-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VsSrBkVr9q3tLtgpsiI4FKavQ50B6Yo0Lrip8fJMeCKSB7LsINv4f70q/PWQP7jW Z7GcIOCFPstuBqZCrTun3A== 0000928585-95-000019.txt : 19951119 0000928585-95-000019.hdr.sgml : 19951119 ACCESSION NUMBER: 0000928585-95-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROMUS HOTEL CORP CENTRAL INDEX KEY: 0000944647 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 621596939 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11463 FILM NUMBER: 95589165 BUSINESS ADDRESS: STREET 1: 6800 POPLAR AVENUE STREET 2: STE 200 CITY: MEMPHIS STATE: TN ZIP: 38138 MAIL ADDRESS: STREET 1: 6800 POPLAR AVENUE STREET 2: STE 200 CITY: MEMPHIS STATE: TN ZIP: 38138 10-Q 1 QUARTERLY FILING SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . Commission File No. 1-11463 3 PROMUS HOTEL CORPORATION (Exact name of registrant as specified in its charter) Delaware I.R.S. No. 62-1596939 (State of Incorporation) (I.R.S. Employer Identification No.) 850 Ridge Lake Blvd., Suite 400 Memphis, Tennessee 38120 (Address of principal executive offices) (901) 680-7200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- At September 30, 1995, there were outstanding 51,373,688 shares of the Company's Common Stock. Page 1 of 60 Exhibit Index Page 32 2 PART I - FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements - ------------------------------ As discussed in Note 1, on June 30, 1995, The Promus Companies Incorporated (Parent) completed the planned spin-off (Spin-Off) that split Parent into two independent public corporations, one for conducting its casino entertainment business and one for conducting its hotel business. Parent's interests in the Embassy Suites, Hampton Inn and Homewood Suites hotel divisions and certain other hotel-related assets and liabilities were transferred to Promus Hotel Corporation (PHC or the Company). The accompanying consolidated condensed financial statements of PHC include the assets and liabilities, revenues, expenses and cash flows of Parent's hotel business on a stand-alone basis as of December 31, 1994, and through the six months ended June 30, 1995, as well as actual results of the Company for the three months ended September 30, 1995. The accompanying unaudited consolidated condensed financial statements of PHC, a Delaware corporation, have been prepared in accordance with the instructions to Form 10-Q, and therefore do not include all information and notes necessary for complete financial statements in conformity with generally accepted accounting principles. The results for the periods indicated are unaudited, but reflect all adjustments (consisting only of normal recurring adjustments) which management considers necessary for a fair presentation of operating results. Results of operations for interim periods are not necessarily indicative of a full year of operations. These consolidated condensed financial statements should be read in conjunction with the PHC combined financial statements and notes thereto included in the PHC Registration Statement on Form 10/A as declared effective on May 3, 1995. 3 PROMUS HOTEL CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) Sept 30, Dec 31, (in thousands, except share amounts) 1995 1994 --------- -------- ASSETS Current assets Cash and cash equivalents $ 1,860 $ 2,222 Receivables, including notes receivable of $7,992 and $66, less allowance for doubtful accounts of $1,654 and $1,270 34,001 18,148 Deferred income taxes 1,473 2,844 Supplies 4,298 1,095 Prepayments and other 3,128 1,256 --------- -------- Total current assets 44,760 25,565 --------- -------- Land, buildings and equipment 460,071 410,751 Less: accumulated depreciation (110,665) (88,611) --------- -------- 349,406 322,140 Investments in and advances to nonconsolidated affiliates (Note 7) 49,416 35,856 Deferred costs and other 45,954 37,004 --------- -------- $ 489,536 $420,565 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 19,390 $ 14,437 Accrued expenses 42,615 18,769 Current portion of long-term debt 983 1,255 --------- -------- Total current liabilities 62,988 34,461 Long-term debt (Note 2) 203,963 189,943 Deferred credits and other 35,752 28,649 Deferred income taxes 28,458 24,504 --------- -------- 331,161 277,557 --------- -------- Commitments and contingencies (Notes 5 and 8) Stockholders' equity Common stock, $0.10 par value, 360,000,000 shares authorized, 51,373,688 shares outstanding 5,137 - Capital surplus 138,814 - Retained earnings 15,761 - Deferred compensation related to restricted stock (1,337) - Parent company investment - 143,008 --------- -------- 158,375 143,008 --------- -------- $ 489,536 $420,565 ========= ======== See accompanying Notes to Consolidated Condensed Financial Statements. 4 PROMUS HOTEL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) Third Quarter Ended Nine Months Ended (in thousands, except Sept 30, Sept 30, Sept 30, Sept 30, per share amounts) 1995 1994 1995 1994 -------- -------- -------- -------- Revenues Rooms $ 29,333 $ 28,270 $ 88,967 $ 84,167 Food and beverage 1,690 1,791 5,478 5,908 Franchise and management fees 22,491 22,438 60,684 57,594 Other (Note 7) 18,457 13,007 49,627 36,931 -------- -------- -------- -------- Total revenues 71,971 65,506 204,756 184,600 -------- -------- -------- -------- Operating expenses Direct Rooms 14,360 14,598 42,341 42,720 Food and beverage 1,722 1,789 5,276 5,823 Depreciation 6,399 6,612 20,113 18,306 Other 19,004 12,995 51,410 42,277 -------- -------- -------- -------- Total direct operating expenses 41,485 35,994 119,140 109,126 -------- -------- -------- -------- 30,486 29,512 85,616 75,474 General and administrative (1,009) (756) (2,675) (2,276) Property transactions 2,366 2,324 2,035 1,927 -------- -------- -------- -------- Operating income 31,843 31,080 84,976 75,125 Interest expense, net of interest capitalized (Notes 2 and 7) (7,570) (7,682) (24,312) (22,703) Interest and other income 80 27 353 78 -------- -------- -------- -------- Income before income taxes and extraordinary item 24,353 23,425 61,017 52,500 Provision for income taxes (10,253) (9,833) (25,688) (22,570) -------- -------- -------- -------- Income before extraordinary item 14,100 13,592 35,329 29,930 Extraordinary gain, net of income tax 1,661 - 1,661 - -------- -------- -------- -------- Net income $ 15,761 $ 13,592 $ 36,990 $ 29,930 ======== ======== ======== ======== Income per common and common equivalent share (Note 10) $ .31 ======== Average common and common equivalent shares outstanding 51,570 ======== See accompanying Notes to Consolidated Condensed Financial Statements. 5
PROMUS HOTEL CORPORATION CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (NOTES 1 and 4) (UNAUDITED) Deferred Compensation Related to Restricted Parent Common Stock Capital Retained Stock Company (in thousands) Shares Amount Surplus Earnings (Note 6) Investment Total ------ ------ -------- -------- ------------ ---------- -------- Balance - December 31, 1994 - $ - $ - $ - $ - $ 143,008 $143,008 Net Income - January 1, 1995 through June 30, 1995 - - - - - 21,230 21,230 Intercompany activity with Parent - January 1, 1995 through June 30, 1995 - - - - - (21,967) (21,967) Spin-Off of the Company (Note 1) 51,352 5,135 138,490 - (1,354) (142,271) - Shares issued under incentive compensation plan 8 1 174 - (175) - - ------ ------ -------- ------- ------- --------- -------- Balance - June 30, 1995 51,360 5,136 138,664 - (1,529) - 142,271 Net Income- July 1, 1995 through Sept 30, 1995 - - - 15,761 - - 15,761 Net shares issued under incentive compensation plans, including income tax benefit of $97 14 1 150 - 192 - 343 ------ ------ -------- ------- ------- --------- -------- Balance - Sept 30, 1995 51,374 $5,137 $138,814 $15,761 $(1,337) $ - $158,375 ====== ====== ======== ======= ======= ========= ========
See accompanying Notes to Consolidated Condensed Financial Statements. 6 PROMUS HOTEL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended Sept 30, Sept 30, (in thousands) 1995 1994 -------- -------- Cash flows from operating activities Net income $ 36,990 $ 29,930 Adjustments to reconcile net income to cash flows from operating activities Depreciation and amortization 22,762 18,737 Other noncash items (723) (3,054) Equity in earnings and distributions from nonconsolidated affiliates (4,204) 313 Net gains from property transactions (2,159) (103) Net change in long-term accounts 4,421 6,173 Net change in working capital accounts (397) (12,419) -------- -------- Cash flows provided by operating activities 56,690 39,577 -------- -------- Cash flows from investing activities Land, building and equipment additions (50,922) (11,099) Other (7,590) 17,184 -------- -------- Cash flows (used in) provided by investing activities (58,512) 6,085 -------- -------- Cash flows from financing activities Debt retirements (16,276) (1,452) Advances from (to) Parent 17,680 (45,554) Other 56 - -------- -------- Cash flows provided by (used in) financing activities 1,460 (47,006) -------- -------- Net decrease in cash and cash equivalents (362) (1,344) Cash and cash equivalents, beginning of period 2,222 3,653 -------- -------- Cash and cash equivalents, end of period $ 1,860 $ 2,309 ======== ======== See accompanying Notes to Consolidated Condensed Financial Statements. 7 PROMUS HOTEL CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 1995 (UNAUDITED) Note 1 - Basis of Presentation and Organization - ----------------------------------------------- On June 30, 1995, The Promus Companies Incorporated (Parent) completed the transfer of the operations, assets and liabilities of its hotel business (the Hotel Business), composed of three hotel brands targeted at specific market segments: Embassy Suites, Hampton Inn and Homewood Suites, to a new publicly traded entity, Promus Hotel Corporation (PHC or the Company). As approved by Parent's Board of Directors and stockholders on May 26, 1995, this entity was spun-off (the Spin-Off) from the Parent and its stock was distributed to Parent's stockholders on a one- for-two basis effective June 30, 1995 (the Distribution). Concurrent with the Distribution, Parent changed its name to Harrah's Entertainment, Inc. The accompanying consolidated condensed financial statements include the assets, liabilities, revenues, expenses and cash flows of Parent's Hotel Business on a stand-alone basis as of December 31, 1994, and through the six months ended June 30, 1995, as well as actual results of the Company for the three months ended September 30, 1995. All significant intercompany accounts and transactions among PHC entities have been eliminated. Investments in 50% or less owned companies and joint ventures over which PHC has the ability to exercise significant influence, but does not control, are accounted for using the equity method. PHC reflects its share of income before interest expense and any extraordinary items of these nonconsolidated affiliates in revenues - other. PHC's proportionate share of interest expense of such nonconsolidated affiliates is included in interest expense in the Consolidated Condensed Statements of Income (see Note 7 for combined summarized financial information regarding these nonconsolidated affiliates). Management believes that PHC's income statement treatment of equity investments is the preferable presentation due to the nature of PHC's equity investments. Note 2 - Long-term Debt - ----------------------- Parent Debt Allocation ---------------------- The Company's financial position at December 31, 1994, and its results of operations through June 30, 1995, reflect all indebtedness, together with related interest expense, specifically identified with PHC entities, as well as a pro-rata portion of Parent's historical corporate debt balance, unamortized deferred finance charges and interest expense. Allocations of those amounts to PHC from Parent were based on the percentage of Parent's historical corporate debt that was expected to be retired using proceeds from PHC's new $350 million bank credit facility (the PHC Facility). The accompanying Consolidated Condensed Balance Sheet, as of December 31, 1994, reflects corporate debt allocated to PHC from Parent of $187.8 8 million, together with debt specifically associated with PHC entities of $3.3 million, as well as the unamortized deferred finance charges allocated to PHC of $3.2 million. PHC's interest expense includes interest related to indebtedness specifically identified with PHC entities, PHC's proportionate share of interest expense of its nonconsolidated affiliates (see Note 7), and Parent's allocation of interest and deferred finance costs related to the allocated debt. Parent's corporate interest expense, including deferred finance costs, allocated to PHC was $4.2 million for third quarter 1994, and $10.5 million (which represents interest only allocated through June 30, 1995) and $12.7 million for the nine months ended September 30, 1995 and 1994, respectively. New Bank Facility ----------------- Immediately prior to the Distribution, Parent drew, through its then wholly-owned subsidiary Embassy Suites, Inc., $218 million under the PHC Facility to retire a portion of existing Parent debt which had been previously allocated to PHC and to pay related bank fees and expenses. The actual borrowings outstanding of $202.5 million, together with deferred finance charges of $2.3 million, are reflected in long-term debt and deferred costs and other, respectively, in the accompanying Consolidated Condensed Balance Sheet as of September 30, 1995. The PHC Facility is secured by the stock of PHC's material subsidiaries. The liability associated with all current and future borrowings under the PHC Facility was assumed by Promus Hotels, Inc. (PHI), PHC's wholly-owned subsidiary, with PHC as guarantor, upon consummation of the Spin-Off, at which time Parent was released from liability. The PHC Facility consists of a $300 million revolving credit arrangement with a maturity of five years (the Five-Year Revolver) and a $50 million annually extendible revolving credit facility with an initial maturity of 364 days (the Extendible Revolver). The Extendible Revolver is convertible into a two- year term loan with equal amortizing payments over such two-year period. Interest on the drawn portion of the PHC Facility will be, at the option of the Company, equal to either (i) the Base Rate, as defined, or (ii) LIBOR plus the applicable spread. Both agreements incorporate a tiered scale that defines the applicable LIBOR spread and a facility fee based upon the more favorable of the Company's current debt rating or leverage ratio, as defined. Currently, the LIBOR spread on the Five-Year Revolver and the Extendible Revolver is .35% and .40%, respectively, and the facility fee required on the total amount of the Five-Year Revolver and the Extendible Revolver is 0.20% and 0.15%, respectively. The PHC Facility also contains provisions that restrict certain investments, limit the Company's ability to incur additional indebtedness and pay dividends, and require that certain performance ratios be maintained. As of September 30, 1995, PHC was in compliance with all such 9 covenants. The Five-Year Revolver also provides for a sublimit for letters of credit of $20 million. At September 30, 1995, approximately $8.6 million in letters of credit were outstanding under this agreement. Interest Rate Agreements ------------------------ In connection with the Spin-Off, PHI assumed two of Parent's existing interest rate swaps, each with a notional amount of $50 million, in order to effectively convert to a fixed rate a portion of the amount of variable rate debt outstanding under the PHC Facility. The floating rate resets every three months under both agreements. One swap arrangement specifies a 6.99% contractual fixed rate (effective rate of 7.54%) with a March 20, 2000 expiration, while the other bears a 7.8625% contractual fixed rate (effective rate of 8.4125%) expiring July 28, 1997. Note 3 - Supplemental Disclosure of Cash Paid for Interest and Taxes - ---------------------------------------------------------------- The following table reconciles PHC's interest expense, net of interest capitalized, to cash paid for interest: Third Quarter Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, (in thousands) 1995 1994 1995 1994 ------- ------- ------- ------- Interest expense, net of amount capitalized (Note 2) $ 7,570 $ 7,682 $24,312 $22,703 Adjustments to reconcile to cash paid for interest PHC's share of interest expense of nonconsolidated affiliates (Note 7) (3,208) (3,302) (9,823) (9,454) Amortization of deferred finance charges (192) (196) (594) (558) Amounts accrued but not yet paid (1,791) - (1,791) - Net amortization of discounts and premiums - (12) (8) (34) Other (39) (35) (116) (104) ------- ------- ------- ------- Cash paid for interest, net of amount capitalized $ 2,340 $ 4,137 $11,980 $12,553 ======= ======= ======= ======= Cash paid for income taxes $ 640 $ - $ 640 $ - ======= ======= ======= ======= For purposes of this presentation, interest expense allocated to PHC by Parent is assumed to have been paid in the quarter allocated. Additionally, Parent was responsible for the payment of PHC income taxes for periods prior to the Spin-Off. 10 Concurrent with the Spin-Off, the historical net assets and liabilities of the Hotel Business were transferred to PHC by Parent, and the issuance of PHC common stock was completed in connection with the Distribution. Note 4 - Stockholders' Equity - ----------------------------- In addition to its common stock, the Company 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 A, $1.125 par value Note 5 - Commitments and Contingencies - -------------------------------------- Contractual Commitments ----------------------- PHC 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, PHC is liable under certain lease agreements where it has assigned the direct obligation to third party interests, and under certain loan guarantees. PHC believes the likelihood is remote that material payments will be required under these agreements. PHC's estimated maximum exposure under such agreements is currently less than $39 million over the next 30 years. FelCor Agreements ----------------- During September 1995, PHI entered into an agreement with FelCor Suite Hotels, Inc. and Felcor Suites Limited Partnership (FelCor), resulting from FelCor's agreement to acquire the Crown Sterling hotel chain (the Crown Sterling Agreement). In connection with the acquisition, FelCor plans to convert up to 16 of these hotels (over 4,000 suites) to the Embassy Suites brand. In return, PHI will make available up to $50 million to FelCor for the conversion through investments in FelCor common stock and/or limited partnership interests that are convertible to FelCor common stock. These investments may be subsequently sold on the open market subject to certain restrictions. PHI will also guarantee a third party loan, not to exceed $25 million. Each converted hotel will operate under a 20-year license agreement, and a ten-year management contract will be awarded to the Company. Pursuant to this agreement, PHI loaned FelCor $7.5 million representing one-half of the deposit required for the acquisition. Availability under the Subscription Agreement (described below) has been reduced by the outstanding loan amount. 11 On May 3, 1995, Parent entered into a Subscription Agreement with FelCor whereby Parent agreed to purchase up to $25 million in FelCor limited partnership interests. Parent's commitment, which was assumed by PHI at the Distribution date, is subject to various conditions which include, but are not limited to, the limited partnership's acquisition of additional hotels to be converted to the Embassy Suites hotel brand (Embassy) and PHI being granted the management contract for the subject property. The limited partnership interests are convertible into FelCor common stock at $25.00 per share, subject to some limitations. Pursuant to the terms of the Subscription Agreement, an all- suites hotel was purchased by FelCor and converted to an Embassy on July 1, 1995. FelCor subsequently purchased an interest in three other properties that were already in the Embassy system, and management contracts for all four properties were awarded to PHI. In accordance with the agreement, PHI agreed to purchase $12.5 million of limited partnership interests representing consideration for all four hotels. Virtually all of the $75 million committed under these agreements (subject to the reduction associated with the loan advanced under the Crown Sterling Agreement) is expected to be funded before the end of the first quarter 1996. Litigation ---------- Upon completion of the Distribution, PHC assumed responsibility for various inquiries, administrative proceedings and litigation relating to contracts, sales of property and other matters arising in the normal course of the Hotel Business. While any proceeding or litigation has an element of uncertainty, management believes that the final outcome of these matters will not have a materially adverse effect upon PHC's consolidated financial position or its results of operations. Employment and Severance Agreements ----------------------------------- PHC has entered into individual severance agreements with 13 senior officers of the Company that provide for a compensation payment of 2.99 times the average annual cash compensation (salary and bonus) paid to each such executive for the five preceding calendar years, including such compensation paid during service with Parent, as well as accelerated payment of any compensation or awards payable to such executive under any PHC incentive compensation or stock option plan if the executive is terminated subsequent to a change in control of PHC, as defined. The maximum amount of compensation that would be payable under all agreements if a change in control occurred and if such executives were terminated as of September 30, 1995, would be approximately $13.7 million. 12 Self-Insurance Reserves ----------------------- Prior to the Spin-Off, PHC, along with its joint venture and management contract properties, was covered under Parent- sponsored self-insurance and captive insurance programs for various levels of general liability, workers' compensation and employee medical coverage. Concurrent with the Spin-Off, PHC established similar programs and indemnified Parent against any future self-insurance obligations. For five years following the Spin-Off, PHC will guarantee, but Parent will retain, the insurance reserves related to the Company's general liability and workers' compensation claims for all periods prior to the Spin- Off date. PHC claims prior to the Spin-Off will be administered by the Company, but will be funded by Parent. Medical insurance claims and reserves related to PHC that existed at June 30, 1995, were transferred from Parent in connection with the Spin-Off. All self-insurance reserves include accruals of estimated settlements for known claims, as well as accruals of actuarial estimates of incurred but not reported claims. Note 6 - Employee Benefit Plans - ------------------------------- Savings and Retirement Plan --------------------------- In connection with the Spin-Off, PHC established a defined contribution savings and retirement plan (PHC S&RP) to replace Parent's S&RP. Employees participating in the PHC S&RP may elect to make pre-tax and after-tax contributions of up to 16 percent of their eligible earnings, the first six percent of which PHC will match fully. Amounts contributed to the plan are invested, at the participant's option, in a PHC common stock fund, an aggressive stock fund, a diversified stock fund, a long-term bond fund, an income fund and/or a treasury fund. On June 30, 1995, all PHC employee participant accounts were transferred from Parent's S&RP to the PHC S&RP while retaining participants' current investment elections. Previous investments in Parent's common stock fund were converted to PHC common stock on a dollar value basis. Participants become vested in PHC's matching contributions over seven years of credited service, including any previous credited service under Parent's plan. Restricted Stock ---------------- The Company established a restricted stock plan (RSP) in connection with the Spin-Off. At the Distribution date, PHC employees with unvested restricted stock in Parent's RSP received a dividend of one share of PHC common stock for each two shares of Parent RSP common stock held as of the Spin-Off date. Concurrent with the Spin-Off, the unamortized Parent RSP shares 13 held by PHC employees were cancelled and replaced by an adjusted number of PHC RSP shares that will vest under the same terms and conditions as the Parent RSP shares they replaced. Under the new PHC RSP, executives and key employees may be awarded shares of PHC's common stock. Shares granted under the PHC RSP are restricted as to transfer, are subject to forfeiture prior to vesting and will generally vest evenly over periods from two to four years. The deferred compensation expense is amortized over the vesting period. Stock Option Plan ----------------- Parent maintained a stock option plan (SOP) under which options had been granted to PHC key management personnel to purchase Parent's common stock at a price equal to its market value at the date of grant. Pursuant to the Spin-Off, the Company established a similar plan and outstanding options for Parent's common stock held by PHC employees were cancelled and new options for PHC common stock were issued under PHC's SOP. The number of shares subject to option and the exercise price were calculated so as to preserve the intrinsic value of Parent options cancelled while maintaining the ratio of the exercise price per option to market value per share as of the Spin-Off date. As of September 30, 1995, there were approximately 1.9 million unexercised PHC options outstanding at option prices ranging from $2.41 to $30.71. Deferred Compensation Plans --------------------------- Concurrent with the Spin-Off, PHC established deferred compensation plans similar to Parent's under which certain employees may defer a portion of their compensation. Amounts deposited into these plans are unsecured and earn interest at rates approved by the Human Resources Committee of the Board of Directors. In connection with the administration of the executive deferred compensation plan, company-owned life insurance policies insuring the lives of certain directors, officers and key employees have been purchased. As of September 30, 1995, the total liability under these plans was $7.7 million, and the related cash surrender value of life insurance policies was $11.0 million. Stock Incentive Plan -------------------- The Company has established a PHC 1996 Non-Management Directors Stock Incentive Plan under which (i) directors will automatically receive each May 1, August 1, November 1, and February 1, in lieu of cash payments, shares of PHC common stock based upon one-half of the meeting and retainer fees earned and the fair market value of PHC common stock and (ii) may elect to receive the remaining one-half of compensation due in the form of a cash payment or as PHC common stock. Shares issued under the plan are restricted as to transfer for at least six months after the date of grant, and the compensation expense will be amortized ratably over such restricted period. The plan becomes effective as of the date of the 1996 PHC annual stockholders' meeting. 14 Note 7 - Nonconsolidated Affiliates - ----------------------------------- Combined summarized income statements of nonconsolidated affiliates, which PHC accounted for using the equity method, were as follows: Third Quarter Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, (in thousands) 1995 1994 1995 1994 ------- ------- -------- -------- Combined Summarized Income Statements Revenues $40,643 $41,753 $121,413 $120,534 ======= ======= ======== ======== Operating income $ 9,573 $ 9,381 $ 28,745 $ 26,196 ======= ======= ======== ======== Net income $ 8,017 $ 2,398 $ 13,022 $ 6,212 ======= ======= ======== ======== PHC's share of nonconsolidated affiliates' combined net income is reflected in the accompanying Consolidated Condensed Statements of Income as follows: Third Quarter Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, (in thousands) 1995 1994 1995 1994 ------- ------- ------- ------- Pre-interest operating income (included in revenues-other) $ 5,182 $ 5,310 $15,648 $14,350 ======= ======= ======= ======= Interest expense (included in interest expense) $(3,208) $(3,302) $(9,823) $(9,454) ======= ======= ======= ======= Extraordinary gain on forgiveness of debt (included in extraordinary gain, net of income tax) $ 1,661 - $ 1,661 - ======= ======= ======= ======= Sept 30, Dec 31, 1995 1994 ------- ------- PHC's investments in and advances to nonconsolidated affiliates At equity $39,388 $25,551 At cost 10,028 10,305 ------- ------- $49,416 $35,856 ======= ======= 15 Note 8 - Relationship Between PHC and Parent after the Distribution - ---------------------------------------------------------------- General ------- For the purpose of governing certain ongoing relationships between PHC and Parent after the Distribution and to provide mechanisms for an orderly transition, Parent and PHC have entered into various agreements and have adopted policies governing their future relationship. PHC believes that the agreements are fair to both parties and contain terms which generally are comparable to those which would have been reached in arm's-length negotiations with unaffiliated parties (although comparisons are difficult with respect to certain agreements that relate to the specific circumstances of this transaction). In some cases the agreements are comparable to those used by other companies in similar transactions. Tax Sharing Agreement --------------------- In connection with the Spin-Off, PHC and Parent entered into a tax sharing agreement that defines each company's rights and obligations with respect to deficiencies and refunds of federal, state and other income or franchise taxes relating to PHC's business for tax years prior to the Distribution and with respect to certain tax attributes of PHC after the Distribution. In general, with respect to periods ending on or before December 31, 1995, Parent is responsible for (i) filing federal tax returns for the Parent and PHC for the periods such companies were members of the same consolidated group, and (ii) paying taxes relating to such returns (to include any subsequent adjustments resulting from the redetermination of such tax liabilities by the applicable taxing authorities; PHC will reimburse Parent for the portion of such adjustments relating to the Hotel Business). PHC is responsible for filing returns and paying taxes for periods beginning after the Spin-Off. PHC and Parent have agreed to cooperate with each other and to share information in preparing such tax returns and in dealing with other tax matters. 16 Note 9 - Summarized Financial Information - ----------------------------------------- Promus Hotels, Inc. (PHI) is a wholly-owned subsidiary of PHC and the primary entity through which the operations of PHC are conducted. PHI is also PHC's principal asset. Summarized financial information for PHI, prepared on the same basis as PHC, is as follows: Sept 30, Dec 31, (in thousands) 1995 1994 -------- -------- ASSETS Current assets $ 44,685 $ 25,565 Land, buildings and equipment, net 349,406 322,140 Other assets 94,566 72,860 -------- -------- 488,657 420,565 -------- -------- LIABILITIES Current liabilities 62,988 34,461 Long-term debt 203,963 189,943 Other liabilities 64,210 53,153 -------- -------- 331,161 277,557 -------- -------- Net assets $157,496 $143,008 ======== ======== Third Quarter Ended Nine Months Ended Sept 30, Sept 30, Sept 30, Sept 30, (in thousands) 1995 1994 1995 1994 ------- ------- -------- -------- Revenues $71,971 $65,506 $204,756 $184,600 ======= ======= ======== ======== Operating income $32,092 $31,080 $ 85,255 $ 75,125 ======= ======= ======== ======== Net income $15,905 $13,592 $ 37,134 $ 29,930 ======= ======= ======== ======== 17 Note 10 - Earnings Per Share - ---------------------------- The Company's stock was distributed in connection with the Spin-Off on June 30, 1995. In order to present earnings per share on a comparable basis, the average common shares outstanding below for periods prior to the Spin-Off is assumed to be equal to the actual common and common equivalent shares outstanding on June 30, 1995. Historical net income is used for all periods presented. Third Quarter Ended Nine Months Ended (in thousands, except Sept 30, Sept 30, Sept 30, Sept 30, per share amounts) 1995 1994 1995 1994 ------- ------- ------- ------- Net income $15,761 $13,592 $36,990 $29,930 ======= ======= ======= ======= Average common and common equivalent shares outstanding 51,570 51,573 51,566 51,573 ======= ======= ======= ======= Earnings per share $ 0.31 $ 0.26 $ 0.72 $ 0.58 ======= ======= ======= ======= 18 PERFORMANCE STATISTICS - ---------------------- Third Quarter Ended Nine Months Ended Sept 30, Sept 30, Inc/ Sept 30, Sept 30, Inc/ 1995 1994 (Dec) 1995 1994 Dec) -------- -------- ----- ------- ------- ---- COMPARABLE SYSTEM HOTELS* Embassy Suites Occupancy 77.3% 78.1% (0.8)pts 76.4% 76.7% (0.3)pts ADR $101.74 $96.79 5.1% $102.28 $96.75 5.7% RevPAS $ 78.62 $75.58 4.0% $ 78.11 $74.21 5.3% Hampton Inn Occupancy 81.8% 81.9% (0.1)pts 77.4% 76.7% 0.7 pts ADR $58.44 $54.86 6.5% $56.65 $53.40 6.1% RevPAR $47.81 $44.95 6.4% $43.86 $40.95 7.1% Homewood Suites Occupancy 83.3% 84.9% (1.6)pts 80.3% 80.6% (0.3)pts ADR $84.88 $78.43 8.2% $81.63 $75.81 7.7% RevPAS $70.73 $66.58 6.2% $65.53 $61.09 7.3% TOTAL SYSTEM HOTELS Embassy Suites Occupancy 77.1% 78.1% (1.0)pts 76.2% 76.6% (0.4)pts ADR $101.69 $97.47 4.3% $101.99 $97.63 4.5% RevPAS $ 78.37 $76.12 3.0% $ 77.69 $74.82 3.8% Hampton Inn Occupancy 80.4% 81.6% (1.2)pts 76.3% 76.4% (0.1)pts ADR $58.84 $54.96 7.1% $57.01 $53.51 6.5% RevPAR $47.33 $44.84 5.6% $43.49 $40.86 6.4% Homewood Suites Occupancy 83.0% 84.3% (1.3)pts 79.5% 79.8% (0.3)pts ADR $84.55 $77.74 8.8% $82.13 $76.28 7.7% RevPAS $70.19 $65.50 7.2% $65.27 $60.88 7.2% TOTAL SYSTEM REVENUES (in thousands) Embassy Suites $190,243 $181,088 5.1% $ 555,340 $ 529,728 4.8% Hampton Inn 240,824 196,777 22.4% 626,820 512,028 22.4% Homewood Suites 18,539 17,408 6.5% 52,111 47,205 10.4% -------- -------- ---------- ---------- $449,606 $395,273 13.7% $1,234,271 $1,088,961 13.3% ======== ======== ========== ========== *Includes results for only those hotels open for the entire applicable period for both years. PERFORMANCE STATISTICS (CONTINUED) - ---------------------------------- TOTAL HOTELS AND ROOMS/SUITES Number of Hotels Rooms/Suites Sept 30, Sept 30, Sept 30, Sept 30, 1995 1994 1995 1994 ------- ------- ------- ------- Embassy Suites Company owned 9 9 2,025 2,026 Joint venture 23 23 5,901 5,912 Management contract 27 24 6,280 6,075 Franchised 52 50 12,048 11,531 --- --- ------ ------ 111 106 26,254 25,544 === === ====== ====== Hampton Inn Company owned 14 15 1,916 2,048 Joint venture 19 19 2,376 2,376 Management contract 4 5 464 585 *Franchised 467 382 51,254 43,553 --- --- ------ ------ 504 421 56,010 48,562 === === ====== ====== Homewood Suites Company owned 9 8 1,024 932 Joint venture - - - - Management contract - - - - Franchised 18 18 1,881 1,949 --- --- ------ ------ 27 26 2,905 2,881 === === ====== ====== Total System Company owned 32 32 4,965 5,006 Joint venture 42 42 8,277 8,288 Management contract 31 29 6,744 6,660 Franchised 537 450 65,183 57,033 --- --- ------ ------ 642 553 85,169 76,987 === === ====== ====== *1995 includes three Hampton Inn & Suites with 332 rooms. 20 Item 2. Management's Discussion and Analysis - -------------------------------------------- of Financial Condition and Results of Operations - ------------------------------------------------ On June 30, 1995, The Promus Companies Incorporated (Parent) completed the previously announced and approved spin-off that split the company into two independent public corporations, one for conducting its casino entertainment business and one for conducting its hotel business (the Spin-Off). Parent's hotel operations were transferred to a new entity, Promus Hotel Corporation (PHC or the Company), the stock of which was distributed to Parent's stockholders on a one-for-two basis (the Distribution). The following is a discussion and analysis of the financial condition and results of operations of PHC as a stand- alone business. RESULTS OF OPERATIONS - --------------------- The principal factors affecting PHC results are: continued growth in the number of hotels; occupancies and room rates achieved by the three hotel brands; number and relative mix of owned, managed and franchised hotels; and PHC's ability to manage costs. The number of rooms/suites at franchised and managed properties and revenue per available room/suite (RevPAR/S) significantly affect PHC results since franchise royalty fees and management fees are based upon a percentage of rooms/suites revenues. Increases in franchise and management fee revenues have a disproportionate favorable impact on PHC's operating margin due to lower incremental costs associated with these revenues. Although occupancy decreased slightly compared to 1994, increases in the average daily rate (ADR), which contributed to higher RevPAR/S, and the addition of new (primarily franchised) hotels, resulted in improved financial results over the prior year for both the three and nine months ended September 30, 1995. As of September 30, 1995, PHC's combined hotel system had grown to include 642 properties, a net increase of 89 properties compared to September 30, 1994. Embassy Suites', Hampton Inn's and Homewood Suites' RevPAR/S for comparable hotels improved by 4.0%, 6.4% and 6.2%, respectively, for the third quarter and 5.3%, 7.1%, and 7.3%, respectively, for the nine months ended September 30, 1995. Total system revenues for the third quarter and first nine months of the year increased 13.7% and 13.3% over the comparable periods last year to $450 million and $1.2 billion, respectively. The continued unit growth of the franchise systems, coupled with a continued focus on rate growth and cost management, contributed to the Company's higher revenues and operating income. 21 Third Quarter Ended Nine Months Ended Sept 30, Sept 30, Inc/ Sept 30, Sept 30, Inc/ (in millions) 1995 1994 (Dec) 1995 1994 (Dec) --------- ------- ----- ------- ------- ----- Revenues $72.0 $65.5 9.9% $204.8 $184.6 10.9% Operating profit before general and administrative expense and property transactions 30.5 29.5 3.4% 85.6 75.5 13.4% Operating income 31.8 31.1 2.3% 85.0 75.1 13.2% Net income 15.8 13.6 16.2% 37.0 29.9 23.7% Operating margin 44.2% 47.5% (3.3)pts 41.5% 40.7% 0.8 pts Net income for the third quarter of 1994 includes approximately $3.7 million of non-recurring management fees and other operating income, as well as $2.3 million of gains on property transactions. Net income for the third quarter of 1995 includes approximately $1.0 million of non-recurring operating income, $2.4 million of gains from property transactions, and incremental costs associated with operating as a separate publicly-traded entity estimated at approximately $1.8 million. Excluding the impact of these items from both periods, as well as the extraordinary gain in the third quarter of 1995, a comparison of third quarter results would be as follows: As Adjusted Third Quarter Ended Sept 30, Sept 30, Inc/ (in millions) 1995 1994 (Dec) --------- ------- ----- Revenues $71.7 $62.5 14.7% Operating profit before general and administrative expense and property transactions 31.3 25.8 21.3% Operating income 30.3 25.1 20.7% Net income 13.2 10.1 30.7% Operating margin 42.3% 40.1% 2.2 pts The increase in revenues for both the three and nine months ended September 30, 1995 was due primarily to the addition of new franchised hotels and improved ADR and RevPAR/S throughout the system. As adjusted for unusual income and incremental stand- alone company expenses, for purposes of comparability, operating profit before general and administrative expense and property transactions for both the third quarter and the first nine months of the year increased primarily as the result of franchise royalties and favorable results of operations at company owned hotels. Third Quarter Ended Nine Months Ended Sept 30, Sept 30, Inc/ Sept 30, Sept 30, Inc/ (in millions) 1995 1994 (Dec) 1995 1994 (Dec) --------- ------- ----- ------- ------- ----- General and administrative $ 1.0 $ 0.8 25.0 % $ 2.7 $ 2.3 17.4 % Property transactions (2.4) (2.3) 4.3 % (2.0) (1.9) 5.3 % Interest expense 7.6 7.7 (1.3)% 24.3 22.7 7.0 % Extraordinary gain, net of income tax 1.7 - N/M 1.7 - N/M Effective tax rate 42.1% 42.0% 0.1 pts 42.1% 43.0% (0.9)pts 22 General and administrative expense reflects the cost of specific PHC staff functions which support all three hotel brands. Other general corporate support functions (both those allocated to PHC by Parent prior to the Spin-Off, and the actual incurred after that date), along with the incremental costs attributable to operating as a stand-alone entity, are reflected in other operating expenses in the accompanying Consolidated Condensed Statements of Income. During the third quarter 1995, the Company sold a Hampton Inn hotel to a franchisee, which resulted in a pre-tax property transaction gain of $2.3 million. The hotel continues to be operated as a franchised Hampton Inn hotel. The property transaction gain recorded in the third quarter 1994 was the result of several property related transactions within the Embassy Suites brand, and the sale of a Hampton Inn hotel. Interest expense through June 30, 1995, includes the pro-rata allocation of corporate interest by Parent related to the debt that was expected to be retired in connection with the Distribution using funds drawn on the PHC Facility. (See "Liquidity and Capital Resources" for additional discussion). Beginning with third quarter 1995, interest expense reflects the costs associated with the actual amounts outstanding under the revolving credit agreements. Interest expense (for all periods presented) also includes PHC's share of interest expense of its nonconsolidated affiliates. Interest expense decreased slightly in the third quarter compared with the same period last year, as higher average debt balances and higher interest attributable to deferred compensation balances were offset by the impact of lower interest rates than previously incurred as part of Parent. Interest expense for the first nine months of 1995 increased due primarily to higher average debt balances, higher interest attributable to deferred compensation balances and an increase in PHC's share of interest expense associated with its nonconsolidated affiliates. During the third quarter 1995, an Embassy Suites hotel, in which the Company is a 50 percent joint venture partner, realized an extraordinary gain related to the early payoff and forgiveness of a portion of its existing debt. The cash to fund the early debt payoff was made available through additional capital contributions to the joint venture of approximately $9 million from each of its partners. PHC's share of this nonconsolidated affiliate's gain, net of applicable income tax expense, was $1.7 million. The effective tax rate for all periods is higher than the federal statutory rate primarily due to state income taxes. 23 DEVELOPMENT AND CAPITAL SPENDING - -------------------------------- FelCor Agreements ----------------- During September 1995, PHI entered into an agreement with FelCor Suite Hotels, Inc. and Felcor Suites Limited Partnership (FelCor), in connection with FelCor's agreement to acquire the Crown Sterling hotel chain (the Crown Sterling Agreement). FelCor plans to convert up to 16 of the Crown Sterling hotels (over 4,000 suites) to the Embassy Suites brand, which PHI will manage. In return, PHI will make available up to $50 million to FelCor for the conversion through investments in FelCor common stock and/or limited partnership interests that are convertible into FelCor common stock. These investments may be subsequently sold on the open market subject to certain restrictions. PHI will also guarantee a third party loan to FelCor, not to exceed $25 million. Each converted hotel will operate under a 20-year license agreement and a ten-year management contract. Pursuant to this agreement, PHI loaned FelCor $7.5 million representing one-half of the deposit required for the acquisition. Availability under the Subscription Agreement (described below) has been reduced by the outstanding loan amount. On May 3, 1995, Parent entered into a Subscription Agreement with FelCor whereby Parent agreed to purchase up to $25 million in FelCor limited partnership interests. Parent's commitment, which was assumed by PHI at the Distribution date, is subject to various conditions which include, but are not limited to, the limited partnership's acquisition of additional hotels to be converted to the Embassy Suites hotel brand (Embassy) and PHI being granted the management contract for the subject property. The limited partnership interests are convertible into FelCor common stock at $25.00 per share, subject to some limitations. Pursuant to the terms of the Subscription Agreement, an all- suites hotel was purchased by FelCor and converted to an Embassy on July 1, 1995. FelCor has subsequently purchased an interest in three other properties that were already in the Embassy system, and management contracts for all four properties were awarded to PHI. In accordance with the agreement, PHC has agreed to purchase $12.5 million of limited partnership interests representing consideration for all four hotels. Virtually all of the $75 million committed under these agreements (subject to the reduction associated with the loan advanced under the Crown Sterling Agreement) is expected to be funded before the end of first quarter 1996. Hotel Development ----------------- PHC had net additions of 69 franchised properties during the first nine months of 1995, compared to 49 in the comparable 1994 period. The system growth occurred primarily in the Hampton Inn brand. As of September 30, 1995, 86 properties were under construction, 81 of which will operate under franchise agreements as PHC brands: 68 Hampton Inn hotels (including eight Hampton Inn & Suites); ten Homewood Suites hotels; and eight Embassy Suites hotels. These 86 properties will add 9,312 rooms/suites to the PHC hotel system. The Company had 68 properties under construction at the same time last year. PHC had 175 hotels in the design phase at September 30, 1995. 24 By the end of the third quarter, PHC had opened three Hampton Inn & Suites hotels. These franchised hotels are the newest PHC hotel product and combine, as a single hotel, Hampton-style rooms with two-room suites and a common lodge in the center. Of the 175 hotels in the design phase at September 30, 1995, 21 were Hampton Inn & Suites. To further encourage system growth, PHC currently plans to spend up to $130 million to expand the Homewood Suites hotel brand by developing as many as 15 additional company owned properties over the next three to five years. PHC, however, plans to continue to follow its general strategy of growing its systems primarily through franchising and management contracts. As in the past, company owned hotels may be sold to franchisees and the proceeds used to fuel additional system growth, develop new concepts or for other corporate purposes. Mezzanine Financing Program --------------------------- To encourage growth (primarily in the Hampton Inn & Suites and Homewood Suites franchise segments of the business), in light of the lack of available financing for new hotel construction, PHC has developed a mezzanine financing program whereby the Company provides conservatively underwritten secondary financing to franchisees. A minimum of 20 percent equity in the project is required by the borrower, and the investment must meet certain defined underwriting criteria. The terms of the mezzanine financing must be consistent with the terms of the first mortgage lender, with whom PHC will enter into an inter-creditor agreement. PHC provided $6.8 million in mezzanine loans during the first nine months of 1995, and anticipates providing an additional $.7 million during the remainder of the year. Outstanding loans bear interest at rates ranging from 10.0% to 11.5%. Other ----- Ongoing refurbishment of PHC's existing company owned hotel properties to maintain the quality standards set for those properties will continue in 1995 at an estimated annual cost of $11.5 million. In early 1995, PHC acquired for approximately $22.0 million an office complex in Memphis, Tennessee, which will serve as its future corporate headquarters. Cash necessary to finance projects currently under development, as well as additional projects to be developed by PHC, will be made available from operating cash flows, the PHC Facility (see "Liquidity and Capital Resources"), joint venture partners, specific project financing, sales of existing hotel assets and, if necessary, PHC debt and equity offerings. PHC capital expenditures totaled $58.5 million during the nine months ended September 30, 1995. Approximately $59.8 million is expected to be spent during the remainder of 1995 to fund project development, including those projects discussed above, to refurbish existing facilities and for other corporate related projects. 25 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The accompanying financial statements represent the portion of Parent's historical revenues, expenses, assets, liabilities and cash flows associated with its hotel operations through June 30, 1995, and actual results as a stand-alone company beginning July 1, 1995. The year to date results of operations and cash flows are not necessarily indicative of PHC's future results as a separate corporation. The most significant items that will affect such future results are incremental costs associated with operating as a stand-alone company, a decrease in the Company's average borrowing rate, and the fact that PHC will assume responsibility for payment of state and federal income taxes subsequent to the Distribution (Parent historically paid PHC taxes). Cash flows from operating activities for the nine months ended September 30, 1995, were $56.7 million, compared with $39.6 million for the same period last year, representing a 43.2% increase. EBITDA, consisting of income before extraordinary items plus interest, taxes, depreciation, amortization and net earnings of, or distributions from, nonconsolidated affiliates, was $96.1 million for the first nine months of 1995, compared with $84.2 million for the comparable period in 1994, representing a 14.1% increase. EBITDA is a supplemental financial measurement used by management as well as by industry analysts to evaluate operations, but should not be construed as an alternative to operating income (as an indicator of the Company's operating performance) or to cash flows from operating activities (as a measure of liquidity) as determined in accordance with generally accepted accounting principles. Parent, through its wholly-owned subsidiary Embassy Suites, Inc., entered into a $350 million bank credit facility to be secured by the stock of certain material subsidiaries of PHC (the PHC Facility). Concurrent with the Distribution, $218 million was drawn on the PHC Facility by Parent to retire existing Parent debt which had been previously allocated to PHC and to pay PHC Facility fees and expenses. Subsequent to the Distribution, the liability associated with the actual outstanding borrowings was assumed by PHI with PHC as guarantor, and Parent was released from liability related to any current or future borrowings under the PHC Facility. The PHC Facility consists of two agreements, the significant terms of which are as follows: Total Facility Maturity Date Interest Rate Facility Fees ------------ ------------- ----------------- -------------- Base Rate, as 0.20% of the Five-Year defined, or LIBOR total facility Revolver $300,000,000 June 30, 2000 +35 basis points Base Rate, as 0.15% of the Extendible defined, or LIBOR total facility Revolver $ 50,000,000 June 6, 1996 +40 basis points The Extendible Revolver is a 364-day facility with annual renewals and may be converted into a two-year term loan with equal amortizing payments over such two-year period. Facility fees and interest on Base Rate loans are paid quarterly. The agreements contain a tiered scale for facility fees and the applicable LIBOR spread (current rates for both reflected above) 26 that is based on the more favorable of PHC's current credit rating or leverage ratio, as defined. They also contain provisions that restrict certain investments, limit the Company's ability to incur additional indebtedness and pay dividends, and require that certain performance ratios be maintained. As of September 30, 1995, PHC was in compliance with all such covenants. PHC's initial credit rating by Standard & Poor's was Investment Grade. The Investment Grade rating allows PHC to receive more favorable interest rate spreads on borrowings and facility fees under the PHC Facility. The Five-Year Revolver includes a sublimit for letters of credit of $20 million. At September 30, 1995, approximately $8.6 million in letters of credit were outstanding under this agreement (related primarily to the Company's self-insurance reserves). There was approximately $139 million of availability under the PHC Facility as of September 30, 1995. The remaining borrowing capacity available under the PHC Facility is available for working capital, hotel development and other general corporate purposes. A pro-rata portion of Parent's historical outstanding debt balance and unamortized deferred finance charges was allocated to PHC and reflected in the accompanying Consolidated Condensed Balance Sheet as of December 31, 1994. A pro-rata portion of Parent's interest expense was also allocated to PHC through June 30, 1995, and is reflected in the accompanying Consolidated Condensed Statements of Income for all periods presented. In addition to amounts allocated by Parent, all indebtedness, together with related interest expense specifically identified with a PHC entity, is included in the accompanying Consolidated Condensed Financial Statements. The amounts allocated by Parent are based on the percentage of Parent's existing debt that was expected to be retired using proceeds from the PHC Facility. The amount of Parent's corporate interest expense allocated to PHC was $4.2 million for third quarter 1994, and $10.5 million (representing interest allocated through June 30) and $12.7 million for the nine months ended September 30, 1995 and 1994, respectively. Beginning with third quarter 1995, interest expense reflects the costs associated with the actual amounts outstanding under the PHC Facility. The amount of Parent's corporate interest allocated to PHC is in addition to the interest expense included in PHC's financial statements on indebtedness specifically identified with a PHC entity and PHC's proportionate share of interest expense of its nonconsolidated affiliates (see Note 7 to financial statements). PHI assumed two of Parent's existing interest rate swap agreements, each with a notional amount of $50 million. The effect of the swap agreements was to convert to a fixed rate a portion of the amount of variable rate debt outstanding under the PHC Facility. The floating rate resets every three months under both agreements. One swap specifies a 6.99% contractual fixed rate (effective rate of 7.54%) and expires on March 20, 2000, while the other has a 7.8625% contractual fixed rate (effective rate of 8.4125%) with a July 28, 1997 expiration. 27 RELATIONSHIP BETWEEN PHC AND PARENT AFTER THE DISTRIBUTION - ---------------------------------------------------------- For the purpose of governing certain of the ongoing relationships between PHC and Parent after the Distribution and to provide mechanisms for an orderly transition, Parent and PHC have entered into various agreements and adopted policies to govern their future relationship. PHC believes that the agreements are fair to both parties and contain terms which generally are comparable to those which would have been reached in arm's-length negotiations with unaffiliated parties (although comparisons are difficult with respect to certain agreements that relate to the specific circumstances of this transaction). In some cases the agreements are comparable to those used by other companies in similar transactions. TAX SHARING AGREEMENT - --------------------- In connection with the Spin-Off, PHC and Parent entered into a tax sharing agreement that defines each company's rights and obligations with respect to deficiencies and refunds of federal, state and other income or franchise taxes relating to PHC's business for tax years prior to the Distribution and with respect to certain tax attributes of PHC after the Distribution. In general, with respect to periods ending on or before December 31, 1995, Parent is responsible for (i) filing federal tax returns for the Parent and PHC for the periods such companies were members of the same consolidated group, and (ii) paying the taxes relating to such returns (to include any subsequent adjustments resulting from the redetermination of such tax liabilities by the applicable taxing authorities; PHC will reimburse Parent for the portion of such adjustments relating to the Hotel Business). PHC is responsible for filing returns and paying taxes for periods beginning after the Spin-Off. PHC and Parent have agreed to cooperate with each other and to share information in preparing such tax returns and in dealing with other tax matters. 28 PART II - OTHER INFORMATION - --------------------------- Item 2. Changes in Securities - ------------------------------ The PHC Facility requires the Company to maintain certain specified financial covenants. Although the payment of dividends is not prohibited by the agreement, the covenants are structured such that the Company's ability to pay dividends is limited. Item 6. Exhibit and Reports on Form 8-K - ---------------------------------------- (a) Exhibits EX-10.1 Promus Hotel Corporation Savings and Retirement Plan. (1) EX-10.2 Promus Hotel Corporation 1995 Stock Option Plan. (2) EX-10.3 Promus Hotel Corporation Restricted Stock Plan. (2) EX-10.4 Promus Hotel Corporation Non-Management Directors Stock Incentive Plan. (2) EX-10.5 Plan of Reorganization and Distribution Agreement, dated as of June 30, 1995, between The Promus Companies Incorporated and Promus Hotel Corporation. (4) EX-10.6 Tranche A Credit Agreement, dated as of June 7, 1995, among Embassy Suites, Inc., as Initial Borrower, Promus Hotels, Inc., as the Subsequent Borrower, certain subsidiaries and related parties from time to time party thereto, as Guarantors, the several lenders from time to time party thereto, and NationsBank, N.A. (Carolinas), as Agent. (3) Ex-10.7 First Amendment to Tranche A Credit Agreement dated as of June 30, 1995, by and among Embassy Suites, Inc., Promus Hotels, Inc., The Promus Companies Incorporated, Promus Hotel Corporation and NationsBank, N.A. (Carolinas). (4) EX-10.8 Tranche A Assignment and Assumption Agreement dated as of June 30, 1995, among Embassy Suites, Inc., Promus Hotels, Inc., The Promus Companies Incorporated and NationsBank, N.A. (Carolinas). (4) EX-10.9 Tranche B Credit Agreement, dated as of June 7, 1995, among Embassy Suites, Inc., as Initial Borrower, Promus Hotels, Inc., as the Subsequent Borrower, certain subsidiaries and related parties from time to time party thereto, as Guarantors, the several lenders from time to time party thereto, and NationsBank, N.A. (Carolinas), as Agent. (3) 29 EX-10.10 First Amendment to Tranche B Credit Agreement dated as of June 30, 1995, by and among Embassy Suites, Inc., Promus Hotels, Inc., The Promus Companies Incorporated, Promus Hotel Corporation and NationsBank, N.A. (Carolinas). (4) EX-10.11 Tranche B Assignment and Assumption Agreement dated as of June 30, 1995, by and among Embassy Suites, Inc., Promus Hotels, Inc., The Promus Companies Incorporated and NationsBank, N.A. (Carolinas). (4) EX-10.12 Pledge Agreement dated as of June 30, 1995, by and among Promus Hotel Corporation, Promus Hotels, Inc., certain subsidiaries which may now be owners of Credit Parties and NationsBank, N.A. (Carolinas). (4) EX-10.13 Escrow Agreement, dated as of June 30, 1995, among Promus Hotel Corporation, Promus Hotels, Inc. and NationsBank. (3) EX-10.14 Employee Benefits and Other Employment Matters Allocation Agreement, dated as of June 30, 1995, between The Promus Companies Incorporated and Promus Hotel Corporation. (4) EX-10.15 Risk Management Allocation Agreement, dated as of June 30, 1995, between The Promus Companies Incorporated and Promus Hotel Corporation. (4) EX-10.16 Tax Sharing Agreement, dated as of June 30, 1995, between The Promus Companies Incorporated and Promus Hotel Corporation. (4) EX-10.17 Promus Hotel Corporation Executive Deferred Compensation Plan. (3) EX-10.18 Promus Hotel Corporation Deferred Compensation Plan. (3) EX-10.19 Promus Hotel Corporation Savings and Retirement Plan Trust Agreement, dated as of May 26, 1995, among Promus Hotel Corporation, and Robert S. Davis, Donald H. Dempsey, Patricia R. Ferguson, Jeffery M. Jarvis, Kelly R. Jenkins, Frederick G. Schultz and Mark C. Wells. (3) EX-10.20 Form of Severance Agreement, dated as of June 30, 1995, entered into with Donald H. Dempsey, Thomas L. Keltner, Ralph B. Lake, David C. Sullivan, and Mark C. Wells. (4) EX-10.21 Form of Severance Agreement, dated June 30, 1995, entered into with Michael D. Rose and Raymond E. Schultz. (4) EX-10.22 Employment Agreement, dated as of June 30, 1995, between Michael D. Rose and Promus Hotel Corporation. (4) EX-10.23 Employment Agreement, dated as of July 1, 1995, between Raymond E. Schultz and Promus Hotel Corporation.(5) 30 EX-10.24 Promus Hotel Corporation Key Executive Officer Annual Incentive Plan. (2) EX-10.25 International Swap Dealers Association, Inc. Master Agreement, dated as of June 30, 1995, among Promus Hotels, Inc. and NationsBank, N.A. (Carolinas). (4) EX-10.26 Transfer Agreement, dated as of June 30, 1995, among Embassy Suites, Inc., Promus Hotels, Inc., and NationsBank, N.A. (Carolinas). (4) EX-10.27 Subscription Agreement, dated as of October 17, 1995, by and among Promus Hotels, Inc., FelCor Suite Hotels, Inc., and FelCor Suites Limited Partnership.(5) EX-27 Financial Data Schedule. (5) (b) No reports on Form 8-K were filed during the quarter ended September 30, 1995. Footnotes - --------- (1) Incorporated by reference from Promus Hotel Corporation Registration Statement No. 33-59977 on Form S-8 for the Promus Hotel Corporation 1995 Stock Option Plan, filed June 6, 1995. (2) Incorporated by reference from Promus Hotel Corporation Form 10/A, filed May 3, 1995, File No. 1-11463. (3) Incorporated by reference from Promus Hotel Corporation Form 8-K, filed June 14, 1995, File No. 1-11463. (4) Incorporated by reference from Promus Hotel Corporation Form 10-Q, filed August 11, 1995, File No. 1-11463. (5) Filed herewith. 31 Signature --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROMUS HOTEL CORPORATION November 9, 1995 By: /s/ JEFFERY M. JARVIS --------------------------- Jeffery M. Jarvis Vice President and Controller (Chief Accounting Officer) 32 Exhibit Index - ------------- Exhibit No. Description Sequential Page No. - ------------- ------------------------------- ----------- (a) EX-10.1 Promus Hotel Corporation Savings and Retirement Plan. (1) EX-10.2 Promus Hotel Corporation 1995 Stock Option Plan. (2) EX-10.3 Promus Hotel Corporation Restricted Stock Plan. (2) EX-10.4 Promus Hotel Corporation Non-Management Directors Stock Incentive Plan. (2) EX-10.5 Plan of Reorganization and Distribution Agreement, dated as of June 30, 1995, between The Promus Companies Incorporated and Promus Hotel Corporation. (4) EX-10.6 Tranche A Credit Agreement, dated as of June 7, 1995, among Embassy Suites, Inc., as Initial Borrower, Promus Hotels, Inc., as the Subsequent Borrower, certain subsidiaries and related parties from time to time party thereto, as Guarantors, the several lenders from time to time party thereto, and NationsBank, N.A. (Carolinas), as Agent. (3) Ex-10.7 First Amendment to Tranche A Credit Agreement dated as of June 30, 1995, by and among Embassy Suites, Inc., Promus Hotels, Inc., The Promus Companies Incorporated, Promus Hotel Corporation and NationsBank, N.A. (Carolinas). (4) EX-10.8 Tranche A Assignment and Assumption Agreement dated as of June 30, 1995, among Embassy Suites, Inc., Promus Hotels, Inc., The Promus Companies Incorporated and NationsBank, N.A. (Carolinas). (4) EX-10.9 Tranche B Credit Agreement, dated as of June 7, 1995, among Embassy Suites, Inc., as Initial Borrower, Promus Hotels, Inc., as the Subsequent Borrower, certain subsidiaries and related parties from time to time party thereto, as Guarantors, the several lenders from time to time party thereto, and NationsBank, N.A. (Carolinas), as Agent. (3) 33 EX-10.10 First Amendment to Tranche B Credit Agreement dated as of June 30, 1995, by and among Embassy Suites, Inc., Promus Hotels, Inc., The Promus Companies Incorporated, Promus Hotel Corporation and NationsBank, N.A. (Carolinas). (4) EX-10.11 Tranche B Assignment and Assumption Agreement dated as of June 30, 1995, by and among Embassy Suites, Inc., Promus Hotels, Inc., The Promus Companies Incorporated and NationsBank, N.A. (Carolinas). (4) EX-10.12 Pledge Agreement dated as of June 30, 1995, by and among Promus Hotel Corporation, Promus Hotels, Inc., certain subsidiaries which may now be owners of Credit Parties and NationsBank, N.A. (Carolinas). (4) EX-10.13 Escrow Agreement, dated as of June 30, 1995, among Promus Hotel Corporation, Promus Hotels, Inc. and NationsBank. (3) EX-10.14 Employee Benefits and Other Employment Matters Allocation Agreement, dated as of June 30, 1995, between The Promus Companies Incorporated and Promus Hotel Corporation. (4) EX-10.15 Risk Management Allocation Agreement, dated as of June 30, 1995, between The Promus Companies Incorporated and Promus Hotel Corporation. (4) EX-10.16 Tax Sharing Agreement, dated as of June 30, 1995, between The Promus Companies Incorporated and Promus Hotel Corporation. (4) EX-10.17 Promus Hotel Corporation Executive Deferred Compensation Plan. (3) EX-10.18 Promus Hotel Corporation Deferred Compensation Plan. (3) 34 EX-10.19 Promus Hotel Corporation Savings and Retirement Plan Trust Agreement, dated as of May 26, 1995, among Promus Hotel Corporation, and Robert S. Davis, Donald H. Dempsey, Patricia R. Ferguson, Jeffery M. Jarvis, Kelly R. Jenkins, Frederick G. Schultz and Mark C. Wells. (3) EX-10.20 Form of Severance Agreement, dated as of June 30, 1995, entered into with Donald H. Dempsey, Thomas L. Keltner, Ralph B. Lake, David C. Sullivan, and Mark C. Wells. (4) EX-10.21 Form of Severance Agreement, dated June 30, 1995, entered into with Michael D. Rose and Raymond E. Schultz. (4) EX-10.22 Employment Agreement, dated as of June 30, 1995, between Michael D. Rose and Promus Hotel Corporation. (4) EX-10.23 Employment Agreement, dated as of July 1, 1995, and Raymond E. Schultz 36 and Promus Hotel Corporation. (5) EX-10.24 Promus Hotel Corporation Key Executive Officer Annual Incentive Plan. (2) EX-10.25 International Swap Dealers Association, Inc. Master Agreement, dated as of June 30, 1995, among Promus Hotels, Inc. and NationsBank, N.A. (Carolinas). (4) EX-10.26 Transfer Agreement, dated as of June 30, 1995, among Embassy Suites, Inc., Promus Hotels, Inc., and NationsBank, N.A. (Carolinas). (4) EX-10.27 Subscription Agreement, dated as of October 17, 1995, by and among Promus Hotels, Inc., FelCor Suite Hotels, Inc., and FelCor Suites Limited Partnership.(5) 47 EX-27 Financial Data Schedule. (5) 59 35 Footnotes - --------- (1) Incorporated by reference from Promus Hotel Corporation Registration Statement No. 33-59977 on Form S-8 for the Promus Hotel Corporation 1995 Stock Option Plan, filed June 6, 1995. (2) Incorporated by reference from Promus Hotel Corporation Form 10/A, filed May 3, 1995, File No. 1-11463. (3) Incorporated by reference from Promus Hotel Corporation Form 8-K, filed on June 14, 1995, File No. 1-11463. (4) Incorporated by reference from Promus Hotel Corporation Form 10-Q, filed August 11, 1995, File No. 1-11463. (5) Filed herewith. EX-1 2 EXHIBIT 10.23 EMPLOYMENT AGREEMENT THIS AGREEMENT, made as of the 1st day of July, 1995, between Promus Hotel Corporation, a Delaware corporation with its executive offices at 850 Ridge Lake Boulevard, Memphis, Tennessee (the "Company"), and Raymond E. Schultz (the "Executive"). The Company and the Executive agree as follows: 1. Introductory Statement. The Company desires to secure the services of the Executive as Chief Executive Officer, and the Executive is willing to execute this Agreement with respect to his employment. This Agreement is effective on July 1, 1995, and shall expire on December 31, 1999 ("the Termination Date"), subject to the terms and conditions herein. 2. Agreement of Employment. The Company agrees to, and hereby does, employ the Executive, and the Executive agrees to, and hereby does accept, employment by the Company, in a full-time capacity as Chief Executive Officer, pursuant to the provisions of this Agreement and of the bylaws of the Company and subject to the control of the Board of Directors. It is understood that the Executive's position as Chief Executive Officer is subject to his yearly re-election as Chief Executive Officer by the Board. See paragraph 6 herein for Executive's rights if such re-election does not occur during the term of this Agreement. 3. Executive's Obligations. During the period of his service under this Agreement, the Executive shall devote substantially all of his time and energies during business hours to the supervision and conduct, faithfully and to the best of his ability, of the business and affairs of the Company and to the furtherance of its interests, and to such other duties as directed by the Board. 4. Compensation. The Company shall pay to Executive a salary at the rate of $310,000 per year, in equal bi-weekly installments, provided, however, that the Human Resources Committee of the Board (the "HRC") shall in good faith review the salary of the Executive, on an annual basis, with a view to consideration of appropriate merit increases in such salary. In addition, except as otherwise provided in this Agreement, during the term of this Agreement the Executive shall be entitled to participate in incentive compensation programs and to receive employee benefits and perquisites at least as favorable to the Executive as those presently provided to Executive by the Company, and as may be enhanced for all senior officers. Such benefits include, but are not limited to, the rabbi trust (provided pursuant to the escrow agreement dated June 30, 1995 as amended (the "Escrow Agreement")) and his Severance Agreement dated June 30, 1995, a copy of which is attached hereto as Exhibit A (the "Severance Agreement") both of which will continue in force subject to their terms and conditions including the termination and amendment provisions thereof. There will be no diminution of the above compensation, perquisites, or benefits except as provided in this Agreement. 37 The Executive will use the Company's aircraft for security purposes for himself and his family (with standard charges for non-employee family members and for non-Company business usage). The Company will also provide Executive with appropriate security arrangements at his residence. If the Executive dies or resigns pursuant to this Agreement or pursuant to any other agreement between the Company and the Executive providing for such resignation during the period of this Agreement, service for any part of the month in which any such event occurs shall be considered service for the entire month. 5. Termination From Employment on December 31, 1999 5.1 Except as otherwise provided in this Agreement, the date of Executive's termination from employment shall be December 31, 1999 ("the Termination Date"). 5.2 After the date of Executive's termination from employment at any time (including termination or resignation prior to the Termination Date, if that should occur), he will be entitled to participate at the Company's expense for his lifetime in the Company's group health insurance plans applicable to corporate executives including family coverage as applicable (medical, dental and vision coverage). It is understood that the Executive will be subject to income tax on the cost of the benefits provided to him after his termination. His group health insurance benefits after any termination of employment will not be less than those offered to corporate officers of the Company, and he will be entitled to any later enhancements in such benefits. His benefits will be the same as normally provided to other retired management directors pursuant to the policy adopted by the HRC on May 26, 1995, including term life insurance of $50,000 (except to the extent he voluntarily elects not to participate in any plan). 5.3 After the date of Executive's termination from employment, his EDCP account and any other deferred compensation balances will continue to be protected by the Escrow Agreement if it is then in force subject to the terms and conditions of the Escrow Agreement including its termination and amendment provisions. 6. Termination Without Cause or Resignation for Good Reason 6.1 The Board reserves the right to terminate Executive from his then current position without cause at any time upon at least three months prior written notice. The failure of the Board to elect Executive as Chief Executive Officer during the annual election of officers shall also be deemed termination without cause for purposes of this Agreement unless, before the election, the Board has sent the written notice initiating termination for Cause as provided in paragraph 11.1, and Executive is thereafter terminated for Cause. Executive reserves the right to resign his position for Good Reason (as defined in paragraph 11.2 herein) by giving the Company 30 days written notice which states the reason for his resignation. For purposes of this Agreement, Good Reason does not include changes that are expressly permitted by this Agreement. 6.2 Upon Executive's termination without cause or resignation from his position with Good Reason as described in paragraph 6.1 above: 38 (a) Executive will continue in employee status as a consultant-employee for two years beginning on the date of such termination without cause or resignation with Good Reason (the "Transition Period"). His stock options and any restricted stock will continue in force for vesting purposes during the Transition Period. Any unvested stock options and unvested shares of restricted stock that do not vest during the Transition Period will be forfeited. (b) Executive will become vested at the retirement rate under the Executive Deferred Compensation Plan ("EDCP") on the date of such termination without cause or resignation with Good Reason. (c) Executive will continue to receive his then-current salary rate and the right to participate in the Company's benefit plans during the Transition Period but he will no longer be eligible for bonus, stock option or restricted stock grants or any other long term incentive awards then in effect. (d) After the expiration of the Transition Period, Executive will be entitled to the lifetime group insurance benefits described in paragraph 5.2. 7. Termination For Cause or Resignation Without Good Reason 7.1 The Board will have the right to terminate Executive at any time from his then-current position for Cause (as defined in paragraph 11.1 herein). 7.2 If Executive is terminated for Cause or if he resigns his position without Good Reason (including if he retires without Good Reason, except as otherwise provided in Paragraph 7.3 below), then (a) all of his rights and benefits under this Agreement shall thereupon terminate and his employment shall be deemed terminated on the date of such termination or resignation, (b) he shall be entitled to all accrued rights, payments and benefits vested or paid on or before such date under the Company's plans and programs, but unvested stock options and unvested shares of restricted stock, if any, will be forfeited, (c) his right to exercise vested stock options will expire at 12:00 p.m. midnight on the date of such termination or resignation and all stock options not so exercised will be forfeited, (d) his indemnification agreement will continue in force, (e) the Escrow Agreement, if then in force, will continue in force, unless such agreement is thereafter amended or terminated pursuant to its terms, (f) he will be entitled to the lifetime group insurance benefits described in paragraph 5.2 above except that any future amendments to such benefits shall apply to him in the same manner as such amendments apply to other employees and (g) his Severance Agreement and all rights thereunder will terminate as of such termination or resignation date unless a Change in Control or Potential Change in Control (as such terms are defined in the Severance Agreement) has occurred prior to such termination or resignation date. If Executive's Severance Agreement is in force upon a Change in Control (as defined in the Severance Agreement), the provisions of this paragraph 7.2 will not be applicable if he resigns (with or without Good Reason) within two (2) years after the Change in 39 Control, and in the event of such resignation after a Change in Control he will be entitled to the payments, rights and benefits as provided in paragraph 10 below. 7.3 If Executive retires anytime after June 30, 1997, and prior to the Termination Date, any stock options and shares of restricted stock scheduled to vest during the two years after the date of retirement shall vest immediately on the date of retirement. If Executive retires after the Termination Date, all unvested stock options and shares of restricted stock shall vest immediately on the date of retirement. Except as provided in this paragraph, all other provisions of Paragraph 7.2 shall apply if Executive retires without Good Reason. This provision shall survive the termination of the agreement, but shall not apply if Executive could, at the time of retirement, be discharged for Cause. 8. Death In the event of Executive's death prior to the Termination Date, during his employment under this Agreement, his salary and all rights and benefits under this Agreement will terminate, and his estate and beneficiary(ies) will receive the benefits they are entitled to under the terms of the Company's benefit plans and programs by reason of a participant's death during active employment including the death benefits provided by the EDCP and the applicable rights and benefits under the Company's stock plans. The Escrow Agreement if then in force will continue in force (subject to its amendment or termination in accordance with its terms) for the benefit of Executive's beneficiaries until his deferred compensation accounts are paid in full, and Executive's indemnification agreement will continue in force for the benefit of his estate. 9. Disability In the event of Executive's disability prior to the Termination Date, during his employment, he will be entitled to apply at his option for the Company's long term disability benefits. If he is accepted for such benefits, then the terms and provisions of the Company's benefit plans and programs (including the EDCP and the Company's Stock Option and Restricted Stock Plans) that are applicable in the event of such disability of an employee shall apply in lieu of the salary and benefits under this Agreement, except that (a) the Escrow Agreement (if then in force) and his indemnification agreement will continue in force (the Escrow Agreement will be subject to amendment or termination in accordance with its terms), and (b) he will be entitled to the lifetime group insurance benefits described in paragraph 5.2. If Executive is disabled so that he cannot perform his duties (as determined by the HRC), and if he does not apply for long term disability benefits or is not accepted for such benefits, then the Board may terminate his duties under this Agreement and, in such event, he will receive two years salary continuation together with all other benefits, and during such period of salary continuation any stock options and restricted stock grants then in existence will continue in force for vesting purposes. However, during such period of salary continuation for disability, Executive will not be eligible to participate in the annual bonus plan nor will he be eligible to receive stock option or restricted stock grants or any other long term incentive awards except to the extent approved by the HRC. 40 10. Change in Control If a Change in Control as defined in Executive's Severance Agreement occurs prior to Executive's termination of employment and if the Severance Agreement is in force when the Change in Control occurs, then, upon his termination or voluntary or involuntary resignation within two years after the Change in Control (including termination on December 31, 1999 due to expiration of this Agreement), except if his termination of employment is for "Cause," "Disability" or "Retirement" as set forth in the Severance Agreement, he will be entitled to all the rights, payments and benefits provided under his Severance Agreement including the benefits that the Severance Agreement provides with respect to the benefit plans and programs of the Company resulting from his termination or voluntary resignation, in lieu of the rights and benefits that would otherwise apply under this Agreement by virtue of his termination or resignation, provided that (a) the Escrow Agreement (if then in force) and his indemnification agreement will continue in force (the Escrow Agreement will be subject to amendment or termination in accordance with its terms) and (b) he will be entitled to the lifetime group insurance benefits described in paragraph 5.2. 11. Definitions of Cause and Good Reason. 11.1 Cause. Termination by the Company of this Agreement for "Cause" shall mean termination upon the Executive's engaging in willful and continued misconduct, or the Executive's willful and continued failure to substantially perform his duties with the Company (other than due to physical or mental illness), if such failure or misconduct is materially damaging or materially detrimental to the business and operations of the Company; provided that Executive shall have received written notice of such failure or misconduct and shall have continued to engage in such failure or misconduct after 30 days following receipt of such notice from the Board, which notice specifically identifies the manner in which the Board believes that Executive has engaged in such failure or misconduct. For purposes of this Paragraph, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purposes (after reasonable notice to the Executive and an opportunity for him, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Executive was guilty of failure to substantially perform his duties or of misconduct in accordance with the first sentence of this paragraph, and of continuing such failure to substantially perform his duties or misconduct as aforesaid after notice from the Board, and specifying the particulars thereof in detail. 11.2 Good Reason. "Good Reason" shall mean, without Executive's express written consent, the occurrence of any of the following circumstances unless, in the case of paragraphs (a), (e), (f) or (g), such circumstances are fully corrected prior to the date of termination specified in the written notice given by Executive notifying the Company of his resignation for Good Reason: 41 (a) The assignment to Executive of any duties inconsistent with his status as Chief Executive Officer of the Company or a substantial adverse alteration in the nature or status of his responsibilities; (b) A reduction by the Company in his annual base salary of $310,000 or as the same may be increased from time to time pursuant to paragraph 4 hereof; (c) The relocation of the Company's principal executive offices where Executive is working to a location more than 50 miles from the location of such offices on the date of this Agreement, or the Company's requiring Executive to be based anywhere other than the location of the Company's principal offices where Executive is working on the date of this Agreement except for required travel on the Company's business to an extent substantially consistent with Executive's present business travel obligations; (d) The failure by the Company, without Executive's consent, to pay to him any portion of his current compensation except pursuant to a compensation deferral elected by the Executive, or to pay to Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company within thirty days of the date such compensation is due; (e) Except as permitted by this Agreement, the failure by the Company to continue in effect any compensation plan in which Executive is participating on the date of this Agreement which is material to Executive's total compensation, including, but not limited to, the Company's annual bonus plan, the EDCP (which may be modified or terminated as to further deferrals after 1995), the Restricted Stock Plan, or the Stock Option Plan or any substitute plans unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of Executive's participation relative to other participants at Executive's grade level; (f) The failure by the Company to continue to provide Executive with benefits substantially similar to those enjoyed by him under the S&RP, except as required by law, and the life insurance, medical, health and accident, and disability plans in which Executive is participating on the date of this Agreement, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed by Executive on the date of this Agreement except as permitted by this Agreement, or the failure by the Company to provide Executive with the number of paid vacation days to which Executive is entitled; or (g) The failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 14 hereof. Executive's right to terminate his employment pursuant to this Agreement for Good Reason shall not be affected by Executive's incapacity due to physical or mental illness. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. 42 12. Non-Competition Agreement. 12.1 For a period of two years after Executive's full-time, active employment (which period, for purposes of this paragraph 12.1, shall not include employee status as a consultant-employee in paragraph 6.2(a)) with the Company (or with a direct or indirect subsidiary of the Company) ends, he will not, directly or indirectly, solicit or recruit any employee of the Company or of any of its direct or indirect subsidiaries, and he will not engage (as an employee, consultant, director, investor, contractor, or otherwise) directly or indirectly in any business in the United States, Canada or Mexico that is competitive with any business that the Company or its direct or indirect subsidiaries are engaged (as owner, manager, consultant, licensor, partner, or otherwise) in at the time such employment ends except with the prior specific approval of the Board. 12.2 If Executive breaches any of the above covenants in 12.1, then the Board may terminate any of his rights under this Agreement upon thirty days written notice whereupon all of the Company's obligations under this Agreement shall terminate (including, without limitation, the right to lifetime group insurance) without further obligation to him except for obligations that have been paid, accrued or are vested as of or prior to such termination date. In addition the Company shall be entitled to enforce any such covenants including obtaining monetary damages, specific performance and injunctive relief. 13. Binding Arbitration. Any and all claims, disputes or controversies arising out of or related to this Agreement or the breach thereof shall be resolved by arbitration in accordance with the rules of the American Arbitration Association (the "AAA") then in existence, subject to this paragraph 13. Such arbitration shall be conducted by a panel of three arbitrators. The Executive shall appoint one arbitrator, the Company shall appoint one arbitrator, and the third shall be appointed by the two arbitrators appointed by the parties. The third arbitrator shall serve as chairman of the panel. The parties shall appoint their arbitrators within 30 days after the demand for arbitration is served, failing which the AAA promptly shall appoint a defaulting party's arbitrator, and the two arbitrators shall select the third arbitrator within 15 days after their appointment, or if they cannot agree or fail to so appoint, then the AAA promptly shall appoint the third arbitrator. The arbitrators shall render their decision in writing within 60 days after the close of evidence or other termination of the proceedings by the panel. The determination or award rendered in such arbitration shall be binding and conclusive upon the parties and shall not be appealable, and judgment may be entered thereon in accordance with applicable law in any court of competent jurisdiction. Any hearings in the arbitration shall be held in Memphis, Tennessee, and shall be private and not open to the public. Each party shall bear the fees and expenses of its arbitrator, counsel and witnesses, and the fees and expenses of the third arbitrator shall be shared equally by the parties. Other costs of the arbitration, including the fees of AAA, shall be shared equally by the parties. 43 14. Assumption of Agreement on Merger, Consolidation or Sale of Assets. The Company agrees that until the termination of this Agreement as above provided, it will not enter into any merger or consolidation with another company in which the Company is not the surviving company, or sell or dispose of all or substantially all of its assets, unless the company which is to survive such merger or consolidation or the prospective purchaser of such assets first makes a written agreement with the Executive either (1) assuming the Company's financial obligations to the Executive under this Agreement, or (2) making such other provision for the Executive as is satisfactory to the Executive and approved by him in writing in lieu of assuming the Company's financial obligations to him under this Agreement. 15. Assurances on Liquidation. The Company agrees that until the termination of this Agreement as above provided, it will not voluntarily liquidate or dissolve without first making a full settlement or, at the discretion of the Executive, a written agreement with the Executive satisfactory to and approved by him in writing, in fulfillment of or in lieu of its obligations to him under this Agreement. 16. Amendments. This Agreement may not be amended or modified orally, and no provision hereof may be waived, except in a writing signed by the parties hereto. 17. Assignment. 17.1 Except as otherwise provided in paragraph 17.2, this Agreement cannot be assigned by either party hereto except with the written consent of the other. Any assignment of this Agreement by either party hereto shall not relieve such party of its or his obligations hereunder. 17.2 The Company may elect to perform any or all of its obligations under this Agreement through its wholly-owned subsidiary, Promus Hotels, Inc., or another subsidiary, and if the Company so elects, Executive will be an employee of Promus Hotels, Inc., or such other subsidiary. Notwithstanding any such election, the Company's obligations to Executive under this Agreement will continue in full force and effect as obligations of the Company, and the Company shall retain primary liability for their performance. 18. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the personal representatives and successors in interest of the Company. 19. Choice of Law. This Agreement shall be governed by the law of the State of Tennessee as to all matters, including but not limited to matters of validity, construction, effect and performance. 44 20. Severability of Provisions. In case any one or more of the provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby, and this Agreement shall be interpreted as if such invalid, illegal or unenforceable provision was not contained herein. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name and on its behalf and its corporate seal to be hereunto affixed and attested by its corporate officers thereunto duly authorized. /s/ Raymond E. Schultz Raymond E. Schultz (Corporate Seal) PROMUS HOTEL CORPORATION By: ATTEST: Secretary 45 Summary of Employment Agreement of Raymond E. Schultz 1. Term: Four and one-half (4 1/2) years from July 1, 1995 to December 31, 1999. 2. Duties: Chief Executive Officer, or as otherwise determined by the Board. 3. Compensation and Benefits: He receives an annual salary of $310,000, plus merit increases as determined by the Human Resource Committee, incentive compensation, and benefits including use of company aircraft for business, family and personal use and appropriate security arrangements. Following any termination of employment, he will receive lifetime health and life insurance benefits at Company expense as provided to retired management directors. 4. Termination without Cause or Resignation For Good Reason: The Board can terminate him without cause, or he can resign for "Good Reason." If either occurs, he will receive two years salary continuation as a employee-consultant plus benefits (except for new stock grants and annual bonus). His unvested stock options and restricted stock continue in force for vesting purposes during the two year period, and any that do not vest during that period will be forfeited. His EDCP will vest at the retirement rate on the date of termination of active employment. Note: "Good Reason" includes such events as an adverse change in his duties, salary reduction, decreased benefits, or a relocation of his office by more than 50 miles. 5. Termination for Cause; Resignation Without Good Reason; Retirement: The Board can terminate him for "Cause." If so, or if he resigns without Good Reason, any unvested options and restricted stock are forfeited. However, if he retires after June 30, 1997 but before December 31, 1999, any stock options and restricted stock scheduled to vest during the next two years vest immediately; if he retires after December 31, 1999, all unvested options and shares of restricted stock vest immediately. He can exercise vested stock options up to 12:00 p.m. on the termination date. Benefits cease except for lifetime health insurance. 6. Expiration of Agreement: Upon expiration of the agreement, all salary and benefits will cease (except for lifetime health insurance). 7. Change in Control: If he resigns or is terminated (except due to death, disability or retirement) within two years after a change in control, he receives benefits under his severance agreement in lieu of salary continuation or other rights under his employment agreement. 46 8. Death: Upon his death, the employment agreement terminates, and his beneficiary/estate will receive the benefits normally provided to the beneficiaries of a deceased employee. 9. Disability: Upon disability, he can apply for standard long-term disability benefits. If he does not apply or does not qualify, and if the Human Resources Committee nevertheless determines he is unable to perform his job, the Board can terminate his agreement. If this occurs, he will receive two years salary continuation and all benefits (except for new stock grants and annual bonus), and his unvested options and restricted stock will continue in force for vesting purposes during the salary continuation period. He will receive lifetime insurance benefits. If he does qualify for long-term disability, then the terms of the applicable plans and programs will apply in lieu of salary and benefits under this agreement. 10. Escrow Agreement (Rabbi Trust) and Indemnification Agreement: If his employment terminates for any reason, his indemnification agreement will continue in effect, and the Escrow Agreement will continue in effect subject to amendment or termination under its own terms. 11. Covenant Not to Compete: For two years after his termination of employment status or consultancy, he agrees not to engage directly or indirectly in any business in the U.S., Mexico, or Canada that is competitive with any business of the Company and not to solicit or recruit Promus Hotel employees without prior specific Board approval. 12. Arbitration: All disputes under the agreement are to be settled by binding arbitration with each party bearing its own cost and expenses. 13. Merger/Liquidation: The Company cannot liquidate or merge into another company unless the new company assumes the financial obligation of the employment agreement or unless a settlement agreement is entered into that is satisfactory to him. 14. Employment by Subsidiary: He may legally be an employee of Promus Hotels, Inc., or another Promus Hotel Corporation subsidiary, but Promus Hotel Corporation will remain primarily obligated for the obligations under this agreement. 47 EX-2 3 EXHIBIT 10.27 SUBSCRIPTION AGREEMENT This SUBSCRIPTION AGREEMENT (the "Agreement") is made and entered as of this 17th day of October, 1995, by and among PROMUS HOTELS, INC. ("Promus"), a Delaware corporation, FELCOR SUITE HOTELS, INC. (the "Company"), a Maryland corporation, and FELCOR SUITES LIMITED PARTNERSHIP (the "Partnership"), a Delaware limited partnership. RECITALS A. Promus owns, operates and franchises hotels under the trademark and service mark Embassy Suites ("Embassy Suites hotels"). B. The Company owns an approximate 82.8% general partner interest in the Partnership, which currently owns interests in thirteen Embassy Suites hotels, all of which hotels are leased by the Partnership to DJONT Operations, L.L.C. (the "Lessee"). C. All of the Embassy Suites hotels currently owned by the Partnership are operated by the Lessee under franchise licenses from Promus pursuant to franchise license agreements between the Lessee and Promus, and twelve of the Embassy Suites hotels currently owned by the Partnership are managed on behalf of the Lessee by Promus pursuant to management agreements between the Lessee and Promus. D. As of September 19, 1995, Felcor/CSS Holdings, L.P. and PFS Ventures, Inc. ("FelCor") entered into documents (as in effect on such date and without regard to any subsequent amendments or modifications thereto, the "Acquisition Documents") regarding the acquisition by FelCor of fee ownership of thirteen Crown Sterling hotels, ground leases in three Crown Sterling hotels, general and limited partnership interests in the LAX and Mandalay Crown Sterling hotels (the "Partnership Interests"), the Crown Sterling trademark and related intellectual property and all management and license agreements with respect to Crown Sterling (collectively the "Crown Sterling Hotel Chain"). The acquisition contemplated by the Acquisition Documents is intended to be closed in two or more phases. At a closing anticipated for November 15, 1995 (the "First Crown Sterling Closing"), it is contemplated that FelCor will acquire up to seven Crown Sterling hotels, the Partnership Interests, the Crown Sterling trademark and related intellectual property, and the management and license agreements relating to such hotels. It is contemplated that FelCor will acquire the remaining Crown Sterling hotels and the remainder of the Crown Sterling Hotel Chain at a second closing (the "Second Crown Sterling Closing") anticipated for January 3, 1996, but extendible to a date not later than February 15, 1996. E. The Company intends to undertake a public offering of its common stock, $0.01 par value (the "Common Stock") pursuant to a registration statement to be filed with the Securities and Exchange Commission on or shortly after October 18, 1995 (the "Public Offering"), all of the proceeds of which will be contributed by the Company to the Partnership for use by the Partnership, in part, to complete the acquisition by FelCor contemplated by the Acquisition Documents. Concurrently with the Public Offering, Promus shall purchase Common Stock in the amount of Twenty-Five Million Dollars ($25,000,000), at a per share price equal to the per share price at which shares of Common Stock are sold in the Public Offering, 48 pursuant to the same registration statement in a concurrent offering (the "Promus Offering"). F. Also in connection with the acquisition contemplated by the Acquisition Documents and certain other acquisitions as set forth herein, Promus has agreed to subscribe for the purchase of up to Twenty-Five Million Dollars ($25,000,000) in Common Stock and/or units of limited partner interest of the Partnership (the "Units") upon the terms outlined in this Agreement (the "Crown Sterling Subscription"). Subject to the terms and conditions set forth in this Agreement, the aggregate amount committed by Promus in connection with the Promus Offering and the Crown Sterling Subscription shall be up to Fifty Million Dollars ($50,000,000), subject to compliance with applicable law. G. The parties to this Agreement agree that Promus will have the right to sell to the public any Common Stock and/or Units received in the Promus Offering and/or pursuant to the Crown Sterling Subscription at any time following one year from the date of first issuance of said Common Stock and/or Units to Promus. AGREEMENT NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows: 1. Terms of Subscription (a) Promus Offering. Promus hereby subscribes for and agrees to consummate the Promus Offering at the purchase price determined in accordance with Section 2 below. (b) Crown Sterling Subscription. Promus hereby subscribes for and agrees to purchase, from time to time, Common Sock and/or Units in consummation of the Crown Sterling Subscription, subject to the limitations set forth in Section 1(e) below, at the purchase price determined in accordance with Section 2 below. The Crown Sterling Subscription shall consist exclusively of Common Stock unless, at the time of any incremental purchase (each a "Crown Sterling Incremental Purchase"), Promus owns the maximum amount of Common Stock (the "Limit") permitted under the charter of the Company and no waiver of such Limit can be made without jeopardizing the Company's REIT status. (c) Units. Any Crown Sterling Incremental Purchase which, if consisting exclusively of Common Stock, would result in Promus owning an amount of Common Stock in excess of the Limit shall consist of (i) in those instances where, prior to undertaking the Crown Sterling Incremental Purchase in question, Promus did not own an amount of Common Stock equal to or in excess of the Limit, (A) Common Stock up to and until such point as Promus owns the Limit of Common Stock and (B) Units in sufficient number to satisfy any difference between the dollar amount of such Crown Sterling Incremental Purchase and the dollar amount of Common Stock received by Promus pursuant to clause (A) above, or (ii) in those instances where, prior to undertaking the Crown Sterling Incremental 49 Purchase in question, Promus owns an amount of Common Stock equal to or in excess of the Limit, Units exclusively. To the extent that any provision of the charter of the Company would restrict the amount of Common Stock which Promus could acquire, the Company agrees to waive such restriction so long as its REIT status would not be jeopardized as a result of such waiver. (d) Redemption of Units. Each Unit shall be redeemable by Promus, at any time following one year after the date of first issuance of such Units pursuant to this Section 1 for one share of Common Stock, subject only to the restrictions contained in Section 7.5 of the Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of July 25, 1994 (as in effect as of the date of this Agreement and without regard to any subsequent amendments or modifications thereto, the "Partnership Agreement"); provided, that if Promus would be subject to the recovery of profits under Section 16(b) of the Securities Exchange Act of 1934, as amended, with respect to the redemption of such Units for cash, the Partnership shall not satisfy such redemption in whole or in part with cash without the prior consent of Promus. (e) Limitations. Promus' agreement herein to purchase Common Stock and/or Units in the Crown Sterling Subscription, the proceeds of which are to be used by the Partnership to complete the acquisition by FelCor pursuant to the Acquisition Documents shall not exceed at any time the amount (the "Aggregate Subscription Limit") by which the Closed Hotel Amount (as hereinafter defined) exceeds Twenty-Five Million Dollars ($25,000,000). The "Closed Hotel Amount" shall equal Fifty Million Dollars ($50,000,000) times a fraction, the numerator of which is the sum of the Allocated Purchase Price (as set forth on Exhibit A hereto) for all hotels the purchase of which has been closed pursuant to the Acquisition Documents, and the denominator of which shall equal Four Hundred Eighty-Five Million Five Hundred Thirty-Eight Thousand Seven dollars ($485,538,007). The difference between the Aggregate Subscription Limit and Twenty Five Million Dollars ($25,000,000) shall be available for purchases of Qualifying Hotels, as defined in, and pursuant to the terms and conditions of, that certain Subscription Agreement, dated as of May 3, 1995 by and among Embassy Suites, Inc., the Company and the Partnership (the "Prior Subscription Agreement") as though such terms and conditions of the Prior Subscription Agreement were set forth herein, and in no event shall the amount of Common Stock and/or Units purchased by Promus hereunder (other than pursuant to the Promus Offering) exceed Twenty Five Million Dollars ($25,000,000). (f) Sale. Subject to Section 8(d) hereof, Promus may not sell to the public any Common Stock and/or Units received in the Promus Offering, pursuant to the Crown Sterling Subscription or upon redemption of such Units until at least one year following the date of first issuance of said Common Stock and/or Units. 50 2. Purchase Price. The purchase price for each share of Common Stock and each Unit acquired hereunder (the "Crown Sterling Purchase Price") shall be equal to the public offering price per share at which shares of Common Stock are sold in the Public Offering. 3. Conditions to Purchase. The following shall be conditions precedent to the obligation of Promus to purchase Common Stock and/or Units in connection with the Crown Sterling Subscription: (a) FelCor shall have made a formal request upon Promus in connection with either (i) the First Crown Sterling Closing, (ii) the Second Crown Sterling Closing, (iii) an interim closing of the purchase by FelCor of interests in one or more Crown Sterling hotels pursuant to the Acquisition Documents or (iv) following the date on which a minimum of fourteen (14) of the hotels listed on Exhibit A have been acquired pursuant to the Acquisition Documents, the purchase of any other Qualifying Hotel. (b) With respect to acquisitions pursuant to the Acquisition Documents, any request for a Crown Sterling Incremental Purchase from the Company shall be for an amount which, when aggregated with all amounts previously purchased hereunder, shall not exceed the Aggregate Subscription Limit. No request hereunder shall, when aggregated with all amounts previously subscribed hereunder, exceed Twenty-Five Million Dollars ($25,000,000) in the aggregate. 4. Purchase Closings. In connection with the Crown Sterling Subscription, Promus shall pay to the Partnership, by wire transfer or by certified or bank cashier's check, amounts as designated by the Partnership from time to time, the aggregate amount not to exceed the Aggregate Subscription Limit with respect to the acquisition pursuant to the Acquisition Documents, and Twenty Five Million Dollars ($25,000,000) in the aggregate. In connection with each Crown Sterling Incremental Purchase, the Partnership shall issue to Promus one or more certificates representing the whole number of shares of Common Stock and/or Units, as provided in Section 1 hereof, equal to the quotient of (i) the amount paid by Promus to the Partnership in connection with such incremental purchase divided by (ii) the Crown Sterling Purchase Price. The Partnership shall not be required to issue fractional shares of Common Stock or Units in connection with such incremental purchase and, in lieu thereof, the Partnership shall refund to Promus the cash amount represented by the fractional share of Common Stock or Unit based upon the Crown Sterling Purchase Price. 5. Term. Promus' obligations in connection with the Crown Sterling Subscription shall terminate (a) upon the earliest to occur of (i) the date that Promus shall have completed its subscription obligation in connection with the Crown Sterling Subscription, (ii) delivery of written notice to Promus that the Partnership has terminated Promus' obligation in connection with the Crown Sterling Subscription and (iii) with respect to hotels acquired pursuant to the Acquisition Documents, the date on which the final Crown Sterling Closing occurs, but not later than March 31, 1996, and (b) with respect to any other Qualifying Hotels, June 30, 1996. 6. Representations and Warranties of Promus. Promus hereby represents and warrants to the Company and the Partnership as follows: 51 (a) The execution, delivery and performance of this Agreement by Promus has been duly authorized by all necessary corporate action. This Agreement constitutes a valid and binding obligation of Promus, enforceable in accordance with its terms. (b) It is familiar with the business and financial condition of the Company and the Partnership, and is not relying upon any representations made to it by the Company, the Partnership or any of the officers, employees or agents of either of them that are not contained herein. (c) It is aware of the risks involved in making an investment in the Common Stock and in the Units. It has had an opportunity to ask questions of, and to receive answers from, the Partnership and the Company, or a person or persons authorized to act on their behalf, concerning the terms and conditions of this investment. Promus confirms that all documents, records and books pertaining to its investment in the Partnership that have been requested by it have been made available or delivered to it prior to the date hereof. (d) It understands that neither the Common Stock nor the Units to be issued pursuant to the Crown Sterling Subscription have been registered under the Securities Act of 1933, as amended, or any state securities acts, and are instead being offered and sold in reliance on an exemption from such registration requirements. The Common Stock and Units for which Promus hereby subscribes are being acquired solely for its own account, for investment, and are not being purchased with a view to, or for resale in connection with, any distribution, subdivision or fractionalization thereof, in violation of such laws and Promus has no present intention to enter into any contract, undertaking, agreement or arrangement with respect to any such resale. (e) It is an accredited investor as that term is defined in Rule 501 and Regulation D of the Securities Act of 1933, as amended. The foregoing representations and warranties are true and accurate as of the date hereof and shall be true and accurate as of the date of each incremental purchase pursuant to the terms of this Agreement. If in any respect such representations and warranties shall not be true and accurate as of any such incremental purchase, Promus shall give written notice of such fact to the Company and the Partnership prior to such purchase, specifying which representations and warranties are not true and accurate and the reasons therefor. 7. Representations and Warranties of the Company and the Partnership. Each of the Company and the Partnership hereby jointly and severally represents and warrants to Promus that the representations and warranties set forth in Exhibit B attached hereto and by this reference incorporated herein shall be true and correct in all material respects as of the date of the consummation of the Public Offering, and each of the Company and the Partnership further jointly and severally represents and warrants to Promus as follows: 52 (a) The Company and the Partnership each have full legal right, power and authority to enter into this Agreement and the registration rights agreement referred to in Section 8 hereof, and to consummate the transactions contemplated herein and therein. This Agreement has been, and the registration rights agreement referred to in Section 8 hereof will be, duly authorized by all necessary corporate and partnership action, and each will constitute the valid and binding obligation of each of the Company and the Partnership, enforceable in accordance with their respective terms. The Partnership Agreement constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms. (b) Units, when issued to Promus, will have been duly and validly authorized and issued, free of any preemptive or similar rights, and be fully paid and nonassessable, without any obligation to restore capital except as required by the Delaware Revised Uniform Limited Partnership Act (the "Delaware Act"). As a holder thereof, Promus shall be admitted as a limited partner of the Partnership entitled to all of the rights and protections of limited partners under the Delaware Act and the provisions of the Partnership Agreement, with the same rights, preferences and privileges as all existing limited partners on a pari passu basis. The Common Stock has been validly authorized and, when issued to Promus, will be duly and validly issued, fully paid, nonassessable and free of preemptive or similar rights. Authorized and unissued shares of Common Stock sufficient to satisfy the Company's obligation to issue such shares to Promus upon redemption of Units shall at all times be reserved by the Company, and the Company shall take no action to prevent the redemption of the Units by virtue of Section 7.5(c)(v) of the Partnership Agreement. (c) Assuming the accuracy of the representations of Promus set forth in Section 6 hereof, (i) the Common Stock and Units will have been issued, offered and sold to Promus in compliance with all applicable laws (including, without limitation, federal and state securities laws), (ii) any share of Common Stock issued to Promus, either in connection with an incremental purchase pursuant to the terms of this Agreement or upon redemption of Units so received, shall have been issued, offered and sold in compliance with all applicable laws (including, without limitation, federal and state securities laws) and (iii) each consent, approval, authorization, order, license, certificate, permit, registration, designation or filing by or with any governmental agency or body necessary for the valid authorization, issuance, sale and delivery of any Common Stock or Units to Promus, the valid authorization, issuance, sale and delivery of such shares upon redemption of the Units, the execution, delivery and performance of this Agreement and the registration rights agreement referred to in Section 8 hereof and the consummation by the Company and the Partnership of the transactions contemplated hereby and thereby has been made or obtained and is in full force and effect. 53 (d) Neither the issuance, sale and delivery to Promus by the Partnership of the Units, nor the issuance, sale and delivery to Promus by the Company of the Common Stock directly or upon redemption of the Units, nor the execution, delivery and performance of this Agreement and the registration rights agreement referred to in Section 8 hereof, nor the consummation of the transactions contemplated hereby or thereby by the Company or the Partnership, as applicable, will conflict with or result in a breach or violation of any of the terms and provisions of, or (with or without the giving of notice or passage of time or both) constitute a default under, any agreement to which the Company, the Partnership, the Lessee or FelCor is a party, the certificate of incorporation, bylaws, certificate of limited partnership, partnership agreement or limited liability company agreement, as the case may be, of the Company, the Partnership or the Lessee, any indenture, mortgage, deed of trust, loan agreement, note, lease or other agreement or instrument to which the Company, the Partnership or the Lessee is a party or to which any of them, any of their respective properties or other assets or any hotel is subject, or any applicable statute, judgment, decree, rule or regulation of any court or governmental agency or body applicable to any of the foregoing or any of their respective properties, or result in the creation or imposition of any lien, charge, claim or encumbrance upon any property or asset of any of the foregoing. The foregoing representations and warranties are true and accurate as of the date hereof, or such other date as of which they are deemed to be made, and shall be true and accurate as of the date of the first subscription pursuant to the terms of this Agreement, and shall survive such date; and the representations and warranties set forth in Exhibit B hereto, and paragraphs (a) through (d) above, shall also be true and accurate as of the date of each subsequent Crown Sterling Incremental Purchase, and shall survive each such date. 8. Registration Rights. Prior to the earlier to occur of the first purchase of Units hereunder and the closing of the Promus Offering, the Company shall enter into with Promus a registration rights agreement in form and substance agreeable to Promus and the Company, providing, among other things, for the following with respect to Common Stock purchased by Promus pursuant to the Promus Offering, Common Stock acquired by Promus pursuant to the Crown Sterling Subscription and Common Stock issued upon redemption of the Units: (a) On or before July 1, 1996, the Company shall file and use its best efforts to cause to become effective, a registration statement under the Securities Act of 1933, as amended, and necessary qualifications or registrations under the securities laws covering the resale by Promus of all shares of Common Stock issued to Promus under and pursuant to this Agreement and pursuant to the redemption of any Units issued to Promus under and pursuant to this Agreement. The Company shall use its best efforts to maintain the effectiveness of such registration statement and such qualifications or registrations (except during periods when Promus shall be restricted from selling shares hereunder) until the earlier of (i) such time as all of the shares of Common Stock issuable upon redemption of the Units and pursuant 54 to the Promus Offering have been issued to and sold by Promus, (ii) such time as all remaining shares of Common Stock issuable upon redemption of the Units and pursuant to the Promus Offering have been issued to and may be resold by Promus without restriction under the Securities Act of 1933, as amended, and (iii) December 31, 2000. (b) During any consecutive three month period, Promus shall be prohibited, unless the Company shall otherwise consent thereto in writing, from selling more than 3% of the outstanding shares of Common Stock, whether pursuant to said registration statement or otherwise, except in an underwritten public offering in which the managing underwriter is one reasonably acceptable to the Company. (c) All expenses of such registration statement, other than any underwriting discounts or commissions or transfer taxes, but including the reasonable fees and expenses of all separate counsel for Promus, shall be borne by the Company. (d) (i) Promus shall refrain from the sale of any shares of Common Stock for one or more periods of not more than sixty (60) days following written notice from the Company that the registration statement is not then current, due to the existence of material non-public information disclosure of which would materially adversely affect the business interests of the Company, and prior to Promus' receipt from the Company of written notice that such registration statement is again current, provided that Promus shall not be precluded from effecting sales pursuant to this clause (i) for more than ninety (90) days during any 360-day period. (ii) Following written notice from the Company that it has filed and caused to become effective a registration statement including an offering of shares of Common Stock for sale by the Company to the public in an underwritten public offering, Promus shall enter into agreements with the underwriters of such public offering, substantially in the same form as agreements entered into by the officers and directors of the Company, precluding the sale of Common Stock by Promus for a period not to exceed one hundred eighty (180) days following such notice, provided that Promus was given the opportunity to include its shares for sale in such public offering. 9. Use of Proceeds. The Company and the Partnership agree with Promus that the proceeds of the sale of Common Stock and/or Units in connection with the Crown Sterling Subscription will be used solely to complete the acquisition by FelCor of the Crown Sterling Hotel Chain pursuant to the Acquisition Documents or, prior to June 30, 1996, as a portion of the purchase price for the Partnership or FelCor to acquire other Qualifying Hotels (provided that a minimum of fourteen (14) of the hotels listed on Exhibit A have been acquired pursuant to the Acquisition Documents). 55 10. Miscellaneous (a) All notices or other communications given or made hereunder shall be in writing and shall be delivered or mailed by registered or certified mail, return receipt requested, postage prepaid, to Promus at 850 Ridge Lake Boulevard, Suite 300, Memphis, Tennessee 38120, Attention: General Counsel, with a copy to the same address, Attention: Chief Financial Officer, and to the Company or the Partnership at 5215 N. O'Connor Blvd., Suite 330, Irving, Texas 75039. (b) NOTWITHSTANDING THE PLACE WHERE THIS AGREEMENT MAY BE EXECUTED BY ANY OF THE PARTIES HERETO, THE PARTIES EXPRESSLY AGREE THAT ALL OF THE TERMS AND PROVISIONS HEREOF SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES), APPLICABLE TO AGREEMENTS MADE AND TO BE WHOLLY PERFORMED THEREIN. (c) This Agreement supersedes that certain Memorandum of Terms, dated as of September 20, 1995, by and between Promus and the Company, and constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. This Agreement may be amended only by an instrument in writing executed by all parties. Promus may assign and transfer its rights and obligations hereunder, and the Common Stock or Units it acquires, to any direct or indirect subsidiary thereof. (d) This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. (e) All terms used herein shall be deemed to include the masculine and the feminine and the singular and the plural as the context requires. Captions herein are for convenience of reference only and shall not alter or affect the meaning or construction of the paragraphs hereof to which they relate. (f) The parties hereto agree to take all actions, including the entering into of any documents, agreements or instruments, or amendments thereof, as may be necessary or appropriate to effectuate the intents and purposes hereof and consummate and make effective the transactions contemplated hereby. (g) Counterparts. This Agreement may be executed in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together will constitute one and the same Agreement. 56 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the date first above written. PROMUS HOTELS, INC., a Delaware corporation By: Name: Title: FELCOR SUITE HOTELS, INC., a Maryland corporation By: Name: Title: FELCOR SUITES LIMITED PARTNERSHIP, a Delaware limited partnership By: FELCOR SUITE HOTELS, INC., a Maryland corporation and its sole general partner By: Name: Title: 57 EXHIBIT A PURCHASE PRICE ALLOCATION October 17, 1995 LOCATION SUITES AMOUNT Phase I Burlingame 339 $41,004,865 Mandalay-Beach 249 24,058,551 Los Angeles Airport 350 26,770,178 Minneapolis-Airport 311 42,918,886 Minneapolis-Downtown 218 18,267,959 Napa 205 18,548,195 St. Paul 210 19,469,864 Phase II Anaheim, CA 222 $ 17,823,484 Baton Rouge, LA 224 21,882,805 Birmingham, AL 242 32,162,141 Deerfield Beach, FL 224 34,905,960 Ft. Lauderdale, FL 359 53,833,588 Miami Airport 314 30,228,707 Milpitas 267 28,194,773 Phoenix 233 39,767,715 S. San Francisco 312 35,700,343 ------------ TOTAL PURCHASE PRICE $485,538,007 ============ 58 EXHIBIT B REPRESENTATIONS & WARRANTIES Representations and warranties under the Underwriting Agreement relating to the Public Offering shall be attached hereto and incorporated herein provided that they are satisfactory to Promus. In the event that an Exhibit B which is reasonably satisfactory to Promus has not been attached hereto and incorporated herein prior to the closing of the Public Offering, Promus shall have the right to terminate this Agreement upon written notice to FelCor with no liability to Promus whatsoever. 59 EX-3 4 [ARTICLE] 5 [LEGEND] THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) AS OF SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. [/LEGEND] [RESTATED] [MULTIPLIER] 1,000 [PERIOD-TYPE] 9-MOS [FISCAL-YEAR-END] DEC-31-1995 [PERIOD-END] SEP-30-1995 [CASH] 1,860 [SECURITIES] 0 [RECEIVABLES] 35,655 [ALLOWANCES] 1,654 [INVENTORY] 4,298 [CURRENT-ASSETS] 44,760 [PP&E] 460,071 [DEPRECIATION] 110,665 [TOTAL-ASSETS] 489,536 [CURRENT-LIABILITIES] 62,988 [BONDS] 203,963 [COMMON] 5,137 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [OTHER-SE] 153,238 [TOTAL-LIABILITY-AND-EQUITY] 489,536 [SALES] 0 [TOTAL-REVENUES] 204,756 [CGS] 0 [TOTAL-COSTS] 119,140 [OTHER-EXPENSES] 640 [LOSS-PROVISION] 71 [INTEREST-EXPENSE] 24,312 [INCOME-PRETAX] 61,017 [INCOME-TAX] 25,688 [INCOME-CONTINUING] 35,329 [DISCONTINUED] 0 [EXTRAORDINARY] 1,661 [CHANGES] 0 [NET-INCOME] 36,990 [EPS-PRIMARY] 0 [EPS-DILUTED] 0 See Note 10 - Earnings Per Share, Notes to Consolidated Condensed Financial Statements, September 30, 1995.
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