FINANCIAL OVERVIEW
With the completion of the Promus transaction on November 30, 1999,
the financial statements in this annual report include 11 months of
Hilton as a stand-alone company, and one month as a combined company.
Within this financial overview section, we are presenting information
on a pro forma basis, thereby providing a more meaningful comparison
than the historical results required elsewhere in the annual report.
The pro forma results are presented as if the acquisition of Promus
Hotel Corporation had been completed as of January 1, 1998.
Income from continuing operations for 1999 rose 10 percent to
$216 million, from $197 million in 1998. Diluted income from
continuing operations per share increased 14 percent to $.58 per
share, from $.51 in the previous year. Earnings before interest,
taxes, depreciation, amortization, pre-opening expense and non-cash
items (EBITDA) increased 8 percent to $1.094 billion, from $1.016
billion a year ago.
Included in EBITDA are non-recurring charges totaling $51 million
in 1998 and $36 million in 1999. The per-share impact of these charges
was $.11 in 1998 and $.06 in 1999. Non-recurring charges include such
items as business combination expenses related to the Promus
acquisition, business combination and other costs associated with the
Promus-Doubletree merger, and spin-off costs we incurred in 1998.
Despite the increases mentioned above, 1999 was a generally
disappointing year in terms of our ability to deliver bottom line
results. While we posted good revenue per available room (RevPAR)
increases at most of our major owned hotels -- nearly 3 percent across
our owned system -- we were unable to bring these solid RevPAR gains
to the EBITDA line. This "flow-through" to EBITDA was affected at
various points during the year by such factors as reduced attendance
at group meetings, property tax increases, year-long softness in the
Hawaii market and a millennium that failed to meet expectations. With
the confidence that we can continue to achieve RevPAR increases in the
range of 3 percent at our owned hotels, we have as one of our primary
financial goals for 2000 and beyond to improve the RevPAR flow-through
to EBITDA to a ratio of at least 1.5 times. Toward this end we have
instituted a vigorous asset management program to closely monitor the
operating activities of our owned hotels and their capital spending
plans.
In terms of capital expenditures, we have a number of renovation
and construction projects underway, including the guest room tower and
vacation ownership facility at the Hilton Hawaiian Village discussed
previously in this report; expansion and upgrades at our hotels in
Seattle and Portland, and construction of a select number of Homewood
Suites by Hilton properties. Additionally, our continuing reinvestment
in our owned properties through a disciplined maintenance capital
expenditure program ensures that our hotels are kept in first-class
physical condition. As discussed in the Letter to Shareholders, unit
growth, however, will come primarily from the strong existing pipeline
of managed and franchised properties requiring little or no capital
investment.
Importantly, we were able to structure the Promus acquisition to
retain investment grade credit. The cash portion of the transaction
was successfully financed by a syndicate of 25 banks, led by Bank of
America N.A., which arranged senior credit facilities totaling $1.85
billion at the attractive rate of LIBOR + 1.25 %. We amended our
existing 2 year $1.75 billion senior credit facility to match the
terms and pricing of the new facilities.
Our financial position remains strong, though balance sheet
improvement and strengthening of our existing investment grade credit
rating are additional priorities for 2000. Our goal is to reduce our
debt-to-EBITDA ratio through a combination of increased EBITDA and
selective asset dispositions that will ultimately lead to reduced debt
levels.
Financial Information
Management's Discussion 23
and Analysis
----------------------------------------
Consolidated Statements 31
of Income
----------------------------------------
Consolidated 32
Balance Sheets
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Consolidated Statements 33
of Cash Flow
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Consolidated Statements 34
of Stockholders' Equity
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Notes to Consolidated 35
Financial Statements
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Report of Independent 46
Public Accountants
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Supplementary 47
Financial Information
----------------------------------------
Five Year Summary 49
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MD&A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company
On December 31, 1998, Hilton Hotels Corporation ("Hilton" or the
"Company") completed a spin-off that split the Company's operations
into two independent public corporations, one for conducting its hotel
business and one for conducting its gaming business. Hilton retained
ownership of the hotel business. The Company transferred the gaming
business to a new corporation named Park Place Entertainment
Corporation ("Park Place"), and distributed the stock of Park Place
tax-free to Hilton stockholders on a one-for-one basis. As a result of
the spin-off, Hilton's historical financial statements reflect the
gaming business as discontinued operations. The following discussion
and analysis of financial condition and results of operations is that
of Hilton's continuing operations.
On November 30, 1999, Hilton completed the acquisition of Promus
Hotel Corporation ("Promus"). As a result of the Promus acquisition,
the Company expanded its hotel count by over 1,450 properties
representing more than 200,000 rooms. The discussion and analysis of
results of operations include the results of Promus from the date of
acquisition.
Hilton's continuing operations include the consolidated results
of the Company's owned, partially owned and leased hotel assets,
equity income from unconsolidated affiliates, management and franchise
fees and earnings from vacation ownership and conference center
operations. At December 31, 1999, the Company's hotel system contained
1,752 properties totaling approximately 300,000 rooms worldwide. The
Company's brands include Hilton, Hilton Garden Inn, Doubletree,
Embassy Suites, Hampton Inn, Homewood Suites by Hilton, Red Lion,
Conrad, Hilton Grand Vacations and Harrison Conference Centers. The
Company's system also includes certain properties that are not
Company-branded.
Of the 1,752 total hotels at December 31, 1999, 1,352 are owned
and operated by franchisees, and 400 are operated by the Company.
Depending on the brand, the Company charges franchise royalty fees of
up to five percent of rooms revenue in exchange for the use of one of
its brand names and franchise related services. Company operated
properties include 141 owned or partially owned hotels, 74 leased
hotels and 185 hotels managed for third parties. As a manager of
hotels, the Company 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.
DEVELOPMENT
OVERVIEW
Prior to the acquisition of Promus on November 30, 1999, the Company's
system growth was derived primarily through selective acquisition of
large full-service hotels in major market locations and franchise
expansion through the Hilton Garden Inn product.
Acquisitions in the current year include the 495-room Radisson
Plaza Hotel at Mark Center in Alexandria, Virginia (re-named the
Hilton Alexandria Mark Center), which Hilton acquired in February
1999. In April 1999, the Company acquired the 563-room Pointe Hilton
Squaw Peak Resort in Phoenix, Arizona. Also in April 1999, the Company
acquired the 385-room Hilton Boston Back Bay. In November 1999, the
Company acquired the 814-room Hilton Minneapolis & Towers. The Company
also completed construction during 1999 of a new 600-room hotel at the
center of Boston's Logan Airport. This hotel, Hilton's first new-build
hotel in ten years, is conveniently located on the grounds of Logan
International Airport and connected directly to the airport terminals.
During 1999, the Company continued to improve its franchise
business primarily through the expansion of the Hilton Garden Inn
product. The Company opened 45 Garden Inn properties in 1999, bringing
the total number of such properties to 63 at December 31, 1999. The
Promus acquisition has increased Hilton's franchise business
significantly, adding more than 1,100 franchise properties to the
Company's portfolio. The Company believes this will result in greater
diversification of revenue and cash flow.
The Company also acquired a strong development pipeline with the
Promus transaction, with 300 properties either in the design or
construction phase as of December 31, 1999. The
MD&A (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
majority of this new development will be franchise properties in the
Hampton Inn and Hampton Inn & Suites brands. The Company's total
development pipeline for 2000 and 2001, including Hilton Garden Inn
franchise expansion, totals more than 430 hotels and 63,000 rooms
either under construction or in design.
Hilton intends to grow its brands primarily through franchising
and the addition of management contracts. The success of our ability
to grow the number of franchised and managed hotels is affected by,
among other things, national and regional economic conditions, capital
markets, credit availability, relationships with franchisees and
owners as well as competition from other hotel franchisors and
managers. In addition, the Company will continue to review its hotel
portfolio in light of the Promus acquisition for potential
repositioning or re-branding opportunities, and may seek to sell
certain owned assets. Acquisition spending is not expected to be
significant in 2000.
STRATEGIC ALLIANCES AND JOINT VENTURES
In 1997, the Company entered into an agreement with Hilton Group plc,
formerly known as Ladbroke Group PLC, whose wholly owned subsidiary,
Hilton International Co. ("HI"), owns the rights to the Hilton name
outside the United States. The agreements provide for the
reunification of the Hilton brand worldwide through a strategic
alliance between the companies, including cooperation on sales and
marketing, loyalty programs and other operational matters. Pursuant to
these agreements, the Company and HI have integrated their reservation
system under Hilton Reservations Worldwide, LLC, launched the Hilton
HHonors Worldwide loyalty program, integrated worldwide sales offices,
developed joint marketing initiatives and adopted a new Hilton brand
identity used by both companies.
As of December 31, 1999, Hilton owned approximately 1.5 million
shares of FelCor Lodging Trust Inc. ("FelCor") common stock,
representing approximately two percent of FelCor's outstanding shares.
FelCor owned or had an interest in 75 Company brand hotels as of
December 31, 1999. In addition, the Company has guaranteed repayment
of a third party loan to FelCor of up to $25 million.
At December 31, 1999, the Company owned approximately 2.6 million
shares of Candlewood Hotel Company ("Candlewood") common stock. The
Company also has a note receivable from Candlewood with a balance at
December 31, 1999 of approximately $15 million.
As of December 31, 1999, the Company leased 52 properties from
RFS Hotel Investors, Inc. ("RFS"). In January 2000, the Company
entered into an agreement which gives RFS the option to terminate
these leases. As consideration for terminating the leases, RFS will
pay the Company approximately $60 million. As part of the agreement,
the Company has the option of requiring RFS to repurchase convertible
preferred stock of RFS currently owned by Hilton for approximately $13
million. It is anticipated that the lease termination and repurchase
of the convertible preferred stock will be accomplished simultaneously
in the first quarter of 2001.
DEVELOPMENT FINANCING
In order to assist prospective owners in obtaining financing for hotel
projects, the Company has initiated programs to provide alternative
capital sources to owners.
Promus Acceptance Corp. ("ProMAC"), a third party lending entity,
provides first mortgage construction financing to franchisees for
select Homewood Suites by Hilton, Hampton Inn and Embassy Suites
hotels. The Company has provided a guarantee of up to $36 million on
loans outstanding under the ProMAC program. The Company has also
agreed to guarantee up to 25 percent of construction financing
relating to select Hilton Garden Inn development projects. Guarantees
under the Hilton Garden Inn development program were not significant
at December 31, 1999.
Under a pre-existing program, the Company provided secondary
financing to franchisees under a mezzanine financing program. Loans
outstanding at December 31, 1999 totaled approximately $48 million.
MD&A (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company has provided credit support for a loan facility
utilized by Candlewood to provide construction and permanent financing
to Candlewood and its franchisees. The Company's aggregate maximum
exposure for such credit support is capped at $30 million. As of
December 31, 1999, the Company has guaranteed $11 million in such
financing.
ACQUISITIONS AND CAPITAL SPENDING
Aggregate consideration in the November 30, 1999 acquisition of Promus
consisted of approximately 113 million shares of the Company's common
stock and $1.7 billion in cash, for a combined equity value of
approximately $2.8 billion, transaction costs of $175 million, and the
assumption of debt totaling $750 million. In addition, hotel
acquisitions completed during 1999 totaled $330 million, including the
assumption of debt. Each of these hotel acquisitions was completed at
a discount to replacement cost.
Capital expenditures and new investments totaled $356 million
during 1999, including maintenance capital expenditures, costs
associated with the new Hilton Boston Logan Airport and several
significant renovation projects. During 1999, the Company
substantially completed the renovation of the Hilton New York &
Towers, which includes new restaurants, a state-of-the-art
business/conference center, a world-class fitness facility and an
exclusive Towers Lounge overlooking Manhattan. The Company also
completed construction of a new 232-unit vacation ownership resort in
Las Vegas.
Significant ongoing construction projects include the new
453-room Kalia Tower at the Hilton Hawaiian Village. In close
proximity to the new Hawaii Convention Center, the Kalia Tower will
feature a world class health club and wellness spa, exciting retail
shops and an interactive Hawaiian cultural center. Construction on the
project is scheduled to be completed in Spring 2001. Construction has
also begun on a 275-unit vacation ownership resort at the Hilton
Hawaiian Village. Interval sales will commence in the first quarter of
2000 with the project expected to open in the first quarter of 2001.
Renovation and construction projects are also underway at the Hilton
Seattle Airport and the Hilton Portland. The Seattle project includes
renovating existing rooms and constructing a 222-room addition, while
the Portland project involves construction of a 319-room tower
addition. The Company is also currently constructing five new Homewood
Suites by Hilton properties.
In addition to an estimated $300 million in 2000 expenditures
related to renovation and construction projects and development
financing, the Company intends to spend approximately $300 million in
2000 on normal capital replacements, upgrades and technology.
Expenditures required to complete acquisitions and capital
spending programs in 2000 will be financed through available cash
flows and general corporate borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $229 million, $390
million and $279 million for the years ended December 31, 1997, 1998
and 1999, respectively. The decrease in 1999 was primarily
attributable to working capital variances. The increase in 1998 over
1997 operating cash flow was attributable to strong operating results
at many of the Company's owned and partially owned full-service
hotels, the benefit of cash flow from newly acquired hotel properties
and year over year working capital variances. Cash and equivalents
totaled $104 million at December 31, 1999, an increase of $57 million
from December 31, 1998.
Net cash used in investing activities was $1.1 billion in 1998
compared to $2.3 billion in 1999. The net increase of $1.2 billion was
due primarily to the acquisition of Promus partially offset by a lower
level of hotel acquisition spending in the 1999 period compared to the
prior year. The increase in net cash used in investing activities of
$1.0 billion from 1997 to 1998 reflects significant hotel acquisition
activity in the 1998 period and $123 million of cash proceeds from
asset sales in the 1997 period. The proceeds from assets sales in 1997
are primarily the sale of the Company's interest in the Conrad
International Hong Kong.
Net cash provided by financing activities increased approximately
$1.7 billion in 1999, primarily representing additional revolving debt
borrowings to fund the cash portion of the Promus acquisition. The
$377 million increase in cash provided by financing activities in 1998
over 1997 reflects increased borrowings associated with a higher level
of hotel acquisition activity combined with increased share repurchase
activity.
MD&A (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Hilton believes that its operating cash flow, available
borrowings under its revolving credit facilities, and the Company's
ability to obtain additional financing through various financial
markets are sufficient to meet its liquidity needs.
FINANCING
In 1999, the Company entered into a new $1.85 billion revolving credit
facility, consisting of a $1.4 billion five-year revolver and a $450
million 364-day revolver. As of December 31, 1999, approximately $1.3
billion of borrowings were outstanding under the five-year portion of
the new revolver and the $450 million 364-day portion of the new
revolver was undrawn. The Company's existing $1.75 billion revolving
credit facility, which expires in 2001, was fully drawn as of December
31, 1999, leaving total revolving debt capacity of approximately $550
million available to the Company at such date.
In October 1997, the Company filed a shelf registration statement
("Shelf") with the Securities and Exchange Commission registering up
to $2.5 billion in debt or equity securities. At December 31, 1999,
available financing under the Shelf totaled $2.1 billion. The terms of
any additional securities offered pursuant to the Shelf will be
determined by market conditions at the time of issuance.
The 1998 and 1999 debt balances include $625 million of long-term
debt which, although allocated to Park Place under a debt assumption
agreement, remains the legal obligation of Hilton. At the time of the
spin-off, Park Place assumed and agreed to pay 100% of the amount of
each payment required to be made by Hilton under the terms of the
indentures governing Hilton's $300 million 7.375% Senior Notes due
2002 and its $325 million 7% Senior Notes due 2004. These notes remain
in Hilton's long-term debt balance and a long-term receivable from
Park Place in an equal amount is included in the Company's 1998 and
1999 consolidated balance sheets. In the event of an increase in the
interest rate on these notes as a result of certain actions taken by
Hilton or in certain other limited circumstances, Hilton will be
required to reimburse Park Place for any such increase. Hilton is
obligated to make any payment Park Place fails to make, and in such
event Park Place shall pay to Hilton the amount of such payment
together with interest, at the rate per annum borne by the applicable
notes plus two percent, to the date of reimbursement.
Pursuant to the Company's stock repurchase program, during 1999
the Company repurchased 6.4 million shares of common stock for an
aggregate purchase price of $90 million. The Company may, at any time,
repurchase up to 9.3 million remaining shares authorized for
repurchase pursuant to such program. The timing of stock repurchases
are made at the discretion of the Company's management, subject to
certain business and market conditions.
In accordance with the terms of the indenture governing the
Company's $500 million 5% Convertible Subordinated Notes due 2006,
effective January 4, 1999 the conversion price was adjusted to $22.17,
reflecting the gaming spin-off.
STOCKHOLDERS' EQUITY
Stockholders' equity totaled $1.4 billion at December 31, 1999,
reflecting the issuance of approximately 113 million shares of common
stock in connection with the Promus acquisition. Dividends paid on
common shares were $.32 per share in 1997 and 1998 and $.08 per share
in 1999.
RESULTS OF OPERATIONS
The following discussion presents an analysis of the Company's results
of operations for the three years ended December 31, 1999. EBITDA
(earnings before interest, taxes, depreciation, amortization,
pre-opening expense and non-cash items) is presented supplementally in
the tables below and in the discussion of operating results because
management believes it allows for a more complete analysis of results
of operations. Non-cash items, such as asset write-downs and
impairment losses, are excluded from EBITDA as these items do not
impact operating results on a recurring basis. EBITDA can be computed
by adding depreciation, amortization, pre-opening expense, interest
and
MD&A (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
dividend income from investments related to operating activities and
non-cash items to operating income. This information should not be
considered as an alternative to any measure of performance as
promulgated under generally accepted accounting principles (such as
operating income or net income), nor should it be considered as an
indicator of the overall financial performance of the Company. The
Company's calculation of EBITDA may be different from the calculation
used by other companies and therefore comparability may be limited.
Fiscal 1999 Compared with Fiscal 1998
OVERVIEW
A summary of the Company's consolidated revenue and earnings for the
years ended December 31, 1998 and 1999 is as follows:
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1998 1999 % CHANGE
Revenue $ 1,769 2,150 22%
Operating income 464 495 7
Income from continuing operations 188 176 (6)
Income From Continuing Operations Per Share
Basic $ .71 .66 (7)%
Diluted .71 .66 (7)
Other Operating Data
EBITDA
Operations $ 660 768 16%
Corporate expense, net (64) (73) 14
---------- ---------- ---------
Total $ 596 695 17%
========== ========== =========
Total revenue for 1999 was $2.2 billion, an increase of 22
percent over 1998. EBITDA from operations was $768 million for 1999, a
16 percent increase compared to 1998, while total EBITDA was $695
million for 1999, a 17 percent increase over the prior year. Total
operating income increased seven percent to $495 million.
The Company's consolidated results include the impact of the
Promus acquisition only from November 30, 1999, the date the
transaction was completed. The Promus acquisition resulted in
incremental revenue and EBITDA of $69 million and $19 million,
respectively, representing operations for the month of December 1999.
The impact of the Promus acquisition was not significant to operating
income in 1999. Results in 1999 were also impacted by non-recurring
charges incurred by Hilton related to the Promus acquisition totaling
approximately $26 million.
Consolidated results are significantly influenced by the
operating performance of the Company's owned portfolio of major market
domestic full-service properties. Operating performance is primarily
affected by volume (as measured by occupancy), pricing (as measured by
average room rate), the Company's ability to manage costs and the
growth in the number of available rooms through acquisition and
development. Excluding the one month results from the Promus
acquisition, the Company's domestic owned hotels generated $611
million of EBITDA in 1999. EBITDA margins at these hotels remained
strong at 34 percent. Occupancy in 1999 at comparable owned hotels was
essentially flat at 75.3 percent, with the average rate increasing two
percent to $168.22, resulting in a 2.7 percent improvement in revenue
per available room ("RevPAR").
Strong volume and average rate increases in the group segment
drove a year over year RevPAR increase of nine percent at the Hilton
New Orleans Riverside resulting in a $6 million or 14 percent increase
in EBITDA from 1998. EBITDA at the Hilton San Francisco & Towers
increased $5 million or ten percent compared to the prior year due to
a significant increase in individual business traveler ("IBT") volume
and higher average rates in the group segment. RevPAR at this property
increased seven percent. EBITDA from the Waldorf=Astoria increased $4
million or six percent over 1998. Nearly all of the increase occurred
in the fourth quarter as the property benefited from higher rates,
strong banquet activity and millennium related activities. Combined
EBITDA from the Hilton Washington & Towers and the Capital Hilton
increased $3 million on a combined RevPAR increase of five percent.
Both properties benefited from occupancy growth in the higher rate IBT
segment, and the Hilton Washington & Towers increased average rates
nearly eight percent. Combined EBITDA from the Hilton Chicago &
Towers, the Hilton Chicago O'Hare Airport and the Palmer House Hilton
increased $2 million from the prior year. A strong city-wide
MD&A (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
convention market in the first quarter of 1999 was offset by a softer
group market and lower convention attendance experienced in subsequent
quarters. EBITDA flow through at these three properties was also
mitigated by higher property tax expense in the 1999 period. EBITDA
from the Hilton New York & Towers decreased $2 million from the prior
year, primarily due to disruptions caused by the property's major
renovation project. This project was substantially complete at the end
of the year.
On a comparable basis, EBITDA from the Hilton Hawaiian Village
declined ten percent from the prior year. This property continued to
be affected for most of the year by softness due primarily to the
impact of the Asian economic situation. However, year over year
comparisons did improve in late 1999, and the Company anticipates
improved market conditions and commensurate improvement at the Hilton
Hawaiian Village in 2000. Factors leading to this outlook include an
increase in advance bookings and enhanced marketing efforts in Asia
and on the U.S. mainland by the State of Hawaii to attract additional
visitors. Excluding this property and the impact of the Promus
acquisition, comparable EBITDA at the Company's domestic owned hotels
increased $15 million or three percent for the year. Occupancy for
comparable domestic owned hotels (excluding the Hilton Hawaiian
Village and Promus) was essentially flat at 75.4 percent. The average
room rate increased 3.2 percent to $168.71 in 1999 and RevPAR improved
3.6 percent.
Hotel acquisition and development activity, excluding the impact
of the Promus acquisition, contributed approximately $66 million of
EBITDA in 1999. The Company opened one new-build hotel and acquired
four full service domestic properties during 1999.
Management and franchise fee revenue increased $16 million in
1999 to $120 million. This increase is attributable primarily to $12
million of incremental fee income as a result of the Promus
acquisition, a $2 million increase in initial and termination fees
from franchise properties, and increased fees as a result of the
Hilton Garden Inn franchise expansion. Fee revenue is based primarily
on operating revenue at managed properties and rooms revenue at
franchised properties.
Depreciation and amortization, including the Company's
proportionate share of depreciation and amortization from its
unconsolidated affiliates, increased $63 million in 1999 to $195
million due primarily to acquisition activity.
Although the supply-demand balance in the Company's major markets
generally remains favorable, future operating results could be
adversely impacted by increased capacity and weak demand. These
conditions could limit the Company's ability to pass through
inflationary increases in operating costs in the form of higher room
rates. Increases in transportation and fuel costs or sustained
recessionary periods in the U.S. (affecting domestic travel) and
internationally (affecting inbound travel from abroad) could also
unfavorably impact future results. However, the Company believes that
its financial strength and diverse market presence will enable it to
remain extremely competitive.
CORPORATE EXPENSE, NET
Corporate expense increased $9 million in 1999 to $73 million. The
1999 expense includes non-recurring charges incurred by Hilton related
to the Promus acquisition. These expenses totaled $26 million in 1999,
$21 million of which are included in corporate expense. The 1998
expense includes the Company's proportionate share of costs associated
with the gaming spin-off totaling $13 million.
FINANCING ACTIVITIES
Interest and dividend income increased $44 million compared with the
prior year, primarily due to interest on the $625 million of Hilton
public debt assumed by Park Place at the time of the spin-off of
Hilton's gaming operations. Interest expense, net of amounts
capitalized, increased $100 million reflecting the $625 million of
debt assumed by Park Place, higher debt levels due to the Promus
acquisition, individual hotel acquisition activity during the year and
significant construction and renovation project expenditures.
MD&A (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INCOME TAXES
The effective income tax rate in 1999 increased to 41.5% from 40.5% in
1998. The Company's effective income tax rate is determined by the
level and composition of pretax income and the mix of income subject
to varying foreign, state and local taxes.
FISCAL 1998 COMPARED WITH FISCAL 1997
OVERVIEW
A summary of the Company's consolidated revenue and earnings for the
years ended December 31, 1998 and 1997 is as follows:
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1997 1998 % CHANGE
Revenue $ 1,475 1,769 20%
Operating income 395 464 17
Income from continuing operations 183 188 3
Income From Continuing Operations Per Share
Basic $ .68 .71 4%
Diluted .68 .71 4
Other Operating Data
EBITDA
Operations $ 561 660 18%
Corporate expense, net (64) (64) --
---------- ---------- ---------
Total $ 497 596 20%
========== ========== =========
Total revenue for 1998 was $1.8 billion, an increase of 20
percent over 1997. EBITDA from operations was $660 million for 1998,
an 18 percent increase compared to 1997, while total EBITDA was $596
million for 1998, a 20 percent increase over the prior year. Total
operating income increased 17 percent to $464 million.
The Company's domestic owned hotels generated $533 million of
EBITDA in 1998, with comparable EBITDA increasing 11 percent over the
prior year. EBITDA margins at these hotels improved two points to 34
percent. The comparable EBITDA increase improved to 17 percent when
excluding the Hilton Hawaiian Village, which was adversely impacted by
the Asian economic crisis. Occupancy in 1998 at comparable owned
hotels declined 2.3 points to 75.0 percent, with the average rate
increasing 8.4 percent to $164.51, resulting in a 5.2 percent
improvement in RevPAR. Without the Hilton Hawaiian Village, RevPAR for
the year at this group of properties increased 7.1 percent.
Combined EBITDA from the Waldorf=Astoria and the Hilton New York
& Towers increased $24 million or 22 percent over the prior year.
RevPAR gains of 10 and 11 percent, respectively, were driven by strong
rate gains in both the leisure and IBT segments. Combined EBITDA from
the Hilton Chicago & Towers, the Hilton Chicago O'Hare Airport and the
Palmer House Hilton increased $20 million or 26 percent over the prior
year. All three properties maintained strong volume and achieved
double-digit rate growth in the IBT segment. Combined EBITDA margins
at these three Chicago properties averaged 35 percent, a five point
increase from 1997. Results also benefited from a combined EBITDA
increase of $11 million from the San Diego and San Francisco Hiltons.
The San Diego property benefited from strong rate increases in all
segments and a seven point improvement in EBITDA margin. The impact of
reduced leisure demand at the Hilton San Francisco & Towers was offset
by an increase in higher rate IBT room nights. EBITDA from the Hilton
New Orleans Riverside & Towers increased $4 million or nine percent
from the prior year. Occupied rooms at this property remained flat
year over year, however decreased leisure volume was replaced with
higher rate convention and IBT business. Growth was negatively
impacted by results at the Hilton Hawaiian Village. On a comparable
basis, EBITDA at this property declined 13 percent.
Acquisition activity, including increased ownership of properties
which were previously partially owned and new property acquisitions,
added $47 million of EBITDA in 1998. The Company acquired or increased
its ownership interest in eight full-service domestic properties
during 1998.
Management and franchise fee revenue decreased $11 million in
1998 to $104 million. This decrease is attributable primarily to the
acquisition of several previously managed properties during 1998,
reduced management fees from the Conrad International Hong Kong, which
was negatively impacted by economic conditions in Asia, and a $1
million decrease in initial and termination fees from franchise
properties.
MD&A (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Depreciation and amortization, including the Company's
proportionate share of depreciation and amortization from its
unconsolidated affiliates, increased $28 million in 1998 to $132
million due primarily to new acquisitions.
CORPORATE EXPENSE, NET
Corporate expense was flat in 1998 at $64 million. The 1998 expense
includes the Company's proportionate share of costs associated with
the gaming spin-off totaling $13 million. The 1997 expense includes
$25 million in costs related to the Company's efforts to acquire ITT
Corporation ("ITT"). The 1997 costs were partially offset by a $10
million gain recognized on the sale of ITT stock previously purchased
by the Company.
FINANCING ACTIVITIES
Interest and dividend income decreased $4 million compared with the
prior year, primarily due to lower investment balances. Interest
expense, net of amounts capitalized, increased $47 million reflecting
higher debt levels due to acquisition activity during the year and a
higher average cost of debt resulting from the Company issuing
long-term notes to replace floating rate debt in 1997. Net interest
expense from unconsolidated affiliates decreased $4 million,
reflecting the mid-year consolidation of the Hilton Hawaiian Village.
INCOME TAXES
The effective income tax rate in 1998 increased to 40.5% from 39.5% in
1997.
OTHER MATTERS
YEAR 2000
The Company encountered no significant problems from the impact of the
Year 2000 on the processing of date-sensitive information by its
computerized information systems. The Company had established a Year
2000 program to ensure that all significant information technology
systems, non-information technology systems and suppliers were Year
2000 compliant. The cost to assess, test and remediate potential Year
2000 problems totaled approximately $6 million.
OTHER
Various lawsuits are pending against the Company. In management's
opinion, disposition of these lawsuits is not expected to have a
material effect on the Company's financial position or results of
operations.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this report, including without
limitation, those set forth under the captions "Development,"
"Liquidity and Capital Resources," "Results of Operations," and "Other
Matters," and statements relating to the Company's plans, strategies,
objectives, expectations, intentions and adequacy of resources, are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
The words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements reflect the Company's current views with
respect to future events and financial performance, and are subject to
certain risks and uncertainties, including those identified above
under "Results of Operations" and those in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999 under the
captions "Additional Information -- Business Risks," and
"Competition," the effect of economic conditions, and customer demand,
which could cause actual results to differ materially from historical
results or those anticipated. Although the Company believes the
expectations reflected in such forward-looking statements are based
upon reasonable assumptions, it can give no assurance that its
expectations will be attained.
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, 1997 1998 1999
REVENUE
Owned hotels $1,203 1,485 1,813
Leased hotels -- -- 26
Management and franchise fees 115 104 120
Other fees and income 157 180 191
------ ----- ------
1,475 1,769 2,150
------ ----- ------
EXPENSES
Owned hotels 820 964 1,196
Leased hotels -- -- 26
Depreciation and amortization 93 125 187
Other operating expenses 103 152 173
Corporate expense, net 64 64 73
------ ----- ------
1,080 1,305 1,655
------ ----- ------
OPERATING INCOME 395 464 495
Interest and dividend income 17 13 57
Interest expense (90) (137) (237)
Interest expense, net, from unconsolidated affiliates (8) (4) (2)
------ ----- ------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 314 336 313
Provision for income taxes (124) (136) (130)
Minority interest, net (7) (12) (7)
------ ----- ------
INCOME FROM CONTINUING OPERATIONS 183 188 176
Income from discontinued gaming operations,
net of tax provision of $63 and $111 in
1997 and 1998, respectively 67 109 --
Cumulative effect of accounting change,
net of tax benefit of $1 in 1999 -- -- (2)
------ ----- ------
NET INCOME $ 250 297 174
====== ===== ======
BASIC EARNINGS PER SHARE
Income from continuing operations $ .68 .71 .66
Discontinued gaming operations .27 .44 --
Cumulative effect of accounting change -- -- (.01)
------ ----- ------
Net income per share $ .95 1.15 .65
====== ===== ======
DILUTED EARNINGS PER SHARE
Income from continuing operations $ .68 .71 .66
Discontinued gaming operations .26 .41 --
Cumulative effect of accounting change -- -- (.01)
------ ----- ------
Net income per share $ .94 1.12 .65
====== ===== ======
See notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS) DECEMBER 31, 1998 1999
Assets
CURRENT ASSETS
Cash and equivalents $ 47 104
Accounts receivable, net of allowance of $12 in 1998 and 1999 204 396
Receivable from discontinued gaming operations 73 --
Inventories 54 90
Deferred income taxes 48 15
Current portion of notes receivable -- 78
Other current assets 43 80
-------- -----
Total current assets 469 763
INVESTMENTS, PROPERTY AND OTHER ASSETS
Investments and notes receivable 262 676
Long-term receivable 625 625
Property and equipment, net 2,483 3,892
Management and franchise contracts, net -- 647
Leases, net -- 216
Brands, net -- 1,048
Goodwill, net 36 1,277
Other assets 69 109
-------- -----
Total investments, property and other assets 3,475 8,490
-------- -----
TOTAL ASSETS $ 3,944 9,253
======== =====
Liabilities and Stockholders' Equity
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 410 615
Current maturities of long-term debt 62 9
Income taxes payable 34 5
-------- -----
Total current liabilities 506 629
Long-term debt 3,037 6,085
Deferred income taxes 65 879
Insurance reserves and other 149 245
-------- -----
Total liabilities 3,757 7,838
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, 261 and 368 shares outstanding, respectively 663 946
Additional paid-in capital -- 853
Retained deficit (347) (197)
Accumulated other comprehensive income -- 24
-------- -----
316 1,626
Less treasury stock, at cost 129 211
-------- -----
Total stockholders' equity 187 1,415
-------- -----
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,944 9,253
======== =====
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN MILLIONS) YEAR ENDED DECEMBER 31, 1997 1998 1999
OPERATING ACTIVITIES
Net income $ 250 297 174
Adjustments to reconcile net income to net
cash provided by operating activities:
Income from discontinued gaming operations (67) (109) --
Cumulative effect of accounting change -- -- 2
Depreciation and amortization 93 125 187
Amortization of loan costs 1 2 3
Change in working capital components:
Inventories 10 (15) (30)
Accounts receivable 5 (42) (58)
Other current assets (5) (17) 15
Accounts payable and accrued expenses 4 124 16
Income taxes payable 4 25 (29)
Change in deferred income taxes (63) 9 (5)
Change in other liabilities (46) 5 4
Unconsolidated affiliates' distributions
in excess of (less than) earnings 6 (17) (7)
Other 37 3 7
-------- ------- -------
Net cash provided by operating activities 229 390 279
-------- ------- -------
INVESTING ACTIVITIES
Capital expenditures (93) (171) (254)
Additional investments (97) (98) (102)
Change in temporary investments 25 -- --
Proceeds from asset sales 123 -- --
Payments on notes and other 49 49 78
Acquisitions, net of cash acquired (67) (842) (2,036)
-------- ------- -------
Net cash used in investing activities (60) (1,062) (2,314)
-------- ------- -------
FINANCING ACTIVITIES
Change in commercial paper borrowings and
revolving loans (1,218) 355 2,264
Long-term borrowings 1,393 400 --
Reduction of long-term debt (95) (247) (64)
Issuance of common stock 38 25 5
Purchase of common stock (40) (81) (90)
Cash dividends (93) (90) (23)
-------- ------- -------
Net cash (used in) provided by financing activities (15) 362 2,092
-------- ------- -------
Net transfers (to) from discontinued gaming operations (191) 352 --
-------- ------- -------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (37) 42 57
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 42 5 47
-------- ------- -------
CASH AND EQUIVALENTS AT END OF YEAR $ 5 47 104
======== ======= =======
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
8% PRIDES ACCUMULATED
CONNVERTIBLE ADDITIONAL RETAINED OTHER
PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE TREASURY
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) STOCK STOCK CAPITAL (DEFICIT) INCOME (LOSS) STOCK TOTAL
BALANCE, DECEMBER 31, 1996 $ 15 627 1,745 931 4 (111) 3,211
Net income -- -- -- 250 -- -- 250
Other comprehensive income:
Cumulative translation adjustment,
net of deferred tax -- -- -- -- (4) -- (4)
Change in unrealized gain/loss
on marketable securities,
net of deferred tax -- -- -- -- 11 -- 11
--------- -------- -------- --------- --------- -------- -------
Comprehensive income for 1997 -- -- -- 250 7 -- 257
Issuance of common stock -- 1 4 -- -- 5 10
Exercise of stock options -- -- -- (48) -- 76 28
Treasury stock acquired -- -- -- -- -- (40) (40)
Deferred compensation -- -- 10 -- -- -- 10
Dividends
PRIDES ($.89 per share) -- -- -- (13) -- -- (13)
Common ($.32 per share) -- -- -- (80) -- -- (80)
--------- -------- -------- --------- --------- -------- -------
BALANCE, DECEMBER 31, 1997 15 628 1,759 1,040 11 (70) 3,383
--------- -------- -------- --------- --------- -------- -------
Net income -- -- -- 297 -- -- 297
Other comprehensive income:
Cumulative translation adjustment,
net of deferred tax -- -- -- -- (9) -- (9)
Change in unrealized gain/loss
on marketable securities,
net of deferred tax -- -- -- -- (10) -- (10)
--------- -------- -------- --------- --------- -------- -------
Comprehensive income for 1998 -- -- -- 297 (19) -- 278
Issuance of common stock -- 1 10 -- -- -- 11
Exercise of stock options -- -- -- (8) -- 22 14
Treasury stock acquired -- -- -- -- -- (81) (81)
Conversion of PRIDES (15) 34 (19) -- -- -- --
Deferred compensation -- -- 10 -- -- -- 10
Dividends
PRIDES ($.67 per share) -- -- -- (10) -- -- (10)
Common ($.32 per share) -- -- -- (80) -- -- (80)
Spin-off of Park Place
Entertainment Corporation -- -- (1,760) (1,586) 8 -- (3,338)
--------- -------- -------- --------- --------- -------- -------
BALANCE, DECEMBER 31, 1998 -- 663 -- (347) -- (129) 187
--------- -------- -------- --------- --------- -------- -------
Net income -- -- -- 174 -- -- 174
Other comprehensive income:
Cumulative translation adjustment,
net of deferred tax -- -- -- -- (1) -- (1)
Change in unrealized gain/loss
on marketable securities,
net of deferred tax -- -- -- -- 25 -- 25
--------- -------- -------- --------- --------- -------- -------
Comprehensive income for 1999 -- -- -- 174 24 -- 198
Issuance of common stock -- 283 843 -- -- -- 1,126
Exercise of stock options -- -- -- (5) -- 8 3
Treasury stock acquired -- -- -- -- -- (90) (90)
Deferred compensation -- -- 10 -- -- -- 10
Common dividends ($.08 per share) -- -- -- (23) -- -- (23)
Adjustment to spin-off of Park
Place Entertainment Corporation -- -- -- 4 -- -- 4
--------- -------- -------- --------- --------- -------- -------
BALANCE, DECEMBER 31, 1999 $-- 946 853 (197) 24 (211) 1,415
========= ======== ======== ========= ========= ======== =======
See notes to consolidated financial statements
NOTES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
BASIS OF PRESENTATION AND ORGANIZATION
On November 30, 1999, Hilton Hotels Corporation ("Hilton" or the
"Company") acquired Promus Hotel Corporation ("Promus") in a business
combination accounted for as a purchase. Accordingly, the consolidated
financial results of Hilton include the results of Promus and its
subsidiaries from the date of acquisition.
On December 31, 1998, Hilton completed a spin-off that split the
Company's operations into two independent public corporations per an
agreement dated June 30, 1998, one for conducting its hotel business
and one for conducting its gaming business. Hilton retained ownership
of the hotel business. Hilton transferred the gaming business to a new
corporation named Park Place Entertainment Corporation ("Park Place")
and distributed the stock of Park Place tax-free to Hilton
stockholders on a one-for-one basis. As a result of the spin-off,
Hilton's financial statements reflect the gaming business as
discontinued operations.
Hilton is primarily engaged in the ownership, management and
development of hotels, resorts and vacation ownership properties and
the franchising of lodging properties. Hilton operates in select
markets throughout the world, predominately in the United States.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Hilton
Hotels Corporation and its majority owned and controlled subsidiaries.
All material intercompany transactions are eliminated and net earnings
are reduced by the portion of the earnings of affiliates applicable
to other ownership interests. There are no significant restrictions
on the transfer of funds from the Company's wholly owned subsidiaries
to Hilton Hotels Corporation.
CASH AND EQUIVALENTS
Cash and equivalents include investments with initial maturities
of three months or less.
CURRENCY TRANSLATION
Assets and liabilities denominated in most foreign currencies are
translated into U.S. dollars at year-end exchange rates and related
gains and losses, net of applicable deferred income taxes, are
reflected in stockholders' equity. Gains and losses from foreign
currency transactions are included in earnings.
VALUATION OF LONG-LIVED ASSETS
The carrying value of the Company's long-lived assets are reviewed
when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If it is determined that an
impairment loss has occurred based on expected future cash flows, then
a loss is recognized in the income statement using a fair value based
model.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Interest incurred during
construction of facilities is capitalized and amortized over the life
of the asset. Costs of improvements are capitalized. Costs of normal
repairs and maintenance are charged to expense as incurred. Upon the
sale or retirement of property and equipment, the cost and related
accumulated depreciation are removed from the respective accounts, and
the resulting gain or loss, if any, is included in income.
Depreciation is provided on a straight-line basis over the
estimated useful life of the assets. Leasehold improvements are
amortized over the shorter of the asset life or lease term. The
service lives of assets are generally 40 years for buildings and eight
years for building improvements and furniture and equipment.
NOTES (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
PRE-OPENING COSTS
In April 1998, the AICPA issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities." This SOP requires
that all nongovernmental entities expense the costs of start-up
activities (pre-opening, pre-operating and organizational costs) as
those costs are incurred and requires the write-off of any unamortized
balances upon implementation. The Company's adoption of SOP 98-5
resulted in a cumulative effect of accounting change of $2 million,
net of a tax benefit of $1 million, in the first quarter of 1999.
MANAGEMENT AND FRANCHISE CONTRACTS
Management and franchise contracts acquired in acquisitions that were
accounted for as purchases are recorded at the estimated present value
of net cash flows expected to be received over the lives of the
contracts. This value is amortized using the straight-line method over
the remaining contract life. Costs incurred to acquire individual
management and franchise contracts are amortized using the
straight-line method over the life of the respective contract.
LEASES
Leases acquired in acquisitions that were accounted for as purchases
are recorded at the estimated present value of net cash flows expected
to be received over the lives of the lease agreements. This value is
amortized using the straight-line method over the remaining lease
term.
BRANDS
The brand names of hotels acquired in acquisitions are assigned a fair
market value. To arrive at a value for each brand name, an estimation
is made of the amount of royalty income that could be generated from
the brand name if it was licensed to an independent third-party owner.
The resulting cash flow is discounted back using the estimated
weighted average cost of capital for each respective brand name. The
brand value is amortized on a straight line basis over 40 years.
GOODWILL
Goodwill arose in connection with purchase acquisitions and is
amortized using the straight-line method over 40 years.
UNAMORTIZED LOAN COSTS
Debt discount and issuance costs incurred in connection with the
placement of long-term debt are capitalized and amortized to interest
expense over the lives of the related debt.
SELF-INSURANCE
The Company is self-insured for various levels of general liability,
workers' compensation and employee medical and life insurance
coverage. Insurance reserves include the present values of projected
settlements for claims.
EARNINGS PER SHARE ("EPS")
Basic EPS is computed by dividing net income available to common
stockholders (net income less preferred dividends of $13 million in
1997 and $10 million in 1998; no preferred stock was outstanding in
1999) by the weighted average number of common shares outstanding for
the period. The weighted average number of common shares outstanding
for 1997, 1998 and 1999 were 250 million, 250 million and 266 million,
respectively. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted. The dilutive effect of the assumed exercise of
stock options and convertible securities
NOTES (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
increased the weighted average number of common shares by 31 million,
28 million and 24 million for 1997, 1998 and 1999, respectively. In
addition, the increase to net income resulting from interest on
convertible securities assumed to have not been paid was $15 million
per year for 1997, 1998 and 1999.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATIONS
The consolidated financial statements for prior years reflect certain
reclassifications to conform with classifications adopted in 1999.
These classifications have no effect on net income.
ACQUISITIONS AND DIVESTITURES
ACQUISITION OF PROMUS HOTEL CORPORATION
On November 30, 1999, the Company completed the acquisition of Promus
pursuant to an agreement dated September 3, 1999. Aggregate
consideration consisted of approximately $1.7 billion in cash in
exchange for 55 percent of the outstanding shares of Promus common
stock and approximately 113 million shares of the Company's common
stock in exchange for the remaining 45 percent of Promus stock for a
combined equity value of approximately $2.8 billion, transaction costs
of $175 million, and the assumption of Promus and Promus subsidiary
debt totaling $750 million. Transaction costs include $46 million of
severance costs, $28 million of which had been paid as of December 31,
1999, covering the termination of Promus employees whose positions
were duplicative.
The acquisition has been accounted for using the purchase method
of accounting, and accordingly, the acquisition cost has been
allocated to the assets acquired and liabilities assumed based on
preliminary estimates of their fair value. A total of $1.2 billion,
representing the excess of acquisition cost over the preliminary fair
value of Promus' tangible and identifiable intangible net assets, has
been allocated to goodwill and is being amortized over 40 years.
The Company's consolidated results of operations incorporate
Promus' activity from the date of the acquisition. The following
unaudited pro forma information has been prepared assuming that this
acquisition had taken place at the beginning of the respective
periods. This pro forma information does not purport to be indicative
of future results or what would have occurred had the acquisition been
made as of those dates.
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS UNAUDITED) 1998 1999
Revenues $ 2,876 3,161
Operating income 676 703
Income from continuing operations 197 216
Net income 306 214
Basic earnings per share
Income from continuing operations .51 .58
Net income .81 .58
Diluted earnings per share
Income from continuing operations .51 .58
Net income .81 .58
NOTES (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
SPIN-OFF OF GAMING OPERATIONS
On December 31, 1998, the Company completed a spin-off of its gaming
operations. Accordingly, results of operations and cash flows of Park
Place have been reported as discontinued operations in the 1997 and
1998 periods presented in the consolidated financial statements.
Income from discontinued gaming operations for the years ended
December 31, 1997 and 1998 are as follows:
(IN MILLIONS) 1997 1998
Revenue $2,145 2,295
Costs and expenses 1,944 1,993
------- -------
Operating income 201 302
Net interest expense 67 79
------- -------
Income before income taxes and minority interest 134 223
Provision for income taxes 63 111
Minority interest, net 4 3
------- -------
Income from discontiued gaming operations $ 67 109
======= =======
INVENTORIES
Included in inventories at December 31, 1998 and 1999 are unsold
intervals at the Company's vacation ownership properties of $42
million and $70 million, respectively. Inventories are valued at the
lower of cost or estimated net realizable value.
INVESTMENTS AND NOTES RECEIVABLE
Investments and notes receivable at December 31, 1998 and 1999 are as
follows:
(IN MILLIONS) 1998 1999
Equity investments
Hotels $ 33 220
Other 58 74
Vacation ownership notes receivable 107 123
Other notes receivable 40 212
Marketable securities 24 125
------ ------
262 754
Less current portion of notes receivable -- 78
------ ------
Total $ 262 676
====== ======
PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1999 are as follows:
(IN MILLIONS) 1998 1999
Land $ 379 590
Buildings and leasehold improvements 2,296 3,256
Furniture and equipment 540 872
Property held for sale or development 37 22
Construction in progress 71 86
------- -------
3,323 4,826
Less accumulated depreciation 840 934
------- -------
Total $2,483 3,892
======= =======
NOTES (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1998 and 1999
are as follows:
(IN MILLIONS) 1998 1999
Accounts and notes payable $128 106
Accrued compensation and benefits 63 140
Accrued property tax 24 32
Accrued interest 27 34
Other accrued expenses 168 303
------- ------
Total $410 615
======= ======
LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1999 is as follows:
(IN MILLIONS) 1998 1999
Industrial development revenue bonds at adjustable rates, due 2015 $ 82 82
Senior notes, with an average rate of 7.7%, due 2001 to 2017 1,117 1,057
Senior notes, with an average rate of 7.2%, due 2002 to 2004 625 625
Mortgage notes, 6.0% to 8.6%, due 2000 to 2016 145 308
5% Convertible subordinated notes due 2006 492 494
Commercial paper -- 19
Revolving loans 635 3,506
Other 3 3
--------- --------
3,099 6,094
Less current maturities 62 9
--------- --------
Net long-term debt $3,037 6,085
========= ========
Interest paid, net of amounts capitalized, was $74 million, $130
million and $187 million in 1997, 1998 and 1999, respectively.
Capitalized interest amounted to $2 million, $4 million and $7 million
in 1997, 1998 and 1999, respectively.
Debt maturities during the next five years are as follows:
(IN MILLIONS)
2000 $ 9
2001 1,818
2002 634
2003 489
2004 1,631
During 1996, the Company entered into a long-term revolving
credit facility with an aggregate commitment of $1.75 billion, which
expires in 2001 and may be extended for successive one year periods at
the request of the Company with prior written consent of the lenders.
In 1999, the Company entered into an additional $1.85 billion
unsecured senior credit facility consisting of a $1.4 billion
five-year revolver and a $450 million 364-day revolver. The maturity
dates of the $1.85 billion facility are extendible on substantially
the same terms as the $1.75 billion facility. At December 31, 1999,
the $1.75 billion revolving credit facility was fully drawn and
approximately $1.3 billion was outstanding under the five-year portion
of the $1.85 billion revolving credit facility, leaving approximately
$550 million of the revolving credit facilities available to the
Company at such date. Borrowings will generally bear interest at the
London Interbank Offered Rate ("LIBOR") plus a spread based on the
Company's public debt rating or a leverage ratio. The all-in cost of
borrowings under the facilities was approximately LIBOR plus 125 basis
points as of December 31, 1999.
NOTES (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
Consolidated long-term debt at December 31, 1999 also includes
$480 million of borrowings outstanding under a $500 million revolving
credit facility at the Hilton Hawaiian Village. The all-in cost of
borrowings under this facility, which expires in 2003, was
approximately LIBOR plus 87.5 basis points as of December 31, 1999.
In October 1997, the Company filed a shelf registration statement
("Shelf") with the Securities and Exchange Commission registering up
to $2.5 billion in debt or equity securities. At December 31, 1999,
available financing under the Shelf totaled $2.1 billion. The terms of
any additional securities offered pursuant to the Shelf will be
determined by market conditions at the time of issuance.
Pursuant to a debt assumption agreement entered into at the time
of the Park Place spin-off, Park Place assumed and agreed to pay 100%
of the amount of each payment required to be made by Hilton under the
terms of the indentures governing Hilton's $300 million 7.375% Senior
Notes due 2002 and its $325 million 7% Senior Notes due 2004. These
notes remain in Hilton's long-term debt balance and a long-term
receivable from Park Place in an equal amount is included in the
Company's 1998 and 1999 consolidated balance sheets. In the event of
an increase in the interest rate on these notes as a result of certain
actions taken by Hilton or in certain other limited circumstances,
Hilton will be required to reimburse Park Place for any such increase.
Hilton is obligated to make any payment Park Place fails to make, and
in such event Park Place shall pay to Hilton the amount of such
payment together with interest, at the rate per annum borne by the
applicable notes plus two percent, to the date of such reimbursement.
A pro rata portion of Hilton's historical outstanding public and
corporate bank debt balances and related interest expense has been
allocated to Park Place for prior periods.
Provisions under various loan agreements require the Company to
comply with certain financial covenants which include limiting the
amount of outstanding indebtedness.
FINANCIAL INSTRUMENTS
CASH EQUIVALENTS AND LONG-TERM MARKETABLE SECURITIES
The fair value of cash equivalents and long-term marketable securities
is estimated based on the quoted market price of the investments.
LONG-TERM DEBT
The estimated fair value of long-term debt is based on the quoted
market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
The estimated fair values of the Company's financial instruments
at December 31, 1998 and 1999 are as follows:
1998 1999
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
(IN MILLIONS) AMOUNT VALUE AMOUNT VALUE
Cash and equivalents and long-term
marketable securities $ 71 71 229 229
Long-term debt (including current maturities) 3,099 3,123 6,094 5,837
NOTES (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
INCOME TAXES
The provisions for income taxes for the three years ended
December 31 are as follows:
(IN MILLIONS) 1997 1998 1999
Current
Federal $ 168 98 98
State, foreign and local 34 31 34
------ ------- -------
202 129 132
Deferred (78) 7 (2)
------ ------- -------
Total $ 124 136 130
====== ======= =======
During 1997, 1998 and 1999 the Company paid income taxes,
including amounts paid on behalf of the discontinued gaming operations
during 1997 and 1998, of $150 million, $165 million and $141 million,
respectively.
The income tax effects of temporary differences between financial
and income tax reporting that gave rise to deferred income tax assets
and liabilities at December 31, 1998 and 1999 are as follows:
(IN MILLIONS) 1998 1999
Deferred tax assets
Compensation $ 20 57
Deferred income 3 7
Insurance 17 25
Reserves 21 11
Foreign taxes 21 29
Business combination expense -- 45
NOL carryforwards -- 3
Other -- 9
--------- --------
82 186
Valuation allowance (3) (6)
--------- --------
79 180
--------- --------
Deferred tax liabilities
Basis difference (1) (269)
Investments (80) (207)
Property (2) (119)
Brand value -- (420)
Other (13) (29)
--------- --------
(96) (1,044)
--------- --------
Net deferred tax liability $ (17) (864)
========= ========
The reconciliation of the Federal income tax rate to the
Company's effective tax rate is as follows:
1997 1998 1999
Federal income tax rate 35.0% 35.0 35.0
Increase in taxes
State and local income taxes, net of Federal tax benefits 4.0 4.2 4.7
Foreign taxes, net .4 -- --
Spin-off costs -- .8 --
Other .1 .5 1.8
-------- -------- --------
Effective tax rate 39.5% 40.5 41.5
======== ======== ========
NOTES (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
STOCKHOLDERS' EQUITY
Five hundred million shares of common stock with a par value of $2.50
per share are authorized, of which 265 million and 378 million were
issued at December 31, 1998 and 1999, respectively, including treasury
shares of four million and ten million in 1998 and 1999, respectively.
Authorized preferred stock includes 25 million shares of preferred
stock with a par value of $1.00 per share. In October 1998, 15 million
shares of 8% PRIDES convertible preferred stock were converted into 14
million shares of common stock. No preferred shares were issued or
outstanding at December 31, 1998 and 1999.
To reflect the spin-off of the gaming business, the $3.3 billion
book value of net assets of discontinued gaming operations as of
December 31, 1998 was charged against the Company's retained earnings
and additional paid-in capital. During 1999, adjustments to the
spin-off totaling $4 million were recorded through retained earnings.
The Company's Board of Directors has approved the repurchase by
the Company of up to 20 million shares of its common stock pursuant to
a stock repurchase program. The timing of the stock purchases are made
at the discretion of the Company's management. At December 31, 1999,
the Company had repurchased 10.7 million shares or 54 percent of the
total authorized to be repurchased. The Company may at any time
repurchase up to 9.3 million of the remaining shares authorized for
repurchase.
The Company has a Share Purchase Rights Plan under which a right
is attached to each share of the Company's common stock. The rights
may only become exercisable under certain circumstances involving
actual or potential acquisitions of the Company's common stock by a
specified person or affiliated group. Depending on the circumstances,
if the rights become exercisable, the holder may be entitled to
purchase units of the Company's junior participating preferred stock,
shares of the Company's common stock or shares of common stock of the
acquiror. The rights remain in existence until November 2009 unless
they are terminated, exercised or redeemed.
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock-based compensation plans. Accordingly,
compensation expense recognized was different than what would have
otherwise been recognized under the fair value based method defined in
SFAS No. 123, "Accounting for Stock-Based Compensation." Had
compensation cost for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of SFAS No. 123, the
Company's net income and net income per share would have been reduced
to the pro forma amounts indicated below:
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1997 1998 1999
Income from continuing operations $ 178 183 169
Discontinued gaming operations 61 92 --
Cumulative effect of accounting change -- -- (2)
-------- -------- ---------
Net income $ 239 275 167
======== ======== =========
Basic EPS
Income from continuing operations $ .66 .69 .63
Discontinued gaming operations .25 .37 --
Cumulative effect of accounting change -- -- (.01)
-------- -------- ---------
Net income $ .91 1.06 .62
======== ======== =========
Diluted EPS
Income from continuing operations $ .66 .69 .63
Discontinued gaming operations .24 .35 --
Cumulative effect of accounting change -- -- (.01)
-------- -------- ---------
Net income $ .90 1.04 .62
======== ======== =========
NOTES (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
At December 31, 1999, 33 million shares of common stock were
reserved for the exercise of options under the Company's Stock
Incentive Plans. Options may be granted to salaried officers,
directors and other key employees of the Company to purchase common
stock at not less than the fair market value at the date of grant.
Generally, options may be exercised in installments commencing one
year after the date of grant. The Stock Incentive Plans also permit
the granting of Stock Appreciation Rights ("SARs"). No SARs have been
granted as of December 31, 1999.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997, 1998 and 1999,
respectively: dividend yield of one percent for each of the three
years; expected volatility of 32, 34 and 31 percent; risk-free
interest rates of 6.5, 5.5 and 4.8 percent and expected lives of six
years for 1997 and 1998 and seven years for 1999.
A summary of the status of the Company's stock option plans as of
December 31, 1997, 1998 and 1999, and changes during the years ending
on those dates is presented below:
OPTIONS WEIGHTED
PRICE AVERAGE AVAILABLE
RANGE PRICE OPTIONS FOR
(PER SHARE) (PER SHARE) OUTSTANDING GRANT
Balance at December 31, 1996 $ 4.68 - 18.70 $ 12.08 13,799,456 3,221,762
Authorized -- 6,200,000
Granted 15.95 - 21.30 16.73 3,046,990 (3,046,990)
Exercised 4.72 - 16.23 9.32 (1,418,185) --
Cancelled 7.46 - 17.15 13.87 (796,642) 795,892
---------------- ----------- -------------- ------------
Balance at December 31, 1997 4.68 - 21.30 13.23 14,631,619 7,170,664
Authorized -- 12,000,000
Granted 12.17 - 27.53 18.23 9,113,850 (9,113,850)
Exercised 4.72 - 18.38 10.04 (692,067) --
Cancelled 10.48 - 21.30 15.71 (2,359,632) 2,359,632
---------------- ----------- -------------- ------------
Balance at December 31, 1998 4.68 - 27.53 15.25 20,693,770 12,416,446
Granted 10.84 - 15.31 14.84 3,157,400 (3,157,400)
Exercised 4.72 - 16.59 9.35 (270,276) --
Cancelled 10.48 - 21.30 16.39 (823,152) 823,152
---------------- ----------- -------------- ------------
Balance at December 31, 1999 $ 4.68 - 27.53 $ 15.22 22,757,742 10,082,198
================ =========== ============== ============
The following table summarizes information about stock options
outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------------
WEIGHTED
RANGE AVARAGE WEIGHTED WEIGHTED
OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
$ 4.68 - 11.88 7,747,892 5.1 $11.40 6,234,892 $11.28
12.51 - 14.84 8,132,250 8.6 14.21 2,025,101 14.14
15.06 - 27.53 6,877,600 7.9 20.74 2,144,181 17.48
---------------- ------------ --------- ---------- ------------- -----------
$ 4.68 - 27.53 22,757,742 7.2 $15.22 10,404,174 $13.11
================ ============ ========= ========== ============= ===========
Effective January 1, 1997, the Company adopted the 1997 Employee
Stock Purchase Plan by which the Company is authorized to issue up to
two million shares of common stock to its full-time employees. Under
the terms of the Plan, employees can elect to have a percentage of
their earnings withheld to purchase the Company's common stock.
NOTES (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have various employee investment
plans whereby the Company contributes certain percentages of employee
contributions. The aggregate expense to the Company under these plans
totaled $4 million, $4 million and $6 million in 1997, 1998 and 1999,
respectively.
A significant number of the Company's employees are covered by
union sponsored, collectively bargained multi-employer pension plans.
The Company contributed and charged to expense $9 million, $11 million
and $13 million in 1997, 1998 and 1999, respectively, for such plans.
Information from the plans' administrators is not sufficient to permit
the Company to determine its share, if any, of unfunded vested
benefits.
In addition, a significant number of the Company's employees are
covered by a noncontributory retirement plan ("Basic Plan"). The
Company also has plans covering qualifying employees and non-officer
directors ("Supplemental Plans"). Benefits for all plans are based
upon years of service and compensation, as defined. As of December 31,
1996, employees have not accrued additional benefits under either the
Basic or Supplemental Plans. Plan assets will be used to pay benefits
due employees for service through this date. As of December 31, 1998
and 1999, these plans have assets of $257 million and $258 million and
a projected benefit obligation of $233 million and $224 million,
respectively. Accrued pension cost totaled $17 million at December 31,
1998 and 1999. Pension expense for the years ended December 31, 1997,
1998 and 1999 was not significant.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides life insurance benefits to certain retired
employees. Under terms of the plan covering such life insurance
benefits, the Company reserves the right to change, modify or
discontinue these benefits. The Company does not provide
postretirement health care benefits to its employees. The cost of
the benefits provided is not significant.
LEASES
The Company leases hotel properties and land under operating leases.
As of December 31, 1999, the Company leased 74 hotels, 52 of which are
leased from RFS Hotel Investors, Inc. ("RFS"). The Company's hotel
leases require the payment of rent equal to the greater of fixed base
rent or percentage rent based on a percentage of revenue, and expire
through July 2012, with varying renewal options. Substantially all of
the hotels leased from RFS are cross-defaulted with one another. The
Company's land leases represent ground leases for certain owned hotels
and, in addition to minimum base rental payments, may require the
payment of additional rents based on varying percentages of revenue or
income. Total rent expense incurred under the Company's leases was $19
million, $22 million and $23 million in 1997, 1998 and 1999
respectively. Minimum lease commitments under noncancelable operating
leases, including RFS, approximate $66 million annually through 2004
with an aggregate commitment of $811 million through 2044.
In January 2000, the Company entered into an agreement which
gives RFS the option to terminate the RFS leases. As consideration for
terminating the leases, RFS will pay the Company approximately $60
million. It is anticipated that the lease termination will be
accomplished in the first quarter of 2001.
NOTES (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
COMMITMENTS AND CONTINGENCIES
The Company is liable under certain lease agreements pursuant to which
it has assigned the direct obligation to third party interests.
Additionally, the Company 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 loans and leases related to
certain joint ventures. Management believes the likelihood is remote
that material payments will be required under these agreements. The
Company's estimated maximum exposure under such agreements is
approximately $41 million over the next 30 years.
At December 31, 1999, the Company had contractual commitments for
construction, major expansion and rehabilitation projects of
approximately $175 million.
FELCOR
FelCor Lodging Trust Inc. ("FelCor") owns or has an interest in 75
Company hotels as of December 31, 1999. The Company has guaranteed
repayment of a third party loan to FelCor of up to $25 million.
CANDLEWOOD
A subsidiary of the Company has committed to provide credit support
for a loan facility utilized by Candlewood Hotel Company
("Candlewood") to provide construction and permanent financing to
Candlewood and its franchisees, with the aggregate amount of exposure
for all such credit support capped at $30 million. As of December 31,
1999, the Company has guaranteed $11 million in such financing.
FRANCHISE FINANCING
The Company has established franchise financing programs with third
party lenders to support the growth of its Hampton Inn, Homewood
Suites by Hilton, Hilton Garden Inn and Embassy Suites hotels. As of
December 31, 1999, the Company has provided guarantees of $36 million
on loans outstanding under the programs.
OTHER
Various lawsuits are pending against the Company. In management's
opinion, disposition of these lawsuits is not expected to have a
material effect on the Company's financial position or results of
operations.
SUPPLEMENTAL FINANCIAL INFORMATION
Promus Hotels, Inc. ("PHI") is a wholly-owned subsidiary of the
Company that was acquired as part of the Promus acquisition on
November 30, 1999. The Company's consolidated results reflect the
operations of PHI only for the month of December 1999. Among other
things, PHI holds the franchise license for many of the Company's
franchised hotels, primarily Embassy Suites, Hampton Inn and Homewood
Suites by Hilton brands. The following summarized financial
information for PHI, as of and for the twelve months ended December
31, reflects the push-down of purchase accounting in December 1999.
(IN MILLIONS) 1997 1998 1999
ASSETS
Current assets $ 37 84
Property and equipment, net 427 323
Other assets 409 1,090
-------- --------
$873 1,497
-------- --------
LIABILITIES
Current liabilities $ 86 84
Notes payable 243 6
Other long-term obligations 119 111
-------- --------
448 201
-------- --------
Net assets $425 1,296
======== ========
Revenues $ 290 316 326
Operating income 104 166 192
Net income 74 93 68
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF HILTON HOTELS CORPORATION:
We have audited the accompanying consolidated balance sheets of Hilton
Hotels Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Hilton Hotels Corporation and subsidiaries as of December 31, 1999 and
1998 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United
States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Los Angeles, California
February 3, 2000
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
QUARTERLY FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
1998
Revenue $ 366 457 450 496 1,769
EBITDA(1) 122 173 150 151 596
Operating income 94 142 116 112 464
Income from continuing operations 38 65 41 44 188
Income from discontinued
gaming operations 39 41 38 (9) 109
Net income 77 106 79 35 297
Basic EPS(2)
Continuing operations $ .14 .25 .15 .17 .71
Discontinued gaming operations .16 .16 .16 (.03) .44
--------- ------- -------- -------- --------
Net income $ .30 .41 .31 .14 1.15
--------- ------- -------- -------- --------
Diluted EPS
Continuing operations $ .14 .25 .15 .17 .71
Discontinued gaming operations .15 .14 .15 (.03) .41
--------- ------- -------- -------- --------
Net income $ .29 .39 .30 .14 1.12
--------- ------- -------- -------- --------
1999
Revenue $ 475 539 498 638 2,150
EBITDA(1) 156 198 161 180 695
Operating income 116 154 114 111 495
Income from continuing operations 42 66 42 26 176
Cumulative effect of accounting
change, net of tax benefit (2) -- -- -- (2)
Net income 40 66 42 26 174
Basic EPS(2)
Continuing operations $ .16 .26 .16 .09 .66
Cumulative effect of
accounting change (.01) -- -- -- (.01)
--------- ------- -------- -------- --------
Net income $ .15 .26 .16 .09 .65
--------- ------- -------- -------- --------
Diluted EPS
Continuing operations $ .16 .25 .16 .09 .66
Cumulative effect of
accounting change (.01) -- -- -- (.01)
--------- ------- -------- -------- --------
Net income $ .15 .25 .16 .09 .65
========= ======= ======== ======== ========
As of December 31, 1999 there were approximately 23,300 stockholders of
record.
(1) EBITDA is earnings before interest, taxes, depreciation, amortization,
pre-opening expense and non-cash items. EBITDA can be computed by adding
depreciation, amortization, pre-opening expense, interest and dividend
income from investments related to operating activities and non-cash
items to operating income. EBITDA is presented supplementally because
management believes it allows for a more complete analysis of results of
operations. Non-cash items, such as asset write-downs and impairment
losses, are excluded from EBITDA as these items do not impact operating
results on a recurring basis. This information should not be considered
as an alternative to any measure of performance as promulgated under
generally accepted accounting principles, such as operating income or
net income, nor should it be considered as an indicator of the overall
financial performance of the Company. The Company's calculation of
EBITDA may be different from the calculation used by other companies,
and therefore comparability may be limited.
(2) The sum of EPS for the four quarters may differ from the annual EPS due
to the required method of computing weighted average number of shares in
the respective periods.
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
GENERAL INFORMATION
YEAR ENDED DECEMBER 31, 1997 1998 1999
EBITDA (IN MILLIONS)
EBITDA
Operations $561 660 768
Corporate expense, net (64) (64) (73)
------- ------ ------
Total EBITDA $497 596 695
======= ====== ======
Reconciliation of operating income to EBITDA:
Operating income $395 464 495
Pre-opening expense -- -- 2
Non-cash items (2) -- --
Operating interest and dividend income -- -- 3
Depreciation and amortization(1) 104 132 195
------- ------ ------
EBITDA $497 596 695
======= ====== ======
1998 1999 CHANGE
COMPARATIVE STATISTICAL INFORMATION(2)
Hilton
Occupancy 71.2 % 70.7 % (.5)pts
Average rate $127.19 $130.60 2.7 %
RevPAR $ 90.54 $ 92.34 2.0 %
Hilton Garden Inn
Occupancy 64.0 % 65.9 % 1.9 pts
Average rate $ 91.00 $ 92.05 1.2 %
RevPAR $ 58.20 $ 60.63 4.2 %
Doubletree(3)
Occupancy 70.8 % 70.1 % (.7)pts
Average rate $106.34 $108.01 1.6 %
RevPAR $ 75.31 $ 75.70 .5 %
Embassy Suites
Occupancy 72.5 % 73.1 % .6 pts
Average rate $120.77 $121.49 .6 %
RevPAR $ 87.57 $ 88.84 1.5 %
Homewood Suites by Hilton
Occupancy 73.9 % 73.7 % (.2)pts
Average rate $ 96.01 $ 95.01 (1.0)%
RevPAR $ 70.93 $ 69.98 (1.3)%
Hampton Inn
Occupancy 70.0 % 68.1 % (1.9)pts
Average rate $ 68.57 $ 71.29 4.0 %
RevPAR $ 47.98 $ 48.57 1.2 %
Other
Occupancy 68.1 % 67.0 % (1.1)pts
Average rate $ 98.38 $ 99.50 1.1 %
RevPAR $ 67.02 $ 66.70 (.5)%
(1) Includes proportionate share of unconsolidated affiliates.
(2) Statistics are presented on a pro forma basis for both periods, as if
the acquisition of Promus Hotel Corporation had been completed as of
January 1, 1998. Statistics are for comparable hotels, and include only
those hotels in the system as of December 31, 1999 which were owned,
managed or franchised by Hilton since January 1, 1998.
(3) Doubletree franchised hotels are not included in the statistical
information.
FIVE YEAR SUMMARY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, 1995 1996 1997 1998 1999
OPERATING DATA
REVENUE $ 715 947 1,475 1,769 2,150
INCOME
Income from continuing operations $ 88 120 183 188 176
Discontinued gaming operations 85 (38) 67 109 --
Cumulative effect of
accounting change -- -- -- -- (2)
--------- -------- -------- -------- --------
Net income $ 173 82 250 297 174
========= ======== ======== ======== ========
BASIC EARNINGS PER SHARE
Income from continuing operations $ .46 .61 .68 .71 .66
Discontinued gaming operations .44 (.20) .27 .44 --
Cumulative effect of
accounting change -- -- -- -- (.01)
--------- -------- -------- -------- --------
Net income $ .90 .41 .95 1.15 .65
========= ======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Income from continuing operations $ .45 .61 .68 .71 .66
Discontinued gaming operations .44 (.20) .26 .41 --
Cumulative effect of
accounting change -- -- -- -- (.01)
--------- -------- -------- -------- --------
Net income $ .89 .41 .94 1.12 .65
========= ======== ======== ======== ========
CASH DIVIDENDS PER COMMON SHARE $ .30 .305 .32 .32 .08
Other Information
EBITDA
Operations $ 308 401 561 660 768
Corporate expense, net (18) (40) (64) (64) (73)
--------- -------- -------- -------- --------
Total $ 290 361 497 596 695
========= ======== ======== ======== ========
NUMBER OF PROPERTIES AT YEAR END
Owned(1) 19 24 25 32 85
Joint venture 14 7 7 5 56
Leased -- -- -- -- 74
Managed 24 28 27 24 185
Franchised 162 172 180 188 1,352
--------- -------- -------- -------- --------
Total 219 231 239 249 1,752
========= ======== ======== ======== ========
AVAILABLE ROOMS AT YEAR END
Owned(1) 10,714 17,786 18,377 23,341 36,367
Joint venture 13,384 5,306 5,422 2,421 16,171
Leased -- -- -- -- 12,681
Managed 15,096 16,776 15,779 14,690 51,979
Franchised 41,687 43,694 45,092 46,562 183,081
--------- -------- -------- -------- --------
Total 80,881 83,562 84,670 87,014 300,279
========= ======== ======== ======== ========
(1) Includes majority owned and controlled hotels.
CORPORATE INFORMATION
BOARD OF DIRECTORS
Stephen F. Bollenbach(3,4)
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
A. Steven Crown(1,2,3)
GENERAL PARTNER,
HENRY CROWN & COMPANY,
CHICAGO, ILLINOIS - DIVERSIFIED
MANUFACTURING OPERATIONS,
MARINE OPERATIONS AND REAL
ESTATE VENTURES
Peter M. George(1,2,3)
VICE CHAIRMAN AND GROUP
CHIEF EXECUTIVE - HILTON
GROUP PLC, AND CHAIRMAN -
HILTON INTERNATIONAL CO.,
HERTS, ENGLAND - HOTEL AND
GAMING COMPANY
Arthur M. Goldberg
PRESIDENT AND
CHIEF EXECUTIVE OFFICER,
PARK PLACE ENTERTAINMENT
CORPORATION, LAS VEGAS,
NEVADA - CASINO GAMING COMPANY
Barron Hilton(3)
CHAIRMAN
Dieter H. Huckestein
EXECUTIVE VICE PRESIDENT,
HILTON HOTELS CORPORATION,
AND PRESIDENT - HOTEL
DIVISION
Robert L. Johnson(1,2,3,4)
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER,
BET HOLDINGS, INC.,
WASHINGTON, D.C. -
DIVERSIFIED MEDIA HOLDING
COMPANY, CHAIRMAN AND
PRESIDENT OF DISTRICT
CABLEVISION, INC.
Benjamin V. Lambert(1,3)
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER,
EASTDIL REALTY COMPANY,
L.L.C., NEW YORK -REAL
ESTATE INVESTMENT BANKERS
John H. Myers
PRESIDENT AND
CHIEF EXECUTIVE OFFICER,
GENERAL ELECTRIC ASSET
MANAGEMENT INCORPORATED,
STAMFORD, CONNECTICUT - A
WHOLLY-OWNED SUBSIDIARY OF
GENERAL ELECTRIC COMPANY
John L. Notter(1,2,3)
CHAIRMAN,
SWISS AMERICAN INVESTMENT
CORP. - AN INVESTMENT FIRM,
AND CHAIRMAN, WESTLAKE
PROPERTIES, WESTLAKE VILLAGE,
CALIFORNIA - A HOTEL AND REAL
ESTATE DEVELOPMENT COMPANY
Judy L. Shelton (1,2,3)
ECONOMIST, SPECIALIZING IN
INTERNATIONAL MONEY, FINANCE
AND TRADE ISSUES, MARSHALL,
VIRGINIA, AND PROFESSOR OF
INTERNATIONAL FINANCE AT THE
DUXX ESCUELA DE GRADUADOS
EN LIDERAZGO EMPRESERIAL, IN
MONTERREY, MEXICO
Donna F. Tuttle(1,2,3,4)
PRESIDENT, KORN TUTTLE
CAPITAL GROUP, LOS ANGELES,
CALIFORNIA - FINANCIAL
CONSULTING AND INVESTMENTS FIRM
Peter V. Ueberroth
MANAGING DIRECTOR,
CONTRARIAN GROUP, INC.,
NEWPORT BEACH, CALIFORNIA - A
BUSINESS MANAGEMENT COMPANY,
AND CO-CHAIRMAN,
PEBBLE BEACH COMPANY, PEBBLE
BEACH, CALIFORNIA -
A GOLF MANAGEMENT COMPANY
Sam D. Young, Jr.(1,2,3)
CHAIRMAN, TRANS-WEST
ENTERPRISES, INC.,
EL PASO, TEXAS -
AN INVESTMENT COMPANY
(1) Members of the Audit Committee
(2) Members of the Compensation Committee
(3) Members of the Nominating Committee
(4) Members of the Diversity Committee
CORPORATE EXECUTIVE OFFICERS
Stephen F. Bollenbach
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Thomas E. Gallagher
EXECUTIVE VICE PRESIDENT,
CHIEF ADMINISTRATIVE OFFICER,
GENERAL COUNSEL AND
SECRETARY
Matthew J. Hart
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Dieter H. Huckestein
EXECUTIVE VICE PRESIDENT -
HILTON HOTELS CORPORATION,
AND PRESIDENT -
HOTEL DIVISION
Thomas L. Keltner
EXECUTIVE VICE PRESIDENT -
HILTON HOTELS CORPORATION,
AND PRESIDENT - FRANCHISE
HOTEL GROUP
CORPORATE SENIOR OFFICERS
Mariel C. Albrecht
SENIOR VICE PRESIDENT AND
TREASURER
Marc A. Grossman
SENIOR VICE PRESIDENT -
CORPORATE AFFAIRS
James T. Harvey
SENIOR VICE PRESIDENT AND
CHIEF INFORMATION OFFICER
Dorothy Hayden-Watkins
SENIOR VICE PRESIDENT -
DIVERSITY
Robert M. La Forgia
SENIOR VICE PRESIDENT AND
CONTROLLER
Molly McKenzie-Swarts
SENIOR VICE PRESIDENT -
HUMAN RESOURCES
Stevan D. Porter
SENIOR VICE PRESIDENT -
HILTON HOTELS CORPORATION,
AND EXECUTIVE VICE PRESIDENT
- - HOTEL DIVISION
- - HOTEL OPERATIONS
Hilmar A. Rosenast
SENIOR VICE PRESIDENT -
HILTON HOTELS CORPORATION,
AND EXECUTIVE VICE PRESIDENT
- - HOTEL DIVISION
- - SELECT HOTELS
GENERAL INFORMATION
Hilton Hotels
Corporation
WORLD HEADQUARTERS
9336 CIVIC CENTER DRIVE
BEVERLY HILLS, CA 90210
310.278.4321
Transfer Agent and
Registrar for Common
Stock
CHASEMELLON
SHAREHOLDER SERVICES, L.L.C.
85 CHALLENGER ROAD
OVERPECK CENTRE
RIDGEFIELD PARK, NJ 07660
www.chasemellon.com
1.888.224.2751
FOR THE HEARING IMPAIRED:
1.800.231.5469
Independent Public
Accountants
ARTHUR ANDERSEN LLP
Form 10-K
STOCKHOLDERS WISHING TO
RECEIVE A COPY OF THE
COMPANY'S ANNUAL REPORT
ON FORM 10-K, AS FILED WITH
THE SECURITIES AND EXCHANGE
COMMISSION, EXCLUSIVE OF THE
EXHIBITS THERETO, MAY DO SO
WITHOUT CHARGE BY WRITING TO
INVESTOR RELATIONS,
HILTON HOTELS CORPORATION,
9336 CIVIC CENTER DRIVE,
BEVERLY HILLS, CA 90210.
Annual Meeting
THE ANNUAL MEETING OF STOCKHOLDERS
IS SCHEDULED TO BE HELD
AT THE BEVERLY HILTON,
9876 WILSHIRE BOULEVARD,
BEVERLY HILLS, CALIFORNIA, ON
MAY 11, 2000 AT 10:00 A.M.
Hotel Reservation Information
1.800.HILTONS
Visit our website at:
www.hilton.com
The following service marks used in this annual report are owned by Hilton
Hospitality, Inc.; Hilton,-Registered Trademark- Doubletree,-Registered
Trademark- Embassy Suites,-Registered Trademark- Hampton Inn,-Registered
Trademark- Hampton Inn & Suites,-Registered Trademark- Homewood
Suites-Registered Trademark- by Hilton, Conrad International,-Registered
Trademark- Red Lion,-Registered Trademark- and HHonors.-Registered
Trademark-