View:
As filed with the Securities and Exchange Commission on October 11, 1994.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1994
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 June 30, 1994, there were outstanding 102,398,252 shares
of the Company's Common Stock.
Page 1 of 30
Exhibit Index Page 29
Items 1 and 2 of Part I and Item 6 of Part II for the fiscal quarter
and first six months ended June 30, 1994, are hereby amended to read as
follows:
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' 1993 Annual Report to Stockholders.
The accompanying financial information has been amended and restated
to reflect the impact of a change in accounting policy for preopening costs.
(See Note 2.)
-2-
THE PROMUS COMPANIES INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
June 30, Dec. 31,
(In thousands, except share amounts) 1994 1993
ASSETS
Current assets
Cash and cash equivalents $ 57,553 $ 61,962
Receivables, including notes receivable of
$1,845 and $2,197, less allowance for
doubtful accounts of $10,753 and $10,864 44,051 47,448
Deferred income taxes 23,169 21,024
Supplies 12,918 12,996
Prepayments and other 20,466 20,128
---------- ----------
Total current assets 158,157 163,558
---------- ----------
Land, buildings, riverboats and equipment 1,933,706 1,824,433
Less: accumulated depreciation (524,627) (486,231)
---------- ----------
1,409,079 1,338,202
Investments in and advances to
nonconsolidated affiliates 82,348 70,050
Deferred costs and other 223,852 221,308
---------- ----------
$1,873,436 $1,793,118
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 47,995 $ 60,530
Construction payables 16,395 26,345
Accrued expenses 148,891 162,969
Current portion of long-term debt 2,777 2,160
---------- ----------
Total current liabilities 216,058 252,004
Long-term debt 875,026 839,804
Deferred credits and other 103,678 86,829
Deferred income taxes 56,613 63,460
---------- ----------
1,251,375 1,242,097
---------- ----------
Minority interests 18,392 14,984
---------- ----------
Commitments and contingencies (Notes 6 and 7)
Stockholders' equity
Common stock, $0.10 par value,
authorized - 360,000,000 shares,
outstanding - 102,398,252 and 102,258,442
shares (net of 9,784 and 25,251 shares
held in treasury) 10,240 10,226
Capital surplus 351,076 344,197
Retained earnings 247,364 187,203
Deferred compensation related to
restricted stock (5,011) (5,589)
---------- ----------
603,669 536,037
---------- ----------
$1,873,436 $1,793,118
========== ==========
See accompanying Notes to Consolidated Condensed Financial Statements.
-3-
THE PROMUS COMPANIES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Second Quarter Ended Six Months Ended
(In thousands, June 30, June 30, June 30, June 30,
except per share amounts) 1994 1993 1994 1993
Revenues
Casino $283,474 $200,620 $526,484 $366,800
Rooms 54,947 60,712 106,057 117,884
Food and beverage 41,999 37,345 80,405 70,541
Franchise and
management fees 19,781 15,242 35,601 28,162
Other 33,014 26,454 59,453 47,881
Less: casino promotional
allowances (30,870) (24,126) (59,868) (45,814)
-------- -------- -------- --------
Total revenues 402,345 316,247 748,132 585,454
-------- -------- -------- --------
Operating expenses
Direct
Casino 115,775 88,854 228,409 171,491
Rooms 22,808 28,117 44,600 53,164
Food and beverage 25,655 25,180 45,840 42,119
Depreciation of
buildings, riverboats
and equipment 23,109 19,445 44,501 37,653
Other 101,749 79,422 184,665 150,676
-------- -------- -------- --------
Total operating
expenses 289,096 241,018 548,015 455,103
-------- -------- -------- --------
113,249 75,229 200,117 130,351
Preopening costs (5,141) - (5,141) -
Property transactions (199) 15 (397) (250)
-------- -------- -------- --------
Operating income 107,909 75,244 194,579 130,101
Corporate expense (7,493) (7,471) (13,031) (14,180)
Interest expense, net of
interest capitalized (26,835) (28,382) (52,572) (56,327)
Interest and other
income 463 420 894 776
-------- -------- -------- --------
Income before income
taxes and minority
interest 74,044 39,811 129,870 60,370
Provision for income taxes (30,910) (16,457) (53,797) (25,051)
Minority interests (3,258) (539) (7,981) (539)
-------- -------- -------- --------
Income before
extraordinary items and
cumulative effect of
change in accounting
policy 39,876 22,815 68,092 34,780
Extraordinary losses on
extinguishments of debt,
net of income tax
benefit of $211 and $890 - (316) - (1,325)
Cumulative effect of change
in accounting policy, net
of tax benefit of $4,317 - - (7,932) -
-------- -------- -------- --------
Net income $ 39,876 $ 22,499 $ 60,160 $ 33,455
======== ======== ======== ========
Earnings per share before
extraordinary items and
cumulative effect of
change in accounting
policy $ 0.39 $ 0.22 $ 0.66 $ 0.34
Extraordinary items, net - - - (0.01)
Cumulative effect of
change in accounting
policy, net - - (0.08) -
-------- -------- -------- --------
Earnings per share $ 0.39 $ 0.22 $ 0.58 $ 0.33
======== ======== ======== ========
Average common shares
outstanding 102,826 102,343 102,858 102,192
======== ======== ======== ========
See accompanying Notes to Consolidated Condensed Financial Statements.
-4-
THE PROMUS COMPANIES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30, June 30,
(In thousands) 1994 1993
Cash flows from operating activities
Net income $ 60,160 $ 33,455
Adjustments to reconcile net income
to cash flows from operating activities
Extraordinary items, before income taxes - 2,215
Cumulative effect of change in accounting
policy, before income taxes 12,249 -
Depreciation and amortization 53,353 48,589
Preopening costs charged to expense 5,141 -
Other noncash items (1,284) 11,723
Minority interests share of net income 7,981 539
Net losses of and distributions from
nonconsolidated affiliates 5,783 744
Net losses from property transactions 320 437
Net change in long-term accounts (6,449) (4,364)
Net change in working capital accounts 11,460 13,044
Tax indemnification payments to Bass (25,469) (2,171)
--------- ---------
Cash flows provided by operating
activities 123,245 104,211
--------- ---------
Cash flows from investing activities
Land, buildings, riverboats and equipment
additions (114,366) (71,437)
Investments in and advances to
nonconsolidated affiliates (18,656) (2,178)
Decrease in construction payables (9,950) -
Proceeds from property transactions 1,085 8,426
Other (17,343) (10,707)
--------- ---------
Cash flows used in investing activities (159,230) (75,896)
--------- ---------
Cash flows from financing activities
Net borrowings under revolving credit
facility 75,350 3,000
Proceeds from issuance of senior subordinated
notes, net of issue costs of $4,000 - 196,000
Debt retirements (40,825) (227,483)
Minority interest (distributions) contributions (2,949) 4,041
--------- ---------
Cash flows provided by (used in)
financing activities 31,576 (24,442)
--------- ---------
Net change in cash and cash equivalents (4,409) 3,873
Cash and cash equivalents, beginning
of period 61,962 43,756
--------- ---------
Cash and cash equivalents, end of period $ 57,553 $ 47,629
========= =========
See accompanying Notes to Consolidated Condensed Financial Statements.
-5-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1994
(UNAUDITED)
Note 1 - Basis of Presentation
- ------------------------------
Promus is a hospitality company with two primary business segments: casino
entertainment and hotels. Promus owns and operates casino entertainment 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 Joliet, Illinois; Shreveport, Louisiana; and Tunica and
Vicksburg, Mississippi. Harrah's also has an ownership interest in and manages
two limited stakes casinos in Black Hawk and Central City, Colorado. The hotel
segment is composed of three hotel brands targeted to specific market segments:
Embassy Suites, Hampton Inn and Homewood Suites.
The consolidated condensed financial statements include all 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 and operating income. Promus' proportionate share of the interest
expense of such nonconsolidated affiliates is included in interest expense.
(See Note 8.)
Certain amounts for the prior year second quarter and first six months
ended June 30, 1993, have been reclassified to conform with the presentation
for second quarter and first six months ended June 30, 1994.
Note 2 - Change in Accounting Policy
- ------------------------------------
On October 3, 1994, Promus changed its accounting policy effective
January 1, 1994, relating to preopening costs incurred during development
of new casino entertainment and hotel projects. Promus' new policy is
to capitalize preopening costs as incurred prior to opening and to expense
them upon opening of each project. Previously, Promus' policy had been to
capitalize such costs and amortize them to expense over 36 months from the
date of opening. Operating results for the first six months of 1994 have been
restated to reflect the cumulative charge against earings, net of income taxes,
for this change in accounting policy of approximately $7.9 million or $0.08 per
share.
Note 3 - Long-Term Debt
- -----------------------
Interest Rate Agreements
------------------------
Promus has entered into interest rate swap agreements, as summarized in the
following table:
Effective Next Semi-
Swap Rate at Annual Rate
Rate June 30, Adjustment Swap Agreement
Associated Debt (LIBOR+) 1994 Date Expiration Date
- --------------- ------- --------- ----------- ----------------
10 7/8% Notes
$200 million 4.73% 9.16% October 15 October 15, 1997
8 3/4% Notes
$50 million 3.42% 8.85% November 15 May 15, 1998
$50 million 3.22% 6.67% July 15 July 15, 1998
In accordance with the terms of the interest rate swap agreements, the
effective interest rate on the 8 3/4% Notes was adjusted on July 15, 1994, to
8.71%. This rate will remain in effect until January 15, 1995.
-6-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
Note 3 - Long-Term Debt (Continued)
- ----------------------------------
In connection with its guarantee of the debt of a third party, Promus has
entered into an interest rate swap with the third party in which Promus
exchanged a fixed interest rate for the variable interest rate of the subject
debt. Management does not believe that its exposure under this agreement is
material.
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 June 1995 and currently
holds Promus' interest rate in a range between 8.8% and 12.0%.
Note 4 - Stockholders' Equity
- -----------------------------
On April 29, 1994, Promus' stockholders approved an amendment to the
Certificate of Incorporation which increased the number of authorized common
shares from 120 million to 360 million and reduced the par value per common
share from $1.50 to $0.10. As a result, approximately $143.2 million was
transferred as of December 31, 1993, from common stock to capital surplus on
the consolidated condensed balance sheets to retroactively reflect the impact
of the change in par value.
On October 29, 1993, Promus' Board of Directors approved a three-for-two
stock 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. All references in these financial
statements to prior year numbers of common shares and earnings per share
amounts have been restated to give retroactive effect to the stock split.
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
-7-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
Note 5 - 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:
Six Months Ended
June 30, June 30,
(In thousands) 1994 1993
Interest expense, net of interest capitalized $52,572 $56,327
Adjustments to reconcile to cash paid for
interest
Promus' share of interest expense of
nonconsolidated affiliates (6,152) (6,400)
Net change in accruals 3,737 (3,003)
Amortization of deferred finance charges (1,767) (2,426)
Net amortization of discounts and premiums (109) (1,020)
------- -------
Cash paid for interest, net of amount
capitalized $48,281 $43,478
======= =======
Cash payments for income taxes, net of refunds $47,289 $10,280
======= =======
Note 6 - 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 June 30, 1994, Promus had guaranteed
third party debts of $65 million and had contractual agreements, primarily
related to riverboat casino facilities construction, of $46 million, excluding
amounts previously recorded.
Promus manages certain hotels for others under agreements which 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 million over the next
30 years.
-8-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
Note 6 - Commitments and Contingent Liabilities (Continued)
- ----------------------------------------------------------
Guarantee of Insurance Contract
-------------------------------
Promus' defined contribution savings plan 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 June 30, 1994, is approximately $7.8
million.
Self-Insurance
--------------
Promus is self-insured for various levels of general liability, workers'
compensation and employee medical coverage. Accrued expenses include an
accrual for estimated settlements for known and anticipated claims.
Severance Agreements
--------------------
As of June 30, 1994, Promus had severance agreements with twelve 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 June 30, 1994,
that would have been payable under the agreements to these executives based on
earnings and stock options aggregated approximately $28.4 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-Spin-off tax periods. Bass PLC (Bass) is obligated under the terms of
the Tax Sharing Agreements to pay Promus the amount of any tax benefits
realized from pre-Spin-off tax periods of Holiday and its subsidiaries.
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 was 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 during
first quarter 1994. 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 have begun. 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.
-9-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
Note 7 - 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.
-10-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
Note 8 - Nonconsolidated Affiliates
- -----------------------------------
Combined summarized income statements of nonconsolidated affiliates which
Promus accounted for on the equity basis for the second quarter and six months
ended June 30, 1994 and 1993 were as follows:
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
(In thousands) 1994 1993 1994 1993
Revenues $268,462 $267,323 $486,342 $473,914
======== ======== ======== ========
Operating income $ 20,583 $ 22,603 $ 13,917 $ 28,589
======== ======== ======== ========
Net income (loss) $ 891 $ 4,464 $(19,529) $ (7,128)
======== ======== ======== ========
Promus' share of nonconsolidated affiliates' combined net operating results
is reflected in the accompanying consolidated condensed statements of income as
follows:
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
(In thousands) 1994 1993 1994 1993
Pre-interest operating
income (included in
Revenues-other) $ 2,683 $ 4,519 $ 3,343 $ 7,921
======== ======== ======== ========
Interest expense
(included in Interest
expense) $ (3,207) $ (3,210) $ (6,152) $ (6,400)
======== ======== ======== ========
June 30, Dec. 31,
(In thousands) 1994 1993
Promus' investments in and advances to
nonconsolidated affiliates
At equity $47,636 $35,893
At cost 34,712 34,157
------- -------
$82,348 $70,050
======= =======
The June 30, 1994, balance includes a total investment in and advances to the
partnership developing Harrah's New Orleans of approximately $19.3 million.
The values of certain of 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 condensed balance sheets was $4.7 million and $5.1 million at
June 30, 1994, and December 31, 1993, respectively.
-11-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
Note 9 - Summarized Financial Information
- -----------------------------------------
Embassy Suites, Inc. (Embassy), is a wholly-owned subsidiary and the
principal asset of Promus. Summarized financial information of Embassy as of
June 30, 1994 and December 31, 1993, and for the second quarter and six months
ended June 30, 1994 and 1993, prepared on the same basis as Promus, was as
follows:
June 30, Dec. 31,
(In thousands) 1994 1993
Current assets $ 160,026 $ 165,753
Land, buildings, riverboats and
equipment, net 1,409,079 1,338,202
Other assets 305,802 290,454
---------- ----------
1,874,907 1,794,409
---------- ----------
Current liabilities 204,464 240,438
Long-term debt 875,026 839,804
Other liabilities 160,648 150,646
Minority interests 18,392 14,984
---------- ----------
1,258,530 1,245,872
---------- ----------
Net assets $ 616,377 $ 548,537
========== ==========
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
(In thousands) 1994 1993 1994 1993
Revenues $401,832 $315,858 $747,017 $584,625
======== ======== ======== ========
Operating income $108,310 $ 74,129 $193,273 $128,938
======== ======== ======== ========
Income before income taxes
and minority interest $ 74,445 $ 38,801 $128,564 $ 59,415
======== ======== ======== ========
Income before
extraordinary items
and cumulative effect
of change in accounting
policy $ 40,137 $ 22,149 $ 67,243 $ 34,150
======== ======== ======== ========
Net income $ 40,137 $ 21,833 $ 59,311 $ 32,825
======== ======== ======== ========
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.
Pursuant to the terms of the most restricted covenant regarding restricted
payments, approximately $607.3 million of Embassy's net assets were not
available for payment of dividends to Promus as of June 30, 1994.
-12-
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
Note 10 - Operating Segment Information
- --------------------------------------
Operating results for Promus' operating segments for the second quarter and
six months ended June 30, 1994 and 1993, were as follows:
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
(In thousands) 1994 1993 1994 1993
Casino Entertainment Segment
Operating Data
Revenues
Casino $283,474 $200,620 $526,484 $366,800
Food and beverage 39,873 35,163 76,288 66,253
Rooms 26,381 25,966 50,160 48,643
Management fees 187 - 445 -
Other 18,321 14,194 32,571 24,703
Less: casino promotional
allowances (30,870) (24,126) (59,868) (45,814)
-------- -------- -------- --------
Total revenues 337,366 251,817 626,080 460,585
-------- -------- -------- --------
Operating expenses
Departmental direct costs
Casino 115,775 88,854 228,409 171,491
Food and beverage 23,483 22,934 41,807 37,734
Rooms 8,415 9,579 16,478 16,678
Other 100,447 71,181 183,706 137,532
-------- -------- -------- --------
Total operating
expenses 248,120 192,548 470,400 363,435
-------- -------- -------- --------
89,246 59,269 155,680 97,150
Preopening costs (5,141) - (5,141) -
-------- -------- -------- --------
Operating income $ 84,105 $ 59,269 $150,539 $ 97,150
======== ======== ======== ========
Hotel Segment Operating Data
Revenues
Rooms $ 28,566 $ 34,746 $ 55,897 $ 69,241
Franchise and
management fees 19,594 15,242 35,156 28,162
Food and beverage 2,126 2,182 4,117 4,288
Other 12,997 10,773 23,443 20,194
-------- -------- -------- --------
Total revenues 63,283 62,943 118,613 121,885
-------- -------- -------- --------
Operating expenses
Departmental direct costs
Rooms 14,393 18,538 28,122 36,486
Food and beverage 2,172 2,246 4,033 4,385
Other 22,470 27,325 42,497 49,168
-------- -------- -------- --------
Total operating
expenses 39,035 48,109 74,652 90,039
-------- -------- -------- --------
24,248 14,834 43,961 31,846
Property transactions (199) 15 (397) (250)
-------- -------- -------- --------
Operating income $ 24,049 $ 14,849 $ 43,564 $ 31,596
======== ======== ======== ========
Other Operations Segment
Operating Data
Revenues $ 1,696 $ 1,487 $ 3,439 $ 2,984
Operating expenses 1,941 361 2,963 1,629
-------- -------- -------- --------
Operating income (loss) $ (245) $ 1,126 $ 476 $ 1,355
======== ======== ======== ========
-13-
Item 2. Management's Discussion and Analysis
---------------------------------------------
of Financial Condition and Results of Operations
------------------------------------------------
The following discussion and analysis of The Promus Companies
Incorporated's (Promus) financial position and operating results for second
quarter and the first six months of 1994 and 1993 complements and updates the
Management's Discussion and Analysis of Financial Position and Results of
Operations (MD&A) presented in Promus' 1993 Annual Report. The following
information should be read in conjunction with Promus' 1993 Annual Report MD&A
disclosure. References to Promus include its consolidated subsidiaries where
the context requires.
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 three established brands, Embassy Suites, Hampton Inn and Homewood
Suites (collectively Promus Hotels), targeted at specific market segments. A
fourth hotel brand, Hampton Inn & Suites, was introduced in late 1993 and is
designed to target a new development segment not addressed by the existing
brands.
From six land-based casinos in the traditional markets of Nevada and New
Jersey and one riverboat casino in Joliet, Illinois, in operation at the end of
second quarter 1993, Promus' casino entertainment segment has grown to include
thirteen properties located in six states, including the latest addition,
Harrah's Shreveport. In recognition of the increasingly competitive
environment faced by Promus in most of the casino markets in which it operates
and to maximize performance of its existing operations, Promus' operating focus
has been on improving margins and increasing operating cash flows by
controlling costs and streamlining operations. Due to the performances of the
Riverboat Division and the hotel segment, Promus' overall operating margin
increased 3.0 percentage points for second quarter 1994 and 3.8 percentage
points for the first six months of 1994 over the comparable prior year periods.
Cash flows from operations for the first six months of 1994 increased 18.3%
over prior year, to $123.2 million.
RESULTS OF OPERATIONS
- ---------------------
Overall
- -------
Second Quarter Percent First Six Months Percent
(in millions, except -------------- Increase/ ---------------- Increase/
earnings per share) 1994 1993 (Decrease) 1994 1993 (Decrease)
------ ------ ---------- ------ ------ ----------
Revenues $402.3 $316.2 27.2 % $748.1 $585.5 27.8 %
Operating income 107.9 75.2 43.5 % 194.6 130.1 49.6 %
Net income 39.9 22.5 77.3 % 60.2 33.5 79.7 %
Earnings per share 0.39 0.22 77.3 % 0.58 0.33 75.8 %
Operating margin 26.8% 23.8% 3.0 pts 26.0% 22.2% 3.8 pts
-14-
Record revenues, operating income and earnings per share for both the
second quarter and first six months of 1994 are due primarily to unit growth
attained in both segments, especially the addition of four riverboat casino
properties over the last nine months, revenue per available room growth by all
three established hotel brands and interest expense savings achieved in part by
a debt refinancing strategy completed in 1993. A summary of Promus' operating
segments' performance for the second quarter and first six months ended June
30, 1994 and 1993 is presented in Note 10 to the accompanying consolidated
condensed financial statements.
Operating results for the second quarter and first six months of 1994 have
been restated to reflect the cumulative effect of a change in accounting
policy. On October 3, 1994, Promus changed its accounting policy effective
January 1, 1994, related to preopening costs to expense those costs upon
opening of the new casino entertainment or hotel project. Previously, Promus
had amortized preopening costs to expense over 36 months following the opening
of the project. As a result of this change, Promus' operating results have
been restated to include the write off of the unamortized preopening costs
balances related to projects opened in prior years. The effect of this
change on reported net income and earnings per share is as follows:
Second Quarter 1994 First Six Months
-------------------- -----------------
As As
Reported Restated Reported Restated
-------- -------- -------- --------
Net income $41,941 $39,876 $69,313 $60,160
Earnings per share 0.41 0.39 0.67 0.58
The mix of Promus' operating income among the casino entertainment
divisions, including the contribution now made by the Riverboat Casino
Entertainment Division, and the continuing growth achieved by the hotel segment
have resulted in an increasing diversification of Promus' operations. The
following table summarizes operating income before preopening costs and
property transactions for the twelve-month periods ended June 30, 1994, 1993
and 1992 in millions of dollars and as a percent of the total for each of
Promus' casino entertainment divisions and primary business segments:
Operating Income Contributions for the
Twelve Months Ended June 30,
-------------------------------------------
In Millions of Dollars Percent of Total
---------------------- --------------------
1994 1993 1992 1994 1993 1992
------ ------ ------ ------ ------ ------
Casino Entertainment
Riverboat $ 95 $ 3 $ - 25 % 1 % - %
Southern Nevada 77 75 59 21 % 29 % 26 %
Northern Nevada 77 71 63 21 % 28 % 28 %
Atlantic City 68 65 69 18 % 25 % 30 %
New Orleans (5) - - (1)% - -
Other, including
project development
costs (18) (15) (7) (5)% (6)% (3)%
---- ---- ---- --- --- ---
Total 294 199 184 79 % 77 % 81 %
Hotel 77 55 43 21 % 22 % 19 %
Other 2 3 (1) - % 1 % -
---- ---- ---- --- --- ---
Total Promus $373 $257 $226 100 % 100 % 100 %
==== ==== ==== === === ===
-15-
Casino Entertainment
- --------------------
Promus' casino entertainment segment includes the combined results of
Promus' casino entertainment properties located in Colorado, Illinois,
Louisiana, Mississippi, Nevada and New Jersey. Overall revenues and operating
income for the segment increased 34.0% and 41.9%, respectively, for second
quarter 1994 and 35.9% and 55.0%, respectively, for the first six months of
1994 over the comparable prior year periods. This growth is a result of the
operating contributions made by the Riverboat Casino Entertainment Division,
partially offset by the recognition of Promus' pro-rata share of Harrah's New
Orleans preopening-related costs, increased project development costs and
declines experienced by the land-based properties reflecting various
competitive and operational issues as discussed below.
Development costs incurred related to Promus' pursuit of additional casino
entertainment projects and charged to casino entertainment segment other
operating expense were as follows:
Second Quarter Ended First Six Months
-------------------- -------------------
June 30, June 30, June 30, June 30,
(in millions) 1994 1993 1994 1993
------- ------- ------- -------
Development costs
charged to expense $3.5 $2.6 $7.1 $4.0
Promus expects the trend of an increasing level of development costs as
compared to the prior year to continue over the remainder of 1994 as it
continues to aggressively pursue additional casino development opportunities.
Riverboat Division
------------------
Second Quarter Percent First Six Months Percent
----------------- Increase/ ----------------- Increase/
(in millions) 1994 1993 (Decrease) 1994 1993 (Decrease)
-------- -------- ---------- -------- -------- ----------
Revenues $ 109.8 $ 13.4 NM* $ 193.0 $ 13.4 NM
Operating income 38.8 3.0 NM 70.3 3.0 NM
Operating margin 35.3% 22.4% 12.9 pts 36.4% 22.4% 14.0 pts
Gaming volume $1,147.7 $ 111.7 NM $1,932.4 $ 111.7 NM
- --------
* Not Meaningful
As of the end of second quarter 1994, the Riverboat Division included the
operations of five riverboats, as compared to one riverboat in operation at the
end of second quarter 1993. The higher overall operating margin achieved by
this Division relative to Promus' other casino entertainment segment divisions
reflects operational differences between a riverboat facility and a
conventional land-based property and limited competition initially faced by
facilities opening in new, emerging markets. Second quarter 1994's operating
margin is lower than for the first six months of the year due to increasing
competition in the Mississippi markets in which Promus operates, negatively
impacting operating margins at those properties. Subsequent to the end of the
second quarter, Promus implemented limited work force reductions at both
Mississippi properties in response to the changing operating environment and to
improve operating efficiency. The estimated one-time charge to Promus of these
actions is not material.
-16-
Southern Nevada
---------------
Second Quarter Percent First Six Months Percent
-------------- Increase/ ------------------- Increase/
(in millions) 1994 1993 (Decrease) 1994 1993 (Decrease)
------ ------ ---------- -------- -------- ----------
Revenues $ 74.7 $ 76.6 (2.5)% $ 146.0 $ 146.4 (0.3)%
Operating income 20.0 22.1 (9.5)% 38.3 40.9 (6.4)%
Operating margin 26.8% 28.9% (2.1)pts 26.2% 27.9% (1.7)pts
Gaming volume $754.7 $781.6 (3.4)% $1,509.6 $1,523.9 (0.9)%
The Southern Nevada Division's declines in revenues and operating income
for the second quarter and first six months of 1994 as compared to prior year
periods are due to continuing absorption in both the Las Vegas and Laughlin
markets of large capacity increases during the last twelve months. The
Laughlin market has been impacted not only by expansion in its market, but also
by its traditional customers visiting the new Las Vegas properties.
Northern Nevada
---------------
Second Quarter Percent First Six Months Percent
-------------- Increase/ ------------------- Increase/
(in millions) 1994 1993 (Decrease) 1994 1993 (Decrease)
------ ------ ---------- -------- -------- ----------
Revenues $ 75.2 $ 81.2 (7.4)% $ 145.6 $ 148.8 (2.2)%
Operating income 18.0 20.2 (10.9)% 30.1 31.0 (2.9)%
Operating margin 23.9% 24.9% (1.0)pts 20.7% 20.8% (0.1)pts
Gaming volume $926.9 $992.4 (6.6)% $1,735.5 $1,767.9 (1.8)%
In Northern Nevada, operations have also been negatively impacted by
patrons from the region's key feeder markets choosing to visit the new "mega"
property offerings in Las Vegas. Second quarter 1994 results were also
impacted by a rare May snowstorm, resulting in a decline from the record
results posted in second quarter 1993. The declines experienced in second
quarter 1994 more than offset operating gains achieved during first quarter,
resulting in an overall decline for this Division for the first six months of
1994 versus the prior year.
Atlantic City
-------------
Second Quarter Percent First Six Months Percent
-------------- Increase/ ------------------- Increase/
(in millions) 1994 1993 (Decrease) 1994 1993 (Decrease)
------ ------ ---------- -------- -------- ----------
Revenues $ 78.1 $ 80.1 (2.5)% $ 143.9 $ 150.6 (4.4)%
Operating income 18.2 18.4 (1.1)% 28.6 28.8 (0.7)%
Operating margin 23.3% 23.0% 0.3 pts 19.9% 19.1% 0.8 pts
Gaming volume $800.8 $758.4 5.6 % $1,485.4 $1,408.5 5.5 %
-17-
Despite declines in revenues in this highly competitive market for both
second quarter and the first six months of 1994 versus the prior year, Harrah's
Atlantic City nearly equalled its prior year operating income and achieved
operating margin increases over the comparable prior year periods due to
effective management of costs and lower promotional allowances. Revenue
declines versus the comparable prior year periods are due to lower pit volume
and overall hold percentages, partially offset by increased slot volume,
reflecting the continuing shift of gaming volume from table games to slots.
The lower hold percentage associated with slot play resulted in reduced
revenues, despite the overall gaming volume growth.
Harrah's New Orleans
--------------------
Revenues and operating income for the casino entertainment segment include
a loss of $1.6 million for second quarter 1994, and $4.8 million for the first
six months of 1994, representing Promus' pro-rata share of preopening-related
costs incurred by the joint venture developing Harrah's New Orleans. (See
CAPITAL SPENDING AND DEVELOPMENT section for further discussion of the current
status of this development project.)
Hotel
- -----
Second Quarter Percent First Six Months Percent
(in millions, except -------------- Increase/ ---------------- Increase/
rooms/hotel and 1994 1993 (Decrease) 1994 1993 (Decrease)
RevPAR/S data) ------ ------ ---------- ------ ------ ----------
Revenues $ 63.3 $ 62.9 0.6 % $118.6 $121.9 (2.7)%
Operating income
before property
transactions 24.2 14.8 63.5 % 44.0 31.8 38.4 %
Operating margin 38.2% 23.5% 14.7 pts 37.1% 26.1% 11.0 pts
Number of rooms 75,670 70,792 6.9 %
Number of hotels 535 479 11.7 %
Total System RevPAR/S
Embassy Suites $76.04 $70.64 7.6 % $74.16 $69.62 6.5 %
Hampton Inn 42.13 39.19 7.5 % 38.71 36.19 7.0 %
Homewood Suites 61.54 56.93 8.1 % 58.47 54.70 6.9 %
Hotel segment revenues for second quarter 1994 increased slightly over the
comparable prior year period as increased franchise and management fees,
reflecting unit growth in the combined hotel systems and increased revenue per
available room (suite) (RevPAR/S), offset the revenue impact of a decrease in
the number of company-owned Embassy Suites properties. 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
revenue at franchised hotels. For the first six months of 1994, revenues
declined compared to the prior year due to the first quarter 1994 impact on
revenues of the third quarter 1993 sales of six Embassy Suites properties.
-18-
The disproportionate increase in operating income versus revenues is due to
the limited direct costs associated with increases in franchise royalties and
the inclusion in second quarter 1993 of a $3.6 million writedown of a
receivable from an Embassy Suites' franchisee. Excluding this one-time charge
from the comparison, second quarter 1994 operating income increased 31.5% and
operating margin increased 8.9 percentage points versus the comparable prior
year period. Also contributing to the operating income and margin improvements
for the hotel segment are overhead cost savings achieved as a result of
consolidation of hotel brand management into a single organization announced in
third quarter 1993.
Other Factors Affecting Income Per Share
- ----------------------------------------
Second Quarter Percent First Six Months Percent
(Income)/Expense -------------- Increase/ ---------------- Increase/
(in millions) 1994 1993 (Decrease) 1994 1993 (Decrease)
------ ------ ---------- ------ ------ ----------
Preopening costs $ 5.1 $ - NM $ 5.1 $ - NM
Property transaction
losses, net 0.2 - NM 0.4 0.3 33.3 %
Corporate expense 7.5 7.5 - 13.0 14.2 (8.5)%
Interest expense 26.8 28.4 (5.6)% 52.6 56.3 (6.6)%
Interest and other
income (0.5) (0.4) 25.0 % (0.9) (0.8) 12.5 %
Effective tax rate 41.7% 41.3% 0.2 pts 41.4% 41.5% (0.1)pts
Minority interests $ 3.3 $ 0.5 NM $ 8.0 $ 0.5 NM
Extraordinary loss,
net - 0.3 NM - 1.3 NM
Cumulative effect
of change in
accounting
policy, net - - - (7.9) - NM
Preopening costs represent those costs charged to expense upon opening
of Harrah's Shreveport in April 1994. Corporate expense for the first six
months of 1994 decreased primarily due to timing and reimbursement of certain
expenses during first quarter 1994. The decrease in interest expense is due
to the impact of lower interest rates on Promus' variable rate debt and lower
overall levels of debt. The effective tax rate is higher than the federal
statutory rate due primarily to state income taxes. Minority interests
reflect joint venture partners' shares of income at joint venture riverboat
casinos. The extraordinary losses recorded in the prior year periods
represent related write-offs of unamortized deferred finance charges due to
early retirements of debt. The cumulative effect of change in accounting
policy reflects the write-off of unamortized preopening costs associated with
projects opened in prior years.
CAPITAL SPENDING AND DEVELOPMENT
- --------------------------------
Casino Entertainment
- --------------------
To maintain its leading position in the casino entertainment industry and
to further build the value of Harrah's as a national casino brand, Promus
continues its development of previously announced projects and its
investigation and pursuit of additional development opportunities in emerging
markets throughout the U.S. and, to a lesser extent, abroad. Promus focused
the majority of its capital spending during the first six months of 1994 on
casino development opportunities.
-19-
Harrah's New Orleans
--------------------
A Promus subsidiary is a one-third partner in a partnership (the
Partnership) selected in May 1994 by the Louisiana Economic Development and
Gaming Corporation (LEDGC) to negotiate for the right to own and operate the
sole land-based casino permitted by law to operate in Orleans Parish,
Louisiana. This selection was made pursuant to a public bidding process
involving three public solicitations of proposals by the LEDGC dating back to
May 1993. The negotiations with the LEDGC culminated with the execution in
July 1994 of a casino operating contract with the LEDGC. However, the contract
is generally not effective until additional agreements with the City of New
Orleans (City) satisfactory to the Partnership are obtained and approved by the
LEDGC. The Partnership is seeking to obtain these agreements and approvals by
September 1, 1994.
In March 1994, the Partnership reached agreement with the City to lease
from the City's Rivergate Development Corporation the sites of the Rivergate
Convention Center, the legally mandated site of the permanent casino, and the
Municipal Auditorium, the site of the temporary casino. Notwithstanding these
lease agreements, it will be necessary for the Partnership to reach the
additional agreements discussed above with the City, and have those agreements
approved by the LEDGC, to create an effective casino operating contract and
proceed with the project.
The estimated cost of the project is $790 million, which is expected to be
financed through a combination of partner capital contributions, public debt
securities, bank debt and operating cash flow from the temporary casino. The
Partnership is currently in the process of registering a public offering of
$570 million in debt and arranging $100 million in bank debt. The total
capital contribution of Promus' subsidiary is expected to be $23.3 million.
Promus has agreed to provide completion guarantees for the project, subject to
certain conditions and exceptions, in exchange for a fee to be paid by the
Partnership. Before the Partnership can begin construction of either the
planned 76,000 square foot temporary casino or the proposed 400,000 square foot
permanent casino facility (200,000 square foot casino space), other conditions
and legal issues pertinent to the transaction (in addition to obtaining the
additional agreements with the City and the approval of those agreements by the
LEDGC) must be satisfied, including, without limitation, obtaining financing,
and satisfying other governmental requirements.
Assuming the timely satisfaction of the conditions and legal issues
discussed above, the projected opening dates for the temporary casino and
permanent casino are expected to be March 1995 and first quarter 1996,
respectively.
Litigation concerning title to a portion of the land underlying the
permanent casino site was decided favorably at the trial court level. The
trial court decision was appealed on April 29, 1994. If this appeal were
ultimately decided unfavorably, it might delay or prevent the opening of the
casino facilities or otherwise adversely affect their operations.
-20-
Riverboat Casino Development
----------------------------
During the first six months of 1994, Promus opened two additional riverboat
casinos. In January 1994, Promus' second Joliet, Illinois based riverboat
casino, the Harrah's Southern Star, began operations. The Southern Star shares
shoreside facilities with its sister ship, the Northern Star. On April 18,
1994, Promus began operations of the Shreveport Rose, a dockside Harrah's
riverboat casino located in downtown Shreveport, Louisiana. In addition to the
five riverboat casinos now operating, Promus has announced two riverboat casino
projects in the state of Missouri. Following the failure of a statewide
referendum that would have approved games of chance for proposed casino
developments in Missouri and would have resolved the uncertainty which resulted
earlier this year when a state court ruling cast doubt on the permissibility of
offering certain types of games in casinos, Promus reevaluated its development
plans and opportunities in this state.
In North Kansas City, Promus continues its development of a classic
sternwheeler designed riverboat casino featuring approximately 33,000 square
feet of casino space. Approximately $47.4 million of the total estimated
project cost of $89.2 million had been spent as of the end of second quarter
1994. The project is expected to open during third quarter 1994, subject to
the approval of various regulatory bodies, and will feature certain types of
games determined to be legal under the court ruling.
Construction of the shoreside facilities at the site of Promus' second
Missouri riverboat casino, to be located in Maryland Heights, a suburb of St.
Louis, has been postponed. Construction of the casino riverboat intended for
use at the Maryland Heights site is continuing and, upon its completion, could
be available for use at another site, should Promus decide not to pursue a
development on this site. A final decision concerning the Maryland Heights
development will be made after an anticipated November 1994 statewide
referendum in Missouri to approve offering games of chance in casinos.
$22.2 million had been spent on the project as of the end of second quarter
1994, primarily related to construction of the riverboat casino, which will
feature 27,500 square feet of casino space.
During second quarter 1994, Promus executed its option to acquire an
additional ownership interest in the joint venture which owns and operates the
riverboat casino in Shreveport, Louisiana. As a result of this transaction,
Promus' ownership interest in the joint venture increased from approximately
86% to 96%.
Indian Lands
------------
Promus has entered into management and development agreements with the Ak-
Chin Indian Community of the Maricopa Indian Reservation for a $24.7 million
casino entertainment facility currently under construction near Phoenix,
Arizona. Promus is not funding this development, although it has guaranteed
the related bank financing. The facility is expected to open in late fourth
quarter 1994, subject to the receipt of approvals from various regulatory
agencies, including the National Indian Gaming Commission. Promus will manage
the facility, which is owned by the Ak-Chin Indian Community, 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.
-21-
Promus is in various stages of negotiations or agreements with a number of
other Indian communities to develop and/or manage facilities on Indian lands,
which would require approvals from various government agencies to proceed.
International
-------------
Promus and its local partner began construction of a casino in Auckland,
New Zealand, during second quarter. Promus will own a 20% interest in the
partnership and will manage the facility for a fee. Of Promus' total expected
capital contribution of $23.0 million, $1.4 million had been contributed at
June 30, 1994. Construction of the $230 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.
Acquisition of Station Square
-----------------------------
During June 1994, a general partnership in which Promus is a 75% partner
announced its intention to acquire Station Square, an entertainment, business
and retail center in Pittsburgh, Pennsylvania. The Station Square site
includes approximately 25 acres of land available for development and extends
along the Monongahela River, across from the Golden Triangle of Pittsburgh.
The transaction is expected to close during third quarter 1994, subject to
normal contingencies for transactions of this nature. Subject to satisfaction
of these contingencies, Promus expects to provide all or a portion of the funds
needed to acquire the property, either in the form of capital contributions,
assisting the venture in securing non-recourse debt or a combination of
contributions and debt assistance. If casino gaming is legalized in this
jurisdiction, the partnership plans to pursue development of a casino
entertainment facility at the Station Square site, which would require
additional funding if such development proceeded.
Existing Casino Facilities
--------------------------
Promus has committed $28.6 million to construct a company-owned Hampton Inn
hotel on the site of Harrah's Reno. The 408-room hotel is expected to open
during first quarter 1996. No major additions of casino square footage or
hotel rooms are currently planned at Promus' other casino entertainment
properties. On-going refurbishment and maintenance of Promus' casino
entertainment facilities continues to maintain the quality standards set for
these properties.
-22-
Overall
-------
In addition to the projects discussed above, Promus continues to pursue
additional casino entertainment development opportunities in various new
jurisdictions across the United States and abroad, although no material
definitive development agreements have been completed and no material capital
commitments to construct additional facilities 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. 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 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
- -----
Promus' three established hotel brands continued their steady growth during
the first six months of 1994 with the opening of 34 additional franchised
properties. An additional 50 franchised properties, comprised of 43 Hampton
Inn hotels, five Embassy Suites hotels and two Homewood Suites hotels, were
under construction or conversion to Promus brands at June 30, 1994.
Construction of a company-owned prototype of a downsized Homewood Suites
property suitable for smaller markets is expected to begin during third quarter
1994. The prototype is expected to be completed during third quarter 1995 at
an estimated cost of not more than $6 million. Six franchised Hampton Inn &
Suites hotels, a new concept combining rooms and suites in a single property
introduced by Promus hotels in late 1993, have been approved for development.
The first Hampton Inn & Suites property is expected to open in second quarter
1995.
To increase distribution and brand awareness of its Homewood Suites brand,
during second quarter 1994 Promus announced plans to expand the brand by
developing 20 to 25 additional properties over the next three years. A total
of up to $150 million is expected to be required over the three year period to
fund this development.
Summary
- -------
Cash needed to finance projects currently under development as well as
additional projects being pursued by Promus will be made available from
operating cash flows, the Bank Facility (see DEBT REFINANCING ACTIVITIES
section), joint venture partners, specific project financing, guarantees by
-23-
Promus of third party debt, sales of existing hotel assets and, if necessary,
Promus debt and/or equity offerings. Including $133.0 million spent during the
first six months of 1994, Promus currently estimates $325 million to $375
million of cash from all sources will be required 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 AND LIQUIDITY
- ------------------
Bank Facility
- -------------
Available Borrowing Capacity
----------------------------
At June 30, 1994, $245.4 million in borrowings was outstanding under
Promus' reducing revolving and letter of credit facility (the Bank Facility).
An additional $220.8 million of the Bank Facility was committed to back certain
letters of credit, including a $204.7 million letter of credit supporting the
9% Notes. After consideration of these borrowings, $183.8 million was
available to Promus under the Bank Facility as of June 30, 1994.
Interest Rate Reduction
-----------------------
A primary financial objective was fulfilled during second quarter 1994 with
the announcement by Standard and Poor's that it had upgraded Promus' implied
senior debt rating to investment grade status. As a result of achieving
investment grade status, the interest rate on Promus' Bank Facility has been
reduced by 1/4 of 1%. The interest rate has also been reduced by an additional
1/4 of 1% due to Promus' exceeding a defined minimum financial covenant
requirement. Both rate reductions were effective July 25, 1994. These
interest rate reductions will remain in force so long as the investment grade
status is maintained and the minimum financial covenant is exceeded.
Interest Rate Agreements
------------------------
In prior years, Promus entered into various interest rate swap agreements
as summarized in the following table:
Next Semi-
Swap Rate at Annual Rate
Associated Rate June 30, Adjustment Swap Agreement
Debt (LIBOR+) 1994 Date Expiration Date
- -------------- -------- -------- ----------- ----------------
10 7/8% Notes
$200 million 4.73% 9.16% Oct. 15 October 15, 1997
8 3/4% Notes
$50 million 3.42% 8.85% Nov. 15 May 15, 1998
$50 million 3.22% 6.69% July 15 July 15, 1998
-24-
In accordance with the terms of the interest rate swap agreements, the
effective interest rate on $50 million of 8 3/4% Notes was adjusted on July 15,
1994 to 8.71%. This rate will remain in effect until January 15, 1995.
Promus has guaranteed the debt of a third party and has entered into an
interest rate swap with the third party in which Promus exchanged a fixed
interest rate for the variable interest rate of the subject debt. Promus does
not believe that its exposure under this agreement is material.
Promus maintains interest rate protection, in the form of a rate collar
transaction entered into in June 1990, on $140 million on its variable rate
bank debt. The interest rate protection expires in June 1995 and currently
holds Promus' interest rate in a range between 8.8% and 12.0%.
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.
INCOME TAX MATTERS
- ------------------
In connection with the spin-off of Promus' stock (the Spin-off) to Holiday
Corporation (Holiday) stockholders on February 7, 1990, Promus is liable, with
certain exceptions, for the taxes of Holiday and subsidiaries for all pre-Spin-
off 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 was 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 during first quarter 1994. 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 have begun. 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.
EQUITY TRANSACTIONS
- -------------------
On April 29, 1994, Promus' stockholders approved an amendment to the
Certificate of Incorporation which increased the number of authorized shares
from 120 million to 360 million and reduced the par value per share from $1.50
to $0.10. As a result of the change in the par value, approximately $143
million was transferred from the common stock account to capital surplus on
the balance sheet.
-25-
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 during fourth quarter 1993
adding more than 350,000 square feet of casino space and 10,000 rooms to the
market. 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 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. Certain 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, creating the potential for over capacity in the market. In such
markets, operating performance may suffer due to oversupply and as competing
casinos 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 August
9, 1994, had resulted in the approval of 107 compacts for the development of
casinos on Native American lands in 19 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 and the hotel
segment as discussed above, combined with the further geographic
diversification and the continuing 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.
INTERCOMPANY DIVIDEND RESTRICTION
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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 $607.3 million at June 30, 1994. 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.
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Item 6. Exhibits and Reports on Form 8-K
----------------------------------------------------------
(a) Exhibits
EX-10.1 Employment Agreement dated as of
February 25, 1994, and effective April
29, 1994, between The Promus Companies
Incorporated and Michael D. Rose.*
EX-10.2 Amendment dated February 25, 1994, and
effective April 29, 1994, to Amended and
Restated Severance Agreement dated November
5, 1992, between the Promus Companies
Incorporated and Philip G. Satre.*
EX-10.3 The Promus Companies Incorporated 1990 Stock
Option Plan, as amended July 29, 1994.*
EX-10.4 Amendment dated as of May 27, 1994, to
The Promus Companies Incorporated Savings
and Retirement Plan.*
EX-11 Computation of per share earnings.**
(b) No reports on Form 8-K were filed during the quarter ended June 30, 1994.
* Previously filed.
** 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
BY: MICHAEL N. REGAN
October 11, 1994 ------------------------------
Michael N. Regan
Vice President and Controller
(Chief Accounting Officer)
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Exhibit Index
-------------
Exhibit No. Description Sequential Page No.
----------- ----------- -------------------
EX-10.1 Employment Agreement dated as of
February 25, 1994, and effective April
29, 1994, between The Promus Companies
Incorporated and Michael D. Rose.* N/A
EX-10.2 Amendment dated February 25, 1994, and
effective April 29, 1994, to Amended and
Restated Severance Agreement dated November
5, 1992, between the Promus Companies
Incorporated and Philip G. Satre.* N/A
EX-10.3 The Promus Companies Incorporated 1990 Stock
Option Plan, as amended July 29, 1994.* N/A
EX-10.4 Amendment dated as of May 27, 1994, to
The Promus Companies Incorporated Savings
and Retirement Plan.* N/A
EX-11 Computation of per share earnings.** 30
* Previously filed.
** Filed herewith.
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EX-11
THE PROMUS COMPANIES INCORPORATED
COMPUTATION OF PER SHARE EARNINGS (1)
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1994 1993 1994 1993
Income before
extraordinary items $ 39,876,000 $ 22,815,000 $ 68,092,000 $ 34,780,000
Extraordinary items, net - (316,000) - (1,325,000)
Cumulative effect of
change in accounting
policy, net - - (7,932,000) -
------------ ------------ ------------ ------------
Net income $ 39,876,000 $ 22,499,000 $ 60,160,000 $ 33,455,000
============ ============ ============ ============
Primary earnings per
share
Weighted average number
of common shares
outstanding 101,615,334 100,631,313 101,556,187 100,568,984
Common stock
equivalents
Additional shares
based on average
market price for
period applicable
to:
Restricted
stock 432,838 878,586 448,017 878,700
Stock options 778,039 833,462 853,851 744,767
------------ ------------ ------------ ------------
Average number of
primary common and
common equivalent
shares outstanding 102,826,211 102,343,361 102,858,055 102,192,451
============ ============ ============ ============
Primary earnings per
common and common
equivalent share
Income before
extraordinary items $ 0.39 $ 0.22 $ 0.66 $ 0.34
Extraordinary items - - - (0.01)
Change in accounting
policy - - (0.08) -
------ ------ ------ ------
Net income $ 0.39 $ 0.22 $ 0.58 $ 0.33
====== ====== ====== ======
Fully diluted earnings
per share
Average number of
primary common and
common equivalent
shares outstanding 102,826,211 102,343,361 102,858,055 102,192,451
Additional shares
based on period-
end price
applicable to:
Restricted stock 13,606 4,854 23,952 -
Stock options - 61,433 - 150,128
------------ ------------ ------------ ------------
Average number of fully
diluted common and
common equivalent
shares outstanding 102,839,817 102,409,648 102,882,007 102,342,579
============ ============ ============ ============
Fully diluted earnings
per common and
common equivalent
share
Income before
extraordinary items $ 0.39 $ 0.22 $ 0.66 $ 0.34
Extraordinary items - - - (0.01)
Change in accounting
policy - - (0.08) -
------ ------ ------ ------
Net income $ 0.39 $ 0.22 $ 0.58 $ 0.33
====== ====== ====== ======
(1) June 30, 1993 amounts have been retroactively adjusted for three-for-two
stock split approved by Promus' Board of Directors on October 29, 1993.
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