-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KlSS8s47DD6Ec7JGktRzHJ/kmKigFCKVrWtCDW2YyVwHftiYei5DF74JnbhI1qvr TDOWSF8ZgHKWuBP97pPj3g== 0001047469-98-029795.txt : 19980810 0001047469-98-029795.hdr.sgml : 19980810 ACCESSION NUMBER: 0001047469-98-029795 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980807 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROMUS HOTEL CORP/OLD CENTRAL INDEX KEY: 0000944647 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 621596939 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-14023-01 FILM NUMBER: 98679014 BUSINESS ADDRESS: STREET 1: 755 CROSSOVER LANE CITY: MEMPHIS STATE: TN ZIP: 38117 BUSINESS PHONE: 9013745000 MAIL ADDRESS: STREET 1: 755 CROSSOVER LANE CITY: MEMPHIS STATE: TN ZIP: 38117 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________. COMMISSION FILE NUMBER 1-13719 ------------------------ PROMUS HOTEL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE I.R.S. NO. 62-1716020 (State of Incorporation) (I.R.S. Employer Identification No.) 755 CROSSOVER LANE MEMPHIS, TENNESSEE 38117-4900 (Address of principal executive offices)(Zip Code) (901) 374-5000 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of June 30, 1998. 87,312,780 Common Stock....................................... shares
Page 1 of 24 Exhibit Index Page 23 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 unaudited consolidated condensed financial statements should be read in conjunction with Promus' consolidated financial statements and notes thereto included in the Company's 1997 Annual Report to Stockholders. 2 PROMUS HOTEL CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
DECEMBER 31, JUNE 30, 1997 1998 ------------ ------------ ASSETS Cash and cash equivalents............................................................ $ 24,066 $ 11,405 Accounts receivable, net............................................................. 78,941 91,950 Other................................................................................ 43,222 24,979 ------------ ------------ Total current assets............................................................... 146,229 128,334 ------------ ------------ Property and equipment, net.......................................................... 960,231 1,078,464 Investments.......................................................................... 250,688 247,374 Management and franchise contracts, net.............................................. 440,568 435,130 Goodwill, net........................................................................ 374,500 397,718 Notes receivable..................................................................... 89,452 68,400 Investment in franchise system....................................................... 50,421 53,208 Deferred costs and other assets...................................................... 66,957 49,063 ------------ ------------ $2,379,046 $ 2,457,691 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses................................................ $ 220,924 $ 187,479 Current portion of notes payable..................................................... 46,020 1,382 ------------ ------------ Total current liabilities.......................................................... 266,944 188,861 ------------ ------------ Deferred income taxes................................................................ 264,859 279,580 Notes payable........................................................................ 671,978 693,647 Other long-term obligations.......................................................... 79,530 72,808 ------------ ------------ 1,283,311 1,234,896 ------------ ------------ Commitments and contingencies Stockholders' equity: Common stock, $0.01 par value. Authorized 500,000,000 shares; 86,118,141 and 87,312,780 shares issued and outstanding......................................... 861 873 Additional paid-in capital......................................................... 856,008 896,344 Unearned employee compensation..................................................... (70) (35) Retained earnings.................................................................. 225,335 313,540 Accumulated other comprehensive income............................................. 13,601 12,073 ------------ ------------ 1,095,735 1,222,795 ------------ ------------ $2,379,046 $ 2,457,691 ------------ ------------ ------------ ------------ The accompanying notes are an integral part of these consolidated condensed financial statements.
3 PROMUS HOTEL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- --------------------- 1997 1998 1997 1998 --------- --------- --------- ---------- Revenues: Franchise and management fees...................................... $ 49,477 $ 59,088 $ 90,294 $ 108,432 Owned hotel revenues............................................... 97,860 102,010 188,389 193,591 Leased hotel revenues.............................................. 107,881 109,187 202,714 207,666 Purchasing and service fees........................................ 3,760 6,198 7,059 11,288 Other fees and income.............................................. 1,087 14,244 31,095 24,293 --------- --------- --------- ---------- Total revenues................................................... 260,065 290,727 519,551 545,270 --------- --------- --------- ---------- Operating costs and expenses: General and administrative expenses................................ 19,501 20,059 42,568 38,594 Owned hotel expenses............................................... 58,063 62,071 114,689 119,737 Leased hotel expenses.............................................. 94,195 94,810 180,891 184,069 Depreciation and amortization...................................... 18,185 19,357 36,461 38,537 --------- --------- --------- ---------- Total operating costs and expenses............................... 189,944 196,297 374,609 380,937 --------- --------- --------- ---------- Operating income..................................................... 70,121 94,430 144,942 164,333 Interest and dividend income....................................... 5,484 5,007 11,372 10,625 Interest expense, net.............................................. (18,235) (14,923) (36,656) (30,228) Gain on sale of real estate and securities......................... 21,056 2,289 23,164 2,285 --------- --------- --------- ---------- Income before income taxes and minority interest..................... 78,426 86,803 142,822 147,015 Minority interest share of net income.............................. (790) (824) (1,446) (1,703) --------- --------- --------- ---------- Income before income taxes........................................... 77,636 85,979 141,376 145,312 Income tax expense................................................. (30,260) (33,790) (55,098) (57,107) --------- --------- --------- ---------- Net income........................................................... $ 47,376 $ 52,189 $ 86,278 $ 88,205 --------- --------- --------- ---------- --------- --------- --------- ---------- Net income per share Basic............................................................ $ 0.55 $ 0.60 $ 0.99 $ 1.02 --------- --------- --------- ---------- --------- --------- --------- ---------- Diluted.......................................................... $ 0.54 $ 0.59 $ 0.98 $ 1.00 --------- --------- --------- ---------- --------- --------- --------- ---------- The accompanying notes are an integral part of these consolidated condensed financial statements.
4 PROMUS HOTEL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------- 1997 1998 --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income................................................................................. $ 86,278 $ 88,205 Adjustments to reconcile net income to net cash provided by operations: Payment of business combination expenses............................................... -- (36,817) Depreciation and amortization.......................................................... 36,461 38,537 Other non-cash expenses................................................................ 8,298 (1,012) Equity in earnings of nonconsolidated affiliates....................................... (6,430) (10,098) (Gain) loss on sale of investments in partnerships and affiliates...................... 1,117 (1,565) Gain on sale of real estate and securities............................................. (23,164) (2,285) Changes in assets and liabilities: Increase in accounts receivable, net................................................... (11,443) (16,916) Decrease in other current assets....................................................... 997 12,969 Increase in accounts payable and accrued expenses...................................... 2,554 22,059 Increase in deferred costs and other assets............................................ (1,550) (4,701) Increase in other long-term obligations and deferred income taxes...................... 1,351 946 --------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES............................................ 94,469 89,322 --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment.................................................... (36,346) (93,531) Purchase of Harrison Conference Associates............................................. -- (61,150) Purchase of Red Lion Hotels, Inc....................................................... (15,888) -- Proceeds from sale of investments...................................................... 55,004 4,548 Proceeds from the sale of property and equipment....................................... -- 1,664 Investments in and advances to partnerships and affiliates............................. (20,746) (19,659) Distributions from partnerships and affiliates......................................... 3,660 20,540 Net investment in management and franchise contracts................................... 1,323 449 Escrow deposits used for development................................................... -- 20,537 Loans to owners of managed and franchised hotels....................................... (10,425) (10,663) Collections of loans to owners of managed and franchised hotels........................ 8,107 31,493 Net investment in franchise system..................................................... (5,452) (3,008) Other.................................................................................. (1,273) (643) --------- ---------- NET CASH USED IN INVESTING ACTIVITIES................................................ (22,036) (109,423) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of common stock options......................................... 2,138 30,442 Purchases of treasury stock............................................................ (23,761) -- Net activity under revolving credit facilities......................................... (37,900) (21,125) Principal payments on notes payable.................................................... (13,878) (1,877) Other.................................................................................. 1 -- --------- ---------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................................. (73,400) 7,440 --------- ---------- Net decrease in cash and cash equivalents.................................................. (967) (12,661) Cash and cash equivalents, beginning of period............................................. 29,288 24,066 --------- ---------- Cash and cash equivalents, end of period................................................... $ 28,321 $ 11,405 --------- ---------- --------- ---------- The accompanying notes are an integral part of these consolidated condensed financial statements.
5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) NOTE 1--BASIS OF PRESENTATION On December 19, 1997, Doubletree Corporation (Doubletree) and Promus Hotel Corporation (PHC) merged in accordance with the Agreement and Plan of Merger (the Merger Agreement or the Merger) by and among Doubletree, PHC and Parent Holding Corp., a newly-formed corporation jointly owned by Doubletree and PHC. This transaction was accounted for as a pooling-of-interests and, accordingly, the accompanying consolidated financial statements have been restated to combine the historical results of both Doubletree and PHC for all periods presented. Concurrent with consummation of the Merger, PHC was renamed Promus Operating Company, Inc. and Parent Holding Corp. was renamed Promus Hotel Corporation. Promus Hotel Corporation and subsidiaries are collectively referred to herein as Promus or the Company. The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. While management endeavors to make accurate estimates, actual results could differ from these estimates. Certain financial statement items from prior years have been reclassified to achieve consistency in presentation between Doubletree and PHC. During the first quarter of 1998, Promus adopted the provisions of Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income." The standard requires that entities include within their financial statements information on comprehensive income, which is defined as all activity impacting equity from non-owner sources. For Promus, adjustments to derive comprehensive income are comprised exclusively of changes in unrealized gains, net of gains realized, on its investments in common stock. Comprehensive income, net of tax, for the six months ended June 30, 1997 and 1998 was $1,010,000 and $(565,000), respectively. NOTE 2--NATURE OF OPERATIONS Through its wholly-owned subsidiaries, Promus franchises and manages hotels with the following brands: Club Hotels by Doubletree, Doubletree Hotels, Doubletree Guest Suites, Embassy Suites, Hampton Inn, Hampton Inn & Suites and Homewood Suites. Promus may also own all or a portion of these hotels or lease these hotels from others. In addition, Promus leases and manages hotels that are not Promus-branded. At June 30, 1998, Promus franchises 932 hotels and operates 343 hotels, of which 59 hotels are wholly-owned, 22 are partially-owned through joint ventures, 82 are leased from third parties and 180 are managed for third parties. These hotels are located in all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and six foreign countries. The Company also operates and licenses vacation interval ownership systems under the Embassy Vacation Resort and Hampton Vacation Resort names. Promus' primary focus is to develop, grow and support its franchise and management business. Promus' primary sources of revenues are from the operations of owned and leased hotels, franchise royalty fees and management fees. Promus charges franchisees a royalty fee of up to four percent of room revenues. Management fees are based on a percentage of the managed hotels' gross revenues, operating profits, cash flow, or a combination thereof. Generally, the Company is also reimbursed for certain costs associated with providing central reservations, sales, marketing, accounting, data processing, internal audit and employee training services to hotels. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1998 (UNAUDITED) NOTE 3--BUSINESS COMBINATIONS DOUBLETREE/PROMUS MERGER The Company was formed on December 19, 1997, as a result of the Merger of Doubletree and PHC. As a result of the Merger Agreement, (i) Doubletree and PHC became wholly-owned subsidiaries of Promus; (ii) each outstanding share of common stock of Doubletree was converted into one share of common stock of Promus; and (iii) each outstanding share of PHC common stock was converted into 0.925 of a share of common stock of Promus. The Merger qualified as a tax free exchange and was accounted for as a pooling-of-interests. Historical financial results of Doubletree and PHC have been combined for all periods presented. The results of operations for the separate companies and the pro forma combined results presented in the accompanying consolidated financial statements are as follows (in thousands):
(UNAUDITED) (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1997 JUNE 30, 1997 ------------------- ---------------- Revenues: Doubletree........................................... $ 191,239 $ 374,419 PHC.................................................. 68,826 145,132 -------- -------- Combined............................................. $ 260,065 $ 519,551 -------- -------- -------- -------- Net Income: Doubletree........................................... $ 18,436 $ 33,618 PHC.................................................. 28,940 52,660 -------- -------- Combined............................................. $ 47,376 $ 86,278 -------- -------- -------- --------
In connection with the Merger, the Company recorded a $115.0 million provision for business combination expenses in December 1997. At June 30, 1998, $29.0 million of this provision remained and was classified within current liabilities. ACQUISITION OF HARRISON CONFERENCE ASSOCIATES, INC. In January 1998, the Company acquired Harrison Conference Associates, Inc. (Harrison) for approximately $61.2 million cash, including acquisition costs, in a transaction accounted for as a purchase. Harrison is a leading conference center operator with over 1,200 rooms under management, including two owned and seven managed properties. NOTE 4--INVESTMENTS Investments consist of the following (in thousands):
DECEMBER 31, JUNE 30, 1997 1998 ------------ ---------- Hotel partnerships................................................. $ 168,884 $ 167,720 Investments in common stock (at market)............................ 63,304 61,154 Convertible preferred stock........................................ 18,500 18,500 ------------ ---------- $ 250,688 $ 247,374 ------------ ---------- ------------ ----------
7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1998 (UNAUDITED) NOTE 4--INVESTMENTS (CONTINUED) The Company's non-controlling general and/or limited partnership interests in hotel partnerships range from less than 1.0% to 50.0%. Investments in common stock are carried at market value. Promus' cost of these investments at June 30, 1998 was approximately $40.9 million. NOTE 5--NOTES PAYABLE Promus' indebtedness consists of the following (in thousands):
DECEMBER 31, JUNE 30, 1997 1998 ------------ ---------- Promus Facility.................................................... $ 607,050 $ 584,650 Mortgages, LIBOR plus 1.5%-8.0%, maturities through 2005........... 85,037 84,475 Convertible rate term loan......................................... 20,000 20,000 Notes payable and other unsecured debt, 8.4%-13.0%, maturities through 2022..................................................... 5,911 5,904 ------------ ---------- 717,998 695,029 Current portion of notes payable................................... (46,020) (1,382) ------------ ---------- $ 671,978 $ 693,647 ------------ ---------- ------------ ----------
Subsequent to June 30, 1998, a consolidated joint venture of the Company refinanced its debt. At June 30, 1998 and at December 31, 1997 the debt outstanding was $45 million and was included in the current portion of notes payable at December 31, 1997. DERIVATIVE FINANCIAL INSTRUMENTS In order to manage its interest rate sensitivity, Promus maintains several interest rate swap agreements which serve to convert a portion of the Promus Facility from a floating to a fixed rate. At June 30, 1998, the fair value of Promus' swap agreements, which Promus would have been required to pay to terminate them, was approximately $2.8 million. NOTE 6--EARNINGS PER SHARE The following table reflects Promus' weighted average common shares outstanding and the impact of its dilutive common share equivalents (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1997 1998 1997 1998 --------- --------- --------- --------- Basic weighted average shares outstanding.......................... 86,916 87,202 86,992 86,773 Effect of dilutive securities: Restricted stock................................................. 8 -- 7 -- Stock options and warrants....................................... 1,301 935 1,280 1,057 --------- --------- --------- --------- Diluted weighted average shares outstanding........................ 88,225 88,137 88,279 87,830 --------- --------- --------- --------- --------- --------- --------- ---------
8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1998 (UNAUDITED) NOTE 6--EARNINGS PER SHARE (CONTINUED) Options to purchase approximately 15,950 and 117,654 shares of common stock were outstanding at June 30, 1997 and 1998, respectively, but were not included in the above computations of diluted weighted average outstanding shares because the options' exercise prices were greater than the average market price of the common shares. NOTE 7--STOCK OPTIONS The 1997 Equity Participation Plan (the Plan) allows options to be granted to key personnel to purchase shares of the Company's stock at a price not less than the current market price at the date of grant. The options vest annually and ratably over a four year period from the date of grant and expire ten years after the grant date. An aggregate of 10,000,000 shares have been authorized for issuance under the Plan. In addition, shares existing prior to the Merger under Doubletree and PHC's former plans were converted into options under the Plan. These converted options were issued with identical remaining terms and conditions, except such options were immediately vested, in accordance with the terms of the prior plans. The Plan also provides for the issuance of stock appreciation rights, restricted stock or other awards. As of June 30, 1998, approximately 7,615,000 options were outstanding under the Plan. NOTE 8--SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest, net of interest capitalized, amounted to $30.8 million and $23.1 million for the six months ended June 30, 1997 and 1998, respectively. Cash paid for income taxes, net of refunds received, amounted to $47.8 million and $12.4 million for the six months ended June 30, 1997 and 1998, respectively. NOTE 9--RFS HOTEL INVESTORS, INC. LEASES In April 1998, RFS Hotel Investors, Inc. (RFS REIT), the lessor of 56 hotels to the Company, announced that they had entered into an agreement in which Equity Inns, Inc. would acquire RFS REIT. In connection with this proposed transaction, RFS REIT has informed the Company that they intend to terminate the Company's leasehold interests. The lease agreement requires, in the event of a termination, that the Company receive a termination payment based on the fair market value of the remaining term of the leases (approximately 12 years). This payment is expected to be at least $95.0 million. In 1997, 47.1% and 49.1% of leased hotel revenues and leased hotel expenses, respectively, were realized from leasing hotels from RFS REIT. These leases contributed approximately 5.9% of the Company's 1997 operating income. The transaction, if consummated and the leases terminated, is not expected to have a material impact on earnings after considering the reinvestment of the proceeds. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On December 19, 1997, Doubletree Corporation (Doubletree) and Promus Hotel Corporation (PHC) merged in a transaction that qualified as a tax free exchange and was accounted for as a pooling-of-interests; accordingly, the accompanying consolidated financial statements and financial information contained herein have been restated to combine the historical results of both Doubletree and PHC for all periods presented. As of June 30, 1998, the Promus hotel system contained 1,275 hotels, representing over 186,000 hotel rooms, in all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and six foreign countries. Promus brands include some of America's premier hotel products, including Club Hotels by Doubletree, Doubletree Hotels, Doubletree Guest Suites, Embassy Suites, Hampton Inn, Hampton Inn & Suites and Homewood Suites. The Promus system also includes certain properties that are not Promus-branded. Of these 1,275 hotels, 932 are owned and operated by franchisees, and 343 are operated by the Company. Depending on the hotel brand, Promus charges each franchisee royalty fees of up to four percent of suite or room revenues in exchange for the use of one of its brand names and franchise-related services. Company operated properties include 59 wholly-owned hotels, 82 leased hotels, 22 hotels partially-owned through joint ventures and 180 hotels managed for third parties. As a manager of hotels, Promus is typically responsible for supervising or operating the hotel in exchange for fees based on a percentage of the hotel's gross revenues, operating profits, cash flow, or a combination thereof. The Company's results of operations for owned and leased hotels reflect the revenues and expenses of these hotel operations. Promus also licenses eight vacation interval ownership properties under the Embassy Vacation Resort and Hampton Vacation Resort brand names, for which the Company earns franchise fees on net interval sales and on revenues related to the rental of interval units. Promus also earns management fees for its role as manager of some of the vacation resort properties. Promus' primary focus is to grow its franchise and management businesses, while limiting its ownership of real estate. The Company owns a mix of Promus-brand hotels that can enhance its role as manager and franchisor for its brands, but periodically sells hotels as opportunities arise to realize a hotel's appreciated value. 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, leased, managed and franchised hotels; and Promus' ability to manage costs. The number of rooms at franchised and managed properties and revenue per available room (RevPAR) significantly affect Promus' results because franchise royalty and management fees are generally based upon a percentage of room revenues. Increases in franchise royalty and management fee revenues have a favorable impact on Promus' operating margin due to minimal incremental costs associated with this type of revenue. 10 Though its revenues come from various sources, nearly all components of Promus' revenues are favorably impacted by system-wide increases in RevPAR. On a comparable hotel basis, RevPAR increases were as follows: REVENUE PER AVAILABLE ROOM COMPARABLE HOTELS (a)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------------- ----------------------------------- 1997 1998 INCREASE 1997 1998 INCREASE --------- --------- ------------- --------- --------- ------------- Doubletree Hotels.................... $ 79.15 $ 83.80 5.9% $ 77.16 $ 82.76 7.4% Red Lion hotels converted to Doubletree Hotels (b).............. 66.54 68.32 2.7% 63.21 63.72 0.8% Embassy Suites....................... 88.88 93.00 4.6% 86.56 90.84 4.9% Hampton Inn.......................... 49.00 51.10 4.3% 45.30 47.25 4.3% Hampton Inn & Suites................. 59.70 65.38 9.5% 55.80 61.05 9.4% Homewood Suites...................... 73.52 78.07 6.2% 71.69 75.70 5.6% Other hotels (c)..................... 63.31 64.35 1.6% 58.06 60.25 3.8%
- ------------------------ (a) Revenue statistics are for comparable hotels, and include information only for those hotels in the system as of June 30, 1998 and managed or franchised by PHC or managed by Doubletree since April 1, 1997 for the second quarter results and January 1, 1997 for the six months results. Doubletree franchised hotels are not included in the statistical information. (b) Include results for the 4 Red Lion hotels converted to the Doubletree brand on April 1, 1997 and the 36 Red Lion hotels converted to the Doubletree brand on July 1, 1997. (c) Includes results for the 15 Red Lion hotels that have not been converted to the Doubletree brand as well as the results for comparable hotels managed under other franchisors' brands or as independent hotels. THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997 Second quarter 1998 revenues increased 11.8%, or $30.6 million, to $290.7 million compared to second quarter 1997 revenues of $260.1 million. Revenues from franchise and management fees increased $9.6 million, or 19.4%, for the second quarter 1998 as compared with the second quarter of 1997. The increase was due to growth in the number of franchised and managed properties as well as improved performance at existing franchised and managed properties. Since June 1997 the Company has added 174 franchise and management contracts (net of terminations). New contracts represented 53.3% of the second quarter 1998 increase in franchise and management fees. Incentive management fees increased 13.8% in the second quarter of 1998 compared to the second quarter of 1997 to approximately $8.1 million. Owned hotel revenues for the second quarter increased 4.2%, or $4.1 million, from the second quarter of 1997. Revenues from newly opened or acquired hotels, including the Harrison Conference Associates, Inc. (Harrison) hotels, and higher revenues from comparable hotels, were substantially offset by the effects of 1997 hotel sales. Owned hotel expenses increased by 6.9%, or $4.0 million in the second quarter of 1998 as compared to 1997, and operating margins decreased to 39.2% for the three month period ended June 30, 1998 from 40.7% for the same period in 1997. Leased hotel revenues increased $1.3 million, or 1.2%, for the second quarter of 1998 over the second quarter of 1997, due to property performance improvements and the impact of a full year of operations for 1997 additions. Leased hotel expenses increased 0.7% in the second quarter of 1998 compared to the second quarter of 1997, also primarily due to the increase in the number of leased properties. The 11 operating margin on leased hotels increased to 13.2% in the quarter ended June 30, 1998 from 12.7% for the same period in 1997. Purchasing and service fees increased 64.8%, or $2.4 million for the three months ended June 30, 1998, over the same period in 1997. The increase is due to an increase in the number of preferred vendor programs, whereby the Company earns an administrative fee as opposed to purchasing and reselling goods, combined with improvements related to the integration of existing purchasing programs. Revenues are also increasing as Promus makes its preferred vendor programs available to all system hotels. Other fees and income increased $13.2 million in the 1998 second quarter as compared with the same period in 1997. Included in the quarters ended June 30, 1998 and 1997 are certain unusual items. In the second quarter of 1998, the Company realized gains of $1.3 million on the sale of excess joint venture land. During the second quarter of 1997, the Company realized an $8.9 million loss related to the sale of 19 joint venture hotels. Excluding these unusual items, other fees and income for the quarter ended June 30, 1998 compared to the quarter ended June 30, 1997 would have increased $2.9 million or 28.9%, primarily due to an increase in earnings from unconsolidated joint ventures. General and administrative expenses in the 1998 second quarter include $0.3 million related to Harrison. Excluding the effect of Harrison, general and administrative expenses increased $0.3 million, or 1.5%, in the second quarter of 1998 over the second quarter of 1997. The Company expects to realize annual savings of $15.0 to $20.0 million in general and administrative costs after the integration of Doubletree and PHC is complete. Depreciation and amortization increased 6.4%, or $1.2 million, in the quarter ended June 30, 1998 compared to the same period in 1997, due primarily to the acquisition of Harrison in early January 1998. Interest and dividend income decreased $0.5 million or 8.7%, for the second quarter of 1998 compared to the second quarter of 1997, due to lower dividend income resulting from the 1997 sales of portions of the Company's common stock investments. Interest expense decreased $3.3 million or 18.2% in 1998 as compared to 1997, due to lower overall borrowing costs and a decrease in the amount of borrowings. The Company's current interest rate is more favorable than Doubletree and PHC's borrowing rates prior to the Merger. Operating results for the second quarter of 1998 reflect an overall tax rate of 39.3%, compared with an overall rate of 39.0% for the 1997 period. Minority interest share of net income reflects the profits allocable to third party owners of consolidated joint venture hotels, and remained consistent between the six month periods. Net income and earnings per diluted share for the quarter ended June 30, 1998 were $52.2 million and $0.59, respectively, compared to $47.4 million and $0.54, respectively for 1997. Comparison of these operating results is difficult due to the inclusion in the second quarters of 1998 and 1997 of certain unusual items. Included in second quarter 1998 results were a realized gain of $1.3 million on the sale of excess joint venture land, a $1.0 million gain on the sale of securities, and $1.3 million of previously deferred gains on the sale of hotels. Unusual items for the second quarter of 1997 include an $11.9 million gain on the sale of two hotels, a gain of $9.1 million on the sale of securities, and an $8.9 million loss on the sale of 19 joint venture hotels. Excluding these items, net income and earnings per diluted share for the second quarter of 1998 and 1997 would have been $50.0 million and $0.57 and $40.0 million and $0.45, respectively. SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997 Revenues for the first six months of 1998 increased 5.0%, or $25.7 million over the same period in 1997, to $545.3 million. Revenues from franchise and management fees increased $18.1 million, or 20.1% for the first half of 1998 as compared to the first half of 1997. The increase was due to growth in the number of franchised and 12 managed properties as well as improved performance at existing franchised and managed properties. Since June 1997 the Company has added 174 franchise and management contracts (net of terminations). New contracts represented 54.2% of the year-over-year increase in franchise and management fees. Incentive management fees increased 24.6% for the first half of 1998 over the same period in 1997 to approximately $15.4 million. Owned hotel revenues increased 2.8%, or $5.2 million for the first six months of 1998 compared to the first six months of 1997. Revenues from newly opened or acquired hotels, including the Harrison Conference Associates, Inc. (Harrison) hotels, and higher revenues from comparable hotels, were substantially offset by the effects of 1997 hotel sales. Owned hotel expenses increased by 4.4%, or $5.0 million for the six months ended June 30, 1998 as compared to the same period in 1997, and caused operating margins to decrease slightly to 38.1% for the first half of 1998 from 39.1% for the same period in 1997. Leased hotel revenues increased $4.9 million, or 2.4% for the first half of 1998 when compared to the same period in 1997, due to property performance improvements and the impact of a full year of operations for 1997 additions. Leased hotel expenses increased 1.8% in 1998 on a year-to-year comparison with 1997, also primarily due to the increase in the number of leased properties. The operating margin on leased hotels increased to 11.4% for the six months ended June 30, 1998 from 10.8% for the same period in 1997. Purchasing and service fees increased 59.9%, or $4.2 million for the six months ended June 30, 1998 over the same period in 1997. The increase is due to an increase in the number of preferred vendor programs, whereby the Company earns an administrative fee as opposed to purchasing and reselling goods, combined with improvements related to the integration of existing purchasing programs. Revenues are also increasing as Promus makes its preferred vendor programs available to all system hotels. Other fees and income decreased $6.8 million, or 21.9% in the first half of 1998 compared to the same period in 1997. Included in the six months ended June 30, 1998 and 1997 are certain unusual items. In the first half of 1998, the Company realized gains of $1.3 million on the sale of excess joint venture land. During the first half of 1997, the Company realized a break-up fee of $10.9 million (net of expenses) resulting from the terminated Renaissance transaction, a net gain of $1.9 million from the sale of 21 joint venture hotels and the Company's management rights for a planned hotel in Atlantic City. Excluding these unusual items, other fees and income on a year-to-year comparison increased $4.7 million or 25.7%, primarily due to an increase in earnings from unconsolidated joint ventures. General and administrative expenses decreased $4.0 million, or 9.3%, in the first six months of 1998. The first six months of 1997 included a $5.5 million charge related to the establishment of certain long-term executive compensation programs. Excluding this charge, general and administrative expenses increased $1.5 million, of which $0.6 million relates to Harrison. The Company expects to realize annual savings of $15.0 to $20.0 million in general and administrative costs after the integration of Doubletree and PHC is complete. Depreciation and amortization increased 5.7%, or $2.1 million, in the first half of 1998, due primarily to the acquisition of Harrison in early January 1998. Interest and dividend income decreased $0.7 million or 6.6%, in the 1998 six month period, primarily due to lower dividend income resulting from sales during 1997 of portions of the Company's common stock investments. Interest expense decreased $6.4 million or 17.5% in 1998 as compared to 1997, primarily due to lower overall borrowing costs and a decrease in the amount of borrowings. The Company's current interest rate is more favorable than Doubletree and PHC's borrowing rates prior to the Merger. Operating results for the first six months of 1998 reflect an overall tax rate of 39.3%, compared with an overall rate of 39.0% for the 1997 period. Minority interest share of net income reflects the profits allocable to third party owners of consolidated joint venture hotels, and remained consistent between the six month periods. 13 Net income and earnings per diluted share for the six months ended June 30, 1998, were $88.2 million and $1.00, respectively compared to $86.3 million and $0.98, respectively for 1997. Comparison of these operating results is difficult due to the inclusion in 1998 and 1997 of certain unusual items. Unusual items included in the operating results for the first six months of 1998 are a realized gain of $1.3 million on the sale of excess joint venture land, a $1.0 million gain on the sale of securities, and $1.3 million of previously deferred gains on the sale of hotels. Unusual items for 1997 include the $10.9 million breakup fee received in connection with the terminated Renaissance Hotel Group transaction, gains of $11.9 million on the sale of two hotels, gains of $1.9 million on the sale of 21 joint venture hotels and Promus' management rights for a hotel under development, gains of $11.2 million on the sale of securities, and $5.5 million of expenses for the establishment of long-term compensation plans. Excluding these items, net income and earnings per diluted share for 1998 and 1997 would have been $86.0 million and $0.98 and $67.7 million and $0.77, respectively. OVERALL The Company's operating income, excluding the effect of unusual items, increased 17.8% to $93.1 million for the second quarter of 1998 from $79.1 million for the same period in 1997. Promus' operating income, excluding the effect of unusual items, increased 18.5% to $163.0 million in the first half of 1998 from $137.6 million in 1997. Though increases in operating income are in part due to revenue growth, growth has also come from the changing mix of Promus' business. Due to the size and strength of Promus' infrastructure and systems, openings of additional franchised or managed properties require fewer incremental costs, and the growth which has occurred in Promus' franchise and management portfolio over the past several years has served to improve overall operating profitability. 14 DEVELOPMENT HOTELS Promus is an industry leader in hotel development. In the first six months of 1998, the Company added 76 net hotels and 7,454 net rooms to its hotel system, compared to the addition of 85 net hotels and 9,589 net rooms during the first six months of 1997. Net room additions, by brand, are as follows:
NET ROOMS ADDED ------------------------------------------ QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1997 1998 1997 1998 --------- --------- --------- --------- Doubletree Hotels (a)........................................... 11,643 (580) 14,636 (93) Hampton Inn..................................................... 2,723 3,208 5,788 5,223 Hampton Inn & Suites............................................ 19 960 654 1,440 Embassy Suites.................................................. (384) (358) 163 (158) Homewood Suites................................................. 449 940 540 1,739 Other (a)....................................................... (10,509) (254) (12,192) (697) --------- --------- --------- --------- 3,941 3,916 9,589 7,454 --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (a) Reflects the conversion of 40 Red Lion Hotels to Doubletree full-service hotels. Hampton Inn continued to lead the Company's unit growth, with 36 franchised properties added during the quarter and 54 added in the first half. Promus will continue growing the Hampton Inn brand as demand from franchisees and guests remains strong, but the pace of Hampton Inn approvals has declined slightly, in part because of the supply growth over the past several years in Hampton Inn's mid-price market segment. Doubletree lost a net of 93 rooms during the first six months of 1998, due to management's decision to terminate two franchised properties and the loss of three franchised properties due to changes in ownership, this was offset by the addition of five new franchise and management contracts. The greatest percentage growth occurred within the Homewood Suites and Hampton Inn & Suites brands, which added 1,739 rooms and 1,440 rooms, respectively, during the first six months of 1998, representing 33.0% and 41.7% increases in these brands' total rooms. During the first six months of 1997, Doubletree added 52 new hotels containing 14,636 rooms. Forty of these additions, containing 11,957 rooms, resulted from the conversion of Red Lion hotels to the Doubletree brand (these conversions also account for the decrease in other rooms). Promus' pipeline as of June 30, 1998 contained 354 properties that were either in the design or construction phase, as follows:
UNDER CONSTRUCTION/ IN CONVERSION DESIGN TOTAL ----------------- ----------- ----- Hampton Inn............................................................ 93 108 201 Homewood Suites........................................................ 16 20 36 Hampton Inn & Suites................................................... 18 32 50 Embassy Suites......................................................... 9 21 30 Doubletree Hotels and Guest Suites..................................... 6 12 18 Club Hotels by Doubletree.............................................. 4 12 16 Other.................................................................. 3 -- 3 --- --- --- 149 205 354 --- --- --- --- --- ---
15 The 354 properties in the development pipeline represent almost 45,000 rooms. Twenty-eight of the properties within the pipeline are being developed by the Company to be sold to strategic alliance partners or for operation as Company owned hotels; the remainder are being developed by franchisees. Promus plans to actively pursue development opportunities for all its brands. This development is expected to come through both the ground-up construction of new hotels discussed above and the acquisition of management contracts and/or existing hotels. In addition, Promus is assessing the market position of individual properties/markets, and could consider repositioning some hotels by rebranding existing properties or acquiring or selling selected properties. STRATEGIC ALLIANCES AND ACQUISITIONS On May 1, 1998, Promus announced an agreement with FelCor under which Promus will manage five Embassy Suites hotels and one Doubletree hotel that were purchased by FelCor. These hotels, all of which were previously franchised properties, will operate under 20-year license agreements and 10-year management contracts. Under the terms of this agreement, Promus has guaranteed payment of 12.5% of the first year's rent to the lessee in order to capitalize the lessee for REIT purposes. In January 1998, Promus announced its acquisition of Harrison Conference Associates, Inc. (Harrison) for $61.2 million in cash, including acquisition costs. Harrison is a leading conference center operator with over 1,200 rooms under management, including two owned and seven managed properties. VACATION RESORTS The Company has two licensed Promus Vacation Resort (PVR) products: Embassy Vacation Resorts and Hampton Vacation Resorts. PVR statistics are as follows:
DECEMBER 31, JUNE 30, 1997 1998 ------------- ----------- Total vacation resorts open...................................... 6 8 Total available timeshare units.................................. 1,046 1,234 Total available timeshare intervals.............................. 53,346 62,934 Total timeshare intervals sold*.................................. 10,304 14,950
- ------------------------ * Includes presold intervals for resorts under construction PVR also manages a non-branded resort property in Miami, Florida. OTHER In addition to ground-up development of hotels, strategic alliances with others, and incentives provided to hotel owners as a means of obtaining franchise and management contracts, the Company pursues other means of system growth, including strategic hotel acquisitions. The hotel industry is in an intense period of consolidation, which is expected to continue for several more years. Promus is well positioned to take advantage of these unique market conditions and may, from time to time, pursue attractive opportunities as they arise. CAPITAL SPENDING The Company expects to spend between $250.0 million and $300.0 million during 1998, excluding the Harrison purchase, to fund hotel and resort development, refurbish existing facilities, support its hotel management and business systems, loan funds to hotel owners, invest in joint ventures and pursue other corporate related projects. If the Company identifies other significant acquisition and/or investment opportunities, 1998 capital spending could increase from these planned levels. In order to maintain Promus' quality standards, ongoing refurbishment of existing company owned and leased hotel properties 16 will continue in 1998 with estimated annual expenditures of approximately $40.0 million. Promus' capital expenditures, including the Harrison purchase, totaled $185.4 million for the six months ended June 30, 1998. Cash necessary to finance projects currently identified, as well as additional projects to be pursued by Promus, will be made available from operating cash flows, the revolving credit facility, joint venture partners, specific project financing, sales of existing hotel assets and/or investments and, if necessary, Promus debt and/or equity offerings. LIQUIDITY AND CAPITAL RESOURCES Operating cash flow decreased $5.1 million in the first six months of 1998 from 1997 levels. This decrease is primarily due to the payment of $36.8 million of business combination expenses in the current year, partially offset by higher income before unusual items. Net income in the 1997 period included $11.9 million in nonoperating pre-tax gains from property sales, along with $18.5 million in other pre-tax income, which was of a nonrecurring nature. Cash flows used in investing activities increased in 1998 from 1997 levels, due to the 1998 $61.2 million purchase of Harrison and the acquisition of two Homewood Suites hotels for $17.9 million, partially offset by higher distributions from partnerships and affiliates, the release of escrow deposits, and repayments of loans to hotel owners. Financing activities served as a net source of cash during 1998 as a result of proceeds from the exercise of stock options partially offset by the net repayment of borrowings. On June 30, 1998, the Company had a working capital deficit of $60.5 million, compared to a $120.7 million deficit that existed at December 31, 1997. The Company's cash management program uses all excess cash to pay down amounts outstanding under the Promus Facility. Promus does not believe that the current ratio is an appropriate measure of its short-term liquidity without considering the aggregate availability of its 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. YEAR 2000 With the approach of the year 2000, there has been concern over the impact of this event on computer systems worldwide. Promus has assessed the impact of the year 2000 on its business, and does not believe this event will materially or adversely affect its future operations, financial results or financial position. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives either as assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 allows an entity to designate a derivative instrument, if certain conditions are met, as one of the following three types: 1) a Fair Value Hedge, which is a hedge of the exposure to changes in the fair value of a recognized asset or liability, or of an unrecognized firm commitment, 2) a Cash Flow Hedge, which is a hedge of the exposure to variability in the cash flow of a recognized asset or liability, or of a forecasted transaction, or 3) a Foreign Currency Hedge, which is a hedge of the foreign currency exposure 17 of an unrecognized firm commitment, an available-for-sale security, a forecasted transaction, or a net investment in a foreign operation. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. The Company's derivatives at June 30, 1998 would be considered as Cash Flow Hedges. SFAS No. 133 amends SFAS No. 52, "Foreign Currency Translation", SFAS No. 80, "Accounting for Futures Contracts", SFAS No. 105, "Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk" and SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier application is encouraged, but the Statement should not be applied retroactively to financial statements of prior periods. The adoption of SFAS No. 133 is not anticipated to have a material impact on the financial position or results of operations of the Company. FORWARD LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward looking statements. Certain information included in this document and other materials filed or to be filed by the Company with the Securities and Exchange Commission (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 and customer demand, which can impact future performance; (B) changes in the size of Promus' hotel system, including anticipated scope and opening dates of new developments and planned future capital spending; (C) relationships with third parties, including franchisees, lessors, hotel owners, lenders and others; (D) litigation or other judicial actions; (E) changes in the economy; and (F) adverse changes in interest rates for both Promus and its franchisees and business partners. 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. 18 PERFORMANCE STATISTICS
NUMBER OF HOTELS NUMBER OF ROOMS -------------------- -------------------- JUNE 30, JUNE 30, -------------------- INCREASE -------------------- INCREASE 1997 1998 (DECREASE) 1997 1998 (DECREASE) --------- --------- --------------- --------- --------- ----------- Doubletree Hotels Company owned.................................... 16 16 -- 4,749 4,748 (1) Leased........................................... 18 18 -- 4,756 4,809 53 Joint venture (a)................................ 3 3 -- 812 812 -- Management contract.............................. 83 86 3 23,589 24,268 679 Franchised....................................... 42 46 4 9,426 10,082 656 --------- --------- --- --------- --------- ----------- 162 169 7 43,332 44,719 1,387 --------- --------- --- --------- --------- ----------- --------- --------- --- --------- --------- ----------- Embassy Suites Company owned.................................... 7 6 (1) 1,566 1,366 (200) Joint venture (a)................................ 21 19 (2) 5,470 4,946 (524) Management contract.............................. 48 58 10 11,592 14,268 2,676 Franchised....................................... 60 59 (1) 14,182 13,353 (829) --------- --------- --- --------- --------- ----------- 136 142 6 32,810 33,933 1,123 --------- --------- --- --------- --------- ----------- --------- --------- --- --------- --------- ----------- Hampton Inn Company owned.................................... 12 11 (1) 1,654 1,506 (148) Leased........................................... 19 19 -- 2,359 2,359 -- Joint venture (a)................................ 19 -- (19) 2,376 -- (2,376) Management contract.............................. 6 7 1 738 929 191 Franchised....................................... 623 743 120 66,199 78,016 11,817 --------- --------- --- --------- --------- ----------- 679 780 101 73,326 82,810 9,484 --------- --------- --- --------- --------- ----------- --------- --------- --- --------- --------- ----------- Hampton Inn & Suites Management contract.............................. 2 2 -- 203 287 84 Franchised....................................... 21 40 19 2,297 4,607 2,310 --------- --------- --- --------- --------- ----------- 23 42 19 2,500 4,894 2,394 --------- --------- --- --------- --------- ----------- --------- --------- --- --------- --------- ----------- Homewood Suites Company owned.................................... 8 16 8 891 1,828 937 Management contract.............................. 4 6 2 471 677 206 Franchised....................................... 31 44 13 3,077 4,497 1,420 --------- --------- --- --------- --------- ----------- 43 66 23 4,439 7,002 2,563 --------- --------- --- --------- --------- ----------- --------- --------- --- --------- --------- ----------- Other Hotels Company owned.................................... 7 10 3 1,039 1,620 581 Leased........................................... 49 45 (4) 7,293 6,848 (445) Management contract.............................. 18 21 3 4,515 4,430 (85) --------- --------- --- --------- --------- ----------- 74 76 2 12,847 12,898 51 --------- --------- --- --------- --------- ----------- --------- --------- --- --------- --------- ----------- Total System Company owned.................................... 50 59 9 9,899 11,068 1,169 Leased........................................... 86 82 (4) 14,408 14,016 (392) Joint venture (a)................................ 43 22 (21) 8,658 5,758 (2,900) Management contract.............................. 161 180 19 41,108 44,859 3,751 Franchised....................................... 777 932 155 95,181 110,555 15,374 --------- --------- --- --------- --------- ----------- 1,117 1,275 158 169,254 186,256 17,002 --------- --------- --- --------- --------- ----------- --------- --------- --- --------- --------- -----------
- ------------------------ (a) For statistical purposes only, the Company classifies unconsolidated joint ventures in which it holds less than a 20% interest as management contracts and consolidated joint ventures in which it owns more than a 50% interest as Company owned. 19
MANAGED FRANCHISED TOTAL -------------------- -------------------- -------------------- JUNE 30, JUNE 30, JUNE 30, -------------------- -------------------- -------------------- 1997 1998 1997 1998 1997 1998 --------- --------- --------- --------- --------- --------- Promus Vacation Resorts (a) Resort properties................................... 2 5 2 3 4 8 Timeshare units..................................... 188 360 405 874 593 1,234 Timeshare intervals available....................... 9,588 18,360 20,655 44,574 30,243 62,934 Timeshare intervals sold (b)........................ 3,789 8,673 2,712 6,277 6,501 14,950 INCREASE ----------- Promus Vacation Resorts (a) Resort properties................................... 4 Timeshare units..................................... 641 Timeshare intervals available....................... 32,691 Timeshare intervals sold (b)........................ 8,449
- ------------------------ (a) 1997 statistics do not include 40 nonbranded resort units managed by Promus. (b) Includes presales for resorts under construction but not yet open.
SECOND QUARTER ENDED JUNE 30, (a) SIX MONTHS ENDED JUNE 30, (a) -------------------------------- -------------------------------- 1997 1998 CHANGE 1997 1998 CHANGE ------- ------- ---------- ------- ------- ---------- Doubletree Hotels Occupancy....................................... 75.6% 74.6% (1.0) pts 73.1% 73.0% (0.1) pts ADR............................................. $ 104.74 $ 112.38 7.3% $ 105.53 $ 113.46 7.5% RevPAR.......................................... $ 79.15 $ 83.80 5.9% $ 77.16 $ 82.76 7.4% Red Lion Hotels converted to Doubletree Hotels (b) Occupancy....................................... 73.6% 74.1% 0.5pts 69.3% 69.3% --pts ADR............................................. $ 90.40 $ 92.25 2.0% $ 89.94 $ 91.99 2.3% RevPAR.......................................... $ 66.54 $ 68.32 2.7% $ 63.21 $ 63.72 0.8% Embassy Suites Occupancy....................................... 78.5% 77.3% (1.2) pts 76.1% 75.1% (1.0) pts ADR............................................. $ 113.22 $ 120.32 6.3% $ 113.75 $ 121.00 6.4% RevPAR.......................................... $ 88.88 $ 93.00 4.6% $ 86.56 $ 90.84 4.9% Hampton Inn Occupancy....................................... 76.2% 75.8% (0.4) pts 71.6% 71.1% (0.5) pts ADR............................................. $ 64.30 $ 67.40 4.8% $ 63.30 $ 66.44 5.0% RevPAR.......................................... $ 49.00 $ 51.10 4.3% $ 45.30 $ 47.25 4.3% Hampton Inn & Suites Occupancy....................................... 74.5% 78.0% 3.5pts 71.5% 74.4% 2.9 ADR............................................. $ 80.10 $ 83.77 4.6% $ 78.02 $ 82.08 5.2% RevPAR.......................................... $ 59.70 $ 65.38 9.5% $ 55.80 $ 61.05 9.4% Homewood Suites Occupancy....................................... 79.8% 80.2% 0.4pts 77.3% 77.3% --pts ADR............................................. $ 92.16 $ 97.34 5.6% $ 92.80 $ 97.97 5.6% RevPAR.......................................... $ 73.52 $ 78.07 6.2% $ 71.69 $ 75.70 5.6% Other Hotels (c) Occupancy....................................... 77.7% 73.6% (4.1) pts 72.5% 70.4% (2.1) pts ADR............................................. $ 81.46 $ 87.42 7.3% $ 80.11 $ 85.86 7.2% RevPAR.......................................... $ 63.31 $ 64.35 1.6% $ 58.06 $ 60.25 3.8%
- ------------------------ (a) Revenue statistics are for comparable hotels, and include information only for those hotels in the system as of June 30, 1998 and managed or franchised by PHC or managed by Doubletree since April 1, 1997 for the second quarter results and January 1, 1997 for the six months results. Doubletree franchised hotels are not included in the statistical information. (b) Includes results for the 4 Red Lion hotels converted to the Doubletree brand on April 1, 1997 and the 36 Red Lion hotels converted to the Doubletree brand on July 1, 1997. (c) Includes results for the 15 Red Lion hotels that have not been converted to the Doubletree brand as well as the results for comparable hotels managed under other franchisors' brands or as independent hotels. 20 ITEM 5. OTHER INFORMATION MANAGEMENT ANNOUNCEMENT On August 4, 1998, the Company issued a press release announcing certain anticipated changes in the composition of the Board of Directors and the executive management of the Company. On August 5, 1998, the Company filed a Current Report on Form 8-K containing the press release with the Securities and Exchange Commission. STOCKHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING Any stockholder who meets the requirements of the proxy rules under the Securities Exchange Act of 1934 (the "1934 Act") may submit to the Board of Directors proposals to be considered for submission to the stockholders at the 1999 Annual Meeting of Stockholders. Any such proposal must comply with the requirements of Rule 14a8 under the 1934 Act and be submitted in writing by notice delivered or mailed by firstclass United States mail, postage prepaid, to the Corporate Secretary, Promus Hotel Corporation, 755 Crossover Lane, Memphis, Tennessee 38117, and must be received no later than November 26, 1998. Pursuant to Rule 14a8, any such notice shall set forth, among other things: (a) the name and address of the stockholder and the text of the proposal to be introduced; (b) the number of shares of stock held of record, owned beneficially and represented by proxy by such stockholder as of the date of such notice, the dates upon which he acquired the securities, and documentary support for a claim of beneficial ownership; and (c) a representation that the stockholder intends to continue ownership of such securities through the date on which the meeting is held. In addition, the Company's Bylaws provide for notice procedures to recommend a person for nomination as a director and to propose business to be considered by stockholders at a meeting. In addition to any other applicable requirements, the Bylaws of Promus Hotel Corporation require that for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof, containing the information required by the Bylaws and in writing, to the Corporate Secretary of Promus Hotel Corporation. To be timely, a stockholder's notice containing the information required by the Bylaws must be delivered to or mailed and received at the principal executive offices of Promus not less than sixty days nor more than ninety days prior to the meeting; provided, however, that in the event that less than seventy days notice or prior public disclosure of the date of the annual meeting is given or made to stockholders, notice by a stockholder, to be timely, must be received no later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever first occurs. ITEM 6. EXHIBITS AND REPORTS ON FORM 8K (a) Exhibits EX-11 Computation of Per Share Earnings. (1) EX-27 Financial Data Schedule. (1) (b) No reports on Form 8-K were filed during the quarter ended June 30, 1998, however, the Company filed a report on Form 8-K on August 5, 1998, for an event dated August 4, 1998. - ------------------------ Footnotes File No. 113719. (1) Filed herewith. 21 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 By: /s/ WILLIAM L. PEROCCHI ----------------------------------------- William L. Perocchi EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER AND DULY August 7, 1998 AUTHORIZED OFFICER)
22 EXHIBIT INDEX
SEQUENTIAL EXHIBIT NO. DESCRIPTION PAGE NO. - ------------ --------------------------------------------------------------------------------------- --------------- (a) EX-11 Computation of Per Share Earnings. (1) (b) EX-27 Financial Data Schedule. (1) (c) No reports on Form 8-K were filed during the quarter ended June 30, 1998, however, the Company filed a report on Form 8-K on August 5, 1998, for an event dated August 4, 1998.
- ------------------------ Footnotes (1) Filed herewith. 23 EX-11 2 COMP. OF PER SHARE EARNINGS EXHIBIT 11 PROMUS HOTEL CORPORATION COMPUTATIONS OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1997 1998 1997 1998 --------- --------- --------- --------- Net income............................................................ $ 47,376 $ 52,189 $ 86,278 $ 88,205 --------- --------- --------- --------- --------- --------- --------- --------- Basic Earnings per Share: Weighted average outstanding shares................................... 86,916 87,202 86,992 86,773 --------- --------- --------- --------- --------- --------- --------- --------- Net income............................................................ $ 0.55 $ 0.60 $ 0.99 $ 1.02 --------- --------- --------- --------- --------- --------- --------- --------- Diluted Earnings per Share: Weighted average outstanding shares................................... 86,916 87,202 86,992 86,773 Effect of dilutive securities: Restricted stock...................................................... 8 -- 7 -- Stock options and warrants............................................ 1,301 935 1,280 1,057 --------- --------- --------- --------- Weighted average shares assuming conversion........................... 88,225 88,137 88,279 87,830 --------- --------- --------- --------- --------- --------- --------- --------- Net income............................................................ $ 0.54 $ 0.59 $ 0.98 $ 1.00 --------- --------- --------- --------- --------- --------- --------- ---------
EX-27 3 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JUN-30-1998 11,405 0 91,950 0 0 128,334 1,078,464 0 2,457,691 188,861 693,647 0 0 873 1,221,922 2,457,691 0 545,270 0 380,937 (2,285) 0 30,228 145,312 57,107 88,205 0 0 0 88,205 1.02 1.00
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