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 JUNE 30, 1996
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 Number 1-11463
PROMUS HOTEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware I.R.S. No. 62-1596939
(State of Incorporation) (I.R.S. Employer Identification No.)
755 Crossover Lane
Memphis, Tennessee 38117
(Address of principal executive offices)(Zip Code)
(901) 374-5000
(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
------- ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of June 30, 1996.
Common Stock ................................ 51,389,314 shares
Page 1 of 52
Exhibit Index Page 32
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
----------------------------
As discussed in Note 1, on June 30, 1995, The Promus Companies Incorporated
(Parent) completed the transfer of the operations, assets and liabilities of its
hotel business (the Hotel Business), composed of three brands targeted at
specific market segments (Embassy Suites, Hampton Inn and Homewood Suites) to a
new publicly traded entity, Promus Hotel Corporation (Promus or the Company).
The accompanying consolidated condensed financial statements of Promus include
the assets, liabilities, revenues, expenses and cash flows of the Hotel Business
on a stand-alone basis for the six months ended June 30, 1995, as well as actual
results of the Company as of December 31, 1995 and for the six months ended June
30, 1996.
The accompanying unaudited consolidated condensed financial statements of
Promus, 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 financial statements are unaudited, but
reflect all adjustments (consisting only of normal recurring adjustments) which
management considers necessary for a fair presentation of financial position,
results of operations and cash flows. 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 Promus'
consolidated financial statements and notes thereto included in the Promus 1995
Annual Report to Stockholders.
2
<PAGE>
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, Dec. 31,
(in thousands, except share amounts) 1996 1995
<S> ---------- ----------
ASSETS <C> <C>
Current assets
Cash and cash equivalents $ 4,291 $ 2,668
Receivables, including notes receivable of $1,076 and $497,
less allowance for doubtful accounts of $1,248 and $1,172 19,454 14,837
Deferred income taxes 3,397 3,492
Prepayments and other 3,867 2,429
--------- ---------
Total current assets 31,009 23,426
Land, buildings, furniture and equipment 440,582 436,887
Less: accumulated depreciation (111,796) (104,993)
--------- ---------
328,786 331,894
Investments in and advances to nonconsolidated affiliates
(Note 6) 135,271 90,506
Investment in franchise system 40,814 31,652
Deferred costs and other 42,982 42,331
--------- ---------
$ 578,862 $ 519,809
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 19,948 $ 18,202
Accrued expenses 39,469 36,371
Current portion of long-term debt 275 278
--------- ---------
Total current liabilities 59,692 54,851
Long-term debt (Note 3) 243,180 229,479
Deferred credits and other 39,499 36,282
Deferred income taxes 32,040 31,830
--------- ---------
374,411 352,442
--------- ---------
Commitments and contingencies (Note 4)
Stockholders' equity
Common stock, $0.10 par value, 360,000,000 shares authorized,
51,389,314 and 51,371,152 shares outstanding, net of 5,466
and 2,626 shares held in treasury 5,139 5,137
Capital surplus 136,291 136,057
Retained earnings 56,234 25,349
Unrealized gain on marketable equity securities, net of
related deferred tax liability of $4,830 and $1,165 7,555 1,822
Deferred compensation related to restricted stock (768) (998)
--------- ---------
204,451 167,367
--------- ---------
$ 578,862 $ 519,809
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
balance sheets.
3
<PAGE>
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
(in thousands) 1996 1995 1996 1995
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Company owned hotels
Rooms $ 31,642 $30,165 $ 62,955 $ 59,634
Food and beverage 1,661 1,896 3,186 3,788
Other 1,852 1,738 3,744 3,430
Franchise and management fees 26,198 20,697 47,518 38,193
Other 8,040 7,028 14,152 12,966
-------- ------- -------- --------
Total revenues 69,393 61,524 131,555 118,011
-------- ------- -------- --------
Operating expenses
Company owned hotels
Rooms 15,300 14,381 29,980 27,981
Food and beverage 1,551 1,852 2,943 3,554
Other 3,286 3,116 6,530 6,687
Other operating expenses 7,812 7,230 13,483 12,452
Depreciation of buildings and equipment 6,005 5,319 11,854 10,439
Corporate expense 3,190 1,869 7,021 4,201
-------- ------- -------- --------
Total operating expenses 37,144 33,767 71,811 65,314
-------- ------- -------- --------
Operating income before property transactions 32,249 27,757 59,744 52,697
Property transactions 3,802 (32) 3,537 (327)
-------- ------- -------- --------
Operating income 36,051 27,725 63,281 52,370
Interest expense, net of interest capitalized
(Note 3) (7,693) (8,068) (15,401) (16,380)
Interest and other income 2,432 420 4,556 674
-------- ------- -------- --------
Income before income taxes 30,790 20,077 52,436 36,664
Provision for income taxes (12,654) (8,451) (21,551) (15,434)
-------- ------- -------- --------
Net income (Note 8) $ 18,136 $11,626 $ 30,885 $ 21,230
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE>
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
(in thousands) 1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 30,885 $ 21,230
Adjustments to reconcile net income
to cash flows provided by operating activities
Depreciation and amortization 13,347 11,731
Other noncash items 42 (230)
Equity in earnings of, net of distributions
from, nonconsolidated affiliates 2,094 (952)
Net (gains) losses from property transactions (3,789) 175
Net change in long-term accounts (1,114) 1,773
Net change in working capital accounts (698) (1,800)
-------- --------
Cash flows provided by operating activities 40,767 31,927
-------- --------
Cash flows from investing activities
Investment in and advances to nonconsolidated
affiliates (37,205) (294)
Land, buildings, furniture and equipment additions (23,812) (33,608)
Proceeds from property transactions 18,629 (175)
Net investments in franchise system (12,336) (8,400)
Advances under mezzanine loan agreements (2,910) (5,874)
Recovery of investment in franchise system 2,699 1,710
Repayments under mezzanine loan agreements 1,500 -
Other 378 227
-------- --------
Cash flows used in investing activities (53,057) (46,414)
-------- --------
Cash flows from financing activities
Net borrowings under revolving credit facility 13,850 -
Debt retirements (152) (145)
Advances from parent - 14,840
Other 215 -
-------- --------
Cash flows provided by financing
activities 13,913 14,695
-------- --------
Net increase in cash and cash equivalents 1,623 208
Cash and cash equivalents, beginning of period 2,668 2,221
-------- --------
Cash and cash equivalents, end of period $ 4,291 $ 2,429
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND ORGANIZATION
- ------------------------------------------------
On June 30, 1995, The Promus Companies Incorporated (Parent) completed the
transfer of the operations, assets and liabilities of its hotel business (the
Hotel Business), composed of three hotel brands targeted at specific market
segments (Embassy Suites, Hampton Inn and Homewood Suites) to a new publicly
traded entity, Promus Hotel Corporation (Promus or the Company). As approved by
Parent's Board of Directors and stockholders on May 26, 1995, this entity was
spun-off (the Spin-Off) from Parent and its stock was distributed to Parent's
stockholders on a one-for-two basis effective June 30, 1995 (the Distribution).
Concurrent with the Distribution, Parent changed its name to Harrah's
Entertainment, Inc.
The accompanying consolidated condensed financial statements include the
assets, liabilities, revenues, expenses and cash flows of Parent's Hotel
Business on a stand-alone basis for the six months ended June 30, 1995, as well
as actual results of the Company as of December 31, 1995 and for the six months
ended June 30, 1996. The preparation of these financial statements required the
use of certain estimates by management in determining the Company's assets,
liabilities, revenues and expenses.
All significant intercompany accounts and transactions have been
eliminated. 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 - other and its
proportionate share of interest expense of such nonconsolidated affiliates is
included in interest expense in the consolidated statements of income (see Note
6 for combined summarized financial information regarding these nonconsolidated
affiliates). Management believes Promus' inclusion of its proportionate share of
the interest expense of its equity investees in interest expense is the
preferable presentation due to the nature of its equity investments. Certain
prior year amounts have been reclassified to conform with the current year
presentation.
6
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
NOTE 2 - NATURE OF OPERATIONS
- -----------------------------
Promus owns, operates and franchises the Embassy Suites, Embassy Vacation
Resorts, Hampton Inn, Homewood Suites and Hampton Inn & Suites hotel brands. The
Embassy Suites brand is a full-service hotel brand that management believes
comprises the largest all-suite upscale hotel system in the United States by
number of hotel suites and system revenue. Embassy Vacation Resorts is the
Company's newest hotel brand and represents Promus' entry into the timeshare
market. The Hampton Inn brand offers a limited-facility hotel and the Homewood
Suites brand offers residential-style accommodations designed for the extended
stay traveler. The Hampton Inn & Suites brand combines, in a single hotel,
Hampton-style rooms with two-room suites and a lodge-like common area.
Promus' primary focus is to develop, grow and support its franchise
business for all brands. Promus brand hotels are located in virtually every
state, the District of Columbia and five foreign countries. Promus charges each
franchisee royalty fees of generally four percent of suite or room rentals.
Royalty fees for the six months ended June 30, 1996 and 1995 were based on
system-wide reported rooms revenues of $923.4 million (including $63.0 million
from company owned hotels) and $783.1 million, (including $59.6 million from
company owned hotels) respectively. In addition, Promus earns a licensing fee
for new licenses granted to franchisees when the franchise is approved. Promus
also receives franchise fees of generally two percent of net interval sales and
two percent of suite revenues related to Embassy Vacation Resort properties.
Promus operates 116 Promus-brand hotels (including one Embassy Vacation
Resort). Company operated properties include wholly-owned, partially owned
through joint ventures and hotels managed for third parties. Promus has followed
an asset strategy to own and manage a mix of Promus hotels that can positively
affect profits and enhance its role as franchisor for its brands. Management fee
income is based on a percentage of gross revenues, profits, or both, at the
related managed property.
7
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
NOTE 3 - LONG-TERM DEBT
- -----------------------
Parent Debt Allocation
----------------------
The Company's results of operations through June 30, 1995 reflect all
indebtedness, together with related interest expense, specifically identified
with Promus entities, as well as a pro rata portion of Parent's historical
corporate debt balance, unamortized deferred finance charges and interest
expense. Allocations of those amounts to Promus from Parent were based on the
percentage of Parent's historical corporate debt that was expected to be retired
using proceeds from Promus' new $350 million bank credit facility (the Promus
Facility). Parent's corporate interest expense, including amortization of
deferred finance costs, allocated to Promus before the Spin-Off was $5.5 million
and $10.5 million for the three and six months ended June 30, 1995.
Interest Rate Agreements
------------------------
As of June 30, 1996, Promus was a party to several interest rate swap
agreements that help the Company manage the relative mix of its debt between
fixed and variable rate instruments. These agreements effectively modify the
interest characteristics of its outstanding debt without an exchange of the
underlying principal amount. Pursuant to the agreements, Promus receives a
variable interest rate tied to LIBOR in exchange for its payments at a fixed
interest rate. The fixed rates to be paid by Promus are summarized in the
following table.
Next
Quarterly
Notional Amount Variable
(All Associated Effective Rate
with the Promus Swap Rate Rate at Adjustment Swap
Facility) Paid(Fixed) June 30 Date Maturity
--------------- ----------- --------- ---------- --------
$12.5 million 6.92% 7.37% 9/1996 12/1998
$12.5 million 6.74% 7.19% 7/1996 1/1999
$12.5 million 6.68% 7.13% 9/1996 12/1999
$12.5 million 6.52% 6.97% 7/1996 1/2000
$50.0 million 6.99% 7.44% 9/1996 3/2000
8
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
NOTE 3 - LONG TERM DEBT (CONTINUED)
- ----------------------------------
The differences to be paid or received under the terms of the interest rate
swap agreements described above are accrued as an adjustment to interest expense
for the related debt. Changes in interest rates pursuant to the terms of these
interest rate agreements will have a corresponding effect on Promus' 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.
NOTE 4 - CONTRACTUAL COMMITMENTS
- --------------------------------
Contractual Commitments
-----------------------
Promus is liable under certain lease agreements pursuant to which it has
assigned the direct obligation to third party interests. Additionally, Promus
manages certain hotels for others under agreements that provide for payments or
loans to the hotel owners if stipulated levels of financial performance are not
maintained. The Company has also provided guarantees for certain loans related
to joint venture and other investments (see discussion regarding $25.0 million
loan guarantee related to the FelCor Agreements below). Promus believes the
likelihood is remote that material payments will be required under these
agreements. Promus' estimated maximum exposure under such agreements is
approximately $64.0 million over the next 30 years.
FelCor Agreements
-----------------
In May 1995, Promus entered into a Subscription Agreement with FelCor Suite
Hotels, Inc. and FelCor Suites Limited Partnership (FelCor) whereby Promus
agreed to purchase up to $25.0 million in FelCor limited partnership interests
to help fund the partnership's acquisition of all-suite upscale hotels to be
converted to the Embassy Suites brand. In September 1995, Promus entered into a
second agreement with FelCor in connection with FelCor's agreement to acquire
the Crown Sterling Suites hotel chain. FelCor is currently in the process of
converting 16 of the Crown Sterling Suites hotels they acquired (over 4,000
suites) to the Embassy Suites brand. In
9
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
- -------------------------------------------------
consideration, Promus agreed to make up to a $50.0 million investment in FelCor
common stock and has guaranteed repayment of a third party loan advanced
to FelCor that is not to exceed $25.0 million (which is included in the
$64.0 million estimate of maximum exposure under contractual commitments
discussed above). Hotels converted to the Embassy Suites brand under either of
these agreements will operate under 20-year license agreements, and 10-year
management contracts will be awarded to Promus. Subject to some restrictions,
the limited partnership interests may be converted to shares of FelCor common
stock on a one-for-one basis and the common stock may be sold on the open
market.
As of June 30, 1996, FelCor had acquired 24 all-suite hotel properties
(including 16 Crown Sterling Suites hotels) under these agreements. Of the eight
non-Crown Sterling Suites hotels acquired, five had been Embassy Suites hotels
before their acquisition, and two of those five were already being managed by
Promus. As of June 30, 1996, Promus managed all 24 properties (which include
5,765 suites), with nine of the Crown Sterling Suites hotels still in the
process of being converted to the Embassy Suites brand. Conversion of the
remaining properties is expected to be complete by the fall of 1996. Although
management fees are already being earned on all of these properties, franchise
royalties do not begin to accrue until the conversion is complete. As of June
30, 1996, Promus had funded $70.6 million of the total $75.0 million commitment.
Based on the market value of FelCor common stock as of June 30, 1996, Promus
recorded an unrealized gain on marketable equity securities of $12.4 million
(before tax) directly to stockholders' equity. This amount will change with
increases or decreases in the market value of FelCor common stock.
Equity Inns and Winston Hotels Agreements
-----------------------------------------
Promus has strategic development alliances with Equity Inns, Inc. (Equity
Inns), and Winston Hotels, Inc. (Winston Hotels) whereby Promus will invest up
to $15.0 million in both Equity Inns and Winston Hotels common stock as they
purchase existing or to be constructed Promus hotels from the Company. During
the second quarter two company owned properties, a Hampton Inn hotel in Michigan
and a Homewood Suites hotel in Connecticut, were sold to Equity Inns for cash
proceeds of $18.6 million. Simultaneously, Promus made a $4.0 million investment
in Equity Inns common stock.
10
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
- -------------------------------------------------
The agreements provide for the sale of one additional company owned property at
a stated price and seven company approved projects at Promus' cost of
construction. In addition to the Homewood Suites hotel Equity Inns purchased
in the second quarter, they are the largest owner of Hampton Inn hotels, with
31 properties. Winston Hotels currently owns 13 Promus branded hotels. Equity
Inns and Winston Hotels have each expressed their intent to spend $100.0
million for development of Promus brand properties over the next few years.
Promus will receive 20-year license agreements and 10-year management
agreements for hotels developed or purchased pursuant to these agreements.
Litigation
----------
The Company is a party to 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.
Employment and Severance Agreements
-----------------------------------
Promus has severance agreements with 13 senior officers of the Company that
provide for a payment of 2.99 times the average annual cash compensation (salary
and bonus) paid to each executive for the five preceding calendar years,
including compensation paid during service with Parent. The agreements also
provide for accelerated payment of any compensation or awards payable to the
executives under any Promus incentive compensation or stock option plan in the
event of termination of an executive's employment, as described in the
agreements, subsequent to a change in control of Promus, as defined. The maximum
amount of compensation that would be payable under all agreements if a change in
control occurred and if the executives were terminated as of June 30, 1996,
would be approximately $22.7 million.
11
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
- -------------------------------------------------
Self-Insurance Reserves
-----------------------
Promus self-insures various levels of general liability, workers'
compensation and employee medical coverage. All self-insurance reserves include
accruals of estimated settlements for known claims, as well as accruals of
actuarial estimates of incurred but not reported claims. These estimates are
based on historical information along with certain assumptions about future
events. Changes in assumptions for such things as medical costs and legal
expenses, as well as changes in actual experience, could cause these estimates
to change in the near term.
NOTE 5 - SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR INTEREST AND TAXES
- --------------------------------------------------------------------
The following table reconciles Promus' interest expense, net of interest
capitalized, to cash paid for interest (in thousands):
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest expense, net of amount capitalized
(Note 3) $ 7,693 $ 8,068 $15,401 $16,380
Adjustments to reconcile to cash paid for interest
Promus' share of interest expense of
nonconsolidated affiliates (Note 6) (3,029) (3,354) (6,036) (6,615)
Capitalized interest 395 664 725 664
Net change in accruals 580 - 246 -
Amortization of deferred finance charges (196) (208) (388) (402)
Other (38) (41) (76) (85)
------- ------- ------- -------
Cash paid for interest $ 5,405 $ 5,129 $ 9,872 $ 9,942
======= ======= ======= =======
Cash paid for income taxes $20,191 $ - $24,779 $ -
======= ======= ======= =======
</TABLE>
For purposes of this presentation, interest expense allocated to Promus by
Parent is assumed to be paid in the quarter allocated. Parent was responsible
for the payment of Promus' income taxes for periods prior to the Spin-Off.
12
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
NOTE 6 - NONCONSOLIDATED AFFILIATES
- -----------------------------------
Combined summarized statements of income for nonconsolidated affiliates,
which Promus accounted for using the equity method, were as follows (in
thousands):
<TABLE>
<CAPTION
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Combined Summarized Statements of Income
Revenues $42,224 $42,797 $83,165 $80,770
======= ======= ======= =======
Operating income $11,222 $11,201 $20,261 $19,172
======= ======= ======= =======
Net income $ 4,735 $ 4,024 $ 7,321 $ 5,005
======= ======= ======= =======
</TABLE>
Promus' share of its nonconsolidated affiliates' combined net income is
reflected in the accompanying consolidated condensed statements of income as
follows (in thousands):
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Pre-interest income (included in
revenues - other) $ 5,915 $ 5,986 $10,860 $10,466
======= ======= ======= =======
Interest expense (included in interest expense) $(3,029) $(3,354) $(6,036) $(6,615)
======= ======= ======= =======
</TABLE>
The components of investments in and advances to nonconsolidated affiliates
reflected in the consolidated condensed balance sheets were as follows (in
thousands):
June 30, Dec. 31,
1996 1995
-------- -------
At market $ 87,421 $33,016
At equity 37,904 39,868
At cost 9,946 17,622
-------- -------
$135,271 $90,506
======== =======
13
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
NOTE 7 - SUMMARIZED FINANCIAL INFORMATION
- -----------------------------------------
Promus Hotels, Inc. (PHI) is a wholly-owned subsidiary of Promus and the
primary entity through which the operations of Promus are conducted. PHI is also
Promus' principal asset. Summarized consolidated financial information for PHI,
prepared on the same basis as Promus, is as follows (in thousands):
<TABLE>
<CAPTION>
June 30, Dec. 31,
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets $ 30,759 $ 23,246
Land, buildings and equipment, net 328,786 331,894
Other assets 215,228 163,714
-------- --------
574,773 518,854
-------- --------
LIABILITIES
Current liabilities 59,918 54,851
Long-term debt 243,180 229,479
Other liabilities 71,539 68,112
-------- --------
374,637 352,442
-------- --------
Net assets $200,136 $166,412
======== ========
</TABLE>
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues $69,393 $61,524 $131,555 $118,011
======= ======= ======== ========
Operating income $36,282 $27,725 $ 63,640 $ 52,370
======= ======= ======== ========
Net income $18,279 $11,626 $ 31,104 $ 21,230
======= ======= ======== ========
</TABLE>
14
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
NOTE 8 - EARNINGS PER SHARE
- ---------------------------
Promus' common stock was distributed in connection with the Spin-Off on
June 30, 1995. In order to present earnings per share on a comparable basis, the
weighted average common shares outstanding for periods prior to the Spin-Off are
assumed to be equal to the actual common and common equivalent shares
outstanding on June 30, 1995. Historical net income is used for all periods
presented (in thousands, except per share amounts).
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $18,136 $11,626 $30,885 $21,230
======= ======= ======= =======
Earnings per share $ 0.35 $ 0.23 $ 0.60 $ 0.41
======= ======= ======= =======
Weighted average shares outstanding 51,685 51,573 51,632 51,573
======= ======= ======= =======
</TABLE>
15
<PAGE>
Item 2. Management's Discussion and Analysis
---------------------------------------------
of Financial Condition and Results of Operations
-------------------------------------------------
On June 30, 1995, The Promus Companies Incorporated (Parent) completed the
transfer of the operations, assets and liabilities of its hotel business (the
Hotel Business), composed of three hotel brands targeted at specific market
segments (Embassy Suites, Hampton Inn and Homewood Suites) to a new publicly
traded entity, Promus Hotel Corporation (Promus or the Company). As approved by
Parent's Board of Directors and stockholders on May 26, 1995, this entity was
spun-off (the Spin-Off) from Parent and its stock was distributed to Parent's
stockholders on a one-for-two basis effective June 30, 1995 (the Distribution).
Concurrent with the Distribution, Parent changed its name to Harrah's
Entertainment, Inc.
Promus owns, operates and franchises the Embassy Suites, Embassy Vacation
Resorts, Hampton Inn, Homewood Suites and Hampton Inn & Suites hotel brands. The
Embassy Suites brand is a full-service hotel brand that management believes
comprises the largest all-suite upscale hotel system in the United States by
number of hotel suites and system revenue. Embassy Vacation Resorts is the
Company's newest hotel brand and represents Promus' entry into the timeshare
market. The Hampton Inn brand offers a limited-facility hotel and the Homewood
Suites brand offers residential-style accommodations designed for the extended
stay traveler. The Hampton Inn & Suites brand combines, in a single hotel,
Hampton-style rooms with two-room suites and a lodge-like common area.
Promus' primary focus is to develop, grow and support its franchise
business for all brands. Promus brand hotels are located in virtually every
state, the District of Columbia and five foreign countries. Promus charges each
franchisee royalty fees of generally four percent of suite or room rentals.
Royalty fees for the six months ended June 30, 1996 and 1995 were based on
system-wide reported rooms revenues of $923.4 million (including $63.0 million
from company owned hotels) and $783.1 million, (including $59.6 million from
company owned hotels) respectively. In addition, Promus earns a licensing fee
for new licenses granted to franchisees when the franchise is approved. Promus
also receives franchise fees of generally two percent of net interval sales and
two percent of suite revenues related to Embassy Vacation Resort properties.
16
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Promus operates 116 Promus-brand hotels (including one Embassy Vacation
Resort). Company operated properties include wholly-owned, partially owned
through joint ventures and hotels managed for third parties. Promus has followed
an asset strategy to own and manage a mix of Promus hotels that can positively
affect profits and enhance its role as franchisor for its brands. Management fee
income is based on a percentage of gross revenues, profits, or both, at the
related managed property.
RESULTS OF OPERATIONS
- ---------------------
The principal factors affecting Promus' results are: continued growth in
the number of hotels; occupancies and room rates achieved by the hotel brands;
number and relative mix of owned, managed and franchised hotels; and Promus'
ability to manage costs. The number of rooms/suites at franchised and managed
properties and revenue per available room/suite (RevPAR/S) significantly affect
Promus' results because franchise royalty and management fees are based upon a
percentage of rooms/suites revenues. Increases in franchise and management fee
revenues have a disproportionate favorable impact on Promus' operating margin
due to minimal incremental costs associated with these revenues.
Actual historical results of operations for the three and six months ended
June 30, 1996 and 1995 were as follows (in millions, except percentages and per
share data):
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30, June 30, Inc/ June 30, June 30, Inc/
1996 1995 (Dec) 1996 1995 (Dec)
------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $69.4 $61.5 12.8% $131.6 $118.0 11.5%
Operating income before
property transactions $32.2 $27.8 15.8% $ 59.7 $ 52.7 13.3%
Operating margin before
property transactions 46.4% 45.2% 1.2pts 45.4% 44.7% 0.7pts
Operating income $36.1 $27.7 30.3% $ 63.3 $ 52.4 20.8%
Operating margin 52.0% 45.0% 7.0pts 48.1% 44.4% 3.7pts
Net income $18.1 $11.6 56.0% $ 30.9 $ 21.2 45.8%
Earnings per share (a) $ 0.35 $ 0.23 52.2% $ 0.60 $ 0.41 46.3%
Weighted average shares
outstanding (a) 51.7 51.6 51.6 51.6
</TABLE>
- --------
(a) For purposes of computing earnings per share on a comparable basis,
the weighted average shares outstanding for periods prior to the Spin-Off are
assumed to be equal to the actual common and common equivalent shares
outstanding on June 30, 1995.
17
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Because Promus began operations as a public company on July 1, 1995,
comparison with historical results is difficult. The most notable differences
between years relate to the incremental stand alone public company costs
incurred in the first six months of 1996, and that prior to the Spin-Off,
interest was allocated to Promus from Parent at Parent's higher overall
borrowing rate. In order to present the Company's 1995 results of operations on
a pro forma basis to achieve better comparability between years, the following
adjustments were made (in millions):
Second Quarter Six Months
Ended Ended
-------------- ----------
Incremental stand alone public
company costs $(2.0) $(4.1)
Net reduction in interest expense 1.0 2.2
Decrease in tax provision related to
the above adjustments 0.4 0.8
----- -----
Total adjustments to net income $(0.6) $(1.1)
===== =====
Results of operations on a pro forma basis for 1995 versus actual results
for 1996 were as follows (in millions, except percentages and per share data):
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30, June 30, Inc/ June 30, June 30, Inc/
1996 1995 (Dec) 1996 1995 (Dec)
------- ------ ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $69.4 $61.5 12.8% $131.6 $118.1 11.4%
Operating income before
property transactions $32.2 $25.7 25.3% $ 59.7 $ 48.6 22.8%
Operating margin before
property transactions 46.4% 41.8% 4.6pts 45.4% 41.2% 4.2pts
Operating income $36.1 $25.7 40.5% $ 63.3 $ 48.3 31.1%
Operating margin 52.0% 41.8% 10.2pts 48.1% 40.9% 7.2pts
Net income $18.1 $11.0 64.5% $ 30.9 $ 20.2 53.0%
Earnings per share $ 0.35 $ 0.21 66.7% $ 0.60 $ 0.39 53.8%
Weighted average shares
outstanding 51.7 51.6 51.6 51.6
</TABLE>
18
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The 1996 increases in revenues, operating income and operating margins are
primarily a function of the approval and addition of new franchised hotels,
additional management contracts (primarily as a result of the FelCor Agreements
- - see Development and Capital Spending), system-wide increases in ADR and cost
containment. In addition, the May 1996 sale of two company owned hotels (one
Hampton Inn and one Homewood Suites), the September 1995 opening of a new
Homewood Suites hotel, and one Embassy Suites restaurant lease termination in
October 1995, impact the year over year comparisons.
Company owned hotel revenues increased 4.0% or $1.4 million and 4.5% or
$3.0 million over 1995 for the three and six months ended June 30, 1996,
respectively. On a comparable hotel basis (which includes only those hotels open
for both years), second quarter 1996 RevPAR/S increased 6.3%, 6.2% and 6.6% over
the same period last year at Embassy Suites, Hampton Inn and Homewood Suites
hotels, respectively. For the six months ended June 30, 1996, RevPAR/S at
Embassy Suites, Hampton Inn and Homewood Suites hotels increased 5.6%, 5.3% and
5.7% over 1995 on a comparable basis, respectively. Company owned hotel expenses
increased 4.1% or $0.8 million and 3.2% or $1.2 million for the second quarter
and first six months of 1996 compared to the same periods last year.
Franchise and management fees increased 26.6% or $5.5 million and 24.4% or
$9.3 million over 1995 for the three and six months ended June 30, 1996,
respectively. As of June 30, 1996, Promus' combined hotel system had grown to
include 729 properties and 96,087 rooms/suites (not including Embassy Vacation
Resort properties), representing 17.6% and 15.9% increases over June 30, 1995,
respectively. Although comparable system occupancy rates generally decreased
slightly across brands, average daily rates (ADR) have consistently increased,
resulting in higher RevPAR/S. The system expansion plus continued year over year
RevPAR/S increases are the primary elements causing total system room revenues
to increase 18.7% and 17.9% for the second quarter and first six months of 1996,
over the comparable periods last year, to $496.9 million and $923.4 million,
respectively. With the closing of the 16th and final Crown Sterling Suites hotel
property by FelCor in May 1996, rooms under management contracts as of June 30,
1996 have increased 76.6% over prior year. This continued unit growth in the
franchise systems and the expansion of hotels under management contract, coupled
with the continued focus on rate growth and cost management, were the primary
contributors to the Company's higher revenues, margins and operating income as
compared to prior year.
19
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Net income on a pro forma basis increased 64.5% and 53.0% over 1995 for the
three and six months ended June 30, 1996. The 1996 results include a pretax
property transaction gain of $4.2 million on the sale of a Hampton Inn hotel and
a Homewood Suites hotel to Equity Inns (see Development and Capital Spending).
Excluding property transactions from all periods, net income increased 43.8%, or
$4.8 million and 41.5% or $8.5 million over 1995 for the three and six months
ended June 30, 1996, respectively.
The following comparison of expenses and other items is based on actual
historical results (in millions, except percentages):
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30, June 30, Inc/ June 30, June 30, Inc/
1996 1995 (Dec) 1996 1995 (Dec)
------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest expense $(7.7) $(8.1) (4.9)% $(15.4) $(16.4) (6.1)%
Interest and other income 2.4 0.4 N/M 4.6 .7 N/M
Effective tax rate 41.1% 42.1% (1.0)pts 41.1% 42.1% (1.0)pts
</TABLE>
Interest expense for the quarter and six months ended June 30, 1995,
includes the pro rata allocation of corporate interest by Parent related to the
debt that was expected to be retired in connection with the Spin-Off using funds
drawn on the Company's new $350 million bank credit facility (the Promus
Facility), in addition to Promus' share of interest expense attributable to its
nonconsolidated affiliates (including joint ventures) and other specific
hotel-related debt. Interest expense for the second quarter and first half of
1996 decreased compared to 1995 due primarily to lower actual interest rates
obtained under the Promus Facility as compared to Parent's overall borrowing
rate used to allocate corporate interest expense before the Spin-Off, in
addition to a decrease in interest expense attributable to the Company's
nonconsolidated subsidiaries, partially offset by an increase in interest
expense related to deferred compensation balances. The decrease in
nonconsolidated subsidiaries' interest expense results primarily from the July
1995 early debt extinguishment and accompanying $9.0 million investment the
Company made in an Embassy Suites joint venture, and successfully securing more
favorable terms on several other joint ventures' debt instruments over the past
year.
20
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Interest and other income for the second quarter and first six months of
1996 increased over 1995 due primarily to increased dividend income associated
with the Company's REIT investments (see Development and Capital Spending), as
well as interest income on mezzanine loans to franchisees and interest charged
on Promus' investment in the franchise system.
The effective tax rate for all periods is higher than the federal statutory
rate primarily due to state income taxes.
DEVELOPMENT AND CAPITAL SPENDING
- --------------------------------
Hotel Development
-----------------
There were 60 net hotel additions to the hotel systems during the first
half of 1996 compared to 50 in the same period last year. This continued
development growth is particularly impressive considering that, per the latest
available information provided to Smith Travel Research at June 1996, Promus
hotel brands had a 2.8% share of the entire United States room supply, and
accounted for 13.1% of new rooms added to the market from ground-up construction
during the first six months of 1996. This growth occurred primarily in the
Hampton Inn brand. As of June 30, 1996, 131 properties were under construction
or in the process of being converted to a Promus brand (excluding Embassy
Vacation Resorts), 128 of which will operate under franchise agreements as
Promus brands: 91 Hampton Inn hotels; 17 Embassy Suites hotels; 12 Hampton Inn &
Suites hotels and 8 Homewood Suites hotels. These 131 properties will add over
15,000 rooms or suites to the Promus hotel system. The Company had 78 properties
under construction at the same time last year. Promus had an additional 193
hotels approved and in the design phase at June 30, 1996, although construction
had not yet begun.
Promus opened four Hampton Inn & Suites hotels in the first six months of
1996. The Hampton Inn & Suites brand combines, in a single hotel, Hampton-style
rooms with two-room suites and a lodge-like common area. Of the 193 hotels in
the design phase at June 30, 1996, 28 were Hampton Inn & Suites hotels. Promus
currently plans to build approximately 3-4 Homewood Suites or Hampton Inn &
Suites properties per year at an average cost of approximately $7-10 million per
property. Promus will build an additional 4-6 properties per year, some or all
of which may be sold to either Equity Inns, Inc., or Winston Hotels, Inc., upon
completion (see discussion below). The Company plans to continue its general
strategy of growing its brands primarily through franchise and management
contracts. As in the past, company owned hotels and new development projects
may be sold to franchisees and the proceeds used to fuel
21
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
additional system growth, develop new concepts or for other corporate purposes.
The Company also has three franchised Embassy Vacation Resort (EVR)
properties. The EVR property in Poipu on the Hawaiian island of Kauai was
converted to the EVR brand and has 207 suites. The property in Orlando, Florida,
which is under construction, has 72 suites open and will add an additional 298
suites over the next 4 years. Construction is underway on the property in South
Lake Tahoe, California, which will add 210 suites over the next 5 years. Sales
of timeshare intervals are underway at all three properties.
FelCor Agreements
-----------------
In May 1995, Promus entered into a Subscription Agreement with FelCor Suite
Hotels, Inc. and FelCor Suites Limited Partnership (FelCor) whereby Promus
agreed to purchase up to $25.0 million in FelCor limited partnership interests
to help fund the partnership's acquisition of all-suite upscale hotels to be
converted to the Embassy Suites brand. In September 1995, Promus entered into a
second agreement with FelCor in connection with FelCor's agreement to acquire
the Crown Sterling Suites hotel chain. FelCor is currently in the process of
converting 16 of the Crown Sterling Suites hotels they acquired (over 4,000
suites) to the Embassy Suites brand. In consideration, Promus agreed to make up
to a $50.0 million investment in FelCor common stock and has guaranteed
repayment of a third party loan advanced to FelCor that is not to exceed
$25.0 million. Hotels converted to the Embassy Suites brand under either of
these agreements will operate under 20-year license agreements, and 10-year
management contracts will be awarded to Promus. Subject to some restrictions,
the limited partnership interests may be converted to shares of FelCor common
stock on a one-for-one basis and the common stock may be sold on the open
market.
As of June 30, 1996, FelCor had acquired 24 all-suite hotel properties
(including 16 Crown Sterling Suites hotels) under these agreements. Of the eight
non-Crown Sterling Suites hotels acquired, five had been Embassy Suites hotels
before their acquisition, and two of those five were already being managed by
Promus. As of June 30, 1996, Promus managed all 24 properties (which include
5,765 suites), with nine of the Crown Sterling Suites hotels still in the
process of being converted to the Embassy Suites brand. Conversion of the
remaining properties is expected to be complete by the fall of 1996. Although
management fees are already being earned on all of these properties, franchise
royalties do not begin to accrue until the conversion is complete. As of June
30, 1996, Promus had funded $70.6 million of the total
22
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
$75.0 million commitment. Based on the market value of FelCor common stock as of
June 30, 1996, Promus recorded an unrealized gain on marketable equity
securities of $12.4 million (before tax) directly to stockholders' equity. This
amount will change with increases or decreases in the market value of FelCor
common stock.
Equity Inns and Winston Hotels Agreements
-----------------------------------------
Promus has strategic development alliances with Equity Inns, Inc. (Equity
Inns), and Winston Hotels, Inc. (Winston Hotels) whereby Promus will invest up
to $15.0 million in both Equity Inns and Winston Hotels common stock as they
purchase existing or to be constructed Promus hotels from the Company. During
the second quarter two company owned properties, a Hampton Inn hotel in Michigan
and a Homewood Suites hotel in Connecticut, were sold to Equity Inns for cash
proceeds of $18.6 million. Simultaneously, Promus made a $4.0 million investment
in Equity Inns common stock. The agreements provide for the sale of one
additional company owned property at a stated price and seven company approved
projects at Promus' cost of construction. In addition to the Homewood Suites
hotel Equity Inns purchased in the second quarter, they are the largest owner
of Hampton Inn hotels, with 31 properties. Winston Hotels currently owns 13
Promus branded hotels. Equity Inns and Winston Hotels have each expressed their
intent to spend $100.0 million for development of Promus brand properties over
the next few years. Promus will receive 20-year license agreements and 10-year
management agreements for hotels developed or purchased pursuant to these
agreements.
Mezzanine Financing Program
---------------------------
To encourage growth (primarily in the Hampton Inn & Suites and Homewood
Suites brands) in light of limited available financing for new hotel
construction, Promus developed a mezzanine financing program. Under the program
Promus provides conservatively underwritten secondary financing to franchisees.
A minimum of 20 percent equity is required by the borrower, and the investment
must meet certain defined underwriting criteria. The terms of the first mortgage
and the mezzanine financing must be acceptable to Promus and the first mortgage
lender, with whom Promus will enter into an inter-creditor agreement. Promus
provided $2.9 million in mezzanine loans during the first six months of 1996,
and anticipates providing an additional $10.0 million during 1996. Additionally,
$1.5 million was paid off during the first half of the year. Outstanding loans
bear interest at rates ranging from 10.0% to 10.25%.
23
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Investment in Franchise System
------------------------------
Additional investments in the franchise system are primarily attributable
to the addition of new system hotels and enhancements made to the systems
already in place at existing hotels. Seasonal fluctuations in customer traffic,
which are higher during the summer months, and a concentration of national media
advertising expenses in the early part of the year generally result in higher
net advances made by Promus to the franchise system funds. As of June 30, 1996,
the Company had incurred $5.6 million and plans to spend an additional
$12.5 million before the end of the year on franchise system expansion and
enhancements.
Other
-----
Ongoing refurbishment of Promus' existing company owned hotel properties to
maintain the quality standards set for those properties will continue in 1996 at
an estimated annual cost of approximately $11.0 million. During the first six
months of 1996, $5.5 million in costs had been incurred for hotel refurbishment.
As of June 30, 1996, Promus had incurred $5.5 million in costs to renovate
its corporate headquarters. An additional $5.0 million is estimated to complete
the renovation by year-end 1996.
Cash necessary to finance projects currently under development, as well as
additional projects to be developed by Promus, will be made available from
operating cash flows, the Promus Facility (see Liquidity and Capital
Resources), joint venture partners, specific project financing, sales of
existing hotel assets and, if necessary, Promus debt and equity offerings.
Promus' capital expenditures totaled $76.3 million during the first half of
1996. The Company expects to spend between $160.0 million and $180.0 million
during 1996 to fund hotel development, to refurbish existing facilities, for
investments in the common stock of FelCor, Equity Inns and Winston Hotels, for
hotel business systems, to make advances under mezzanine loan agreements and for
other corporate related projects. However, Promus expects to receive proceeds
from additional hotel sales to Equity Inns and Winston Hotels over the next 18
months.
24
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The accompanying financial statements represent the portion of Parent's
historical revenues, expenses, assets, liabilities and cash flows associated
with its hotel operations through June 30, 1995, before becoming a stand alone
company on July 1, 1995. The 1995 year to date results of operations and cash
flows are not necessarily indicative of Promus' future results as a separate
corporation. The most significant items that will affect liquidity and capital
resources as a result of the Spin-Off are incremental costs associated with
operating as a stand-alone company, a decrease in the Company's average
borrowing rate, and Promus' payment of state and federal income taxes and
interest expense subsequent to the Distribution (Parent historically paid both).
Cash flows from operating activities for the six months ended June 30,
1996, were $40.8 million, compared with $31.9 million for the same period last
year. This increase primarily results from improved operations. Earnings before
interest, taxes, depreciation and amortization plus cash distributions from
nonconsolidated affiliates less earnings from nonconsolidated affiliates
(EBITDA) is a supplemental financial measurement used by management as well as
by industry analysts to evaluate operations. It should not be construed as an
alternative to operating income (as an indicator of operating performance) or to
cash flows from operating activities (as a measure of liquidity) as determined
in accordance with generally accepted accounting principles. A comparison of
EBITDA and the related margins for the six months ended June 30 is as follows
(dollars in millions):
Inc/
1996 1995 (Dec)
----- ----- -----
EBITDA $76.9 $56.8 35.4%
EBITDA margin 58.4% 48.1% 10.3pts
EBITDA to interest paid 7.8 5.7 36.8%
On June 30, 1996, the Company had a working capital deficit of
$28.7 million which is a $2.7 million improvement over the deficit at
December 31, 1995. The working capital deficit results primarily from
Promus' cash management program that calls for all excess cash to pay
down amounts outstanding under the Promus Facility. Therefore, the Company
does not believe that the current ratio is an appropriate measure of its
short-term liquidity without considering availability under the Promus
Facility.
25
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
During 1995 the Company entered into the Promus Facility which consists of
two agreements, the significant terms of which are as follows:
Total Maturity Interest Facility
Facility Date Rate Fees
------------ ------------- -------------- --------------
Base Rate, as
defined, or
Five-year LIBOR +30 0.15% of the
Revolver $300,000,000 June 30, 2000 basis points total facility
Base Rate, as
defined, or
Extendible LIBOR +32.5 0.125% of the
Revolver $ 50,000,000 June 4, 1997 basis points total facility
The Extendible Revolver is a 364-day facility with annual renewals and may
be converted into a two-year term loan with equal amortizing payments over such
two-year period. Facility fees and interest on Base Rate loans are paid
quarterly. The agreements contain a tiered scale for facility fees and the
applicable LIBOR spread (current rates for both reflected above) that is based
on the more favorable of Promus' current credit rating (Investment Grade rating
by both Moody's Investors Service and Standard & Poor's) or the leverage ratio,
as defined. They also contain provisions that restrict certain investments,
limit the Company's ability to incur additional indebtedness and pay dividends,
and require that certain performance ratios be maintained. As of June 30, 1996,
Promus was in compliance with all such covenants.
The Five-Year Revolver includes a sublimit for letters of credit of
$20.0 million. At June 30, 1996, approximately $11.2 million in letters
of credit were outstanding under this agreement (related primarily to the
Company's self-insurance reserves). There was approximately $96.4 million
of availability under the Promus Facility as of June 30, 1996. The remaining
borrowing capacity available under the Promus Facility is available for
working capital, hotel development and other general corporate purposes.
Both the Extendible Revolver and the Five-Year Revolver are unsecured.
As of June 30, 1996, Promus was a party to several interest rate swap
agreements that bear a total notional amount of $100.0 million. The effect of
the swap agreements was to convert a portion of the Company's variable rate debt
under the Promus Facility to a fixed rate. The weighted average effective fixed
rate pursuant to the agreements, which expire between December 1998 and March
2000, was approximately 7.3% at June 30, 1996.
26
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
RELATIONSHIP WITH PARENT
- ------------------------
For the purpose of governing certain of the ongoing relationships between
Promus and Parent after the Distribution and to provide mechanisms for an
orderly transition, Parent and Promus have entered into various agreements and
adopted policies to govern their future relationship. Management believes that
the agreements are fair to both parties and contain terms comparable to those
which would have been reached in arm's-length negotiations with unaffiliated
parties (although comparisons are difficult with respect to certain agreements
that relate to the specific circumstances of the Distribution).
TAX SHARING AGREEMENT
- ---------------------
In connection with the Spin-Off, Promus and Parent entered into a tax
sharing agreement that defines each company's rights and obligations with
respect to deficiencies and refunds of federal, state and other income or
franchise taxes relating to Promus' business for tax years prior to the
Distribution and with respect to certain tax attributes of Promus after the
Distribution. In general, with respect to periods ending on or before December
31, 1995, Parent is responsible for (i) filing federal tax returns for Parent
and Promus for the periods such companies were members of the same consolidated
group, and (ii) paying the taxes relating to such returns (to include any
subsequent adjustments resulting from the redetermination of such tax
liabilities by the applicable taxing authorities; Promus will reimburse Parent
for the portion of such adjustments relating to the hotel business). Promus is
responsible for filing returns and paying taxes for periods beginning after the
Spin-Off.
27
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
PERFORMANCE STATISTICS
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30, June 30, Inc/ June 30, June 30, Inc/
1996 1995 (Dec) 1996 1995 (Dec)
------- ------- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Comparable System Hotels*
- ------------------------
Embassy Suites
Occupancy 78.2% 77.6% 0.6 pts 76.0% 75.8% 0.2 pts
ADR $107.62 $101.93 5.6% $108.04 $102.56 5.3%
RevPAS $ 84.14 $ 79.12 6.3% $ 82.12 $ 77.79 5.6%
Hampton Inn
Occupancy 79.0% 79.4% (0.4)pts 73.4% 74.6% (1.2)pts
ADR $ 60.53 $ 56.70 6.8% $ 59.74 $ 55.90 6.9%
RevPAR $ 47.80 $ 45.03 6.2% $ 43.87 $ 41.68 5.3%
Hampton Inn & Suites
Occupancy - - - - - -
ADR - - - - - -
RevPAS - - - - - -
Homewood Suites
Occupancy 80.6% 81.1% (0.5)pts 77.6% 78.9% (1.3)pts
ADR $ 89.22 $ 83.18 7.3% $ 87.99 $ 81.84 7.5%
RevPAS $ 71.94 $ 67.47 6.6% $ 68.28 $ 64.58 5.7%
Total System Hotels
- -------------------
Embassy Suites
Occupancy 76.3% 77.4% (1.1)pts 74.7% 75.7% (1.0)pts
ADR $106.94 $101.73 5.1% $107.44 $102.14 5.2%
RevPAS $ 81.64 $ 78.78 3.6% $ 80.30 $ 77.34 3.8%
Hampton Inn
Occupancy 77.5% 78.8% (1.3)pts 72.4% 74.0% (1.6)pts
ADR $ 60.62 $ 56.67 7.0% $ 59.83 $ 55.92 7.0%
RevPAR $ 46.98 $ 44.67 5.2% $ 43.29 $ 41.41 4.5%
Hampton Inn & Suites
Occupancy 71.3% 42.2% N/M 64.1% 42.2% N/M
ADR $ 70.58 $ 63.78 10.7% $ 69.03 $ 63.78 8.2%
RevPAS $ 50.29 $ 26.89 N/M $ 44.26 $ 26.89 N/M
Homewood Suites
Occupancy 77.3% 80.6% (3.3)pts 74.6% 77.7% (3.1)pts
ADR $ 90.41 $ 82.25 9.9% $ 88.86 $ 80.85 9.9%
RevPAS $ 69.89 $ 66.26 5.5% $ 66.24 $ 62.83 5.4%
Total System Revenues
- ---------------------
(in thousands)
Hampton Inn $258,046 $213,623 20.8% $466,689 $385,915 20.9%
Embassy Suites 213,634 186,883 14.3% 411,371 363,487 13.2%
Homewood Suites 21,342 17,874 19.4% 39,425 33,572 17.4%
Hampton Inn & Suites 3,857 81 N/M 5,893 81 N/M
-------- -------- -------- --------
$496,879 $418,461 18.7% $923,378 $783,055 17.9%
======== ======== ======== ========
</TABLE>
*Includes results for only those hotels open for the entire applicable period
for both years.
28
<PAGE>
<TABLE>
<CAPTION>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Number of Hotels Number of Rooms/Suites
June 30, June 30, Inc/ June 30, June 30, Inc/
1996 1995 (Dec) 1996 1995 (Dec)
------- ------- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Embassy Suites*
Company owned 9 9 - 2,025 2,025 -
Joint venture 23 23 - 5,897 5,901 (0.1)%
Management contract 36 26 38.5 % 8,641 6,224 38.8 %
Franchised 56 52 7.7 % 12,958 11,867 9.2 %
--- --- ------ ------
124 110 12.7 % 29,521 26,017 13.5 %
=== === ====== ======
Hampton Inn
Company owned 13 15 (13.3)% 1,791 2,047 (12.5)%
Joint venture 19 19 - 2,376 2,376 -
Management contract 5 4 25.0 % 589 464 26.9 %
Franchised 526 444 18.5 % 57,264 48,900 17.1 %
--- --- ------ ------
563 482 16.8 % 62,020 53,787 15.3 %
=== === ====== ======
Hampton Inn & Suites
Company owned - - - - - -
Joint venture - - - - - -
Management contract 1 - N/M 127 - N/M
Franchised 8 1 N/M 969 120 N/M
--- --- ------ ------
9 1 N/M 1,096 120 N/M
=== === ====== ======
Homewood Suites
Company owned 8 8 - 892 932 (4.3)%
Joint venture - - - - - -
Management contract 1 - N/M 132 - N/M
Franchised 24 19 26.3 % 2,426 2,033 19.3 %
--- --- ------ ------
33 27 22.2 % 3,450 2,965 16.4 %
=== === ====== ======
Total System
Company owned 30 32 (6.3)% 4,708 5,004 (5.9)%
Joint venture 42 42 - 8,273 8,277 -
Management contract 43 30 43.3 % 9,489 6,688 41.9 %
Franchised 614 516 19.0 % 73,617 62,920 17.0 %
--- --- ------ ------
729 620 17.6 % 96,087 82,889 15.9 %
=== === ====== ======
</TABLE>
<TABLE>
<CAPTION>
Resorts Managed Resorts Franchised
June 30, June 30, Inc/ June 30, June 30, Inc/
1996 1995 (Dec) 1996 1995 (Dec)
------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Embassy Vacation Resorts
Resort Properties 1 1 N/M 1 - N/M
Timeshare units open 72 24 N/M 207 - N/M
Timeshare intervals sold 1,969 755 N/M 748 - N/M
</TABLE>
*Excludes Embassy Vacation Resorts and nine Crown Sterling Suites hotels with
2,325 rooms that had not yet been converted to the Embassy Suites brand.
29
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
EX-10.1 Second Amendment to Tranche A Credit Agreement (1)
EX-10.2 Second Amendment to Tranche B Credit Agreement (1)
EX-27 Financial Data Schedule (1)
(b) No reports on Form 8-K were filed during the quarter ended June 30, 1996.
- --------
Footnote
(1) Filed herewith.
30
<PAGE>
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROMUS HOTEL CORPORATION
August 12, 1996 By: JEFFERY M. JARVIS
-----------------------------
Jeffery M. Jarvis
Vice President and Controller
(Chief Accounting Officer)
31
<PAGE>
Exhibit Index
-------------
Sequential
Exhibit No. Description Page No.
- ------------ ---------------------------------------- ----------
EX-10.1 Second Amendment to Tranche A Credit
Agreement (1) 33
EX-10.2 Second Amendment to Tranche B Credit
Agreement (1) 43
EX-27 Financial Data Schedule (1) 52
- --------
Footnote
(1) Filed herewith.
32
Exhibit 10.1
SECOND AMENDMENT TO TRANCHE A CREDIT AGREEMENT
THIS SECOND AMENDMENT dated as of May 15, 1996 (the "Second Amendment") is
to that Tranche A Credit Agreement dated as of June 7, 1995 as amended by that
First Amendment to Tranche A Credit Agreement dated as of June 30, 1995 (the
"Credit Agreement"; capitalized terms used but not otherwise defined herein
shall have the meanings provided in the Credit Agreement) by and among EMBASSY
SUITES, INC., a Delaware corporation as the initial Borrower, and PROMUS HOTELS,
INC., a Delaware corporation, as assignee and subsequent Borrower (the
applicable Borrower hereunder being referred to as the "Borrower"), THE PROMUS
COMPANIES INCORPORATED, a Delaware corporation as an initial guarantor, and
PROMUS HOTEL CORPORATION, a Delaware corporation as a guarantor and those
certain Subsidiaries and related parties identified as "Guarantors" on the
signature pages thereto as listed on the signature pages hereto, the several
lenders identified on the signature pages thereto as listed on the signature
pages hereto (each a "Lender" and collectively, the "Lenders") and NATIONSBANK,
N.A., a national banking association formerly known as NationsBank, N.A.
(Carolinas), as agent for the Lenders (in such capacity, the "Agent").
W I T N E S S E T H:
WHEREAS, the Lenders have extended a $300,000,000 5-year revolving credit
facility pursuant to the terms of the Credit Agreement;
WHEREAS, the Borrower has requested the modification of certain provisions
of the Credit Agreement;
WHEREAS, the requested modifications are subject to the consent of the
Required Lenders;
WHEREAS, the Required Lenders have agreed to the requested modifications on
the terms and conditions set forth herein;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
33
<PAGE>
A. The Credit Agreement is amended and modified in the
following respects:
1. In Section 1.1 the definitions of "Material Asset Sale" and "Net Sale
Proceeds" are deleted and the following definitions are added or amended to read
as follows:
"Consolidated Assets" means the assets of the Parent Company and its
Subsidiaries on a consolidated basis determined in accordance with
GAAP.
"Consolidated Net Income Available for Fixed Charges" means, for any
period, the sum of Consolidated Adjusted EBITDA minus Capital
Expenditures made or incurred (excluding, for purposes hereof, up to
$27,000,000 of Capital Expenditures for Audobon Woods during fiscal
year 1995) plus Rentals plus net proceeds from casualty events or from
sales and dispositions permitted under Section 8.4(b) hereof, but in
no event exceeding Capital Expenditures for such periods, in each case
for the Parent Company and its Subsidiaries on a consolidated basis
determined in accordance with GAAP. For the portion of any such period
which is prior to the Closing Date, Consolidated Net Income Available
for Fixed Charges shall be calculated with respect to the Hotel Inc.
Business.
2. The proviso in Section 1.3 is amended to read as follows:
provided, that, except as otherwise specifically provided herein, all
computations determining compliance with Section 7.11 shall utilize
accounting principles and policies in conformity with those used to
prepare the annual audited financial statements delivered to the Agent
for fiscal year 1995.
3. Section 3.3(b) is amended to read as follows:
(b) Mandatory Reduction in Commitments. If at any time after the
Closing Date, the sum of the aggregate Revolving Committed Amount
hereunder plus the aggregate Revolving Committed Amount under the
Tranche B Credit Agreement shall exceed an amount equal to 75% of the
net book value of Consolidated Assets, on account of asset sales or
dispositions or otherwise, the aggregate Revolving Committed Amounts
hereunder and under the Tranche B Credit Agreement shall be
immediately and permanently reduced in an amount equal to the
deficiency. Commitment reductions hereunder shall be applied as
follows:
34
<PAGE>
(i) prior to the Termination Date under the Tranche B Credit
Agreement, first to the aggregate Revolving Committed Amount hereunder
until such Revolving Committed Amount is reduced to zero and terminated,
and then to the aggregate Revolving Committed Amount under the Tranche B
Credit Agreement; and
(ii) after the Termination Date under the Tranche B Credit Agreement,
first to the Term Loans outstanding under the Tranche B Credit Agreement,
if any, and then to the aggregate Revolving Committed Amount hereunder.
4. The last sentence in Section 7.12 is deleted in its entirety.
5. Section 8.1(l) of the Credit Agreement is amended to read as follows:
(l) Unsecured Guaranty Obligations in relation to Indebtedness of
Specified Subsidiaries, Joint Ventures and parties to management or
franchise agreements with the Borrower or its Subsidiaries or such Joint
Ventures engaged in each case primarily in the hotel business or other
reasonably related business, but only if, and to the extent, that the sum
of (i) the aggregate amount of such Guaranty Obligations at any time owing
under this subsection (l) made after the Closing Date plus (ii) the
aggregate amount of cash Investments at any time outstanding under Section
8.5(g) made after the Closing Date, shall not at any time exceed
$150,000,000, provided that the limitation set forth above shall be (A)
increased (or decreased if Consolidated Net Income is negative) on the
first day of each fiscal quarter of the Parent Company (commencing with the
first day of fiscal year 1996) by 100% of the Consolidated Net Income for
the fiscal quarter last ended and (B) decreased from time to time by the
aggregate amount of cash Dividends paid by the Parent Company on and after
the Closing Date and prior to the date of determination (such limitation,
as increased and decreased from time to time, herein referred to as the
"Third Party Investment Basket Amount");
6. Section 8.4(b) of the Credit Agreement is hereby amended and modified to
read as follows:
(b) sell, transfer or otherwise dispose of any of its Property
(including without limitation pursuant to any sale and leaseback
transaction) except that the following shall be permitted: (i) the sale of
inventory for fair value in the ordinary course of business, (ii) the sale
or disposition of machinery and equipment no longer useful in the conduct
of such Person's business, (iii) transfers of Property to Credit Parties,
(iv) non-cash Investments permitted under Section 8.5(d) and (e), and (v)
other sales, transfers and dispositions for fair value in
35
<PAGE>
the reasonable determination of the Borrower, so long as (A) no Default or
Event of Default then exists or would exist after giving effect thereto and
(B) where the aggregate gross sales price for all such sales, transfers and
dispositions shall exceed $10,000,000 in any fiscal year, then no more than
25% of the gross consideration received in connection therewith in excess
of such amount shall consist of Non-Investment Grade debt or equity
interests. Sales, leases, transfers and other dispositions may result in a
mandatory reduction in the Commitments hereunder as provided in Section
3.3(b).
7. Section 8.5(g) of the Credit Agreement is hereby amended and modified to
read as follows:
(g) cash Investments in Subsidiaries of the Parent Company or the Borrower
which are not Wholly-Owned Subsidiaries of the Parent Company or the
Borrower, Joint Ventures, parties to management or franchise agreements
with the Borrower or its Subsidiaries or such Joint Ventures engaged
primarily in the hotel business or other reasonably related business, but
only if, and to the extent, that the sum of (i) the aggregate amount of
such Investments at any time outstanding under this subsection (g) made
after the Closing Date plus (ii) the aggregate amount of Guaranty
Obligations at any time outstanding permitted under Section 8.1(l) incurred
after the Closing Date, shall not at any time exceed the Third Party
Investment Basket Amount.
B. Reference is made to the Pledge Agreement referenced and defined in the
Credit Agreement. The Lenders hereby terminate the Pledge Agreement and release
the pledge thereunder and the security interests in and liens on the Collateral
referenced and defined therein. Upon execution of this Second Amendment by the
Lenders, the Pledged Securities (as such term is defined in the Pledge
Agreement) and stock powers relating thereto will be returned to the Borrower.
C. The Borrower and the Guarantors hereby certify that as of the date
hereof:
(i) the representations and warranties set forth in Section 6 of the
Credit Agreement and in the Pledge Agreement are true and correct in
all material respects (except for those which expressly relate to an
earlier date); and
(ii) no Default or Event of Default exists and is continuing either
prior to or after giving effect to this Second Amendment.
36
<PAGE>
D. Except as modified hereby, all of the terms and provisions of the Credit
Agreement (and schedules) remain in full force and effect.
E. The Borrower agrees to pay all reasonable costs and expenses in
connection with the preparation, execution and delivery of this Second
Amendment, including without limitation the reasonable fees and expenses of
Moore & Van Allen, PLLC.
F. This Second Amendment may be executed in any number of counterparts,
each of which when executed and delivered shall be deemed to be an original and
it shall not be necessary in making proof of this Second Amendment to produce or
account for more than one such counterpart.
G. This Second Amendment and the Credit Agreement, as amended hereby, shall
be deemed to be contracts made under, and for all purposes be construed in
accordance with the laws of the State of North Carolina.
[Remainder of Page Intentionally Left Blank]
37
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Second
Amendment to be duly executed and delivered as of the date first above written.
BORROWER:
PROMUS HOTELS, INC.,
a Delaware corporation
By____________________________
Carol G. Champion,
Vice President
GUARANTORS:
PROMUS HOTEL CORPORATION,
a Delaware corporation
By____________________________
Carol G. Champion,
Vice President
HAMPTON INNS, INC.,
a Delaware corporation
By____________________________
Carol G. Champion,
Assistant Treasurer
EMBASSY EQUITY DEVELOPMENT CORPORATION,
a Delaware corporation
By____________________________
Carol G. Champion,
Assistant Treasurer
38
<PAGE>
LENDERS:
NATIONSBANK, N.A., a national banking
association formerly known as
NationsBank, N.A. (Carolinas),
individually in its capacity as a
Lender and in its capacity as Agent
By_____________________________
Title__________________________
THE BANK OF NEW YORK
By_____________________________
Title__________________________
THE BANK OF NOVA SCOTIA
By_____________________________
Title__________________________
CIBC INC.
By_____________________________
Title__________________________
THE SUMITOMO BANK, LIMITED, ATLANTA AGENCY
By_____________________________
Title__________________________
39
<PAGE>
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
By_____________________________
Title__________________________
LTCB TRUST COMPANY
By_____________________________
Title__________________________
THE NIPPON CREDIT BANK, LTD. -
LOS ANGELES AGENCY
By_____________________________
Title__________________________
SOCIETE GENERALE, SOUTHWEST AGENCY
By_____________________________
Title__________________________
CREDIT LYONNAIS, CAYMAN ISLAND BRANCH
By_____________________________
Title__________________________
40
<PAGE>
FIRST AMERICAN NATIONAL BANK
By_____________________________
Title__________________________
FIRST NATIONAL BANK OF COMMERCE
By_____________________________
Title__________________________
FIRST TENNESSEE BANK, NATIONAL ASSOCIATION
By_____________________________
Title__________________________
41
<PAGE>
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
ATLANTA AGENCY
By_____________________________
Title__________________________
THIRD NATIONAL BANK
By_____________________________
Title__________________________
U.S. NATIONAL BANK OF OREGON
By_____________________________
Title__________________________
42
Exhibit 10.2
SECOND AMENDMENT TO TRANCHE B CREDIT AGREEMENT
THIS SECOND AMENDMENT dated as of May 15, 1996 (the "Second Amendment") is
to that Tranche B Credit Agreement dated as of June 7, 1995 as amended by that
First Amendment to Tranche B Credit Agreement dated as of June 30, 1995 (the
"Credit Agreement"; capitalized terms used but not otherwise defined herein
shall have the meanings provided in the Credit Agreement) by and among EMBASSY
SUITES, INC., a Delaware corporation as the initial Borrower, and PROMUS HOTELS,
INC., a Delaware corporation, as assignee and subsequent Borrower (the
applicable Borrower hereunder being referred to as the "Borrower"), THE PROMUS
COMPANIES INCORPORATED, a Delaware corporation as an initial guarantor, and
PROMUS HOTEL CORPORATION, a Delaware corporation as a guarantor and those
certain Subsidiaries and related parties identified as "Guarantors" on the
signature pages thereto as listed on the signature pages hereto, the several
lenders identified on the signature pages thereto as listed on the signature
pages hereto (each a "Lender" and collectively, the "Lenders") and NATIONSBANK,
N.A., a national banking association formerly known as NationsBank, N.A.
(Carolinas), as agent for the Lenders (in such capacity, the "Agent").
W I T N E S S E T H:
WHEREAS, the Lenders have extended a $50,000,000 364-day revolving credit
facility pursuant to the terms of the Credit Agreement;
WHEREAS, the Borrower has requested modification of certain provisions of
the Credit Agreement;
WHEREAS, the Lenders have agreed to the requested modifications on the
terms and conditions set forth herein;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
A. The Credit Agreement is amended and modified in the following respects:
1. In accordance with the provisions of Section 2.5, the Termination
Date is extended to June 4, 1997 (being the date 364 days following the
Termination Date in existence prior to the date of this Second Amendment).
43
<PAGE>
2. In Section 1.1 the definitions of "Material Asset Sale" and "Net
Sale Proceeds" are deleted and the following definitions are added or
amended to read as follows:
"Consolidated Assets" means the assets of the Parent Company and
its Subsidiaries on a consolidated basis determined in accordance with
GAAP.
"Consolidated Net Income Available for Fixed Charges" means, for
any period, the sum of Consolidated Adjusted EBITDA minus Capital
Expenditures made or incurred (excluding, for purposes hereof, up to
$27,000,000 of Capital Expenditures for Audobon Woods during fiscal
year 1995) plus Rentals plus net proceeds from casualty events or from
sales and dispositions permitted under Section 8.4(b) hereof, but in
no event exceeding Capital Expenditures for such periods, in each case
for the Parent Company and its Subsidiaries on a consolidated basis
determined in accordance with GAAP. For the portion of any such period
which is prior to the Closing Date, Consolidated Net Income Available
for Fixed Charges shall be calculated with respect to the Hotel Inc.
Business.
3. The proviso in Section 1.3 is amended to read as follows:
provided, that, except as otherwise specifically provided herein, all
computations determining compliance with Section 7.11 shall utilize
accounting principles and policies in conformity with those used to
prepare the annual audited financial statements delivered to the Agent
for fiscal year 1995.
4. Section 3.3(b) is amended to read as follows:
(b) Mandatory Reduction in Commitments. If at any time after the
Closing Date, the sum of the aggregate Revolving Committed Amount
hereunder plus the aggregate Revolving Committed Amount under the
Tranche A Credit Agreement shall exceed an amount equal to 75% of
the net book value of Consolidated Assets, on account of asset
sales or dispositions or otherwise, the aggregate Revolving
Committed Amounts hereunder and under the Tranche A Credit
Agreement shall be immediately and permanently reduced in an
amount equal to the deficiency. Commitment reductions hereunder
shall be applied as follows:
(i) prior to the Termination Date hereunder, first to the
aggregate Revolving Committed Amount under the Tranche A Credit
Agreement until such Revolving Committed Amount thereunder is
reduced to zero and terminated, and then to the aggregate
Revolving Committed Amount hereunder; and
44
<PAGE>
(ii)after the Termination Date hereunder, first to the Term
Loans outstanding hereunder, if any, to Base Rate Loans,
Eurodollar Loans and Competitive Loans as the Borrower may
specify, or if the Borrower shall fail to specify then in the
order provided in Section 3.3(f), with any such payments being
also applied to (and serving to reduce) principal amortization
payments due under Section 2.6(a) in direct order of installment
maturity, and then to the aggregate Revolving Committed Amount
under the Tranche A Credit Agreement.
5. The last sentence in Section 7.12 is deleted in its entirety.
6. Section 8.1(l) of the Credit Agreement is hereby amended to read as
follows:
(l) Unsecured Guaranty Obligations in relation to Indebtedness of
Specified Subsidiaries, Joint Ventures and parties to management or
franchise agreements with the Borrower or its Subsidiaries or such
Joint Ventures engaged in each case primarily in the hotel business or
other reasonably related business, but only if, and to the extent,
that the sum of (i) the aggregate amount of such Guaranty Obligations
at any time owing under this subsection (l) made after the Closing
Date plus (ii) the aggregate amount of cash Investments at any time
outstanding under Section 8.5(g) made after the Closing Date, shall
not at any time exceed $150,000,000, provided that the limitation set
forth above shall be (A) increased (or decreased if Consolidated Net
Income is negative) on the first day of each fiscal quarter of the
Parent Company (commencing with the first day of fiscal year 1996) by
100% of the Consolidated Net Income for the fiscal quarter last ended
and (B) decreased from time to time by the aggregate amount of cash
Dividends paid by the Parent Company on and after the Closing Date and
prior to the date of determination (such limitation, as increased and
decreased from time to time, herein referred to as the "Third Party
Investment Basket Amount");
7. Section 8.4(b) of the Credit Agreement is hereby amended and
modified to read as follows:
(b) sell, transfer or otherwise dispose of any of its Property
(including without limitation pursuant to any sale and leaseback
transaction) except that the following shall be permitted: (i) the
sale of inventory for fair value in the ordinary course of business,
(ii) the sale or disposition of machinery and equipment no longer
useful in the conduct of such Person's business, (iii) transfers of
Property to Credit Parties, (iv) non-cash Investments permitted under
Section 8.5(d) and
45
<PAGE>
(e), and (v) other sales, transfers and dispositions for fair value in
the reasonable determination of the Borrower, so long as (A) no
Default or Event of Default then exists or would exist after giving
effect thereto and (B) where the aggregate gross sales price for all
such sales, transfers and dispositions shall exceed $10,000,000 in any
fiscal year, then no more than 25% of the gross consideration received
in connection therewith in excess of such amount shall consist of
Non-Investment Grade debt or equity interests. Sales, leases,
transfers and other dispositions may result in a mandatory reduction
in the Commitments hereunder as provided in Section 3.3(b).
8. Section 8.5(g) of the Credit Agreement is hereby amended and
modified to read as follows:
(g) cash Investments in Subsidiaries of the Parent Company or the
Borrower which are not Wholly-Owned Subsidiaries of the Parent Company
or the Borrower, Joint Ventures, parties to management or franchise
agreements with the Borrower or its Subsidiaries or such Joint
Ventures engaged primarily in the hotel business or other reasonably
related business, but only if, and to the extent, that the sum of (i)
the aggregate amount of such Investments at any time outstanding under
this subsection (g) made after the Closing Date plus (ii) the
aggregate amount of Guaranty Obligations at any time outstanding
permitted under Section 8.1(l) incurred after the Closing Date, shall
not at any time exceed the Third Party Investment Basket Amount.
B. Reference is made to the Pledge Agreement referenced and defined in
the Credit Agreement. The Lenders hereby terminate the Pledge Agreement and
release the pledge thereunder and the security interests in and liens on the
Collateral referenced and defined therein. Upon execution of this Second
Amendment by the Lenders, the Pledged Securities (as defined in the Pledge
Agreement) and stock powers relating thereto will be returned to the Borrower.
C. The Borrower and the Guarantors hereby certify that as of the date
hereof:
(i) the representations and warranties set forth in Section 6 of the
Credit Agreement and in the Pledge Agreement are true and correct in all
material respects (except for those which expressly relate to an earlier
date); and
(ii) no Default or Event of Default exists and is continuing either
prior to or after giving effect to this Second Amendment.
46
<PAGE>
D. Except as modified hereby, all of the terms and provisions of the
Credit Agreement (and schedules) remain in full force and effect.
E. The Borrower agrees to pay all reasonable costs and expenses in
connection with the preparation, execution and delivery of this Second
Amendment, including without limitation the reasonable fees and expenses of
Moore & Van Allen, PLLC.
F. This Second Amendment may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to
be an original and it shall not be necessary in making proof of this Second
Amendment to produce or account for more than one such counterpart.
G. This Second Amendment and the Credit Agreement, as amended hereby,
shall be deemed to be contracts made under, and for all purposes be
construed in accordance with the laws of the State of North Carolina.
[Remainder of Page Intentionally Left Blank]
47
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Second
Amendment to be duly executed and delivered as of the date first above written.
BORROWER:
PROMUS HOTELS, INC.,
a Delaware corporation
By____________________________
Carol G. Champion,
Vice President
GUARANTORS:
PROMUS HOTEL CORPORATION,
a Delaware corporation
By____________________________
Carol G. Champion,
Vice President
HAMPTON INNS, INC.,
a Delaware corporation
By____________________________
Carol G. Champion,
Assistant Treasurer
EMBASSY EQUITY DEVELOPMENT CORPORATION,
a Delaware corporation
By____________________________
Carol G. Champion,
Assistant Treasurer
48
<PAGE>
LENDERS:
NATIONSBANK, N.A., a national banking
association formerly known as
NationsBank, N.A. (Carolinas),
individually in its capacity as a
Lender and in its capacity as Agent
By_____________________________
Title__________________________
THE BANK OF NEW YORK
By_____________________________
Title__________________________
THE BANK OF NOVA SCOTIA
By_____________________________
Title__________________________
CIBC INC.
By_____________________________
Title__________________________
THE SUMITOMO BANK, LIMITED, ATLANTA AGENCY
By_____________________________
Title__________________________
49
<PAGE>
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
By_____________________________
Title__________________________
LTCB TRUST COMPANY
By_____________________________
Title__________________________
THE NIPPON CREDIT BANK, LTD. -
LOS ANGELES AGENCY
By_____________________________
Title__________________________
SOCIETE GENERALE, SOUTHWEST AGENCY
By_____________________________
Title__________________________
CREDIT LYONNAIS, CAYMAN ISLAND BRANCH
By_____________________________
Title__________________________
50
<PAGE>
FIRST AMERICAN NATIONAL BANK
By_____________________________
Title__________________________
FIRST NATIONAL BANK OF COMMERCE
By_____________________________
Title__________________________
FIRST TENNESSEE BANK, NATIONAL ASSOCIATION
By_____________________________
Title__________________________
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
ATLANTA AGENCY
By_____________________________
Title__________________________
THIRD NATIONAL BANK
By_____________________________
Title__________________________
U.S. NATIONAL BANK OF OREGON
By_____________________________
Title__________________________
51
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,291
<SECURITIES> 0
<RECEIVABLES> 20,702
<ALLOWANCES> (1,248)
<INVENTORY> 207
<CURRENT-ASSETS> 31,009
<PP&E> 440,582
<DEPRECIATION> (111,796)
<TOTAL-ASSETS> 578,862
<CURRENT-LIABILITIES> 59,692
<BONDS> 243,180
0
0
<COMMON> 5,139
<OTHER-SE> 199,312
<TOTAL-LIABILITY-AND-EQUITY> 578,862
<SALES> 0
<TOTAL-REVENUES> 131,555
<CGS> 0
<TOTAL-COSTS> 71,811
<OTHER-EXPENSES> (3,537)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,401
<INCOME-PRETAX> 52,436
<INCOME-TAX> 21,551
<INCOME-CONTINUING> 30,885
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,885
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
</TABLE>
