliates, which are 50 percentor 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 and six month periods ended June 30, 2003 arenot necessarily 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 to conform to classifications adopted in the current period.These reclassifications have no effect on previously reported net income(loss).

 

6

----

 

*Recently IssuedAccounting Pronouncement*

 

In May 2003, the FinancialAccounting Standards Board issued Statement of Financial Accounting Standard(“SFAS”) No. 150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity.”  SFAS No. 150 establishes standards for how an issuer classifiesand measures certain financial instruments with characteristics of bothliabilities and equity and requires that an issuer classify a financialinstrument that is within its scope as a liability (or an asset in somecircumstances).  The Company hasdetermined that SFAS No. 150 will not have a material impact on its financialposition and results of operations.

 

*Stock-BasedCompensation*

 

The Company has StockIncentive Plans and applies Accounting Principles Board Opinion No. 25 andrelated interpretations in accounting for its stock-based compensationplans using the intrinsic value method. Accordingly, no compensation expense isreflected in net income for stock options, as all options granted had anexercise price equal to the market value of the underlying common stock on thedate of grant.  The compensation expenseassociated with the Supplemental Retention Plan, which is described in theCompany’s Annual Report of Form 10-K, was $1 million for the three monthsand six months ended June 30, 2003 and 2002, respectively. Had compensationcost for the Company’s Stock Incentive Plans been determined based on the fairvalue at the grant dates for awards under those plans consistent with themethod of SFAS No. 123 “Accounting for Stock-Based Compensation,” theCompany’s net income (loss) and net income (loss) per share would have beenreduced to the pro forma amounts as follows (in millions, except per shareamounts):

 
|                                                                                                                   |   | **Three  months ended  June 30,** |       | **Six months  ended  June 30,** |       |
|------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|---------------------------------|------------|
|                                                                                                                   |   | **2003**                          |       | **2002**                        |       | **2003** |   | **2002** |   |
|                                                                                                                   |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| Net income (loss),  as reported                                                                                        |   | $                                 | 41         |                            | $          | 96 |   | $ | 82 |   | $ | (843 | ) |
| Add: Total  stock-based employee compensation expense included in reported net income,  net of related taxes           |   | 1                                 |       | 1                               |       | 1 |   | 1 |   |
| Deduct: Total  stock-based employee compensation expense determined under the fair value  method, net of related taxes |   | (4                                | )          | (5                              | )          | (7 | ) | (8 | ) |
| Pro forma net income (loss)                                                                                            |   | $                                 | 38         |                            | $          | 92 |   | $ | 76 |   | $ | (850 | ) |
|                                                                                                                   |   |                              |       |                            |       |   |   |   |   |
| Earnings (loss) per share:                                                                                             |   |                              |       |                            |       |   |   |   |   |
| Basic, as reported                                                                                                     |   | $                                 | 0.14       |                            | $          | 0.32 |   | $ | 0.27 |   | $ | (2.79 | ) |
| Basic, pro forma                                                                                                       |   | $                                 | 0.13       |                            | $          | 0.30 |   | $ | 0.25 |   | $ | (2.81 | ) |
|                                                                                                                   |   |                              |       |                            |       |   |   |   |   |
| Diluted, as reported                                                                                                   |   | $                                 | 0.14       |                            | $          | 0.31 |   | $ | 0.27 |   | $ | (2.76 | ) |
| Diluted, pro forma                                                                                                     |   | $                                 | 0.13       |                            | $          | 0.30 |   | $ | 0.25 |   | $ | (2.79 | ) |

 

**Note3.  Goodwill and Other Intangible Assets**

 

Under SFAS No.142, “Goodwill and Other Intangible Assets,” goodwill and indefinite-livedintangible assets are no longer amortized but are reviewed at least annuallyfor impairment.  Separable intangibleassets that are not deemed to have an indefinite life will continue to beamortized over their useful lives.

 

7

----

 

In accordancewith the initial adoption of SFAS No. 142, each property with assigned goodwillwas valued as an operating entity.  TheCompany engaged an independent company to assist in the valuation of propertieswith a significant 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 similar transactions method.  Based on this analysis and the tests noted above, the Companycompleted its implementation analysis of goodwill arising from prioracquisitions and recorded an impairment charge of $979 million as a cumulative effect ofaccounting change in the first quarter of 2002.

 

**Note4.  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 June 30, 2003 and 2002 was301 million and 302 million, respectively, and 301 million and302 million for the six months ended June 30, 2003 and 2002,respectively.  Diluted EPS reflects theeffect of assumed stock option exercises. The dilutive effect of the assumed exercise of stock options increasedthe weighted-average number of common shares by 1 million and4 million for the three months ended June 30, 2003 and 2002,respectively, and 1 million and 3 million for the six months endedJune 30, 2003 and 2002, respectively. For the three months and six monthsended June 30, 2003, 20 million shares and 23 million shares would have beenincluded in the calculation of diluted EPS, however the exercise price of thoseoptions exceeded the average market price. For the three months and six months ended June 30, 2002, 10 millionshares and 12 million shares were excluded from the calculation of dilutedEPS.

 

**Note5.  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 and six months ended June 30, 2003 and 2002 is asfollows (in millions):

 
|                            |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|---------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                            |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
| Net income (loss)               |   | $                                 | 41     |                            | $      | 96 |   | $ | 82 |   | $ | (843 | ) |
| Currency translation adjustment |   | 9                                 |   | 22                              |   | 17 |   | 22 |   |
| Comprehensive income (loss)     |   | $                                 | 50     |                            | $      | 118 |   | $ | 99 |   | $ | (821 | ) |

 

8

----

 

**Note6.  Long-Term Debt**

 

Long-term debt is as follows (in millions):

 
|                                                                                                                             |   | **June 30,  2003** |   | **December  31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|-------------------------|--------|
| Senior and senior subordinated notes, net  of unamortized discount of $4 million and $5 million for 2003 and 2002,  respectively |   | $                  | 3,771  |                    | $      | 3,470 |   |
| Credit facilities                                                                                                                |   | 965                |   | 1,435                   |   |
| Other                                                                                                                            |   | 4                  |   | 5                       |   |
|                                                                                                                             |   | 4,740              |   | 4,910                   |   |
| Less current maturities                                                                                                          |   | (1                 | )      | (325                    | )      |
| Net  long-term debt                                                                                                              |   | $                  | 4,739  |                    | $      | 4,585 |   |

 

As of June 30, 2003, the Company had twoprincipal credit facilities, collectively known as the “CreditFacilities.”  The first was a 364-dayrevolving facility expiring in August 2003 with total availability of$700 million.  The second facilitywas a $2.0 billion five-year revolving facility, maturing inDecember 2003, with a $1.4 billion two-year extension upon expirationor voluntary termination of the existing five-year revolving facility.  As of June 30, 2003, $965 million wasoutstanding under the five-year revolving facility and no amounts wereoutstanding under the 364-day revolving facility.

 

The Credit Facilities contained financial covenants including a maximumleverage ratio (total debt to ebitda, as defined in the Credit Facilities) of4.75 to 1.00 and a minimum interest coverage ratio (ebitda, as defined in theCredit Facilities, to interest expense) of 2.75 to 1.00 as of June 30, 2003.The Company is required to compute its actual leverage and interest coverageratios on a rolling twelve-month basis as of the end of each calendar quarter.If the Company is not in compliance with the required covenant ratios, an eventof default 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. As of June30, 2003, the Company was in compliance with the applicable covenants.

 

In August 2003,the Company amended the Credit Facilities. After amending the Credit Facilities and refinancing the expiring364-day revolving facility, the Company has the following credit facilities inplace: (1) a $493 million 364-day revolving credit facility and (2) a$2.318 billion five-year revolving facility expiring in December 2003 witha $1.741 billion two-year extension upon expiration or termination of theexisting five-year revolvingfacility.  Approximately $700million of the $1.741 billion two-year revolving facility was convertedfrom revolving capacity to term loan capacity. If prepaid, the availability of the term loan is permanentlyreduced.    The Company also amended themaximum leverage ratio to 5.25 to 1.00 for the quarterly testing periods endedSeptember 30, 2003 through June 30, 2004, 5.00 to 1.00 for the quarterly testingperiods ending September 30, 2004 through March 31, 2005, 4.75 to 1.00 for thequarterly testing period ending June 30, 2005, and 4.50 to 1.00thereafter.  The interest coverage ratiocovenant was not amended.

 

In April 2003, the Company pre-funded its retirement of the $300million 7.95 percent senior notes which were redeemed in August 2003 (the “7.95percent Notes”) with proceeds from the issuance of $300 million 7.0 percentsenior notes due April 2013.  Becausethe Company had both the intent and the ability to refinance the 7.95 percentNotes, it has classified the 7.95 percent Notes as long-term as of June 30,2003 in the accompanying condensed consolidated balance sheets.

 

9

----

 

The Companyissued the $300 million of 7.0 percent senior notes due 2013 through a privateplacement offering to institutional investors in April 2003.  These notes were subsequently exchanged fornotes 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.  Proceeds from this offering were initially used to reduceborrowings under the Credit Facilities.

 

**Note7.  Commitments and Contingencies**

 

*Litigation*

 

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

 

In the matters captioned *Dalton, et al. v. Pataki*and *Karr v.Pataki, et al,*which was previously detailed in the Company’s Form10-K for the year ended December 31, 2002, on July 17, 2003, the State of NewYork Supreme Court upheld the constitutionality of the legislation that, amongother matters, authorized the Governor of the State of New York to executetribal-state gaming compacts.

 

For certain of the Company’slegal proceedings arising out of the ordinary course of its business, verdictshave been returned against the Company. The Company believes that it has avalid 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 June 30, 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 past several years, the Company has provided capital (in the formof loans) to Baluma Holdings, S.A. (“Holdings”), the ultimate parent of Baluma,S.A. (“Baluma,” the entity that owns the Conrad Punta del Este (the “Resort”),in Punta 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

----

 

**ITEM 2****.****         ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

 

**RESULTSOF OPERATIONS**

 

Our results of operationsinclude the following properties whose operations are fully consolidated exceptas 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      |

 

----

(1)                      These are properties from which our solesource of income is management fees.

 

(2)                      These are properties which we manage and inwhich we have a 50 percent or less ownership interest.  They are accounted for under the equitymethod.  We exercise significant influenceover these properties due to our ownership percentages, board representationand management agreements.

 

(3)                      This is a property in which we own 50 percentof a company that manages the casino hotel complex and our investment in thatmanagement company is accounted for under the equity method.

 

*Comparison of Threeand Six Months Ended June 30, 2003 and 2002*

 

A summary ofour consolidated net revenues and earnings for the three and six months endedJune 30, 2003 and 2002 is as follows (in millions, except per shareamounts):

 
|                                                              |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|-------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                              |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
| Net revenues                                                      |   | $                                 | 1,187  |                            | $      | 1,192 |   | $ | 2,330 |   | $ | 2,335 |   |
| Operating income                                                  |   | 158                               |   | 190                             |   | 314 |   | 349 |   |
| Income before cumulative effect of  accounting change             |   | 41                                |   | 96                              |   | 82 |   | 136 |   |
| Cumulative effect of accounting change –  goodwill           |   | —                            |   | —                          |   | — |   | (979 | ) |
| Net income (loss)                                                 |   | 41                                |   | 96                              |   | 82 |   | (843 | ) |
| Earnings per share before cumulative effect  of accounting change |   |                              |   |                            |   |   |   |   |   |
| Basic                                                             |   | 0.14                              |   | 0.32                            |   | 0.27 |   | 0.45 |   |
| Diluted                                                           |   | 0.14                              |   | 0.31                            |   | 0.27 |   | 0.45 |   |
| Earnings (loss) per share                                         |   |                              |   |                            |   |   |   |   |   |
| Basic                                                             |   | 0.14                              |   | 0.32                            |   | 0.27 |   | (2.79 | ) |
| Diluted                                                           |   | 0.14                              |   | 0.31                            |   | 0.27 |   | (2.76 | ) |
|                                                                   |        |                                   |        |                                 |        |  |  |  |  |  |  |  |  |

 

We are in the business ofoperating casino hotels.  Our primarysources of revenue consist of casino operations, room rentals, and food andbeverage sales.

 

11

----

 

Casino revenues are derivedprimarily from patrons wagering on slot machines, table games and other gamingactivities.  Table games generallyinclude 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 revenues are recognized at the end of each gaming day.

 

Room revenues are derivedfrom rooms and suites rented to guests. “Average daily rate” is an industry specific term used to define theaverage amount of revenue per rented room per day.  “Occupancy percentage” defines the total percentage of roomsoccupied, and is computed by dividing the number of rooms occupied by the totalnumber of rooms available.  Roomrevenues are recognized at the time the room is provided to the guest.

 

Food and beverage revenuesare derived from food and beverage sales in the food outlets of our casinohotels, including restaurants, room service and banquets.  Food and beverage revenues are recognized atthe time the food and/or beverage are provided to the guest.

 

We recordednet income of $41 million and diluted earnings per share of $0.14 for the threemonths ended June 30, 2003, compared with net income of $96 million anddiluted earnings per share of $0.31 for the three months ended June 30,2002.  The prior period results werepositively impacted by an investment gain of $44 million ($39 million, net oftax) on the sale of our equity interest in Jupiters Limited which is the parentcompany of Conrad Jupiters Gold Coast and Conrad International Treasury CasinoBrisbane.

 

We recordednet income of $82 million and diluted earnings per share of $0.27 for the sixmonths ended June 30, 2003 compared to income before a cumulative effect ofaccounting change of $136 million and diluted earnings per share of $0.45 forthe six months ended June 30, 2002.  Inconnection with the implementation of SFAS No. 142, “Accounting for Goodwilland Other Intangible Assets,” on January 1, 2002, we no longer amortizegoodwill and we recognized an impairment charge of $979 million as a cumulativeeffect of an accounting change in the first quarter of 2002.  Including this cumulative effect ofaccounting change, we reported a net loss of $843 million or a dilutedloss per share of $2.76 for the six months ended June 30, 2002.

 

*Casino*

 

Consolidatedcasino revenues decreased $12 million to $838 million for the threemonths ended June 30, 2003, compared to $850 million recorded for the threemonths ended June 30, 2002. Casino revenues in the Eastern Region increased $9million offset by a decrease in the Western Region of $23 million for thequarter. The improvement in the Eastern Region was a result of increased tablehold and slot volumes. The decrease in the Western Region was largely due tolower table hold. In the Mid-South Region, casino revenues increased $2 millioncompared to the prior year’s quarter. The improvement in the Mid-South is primarily due to increased slotvolumes at Caesars Indiana.

 

Ourconsolidated casino operating margin was 48 percent for the three months endedJune 30, 2003 compared to 49 percent for the three months ended June 30,2002.  Casino revenues for the quarter

 

12

----

 

decreased 1.4 percent whileexpenses generally remained flat, with the exception of Caesars Indiana wheregaming taxes increased $7 million due to the change in tax rates that becameeffective in August 2002.

 

Consolidatedcasino revenues for the six months ended June 30, 2003 were $1.643 billioncompared to $1.669 billion for the six months ended June 30, 2002.  The decrease consisted of a $20 milliondecline in the Western Region and $6 million decline in the Mid-SouthRegion.  The Eastern Region was flat ascompared to the same period last year. The decline in the Western Region wasprimarily due to decreased table game hold for the six months ended June 30,2003 compared to same period in the prior year. In the Mid-South Region, casinorevenues decreased due to lower table game volumes which were slightly offsetby an increase in slot volumes at Caesars Indiana.

 

Ourconsolidated casino operating margin was 48 percent for the each of the sixmonths ended June 30, 2003 and 2002. Casino revenues were down 1.6 percent while there was a reduction inexpenses due to cost containment programs, which was partially offset byincreased Indiana taxes.

 

*Rooms*

 

|             |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|             |   | **Average  Daily  Rate**          |   | **Occupancy  Percentage**       |   | **Average  Daily  Rate** |   | **Occupancy  Percentage** |   |
|             |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   | **2003** |   | **2002** |   | **2003** |   | **2002** |   |
| Western Region   |   | $                                 | 92     |                            | $      | 93 |   | 91 | % | 91 | % | $ | 96 |   | $ | 94 |   | 91 | % | 90 | % |
| Eastern Region   |   | $                                 | 88     |                            | $      | 90 |   | 98 | % | 97 | % | $ | 83 |   | $ | 85 |   | 97 | % | 97 | % |
| Mid-South Region |   | $                                 | 63     |                            | $      | 62 |   | 90 | % | 90 | % | $ | 59 |   | $ | 59 |   | 89 | % | 90 | % |

 

Consolidatedroom revenues increased slightly to $149 million for the three monthsended June 30, 2003 compared to $148 million recorded for the threemonths ended June 30, 2002.  The mostsignificant improvements came from increased average daily rates at theFlamingo Las Vegas as well as increased occupancy and average daily rates atCaesars Palace.

 

Theconsolidated room operating margin for the quarter ended June 30, 2003 was67 percent, compared to 69 percent for the quarter ended June 30, 2002.

 

For the sixmonths ended June 30, 2003, we recorded $297 million in consolidated roomrevenues, a $13 million increase from the $284 million recorded for thesix months ended June 30, 2002. The year-over-year increase is primarily attributable to a $14 millionincrease in the Western Region due to improved average daily room rates andoccupancy percentages.  The WesternRegion average daily rates increased to $96 for the first six months of 2003and the occupancy percentage was 91 percent compared to 90 percent in theprior year.  The Eastern Regiondecreased $2 million due to decreased room rates in the current period.

 

Theconsolidated room operating margin for the first six months of 2003 was68 percent, compared to 69 percent for the same period in 2002.

 

*Food and Beverage*

 

Consolidatedfood and beverage revenues increased $6 million to $126 million for the threemonths ended June 30, 2003. The increase is primarily attributable to theWestern Region where Caesars

 

13

----

 

Palace has opened newrestaurant outlets and experienced higher customer visitation.

 

Theconsolidated food and beverage operating margin for the quarter ended June 30,2003 was 9 percent compared to 13 percent for the quarter ended June30, 2002.  The decrease is largelyattributable to increased salaries and benefits and new union benefitseffective in 2003 at our Las Vegas properties.

 

For the sixmonths ended June 30, 2003, consolidated food and beverage revenues increased$11 million to $245 million when compared to the prior period. Thisimprovement is mainly attributable to our Las Vegas properties where banquetrevenues increased over the prior year and new restaurants opened at CaesarsPalace and Paris/Bally’s.

 

Theconsolidated food and beverage operating margin for the first half of 2003 was9 percent compared to 13 percent for 2002.  The year-over-year decrease is due to the same reasons as notedabove.

 

*Other*

 

Consolidatedother revenues include retail sales, entertainment sales, telephone, managementfee income and other miscellaneous income at our casino hotels.  Consolidated other revenues remained flat at$74 million for the three months ended June 30, 2003 as compared tothe three months ended June 30, 2002. For the six month period, consolidated other revenues decreased $3million due to a decrease in entertainment revenues.

 

Consolidatedother expenses include selling, general, administrative, property operations,retail, entertainment, telephone and other miscellaneous costs at our casinohotels.  Consolidated other expensesincreased $6 million for the three months ended June 30, 2003 compared to thethree months ended June 30, 2002.  Forthe first six months of the year, consolidated other expenses increased $10million when compared to the prior year. The increases are partially attributedto advertising and marketing at our Las Vegas properties.

 

*Pre-opening Expense*

 

There was no pre-opening expense in the quarters ended June 30, 2003 or2002.  Pre-opening expense of $1 millionfor the six months ended June 30, 2003 was related to the opening of “A NewDay...,” a show featuring Celine Dion which opened in The Colosseum at CaesarsPalace in March 2003.

 

*Corporate Expense*

 

Corporateexpense remained consistent at $17 million and $34 million for the three monthsand six months ended June 30, 2003 as compared to the three months and sixmonths ended June 30, 2002.

 

*Depreciation and Amortization*

 

Consolidateddepreciation and amortization expense decreased to $118 million for the threemonths ended June 30, 2003 compared to $119 million for comparable period of2002.  Consolidated depreciation andamortization expense decreased to $233 million for the six months ended June30, 2003 compared to $236 million for comparable period of 2002.

 

14

----

 

*Net Interest Expense*

 

Consolidatednet interest expense decreased $2 million to $88 million for the threemonths ended June 30, 2003 compared to the three months ended June 30, 2002.For the six months ended June 30, 2003, consolidated net interest expensedecreased $8 million when compared to the prior year.  The decrease in net interest expense was attributable to lowerdebt balances and lower average interest rates on our borrowings. Capitalizedinterest was $1 million and $2 million for the three months ended June 30, 2003and 2002, respectively.  For the sixmonths ended June 30, 2003 and 2002, capitalized interest was $3 million and $4million, respectively.

 

*Equity in Earnings of UnconsolidatedAffiliates*

 

Equity in earnings of unconsolidated affiliates was $2 million and$5 million for the second quarter of 2003 and 2002, respectively.  For the first six months of 2003 and 2002,equity in earnings of unconsolidated affiliates was $11 million and$17 million, respectively.  Thedecrease in equity in earnings of unconsolidated affiliates for the quarter andsix months ended June 30, 2003, primarily relates to the sale of ourequity interest in Jupiters Limited in April 2002.  Prior to the sale of our equity interest inJupiters Limited, we recognized equity in earnings of Jupiters Limited.

 

*Income Taxes*

 

The effective income taxrates for the three months ended June 30, 2003 and 2002 were 41.4 percentand 32.6 percent, respectively. For the six months ended June 30, 2003 and 2002, the effective incometax rates were 42.0 percent and 35.0 percent, respectively.  The increase in our effective income taxrate is primarily due to the tax impact of the gain on the sale of our equityinterest in Jupiters Limited and increases in permanent book-tax differencesand state income taxes.  Excluding thesale of our equity interest in Jupiters Limited our effective income tax ratesfor the three and six months ended June 30, 2002 were 42.0 percent and 41.2percent, respectively.  Our effectiveincome tax rate is determined by the level and composition of pretax incomesubject to varying foreign, state, and local taxes.

 

*Other Developments*

 

We believe that ouroperating results reflect the impact of weakened consumer spending and, to alesser extent, the military operations in Iraq which began in the first quarterof 2003.  The Western Region was impactedby decreased travel in April and by low table hold throughout the secondquarter; however, the Eastern and Mid-South Regions continued to show thestrength of their markets.  We continueto closely examine our cost structure though our “Work Smart” cost reductionprogram, which in the first half of 2003 achieved $30 million inoperational savings, which were offset by increased expenses in other areassuch as gaming taxes and insurance costs. We are hoping for economic improvement, but we are not expecting arecovery in consumer sentiment or discretionary spending this year.  Substantial economic issues still remainrelated to the economy, consumer confidence, and continued competition from theexpansion of Indian gaming in California and the July 2003 opening of the firstnew resort in Atlantic City since 1990.

 

15

----

 

*New Jersey Taxes*

 

The State of New Jerseyrecently enacted new tax legislation, effective July 2003, that includes newtaxes on casino net income, complimentaries, parking and rooms.  We estimate that the full-year impact of thenewly enacted taxes is approximately $23 million (before any federal taxbenefit).

 

*Nevada Taxes*

 

The State of Nevada recentlyenacted legislation, effective August 2003, that will increase taxes on thegaming industry. We estimate that the full-year impact of the new tax packageis approximately $12 million (before any federal tax benefit).

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

*Liquidity*

 

As of June 30,2003, we had cash and cash equivalents of $286 million, which is primarilycash in our casinos used to fund our daily operations.  In addition, at June 30, 2003, approximately$1.7 billion was undrawn under our credit facilities.  We expect to finance our operations andcapital expenditures through cash flows from current operations, existing cashbalances, borrowings under our credit facilities, and capital markettransactions.

 

*Investing Activities*

 

For the six months endedJune 30, 2003, net cash used in investing activities was $174 million,consisting principally of $159 million of capital expenditures and$25 million of additional investments which include the Las Vegas Monorailproject and the Margaritaville Café joint venture. Our capital expenditures includemaintenance capital expenditures which are those long-lived assets required tomaintain our properties in good operating condition.  Such capital items include new gaming equipment, room andrestaurant refurbishments, computer hardware, furniture and office equipment,and other similar items.  Additionally,our capital expenditures include expansion projects funded during the period,which include a new restaurant and nightclub at Paris/Bally’s, and additionalattractions and amenities at Caesars Palace as we continue to enhance thegaming and entertainment experience for our guests.

 

Wediscuss our capital expenditure program in terms of a capital expenditure“backlog,” which is defined as all capital expenditures approved by our Boardof Directors less amounts that have actually been spent on those projects.  At December 31, 2002, the capitalexpenditure backlog was $623 million. Of this amount, approximately $60 million associated with the SaintRegis Mohawk Casino project in Sullivan County, New York will not be spentuntil there is a favorable resolution to the litigation which challenges theconstitutionality of New York State’s casino legislation.  As of June 30, 2003, our remaining backlogof capital expenditures was $465 million. We currently anticipate total capital expenditures for 2003 to be$477 million, largely on maintenance projects throughout the Company andprojects underway at Caesars Palace.

 

*Financing Activities*

 

During the six months ended June 30, 2003, we reduced our aggregatedebt by $170 million.

 

At June 30, 2003, we had two principal creditfacilities, collectively known as the “Credit Facilities.” The first was a364-day revolving facility expiring in August 2003 with total availability of

 

16

----

 

$700 million.  The second facility was a $2.0 billionfive-year revolving facility, maturing in December 2003, with a$1.4 billion two-year extension upon expiration or voluntary terminationof the existing five-year revolving facility. As of June 30, 2003, we had $965million drawn under the five-year revolving facility and no amounts outstandingunder the 364-day revolving facility.

 

The Credit Facilitiescontained financial covenants including a maximum leverage ratio (total debt toebitda, as defined in the Credit Facilities) of 4.75 to 1.00 and a minimuminterest coverage ratio (ebitda, as defined in the Credit Facilities, tointerest expense) of 2.75 to 1.00 as of June 30, 2003. We are required tocompute our actual leverage and interest coverage ratios on a rollingtwelve-month basis as of the end of each calendar quarter. If we are not incompliance with the required covenant ratios, an event of default would occur,which if not cured could cause the entire outstanding borrowings under theCredit Facilities to become immediately due and payable as well as trigger thecross default provisions of other debt issues. As of June 30, 2003, we were in compliance with the applicablecovenants.

 

In August 2003, weamended our Credit Facilities.  Afteramending the Credit Facilities and refinancing the expiring 364-day revolvingfacility, we have the following credit facilities in place: (1) a $493 million364-day revolving credit facility and (2) a $2.318 billion five-yearrevolving facility expiring in December 2003 with a $1.741 billiontwo-year extension upon expiration or termination of the existing five-yearrevolving facility.  Approximately $700million of the $1.741 billion two-year revolving facility was convertedfrom revolving capacity to term loan capacity. If prepaid, the availability of the term loan is permanentlyreduced.  We also amended the maximumleverage ratio to 5.25 to 1.00 for the quarterly testing periods endingSeptember 30, 2003 through June 30, 2004, 5.00 to 1.00 for the quarterly testingperiods ending September 30, 2004 through March 31, 2005, 4.75 to 1.00 for thequarterly testing period ending June 30, 2005, and 4.50 to 1.00thereafter.  The interest coverage ratiocovenant was not amended.

 

Borrowingsunder the Credit Facilities bear interest at a floating rate and may beobtained, at our option, as LIBOR advances for varying periods, or as base rateadvances, each adjusted for an applicable margin (as further described in theCredit Facilities).  We havehistorically borrowed using LIBOR advances and expect to continue doing so forthe foreseeable future.  We pay a marginover LIBOR which is a function of both our leverage ratio and our creditrating; this margin is adjusted quarterly. At June 30, 2003, our effective all-in borrowing cost of LIBOR advancesunder the five-year revolving facility was LIBOR plus 127.5 basis points.  In August 2003, Standard & Poor’sannounced that it was reviewing Park Place’s credit rating.  Should our Standard & Poor’s creditrating be lowered, our all-in borrowing cost under the Credit Facilities wouldincrease to LIBOR plus 152.5 basis points; however, there would be no impact onthe borrowing costs of our other indebtedness.

 

In April 2003, we pre-funded the retirement of our $300 million 7.95 percentsenior notes which were redeemed in August 2003 (the “7.95 percent Notes”) withproceeds from the issuance of $300 million 7.0 percent senior notes dueApril 2013.  Because we had both theintent and the ability to refinance the 7.95 percent Notes, the 7.95 percentNotes were classified as long-term as of June 30, 2003 in the accompanyingcondensed consolidated balance sheets.

 

We issued the $300 million of 7.0 percent senior notes due 2013 througha private placement offering to institutional investors in April 2003.  These notes were subsequently exchanged fornotes 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 our other senior indebtedness and are senior toall our junior indebtedness.  Proceedsfrom this offering were initially used to reduce borrowings under the CreditFacilities.

 

17

----

 

**SAINT REGIS MOHAWK TRIBE**

 

We entered into an agreementin April 2000 with the Saint Regis Mohawk Tribe in Hogansburg, New York.  We paid $3 million for the exclusiverights to develop a Class II or Class III casino project with the Tribe in theState of New York.  In November 2001,the parties entered into a seven-year definitive management agreement for ParkPlace to manage a casino to be located at Kutsher’s Country Club in Thompson,New York in return for a management fee equal to 30 percent of ebitda, asdefined in the agreement.  Themanagement agreement is subject to the approval of the National Indian GamingCommission (the “NIGC”).

 

We have entered into adefinitive agreement, as amended, to acquire approximately 66 acres of theKutsher’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 the agreements andplans relating to the development and management of this project are contingentupon various regulatory and governmental approvals, including execution of acompact between the Saint Regis Mohawk Tribe and the State of New York, andreceipt of approvals from the BIA, NIGC and local planning and zoningboards.  There is no guarantee that therequisite regulatory approvals will be received.

 

On May 12, 2003, the SaintRegis 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 is party tonumerous lawsuits regarding its involvement in the Saint Regis Mohawk project,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.

 

In the matters captioned *Dalton, et al. v. Pataki*and *Karr v.Pataki, et al,*which was previously detailed in the Company’s Form10-K for the year ended December 31, 2002, on July 17, 2003, the State of NewYork Supreme Court upheld the constitutionality of the legislation that, amongother matters, authorized the Governor of the State of New York to executetribal-state gaming compacts.

 

These lawsuits are detailed in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2002, and such summaries will be updatedas warranted.

 

**BALUMA HOLDINGS, S.A.**

 

Overthe past several years, we have 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 Resort &Casino (the “Resort”), in Punta del Este, Uruguay).  Two promissory notes (the “Baluma Loans”), aggregating$80 million in principal, matured on July 31, 2002.  The principal, together with certain accruedand unpaid interest, was not repaid. The Baluma Loans are secured by a firstpriority lien on all of the assets comprising the Resort and on the stock ofBaluma.  Baluma is heavily indebted, anda restructuring 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.

 

18

----

 

**SIGNIFICANT ACCOUNTING POLICIES**

 

A descriptionof the 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 endedDecember 31, 2002. There have been no material changes to these policies orestimates as of June 30, 2003.

 

**RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT**

 

InMay 2003, the Financial Accounting Standards Board issued SFAS No. 150, *Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity*.  SFAS No. 150establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity andrequires that an issuer classify a financial instrument that is within itsscope as a liability (or an asset in some circumstances). Many of thoseinstruments were previously classified as equity.  The Company has determined that SFAS No. 150 will not have amaterial impact on its financial position and results of operations.

 

**FORWARD-LOOKING STATEMENTS**

 

**Factorsthat May Affect Future Results**

(Cautionary Statements Underthe Private Securities Litigation Reform Act 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:

 

•                  statementsrelating to our business strategy; and

 

•                  our current andfuture development plans.

 

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 we undertake no duty to update such statements in thefuture.  Such statements includeinformation relating to plans for future expansion and other business developmentactivities as well as capital spending, financing sources and the effects ofregulation (including gaming and tax regulation) and competition.  From time to time, oral or writtenforward-looking statements are included in the Company’s periodic reports onForms 10-K, 10-Q and 8-K, press releases and other materials released to thepublic.

 

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

 

19

----

 

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.

 

Weundertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events orotherwise.  However, any furtherdisclosures made on related subjects in our subsequent reports filed with theSecurities and Exchange Commission on Forms 10-K, 10-Q and 8-K should beconsulted. The following discussion of risks, uncertainties and possibleinaccurate assumptions relevant to the Company’s business includes factors thatmanagement believes could cause Park Place’s actual results to differmaterially from expected and historical results. This discussion is provided aspermitted by the Private Securities Litigation Reform Act of 1995.

 

•                  TheCompany’s operations are affected by changes in local and national generaleconomic and market conditions in the locations where those operations areconducted and where customers live.

 

•                  Ourability to meet our debt service obligations will depend on our futureperformance, which will be subject to many factors that are beyond our control.

 

•                  OurNevada properties are adversely affected by disruptions in air travel.

 

•                  TheCompany operates in very competitive environments, particularly Las Vegas,Atlantic City and Mississippi. To the extent that hotels and/or casinos areexpanded by others in markets in which the Company operates, competition willincrease and the increased competition could adversely impact our futureoperations. Additionally, the establishment of new large-scale gamingoperations on Native American lands in the states of New York and Californiacould adversely affect the operations of the Company’s properties in AtlanticCity and Nevada.

 

•                  TheCompany’s gaming operations are highly regulated by governmental authorities.We will also become subject to regulation in any other jurisdiction where theCompany conducts gaming in the future.

 

•                  Ourproperties face a variety of risks which may result in loss.  Specifically, several of our properties arelocated in areas that are subject to adverse weather.  In addition, all of our properties could be considered at riskfor terrorist or other hostile acts.

 

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

 

•                  Thegaming industry represents a significant source of tax revenues to the state,county and local jurisdictions in which gaming is conducted. From time to time,various state and federal legislators and officials have proposed changes intax laws, or in the administration of the laws affecting the gaming industry.If enacted, such taxes will impact our cash flows and could impact our abilityto meet debt service requirements and, depending on the level of taxation,would materially adversely affect our business.

 

•                  Claimshave been brought against us in various legal proceedings, and additional legaland/or

 

20

----

 

regulatory claims may arise from time to time. While we believe thatthe ultimate disposition of current matters will not have a material impact onour financial 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.

 

•                  WhilePark Place from time to time communicates with securities analysts, it isagainst our policy to disclose to them any material non-public information orother confidential business information. It should not be assumed that we agreewith any statement or report issued by any analysts, irrespective of thecontent of the statement or report.

 

**ITEM3****.          QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Market risk isthe risk of loss arising from changes in market rates and prices, such asinterest rates, 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. Based on our $1.0 billion of outstanding debt under thecredit facilities at June 30, 2003, a hypothetical 100 basis point (1%) changein interest rates would result in an annual interest expense change ofapproximately $10 million.

 

**ITEM 4.****                            ****CONTROLS ANDPROCEDURES**

 

**(a)  Disclosure Controls and Procedures.  The Company’s management, with theparticipation of the Company’s Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness of the Company’s disclosure controlsand procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer andChief Financial Officer have concluded that, as of the end of such period, theCompany’s disclosure controls and procedures are effective.**

 

(b)  Internal Control Over FinancialReporting.  There have not been anychanges in the Company’s internal control over financial reporting (as suchterm is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) duringthe fiscal quarter to which this report relates that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

21

----

 

**PART II.                OTHERINFORMATION**

 

**ITEM4.          SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

The Company’s Annual Meeting of Stockholders was held on May 21,2003.  Approximately 253,384,000 of theeligible 300,808,110 shares of the Company’s common stock were represented atthe meeting.  The matter voted upon andthe results of the voting follow:

 

***Election ofDirectors.*** The three directors nominated wereelected to three-year terms.

 
|             |   | **FOR**     |   | **WITHHELD** |
|------------------|--------|-------------|--------|--------------|
| Barbara  Coleman |   | 247,706,537 |   | 5,677,477    |
| Clive S.  Cummis |   | 245,402,308 |   | 7,981,706    |
| Eric M.  Hilton  |   | 243,898,201 |   | 9,485,813    |

 

In addition toMs. Coleman, Mr. Cummis and Mr. Eric Hilton, the directors continuing to serveon the board of directors after the Annual Meeting of Stockholders are WallaceR. Barr, Stephen F. Bollenbach, A. Steven Crown, Peter G. Ernaut, WilliamBarron Hilton, and Gilbert Shelton.  Effective as of May 21, 2003, the date of theAnnual Meeting of Stockholders, the Board of Directors was reduced from tenmembers to nine with the resignation of P.X. Kelley.  On July 22, 2003, the Board of Directors approved increasing thenumber of directors to ten members and elected Ralph C. Ferrara, subject toregulatory requirements, to fill the vacancy.

 

**ITEM6.          EXHIBITS AND REPORTS ON FORM8-K**

 

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

 

10.1                           Amendmentof Employment Agreement between Harry C. Hagerty, III and Park PlaceEntertainment, dated June 16, 2003.

 

10.2                           Amendmentof Employment Agreement between Bernard E. DeLury, Jr. and Park PlaceEntertainment, dated June 5, 2003.

 

31.1                           Certificationof the Chief Executive Officer of Park Place Entertainment Corporation pursuantto Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2                           Certificationof the Chief Financial Officer of Park Place Entertainment Corporation pursuantto Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1                           Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 of the Chief Executive Officer of Park PlaceEntertainment Corporation.

 

32.2                           Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 of the Chief Financial Officer of Park PlaceEntertainment Corporation.

 

**(b)****                                  Reportson Form 8-K**

 

On May 1, 2003, the Company filed a Form 8-K, dated May 1, 2003.  This Form 8-K contains our earnings releasefor the three months ended March 31, 2003.

 

22

----

 

**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

**PARK PLACE ENTERTAINMENTCORPORATION**

(Registrant)

 

Date: August 14, 2003

 

 
| /s/ HARRY C. HAGERTY,  III                                                          |   |
|-------------------------------------------------------------------------------------|--------|
| Harry C.  Hagerty, III                                                              |
| Executive  Vice President,  Chief Financial Officer  (Principal Accounting Officer) |

 

23

----