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, 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 October 31, 1998 --- Common Stock, $2.50 par value
- - --- 260,772,408 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 Nine months ended
September 30, September 30,
1998 1997 1998 1997
- - ------------------------------------------------------------------------- ---------------------
Revenue Hotels $ 662 654 2,109 2,043
Gaming 671 660 2,033 1,934
------------------------------------------- --------------------
1,333 1,314 4,142 3,977
Expenses Hotels 536 541 1,727 1,705
Gaming 574 561 1,738 1,665
Corporate, net 15 14 46 49
------------------------------------------- --------------------
1,125 1,116 3,511 3,419
------------------------------------------- --------------------
Operating Income 208 198 631 558
Interest and
dividend income 9 11 27 34
Interest expense (61) (43) (164) (131)
Interest expense,
net, from equity
investments (4) (4) (13) (13)
------------------------------------------- -------------------
Income Before Income Taxes
and Minority Interest 152 162 481 448
Provision for
income taxes 66 66 207 184
Minority interest, net 7 2 12 9
------------------------------------------- -------------------
Net Income $ 79 94 262 255
- - -------------------------------------------------------------------------- -------------------
- - -------------------------------------------------------------------------- -------------------
Basic Earnings Per Share $ .31 .36 1.02 .98
- - -------------------------------------------------------------------------- -------------------
- - -------------------------------------------------------------------------- -------------------
Diluted Earnings Per Share $ .30 .35 .98 .95
- - -------------------------------------------------------------------------- -------------------
- - -------------------------------------------------------------------------- -------------------
1
HILTON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
September 30, December 31,
1998 1997
- - -----------------------------------------------------------------------------------------------------------------------
Assets Cash and equivalents $ 221 330
Temporary investments 30 43
Accounts receivable, net 420 403
Other current assets 220 235
----------------------------------------------------------------------------------------------
Total current assets 891 1,011
Investments 434 409
Property and equipment, net 6,420 4,994
Goodwill 1,329 1,313
Other assets 121 99
----------------------------------------------------------------------------------------------
Total investments, property and other assets 8,304 6,815
----------------------------------------------------------------------------------------------
Total Assets $ 9,195 7,826
- - ----------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------
Liabilities and Accounts payable and accrued expenses $ 888 865
Stockholders' Equity Current maturities of long-term debt 104 65
Income taxes payable 53 11
----------------------------------------------------------------------------------------------
Total current liabilities 1,045 941
Long-term debt 3,812 2,709
Deferred income taxes and other liabilities 831 793
Stockholders' equity 3,507 3,383
----------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 9,195 7,826
- - ----------------------------------------------------------------------------------------------------------------------
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2
HILTON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Nine months ended
September 30,
1998 1997
- - ------------------------------------------------------------------------------------------------------------------------
Operating Activities Net income $ 262 255
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 247 216
Amortization of loan costs 3 2
Change in working capital components:
Other current assets (7) 46
Accounts payable and accrued expenses 33 4
Income taxes payable 42 19
Change in deferred income taxes 21 (33)
Change in other liabilities (5) (90)
Distributions from equity investments (less than)
in excess of earnings (19) 11
Other (12) (16)
--------------------------------------------------------------------------------------------
Net cash provided by operating activities 565 414
- - ------------------------------------------------------------------------------------------------------------------------
Investing Activities Capital expenditures (606) (384)
Additional investments (75) (123)
Change in temporary investments 12 1
Proceeds from property sales - 100
Payments on notes and other 39 36
Acquisitions, net of cash acquired (818) (124)
--------------------------------------------------------------------------------------------
Net cash used in investing activities (1,448) (494)
- - ------------------------------------------------------------------------------------------------------------------------
Financing Activities Change in commercial paper borrowings
and revolving loans 642 (815)
Long-term borrowings 480 994
Reduction of long-term debt (216) (94)
Issuance of common stock 18 24
Purchase of common stock (81) -
Cash dividends (69) (70)
--------------------------------------------------------------------------------------------
Net cash provided by financing activities 774 39
- - ------------------------------------------------------------------------------------------------------------------------
Decrease in Cash and Equivalents (109) (41)
Cash and Equivalents at Beginning of Year 330 388
- - ------------------------------------------------------------------------------------------------------------------------
Cash and Equivalents at End of Period $ 221 347
- - ------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------
3
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 nine months ended September 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 Nine months ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(in millions) (in millions)
Revenue $ 314 424 1,223 1,395
Operating expenses, including
remittances to owners 294 393 1,136 1,295
At September 30, 1998 At December 31, 1997
--------------------- ---------------------
Current assets(1) and current liabilities $ 257 299
(1) Including cash and equivalents of $69 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 $10
million in each nine month period) by the weighted average number of common
shares outstanding for the period. The weighted average number of common
shares outstanding totaled 248 million and 247 million for the three and nine
months ended September 30, 1998, respectively and 250 million for the three
and nine months ended September 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
4
and convertible securities increased the weighted average number of common
shares by 29 million and 31 million for the three and nine months ended
September 30, 1998, respectively and 32 million and 31 million for the three
and nine months ended September 30, 1997, 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, 1998 and 1997 and $11 million for each of the
nine month periods ended September 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, which will be named Park
Place Entertainment Corporation (Park Place). Following completion of the
distribution, a subsidiary of Park Place will merge with the Mississippi
gaming operations (the Mississippi Casino Business) of Grand Casinos, Inc.
(Grand) in exchange for the issuance of Park Place stock to the holders of
Grand stock.
Both transactions are expected to be completed by year-end 1998, subject to
certain shareholder and regulatory approvals. 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 Park
Place for every share owned in Hilton Hotels Corporation. Pursuant to the
merger, Park Place will acquire Grand's three casino operations in Tunica,
Gulfport and Biloxi, Mississippi. Grand shareholders will receive shares of
Park Place determined by an exchange ratio based upon a "valuation factor"
for Grand's Mississippi Casino Business and for Park Place. Upon consummation
of the merger, Hilton shareholders are expected to own approximately 86.4
percent of Park Place, with Grand shareholders owning approximately 13.6
percent, although these percentages are subject to change.
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 Park Place) 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 Park Place
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 changes in the outstanding shares of the
companies, other than as a result of option exercises or conversion of Hilton
preferred stock).
If the Mississippi Casino Business net equity value at closing is below
$617.6 million and more than $585.1 million, then it will be deemed to be
equal to $617.6 million for the purposes of determining the number of Park
Place shares issuable to Grand shareholders. In the event the Mississippi
Casino Business net equity value is between $617.6 million and $585.1 million
and Park Place'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, Park
Place may terminate the merger agreement.
5
NOTE 5: SUPPLEMENTAL CASH FLOW INFORMATION
Nine months ended
September 30,
1998 1997
---- ----
(in millions)
Cash paid during the period for the following:
Interest, net of amounts capitalized $ 89 103
Income taxes 118 142
NOTE 6: SUPPLEMENTAL SEGMENT DATA
Supplemental hotel segment data for the three and nine months ended September
30, 1998 and 1997 are as follows:
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(in millions) (in millions)
Revenue
Rooms $ 392 392 1,219 1,189
Food and beverage 161 161 566 545
Franchise fees 15 13 41 40
Other products and services 94 88 283 269
------- ------ ------- ------
662 654 2,109 2,043
------- ------ ------- ------
Expenses
Rooms 100 104 301 307
Food and beverage 132 132 427 415
Other expenses, including
remittances to owners 304 305 999 983
------- ------ ------- ------
536 541 1,727 1,705
------- ------ ------- ------
Hotel operating income $ 126 113 382 338
------- ------ ------- ------
------- ------ ------- ------
Supplemental gaming segment data for the three and nine months ended September
30, 1998 and 1997 are as follows:
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(in millions) (in millions)
Revenue
Rooms $ 74 78 239 243
Food and beverage 65 66 203 195
Casino 493 471 1,468 1,369
Other products and services 39 45 123 127
-------- ------ ------- ------
671 660 2,033 1,934
-------- ------ ------- ------
Expenses
Rooms 29 29 86 86
Food and beverage 61 57 182 168
Casino 264 259 785 743
Other expenses, including
remittances to owners 220 216 685 668
-------- ------ ------- ------
574 561 1,738 1,665
-------- ------ ------- ------
Gaming operating income $ 97 99 295 269
-------- ------ ------- ------
-------- ------ ------- ------
6
NOTE 7: COMPREHENSIVE INCOME
In June 1997, the FASB 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 nine months ended September 30, 1998 and
1997 is as follows:
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(in millions) (in millions)
Net Income $ 79 94 262 255
Change in unrealized holding gains
or losses on securities (9) 5 (13) 16
------- ------ ------- ------
Comprehensive Income $ 70 99 249 271
------- ------ ------- ------
------- ------ ------- ------
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
LIQUIDITY
For the nine months ended September 30, net cash provided by operating
activities was $565 million and $414 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, newly acquired hotel
properties, significantly improved results at the Las Vegas Hilton, the
addition of 300 hotel rooms at the Company's casino in Punta del Este,
Uruguay and a full period of operations of "The Wild Wild West" casino in
Atlantic City.
ACQUISITIONS AND CAPITAL SPENDING
Cash used in investing activities was $1.4 billion in the 1998 nine month
period compared to $494 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 Hilton Chicago &
Towers, Hilton San Francisco & Towers, Hilton Washington & Towers, Hilton Rye
Town and Capital Hilton from The Prudential Insurance Company of America
(Prudential), thereby increasing the Company's ownership interest in each
property to 100%.
In January 1998, the Company purchased The Prospect Company's 92.5% ownership
interest in the 458-room Hilton McLean 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 Short Hills, a "Five Diamond" hotel located in Short
Hills, New Jersey.
8
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.
In July 1998, the Company purchased the 405-room Hilton New Brunswick &
Towers in East Brunswick, New Jersey.
In June 1998, the Company announced that it had entered into an agreement
with Prudential to restructure their joint venture ownership of the
2,545-room Hilton Hawaiian Village. In September 1998, the Company increased
its investment in the joint venture from 50% to 98%. In August 1998, the
Company acquired a 75% interest in the 585-room Pointe Hilton Tapatio Cliffs
Resort in Phoenix, Arizona.
The Company is currently renovating the Hilton New York & Towers. 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. The Company is also in the process of constructing a new 600-room hotel
at the center of Boston's Logan Airport, which is expected to be completed in
late 1999.
In addition to an estimated $750 million in 1998 expenditures related to the
aforementioned hotel acquisitions and an estimated $185 million related to
construction projects, the Company intends to spend approximately $120
million in the hotel segment in 1998 on normal capital replacements, upgrades
and compliance projects. The Company is also evaluating several additional
hotel acquisitions.
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.
9
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%.
In addition to an estimated $550 million in 1998 expenditures related to
acquisitions and new construction, the Company anticipates spending
approximately $170 million in the gaming segment in 1998 on normal capital
replacements, ADA/safety compliance projects, structural and technology
upgrades and $50 million on improvement projects that are evaluated on a ROI
basis.
The expenditures discussed above do not include any costs associated with the
proposed separation of Hilton's lodging and gaming operations and the
proposed merger relating to 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 September 30, 1998 totaled $3.8 billion, compared with $2.7
billion at December 31, 1997. For the nine months ended September 30, 1998,
cash provided by financing activities totaled $774 million compared to $39
million in the 1997 period. The 1998 period includes additional commercial
paper borrowings to fund acquisitions and capital expenditures and increased
debt related to the restructuring of the Hilton Hawaiian Village joint
venture.
10
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 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.
At September 30, 1998, approximately $923 million of the aggregate commitment
of the Company's $1.75 billion revolving credit facility supported the
issuance of commercial paper, leaving approximately $827 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 September 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.
11
STOCKHOLDERS' EQUITY
On October 3, 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 months ended September 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.
12
COMPARISON OF FISCAL QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
OVERVIEW
A summary of the Company's consolidated revenue and earnings for the three
months ended September 30, 1998 and 1997 is as follows:
(in millions, except per share amounts) 1998 1997 % Change
---- ---- --------
Revenue $1,333 1,314 1 %
Operating income 208 198 5 %
Net income 79 94 (16)%
Basic EPS .31 .36 (14)%
Diluted EPS .30 .35 (14)%
OTHER OPERATING DATA
EBITDA
Hotels $ 159 137 16 %
Gaming 151 153 (1)%
Corporate expense, net (13) (14) (7)%
-------- -------
Total $ 297 276 8 %
-------- -------
-------- -------
HOTELS
Hotel revenue for the 1998 third quarter was $662 million, an increase of one
percent over 1997. EBITDA from the hotel division was $159 million for the
1998 third quarter, a 16 percent increase compared to $137 million a year
ago, while hotel operating income increased 12 percent to $126 million from
$113 million last year.
Consolidated hotel revenue was negatively impacted by decreased occupancies
and average rates at the Company's properties in Hawaii, Asia and the Middle
East. In addition, third quarter results at the Company's U.S. properties
were affected by the timing of religious holidays that, in 1997, fell in the
fourth quarter and post-summer business travel activity starting later than
usual due to the timing of Labor Day. Excluding the impact of the Company's
properties in Hawaii, Asia and the Middle East, hotel revenue increased four
percent.
Occupancy for comparable U.S. owned and managed hotels was 74.9 percent in
the 1998 quarter compared to 78.4 percent in the 1997 period. The average
room rate increased seven percent to $147.72 from $137.79 in the prior year.
13
EBITDA from the Company's ten major full-service properties totaled $95
million in the 1998 third quarter, which, on a comparable basis, represented
a 15 percent increase over the prior year. EBITDA margins at these hotels
improved two points to 34 percent due primarily to higher average rates.
Combined EBITDA from The Waldorf=Astoria and the Hilton New York & Towers
increased $5 million or 24 percent over the 1997 third quarter. Double-digit
average rate growth in the leisure segment and increased demand in the higher
rated group market contributed to increases in revenue per available room
(REVPAR) at these two properties of nine percent and seven percent,
respectively. Combined EBITDA from the Hilton Chicago & Towers, the Hilton
Chicago O'Hare Airport and the Palmer House Hilton increased $6 million or 29
percent over the prior year quarter on a combined REVPAR increase of seven
percent and one-time real estate tax credits of approximately $2 million.
Each of these three properties achieved significant room rate growth from the
individual business traveler (IBT) segment. EBITDA at the Hilton San
Francisco & Towers declined slightly due to reduced international leisure and
convention room nights. Inbound travel to Hawaii continued to be impacted by
the Asian economic crisis. On a comparable basis, EBITDA contribution from
the Hilton Hawaiian Village in Honolulu declined $2 million from the prior
year period. Occupancy at this property decreased six points due to a
significant decline in leisure room nights.
Occupancy for these ten major full-service hotels (which also includes
properties in New Orleans and Washington D.C.) was 80.7 percent versus 83.2
percent in the 1997 quarter. The average room rate increased six percent to
$166.57 in the 1998 third quarter from $157.05 and REVPAR improved three
percent between periods. Excluding the impact of Hawaii from these ten
properties, EBITDA increased 21 percent and REVPAR increased six percent.
Hotel division results in the quarter also benefited from newly acquired
properties and the required full consolidation of the Hilton Hawaiian Village
results beginning June 1, 1998 due to the aforementioned restructuring. On a
same store basis, consolidated hotel EBITDA increased eight percent over the
prior year.
14
Depreciation and amortization for the hotel segment, including the Company's
proportionate share of equity investments, increased $9 million over the
prior year to $33 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 two percent in the 1998 third quarter to $671
million from $660 million in 1997. Casino revenue, a component of gaming
revenue, increased five percent to $493 million in 1998 compared to $471
million in the prior year quarter. EBITDA from the gaming division was $151
million, a one percent decrease from $153 million in the prior year quarter,
and gaming operating income decreased two percent to $97 million from $99
million last year. The Company's gaming division was impacted by difficult
market conditions in Reno, lower than expected REVPAR due to sluggish market
conditions in Las Vegas and a comparatively low table game hold percentage
combined with lower margins at Bally's Park Place in Atlantic City.
EBITDA at the Las Vegas Hilton increased $6 million over the prior year
quarter, more than doubling last year's results. Total casino revenue
increased significantly due to higher volumes both in non-baccarat table
games and slots. The Company's efforts to broaden the property's domestic
customer base have resulted in significant increases in non-baccarat table
game and slot volume and a decrease in baccarat play. Table game (excluding
baccarat) and slot win increased 66 percent and 11 percent, respectively.
Baccarat volume decreased 26 percent, however total baccarat win increased 69
percent due to a significantly higher win percentage in the 1998 quarter.
Despite third quarter occupancy growth of three
15
points to 83.2 percent, the property's non-casino revenue decreased $1
million as a result of an 11 percent drop in the average room rate. 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 has broadened the Las Vegas Hilton's domestic customer base and
increased non-premium play volume.
EBITDA from the Flamingo Hilton - Las Vegas decreased $3 million from the
prior year quarter, primarily due to a decline in the property's non-casino
revenue. Occupancy decreased two points to 87.6 percent and average rate
declined seven percent to $69.02. An 18 percent increase in slot win was
partially offset by a 13 percent decrease in table game win. Bally's Las
Vegas generated EBITDA of $20 million in the 1998 third quarter, an increase
of $1 million from last year. A decrease in non-casino revenues softened the
impact of the property's increases in table game and slot win. Occupancy was
up fractionally while average rate decreased six percent to $81.19
Combined EBITDA from the Reno Hilton and the Flamingo Hilton - Reno decreased
$6 million from the 1997 quarter. Both Reno properties recorded lower
occupancy and lower average rate compared to the 1997 period due to difficult
conditions that are continuing to challenge the market.
Occupancy for the Nevada hotel-casinos was 87.5 percent in the 1998 third
quarter compared to 86.6 percent last year. The average room rate for the
Nevada properties was $67.88 compared to $72.46 in the prior year period.
In Atlantic City, Bally's Park Place generated EBITDA of $52 million, a
decrease of 12 percent from last year's $59 million. The decrease was
primarily attributable to lower margins and low table game hold and slot win
combined with a difficult comparison due to the impact of the successful
grand opening of "The Wild Wild West" casino in the 1997 third quarter. The
Atlantic City Hilton reported EBITDA of $19 million,
16
$6 million above the third quarter last year. The improvement was due to
higher table game drop and win and the impact of the property's 300-room
tower construction on pedestrian traffic, which reduced gaming volume in the
1997 quarter.
Occupancy for the Atlantic City hotel-casinos was 96.8 percent in the 1998
third quarter compared to 95.1 percent last year. The average room rate for
the Atlantic City properties was $94.76 compared to $103.13 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 was
comparable to the prior year quarter in spite of 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, was $54 million in the
third quarters of 1998 and 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
Interest and dividend income decreased $2 million in the 1998 period to $9
million due to lower investment balances. Consolidated interest expense
increased $18 million to $61 million due primarily to higher average debt
levels resulting from acquisition spending.
17
The effective income tax rate for the 1998 period increased to 43.4 percent
compared to 40.7 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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
OVERVIEW
A summary of the Company's consolidated revenue and earnings for the nine months
ended September 30, 1998 and 1997 is as follows:
(in millions, except per share amounts) 1998 1997 % Change
---- ---- --------
Revenue $4,142 3,977 4 %
Operating income 631 558 13 %
Net income 262 255 3 %
Basic EPS 1.02 .98 4 %
Diluted EPS .98 .95 3 %
OTHER OPERATING DATA
EBITDA
Hotels $ 473 410 15 %
Gaming 461 422 9 %
Corporate expense, net (43) (47) (9)%
-------- -------
Total $ 891 785 14 %
-------- -------
-------- -------
HOTELS
Hotel revenue for the 1998 nine month period was $2.1 billion, an increase of
three percent over 1997. Hotel EBITDA increased $63 million or 15 percent to
$473 million compared to $410 million a year ago, while hotel operating
income increased 13 percent to $382 million from $338 million last year.
Excluding the Company's properties in Hawaii, Asia and the Middle East, hotel
revenue increased by six percent. Occupancy from comparable U.S. owned and
managed hotels was 74.2 percent in the 1998 period compared to 77.0 percent
last year. The average room rate increased eight percent to $154.87.
EBITDA from the Company's ten major full-service properties increased $38
million or 15 percent over the prior year. For the nine month period, EBITDA
margins at these hotels improved three points to 36 percent due primarily to
higher average rates and operating efficiencies. Combined EBITDA from The
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Waldorf=Astoria and the Hilton New York & Towers increased $17 million or 25
percent over 1997. Growth in the higher-rated IBT segment was partially
offset by a decline in leisure room nights resulting in REVPAR growth at
these two properties of eight percent and ten percent, respectively. Combined
EBITDA from the Hilton Chicago & Towers, the Hilton Chicago O'Hare Airport
and the Palmer House Hilton increased $16 million or 30 percent over the
prior year on a combined REVPAR increase of ten percent. The combined
increase in REVPAR was attributable primarily to significantly higher room
rates in the IBT segment along with increased IBT room night demand. EBITDA
at the Hilton San Francisco & Towers increased $5 million in the nine month
period as strong IBT demand and rates helped to offset declines in leisure
stays and convention business. On a comparable basis, EBITDA contribution
from the Hilton Hawaiian Village declined $5 million from the prior period as
a significant decline in leisure room nights was partially offset by gains in
IBT and group room nights. Economic conditions in Asia continue to adversely
impact leisure travel to Hawaii.
Occupancy for these ten major full-service hotels (which also includes
properties in New Orleans and Washington D.C.) was 77.7 percent versus 80.4
percent in the 1997 period. The average room rate increased eight percent to
$174.06 in 1998 from $160.92, and REVPAR improved five percent between
periods. Excluding the impact of Hawaii from these ten properties, EBITDA
increased 21 percent and REVPAR increased seven percent.
In the 1998 nine month period, the hotel division also benefited from new
acquisitions. On a same store basis, hotel EBITDA increased 11 percent
compared to the prior period.
Depreciation and amortization for the hotel division, including the Company's
proportionate share of equity investments, increased $15 million to $91
million due primarily to new acquisitions.
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GAMING
Total gaming revenue increased five percent in the nine month period to $2.0
billion. Casino revenue, a component of gaming revenue, increased seven
percent to $1.5 billion in 1998 compared to $1.4 billion in the prior year.
EBITDA from the gaming division was $461 million, a nine percent increase
from $422 million in the prior year, and gaming operating income increased
ten percent to $295 million from $269 million in 1997. The gaming division's
nine month results benefited from significantly improved results at the Las
Vegas Hilton, the addition of 300 hotel rooms at the Conrad International
Punta del Este Resort and Casino in late 1997 and the opening of "The Wild
Wild West" Casino in Atlantic City.
EBITDA at the Las Vegas Hilton increased $15 million over the prior year to
$50 million. The Company's efforts to broaden the property's domestic
customer base have resulted in significant increases in non-baccarat table
game and slot volume and a decrease in baccarat play. Non-baccarat table game
win increased 50 percent and slot revenue increased 22 percent on higher
volume and comparable win percentages. Baccarat volume decreased 18 percent
from the prior year, however baccarat win increased 20 percent on a
significantly increased win percentage.
EBITDA from the Flamingo Hilton - Las Vegas declined $4 million from the
prior year to $77 million due to lower table game volume and win and a
decline in non-casino revenues. Occupancy declined one point to 90.3 percent,
and the average rate fell five percent to $76.31. Bally's Las Vegas generated
EBITDA of $67 million for the nine month period, a decrease of $2 million
from the prior year. The decline was due to a one point decrease in table
game win percentage combined with lower drop and lower rooms revenue
resulting from a one point decline in occupancy and a two percent decrease in
the average rate to $89.76. Combined EBITDA from the Reno Hilton and the
Flamingo Hilton - Reno decreased $1 million from 1997.
Occupancy for the Nevada hotel-casinos was 88.1 percent in the 1998 period
compared to 87.8 percent last year. The average room rate for the Nevada
properties was $74.28 compared to $75.68 in the prior year period.
20
In Atlantic City, Bally's Park Place generated EBITDA of $130 million, an
increase of five percent from last year's $124 million, due primarily to the
opening of "The Wild Wild West" casino in July 1997. The Atlantic City Hilton
reported EBITDA of $31 million, $7 million above last year. The improvement
was due to higher table game drop and win as well as increased non-casino
revenues from the property's new 300-room tower.
Occupancy for the Atlantic City hotel-casinos was 94.7 percent in the 1998
period compared to 93.1 percent last year. The average room rate for the
Atlantic City properties was $83.93, down nine percent from $92.34 last year.
Combined EBITDA from the Company's riverboat properties in Mississippi,
Louisiana, and Missouri increased $7 million over last year, while EBITDA
contribution from the Company's two hotel-casinos in Australia was flat at
$19 million.
The opening of 300 hotel rooms in the latter half of 1997 resulted in
significant growth in casino volume at the 43% owned Conrad International
Punta del Este Resort and Casino in Uruguay. EBITDA totaled $18 million in
the nine month period, a $13 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
$166 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 $7 million in the 1998 period to $27
million due to lower investment balances. Consolidated interest expense
increased $33 million to $164 million due primarily to higher average debt
levels resulting from acquisition spending and a full nine months of a higher
average
21
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 43.0 percent from 41.1 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, which will be named Park
Place Entertainment Corporation (Park Place). Following completion of the
distribution, a subsidiary of Park Place will merge with the Mississippi
gaming operations (the Mississippi Casino Business) of Grand Casinos, Inc.
(Grand) in exchange for the issuance of Park Place stock to the holders of
Grand stock.
Both transactions are expected to be completed by year-end 1998, subject to
certain shareholder and regulatory approvals. 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 Park
Place for every share owned in Hilton Hotels Corporation. Pursuant to the
merger, Park Place will acquire Grand's three casino operations in Tunica,
Gulfport and Biloxi, Mississippi. Grand shareholders will receive shares of
Park Place determined by an exchange ratio based upon a "valuation factor"
for Grand's Mississippi Casino Business and for Park Place. Upon consummation
of the merger, Hilton shareholders are expected to own approximately 86.4
percent of Park Place, with Grand shareholders owning approximately 13.6
percent, although these percentages are subject to change.
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 Park Place) 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
22
of Park Place 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 changes in the outstanding
shares of the companies, other than as a result of option exercises or
conversion of Hilton preferred stock).
If the Mississippi Casino Business net equity value at closing is below
$617.6 million and more than $585.1 million, then it will be deemed to be
$617.6 million for the purposes of determining the number of Park Place
shares issuable to Grand shareholders. In the event the Mississippi Casino
Business net equity value is between $617.6 million and $585.1 million and
Park Place'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, Park
Place may terminate the merger agreement.
OTHER MATTERS
YEAR 2000
The Company is currently working 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.
23
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. These
core systems have been assessed, plans are in place, and work is being
undertaken to test and implement changes where required. No significant
remediation has been identified. The appropriate vendors and suppliers have
been contacted as to their Year 2000 compliance and their deliverables have
been factored into the Company's plans.
NON-IT SYSTEMS
An inventory of all property level non-IT systems (including elevators,
electronic door locks, gaming devices, etc.) is near completion. The majority
of these non-IT systems have been assessed, plans are in place, and work is
being undertaken to test and implement changes where required. The
appropriate vendors and suppliers have been contacted 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 the remainder of the 1998 and 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 less than $5 million. However, if the Company is
unable to resolve its Year 2000 issues, contingency
24
plans to update existing systems (i.e., reservation, payroll, etc.) are in
place for which the Company expects the cost, if any, to be an additional $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 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 nine months ended September 30, 1998 by $294 million and $1.1
billion, respectively, and would have reduced each of revenues and operating
expenses for the three and nine months ended September 30, 1997 by $393
million and $1.3 billion, respectively. Current assets and current
liabilities at September 30, 1998 and December 31, 1997
25
would be reduced by $257 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.
26
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27. Financial data schedule for the nine month period ended September 30,
1998.
99.01 Amended and Restated Rights Agreement dated as of September 10, 1998
between the Company and ChaseMellon Shareholder Services, L.L.C.
(incorporated by reference from the Company's Form 8-A/A Registration
Statement filed with the Securities and Exchange Commission on
September 16, 1998.)
(b) REPORTS ON FORM 8-K
The Company filed a Report on Form 8-K dated August 21, 1998, under
Item 5 Other Events announcing redemption of the outstanding shares of
its Preferred Redeemable Increased Dividend Equity Securities, 8%
PRIDES Convertible Preferred Stock on October 3, 1998.
The Company filed a Report on Form 8-K dated September 14, 1998, under
Item 5 Other Events announcing a revised earnings forecast for the 1998
third quarter.
The Company filed a Report on Form 8-K dated October 20, 1998, under
Item 5 Other Events to report results for the three and nine month
periods ended September 30, 1998 and disclose certain information
relating to Park Place and its proposed merger with Grand's Mississippi
Casino Business.
27
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 2, 1998 MATTHEW J. HART
---------------
Matthew J. Hart
Executive Vice President and
Chief Financial Officer
Date: November 2, 1998 THOMAS E. GALLAGHER
-------------------
Thomas E. Gallagher
Executive Vice President and
General Counsel
28