<PAGE>
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, 1996
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, 1996 --- Common Stock, $2.50 par value ---
195,446,254 shares.
<PAGE>
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)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
- - ----------------------------------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C>
Revenue Rooms $ 154.8 145.9 475.5 433.6
Food and beverage 64.3 61.4 208.9 190.5
Casino 120.9 110.6 340.3 362.6
Management and franchise fees 31.5 26.4 92.7 75.7
Other 58.4 31.5 165.4 90.4
Operating income
from unconsolidated affiliates 23.6 9.9 70.6 39.0
-------------------------------------------------------------------------------- ----------------------
453.5 385.7 1,353.4 1,191.8
- - ----------------------------------------------------------------------------------------------- ----------------------
Expenses Rooms 48.6 47.0 146.2 138.1
Food and beverage 57.0 55.1 177.7 166.8
Casino 55.9 59.1 177.6 175.2
Other costs and expenses 175.7 161.6 522.0 455.6
Corporate expense 15.1 10.3 37.0 24.5
-------------------------------------------------------------------------------- ----------------------
352.3 333.1 1,060.5 960.2
- - ----------------------------------------------------------------------------------------------- ----------------------
Operating income 101.2 52.6 292.9 231.6
Interest and dividend income 9.2 9.4 25.4 25.1
Interest expense (16.4) (24.5) (55.2) (71.3)
Interest expense, net, from
unconsolidated affiliates (2.4) (4.7) (9.4) (11.8)
Property transactions - .2 - 1.2
- - ----------------------------------------------------------------------------------------------- ----------------------
Income before income taxes
and minority interest 91.6 33.0 253.7 174.8
Provision for income taxes 36.3 7.5 99.9 61.6
Minority interest, net .8 .7 3.5 3.5
- - ----------------------------------------------------------------------------------------------- ----------------------
Net income $ 54.5 24.8 150.3 109.7
- - ----------------------------------------------------------------------------------------------- ----------------------
- - ----------------------------------------------------------------------------------------------- ----------------------
Net income per share $ .28 .13 .77 .57
- - ----------------------------------------------------------------------------------------------- ----------------------
- - ----------------------------------------------------------------------------------------------- ----------------------
Average number
of shares 197.3 194.6 195.1 194.2
- - ----------------------------------------------------------------------------------------------- ----------------------
- - ----------------------------------------------------------------------------------------------- ----------------------
</TABLE>
<PAGE>
HILTON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets Current assets
Cash and equivalents $ 211.4 338.0
Temporary investments 56.3 70.7
Other current assets 342.1 308.6
-------------------------------------------------------------------------------------
Total current assets 609.8 717.3
Investments 590.0 595.3
Property and equipment, net 1,757.1 1,695.9
Other assets 62.5 51.8
-------------------------------------------------------------------------------------
Total assets $ 3,019.4 3,060.3
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
Liabilities and Current liabilities
stockholders' equity Accounts payable and accrued expenses $ 307.3 306.5
Current maturities of long-term debt 15.7 216.8
Income taxes payable 32.0 11.6
-------------------------------------------------------------------------------------
Total current liabilities 355.0 534.9
Long-term debt 1,087.2 1,069.7
Deferred income taxes and other liabilities 185.1 202.0
Stockholders' equity 1,392.1 1,253.7
-------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 3,019.4 3,060.3
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
HILTON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1995
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities Net income $ 150.3 109.7
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 110.8 104.5
Change in working capital components:
Other current assets 22.4 26.9
Accounts payable and accrued expenses (8.5) 2.1
Income taxes payable 20.4 1.4
Decrease in deferred income taxes (2.1) (7.1)
Decrease in other liabilities (12.8) (19.0)
Unconsolidated affiliates' distributions
in excess of earnings 15.6 26.4
Gain from property transactions - (1.2)
Other .6 (.7)
-------------------------------------------------------------------------------------
Net cash provided by operating activities 296.7 243.0
- - --------------------------------------------------------------------------------------------------------------
Investing activities Capital expenditures (167.1) (151.8)
Additional investments (69.9) (73.7)
Decrease in temporary investments 17.5 124.1
Payments on notes and other investments 1.1 17.5
-------------------------------------------------------------------------------------
Net cash used in investing activities (218.4) (83.9)
- - --------------------------------------------------------------------------------------------------------------
Financing activities (Decrease) increase in commercial paper
borrowings and revolving loans (457.2) 172.9
Long-term borrowings 490.0 -
Reduction of long-term debt (216.9) (191.6)
Issuance of common stock 23.1 8.0
Cash dividends (43.9) (43.4)
-------------------------------------------------------------------------------------
Net cash used in financing activities (204.9) (54.1)
- - --------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and equivalents (126.6) 105.0
Cash and equivalents at beginning of year 338.0 184.4
- - --------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 211.4 289.4
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
HILTON HOTELS CORPORATION AND SUBSIDIARIES
SUMMARY OF OPERATIONS
(dollars in millions, except average rate amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue Hotels $ 214.9 168.7 644.5 508.5
Gaming 238.6 217.0 708.9 683.3
---------------------------------------------------------------------------------------------------------
Total $ 453.5 385.7 1,353.4 1,191.8
- - -----------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------
Operating Hotels $ 72.4 43.0 209.7 140.8
income Gaming 43.9 19.9 120.2 115.3
Corporate expense (15.1) (10.3) (37.0) (24.5)
---------------------------------------------------------------------------------------------------------
Total 101.2 52.6 292.9 231.6
Net interest expense (9.6) (19.8) (39.2) (58.0)
Property transactions - .2 - 1.2
Provision for income taxes (36.3) (7.5) (99.9) (61.6)
Minority interest, net (.8) (.7) (3.5) (3.5)
- - -----------------------------------------------------------------------------------------------------------------------------
Net income $ 54.5 24.8 150.3 109.7
- - -----------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------
Percentage of
occupancy Hotels 77 76 75 74
Gaming 89 87 90 86
- - -----------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------
Average rate Hotels $ 129 119 133 124
Gaming 68 66 72 69
- - -----------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
-------------------------------------- ----------------------------------
Number of Available Casino Number of Available Casino
Properties Rooms Sq. ft. Properties Rooms Sq. ft.
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hotels Wholly owned or leased 17 8,603 - 18 9,106 -
Partially owned 15 14,977 - 15 14,992 -
Managed 26 15,849 - 23 14,786 -
Franchised 170 43,279 - 162 41,414 -
--------------------------------------------------------------------------------------------------------------
Total hotels 228 82,708 - 218 80,298 -
Gaming Owned, partially owned and
managed casinos and
hotel-casinos 10 12,782 617,000 10 12,782 602,000
- - -----------------------------------------------------------------------------------------------------------------------------
Total 238 95,490 617,000 228 93,080 602,000
- - -----------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NET INCOME PER SHARE
The calculations of common and equivalent shares, net income and net income per
share are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ----- -----
<S> <C> <C> <C> <C>
Shares outstanding
beginning of period 195,400,356 193,096,532 193,348,712 192,458,892
Net common shares issued/
issuable upon exercise
of certain stock
options 1,879,454 1,501,996 1,784,811 1,744,396
----------- ----------- ----------- -----------
Common and equivalent
shares 197,279,810 194,598,528 195,133,523 194,203,288
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (in millions) $54.5 $24.8 $150.3 $109.7
----- ----- ------ ------
----- ----- ------ ------
Net income per share $.28 $.13 $.77 $.57
---- ---- ---- ----
---- ---- ---- ----
Dividends declared per share $.075 $.075 $.225 $.225
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
The consolidated financial statements presented herein have been prepared by
Hilton Hotels Corporation and subsidiaries (the "Company") in accordance with
the accounting policies described in its 1995 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, 1996 and 1995
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 1995 periods reflect certain
reclassifications to conform with classifications adopted in 1996. These
classifications have no effect on net income.
NOTE 2: STOCK SPLIT
On September 19, 1996, the stockholders of the Company approved a four-for-one
stock split which was distributed on September 25, 1996 to stockholders of
record on September 19, 1996. All references in the financial statements to
number of shares, per share amounts and dividends paid have been restated to
reflect this stock split.
NOTE 3: SUPPLEMENTAL CASH FLOW INFORMATION
Nine months ended
September 30,
1996 1995
---- ----
(in millions)
Cash paid during the period for the following:
Interest, net of $5.7 and $2.6 capitalized, respectively $60.3 74.3
Income taxes 71.6 64.8
NOTE 4: INVESTMENTS
Summarized operating results of the Company's unconsolidated affiliates are as
follows:
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(in millions) (in millions)
Revenue $363.6 373.1 1,075.4 994.2
Expenses 267.8 342.3 862.5 901.2
Net Income 87.0 26.9 188.2 83.4
<PAGE>
NOTE 5: SUPPLEMENTAL SEGMENT DATA
Supplemental hotel segment data for the three and nine months ended September
30, 1996 and 1995 are as follows:
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(in millions) (in millions)
Revenue
Rooms $ 101.2 94.0 300.5 271.8
Food and beverage 31.2 30.8 105.5 98.5
Management and franchise fees 26.8 23.3 79.5 67.7
Other 38.5 14.3 105.7 41.8
Operating income
from unconsolidated
affiliates 17.2 6.3 53.3 28.7
------- ----- ----- -----
214.9 168.7 644.5 508.5
------- ----- ----- -----
Expenses
Rooms 28.4 27.5 84.6 80.7
Food and beverage 27.0 26.6 86.7 82.5
Other costs and expenses 87.1 71.6 263.5 204.5
------- ----- ----- -----
142.5 125.7 434.8 367.7
------- ----- ----- -----
Hotel operating income $ 72.4 43.0 209.7 140.8
------- ----- ----- -----
------- ----- ----- -----
Supplemental gaming segment data for the three and nine months ended
September 30, 1996 and 1995 are as follows:
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(in millions) (in millions)
Revenue
Rooms $ 53.6 51.9 175.0 161.8
Food and beverage 33.1 30.6 103.4 92.0
Casino 120.9 110.6 340.3 362.6
Management and franchise fees 4.7 3.1 13.2 8.0
Other 19.9 17.2 59.7 48.6
Operating income
from unconsolidated
affiliates 6.4 3.6 17.3 10.3
------- ----- ----- -----
238.6 217.0 708.9 683.3
------- ----- ----- -----
Expenses
Rooms 20.2 19.5 61.6 57.4
Food and beverage 30.0 28.5 91.0 84.3
Casino 55.9 59.1 177.6 175.2
Other costs and expenses 88.6 90.0 258.5 251.1
------- ----- ----- -----
194.7 197.1 588.7 568.0
------- ----- ----- -----
Gaming operating income $ 43.9 19.9 120.2 115.3
------- ----- ----- -----
------- ----- ----- -----
NOTE 6: ACQUISITIONS
On June 6, 1996, the Company entered into an agreement with Bally
Entertainment Corporation ("Bally") pursuant to which Bally will merge with
and into the Company. If the merger is consummated, each share of Bally
common stock issued and outstanding immediately prior to the merger would be
converted into the right to receive one share of common stock of the Company.
In the event that the Determination Price (as defined) of the Company's
common stock is less than $27.00 per share, each holder of Bally common stock
will receive an additional cash payment, up to $3.00 per share, equal to the
<PAGE>
excess of $27.00 over such Determination Price. Each share of Bally's
Preferred Redeemable Increased Dividend Equity Securities, 8% PRIDES,
Convertible Preferred Stock outstanding immediately prior to the merger will
be converted into the right to receive one share of newly authorized
Preferred Redeemable Increased Dividend Equity Securities, 8% PRIDES,
Convertible Preferred Stock of the Company. In addition, the Company will
assume Bally's net debt of approximately $1 billion. The transaction, which
has been approved by both Bally's and the Company's respective Boards of
Directors and stockholders, is subject to approval by various regulatory
agencies, including gaming regulators of several states, and is expected to
close by year end 1996.
During the third quarter, the Company announced agreements with The
Prudential Insurance Company of America ("Prudential") whereby the Company
will acquire the majority of Prudential's ownership interests in the Chicago
Hilton and Towers, San Francisco Hilton and Towers, Washington Hilton and
Towers, New York Hilton and Towers, Rye Town Hilton and Capital Hilton hotels
for a combined cost of $433 million. The sale of the San Francisco and
Chicago properties closed in October; the sale of the remaining properties is
expected to close by year end.
NOTE 7: SUBSEQUENT EVENTS
On October 25, 1996, the Company announced cash tender offers, contingent on
the consummation of the Bally merger, to purchase any and all of each of the
following series of notes of Bally's wholly owned subsidiaries: 9 1/4%
Bally's Park Place Funding, Inc. First Mortgage Notes due 2004; 10 5/8% GNF,
Corp. First Mortgage Notes due 2003; and Bally Casino Holdings, Inc. Senior
Discount Notes and Senior Discount Notes due 1998. The Company is also
soliciting consents to amend the indentures governing each series of notes.
Also on October 25, 1996, the Company announced a cash tender offer,
contingent on the consummation of the Bally merger, to purchase any and all
of the 10 3/8% First Mortgage Notes due 2003 of Bally's Grand, Inc., an
approximately 85% owned subsidiary of Bally. The Company is also soliciting
consents to amend the indenture governing such notes.
Successful completion of the tender offers at the offer prices announced on
October 25, 1996 would result in an extraordinary loss in the fourth quarter
which may be significant to the Company's results of operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
COMPARISON OF FISCAL QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
OVERVIEW
Net income for the 1996 third quarter increased 120 percent to $54.5 million or
$.28 per share, compared to $24.8 million or $.13 per share in 1995. Total
revenue in the 1996 quarter increased 18 percent to $453.5 million, while total
operating income increased 92 percent to $101.2 million from $52.6 million in
1995.
HOTELS
Hotel revenue for the 1996 quarter was $214.9 million, an increase of 27 percent
over 1995, while hotel operating income increased 68 percent to $72.4 million
from $43.0 million last year. Adjusting for the impact of consolidating the
Company's vacation ownership projects in Las Vegas and Orlando beginning in
1996, revenue increased 18 percent; the impact of this consolidation on
operating income was not significant. Hotel industry fundamentals remain
strong, particularly in the full service segment. The Company continues to
benefit from high demand and limited new supply at most of its major full
service properties. The Company capitalized on these strong fundamentals in the
third quarter, improving margins and producing operating income increases at
nearly all of its owned and partially owned hotels. Occupancy for hotels owned
or managed was 77 percent in 1996 compared to 76 percent in 1995. The average
room rate increased 8 percent to $129 from $119 in the prior year.
Each of the Company's ten major full service properties achieved improved
operating results compared to the 1995 third quarter. Combined operating income
from the Waldorf=Astoria and the 50% owned New York Hilton and Towers increased
$2.8 million over the 1995 third quarter on strong individual business traveler
and leisure guest volume. Combined revenue per available room increased 13
percent over the 1995 quarter. Double digit growth in revenue per available
room was also attained at the O'Hare Hilton,
<PAGE>
the Palmer House Hilton, and the one-third owned Chicago Hilton and Towers.
Combined results from these three properties increased $3.3 million over the
prior year. Operating income from the 50% owned Hilton Hawaiian Village, the
50% owned San Francisco Hilton and Towers and the New Orleans Hilton Riverside
and Towers, benefiting from significant increases in revenue per available room,
increased a combined $2.4 million compared to the 1995 quarter. As a group, the
operating income from these ten properties (which also includes the 50% owned
Capital Hilton and the 50% owned Washington Hilton and Towers) improved 39
percent over the 1995 quarter. Occupancy at these hotels was 82 percent versus
81 percent in the 1995 quarter, with the average daily rate increasing to $144
from $133 and revenue per available room improving 11 percent.
Results at the San Diego Hilton Beach and Tennis Resort and the Portland Hilton
continue to benefit from major renovation projects completed in the prior year.
Operating income increased a combined $1.3 million over the 1995 third quarter.
Combined revenue per available room at these two wholly owned properties
increased 18 percent from 1995.
Operating income from the Company's Orlando and Las Vegas vacation ownership
projects increased $5.0 million compared to the 1995 period. Results in 1995
include the recognition of deferred operating losses of the Orlando project,
prompted by the completion of the first phase of construction.
Hotel management and franchise fees increased $3.5 million in 1996 to $26.8
million. Fee revenue is based primarily on operating revenue at managed
properties and room revenue at franchised hotels.
Future operating results could be unfavorably impacted by new capacity or
factors which influence demand, including increases in transportation and fuel
costs or sustained recessionary periods. The Company does not anticipate any
meaningful near term increase in supply in the full service segment given the
long lead times inherent in this type of construction. The Company also
believes its financial strength, market presence and diverse product line will
enable it to remain competitive in the hotel segment.
<PAGE>
GAMING
Total gaming revenue increased 10 percent in the 1996 third quarter to $238.6
million from $217.0 million in 1995. Casino revenue, a component of gaming
revenue, increased 9 percent to $120.9 million in 1996 compared to $110.6
million in the prior year. Gaming operating income increased 121 percent to
$43.9 million from $19.9 million in the 1995 third quarter.
Results at the Las Vegas Hilton increased $17.9 million from the prior year,
primarily due to a significant increase in volume of its premium play baccarat
business coupled with a normalized win percentage. Baccarat drop increased 117%
over the prior year and the baccarat win percentage increased 13 points from a
lower than normal win percentage in the 1995 third 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 operating income at this property.
The Flamingo Hilton - Las Vegas, continuing to benefit from major expansion and
enhancement projects completed in 1995, recorded a $1.9 million increase in
operating income. Revenue per available room increased 13 percent compared to
the prior year. A generally soft market continues to affect the Flamingo Hilton
- - - Laughlin, which posted a $1.3 million decrease in operating income. Combined
results from the Reno Hilton and the Flamingo Hilton - Reno decreased $2.6
million from the comparable 1995 quarter. Both properties demonstrated lower
occupancy and reduced room rates due to increased competition in the Reno
market. Operating income from the Company's river casino operations in New
Orleans increased $1.0 million from the prior year.
Equity and fee income from the 19.9% owned Hotel Conrad and Jupiters Casino in
Australia increased $2.9 million from the prior year, primarily due to increased
table game win compared to the 1995 period.
<PAGE>
Equity and fee income from the 19.9% owned Conrad International Treasury,
which opened in April 1995 in Brisbane, remained consistent with prior year.
Combined table hold for the Nevada hotel-casinos increased to 21 percent in the
1996 third quarter from 17 percent in the 1995 period, due to the improvement in
premium play hold at the Las Vegas Hilton. Occupancy for the Nevada hotel-
casinos was 90 percent in the 1996 quarter compared to 88 percent last year.
The average room rate for the Nevada properties increased two percent to $65.
The gaming industry continues to experience growth and increasing competition,
particularly in existing markets. Competitors have announced and are developing
new projects which will add significant room supply and casino space to the Las
Vegas market over the next several years. These additions could adversely
impact the Company's future gaming income.
CORPORATE EXPENSE
Corporate expense increased $4.8 million to $15.1 million in the 1996 third
quarter. The 1996 period includes a $2.6 million non-cash charge for stock-
based compensation related to the 1996 Chief Executive Stock Incentive Plan.
FINANCING ACTIVITIES
Interest and dividend income totaled $9.2 million in the 1996 period compared to
$9.4 million in 1995. Consolidated interest expense decreased $8.1 million to
$16.4 million primarily due to lower interest rates and lower average debt
levels compared to the 1995 third quarter. Interest expense from unconsolidated
affiliates decreased $2.3 million.
INCOME TAXES
The effective income tax rate for the 1996 period was 39.6 percent compared to
22.7 percent in 1995. The Company's effective income tax rate is determined by
the level and composition of pretax income
<PAGE>
subject to varying foreign, state and local taxes. The 1995 effective income
tax rate benefited from the favorable resolution of Federal tax issues for prior
years and the utilization of foreign tax credits.
MINORITY INTEREST
The minority interest results from the consolidation of the 67.4% owned New
Orleans Hilton Riverside and Towers.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
OVERVIEW
Net income for the nine month period was $150.3 million or $.77 per share, an
increase of 37 percent over last year. Total revenue in the 1996 period
increased 14 percent to $1.4 billion, while total operating income increased 26
percent to $292.9 million from $231.6 million in 1995.
HOTELS
Hotel revenue increased 27 percent to $644.5 million for the nine month period
from $508.5 million in 1995, while hotel operating income increased 49 percent
to $209.7 million from $140.8 million in the 1995 period. Adjusting for the
impact of consolidating the Company's vacation ownership projects in Las Vegas
and Orlando beginning in 1996, revenue increased 17 percent; the impact of this
consolidation on operating income was not significant. Occupancy for hotels
owned or managed was 75 percent in 1996 compared to 74 percent in 1995. Average
room rates increased 7 percent to $133 from $124 in the prior year.
Combined operating income at the Waldorf=Astoria and the 50% owned New York
Hilton and Towers increased $12.1 million over the 1995 period, driven by a
combined 13 percent increase in revenue per available room. The O'Hare Hilton,
the Palmer House Hilton and the one-third owned Chicago Hilton and Towers each
demonstrated gains in both occupancy and average rates, resulting in double
digit growth in revenue per available room. Combined results from these three
properties increased $9.5 million over the
<PAGE>
prior year. Combined operating income at the 50% owned Capital Hilton and the
50% owned Washington Hilton and Towers improved $2.4 million compared to the
same period in the prior year. Strong volume and increased average room rates
also led to operating income improvements at other major market full service
properties, including the 50% owned Hilton Hawaiian Village, the 50% owned San
Francisco Hilton and Towers and the New Orleans Hilton Riverside and Towers.
Combined operating income from these three properties improved $6.9 million over
the 1995 period. Combined operating income from the Company's ten major full
service properties improved 42 percent over the first nine months of 1995.
Occupancy at these hotels increased two points to 79 percent in 1996, with the
average daily room rate increasing to $148 from $138 and revenue per available
room increasing 10 percent.
Combined operating income from the San Diego Hilton Beach and Tennis Resort and
the Portland Hilton increased $6.9 million, reflecting the completion of major
renovation projects in 1995.
Operating income from the Company's Orlando and Las Vegas vacation ownership
projects increased $6.9 million compared to the 1995 period. Results in 1995
include the recognition of deferred operating losses of the Orlando project.
Hotel management and franchise fees for the nine month period increased $11.8
million to $79.5 million.
GAMING
Total gaming revenue in the 1996 nine month period increased four percent to
$708.9 million from $683.3 million in 1995. Casino revenue, a component of
gaming revenue, was $340.3 million in 1996 compared to $362.6 million in the
prior year. Gaming operating income increased four percent to $120.2 million
from $115.3 million in the 1995 period.
Operating income at the Las Vegas Hilton decreased $22.4 million from the prior
year, primarily due to a reduction in the win percentage on its premium play
baccarat business. The baccarat win percentage decreased 12 points from a
higher than normal win percentage in the 1995 period. Results from the
<PAGE>
Flamingo Hilton - Las Vegas increased $20.2 million in the 1996 nine month
period, reflecting improved occupancy, average room rate and gaming volume
since the completion of significant property improvements in the prior year.
Increased competition continues to result in reduced occupancy and room rate
pressures at the Flamingo Hilton - Reno and the Reno Hilton. Combined
results from these two properties decreased $9.1 million from the 1995
period. A generally soft market continues to affect the Flaming Hilton -
Laughlin, which posted a $1.3 million decrease in operating income.
Operating income from the Company's river casino operations in New Orleans
was consistent with the prior year.
Equity and fee income from the 19.9% owned Hotel Conrad and Jupiters Casino
increased $7.9 million from the prior year, primarily due to increased table
game win. Benefiting from a full nine months of operations, equity and fee
income from the 19.9% owned Conrad International Treasury increased $3.4
million. Fee income from the one-third owned consortium which operates and
manages Casino Windsor increased $1.8 million from the 1995 period.
Combined table hold for the Nevada hotel-casinos decreased to 18 percent in
the 1996 period from 22 percent in the prior year, primarily due to the
variance in premium play hold at the Las Vegas Hilton. Occupancy for the
Nevada hotel-casinos was 92 percent in the 1996 period versus 88 percent last
year. The average room rate for Nevada increased three percent to $69.
CORPORATE EXPENSE
Corporate expense increased $12.5 million to $37.0 million in the 1996 nine
month period. The 1996 period includes a $7.0 million non-cash charge for
stock-based compensation related to the 1996 Chief Executive Stock Incentive
Plan.
FINANCING ACTIVITIES
Interest and dividend income totaled $25.4 million in the 1996 period
compared to $25.1 million in the prior year. Consolidated interest expense
decreased $16.1 million to $55.2 million in the 1996 period due to
<PAGE>
lower average debt levels, lower interest rates and higher amounts of
capitalized interest on construction projects. Interest expense from
unconsolidated affiliates decreased $2.4 million.
INCOME TAXES
The effective income tax rate for the 1996 period was 39.4 percent compared to
35.2 percent in 1995. The 1995 effective income tax rate benefited from the
favorable resolution of Federal tax issues for prior years and the utilization
of foreign tax credits.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL SPENDING
Net cash provided by operating activities totaled $296.7 million for the nine
months ended September 30, 1996 compared to $243.0 million in the same period
last year. Working capital increased to $254.8 million at September 30, 1996
from $182.4 million at December 31, 1995. This increase was primarily the
result of utilizing long-term financing to fund current debt maturities.
Capital expenditures during the period totaled $167.1 million, while new
investments amounted to $69.9 million.
During the third quarter, the Company announced agreements with The Prudential
Insurance Company of America ("Prudential") whereby the Company will acquire the
majority of Prudential's ownership interests in the Chicago Hilton and Towers,
San Francisco Hilton and Towers, Washington Hilton and Towers, New York Hilton
and Towers, Rye Town Hilton and Capital Hilton hotels for a combined cost of
$433 million. The sale of the San Francisco and Chicago properties closed in
October; the sale of the remaining properties is expected to close by year end.
The Company plans to continue to significantly grow its revenue base through
selective acquisition of large full service hotels.
Refurbishment programs are continually underway at the Company's hotel and
casino properties. In addition, construction projects continued at a number of
Company properties during the 1996 period. In January 1996 the Company broke
ground on the "Star Trek: The Experience at the Las Vegas Hilton" attraction and
related themed casino, which is scheduled to open in mid 1997. Construction was
<PAGE>
completed on the Flamingo Casino - Kansas City river casino, which opened in
October. Construction continues on the related hotel facility, which is
expected to be in operation by mid 1997. Construction also continues on
schedule at the 43% owned Conrad International Punta del Este Resort and Casino
in Punta del Este, Uruguay, with a planned January 1997 casino opening.
In January 1996 the Company announced plans to target mid-market business
travelers through a major expansion of its franchising program using the Hilton
Garden Inn product. The Company plans to franchise as many as 100 new Hilton
Garden Inns over the next five years, approximately 80 percent of which will be
new construction with the remainder to be conversions of existing properties.
The Company anticipates that acquisitions, capital expenditures and investments
in 1996, including the funding requirements associated with the aforementioned
projects, will total approximately $800 million. The Company intends to fund
these expenditures through internal cash flows and new borrowings.
On June 6, 1996, the Company entered into an agreement with Bally pursuant to
which Bally will merge with and into the Company. If the merger is
consummated, each share of Bally common stock issued and outstanding
immediately prior to the merger would be converted into the right to receive
one share of common stock of the Company. In the event that the
Determination Price (as defined) of the Company's common stock is less than
$27.00 per share, each holder of Bally common stock will receive an
additional cash payment, up to $3.00 per share, equal to the excess of $27.00
over such Determination Price. Each share of Bally's Preferred Redeemable
Increased Dividend Equity Securities, 8% PRIDES, Convertible Preferred Stock
outstanding immediately prior to the merger will be converted into the right
to receive one share of newly authorized Preferred Redeemable Increased
Dividend Equity Securities, 8% PRIDES, Convertible Preferred Stock of the
Company. In addition, the Company will assume Bally's net debt of
approximately $1 billion. The transaction, which has been approved by both
Bally's and the Company's respective Boards of Directors and stockholders, is
subject to approval by various regulatory agencies, including gaming
regulators of several states, and is expected to close by year end 1996.
<PAGE>
In August 1996 the Company announced the signing of a heads of agreement for a
strategic alliance with Ladbroke Group, PLC ("Ladbroke"), whose wholly owned
subsidiary, Hilton International, holds the rights to the Hilton name outside of
the United States. The aim of the alliance is to reunify the Hilton brand name.
Under the terms of the alliance, which is subject to the execution of definitive
agreements and certain regulatory approvals, the Company and Ladbroke intend,
beginning in 1997, to cooperate on sales and marketing, loyalty programs, hotel
development and other operational matters. The definitive agreements will
contain a reciprocal opportunity for the purchase of shares in the other party.
The Company intends to acquire a five percent stake in Ladbroke at the earliest
opportunity after the execution of the agreements.
LONG-TERM DEBT
Long-term debt at September 30, 1996 totaled $1.1 billion, consistent with total
long-term debt at December 31, 1995. During the nine month period the Company
repaid $457.2 million of long-term debt, representing all borrowings under its
commercial paper program and revolving bank credit lines. In May 1996 the
Company completed a $500 million public offering of 5% convertible subordinated
notes.
The Company's long-term revolving credit facilities had an aggregate commitment
at September 30, 1996 of $597.5 million, all of which was available to the
Company. In addition, $30 million in financing remains available under the
Company's Series B Medium Term Note program. In October 1996, the Company
closed on a five-year, $1.75 billion revolving credit facility which
consolidates and increases the Company's existing revolving credit facility.
Also in October 1996, the Company announced cash tender offers, contingent on
the consummation of the Bally merger, to purchase any and all of each of the
following series of notes of Bally's wholly owned subsidiaries: 9 1/4% Bally's
Park Place Funding, Inc. First Mortgage Notes due 2004; 10 5/8% GNF, Corp. First
Mortgage Notes due 2003; and Bally Casino Holdings, Inc. Senior Discount Notes
and Senior Discount Notes due 1998. In addition, the Company announced a cash
tender offer, contingent on the
<PAGE>
consummation of the Bally merger, to purchase the 10 3/8% First Mortgage
Notes of Bally's Grand, Inc., an approximately 85% owned subsidiary of Bally.
The Company is also soliciting consents to amend the indentures governing
each series of notes. The principal purpose of the tender offers is to
reduce the debt service obligations of the Company following the merger with
Bally and to eliminate certain restrictive covenants to provide the Company
with additional operating flexibility following the merger. It is currently
contemplated that the Company will finance the purchase of notes pursuant to
the tender offers, if consummated, with available funds, including borrowings
under the $1.75 billion revolving credit facility and/or with commercial
paper. As of September 30, 1996, the outstanding principal amount of the 10
5/8% Notes, the 9 1/4% Notes and the 10 3/8% Notes was $275.0 million, $425.0
and $315.0 million, respectively, and the accreted value of the Discount
Notes was $165.9 million ($69.8 million of accreted value of such Discount
Notes being held by Bally). Successful completion of the tender offers at the
offer prices announced on October 25, 1996 would result in an extraordinary
loss in the fourth quarter which may be significant to the Company's results
of operations.
<PAGE>
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On September 19, 1996, the stockholders of the Company approved a
four-for-one stock split of the Company's Common Stock, which was
distributed on September 25, 1996 to stockholders of record on
September 19, 1996.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
A special meeting of stockholders was held on Thursday, September 19,
1996 at the Beverly Hilton in Beverly Hills, California.
Approximately 86 percent of the eligible shares were voted.
The stockholders voted to approve and adopt the Agreement and Plan of
Merger, as amended, pursuant to which, among other things, Bally will
merge with and into the Company, and to approve the grant of options
to purchase shares of Hilton Common Stock to the Chairman, President
and Chief Executive Officer of Bally (collectively, the "Merger
Proposal"). Approximately 99 percent of the votes cast were voted for
the Merger Proposal.
The stockholders voted to amend the Hilton Certificate of
Incorporation to: (i) increase the number of authorized shares of
Hilton Common Stock from 90,000,000 to 400,000,000; (ii) increase the
number of authorized shares of preferred stock of Hilton from
10,000,000 to 24,832,700 ("Hilton Preferred Stock") and (iii)
designate 14,832,700 shares of Hilton Preferred Stock as Hilton
PRIDES. Approximately 99 percent of the votes cast were voted for
such proposal.
The stockholders voted to approve a stock split of Hilton Common
Stock, whereby each share of Hilton Common Stock would be subdivided
into four shares of Hilton Common Stock. Approximately 99 percent of
the votes cast were voted for such proposal. Stockholders also
approved the issuance pursuant to the Agreement and Plan of Merger of
shares of Hilton Common Stock (estimated to be up to approximately
62,273,733, subject to adjustment) and up to 14,832,700 shares of
Hilton PRIDES. Approximately 99 percent of the votes cast were voted
for such proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27. Financial data schedule for the nine month period ended September 30,
1996.
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated August 29, 1996, under Item 5
Other Events to report the signing of a heads of agreement for a strategic
alliance with Ladbroke Group, PLC, whose wholly-owned subsidiary, Hilton
International, holds the rights to the Hilton name outside of the United
States.
The Company filed a report on Form 8-K dated September 19, 1996, under Item
5 Other Events to report that the stockholders of the Company approved and
adopted the Agreement and Plan of Merger, pursuant to which Bally will
merge with and into the Company. Additionally, the Company's stockholders
approved a four-for-one stock split of the Company's common stock.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HILTON HOTELS CORPORATION
(Registrant)
Date: November 12, 1996 /s/ MATTHEW J. HART
-----------------------------------
Matthew J. Hart
Executive Vice President and
Chief Financial Officer
Date: November 12, 1996 /s/ WILLIAM C. LEBO, JR.
-----------------------------------
William C. Lebo, Jr.
Senior Vice President and
General Counsel
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