SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
Commission File No. 1-11463
3
PROMUS HOTEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware I.R.S. No. 62-1596939
(State of Incorporation) (I.R.S. Employer Identification No.)
850 Ridge Lake Blvd., Suite 400
Memphis, Tennessee 38120
(Address of principal executive offices)
(901) 680-7200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
At September 30, 1995, there were outstanding 51,373,688
shares of the Company's Common Stock.
Page 1 of 60
Exhibit Index Page 32
2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
- ------------------------------
As discussed in Note 1, on June 30, 1995, The Promus Companies
Incorporated (Parent) completed the planned spin-off (Spin-Off)
that split Parent into two independent public corporations, one
for conducting its casino entertainment business and one for
conducting its hotel business. Parent's interests in the Embassy
Suites, Hampton Inn and Homewood Suites hotel divisions and
certain other hotel-related assets and liabilities were
transferred to Promus Hotel Corporation (PHC or the Company).
The accompanying consolidated condensed financial statements of
PHC include the assets and liabilities, revenues, expenses and
cash flows of Parent's hotel business on a stand-alone basis as
of December 31, 1994, and through the six months ended June 30,
1995, as well as actual results of the Company for the three
months ended September 30, 1995.
The accompanying unaudited consolidated condensed financial
statements of PHC, a Delaware corporation, have been prepared in
accordance with the instructions to Form 10-Q, and therefore do
not include all information and notes necessary for complete
financial statements in conformity with generally accepted
accounting principles. The results for the periods indicated are
unaudited, but reflect all adjustments (consisting only of normal
recurring adjustments) which management considers necessary for a
fair presentation of operating results. Results of operations
for interim periods are not necessarily indicative of a full year
of operations. These consolidated condensed financial statements
should be read in conjunction with the PHC combined financial
statements and notes thereto included in the PHC Registration
Statement on Form 10/A as declared effective on May 3, 1995.
3
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
Sept 30, Dec 31,
(in thousands, except share amounts) 1995 1994
--------- --------
ASSETS
Current assets
Cash and cash equivalents $ 1,860 $ 2,222
Receivables, including notes receivable of
$7,992 and $66, less allowance for doubtful
accounts of $1,654 and $1,270 34,001 18,148
Deferred income taxes 1,473 2,844
Supplies 4,298 1,095
Prepayments and other 3,128 1,256
--------- --------
Total current assets 44,760 25,565
--------- --------
Land, buildings and equipment 460,071 410,751
Less: accumulated depreciation (110,665) (88,611)
--------- --------
349,406 322,140
Investments in and advances to nonconsolidated
affiliates (Note 7) 49,416 35,856
Deferred costs and other 45,954 37,004
--------- --------
$ 489,536 $420,565
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 19,390 $ 14,437
Accrued expenses 42,615 18,769
Current portion of long-term debt 983 1,255
--------- --------
Total current liabilities 62,988 34,461
Long-term debt (Note 2) 203,963 189,943
Deferred credits and other 35,752 28,649
Deferred income taxes 28,458 24,504
--------- --------
331,161 277,557
--------- --------
Commitments and contingencies (Notes 5 and 8)
Stockholders' equity
Common stock, $0.10 par value, 360,000,000
shares authorized, 51,373,688 shares
outstanding 5,137 -
Capital surplus 138,814 -
Retained earnings 15,761 -
Deferred compensation related to
restricted stock (1,337) -
Parent company investment - 143,008
--------- --------
158,375 143,008
--------- --------
$ 489,536 $420,565
========= ========
See accompanying Notes to Consolidated Condensed Financial Statements.
4
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Third Quarter Ended Nine Months Ended
(in thousands, except Sept 30, Sept 30, Sept 30, Sept 30,
per share amounts) 1995 1994 1995 1994
-------- -------- -------- --------
Revenues
Rooms $ 29,333 $ 28,270 $ 88,967 $ 84,167
Food and beverage 1,690 1,791 5,478 5,908
Franchise and management
fees 22,491 22,438 60,684 57,594
Other (Note 7) 18,457 13,007 49,627 36,931
-------- -------- -------- --------
Total revenues 71,971 65,506 204,756 184,600
-------- -------- -------- --------
Operating expenses
Direct
Rooms 14,360 14,598 42,341 42,720
Food and beverage 1,722 1,789 5,276 5,823
Depreciation 6,399 6,612 20,113 18,306
Other 19,004 12,995 51,410 42,277
-------- -------- -------- --------
Total direct operating
expenses 41,485 35,994 119,140 109,126
-------- -------- -------- --------
30,486 29,512 85,616 75,474
General and administrative (1,009) (756) (2,675) (2,276)
Property transactions 2,366 2,324 2,035 1,927
-------- -------- -------- --------
Operating income 31,843 31,080 84,976 75,125
Interest expense, net of
interest capitalized
(Notes 2 and 7) (7,570) (7,682) (24,312) (22,703)
Interest and other income 80 27 353 78
-------- -------- -------- --------
Income before income taxes
and extraordinary item 24,353 23,425 61,017 52,500
Provision for income taxes (10,253) (9,833) (25,688) (22,570)
-------- -------- -------- --------
Income before extraordinary
item 14,100 13,592 35,329 29,930
Extraordinary gain, net of
income tax 1,661 - 1,661 -
-------- -------- -------- --------
Net income $ 15,761 $ 13,592 $ 36,990 $ 29,930
======== ======== ======== ========
Income per common and
common equivalent
share (Note 10) $ .31
========
Average common and common
equivalent shares
outstanding 51,570
========
See accompanying Notes to Consolidated Condensed Financial Statements.
5
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS'
EQUITY (NOTES 1 and 4)
(UNAUDITED)
Deferred
Compensation
Related to
Restricted Parent
Common Stock Capital Retained Stock Company
(in thousands) Shares Amount Surplus Earnings (Note 6) Investment Total
------ ------ -------- -------- ------------ ---------- --------
Balance -
December 31, 1994 - $ - $ - $ - $ - $ 143,008 $143,008
Net Income -
January 1, 1995
through
June 30, 1995 - - - - - 21,230 21,230
Intercompany
activity with
Parent - January 1,
1995 through
June 30, 1995 - - - - - (21,967) (21,967)
Spin-Off of the
Company (Note 1) 51,352 5,135 138,490 - (1,354) (142,271) -
Shares issued
under incentive
compensation plan 8 1 174 - (175) - -
------ ------ -------- ------- ------- --------- --------
Balance -
June 30, 1995 51,360 5,136 138,664 - (1,529) - 142,271
Net Income-
July 1, 1995
through
Sept 30, 1995 - - - 15,761 - - 15,761
Net shares issued
under incentive
compensation
plans, including
income tax
benefit of $97 14 1 150 - 192 - 343
------ ------ -------- ------- ------- --------- --------
Balance -
Sept 30, 1995 51,374 $5,137 $138,814 $15,761 $(1,337) $ - $158,375
====== ====== ======== ======= ======= ========= ========
See accompanying Notes to Consolidated Condensed Financial Statements.
6
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
Sept 30, Sept 30,
(in thousands) 1995 1994
-------- --------
Cash flows from operating activities
Net income $ 36,990 $ 29,930
Adjustments to reconcile net income to cash
flows from operating activities
Depreciation and amortization 22,762 18,737
Other noncash items (723) (3,054)
Equity in earnings and distributions from
nonconsolidated affiliates (4,204) 313
Net gains from property transactions (2,159) (103)
Net change in long-term accounts 4,421 6,173
Net change in working capital accounts (397) (12,419)
-------- --------
Cash flows provided by operating
activities 56,690 39,577
-------- --------
Cash flows from investing activities
Land, building and equipment additions (50,922) (11,099)
Other (7,590) 17,184
-------- --------
Cash flows (used in) provided by
investing activities (58,512) 6,085
-------- --------
Cash flows from financing activities
Debt retirements (16,276) (1,452)
Advances from (to) Parent 17,680 (45,554)
Other 56 -
-------- --------
Cash flows provided by (used in)
financing activities 1,460 (47,006)
-------- --------
Net decrease in cash and cash equivalents (362) (1,344)
Cash and cash equivalents, beginning of period 2,222 3,653
-------- --------
Cash and cash equivalents, end of period $ 1,860 $ 2,309
======== ========
See accompanying Notes to Consolidated Condensed Financial Statements.
7
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(UNAUDITED)
Note 1 - Basis of Presentation and Organization
- -----------------------------------------------
On June 30, 1995, The Promus Companies Incorporated (Parent)
completed the transfer of the operations, assets and liabilities
of its hotel business (the Hotel Business), composed of three
hotel brands targeted at specific market segments: Embassy
Suites, Hampton Inn and Homewood Suites, to a new publicly traded
entity, Promus Hotel Corporation (PHC or the Company). As
approved by Parent's Board of Directors and stockholders on May
26, 1995, this entity was spun-off (the Spin-Off) from the Parent
and its stock was distributed to Parent's stockholders on a one-
for-two basis effective June 30, 1995 (the Distribution).
Concurrent with the Distribution, Parent changed its name to
Harrah's Entertainment, Inc.
The accompanying consolidated condensed financial statements
include the assets, liabilities, revenues, expenses and cash
flows of Parent's Hotel Business on a stand-alone basis as of
December 31, 1994, and through the six months ended June 30,
1995, as well as actual results of the Company for the three
months ended September 30, 1995.
All significant intercompany accounts and transactions among
PHC entities have been eliminated. Investments in 50% or less
owned companies and joint ventures over which PHC has the ability
to exercise significant influence, but does not control, are
accounted for using the equity method. PHC reflects its share of
income before interest expense and any extraordinary items of
these nonconsolidated affiliates in revenues - other. PHC's
proportionate share of interest expense of such nonconsolidated
affiliates is included in interest expense in the Consolidated
Condensed Statements of Income (see Note 7 for combined
summarized financial information regarding these nonconsolidated
affiliates). Management believes that PHC's income statement
treatment of equity investments is the preferable presentation
due to the nature of PHC's equity investments.
Note 2 - Long-term Debt
- -----------------------
Parent Debt Allocation
----------------------
The Company's financial position at December 31, 1994, and
its results of operations through June 30, 1995, reflect all
indebtedness, together with related interest expense,
specifically identified with PHC entities, as well as a pro-rata
portion of Parent's historical corporate debt balance,
unamortized deferred finance charges and interest expense.
Allocations of those amounts to PHC from Parent were based on the
percentage of Parent's historical corporate debt that was
expected to be retired using proceeds from PHC's new $350 million
bank credit facility (the PHC Facility). The accompanying
Consolidated Condensed Balance Sheet, as of December 31, 1994,
reflects corporate debt allocated to PHC from Parent of $187.8
8
million, together with debt specifically associated with PHC
entities of $3.3 million, as well as the unamortized deferred
finance charges allocated to PHC of $3.2 million.
PHC's interest expense includes interest related to
indebtedness specifically identified with PHC entities, PHC's
proportionate share of interest expense of its nonconsolidated
affiliates (see Note 7), and Parent's allocation of interest and
deferred finance costs related to the allocated debt. Parent's
corporate interest expense, including deferred finance costs,
allocated to PHC was $4.2 million for third quarter 1994, and
$10.5 million (which represents interest only allocated through
June 30, 1995) and $12.7 million for the nine months ended
September 30, 1995 and 1994, respectively.
New Bank Facility
-----------------
Immediately prior to the Distribution, Parent drew, through
its then wholly-owned subsidiary Embassy Suites, Inc., $218
million under the PHC Facility to retire a portion of existing
Parent debt which had been previously allocated to PHC and to pay
related bank fees and expenses. The actual borrowings
outstanding of $202.5 million, together with deferred finance
charges of $2.3 million, are reflected in long-term debt and
deferred costs and other, respectively, in the accompanying
Consolidated Condensed Balance Sheet as of September 30, 1995.
The PHC Facility is secured by the stock of PHC's material
subsidiaries. The liability associated with all current and
future borrowings under the PHC Facility was assumed by Promus
Hotels, Inc. (PHI), PHC's wholly-owned subsidiary, with PHC as
guarantor, upon consummation of the Spin-Off, at which time
Parent was released from liability.
The PHC Facility consists of a $300 million revolving credit
arrangement with a maturity of five years (the Five-Year
Revolver) and a $50 million annually extendible revolving credit
facility with an initial maturity of 364 days (the Extendible
Revolver). The Extendible Revolver is convertible into a two-
year term loan with equal amortizing payments over such two-year
period. Interest on the drawn portion of the PHC Facility will
be, at the option of the Company, equal to either (i) the Base
Rate, as defined, or (ii) LIBOR plus the applicable spread. Both
agreements incorporate a tiered scale that defines the applicable
LIBOR spread and a facility fee based upon the more favorable of
the Company's current debt rating or leverage ratio, as defined.
Currently, the LIBOR spread on the Five-Year Revolver and the
Extendible Revolver is .35% and .40%, respectively, and the
facility fee required on the total amount of the Five-Year
Revolver and the Extendible Revolver is 0.20% and 0.15%,
respectively. The PHC Facility also contains provisions that
restrict certain investments, limit the Company's ability to
incur additional indebtedness and pay dividends, and require that
certain performance ratios be maintained. As of
September 30, 1995, PHC was in compliance with all such
9
covenants.
The Five-Year Revolver also provides for a sublimit for
letters of credit of $20 million. At September 30, 1995,
approximately $8.6 million in letters of credit were outstanding
under this agreement.
Interest Rate Agreements
------------------------
In connection with the Spin-Off, PHI assumed two of Parent's
existing interest rate swaps, each with a notional amount of
$50 million, in order to effectively convert to a fixed rate a
portion of the amount of variable rate debt outstanding under the
PHC Facility. The floating rate resets every three months under
both agreements. One swap arrangement specifies a 6.99%
contractual fixed rate (effective rate of 7.54%) with a March 20,
2000 expiration, while the other bears a 7.8625% contractual
fixed rate (effective rate of 8.4125%) expiring July 28, 1997.
Note 3 - Supplemental Disclosure of Cash Paid for Interest and
Taxes
- ----------------------------------------------------------------
The following table reconciles PHC's interest expense, net of
interest capitalized, to cash paid for interest:
Third Quarter Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
(in thousands) 1995 1994 1995 1994
------- ------- ------- -------
Interest expense, net of amount
capitalized (Note 2) $ 7,570 $ 7,682 $24,312 $22,703
Adjustments to reconcile to cash
paid for interest
PHC's share of interest
expense of nonconsolidated
affiliates (Note 7) (3,208) (3,302) (9,823) (9,454)
Amortization of deferred
finance charges (192) (196) (594) (558)
Amounts accrued but not yet
paid (1,791) - (1,791) -
Net amortization of discounts
and premiums - (12) (8) (34)
Other (39) (35) (116) (104)
------- ------- ------- -------
Cash paid for interest, net of
amount capitalized $ 2,340 $ 4,137 $11,980 $12,553
======= ======= ======= =======
Cash paid for income taxes $ 640 $ - $ 640 $ -
======= ======= ======= =======
For purposes of this presentation, interest expense allocated
to PHC by Parent is assumed to have been paid in the quarter
allocated. Additionally, Parent was responsible for the payment
of PHC income taxes for periods prior to the Spin-Off.
10
Concurrent with the Spin-Off, the historical net assets and
liabilities of the Hotel Business were transferred to PHC by
Parent, and the issuance of PHC common stock was completed in
connection with the Distribution.
Note 4 - Stockholders' Equity
- -----------------------------
In addition to its common stock, the Company has the
following classes of stock authorized but unissued:
Preferred stock, $100 par value, 150,000 shares authorized
Special stock, 5,000,000 shares authorized -
Series A, $1.125 par value
Note 5 - Commitments and Contingencies
- --------------------------------------
Contractual Commitments
-----------------------
PHC manages certain hotels for others under agreements that
provide for payments/loans to the hotel owners if stipulated
levels of financial performance are not maintained. In addition,
PHC is liable under certain lease agreements where it has
assigned the direct obligation to third party interests, and
under certain loan guarantees. PHC believes the likelihood is
remote that material payments will be required under these
agreements. PHC's estimated maximum exposure under such
agreements is currently less than $39 million over the next
30 years.
FelCor Agreements
-----------------
During September 1995, PHI entered into an agreement with
FelCor Suite Hotels, Inc. and Felcor Suites Limited Partnership
(FelCor), resulting from FelCor's agreement to acquire the Crown
Sterling hotel chain (the Crown Sterling Agreement). In
connection with the acquisition, FelCor plans to convert up to 16
of these hotels (over 4,000 suites) to the Embassy Suites brand.
In return, PHI will make available up to $50 million to FelCor
for the conversion through investments in FelCor common stock
and/or limited partnership interests that are convertible to
FelCor common stock. These investments may be subsequently sold
on the open market subject to certain restrictions. PHI will
also guarantee a third party loan, not to exceed $25 million.
Each converted hotel will operate under a 20-year license
agreement, and a ten-year management contract will be awarded to
the Company. Pursuant to this agreement, PHI loaned FelCor $7.5
million representing one-half of the deposit required for the
acquisition. Availability under the Subscription Agreement
(described below) has been reduced by the outstanding loan
amount.
11
On May 3, 1995, Parent entered into a Subscription Agreement
with FelCor whereby Parent agreed to purchase up to $25 million
in FelCor limited partnership interests. Parent's commitment,
which was assumed by PHI at the Distribution date, is subject to
various conditions which include, but are not limited to, the
limited partnership's acquisition of additional hotels to be
converted to the Embassy Suites hotel brand (Embassy) and PHI
being granted the management contract for the subject property.
The limited partnership interests are convertible into FelCor
common stock at $25.00 per share, subject to some limitations.
Pursuant to the terms of the Subscription Agreement, an all-
suites hotel was purchased by FelCor and converted to an Embassy
on July 1, 1995. FelCor subsequently purchased an interest in
three other properties that were already in the Embassy system,
and management contracts for all four properties were awarded to
PHI. In accordance with the agreement, PHI agreed to purchase
$12.5 million of limited partnership interests representing
consideration for all four hotels.
Virtually all of the $75 million committed under these
agreements (subject to the reduction associated with the loan
advanced under the Crown Sterling Agreement) is expected to be
funded before the end of the first quarter 1996.
Litigation
----------
Upon completion of the Distribution, PHC assumed
responsibility for various inquiries, administrative proceedings
and litigation relating to contracts, sales of property and other
matters arising in the normal course of the Hotel Business.
While any proceeding or litigation has an element of uncertainty,
management believes that the final outcome of these matters will
not have a materially adverse effect upon PHC's consolidated
financial position or its results of operations.
Employment and Severance Agreements
-----------------------------------
PHC has entered into individual severance agreements with 13
senior officers of the Company that provide for a compensation
payment of 2.99 times the average annual cash compensation
(salary and bonus) paid to each such executive for the five
preceding calendar years, including such compensation paid during
service with Parent, as well as accelerated payment of any
compensation or awards payable to such executive under any PHC
incentive compensation or stock option plan if the executive is
terminated subsequent to a change in control of PHC, as defined.
The maximum amount of compensation that would be payable under
all agreements if a change in control occurred and if such
executives were terminated as of September 30, 1995, would be
approximately $13.7 million.
12
Self-Insurance Reserves
-----------------------
Prior to the Spin-Off, PHC, along with its joint venture and
management contract properties, was covered under Parent-
sponsored self-insurance and captive insurance programs for
various levels of general liability, workers' compensation and
employee medical coverage. Concurrent with the Spin-Off, PHC
established similar programs and indemnified Parent against any
future self-insurance obligations. For five years following the
Spin-Off, PHC will guarantee, but Parent will retain, the
insurance reserves related to the Company's general liability and
workers' compensation claims for all periods prior to the Spin-
Off date. PHC claims prior to the Spin-Off will be administered
by the Company, but will be funded by Parent. Medical insurance
claims and reserves related to PHC that existed at June 30, 1995,
were transferred from Parent in connection with the Spin-Off.
All self-insurance reserves include accruals of estimated
settlements for known claims, as well as accruals of actuarial
estimates of incurred but not reported claims.
Note 6 - Employee Benefit Plans
- -------------------------------
Savings and Retirement Plan
---------------------------
In connection with the Spin-Off, PHC established a defined
contribution savings and retirement plan (PHC S&RP) to replace
Parent's S&RP. Employees participating in the PHC S&RP may elect
to make pre-tax and after-tax contributions of up to 16 percent
of their eligible earnings, the first six percent of which PHC
will match fully. Amounts contributed to the plan are invested,
at the participant's option, in a PHC common stock fund, an
aggressive stock fund, a diversified stock fund, a long-term bond
fund, an income fund and/or a treasury fund. On June 30, 1995,
all PHC employee participant accounts were transferred from
Parent's S&RP to the PHC S&RP while retaining participants'
current investment elections. Previous investments in Parent's
common stock fund were converted to PHC common stock on a dollar
value basis. Participants become vested in PHC's matching
contributions over seven years of credited service, including any
previous credited service under Parent's plan.
Restricted Stock
----------------
The Company established a restricted stock plan (RSP) in
connection with the Spin-Off. At the Distribution date, PHC
employees with unvested restricted stock in Parent's RSP received
a dividend of one share of PHC common stock for each two shares
of Parent RSP common stock held as of the Spin-Off date.
Concurrent with the Spin-Off, the unamortized Parent RSP shares
13
held by PHC employees were cancelled and replaced by an adjusted
number of PHC RSP shares that will vest under the same terms and
conditions as the Parent RSP shares they replaced. Under the new
PHC RSP, executives and key employees may be awarded shares of
PHC's common stock. Shares granted under the PHC RSP are
restricted as to transfer, are subject to forfeiture prior to
vesting and will generally vest evenly over periods from two to
four years. The deferred compensation expense is amortized over
the vesting period.
Stock Option Plan
-----------------
Parent maintained a stock option plan (SOP) under which
options had been granted to PHC key management personnel to
purchase Parent's common stock at a price equal to its market
value at the date of grant. Pursuant to the Spin-Off, the
Company established a similar plan and outstanding options for
Parent's common stock held by PHC employees were cancelled and
new options for PHC common stock were issued under PHC's SOP.
The number of shares subject to option and the exercise price
were calculated so as to preserve the intrinsic value of Parent
options cancelled while maintaining the ratio of the exercise
price per option to market value per share as of the Spin-Off
date. As of September 30, 1995, there were approximately 1.9
million unexercised PHC options outstanding at option prices
ranging from $2.41 to $30.71.
Deferred Compensation Plans
---------------------------
Concurrent with the Spin-Off, PHC established deferred
compensation plans similar to Parent's under which certain
employees may defer a portion of their compensation. Amounts
deposited into these plans are unsecured and earn interest at
rates approved by the Human Resources Committee of the Board of
Directors. In connection with the administration of the
executive deferred compensation plan, company-owned life
insurance policies insuring the lives of certain directors,
officers and key employees have been purchased. As of
September 30, 1995, the total liability under these plans was
$7.7 million, and the related cash surrender value of life
insurance policies was $11.0 million.
Stock Incentive Plan
--------------------
The Company has established a PHC 1996 Non-Management
Directors Stock Incentive Plan under which (i) directors will
automatically receive each May 1, August 1, November 1, and
February 1, in lieu of cash payments, shares of PHC common stock
based upon one-half of the meeting and retainer fees earned and
the fair market value of PHC common stock and (ii) may elect to
receive the remaining one-half of compensation due in the form of
a cash payment or as PHC common stock. Shares issued under the
plan are restricted as to transfer for at least six months after
the date of grant, and the compensation expense will be amortized
ratably over such restricted period. The plan becomes effective
as of the date of the 1996 PHC annual stockholders' meeting.
14
Note 7 - Nonconsolidated Affiliates
- -----------------------------------
Combined summarized income statements of nonconsolidated
affiliates, which PHC accounted for using the equity method, were
as follows:
Third Quarter Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
(in thousands) 1995 1994 1995 1994
------- ------- -------- --------
Combined Summarized Income
Statements
Revenues $40,643 $41,753 $121,413 $120,534
======= ======= ======== ========
Operating income $ 9,573 $ 9,381 $ 28,745 $ 26,196
======= ======= ======== ========
Net income $ 8,017 $ 2,398 $ 13,022 $ 6,212
======= ======= ======== ========
PHC's share of nonconsolidated affiliates' combined net income is reflected
in the accompanying Consolidated Condensed Statements of Income as follows:
Third Quarter Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
(in thousands) 1995 1994 1995 1994
------- ------- ------- -------
Pre-interest operating income
(included in revenues-other) $ 5,182 $ 5,310 $15,648 $14,350
======= ======= ======= =======
Interest expense (included in
interest expense) $(3,208) $(3,302) $(9,823) $(9,454)
======= ======= ======= =======
Extraordinary gain on
forgiveness of debt
(included in extraordinary
gain, net of income tax) $ 1,661 - $ 1,661 -
======= ======= ======= =======
Sept 30, Dec 31,
1995 1994
------- -------
PHC's investments in and
advances to nonconsolidated
affiliates
At equity $39,388 $25,551
At cost 10,028 10,305
------- -------
$49,416 $35,856
======= =======
15
Note 8 - Relationship Between PHC and Parent after the
Distribution
- ----------------------------------------------------------------
General
-------
For the purpose of governing certain ongoing relationships
between PHC and Parent after the Distribution and to provide
mechanisms for an orderly transition, Parent and PHC have entered
into various agreements and have adopted policies governing their
future relationship. PHC believes that the agreements are fair
to both parties and contain terms which generally are comparable
to those which would have been reached in arm's-length
negotiations with unaffiliated parties (although comparisons are
difficult with respect to certain agreements that relate to the
specific circumstances of this transaction). In some cases the
agreements are comparable to those used by other companies in
similar transactions.
Tax Sharing Agreement
---------------------
In connection with the Spin-Off, PHC and Parent entered into
a tax sharing agreement that defines each company's rights and
obligations with respect to deficiencies and refunds of federal,
state and other income or franchise taxes relating to PHC's
business for tax years prior to the Distribution and with respect
to certain tax attributes of PHC after the Distribution. In
general, with respect to periods ending on or before December 31,
1995, Parent is responsible for (i) filing federal tax returns
for the Parent and PHC for the periods such companies were
members of the same consolidated group, and (ii) paying taxes
relating to such returns (to include any subsequent adjustments
resulting from the redetermination of such tax liabilities by the
applicable taxing authorities; PHC will reimburse Parent for the
portion of such adjustments relating to the Hotel Business). PHC
is responsible for filing returns and paying taxes for periods
beginning after the Spin-Off. PHC and Parent have agreed to
cooperate with each other and to share information in preparing
such tax returns and in dealing with other tax matters.
16
Note 9 - Summarized Financial Information
- -----------------------------------------
Promus Hotels, Inc. (PHI) is a wholly-owned subsidiary of
PHC and the primary entity through which the operations of PHC
are conducted. PHI is also PHC's principal asset. Summarized
financial information for PHI, prepared on the same basis as PHC,
is as follows:
Sept 30, Dec 31,
(in thousands) 1995 1994
-------- --------
ASSETS
Current assets $ 44,685 $ 25,565
Land, buildings and equipment, net 349,406 322,140
Other assets 94,566 72,860
-------- --------
488,657 420,565
-------- --------
LIABILITIES
Current liabilities 62,988 34,461
Long-term debt 203,963 189,943
Other liabilities 64,210 53,153
-------- --------
331,161 277,557
-------- --------
Net assets $157,496 $143,008
======== ========
Third Quarter Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
(in thousands) 1995 1994 1995 1994
------- ------- -------- --------
Revenues $71,971 $65,506 $204,756 $184,600
======= ======= ======== ========
Operating income $32,092 $31,080 $ 85,255 $ 75,125
======= ======= ======== ========
Net income $15,905 $13,592 $ 37,134 $ 29,930
======= ======= ======== ========
17
Note 10 - Earnings Per Share
- ----------------------------
The Company's stock was distributed in connection with the
Spin-Off on June 30, 1995. In order to present earnings per
share on a comparable basis, the average common shares
outstanding below for periods prior to the Spin-Off is assumed to
be equal to the actual common and common equivalent shares
outstanding on June 30, 1995. Historical net income is used for
all periods presented.
Third Quarter Ended Nine Months Ended
(in thousands, except Sept 30, Sept 30, Sept 30, Sept 30,
per share amounts) 1995 1994 1995 1994
------- ------- ------- -------
Net income $15,761 $13,592 $36,990 $29,930
======= ======= ======= =======
Average common and common
equivalent shares
outstanding 51,570 51,573 51,566 51,573
======= ======= ======= =======
Earnings per share $ 0.31 $ 0.26 $ 0.72 $ 0.58
======= ======= ======= =======
18
PERFORMANCE STATISTICS
- ----------------------
Third Quarter Ended Nine Months Ended
Sept 30, Sept 30, Inc/ Sept 30, Sept 30, Inc/
1995 1994 (Dec) 1995 1994 Dec)
-------- -------- ----- ------- ------- ----
COMPARABLE SYSTEM
HOTELS*
Embassy Suites
Occupancy 77.3% 78.1% (0.8)pts 76.4% 76.7% (0.3)pts
ADR $101.74 $96.79 5.1% $102.28 $96.75 5.7%
RevPAS $ 78.62 $75.58 4.0% $ 78.11 $74.21 5.3%
Hampton Inn
Occupancy 81.8% 81.9% (0.1)pts 77.4% 76.7% 0.7 pts
ADR $58.44 $54.86 6.5% $56.65 $53.40 6.1%
RevPAR $47.81 $44.95 6.4% $43.86 $40.95 7.1%
Homewood Suites
Occupancy 83.3% 84.9% (1.6)pts 80.3% 80.6% (0.3)pts
ADR $84.88 $78.43 8.2% $81.63 $75.81 7.7%
RevPAS $70.73 $66.58 6.2% $65.53 $61.09 7.3%
TOTAL SYSTEM HOTELS
Embassy Suites
Occupancy 77.1% 78.1% (1.0)pts 76.2% 76.6% (0.4)pts
ADR $101.69 $97.47 4.3% $101.99 $97.63 4.5%
RevPAS $ 78.37 $76.12 3.0% $ 77.69 $74.82 3.8%
Hampton Inn
Occupancy 80.4% 81.6% (1.2)pts 76.3% 76.4% (0.1)pts
ADR $58.84 $54.96 7.1% $57.01 $53.51 6.5%
RevPAR $47.33 $44.84 5.6% $43.49 $40.86 6.4%
Homewood Suites
Occupancy 83.0% 84.3% (1.3)pts 79.5% 79.8% (0.3)pts
ADR $84.55 $77.74 8.8% $82.13 $76.28 7.7%
RevPAS $70.19 $65.50 7.2% $65.27 $60.88 7.2%
TOTAL SYSTEM REVENUES
(in thousands)
Embassy Suites $190,243 $181,088 5.1% $ 555,340 $ 529,728 4.8%
Hampton Inn 240,824 196,777 22.4% 626,820 512,028 22.4%
Homewood Suites 18,539 17,408 6.5% 52,111 47,205 10.4%
-------- -------- ---------- ----------
$449,606 $395,273 13.7% $1,234,271 $1,088,961 13.3%
======== ======== ========== ==========
*Includes results for only those hotels open for the entire applicable period
for both years.
<PAGE 19>
PERFORMANCE STATISTICS (CONTINUED)
- ----------------------------------
TOTAL HOTELS AND ROOMS/SUITES
Number of Hotels Rooms/Suites
Sept 30, Sept 30, Sept 30, Sept 30,
1995 1994 1995 1994
------- ------- ------- -------
Embassy Suites
Company owned 9 9 2,025 2,026
Joint venture 23 23 5,901 5,912
Management contract 27 24 6,280 6,075
Franchised 52 50 12,048 11,531
--- --- ------ ------
111 106 26,254 25,544
=== === ====== ======
Hampton Inn
Company owned 14 15 1,916 2,048
Joint venture 19 19 2,376 2,376
Management contract 4 5 464 585
*Franchised 467 382 51,254 43,553
--- --- ------ ------
504 421 56,010 48,562
=== === ====== ======
Homewood Suites
Company owned 9 8 1,024 932
Joint venture - - - -
Management contract - - - -
Franchised 18 18 1,881 1,949
--- --- ------ ------
27 26 2,905 2,881
=== === ====== ======
Total System
Company owned 32 32 4,965 5,006
Joint venture 42 42 8,277 8,288
Management contract 31 29 6,744 6,660
Franchised 537 450 65,183 57,033
--- --- ------ ------
642 553 85,169 76,987
=== === ====== ======
*1995 includes three Hampton Inn & Suites with 332 rooms.
20
Item 2. Management's Discussion and Analysis
- --------------------------------------------
of Financial Condition and Results of Operations
- ------------------------------------------------
On June 30, 1995, The Promus Companies Incorporated (Parent)
completed the previously announced and approved spin-off that
split the company into two independent public corporations, one
for conducting its casino entertainment business and one for
conducting its hotel business (the Spin-Off). Parent's hotel
operations were transferred to a new entity, Promus Hotel
Corporation (PHC or the Company), the stock of which was
distributed to Parent's stockholders on a one-for-two basis (the
Distribution). The following is a discussion and analysis of the
financial condition and results of operations of PHC as a stand-
alone business.
RESULTS OF OPERATIONS
- ---------------------
The principal factors affecting PHC results are: continued
growth in the number of hotels; occupancies and room rates
achieved by the three hotel brands; number and relative mix of
owned, managed and franchised hotels; and PHC's ability to manage
costs. The number of rooms/suites at franchised and managed
properties and revenue per available room/suite (RevPAR/S)
significantly affect PHC results since franchise royalty fees and
management fees are based upon a percentage of rooms/suites
revenues. Increases in franchise and management fee revenues
have a disproportionate favorable impact on PHC's operating
margin due to lower incremental costs associated with these
revenues. Although occupancy decreased slightly compared to
1994, increases in the average daily rate (ADR), which
contributed to higher RevPAR/S, and the addition of new
(primarily franchised) hotels, resulted in improved financial
results over the prior year for both the three and nine months
ended September 30, 1995.
As of September 30, 1995, PHC's combined hotel system had
grown to include 642 properties, a net increase of 89 properties
compared to September 30, 1994. Embassy Suites', Hampton Inn's
and Homewood Suites' RevPAR/S for comparable hotels improved by
4.0%, 6.4% and 6.2%, respectively, for the third quarter and
5.3%, 7.1%, and 7.3%, respectively, for the nine months ended
September 30, 1995. Total system revenues for the third quarter
and first nine months of the year increased 13.7% and 13.3% over
the comparable periods last year to $450 million and $1.2
billion, respectively. The continued unit growth of the
franchise systems, coupled with a continued focus on rate growth
and cost management, contributed to the Company's higher revenues
and operating income.
21
Third Quarter Ended Nine Months Ended
Sept 30, Sept 30, Inc/ Sept 30, Sept 30, Inc/
(in millions) 1995 1994 (Dec) 1995 1994 (Dec)
--------- ------- ----- ------- ------- -----
Revenues $72.0 $65.5 9.9% $204.8 $184.6 10.9%
Operating profit
before general and
administrative
expense and
property transactions 30.5 29.5 3.4% 85.6 75.5 13.4%
Operating income 31.8 31.1 2.3% 85.0 75.1 13.2%
Net income 15.8 13.6 16.2% 37.0 29.9 23.7%
Operating margin 44.2% 47.5% (3.3)pts 41.5% 40.7% 0.8 pts
Net income for the third quarter of 1994 includes approximately
$3.7 million of non-recurring management fees and other operating
income, as well as $2.3 million of gains on property transactions.
Net income for the third quarter of 1995 includes approximately
$1.0 million of non-recurring operating income, $2.4 million of gains
from property transactions, and incremental costs associated with
operating as a separate publicly-traded entity estimated at
approximately $1.8 million. Excluding the impact of these items
from both periods, as well as the extraordinary gain in the third
quarter of 1995, a comparison of third quarter results would be
as follows:
As Adjusted
Third Quarter Ended
Sept 30, Sept 30, Inc/
(in millions) 1995 1994 (Dec)
--------- ------- -----
Revenues $71.7 $62.5 14.7%
Operating profit before general and
administrative expense and property
transactions 31.3 25.8 21.3%
Operating income 30.3 25.1 20.7%
Net income 13.2 10.1 30.7%
Operating margin 42.3% 40.1% 2.2 pts
The increase in revenues for both the three and nine months
ended September 30, 1995 was due primarily to the addition of new
franchised hotels and improved ADR and RevPAR/S throughout the
system. As adjusted for unusual income and incremental stand-
alone company expenses, for purposes of comparability, operating
profit before general and administrative expense and property
transactions for both the third quarter and the first nine months
of the year increased primarily as the result of franchise
royalties and favorable results of operations at company owned
hotels.
Third Quarter Ended Nine Months Ended
Sept 30, Sept 30, Inc/ Sept 30, Sept 30, Inc/
(in millions) 1995 1994 (Dec) 1995 1994 (Dec)
--------- ------- ----- ------- ------- -----
General and
administrative $ 1.0 $ 0.8 25.0 % $ 2.7 $ 2.3 17.4 %
Property transactions (2.4) (2.3) 4.3 % (2.0) (1.9) 5.3 %
Interest expense 7.6 7.7 (1.3)% 24.3 22.7 7.0 %
Extraordinary gain,
net of income tax 1.7 - N/M 1.7 - N/M
Effective tax rate 42.1% 42.0% 0.1 pts 42.1% 43.0% (0.9)pts
22
General and administrative expense reflects the cost of
specific PHC staff functions which support all three hotel
brands. Other general corporate support functions (both those
allocated to PHC by Parent prior to the Spin-Off, and the actual
incurred after that date), along with the incremental costs
attributable to operating as a stand-alone entity, are reflected
in other operating expenses in the accompanying Consolidated
Condensed Statements of Income.
During the third quarter 1995, the Company sold a Hampton Inn
hotel to a franchisee, which resulted in a pre-tax property
transaction gain of $2.3 million. The hotel continues to be
operated as a franchised Hampton Inn hotel. The property
transaction gain recorded in the third quarter 1994 was the
result of several property related transactions within the
Embassy Suites brand, and the sale of a Hampton Inn hotel.
Interest expense through June 30, 1995, includes the pro-rata
allocation of corporate interest by Parent related to the debt
that was expected to be retired in connection with the
Distribution using funds drawn on the PHC Facility. (See
"Liquidity and Capital Resources" for additional discussion).
Beginning with third quarter 1995, interest expense reflects the
costs associated with the actual amounts outstanding under the
revolving credit agreements. Interest expense (for all periods
presented) also includes PHC's share of interest expense of its
nonconsolidated affiliates. Interest expense decreased slightly
in the third quarter compared with the same period last year, as
higher average debt balances and higher interest attributable to
deferred compensation balances were offset by the impact of lower
interest rates than previously incurred as part of Parent.
Interest expense for the first nine months of 1995 increased due
primarily to higher average debt balances, higher interest
attributable to deferred compensation balances and an increase in
PHC's share of interest expense associated with its
nonconsolidated affiliates.
During the third quarter 1995, an Embassy Suites hotel, in
which the Company is a 50 percent joint venture partner, realized
an extraordinary gain related to the early payoff and forgiveness
of a portion of its existing debt. The cash to fund the early
debt payoff was made available through additional capital
contributions to the joint venture of approximately $9 million
from each of its partners. PHC's share of this nonconsolidated
affiliate's gain, net of applicable income tax expense, was $1.7
million.
The effective tax rate for all periods is higher than the
federal statutory rate primarily due to state income taxes.
23
DEVELOPMENT AND CAPITAL SPENDING
- --------------------------------
FelCor Agreements
-----------------
During September 1995, PHI entered into an agreement with
FelCor Suite Hotels, Inc. and Felcor Suites Limited Partnership
(FelCor), in connection with FelCor's agreement to acquire the
Crown Sterling hotel chain (the Crown Sterling Agreement).
FelCor plans to convert up to 16 of the Crown Sterling hotels
(over 4,000 suites) to the Embassy Suites brand, which PHI will
manage. In return, PHI will make available up to $50 million to
FelCor for the conversion through investments in FelCor common
stock and/or limited partnership interests that are convertible
into FelCor common stock. These investments may be subsequently
sold on the open market subject to certain restrictions. PHI
will also guarantee a third party loan to FelCor, not to exceed
$25 million. Each converted hotel will operate under a 20-year
license agreement and a ten-year management contract. Pursuant
to this agreement, PHI loaned FelCor $7.5 million representing
one-half of the deposit required for the acquisition.
Availability under the Subscription Agreement (described below)
has been reduced by the outstanding loan amount.
On May 3, 1995, Parent entered into a Subscription Agreement
with FelCor whereby Parent agreed to purchase up to $25 million
in FelCor limited partnership interests. Parent's commitment,
which was assumed by PHI at the Distribution date, is subject to
various conditions which include, but are not limited to, the
limited partnership's acquisition of additional hotels to be
converted to the Embassy Suites hotel brand (Embassy) and PHI
being granted the management contract for the subject property.
The limited partnership interests are convertible into FelCor
common stock at $25.00 per share, subject to some limitations.
Pursuant to the terms of the Subscription Agreement, an all-
suites hotel was purchased by FelCor and converted to an Embassy
on July 1, 1995. FelCor has subsequently purchased an interest
in three other properties that were already in the Embassy
system, and management contracts for all four properties were
awarded to PHI. In accordance with the agreement, PHC has agreed
to purchase $12.5 million of limited partnership interests
representing consideration for all four hotels.
Virtually all of the $75 million committed under these
agreements (subject to the reduction associated with the loan
advanced under the Crown Sterling Agreement) is expected to be
funded before the end of first quarter 1996.
Hotel Development
-----------------
PHC had net additions of 69 franchised properties during the
first nine months of 1995, compared to 49 in the comparable 1994
period. The system growth occurred primarily in the Hampton Inn
brand. As of September 30, 1995, 86 properties were under
construction, 81 of which will operate under franchise agreements
as PHC brands: 68 Hampton Inn hotels (including eight Hampton Inn
& Suites); ten Homewood Suites hotels; and eight Embassy Suites
hotels. These 86 properties will add 9,312 rooms/suites to the
PHC hotel system. The Company had 68 properties under
construction at the same time last year. PHC had 175 hotels in
the design phase at September 30, 1995.
24
By the end of the third quarter, PHC had opened three Hampton
Inn & Suites hotels. These franchised hotels are the newest PHC
hotel product and combine, as a single hotel, Hampton-style rooms
with two-room suites and a common lodge in the center. Of the
175 hotels in the design phase at September 30, 1995, 21 were
Hampton Inn & Suites. To further encourage system growth, PHC
currently plans to spend up to $130 million to expand the
Homewood Suites hotel brand by developing as many as 15
additional company owned properties over the next three to five
years. PHC, however, plans to continue to follow its general
strategy of growing its systems primarily through franchising and
management contracts. As in the past, company owned hotels may
be sold to franchisees and the proceeds used to fuel additional
system growth, develop new concepts or for other corporate
purposes.
Mezzanine Financing Program
---------------------------
To encourage growth (primarily in the Hampton Inn & Suites
and Homewood Suites franchise segments of the business), in light
of the lack of available financing for new hotel construction,
PHC has developed a mezzanine financing program whereby the
Company provides conservatively underwritten secondary financing
to franchisees. A minimum of 20 percent equity in the project is
required by the borrower, and the investment must meet certain
defined underwriting criteria. The terms of the mezzanine
financing must be consistent with the terms of the first mortgage
lender, with whom PHC will enter into an inter-creditor
agreement. PHC provided $6.8 million in mezzanine loans during
the first nine months of 1995, and anticipates providing an
additional $.7 million during the remainder of the year.
Outstanding loans bear interest at rates ranging from 10.0% to
11.5%.
Other
-----
Ongoing refurbishment of PHC's existing company owned hotel
properties to maintain the quality standards set for those
properties will continue in 1995 at an estimated annual cost of
$11.5 million. In early 1995, PHC acquired for approximately
$22.0 million an office complex in Memphis, Tennessee, which will
serve as its future corporate headquarters.
Cash necessary to finance projects currently under
development, as well as additional projects to be developed by
PHC, will be made available from operating cash flows, the PHC
Facility (see "Liquidity and Capital Resources"), joint venture
partners, specific project financing, sales of existing hotel
assets and, if necessary, PHC debt and equity offerings. PHC
capital expenditures totaled $58.5 million during the nine months
ended September 30, 1995. Approximately $59.8 million is
expected to be spent during the remainder of 1995 to fund project
development, including those projects discussed above, to
refurbish existing facilities and for other corporate related
projects.
25
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The accompanying financial statements represent the portion
of Parent's historical revenues, expenses, assets, liabilities
and cash flows associated with its hotel operations through June
30, 1995, and actual results as a stand-alone company beginning
July 1, 1995. The year to date results of operations and cash
flows are not necessarily indicative of PHC's future results as a
separate corporation. The most significant items that will
affect such future results are incremental costs associated with
operating as a stand-alone company, a decrease in the Company's
average borrowing rate, and the fact that PHC will assume
responsibility for payment of state and federal income taxes
subsequent to the Distribution (Parent historically paid PHC
taxes).
Cash flows from operating activities for the nine months
ended September 30, 1995, were $56.7 million, compared with $39.6
million for the same period last year, representing a 43.2%
increase. EBITDA, consisting of income before extraordinary
items plus interest, taxes, depreciation, amortization and net
earnings of, or distributions from, nonconsolidated affiliates,
was $96.1 million for the first nine months of 1995, compared
with $84.2 million for the comparable period in 1994,
representing a 14.1% increase. EBITDA is a supplemental financial
measurement used by management as well as by industry analysts to
evaluate operations, but should not be construed as an
alternative to operating income (as an indicator of the Company's
operating performance) or to cash flows from operating activities
(as a measure of liquidity) as determined in accordance with
generally accepted accounting principles.
Parent, through its wholly-owned subsidiary Embassy Suites,
Inc., entered into a $350 million bank credit facility to be
secured by the stock of certain material subsidiaries of PHC (the
PHC Facility). Concurrent with the Distribution, $218 million
was drawn on the PHC Facility by Parent to retire existing Parent
debt which had been previously allocated to PHC and to pay PHC
Facility fees and expenses. Subsequent to the Distribution, the
liability associated with the actual outstanding borrowings was
assumed by PHI with PHC as guarantor, and Parent was released
from liability related to any current or future borrowings under
the PHC Facility. The PHC Facility consists of two agreements,
the significant terms of which are as follows:
Total
Facility Maturity Date Interest Rate Facility Fees
------------ ------------- ----------------- --------------
Base Rate, as 0.20% of the
Five-Year defined, or LIBOR total facility
Revolver $300,000,000 June 30, 2000 +35 basis points
Base Rate, as 0.15% of the
Extendible defined, or LIBOR total facility
Revolver $ 50,000,000 June 6, 1996 +40 basis points
The Extendible Revolver is a 364-day facility with annual
renewals and may be converted into a two-year term loan with
equal amortizing payments over such two-year period. Facility
fees and interest on Base Rate loans are paid quarterly. The
agreements contain a tiered scale for facility fees and the
applicable LIBOR spread (current rates for both reflected above)
26
that is based on the more favorable of PHC's current credit
rating or leverage ratio, as defined. They also contain
provisions that restrict certain investments, limit the Company's
ability to incur additional indebtedness and pay dividends, and
require that certain performance ratios be maintained. As of
September 30, 1995, PHC was in compliance with all such
covenants.
PHC's initial credit rating by Standard & Poor's was
Investment Grade. The Investment Grade rating allows PHC to
receive more favorable interest rate spreads on borrowings and
facility fees under the PHC Facility.
The Five-Year Revolver includes a sublimit for letters of
credit of $20 million. At September 30, 1995, approximately
$8.6 million in letters of credit were outstanding under this
agreement (related primarily to the Company's self-insurance
reserves). There was approximately $139 million of availability
under the PHC Facility as of September 30, 1995. The remaining
borrowing capacity available under the PHC Facility is available
for working capital, hotel development and other general
corporate purposes.
A pro-rata portion of Parent's historical outstanding debt
balance and unamortized deferred finance charges was allocated to
PHC and reflected in the accompanying Consolidated Condensed
Balance Sheet as of December 31, 1994. A pro-rata portion of
Parent's interest expense was also allocated to PHC through June
30, 1995, and is reflected in the accompanying Consolidated
Condensed Statements of Income for all periods presented. In
addition to amounts allocated by Parent, all indebtedness,
together with related interest expense specifically identified
with a PHC entity, is included in the accompanying Consolidated
Condensed Financial Statements. The amounts allocated by Parent
are based on the percentage of Parent's existing debt that was
expected to be retired using proceeds from the PHC Facility. The
amount of Parent's corporate interest expense allocated to PHC
was $4.2 million for third quarter 1994, and $10.5 million
(representing interest allocated through June 30) and $12.7
million for the nine months ended September 30, 1995 and 1994,
respectively. Beginning with third quarter 1995, interest
expense reflects the costs associated with the actual amounts
outstanding under the PHC Facility. The amount of Parent's
corporate interest allocated to PHC is in addition to the
interest expense included in PHC's financial statements on
indebtedness specifically identified with a PHC entity and PHC's
proportionate share of interest expense of its nonconsolidated
affiliates (see Note 7 to financial statements).
PHI assumed two of Parent's existing interest rate swap
agreements, each with a notional amount of $50 million. The
effect of the swap agreements was to convert to a fixed rate a
portion of the amount of variable rate debt outstanding under the
PHC Facility. The floating rate resets every three months under
both agreements. One swap specifies a 6.99% contractual fixed
rate (effective rate of 7.54%) and expires on March 20, 2000,
while the other has a 7.8625% contractual fixed rate (effective
rate of 8.4125%) with a July 28, 1997 expiration.
27
RELATIONSHIP BETWEEN PHC AND PARENT AFTER THE DISTRIBUTION
- ----------------------------------------------------------
For the purpose of governing certain of the ongoing
relationships between PHC and Parent after the Distribution and
to provide mechanisms for an orderly transition, Parent and PHC
have entered into various agreements and adopted policies to
govern their future relationship. PHC believes that the
agreements are fair to both parties and contain terms which
generally are comparable to those which would have been reached
in arm's-length negotiations with unaffiliated parties (although
comparisons are difficult with respect to certain agreements that
relate to the specific circumstances of this transaction). In
some cases the agreements are comparable to those used by other
companies in similar transactions.
TAX SHARING AGREEMENT
- ---------------------
In connection with the Spin-Off, PHC and Parent entered into
a tax sharing agreement that defines each company's rights and
obligations with respect to deficiencies and refunds of federal,
state and other income or franchise taxes relating to PHC's
business for tax years prior to the Distribution and with respect
to certain tax attributes of PHC after the Distribution. In
general, with respect to periods ending on or before December 31,
1995, Parent is responsible for (i) filing federal tax returns
for the Parent and PHC for the periods such companies were
members of the same consolidated group, and (ii) paying the taxes
relating to such returns (to include any subsequent adjustments
resulting from the redetermination of such tax liabilities by the
applicable taxing authorities; PHC will reimburse Parent for the
portion of such adjustments relating to the Hotel Business). PHC
is responsible for filing returns and paying taxes for periods
beginning after the Spin-Off. PHC and Parent have agreed to
cooperate with each other and to share information in preparing
such tax returns and in dealing with other tax matters.
28
PART II - OTHER INFORMATION
- ---------------------------
Item 2. Changes in Securities
- ------------------------------
The PHC Facility requires the Company to maintain certain
specified financial covenants. Although the payment of dividends
is not prohibited by the agreement, the covenants are structured
such that the Company's ability to pay dividends is limited.
Item 6. Exhibit and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
EX-10.1 Promus Hotel Corporation Savings and Retirement
Plan. (1)
EX-10.2 Promus Hotel Corporation 1995 Stock Option Plan.
(2)
EX-10.3 Promus Hotel Corporation Restricted Stock Plan.
(2)
EX-10.4 Promus Hotel Corporation Non-Management Directors
Stock Incentive Plan. (2)
EX-10.5 Plan of Reorganization and Distribution Agreement,
dated as of June 30, 1995, between The Promus
Companies Incorporated and Promus Hotel
Corporation. (4)
EX-10.6 Tranche A Credit Agreement, dated as of June 7,
1995, among Embassy Suites, Inc., as Initial
Borrower, Promus Hotels, Inc., as the Subsequent
Borrower, certain subsidiaries and related parties
from time to time party thereto, as Guarantors,
the several lenders from time to time party
thereto, and NationsBank, N.A. (Carolinas), as
Agent. (3)
Ex-10.7 First Amendment to Tranche A Credit Agreement
dated as of June 30, 1995, by and among Embassy
Suites, Inc., Promus Hotels, Inc., The Promus
Companies Incorporated, Promus Hotel Corporation
and NationsBank, N.A. (Carolinas). (4)
EX-10.8 Tranche A Assignment and Assumption Agreement
dated as of June 30, 1995, among Embassy Suites,
Inc., Promus Hotels, Inc., The Promus Companies
Incorporated and NationsBank, N.A. (Carolinas).
(4)
EX-10.9 Tranche B Credit Agreement, dated as of June 7,
1995, among Embassy Suites, Inc., as Initial
Borrower, Promus Hotels, Inc., as the Subsequent
Borrower, certain subsidiaries and related parties
from time to time party thereto, as Guarantors,
the several lenders from time to time party
thereto, and NationsBank, N.A. (Carolinas), as
Agent. (3)
29
EX-10.10 First Amendment to Tranche B Credit Agreement
dated as of June 30, 1995, by and among Embassy
Suites, Inc., Promus Hotels, Inc., The Promus
Companies Incorporated, Promus Hotel Corporation
and NationsBank, N.A. (Carolinas). (4)
EX-10.11 Tranche B Assignment and Assumption Agreement
dated as of June 30, 1995, by and among Embassy
Suites, Inc., Promus Hotels, Inc., The Promus
Companies Incorporated and NationsBank, N.A.
(Carolinas). (4)
EX-10.12 Pledge Agreement dated as of June 30, 1995, by and
among Promus Hotel Corporation, Promus Hotels,
Inc., certain subsidiaries which may now be owners
of Credit Parties and NationsBank, N.A.
(Carolinas). (4)
EX-10.13 Escrow Agreement, dated as of June 30, 1995, among
Promus Hotel Corporation, Promus Hotels, Inc. and
NationsBank. (3)
EX-10.14 Employee Benefits and Other Employment Matters
Allocation Agreement, dated as of June 30, 1995,
between The Promus Companies Incorporated and
Promus Hotel Corporation. (4)
EX-10.15 Risk Management Allocation Agreement, dated as
of June 30, 1995, between The Promus Companies
Incorporated and Promus Hotel Corporation. (4)
EX-10.16 Tax Sharing Agreement, dated as of June 30, 1995,
between The Promus Companies Incorporated and
Promus Hotel Corporation. (4)
EX-10.17 Promus Hotel Corporation Executive Deferred
Compensation Plan. (3)
EX-10.18 Promus Hotel Corporation Deferred Compensation
Plan. (3)
EX-10.19 Promus Hotel Corporation Savings and Retirement
Plan Trust Agreement, dated as of May 26, 1995,
among Promus Hotel Corporation, and Robert S.
Davis, Donald H. Dempsey, Patricia R. Ferguson,
Jeffery M. Jarvis, Kelly R. Jenkins, Frederick G.
Schultz and Mark C. Wells. (3)
EX-10.20 Form of Severance Agreement, dated as of June 30,
1995, entered into with Donald H. Dempsey, Thomas
L. Keltner, Ralph B. Lake, David C. Sullivan, and
Mark C. Wells. (4)
EX-10.21 Form of Severance Agreement, dated June 30, 1995,
entered into with Michael D. Rose and Raymond E.
Schultz. (4)
EX-10.22 Employment Agreement, dated as of June 30, 1995,
between Michael D. Rose and Promus Hotel
Corporation. (4)
EX-10.23 Employment Agreement, dated as of July 1, 1995,
between Raymond E. Schultz and Promus Hotel
Corporation.(5)
30
EX-10.24 Promus Hotel Corporation Key Executive Officer
Annual Incentive Plan. (2)
EX-10.25 International Swap Dealers Association, Inc.
Master Agreement, dated as of June 30, 1995, among
Promus Hotels, Inc. and NationsBank, N.A.
(Carolinas). (4)
EX-10.26 Transfer Agreement, dated as of June 30, 1995,
among Embassy Suites, Inc., Promus Hotels, Inc.,
and NationsBank, N.A. (Carolinas). (4)
EX-10.27 Subscription Agreement, dated as of October 17,
1995, by and among Promus Hotels, Inc., FelCor
Suite Hotels, Inc., and FelCor Suites Limited
Partnership.(5)
EX-27 Financial Data Schedule. (5)
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1995.
Footnotes
- ---------
(1) Incorporated by reference from Promus Hotel Corporation
Registration Statement No. 33-59977 on Form S-8 for the
Promus Hotel Corporation 1995 Stock Option Plan, filed
June 6, 1995.
(2) Incorporated by reference from Promus Hotel Corporation Form
10/A, filed May 3, 1995, File No. 1-11463.
(3) Incorporated by reference from Promus Hotel Corporation Form
8-K, filed June 14, 1995, File No. 1-11463.
(4) Incorporated by reference from Promus Hotel Corporation Form
10-Q, filed August 11, 1995, File No. 1-11463.
(5) Filed herewith.
31
Signature
---------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
PROMUS HOTEL CORPORATION
November 9, 1995 By: /s/ JEFFERY M. JARVIS
---------------------------
Jeffery M. Jarvis
Vice President and Controller
(Chief Accounting Officer)
32
Exhibit Index
- -------------
Exhibit No. Description Sequential
Page No.
- ------------- ------------------------------- -----------
(a) EX-10.1 Promus Hotel Corporation Savings
and Retirement Plan. (1)
EX-10.2 Promus Hotel Corporation 1995 Stock
Option Plan. (2)
EX-10.3 Promus Hotel Corporation Restricted
Stock Plan. (2)
EX-10.4 Promus Hotel Corporation Non-Management
Directors Stock Incentive Plan. (2)
EX-10.5 Plan of Reorganization and Distribution
Agreement, dated as of June 30, 1995,
between The Promus Companies Incorporated
and Promus Hotel Corporation. (4)
EX-10.6 Tranche A Credit Agreement, dated as of
June 7, 1995, among Embassy Suites, Inc.,
as Initial Borrower, Promus Hotels, Inc.,
as the Subsequent Borrower, certain
subsidiaries and related parties from time
to time party thereto, as Guarantors, the
several lenders from time to time party
thereto, and NationsBank, N.A. (Carolinas),
as Agent. (3)
Ex-10.7 First Amendment to Tranche A Credit
Agreement dated as of June 30, 1995,
by and among Embassy Suites, Inc.,
Promus Hotels, Inc., The Promus Companies
Incorporated, Promus Hotel Corporation
and NationsBank, N.A. (Carolinas). (4)
EX-10.8 Tranche A Assignment and Assumption
Agreement dated as of June 30, 1995,
among Embassy Suites, Inc., Promus
Hotels, Inc., The Promus Companies
Incorporated and NationsBank, N.A.
(Carolinas). (4)
EX-10.9 Tranche B Credit Agreement, dated as of
June 7, 1995, among Embassy Suites, Inc.,
as Initial Borrower, Promus Hotels, Inc.,
as the Subsequent Borrower, certain
subsidiaries and related parties from time
to time party thereto, as Guarantors, the
several lenders from time to time party
thereto, and NationsBank, N.A. (Carolinas),
as Agent. (3)
33
EX-10.10 First Amendment to Tranche B Credit
Agreement dated as of June 30, 1995,
by and among Embassy Suites, Inc., Promus
Hotels, Inc., The Promus Companies
Incorporated, Promus Hotel Corporation
and NationsBank, N.A. (Carolinas). (4)
EX-10.11 Tranche B Assignment and Assumption
Agreement dated as of June 30, 1995, by
and among Embassy Suites, Inc., Promus
Hotels, Inc., The Promus Companies
Incorporated and NationsBank, N.A.
(Carolinas). (4)
EX-10.12 Pledge Agreement dated as of June 30, 1995,
by and among Promus Hotel Corporation,
Promus Hotels, Inc., certain subsidiaries
which may now be owners of Credit Parties
and NationsBank, N.A. (Carolinas). (4)
EX-10.13 Escrow Agreement, dated as of June 30, 1995,
among Promus Hotel Corporation, Promus
Hotels, Inc. and NationsBank. (3)
EX-10.14 Employee Benefits and Other Employment
Matters Allocation Agreement, dated as of
June 30, 1995, between The Promus
Companies Incorporated and Promus Hotel
Corporation. (4)
EX-10.15 Risk Management Allocation Agreement,
dated as of June 30, 1995, between The
Promus Companies Incorporated and
Promus Hotel Corporation. (4)
EX-10.16 Tax Sharing Agreement, dated as of
June 30, 1995, between The Promus
Companies Incorporated and Promus
Hotel Corporation. (4)
EX-10.17 Promus Hotel Corporation Executive
Deferred Compensation Plan. (3)
EX-10.18 Promus Hotel Corporation Deferred
Compensation Plan. (3)
34
EX-10.19 Promus Hotel Corporation Savings and
Retirement Plan Trust Agreement, dated
as of May 26, 1995, among Promus Hotel
Corporation, and Robert S. Davis,
Donald H. Dempsey, Patricia R. Ferguson,
Jeffery M. Jarvis, Kelly R. Jenkins,
Frederick G. Schultz and Mark C. Wells. (3)
EX-10.20 Form of Severance Agreement, dated as
of June 30, 1995, entered into with
Donald H. Dempsey, Thomas L. Keltner,
Ralph B. Lake, David C. Sullivan, and
Mark C. Wells. (4)
EX-10.21 Form of Severance Agreement, dated
June 30, 1995, entered into with
Michael D. Rose and Raymond E. Schultz. (4)
EX-10.22 Employment Agreement, dated as of
June 30, 1995, between Michael D. Rose
and Promus Hotel Corporation. (4)
EX-10.23 Employment Agreement, dated as of
July 1, 1995, and Raymond E. Schultz 36
and Promus Hotel Corporation. (5)
EX-10.24 Promus Hotel Corporation Key Executive
Officer Annual Incentive Plan. (2)
EX-10.25 International Swap Dealers Association,
Inc. Master Agreement, dated as of
June 30, 1995, among Promus Hotels,
Inc. and NationsBank, N.A. (Carolinas). (4)
EX-10.26 Transfer Agreement, dated as of June 30,
1995, among Embassy Suites, Inc.,
Promus Hotels, Inc., and NationsBank, N.A.
(Carolinas). (4)
EX-10.27 Subscription Agreement, dated as of
October 17, 1995, by and among Promus
Hotels, Inc., FelCor Suite Hotels, Inc.,
and FelCor Suites Limited Partnership.(5) 47
EX-27 Financial Data Schedule. (5) 59
35
Footnotes
- ---------
(1) Incorporated by reference from Promus Hotel Corporation
Registration Statement No. 33-59977 on Form S-8 for the
Promus Hotel Corporation 1995 Stock Option Plan, filed
June 6, 1995.
(2) Incorporated by reference from Promus Hotel Corporation Form
10/A, filed May 3, 1995, File No. 1-11463.
(3) Incorporated by reference from Promus Hotel Corporation Form
8-K, filed on June 14, 1995, File No. 1-11463.
(4) Incorporated by reference from Promus Hotel Corporation Form
10-Q, filed August 11, 1995, File No. 1-11463.
(5) Filed herewith.
<PAGE 36>