1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 June 30, 1999.
Common Stock ................78,666,051 shares
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FORM 10-Q CROSS-REFERENCE INDEX
PART I--FINANCIAL INFORMATION.............................................................................1
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
December 31, 1998 and June 30, 1999.....................................................2
Consolidated Statements of Operations
June 30, 1998 and June 30, 1999.........................................................3
Consolidated Statements of Cash Flows
June 30, 1998 and June 30, 1999.........................................................4
Notes to Consolidated Financial Statements..................................................5
Item 2. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations.............................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................24
PART II--OTHER INFORMATION...............................................................................25
Item 1. Legal Proceedings.........................................................................25
Item 2. Changes in Securities and Use of Proceeds.................................................25
Item 3. Defaults Upon Senior Securities...........................................................25
Item 4. Submission of Matters to a Vote of Security Holders.......................................25
Item 5. Other Information.........................................................................25
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.
Page 1 of 29
Exhibit Index Page 28
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PROMUS HOTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
DECEMBER 31, JUNE 30,
1998 1999
----------- -----------
ASSETS
Cash and cash equivalents ........................................ $ 6,466 $ 32,749
Accounts receivable, net ......................................... 101,742 100,606
Other ............................................................ 44,485 32,849
----------- -----------
Total current assets .................................... 152,693 166,204
----------- -----------
Property and equipment, net ...................................... 1,109,868 1,138,574
Investments ...................................................... 220,268 186,596
Management and franchise contracts, net .......................... 427,421 420,320
Goodwill, net .................................................... 392,419 387,360
Notes receivable ................................................. 68,991 93,740
Investment in franchise system ................................... 57,023 67,917
Deferred costs and other assets .................................. 45,318 44,364
----------- -----------
$ 2,474,001 $ 2,505,075
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses ............................ $ 180,189 $ 145,085
Current portion of notes payable ................................. 1,797 2,380
----------- -----------
Total current liabilities ............................... 181,986 147,465
----------- -----------
Deferred income taxes ............................................ 276,498 275,022
Notes payable .................................................... 768,891 909,135
Other long-term obligations ...................................... 87,931 81,493
----------- -----------
1,315,306 1,413,115
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value. Authorized 500,000,000 shares;
87,457,099 and 87,948,351 shares issued and outstanding . 875 879
Additional paid-in capital .................................. 898,900 912,431
Retained earnings ........................................... 379,423 459,148
Accumulated other comprehensive income (loss) ............... (2,909) (4,523)
Treasury stock, at cost (3,620,000 and 9,282,300 shares) .... (117,594) (275,975)
----------- -----------
1,158,695 1,091,960
----------- -----------
$ 2,474,001 $ 2,505,075
=========== ===========
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
....................................................
Revenues:
Franchise and management fees ..................... $ 59,088 $ 57,270 $ 108,432 $ 109,360
Owned hotel revenues .............................. 102,010 110,627 193,591 212,117
Leased hotel revenues ............................. 109,187 100,599 207,666 191,255
Purchasing and service fees ....................... 6,198 5,146 11,288 10,005
Joint venture income and other revenues ........... 14,244 13,469 24,293 24,515
--------- --------- --------- ---------
Total revenues ................................ 290,727 287,111 545,270 547,252
--------- --------- --------- ---------
Operating costs and expenses:
General and administrative expenses ............... 20,059 21,202 38,594 44,988
Owned hotel expenses .............................. 62,071 69,522 119,737 135,237
Leased hotel expenses ............................. 94,810 88,741 184,069 171,351
Depreciation and amortization ..................... 19,357 21,688 38,537 42,730
--------- --------- --------- ---------
Total operating costs and expenses ............ 196,297 201,153 380,937 394,306
--------- --------- --------- ---------
Operating income .............................. 94,430 85,958 164,333 152,946
Interest and dividend income ...................... 5,007 4,940 10,625 9,774
Interest expense, net ............................. (14,923) (16,380) (30,228) (32,831)
Gain/(loss) on sale of real estate and securities . 2,289 (440) 2,285 (708)
--------- --------- --------- ---------
Income before income taxes and
minority interest ........................ 86,803 74,078 147,015 129,181
Minority interest share of net income .................. (824) (868) (1,703) (1,416)
--------- --------- --------- ---------
Income before income taxes .................... 85,979 73,210 145,312 127,765
Income tax expense ..................................... (33,790) (27,527) (57,107) (48,040)
--------- --------- --------- ---------
Net income .................................... $ 52,189 $ 45,683 $ 88,205 $ 79,725
========= ========= ========= =========
Net income per share
Basic ......................................... $ 0.60 $ 0.56 $ 1.02 $ 0.97
========= ========= ========= =========
Diluted ....................................... $ 0.59 $ 0.56 $ 1.00 $ 0.97
========= ========= ========= =========
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)
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ......................................................... $ 88,205 $ 79,725
Adjustments to reconcile net income to net cash
provided by operations:
Payment of business combination expenses .................... (36,817) (34,264)
Depreciation and amortization ............................... 38,537 42,730
Other non-cash income ....................................... (1,012) (1,053)
Equity in earnings of nonconsolidated affiliates ............ (11,663) (8,246)
Gain on sale of real estate, securities and investments ..... (2,285) (635)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net ............. (16,916) 1,784
Decrease in other current assets ............................ 12,969 12,006
Increase in deferred costs and other assets ................. (4,701) (84)
Increase (decrease) in accounts payable and accrued expenses 22,059 (101)
Increase (decrease) in other long-term obligations and
deferred income taxes .................................... 946 (7,648)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............ 89,322 84,214
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions ................................................ (61,150) (5,234)
Purchases of property and equipment ......................... (93,531) (40,698)
Proceeds from sale of real estate, securities and investments 6,212 24,699
Investments in and advances to partnerships and affiliates .. (19,659) (5,452)
Distributions from partnerships and affiliates .............. 20,540 17,156
Net investment in management and franchise contracts ........ 449 (462)
Escrow deposits used for development ........................ 20,537 --
Loans to owners of managed and franchised hotels ............ (10,663) (33,899)
Collections of loans to owners of managed and
franchised hotels ........................................ 31,493 8,394
Other ....................................................... (3,651) (11,097)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ................ (109,423) (46,593)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options .............. 30,442 11,267
Purchases of treasury stock ................................. -- (158,381)
Net activity under revolving credit facility ................ (21,125) 126,350
Proceeds from notes payable ................................. -- 45,000
Principal payments on notes payable ......................... (1,877) (35,574)
--------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ........................... 7,440 (11,338)
--------- ---------
Net increase (decrease) in cash and cash equivalents ............... (12,661) 26,283
Cash and cash equivalents, beginning of period ..................... 24,066 6,466
--------- ---------
Cash and cash equivalents, end of period ........................... $ 11,405 $ 32,749
========= =========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 equity securities. The adjustments, net of tax, for the six
months ended June 30, 1998 and 1999 were $(565,000) and $(1,614,000),
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 June 30,
1999, Promus franchised 1,059 hotels and operated 339 hotels, of which 64
hotels were wholly owned, 23 were partially owned through joint ventures, 73
were leased from third parties and 179 were managed for third parties. These
hotels were 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.
NOTE 3 - ACQUISITIONS AND 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 June 30, 1999,
$3.4 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.
Acquisition of Doubletree La Posada Resort
In June 1999, Promus acquired the remaining 50% interest in the Doubletree La
Posada Resort, a joint venture hotel, for $5.5 million in cash. The
transaction was accounted for as a purchase. Prior to its purchase Promus had
accounted for the joint venture as an equity investment.
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NOTE 4 - INVESTMENTS
Investments consist of the following (in thousands):
DECEMBER 31, JUNE 30,
1998 1999
---------- ----------
Hotel partnerships................................... $ 165,678 $ 134,700
Investments in common stock (at market).............. 36,090 33,396
Convertible preferred stock.......................... 18,500 18,500
---------- ----------
$ 220,268 $ 186,596
========== ==========
Promus' non-controlling general and/or limited 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 June 30,
1999 was approximately $40.9 million.
NOTE 5 - NOTES PAYABLE
Promus' indebtedness consists of the following (in thousands):
DECEMBER 31, JUNE 30,
1998 1999
---------- ----------
Promus Facility................................................. $ 634,250 $ 750,600
Mortgages, 6.9% - 8.6%, maturities
through 2008................................................ 95,660 100,054
Convertible rate term loan...................................... 20,000 20,000
Notes payable and other unsecured debt, 6.0%-13.0%,
maturities through 2022..................................... 20,778 40,861
---------- ----------
770,688 911,515
Current portion of notes payable................................ (1,797) (2,380)
---------- ----------
$ 768,891 $ 909,135
========== ==========
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 June 30, 1999, the fair value of Promus'
swap agreements, which Promus would have been required to pay to terminate
them, was approximately $1.3 million.
NOTE 6 - STOCKHOLDER'S 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 provided for
Promus to conduct the repurchase program in the open market, or in negotiated
or block transactions at prevailing market prices until December 31, 1999. 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. Through June
30, 1999, Promus had repurchased a total of 9.3 million shares of its common
stock, pursuant to these authorizations, at a total cost of approximately
$275.6 million, excluding brokers' commissions.
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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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
1998 1999 1998 1999
-------- -------- ------- --------
Basic weighted average shares outstanding................ 87,202 80,995 86,773 82,219
Effect of dilutive securities:
Stock options and warrants......................... 935 271 1,057 334
-------- -------- ------- --------
Diluted weighted average shares outstanding.............. 88,137 81,266 87,830 82,553
======== ======== ======= ========
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 June 30, 1999, 9,679,863 options were excluded. For the three
months ended June 30, 1998, 117,654 options were excluded. For the six months
ended June 30, 1999, 7,097,237 options were excluded. For the six months
ended June 30, 1998, 117,654 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 June 30, 1999, approximately 11,222,000 options were outstanding.
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of interest capitalized, amounted to $23.1
million and $24.8 million for the six months ended June 30, 1998 and 1999,
respectively. Cash paid for income taxes, net of refunds received, amounted
to $12.4 million and $36.4 million for the six months ended June 30, 1998 and
1999, respectively. Investments in marketable equity securities, carried at
market values, had unrealized gains of $19.9 million at June 30, 1998 and
unrealized losses of $7.5 million at June 30, 1999.
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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.
The following table presents the revenues, operating profit and assets of
Promus' reportable segment for the six months ended June 30, (in thousands):
1998 1999
------------ -------------
Revenues
Lodging................................ $ 531,703 $ 533,582
Other (a).............................. 13,567 13,670
------------ -------------
$ 545,270 $ 547,252
============ =============
Operating profit (b)
Lodging................................ $ 194,434 $ 189,397
Other.................................. 8,493 8,537
------------ -------------
$ 202,927 $ 197,934
============ =============
Depreciation and amortization
Lodging................................ $ 30,340 $ 33,899
Corporate.............................. 8,197 8,831
------------ -------------
$ 38,537 $ 42,730
============ =============
Segment assets
Lodging................................ $ 2,050,799 $ 2,119,847
Other.................................. 36,185 39,718
Corporate.............................. 370,707 345,510
------------ -------------
$ 2,457,691 $ 2,505,075
============ =============
Capital expenditures (c)
Lodging................................ $ 88,302 $ 35,881
Other.................................. - -
Corporate.............................. 5,229 5,143
------------ -------------
$ 93,531 $ 41,024
============ =============
----------
(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 June 30, 1999, the Promus Hotel Corporation system contained 1,398 hotels,
representing over 198,000 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 1,398 hotels, 1,059 were owned/operated by franchisees and we
operated 339 and owned 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.
At June 30, 1999, Promus operated properties included:
Wholly-owned hotels......................... 64
Leased hotels............................... 73
Joint venture hotels........................ 23
Hotels managed for third parties............ 179
-----
Total.............................. 339
=====
We receive 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. Our results of operations for
owned and leased hotels reflect the revenues and expenses of these hotels.
We also license 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.
Our primary focus is to grow our franchise and management businesses, while
limiting our ownership of real estate. We own a mix of Promus-brand hotels
that enhance our role as manager and franchisor for our brands. In the second
quarter of 1999, we announced our intention to reduce our ownership of real
estate by opportunistically selling our owned hotels. We have entered into a
letter of intent to sell 13 Homewood Suites hotels and we have signed a
definitive agreement to sell 10 Hampton Inn hotels. For a more detailed
discussion please see "Real Estate Sales" on page 18 of this report.
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RESULTS OF OPERATIONS
The principal factors affecting our results are:
- continued growth in the number of hotel rooms
- 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- ------------------------------
1998 1999 INCREASE 1998 1999 INCREASE
-------- -------- -------- ------- ------- --------
Doubletree Hotels.......... $ 77.44 $ 77.67 0.3 % $ 73.90 $ 75.23 1.8 %
Embassy Suites............. $ 92.26 $ 93.27 1.1 % $ 90.40 $ 91.94 1.7 %
Hampton Inn................ $ 50.70 $ 51.56 1.7 % $ 47.20 $ 48.00 1.7 %
Hampton Inn & Suites....... $ 64.77 $ 67.43 4.1 % $ 58.51 $ 61.03 4.3 %
Homewood Suites............ $ 72.76 $ 74.43 2.3 % $ 72.65 $ 72.29 (0.5)%
Other hotels (b)........... $ 72.73 $ 74.26 2.1 % $ 68.29 $ 69.11 1.2 %
----------
(a) Revenue statistics are for comparable hotels, and include information
only for those hotels in the system as of June 30, 1999 and managed or
franchised by Promus since April 1, 1998, for the quarterly comparison
and since January 1, 1998 for the year-to-date comparison. 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 JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998
OPERATING REVENUES AND EXPENSES
Second quarter 1999 revenues decreased 1.2%, or $3.6 million, to $287.1
million compared to second quarter 1998 revenues of $290.7 million.
The following table compares operating revenues and expenses for the three
months ended June 30, 1998 and 1999 (dollars in thousands):
THREE MONTHS ENDED
JUNE 30,
------------------------ INCREASE PERCENTAGE
1998 1999 (DECREASE) CHANGE
---------- ---------- ---------- ------
Franchise and management fees............ $ 59,088 $ 57,270 $ (1,818) (3.1) %
Owned hotel revenues..................... 102,010 110,627 8,617 8.4
Leased hotel revenues.................... 109,187 100,599 (8,588) (7.9)
Purchasing and service fees.............. 6,198 5,146 (1,052) (17.0)
Joint venture income and other revenues.. 14,244 13,469 (775) (5.4)
---------- ---------- --------- ------
Total operating revenues.......... 290,727 287,111 (3,616) (1.2)
---------- ---------- --------- ------
General and administrative expenses...... 20,059 21,202 (1,143) (5.7)
Owned hotel expenses..................... 62,071 69,522 (7,451) (12.0)
Leased hotel expenses.................... 94,810 88,741 6,069 6.4
Depreciation and amortization............ 19,357 21,688 (2,331) (12.0)
---------- ---------- --------- ------
Total operating expenses.......... 196,297 201,153 (4,856) (2.5)
---------- ---------- --------- ------
Operating income.................. $ 94,430 $ 85,958 $ (8,472) (9.0) %
========== ========== ========= ======
Operating margins:
Total (a).............................. 32.5 % 29.9 %
Owned hotels (b)....................... 39.2 37.2
Leased hotels (c)...................... 13.2 11.8
----------
(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 decrease was due to lower change of
ownership and termination fees that declined by $4.6 million from the amounts
received in the second quarter of 1998. This decline was due to significantly
fewer real estate transactions involving the hotels we franchise and manage.
Incentive management fees were also lower in the second quarter of 1999
compared to the second quarter of 1998. An increase in fees from new
contracts and improved performance at existing franchised and managed
properties helped to offset the declines. Since June 30, 1998 we added 126
franchise and management contracts (net of terminations).
Owned hotel revenues and expenses - Revenue and expense increases are due to
the net addition of five hotels since June 30, 1998. We also experienced
revenue growth due to increases in RevPAR. The operating margin decline on
owned hotels primarily resulted from the impact of the new hotels opened
since the second quarter of 1998. New hotels typically generate lower
operating margins prior to reaching maturity.
Leased hotel revenues and expenses - Since June 30, 1998, the number of
leased hotels decreased by nine, including four hotels which were converted
to management contracts. This decrease in the number of leased hotels caused
a decrease in revenues and expenses for the second quarter of 1999. The
operating margin for leased hotels decreased to 11.8% for the quarter ended
June 30, 1999 from 13.2% for the same period in 1998. The Asian economic
crisis that occurred after the second quarter of 1998 had a negative affect
on the operating margin of the hotels in the Pacific Northwest.
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Purchasing and service fees - We negotiate preferred supplier agreements on
behalf of our franchised and managed hotels which generate rebates and we
manage various capital projects for a fee. Our fees decreased 17.0% for the
three months ended June 30, 1999, over the same period in 1998 due to a
reduction in project management fees.
Joint venture income and other revenues - During the second quarter of 1998,
we realized a $1.3 million gain related to the sale of excess joint venture
land. Excluding this unusual item, joint venture income and other revenues
for the quarter ended June 30, 1999 compared to the quarter ended June 30,
1998 would have increased $0.5 million.
General and administrative expenses - The increase in the 1999 second quarter
includes a charge of $1.3 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 $0.2 million, or 1.0%, in the second
quarter of 1999 compared with the second quarter of 1998.
Depreciation and amortization - The increase of $2.3 million over the second
quarter of 1999 is primarily due to the addition of five owned hotels and
property and equipment additions at existing hotels since the second quarter
of 1998.
OTHER ITEMS AFFECTING NET INCOME
Interest and dividend income - Interest and dividend income was $5.0 million
in the second quarter of 1998 compared to $4.9 million in the second quarter
of 1999. Interest and dividend income was unchanged in the year-to-year
second quarter comparison.
Interest expense - Interest expense was $14.9 million in second quarter 1998
compared to $16.4 million in second quarter 1999. The increase was due to
higher average borrowings for the second quarter of 1999 over the second
quarter 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 second quarter 1999 helped to reduce the increase in
interest expense caused by the higher average borrowings.
Operating results for the second quarter of 1998 reflect an overall tax rate
of 39.3%, compared with an overall rate of 37.6% for the second 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 June 30, 1998
were $52.2 million and $0.59, respectively, compared to $45.7 million and
$0.56, respectively for 1999. It is difficult to compare operating results
due to the inclusion in the second quarter of 1998 and 1999 of certain
unusual items. Included in second quarter 1998 results were (a) a gain of
$1.3 million on the sale of excess joint venture land, (b) gains of $1.3
million on the prior sale of hotels, and (c) gains of $1.0 million on the
sale of securities. Unusual items for the second quarter of 1999 were (a) a
$1.3 million charge for retention and employment-related expenses associated
with the management change following the Promus/Doubletree merger and (b)
losses of $0.4 million on the sale of real estate. Excluding these items, net
income and earnings per diluted share for the second quarter of 1998 and 1999
would have been $50.0 million and $0.57 and $46.8 million and $0.58,
respectively.
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SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
OPERATING REVENUES AND EXPENSES
Revenues for the first six months of 1999 increased 0.4%, or $2.0 million, to
$547.3 million compared to the revenues for the first six months of 1998 of
$545.3 million.
The following table compares operating revenues and expenses for the six
months ended June 30, 1998 and 1999 (dollars in thousands):
SIX MONTHS ENDED
JUNE 30,
------------------------ INCREASE PERCENTAGE
1998 1999 (DECREASE) CHANGE
---------- ---------- ---------- ------
Franchise and management fees............ $ 108,432 $ 109,360 $ 928 0.9 %
Owned hotel revenues..................... 193,591 212,117 18,526 9.6
Leased hotel revenues.................... 207,666 191,255 (16,411) (7.9)
Purchasing and service fees.............. 11,288 10,005 (1,283) (11.4)
Joint venture income and other revenues.. 24,293 24,515 222 0.9
---------- ---------- ---------- ------
Total operating revenues.......... 545,270 547,252 1,982 0.4
---------- ---------- ---------- ------
General and administrative expenses...... 38,594 44,988 (6,394) (16.6)
Owned hotel expenses..................... 119,737 135,237 (15,500) (12.9)
Leased hotel expenses.................... 184,069 171,351 12,718 6.9
Depreciation and amortization............ 38,537 42,730 (4,193) (10.9)
---------- ---------- ---------- ------
Total operating expenses.......... 380,937 394,306 (13,369) (3.5)
---------- ---------- ---------- ------
Operating income.................. $ 164,333 $ 152,946 $ (11,387) (6.9)%
========== ========== ========== ======
Operating margins:
Total (a).............................. 30.1 % 27.9 %
Owned hotels (b)....................... 38.1 36.2
Leased hotels (c)...................... 11.4 10.4
----------
(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 - Franchise and management fees were basically
flat during the six months ended June 30, 1999 compared with the prior year.
The increase in fee revenue that resulted from the addition of 126 franchise
and management contracts (net of terminations) was offset by decreases in
change of ownership and termination fees and incentive management fees.
Owned hotel revenues and expenses - Revenue and expense increases are due to
the net addition of five hotels since June 30, 1998. We also experienced
revenue growth due to increases in RevPAR. The operating margin decline on
owned hotels primarily resulted from the impact of the new hotels opened
since the first six months of 1998. New hotels typically generate lower
operating margins prior to reaching maturity.
Leased hotel revenues and expenses - Since June 30, 1998, the number of
leased hotels decreased by nine, including four hotels which were converted
to management contracts. This decrease in the number of leased hotels caused
a decrease in revenues and expenses for the first half of 1999. The operating
margin for leased hotels decreased to 10.4% for the six months ended June 30,
1999 from 11.4% for the same period in 1998. The Asian economic crisis that
occurred after the second quarter of 1998 had a negative affect on the
operating margin of the hotels in the Pacific Northwest.
Purchasing and service fees - We negotiate preferred supplier agreements on
behalf of our franchised and managed hotels which generate rebates and we
manage various capital projects for a fee. Our fees decreased 11.4% for the
six months ended June 30, 1999, over the same period in 1998 due to lower
project management fees.
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Joint venture income and other revenues - During the first six months of
1999, we realized a $1.3 million gain related to the sale of a joint venture
hotel. Also, during the first six months of 1998 we realized a $1.3 million
gain on the sale of excess joint venture land. Excluding these unusual items,
joint venture income and other revenues for the six months ended June 30,
1999 compared to the six months ended June 30, 1998 would have increased less
than 1.0%.
General and administrative expenses - The increase in the 1999 first half
includes a charge of $9.0 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 $2.6 million, or 6.7%, in the first six
months of 1999 over the first six months 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 $4.2 million over the first
half of 1999 is primarily due to the addition of five owned hotels and
property and equipment additions at existing hotels since the first half of
1998.
OTHER ITEMS AFFECTING NET INCOME
Interest and dividend income - Interest and dividend income was $10.6 million
in the first half of 1998 compared to $9.8 million in the first half of 1999.
The decrease is due to lower interest income from notes receivable and escrow
deposits. Average notes receivable for the first six months of 1999 decreased
in comparison to the same period in 1998. 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 $30.2 million in first half 1998
compared to $32.8 million in first half 1999. The increase was due to higher
average borrowings for the first half of 1999 over the first half 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 the first half of 1999 helped to reduce the increase in interest expense
caused by the higher average borrowings.
Operating results for the first half of 1998 reflect an overall tax rate of
39.3%, compared with an overall rate of 37.6% for the first half 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 six months ended June 30,
1998 were $88.2 million and $1.00, respectively, compared to $79.7 million
and $0.97, respectively for 1999. It is difficult to compare operating
results due to the inclusion in the first half of 1998 and 1999 of certain
unusual items. Included in first half 1998 results were a net gain of $1.3
million on the sale of excess joint venture land, gains of $1.3 million on
the prior sale of hotels, and gains of $1.0 million on the sale of
securities. Unusual items in the first half of 1999 included a $1.3 million
gain on the sale of a joint venture hotel, $9.0 million in charges relating
to employment-related expenses associated with the management change
following the Promus/Doubletree merger, and losses of $0.7 million on the
sale of real estate. Excluding these items, net income and earnings per
diluted share for the first half of 1998 and 1999 would have been $86.0
million and $0.98 and $84.9 million and $1.03, respectively.
Overall
Promus' operating income, excluding the effect of unusual items, decreased
6.3% to $87.3 million for the second quarter of 1999 from $93.1 million for
the same period in 1998. Promus' operating income, excluding the effect of
unusual items, decreased 1.5% to $160.6 million for the first half of 1999
from $163.0 million for the same period in 1998. This decrease in operating
income is due to lower franchise and management fee revenue and decreases in
the operating income from owned and leased hotels. Our decreases in these
items reflect the slowdown of the demand in the lodging industry. This
slowdown has been offset somewhat by our ability to grow our portfolio of
franchised and managed hotels. Due to the size and strength of our
infrastructure and systems, openings of additional franchised or managed
properties require fewer incremental costs.
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EARNINGS BEFORE INTEREST EXPENSE, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)
We consider EBITDA to be a useful measure of our operating performance.
EBITDA is also considered useful by the investment community to aid in
understanding our results and can be used to measure our ability to service
debt or fund capital expenditures. EBITDA should not be used as an
alternative to net income, operating income, cash from operations or any
other operating or liquidity performance measure as defined by generally
accepted accounting principles. We will continue to incur cash expenditures
for interest expense and income taxes, which are not included in EBITDA. Our
EBITDA before unusual items for the second quarter of 1999 decreased $3.6
million or 3.0% compared to the second quarter of 1998. The decrease for the
first six months of 1999 compared to the same period in 1998 was only $0.9
million or less than 1.0%. Our interest coverage, defined as EBITDA before
unusual items divided by interest expense, was 7.0 times for the second
quarter of 1999 compared to 7.9 times for the second quarter of 1998.
Interest coverage for the first half of 1999 was 6.5 times compared to 7.0
times for the same period in 1998.
SYSTEM GROWTH
Hotels
Promus is an industry leader in the development of franchised and managed
hotels. In the first six months of 1999, we added 61 net hotels and 6,483 net
rooms to our hotel system, compared to the addition of 76 net hotels and
7,454 net rooms during the first six months of 1998. Net room additions, by
brand, are as follows:
NET ROOMS ADDED
--------------------------------------------------------
QUARTERS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
1998 1999 1998 1999
------ ------ ------ ------
Doubletree Hotels .. (580) 57 (93) (288)
Hampton Inn ........ 3,208 2,305 5,223 4,117
Hampton Inn & Suites 960 399 1,440 952
Embassy Suites ..... (358) 1,001 (158) 1,101
Homewood Suites .... 940 709 1,739 1,323
Other .............. (254) (176) (697) (722)
------ ------ ------ ------
3,916 4,295 7,454 6,483
====== ====== ====== ======
Hampton Inn continued to lead Promus' unit growth, with a net of 26
properties added during the quarter and 44 properties added during the first
six months. We expect to continue growing the Hampton Inn brand as demand
from franchisees and guests appears strong. Doubletree lost a net of one
hotel during the six months ended June 30, 1999. Embassy Suites added a net
of three hotels in the first six months of 1999. The greatest percentage
growth in the first six months of 1999 occurred within the Homewood Suites
and Hampton Inn & Suites brands. Homewood Suites added 10 hotels, a 16.7%
increase in total rooms. Hampton Inn & Suites added eight hotels, a 17.0%
increase in total rooms. Other non-Promus branded hotel rooms decreased due
to the termination of three management contracts.
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Promus' pipeline as of June 30, 1999 contained 331 properties that were
either in the design or construction phase, as follows:
UNDER
CONSTRUCTION/ IN
CONVERSION DESIGN TOTAL
---------- ------ -----
Hampton Inn............................. 89 98 187
Homewood Suites......................... 9 17 26
Hampton Inn & Suites.................... 30 23 53
Embassy Suites.......................... 10 28 38
Doubletree Hotels, Suites and Clubs..... 8 14 22
Other................................... 2 3 5
----- ----- ------
148 183 331
===== ===== ======
The 183 properties in design represent almost 24,000 rooms. During the
quarter, Promus' rate of rescissions on its development pipeline was
consistent with past history. We are developing 13 of the properties within
the pipeline for operation as company owned hotels until they are sold to
third parties. Franchisees are developing the remaining hotels in the
pipeline. 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 150 hotels to the Promus system by year-end.
Promus plans to actively pursue growth opportunities for all its brands. This
growth is expected to come through franchising, construction of new hotels
and the addition of management contracts. 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 ability to grow our number of franchised and managed
hotels 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.
Acquisitions
In June 1999, we purchased the remaining 50% interest in the Doubletree
LaPosada Resort, a joint venture hotel located in Phoenix, Arizona for $5.5
million in cash. The acquisition was accounted for as a purchase. Prior to
the hotel's purchase we accounted for the joint venture as an equity
investment.
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, JUNE 30,
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 31,570
* Includes pre-sold intervals for resorts under construction
Other
System growth comes mainly from construction of franchised 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
We expect 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 we identify 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 $65.0 million. Our capital expenditures for
refurbishment totaled $18.3 million for the six months ended June 30, 1999.
Total capital expenditures for the items listed above totaled $80.0 million
in the first half of 1999. Additionally, we spent $158.4 million in the first
six months of 1999 to reacquire a portion of our outstanding shares under the
two $200.0 million share repurchase programs authorized by our board of
directors announced in August 1998 and April 1999. The repurchase program
announced in August 1998 was completed in the second quarter of 1999. The
share repurchase program announced in April 1999 is authorized 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 we may pursue, can be made available from the following
sources:
- operating cash flows
- our 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 $5.1 million in the first six months of
1999 from 1998 levels. This decrease is primarily due to the decrease in net
income in the first half of 1999 compared to first half of 1998. Net income
in the 1999 period included $1.3 million in non-operating net gains from
sales of joint venture real estate and $9.0 million in charges for retention
and employment-related expenses, which were of a non-recurring nature.
Non-recurring items in the first half of 1998 included a $1.3 million gain on
the sale of excess joint venture land, gains of $1.3 million on the prior
sale of hotels and gains of $1.0 million on the sale of securities.
Net cash flows used in investing activities decreased by $62.8 million in
1999 from 1998 levels. Uses of cash for investing activities in 1998 included
$61.2 million for the purchase of Harrison and $93.5 million for purchases of
property and equipment. Proceeds from the sale of real estate and securities
and the use of escrow deposits provided $26.7 million in investing cash flows
in the first half 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 $46.3 million in cash used for loans, net
of collections, to hotel owners.
Net cash provided by financing activities decreased $18.8 million in the
first half of 1999 from the same period in 1998. The decrease in net cash
provided during the first half of 1999 is attributable to treasury stock
purchases of $158.4 million and a decrease of $19.2 million in proceeds from
the exercise of stock options. An increase of $158.8 million in net
borrowings of long-term debt helped offset the treasury stock purchases and
the decrease in proceeds from stock option exercises.
On June 30, 1999, we had a working capital surplus of $18.7 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 $34.3 million
decrease in the liability for business combination expenses.
Our 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.
REAL ESTATE SALES
We have announced a letter of intent to sell 13 Homewood Suites hotels. We
will retain management and franchise agreements for these hotels. The
aggregate book value of the property and equipment for these hotels is
approximately $93.0 million. In addition, we have signed a definitive
agreement to sell 10 Hampton Inn hotels with a property and equipment book
value of approximately $51.0 million. We will sign franchise agreements for
all 10 of these hotels. Both of these transactions are expected to close
during the third quarter of this year, subject to timely completion of
customary due diligence review.
We have announced our intention to reduce our ownership of real estate by
opportunistically selling our owned hotels. The above hotel sales are a
reflection of this strategy. We continue to hold discussions with other
potential real estate buyers and to identify other hotels in our owned
portfolio, which may be attractive to such buyers.
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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. This phase was completed in
the second quarter of 1999.
- 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 is available through Promus' Intranet
for hotel owners and managers. 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 complete, although it is anticipated that 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.
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- Contingency Planning
Promus is developing 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. The hotels have completed their
plans, subject to updating and refinement throughout the remainder of
the year. The remaining areas are scheduled for completion in
September 1999.
Year 2000 Remediation Costs
During the first half of 1999, Promus spent approximately $0.4 million on
Year 2000 remediation costs. Since 1997, we have spent approximately $1.5
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 $0.6 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.
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.
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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 June 30, 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.
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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24
PERFORMANCE STATISTICS
NUMBER OF HOTELS NUMBER OF ROOMS/SUITES
-------------------------------- -------------------------------
AS OF CHANGE SINCE AS OF CHANGE SINCE
-------- ------------------- -------- ------------------
JUNE 30, MAR. 31, DEC. 31, JUNE 30, MAR. 31, DEC. 31,
1999 1999 1998 1999 1999 1998
------ ----- ----- --------- -------- --------
Doubletree Hotels (a)
Company owned...................... 16 - - 4,649 (98) (97)
Leased............................. 14 - (4) 3,877 - (935)
Joint venture (b) ................. 4 - - 1,100 98 98
Management contract................ 91 1 4 25,085 34 761
Franchised......................... 50 - (1) 11,812 23 (115)
------ ----- ----- --------- -------- --------
175 1 (1) 46,523 57 (288)
Embassy Suites
Company owned...................... 6 - - 1,299 - -
Joint venture (b) ................. 19 1 - 5,098 321 154
Management contract................ 60 - 2 15,050 230 625
Franchised......................... 63 2 1 14,227 450 322
------ ----- ----- --------- -------- -------
148 3 3 35,674 1,001 1,101
Hampton Inn
Company owned...................... 10 (1) (1) 1,378 (126) (126)
Leased............................. 18 - - 2,250 - -
Management contract................ 7 - - 929 - -
Franchised......................... 835 27 45 85,641 2,431 4,243
------ ----- ----- --------- -------- -------
870 26 44 90,198 2,305 4,117
Hampton Inn & Suites
Management contract................ 3 - - 408 - -
Franchised......................... 53 3 8 6,135 399 952
------ ----- ----- --------- -------- -------
56 3 8 6,543 399 952
Homewood Suites
Company owned...................... 22 1 3 2,605 137 373
Management contract................ 4 (1) (1) 471 (83) (83)
Franchised......................... 58 4 8 6,114 655 1,033
------ ----- ----- --------- -------- -------
84 4 10 9,190 709 1,323
Other Hotels (c)
Company owned...................... 10 - - 1,620 - -
Leased............................. 41 - - 6,433 - -
Management Contract................ 14 (1) (3) 2,345 (176) (722)
------ ----- ----- --------- --------- --------
65 (1) (3) 10,398 (176) (722)
Total System
Company owned...................... 64 - 2 11,551 (87) 150
Leased............................. 73 - (4) 12,560 - (935)
Joint venture (b) ................. 23 1 - 6,198 419 252
Management contract................ 179 (1) 2 44,288 5 581
Franchised......................... 1,059 36 61 123,929 3,958 6,435
------ ----- ----- --------- -------- -------
1,398 36 61 198,526 4,295 6,483
====== ===== ===== ========= ======== =======
- ----------
(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
---------------- --------------- ---------------
JUNE 30, JUNE 30, JUNE 30,
---------------- --------------- ---------------
1998 1999 1998 1999 1998 1999 INCREASE
------- ------- ------- ------ ------ ------- ---------
Promus Vacation Resorts
Resort properties........................ 4 5 3 3 7 8 1
Timeshare units.......................... 360 500 874 874 1,234 1,374 140
Timeshare intervals available............ 18,360 25,500 44,574 44,574 62,934 70,074 7,140
Timeshare intervals sold (a) ............ 9,784 18,954 7,515 12,616 17,299 31,570 14,271
- ----------
(a) Includes pre-sales for resorts under construction but not yet open.
SECOND QUARTER ENDED JUNE 30, (A) SIX MONTHS ENDED JUNE 30, (A)
-------------------------------------- --------------------------------------
1998 1999 CHANGE 1998 1999 CHANGE
------- ------- ------- ------- ------- ------
Doubletree Hotels (b)
Occupancy ......... 74.1% 73.2% (0.9) pts 70.5% 70.4% (0.1) pts
ADR ............... $104.57 $106.14 1.5% $104.90 $106.89 1.9%
RevPAR ............ $ 77.44 $ 77.67 0.3% $ 73.90 $ 75.23 1.8%
Embassy Suites
Occupancy ......... 75.6% 76.4% 0.8 pts 73.7% 74.6% 0.9 pts
ADR ............... $122.06 $122.06 0.0% $122.70 $123.19 0.4%
RevPAR ............ $ 92.26 $93.27 1.1% $ 90.40 $ 91.94 1.7%
Hampton Inn
Occupancy ......... 74.4% 72.6% (1.8) pts 70.0% 68.6% (1.4) pts
ADR ............... $ 68.12 $ 70.98 4.2% $ 67.46 $ 70.02 3.8%
RevPAR ............ $ 50.70 $ 51.56 1.7% $ 47.20 $ 48.00 1.7%
Hampton Inn & Suites
Occupancy ......... 73.7% 74.3% 0.6 pts 70.1% 71.4% 1.3 pts
ADR ............... $ 87.92 $ 90.73 3.2% $ 83.61 $ 85.53 2.3%
RevPAR ............ $ 64.77 $ 67.43 4.1% $ 58.51 $ 61.03 4.3%
Homewood Suites
Occupancy ......... 74.9% 76.8% 1.9 pts 74.9% 74.5% (0.4) pts
ADR ............... $ 97.06 $ 96.87 (0.2)% $ 97.04 $ 97.04 0.0%
RevPAR ............ $ 72.76 $ 74.43 2.3% $ 72.65 $ 72.29 (0.5)%
Other Hotels (c)
Occupancy ......... 72.6% 71.6% (1.0) pts 69.2% 67.9% (1.3) pts
ADR ............... $100.27 $103.78 3.5% $ 98.68 $101.84 3.2%
RevPAR ............ $ 72.73 $ 74.26 2.1% $ 68.29 $ 69.11 1.2%
- ----------
(a) Revenue statistics are for comparable hotels, and include information only
for those hotels in the system as of June 30, 1999 and managed or
franchised by Promus or managed by Doubletree since April 1, 1998 for the
quarterly comparison and since January 1, 1998 for the year-to-date
comparison. 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.
23
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 fixed rate obligations and by earliest repricing
date for variable rate obligations. 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)
Assets:
Notes Receivable
Fixed rate ................ $ 0.4 $ 4.0 $ 18.6 $ 1.5 $ 1.3 $ 54.3 $ 80.1 $ 80.7
Average interest rate ... 7.2% 8.7% 13.2% 12.0% 10.0% 8.0% 9.2%
Variable rate ............. $ 13.6 $ -- $ -- $ -- $ -- $ -- $ 13.6 $ 13.6
Average interest rate (2) 9.5% -- -- -- -- -- 9.5%
Liabilities:
Long-term debt
Fixed rate ................ $ 1.3 $ 2.6 $ 2.8 $ 38.7 $ 2.2 $ 58.3 $105.9 $104.1
Average interest rate ... 7.7% 7.6% 7.5% 5.9% 7.2% 7.2% 6.7%
Variable rate ............. $805.6 $ -- $ -- $ -- $ -- $ -- $805.6 $805.6
Average interest rate (2) 5.5% -- -- -- -- -- 5.5%
Interest Rate Swaps:
Variable to Fixed ......... $175.0 $ -- $ -- $ 39.1 $ -- $ -- $214.1 $ (1.3)
Average pay rate ........ 6.1% -- -- 6.4% -- -- 6.1%
Average receive rate .... 5.1% -- -- 5.3% -- -- 5.1%
- ----------
(1) The carrying values of variable rate notes receivable approximate fair
value due to their interest terms. The fair value of the fixed rate notes
receivable is based on discounted cash flows. The carrying values of
variable rate long-term debt approximate fair value due to their short
maturities and interest terms. The fair value of the fixed rate long-term
debt is based on market quotes for debt instruments with similar 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 June 30, 1999, variable rates.
Actual rates in future periods could vary.
The notes receivable consist of secured and unsecured loans to our franchisees
and other nonconsolidated affiliates.
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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27
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
Promus' Annual Meeting of Shareholders was held on April 30, 1999. Matters
submitted to and approved by the shareholders are listed below along with a
tabulation of voting. There were no broker non-votes as both proposals were
considered routine.
(1) The five persons nominated as Class II Directors were elected:
For Withheld
---------- --------
John H. Dasburg 70,919,556 221,504
Dale F. Frey 70,435,252 705,808
Michael I. Roth 70,976,621 164,439
Jay Stein 70,953,116 187,944
Anne Marie Whittemore 70,973,159 167,901
(2) The selection by the Board of Directors of Arthur Andersen LLP as Promus'
independent public accountants for the year ending December 31, 1999:
For Against Abstain
---------- ------- -------
71,109,480 16,039 15,541
ITEM 5. OTHER INFORMATION
None.
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28
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:
Date of Current Report Subject
---------------------- -------
May 3, 1999 Press release announcing the
authorization by our board of directors
to repurchase an additional $200 million
of our common stock, reported under
Item 5.
May 25, 1999 Press release announcing Promus Hotel
Corporation's reduction in our earnings
outlook and an agreement to sell $124
million of real estate, reported under
Item 5.
- --------
Footnotes
File No. 1-13719.
(1) Filed herewith.
26
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROMUS HOTEL CORPORATION
August 13, 1999 By: /s/ DAN L. HALE
------------------------------------
Dan L. Hale
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
27
30
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) Reports on Form 8-K:
Date of Current Report Subject
---------------------- -------
May 3, 1999 Press release announcing the
authorization by our board of directors
to repurchase an additional $200 million
of our common stock, reported under
Item 5.
May 25, 1999 Press release announcing Promus Hotel
Corporation's reduction in our earnings
outlook and an agreement to sell $124
million of real estate, reported under
Item 5.
- --------
Footnotes
(1) Filed herewith.
28