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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (901) 762-8600
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Capital Stock, Par Value $0.10 per NEW YORK STOCK EXCHANGE
share* MIDWEST STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
PHILADELPHIA STOCK EXCHANGE
11% Subordinated Debentures due 1999 of Embassy NEW YORK STOCK EXCHANGE
Suites, Inc.** NEW YORK STOCK EXCHANGE
10 7/8% Senior Subordinated Notes due 2002 of
Embassy Suites, Inc.**
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* Common Capital Stock also has special stock purchase rights listed on each of
the same exchanges
** Securities guaranteed by Registrant
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant based upon the closing price of $34.00 for the Common Stock as
reported on the New York Stock Exchange Composite Tape on January 31, 1995, is
$3,392,359,792.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of January 31, 1995.
Common Stock ................................................ 102,463,487 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement (the "Proxy Statement") to be
filed for the 1995 Annual Meeting of Stockholders are incorporated by reference
into Part III hereof.
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
The Promus Companies Incorporated (referred to herein, together with its
subsidiaries where the context requires, as the "Company" or "Promus") is one of
the leading casino entertainment and hotel companies in the United States. Its
Harrah's casino entertainment division operates fifteen casino properties and
has additional casino locations under development, including two under
construction. The Company's hotel division operates the Embassy Suites, Hampton
Inn and Homewood Suites hotel brands. A new brand, Hampton Inn & Suites, is
under development.
Promus was incorporated on November 2, 1989 under Delaware law and conducts
its casino entertainment and hotel businesses through its wholly-owned
subsidiary, Embassy Suites, Inc. ("Embassy"), and Embassy's subsidiaries. The
principal asset of Promus is the stock of Embassy, which holds, directly or
indirectly through subsidiaries, substantially all of the assets of the
Company's businesses. The principal executive offices of Promus are located at
1023 Cherry Road, Memphis, Tennessee 38117, telephone (901) 762-8600.
Operating data for the three most recent fiscal years, together with
corporate expense, interest expense and other income, is set forth on page 52
herein. Information regarding mortgages on properties of the Company is set
forth on pages 61 through 65 herein.
For information on operating results and a discussion of those results, see
"Management's Discussion and Analysis--Results of Operations" on pages 40
through 44 herein and the consolidated financial statements herein.
SPIN-OFF OF HOTEL BUSINESS
In January 1995 the Company announced a planned spin-off that will split the
Company into two independent public corporations, one for conducting its casino
entertainment business and one for conducting its hotel business. The
transaction is structured to be tax-free, with stockholders currently
anticipated to receive one share of the new hotel company for each two shares of
Promus. Each Promus stockholder will retain the shares owned in Promus, which is
expected to be renamed Harrah's Entertainment, Inc. when the spin-off is
consummated. Both companies are expected to trade on the New York Stock
Exchange.
The spin-off is subject to a number of conditions, including regulatory and
other third party approvals, including bondholders and bank lenders, a legal
opinion as to the tax-free status of the transaction, market conditions, final
approval of the board of directors and stockholder approval. It is expected that
the spin-off will be completed by the end of second quarter 1995.
CASINO ENTERTAINMENT
GENERAL
Harrah's, an indirect wholly-owned subsidiary of the Company, has been in
operation for more than 57 years and is unique among casino entertainment
companies in its broad geographic diversification. Harrah's or its subsidiaries
(hereinafter referred to as "Harrah's") operates casino hotels in the five
traditional U.S. gaming markets of Reno, Lake Tahoe, Las Vegas and Laughlin,
Nevada and Atlantic City, New Jersey. It also operates riverboat casinos in
Joliet, Illinois; dockside casinos in Vicksburg and Tunica, Mississippi,
Shreveport, Louisiana and North Kansas City, Missouri; limited stakes casinos in
Central City and Black Hawk, Colorado; and a casino on an Indian reservation
near Phoenix, Arizona. As of December 31, 1994, Harrah's operated a total of
approximately 521,400 square feet of casino space, 14,808 slot machines, 789
table games, 5,367 hotel rooms or suites, approximately 76,000 square feet of
convention space, 51 restaurants, four showrooms and three cabarets.
Harrah's marketing strategy is designed to appeal primarily to the broad
middle-market gaming customer segment. Harrah's strategic direction is focused
on establishing a well-defined brand identity that communicates a consistent
message of quality and service.
1
HARRAH'S CASINO HOTEL DIVISION
ATLANTIC CITY
The Harrah's Atlantic City casino hotel ("Harrah's Atlantic City") is
situated on 21.4 acres in the Marina area of Atlantic City and has approximately
65,700 square feet of casino space. It consists of dual 16-story hotel towers
with 288 suites and 492 regular rooms and adjoining low rise buildings which
house the casino space and the 23,000 square foot convention center. The
facilities include eight restaurants, an 850-seat showroom, a pool, health club,
teen center with video games, child care facilities and parking for 2,482 cars.
The property also has a 107-slip marina. Occupancy at the hotel has averaged
86.6% for the past three years. During 1994, it had the highest gaming revenues
and operating profit of the Company's casinos.
Most of the casino's customers arrive by car from within a 150-mile radius
which includes Philadelphia, New York and northern New Jersey, Harrah's Atlantic
City's primary feeder market.
LAS VEGAS
Harrah's Las Vegas is located on approximately 16.4 acres of the Strip in
Las Vegas and consists of a 15-floor hotel tower, a 23-floor hotel tower, a
32-floor hotel tower, and adjacent low-rise buildings which house the 15,000
square foot convention center and the casino. The hotel has 1,713 total rooms
including 34 suites. The size of the property would permit the Company to expand
its facilities if the Company decided that additional capacity were economically
desirable in the future.
The Harrah's Las Vegas complex has approximately 80,000 square feet of
casino space, five restaurants, the 525-seat Commander's Theatre, a health club
and a heated pool. There are 3,012 parking spaces available, including a
substantial portion in a self-park garage. Occupancy at the hotel has averaged
93.5% for the past three years.
The casino's primary feeder markets are the Midwest, California and Canada.
LAKE TAHOE
Harrah's Lake Tahoe is situated on 22.9 acres near Lake Tahoe and consists
of an 18-story tower and adjoining low-rise building which house a 16,500 square
foot convention center and approximately 63,200 square feet of casino space. The
casino hotel, with 62 suites and 472 luxury rooms, has seven restaurants, the
800-seat South Shore Showroom, a health club, retail shops, a heated pool and an
arcade. The facility has customer parking for 854 cars in a garage and 1,098
additional spaces in an adjoining lot. Occupancy at the hotel has averaged 80.1%
for the past three years.
Harrah's also operates Bill's Lake Tahoe Casino which is located on a 2.1
acre site adjacent to Harrah's Lake Tahoe casino hotel. The casino includes
approximately 18,000 square feet of casino space and two casual on-premise
restaurants, Bennigan's and McDonald's, operated by non-affiliated restaurant
companies.
The primary feeder markets for both casinos are California and the Pacific
Northwest.
RENO
Harrah's Reno, situated on approximately 3.5 acres, consists of a casino
hotel complex with a 24-story structure, a 14,500 square foot convention center
and 58,300 square feet of casino space. The hotel, with seven suites and 558
rooms, has seven restaurants, the 420-seat Sammy's Showroom, a pool, a health
club and an arcade. In October 1994, a Planet Hollywood restaurant and lounge,
operated by a non-affiliated company, opened at Harrah's Reno. The complex can
accommodate 587 cars in a valet parking garage and another 377 cars in a
self-park garage. In addition to this on-site parking, Harrah's Reno also leases
approximately 646 spaces nearby that are available for overflow valet parking.
Occupancy at the hotel has averaged 87.4% for the past three years. The Company
commenced construction in December 1994 on a 408-room 26-story Hampton Inn hotel
adjacent to Harrah's Reno,
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which will provide an additional supply of high-quality, moderately-priced guest
rooms. The hotel is expected to open in fourth quarter 1995 or January 1996 and
will be operated by Harrah's as a franchisee after the planned spin-off of the
Company's hotel business.
The primary feeder markets for Harrah's Reno are northern California, the
Pacific Northwest and Canada.
LAUGHLIN
Harrah's Laughlin is located in Laughlin, Nevada on a 44.9 acre site in a
natural cove on the Colorado River and features a hotel with 1,658 total rooms
including 23 suites, five restaurants and a 90-seat cabaret, all with a
south-of-the-border theme. It is the only property in Laughlin with a developed
beachfront on the river. Harrah's Laughlin has approximately 47,000 square feet
of casino space and approximately 7,000 square feet of convention center space.
The facility has customer parking for 2,789 cars and vans, including a covered
parking garage, and a park for recreational vehicles. Occupancy at Harrah's
Laughlin has averaged 84.4% for the last three years. The casino's primary
feeder market is the Los Angeles and Phoenix metropolitan areas where a combined
total of approximately 15 million people reside.
CENTRAL CITY AND BLACK HAWK
The Company owns an approximate 17 percent interest in Eagle Gaming, L.P.
("Eagle"). Eagle owns casinos in Central City and Black Hawk, Colorado, that
Harrah's manages for a fee. Both of the casinos are approximately 45 minutes
from downtown Denver.
Harrah's Central City has approximately 40,000 square feet of total space
located in four historic buildings decorated in authentic 1800's Victorian
furnishings. The casino, with approximately 11,700 square feet of casino space,
490 slot machines and 11 table games, features the 100 year old Glory Hole Bar
and the Gilded Garter Cabaret, with live entertainment, two restaurants and a
gift shop.
Harrah's Black Hawk is located in the historic mining town of Black Hawk and
has approximately 46,000 square feet of total space on three levels and is
decorated in Victorian design reminiscent of the gold rush days in the late
1800's. The casino has approximately 16,100 square feet of casino space, 530
slot machines, 13 table games, a restaurant and a gift shop.
Both of these casinos offer limited stakes gaming pursuant to Colorado law.
Complimentary shuttle service is available between Harrah's Black Hawk and
Harrah's Central City, a distance of approximately one mile. The primary feeder
market for both casinos is the Denver/Boulder metropolitan area.
RIVERBOAT CASINO ENTERTAINMENT DIVISION
JOLIET
Harrah's Joliet, the Company's first riverboat casino operation, is located
in downtown Joliet, Illinois, on the Des Plaines River. The facilities include
two riverboats. The Harrah's Northern Star, a modern 210-foot mega-yacht, has
17,000 square feet of casino space with 31 table games and 481 slot machines.
This riverboat, which has three levels, has the capacity to accommodate
approximately 825 guests per cruise. It offers six cruises per day. In January
1994, a second riverboat casino, the Harrah's Southern Star, was placed into
operation in Joliet. This 210-foot long riverboat is designed in the spirit of a
traditional 1880's sternwheeler and contains approximately 20,000 square feet of
casino space. The tri-level riverboat features a snack bar and lounge on its
third level, has 481 slot machines, 28 table games, and can accommodate up to
825 guests per cruise. It offers seven cruises per day, with an additional
eighth cruise on Fridays, Saturdays and holidays. With both riverboats in
operation on a typical weekday, Harrah's can serve 10,725 customers based on a
combined total of 13 excursions. Dockside facilities include a pavilion with two
restaurants, two lounges, including one with live
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entertainment, and a retail shop. Parking is available for over 1,200 cars,
including a 4-story parking garage with 750 spaces.
A partnership, in which an indirect subsidiary of the Company is the 80
percent general partner, developed and owns the dockside facilities and the
Harrah's Northern Star vessel. The Harrah's Southern Star vessel is owned by the
Company and is leased to the partnership. Both of the Joliet riverboat
businesses are owned by the partnership and are operated by Harrah's for a fee.
The Chicago metropolitan area is the primary feeder market for Harrah's
Joliet, with Joliet being only 30 miles from downtown Chicago.
TUNICA
Harrah's Tunica is a dockside riverboat casino located in Tunica,
Mississippi, approximately 30 miles south of downtown Memphis, Tennessee. The
stationary riverboat, with a classic antebellum design, has 27,000 square feet
of casino space on two levels, with 926 slot machines, 46 table games and an
entertainment lounge. On the third level there is approximately 8,000 square
feet for conventions, meetings and special events. Adjacent to the riverboat
casino is a 30,000 square foot pavilion that houses a 220 seat buffet
restaurant, employee facilities and executive offices. On-site parking is
available for 1,336 cars with valet parking available.
The Company owns the constructed facilities and the casino business. It is
anticipated that a limited partner will have a 17% minority interest subject to
its licensing by regulatory authorities. The underlying land, including
adjoining land used for a private access road and a sewage treatment facility,
is under long term lease with options to purchase.
The primary feeder market for Harrah's Tunica is the Memphis metropolitan
area.
VICKSBURG
Harrah's Vicksburg is the Company's dockside casino entertainment complex in
Vicksburg, Mississippi. The complex, which is located in downtown Vicksburg on
the Yazoo Diversion Canal of the Mississippi River, includes a 297-foot long
stationary riverboat casino designed in the spirit of a traditional 1800's
riverboat with approximately 14,300 square feet of casino space, 550 slot
machines and 37 table games. The casino is docked next to the Company's
shoreside entertainment complex which features a buffet, a restaurant/lounge, a
retail outlet and meeting rooms/convention area. Adjacent to the riverboat is a
117 room Harrah's hotel owned and operated by the Company and two covered
parking garages with combined parking for 839 cars. The Company owns the
riverboat and holds long-term rights to all real property pertaining to the
project.
The casino's primary feeder markets are western and central Mississippi and
eastern Louisiana.
SHREVEPORT
In April 1994, the Company opened its dockside riverboat casino in downtown
Shreveport, Louisiana. The facilities included a stationary 210-foot long
19th-century design paddlewheeler riverboat with 19,500 square feet of casino
space, 728 slot machines and 40 table games at year end. The riverboat
accommodates 1,200 guests and has three levels, one of which is a no-smoking
floor. In February 1995, the Company replaced the riverboat in Shreveport with a
254-foot long 19th-century design paddlewheeler riverboat, resulting in
approximately 27% more gaming positions at the Shreveport facility. The new
riverboat, the ShreveStar, has 30,000 square feet of gaming space with 928 slot
machines and 55 table games. A 40,000 square foot pavilion adjoins the casino on
the banks of the Red River and includes a 4,100 square foot area for private
parties and group functions, a full service restaurant, a food court area and
retail offerings. The facilities also include a scenic riverwalk along the
river.
The casino is owned by a partnership in which an indirect subsidiary of the
Company is the 99% general partner.
4
The primary feeder markets for the casino are northeastern Louisiana, east
Texas and the Dallas/Ft. Worth metropolitan area.
NORTH KANSAS CITY
The Company opened a riverboat casino in North Kansas City, Missouri, in
September 1994. The facilities include a 295-foot long classic sternwheeler
designed stationary riverboat with approximately 31,600 square feet of casino
space. At opening, the casino contained certain types of casino games and poker
machines allowed by Missouri law. On November 8, 1994, the passage of a
statewide referendum in Missouri permitted the addition of traditional reel-type
slot machines and other games of chance ("Referendum"). In December 1994, the
Company began reconfiguration of the casino space on the riverboat which
resulted in 920 slot machines and 82 table games. Shoreside facilities include a
55,000 square foot pavilion that houses three restaurants, a meeting room,
employee facilities and administrative offices. On-site parking is available for
1,800 cars. The riverboat casino is owned and operated by the Company.
The casino's primary feeder market is the Kansas City metropolitan area.
UNDER DEVELOPMENT
ST. LOUIS--RIVERPORT
The development by the Company of a riverboat casino project along the
Missouri River in Maryland Heights, Missouri, in northwest St. Louis County, 16
miles from downtown St. Louis, was postponed in 1994, pending the results of the
Referendum. The Company intends to proceed with the project, which is currently
being redesigned. The Company's current net investment in this project is $39
million. In March 1995, the Company signed a preliminary agreement with Players
International, Inc. under which each company will develop and operate its own
separately branded riverboat casino in Maryland Heights with jointly developed
shoreside facilities. Construction and opening of the project is subject to
various regulatory and other necessary approvals.
INDIAN GAMING DIVISION
AK-CHIN
In December 1994, Harrah's Phoenix Ak-Chin casino opened on the Maricopa
Indian Reservation, approximately 25 miles south of Phoenix, Arizona. The casino
includes 32,000 square feet of casino space with 475 slot machines, 40 gaming
tables, bingo, keno, a restaurant, an entertainment lounge, meeting rooms and a
retail shop. The complex has customer parking for approximately 1,000 cars and
has valet parking available. Harrah's manages the casino for a fee under a
management contract that has a five year term.
The Company has guaranteed repayment of bank financing equal to 100 percent
of the project cost of $26.4 million for the Ak-Chin facility, and Sodak Gaming,
Inc. ("Sodak") has provided a guarantee to Promus for one-half of this
financing.
The primary feeder markets for the casino are Phoenix and Tucson.
SODAK GAMING, INC.
The Company owns a 13.8% ownership interest in Sodak. Sodak is a leading
distributor of electronic gaming machines and gaming-related products and
systems. Under terms of an agreement with International Game Technology ("IGT")
expiring on May 5, 1998, Sodak is the exclusive distributor for IGT of its
gaming equipment in the states of North Dakota, South Dakota and Wyoming, and on
Native American Reservations within the 48 contiguous states, excluding Nevada
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and New Jersey. This distribution agreement continues from year to year after
May 5, 1998, until it is cancelled. Sodak also has an international
distributorship agreement with IGT for gaming equipment.
PROPOSED DEVELOPMENTS
The Company has entered into management and development agreements with two
Indian communities in Washington state and California in connection with the
proposed development of casino entertainment facilities on lands owned by the
respective tribes. These agreements are subject to approval by the National
Indian Gaming Commission (the "NIGC"). Development of the casino facilities,
which would be managed by the Company for a fee, will not commence until NIGC
approval and other required approvals are received. The Company expects the
proposed projects will be financed by bank loans that would be guaranteed by the
Company.
LAND-BASED CASINOS UNDER DEVELOPMENT
NEW ORLEANS
Harrah's New Orleans Investment Company (an indirect wholly-owned subsidiary
of the Company) ("Harrah's Investment") is one of three partners in a
partnership named Harrah's Jazz Company ("Harrah's Jazz"). Harrah's Jazz is
constructing and plans to open a new 400,000 square foot facility called
"Harrah's Casino New Orleans" on the site of the former Rivergate Convention
Center in downtown New Orleans (the "Rivergate site"), featuring approximately
200,000 square feet of casino space, approximately 6,000 slot machines and 200
table games (the "Permanent Casino").
Pending the opening of the Permanent Casino, Harrah's Jazz commenced
development in November 1994 on an approximate 76,000 square foot temporary
casino in the New Orleans Municipal Auditorium, with approximately 3,000 slot
machines and 85 table games (the "Temporary Casino").
It is anticipated that the Temporary Casino will open in second quarter
1995, and the Permanent Casino is expected to open in second quarter 1996. (The
Temporary Casino and the Permanent Casino are sometimes referred to herein as
the "New Orleans Gaming Facilities.") The sites for the New Orleans Gaming
Facilities have been leased from the City of New Orleans. A casino operating
contract, or license, from the State of Louisiana has been executed.
The total project cost is expected to be $815 million, which is being funded
through a combination of partner equity contributions, public debt securities,
cash flow from the Temporary Casino, and bank debt. Financing for the New
Orleans Gaming Facilities was completed in November 1994 and included the
issuance by Harrah's Jazz of $435 million of 14.25% First Mortgage Notes due
2001 (the Public Debt), and the closing of bank credit facilities providing up
to $175 million in borrowing capacity to Harrah's Jazz. Harrah's Investment has
made total capital contributions to this project of approximately $90 million.
An indirect wholly-owned subsidiary of the Company will manage the operations
for a fee. In exchange for a fee to be paid by Harrah's Jazz, the Company has
guaranteed the completion of the New Orleans Gaming Facilities, subject to
certain exceptions and qualifications.
Harrah's Investment presently owns approximately 53% of Harrah's Jazz. One
of the other partners of Harrah's Jazz, which presently owns approximately 13.7%
of Harrah's Jazz, has the option to acquire from Harrah's Investment an
additional interest in Harrah's Jazz of approximately 14.6%. This option may be
exercised at any time until 120 days after the opening of the Temporary Casino
for a purchase price of $33.3 million. If the option is exercised, Harrah's
Investment's interest in Harrah's Jazz would decrease to approximately 38.3%.
The debt of the Partnership is presently considered debt of the Company and
its subsidiaries for purposes of the Company's public debt indentures, unless
and until the Company's ownership interest is reduced to 50% or less pursuant to
the exercise of the options discussed above or otherwise. However, since the
Company's ownership of a majority interest in the Partnership is expected to be
temporary and voting control of the Partnership in any event continues to be
shared equally by each partner during the
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option period, the Partnership is not consolidated into the Company's financial
statements for accounting purposes.
The New Orleans project is the subject of several legal proceedings that
could delay or otherwise adversely affect the project. In one state court
proceeding filed in 1993, the plaintiffs asserted, among other things, an
ownership interest in certain land underlying the Rivergate site and also sought
permanent injunctive relief prohibiting the use of such land for the Casino.
Although the plaintiffs' claims were dismissed by the trial court on summary
judgment in 1994, the plaintiffs appealed such decision. On February 23, 1995,
the state appellate court affirmed the trial court's ruling that the plaintiff
did not have an ownership interest in such land underlying the Rivergate site
and remanded the case to the trial court to determine whether the plaintiff has
standing to assert other claims regarding the use of the site. Both parties have
the right to appeal the appellate court's decision by filing a petition for a
writ of certiorari to the Louisiana Supreme Court.
In a second state court proceeding filed in 1994, the plaintiffs challenged
the validity of ordinances authorizing amendments to the Company's lease of the
Rivergate site. A successful challenge of these ordinances could call into
question the validity of the lease of the Rivergate site.
In a third legal proceeding filed in federal court in 1994, the court
enjoined the Company in January 1995 from removing a statue or converting a
plaza situated adjacent to the Casino and in which the statue is located without
approval of the United States Secretary of the Interior. If the Company is
unable to successfully appeal the court's ruling or obtain such approval, the
Company will be required to redesign portions of the Casino since current design
plans for the Casino contemplate locating the main access areas for the Casino
in the area currently in use as the plaza. A redesign will require the approval
of certain state and local governmental agencies.
NEW ZEALAND
The Company and its venture partner have been granted licenses by the New
Zealand Casino Control Authority for a casino entertainment facility currently
under construction in Auckland, New Zealand. The Company is a 20% partner in the
joint venture developing and constructing the casino, which will be managed by
the Company for a fee. The Company anticipates making an investment of up to
$30.5 million in the joint venture. The proposed facility will feature 50,000
square feet of casino space, a 344-room hotel, six restaurants, a showroom, a
conference center, bus terminal, and parking in garages for 2,770 cars. A
special attraction of the facility will be a 1,076-foot Sky Tower. Construction
of the project, currently budgeted at $331 million, to be financed through a
combination of partner contributions and non-recourse debt, began in first
quarter 1994. Opening of the project, which is expected in first quarter 1996,
is subject to receipt of necessary regulatory approvals.
CASINO ENTERTAINMENT--OTHER
In addition to the above, the Company is actively pursuing numerous casino
entertainment opportunities in various jurisdictions both domestically and
abroad, including land-based, riverboat casino and Indian gaming projects in the
United States. A number of these projects, if they go forward, would require
significant capital investments by the Company.
HOTELS
For a discussion of the planned spin-off of the Hotel Business, please refer
to "Spin-off of Hotel Business" under Items 1 and 2 above.
GENERAL
The Company's hotel business consists of the Embassy Suites, Hampton Inn and
Homewood Suites hotel brands. Each brand is targeted to a specific market
segment. In December 1993, the Company announced a new brand, Hampton Inn &
Suites, which is under development.
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Embassy Suites hotels, of which there were 107 on December 31, 1994, appeal
to the traveler who has a need or desire for greater space and more focused
services than are available in traditional upscale hotels. Embassy Suites hotels
comprise the largest upscale all-suite hotel system in the United States by
number of suites and system revenues.
Hampton Inn hotels are moderately priced hotels designed to attract the
business and leisure traveler desiring quality accommodations at affordable
prices. Since 1984, when the brand was introduced, the system has grown to 437
hotels as of December 31, 1994.
Homewood Suites hotels, of which there were 26 on December 31, 1994,
represent the Company's entry in the extended stay market and target the
traveler who stays five or more consecutive nights, as well as the traditional
business and leisure traveler.
The Hampton Inn & Suites brand now under development will incorporate the
best features of the Hampton Inn and Homewood Suites brands, offering both
traditional hotel room accommodations and apartment-style suites within one
property.
As of December 31, 1994, the Company's hotel brands included 468 properties
that are licensed by the Company, 70 properties that are managed by the Company,
and 32 properties that are owned and operated by the Company. These properties
total approximately 78,600 rooms and suites.
All of the Company's hotel brands are managed by a common senior management
team.
The Company pursues a strategy of growing its hotel brands by minimizing its
ownership of hotel real estate and concentrating on obtaining new franchise or
management contracts. As a part of this strategy, owned or leased hotels are
sold thereby realizing the value of the underlying assets for its stockholders
and increasing returns on investment. Following the sale, the hotels typically
are operated either by the Company under a management contract or by the
purchaser under license from the Company.
Each of the Company's hotel brands uses a centralized business system, which
includes access to reservation services, performance support or training,
operations and marketing management and revenue management. This network of
business systems is one of the most sophisticated systems in the hotel industry.
The Embassy Suites, Hampton Inn and Homewood Suites business systems'
reservation module receives reservation requests entered on terminals located at
all of their respective hotels and reservations centers, and major domestic
airlines. The systems immediately confirm reservations or indicate
accommodations available at alternate system hotels. Confirmations are
transmitted automatically to the hotel for which the reservation is made. The
Company's computer center in Memphis, Tennessee, houses the computers and
satellite communications equipment necessary for its reservations system, which
is currently operational, and for its property management system, which has been
developed and is being placed into service.
Each of the Company's hotel brands offers an unconditional money-back
guarantee of service satisfaction. All of the Company's hotel brands offer
suites/rooms exclusively for non-smoking guests.
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EMBASSY SUITES HOTELS
The following table sets forth information regarding all Embassy Suites
hotels, including company-owned hotels, hotels operated by Embassy under
management contracts or joint venture arrangements and hotels operated by
licensees:
MANAGEMENT
CONTRACTS/
LICENSED OWNED JOINT VENTURES
---------------- ------------------ -----------------
NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER
OF OF OF OF OF OF
HOTELS SUITES HOTELS SUITES HOTELS SUITES
------ ------ ------ ------- ------ ------
Fiscal Year-End 1991..................... 42 9,806 15 3,450 44 11,452
1992 Activity:
Additions.............................. 2 685 - - - (3)
Transfers, net (a)..................... 1 221 - - (1) (221)
-- ------ -- ------- -- ------
Fiscal Year-End 1992..................... 45 10,712 15 3,450 43 11,228
1993 Activity:
Additions.............................. 5 938 - - - (3)
Transfers, net (a)..................... 3 900 (6) (1,423) 3 523
Sales/Terminations..................... (1) (196) - - - -
-- ------ -- ------- -- ------
Fiscal Year-End 1993..................... 52 12,354 9 2,027 46 11,748
1994 Activity:
Additions.............................. 1 177 - - 2 410
Transfers, net (a)..................... - (15) - (2) - 15
Sales/Terminations..................... (2) (760) - - (1) (239)
-- ------ -- ------- -- ------
Fiscal Year-End 1994..................... 51 11,756 9(b) 2,025 47(c) 11,934
-- ------ -- ------- -- ------
-- ------ -- ------- -- ------
- ------------
(a) Transfers of properties among licensed, managed and owned categories.
(b) Includes one property in which the Company owns more than a 50% interest.
(This property is under a license agreement to a third party and is managed
by Embassy.)
(c) Includes 45 hotels that are also licensed to third parties.
On December 31, 1994, eight Embassy Suites hotels were under construction,
all of which will be licensee-operated.
Embassy Suites hotels are located in 33 states and the District of Columbia
in the United States and two hotels are located in Canada. One hotel is under
construction in each of the following countries: Thailand, Columbia and Mexico.
Embassy Suites hotels range in size between 102 and 413 suites. Each guest suite
has a separate living room and dining/work area, with a television, refrigerator
and wet bar, as well as a traditional bedroom where most feature a
remote-controlled television. Most Embassy Suites hotels are built around a
landscaped lobby. All hotels offer free breakfast and complimentary evening
cocktails (where local law allows).
The following table sets forth information concerning system occupancy,
average daily rate per occupied suite and revenue per available suite for all
Embassy Suites hotels:
AVERAGE DAILY
OCCUPANCY RATE PER REVENUE PER
FISCAL YEAR RATE OCCUPIED SUITE AVAILABLE SUITE
- -------------------------------------- --------- -------------- ---------------
1994.................................. 74.9% $97.28 $ 72.86
1993.................................. 73.0% $93.91 $ 68.58
1992.................................. 71.7% $90.97 $ 65.26
9
HAMPTON INN HOTELS
The following table sets forth information regarding all Hampton Inn hotels,
including company-owned hotels, hotels operated by Hampton Inns under management
contracts or joint venture arrangements and hotels operated by licensees:
MANAGEMENT
CONTRACTS/
LICENSED OWNED JOINT VENTURES
----------------- ---------------- ----------------
NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER
OF OF OF OF OF OF
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------ ------ ------ ------ ------ ------
Fiscal Year-End 1991....................... 259 32,303 15 2,049 21 2,618
1992 Activity:
Additions................................ 32 3,216 - (1) 2 292
Terminations............................. (2) (277) - - - -
------ ------ -- ------ -- ------
Fiscal Year-End 1992....................... 289 35,242 15 2,048 23 2,910
1993 Activity:
Additions................................ 46 4,147 - - 1 51
Terminations............................. (2) (236) - - - -
------ ------ -- ------ -- ------
Fiscal Year-End 1993....................... 333 39,153 15 2,048 24 2,961
1994 Activity:
Additions................................ 67 6,149 - - - -
Terminations............................. (1) (118) - (1) (1) (121)
------ ------ -- ------ -- ------
Fiscal Year-End 1994....................... 399(a) 45,184 15 2,047 23(b) 2,840
------ ------ -- ------ -- ------
------ ------ -- ------ -- ------
- ------------
(a) Includes one property open only on a seasonal basis.
(b) These hotels are also licensed to third parties.
On December 31, 1994, 67 Hampton Inn hotels, including three Hampton Inn &
Suites properties, were under construction, all of which will be
licensee-operated.
Hampton Inn hotels are currently located in 43 states in the United States
and one hotel is in each of the following countries: Canada, Mexico and Costa
Rica. There is one additional hotel under construction in Mexico and one in
Thailand. An average Hampton Inn hotel has from 80 to 150 rooms. The Hampton Inn
hotel's standardized concept provides a guest room featuring a remote control
television, free in-room movies, free local telephone calls and complimentary
continental breakfast. Unlike full-service hotels, Hampton Inn hotels do not
feature restaurants, lounges or large public spaces.
Hampton Inns also has a modified lodging property for use in communities
supporting hotels of fewer than 90 rooms. The building design for these smaller
communities has the same features as a standard Hampton Inn hotel, but with
fewer rooms and a smaller lobby. There are over 80 of these modified design
hotels open and 43 currently under construction.
The following table sets forth information concerning system occupancy,
average daily rate per occupied room and revenue per available room for all
Hampton Inn hotels:
AVERAGE DAILY
OCCUPANCY RATE PER REVENUE PER
FISCAL YEAR RATE OCCUPIED ROOM AVAILABLE ROOM
- ------------------------------------- --------- ------------- --------------
1994................................. 74.3% $ 53.46 $39.74
1993................................. 73.0% $ 50.81 $37.10
1992................................. 71.2% $ 48.91 $34.82
In December 1993, the Company announced the Hampton Inn & Suites brand which
combines standard guest rooms with a significant block of two-room suites in a
single property. Development of this new brand is targeted for commercial and
suburban markets, as well as destination and resort
10
markets. Each property will contain a centrally located expanded lobby and
complimentary services area and will include an exercise room, convenience shop,
meeting/hospitality room and coin-laundry. An expanded complimentary continental
breakfast-buffet will be offered. The first Hampton Inn & Suites hotel is
expected to open in second quarter 1995.
HOMEWOOD SUITES HOTELS
The following table sets forth information regarding all Homewood Suites
hotels, including company-owned hotels and hotels operated by licensees:
LICENSED OWNED
---------------- ----------------
NUMBER NUMBER NUMBER NUMBER
OF OF OF OF
HOTELS SUITES HOTELS SUITES
------ ------ ------ ------
Fiscal Year-End 1991....................................... 14 1,504 8 940
1992 Activity:
Additions................................................ 2 250 - (8)
-- ------ -- -----
Fiscal Year-End 1992....................................... 16 1,754 8 932
1993 Activity:
Additions................................................ - 40 - -
-- ------ -- -----
Fiscal Year-End 1993....................................... 16 1,794 8 932
1994 Activity:
Additions................................................ 2 155 - -
-- ------ -- -----
Fiscal Year-End 1994....................................... 18 1,949 8 932
-- ------ -- -----
-- ------ -- -----
On December 31, 1994, four Homewood Suites hotels were under construction,
three of which will be licensee operated and one will be company-owned.
Homewood Suites hotels are currently located in 17 states and hotels are
under construction in one additional state. Homewood Suites hotels feature
residential-style accommodations, which include a living room area (some with
fireplaces), separate bedroom, bath and a fully-equipped kitchen. The buildings
that contain the hotel suites, generally two- or three-stories, are centered
around a central community building, called the Lodge, which affords guests a
high level of social interaction. Amenities include an expanded complimentary
continental breakfast and a complimentary evening social hour, a convenience
store, shopping service, business center, outdoor pool, exercise center and
limited meeting facilities.
The Homewood Suites brand includes a smaller, modified prototype of its
standard hotel for use in suburban areas of major cities, as well as secondary
cities with active industrial or commercial areas. The modified prototype
reflects the signature design and amenities of a traditional Homewood Suites
hotel, but with fewer suites, a smaller Lodge and other construction
modifications that will require less land. There are currently two modified
prototype hotels under construction, both of which will be licensee operated.
In May 1994, the Company announced plans for a major expansion of the
Homewood Suites brand involving the financing and construction of 20 to 25
company-owned Homewood Suites hotels during the next three years.
The following table sets forth information concerning system occupancy,
average daily rate per occupied suite and revenue per available suite for all
Homewood Suites hotels:
AVERAGE DAILY
OCCUPANCY RATE PER REVENUE PER
FISCAL YEAR RATE OCCUPIED SUITE AVAILABLE SUITE
- -------------------------------------- --------- -------------- ---------------
1994.................................. 78.1% $76.38 $ 59.67
1993.................................. 75.8% $72.47 $ 54.91
1992.................................. 71.9% $69.65 $ 50.10
11
LICENSING AND MANAGEMENT CONTRACT OPERATIONS
Revenues from licensing operations for all Embassy Suites, Hampton Inn and
Homewood Suites hotels operated under license from Embassy's hotel divisions
(referred to in this section as the "Company") consist of initial license
application fees and continuing royalties. The initial license agreement
application fee for an Embassy Suites license agreement is $500 per room, with a
minimum of $100,000, and $400 per room, with a minimum of $40,000 for each
Hampton Inn, Hampton Inn & Suites and Homewood Suites license agreement. The
license agreements provide for a four percent royalty based upon gross
rooms/suites revenues and also provide for a marketing and reservation
contribution.
In screening applicants for license agreements, the Company evaluates the
character, operations ability, experience and financial responsibility of each
applicant; the Company's prior business dealings, if any, with the applicant;
market feasibility of the proposed hotel location and other factors. The license
agreement establishes general requirements for service and quality of
accommodations. The Company provides certain training for licensee management
and makes regular inspections of licensed hotels.
License agreements for new hotels generally have a 20-year term. The Company
may terminate a license agreement if the licensee fails to timely cure a breach
of the license agreement. In certain instances, a license agreement may be
terminated by the licensee, but such termination generally requires a payment to
the Company.
Revenues from management contracts consist primarily of management fees
which are based on a percentage of adjusted gross revenues of the hotel. The
contract terms governing management fees can vary depending on the size and
location of the hotel and other factors relative to the property.
Under the Company's management contracts, the Company, as the manager,
operates or supervises all aspects of the hotel's operations. The hotel owner is
generally responsible for all costs, expenses and liabilities incurred in
connection with operating the hotel including the expenses and salaries of all
hotel employees. The hotel owner also enters into a license agreement with the
Company and pays the royalty and marketing and reservation contributions as
provided in the license agreement. In addition, the hotel owner is often
required to set aside a certain percentage of hotel revenues for capital
replacement. The Company's management contracts typically have a term of ten to
20 years and most give the Company specified renewal rights. The management
contract may be terminated by either party due to an uncured default by the
other party.
OTHER
STATION SQUARE-PITTSBURGH, PENNSYLVANIA
In August 1994, a general partnership in which the Company is a 75% partner
acquired an entertainment, business and retail center known as Station Square in
Pittsburgh, Pennsylvania. The approximately 52-acre 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. At closing,
the Company provided approximately $23.5 million to the partnership in the form
of a capital contribution. If casino gaming is legalized in this jurisdiction,
the partnership plans to pursue development of a casino entertainment facility
at the Station Square site.
AUDUBON WOODS BUSINESS CAMPUS
In January 1995, the Company acquired property in Memphis, Tennessee known
as the Audubon Woods Business Campus for a purchase price of $21.7 million. This
office complex consists of four office buildings containing approximately
360,000 square feet of office space and is located on approximately 31 acres of
land.
12
TRADEMARKS
The following trademarks used herein are owned by the Company: Promus(R);
Harrah's(R); Bill's(R); Embassy Suites(R); Hampton Inn(R); Hampton Inn &
Suitessm; Homewood Suites(R); Harrah's Northern Starsm; Harrah's Southern
Starsm; ShreveStarsm; and Harrah's Jazz Companysm. The names "Harrah's",
"Embassy Suites", "Hampton Inn", and "Homewood Suites" are registered as service
marks in the United States and in certain foreign countries. The Company
considers all of these marks, and the associated name recognition, to be
valuable to its business.
The Company acquired the name "Embassy" (as used in connection with hotels)
in eleven countries in western Europe in 1991. The Company paid an initial fee
to acquire the name and will pay an additional fee for each hotel opened under
the name.
COMPETITION
CASINO ENTERTAINMENT
Harrah's is the casino industry's only true national casino brand. As the
operator of land-based, dockside, riverboat, Indian and limited stakes casino
facilities in all of the traditional, and many of the new, U.S. casino
entertainment jurisdictions, Harrah's competes with numerous casinos and casino
hotels of varying quality and size in the market areas where its properties are
located, with other resorts and vacation areas, and with various other casino
gaming businesses. The casino gaming business is characterized by competitors
which vary considerably by their size, number of operations, growth strategies
and concentration on new jurisdictions and new types of casino gaming. In
certain areas such as Las Vegas, Harrah's competes with a wide range of casinos,
some of which are significantly larger and newer and offer substantially more
non-gaming activities to attract customers.
In most markets, Harrah's competes directly with other casino facilities
operating in the immediate market area. In major casino destinations, such as
Las Vegas, Atlantic City and, in all likelihood, New Orleans, Harrah's faces, or
will face, competition from other markets in addition to direct competition in
the immediate market area.
Harrah's believes it is well positioned to take advantage of the recent
trend of proliferation of jurisdictions which allow casino gaming, positive
consumer acceptance of casino gaming as an entertainment activity, and increased
visitation to casino facilities. However, this trend presents competitive issues
for Harrah's and as casino gaming proliferates, competition among different
markets could intensify. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Effects of Current Economic and
Political Conditions."
HOTELS
Intense competition among many chains exists for hotel guests as well as in
the sale of hotel franchises and in obtaining management contracts. The
Company's hotels are in vigorous competition with a wide range of facilities
offering various types of lodging options and related services to the public.
The competition includes several large and moderate size chains and independent
hotels offering all-suite, upper and lower upscale, midscale, and upper and
lower economy accommodations.
The hotel industry saw continued improvement in 1994. With improving
occupancies, and modest growth in average daily rate, revenue per available room
in the industry improved over 6% in 1994 based on data provided by the major
firm that tracks hotel statistics.
In 1994 all of the Company's hotel brands outperformed their respective
competitive segment in revenue per available room/suite (RevPAR/S).
GOVERNMENTAL REGULATION
GAMING-NEVADA
The ownership and operation of casino gaming facilities in Nevada are
subject to: (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (collectively, "Nevada Act"); and (ii) various local ordinances and
regulations. Promus' gaming operations are subject to the licensing and
13
regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the
Nevada State Gaming Control Board ("Nevada Board"), the Clark County Liquor and
Gaming Licensing Board ("CCLGLB"), the City of Reno ("Reno"), and the Douglas
County Sheriff's Department ("Douglas"). The Nevada Commission, the Nevada State
Gaming Control Board, the CCLGLB, Reno, and Douglas are collectively referred to
as the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) providing a source of state and local revenues
through taxation and licensing fees. Changes in such laws, regulations and
procedures could have an adverse effect on Promus' Nevada gaming operations.
Harrah's Club, Harrah's Las Vegas, Inc. and Harrah's Laughlin, Inc., each an
indirect subsidiary of Promus (hereinafter collectively referred to as the
"Gaming Subsidiaries"), are required to be licensed by the Nevada Gaming
Authorities to enable Promus to operate casinos at Harrah's Lake Tahoe,
including Bill's Lake Tahoe Casino, Harrah's Reno, Harrah's Las Vegas, and
Harrah's Laughlin. The gaming licenses require the periodic payment of fees and
taxes and are not transferable. Promus is registered with the Nevada Commission
as a publicly traded corporation ("Registered Corporation"), and as such, it is
required periodically to submit detailed financial and operating reports to the
Nevada Commission and furnish any other information which the Nevada Commission
may require. No person may become a stockholder of, or receive any percentage of
profits from, the Gaming Subsidiaries without first obtaining licenses and
approvals from the Nevada Gaming Authorities. Promus and the Gaming Subsidiaries
have obtained from the Nevada Gaming Authorities the various registrations,
approvals, permits and licenses required in order to engage in gaming activities
in Nevada.
Promus has been found suitable to be the sole shareholder of Embassy, which
in turn is a Registered Corporation (by virtue of being the obligor on certain
outstanding debt securities) and has been found suitable to be the sole
shareholder of Harrah's. Harrah's is registered as an intermediary company and
has been found suitable to be the sole shareholder of Harrah's Club and Harrah's
Laughlin, Inc. In addition to its gaming license, Harrah's Club is also licensed
as a manufacturer and distributor of gaming devices, is registered as an
intermediary company and has been found suitable to be the sole shareholder of
Harrah's Las Vegas, Inc. Promus may not sell or transfer beneficial ownership of
any of Embassy's voting securities without prior approval of the Nevada
Commission.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, Promus, Embassy or the
Gaming Subsidiaries in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors and certain key employees of the Gaming Subsidiaries must file
applications with the Nevada Gaming Authorities and may be required to be
licensed or found suitable by the Nevada Gaming Authorities. Officers, directors
and key employees of Promus and Embassy who are actively and directly involved
in gaming activities of the Gaming Subsidiaries may be required to be licensed
or found suitable by the Nevada Gaming Authorities. The Nevada Gaming
Authorities may deny an application for licensing for any cause which they deem
reasonable. A finding of suitability is comparable to licensing, and both
require submission of detailed personal and financial information followed by a
thorough investigation. The applicant for licensing or a finding of suitability
must pay all the costs of the investigation. Changes in licensed positions must
be reported to the Nevada Gaming Authorities and in addition to their authority
to deny an application for a finding of suitability or licensure, the Nevada
Gaming Authorities have jurisdiction to disapprove a change in a corporate
position.
14
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with Promus, Embassy or the Gaming Subsidiaries, the companies
involved would have to sever all relationships with such person. In addition,
the Nevada Commission may require Promus, Embassy or the Gaming Subsidiaries to
terminate the employment of any person who refuses to file appropriate
applications. According to the Nevada Act, determinations of suitability or of
questions pertaining to licensing are not subject to judicial review in Nevada.
Promus, Embassy and the Gaming Subsidiaries are required to submit detailed
financial and operating reports to the Nevada Commission. Substantially all
material loans, leases, sales of securities and similar financing transactions
by the Gaming Subsidiaries must be reported to, or approved by, the Nevada
Commission.
If it were determined that the Nevada Act was violated by the Gaming
Subsidiaries, the gaming licenses they hold could be limited, conditioned,
suspended or revoked, subject to compliance with certain statutory and
regulatory procedures. In addition, the Gaming Subsidiaries, Promus, Embassy and
the persons involved could be subject to substantial fines for each separate
violation of the Nevada Act at the discretion of the Nevada Commission. Further,
a supervisor could be appointed by the Nevada Commission to operate Promus'
gaming properties and, under certain circumstances, earnings generated during
the supervisor's appointment (except for the reasonable rental value of the
Company's gaming properties) could be forfeited to the State of Nevada.
Limitation, conditioning or suspension of any gaming license or the appointment
of a supervisor could (and revocation of any gaming license would) materially
adversely affect Promus' gaming operations.
Any beneficial holder of Promus' voting securities, regardless of the number
of shares owned, may be required to file an application, be investigated, and
have his suitability as a beneficial holder of Promus' voting securities
determined if the Nevada Commission has reason to believe that such ownership
would otherwise be inconsistent with the declared policies of the state of
Nevada. The applicant must pay all costs of investigation incurred by the Nevada
Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of Promus'
voting securities to report the acquisition to the Nevada Commission. The Nevada
Act requires that beneficial owners of more than 10% of Promus' voting
securities apply to the Nevada Commission for a finding of suitability within
thirty days after the Chairman of the Nevada Board mails the written notice
requiring such filing. Under certain circumstances, an "institutional investor,"
as defined in the Nevada Act, which acquires more than 10%, but not more than
15%, of Promus' voting securities may apply to the Nevada Commission for a
waiver of such finding of suitability if such institutional investor holds the
voting securities for investment purposes only. An institutional investor shall
not be deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of business
as an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of Promus, any change in Promus' corporate charter, bylaws, management, policies
or operations of Promus, or any of its gaming affiliates, or any other action
which the Nevada Commission finds to be inconsistent with holding Promus' voting
securities for investment purposes only. Activities which are not deemed to be
inconsistent with holding voting securities for investment purposes only
include: (i) voting on all matters voted on by stockholders; (ii) making
financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent. If
the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
15
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. Promus is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with Promus, Embassy or the
Gaming Subsidiaries, it: (i) pays that person any dividend or interest upon
voting securities of Promus; (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by that person;
(iii) pays remuneration in any form to that person for services rendered or
otherwise; or (iv) fails to pursue all lawful efforts to require such unsuitable
person to relinquish his voting securities for cash at fair market value.
Additionally, the CCLGLB requires that any person who is required to be licensed
or found suitable by the Nevada Commission must file a license application with
the CCLGLB.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
Promus would normally be required to maintain a current stock ledger in
Nevada which may be examined by the Nevada Gaming Authorities at any time, but
instead, it has been required by the Nevada Commission to maintain its stock
ledgers in its executive offices in Memphis, Tennessee which may be examined by
the Nevada Board at any time. If any securities are held in trust by an agent or
by a nominee, the record holder may be required to disclose the identity of the
beneficial owner to the Nevada Gaming Authorities. A failure to make such
disclosure may be grounds for finding the record holder unsuitable. Promus also
is required to render maximum assistance in determining the identity of the
beneficial owner. The Nevada Commission has the power to require the Company's
stock certificates to bear a legend indicating that the securities are subject
to the Nevada Act. However, to date, the Nevada Commission has not imposed such
a requirement on Promus.
Promus and Embassy may not make a public offering of their securities
without the prior approval of the Nevada Commission if the securities or the
proceeds therefrom are intended to be used to construct, acquire or finance
gaming facilities in Nevada, or to retire or extend obligations incurred for
such purposes. On April 21, 1994, the Nevada Commission granted Promus and
Embassy prior approval to make offerings for a period of one year, subject to
certain conditions ("Shelf Approval"). The Shelf Approval does not constitute a
finding, recommendation or approval by the Nevada Commission or the Nevada Board
as to the accuracy or adequacy of the prospectus or the investment merits of the
securities offered. Any representation to the contrary is unlawful.
Changes in control of Promus through merger, consolidation, stock or asset
acquisitions, management or consulting agreements, or any act or conduct by a
person whereby he obtains control, may not occur without the prior approval of
the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and Nevada Commission in a variety of
stringent standards prior to assuming control of such Registered Corporation.
The Nevada Commission may also require controlling stockholders, officers,
directors and other persons having a material relationship or involvement with
the entity proposing to acquire control, to be investigated and licensed as part
of the approval process relating to the transaction.
16
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environmental for the orderly governance of
corporate affairs. Approvals are, in certain circumstances, required from the
Nevada Commission before the Registered Corporation can make exceptional
repurchases of voting securities above the current market price thereof and
before a corporate acquisition opposed by management can be consummated. The
Nevada Act also requires prior approval of a plan of recapitalization proposed
by the Registered Corporation's Board of Directors in response to a tender offer
made directly to the Registered Corporation's stockholders for the purposes of
acquiring control of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Gaming Subsidiaries' respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon
either: (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; or (iii) the number of table games operated. A casino
entertainment tax is also paid by casino operations where entertainment is
furnished in connection with the selling of food or refreshments. Nevada
licensees that hold a license as an operator of a slot route, or a
manufacturer's or distributor's license, also pay certain fees and taxes to the
State of Nevada.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees") and who proposes to become involved in a gaming venture outside of
Nevada is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation of
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employ a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
GAMING--NEW JERSEY
As a holding company of Marina Associates ("Marina"), which holds a license
to operate Harrah's Atlantic City in New Jersey, Promus is subject to the
provisions of the New Jersey Casino Control Act (the "New Jersey Act"). The
ownership and operation of casino hotel facilities in Atlantic City, New Jersey,
are the subject of pervasive state regulation under the New Jersey Act and the
regulations adopted thereunder by the New Jersey Casino Control Commission (the
"New Jersey Commission"). The New Jersey Commission is empowered to regulate a
wide spectrum of gaming and non-gaming related activities and to approve the
form of ownership and financial structure of not only the casino licensee,
Marina, but also its intermediary and ultimate holding companies, including
Promus and Embassy. In addition to taxes imposed by the State of New Jersey on
all businesses, the New Jersey Act imposes certain fees and taxes on casino
licensees, including an 8% gross gaming revenue tax, an investment alternative
obligation of 1.25% (or an investment alternative tax of 2.5%) of gross gaming
revenue and various license fees.
17
No casino hotel facility may operate unless the appropriate licenses and
approvals are obtained from the New Jersey Commission, which has broad
discretion with regard to the issuance, renewal and revocation or suspension of
the non-transferable casino license (which licenses are issued initially for a
one-year period and renewable for a one-year period for the first two renewal
periods and two years thereafter), including the power to impose conditions
which are necessary to effectuate the purposes of the New Jersey Act. Each
applicant for a casino license must demonstrate, among other things, its
financial stability (including establishing ability to maintain adequate casino
bankroll, meet ongoing operating expenses, pay all local, state and federal
taxes, make necessary capital improvements and pay, exchange, refinance, or
extend all long and short term debt due and payable during the license term),
its financial integrity and responsibility, its reputation for good character,
honesty and integrity, the suitability of the casino and related facilities and
that it has sufficient business ability and casino experience to establish the
likelihood of creation or maintenance of a successful, efficient casino
operation. With the exception of licensed lending institutions and certain
"institutional investors" waived from the qualification requirements under the
New Jersey Act, each applicant is also required to establish the reputation of
its financial sources including, but not limited to, its financial backers,
investors, mortgagees and bond holders.
The New Jersey Act requires that all officers, directors and principal
employees of the casino licensee be licensed. In addition, each person who
directly or indirectly holds any beneficial interest or ownership of the casino
licensee and any person who in the opinion of the New Jersey Commission has the
ability to control the casino licensee must obtain qualification approval. Each
holding and intermediary company having an interest in the casino licensee must
also obtain qualification approval by meeting essentially the same standards as
that required of the casino licensee. All directors, officers and persons who
directly or indirectly hold any beneficial interest, ownership or control in any
of the intermediary or ultimate holding companies of the casino licensee may
have to seek qualification from the New Jersey Commission. Lenders,
underwriters, agents, employees and security holders of both equity and debt of
the intermediary and holding companies of the casino licensee and any other
person whom the New Jersey Commission deems appropriate may also have to seek
qualification from the New Jersey Commission. Since Promus and Embassy are
publicly-traded holding companies (as defined by the New Jersey Act), however,
the persons described in the two previous sentences may be waived from
compliance with the qualification process if the New Jersey Commission, with the
concurrence of the Director of the New Jersey Division of Gaming Enforcement,
determines that they are not significantly involved in the activities of the
Marina and, in the case of security holders, that they do not have the ability
to control Promus (or its subsidiaries) or elect one or more of its directors.
Any person holding 5% or more of a security in an intermediary or ultimate
holding company, or having the ability to elect one or more of the directors of
a company, is presumed to have the ability to control the company and thus may
be required to seek qualification unless the presumption is rebutted.
Notwithstanding this presumption of control, the New Jersey Act permits the
waiver of the qualification requirements for passive "institutional investors"
(as defined by the New Jersey Act), when such institutional holdings are for
investment purposes only and where such securities represent less than 10% of
the equity securities of a casino licensee's holding or intermediary companies
or debt securities of a casino licensee's holding or intermediary companies not
exceeding 20% of a company's total outstanding debt or 50% of an individual debt
issue. The waiver, which is subject to certain specified conditions including,
upon request, the filing of a certified statement that the investor has no
intention of influencing the affairs of the issuer, may be granted to an
"institutional investor" holding a higher percentage of such securities upon a
showing of good cause. If an "institutional investor" is granted a waiver of the
qualification requirements and subsequently changes its investment intent, the
New Jersey Act provides that no action other than divestiture may be taken by
the investor without compliance with the Interim Casino Authorization Act (the
"Interim Act") described below.
In the event a security holder of either equity or debt is required to
qualify under the New Jersey Act, the provisions of the Interim Act may be
triggered requiring, among other things, either: (i) the filing of a completed
application for qualification within thirty days after being ordered to do so,
which
18
application must include an approved Trust Agreement pursuant to which all
securities of Promus (or its respective subsidiaries) held by the security
holder must be placed in trust with a trustee who has been approved by the New
Jersey Commission; or (ii) the divestiture of all securities of Promus (or its
respective subsidiaries) within 120 days after the New Jersey Commission
determines that qualification is required or declines to waive qualification,
provided the security holder files a notice of intent to divest within 30 days
after the determination of qualification. If a security holder files an
application under the Interim Act, during the period the Trust Agreement remains
in place, such holder may, through the approved trustee, continue to exercise
all rights incident to the ownership of the securities with the exception that:
(i) the security holder may only receive a return on its investment in an amount
not to exceed the actual cost of the investment (as defined by the New Jersey
Act) until the New Jersey Commission finds such holder qualified; and (ii) in
the event the New Jersey Commission finds there is reasonable cause to believe
that the security holder may be found unqualified, the Trust Agreement will
become fully operative vesting the trustee with all rights incident to ownership
of the securities pending a determination on such holder's qualifications;
provided, however, that during the period the securities remain in trust, the
security holder may petition the New Jersey Commission to: (a) direct the
trustee to dispose of the trust property; and (b) direct the trustee to
distribute proceeds thereof to the security holder in an amount not to exceed
the lower of the actual cost of the investment or the value of the securities on
the date the Trust became operative. If the security holder is ultimately not
found to be qualified, the trustee is required to sell the securities and to
distribute the proceeds of the sale to the applicant in an amount not exceeding
the lower of the actual cost of the investment or the value of the securities on
the date the Trust became operative (if not already sold and distributed at the
direction of the security holder) and to distribute the remaining proceeds to
the Casino Revenue Fund. If the security holder is found qualified, the Trust
Agreement will be terminated.
The New Jersey Commission can find that any holder of the equity or debt
securities issued by Promus or its subsidiaries is not qualified to own such
securities. If a security holder of Promus or its subsidiaries is found
disqualified, the New Jersey Act provides that it is unlawful for the security
holder to: (i) receive any dividends or interest payment on such securities;
(ii) exercise, directly or indirectly, any rights conferred by the securities;
or (iii) receive any remuneration from the company in which the security holder
holds an interest. To implement these provisions, the New Jersey Act requires,
among other things, casino licensees and their holding companies to adopt
provisions in their certificate of incorporation providing for certain remedial
action in the event that a holder of any security of such company is found
disqualified. The required certificate of incorporation provisions vary
depending on whether such company is a publicly or privately traded company as
defined by the New Jersey Act. The Certificates of Incorporation of Promus and
Embassy (both "publicly-traded companies" as defined by the New Jersey Act)
contain provisions which provide Promus and Embassy, respectively, with the
right to redeem the securities of disqualified holders, if necessary, to prevent
the loss or to secure the reinstatement of any license or franchise held by
Promus or Embassy or their subsidiaries. The Certificates of Incorporation of
Promus and Embassy also contain provisions defining the redemption price and the
rights of a disqualified security holder. In the event a security holder is
disqualified, the New Jersey Commission is empowered to propose any necessary
action to protect the public interest, including the suspension or revocation of
the casino license of Marina. The New Jersey Act provides, however, that the New
Jersey Commission shall not take action against a casino licensee or its parent
companies with respect to the continued ownership of the security interest by
the disqualified holder, if the New Jersey Commission finds that: (i) such
company has a certificate of incorporation provision providing for the
disposition of such securities as discussed above; (ii) such company has made a
good faith effort to comply with any order requiring the divestiture of the
security interest held by the disqualified holder; and (iii) the disqualified
holder does not have the ability to control the casino licensee or its parent
companies or to elect one or more members to the board of directors of such
company. The Certificate of Incorporation of Embassy further provides that debt
securities issued by Embassy are held subject to the condition that if a holder
is found unsuitable by any governmental agency the corporation shall have the
right to redeem the securities.
19
If, at any time, it is determined that Marina or its holding companies have
violated the New Jersey Act or regulations promulgated thereunder or that such
companies cannot meet the qualification requirements of the New Jersey Act,
Marina could be subject to fines or its license could be suspended or revoked.
If Marina's license is suspended or revoked, the New Jersey Commission could
appoint a Conservator to operate and dispose of the casino hotel facilities of
Marina. A Conservator would be vested with title to the assets of Marina,
subject to valid liens, claims and encumbrances. The Conservator would be
required to act under the general supervision of the New Jersey Commission and
would be charged with the duty of conserving, preserving and, if permitted,
continuing the operation of the casino hotel. During the period of any such
conservatorship, the Conservator may not make any distributions of net earnings
without the prior approval of the New Jersey Commission. The New Jersey
Commission may direct that all or part of such net earnings be paid to the
Casino Revenue Fund, provided, however, that a suspended or former licensee is
entitled to a fair rate of return.
The New Jersey Commission granted Marina a plenary casino license in
connection with Harrah's Atlantic City in November 1981, and it has been renewed
since then. In April 1994, the New Jersey Commission renewed the license for a
two-year period and also found Promus, Embassy, Harrah's and Casino Holding
Company to be qualified as holding companies of Marina.
GAMING--COLORADO
The ownership and operation of limited gaming facilities in the State of
Colorado are subject to extensive state and local regulation. In Colorado, the
two casinos managed and partially owned by subsidiaries of Promus (Harrah's
Central City and Harrah's Black Hawk) are subject to licensing by and regulatory
control of both the State of Colorado Limited Gaming Control Commission and the
State of Colorado Division of Gaming (hereinafter collectively referred to as
the "Colorado Gaming Authorities"). As Promus is a public company, the casinos
must comply with specific rules relating to public companies involved in limited
gaming. The Colorado Gaming Authorities examine and decide upon the suitability
of persons owning any interest in a limited gaming establishment, as well as
those persons associated with such owners. Persons employed in connection with
gaming operations must also be licensed as either "key employees" or "support
employees." The State of Colorado Limited Gaming Control Commission also has the
power to levy substantial taxes with respect to gaming revenues, and with
respect to gaming devices. The licenses held by Harrah's Central City and
Harrah's Black Hawk are not transferable, and must be renewed on an annual
basis. A Colorado constitutional amendment passed in November 1990, legalized
limited stakes gaming ($5.00 or less per bet) in three Colorado cities: Central
City, Black Hawk, and Cripple Creek. The constitutional amendment restricts
limited gaming to the commercially zoned districts of each respective city. At
each limited gaming location, no more than thirty-five percent (35%) of the
total square footage of a building, and no more than fifty percent (50%) of the
square footage of any single floor may be used for limited gaming purposes. The
Colorado Gaming Authorities have broad power to insure compliance with the
statute and regulations currently in force in the State of Colorado. The
Colorado Gaming Authorities may inspect, without notice, any premises where
gaming is being conducted, and may seize, impound, or remove any gaming device.
The statute and regulations require licensees to maintain certain minimum
operating, security and payoff procedures, as well as books and records that are
audited on an annual basis.
There are specific reporting procedures and approval requirements for
transfers of interests and other involvement with publicly traded corporations
directly or indirectly involved in limited gaming in the State of Colorado. In
addition to the reporting requirements, certain provisions must be included in
the Articles of Organization or other similar chartering documents of any entity
licensed as either an operator or retailer in the State of Colorado. The State
of Colorado Limited Gaming Control Commission may require that any individual
who has a material relationship to or a material involvement with a licensee, or
otherwise, must apply for a finding of suitability by the Commission, or apply
for a key employee license. If an individual or person has been deemed to be
unsuitable by the State of Colorado Limited Gaming Control Commission, the
Commission may require a licensee to pursue all lawful efforts to require that
the unsuitable person relinquish all voting securities in addition to certain
other powers granted to the Commission.
20
The Colorado Gaming Authorities have full and complete access to any records
of a licensee, as well as individuals associated with licensees, investigate the
background and conduct of licensees and their employees, and are empowered to
bring disciplinary actions against licensees. The Colorado Gaming Authorities
have the power to investigate the background of creditors of licensees as well.
No interest in a licensee, once approved by the Commission, may be alienated in
any fashion without the prior approval of the State of Colorado Limited Gaming
Control Commission. Any person or entity may not have an interest in more than
three retail gaming licenses.
All persons, places or practices connected with limited gaming must be
"suitable" as determined by the Colorado Gaming Authorities. In this regard, the
burden is always on any applicant to prove by clear and convincing evidence that
the applicant is qualified for the licenses applied for. Thus, licensees must be
able to demonstrate that any equity holder, or any person providing financing in
connection with the establishment or operation of a licensee, must be: (i) of
good moral character; (ii) a person whose prior activities, criminal record,
reputation, habits and associations do not pose a threat to the public interests
of the State of Colorado; (iii) a person who has not served a sentence upon a
conviction of a felony or been under the supervision of a probation department
within ten years prior to the date of application; (iv) and, a person who has
not seriously or repeatedly violated the provisions of the "Limited Gaming Act
of 1991" in Colorado. At the request of the Colorado Gaming Authorities, any
person connected with limited gaming must disclose personal background and
financial information, including criminal records, and any and all other
information requested by the Colorado Gaming Authorities.
The constitutional amendment gave the State of Colorado Limited Gaming
Control Commission the power to tax up to forty percent (40%) of the adjusted
gross proceeds received by a licensee from limited gaming. Effective October 1,
1994, the tax schedule for the gaming year (October 1, 1994 to September 30,
1995) is as follows:
PERCENTAGE
ADJUSTED GROSS PROCEEDS TAX
- ----------------------------------------------------------------- ----------
Up to $2,000,000................................................. 2%
$2,000,001 to $4,000,000......................................... 8%
$4,000,001 to $5,000,000......................................... 15%
$5,000,001 and over.............................................. 18%
For the same gaming year, the State gaming device fee is Seventy-Five Dollars
($75) per gaming device for the year. In addition, local device fees are
assessed by both Central City and Black Hawk. In Central City the current device
fee is One Thousand Two Hundred Sixty-Five Dollars ($1,265) per device per year.
In Black Hawk, Seven Hundred Fifty Dollars ($750) per device per year is the
current device fee.
Changes in this regulatory scheme could adversely affect the operation of
the Colorado properties.
GAMING--LOUISIANA (NEW ORLEANS)
An indirect subsidiary of Promus owns an approximate 53% interest in
Harrah's Jazz Company, the partnership which has the contract (the "Casino
Operating Contract") with the Louisiana Economic Development and Gaming
Corporation (the "LEDGC") to operate the sole land-based casino (the "Gaming
Facilities") in Louisiana. Under the Casino Operating Contract, Harrah's Jazz
Company (the "Casino Operator") has the authority to engage a separate indirect
subsidiary of Promus, Harrah's New Orleans Management Company (the "Casino
Manager"), to manage the Gaming Facilities. The ownership and operation of the
Gaming Facilities are subject to pervasive governmental regulation, including
regulation by the LEDGC in accordance with the terms of the Louisiana Economic
Development and Gaming Corporation Law (the "Gaming Act"), the rules and
regulations promulgated thereunder from time to time, and the Casino Operating
Contract.
The LEDGC. The Gaming Act established the LEDGC as a special public purpose
corporation to regulate land-based gaming in Louisiana. The Gaming Act provides
that the LEDGC is not a state agency except as specifically provided therein,
and none of its obligations is subject to or backed by the
21
full faith and credit of the State of Louisiana. The affairs of the LEDGC are
supervised by a nine member board of directors appointed by the governor and
confirmed by the Louisiana Senate.
LEDGC's Authority to Enter Into Casino Operating Contract. The Casino
Operating Contract was entered into by the LEDGC pursuant to authority granted
under the Gaming Act. Under the Casino Operating Contract, the Casino Operator
can conduct gaming operations at a single official land-based gaming
establishment located at the site of the Rivergate Convention Center. The term
of the Casino Operating Contract is 20 years with one 10 year renewal option.
Under the Casino Operating Contract, the Casino Operator is required to pay the
LEDGC an initial payment of $125 million (the "Initial Payment") in
installments. $5 million of the Initial Payment has been paid. The last
installment of $120 million is due within 10 days after the opening date of the
Temporary Casino. In addition to the Initial Payment, the Casino Operating
Contract requires the Casino Operator to pay to the LEDGC a share of annual
gross gaming revenues from the Permanent Casino equal to the greater of (a) $100
million or (b) a percentage of annual gross gaming revenue as follows:
(i) 19% of gross gaming revenue up to and including $600 million; plus
(ii) 20% of gross gaming revenue in excess of $600 million up to and
including $700 million; plus
(iii) 22% of gross gaming revenue in excess of $700 million up to and
including $800 million; plus
(iv) 24% of gross gaming revenue in excess of $800 million up to and
including $900 million; plus
(v) 25% of gross gaming revenue in excess of $900 million.
Under the Gaming Act, the gaming activities that may be conducted, subject
to the rule-making authority of the LEDGC, include any banking or percentage
game that is played with cards, dice or any electronic, electrical or mechanical
device or machine for money, property or any thing of value, but exclude
lottery, bingo, charitable games, raffles, electronic video bingo, pull tabs,
cable television bingo, wagering on dog or horse races, sports betting or
wagering on any type of sports contest or event. The Gaming Act provides that
the LEDGC shall adopt rules for the conduct of specific games and gaming
operations, including the types of games to be conducted and the granting of
credit to a patron.
The Gaming Act provides that the LEDGC is authorized to permit the casino
operator to conduct limited temporary gaming operations in Orleans Parish at a
location designated by the casino operator and approved by the LEDGC. The
compensation payable to the LEDGC from gaming operations at the Temporary Casino
is 25% of gross gaming revenues with the remainder to the Casino Operator, the
net proceeds therefrom after deducting operating expenses to be used to perform
and complete the obligations of the Casino Operator as contained in the Casino
Operating Contract. The Gaming Act requires that gaming operations at the
Temporary Casino cease upon the commencement of gaming operations at the
Permanent Casino.
The Gaming Act requires the casino operator to agree to maintain its
suitability at all times during the existence of the casino operating contract.
The Gaming Act provides that the LEDGC has the right but is not required to set
aside or renegotiate the provisions of the casino operating contract if the
casino operator is voluntarily or involuntarily placed in bankruptcy,
receivership, conservatorship or similar status.
Regulations. Under the Gaming Act, the LEDGC has broad discretionary
authority to regulate all aspects of the casino operator's operations, including
the power to adopt administrative rules and regulations as may be necessary to
carry out and implement its powers and duties, the conduct of gaming operations,
and any other matters necessary or desirable for the efficient and effective
operation of casino gaming or public convenience. The Gaming Act gives the LEDGC
the power, among other things, to (i) investigate the qualifications of the
gaming operator and each applicant for a license or permit, (ii) investigate
violations of the Gaming Act and any rules and regulations promulgated
thereunder, and any other incidents or transactions which it deems appropriate,
(iii) conduct hearings
22
and proceedings concerning, and review and inspections of, gaming operations and
related activities, (iv) inspect and examine all premises, and all equipment or
supplies thereon, where gaming activities are conducted or gaming devices or
equipment are manufactured, sold, or distributed, and summarily seize and remove
from such premises and impound any equipment or supplies for the purpose of
examination and inspection, (v) audit the records of applicants and gaming
operators respecting all revenues produced by any gaming operations, (vi) issue
interrogatories and subpoenas, and (vii) monitor the conduct of all casino
operators, licensees, permittees and other persons having a material involvement
director or indirectly with a casino operator.
The Rules and Regulations currently in effect address administrative
matters, applications, licensing, permitting and suitability; vendor and junket
representative licensing and registration; and minority participation.
Additional rules and regulations addressing numerous other matters within the
scope of its authority are being finalized.
Issuance of Licenses and Permits. Under the Gaming Act, the LEDGC is
required to issue licenses or permits to certain persons associated with gaming
operations, including: (i) certain employees of the casino operator, (ii)
certain manufacturers, distributors and suppliers of gaming devices; (iii)
certain suppliers of goods or services; (iv) any person who furnishes services
or property to the casino operator under an arrangement pursuant to which the
person receives payments based on earnings, profits or receipts from gaming
operations; and (v) any other persons deemed necessary by the LEDGC.
The securing of the requisite licenses and permits under the Gaming Act is a
prerequisite for conducting, operating or performing any activity regulated by
the LEDGC or the Gaming Act. The Gaming Act provides that the LEDGC has full and
absolute power to deny an application, or to limit, condition, restrict, revoke
or suspend any license, permit or approval, or to fine any person licensed,
permitted or approved for any cause specified in the Gaming Act or rules
promulgated by the LEDGC. The Rules and Regulations provide that the LEDGC may
take any of the foregoing actions with respect to any person licensed,
permitted, or approved, or any person registered, found suitable, or holding a
contract, for any cause deemed reasonable.
The Gaming Act provides that it is the express intent, desire and policy of
the legislature that no holder of the casino operating contract, applicant for a
license, permit, contract or other thing existing, issue or let as a result of
the Gaming Act shall have any right or action to obtain any license, permit,
contract or the granting of the approval sought except as provided for and
authorized by the Gaming Act. Any license, permit, contract, approval or thing
obtained or issued pursuant to the provisions of the Gaming Act has been
expressly declared by the legislature to be a pure and absolute revocable
privilege and not a right, property or otherwise, under the constitutions of the
United States or of the State of Louisiana. The Gaming Act also provides that no
holder acquires any vested right therein or thereunder.
Suitability. Under the Gaming Act, no person is eligible to receive a
license or enter into a contract to conduct casino gaming operations unless,
among other things, the LEDGC is satisfied the applicant is suitable.
Suitability requires a demonstration by each applicant, by clear and convincing
evidence, that, among other things, (i) he is a person of good character,
honesty and integrity; (ii) his prior activities, criminal record, if any,
reputation, habits and associations do not pose a threat to the public interest
of the State or the regulation and control of casino gaming or create or enhance
the dangers of unsuitable, unfair or illegal practices, methods and activities
in the conduct of gaming or the carrying on of the business and financial
arrangements incidental thereto; and (iii) he is capable of and is likely to
conduct the activities for which a license or contract is sought. In addition,
to be found suitable for purposes of the casino operating contract, the casino
operator must demonstrate by clear and convincing evidence that: (a) it has or
guarantees acquisition of adequate business competence and experience in the
operation of casino gaming operations; (b) the proposed financing is adequate
for the proposed operation and is from suitable sources; and (c) it has or is
capable of and guarantees the obtaining of a bond or satisfactory financial
guarantee of sufficient amount, as determined by the
23
LEDGC, to guarantee successful completion of and compliance with the casino
operating contract or such other projects which are regulated by the LEDGC. The
Rules and Regulations provide that an applicant shall release all claims and
accept any risk of adverse publicity, embarrassment, criticism, or other action,
or financial loss which may result or occur from action with respect to an
application and expressly waive any claim for damages as a result thereof.
Under the Gaming Act, the LEDGC may not award the casino operating contract
or a license to a person disqualified on the basis of any of the following
criteria: (i) failures of the applicant to prove suitability in accordance with
the provisions of the Gaming Act; (ii) failure of the applicant to provide
information and documentation material to a suitability determination, or
providing untrue or misleading material information pertaining to the
qualification criteria; (iii) conviction of, or plea of guilty or nolo
contendere by, or current prosecution of, or pending charges in any jurisdiction
against, the applicant, or of any person required to be qualified under the
Gaming Act as a condition for a contract, for an offense punishable by
imprisonment for more than one year; (iv) if the applicant is a corporation that
is owned by a parent or other corporation or person, then the applicant shall be
disqualified if any person owning more than 5% of the common stock of the parent
corporation has been convicted of, or pled guilty or nolo contendere to, a
felony offense; or (v) if the applicant is a corporation or other entity of
which any individual holding 5% or more interest in the profits or loss has been
convicted of, or pled guilty or nolo contendere to, an offense that at the time
of conviction is punishable as a felony. The Rules and Regulations further
provide that a license or contract shall not be granted to an applicant that has
been found unsuitable or has been denied a gaming license or permit or has had a
gaming license or permit suspended or revoked in another gaming jurisdiction,
unless the LEDGC determines that such action is not contrary to the interest of
the State. The Rules and Regulations provide that no person shall knowingly be
or remain employed by the casino operator, nor shall they be licensed or receive
a permit, if they are not current in filing all applicable tax returns and in
the payment of all taxes, interest and penalties owed to the State of Louisiana
and the Internal Revenue Service, with certain exceptions.
The Rules and Regulations provide that the LEDGC may deny, revoke, suspend,
limit, condition, or restrict any finding of suitability or application therefor
upon the same grounds as it may take such action with respect to licensees and
permittees, without exclusion of any other grounds. The Rules and Regulations
provide that the LEDGC may further take such action on the grounds that the
registrant or person found suitable is associated with, or is controlled by, or
is under common control with, an unsuitable or disqualified person. The Rules
and Regulations also provide that the LEDGC has full and absolute authority to
deny the application, or to limit, condition or restrict any license, contract
or finding of suitability.
The LEDGC can find that the holder of any equity interest in, or debt
securities issued by, the casino operator or its affiliated companies, must be
found suitable to own such interest or securities. The Gaming Act provides that
every person that has or controls more than a 5% ownership, income or profit
interest in an entity that has or applies for a contract in accordance with the
provisions of the Gaming Act or has the ability, in the opinion of the LEDGC, to
exercise significant influence over the activities of the casino operator, must
meet all suitability requirements and qualifications for licensees. The Gaming
Act provides that the LEDGC may also issue, under penalty of revocation of a
license, a condition of disqualification naming the person or persons and
declaring that such person or persons may not: (i) receive dividends or interest
on securities of the casino operator; (ii) exercise directly or indirectly,
including through a trustee or nominee, a right conferred by securities of the
casino operator; (iii) receive remuneration from the casino operator; (iv)
receive any economic benefit from the casino operator; or (v) continue in an
ownership or economic interest in a casino gaming operation contract or remain
as a manager, officer, director or partner of the casino operator (collectively,
"Ownership Benefits").
24
Under the Rules and Regulations, if at any time the LEDGC finds that any
person required to be and remain suitable has failed to demonstrate suitability,
the LEDGC may, consistent with the Gaming Act and the casino operating contract,
take any action that the LEDGC deems necessary to protect the public interest.
The Rules and Regulations provide, however, that if a person associated with the
casino operator or an affiliate, intermediary, or holding company thereof has
failed to be found or remain suitable, the LEDGC shall not declare the casino
operator or its affiliate, intermediary, or holding company, as the case may be,
unsuitable as a result if such companies comply with the conditional licensing
provisions, take immediate good faith action and comply with any order of the
LEDGC to cause such person to dispose of its interest, and, before such
disposition, ensure that the disqualified person does not receive any Ownership
Benefits. The above safe harbor protections do not apply if: (i) the casino
manager has failed to remain suitable, (ii) the casino operator engaged in a
relationship with the unsuitable person and had actual or constructive knowledge
of the wrongdoing causing the LEDGC's action, (iii) the casino operator is so
tainted by such person that it affects the suitability standards contained in
the Gaming Act and the Rules and Regulations.
The Gaming Act provides that every person who is required to be found
suitable has a continuing duty to maintain his suitability. The casino operator
and all licensees, permittees, registrants and persons required to be qualified
under the Gaming Act have a continuing duty to inform the LEDGC of any action
that they believe would constitute a violation of the Gaming Act.
Transfers. The sale, transfer, assignment, or alienation of a casino
operating contract, or an interest therein, without the approval of the LEDGC,
is prohibited. Also, the sale, transfer, assignment, pledge, alienation,
disposition, public offering, or acquisition of securities that results in one
person's owning 5% or more of the total outstanding shares issued by the casino
operator is void as to such person without prior approval of the LEDGC. Failure
to obtain prior approval by the LEDGC of a person acquiring 5% or more of the
total outstanding shares of a licensee or 5% or more economic interest in the
casino operator is grounds for cancellation of the casino operating contract or
license suspension or revocation.
Exclusive Contract. The Gaming Act provides that the casino operating
contract is exclusive and no other official gaming establishment shall be
contracted or licensed in Orleans Parish during the term of the casino operating
contract. The Gaming Act also provides that, in the event that, at any time
while the casino operating contract is in effect, one or more land-based casino
gaming establishments in addition to the single casino gaming operation provided
for by the Gaming Act is authorized to operate in Orleans Parish, the casino
operator shall be relieved of the obligation to remit to the LEDGC the
compensation required under the casino operating contract. Gaming operations
upon riverboats in accordance with the Louisiana Riverboat Economic Development
and Gaming Control Act, video poker operations authorized pursuant to the Video
Draw Poker Devices Control Law, authorized charitable gaming activities, lottery
games conducted pursuant to the provisions of the Louisiana Lottery Corporation
Law and pari-mutuel wagering as authorized by the provisions of Chapter 4 of
Title 4 of the Louisiana Revised Statutes of 1950 do not constitute the
authorization of additional land-based casino gaming operations, which relieves
the casino operator of payment of compensation to the LEDGC. The Company and the
LEDGC dispute the effect of dockside riverboat gaming operations on the
Company's payment obligations under the Gaming Act and the Casino Operating
Contract. The Casino Operating Contract contains a detailed agreement on this
issue.
Priority to Louisiana Residents and Business; Minority Employment. The
Gaming Act obligates the casino operator to give preference and priority to
Louisiana residents, laborers, vendors and suppliers, except when not reasonably
possible to do so without added expense, substantial inconvenience or sacrifice
in operational efficiency. The Gaming Act further obligates the casino operator
to give preference and priority to Louisiana residents in considering applicants
for employment and requires that no less than 80% of the persons employed by the
casino operator be Louisiana residents for at least one year immediately prior
to employment.
25
The Gaming Act requires that the casino operator and/or LEDGC adopt written
policies, procedures, and regulations to allow the participation of businesses
owned by minorities in all design, engineering, and construction contracts
and/or projects to the maximum extent practicable. The Rules and Regulations
provide that the casino operator and the casino manager must take the foregoing
actions with respect to all design, engineering, construction, banking and
maintenance contracts and any other projects initiated by the casino operator or
casino manager. The Gaming Act further requires the casino operator, as nearly
as practicable, to employ minorities consistent with the population of the
State. The Rules and Regulations extend this obligation to the casino manager as
well. The Rules and Regulations provide that if at any time the LEDGC shall
conclude that the casino operator or the casino manager is conducting itself in
a manner inconsistent with the requirements of Louisiana law or the Rules and
Regulations, the LEDGC may take enforcement action, including fines and the
imposition of a plan that the LEDGC determines meets the objectives of the
Gaming Act and the Rules and Regulations.
Limits on Restaurant, Lodging, Retail Operations. The Gaming Act provides
that the casino operator shall not: (i) offer seated restaurant facilities with
table food service for patrons, but may offer limited cafeteria style food
services for employees and patrons as provided by rule of the LEDGC, provided,
however, that no food may be given away or subsidized within the official gaming
establishment by the casino operator or any licensee, and no facility for food
service shall exceed seating for 250 persons; (ii) offer lodging in the official
gaming establishment, nor engage in any practice or enter into any business
relationships to give any hotel, whether or not affiliated with the casino
operator, any advantage or preference not available to all similarly situated
hotels; (iii) engage in such activities as are prohibited by the casino
operating contract; (iv) engage in the sale of products that are not directly
related to gaming; or (v) cash or accept in exchange for the purchase of tokens,
chips or electronic cards an identifiable employee payroll check. Any contract
between the casino operator and any hotel or lodging facilities must be
submitted to the LEDGC for approval prior to entering into the contract.
Rights of Holders of Security Interest. The Gaming act authorizes the LEDGC
to provide for the protection of the rights of holders of security interests in
both immovable property and movable property used in or related to casino gaming
operations ("Gaming Collateral") and to provide for the continued operation of
the official gaming establishment during the period of time that a lender, as a
holder of a security interest, seeks to enforce its security interest in such
property. In connection therewith, the Gaming Act provides that the holder of a
security interest in Gaming Collateral may receive payments from the owner or
lessee of such property out of the proceeds of casino gaming operations received
by the owner or lessee, and, the holder of the security interest may be exempt
from the licensing requirements of the Gaming Act with respect to such payments
if the transaction(s) giving rise to such payments have been approved in advance
by the LEDGC and complies with all rules and regulations of the LEDGC and the
LEDGC determines the holder to be suitable.
Under the Gaming Act, a holder of a security interest in a gaming device who
asserts the right to ownership or possession of the encumbered property may be
granted a one-time, nonrenewable, provisional contract for a maximum of 90 days
for the sole purpose of acquiring ownership or possession for resale to a
licensed or approved person, all in accordance with rules and regulations to be
promulgated by the LEDGC. The license or contract shall not authorize the holder
to operate the gaming device or to utilize the property in gaming activities.
If the holder of a security interest in immovable property comprising the
official gaming establishment wishes to continue the operation of the official
gaming establishment during and after the filing of a suit to enforce the
security interest, the Gaming Act provides that the holder of the security
interest must name the LEDGC as a nominal defendant in such suit and request the
appointment of a receiver from among the persons on a list maintained by the
LEDGC. Upon proof of the debtor's default under the security instrument and the
holder's right to enforce the security interest, the court shall appoint a
person from the LEDGC's list as a receiver of the official gaming establishment.
Upon appointment of
26
the receiver, the Gaming Act requires the receiver to furnish a fidelity bond in
favor of the security interest holder, the owner or lessee of the official
gaming establishment and the LEDGC in an amount to be set by the court after
consultation with the LEDGC and all parties. The Gaming Act requires the LEDGC
to issue to the receiver a one-time, nonrenewable, provisional contract to
continue gaming operations until the receivership is terminated. The receiver is
considered to have all the rights and obligations of the casino operator under
the casino operating contract. The holder of the security interest provoking the
appointment of a receiver under the Gaming Act is required to pay the cost of
the receiver's bond and the cost of operating the official gaming establishment
or gaming operator during the term of receivership to the extent that such costs
exceed available revenues, in accordance with the rules and regulations of the
LEDGC. The Gaming Act further provides that the fees of the receiver and the
authority for expenditures of the receiver are to be established by rules and
regulations of the LEDGC.
The Gaming Act provides that a receivership must terminate upon: (i) the
sale of the property subject to receivership to a duly approved or authorized
person; (ii) the payment in full of all obligations due to the holder of the
security interest in the property subject to the receivership; (iii) an
agreement for termination of the receivership signed by the holder of the
security interest and the debtor, and approved by the LEDGC and the court; or,
(iv) the lapse of five years from the date of the initial appointment of the
receiver. Under the Gaming Act, a receivership may also be terminated by notice
from the holder of the security interest who provoked the receivership addressed
to the court and the LEDGC of its intention to withdraw its financial support of
the receivership at a specified time not less than 90 days from the date of the
notice. In the event of such notice, the Gaming Act provides that the holder of
the security interest giving the notice will not be responsible for any costs or
expenses of the receivership after the date specified in the notice; except for
reasonable costs and fees of the receiver in concluding the receivership, and
the costs of a final accounting.
GAMING--ILLINOIS
The ownership and operation of a gaming riverboat in Illinois is subject to
extensive regulation under Illinois gaming laws and regulations. A five-member
Illinois Gaming Board is charged with such regulatory authority, including the
issuance of riverboat gaming licenses not to exceed ten in number. The granting
of an owner's license involves a preliminary approval procedure in which the
Illinois Gaming Board issues a finding of preliminary suitability to a license
applicant and effectively reserves a gaming license for such applicant. The
Board has issued all ten licenses or findings of preliminary suitability. Des
Plaines Development Limited Partnership, of which 80% is owned by Harrah's
Illinois Corporation, received an owner's license in 1993. Harrah's Illinois
Corporation also holds a supplier's license, which entitles it to manage the
Joliet riverboats for the partnership for a fee and lease one of the riverboats
to the partnership.
To obtain an owner's license (and a finding of preliminary suitability),
applicants must submit comprehensive application forms, be fingerprinted and
undergo an extensive background investigation by the Illinois Gaming Board.
Each license granted entitles a licensee to own and operate up to two
riverboats (with a combined maximum of 1,200 gaming positions) and equipment
thereon from a specific location. The duration of the license initially runs for
a period of three years (with a fee of $25,000 for the first year and $5,000 for
the following two years). Thereafter, the license is subject to renewal on an
annual basis upon payments of a fee of $5,000 and a determination by the
Illinois Gaming Board that the licensee continues to be eligible for an owner's
license pursuant to the Illinois legislation and the Illinois Gaming Board's
rules. All use, occupancy and excise taxes which apply to food and beverages and
all taxes imposed on the sale or use of tangible property apply to sales aboard
riverboats.
27
An applicant is ineligible to receive an owner's license if the applicant,
any of its officers, directors or managerial employees or any person who
participates in the management or operation of gaming operations: (i) has been
convicted of a felony; (ii) has been convicted of any violation under Article 28
of the Illinois Criminal Code or any similar statutes in any other jurisdiction;
(iii) has submitted an application which contains false information; or (iv) is
a member of the Illinois Gaming Board. In addition, an applicant is ineligible
to receive an owners' license if the applicant owns more than a 10% ownership
interest in an entity holding another Illinois owner's license, or if a license
of the applicant issued under the Illinois legislation or a license to own or
operate gaming facilities in any other jurisdiction has been revoked.
In determining whether to grant a license, the Illinois Gaming Board
considers: (i) the character, reputation, experience and financial integrity of
the applicants; (ii) the type of facilities (including riverboat and docking
facilities) proposed by the applicant; (iii) the highest prospective total
revenue to be derived by the state from the conduct of riverboat gaming; (iv)
affirmative action plans of the applicant, including minority training and
employment; and (v) the financial ability of the applicant to purchase and
maintain adequate liability and casualty insurance. Municipal (or county, if an
operation is located outside of a municipality) approval of a proposed applicant
is required, and all documents, resolutions, and letters of support must be
submitted with the initial application.
A holder of a license is subject to the imposition of fines, suspension or
revocation of its license for any act that is injurious to the public health,
safety, morals, good order, and general welfare of the people of the state of
Illinois, or that would discredit or tend to discredit the Illinois gaming
industry or the state of Illinois, including without limitation: (i) failing to
comply with or make provision for compliance with the legislation, the rules
promulgated thereunder or any federal, state or local law or regulation; (ii)
failing to comply with any rule, order or ruling of the Illinois Gaming Board or
its agents pertaining to gaming; (iii) receiving goods or services from a person
or business entity who does not hold a supplier's license but who is required to
hold such license by the rules; (iv) being suspended or ruled ineligible or
having a license revoked or suspended in any state or gaming jurisdiction; (v)
associating with, either socially or in business affairs, or employing persons
of notorious or unsavory reputation or who have extensive police records, or who
have failed to cooperate with any official constituted investigatory or
administrative body and would adversely affect public confidence and trust in
gaming; and (vi) employing in any Illinois riverboat's gaming operation any
person known to have been found guilty of cheating or using any improper device
in connection with any game.
An ownership interest in a license or in a business entity, other than a
publicly held business entity which holds an owner's license, may not be
transferred without approval of the Illinois Gaming Board. In addition, an
ownership interest in a license or in a business entity, other than a publicly
held business entity, which holds either directly or indirectly an owner's
license, may not be pledged as collateral without approval of the Illinois
Gaming Board.
A person employed at a riverboat gaming operation must hold an occupational
license which permits the holder to perform only activities included within such
holder's level of occupation license or any lower level of occupation license.
In addition, the Illinois Gaming Board will issue suppliers licenses which
authorize the supplier licensee to sell or lease gaming equipment and supplies
to any licensee involved in the ownership and management of gaming operations.
Riverboat cruises are limited to a duration of four hours, and no gaming may
be conducted while the boat is docked, with the exceptions: (i) of 30-minute
time periods at the beginning of and at the end of a cruise while the passengers
are embarking and debarking (total gaming time is limited to four hours,
however, including the pre- and post-docking periods); and (ii) when weather or
mechanical problems prevent the boat from cruising. Minimum and maximum wagers
on games are set by the licensee and wagering may be conducted only with a
cashless wagering system, whereby money is converted to tokens, electronic cards
or chips which can only be used for wagering. No person under the
28
age of 21 is permitted to wager, and wagers may only be taken from a person
present on a licensed riverboat. With respect to electronic gaming devices, the
payout percentage may not be less than 80% nor more than 100%.
The legislation imposes a 20% wagering tax on adjusted receipts from
gambling games. The tax imposed is to be paid by the licensed owner to the
Illinois Gaming Board on the day after the day when the wagers were made. Of the
proceeds of that tax, 25% goes to the local government where the home dock is
located, a small portion goes to the Illinois Gaming Board for administration
and enforcement expenses, and the remainder goes to the state education
assistance fund.
The legislation also requires that licensees pay a $2.00 admission tax for
each person admitted to a gaming cruise. Of this admission tax, the host
municipality or county receives $1.00. The licensed owner is required to
maintain public books and records clearly showing amounts received from
admission fees, the total amount of gross receipts and the total amount of
adjusted gross receipts.
GAMING--MISSISSIPPI
The ownership and operation of a gaming business in the State of Mississippi
is subject to extensive laws and regulations, including the Mississippi Gaming
Control Act (the "Mississippi Act") and the regulations (the "Mississippi
Regulations") promulgated thereunder by the Mississippi Gaming Commission (the
"Mississippi Commission"), which is empowered to oversee and enforce the
Mississippi Act. Gaming in Mississippi can be legally conducted only on vessels
of a certain minimum size in navigable waters within any county bordering the
Mississippi River or in waters of the State of Mississippi which lie adjacent
and to the south (principally in the Gulf of Mexico) of the Counties of Hancock,
Harrison and Jackson, provided that the county in question has not voted by
referendum not to permit gaming in that county. The underlying policy of the
Mississippi Act is to ensure that gaming operations in Mississippi are
conducted: (i) honestly and competitively; (ii) free of criminal and corruptive
influences; and (iii) in a manner which protects the rights of the creditors of
gaming operations.
The Mississippi Act requires that a person (including any corporation or
other entity) be licensed to conduct gaming activities in the State of
Mississippi. A license will be issued only for a specified location which has
been approved in advance as a gaming site by the Mississippi Commission.
Harrah's Tunica Corporation and Harrah's Vicksburg Corporation, indirect
subsidiaries of Promus, are licensed to operate riverboat casinos in Tunica and
Vicksburg, Mississippi, respectively. In addition, a parent company of a company
holding a license must register under the Mississippi Act. Promus and certain of
its subsidiaries are registered with the Mississippi Commission.
The Mississippi Act also requires that each officer or director of a gaming
licensee, or other person who exercises a material degree of control over the
licensee, either directly or indirectly, be found suitable by the Mississippi
Commission. In addition, any employee of a licensee who is directly involved in
gaming must obtain a work permit from the Mississippi Commission. The
Mississippi Commission will not issue a license or make a finding of suitability
unless it is satisfied, after an investigation paid for by the applicant, that
the persons associated with the gaming licensee or applicant for a license are
of good character, honesty and integrity, with no relevant or material criminal
record. In addition, the Mississippi Commission will not issue a license unless
it is satisfied that the licensee is adequately financed or has a reasonable
plan to finance its proposed operations from acceptable sources, and that
persons associated with the applicant have sufficient business probity,
competence and experience to engage in the proposed gaming enterprise. The
Mississippi Commission may refuse to issue a work permit to a gaming employee:
(i) if the employee has committed larceny, embezzlement or any crime of moral
turpitude, or has knowingly violated the Mississippi Act or Mississippi
Regulations; or (ii) for any other reasonable cause.
29
There can be no assurance that such persons will be found suitable by the
Mississippi Commission. An application for licensing, finding of suitability or
registration may be denied for any cause deemed reasonable by the issuing
agency. Changes in licensed positions must be reported to the issuing agency. In
addition to its authority to deny an application for a license, finding of
suitability or registration, the Mississippi Commission has jurisdiction to
disapprove a change in corporate position. If the Mississippi Commission were to
find a director, officer or key employee unsuitable for licensing or unsuitable
to continue having a relationship with the licensee, such entity would be
required to suspend, dismiss and sever all relationships with such person. The
licensee would have similar obligations with regard to any person who refuses to
file appropriate applications. Each gaming employee must obtain a work permit
which may be revoked upon the occurrence of certain specified events.
Any individual who is found to have a material relationship to, or material
involvement with, Promus may be required to submit to an investigation in order
to be found suitable or be licensed as a business associate of any subsidiary
holding a gaming license. Key employees, controlling persons or others who
exercise significant influence upon the management or affairs of Promus may be
deemed to have such a relationship or involvement.
The Mississippi Commission has the power to deny, limit, condition, revoke
and suspend any license, finding of suitability or registration, or to fine any
person, as it deems reasonable and in the public interest, subject to an
opportunity for a hearing. The Mississippi Commission may fine any licensee or
person who was found suitable up to $100,000 for each violation of the
Mississippi Act or the Mississippi Regulations which is the subject of an
initial complaint, and up to $250,000 for each such violation which is the
subject of any subsequent complaint. The Mississippi Act provides for judicial
review of any final decision of the Mississippi Commission by petition to a
Mississippi Circuit Court, but the filing of such petition does not necessarily
stay any action taken by the Mississippi Commission pending a decision by the
Circuit Court.
Each gaming licensee must pay a license fee to the State of Mississippi
based upon "gaming receipts" (generally defined as gross receipts less payouts
to customers as winnings). The license fee equals four percent of gaming
receipts of $50,000 or less per month, six percent of gaming receipts over
$50,000 and up to $134,000 per month, and eight percent of gaming receipts over
$134,000. The foregoing license fees are allowed as a credit against Mississippi
State income tax liability for the year paid. A gaming operator may also be
subject to local, municipal or county taxes equal to one-tenth of the license
fee due to the State of Mississippi, as set forth above (.4 percent, .6 percent
and .8 percent, respectively). An additional license fee, based upon the number
of games conducted or planned to be conducted on the gaming premises, is payable
to the State of Mississippi annually in advance. In addition to the state and
local fees imposed under the Mississippi Act, taxes and fees also may be
assessed by municipalities and counties in amounts varying from jurisdiction to
jurisdiction. Warren County and the City of Vicksburg have the authority to
impose taxes on gaming receipts in an amount up to 3.2 percent in the aggregate.
The Company also is subject to certain audit and record-keeping
requirements, primarily intended to ensure compliance with the Mississippi Act,
including compliance with the provisions relating to the payment of license
fees.
Under the Mississippi Regulations, a person is prohibited from acquiring
control of Promus without prior approval of the Mississippi Commission. Promus
also is prohibited from consummating a plan of recapitalization proposed by
management in opposition to an attempted acquisition of control of Promus and
which involves the issuance of a significant dividend to Common Stock holders,
where such dividend is financed by borrowings from financial institutions or the
issuance of debt securities. In addition, Promus is prohibited from repurchasing
any of its voting securities under circumstances (subject to certain exemptions)
where the repurchase involves more than one percent of Promus' outstanding
Common Stock at a price in excess of 110 percent of the then-current market
value of
30
Promus' Common Stock from a person who owns and has for less than one year owned
more than three percent of Promus' outstanding Common Stock, unless the
repurchase has been approved by a majority of Promus' shareholders voting on the
issue (excluding the person from whom the repurchase is being made) or the offer
is made to all other shareholders of Promus.
Under the Mississippi Regulations, a gaming license may not be held by a
publicly held corporation, although an affiliated corporation, such as Promus,
may be publicly held so long as Promus registers with and gets the approval of
the Mississippi Commission. Promus must obtain prior approval from the
Mississippi Commission for any subsequent public offering of the securities of
Promus if any part of the proceeds from that offering are intended to be used to
pay for or reduce debt used to pay for the construction, acquisition or
operation of any gaming facility in Mississippi. In addition, in order to
register with the Mississippi Commission as a publicly held holding corporation,
Promus must provide further documentation which is satisfactory to the
Mississippi Commission, which includes all documents filed with the Securities
and Exchange Commission.
Any person who, directly or indirectly, or in association with others,
acquires beneficial ownership of more than 5% of the Common Stock of Promus must
notify the Mississippi Commission of this acquisition. Regardless of the amount
of securities owned, any person who has any beneficial ownership in the Common
Stock of Promus may be required to be found suitable if the Mississippi
Commission has reason to believe that such ownership would be inconsistent with
the declared policies of the State of Mississippi. Any person who is required to
be found suitable must apply for a finding of suitability from the Mississippi
Commission within 30 days after being requested to do so, and must deposit a sum
of money which is adequate to pay the anticipated investigatory costs associated
with such finding. Any person who is found not to be suitable by the Mississippi
Commission shall not be permitted to have any direct or indirect ownership in
Promus' Common Stock. Any person who is required to apply for a finding of
suitability and fails to do so, or who fails to dispose of his or her interest
in Promus' Common Stock if found unsuitable, is guilty of a misdemeanor. If a
finding of suitability with respect to any person is not applied for where
required, or if it is denied or revoked by the Mississippi Commission, Promus is
not permitted to pay such person for services rendered, or to employ or enter
into any contract with such person.
Promus is required to maintain current stock ledgers in the State of
Mississippi which may be examined by a representative of the Mississippi
Commission at any time. If any securities are held in trust by an agent or by a
nominee, the record holder may be required to disclose the identity of the
beneficial owner to the Mississippi Commission. A failure to make such
disclosure may be grounds for finding the record holder unsuitable. Promus also
is required to render maximum assistance in determining the identity of the
beneficial owner.
Because Promus is licensed to conduct gaming in the State of Mississippi,
neither Promus nor any subsidiary may engage in gaming activities in Mississippi
while also conducting gaming operations outside of Mississippi without approval
of the Mississippi Commission. The Mississippi Commission has approved the
conduct of gaming in all jurisdictions in which Promus had ongoing operations or
approved projects as of November 1994, but will need to approve any other future
gaming operations outside of Mississippi. There can be no assurance that such
approvals can be obtained. The failure to obtain such approvals could have a
materially adverse effect on Promus.
GAMING--LOUISIANA (RIVERBOAT)
The ownership and operation of a gaming riverboat in Louisiana is subject to
extensive regulation under Louisiana gaming laws and regulations. A seven-member
Riverboat Gaming Commission ("Commission") and the Riverboat Gaming Enforcement
Division ("Division"), a part of the Louisiana State Police, are charged with
such regulatory authority, including the issuance of riverboat gaming licenses.
The number of licenses to conduct gaming on a riverboat is limited by statute to
fifteen. No
31
more than six licenses may be granted for the operation of gaming activities on
riverboats in any one parish (county). In general, riverboat gaming in Louisiana
can be conducted legally only on approved riverboats that cruise with certain
exceptions including exceptions for certain portions of the Red River where
riverboats can be continuously docked. Harrah's Shreveport Investment Company,
Inc. an indirect subsidiary of Promus, is the general partner of, and owns 99%
of, Red River Entertainment of Shreveport Partnership in Commendam, a Louisiana
partnership which was granted a gaming license in April, 1994, to operate a
continuously docked gaming riverboat. The riverboat is managed by Harrah's
Shreveport Management Company, Inc., another subsidiary, pursuant to an
agreement with the Partnership.
To obtain a gaming license, applicants must obtain certain Certificates of
Approval from the Commission and submit comprehensive application forms, be
fingerprinted and undergo an extensive background investigation by the Division.
An applicant is ineligible to receive a gaming license if the applicant has not
established good character, honesty and integrity. Each license granted entitles
a licensee to operate a riverboat and equipment thereon from a specific
location. The duration of the license initially runs for five years; renewals
are for one year terms. In determining whether to grant a license, the Division
considers: (i) the good character, honesty and integrity of the applicant; (ii)
the applicant's ability to conduct gaming operations; (iii) the adequacy and
source of the applicant's financing; (iv) the adequacy of the design documents
submitted; (v) the docking facilities to be used; (vi) applicant's plan to
recruit, train, and upgrade minorities in employment and to provide for
minority-owned business participation.
A holder of a license is subject to the imposition of penalties, suspension
or revocation of its license for any act that is injurious to the public health,
safety, morals, good order, and general welfare of the people of the state of
Louisiana, or that violates the gaming laws and regulations.
The transfer of a license or an interest in a license is prohibited. In
addition, an ownership interest of five percent (5%) or more in a business
entity which holds a gaming license may not be sold, assigned, transferred or
pledged without the Division's approval.
No person may be employed as a gaming employee unless such person holds a
gaming employee permit issued by the Division. In addition, the Division issues
suppliers licenses which authorize the supplier licensee to sell or lease gaming
equipment and supplies to any licensee.
Minimum and maximum wagers on games are set by the licensee and wagering may
be conducted only with a cashless wagering system, whereby all money is
converted to tokens, electronic cards, or chips used only for wagering in the
gaming establishment. No person under the age of 21 is permitted to wager, and
wagers may only be taken from a person present on a licensed riverboat.
The legislation imposes a franchise fee for the right to operate on
Louisiana waterways of 15% of net gaming proceeds and a license fee of $50,000
(first year) and $100,000 (subsequent years) plus 3 1/2% of net gaming proceeds.
All fees are paid to the Division. In addition, the legislation authorizes local
governing authorities the power to levy an admission fee up to $2.50 for each
person boarding the riverboat. Currently that amount is paid by the license
holder.
GAMING--MISSOURI
The ownership and operation of a gaming riverboat in Missouri is subject to
extensive regulation under Missouri gaming laws and regulations. A five-member
Missouri Gaming Commission ("Commission") is charged with such regulatory
authority, including the issuance of riverboat gaming licenses. Harrah's North
Kansas City Corporation, an indirect subsidiary of Promus, has been issued a
license to conduct riverboat gaming by the Commission. Gaming in Missouri can be
conducted legally only on either excursion gambling boats or floating facilities
approved by the Commission on the Mississippi and Missouri Rivers. Unless
permitted to be continuously docked by the Commission for certain stated
32
reasons, including safety, excursion gambling boats must cruise. The Commission
has approved dockside gaming for the Company's riverboat in North Kansas City.
To obtain a gaming license, applicants must submit comprehensive application
forms, be fingerprinted and undergo an extensive background investigation by the
Commission. An applicant is ineligible to receive an owner's license if the
applicant has not established good reputation and moral character or if the
applicant, any of its officers, directors or managerial employees or any person
who participates in the management or operation of gaming operations has been
convicted of a felony. There are separate licenses for owners and operators of
riverboat gambling operations, which can be applied for and held concurrently.
Each license granted entitles a licensee to own and/or operate an excursion
gambling boat and equipment thereon from a specific location. The duration of
the license initially runs for two one-year terms followed by two-year terms.
The Commission also licenses the serving of alcoholic beverages on riverboats
and adjacent facilities. All local income, earnings, use, property and sales
taxes are applicable to licensees.
In determining whether to grant a license, the Commission considers: (i) the
integrity of the applicants; (ii) the types and variety of games to be offered;
(iii) the quality of the physical facility, together with improvements and
equipment, and how soon the project will be completed; (iv) the financial
ability of the applicant to develop and operate the facility successfully; (v)
the status of governmental actions required for the facility; (vi) management
ability of the applicant; (vii) compliance with applicable laws, rules,
charters, and ordinances; (viii) the economic, ecological and social impact of
the facility as well as the cost of public improvements; (ix) the extent of
public support or opposition; (x) the plan adopted by the home dock city or
county; and (xi) effects on competition.
A holder of a license is subject to the imposition of penalties, suspension
or revocation of its license for any act that is injurious to the public health,
safety, morals, good order, and general welfare of the people of the state of
Missouri, or that would discredit or tend to discredit the Missouri gaming
industry or the state of Missouri, including without limitation: (i) failing to
comply with or make provision for compliance with the legislation, the rules
promulgated thereunder or any federal, state or local law or regulation; (ii)
failing to comply with any rules, order or ruling of the Commission or its
agents pertaining to gaming; (iii) receiving goods or services from a person or
business entity who does not hold a supplier's license but who is required to
hold such license by the legislation or the rules; (iv) being suspended or ruled
ineligible or having a license revoked or suspended in any state or gaming
jurisdiction; (v) associating with, either socially or in business affairs, or
employing persons of notorious or unsavory reputation or who have extensive
police records, or who have failed to cooperate with any official constituted
investigatory or administrative body and would adversely affect public
confidence and trust in gaming; (vi) employing in any Missouri gaming operation
any person known to have been found guilty of cheating or using any improper
device in connection with any game; (vii) use of fraud, deception,
misrepresentation or bribery in securing any license or permit issued pursuant
to the legislation; (viii) obtaining any fee, charge, or other compensation by
fraud, deception or misrepresentation; and (ix) incompetence, misconduct, gross
negligence, fraud, misrepresentation or dishonesty in the performance of the
functions or duties regulated by the legislation.
An ownership interest in a license or in a business entity, other than a
publicly held business entity which holds an owner's license, may not be
transferred without the approval of the Commission. In addition, an ownership
interest in a license or in a business entity, other than a publicly held
business entity, which holds either directly or indirectly an owner's license,
may not be pledged as collateral to other than a regulated bank or saving and
loan association without the Commission's approval.
Every employee participating in a riverboat gaming operation must hold an
occupational license which permits the holder to perform only activities
included within such holder's level of occupation license or any lower level of
occupation license. In addition, the Commission will issue suppliers licenses
33
which authorize the supplier licensee to sell or lease gaming equipment and
supplies to any licensee involved in the ownership and management of gaming
operations.
Even if continuously docked, licensed riverboats must establish and abide by
a cruise schedule. Riverboat cruises are required to be a minimum of two hours
and a maximum of four hours. For the Company's riverboat in North Kansas City,
MO, which is continuously docked, passengers may board the riverboat for a
45-minute period at the beginning of a cruise. They may disembark at any time.
There is a maximum loss per person per cruise of $500. Minimum and maximum
wagers on games are set by the licensee and wagering may be conducted only with
a cashless wagering system, whereby money is converted to tokens, electronic
cards or chips which can only be used for wagering. No person under the age of
21 is permitted to wager, and wagers may only be taken from a person present on
a licensed excursion gambling boat.
The legislation imposes a 20% wagering tax on adjusted gross receipts from
gambling games. The tax imposed is to be paid by the licensed owner to the
Commissioner on the day after the day when the wagers were made. Of the proceeds
of that tax, 10% goes to the local government where the home dock is located,
and the remainder goes to the state education assistance fund.
The legislation also requires that licensees pay a $2.00 admission tax for
each person admitted to a gaming cruise. Of this admission tax, the host
municipality or county receives $1.00. The licensed owner is required to
maintain public books and records clearly showing amounts received from
admission fees, the total amount of gross receipts and the total amount of
adjusted gross receipts.
INDIAN GAMING
The terms and conditions of management contracts and the operation of
casinos and all gaming on Indian land in the United States are subject to the
Indian Gaming Regulatory Act of 1988 ("IGRA"), which is administered by the
National Indian Gaming Commission ("NIGC"). IGRA is subject to interpretation by
the Secretary and NIGC and may be subject to judicial and legislative
clarification or amendment.
IGRA requires NIGC to approve management contracts and certain collateral
agreements. All contracts relating to Harrah's Phoenix Ak-Chin casino were
approved by the NIGC. The NIGC will not approve a management contract if a
director or a 10% shareholder of the management company: (i) is an elected
member of the Indian tribal government which owns the facility purchasing or
leasing the games; (ii) has been or is convicted of a felony gaming offense;
(iii) has knowingly and willfully provided materially false information to the
NIGC or the tribe; (iv) has refused to respond to questions from the NIGC; or
(v) is a person whose prior history, reputation and associations pose a threat
to the public interest or to effective gaming regulation and control, or create
or enhance the chance of unsuitable activities in gaming or the business and
financial arrangements incidental thereto. In addition, the NIGC will not
approve a management contract if the management company or any of its agents
have attempted to unduly influence any decision or process of tribal government
relating to gaming, or if the management company has materially breached the
terms of the management contract or the tribe's gaming ordinance, or a trustee,
exercising due diligence, would not approve such management contract.
A management contract can be approved only after NIGC determines that the
contract provides, among other things, for: (i) adequate accounting procedures
and verifiable financial reports, which must be furnished to the tribe; (ii)
tribal access to the daily operations of the gaming enterprise, including the
right to verify daily gross revenues and income; (iii) minimum guaranteed
payments to the tribe, which must have priority over the retirement of
development and construction costs; (iv) a ceiling on the repayment of such
development and construction costs and (v) a contract term not exceeding five
years and a management fee not exceeding 30% of net revenues (as determined by
the NIGC); provided that the NIGC may approve up to a seven year term and a
management fee not to exceed 40% of net
34
revenues if NIGC is satisfied that the capital investment required, and the
income projections for the particular gaming activity justify the larger profit
allocation and longer term.
IGRA established three separate classes of tribal gaming--Class I, Class II
and Class III. Class I includes all traditional or social games played by a
tribe in connection with celebrations or ceremonies. Class II gaming includes
games such as bingo, pulltabs, punchboards, instant bingo and non-banked card
games (those that are not played against the house), such as poker. Class III
gaming is casino-style gaming and includes banked table games such as blackjack,
craps and roulette, and gaming machines such as slots, video poker, lotteries
and parimutuel wagering. Harrah's Phoenix Ak-Chin provides both Class II and III
gaming.
IGRA prohibits substantially all forms of Class III gaming unless the tribe
has entered into a written agreement with the host state that specifically
authorizes the types of commercial gaming the tribe may offer (a "tribal-state
compact"). IGRA requires states to negotiate in good faith with tribes that seek
tribal-state compacts and grants Indian tribes the right to seek a federal court
order to compel such negotiations. Many states have refused to enter into such
negotiations. Tribes in several states have sought federal court orders to
compel such negotiations. However, some courts have held that the Eleventh
Amendment to the United States Constitution immunizes states from suit by Indian
tribes in federal court without the state's consent. If Indian tribes are unable
to compel states to negotiate tribal-state compacts, the Company may not be able
to develop and manage casinos offering Class III games in states that refuse to
enter into tribal-state compacts.
The State of Arizona has entered into a tribal-state compact with the
Ak-Chin Indian Community, and the State of Washington has entered into a
tribal-state compact with the Upper Skagit Indian Tribe. Accordingly, the
Company does not believe that the operations of Harrah's Phoenix Ak-Chin or the
proposed operations at Harrah's Upper Skagit will be affected by these court
decisions. These compacts provide that the gaming agencies in each state are to
conduct background investigations and certify the suitability of the manager,
its officers, directors, and key employees to conduct gaming on tribal lands.
The Company received such certification from the Arizona gaming authorities
prior to opening the Phoenix Ak-Chin casino. The Pala Band of Mission Indians
will need to enter into a tribal-state compact with the State of California
prior to conducting Class III gaming. (The casino which the Company plans to
manage will offer Class II gaming until such tribal-state compact is agreed
upon). There can be no assurance that the Pala Band and the State of California
will enter into a mutually acceptable tribal-state compact.
Title 25, Section 81 of the United States Code states that "no agreement
shall be made by any person with any tribe of Indians, or individual Indians not
citizens of the United States, for the payment or delivery of any money or other
thing of value . . . in consideration of services for said Indians relative to
their lands . . . unless such contract or agreement be executed and approved" by
the Secretary of the Interior (the "Secretary") or his or her designee. An
agreement or contract for services relative to Indian lands which fails to
conform with the requirements of Section 81 will be void and unenforceable. All
money or other thing of value paid to any person by any Indian or tribe for or
on his or their behalf, on account of such services, in excess of any amount
approved by the Secretary or his or her authorized representative will be
subject to forfeiture. The Company believes that it has complied with the
requirements of section 81 with respect to its management contract for Harrah's
Phoenix Ak-Chin and intends to comply with Section 81 with respect to proposed
Upper Skagit, Pala Band and any other contract to manage casinos located on
Indian land in the United States.
Indian tribes are sovereign nations with their own governmental systems,
which have primary regulatory authority over gaming on land within the tribes'
jurisdiction. Therefore, persons engaged in gaming activities, including the
Company, are subject to the provisions of tribal ordinances and regulations on
gaming. These ordinances are subject to review by NIGC under certain standards
established by IGRA. NIGC may determine that some or all of the ordinances
require amendment, and
35
that additional requirements, including additional licensing requirements, may
be imposed on the Company. The Company has received no such notification
regarding the Ak-Chin casino. The possession of valid licenses from the Ak-Chin
Indian Community is an ongoing condition of the Ak-Chin Agreement.
GAMING--OTHER
The Company and its joint venture partner have been granted a gaming license
in connection with the development of a casino entertainment facility in
Auckland, New Zealand and will also be subject to extensive regulations in that
jurisdiction.
HOTEL LICENSING
A number of states regulate the licensing of hotels and restaurants and the
granting of liquor licenses by requiring registration, disclosure statements and
compliance with specific standards of conduct. In addition, various federal and
state regulations mandate certain disclosures and other practices with respect
to the sales of license agreements and the licensor/licensee relationship. The
Company's operations have not been materially affected by such legislation and
regulations, but the Company cannot predict the effect of future legislation.
FUEL SHORTAGES AND COSTS; WEATHER
Although gasoline supplies are now in relative abundance, gasoline shortages
and price increases may have adverse effects on the hotel business of Promus.
The business of Harrah's is also sensitive to the cost and availability of
gasoline. Access to the Lake Tahoe and Reno areas of northern Nevada, Atlantic
City, New Jersey and the Colorado properties may be restricted from time to time
during the winter months by adverse weather conditions which can cause road
closures. Such closures have at times adversely affected operating results at
Harrah's Lake Tahoe, Harrah's Reno, Bill's Lake Tahoe Casino and Harrah's
Atlantic City.
EMPLOYEE RELATIONS
Promus, through its subsidiaries, has approximately 28,500 employees. Labor
relations with employees are good.
Promus' subsidiaries have collective bargaining agreements covering
approximately 3,000 employees. These agreements relate to certain casino, hotel
and restaurant employees at Harrah's Atlantic City and Harrah's Las Vegas.
Approximately 2,500 of these 3,000 employees are covered by collective
bargaining agreements expiring in 1997.
ITEM 3. LEGAL PROCEEDINGS.
Bass Public Limited Company, Bass International Holdings N.V., Bass (U.S.A.)
Incorporated, Holiday Corporation and Holiday Inns, Inc. (collectively "Bass")
v. The Promus Companies Incorporated ("Promus"). A complaint was filed in the
United States District Court for the Southern District of New York against
Promus on February 6, 1992, under Civil Action No. 92 Civ. 0969 (SWK). On March
17, 1995, the Company signed a settlement agreement (the "Settlement") with Bass
that will settle all claims and counterclaims in this litigation (including the
resolution of certain tax issues). The Settlement is subject to approval of the
court. As a result of the Settlement, $53.4 million has been charged against the
Company's 1994 earnings, including $4.3 million for legal fees previously
reported in corporate expense.
36
Certain tax matters. In connection with the 1990 spin-off (the "1990
Spin-off") of Promus and acquisition of the Holiday Inn hotel business by Bass,
Promus was liable, with certain exceptions, for taxes of Holiday and its
subsidiaries for all pre-1990 Spin-off tax periods. Bass was obligated under the
terms of the Tax Sharing Agreement to pay Promus the amount of any tax benefits
realized by Holiday as a result of adjustments to pre-1990 Spin-off tax periods
of Holiday and its subsidiaries. All examinations for tax years prior to 1987
have been completed and any taxes and related interest regarding those years
have been paid. A protest of all unagreed issues for the IRS examination of 1987
through the 1990 Spin-off date was filed with the IRS during the third quarter
of 1993 and negotiations to resolve disputed issues continue.
Under the terms of the Settlement between Bass and the Company, the Tax
Sharing Agreement will be terminated. Pursuant to the Settlement, the Company
will remain obligated for certain tax issues related to Promus' subsidiaries for
pre-1990 Spin-off tax periods and for certain other items related to the final
resolution of the disputed issues for 1987 through the 1990 Spin-off date. Final
resolution of the disputed issues is not expected to have a material adverse
effect on Promus' consolidated financial position or its results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
37
EXECUTIVE OFFICERS OF THE REGISTRANT
POSITIONS AND OFFICES HELD AND PRINCIPAL
NAME AND AGE OCCUPATIONS OR EMPLOYMENT DURING PAST 5 YEARS
- ------------------------------------ ------------------------------------------------------------
Michael D. Rose (53)................ Chairman of the Board of Promus since November 1989. Chief
Executive Officer (1989-1994) and President (1989-1991) of
Promus. Mr. Rose also is a director of Ashland Oil, Inc.,
First Tennessee National Corporation and General Mills,
Inc.
Philip G. Satre (45)................ Director since 1989, President since April 1991 and Chief
Executive Officer since April 1994 of Promus. Chief
Operating Officer (1991-1994) and Senior Vice President
(1989-1991) of Promus. President (since 1984) and Chief
Executive Officer (1984-1991) of Harrah's. He is a member
of the Executive Committee of Harrah's Jazz Company and a
director of Harrah's Jazz Finance Corp.
John M. Boushy (40)................. Senior Vice President, Information Technology and Corporate
Marketing Services of Promus since June 1993. Vice
President, Strategic Marketing of Harrah's April 1989 to
June 1993.
Charles A. Ledsinger, Jr. (45)...... Senior Vice President and Chief Financial Officer of Promus
since August 1990. Treasurer of Promus from November 1989
to February 1991. Vice President of Promus from November
1989 to August 1990. He also is a director of Perkins
Management Company, Inc., a privately-held general partner
of Perkins Family Restaurants, L.P., a publicly-traded
limited partnership.
Ben C. Peternell (49)............... Senior Vice President, Corporate Human Resources and
Communications of Promus since November 1989.
Colin V. Reed (47).................. Senior Vice President, Corporate Development of Promus since
May 1992. Vice President, Corporate Development of Promus
from November 1989 to May 1992. He also is a director of
Sodak Gaming, Inc. He is also a member of the Executive
Committee of Harrah's Jazz Company and a director of
Harrah's Jazz Finance Corp.
E. O. Robinson, Jr. (55)............ Senior Vice President and General Counsel of Promus since
April 1993 and Secretary of Promus since November 1989.
Vice President and Associate General Counsel of Promus
from November 1989 to April 1993.
38
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange and
traded under the ticker symbol "PRI". The stock is also listed on the Midwest
Stock Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange.
The following table sets forth the high and low price per share of the
Company's Common Stock for the last two years:
HIGH LOW
---- ---
1993*
First Quarter......................................... 25 17 15/32
Second Quarter........................................ 32 22 29/32
Third Quarter......................................... 53 31/32 31 11/32
Fourth Quarter........................................ 55 39
1994
First Quarter......................................... 55 1/4 36 1/2
Second Quarter........................................ 41 27 1/8
Third Quarter......................................... 38 27 3/4
Fourth Quarter........................................ 34 1/8 25 7/8
- ------------
* Retroactively adjusted for stock splits that occurred in 1993.
The approximate number of holders of record of the Company's Common Stock as
of January 31, 1995, is as follows:
APPROXIMATE NUMBER
OF HOLDERS OF
TITLE OF CLASS RECORD
- --------------------------------------------------------- ------------------
Common Stock, Par Value $0.10 per share.................. 16,993
The Company does not presently intend to declare cash dividends. The terms
of the Company's Bank Facility substantially limit the Company's ability to pay
cash dividends on Common Stock and limitations are also contained in agreements
covering other debt of the Company. See "Management's Discussion and
Analysis--Intercompany Dividend Restriction" on page 49 herein and Note 16 to
the financial statements on page 74 herein. When permitted under the terms of
the Bank Facility and the other debt, the declaration and payment of dividends
is at the discretion of the Board of Directors of the Company. The Board of
Directors of the Company intends to reevaluate its dividend policy in the future
in light of the Company's results of operations, financial condition, cash
requirements, future prospects and other factors deemed relevant by the Board of
Directors.
ITEM 6. SELECTED FINANCIAL DATA.
See the information for the years 1990 through 1994 set forth under
"Selected Financial and Statistical Data" on page 50 herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Since its creation on February 7, 1990, The Promus Companies Incorporated
(Promus) has been a leader in the hospitality industry, operating four major
brands: Harrah's, one of the premier names in the casino entertainment industry,
and Embassy Suites, Hampton Inn and Homewood Suites, each leading hotel brands.
On January 30, 1995, Promus announced a planned spin-off, expected to be
completed by the end of second quarter 1995, that will split the Company into
two independent public
39
corporations, one for conducting its casino entertainment business and one for
conducting its hotel business. Promus, which is expected to be renamed Harrah's
Entertainment, Inc., will retain ownership of the casino entertainment business.
Promus' hotel operations will be transferred to a new entity, expected to be
named Promus Hotel Corporation (PHC), the stock of which is to be distributed to
Promus' stockholders on a one-for-two basis (the PHC Spin-off).
As a result of this announcement, Promus' historical financial statements
have been restated to reflect the hotel business as discontinued operations. The
PHC Spin-off is subject to a number of conditions, including regulatory,
bondholder, bank lender and other third-party consents, receipt of an opinion
from outside legal counsel regarding the tax-free status of the transaction,
market conditions, final approval of the Board of Directors and stockholder
approval.
RESULTS OF OPERATIONS
Overall
PERCENTAGE
INCREASE/(DECREASE)
----------------------
(IN MILLIONS, EXCEPT EARNINGS PER SHARE) 1994 1993 1992 94 VS 93 93 VS 92
-------- -------- ------ ---------- --------
Revenues................................... $1,339.4 $1,020.6 $894.4 31.2% 14.1%
Operating income........................... 269.2 210.0 161.0 28.2% 30.4%
Income from continuing operations.......... 50.0 74.9 49.6 (33.2)% 51.0%
Earnings from discontinued hotel
operations................................. 36.3 16.9 1.8 114.8% 838.9%
Net income................................. 78.4 86.3 52.5 (9.2)% 64.4%
Earnings per share
Continuing operations.................... 0.49 0.73 0.49 (32.9)% 49.0%
Discontinued operations.................. 0.35 0.16 0.02 118.8% 700.0%
Net income............................... 0.76 0.84 0.52 (9.5)% 61.5%
Operating margin........................... 20.1% 20.6% 18.0% (0.5)pts 2.6pts
Promus' operating results include the combined results of its ownership
and/or management of 15 casino entertainment properties located in Arizona,
Colorado, Illinois, Louisiana, Mississippi, Missouri, Nevada and New Jersey.
Most of 1994's growth occurred within the riverboat division as Promus entered
new gaming markets. In January 1994, Harrah's opened a second riverboat casino
in Joliet, Illinois. Harrah's also opened new riverboat casinos in Shreveport,
Louisiana and North Kansas City, Missouri in April and September, respectively.
Harrah's Phoenix Ak-Chin, the Company's first managed Indian gaming operation,
opened on December 27, 1994. 1994 also represented the first full year of
operations for Promus' initial three riverboat casinos, the first of which
opened in May 1993. This increase in the number of casinos, in particular
riverboat casinos, resulted in record consolidated revenues and operating
income.
The increases in operating income provided by the new riverboat casinos were
partially offset by increased development costs, the write-off of preopening
costs related to those projects opened during the year reflecting a change in
accounting policy, and the recognition of Promus' pro-rata share of Harrah's New
Orleans preopening related costs. Promus expects the level of development costs
to be lower in 1995. The Company continues to actively pursue additional casino
development. However, development costs in 1994 included significant
expenditures related to referenda in Missouri, Florida and Arkansas that are not
expected to recur in 1995.
Income from continuing operations and net income for 1994 declined from the
prior year due to the inclusion in 1994's financial results of a $53.4 million
provision for the settlement of litigation, related legal fees and other
expenses, as discussed further below. Excluding this amount from the comparison,
1994 income from continuing operations and net income increased 37.4% and 52.0%,
respectively, over the prior year.
40
Promus' overall operating margin declined 0.5 percentage points for 1994 as
compared to the prior year due to the impact of the increased development costs,
the write-off of preopening costs and the equity pick-up of the Harrah's New
Orleans project pre-operating losses. If the impact of these three items is
excluded from the comparison, Promus' operating margin would have increased 2.2
percentage points over the prior year, to 22.8%.
The following table summarizes operating income before preopening costs and
corporate expense for 1994, 1993 and 1992 in millions of dollars and as a
percent of the total for each of Promus' casino entertainment divisions:
CONTRIBUTION FOR FISCAL YEAR ENDED
DECEMBER 31,
--------------------------------------------
IN MILLIONS OF
DOLLARS PERCENT OF TOTAL
-------------------- --------------------
1994 1993 1992 1994 1993 1992
---- ---- ---- ---- ---- ----
Casino Entertainment
Riverboat........................................... $127 $ 28 $ - 40% 12% -%
Northern Nevada..................................... 76 77 67 24 33 36
Southern Nevada..................................... 75 79 66 24 33 35
Atlantic City....................................... 74 68 66 24 28 35
New Orleans......................................... (9) - - (3) - -
Development costs................................... (22) (10) (6) (7) (4) (3)
Other............................................... (8) (5) (5) (2) (2) (3)
---- ---- ---- ---- ---- ----
Total Promus.................................... $313 $237 $188 100% 100% 100%
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
Riverboat Division
PERCENTAGE
(IN MILLIONS) 1994 1993 INCREASE/(DECREASE)
-------- ------ -------------------
Revenues................................................. $ 415.0 $ 90.8 357.0%
Operating income......................................... 126.8 28.0 352.9%
Operating margin......................................... 30.6% 30.8% (0.2)pts
Gaming volume............................................ $4,300.4 $822.3 423.0%
As of the end of 1994, the Riverboat Division included the operations of six
riverboat casinos, as compared to three in operation at the end of 1993. The
growth in the number of operating riverboat casinos, coupled with the inclusion
in 1994 of a full year of operations for the three riverboats opened during
1993, resulted in increased revenues and operating income for the Division.
The higher operating margin achieved by this Division versus the other
divisions reflects the operational differences between a riverboat facility and
a conventional land-based property, the economies of scale derived from the
centralization of certain Division support functions and limited competition
initially faced by facilities opening in new, emerging markets. Overall
operating margin for the Division declined slightly during the year, reflecting
primarily decreased operating margins at Promus' Mississippi casinos due to
increasingly intense competition faced in those markets. Although Promus has
taken actions in these markets in response to the changing operating environment
and to improve operating efficiency, operating margins are not expected to
return to the levels achieved during the period of limited competition.
41
Southern Nevada Division
PERCENTAGE
INCREASE/(DECREASE)
--------------------
(IN MILLIONS) 1994 1993 1992 94 VS 93 93 VS 92
-------- -------- -------- -------- --------
Revenues.................................... $ 293.8 $ 294.3 $ 266.3 (0.2)% 10.5%
Operating income............................ 74.9 79.4 65.8 (5.7)% 20.7%
Operating margin............................ 25.5% 27.0% 24.7% (1.5)pts 2.3pts
Gaming volume............................... $2,981.8 $3,069.6 $2,895.2 (2.9)% 6.0%
As a result of capacity increases in both the Las Vegas and Laughlin
markets, gaming volume for the Division decreased from 1993 levels. The
decreased gaming revenue resulting from the lower volume was offset by higher
Las Vegas non-gaming revenue, particularly lodging. Operating income and margins
decreased from 1993 due to higher promotional costs and the lower margins
inherent in non-gaming revenue.
1993 operating results reflected growth in both revenues and operating
income due to increased gaming volume at both the Las Vegas and Laughlin
properties. The Las Vegas property continued to benefit from the name change to
Harrah's, completed in 1992, and the Laughlin property attracted more customers
as a result of a third hotel tower, completed in third quarter 1992.
Northern Nevada Division
PERCENTAGE
INCREASE/(DECREASE)
--------------------
(IN MILLIONS) 1994 1993 1992 94 VS 93 93 VS 92
-------- -------- -------- -------- --------
Revenues.................................... $ 310.3 $ 315.6 $ 310.5 (1.7)% 1.6%
Operating income............................ 75.7 76.6 67.3 (1.2)% 13.8%
Operating margin............................ 24.4% 24.3% 21.7% 0.1pt 2.6pts
Gaming volume............................... $3,727.4 $3,756.0 $3,716.7 (0.8)% 1.1%
Lower gaming volume during 1994 resulted in a slight decline in revenues and
operating income for the year. The decrease in volume may be attributed to the
trial by traditional Northern Nevada customers of the new "mega" properties in
the Las Vegas market, which opened in the fall of 1993, and severe winter
weather experienced during fourth quarter 1994.
Despite lower gaming volume in 1994, the Division achieved a slight
improvement in its operating margin over the prior year by continuing its
emphasis on cost savings and operating efficiencies. These efforts also
contributed to the 2.6 percentage points increase in operating margin for 1993
versus 1992.
Atlantic City
PERCENTAGE
INCREASE/(DECREASE)
--------------------
(IN MILLIONS) 1994 1993 1992 94 VS 93 93 VS 92
-------- -------- -------- -------- --------
Revenues.................................... $ 316.6 $ 312.1 $ 312.1 1.4% -
Operating income............................ 74.5 68.0 66.2 9.6% 2.7%
Operating margin............................ 23.5% 21.8% 21.2% 1.7pts 0.6pts
Gaming volume............................... $3,224.5 $2,991.6 $2,724.1 7.8% 9.8%
Atlantic City's revenue increased in 1994 as a result of slot volume growth.
This increased volume can be attributed to highly focused marketing efforts
undertaken in 1994, as well as to a casino renovation substantially completed
during the year. Cost management initiatives kept 1994 operating expenses
consistent with those of 1993, resulting in operating margin improvement.
1993 revenues were essentially even with 1992 revenues, as Harrah's Atlantic
City successfully met the demands of a highly competitive market. Operating
income increased slightly in 1993 over 1992 as a result of cost management
measures.
42
Harrah's New Orleans
Revenues and operating income for 1994 include a loss of $8.5 million
related to Promus' investment in Harrah's Jazz Company. This loss represents
Promus' pro-rata share of preoperating losses incurred by the partnership
developing Harrah's New Orleans. (See Capital Spending and Development section
for further discussion of the current status of this development project.)
Other Factors Affecting Income Per Share
PERCENTAGE
INCREASE/(DECREASE)
--------------------
1994 1993 1992 94 VS 93 93 VS 92
------ ------ ----- -------- --------
(INCOME)/EXPENSE (IN MILLIONS)
Corporate expense.................................. $ 28.9 $ 26.7 $26.6 8.2% 0.4%
Preopening costs................................... 15.3 - - N/M N/M
Interest expense................................... 78.3 73.1 77.6 7.1% (5.8)%
Provision for settlement of litigation and related
costs.............................................. 53.4 0.4 1.8 N/M N/M
Other income....................................... (1.9) (2.5) (3.5) (24.0)% (28.6)%
Effective tax rate................................. 54.1% 42.7% 41.7% 11.4pts 1.0pt
Minority interests................................. $ 13.9 $ 4.8 $ - 189.6% N/M
Discontinued hotel operations, net of income
taxes.............................................. (36.3) (16.9) (1.8) 114.8% 838.9%
Extraordinary loss (gain), net of income taxes..... - 5.4 (1.1) N/M N/M
Cumulative effect of change in accounting policy,
net of income taxes.............................. 7.9 - - N/M N/M
Corporate expense in 1994 increased from the 1993 level, following a slight
increase in 1993 versus 1992, reflecting the impact of Promus' growth on the
corporate staff functions. Interest expense increased in 1994 as a result of
increasing debt levels and interest rates on variable rate debt over the course
of the year. 1993 interest expense decreased from the prior year due to the
refinancing completed in July 1993 and favorable variable interest rates.
The provision for settlement of litigation and related costs includes a
charge of $49.2 million to accrue the estimated cost, including related legal
fees and other expenses, of the March 1995, settlement of certain litigation
associated with the 1990 Spin-off of Promus and acquisition of the Holiday Inn
business by Bass PLC. In addition to these costs, this expense category also
includes legal fees and other expenses incurred related to Promus' defense of
this litigation, which amounted to $4.3 million, $0.4 million and $1.8 million
in 1994, 1993 and 1992, respectively. The settlement payment is expected to be
made in March 1995 using funds provided by Promus' revolving credit facility and
operations.
Effective January 1, 1994, Promus changed its accounting policy related to
preopening costs incurred during development of new projects. Promus' new policy
is to defer preopening costs as incurred prior to opening and to expense them
upon opening of each project. Previously, Promus had capitalized such costs and
amortized them to expense over 36 months from the date of opening. Preopening
costs for 1994 primarily represent those costs charged to expense upon the
opening of Harrah's Shreveport in April and Harrah's North Kansas City in
September, as well as the write-off of costs related to Promus' St. Louis
project (see Capital Spending and Development section). Operating results for
1994 also reflect the cumulative charge against earnings, net of income taxes,
of $7.9 million, or $0.08 per share, to write off the unamortized preopening
costs balances related to projects opened in prior years (see Note 4 to the
accompanying consolidated financial statements).
The effective tax rate for 1994 is higher than the federal statutory rate
primarily due to the inclusion in Promus' 1994 operating results of the
provision for settlement of litigation, which is not expected to be deductible
for federal income tax purposes, and state income taxes. The effective tax rates
for 1993 and 1992 are higher than the federal statutory rate due primarily to
state income taxes.
43
Minority interest reflects joint venture partners' shares of income at joint
venture riverboat casinos, and has increased as additional joint venture casinos
open.
As previously discussed, on January 30, 1995, Promus announced its plans to
split the Company into two independent public corporations. Accordingly, the
operating results of Promus' hotel business have been segregated and reported as
discontinued operations in the accompanying consolidated financial statements of
income. Promus' prior year consolidated income statements have been restated to
conform to the 1994 presentation.
The extraordinary losses recorded in 1993 represent write-offs of
unamortized deferred finance charges due to early retirements of debt. During
1992, Promus incurred three extraordinary items, including a $2.7 million
extraordinary gain, net of tax, representing Promus' equity share of the
forgiveness of debt recognized by a hotel joint venture. A second extraordinary
gain of $1.8 million, net of tax, represented a discount realized by Promus upon
early extinguishment of a mortgage on a company-owned hotel property. Partially
offsetting these extraordinary gains was a $3.4 million extraordinary loss, net
of tax, on the early extinguishment of debt, including a premium paid to holders
of notes tendered under a fixed spread tender offer and the write-off of related
deferred finance charges.
CAPITAL SPENDING AND DEVELOPMENT
Promus continues to pursue development opportunities within the casino
entertainment industry. These opportunities include traditional land-based
casinos, riverboat casinos, Indian gaming projects and international casino
projects.
Harrah's New Orleans
Harrah's Jazz Company (Harrah's Jazz), in which a Promus subsidiary is one
of three partners, was 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. In March 1994, Harrah's Jazz
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. In October 1994, Harrah's Jazz executed additional agreements
with the City concerning such matters.
The estimated project cost of $815 million will be financed through a
combination of partner capital contributions, public debt securities, bank debt
and operating cash flow from the temporary casino. In November 1994 the
Partnership sold $435 million of first mortgage notes and obtained a $175
million bank facility, $75 million of which was outstanding at December 31,
1994. At closing, the Promus subsidiary contributed a total of $90 million,
including $33.3 million contributed on behalf of another partner. As a result of
the Promus subsidiary's contribution on its partner's behalf, Promus currently
holds an approximate 53% equity interest in the Partnership. The partner has the
option to reacquire a portion of the incremental ownership percentage by making
capital contributions within 120 days of the opening of the temporary casino.
Because Promus' ownership of this majority interest is expected to be temporary
and voting control continues to be shared equally by each partner during the
option period, Harrah's Jazz is not consolidated into Promus' financial
statements. Upon repayment of the capital contribution by Promus' partner,
Promus' subsidiary's equity interest in the Partnership will be approximately
38.3%. If the funds available from the partner capital contributions, public
debt securities, bank debt and operating cash flows are insufficient to meet the
costs of developing, constructing and opening the temporary and permanent
casinos, Promus has also agreed to loan Harrah's Jazz the funds necessary to
complete the project, subject to certain conditions and exceptions, in exchange
for a fee to be paid by Harrah's Jazz.
44
Construction is currently underway on the 76,000 square foot temporary
casino, expected to open during second quarter 1995. Construction of the 400,000
square foot permanent casino facility (200,000 square foot casino space) is also
proceeding with a targeted opening date of second quarter 1996, but the timing
of completion remains subject to certain pending legal issues, including various
litigation proceedings affecting the project.
Riverboat Casino Development
Three new riverboat casino entertainment projects opened in 1994. In
January, Harrah's added a second riverboat casino in Joliet, Illinois. The
addition of the Southern Star followed the May 1993 opening of the Northern
Star, and increased Harrah's Joliet's casino square footage by more than 85%.
On April 18, 1994, Harrah's began operations aboard the Shreveport Rose, a
dockside casino property located in downtown Shreveport, Louisiana. In addition
to serving the Shreveport market, the facility draws customers from the Dallas,
Texas metropolitan area and East Texas. The property was developed as a joint
venture, with Harrah's owning an 86% interest at the property's opening. Promus
has since acquired the interests of various minority partners and currently owns
99% of the project.
Harrah's North Kansas City, a 33,000 square foot riverboat and Promus' first
Missouri casino, began operations on September 22, 1994. At the date of opening,
traditional reel-type slot machines and other games of chance were not allowed
under Missouri law; as a result, the property was initially configured with 94
table games and 807 video poker and video blackjack machines. On November 8,
1994, Missouri voters approved a statewide referendum allowing traditional slot
machines and other games of chance. The property has since reconfigured its
product mix to include slot machines. This reconfiguration is expected to result
in higher gaming volume, operating income and operating margins for the
property.
In addition to the six riverboat casinos now operating, Promus previously
announced a second riverboat casino project in the state of Missouri to be
located in Maryland Heights, a suburb of St. Louis. Approximately $39 million
had been incurred on the project as of the end of 1994, of which $13 million is
expected to be paid during 1995. Following the failure in April 1994 of a
statewide referendum that would have approved games of chance for proposed
casino developments in Missouri, Promus reevaluated its development plans for
this project and postponed construction of the shoreside facilities at the
Maryland Heights site. As a result of the voter approval of a similar referendum
in November 1994, Promus resumed its development planning for this project.
Subsequent to the end of the year, Promus announced plans to form a joint
venture with another casino entertainment company to jointly develop a riverboat
casino entertainment complex in Maryland Heights. Each company will develop and
operate its separately branded riverboat casino, and Promus and its partner will
jointly develop the related shoreside facilities. Subject to the receipt of the
necessary approvals, construction is expected to begin in second quarter 1995
and be completed in second quarter 1996.
A 30,000 square foot riverboat casino was moved to Shreveport, Louisiana, in
February 1995 and placed in service as a replacement vessel for the existing
Shreveport Rose, which contained 19,500 square feet. This exchange resulted in
approximately 27% more gaming positions at Harrah's Shreveport. The Shreveport
Rose was moved from Shreveport to a dockyard in Louisiana and will be available
for use at another as yet undetermined site. The costs associated with
exchanging the boats and with maintaining the Shreveport Rose until it is
returned to service are not material.
Indian Lands
Promus opened its first Indian gaming facility on Native American land on
December 27, 1994. Harrah's Ak-Chin Phoenix is located on the Maricopa Indian
Reservation approximately 25 miles south of Phoenix and 90 miles north of
Tucson. The casino entertainment facility is owned by the Ak-Chin tribe and is
managed by Promus for a fee under terms of a management contract with a five
year term. Though Promus did not fund the development, it has guaranteed the
related bank financing.
45
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 1994. Promus will own a 20% interest in the
partnership and will manage the facility for a fee. Of Promus' total expected
capital contribution of US$30.5 million, US$1.4 million had been contributed at
December 31, 1994. Construction of the US$331 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 August 1994, a general partnership in which Promus is a 75% partner
completed its acquisition of Station Square, an entertainment, business and
retail center in Pittsburgh, Pennsylvania. The approximately 52-acre 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.
If casino gaming is legalized in this jurisdiction, the partnership plans to
pursue development of a casino entertainment facility at the Station Square
site. Such development could require significant additional funding for design
and construction of a casino entertainment facility. The project would also be
contingent upon approval by necessary regulatory and governmental authorities
and obtaining the required licenses to operate a gaming facility.
Existing Casino Facilities
Promus has begun construction of a $28.6 million company-owned hotel, being
developed under a license agreement with Hampton Inn, on the site of Harrah's
Reno. The 408-room, 26-story hotel is expected to begin operations in fourth
quarter 1995. Although Promus is considering additions of casino square footage
or hotel rooms at certain of its other existing casino entertainment properties,
no major additions are currently underway. On-going refurbishment and
maintenance of Promus' casino entertainment facilities continues to maintain the
quality standards set for these properties.
Overall
In addition to the projects discussed above, Promus continues to pursue
additional casino entertainment development opportunities in various possible
jurisdictions across the United States and abroad. Until necessary approvals to
proceed with development of a project are obtained from the relevant regulatory
bodies, the costs of pursuing casino entertainment projects are expensed as
incurred. Construction-related costs incurred after the receipt of necessary
approvals are capitalized and depreciated over the estimated useful life of the
resulting asset. Other preopening costs are deferred as incurred and expensed at
the respective property's opening.
A number of these projects, if they go forward, may require, individually
and in the aggregate, a significant capital commitment and, if completed, may
result in significant additional revenues. The commitment of capital, the timing
of completion and the commencement of operations of casino entertainment
development projects are contingent upon, among other things, negotiation of
final agreements and receipt of approvals from the appropriate political and
regulatory bodies. Cash needed to finance projects currently under development
as well as additional projects being pursued by Promus will be made available
from operating cash flows, the Bank Facility (see Debt and Liquidity section),
joint venture partners, specific project financing, guarantees by Promus of
third party debt and, if necessary, Promus debt and/or equity offerings. Promus'
capital spending totalled $316 million during 1994. Anticipated 1995 capital
expenditures are estimated at $250 million to $275 million, including the
projects discussed in this Capital Spending and Development section,
refurbishment of existing facilities and other projects.
46
DEBT AND LIQUIDITY
Bank Facility
Available Borrowing Capacity
Promus currently has in place a $650 million reducing revolving and letter
of credit facility (the Facility). At December 31, 1994, $288.6 million in
borrowings was outstanding under the Facility. An additional $226.4 million of
the Facility was committed to back certain letters of credit, including a $204.7
million letter of credit supporting the existing 9% Notes. These facility
commitments resulted in $135.0 million of the Facility being available to Promus
as of December 31, 1994. In connection with the proposed PHC Spin-off, Promus is
negotiating a new $350 million bank facility (the PHC Facility) to be secured by
the stock of PHC and its material subsidiaries. Prior to the PHC Spin-off, it is
expected that approximately $210 million will be drawn on the PHC Facility and
used to retire a portion of Promus' existing outstanding debt. The PHC Facility
will be assumed by PHC, and Promus will be released from liability, upon
consummation of the PHC Spin-off. As a result, Promus is negotiating amendments
to the Facility which are expected to include, among other things, a reduction
in its borrowing capacity available under the Facility, in recognition of its
reduced capital needs after the PHC Spin-off, and modifications to certain
financial covenants.
The maturity of the 9% Notes in February 1995 resulted in a reduction of the
letter of credit facility portion to $50 million. Because the Bank Facility was
used to retire the Notes, the total committed and total available Bank Facility
balances remained substantially unchanged as a result of the 9% Notes' maturity.
Interest Rate Reduction
As a result of achieving investment grade status during second quarter 1994,
the interest rate on Promus' Bank Facility was reduced by 1/4 of 1%. At December
31, 1994, the interest rate had also been reduced by an additional 3/8 of 1% due
to Promus' exceeding a defined financial covenant requirement.
Interest Rate Agreements
To manage the relative mix of its debt between fixed and variable rate
instruments, Promus enters into interest rate swap agreements to modify the
interest characteristics of its outstanding debt without an exchange of the
underlying principal amount. As of December 31, 1994, Promus was a party to the
following interest rate swap agreements on certain fixed rate debt:
SWAP RATE AT NEXT
ASSOCIATED RATE DEC. 31, SEMI-ANNUAL RATE
DEBT (LIBOR+) 1994 ADJUSTMENT DATE SWAP MATURITY
- ------------------------------------------- -------- -------- ---------------- -------------
10 7/8% Notes
$200 million............................. 4.73% 10.68% April 15 October 1997
8 3/4% Notes
$50 million.............................. 3.42% 9.58% May 15 May 1998
$50 million.............................. 3.22% 8.71% January 15 July 1998
In accordance with the terms of the interest rate swap agreements, the
effective interest rate on $50 million of the 8 3/4% Notes was adjusted on
January 15, 1995, to 10.01%.
Promus also maintains interest rate protection, in the form of a rate collar
transaction entered into in June 1990, on $140 million of its variable rate bank
debt. The interest rate protection, which at December 31, 1994, held Promus'
interest rate in a range between 8.7% and 11.9%, expires in June 1995 and is not
expected to be renewed.
During January 1995, Promus entered into four additional interest rate swap
agreements to effectively convert a total of $200 million in variable rate debt
to a fixed rate in expectation of the scheduled retirement of $200 million of
Promus' outstanding 9% Notes using borrowings under the
47
variable rate Bank Facility. During March 1995, Promus entered into two
additional interest rate swap agreements to effectively convert an additional
$100 million in variable rate debt to a fixed rate reflecting Promus' on-going
management of the relative mix of its debt between fixed and variable rates in
light of an increased level of borrowings under the Bank Facility. All six
swaps, which are summarized in the following table, reset on a quarterly basis.
EFFECTIVE RATE
SWAP RATE ON ASSOCIATED SWAP
ASSOCIATED DEBT PAID (FIXED) DEBT AT INCEPTION MATURITY
- -------------------------------------------------- ------------ ----------------- ------------
Revolving Credit Facility (Eurodollar plus 7/8%)
$50 million..................................... 7.915% 8.790% January 1998
$50 million..................................... 7.914% 8.789% January 1998
$50 million..................................... 7.910% 8.785% January 1998
$50 million..................................... 7.863% 8.738% July 1997
$50 million..................................... 6.990% 7.865% March 2000
$50 million..................................... 6.985% 7.860% March 2000
The differences to be paid or received under the terms of the interest rate
swap agreements and the rate collar transaction described above are accrued as
interest rates change and recognized as an adjustment to interest expense for
the related debt. Changes in the effective interest rates to be paid by Promus
pursuant to the terms of its interest rate agreements will have a corresponding
effect on its future cash flows. These agreements contain a credit risk that the
counterparties may be unable to meet the terms of the agreements. Promus
minimizes that risk exposure by evaluating the creditworthiness of its
counterparties, which are limited to major banks and financial institutions, and
does not anticipate nonperformance by the counterparties.
As a component of a transaction whereby Promus effectively secured an option
to a site for a potential casino, Promus has guaranteed a third party's $25
million variable rate bank loan. Promus also entered into an interest rate swap
agreement in which Promus receives a fixed interest rate of 7% from the third
party and pays the variable interest rate of the subject debt (LIBOR plus 1.75%
at December 31, 1994) to the bank. The negative value of the swap, which is
marked to market by the Company and included in interest expense, was
approximately $1.1 million at December 31, 1994. Promus' guarantee and the swap
agreement expire December 1, 1996, and are also subject to earlier termination
upon the occurrence of certain events.
Shelf Registration
Promus, through its wholly-owned subsidiary Embassy Suites, Inc. (Embassy),
has registered up to $200 million of new debt securities pursuant to a shelf
registration declared effective by the Securities and Exchange Commission. The
terms and conditions of these debt securities, which will be unconditionally
guaranteed by Promus, will be determined by market conditions at the time of
issuance. The shelf registration expires in August 1995. The name of the Embassy
legal entity will be changed in connection with the PHC Spin-off and the
re-named entity will remain a subsidiary of Promus.
INCOME TAX MATTERS
Under the terms of the Settlement between Promus and Bass PLC (Bass), the
Tax Sharing Agreement entered into in connection with the February 7, 1990,
spin-off (the 1990 Spin-off) of the stock of Promus to stockholders of Holiday
Corporation will be terminated. Under the Tax Sharing Agreement, Promus was
liable, with certain exceptions, for taxes of Holiday and its subsidiaries for
all pre-1990 Spin-off tax periods. Bass was obligated under the same agreement
to pay Promus the amount of any tax benefits realized from pre-1990 Spin-off tax
periods of Holiday and its subsidiaries. Under the provisions of the Settlement,
Promus will remain obligated for certain tax issues related to Promus and its
subsidiaries for the pre-Spin-off tax periods and certain other items related to
the final resolution
48
of disputed issues from the Internal Revenue Service (IRS) examination of income
tax returns for 1987 through the 1990 Spin-off date. A protest defending the
taxpayers' position on all disputed issues for these periods was filed with the
IRS during third quarter 1993 and negotiations to resolve these issues continue.
Final resolution of the disputed issues is not expected to have a material
adverse effect on Promus' consolidated financial position or its results of
operations.
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, previously reported amounts for prior years in the
Consolidated Balance Sheets and Consolidated Statements of Stockholders' Equity
have been restated to reclassify amounts from common stock to capital surplus to
retroactively reflect the impact of the change in par value.
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. Since that time,
plans for several new facilities have been announced. In Laughlin, expansions by
competitors completed in 1993 increased the number of rooms available in that
market by 12%. In Reno, competitors continue the development of new projects
which are expected to add additional casino space and hotel rooms to that market
during 1995.
In addition, the expansion of casino gaming activity into new jurisdictions
is continuing due to the 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, which has created 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 February 23, 1995, had resulted in the
approval of 114 compacts for the development of casinos on Native American lands
in 22 states.
Promus is not able to determine the long-term impact, whether favorable or
unfavorable, that these developments will have on the markets in which it
currently operates. However, management believes that the current balance of its
operations among the existing casino entertainment divisions as discussed above,
combined with the further geographic diversification and the continuing pursuit
of the Harrah's national brand strategy, have well-positioned Promus to face the
challenges presented by these developments and help to reduce the potentially
negative impact these new developments may have on Promus' overall operations.
INTERCOMPANY DIVIDEND RESTRICTION
Agreements governing the terms of its debt require Promus to abide by
covenants which, among other things, limit Embassy's ability to pay dividends
and make other restricted payments, as defined, to Promus. The amount of
Embassy's restricted net assets, as defined, computed in accordance with the
most restrictive of these covenants regarding restricted payments, was
approximately $628.0 million at December 31, 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.
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
THE PROMUS COMPANIES INCORPORATED
SELECTED FINANCIAL AND STATISTICAL DATA
(IN MILLIONS, EXCEPT STOCK DATA AND STATISTICAL DATA)
(SEE NOTES 1 AND 2)
COMPOUND
GROWTH
1994 (A) 1993 1992 1991 1990 RATE
-------- -------- -------- -------- -------- --------
OPERATING RESULTS
Continuing operations
Revenues............................. $1,339.4 $1,020.6 $ 894.4 $ 863.4 $ 875.3 11.2%
Operating income..................... 269.2 210.0 161.0 142.2 139.3 17.9%
Income before income taxes and
minority interest.................. 139.3 139.0 85.1 59.1 54.2 26.6%
Income from continuing operations.... 50.0 74.9 49.6 34.5 30.7 13.0%
Net income............................. 78.4 86.3 52.5 30.0 23.4 35.3%
Earnings before interest, taxes,
depreciation and amortization
(EBITDA)............................. 297.8 274.1 221.8 213.0 209.0 9.3%
COMMON STOCK DATA (B)
Earnings (loss) per share
Continuing operations................ 0.49 0.73 0.49 0.39 0.39 5.9%
Discontinued hotel operations........ 0.35 0.16 0.02 (0.06) (0.09) N/M
Net income........................... 0.76 0.84 0.52 0.33 0.30 26.2%
Cash dividend per share................ - - - - 10.00 N/M
Market price of common stock at
December 31.......................... 30.88 45.75 18.33 7.33 5.00 57.6%
Common shares outstanding at year-end
(in thousands)....................... 102,403 102,258 101,882 101,368 79,959 6.4%
FINANCIAL POSITION
Total assets........................... $1,738.0 $1,528.0 $1,297.3 $1,226.0 $1,141.2 11.1%
Total assets of continuing
operations........................... 1,595.0 1,347.5 1,085.1 1,034.3 1,028.6 11.6%
Current portion of long-term debt...... 1.0 1.0 2.2 40.7 40.6 N/M
Long-term debt......................... 727.5 665.2 660.7 614.5 712.3 0.5%
Stockholders' equity................... 623.4 536.0 427.9 365.5 203.7 32.3%
CAPITAL EXPENDITURES..................... 301.8 234.5 101.9 46.8 80.6 39.1%
FINANCIAL PERCENTAGES AND RATIOS
Return on revenues..................... 3.7% 7.3% 5.5% 4.0% 3.5%
Return on average invested capital..... 7.0% 9.4% 8.7% 8.9% 9.1%
Return on average equity............... 8.2% 15.8% 12.5% 11.5% 8.5%
Ratio of earnings to fixed charges..... 2.4 2.6 2.0 1.6 1.5
Current ratio.......................... 0.6 0.7 0.9 0.5 0.5
Ratio of book equity to debt........... 0.9 0.8 0.6 0.6 0.3
Ratio of market equity to debt......... 4.3 7.0 2.8 1.1 0.5
Ratio of EBITDA to interest paid....... 3.9 3.8 3.0 2.4 2.4
Ratio of debt to EBITDA................ 2.4 2.4 3.0 3.1 3.6
SELECTED STATISTICAL DATA
Casino square footage.................. 521,400 436,400 333,100 330,500 316,000
Number of table games.................. 789 641 465 512 492
Number of slot machines................ 14,808 12,504 9,100 9,090 9,445
Number of hotel rooms.................. 5,367 5,348 5,242 4,542 4,541
- ------------
(a) 1994 includes a $53.4 million provision for settlement of litigation and
related costs (see Note 13).
(b) Retroactively adjusted for stock splits (see Note 5).
50
THE PROMUS COMPANIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
------------------------
1994 1993
---------- ----------
ASSETS
Current assets
Cash and cash equivalents........................................ $ 84,968 $ 58,309
Receivables, including notes receivable of $528 and $1,966, less
allowance for doubtful accounts of $9,551 and $9,252........... 33,051 31,907
Deferred income taxes (Note 10).................................. 18,979 18,165
Prepayments...................................................... 4,291 2,471
Supplies......................................................... 11,463 11,722
Other............................................................ 19,083 17,268
---------- ----------
Total current assets......................................... 171,835 139,842
---------- ----------
Land, buildings, riverboats and equipment
Land and land improvements....................................... 228,232 182,072
Buildings, riverboats and improvements........................... 981,647 895,362
Furniture, fixtures and equipment................................ 392,741 339,046
---------- ----------
1,602,620 1,416,480
Less: accumulated depreciation................................... (472,779) (414,978)
---------- ----------
1,129,841 1,001,502
Net assets of discontinued hotel operations (Notes 1 and 2)........ 143,008 180,522
Investments in and advances to nonconsolidated affiliates
(Note 15)......................................................... 116,932 31,881
Deferred costs and other (Note 6).................................. 176,349 174,211
---------- ----------
$1,737,965 $1,527,958
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................................. $ 54,621 $ 15,268
Accrued litigation settlement and related costs (Note 13)........ 72,101 -
Construction payables............................................ 10,879 26,345
Accrued expenses (Note 6)........................................ 156,446 145,643
Current portion of long-term debt (Note 8)....................... 1,036 1,002
---------- ----------
Total current liabilities.................................... 295,083 188,258
Long-term debt (Note 8)............................................ 727,493 665,159
Deferred credits and other......................................... 66,735 84,979
Deferred income taxes (Note 10).................................... 7,138 39,189
---------- ----------
1,096,449 977,585
---------- ----------
Minority interests................................................. 18,079 14,336
---------- ----------
Commitments and contingencies (Notes 9 and 12 through 15)
Stockholders' equity (Notes 5, 14 and 15)
Common stock, $0.10 par value, authorized-360,000,000 shares,
outstanding-102,402,619 and 102,258,442 shares (net of 37,172
and 25,251 shares held in treasury)............................ 10,240 10,226
Capital surplus.................................................. 350,196 344,197
Retained earnings................................................ 265,574 187,203
Deferred compensation related to restricted stock................ (2,573) (5,589)
---------- ----------
623,437 536,037
---------- ----------
$1,737,965 $1,527,958
---------- ----------
---------- ----------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
51
THE PROMUS COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------
1994 1993 1992
---------- ---------- --------
Revenues
Casino................................................. $1,118,107 $ 812,081 $711,777
Food and beverage...................................... 162,413 139,522 133,485
Rooms.................................................. 105,642 102,024 94,092
Management fees........................................ 914 150 -
Other.................................................. 80,151 67,588 47,181
Less: casino promotional allowances.................... (127,821) (100,720) (92,151)
---------- ---------- --------
Total revenues..................................... 1,339,406 1,020,645 894,384
---------- ---------- --------
Operating expenses
Direct
Casino............................................... 497,686 369,335 334,702
Food and beverage.................................... 82,825 76,498 71,551
Rooms................................................ 33,430 33,124 31,958
Depreciation of buildings and equipment................ 70,632 54,631 48,963
Development costs...................................... 22,015 10,175 6,027
Other.................................................. 319,411 240,113 213,596
---------- ---------- --------
Total operating expenses........................... 1,025,999 783,876 706,797
---------- ---------- --------
Operating income before corporate expense and
preopening costs....................................... 313,407 236,769 187,587
Corporate expense........................................ (28,907) (26,736) (26,606)
Preopening costs......................................... (15,313) - -
---------- ---------- --------
Operating income......................................... 269,187 210,033 160,981
Interest expense, net of interest capitalized (Note 3)... (78,322) (73,080) (77,571)
Provision for settlement of litigation and related
costs (Note 13)........................................ (53,449) (400) (1,844)
Other income, including interest income.................. 1,867 2,462 3,490
---------- ---------- --------
Income before income taxes and minority interest......... 139,283 139,015 85,056
Provision for income taxes (Note 10)..................... (75,391) (59,394) (35,479)
Minority interests....................................... (13,908) (4,754) -
---------- ---------- --------
Income from continuing operations........................ 49,984 74,867 49,577
Earnings from discontinued hotel operations, net of
tax provisions of $26,798, $13,869 and $1,401
(Note 2)............................................... 36,319 16,926 1,841
---------- ---------- --------
Income before extraordinary items and cumulative effect
of change in accounting policy......................... 86,303 91,793 51,418
Extraordinary items, net of tax benefit (provision) of
$3,415 and $(753) (Note 7)............................. - (5,447) 1,074
Cumulative effect of change in accounting policy, net of
tax benefit of $4,317 (Note 4)......................... (7,932) - -
---------- ---------- --------
Net income............................................... $ 78,371 $ 86,346 $ 52,492
---------- ---------- --------
---------- ---------- --------
Earnings (loss) per share
Continuing operations.................................. $ 0.49 $ 0.73 $ 0.49
Discontinued operations, net........................... 0.35 0.16 0.02
Extraordinary items, net............................... - (0.05) 0.01
Cumulative effect of change in accounting policy,
net.................................................. (0.08) - -
---------- ---------- --------
Net income........................................... $ 0.76 $ 0.84 $ 0.52
---------- ---------- --------
---------- ---------- --------
Average common shares outstanding........................ 102,810 102,562 101,116
---------- ---------- --------
---------- ---------- --------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
52
THE PROMUS COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NOTES 5, 14 AND 15)
(IN THOUSANDS)
DEFERRED
COMMON STOCK COMPENSATION
--------------------- RELATED TO
SHARES CAPITAL RETAINED RESTRICTED
OUTSTANDING AMOUNT SURPLUS EARNINGS STOCK TOTAL
----------- ------- -------- -------- ------------ --------
BALANCE-JANUARY 3, 1992.............. 101,368 $10,137 $314,094 $ 48,365 $ (7,101) $365,495
Net income......................... 52,492 52,492
Net shares issued under incentive
compensation plans, including
income tax benefit of $3,726..... 514 51 7,513 2,379 9,943
----------- ------- -------- -------- ------------ --------
BALANCE-DECEMBER 31, 1992............ 101,882 10,188 321,607 100,857 (4,722) 427,930
Net income......................... 86,346 86,346
Pro-rata share of proceeds from
equity investee's initial public
offering, less tax provision of
$2,662........................... 3,752 3,752
Net shares issued under incentive
compensation plans, including
income tax benefit of $10,467.... 376 38 18,838 (867) 18,009
----------- ------- -------- -------- ------------ --------
BALANCE-DECEMBER 31, 1993............ 102,258 10,226 344,197 187,203 (5,589) 536,037
Net income......................... 78,371 78,371
Net shares issued under incentive
compensation plans, including
income tax benefit of $3,252..... 145 14 5,999 3,016 9,029
----------- ------- -------- -------- ------------ --------
BALANCE-DECEMBER 31, 1994............ 102,403 $10,240 $350,196 $265,574 $ (2,573) $623,437
----------- ------- -------- -------- ------------ --------
----------- ------- -------- -------- ------------ --------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
53
THE PROMUS COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 11)
(IN THOUSANDS)
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
--------- --------- ---------
Cash flows from operating activities
Net income............................................. $ 78,371 $ 86,346 $ 52,492
Adjustments to reconcile net income to cash flows from
operating activities
Earnings from discontinued hotel operations........ (36,319) (16,926) (1,841)
Extraordinary items, before income taxes........... - 8,862 (1,827)
Cumulative effect of change in accounting policy,
before income taxes.............................. 12,249 - -
Depreciation and amortization...................... 86,644 70,207 63,826
Provision for settlement of litigation and related
costs............................................ 49,158 - -
Other noncash items................................ 10,348 23,945 24,613
Minority interests share of net income............. 13,908 4,754 -
Equity in and distributions of (earnings) losses of
nonconsolidated affiliates....................... 12,398 (37) 167
Net (gains) losses from property transactions...... 570 196 (3,407)
Net change in long-term accounts................... (4,447) 595 (16,339)
Net change in working capital accounts............. 30,883 28,718 4,324
Tax indemnification payments to Bass............... (26,466) (8,459) (13,238)
--------- --------- ---------
Cash flows provided by operating activities.... 227,297 198,201 108,770
--------- --------- ---------
Cash flows from investing activities
Land, buildings, riverboats and equipment additions.... (219,139) (219,042) (92,811)
(Decrease) increase in construction payables........... (15,466) 26,345 -
Proceeds from sales of equity investments.............. - - 3,733
Proceeds from property transactions.................... 4,192 8,248 3,488
Investments in and advances to nonconsolidated
affiliates........................................... (82,705) (15,463) (9,050)
Other.................................................. (18,291) (25,909) (4,661)
--------- --------- ---------
Cash flows used in investing activities........ (331,409) (225,821) (99,301)
--------- --------- ---------
Cash flows from financing activities
Net borrowings under Revolving Credit Facility, net of
issue costs of $11,547 in 1993....................... 118,550 158,453 -
Debt retirements....................................... (40,320) (366,134) (190,573)
Minority interests contributions, net of
distributions........................................ (8,434) 4,548 2,908
Proceeds from issuance of senior subordinated notes,
net of issue costs of $3,819 and $5,687.............. - 196,181 194,313
Premiums paid on early extinguishment of debt.......... - - (4,426)
--------- --------- ---------
Cash flows provided by (used in) financing
activities................................... 69,796 (6,952) 2,222
--------- --------- ---------
Cash flows provided by (used in) discontinued hotel
operations............................................. 60,975 51,367 (2,626)
--------- --------- ---------
Net increase in cash and cash equivalents................ 26,659 16,795 9,065
Cash and cash equivalents, beginning of period........... 58,309 41,514 32,449
--------- --------- ---------
Cash and cash equivalents, end of period................. $ 84,968 $ 58,309 $ 41,514
--------- --------- ---------
--------- --------- ---------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
54
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 1--BASIS OF PRESENTATION AND ORGANIZATION
The Promus Companies Incorporated (Promus), a Delaware corporation, is a
hospitality company with two primary business segments: casino entertainment and
hotels. On January 30, 1995, Promus announced a planned spin-off, expected to be
completed by the end of second quarter 1995, that will split the Company into
two independent public corporations, one for conducting its casino entertainment
business and one for conducting its hotel business. Promus, which is expected to
be renamed Harrah's Entertainment, Inc., will retain ownership of the casino
entertainment business. Promus' hotel operations, which include the Embassy
Suites, Hampton Inn and Homewood Suites hotel brands, will be transferred to a
new entity, expected to be named Promus Hotel Corporation (PHC), the stock of
which is to be distributed to Promus' stockholders on a one-for-two basis (the
PHC Spin-off). As a result of this announcement, Promus' historical financial
statements have been restated to reflect the hotel business as discontinued
operations (see Note 2). The PHC Spin-off is subject to a number of conditions,
including regulatory, bondholder, bank lender and other third party approvals,
receipt of an opinion from outside legal counsel regarding the tax-free status
of the transaction, market conditions, final approval of the Board of Directors
and stockholder approval.
Promus owns and operates 15 casino entertainment facilities in eight states
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; Tunica and Vicksburg, Mississippi; and North
Kansas City, Missouri. In addition, Harrah's has an ownership interest in and
manages two limited stakes casinos in Black Hawk and Central City, Colorado, and
manages a casino on Indian lands near Phoenix, Arizona.
NOTE 2--DISCONTINUED OPERATIONS
As discussed in Note 1, on January 30, 1995, Promus announced a planned
spin-off of its hotel operations. Accordingly, the financial position, results
of operations and cash flows of Promus' hotel business have been reported as
discontinued operations for all periods presented in the consolidated financial
statements. Summarized financial information of the discontinued operations is
presented in the following tables:
Net assets of discontinued hotel operations:
DECEMBER 31,
----------------------
1994 1993
--------- ---------
Current assets...................................... $ 25,565 $ 24,259
Current liabilities................................. (34,461) (37,941)
--------- ---------
Net current liabilities........................... (8,896) (13,682)
Land, buildings and equipment, net.................. 322,140 336,701
Other assets........................................ 72,860 85,266
Long-term debt, including allocated debt (Note 8)... (189,943) (174,645)
Other liabilities and deferred taxes................ (53,153) (53,118)
--------- ---------
Net assets of discontinued hotel operations....... $ 143,008 $ 180,522
--------- ---------
--------- ---------
55
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 2--DISCONTINUED OPERATIONS (CONTINUED)
Earnings from discontinued hotel operations:
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
--------- --------- ---------
Revenues................................. $ 242,724 $ 231,210 $ 218,681
Costs and expenses....................... (148,470) (163,758) (174,852)
--------- --------- ---------
Operating income......................... 94,254 67,452 43,829
Interest expense......................... (31,148) (33,482) (40,711)
Other expense............................ 11 (3,175) 124
--------- --------- ---------
Income before income taxes............... 63,117 30,795 3,242
Provision for income taxes............... (26,798) (13,869) (1,401)
--------- --------- ---------
Earnings from discontinued hotel
operations............................... $ 36,319 $ 16,926 $ 1,841
--------- --------- ---------
--------- --------- ---------
In connection with its hotel business, Promus manages certain hotels for
others under agreements that provide for payments/loans to the hotel owners if
stipulated levels of financial performance are not maintained. In addition,
Promus is liable under certain lease agreements where it has assigned the direct
obligation to third party interests. Promus believes the likelihood is remote
that material payments will be required under these agreements. Promus'
estimated maximum exposure under such agreements is currently less than $38
million over the next 30 years. It is expected that PHC will assume these
commitments upon consummation of the PHC Spin-off, at which time Promus will be
released from any obligation.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Promus and its
subsidiaries after elimination of all significant intercompany accounts and
transactions. Investments in 50% or less owned companies and joint ventures over
which Promus has the ability to exercise significant influence are accounted for
using the equity method. Promus reflects its share of income before interest
expense of these nonconsolidated affiliates in revenues. Promus' proportionate
share of interest expense of such nonconsolidated affiliates is included in
interest expense (see Note 15).
Fiscal Year
As of the beginning of 1992, Promus changed from a fiscal year to a calendar
year for financial reporting purposes. The impact of this change on Promus'
financial statements was immaterial. For years prior to fiscal 1992, Promus'
fiscal year ended on the Friday nearest to December 31. Fiscal year 1992 began
on January 4, 1992.
Cash Equivalents
Cash equivalents are highly liquid investments with a maturity of less than
three months and are stated at the lower of cost or market value.
56
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Supplies
Supplies inventories, which consist primarily of food, beverage and
operating supplies, are stated at average cost.
Land, Buildings, Riverboats and Equipment
Land, buildings, riverboats and equipment are stated at cost. Land includes
land held for future development or disposition which totaled $45.9 million and
$30.4 million at December 31, 1994 and 1993, respectively. Improvements and
extraordinary repairs that extend the life of the asset are capitalized.
Maintenance and repairs are expensed as incurred. Interest expense is
capitalized on internally constructed assets at Promus' overall weighted average
borrowing rate of interest. Capitalized interest amounted to $3.8 million, $3.1
million and $2.3 million in 1994, 1993 and 1992, respectively.
Depreciation of buildings, riverboats and equipment is calculated using the
straight-line method over the estimated useful life of the assets or over the
related lease term, as follows:
Buildings and improvements................................. 16 to 40 years
Riverboats................................................. 30 years
Furniture, fixtures and equipment.......................... 2 to 15 years
Treasury Stock
Shares of Promus' common stock held in treasury are reflected in the
Consolidated Balance Sheets and Consolidated Statements of Stockholders' Equity
as if they were retired.
Revenue Recognition
Casino revenues consist of net gaming wins. Food and beverage and rooms
revenues include the aggregate amounts generated by those departments at all
company-owned casinos and casino hotels.
Casino promotional allowances consist principally of the retail value of
complimentary food and beverages, accommodations and entertainment provided to
casino patrons. The estimated costs of providing such complimentary services,
classified as casino expenses through interdepartmental allocations, were as
follows:
1994 1993 1992
------- ------- -------
Food and beverage............................. $63,414 $52,057 $51,235
Rooms......................................... 13,875 13,140 12,658
Other......................................... 2,634 1,541 1,657
------- ------- -------
$79,923 $66,738 $65,550
------- ------- -------
------- ------- -------
Amortization
The excess of costs over net assets of businesses acquired and other
intangibles are amortized on a straight-line basis over periods up to 40 years.
Deferred financing charges are amortized using the interest method based on the
terms of the related debt agreements.
57
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Preopening Costs
Preopening costs, representing primarily direct salaries and other operating
costs incurred prior to the opening of new facilities, are deferred as incurred
and expensed upon the opening of the related facility (see Note 4).
Earnings Per Share
Earnings per share is computed by dividing Net income by the number of
weighted average common shares outstanding during the year, including common
stock equivalents and adjusted for stock splits (see Note 5).
Reclassifications
Certain amounts for prior fiscal years have been reclassified to conform
with the presentation for fiscal year 1994.
NOTE 4--CHANGE IN ACCOUNTING POLICY
Effective January 1, 1994, Promus changed its accounting policy relating to
preopening costs incurred during development of new casino entertainment and
hotel projects. Promus' new policy is to defer preopening costs as incurred
prior to opening and to expense them upon opening of each project. Previously,
Promus had capitalized such costs and amortized them to expense over 36 months
from the date of opening. As a result of this change, operating results for the
year ended December 31, 1994, reflect the cumulative charge against earnings,
net of income taxes, of $7.9 million, or $0.08 per share, to write off the
unamortized preopening costs related to projects opened in prior years.
Operating results for 1994 also include preopening costs charged to expense of
$15.3 million, primarily related to projects opened during 1994.
NOTE 5--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, previously reported amounts for prior
years in the Consolidated Balance Sheets and Consolidated Statements of
Stockholders' Equity have been restated to reclassify amounts from common stock
to capital surplus 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. This October 1993 split followed a
two-for-one stock split, also effected as a stock dividend, approved by Promus'
Board on February 26, 1993, and distributed on March 29, 1993. The par value of
the additional shares issued as a result of these splits was capitalized into
common stock on the balance sheet by means of a transfer from capital surplus.
All references in these financial statements to numbers of common shares and
earnings per share have been restated to give retroactive effect to both stock
splits.
58
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 5--STOCKHOLDERS' EQUITY (CONTINUED)
In addition to its common stock, Promus has the following classes of stock
authorized but unissued:
Preferred stock, $100 par value, 150,000 shares authorized
Special stock, 5,000,000 shares authorized--
Series B, $1.125 par value
Under the terms of employee compensation programs previously approved by the
stockholders, Promus has reserved shares of its common stock for issuance under
the Restricted Stock and Stock Option Plans. (See Note 14 for a description of
the plans.) The following table summarizes the total number of shares authorized
for issuance under each of these plans and the remaining unissued shares as of
December 31, 1994:
RESTRICTED STOCK
STOCK PLAN OPTION PLAN
---------- -----------
Total shares authorized for issuance under the
plans............................................ 4,800,000 5,850,000
Shares issued and options granted.................. (4,300,307) (3,358,035)
---------- -----------
Shares held in reserve for issuance or grant under
the plans as of December 31, 1994................ 499,693 2,491,965
---------- -----------
---------- -----------
Promus' Board of Directors has authorized that one-third of a special right
be attached to each outstanding share of common stock. These rights entitle the
holders to purchase, under certain conditions, units consisting of fractional
shares of special stock--series B at a purchase price of $125 per unit, subject
to adjustment. The rights also, under certain conditions, entitle the holders to
purchase $250 worth of common stock for $125. These rights expire on October 5,
1996, unless Promus decides to redeem them earlier at $0.05 per right or upon
the occurrence of certain other events.
59
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 6--DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Deferred costs and other consisted of the following:
1994 1993
--------- ---------
Excess of cost over net assets of businesses
acquired.......................................... $ 48,880 $ 50,719
Cash surrender value of life insurance (Note 14).... 44,243 40,258
Deferred finance charges............................ 12,265 15,065
Receivables due after one year, net of allowance for
doubtful accounts of $75 in 1994.................. 3,941 19,966
Preopening costs (Note 4)........................... - 22,825
Other............................................... 67,020 25,378
--------- ---------
$ 176,349 $ 174,211
--------- ---------
--------- ---------
Accrued expenses consisted of the following:
1994 1993
--------- ---------
Insurance claims and reserves....................... $ 49,448 $ 39,859
Payroll and other compensation...................... 41,937 31,573
Accrued interest payable............................ 12,884 13,388
Deposits and customer funds......................... 12,815 12,315
Taxes, including income taxes....................... (4,419) 30,946
Other accruals...................................... 43,781 17,562
--------- ---------
$ 156,446 $ 145,643
--------- ---------
--------- ---------
As of December 31, 1993, Receivables due after one year and Taxes, including
income taxes, included $16.4 million and $29.1 million, respectively, for
estimated amounts receivable from and payable to Bass PLC (Bass) as of that date
pursuant to terms of the Tax Sharing Agreement (see Note 12). At December 31,
1994, pursuant to the terms of the Settlement with Bass, all amounts receivable
from or payable to Bass have been reclassified in the Consolidated Balance Sheet
to Accrued litigation settlement and related costs (see Note 13).
60
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 7--EXTRAORDINARY ITEMS
The components of the net extraordinary items for fiscal 1993 and 1992 were
as follows:
1993 1992
--------- ---------
Losses on early extinguishments of debt............. $ (8,862) $ (5,558)
Income tax benefit.................................. 3,415 2,112
--------- ---------
(5,447) (3,446)
--------- ---------
Extraordinary items related to discontinued hotel
operations
Gain on forgiveness of joint venture debt......... - 4,353
Gain due to discounting of debt at
extinguishment.................................. - 3,032
--------- ---------
- 7,385
Income tax provision.............................. - (2,865)
--------- ---------
- 4,520
--------- ---------
Extraordinary items, net of income taxes............ $ (5,447) $ 1,074
--------- ---------
--------- ---------
There were no extraordinary items reported in fiscal 1994.
NOTE 8--LONG-TERM DEBT
Long-term debt consisted of the following:
1994 1993
--------- ---------
Secured Bank Facilities
Revolving Credit Facility, 4.7%-8.5% at
December 31, 1994, maturity 1998................ $ 288,550 $ 170,000
9% Notes, backed by letter of credit, maturity
1995............................................ 199,977 199,790
Unsecured Senior Subordinated Notes
8 3/4%, maturity 2000............................. 200,000 200,000
10 7/8%, maturity 2002............................ 200,000 200,000
Unsecured Notes Payable
8 3/8%-15%, maturities to 2001.................... 27,862 68,148
Debt allocated to discontinued hotel operations..... (187,860) (171,777)
--------- ---------
728,529 666,161
Current portion of long-term debt................... (1,036) (1,002)
--------- ---------
$ 727,493 $ 665,159
--------- ---------
--------- ---------
Promus is negotiating a new $350 million bank facility (Hotel Facility), to
be secured by the stock of PHC and its material subsidiaries. Prior to the PHC
Spin-off, it is expected that approximately $210 million will be drawn on the
Hotel Facility and used to retire a portion of Promus' existing outstanding
debt. The Hotel Facility will be assumed by PHC, and Promus will be released
from liability, upon consummation of the PHC Spin-off. Promus' outstanding
corporate debt is not specifically related to either its casino entertainment or
hotel business. Therefore, in anticipation of these transactions, a pro-rata
portion of Promus' historical outstanding debt balance, unamortized deferred
finance charges and interest expense has been allocated to the discontinued
hotel operations for all periods presented. The
61
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 8--LONG-TERM DEBT (CONTINUED)
amounts allocated are based on the percentage of Promus' existing debt expected
to be retired using proceeds from the Hotel Facility and, together with debt
specifically related to PHC of $3.3 million and $4.0 million at December 31,
1994 and 1993, respectively, are included in net assets of discontinued hotel
operations.
As of December 31, 1994, annual principal requirements, net of the debt
allocated to the discontinued hotel operations, for the four years subsequent to
1995 were: 1996, $1.6 million; 1997, $1.6 million; 1998, $302.7 million; and
1999, $19.4 million. Promus funded the scheduled retirement of the 9% Notes
which matured on February 15, 1995 using funds drawn under the long-term
revolving credit facility. Therefore, these Notes are considered to be retired
in 1998 for purposes of this disclosure.
Revolving Credit Facility
Promus' secured bank facility consists of a $650 million reducing revolving
and letter of credit facility (the Facility). Reductions of the borrowing
capacity available under the Facility are as follows: $50 million, July 1996;
$75 million, January 1997; $75 million, July 1997; and $450 million, July 1998.
Of the $650 million available under the Facility, there is a sub-limit of $255
million for letters of credit. The Facility originally provided for borrowings
at a base rate of either the Eurodollar rate plus 1 1/2% or prime rate plus
1/2%. As a result of achieving certain defined financial objectives contained in
the Facility agreement, the interest rate on the Facility was reduced during
1994 to the Eurodollar rate plus 7/8% as of December 31, 1994. The annual fees
on letters of credit and commitment fees on the unutilized portion under the
Facility, at December 31, 1994, were 1 1/8% and 3/8%, respectively.
The Facility is secured by the assets of Promus' Nevada and New Jersey
casino properties, the stock of its principal subsidiary, Embassy Suites, Inc.
(Embassy), and certain other subsidiaries and certain other casino entertainment
segment trademarks. The Facility agreement contains financial covenants
requiring Promus to maintain a specific tangible net worth and to meet other
financial ratios. Its covenants limit Promus' ability to pay dividends and to
repurchase its outstanding shares. Approval from the banks providing the
Facility will be required prior to consummation of the PHC Spin-off. In
connection with the PHC Spin-off, Promus is negotiating amendments to the
Facility which are expected to include, among other things, a reduction in the
aggregate principal amount available under the Facility and modifications to
certain financial covenants.
As of December 31, 1994, Promus' borrowings under the Facility, including
amounts allocated to the discontinued hotel operations, were $288.6 million and
an additional $226.4 million was committed to back certain letters of credit,
including a $204.7 million letter of credit backing the 9% Notes. After
consideration of these borrowings, $135.0 million of the Facility was available
to Promus at December 31, 1994.
Senior Subordinated Notes
During 1993, Embassy, a wholly-owned subsidiary of Promus, completed an
offering of $200 million principal amount of 8 3/4% Senior Subordinated Notes
due 2000 (8 3/4% Notes). The 8 3/4% Notes are unsecured and contain covenants
which, among other things, place limitations on Embassy's ability to pay
dividends and make restricted payments, as defined, to Promus (see Note 16), and
limit Embassy's ability to incur additional debt. The 8 3/4% Notes have
essentially the same financial covenants as, and are pari passu in right of
payment to, the 10 7/8% Senior Subordinated Notes due 2002 (10 7/8% Notes)
issued during 1992.
62
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 8--LONG-TERM DEBT (CONTINUED)
Promus has unconditionally guaranteed Embassy's obligations under both the
8 3/4% Notes and the 10 7/8% Notes.
Interest Rate Agreements
To manage the relative mix of its debt between fixed and variable rate
instruments, Promus enters into interest rate swap agreements to modify the
interest characteristics of its outstanding debt without an exchange of the
underlying principal amount. At December 31, 1994 and 1993, Promus was a party
to certain interest rate swap agreements pursuant to which it pays a variable
interest rate in exchange for receiving a fixed interest rate. The average
variable rate paid by Promus was 5.8% and 3.4% at December 31, 1994 and 1993,
respectively, and the average fixed interest rate received was 5.9% at both
dates. The impact of these interest rate swap agreements on the effective
interest rates of the associated debt was as follows:
EFFECTIVE
RATE AT NEXT SEMI-
CONVERTED DECEMBER 31, ANNUAL RATE
RATE ------------- ADJUSTMENT
ASSOCIATED DEBT (LIBOR+) 1994 1993 DATE SWAP MATURITY
- ----------------------------------- --------- ----- ---- ----------- -------------
10 7/8% Notes
$200 million..................... 4.73% 10.68% 8.14% April 15 October 1997
8 3/4% Notes
$50 million...................... 3.42% 9.58% 6.93% May 15 May 1998
$50 million...................... 3.22% 8.71% 6.76% January 15 July 1998
In accordance with the terms of the interest rate swap agreements, the
effective interest rate on $50 million of the 8 3/4% Notes was adjusted on
January 15, 1995 to 10.01%.
Promus also maintains interest rate protection, in the form of a rate collar
transaction entered into in June 1990, on $140 million of its variable rate bank
debt. The interest rate protection expires in June 1995 and at December 31,
1994, held Promus' interest rate in a range between 8.7% and 11.9%.
On January 24, 1995, Promus entered into additional interest rate swap
agreements to effectively convert $200 million in variable rate debt to a fixed
rate in expectation of using borrowings under the variable rate bank facility to
fund the scheduled retirement of the $200 million 9% Notes. On March 16, 1995,
Promus entered into two additional interest rate swap agreements to effectively
convert an additional $100 million in variable rate debt to a fixed rate.
Pursuant to the terms of these
63
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 8--LONG-TERM DEBT (CONTINUED)
swaps, Promus will receive variable payments tied to LIBOR in exchange for
Promus' payments at a fixed interest rate. The fixed rates to be paid by Promus
are summarized in the following table:
EFFECTIVE RATE
SWAP RATE ON ASSOCIATED
PAID DEBT SWAP
ASSOCIATED DEBT (FIXED) AT INCEPTION MATURITY
- ------------------------------------- --------- -------------- -------------
Revolving Credit Facility (Eurodollar
plus 7/8%)
$50 million....................... 7.915% 8.790% January 1998
$50 million....................... 7.914% 8.789% January 1998
$50 million....................... 7.910% 8.785% January 1998
$50 million....................... 7.863% 8.738% July 1997
$50 million....................... 6.990% 7.865% March 2000
$50 million....................... 6.985% 7.860% March 2000
The differences to be paid or received under the terms of the interest rate
swap agreements and the rate collar transaction described above are accrued as
an adjustment to interest expense for the related debt. Changes in the effective
interest rates to be paid by Promus pursuant to the terms of its interest rate
agreements will have a corresponding effect on its future cash flows. These
agreements contain a credit risk that the counterparties may be unable to meet
the terms of the agreements. Promus minimizes that risk by evaluating the
creditworthiness of its counterparties, which are limited to major banks and
financial institutions, and does not anticipate nonperformance by the
counterparties.
As a component of a transaction whereby Promus effectively secured an option
to a site for a potential casino, Promus has guaranteed a third party's $25
million variable rate bank loan. Promus also has entered into an interest rate
swap agreement in which Promus receives a fixed interest rate of 7% from the
third party and pays the variable interest rate of the subject debt (LIBOR plus
1.75%). The negative value of the swap, which is marked to market by Promus and
included in interest expense, was approximately $1.1 million at December 31,
1994. Promus' guarantee and the swap agreement expire December 1, 1996 and are
also subject to earlier termination upon the occurrence of certain events. As
with the other interest rate swap agreements entered into by Promus, this
agreement contains an element of risk that the counterparty may be unable to
meet the terms of the agreement. Promus has minimized such exposure by obtaining
a security interest in certain assets of the third party.
Shelf Registration
Embassy has an effective shelf registration with the Securities and Exchange
Commission for up to $200 million of new debt securities. The terms and
conditions of these debt securities, which will be unconditionally guaranteed by
Promus, will be determined by market conditions at the time of issuance. The
shelf registration expires in August 1995.
Fair Market Value
Based on the borrowing rates currently available for debt with similar terms
and maturities and market quotes of its publicly traded debt, the fair value of
Promus' long-term debt, including the
64
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 8--LONG-TERM DEBT (CONTINUED)
interest rate agreements and excluding debt allocated to the discontinued hotel
operations, at December 31, 1994 and 1993 was as follows:
DECEMBER 31,
------------------------------------------
1994 1993
------------------- -------------------
CARRYING MARKET CARRYING MARKET
(IN MILLIONS) VALUE VALUE VALUE VALUE
-------- ------- -------- -------
Outstanding debt....................................... $ (728.5) $(723.0) $ (666.1) $(701.6)
Interest rate agreements (used for hedging purposes)
Interest rate swaps.................................. - (17.9) 1.7 9.8
Interest rate collar................................. (0.3) (0.8) (0.4) (7.8)
The amounts reflected as the "carrying value" of the interest rate
agreements represent the accrual balance as of the date reported. The "market
value" of the interest rate agreements represent the estimated amount,
considering the prevailing interest rates, that Promus would receive (or pay) to
terminate the agreement as of the date reported. The above table excludes the
interest rate swap agreements entered into subsequent to year-end.
NOTE 9--LEASES
Promus leases both real estate and equipment used in its operations through
operating and capital leases. Leases which transfer substantially all benefit
and risk incidental to the ownership of property are capitalized. In addition to
minimum rentals, many leases provide for contingent rents based on percentages
of revenue. Real estate operating leases range from five to 10 years with
various automatic extensions totaling up to 30 years. The average remaining term
for other operating leases, which generally contain renewal options, extends
approximately five years. The costs of leased assets are amortized over periods
not in excess of the lease terms.
Rental expense associated with operating leases included in the Consolidated
Statements of Income was as follows:
1994 1993 1992
------- ------- -------
Noncancelable
Minimum..................................... $ 9,919 $ 9,052 $ 8,504
Contingent.................................. - 122 -
Sublease.................................... (11) (4) (26)
Other......................................... 2,195 5,297 2,677
------- ------- -------
$12,103 $14,467 $11,155
------- ------- -------
------- ------- -------
65
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 9--LEASES (CONTINUED)
The future minimum rental commitments as of December 31, 1994, were as
follows:
NONCANCELABLE
OPERATING
LEASES
-------------
1995.......................................................... $ 12,397
1996.......................................................... 9,223
1997.......................................................... 6,729
1998.......................................................... 5,550
1999.......................................................... 5,220
Thereafter.................................................... 62,132
-------------
Total minimum lease payments.................................. $ 101,251
-------------
-------------
Minimum rental commitments exclude contingent rentals, which may be paid
under certain leases based on a percentage of revenues in excess of specified
amounts.
NOTE 10--INCOME TAXES
Promus' federal and state income tax provision (benefit) allocable to
identified income statement and balance sheet line items was as follows:
1994 1993 1992
------- -------- -------
Income before income taxes and minority
interest.................................... $75,391 $ 59,394 $35,479
Discontinued operations....................... 26,798 13,869 1,401
Extraordinary items........................... - (3,415) 753
Cumulative effect of change in accounting
policy...................................... (4,317) - -
Stockholders' equity
Compensation expense for tax purposes in
excess of amounts recognized for financial
reporting purposes........................ (3,252) (10,467) (3,726)
Pro-rata share of proceeds from equity
investee's initial public offering........ - 2,662 -
------- -------- -------
$94,620 $ 62,043 $33,907
------- -------- -------
------- -------- -------
Income tax expense attributable to Income before income taxes and minority
interest consisted of the following:
1994 1993 1992
-------- ------- -------
Current
Federal.................................... $103,264 $44,557 $25,224
State...................................... 4,992 4,424 5,361
Deferred..................................... (32,865) 10,413 4,894
-------- ------- -------
$ 75,391 $59,394 $35,479
-------- ------- -------
-------- ------- -------
66
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 10--INCOME TAXES (CONTINUED)
The differences between the statutory federal income tax rate and the
effective tax rate expressed as a percentage of Income before income taxes and
minority interest were as follows:
1994 1993 1992
---- ---- ----
Statutory tax rate................................. 35.0% 35.0% 34.0%
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit.......... 3.2 2.4 7.3
Provision for settlement of litigation and
related costs (Note 13)........................ 13.3 0.1 0.4
Minority interest in partnership earnings........ (3.5) (1.2) -
Adjustment of valuation of deferred tax assets
and liabilities due to change in tax rate...... - 0.7 -
Targeted jobs tax credit......................... (1.0) (0.6) (0.5)
Goodwill amortization............................ 0.5 0.4 0.7
Other............................................ 6.6 5.9 (0.2)
---- ---- ----
54.1% 42.7% 41.7%
---- ---- ----
---- ---- ----
The components of Promus' net deferred tax balance included in the
Consolidated Balance Sheets were as follows:
1994 1993
-------- --------
Deferred tax assets
Compensation........................................ $ 19,478 $ 17,874
Self-insurance reserves............................. 10,346 9,456
Preopening expenses................................. 6,515 -
Investments in nonconsolidated affiliates........... 4,967 -
Bad debt reserve.................................... 4,051 3,280
Deferred income..................................... 908 113
Tax credits......................................... - 618
Other............................................... 3,967 3,264
-------- --------
50,232 34,605
-------- --------
Deferred tax liabilities
Property............................................ (38,391) (50,372)
Investments in nonconsolidated affiliates........... - (1,571)
Other............................................... - (3,686)
-------- --------
(38,391) (55,629)
-------- --------
Net deferred tax asset (liability)................ $ 11,841 $(21,024)
-------- --------
-------- --------
67
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 11--SUPPLEMENTAL CASH FLOW INFORMATION
The increase (decrease) in cash and cash equivalents due to the changes in
long-term and working capital accounts was as follows:
1994 1993 1992
-------- ------- --------
Long-term accounts
Deferred costs and other assets............ $ 1,413 $(2,534) $ (6,580)
Deferred credits and other long-term
liabilities.............................. (5,860) 3,129 (9,759)
-------- ------- --------
Net change in long-term accounts......... $ (4,447) $ 595 $(16,339)
-------- ------- --------
-------- ------- --------
Working capital accounts
Receivables................................ $(15,256) $(5,185) $ (9,396)
Supplies................................... 369 (1,319) (454)
Prepayments................................ (1,868) (885) 6,017
Other current assets....................... (798) (7,545) (8,312)
Accounts payable........................... 22,552 7,988 (2,419)
Accrued expenses........................... 25,884 35,664 18,888
-------- ------- --------
Net change in working capital accounts... $ 30,883 $28,718 $ 4,324
-------- ------- --------
-------- ------- --------
Supplemental Disclosure of Cash Paid for Interest and Taxes
The following table reconciles Promus' Interest expense, net of interest
capitalized, per the Consolidated Statements of Income, to cash paid for
interest:
1994 1993 1992
------- -------- -------
Interest expense, net of amount capitalized
(Note 3).................................... $78,322 $ 73,080 $77,571
Adjustments to reconcile to cash paid for
interest:
Promus' share of interest expense of
nonconsolidated affiliates (Note 15)...... (1,959) - -
Net change in accruals...................... (4,923) (10,708) (5,264)
Amortization of deferred finance charges.... (2,844) (3,261) (4,661)
Net amortization of discounts and
premiums.................................. (176) (172) (194)
------- -------- -------
Cash paid for interest, net of amount
capitalized................................. $68,420 $ 58,939 $67,452
------- -------- -------
------- -------- -------
Cash payments, net of refunds, for income taxes, including amounts paid on
behalf of the discontinued hotel operations, amounted to $116,093, $49,771 and
$28,038 for 1994, 1993 and 1992, respectively (see Note 10).
NOTE 12--COMMITMENTS AND CONTINGENCIES
Contractual Commitments
Promus is pursuing many casino development opportunities that may require,
individually and in the aggregate, significant commitments of capital, up-front
payments to third parties, guarantees by Promus of third party debt and
development completion guarantees. As of December 31, 1994, Promus
68
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 12--COMMITMENTS AND CONTINGENCIES (CONTINUED)
has guaranteed third party loans and leases of $57 million, which are secured by
certain assets, and has other contractual commitments of $64 million, excluding
amounts previously recorded.
See Note 15 for discussion of the completion guarantee provided to Harrah's
Jazz Company by Promus related to development of the New Orleans' casino.
Guarantee of Insurance Contract
Promus has guaranteed the value of a guaranteed investment contract with an
insurance company held by Promus' defined contribution savings plan. Promus has
also agreed to provide non-interest-bearing loans to the plan to fund, on an
interim basis, withdrawals from this contract by retired or terminated
employees. Promus' maximum exposure on this guarantee as of December 31, 1994,
is $8.0 million.
Self-Insurance
Promus is self-insured for various levels of general liability, workers'
compensation and employee medical coverage. Insurance claims and reserves
include accruals of estimated settlements for known claims, as well as accruals
of actuarial estimates of incurred but not reported claims.
Severance Agreements
Promus has severance agreements with 11 of its senior executives, which
provide for payments to the executives in the event of their termination after a
change in control, as defined, of Promus. These agreements provide, among other
things, for a compensation payment equal to 2.99 times the average annual
compensation paid to the executive for the five preceding calendar years, as
well as for accelerated payment or accelerated vesting of any compensation or
awards payable to the executive under any of Promus' incentive plans. The
estimated amount, computed as of December 31, 1994, that would have been payable
under the agreements to these executives based on earnings and stock options
aggregated approximately $27.7 million.
Tax Sharing Agreements
Under the terms of the Settlement between Promus and Bass PLC (Bass) (see
Note 13), the Tax Sharing Agreement entered into in connection with the February
7, 1990, spin-off (the 1990 Spin-off) of the stock of Promus to stockholders of
Holiday Corporation will be terminated. Under the Tax Sharing Agreement, Promus
was liable, with certain exceptions, for taxes of Holiday and its subsidiaries
for all pre-1990 Spin-off tax periods. Bass was obligated under the same
agreement to pay Promus the amount of any tax benefits realized by Holiday as a
result of adjustments to pre-1990 Spin-off tax periods of Holiday and its
subsidiaries. Under the provisions of the Settlement, Promus will remain
obligated for certain tax issues related to Promus and its subsidiaries for the
pre-1990 Spin-off tax periods and certain other items related to the final
resolution of disputed issues from the Internal Revenue Service (IRS)
examination of income tax returns for 1987 through the 1990 Spin-off date. A
protest defending the taxpayers' position on all disputed issues for these
periods was filed with the IRS during third quarter 1993 and negotiations to
resolve these issues continue. Final resolution of the disputed issues is not
expected to have a material adverse effect on Promus' consolidated financial
position or its results of operations.
69
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 13--LITIGATION
In March 1995, Promus entered into a settlement agreement (the Settlement)
with Bass of all claims related to the Merger Agreement and Tax Sharing
Agreement arising from the 1990 Spin-off of Promus and acquisition of the
Holiday Inn hotel business by Bass. As a result of the Settlement, which is
subject to approval of the court, a charge of $49.2 million was recorded in 1994
to accrue the estimated cost of the Settlement, the related legal fees and other
associated expenses. In addition to these costs, legal fees and other expenses
incurred related to Promus' defense of this litigation are included in the
Provision for settlement of litigation and related costs in the Consolidated
Statements of Income for all periods presented. Such costs amounted to $4.3
million, $0.4 million and $1.8 million in 1994, 1993 and 1992, respectively.
Payments for the Settlement are not expected to be deductible for federal income
tax purposes (see Note 10).
Promus is involved in various inquiries, administrative proceedings and
litigation relating to contracts, sales of property and other matters arising in
the normal course of business. While any proceeding or litigation has an element
of uncertainty, management believes that the final outcome of these matters will
not have a material adverse effect upon Promus' consolidated financial
position or its results of operations.
NOTE 14--EMPLOYEE BENEFIT PLANS
Savings and Retirement Plan
Promus maintains a defined contribution savings and retirement plan, which,
among other things, allows pre-tax and after-tax contributions to be made by
employees to the plan. Under the plan, participating employees may elect to
contribute up to 16 percent of their eligible earnings, the first six percent of
which Promus will match fully. Amounts contributed to the plan are invested, at
the participant's option, in a Promus company stock fund, a diversified stock
fund, an aggressive stock fund, a long-term bond fund, an income fund and a
treasury fund. Participants become vested in Promus' matching contribution over
seven years of credited service. Promus' contribution expense for this plan was
$11.4 million, $10.2 million and $8.9 million in 1994, 1993 and 1992,
respectively.
Employee Stock Ownership Plan
Promus has an employee stock ownership plan, which is a noncontributory
stock bonus plan covering employees of Promus and its affiliates. Promus'
contributions to the plan are discretionary and are made only if approved by the
Human Resources Committee of Promus' Board of Directors. Contributions of $0.5
million, $0.7 million and $0.8 million were approved for the plan years 1994,
1993 and 1992, respectively.
Restricted Stock and Stock Option Plans
As a component of Promus' retention and long-term compensation packages, key
employees may be granted shares of common stock under the Promus Restricted
Stock Plan (RSP) and/or options to purchase shares of Promus common stock under
the Promus Stock Option Plan (SOP). Shares granted under the RSP are restricted
as to transfer and subject to forfeiture during a specified period or periods
prior to vesting. The shares generally vest over staggered periods ranging from
two to four years. No awards of RSP shares may be made under the current plan
after November 1999. The deferred compensation related to the RSP shares is
generally amortized to expense over the vesting period. This expense totaled
$4.4 million, $4.8 million and $4.3 million in 1994, 1993 and 1992,
respectively.
70
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 14--EMPLOYEE BENEFIT PLANS (CONTINUED)
Promus' SOP allows an option holder to purchase Promus common stock over
specified periods of time, generally ten years, at a fixed price equal to the
market value at the date of grant. No options may be granted under the SOP after
November 1999. A summary of stock option transactions during 1994 follows:
NUMBER OF
COMMON SHARES
OPTION PRICE --------------------------
RANGE OPTIONS AVAILABLE
(PER SHARE) OUTSTANDING FOR GRANT
------------- ----------- -----------
Balance-January 1, 1994........... $ 1.19-$47.75 2,137,737 2,750,155
1994 grants....................... $28.44-$50.00 1,141,865 (1,141,865)
Exercised......................... $ 1.19-$15.67 (127,633) -
Canceled.......................... $ 9.00-$50.00 (883,675) 883,675
----------- -----------
Balance-December 31, 1994......... $ 3.94-$50.00 2,268,294 2,491,965
----------- -----------
----------- -----------
Exercisable at December 31, 1994.. $ 3.94-$47.75 435,954
-----------
-----------
Deferred Compensation Plans
Promus maintains deferred compensation plans under which certain employees
and its directors may defer a portion of their compensation. Amounts deposited
into these plans are unsecured liabilities of Promus and earn interest at rates
approved by the Human Resources Committee of the Board of Directors. The total
liability included in Deferred credits and other liabilities for these plans at
December 31, 1994 and 1993 was $35.9 million and $31.0 million, respectively. In
connection with the administration of one of these plans, Promus has purchased
company-owned life insurance policies insuring the lives of certain directors,
officers and key employees.
Multi-Employer Pension Plan
Approximately 2,600 of Promus' employees are covered by union sponsored,
collectively bargained multi-employer pension plans. Promus contributed and
charged to expense $1.9 million, $2.0 million and $1.8 million in 1994, 1993 and
1992, respectively, for such plans. The plans' administrators do not provide
sufficient information to enable Promus to determine its share, if any, of
unfunded vested benefits.
NOTE 15--NONCONSOLIDATED AFFILIATES
Harrah's Jazz Company
A Promus subsidiary owns an approximate 53% equity interest in Harrah's Jazz
Company (Harrah's Jazz), the partnership developing the sole land-based casino
permitted by law to operate in Orleans Parish, Louisiana. One of Promus'
partners in Harrah's Jazz has an option to purchase an additional equity
interest of approximately 14.6% from Promus for $33.3 million at any time until
120 days after opening of the temporary casino. Due to the existence of this
option and its likelihood of being exercised, Promus' ownership of a majority
interest in Harrah's Jazz is expected to be temporary. As a result, Harrah's
Jazz is not consolidated into Promus' financial statements.
Summarized balance sheet and income statement information for Harrah's Jazz,
which Promus accounted for using the equity method, as of December 31, 1994 and
1993, and for the period from
71
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 15--NONCONSOLIDATED AFFILIATES (CONTINUED)
November 29, 1993 (date of inception) through December 31, 1993, and the year
ended December 31, 1994 were as follows:
1994 1993
-------- -------
Summarized Balance Sheet Information
Current assets....................................... $454,295 $ 347
Land, buildings and equipment, net................... 69,608 47,887
Other assets......................................... 141,488 39,539
-------- -------
Total assets....................................... 665,391 87,773
-------- -------
Current liabilities.................................. 23,894 4,358
Long-term debt....................................... 510,000 65,376
-------- -------
Total liabilities.................................. 533,894 69,734
-------- -------
Net assets....................................... $131,497 $18,039
-------- -------
-------- -------
INCEPTION
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
Summarized Statements of Operations
Revenues...................................... $ 291 $ 50
------------ ------------
------------ ------------
Operating loss................................ $ (23,891) $ (6,167)
------------ ------------
------------ ------------
Net loss...................................... $ (29,201) $ (6,302)
------------ ------------
------------ ------------
The estimated cost of the project is $815 million, of which approximately
$251 million had been incurred as of December 31, 1994, and is being financed
through a combination of partner capital contributions, public debt securities,
bank debt and operating cash flow from the temporary casino to be operated by
Harrah's Jazz during construction of the permanent casino. If the funds
available from these sources are insufficient to meet the costs of developing,
constructing and opening the temporary and permanent casinos, Promus has agreed
to loan Harrah's Jazz the funds necessary to complete the project, subject to
certain important conditions and exceptions, in exchange for a $12.2 million fee
to be paid by Harrah's Jazz.
Other
Condensed financial information relating to a foreign casino property
currently under development and a restaurant subsidiary has not been presented
since their operating results and financial position are not material to Promus
either individually or in the aggregate.
72
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 15--NONCONSOLIDATED AFFILIATES (CONTINUED)
Promus' share of nonconsolidated affiliates' net income (losses), including
Harrah's Jazz, is reflected in the accompanying Consolidated Statements of
Income as follows:
1994 1993 1992
-------- ------- -----
Pre-interest operating (loss) income (included in
Revenue-other)............................................ $(10,535) $ 89 $(167)
-------- ------- -----
-------- ------- -----
Interest expense (included in Interest expense)............. $ (1,959) $ - $ -
-------- ------- -----
-------- ------- -----
Promus' investments in and advances to nonconsolidated
affiliates
At Equity:
Harrah's Jazz........................................... $ 74,385 $ 8,154
Other................................................... 18,320 228
At cost................................................... 24,227 23,499
-------- -------
$116,932 $31,881
-------- -------
-------- -------
During 1993, an equity investee of Promus completed an initial public
offering of its common stock. As required by equity accounting rules, Promus
increased the carrying value of its investment by an amount equal to its pro-
rata share of the proceeds of the investee's offering, approximately $6.4
million. A corresponding increase was recorded in the combination of Promus'
capital surplus and deferred income tax liability accounts. As a result of this
offering, Promus' ownership interest fell below 20% and, accordingly, the
investment is no longer accounted for on the equity method.
73
THE PROMUS COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)
NOTE 16--SUMMARIZED FINANCIAL INFORMATION
Embassy is a wholly owned subsidiary and the principal asset of Promus.
Summarized financial information of Embassy as of December 31, 1994 and 1993 and
for each of the three fiscal years ended December 31, 1994, prepared on the same
basis as Promus, was as follows:
1994 1993 1992
---------- ---------- --------
Current assets.......................... $ 171,445 $ 141,494
Land, buildings, riverboats and
equipment, net........................ 1,129,841 1,001,502
Net assets of discontinued hotel
operations............................ 143,008 180,522
Other assets............................ 293,015 205,188
---------- ----------
1,737,309 1,528,706
---------- ----------
Current liabilities..................... 280,295 202,496
Long-term debt.......................... 727,492 665,159
Other liabilities....................... 74,043 98,178
Minority interest....................... 18,267 14,336
---------- ----------
1,100,097 980,169
---------- ----------
Net assets........................ $ 637,212 $ 548,537
---------- ----------
---------- ----------
Revenues................................ $1,337,110 $1,018,776 $890,650
---------- ---------- --------
---------- ---------- --------
Operating income........................ $ 267,742 $ 207,931 $160,056
---------- ---------- --------
---------- ---------- --------
Income from continuing operations....... $ 49,044 $ 74,867 $ 49,577
---------- ---------- --------
---------- ---------- --------
Net income.............................. $ 77,430 $ 85,167 $ 52,184
---------- ---------- --------
---------- ---------- --------
The agreements governing the terms of Promus' debt contain certain covenants
which, among other things, place limitations on Embassy's ability to pay
dividends and make other restricted payments, as defined, to Promus. The amount
of Embassy's restricted net assets, as defined, computed in accordance with the
most restrictive of these covenants regarding restricted payments, was
approximately $628.0 million at December 31, 1994.
74
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
Promus is responsible for preparing the financial statements and related
information appearing in this report. Management believes that the financial
statements present fairly its financial position, its results of operations and
its cash flows in conformity with generally accepted accounting principles. In
preparing its financial statements, Promus is required to include amounts based
on estimates and judgments which it believes are reasonable under the
circumstances.
Promus maintains accounting and other control systems designed to provide
reasonable assurance that financial records are reliable for purposes of
preparing financial statements and that assets are properly accounted for and
safeguarded. Compliance with these systems and controls is reviewed through a
program of audits by an internal auditing staff. Limitations exist in any
internal control system, recognizing that the system's cost should not exceed
the benefits derived.
The Board of Directors pursues its responsibility for Promus' financial
statements through its Audit Committee, which is composed solely of directors
who are not Promus officers or employees. The Audit Committee meets from time to
time with the independent public accountants, management and the internal
auditors. Promus' internal auditors report directly to the Audit Committee
pursuant to gaming regulations. The independent public accountants have direct
access to the Audit Committee, with and without the presence of management
representatives.
MICHAEL D. ROSE MICHAEL N. REGAN
Chairman of the Board Vice President, Controller and
Chief Accounting Officer
75
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Promus Companies Incorporated:
We have audited the accompanying consolidated balance sheets of The Promus
Companies Incorporated (a Delaware corporation) and subsidiaries (Promus) as of
December 31, 1994 and 1993, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years ended December
31, 1994. These financial statements are the responsibility of Promus'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Promus as of December 31,
1994 and 1993 and the results of its operations and its cash flows for each of
the three years ended December 31, 1994, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed under Item 14(a)2 on
page 79 are the responsibility of Promus' management and are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
As explained in Note 4 to the consolidated financial statements, effective
January 1, 1994, Promus changed its method of accounting for preopening costs.
ARTHUR ANDERSEN LLP
Memphis, Tennessee,
March 20, 1995.
76
THE PROMUS COMPANIES INCORPORATED
QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE FIRST SECOND THIRD FOURTH FISCAL
AMOUNTS) QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- ----------
1994
Revenues........................ $290,232 $338,805 $366,811 $343,558 $1,339,406
Operating income................ 62,038 77,227 75,851 54,071 269,187
Income from continuing
operations.................... 22,085 30,774 29,355 (32,230)(1) 49,984
Income from discontinued hotel
operations.................... 6,131 9,101 14,829 6,258 36,319
Net income...................... 20,284 39,876 44,183 (25,972)(1) 78,371
Earnings (loss) per share (2):
Continuing operations......... 0.22 0.30 0.29 (0.31)(1) 0.49
Discontinued operations,
net......................... 0.06 0.09 0.14 0.06 0.35
Net income (loss)............. 0.20 0.39 0.43 (0.25)(1) 0.76
1993
Revenues........................ $210,058 $253,081 $289,704 $267,802 $1,020,645
Operating income................ 31,345 52,798 74,922 50,968 210,033
Income from continuing
operations.................... 5,599 19,830 30,112 19,326 74,867
Income from discontinued hotel
operations.................... 6,367 2,983 6,946 630 16,926
Net income...................... 10,956 22,499 32,935 19,956 86,346
Earnings per share (2)(3):
Continuing operations......... 0.06 0.19 0.29 0.19 0.73
Discontinued operations,
net......................... 0.06 0.03 0.07 - 0.16
Net income.................... 0.11 0.22 0.32 0.19 0.84
- ------------
(1) Fourth quarter 1994 includes a $53.4 million provision for settlement of
litigation and related costs (see Note 13).
(2) The sum of the quarterly per share amounts may not equal the annual amount
reported, as per share amounts are computed independently for each quarter
while the full year is based on the annual weighted average common and
common equivalent shares outstanding.
(3) Retroactively adjusted for stock splits (see Note 5).
77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTORS
See the information regarding the names, ages, positions and prior business
experience of the directors of the Company set forth in the subsection
"Nominees" under "Election of Promus Directors" in the Proxy Statement which
subsection is incorporated herein by reference.
EXECUTIVE OFFICERS
See "Executive Officers of the Registrant" on page 38 in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION.
See the information set forth in the subsections "Compensation of
Directors", "Executive Officer Compensation" and "Certain Employment
Arrangements" under "Election of Promus Directors" in the Proxy Statement which
subsections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information set forth in the subsection "Ownership of Promus
Securities" under "Election of Directors" in the Proxy Statement which
subsection is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information set forth in the subsection "Certain Transactions" under
"Election of Directors" in the Proxy Statement which subsection is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial statements (including related notes to consolidated
financial statements) filed as part of this report are listed below:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1994 and 1993.
Consolidated Statements of Income for the Fiscal Years Ended December 31,
1994, 1993 and 1992.
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended December 31, 1994, 1993 and 1992.
Consolidated Statements of Cash Flows for the Fiscal Years Ended December
31, 1994, 1993 and 1992.
78
2. Schedules for the fiscal years ended December 31, 1994, 1993 and 1992,
are as follows:
NO.
---
I -Condensed financial information of registrant
II -Valuation and qualifying accounts
Schedules III, IV, and V are not applicable and have therefore been omitted.
3. Exhibits (footnotes appear on pages 86 and 87):
NO.
- ----------
3(1) -Certificate of Incorporation of The Promus Companies Incorporated; Certificate
of Amendment of Certificate of Incorporation of The Promus Companies
Incorporated dated April 29, 1994. (25)
3(2) -Bylaws of The Promus Companies Incorporated, as amended April 29, 1994. (25)
4(1) -Rights Agreement dated as of February 7, 1990, between The Promus Companies
Incorporated and The Bank of New York as Rights Agent. (12)
4(2) -Indenture dated as of March 30, 1987, between Holiday Inns, Inc., Issuer,
Holiday Corporation, Guarantor, and LaSalle National Bank, Trustee; Prospectus
dated March 5, 1987, for $500,000,000 Holiday Inns, Inc. 11% Subordinated
Debentures due 1999. (5)
4(3) -First Supplemental Indenture dated as of January 8, 1988, under Indenture dated
as of March 30, 1987, among Holiday Inns, Inc., Holiday Corporation and LaSalle
National Bank. (3)
4(4) -Second Supplemental Indenture dated as of February 23, 1988, under Indenture
dated as of March 30, 1987, among Holiday Inns, Inc., Holiday Corporation,
Guarantor, and LaSalle National Bank. (3)
4(5) -Third Supplemental Indenture dated as of January 17, 1990, with respect to the
11% Subordinated Debentures due 1999, among LaSalle National Bank, as trustee,
Holiday Corporation, as guarantor, The Promus Companies Incorporated and Holiday
Inns, Inc., as issuer; Fourth Supplemental Indenture dated as of February 7,
1990, with respect to the 11% Subordinated Debentures due 1999, among Holiday
Inns, Inc., Holiday Corporation, Embassy Suites, Inc., The Promus Companies
Incorporated and LaSalle National Bank; Form of Debenture for 11% Subordinated
Debentures due 1999. (12)
4(6) -Letter to Bank of New York dated March 18, 1993 constituting Certificate under
Section 12 of the Rights Agreement dated as of February 7, 1990. (11)
4(7) -Interest Swap Agreement between Bank of America National Trust and Savings
Association and Embassy Suites, Inc. dated May 14, 1993. (6)
4(8) -Interest Swap Agreement between NationsBank of North Carolina, N.A. and Embassy
Suites, Inc. dated May 18, 1993. (6)
4(9) -First Supplemental Indenture dated as of July 15, 1987, among Irving Trust
Company, as resigning trustee with respect to the 1999 Notes, Indiana National
Bank as successor trustee with respect to the 1999 Notes and Holiday Inns, Inc.;
Second Supplemental Indenture dated as of January 8, 1988, under Indenture dated
as of January 15, 1984, between Holiday Inns, Inc., and Irving Trust Company, as
trustee with respect to 8 3/8% Notes due 1996; Third Supplemental Indenture
dated as of January 8, 1988, under Indenture dated as of January 15, 1984, among
Holiday Inns, Inc., Irving Trust Company, as resigning trustee with respect to
the 8 3/8% Notes due 1996, and LaSalle National Bank as successor trustee with
respect to the 8 3/8% Notes due 1996; Fourth Supplemental Indenture dated as of
February 23, 1988, under Indenture dated as of January 15, 1984, between Holiday
Inns, Inc. and LaSalle National Bank, as trustee with respect to the 8 3/8%
Notes due 1996. (3)
79
NO.
- ----------
4(10) -Fifth Supplemental Indenture dated as of January 23, 1990, with respect to the 8
3/8% Notes due 1996, among LaSalle National Bank, as trustee, The Promus
Companies Incorporated and Holiday Inns, Inc., as issuer; Sixth Supplemental
Indenture dated as of February 7, 1990, with respect to the 8 3/8% Notes due
1996, among Holiday Inns, Inc., Embassy Suites, Inc., The Promus Companies
Incorporated and LaSalle National Bank; Form of Note for 8 3/8% Notes due 1996.
(12)
4(11) -Indenture dated as of April 1, 1992, with respect to the 10 7/8% Senior
Subordinated Notes due 2002, among The Bank of New York, as trustee, The Promus
Companies Incorporated, as guarantor, and Embassy Suites, Inc., as issuer; Form
of Note for 10 7/8% Senior Subordinated Notes due 2002. (18)
4(12) -Indenture dated as of August 1, 1993, with respect to the 8 3/4% Senior
Subordinated Notes due 2000, among The Bank of New York, as trustee, The Promus
Companies Incorporated, as guarantor, and Embassy Suites, Inc., as issuer; Form
of Note for 8 3/4% Senior Subordinated Notes due 2000. (6)
4(13) -Interest Swap Agreement between The Sumitomo Bank, Limited and Embassy Suites,
Inc. dated October 22, 1992; Interest Swap Agreement between The Bank of Nova
Scotia and Embassy Suites, Inc. dated October 22, 1992; Interest Swap Agreement
between The Nippon Credit Bank and Embassy Suites, Inc. dated October 22, 1992;
(18)
**4(14) -Interest Swap Agreement between Bank of America National Trust and Savings
Association and Embassy Suites, Inc. dated January 25, 1995.
**4(15) -Interest Swap Agreements between NationsBank, N.A. (Carolinas) and Embassy
Suites, Inc. dated January 25, 1995.
**4(16) -Interest Swap Agreement between The Bank of Nova Scotia and Embassy Suites, Inc.
dated January 25, 1995 and amended February 2, 1995.
**4(17) -Interest Swap Agreement between The Bank of Nova Scotia and Embassy Suites, Inc.
dated March 16, 1995.
**4(18) -Interest Swap Agreement between NationsBank, N.A. (Carolinas) and Embassy
Suites, Inc. dated March 16, 1995.
10(1) -Amended and Restated Agreement and Plan of Merger among Holiday Corporation,
Holiday Inns, Inc., The Promus Companies Incorporated, Bass plc, Bass (U.S.A.)
Hotels, Incorporated (a Delaware corporation) and Bass (U.S.A.) Hotels,
Incorporated (a Tennessee corporation), dated as of August 24, 1989. (1)
10(2) -First Amendment to the Amended and Restated Agreement and Plan of Merger among
Holiday Corporation, Holiday Inns, Inc., The Promus Companies Incorporated, Bass
plc and Bass (U.S.A.) Hotels, Incorporated, dated as of February 7, 1990. (2)
10(3) -Tax Sharing Agreement dated as of February 7, 1990, among Holiday Corporation,
Holiday Inns, Inc., The Promus Companies Incorporated, Bass plc, Bass European
Holdings, N.V., Bass (U.S.A.), Inc. and Bass (U.S.A.) Hotels, Incorporated. (12)
+10(4) -Form of Indemnification Agreement entered into by The Promus Companies
Incorporated and each of its directors and executive officers. (1)
+10(5) -The Promus Companies Incorporated 1990 Stock Option Plan. (12)
+10(6) -The Promus Companies Incorporated 1990 Restricted Stock Plan. (12)
+10(7) -The Promus Companies Incorporated Savings and Retirement Plan Trust Agreement.
(12)
+10(8) -Amendment to The Promus Companies Incorporated Savings and Retirement Plan dated
May 1, 1991. (15)
- ------------
** Filed herewith
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to item 14(a)(3) of Form 10-K.
80
NO.
- ----------
+10(9) -Financial Counseling Plan of The Promus Companies Incorporated as amended
February 25, 1993. (11)
+10(10) -Form of Severance Agreement dated July 30, 1993, entered into with E. O.
Robinson, Jr. and John M. Boushy. (22)
10(11) -Credit Agreement, dated as of July 22, 1993, among Embassy Suites, Inc., The
Promus Companies Incorporated, the Banks parties thereto, Marina Associates and
Bankers Trust Company, as Administrative Agent. (19)
10(12) -Amended and Restated Reimbursement Agreement, dated as of July 22, 1993, among
Embassy Suites, Inc., The Promus Companies Incorporated, Marina Associates and
The Sumitomo Bank, Limited, New York Branch. (19)
10(13) -Master Collateral Agreement, dated as of July 22, 1993, among The Promus
Companies Incorporated, Embassy Suites, Inc., the other Collateral Grantors
parties thereto, Bankers Trust Company, as Administrative Agent, and Bankers
Trust Company as Collateral Agent. (19)
10(14) -Security Agreement dated as of July 22, 1993, among Embassy Suites, Inc., the
Collateral Grantors parties thereto and Bankers Trust Company, as Collateral
Agent. (19)
10(15) -Deed of Trust, Leasehold Deed of Trust, Assignment, Assignment of Leases and
Rents, Security Agreement and Financing Statement, dated as of July 22, 1993,
from Embassy Suites, Inc., Harrah's Laughlin, Inc., and Harrah's Reno Holding
Company, Inc., the Grantors, to First American Title Company of Nevada, as
Trustee, for the benefit of Bankers Trust Company, as Beneficiary. (19)
10(16) -Mortgage, Leasehold Mortgage, Assignment, Assignment of Leases and Rents and
Security Agreement, dated as of July 22, 1993, from Marina Associates and
Embassy Suites, Inc., the Mortgagors, to Bankers Trust Company, as Collateral
Agent and the Mortgagee. (19)
10(17) -Pledge Agreement, dated as of July 22, 1993, between The Promus Companies
Incorporated and Bankers Trust Company, as Collateral Agent. (19)
10(18) -Pledge Agreement, dated as of July 22, 1993, among Embassy Suites, Inc., ESI
Equity Development Corporation, Harrah's, Harrah's Club, Casino Holding Company,
and Bankers Trust Company, as the General Collateral Agent, and Bank of America
Nevada as the Nevada Collateral Agent. (19)
10(19) -Form of License Agreement for Hampton Inn. (7)
10(20) -Form of License Agreement for Hampton Inn revised 1988. (8)
10(21) -Form of License Agreement for Hampton Inn revised 1991. (15)
10(22) -Form of License Agreement for Hampton Inn revised 1992. (18)
10(23) -Form of License Agreement for Embassy Suites. (9)
10(24) -Form of License Agreement for Embassy Suites revised 1989. (12)
10(25) -Form of License Agreement for Embassy Suites revised 1990. (13)
10(26) -Form of License Agreement for Embassy Suites revised 1991. (15)
10(27) -Form of License Agreement for Embassy Suites revised 1992. (18)
10(28) -Form of Short-Term License Agreement for Embassy Suites. (12)
10(29) -Form of Short-Term License Agreement for Embassy Suites revised 1990. (13)
10(30) -Form of Short-Term License Agreement for Embassy Suites revised 1991. (15)
10(31) -Form of Short-Term License Agreement for Embassy Suites revised 1992. (18)
10(32) -Form of License Agreement for Homewood Suites. (3)
10(33) -Form of License Agreement for Homewood Suites revised 1992. (18)
- ------------
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to item 14(a)(3) of Form 10-K.
81
NO.
- ----------
10(34) -Form of License Agreement for Homewood Suites revised 1993. (24)
10(35) -Form of License Agreement for Embassy Suites revised 1993. (24)
10(36) -Form of Short-Term License Agreement for Embassy Suites revised 1993. (24)
10(37) -Form of License Agreement for Hampton Inn revised 1993. (24)
10(38) -Form of License Agreement for Hampton Inn & Suites. (24)
**10(39) -Form of License Agreement for Embassy Suites revised 1994.
**10(40) -Form of Short-Term License Agreement for Embassy Suites revised 1994.
**10(41) -Form of License Agreement for Hampton Inn revised 1994.
**10(42) -Form of License Agreement for Hampton Inn & Suites revised 1994.
**10(43) -Form of License Agreement for Homewood Suites revised 1994.
10(44) -Management Agreement dated as of December 17, 1986, between Hampton Inns, Inc.
and Hampton/GHI Associates No. 1. (10)
10(45) -Form of Management Agreement between Embassy Suites, Inc. and affiliates of
General Electric Pension Trust. (10)
+10(46) -Employment Agreement dated as of February 26, 1994, and effective April 29,
1994, between The Promus Companies Incorporated and Michael D. Rose. (26)
+10(47) -Amended and Restated Severance Agreement dated as of May 1, 1992 between The
Promus Companies Incorporated and Michael D. Rose. (18)
+10(48) -Summary Plan Description of Executive Term Life Insurance Plan. (18)
+10(49) -Forms of Stock Option (1990 Stock Option Plan). (12)
+10(50) -Revised Forms of Stock Option (1990 Stock Option Plan). (18)
+10(51) -Form of The Promus Companies Incorporated's Annual Bonus Plan, as amended, for
Managers and Executives. (13)
+10(52) -Forms of Restricted Stock Award (1990 Restricted Stock Plan). (12)
+10(53) -Deferred Compensation Plan dated October 16, 1991. (15)
+10(54) -Form of Deferred Compensation Agreement. (12)
+10(55) -Form of Deferred Compensation Agreement revised November 1991. (15)
+10(56) -Executive Deferred Compensation Plan. (12)
+10(57) -First Amendment to Executive Deferred Compensation Plan, dated as of October 25,
1990. (13)
+10(58) -Second Amendment to Executive Deferred Compensation Plan, dated as of October
25, 1991. (15)
+10(59) -Third Amendment to Executive Deferred Compensation Plan, dated as of October 29,
1992. (18)
+10(60) -Forms of Restricted Stock Award (1990 Restricted Stock Plan). (18)
+10(61) -First Amendment to Escrow Agreement dated January 31, 1990 among Holiday
Corporation, certain subsidiaries thereof and Sovran Bank, as escrow agent. (12)
+10(62) -Escrow Agreement dated February 6, 1990 between The Promus Companies
Incorporated, certain subsidiaries thereof, and Sovran Bank, as escrow agent.
(12)
+10(63) -Form of Amended and Restated Severance Agreement dated November 5, 1992, entered
into with Charles A. Ledsinger, Jr., Ben C. Peternell, Philip G. Satre and Colin
V. Reed. (18)
- ------------
** Filed herewith
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to item 14(a)(3) of Form 10-K.
82
NO.
- ----------
+10(64) -Form of memorandum agreement dated July 2, 1991, eliminating stock appreciation
rights under stock options held by Charles A. Ledsinger, Jr., Ben C. Peternell
and Philip G. Satre. (14)
+10(65) -The Promus Companies Incorporated Amended and Restated Savings and Retirement
Plan dated as of February 6, 1990. (18)
+10(66) -Administrative Regulations, Long Term Compensation Plan (Restricted Stock Plan
and Stock Option Plan), dated as of January 1, 1992. (17)
+10(67) -Amendment dated October 29, 1992 to The Promus Companies Incorporated Savings
and Retirement Plan Trust Agreement; Amendment dated September 21, 1992 to The
Promus Companies Incorporated Savings and Retirement Plan Trust Agreement. (18)
+10(68) -Revised Form of Stock Option. (21)
+10(69) -The Promus Companies Incorporated 1990 Stock Option Plan (as amended as of April
30, 1993). (20)
10(70) -Limited Partnership Agreement of Des Plaines Development Limited Partnership
between Harrah's Illinois Corporation and John Q. Hammons, dated February 28,
1992; First Amendment to Limited Partnership Agreement of Des Plaines Limited
Development Partnership dated as of October 5, 1992. (24)
+10(71) -Amendment to Escrow Agreement dated as of October 29, 1993 among The Promus
Companies Incorporated, certain subsidiaries thereof, and NationsBank, formerly
Sovran Bank. (24)
10(72) -Amended and Restated Partnership Agreement of Harrah's Jazz Company, dated as of
March 15, 1994, among Harrah's New Orleans Investment Company, New
Orleans/Louisiana Development Corporation and Grand Palais Casino, Inc.; First
Amendment to the Amended and Restated Partnership Agreement of Harrah's Jazz
Company, effective as of March 15, 1994. (24)
10(73) -Second Amendment dated March 31, 1994 to the Amended and Restated Partnership
Agreement of Harrah's Jazz Company. (25)
+10(74) -The Promus Companies Incorporated 1990 Stock Option Plan, as amended April 29,
1994. (25)
+10(75) -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. (26)
+10(76) -The Promus Companies Incorporated 1990 Stock Option Plan, as amended July 29,
1994. (26)
+10(77) -Amendment dated May 27, 1994 to The Promus Companies Incorporated Savings and
Retirement Plan. (26)
+10(78) -Employment Agreement dated as of February 25, 1994, and effective April 29,
1994, between The Promus Companies Incorporated and Philip G. Satre including
exhibits thereto. (27)
+10(79) -Amendment dated as of August 31, 1994 to The Promus Companies Incorporated
Savings and Retirement Plan. (27)
10(80) -Consent dated as of October 7, 1994, among The Promus Companies Incorporated,
Embassy Suites, Inc., the Banks and Agents parties thereto, Marina Associates
and Bankers Trust Company, as Administrative Agent. (27)
10(81) -Amended and Restated Third Amendment to the Amended and Restated Partnership
Agreement of Harrah's Jazz Company. (16)
10(82) -Fourth Amendment to the Amended and Restated Partnership Agreement of Harrah's
Jazz Company. (16)
- ------------
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to Item 14(a)(3) of Form 10-K
83
NO.
- ----------
10(83) -Indenture dated as of November 15, 1994 between Harrah's Jazz Company, Harrah's
Jazz Finance Corp. and First National Bank of Commerce as Trustee for the First
Mortgage Notes including form of First Mortgage Note. (16)
10(84) -Intercreditor Agreement between the Bank Lenders and the First National Bank of
Commerce as Trustee dated as of November 15, 1994. (16)
10(85) -Notes Completion Guarantee among Embassy Suites, Inc., The Promus Companies
Incorporated and First National Bank of Commerce as Trustee dated as of November
16, 1994. (16)
10(86) -Cash Collateral and Disbursement Agreement among First National Bank of Commerce
as Trustee, First National Bank of Commerce as Collateral Agent, Harrah's Jazz
Company and Harrah's Jazz Finance Corp., dated November 16, 1994. (16)
10(87) -Collateral Mortgage Note by Harrah's Jazz Company dated November 15, 1994. (16)
10(88) -Act of Collateral Mortgage and Collateral Assignment of Proceeds by Harrah's
Jazz Company dated November 15, 1994. (16)
10(89) -Act of Collateral Assignment of Leases and Rents between Harrah's Jazz Company
and First National Bank of Commerce as Collateral Agent dated November 15, 1994.
(16)
10(90) -Act of Security Agreement and Pledge between Harrah's Jazz Company and First
National Bank of Commerce as Collateral Agent dated November 15, 1994. (16)
10(91) -Pledge Agreement between Harrah's Jazz Company, Harrah's Jazz Finance Corp. and
First National Bank of Commerce as Collateral Agent dated as of November 16,
1994. (16)
10(92) -Security Agreement among Harrah's Jazz Company, Harrah's Jazz Finance Corp. and
First National Bank of Commerce as Collateral Agent dated as of November 16,
1994. (16)
10(93) -Security Agreement (Cash Collateral) among Harrah's Jazz Company, Harrah's Jazz
Finance Corp. and First National Bank of Commerce as Trustee dated November 16,
1994. (16)
10(94) -Manager Subordination Agreement (First Mortgage Notes) among Harrah's Jazz
Company, Harrah's New Orleans Management Company and First National Bank of
Commerce as Trustee dated as of November 16, 1994. (16)
10(95) -Consultant Subordination Agreement (First Mortgage Notes) among Harrah's Jazz
Company, Grand Palais Management Company, New Orleans/Louisiana Development
Corporation and First National Bank of Commerce as Trustee dated as of November
16,1994. (16)
10(96) -Completion Guarantor Subordination Agreement (First Mortgage Notes) among
Harrah's Jazz Company, The Promus Companies Incorporated, Embassy Suites, Inc.
and First National Bank of Commerce as Trustee dated as of November 16, 1994.
(16)
10(97) -Amended Lease Agreement between Rivergate Development Corporation, as Landlord
and Harrah's Jazz Company, as Tenant and City of New Orleans, as Intervenor
dated March 15, 1994. (28)
10(98) -Amended General Development Agreement between Rivergate Development Corporation
and Harrah's Jazz Company and City of New Orleans, as Intervenor dated March 15,
1994. (4)
10(99) -Temporary Casino Lease between Rivergate Development Corporation, as Landlord
and Harrah's Jazz Company, as Tenant and City of New Orleans, as Intervenor
dated March 15, 1994. (4)
10(100) -Amendment to Amended Lease Agreement between Rivergate Development Corporation,
as Landlord and Harrah's Jazz Company, as Tenant and City of New Orleans, as
Intervenor dated October 5, 1994. (28)
84
NO.
- ----------
10(101) -Agreement between City of New Orleans and Harrah's Jazz Company, dated October
5, 1994 (the "Separate City Agreement"). (28)
10(102) -Agreement among Rivergate Development Corporation, City of New Orleans and
Embassy Suites, Inc. and Harrah's Jazz Company, as intervenor, dated October 5,
1994 (the "Embassy Access Agreement"). (28)
10(103) -Casino Operating Contract between the Louisiana Economic Development and Gaming
Corporation and Harrah's Jazz Company dated July 15, 1994. (4)
10(104) -First Amendment to Casino Operating Contract between the Louisiana Economic
Development and Gaming Corporation and Harrah's Jazz Company dated August 31,
1994. (28)
10(105) -Amended and Restated Management Agreement between Harrah's New Orleans
Management Company and Harrah's Jazz Company dated March 14, 1994. (4)
10(106) -Construction Agreement between Harrah's Jazz Company and Centex Landis
Construction Co., Inc. dated October 10, 1994, for the construction of the
Permanent Casino. (28)
10(107) -Construction Agreement between Harrah's Jazz Company and Harvey Honore
Construction Company, Inc. and Broadmoor dated October 10, 1994, for the
construction of the Temporary Casino. (28)
10(108) -Design and Construction Agreement between Harrah's Jazz Company and Broadmoor
dated October 10, 1994, for the construction of the parking structure. (28)
10(109) -Credit Agreement among Harrah's Jazz Company, Harrah's Jazz Finance Corp.,
Various Banks, and Bankers Trust Company as Administrative Agent dated as of
November 8, 1994. (16)
10(110) -Owner's Policy issued March 16, 1994 by First American Title Insurance Company
to Harrah's Jazz Company with attachments. (16)
10(111) -Lender's Title Insurance Policy issued November 16, 1994 by First American Title
Insurance Company together with reinsurance agreements. (16)
10(112) -Completion Loan Agreement among Harrah's Jazz Company, Embassy Suites, Inc., The
Promus Companies Incorporated, New Orleans/Louisiana Development Corporation,
Grand Palais Casino, Inc., and Grand Palais Management Company, L.L.C. dated
October 12, 1994. (23)
10(113) -Construction Lien Indemnity Obligation Agreement between Harrah's Jazz Company
and Embassy Suites, Inc. dated October 12, 1994. (23)
10(114) -First Amendment to the Construction Lien Indemnity Obligation Agreement. (16)
10(115) -Option Agreement between Harrah's New Orleans Investment Company and New
Orleans/Louisiana Development Corporation dated November 8, 1994. (16)
10(116) -Option Agreement between Harrah's New Orleans Investment Company and Grand
Palais Casino, Inc. dated November 8 , 1994. (16)
10(117) -Put Agreement between Harrah's New Orleans Investment Company and New
Orleans/Louisiana Development Corporation dated November 8, 1994. (16)
10(118) -Put Agreement between Harrah's New Orleans Investment Company and Grand Palais
Casino, Inc. dated November 8, 1994. (16)
10(119) -Underwriting Agreement among Donaldson, Lufkin & Jenrette Securities
Corporation, Salomon Brothers Inc, BT Securities Corporation, Harrah's Jazz
Company and Harrah's Jazz Finance Corp. dated November 9, 1994. (16)
10(120) -Specimen form of 14 1/4% First Mortgage Note Due 2001 of Harrrah's Jazz Company
and Harrah's Jazz Finance Corp. (16)
10(121) -Manager Subordination Agreement (Credit Agreement) between Harrah's New Orleans
Management Company and Bankers Trust Company as Administrative Agent dated as of
November 16, 1994. (16)
85
NO.
- ----------
10(122) -Bank Completion Guaranty among Embassy Suites, Inc., The Promus Companies
Incorporated and Bankers Trust Company as Administrative Agent dated as of
November 16, 1994. (16)
10(123) -Bank Disbursement and Security Agreement among Harrah's Jazz Company, Harrah's
Jazz Finance Corp. and First National Bank of Commerce as Collateral Agent dated
as of November 16, 1994. (16)
10(124) -Completion Guaranty by The Promus Companies Incorporated and Embassy Suites,
Inc. dated as of November 16, 1994 in favor of the Louisiana Economic
Development and Gaming Corporation. (16)
+**10(125) -Revised Form of Stock Option (1990 Stock Option Plan).
+**10(126) -Revised Forms of Restricted Stock Award (1990 Stock Option Plan).
+**10(127) -Administrative Regulations, Long Term Compensation Plan (Restricted Stock Plan
and Stock Option Plan) dated as of February 24, 1995.
+**10(128) -Form of Agreement to Cancel Options dated as of December 16, 1994 entered into
with Michael D. Rose, Philip G. Satre, Charles A. Ledsinger, Jr., Ben C.
Peternell, Colin V. Reed, E. O. Robinson, Jr. and John M. Boushy.
**11 -Computation of per share earnings.
**12 -Computations of ratios.
**21 -List of subsidiaries of The Promus Companies Incorporated.
**27 -Financial Data Schedule
99(1) -Proxy Statement--Information Statement--Prospectus dated December 13, 1989 of
Holiday Corporation, The Promus Companies Incorporated and Bass Public Limited
Company. (12)
- ------------
** Filed herewith
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to item 14(a)(3) of Form 10-K.
FOOTNOTES
(1) Incorporated by reference from the Company's Registration Statement on Form
10, File No. 1-10410, filed on December 13, 1989.
(2) Incorporated by reference from the Company's Current Report on Form 8-K
dated February 16, 1990, File No. 1-10410.
(3) Incorporated by reference from Holiday Corporation's Annual Report on Form
10-K for the fiscal year ended January 1, 1988, filed March 31, 1988, File
No. 1-8900.
(4) Incorporated by reference from Amendment No. 3 to Form S-1 Registration
Statement of Harrah's Jazz Company and Harrah's Jazz Finance Corp., File
No. 33-73370, filed August 4, 1994.
(5) Incorporated by reference from Holiday Inns, Inc's Registration Statement
on Form S-3, File No. 33-11163, filed December 31, 1986.
(6) Incorporated by reference from the Company's and Embassy Suites, Inc.'s
Amendment No. 2 to Form S-4 Registration Statement, File No. 33-49509-01,
filed July 16, 1993.
(7) Incorporated by reference from Holiday Inns, Inc.'s Annual Report on Form
10-K for the fiscal year ended December 30, 1983, filed March 21, 1984,
File No. 1-4804.
(8) Incorporated by reference from Holiday Corporation's Annual Report on Form
10-K for the fiscal year ended December 30, 1988, filed March 30, 1989,
File No. 1-8900.
(9) Incorporated by reference from Holiday Corporation's Annual Report on Form
10-K for the fiscal year ended January 3, 1986, filed March 28, 1986, File
No. 1-8900.
(10) Incorporated by reference from Holiday Corporation's Annual Report on Form
10-K for the fiscal year ended January 2, 1987, filed March 27, 1987, File
No. 1-8900.
86
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1993, filed May 13, 1993, File No. 1-10410.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 1989, filed March 28, 1990, File No.
1-10410.
(13) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 28, 1990, filed March 21, 1991, File No.
1-10410.
(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 27, 1991, filed November 8, 1991, File No.
1-10410.
(15) Incorporated by reference from Amendment No. 2 to the Company's and
Embassy's Registration Statement on Form S-1, File No. 33-43748, filed
March 18, 1992.
(16) Incorporated by reference from Harrah's Jazz Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994, filed December 21,
1994, File No. .
(17) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1992, filed May 13, 1992, File No. 1-10410.
(18) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992, filed March 12, 1993, File No.
1-10410.
(19) Incorporated by reference from the Company's Current Report on Form 8-K
filed August 6, 1993, File No. 1-10410.
(20) Incorporated by reference from Post-Effective Amendment No. 1 to the
Company's Form S-8 Registration Statement, File No. 33-32864-01, filed July
22, 1993.
(21) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993, filed August 12, 1993, File No.
1-10410.
(22) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993, filed November 12, 1993, File No.
1-10410.
(23) Incorporated by reference from Amendment No. 5 to Form S-1 Registration
Statement of Harrah's Jazz Company and Harrah's Jazz Finance Corp., File
No. 33-73370, filed October 26, 1994.
(24) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993, filed March 28, 1994, File No.
1-10410.
(25) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994, filed May 12, 1994, File No. 1-10410.
(26) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, filed August 11, 1994, File No.
1-10410.
(27) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994, filed November 14, 1994, File No.
1-10410.
(28) Incorporated by reference from Amendment No. 4 to Form S-1 Registration
Statement of Harrah's Jazz Company and Harrah's Jazz Finance Corp., File
No. 33-73370, filed October 12, 1994.
(b) No Reports on Form 8-K were filed during the fourth quarter of 1994 and
thereafter through March 20, 1995.
87
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 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
Dated: March 21, 1995 By: MICHAEL D. ROSE
...................................
(Michael D. Rose, Chairman)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title Date
- ------------------------------------- ------------------------ --------------
JAMES L. BARKSDALE Director March 21, 1995
.....................................
(James L. Barksdale)
SUSAN CLARK-JACKSON Director March 21, 1995
.....................................
(Susan Clark-Jackson)
JAMES B. FARLEY Director March 21, 1995
.....................................
(James B. Farley)
JOE M. HENSON Director March 21, 1995
.....................................
(Joe M. Henson)
MICHAEL D. ROSE Director and Chairman March 21, 1995
.....................................
(Michael D. Rose)
WALTER J. SALMON Director March 21, 1995
.....................................
(Walter J. Salmon)
PHILIP G. SATRE Director, President and March 21, 1995
Chief Executive
..................................... Officer
(Philip G. Satre)
BOAKE A. SELLS Director March 21, 1995
.....................................
(Boake A. Sells)
RONALD TERRY Director March 21, 1995
.....................................
(Ronald Terry)
EDDIE N. WILLIAMS Director March 21, 1995
.....................................
(Eddie N. Williams)
SHIRLEY YOUNG Director March 21, 1995
.....................................
(Shirley Young)
CHARLES A. LEDSINGER, JR. Chief Financial Officer March 21, 1995
.....................................
(Charles A. Ledsinger, Jr.)
MICHAEL N. REGAN Controller and Principal March 21, 1995
Accounting Officer
.....................................
(Michael N. Regan)
88
SCHEDULE I
THE PROMUS COMPANIES INCORPORATED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
--------------------
1994 1993
-------- --------
ASSETS
Cash................................................................... $ - $ -
Investments in and advances to subsidiaries (eliminated in
consolidation)....................................................... 480,520 355,185
Net assets of discontinued hotel operations............................ 143,008 180,522
Organizational costs................................................... 31 302
-------- --------
$623,559 $536,009
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued taxes, including federal income taxes.......................... $ 122 $ (28)
-------- --------
Commitments and contingencies (Notes 4, 5, 10 and 11)
Stockholders' equity
Common stock, $0.10 par value, authorized-360,000,000 shares,
outstanding-102,402,619 and 102,258,442 shares (net of 37,172 and
25,251 shares held in treasury).................................... 10,240 10,226
Capital surplus...................................................... 350,196 344,197
Retained earnings.................................................... 265,574 187,203
Deferred compensation related to restricted stock.................... (2,573) (5,589)
-------- --------
623,437 536,037
-------- --------
$623,559 $536,009
-------- --------
-------- --------
The accompanying Notes to Financial Statements
are an integral part of these balance sheets.
S-1
SCHEDULE I (CONTINUED)
THE PROMUS COMPANIES INCORPORATED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
(IN THOUSANDS)
FISCAL YEAR ENDED DECEMBER
31,
-----------------------------
1994 1993 1992
------- ------- -------
Revenues....................................................... $ - $ - $ -
Costs and expenses............................................. 466 319 458
------- ------- -------
Loss before income taxes and equity in subsidiaries' continuing
earnings..................................................... (466) (319) (458)
Income tax benefit............................................. 163 112 155
------- ------- -------
Loss before equity in subsidiaries' continuing earnings........ (303) (207) (303)
Equity in subsidiaries' continuing earnings.................... 50,287 75,074 49,880
------- ------- -------
Income from continuing operations.............................. 49,984 74,867 49,577
Equity in subsidiaries' income from discontinued operations.... 36,319 16,926 1,841
------- ------- -------
Income before extraordinary items and cumulative effect of
change in accounting policy.................................. 86,303 91,793 51,418
Extraordinary items, net of tax benefit (provision) of $3,415
and $(753) (Note 8).......................................... - (5,447) 1,074
Cumulative effect of change in accounting policy, net of tax
benefit of $4,317 (Note 9)................................... (7,932) - -
------- ------- -------
Net income..................................................... $78,371 $86,346 $52,492
------- ------- -------
------- ------- -------
The accompanying Notes to Financial Statements
are an integral part of these statements.
S-2
SCHEDULE I (CONTINUED)
THE PROMUS COMPANIES INCORPORATED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
-------- -------- --------
Cash flows from operating activities
Net income................................................. $ 78,371 $ 86,346 $ 52,492
Adjustment to reconcile net income to cash flows from
operating activities
Equity in subsidiaries' income from discontinued
operations........................................... (36,319) (16,926) (1,841)
Extraordinary items.................................... - 8,862 (1,827)
Cumulative effect of change in accounting policy,
before income taxes.................................. 13,924 - -
Amortization........................................... 271 271 265
Equity in undistributed continuing earnings of
subsidiaries......................................... (50,287) (75,074) (49,880)
Dividend received from subsidiary...................... - - 500
Net change in working capital accounts................. (5,960) (3,479) 791
-------- -------- --------
Cash flows from operating activities................. - - 500
-------- -------- --------
Cash flows used in investing activities
Advances and capital contributions to subsidiaries......... - - (500)
-------- -------- --------
Net change in cash........................................... - - -
Cash, beginning of period.................................... - - -
-------- -------- --------
Cash, end of period.......................................... $ - $ - $ -
-------- -------- --------
-------- -------- --------
The accompanying Notes to Financial Statements
are an integral part of these statements.
S-3
SCHEDULE I (CONTINUED)
THE PROMUS COMPANIES INCORPORATED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BASIS OF ORGANIZATION
The Promus Companies Incorporated (Promus), a Delaware corporation, is a
holding company, the principal assets of which are the capital stock of two
subsidiaries, Embassy Suites, Inc. (Embassy) and Aster Insurance Ltd. (Aster).
These condensed financial statements should be read in conjunction with the
consolidated financial statements of Promus and subsidiaries.
On January 30, 1995, Promus announced a planned spin-off, expected to be
completed by the end of second quarter 1995, that will split the company into
two independent public corporations, one for conducting its casino entertainment
business and one for conducting its hotel business. Promus, which is expected to
be renamed Harrah's Entertainment, Inc., will retain ownership of the casino
entertainment business. Promus' hotel operations, which include the Embassy
Suites, Hampton Inn and Homewood Suites hotel brands, will be transferred to a
new entity, expected to be named Promus Hotel Corporation (PHC), the stock of
which is to be distributed to Promus' stockholders on a one-for-two basis (the
PHC Spin-off). As a result of this announcement, Promus' historical financial
statements have been restated to reflect the hotel business as discontinued
operations. The PHC Spin-off is subject to a number of conditions, including
regulatory, bondholder, bank lender and other third party consents, receipt of
an opinion from outside legal counsel regarding the tax-free status of the
transaction, market conditions, final approval of the Board of Directors and
stockholder approval.
NOTE 2--FISCAL YEAR
As of the beginning of fiscal 1992, Promus changed from a fiscal year to a
calendar year for financial reporting purposes. The impact of this change on
Promus' financial statements was immaterial.
NOTE 3--ORGANIZATIONAL COSTS
Organizational costs are being amortized on a straight-line basis over a
five year period.
NOTE 4--OWNERSHIP OF ASTER
The value of Promus' investment in Aster has been reduced below zero.
Promus' negative investment in Aster at December 31, 1994 and 1993 was $13.4
million and $12.8 million, respectively, and is included in investments in and
advances to subsidiaries on the balance sheet. In addition, Promus has
guaranteed the future payment by Aster of certain insurance-related liabilities.
NOTE 5--LONG-TERM DEBT
Promus has no long-term debt obligations. Promus has guaranteed certain
long-term debt obligations of Embassy.
NOTE 6--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, previously reported amounts
S-4
SCHEDULE I (CONTINUED)
THE PROMUS COMPANIES INCORPORATED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO FINANCIAL STATEMENTS
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
for the prior year in the consolidated condensed balance sheets have been
restated to reclassify amounts from common stock to capital surplus 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. This October 1993 split followed a
two-for-one split, also effected as a stock dividend, approved by the Board on
February 26, 1993, and distributed on March 29, 1993. The $1.50 par value per
share of Promus' common stock was unchanged by these splits. The par value of
the additional shares issued as a result of these splits was capitalized into
common stock on the balance sheet by means of a transfer from capital surplus.
All references in these financial statements to numbers of common shares and
earnings per share have been restated to give retroactive effect to both stock
splits.
During 1993 an equity investee of Promus completed an initial public
offering of its common stock. As required by equity accounting rules, Promus
increased the carrying value of its investment by an amount equal to its pro-
rata share of the proceeds of the investee's offering, approximately $6.4
million. A corresponding increase was recorded in the combination of Promus'
capital surplus and deferred income tax liability accounts. As a result of this
offering, Promus increased its capital surplus by approximately $3.8 million.
In addition to its common stock, Promus has the following classes of stock
authorized but unissued:
Preferred stock, $100 par value, 150,000 shares authorized
Special stock, 5,000,000 shares authorized-
Series B, $1.125 par value
NOTE 7--INCOME TAXES
Promus files a consolidated tax return with its subsidiaries.
NOTE 8--EXTRAORDINARY ITEMS
Promus' equity in Embassy's net extraordinary items for fiscal 1993 and 1992
were as follows:
1993 1992
------- -------
Loss on early extinguishments of debt................... $(8,862) $(5,558)
Gain on forgiveness of joint venture debt............... - 4,353
Gain due to discontinuing of debt at extinguishment..... - 3,032
------- -------
(8,862) 1,827
Income tax benefit (provision).......................... 3,415 (753)
------- -------
Extraordinary items, net of income taxes................ $(5,447) $ 1,074
------- -------
------- -------
S-5
SCHEDULE I (CONTINUED)
THE PROMUS COMPANIES INCORPORATED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO FINANCIAL STATEMENTS
NOTE 9--CHANGE IN ACCOUNTING POLICY
Effective January 1, 1994, Promus changed its accounting policy relating to
preopening costs incurred during development of new casino entertainment and
hotel projects. Promus' new policy is to defer preopening costs as incurred
prior to opening and to expense them upon opening of each project. Previously,
Promus had capitalized such costs and amortized them to expense over 36 months
from the date of opening. As a result of this change, operating results for the
year ended December 31, 1994, reflect the cumulative charge against earnings,
net of income taxes, of $7.9 million, or $0.08 per share, to write off the
unamortized preopening costs related to projects opened in prior years.
NOTE 10--COMMITMENTS AND CONTINGENCIES
A Promus subsidiary is one of three partners in Harrah's Jazz Company
(Harrah's Jazz), a partnership developing a land-based casino entertainment
facility in New Orleans, Louisiana. The estimated cost of the project is $815
million, of which approximately $251 million had been incurred as of December
31, 1994, is being financed through a combination of partner capital
contributions, public debt securities, bank debt and operating cash flow from a
temporary casino to be operated by Harrah's Jazz during construction of the
permanent casino. If the funds available from these sources are insufficient to
meet the costs of developing, construction and opening the temporary and
permanent casinos, Promus has agreed to loan Harrah's Jazz the funds necessary
to complete the project, subject to certain important conditions and exceptions,
in exchange for a $12.2 million fee to be paid by Harrah's Jazz.
NOTE 11--LITIGATION
In March 1995, Promus entered into a settlement agreement (the Settlement)
with Bass PLC (Bass) of all claims related to the Merger Agreement and Tax
Sharing Agreement from the 1990 Spin-off of Promus and acquisition of the
Holiday Inn hotel business by Bass. As a result of the Settlement, which is
subject to approval of the court, a charge of $53.4 million was recorded in 1994
on the books of Embassy to accrue the estimated cost of the settlement, the
related legal fees and other associated expenses.
S-6
SCHEDULE II
THE PROMUS COMPANIES INCORPORATED
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------
ADDITIONS
--------------------
CHARGED
BALANCE AT TO COSTS CHARGED DEDUCTIONS BALANCE
BEGINNING AND TO OTHER FROM AT CLOSE
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD
- -----------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts
Current......................... $ 9,252 $ 5,731 $ - $ 5,432(A) $ 9,551
---------- -------- -------- ---------- ----------
---------- -------- -------- ---------- ----------
Long-term....................... $ - $ 75 $ - $ - $ 75
---------- -------- -------- ---------- ----------
---------- -------- -------- ---------- ----------
Allowance for losses on property
dispositions.................. $ 11,000 $ 231 $ - $ - $ 11,231
---------- -------- -------- ---------- ----------
---------- -------- -------- ---------- ----------
Insurance allowances and
reserves...................... $ 39,859 $ 52,908 $ - $ 43,319 $ 49,448
---------- -------- -------- ---------- ----------
---------- -------- -------- ---------- ----------
FISCAL YEAR ENDED DECEMBER 31, 1993
Allowance for doubtful accounts,
current....................... $ 9,617 $ 4,673 $ - $ 5,038(A) $ 9,252
---------- -------- -------- ---------- ----------
---------- -------- -------- ---------- ----------
Allowance for losses on property
dispositions.................. $ 11,000 $ - $ - $ - $ 11,000
---------- -------- -------- ---------- ----------
---------- -------- -------- ---------- ----------
Insurance allowances and
reserves...................... $ 31,371 $ 46,333 $ - $ 37,845 $ 39,859
---------- -------- -------- ---------- ----------
---------- -------- -------- ---------- ----------
FISCAL YEAR ENDED DECEMBER 31, 1992
Allowance for doubtful accounts,
current....................... $ 10,727 $ 5,211 $ - $ 6,321(A) $ 9,617
---------- -------- -------- ---------- ----------
---------- -------- -------- ---------- ----------
Allowance for losses on property
dispositions.................. $ 11,000 $ - $ - $ - $ 11,000
---------- -------- -------- ---------- ----------
---------- -------- -------- ---------- ----------
Insurance allowances and
reserves...................... $ 28,432 $ 45,048 $ - $ 42,109 $ 31,371
---------- -------- -------- ---------- ----------
---------- -------- -------- ---------- ----------
- ------------
(A) Uncollectible accounts written off, net of amounts recovered.
S-7
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated March 20, 1995, included in this Form 10-K for the year ended
December 31, 1994, into the Company's previously filed Registration Statements
File Nos. 33-32863, 33-32864 and 33-32865.
ARTHUR ANDERSEN LLP
Memphis, Tennessee,
March 20, 1995.
EXHIBIT INDEX
NO.
- ----------
3(1) -Certificate of Incorporation of The Promus Companies Incorporated; Certificate
of Amendment of Certificate of Incorporation of The Promus Companies
Incorporated dated April 29, 1994. (25)
3(2) -Bylaws of The Promus Companies Incorporated, as amended April 29, 1994. (25)
4(1) -Rights Agreement dated as of February 7, 1990, between The Promus Companies
Incorporated and The Bank of New York as Rights Agent. (12)
4(2) -Indenture dated as of March 30, 1987, between Holiday Inns, Inc., Issuer,
Holiday Corporation, Guarantor, and LaSalle National Bank, Trustee; Prospectus
dated March 5, 1987, for $500,000,000 Holiday Inns, Inc. 11% Subordinated
Debentures due 1999. (5)
4(3) -First Supplemental Indenture dated as of January 8, 1988, under Indenture dated
as of March 30, 1987, among Holiday Inns, Inc., Holiday Corporation and LaSalle
National Bank. (3)
4(4) -Second Supplemental Indenture dated as of February 23, 1988, under Indenture
dated as of March 30, 1987, among Holiday Inns, Inc., Holiday Corporation,
Guarantor, and LaSalle National Bank. (3)
4(5) -Third Supplemental Indenture dated as of January 17, 1990, with respect to the
11% Subordinated Debentures due 1999, among LaSalle National Bank, as trustee,
Holiday Corporation, as guarantor, The Promus Companies Incorporated and Holiday
Inns, Inc., as issuer; Fourth Supplemental Indenture dated as of February 7,
1990, with respect to the 11% Subordinated Debentures due 1999, among Holiday
Inns, Inc., Holiday Corporation, Embassy Suites, Inc., The Promus Companies
Incorporated and LaSalle National Bank; Form of Debenture for 11% Subordinated
Debentures due 1999. (12)
4(6) -Letter to Bank of New York dated March 18, 1993 constituting Certificate under
Section 12 of the Rights Agreement dated as of February 7, 1990. (11)
4(7) -Interest Swap Agreement between Bank of America National Trust and Savings
Association and Embassy Suites, Inc. dated May 14, 1993. (6)
4(8) -Interest Swap Agreement between NationsBank of North Carolina, N.A. and Embassy
Suites, Inc. dated May 18, 1993. (6)
4(9) -First Supplemental Indenture dated as of July 15, 1987, among Irving Trust
Company, as resigning trustee with respect to the 1999 Notes, Indiana National
Bank as successor trustee with respect to the 1999 Notes and Holiday Inns, Inc.;
Second Supplemental Indenture dated as of January 8, 1988, under Indenture dated
as of January 15, 1984, between Holiday Inns, Inc., and Irving Trust Company, as
trustee with respect to 8 3/8% Notes due 1996; Third Supplemental Indenture
dated as of January 8, 1988, under Indenture dated as of January 15, 1984, among
Holiday Inns, Inc., Irving Trust Company, as resigning trustee with respect to
the 8 3/8% Notes due 1996, and LaSalle National Bank as successor trustee with
respect to the 8 3/8% Notes due 1996; Fourth Supplemental Indenture dated as of
February 23, 1988, under Indenture dated as of January 15, 1984, between Holiday
Inns, Inc. and LaSalle National Bank, as trustee with respect to the 8 3/8%
Notes due 1996. (3)
NO.
- ----------
4(10) -Fifth Supplemental Indenture dated as of January 23, 1990, with respect to the 8
3/8% Notes due 1996, among LaSalle National Bank, as trustee, The Promus
Companies Incorporated and Holiday Inns, Inc., as issuer; Sixth Supplemental
Indenture dated as of February 7, 1990, with respect to the 8 3/8% Notes due
1996, among Holiday Inns, Inc., Embassy Suites, Inc., The Promus Companies
Incorporated and LaSalle National Bank; Form of Note for 8 3/8% Notes due 1996.
(12)
4(11) -Indenture dated as of April 1, 1992, with respect to the 10 7/8% Senior
Subordinated Notes due 2002, among The Bank of New York, as trustee, The Promus
Companies Incorporated, as guarantor, and Embassy Suites, Inc., as issuer; Form
of Note for 10 7/8% Senior Subordinated Notes due 2002. (18)
4(12) -Indenture dated as of August 1, 1993, with respect to the 8 3/4% Senior
Subordinated Notes due 2000, among The Bank of New York, as trustee, The Promus
Companies Incorporated, as guarantor, and Embassy Suites, Inc., as issuer; Form
of Note for 8 3/4% Senior Subordinated Notes due 2000. (6)
4(13) -Interest Swap Agreement between The Sumitomo Bank, Limited and Embassy Suites,
Inc. dated October 22, 1992; Interest Swap Agreement between The Bank of Nova
Scotia and Embassy Suites, Inc. dated October 22, 1992; Interest Swap Agreement
between The Nippon Credit Bank and Embassy Suites, Inc. dated October 22, 1992;
(18)
**4(14) -Interest Swap Agreement between Bank of America National Trust and Savings
Association and Embassy Suites, Inc. dated January 25, 1995.
**4(15) -Interest Swap Agreements between NationsBank, N.A. (Carolinas) and Embassy
Suites, Inc. dated January 25, 1995.
**4(16) -Interest Swap Agreement between The Bank of Nova Scotia and Embassy Suites, Inc.
dated January 25, 1995 and amended February 2, 1995.
**4(17) -Interest Swap Agreement between The Bank of Nova Scotia and Embassy Suites, Inc.
dated March 16, 1995.
**4(18) -Interest Swap Agreement between NationsBank, N.A. (Carolinas) and Embassy
Suites, Inc. dated March 16, 1995.
10(1) -Amended and Restated Agreement and Plan of Merger among Holiday Corporation,
Holiday Inns, Inc., The Promus Companies Incorporated, Bass plc, Bass (U.S.A.)
Hotels, Incorporated (a Delaware corporation) and Bass (U.S.A.) Hotels,
Incorporated (a Tennessee corporation), dated as of August 24, 1989. (1)
10(2) -First Amendment to the Amended and Restated Agreement and Plan of Merger among
Holiday Corporation, Holiday Inns, Inc., The Promus Companies Incorporated, Bass
plc and Bass (U.S.A.) Hotels, Incorporated, dated as of February 7, 1990. (2)
10(3) -Tax Sharing Agreement dated as of February 7, 1990, among Holiday Corporation,
Holiday Inns, Inc., The Promus Companies Incorporated, Bass plc, Bass European
Holdings, N.V., Bass (U.S.A.), Inc. and Bass (U.S.A.) Hotels, Incorporated. (12)
+10(4) -Form of Indemnification Agreement entered into by The Promus Companies
Incorporated and each of its directors and executive officers. (1)
+10(5) -The Promus Companies Incorporated 1990 Stock Option Plan. (12)
+10(6) -The Promus Companies Incorporated 1990 Restricted Stock Plan. (12)
+10(7) -The Promus Companies Incorporated Savings and Retirement Plan Trust Agreement.
(12)
+10(8) -Amendment to The Promus Companies Incorporated Savings and Retirement Plan dated
May 1, 1991. (15)
- ------------
** Filed herewith
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to item 14(a)(3) of Form 10-K.
NO.
- ----------
+10(9) -Financial Counseling Plan of The Promus Companies Incorporated as amended
February 25, 1993. (11)
+10(10) -Form of Severance Agreement dated July 30, 1993, entered into with E. O.
Robinson, Jr. and John M. Boushy. (22)
10(11) -Credit Agreement, dated as of July 22, 1993, among Embassy Suites, Inc., The
Promus Companies Incorporated, the Banks parties thereto, Marina Associates and
Bankers Trust Company, as Administrative Agent. (19)
10(12) -Amended and Restated Reimbursement Agreement, dated as of July 22, 1993, among
Embassy Suites, Inc., The Promus Companies Incorporated, Marina Associates and
The Sumitomo Bank, Limited, New York Branch. (19)
10(13) -Master Collateral Agreement, dated as of July 22, 1993, among The Promus
Companies Incorporated, Embassy Suites, Inc., the other Collateral Grantors
parties thereto, Bankers Trust Company, as Administrative Agent, and Bankers
Trust Company as Collateral Agent. (19)
10(14) -Security Agreement dated as of July 22, 1993, among Embassy Suites, Inc., the
Collateral Grantors parties thereto and Bankers Trust Company, as Collateral
Agent. (19)
10(15) -Deed of Trust, Leasehold Deed of Trust, Assignment, Assignment of Leases and
Rents, Security Agreement and Financing Statement, dated as of July 22, 1993,
from Embassy Suites, Inc., Harrah's Laughlin, Inc., and Harrah's Reno Holding
Company, Inc., the Grantors, to First American Title Company of Nevada, as
Trustee, for the benefit of Bankers Trust Company, as Beneficiary. (19)
10(16) -Mortgage, Leasehold Mortgage, Assignment, Assignment of Leases and Rents and
Security Agreement, dated as of July 22, 1993, from Marina Associates and
Embassy Suites, Inc., the Mortgagors, to Bankers Trust Company, as Collateral
Agent and the Mortgagee. (19)
10(17) -Pledge Agreement, dated as of July 22, 1993, between The Promus Companies
Incorporated and Bankers Trust Company, as Collateral Agent. (19)
10(18) -Pledge Agreement, dated as of July 22, 1993, among Embassy Suites, Inc., ESI
Equity Development Corporation, Harrah's, Harrah's Club, Casino Holding Company,
and Bankers Trust Company, as the General Collateral Agent, and Bank of America
Nevada as the Nevada Collateral Agent. (19)
10(19) -Form of License Agreement for Hampton Inn. (7)
10(20) -Form of License Agreement for Hampton Inn revised 1988. (8)
10(21) -Form of License Agreement for Hampton Inn revised 1991. (15)
10(22) -Form of License Agreement for Hampton Inn revised 1992. (18)
10(23) -Form of License Agreement for Embassy Suites. (9)
10(24) -Form of License Agreement for Embassy Suites revised 1989. (12)
10(25) -Form of License Agreement for Embassy Suites revised 1990. (13)
10(26) -Form of License Agreement for Embassy Suites revised 1991. (15)
10(27) -Form of License Agreement for Embassy Suites revised 1992. (18)
10(28) -Form of Short-Term License Agreement for Embassy Suites. (12)
10(29) -Form of Short-Term License Agreement for Embassy Suites revised 1990. (13)
10(30) -Form of Short-Term License Agreement for Embassy Suites revised 1991. (15)
10(31) -Form of Short-Term License Agreement for Embassy Suites revised 1992. (18)
10(32) -Form of License Agreement for Homewood Suites. (3)
10(33) -Form of License Agreement for Homewood Suites revised 1992. (18)
- ------------
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to item 14(a)(3) of Form 10-K.
NO.
- ----------
10(34) -Form of License Agreement for Homewood Suites revised 1993. (24)
10(35) -Form of License Agreement for Embassy Suites revised 1993. (24)
10(36) -Form of Short-Term License Agreement for Embassy Suites revised 1993. (24)
10(37) -Form of License Agreement for Hampton Inn revised 1993. (24)
10(38) -Form of License Agreement for Hampton Inn & Suites. (24)
**10(39) -Form of License Agreement for Embassy Suites revised 1994.
**10(40) -Form of Short-Term License Agreement for Embassy Suites revised 1994.
**10(41) -Form of License Agreement for Hampton Inn revised 1994.
**10(42) -Form of License Agreement for Hampton Inn & Suites revised 1994.
**10(43) -Form of License Agreement for Homewood Suites revised 1994.
10(44) -Management Agreement dated as of December 17, 1986, between Hampton Inns, Inc.
and Hampton/GHI Associates No. 1. (10)
10(45) -Form of Management Agreement between Embassy Suites, Inc. and affiliates of
General Electric Pension Trust. (10)
+10(46) -Employment Agreement dated as of February 26, 1994, and effective April 29,
1994, between The Promus Companies Incorporated and Michael D. Rose. (26)
+10(47) -Amended and Restated Severance Agreement dated as of May 1, 1992 between The
Promus Companies Incorporated and Michael D. Rose. (18)
+10(48) -Summary Plan Description of Executive Term Life Insurance Plan. (18)
+10(49) -Forms of Stock Option (1990 Stock Option Plan). (12)
+10(50) -Revised Forms of Stock Option (1990 Stock Option Plan). (18)
+10(51) -Form of The Promus Companies Incorporated's Annual Bonus Plan, as amended, for
Managers and Executives. (13)
+10(52) -Forms of Restricted Stock Award (1990 Restricted Stock Plan). (12)
+10(53) -Deferred Compensation Plan dated October 16, 1991. (15)
+10(54) -Form of Deferred Compensation Agreement. (12)
+10(55) -Form of Deferred Compensation Agreement revised November 1991. (15)
+10(56) -Executive Deferred Compensation Plan. (12)
+10(57) -First Amendment to Executive Deferred Compensation Plan, dated as of October 25,
1990. (13)
+10(58) -Second Amendment to Executive Deferred Compensation Plan, dated as of October
25, 1991. (15)
+10(59) -Third Amendment to Executive Deferred Compensation Plan, dated as of October 29,
1992. (18)
+10(60) -Forms of Restricted Stock Award (1990 Restricted Stock Plan). (18)
+10(61) -First Amendment to Escrow Agreement dated January 31, 1990 among Holiday
Corporation, certain subsidiaries thereof and Sovran Bank, as escrow agent. (12)
+10(62) -Escrow Agreement dated February 6, 1990 between The Promus Companies
Incorporated, certain subsidiaries thereof, and Sovran Bank, as escrow agent.
(12)
+10(63) -Form of Amended and Restated Severance Agreement dated November 5, 1992, entered
into with Charles A. Ledsinger, Jr., Ben C. Peternell, Philip G. Satre and Colin
V. Reed. (18)
- ------------
** Filed herewith
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to item 14(a)(3) of Form 10-K.
NO.
- ----------
+10(64) -Form of memorandum agreement dated July 2, 1991, eliminating stock appreciation
rights under stock options held by Charles A. Ledsinger, Jr., Ben C. Peternell
and Philip G. Satre. (14)
+10(65) -The Promus Companies Incorporated Amended and Restated Savings and Retirement
Plan dated as of February 6, 1990. (18)
+10(66) -Administrative Regulations, Long Term Compensation Plan (Restricted Stock Plan
and Stock Option Plan), dated as of January 1, 1992. (17)
+10(67) -Amendment dated October 29, 1992 to The Promus Companies Incorporated Savings
and Retirement Plan Trust Agreement; Amendment dated September 21, 1992 to The
Promus Companies Incorporated Savings and Retirement Plan Trust Agreement. (18)
+10(68) -Revised Form of Stock Option. (21)
+10(69) -The Promus Companies Incorporated 1990 Stock Option Plan (as amended as of April
30, 1993). (20)
10(70) -Limited Partnership Agreement of Des Plaines Development Limited Partnership
between Harrah's Illinois Corporation and John Q. Hammons, dated February 28,
1992; First Amendment to Limited Partnership Agreement of Des Plaines Limited
Development Partnership dated as of October 5, 1992. (24)
+10(71) -Amendment to Escrow Agreement dated as of October 29, 1993 among The Promus
Companies Incorporated, certain subsidiaries thereof, and NationsBank, formerly
Sovran Bank. (24)
10(72) -Amended and Restated Partnership Agreement of Harrah's Jazz Company, dated as of
March 15, 1994, among Harrah's New Orleans Investment Company, New
Orleans/Louisiana Development Corporation and Grand Palais Casino, Inc.; First
Amendment to the Amended and Restated Partnership Agreement of Harrah's Jazz
Company, effective as of March 15, 1994. (24)
10(73) -Second Amendment dated March 31, 1994 to the Amended and Restated Partnership
Agreement of Harrah's Jazz Company. (25)
+10(74) -The Promus Companies Incorporated 1990 Stock Option Plan, as amended April 29,
1994. (25)
+10(75) -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. (26)
+10(76) -The Promus Companies Incorporated 1990 Stock Option Plan, as amended July 29,
1994. (26)
+10(77) -Amendment dated May 27, 1994 to The Promus Companies Incorporated Savings and
Retirement Plan. (26)
+10(78) -Employment Agreement dated as of February 25, 1994, and effective April 29,
1994, between The Promus Companies Incorporated and Philip G. Satre including
exhibits thereto. (27)
+10(79) -Amendment dated as of August 31, 1994 to The Promus Companies Incorporated
Savings and Retirement Plan. (27)
10(80) -Consent dated as of October 7, 1994, among The Promus Companies Incorporated,
Embassy Suites, Inc., the Banks and Agents parties thereto, Marina Associates
and Bankers Trust Company, as Administrative Agent. (27)
10(81) -Amended and Restated Third Amendment to the Amended and Restated Partnership
Agreement of Harrah's Jazz Company. (16)
10(82) -Fourth Amendment to the Amended and Restated Partnership Agreement of Harrah's
Jazz Company. (16)
- ------------
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to Item 14(a)(3) of Form 10-K
NO.
- ----------
10(83) -Indenture dated as of November 15, 1994 between Harrah's Jazz Company, Harrah's
Jazz Finance Corp. and First National Bank of Commerce as Trustee for the First
Mortgage Notes including form of First Mortgage Note. (16)
10(84) -Intercreditor Agreement between the Bank Lenders and the First National Bank of
Commerce as Trustee dated as of November 15, 1994. (16)
10(85) -Notes Completion Guarantee among Embassy Suites, Inc., The Promus Companies
Incorporated and First National Bank of Commerce as Trustee dated as of November
16, 1994. (16)
10(86) -Cash Collateral and Disbursement Agreement among First National Bank of Commerce
as Trustee, First National Bank of Commerce as Collateral Agent, Harrah's Jazz
Company and Harrah's Jazz Finance Corp., dated November 16, 1994. (16)
10(87) -Collateral Mortgage Note by Harrah's Jazz Company dated November 15, 1994. (16)
10(88) -Act of Collateral Mortgage and Collateral Assignment of Proceeds by Harrah's
Jazz Company dated November 15, 1994. (16)
10(89) -Act of Collateral Assignment of Leases and Rents between Harrah's Jazz Company
and First National Bank of Commerce as Collateral Agent dated November 15, 1994.
(16)
10(90) -Act of Security Agreement and Pledge between Harrah's Jazz Company and First
National Bank of Commerce as Collateral Agent dated November 15, 1994. (16)
10(91) -Pledge Agreement between Harrah's Jazz Company, Harrah's Jazz Finance Corp. and
First National Bank of Commerce as Collateral Agent dated as of November 16,
1994. (16)
10(92) -Security Agreement among Harrah's Jazz Company, Harrah's Jazz Finance Corp. and
First National Bank of Commerce as Collateral Agent dated as of November 16,
1994. (16)
10(93) -Security Agreement (Cash Collateral) among Harrah's Jazz Company, Harrah's Jazz
Finance Corp. and First National Bank of Commerce as Trustee dated November 16,
1994. (16)
10(94) -Manager Subordination Agreement (First Mortgage Notes) among Harrah's Jazz
Company, Harrah's New Orleans Management Company and First National Bank of
Commerce as Trustee dated as of November 16, 1994. (16)
10(95) -Consultant Subordination Agreement (First Mortgage Notes) among Harrah's Jazz
Company, Grand Palais Management Company, New Orleans/Louisiana Development
Corporation and First National Bank of Commerce as Trustee dated as of November
16,1994. (16)
10(96) -Completion Guarantor Subordination Agreement (First Mortgage Notes) among
Harrah's Jazz Company, The Promus Companies Incorporated, Embassy Suites, Inc.
and First National Bank of Commerce as Trustee dated as of November 16, 1994.
(16)
10(97) -Amended Lease Agreement between Rivergate Development Corporation, as Landlord
and Harrah's Jazz Company, as Tenant and City of New Orleans, as Intervenor
dated March 15, 1994. (28)
10(98) -Amended General Development Agreement between Rivergate Development Corporation
and Harrah's Jazz Company and City of New Orleans, as Intervenor dated March 15,
1994. (4)
10(99) -Temporary Casino Lease between Rivergate Development Corporation, as Landlord
and Harrah's Jazz Company, as Tenant and City of New Orleans, as Intervenor
dated March 15, 1994. (4)
10(100) -Amendment to Amended Lease Agreement between Rivergate Development Corporation,
as Landlord and Harrah's Jazz Company, as Tenant and City of New Orleans, as
Intervenor dated October 5, 1994. (28)
NO.
- ----------
10(101) -Agreement between City of New Orleans and Harrah's Jazz Company, dated October
5, 1994 (the "Separate City Agreement"). (28)
10(102) -Agreement among Rivergate Development Corporation, City of New Orleans and
Embassy Suites, Inc. and Harrah's Jazz Company, as intervenor, dated October 5,
1994 (the "Embassy Access Agreement"). (28)
10(103) -Casino Operating Contract between the Louisiana Economic Development and Gaming
Corporation and Harrah's Jazz Company dated July 15, 1994. (4)
10(104) -First Amendment to Casino Operating Contract between the Louisiana Economic
Development and Gaming Corporation and Harrah's Jazz Company dated August 31,
1994. (28)
10(105) -Amended and Restated Management Agreement between Harrah's New Orleans
Management Company and Harrah's Jazz Company dated March 14, 1994. (4)
10(106) -Construction Agreement between Harrah's Jazz Company and Centex Landis
Construction Co., Inc. dated October 10, 1994, for the construction of the
Permanent Casino. (28)
10(107) -Construction Agreement between Harrah's Jazz Company and Harvey Honore
Construction Company, Inc. and Broadmoor dated October 10, 1994, for the
construction of the Temporary Casino. (28)
10(108) -Design and Construction Agreement between Harrah's Jazz Company and Broadmoor
dated October 10, 1994, for the construction of the parking structure. (28)
10(109) -Credit Agreement among Harrah's Jazz Company, Harrah's Jazz Finance Corp.,
Various Banks, and Bankers Trust Company as Administrative Agent dated as of
November 8, 1994. (16)
10(110) -Owner's Policy issued March 16, 1994 by First American Title Insurance Company
to Harrah's Jazz Company with attachments. (16)
10(111) -Lender's Title Insurance Policy issued November 16, 1994 by First American Title
Insurance Company together with reinsurance agreements. (16)
10(112) -Completion Loan Agreement among Harrah's Jazz Company, Embassy Suites, Inc., The
Promus Companies Incorporated, New Orleans/Louisiana Development Corporation,
Grand Palais Casino, Inc., and Grand Palais Management Company, L.L.C. dated
October 12, 1994. (23)
10(113) -Construction Lien Indemnity Obligation Agreement between Harrah's Jazz Company
and Embassy Suites, Inc. dated October 12, 1994. (23)
10(114) -First Amendment to the Construction Lien Indemnity Obligation Agreement. (16)
10(115) -Option Agreement between Harrah's New Orleans Investment Company and New
Orleans/Louisiana Development Corporation dated November 8, 1994. (16)
10(116) -Option Agreement between Harrah's New Orleans Investment Company and Grand
Palais Casino, Inc. dated November 8 , 1994. (16)
10(117) -Put Agreement between Harrah's New Orleans Investment Company and New
Orleans/Louisiana Development Corporation dated November 8, 1994. (16)
10(118) -Put Agreement between Harrah's New Orleans Investment Company and Grand Palais
Casino, Inc. dated November 8, 1994. (16)
10(119) -Underwriting Agreement among Donaldson, Lufkin & Jenrette Securities
Corporation, Salomon Brothers Inc, BT Securities Corporation, Harrah's Jazz
Company and Harrah's Jazz Finance Corp. dated November 9, 1994. (16)
10(120) -Specimen form of 14 1/4% First Mortgage Note Due 2001 of Harrrah's Jazz Company
and Harrah's Jazz Finance Corp. (16)
10(121) -Manager Subordination Agreement (Credit Agreement) between Harrah's New Orleans
Management Company and Bankers Trust Company as Administrative Agent dated as of
November 16, 1994. (16)
NO.
- ----------
10(122) -Bank Completion Guaranty among Embassy Suites, Inc., The Promus Companies
Incorporated and Bankers Trust Company as Administrative Agent dated as of
November 16, 1994. (16)
10(123) -Bank Disbursement and Security Agreement among Harrah's Jazz Company, Harrah's
Jazz Finance Corp. and First National Bank of Commerce as Collateral Agent dated
as of November 16, 1994. (16)
10(124) -Completion Guaranty by The Promus Companies Incorporated and Embassy Suites,
Inc. dated as of November 16, 1994 in favor of the Louisiana Economic
Development and Gaming Corporation. (16)
+**10(125) -Revised Form of Stock Option (1990 Stock Option Plan).
+**10(126) -Revised Forms of Restricted Stock Award (1990 Stock Option Plan).
+**10(127) -Administrative Regulations, Long Term Compensation Plan (Restricted Stock Plan
and Stock Option Plan) dated as of February 24, 1995.
+**10(128) -Form of Agreement to Cancel Options dated as of December 16, 1994 entered into
with Michael D. Rose, Philip G. Satre, Charles A. Ledsinger, Jr., Ben C.
Peternell, Colin V. Reed, E. O. Robinson, Jr. and John M. Boushy.
**11 -Computation of per share earnings.
**12 -Computations of ratios.
**21 -List of subsidiaries of The Promus Companies Incorporated.
**27 -Financial Data Schedule
99(1) -Proxy Statement--Information Statement--Prospectus dated December 13, 1989 of
Holiday Corporation, The Promus Companies Incorporated and Bass Public Limited
Company. (12)
- ------------
** Filed herewith
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to item 14(a)(3) of Form 10-K.
FOOTNOTES
(1) Incorporated by reference from the Company's Registration Statement on Form
10, File No. 1-10410, filed on December 13, 1989.
(2) Incorporated by reference from the Company's Current Report on Form 8-K
dated February 16, 1990, File No. 1-10410.
(3) Incorporated by reference from Holiday Corporation's Annual Report on Form
10-K for the fiscal year ended January 1, 1988, filed March 31, 1988, File
No. 1-8900.
(4) Incorporated by reference from Amendment No. 3 to Form S-1 Registration
Statement of Harrah's Jazz Company and Harrah's Jazz Finance Corp., File
No. 33-73370, filed August 4, 1994.
(5) Incorporated by reference from Holiday Inns, Inc's Registration Statement
on Form S-3, File No. 33-11163, filed December 31, 1986.
(6) Incorporated by reference from the Company's and Embassy Suites, Inc.'s
Amendment No. 2 to Form S-4 Registration Statement, File No. 33-49509-01,
filed July 16, 1993.
(7) Incorporated by reference from Holiday Inns, Inc.'s Annual Report on Form
10-K for the fiscal year ended December 30, 1983, filed March 21, 1984,
File No. 1-4804.
(8) Incorporated by reference from Holiday Corporation's Annual Report on Form
10-K for the fiscal year ended December 30, 1988, filed March 30, 1989,
File No. 1-8900.
(9) Incorporated by reference from Holiday Corporation's Annual Report on Form
10-K for the fiscal year ended January 3, 1986, filed March 28, 1986, File
No. 1-8900.
(10) Incorporated by reference from Holiday Corporation's Annual Report on Form
10-K for the fiscal year ended January 2, 1987, filed March 27, 1987, File
No. 1-8900.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1993, filed May 13, 1993, File No. 1-10410.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 1989, filed March 28, 1990, File No.
1-10410.
(13) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 28, 1990, filed March 21, 1991, File No.
1-10410.
(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 27, 1991, filed November 8, 1991, File No.
1-10410.
(15) Incorporated by reference from Amendment No. 2 to the Company's and
Embassy's Registration Statement on Form S-1, File No. 33-43748, filed
March 18, 1992.
(16) Incorporated by reference from Harrah's Jazz Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994, filed December 21,
1994, File No. .
(17) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1992, filed May 13, 1992, File No. 1-10410.
(18) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992, filed March 12, 1993, File No.
1-10410.
(19) Incorporated by reference from the Company's Current Report on Form 8-K
filed August 6, 1993, File No. 1-10410.
(20) Incorporated by reference from Post-Effective Amendment No. 1 to the
Company's Form S-8 Registration Statement, File No. 33-32864-01, filed July
22, 1993.
(21) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993, filed August 12, 1993, File No.
1-10410.
(22) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993, filed November 12, 1993, File No.
1-10410.
(23) Incorporated by reference from Amendment No. 5 to Form S-1 Registration
Statement of Harrah's Jazz Company and Harrah's Jazz Finance Corp., File
No. 33-73370, filed October 26, 1994.
(24) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993, filed March 28, 1994, File No.
1-10410.
(25) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994, filed May 12, 1994, File No. 1-10410.
(26) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, filed August 11, 1994, File No.
1-10410.
(27) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994, filed November 14, 1994, File No.
1-10410.
(28) Incorporated by reference from Amendment No. 4 to Form S-1 Registration
Statement of Harrah's Jazz Company and Harrah's Jazz Finance Corp., File
No. 33-73370, filed October 12, 1994.