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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, 1999
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 1-13719
PROMUS HOTEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware I.R.S. No. 62-1716020
(State of Incorporation) (I.R.S. Employer Identification No.)
755 Crossover Lane
Memphis, Tennessee 38117-4900
(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, 1999.
Common Stock ................82,909,965 shares
Page 1 of 29
Exhibit Index Page 28
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Form 10-Q Cross-Reference Index
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
a) Consolidated Balance Sheets - December 31, 1998 and
March 31, 1999 3
b) Consolidated Statements of Operations - March 31, 1998
and March 31, 1999 4
c) Consolidated Statements of Cash Flows - March 31, 1998
and March 31, 1999 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited consolidated condensed financial statements of Promus
Hotel Corporation (Promus), incorporated in the state of Delaware, 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 unaudited
consolidated condensed financial statements should be read in conjunction with
Promus' consolidated financial statements and notes thereto included in Promus'
1998 Annual Report to Shareholders.
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Promus Hotel Corporation
Consolidated Balance Sheets
(in thousands, except share amounts)
(unaudited)
December 31, March 31,
1998 1999
------------ ----------
ASSETS
Cash and cash equivalents $ 6,466 $ 22,720
Accounts receivable, net 101,742 110,158
Other 44,485 37,879
---------- ----------
Total current assets 152,693 170,757
---------- ----------
Property and equipment, net 1,109,868 1,100,658
Investments 220,268 215,536
Management and franchise contracts, net 427,421 424,035
Goodwill, net 392,419 389,825
Notes receivable 68,991 79,321
Investment in franchise system 57,023 57,145
Deferred costs and other assets 45,318 43,781
---------- ----------
$2,474,001 $2,481,058
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 180,189 $ 154,526
Current portion of notes payable 1,797 1,748
---------- ----------
Total current liabilities 181,986 156,274
---------- ----------
Deferred income taxes 276,498 277,128
Notes payable 768,891 809,426
Other long-term obligations 87,931 82,364
---------- ----------
1,315,306 1,325,192
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value. Authorized 500,000,000 shares;
87,457,099 and 87,880,465 shares issued and outstanding 875 879
Additional paid-in capital 898,900 910,692
Retained earnings 379,423 413,465
Accumulated other comprehensive income (loss) (2,909) (2,778)
Treasury stock, at cost (3,620,000 and 4,970,500 shares) (117,594) (166,392)
---------- ----------
1,158,695 1,155,866
---------- ----------
$2,474,001 $2,481,058
========== ==========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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Promus Hotel Corporation
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
March 31,
----------------------
1998 1999
-------- --------
Revenues:
Franchise and management fees $ 49,344 $ 52,090
Owned hotel revenues 91,581 101,490
Leased hotel revenues 98,479 90,656
Purchasing and service fees 5,090 4,859
Other fees and income 10,049 11,046
-------- --------
Total revenues 254,543 260,141
-------- --------
Operating costs and expenses:
General and administrative expenses 18,535 23,786
Owned hotel expenses 57,666 65,715
Leased hotel expenses 89,259 82,610
Depreciation and amortization 19,180 21,042
-------- --------
Total operating costs and expenses 184,640 193,153
-------- --------
Operating income 69,903 66,988
Interest and dividend income 5,618 4,834
Interest expense, net (15,305) (16,451)
Loss on sale of real estate and securities (4) (268)
-------- --------
Income before income taxes and minority interest 60,212 55,103
Minority interest share of net income (879) (548)
-------- --------
Income before income taxes 59,333 54,555
Income tax expense (23,317) (20,513)
-------- --------
Net income $ 36,016 $ 34,042
======== ========
Net income per share
Basic $ 0.42 $ 0.41
======== ========
Diluted $ 0.41 $ 0.40
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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Promus Hotel Corporation
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended March 31,
-------------------------------
1998 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 36,016 $ 34,042
Adjustments to reconcile net income to net cash
provided by operations:
Payment of business combination expenses (24,039) (27,667)
Depreciation and amortization 19,180 21,042
Other non-cash income (150) (618)
Equity in earnings of nonconsolidated affiliates (3,611) (3,676)
Loss (gain) on sale of real estate, securities and investments 4 (1,075)
Changes in assets and liabilities:
Increase in accounts receivable, net (5,975) (8,664)
Decrease in other current assets 6,436 6,606
Decrease in deferred costs and other assets 99 130
Increase in accounts payable and accrued expenses 26,593 3,949
Increase (decrease) in other long-term obligations and
deferred income taxes 1,431 (4,855)
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 55,984 19,214
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (61,150) -
Purchases of property and equipment (42,890) (22,646)
Proceeds from sale of real estate, securities and investments 2,115 21,738
Investments in and advances to partnerships and affiliates (8,626) (3,886)
Distributions from partnerships and affiliates 16,568 12,084
Net investment in management and franchise contracts (118) (398)
Escrow deposits used for development 20,537 -
Loans to owners of managed and franchised hotels (4,976) (18,565)
Collections of loans to owners of managed and
franchised hotels 5,824 7,496
Other (229) (231)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (72,945) (4,408)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options 23,768 9,760
Purchases of treasury stock - (48,798)
Net activity under revolving credit facility 21,500 5,750
Proceeds from notes payable - 35,000
Principal payments on notes payable (361) (264)
-------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 44,907 1,448
-------- -------
Net increase in cash and cash equivalents 27,946 16,254
Cash and cash equivalents, beginning of period 24,066 6,466
-------- -------
Cash and cash equivalents, end of period $ 52,012 $ 22,720
======== =======
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - March 31, 1999 (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Promus Hotel Corporation (Promus) and its majority-owned subsidiaries. All
significant intercompany accounts and transactions are eliminated. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
the disclosure of contingent assets and liabilities. While management seeks to
make accurate estimates, actual results could differ from these estimates.
During the first quarter of 1998, Promus adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
The standard requires that entities include within their financial statements
information on comprehensive income, which is defined as all activity impacting
equity from non-owner sources. For Promus, adjustments to calculate
comprehensive income are comprised exclusively of changes in unrealized gains
(losses), net of gains (losses) realized, on its investments in marketable
common stock. The adjustments, net of tax, for the three months ended March 31,
1998 and 1999 were $4,366,000 and $132,000, respectively.
NOTE 2 - NATURE OF OPERATIONS
Through its wholly-owned subsidiaries, Promus franchises and manages hotels with
the following brands: Doubletree Hotels, Doubletree Guest Suites, Embassy
Suites, Hampton Inn, Hampton Inn & Suites, Homewood Suites, Club Hotels by
Doubletree, and Red Lion Inns and Hotels. Promus may also own all or a portion
of these hotels or lease these hotels from others. In addition, Promus leases
and manages hotels that are not Promus-branded. At March 31, 1999, Promus
franchises 1,023 hotels and operates 339 hotels, of which 64 hotels are wholly
owned, 22 are partially owned through joint ventures, 73 are leased from third
parties and 180 are managed for third parties. These hotels are located in all
50 states, the District of Columbia, Puerto Rico and six foreign countries.
Promus also operates and licenses vacation interval ownership systems under the
Embassy Vacation Resort and Hampton Vacation Resort names.
Promus' primary focus is to develop, grow and support its franchise and
management business. Promus' primary sources of revenues are from the operations
of owned and leased hotels, franchise royalty fees and management fees. Promus
charges franchisees a royalty fee of up to four percent of the franchised
hotels' room revenues. Management fees are based on a percentage of the managed
hotels' gross revenues, operating profits, cash flow, or a combination thereof.
Generally, Promus is also reimbursed for certain costs associated with providing
central reservations, sales, marketing, accounting, data processing, internal
audit and employee training services to hotels.
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NOTE 3 - BUSINESS COMBINATIONS
On December 19, 1997, Promus Hotel Corporation and Doubletree Corporation
merged. The merger was accounted for under the pooling of interests method. In
connection with the merger, Promus recorded a $115.0 million provision for
business combination expenses in December 1997 and an employee severance accrual
of $28.1 million in the fourth quarter of 1998. At March 31, 1999, $10.2 million
of these accruals remained and were included in current liabilities.
Acquisition of Harrison Conference Associates, Inc.
In January 1998, Promus acquired Harrison Conference Associates, Inc. (Harrison)
for approximately $61.2 million cash, including acquisition costs, in a
transaction accounted for as a purchase. Harrison is a leading conference center
operator with over 1,200 rooms under management, including two owned and six
managed properties.
NOTE 4 - INVESTMENTS
Investments consist of the following (in thousands):
December 31, March 31,
1998 1999
----------- --------
Hotel partnerships $165,678 $160,738
Investments in common stock (at market) 36,090 36,298
Convertible preferred stock 18,500 18,500
-------- --------
$220,268 $215,536
======== ========
Promus' non-controlling general and/or limited partnership interests in hotel
partnerships range from less than 1.0% to 50.0%. Investments in common stock are
carried at market value. Promus' cost of these investments at March 31, 1999 was
approximately $40.9 million.
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NOTE 5 - NOTES PAYABLE
Promus' indebtedness consists of the following (in thousands):
December 31, March 31,
1998 1999
----------- ---------
Promus Facility $634,250 $640,000
Mortgages, 6.9% - 8.6%, maturities
through 2008 95,660 95,439
Convertible rate term loan 20,000 20,000
Notes payable and other unsecured debt, 6.0%-13.0%,
maturities through 2022 20,778 55,735
-------- --------
770,688 811,174
Current portion of notes payable (1,797) (1,748)
-------- --------
$768,891 $809,426
======== ========
Derivative Financial Instruments
To manage its interest rate sensitivity, Promus maintains several interest rate
swap agreements, which serve to convert a portion of the Promus Facility from a
floating to a fixed rate. At March 31, 1999, the fair value of Promus' swap
agreements, which Promus would have been required to pay to terminate them, was
approximately $2.3 million.
NOTE 6 - STOCKHOLDERS' EQUITY
In August 1998, Promus' board of directors authorized the repurchase of up to
$200.0 million of its common stock for cash. The authorization allows Promus to
conduct the repurchase program in the open market, or in negotiated or block
transactions at prevailing market prices until December 31, 1999. Through March
31, 1999, Promus had repurchased 4,970,500 shares of its common stock at a total
cost of approximately $166.4 million.
On April 30, 1999, Promus' board of directors authorized a continuation of the
share repurchase program through December 31, 2000. The authorization allows
Promus to repurchase up to an additional $200.0 million of common stock for cash
under the same conditions as the August 1998 authorization.
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NOTE 7 - EARNINGS PER SHARE
The following table reflects Promus' weighted average common shares outstanding
and the impact of its dilutive common share equivalents (in thousands):
Three months ended
March 31,
--------------------
1998 1999
------ ------
Basic weighted average shares outstanding 86,415 83,616
Effect of dilutive securities:
Stock options and warrants 1,224 445
------ ------
Diluted weighted average shares outstanding 87,639 84,061
====== ======
Outstanding options to purchase shares of common stock, where the options'
exercise prices were greater than the average market price of the common shares
for the time period reported, must be excluded from the above computations of
diluted weighted average outstanding shares. For the three months ended March
31, 1998, 2,000 options were excluded. For the three months ended March 31,
1999, 5,849,598 options were excluded.
NOTE 8 - STOCK OPTIONS
The 1997 Equity Participation Plan allows options to be granted to key personnel
to purchase shares of Promus' stock at a price not less than the current market
price at the date of grant. The options vest annually and ratably over a
four-year period from the date of grant and expire ten years after the grant
date. An aggregate of 10,000,000 shares has been authorized for issuance under
the plan. The plan also provides for the issuance of stock appreciation rights,
restricted stock or other awards.
Additionally, Promus and Doubletree had stock option plans prior to their merger
on December 19, 1997. On the date of the merger, options were issued to replace
the options outstanding under the prior plans. The replacement options were
issued with identical remaining terms and conditions, except the replacement
options vested immediately. The immediate vesting was in accordance with the
terms of the prior plans.
As of March 31, 1999, approximately 11,367,000 options were outstanding.
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of interest capitalized, amounted to $9.4 million
and $12.6 million for the three months ended March 31, 1998 and 1999,
respectively. Cash paid for income taxes, net of refunds received, amounted to
$(0.9) million and $1.2 million for the three months ended March 31, 1998 and
1999, respectively. Investments in common stock, carried at market values, had
unrealized gains of $29.2 million at March 31, 1998 and unrealized losses of
$4.6 million at March 31, 1999.
NOTE 10 - SEGMENT REPORTING
On January 1, 1998, Promus adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Under SFAS No. 131,
Promus has one operating segment, lodging, which is managed as one business
unit. The accounting policies of the segment are the same as those described in
the summary of significant accounting policies. Promus does not record taxes at
the segment level.
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The following table presents the revenues, operating profit and assets of
Promus' reportable segment for the three months ended March 31, (in thousands):
1998 1999
---------- ----------
Revenues
Lodging $ 248,519 $ 253,831
Other (a) 6,024 6,310
---------- ----------
254,543 260,141
---------- ----------
Operating profit (b)
Lodging $ 85,036 $ 87,077
Other 3,402 3,697
---------- ----------
88,438 90,774
---------- ----------
Depreciation and amortization
Lodging $ 14,728 $ 16,915
Corporate 4,452 4,127
---------- ----------
19,180 21,042
---------- ----------
Segment assets
Lodging $1,798,125 $1,870,861
Other 37,249 42,257
Corporate 646,691 567,940
---------- ----------
2,482,065 2,481,058
---------- ----------
Capital expenditures (c)
Lodging $ 41,213 $ 13,589
Other - -
Corporate 1,677 9,057
---------- ----------
42,890 22,646
---------- ----------
(a) - Other revenues are derived from Promus Vacation Resorts and Promus'
purchasing subsidiary.
(b) - Operating profit excludes interest and gain on sale of real estate and
securities.
(c) - Capital expenditures do not include the purchase of Harrison in 1998.
Promus does not record gains on the sales of real estate and securities,
interest and dividend income, or interest expense at the segment level;
therefore, segment assets do not include investments or notes receivable.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On March 31, 1999, the Promus Hotel Corporation system contained 1,362 hotels,
representing over 194,000 hotel rooms. Promus has hotels in all 50 states, the
District of Columbia, Puerto Rico, and six foreign countries. Our brands
include:
- - Doubletree Hotels
- - Doubletree Guest Suites
- - Embassy Suites
- - Hampton Inn
- - Hampton Inn & Suites
- - Homewood Suites
- - Club Hotels by Doubletree
- - Red Lion Inns and Hotels
The Promus system also includes certain properties that are not Promus-branded.
Of these 1,362 hotels, 1,023 are owned/operated by franchisees and Promus
operates 275 and owns 64. Depending on the hotel brand, we charge each
franchisee royalty fees of up to four percent of suite or room revenues in
exchange for the use of one of our brand names and franchise-related services.
Promus operated properties include:
Wholly-owned hotels 64
Leased hotels 73
Joint venture hotels 22
Hotels managed for third parties 180
---
Total 339
===
Promus receives management fees for supervising or operating hotels. Management
fees are based on a percentage of the hotel's gross revenues, operating profits,
cash flow, or a combination of each. Promus' results of operations for owned and
leased hotels reflect the revenues and expenses of these hotels.
Promus also licenses eight vacation interval ownership properties under the
Embassy Vacation Resort and Hampton Vacation Resort brand names. We earn
franchise fees on net interval sales and on revenues related to the rental of
interval units. We also earn management fees for our role as manager of some of
the vacation resort properties.
Promus' primary focus is to grow its franchise and management businesses, while
limiting its ownership of real estate. We own a mix of Promus-brand hotels that
enhance our role as manager and franchisor for our brands. We may periodically
sell hotels as appropriate and when opportunities arise.
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RESULTS OF OPERATIONS
The principal factors affecting our results are:
- - continued growth in the number of system hotels
- - occupancy and room rates achieved by hotels
- - the relative mix of owned, leased, managed and franchised hotels
- - our ability to manage costs
The number of rooms at franchised and managed properties and revenue per
available room (RevPAR) significantly affect our results because franchise
royalty and management fees are generally based upon a percentage of room
revenues. Increases in franchise royalty and management fee revenues have a
favorable impact on our operating margin due to minimal incremental costs
associated with this type of revenue.
Almost all components of our revenues are favorably impacted by system-wide
increases in RevPAR, even though our revenues come from various sources. On a
comparable hotel basis, RevPAR increases were as follows:
Revenue per Available Room for
Comparable Hotels (a)
Three months ended March 31,
--------------------------------
1998 1999 Increase
------ ------ --------
Doubletree Hotels $70.19 $72.76 3.7%
Embassy Suites 88.39 90.67 2.6%
Hampton Inn 43.42 44.37 2.2%
Hampton Inn & Suites 55.87 59.15 5.9%
Homewood Suites 69.65 70.61 1.4%
Other hotels (b) 63.68 64.09 0.6%
(a) Revenue statistics are for comparable hotels, and include information only
for those hotels in the system as of March 31, 1999 and managed or franchised by
Promus since January 1, 1998. Doubletree franchised hotels are not included in
the statistical information.
(b) Includes results for the 15 Red Lion hotels as well as the results for
comparable hotels managed/leased under other franchisors' brands or as
independent hotels and/or conference centers.
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Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
1998
Operating Revenues and Expenses
First quarter 1999 revenues increased 2.2%, or $5.6 million, to $260.1 million
compared to first quarter 1998 revenues of $254.5 million.
The following table compares operating revenues and expenses for the three
months ended March 31, 1998 and 1999 (dollars in thousands):
Three months ended
March 31,
------------------- Increase Percentage
1998 1999 (Decrease) Change
-------- -------- ---------- -----------
Franchise and management fees $ 49,344 $ 52,090 $ 2,746 5.6 %
Owned hotel revenues 91,581 101,490 9,909 10.8
Leased hotel revenues 98,479 90,656 (7,823) (7.9)
Purchasing and service fees 5,090 4,859 (231) (4.5)
Other fees and income 10,049 11,046 997 9.9
-------- -------- ------- ---
Total operating revenues 254,543 260,141 5,598 2.2
-------- -------- ------- ---
General and administrative expenses 18,535 23,786 5,251 28.3
Owned hotel expenses 57,666 65,715 8,049 13.9
Leased hotel expenses 89,259 82,610 (6,649) (7.4)
Depreciation and amortization 19,180 21,042 1,862 9.7
-------- -------- ------- ---
Total operating expenses 184,640 193,153 8,513 4.6
-------- -------- ------- ---
Operating income $ 69,903 $ 66,988 $(2,915) (4.2)%
======== ======== ======= ===
Operating margins:
Total (a) 27.5% 25.8%
Owned hotels (b) 37.0 35.2
Leased hotels (c) 9.4 8.9
(a) - Operating income divided by total operating revenue.
(b) - Owned hotel revenues less owned hotel expenses divided by owned hotel
revenues.
(c) - Leased hotel revenues less leased hotel expenses divided by
leased hotel revenues.
Franchise and management fees - The increase was due to growth in the number of
franchised and managed properties as well as improved performance at existing
franchised and managed properties. Since March 31, 1998 we have added 136
franchise and management contracts (net of terminations). Incentive management
fees totaled $7.3 million in the first quarter of 1998 and 1999.
Owned hotel revenues and expenses - Revenue and expense increases are due to the
net addition of eight hotels since March 31, 1998. We also experienced revenue
growth due to increases in RevPAR. The margin decline primarily resulted from
the impact of the new hotels opened since the first quarter of 1998. New hotels
typically generate lower margins prior to reaching maturity. The effect of the
Asian economic crisis on our hotels in the Pacific Northwest also negatively
impacted the margin.
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Leased hotel revenues and expenses - Since March 31, 1998, the number of leased
hotels decreased by nine. This decrease in the number of leased hotels caused a
decrease in revenues and expenses for the first quarter of 1999. The operating
margin decreased to 8.9% for the quarter ended March 31, 1999 from 9.4% for the
same period in 1998. The net decrease in the number of leased hotels negatively
impacted the margin.
Purchasing and service fees - We supply franchised and managed hotels and manage
various capital projects for a fee. Our fees decreased 4.5% for the three months
ended March 31, 1999, over the same period in 1998. Fees from preferred vendor
programs increased $1.1 million but were offset by a decrease of $1.3 million in
project management fees.
Other fees and income - During the first quarter of 1999, we realized a $1.3
million gain related to the sale of a joint venture hotel. Excluding this
unusual item, other fees and income for the quarter ended March 31, 1999
compared to the quarter ended March 31, 1998 would have decreased $0.3 million.
General and administrative expenses - The increase in the 1999 first quarter
includes a charge of $7.6 million for retention and employment-related expenses
associated with the management change following the Promus/Doubletree merger.
Excluding the effect of this unusual item, general and administrative expenses
decreased $2.4 million, or 12.7%, in the first quarter of 1999 over the first
quarter of 1998. The reduction in general and administrative expenses was
directly attributable to efficiencies from the Promus/Doubletree merger.
Depreciation and amortization - The increase of 9.7% in the first quarter of
1999 is primarily due to the addition of eight owned hotels since the first
quarter of 1998.
Other Items Affecting Net Income
Interest and dividend income - Interest and dividend income was $5.6 million in
the first quarter of 1998 compared to $4.8 million in the first quarter of 1999.
The decrease is due to lower interest income from notes receivable and escrow
deposits. Notes receivable outstanding were $88.1 million at March 31, 1998
compared to $79.3 million at March 31, 1999. Escrow deposits were proceeds from
hotel sales in 1997. We deposited these proceeds into interest earning accounts
until they were used for hotel purchases during the first quarter of 1998.
Interest expense - Interest expense was $15.3 million in first quarter 1998
compared to $16.5 million in first quarter 1999. The increase was due to higher
average borrowings for the first three months of 1999 over the first three
months of 1998. Average borrowings increased to fund the repurchase of a portion
of Promus' outstanding common stock. A lower average interest rate paid for
borrowings in first quarter 1999 helped to reduce the increase in interest
expense caused by the higher average borrowings.
Operating results for the first quarter of 1998 reflect an overall tax rate of
39.3%, compared with an overall rate of 37.6% for the first quarter of 1999.
Minority interest share of net income reflects the profits allocable to third
party owners of consolidated joint venture hotels.
Net income and earnings per diluted share for the quarter ended March 31, 1998
were $36.0 million and $0.41, respectively, compared to $34.0 million and $0.40,
respectively for 1999. It is difficult to compare operating results due to the
inclusion in the first quarter of 1999 of certain unusual items. Included in
first quarter 1999 results were a net gain of $1.1 million on the sale of real
estate and a $7.6 million charge for retention and employment-related expenses
associated with the management change following the Promus/Doubletree merger.
Unusual items for the first quarter of 1998 were not significant. Excluding
these items, net income and earnings per diluted share for the first quarter of
1998 and 1999 would have been $36.0 million and $0.41 and $38.1 million and
$0.45, respectively.
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Overall
Promus' operating income, excluding the effect of unusual items, increased 4.8%
to $73.3 million for the first quarter of 1999 from $69.9 million for the same
period in 1998. Though increases in operating income are in part due to revenue
growth, growth has also come from the changing mix of Promus' business. Due to
the size and strength of our infrastructure and systems, openings of additional
franchised or managed properties require fewer incremental costs. The growth in
our franchise and management portfolio over the past several years has served to
improve overall operating profitability.
DEVELOPMENT
Hotels
Promus is an industry leader in franchised and owned hotel development. In the
first three months of 1999, we added 25 net hotels and 2,188 net rooms to our
hotel system, compared to the addition of 28 net hotels and 3,538 net rooms
during the first three months of 1998. Net room additions, by brand, are as
follows:
Net Rooms Added
------------------------
Quarters Ended March 31,
------------------------
1998 1999
------ ------
Doubletree Hotels 487 (345)
Hampton Inn 2,015 1,812
Hampton Inn & Suites 480 553
Embassy Suites 200 100
Homewood Suites 799 614
Other (443) (546)
----- -----
3,538 2,188
===== =====
Hampton Inn continued to lead Promus' unit growth, with a net of 18 properties
added during the quarter. We expect to continue growing the Hampton Inn brand as
demand from franchisees and guests appears strong. Hampton Inn franchise
application approvals through March 31, 1999 were greater than approvals through
March 31, 1998. Doubletree lost a net of two hotels and 345 rooms during the
three months ended March 31, 1999. The net decrease came from management's
decision to terminate one franchised property, the owner of another hotel
converting to their own brand and the conversion of one Doubletree Guest Suites
to an Embassy Suites hotel. Doubletree added one new franchised hotel in the
first quarter of 1999. Embassy Suites added a net of 100 rooms in the first
quarter of 1999. The net increase came from the conversion of a managed
Doubletree Guest Suites to an Embassy Suites offset by the sale of a joint
venture hotel and management's decision to terminate one franchised property. In
addition, we opened and sold one new Embassy Suites hotel while retaining the
right to manage the property. Other non-Promus branded hotel rooms decreased by
546 due to the termination of two management contracts. The greatest percentage
growth in the first three months of 1999 occurred within the Homewood Suites and
Hampton Inn & Suites brands. Homewood Suites added 614 rooms, a 7.8% increase in
total rooms. Hampton Inn & Suites added 553 rooms, a 9.9% increase in total
rooms.
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Promus' pipeline as of March 31, 1999 contained 335 properties that were either
in the design or construction phase, as follows:
Under
Construction/ In
Conversion Design Total
------------ ------ -----
Hampton Inn 98 92 190
Homewood Suites 10 17 27
Hampton Inn & Suites 24 28 52
Embassy Suites 12 28 40
Doubletree Hotels and Guest Suites 5 8 13
Club Hotels by Doubletree 4 5 9
Other 2 2 4
--- --- ---
155 180 335
=== === ===
The 180 properties in design represent almost 23,000 rooms. During the quarter,
Promus' rate of rescissions on its development pipeline was consistent with past
history. We are developing 17 of the properties within the pipeline for
operation as company owned hotels until they are sold to third parties. The
remainder in the pipeline are being developed by franchisees. Financing for our
franchise driven brands continues to be made available by local and regional
banks. The underwriting on these loans remains conservative with loan-to-cost
ratios of 60-75%. This means the developers are required to provide the balance
of the funding. We expect to achieve our target of adding between 155 to 165
hotels to the Promus system by year-end.
Promus plans to actively pursue development opportunities for all its brands.
This development is expected to come through both the construction of new hotels
and the acquisition of management contracts and/or existing hotels. In addition,
we are assessing the market position of individual properties/markets. We are
planning to reposition some hotels by rebranding existing properties and are
planning to sell selected properties.
The success of our development activities is affected by, among other things,
national and regional economic conditions, capital markets, credit availability,
relationships with franchisees and owners as well as competition from other
hotel franchisors and managers.
Strategic Alliances and Acquisitions
On May 1, 1998, Promus announced an agreement with FelCor under which we will
manage five Embassy Suites hotels and one Doubletree hotel that were purchased
by FelCor. These hotels, all of which were previously franchised properties,
will operate under 20-year license agreements and 10-year management contracts.
Under the terms of this agreement, we have guaranteed payment of 12.5% of the
first year's rent.
In January 1998, Promus acquired Harrison Conference Associates, Inc. for $61.2
million in cash, including acquisition costs. Harrison is a leading conference
center operator with over 1,200 rooms under management, including two owned and
six managed properties.
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Vacation Resorts
We have two licensed Promus Vacation Resort products: Embassy Vacation Resorts
and Hampton Vacation Resorts. Promus Vacation Resort statistics are as follows:
December 31, March 31,
1998 1999
------------ --------
Total vacation resorts open 8 8
Total available timeshare units 1,374 1,374
Total available timeshare intervals 70,074 70,074
Total timeshare intervals sold* 24,425 27,660
*Includes presold intervals for resorts under construction
Other
System growth comes mainly from construction of hotels, strategic alliances with
others, and incentives provided to hotel owners as a means of obtaining
franchise and management contracts. Promus does pursue other means of system
growth, including strategic hotel acquisitions. The hotel industry is in a
period of consolidation, which is expected to continue. We may, from time to
time, pursue acquisition opportunities.
CAPITAL SPENDING
Promus expects to spend between $230.0 million and $250.0 million during 1999 to
fund the following:
- - hotel and resort development
- - refurbish existing facilities
- - support its hotel management and business systems
- - loan funds to hotel owners
- - invest in joint ventures
- - and pursue other corporate related projects
If Promus identifies other significant acquisition and/or investment
opportunities, 1999 capital spending could increase from these planned levels.
In order to maintain our quality standards, ongoing refurbishment of existing
company owned and leased hotel properties will continue in 1999 with estimated
annual expenditures of approximately $61.0 million. Our capital expenditures for
refurbishment totaled $7.2 million for the three months ended March 31, 1999.
Total capital expenditures for the items listed above totaled $45.1 million in
the first quarter of 1999. Additionally, we spent $48.8 million in the first
three months of 1999 to reacquire a portion of our outstanding shares under the
$200.0 million share repurchase program authorized by Promus' board of directors
and announced in August 1998. The board of directors extended the share
repurchase program on April 30, 1999. The board authorized an additional $200.0
million share repurchase through December 31, 2000. The 1999 projected capital
spending of $230.0 to $250.0 million does not include the share repurchase
programs.
Cash necessary to finance projects currently identified, as well as additional
projects to be pursued by Promus, can be made available from the following
sources:
- - operating cash flows
- - Promus' revolving credit facility
- - joint venture partners
- - specific project financing
- - sales of existing hotel assets and/or investments
- - and, if necessary, Promus debt and/or equity offerings
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LIQUIDITY AND CAPITAL RESOURCES
Net operating cash flows decreased $36.8 million in the first three months of
1999 from 1998 levels. This decrease is primarily due to the smaller increase in
accounts payable and accrued expenses in first quarter 1999 compared to first
quarter 1998. Additionally, Promus paid $27.7 million of business combination
expenses in first quarter 1999 compared to $24.0 million paid in first quarter
1998. Net income in the 1999 period included $1.1 million in nonoperating net
gains from sales of real estate and $7.6 million in charges for retention and
employment-related expenses, which were of a nonrecurring nature.
Net cash flows used in investing activities decreased by $68.5 million in 1999
from 1998 levels. Uses of cash for investing activities in 1998 included $61.2
million for the purchase of Harrison and $42.9 million for purchases of property
and equipment. Proceeds from the sale of real estate and securities and the use
of escrow deposits provided $22.7 million in investing cash flows in the first
quarter of 1998. The decrease in cash flows used in 1999 over 1998 was partially
offset by higher distributions from partnerships and affiliates in 1998 and an
increase in 1999 of $11.9 million in cash used for loans, net of collections, to
hotel owners.
Net cash provided by financing activities decreased $43.5 million in the first
quarter of 1999 from the same period in 1998. The decrease in net cash provided
during the first quarter of 1999 is attributable to treasury stock purchases of
$48.8 million and a decrease of $14.0 million in proceeds from the exercise of
stock options. An increase of $19.3 million in net borrowings of long-term debt
helped offset the treasury stock purchases and the decrease in proceeds from
stock option exercises.
On March 31, 1999, Promus had a working capital surplus of $14.5 million,
compared to a $29.3 million deficit at December 31, 1998. The change in working
capital from a deficit to a surplus is primarily due to the $27.5 million
decrease in the liability for business combination expenses and an $8.4 million
increase in accounts receivable.
Promus' cash management program uses all excess cash to pay down debt amounts
outstanding under the Promus Facility. We do not believe that the current ratio
is an appropriate measure of our short-term liquidity without considering the
aggregate availability of our capital resources. We believe that these
resources, consisting of strong operating cash flow, available borrowings under
the Promus Facility, and our ability to obtain additional financing through
various financial markets, are sufficient to meet our liquidity needs for the
next year.
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YEAR 2000
The "Year 2000 Problem" is the result of many computer programs that were
designed to save valuable computer storage space by representing years with a
two-digit number such as `99' for 1999. When the change in the millennium occurs
and year 2000 is represented as `00', such computer programs as well as certain
chip-embedded technology systems may interpret the year as 1900. If not
corrected, computer applications could fail or deliver unreliable and erroneous
results.
As a franchisor, manager and owner of hotels, we rely heavily on computer
systems. These computer systems are present at our corporate offices and at our
franchised, managed and owned hotels.
Promus' Computer Technologies
Promus groups the computer technologies used in support of its business into the
following three categories:
- - Enterprise-wide, mission-critical business systems that support Promus'
franchised, managed and owned hotels as well as other corporate
requirements, including reservation, marketing, property management,
and revenue management systems; financial, human resources and
operational reporting systems; and corporate support technologies that
provide external and internal management reporting.
Most of these systems were built and installed after 1990 when the
Year 2000 Problem was well understood within the technology industry.
These systems were largely Year 2000 compliant when built.
- - Property-based systems that perform functions relating to the
operational support of all of our franchised, managed and owned hotels,
including PBX, call accounting, point-of-sale, and local sales systems.
These systems are selected by the hotel owners and managers and are not
consistently implemented at all hotels.
- - Facility systems that contain embedded computer chips and perform
functions relating to the operation of all of our franchised, managed
and owned hotels, including elevators, automated room key systems,
HVAC, and fire and safety systems. These systems also are selected by
the hotel owners and managers and are not consistently implemented at
all hotels.
Promus' Response to the Year 2000 Problem
Beginning in early 1997, Promus developed and began implementing a plan designed
to identify its exposure to the Year 2000 problem and to minimize potential
disruptions and losses. The initial steps in this plan are as follows:
- - Enterprise-Wide, Mission Critical Business Systems
The remediation steps for the enterprise-wide, mission-critical
business systems have been executed and tested. No significant issues
have surfaced in the integration testing to date. This phase is
substantially complete and is expected to be finished in May 1999.
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- - Vendor Identification and Contact
The external businesses that provide technology systems and other
products and services to Promus and its hotels have been sent letters
requesting verification of their Year 2000 readiness. Responses are
tracked and a vendor database accessible through Promus' Intranet for
hotel owners and managers is being developed. This effort will continue
throughout 1999.
- - Property-Based Systems and Facility Systems
Promus has engaged an independent consultant to perform on-site
inventories and assessments of the property-based systems and facility
systems at all hotels that are managed or owned by us. This phase is
scheduled to be completed in July 1999, although it is anticipated that
assessment and remediation activities will continue throughout the
remainder of the year. For franchised hotels, we have provided their
owners and general managers with a Year 2000 Compliance Guide and
additional communications to assist them in performing their
assessments. Year 2000 readiness is part of our 1999 quality assurance
audits of all hotels.
- - Contingency Planning
Promus is engaged in a reassessment of its contingency plans to respond
to business disruptions that may occur as a result of Year 2000
problems. The principal areas of focus for contingency planning are
hotel operations, corporate finance, human resources, information
technology, and corporate facilities. Completion is scheduled for July
1999, subject to updating and refinement throughout the remainder of
the year.
Year 2000 Remediation Costs
During the first quarter of 1999, Promus spent approximately $0.1 million on
Year 2000 remediation costs. Since 1997, we have spent approximately $1.2
million on the remediation of the Year 2000 problem in the computer systems at
our corporate offices and hotels, most of which was internal labor costs. We
expect to incur approximately $1.0 million in additional Year 2000 problem
remediation costs over the remainder of 1999.
The costs associated with remediation of the Year 2000 problem of property-based
systems and facility systems at the hotels that are managed by Promus and at the
franchised hotels are borne by their respective owners.
Risks Arising from the Year 2000 Problem
Promus believes that the Year 2000 problem will not have a material adverse
effect on its business or its financial condition.
Promus believes that its enterprise-wide, mission-critical business systems, as
well as the property-based systems and facility systems at its owned hotels,
will be ready for Year 2000 in all material respects and will pose minimal risks
of business disruption. We cannot predict with certainty the Year 2000 readiness
of the property-based systems and facility systems at our managed and franchised
hotels, because the decision-making authority with respect to Year 2000
assessment and remediation, and the incurrence of costs related thereto, rests
principally with the owners of those hotels.
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22
Promus and all of its franchised, managed and owned hotels depend on numerous
independent, external providers of products and services. These external
businesses include suppliers of electricity, natural gas, telephone service and
other public utilities; financial institutions and credit card companies; food,
beverage and linen suppliers; and airlines, air traffic control systems, car
rental companies, and gasoline station operators. We do not control these
external businesses and cannot ensure that they and their products and services
will be ready for Year 2000. The most reasonably likely worst case Year 2000
scenario for Promus and its hotels would be the failure by one or more critical
external businesses (e.g., airlines, utilities or credit card companies) to be
ready for Year 2000. This in turn could disrupt service or cause potential hotel
guests to postpone or cancel their travel plans or make claims under the "100%
Satisfaction Guarantee" program available at most Promus-branded hotels, causing
a disruption of our business. We are seeking to verify the Year 2000 readiness
of these external businesses; however, if these external businesses -
particularly critical ones - were to experience a Year 2000 problem, the
resulting business disruption could have a material adverse effect on our
results of operations and financial condition.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives either as assets or liabilities in the statement of financial
position and measure those instruments at fair value.
SFAS No. 133 allows an entity to designate a derivative instrument, if certain
conditions are met, as one of the following three types:
1) a Fair Value Hedge, which is a hedge of the exposure to
changes in the fair value of a recognized asset or liability,
or of an unrecognized firm commitment
2) a Cash Flow Hedge, which is a hedge of the exposure to
variability in the cash flow of a recognized asset or
liability, or of a forecasted transaction, or
3) a Foreign Currency Hedge, which is a hedge of the foreign
currency exposure of an unrecognized firm commitment, an
available-for-sale security, a forecasted transaction, or a
net investment in a foreign operation.
The accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation. Promus' derivatives at March 31, 1999 are cash flow hedges.
This Statement is effective for all fiscal quarters of fiscal years beginning
after September 15, 1999. The adoption of SFAS No. 133 is not anticipated to
have a material impact on the financial position or results of operations of
Promus.
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FORWARD LOOKING STATEMENTS
Certain matters discussed in this report may constitute forward-looking
statements within the meaning of the federal securities laws.
Forward-looking statements are those that express management's view of future
performance and trends, and usually are preceded with "expects", "anticipates",
"believes", "hopes", "estimates", "plans" or similar phrasing, and include
statements regarding Year 2000 readiness and potential exposure, Promus' ability
to increase rates, margin improvements and projected expenditures, capital
spending and availability of capital resources. Such statements are based on
management's beliefs, assumptions and expectations, which in turn are based on
information currently available to management. Our actual performance and
results could differ materially from those expressed in or contemplated by the
forward-looking statements due to a number of factors, many of which are beyond
our ability to predict or control. Such factors include, but are not limited to,
operations of existing hotel properties, including the effects of competition
and customer demand; changes in the size of Promus' hotel system, including
anticipated scope and opening dates of new developments, planned future capital
spending, terminations of franchise or management agreements or dispositions of
properties; relationships with third parties, including franchisees, lessors,
hotel owners, lenders and others; litigation or other judicial actions; changes
in the national economy or regional economies, which among other things, affect
business and leisure travel and expenditures and capital availability for hotel
development; and adverse changes in interest rates for both Promus and its
franchisees and business partners which, among other things, affect new hotel
development; real estate values; and credit availability. Promus disclaims any
obligation to update forward-looking information. For further information on
factors which could impact Promus and the statements contained herein, please
refer to the current, quarterly and annual reports and other filings, including
without limitation our 10-K for the year ended December 31, 1998, made by
Promus with the Securities and Exchange Commission.
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PERFORMANCE STATISTICS
Number of Hotels Number of Rooms/Suites
-------------------------------- --------------------------------
As Of Change Since As Of Change Since
--------- ------------ --------- ------------
March 31, Dec. 31, March 31, Dec. 31,
1999 1998 1999 1998
--------- -------- --------- --------
Doubletree Hotels (a)
Company owned 16 - 4,747 1
Leased 14 (4) 3,877 (935)
Joint venture (b) 4 - 1,002 -
Management contract 90 3 25,051 727
Franchised 50 (1) 11,789 (138)
----- --- ------- ------
174 (2) 46,466 (345)
Embassy Suites
Company owned 6 - 1,299 -
Joint venture (b) 18 (1) 4,777 (167)
Management contract 60 2 14,820 395
Franchised 61 (1) 13,777 (128)
----- --- ------- ------
145 0 34,673 100
Hampton Inn
Company owned 11 - 1,504 -
Leased 18 - 2,250 -
Management contract 7 - 929 -
Franchised 808 18 83,210 1,812
----- --- ------- ------
844 18 87,893 1,812
Hampton Inn & Suites
Management contract 3 - 408 -
Franchised 50 5 5,736 553
----- --- ------- ------
53 5 6,144 553
Homewood Suites
Company owned 21 2 2,468 236
Management contract 5 - 554 -
Franchised 54 4 5,459 378
----- --- ------- ------
80 6 8,481 614
Other Hotels (c)
Company owned 10 - 1,620 -
Leased 41 - 6,433 -
Management contract 15 (2) 2,521 (546)
----- --- ------- ------
66 (2) 10,574 (546)
Total System
Company owned 64 2 11,638 237
Leased 73 (4) 12,560 (935)
Joint venture (b) 22 (1) 5,779 (167)
Management contract 180 3 44,283 576
Franchised 1,023 25 119,971 2,477
----- --- ------- ------
1,362 25 194,231 2,188
===== === ======= ======
(a) Includes Doubletree Hotels, Doubletree Guest Suites and Club Hotel by
Doubletree brands.
(b) For statistical purposes only, Promus classifies unconsolidated joint
ventures in which it holds less than a 20% interest as management contracts
and consolidated joint ventures in which it owns more than a 50% interest as
company owned.
(c) Includes Red Lion Inns and Hotels.
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Managed Franchised Total
--------------- --------------- ----------------
March 31, March 31, March 31,
--------------- --------------- ----------------
1998 1999 1998 1999 1998 1999 Increase
------ ------ ------ ------ ------ ------ --------
Promus Vacation Resorts
Resort properties 4 5 3 3 7 8 1
Timeshare units 342 500 874 874 1,216 1,374 158
Timeshare intervals available 17,442 25,500 44,574 44,574 62,016 70,074 8,058
Timeshare intervals sold (a) 7,940 16,264 6,139 11,396 14,079 27,660 13,581
(a) Includes pre-sales for resorts under construction but not yet open.
First Quarter ended March 31, (a)
-------------------------------------
1998 1999 Change
------- ------- ------
Doubletree Hotels (b)
Occupancy 66.7% 67.5% 0.8 pts
ADR $105.15 $107.78 2.5 %
RevPAR $ 70.19 $ 72.76 3.7 %
Embassy Suites
Occupancy 71.4% 72.7% 1.3 pts
ADR $123.85 $124.69 0.7 %
RevPAR $ 88.39 $ 90.67 2.6 %
Hampton Inn
Occupancy 65.1% 64.3% (0.8) pts
ADR $ 66.70 $ 68.98 3.4 %
RevPAR $ 43.42 $ 44.37 2.2 %
Hampton Inn & Suites
Occupancy 66.2% 68.8% 2.6 pts
ADR $ 84.32 $ 85.91 1.9 %
RevPAR $ 55.87 $ 59.15 5.9 %
Homewood Suites
Occupancy 71.4% 72.2% 0.8 pts
ADR $ 97.55 $ 97.87 0.3 %
RevPAR $ 69.65 $ 70.61 1.4 %
Other Hotels (c)
Occupancy 65.7% 64.3% (1.4) pts
ADR $ 96.83 $ 99.65 2.9 %
RevPAR $ 63.68 $ 64.09 0.6 %
(a) Revenue statistics are for comparable hotels, and include information
only for those hotels in the system as of March 31, 1999 and managed or
franchised by Promus since January 1, 1998. Doubletree franchised
hotels are not included in the statistical information.
(b) Includes Doubletree Hotels, Doubletree Guest Suites and Club Hotel by
Doubletree brands.
(c) Includes results for the 15 Red Lion hotels as well as the results for
comparable hotels managed/leased under other franchisors' brands or as
independent hotels and/or conference centers.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Promus is exposed to market risk, primarily changes in interest rates. We have
entered into derivative transactions to hedge our exposure to interest rate
changes. We do not hold or issue derivative financial instruments for trading
purposes and do not enter into derivative transactions that would be considered
speculative positions.
The table below provides information about our derivative financial instruments
and other financial instruments that are sensitive to changes in interest rates,
including interest rate swaps and debt obligations. For debt obligations, the
table presents principal cash flows and related weighted average interest rates
by expected maturity dates. For interest rate swaps, the table presents notional
amounts and weighted average rates by contractual maturity dates.
Maturity Date
------------------------------------------------------ Fair
1999 2000 2001 2002 2003 Thereafter Total Value(1)
---- ---- ---- ---- ---- ---------- ----- --------
(Dollars in millions)
Liabilities:
Long-term debt
Fixed rate $ 1.4 $ 1.9 $ 2.1 $37.9 $ 1.3 $56.6 $101.2 $101.9
Average interest rate 7.5% 7.5% 7.5% 5.8% 7.1% 7.1% 6.6%
Variable rate $710.0 $ - $ - $ - $ - $ - $710.0 $710.0
Average interest rate(2) 5.4% - - - - - 5.4%
Interest Rate Swaps:
Variable to Fixed $ 75.0 $ - $ - $39.1 $ - $ - $114.1 $ (2.3)
Average pay rate 6.9% - - 6.4% - - 6.7%
Average receive rate 5.0% - - 5.3% - - 5.1%
(1) The carrying values of long-term debt approximate fair value due to their
short maturities and interest terms. The fair value of the swap agreements
is based on the price we would have to pay to terminate them.
(2) The average interest rates were based on March 31, 1999, variable rates.
Actual rates in future periods could vary.
The long-term debt consists of an unsecured credit arrangement (the Promus
Facility), mortgage indebtedness, and other unsecured notes payable. For a more
detailed discussion of the Promus Facility and our other indebtedness, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Promus Facility and Other
Indebtedness" on page 30 and "Note 8 - Notes Payable" on pages 44 and 45 of the
1998 Annual Report to Shareholders, which information is incorporated herein by
reference.
The interest rate swap agreements contain a credit risk to Promus that the
counterparties may be unable to meet the terms of the agreements. We minimize
this risk by evaluating the creditworthiness of our counterparties, which are
limited to major banks and financial institutions.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Actions for negligence or other tort claims occur routinely in the ordinary
course of Promus' business, but none of these proceedings involves a claim for
damages (in excess of applicable excess umbrella insurance coverages) involving
more than 10% of current assets of Promus. We do not anticipate that any amounts
which we may be required to pay as a result of an adverse determination of such
legal proceedings, individually or in the aggregate, or any other relief granted
by reason thereof, will have a material adverse effect on Promus' financial
condition or results of operation.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EX-11 Computation of Per Share Earnings. (1)
EX-27 Financial Data Schedule. (1)
(b) Reports on Form 8-K:
None.
--------
Footnotes
File No. 1-13719.
(1) Filed herewith.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROMUS HOTEL CORPORATION
May 12, 1999 By: /s/ DAN L. HALE
---------------------------------
Dan L. Hale
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
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Exhibit Index
Sequential
Exhibit No. Description Page No.
- ------------ ---------------------------------------- ----------
(a) EX-11 Computation of Per Share Earnings. (1) 29
(b) EX-27 Financial Data Schedule. (1)
(c) No reports on Form 8-K were filed during the quarter ended
March 31, 1999
- --------
Footnotes
(1) Filed herewith.
28