<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, 2000
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, 2000 --- Common Stock, $2.50 par value ---
368,635,374 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
<TABLE>
<CAPTION>
Three months ended Nine months ended
CONSOLIDATED STATEMENTS OF INCOME September 30, September 30,
(in millions, except per share amounts) 1999 2000 1999 2000
-------------------------------------------------------------------------------------------------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenue Owned hotels $ 429 599 1,297 1,797
Leased hotels -- 108 -- 305
Management and franchise fees 25 89 76 264
Other fees and income 44 71 139 210
----------------------------------------------------------------------- -----------------
498 867 1,512 2,576
Expenses Owned hotels 291 391 851 1,158
Leased hotels -- 97 -- 277
Depreciation and amortization 42 98 123 286
Other operating expenses 39 60 117 177
Corporate expense, net 12 18 37 52
----------------------------------------------------------------------- -----------------
384 664 1,128 1,950
----------------------------------------------------------------------- -----------------
Operating Income 114 203 384 626
Interest and dividend income 13 22 39 63
Interest expense (56) (117) (162) (342)
Interest expense, net, from unconsolidated affiliates -- (5) (1) (12)
Net gain on asset dispositions -- 3 -- 32
----------------------------------------------------------------------- -----------------
Income Before Income Taxes
and Minority Interest 71 106 260 367
Provision for income taxes (29) (44) (105) (154)
Minority interest, net -- -- (5) (5)
----------------------------------------------------------------------- -----------------
Income Before Cumulative
Effect of Accounting Change 42 62 150 208
Cumulative effect of accounting change,
net of tax benefit of $1 -- -- (2) --
----------------------------------------------------------------------- -----------------
Net Income $ 42 62 148 208
======================================================================================================== =================
Basic Earnings Per Share Income before cumulative effect
of accounting change $ .16 .17 .58 .57
Cumulative effect of accounting change -- -- (.01) --
----------------------------------------------------------------------- -----------------
Net Income Per Share $ .16 .17 .57 .57
======================================================================================================== =================
Diluted Earnings Per Share Income before cumulative effect
of accounting change $ .16 .17 .57 .56
Cumulative effect of accounting change -- -- (.01) --
----------------------------------------------------------------------- -----------------
Net Income Per Share $ .16 .17 .56 .56
======================================================================================================== =================
</TABLE>
see notes to consolidated financial statements
1
<PAGE>
<TABLE>
<CAPTION>
HILTON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS December 31, September 30,
(in millions) 1999 2000
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets Cash and equivalents $ 104 89
Accounts receivable, net 396 440
Inventories 90 128
Deferred income taxes 15 15
Current portion of notes receivable 78 30
Other current assets 80 68
------------------------------------------------------------------------------------
Total current assets 763 770
Investments and notes receivable 676 582
Long-term receivable 625 625
Property and equipment, net 3,892 3,984
Management and franchise contracts, net 647 609
Leases, net 216 208
Brands, net 1,048 1,028
Goodwill, net 1,277 1,261
Other assets 109 113
------------------------------------------------------------------------------------
Total investments, property and other assets 8,490 8,410
------------------------------------------------------------------------------------
Total Assets $ 9,253 9,180
================================================================================================================
Liabilities and Accounts payable and accrued expenses $ 615 602
Stockholders' Equity Current maturities of long-term debt 9 24
Income taxes payable 5 64
------------------------------------------------------------------------------------
Total current liabilities 629 690
Long-term debt 6,085 5,830
Deferred income taxes and other liabilities 1,124 1,071
Stockholders' equity 1,415 1,589
------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 9,253 9,180
================================================================================================================
</TABLE>
see notes to consolidated financial statements
2
<PAGE>
<TABLE>
<CAPTION>
HILTON HOTELS CORPORATION AND SUBSIDIARIES Nine months ended
CONSOLIDATED STATEMENTS OF CASH FLOW September 30,
(in millions) 1999 2000
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities Net income $ 148 208
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of accounting change 2 -
Depreciation and amortization 123 286
Amortization of loan costs 2 6
Gain on asset dispositions - (32)
Change in working capital components:
Receivables, inventories and other current assets (12) 5
Accounts payable and accrued expenses (31) (92)
Income taxes payable (4) 59
Change in deferred income taxes (12) (32)
Change in other liabilities (16) (5)
Unconsolidated affiliates' distributions (less than) in
excess of earnings (8) 35
Other 31 (19)
--------------------------------------------------------------------------------------------
Net cash provided by operating activities 223 419
------------------------------------------------------------------------------------------------------------------
Investing Activities Capital expenditures (138) (317)
Additional investments (88) (93)
Proceeds from asset dispositions - 96
Payments on notes and other 57 141
Acquisitions, net of cash acquired (237) -
--------------------------------------------------------------------------------------------
Net cash used in investing activities (406) (173)
------------------------------------------------------------------------------------------------------------------
Financing Activities Change in commercial paper borrowings and revolving loans 376 (798)
Long-term borrowings - 655
Reduction of long-term debt (46) (98)
Issuance of common stock 4 2
Purchase of common stock (90) -
Cash dividends (15) (22)
--------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 229 (261)
------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Equivalents 46 (15)
Cash and Equivalents at Beginning of Year 47 104
------------------------------------------------------------------------------------------------------------------
Cash and Equivalents at End of Period $ 93 89
==================================================================================================================
</TABLE>
see notes to consolidated financial statements
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
The consolidated financial statements presented herein have been prepared by
Hilton Hotels Corporation ("Hilton" or the "Company") in accordance with the
accounting policies described in its 1999 Annual Report to Stockholders and
should be read in conjunction with the Notes to Consolidated Financial
Statements which appear in that report.
The statements for the three and nine months ended September 30, 1999 and 2000
are unaudited; however, in the opinion of management, all adjustments (which
include only normal recurring accruals) have been made which are considered
necessary to present fairly the operating results and financial position for the
unaudited periods.
The consolidated financial statements for prior periods reflect certain
reclassifications to conform with classifications adopted in the current period.
These reclassifications have no effect on net income.
NOTE 2: EARNINGS PER SHARE
Basic EPS is computed by dividing net income available to common stockholders by
the weighted average number of common shares outstanding for the period. The
weighted average number of common shares outstanding totaled 368 million for
both the three and nine months ended September 30, 2000, and 255 million and 258
million for the three and nine months ended September 30, 1999, respectively.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted. The dilutive
effect of the assumed exercise of stock options and convertible securities
increased the weighted average number of common shares by 24 million and 23
million for the three and nine months ended September 30, 2000, respectively,
and 23 million and 24 million for the three and nine months ended September 30,
1999, respectively. In addition, the increase to net income resulting from
interest on convertible securities assumed to have not been paid was $3.7
million for each of the three month periods ended September 30, 1999 and 2000
and $11.0 million for each of the nine month periods ended September 30, 1999
and 2000.
NOTE 3: SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 2000
------ ------
(in millions)
<S> <C> <C>
Cash paid during the period for the following:
Interest, net of amounts capitalized $ 112 284
Income taxes 109 103
</TABLE>
NOTE 4: COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 2000 1999 2000
-------- -------- -------- -------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Net income $ 42 62 148 208
Change in unrealized gains and losses, net of tax 4 (4) 18 (17)
-------- -------- -------- -------
Comprehensive income $ 46 58 166 191
======== ======== ======== =======
</TABLE>
4
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is primarily engaged in the ownership, management and franchising of
hotels. At September 30, 2000, the Company's hotel system contained 1,867
properties totaling approximately 315,000 rooms worldwide. The Company's brands
include Hilton, Hilton Garden Inn, Doubletree, Embassy Suites, Hampton Inn,
Homewood Suites by Hilton, Red Lion, Conrad and Harrison Conference Centers. The
Company's hotel system also includes certain properties that are not
Company-branded. In addition, the Company develops and operates vacation
ownership resorts through Hilton Grand Vacations Company and its related
entities, which are wholly owned by the Company. The Company is also engaged in
various other activities incidental or related to the operation of hotels.
DEVELOPMENT
OVERVIEW
Hilton intends to grow its brands primarily through franchising and the addition
of management contracts. In addition, the Company will continue to review its
hotel portfolio for potential repositioning or re-branding opportunities and may
seek to sell certain owned assets. The Company did not purchase any hotel
properties in the first nine months of 2000 and acquisition spending is not
expected to be significant for the remainder of the year.
During the first nine months of 2000, the Company added a total of 136 hotels
and approximately 18,600 rooms to its portfolio, including an increase of 124
franchise properties. A total of 21 properties and approximately 4,300 rooms
were removed from the Company's system during the same period. Most of these
removals occurred in the first six months of 2000 and related to former
Promus Hotel Corporation ("Promus") brand franchise hotels which did not meet
the Company's quality standards; only two properties were removed in the
third quarter of 2000. The Company anticipates opening more than 180 hotels
in calendar 2000 and approximately 400 in the next two years, with Hampton
Inn, Hilton Garden Inn and Homewood Suites by Hilton accounting for most of
the new development. The Company continued to develop its strong pipeline in
the first nine months of 2000 by approving 170 new hotels, primarily
franchises, representing approximately 22,000 rooms. The Company remains on
track to achieve its annual unit growth target of eight to ten percent for
the next three to four years.
5
<PAGE>
Our ability to grow the number of franchised and managed hotels is affected by,
among other things, national and regional economic conditions, capital markets,
credit availability, relationships with franchisees and owners as well as
competition from other hotel franchisors and managers.
Properties by brand at September 30, 2000 are as follows:
<TABLE>
<CAPTION>
HOTELS ROOMS
<S> <C> <C>
Hilton 229 85,471
Hilton Garden Inn 84 11,826
Doubletree 160 43,130
Embassy Suites 155 37,831
Homewood Suites by Hilton 91 10,006
Hampton 1,055 109,539
Other 93 16,826
Total ------- ---------
1,867 314,629
======= =========
</TABLE>
STRATEGIC ALLIANCES AND JOINT VENTURES
In 1997, the Company entered into agreements with Hilton Group plc, whose
wholly owned subsidiary Hilton International Co. ("HI") owns the rights to
the Hilton name outside the United States. The agreements provide for the
reunification of the Hilton brand worldwide through a strategic alliance
between the companies, including cooperation on sales and marketing, loyalty
programs and other operational matters. Pursuant to these agreements, the
Company and HI launched the Hilton HHonors Worldwide loyalty program
("HHonors"). On April 3, 2000, HHonors was expanded to include the Hampton
Inn, Doubletree, Embassy Suites and Homewood Suites by Hilton brands. HHonors
related stays accounted for over 20 percent of total stays at these four
brands during the third quarter of 2000. HHonors is now featured in more than
2,000 hotels worldwide and has a total membership of approximately 10 million
travelers. The Company anticipates HHonors membership will increase to nearly
11 million by year end. Since the expansion of HHonors, nearly 25 percent of
the new enrollments were completed through the Hilton.com website. The
Company expects the expansion of HHonors to continue to have a positive
impact on the brands that participate in the program.
As of September 30, 2000, the Company leased 51 properties from RFS Hotel
Investors, Inc. ("RFS"). In January 2000, the Company entered into an agreement
which gives RFS the option to terminate these leases. As consideration for
terminating the leases, RFS will pay the Company approximately $60 million. As
part of the agreement, the Company has the option of requiring RFS to repurchase
convertible preferred stock of RFS currently owned by Hilton for approximately
$13 million. If RFS elects not to terminate the leases, the Company will have
the right to require RFS to redeem the convertible preferred stock for $13.75
million. RFS may elect to pay all or part of the purchase price for the
preferred shares in the form of RFS common stock. It is
6
<PAGE>
anticipated that the lease termination and repurchase of the convertible
preferred stock will be accomplished simultaneously in the first quarter of
2001.
ACQUISITIONS AND CAPITAL SPENDING
On November 30, 1999, Hilton completed the acquisition of Promus. As a result of
the Promus acquisition, the Company expanded its hotel count by over 1,450
properties representing more than 200,000 rooms. The Promus acquisition has
created a more diversified and balanced income stream by increasing the
percentage of revenue that the Company derives from management and franchise
fees which require little or no ongoing capital investment by the Company. The
integration of Promus was substantially completed during the first quarter of
2000. The Company believes the Promus acquisition has and will continue to yield
significant synergies, economies of scale and revenue enhancements by providing
greater opportunity for expansion with multiple brands and market segments;
spreading overhead over a wider base of properties; and including the Promus
brands in Hilton's HHonors program, its central reservation system and its sales
and marketing initiatives. Based on the success of the integration efforts to
date, the Company believes it will exceed its initial synergy targets for the
year.
Capital expenditures at owned properties during the first nine months of 2000
totaled $317 million, representing maintenance capital expenditures and several
significant renovation and construction projects. These projects include
construction of the 453-room Kalia Tower at the Hilton Hawaiian Village, which
will feature a world class health club and wellness spa, exciting retail shops
and an interactive Hawaiian cultural center. The project is scheduled to be
completed in Spring 2001. Renovation and construction projects are also underway
at the Hilton Portland and the Hilton Seattle Airport. The Portland project
involves construction of a 319-room tower addition, while the Seattle project
includes renovation of existing rooms and construction of a 222-room addition.
The renovation portion of the Seattle project was completed in October 2000
while the room addition is expected to be complete in the first quarter of 2001.
The Company is also currently constructing three new Homewood Suites by Hilton
properties. New investments during the first nine months of 2000 totaled $93
million, consisting primarily of loans related to financing of Hilton Grand
Vacation timeshare unit sales.
Construction continued on a 275-unit vacation ownership resort at the Hilton
Hawaiian Village. Interval sales commenced during the first quarter of 2000 and
are well ahead of forecast. The project is expected to open early next year and
the Company expects to begin recognizing the income from these sales in the
first quarter of 2001. Construction costs associated with timeshare intervals
are reflected as inventory until the intervals are sold.
7
<PAGE>
In September 2000, the Company completed a transaction with Boykin Lodging
Company ("Boykin") in which the two companies exchanged hotel properties that
were of equal value, but which would have more strategic value in each other's
portfolios. In the transaction, Hilton transferred ownership of the Doubletree
San Antonio Airport and the Doubletree Guest Suites in Southfield, Michigan to
Boykin in exchange for the Cleveland Marriott East in Beachwood, Ohio, which has
been converted to the Hilton brand. The Company retained franchise agreements on
the properties transferred to Boykin.
During 2000, the Company anticipates spending approximately $300 million on
renovation and construction projects, as well as approximately $300 million on
normal capital replacements, upgrades and technology. Expenditures required to
complete capital spending programs in 2000 will be financed through available
cash flows and general corporate borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $223 million and $419 million
for the nine months ended September 30, 1999 and 2000, respectively. The
increase was primarily attributable to continued strength at many of the
Company's owned full-service hotels and the benefit of cash flow from the hotel
properties acquired in the Promus acquisition. Net cash used in investing
activities was $406 million in 1999 compared to $173 million in 2000. The net
decrease of $233 million was due primarily to the impact of hotel acquisition
spending in the first half of 1999. Increased capital expenditures and
additional investments in the 2000 period were offset by proceeds received from
the sale of securities and the current year collection of notes receivable
related to Homewood Suites properties sold in 1999. Net cash provided by
financing activities totaled $229 million in the 1999 first nine months and net
cash used in financing activities totaled $261 million in the 2000 first nine
months. The decrease in cash provided is primarily attributable to the change in
commercial paper borrowings and revolving loans in the first nine months of 2000
in comparison to the 1999 period, partially offset by additional long-term fixed
rate borrowings.
Cash and equivalents totaled $89 million at September 30, 2000, a decrease of
$15 million from December 31, 1999. Hilton believes that its operating cash
flow, available borrowings under its revolving credit facilities, and the
Company's ability to obtain additional financing through various financial
markets are sufficient to meet its liquidity needs.
8
<PAGE>
FINANCING
In September 2000, the Company entered into a financing agreement pursuant to
which it borrowed $500 million for ten years at a fixed rate of 7.95 percent.
Five of the Company's hotels serve as collateral for the agreement, the proceeds
of which were used to pay down the Company's floating rate revolving debt. In
August 2000, the Company and its partners refinanced the debt on the 67.4
percent owned Hilton New Orleans. The new $155 million mortgage has a term of
ten years at a fixed rate of 8.62 percent.
The Company has two revolving credit facilities. As of September 30, 2000, the
Company's $1.75 billion revolving credit facility had been reduced to $1.17
billion through the repayment of outstanding balances. In October 2000, the
term of the facility, with a commitment and outstanding balance of $1.145
billion, was extended from 2001 to 2003. The Company's $1.8 billion revolving
credit facility consists of a $1.4 billion revolver which expires in 2004 and a
$400 million 364-day revolver which expires in 2001. The 364-day facility, which
remains undrawn, was extended to 2001 and reduced to $400 million from $450
million effective November 28, 2000. As of September 30, 2000, $780 million of
borrowings were outstanding under the $1.4 billion revolver and $347 million of
the $1.4 billion revolver supported the issuance of commercial paper. Adjusted
for the aforementioned amendments, the total revolving debt capacity available
to the Company is approximately $675 million.
In October 1997, the Company filed a shelf registration statement ("Shelf") with
the Securities and Exchange Commission registering up to $2.5 billion in debt or
equity securities. At September 30, 2000, available financing under the Shelf
totaled $2.1 billion. The terms of any additional securities offered pursuant to
the Shelf will be determined by market conditions at the time of issuance.
On December 31, 1998, the Company completed a spin-off of the Company's gaming
business to a new corporation named Park Place Entertainment Corporation ("Park
Place"). The 1999 and 2000 debt balances include $625 million of long-term debt
which, although allocated to Park Place under a debt assumption agreement,
remains the legal obligation of Hilton. At the time of the spin-off, Park Place
assumed and agreed to pay 100% of the amount of each payment required to be made
by Hilton under the terms of the indentures governing Hilton's $300 million
7.375% Senior Notes due 2002 and its $325 million 7% Senior Notes due 2004.
These notes remain in Hilton's long-term debt balance and a long-term receivable
from Park Place in an equal amount is included in the Company's 1999 and 2000
consolidated balance sheets. In the event of an increase in the interest rate on
these notes as a result of certain actions taken by Hilton or in certain other
limited circumstances, Hilton will be required to reimburse
9
<PAGE>
Park Place for any such increase. Hilton is obligated to make any payment Park
Place fails to make, and in such event Park Place would be obligated to pay to
Hilton the amount of such payment together with interest, at the rate per annum
borne by the applicable notes plus two percent, to the date of reimbursement.
As of September 30, 2000, approximately 54% of the Company's long-term debt
(excluding the Park Place allocated debt) bears interest at floating rates. The
Company will continue to seek a balance in its exposure to changes in short-term
interest rates by seeking to opportunistically refinance a portion of its
floating rate debt, subject to appropriate market conditions.
STOCKHOLDERS' EQUITY
Dividends paid on common shares were $.02 per share for the three month periods
ended September 30, 1999 and 2000, and $.06 for the nine month periods ended
September 30, 1999 and 2000.
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, 1999 and 2000.
EBITDA (earnings before interest, taxes, depreciation, amortization, pre-opening
expense and non-cash items) is presented supplementally in the tables below and
in the discussion of operating results because management believes it allows for
a more complete analysis of results of operations. Non-cash items, such as asset
write-downs and impairment losses, are excluded from EBITDA as these items do
not impact operating results on a recurring basis. EBITDA can be computed by
adding depreciation, amortization, pre-opening expense, interest and dividend
income from investments related to operating activities and non-cash items to
operating income. 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.
The Company operates in one business segment, hospitality and leisure. The
Company's results are significantly affected by growth in the number of
available rooms through acquisition and development, occupancy and room rates
achieved by hotels, the Company's ability to manage costs and the relative mix
of owned, leased, managed and franchised hotels.
10
<PAGE>
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 room 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 and diverse
market presence will enable it to remain competitive.
COMPARISON OF FISCAL QUARTERS ENDED SEPTEMBER 30, 1999 AND 2000
OVERVIEW
A summary of the Company's consolidated results for the three months ended
September 30, 1999 and 2000 is as follows:
<TABLE>
<CAPTION>
(in millions, except per share amounts) 1999 2000 % Change
---- ---- --------
<S> <C> <C> <C>
Revenue $ 498 867 74%
Operating Income 114 203 78
Net Income 42 62 48
Basic EPS .16 .17 6
Diluted EPS .16 .17 6
OTHER OPERATING DATA
Reconciliation of Net Income to EBITDA:
Net Income $ 42 62 48%
Minority interest, net - -
Provision for income taxes 29 44
Net gain on asset dispositions - (3)
Interest expense, net, from unconsolidated affiliates - 5
Interest expense 56 117
Interest and dividend income (13) (22)
------- -------
Operating Income 114 203 78%
Operating interest and dividend income - 8
Depreciation and amortization(1) 45 104
Pre-opening expense 2 2
------- -------
Total EBITDA $ 161 317 97%
======= =======
</TABLE>
----------------------
(1) Includes proportionate share of unconsolidated affiliates.
Total revenue for the third quarter of 2000 was $867 million, an increase of
$369 million over 1999. Total EBITDA was $317 million, an increase of $156
million compared to a year ago. The Company's consolidated EBITDA margin
increased 4.3 points to 36.6 percent in the third quarter of 2000 from 32.3
percent in the 1999 quarter. Total operating income increased $89 million to
$203 million. The 2000 results benefited from the Promus acquisition, which was
completed on November 30, 1999, and from other 1999 acquisition and development
activity. Results were also positively impacted by significant increases
11
<PAGE>
in revenue per available room ("RevPAR") at most of the Company's major market
owned hotels and increases in management and franchise fee revenue due to unit
growth and system-wide RevPAR gains across all brands. A record summer travel
season, continued high demand for hotel rooms in many major U. S. cities and
limited new competitive supply in markets where Hilton has a major ownership
presence, all contributed to the Company's strong RevPAR increases. Overall
operating results also reflect the benefit of the April 2000 introduction of the
HHonors loyalty program to the former Promus brands as well as the Company's
cross-selling and other marketing initiatives.
The Company's domestic owned hotels contributed $208 million of EBITDA in the
2000 third quarter, compared to $138 million in the prior year. The 2000 third
quarter benefited from the Promus acquisition, the 1999 acquisition of the
Hilton Minneapolis, and the September 1999 opening of the Hilton Boston Logan
Airport. In total, acquisition and development activity provided $48 million of
incremental domestic owned EBITDA in the 2000 third quarter, of which $37
million related to the Promus acquisition.
Results in the quarter benefited from strong performances and RevPAR gains at
many of the Company's Hilton brand owned properties. Particularly strong
results were seen in Chicago, New York and San Francisco, which benefited
from strong group business in the 2000 third quarter. The strength of the
group business in these markets resulted in lower year over year group
cancellation fees, which tempered the overall increase in EBITDA. The Company
also benefited from a strong market in San Diego and continued improvement in
Honolulu, with the Company's owned hotels in these markets each achieving
RevPAR and EBITDA gains in excess of 15 percent for the quarter. RevPAR for
comparable owned Hilton properties improved 12.0 percent in the 2000 third
quarter, with occupancy up 3.2 points to 81.3 percent and average daily rate
("ADR") up 7.6 percent to $170.28.
In addition to the $37 million of incremental EBITDA from domestic owned
properties, the Promus acquisition provided incremental EBITDA of $15 million
from unconsolidated affiliates which own interests in hotels pursuant to joint
venture agreements and $11 million from properties operated by the Company under
operating lease agreements. The Company did not operate properties under
operating lease agreements prior to the Promus acquisition.
In addition, the acquisition generated incremental EBITDA of $62 million from
management and franchise fees. This incremental fee income includes the
impact of unit growth and system-wide RevPAR gains across the former Promus
brands. Including this $62 million of incremental fee income, management and
franchise fee revenue increased $64 million in the third quarter of 2000
12
<PAGE>
to $89 million. Fee growth was negatively impacted by a decrease of $3
million in fee income from properties included in the 1999 quarter which
have left the system or were subsequently acquired by the Company. Fee
revenue for all brands benefited from the expansion of the HHonors program
and the Company's cross-selling and other marketing initiatives. Fee revenue
is based primarily on operating revenue at managed properties and rooms
revenue at franchised properties.
Total EBITDA growth was negatively impacted by lower operating results from the
Company's managed casino operations in Windsor. Increased competition from
Detroit led to a $2 million EBITDA decrease compared to the 1999 third quarter.
Depreciation and amortization, including the Company's proportionate share of
depreciation and amortization from its unconsolidated affiliates, increased $59
million in the third quarter of 2000 to $104 million due primarily to the
depreciation of fixed assets and the amortization of identifiable intangible
assets and goodwill associated with the Promus acquisition.
CORPORATE ACTIVITY
The Company realized a pre-tax gain on asset dispositions of $3 million in
the 2000 third quarter from the sale of marketable securities. Corporate
expense increased $6 million in the third quarter of 2000 to $18 million,
primarily from incremental costs as a result of the Promus acquisition.
Interest and dividend income increased $9 million compared with the prior year,
primarily due to an increase in notes receivable as the result of balances
acquired in the Promus acquisition. Interest expense, net of amounts
capitalized, increased $61 million reflecting higher debt levels due to the
Promus acquisition and higher interest rates on the Company's floating rate
debt.
The effective income tax rate for the third quarter of 2000 increased to 41.5%
from 40.8% in the third quarter of 1999, primarily due to the amortization of
goodwill recorded as a result of the Promus acquisition, which is not deductible
for tax purposes. The Company's effective income tax rate is determined by the
level and composition of pretax income and the mix of income subject to varying
foreign, state and local taxes.
13
<PAGE>
HOTEL STATISTICS
RevPAR for U.S. owned-or-operated hotels and system-wide for the three months
ended September 30, 1999 and 2000 is as follows:
<TABLE>
<CAPTION>
U.S. OWNED-OR-OPERATED HOTELS(1)
---------------------------------
Three months ended September 30,
1999 2000 % Change
---- ---- --------
<S> <C> <C> <C>
Hilton $114.11 129.38 13.4%
Doubletree 76.27 82.49 8.2
Embassy Suites 92.95 101.43 9.1
Other 66.81 69.76 4.4
Total 91.13 100.37 10.1
</TABLE>
----------------------
(1) Statistics for 1999 include the properties acquired in the Promus
acquisition on a pro forma basis. Statistics are for comparable U.S.
hotels, and include only hotels in the system as of September 30, 2000
and owned or managed by Hilton since January 1, 1999.
<TABLE>
<CAPTION>
SYSTEM-WIDE(2)
--------------------------------
Three months ended September 30,
1999 2000 % Change
---- ---- --------
<S> <C> <C> <C>
Hilton $ 90.69 100.93 11.3%
Hilton Garden Inn 66.72 74.08 11.0
Doubletree 72.80 78.85 8.3
Embassy Suites 90.61 97.64 7.8
Homewood Suites by Hilton 71.80 75.09 4.6
Hampton 53.87 56.01 4.0
Other 74.22 79.83 7.6
</TABLE>
----------------------
(2) Statistics for 1999 include the properties acquired in the Promus
acquisition on a pro forma basis. Statistics are for comparable
hotels, and include only hotels in the system as of September 30, 2000
and owned, managed or franchised by Hilton since January 1, 1999.
14
<PAGE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
OVERVIEW
A summary of the Company's consolidated results for the nine months ended
September 30, 1999 and 2000 is as follows:
<TABLE>
<CAPTION>
(in millions, except per share amounts) 1999 2000 % Change
---- ---- --------
<S> <C> <C> <C>
Revenue $ 1,512 2,576 70%
Operating income 384 626 63
Income before cumulative effect of accounting change 150 208 39
Basic EPS before cumulative effect of accounting change .58 .57 (2)
Diluted EPS before cumulative effect of accounting change .57 .56 (2)
OTHER OPERATING DATA
Reconciliation of Net Income to EBITDA:
Net Income $ 148 208 41%
Cumulative effect of accounting change 2 -
Minority interest, net 5 5
Provision for income taxes 105 154
Net gain on asset dispositions - (32)
Interest expense, net, from unconsolidated affiliates 1 12
Interest expense 162 342
Interest and dividend income (39) (63)
--------- --------
Operating Income 384 626 63%
Operating interest and dividend income - 25
Depreciation and amortization(1) 129 303
Pre-opening expense 2 4
--------- --------
Total EBITDA $ 515 958 86%
========= ========
</TABLE>
----------------------------
(1) Includes proportionate share of unconsolidated affiliates.
Total revenue in the first nine months of 2000 was $2.6 billion, an increase of
$1.1 billion over 1999. Total EBITDA was $958 million, an increase of $443
million compared to a year ago. The Company's consolidated EBITDA margin
increased 3.1 points to 37.2 percent in 2000 from 34.1 percent in the 1999 nine
month period. Total operating income increased $242 million to $626 million. The
2000 results benefited from the Promus acquisition and from other 1999
acquisition and development activity. Results were also positively impacted by
significant increases in RevPAR at many of the Company's major market hotels and
increases in management and franchise fee revenue due to unit growth and
system-wide RevPAR gains across all brands. Overall operating results also
reflect the benefit of the Company's cross-selling and other marketing
initiatives as well as the second quarter 2000 introduction of the HHonors
program to the former Promus brands.
15
<PAGE>
The Company's domestic owned hotels contributed $639 million of EBITDA in the
first nine months of 2000, compared to $446 million in the prior year. The 2000
nine month period benefited from the Promus acquisition, the 1999 acquisition of
the Pointe Hilton Squaw Peak Resort and the Hilton Minneapolis, and the
September 1999 opening of the Hilton Boston Logan Airport. In total, acquisition
and development activity provided $138 million of incremental domestic owned
EBITDA in the first nine months of 2000, of which $107 million related to the
Promus acquisition.
Nine month results benefited from double-digit EBITDA and RevPAR gains at many
of the Company's Hilton brand owned properties. Year over year results continued
to be strong in New York and San Francisco. The Company's properties in both
markets benefited from strong group business, while San Francisco also achieved
strong occupancy and rate increases in the individual business traveler segment.
Results in Honolulu continue to be outstanding, with a year over year EBITDA
increase in excess of 30 percent. RevPAR for comparable owned Hilton properties
improved 9.8 percent in the 2000 first nine months, with occupancy up 2.4 points
to 78.9 percent and ADR up 6.6 percent to $171.51.
In addition to the $107 million of incremental EBITDA from domestic owned
properties, the Promus acquisition provided incremental EBITDA of $40 million
from unconsolidated affiliates which own interests in hotels pursuant to joint
venture agreements and $28 million from properties operated by the Company under
operating lease agreements.
The acquisition also added incremental EBITDA of $175 million from management
and franchise fees. This incremental fee income includes the impact of unit
growth and system-wide RevPAR gains across the former Promus brands. Including
this $175 million of incremental fee income, management and franchise fee
revenue increased $188 million in the first nine months of 2000 to $264 million.
Fee revenue across all brands benefited from revenue increases resulting from
the expansion of the HHonors program and the Company's cross-selling and
marketing initiatives, particularly in the second and third quarters of 2000.
Depreciation and amortization, including the Company's proportionate share of
depreciation and amortization from its unconsolidated affiliates, increased $174
million in the first nine months of 2000 to $303 million due primarily to the
depreciation of fixed assets and the amortization of identifiable intangible
assets and goodwill associated with the Promus acquisition.
16
<PAGE>
CORPORATE ACTIVITY
In the 2000 first nine months, the Company realized a pre-tax gain on asset
dispositions of $32 million from the sale of marketable securities. Corporate
expense increased $15 million in the first nine months of 2000 to $52 million,
primarily from incremental costs as a result of the Promus acquisition.
Interest and dividend income increased $24 million compared with the prior year,
primarily due to an increase in notes receivable as the result of balances
acquired in the Promus acquisition. Interest expense, net of amounts
capitalized, increased $180 million reflecting higher debt levels due to the
Promus acquisition and higher interest rates on the Company's floating rate
debt.
The effective income tax rate for the first nine months of 2000 increased to
42.0% from 40.4% in the first nine months of 1999, primarily due to the
amortization of goodwill recorded as a result of the Promus acquisition, which
is not deductible for tax purposes.
17
<PAGE>
HOTEL STATISTICS
RevPAR for U.S. owned-or-operated hotels and system-wide for the nine months
ended September 30, 1999 and 2000 is as follows:
<TABLE>
<CAPTION>
U.S. OWNED-OR-OPERATED HOTELS(1)
--------------------------------
Nine months ended September 30,
1999 2000 % Change
---- ---- --------
<S> <C> <C> <C>
Hilton $ 116.11 128.04 10.3%
Doubletree 76.11 80.43 5.7
Embassy Suites 95.59 102.03 6.7
Other 63.61 66.15 4.0
Total 91.70 98.80 7.7
</TABLE>
----------------------------
(1) Statistics for 1999 include the properties acquired in the Promus
acquisition on a pro forma basis. Statistics are for comparable U.S.
hotels, and include only hotels in the system as of September 30, 2000
and owned or managed by Hilton since January 1, 1999.
<TABLE>
<CAPTION>
SYSTEM-WIDE(2)
---------------------------------
Nine months ended September 30,
1999 2000 % Change
---- ---- --------
<S> <C> <C> <C>
Hilton $ 91.80 99.92 8.8%
Hilton Garden Inn 61.62 69.29 12.4
Doubletree 72.07 76.47 6.1
Embassy Suites 91.11 96.09 5.5
Homewood Suites by Hilton 70.80 74.08 4.6
Hampton 50.30 51.82 3.0
Other 69.38 74.10 6.8
</TABLE>
----------------------------
(2) Statistics for 1999 include the properties acquired in the Promus
acquisition on a pro forma basis. Statistics are for comparable
hotels, and include only hotels in the system as of September 30, 2000
and owned, managed or franchised by Hilton since January 1, 1999.
18
<PAGE>
OTHER MATTERS
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The effective date for implementation of
this new standard is January 1, 2001. Adoption of the statement is not expected
to have a material impact on the Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, which summarized the SEC's views and
provides guidance on the topic of revenue recognition. The Company will adopt
SAB 101 in the fourth quarter of 2000. Adoption of the SAB is not expected to
have a material impact on the Company's results of operations.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this report, including without limitation, those
set forth under the captions "Development," "Liquidity and Capital Resources,"
and "Results of Operations," and statements relating to the Company's plans,
strategies, objectives, expectations, intentions and adequacy of resources, are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995.
The words "believes," "anticipates," "expects" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements reflect the Company's current views with respect to future events
and financial performance, and are subject to certain risks and
uncertainties, including those identified above under "Results of Operations"
and those in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 under the captions "Additional Information --
Business Risks," and "Competition," the effect of economic conditions, and
customer demand, which could cause actual results to differ materially from
historical results or those anticipated. Although the Company believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will
be attained.
19
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As reported in the Company's 1999 Annual Report on Form 10-K, on or about
October 11, 1999, an action was filed in the United States District Court for
the Southern District of Florida entitled HOTELERAMA ASSOCIATES, LTD. V.
HILTON HOTELS CORPORATION (Case No. 99-CV02717), alleging that the
acquisition of Promus would cause Hilton to be in violation of territorial
restrictions contained in a management agreement under which Hilton manages a
hotel owned by the plaintiff in Miami, Florida. The complaint sought to
enjoin Hilton from violating the restrictive covenant by its acquisition of
Promus, as well as other remedies. On November 19, 1999, the Court denied the
plaintiff's motion to enjoin Hilton from acquiring Promus, and the Promus
acquisition was consummated on November 30, 1999. On March 16, 2000, the
Company and plaintiff reached an agreement in principle to settle all
outstanding issues between the parties, subject to documentation. On
September 26, 2000, the Court granted the parties' joint motion to dismiss
the action with prejudice.
Also as reported in the Company's 1999 Annual Report on Form 10-K, a
purported class action against the Company was filed in the Court of Chancery
for the State of Delaware on or about February 22, 2000, under the caption
LEONARD LOVENTHAL ACCOUNT V. HILTON HOTELS CORPORATION (C.A. No. 17803NC).
The plaintiff alleged that the Rights Agreement, dated as of November 29,
1999, between the Company and ChaseMellon Shareholder Services L.L.C.,
relating to the Company's preferred share purchase rights plan, is invalid
and unenforceable and violates provisions of the Delaware General Corporation
Law, the Uniform Commercial Code and the Company's Restated Certificate of
Incorporation and By-Laws. In the complaint, the plaintiff sought an order
declaring the Rights Agreement to be invalid and enjoining the Company from
enforcing the Rights Agreement, and monetary damages in an unspecified
amount. In an opinion dated October 10, 2000, the Court granted the Company's
motion to dismiss this action in its entirety.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial data schedule for the nine month period ended September 30,
2000.
99.01 Loan Agreement, dated as of September 27, 2000, among Phoenix SP Hilton
LLC, S.F. Hilton, Inc., Chicago Hilton LLC, Short Hills Hilton LLC and
McLean Hilton LLC, as borrowers, and Secore Financial Corporation, as
lender.
99.02 First Amendment to Loan Agreement, dated as of October 30, 2000, among
Phoenix SP Hilton LLC, S.F. Hilton, Inc., Chicago Hilton LLC, Short
Hills Hilton LLC and McLean Hilton LLC, as borrowers, and Morgan Stanley
Dean Witter Mortgage Capital Inc., as lender.
99.03 Amended and Restated Credit Agreement, dated as of October 6, 2000, among
the Company, First Union National Bank and The Bank of Nova Scotia, as
documentation agents, Bank of America, N.A., as syndication agent, The
Bank of New York, as administrative agent, and the financial institutions
signatory thereto.
99.04 Amendment No. 3 to Credit Agreement, dated as of September 15, 2000,
among Hilton Hawaiian Village LLC, the Company, Bank of America, N.A., as
syndication agent, First Union National Bank, as documentation agent, The
Bank of New York, as administrative agent, and the financial institutions
signatory thereto.
99.05 First Amendment to Five Year Credit Agreement, dated as of September 15,
2000, among the Company, Bank of America, N.A., as administrative agent,
and the financial institutions signatory thereto.
99.06 First Amendment to Short Term Credit Agreement, dated as of September 15,
2000, among the Company, Bank of America, N.A., as administrative agent,
and the financial institutions signatory thereto.
99.07 Fifth Amendment to Reimbursement Agreement, dated as of September 15,
2000, among the Company, Deutsche Bank AG and the financial institutions
signatory thereto.
(b) REPORTS ON FORM 8-K
None
20
<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 10, 2000 /s/ MATTHEW J. HART
--------------------------------------------
Matthew J. Hart
Executive Vice President and
Chief Financial Officer
21
