EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
STRATEGIC AND FINANCIAL OBJECTIVES
Management's primary objective is to maximize shareholder value. Management
intends to achieve this objective through the pursuit of four major
strategies: make efficient use of the Company's strong balance sheet and
the attractive capital markets while maintaining an investment grade
rating; grow the hotel business by buying and owning full-service hotels in
major market locations; expand the Company's gaming operations through
acquisitions and new development; and leverage the Hilton brand name
worldwide. Management believes that continued implementation of these
strategies will result in strong cash flow growth and enhanced shareholder
value.
FINANCIAL CONDITION
LIQUIDITY
(in millions) 1996 1995 1994
--------------------------------------------------------------------------
EBITDA(1)
Hotels $392 301 240
Gaming 233 267 244
Corporate (48) (25) (23)
-----------------------------
Total $577 543 461
-----------------------------
-----------------------------
Net cash provided by operating activities $438 380 253
Working capital 153 183 346
Capital expenditures 242 186 265
Additional investments 104 98 157
(1) EBITDA is earnings before interest, taxes, depreciation, amortization
and non-cash charges. EBITDA is presented supplementally because
management believes it allows for a more complete analysis of results
of operations. This information should not be considered as an
alternative to any measure of performance or liquidity as promulgated
under generally accepted accounting principles nor should it be
considered as an indicator of the overall financial performance of the
Company.
Total EBITDA increased $34 million compared to the prior year. This
increase is attributable to continued strong results at the Company's owned
and partially owned full-service hotels and resorts. EBITDA for the
Company's hotel segment increased $91 million, a 30 percent improvement
from the prior year. The primary contributors to this strong performance
were the Company's ten major owned and partially owned properties in New
York, Chicago, San Francisco, Washington D.C., New Orleans and Honolulu.
EBITDA for the Company's gaming segment decreased $34 million or 13 percent
compared to the prior year primarily as a result of a substantial decrease
in baccarat drop and win percentage at the Las Vegas Hilton along with
sluggish conditions at its hotel casinos in Laughlin and Reno.
ACQUISITIONS AND CAPITAL SPENDING
The Company seeks to expand its gaming and hotel operations while
maintaining diversity in its operations and a balance of cash flows
generated by each segment. Growth in the gaming segment will occur
primarily through acquisitions and new development. In December 1996, the
Company consummated its acquisition of Bally Entertainment Corporation
(Bally) through the merger of Bally with and into the Company (Bally
Merger). Aggregate consideration consisted of approximately 53 million
shares of the Company's common stock and approximately 15 million shares of
the Company's newly authorized Preferred Redeemable Increased Dividend
Equity Securities, 8% PRIDES, Convertible Preferred Stock (PRIDES), for a
combined equity value of $1.9 billion and the assumption of $1.2 billion of
Bally and Bally subsidiary debt.
As a result of the Bally Merger, the Company now operates the
following additional properties: the 1,265-room Bally's Park Place Casino
Resort and the 509-room Atlantic City Hilton (formerly The Grand), both in
Atlantic City, New Jersey and wholly owned by the Company; the 2,814-room
Bally's Las Vegas which is 84% owned; the 58% owned Bally's Saloon Gambling
Hall Hotel dockside casino and 238-room hotel in Robinsonville, Mississippi
and the 50% owned Bally's Casino Lakeshore Resort riverboat casino in New
Orleans, Louisiana.
25
HILTON HOTELS CORPORATION 1996 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- - -------------------------------------------------------------------------------
(CONTINUED)
The Atlantic City Hilton is mid-way through the construction of a new
300-room tower that will increase capacity by nearly 60 percent. This $50
million project is expected to be completed by mid-1997. Adjacent to
Bally's Park Place, the Company is mid-way through construction of a new
themed western-style casino and entertainment complex which is expected to
be Atlantic City's first themed casino. This $110 million project is
located on approximately four acres of boardwalk property and will feature
a 70,000 square foot casino complex.
The Bally Merger also resulted in the acquisition of a 24 acre parcel
adjacent to Bally's Las Vegas. This will be the site of the planned $750
million, 2,900-room Paris Casino-Resort which will feature an 85,000 square
foot casino and a 50-story replica of the Eiffel Tower. This project is
expected to be completed in mid-1999.
During 1996, the Company continued to expand on a number of new
development fronts. In October, the Company opened the Flamingo Casino-
Kansas City located adjacent to the Missouri River near downtown Kansas
City. This $103 million project includes a 30,000 square foot casino on a
continuously docked barge as well as concession and entertainment
facilities. In January 1996, the Company began construction on "Star Trek:
The Experience at the Las Vegas Hilton," an adult-oriented attraction being
developed in collaboration with Paramount Parks, Inc. This project will
include the addition of a new 22,000 square foot themed casino and is
scheduled to open in late summer 1997. The Company's share of costs for
this project will total approximately $70 million.
During 1996, construction continued on the Conrad International Punta
del Este Resort and Casino in Uruguay. This $193 million project includes a
38,000 square foot casino which opened in January 1997, and a 300-room
luxury hotel which is scheduled to open in late-1997. As of December 31,
1996, the Company has provided debt financing for this project totaling $55
million. This property is approximately 43% owned by the Company and is
being financed with a combination of long-term debt and equity.
In addition to the estimated $380 million in 1997 expenditures related
to the aforementioned gaming projects, the Company anticipates spending
approximately $150 million in the gaming segment in 1997 on normal capital
replacements, structural and technology upgrades, ADA/safety compliance and
improvement projects that are evaluated using the Company's ROI criteria.
Growth in the hotel segment continues through selective acquisition of
large full-service hotels in major market locations. During the 1996 fourth
quarter, the Company acquired from The Prudential Insurance Company of
America (Prudential) approximately 50% of the ownership interests in the
joint ventures which own the Capital Hilton, Washington Hilton & Towers,
Chicago Hilton & Towers, New York Hilton & Towers, Rye Town Hilton and the
San Francisco Hilton & Towers for approximately $430 million. As a result
of these acquisitions, the Company's ownership interest exceeds 99% in each
of these properties, except the Chicago Hilton & Towers, in which the
Company's ownership interest is approximately 83%. In 1997 and 1998, the
Company will have an option to purchase the remaining interest in such
properties, other than Prudential's .5% interest in the New York Hilton &
Towers.
The Company expects to make further acquisitions in 1997. In addition,
the Company intends to spend approximately $85 million in the hotel segment
on normal capital replacements, upgrades,compliance and improvement
projects which are subject to strict ROI analysis.
The estimated 1997 expenditures required to complete the
aforementioned projects and capital spending programs will be financed
through available cash flows and general corporate borrowings.
SIGNIFICANT NEW DEVELOPMENTS
In December 1996, the Company and Patriot American Hospitality, Inc.
(Patriot) entered into a letter of intent for Patriot to acquire and
develop a range of Hilton properties in key U.S. markets. The alliance
calls for Patriot to acquire four existing wholly owned Hilton Suites
hotels for approximately $105 million, develop new suites, acquire and
convert full-service hotels and suites to the Hilton brand and develop
approximately 15 new Hilton Garden Inns within an 18-month period.
In January 1997, the Company finalized agreements with Ladbroke Group
PLC (Ladbroke), 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. The
Company and HI have integrated their reservation systems and, in February
1997, launched the Hilton HHonors Worldwide loyalty program. In addition,
the agreements permit the Company and Ladbroke to acquire up to 20% of each
other's outstanding capital stock.
26
1996 ANNUAL REPORT
In January 1997, the Company commenced an offer to acquire ITT
Corporation (ITT) in a combination cash and stock transaction. The Company
offered a price of $55 for each ITT share, for a consideration of
approximately $6.5 billion. The total transaction, including assumption of
ITT's outstanding debt, would be valued at approximately $10.5 billion. The
Company's offer consists of a cash tender offer of $55 per share for a
majority of the outstanding ITT shares, to be followed by a merger whereby
ITT shareholders would receive shares of the Company's common stock with a
value of $55 in exchange for each remaining ITT share, subject to
appropriate collar provisions. The Company plans to fund the ITT tender
offer from a combination of its available cash, working capital, existing
credit facilities, borrowings under credit facilities that the Company will
seek to obtain from commercial banks and/or issuance of public debt. The
Company has reached a preliminary understanding with HFS Incorporated (HFS)
under which HFS would license, on a long-term worldwide basis, the Sheraton
trademark, franchise systems and management agreements. The acquisition is
subject to regulatory approvals and other conditions, and therefore there
can be no assurance that the Company will be successful in acquiring ITT,
or if successful, what effect such acquisition will have on the Company's
financial condition or results of operations.
As of February 1, 1997, the Company owned 41 percent of the 11 3/4%
First Mortgage Notes due 2002 of Claridge Hotel and Casino Corporation
(Claridge). The Company is discussing with Claridge the possible
acquisition of Claridge by the Company. The acquisition of Claridge would
be subject to certain regulatory approvals.
In February 1997, the Company sold its 30% equity interest in the
Conrad International Hong Kong for total consideration of approximately
$112 million. Also in February 1997, the Company purchased the Anchorage
Hilton hotel in Anchorage, Alaska for $67 million from Bristol Corporation.
LONG-TERM DEBT
Long-term debt at December 31, 1996 totaled $2.6 billion compared to $1.1
billion at December 31, 1995. Debt assumed in the Bally Merger totaled
approximately $1.2 billion. Subsequent to the merger date the Company
completed its cash tender offers and consent solicitations for
substantially all of the outstanding notes of certain wholly owned
subsidiaries including the 9 1/4% Bally's Park Place Funding Inc. First
Mortgage Notes due 2004, the 10 5/8% GNF, Corp. First Mortgage Notes due
2003 and Bally's Casino Holdings, Inc. Senior Discount Notes. The remaining
untendered notes were defeased. The Company also purchased 99.1% of the
outstanding 10 3/8% Bally's Grand, Inc. First Mortgage Notes due 2003. The
aggregate principal amount of debt securities tendered, purchased, or
defeased totaled $1.1 billion. Tender and defeasance premiums and related
expenses totaled approximately $126 million. The Company funded the tender
offers and defeasance primarily with commercial paper.
In May 1996, the Company issued $500 million of 5% Convertible
Subordinated Notes due 2006. Proceeds from the issuance were used to repay
certain outstanding indebtedness and for general corporate purposes,
including the funding of various development and construction projects.
The Company has an effective shelf registration statement on file with
the Securities and Exchange Commission registering up to $1 billion in debt
or equity securities. The terms of any securities offered pursuant to the
shelf registration statement will be determined by market conditions at the
time of issuance.
The Company had $1.4 billion of commercial paper outstanding at
December 31, 1996. In 1996, the Company entered into a five year $1.75
billion revolving credit facility. At December 31, 1996, $1.4 billion of
the aggregate commitment supported the issuance of commercial paper and $75
million was outstanding, leaving approximately $243 million of the
revolving bank debt facility available to the Company at such date.
In February 1997, the Company redeemed its 6% Convertible Subordinated
Notes due 1998 and its 10% Convertible Subordinated Notes due 2006. These
notes, which were formerly obligations of Bally, had an outstanding
principal amount of $1 million and $70 million, respectively, at December
31, 1996.
27
HILTON HOTELS CORPORATION 1996 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- - --------------------------------------------------------------------------------
(CONTINUED)
STOCKHOLDERS' EQUITY
Stockholders' equity totaled $3.2 billion or $12.90 per share at December
31, 1996. Book value per share was $6.50 in 1995 and $5.86 in 1994.
Dividends paid on common shares were $.305 per share in 1996 and $.30 per
share in 1995 and 1994.
OTHER MATTERS
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.
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED WITH FISCAL 1995
OVERVIEW
A summary of the Company's consolidated revenue and earnings for the years
ended December 31, 1996 and 1995 is as follows:
(in millions, except per share amounts) 1996 1995 % Change
--------------------------------------------------------------------------
Revenue $3,940 3,555 11%
Operating income 329 355 (7)
Income before extraordinary item 156 173 (10)
Net income 82 173 (53)
Income before extraordinary item per share .79 .89 (11)
Net income per share .41 .89 (54)
HOTELS
The hotel segment includes the consolidated results of the Company's owned
and leased properties, affiliates operated under long-term management
agreements and franchise fees. Operating results are reduced by the portion
of earnings of non-controlled affiliates applicable to other ownership
interests. At December 31, 1996 the Company owned and partially owned,
managed and franchised 31, 28 and 172 properties, respectively, totaling
approximately 84,000 rooms worldwide.
Hotel segment results are primarily affected by volume (as measured by
occupancy), pricing (as measured by average room rate) and the Company's
ability to manage costs. Hotel industry fundamentals remained strong in
1996, particularly in the full-service segment. High demand and limited new
supply growth continued to benefit the Company's major market full-service
properties. Hotel segment results demonstrated the Company's ability to
capitalize on these strong fundamentals by offering superior products and
top quality service. Occupancy for hotels owned or managed increased to 74
percent in 1996 compared to 73 percent in 1995. Average room rates
increased six percent over 1995.
Consolidated hotel revenue increased 11 percent in 1996 to $2.5
billion. Revenue per available room (REVPAR) is a measure of hotel revenue
generation. REVPAR for owned and managed hotels increased 9 percent in
1996. Hotel operating income, primarily income from hotel interests, long-
term management agreements and franchise fee income, increased 31 percent
in 1996 to $272 million.
Hotel operating income is significantly influenced by the operating
results of the Company's principal downtown/convention, resort and airport
locations where it has large equity interests. A strong domestic economy
continues to fuel increases in both business and leisure travel volume. In
addition, strong international visitor volume continues to benefit a number
of the Company's major market and resort properties. Room nights related to
individual business travel, company meetings and leisure guests each
increased from the prior year. Limited supply growth has also resulted in
substantial pricing power in many key markets. The Company derives
considerable operating leverage from increases in revenue as hotel
operating costs are generally fixed. As a result, the Company improved
margins and increased operating income at nearly all of its owned and
partially owned hotels.
28
Each of the Company's ten major full-service properties realized
improved operating results in 1996 compared to the prior year. Combined
results from the Waldorf=Astoria and the New York Hilton & Towers increased
$19 million compared to 1995. Strong individual business traveler and
leisure guest volume contributed to a combined REVPAR increase of 12
percent over the prior year for these two properties. Double digit REVPAR
growth also helped support a $15 million combined increase in the operating
income of the Palmer House Hilton, the O'Hare Hilton and the 83% owned
Chicago Hilton & Towers. International guest volume at the 50% owned Hilton
Hawaiian Village increased 8 percent over 1995 levels, contributing to a $5
million increase in operating income. International room nights accounted
for over 60 percent of total volume at the Hilton Hawaiian Village in 1996.
Company meeting volume rose 40 percent at the San Francisco Hilton &
Towers, which posted double-digit REVPAR growth and a $6 million increase
in operating results. Results from these ten major full-service hotels and
resorts, which also include the Capital Hilton, the 67% owned New Orleans
Hilton Riverside & Towers and the Washington Hilton & Towers, increased $49
million, or 41 percent, over 1995.
The Company's airport locations continue to benefit from strong
business travel volume. Operating income from the Company's airport
properties in Atlanta, Oakland and San Francisco increased $5 million over
the prior year. Benefiting from major renovation projects completed in
1995, operating income at the San Diego Hilton Beach and Tennis Resort and
the Portland Hilton increased a combined $8 million in 1996. REVPAR at
these two wholly owned properties increased a combined 25 percent over the
prior year. Results from the Company's Orlando and Las Vegas vacation
ownership projects increased $8 million from the prior year. Results in
1995 include the recognition of deferred operating losses of the Orlando
project.
Franchise fee revenue, which is based primarily on rooms revenue at
franchised properties, increased $4 million in 1996 to $43 million.
Hotel segment results were adversely effected by $25 million of
non-recurring charges in the fourth quarter of 1996. These charges
included the write-down of certain investments and notes receivable to
estimated fair market value.
The Company has an ongoing program of actively monitoring and
improving its franchise hotels. In 1996, 11 properties and 2,507 rooms were
added to the franchise system, while one franchise contract, representing
500 rooms, was terminated by the Hilton Inns franchise system.
Although the supply-demand balance 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
rates. Increases in transportation and fuel costs or sustained recessionary
periods could also unfavorably impact future results. However, the Company
believes that its financial strength, market presence and diverse product
line will enable it to remain extremely competitive.
GAMING
The gaming segment includes the consolidated results of the Company's owned
properties and affiliates operated under long-term management agreements.
Operating results are reduced by the portion of earnings of non-controlled
affiliates applicable to other ownership interests. The Company operates
its domestic gaming business under the Hilton, Bally and Flamingo brand
names. The gaming segment includes five wholly owned and one majority owned
Nevada hotel casinos; two wholly owned Atlantic City hotel casinos; a
wholly owned riverboat gaming operation in Kansas City, Missouri; partially
owned riverboat gaming operations in New Orleans, Louisiana (2) and
Robinsonville, Mississippi; partially owned hotel casinos in Australia (2)
and Istanbul, Turkey; managed gaming operations in Windsor, Ontario,
Canada; and beginning in January 1997, a partially owned casino in Punta
del Este, Uruguay.
The Company's Nevada gaming operations offer a diversified product and
service mix which appeal to a broad spectrum of customers. The Flamingo
Hilton-Las Vegas caters to the broad Las Vegas middle market, while the Las
Vegas Hilton caters to premium players and the convention market. Bally's
Las Vegas caters to convention groups and the mid to upper middle market.
The Flamingo Hilton-Reno focuses on middle market activity, while the Reno
Hilton targets both convention and middle market activity. The Flamingo
Hilton-Laughlin targets the budget market segment.
29
HILTON HOTELS CORPORATION 1996 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- - --------------------------------------------------------------------------------
(continued)
Total gaming revenue increased 10 percent to $1.4 billion in 1996
compared to $1.3 billion in 1995. Casino revenue, a component of gaming
revenue, was $857 million in 1996 compared to $791 million in 1995. Gaming
operating income was $109 million in 1996, a 39 percent decrease from $179
million in 1995.
Operating income at the Las Vegas Hilton decreased $61 million
compared to the prior year primarily due to lower than normal drop combined
with a significant reduction in the win percentage on its premium play
baccarat business. The baccarat win percentage decreased 13 points from a
more normalized win percentage in the prior year. Results at the Las Vegas
Hilton are more volatile than the Company's other casinos because this
property caters to the premium play segment of the market. Future
fluctuations in premium play volume and win percentage could result in
greater volatility in the operating income of this property.
Benefiting from a significant renovation and expansion effort
completed in the prior year, the Flamingo Hilton-Las Vegas posted
outstanding results in 1996. Occupancy increased 7 points to 96 percent and
REVPAR increased 15 percent from 1995 levels. Total operating income
increased $24 million from the prior year. A generally soft market
continues to affect the operating income at the Flamingo Hilton-Laughlin
which decreased $4 million compared to 1995. Combined operating income from
the Reno Hilton and the Flamingo Hilton-Reno decreased $12 million from the
prior year primarily due to increased competition and adverse weather
conditions resulting in lower occupancy and average room rates.
Occupancy for the Nevada hotel casinos was 90 percent and 88 percent
in 1996 and 1995, respectively. Average room rates increased four percent
in 1996.
Operating results from the Company's New Orleans river casino
operations remained flat in 1996, reflecting market softness. In October
1996, the Company received approval from Louisiana gaming regulators to
relocate the Flamingo Casino-New Orleans to Shreveport, a move that is
expected to take place in the fall of 1997. Reflecting the increasingly
competitive nature of the Kansas City, Missouri market, initial results
from the Flamingo Casino-Kansas City, which opened in October 1996, were
not significant.
Income from the 19.9% owned Conrad Jupiters, Gold Coast hotel casino
in Australia increased $7 million from 1995, primarily due to increased
table game win and double digit REVPAR growth. Benefiting from a full year
of operations, income from the 19.9% owned Conrad International Treasury
Casino, Brisbane increased $5 million.
The operating income contribution from the properties acquired in the
Bally Merger on December 18, 1996 were not significant to 1996 results.
Gaming segment results were adversely effected by $38 million of non-
recurring charges in the fourth quarter of 1996. These charges included the
write-off of pre-opening expenses for the Flamingo Casino- Kansas City and
costs associated with the planned relocation of the Flamingo Casino-New
Orleans to Shreveport.
The gaming industry continues to experience growth in both existing
markets and new jurisdictions. The Las Vegas and Atlantic City markets are
becoming increasingly competitive due to expansion projects which challenge
the Company's existing market share. These expansion projects, if
completed, could adversely impact the Company's future gaming income.
CORPORATE EXPENSE
Corporate expense increased $20 million in 1996 to $52 million. The
1996 expense includes a $10 million charge for stock-based compensation
related to the 1996 Chief Executive Stock Incentive Plan and a $5 million
non-recurring charge related to certain executive terminations.
INTEREST AND DIVIDEND INCOME/EXPENSE
Interest and dividend income increased $3 million compared with the
prior year. Interest expense, net of amounts capitalized, decreased $5
million. Adjusting for realized losses on the sale of certain investments
included in interest expense in 1996, interest expense decreased $13
million. This decrease is primarily due to lower average debt levels and
lower interest rates. Interest expense, net, from equity investments
decreased $5 million from 1995.
30
INCOME TAXES
The effective income tax rate in 1996 was 39.7% compared to 36.4% in 1995.
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. The 1995 effective income tax rate
benefited from $6 million in credits resulting from the favorable
resolution of Federal tax issues for prior years and higher utilization of
foreign tax credits.
MINORITY INTEREST
The minority interest primarily results from the consolidation of the
approximately 67% owned New Orleans Hilton Riverside & Towers.
EXTRAORDINARY LOSS
The costs and expenses incurred in connection with the extinguishment of
debt, including tender and defeasance premiums, resulted in an
extraordinary loss totaling $74 million, net of a tax benefit of $52
million.
FISCAL 1995 COMPARED WITH FISCAL 1994
OVERVIEW
A summary of the Company's consolidated revenue and earnings for the years
ended December 31, 1995 and 1994 is as follows:
(in millions, except per share amounts) 1995 1994 % Change
---------------------------------------------------------------------------
Revenue $3,555 3,301 8%
Operating income 355 286 24
Net income 173 122 42
Net income per share .89 .63 41
HOTELS
Consolidated hotel revenue increased seven percent in 1995 to $2.3 billion.
Hotel operating income increased 41 percent in 1995 to $208 million.
Results from the Waldorf=Astoria increased $6 million and results from
the 50% owned New York Hilton & Towers increased $5 million, representing a
combined 58 percent increase over the prior year. Both properties produced
increases in average rate and occupancy linked to strong international room
nights and increased business travel volume. A significant increase in
individual business traveler room nights supported a $6 million increase in
operating income at the Palmer House Hilton. Improved occupancy also
benefited a number of the Company's major market equity properties,
including the Capital Hilton, San Francisco Hilton & Towers and Washington
Hilton & Towers, each 50% owned by the Company during 1995. Combined
results at these three properties increased $4 million, or 65 percent, over
1994.
Operating income from the New Orleans Hilton Riverside & Towers
increased $15 million over the prior year. Strong operating performance led
by increased leisure and company meeting volume accounted for $8 million of
the increase, while $7 million is attributable to increased ownership of
the property.
Average room rate growth in the leisure travel segment combined with
improved occupancy produced a $4 million increase in operating income at
the 50% owned Hilton Hawaiian Village. International room nights at this
property increased eight percent as tourism from the key Japanese market
remained strong.
The strength of business travel continued to benefit the Company's
airport properties. Each of the Company's airport locations attained
increases in average room rate and operating income compared to the prior
year. Combined income for the Company's eight wholly owned and partially
owned airport properties increased $8 million, or 65 percent, over 1994
levels.
Results at the Company's vacation ownership facility in Orlando,
Florida were adversely impacted by slower than expected sales. Results also
reflect the required recognition of previously deferred operating losses of
the Orlando project, prompted by the completion of the first phase of
construction in August 1995. Combined results from the Company's Orlando
and Las Vegas vacation ownership projects decreased $9 million from the
prior year.
Occupancy for hotels owned or managed increased to 73 percent in 1995
compared to 70 percent in 1994. Average room rates increased six percent
over 1994.
31
HILTON HOTELS CORPORATION 1996 ANNUAL REPORT
HILTON HOTELS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(continued)
GAMING
Total gaming revenue increased eight percent to $1.3 billion in 1995
compared to $1.2 billion in 1994. Casino revenue, a component of gaming
revenue, was $791 million in 1995 compared to $729 million in 1994.
Operating income at the Las Vegas Hilton increased $26 million from
the prior year primarily due to significantly higher table game win. The
hotel casino's luxury "Sky Villa" suites and new baccarat facility greatly
increased premium play volume compared to the prior year. Baccarat volume
more than doubled resulting in a 91 percent increase in baccarat win
compared to the prior year. The property also benefited from a 10 percent
increase in average room rate.
Results at the Flamingo Hilton-Las Vegas increased $4 million in 1995,
despite disruptions during the first half of the year resulting from major
construction and renovation projects at the property. Average room rate
increased 11 percent over 1994 levels. Operating income at the Flamingo
Hilton-Laughlin decreased $3 million from the prior year, reflecting
continued market softness and competition from Las Vegas. Benefiting from
the mid-year completion of a major casino renovation, operating income from
the Reno Hilton increased $5 million from the prior year. Results from the
Flamingo Hilton-Reno decreased $1 million, primarily due to increased
supply in the last six months of 1995. Results from the Company's New
Orleans river casino operations decreased $2 million from 1994.
Occupancy for the Nevada hotel casinos was 88 percent and 91 percent
in 1995 and 1994, respectively. Average room rates increased seven percent
in 1995.
Income from the consortium which operates and manages the Casino
Windsor increased $3 million from the prior year. The facility opened in
May 1994. Results at the 25% owned Conrad International Istanbul increased
$1 million due to a significant increase in occupancy.
Income from the 19.9% owned Conrad Jupiters, Gold Coast hotel casino
in Australia decreased $11 million from 1994, primarily due to
significantly lower table game win. Income from the 19.9% owned Conrad
International Treasury Casino, Brisbane, which opened in May 1995, totaled
$2 million.
CORPORATE EXPENSE
Corporate expense increased $4 million in 1995 to $32 million primarily due
to $5 million in costs incurred in evaluating strategic alternatives to
enhance shareholder value.
INTEREST AND DIVIDEND INCOME/EXPENSE
Interest and dividend income increased $13 million in 1995 to $35 million
due to higher investable balances. Interest expense, net of amounts
capitalized, increased $6 million primarily due to higher average debt
levels and higher interest rates on commercial paper borrowings. The
increase in consolidated interest expense includes $4 million attributable
to the consolidation of the New Orleans Hilton Riverside & Towers in June
1994. Interest expense, net, from equity investments increased $5 million
over 1994.
INCOME TAXES
The effective income tax rate in 1995 was 36.4% compared to 40.7% in 1994.
The 1995 effective tax rate benefited from $6 million in credits resulting
from the favorable resolution of Federal tax issues for prior years and the
utilization of foreign tax credits.
32
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts) Year Ended December 31, 1996 1995 1994
---------------------------------------------------------------------------------------------------------
Revenue
Rooms $1,734 1,562 1,445
Food and beverage 857 782 738
Casino 857 791 729
Franchise fees 43 39 37
Other 449 381 352
-------------------------------------
3,940 3,555 3,301
-------------------------------------
Expenses
Rooms 508 484 462
Food and beverage 674 625 601
Casino 466 400 344
Other expenses, including remittances to owners 1,911 1,659 1,580
Corporate expense 52 32 28
-------------------------------------
3,611 3,200 3,015
-------------------------------------
Operating Income 329 355 286
Interest and dividend income 38 35 22
Interest expense (88) (93) (87)
Interest expense, net, from equity investments (12) (17) (12)
-------------------------------------
Income Before Income Taxes and Minority Interest 267 280 209
Provision for income taxes 106 102 85
Minority interest, net 5 5 2
-------------------------------------
Income Before Extraordinary Item 156 173 122
Extraordinary loss on extinguishment of debt,
net of tax benefit of $52 (74) -- --
-------------------------------------
Net Income $82 173 122
-------------------------------------
-------------------------------------
Earnings Per Share
Income before extraordinary item $.79 .89 .63
Extraordinary loss (.38) -- --
-------------------------------------
Net Income Per Share $.41 .89 .63
-------------------------------------
-------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
33
HILTON HOTELS CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
(in millions) December 31, 1996 1995
------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and equivalents $388 433
Temporary investments 50 101
Accounts receivable, net 430 348
Other current assets 283 218
---------------------
Total current assets 1,151 1,100
---------------------
Investments, Property and Other Assets
Equity investments 277 576
Other investments 96 19
Property and equipment, net 4,698 1,696
Goodwill 1,295 --
Other assets 60 52
---------------------
Total investments, property and other assets 6,426 2,343
---------------------
Total Assets $7,577 3,443
---------------------
---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current liabilities $998 917
Long-term debt 2,606 1,070
Deferred income taxes 598 124
Insurance reserves and other 164 78
---------------------
Total liabilities 4,366 2,189
---------------------
Commitments and Contingencies
Stockholders' Equity
8% PRIDES convertible preferred stock 15 --
Common stock, 249 million and 193 million
shares outstanding, respectively 627 494
Additional paid-in capital 1,745 --
Retained earnings 931 909
Other 4 (7)
---------------------
3,322 1,396
Less treasury shares, at cost 111 142
----------------------
Total stockholders' equity 3,211 1,254
---------------------
Total Liabilities and Stockholders' Equity $7,577 3,443
---------------------
---------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
34
HILTON HOTELS CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOW
(in millions) Year Ended December 31, 1996 1995 1994
---------------------------------------------------------------------------------------------------------
Operating Activities
Net income $82 173 122
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary loss on extinguishment of
debt 74 -- --
Depreciation and amortization 178 142 133
Non-cash charges 23 -- --
Amortization of debt issue costs 1 1 1
Change in working capital components:
Inventories 23 (11) (37)
Accounts receivable (43) (41) (73)
Other current assets (19) 25 (23)
Accounts payable and accrued expenses 9 71 131
Income taxes payable 43 4 (1)
Change in deferred income taxes (22) 1 (21)
Change in other liabilities 20 (14) 8
Distributions from equity investments in
excess of earnings 33 30 6
Gain from property transactions (5) (1) (1)
Other 41 -- 8
-------------------------------------
Net cash provided by operating activities 438 380 253
-------------------------------------
Investing Activities
Capital expenditures (242) (186) (265)
Additional investments (104) (98) (157)
Decrease in long-term marketable securities -- 1 63
Change in temporary investments 83 139 (119)
Payments on notes and other 21 17 61
Acquisitions, net of cash acquired (288) -- --
-------------------------------------
Net cash used in investing activities (530) (127) (417)
-------------------------------------
Financing Activities
Change in commercial paper borrowings
and revolving loans 1,041 189 (113)
Long-term borrowings 492 1 170
Reduction of long-term debt (1,457) (192) (32)
Issuance of common stock 31 11 12
Cash dividends (60) (58) (58)
-------------------------------------
Net cash provided by (used in) financing
activities 47 (49) (21)
-------------------------------------
(Decrease) Increase in Cash and Equivalents (45) 204 (185)
Cash and Equivalents at Beginning of Year 433 229 414
-------------------------------------
Cash and Equivalents at End of Year $388 433 229
-------------------------------------
-------------------------------------
See notes to consolidated financial statements
35
HILTON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PRIDES
Convertible Additional
Preferred Common Paid-in Retained Treasury
(in millions, except per share amounts) Stock Stock Capital Earnings Other Shares
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 $-- 494 2 732 (2) (169)
Exercise of stock options -- -- (2) (1) -- 15
Cumulative translation
adjustment, net of
deferred tax -- -- -- -- 1 --
Unrealized loss on marketable
securities, net of deferred
tax benefit -- -- -- -- (5) --
Net income -- -- -- 122 -- --
Dividends ($.30 per share) -- -- -- (58) -- --
---------------------------------------------------------------------------
Balance, December 31, 1994 -- 494 -- 795 (6) (154)
Exercise of stock options -- -- -- (1) -- 12
Cumulative translation
adjustment, net of
deferred tax benefit -- -- -- -- (1) --
Net income -- -- -- 173 -- --
Dividends ($.30 per share) -- -- -- (58) -- --
---------------------------------------------------------------------------
Balance, December 31, 1995 -- 494 -- 909 (7) (142)
Exercise of stock options -- -- -- -- -- 31
Bally acquisition 15 133 1,735 -- -- --
Cumulative translation
adjustment, net of
deferred tax -- -- -- -- 6 --
Realized loss on
marketable securities,
net of deferred tax -- -- -- -- 5 --
Deferred compensation -- -- 10 -- -- --
Net income -- -- -- 82 -- --
Dividends ($.305 per share) -- -- -- (60) -- --
---------------------------------------------------------------------------
Balance, December 31, 1996 $15 627 1,745 931 4 (111)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See notes to consolidated financial statements
36
1996 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
During 1996, Hilton Hotels Corporation and subsidiaries (the Company)
elected to change the presentation in its consolidated financial statements
to include the operating results and working capital of properties operated
under long-term management agreements. These agreements effectively convey
to the Company the right to use the properties in exchange for payments to
the property owners, which are based primarily on the properties
profitability. All periods presented reflect this change in presentation
which the Company believes is preferable. The consolidated financial
statements include the following amounts related to managed hotels: current
assets and current liabilities of $344 million and $383 million in 1996 and
1995, respectively, including cash and equivalents of $115 million and $95
million, respectively; revenue of $2.2 billion, $2.0 billion and $1.9
billion in 1996, 1995 and 1994, respectively; and operating expenses,
including remittances to owners, of $2.0 billion, $1.9 billion and
$1.8 billion in 1996, 1995 and 1994, respectively.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is primarily engaged in the ownership, management and
franchising of hotels, resorts and vacation ownership properties and the
ownership and management of casinos and hotel casino properties. The
Company operates in select markets throughout the world, predominately in
the United States. Revenue and income are derived from two business
segments: hotel operations and gaming operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Hilton Hotels
Corporation and its majority owned and controlled subsidiaries. The Company
also consolidates the operating results and working capital of affiliates
operated under long-term management agreements, including such affiliates
in which the Company has investments of 50% or less. 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.
CASINO REVENUE AND PROMOTIONAL ALLOWANCES
Casino revenue is the aggregate of gaming wins and losses. The revenue
components presented in the consolidated financial statements and the notes
thereto exclude the retail value of rooms, food and beverage provided to
customers on a complimentary basis. The estimated cost of providing these
promotional allowances is as follows:
(in millions) 1996 1995 1994
--------------------------------------------------------------------------
Rooms $14 11 11
Food and beverage 40 37 35
----------------------------
Total cost of promotional allowances $54 48 46
---------------------------
---------------------------
The cost of promotional allowances has been allocated to expense as
follows:
(in millions) 1996 1995 1994
-------------------------------------------------------------------------
Casino $46 39 37
Other costs and expenses 8 9 9
37
HILTON HOTELS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
and translation of balance sheets in highly inflationary economies are
included in earnings.
PROPERTY, EQUIPMENT AND DEPRECIATION
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, 30 years for riverboats and 8 years for
building improvements and furniture and equipment.
GOODWILL
The excess of purchase price over net assets of businesses acquired
(goodwill) is amortized using the straight-line method over 40 years. The
Company periodically evaluates the carrying value of goodwill and measures
the amount of impairment, if any, by assessing current and future levels of
income and cash flows as well as other factors.
PRE-OPENING COSTS
Costs associated with the opening of new properties or major additions to
properties placed in service through December 31, 1994 were deferred and
charged to income over a three year period after the opening date. For
projects placed in service after December 31, 1994, pre-opening costs are
deferred and amortized over the shorter of the period benefited or one
year.
UNAMORTIZED LOAN COSTS
Debt discount and issuance costs incurred in connection with long-term debt
are capitalized and amortized to expense, principally on the bonds
outstanding method.
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
Earnings per share is based on the weighted average number of common shares
outstanding plus the common share equivalents which arise from the assumed
exercise of stock options and convertible securities considered to be
common stock equivalents. In September 1996, the stockholders of the
Company approved a four-for-one stock split. All references in the
financial statements to number of shares, per share amounts, dividends paid
and stock option data have been restated to reflect the stock split.
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 1996. These
classifications have no effect on net income.
38
1996 Annual Report
ACQUISITIONS
Effective December 18, 1996, the Company completed the merger of Bally
Entertainment Corporation (Bally) with and into the Company pursuant to an
agreement dated June 6, 1996. Aggregate consideration consisted of
approximately 53 million shares of the Company's common stock and
approximately 15 million shares of the Company's newly authorized Preferred
Redeemable Increased Dividend Equity Securities, 8% PRIDES, Convertible
Preferred Stock (PRIDES) for a combined equity value of $1.9 billion and
assumption of Bally and Bally subsidiary debt totaling $1.2 billion.
The acquisition has been accounted for using the purchase method of
accounting, and accordingly, the acquisition cost of $3.1 billion has been
allocated to the assets acquired and liabilities assumed based on estimates
of their fair value. A total of $1.3 billion, representing the excess of
acquisition cost over the fair value of Bally's tangible net assets, has
been allocated to goodwill and is being amortized over 40 years.
The Company's consolidated results of operations have incorporated
Bally's activity from the effective date of the merger. 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) 1996 1995
-------------------------------------------------------------------------
Revenue $5,041 4,565
Operating income 525 550
Income before extraordinary item 243 278
Net income 169 278
Income before extraordinary item per share .93 1.07
Net income per share .64 1.07
During the 1996 fourth quarter, the Company acquired the majority of
The Prudential Insurance Company of America's (Prudential) ownership
interests in the Chicago Hilton & Towers, San Francisco Hilton & Towers,
Washington Hilton & Towers, New York Hilton & Towers, Rye Town Hilton and
Capital Hilton hotels for a combined cost of approximately $430 million.
The purchase price has been allocated to the assets acquired and
liabilities assumed using the purchase method of accounting. The pro forma
impact on operations was not significant.
EXTRAORDINARY ITEM
In December 1996, the Company completed cash tender offers and consent
solicitations for substantially all of the outstanding notes of certain
wholly owned subsidiaries including the 9 1/4% Bally's Park Place Funding,
Inc. First Mortgage Notes due 2004; 10 5/8% GNF, Corp. First Mortgage Notes
due 2003 and Bally's Casino Holdings, Inc. Senior Discount Notes. The
remaining untendered notes were defeased. The Company also purchased 99.1%
of the outstanding 10 3/8% First Mortgage Notes due 2003 of Bally's Grand,
Inc., an approximately 84% owned subsidiary. Cash consideration for the
repurchase and defeasance, including premiums, totaled $1.2 billion, which
resulted in an after tax extraordinary loss of $74 million, net of a tax
benefit of $52 million.
39
HILTON HOTELS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1996 and 1995 are as follows:
(in millions) 1996 1995
-------------------------------------------------------------------------
Hotel accounts receivable $364 284
Less allowance for doubtful accounts 10 12
----------------
354 272
----------------
Casino accounts receivable 106 94
Less allowance for doubtful accounts 30 18
----------------
76 76
----------------
Total $430 348
----------------
The allowance provided for estimated uncollectible casino receivables,
net of recoveries, is included in casino expenses in the amount of $25
million, $19 million and $13 million in 1996, 1995 and 1994, respectively.
INVENTORIES
Included in other current assets at December 31, 1996 and 1995 are
inventories of $82 million and $98 million, respectively, determined on a
first-in, first-out basis.
INVESTMENTS
The composition of the Company's total equity investments at December 31,
1996 and 1995 is as follows:
(in millions) 1996 1995
------------------------------------------------------------------------
Equity Investments
Hotels (7 in 1996, 14 in 1995) $78 307
Hotel casinos (5 in 1996 and 1995) and riverboat
casino 101 97
Other 25 15
----------------
204 419
Notes receivable 73 157
----------------
Total $277 576
----------------
----------------
The changes in the Company's equity investments are as follows:
(in millions) 1996 1995
------------------------------------------------------------------------
Investments, January 1 $419 428
Earnings 62 37
Distributions received (95) (67)
Additional investments 11 22
Purchase of outside interests (200) --
Other, net 7 (1)
----------------
Investments, December 31 $204 419
----------------
----------------
40
1996 ANNUAL REPORT
Summarized balance sheet information of equity investments at December 31,
1996 and 1995 is as follows:
(in millions) 1996 1995
-------------------------------------------------------------------------
Current assets $274 347
Property and other assets, net 1,359 1,863
Current liabilities 330 363
Long-term debt and other 529 592
Equity 774 1,255
The Company's proportionate share of capital expenditures and
depreciation expense of equity investments were $60 million and $42
million, respectively, in 1996, $61 million and $40 million, respectively,
in 1995 and $61 million and $39 million, respectively, in 1994.
Summarized results of operations of equity investments for the years
ended December 31 are as follows:
(in millions) 1996 1995 1994
--------------------------------------------------------------------------
Revenue $1,388 1,321 1,217
Expenses 1,181 1,184 1,075
Net income 178 117 112
PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995 are as follows:
(in millions) 1996 1995
------------------------------------------------------------------------
Land $712 158
Buildings and leasehold improvements 3,823 1,718
Riverboats 128 32
Furniture and equipment 891 517
Property held for sale or development 40 37
Construction in progress 106 28
-------------------
5,700 2,490
Less accumulated depreciation 1,002 794
-------------------
Total $4,698 1,696
-------------------
-------------------
CURRENT LIABILITIES
Current liabilities at December 31, 1996 and 1995 are as follows:
(in millions) 1996 1995
------------------------------------------------------------------------
Accounts payable and accrued expenses $894 688
Current maturities of long-term debt 101 217
Income taxes payable 3 12
-------------------
Total $998 917
-------------------
-------------------
41
HILTON HOTELS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 is as follows:
(in millions) 1996 1995
------------------------------------------------------------------------------------------------
Industrial development revenue bonds at adjustable rates, due 2015 $ 82 82
Senior notes, with an average rate of 7.70%, due 1997 to 2002 422 637
Mortgage notes, 6.30% to 10.40%, due 1997 to 2011 133 104
5% Convertible subordinated notes due 2006 491 --
10% Convertible subordinated notes due 2006 70 --
Commercial paper 1,423 406
Revolving loans, with an average rate of 5.73% at December 31, 1996 75 51
Other 11 7
----------------------
2,707 1,287
Less current maturities 101 217
----------------------
Net long-term debt $2,606 1,070
----------------------
----------------------
Interest paid, net of amounts capitalized, was $88 million, $95
million and $88 million in 1996, 1995 and 1994, respectively. Capitalized
interest amounted to $6 million, $3 million and $7 million, respectively.
Debt maturities during the next five years are as follows:
(in millions)
---------------------------------------------------------------------
1997 $101
1998 150
1999 68
2000 11
2001 1,500
During 1996 and 1995 the Company issued and renewed commercial paper
for varying periods with interest at market rates. The Company had $1.4
billion and $406 million in commercial paper outstanding at December 31,
1996 and 1995, respectively. In 1996 and 1995 average amounts of commercial
paper outstanding were $260 million and $288 million, respectively, with
the largest amounts outstanding at any one time being $1.4 billion and $418
million, respectively. Weighted average interest rates were 5.57% and
5.98%, respectively.
The Company has entered into a long-term revolving credit facility
with an aggregate commitment at December 31, 1996 of $1.75 billion, which
expires in 2001. A commitment fee of .085% per annum is paid on the unused
portion of the commitments. At December 31, 1996, $1.4 billion of the
aggregate commitment supported the issuance of commercial paper and $75
million was outstanding, leaving approximately $243 million of the
revolving bank debt facility available to the Company at such date.
The Company has an effective shelf registration with the Securities
and Exchange Commission for up to $1 billion in debt or equity securities.
The terms and conditions of these securities will be determined by market
conditions at the time of issuance.
In February 1997, the Company redeemed its 6% convertible subordinated
notes due 1998 and its 10% convertible subordinated notes due 2006. These
notes had an outstanding principal amount of $1 million and $70 million,
respectively, at December 31, 1996.
Provisions under various loan agreements require the Company to comply
with certain financial covenants which include maintaining a minimum
consolidated tangible net worth and limiting the amount of outstanding
indebtedness.
42
1996 ANNUAL REPORT
FINANCIAL INSTRUMENTS
CASH EQUIVALENTS, TEMPORARY INVESTMENTS AND LONG-TERM MARKETABLE SECURITIES
The fair value of cash equivalents, temporary investments and long-term
marketable securities is estimated based on the quoted market price of the
investments.
OTHER FINANCIAL INSTRUMENTS
At December 31, 1996 the Company was party to one interest rate swap
agreement which was not significant. No foreign currency exchange contracts
were outstanding at December 31, 1996 and were not significant at December
31, 1995.
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, 1996 and 1995 are as follows:
1996 1995
-------------------------------------------------------
Carrying Fair Carrying Fair
(in millions) Amount Value Amount Value
-----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents and temporary investments $ 438 438 534 534
Long-term debt (including current maturities) 2,707 2,738 1,287 1,318
INCOME TAXES
The provisions for income taxes for the years ended December 31 are as
follows:
(in millions) 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------
Current
Federal $108 81 84
State, foreign and local 22 20 19
------------------------------------
130 101 103
Deferred (24) 1 (18)
------------------------------------
Total $106 102 85
------------------------------------
------------------------------------
The components of deferred income tax expense for the years ended
December 31 are as follows:
(in millions) 1996 1995 1994
------------------------------------------------------------------------------------------------------------------------------
Equity investments $(3) 12 (9)
Bad debt reserves 2 -- (3)
Self-insurance reserves 4 5 1
Benefit plans (7) (6) (4)
Net operating losses (15) -- --
Other, net (5) (10) (3)
------------------------------------
Total $(24) 1 (18)
-----------------------------------
------------------------------------
During 1996, 1995 and 1994 the Company paid income taxes of $83 million, $95
million and $104 million, respectively.
43
HILTON HOTELS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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, 1996 and 1995 are as follows:
(in millions) 1996 1995
-------------------------------------------------------------------------
Deferred tax assets
Accrued expenses $47 13
Bad debt reserves 17 13
Self-insurance reserves 21 20
Benefit plans 22 10
Net operating losses 29 --
AMT credits 12 --
Other asset reserves 19 6
Foreign tax credit carryovers (expire beginning
in 2000) 5 6
Other 64 26
-------------------
236 94
Valuation allowance (9) (6)
-------------------
227 88
-------------------
Deferred tax liabilities
Fixed assets, primarily depreciation (663) (98)
Equity investments (65) (69)
Other (37) (21)
-------------------
(765) (188)
-------------------
Net deferred tax liability $(538) (100)
-------------------
-------------------
Reconciliation of the Federal income tax rate and the Company's effective
tax rate is as follows:
1996 1995 1994
---------------------------------------------------------------------------------------------
Federal income tax rate 35.0% 35.0 35.0
Increase (reduction) in taxes:
State and local income taxes, net of Federal
tax benefits 2.7 3.1 3.3
Foreign taxes, net .6 (.9) .8
Benefit of dividend and municipal bond income (.2) (.3) (.3)
Other 1.6 (.5) 1.9
-----------------------------
Effective tax rate 39.7% 36.4 40.7
-----------------------------
-----------------------------
CAPITAL STOCK
Four hundred million shares of common stock with a par value of $2.50 per
share are authorized, of which 251 million and 196 million were issued at
December 31, 1996 and 1995, respectively, including treasury shares of 2
million and 3 million in 1996 and 1995, respectively. Authorized preferred
stock includes 25 million shares of preferred stock with a par value of
$1.00 per share. At December 31, 1996, 15 million shares of 8% PRIDES
convertible preferred stock were issued and outstanding; no preferred
shares were issued or outstanding in 1995.
Generally, holders of PRIDES have the right to vote upon matters
coming before any meeting of the holders of common stock on the basis of
4/5 of a vote for each share of PRIDES held. On October 3, 1999, each share
of PRIDES mandatorily converts into 1.12 shares of common stock and the
right to receive an amount in cash equal to any accrued and unpaid
dividends theron. At any time prior to October 3, 1999, unless previously
redeemed, each share of PRIDES is convertible at the option of the holder
into .92 of a share of common stock. The shares of PRIDES are not
redeemable by the Company prior to October 3, 1998.
44
1996 ANNUAL REPORT
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 July 25, 1998 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
Statement of Financial Accounting Standards (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
123, the Company's net income and net income per share would have been
reduced to the pro forma amounts indicated as follows:
(in millions, except per share amounts) 1996 1995
-------------------------------------------------------------------------
Net income
As reported $82 173
Pro forma 75 172
Net income per share
As reported .41 .89
Pro forma .38 .89
At December 31, 1996, 17 million shares of common stock were reserved
for the exercise of options under the Company's 1990 and 1996 Stock
Incentive Plans. Options may be granted to salaried officers 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 1990 and 1996
Stock Incentive Plans also permit the granting of Stock Appreciation Rights
(SARS). No SARS have been granted as of December 31, 1996.
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 1996 and 1995, respectively:
dividend yield of one percent for both years; expected volatility of 27 and
18 percent; risk-free interest rates of 6.33 and 7.58 percent and expected
lives of 6.35 years for both years.
A summary of the status of the Company's stock option plans as of
December 31, 1996, 1995 and 1994, and changes during the years ending on
those dates is presented below:
Options Weighted
Price Range Average Options Available
(Per Share) Price Outstanding for Grant
----------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $7.09 - 13.30 $9.86 5,409,704 1,759,108
Authorized -- 2,000,000
Granted 13.80 - 17.41 17.03 3,013,200 (3,013,200)
Exercised 7.09 - 13.30 8.59 (1,079,240) --
Cancelled 7.41 17.41 13.93 (259,404) 237,896
-----------------------------------------------------------------------
Balance at December 31, 1994 7.09 - 17.41 12.96 7,084,260 983,804
Granted 16.47 - 19.11 16.58 916,200 (916,200)
Exercised 7.09 - 17.41 10.01 (889,820) --
Cancelled 9.53 17.41 16.43 (284,900) 278,900
-----------------------------------------------------------------------
Balance at December 31, 1995 7.36 - 19.11 13.68 6,825,740 346,504
Authorized -- 12,000,000
Granted 18.67 - 29.38 20.87 9,777,900 (9,777,900)
Exercised 7.36 - 19.11 11.13 (2,135,426) --
Cancelled 7.41 26.95 17.33 (668,758) 653,158
-----------------------------------------------------------------------
Balance at December 31, 1996 $7.36 29.38 $18.99 13,799,456 3,221,762
-----------------------------------------------------------------------
-----------------------------------------------------------------------
45
HILTON HOTELS CORPORATION 1996 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following table summarizes information about stock options outstanding
at December 31, 1996:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Price at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
--------------------------------------------------------------------------------------------------------------
$7.36 - 17.41 4,134,756 6.21 $14.69 2,554,656 $13.32
18.67 - 18.67 6,000,000 4.08 18.67 -- --
23.02 - 29.38 3,664,700 8.57 24.38 600,000 26.56
-------------------------------------------------------------------------------------------------------------
$7.36 - 29.38 13,799,456 5.91 $18.99 3,154,656 $15.84
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
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.
Under provisions of Nevada, New Jersey and other gaming laws, and the
Company's certificate of incorporation, certain securities of the Company
are subject to restrictions on ownership which may be imposed by specified
governmental authorities. Such restrictions may require the holder to
dispose of the securities or, if the holder refuses to make such
disposition, the Company may be obligated to repurchase the securities.
EMPLOYEE BENEFIT PLANS
The Company has a noncontributory retirement plan (Basic Plan) covering
substantially all regular full-time, nonunion employees. 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.
The Company's funding policy is to contribute not less than the
minimum amount required under Federal law but not more than the maximum
deductible for Federal income tax purposes. After December 31, 1996,
employees will not accrue additional benefits for future service under
either the Basic or Supplemental Plans. Plan assets will be used to pay
benefits due employees for service through that date.
The following sets forth the funded status for the Basic Plan as of
December 31, 1996 and 1995:
(in millions) 1996 1995
-----------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested benefits of $(194) and $(163), respectively $(214) (183)
----------------------
----------------------
Projected benefit obligation for service rendered to date $(214) (233)
Plan assets at fair value, primarily listed securities and temporary investments 199 178
----------------------
Projected benefit obligation in excess of plan assets (15) (55)
Unrecognized net loss from changes in assumptions -- 46
Unrecognized net asset as of January 1, 1986 -- (7)
----------------------
Accrued pension cost $(15) (16)
----------------------
----------------------
Pension cost includes the following components:
Service cost $12 9
Interest cost on projected benefit obligation 17 15
Actual return on assets (31) (33)
Net amortization 1 19
----------------------
Net periodic cost before allocation (1) 10
Cost allocated to managed properties 2 1
----------------------
Net periodic pension cost $(3) 9
-----------------------
Included in plan assets at fair value are equity securities of the
Company of $36 million and $19 million at December 31, 1996 and 1995,
respectively.
46
The following sets forth the funded status for the Supplemental Plans as of
December 31, 1996 and 1995:
(in millions) 1996 1995
-----------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested benefits
of $(20) and $(19), respectively $(20) (19)
----------------------
----------------------
Projected benefit obligation for service rendered to date $(20) (28)
Plan assets at fair value 14 14
----------------------
Projected benefit obligation in excess of plan assets (6) (14)
Unrecognized net loss from changes in assumptions -- 11
Unrecognized obligation as of January 1, 1986 -- 1
----------------------
Accrued pension cost $(6) (2)
----------------------
----------------------
Pension cost includes the following components:
Service cost $1 1
Interest cost on projected benefit obligation 2 1
Actual return on assets (1) (1)
Net amortization 2 5
----------------------
Net periodic pension cost $4 6
----------------------
----------------------
The discount rate used in determining the actuarial present values of
the projected benefit obligations was seven percent in 1996 and 1995, with
the rate of increase in future compensation projected at five percent in
1996 and 1995. The expected long-term rate of return on assets is nine
percent.
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 $12 million, $10 million and $9 million
in 1996, 1995 and 1994, 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.
The Company also has employee saving plans whereby the Company
contributes certain percentages of employee contributions. The cost of the
plans is not significant.
47
HILTON HOTELS CORPORATION 1996 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides life insurance benefits to certain retired employees.
Under terms of the plans covering such life insurance benefits, the Company
reserves the right to change, modify or discontinue these benefits. The
Company generally does not provide postretirement health care benefits to
its employees. The cost of these benefits is not significant.
SEGMENTS OF BUSINESS
Financial data of the Company's business segments for the years ended
December 31 are as follows:
(in millions) 1996 1995 1994
---------------------------------------------------------------------------------------------------------------
Depreciation and amortization(1)
Hotels $63 57 56
Gaming 111 78 72
Corporate 4 7 5
------------------------------------
Total $178 142 133
------------------------------------
------------------------------------
Capital expenditures(1)
Hotels $46 54 61
Gaming 190 124 202
Corporate 6 8 2
------------------------------------
Total $242 186 265
------------------------------------
------------------------------------
Assets
Hotels $1,918 1,571 1,571
Gaming 5,299 1,380 1,207
Corporate 360 492 483
------------------------------------
Total $7,577 3,443 3,261
------------------------------------
------------------------------------
(1) Excludes proportionate share of equity investments.
48
Supplemental hotels segment operating data for the years ended December 31 are
as follows:
(in millions) 1996 1995 1994
--------------------------------------------------------------------------------------------------------------
Revenue
Rooms $1,473 1,324 1,230
Food and beverage 661 612 584
Franchise fees 43 39 37
Other products and services 340 290 261
--------------------------------------
2,517 2,265 2,112
--------------------------------------
Expenses
Rooms 420 401 383
Food and beverage 507 475 468
Other expenses, including remittances to owners 1,318 1,181 1,113
--------------------------------------
2,245 2,057 1,964
--------------------------------------
Hotels operating income $272 208 148
--------------------------------------
--------------------------------------
Supplemental gaming segment operating data for the years ended December 31 are
as follows:
(in millions) 1996 1995 1994
--------------------------------------------------------------------------------------------------------------
Revenue
Rooms $261 238 215
Food and beverage 196 170 154
Casino 857 791 729
Other products and services 109 91 91
--------------------------------------
1,423 1,290 1,189
--------------------------------------
Expenses
Rooms 88 83 79
Food and beverage 167 150 133
Casino 466 400 344
Other expenses, including remittances to owners 593 478 467
--------------------------------------
1,314 1,111 1,023
--------------------------------------
Gaming operating income $109 179 166
--------------------------------------
--------------------------------------
49
HILTON HOTELS CORPORATION 1996 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
LEASES
The Company operates seven properties under noncancelable operating leases,
all of which are for land only, having remaining terms up to 37 years. Upon
expiration of four of the leases, the Company has renewal options of 25,
30, 30 and 40 years. Six leases require the payment of additional rentals
based on varying percentages of revenue or income. Minimum lease
commitments under noncancelable operating leases approximate $10 million
annually through 2001 with an aggregate commitment of $146 million through
2033.
COMMITMENTS AND CONTINGENT LIABILITIES
At December 31, 1996 the Company had contractual commitments at its wholly
owned or leased properties for major expansion and rehabilitation projects
of approximately $200 million. Additionally, the Company is committed,
under certain conditions, to invest or loan up to $50 million to entities
developing hotel and gaming properties.
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.
In January 1997, the Company commenced an offer to acquire ITT
Corporation (ITT) in a combination cash and stock transaction. The Company
offered a price of $55 for each ITT share, for a consideration of
approximately $6.5 billion. The total transaction, including assumption of
ITT's outstanding debt, would be valued at approximately $10.5 billion. The
Company's offer consists of a cash tender offer of $55 per share for a
majority of the outstanding ITT shares, to be followed by a merger whereby
ITT shareholders would receive shares of the Company's common stock with a
value of $55 in exchange for each remaining ITT share, subject to
appropriate collar provisions. The Company plans to fund the ITT tender
offer from a combination of its available cash, working capital, existing
credit facilities, borrowings under credit facilities that the Company will
seek to obtain from commercial banks and/or issuance of public debt. The
Company has reached a preliminary understanding with HFS Incorporated (HFS)
under which HFS would license, on a long-term worldwide basis, the Sheraton
trademark, franchise systems and management agreements. The acquisition is
subject to regulatory approvals and other conditions, and therefore there
can be no assurance that the Company will be successful in acquiring ITT,
or if successful, what effect such acquisition will have on the Company's
financial condition or results of operations.
50
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, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1996. 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 generally accepted auditing
standards. 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, 1996 and 1995 and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Los Angeles, California
February 14, 1997
51
HILTON HOTELS CORPORATION 1996 ANNUAL REPORT
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
QUARTERLY FINANCIAL DATA
Income
(in millions, except per Before Net
share amounts, stock Occupancy(1) Operating Income Net Income
prices and percentages) Hotels Gaming Revenue EBITDA(2) Income Taxes Income Per Share(3)
---------------------------------------------------------------------------------------------------------------------------
1996
1st Quarter 72% 89 $957 127 79 62 37 .19
2nd Quarter 77 91 1,004 158 113 100 59 .30
3rd Quarter 77 89 943 148 101 92 54 .28
4th Quarter 72 84 1,036 144 36 13 (68) (.33)
----------------------------------------------------------------------------------------------
Year 74% 88 $3,940 577 329 267 82 .41
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
1995
1st Quarter 70% 84 $854 120 75 55 32 .17
2nd Quarter 75 88 891 151 105 87 53 .27
3rd Quarter 76 87 788 97 53 33 25 .13
4th Quarter 71 87 1,022 175 122 105 63 .32
-----------------------------------------------------------------------------------------------
Year 73% 86 $3,555 543 355 280 173 .89
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
(in millions, except per
share amounts, stock Dividends High/Low
prices and percentages) Per Share Stock Price
---------------------------------------------------------
1996
1st Quarter .075 24.94/15.28
2nd Quarter .075 30.50/23.50
3rd Quarter .075 28.63/23.34
4th Quarter .08 31.75/25.63
-------------------------------
Year .305 31.75/15.28
-------------------------------
-------------------------------
1995
1st Quarter .075 19.47/16.03
2nd Quarter .075 19.94/16.41
3rd Quarter .075 18.53/15.09
4th Quarter .075 17.19/15.16
-------------------------------
Year .30 19.94/15.09
-------------------------------
-------------------------------
As of December 31, 1996 there were approximately 16,200 stockholders of
record.
EBITDA(2)
(in millions) Year ended December 31, 1996 1995 1994
----------------------------------------------------------------------------------------------------------
EBITDA
Hotels $392 301 240
Gaming 233 267 244
Corporate expense (48) (25) (23)
------------------------------------
Total EBITDA $577 543 461
------------------------------------
------------------------------------
Reconciliation to income before extraordinary item
EBITDA $577 543 461
Interest and dividend income 38 35 22
Interest expense (88) (93) (87)
Interest expense, net, from equity investments (12) (17) (12)
Depreciation and amortization(4) (225) (188) (175)
Non-cash charges (23) -- --
Provisions for income taxes (106) (102) (85)
Minority interest, net (5) (5) (2)
------------------------------------
Income before extraordinary item $156 173 122
------------------------------------
------------------------------------
(1) Properties owned or managed.
(2) EBITDA is earnings before interest, taxes, depreciation, amortization and
non-cash charges.
(3) The sum of the net income per share for the four quarters in 1996 differs
from the annual net income per share due to the required method of
computing weighted average number of shares in the respective periods.
(4) Includes proportionate share of equity investments.
52
FIVE YEAR SUMMARY
(dollars in millions, except per share and Pro forma
average rate amounts) 1996(1) 1996 1995 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------
Operating Data for Years Ended December 31,
Revenue
Hotels $2,517 2,517 2,265 2,112 1,844 1,720
Gaming 2,524 1,423 1,290 1,189 1,057 930
------------------------------------------------------------------------
Total $5,041 3,940 3,555 3,301 2,901 2,650
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA(2)
Hotels $392 392 301 240 199 177
Gaming 528 233 267 244 234 213
Corporate expense (48) (48) (25) (23) (22) (20)
------------------------------------------------------------------------
Total $872 577 543 461 411 370
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings per share
Income before cumulative effect of
accounting changes and extraordinary item $.93 .79 .89 .63 .53 .54
Cumulative effect of accounting changes, net -- -- -- -- .02 --
Extraordinary loss, net (.29) (.38) -- -- -- --
------------------------------------------------------------------------
Net income $.64 .41 .89 .63 .55 .54
------------------------------------------------------------------------
------------------------------------------------------------------------
General Information
Occupancy(3)
Hotels 74% 73 70 67 66
Gaming 88% 86 87 86 85
Average Rates(3)
Hotels $135 127 120 113 112
Gaming $73 69 64 62 60
Casino square footage 937,000 626,000 526,000 435,000 432,000
Number of Properties at Year End
Owned or partially owned hotels 31 33 33 33 31
Managed hotels 28 24 24 26 25
Franchised hotels 172 162 161 171 180
Owned, partially owned and managed
casinos and hotel casinos 12 9 8 7 7
Wholly or partially owned riverboats 4 1 1 -- --
------------------------------------------------------------------------
Total 247 229 227 237 243
------------------------------------------------------------------------
------------------------------------------------------------------------
Available Rooms at Year End
Owned or partially owned hotels 23,092 24,098 24,098 24,151 22,711
Managed hotels 16,776 15,096 15,686 15,940 14,908
Franchised hotels 43,694 41,687 40,436 42,816 45,002
Wholly or partially owned hotel casinos 17,612 12,782 12,080 12,045 12,557
------------------------------------------------------------------------
Total 101,174 93,663 92,300 94,952 95,178
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Prepared assuming the Bally merger had taken place as of January 1, 1996.
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
that date.
(2) EBITDA is earnings before interest, taxes, depreciation, amortization and
non-cash charges.
(3) Includes properties owned or managed.
53