The Promus Companies . 1993 Annual Report . Book Two
The Promus
Companies
1993
Financial Review
Operating Results by Segment
(In thousands)
Fiscal Year Ended Percentage
---------------------------------------- Increase (Decrease)
December 31, December 31, January 3, --------------------------
1993 1992 1992 '93 vs. '92 '92 vs. '91
----------- ----------- ---------- ----------- -----------
Casino Entertainment
Revenues
Casino $ 812,081 $711,777 $686,177 14.1 % 3.7 %
Food and beverage 139,522 133,485 129,147 4.5 % 3.4 %
Rooms 102,024 94,092 88,749 8.4 % 6.0 %
Other 62,322 43,901 39,620 42.0 % 10.8 %
Less: casino promotional allowances (100,720) (92,151) (84,750) 9.3 % 8.7 %
---------- -------- --------
Total revenues 1,015,229 891,104 858,943 13.9 % 3.7 %
---------- -------- --------
Operating expenses
Departmental direct costs
Casino 369,335 334,702 338,529 10.3 % (1.1)%
Food and beverage 76,498 71,551 69,702 6.9 % 2.7 %
Rooms 33,124 31,958 31,346 3.6 % 2.0 %
Other 301,305 265,683 248,571 13.4 % 6.9 %
---------- -------- --------
Total operating expenses 780,262 703,894 688,148 10.8 % 2.3 %
---------- -------- --------
234,967 187,210 170,795 25.5 % 9.6 %
Property transactions - (327) 168 N/M N/M
---------- -------- --------
Operating income $ 234,967 $186,883 $170,963 25.7 % 9.3 %
========== ======== ========
Operating income before property
transactions margin 23.1% 21.0% 19.9% 2.1 pts 1.1 pts
========== ======== ========
Hotel
Revenues
Rooms $ 121,105 $124,192 $ 88,109 (2.5)% 41.0 %
Food and beverage 8,094 8,310 6,436 (2.6)% 29.1 %
Franchise and management fees 60,359 51,719 45,320 16.7 % 14.1 %
Other 40,740 33,993 27,126 19.8 % 25.3 %
---------- -------- --------
Total revenues 230,298 218,214 166,991 5.5 % 30.7 %
---------- -------- --------
Operating expenses
Departmental direct costs
Rooms 65,529 71,191 51,256 (8.0)% 38.9 %
Food and beverage 8,235 8,696 6,127 (5.3)% 41.9 %
Other 91,338 89,252 75,358 2.3 % 18.4 %
---------- -------- --------
Total operating expenses 165,102 169,139 132,741 (2.4)% 27.4 %
---------- -------- --------
65,196 49,075 34,250 32.8 % 43.3 %
Property transactions 1,345 (5,713) (1,354) N/M N/M
---------- -------- --------
Operating income $ 66,541 $ 43,362 $ 32,896 53.5 % 31.8 %
========== ======== ========
Operating income before property
transactions margin 28.3% 22.5% 20.5% 5.8 pts 2.0 pts
========== ======== ========
Other
Revenues $ 6,328 $ 3,748 $ 5,178 68.8 % (27.6)%
Operating expenses 3,616 2,577 6,056 40.3 % (57.4)%
---------- -------- --------
Operating income (loss) $ 2,712 $ 1,171 $ (878) N/M N/M
========== ======== ========
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The prime objective of management of The Promus Companies Incorporated
(Promus) is to create outstanding value for our customers in order to create
outstanding value for our stockholders. Since Promus' creation on February 7,
1990, when its stock was spun-off (the Spin-off) to Holiday Corporation
(Holiday) stockholders, the commitment to this objective has been evident in
Promus' strategic decisions and financial performance and is also reflected in
Promus' plans for the future. Since the Spin-off, the per share market value
of Promus' common stock has increased more than 300%.
Promus operates four leading hospitality brands comprising two business
segments: a casino entertainment segment consisting of Harrah's, one of the
world's premier names in the casino entertainment industry, and a hotel
segment composed of the Embassy Suites, Hampton Inn and Homewood Suites hotel
brands (collectively, Promus Hotels). During 1993, unit growth in both
business segments and reduced interest expense combined to drive a 65.4%
increase in cash flows from operations over the prior year. This increase
follows a 38.9% increase in cash flows from operations achieved in 1992 over
1991. Promus' increasing cash flows from operations provides a foundation from
which to pursue opportunities to further grow its businesses, either through
expansion of existing facilities or development of new projects, and for
funding debt service requirements.
CAPITAL SPENDING AND DEVELOPMENT
Widespread growing acceptance in recent years of casino gaming as a form
of entertainment has led to a sweeping transformation of the industry and
prompted the proliferation of casino gaming in many new, emerging markets,
both domestically and internationally. From the six land-based casinos in
operation at the end of 1992 located in the traditional markets of Nevada and
New Jersey, Promus' casino entertainment division has grown to include twelve
properties in five states. In recognition of the additional opportunities
presented by the proliferation of casino gaming and the potential for
additional returns to our stockholders, Promus continues to focus the majority
of its capital spending on casino entertainment development opportunities.
Although the casino entertainment segment's development activities
captured the majority of the attention during 1993, the growth achieved by the
hotel segment is also noteworthy. After less than 10 years in operation,
Promus Hotels has grown to a combined total of over 500 hotels, including more
than 50 hotels added in 1993. The growth achieved by Promus Hotels is a
testament to the strength and attractiveness of its franchise systems since
all 90 hotels added to the systems during 1993 and 1992 were developed by
franchisees.
Casino Entertainment Development
Proliferation of casino entertainment is opening new markets for
development of land-based facilities, riverboats, casinos on Indian lands and
limited stakes gaming in such venues as historic mining towns. To maintain its
leading position in the casino entertainment industry and to further build the
value of the Harrah's brand as a national casino brand, Promus continues to
actively investigate and pursue development opportunities in emerging markets
throughout the U.S. and, to a lesser extent, abroad.
Harrah's New Orleans. The year's development activities were
highlighted by the Louisiana Economic Development and Gaming Corporation's
(LEDGC) selection of a partnership (the Partnership) in which a Promus
subsidiary is a partner to negotiate exclusively for a license to develop, own
and operate what is expected to be one of the world's largest casinos in New
Orleans. A Promus subsidiary has a one-third ownership interest in the project
and will supervise the design and construction of the casino. Another Promus
subsidiary will manage the operations of the casino for a fee.
Construction of a 400,000 square foot permanent casino facility, to
include approximately 200,000 square feet of casino gaming space featuring
approximately 6,000 slot machines and 200 table games, is expected to be
completed in third quarter 1995.
2
During the construction period, the Partnership plans to convert the New
Orleans Municipal Auditorium into an approximate 76,000 square foot temporary
casino featuring approximately 3,000 slot machines and 85 table games.
Depending on timely approvals from governmental and regulatory authorities and
satisfaction of other contingencies as discussed below, the temporary casino
is projected to be in operation during third quarter 1994. The estimated
combined total cost of the permanent casino facility, the temporary casino,
significant new parking structures and adjoining commercial buildings and
approximately $170 million of upfront payments to the City of New Orleans and
the State of Louisiana is approximately $720 million. The Partnership is
expecting to finance the project through a combination of partner capital and
public and bank debt. The Partnership is currently in process of registering
$425 million in debt to be sold through a public offering and arranging $200
million in bank debt. Promus' total capital contribution to this project is
expected to be approximately $23.3 million. Promus will provide a completion
guarantee for the project, subject to certain exceptions, in exchange for a
fee to be paid by the Partnership.
Before construction of either the temporary casino in the Municipal
Auditorium or the permanent casino facility can begin, certain events must
occur. These include execution of leases for the respective sites and
obtaining various approvals, contracts and licenses from the appropriate
governing bodies including those of the City of New Orleans and the LEDGC.
Other conditions and legal issues pertinent to the transaction must also be
satisfied, including execution of a definitive partnership agreement and
related contracts and securing of financing. Litigation primarily concerning
title to the permanent casino site has been decided favorably at the trial
court level. However, if the litigation were ultimately decided unfavorably,
it may delay or prevent the opening of the casino facilities or adversely
affect their operations.
Riverboat Casinos. As a result of prior development efforts, riverboat
casinos opened during 1993 in Joliet, Illinois, and Tunica and Vicksburg,
Mississippi. On January 12, 1994, a second riverboat began operations in
Joliet. In addition to the four riverboats now operating, Promus has
previously announced the development of the following riverboat casinos and
related facilities:
Project Cost
Expected (in millions)
Number of --------------
Percent ------------- Total Spent Targeted
Location Owned Slots Tables Est. to Date Opening Date
- ----------------------------------------------------------------------------
Shreveport, LA 86% 760 40 $71 $29.6 2nd qtr 1994
North Kansas
City, MO 100% 1,225 55 83 15.3 3rd qtr 1994
St. Louis Riverport,
MO 100% 1,000 55 82 6.7 4th qtr 1994
Promus is the general partner and also manager, for a fee, of the
Shreveport riverboat project. The opening of each project is subject to the
approval of various regulatory bodies, and, in Missouri, a state and local
referendum is scheduled for April 5, 1994, to address the uncertainty of
legalized gaming in that state.
Indian Lands. Promus continues to actively pursue development
opportunities for casinos on Indian lands under the provisions of the Indian
Gaming Regulatory Act of 1988. Promus has entered into management and
development agreements for a planned $24.7 million casino entertainment
facility near Phoenix, Arizona, to be owned by the Ak-Chin Indian Community of
the Maricopa Indian Reservation. Promus does not expect to fund this
development, although it may guarantee the related bank financing.
Commencement of construction and the opening of the facility are subject to
the receipt of necessary approvals from various regulatory agencies, including
the National Indian Gaming Commission. Promus will manage the facility for a
fee. The Tribal/State Compact between the Ak-Chin Community and the State of
Arizona has received approval from the U.S. Department of the Interior. In
addition, Promus is in various stages of negotiations with a number of other
Indian communities to develop and/or manage facilities on Indian lands.
Limited Stakes. During December 1993, Promus acquired a 17% limited
partnership interest in an entity which owns two limited stakes casinos in
Central City and Black Hawk, Colorado. Both casinos, which are managed by
Promus for a fee, are now operated under the Harrah's name, supporting the
overall strategy of making Harrah's a national casino entertainment brand.
International. During 1993, Promus and its local partner were selected
by the government of New Zealand to develop and operate a casino in Auckland,
New Zealand. Promus will contribute $15 million in exchange for a 20% interest
in the partnership and will manage the facility for a fee. Construction of the
$150 million project, to be financed through a combination of partner
contributions and specific non-recourse debt, is expected to begin in first
quarter 1994, and the facility is projected to be in operation in first
quarter 1996.
Existing Land-Based Markets. On-going refurbishment and maintenance of
Promus' existing casino entertainment facilities in Nevada and New Jersey will
continue during 1994 at an estimated cost of $40 million to maintain the
quality standards set for Harrah's facilities. No major additions of casino
square footage or hotel rooms are currently underway at these properties.
Overall. In addition to the projects discussed above, Promus is
aggressively pursuing additional casino entertainment development
opportunities in various new jurisdictions across the United States and
abroad, although no definitive development agreements have been signed and
no capital commitments to construct such a facility have been made to third
parties at this time. Until all necessary approvals to proceed with
development of a project are obtained from the relevant regulatory bodies, the
costs of pursuing casino entertainment projects are expensed as incurred.
Development costs charged to casino entertainment segment other operating
expense amounted to $10.2 million for fiscal 1993 and are expected to continue
at or above this level in fiscal 1994. Construction-related costs incurred
after the receipt of necessary approvals are capitalized and depreciated over
the estimated useful life of the resulting asset.
A number of these casino entertainment development projects, if they go
forward, may require, individually and in the aggregate, a significant capital
commitment and, if completed, may result in
3
significant additional revenues. The commitment of capital, the timing of
completion and the commencement of operations of casino entertainment
development projects are contingent upon, among other things, negotiation of
final agreements and receipt of approvals from the appropriate political and
regulatory bodies.
Hotel Development
After less than 10 years in operation, Promus Hotels surpassed a major
milestone in 1993 with the opening of its 500th system hotel during December
1993. With the opening of 52 franchised properties during 1993, Promus Hotels
ended the year with 503 properties in its combined systems. An additional 50
franchised properties were under construction or being converted to Promus
brands at December 31, 1993.
Of the 50 franchise projects under development at year-end, 41 are
Hampton Inns, five are Embassy Suites and four are Homewood Suites. The growth
being experienced by the Hampton Inn brand can primarily be attributed to the
introduction in 1991 of a downsized Hampton Inn property suitable for smaller
markets. A similar concept has been developed for the Homewood Suites brand,
and construction of a company-owned prototype of this concept will begin
during second quarter 1994. The prototype is expected to be completed by the
end of 1994 at a cost of less than $6 million. During 1993, the Hampton Inn &
Suites concept was introduced. The combination of rooms and suites in a single
property offered by this concept will target a new development segment not
currently addressed by existing brands, providing Promus with broadened
opportunities for future growth in the hotel segment.
During 1993, Promus reduced the number of company-owned hotel properties
from 38 to 32 as a result of the transfer of its ownership interests in five
Embassy Suites hotels to a third party in exchange for cash, notes receivable
and the third party's assumption of the related mortgages, and the sale of an
Embassy Suites hotel in an unrelated transaction to a third party for cash and
assumption of the related debt. All six properties remain in the Embassy
Suites system as franchises and five are being managed by Embassy Suites for a
fee. If some of the remaining 32 company-owned properties were sold, some of
the proceeds may be used to enhance the brands' growth as part of Promus'
on-going strategy.
On-going refurbishment of Promus' existing company-owned hotel properties
to maintain the quality standards set for those properties will continue in
1994 at an estimated cost of $8.5 million.
Summary
Cash needed to finance the projects currently under development as well
as the additional projects being pursued by Promus will be made available from
operating cash flows, the New Facility (see Debt Refinancing Activities
section), joint venture partners, specific project financing, guarantees by
Promus of third party debt, sales of existing hotel assets and, if necessary,
Promus debt and/or equity offerings. Promus' capital expenditures totaled $251
million during 1993. An additional $375 million to $425 million is expected to
be spent during 1994 to fund project development, including the projects
discussed in this Capital Spending and Development section, refurbishment of
existing facilities and other projects.
DEBT REFINANCING ACTIVITIES
To strengthen its financial structure and better position the Company for
growth, during 1993 Promus replaced its existing bank debt with a new, more
flexible bank facility; issued $200 million of public debt; filed a shelf
registration which can provide access, on an as needed basis, to an additional
$200 million of debt financing; and negotiated additional interest rate swap
agreements. These actions continued Promus' strategy of freeing its operating
cash flows for reinvestment and development purposes by lengthening the
maturities of its long-term debt and reducing its current interest payment
requirements. As a result of these actions, Promus has effectively provided
for its debt maturity requirements into the year 1998.
New Bank Facility. Promus' new bank facility is a $650 million reducing
revolving and letter of credit facility (New Facility), which not only enabled
the Company to prepay the remaining balance of its existing bank debt (Old
Facility) but also provides a financing source for future capital expenditures
and the necessary liquidity to retire $39.1 million of 10 1/2% Notes maturing
in April 1994 and $200 million of 9% Notes maturing in February 1995. Of the
total $650 million available under the New Facility, there is a sub-limit of
$255 million for issuance of letters of credit. At December 31, 1993, $170.0
million in borrowings were outstanding under the New Facility. An additional
$222.6 million of the New Facility was committed to back certain letters of
credit, including a $204.7 million letter of credit supporting the existing 9%
Notes. After consideration of these borrowings, $257.4 million was available
to Promus under the New Facility as of December 31, 1993. The approximate
$11.5 million of deferred finance charges incurred related to the New Facility
are being amortized over the life of the debt using the interest method.
8 3/4% Notes Issuance. During 1993, Promus, through its wholly-owned
subsidiary Embassy Suites, Inc. (Embassy), completed a $200 million private
placement offering of Embassy's 8 3/4% Senior Subordinated Notes due 2000
(8 3/4% Notes). The net proceeds of approximately $196.3 million from the
8 3/4% Notes were used to prepay amounts due under the Old Facility. The
8 3/4% Notes, which are unsecured and unconditionally guaranteed by Promus,
were issued with essentially the same provisions as, and are pari passu in
right of payment to, Embassy's 10 7/8% Senior Subordinated Notes due 2002
(10 7/8% Notes) issued in 1992. Subsequent to the completion of the private
placement, Embassy completed an offering which exchanged all of the 8 3/4%
Notes for new notes on the same terms, except the new notes are registered
under the Securities Act of 1933.
Shelf Registration. To provide additional borrowing capacity and
financing flexibility, Embassy has registered up to $200 million of new debt
securities pursuant to a shelf registration declared effective by the
Securities and Exchange Commission. The terms and conditions of these debt
securities, which will be unconditionally guaranteed by Promus, will be
determined by market conditions at the time of issuance.
4
Interest Rate Agreements. Promus has entered into interest rate swap
agreements, as summarized in the following table, in order to benefit from the
favorable interest rates available in the current financial markets.
Effective Next Semi-
Swap Rate at Annual Rate
Rate Dec. 31, Adjustment Swap Agreement
Associated Debt (LIBOR+) 1993 Date Expiration Date
- -----------------------------------------------------------------------
10 7/8% Notes
$200 million 4.731% 8.143% April 15 October 15, 1997
8 3/4% Notes
$50 million 3.42% 6.929% May 15 May 15, 1998
$50 million 3.22% 6.764% January 18 July 15, 1998
As a result of these swaps, approximately 56% of Promus' outstanding debt
was at variable rates as of December 31, 1993. In accordance with the terms of
the interest rate swap agreements, the effective interest rate on $50 million
of the 8 3/4% Notes was adjusted on January 18, 1994, to 6.688%. This rate
will remain in effect until July 15, 1994.
Promus continues to maintain interest rate protection, in the form of a
rate collar transaction entered into in June 1990, on $140 million of its
variable rate bank debt. The interest rate protection expires in 1995 and
currently holds Promus' interest rate in a range between 9.3% and 12.5%.
EQUITY TRANSACTIONS
On October 29, 1993, Promus' Board of Directors approved a three-for-two
stock split, in the form of a stock dividend, which was effected by a
distribution on November 29, 1993, to stockholders of record on November 8,
1993. This split was in addition to a two-for-one stock split, also in the
form of a stock dividend, distributed on March 29, 1993, to stockholders of
record on March 8, 1993. All prior year numbers of common shares and earnings
per share amounts referenced in this Annual Report have been restated to
give retroactive effect to these stock splits. The number of common shares
authorized and the per share par value of the stock were not affected by the
splits. The stock splits reflect Promus' confidence in its continued growth
and make the shares more accessible to a broader base of investors.
During 1992, Promus acquired a 20% ownership interest in Sodak Gaming,
Inc. (Sodak). During 1993, Sodak completed an initial public offering of its
common stock. As required by equity accounting rules, Promus increased the
carrying value of its investment in Sodak by an amount equal to its pro-rata
share of the proceeds of Sodak's offering, approximately $6.4 million. A
corresponding increase was recorded in the combination of Promus' capital
surplus and deferred income tax liability accounts. As a result of this
offering, Promus' ownership interest in Sodak has fallen below 20% and,
accordingly, the investment is no longer accounted for on the equity method.
RESULTS OF OPERATIONS
Total Promus Percentage
Increase (Decrease)
-------------------
(in millions, except '93 vs '92 vs
earnings per share) 1993 1992 1991 '92 '91
- ---------------------------------------------------------------------------
Revenues $1,251.9 $1,113.1 $1,031.1 12.5% 7.9%
Operating income 304.2 231.4 203.0 31.5% 14.0%
Net income 86.3 52.5 30.0 64.4% 75.0%
Earnings per share 0.84 0.52 0.33 61.5% 56.0%
Operating margin 24.3% 20.8% 19.7% 3.5pts 1.1pts
Promus' casino entertainment and hotel segments both achieved record
operating results during 1993 reflecting the unit growth attained in both
segments. This unit growth together with the lower overall cost of debt were
the primary contributors to a 64.4% increase in Net income. The combined
growth achieved in 1993 by both of Promus' primary operating segments
continues the trend noted in 1992. A summary of the performance of Promus'
operating segments for the three fiscal years ended December 31, 1993, is
presented on the inside front cover of Book Two of this Annual Report.
5
The present mix of Promus' operating income among the casino entertainment
divisions and the growth experienced by the hotel segment have strengthened
Promus' overall operating results and reflect the increasing diversification
of Promus' operations. The following table summarizes operating income before
property transactions for fiscal years 1993, 1992 and 1991 as a percent of the
total for each of Promus' casino entertainment divisions and primary business
segments:
Fiscal Year
----------------------
1993 1992 1991
- ---------------------------------------------------------------------------
Casino Entertainment
Southern Nevada 26 % 28 % 27 %
Northern Nevada 25 % 28 % 28 %
Atlantic City 23 % 28 % 32 %
Riverboat 9 % - -
Other (5)% (5)% (4)%
--- --- ---
78 % 79 % 83 %
Hotel 21 % 21 % 17 %
Other 1 % - -
--- --- ---
Total Promus 100 % 100 % 100 %
=== === ===
CASINO ENTERTAINMENT
Promus' casino entertainment segment includes 12 casino properties
located in Colorado, Illinois, Mississippi, New Jersey and Nevada. Eleven of
the properties are operated under the brand name Harrah's. The casino
entertainment segment contributed approximately 81% of Promus' 1993
consolidated revenues and 78% of operating income before property transactions.
The principal factors affecting casino entertainment segment results are:
gaming volume, which is the dollar amount of wagers placed by slot customers
and chips purchased at tables by table customers; the win percentage, which is
the proportion of wagers won by Promus; and Promus' ability to manage costs.
The casino entertainment segment's revenues and operating income increased
in 1993 primarily due to the addition of three riverboat properties during the
year. The Riverboat Division contributed 8.9% and 11.9% of the segment's
revenues and operating income, respectively. Excluding the Riverboat Division's
results, revenues and operating income increased 3.7% and 10.6%, respectively,
over the prior year. This increase in revenues reflects a 5.2% increase in total
volume, offset by a 0.2 percentage point decline in overall hold percentage
reflecting the continuing shift in play from table games to slots. This shift
continues a trend noted in the prior year and is consistent with industry
trends. The disproportionate increase in operating income before property
transactions versus revenues is primarily due to continuing cost saving efforts
and operating efficiencies achieved during the year. In addition, the increase
in operating income was achieved in spite of increased development costs
incurred related to the pursuit of new casino projects. Development costs
charged to expense in 1993 totaled $10.2 million versus $6.0 million in 1992.
For 1992, the revenue increase for the casino entertainment segment was
primarily due to a 9.5% growth in gaming volume. The impact of the volume
increase on revenue was partially offset by a 0.4 percentage point decrease in
hold percentage reflecting the shift in play from table games to slots. The
increase in operating income before property transactions outpaced the revenue
growth due to cost saving efforts and operating efficiencies achieved during
the year and due to a $3.3 million charge in 1991 to terminate the Holiday Inn
franchise agreement at the Holiday Casino and Holiday Inn hotel in Las Vegas.
Excluding the termination fee, the increase in operating income before
property transactions was 7.5%.
Southern Nevada Division Percentage
Increase (Decrease)
-------------------
'93 vs '92 vs
(in millions) 1993 1992 1991 '92 '91
- ---------------------------------------------------------------------------
Revenues $ 294.3 $ 266.3 $ 242.0 10.5% 10.0%
Operating income 79.4 65.8 55.6 20.7% 18.3%
Operating margin 27.0% 24.7% 23.0% 2.3pts 1.7pts
Gaming volume $3,069.6 $2,895.2 $2,569.8 6.0% 12.7%
During 1993, Promus' Southern Nevada Division experienced growth in both table
games and slot volume. In Las Vegas, the property continued to benefit from
the name change to Harrah's, completed in 1991, as reflected in a 13.4%
increase in table play. In addition, the third Laughlin hotel tower, completed
during third quarter 1992, attracted greater volume to that property.
During 1992, the Southern Nevada Division experienced growth in both
table games and slot volume, as well as revenue growth in non-gaming areas,
reflecting the impact of the name change to Harrah's in Las Vegas and
additional hotel rooms in Laughlin. The Southern Nevada Division also
benefitted from airfare wars among the major airlines during 1992. The
increase in operating income over 1991 was due in part to the inclusion in the
prior year's results of the Holiday Inn franchise termination fee for the Las
Vegas property. Excluding this fee from the comparison, the Southern Nevada
Division's operating income increased 11.7%.
Northern Nevada Division Percentage
Increase (Decrease)
-------------------
'93 vs '92 vs
(in millions) 1993 1992 1991 '92 '91
- ---------------------------------------------------------------------------
Revenues $ 315.6 $ 310.5 $ 304.5 1.6% 2.0%
Operating income 76.6 67.3 56.5 13.8% 19.1%
Operating margin 24.3% 21.7% 18.6% 2.6pts 3.1pts
Gaming volume $3,756.0 $3,716.7 $3,502.1 1.1% 6.1%
The Northern Nevada Division's continuing emphasis on cost savings and
operating efficiencies enabled the division to again achieve disproportionate
growth in operating income and margin versus revenue growth.
In addition to the emphasis on cost savings and achieving operating
efficiencies, slot volume increases also favorably impacted results throughout
1992. These improved results were achieved despite the impact of a week-long
fire, which closed the main highway from California in early October 1992, as
well as major snowstorms in December 1992, which restricted access to the
markets.
6
Atlantic City Percentage
Increase (Decrease)
-------------------
'93 vs '92 vs
(in millions) 1993 1992 1991 '92 '91
- ---------------------------------------------------------------------------
Revenues $ 312.1 $ 312.1 $ 310.3 - 0.6%
Operating income 68.0 66.2 65.7 2.7% 0.8%
Operating margin 21.8% 21.2% 21.2% 0.6pts -
Gaming volume $2,991.6 $2,724.1 $2,457.9 9.8% 10.8%
In 1993, Harrah's Atlantic City was successful in maintaining its revenues
in the face of highly competitive market conditions. The property experienced
net growth in gaming volume as play continued to shift from table games to
slots. The lower hold percentage inherent to slot play offset the impact of the
volume growth on revenues. The negative impact on revenues of inclement
weather experienced early in the year was offset by the proceeds from a
related business interruption insurance claim. Despite flat revenues, however,
the Atlantic City property was able to improve its operating margins through
effective cost management, especially related to promotional allowances.
In 1992, the revenue impact of the net growth in gaming volume
experienced by the property as play shifted from table games to slots was
offset by the costs incurred to obtain the increased slot volume in a highly
competitive market.
Riverboat Division
(in millions) 1993
- ----------------------------------
Revenues $ 90.8
Operating income 28.0
Operating margin 30.8%
Gaming volume $822.3
The Riverboat Division includes the operations of the three riverboat
properties opened during 1993, as well as the results of the Division's group
staff function. Promus' first riverboat casino, the Harrah's Northern Star,
began operations in Joliet, Illinois, in May 1993. Dockside casinos in Tunica
and Vicksburg, Mississippi, began operations in November 1993. The higher
operating margin achieved by this Division reflects the operational
differences between a riverboat facility and a conventional land-based
property, the economies of scale derived from the centralization of certain
Division support functions and limited competition currently faced by
facilities opening in new, emerging markets.
HOTEL
Promus' hotel segment is composed of three hotel brands targeted to
specific market segments: Embassy Suites, Hampton Inn and Homewood Suites. The
hotel segment contributed approximately 18% of Promus' 1993 consolidated
revenues and 21% of its operating income before property transactions. The
principal factors affecting hotel segment results are: continued growth in the
number of hotels; the occupancies and room rates achieved by the hotel
systems; the number and relative mix of owned, managed and franchised hotels;
and Promus' ability to manage costs.
Total revenue increases in 1993 over the prior year are primarily due to
franchise system growth in the Hampton Inn brand, which added 3,895 rooms to
its system during 1993, and revenue per available room/suite (RevPAR/S) growth
by all three brands. Compared to the prior year, RevPAR/S increased 6.5% at
Hampton Inn, 5.1% at Embassy Suites and 9.6% at Homewood Suites. The number of
rooms/suites at franchised properties and RevPAR/S significantly affects hotel
segment results since franchise royalty fees are based upon rooms/suites
revenues of the franchised hotels. Partially offsetting the revenue increase
is the reduction in the number of company-owned Embassy Suites hotel
properties.
Operating income before property transactions continued to outpace the
increase in revenues due to the lower direct costs associated with increases
in franchise royalties. Partially offsetting the growth in operating income
before property transactions during 1993 was a $3.6 million writedown of a
receivable from an Embassy franchisee.
7
During third quarter 1993, Promus consolidated management of its hotel
brands under a single organizational structure. Similar to the 1991 management
consolidation of the Hampton Inn and Homewood Suites brands, the consolidation
of all three brands' management is expected to yield future overhead cost
savings as expected operating efficiencies are realized.
For 1992, revenues increased due to the inclusion of a full year's
operations for the five all-suite hotels acquired by Embassy Suites in October
1991, and increased franchise and management fees reflecting growth in each
brand's franchise system, especially Hampton Inn. Operating income before
property transactions for 1992 outpaced the increase in revenues due to lower
direct costs associated with the increase in franchise royalties. Partially
offsetting the impact on operating income of these increased royalties was a
$2.9 million nonrecurring charge recorded during first quarter 1992 related to
the relocation of Embassy Suites hotel division's headquarters.
Hotel segment property transactions for 1993 included the gain on the
sale of an Embassy Suites property. 1992 included a $3.6 million writedown of
a joint venture hotel that was sold during the year. This property transaction
writedown was offset by an extraordinary gain resulting from the forgiveness
of the joint venture's non-recourse debt.
OTHER FACTORS AFFECTING EARNINGS PER SHARE
Percentage
Increase (Decrease)
-------------------
'93 vs '92 vs
(in millions) 1993 1992 1991 '92 '91
- ---------------------------------------------------------------------------
Corporate expense $ 27.1 $ 28.5 $ 26.8 (4.9)% 6.3 %
Interest expense 106.6 118.3 134.0 (9.9)% (11.7)%
Other expense (income) 0.7 (3.6) (10.0) N/M (64.0)%
Effective tax rate 43.1% 41.8 % 42.5 % 1.3pts (0.7)pts
Extraordinary loss
(income), net 5.4 (1.1) - N/M -
Corporate expense declined from 1992 primarily due to lower legal fees.
In 1992, the increase in corporate expense was primarily due to increased
incentive compensation-related, training and computer-services expenses,
partially offset by lower legal fees.
Interest expense decreased in 1993 from the prior year as a result of the
previously discussed debt refinancing activities which lowered overall
effective interest rates, increased capitalized interest associated with
casino entertainment development projects and lower overall levels of debt.
Interest expense decreased during 1992 due to lower interest rates throughout
the year and lower overall levels of debt.
Other income for 1992 included the gain from the sale of Promus' remaining
interest in an insurance company, partially offset by the recognition of a $2.0
million loss for Promus' guarantee to its Savings & Retirement Plan of that
plan's investment in a guaranteed investment contract. In 1991, other income
included a gain from the sale of stock in an insurance company.
As a result of the early retirements of debt, Promus recorded a non-cash
extraordinary loss of $5.4 million, net of tax, during 1993 to write off the
remaining related unamortized deferred finance charges. During 1992, Promus
incurred three extraordinary items, including a $2.7 million extraordinary
gain, net of tax, on the forgiveness of debt. This gain represented Promus'
equity share of an extraordinary gain recognized by one of Embassy Suites'
joint ventures due to the forgiveness by the secured lender of the venture's
non-recourse debt. A second extraordinary gain of $1.8 million, net of tax,
represented a discount realized by Promus upon early extinguishment of a
mortgage on a company-owned hotel property. Partially offsetting these
extraordinary gains was a $3.4 million extraordinary loss, net of tax, on the
early extinguishment of debt, including a premium paid to holders of notes
tendered under a fixed spread tender offer and the write-off of related
deferred finance charges.
TAX MATTERS
The effective tax rate for all periods is higher than the federal
statutory rate primarily due to state income taxes. The overall effective tax
rate for 1993 increased over the prior year due to the impact of a one percent
increase in the federal income tax rate as part of the Revenue Reconciliation
Act of 1993. In addition to the increased current year provision necessary to
accrue for the tax rate increase, the 1993 provision also includes a $1.2
million charge to adjust the beginning of year deferred income tax balances as
required by Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Promus adopted SFAS No. 109 during 1992 and
applied the provisions of this statement retroactively to the Spin-off date
(February 7, 1990).
In connection with the Spin-off, Promus is liable, with certain
exceptions, for the taxes of Holiday and subsidiaries for all pre-merger tax
periods. Negotiations with the Internal Revenue Service (IRS) to resolve
disputed issues for the 1985 and 1986 tax years were concluded and a
settlement reached during fourth quarter 1993. Final payment of the federal
income taxes and related interest due under the settlement is expected to be
made during second quarter 1994. The IRS has completed its examination of
Holiday's federal income tax returns for 1987 through the Spin-off date and
has issued its proposed adjustments to those returns. Federal income taxes and
related interest assessed on agreed issues were paid subsequent to year-end.
The total liability of approximately $23.7 million for the federal income
taxes and interest payments discussed above was included in current
liabilities at December 31, 1993. A protest defending the taxpayer's position
on all unagreed issues for the 1987 through Spin-off periods was filed with
the IRS during third quarter 1993 and negotiations to resolve disputed issues
are currently expected to begin during the second half of 1994. Final
resolution of the disputed issues is not expected to have a materially
adverse effect on Promus' consolidated financial position or its results of
operations.
8
INTERCOMPANY DIVIDEND RESTRICTION
Agreements governing the terms of its debt require Promus to abide by
covenants which, among other things, limit Embassy's ability to pay dividends
and make other restricted payments, as defined, to Promus. The amount of
Embassy's restricted net assets, as defined, computed in accordance with the
most restrictive of these covenants regarding restricted payments, was
approximately $539.9 million at December 31, 1993. Promus' principal asset is
the stock of Embassy, a wholly-owned subsidiary. Embassy holds, directly and
through subsidiaries, the principal assets of Promus' businesses. Given this
ownership structure, these restrictions should not impair Promus' ability to
conduct its business through its subsidiaries or to pursue its development
plans.
EFFECTS OF CURRENT ECONOMIC AND POLITICAL CONDITIONS
The casino entertainment industry is experiencing expansion in both
existing markets and new jurisdictions. In the Las Vegas market, three
competitors opened new casino "mega" facilities adding more than 10,000 rooms
during fourth quarter 1993. In Laughlin, expansions by competitors completed
in 1993 increased the number of rooms available in that market by 12%. In
Reno, competitors have announced new projects which, if constructed, will add
significant additional casino space and hotel rooms to that market. In
addition, the proliferation of casino gaming activity in many new
jurisdictions is continuing due to the widespread growing acceptance of casino
gaming as a form of entertainment and as an alternative tax revenue source
for municipalities and states. Also furthering the proliferation of casino
gaming has been the Indian Gaming Regulatory Act of 1988 which, as of
February 24, 1994, resulted in the approval of 105 compacts for the
development of casinos on Native American lands in 19 states. Promus is not
able to determine the impact, whether favorable or unfavorable, that these
developments will have on the markets in which it currently operates. However,
management believes that the current balance of its operations among the
existing casino entertainment divisions and the hotel segment as discussed
above, combined with the further geographic diversification and the pursuit of
the Harrah's national brand strategy presently underway in its casino
entertainment segment, have well-positioned Promus to face the challenges
presented by these developments and will reduce the potentially negative
impact these new developments may have on Promus' overall operations.
EFFECTS OF INFLATION
Inflation has had little effect on Promus' historical operations.
Generally, Promus has not experienced any significant negative impact on
gaming volume or on the wagering propensity of its customers as a result
of inflationary pressures. Furthermore, Promus has been successful in
increasing the amount of wagers and playing time of its casino customers
through effective marketing programs. Casino management has also, from time to
time, adjusted its required minimum bets at table games and changed the
relative mix of slot machines in favor of machines with higher denominations.
These strategies supplemented by effective cost management programs have
offset the impact of inflation on Promus' casino entertainment operations.
In its hotels and food and beverage operations, Promus has been able to
increase rates and prices and thereby pass on the effects of inflationary cost
increases. Competitive conditions, principally the result of an overbuilt
market for hotels, may limit the industry's future ability to raise hotel room
rates at the rate of inflation. However, the hotel market segments in which
Promus operates are expected to show stronger than industry average growth
rates in both supply and demand. Promus will continue to emphasize hotel
segment cost containment and productivity improvement programs.
Inflation tends to increase the underlying value of Promus' real estate
and management and franchise contracts.
9
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31,
------------------------
1993 1992
---------- ----------
Assets
Current assets
Cash and cash equivalents $ 61,962 $ 43,756
Receivables, including notes receivable
of $2,197 and $9,831, less allowance for
doubtful accounts of $10,864 and $11,598 47,448 53,283
Deferred income taxes (Note 8) 21,024 15,196
Prepayments 18,063 11,697
Supplies 12,996 11,296
Other 2,065 1,919
---------- ----------
Total current assets 163,558 137,147
---------- ----------
Land, buildings, riverboats and equipment
Land 245,846 243,678
Buildings, riverboats and improvements 1,143,356 1,064,363
Furniture, fixtures and equipment 435,231 375,489
---------- ----------
1,824,433 1,683,530
Less: accumulated depreciation (486,231) (435,039)
---------- ----------
1,338,202 1,248,491
Investments in and advances to nonconsolidated
affiliates (Note 13) 70,050 50,985
Deferred costs and other (Note 4) 221,308 159,914
---------- ----------
$1,793,118 $1,596,537
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 60,530 $ 50,669
Construction payables 26,345 -
Accrued expenses (Note 4) 162,969 102,716
Current portion of long-term debt (Note 6) 2,160 3,898
---------- ----------
Total current liabilities 252,004 157,283
Long-term debt (Note 6) 839,804 877,427
Deferred credits and other 86,829 83,606
Deferred income taxes (Note 8) 63,460 46,623
---------- ----------
1,242,097 1,164,939
---------- ----------
Minority interest 14,984 3,668
---------- ----------
Commitments and contingencies (Notes 7, and
10 through 12)
Stockholders' equity (Notes 3, 12 and 13)
Common stock, $1.50 par value, authorized-
120,000,000 shares, outstanding-102,258,442
and 101,882,082 shares (net of 25,251 and
44,442 shares held in treasury) 153,388 152,823
Capital surplus 201,035 178,972
Retained earnings 187,203 100,857
Deferred compensation related to restricted stock (5,589) (4,722)
---------- ----------
536,037 427,930
---------- ----------
$1,793,118 $1,596,537
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these balance sheets.
10
Consolidated Statements of Income
(In thousands, except per share amounts)
Fiscal Year Ended
---------------------------------------
December 31, December 31, January 3,
1993 1992 1992
----------- ----------- ----------
Revenues
Casino $ 812,081 $ 711,777 $ 686,177
Rooms 223,129 218,284 176,858
Food and beverage 147,616 141,795 135,583
Franchise and management fees 60,359 51,719 45,320
Other 109,390 81,642 71,924
Less: casino promotional allowances (100,720) (92,151) (84,750)
---------- ---------- ----------
Total revenues 1,251,855 1,113,066 1,031,112
---------- ---------- ----------
Operating expenses
Departmental direct costs
Casino 369,335 334,702 338,529
Rooms 98,653 103,149 82,602
Food and beverage 84,733 80,247 75,829
Depreciation of buildings, riverboats and equipment 77,590 69,575 63,857
Other 318,669 287,937 266,128
---------- ---------- ----------
Total operating expenses 948,980 875,610 826,945
---------- ---------- ----------
302,875 237,456 204,167
Property transactions 1,345 (6,040) (1,186)
---------- ---------- ----------
Operating income 304,220 231,416 202,981
Corporate expense (27,136) (28,450) (26,825)
Interest expense, net of interest capitalized
(Notes 2 and 13) (106,561) (118,282) (133,992)
Other (expense) income, including interest income (714) 3,615 10,030
---------- ---------- ----------
Income before income taxes and minority interest 169,809 88,299 52,194
Provision for income taxes (Note 8) (73,262) (36,881) (22,183)
Minority interest (4,754) - -
---------- ---------- ----------
Income before extraordinary items 91,793 51,418 30,011
Extraordinary items, net of tax benefit
(provision) of $3,415 and $(753) (Note 5) (5,447) 1,074 -
---------- ---------- ----------
Net income $ 86,346 $ 52,492 $ 30,011
========== ========== ==========
Earnings per share before extraordinary items $ 0.89 $ 0.51 $ 0.33
Extraordinary items, net (0.05) 0.01 -
---------- ---------- ----------
Earnings per share $ 0.84 $ 0.52 $ 0.33
========== ========== ==========
Average common shares outstanding 102,562 101,116 90,480
========== ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
11
Consolidated Statements of Stockholders' Equity
(Notes 3, 12 and 13)
(In thousands)
Deferred
Common Stock Compensation
---------------------- Related to
Shares Capital Retained Restricted
Outstanding Amount Surplus Earnings Stock Total
----------- -------- -------- -------- ------------ --------
Balance - December 28, 1990 79,959 $119,938 $ 77,660 $ 18,354 $(12,203) $203,749
Net income 30,011 30,011
Public offering of common stock, net of
issue costs of $6,920 21,000 31,500 94,580 126,080
Net shares issued under incentive
compensation plans, less income tax
provision of $1,600 409 614 (61) 5,102 5,655
------- -------- -------- -------- -------- --------
Balance - January 3, 1992 101,368 152,052 172,179 48,365 (7,101) 365,495
Net income 52,492 52,492
Net shares issued under incentive
compensation plans, including income
tax benefit of $3,726 514 771 6,793 2,379 9,943
------- -------- -------- -------- -------- --------
Balance - December 31, 1992 101,882 152,823 178,972 100,857 (4,722) 427,930
Net income 86,346 86,346
Pro-rata share of proceeds from equity
investee's initial public offering, less
income tax provision of $2,662 3,752 3,752
Net shares issued under incentive
compensation plans, including income
tax benefit of $10,467 376 565 18,311 (867) 18,009
------- -------- -------- -------- -------- --------
Balance - December 31, 1993 102,258 $153,388 $201,035 $187,203 $ (5,589) $536,037
======= ======== ======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
12
Consolidated Statements of Cash Flows
(Note 9)
(In thousands)
Fiscal Year Ended
-----------------------------------------
December 31, December 31, January 3,
1993 1992 1992
----------- ----------- ---------
Cash flows from operating activities
Net income $ 86,346 $ 52,492 $ 30,011
Adjustments to reconcile net income
to cash flows from operating activities
Extraordinary items 8,862 (1,827) -
Depreciation and amortization 98,095 92,342 88,073
Other noncash items 27,356 25,678 21,779
Minority interest share of net income 4,754 - -
Equity in earnings of and distributions from
nonconsolidated affiliates 2,782 6,452 13,431
Net (gains) losses from property
transactions (1,481) 972 (5,405)
Net change in long-term accounts 2,239 (11,451) (12,288)
Net change in working capital accounts 33,929 2,437 7,386
Tax indemnification payments to Bass (8,459) (13,238) (32,186)
--------- --------- ---------
Cash flows provided by operating activities 254,423 153,857 110,801
--------- --------- ---------
Cash flows from investing activities
Land, buildings, riverboats and equipment additions (235,766) (117,771) (118,266)
Increase in construction payables 26,345 - -
Proceeds from sales of equity investments - 3,733 12,026
Proceeds from property transactions 25,169 3,585 6,459
Investments in and advances to nonconsolidated
affiliates (15,431) (13,487) (3,986)
Other (27,954) (8,334) (13,371)
--------- --------- ---------
Cash flows used in investing activities (227,637) (132,274) (117,138)
--------- --------- ---------
Cash flows from financing activities
Debt retirements (358,762) (189,219) (82,406)
Proceeds from issuance of senior subordinated
notes, net of issue costs of $3,819 and $5,687 196,181 194,313 -
Net borrowings under Revolving Credit Facility,
net of issue costs of $11,547 158,453 - -
Net repayments under retired revolving credit
facility (9,000) (16,000) (43,000)
Minority interest contributions, net of
distributions 4,548 2,908 -
Proceeds from issuance of common stock, net of issue
costs of $6,920 - - 126,080
Premiums paid on early extinguishment of debt - (4,426) -
--------- --------- ---------
Cash flows (used in) provided by
financing activities (8,580) (12,424) 674
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 18,206 9,159 (5,663)
Cash and cash equivalents, beginning of period 43,756 34,597 40,260
--------- --------- ---------
Cash and cash equivalents, end of period $ 61,962 $ 43,756 $ 34,597
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
13
Notes to Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
Note 1 - Basis of Presentation and Organization
The Promus Companies Incorporated (Promus), a
Delaware corporation, is a hospitality company with two
primary business segments: casino entertainment and hotels.
Promus is one of the leading casino entertainment companies
in the United States, owning and operating casino hotels and
riverboats under the brand name Harrah's. Harrah's casino
hotels are in all five major Nevada and New Jersey gaming
markets: Reno, Lake Tahoe, Las Vegas and Laughlin, Nevada;
and Atlantic City, New Jersey. Harrah's riverboat casinos
are in Tunica and Vicksburg, Mississippi, and Joliet,
Illinois. Harrah's also has an ownership interest in and
manages two limited stakes casinos in Colorado. The casino
entertainment segment contributed 78% and 79% of Promus'
1993 and 1992 consolidated operating income before property
transactions, respectively.
Promus' hotel segment is composed of three different hotel
brands targeted to specific market segments: Embassy Suites,
Hampton Inn and Homewood Suites. Through franchise
licensing agreements, management contracts, joint ventures
and direct ownership, the hotel segment contributed 21% of
Promus' 1993 and 1992 consolidated operating income before
property transactions.
Promus' other operations segment is composed of its risk
management division and an equity investment in a hotel
finance company.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated
financial statements include the accounts of Promus and its
subsidiaries after elimination of all significant
intercompany accounts and transactions. Investments in 50%
or less owned companies and joint ventures over which Promus
has the ability to exercise significant influence are
accounted for using the equity method. Promus reflects its
share of income before interest expense and extraordinary
gain of these nonconsolidated affiliates in Revenues - other.
Promus' proportionate share of interest expense and
extraordinary gain on forgiveness of debt of such
nonconsolidated affiliates is included in interest expense
and extraordinary items, respectively, in the Consolidated
Statements of Income. (See Note 13 for combined summarized
financial information regarding these nonconsolidated
affiliates.)
Fiscal Year. As of the beginning of 1992, Promus changed
from a fiscal year to a calendar year for financial
reporting purposes. The impact of this change on Promus'
financial statements was immaterial. For years prior to
fiscal 1992, Promus' fiscal year ended on the Friday nearest
to December 31. Fiscal year 1991 included 53 weeks.
Cash Equivalents. Cash equivalents are highly liquid
investments with a maturity of less than three months and
are stated at the lower of cost or market value.
Supplies. Supplies inventories, which consist primarily of
food, beverage and operating supplies, are stated at average
cost.
Land, Buildings, Riverboats and Equipment. Land,
buildings, riverboats and equipment are stated at cost. Land
includes land held for future development or disposition
which totaled $42.1 million and $41.4 million at December
31, 1993 and 1992, respectively. Improvements and
extraordinary repairs that extend the life of the asset are
capitalized. Maintenance and repairs are expensed as
incurred. Interest expense is capitalized on internally
constructed assets at Promus' overall weighted average
borrowing rate of interest. Capitalized interest amounted to
$3.1 million, $2.4 million and $3.1 million in 1993, 1992
and 1991, respectively.
Depreciation of buildings, riverboats and equipment is
calculated using the straight-line method over the estimated
useful life of the assets or over the related lease term, as
follows:
Buildings and improvements 4 to 40 years
Riverboats 30 years
Furniture, fixtures and equipment 2 to 15 years
Treasury Stock. Shares of Promus' common stock held in
treasury are reflected in the Consolidated Balance Sheets
and Consolidated Statements of Stockholders' Equity as if
they were retired.
Revenue Recognition. Casino revenues consist of net gaming
wins. Food and beverage and rooms revenues include the
aggregate amounts generated by those departments at all
company-owned hotels and casino hotels.
Casino promotional allowances consist principally of the
retail value of complimentary food and beverages,
accommodations and entertainment provided to casino patrons. The
estimated costs of providing such complimentary
services, classified as casino expenses through
interdepartmental allocations, were as follows:
1993 1992 1991
------- ------- -------
Food and beverage $52,057 $51,235 $48,221
Rooms 13,140 12,658 10,840
Other 1,541 1,657 6,901
------- ------- -------
$66,738 $65,550 $65,962
======= ======= =======
Amortization. The excess of costs over net assets of
businesses acquired and other intangibles are amortized on a
straight-line basis over periods up to 40 years. Deferred
management and franchise contract costs are amortized on a
straight-line basis over the term of the related contract,
generally 10 to 20 years. Deferred finance charges are
amortized using the interest method based on the terms of
the related debt agreements. Pre-opening costs, representing
primarily direct salaries and other operating costs incurred
prior to the opening of new facilities, are deferred and
amortized on a straight-line basis over the three year
period after the opening of the related facility.
Property Transactions. Property transactions include gains
and losses from asset sales, including sales of joint
venture equity interests, writedowns of assets to net
realizable value and the on-going costs of Promus' asset
management staff. The operations of properties sold are
included in the financial statements through the date of
sale.
14
Income Taxes. In February 1992, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Under
the asset and liability method of accounting for income
taxes prescribed by SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and
liabilities are measured using enacted rates expected to
apply to taxable income in the years in which those
temporary differences are expected to be recovered or
settled. The effect of a change in existing tax rates is
recognized as an increase or decrease to the tax provision
in the period that includes the enactment date. Promus
adopted SFAS No. 109 in 1992 and applied the provisions of
the statement retroactively.
Earnings Per Share. Earnings per share is computed by
dividing Net income by the number of weighted average common
shares outstanding during the year, including common stock
equivalents and adjusted for stock splits (see Note 3).
Reclassifications. Certain amounts for prior fiscal years
have been reclassified to conform with the presentation for
fiscal year 1993.
Note 3 - Stockholders' Equity
On October 29, 1993, Promus' Board of Directors
approved a three-for-two stock split (October Split), in
the form of a stock dividend, effected by a distribution on
November 29, 1993, of one additional share for each two
shares owned by stockholders of record on November 8, 1993.
The October Split followed a two-for-one stock split, also
effected as a stock dividend, approved by Promus' Board of
Directors on February 26, 1993, and distributed on March 29,
1993. The $1.50 par value per share of Promus' common stock
was unchanged by these stock splits. The par value of the
additional shares issued as a result of these stock splits
was capitalized into common stock on the balance sheet by
means of a transfer from capital surplus. All references in
these financial statements to numbers of common shares and
earnings per share have been restated to give retroactive
effect to both stock splits.
In addition to its common stock, Promus 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 B, $1.125 par value
Under the terms of employee compensation programs previously
approved by the stockholders, Promus has reserved shares of
its common stock for issuance under the Restricted Stock and
Stock Option Plans. (See Note 12 for a description of the
plans.) The following table summarizes the total number of
shares authorized for issuance under each of these plans and
the remaining unissued shares as of December 31, 1993:
Restricted Stock
Stock Plan Option Plan
---------- -----------
Total shares authorized for issuance
under the plan 4,800,000 5,850,000
Shares issued under the plan 4,296,106 3,099,845
--------- ---------
Shares held in reserve for
issuance under the plan as of
December 31, 1993 503,894 2,750,155
========= =========
To protect its existing stockholders, Promus' Board of
Directors has authorized that one-third of a special right be
attached to each outstanding share of common stock. These rights
entitle the holders to purchase, under certain
conditions, units consisting of fractional shares of special
stock-series B at a purchase price of $125 per unit, subject
to adjustment. The rights also, under certain conditions,
entitle the holders to purchase $250 worth of common stock
for $125. These rights expire on October 5, 1996, unless
Promus decides to redeem them earlier at $0.05 per right or
upon the occurrence of certain other events.
Note 4 - Detail of Certain Balance Sheet Accounts
Deferred costs and other consisted of the following:
1993 1992
-------- --------
Excess of cost over net assets
of businesses acquired $ 50,719 $ 52,558
Cash surrender value of life
insurance (Note 12) 44,734 43,064
Receivables due after one year,
net of allowance for doubtful
accounts of $644 33,777 4,918
Pre-opening costs 23,146 3,379
Deferred finance charges 18,950 16,446
Deferred management and
franchise contract costs 10,173 16,526
Other 39,809 23,023
-------- --------
$221,308 $159,914
======== ========
Accrued expenses consisted of the following:
1993 1992
-------- --------
Payroll and other compensation $ 37,388 $ 29,003
Insurance claims and reserves 35,920 29,989
Taxes, including income taxes 34,757 9,146
Deposits and customer funds 14,824 8,955
Accrued interest payable 13,388 8,292
Other accruals 26,692 17,331
-------- --------
$162,969 $102,716
======== ========
15
Notes to Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
Note 5 - Extraordinary Items
The components of the net extraordinary items for
fiscal 1993 and 1992 were as follows:
1993 1992
------- -------
Losses on early extinguishments
of debt $(8,862) $(5,558)
Gain on forgiveness of joint
venture debt - 4,353
Gain due to discounting of debt at
extinguishment - 3,032
------- -------
(8,862) 1,827
Income tax benefit (provision) 3,415 (753)
------- -------
Extraordinary items,
net of income taxes $(5,447) $ 1,074
======= =======
Note 6 - Long-Term Debt
Long-term debt consisted of the following:
1993 1992
-------- --------
Secured Bank Facilities
Revolving Credit Facility, 4.953%-
6.5% at December 31, 1993,
maturity 1998 $170,000 $ -
9% Notes, backed by letter
of credit, maturity 1995 199,790 199,624
Term Loan Facility, 6.4%-10.3% at
December 31, 1992 - 307,220
8 5/8% Notes, backed by
letter of credit - 47,131
Revolving Credit Facility, 7.5%
at December 31, 1992 - 9,000
8 3/4% Senior Subordinated Notes-
unsecured, maturity 2000 200,000 -
10 7/8% Senior Subordinated Notes-
unsecured, maturity 2002 200,000 200,000
Notes payable and other-unsecured,
8 3/8%-15%, maturities to 2001 69,218 71,929
Mortgages, 8%-8 3/4%,
maturities to 2005 309 45,525
Capital lease obligations, 8.1%-
15.2%, maturities to 1998 2,647 896
-------- --------
841,964 881,325
Current portion of long-term debt (2,160) (3,898)
-------- --------
$839,804 $877,427
======== ========
As of December 31, 1993, annual principal requirements for
the four years subsequent to 1994 were: 1995, $2 million;
1996, $2 million; 1997, $2 million; and 1998, $411 million.
Promus intends to fund scheduled debt retirements of $39.1
million due in 1994 and $200.0 million due in 1995 using
funds to be drawn under the long-term revolving credit
facility. Therefore, these notes are considered to be
retired in 1998 for purposes of this disclosure.
New Bank Facility. In July 1993, Promus entered into a
new secured bank facility, which is a $650 million reducing
revolving and letter of credit facility (New Facility).
Reductions of the borrowing capacity available under the New
Facility are as follows: $50 million, July 1996; $75
million, January 1997; $75 million, July 1997; and $450
million, July 1998. Of the $650 million available under the
New Facility, there is a sub-limit of $255 million for
letters of credit. The New Facility provides for borrowings
at either the Eurodollar rate plus 1 1/2% or the prime rate
plus 1/2%. The annual fees on letters of credit and
commitment fees on the unutilized portion under the New
Facility are 1 3/4% and 1/2%, respectively.
The New Facility is secured by the assets of Promus' Nevada
and New Jersey casino properties, the stock of Embassy
Suites, Inc. (Embassy) and certain other subsidiaries and
certain other casino entertainment segment trademarks. The
New Facility agreement contains financial covenants
requiring Promus to maintain a specific tangible net worth
and to meet other financial ratios. Its covenants limit
Promus' ability to pay dividends and to repurchase its
outstanding shares.
As of December 31, 1993, Promus' borrowings under the New
Facility were $170 million and an additional $222.6 million
was committed to back certain letters of credit, including
a $204.7 million letter of credit backing the 9% Notes.
After consideration of these borrowings, $257.4 million of
the New Facility was available to Promus at December 31,
1993.
Senior Subordinated Notes. During first quarter 1993,
Embassy, a wholly-owned subsidiary of Promus, completed a
private placement offering of $200 million principal amount
of 8 3/4% Senior Subordinated Notes due 2000 (8 3/4% Notes).
The 8 3/4% Notes are unsecured and contain covenants which,
among other things, place limitations on Embassy's ability
to pay dividends and make restricted payments, as defined,
to Promus (see Note 14), and limit Embassy's ability to
incur additional debt. During third quarter 1993, Embassy
completed an offering which exchanged all of the 8 3/4% Notes
for new notes with the same terms, except the new notes are
registered under the Securities Act of 1933.
16
During 1992, Embassy completed a public offering of $200
million principal amount of 10 7/8% Senior Subordinated Notes
due 2002 (10 7/8% Notes). The 10 7/8% Notes, which are
unsecured, were issued with essentially the same financial
covenants as and are pari passu in right of payment to the
8 3/4% Notes.
Promus has unconditionally guaranteed Embassy's
obligations under both the 8 3/4% Notes and the 10 7/8% Notes.
Interest Rate Agreements. During May 1993, Promus entered
into two $50 million interest rate swap agreements to
convert $100 million of the 8 3/4% Notes to floating interest
rates equal to LIBOR plus 3.42% on $50 million and LIBOR
plus 3.22% on $50 million. The LIBOR components are adjusted
semi-annually on May 15 and November 15 for $50 million and
on July 15 and January 15 for the remaining $50 million. The
interest rate swap agreements expire on May 15, 1998, and July 15,
1998, respectively. The interest rates in effect until May
15 and July 15, 1994, are 6.929% and 6.688%, respectively.
During October 1992, Promus entered into interest rate swap
agreements to effectively convert all $200 million of the
10 7/8% Notes to a floating interest rate of LIBOR plus
4.731% through October 1997, when the agreements expire. The
effective interest rate is adjusted semi-annually on April
15 and October 15 of each year. The interest rate in effect
until April 15, 1994, is 8.143%.
Promus maintains interest rate protection, in the form of a
rate collar transaction entered into in June 1990, on $140
million of its variable rate bank debt. The interest rate
protection expires in 1995 and currently holds Promus'
interest rate in a range between 9.3% and 12.5%.
Other. Embassy has an effective shelf registration with
the Securities and Exchange Commission for up to $200
million of new debt securities. The terms and conditions of
these debt securities, which will be unconditionally
guaranteed by Promus, will be determined by market
conditions at the time of issuance.
Based on the borrowing rates currently available for debt
with similar terms and maturities and quoted market prices
of its publicly traded debt, the fair value of Promus'
long-term debt, including the rate collar and the interest
rate swap agreements, was approximately $882 million and
$926 million at December 31, 1993 and 1992, respectively.
Note 7 - Leases
Promus leases both real estate and equipment used in
its operations through operating and capital leases.
Leases which transfer substantially all benefit and risk
incidental to the ownership of property are capitalized. In
addition to minimum rentals, many leases provide for
contingent rents based on percentages of revenue. Real
estate operating leases range from five to 10 years with
various automatic extensions totaling up to 30 years. The
average remaining term for other operating leases, which
generally contain renewal options, extends approximately five
years. The costs of leased assets are amortized over periods
not in excess of the lease terms.
Rental expense associated with operating leases included in
the Consolidated Statements of Income was as follows:
1993 1992 1991
------- ------- -------
Noncancelable
Minimum $14,183 $15,252 $12,004
Contingent 723 557 459
Sublease (4) (26) (26)
Other 6,997 3,713 3,273
------- ------- -------
$21,899 $19,496 $15,710
======= ======= =======
The future minimum rental commitments as of December 31, 1993, were as
follows:
Non-
cancelable
Capital Operating
Leases Leases
------- ----------
1994 $ 993 $ 17,506
1995 869 15,827
1996 838 11,715
1997 406 8,684
1998 12 7,594
Thereafter - 130,410
------ --------
Total minimum lease payments 3,118 $191,736
========
Amounts representing executory costs (13)
------
Net minimum lease payments 3,105
Amounts representing interest (458)
------
Total obligations under capital leases 2,647
Obligations under capital leases due
within one year (772)
------
Long-term obligations under capital leases $1,875
======
Minimum rental commitments exclude contingent rentals, which
may be paid under certain leases based on a percentage of
revenues in excess of specified amounts.
17
Notes to Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
Note 8 - Income Taxes
Federal and state income tax expense is allocated
among continuing operations, extraordinary items and
items charged or credited directly to stockholders' equity.
Promus' provision (benefit) for income taxes attributable to
identified income statement and balance sheet line items was
as follows:
1993 1992 1991
-------- -------- --------
Income before income taxes and
minority interest $ 73,262 $ 36,881 $ 22,183
Extraordinary items (3,415) 753 -
Stockholders' equity
Compensation expense for
tax purposes (in excess of)
less than amounts
recognized for financial
reporting purposes (10,467) (3,726) 1,600
Pro-rata share of proceeds
from equity investee's
initial public offering 2,662 - -
-------- -------- --------
$ 62,042 $ 33,908 $ 23,783
======== ======== ========
Income tax expense attributable to Income before income
taxes and minority interest consisted of the following:
1993 1992 1991
-------- -------- --------
Current
Federal $ 56,643 $ 21,145 $ 5,235
State 5,610 5,587 5,664
Deferred 11,009 10,149 11,284
-------- -------- --------
$ 73,262 $ 36,881 $ 22,183
======== ======== ========
The differences between the statutory federal income tax
rate and the effective tax rate expressed as a percentage of
Income before income taxes and minority interest were as
follows:
1993 1992 1991
---- ---- ----
Statutory tax rate 35.0% 34.0% 34.0%
Increases (decreases) in tax
resulting from:
State taxes, net of federal
tax benefit 2.7 5.2 7.2
Minority interest in
partnership earnings (1.0) - -
Adjustment of valuation of
deferred tax assets and
liabilities due to change
in tax rate 0.7 - -
Targeted jobs tax credit (0.5) (0.8) (1.6)
Goodwill amortization 0.4 0.7 1.2
Other 5.8 2.7 1.7
---- ---- ----
43.1% 41.8% 42.5%
==== ==== ====
The components of Promus' net deferred tax liability
included in the Consolidated Balance Sheets were as follows:
1993 1992
-------- --------
Deferred tax assets
Compensation $ 21,080 $ 21,960
Self-insurance reserves 9,456 9,227
Deferred income 5,676 5,810
Bad debt reserve 4,122 4,956
Tax credits 927 10,115
Other 3,284 1,382
-------- --------
44,545 53,450
-------- --------
Deferred tax liabilities
Property (68,170) (64,048)
Investments (12,715) (17,640)
Deferred system fund (3,327) (1,899)
Basis difference in other assets (2,761) (1,065)
Other (8) (225)
-------- --------
(86,981) (84,877)
-------- --------
Net deferred tax liability $(42,436) $(31,427)
======== ========
Note 9 - Supplemental Cash Flow Information
The increase (decrease) in cash and cash equivalents
due to the changes in long-term and working capital
accounts was as follows:
1993 1992 1991
------- -------- --------
Long-term accounts
Land, buildings, riverboats
and equipment $ 115 $ 13 $ (249)
Deferred costs and
other assets (3,443) (6,859) (7,280)
Deferred credits and other
long-term liabilities 5,567 (4,605) (4,759)
------- -------- --------
Net change in long-term
accounts $ 2,239 $(11,451) $(12,288)
======= ======== ========
Working capital accounts
Receivables $(3,716) $ (8,433) $ 2,552
Supplies (1,762) (151) 324
Prepayments (6,115) (3,983) (2,111)
Other current assets (146) 576 366
Accounts payable 9,862 (2,522) (5,264)
Accrued expenses 35,806 16,950 11,519
------- -------- --------
Net change in working
capital accounts $33,929 $ 2,437 $ 7,386
======= ======== ========
18
Supplemental Disclosure of Noncash Investing and Financing
Activities. During 1993, Promus transferred its ownership
interest in five hotel properties to a third party in
exchange for cash, the assumption by the third party of the
related existing mortgage debt totalling $42.2 million and
the issuance of $10 million in notes receivable maturing in
three to five years. In an unrelated 1993 transaction,
Promus sold a hotel property to a third party for cash and
assumption by the third party of the related existing $3.3
million mortgage debt.
During April 1992, Promus invested an additional $10 million
in its hotel finance subsidiary. The funds for this
investment were provided by a certificate of deposit, which
had been previously recorded as a long-term investment.
During October 1991, Promus acquired five all-suite hotels
for cash and the assumption of $40.9 million of existing
mortgage debt. During July 1991, Promus acquired the
remaining ownership interest in a hotel joint venture by
assuming $16.7 million of existing mortgage debt.
These noncash transactions have been excluded from the
Consolidated Statements of Cash Flows.
Supplemental Disclosure of Cash Paid for Interest and
Taxes. The following table reconciles Promus' Interest
expense, net of interest capitalized, per the Consolidated
Statements of Income, to cash paid for interest:
1993 1992 1991
-------- -------- --------
Interest expense, net of amount
capitalized (Note 2) $106,561 $118,282 $133,992
Adjustments to reconcile to
cash paid for interest:
Promus' share of
interest expense of
nonconsolidated affiliates(Note 13) (12,707) (14,395) (19,122)
Net change in accruals (10,711) (5,411) (1,822)
Amortization of deferred
finance charges (4,107) (5,863) (6,704)
Net amortization of
discounts and premiums (1,041) (1,661) (649)
-------- -------- --------
Cash paid for interest, net
of amount capitalized $ 77,995 $ 90,952 $105,695
======== ======== ========
Cash payments, net of refunds, for income taxes amounted to
$49,771, $28,038 and $39,774 for 1993, 1992 and 1991,
respectively (see Note 8).
Note 10 - Commitments and Contingencies
Contractual Commitments. Promus is pursuing many
casino development opportunities that may require,
individually and in the aggregate, significant commitments
of capital, up-front payments to third parties, guarantees
by Promus of third party debt and development completion
guarantees. As of December 31, 1993, Promus has guaranteed
third party loans of $65 million, which are secured by
certain assets, and has contractual agreements to construct
riverboat casino facilities of $55 million, excluding
amounts previously recorded.
Promus 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, Promus is liable under certain
lease agreements where it has assigned the direct obligation
to third party interests. Promus believes the likelihood is
remote that material payments will be required under these
agreements. Promus' estimated maximum exposure under such
agreements is currently less than $41.3 million over the
next 30 years.
Guarantee of Insurance Contract. Promus' defined
contribution savings plan (see Note 12) includes a $12.9
million guaranteed investment contract with an insurance
company. Promus has agreed to provide non-interest-bearing
loans to the plan to fund, on an interim basis, withdrawals
from this contract by retired or terminated employees.
Promus' maximum exposure on this guarantee as of December
31, 1993, is $8.0 million.
Self-Insurance. Promus is self-insured for various levels
of general liability, workers' compensation and employee
medical coverage. Insurance claims and reserves includes the
accrual of estimated settlements for known and anticipated
claims.
Severance Agreements. Promus has severance agreements with
12 of its senior executives, which provide for payments to
the executives in the event of their termination after a
change in control, as defined, of Promus. These agreements
provide, among other things, for a compensation payment
equal to 2.99 times the average annual compensation paid to
the executive for the five preceding calendar years, as well
as for accelerated payment or accelerated vesting of any
compensation or awards payable to the executive under any of
Promus' incentive plans. The estimated amount, computed as
of December 31, 1993, that would have been payable under the
agreements to these executives based on earnings and stock
options aggregated approximately $44.5 million.
Tax Sharing Agreement. In connection with the February 7,
1990 spin-off (the Spin-off) of the stock of Promus to
stockholders of Holiday Corporation (Holiday), Promus is
liable, with certain exceptions, for taxes of Holiday and
its subsidiaries for all pre-merger tax periods. Bass
PLC (Bass) is obligated under the terms of
19
Notes to Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
the Tax Sharing Agreement to pay Promus the amount of any
tax benefits realized from pre-merger tax periods of Holiday
and its subsidiaries (see Note 11). All federal income taxes
and interest assessed by the Internal Revenue Service (IRS) for
the 1978 through 1984 tax years were paid during 1992. The
federal income taxes and interest thereon associated with
the agreed issues from the IRS audit of the 1985 and 1986
tax years were paid in 1991. Negotiations with the IRS to
resolve disputed issues for the 1985 and 1986 tax years were
concluded and settlement reached during fourth quarter 1993.
Final payment of the federal income taxes and related
interest due under the settlement is expected to be made
during second quarter 1994. The IRS has completed its
examination of Holiday's federal income tax returns for 1987
through the Spin-off date and has issued its proposed
adjustments to those returns. Federal income taxes and
related interest assessed on agreed issues were paid
subsequent to year-end. The total liability of approximately
$23.7 million for the federal income tax and interest
payments discussed above was included in current liabilities
at December 31, 1993. A protest of all unagreed issues for
the 1987 through Spin-off periods was filed with the IRS
during the third quarter of 1993 and negotiations to resolve
disputed issues are currently expected to begin during the
second quarter of 1994. Final resolution of the disputed
issues is not expected to have a materially adverse effect
on Promus' consolidated financial position or its results of
operations.
Note 11 - Litigation
In February 1992, Bass and certain affiliates filed
suit against Promus generally alleging breaches of
representations and warranties under the Merger Agreement
with respect to the 1990 Spin-off of Promus and acquisition
of the Holiday Inn hotel business by Bass, violation of
federal securities laws due to such alleged breaches, and
breaches of the Tax Sharing Agreement between Bass and
Promus entered into at the closing of the Merger Agreement.
The complaint seeks an unspecified amount of damages,
unspecified punitive or exemplary damages, and declaratory
relief. Promus believes that it has complied with all
applicable laws and agreements with Bass in connection with
the Merger and is defending its position vigorously. Promus
has filed (a) an answer denying, and asserting affirmative
defenses to, the substantive allegations of the complaint
and (b) counterclaims alleging that Bass has breached the
Tax Sharing Agreement, the Merger Agreement and agreements
ancillary to the Merger Agreement. The counterclaims request
unspecified compensatory damages, injunctive and declaratory
relief and Promus' costs, including reasonable attorneys
fees and expenses. Discovery has begun, but no trial date
has been set.
In addition to the matter described above, Promus is also
involved in various inquiries, administrative proceedings
and litigation relating to contracts, sales of property and
other matters arising in the normal course of 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
Promus' consolidated financial position or its results of
operations.
Note 12 - Employee Benefit Plans
Savings and Retirement Plan. Promus maintains a
defined contribution savings and retirement plan, which,
among other things, allows pre-tax and after-tax
contributions to be made by employees to the plan. Under the
plan, participating employees may elect to contribute up to
16 percent of their eligible earnings, the first six percent
of which Promus will match fully. Amounts contributed to the
plan are invested, at the participant's option, in a Promus
company stock fund, a diversified stock fund, an income fund
and a treasury fund. Participants become vested in Promus'
matching contribution over seven years of credited service.
Promus' contribution expense for this plan was $8.4 million,
$7.4 million and $7.1 million in 1993, 1992 and 1991,
respectively.
Employee Stock Ownership Plan. Promus has an employee
stock ownership plan, which is a noncontributory stock bonus
plan covering employees of Promus and its affiliates.
Promus' contributions to the plan are discretionary and are
made only if approved by the Human Resources Committee of
Promus' Board of Directors. Contributions of $0.7 million,
$0.8 million and $0.3 million were approved for the plan
years 1993, 1992 and 1991, respectively.
Restricted Stock and Stock Option Plans. As a component
of Promus' retention and long-term compensation packages,
key employees may be granted shares of common stock under
the Promus Restricted Stock Plan (RSP) and/or options to
purchase shares of Promus common stock under the Promus
Stock Option Plan (SOP). Shares granted under the RSP are
restricted as to transfer and subject to forfeiture during a
specified period or periods prior to vesting. The shares
generally vest over staggered periods ranging from two to
four years. No awards of RSP shares may be made under the
current plan after November 1999. The deferred compensation
related to the RSP shares is generally amortized to expense
over the vesting period and this expense totaled $4.8
million, $4.3 million and $6.5 million in 1993, 1992 and
1991, respectively.
Promus SOP allows an option holder to purchase Promus
common stock over specified periods of time, generally 10
years, at a fixed price equal to the market value at the
date of grant. No options may be granted under the SOP after
November 1999. A summary of stock option transactions during
1993 follows:
Number of
Common Shares
Option Price -----------------------
Range Options Available
(Per Share) Outstanding for Grant
------------- ----------- ---------
Balance - January 1, 1993 $ 1.19-$15.67 2,222,745 631,968
1993 grants 18.75- 47.75 326,470 (326,470)
Exercised 1.19- 15.67 (216,821) -
Canceled 3.94- 37.33 (194,657) 194,657
Additional shares authorized
by stockholders - 2,250,000
--------- ---------
Balance - December 31, 1993 1.19- 47.75 2,137,737 2,750,155
========= =========
Exercisable at
December 31, 1993 1.19- 15.67 382,608
=========
20
Deferred Compensation Plans. Promus maintains deferred
compensation plans under which certain employees and its
directors may defer a portion of their compensation.
Amounts deposited into these plans are unsecured liabilities
of Promus and earn interest at rates approved by the Human
Resources Committee of the Board of Directors. The total
liability included in Deferred credits and other liabilities
for these plans at December 31, 1993 and 1992 was $33.9
million and $29.2 million, respectively. In connection with
the administration of one of these plans, Promus has
purchased company-owned life insurance policies insuring the
lives of certain directors, officers and key employees.
Multi-Employer Pension Plans. Approximately 2,500 of
Promus' employees are covered by union sponsored,
collectively bargained multi-employer pension plans. Promus
contributed and charged to expense $2.0 million, $1.8
million and $1.8 million in 1993, 1992 and 1991,
respectively, for such plans. Information from the plans'
administrators is not sufficient to permit Promus to
determine its share, if any, of unfunded vested benefits.
Note 13 - Nonconsolidated Affiliates
Combined summarized balance sheet information and
income statements of nonconsolidated affiliates which
Promus accounted for using the equity method as of December
31, 1993 and 1992, and for the three fiscal years ended
December 31, 1993, were as follows:
1993 1992 1991
---------- --------- ---------
Combined Summarized
Balance Sheet Information
Current assets $ 76,097 $ 92,308
Land, buildings and
equipment, net 830,620 814,394
Other assets 115,031 127,187
---------- ---------
Total assets 1,021,748 1,033,889
---------- ---------
Current liabilities 144,070 177,912
Long-term debt 747,671 700,261
Other liabilities 112,723 46,247
---------- ---------
Total liabilities 1,004,464 924,420
---------- ---------
Net assets $ 17,284 $ 109,469
========== =========
Combined Summarized
Income Statements
Revenues $ 999,626 $ 942,380 $ 852,558
========== ========= =========
Operating income $ 46,383 $ 53,195 $ 48,546
========== ========= =========
Net loss $ (74,868) $ (9,422) $ (34,357)
========== ========= =========
Promus' share of nonconsolidated affiliates' combined net
losses are reflected in the accompanying Consolidated Statements
of Income as follows:
1993 1992 1991
-------- -------- --------
Pre-interest operating income
(included in Revenues-other) $ 15,592 $ 10,086 $ 10,702
======== ======== ========
Interest expense (included
in Interest expense) $(12,707) $(14,395) $(19,122)
======== ======== ========
Extraordinary gain on
forgiveness of debt (included
in Extraordinary items, net) $ - $ 2,699 $ -
======== ======== ========
Promus' investments in and
advances to nonconsolidated
affiliates
At equity $ 35,893 $ 38,872
At cost 34,157 12,113
-------- --------
$ 70,050 $ 50,985
======== ========
The values of certain Promus joint venture investments have
been reduced below zero due to Promus' intention to fund its
share of operating losses in the future, if needed. The
total amount of these negative investments included in
Deferred credits and other liabilities on the Consolidated
Balance Sheets was $5.1 million and $4.2 million at December
31, 1993 and 1992, respectively.
During the second quarter of 1993, Sodak Gaming, Inc.
(Sodak), an equity investment of Promus, completed an
initial public offering of its common stock. As required by
equity accounting rules, Promus increased the carrying value
of its investment in Sodak by an amount equal to its
pro-rata share of the proceeds of Sodak's offering,
approximately $6.4 million. A corresponding increase was
recorded in the combination of Promus' capital surplus and
deferred income tax liability accounts. As a result of this
offering, Promus' ownership interest in Sodak has fallen
below 20% and, accordingly, the investment is no longer
accounted for on the equity method.
21
Note 14 - Summarized Financial Information
Embassy is a wholly owned subsidiary and the
principal asset of Promus. Summarized financial
information of Embassy as of December 31, 1993 and 1992 and
for each of the three fiscal years ended December 31, 1993,
prepared on the same basis as Promus, was as follows:
1993 1992 1991
---------- ---------- ----------
Current assets $ 165,753 $ 132,540
Land, buildings, riverboats
and equipment, net 1,338,202 1,248,491
Other assets 290,454 209,723
---------- ----------
1,794,409 1,590,754
---------- ----------
Current liabilities 240,438 142,479
Long-term debt 839,804 877,427
Other liabilities 150,646 129,046
Minority interest 14,984 3,668
---------- ----------
1,245,872 1,152,620
---------- ----------
Net assets $ 548,537 $ 438,134
========== ==========
Revenues $1,249,986 $1,109,331 $1,031,112
========== ========== ==========
Operating income $ 302,119 $ 230,491 $ 202,981
========== ========== ==========
Income before income taxes
and minority interest $ 168,027 $ 87,833 $ 52,596
========== ========== ==========
Net income $ 85,167 $ 52,184 $ 30,276
========== ========== ==========
The Indentures governing the terms of Promus' debt contain
certain covenants which, among other things, place limitations on
Embassy's ability to pay dividends and make other restricted
payments, as defined, to Promus. Pursuant to the terms of the most
restrictive covenant regarding restricted payments, approximately
$539.9 million of Embassy's net assets were not available for
payment of dividends to Promus as of December 31, 1993.
Note 15 - Operating Segment Information
Promus is a hospitality company with interests
principally in casino entertainment and hotels. The casino
entertainment segment consists of operating results of owned
casinos and casino hotels. The hotel segment consists of
operating results of owned hotels and hotel management and
licensing activities. The other segment consists of Promus'
risk management division and its investment in a hotel
finance company.
1993 1992 1991
---------- ---------- ----------
Revenues
Casino entertainment $1,015,229 $ 891,104 $ 858,943
Hotel 230,298 218,214 166,991
Other 6,328 3,748 5,178
---------- ---------- ----------
$1,251,855 $1,113,066 $1,031,112
========== ========== ==========
Operating income
Casino entertainment $ 234,967 $ 186,883 $ 170,963
Hotel 66,541 43,362 32,896
Other 2,712 1,171 (878)
---------- ---------- ----------
$ 304,220 $ 231,416 $ 202,981
========== ========== ==========
Identifiable assets
Casino entertainment $1,234,377 $1,002,986 $ 943,318
Hotel 429,796 490,535 492,571
Corporate and other 128,945 103,016 101,197
---------- ---------- ----------
$1,793,118 $1,596,537 $1,537,086
========== ========== ==========
Capital expenditures
Casino entertainment $ 221,094 $ 96,093 $ 45,966
Hotel 22,866 32,081 73,484
Corporate and other 7,237 3,085 2,802
---------- ---------- ----------
$ 251,197 $ 131,259 $ 122,252
========== ========== ==========
Depreciation of buildings,
riverboats and equipment
Casino entertainment $ 54,390 $ 49,039 $ 48,650
Hotel 23,171 20,508 15,188
Corporate and other 3,154 2,158 1,480
---------- ----------- ----------
$ 80,715 $ 71,705 $ 65,318
========== =========== ==========
22
MANAGEMENT'S REPORT ON FINANCIAL
STATEMENTS
Promus is responsible for preparing the financial statements
and related information appearing in this report. Management
believes that the financial statements present fairly its
financial position, its results of operations and its cash
flows in conformity with generally accepted accounting
principles. In preparing its financial statements, Promus is
required to include amounts based on estimates and judgments
which it believes are reasonable under the circumstances.
Promus maintains accounting and other control systems
designed to provide reasonable assurance that financial
records are reliable for purposes of preparing financial
statements and that assets are properly accounted for and
safeguarded. Compliance with these systems and controls is
reviewed through a program of audits by an internal auditing
staff. Limitations exist in any internal control system,
recognizing that the system's cost should not exceed the
benefits derived.
The Board of Directors pursues its responsibility for
Promus' financial statements through its Audit Committee,
which is composed solely of directors who are not Promus
officers or employees. The Audit Committee meets from time
to time with the independent public accountants, management
and the internal auditors. Promus' internal auditors report
directly to the Audit Committee pursuant to gaming
regulations. The independent public accountants have direct
access to the Audit Committee, with and without the presence
of management representatives.
/s/ Michael D. Rose /s/ Michael N. Regan
Michael D. Rose Michael N. Regan
Chairman of the Board and Vice President, Controller and
Chief Executive Officer Chief Accounting Officer
REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS
To the Stockholders and Board of Directors
of The Promus Companies Incorporated:
We have audited the accompanying consolidated balance
sheets of The Promus Companies Incorporated (a Delaware
corporation) and subsidiaries (Promus) as of December 31,
1993 and 1992, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1993. These
financial statements are the responsibility of Promus'
management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Promus as of December 31, 1993 and 1992 and the
results of its operations and its cash flows for each of the
three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen & Co.
Memphis, Tennessee,
February 8, 1994.
23
Quarterly Results of Operations
(Unaudited)
(In thousands, except per share amounts)
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
-------------- -------------- -------------- -------------- --------------
1993
Revenues $269,207 $316,247 $346,710 $319,691 $1,251,855
Operating income 54,857 75,244 100,671 73,448 304,220
Income before income taxes and
minority interests 20,559 39,811 70,207 39,232 169,809
Net income 10,956 22,499 32,935 19,956 86,346
Earnings per share before
extraordinary items (1)(2) 0.12 0.22 0.36 0.19 0.89
Earnings per share (1)(2) 0.11 0.22 0.32 0.19 0.84
1992
Revenues $257,661 $281,159 $315,781 $258,465 $1,113,066
Operating income 46,087 59,409 82,626 43,294 231,416
Income before income taxes and
extraordinary items 9,528 25,491 47,466 5,814 88,299
Net income 5,479 13,910 27,976 5,127 52,492
Earnings per share before
extraordinary items (1)(2) 0.05 0.15 0.28 0.03 0.51
Earnings per share (1)(2) 0.05 0.14 0.28 0.05 0.52
(1) The sum of the quarterly per share amounts may not equal the annual amount
reported, as per share amounts are computed independently for each quarter
while the full year is based on the annual weighted average common and
common equivalent shares outstanding.
(2) Retroactively adjusted for stock splits (see Note 3).
Selected Financial Data
(In millions, except per share amounts)
1993 1992 1991 1990 1989(1)
--------- --------- --------- --------- ---------
Revenues $1,251.9 $1,113.1 $1,031.1 $1,004.2 $944.8
Operating income 304.2 231.4 203.0 193.5 208.5
Income before property
transactions, interest
expense, income taxes, minority
interest and extraordinary items 276.0 212.6 187.4 156.3 159.8
Income before income taxes and
minority interest 169.8 88.3 52.2 44.1 154.6
Income before extraordinary items 91.8 51.4 30.0 23.4 -
Net income 86.3 52.5 30.0 23.4 -
Earnings per share(2)
Before extraordinary items 0.89 0.51 0.33 0.30 -
Net income 0.84 0.52 0.33 0.30 -
Cash dividend per share (2) - - - 10.00 -
Total assets 1,793.1 1,596.5 1,537.1 1,432.8 1,328.7
Long-term debt 839.8 877.4 835.2 903.5 24.7
(1) For years before 1990, the financial statements of Holiday Corporation
were disaggregated to present the combined assets, liabilities, revenues
and certain expenses of those entities which now comprise Promus as if
it had been a separate entity for all years presented. Accordingly, the
financial information presented above for fiscal year 1989 is not intended
to be a complete presentation of Promus' financial position or results of
operations for that year.
(2) Retroactively adjusted for stock splits (see Note 3).
24
INVESTOR INFORMATION
Stock Listings
The Promus Companies Incorporated common stock trades on the
New York Stock Exchange under the ticker symbol PRI. The
stock is also listed on the Midwest, Philadelphia and
Pacific regional stock exchanges. Daily trading activity in
the stock and the stock price may be found in the financial
section of major newspapers under "Promus."
STOCK INFORMATION
Quarterly Stock Information
New York Stock Exchange - Common Stock
Stock Price Per Share*
----------------------------
1993 High Low
--------------------------------------------------------
1st Quarter ............... 25 17 15/32
2nd Quarter ............... 32 22 29/32
3rd Quarter ............... 53 31/32 31 11/32
4th Quarter ............... 55 39
1992 High Low
--------------------------------------------------------
1st Quarter ............... 10 21/32 7 11/32
2nd Quarter ............... 10 11/32 8 13/32
3rd Quarter ............... 12 21/32 9
4th Quarter ............... 19 11 29/32
* Retroactively adjusted for stock splits.
The Promus Companies Incorporated
1023 Cherry Road
Memphis, Tennesse 38117
APPENDIX TO MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ("MD&A")
Page 2 of the MD&A contains a graph entitled "Cash Flows from Operations"
showing the following information:
1991 - $111 million cash flow
1992 - $154 million cash flow
1993 - $254 million cash flow
Page 2 of the MD&A contains a graph entitled "Capital Spending by Segment"
showing the following information:
1991 - $ 46 million capital spending for Casino Entertainment
$ 73 million capital spending for Hotel
1992 - $ 96 million capital spending for Casino Entertainment
$ 32 million capital spending for Hotel
1993 - $221 million capital spending for Casino Entertainment
$ 23 million capital spending for Hotel
Page 2 of the MD&A contains a graph entitled "Return on Equity"
showing the following information:
1991 - 10.4% return on equity
1992 - 13.0% return on equity
1993 - 19.3% return on equity
Page 5 of the MD&A contains a graph entitled "Hotels Added by Year"
showing the following information:
Year Franchised Hotels Company Owned Hotels
---- ----------------- --------------------
1991 58 9
1992 38 0
1993 52 0
Page 5 of the MD&A contains a graph entitled "Five Year Debt Maturities"
showing the following (in millions of dollars):
Approx. Approx. Approx. Approx. Approx.
Due in Due in Due in Due in Due in
Year 1 Year 2 Years 3 Years 4 Years 5 Years
---- ------- ------- ------- ------- -------
1991 $52 $174 $168 $227 $147
1992 4 152 258 142 102
1993 2 2 2 2 411
Page 5 of the MD&A contains a graph entitled "Cash Interest Paid"
showing the following information:
1991 - $106 million
1992 - $ 91 million
1993 - $ 78 million
Page 7 of the MD&A contains a graph entitled "Harrah's Casino
Space by State" showing the following information:
1991 - Nevada 269,100 square feet
New Jersey 61,400 square feet
1992 - Nevada 271,900 square feet
New Jersey 61,200 square feet
1993 - Nevada 272,500 square feet
Mississippi 52,100 square feet
Colorado 27,800 square feet
New Jersey 64,000 square feet
Illinois 20,000 square feet
Page 7 of the MD&A contains a graph entitled "Promus Hotels
System Revenues" showing the following information:
1991 - Embassy Suites $568.3 million
Hampton Inn $417.4 million
Homewood Suites $ 34.7 million
1992 - Embassy Suites $638.0 million
Hampton Inn $556.2 million
Homewood Suites $ 48.7 million
1993 - Embassy Suites $690.3 million
Hampton Inn $568.6 million
Homewood Suites $ 55.8 million
Page 7 of the MD&A contains a graph entitled "Earnings Before
Interest, Taxes, Depreciation and Amortization" showing the
following information:
1991 - $261 million
1992 - $283 million
1993 - $355 million