SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
Commission File Number 1-11463
PROMUS HOTEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware I.R.S. No. 62-1596939
(State of Incorporation) (I.R.S. Employer Identification No.)
755 Crossover Lane
Memphis, TN 38117
(Address of principal executive officers) (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 September 30, 1997.
Common Stock........49,981,665 shares
Page 1 of 36
Exhibit Index Page 33
PART I--FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements
-------------------------------
The accompanying unaudited consolidated condensed financial statements of
Promus Hotel Corporation (Promus or the Company), 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 consolidated condensed
financial statements should be read in conjunction with Promus' consolidated
financial statements and notes thereto included in the Company's 1996 Annual
Report to Stockholders.
As discussed in Note 2, on September 2, 1997, Promus announced the
execution of a definitive merger agreement with Doubletree Corporation
(Doubletree), which would create one of the country's largest lodging
companies. These consolidated condensed financial statements reflect the
historical operations of Promus, as of and for the periods ended
September 30, 1997, and accordingly, do not contain any adjustments related
to the proposed merger transaction.
2
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
SEPT. 30, DEC. 31,
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1997 1996
- ------------------------------------ --------- ---------
ASSETS
Current assets
Cash and cash equivalents.................... $ 3,781 $ 3,700
Receivables, including notes receivable of
$713 and $264 less allowance for doubtful
accounts of $994 and $1,180................ 25,543 18,307
Deferred income taxes........................ 2,041 932
Prepayments and other........................ 5,942 7,626
-------- -------
Total current assets...................... 37,307 30,565
-------- -------
Land, building, furniture and equipment....... 413,799 439,072
Less: accumulated depreciation................ (109,453) (118,659)
-------- -------
304,346 320,413
Investments in and advances to nonconsolidated
affiliates (Note 7)......................... 145,117 186,766
Investment in franchise system................ 49,501 48,750
Deferred costs and other (Note 5)............. 114,267 45,471
------- -------
$ 650,538 $ 631,965
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................. $ 16,491 $ 20,753
Accrued expenses............................. 54,314 37,361
Current portion of long-term debt............ 321 288
------- -------
Total current liabilities................. 71,126 58,402
Long-term debt (Note 3)....................... 213,237 243,682
Deferred credits and other.................... 43,543 40,834
Deferred income taxes......................... 44,931 40,958
------- -------
372,837 383,876
------- -------
Commitments and contingencies (Note 5)
Stockholders' equity (Note 4)
Common stock, $0.10 par value, 360,000,000
shares authorized, 51,562,101 and
51,404,815 shares outstanding............... 5,156 5,140
Capital surplus.............................. 140,775 136,655
Retained earnings............................ 177,090 90,073
Treasury stock, at cost (1,580,436 and 5,698
shares)..................................... (60,143) (142)
Unrealized gain on marketable equity
securities, net of related deferred tax
liability of $9,715 and $10,844............. 15,195 16,961
Deferred compensation related to restricted
stock....................................... (372) (598)
------- -------
277,701 248,089
------- -------
$ 650,538 $ 631,965
------- -------
------- -------
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------- --------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1997 1996
- ---------------------------------------- --------- --------- --------- ---------
Revenues
Company owned hotels
Rooms............................................................. $ 28,173 $ 30,405 $ 90,630 $ 93,360
Food and beverage................................................. 1,260 1,446 4,460 4,632
Other............................................................. 1,660 1,786 5,226 5,530
Franchise and management fees....................................... 34,896 29,522 96,666 77,040
Other............................................................... 8,112 9,659 23,434 23,777
------- ------- ------- -------
Total revenues.................................................. 74,101 72,818 220,416 204,339
------- ------- ------- -------
Operating expenses
Company owned hotels
Rooms............................................................. 13,810 14,890 42,739 44,870
Food and beverage................................................. 1,176 1,430 4,113 4,373
Other............................................................. 2,740 3,074 9,378 9,604
Other operating expenses............................................ 7,397 4,370 23,533 18,935
Depreciation of buildings and equipment............................. 4,866 5,638 16,367 16,793
Corporate expense................................................... 4,278 5,802 11,524 12,440
------- ------- ------- -------
Total operating expenses........................................ 34,267 35,204 107,654 107,015
------- ------- ------- -------
Property transactions................................................. 19,759 402 30,508 3,939
------- ------- ------- -------
Operating income...................................................... 59,593 38,016 143,270 101,263
Interest expense, net of interest capitalized (Note 3)................ (5,734) (7,008) (18,608) (22,409)
Dividend income....................................................... 998 1,494 3,924 3,982
Interest and other income............................................. 1,838 931 15,006 3,033
------- ------- ------- -------
Income before income taxes............................................ 56,695 33,433 143,592 85,869
Provision for income taxes............................................ (22,338) (13,741) (56,575) (35,292)
------- ------- ------- -------
Net income............................................................ $ 34,357 $ 19,692 $ 87,017 $ 50,577
------- ------- ------- -------
------- ------- ------- -------
Earnings per share.................................................... $ 0.67 $ 0.38 $ 1.69 $ 0.98
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares outstanding................................... 50,933 51,712 51,441 51,659
------- ------- ------- -------
------- ------- ------- -------
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
---------------------
SEPT. 30, SEPT. 30,
(IN THOUSANDS) 1997 1996
- -------------- ---------- ---------
Cash flows from operating activities
Net income......................................... $ 87,017 $ 50,577
Adjustments to reconcile net income to cash flows
from operating activities
Depreciation and amortization................... 18,949 18,936
Other noncash items............................. 113 (2,143)
Equity in earnings and distributions from
nonconsolidated affiliates.................... (2,483) 765
Net gains from property transactions............ (30,315) (4,252)
Gain from sale of investment in common stock.... (11,250) --
Net change in long-term accounts................ 3,675 (1,053)
Net change in working capital accounts.......... 768 (6,266)
---------- ---------
Cash flows provided by operating
activities................................ 66,474 56,564
---------- ---------
Cash flows from investing activities
Land, buildings, furniture and equipment
additions....................................... (106,707) (38,519)
Investment in and advances to nonconsolidated
affiliates...................................... (6,264) (60,333)
Proceeds from sale of assets...................... 175,235 34,013
Escrow deposits held for future development....... (38,362) --
Advances under mezzanine loan agreements.......... (5,951) (5,793)
Repayments under mezzanine loan agreements........ 5,229 2,750
Net investment in franchise system................ (7,342) (13,878)
Recovery of investment in franchise system........ 6,591 5,015
Other............................................. (978) 4,064
---------- ---------
Cash flows provided by (used in)
investing activities...................... 21,451 (72,681)
---------- ---------
Cash flows from financing activities
Net (retirements) borrowings under revolving
credit facility................................. (30,200) 18,900
Purchases of treasury stock....................... (59,992) --
Other............................................. 2,348 98
---------- ---------
Cash flows (used in) provided by
financing activities...................... (87,844) 18,998
---------- ---------
Net increase in cash and cash equivalents........... 81 2,881
Cash and cash equivalents, beginning of period...... 3,700 2,668
---------- ---------
Cash and cash equivalents, end of period............ $ 3,781 $ 5,549
---------- ---------
---------- ---------
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
All significant intercompany accounts and transactions have been
eliminated. Investments in 50% or less owned companies and joint ventures
over which Promus has the ability to exercise significant influence are
accounted for using the equity method. Promus reflects its share of income
before interest expense and property transactions of these nonconsolidated
affiliates in revenues-other. Promus' proportionate shares of interest
expense and property transactions of such nonconsolidated affiliates are
included in interest expense and property transactions, respectively, in the
consolidated condensed statements of income (see Note 7 for combined
summarized financial information regarding these nonconsolidated affiliates).
Management believes Promus' segregation of its proportionate share of
interest expense and property transactions of its equity investees is the
preferable presentation due to the nature of its equity investments. Certain
prior year amounts have been reclassified to conform with the current year
presentation.
In accordance with Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," Promus reviews long-lived assets and the related
intangible assets for impairment whenever events or changes in circumstances
indicate the carrying value of such assets may not be recoverable.
NOTE 2--NATURE OF OPERATIONS
Through its wholly-owned subsidiary, Promus Hotels, Inc. (PHI), Promus owns,
operates and franchises the Embassy Suites, Hampton Inn, Hampton Inn & Suites
and Homewood Suites hotel brands primarily through three lines of business:
franchise; hotel operations, including management contracts; and hotel real
estate and joint venture investments. The Embassy Suites brand is an all-suite
hotel brand that management believes comprises the largest all-suite upscale
hotel system in the United States by number of hotel suites and system revenue.
The Hampton Inn brand offers a limited-facility hotel for the value-conscious
consumer and the Homewood Suites brand offers residential-style accommodations
designed for the upscale extended-stay traveler. The Hampton Inn & Suites brand
is the newest Promus hotel brand which combines, in a single hotel, Hampton
style rooms with two-room suites. The Company has also developed a related line
of business, vacation interval ownership, under the Promus Vacation Resorts
name. Currently two of these timeshare products are being licensed and operated
by the company: Embassy Vacation Resorts and Hampton Vacation Resorts.
Promus' primary focus is to develop, grow and support its franchise business
for all brands. Promus brand hotels are located in almost every state, the
District of Columbia, Puerto Rico and six foreign countries. Promus charges each
franchisee royalty fees of generally four percent of suite or room rentals.
System-wide room revenues generated by company owned hotels and reported by
franchisees were $649.0 million and $546.6 million, for third quarter 1997 and
1996, respectively and $1.8 billion and $1.5 billion for the respective 1997 and
1996 year-to-date periods. In addition, Promus earns a licensing fee for new
licenses granted to franchisees when the franchise is approved. Promus also
receives franchise fees on net interval sales and on rental revenue related to
Promus Vacation Resort properties.
As of September 30, 1997 the Company operated 110 Promus brand hotel
properties which include wholly-owned, partially owned through joint ventures
and hotels managed for third parties. Promus has followed an asset strategy
to own and manage a mix of hotels that can positively affect profits and
enhance its role as franchisor for its brands. Management fee income is based
on a percentage of gross revenues, profits, free cash flow or a combination
thereof, at the related managed property.
6
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 2--NATURE OF OPERATIONS (CONTINUED)
On September 2, 1997, Promus announced the execution of a definitive merger
agreement with Doubletree Corporation (Doubletree), another leading hotel
company whose brands include Doubletree Hotels, Doubletree Guest Suites, Club
Hotels by Doubletree and Red Lion Hotels & Inns. This transaction, which is
expected to be completed by December 31, 1997, will create one of the country's
largest lodging companies, and will combine Promus' strength at franchising and
building brands with Doubletree's strength in hotel management. This
stock-for-stock transaction will be accomplished through the creation of a new
holding company which will issue its stock in exchange for the stock of both
existing companies. Promus shareholders will receive 0.925 of a share of the new
company's stock in exchange for each share of Promus stock owned, and Doubletree
shareholders will receive one share of the new company's stock in exchange for
each Doubletree share owned. The transaction is expected to be accounted for as
a pooling-of-interests, and is expected to be tax free. For additional
information on the proposed transaction, please refer to the Joint Proxy and
Prospectus, as amended, filed with the Securities and Exchange Commission (SEC)
on November 12, 1997.
NOTE 3--LONG-TERM DEBT
PROMUS FACILITY
The Promus Facility consists of a $300 million revolving credit arrangement
which matures on November 1, 2001 (the Five-Year Revolver) and a $50 million
annually extendible revolving credit facility (the Extendible Revolver). The
Extendible Revolver is convertible into a two-year term loan with equal
amortizing payments over such two-year period. Interest on the Promus Facility
is, at the option of the Company, equal to either (i) the Base Rate, as defined,
or (ii) LIBOR plus the applicable spread. The weighted average interest rate on
borrowings outstanding under this agreement (including the impact of facility
fees and interest rate swaps) was 6.6% for the nine months ended September 30,
1997. Both agreements incorporate a tiered scale that defines the applicable
LIBOR spread and a facility fee based upon the more favorable of the Company's
current debt rating or leverage ratio, as defined. Currently, the LIBOR spread
on the Five-Year Revolver and the Extendible Revolver is 0.225% and 0.245%,
respectively, and the facility fee required on the total amount of the Five-Year
Revolver and the Extendible Revolver is 0.10% and 0.08%, respectively. Both the
Extendible Revolver and the Five-Year Revolver are unsecured. The Promus
Facility contains provisions that restrict certain investments, limit the
Company's ability to incur additional indebtedness and pay dividends, and
require that certain performance ratios be maintained. As of September 30, 1997,
Promus was in compliance with all such covenants.
DERIVATIVE FINANCIAL INSTRUMENTS
Promus' use of derivative financial instruments is limited to the
management of its interest rate exposure. The Company is currently a party to
five interest rate swap agreements which serve to reduce the impact of
interest rate changes on $100 million of the variable rate Promus Facility.
These swap agreements are contracts to exchange floating interest payments
for fixed interest payments over the life of the agreements without the
exchange of the underlying notional amounts. The differential to be paid to,
or received from, the counterparties under the
7
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
terms of these agreements is accrued as interest rates change and is
recognized as an adjustment to interest expense in the consolidated condensed
statements of income. The related accrued receivable or payable is included
in accrued expenses in the consolidated condensed balance sheets. As of
September 30, 1997, the estimated amount, considering prevailing interest
rates and the swap maturity dates, that Promus would have been required to
pay to terminate these agreements before their stated maturity was
approximately $1.7 million. This estimated amount has not been recognized in
the accompanying financial statements, since the agreements are accounted for
as hedges and the Company currently plans to hold all swaps until their
maturity. The following table summarizes the terms of these agreements,
including the effective fixed rate paid by Promus, as of September 30, 1997:
NEXT
QUARTERLY
NOTIONAL AMOUNT VARIABLE
(ALL ASSOCIATED EFFECTIVE RATE
WITH PROMUS SWAP RATE RATE AT ADJUSTMENT SWAP
FACILITY) PAID (FIXED) SEPT. 30 DATE MATURITY
- ---------------- ------------- ----------- ------------ ------------
$50.0 million... 6.990% 7.315% 12/22/1997 3/20/2000
$12.5 million... 6.920% 7.245% 12/15/1997 12/15/1998
$12.5 million... 6.680% 7.005% 12/15/1997 12/15/1999
$12.5 million... 6.740% 7.065% 10/22/1997 1/22/1999
$12.5 million... 6.520% 6.845% 10/22/1997 1/24/2000
Changes in the effective interest rates to be paid by Promus pursuant to
the terms of its interest rate agreements will have a corresponding effect on
its future cash flows. These agreements contain a credit risk that the
counterparties may be unable to meet the terms of the agreements. Promus
minimizes that risk by evaluating the creditworthiness of its counterparties,
which are limited to major banks and financial institutions, and does not
anticipate nonperformance by the counterparties.
NOTE 4--STOCKHOLDERS' EQUITY
In April 1997, Promus' board of directors authorized the Company to
repurchase, in open market, negotiated or block transactions, up to
$150.0 million of its common stock for general corporate purposes and future
strategic investments. Through September 30, 1997, Promus had repurchased
1,573,800 shares of its common stock at a total cost of approximately
$60.0 million. Though it does not expect to do so in the near term due to the
pending merger with Doubletree, the Company may continue to purchase
additional shares as market and business conditions warrant.
NOTE 5--COMMITMENTS AND CONTINGENCIES
CONTRACTUAL COMMITMENTS
Promus is liable under certain lease agreements pursuant to which it has
assigned the direct obligation to third parties. Additionally, Promus manages
certain hotels for others under
8
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
CONTRACTUAL COMMITMENTS (CONTINUED)
agreements that provide for payments or loans to the hotel owners if
stipulated levels of financial performance are not maintained. The Company has
also provided guarantees for certain loans related to joint venture and other
investments. Promus believes the likelihood is remote that material payments
will be required under these agreements. Promus' estimated maximum exposure
under such agreements is approximately $33.1 million over the next 30 years.
FELCOR AGREEMENTS
During 1995, Promus entered into development agreements with Felcor Suite
Hotels, Inc. and FelCor Suites Limited Partnership (FelCor) in which Promus
invested $75.0 million in FelCor limited partnership interests and common stock
and has guaranteed repayment of up to $25.0 million of a third party loan
advanced to FelCor. Subject to some restrictions, the limited partnership
interests are convertible to common stock, which may be sold on the open market.
During second quarter 1997 and first quarter 1997, Promus sold approximately
$31.8 million and $6.9 million, respectively, of its original investment in
FelCor common stock, the proceeds from which will be used to promote further
growth of the Embassy Suites brand, including the development of new Embassy
Suites properties pursuant to an alliance with FelCor (see below). These sales
resulted in pre-tax gains of approximately $9.1 million and $2.1 million for
second quarter 1997 and first quarter 1997, respectively. Based on the market
value of the remaining investment in FelCor common stock as of September 30,
1997, Promus recorded an unrealized gain on marketable equity securities of
$22.1 million (before tax).
During second quarter 1997, Promus announced the formation of a new
strategic alliance with FelCor, under which Promus committed to construct at
least five Embassy Suites hotel properties. Upon completion of these
developments, FelCor will purchase a 90% interest in the properties. As part
of this new alliance, Promus also sold two company owned Embassy Suites
hotels in Dallas and Syracuse to FelCor for approximately $46.7 million. The
proceeds from these sales were placed in escrow pending the identification of
replacement properties that would qualify as a like-kind exchange for tax
purposes. Promus will receive 20-year license agreements and 15-year
management contracts for all hotels pursuant to this agreement.
As of September 30, 1997, FelCor owned or had an interest in 52 Embassy
Suites hotels, which represents 5.6% and 10.7% of all Promus brand hotels and
hotel rooms/suites, respectively. Promus owns a 50 percent interest in 12 of
the 52 hotels. Those 52 hotels contributed approximately 16.5% of total
system revenues and 17.3% of the Company's franchise and management fee
revenue for the nine months ended September 30, 1997.
SHC AGREEMENTS
During October 1997, Promus announced the formation of a strategic alliance
with Strategic Hotel Capital, Inc. (SHC), under which Promus committed to
construct at least ten Embassy Suites hotel properties. Upon completion of these
developments, SHC will purchase these hotel properties.
9
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
SHC AGREEMENTS (CONTINUED)
As part of this new alliance, on September 30, 1997, Promus sold two of
its owned and operated Embassy Suites hotels in Philadelphia and Orlando, to
SHC for approximately $65.0 million. This sale resulted in a pretax gain of
approximately $15.3 million. Approximately $38.7 million of the sale proceeds
from this transaction were placed in escrow, pending the identification of
replacement property, as Promus plans to qualify one of these sales as a
like-kind exchange for tax purposes. This escrow balance is reflected in
deferred costs and other in the accompanying consolidated condensed balance
sheets. Promus will receive 20-year license agreements and management
contracts for all hotels pursuant to this agreement.
SHC also purchased on September 30, 1997, two Embassy Suites hotels in Santa
Clara, California and Arlington, Virginia from a joint venture in which
Promus owned a minority interest. Promus' share of the gain on this sale
(pretax) was approximately $6.8 million.
EQUITY INNS AND WINSTON AGREEMENTS
During 1996, Promus entered into strategic development alliances with Equity
Inns, Inc. (Equity) and Winston Hotels, Inc. (Winston), two real estate
investment trusts (REITs), whereby Promus agreed to invest up to $15.0 million
in the common stock of both REITs as they purchase existing or to be constructed
hotels from the Company. As of September 30, 1997, Promus had invested
$7.1 million and $1.5 million in the Equity and Winston REITs, respectively, and
Equity and Winston had purchased four hotels and one hotel, respectively. Based
on the market value of these investments at September 30, 1997, Promus has
recorded an unrealized gain on marketable equity securities of approximately
$2.8 million (before tax). The Company's current plans call for construction of
approximately six to eight Homewood Suites and/or Hampton Inn & Suites
properties per year at an average cost of $7-10 million per property. Under the
terms of these alliances, Promus may offer additional properties for sale to
Equity and Winston at Promus' cost of development. Promus will receive 20-year
license agreements and 10-year management contracts for all hotels developed or
purchased pursuant to these alliances.
OTHER AGREEMENTS
Promus has entered into an agreement with Remington Hotel Corporation and
Nomura Asset Capital Corporation to develop ten Embassy Suites hotels that will
incorporate a new, smaller 150-suite prototype design. This innovative new
design will allow Embassy Suites properties to be built in somewhat smaller
markets at a proportionately lower cost of construction. Promus has committed to
invest approximately $2 million in each project through a form of mezzanine
financing. As of September 30, 1997, Promus had funded one such project.
LITIGATION
The Company is a party to various inquiries, administrative proceedings and
litigation relating to contracts, sales of property and other matters arising in
the normal course of business. While any proceeding or litigation has an element
of uncertainty, management does not believe that the final outcome of these
matters will have a materially adverse effect upon Promus' consolidated
financial position or its results of operations.
10
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
EMPLOYMENT AND SEVERANCE AGREEMENTS
Promus has severance agreements with 15 senior officers of the Company that
generally provide for a payment of three times the sum of (a) the officer's
current base salary and (b) the average bonus paid to each officer for the
three preceding years (including bonuses paid during service with The Promus
Companies Incorporated, prior to its spin-off of the Company in 1995). The
agreements also provide for accelerated payment of any compensation or awards
payable to such executive under any Promus incentive compensation or stock
option plan in the event of termination of an executive's employment, as
described in the agreements, subsequent to a change in control of Promus, as
defined. These agreements were amended following the announcement of the
proposed Doubletree merger (see Note 2), to exclude the proposed transaction
from the definition of a change in control (see Proposed Merger Transaction
section below). The maximum amount of compensation that would be payable
under all agreements if a change in control occurred and if such executives
were terminated as of September 30, 1997, would be approximately
$46.7 million.
SELF-INSURANCE RESERVES
Promus self-insures various levels of general liability, workers'
compensation and employee medical coverage. All self-insurance reserves include
accruals of estimated settlements for known claims, as well as accruals of
actuarial estimates of incurred but not reported claims. These estimates are
based on historical information along with certain assumptions about future
events. Changes in assumptions for such things as medical costs and legal
expenses, as well as changes in actual experience, could cause these estimates
to change in the near term.
PROMUS ACCEPTANCE CORP.
In May 1997 the Company announced the formation of Promus Acceptance Corp.
(ProMAC). ProMAC will provide first mortgage financing to Promus franchisees for
newly constructed Hampton Inn, Hampton Inn & Suites and Homewood Suites hotels
by issuing up to $120 million in commercial paper that will be backed by a
liquidity facility from participating financial institutions. The terms
generally provide for favorably priced floating and fixed rate loans ranging
from $3.5 million to $8.0 million with six-year terms and 20-year amortization
schedules. Promus will provide a guarantee up to $36.0 million on loans
outstanding under the program, and will also provide a $1.0 million working
capital guarantee to ProMAC. Additionally, Promus has provided a $2.0 million
start up loan to ProMAC, which earns interest at prime and matures in April
2005.
PROPOSED MERGER TRANSACTION
As discussed in Note 2, Promus has entered into a proposed merger
transaction with Doubletree. As of September 30, 1997, Promus had incurred
approximately $1.7 million in costs related to the proposed merger, including
SEC filing fees, legal and professional fees. The merger agreement also contains
certain provisions that would require Promus or Doubletree, under certain
conditions, to pay the other company a fee of $45 million upon termination of
the merger agreement. In connection with the Merger Agreement, Promus and
Doubletree also have entered into a Stock Option Agreement pursuant to which
Promus granted to Doubletree an option to purchase up to 19.9% of the
outstanding common stock of Promus under certain circumstances and (ii) a Stock
Option Agreement pursuant to which Doubletree has granted to Promus an option to
purchase up to 19.9% of the outstanding common stock of Doubletree under certain
circumstances.
11
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 6--SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR INTEREST AND TAXES
The following table reconciles Promus' interest expense, net of interest
capitalized, to cash paid for interest (in thousands):
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1997 1996
--------- --------- --------- ---------
Interest expense, net of amount capitalized
(Note 3)............................................................ $ 5,734 $ 7,008 $18,608 $22,409
Adjustments to reconcile to cash paid for
interest:
Promus' share of interest expense of
nonconsolidated affiliates (Note 7)............................. (2,213) (2,656) (6,722) (8,692)
Capitalized interest............................................... 705 414 1,485 1,139
Net change in accruals............................................. 191 (272) (312) (534)
Amortization of deferred finance charges........................... (144) (105) (429) (493)
Other.............................................................. (39) (40) (117) (116)
------- ------- ------- -------
Cash paid for interest............................................... $ 4,234 $ 4,349 $12,513 $13,713
------- ------- ------- -------
------- ------- ------- -------
Cash paid for income taxes........................................... $13,210 $13,237 $39,432 $38,016
------- ------- ------- -------
------- ------- ------- -------
NOTE 7--NONCONSOLIDATED AFFILIATES
Combined summarized statements of income for nonconsolidated affiliates,
which Promus accounted for using the equity method, were as follows (in
thousands):
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1997 1996
--------- --------- --------- ----------
Combined Summarized Statements of Income
Revenues......................................................... $ 30,565 $ 41,547 $ 92,472 $124,712
Operating expenses............................................... (19,144) (30,083) (60,459) (92,987)
Property transactions............................................ 52 -- 15,081 --
------- ------- ------- -------
Operating Income................................................. $ 11,473 $ 11,464 $ 47,094 $ 31,725
------- ------- ------- -------
------- ------- ------- -------
Net income....................................................... $ 6,662 $ 5,777 $ 32,518 $ 13,098
------- ------- ------- -------
------- ------- ------- -------
12
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 7--NONCONSOLIDATED AFFILIATES (CONTINUED)
Promus' share of combined net income of nonconsolidated affiliates which
Promus accounted for using the equity method, are reflected in the
accompanying consolidated condensed statements of income as follows (in
thousands):
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1997 1996
----------- ----------- --------- ---------
Pre-interest operating income (included in
revenues-other)................................................. $ 6,145 $ 6,523 $17,490 $17,383
------ ------ ------ ------
------ ------ ------ ------
Interest expense (included in interest expense).................. $(2,213) $(2,656) $(6,722) $(8,692)
------ ------ ------ ------
------ ------ ------ ------
Property transactions (included in property
transactions)................................................... $ 26 $ -- $ 7,340 $ --
------ ------ ------ ------
------ ------ ------ ------
The components of investments in and advances to nonconsolidated affiliates
reflected in the accompanying condensed balance sheets were as follows (in
thousands):
SEPT. 30, DEC. 31,
1997 1996
---------- ----------
At market........................................................ $ 70,015 $111,859
At equity........................................................ 69,852 64,217
At cost.......................................................... 5,250 10,690
--------- --------
$145,117 $186,766
--------- --------
--------- --------
13
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 8--SUMMARIZED FINANCIAL INFORMATION
Promus Hotels, Inc. (PHI) is a wholly-owned subsidiary of Promus and the
primary entity through which the operations of Promus are conducted. PHI is also
Promus' principal asset. Summarized financial information for PHI, prepared on
the same basis as Promus, is as follows (in thousands):
SEPT. 30, DEC. 31,
1997 1996
---------- ----------
ASSETS
Current assets..................................................... $ 35,836 $ 29,397
Land, buildings, furniture and equipment, net...................... 304,346 320,413
Other assets....................................................... 303,848 276,876
-------- --------
644,030 626,686
-------- --------
LIABILITIES
Current liabilities................................................ 58,616 50,561
Long-term debt..................................................... 213,237 243,682
Other liabilities.................................................. 88,921 81,621
-------- --------
360,774 375,864
-------- --------
Net assets......................................................... $283,256 $250,822
-------- --------
-------- --------
THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------- ----------------------
SEPT. 30, SEPT. 30, SEPT. 30 SEPT.30,
1997 1996 1997 1996
--------- --------- ---------- ----------
Revenues........................................................... $74,101 $72,818 $220,416 $204,339
------- ------- ------- -------
------- ------- ------- -------
Operating income................................................... $59,743 $38,145 $143,729 $101,751
------- ------- ------- -------
------- ------- ------- -------
Net income......................................................... $34,449 $19,771 $ 87,297 $ 50,875
------- ------- ------- -------
------- ------- ------- -------
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Promus Hotel Corporation (Promus or the Company) currently owns, operates
and franchises four leading hotel brands--Embassy Suites, Hampton Inn,
Hampton Inn & Suites and Homewood Suites--and two vacation interval ownership
brands-Embassy Vacation Resorts and Hampton Vacation Resorts.
On September 2, 1997, Promus announced the execution of a definitive
merger agreement with Doubletree Corporation (Doubletree), another leading
hotel company whose brands include Doubletree Hotels, Doubletree Guest
Suites, Club Hotels by Doubletree and Red Lion Hotels & Inns. This
transaction, which is expected to be completed by December 31, 1997, will
create one of the country's largest lodging companies, and will combine
Promus' strength at franchising and building brands with Doubletree's
strength in hotel management. As of September 30, 1997, the combined company
would have had approximately 1,180 hotels containing approximately 177,000
rooms, and would have had over 40,000 employees throughout the United States
as well as in selected locations in Latin America and Asia. This
stock-for-stock transaction will be accounted for as a pooling of interests
pursuant to Accounting Principles Board Opinion No. 16. Promus shareholders
will receive 0.925 of a share of the new company's stock in exchange for each
share of Promus stock owned, and Doubletree shareholders will receive one
share of the new company's stock in exchange for each share of Doubletree
stock owned. The transaction is expected to be tax free. For additional
information on the proposed transaction, please refer to the Joint Proxy and
Prospectus, as amended, filed with the Securities and Exchange Commission on
November 12, 1997.
Promus' current focus is to develop, grow and support its franchise
business for all brands. As of September 30, 1997, the Promus hotel system
included 922 hotel properties, 896 of which were franchised. Promus' system
hotels are located in almost every state, the District of Columbia, Puerto
Rico and six foreign countries. Promus charges each franchisee royalty fees
of generally four percent of suite or room rentals. System-wide room revenues
generated by company owned hotels and reported by franchisees in third
quarter 1997 and 1996 were $649.0 million and $546.6 million, respectively.
System-wide revenues for the nine month periods totaled $1.8 billion and
$1.5 billion, respectively. In addition, Promus earns a licensing fee for new
licenses granted to franchisees when the franchise is approved. Promus also
receives franchise fees on net interval sales and on rental revenues related
to Promus Vacation Resorts.
As of September 30, 1997, the Company operated 110 Promus brand hotel
properties which include wholly-owned, partially owned through joint ventures
and hotels managed for third parties. Promus has followed an asset strategy
to own and manage a mix of Promus hotels that can impact profits and enhance
its role as franchisor for its brands. Management fee income is based on a
percentage of gross revenues, profits, free cash flow or a combination
thereof, at the related managed property.
RESULTS OF OPERATIONS
The principal factors which affect Promus' results are: continued growth in
the number of system hotels; occupancy and room rates achieved by hotels; the
relative mix of owned, managed and franchised hotels; and Promus' ability to
manage costs. The number of rooms/suites at franchised and managed properties
and revenue per available room/suite (RevPAR/S) significantly affect Promus'
results because franchise royalty and management fees are based upon a
percentage of room/suite revenues. Increases in franchise and management fee
revenues have a favorable impact on Promus' operating margin due to minimal
incremental costs associated with this type of revenue.
15
Results of operations for third quarter and nine month periods ended
September 30 were as follows (in millions, except percentages and per share
data):
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1997 1996 INCREASE 1997 1996 INCREASE
--------- --------- ----------- --------- --------- -----------
Revenues............................................ $74.1 $72.8 1.8% $220.4 $204.3 7.9%
Operating income before property transactions....... 39.8 37.6 5.9% 112.8 97.3 15.9%
Operating income.................................... 59.6 38.0 56.8% 143.3 101.3 41.5%
Income before property transactions and gains on
stock sales (net of tax)........................... 22.4 19.5 14.9% 61.7 48.3 27.7%
Net income.......................................... 34.4 19.7 74.6% 87.0 50.6 71.9%
Earnings per share.................................. 0.67 0.38 76.3% 1.69 0.98 72.4%
Operating margin before property transactions....... 53.8% 51.7% 2.1pts 51.2% 47.6% 3.6pts
Operating margin.................................... 80.4% 52.2% N/M 65.0% 49.6% N/M
Changes in the above revenue comparisons have been impacted by several
factors, but Promus' overall revenue growth continues to be driven primarily
by higher franchise and management fee income. Contributions to Promus' total
revenues for the third quarter and nine month periods were as follows
(dollars in millions):
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- INCREASE/ -------------------- INCREASE/
1997 1996 (DECREASE) 1997 1996 (DECREASE)
--------- --------- ------------- --------- --------- -------------
Company owned hotels
Rooms................................ $28.2 $30.4 (7.2)% $ 90.6 $ 93.4 (3.0)%
Food and beverage.................... 1.3 1.4 (7.1)% 4.5 4.6 (2.2)%
Other................................ 1.6 1.8 (11.1)% 5.2 5.5 (5.5)%
Franchise and management fees.......... 34.9 29.5 18.3 % 96.7 77.0 25.6 %
Other.................................. 8.1 9.7 (16.5)% 23.4 23.8 (1.7)%
----- ----- ------ ------
$74.1 $72.8 1.8 % $220.4 $204.3 7.9%
----- ----- ------ ------
----- ----- ------ ------
1997 company owned hotel revenues (and expenses) decreased in both third
quarter and the nine month period, due in large part to the June 30, 1997
sale of two company owned Embassy Suites hotels in Dallas, Texas and
Syracuse, New York. Partially offsetting these decreases were revenues from
new company owned Homewood Suites hotels which opened during 1997, as
well as system-wide RevPAR/S growth.
16
Franchise and management fees for third quarter and the nine month period
increased 18% and 26%, respectively, over prior year amounts due primarily to
growth in the number of franchised properties in operation. The number of
properties which pay franchise royalties (non Company owned) reached 896
properties on September 30, 1997, a 21% increase from a year earlier. Because
franchise royalties are based on each hotel's revenues, system-wide RevPAR/S
improvements also contributed to the income growth.
Revenues derived from property management improved due to improved
operations at several managed properties, as well as higher incentive management
fees associated with changes in hotel ownership. The conversion, subsequent to
September 30, 1996, of the final four Crown Sterling Suites hotel properties to
the Embassy Suites brand represents approximately 30% of the increase in number
of rooms under management contracts, but had an insignificant impact on Promus'
management fee income, as Promus managed most of these properties prior to their
conversions.
In June 1997, a portfolio of 19 Hampton Inn properties in which the Company
owned a minority interest was sold, and as part of this transaction, Promus will
no longer manage these properties (Promus will continue to earn franchise fees
from these properties). Third quarter 1996 included approximately $0.6 million
in management fees related to these properties.
As noted above, nearly all components of Promus' revenues were favorably
impacted by system-wide increases in RevPAR/S. On a comparable hotel basis
(which excludes those hotels that had room additions or were not open for the
entire reporting period in both years), RevPAR/S increased at all brands for
both third quarter and the nine month period, as follows:
Revenue per Available Room/Suite (comparable hotels)
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 INCREASE 1997 1996 INCREASE
--------- --------- ----------- --------- -------- ---------
Embassy Suites................................................. $87.10 $83.08 4.8% $87.19 $82.19 6.1%
Hampton Inn.................................................... 51.24 49.56 3.4% 47.96 45.77 4.8%
Hampton Inn & Suites........................................... 63.37 55.45 14.3% 51.75 47.53 8.9%
Homewood Suites................................................ 78.60 73.37 7.1% 74.74 70.05 6.7%
The above RevPAR/S comparisons are negatively impacted by the inclusion in
1996 results of travel related to the summer olympic games in Atlanta. Excluding
the impact of Promus' Georgia properties, third quarter RevPAR/S increases
ranged from 4.4% (Hampton Inn) to 12.1% (Hampton Inn & Suites). Year to date
RevPAR/S increases, excluding Georgia, ranged from 5.5% (Hampton Inn) to 8.9%
(Hampton Inn & Suites).
Though Promus' operating income and operating margin (before property
transactions) increased in part due to the revenue growth discussed above,
they have also been positively impacted by the changing mix of Promus' business.
Due to the size and strength of Promus' infrastructure and systems, openings of
additional franchised or managed properties require few incremental costs, and
the growth which occurred in the Promus system over the past year served
to improve overall
17
operating margins. Due to the continuing growth of Promus' franchise and
management businesses and the sale of two owned and operated hotels in June
1997, total operating expenses actually decreased 3% in third quarter 1997
from the comparable 1996 period, resulting in higher operating income and
operating margin for both third quarter 1997 and the nine month period. This
trend of margin improvement has continued over the past several years, as
Promus' franchising and management businesses have grown.
Also affecting the comparison of operating results is the inclusion in third
quarter 1996 of approximately $3.4 million of nonrecurring operating income from
a transaction related to the restructuring of a joint venture Embassy Suites
hotel.
Other items affecting net income for third quarter and the nine month period
were as follows:
Income (expense)
(in millions, except percentages):
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
1997 1996 (DECREASE) 1997 1996 (DECREASE)
--------- ------- ----------- -------- -------- ----------
Property transactions....................................... $ 19.8 $ 0.4 N/M $ 30.5 $ 3.9 N/M
Interest expense, net
of interest capitalized................................... (5.7) (7.0) (18.6)% (18.6) (22.4) (17.0)%
Dividend income............................................. 1.0 1.5 (33.3)% 3.9 4.0 (2.5)%
Interest and other income................................... 1.8 0.9 100.0% 15.0 3.0 N/M
Effective tax rate.......................................... 39.4% 41.1% (1.7)pts 39.4% 41.1% (1.7)pts
Property transactions in third quarter 1997 include a pre-tax gain of
$15.3 million on the sale of two owned and operated Embassy Suites hotels to
Strategic Hotel Capital, Inc. (SHC). Under the terms of a recent alliance
with SHC (see Hotel Brand Development), Promus will serve as manager of these
properties and will earn management and franchise fees prospectively. SHC
also purchased, in third quarter 1997, two Embassy Suites hotels from a joint
venture in which Promus owned a 10% interest and Promus' share of that gain,
which is also reflected in property transactions, was approximately
$4.3 million (pre-tax). For the nine month period, property transactions also
include a second quarter pre-tax gain of $11.9 million on the sale of two
company owned Embassy Suites hotels and a first quarter pre-tax gain of
$8.1 million on the sale of joint venture interests in two Embassy Suites
hotels, partially offset by a second quarter pre-tax charge of $9.1 million
related to the liquidation of a partnership (mentioned above) in which the
Company owned a 20% interest. This charge resulted from Promus' requirement to
restore their negative capital account balance back to zero upon the sale of
the 19 hotels and liquidation of the partnership. Cash distributions and tax
benefits received by Promus over the course of the partnership agreement,
however, more than offset this current charge, resulting in an overall
cumulative net gain on this investment. 1996 property transactions included a
$4.2 million pre-tax gain in the second quarter, related to the sale of a
Homewood Suites hotel and a Hampton Inn hotel to a real estate investment
trust (REIT) in accordance with a strategic development agreement (see Hotel
Brand Development).
Interest expense decreased year over year as a result of the combined
effects of lower debt balances, lower interest expense attributable to the
Company's nonconsolidated subsidiaries, and higher capitalized interest. The
average daily balance outstanding on the Company's revolving credit facility has
decreased approximately 8% for the 1997 nine month period as compared to the
prior year. The decrease in Promus' share of nonconsolidated subsidiaries'
interest expense has
18
resulted from 1996 joint venture restructurings and refinancings and from the
first quarter sale of the Company's joint venture interests in two Embassy
Suites hotels (discussed above). Capitalized interest increased due to
increasing construction of company owned hotels (either to be held by Promus
or sold to strategic partners).
Dividend income relates to Promus' investments in the common stock of three
REITs in connection with hotel development agreements, and decreased in third
quarter 1997 from the comparable 1996 period due to the sale of REIT stocks
earlier in the year. 1997 interest and other income includes a second quarter
pre-tax gain of $9.1 million and a first quarter pre-tax gain of $2.1 million on
sales of portions of Promus' investment in one of these REITs. The proceeds from
these sales will be used to promote further growth of the Embassy Suites brand,
including development of hotels pursuant to recent strategic alliance agreements
(see Hotel Brand Development).
The Company's overall effective tax rate for both periods is higher than the
federal statutory rate primarily due to state income taxes, but has decreased
from the prior year due to effective management of the Company's tax
liabilities.
As of September 30, 1997, Promus has incurred approximately $1.7 million in
costs related to the proposed Doubletree merger, and expects to incur additional
costs during fourth quarter 1997. In addition, the merger agreement with
Doubletree includes penalties which either company must pay, under certain
conditions, should they withdraw from the merger discussions. These penalties
include a $45 million termination fee. Additionally, each company has granted
the other an option to purchase up to 19.9% of its stock, should it end merger
discussions.
Earnings before interest, taxes, depreciation and amortization plus cash
distributions from nonconsolidated affiliates less earnings from operations of
nonconsolidated affiliates (EBITDA) is a supplemental financial measurement used
by management as well as by industry analysts to evaluate operations. It should
not be construed as an alternative to operating income (as an indicator of
operating performance) or to cash flows from operating activities (as a measure
of liquidity) as determined in accordance with generally accepted accounting
principles, as these funds may not be available for management's discretionary
use. Further, EBITDA may not be comparable to similarly titled measures reported
by other companies. A comparison of EBITDA and the related margins are included
in the following table. The table also includes EBITDA and related margins,
excluding the effect of unusual items in both years. These unusual items include
property transactions in all periods, 1997 gains from the sale of REIT stocks,
and 1996 income related to the restructuring of a joint venture.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(dollars in millions) 1997 1996 INCREASE 1997 1996 INCREASE
--------- --------- --------- --------- --------- --------
EBITDA...................................................... $65.2 $42.6 53.1% $171.5 $118.8 44.4%
EBITDA margin............................................... 88.0% 58.6% 29.4pts 77.8% 58.1% 19.7pts
EBITDA to interest paid..................................... 15.4x 9.8x 57.1% 13.7x 8.7x 57.5%
EBITDA before unusual items................................. $45.5 $38.8 17.3% $129.8 $111.4 16.5%
EBITDA margin (before unusual items)........................ 61.3% 55.1% 6.2pts 58.9% 55.2% 3.7pts
EBITDA to interest paid (before unusual items).............. 10.7x 8.9x 20.2% 10.4x 8.1x 28.4%
19
HOTEL BRAND DEVELOPMENT
Overall
Promus brands continue to be industry leaders in hotel development.
During the first nine months of 1997, the Company added 11,537 net rooms to
its hotel system, increasing its system size by almost 11% since December 31,
1996. This compares to 13,188 net rooms added in the prior year nine month
period (includes 3,013 rooms attributable to the Crown Sterling conversions).
Leading this increase was the Hampton Inn brand, unquestionably one of the
most successful hotel brands in recent history. Hampton Inn added 8,474, or
73%, of the 1997 net room additions. Though Promus will continue growing the
Hampton Inn brand as demand from franchisees and guests remains strong, the
Company has seen a slight decline in Hampton Inn approvals, in part because
of the significant supply growth over the past several years in Hampton Inn's
market segment. However, Promus has also entered into several agreements that
will help to significantly grow its Embassy Suites brand over the coming
years. Promus' current development activity also contains an increasing
number of projects within the Homewood Suites and Hampton Inn & Suites
brands, its newer, and therefore less mature, products.
Promus' hotel development pipeline as of September 30, 1997 contained 337
properties that were either in the design or construction phase, compared with
332 properties as of September 30, 1996. At September 30, 1997, 143 of these
properties were under construction. When completed, these 143 properties will
add over 15,000 rooms or suites to the Promus hotel system. The remaining 194
hotels in the pipeline were approved and in the design phase at September 30,
1997, although construction had not yet begun.
Embassy Suites Brand Development
As part of the September 1997 hotel sales discussed above, Promus and SHC
entered into a strategic development agreement, under which SHC has committed to
invest up to $200 million in the development of at least ten Embassy Suites
hotel properties. Under the agreement, Promus will fund the construction of the
hotels and, upon completion, SHC will purchase the hotel properties. Promus will
retain management and franchise agreements with twenty year terms. Promus is not
expected to make significant investments in these projects until 1998, and the
first such property is not expected to open until 1999.
Promus has also entered into several development agreements with FelCor
Suite Hotels, Inc. and FelCor Suites Limited Partnership (FelCor). Recently,
Promus announced the formation of a strategic alliance under which FelCor has
committed to invest up to $100 million in Embassy Suites developments. Promus
will construct at least five Embassy properties and, upon completion, will sell
a 90% interest in each property to FelCor. These hotels will operate under
Promus management contracts and franchise contracts with fifteen and twenty year
terms, respectively. As with the SHC developments, Promus' significant
investment in these projects and the first property's opening are not expected
to occur until 1998 and 1999, respectively.
20
During 1995 Promus entered into development agreements with FelCor in
which Promus invested $75 million in FelCor limited partnership interests and
common stock and has guaranteed repayment of up to $25 million of a third
party loan advanced to FelCor. Subject to some restrictions, the limited
partnership interests are convertible to common stock, which may be sold on
the open market. During the first six months of 1997, Promus sold
approximately 51% of its FelCor investment for approximately $50.1 million,
resulting in pre-tax gains of $11.3 million. The proceeds from these sales
will be used to promote further growth of the Embassy Suites brand, including
the development of new Embassy Suites properties pursuant to the FelCor
alliance discussed above. Based on the market value of its remaining FelCor
common stock as of September 30, 1997, Promus recorded an unrealized gain
on marketable equity securities of approximately $22.1 million (pre-tax). As
with the other REIT investments, this amount will fluctuate based on the
market value of FelCor stock, but no earnings impact will be realized until
the stock is actually sold.
As of September 30, 1997, FelCor owned or had an interest in 52 Embassy
Suites hotels, which represents 5.6% and 10.7% of all Promus brand hotels and
hotel rooms/suites, respectively. Promus owns a 50 percent interest in 12 of the
52 hotels. Those 52 hotels contributed approximately 16.5% of total system
revenues and 17.3% of the Company's franchise and management fee revenue for the
nine months ended September 30, 1997.
Promus has also entered into an agreement with Remington Hotel
Corporation and Nomura Asset Capital Corporation to develop ten Embassy
Suites hotels that will incorporate a new, smaller 150-suite prototype
design. This innovative new design will allow Embassy Suites properties to be
built in somewhat smaller markets at a proportionately lower cost of
construction. Promus will provide a portion of the total project capital
through a form of mezzanine financing. Investments pursuant to this agreement
are expected to total approximately $2 million for the year. As of
September 30, 1997, there were three such projects under construction
and another five approved and in the development pipeline. The first of
these smaller Embassy Suites hotels is expected to open in December, 1997.
Homewood Suites and Hampton Inn & Suites Brand Development
As noted above, Promus' short term development plans also include
significant development within these two hotel brands. During the first nine
months of this year, the Company opened 12 Hampton Inn & Suites hotels and 13
Homewood Suites hotels, representing 21% of new rooms added during that period.
These brands comprise over 32% of the rooms under construction at September 30,
1997, and over 25% of those rooms in the design phase. At September 30,
1997 there were 24 Homewood Suites properties under construction, with an
additional 20 properties in the design phase. There were 20 and 26 Hampton Inn &
Suites properties under construction and in design, respectively. The Company
plans to follow its overall strategy of growing these brands through franchise
and management contracts, but recognizes the challenges faced by some
prospective owners in obtaining conventional financing for such projects. As a
result, Promus has initiated several programs designed to grow the Promus hotel
system by providing alternative capital sources to such owners.
21
In May 1997 the Company announced the formation of Promus Acceptance
Corp. (ProMAC). ProMAC will provide first mortgage financing to Promus
franchisees for newly constructed Hampton Inn, Hampton Inn & Suites and
Homewood Suites hotels by issuing up to $120 million in commercial paper that
will be backed by a liquidity facility from participating financial
institutions. The terms generally provide for favorably-priced floating and
fixed rate loans ranging from $3.5 million to $8.0 million with six-year
terms and 20-year amortization schedules. In June 1997, Promus loaned
$2.0 million to ProMAC in the form of a start-up loan. This loan, which bears
interest at prime, matures in April 2005. As of September 30, 1997,
applications for approximately $49.0 million in financing had been received
by ProMAC, with loans totaling $5.3 million and $2.2 million closed and
funded, respectively.
Under its mezzanine financing program, Promus provides conservatively
underwritten secondary financing to franchisees. A minimum of 20 percent equity
is required by the borrower, and the investment must meet certain defined
underwriting criteria. The terms of the first mortgage and the mezzanine
financing must be acceptable to Promus and the first mortgage lender, with whom
Promus will enter into an inter-creditor agreement. During the first nine months
of 1997, Promus provided $6.0 million in mezzanine loans, and anticipates
providing up to $2.0 million in additional loans throughout the rest of the
year. Additionally, $5.2 million was repaid during the year. Outstanding loans
bear interest at rates ranging from 10.0% to 10.5%.
During 1996, Promus entered into strategic development alliances with
Equity Inns, Inc. (Equity) and Winston Hotels, Inc. (Winston), two REITs,
whereby Promus agreed to invest up to $15.0 million in the common stock of
both REITs as they purchase existing or to be constructed Promus hotels from
the Company. As of September 30, 1997, Promus had invested $7.1 million and
$1.5 million in the Equity and Winston REITs, respectively, and Equity and
Winston had purchased four hotels and one hotel, respectively. Based on the
market value of these investments at September 30, 1997, Promus recorded
an unrealized gain on marketable securities of approximately $2.8 million
(before tax). This amount will fluctuate based on the market value of Equity
and Winston stock, but no earnings impact will be realized until the stock is
actually sold. Subsequent to September 30, 1997, Promus sold 22% of its
Equity stock for $2.1 million, recognizing a pre-tax gain of approximately
$0.6 million on the transaction. The Company's current development plans call
for construction of approximately six to eight Homewood Suites and/or Hampton
Inn & Suites properties per year at an average cost of $7-10 million per
property. Under the terms of these alliances, Promus may offer additional
Homewood Suites or Hampton Inn & Suites properties for sale to Equity and
Winston at Promus' cost of development. Promus will receive 20-year license
agreements and 10-year management contracts for all hotels developed or
purchased pursuant to these alliances.
Subsequent to September 30, 1997, Promus purchased two Homewood Suites
hotels, in Salt Lake City, Utah and Plano, Texas, for approximately
$15.5 million. These properties, which together contain 197 suites, will be
operated as company owned hotels.
Promus Vacation Resorts Development
Promus Vacation Resorts (PVR) are the Company's newest avenue in which to
expand upon the reputation of the Promus brands, as well as the Company's
expertise in the lodging and hospitality industries. The Company has
currently licensed two PVR products: Embassy Vacation Resorts and Hampton
Vacation Resorts. Development of PVR properties will consist of the
construction or acquisition of resort-quality accommodations in destination
cities throughout the United States. These accommodations consist of
full-featured one, two and three bedroom units, which are sold in one week
intervals as an alternative to renting. Each unit contains fifty-one sellable
weekly intervals, with one week reserved for annual maintenance. By
purchasing an interval, owners are entitled to a one week stay during each
year. Owners have several options with an interval purchase, including
splitting their week, spending their week at other timeshare resorts (by
trading
22
with other owners using an outside agency), or renting (as a hotel suite) the
unit during their interval in any year. Units containing unsold intervals are
also rented on a daily basis. Promus receives a one-time franchise licensing
fee upon the sale of an interval; the Company then receives ongoing franchise
royalty fees from interval owners, as well as royalty fees for hotel revenues
earned from any interval rentals. For properties which Promus manages, the
Company will also earn a management fee from the operation of the facility.
To facilitate growth and development of PVR properties, Promus has entered
into two alliances as outlined below. Promus entered into a five-year joint
venture development agreement with Vistana, Inc. (Vistana) to acquire,
develop, manage and market vacation ownership resorts in North America under
Promus brand names. Vistana will serve as managing partner and project
developer and will market the timeshare units. Promus will serve as
franchisor and manager of these joint venture properties and will own a 50
percent interest in certain projects developed pursuant to this agreement. In
addition to the proposed joint venture developments, Vistana has licensed
three other PVR properties. The latest of these, announced in October 1997,
calls for the development by Vistana of a 150-unit Embassy Vacation Resort in
Scottsdale, Arizona which will be managed by Promus. In May 1997, Vistana
opened the first Hampton Vacation Resort in Kissimmee, Florida. This resort
is managed by Vistana. An Embassy Vacation Resort in Myrtle Beach, South
Carolina, which will be managed by Promus, is currently under construction.
In 1994, Promus licensed the first Embassy Vacation Resort to a
predecessor of Signature Resorts (Signature), and has licensed three
additional resorts to Signature since that time. The latest agreement with
Signature, announced in October, calls for the conversion, by Signature, of
the Embassy Suites hotel in Maui, Hawaii, to an Embassy Vacation Resort. This
resort features over 400 units, 157 of which will be initially converted to
interval ownership units. Plans for additional Embassy Vacation Resort
properties to be developed or acquired by Signature and licensed by the
Company are being discussed. Promus plans to grow its vacation resort
business through its alliances with Vistana and Signature.
To date, Promus has licensed six Embassy Vacation Resort properties and
one Hampton Vacation Resort property. Four of these seven properties are or
will be managed by Promus. Two of these resorts were converted to PVR brands
and the other five are being built in phases. Upon completion of
construction, these seven properties will contain over 2,100 units,
representing almost 97,000 available timeshare intervals. As of September 30,
1997, four of the resorts, containing 565 completed units and almost 29,000
available intervals, were in operation. An additional resort in Myrtle Beach,
South Carolina is nearing completion and has begun preselling timeshare
intervals. As of September 30, 1997, approximately 9,000 intervals had been
sold, including sales for the completed projects and presold units for the
project nearing completion. PVR resorts in Myrtle Beach, South Carolina;
Maui, Hawaii; and Scottsdale, Arizona remain under construction or in design.
Promus Vacation Resorts has also entered into an agreement to manage a
nonbranded resort property in Miami, Florida, which is currently being converted
to timeshare units. Promus began managing this property in September, 1997.
CAPITAL SPENDING
Investment in Franchise System
Promus' net investment in its franchise system infrastructure at
September 30, 1997 remains consistent with the December 31, 1996 net
investment. The Company plans to spend approximately $3 million through the
remainder of the year on franchise system expansion, enhancements, and the
introduction and roll-out of Promus' new Microsoft Windows based hotel
management system (System 21-TM-). The roll-out of System 21-TM- began in
first quarter 1997 and is expected to be complete by the end of 1998.
23
Other
In order to maintain Promus' quality standards, ongoing refurbishment of
existing company owned hotel properties will continue in 1997 at an estimated
annual cost of approximately $13 million. For the first nine months of 1997,
$8.6 million in such costs were incurred.
In April 1997, Promus' board of directors authorized the Company to
repurchase, in open market, negotiated or block transactions, up to
$150.0 million of its common stock for general corporate purposes and future
strategic investments. Through September 30, 1997, Promus had repurchased
1,573,800 shares of its common stock at a cost of approximately $60.0 million.
Repurchases of these shares are being funded through operating cash flows and
the Promus Facility (see Liquidity and Capital Resources). Though the Company
does not expect to purchase additional shares in the near term due to the
pending merger with Doubletree, it may continue to purchase additional shares
as market and business conditions warrant.
Cash necessary to finance projects currently under development, as well as
additional projects to be developed by Promus, will be made available from
operating cash flows, the Promus Facility (see Liquidity and Capital Resources),
joint venture partners, specific project financing, sales of existing hotel
assets and investments and, if necessary, Promus debt and equity offerings.
Promus' capital expenditures totaled $122 million for the nine months ended
September 30, 1997. The Company expects to spend approximately $150 million
during 1997 to fund hotel and resort development, refurbish existing facilities,
support its hotel management and business systems, make advances under mezzanine
loan agreements, repurchase company stock, purchase REIT common stocks and
pursue other corporate related projects. However, some of these expenditures
could be offset by the receipt of proceeds from the sale of REIT investments or
the sale of completed hotels to FelCor, SHC, Equity, Winston and others.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows for the nine month periods ended September 30
were as follows:
Nine Months Ended Percentage
Sept. 30, Sept. 30, Increase/
(in millions) 1997 1996 (Decrease)
- ------------------------------------------------------------------------------------- --------- --------- -------------
Cash flows provided by (used in):
Operating activities............................................................... $ 66.5 $ 56.6 17.5%
Investing activities............................................................... 21.5 (72.7) N/M
Financing activities............................................................... (87.8) 19.0 N/M
Operating cash flow has increased from the prior year due to higher earnings,
partially offset by a decrease due to lower cash distributions from
nonconsolidated affiliates. Cash flows from investing activities represent a
net source of cash in 1997 and include proceeds from the sale of company
owned hotels and stock and joint venture investments, as compared to a net
use of cash in 1996, which included the purchase of stock related to the
FelCor agreements (see Hotel Brand Development). The change in cash flows
from financing activities relates to activity under the Promus Facility and
the repurchase of the Company's common stock (see Capital Spending).
On September 30, 1997, the Company had a working capital deficit of
$33.8 million, compared to a $27.8 million deficit that existed at December 31,
1996. This increase in the deficit is the result of several factors,
including the timing of income tax payments and the accrual of a $9.1 million
capital contribution true-up related to the sale by a joint venture of
19 Hampton Inn properties and the liquidation of that partnership (see Results
of Operations), partially offset by seasonally
24
higher accounts receivable. Due to the nature of the Company's cash
management program, whereby all excess cash is normally used to pay down
amounts outstanding under the Promus Facility, the Company typically reports
a working capital deficit. For this reason, Promus does not believe that the
current ratio is an appropriate measure of its short-term liquidity without
considering the aggregate availability of its various capital resources.
Promus believes that these resources, consisting of strong operating cash
flow, available borrowings under the Promus Facility, and Promus' ability to
obtain additional financing through various financial markets, are sufficient
to meet its liquidity needs.
The Company has a revolving credit arrangement (the Promus Facility) which
consists of two agreements, the significant terms of which are as follows:
Total Maturity Interest Facility
Facility Date Rate Fees
-------------- -------------------- ----------------------- -----------------------
Base Rate, as defined,
Five-Year or LIBOR +22.5 basis 0.10% of the total
Revolver $ 300,000,000 November 1, 2001 points facility
Base Rate, as defined,
Extendible or LIBOR +24.5 basis 0.08% of the total
Revolver $ 50,000,000 June 4, 1998 points facility
The Extendible Revolver is a 364-day facility with annual renewals and
may be converted into a two-year term loan with equal amortizing payments
over such two-year period. Facility fees and interest on Base Rate loans are
paid quarterly. The agreements contain a tiered scale for facility fees and
the applicable LIBOR spread (current rates for both reflected above) that is
based on the more favorable of Promus' current credit rating (BBB+ per
Standard & Poor's) or the leverage ratio, as defined. They also contain
provisions that restrict certain investments, limit the Company's ability to
incur additional indebtedness and pay dividends, and require that certain
performance ratios be maintained. As of September 30, 1997, Promus was in
compliance with all such covenants.
The Five-Year Revolver includes a sublimit for letters of credit of
$20.0 million. At September 30, 1997, approximately $14.3 million in letters
of credit were outstanding under this agreement (related primarily to the
Company's self-insurance reserves). There was $122.8 million of availability
under the Promus Facility as of September 30, 1997. The remaining borrowing
capacity available under the Promus Facility is available for working capital,
hotel development and other general corporate purposes. Both the Extendible
Revolver and the Five-Year Revolver are unsecured.
As of September 30, 1997, Promus was a party to several interest rate swap
agreements that bear a total notional amount of $100.0 million. The effect of
the swap agreements was to convert a portion of the Company's variable rate debt
under the Promus Facility to a fixed rate of interest. The weighted average
effective fixed rate pursuant to the agreements, which expire between December
1998 and March 2000, was approximately 7.2% at September 30, 1997.
Subsequent to September 30, 1997, Promus obtained a $20 million five year
convertible rate term loan, the proceeds from which were used to retire a
portion of the Promus Facility. This loan bears interest for two years at the
three month LIBOR rate minus 15 basis points; at the beginning of the third
year, the rate changes to a fixed rate of 6.71%. The bank may elect to convert
this fixed rate to the three month LIBOR rate plus 32.5 basis points, under a
conversion option that is exercisable annually beginning on October 28, 1999.
25
The Company has filed a shelf registration for up to $300 million in debt
securities with the SEC. The securities issuable under the registration
statement may be offered from time to time in one or more series, in amounts,
at prices and on terms to be determined at the time of the offerings.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued several Statements of
Financial Accounting Standards (SFAS) in recent months. SFAS No. 128,
"Earnings Per Share," provides changes in the way earnings per share is
currently computed, and is effective for interim and annual periods ending
after December 15, 1997. Earnings per share, as currently computed and
reported, and as if computed under the new pronouncement, were as follows:
Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Earnings per share:
As reported................................................................... $0.67 $0.38 $1.69 $0.98
SFAS 128 (basic).............................................................. 0.68 0.38 1.71 0.99
SFAS 128 (diluted)............................................................ 0.67 0.38 1.69 0.98
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
the reporting and display of comprehensive income and its components within the
financial statements. This statement will affect the presentation, but not the
content, of Promus' financial statements, by requiring disclosure of
comprehensive income, which may include items that are not currently reflected
in earnings. SFAS No. 130 is effective for annual periods beginning after
December 15, 1997, but summary disclosure will be required in Promus' first
quarter 1998 Form 10-Q. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," will require additional financial and
descriptive disclosure regarding Promus' operating segments, and is effective
for annual periods beginning after December 15, 1997.
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. Certain information included in this
Form 10-Q and other materials filed or to be filed by the Company with the
SEC (as well as information included in oral statements or other written
statements made or to be made by the Company) contains statements based on
management's beliefs and assumptions, which are based on information
currently available to management. Forward-looking statements include
information relating to, and may be impacted by changes in, the following
activities, among others: (A) operations of existing hotel properties,
including the effects of competition, customer demand and general economic
conditions, which can impact future performance; (B) consummation of the
merger agreement with Doubletree Corporation and various facets of that
transaction; (C) changes in the size of Promus' hotel system, including
anticipated scope and opening dates of new developments and planned future
capital spending; (D) relationships with third parties, including
franchisees, lenders and others; and (E) litigation or other judicial
actions. These activities involve important factors, some of which are beyond
Promus' ability to control and predict, that could cause actual results to
differ materially from those expressed in any forward looking statements made
by or on behalf of the Company. Any forward looking statements are made
pursuant to the Private Securities Litigation Reform Act of 1995 and, as
such, speak only as of the date made.
26
HOTELS AND ROOMS/SUITES STATISTICS
NUMBER OF HOTELS NUMBER OF ROOMS/SUITES
-------------------------- PERCENT PERCENT
SEPT. 30, SEPT. 30, INC/ SEPT. 30, SEPT. 30, INC/
1997 1996 (DEC) 1997 1996 (DEC)
----------- ----------- ----------- ----------- ----------- -----------
Embassy Suites
Company owned........................... 5 9 (44.4)% 1,023 2,025 (49.5)%
Joint venture........................... 19 23 (17.4)% 4,946 5,895 (16.1)%
Management contract..................... 52 41 26.8 % 12,766 9,914 28.8 %
Franchisee operated..................... 61 56 8.9 % 14,451 12,968 11.4 %
--- --- ----------- -----------
137 129 6.2 % 33,186 30,802 7.7 %
--- --- ----------- -----------
--- --- ----------- -----------
Hampton Inn
Company owned........................... 12 13 (7.7)% 1,654 1,790 (7.6)%
Joint venture........................... -- 19 (100.0)% -- 2,376 (100.0)%
Management contract..................... 7 5 40.0 % 929 589 57.7 %
Franchisee operated..................... 688 557 23.5 % 73,429 60,430 21.5 %
--- --- ----------- -----------
707 594 19.0 % 76,012 65,185 16.6 %
--- --- ----------- -----------
--- --- ----------- -----------
Hampton Inn & Suites
Management contract..................... 2 1 100.0 % 287 127 126.0 %
Franchisee operated..................... 26 12 116.7 % 2,802 1,390 101.6 %
--- --- ----------- -----------
28 13 115.4 % 3,089 1,517 103.6 %
--- --- ----------- -----------
--- --- ----------- -----------
Homewood Suites
Company owned........................... 9 8 12.5 % 1,005 924 8.8 %
Management contract..................... 4 3 33.3 % 471 347 35.7 %
Franchisee operated..................... 37 25 48.0 % 3,704 2,530 46.4 %
--- --- ----------- -----------
50 36 38.9 % 5,180 3,801 36.3 %
--- --- ----------- -----------
--- --- ----------- -----------
Total System
Company owned........................... 26 30 (13.3)% 3,682 4,739 (22.3)%
Joint venture........................... 19 42 (54.8)% 4,946 8,271 (40.2)%
Management contract..................... 65 50 30.0 % 14,453 10,977 31.7 %
Franchisee operated..................... 812 650 24.9 % 94,386 77,318 22.1 %
--- --- ----------- -----------
922 772 19.4 % 117,467 101,305 16.0 %
--- --- ----------- -----------
--- --- ----------- -----------
27
VACATION RESORT STATISTICS
NUMBER OF RESORTS NUMBER OF UNITS
------------------------ PERCENT ------------------------ PERCENT
SEPT. 30, SEPT. 30, INC/ SEPT. 30, SEPT. 30, INC/
1997 1996 (DEC) 1997 1996 (DEC)
----------- ----------- ----------- ----------- ----------- -----------
Embassy Vacation Resorts
Management contract..................... 3 2 50.0% 188 102 84.3%
Franchisee operated..................... 1 1 -- 219 207 5.8%
----------- ----------- ----- -----
4 3 33.3% 407 309 31.7%
----------- ----------- ----- -----
----------- ----------- ----- -----
Hampton Vacation Resorts
Franchisee operated..................... 1 -- N/M 158 -- N/M
----------- ----------- ----- -----
1 -- N/M 158 -- N/M
----------- ----------- ----- -----
----------- ----------- ----- -----
Non-branded resorts
Management contract..................... 1 -- N/M 40 -- N/M
----------- ----------- ----- -----
1 -- N/M 40 -- N/M
----------- ----------- ----- -----
----------- ----------- ----- -----
Total Vacation Resorts
Management contract..................... 4 2 100.0% 228 102 123.5%
Franchisee operated..................... 2 1 100.0% 377 207 82.1%
----------- ----------- ----- -----
6 3 100.0% 605 309 95.8%
----------- ----------- ----- -----
----------- ----------- ----- -----
NUMBER OF AVAILABLE NUMBER OF TIMESHARE
TIMESHARE INTERVALS INTERVALS SOLD
------------------------ PERCENT ------------------------ PERCENT
SEPT. 30, SEPT. 30, INC/ SEPT. 30, SEPT. 30, INC/
1997 1996 (DEC) 1997 1996 (DEC)
----------- ----------- ----------- ----------- ----------- -----------
TOTAL VACATION RESORTS.................... 30,855 15,759 95.8% 8,992 3,545 N/M
----------- ---------- ----- ------
----------- ---------- ----- ------
28
PERFORMANCE STATISTICS
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------------ ------------------------
SEPT. 30, SEPT. 30, INC/ SEPT. 30, SEPT. 30, INC/
1997 1996 (DEC) 1997 1996 (DEC)
----------- ----------- --------- ----------- ----------- -------
COMPARABLE SYSTEM HOTELS*
Embassy Suites
Occupancy............................... 76.9% 77.0% (0.1)pts 76.8% 76.3% 0.5 pts
ADR..................................... $ 113.31 $ 107.90 5.0% $ 113.52 $ 107.66 5.4%
RevPAS.................................. $ 87.10 $ 83.08 4.8% $ 87.19 $ 82.19 6.1%
Hampton Inn
Occupancy............................... 77.8% 78.6% (0.8)pts 74.6% 75.1% (0.5) pts
ADR..................................... $ 65.83 $ 63.02 4.5% $ 64.27 $ 60.94 5.5%
RevPAR.................................. $ 51.24 $ 49.56 3.4% $ 47.96 $ 45.77 4.8%
Hampton Inn & Suites
Occupancy............................... 79.3% 72.7% 6.6 pts 72.5% 68.9% 3.6 pts
ADR..................................... $ 79.95 $ 76.33 4.7% $ 71.42 $ 69.00 3.5%
RevPAS.................................. $ 63.37 $ 55.45 14.3% $ 51.75 $ 47.53 8.9%
Homewood Suites
Occupancy............................... 82.4% 79.2% 3.2 pts 81.1% 78.3% 2.8 pts
ADR..................................... $ 95.43 $ 92.68 3.0% $ 92.17 $ 89.44 3.1%
RevPAS.................................. $ 78.60 $ 73.37 7.1% $ 74.74 $ 70.05 6.7%
TOTAL SYSTEM HOTELS
Embassy Suites
Occupancy............................... 76.1% 76.9% (0.8)pts 75.2% 75.5% (0.3)pts
ADR..................................... $ 112.53 $ 107.81 4.4% $ 113.84 $ 107.57 5.8%
RevPAS.................................. $ 85.63 $ 82.87 3.3% $ 85.65 $ 81.20 5.5%
Hampton Inn
Occupancy............................... 76.2% 78.1% (1.9)pts 72.9% 74.4% (1.5)pts
ADR..................................... $ 66.45 $ 63.04 5.4% $ 64.61 $ 61.02 5.9%
RevPAR.................................. $ 50.65 $ 49.22 2.9% $ 47.09 $ 45.38 3.8%
Hampton Inn & Suites
Occupancy............................... 73.4% 70.5% 2.9 pts 70.7% 67.1% 3.6 pts
ADR..................................... $ 80.22 $ 76.36 5.1% $ 79.73 $ 72.60 9.8%
RevPAS.................................. $ 58.89 $ 53.82 9.4% $ 56.37 $ 48.69 15.8%
Homewood Suites
Occupancy............................... 74.7% 77.8% (3.1)pts 74.9% 75.7% (0.8)pts
ADR..................................... $ 93.20 $ 92.67 0.6% $ 92.99 $ 90.25 3.0%
RevPAS.................................. $ 69.63 $ 72.08 (3.4)% $ 69.65 $ 68.31 2.0%
TOTAL SYSTEM REVENUES (in thousands)
Hampton Inn............................... $ 348,251 $ 289,169 20.4% $ 923,185 $ 755,858 22.1%
Embassy Suites............................ 254,364 227,659 11.7% 761,066 639,030 19.1%
Homewood Suites........................... 31,026 23,569 31.6% 83,124 62,994 32.0%
Hampton Inn & Suites...................... 15,340 6,175 N/M 38,190 12,068 N/M
----------- ----------- ---------- -----------
$ 648,981 $ 546,572 18.7% $1,805,565 $1,469,950 22.8%
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
* Excludes those hotels that had room additions or were not open for the
entire reporting period in both years.
29
REGIONAL HOTEL STATISTICS
AS OF SEPTEMBER 30, 1997 NINE MONTHS ENDED SEPTEMBER 30, 1997**
------------------------ --------------------------------------
NUMBER OF NUMBER OF OCCUPANCY AVERAGE DAILY REVPAR/S
HOTELS ROOMS/SUITES PERCENTAGE RATE
--------- ------------ ---------- ------------- --------
NEW ENGLAND
- -----------
Embassy Suites 2 348 82.6% $106.73 $88.19
Hampton Inn 14 1,816 72.7% $ 68.19 $49.58
Homewood Suites 1 132 81.5% $ 89.31 $72.80
--------- -----------
Total New England Region 17 2,296
--------- -----------
MIDDLE ATLANTIC
- ---------------
Embassy Suites 15 3,648 78.3% $123.64 $96.77
Hampton Inn 109 12,507 75.9% $ 68.16 $51.74
Hampton Inn & Suites 5 547 89.3% $ 66.88 $59.76
Homewood Suites 5 451 76.8% $ 87.85 $67.47
--------- ------------
Total Middle Atlantic Region 134 17,153
--------- ------------
MIDWEST
- -------
Embassy Suites 12 3,025 76.3% $120.08 $91.59
Hampton Inn 111 11,418 73.3% $ 64.81 $47.52
Hampton Inn & Suites 4 377 N/A N/A N/A
Homewood Suites 10 944 81.5% $ 81.74 $66.65
--------- -------------
Total Midwest Region 137 15,764
--------- -------------
PLAINS
- ------
Embassy Suites 10 2,377 75.0% $103.06 $77.30
Hampton Inn 45 5,082 69.4% $ 63.49 $44.09
Homewood Suites 3 319 68.9% $ 72.91 $50.25
--------- -------------
Total Plains Region 58 7,778
--------- -------------
SOUTHEAST
- ---------
Embassy Suites 31 7,545 78.0% $113.36 $88.46
Hampton Inn 298 30,629 75.7% $ 63.04 $47.74
Hampton Inn & Suites 14 1,581 63.3% $ 78.37 $49.64
Homewood Suites 15 1,546 81.9% $ 92.63 $75.89
--------- -------------
Total Southeast Region 358 41,301
--------- -------------
SOUTHWEST
- ---------
Embassy Suites 24 5,350 76.1% $101.05 $76.91
Hampton Inn 72 7,686 70.6% $ 62.52 $44.17
Hampton Inn & Suites 2 299 73.7% $ 67.28 $49.60
Homewood Suites 11 1,228 79.6% $ 99.10 $78.89
--------- -------------
Total Southwest Region 109 14,563
--------- -------------
MOUNTAIN
- --------
Embassy Suites 7 1,510 77.4% $110.62 $85.63
Hampton Inn 26 3,062 78.2% $ 60.95 $47.64
Hampton Inn & Suites 2 181 N/A N/A N/A
Homewood Suites 2 210 83.9% $115.23 $96.70
--------- -------------
Total Mountain Region 37 4,963
--------- -------------
PACIFIC REGION
- --------------
Embassy Suites 31 8,065 75.5% $121.46 $ 91.74
Hampton Inn 23 2,729 75.5% $ 63.96 $ 48.30
Homewood Suites 3 350 86.3% $108.95 $ 94.05
--------- -------------
Total Pacific Region 57 11,144
--------- -------------
ALL PROPERTIES*
- ---------------
Embassy Suites 137 33,186 76.8% $113.52 $87.19
Hampton Inn 707 76,012 74.6% $ 64.27 $47.96
Hampton Inn & Suites 28 3,089 72.5% $ 71.42 $51.75
Homewood Suites 50 5,180 81.1% $ 92.17 $74.74
--------- -------------
Total Promus System 922 117,467
--------- -------------
*All Properties totals include 15 International hotels with 2,505 rooms/suites.
**Revenue statistics are for comparable hotels and exclude those hotels
that had room additions or were not open for the entire nine month period in
both current and prior year.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EX-10.1 Form of Amendment dated as of September 1, 1997, to the
Severance Agreement dated June 30, 1995, entered into with
Michael D. Rose, Raymond E. Schultz, David C. Sullivan, Donald
H. Dempsey, Thomas L. Keltner, Ralph B. Lake and Mark C.
Wells. (1)
EX-11 Computation of Per Share Earnings. (1)
EX-27 Financial Data Schedule. (1)
(b) Reports on Form 8-K:
The Company filed a current report on form 8-K dated September 5, 1997,
that described the proposed merger of Promus with Doubletree Corporation,
another lodging company. Consummation of this transaction is subject to
certain conditions and is expected to be complete by December 31, 1997.
- ------------------------
Footnotes
File No. 1-11463.
(1) Filed herewith.
31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROMUS HOTEL CORPORATION
November 12, 1997 By: JEFFERY M. JARVIS
-----------------------------
Jeffery M. Jarvis
Vice President and Controller
(Chief Accounting Officer)
32
Exhibit Index
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ------------- ----------------------------------------------------------------- -----------
(a) EX-10.1 Form of Amendment dated as of September 1, 1997, to the 34
Severance Agreement dated June 30, 1995, entered into with
Michael D. Rose, Raymond E. Schultz, David C. Sullivan, Donald
H. Dempsey, Thomas L. Keltner, Ralph B. Lake and Mark C.
Wells. (1)
(b) EX-11 Computation of Per Share Earnings. (1) 36
(c) EX-27 Financial Data Schedule. (1)
(d) Reports on Form 8-K:
The Company filed a current report on form 8-K dated September 5, 1997,
that described the proposed merger of Promus with Doubletree Corporation,
another lodging company. Consummation of this transaction is subject to
certain conditions and is expected to be complete by December 31, 1997.
- ------------------------
Footnotes
(1) Filed herewith.
33