SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
Commission File No. 1-10410
THE PROMUS COMPANIES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware I.R.S. No. 62-1411755
(State of Incorporation) (I.R.S. Employer
Identification No.)
1023 Cherry Road
Memphis, Tennessee 38117
(Address of principal executive offices)
(901) 762-8600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
------- -------
At March 31, 1995, there were outstanding 102,518,639 shares of the
Company's Common Stock.
Page 1 of 50
Exhibit Index Page 37
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
----------------------------
The accompanying unaudited consolidated condensed financial statements
of The Promus Companies Incorporated (Promus or the Company), a Delaware
corporation, have been prepared in accordance with the instructions to Form
10-Q, and therefore do not include all information and notes necessary for
complete financial statements in conformity with generally accepted
accounting principles. The results for the periods indicated are
unaudited, but reflect all adjustments (consisting only of normal recurring
adjustments) which management considers necessary for a fair presentation
of operating results. Results of operations for interim periods are not
necessarily indicative of a full year of operations. These consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in Promus'
1994 Annual Report to Stockholders.
As discussed in Notes 1 and 2, on January 30, 1995, Promus announced
a planned spin-off, expected to be completed by the end of second quarter
1995, that will split the Company into two independent public corporations,
one for conducting its casino entertainment business and one for conducting
its hotel business. As a result of this announcement, these consolidated
condensed financial statements reflect the hotel business as discontinued
operations.
-2-
THE PROMUS COMPANIES INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
March 31, Dec. 31,
(In thousands, except share amounts) 1995 1994
ASSETS
Current assets
Cash and cash equivalents $ 71,200 $ 84,968
Receivables, including notes receivable of
$658 and $528, less allowance for doubtful
accounts of $10,417 and $9,460 40,932 33,051
Deferred income taxes 19,363 18,979
Supplies 11,194 11,463
Prepayments and other 23,059 23,374
---------- ----------
Total current assets 165,748 171,835
---------- ----------
Land, buildings, riverboats and equipment 1,621,398 1,602,620
Less: accumulated depreciation (489,919) (472,779)
---------- ----------
1,131,479 1,129,841
Net assets of discontinued hotel operations
(Notes 1 and 2) 160,332 143,008
Investments in and advances to
nonconsolidated affiliates 111,499 116,932
Deferred costs and other 174,034 176,349
---------- ----------
$1,743,092 $1,737,965
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 56,563 $ 54,621
Accrued litigation settlement and related
costs (Note 8) 1,873 72,101
Construction payables 2,589 10,879
Accrued expenses 167,321 156,446
Current portion of long-term debt 1,330 1,036
---------- ----------
Total current liabilities 229,676 295,083
Long-term debt 758,150 727,493
Deferred credits and other 73,259 66,735
Deferred income taxes 8,792 7,138
---------- ----------
1,069,877 1,096,449
---------- ----------
Minority interests 20,002 18,079
---------- ----------
Commitments and contingencies (Notes 7 and 8)
Stockholders' equity
Common stock, $0.10 par value,
authorized - 360,000,000 shares,
outstanding - 102,518,639 and 102,402,619
shares (net of 20,060 and 37,172 shares
held in treasury) 10,252 10,240
Capital surplus 358,456 350,196
Retained earnings 288,676 265,574
Deferred compensation related to
restricted stock (4,171) (2,573)
---------- ----------
653,213 623,437
---------- ----------
$1,743,092 $1,737,965
========== ==========
See accompanying Notes to Consolidated Condensed Financial Statements.
-3-
THE PROMUS COMPANIES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
First Quarter Ended
March 31, March 31,
(In thousands, except per share amounts) 1995 1994
Revenues
Casino $298,532 $243,010
Food and beverage 41,885 36,415
Rooms 24,654 23,779
Management fees 2,977 258
Other 23,390 15,768
Less: casino promotional allowances (34,957) (28,998)
-------- --------
Total revenues 356,481 290,232
-------- --------
Operating expenses
Direct
Casino 144,550 112,634
Food and beverage 18,942 18,324
Rooms 7,640 8,063
Depreciation of buildings, riverboats and equipment 18,249 15,872
Development costs 4,248 3,624
Other 85,049 64,785
-------- --------
Total operating expenses 278,678 223,302
-------- --------
Operating profit before corporate expense 77,803 66,930
Corporate expense (5,382) (4,892)
-------- --------
Operating income 72,421 62,038
Interest expense, net of interest capitalized (18,328) (18,037)
Interest expense, net, from nonconsolidated affiliates (3,736) -
Provision for settlement of litigation and related
costs (Note 8) - (646)
Interest and other income 2,033 404
-------- --------
Income before income taxes and minority interest 52,390 43,759
Provision for income taxes (20,357) (16,951)
Minority interests (3,337) (4,723)
-------- --------
Income from continuing operations 28,696 22,085
Discontinued operations
Earnings from hotel operations, net of tax provision
of $6,983 and $5,936 (Note 2) 9,604 6,131
Spin-off transaction expenses, net of tax benefit
of $3,552 (15,198) -
-------- --------
Income before cumulative effect of change in
accounting policy 23,102 28,216
Cumulative effect of change in accounting
policy, net of tax benefit of $4,317 - (7,932)
-------- --------
Net income $ 23,102 $ 20,284
======== ========
Earnings per share
Continuing operations $ 0.28 $ 0.21
Discontinued operations
Earnings of hotel operations, net 0.09 0.07
Spin-off transaction expenses, net (0.15) -
Cumulative effect of change in accounting
policy, net - (0.08)
-------- --------
Earnings per share $ 0.22 $ 0.20
======== ========
Average common shares outstanding 103,014 102,907
======== ========
See accompanying Notes to Consolidated Condensed Financial Statements.
-4-
THE PROMUS COMPANIES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
First Quarter Ended
March 31, March 31,
(In thousands) 1995 1994
Cash flows from operating activities
Net income $ 23,102 $ 20,284
Adjustments to reconcile net income
to cash flows from operating activities
Discontinued operations
Earnings from hotel operations (9,604) (6,131)
Spin-off transaction expenses, before income
taxes 18,750 -
Cumulative effect of change in accounting
policy, before income taxes - 12,249
Depreciation and amortization 22,302 19,717
Other noncash items 5,620 (2,903)
Minority interests share of net income 3,337 4,723
Equity in and distributions of (earnings)
losses of nonconsolidated affiliates 6,503 3,982
Net (gains) losses from asset sales (1,650) -
Net change in long-term accounts (6,015) (375)
Net change in working capital accounts 11,436 14,763
Net change in accrued litigation settlement
and related costs (42,228) -
Tax indemnification payments to Bass (28,000) (4,282)
--------- ---------
Cash flows provided by operating
activities 3,553 62,027
--------- ---------
Cash flows from investing activities
Land, buildings, riverboats and equipment
additions (26,622) (41,813)
Investments in and advances to
nonconsolidated affiliates (5,089) (12,645)
Decrease in construction payables (8,290) (18,110)
Proceeds from asset sales 3,437 -
Other (4,278) (2,913)
--------- ---------
Cash flows used in investing activities (40,842) (75,481)
--------- ---------
Cash flows from financing activities
Net borrowings under Revolving Credit Facility 53,150 15,000
Debt retirements (766) (760)
Minority interest distributions, net of contributions (974) (2,334)
--------- ---------
Cash flows provided by financing
activities 51,410 11,906
--------- ---------
Cash flows from discontinued hotel operations
Net transfers to (from) discontinued hotel operations (25,371) (4,125)
Payment of spin-off transaction expenses (2,518) -
--------- ---------
Cash flows used in discontinued operations (27,889) (4,125)
--------- ---------
Net change in cash and cash equivalents (13,768) (5,673)
Cash and cash equivalents, beginning of period 84,968 58,309
--------- ---------
Cash and cash equivalents, end of period $ 71,200 $ 52,636
========= =========
See accompanying Notes to Consolidated Condensed Financial Statements.
-5-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1995
(UNAUDITED)
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. On January 30, 1995, Promus announced a planned
spin-off, expected to be completed by the end of second quarter 1995, that
will split the Company into two independent public corporations, one for
conducting its casino entertainment business and one for conducting its
hotel business. Promus, which will be renamed Harrah's Entertainment,
Inc., will retain ownership of the casino entertainment business. Promus'
hotel operations, which include the Embassy Suites, Hampton Inn and
Homewood Suites hotel brands, will be transferred to a new entity, named
Promus Hotel Corporation (PHC), the stock of which is to be distributed to
Promus' stockholders on a one-for-two basis (the PHC Spin-off). As a
result of this announcement, Promus' historical financial statements
reflect the hotel business as discontinued operations (see Note 2). The
PHC Spin-off is subject to a number of conditions, including regulatory,
bondholder, bank lender and other third party approvals, receipt of an
opinion from outside legal counsel regarding the tax-free status of the
transaction, market conditions, final approval of the Board of Directors
and stockholder approval.
The consolidated condensed 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 of these
nonconsolidated affiliates in revenues. Promus' proportionate share of
interest expense of such nonconsolidated affiliates is included in interest
expense, net, from nonconsolidated affiliates. (See Note 9.)
Certain amounts for the first quarter ended March 31, 1994, have been
reclassified to conform with the presentation for the first quarter ended
March 31, 1995.
Note 2 - Discontinued Operations
- --------------------------------
As discussed in Note 1, on January 30, 1995, Promus announced a planned
spin-off of its hotel operations. Accordingly, the financial position,
results of operations and cash flows of Promus' hotel business have been
reported as discontinued operations for all periods presented in the
consolidated condensed financial statements. Summarized financial
information of the discontinued operations is presented in the following
tables:
-6-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995
(UNAUDITED)
Note 2 - Discontinued Operations (Continued)
- -------------------------------------------
Net assets of discontinued hotel operations:
March 31, Dec. 31,
1995 1994
Current assets $ 31,375 $ 25,565
Current liabilities (32,870) (34,461)
--------- ---------
Net current liabilities (1,495) (8,896)
Land, buildings and equipment, net 346,507 322,140
Other assets 79,948 72,860
Long-term debt, including allocated debt
(Note 8) (211,458) (189,943)
Other liabilities and deferred taxes (53,170) (53,153)
--------- ---------
Net assets of discontinued hotel
operations $ 160,332 $ 143,008
========= =========
Earnings from discontinued hotel operations:
First Quarter Ended
March 31, March 31,
1995 1994
Revenues $ 63,218 $ 55,555
Costs and expenses (38,275) (35,815)
--------- ---------
Operating income 24,943 19,740
Interest expense (8,407) (7,700)
Other expense 51 27
--------- ---------
Income before income taxes 16,587 12,067
Provision for income taxes (6,983) (5,936)
--------- ---------
Earnings from discontinued hotel operations $ 9,604 $ 6,131
========= =========
In addition to the earnings of its discontinued hotel operations,
Promus' first quarter 1995 operating results also include a charge of
$15.2 million, net of tax, to accrue the estimated expenses of the PHC
Spin-off transaction.
In anticipation of the PHC Spin-off, Embassy Suites, Inc. (Embassy), a
wholly-owned subsidiary of Promus is negotiating a new $350 million bank
facility (Hotel Facility), to be secured by the stock of PHC's material
subsidiaries. Immediately prior to the PHC spin-off, Embassy will
draw approximately $210 million on the Hotel Facility and retire a portion
of Promus' existing corporate debt. Upon consummation of the PHC Spin-off,
the Hotel Facility will be assumed by PHC, and Embassy will be released
from liability. In addition, it is expected that PHC will assume two of
Promus' existing interest rate swaps, with a total notional amount of
$100 million, converting that amount of variable rate debt which will be
outstanding under the Hotel Facility to a fixed rate.
-7-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995
(UNAUDITED)
Note 2 - Discontinued Operations (Continued)
- -------------------------------------------
Promus' corporate debt is not specifically related to either its casino
entertainment or hotel segment. However, corporate debt service
requirements have been met using cash flows provided by both segments.
Therefore, in anticipation of the PHC Spin-off, a portion of Promus'
corporate debt balance, unamortized deferred finance charges and interest
expense has been allocated to discontinued hotel operations for the periods
presented based on the percentage of Promus' existing corporate debt
expected to be retired using proceeds from the Hotel Facility. The
corporate debt allocated to discontinued hotel operations of $209.3 million
and $187.8 million at March 31, 1995 and December 31, 1994, respectively,
together with debt specifically related to PHC of $3.2 million and
$3.3 million at March 31, 1995, and December 31, 1994, respectively, are
included in net assets of discontinued hotel operations in the accompanying
Consolidated Condensed Balance Sheets. In addition, unamortized deferred
finance charges of $3.2 million at March 31, 1995 and December 31, 1994,
and interest expense of $5.0 million and $4.6 million for the first quarter
ended March 31, 1995 and 1994, respectively, have been allocated to
discontinued hotel operations.
In connection with its hotel business, 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 $37 million over the next 30 years. It is expected
that PHC will assume these commitments upon consummation of the PHC Spin-
off, at which time Promus will be released from any obligation.
As part of the planned public offering of common stock of a real estate
investment trust (REIT) which is a franchisee, Embassy has committed to
invest up to $25 million in a partnership owned by the REIT. Upon
completion of the PHC Spin-off, this commitment will be assigned to PHC.
-8-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995
(UNAUDITED)
Note 3 - Change in Accounting Policy
- ------------------------------------
On October 3, 1994, Promus changed its accounting policy effective
January 1, 1994, relating to preopening costs to capitalize such costs as
incurred prior to opening and to expense them upon opening of each project.
Previously, Promus had capitalized preopening costs and amortized them to
expense over 36 months from the date of opening. As a result of this
change, operating results for the first quarter ended March 31, 1994,
reflect the cumulative charge against earnings, net of income taxes, of
$7.9 million, or $0.08 per share, to write off the unamortized preopening
costs balances related to projects opened in prior years.
Note 4 - Long-Term Debt
- -----------------------
During second quarter 1995, Promus announced its intention to redeem the
approximately $18.1 million principal amount outstanding of the 11%
Subordinated Debentures due 1999 of Embassy. The cost of this redemption
is not material.
Promus is negotiating amendments to the current bank facility in
connection with the PHC Spin-off which include, among other things, an
adjustment in its borrowing capacity and modifications to certain financial
covenants.
Interest Rate Agreements
- ------------------------
To manage the relative mix of its debt between fixed and variable rate
instruments, Promus enters into interest rate swap agreements to modify the
interest characteristics of its outstanding debt without an exchange of the
underlying principal amount. As of March 31, 1995 and 1994, Promus was a
party to the following interest rate swap agreements pursuant to which it
pays a variable interest rate in exchange for receiving a fixed interest
rate. The average variable rate paid by Promus was 6.4% and 3.4% at
March 31, 1995 and 1994, respectively, and the average fixed interest rate
received was 5.9% at both dates. The impact of these interest rate swap
agreements on the effective interest rates of the associated debt was as
follows:
Effective Next Semi-
Swap Rate at Annual Rate
Associated Rate March 31, Adjustment
Debt (LIBOR+) 1995 1994 Date Swap Maturity
- ------------- -------- ----- ---- ----------- -------------
10 7/8% Notes
$200 million 4.73% 10.68% 8.14% April 15 October 1997
8 3/4% Notes
$50 million 3.42% 9.58% 6.93% May 15 May 1998
$50 million 3.22% 10.01% 8.69% July 15 July 1998
In accordance with the terms of the interest rate swap agreements, the
effective interest rate on the $200 million 10 7/8% Notes was adjusted on
April 15, 1995, to 11.26%.
-9-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995
(UNAUDITED)
Note 4 - Long-Term Debt (Continued)
- ----------------------------------
Promus also 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, which at March 31,
1995, held Promus' interest rate in a range between 8.7% and 11.9%, expires
in June 1995 and is not expected to be renewed.
During first quarter 1995, Promus entered into six additional interest
rate swap agreements to effectively convert a total of $300 million in
variable rate debt to a fixed rate. Pursuant to the terms of these swaps,
Promus will receive variable payments tied to LIBOR in exchange for Promus'
payments at a fixed interest rate. The fixed rates to be paid by Promus
are summarized in the following table:
Effective Rate
Swap Rate on Associated Debt Swap
Associated Debt Paid (Fixed) at March 31, 1995 Maturity
- ---------------------- ------------ ------------------ ---------
Revolving Credit
Facility (Eurodollar
plus 7/8%)
$50 million 7.915% 8.790% January 1998
$50 million 7.914% 8.789% January 1998
$50 million 7.910% 8.785% January 1998
$50 million 7.863% 8.738% July 1997
$50 million 6.990% 7.865% March 2000
$50 million 6.985% 7.860% March 2000
Subsequent to March 31, 1995, Promus entered into an additional
interest rate swap agreement to convert $50 million in variable rate debt
to a fixed rate. Under the swap agreement, which matures in May 2000,
Promus pays an effective fixed rate of 7.401% and receives a variable rate
which is currently 6.125%.
The differences to be paid or received under the terms of the interest
rate swap agreements and the rate collar transaction described above are
accrued as an adjustment to interest expense for the related debt. Changes
in the effective interest rates to be paid by Promus pursuant to the terms
of its interest rate agreements will have a corresponding effect on its
future cash flows. These agreements contain a credit risk that the
counterparties may be unable to meet the terms of the agreements. Promus
minimizes that risk by evaluating the creditworthiness of its
counterparties, which are limited to major banks and financial
institutions, and does not anticipate nonperformance by the counterparties.
As a component of a transaction whereby Promus effectively secured an
option to a site for a potential casino, Promus has guaranteed a third
party's $25 million variable rate bank loan. Promus also has entered into
an interest rate swap agreement in which Promus receives a fixed interest
rate of 7% from the third party and pays the variable interest rate of the
subject debt, which on January 30, 1995, was adjusted to LIBOR plus 1.0%.
The negative value of the swap, which is marked to market by Promus, was
approximately $0.4 million at March 31, 1995. Adjustments to the swap's
market value are included in interest expense in the Consolidated
Statements of Income. Promus' guarantee and the swap agreement expire
December 1, 1996, and are also subject to
-10-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995
(UNAUDITED)
Note 4 - Long-Term Debt (Continued)
- ----------------------------------
earlier termination upon the occurrence of certain events. As with the
other interest rate swap agreements entered into by Promus, this agreement
contains an element of risk that the counterparty may be unable to meet the
terms of the agreement. Promus has minimized such exposure by obtaining a
security interest in certain assets of the third party.
Note 5 - Stockholders' Equity
- -----------------------------
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
Note 6 - Supplemental Disclosure of Cash Paid for Interest and Taxes
- --------------------------------------------------------------------
The following table reconciles Promus' interest expense, net of
interest capitalized, per the consolidated condensed statements of income,
to cash paid for interest:
First Quarter Ended
March 31, March 31,
(In thousands) 1995 1994
Interest expense, net of amount capitalized $18,328 $18,037
Adjustments to reconcile to cash paid for
interest
Net change in accruals 11,289 (3,932)
Amortization of deferred finance charges (728) (647)
Net amortization of discounts and premiums (25) (43)
------- -------
Cash paid for interest, net of amount
capitalized $28,864 $13,415
======= =======
Cash payments for income taxes, net of refunds $13,220 $4,454
======= =======
Note 7 - Commitments and Contingent Liabilities
- -----------------------------------------------
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 March 31, 1995,
Promus has guaranteed third party loans and leases of $98 million, which
are secured by certain assets, and has other contractual commitments, of
$30 million, excluding amounts previously recorded.
See Note 9 for discussion of the completion guarantee provided to
Harrah's Jazz Company by Promus related to development of the New Orleans
casino.
-11-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995
(UNAUDITED)
Note 7 - Commitments and Contingent Liabilities (Continued)
- ----------------------------------------------------------
Guarantee of Insurance Contract
-------------------------------
Promus has guaranteed the value of a guaranteed investment contract
with an insurance company held by Promus' defined contribution savings
plan. Promus has also 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 March 31, 1995, is approximately $7.8 million.
Self-Insurance
--------------
Promus is self-insured for various levels of general liability,
workers' compensation and employee medical coverage. Insurance claims and
reserves include accruals of estimated settlements for known and
anticipated claims, as well as accruals of actuarial estimates of incurred
but not reported claims.
Severance Agreements
--------------------
Promus has severance agreements with eleven 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
March 31, 1995, that would have been payable under the agreements to these
executives based on earnings and stock options aggregated approximately
$35.2 million.
Tax Sharing Agreements
----------------------
Under the terms of the Settlement between Promus and Bass PLC (Bass)
(see Note 8), the Tax Sharing Agreement entered in connection with the
February 7, 1990, spin-off (the Spin-off) of the stock of Promus to
stockholders of Holiday Corporation has been terminated. Under the Tax
Sharing Agreement, Promus was liable, with certain exceptions, for taxes of
Holiday and its subsidiaries for all pre-1990 Spin-off tax periods. Bass
was obligated under the same agreement to pay Promus the amount of any tax
benefits realized by Holiday as a result of adjustments to pre-1990 Spin-
off tax periods of Holiday and its subsidiaries. Under the provisions of
the Settlement, Promus will remain obligated for certain tax issues related
to Promus and its subsidiaries for the pre-1990 Spin-off tax periods and
certain other items related to the final resolution of disputed issues from
the Internal Revenue Service (IRS) examination of income tax returns for
1987 through the 1990 Spin-off date. A protest defending the taxpayers'
position on all disputed issues for these periods was filed with the IRS
during third quarter 1993 and negotiations to resolve these issues
continue. Final resolution of the disputed issues is not expected to have
a material adverse effect on Promus' consolidated financial position or
its results of operations.
-12-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995
(UNAUDITED)
Note 8 - Litigation
- -------------------
In March 1995, Promus entered into a settlement agreement (the
Settlement) with Bass of all claims related to the Merger Agreement and Tax
Sharing Agreement arising from the 1990 Spin-off of Promus and acquisition
of the Holiday Inn hotel business by Bass. As a result of the Settlement,
a charge of $49.2 million was recorded in fourth quarter 1994's operating
results to accrue the estimated cost of the Settlement, the related legal
fees and other associated expenses. Operating results for first quarter
1994 include $0.6 million of legal fees and other expenses incurred related
to Promus' defense of this litigation. The provision for settlement of
litigation and related costs is not expected to be deductible for federal
income tax purposes.
Promus is 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 material adverse effect upon
Promus' consolidated financial position or its results of operations.
13-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995
(UNAUDITED)
Note 9 - Nonconsolidated Affiliates
- -----------------------------------
Harrah's Jazz Company
- ---------------------
A Promus subsidiary owns an approximate 53% equity interest in Harrah's
Jazz Company (Harrah's Jazz), the partnership developing the sole land-
based casino permitted by law to operate in Orleans Parish, Louisiana. One
of Promus' partners in Harrah's Jazz has an option to purchase an
additional equity interest of approximately 14.6% from Promus for
$33.3 million at any time until 120 days after opening of the temporary
casino. Due to the existence of this option and its likelihood of being
exercised, Promus' ownership of a majority interest in Harrah's Jazz is
expected to be temporary and voting control of the partnership in any event
continues to be shared equally by each partner during the option period.
As a result, Harrah's Jazz is not consolidated into Promus' financial
statements.
Summarized balance sheet and income statement information for Harrah's
Jazz, which Promus accounted for using the equity method, as of March 31,
1995 and December 31, 1994, and for the first quarter ended March 31, 1995
and 1994 were as follows:
March 31, Dec. 31,
1995 1994
Summarized Balance Sheet Information
Current assets $411,213 $454,295
Land, buildings and equipment, net 123,587 69,608
Other assets 140,964 141,488
-------- --------
Total assets 675,764 665,391
-------- --------
Current liabilities 52,208 23,894
Long-term debt 510,000 510,000
-------- --------
Total liabilities 562,208 533,894
-------- --------
Net assets $113,556 $131,497
======== ========
First Quarter Ended
March 31, March 31,
1995 1994
Summarized Statements of Operations
Revenues $ - $ -
======== ========
Operating loss $ (8,193) $ (6,519)
======== ========
Net loss $(17,941) $ (6,734)
======== ========
-14-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995
(UNAUDITED)
Note 9 - Nonconsolidated Affiliates (Continued)
- ----------------------------------------------
The current estimated cost of the project is $816 million, of which
approximately $336 million had been incurred as of March 31, 1995, and is
being financed through a combination of partner capital contributions,
public debt securities, bank debt and operating cash flow from the
temporary casino being operated by Harrah's Jazz during construction of the
permanent casino. If the funds available from these sources are
insufficient to meet the costs of developing, constructing and opening
the temporary and permanent casinos, Promus has agreed to loan Harrah's
Jazz the funds necessary to complete the project, subject to certain
important conditions and exceptions, in exchange for a $12.2 million fee to
be paid by Harrah's Jazz.
Other
- -----
Condensed financial information relating to a foreign casino property
currently under development and a restaurant subsidiary has not been
presented since their operating results and financial position are not
material to Promus either individually or in the aggregate.
Promus' share of nonconsolidated affiliates' combined net operating
results are reflected in the accompanying consolidated condensed statements
of income as follows:
First Quarter Ended
March 31, March 31,
(In thousands) 1995 1994
Pre-interest operating loss (included in
Revenues-other) $ (2,803) $ (3,226)
======== ========
Interest expense (included in Interest
expense from nonconsolidated affiliates) $ (3,736) $ -
======== ========
March 31, Dec. 31,
(In thousands) 1995 1994
Promus' investments in and advances to
nonconsolidated affiliates
At equity
Harrah's Jazz $ 65,769 $ 74,385
Other 21,079 18,320
At cost 24,651 24,227
-------- --------
$111,499 $116,932
======== ========
-15-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995
(UNAUDITED)
Note 10 - Summarized Financial Information
- ------------------------------------------
Embassy is a wholly-owned subsidiary and the principal asset of Promus.
Summarized financial information of Embassy as of March 31, 1995 and
December 31, 1994, and for the first quarter ended March 31, 1995 and 1994,
prepared on the same basis as Promus, was as follows:
March 31, Dec. 31,
(In thousands) 1995 1994
Current assets $ 162,927 $ 171,445
Land, buildings, riverboats and
equipment, net 1,131,480 1,129,841
Net assets of discontinued hotel operations 160,332 143,008
Other assets 285,297 293,015
---------- ----------
1,740,036 1,737,309
---------- ----------
Current liabilities 212,049 280,295
Long-term debt 758,150 727,492
Other liabilities 83,295 74,043
Minority interest 20,003 18,267
---------- ----------
1,073,497 1,100,097
---------- ----------
Net assets $ 666,539 $ 637,212
========== ==========
First Quarter Ended
March 31, March 31,
(In thousands) 1995 1994
Revenues $356,197 $289,630
======== ========
Operating income $ 77,247 $ 65,223
======== ========
Income from continuing operations $ 28,334 $ 20,975
======== ========
Net income $ 22,740 $ 19,174
======== ========
The agreements 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.
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 $657.6 million at March 31, 1995.
-16-
Item 2. Management's Discussion and Analysis
---------------------------------------------
of Financial Condition and Results of Operations
------------------------------------------------
Since its creation on February 7, 1990, The Promus Companies
Incorporated (Promus) has been a leader in the hospitality industry,
operating four major brands: Harrah's, one of the premier names in the
casino entertainment industry, and Embassy Suites, Hampton Inn and Homewood
Suites, each leading hotel brands. On January 30, 1995, Promus announced a
planned spin-off, expected to be completed by the end of second quarter
1995, that will split the Company into two independent public corporations,
one for conducting its casino entertainment business and one for conducting
its hotel business. Promus, which will be renamed Harrah's Entertainment,
Inc., will retain ownership of the casino entertainment business. Promus'
hotel operations will be transferred to a new entity, to be named Promus
Hotel Corporation (PHC), the stock of which is to be distributed to Promus'
stockholders on a one-for-two basis (the PHC Spin-off).
As a result of this announcement, Promus' historical financial
statements reflect the hotel business as discontinued operations. The PHC
Spin-off is subject to a number of conditions, including regulatory,
bondholder, bank lender and other third-party consents, receipt of an
opinion from outside legal counsel regarding the tax-free status of the
transaction, market conditions, final approval of the Board of Directors
and stockholder approval.
RESULTS OF CONTINUING OPERATIONS
- --------------------------------
Overall
- -------
First Quarter Percentage
(in millions, except ---------------- Increase
earnings per share) 1995 1994 (Decrease)
------- ------- -----------
Revenues $ 356.5 $ 290.2 22.9%
Operating income 72.4 62.0 16.8%
Income from continuing
operations 28.7 22.1 29.9%
Net income 23.1 20.2 14.4%
Earnings per share
Continuing operations 0.28 0.22 27.3%
Net income 0.22 0.20 10.0%
Operating margin 20.3% 21.4% (1.1)pts
-17-
Promus' first quarter 1995 operating results include the combined
results of its ownership and/or management of 15 casino entertainment
properties located in Arizona, Colorado, Illinois, Louisiana, Mississippi,
Missouri, Nevada and New Jersey. Most of first quarter 1995's growth
occurred within the Riverboat Casino Entertainment Division as a result of
an increase in the number of operating riverboat casinos during first
quarter 1995 versus the comparable prior year period. First quarter 1995
also includes management fees from Harrah's Phoenix Ak-Chin, Promus' first
managed Indian gaming operation, which opened on December 27, 1994. This
increase in the number of owned and managed casinos resulted in record
revenues and operating income for first quarter 1995.
The increases in operating income provided by the new casino
properties were partially offset by lower operating income at Promus'
Mississippi and Northern Nevada properties. The Mississippi properties
experienced lower gaming volume as the amount of competition has increased
over the past twelve months. Northern Nevada experienced unfavorable
weather conditions through much of first quarter 1995.
Income from continuing operations for first quarter 1995 also
increased as a result of the additional casino entertainment projects now
open. Income from discontinued hotel operations for first quarter 1995
increased over first quarter 1994 due to system growth and improved
operating efficiencies. Net income for first quarter 1995 increased 14%
over first quarter 1994, despite the inclusion of higher one-time charges.
First quarter 1995's financial results include a $15.2 million charge, net
of tax, for estimated costs associated with the PHC Spin-off. 1994's
first quarter included a charge of $7.9 million, net of tax, representing
the cumulative effect of a change in Promus' accounting policy for
preopening costs.
Promus' overall operating margin declined 1.1 percentage points for
first quarter 1995 compared with the prior year period primarily due to the
combination of increased competition in Mississippi markets and unfavorable
weather conditions in Northern Nevada.
The following table summarizes operating profit before preopening
costs and corporate expense for the twelve month periods ended March 31,
1995, 1994 and 1993 in millions of dollars and as a percent of the total
for each of Promus' casino entertainment divisions:
-18-
Operating Profit Contribution
for the Twelve Months
Ended March 31,
--------------------------------------------
In Millions of Dollars Percent of Total
---------------------- --------------------
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
Riverboat $136 $ 60 $ - 42% 23% -
Atlantic City 80 68 63 24 26 34
Southern Nevada 74 79 69 23 30 36
Northern Nevada 70 79 69 21 30 36
Indian Gaming 2 - - 1 - -
New Orleans (8) (3) - (2) (1) -
Development costs (22) (12) (7) (7) (5) (3)
Other (7) (7) (6) (2) (3) (3)
---- ---- ---- --- --- ---
Total Promus $325 $264 $188 100% 100% 100%
==== ==== ==== === === ===
Riverboat Division
------------------
First Quarter Percentage
----------------- Increase/
(in millions) 1995 1994 (Decrease)
-------- ------- -----------
Revenues $ 137.8 $ 83.1 65.8%
Operating income 40.9 31.5 29.8%
Operating margin 29.7% 37.9% (8.2)pts
Gaming volume $1,736.5 $ 790.5 119.7%
Revenues and operating income for first quarter 1995 increased over
first quarter 1994 primarily due to growth in the number of operating
casinos. As of the end of first quarter 1995, the Riverboat Division
included the operations of six riverboat casinos, as compared to four in
operation at the end of first quarter 1994.
First quarter 1995's overall operating margin for the Riverboat
Division declined from first quarter 1994, reflecting primarily decreased
operating margins at Promus' Mississippi casinos due to increasingly
intense competition in those markets. Although revenues and operating
income for first quarter 1995 at the Mississippi properties decreased as a
result of the increased
-19-
competition, cost management initiatives have allowed the properties to
maintain profitability as these markets mature. Operating margins at the
Mississippi properties, however, are not expected to return to the levels
achieved during the period of limited competition. The overall operating
margin for the Riverboat Division remains higher than margins for other
divisions due to the operational differences between a riverboat facility
and conventional land-based properties.
Southern Nevada Division
------------------------
First Quarter Percentage
----------------- Increase/
(in millions) 1995 1994 (Decrease)
------ ------ -----------
Revenues $ 72.3 $ 71.4 1.3%
Operating income 18.0 18.3 (1.6)
Operating margin 24.9% 25.6% (0.7)pts
Gaming volume $726.9 $754.9 (3.7)%
Gaming volume for this Division decreased in first quarter 1995 from
first quarter 1994 levels. Harrah's Las Vegas had gaming revenues slightly
higher than the prior year as a result of a 5.7% increase in slot revenue,
while increased table game volume was offset by a lower win percentage.
Higher nongaming revenues, particularly lodging, contributed to record
revenues and operating income in first quarter 1995. The higher overall
Las Vegas revenue was offset by lower Laughlin revenues and operating
income as this market continues to be affected by regional competition,
especially from the Las Vegas market.
Northern Nevada Division
------------------------
First Quarter Percentage
--------------- Increase/
(in millions) 1995 1994 (Decrease)
------ ------ -----------
Revenues $ 65.0 $ 70.3 (7.5)%
Operating income 7.6 13.1 (42.0)%
Operating margin 11.7% 18.6% (6.9)pts
Gaming volume $774.3 $808.6 (4.2)%
-20-
Snowstorms in Northern Nevada and heavy rainfall in key California
feeder markets during January and March 1995 resulted in lower guestcounts,
lower gaming volume, revenues and operating income for first quarter 1995
compared with first quarter 1994. During February 1995, the only month in
the quarter with favorable weather conditions, operating income for the
Division increased 42% over the prior year.
Atlantic City
-------------
First Quarter Percentage
---------------- Increase/
(in millions) 1995 1994 (Decrease)
------ ------ -----------
Revenues $ 77.3 $ 65.8 17.5%
Operating income 15.8 10.4 51.9%
Operating margin 20.4% 15.8% 4.6pts
Gaming volume $809.0 $684.6 18.2%
Atlantic City's revenue increased in first quarter 1995 as a result of
slot volume growth. This increased volume can be attributed to
unseasonably mild weather experienced during first quarter 1995, highly
focused marketing efforts and a casino renovation completed since first
quarter 1994. Cost management initiatives successfully reduced first
quarter 1995 incremental operating expenses, resulting in operating margin
improvement.
Harrah's New Orleans
--------------------
Revenues and operating income for first quarter 1995 and 1994 include
losses of $2.9 million and $3.2 million, respectively, representing Promus'
pro-rata share of preoperating losses incurred by the partnership
developing Harrah's New Orleans. (See Capital Spending and Development
section for further discussion of the current status of this development
project.)
-21-
Other Factors Affecting Income Per Share
- ----------------------------------------
First Quarter Percentage
(Income)/Expense -------------- Increase/
(in millions) 1995 1994 (Decrease)
----- ----- -----------
Corporate expense $ 5.4 $ 4.9 10.2%
Interest expense 22.1 18.0 22.8%
Provision for settlement of
litigation and related costs - 0.6 N/M
Other income (2.0) (0.4) N/M
Effective tax rate 41.5% 44.6% (3.1)pts
Minority interests $ 3.3 $ 4.7 (29.8)%
Discontinued operations
Earnings from hotel operations,
net of income taxes (9.6) (6.6) 45.5%
Spin-off transaction expenses,
net of income taxes (15.2) - N/M
Cumulative effect of change
in accounting policy,
net of income taxes - 7.9 N/M
Corporate expense in first quarter 1995 increased from the first
quarter 1994 level, due primarily to the inclusion in first quarter 1994 of
reimbursement of certain expenses. Interest expense increased in first
quarter 1995 over first quarter 1994 primarily as a result of the inclusion
of Promus' share of Harrah's New Orleans interest expense.
The provision for settlement of litigation and related costs included
legal fees and other expenses incurred during first quarter 1994 related to
Promus' defense of litigation associated with the 1990 Spin-off of Promus
and the acquisition of the Holiday Inn business by Bass PLC. A settlement
agreement was reached in March 1995 and accrued in fourth quarter 1994.
Payment under the settlement agreement was made using funds provided by
Promus' revolving credit facility and by operations. Other income
increased in first quarter 1995 over first quarter 1994 as a result of a
gain on the sale of certain non-operating property.
The effective tax rates for first quarter 1995 and 1994 are higher
than the federal statutory rate primarily due to state income taxes.
Minority interests reflect joint venture partners' shares of income at
joint venture riverboat casinos.
-22-
As previously discussed, on January 30, 1995, Promus announced its
plans to split the Company into two independent public corporations.
Accordingly, the operating results of Promus' hotel business are segregated
and reported as discontinued operations in the accompanying consolidated
financial statements (see further discussion below). The prior year
consolidated statements have been restated to conform to the 1995
presentation.
First quarter 1995 also includes a charge of $15.2 million, net of tax,
to accrue the estimated expenses of the PHC Spin-off transaction. This
amount represented management's best estimate of the transaction expenses,
including estimated fees to be paid to third parties to consent to the
transaction. Actual transaction expenses may increase prior to the consummation
of the transaction, and any increases may be material to Promus' results of
operations in the quarter in which such expenses are charged. It is anticipated
that any additional transaction expenses will be charged against earnings in
second quarter 1995.
Effective January 1, 1994, Promus changed its accounting policy
related to preopening costs to capitalize such costs as incurred prior to
opening and to expense them upon opening of each project. Previously,
Promus had capitalized such costs and amortized them to expense over 36
months from the date of opening. Operating results for first quarter 1994
reflect the cumulative charge against earnings, net of income taxes, of
$7.9 million, or $0.08 per share, to write off the unamortized preopening
costs balances related to projects opened in prior years (see Note 3 to the
accompanying consolidated financial statements).
-23-
Discontinued Hotel Operations
- -----------------------------
First Quarter
------------- Percentage
(in millions) 1995 1994 Increase
----- ----- ----------
Revenues $63.2 $55.6 13.7%
Operating income 24.9 19.7 26.4%
Interest expense (8.4) (7.7) 9.1%
Provision for income taxes (7.0) (5.9) 18.6%
Net earnings of discontinued
hotel operations 9.6 6.1 57.4%
Operating Margin 39.4% 35.4% 4.0pts
System-wide RevPAR/S
Embassy Suites $75.88 $72.26 5.0%
Hampton Inn 37.97 35.14 8.1%
Homewood Suites 59.34 55.28 7.3%
Number of Hotels
Company-owned
Embassy Suites 9 9
Hampton Inn 15 15
Homewood Suites 8 8
Franchised, including
managed properties
Embassy Suites 100 98
Hampton Inn 439 363
Homewood Suites 19 18
Revenues increased in first quarter 1995 over the comparable prior year
period as a result of improvement in revenue per available room/suite
(RevPAR/S) at all three brands and increased franchise fees due to system
growth. Operating income was further increased since these revenues are
high-margin and as a result of lower operating expenses at company-owned
hotels. Interest expense for both quarters includes an allocation of
Promus' corporate interest expense and has increased due to higher hotel
debt levels, primarily to purchase a new PHC office building, and higher
interest rates on variable rate debt.
In connection with the proposed PHC Spin-off, Promus is negotiating a
new $350 million bank facility (the PHC Facility) to be secured by the stock
of PHC's material subsidiaries and to be assumed by PHC upon the
Spin-off. Prior to the PHC Spin-off, it is expected that approximately
$210 million will be drawn on the PHC Facility and used to retire a portion
of Promus' existing outstanding debt. In addition, it is expected that PHC
will assume two of Promus' existing interest rate swaps, with a notional
amount of $100 million, converting that amount of variable rate debt which
will be outstanding under the Hotel Facility to a fixed rate.
-24-
Promus' corporate debt is not specifically related to either its
casino entertainment or hotel segment. However, corporate debt service
requirements have been met using cash flows provided by both segments.
Therefore, in anticipation of the PHC Spin-off, a portion of Promus'
corporate debt balance, unamortized deferred finance charges and interest
expense has been allocated to discontinued hotel operations for the periods
presented based on the percentage of Promus' existing corporate debt
expected to be retired using proceeds from the Hotel Facility. The
corporate debt allocated to discontinued hotel operations of $209.3 million
and $187.8 million at March 31, 1995 and December 31, 1994, respectively,
together with debt specifically related to PHC of $3.2 million and
$3.3 million at March 31, 1995 and December 31, 1994, respectively, are included
in net assets of discontinued hotel operations in the accompanying
Consolidated Condensed Balance Sheets. Unamortized deferred finance
charges of $3.2 million at March 31, 1995 and December 31, 1994, and
interest expense of $5.0 million and $4.6 million for the first quarter
ended March 31, 1995 and 1994, respectively, have been allocated to
discontinued hotel operations.
CAPITAL SPENDING AND DEVELOPMENT
- --------------------------------
Promus continues to pursue development opportunities within the casino
entertainment industry. These opportunities include traditional land-based
casinos, riverboat casinos, Indian gaming projects and international casino
projects.
Harrah's New Orleans
--------------------
Harrah's Jazz Company (Harrah's Jazz), in which a Promus subsidiary is
one of three partners, is currently developing the sole land-based casino
permitted by law to operate in Orleans Parish, Louisiana. Harrah's Jazz
has leased and refurbished the New Orleans Municipal Auditorium for use as
a temporary casino. This temporary casino, which contains approximately
76,000 square feet of casino space, opened on May 1, 1995, and will operate
until the permanent casino entertainment facility is open. Harrah's Jazz has
also leased the site of the City's former Rivergate Convention Center, the
legally mandated site of the permanent casino, and construction is currently
underway on the 400,000 square foot facility (approximately 200,000 square
feet of casino space). The permanent facility is expected to open during
second quarter 1996, but the timing of completion remains subject to certain
pending legal issues, including various litigation affecting the project.
-25-
The current estimated project cost of $816 million, which includes
both the temporary casino and permanent casino, is being financed through a
combination of partner capital contributions, public debt securities, bank
debt and operating cash flow from the temporary casino. Concurrent with
closing of financing, Promus contributed a total of $90 million, including
$33.3 million contributed on behalf of another partner. As a result of the
Promus subsidiary's contribution on its partner's behalf, Promus currently
holds an approximate 53% equity interest in the Partnership. The partner
has the option to reacquire a 14.6% portion of the incremental ownership
percentage from Promus by making capital contributions within 120 days of
the opening of the temporary casino. Because Promus' ownership of this
majority interest is expected to be temporary and voting control continues
to be shared equally by each partner during the option period, Harrah's
Jazz is not consolidated into Promus' financial statements. Upon full
repayment of the capital contribution by Promus' partner, Promus'
subsidiary's equity interest in the Partnership will be approximately
38.3%.
If the funds available from the partner capital contributions, public
debt securities, bank debt and operating cash flows are insufficient to
meet the costs of developing, constructing and opening the temporary and
permanent casinos, Promus has also agreed to loan Harrah's Jazz the funds
necessary to complete the project, subject to certain conditions and
exceptions, in exchange for a fee to be paid by Harrah's Jazz.
Riverboat Casino Development
----------------------------
In February 1995, the Shreveport Rose, which contained 19,500 square
feet of casino space, was replaced by the Shreve Star, a riverboat casino
with 30,000 square feet of casino space. This exchange resulted in
approximately 27% more gaming positions at Harrah's Shreveport. The
Shreveport Rose was moved from Shreveport to a dockyard in Louisiana, where
it will be refurbished at a cost of approximately $5.5 million and will be
available for use at another site. The costs associated with exchanging
the riverboats and with maintaining the Shreveport Rose until it is
returned to service are not material.
In addition to the six riverboat casinos now operating, Promus
previously announced a second riverboat casino project in the state of
Missouri to be located in Maryland Heights, a suburb of St. Louis.
Approximately $39 million had been incurred on the project as of the end of
first quarter 1995, of which $11 million is expected to be paid during the
remainder of 1995. In March 1995, Promus announced plans to form a joint
venture with another casino entertainment company to jointly develop a
riverboat casino entertainment complex in Maryland Heights. Each company
will develop and operate its separately branded riverboat casino, and
Promus and its partner will jointly develop the related shoreside
facilities. Subject to the receipt of the necessary approvals,
construction is expected to begin in third quarter 1995 and be completed in
third quarter 1996.
-26-
During March 1995, the Mississippi Gaming Commission approved the
application of a minority partner in the Harrah's Tunica casino
entertainment property. The partnership agreement, which was effective on
March 30, 1995, is retroactive to the property's opening. In anticipation
of the approval of this agreement, the minority partner's share of the
property's income has been deferred as minority interest since operations
began. As a result, the impact of the approval of this agreement on
Promus' consolidated financial statements is not material.
On May 11, 1995, Promus submitted the high bid through a public
bankruptcy auction to acquire the former Southern Belle Casino in Tunica
County, Mississippi, at a cost of $34.2 million. The purchase is subject to
approval of the courts. Promus intends to open the new facility by first
quarter 1996 after completion of a planned renovation of the property. Promus
will continue to operate the current Harrah's Tunica Casino, while it also
evaluates its long-term options for this facility.
Indian Lands
------------
Promus opened its first managed Indian gaming facility on Native
American land on December 27, 1994. Harrah's Ak-Chin Phoenix is located on
the Maricopa Indian Reservation approximately 25 miles south of Phoenix and
90 miles north of Tucson. The casino entertainment facility is owned by
the Ak-Chin tribe and is managed by Promus for a fee under terms of a
management contract with a five year term. Though Promus did not fund the
development, it has guaranteed the tribe's borrowing for development costs
of the casino entertainment facility up to $26.2 million. In conjunction
with this guaranty, Promus has a first lien on the personal property
(tangible and intangible) of the casino enterprise. The Ak-Chin tribe has
also granted Promus a limited waiver of its sovereign immunity to allow
Promus to pursue its rights under the contracts between the parties and
to enforce collection efforts as to only the above-referred assets.
Additionally, Sodak Gaming, Inc., has provided a guarantee to Promus for
one-half of this financing.
In April 1995, Promus received approval from the National Indian
Gaming Commission for gaming management and development agreements between
Harrah's and the Upper Skagit Indian Tribe. In May 1995, construction
began on a planned $22.8 million casino entertainment facility
approximately 70 miles north of Seattle, Washington. Though Promus will
not fund the development, it anticipates guaranteeing the related bank
financing.
Promus has also previously announced agreements with certain other
Indian tribes, which are in various stages of negotiation and are subject
to various conditions, including approval from appropriate government
agencies, prior to substantive financial involvement by Promus.
-27-
International
-------------
Promus and its local partner continue construction of a casino in
Auckland, New Zealand expected to contain approximately 55,000 square feet
of casino space. Promus owns a 20% interest in the partnership and will
manage the facility for a fee. Of Promus' total expected capital
contribution of US$30.5 million, US$21.2 million had been contributed at
March 31, 1995. Construction of the US$335 million project, to be financed
through a combination of partner contributions and non-recourse debt, is
expected to be completed and the facility to be in operation in first
quarter 1996.
Existing Casino Facilities
--------------------------
Promus continues construction of a $28.6 million company-owned hotel
under a license agreement with Hampton Inn, on the site of Harrah's Reno.
The 408-room, 26-story hotel is expected to begin operations in fourth
quarter 1995. Although Promus is considering additions of casino square
footage or hotel rooms at certain of its other existing casino
entertainment properties, no major additions are currently underway. On-
going refurbishment and maintenance of Promus' casino entertainment
facilities continues to maintain the quality standards set for these
properties.
Overall
-------
In addition to the projects discussed above, Promus continues to pursue
additional casino entertainment development opportunities in various
possible jurisdictions across the United States and abroad. Until
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. Construction-related
costs incurred after the receipt of necessary approvals are capitalized and
depreciated over the estimated useful life of the resulting asset. Other
preopening costs are deferred as incurred and expensed at the respective
property's opening.
A number of these projects, if they go forward, may require,
individually and in the aggregate, a significant capital commitment and, if
completed, may result in 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. Cash needed to finance
projects currently under development as well as additional projects being
pursued by Promus will be made
-28-
available from operating cash flows, the Bank Facility (see Debt and Liquidity
section), joint venture partners, specific project financing, guarantees by
Promus of third party debt and, if necessary, Promus debt and/or equity
offerings. Promus' capital spending during first quarter 1995 totalled
approximately $32 million. Anticipated 1995 capital expenditures are
estimated at $175 million to $225 million, including the projects discussed
in this Capital Spending and Development section as well as other projects,
refurbishment of existing facilities and other projects.
DEBT AND LIQUIDITY
- ------------------
Bank Facility
- -------------
Promus currently has in place a $650 million reducing revolving and
letter of credit facility (the Facility). At March 31, 1995, $541.7 million
in borrowings was outstanding under the Facility, with an additional
$24.4 million committed to back certain letters of credit. These facility
commitments resulted in $83.9 million of the Facility being available to
Promus as of March 31, 1995. In connection with the PHC Spin-off, Promus
is currently negotiating amendments to the Facility which are expected to
include, among other things, an adjustment in its borrowing capacity
available under the Facility and modifications to certain financial covenants.
The retirement of the 9% Notes in February 1995 resulted in a
reduction of the letter of credit facility portion from $255 million to
$50 million.
Interest Rate Agreements
- ------------------------
To manage the relative mix of its debt between fixed and variable rate
instruments, Promus enters into interest rate swap agreements to modify the
interest characteristics of its outstanding debt without an exchange of the
underlying principal amount. As of March 31, 1995, Promus was a party to
the following interest rate swap agreements which effectively convert
certain fixed rate debt to variable rates:
Effective Next Semi-
Swap Rate at Annual Rate
Associated Rate March 31, Adjustment
Debt (LIBOR+) 1995 Date Swap Maturity
- -------------- ------ --------- ----------- -------------
10 7/8% Notes
$200 million 4.73% 10.68% April 15 October 1997
8 3/4% Notes
$50 million 3.42% 9.58% May 15 May 1998
$50 million 3.22% 10.01% July 15 July 1998
-29-
In accordance with the terms of the interest rate swap agreements, the
effective interest rate on $200 million of the 10 7/8% Notes was adjusted on
April 15, 1995, to 11.26%.
During first quarter 1995, Promus entered into six additional interest
rate swap agreements to effectively convert a total of $300 million in
variable rate debt to a fixed rate. All six swaps, which are summarized
in the following table, reset on a quarterly basis.
Effective Rate
Swap Rate on Associated Swap
Associated Debt Paid (Fixed) Debt at Inception Maturity
- ----------------------- ----------- ----------------- --------
Revolving Credit
Facility
(Eurodollar plus 7/8%)
$50 million 7.915% 8.790% January 1998
$50 million 7.914% 8.789% January 1998
$50 million 7.910% 8.785% January 1998
$50 million 7.863% 8.738% July 1997
$50 million 6.990% 7.865% March 2000
$50 million 6.985% 7.860% March 2000
Subsequent to March 31, 1995, Promus entered into an additional
interest rate swap agreement to convert $50 million in variable rate debt
to a fixed rate. Under the swap agreement, which matures May 2000, Promus
pays an effective fixed rate of 7.401% and receives a variable rate which is
currently 6.125%.
Promus also 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, which at March 31,
1995, held Promus' interest rate in a range between 8.7% and 11.9%, expires
in June 1995 and is not expected to be renewed.
The differences to be paid or received under the terms of the interest
rate swap agreements and the rate collar transaction described above are
accrued as interest rates change and recognized as an adjustment to
interest expense for the related debt. Changes in the effective interest
rates to be paid by Promus pursuant to the terms of its interest rate
agreements will have a corresponding effect on its future cash flows.
These agreements contain a credit risk that the counterparties may be
unable to meet the terms of the agreements. Promus minimizes that risk by
evaluating the creditworthiness of its counterparties, which are limited to
major banks and financial institutions, and does not anticipate
nonperformance by the counterparties.
-30-
As a component of a transaction whereby Promus effectively secured an
option to a site for a potential casino, Promus has guaranteed a third
party's $25 million variable rate bank loan. Promus also entered into an
interest rate swap agreement in which Promus receives a fixed interest rate
of 7% from the third party and pays the variable interest rate of the
subject debt (LIBOR plus 1% at March 31, 1995) to the bank. The negative
value of the swap, which is marked to market by Promus, was approximately
$0.4 million at March 31, 1995. Adjustments to the swap's market value are
included in interest expense in the consolidated statements of income.
Promus' guarantee and the swap agreement expire December 1, 1996, and are
also subject to earlier termination upon the occurrence of certain events.
Shelf Registration
- ------------------
Promus, through its wholly-owned subsidiary Embassy Suites, Inc. (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. The shelf registration expires in August 1995. In connection with
the PHC Spin-off, the name of the Embassy legal entity will be changed to
Harrah's Operating Company, Inc., which will remain a subsidiary of Harrah's
Entertainment, Inc.
Other
- -----
During second quarter 1995, Promus announced its intention to redeem the
approximately $18.1 million principal amount outstanding of the 11%
Subordinated Debentures due 1999 of Embassy. The cost of this redemption
is not material.
In connection with the PHC Spin-off, on April 25, 1995, Promus commenced
soliciting consents of the holders of $400 million of public debt issued by
its principal subsidiary, Embassy. On May 11, 1995, Promus announced that it
was extending the consent solicitations to May 18, 1995, and it was modifying
the terms of the consent solicitations to increase the amount offered to be
paid to each consenting holder from $2.50 per $1,000 principal amount to $12.50
per $1,000 principal amount.
-31-
INCOME TAX MATTERS
- ------------------
Under the terms of the Settlement between Promus and Bass PLC (Bass),
the Tax Sharing Agreement entered into in connection with the
February 7, 1990, spin-off (the 1990 Spin-off) of the stock of Promus to
stockholders of Holiday Corporation has been terminated. Under the Tax Sharing
Agreement, Promus was liable, with certain exceptions, for taxes of Holiday
and its subsidiaries for all pre-1990 Spin-off tax periods. Bass was
obligated under the same agreement to pay Promus the amount of any tax
benefits realized from pre-1990 Spin-off tax periods of Holiday and its
subsidiaries. Under the provisions of the Settlement, Promus remains
obligated for certain tax issues related to Promus and its subsidiaries for the
pre-Spin-off tax periods and certain other items related to the final resolution
of disputed issues from the Internal Revenue Service (IRS) examination of income
tax returns for 1987 through the 1990 Spin-off date. A protest defending the
taxpayers' position on all disputed issues for these periods was filed with the
IRS during third quarter 1993 and negotiations to resolve these issues continue.
Final resolution of the disputed issues is not expected to have a material
adverse effect on Promus' consolidated financial position or its results of
operations.
EFFECTS OF CURRENT ECONOMIC AND POLITICAL CONDITIONS
- ----------------------------------------------------
In recent years, the casino entertainment industry in the United States
has experienced significant expansion in both existing markets and new
jurisdictions. Though expansion is continuing within the industry, the
pace of casino gaming approval within new jurisdictions in the United
States has subsided and, as a result, future increases or decreases in
gaming demand and legalization are difficult to predict. Three large
properties opened in late 1993 in the Las Vegas market, and development has
begun on several new projects and major expansions of existing properties
in and around Las Vegas. Revenues in the Laughlin market continue to be
impacted by the recently completed additions to competitive supply in and
around Las Vegas and from Indian casinos in the region. In Reno, work
continues on the development of a major new project which is expected to
add substantial additional casino space and hotel rooms to that market
during third quarter 1995.
In addition, certain new jurisdictions have restrictions on entry into
the market, either through limitations on number of licenses granted or
required minimum initial capital investment, which serve to limit capacity
as well as to limit competition within those jurisdictions. In other
jurisdictions, such as Mississippi, there are no constraints on market
entry, which has created over capacity in the market. In such markets,
operating performance may suffer due to oversupply and as competing casinos
-32-
engage in high cost marketing and promotional activities that increase
costs for all market participants. The proliferation of casino gaming has
also been furthered by the Indian Gaming Regulatory Act of 1988 which, as
of April 24, 1995, had resulted in the approval of 131 compacts for the
development of casinos on Native American lands in 23 states.
Promus is not able to determine the long-term 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
as discussed above, combined with the further geographic diversification
and the continuing pursuit of the Harrah's national brand strategy, have
well-positioned Promus to face the challenges presented by these
developments and help to reduce the potentially negative impact these new
developments may have on Promus' overall operations.
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 $657.6 million at March 31, 1995.
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.
-33-
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
--------------------------
Bass Public Limited Company, Bass International Holdings N.V., Bass
(U.S.A.) Incorporated, Holiday Corporation and Holiday Inns, Inc.
(collectively "Bass") v. The Promus Companies Incorporated ("Promus"). A
complaint was filed in the United States District Court for the Southern
District of New York against Promus on February 6, 1992, under Civil Action
No. 92 Civ. 0969 (SWK). On March 17, 1995, the Company and Bass signed a
settlement agreement (the "Settlement") that settled all claims and
counterclaims in this litigation (including the resolution of certain tax
issues). The Settlement was approved by the court on March 22, 1995. As a
result of the Settlement, $53.4 million was charged against the Company's
1994 earnings, including $4.3 million for legal fees previously reported in
corporate expense.
Certain tax matters. In connection with the 1990 spin-off (the "1990
Spin-off") of Promus and acquisition of the Holiday Inn hotel business by
Bass, Promus was liable, with certain exceptions, for taxes of Holiday
Corporation and its subsidiaries for all pre-1990 Spin-off tax periods.
Bass was obligated under the terms of a tax sharing agreement to pay Promus
the amount of any tax benefits realized by Holiday Corporation as a result
of adjustments to pre-1990 Spin-off tax periods of Holiday Corporation and
its subsidiaries. All examinations for tax years prior to 1987 have been
completed and any taxes and related interest regarding those years have
been paid. A protest of all unagreed issues for the IRS examination of
1987 through the 1990 Spin-off date was filed with the IRS during the third
quarter of 1993 and negotiations to resolve disputed issues continue.
Under the terms of the Settlement, the tax sharing agreement has been
terminated. Pursuant to the Settlement Agreement, and as a result of a
payment by Promus thereunder, Bass has assumed exclusive liability for
substantially all of the unagreed issues for the IRS examination of the
1987 through February 7, 1990 period. The remaining unagreed tax issues
(which were not assumed by Bass pursuant to the Settlement Agreement) are
expected to result in a refund to Promus of previously paid taxes or are
expected to have no material adverse effect on Promus's consolidated
financial position or its results of operations.
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Item 6. Exhibits and Reports on Form 8-K
----------------------------------------------------------
(a) Exhibits
*EX-3 Bylaws of The Promus Companies Incorporated, as amended
April 5, 1995.
*EX-11 Computation of per share earnings.
*EX-27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended March 31,
1995.
- ------------
*Filed herewith.
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Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THE PROMUS COMPANIES INCORPORATED
May 15, 1995 BY: MICHAEL N. REGAN
------------------------------
Michael N. Regan
Vice President and Controller
(Chief Accounting Officer)
-36-
Exhibit Index
-------------
Exhibit No. Description Sequential Page
No.
- ----------- ------------ ------------------
*EX-3 Bylaws of The Promus Companies 38
Incorporated, as amended April 5,
1995.
*EX-11 Computation of per share earnings. 49
*EX-27 Financial Data Schedule. 50
- ------------
*Filed herewith.
-37-