SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
Commission File Number 1-11463
PROMUS HOTEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware I.R.S. No. 62-1596939
(State of Incorporation) (I.R.S. Employer Identification No.)
755 Crossover Lane
Memphis, Tennessee 38117
(Address of principal executive offices)(Zip Code)
(901) 374-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of March 31, 1996.
Common Stock ................................ 51,384,859 shares
Page 1 of 43
Exhibit Index Page 25
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
----------------------------
As discussed in Note 1, on June 30, 1995, The Promus Companies
Incorporated (Parent) completed the transfer of the operations, assets and
liabilities of its hotel business (the Hotel Business), composed of three brands
targeted at specific market segments (Embassy Suites, Hampton Inn and Homewood
Suites) to a new publicly traded entity, Promus Hotel Corporation (Promus or the
Company). The accompanying consolidated condensed financial statements of
Promus include the assets, liabilities, revenues, expenses and cash flows of the
Hotel Business on a stand-alone basis for the three months ended March 31, 1995,
as well as actual results of the Company as of December 31, 1995 and for the
three months ended March 31, 1996.
The accompanying unaudited consolidated condensed financial statements of
Promus, a Delaware corporation, have been prepared in accordance with the
instructions to Form 10-Q, and therefore do not include all information and
notes necessary for complete financial statements in conformity with generally
accepted accounting principles. The 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 Promus'
consolidated financial statements and notes thereto included in the Promus 1995
Annual Report to Stockholders.
2
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
March 31, Dec. 31,
(in thousands, except share amounts) 1996 1995
--------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 2,622 $ 2,668
Receivables, including notes receivable of
$601 and $497, less allowance for doubtful
accounts of $1,211 and $1,172 20,324 14,837
Deferred income taxes 3,556 3,492
Prepayments and other 2,263 2,429
--------- ---------
Total current assets 28,765 23,426
--------- ---------
Land, buildings, furniture and equipment 444,935 436,887
Less: accumulated depreciation (110,510) (104,993)
--------- ---------
334,425 331,894
Investments in and advances to nonconsolidated
affiliates (Note 6) 134,651 90,506
Investment in franchise system 35,408 31,652
Deferred costs and other 40,938 42,331
--------- ---------
$ 574,187 $ 519,809
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 15,921 $ 18,202
Accrued expenses 41,030 36,371
Current portion of long-term debt 275 278
--------- ---------
Total current liabilities 57,226 54,851
Long-term debt (Note 3) 257,649 229,479
Deferred credits and other 38,238 36,282
Deferred income taxes 34,836 31,830
--------- ---------
387,949 352,442
--------- ---------
Commitments and contingencies (Note 4)
Stockholders' equity
Common stock, $0.10 par value, 360,000,000 shares
authorized, 51,384,859 and 51,371,152 shares
outstanding, net of 3,984 and 2,626 shares held
in treasury 5,138 5,137
Capital surplus 136,219 136,057
Retained earnings 38,098 25,349
Unrealized gain on marketable equity securities,
net of related deferred tax liability of $4,901
and $1,165 7,665 1,822
Deferred compensation related to restricted stock (882) (998)
--------- ---------
186,238 167,367
--------- ---------
$ 574,187 $ 519,809
========= =========
The accompanying notes are an integral part of these consolidated condensed
balance sheets.
3
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
First Quarter Ended
March 31, March 31,
(in thousands) 1996 1995
-------- --------
Revenues
Company owned hotels
Rooms $31,313 $29,469
Food and beverage 1,525 1,892
Other 1,892 1,692
Franchise and management fees 21,320 17,496
Other 6,112 5,938
------- -------
Total revenues 62,162 56,487
------- -------
Operating expenses
Company owned hotels
Rooms 14,680 13,600
Food and beverage 1,392 1,702
Other 3,244 3,571
Other operating expenses 5,671 5,222
Depreciation of buildings and equipment 5,849 5,120
Corporate expense 3,831 2,332
------- -------
Total operating expenses 34,667 31,547
------- -------
Operating income before property transactions 27,495 24,940
Property transactions (265) (295)
------- -------
Operating income 27,230 24,645
Interest expense, net of interest capitalized
(Note 3) (7,708) (8,312)
Interest and other income 2,124 254
------- -------
Income before income taxes 21,646 16,587
Provision for income taxes (8,897) (6,983)
------- -------
Net income (Note 8) $12,749 $ 9,604
======= =======
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
First Quarter Ended
March 31, March 31,
(in thousands) 1996 1995
-------- --------
Cash flows from operating activities
Net income $ 12,749 $ 9,604
Adjustments to reconcile net income
to cash flows provided by operating activities
Depreciation and amortization 6,655 5,736
Other noncash items 379 260
Equity in earnings of, net of distributions
from, nonconsolidated affiliates (583) 152
Net losses from property transactions - 93
Net change in long-term accounts 2,081 (229)
Net change in working capital accounts (2,874) (7,391)
-------- --------
Cash flows provided by operating activities 18,407 8,225
-------- --------
Cash flows from investing activities
Land, buildings, furniture and equipment additions (8,468) (29,019)
Investment in and advances to nonconsolidated
affiliates (34,114) -
Advances under mezzanine loan agreements (1,206) (3,151)
Repayments under mezzanine loan agreements 1,000 -
Net investments in franchise system (5,626) (2,346)
Recovery of investment in franchise system 1,394 817
Other 254 43
-------- --------
Cash flows used in investing activities (46,766) (33,656)
-------- --------
Cash flows from financing activities
Debt retirements (83) (75)
Net borrowings under revolving credit facility 28,250 -
Advances from parent - 25,371
Other 146 -
-------- --------
Cash flows provided by financing
activities 28,313 25,296
-------- --------
Net decrease in cash and cash equivalents (46) (135)
Cash and cash equivalents, beginning of period 2,668 2,221
-------- --------
Cash and cash equivalents, end of period $ 2,622 $ 2,086
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND ORGANIZATION
- -----------------------------------------------
On June 30, 1995, The Promus Companies Incorporated (Parent) completed the
transfer of the operations, assets and liabilities of its hotel business (the
Hotel Business), composed of three hotel brands targeted at specific market
segments (Embassy Suites, Hampton Inn and Homewood Suites) to a new publicly
traded entity, Promus Hotel Corporation (Promus or the Company). As approved by
Parent's Board of Directors and stockholders on May 26, 1995, this entity was
spun-off (the Spin-Off) from Parent and its stock was distributed to Parent's
stockholders on a one-for-two basis effective June 30, 1995 (the Distribution).
Concurrent with the Distribution, Parent changed its name to Harrah's
Entertainment, Inc.
The accompanying consolidated condensed financial statements include the
assets, liabilities, revenues, expenses and cash flows of Parent's Hotel
Business on a stand-alone basis for the three months ended March 31, 1995, as
well as actual results of the Company as of December 31, 1995 and for the three
months ended March 31, 1996. The preparation of these financial statements
required the use of certain estimates by management in determining the Company's
assets, liabilities, revenues and expenses.
All significant intercompany accounts and transactions have been
eliminated. Investments in 50% or less owned companies and joint ventures over
which Promus has the ability to exercise significant influence are accounted for
using the equity method. Promus reflects its share of income before interest
expense of these nonconsolidated affiliates in revenues - other and its
proportionate share of interest expense of such nonconsolidated affiliates is
included in interest expense in the consolidated statements of income (see Note
6 for combined summarized financial information regarding these nonconsolidated
affiliates). Management believes Promus' inclusion of its proportionate share
of the interest expense of its equity investees in interest expense is the
preferable presentation due to the nature of its equity investments.
NOTE 2 - NATURE OF OPERATIONS
- -----------------------------
Promus operates the Embassy Suites, Hampton Inn, Homewood Suites and
Hampton Inn & Suites hotel brands primarily through three lines of business:
franchise; hotel operations, including management contracts; and hotel real
estate and joint venture investments. The Embassy Suites brand is a full-
service hotel brand that management believes comprises the largest all-suite
upscale hotel system in the United States by number of suites and system
revenue. The Hampton Inn brand offers a limited-facility hotel and the Homewood
Suites brand offers residential-style accommodations designed for the extended
stay traveler. The Hampton Inn & Suites brand is the newest Promus hotel brand
and combines, in a single hotel, Hampton-style rooms or two-room suites and a
common lodge in the center.
Promus' primary focus is to develop, grow and support its franchise
business for all brands. Promus hotel brands are located in virtually every
state, the District of Columbia and four foreign countries. Promus charges each
franchisee royalty fees of generally four percent of suite or room rentals.
Royalty fees for the three months ended March 31, 1996 and 1995, were based on
system-wide reported rooms revenues of $426 million and $365 million,
respectively. In addition, Promus earns a licensing fee for new licenses
granted to franchisees when the franchise is approved.
6
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
(UNAUDITED)
Promus operates more than 100 Promus-brand hotels. Company operated
properties include wholly-owned, partially owned through joint ventures and
hotels managed for third parties. Promus has followed an asset strategy to own
and manage a mix of Promus hotel brands that can impact profits and enhance its
role as franchisor for the respective brands. Management fee income is based on
a percentage of gross revenues, profits, or both at the related managed
property.
NOTE 3 - LONG-TERM DEBT
- -----------------------
Parent Debt Allocation
----------------------
The Company's results of operations through March 31, 1995, reflect all
indebtedness, together with related interest expense, specifically identified
with Promus entities, as well as a pro rata portion of Parent's historical
corporate debt balance, unamortized deferred finance charges and interest
expense. Allocations of those amounts to Promus from Parent were based on the
percentage of Parent's historical corporate debt that was expected to be retired
using proceeds from Promus' new $350 million bank credit facility (the Promus
Facility). Parent's corporate interest expense, including amortization of
deferred finance costs, allocated to Promus before the Spin-Off was
$5.0 million for the three months ended March 31, 1995.
Interest Rate Agreements
------------------------
As of March 31, 1996, Promus was a party to several interest rate swap
agreements that help the Company manage the relative mix of its debt between
fixed and variable rate instruments. These agreements effectively modify the
interest characteristics of its outstanding debt without an exchange of the
underlying principal amount. Pursuant to the agreements, Promus receives a
variable interest rate tied to LIBOR in exchange for its payments at a fixed
interest rate. The fixed rates to be paid by Promus are summarized in the
following table.
Next
Quarterly
Notional Amount Variable
(All Associated Effective Rate
with the Promus Swap Rate Rate at Adjustment Swap
Facility) Paid (Fixed) March 31 Date Maturity
- --------------- ----------- --------- ---------- --------
$12.5 million 6.92% 7.47% 6/1996 12/1998
$12.5 million 6.74% 7.29% 4/1996 1/1999
$12.5 million 6.68% 7.23% 6/1996 12/1999
$12.5 million 6.52% 7.07% 4/1996 1/2000
$50.0 million 6.99% 7.54% 6/1996 3/2000
The differences to be paid or received under the terms of the interest rate
swap agreements described above are accrued as an adjustment to interest expense
for the related debt. Changes in interest rates pursuant to the terms of these
interest rate agreements will have a corresponding effect on Promus' future cash
flows. These agreements contain a credit risk that the counterparties may be
unable to meet the terms of the agreements. Promus minimizes that risk by
evaluating the creditworthiness of its counterparties, which are limited to
major banks and financial institutions, and does not anticipate nonperformance
by the counterparties.
7
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Contractual Commitments
-----------------------
Promus is liable under certain lease agreements pursuant to which it has
assigned the direct obligation to third party interests. Additionally, Promus
manages certain hotels for others under agreements that provide for payments or
loans to the hotel owners if stipulated levels of financial performance are not
maintained. The Company has also provided guarantees for certain loans related
to joint venture and other investments. Promus believes the likelihood is
remote that material payments will be required under these agreements. Promus'
estimated maximum exposure under such agreements is approximately $64 million
over the next 30 years.
FelCor Agreements
-----------------
In May 1995, Promus entered into a Subscription Agreement with FelCor Suite
Hotels, Inc. and FelCor Suites Limited Partnership (FelCor) whereby Promus
agreed to purchase up to $25 million in FelCor limited partnership interests to
help fund the partnership's acquisition of all-suite upscale hotels to be
converted to the Embassy Suites brand. In September 1995, Promus entered into a
second agreement with FelCor in connection with FelCor's agreement to acquire
the Crown Sterling Suites hotel chain. FelCor plans to convert up to 16 of the
Crown Sterling Suites hotels to the Embassy Suites brand. In consideration,
Promus agreed to make up to $50 million available to FelCor for the conversions
through investments in FelCor common stock and guaranteed a third party loan to
FelCor, not to exceed $25 million. Hotels converted to the Embassy Suites brand
under either of these agreements will operate under 20-year license agreements,
and 10-year management contracts will be awarded to Promus. Subject to some
restrictions, the limited partnership interests may be converted to shares of
FelCor common stock on a one-for-one basis and the common stock may be sold on
the open market.
As of March 31, 1996, FelCor has acquired under both agreements, 21 all-
suite hotel properties with three Crown Sterling hotels remaining to close (one
closed in early April 1996 and two are scheduled to close in early May 1996).
Of the eight non-Crown Sterling hotels acquired by FelCor, five of these
properties were Embassy Suites hotels before their acquisition and two of the
five were already being managed by Promus. As of March 31, 1996, Promus managed
all 21 properties of which 12 remain to be converted to the Embassy Suites
brand. Conversion of these remaining properties is expected to be completed by
mid-year 1996 and franchise fees will be earned on these properties only after
the conversion to the Embassy Suites brand is complete.
As of March 31, 1996, Promus had funded approximately $67.9 million of the
total $75 million commitment, and had loaned an additional $3.7 million to
FelCor, representing one-half of the remaining deposit required for the Crown
Sterling Suites acquisition. The total commitment will be reduced by the amount
of such loans outstanding. Based on the market value of the FelCor common stock
as of March 31, 1996, Promus has recorded an unrealized gain on marketable
equity securities of $12.6 million (before tax). However, this amount will
fluctuate based on Promus' funding for the remaining three properties and the
market value of the FelCor common stock.
8
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
(UNAUDITED)
Litigation
----------
The Company is a party to various inquiries, administrative proceedings and
litigation relating to contracts, sales of property and other matters arising in
the normal course of business. While any proceeding or litigation has an
element of uncertainty, management believes that the final outcome of these
matters will not have a materially adverse effect upon Promus' consolidated
financial position or its results of operations.
Employment and Severance Agreements
-----------------------------------
Promus has severance agreements with 13 senior officers of the Company that
provide for a payment of 2.99 times the average annual cash compensation (salary
and bonus) paid to each such executive for the five preceding calendar years,
including such compensation paid during service with Parent. The agreements
also provide for accelerated payment of any compensation or awards payable to
such executive under any Promus incentive compensation or stock option plan in
the event of termination of an executive's employment, as described in the
agreements, subsequent to a change in control of Promus, as defined. The
maximum amount of compensation that would be payable under all agreements if a
change in control occurred and if such executives were terminated as of March
31, 1996, would be approximately $19.2 million.
Self-Insurance Reserves
-----------------------
Promus self-insures various levels of general liability, workers'
compensation and employee medical coverage. All self-insurance reserves include
accruals of estimated settlements for known claims, as well as accruals of
actuarial estimates of incurred but not reported claims. These estimates are
based on historical information along with certain assumptions about future
events. Changes in assumptions for such things as medical costs and legal
expenses, as well as changes in actual experience, could cause these estimates
to change in the near term.
9
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
(UNAUDITED)
NOTE 5 - SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR INTEREST AND TAXES
- --------------------------------------------------------------------
The following table reconciles Promus' interest expense, net of interest
capitalized, to cash paid for interest (in thousands):
First Quarter Ended
March 31, March 31,
1996 1995
-------- --------
Interest expense, net of amount capitalized
(Note 3) $ 7,708 $ 8,312
Adjustments to reconcile to cash paid for
interest
Promus' share of interest expense of
nonconsolidated affiliates (Note 6) (3,007) (3,261)
Net change in accruals (334) -
Amortization of deferred finance charges (192) (194)
Net amortization of discounts and premiums - (6)
Other (38) (38)
------- -------
Cash paid for interest, net of amount
capitalized $ 4,137 $ 4,813
======= =======
Cash paid for income taxes $ 4,588 $ -
======= =======
For purposes of this presentation, interest expense allocated to Promus by
Parent is assumed to be paid in the quarter allocated. Parent was responsible
for the payment of Promus' income taxes for periods prior to the Spin-Off.
10
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
(UNAUDITED)
NOTE 6 - NONCONSOLIDATED AFFILIATES
- -----------------------------------
Combined summarized statements of income for nonconsolidated affiliates,
which Promus accounted for using the equity method, were as follows (in
thousands):
First Quarter Ended
March 31, March 31,
1996 1995
-------- --------
Combined Summarized Statements of Income
Revenues $40,941 $37,973
======= =======
Operating income $ 9,039 $ 7,971
======= =======
Net income $ 2,586 $ 981
======= =======
Promus' share of its nonconsolidated affiliates' combined net income is
reflected in the accompanying consolidated condensed statements of income as
follows (in thousands):
First Quarter Ended
March 31, March 31,
1996 1995
-------- --------
Pre-interest operating income (included in
revenues - other) $ 4,945 $ 4,480
======= =======
Interest expense (included in interest expense) $(3,007) $(3,261)
======= =======
The components of investments in and advances to nonconsolidated affiliates
reflected in the consolidated condensed balance sheet were as follows (in
thousands):
March 31, Dec. 31,
1996 1995
-------- -------
At equity $ 40,370 $39,868
At cost 14,115 17,622
At market 80,166 33,016
-------- -------
$134,651 $90,506
======== =======
11
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
(UNAUDITED)
NOTE 7 - SUMMARIZED FINANCIAL INFORMATION
- -----------------------------------------
Promus Hotels, Inc. (PHI) is a wholly-owned subsidiary of Promus and the
primary entity through which the operations of Promus are conducted. PHI is
also Promus' principal asset. Summarized financial information for PHI,
prepared on the same basis as Promus, is as follows (in thousands):
March 31, Dec. 31,
1996 1995
-------- --------
ASSETS
Current assets $ 28,536 $ 23,246
Land, buildings and equipment, net 334,425 331,894
Other assets 210,265 163,714
-------- --------
573,226 518,854
-------- --------
LIABILITIES
Current liabilities 57,149 54,851
Long-term debt 257,649 229,479
Other liabilities 73,074 68,112
-------- --------
387,872 352,442
-------- --------
Net assets $185,354 $166,412
======== ========
First Quarter Ended
March 31, March 31,
1996 1995
-------- --------
Revenues $ 62,162 $ 56,487
======== ========
Operating income $ 27,358 $ 24,645
======== ========
Net income $ 12,825 $ 9,604
======== ========
NOTE 8 - EARNINGS PER SHARE
- ---------------------------
Promus' common stock was distributed in connection with the Spin-Off on
June 30, 1995. In order to present earnings per share on a comparable basis,
the weighted average common shares outstanding 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 (in thousands, except per share amounts).
First Quarter Ended
March 31, March 31,
1996 1995
-------- --------
Net income $12,749 $ 9,604
======= =======
Earnings per share $ 0.25 $ 0.19
======= =======
Weighted average shares outstanding 51,577 51,573
======= =======
12
Item 2. Management's Discussion and Analysis
---------------------------------------------
of Financial Condition and Results of Operations
-------------------------------------------------
On June 30, 1995, The Promus Companies Incorporated (Parent) completed the
transfer of the operations, assets and liabilities of its hotel business (the
Hotel Business), composed of three hotel brands targeted at specific market
segments (Embassy Suites, Hampton Inn and Homewood Suites) to a new publicly
traded entity, Promus Hotel Corporation (Promus or the Company). As approved by
Parent's Board of Directors and stockholders on May 26, 1995, this entity was
spun-off (the Spin-Off) from Parent and its stock was distributed to Parent's
stockholders on a one-for-two basis effective June 30, 1995 (the Distribution).
Concurrent with the Distribution, Parent changed its name to Harrah's
Entertainment, Inc.
RESULTS OF OPERATIONS
- ---------------------
The principal factors affecting Promus' results are: continued growth in
the number of hotels; occupancies and room rates achieved by the hotel brands;
number and relative mix of owned, managed and franchised hotels; and Promus'
ability to manage costs. The number of rooms/suites at franchised and managed
properties and revenue per available room/suite (RevPAR/S) significantly affect
Promus' results because franchise royalty and management fees are based upon a
percentage of rooms/suites revenues. Increases in franchise and management fee
revenues have a disproportionate favorable impact on Promus' operating margin
due to lower incremental costs associated with these revenues.
As of March 31, 1996, Promus' combined hotel system had grown to include
686 properties, representing a 16.3% increase over first quarter 1995. Total
system room revenues for the first quarter 1996 have grown to $426.5 million,
which is an annual growth rate of 17.0% since first quarter 1995. Although
comparable system (which includes only those hotels open for both quarters)
occupancy rates decreased 1.4%, the average daily rate (ADR) increased 6.3%,
which contributed to higher RevPAR/S, and the addition of new (primarily
franchised) hotels, resulted in significantly improved financial results over
prior year first quarter. The continued unit growth of the franchise systems,
coupled with a continued focus on rate growth and cost management, were the
primary contributors to the Company's higher revenues, margins and operating
income.
13
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Actual historical results of operations for the first quarter ended 1996
and 1995 were as follows (in millions, except percentages and per share data):
Percentage
First Quarter Ended Increase/
1996 1995 (Decrease)
----- ----- ----------
Revenues $62.2 $56.5 10.1%
Income before property transactions 27.5 24.9 10.4
Operating income 27.2 24.6 10.6
Net income 12.7 9.6 32.3
Operating margin 43.7% 43.5% 0.2pts
Earnings per share (a) $ 0.25 $ 0.19 31.6%
Weighted average shares outstanding (a) 51.6 51.6
- --------
(a) For purposes of computing earnings per share on a comparable basis, the
weighted average shares outstanding for periods prior to the Spin-Off are
assumed to be equal to the actual common and common equivalent shares
outstanding on June 30, 1995.
Since Promus began operations as a public company on July 1, 1995,
comparison of historical results is difficult. The most notable differences
between years relate to the incremental stand alone public company costs
incurred in the first three months of 1996, and that prior to the Spin-Off,
interest was allocated to Promus from Parent at Parent's higher overall
borrowing rate. In order to recompute the Company's results of operations on a
pro forma basis to achieve better comparability between quarters ended March 31,
the following adjustments were made (in thousands):
1995
-------
Incremental stand alone public company costs $(2,032)
Net reduction in interest expense 1,198
Net revenues and expenses related to the
purchase of the corporate office complex 8
Decrease in tax provision related to the
above adjustments 348
-------
Total adjustments to net income $ (478)
=======
Results of operations on a pro forma basis for the first quarter 1995
versus actual results for first quarter 1996 were as follows (in millions,
except percentages and per share data):
First Quarter Ended Percentage
Pro Forma Increase/
1996 1995 (Decrease)
----- --------- ----------
Revenues $62.2 $56.6 9.9%
Income before property transactions 27.5 22.9 20.1
Operating income 27.2 22.6 20.4
Net income 12.7 9.1 39.6
Operating margin 43.7% 39.9% 3.8pts
Earnings per share $ 0.25 $ 0.18 38.9%
Weighted average shares outstanding 51.6 51.6
14
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The first quarter 1996 increases in operating income and margins are
primarily a function of the addition of new franchised hotels, system-wide
increases in ADR and cost containment. On a comparable hotel basis, first
quarter 1996 RevPAR/S increased 4.8%, 4.8% and 5.5% over 1995 at Embassy Suites,
Hampton Inn and Homewood Suites hotels, respectively. Company owned hotel
revenues for 1996 increased approximately 5.1% or $1.7 million over 1995, while
the related operating expenses increased only 2.3% or $0.4 million.
The following comparison of expenses and other items is based on actual
historical results (in millions, except percentages):
Percentage
First Quarter Ended Increase/
1996 1995 (Decrease)
----- ----- ----------
Corporate expense $ 3.8 $ 2.3 65.2%
Property transactions 0.3 0.3 -
Interest expense (7.7) (8.3) (7.2)
Interest and other income 2.1 0.3 N/M
Effective tax rate 41.1% 42.1% (1.0)pts
Corporate expense reflects the cost of specific Promus staff functions
which support all the hotel brands, as well as stand alone company costs for
1996.
Interest expense for the quarter ended March 31, 1995, includes the pro
rata allocation of corporate interest by Parent related to the debt that was
expected to be retired in connection with the Spin-Off using funds drawn on the
Company's new $350 million bank credit facility (the Promus Facility), in
addition to Promus' share of interest expense attributable to its
nonconsolidated affiliates (including joint ventures) and other specific hotel-
related debt. Interest expense for the first quarter 1996 decreased compared to
1995 due primarily to lower actual interest rates obtained under the Promus
Facility as compared to Parent's overall borrowing rate used to allocate
corporate interest expense before the Spin-Off.
Interest and other income for first quarter 1996 increased over 1995 due
primarily to interest charged on the investment in franchise system, as well as
increased interest income on mezzanine loans to franchisees and dividend income
associated with the Company's investments (see Development and Capital
Spending).
The effective tax rate for all periods is higher than the federal statutory
rate primarily due to state income taxes.
15
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
DEVELOPMENT AND CAPITAL SPENDING
- --------------------------------
Hotel Development
-----------------
There were 17 net franchised additions in the Promus hotel system during
first quarter 1996 compared to 20 in first quarter 1995. This continued
development growth is particularly impressive when one considers that, per Smith
Travel Research as of the latest available information at February 29, 1996,
Promus hotel brands had a 2.7% share of the entire United States room supply,
but accounted for an industry leading 16.9% share of new rooms added to the
market from ground-up construction during the first two months of 1996. This
growth occurred primarily in the Hampton Inn brand. As of March 31, 1996, 138
properties were under construction or in the process of being converted to a
Promus brand, 135 of which will operate under franchise agreements as Promus
brands: 94 Hampton Inn hotels; 22 Embassy Suites hotels; 11 Hampton Inn &
Suites; and 11 Homewood Suites hotels. These 138 properties will add over
16,000 rooms or suites to the Promus hotel system. The Company had 84
properties under construction at the same time last year. Promus had an
additional 183 hotels approved and in the design phase at March 31, 1996.
Promus opened two Hampton Inn & Suites hotels in first quarter 1996. The
Hampton Inn & Suites brand is the newest Promus hotel brand and combines, in a
single hotel, Hampton-style rooms or two-room suites and a common lodge in the
center. Of the 183 hotels in the design phase at March 31, 1996, 30 were
Hampton Inn & Suites hotels. To encourage system growth, Promus currently plans
to spend approximately $110 million to expand the Homewood Suites brand by
developing as many as 14 additional company owned properties over the next three
to five years. The Company, however, plans to continue its general strategy of
growing its brands primarily through franchise and management contracts. As in
the past, company owned hotels and new development projects may be sold to
franchisees and the proceeds used to fuel additional system growth, develop new
concepts or for other corporate purposes.
FelCor Agreements
-----------------
In May 1995, Promus entered into a Subscription Agreement with FelCor Suite
Hotels, Inc. and FelCor Suites Limited Partnership (FelCor) whereby Promus
agreed to purchase up to $25 million in FelCor limited partnership interests to
help fund the partnership's acquisition of all-suite upscale hotels to be
converted to the Embassy Suites brand. In September 1995, Promus entered into a
second agreement with FelCor in connection with FelCor's agreement to acquire
the Crown Sterling Suites hotel chain. FelCor plans to convert up to 16 of the
Crown Sterling Suites hotels (over 4,000 suites) to the Embassy Suites brand.
In consideration, Promus agreed to make up to $50 million available to FelCor
for the conversions through investments in FelCor common stock and guaranteed a
third party loan to FelCor, not to exceed $25 million. Hotels converted to the
Embassy Suites brand under either of these agreements will operate under 20-year
license agreements, and 10-year management contracts will be awarded to Promus.
Subject to some restrictions, the limited partnership interests may be converted
to shares of FelCor common stock on a one-for-one basis and the common stock may
be sold on the open market.
16
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
As of March 31, 1996, FelCor has acquired under both agreements, 21 all-
suite hotel properties with three Crown Sterling hotels remaining to close (one
closed in early April 1996 and two are scheduled to close in early May 1996).
Of the eight non-Crown Sterling hotels acquired by FelCor, five of these
properties were Embassy Suites hotels before their acquisition and two of the
five were already being managed by Promus. As of March 31, 1996, Promus managed
all 21 properties of which 12 remain to be converted to the Embassy Suites
brand. Conversion of these remaining properties is expected to be completed by
mid-year 1996 and franchise fees will be earned on these properties only after
the conversion to the Embassy Suites brand is complete. These 24 properties
include 5,765 suites.
As of March 31, 1996, Promus had funded approximately $67.9 million of the
total $75 million commitment, and had loaned an additional $3.7 million to
FelCor, representing one-half of the remaining deposit required for the Crown
Sterling Suites acquisition. The total commitment will be reduced by the amount
of such loans outstanding. Based on the market value of the FelCor common stock
as of March 31, 1996, Promus has recorded an unrealized gain on marketable
equity securities of $12.6 million (before tax). However, this amount will
fluctuate based on Promus' funding for the remaining three properties and the
market value of the FelCor common stock.
Strategic Alliance Agreements
-----------------------------
In March 1996, Promus announced it would enter into strategic development
alliances with Equity Inns, Inc. (Equity Inns), and Winston Hotels, Inc.
(Winston Hotels). Equity Inns is the largest owner of Hampton Inn hotels, with
29 properties and Winston Hotels currently owns 13 Promus branded hotels. Under
the terms of separate memorandums of understanding, Promus will invest up to $15
million in common stock of both Equity Inns and Winston Hotels as they purchase
existing or to be constructed Promus hotels. The agreements contemplate three
existing properties at a stated price and seven company approved projects at
Promus' cost of construction. Total proceeds to Promus from these sales are
estimated at $94.2 million over the next 18 months. Both Equity Inns and
Winston Hotels intend to spend $100 million for the development of Promus brand
properties over the next few years. In return, Promus will receive 20-year
license agreements and 10-year management agreements.
Mezzanine Financing Program
---------------------------
To encourage growth (primarily in the Hampton Inn & Suites and Homewood
Suites brands) in light of the lack of available financing for new hotel
construction, Promus developed a mezzanine financing program. Under the program
Promus provides conservatively underwritten secondary financing to franchisees.
A minimum of 20 percent equity is required by the borrower, and the investment
must meet certain defined underwriting criteria. The terms of the mezzanine
financing must be consistent with the terms of the first mortgage lender, with
whom Promus will enter into an inter-creditor agreement. Promus provided $1.2
million in mezzanine loans during first quarter 1996, and anticipates providing
an additional $18.4 million during 1996. Additionally, one loan with a balance
of $1.0 million was paid off early during first quarter 1996. Outstanding loans
bear interest at rates ranging from 10.0% to 10.5%.
17
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Other
-----
Ongoing refurbishment of Promus' existing company owned hotel properties to
maintain the quality standards set for those properties will continue in 1996 at
an estimated annual cost of approximately $11 million. During the first quarter
1996, $2.5 million in costs had been incurred for hotel refurbishment. As of
March 31, 1996, Promus had incurred $1.3 million in costs to renovate its
corporate headquarters. An additional $8.6 million is estimated to complete the
renovation by year-end 1996.
Cash necessary to finance projects currently under development, as well as
additional projects to be developed by Promus, will be made available from
operating cash flows, the Promus Facility (see "Liquidity and Capital
Resources"), joint venture partners, specific project financing, sales of
existing hotel assets and, if necessary, Promus debt and equity offerings.
Promus' capital expenditures totaled $51.9 million during first quarter 1996.
The Company expects to spend between $140 million and $160 million during 1996
to fund project development, including those projects discussed above, as well
as to refurbish existing facilities and for other corporate related projects.
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 March 31, 1995, before becoming a stand alone
company on July 1, 1995. The year to date results of operations and cash flows
are not necessarily indicative of Promus' future results as a separate
corporation. The most significant items that will affect liquidity and capital
resources as a result of the Spin-Off are incremental costs associated with
operating as a stand-alone company, a decrease in the Company's average
borrowing rate, and Promus' payment of state and federal income taxes subsequent
to the Distribution (Parent historically paid Promus' taxes).
Cash flows from operating activities for the quarter ended March 31, 1996,
were $18.4 million, compared with $8.2 million for the same period last year.
This increase primarily results from improved operations and a $4.5 million
increase in income taxes payable. EBITDA, consisting of income before
extraordinary items plus interest, taxes, depreciation, amortization and net
earnings of, or distributions from, nonconsolidated affiliates, was
$32.2 million for first quarter 1996, compared with $27.3 million for the
comparable period in 1995, representing a 17.9% 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 operating performance) or to cash flows
from operating activities (as a measure of liquidity) as determined in
accordance with generally accepted accounting principles.
On March 31, 1996, the Company had a working capital deficit of
$28.5 million which is a $2.9 million improvement over the deficit at
December 31, 1995. The working capital deficit resulted primarily from Promus'
cash management program that calls for all excess cash to pay down amounts
outstanding under the Promus Facility. Therefore, the Company does not believe
that the current ratio is an appropriate measure of its short-term liquidity
without considering availability under the Promus Facility.
18
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The Promus Facility, which is secured by the stock of certain of its
material subsidiaries, consists of two agreements, the significant terms of
which are as follows.
Total Maturity Interest Facility
Facility Date Rate Fees
------------ ------------- -------------- --------------
Base Rate, as
defined, or
Five-Year LIBOR +35 0.20% of the
Revolver $300,000,000 June 30, 2000 basis points total facility
Base Rate, as
defined, or
Extendible LIBOR +40 0.15% of the
Revolver $ 50,000,000 June 6, 1996 basis points total facility
The Extendible Revolver is a 364-day facility with annual renewals and
may be converted into a two-year term loan with equal amortizing payments over
such two-year period. Facility fees and interest on Base Rate loans are paid
quarterly. The agreements contain a tiered scale for facility fees and the
applicable LIBOR spread (current rates for both reflected above) that is based
on the more favorable of Promus' current credit rating (Investment Grade ratings
by both Moody's Investors Service and Standard & Poor's) 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 March 31, 1996,
Promus was in compliance with all such covenants.
The Five-Year Revolver includes a sublimit for letters of credit of
$20 million. At March 31, 1996, approximately $11.2 million in letters of
credit were outstanding under this agreement (related primarily to the Company's
self-insurance reserves). There was approximately $82 million of availability
under the Promus Facility as of March 31, 1996. The remaining borrowing
capacity available under the Promus Facility is available for working capital,
hotel development and other general corporate purposes.
As of March 31, 1996, Promus was a party to several interest rate swap
agreements that bear a total notional amount of $100 million. The effect of the
swap agreements was to convert a portion of the Company's variable rate debt
under the Promus Facility to a fixed rate. The weighted average effective fixed
rate pursuant to the agreements, which expire between December 1998 and March
2000, was approximately 7.4% at the end of the quarter.
RELATIONSHIP WITH PARENT
- ------------------------
For the purpose of governing certain of the ongoing relationships between
Promus and Parent after the Distribution and to provide mechanisms for an
orderly transition, Parent and Promus have entered into various agreements and
adopted policies to govern their future relationship. Management believes that
the agreements are fair to both parties and contain terms comparable to those
which would have been reached in arm's-length negotiations with unaffiliated
parties (although comparisons are difficult with respect to certain agreements
that relate to the specific circumstances of the Distribution).
19
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
TAX SHARING AGREEMENT
- ---------------------
In connection with the Spin-Off, Promus and Parent entered into a tax
sharing agreement that defines each company's rights and obligations with
respect to deficiencies and refunds of federal, state and other income or
franchise taxes relating to Promus' business for tax years prior to the
Distribution and with respect to certain tax attributes of Promus after the
Distribution. In general, with respect to periods ending on or before December
31, 1995, Parent is responsible for (i) filing federal tax returns for Parent
and Promus for the periods such companies were members of the same consolidated
group, and (ii) paying the taxes relating to such returns (to include any
subsequent adjustments resulting from the redetermination of such tax
liabilities by the applicable taxing authorities; Promus will reimburse Parent
for the portion of such adjustments relating to the hotel business). Promus is
responsible for filing returns and paying taxes for periods beginning after the
Spin-Off.
20
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
First Quarter Ended
March 31, March 31, Inc/
PERFORMANCE STATISTICS 1996 1995 (Dec)
- ---------------------- -------- ------- ------
COMPARABLE SYSTEM HOTELS*
Embassy Suites
Occupancy 73.8% 74.1% (0.3)pts
ADR $108.30 $102.98 5.2%
RevPAS $ 79.90 $ 76.27 4.8%
Hampton Inn
Occupancy 68.0% 69.3% (1.3)pts
ADR $ 58.76 $ 54.97 6.9%
RevPAR $ 39.94 $ 38.12 4.8%
Hampton Inn & Suites
Occupancy - - -
ADR - - -
RevPAS - - -
Homewood Suites
Occupancy 74.2% 75.7% (1.5)pts
ADR $ 86.12 $ 80.02 7.6%
RevPAS $ 63.89 $ 60.54 5.5%
TOTAL SYSTEM HOTELS
Embassy Suites
Occupancy 73.1% 74.0% (0.9)pts
ADR $107.99 $102.57 5.3%
RevPAS $ 78.91 $ 75.88 4.0%
Hampton Inn
Occupancy 67.0% 69.0% (2.0)pts
ADR $ 58.89 $ 55.02 7.0%
RevPAR $ 39.46 $ 37.97 3.9%
Hampton Inn & Suites
Occupancy 54.4% - N/M
ADR $ 66.28 - N/M
RevPAS $ 36.07 - N/M
Homewood Suites
Occupancy 71.6% 74.8% (3.2)pts
ADR $ 87.09 $ 79.32 9.8%
RevPAS $ 62.39 $ 59.34 5.1%
TOTAL SYSTEM REVENUES (in thousands)
Hampton Inn $208,643 $172,292 21.1%
Embassy Suites 197,737 176,604 12.0%
Homewood Suites 18,083 15,698 15.2%
Hampton Inn & Suites 2,036 - N/M
-------- --------
$426,499 $364,594 17.0%
======== ========
*Includes results for only those hotels open for the entire applicable period
for both years.
21
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
TOTAL HOTELS AND ROOMS/SUITES
Number of Hotels Percent Number of Rooms/Suites Percent
March 31, March 31, Inc/ March 31, March 31, Inc/
1996 1995 (Dec) 1996 1995 (Dec)
-------- -------- ------- ----------- -------- -------
Embassy Suites
Company owned 9 9 - 2,025 2,025 -
Joint venture 23 23 - 5,897 5,901 (0.1)%
Management contract 30 25 20.0 % 7,251 6,124 18.4 %
Franchised 55 52 5.8 % 12,493 11,885 5.1 %
--- --- ------ ------
117 109 7.3 % 27,666 25,935 6.7 %
=== === ====== ======
Hampton Inn
Company owned 14 15 (6.7)% 1,916 2,047 (6.4)%
Joint venture 19 19 - 2,376 2,376 -
Management contract 4 4 - 464 464 -
Franchised 494 416 18.8 % 54,082 46,528 16.2 %
--- --- ------ ------
531 454 17.0 % 58,838 51,415 14.4 %
=== === ====== ======
Hampton Inn & Suites
Company owned - - - - - -
Joint venture - - - - - -
Management contract 1 - - 127 - -
Franchised 6 - - 677 - -
--- --- ------ ------
7 - - 804 - -
=== === ====== ======
Homewood Suites
Company owned 9 8 12.5 % 1,024 932 9.9 %
Joint venture - - - - - -
Management contract - - - - - -
Franchised 22 19 15.8 % 2,217 2,033 9.1 %
--- --- ------ ------
31 27 14.8 % 3,241 2,965 9.3 %
=== === ====== ======
Total System
Company owned 32 32 - 4,965 5,004 (0.8)%
Joint venture 42 42 - 8,273 8,277 (0.1)%
Management contract 35 29 20.7 % 7,842 6,588 19.0 %
Franchised 577 487 18.5 % 69,469 60,446 14.9 %
--- --- ------ ------
686 590 16.3 % 90,549 80,315 12.7 %
=== === ====== ======
22
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
EX-10.1 Form of Interest Swap Confirmations, dated January 22, 1996,
between NationsBank, N.A. and Promus Hotels, Inc.(1)
EX-10.2 Form of Unwind Interest Swap Confirmation, dated January 22,
1996, between NationsBank, N.A. and Promus Hotels, Inc.(1)
EX-10.3 Form of Guarantee Agreement, dated February 6, 1996, among
Promus Hotel Corporation and Promus Hotels, Inc., Canadian
Imperial Bank of Commerce, as agent for the Lenders, FelCor
Suites Limited Partnership, FelCor/CSS Holdings L.P., and
FelCor Suite Hotels, Inc. (1)
EX-27 Financial Data Schedule. (1)
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1996.
- --------
Footnote
(1) Filed herewith.
23
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
May 7, 1996 By: JEFFERY M. JARVIS
-----------------------------
Jeffery M. Jarvis
Vice President and Controller
(Chief Accounting Officer)
24
Exhibit Index
-------------
Sequential
Exhibit No. Description Page No.
- ------------ ---------------------------------------- ----------
(a) EX-10.1 Form of Interest Swap Confirmations,
dated January 22, 1996, between
NationsBank, N.A. and Promus Hotels,
Inc.(1) 26
EX-10.2 Form of Unwind Interest Swap Confirmation,
dated January 22, 1996, between NationsBank,
N.A. and Promus Hotels, Inc.(1) 32
EX-10.3 Form of Guarantee Agreement, dated
February 6, 1996, among Promus Hotel
Corporation, and Promus Hotels, Inc., Canadian
Imperial Bank of Commerce, as agent for the
Lenders, FelCor Suites Limited
Partnership, FelCor/CSS Holdings L.P., and
FelCor Suite Hotels, Inc. (1) 33
EX-27 Financial Data Schedule. (1) 43
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1996.
- --------
Footnote
(1) Filed herewith.
25