SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............. to ..............
Commission file number 1-3427
HILTON HOTELS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2058176
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9336 CIVIC CENTER DRIVE, BEVERLY HILLS, CALIFORNIA 90210
(Address of principal executive offices) (Zip code)
(310) 278-4321
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 1999 --- Common Stock, $2.50 par value ---
254,978,461 shares.
PART I FINANCIAL INFORMATION
Company or group of companies for which report is filed:
HILTON HOTELS CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
Three months ended Nine months ended
CONSOLIDATED STATEMENTS OF INCOME September 30, September 30,
(in millions, except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------ -----------------
Revenue Rooms $ 287 255 830 683
Food and beverage 104 92 353 286
Management and franchise fees 25 25 76 80
Other revenue 82 78 253 224
------------------------------------------------------------------------- -----------------
498 450 1,512 1,273
Expenses Rooms 74 64 211 169
Food and beverage 86 76 268 221
Other expenses 211 181 610 491
Corporate expense, net 13 13 39 40
------------------------------------------------------------------------- -----------------
384 334 1,128 921
------------------------------------------------------------------------- -----------------
Operating Income 114 116 384 352
Interest income 13 6 39 10
Interest expense (56) (38) (162) (98)
Interest expense, net, from unconsolidated affiliates - (1) (1) (4)
------------------------------------------------------------------------- -----------------
Income Before Income Taxes
and Minority Interest 71 83 260 260
Provision for income taxes (29) (35) (105) (106)
Minority interest, net - (7) (5) (10)
------------------------------------------------------------------------- -----------------
Income from Continuing Operations 42 41 150 144
Income from discontinued gaming operations,
net of tax provisions of $31 and $101 - 38 - 118
Cumulative effect of accounting change,
net of tax benefit of $1 - - (2) -
------------------------------------------------------------------------- -----------------
Net Income $ 42 79 148 262
============================================================================================================ =================
Basic Earnings Per Share
Income from Continuing Operations $ .16 .15 .58 .54
Discontinued Operations - .16 - .48
Cumulative Effect of Accounting Change - - (.01) -
------------------------------------------------------------------------- -----------------
Net Income Per Share $ .16 .31 .57 1.02
============================================================================================================ =================
Diluted Earnings Per Share
Income from Continuing Operations $ .16 .15 .57 .54
Discontinued Operations - .15 - .44
Cumulative Effect of Accounting Change - - (.01) -
------------------------------------------------------------------------- -----------------
Net Income Per Share $ .16 .30 .56 .98
============================================================================================================ =================
1
HILTON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
September 30, December 31,
1999 1998
===============================================================================================================
Assets Cash and equivalents $ 93 47
Accounts receivable, net 242 204
Receivable from discontinued gaming operations - 73
Inventories 77 54
Deferred income taxes 36 48
Other current assets 69 43
--------------------------------------------------------------------------
Total current assets 517 469
Investments 328 262
Long-term receivable 625 625
Property and equipment, net 2,712 2,483
Other assets 91 105
--------------------------------------------------------------------------
Total investments, property and other assets 3,756 3,475
--------------------------------------------------------------------------
Total Assets $4,273 3,944
==========================================================================
Liabilities and Accounts payable and accrued expenses $ 371 410
Stockholders' Equity Current maturities of long-term debt 13 62
Income taxes payable 30 34
--------------------------------------------------------------------------
Total current liabilities 414 506
Long-term debt 3,415 3,037
Deferred income taxes and other liabilities 185 214
Stockholders' equity 259 187
--------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $4,273 3,944
==========================================================================
2
HILTON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in millions)
Nine months ended
September 30,
1999 1998
==============================================================================================================================
Operating Activities Net income $ 148 262
Adjustments to reconcile net income to net
cash provided by operating activities:
Income from discontinued gaming operations - (118)
Cumulative effect of accounting change 2 -
Depreciation and amortization 123 86
Amortization of loan costs 2 2
Change in working capital components:
Receivables, inventories and other current assets (12) (15)
Accounts payable and accrued expenses (31) 83
Income taxes payable (4) 42
Change in deferred income taxes (12) 7
Change in other liabilities (16) 21
Distributions from unconsolidated affiliates less than earnings (8) (14)
Other 31 (32)
----------------------------------------------------------------------------------------------
Net cash provided by operating activities 223 324
- ------------------------------------------------------------------------------------------------------------------------------
Investing Activities Capital expenditures (138) (137)
Additional investments (88) (67)
Payments on notes and other 57 65
Acquisitions, net of cash acquired (237) (760)
----------------------------------------------------------------------------------------------
Net cash used in investing activities (406) (899)
- ------------------------------------------------------------------------------------------------------------------------------
Financing Activities Change in commercial paper borrowings
and revolving loans 376 1,122
Reduction of long-term debt (46) (209)
Issuance of common stock 4 18
Purchase of common stock (90) (81)
Cash dividends (15) (69)
---------------------------------------------------------------------------------------------
Net cash provided by financing activities 229 781
- ------------------------------------------------------------------------------------------------------------------------------
Net Transfers To Discontinued Gaming Operations - (169)
Increase in Cash and Equivalents 46 37
Cash and Equivalents at Beginning of Year 47 5
- ------------------------------------------------------------------------------------------------------------------------------
Cash and Equivalents at End of Period $ 93 42
==============================================================================================================================
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
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.
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.
The consolidated financial statements presented herein have been prepared by
Hilton in accordance with the accounting policies described in its 1998 Annual
Report to Stockholders and should be read in conjunction with the Notes to
Consolidated Financial Statements which appear in that report.
The statements for the three and nine months ended September 30, 1999 and 1998
are unaudited; however, in the opinion of management, all adjustments (which
include only normal recurring accruals) have been made which are considered
necessary to present fairly the operating results and financial position for the
unaudited periods.
The consolidated financial statements for prior periods reflect certain
reclassifications to conform with classifications adopted in the current period.
These reclassifications have no effect on net income.
NOTE 2: ACQUISITION OF PROMUS HOTEL CORPORATION
On September 3, 1999, the Company entered into a merger agreement with Promus
Hotel Corporation (Promus) that provides for the Company's acquisition of
Promus. In the acquisition, Promus shareholders will receive, at their election,
for each share of Promus common stock, either $38.50 in cash or a number of
shares of Hilton common stock equal to $38.50 divided by the average Hilton
stock price as defined, but in any event not less than 2.9096 shares or more
than 3.2158 shares. The average Hilton stock price is the average of the volume
weighted average per share sales price of Hilton common stock on the NYSE for 20
trading days selected by lot from the 30 trading days ending on the fifth
trading day before the closing of the acquisition. In addition, the Company will
assume Promus' debt at the date of the acquisition.
Each Promus stockholders' election may be subject to proration depending on the
consideration other Promus stockholders elect to receive. The proration will
ensure that 55% of the outstanding Promus shares will be converted into cash,
while the remaining 45% will be converted into Hilton common stock.
The acquisition, which has been approved by both the Hilton and the Promus
boards of directors, is subject to approval by the companies' stockholders. The
special stockholder meetings are scheduled to be held on November 30, 1999, and
subject to approval, it is anticipated that the transaction will be completed on
that date.
4
NOTE 3: EARNINGS PER SHARE
Basic EPS is computed by dividing net income available to common stockholders
(net income less preferred dividends of $3 million and $10 million for the three
and nine months ended September 30, 1998, respectively) by the weighted average
number of common shares outstanding for the period. The weighted average number
of common shares outstanding totaled 255 million and 258 million for the three
and nine months ended September 30, 1999, respectively and 248 million and 247
million for the three and nine months ended September 30, 1998, 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
increased the weighted average number of common shares by 23 million and 24
million for the three and nine months ended September 30, 1999, respectively and
29 million and 31 million for the three and nine months ended September 30,
1998, respectively. In addition, the increase to net income resulting from
interest on convertible securities assumed to have not been paid was $4 million
for each of the three month periods ended September 30, 1999 and 1998 and $11
million for each of the nine month periods ended September 30, 1999 and 1998.
NOTE 4: SUPPLEMENTAL CASH FLOW INFORMATION
Nine months ended
September 30,
1999 1998
---- ----
(in millions)
Cash paid during the period for the following:
Interest, net of amounts capitalized $ 112 58
Income taxes (1) 109 118
(1) Includes amounts paid by the Company on behalf of the discontinued gaming
operations.
NOTE 5: COMPREHENSIVE INCOME
Comprehensive income for the three and nine months ended September 30, 1999 and
1998 is as follows:
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(in millions) (in millions)
Net Income $42 79 148 262
Change in unrealized gains
and losses, net of tax 4 (9) 18 (13)
--- --- --- ----
Comprehensive Income $46 70 166 249
=== === === ====
NOTE 6: CHANGE IN ACCOUNTING PRINCIPLE
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 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. SOP 98-5 is effective for
financial statements issued for periods beginning after December 15, 1998. 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 1999 first
quarter.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On December 31, 1998, the Company completed a spin-off of its gaming operations.
As a result, the Company's historical financial statements have been restated to
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.
FINANCIAL CONDITION
LIQUIDITY
For the nine months ended September 30, net cash provided by operating
activities was $223 million and $324 million in 1999 and 1998, respectively.
Cash and equivalents totaled $93 million at September 30, 1999, an increase of
$46 million from December 31, 1998.
ACQUISITIONS AND CAPITAL SPENDING
Net cash used in investing activities was $406 million in the 1999 nine month
period compared to $899 million last year. The decrease was primarily due to
higher acquisition spending in the 1998 period associated with the restructuring
of the Hilton Hawaiian Village joint venture. Expenditures required to complete
acquisitions and capital spending programs in 1999 will be financed through
available cash flows and general corporate borrowings.
Growth continues through selective acquisition of large full-service hotels in
major market locations. In February 1999, the Company acquired the 495-room
Radisson Plaza Hotel at Mark Center in Alexandria, Virginia (re-named the Hilton
Alexandria Mark Center) for approximately $52 million. The Company plans to
spend approximately $11 million to renovate guest rooms and public space at this
property. In April 1999, the Company purchased the 563-room Pointe Hilton Squaw
Peak Resort in Phoenix, Arizona for approximately $94 million. Also in April
1999, the Company acquired the 385-room Hilton Boston Back Bay for approximately
$70 million. The Company plans to spend approximately $12 million to renovate
guest rooms, meeting rooms, the lobby and the health club at this property. In
October 1999, the
6
Company purchased the 814-room Hilton Minneapolis & Towers for total
consideration of approximately $118 million.
In September 1999, the Company opened the newly constructed 600-room Hilton
Boston Logan Airport. This $100 million hotel is located on the grounds of Logan
International Airport and is connected directly to the airport terminals.
The renovation of the Hilton New York & Towers continued during the third
quarter. This project, which includes new restaurants, a state-of-the-art
business/conference center, a world-class fitness facility and an exclusive
Towers Lounge overlooking Manhattan, is expected to be completed in late 1999.
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 nearing
completion on construction of a 232-unit vacation ownership resort adjacent to
the Las Vegas Hilton, which is expected to open in the 1999 fourth quarter.
In June 1999, the Company announced plans to develop a 245-unit vacation
ownership resort adjacent to 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. In addition, in August 1999 the Company announced that
construction will begin on a 453-room tower addition at the Hilton Hawaiian
Village. Construction of the Kalia Tower is scheduled to be complete in Spring
2001.
In addition to an estimated $200 million in 1999 development related
expenditures including those related to the aforementioned renovation and
construction projects, the Company intends to spend approximately $140 million
in 1999 on normal capital replacements, upgrades and compliance projects.
7
OTHER DEVELOPMENTS
The Company continues to improve its franchise business primarily through the
expansion of the Hilton Garden Inn product. As of September 30, 1999, a total of
53 Garden Inn properties were open and 68 are expected to be open by year-end.
The Company expects to have 140 Garden Inn properties open with another 60 under
construction by year-end 2000.
FINANCING
Long-term debt at September 30, 1999 totaled $3.4 billion, compared with $3.0
billion at December 31, 1998. For the nine months ended September 30, 1999, cash
provided by financing activities totaled $229 million compared to $781 million
in the 1998 period. Commercial paper borrowings in the 1998 period reflect a
higher level of acquisition activity and the restructuring of the Hilton
Hawaiian Village joint venture. By virtue of an agreement with The Prudential
Insurance Company of America (Prudential) to restructure the joint venture
ownership of the Hilton Hawaiian Village, effective June 1, 1998 the Company was
deemed to control the joint venture, thus requiring consolidation of this
previously unconsolidated entity. The agreement also called for the refinancing
of the joint venture's existing debt under a new joint venture revolving credit
facility. In accordance with the terms of the agreement, this new facility was
used to borrow an additional $294 million which was loaned to a Prudential
affiliate and subsequently redeemed to increase the Company's investment in the
joint venture from 50% to 98%. The consolidation of the joint venture, which
includes the total borrowings under the new facility, resulted in an increase in
consolidated debt of $480 million in the 1998 period.
The debt balance at September 30, 1999 and December 31, 1998 includes $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 consolidated balance sheets. In the event of an
increase in the interest rate on these
8
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.
At September 30, 1999, approximately $520 million of the aggregate commitment of
the Company's $1.75 billion revolving credit facility supported the issuance of
commercial paper, leaving approximately $1.2 billion of the revolving bank debt
facility 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 September 30, 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 the Company's stock repurchase program, during the first nine months
of 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 to reflect the gaming spin-off.
9
STOCKHOLDERS' EQUITY
Dividends paid on common shares were $.02 and $.08 for the three months ended
September 30, 1999 and 1998, respectively and $.06 and $.24 for the nine months
ended September 30, 1999 and 1998, respectively. In October 1998, 14.8 million
shares of the Company's Preferred Redeemable Increased Dividend Equity
Securities, 8% PRIDES, Convertible Preferred Stock were converted into 13.6
million shares of common stock.
RESULTS OF OPERATIONS
The following discussion presents an analysis of the Company's results of
operations for the three and nine month periods ended September 30, 1999 and
1998. 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.
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.
10
COMPARISON OF FISCAL QUARTERS ENDED SEPTEMBER 30, 1999 AND 1998
OVERVIEW
A summary of the Company's consolidated revenue and earnings for the three
months ended September 30, 1999 and 1998 is as follows:
(in millions, except per share amounts) 1999 1998 % CHANGE
---- ---- --------
Revenue $498 450 11%
Operating income 114 116 (2)%
Income from continuing operations 42 41 2%
Basic EPS from continuing operations .16 .15 7%
Diluted EPS from continuing operations .16 .15 7%
OTHER OPERATING DATA
Reconciliation of EBITDA to income from continuing operations:
EBITDA
Operations $ 173 162 7 %
Corporate expense, net (12) (12) - %
--- ---
Total EBITDA 161 150 7 %
Depreciation and amortization (1) (45) (34) 32 %
Pre-opening expense (2) - - %
--- ---
Operating income 114 116 (2)%
Interest income 13 6 - %
Interest expense (56) (38) 47 %
Interest expense, net, from unconsolidated affiliates - (1) - %
Provision for income taxes (29) (35) (17)%
Minority interest, net - (7) - %
--- ---
Income from continuing operations $ 42 41 2 %
===== ===
(1) Includes proportionate share of unconsolidated affiliates.
Consolidated revenue for the 1999 third quarter was $498 million, an increase of
11 percent over 1998. Total EBITDA was $161 million for the 1999 third quarter,
a seven percent increase compared to $150 million a year ago, while operating
income decreased two percent to $114 million from $116 million last year.
The Company's domestic owned and equity hotels contributed $141 million of
EBITDA in the 1999 third quarter, compared to $132 million in the prior year.
The 1999 results benefited from earnings contributions from hotels acquired in
1998 and 1999 as well as strong operating results at the Company's properties in
San Francisco and Washington D.C. EBITDA growth was negatively impacted by a
soft group market and higher property tax expense at the Company's Chicago and
New York hotels and the
11
impact of the continuing renovation project at the Hilton New York & Towers.
Comparable EBITDA at the Company's domestic owned and equity properties
increased 1.5 percent from the 1998 third quarter. Occupancy for comparable
domestic owned and equity hotels was 78.6 percent compared to 78.0 percent in
the 1998 quarter. The average room rate increased 3.3 percent to $162.65 in the
1999 second quarter and RevPAR increased four percent.
EBITDA at the Hilton San Francisco & Towers increased $4 million or 35 percent
compared to the 1998 third quarter. A 20 percent increase in revenue per
available room (RevPAR) resulted from a significant increase in individual
business traveler (IBT) volume and increases in occupancy and average rates in
the company meetings segment. Combined EBITDA from the Hilton Washington &
Towers and Capital Hilton increased $1 million, or 19 percent, from the prior
year quarter on a combined eight percent RevPAR increase. Combined EBITDA from
the Hilton Chicago & Towers, the Hilton Chicago O'Hare Airport and the Palmer
House Hilton decreased $2 million or six percent from the prior year quarter on
a combined RevPAR decrease of two percent. Soft group demand at the two downtown
properties drove the RevPAR decline, which also limited the properties' ability
to increase transient rates. EBITDA flow through at the Chicago properties was
also affected by higher property tax expense. Results at the Hilton New York &
Towers continue to be impacted by the renovation project currently underway,
which has reduced foot traffic and resulted in the temporary closure of three
food and beverage outlets. These conditions, combined with higher property tax,
resulted in flat EBITDA compared to the 1998 third quarter despite a 4.5 percent
increase in RevPAR. Results at the Waldorf=Astoria were also affected by higher
property tax expense, along with group softness which negatively effected food
and beverage revenues. EBITDA at the Waldorf=Astoria declined $1 million or
eight percent in the 1999 third quarter.
Results at the Hilton Hawaiian Village in Honolulu were flat and EBITDA from the
Hilton Waikoloa Village on the Big Island of Hawaii increased $.5 million, both
as compared to the 1998 third quarter. The Company anticipates continued
softness in the Honolulu market for the remainder of 1999 due to the impact of
the Asian economic situation, with the Hilton Hawaiian Village expected to show
declining results for the full year. The Company, however, anticipates improved
market conditions and commensurate
12
improvement at both Hawaii properties in 2000. Factors leading to this outlook
include an increase in advance bookings at the Hilton Hawaiian Village, new
business to the state generated as a result of the newly opened Hawaii
Convention Center, increased business and leisure travel coinciding with Year
2000 events and activities, and enhanced marketing efforts in Asia and the U.S.
mainland by the State of Hawaii to attract additional visitors. Excluding the
Company's two properties in Hawaii, comparable EBITDA at the Company's domestic
owned and equity hotels increased 1.4 percent in the 1999 third quarter.
Occupancy for comparable domestic owned and equity hotels (excluding Hawaii) was
78.2 percent versus 77.8 percent in the 1998 quarter. The average room rate
increased 4.0 percent to $160.26 in the 1999 third quarter and RevPAR improved
4.6 percent between periods.
Acquisition and development activity, including increased ownership of
properties which were previously partially owned and new property acquisitions,
contributed approximately $6 million of EBITDA to the third quarter of 1999.
Management and franchise fees were flat in 1999 due to the acquisition of
several previously managed properties during 1998 and 1999 and a franchise
termination fee in the 1998 period, the effect of which offset increased
franchise fees from the expansion of the Company's Hilton Garden Inn product.
Depreciation and amortization, including the Company's proportionate share of
unconsolidated affiliates, increased $11 million over the prior year to $45
million due to new acquisitions.
Future operating results could be adversely impacted by increased capacity or
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 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, market presence and diverse product line
will enable it to remain extremely competitive.
CORPORATE ACTIVITY
Interest income increased $7 million in the 1999 period to $13 million,
primarily due to the interest on the $625 million of Hilton public debt assumed
by Park Place at the time of the spin-off of Hilton's gaming
13
operations. As Hilton remains the legal obligor of the debt, an equal amount of
interest is included in interest expense. Consolidated interest expense
increased $18 million to $56 million primarily due to the $625 million of debt
assumed by Park Place and higher average debt levels resulting from acquisition
spending.
The effective income tax rate for the 1999 period decreased to 40.8 percent
compared to 42.2 percent for 1998. The Company's effective income tax rate is
determined by the level and composition of pretax income subject to varying
foreign, state and local taxes.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
OVERVIEW
A summary of the Company's consolidated revenue and earnings for the nine months
ended September 30, 1999 and 1998 is as follows:
(in millions, except per share amounts) 1999 1998 % CHANGE
---- ---- -------
Revenue $ 1,512 1,273 19 %
Operating income 384 352 9 %
Income from continuing operations 150 144 4 %
Basic EPS from continuing operations .58 .54 7 %
Diluted EPS from continuing operations .57 .54 6 %
OTHER OPERATING DATA
Reconciliation of EBITDA to income from continuing operations:
EBITDA
Operations $ 552 483 14 %
Corporate expense, net (37) (38) (3)%
---- ---
Total EBITDA 515 445 16 %
Depreciation and amortization (1) (129) (93) 39 %
Pre-opening expense (2) - - %
---- ---
Operating income 384 352 9 %
Interest income 39 10 - %
Interest expense (162) (98) 65 %
Interest expense, net, from unconsolidated affiliates (1) (4) - %
Provision for income taxes (105) (106) (1)%
Minority interest, net (5) (10) (50)%
---- ---
Income from continuing operations $ 150 144 4 %
==== ===
(1) Includes proportionate share of unconsolidated affiliates.
14
Consolidated revenue for the 1999 nine month period was $1.5 billion, an
increase of 19 percent over 1998. Total EBITDA was $515 million for the first
nine months of 1999, a 16 percent increase compared to $445 million a year ago,
while operating income increased nine percent to $384 million from $352 million
last year.
The Company's domestic owned and equity hotels contributed $455 million of
EBITDA in the 1999 nine month period, compared to $395 million in the prior
year. Growth was primarily the result of EBITDA contributions from hotels
acquired in 1999 and 1998. Comparable EBITDA at the Company's owned and equity
hotels increased $3 million or one percent compared to the prior year nine month
period. Growth was limited by a $8 million EBITDA decrease at the Company's two
Hawaii properties. Occupancy for comparable domestic owned and equity hotels was
76.7 percent compared to 75.9 percent in the 1998 period. The average room rate
increased 1.1 percent to $165.11 and RevPAR increased 2.2 percent.
EBITDA at the Hilton San Francisco & Towers increased $8 million or 23 percent
compared to the 1998 nine month period. A significant increase in IBT volume and
increases in both volume and rate in the group segment resulted in a 17 percent
increase in RevPAR. Strong volume and rate increases in the group segment drove
a seven percent RevPAR increase at the Hilton New Orleans Riverside, resulting
in a $3 million EBITDA increase. Combined EBITDA from the Hilton Washington &
Towers and the Capital Hilton increased $3 million on a combined RevPAR increase
of seven percent. The Capital Hilton benefited from occupancy growth in the IBT
segment, while increased food and beverage profits and rate increases drove
results at the Hilton Washington & Towers. Combined EBITDA from the Hilton
Chicago & Towers, the Hilton Chicago O'Hare Airport and the Palmer House Hilton
increased $2 million over the prior year nine month period on a combined RevPAR
increase of two percent. A strong city-wide convention market in the first
quarter of 1999 was offset by a softer group market and lower convention
attendance experienced in the 1999 second and third quarters. EBITDA flow
through was also mitigated by higher property tax expense in the 1999 period.
Renovations at the Hilton New York & Towers contributed to a $2 million or four
percent decline in EBITDA in the 1999 nine month period. The Company benefited
from improved results at the recently acquired Hilton Boston Back Bay, Hilton
East Brunswick & Towers, Hilton
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Charlotte & Towers, Hilton La Jolla Torrey Pines and the Hilton Short Hills.
These five properties posted a combined $4 million or 15 percent EBITDA increase
compared to pro forma 1998 results.
On a comparable basis, EBITDA from the Hilton Hawaiian Village and the Hilton
Waikoloa Village declined 13 percent and 12 percent, respectively, from the
prior year period. Excluding the Company's two properties in Hawaii, comparable
EBITDA at the Company's domestic owned and equity hotels increased $11 million
or three percent from the 1998 nine month period. Occupancy for comparable
domestic owned and equity hotels (excluding Hawaii) was 77.1 percent versus 76.0
percent in the 1998 period. The average room rate increased 2.5 percent to
$163.54 in the 1999 period and RevPAR improved 3.9 percent between periods.
Acquisition and development activity contributed approximately $54 million of
EBITDA to the first nine months of 1999. Management and franchise fees decreased
$4 million in 1999 to $76 million. This decrease is primarily attributable to
the acquisition of several previously managed properties during 1998 and 1999.
Depreciation and amortization, including the Company's proportionate share of
unconsolidated affiliates, increased $36 million over the prior year to $129
million primarily due to new acquisitions.
CORPORATE ACTIVITY
Interest income increased $29 million in the 1999 period to $39 million due
primarily to the 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.
Consolidated interest expense increased $64 million to $162 million primarily
due to the $625 million of debt assumed by Park Place and higher average debt
levels resulting from acquisition spending.
The effective income tax rate for the 1999 period decreased to 40.4 percent
compared to 40.8 percent for 1998.
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RECENT EVENTS
On September 3, 1999, the Company entered into a merger agreement with Promus
Hotel Corporation (Promus) that provides for the Company's acquisition of
Promus. Management believes the acquisition will create value by enhancing the
Company's competitive position, increasing revenue from management and
franchising, broadening the Company's portfolio of hotel brands and geographic
and brand diversification, and achieving significant synergies and economies of
scale, although such benefits cannot be assured.
In the acquisition, Promus shareholders will receive, at their election, for
each share of Promus common stock, either $38.50 in cash or a number of shares
of Hilton common stock equal to $38.50 divided by the average Hilton stock price
as defined, but in any event not less than 2.9096 shares or more than 3.2158
shares. The average Hilton stock price is the average of the volume weighted per
share sales price of Hilton common stock on the NYSE for 20 trading days
selected by lot from the 30 trading days ending on the fifth trading day before
the closing of the acquisition. In addition, the Company will assume Promus'
debt at the date of the acquisition.
Each Promus stockholders' election may be subject to proration depending on the
consideration other Promus stockholders elect to receive. The proration will
ensure that 55% of the outstanding Promus shares will be converted into cash,
while the remaining 45% will be converted into Hilton common stock.
The acquisition, which has been approved by both the Hilton and Promus boards of
directors, is subject to approval by the companies' stockholders. The special
stockholder meetings are scheduled to be held on November 30, 1999, and subject
to approval, it is anticipated that the transaction will be completed on that
date.
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OTHER MATTERS
YEAR 2000
The Company continues to work to resolve the potential impact of the Year 2000
on the processing of date-sensitive information by its computerized information
systems. The Year 2000 problem is the result of computer programs being written
using two digits (rather than four) to define the applicable year. Any of the
Company's programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the Year 2000, which could result in
miscalculations or system failures.
The Company has a Year 2000 program, the objective of which is to determine and
assess the risks of the Year 2000 issue, and plan and institute mitigating
actions to minimize those risks. The Company's standard for compliance requires
that for a computer system or business process to be Year 2000 compliant, it
must be designed to operate without error in date and date-related data prior
to, on and after January 1, 2000. The Company expects to be fully Year 2000
compliant with respect to all significant business systems prior to December 31,
1999.
The Company's various project teams are focusing their attention in the
following major areas:
INFORMATION TECHNOLOGY (IT) SYSTEMS
Information technology systems account for much of the Year 2000 work and
include all computer systems and technology managed by the Company. The Company
has assessed these core systems, has plans in place, and is undertaking to test
and implement changes where required. The Company has not yet identified any
significant remediation. The Company has contacted appropriate vendors and
suppliers as to their Year 2000 compliance and their deliverables have been
factored into the Company's plans.
NON-IT SYSTEMS
The Company has completed an inventory of all property level non-IT systems
(including elevators, electronic door locks, etc.). The Company has assessed the
majority of these non-IT systems, has plans in place, and is undertaking to test
and implement changes where required. The Company has contacted
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appropriate vendors and suppliers as to their Year 2000 compliance and their
deliverables have been factored into the Company's plans.
SUPPLIERS
The Company is communicating with its significant suppliers to understand their
Year 2000 issues and how they might prepare themselves to manage those issues as
they relate to the Company. To date, no significant supplier has informed the
Company that a material Year 2000 issue exists which will have a material effect
on the Company.
During 1999, the Company will continually review its progress against its
Year 2000 plans and determine what contingency plans are appropriate to
reduce its exposure to Year 2000 related issues.
Based on the Company's current assessment, the costs of addressing potential
problems are expected to be approximately $5 million. If the Company's customers
or vendors identify significant Year 2000 issues in the future and are unable to
resolve such issues in a timely manner, it could result in a material financial
risk. Accordingly, the Company plans to devote the necessary resources to
resolve all significant Year 2000 issues in a timely manner.
RECENT ACCOUNTING PRONOUNCEMENTS
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 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. SOP 98-5 is effective for
financial statements issued for periods beginning after December 15, 1998. 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 1999 first
quarter.
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FORWARD-LOOKING STATEMENTS
Forward-looking statements in this report, including without limitation, those
set forth under the captions "Financial Condition," "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, 1998
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.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or around September 7, 1999, two actions were filed in the Court of
Chancery for the State of Delaware by alleged common stockholders of
Promus on behalf of a purported class of similarly situated Promus
stockholders. The actions are styled STEVEN GOLDSTEIN V. PROMUS HOTEL
CORPORATION, ET AL., C.A. No. 17410NC and JOSEPH CARCO V. PROMUS HOTEL
CORPORATION, ET AL., C.A. No. 17411NC. The complaints in the actions,
which are substantially similar, name as defendants Promus, the
members of the Promus board of directors and Hilton, and allege that
the Promus directors breached their fiduciary duties to Promus
stockholders by agreeing to the acquisition and by allegedly failing
to obtain the highest value for Promus stockholders, and that Hilton
allegedly aided and abetted such alleged breaches of fiduciary duty.
The complaints seek injunctive relief and monetary damages in an
unspecified amount. Defendants intend to defend the actions
vigorously.
On or about October 11, 1999, an action was filed in the United States
District Court for the Southern District of Florida entitled HOTELRAMA
ASSOCIATES, LTD. V. HILTON HOTELS CORPORATION (Case No. 99-CV02717).
The plaintiff is the owner of the Fountainbleau Hilton Resort & Towers
in Miami, Florida, which is managed by Hilton. The complaint alleges
that the acquisition will cause Hilton to be in violation of
territorial restrictions contained in the management agreement. The
complaint seeks an injunction enjoining Hilton from violating the
restrictive covenant by its acquisition of Promus and for the entry of
a judgment entitling the plaintiff to any and all remedies available
under Florida law. Hilton intends to defend the action vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 3, 1999, the board of directors of the Company approved
an amendment to the Company's Amended and Restated Rights Agreement to
increase the percentage ownership threshold at which the rights become
exercisable from 15 percent to 20 percent.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27. Financial data schedule for the nine month period ended September 30,
1999.
(b) REPORTS ON FORM 8-K
The Company filed a Report on Form 8-K dated September 3, 1999, under
Item 5 Other Events announcing an amendment to the Company's Amended
and Restated Rights Agreement.
The Company filed a Report on Form 8-K dated September 8, 1999, under
Item 5 Other Events announcing the execution of an Agreement and Plan
of Merger with Promus Hotel Corporation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HILTON HOTELS CORPORATION
(Registrant)
Date: November 12, 1999 /s/ MATTHEW J. HART
-------------------
Matthew J. Hart
Executive Vice President,
Chief Financial Officer and Treasurer
Date: November 12, 1999 /s/ THOMAS E. GALLAGHER
-----------------------
Thomas E. Gallagher
Executive Vice President, Chief Administrative
Officer, General Counsel and Secretary
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