<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-Q
---------------
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
(STATE OF INCORPORATION)
I.R.S. NO. 62-1596939
(I.R.S. EMPLOYER IDENTIFICATION NO.)
755 CROSSOVER LANE
MEMPHIS, TENNESSEE 38117
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
(901) 374-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 1997.
<TABLE>
<S> <C>
51,433,153
Common Stock........................................... shares
</TABLE>
Page 1 of 25
Exhibit Index Page 24
<PAGE>
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.
2
<PAGE>
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DEC. 31,
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................................... $ 4,457 $ 3,700
Receivables, including notes receivable of $170 and $264, less allowance for doubtful
accounts of $1,143 and $1,180......................................................... 29,485 18,307
Deferred income taxes................................................................... 792 932
Prepayments and other................................................................... 4,112 7,626
---------- ----------
Total current assets................................................................ 38,846 30,565
---------- ----------
Land, buildings, furniture and equipment.................................................. 452,529 439,072
Less: accumulated depreciation............................................................ (124,731) (118,659)
---------- ----------
327,798 320,413
Investments in and advances to nonconsolidated affiliates (Note 6)........................ 185,023 186,766
Investment in franchise system............................................................ 50,519 48,750
Deferred costs and other.................................................................. 45,048 45,471
---------- ----------
$ 647,234 $ 631,965
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable........................................................................ $ 17,396 $ 20,753
Accrued expenses........................................................................ 43,704 37,361
Current portion of long-term debt....................................................... 305 288
---------- ----------
Total current liabilities........................................................... 61,405 58,402
Long-term debt (Note 3)................................................................... 229,487 243,682
Deferred credits and other................................................................ 42,579 40,834
Deferred income taxes..................................................................... 40,106 40,958
---------- ----------
373,577 383,876
---------- ----------
Commitments and contingencies (Note 4)
Stockholders' equity
Common stock, $0.10 par value, 360,000,000 shares authorized, 51,433,153 and 51,399,117
shares outstanding, net of 5,698 shares held in treasury in both periods.............. 5,143 5,140
Capital surplus......................................................................... 137,383 136,513
Retained earnings....................................................................... 113,793 90,073
Unrealized gain on marketable equity securities, net of related deferred tax liability
of $11,420 and $10,844................................................................ 17,862 16,961
Deferred compensation related to restricted stock....................................... (524) (598)
---------- ----------
273,657 248,089
---------- ----------
$ 647,234 $ 631,965
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
balance sheets.
3
<PAGE>
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
<S> <C> <C>
MARCH 31, MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996
----------- -----------
Revenues
Company owned hotels.....................................................................
Rooms.................................................................................. $ 30,541 $ 31,313
Food and beverage...................................................................... 1,643 1,525
Other.................................................................................. 1,753 1,892
Franchise and management fees............................................................ 28,010 21,320
Other.................................................................................... 6,435 6,112
----------- -----------
Total revenues....................................................................... 68,382 62,162
----------- -----------
Operating expenses
Company owned hotels.....................................................................
Rooms.................................................................................. 13,977 14,680
Food and beverage...................................................................... 1,547 1,392
Other.................................................................................. 3,507 3,244
Other operating expenses................................................................. 6,343 5,893
Depreciation of buildings and equipment.................................................. 5,851 5,491
Corporate expense........................................................................ 4,152 3,967
----------- -----------
Total operating expenses............................................................. 35,377 34,667
----------- -----------
Operating income before property transactions.............................................. 33,005 27,495
Property transactions...................................................................... 7,901 (265)
----------- -----------
Operating income........................................................................... 40,906 27,230
Interest expense, net of interest capitalized (Note 3)..................................... (6,497) (7,708)
Dividend income............................................................................ 1,605 1,197
Interest and other income.................................................................. 3,128 927
----------- -----------
Income before income taxes................................................................. 39,142 21,646
Provision for income taxes................................................................. (15,422) (8,897)
----------- -----------
Net income................................................................................. $ 23,720 $ 12,749
----------- -----------
----------- -----------
Earnings per share......................................................................... $ 0.46 $ 0.25
----------- -----------
----------- -----------
Weighted average shares outstanding........................................................ 51,849 51,577
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE>
PROMUS HOTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
<S> <C> <C>
MARCH 31, MARCH 31,
(IN THOUSANDS) 1997 1996
----------- -----------
Cash flows from operating activities
Net income............................................................................... $ 23,720 $ 12,749
Adjustments to reconcile net income to cash flows from operating activities
Depreciation and amortization.......................................................... 6,636 6,297
Other noncash items.................................................................... (309) 379
Equity in earnings and distributions from nonconsolidated affiliates................... 103 (583)
Net (gains) losses from property transactions.......................................... (7,799) 36
Gain from sale of investment in common stock........................................... (2,141) --
Net change in long-term accounts....................................................... 1,073 2,081
Net change in working capital accounts................................................. 1,794 (2,874)
----------- -----------
Cash flows provided by operating activities.......................................... 23,077 18,085
----------- -----------
Cash flows from investing activities
Land, buildings, furniture and equipment additions....................................... (13,552) (8,468)
Investment in and advances to nonconsolidated affiliates................................. (8,100) (34,114)
Proceeds from sale of investments........................................................ 13,951 --
Advances under mezzanine loan agreements................................................. (785) (1,206)
Repayments under mezzanine loan agreements............................................... 1,000 1,000
Net investment in franchise system....................................................... (3,496) (5,626)
Recovery of investment in franchise system............................................... 1,728 1,752
Other.................................................................................... 505 218
----------- -----------
Cash flows used in investing activities.............................................. (8,749) (46,444)
----------- -----------
Cash flows from financing activities
Net (retirements) borrowings under revolving credit facility............................. (14,100) 28,250
Other.................................................................................... 529 63
----------- -----------
Cash flows (used in) provided by financing activities................................ (13,571) 28,313
----------- -----------
Net increase (decrease) in cash and cash equivalents....................................... 757 (46)
Cash and cash equivalents, beginning of period............................................. 3,700 2,668
----------- -----------
Cash and cash equivalents, end of period................................................... $ 4,457 $ 2,622
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 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 of
these nonconsolidated affiliates in revenues--other and its proportionate share
of interest expense of such nonconsolidated affiliates is included in interest
expense in the consolidated statements of income (see Note 6 for combined
summarized financial information regarding these nonconsolidated affiliates).
Management believes Promus' inclusion of its proportionate share of the interest
expense of its equity investees in interest expense is the preferable
presentation due to the nature of its equity investments. Certain prior year
amounts have been reclassified to conform with the current year presentation.
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 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
the first quarter of 1997 and 1996 were $537.1 million and $426.5 million,
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
Resort properties.
As of March 31, 1997 the Company operated 128 Promus-brand hotels and
resorts. Company operated properties include wholly-owned, partially owned
through joint ventures and hotels managed for third parties. Promus has followed
an asset strategy to own and manage a mix of Promus 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, or both, at the related
managed property.
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
6
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
PROMUS FACILITY (CONTINUED)
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 6.5% for first quarter 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 March 31, 1997, Promus was in compliance
with all such covenants.
INTEREST RATE AGREEMENTS
As of March 31, 1997, Promus was a party to several interest rate swap
agreements that help the Company manage the relative mix of its debt between
fixed and variable rate instruments. These agreements effectively modify the
interest characteristics of its outstanding debt without an exchange of the
underlying principal amount. Pursuant to the agreements, Promus receives a
variable interest rate tied to LIBOR in exchange for its payments at a fixed
interest rate. The fixed rates to be paid by Promus are summarized in the
following table:
<TABLE>
<CAPTION>
NEXT
QUARTERLY
NOTIONAL AMOUNT VARIABLE
(ALL ASSOCIATED EFFECTIVE RATE
WITH PROMUS SWAP RATE RATE AT ADJUSTMENT SWAP
FACILITY) PAID (FIXED) MARCH 31 DATE MATURITY
- ---------------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
5$0.0 million... 6.990% 7.315% 06/20/1997 03/20/2000
1$2.5 million... 6.920% 7.245% 06/16/1997 12/15/1998
1$2.5 million... 6.680% 7.005% 06/16/1997 12/15/1999
1$2.5 million... 6.740% 7.065% 04/22/1997 01/22/1999
1$2.5 million... 6.520% 6.845% 04/22/1997 01/24/2000
</TABLE>
NOTE 4--COMMITMENTS AND CONTINGENCIES
CONTRACTUAL COMMITMENTS
Promus is liable under certain lease agreements pursuant to which it has
assigned the direct obligation to third parties. Additionally, Promus manages
certain hotels for others under agreements that provide for payments or loans to
the hotel owners if stipulated levels of financial performance are not
maintained. The Company has also provided guarantees for certain loans related
to joint venture and other investments. Promus believes the likelihood is remote
that material payments will be required under these agreements. Promus'
estimated maximum exposure under such agreements is approximately $36 million
over the next 30 years.
7
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
NOTE 4--COMMITMENTS AND CONTINGENCIES (CONTINUED)
FELCOR AGREEMENTS
During 1995 Promus entered into agreements with FelCor Suite Hotels, Inc.
and FelCor Suites Limited Partnership (FelCor) whereby FelCor acquired and
converted all-suite upscale hotels (including the Crown Sterling Suites hotels)
to the Embassy Suites brand. In return, 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. Hotels converted
to the Embassy Suites brand under these agreements operate under 20-year license
agreements and 10-year management contracts. Subject to some restrictions, the
limited partnership interests are convertible to common stock, and the common
stock may be sold on the open market.
During the first quarter of 1997, Promus sold approximately $6.9 million 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 a new 150-suite prototype designed for suburban and smaller
markets. This sale resulted in a pre-tax gain of approximately $2.1 million.
Based on the market value of the remaining investment in FelCor common stock as
of March 31, 1997, Promus has recorded an unrealized gain on marketable equity
securities of $28.1 million (before tax). This amount will fluctuate based on
the market value of FelCor common stock, but no earnings impact will be realized
until the stock is actually sold.
As of March 31, 1997, FelCor owned or had an interest in 51 Embassy Suites
hotels, which represents 6.0% and 11.0% of all Promus brand hotels and hotel
rooms/suites, respectively. Promus owns a 50 percent interest in eleven of the
51 hotels. Those 51 hotels contributed approximately 17.5% of total system
revenues and 17.3% of the Company's franchise and management fee revenue for
1997.
EQUITY INNS AND WINSTON AGREEMENTS
During 1996, Promus entered into strategic development alliances with Equity
Inns, Inc. (Equity) and Winston Hotels, Inc. (Winston) whereby Promus will
invest up to $15.0 million in the common stock of both the Equity and Winston
real estate investment trusts (REITs) as they purchase existing or to be
constructed Promus hotels from the Company. Promus currently plans to build
approximately seven to ten Homewood Suites and/or Hampton Inn & Suites
properties per year at an average cost of $7-10 million per property. Of those
hotels built each year, several are expected to be offered for sale to Equity
and Winston at Promus' cost of construction. Promus will receive 20-year license
agreements and 10-year management contracts for all hotels developed or
purchased pursuant to these alliances. As of March 31, 1997, Promus had invested
$7.1 million and $1.5 million in the Equity and Winston REITs, respectively.
Based on the market value of that common stock as of March 31, 1997, Promus
recorded an unrealized gain of $1.2 million (before tax) directly to
stockholders' equity.
LITIGATION
The Company is a party to various inquiries, administrative proceedings and
litigation relating to contracts, sales of property and other matters arising in
the normal course of business. While any proceeding or litigation has an element
of uncertainty, management believes that the final outcome of these matters will
not have a materially adverse effect upon Promus' consolidated financial
position or its results of operations.
8
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
NOTE 4--COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AND SEVERANCE AGREEMENTS
Promus has severance agreements with 15 senior officers of the Company that
provide for a payment of 2.99 times the average annual cash compensation (salary
and bonus) paid to each such executive for the five preceding calendar years,
including such compensation paid during service with Parent. The agreements also
provide for accelerated payment of any compensation or awards payable to such
executive under any Promus incentive compensation or stock option plan in the
event of termination of an executive's employment, as described in the
agreements, subsequent to a change in control of Promus, as defined. The maximum
amount of compensation that would be payable under all agreements if a change in
control occurred and if such executives were terminated as of March 31, 1997,
would be approximately $28.7 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 CORPORATION
In May 1997 the Company announced the formation of Promus Acceptance
Corporation (PROMAC). Through PROMAC, participating financial institutions will
initially establish a $120.0 million investment pool to provide first mortgage
financing to Promus franchisees for newly constructed Hampton Inn, Hampton Inn &
Suites and Homewood Suites hotels. 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 will fund up to $2.0 million to PROMAC
under a start-up loan, which will earn interest at prime, as defined, which is
estimated to be repaid over eight years.
9
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
NOTE 5--SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR INTEREST AND TAXES
The following table reconciles Promus' interest expense, net of interest
capitalized, to cash paid for interest (in thousands):
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
------------------------
<S> <C> <C>
MARCH 31, MARCH 31,
1997 1996
----------- -----------
Interest expense, net of amount capitalized (Note 3)................... $ 6,497 $ 7,708
Adjustments to reconcile to cash paid for interest
Promus' share of interest expense of nonconsolidated
affiliates (Note 6)................................................ (2,316) (3,007)
Capitalized interest................................................. 361 330
Net change in accruals............................................... (376) (334)
Amortization of deferred finance charges............................. (142) (192)
Other................................................................ (39) (38)
----------- -----------
Cash paid for interest................................................. $ 3,985 $ 4,467
----------- -----------
----------- -----------
Cash paid for income taxes............................................. $ 1,232 $ 4,588
----------- -----------
----------- -----------
</TABLE>
NOTE 6--NONCONSOLIDATED AFFILIATES
Combined summarized statements of income for nonconsolidated affiliates,
which Promus accounted for using the equity method, were as follows (in
thousands):
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
------------------------
<S> <C> <C>
MARCH 31, MARCH 31,
1997 1996
----------- -----------
Combined Summarized Statements of Income
Revenues............................................................. $ 28,469 $ 40,941
----------- -----------
----------- -----------
Operating income before property transactions........................ $ 7,948 $ 9,039
----------- -----------
----------- -----------
Property transactions................................................ $ 15,016 $ --
----------- -----------
----------- -----------
Net income........................................................... $ 17,978 $ 2,586
----------- -----------
----------- -----------
</TABLE>
Promus' share of its nonconsolidated affiliates' combined net income is
reflected in the accompanying consolidated condensed statements of income as
follows (in thousands):
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
------------------------
<S> <C> <C>
MARCH 31, MARCH 31,
1997 1996
----------- -----------
Pre-interest operating income (included in revenues--other)............ $ 5,129 $ 4,945
----------- -----------
----------- -----------
Interest expense (included in interest expense)........................ $ (2,316) $ (3,007)
----------- -----------
----------- -----------
Property transactions (included in property transactions).............. $ 7,308 $ --
----------- -----------
----------- -----------
</TABLE>
10
<PAGE>
PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
NOTE 6--NONCONSOLIDATED AFFILIATES (CONTINUED)
The components of investments in and advances to nonconsolidated affiliates
reflected in the consolidated condensed balance sheets were as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, DEC. 31,
1997 1996
---------- ----------
<S> <C> <C>
At market............................................................. $ 106,323 $ 111,859
At equity............................................................. 67,858 64,217
At cost............................................................... 10,842 10,690
---------- ----------
$ 185,023 $ 186,766
---------- ----------
---------- ----------
</TABLE>
NOTE 7--SUMMARIZED FINANCIAL INFORMATION
Promus Hotels, Inc. (PHI) is a wholly-owned subsidiary of Promus and the
primary entity through which the operations of Promus are conducted. PHI is also
Promus' principal asset. Summarized financial information for PHI, prepared on
the same basis as Promus, is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DEC. 31,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets........................................................ $ 37,467 $ 29,397
Land, buildings, furniture and equipment, net......................... 327,798 320,413
Other assets.......................................................... 276,601 276,876
---------- ----------
641,866 626,686
---------- ----------
LIABILITIES
Current liabilities................................................... 52,469 50,561
Long-term debt........................................................ 229,487 243,682
Other liabilities..................................................... 90,749 88,871
---------- ----------
372,705 383,114
---------- ----------
Net assets............................................................ $ 269,161 $ 243,572
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
------------------------
<S> <C> <C>
MARCH 31, MARCH 31,
1997 1996
----------- -----------
Revenues............................................................... $ 68,382 $ 62,162
----------- -----------
----------- -----------
Operating income....................................................... $ 41,062 $ 27,358
----------- -----------
----------- -----------
Net income............................................................. $ 23,815 $ 12,825
----------- -----------
----------- -----------
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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 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
the first quarter of 1997 and 1996 were $537.1 million and $426.5 million,
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
Resort properties.
As of March 31, 1997 the Company operated 128 Promus-brand hotels and
resorts. Company operated properties include wholly-owned, partially owned
through joint ventures and hotels managed for third parties. Promus has followed
an asset strategy to own and manage a mix of Promus 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, or both, at the related
managed property.
RESULTS OF OPERATIONS
The principal factors affecting Promus' results are: continued growth in the
number of hotels; occupancy and room rates achieved by the hotel brands; number
and relative mix of owned, managed and franchised hotels; and Promus' ability to
manage costs. The number of rooms/suites at franchised and managed properties
and revenue per available room/suite (RevPAR/S) significantly affect Promus'
results because franchise royalty and management fees are based upon a
percentage of rooms/suites revenues. Increases in franchise and management fee
revenues have a favorable impact on Promus' operating margin due to minimal
incremental costs associated with this type of revenue.
Results of operations for the first quarter ended March 31 were as follows
(in millions, except percentages and per share data):
<TABLE>
<CAPTION>
FIRST QUARTER ENDED PERCENTAGE
1997 1996 INCREASE
--------- --------- -------------
<S> <C> <C> <C>
Revenues...................................................................... $ 68.4 $ 62.2 10.0%
Operating income before property transactions................................. 33.0 27.5 20.0
Operating income.............................................................. 40.9 27.2 50.4
Income before property transactions, net of tax............................... 18.9 12.9 46.5
Net income.................................................................... 23.7 12.7 86.6
Earnings per share............................................................ 0.46 0.25 84.0
Operating margin before property transactions................................. 48.3% 44.2% 4.1pts
Operating margin.............................................................. 59.8% 43.8% 16.0pts
</TABLE>
The increases in revenues, operating income and operating margins are
primarily a function of the addition of new franchised hotels, changes in
ownership of existing franchised hotels, system-wide
12
<PAGE>
increases in ADR and cost containment. The 1996 sales of three company owned
hotels (a Hampton Inn and two Homewood Suites) also impact year over year
comparisons. Promus' revenues through March 31 were composed of the following
(dollars in millions):
<TABLE>
<CAPTION>
FIRST
QUARTER PERCENTAGE
ENDED INCREASE/
1997 1996 (DECREASE)
----- ----- ----------
<S> <C> <C> <C>
Company owned hotels
Rooms............................................................................................. $30.5 $31.3 (2.6)%
Food and beverage................................................................................. 1.7 1.6 6.3
Other............................................................................................. 1.8 1.9 (5.3)
Franchise and management fees....................................................................... 28.0 21.3 31.5
Other............................................................................................... 6.4 6.1 4.9
----- -----
$68.4 $62.2 10.0
----- -----
----- -----
</TABLE>
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), first quarter occupancy rates and average daily rates
(ADR) increased in 1997, resulting in RevPAR/S increases ranging from 6.5% in
the Embassy Suites brand to 14.2% in the new Hampton Inn & Suites brand.
Company owned hotel revenues (which includes rooms and other company owned
hotel revenues, except for food and beverage) for the first three months of 1997
decreased 2.7% or $0.9 million from 1996, while the related expenses decreased
2.5% or $0.4 million over the same period, resulting in flat margins year over
year. These decreases were the result of the hotel sales discussed above,
partially offset by increases in RevPAR/S.
Franchise and management fees increased 31.5% or $6.7 million over 1996, due
primarily to increased franchise (or royalty fee) income and the change in
ownership of existing franchise hotels. As of March 31, 1997, Promus' combined
hotel system had grown to include 848 properties and 110,268 rooms/suites (not
including Promus Vacation Resort properties), representing 23.6% and 21.8%
increases over March 31, 1996, respectively. System expansion plus continued
year over year RevPAR/S increases have helped generate a 25.9% increase in total
system room revenues over the first quarter of 1996.
Rooms under management contracts as of March 31, 1997 increased 62.4% over
prior year (due in large part to the acquisition and final conversion of the 16
Crown Sterling Suites hotel properties by FelCor in 1996--see Hotel Brand
Development). This increase, however, did not result in a significant increase
in management fee income for the first quarter as the Company managed most of
the Crown Sterling Suites properties (and therefore earned management fees)
before they were converted to the Embassy Suites brand (at which time franchise
income was earned and the properties were added to the number of system hotels
open and under company management).
The continued unit growth in the Company's franchise system, coupled with
the continued focus on rate growth and cost management, were the primary
contributors to the Company's higher revenues, margins and operating income
(before property transactions) as compared to prior year.
During the first quarter of 1997, the Company realized an $8.1 million
pre-tax gain related to the sale of its joint venture interests in two Embassy
Suites hotels. The sale reflects a brand repositioning in the two markets (Omaha
and Minneapolis), where new Embassy Suites properties have been added to replace
older hotels. According to the sales agreement, the two hotels sold will be
converted to another brand at the Company's request.
The Company also realized a pre-tax gain of $2.1 million on the sale of a
portion of its investment in a real estate investment trust (REIT). The proceeds
from this sale will be used to promote further growth of
13
<PAGE>
the Embassy Suites brand, including the development of a new 150-suite prototype
designed for suburban and smaller markets. Excluding the impact of this
transaction, first quarter income before property transactions, net of tax,
would have been $17.6 million or $0.34 per share in 1997, compared with $12.9
million or $0.25 per share in 1996, a 36.0% increase.
Interest expense and other items through March 31 were as follows (in
millions, except percentages):
<TABLE>
<CAPTION>
FIRST QUARTER PERCENTAGE
ENDED INCREASE/
1997 1996 (DECREASE)
--------- --------- -------------
<S> <C> <C> <C>
Interest expense, net of interest capitalized..................................... $ (6.5) $ (7.7) (15.6)%
Dividend income................................................................... 1.6 1.2 33.3
Interest and other income......................................................... 3.1 0.9 N/M
Effective tax rate................................................................ 39.4% 41.1% (1.7 )pts
</TABLE>
Interest expense decreased year-over-year as a result of a decrease in the
interest expense attributable to the Company's nonconsolidated subsidiaries, as
well as decreases in interest expense related to the Company's revolving credit
facility. The decrease in nonconsolidated subsidiaries' interest expense
resulted primarily from a joint venture restructuring where the property's debt
was replaced with additional equity, and the sale of the Company's joint venture
interests in two Embassy Suites hotels discussed above. Also contributing to the
decrease are the more favorable terms secured on the refinancing of several
other joint ventures' debt instruments in 1996. The decrease in interest expense
related to the revolving credit facility is primarily the result of lower
outstanding debt balances as well as the Company's ability to obtain more
favorable rates.
Dividend income relates to Promus' investments in three REITs (see Hotel
Brand Development). Interest and other income increased due primarily to the
gain on the sale of a portion of those investments discussed above.
The Company's overall effective tax rate for both periods is higher than the
federal statutory rate primarily due to state income taxes, but decreased due to
effective management of the Company's tax liabilities.
Earnings before interest, taxes, depreciation and amortization plus cash
distributions from nonconsolidated affiliates less earnings from 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. A comparison of EBITDA and the related margins is as follows
(dollars in millions):
<TABLE>
<CAPTION>
FIRST QUARTER PERCENTAGE
ENDED INCREASE/
1997 1996 (DECREASE)
--------- --------- -------------
<S> <C> <C> <C>
EBITDA....................................................................... $ 49.9 $ 31.9 56.4%
EBITDA before property transactions and gain on sale of investments.......... 39.9 32.1 24.3
EBITDA margin................................................................ 73.0% 51.3% 21.7pts
EBITDA to interest paid...................................................... 12.5x 7.1x 5.4pts
</TABLE>
HOTEL BRAND DEVELOPMENT
OVERALL
There were 39 net hotels (4,338 rooms) added to the Promus hotel systems
during first quarter 1997 compared with 17 (2,432 rooms) in first quarter 1996.
This continued development growth is impressive
14
<PAGE>
considering that, per the latest available information provided by Smith Travel
Research as of March 31, 1997, Promus hotel brands had a 3.2% share of the
entire United States room supply and accounted for 17.7% of new rooms (excluding
casino related hotel rooms) added to the market from ground-up construction
during the first quarter of 1997. The Hampton Inn brand added a net 30 hotels
and 3,065 rooms in first quarter 1997. Although there is significant building in
the midscale and upper economy segments of the industry in which the Hampton Inn
brand competes, Promus will continue growing this brand as demand from
franchisees and guests for these hotels (that are actually replacing aging and
competitively obsolete supply) remains strong.
Promus increased its development pipeline as of March 31, 1997 by 5.6% to
339 properties either in the design or construction phase as compared with March
31, 1996. At the end of the first quarter of 1997, 132 properties were under
construction (excluding Promus Vacation Resort properties), 128 of which will
operate under franchise licenses: 84 Hampton Inn hotels; 19 Homewood Suites
hotels; 14 Hampton Inn & Suites hotels and 11 Embassy Suites hotels. The 132
properties will add over 14,000 rooms or suites to the Promus hotel system. The
remaining 207 hotels in the pipeline were approved and in the design phase at
March 31, 1997, although construction had not yet begun.
HOMEWOOD SUITES AND HAMPTON INN & SUITES BRAND DEVELOPMENT
Promus' internal development plans over the next several years include
continued focus on growing the newer and therefore less mature Homewood Suites
and Hampton Inn & Suites hotel brands. During 1997, Promus opened six Hampton
Inn & Suites hotels and one Homewood Suites hotel. Of the 207 hotels in the
design phase at March 31, 1997, 31 were Homewood Suites and another 32 were
Hampton Inn & Suites. The Company plans to follow its overall strategy of
growing these brands through franchise and management contracts, but recognizes
some franchisees' difficulty in obtaining conventional financing for such
projects. As a result, the Company has initiated several programs designed to
bridge the gap between the financing that is currently available and the equity
required by the prospective owners.
During 1996, Promus entered into strategic development alliances with Equity
and Winston whereby Promus will invest up to $15.0 million in the common stock
of both the Equity and Winston REITs as they purchase existing or to be
constructed Promus hotels from the Company. Promus currently plans to build
approximately seven to ten Homewood Suites and/or Hampton Inn & Suites
properties per year at an average cost of $7-10 million per property. Of those
hotels built each year, several are expected to be offered for sale to Equity
and Winston at Promus' cost of construction. Promus will receive 20-year license
agreements and 10-year management contracts for all hotels developed or
purchased pursuant to these alliances. As of March 31, 1997, Promus had invested
$7.1 million and $1.5 million in the Equity and Winston REITs, respectively.
Based on the market value of that common stock as of March 31, 1997, Promus
recorded an unrealized gain of $1.2 million (before tax) directly to
stockholders' equity.
Under a 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. Promus has provided $0.8
million in mezzanine loans during 1997, and anticipates providing an additional
$18.0 million throughout the rest of the year. Additionally, $1.0 million was
repaid during the year. Outstanding loans bear interest at rates ranging from
10.0% to 10.5%.
In May 1997 the Company announced the formation of Promus Acceptance
Corporation (PROMAC). Through PROMAC, participating financial institutions will
initially establish a $120.0 million investment pool to provide first mortgage
financing to Promus franchisees for newly constructed Hampton Inn, Hampton Inn &
Suites and Homewood Suites hotels. 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.
15
<PAGE>
EMBASSY SUITES BRAND DEVELOPMENT
During 1995 Promus entered into agreements with FelCor Suite Hotels, Inc.
and FelCor Suites Limited Partnership (FelCor) whereby FelCor acquired and
converted all-suite upscale hotels (including the Crown Sterling Suites hotels)
to the Embassy Suites brand. In return, 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. Hotels converted
to the Embassy Suites brand under these agreements operate under 20-year license
agreements and 10-year management contracts. Subject to some restrictions, the
limited partnership interests are convertible to common stock, and the common
stock may be sold on the open market. These agreements are the primary
contributor to the year over year growth in the Embassy Suites brand.
During the first quarter of 1997, Promus sold approximately $6.9 million of
its FelCor common stock investment, the proceeds from which will be used to
promote further growth of the Embassy Suites brand, including the development of
a new 150-suite prototype designed for suburban and smaller markets. This sale
resulted in a pre-tax gain of $2.1 million. Based on the market value of FelCor
common stock as of March 31, 1997, Promus recorded an unrealized gain on
marketable equity securities of $28.1 million related to its remaining
investment (before tax). This amount will fluctuate based on the market value of
FelCor common stock, but no earnings impact will be realized until the stock is
actually sold.
As of March 31, 1997, FelCor owned or had an interest in 51 Embassy Suites
hotels, which represents 6.0% and 11.0% of all Promus brand hotels and hotel
rooms/suites, respectively. Promus owns a 50 percent interest in eleven of the
51 hotels. Those 51 hotels contributed approximately 17.5% of total system
revenues and 17.3% of the Company's franchise and management fee revenue for
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 the new 150-suite prototype design. 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 $4.0
million for the year. As of March 31, 1997, there were two such projects under
construction and another two approved and in the development pipeline.
PROMUS VACATION RESORT DEVELOPMENT
Promus has entered into a five-year joint venture development agreement with
Vistana Development, Ltd. (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.
Promus entered the vacation ownership industry in 1994 by licensing the
first Embassy Vacation Resort to a predecessor of Signature Resorts (Signature).
Promus will continue to license and manage those properties currently owned by
Signature. 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 ownership business through its
alliances with Vistana and Signature.
As of March 31, 1997 the Company had licensed three Embassy Vacation Resort
properties, two of which are also managed by Promus. Through these three
properties, the Embassy Vacation Resort system has grown to nearly 19,000
intervals (with 371 units open), of which over 5,000 are already sold. One of
these resorts was converted to the Embassy Vacation Resort brand and the other
two are being built in phases. Once construction is complete, these three
properties are planned to include a total of over 700 units and nearly 39,000
intervals.
In May 1997, the first Hampton Vacation Resort was licensed to Vistana. The
property, in Kissimmee, Florida, will contribute over 200 units to the system.
Development of a 550-unit Embassy Vacation Resort
16
<PAGE>
property is now also underway (pursuant to the Company's development agreement
with Vistana) in Myrtle Beach, South Carolina.
CAPITAL SPENDING
INVESTMENT IN FRANCHISE SYSTEM
Promus made additional investments in its franchise system infrastructure
during the first quarter of 1997 relating primarily to the addition of new
system hotels and enhancements made to the systems already in place at existing
hotels. Additionally, seasonal fluctuations in customer traffic (which are
higher during the summer months) and a concentration of national media
advertising expenses in the early part of the year resulted in higher net
advances made by Promus to the franchise system funds during the first quarter.
During the first quarter, the Company invested approximately $2.0 million (net
of recoveries) and plans to spend an additional $5.0 million throughout 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.
OTHER
Ongoing refurbishment of Promus' existing company owned hotel properties to
maintain the quality standards set for those properties will continue in 1997 at
an estimated annual cost of approximately $12.0 million. During the first
quarter of 1997, $2.4 million in costs were incurred for hotel refurbishment.
Promus' board of directors has authorized the Company to repurchase up to
$150.0 million of its common stock for cash as market and business conditions
warrant in the open market, or in negotiated or block transactions. The shares
will be accumulated for general corporate purposes and future strategic
investments. Any such repurchases will be funded through operating cash flows
and the Promus Facility (see Liquidity and Capital Resources).
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 $18.6 million during first quarter 1997.
The Company expects to spend approximately $142 million during 1997 to fund
hotel and Promus Vacation Resort development, to refurbish existing facilities,
for investments in the common stock of Equity and Winston, for hotel management
and business systems, to make advances under mezzanine loan agreements, for
share repurchases and for other corporate related projects. However, some of
these expenditures are expected to be offset by the receipt of proceeds from
additional hotel sales to Equity and Winston.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows for the three months ended March 31 were as follows
(dollars in millions):
<TABLE>
<CAPTION>
FIRST QUARTER PERCENTAGE
ENDED INCREASE/
1997 1996 (DECREASE)
--------- --------- -------------
<S> <C> <C> <C>
Cash flows provided by (used in):
Operating activities............................................................... $ 23.1 $ 18.1 27.6%
Investing activities............................................................... (8.7) (46.4) (81.3)
Financing activities............................................................... (13.6) 28.3 N/M
</TABLE>
The increase in operating activities is due primarily to an increase in
operating margin (see Results of Operations), in addition to an increase in
accrued income taxes payable. Investing activities in 1996 include
17
<PAGE>
disbursements related to the FelCor agreements (see Hotel Brand Development).
The change in financing activities relates to activity under the Promus
Facility.
On March 31, 1997, the Company had a working capital deficit of $22.6
million which is a $5.2 million improvement over the deficit at December 31,
1996. The working capital deficit results primarily from Promus' cash management
program whereby all excess cash is used to pay down amounts outstanding under
the Promus Facility. Therefore, the Company does not believe that the current
ratio is an appropriate measure of its short-term liquidity without considering
availability under the Promus Facility.
The Company has a revolving credit arrangement (the Promus Facility) which
consists of two agreements, the significant terms of which are as follows:
<TABLE>
<CAPTION>
TOTAL MATURITY INTEREST FACILITY
FACILITY DATE RATE FEES
-------------- -------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Five-Year Revolver......... $ 300,000,000 November 1, 2001 Base Rate, as 0.10% of the total
defined, or LIBOR facility
+22.5 basis points
Extendible Revolver........ $ 50,000,000 June 4, 1997 Base Rate, as 0.08% of the total
defined, or LIBOR facility
+24.5 basis points
</TABLE>
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 March 31, 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 March 31, 1997, approximately $12.0 million in letters of credit
were outstanding under this agreement (related primarily to the Company's
self-insurance reserves). There was $109.0 million of availability under the
Promus Facility as of March 31, 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 March 31, 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 March 31, 1997.
The Company has filed a shelf registration for up to $300.0 million in debt
securities with the Securities and Exchange Commission. 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.
18
<PAGE>
NEWLY ISSUED ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," which is effective for
interim and annual periods ending after December 15, 1997. Earnings per share
computed using the new pronouncement were identical to the amounts reported in
the accompanying consolidated condensed statements of income.
TOTAL HOTELS AND ROOMS/SUITES
<TABLE>
<CAPTION>
NUMBER OF ROOMS/
NUMBER OF HOTELS SUITES
--------------------- PERCENT --------------------- PERCENT
MARCH 31, MARCH 31, INC/ MARCH 31, MARCH 31, INC/
1997 1996 (DEC) 1997 1996 (DEC)
--------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Embassy Suites
Company owned............................................. 9 9 -- 2,025 2,025 --
Joint venture............................................. 21 23 (8.7)% 5,470 5,897 (7.2)%
Management contract....................................... 47 30 56.7% 11,459 7,251 58.0%
Franchised................................................ 61 55 10.9% 14,240 12,493 14.0%
--- --- --------- ---------
138 117 17.9% 33,194 27,666 20.0%
--- --- --------- ---------
--- --- --------- ---------
Hampton Inn
Company owned............................................. 12 14 (14.3)% 1,654 1,916 (13.7)%
Joint venture............................................. 19 19 -- 2,376 2,376 --
Management contract....................................... 5 4 25.0% 678 464 46.1%
Franchised................................................ 614 494 24.3% 65,895 54,082 21.8%
--- --- --------- ---------
650 531 22.4% 70,603 58,838 20.0%
--- --- --------- ---------
--- --- --------- ---------
Hampton Inn & Suites
Management contract....................................... 1 1 -- 127 127 --
Franchised................................................ 21 6 N/M 2,354 677 N/M
--- --- --------- ---------
22 7 N/M 2,481 804 N/M
--- --- --------- ---------
Homewood Suites
Company owned............................................. 8 9 (11.1)% 891 1,024 (13.0)%
Management contract....................................... 4 -- N/M 471 -- N/M
Franchised................................................ 26 22 18.2% 2,628 2,217 18.5%
--- --- --------- ---------
38 31 22.6% 3,990 3,241 23.1%
--- --- --------- ---------
--- --- --------- ---------
Total System
Company owned............................................. 29 32 (9.4)% 4,570 4,965 (8.0)%
Joint venture............................................. 40 42 (4.8)% 7,846 8,273 (5.2)%
Management contract....................................... 57 35 62.9% 12,735 7,842 62.4%
Franchised................................................ 722 577 25.1% 85,117 69,469 22.5%
--- --- --------- ---------
848 686 23.6% 110,268 90,549 21.8%
--- --- --------- ---------
--- --- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
MANAGED FRANCHISED TOTAL
---------------------- -------------------- --------------------
1997 1996 1997 1996 1997 1996
--------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Vacation Resorts
Resort properties............................................. 2 1 1 1 3 2
Timeshare units............................................... 164 72 207 207 371 279
Timeshare intervals available................................. 8,364 3,672 10,557 10,557 18,921 14,229
Timeshare intervals sold...................................... 3,562 1,890 1,729 546 5,291 2,436
</TABLE>
19
<PAGE>
PERFORMANCE STATISTICS
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
----------------------
<S> <C> <C> <C>
MARCH 31, MARCH 31, INC/
1997 1996 (DEC)
---------- ---------- ---------
COMPARABLE SYSTEM HOTELS*
Embassy Suites
Occupancy............................................................. 73.3% 73.2% 0.1pts
ADR................................................................... $ 114.49 $ 107.68 6.3%
RevPAS................................................................ $ 83.92 $ 78.80 6.5%
Hampton Inn
Occupancy............................................................. 67.6% 67.1% 0.5pts
ADR................................................................... $ 62.24 $ 58.72 6.0%
RevPAR................................................................ $ 42.05 $ 39.41 6.7%
Hampton Inn & Suites
Occupancy............................................................. 62.7% 54.8% 7.9pts
ADR................................................................... $ 65.45 $ 65.51 (0.1)%
RevPAS................................................................ $ 41.04 $ 35.93 14.2%
Homewood Suites
Occupancy............................................................. 75.1% 72.8% 2.3pts
ADR................................................................... $ 89.95 $ 86.49 4.0%
RevPAS................................................................ $ 67.52 $ 62.96 7.2%
TOTAL SYSTEM HOTELS
Embassy Suites
Occupancy............................................................. 72.0% 73.1% (1.1)pts
ADR................................................................... $ 115.85 $ 107.99 7.3%
RevPAS................................................................ $ 83.45 $ 78.91 5.8%
Hampton Inn
Occupancy............................................................. 66.1% 67.0% (0.9)pts
ADR................................................................... $ 62.63 $ 58.89 6.4%
RevPAR................................................................ $ 41.37 $ 39.46 4.8%
Hampton Inn & Suites
Occupancy............................................................. 63.2% 54.4% 8.8pts
ADR................................................................... $ 79.06 $ 66.28 19.3%
RevPAS................................................................ $ 49.98 36.07 38.6%
Homewood Suites
Occupancy............................................................. 72.2% 71.6% 0.6pts
ADR................................................................... $ 92.89 $ 87.09 6.7%
RevPAS................................................................ $ 67.05 $ 62.39 7.5%
TOTAL SYSTEM REVENUES (in thousands)
Hampton Inn............................................................. $ 255,961 $ 208,643 22.7%
Embassy Suites.......................................................... 247,485 197,737 25.2%
Homewood Suites......................................................... 23,805 18,083 31.6%
Hampton Inn & Suites.................................................... 9,807 2,036 N/M
---------- ---------- ---------
$ 537,058 $ 426,499 25.9%
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
- ------------------------
* Excludes those hotels that had room additions or were not open for the
entire reporting period in both years.
20
<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Promus Hotel Corporation was held on
April 23, 1997. U. Bertram Ellis, Jr., Michael D. Rose, Michael I. Roth, and
Ronald Terry were elected to continue as directors of the Company. The
stockholders also approved the Company's Bonus Replacement Options Plan and
ratified the appointment of Arthur Andersen LLP as the Company's independent
public accountants for the 1997 calendar year. Voting results were as follows:
<TABLE>
<CAPTION>
WITHHELD/ BROKER
FOR AGAINST ABSTAIN NON-VOTES
------------ ---------- --------- ----------
<S> <C> <C> <C> <C>
Election of Directors:
U. Bertram Ellis, Jr......................................... 47,828,868 461,190 -- --
Michael D. Rose.............................................. 47,824,736 465,322 -- --
Michael I. Roth.............................................. 47,892,935 457,123 -- --
Ronald Terry................................................. 47,798,237 491,821 -- --
Approval of the Company's Bonus Replacement Options Plan....... 42,079,077 1,184,745 104,993 4,921,243
Appointment of Arthur Andersen LLP............................. 48,214,956 30,402 44,700 --
</TABLE>
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EX-10.1 Promus Hotel Corporation Bonus Replacement Options Plan. (1)
EX-27 Financial Data Schedule. (2)
(b) No reports on Form 8-K were filed during the quarter ended March 31,
1997.
- ------------------------
Footnotes
(1) Incorporated by reference from the Company's Proxy Statement, Annex I, dated
March 18, 1997, File No. 1-11463.
(2) Filed herewith.
22
<PAGE>
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: JEFFERY M. JARVIS
-----------------------------------------
Jeffery M. Jarvis
Vice President and Controller
(Chief Accounting Officer)
May 15, 1997
23
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ------------- -------------------------------------------------------------------------------------- -------------
<S> <C> <C>
(a) EX-10.1 Promus Hotel Corporation Bonus Replacement Options Plan (1)
EX-27 Financial Data Schedule. (2) 25
(b) No reports on Form 8-K were filed during the quarter ended March 31, 1997.
</TABLE>
- ------------------------
Footnotes
(1) Incorporated by reference from the Company's Proxy Statement, Annex I, dated
March 18, 1997, File No. 1-11463.
(2) Filed herewith.
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,457
<SECURITIES> 0
<RECEIVABLES> 30,628
<ALLOWANCES> (1,143)
<INVENTORY> 197
<CURRENT-ASSETS> 38,846
<PP&E> 452,529
<DEPRECIATION> (124,731)
<TOTAL-ASSETS> 647,234
<CURRENT-LIABILITIES> 61,405
<BONDS> 229,487
0
0
<COMMON> 5,143
<OTHER-SE> 268,514
<TOTAL-LIABILITY-AND-EQUITY> 647,234
<SALES> 0
<TOTAL-REVENUES> 68,382
<CGS> 0
<TOTAL-COSTS> 35,377
<OTHER-EXPENSES> (7,901)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,497
<INCOME-PRETAX> 39,142
<INCOME-TAX> 15,422
<INCOME-CONTINUING> 23,720
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,720
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
</TABLE>
