SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________to ______________________
Commission file number 1-3427
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 July 31, 1998 -- Common Stock, $2.50 par value --
246,909,951 shares.
PART I FINANCIAL INFORMATION
Company or group of companies for which report is filed:
HILTON HOTELS CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
- - --------------------------------------------------------------------------------------------- --------------------
Revenue Hotels $ 748 722 1,447 1,389
Gaming 665 638 1,362 1,274
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1,413 1,360 2,809 2,663
Expenses Hotels 594 582 1,191 1,164
Gaming 564 553 1,164 1,104
Corporate, net 18 22 31 35
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1,176 1,157 2,386 2,303
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Operating Income 237 203 423 360
Interest and dividend income 7 10 18 23
Interest expense (53) (45) (103) (88)
Interest expense, net, from
equity investments (3) (5) (9) (9)
Income Before Income Taxes ---------------------------------------------------------------- --------------------
and Minority Interest 188 163 329 286
Provision for income taxes 80 67 141 118
Minority interest, net 2 3 5 7
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NET INCOME $ 106 93 183 161
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BASIC EARNINGS PER SHARE $ .41 .36 .71 .62
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DILUTED EARNINGS PER SHARE $ .39 .34 .68 .60
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HILTON HOTELS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
June 30, December 31,
1998 1997
- - ---------------------------------------------------------------------------------------------------------
Assets Cash and equivalents $ 316 330
Temporary investments 32 43
Accounts receivable, net 429 403
Other current assets 257 235
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Total current assets 1,034 1,011
Investments 712 409
Property and equipment, net 5,815 4,994
Goodwill 1,326 1,313
Other assets 118 99
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Total investments, property and other asset 7,971 6,815
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Total Assets $ 9,005 7,826
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
Liabilities and Accounts payable and accrued expenses $ 845 865
Stockholders' Equity Current maturities of long-term debt 65 65
Income taxes payable 44 11
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Total current liabilities 954 941
Long-term debt 3,763 2,709
Deferred income taxes and other liabilities 837 793
Stockholders' equity 3,451 3,383
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Total Liabilities and Stockholders' Equity $ 9,005 7,826
- - ---------------------------------------------------------------------------------------------------------
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HILTON HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Six months ended
June 30,
1998 1997
- - ---------------------------------------------------------------------------------------------------------------
Operating Activities Net income $ 183 161
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 162 140
Amortization of loan costs 2 1
Change in working capital components:
Other current assets (48) 82
Accounts payable and accrued expenses (10) (53)
Income taxes payable 33 30
Change in deferred income taxes - (58)
Change in other liabilities (8) (75)
Distributions from equity investments (less than)
in excess of earnings (16) 12
Other (15) (12)
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Net cash provided by operating activities 283 228
- - ---------------------------------------------------------------------------------------------------------------
Investing Activities Capital expenditures (353) (309)
Additional investments (334) (98)
Change in temporary investments 11 (3)
Proceeds from property sales - 100
Payments on notes and other 26 25
Acquisitions, net of cash acquired (398) (69)
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Net cash used in investing activities (1,048) (354)
- - ---------------------------------------------------------------------------------------------------------------
Financing Activities Change in commercial paper borrowings
and revolving loans 580 (527)
Long-term borrowings 480 670
Reduction of long-term debt (193) (76)
Issuance of common stock 11 15
Purchase of common stock (81) -
Cash dividends (46) (47)
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Net cash provided by financing activities 751 35
- - ---------------------------------------------------------------------------------------------------------------
Decrease in Cash and Equivalents (14) (91)
Cash and Equivalents at Beginning of Year 330 388
- - ---------------------------------------------------------------------------------------------------------------
Cash and Equivalents at End of Period $ 316 297
- - ---------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------
see notes to consolidiated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
- - ----------------
The consolidated financial statements presented herein have been prepared by
Hilton Hotels Corporation and subsidiaries (Hilton or the Company) in accordance
with the accounting policies described in its 1997 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 six months ended June 30, 1998 and 1997 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 the 1997 periods reflect certain
reclassifications to conform with classifications adopted in 1998. These
reclassifications have no effect on net income.
NOTE 2: CONSOLIDATION OF AFFILIATES
- - ------------------------------------
The consolidated financial statements include the following amounts related to
managed hotels:
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
(in millions) (in millions)
Revenue $ 409 478 909 971
Operating expenses, including
remittances to owners 385 442 842 902
At June 30, 1998 At December 31, 1997
---------------- --------------------
Current assets(1) and current
liabilities $ 281 299
(1) Including cash and equivalents of $81 and $126, respectively.
On November 20, 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus in EITF 97-2 "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management
Arrangements." EITF 97-2 addresses the circumstances in which a management
entity may include the revenues and expenses of a managed entity in its
financial statements.
Upon the adoption of EITF 97-2, which is expected to be in the fourth quarter
of 1998, the Company will no longer include in its financial statements the
revenues, operating expenses and working capital of its managed properties.
Application of EITF 97-2 will have no impact on reported operating income,
net income, earnings per share or stockholders' equity.
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 in each quarter and $7
million in each six month period) by the weighted average number of common
shares outstanding for the period. The weighted average number of common
shares outstanding totaled 247 million for the three and six months ended
June 30, 1998 and 249 million for the three and six months ended June 30,
1997. 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 32 million for the three and six months ended June 30, 1998 and 31 million
for the three and six months ended June 30, 1997. 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
June 30, 1998 and 1997 and $7 million for each of the six month periods ended
June 30, 1998 and 1997.
Note 4: Separation of Hotel And Gaming Businesses, Acquisition of Grand
- - ------------------------------------------------------------------------
Casinos, Inc.
-------------
In June 1998, the Company announced that it will separate its gaming and
lodging operations, thereby creating a new publicly held gaming company. The
separation will be accomplished through a tax free distribution to Hilton
shareholders of the shares of its gaming company. Following completion of
the distribution, a subsidiary of the new gaming company will merge with the
Mississippi gaming operations (the "Mississippi Casino Business") of Grand
Casinos, Inc. ("Grand") in a transaction comprised entirely of the new gaming
company stock.
Both transactions are subject to certain shareholder and regulatory approvals
and are expected to be completed by year-end 1998. The Company plans to
obtain a ruling from the Internal Revenue Service that the distribution will
not be taxable to the Company or its shareholders. The Boards of Directors
of both the Company and Grand have approved the transactions.
Under the distribution, Hilton shareholders will receive one share of the new
gaming company for every share owned in Hilton Hotels Corporation. Pursuant
to the merger with the new gaming company, the new gaming company will
acquire Grand's three casino operations in Tunica, Gulfport and Biloxi,
Mississippi. Grand shareholders will receive shares of the new gaming company
determined by an exchange ratio based upon a "valuation factor" for Grand's
Mississippi Casino Business and for the new gaming company business. Upon
consummation of the merger, Hilton shareholders are expected to own, subject
to fluctuation based on certain factors, approximately 86.4 percent of the
new gaming company, with Grand shareholders owning approximately 13.6 percent.
Total consideration for the Mississippi Casino Business to be acquired by the
new gaming company is expected to be approximately $1.2 billion, including
assumption of approximately $550 million of Grand's net debt estimated to be
outstanding as of December 31, 1998.
The valuation factor used for each company is based on a notional enterprise
value ($1.2 billion for the Mississippi Casino Business and approximately
$6.025 billion for the new gaming company) minus, in each case, estimated
debt as of the closing date ("net equity value"). "Debt" is defined to
include indebtedness for money borrowed, increases in net working capital
(excluding certain items) from year-end 1997 levels, and certain unfunded
budgeted capital expenditures for projects currently underway. The actual
number of gaming company shares issuable to Grand shareholders will be
determined by the relationship between the relative net equity values of the
two companies at closing (with further adjustments in the event of increases
in the outstanding shares of the companies, other than as a result of option
exercises or conversion of Hilton preferred stock).
The downward adjustment in the number of gaming company shares issuable to
Grand shareholders is limited, and no further downward adjustment will be
made if the Mississippi Casino Business net equity value at closing drops
below $617.6 million. In the event the Mississippi Casino Business net
equity value is $617.6 million or less and the new gaming company's net
equity value remains consistent with the assumptions made in establishing the
exchange ratio, Grand shareholders would receive approximately 13% of the
combined company. In the event that the net equity value of the Mississippi
Casino Business is less than $585.1 million, the new gaming company may
terminate the merger agreement.
Note 5: Supplemental Cash Flow Information
- - --------------------------------------------
Six months ended
June 30,
1998 1997
---- ----
(in millions)
Cash paid during the period for the
following:
Interest, net of amounts capitalized $ 76 81
Income taxes 98 75
Note 6: Supplemental Segment Data
- - ----------------------------------
Supplemental hotel segment data for the three and six months ended June 30,
1998 and 1997 are as follows:
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
(in millions) (in millions)
Revenue
Rooms $ 429 416 827 797
Food and beverage 210 200 405 384
Franchise fees 14 15 26 27
Other products and services 95 91 189 181
----- ----- ----- -----
748 722 1,447 1,389
----- ----- ----- -----
Expenses
Rooms 103 104 201 203
Food and beverage 150 144 295 283
Other expenses, including
remittances to owners 341 334 695 678
----- ----- ----- -----
594 582 1,191 1,164
----- ----- ----- -----
Hotel operating income $ 154 140 256 225
----- ----- ----- -----
----- ----- ----- -----
Supplemental gaming segment data for the three and six months ended June 30,
1998 and 1997 are as follows:
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
(in millions) (in millions)
Revenue
Rooms $ 85 86 165 165
Food and beverage 68 63 138 129
Casino 471 448 975 898
Other products and services 41 41 84 82
----- ----- ----- -----
665 638 1,362 1,274
----- ----- ----- -----
Expenses
Rooms 32 28 57 57
Food and beverage 54 55 121 111
Casino 255 242 521 484
Other expenses, including
remittances to owners 223 228 465 452
----- ----- ----- -----
564 553 1,164 1,104
----- ----- ----- -----
Gaming operating income $ 101 85 198 170
----- ----- ----- -----
----- ----- ----- -----
Note 7: Comprehensive Income
- - -----------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The Company has adopted SFAS No. 130
beginning January 1, 1998. The statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements or in the footnotes to
the interim financial statements. Comprehensive income for the three and six
months ended June 30, 1998 and 1997 is as follows:
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
(in millions) (in millions)
Net Income $ 106 93 183 161
Change in unrealized holding gains
on securities 1 2 (4) 11
----- ----- ----- -----
Comprehensive Income $ 107 95 179 172
----- ----- ----- -----
----- ----- ----- -----
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
LIQUIDITY
For the six months ended June 30, net cash provided by operating activities was
$283 million and $228 million in 1998 and 1997, respectively. The increase was
attributable primarily to continued strength at many of the Company's U.S. owned
and partially owned hotels, the addition of "The Wild Wild West" casino in
Atlantic City and significantly improved results at the Las Vegas Hilton.
ACQUISITIONS AND CAPITAL SPENDING
Cash used in investing activities was $1.048 billion in the 1998 six month
period compared to $354 million last year. The increase was due primarily to
new hotel acquisitions and construction costs on the Paris Casino-Resort in Las
Vegas. Expenditures required to complete acquisitions and capital spending
programs in 1998 will be financed through available cash flows and general
corporate borrowings.
Growth in the hotel segment continues through selective acquisition of large
full-service hotels in major market locations. In December 1997 and January
1998, the Company acquired the remaining interests in the Chicago Hilton and
Towers, San Francisco Hilton and Towers, Washington Hilton and Towers, Rye Town
Hilton and Capital Hilton from The Prudential Insurance Company of America for a
total cost of $27 million, thereby increasing the Company's ownership interest
in each property to 100%.
In July 1997, the Company's Board of Directors approved a renovation of the New
York Hilton and Towers, including new restaurants, a state-of-the-art
business/conference center, a world-class fitness facility and an exclusive
Towers Lounge overlooking New York City. This $85 million project is expected
to be completed in late 1999.
In September 1997, the Company began construction on a new 600-room hotel at
the center of Boston's Logan Airport. This $100 million project is expected
to be completed in late 1999.
In January 1998, the Company purchased The Prospect Company's 92.5% ownership
interest in the 458-room McLean Hilton and office building complex in McLean,
Virginia located just outside Washington D.C., thereby increasing the Company's
ownership interest to 100%. In March 1998, the Company purchased the 300-room
Hilton at Short Hills, a "Five Diamond" hotel located in Short Hills, New
Jersey.
In April 1998, the Company purchased the 407-room Westin Hotel in Charlotte,
North Carolina (re-named the Hilton Charlotte) and the 395-room DFW Lakes
Hilton Executive Conference Center at Dallas-Ft. Worth International Airport
for a combined cost of approximately $170 million. In July 1998, the Company
purchased the 405-room Hilton Brunswick and Towers in East Brunswick, New
Jersey at a cost of approximately $49 million.
In June 1998, the Company announced that it had entered into an agreement
with The Prudential Insurance Company of America to restructure their joint
venture ownership of the 2,545-room Hilton Hawaiian Village . Under the
agreement, the Company plans to increase its investment in the joint venture
by as much as $400 million and assume a controlling financial interest.
In addition to an estimated $870 million in 1998 expenditures related to the
aforementioned hotel acquisitions and projects, the Company intends to spend
approximately $100 million in the hotel segment in 1998 on normal capital
replacements, upgrades and compliance projects. Additionally, the Company
expects to make further acquisitions in 1998.
Growth in the gaming segment occurs primarily through acquisition and new
development. In April 1997, the Company began construction on the $760
million, 2,900-room Paris Casino-Resort which will feature an 85,000 square
foot casino, a 50-story replica of the Eiffel Tower, thirteen restaurants,
130,000 square feet of convention space and a retail shopping complex with a
French influence. This project, which is adjacent to Bally's Las Vegas, is
expected to be completed in the 1999 third quarter.
In June 1997, Bally's Grand Inc., a majority owned subsidiary of the Company
which owns Bally's Las Vegas, agreed to settle pending shareholder litigation
and pursuant thereto repurchased certain outstanding shares of common stock
and warrants. As a result, the Company's indirect ownership of Bally's Grand
Inc. increased from 84% to 95% at a cost of $55 million. Under the terms of
the settlement, the Company acquired the remaining interest in March 1998 for
$44 million, increasing the Company's ownership to 100%.
The Company's 22,000 square foot SpaceQuest casino addition at the Las Vegas
Hilton opened in November 1997, in conjunction with its venture with
Paramount Parks, Inc. for an attraction called "Star Trek: The Experience at
the Las Vegas Hilton," which opened in January 1998. The Company's share of
costs for this project totaled approximately $70 million.
In addition to an estimated $550 million in 1998 expenditures related to
acquisitions and new construction, the Company anticipates spending
approximately $180 million in the gaming segment in 1998 on normal capital
replacements, ADA/safety compliance projects, structural and technology
upgrades and improvement projects that are evaluated on a ROI basis.
The expenditures discussed above do not include any costs associated with the
proposed merger with the Mississippi gaming operations of Grand Casinos, Inc.
(see "Recent Events" below) or any costs associated with any other potential
acquisitions in which the Company may engage. The Company is continually
evaluating acquisition opportunities and may at any time be negotiating to
engage in a business combination transaction or other acquisition with
respect to the gaming segment or the hotel segment. However, there can be no
assurances that the Company will engage in any of such transactions.
FINANCING
Long-term debt at June 30, 1998 totaled $3.8 billion, compared with $2.7
billion at December 31, 1997. For the six months ended June 30, 1998, cash
provided by financing activities totaled $751 million
compared to $35 million in the 1997 period. The 1998 period includes
additional commercial paper borrowings to fund capital expenditures and
acquisitions and increased debt related to the restructuring of the Hilton
Hawaiian Village joint venture.
By virtue of the aforementioned agreement with 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 credit facility. In accordance with the terms of the
agreement, this new credit facility was used to borrow an additional $294
million which was loaned to a Prudential affiliate. 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.
At June 30, 1998, approximately $860 million of the aggregate commitment of
the Company's five year $1.75 billion revolving credit facility supported the
issuance of commercial paper, leaving approximately $890 million of the
revolving bank debt facility available to the Company at such date.
On October 16, 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 June 30, 1998, available financing under the
Shelf totaled $2.1 billion. The Company may at any time issue securities
under the Shelf and 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 1998 first
quarter the Company repurchased 2.8 million shares of common stock, or 14
percent of the total authorized to be repurchased, for an aggregate purchase
price of $81 million. The Company may, at any time, repurchase up to 15.7
million remaining shares authorized for repurchase pursuant to such program.
The timing of stock purchases are made at the discretion of the Company's
management, subject to certain business and market conditions.
RESULTS OF OPERATIONS
The following discussion presents an analysis of the Company's results of
operations for the three and six months ended June 30, 1998 and 1997.
EBITDA (earnings before interest, taxes, depreciation, amortization 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.
COMPARISON OF FISCAL QUARTERS ENDED JUNE 30, 1998 AND 1997
OVERVIEW
A summary of the Company's consolidated revenue and earnings for the three
months ended June 30, 1998 and 1997 is as follows:
(in millions, except per share amounts) 1998 1997 % CHANGE
---- ---- --------
Revenue $ 1,413 1,360 4%
Operating income 237 203 17%
Net income 106 93 14%
Basic EPS .41 .36 14%
Diluted EPS .39 .34 15%
Other Operating Data
- - --------------------
EBITDA
Hotels $ 184 162 14%
Gaming 157 136 15%
Corporate expense, net (17) (20) (15%)
------- ------
Total $ 324 278 17%
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HOTELS
Hotel revenue for the 1998 second quarter was $748 million, an increase of
four percent over 1997. EBITDA from the hotel division was $184 million for
the 1998 second quarter, a 14 percent increase compared to $162 million a
year ago, while hotel operating income increased ten percent to $154 million
from $140 million last year.
Consolidated revenue was negatively impacted by decreased occupancies and
average rates at the Company's managed properties in Asia and the Middle
East. Excluding the impact of these declines, hotel revenue increased five
percent.
Second quarter results at the Company's U.S. properties were affected by the
timing of the Easter holiday period, which typically results in reduced
occupancy levels. The Easter holiday fell in the month of April during 1998
and in the month of March in the prior year. Occupancy for comparable U.S.
owned and managed hotels was 75.7 percent in the 1998 quarter compared to
79.7 percent in the 1997 period. The average room rate increased nine
percent to $158.17 from $144.76 in the prior year.
EBITDA from the Company's ten major full-service properties totaled $121
million in the 1998 second quarter, which, on a comparable basis, represented
a 13 percent increase over the prior year. EBITDA margins at these hotels
improved 2 points to 40 percent due primarily to higher average rates.
Combined EBITDA from the Waldorf=Astoria and the New York Hilton and Towers
increased $8 million or 26 percent over the 1997 second quarter. Growth in
the individual business traveler (IBT) segment contributed to increases in
revenue per available room (REVPAR) at these two properties of 10 percent and
14 percent, respectively. Combined EBITDA from the Chicago Hilton and Towers,
the O'Hare Hilton and the Palmer House Hilton increased $5 million or 19
percent over the prior year quarter on a combined REVPAR increase of ten
percent. Each of these three properties achieved significant room rate
growth from the IBT segment. EBITDA at the San Francisco Hilton and Towers
increased $3 million in the second quarter. Strong IBT demand offset by a
decline in leisure and contract room nights boosted the average rate by 15
percent for the quarter, though occupancy fell by 6.5 points. This property
also benefited from fees
associated with the cancellation of certain conventions. On a comparable
basis, EBITDA contribution from the Hilton Hawaiian Village in Honolulu
declined over $2 million from the prior period. Occupancy at this property
decreased 9.5 points due to a significant decline in convention and
international room nights, the latter due to adverse economic conditions in
Asia which affected travel to Hawaii.
Occupancy for these ten major full-service hotels (which also includes
properties in New Orleans and Washington D.C.) was 79.9 percent versus 84.3
percent in the 1997 quarter. The average room rate increased ten percent to
$181.97 in the 1998 second quarter from $164.69 and REVPAR improved five
percent between periods. Excluding the impact of Hawaii from these ten
properties, EBITDA increased 17 percent and REVPAR increased eight percent.
Hotel division results in the quarter also benefited from $9 million in
EBITDA from newly acquired properties and the required full consolidation of
the Hilton Hawaiian Village results beginning June 1, 1998 due to the
aforementioned restructuring.
Depreciation and amortization for the hotel segment, including the Company's
proportionate share of equity investments, increased $4 million over the
prior year to $30 million due primarily to new acquisitions.
Although the supply-demand balance in the Company's major markets generally
remains favorable, future operating results could be adversely impacted by
increased capacity and weak demand. These conditions could limit the
Company's ability to pass through inflationary increases in operating costs
in the form of higher 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.
GAMING
Total gaming revenue increased four percent in the 1998 second quarter to
$665 million from $638 million in 1997. Casino revenue, a component of
gaming revenue, increased five percent to $471 million in 1998 compared to
$448 million in the prior year quarter. EBITDA from the gaming division was
$157 million, a 15 percent increase from $136 million in the prior year
quarter, and gaming operating income increased 19 percent to $101 million
from $85 million last year. The Company's gaming division benefited from the
July 1997 opening of "The Wild Wild West" casino at Bally's Park Place in
Atlantic City and significantly improved results at the Las Vegas Hilton.
EBITDA at the Las Vegas Hilton increased $12 million over the prior year
quarter, more than doubling last year's results. Second quarter occupancy
grew 7.3 points to 89.0 percent due to strong demand in May and June. Total
casino revenue increased 34 percent due to significantly higher volumes both
in table games and slots. Table game and slot win increased 44% and 51%,
respectively, in the quarter. 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 continued volatility in the results
at this property. However, the Company believes that its implementation of
new casino marketing and entertainment strategies and the opening of the
"Star Trek" attraction and SpaceQuest casino has broadened the Las Vegas
Hilton's customer base and increased non-premium play volume.
EBITDA from the Flamingo Hilton - Las Vegas remained flat with the prior year
quarter. Occupancy was flat at 93.3 percent, with average rate down four
percent to $81.67. Bally's Las Vegas generated EBITDA of $22 million in the
1998 second quarter, a decrease of $1 million from last year. Lower table
game volume and a lower than normal win percentage impacted results for the
quarter. Occupancy declined 1.4 points and the average rate declined four
percent to $87.96.
Combined EBITDA from the Reno Hilton and the Flamingo Hilton - Reno increased
$1 million from the 1997 quarter. Both Reno properties recorded higher
occupancy and casino volume compared to the 1997 period.
Occupancy for the Nevada hotel-casinos was 90.6 percent in the 1998 second
quarter compared to 88.3 percent last year. The average room rate for the
Nevada properties was $76.14 compared to $77.99 in the prior period.
In Atlantic City, Bally's Park Place generated EBITDA of $41 million, an
increase of 17 percent from last year's $35 million. The increase was
primarily attributable to the opening of "The Wild Wild West" casino in July
1997. The Atlantic City Hilton reported EBITDA of $8 million, $1 million
above the second quarter last year. The improvement was due to higher table
game drop and win as well as increased non-casino revenues as a result of the
property's new 300-room tower.
Occupancy for the Atlantic City hotel-casinos was 93.0 percent in the 1998
second quarter compared to 94.0 percent last year. The average room rate for
the Atlantic City properties was $82.58 compared to $92.83 in the 1997
quarter. New hotel room supply in the Atlantic City market has put downward
pressure on room rates.
Combined EBITDA from the company's riverboat properties in Mississippi,
Louisiana, and Missouri increased $3 million over last year's quarter, while
EBITDA contribution from the company's two hotel-casinos in Australia
decreased $2 million due to adverse conditions in Asia and continued weakness
of the Australian dollar.
Depreciation and amortization for the gaming division, including the
Company's proportionate share of equity investments, increased $5 million to
$56 million in the second quarter of 1998, due primarily to the Las Vegas and
Atlantic City expansion projects completed in 1997.
The gaming industry continues to experience growth primarily in existing
markets. The Las Vegas and Atlantic City markets are becoming increasingly
competitive due to new developments and expansion projects which challenge
the Company's existing market share. These projects could adversely impact
the Company's future gaming income.
CORPORATE ACTIVITY
Corporate expense declined $4 million to $18 million in the 1998 quarter.
The 1997 period includes a $5 million non-recurring accrual for certain
litigation costs.
Interest and dividend income decreased $3 million in the 1998 period to $7
million due to lower investment balances. Consolidated interest expense
increased $8 million to $53 million due primarily to higher average debt
levels resulting from acquisition spending and a full quarter of a higher
average cost of debt resulting from the Company issuing long-term fixed notes
to replace floating rate debt in 1997.
The effective income tax rate for the 1998 period increased to 42.6 percent
compared to 41.1 percent for 1997. 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 SIX MONTHS ENDED JUNE 30, 1998 AND 1997
OVERVIEW
A summary of the Company's consolidated revenue and earnings for the six
months ended June 30, 1998 and 1997 is as follows:
(in millions, except per share amounts) 1998 1997 % CHANGE
---- ---- --------
Revenue $ 2,809 2,663 5%
Operating income 423 360 18%
Net income 183 161 14%
Basic EPS .71 .62 15%
Diluted EPS .68 .60 13%
Other Operating Data
- - --------------------
EBITDA
Hotels $ 314 273 15%
Gaming 310 269 15%
Corporate expense, net (30) (33) (9%)
------- ------
Total $ 594 509 17%
------- ------
------- ------
HOTELS
Hotel revenue for the 1998 six month period was $1.4 billion, an increase of
four percent over 1997. Hotel EBITDA increased $41 million or 15 percent to
$314 million compared to $273 million a year ago, while hotel operating
income increased 14 percent to $256 million from $225 million last year.
Excluding the Company's managed properties in Asia and the Middle East, hotel
revenue increased by five percent. Occupancy from comparable U.S. owned and
managed hotels was 73.8 percent in the 1998 period compared to 76.3 percent
last year. The average room rate increased nine percent to $158.50.
EBITDA from the Company's ten major full-service properties increased $27
million or 16 percent over the prior year. For the six month period, EBITDA
margins at these hotels improved 2 points to 36 percent due primarily to
higher average rates and operating efficiencies. Combined EBITDA from the
Waldorf=Astoria and the New York Hilton and Towers increased $12 million or
26 percent over 1997. Growth in the higher-rated individual business
traveler (IBT) segment helped to partially offset a decline in leisure room
nights resulting in REVPAR growth at these two properties of eight percent
and 12 percent, respectively.
Combined EBITDA from the Chicago Hilton and Towers, the O'Hare Hilton and
the Palmer House Hilton increased $10 million or 31 percent over the prior
year on a combined REVPAR increase of 12 percent. The combined increase in
REVPAR was attributable primarily to significantly higher room rates in the
IBT segment. EBITDA at the San Francisco Hilton and Towers increased $5
million in the six month period as strong IBT demand and rates helped to
offset declines in leisure stays, conventions and contract business. This
property also benefited from fees associated with the cancellation of certain
conventions in the 1998 second quarter. On a comparable basis, EBITDA
contribution from the Hilton Hawaiian Village declined $3 million from the
prior period. Six month occupancy at this property declined 6.7 points due
to a 16 percent decline in leisure room nights. Economic conditions in Asia
continue to adversely impact inbound travel to Hawaii.
Occupancy for these ten major full-service hotels (which also includes
properties in New Orleans and Washington D.C.) was 76.4 percent versus 79.1
percent in the 1997 period. The average room rate increased nine percent to
$177.78 in 1998 from $162.89, and REVPAR improved five percent between
periods. Excluding the impact of Hawaii from these ten properties, EBITDA
increased 21 percent and REVPAR increased eight percent.
In the 1998 six month period, the hotel division also benefited from new
acquisitions which contributed $10 million in EBITDA.
Depreciation and amortization for the hotel division, including the Company's
proportionate share of equity investments, increased $6 million to $58
million due primarily to new acquisitions.
GAMING
Total gaming revenue increased seven percent in the six month period to $1.4
billion. Casino revenue, a component of gaming revenue, increased nine
percent to $975 million in 1998 compared to $898 million in the prior year.
EBITDA from the gaming division was $310 million, a 15 percent increase from
$269 million in the prior year, and gaming operating income increased 16
percent to $198 million from $170
million in 1997. The gaming division's six month results benefited from the
July 1997 opening of "The Wild Wild West" casino at Bally's Park Place in
Atlantic City, significantly improved operations at the Las Vegas Hilton and
the introduction of 300 hotel rooms at the Conrad International Punta del
Este Resort and Casino in late 1997.
EBITDA at the Las Vegas Hilton increased $9 million over the prior year to
$39 million. Total casino revenue increased 16 percent due to significantly
higher volumes both in non-baccarat table games and slots. Overall table
game and slot win increased 18% and 29%, respectively, in the six month
period. While the average rate was flat at $106.07, a 2.5 point increase in
occupancy to 88.4 percent positively impacted non-casino revenues.
EBITDA from the Flamingo Hilton - Las Vegas declined $1 million from the
prior year to $55 million due to lower table game volume and win and a
decline in non-casino revenues. Occupancy declined 1.2 points to 91.6
percent, and the average rate fell four percent to $79.86. Bally's Las Vegas
generated EBITDA of $47 million for the six month period, a decrease of $3
million from the prior year. The decline was due to a three point decrease in
table game win percentage combined with lower overall volume. Occupancy
declined 1.6 points, while the average rate was flat at $94.12.
Combined EBITDA from the Reno Hilton and the Flamingo Hilton - Reno increased
$5 million from 1997. Six month occupancy and casino volume increased
substantially over the 1997 period.
Occupancy and average rate for the Nevada hotel-casinos was 88.4 percent and
$77.50, respectively, each comparable to the prior period.
In Atlantic City, Bally's Park Place generated EBITDA of $78 million, an
increase of 20 percent from last year's $65 million, due primarily to the
opening of "The Wild Wild West" casino in July 1997. The Atlantic City
Hilton reported EBITDA of $12 million, $1 million above last year. The
improvement was due to
higher table game drop and win as well as increased revenues as a result of
the property's new 300-room tower.
Occupancy for the Atlantic City hotel-casinos was 93.6 percent in the 1998
period compared to 92.0 percent last year. The average room rate for the
Atlantic City properties was $78.12, down nine percent from $85.90 last year.
Combined EBITDA from the company's riverboat properties in Mississippi,
Louisiana, and Missouri increased $8 million over last year, while EBITDA
contribution from the company's two hotel-casinos in Australia decreased
nearly $1 million due to adverse conditions in Asia and weakness of the
Australian dollar.
The opening of 300 hotel rooms in the latter half of 1997 resulted in
significant growth in casino volume of the 43% owned Conrad International
Punta del Este Resort and Casino in Uruguay. EBITDA totaled $16 million in
the six month period, an $11 million increase over the prior year. Results
from this property are highly seasonal, with the peak season falling in the
first quarter.
Depreciation and amortization for the gaming division, including the
Company's proportionate share of equity investments, increased $13 million to
$112 million in the 1998 period due primarily to the Las Vegas and Atlantic
City expansion projects completed in 1997.
CORPORATE ACTIVITY
Interest and dividend income decreased $5 million in the 1998 period to $18
million in 1997 due to lower investment balances. Consolidated interest
expense increased $15 million to $103 million due primarily to higher average
debt levels resulting from acquisition spending and a full six months of a
higher average cost of debt resulting from the Company issuing long-term
fixed notes to replace floating rate debt in 1997. The effective income tax
rate for the 1998 period increased to 42.9 percent from 41.3 percent in 1997.
RECENT EVENTS
In June 1998, the Company announced that it will separate its gaming and
lodging operations, thereby creating a new publicly held gaming company. The
separation will be accomplished through a tax free distribution to Hilton
shareholders of the shares of its gaming company. Following completion of
the distribution, a subsidiary of the new gaming company will merge with the
Mississippi gaming operations (the "Mississippi Casino Business) of Grand
Casinos, Inc. ("Grand") in a transaction comprised entirely of the new gaming
company stock.
Both transactions are subject to certain shareholder and regulatory approvals
and are expected to be completed by year-end 1998. The Company plans to
obtain a ruling from the Internal Revenue Service that the distribution will
not be taxable to the Company or its shareholders. The Boards of Directors
of both the Company and Grand have approved the transactions.
Under the distribution, Hilton shareholders will receive one share of the new
gaming company for every share owned in Hilton Hotels Corporation. Pursuant
to the merger with the new gaming company, the new gaming company will
acquire Grand's three casino operations in Tunica, Gulfport and Biloxi,
Mississippi. Grand shareholders will receive shares of the new gaming company
determined by an exchange ratio based upon a "valuation factor" for Grand's
Mississippi Casino Business and for the new gaming company business. Upon
consummation of the merger, Hilton shareholders are expected to own, subject
to fluctuation based on certain factors, approximately 86.4 percent of the new
gaming company, with Grand shareholders owning approximately 13.6 percent.
Total consideration for the Mississippi Casino Business to be acquired by the
new gaming company is expected to be approximately $1.2 billion, including
assumption of approximately $550 million of Grand's net debt estimated to be
outstanding as of December 31, 1998.
The valuation factor used for each company is based on a notional enterprise
value ($1.2 billion for the Mississippi Casino Business and approximately
$6.025 billion for the new gaming company) minus, in
each case, estimated debt as of the closing date ("net equity value").
"Debt" is defined to include indebtedness for money borrowed, increases in
net working capital (excluding certain items) from year-end 1997 levels, and
certain unfunded budgeted capital expenditures for projects currently
underway. The actual number of gaming company shares issuable to Grand
shareholders will be determined by the relationship between the relative net
equity values of the two companies at closing (with further adjustments in
the event of increases in the outstanding shares of the companies, other than
as a result of option exercises or conversion of Hilton preferred stock).
The downward adjustment in the number of gaming company shares issuable to
Grand shareholders is limited, and no further downward adjustment will be
made if the Mississippi Casino Business net equity value at closing drops
below $617.6 million. In the event the Mississippi Casino Business net
equity value is $617.6 million or less and the new gaming company's net
equity value remains consistent with the assumptions made in establishing the
exchange ratio, Grand shareholders would receive approximately 13% of the
combined company. In the event that the net equity value of the Mississippi
Casino Business is less than $585.1 million, the new gaming company may
terminate the merger agreement.
OTHER MATTERS
YEAR 2000
The Company has developed preliminary plans to address the possible exposures
related to the impact on its computer systems of the year 2000. Key
financial, information and operational systems are being assessed and
preliminary plans have been developed to address system modifications
required by December 31, 1999. The financial impact of making the required
systems changes is not expected to be material to the Company's financial
position or results of operations.
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 expects to adopt SOP 98-5 in the first quarter of 1999. Adoption
of the SOP is not expected to have a material impact on 1999 results of
operations.
On November 20, 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus in EITF 97-2 "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management
Arrangements." EITF 97-2 addresses the circumstances in which a management
entity may include the revenues and expenses of a managed entity in its
financial statements.
Upon the implementation of EITF 97-2, which is expected to be in the fourth
quarter of 1998, the Company will no longer include in its financial
statements the revenues, operating expenses and working capital of its
managed properties. Application of EITF 97-2 to the Company's financial
statements would have reduced each of revenues and operating expenses for the
three and six months ended June 30, 1998 by $385 million and $842 million,
respectively, and would have reduced each of revenues and operating expenses
for the three and six months ended June 30, 1997 by $442 million and $902
million, respectively. Current assets and current liabilities at June 30,
1998 and December 31, 1997 would be reduced by $281 million and $299 million,
respectively. Application of EITF 97-2 would have no impact on reported
operating income, net income, earnings per share or stockholders' equity.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this report, including without limitation, those
set forth under the captions "Financial Condition", "Results of Operations",
"Recent Events" 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 "Financial Condition" and those in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997 under the captions "Additional Information - Business Risks",
"Competition" and "Gaming Operations", 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. The Company undertakes no obligation
to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On May 21, 1998, the Securities and Exchange Commission adopted an amendment
to Rule 14a-4 promulgated under the Securities Exchange Act of 1934, as
amended, which governs a company's use of its discretionary proxy voting
authority with respect to certain stockholder proposals raised at a
stockholders meeting. The Company's bylaws contain an advance notice
provision that requires that notice of stockholder proposals be received by
the Company not less than 60 days prior to an annual meeting in order to be
properly brought before the meeting. This bylaw provision will govern under
amended Rule 14a-4.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Agreement and Plan of Merger with Grand Casinos, Inc. dated as of June
30, 1998. Schedules to such agreement are referenced therein and have
not been filed. The Company will furnish supplementally to the
Securities and Exchange Commission any omitted schedule.
27. Financial data schedule for the six month period ended June 30, 1998.
99.1 Shareholder Support Agreement dated as of June 30, 1998.
(b) REPORTS ON FORM 8-K
The Company filed a Report on Form 8-K dated July 1, 1998, under Item
5 Other Events announcing the execution of an Agreement and Plan of
Merger with Grand Casinos, Inc.
The Company filed a Report on Form 8-K dated July 10, 1998, under Item
5 Other Events announcing the adoption by the Company's Board of
Directors of a Preferred Share Purchase Rights Plan to replace its
existing rights plan which expires on July 27, 1998.
The Company filed a Report on Form 8-K dated July 22, 1998, under Item
5 Other Events to report results for the three and six month periods
ended June 30, 1998.
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: August 5, 1998 /s/ MATTHEW J. HART
---------------------------
Matthew J. Hart
Executive Vice President and
Chief Financial Officer
Date: August 5, 1998 /s/ THOMAS E. GALLAGHER
---------------------------
Thomas E. Gallagher
Executive Vice President and
General Counsel