-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ANgDt/p/H0h5sbMkKlgM3NFbWkcVGO0YX+7Pttwh48dLu4r0M+CbkmP/rypcSxfQ 1i0cRQIJeAVTG+SNcgIqHg== 0000912057-96-004987.txt : 19960325 0000912057-96-004987.hdr.sgml : 19960325 ACCESSION NUMBER: 0000912057-96-004987 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960322 SROS: CSE SROS: CSX SROS: NYSE SROS: PHLX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HILTON HOTELS CORP CENTRAL INDEX KEY: 0000047580 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 362058176 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03427 FILM NUMBER: 96537594 BUSINESS ADDRESS: STREET 1: 9336 CIVIC CTR DR CITY: BEVERLY HILLS STATE: CA ZIP: 90210 BUSINESS PHONE: 3102784321 MAIL ADDRESS: STREET 1: 9336 CIVIC CENTER DR CITY: BEVERLY STATE: CA ZIP: 90210 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 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 (I.R.S. EMPLOYER OF INCORPORATION OR IDENTIFICATION NUMBER) ORGANIZATION) 9336 CIVIC CENTER DRIVE 90210 BEVERLY HILLS, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (310) 278-4321 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered - ---------------------------------------- -------------------------------------- Common Stock, par value $2.50 per share New York, Pacific
Securities registered pursuant to Section 12(g) of the Act: None 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 12 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ Based upon the February 29, 1996 New York Stock Exchange closing price of $93.75 per share, the aggregate market value of Registrant's outstanding Common Stock held by non-affiliates of the Registrant was approximately $3.1 billion. On that date, there were 48,720,634 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of Registrant's annual report to stockholders for the fiscal year ended December 31, 1995 are incorporated by reference under Parts I and II. Certain portions of Registrant's definitive proxy statement, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the Registrant's fiscal year, are incorporated by reference under Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL INFORMATION CURRENT OPERATIONS Hilton Hotels Corporation and its majority and wholly-owned subsidiaries are collectively referred to as "Hilton" or the "Company," unless the context indicates otherwise. The Company is primarily engaged in the ownership and management of hotels and hotel-casinos. All of these properties are located in the United States, with the exception of six hotels and three hotel-casinos operated by the Company's wholly-owned subsidiary, Conrad International Hotels Corporation and its subsidiaries ("Conrad International"). On February 1, 1996, Hilton owned or leased and operated 23 hotels and managed 44 hotels partially or wholly-owned by others. In addition, 164 hotels were operated under the "Hilton," "Hilton Garden Inn" and "Hilton Suites" names by others pursuant to franchises granted by a subsidiary of Hilton. Eight of the hotels have substantial gaming operations, five of which are wholly-owned by the Company and are located in Nevada and the other three hotels are partially owned by the Company and are located in Australia and Turkey. The Company also partially owns and manages one river casino in the United States and owns a minority interest in a company which operates one casino in Canada. The Company's gaming operations accounted for approximately 71%, 58% and 50% of its total operating income in 1993, 1994 and 1995, respectively. For additional information, see the Ten Year Summary on pages 58 and 59 in the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1995 (the "Stockholders Report"), which report is included as Exhibit 13 hereto and, to the extent specific references are made thereto, incorporated herein by such references. The Company, along with other entities in which the Company has an investment, is also engaged in various other activities incidental or related to the operation of hotels and hotel-casinos. See "Additional Information." Hilton was organized in the State of Delaware on May 29, 1946. Its principal executive offices are located at 9336 Civic Center Drive, Beverly Hills, California 90210, and its telephone number is (310) 278-4321. RECENT DEVELOPMENTS Since January 1, 1995, the Company took advantage of various opportunities to expand its business, the most significant of which included the opening of new vacation ownership resorts in Las Vegas, Nevada and Orlando, Florida; the completion of the third of three new 12,600 to 15,400 square foot "Sky Villa" luxury suites at the Las Vegas Hilton; the opening of the 136-room Conrad International Treasury hotel-casino in Brisbane, Australia; chartering a river casino to serve as a complementary facility for Casino Windsor in Windsor, Ontario, Canada; the management of a 294-room hotel in Durango, Colorado, a 260-room hotel in Hurghada, Egypt and a 412-room hotel in Barcelona, Spain; and the announcement of a major expansion of Hilton Garden Inn properties. The Company also announced in January 1996 that it would not proceed with the proposed spin-off of its gaming operations. For a more detailed description of the Company's recent developments, see "Hotel Operations," "Gaming Operations" and "Additional Information -- Vacation Ownership" below. For a description of the Company's planned expansion activities, see "Hotel Operations -- Expansion Program" and "Gaming Operations - -- Expansion Program" below. INDUSTRY SEGMENTS Hilton's revenues and income are derived primarily from two sources: (i) hotel operations, which include the operation of Hilton's owned or leased hotels, management and franchise fees and operating income from unconsolidated affiliates and (ii) gaming operations, which include the operation of Hilton's owned hotel-casinos and management fees and operating income from partially owned hotel-casinos and river casinos. For financial data relating to the Company's hotel and gaming operations for the three years ended December 31, 1995, see "Segments of Business" in the Notes to the Company's Consolidated Financial Statements on pages 55 and 56 in the Stockholders Report. The Company re-entered the international arena in November 1985, with the opening of a hotel-casino in Queensland, Australia and, thereafter, the opening of additional managed (and in some cases, partially owned) hotel properties in Ireland, England, Hong Kong, Turkey, Belgium, Australia, Spain and Egypt. To date, the amounts of revenues, operating profits and identifiable assets attributable to geographic areas, other than the United States, have not been material. HOTEL OPERATIONS OWNED HOTELS On February 1, 1996, the following hotels were owned in fee and operated by Hilton:
NUMBER OF MORTGAGE ROOMS/SUITES YEAR INDEBTEDNESS (YEAR OF ACQUIRED AS OF FEBRUARY 1, NAME AND LOCATION COMPLETION) BY HILTON 1996 - -------------------------------------------------- ------------- --------- ----------------- Atlanta Airport Hilton & Towers 503 1960 $50,000,000 Atlanta, Georgia(1) (1989) Palmer House Hilton 1,639 1988 -- Chicago, Illinois(2) (1925; 1945) Flamingo Hilton-Las Vegas 3,642 Las Vegas, Nevada (various 1971 -- dates through 1995) Las Vegas Hilton 3,174 Las Vegas, Nevada (various 1971 -- dates through 1995) Flamingo Hilton-Laughlin 2,000 1990 -- Laughlin, Nevada (1990) New Orleans Airport Hilton 317 1959 $32,000,000 New Orleans, Louisiana(1) (1989) Waldorf=Astoria 1,380 1977 -- New York, New York(3) (1931) Portland Hilton 455 1963 -- Portland, Oregon (1963) Flamingo Hilton-Reno 604 1981 -- Reno, Nevada(4) (1978) Reno Hilton 2,001 1992 -- Reno, Nevada (1978) Hilton Garden Inn 195 1993 -- Southfield, Michigan(5) (1988) Hilton Suites 224 1991 -- Auburn Hills, Michigan (1991) Hilton Suites 203 1989 -- Brentwood, Tennessee (1989) Hilton Suites 230 1989 -- Orange, California (1989) Hilton Suites 226 1990 -- Phoenix, Arizona (1990)
- --------- (1) The Atlanta Airport Hilton & Towers and the New Orleans Airport Hilton were closed and demolished in 1986 and, thereafter, rebuilt and reopened in 1989. 2 (2) The Company owned the Palmer House Hilton from May 1946 to December 1962 and, thereafter, operated the Palmer House Hilton under a lease until acquiring the property in February 1988. (3) The Company operated the Waldorf=Astoria under a lease from February 1950 until acquiring the property in April 1977. (4) An extension of the casino operation is contained in a structure located on an adjacent block with a skywalk connecting it to the main building. This structure is held under four long-term leases or subleases, expiring on various dates from January 1, 2001 to August 31, 2034, including renewal options, all of which may not necessarily be exercised. (5) The Company managed the Hilton Garden Inn from July 1991 until acquiring the property in July 1993. LEASED HOTELS Hilton leases the land upon which eight hotels have been built. Upon the expiration of such leases, the buildings and other leasehold improvements presently owned by Hilton revert to the landlords. See "Leases" in the Notes to the Company's Consolidated Financial Statements on page 56 in the Stockholders Report. Hilton, in all cases, owns all furniture and equipment, is responsible for repairs, maintenance, operating expenses and lease rentals, and retains complete managerial discretion over operations. Generally, Hilton pays a percentage rental based on the gross revenues of the facility, but in some instances the rental is a fixed amount. On February 1, 1996, the following hotels were leased and operated by Hilton:
NUMBER OF ROOMS (YEAR OF INITIAL COMPLETION; YEAR ACQUIRED NAME AND LOCATION BY HILTON) EXPIRATION DATE - ------------------------------------- ------------------------------------------------------------------------ Logan Airport Hilton 516 2014, with renewal options aggregating 25 years Boston, Massachusetts(1) (1959; 1988) under specified circumstances O'Hare Hilton 858 2018 Chicago, Illinois(2) (1973; 1991) Oakland Airport Hilton 363 2033 Oakland, California (1970; 1970) Pittsburgh Hilton & Towers 712 2004, with renewal options aggregating 30 years Pittsburgh, Pennsylvania (1959; 1959) San Diego Hilton Beach & Tennis 357 2019 Resort (1962; 1965) San Diego, California San Francisco Airport Hilton 527 1998 San Francisco, California (1959; 1959) Seattle Airport Hilton 173 2004, with renewal options aggregating 30 years Seattle, Washington (1961; 1961) Tarrytown Hilton 236 2003, with renewal options aggregating 40 years Tarrytown, New York(3) (1961; 1993)
- --------- (1) The Company managed and was a joint venture partner with respect to the Logan Airport Hilton from 1975 until July 1988, when it acquired the remaining equity interest in the joint venture leasing the land underlying the hotel. (2) The Company managed the O'Hare Hilton from 1974 until October 1991, when the Company purchased the then remaining leasehold of the hotel. The O'Hare Hilton was closed for renovation in October 1991 and reopened in July 1992. 3 (3) The Company managed and was a joint venture partner with respect to the Tarrytown Hilton from 1975 until August 1993, when it acquired the remaining equity interest in the joint venture leasing the land underlying the hotel. During the three years ended December 31, 1995, Hilton paid aggregate rentals, including rentals attributable to the properties listed in the above table, of $11,300,000, $13,300,000 and $15,300,000, respectively. For information relating to minimum rental commitments in the future, see "Leases" in the Notes to the Company's Consolidated Financial Statements on page 56 in the Stockholders Report. MANAGED HOTELS On February 1, 1996, Hilton operated 35 domestic hotels and nine international hotels under management agreements. Under its standard management arrangement, Hilton operates a hotel for the benefit of its owner, which either owns or leases the hotel and the associated personal property. Hilton's management fee is generally based on a percentage of each hotel's gross revenues plus, in the majority of properties, an incentive fee based on operating performance. Under the management agreements, all operating and other expenses are paid by the owner, and Hilton is generally reimbursed for its out-of-pocket expenses. In turn, Hilton's managerial discretion is subject to approval by the owner in certain major areas, including adoption of capital budgets. In some cases, the owner of a managed hotel is a joint venture in which Hilton has an equity interest. In addition, the Company has a right of first refusal to purchase an interest in certain managed hotels. For information relating to Hilton's investment in entities that own managed properties, see "Investments" in the Notes to the Company's Consolidated Financial Statements on pages 48 and 49 in the Stockholders Report. The Company has also agreed to provide loans or additional investments to the owners of certain managed hotels under specified circumstances. See "Commitments and Contingent Liabilities" in the Notes to the Company's Consolidated Financial Statements on page 57 in the Stockholders Report. On February 1, 1996, the following hotels were operated by Hilton under management agreements:
NUMBER OF ROOMS/SUITES NAME AND LOCATION (YEAR OF COMPLETION) EXPIRATION DATE - ------------------------------------- ------------------------------------------------------------------------ DOMESTIC Anaheim Hilton & Towers 1,576 2014, with renewal options aggregating 30 years, Anaheim, California(1) (1984) subject to certain termination rights Anchorage Hilton 591 2006, with renewal options aggregating 20 years Anchorage, Alaska (various dates through 1986) Atlanta Hilton & Towers 1,224 2006, with a renewal option for 10 years Atlanta, Georgia (1976) Beverly Hilton 581 2007, with renewal options aggregating 20 years, Beverly Hills, California (1955; 1967) subject to certain termination rights Chicago Hilton & Towers 1,543 2005, with renewal options aggregating 20 years Chicago, Illinois(2) (various dates through 1986) Tamarron Hilton Resort 294 2015, subject to certain termination rights Durango, Colorado (1975) Brunswick Hilton & Towers 405 2013, subject to certain termination rights East Brunswick, New Jersey(1) (1989) Hilton Hawaiian Village 2,542 1997, with renewal options aggregating 20 years Honolulu, Hawaii(3) (various dates through 1988)
4
NUMBER OF ROOMS/SUITES NAME AND LOCATION (YEAR OF COMPLETION) EXPIRATION DATE - ------------------------------------- ------------------------------------------------------------------------ Long Beach Hilton 393 2012, with renewal options aggregating 20 years, Long Beach, California (1992) subject to certain termination rights Los Angeles Airport Hilton & Towers 1,234 1999, with renewal options aggregating 10 years, Los Angeles, California (1983) subject to certain termination rights McLean Hilton 458 2007, with renewal options aggregating 20 years McLean, Virginia(2) (1987) Fontainebleau Hilton Resort & Towers 1,206 1998, with a renewal option for 10 years, subject Miami, Florida (1954) to certain termination rights Miami Airport Hilton & Towers 500 2004, with renewal options aggregating 20 years Miami, Florida(2) (1983) Minneapolis Hilton & Towers 814 2012, with renewal options aggregating 20 years, Minneapolis, Minnesota (1992) subject to certain termination rights Newark Airport Hilton 374 2003 Newark, New Jersey (1988) New Orleans Hilton Riverside & Towers 1,600 2007, with a renewal option for 10 years New Orleans, Louisiana(4) (1977; 1983) Millenium Hilton 561 2004, with a renewal option for 10 years, subject New York, New York (1992) to certain termination rights New York Hilton & Towers 2,041 (5) New York, New York(3) (1963) Turtle Bay Hilton Golf & Tennis 485 2004, with a renewal option for 10 years Resort (1972) Oahu, Hawaii Hilton at Walt Disney World 814 2003, with renewal options aggregating 20 years, Orlando, Florida(1) (1983) subject to certain termination rights Pasadena Hilton 291 2004, with a renewal option for 10 years, subject Pasadena, California (1970) to certain termination rights The Pointe Hilton Resort on 636 2012, with renewal options aggregating 20 years, South Mountain (1986) subject to certain termination rights Phoenix, Arizona The Pointe Hilton Resort at Squaw 563 2012, with renewal options aggregating 20 years, Peak (1977) subject to certain termination rights Phoenix, Arizona The Pointe Hilton Resort at 585 2012, with renewal options aggregating 20 years, Tapatio Cliffs (1982) subject to certain termination rights Phoenix, Arizona Rye Town Hilton 438 (5) Rye Brook, New York(3) (1973; 1978) Hilton Palacio del Rio 481 1998, with a renewal option for 10 years San Antonio, Texas (1968)
5
NUMBER OF ROOMS/SUITES NAME AND LOCATION (YEAR OF COMPLETION) EXPIRATION DATE - ------------------------------------- ------------------------------------------------------------------------ San Antonio Airport Hilton 387 2001, subject to certain termination rights San Antonio, Texas(1) (1982) San Francisco Hilton & Towers 1,895 2005, with a renewal option for 10 years San Francisco, California(3) (various dates through 1988) Hilton at Short Hills 300 2000, with a renewal option for 5 years, subject Short Hills, New Jersey (1988) to certain termination rights Innisbrook Hilton Resort 873 2013, subject to certain termination rights Tarpon Springs, Florida(1) (1972) Hilton Waikoloa Village 1,238 2013, subject to certain termination rights Waikoloa, Hawaii(2) (1988) Capital Hilton 543 2005, with a renewal option for 10 years Washington, D.C.(3) (1943; 1985) Washington Hilton & Towers 1,123 (5) Washington, D.C.(3) (1965) Hilton Suites 212 2009, with renewal options aggregating 20 years Oakbrook Terrace, Illinois(1)(3) (1989) Hilton Garden Inn 152 2012, subject to certain termination rights Valencia, California(2) (1991) INTERNATIONAL Conrad International Barcelona 412 2007, with a renewal option for 5 years Barcelona, Spain(1) (1992) Conrad International Treasury 136 2010 Brisbane, Australia(2) (1995) Conrad International Brussels 269 2013, with renewal options aggregating 20 years Brussels, Belgium (1993) Conrad International Dublin 191 2010, with renewal options aggregating 20 years Dublin, Ireland(1)(2) (1989) Conrad International Hong Kong 513 2021 Hong Kong(2) (1990) Conrad International Hurghada 260 2015, with renewal options aggregating 20 years, Hurghada, Egypt (1994) subject to certain termination rights Conrad International Istanbul 620 2011, with a renewal option for 20 years Istanbul, Turkey(1)(2) (1992) Conrad International London 159 2016, with renewal options aggregating 20 years London, England (1990) Hotel Conrad & Jupiters Casino 605 2010 Gold Coast, (1986) Queensland, Australia(2)
- --------- (1) Hilton has made loans to the owners of each of the referenced properties. (2) Hilton has equity interests of less than 50% in joint ventures which own each of the referenced properties. See "Investments" in the Notes to the Company's Consolidated Financial Statements on pages 48 and 49 in the Stockholders Report. 6 (3) Hilton has equity interests of 50% in joint ventures which own each of the referenced properties. See note 2 above. (4) Hilton has a 67.4% equity interest in the joint venture which owns the New Orleans Hilton Riverside & Towers. See note 2 above. (5) The management agreements with respect to each of the referenced properties expired on December 31, 1995, but Hilton continues to manage each of the properties for the fees specified in the expired agreements. FRANCHISE HOTELS Pursuant to franchises granted by the Company, franchise hotels are operated under the "Hilton," "Hilton Garden Inn" or "Hilton Suites" names. The franchise hotels operated under the "Hilton" name are generally smaller than the full service hotels owned, leased or managed by Hilton and average approximately 250 rooms in size. Franchise hotels bearing the "Hilton Garden Inn" name are approximately 90 to 250 rooms in size and utilize a modular design constructed around a courtyard containing an indoor or outdoor swimming pool. The "Hilton Suites" properties operated pursuant to franchise agreements utilize an all-suites design with approximately 200 to 250 suites. In each instance, Hilton approves the plan for and the location of franchise hotels and assists in their design. On February 1, 1996, there were 164 franchise hotels operated by others, of which 160 were operated under the "Hilton" name, three were operated under the "Hilton Garden Inn" name and one was operated under the "Hilton Suites" name. In general, each franchisee pays Hilton an initial fee based on the number of rooms in a franchise hotel and a continuing fee based on a percentage of the facility's room revenues. Although Hilton does not directly participate in the management or operation of franchise hotels, it conducts periodic inspections to ensure that Hilton's standards are maintained and renders advice with respect to hotel operations. The Company has continued its ongoing program of monitoring and improving its franchise operations. The Company added six franchises to its system in 1995, while five franchise arrangements were terminated, several due to noncompliance with the Company's standards. EXPANSION PROGRAM In January 1996, Hilton announced plans for a major expansion of Hilton Garden Inn properties. Hilton plans to add up to 100 new Hilton Garden Inns over the next five years. Approximately 80% of the additional Hilton Garden Inns are anticipated to be newly constructed facilities, with the remainder to be conversions of existing properties. The properties constructed during the first phase of the Hilton Garden Inns expansion are expected to be financed by Hilton, either solely or with local partners. Hilton also intends to expand its domestic operations through conversion of existing hotels into management and franchise properties in strategically significant markets and through development and management of vacation ownership resorts. The Company will invest in new domestic hotel projects or conversion properties where the return on investment meets the Company's criteria. The Company is actively exploring international hotel opportunities, with particular emphasis on city center business hotels and resort hotels. These international properties will generally be operated under the Conrad International name pursuant to long-term management agreements. In certain instances, the Company may invest in or make advances to the entity that owns a hotel. The Company has entered into management contracts to operate the following new hotels, the anticipated opening dates of which are indicated parenthetically: the 350-room Conrad International Sharm El Sheikh in Egypt (fall 1996); the 510-room Conrad International Singapore (fall 1996); the 700-room Conrad International Jakarta in Indonesia (1998); the 400-room Conrad International Amman in Jordan (1998); and the 400-room Conrad International Bangkok in Thailand (1999). Negotiations relating to the management of other international hotels are in varying stages and, in certain instances, letters of intent for management contracts have been executed. However, no assurances can be given that management contracts for such other hotels will be executed or that such other hotels will be constructed and, thereafter, operated by the Company. 7 The operation of hotels internationally is affected by the political and economic conditions of the countries and regions in which they are located, in addition to factors affecting the hotel industry generally. Certain countries have also restricted, from time to time, the repatriation of funds. The Company considers the foregoing factors, among others, when evaluating a management and/or investment opportunity abroad, but the Company can give no assurances that changes in law or governmental policy will not adversely affect international operations in the future. TERRITORIAL RESTRICTIONS Hilton has entered into various agreements which restrict its right to operate hotels in various areas, including those hereinafter described which, in management's opinion, represent the most significant restrictions to which the Company is subject. In addition, pursuant to an agreement entered into at the time of Hilton's distribution on December 1, 1964 to its stockholders of all the issued and outstanding capital stock of Hilton International Co., as subsequently amended, Hilton may not operate facilities outside the United States identified as "Hilton" hotels and Hilton International Co. may not operate facilities within the continental United States identified as "Hilton" hotels. The Company's international hotel and hotel-casino operations are conducted under the Conrad International name. See "Hotel Operations" and "Gaming Operations -- International Hotel-Casinos." Subject to the foregoing restrictions as to the use of the "Hilton" name, Hilton and Hilton International Co. can compete in all, and do compete in certain, markets. The Compass computerized reservation system utilized by Hilton and Hilton International Co. provides information as to their respective hotels, if any, in each market. See "Additional Information -- Computer Systems" and "Reservation System." The Company, under the terms of expired agreements with The Prudential Insurance Company of America ("Prudential"), had agreed (a) that, except for the New York Hilton & Towers and the Waldorf=Astoria (or the ownership, operation and management of a substitute hotel having substantially the same number of rooms) and a hotel with not more than 1,600 rooms, the Company would not own, operate, manage or otherwise have an interest in any hotel or similar establishment in the Borough of Manhattan, (b) that, except for the Washington Hilton & Towers and the Capital Hilton (or the ownership, operation and management of substitute hotels having substantially the same number of rooms), the Company would not own, operate, manage or otherwise have an interest in any other hotel or similar establishment in the District of Columbia, and (c) that the Company would not own, operate, manage or otherwise have an interest in any additional hotels or similar establishments within a radius of 20 miles of the Rye Town Hilton, except that certain areas within said 20 mile radius have been excluded from the territorial restriction. The Company has also entered into an agreement with Prudential which provides that, except for the Chicago Hilton & Towers, the Palmer House Hilton, the O'Hare Hilton and specified other properties, the Company would not manage or operate, or possess an ownership interest in, or license or franchise, any hotel in Chicago, except the ownership and/or management of a hotel with less than 800 rooms at the O'Hare International Airport and a hotel with not more than 400 rooms at any other location in Chicago. PROPERTY TRANSACTIONS In 1995, the Company recorded a $1,500,000 pretax gain from property transactions primarily as a result of the sale of land to Hilton Grand Vacations Company for its vacation ownership resort located adjacent to the Flamingo Hilton-Las Vegas. Gains on this transaction are being recognized on an installment basis. See "Additional Information -- Vacation Ownership." Hilton continuously evaluates its property portfolio and intends to dispose of its interests in hotels or properties that, in its opinion, no longer yield an adequate return on investment or conform to Hilton's long range plans. In so doing, the Company expects to maintain a balanced mix of sources of revenues and a favorable return on stockholders' equity. FOREIGN CURRENCY TRANSACTIONS The Company's international operations are subject to certain economic and political risks, including foreign currency fluctuations. The Company monitors its foreign operations and, where appropriate, adopts 8 hedging strategies to minimize the impact of changing economic and political environments. See "Financial Instruments" in the Notes to the Company's Consolidated Financial Statements on pages 50 and 51 in the Stockholders Report. GAMING OPERATIONS NEVADA HOTEL-CASINOS The Company owns and operates five hotel-casinos in the State of Nevada: the 3,174-room Las Vegas Hilton, the 3,642-room Flamingo Hilton-Las Vegas, the 2,000-room Flamingo Hilton-Laughlin, the 2,001-room Reno Hilton and the 604-room Flamingo Hilton-Reno. The Las Vegas Hilton is located adjacent to the Las Vegas Convention Center and focuses on up-scale individual leisure guests and convention groups. The Flamingo Hilton-Las Vegas, the Reno Hilton and the Flamingo Hilton-Reno focus primarily on the middle market, in particular the group tour and travel segment. The Flamingo Hilton-Laughlin targets the budget and middle market segments. Each of the Company's hotel-casinos has gaming, convention, dining, shopping, entertainment and, with the exception of the Flamingo Hilton-Reno, indoor and outdoor recreational facilities. A variety of popular entertainment is featured in theaters and lounges at each hotel. The Company also operates a vacation ownership resort adjacent to the Flamingo Hilton-Las Vegas. See "Additional Information -- Vacation Ownership." The Company continues to refurbish and expand existing facilities in Nevada to maintain their presence as premier properties in the market. In 1995, the Las Vegas Hilton completed construction of the third of three new 12,600 to 15,400 square foot "Sky Villa" luxury suites for premium players. The Las Vegas Hilton also completed new VIP baccarat facilities and opened a new 6,800 square foot luxury European Suite. The Flamingo Hilton-Las Vegas completed an extensive expansion and renovation project, including a new 600-room tower, a 10,000 square foot casino expansion, a new 21,000 square foot ballroom, remodeling of the race and sports book, new entertainment, recreation, retail and dining facilities, exterior enhancements and guest room renovations. The Flamingo Hilton-Laughlin upgraded its guest room bathrooms and continued its slot machine replacement program. The Reno Hilton completed a renovation of its casino and the registration, entertainment and retail areas of the property, and opened a new Johnny Rockets restaurant. The Flamingo Hilton-Reno renovated its casino and remodeled the Top of the Flamingo Hilton restaurant. The space utilized by the Company's casinos in Nevada, in terms of approximate square footage, is as follows: Las Vegas Hilton -- 78,000 square feet (inclusive of 29,000 square feet attributable to the race and sports book); Flamingo Hilton-Las Vegas -- 74,000 square feet (inclusive of 20,000 square feet attributable to O'Sheas Irish theme casino adjacent to the hotel); Flamingo Hilton-Laughlin -- 58,000 square feet (inclusive of 3,000 square feet attributable to the race and sports book); Reno Hilton -- 118,000 square feet (inclusive of 12,000 square feet attributable to the race and sports book); and Flamingo Hilton-Reno -- 46,000 square feet (inclusive of 2,500 square feet attributable to the race and sports book). Each of the hotel-casinos is open 24 hours a day, seven days a week, for gaming activities. Games operated in these casinos include "21," craps, roulette, big "6," baccarat, poker, keno and slot and other coin machines. The Las Vegas Hilton's race and sports book is tied in by satellite or modem to the casinos at the Flamingo Hilton-Las Vegas, the Flamingo Hilton-Laughlin, the Reno Hilton and the Flamingo Hilton-Reno. It is impracticable for Hilton's hotel-casinos to record the total amount bet in the casinos, although the amount of chips issued for cash and credit is determined regularly. The amount of gaming activity varies significantly from time to time primarily due to general economic conditions, popularity of entertainment in the hotels, and occupancy rates in the hotels and in the Las Vegas, Laughlin and Reno markets. The amount of revenues from gaming operations varies depending upon the amount of gaming activity as well as variations in the odds for different games and the factor of chance. Casino activities are conducted by experienced personnel who are supervised at all times. 9 As in the case of any business extensively involved in the handling of cash, gaming operations at the Company's hotel-casinos are subject to risk of substantial loss as a result of dishonesty. However, the Company believes that it has reduced such risk, by means of procedures for supervision of employees and other controls, to the fullest extent practicable without impediment to play and within the limits of reasonable costs. Substantially all table games and slot machines can be monitored by remote control television and substantially all slot machines at all five Nevada properties are monitored by computers. The Las Vegas Hilton and, to a lesser extent, the Flamingo Hilton-Las Vegas, the Flamingo Hilton-Reno and the Reno Hilton invite VIP customers to their casinos and may pay for or reimburse the cost of their air transportation and provide them with complimentary rooms, food and beverage. In addition, the Las Vegas Hilton and the Reno Hilton have instituted special flight programs, pursuant to which free air transportation on Company owned or chartered aircraft and complimentary rooms, food and beverage are provided to groups or selected persons. These persons either have established casino credit limits or cash on deposit in the casinos and have previously evidenced a willingness to put substantial amounts at risk at the casinos. The special flight programs are sometimes referred to as junkets. The Las Vegas Hilton and the Reno Hilton hosted 11 and 13 special flight programs in 1995, compared to nine and 27 such programs in 1994, respectively. Revenues from the Company's casinos are accounted for in accordance with applicable laws and rules and regulations. As is customary in the Nevada gaming industry, activities are conducted on a credit as well as a cash basis, in accordance with procedures established and supervised by management. Fluctuations in collecting casino receivables could have a material effect on results of operations of these properties. An allowance is provided for estimated uncollectible casino receivables. Casino receivables aggregated $47,900,000, subject to a $7,600,000 (approximately 16%) reserve, at December 31, 1993; $69,100,000, subject to a $16,000,000 (approximately 23%) reserve, at December 31, 1994; and $87,300,000, subject to a $13,500,000 (approximately 15%) reserve, at December 31, 1995. INTERNATIONAL HOTEL-CASINOS The Company, through Conrad International, manages three international hotel-casinos which feature table games and slot machines similar to those offered at the Company's hotel-casinos in Nevada. In April 1995, the Company commenced operation of the 136-room Conrad International Treasury in Brisbane, Australia. This hotel-casino features a 65,000 square foot casino and has the exclusive right to conduct casino gaming in Brisbane until 2005. The Company has a 19.9% ownership interest in this property. The Company also has a 19.9% ownership interest in the 605-room Hotel Conrad & Jupiters Casino, which opened in 1985. This hotel-casino is located on the Gold Coast in Queensland, Australia, and features a 70,000 square foot casino. This property had the exclusive right to conduct casino gaming on Queensland's Gold Coast through 1995. The Company has a 25% ownership interest in the 620-room Conrad International Istanbul, which opened in 1992. This hotel-casino includes a 12,000 square foot casino. CASINO WINDSOR The Company and the other two shareholders of Windsor Casino Limited ("WCL") operate the Casino Windsor, an interim 50,000 square foot casino in Windsor, Ontario, Canada. The Company, through Conrad International, owns a 33.3% interest in WCL, which operates this project for the Ontario provincial government. The Company anticipates that the interim casino will be replaced by a permanent facility in early 1998, which will include a hotel of approximately 400 rooms, a 75,000 square foot casino, entertainment and meeting facilities. Since December 1995, the Company has chartered a river casino to the Ontario provincial government to serve as a complementary facility for Casino Windsor. This vessel provides an additional 25,000 square feet of casino space for the property. 10 NEW ORLEANS RIVER CASINO Since February 1994, the Company has operated a river casino located adjacent to the New Orleans Hilton Riverside & Towers. The Company currently operates a 1,500 passenger vessel which has a 20,000 square foot casino featuring table games and slot machines similar to those offered at the Company's hotel-casinos. This vessel is wholly-owned by the Company and leased to a joint venture, of which the Company owns a 50% interest. EXPANSION PROGRAM In January 1995, the Company and Paramount Parks Inc. ("Paramount") announced plans to build a 65,000 square foot attraction to be called "Star Trek: The Experience at the Las Vegas Hilton." This attraction is scheduled to open in spring 1997 and will feature a motion-based simulation ride, interactive video and virtual reality stations, dining and souvenir shops. The building housing the Star Trek attraction will be owned by the Company and leased to Paramount. The attraction will also be managed by Paramount. In conjunction with the Star Trek attraction, the Company plans to construct a themed 22,000 square foot casino addition at the Las Vegas Hilton, which is also scheduled to open in spring 1997. In 1996, the Las Vegas Hilton plans to rebuild its marquee sign and renovate 700 of its guest rooms. The Flamingo Hilton-Las Vegas plans to complete a new main entrance to the property and renovate the registration area. The Flamingo Hilton-Laughlin plans to renovate 1,000 of its guest rooms, refinish the exterior facade and continue its slot machine replacement program. At the Reno Hilton, renovation of restaurants, meeting rooms and guest rooms are planned. The Flamingo Hilton-Reno plans to renovate guest rooms and open a Benihana restaurant. The government of Uruguay has selected Conrad International and its partners to develop a new 300-room hotel-casino in Punta del Este, Uruguay. This project, which will be the first privately operated casino in Uruguay in 30 years, will include a 38,000 square foot casino. Conrad International will manage and have an equity interest of approximately 43% in the hotel-casino. The casino is scheduled to open in early 1997 and the hotel is expected to commence operations in late 1997. Conrad International has entered into an agreement to develop and operate a 700-room hotel-casino in Cairo, Egypt. This property will feature a 17,000 square foot European-style casino. Conrad International will manage and have a 10% equity interest in the hotel-casino, which is scheduled to open in late 1997. The Company is also developing a river casino in Kansas City, Missouri. The Company will manage and own a 90% interest in this project, which will include a 30,000 square foot casino on a continuously docked 130,000 square foot barge, concessions and entertainment facilities. Subject to the receipt of all required gaming licenses and permits, this project is scheduled to open in mid-1996. The Company also plans to build a 260-room hotel adjacent to the river casino, which is scheduled to open in mid-1997. The New Jersey Casino Control Commission has granted the Company's request for a Statement of Compliance, finding that the Company satisfies all non-facility related criteria for a casino license in Atlantic City, New Jersey. At present, the Company does not own, nor has the Company entered into any agreement to manage, a hotel-casino property in Atlantic City. See "Additional Information -- Regulation and Licensing -- New Jersey Gaming Laws." ADDITIONAL INFORMATION VACATION OWNERSHIP The Company owns a 50% interest in the Hilton Grand Vacations Company joint venture ("HGVC"), which currently operates 12 vacation ownership resorts in Florida and one in Nevada. In January 1995, HGVC commenced operation of a 200-unit vacation ownership resort adjacent to the Flamingo Hilton-Las Vegas. In August 1995, HGVC also commenced operation of the first phase of a 360-unit vacation ownership resort adjacent to Sea World in Orlando, Florida. Development, construction and certain operating costs of HGVC's projects in Las Vegas and Orlando have been substantially funded by the Company in the form of revolving loan facilities. HGVC is actively seeking new development and acquisition opportunities in other resort locations. 11 DESIGN AND FURNISHING SERVICES Hilton, through its wholly-owned subsidiary, Hilton Equipment Corporation, and through its hotels division, provides design and furnishing services and distributes furniture, furnishings, equipment and supplies to hotels and hotel-casinos owned, leased or managed by Hilton and to hotels franchised by Hilton or owned and operated by others. The revenues of this operation depend primarily on the number of new hotels operated or franchised by Hilton and on refurbishing and remodeling of existing Hilton hotels. COMPUTER SYSTEMS Compass Computer Services, Inc. ("Compass"), 50% of which is owned by Hilton and the balance by Budget Rent-A-Car, Inc., operates a computerized reservation system for, among other things, hotel reservations. This system also provides Hilton with certain statistical data and registration packets. Compass is being managed by Litton Computer Services. RESERVATION SYSTEM The Compass computerized reservation system is presently utilized by Hilton Service Corporation, the operator of a worldwide system of reservation offices for hotels operated by Hilton, Hilton International Co., their affiliates and others. Hilton Service Corporation is owned 51% by Hilton and 49% by Hilton International Co. MARKETING Hotel occupancy at Hilton's metropolitan and airport properties is derived primarily from the convention and meeting market and the business traveler market (businesspersons traveling as individuals or in small groups). Hotel occupancy at the Company's resort properties is derived primarily from the tour and leisure market (tourists traveling either as individuals or in groups) and the convention and meeting market. Hotel occupancy at the Company's hotel-casinos is derived primarily from the convention and meeting market, the tour and leisure market and junket and VIP programs. As indicated under "Additional Information -- Business Risks" below, these sources of business are sensitive to general economic and other conditions. In addition, the Company participates in certain joint marketing programs with business partners in the airline, car rental and cruise line industries. STATISTICAL DATA For information regarding the Company's properties, number of available rooms, occupancy ratios and management and franchise fees, see the Ten Year Summary on pages 58 and 59 in the Stockholders Report. BUSINESS RISKS In 1995, the Company was able to increase average room rates by five percent over 1994. The Company's future operating results could be adversely impacted by industry overcapacity and weak demand, which could restrict the Company's ability to raise room rates to keep pace with the rate of inflation. The Company's business could also be adversely affected by increases in transportation and fuel costs or sustained recessionary periods. The operating results for the Company's hotel-casinos can be volatile depending upon the table-game play of premium players. Hilton's occupancy ratios are affected by general economic conditions, as well as by competition, work stoppages and other factors affecting particular properties. Occupancy ratios at the Company's hotels could also be adversely impacted by a decrease in travel resulting from fluctuations in the worldwide economy and by excess industry capacity. COMPETITION Hilton believes it is one of the largest operators of hotels located within the United States. Competition from other hotels, motels and inns, including facilities owned by local interests and facilities owned by national and international chains, is vigorous in all areas in which Hilton operates its facilities. Hilton hotels also compete generally with facilities offering similar services and located in cities and other locations where Hilton hotels are not present. The Company's precise competitive position in most areas in which its hotels are located cannot be determined from the information and data available to Hilton. 12 To the extent that hotel capacity is expanded by others in a city where a Hilton hotel is located, competition will increase. In this regard, recent capacity additions have increased competition in all segments of the Las Vegas market. Certain of the Company's competitors have announced new casino projects in Las Vegas which, if completed, will add significant casino space and hotel rooms to the market. Such new capacity additions to the Las Vegas market could adversely impact the Company's gaming income. In addition, the business of Hilton's Nevada hotel-casinos might be adversely affected if gaming operations of the type conducted in Nevada were to be permitted under the laws of other states, particularly California. The legalization of casino gaming in Atlantic City, New Jersey has had an impact on the Company's Nevada hotel-casinos. The legalization of riverboat gaming in a number of states and the operation of casino gaming on Native American tribal lands could also impact the Company's hotel-casinos in Nevada. REGULATION AND LICENSING Each of the Company's casinos is subject to extensive regulation under laws, rules and supervisory procedures, primarily in the jurisdiction where located or docked. Some jurisdictions, however, empower their regulators to investigate participation by licensees in gaming outside their jurisdiction and require access to and periodic reports respecting such gaming activities. Violations of laws in one jurisdiction could result in disciplinary action in other jurisdictions. NEVADA GAMING LAWS. The ownership and operation of casino gaming facilities in the State of Nevada, such as those at the Las Vegas Hilton, the Flamingo Hilton-Las Vegas, the Flamingo Hilton-Laughlin, the Reno Hilton and the Flamingo Hilton-Reno, are subject to the Nevada Gaming Control Act and the regulations promulgated thereunder (the "Nevada Act") and various local regulations. The Company's gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission (the "Gaming Commission"), the Nevada State Gaming Control Board (the "Control Board"), the Clark County Liquor and Gaming Licensing Board (the "CCB") and the City of Reno. The Gaming Commission, the Control Board, the CCB and the City of Reno are collectively referred to as the "Nevada Gaming Authorities." The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) the provision of a source of state and local revenues through taxation and licensing fees. Changes in such laws, regulations and procedures could have an adverse effect on the Company's gaming operations. The Company's subsidiaries which operate the casinos (the "Licensees") are required to be licensed by the Nevada Gaming Authorities. The gaming license requires the periodic payment of fees and taxes and is not transferable. The Company is registered by the Gaming Commission as a publicly-traded corporation ("Registered Corporation") and, as such, it is required periodically to submit detailed financial and operating reports to the Gaming Commission and furnish any other information which the Gaming Commission may require. No person may become a stockholder of, or receive any percentage of profits from, the Licensees without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company and the Licensees have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or the Licensees in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of the Licensees must file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. Officers, directors and key employees of the Company who are actively and directly involved in gaming activities of the Licensees may be required to 13 be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay for all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and, in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company or the Licensees, the companies involved would have to sever all relationships with such person. In addition, the Gaming Commission may require the Company or the Licensees to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. The Company and the Licensees are required to submit detailed financial and operating reports to the Gaming Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by the Licensees must be reported to, or approved by, the Gaming Commission. If it were determined that the Nevada Act was violated by the Licensees, the gaming licenses they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Licensees, the Company and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Gaming Commission. Further, a supervisor could be appointed by the Gaming Commission to operate the Company's gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the Company's gaming properties) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the Company's gaming operations. Any beneficial holder of the Company's Common Stock, regardless of the number of shares owned, may be required to file an application, be investigated, and have such person's suitability as a beneficial holder of the Company's Common Stock determined if the Gaming Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires more than 5% of the Company's Common Stock to report the acquisition to the Gaming Commission. The Nevada Act requires that beneficial owners of more than 10% of the Company's Common Stock apply to the Gaming Commission for a finding of suitability within thirty days after the Chairman of the Control Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of the Company's Common Stock may apply to the Gaming Commission for a waiver of such finding of suitability if such institutional investor holds the Common Stock for investment purposes only. An institutional investor shall not be deemed to hold the Common Stock for investment purposes unless the Common Stock was acquired and is held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the Board of Directors of the Company, any change in the Company's corporate charter, bylaws, management, policies or operations of the Company, or any of its gaming affiliates, or any other action which the Gaming Commission finds to be inconsistent with holding the Company's Common Stock for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, polices or operations; and (iii) such other activities as the Gaming Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it 14 must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Barron Hilton, the Company's largest stockholder, has been found suitable as a controlling stockholder of the Company. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Gaming Commission or by the Chairman of the Control Board may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the Company's Common Stock beyond such period of time as may be prescribed by the Gaming Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or the Licensees, the Company (i) pays that person any dividend or interest upon voting securities of the Company; (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person; (iii) pays remuneration in any form to that person for services rendered or otherwise; or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish the voting securities for cash at fair market value. Additionally, the CCB has taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license. The Gaming Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation. If the Gaming Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Gaming Commission, it (i) pays to the unsuitable person any dividend, interest or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction. The Company is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Gaming Commission has the power to require the Company's stock certificates to bear a legend indicating that the securities are subject to the Nevada Act. However, to date, the Gaming Commission has not imposed such a requirement on the Company. The Company may not make a public offering of its securities without the prior approval of the Gaming Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation or approval by the Gaming Commission or the Control Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful. The Company was granted approval on September 28, 1995 to make public offerings of securities for a period of one year, subject to certain reporting requirements and the authority of the Chairman of the Control Board to issue an interlocutory stop order for good cause. Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby such person obtains control, may not occur without the prior approval of the Gaming Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Control Board and Gaming Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Gaming Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. 15 The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Gaming Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Gaming Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Company's Board of Directors in response to a tender offer made directly to its stockholders for the purpose of acquiring control of the Company. License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Nevada licensee's respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either: (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of table games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling of food or refreshments. The Company and its affiliates and Licensees, who propose to become involved in a gaming venture outside of Nevada, are required to deposit with the Control Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Control Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Gaming Commission. Thereafter, the Company and its affiliates and Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. These entities are also subject to disciplinary action by the Gaming Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. LOUISIANA GAMING LAWS. The ownership and operation of a riverboat gaming vessel in the State of Louisiana is subject to the Louisiana Riverboat Economic Development and Gaming Control Act (the "Act"). Gaming activities are regulated by the Louisiana Riverboat Gaming Commission (the "Commission") and the Louisiana Riverboat Gaming Enforcement Division (the "Division"), a department within the Louisiana State Police. The Division is responsible for investigating the background of all applicants seeking a riverboat gaming license, issuing the license and enforcing the laws, rules and regulations relating to riverboat gaming activities. The applicant, its officers, directors, key personnel, partners and persons holding a 5% or greater interest in the holder of a gaming license are required to be found suitable by the Division. This requires the filing of an extensive application to the Division disclosing personal, financial, criminal, business and other information. On October 13, 1993, the Division issued a riverboat gaming license to the Queen of New Orleans, a joint venture of which the Company owns a 50% interest. The Company's joint venture commenced riverboat gaming operations in New Orleans, Louisiana on February 10, 1994. The transfer of a Louisiana gaming license is prohibited under the Act. The sale, assignment, transfer, pledge or disposition of securities which represent 5% or more of the total outstanding shares issued by a holder of a license is subject to Division approval and the transferee must be found suitable. In addition, all contracts and leases entered into by a licensee are subject to approval and certain enterprises which transact business with the licensee must be licensed. 16 The Commission must approve all security holders of the licensee and may find any such security holder not qualified to own those securities. Louisiana law may require that the charter or bylaws of the licensee provide that its securities are held subject to the condition that, if a holder is found to be disqualified by the Commission, the holder must dispose of the securities of the licensee. If a security holder of a licensee is found disqualified, it will be unlawful for the security holder to (i) receive any dividend or interest with regard to the securities; (ii) exercise, directly or indirectly, any rights conferred by the securities; or (iii) receive any remuneration from the licensee for services rendered or otherwise. The Commission may impose similar approval requirements on holders of securities of any intermediary or holding company of the licensee, but may waive those requirements with respect to holders of publicly-traded securities of intermediary and holding companies if such holders do not have the ability to control the publicly-traded corporation or elect one or more directors thereof. NEW JERSEY GAMING LAWS. The ownership and operation of hotel-casino facilities in Atlantic City, New Jersey are subject to extensive state regulation under the New Jersey Casino Control Act (the "Act"). No hotel-casino facility may operate unless various licenses and approvals are obtained from New Jersey regulatory authorities, including the Casino Control Commission (the "Commission"). The Commission is authorized under the Act to adopt regulations covering a broad spectrum of gaming and gaming related activities and to prescribe the methods and forms of applications for licenses. The Act permits an applicant to request a Statement of Compliance from the Commission finding that it satisfies one or more of the eligibility criteria for licensure. The Statement of Compliance request may be made prior to the construction or acquisition of a casino in Atlantic City. It is only after all eligibility criteria are met that a casino license may be issued. On February 4, 1991, the Company and a New Jersey subsidiary filed applications with the Commission for a casino license under the Act. At the conclusion of the application investigation, the Company requested a Statement of Compliance regarding all non-facility related criteria. On June 26, 1991, the Commission granted the Company's request for a Statement of Compliance. The Company does not now own, nor has the Company entered into any agreement to manage, a hotel-casino in Atlantic City. The Company filed the license application in contemplation of possibly owning and/or operating a hotel-casino in Atlantic City. In order to be granted a casino license under the Act, officers and directors of a licensee and its employees who are employed in hotel or casino operations in Atlantic City are required to be licensed or approved by the Commission. In addition, all contracts and leases entered into by a licensee would be subject to approval and certain enterprises which transact business with the licensee would themselves have to be licensed. New Jersey law also authorizes the Commission to approve security holders of a licensee in the manner described above under the caption "Louisiana Gaming Laws." QUEENSLAND GAMING LAWS. Queensland, Australia, like Nevada, Louisiana and New Jersey, has comprehensive laws and regulations governing the conduct of casino gaming. All persons connected with the ownership and operation of a casino, including the Company, its subsidiary that manages the Hotel Conrad & Jupiters Casino and the Conrad International Treasury and certain of their principal stockholders, directors and officers, must be found suitable and licensed. A casino license once issued remains in force until surrendered or cancelled. Queensland law defines the grounds for cancellation and, in such event, an administrator may be appointed to assume control of the hotel-casino complex. The Queensland authorities have conducted an investigation of, and have found suitable, the Company and its subsidiary. ONTARIO GAMING LAWS. Ontario, Canada also has laws and regulations governing the conduct of casino gaming. Ontario law requires that the operator of a casino must be found suitable and be registered. A registration once issued remains in force until revoked. Ontario law defines the grounds for registration, as well as revocation or suspension of such registration. The Company and two other shareholders formed Windsor Casino Limited ("WCL") to operate the Casino Windsor. The Ontario authorities have conducted an investigation of, and have found suitable, the Company and the other two shareholders of WCL in connection with the Ontario registration of WCL. 17 TURKEY GAMING LAWS. Turkey has laws and regulations governing the establishment and operation of casino gaming. The Turkish Ministry of Tourism inspects all casino premises prior to the commencement of operations and conducts random inspections of ongoing casino operations. Under Turkish gaming laws, access to casinos is limited to persons carrying a foreign passport or to Turkish citizens receiving a permit from the Ministry of Tourism. The casino located in the Conrad International Istanbul has been authorized to conduct casino operations by the Turkish Ministry of Tourism. IRS REGULATIONS. The Internal Revenue Service ("IRS") requires operators of casinos located in the United States to file information returns for U.S. citizens (including names and addresses of winners) for keno and slot machine winnings in excess of stipulated amounts. The IRS also requires operators to withhold taxes on certain keno, bingo and slot machine winnings of nonresident aliens. Management is unable to predict the extent, if any, to which such requirements, if extended, might impede or otherwise adversely affect operations of, and/or income from, such other games. Regulations adopted by the IRS and the gaming regulatory authorities in certain domestic jurisdictions in which the Company operates, or has applied for licensing to operate, casinos require the reporting of currency transactions in excess of $10,000 occurring within a gaming day, including identification of the patron by name and social security number. This reporting obligation commenced in May 1985 and may have resulted in the loss of gaming revenues to jurisdictions outside the United States which are exempt from the ambit of IRS regulations. OTHER LAWS AND REGULATIONS. Each of the hotels and hotel-casinos operated by the Company is subject to extensive state and local regulations and, on a periodic basis, must obtain various licenses and permits, including those required to sell alcoholic beverages. Management believes that the Company has obtained all required licenses and permits and its businesses are conducted in substantial compliance with applicable laws. EMPLOYEES At February 1, 1996, Hilton employed approximately 48,000 persons, of whom approximately 25,000 are covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment and orderly settlement of labor disputes. Hilton believes that the aggregate compensation benefits and working conditions afforded its employees compare favorably with those received by employees in the hotel and gaming industries generally. Although strikes of short duration have from time to time occurred at certain of Hilton's facilities, Hilton believes its employee relations are satisfactory. ITEM 2. PROPERTIES Hilton considers its hotels and casinos to be leading establishments with respect to desirability of location, size, facilities, physical condition, quality and variety of services offered in most of the areas in which they are located. Obsolescence arising from age and condition of facilities is a factor in the hotel and gaming industries. Accordingly, Hilton expends, and intends to continue to expend, substantial funds to maintain its facilities in first-class condition in order to remain competitive. Hotels and casinos owned and operated, leased and managed by Hilton are briefly described under Item 1 and, in particular, under the captions "Hotel Operations" and "Gaming Operations." In addition, contemplated additions to, and major refurbishing and remodeling of, existing properties and new hotels and casinos presently under construction that will be operated by Hilton are briefly described under the captions "Hotel Operations -- Expansion Program" and "Gaming Operations -- Expansion Program" under Item 1. ITEM 3. LEGAL PROCEEDINGS In management's opinion, disposition of pending litigation against the Company is not expected to have a material effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 18 EXECUTIVE OFFICERS The following table sets forth certain information with respect to the executive officers of the Company:
POSITIONS AND OFFICES NAME WITH THE COMPANY AGE - ------------------------- --------------------------------------------------------------- --------- Barron Hilton Chairman of the Board, and previously served as Chief Executive 68 Officer until February 1996, and President until February 1993 Stephen F. Bollenbach President and Chief Executive Officer since February 1996 53 Eric M. Hilton Vice Chairman of the Board since May 1993, Executive Vice 62 President -- International Operations from May 1992 until May 1993, President, Conrad International Hotels Corporation until May 1993, and Senior Vice President -- Real Estate Development, International until May 1992 Floyd M. Celey, Jr. Executive Vice President and President -- Gaming Operations 56 since September 1994, Senior Vice President -- Global Gaming Operations from May 1993 until September 1994, and prior thereto, Senior Vice President -- Corporate Casino Operations, Conrad International Hotels Corporation Dieter H. Huckestein Executive Vice President and President -- Hotel Operations 52 since May 1994, Senior Vice President -- Hawaii/California/Arizona Region from May 1991 until May 1994, and prior thereto, Senior Vice President -- Hawaiian Region F. Michael O'Brien Executive Vice President -- Gaming Development since September 55 1995, Executive Vice President -- Gaming and Hotel Development from September 1994 until September 1995, Senior Vice President -- Gaming and Hotel Development from January 1994 until September 1994, and from May 1992 until January 1994, Senior Vice President -- Corporate Properties Steve Krithis Senior Vice President -- Finance since November 1994, and prior 66 thereto, Vice President and Corporate Comptroller William C. Lebo, Jr. Senior Vice President and General Counsel 52
Unless otherwise noted in the table, all positions and offices with the Company indicated have been continuously held since January 1991. The executive officers are responsible for all major policy making functions and all other corporate and divisional officers are responsible to, and are under the supervision of, the executive officers. None of the above named executive officers are related, except that Messrs. Barron and Eric Hilton are brothers. Similar information for directors of the Company will be included under "Election of Directors" in the Company's definitive proxy statement to be used in connection with its annual meeting of stockholders scheduled to be held on May 9, 1996 (the "Proxy Statement"). The Company expects to file the Proxy Statement with the Securities and Exchange Commission prior to April 30, 1996, and reference is expressly made thereto for the specific information incorporated herein by the aforesaid reference. 19 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the New York and Pacific Stock Exchanges and is traded under the symbol "HLT." Information regarding sales prices, dividend payments and record holders with respect to the Company's Common Stock is set forth under "Supplementary Financial Information" in the Notes to the Company's Consolidated Financial Statements on page 57 in the Stockholders Report, which information is incorporated herein by reference. On July 14, 1988, Hilton adopted a Preferred Share Purchase Rights Plan ("Plan") and declared a dividend distribution of one Preferred Share Purchase Right ("Rights") on each outstanding share of Hilton Common Stock. The Rights are transferable only with the Common Stock until they become exercisable. Generally, the Rights become exercisable only if a person or group (other than Hilton Interests, as hereinafter defined) acquires 20% or more of Hilton's Common Stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 20% or more of the Common Stock. Each Right entitles stockholders to buy one one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $150. If the Company is acquired in a merger or other business combination transaction, each Right entitles its holder to purchase, at the Right's then current price, a number of the acquiring company's common shares having a then current market value of twice the Right's exercise price. In addition, if a person or group (other than Hilton Interests) acquires 30% or more of the Company's outstanding Common Stock, otherwise than pursuant to a cash tender offer for all shares in which such person or group increases its stake from below 20% to 80% or more of the outstanding shares of Common Stock, each Right entitles its holder (other than such person or members of such group) to purchase, at the Right's then current exercise price, shares of the Company's Common Stock having a market value of twice the Right's exercise price. Following the acquisition by a person or group of beneficial ownership of 30% or more of the Company's Common Stock and prior to an acquisition of 50% or more of the Common Stock, Hilton's Board of Directors may exchange the Rights (other than Rights owned by such person or group), in whole or in part, at an exchange ratio of one share of Common Stock (or one one-hundredth of a share of the new series of junior participating preferred stock) per Right. Prior to the acquisition by a person or group of beneficial ownership of 20% or more of the Company's Common Stock, the Rights are redeemable for one cent per Right at the option of the Company's Board of Directors. "Hilton Interests" refer to Barron Hilton and the Conrad N. Hilton Fund and the shares of Common Stock beneficially owned by them. The full text of the Plan has been filed as Exhibit 4.5 hereto, and the foregoing summary is qualified in its entirety by reference to Exhibit 4.5. ITEM 6. SELECTED FINANCIAL DATA See the Company's Ten Year Summary on pages 58 and 59 in the Stockholders Report and "Segments of Business" in the Notes to the Company's Consolidated Financial Statements on pages 55 and 56 in the Stockholders Report. The ratio of earnings to fixed charges for the five years ended December 31, 1995 is as follows: 1995 - 3.2 to 1; 1994 - 2.8 to 1; 1993 - 2.7 to 1; 1992 - 2.9 to 1; and 1991 - 2.6 to 1. The computation of the aforesaid ratios is set forth in Exhibit 12 hereto. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION See pages 36 through 41 in the Stockholders Report. 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplemental information required by this Item are contained in the Stockholders Report on the pages indicated, which information is incorporated herein by reference.
PAGE ----- Report of independent public accountants............................................... 57 Consolidated statements of income for the three years ended December 31, 1995............................................... 42 Consolidated balance sheets as of December 31, 1995 and 1994........................... 43 Consolidated statements of cash flows for the three years ended December 31, 1995............................................... 44 Consolidated statements of stockholders' equity for the three years ended December 31, 1995............................................... 45 Notes to consolidated financial statements............................................. 46 Segment data for the five years ended December 31, 1995 contained in the Ten Year Summary..................................................... 58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain of the information respecting executive officers required by this Item is set forth under the caption "Executive Officers" in Part I. Other information respecting certain executive officers, as well as the required information for directors, will be contained in the Proxy Statement, and reference is expressly made thereto for the specific information incorporated herein by the aforesaid reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item will be set forth under "Executive Compensation" in the Proxy Statement, and except for information set forth in the Proxy Statement under "Personnel and Compensation Committee Report on Executive Compensation" and "Stockholder Return Performance Graph," reference is expressly made thereto for the specific information incorporated herein by the aforesaid reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item will be set forth under "Common Stock Ownership of Certain Beneficial Owners and Executive Officers" and "Election of Directors" in the Proxy Statement, and reference is expressly made thereto for the specific information incorporated herein by the aforesaid reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item will be set forth under "Election of Directors -- Certain Relationships and Interests in Certain Transactions" in the Proxy Statement, and reference is expressly made thereto for the specific information incorporated herein by the aforesaid reference. 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) INDEX TO FINANCIAL STATEMENTS 1. Financial Statements: The index to consolidated financial statements and supplementary data is set forth under Item 8 on page 21 hereof. 2. Financial Statement Schedules:
PAGE ----- Report of Independent Public Accountants............................................... 23 Schedule II -- Valuation and Qualifying Accounts....................................... 24 Supplemental Note to Consolidated Financial Statements................................. 25
All other schedules are inapplicable or the required information is included elsewhere herein. (B) REPORTS ON FORM 8-K None. (C) EXHIBITS Reference is made to the Index to Exhibits immediately preceding the exhibits hereto. 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS SUPPLEMENTAL SCHEDULE AND SUPPLEMENTAL NOTE To Hilton Hotels Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Hilton Hotels Corporation and subsidiaries included in the Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 1, 1996. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The supplemental schedule II and the supplemental note to consolidated financial statements as shown on pages 24 and 25 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. The supplemental schedule and the supplemental note to the consolidated financial statements have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Los Angeles, California February 1, 1996 23 HILTON HOTELS CORPORATION AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN MILLIONS)
CHARGED BALANCE AT CHARGED TO (CREDITED) BALANCE AT BEGINNING COSTS AND TO OTHER END OF OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OTHER PERIOD ---------- ---------- ---------- ---------- ----- ---------- YEAR ENDED DECEMBER 31, 1995 Allowance for doubtful accounts Hotel and other......................................... $11.4 2.0 (.6) 4.4 -- 8.4 Casino.................................................. 16.0 18.1 -- 20.6 -- 13.5 Reserve for loss on other investments..................... 20.6 -- -- 1.1 -- 19.5 YEAR ENDED DECEMBER 31, 1994 Allowance for doubtful accounts Hotel and other......................................... $11.6 1.7 .5 2.4 -- 11.4 Casino.................................................. 7.6 13.2 -- 4.8 -- 16.0 Reserve for loss on other investments..................... 12.5 -- -- -- 8.1(A) 20.6 YEAR ENDED DECEMBER 31, 1993 Allowance for doubtful accounts Hotel and other......................................... $ 7.2 1.8 4.5 1.9 -- 11.6 Casino.................................................. 14.4 10.9 -- 17.7 -- 7.6 Reserve for loss on other investments -- 12.5 -- -- -- 12.5
- ------------------------ (A) Represents unrealized holding losses on certain equity securities. 24 HILTON HOTELS CORPORATION AND SUBSIDIARIES SUPPLEMENTAL NOTE TO CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 1995 AND 1994 (IN MILLIONS)
1995 1994 --------- --------- Accounts payable and accrued expenses at December 31, consisted of: Accounts and notes payable.................................................................... $ 94.0 87.2 Accrued salaries and wages.................................................................... 31.2 29.5 Insurance..................................................................................... 27.3 28.7 Interest...................................................................................... 18.8 20.6 Other accrued expenses........................................................................ 135.2 118.0 --------- --------- $ 306.5 284.0 --------- --------- --------- ---------
25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on March 14, 1996. HILTON HOTELS CORPORATION (Registrant) By: STEVE KRITHIS ----------------------------------- Steve Krithis Senior Vice President-Finance Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 14, 1996. RAYMOND C. AVANSINO, JR. ROBERT L. JOHNSON - ------------------------------------------- ------------------------------------------- Raymond C. Avansino, Jr. Robert L. Johnson Director Director STEPHEN F. BOLLENBACH DONALD R. KNAB - ------------------------------------------- ------------------------------------------- Stephen F. Bollenbach Donald R. Knab President and Chief Executive Officer Director (Chief Executive Officer) A. STEVEN CROWN STEVE KRITHIS - ------------------------------------------- ------------------------------------------- A. Steven Crown Steve Krithis Director Senior Vice President-Finance (Chief Financial and Accounting Officer) GREGORY R. DILLON BENJAMIN V. LAMBERT - ------------------------------------------- ------------------------------------------- Gregory R. Dillon Benjamin V. Lambert Director Director BARRON HILTON DONNA F. TUTTLE - ------------------------------------------- ------------------------------------------- Barron Hilton Donna F. Tuttle Chairman of the Board Director ERIC M. HILTON SAM D. YOUNG, JR. - ------------------------------------------- ------------------------------------------- Eric M. Hilton Sam D. Young, Jr. Director Director DIETER H. HUCKESTEIN - ------------------------------------------- Dieter H. Huckestein Director
26 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - -------- ---------------------------------------------------------------------------------------------------- ------------ 3.1 Restated Certificate of Incorporation of Registrant, as amended (incorporated herein by reference from Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987) 3.2 By-Laws of Registrant, as amended (incorporated herein by reference from Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992) 3.3 Amendment to By-Laws of Registrant, relating to Exhibit 3.2 hereto.................................. 4.1 Indenture, dated as of July 1, 1988, between Registrant and Citibank, N.A., regarding Registrant's Subordinated Debt Securities (incorporated herein by reference from Exhibit 4.1 to Post-Effective Amendment No. 2 to Registrant's Registration Statement on Form S-3 (File No. 2-95746)) 4.2 Indenture, dated as of July 1, 1988, between Registrant and Morgan Guaranty Trust Company of New York, regarding Registrant's Senior Debt Securities (incorporated herein by reference from Exhibit 4.1 to Post-Effective Amendment No. 1 to Registrant's Registration Statement on Form S-3 (File No. 2-99967)) 4.3 First Supplemental Indenture, dated as of June 30, 1992, between Registrant and Morgan Guaranty Trust Company of New York, regarding Registrant's Senior Debt Securities, relating to Exhibit 4.2 hereto (incorporated herein by reference from Exhibit 4.3 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992) 4.4 Reimbursement Agreements, dated as of November 15, 1990, among Registrant, Swiss Bank Corporation and the financial institutions signatory thereto (incorporated herein by reference from Exhibit 4.7 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990) 4.5 Rights Agreement, dated as of July 14, 1988, between Registrant and The First National Bank of Chicago (incorporated herein by reference from Exhibit 1 to Registrant's Current Report on Form 8-K, dated July 14, 1988) 10.1 1984 Stock Option and Stock Appreciation Rights Plan of Registrant, together with the Stock Option Agreement relating thereto , both as amended (incorporated herein by reference from Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989)* 10.2 Amendment, dated October 18, 1990, to the 1984 Stock Option and Stock Appreciation Rights Plan of Registrant, relating to Exhibit 10.1 hereto (incorporated herein by reference from Exhibit 10.3 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990)* 10.3 1990 Stock Option and Stock Appreciation Rights Plan of Registrant, together with the Stock Option Agreement relating thereto, both as amended (incorporated herein by reference from Exhibit 10.4 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990)* 10.4 Amendment, dated January 20, 1994, to the 1990 Stock Option and Stock Appreciation Rights Plan of Registrant, relating to Exhibit 10.3 hereto (incorporated herein by reference from Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993)*
27
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - -------- ---------------------------------------------------------------------------------------------------- ------------ 10.5 Amendment, dated January 19, 1995, to the 1990 Stock Option and Stock Appreciation Rights Plan of Registrant, relating to Exhibits 10.3 and 10.4 hereto (incorporated herein by reference from Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994)* 10.6 1996 Stock Incentive Plan of Registrant*............................................................ 10.7 1996 Chief Executive Stock Incentive Plan of Registrant*............................................ 10.8 Incentive Compensation Plan of Registrant (incorporated herein by reference from Exhibit 10.4 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1980)* 10.9 Amendment, dated as of January 1, 1994, to the Incentive Compensation Plan of Registrant, relating to Exhibit 10.8 hereto (incorporated herein by reference from Exhibit 10.7 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993)* 10.10 Retirement Plan of Registrant, as amended and restated (incorporated herein by reference from Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994)* 10.11 First Amendment, dated as of November 15, 1995, to the Retirement Plan of Registrant, relating to Exhibit 10.10 hereto*............................................................................... 10.12 Supplemental Executive Retirement Plan of Registrant, as amended (incorporated herein by reference from Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991)* 10.13 Amendment, effective April 1, 1994, to the Supplemental Executive Retirement Plan of Registrant, relating to Exhibit 10.12 hereto (incorporated herein by reference from Exhibit 10.10 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994)* 10.14 Directors' Retirement Benefit Plan of Registrant, as amended (incorporated herein by reference from Exhibit 10.7 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991)* 10.15 Retirement Benefit Replacement Plan of Registrant, as amended (incorporated herein by reference from Exhibit 10.9 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992)* 10.16 Amendment, dated as of January 1, 1994, to the Retirement Benefit Replacement Plan of Registrant, relating to Exhibit 10.15 hereto (incorporated herein by reference from Exhibit 10.12 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993)* 10.17 Amendment, effective April 1, 1994, to the Retirement Benefit Replacement Plan of Registrant, relating to Exhibits 10.15 and 10.16 hereto (incorporated herein by reference from Exhibit 10.14 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994)* 10.18 Thrift Savings Plan of Registrant, as amended and restated (incorporated herein by reference from Exhibit 10.15 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994)* 10.19 First Amendment, dated as of March 16, 1995, to the Thrift Savings Plan of Registrant, relating to Exhibit 10.18 hereto*...............................................................................
28
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - -------- ---------------------------------------------------------------------------------------------------- ------------ 10.20 Form of Executive Employment Agreement, dated as of November 17, 1994 (incorporated herein by reference from Exhibit 10.16 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994)* 10.21 Employment Agreement, dated as of February 1, 1996, between Registrant and Stephen F. Bollenbach*... 11 Computation of Earnings Per Share................................................................... 12 Computation of Ratios of Earnings to Fixed Charges.................................................. 13 Registrant's Annual Report to Stockholders for the year ended December 31, 1995..................... 21 List of Registrant's Subsidiaries................................................................... 23 Consent of Independent Public Accountants........................................................... 99 Undertakings........................................................................................
- ------------------------ * Management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601(b)(10)(iii) of Regulation S-K, previously filed where indicated and incorporated herein by reference. Pursuant to Regulation Section229.601, Item 601(b)(4)(iii) of Regulation S-K, upon request of the Securities and Exchange Commission, the Registrant hereby undertakes to furnish a copy of any unfiled instrument which defines the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries (and for any of its unconsolidated subsidiaries for which financial statements are required to be filed) wherein the total amount of securities authorized thereunder does not exceed 10% of the total consolidated assets of the Registrant. 29 EX-3.3 2 AMEND. TO BYLAWS EXHIBIT 3.3 AMENDMENT TO HILTON HOTELS CORPORATION'S BY-LAWS On March 14, 1996, the Board of Directors of Hilton Hotels Corporation (the "Company") authorized an amendment to the Company's By-Laws. The revised text of Section 23 of the By-Laws is as follows: POWERS AND DUTIES OF OFFICERS OF THE CORPORATION 23. Subject to any resolution of the Board of Directors which may specify otherwise, the powers and duties of the various officers of the Corporation shall be as follows: The Chairman of the Board of Directors shall preside at all meetings of the Board of Directors, the stockholders and the Executive Committee. In the absence or incapacity of the Chairman of the Board, the President shall preside at all meetings of the Board of Directors, the stockholders and the Executive Committee. The President shall be the chief executive officer of the Corporation. Subject to the authority of the Board of Directors, the President shall be responsible for the general management of the business of the Corporation and shall be responsible for implementing the policies and programs of the Board of Directors. The President shall have the power to appoint such agents and employees as in the President's judgment may be necessary or proper for the transaction of the business of the Corporation, and shall determine their duties and recommend their compensation. The President shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. The President shall report to the Board of Directors through the Chairman of the Board. The Executive Vice Presidents and the Senior Vice Presidents shall perform such duties as may be delegated or prescribed by the President, the Board of Directors or the Executive Committee of the Corporation. EX-10.6 3 EXHBIT 10.6 1996 STOCK INCENT. PLAN EXHIBIT 10.6 HILTON HOTELS CORPORATION 1996 STOCK INCENTIVE PLAN SECTION 1. PURPOSE; DEFINITIONS The purpose of the Plan is to give the Corporation a competitive advantage in attracting, retaining and motivating officers and employees and to provide the Corporation and its subsidiaries with a stock plan providing incentives more directly linked to the profitability of the Corporation's businesses and increases in shareholder value. For purposes of the Plan, the following terms are defined as set forth below: a. "AFFILIATE" means a corporation or other entity controlled by the Corporation and designated by the Committee from time to time as such. b. "AWARD" means a Stock Appreciation Right or a Stock Option. c. "BOARD" means the Board of Directors of the Corporation. d. "CHANGE IN CONTROL" and "CHANGE IN CONTROL PRICE" have the meanings set forth in Sections 7(b) and (c), respectively. e. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. f. "COMMISSION" means the Securities and Exchange Commission or any successor agency. g. "COMMITTEE" means the Committee referred to in Section 2. h. "COMMON STOCK" means common stock, par value $2.50 per share, of the Corporation. i. "CORPORATION" means Hilton Hotels Corporation, a Delaware corporation. j. "DISABILITY" means permanent and total disability as determined under procedures established by the Committee for purposes of the Plan. k. "DISINTERESTED PERSON" means a member of the Board who qualifies as a disinterested person as defined in Rule 16b-3(c)(2), as promulgated by the Commission under the Exchange Act, or any successor definition adopted by the Commission. l. "RETIREMENT" means retirement from active employment with the Corporation, a subsidiary or Affiliate at or after age 62. m. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. n. "FAIR MARKET VALUE" means, except as provided in Section 6(b)(ii)(2), as of any given date, the mean between the highest and lowest reported sales prices of the Common Stock on the New York Stock Exchange Composite Tape or, if not listed on such exchange, on any other national securities exchange on which the Common Stock is listed or on NASDAQ. If there is no regular public trading market for such Common Stock, the Fair Market Value of the Common Stock shall be determined by the Committee in good faith. o. "INCENTIVE STOCK OPTION" means any Stock Option designated as, and qualified as, an "incentive stock option" within the meaning of Section 422 of the Code. p. "NONQUALIFIED STOCK OPTION" means any Stock Option that is not an Incentive Stock Option. q. "PLAN" means the Hilton Hotels Corporation 1996 Stock Incentive Plan, as set forth herein and as hereinafter amended from time to time. r. "RULE 16B-3" means Rule 16b-3, as promulgated by the Commission under Section 16(b) of the Exchange Act, as amended from time to time. s. "STOCK APPRECIATION RIGHT" means a right granted under Section 6. t. "STOCK OPTION" means an option granted under Section 5. u. "TERMINATION OF EMPLOYMENT" means the termination of the participant's employment with the Corporation and any subsidiary or Affiliate. A participant employed by a subsidiary or an Affiliate shall also be deemed to incur a Termination of Employment if the subsidiary or Affiliate ceases to be such a subsidiary or an Affiliate, as the case may be, and the participant does not immediately thereafter become an employee of the Corporation or another subsidiary or Affiliate. Temporary absences from employment because of illness, vacation or leave of absence and transfers among the Corporation and its subsidiaries and Affiliates shall not be considered Terminations of Employment. In addition, certain other terms used herein have definitions given to them in the first place in which they are used. SECTION 2. ADMINISTRATION The Plan shall be administered by the Stock Option Committee or such other committee of the Board as the Board may from time to time designate (the "Committee"), which shall be composed of not less than two Disinterested Persons, each of whom shall be an "outside director" for purposes of Section 162(m)(4) of the Code, and shall be appointed by and serve at the pleasure of the Board. The Committee shall have authority to make recommendations to the Board of Directors as to the granting of Awards pursuant to the terms of the Plan to officers and employees of the Corporation and its subsidiaries and Affiliates. Among other things, the Committee shall have the authority, subject to the terms of the Plan: (a) To select the officers and employees to whom Awards may from time to time be granted; (b) Determine whether and to what extent Incentive Stock Options, Nonqualified Stock Options and Stock Appreciation Rights or any combination thereof are to be granted hereunder; (c) Determine the number of shares of Common Stock to be covered by each Award granted hereunder; (d) Determine the terms and conditions of any Award granted hereunder (including, but not limited to, the option price (subject to Section 5(a)), any vesting condition, restriction or limitation (which may be related to the performance of the participant, the Corporation or any subsidiary or Affiliate) and any vesting acceleration or forfeiture waiver regarding any Award and the shares of Common Stock relating thereto, based on such factors as the Committee shall determine; (e) Modify, amend or adjust the terms and conditions of any Award, at any time or from time to time; and 2 (f) Determine to what extent and under what circumstances Common Stock and other amounts payable with respect to an Award shall be deferred. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall from time to time deem advisable, to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreement relating thereto) and to otherwise supervise the administration of the Plan. The Committee may act only by a majority of its members then in office, except that the members thereof may (i) delegate to an officer of the Corporation the authority to make decisions pursuant to paragraphs (c), (f), (g), (h) and (i) of Section 5 (provided that no such delegation may be made that would cause Awards or other transactions under the Plan to cease to be exempt from Section 16(b) of the Exchange Act) and (ii) authorize any one or more of their number or any officer of the Corporation to execute and deliver documents on behalf of the Committee. Any determination made by the Committee or pursuant to delegated authority pursuant to the provisions of the Plan with respect to any Award shall be made in the sole discretion of the Committee or such delegate at the time of the grant of the Award or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Committee or any appropriately delegated officer pursuant to the provisions of the Plan shall be final and binding on all persons, including the Corporation and Plan participants. SECTION 3. COMMON STOCK SUBJECT TO PLAN The total number of shares of Common Stock reserved and available for grant under the Plan shall be 1,500,000. No participant may be granted Awards covering in excess of 150,000 shares of Common Stock in any calendar year. Shares subject to an Award under the Plan may be authorized and unissued shares or may be treasury shares. If any Stock Option (and related Stock Appreciation Right, if any) terminates without being exercised, shares subject to such Awards shall again be available for distribution in connection with Awards under the Plan. In the event of any change in corporate capitalization, such as a stock split or a corporate transaction, any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Corporation, any reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Corporation, the Committee or Board may make such substitution or adjustments in the aggregate number and kind of shares reserved for issuance under the Plan, in the number, kind and option price of shares subject to outstanding Stock Options and Stock Appreciation Rights, in the number and kind of shares subject to other outstanding Awards granted under the Plan and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; PROVIDED, HOWEVER, that the number of shares subject to any Award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Corporation upon the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 4. ELIGIBILITY Full-time (30 hours per week) officers and employees of the Corporation, its subsidiaries and Affiliates who are responsible for or contribute to the management, growth and profitability of the business of the 3 Corporation, its subsidiaries and Affiliates are eligible to be granted Awards under the Plan. No grant shall be made under this Plan to a director who is not an officer or a salaried employee of the Corporation, its subsidiaries or Affiliates. SECTION 5. STOCK OPTIONS Stock Options may be granted alone or in addition to other Awards granted under the Plan and may be of two types: Incentive Stock Options and Nonqualified Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Committee shall have the authority to grant any optionee Incentive Stock Options, Nonqualified Stock Options or both types of Stock Options (in each case with or without Stock Appreciation Rights); PROVIDED, HOWEVER, that grants hereunder are subject to the aggregate limit on grants to individual participants set forth in Section 3. Incentive Stock Options may be granted only to employees of the Corporation and its subsidiaries (within the meaning of Section 424(f) of the Code). To the extent that any Stock Option is not designated as an Incentive Stock Option or even if so designated does not qualify as an Incentive Stock Option, it shall constitute a Nonqualified Stock Option. Stock Options shall be evidenced by option agreements, the terms and provisions of which may differ. An option agreement shall indicate on its face whether it is intended to be an agreement for an Incentive Stock Option or a Nonqualified Stock Option. The grant of a Stock Option shall occur on the date a majority of the independent directors of the Corporation ratify by resolution the Committee's recommendation with respect to the individuals to be participants in any grant of a Stock Option, the number of shares of Common Stock to be subject to such Stock Option to be granted to such individual and specifies the terms and provisions of the Stock Option. The Corporation shall notify a participant of any grant of Stock Option, and a written option agreement or agreements shall be duly executed and delivered by the Corporation to the participant. Such agreement or agreements shall become effective upon execution by the Corporation and the participant. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered nor shall any discretion or authority granted under the Plan be exercised so as to disqualify the Plan under Section 422 of the Code or, without the consent of the optionee affected, to disqualify any Incentive Stock Option under such Section 422. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions as the Committee shall deem desirable: (a) OPTION PRICE. The option price per share of Common Stock purchasable under a Stock Option shall be determined by the Committee and set forth in the option agreement, and shall not be less than the Fair Market Value of the Common Stock subject to the Stock Option on the date of grant. (b) OPTION TERM. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date the Stock Option is granted. (c) EXERCISABILITY. Except as otherwise provided herein, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. If the Committee provides that any Stock Option is exercisable only in installments, the Committee may at 4 any time waive such installment exercise provisions, in whole or in part,based on such factors as the Committee may determine. In addition, the Committee may at any time accelerate the exercisability of any Stock Option. (d) METHOD OF EXERCISE. Subject to the provisions of this Section 5, Stock Options may be exercised, in whole or in part, at any time during the option term by giving written notice of exercise to the Corporation specifying the number of shares of Common Stock subject to the Stock Option to be purchased. Such notice shall be accompanied by payment in full of the purchase price by certified or bank check or such other instrument as the Committee may accept. Payment, in full or in part, may also be made in the form of unrestricted Common Stock already owned by the optionee of the same class as the Common Stock subject to the Stock Option (based on the Fair Market Value of the Common Stock on the date the Stock Option is exercised). Payment for any shares subject to a Stock Option may also be made by delivering a properly executed exercise notice to the Corporation, together with a copy of irrevocable instructions to a broker to deliver promptly to the Corporation the amount of sale or loan proceeds to pay the purchase price, and, if requested, by the amount of any federal, state, local or foreign withholding taxes. To facilitate the foregoing, the Corporation may enter into agreements for coordinated procedures with one or more brokerage firms. No shares of Common Stock shall be issued until full payment therefor has been made. An optionee shall have all of the rights of a shareholder of the Corporation holding the class or series of Common Stock that is subject to such Stock Option (including, if applicable, the right to vote the shares and the right to receive dividends), when the optionee has given written notice of exercise, has paid in full for such shares and, if requested, has given the representation described in Section 11(a). (e) NONTRANSFERABILITY OF STOCK OPTIONS. No Stock Option shall be transferable by the optionee other than (i) by will or by the laws of descent and distribution; or (ii) in the case of a Nonqualified Stock Option, pursuant to a qualified domestic relations order (as defined in the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder) whether directly or indirectly or by means of a trust or partnership or otherwise, under the applicable option agreement. All Stock Options shall be exercisable, subject to the terms of this Plan, during the optionee's lifetime, only by the optionee or by the guardian or legal representative of the optionee or, in the case of a Nonqualified Stock Option, its alternative payee pursuant to such qualified domestic relations order, it being understood that the terms "holder" and "optionee" include the guardian and legal representative of the optionee named in the option agreement and any person to whom an option is transferred by will or the laws of descent and distribution or, in the case of a Nonqualified Stock Option, pursuant to a qualified domestic relations order. (f) TERMINATION BY DEATH. Unless otherwise determined by the Committee, if an optionee's employment terminates by reason of death, any Stock Option held by such optionee may thereafter be exercised, to the extent then exercisable, or on such accelerated basis as the Committee may determine, for a period of one year (or such other period as the Committee may specify in the option agreement) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. 5 (g) TERMINATION BY REASON OF DISABILITY. Unless otherwise determined by the Committee, if an optionee's employment terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination, or on such accelerated basis as the Committee may determine, for a period of six months(or such other period as the Committee may specify in the option agreement) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that if the optionee dies within such period, any unexercised Stock Option held by such optionee shall, notwithstanding the expiration of such period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of 12 months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Nonqualified Stock Option. (h) TERMINATION BY REASON OF RETIREMENT. Unless otherwise determined by the Committee, if an optionee's employment terminates by reason of Retirement, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of such Retirement, or on such accelerated basis as the Committee may determine, for a period of two years (or such other period as the Committee may specify in the option agreement) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that if the optionee dies within such period any unexercised Stock Option held by such optionee shall, notwithstanding the expiration of such period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of 12 months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Nonqualified Stock Option. (i) OTHER TERMINATION. Unless otherwise determined by the Committee: (A) if an optionee incurs a Termination of Employment, all Stock Options held by such optionee shall thereupon terminate; and (B) if an optionee incurs a Termination of Employment for any reason other than death, Disability or Retirement, any Stock Option held by such optionee, to the extent then exercisable, or on such accelerated basis as the Committee may determine, may be exercised, with the consent of the Corporation, for the lesser of three months from the date of such Termination of Employment or the balance of such Stock Option's term; PROVIDED, HOWEVER, that if the optionee dies within such three-month period, any unexercised Stock Option held by such optionee shall, notwithstanding the expiration of such three-month period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of 12 months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. Notwithstanding the foregoing, if an optionee incurs a Termination of Employment at or after a Change in Control (as defined Section 7(b)), other than by reason of death, Disability or Retirement, any Stock Option held by such optionee shall be exercisable for the lesser of (1) six months and one day from the date of such Termination of Employment, and (2) the balance of such Stock Option's term. In the event of Termination of Employment, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Nonqualified Stock Option. 6 (j) CHANGE IN CONTROL CASH-OUT. Notwithstanding any other provision of the Plan, during the 60-day period from and after a Change in Control (the "Exercise Period"), unless the Committee shall determine otherwise at the time of grant, an optionee shall have the right, whether or not the Stock Option is fully exercisable and in lieu of the payment of the exercise price for the shares of Common Stock being purchased under the Stock Option and by giving notice to the Corporation, to elect (within the Exercise Period) to surrender all or part of the Stock Option to the Corporation and to receive cash, within 30 days of such notice, in an amount equal to the amount by which the Change in Control Price per share of Common Stock on the date of such election shall exceed the exercise price per share of Common Stock under the Stock Option (the "Spread") multiplied by the number of shares of Common Stock granted under the Stock Option as to which the right granted under this Section 5(j) shall have been exercised; PROVIDED, HOWEVER, that if the Change in Control is within six months of the date of grant of a particular Stock Option held by an optionee who is an officer or director of the Corporation and is subject to Section 16(b) of the Exchange Act no such election shall be made by such optionee with respect to such Stock Option prior to six months from the date of grant. However, if the end of such 60-day period from and after a Change in Control is within six months of the date of grant of a Stock Option held by an optionee who is an officer or director of the Corporation and is subject to Section 16(b) of the Exchange Act, such Stock Option shall be cancelled in exchange for a cash payment to the optionee, effected on the day which is six months and one day after the date of grant of such Option, equal to the Spread multiplied by the number of shares of Common Stock granted under the Stock Option. Notwithstanding the foregoing, if any right granted pursuant to this Section 5(j) would make a Change in Control transaction ineligible for pooling of interests accounting under APB No. 16 that but for this Section 5(j) would otherwise be eligible for such accounting treatment, the Committee shall have the ability to substitute the cash payable pursuant to this Section 5(j) with Stock with a Fair Market Value equal to the cash that would otherwise be payable hereunder. SECTION 6. STOCK APPRECIATION RIGHTS (a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Nonqualified Stock Option, such rights may be granted either at or after the time of grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of grant of such Stock Option. A Stock Appreciation Right shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option. A Stock Appreciation Right may be exercised by an optionee in accordance with Section 6(b) by surrendering the applicable portion of the related Stock Option in accordance with procedures established by the Committee. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). Stock Options which have been so surrendered shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. (b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate are exercisable in accordance with the provisions of Section 5 and this Section 6; PROVIDED, HOWEVER, that a Stock Appreciation Right shall not be exercisable during the first six months of its term by an optionee who is actually or potentially subject to Section 16(b) of the Exchange Act, except that this limitation shall not apply in the event of death or Disability of the optionee prior to the expiration of the six-month period. 7 (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive an amount in cash, shares of Common Stock or both, equal in value to the excess of the Fair Market Value of one share of Common Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. In the case of Stock Appreciation Rights relating to Stock Options held by optionees who are actually or potentially subject to Section 16(b) of the Exchange Act, the Committee: (1) May require that such Stock Appreciation Rights be exercised for cash only in accordance with the applicable "window period" provisions of Rule 16b-3; and (2) In the case of Stock Appreciation Rights relating to Nonqualified Stock Options, may provide that the amount to be paid in cash upon exercise of such Stock Appreciation Rights during a Rule 16b-3 "window period" shall be based on the highest of the daily means between the highest and lowest reported sales prices of the Common Stock on the New York Stock Exchange or other national securities exchange on which the shares are listed or on NASDAQ, as applicable, on any day during such "window period." (iii) Stock Appreciation Rights shall be transferable only to permitted transferees of the underlying Stock Option in accordance with Section 5(e). (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 on the number of shares of Common Stock to be issued under the Plan, but only to the extent of the number of shares covered by the Stock Appreciation Right at the time of exercise based on the value of the Stock Appreciation Right at such time. SECTION 7. CHANGE IN CONTROL PROVISIONS (a) IMPACT OF EVENT. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change in Control, any Stock Options and Stock Appreciation Rights outstanding as of the date such Change in Control is determined to have occurred, and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; PROVIDED, HOWEVER, that in the case of the holder of Stock Appreciation Rights who is actually subject to Section 16(b) of the Exchange Act, such Stock Appreciation Rights shall have been outstanding for at least six months at the date such Change in control is determined to have occurred. (b) DEFINITION OF CHANGE IN CONTROL. For purposes of the Plan, a "Change in Control" shall mean the happening of any of the following events: (i) An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (1) the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities") (a "Control Purchase"); excluding, however, the following: (1) Any acquisition directly from the Corporation, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Corporation, (2) Any acquisition by the Corporation, 8 (3) Any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation, (4) Any acquisition by any corporation pursuant to a transaction which complies with clauses (1), (2) and (3) of subsection (iii) of this Section 7(b), or (5) Any acquisition by Barron Hilton, the Charitable Remainder Unitrust created by Barron Hilton to receive shares from the Estate of Conrad N. Hilton, or the Conrad N. Hilton Fund; or (ii) A change in the composition of the Board such that the individuals who, as of the effective date of the Plan, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; PROVIDED, HOWEVER, for purposes of this Section 7(b), that any individual who becomes a member of the Board subsequent to the effective date of the Plan, whose election, or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; but, PROVIDED FURTHER, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board (a "Board Change"); or (iii) The approval by the shareholders of the Corporation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation ("Corporate Transaction"); excluding however, such a Corporate Transaction pursuant to which (1) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, (2) no Person (other than the Corporation, any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such Corporate Transaction) will beneficially own, directly or indirectly, 20% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors except to the extent that such ownership existed prior to the Corporate Transaction, and (3) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or (iv) The approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation. (c) CHANGE IN CONTROL PRICE. For purposes of the Plan, "Change in Control Price" means the higher of (i) the highest reported sales price, regular way, of a share of Common Stock in any transaction reported on the New York Stock Exchange Composite Tape or other national exchange on which such shares are listed or 9 on NASDAQ during the 60-day period prior to and including the date of a Change in Control or (ii) if the Change in Control is the result of a tender or exchange offer or a Corporate Transaction, the highest price per share of Common Stock paid in such tender or exchange offer or Corporate Transaction; PROVIDED, HOWEVER, that (x) in the case of a Stock Option which (A) is held by an optionee who is an officer or director of the Corporation and is subject to Section 16(b) of the Exchange Act and (B) was granted within 240 days of the Change in Control, then the Change in Control Price for such Stock Option shall be the Fair Market Value of the Common Stock on the date such Stock Option is exercised or deemed exercised and (y) in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, the Change in Control Price shall be in all cases the Fair Market Value of the Common Stock on the date such Incentive Stock Option or Stock Appreciation Right is exercised. To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other noncash consideration, the value of such securities or other noncash consideration shall be determined in the sole discretion of the Board. SECTION 8. TERM, AMENDMENT AND TERMINATION The Plan will terminate ten years after the effective date of the Plan. Under the Plan, Awards outstanding as of such date shall not be affected or impaired by the termination of the Plan. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would (i) impair the rights of an optionee under a Stock Option or a recipient of a Stock Appreciation Right theretofore granted without the optionee's or recipient's consent, except such an amendment made to cause the Plan to qualify for the exemption provided by Rule 16b-3, or (ii) disqualify the Plan from the exemption provided by Rule 16b-3. In addition, no such amendment shall be made without the approval of the Corporation's shareholders to the extent such approval is required by law or agreement. The Committee may amend the terms of any Stock Option or other Award theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any holder without the holder's consent except such an amendment made to cause the Plan or Award to qualify for the exemption provided by Rule 16b-3. Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in law and tax and accounting rules as well as other developments, and to grant Awards which qualify for beneficial treatment under such rules without stockholder approval. SECTION 9. UNFUNDED STATUS OF PLAN It is presently intended that the Plan constitute an "unfunded" plan for incentive and deferred compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or make payments; PROVIDED, HOWEVER, that unless the Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. SECTION 10. GENERAL PROVISIONS (a) The Committee may require each person purchasing or receiving shares pursuant to an Award to represent to and agree with the Corporation in writing that such person is acquiring the shares without a view to the distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. 10 Notwithstanding any other provision of the Plan or agreements made pursuant thereto, the Corporation shall not be required to issue or deliver any certificate or certificates for shares of Common Stock under the Plan prior to fulfillment of all of the following conditions: (1) Listing or approval for listing upon notice of issuance, of such shares on the New York Stock Exchange, Inc., or such other securities exchange as may at the time be the principal market for the Common Stock; (2) Any registration or other qualification of such shares of the Corporation under any state or federal law or regulation, or the maintaining in effect of any such registration or other qualification which the Committee shall, in its absolute discretion upon the advice of counsel, deem necessary or advisable; and (3) Obtaining any other consent, approval, or permit from any state or federal governmental agency which the Committee shall, in its absolute discretion after receiving the advice of counsel, determine to be necessary or advisable. (b) Nothing contained in the Plan shall prevent the Corporation or any subsidiary or Affiliate from adopting other or additional compensation arrangements for its employees. (c) Adoption of the Plan shall not confer upon any employee any right to continued employment, nor shall it interfere in any way with the right of the Corporation or any subsidiary or Affiliate to terminate the employment of any employee at any time. (d) No later than the date as of which an amount first becomes includible in the gross income of the participant for federal income tax purposes with respect to any Award under the Plan, the participant shall pay to the Corporation, or make arrangements satisfactory to the Committee regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Corporation, withholding obligations may be settled with Common Stock, including Common Stock that is part of the Award that gives rise to the withholding requirement. The obligations of the Corporation under the Plan shall be conditional on such payment or arrangements, and the Corporation and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the participant. The Committee may establish such procedures as it deems appropriate, including making irrevocable elections, for the settlement of withholding obligations with Common Stock. (e) The Committee shall establish such procedures as it deems appropriate for a participant to designate a beneficiary to whom any amounts payable in the event of the participant's death are to be paid or by whom any rights of the participant, after the participant's death, may be exercised. (f) In the case of a grant of an Award to any employee of a subsidiary of the Corporation, the Corporation may, if the Committee so directs, issue or transfer the shares of Common Stock, if any, covered by the Award to the subsidiary, for such lawful consideration as the Committee may specify, upon the condition or understanding that the subsidiary will transfer the shares of Common Stock to the employee in accordance with the terms of the Award specified by the Committee pursuant to the provisions of the Plan. (g) The Plan and all Awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. SECTION 11. EFFECTIVE DATE OF PLAN The Plan shall be effective as of January 18, 1996, provided that it is approved and adopted by at least a majority of the shares voted of Common Stock of the Corporation within 12 months after such date. 11 EX-10.7 4 EXHBIT 10.7 1996 CHIEF EXEC. STOCK INCENT. PLAN EXHIBIT 10.7 HILTON HOTELS CORPORATION 1996 CHIEF EXECUTIVE STOCK INCENTIVE PLAN SECTION 1. PURPOSE; DEFINITIONS The purpose of the Plan is to give the Corporation a competitive advantage by attracting, retaining and motivating a Chief Executive Officer ("CEO") and to link the CEO's interests more directly to the profitability of the Corporation's businesses and increases in shareholder value. For purposes of the Plan, the following terms are defined as set forth below: a. "AFFILIATE" means a corporation or other entity controlled by the Corporation and designated by the Committee from time to time as such. b. "BOARD" means the Board of Directors of the Corporation. c. "CHANGE OF CONTROL" and "CHANGE OF CONTROL PRICE" have the meanings set forth in Sections 6(b) and (c), respectively. d. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. e. "COMMISSION" means the Securities and Exchange Commission or any successor agency. f. "COMMITTEE" means the Committee referred to in Section 2. g. "COMMON STOCK" means common stock, par value $2.50 per share, of the Corporation. h. "CORPORATION" means Hilton Hotels Corporation, a Delaware corporation. i. "DISABILITY" means permanent and total disability as determined under procedures established by the Committee for purposes of the Plan. j. "DISINTERESTED PERSON" means a member of the Board who qualifies as a disinterested person as defined in Rule 16b-3(c)(2), as promulgated by the Commission under the Exchange Act, or any successor definition adopted by the Commission. k. "EMPLOYMENT AGREEMENT" means the Employment Agreement by and between Hilton Hotels Corporation and Stephen F. Bollenbach dated as of the 1st day of February 1996. l. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. m. "FAIR MARKET VALUE" means, except as provided in Section 5(g), as of any given date, the mean between the highest and lowest reported sales prices of the Common Stock on the New York Stock Exchange Composite Tape or, if not listed on such exchange, on any other national securities exchange on which the Common Stock is listed or on NASDAQ. If there is no regular public trading market for such Common Stock, the Fair Market Value of the Common Stock shall be determined by the Committee in good faith. n. "PLAN" means the Hilton Hotels Corporation 1996 Chief Executive Stock Incentive Plan, as set forth herein and as hereinafter amended from time to time. o. "RULE 16B-3" means Rule 16b-3, as promulgated by the Commission under Section 16(b) of the Exchange Act, as amended from time to time. p. "STOCK OPTION" means an option granted under Section 5. q. "TERMINATION OF EMPLOYMENT" means the termination of the CEO's employment with the Corporation and any subsidiary or Affiliate. Temporary absences from employment because of illness, vacation or leave of absence shall not be considered Terminations of Employment. In addition, certain other terms used herein have definitions given to them in the first place in which they are used. SECTION 2. ADMINISTRATION The Plan shall be administered by the Stock Option Committee or such other committee of the Board as the Board may from time to time designate (the "Committee"), which shall be composed of not less than two Disinterested Persons, each of whom shall be an "outside director" for purposes of Section 162(m)(4) of the Code, and shall be appointed by and serve at the pleasure of the Board. The Committee shall have plenary authority to grant Stock Options pursuant to the terms of the Plan to the CEO. Among other things, the Committee shall have the authority, subject to the terms of the Plan, to: (a) Recommend to the Board of Directors whether and to what extent Stock Options are to be granted hereunder; (b) Determine the number of shares of Common Stock to be covered by each Stock Option granted hereunder; (c) Determine the terms and conditions of any Stock Option granted hereunder (including, but not limited to, the option price (subject to Section 5(a)), any vesting condition, restriction or limitation (which may be related to the performance of the optionee or the Corporation) and any vesting acceleration or forfeiture waiver regarding any Stock Option and the shares of Common Stock relating thereto, based on such factors as the Committee shall determine; (d) Modify, amend or adjust the terms and conditions of any Stock Option, at any time or from time to time; and (e) Determine to what extent and under what circumstances Common Stock and other amounts payable with respect to a Stock Option shall be deferred. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall from time to time deem advisable, to interpret the terms and provisions of the Plan and any Stock Option issued under the Plan (and any agreement relating thereto) and to otherwise supervise the administration of the Plan. The Committee may act only by a majority of its members then in office, except that the members thereof may (i) delegate to an officer of the Corporation the authority to make decisions pursuant to paragraphs (c) and (f) of Section 5 (provided that no such delegation may be made that would cause Stock Options or other transactions under the Plan to cease to be exempt from Section 16(b) of the Exchange Act) and (ii) authorize any one or more of their number or any officer of the Corporation to execute and deliver documents on behalf of the Committee. Any determination made by the Committee or pursuant to delegated authority pursuant to the provisions of the Plan with respect to any Stock Option shall be made in the sole discretion of the Committee or 2 such delegate at the time of the grant of the Stock Option or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Committee or any appropriately delegated officer pursuant to the provisions of the Plan shall be final and binding on all persons, including the Corporation and the CEO. SECTION 3. COMMON STOCK SUBJECT TO PLAN The total number of shares of Common Stock reserved and available for grant under the Plan shall be 1,500,000. The CEO may not be granted Stock Options covering in excess of 1,500,000 shares of Common Stock in any calendar year. Shares subject to a Stock Option under the Plan may be authorized and unissued shares or may be treasury shares. If any Stock Option terminates without being exercised, shares subject to such Stock Option shall again be available for distribution in connection with Stock Options under the Plan. In the event of any change in corporate capitalization, such as a stock split or a corporate transaction, any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Corporation, any reorganization (whether or not such reorganization comes within the efinition of such term in Section 368 of the Code) or any partial or complete liquidation of the Corporation, the Committee or Board may make such substitution or adjustments in the aggregate number and kind of shares reserved for issuance under the Plan, in the number, kind and option price of shares subject to outstanding Stock Options, in the number and kind of shares subject to other outstanding Stock Options granted under the Plan and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; PROVIDED, HOWEVER, that the number of shares subject to any Stock Option shall always be a whole number. SECTION 4. ELIGIBILITY Only the CEO is eligible to be granted Stock Options under the Plan. SECTION 5. STOCK OPTIONS Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Committee shall have the authority to grant the CEO Stock Options, PROVIDED, HOWEVER, that grants hereunder are subject to the aggregate annual limit on grants set forth in Section 3. Stock Options shall be evidenced by option agreements, the form, terms and provisions of which may differ. The grant of a Stock Option shall occur on the date (the "Grant Date") a majority of the independent directors of the Corporation ratify by resolution the Committee's recommendation with respect to the numbers of shares of Common Stock to be subject to such Stock Option and the terms and provisions of the Stock Option. Unless the Committee shall determine otherwise, Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions as the Committee shall deem desirable: (a) OPTION PRICE. The option price per share of Common Stock purchasable under a Stock Option shall be determined by the Committee and set forth in the Employment Agreement. 3 (b) OPTION TERM. The term of each Stock Option shall be fixed by the Committee. (c) EXERCISABILITY. Except as otherwise provided herein, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. If the Committee provides that any Stock Option is exercisable only in installments, the Committee may at any time waive such installment exercise provisions, in whole or in part, based on such factors as the Committee may determine. In addition, the Committee may at any time accelerate the exercisability of any Stock Option. (d) METHOD OF EXERCISE. Subject to the provisions of this Section 5, Stock Options may be exercised, in whole or in part, at any time during the option term by giving written notice of exercise to the Corporation specifying the number of shares of Common Stock subject to the Stock Option to be purchased. Such notice shall be accompanied by payment in full of the purchase price by certified or bank check or such other instrument as the Committee may accept. If approved by the Committee, payment, in full or in part, may also be made in the form of unrestricted Common Stock already owned by the optionee of the same class as the Common Stock subject to the Stock Option (based on the Fair Market Value of the Common Stock on the date the Stock Option is exercised). Payment for any shares subject to a Stock Option may also be made by delivering a properly executed exercise notice to the Corporation, together with a copy of irrevocable instructions to a broker to deliver promptly to the Corporation the amount of sale or loan proceeds to pay the purchase price, and, if requested, by the amount of any federal, state, local or foreign withholding taxes. To facilitate the foregoing, the Corporation may enter into agreements for coordinated procedures with one or more brokerage firms. No shares of Common Stock shall be issued until full payment therefor has been made. The optionee shall have all of the rights of a shareholder of the Corporation holding the class or series of Common Stock that is subject to such Stock Option (including, if applicable, the right to vote the shares and the right to receive dividends), when the optionee has given written notice of exercise and has paid in full for such shares. (e) NONTRANSFERABILITY OF STOCK OPTIONS. No Stock Option shall be transferable by the optionee other than (i) by will or by the laws of descent and distribution; or (ii) pursuant to a qualified domestic relations order (as defined in the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended. All Stock Options shall be exercisable, subject to the terms of this Plan, during the optionee's lifetime, only by the optionee or by the guardian or legal representative of the optionee or its alternative payee pursuant to such qualified domestic relations order, it being understood that the terms "holder" and "optionee" include the guardian and legal representative of the optionee and any person to whom an option is transferred by will or the laws of descent and distribution or pursuant to a qualified domestic relations. (f) TERMINATION. Unless otherwise determined by the Committee and subject to the terms of the Employment Agreement, if the optionee's employment terminates for any reason prior to the fifth anniversary of the Grant Date, any Stock Option held by the optionee, to the extent such option has become exercisable on or before the date of such termination (including without limitation, any portion that becomes exercisable because of such termination) shall remain exercisable until the earlier to occur of (x) the first anniversary of such date of termination or (y) the fifth anniversary of the Grant Date. 4 (g) CASHING OUT OF STOCK OPTION. On receipt of written notice of exercise, the Committee may elect to cash out all or part of the portion of the shares of Common Stock for which a Stock Option is being exercised by paying the optionee an amount, in cash or Common Stock, equal to the excess of the Fair Market Value of the Common Stock over the option price times the number of shares of Common Stock for which the Option is being exercised on the effective date of such cash-out. Cash-outs pursuant to this Section 5(g) shall comply with the "window period" provisions of Rule 16b-3, to the extent applicable, and the Committee may determine Fair Market Value based on the highest and lowest reported sales prices of the Common Stock on the New York Stock Exchange or other national securities exchange on which the shares are listed or on NASDAQ, as applicable, on any day during such "window period". (h) CHANGE OF CONTROL CASH-OUT. The Committee may, but need not, determine at the time of grant that, during the 60-day period from and after a Change of Control (the "Exercise Period"), the optionee shall have the right, whether or not the Stock Option is fully exercisable and in lieu of the payment of the exercise price for the shares of Common Stock being purchased under the Stock Option and by giving notice to the Corporation, to elect (within the Exercise Period) to surrender all or part of the Stock Option to the Corporation and to receive cash, within 30 days of such notice, in an amount equal to the amount by which the Change of Control Price per share of Common Stock on the date of such election shall exceed the exercise price per share of Common Stock under the Stock Option (the "Spread") multiplied by the number of shares of Common Stock granted under the Stock Option as to which the right granted under this Section 5(h) shall have been exercised; PROVIDED, HOWEVER, that if the Change of Control is within six months of the date of grant of a particular Stock Option, no such election shall be made by the optionee with respect to such Stock Option prior to six months from the date of grant. However, if the end of such 60-day period from and after a Change of Control is within six months of the date of grant of a Stock Option, such Stock Option shall be canceled in exchange for a cash payment to the optionee, effected on the day which is six months and one day after the date of grant of such Option, equal to the Spread multiplied by the number of shares of Common Stock granted under the Stock Option. Notwithstanding the foregoing, if any right granted pursuant to this Section 5(h) would make a Change of Control transaction ineligible for pooling of interests accounting under APB No. 16 that but for this Section 5(h) would otherwise be eligible for such accounting treatment, the Committee shall have the ability to substitute the cash payable pursuant to this Section 5(h) with Stock with a Fair Market Value equal to the cash that would otherwise be payable hereunder. SECTION 6. CHANGE OF CONTROL PROVISIONS (a) IMPACT OF EVENT. Notwithstanding any other provision of the Plan to the contrary, unless the Committee shall determine otherwise, in the event of a Change of Control, any Stock Options outstanding as of the date such Change of Control is determined to have occurred, and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant. (b) DEFINITION OF CHANGE OF CONTROL. For purposes of the Plan, a "Change of Control" shall mean the happening of any of the following events: (i) An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (1) the then outstanding shares of 5 common stock of the Corporation (the "Outstanding Corporation Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities")(a "Control Purchase"); excluding, however, the following:(1) Any acquisition directly from the Corporation, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Corporation, (2) Any acquisition by the Corporation, (3) Any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation, (4) Any acquisition by any corporation pursuant to a transaction which complies with clauses (1), (2) and (3) of subsection (iii) of this Section 6(b), or (5) Any acquisition by Barron Hilton, the Charitable Remainder Unitrust created by Barron Hilton to receive shares from the Estate of Conrad N. Hilton, or the Conrad N. Hilton Fund (together, the "Hilton Interests"); or (ii) A change in the composition of the Board such that the individuals who, as of the effective date of the Plan, constitute the Board (such Board shall be herein after referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; PROVIDED, HOWEVER, for purposes of this Section 6(b), that any individual who becomes a member of the Board subsequent to the effective date of the Plan, whose election, or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; but, PROVIDED FURTHER, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board (a "Board Change"); or (iii) The approval by the shareholders of the Corporation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation ("Corporate Transaction"); excluding however, such a Corporate Transaction pursuant to which (1) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 50% of, respectively, the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, (2) no Person (other than the Hilton Interests, the Corporation, any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such Corporate Transaction) will beneficially own, directly or indirectly, 20% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors except to the extent that such 6 ownership existed prior to the Corporate Transaction, and (3) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or (iv) The approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation. (c) CHANGE OF CONTROL PRICE. For purposes of the Plan, "Change of Control Price" means the higher of (i) the highest reported sales price, regular way, of a share of Common Stock in any transaction reported on the New York Stock Exchange Composite Tape or other national exchange on which such shares are listed or on NASDAQ during the 60-day period prior to and including the date of a Change of Control or (ii) if the Change of Control is the result of a tender or exchange offer or a Corporate Transaction, the highest price per share of Common Stock paid in such tender or exchange offer or Corporate Transaction; PROVIDED, HOWEVER, that in the case of a Stock Option which (A) is held by an optionee who is an officer or director of the Corporation and is subject to Section 16(b) of the Exchange Act and (B) was granted within 240 days of the Change of Control, then the Change of Control Price for such Stock Option shall be the Fair Market Value of the Common Stock on the date such Stock Option is exercised or deemed exercised. To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other noncash consideration, the value of such securities or other noncash consideration shall be determined in the sole discretion of the Board. SECTION 7. TERM, AMENDMENT AND TERMINATION The Plan will terminate five years after the effective date of the Plan. Under the Plan, Stock Options outstanding as of such date shall not be affected or impaired by the termination of the Plan. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would (i) impair the rights of the optionee under a Stock Option theretofore granted without the optionee's consent, except such an amendment made to cause the Plan to qualify for the exemption provided by Rule 16b-3, or (ii) disqualify the Plan from the exemption provided by Rule 16b-3. In addition, no such amendment shall be made without the approval of the Corporation's shareholders to the extent such approval is required by law or agreement. The Committee may amend the terms of any Stock Option theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of the holder without the holder's consent except such an amendment made to cause the Plan or Stock Option to qualify for the exemption provided by Rule 16b-3. Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in law and tax and accounting rules as well as other developments, and to grant Stock Options which qualify for beneficial treatment under such rules without stockholder approval. SECTION 8. UNFUNDED STATUS OF PLAN It is presently intended that the Plan constitute an "unfunded" plan for incentive and deferred compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or make payments; PROVIDED, HOWEVER, that unless the Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. 7 SECTION 9. GENERAL PROVISIONS (a) Notwithstanding any other provision of the Plan or agreements made pursuant thereto, the Corporation shall not be required to issue or deliver any certificate or certificates for shares of Common Stock under the Plan prior to fulfillment of all of the following conditions: (1) Listing or approval for listing upon notice of issuance, of such shares on the New York Stock Exchange, Inc., or such other securities exchange as may at the time be the principal market for the Common Stock; (2) Any registration or other qualification of such shares of the Corporation under any state or federal law or regulation, or the maintaining in effect of any such registration or other qualification which the Committee shall, in its absolute discretion upon the advice of counsel, deem necessary or advisable; and (3) Obtaining any other consent, approval, or permit from any state or federal governmental agency which the Committee shall, in its absolute discretion after receiving the advice of counsel, determine to be necessary or advisable. (b) Nothing contained in the Plan shall prevent the Corporation or any subsidiary or Affiliate from adopting other or additional compensation arrangements for its employees. (c) Adoption of the Plan shall not confer upon the CEO any right to continued employment, nor shall it interfere in any way with the right of the Corporation or any subsidiary or Affiliate to terminate the employment of the CEO at any time. (d) No later than the date as of which an amount first becomes includible in the gross income of the CEO for federal income tax purposes with respect to any Stock Option under the Plan, the CEO shall pay to the Corporation, or make arrangements satisfactory to the Committee regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Corporation, withholding obligations may be settled with Common Stock, including Common Stock that is part of the Stock Option that gives rise to the withholding requirement. The obligations of the Corporation under the Plan shall be conditional on such payment or arrangements, and the Corporation and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the optionee. The Committee may establish such procedures as it deems appropriate, including making irrevocable elections, for the settlement of withholding obligations with Common Stock. (e) The Committee shall establish such procedures as it deems appropriate for the CEO to designate a beneficiary to whom any amounts payable in the event of the CEO's death are to be paid or by whom any rights of the CEO, after the CEO's death, may be exercised. (f) The Plan and all Stock Options made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. SECTION 10. EFFECTIVE DATE OF PLAN The Plan shall be effective as of February 1, 1996, provided that it is approved and adopted by at least a majority of the shares of Common Stock of the Corporation voting at its annual meeting scheduled to be held on May 9, 1996. 8 EX-10.11 5 EXHIBIT 10.11 FIRST AMEND. RETIREMENT PLAN EXHIBIT 10.11 FIRST AMENDMENT OF HILTON HOTELS RETIREMENT PLAN (As Amended and Restated Effective January 1, 1987) WHEREAS, Hilton Hotels Corporation (the "Company") maintains the Hilton Hotels Retirement Plan (the "Plan"); and WHEREAS, it is desirable that the Plan be amended to provide that (1) a terminated participant whose vested accrued benefit has a lump sum actuarial equivalent of $3,500 or less shall receive his benefit in the form of an immediate cash payment, (2) the actuarial equivalent of a participant's accrued benefit payable in a lump sum shall be determined using the interest rate and mortality assumptions prescribed by Internal Revenue Code Section 417(e)(3) as amended by the Uruguay Round Agreements Act of 1994 ("GATT"), and (3) the GATT interest rate and mortality assumptions in effect for the November preceding the Plan Year in which distribution is made (e.g., November 1994 for the 1995 Plan Year) shall apply to all participants and certain beneficiaries under the Plan who have not commenced distribution of their benefits as of the date this amendment is adopted; and WHEREAS, The Hilton Hotels Pension Committee (the "Committee") and the Board of Directors of the Company have granted the Company the authority to adopt any amendments to the Plan which do not have the effect of increasing the liability of a Participating Employer in a manner which would cause a significant detriment to such Participating Employer; and WHEREAS, nothing in this amendment creates a significant detriment or increases the duties of the Committee under the Plan. NOW, THEREFORE, BE IT RESOLVED, by virtue and in exercise of the power reserved to the Company by Section 8.1 of the Plan, the Plan, as previously amended, be and is hereby further amended, effective as of January 1, 1995 unless otherwise noted, in the following particulars: * * * 1. The first sentence of Section 4.9(d) of the Plan is amended to read as follows: "(d) In the event the Actuarial Equivalent of a Participant's vested accrued benefit determined as of his Break in Employment, or the Surviving Spouse Benefit, is $3,500 or less, the Committee shall pay such Actuarial Equivalent in the form of a single cash lump sum as soon as administratively feasible, in lieu of all other benefits under the Plan." 2. Section 4.9(d) of the Plan is further amended by adding the following at the end thereof: "Notwithstanding Appendix A and the foregoing provisions of this subsection (d), if the lump sum Actuarial Equivalent of (i) the vested accrued benefit of a Participant who incurred a Break in Employment prior to November 15, 1995 and who has not received a distribution prior to November 15, 1995, or (ii) a Surviving Spouse Benefit attributable to the death of a Participant prior to November 15, 1995, which benefit has not been distributed prior to November 15, 1995, is $3,500 or less, such benefit shall be paid in a single cash lump sum as soon as administratively feasible after November 15, 1995. The Actuarial Equivalent for such distributions shall be determined by applying the interest and mortality factors applicable to 1995, as adopted by the First Amendment to the Plan (as amended and restated effective January 1, 1987)." 3. Appendix A of the Plan is amended by revising that portion of the first sentence of Section A.1 immediately following the first semicolon thereunder to read as follows: "provided, however, that for cash lump sum calculation purposes, 'Actuarial Equivalent' shall mean an amount of equivalent value when computed using (i) for cash lump sum distributions made prior to January 1, 1995, the average of the weekly bond yield on the Standard & Poor's AAA Industrial Bond Index for the four weeks preceding the Annuity Starting Date, but no greater than (A) 120% of the 'Applicable Interest Rate' if the present value of the vested accrued benefit exceeds $25,000 (determined using the 'Applicable Interest Rate') and provided that the use of 120% of such rate does not reduce the present value of the benefit below $25,000, or (B) the 'Applicable Interest Rate,' and (ii) for cash lump sum distributions made on or after November 15, 1995, the `applicable mortality table' and the `applicable interest rate' as described in Section 417(e)(3) of the Code for the November immediately preceding the Plan Year in which the distribution is made." 4. Appendix A of the Plan is further amended, effective as of January 1, 1987, by inserting "of 1%" immediately after "0.25" thereunder. 2 IN WITNESS WHEREOF, the Company has caused this amendment to be signed on its behalf by its duly authorized officer as of the_________day of _________________, 1995. HILTON HOTELS CORPORATION By ----------------------- Its ---------------------- 3 EX-10.19 6 EXHIBIT 10.19 FIRST AMEND. THRIFT SAVINGS PLAN EXHIBIT 10.19 FIRST AMENDMENT TO HILTON HOTELS THRIFT SAVINGS PLAN WHEREAS, Hilton Hotels Corporation (the "Company") maintains the Hilton Hotels Thrift Savings Plan (the "Plan"); and WHEREAS, the IRS has requested that certain changes be made to the Plan so that the IRS may issue a favorable determination letter with respect to the Plan's tax qualification; and WHEREAS, Section 8.3 of the Plan provides that the Plan may be amended at any time if necessary to conform to the provisions and requirements of the Internal Revenue Code. NOW, THEREFORE, BE IT RESOLVED, by virtue and in exercise of the power reserved to the Company pursuant to Section 8.3 of the Plan, such Plan is hereby amended effective January 1, 1991 in the following particulars: 1. The definition of "Compensation" contained in Article I of the Plan is amended by revising the second paragraph thereunder in its entirety to read as follows: "Notwithstanding the foregoing, for purposes of Section 3.5 of this Plan, Compensation shall mean compensation actually paid by the Company to the Participant during the Plan Year and reportable for federal income tax purposes on Form W-2, reduced by the amounts described in Treas. Reg. Section 1.414(s)-1(c)(3)." 2. Section 3.5 of the Plan is amended by adding the following new subsection (f): "(f) For purposes of performing the tests described in this Section: (1) if, for purposes of meeting the requirements of Sections 401(m), 401(a)(4) and 410(b) of the Code (other than Section 410(b)(2)(A)(ii) of the Code), this Plan is aggregated with any other plan(s) of the Company which provide for elective deferrals, employer matching and/or employee after-tax contributions, then all contributions subject to Section 401(m) of the Code that are made under this Plan and such other plan(s) shall be treated as having been made under one plan; and (2) if any Highly Compensated Employee under this Plan participates in any other plan(s) of the Company which provide for elective deferrals, employer matching and/or employee after-tax contributions, then all contributions subject to Section 401(m) of the Code that are made by such Highly Compensated Employee under this Plan and such other plan(s) shall be treated as having been made under one plan." Date: ______________________, 1995. HILTON HOTELS CORPORATION By _______________________________ EX-10.21 7 EXHIBIT 10.21 EMPLOYMENT AGREEMENT EXHIBIT 10.21 EMPLOYMENT AGREEMENT AGREEMENT by and between Hilton Hotels Corporation, a Delaware corporation (the "Company"), and Stephen F. Bollenbach (the "Executive"), dated as of the 1st day of February, 1996. WHEREAS, the Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to employ the Executive as President and Chief Executive Officer, and the Executive desires to serve in that capacity; NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. EMPLOYMENT PERIOD. The Company shall employ the Executive, and the Executive shall serve the Company, on the terms and conditions set forth in this Agreement, for the period beginning on the date first above appearing (the "Commencement Date") and ending on the fifth anniversary of the Commencement Date (the "Employment Period"). 2. POSITION AND DUTIES. (a) During the Employment Period, the Executive shall be employed as the President and Chief Executive Officer and commencing with the Company's 1996 annual meeting of shareholders, shall be a member of the Board of Directors of the Company. In such capacity, the Executive shall report to the Board through the Chairman of the Board. During the Employment Period, no executive of the Company other than the Executive shall have a direct reporting relationship with the Chairman of the Board. During the Employment Period, the Executive shall have authority to make all operating decisions, plan the strategic direction of the Company, and hire, promote and terminate employment of all personnel, subject to the direction of the Board. During the Employment Period, the Executive shall have such reasonable and customary powers as are generally associated with the positions of President and Chief Executive Officer, including, without limitation, authority to expend capital resources of the Company and shall have, subject to the direction of the Board, authority to fill all management positions including, without limitation, the position of Chief Financial Officer, which position shall entitle its holder to an annual base salary of up to approximately $450,000, an annual target incentive bonus in the range of up to 50 to 70 per cent of base salary, and a grant of stock options under the Company's stock incentive plans to purchase up to 50,000 shares of the Company's common stock. (b) If, during the Employment Period, Barron Hilton shall cease to serve as Chairman of the Board for any reason, the Executive thereupon shall become Chairman of the Board in addition to President and Chief Executive Officer and shall, as Chairman, report directly to the Board. -2- (c) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote principal attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive under this Agreement, use the Executive's reasonable best efforts to carry out such responsibilities faithfully and efficiently. It shall not be considered a violation of the foregoing for the Executive to (A) serve on corporate, civic or charitable boards or committees (excluding those which would create a conflict of interest), (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not materially interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. (d) The Executive's services shall be performed primarily at the Company's Headquarters in Beverly Hills, California. (e) From time to time during the Employment Period, the Personnel and Compensation Committee of the Company's Board of Directors (the "P&C Committee") shall consider whether, in its good faith judgment, the Executive is -3- endowed with authority comparable to that typically granted to chief executive officers of publicly held companies ("Appropriate Authority"). If the P&C Committee shall determine that the Executive does not have Appropriate Authority and such determination is not cured within 90 days after the other members of the Board have received notice of such determination, the Executive may, but need not, terminate his employment with the Company, and such termination shall be a termination for Good Reason for all purposes under this Agreement. 3. COMPENSATION. (a) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary") of $540,000, payable in accordance with the regular payroll practices of the Company. During the Employment Period, the Annual Base Salary shall be reviewed for possible increase at least annually, with any increase being at the sole discretion of the Board or the P&C Committee. Any increase in the Annual Base Salary shall not limit or reduce any other obligation of the Company under this Agreement. The Annual Base Salary shall not be reduced after any such increase, and the term "Annual Base Salary" shall thereafter refer to the Annual Base Salary as so increased. -4- (b) ANNUAL BONUS. In addition to the Annual Base Salary, the Executive shall be eligible to receive, for each fiscal year or portion of a fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") (either pursuant to the Company's annual incentive plan or otherwise) with an annual target award opportunity of up to 100 per cent of Annual Base Salary provided that the Executive shall receive a minimum guaranteed award for 1996 in an amount equal to the remainder of $1,000,000 minus the amount of Annual Base Salary actually paid to the Executive in 1996. Each Annual Bonus shall be paid in a single cash lump sum no later than 90 days after the end of the fiscal year or portion thereof for which the Annual Bonus is awarded, unless the Executive elects in writing, before the beginning of the fiscal year for which the Annual Bonus is to be awarded (or at such later date as may be permitted under the Company's generally applicable policies or procedures), to defer receipt of the Annual Bonus. (c) OTHER BENEFITS. During the Employment Period: (i) the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs of the Company to at least the same extent as other senior executives of the Company, provided that in determining the Executive's participation in such plans the Incentive Options granted hereunder shall be taken -5- into account; and (ii) the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in, and shall receive all benefits under, all welfare benefit plans, practices, policies and programs provided by the Company (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life insurance, group life insurance, accidental death and travel accident insurance plans and programs) to at least the same extent as other senior executives of the Company. (d) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in carrying out the Executive's duties under this Agreement, provided that the Executive complies with the generally applicable policies, practices and procedures of the Company for submission of expense reports, receipts, or similar documentation of such expenses. (e) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits and perquisites in accordance with the most favorable plans, practices, programs and policies of the Company as in effect at the time with respect to other senior executives of the Company, including, without limitation, the use of an automobile and payment of related expenses; reasonable travel on -6- the Company's aircraft; and first-class travel accommodations on all commercial carriers for travel related to the business of the Company. (f) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to the office at the Company's Beverly Hills Headquarters last occupied by Mr. Raymond C. Avansino, Jr. during Mr. Avansino's tenure as President and Chief Operating Officer of the Company, and to secretarial and other assistance, at least equal to the most favorable of such as provided with respect to other senior executives of the Company. Without limiting the generality of the foregoing, the Executive shall at all times have a personal secretary and a personal assistant. (g) VACATION. During the Employment Period, the Executive shall be entitled to four weeks of paid vacation annually. (h) STOCK OPTIONS: (i) The Executive was granted non-statutory stock options under the Company's 1996 Chief Executive Stock Incentive Plan (the "Stock Plan") covering 1,500,000 shares of the Company's common stock with an exercise price equal to $74.6875 per share (the "Incentive Options"). The Company shall register with the Securities and Exchange Commission under the Securities Act of 1933, as amended, the shares issuable upon the exercise of the -7- Incentive Options not later than January 1, 1997. No Incentive Option shall be exercisable more than 5 years after the date the Incentive Option is granted. The Incentive Options shall vest and become exercisable according to the following schedule: (1) 25%: on January 1, 1997. (2) 50%: on January 1, 1998. (3) 75%: on January 1, 1999. (4) 100%: on January 1, 2000, or upon a Change of Control or a Qualified Transaction (each as defined below) or upon the occurrence of any of the following events (each of (A), (B) and (C) below a "Triggering Event"): (A) termination of the Executive's employment by the Company other than for Cause; (B) termination of the Executive's employment because of death or Disability; or (C) termination of employment by the Executive for Good Reason (as defined below). -8- (ii) In the event of the Executive's termination of employment for any reason prior to the fifth anniversary of the Commencement Date, any portion of the Incentive Options that have become vested on or before the date of such termination (including without limitation, any portion that becomes exercisable due to such termination) shall remain exercisable until the earlier to occur of (x) the first anniversary of such date of termination or (y) the fifth anniversary of the Commencement Date. Notwithstanding the foregoing, in the event that the Executive receives the Substitute Payment, the Incentive Option shall cease to be exercisable at the end of the fifth trading day after the Executive receives the Substitute Payment. (iii) Notwithstanding the foregoing, the Incentive Options shall terminate if the Plan is not approved by a majority of the shares of common stock of the Company voting at its annual meeting scheduled to be held on May 6, 1996. The Company will use its reasonable best efforts to secure such shareholder approval. If such approval is not obtained and unless the Company elects to implement a similar award without obtaining such approval, this Agreement and the Executive's employment with the Company shall terminate immediately, the Company shall pay to the Executive $10,000,000, and the Company thereafter shall have no further -9- obligations under this Agreement and the Executive's sole obligations shall be those set forth in Section 9 hereof. (i) SUBSTITUTE PAYMENT. (1) Notwithstanding any other provision hereof, upon the earlier to occur of: (A) a Triggering Event; or (B) a termination of employment by the Executive without Good Reason on or after the third anniversary of the Commencement Date, the Executive shall be entitled to receive a payment (the "Substitute Payment") not to exceed $20,000,000, equal to the excess, if any, of (x) $20,000,000 over (y) the sum of A plus B, where "A" equals the product of (i) the excess of the Fair Market Value of the Company's Common Stock on the date the Executive becomes entitled to receive the Substitute Payment over the Fair Market Value of the Company's Common Stock on the Commencement Date times (ii) 1,500,000 less the sum of (x) the number of shares of Company common stock acquired upon exercise and disposal of which are referred to in clause (i) of B below, (y) the number of shares of Company common stock acquired upon exercise and referred to in clause (ii) of B below and (z) the number of shares of the Company's Common Stock subject to the Incentive Option that are not vested following the event giving rise to the right to the Substitute Payment; and "B" equals the sum of (i) the aggregate gain, if any, realized by the Executive on the disposition prior to the date the Executive becomes entitled to receive the Substitute Payment of shares of the Company's Common Stock acquired via exercise of Incentive Options, and (ii) the excess, if any, of the Fair Market Value of any shares of the Company's common stock held by the Executive on the date -10- the Executive becomes entitled to the Substitute Payment acquired via the exercise of Incentive Options, over the price paid for those shares. (2) The Executive may elect to receive the Substitute Payment either in cash or the Company's common stock based on the Fair Market Value of such stock on the date the Executive becomes entitled to receive the Substitute Payment, provided, however, that the Company shall have the right to require that the Substitute Payment be made in shares of the Company's common stock if, in the opinion of the Company's accountants, payment of the Substitute Payment in cash would make any transaction ineligible for pooling of interests accounting under APB No. 16 that but for payment of the Substitute Payment in cash would otherwise be eligible for such accounting treatment. The Company shall register any shares issuable in respect of the Substitute Payment with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended. (3) The Executive may assign the right to receive the Substitute Payment to a family partnership designated by the Executive. -11- (4) If the Executive becomes entitled to receive the Substitute Payment because the Executive's employment terminates because of death or Disability, then subparagraphs (1), (2) and (3), above, shall apply with "the Executive or his estate or legal representative" substituted for "the Executive" and "$10,000,000" substituted for "$20,000,000." (j) LOAN. On the Commencement Date, the Company will lend the Executive $5,000,000 (the "Loan"). The Loan will be full recourse and will be due and payable on the earlier of (x) January 1, 2000, and (y) the termination of the Executive's employment, and will bear interest, compounded semi-annually, at 100 per cent of the applicable federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended. The Loan shall be prepayable by the Executive at any time without penalty. The Loan will be secured by a security interest which the Executive will grant the Company in (i) the net number of shares of the Company's common stock (after the payment of any associated tax liability) acquired by the Executive via exercise of Incentive Options, (ii) the Substitute Payment and (iii) the payment, if any, referred to in Section 3(h)(iii), provided that the Company shall release such security interest from any shares as to which the Executive gives the Company notice of his intent sell, so long as the -12- Executive makes arrangements reasonably satisfactory to the Company to apply the net after tax proceeds of such sale to repay such Loan. The Company, in lieu of receiving the security interest described in the preceding sentence, may elect to withhold a portion of the Substitute Payment equal to the total outstanding amount due under the Loan as of the date the Executive becomes entitled to receive the Substitute Payment, such withheld amount, if any, to be in full satisfaction of the Executive's repayment obligations under the terms of the Loan. 4. CERTAIN DEFINITIONS. For purposes of this Agreement: (a) "Change of Control" shall have the meaning assigned thereto in the Stock Plan. (b) A "Qualified Transaction" means a disposition (whether by sale, spin-off, merger or otherwise) of substantially all of the assets comprising either the Company's hotel business or the Company's gaming business occuring (i) on or before June 30, 1998 or (ii) on or before December 31, 1998, pursuant to a binding written contract entered into on or before June 30, 1998. 5. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment -13- Period. The Company shall be entitled to terminate the Executive's employment because of the Executive's Disability during the Employment Period. "Disability" means that (i) the Executive has been unable, for a period of 180 consecutive business days, to perform the Executive's duties under this Agreement, as a result of physical or mental illness or injury, and (ii) a physician selected by the Company or its insurers, and acceptable to the Executive or the Executive's legal representative, has determined that the Executive's incapacity is total and permanent. A termination of the Executive's employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), unless the Executive returns to full-time performance of the Executive's duties before the Disability Effective Date. (b) BY THE COMPANY. (i) The Company may terminate the Executive's employment during the Employment Period for Cause or without Cause. "Cause" means: A. the willful and continued failure of the Executive substantially to perform the Executive's duties under this Agreement (other than as a result of physical or mental illness or injury), after the Board delivers to the Executive a written demand for substantial performance that specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties; -14- B. illegal conduct or gross misconduct by the Executive, in either case that is willful and results in material and demonstrable damage to the business or reputation of the Company; or C. a breach of the covanants or representations contained in Section 9. (ii) A termination of the Executive's employment for Cause shall be effected in accordance with the following procedures. The Company shall give the Executive written notice ("Notice of Termination for Cause") of its intention to terminate the Executive's employment for Cause, setting forth in reasonable detail the specific conduct of the Executive that it considers to constitute Cause and the specific provision(s) of this Agreement on which it relies, and stating the date, time and place of the Special Board Meeting. The "Special Board Meeting" means a meeting of the Board called and held specifically for the purpose of considering the Executive's termination for Cause, that takes place not less than five and not more than fifteen business days after the Executive receives the Notice of Termination for Cause. The Executive shall be given an opportunity, together with counsel, to be heard at the Special Board Meeting. The Executive's termination for Cause shall be effective when and if a resolution is duly adopted at the Special Board Meeting, stating that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in the Notice of -15- Termination for Cause, and such conduct constitutes Cause under this Agreement. (c) GOOD REASON. (i) The Executive may terminate employment for Good Reason or without Good Reason. "Good Reason" means: A. the assignment to the Executive of any duties inconsistent in any material respect with paragraph (a) or, if applicable, (b) of Section 2 of this Agreement, or any other action by the Company that results in a material diminution in the Executive's position, authority, duties or responsibilities, other than an action that is not taken in bad faith and is remedied by the Company promptly after receipt of notice thereof from the Executive; B. any material failure by the Company to comply with any provision of Section 3 of this Agreement, other than a failure that is not taken in bad faith and is remedied by the Company promptly after receipt of notice thereof from the Executive; C. any requirement by the Company that the Executive's services be rendered primarily at a location or locations other than that provided for in paragraph (d) of Section 2 of this Agreement, other than normal business travel; D. any purported termination of the Executive's employment by the Company for a reason or in a manner not expressly permitted by this Agreement; or E. any failure by the Company to comply with paragraph (c) of Section 10 of this Agreement. (ii) A termination of employment by the Executive for Good Reason shall be effectuated by giving the Company written -16- notice ("Notice of Termination for Good Reason") of the termination, setting forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s) of this Agreement on which the Executive relies. A termination of employment by the Executive for Good Reason shall be effective on the fifth business day following the date when the Notice of Termination for Good Reason is given, unless the notice sets forth a later date (which date shall in no event be later than 30 days after the notice is given). (iii) A termination of the Executive's employment by the Executive without Good Reason shall be effected by giving the Company at least 10 business days' advance written notice of the termination. (d) DATE OF TERMINATION. The "Date of Termination" means the date of the Executive's death, the Disability Effective Date, the date on which the termination of the Executive's employment by the Company for Cause or by the Executive for Good Reason or without Good Reason, as the case may be, is effective. 6. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) BY THE COMPANY OTHER THAN FOR CAUSE, DEATH OR DISABILITY OR BY THE EXECUTIVE FOR GOOD REASON. If, during the Employment Period, the Company terminates the Executive's employment, other than for Cause or Disability or by reason of the Executive's death, or the -17- Executive terminates employment for Good Reason, the Company, in addition to fulfilling its obligations under Section 3 hereof, shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the Executive's accrued but unpaid cash compensation (the "Accrued Obligations"), which shall equal the sum of (1) any portion of the Executive's Annual Base Salary through the Date of Termination that has not yet been paid, (2) an amount representing the Annual Bonus for the year of termination based on target, and multiplying that amount by a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 (the "Annual Bonus Amount"); (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) that has not yet been paid; and (4) any accrued but unpaid Annual Bonuses and vacation pay. (b) DEATH OR DISABILITY. If the Executive's employment is terminated by reason of the Executive's death or Disability during the Employment Period, the Company, in addition to fulfilling its obligations under Section 3 hereof, shall pay the Accrued Obligations to the Executive or the Executive's estate or legal representative, as applicable, in a lump sum in cash within 30 days after the Date of Termination, and the Company shall have no further obligations under this Agreement. -18- (c) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment is terminated by the Company for Cause during the Employment Period, the Company shall pay the Executive the Annual Base Salary through the Date of Termination, the amount of any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon), in each case to the extent not yet paid, and the amount of any earned but unpaid Annual Bonuses and vacation pay, and the Company shall have no further obligations under this Agreement. If the Executive voluntarily terminates employment during the Employment Period, other than for Good Reason, the Company shall pay the Accrued Obligations to the Executive in a lump sum in cash within 30 days of the Date of Termination, and the Company shall have no further obligations under this Agreement. 7. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies for which the Executive may qualify, nor, subject to paragraph (f) of Section 11, shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Vested benefits and other amounts that the Executive is otherwise entitled to receive -19- under any plan, policy, practice or program of, or any contract or agreement with, the Company or any of its affiliated companies on or after the Date of Termination shall be payable in accordance with such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 8. NO MITIGATION. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 9. CONFIDENTIAL INFORMATION; NONSOLICITATION; LICENSING; NO CONFLICT. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies and their respective businesses that the Executive obtains during the Executive's employment by the Company or any of its affiliated companies and that is not public knowledge (other than as a result of the Executive's violation of this paragraph (a) of Section 9) ("Confidential Information"). The Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive's -20- employment with the Company, except in the good faith performance of his duties hereunder, with the prior written consent of the Company or as otherwise required by law or legal process. In no event shall an asserted violation of the provisions of this paragraph (a) of Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. (b) The Executive agrees that he will not, for a period of two years after the expiration or termination of the Executive's employment with the Company, without the prior written consent of the Company, whether directly or indirectly, employ, whether as an employee, officer, director, agent, consultant or independent contractor, or solicit the employment of, any person who is or at any time during the previous twelve months was an employee, representative, officer or director of the Company or any of its subsidiaries. (c) The Executive represents that he was previously licensed by the gaming authorities in Nevada and New Jersey and knows of no reason why a license necessary for him to perform his duties hereunder would not be granted to or maintained by him by those or similar authorities in the future. -21- (d) Executive represents to the Company that neither his commencement of employment hereunder nor the performance of his duties hereunder conflicts with any contractual commitment on his part to any third party or violates or interferes with any rights of any third party. 10. SUCCESSORS. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. -22- 11. ARBITRATION. The Company and the Executive mutually consent to the resolution by arbitration of all claims or controversies arising out of Executive's employment (or its termination) that the Company may have against Executive or that Executive may have against the Company or against its officers, directors, shareholders, employees or agents in their capacity as such. The Company and the Executive shall equally share the fees and costs of the arbitrator, and each party shall bear its own costs in connection with any arbitration, unless the Executive shall prevail in an arbitration proceeding as to any material issue, in which case the Company shall reimburse the Executive for all reasonable costs, expenses and fees incurred in connection with such arbitration. 12. LEGAL FEES. The Company agrees to pay all legal fees incurred by the Executive in connection with the negotiation and preparation of this Agreement, up to a maximum of $15,000. 13. MISCELLANEOUS. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except -23- by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: IF TO THE EXECUTIVE: c/o Debevoise & Plimpton 875 Third Avenue New York, NY 10022 Attention: Lawrence Cagney IF TO THE COMPANY: 9336 Civic Center Drive Beverly Hills, CA 90210 Attention: General Counsel or to such other address as either party furnishes to the other in writing in accordance with this paragraph (b) of Section 11. Notices and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If -24- any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. (d) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement (including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to paragraph (c) of Section 5 of this Agreement) shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. (f) The Executive and the Company acknowledge that this Agreement supersedes any other agreement between them concerning the subject matter hereof. (g) This Agreement may be executed in several counterparts, each of which shall be deemed an original, and -25- said counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. ------------------------- Stephen F. Bollenbach HILTON HOTELS CORPORATION By ----------------------- EX-11 8 EXHIBIT 11 COMPUTATION OF PER SHRE EARNINGS EXHIBIT 11 HILTON HOTELS CORPORATION AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS Net income per share is based on net income divided by the total of the weighted average number of common shares outstanding during the year, plus the equivalent shares relating to the assumed exercise of stock options. The calculation of common shares is as follows:
1995 1994 1993 ---------- ---------- ----------- Shares outstanding January 1 48,114,723 47,846,854 47,677,922 Stock option-weighted average exercises 18,538 22,484 14,078 Outstanding when market price exceeds exercise price at end of periods 1,367,325 1,220,560 999,033 Less shares assumed purchased with proceeds (977,468) (805,555) (709,285) ---------- ---------- ---------- COMMON AND COMMON EQUIVALENT SHARES 48,523,118 48,284,343 47,981,748 ========== ========== ========== Net Income (in millions) $172.8 $121.7 106.1 ========== ========== ========== Earnings per share $3.56 2.52 2.21 ========== ========== ==========
EX-12 9 EXHIBIT 12 COMPU. RATIOS OF EARN. TO FIXED CHARGES EXHIBIT 12 HILTON HOTELS CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- Pre-tax income including 50% owned companies $121.3 $156.8 $156.2 $183.6 $261.5 Add: Interest expense from Wholly owned 58.1 66.9 80.4 85.7 93.5 50% owned 10.8 7.3 9.5 9.5 20.8 Distributions from less than 50% owned 5.2 4.8 6.4 12.1 13.5 ----- ----- ----- ----- ----- SUB-TOTAL (A) 195.4 235.8 252.5 290.9 389.3 Add: Rent expense (interest factor) Wholly owned 1.7 1.8 2.1 2.2 2.6 50% owned 0.6 0.9 0.8 0.8 0.9 ----- ----- ----- ----- ----- TOTAL (B) 197.7 238.5 255.4 293.9 392.8 ===== ===== ===== ===== ===== Interest expense Wholly owned 58.1 66.9 80.4 85.7 93.5 50% owned 10.8 7.3 9.5 9.5 20.8 Capitalized interest 5.2 4.9 2.1 8.4 3.3 ----- ----- ----- ----- ----- SUB-TOTAL (C) 74.1 79.1 92.0 103.6 117.6 Add: Rent expense (interest factor) Wholly owned 1.7 1.8 2.1 2.2 2.6 50% owned 0.6 0.9 0.8 0.8 0.9 ----- ----- ----- ------ ------ TOTAL (D) $76.4 $81.8 $94.9 $106.6 $121.1 ===== ===== ===== ====== ====== RATIOS Interest (A/C) 2.6 3.0 2.7 2.8 3.3 Fixed charges (B/D) 2.6 2.9 2.7 2.8 3.2
EX-13 10 EXHIBIT 13 ANNUAL REPORT TO STOCKHOLDERS THIRTY-SIX MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION STRATEGIC AND FINANCIAL OBJECTIVES Management's primary objective is to maximize shareholder value. The commitment to this objective is evident in the continued growth and success of the hotel and gaming business segments, the Company's outstanding earnings and its strong financial condition. The Company will continue to pursue this objective by utilizing the depth and synergies of its combined resources to capitalize on the respective strengths of the hotel and gaming business segments. RESULTS OF OPERATION FISCAL 1995 COMPARED WITH FISCAL 1994 OVERVIEW The Company's net income increased 42 percent to $172.8 million or $3.56 per share compared to $121.7 million or $2.52 per share in 1994. Consolidated revenue in 1995 increased nine percent to $1.6 billion, while operating income increased 24 percent to $353.6 million from $284.6 million in 1994. HOTELS The hotel segment includes the consolidated results of the Company's owned and leased properties. The segment also includes equity income from unconsolidated affiliates, management fees from both domestic and international hotel properties and franchise fees. At December 31, 1995 the Company owned, partially owned, managed and franchised 18, 15, 24 and 162 properties, respectively, totaling 81,000 rooms worldwide. Hotel segment results are primarily affected by volume (as measured by occupancy), pricing (as measured by average room rate) and the Company's ability to manage costs. The Company continues to benefit from the global strength of the travel and tourism industry. In addition, increased demand outpaced lodging supply growth again in 1995. Results in 1995 demonstrate the Company's ability to capitalize on the sustained growth in international travel to the United States and on increased domestic business and leisure travel by offering top quality service and superior hotels and resorts. Occupancy for hotels owned or managed increased to 73 percent in 1995 compared to 70 percent in 1994. Average room rates increased five percent over 1994. Consolidated hotel revenue increased 15 percent in 1995 to $708.8 million. Adjusting for the increase in revenue due to the consolidation of the New Orleans Hilton Riverside in June 1994, hotel revenue increased nine percent over 1994. Revenue per available room (RPAR) is a measure of hotel revenue generation. RPAR for owned and managed hotels increased 10 percent in 1995, the second consecutive year of double-digit growth. Hotel operating income, primarily income from hotel interests and management and franchise fee income, increased 41 percent in 1995 to $207.7 million. Adjusting for the increase in operating income due to the consolidation of the New Orleans Hilton Riverside, operating income increased 31 percent over the prior year. Fluctuations in hotel operating income are significantly influenced by the operating results of the Company's principal downtown/convention, resort and airport locations where it has large equity interests. The strength of the U.S. economy has been a catalyst for increased business travel, which has benefitted a majority of the Company's properties. Individual business travel and company meeting room nights were both well ahead of 1994 levels. In addition, increased international visitation continues to benefit a number of the Company's major market and resort properties. Nearly all of the Company's owned and partially- owned hotels posted increases in operating income compared to the prior year. Results from the Waldorf=Astoria increased $5.7 million and results from the 50% owned New York Hilton increased $5.1 million, representing a combined 58 percent increase over the prior year. Both properties produced increases in average rate and occupancy linked to strong international room nights and increased business travel volume. A significant increase in individual business traveler room nights supported a $6.2 million increase in operating income at the Palmer House Hilton. Improved occupancy also benefitted a number of the Company's major market equity properties, including the Capital Hilton, San Francisco Hilton and Washington Hilton, each 50% owned by the Company. Combined results at these three properties increased $4.1 million, or 65 percent over 1994. 2 THIRTY-SEVEN Operating income from the New Orleans Hilton Riverside increased $15.0 million over the prior year. Strong operating performance led by increased leisure and company meeting volume accounted for $8.1 million of the increase, while $6.9 million is attributable to increased ownership of the property. Average room rate growth in the leisure travel segment combined with improved occupancy produced a $4.1 million increase in operating income at the 50% owned Hilton Hawaiian Village. International room nights at this property increased eight percent as tourism from the key Japanese market remained strong. An 11 percent increase in RPAR at the Company's five owned and partially- owned Hilton Suites properties resulted in a $2.1 million increase in operating income. The strength of business travel continued to benefit the Company's airport properties. Each of the Company's airport locations attained increases in average room rate and operating income compared to the prior year. Combined income for the Company's eight wholly-owned and partially-owned airport properties increased $7.9 million, or 65 percent, over 1994 levels. Operating income from the 30% owned Conrad International Hong Kong increased $.9 million on a double-digit increase in average room rate. Results at the Company's vacation ownership facility in Orlando, Florida were adversely impacted by slower than expected sales. Results also reflect the required recognition of previously deferred operating losses of the Orlando project, prompted by the completion of the first phase of construction in August 1995. Combined results from the Company's Orlando and Las Vegas vacation ownership projects decreased $8.8 million from the prior year. Management and franchise fee revenue increased $6.4 million in 1995 to $89.4 million. Fee revenue is based primarily on operating revenues at managed properties and rooms revenue at franchised properties. The Company has an ongoing program of actively monitoring and improving its franchise hotels. In 1995, five franchise contracts, representing 845 rooms, were terminated by the Hilton Inns franchise system, several due to noncompliance with the Company's standards. Six properties and 2,096 rooms were added to the franchise system in 1995. In addition, in late 1995 the Company assumed management of the 294-room Tamarron Hilton Resort in Durango, Colorado. In 1995 Conrad International Hotels signed management agreements for a 412- room hotel in Barcelona, Spain, a 260-room hotel in Hurghada, Egypt and a 350- room property under development in Sharm El Sheikh, Egypt. The Conrad International Sharm El Sheikh is scheduled to open in Fall 1996. Although the supply-demand imbalance continues to improve, future operating results could be adversely impacted by overcapacity and weak demand. These conditions could limit the Company's ability to pass through inflationary increases in operating costs in the form of higher rates. Increases in transportation and fuel costs or sustained recessionary periods could also unfavorably impact future results. The Company believes that its financial strength, market presence and diverse product line will enable it to remain extremely competitive. GAMING The gaming segment includes five wholly-owned Nevada hotel-casinos, equity income and management fees from gaming operations in New Orleans, Louisiana and Windsor, Ontario, Canada, two partially owned hotel-casinos in Australia and one in Istanbul, Turkey. The Company's Nevada gaming operations offer a diversified product and service mix which appeals to a broad spectrum of customers. The Flamingo Hilton-Las Vegas caters to the broad Las Vegas middle market, while the Las Vegas Hilton caters to premium players and the convention market. The Flamingo Hilton-Reno focuses on middle market activity, while the Reno Hilton targets both convention and middle market activity. The Flamingo Hilton-Laughlin targets the budget market segment. Total gaming revenue increased five percent to $940.6 million in 1995 compared to $895.6 million in 1994. Casino revenue, a component of gaming revenue, was $511.0 million in 1995 compared to $480.6 million in 1994. Gaming operating income was $177.8 million in 1995, a seven percent improvement from $165.4 million in 1994. Operating income at the Las Vegas Hilton increased $26.4 million from the prior year primarily due to significantly higher table game win. The hotel- casino's luxury "Sky Villa" suites and new baccarat facility have greatly increased premium play volume. Baccarat volume more than doubled resulting in a 91 percent increase in baccarat win compared to the prior year. The property also benefitted from a 10 percent increase in average room rate. Results at the Las Vegas Hilton are more volatile than the Company's other casinos because this property caters to the premium play segment of the market. Future fluctuations in premium play volume and win percentage could result in greater volatility in operating income at this property. 3 THIRTY-EIGHT Results at the Flamingo Hilton-Las Vegas increased $3.5 million in 1995, despite disruptions during the first half of the year resulting from major construction and renovation projects at the property. Average room rate increased 11 percent over 1994 levels. Operating income at the Flamingo Hilton- Laughlin decreased $3.3 million from the prior year, reflecting continued market softness and competition from Las Vegas. Benefitting from the mid-year completion of a major casino renovation, operating income from the Reno Hilton increased $5.2 million from the prior year. Results from the Flamingo Hilton- Reno decreased $1.2 million, primarily due to increased competition in the last six months of 1995. Occupancy for the Nevada hotel-casinos was 88 percent and 91 percent in 1995 and 1994, respectively. Average room rates increased seven percent in 1995. Results from the Company's New Orleans river casino operations, including equity and fee income, decreased $2.4 million from 1994. The 1994 results include fee income from a wholly-owned river casino which was leased to the 50% owned joint venture prior to November 1994, when a vessel owned by the joint venture was placed in service. Fee income from the one-third owned consortium which operates and manages the Casino Windsor increased $3.2 million from the prior year. This facility opened in May 1994. Results at the 25% owned Conrad International Istanbul increased $.7 million due to a significant increase in occupancy. Equity and fee income from the 19.9% owned Hotel Conrad & Jupiters Casino in Australia decreased $11.3 million from 1994, primarily due to significantly lower table game win. Equity and fee income from the 19.9% owned Conrad International Treasury, which opened in May 1995 in Brisbane, totaled $2.4 million. The gaming industry continues to experience growth in both existing markets and new jurisdictions. The Las Vegas market is becoming increasingly competitive, with visitor volume growth slowing and per-capita casino spending declining. Competitors have announced new projects which, if completed, will add approximately 15,000 rooms and 500,000 square feet of casino space to the market over the next three years. These additions could adversely impact the Company's future gaming income. CORPORATE EXPENSE Corporate expense increased $3.6 million in 1995 to $31.9 million due to $4.9 million in costs incurred in evaluating strategic alternatives to enhance shareholder value. INTEREST AND DIVIDEND INCOME/EXPENSE Interest and dividend income increased $13.7 million in 1995 to $35.2 million due to higher investable balances. Interest expense, net of amounts capitalized, increased $7.8 million primarily due to higher average debt levels and higher interest rates on commercial paper borrowings. The increase in consolidated interest expense includes $4.3 million attributable to the consolidation of the New Orleans Hilton Riverside in June 1994. Interest expense from unconsolidated affiliates increased $4.3 million over 1994. INCOME TAXES The effective income tax rate in 1995 was 36.6% compared to 40.9% in 1994. 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. The 1995 effective income tax rate benefitted from $5.5 million in credits resulting from the favorable resolution of Federal tax issues for prior years and the utilization of foreign tax credits. The Company believes its recorded tax balances are appropriate. However, future changes in tax law, or in the interpretation of such law, could have a material effect on financial results. Proposed changes affecting the gaming industry have included a Federal gaming tax, withholding requirements on gaming winnings and limitations on the deductibility of the costs of providing meals to employees and providing promotional items to casino customers on a complimentary basis. PROPERTY TRANSACTIONS The gain from property transactions in 1995 primarily reflects a pretax gain on the sale of land to Hilton Grand Vacations Company for its project at the Flamingo Hilton-Las Vegas. Gains on this transaction are being recognized on an installment basis. MINORITY INTEREST The minority interest results from the consolidation of the New Orleans Hilton Riverside. The Company increased its ownership interest in the property from 46.8% to 67.4% in June 1994. 4 THIRTY-NINE FISCAL 1994 COMPARED WITH FISCAL 1993 OVERVIEW The Company's net income increased 18 percent to $121.7 million or $2.52 per share, compared to $102.7 million or $2.14 per share (excluding the cumulative effect of accounting changes totaling $.07 per share) in 1993. Total operating income increased 19 percent to $284.6 million from $239.9 million in 1993. HOTELS Consolidated hotel revenue increased 19 percent in 1994 to $618.3 million. Adjusting for the increase in revenue due to the consolidation of the New Orleans Hilton Riverside in 1994, hotel revenue increased 10 percent over 1993. Hotel operating income increased 53 percent in 1994 to $147.5 million. Adjusting for the increase in operating income due to the consolidation of the New Orleans Hilton Riverside and the adverse impact of a $12.5 million loan reserve in 1993, operating income increased 25 percent over the prior year. During 1994 many of the Company's airport locations showed significant improvements over 1993 results, including double-digit growth in both occupancy and operating income at the Logan Airport Hilton, O'Hare Hilton and the San Francisco Airport Hilton. Combined income for the Company's wholly-owned and partially-owned airport properties increased $6.2 million over the prior year. Significant increases in domestic and international travel contributed to a resurgence in operating results at the Company's major market downtown/convention properties. Combined operating income from the Waldorf=Astoria and the 50% owned New York Hilton increased $5.2 million, or 38 percent over the prior year. International room nights at these two properties were up a combined 61 percent over 1993 levels. Combined results from the Palmer House Hilton and the one-third owned Chicago Hilton increased $5.4 million on improved occupancy and average rates. The operating performance of the New Orleans Hilton Riverside improved dramatically over 1993 due to increased convention and leisure travel room nights and the opening of the adjacent river casino. Both occupancy and average rate increased at this property, resulting in RPAR growth of 14 percent in 1994. Results at the Company's resort properties also benefitted from increased leisure travel. Operating income from the 50% owned Hilton Hawaiian Village increased $4.6 million over 1993 as tourism from the key California and Japanese markets increased. International room nights at this property increased 21 percent over 1993. Operating income from the 30% owned Conrad International Hong Kong increased $1.2 million in 1994. Increases in occupancy and average rate resulted in a 24 percent increase in RPAR. Management and franchise fee revenue increased $4.3 million to $83.0 million. Occupancy for hotels owned or managed increased to 70 percent in 1994 compared to 67 percent in 1993. Average room rates increased seven percent over 1993. GAMING Total gaming revenue increased three percent to $895.6 million in 1994 compared to $873.5 million in 1993. Casino revenue, a component of gaming revenue, was $480.6 million in 1994 compared to $502.1 million in 1993. Gaming operating income was $165.4 million, a three percent decline from $170.5 million in 1993. Excluding the results of the Company's gaming facilities in New Orleans and Windsor, both of which commenced operations in 1994, revenue increased one percent and operating income decreased eight percent from the prior year. Operating income at the Flamingo Hilton-Las Vegas decreased $9.9 million due to the impact of construction activity and the resultant temporary reduction in available room capacity. Operating income at the Flamingo Hilton-Laughlin decreased $2.6 million, reflecting increased room capacity in Laughlin and competition from Las Vegas. Operating income at the Flamingo Hilton-Reno increased 20 percent, primarily due to increases in casino win percentage and slot revenue. Adjusting for a $3.9 million write-off of costs related to abandoned construction plans, operating income at the Reno Hilton was comparable with 1993. Operating income at the Las Vegas Hilton declined $12.1 million from 1993. A decline in premium play volume, partially offset by a one percent increase in casino win percentage, resulted in a decrease of $10.2 million in table game win. Occupancy for the Nevada hotel-casinos was 91 percent and 89 percent in 1994 and 1993, respectively. Average room rates increased three percent in 1994. In February 1994 a joint venture of which the Company is a 50% owner opened the Queen of New Orleans river casino adjacent to the New Orleans Hilton Riverside. This interim vessel was replaced with a permanent vessel, the Flamingo Casino-New Orleans, in November 1994. In May 1994 a consortium of which the Company has a one-third interest opened the Casino Windsor. Combined operating income from these two ventures, including equity and fee income, totaled $10.7 million. Equity income and management fees from the 19.9% owned Hotel Conrad and Jupiters Casino increased $9.6 million over the prior year. Results from the 25% owned Conrad International Istanbul were not significant. 5 FORTY INTEREST AND DIVIDEND INCOME/EXPENSE Interest and dividend income decreased $.3 million in 1994 to $21.5 million due to lower investable balances. Interest expense, net of amounts capitalized, increased $5.3 million due to higher average debt levels and higher interest rates; capitalized interest increased $5.0 million over 1993. Net interest expense from unconsolidated affiliates decreased $2.4 million in 1994 to $12.2 million. INCOME TAXES The effective income tax rate in 1994 was 40.9% compared to 36.2% in 1992. The 1993 effective income tax rate benefitted from $9.0 million in credits resulting from the favorable resolution of Federal and state income taxes for prior years. These credits were partially offset by a $5.0 million increase in the provision for income taxes due to the increase in the Federal income tax rate for corporations from 34 percent to 35 percent. Of the $5.0 million increase, $3.3 million was attributable to the measurement of deferred income tax assets and liabilities at the new higher rate. FINANCIAL CONDITION LIQUIDITY AND CAPITAL SPENDING Net cash provided by operating activities increased to $330.7 million in 1995 from $230.9 million in 1994 and $226.9 million in 1993. The increase in 1995 is due primarily to improved operating results. Working capital decreased from $345.4 million at December 31, 1994 to $182.4 million at December 31, 1995, principally due to a $180.1 million increase in current maturities of long-term debt. Capital expenditures, including those financed with construction payables, were $185.5 million in 1995, while new investments totaled $98.3 million. Capital expenditures and new investments totaled $265.9 million and $156.7 million, respectively, in 1994, and $157.0 million and $104.7 million, respectively, in 1993. Growth in the hotel segment will primarily occur through significant domestic expansion of the Company's new Hilton Garden Inns product, international expansion, conversions of existing domestic properties to the Hilton brand in strategically important markets and the development and management of vacation ownership resorts. The Company plans to target mid-market business travelers by expanding its Hilton Garden Inns product over the next five years. The Company anticipates that approximately 80 percent of the planned 100 additional hotels will be new construction with the remainder being conversions of existing properties. Construction of 15 to 25 of the new properties is scheduled to begin in 1996 and is expected to be financed by the Company either solely or with local partners at a cost to the Company of approximately $100 million. In August 1995 the Company's 50% owned Hilton Grand Vacations Company affiliate completed development of the first phase of a 360-unit vacation ownership resort adjacent to Sea World in Orlando, Florida. Project costs for the Orlando project and the Company's existing 200-unit resort adjacent to the Flamingo Hilton-Las Vegas have been funded by the Company in the form of revolving loan facilities aggregating approximately $117 million at December 31, 1995. Major renovation projects totaling $33 million were completed at the wholly-owned San Diego Hilton Beach & Tennis Resort and Portland Hilton in 1995. The Company is continuing to selectively expand and improve its worldwide gaming operations. In early 1995 the Las Vegas Hilton opened the third of its three luxury "Sky Villa" suites. Built at an aggregate cost of $40 million, the suites cater to select premium casino customers. In December 1995 the property completed construction of a new $12 million VIP baccarat facility. The opening of the "Star Trek: The Experience at the Las Vegas Hilton" attraction and related themed casino is scheduled for Spring 1997. This project, totaling approximately $70 million, will occupy approximately 65,000 square feet at the Las Vegas Hilton. Several significant projects were completed in 1995 at the Flamingo Hilton- Las Vegas. These expansion and enhancement projects, totaling $125 million, include a new 600-room tower addition, a 10,000 square foot casino expansion, remodeling of the race and sports book, new entertainment, recreation, retail and dining facilities, exterior enhancements and room renovations. Casino enhancements totaling $8 million were completed at the Reno Hilton in 1995. In Missouri, the Company broke ground on the Flamingo Casino-Kansas City located adjacent to the Missouri River near downtown Kansas City. The development will include a 30,000 square foot casino on a continuously docked barge, a 260-room hotel, concessions and entertainment facilities. The estimated cost of this development is approximately $121 million, anticipated to be funded through a combination of long-term debt and general corporate funds. The Company will have a 90% ownership in this project. Subject to receipt of all required gaming licenses and permits, the Company anticipates that the casino will be in operation by mid-1996. The hotel is scheduled to open in mid- 1997. 6 FORTY-ONE In December 1995 the Company entered into agreements for the charter of a river casino to the Ontario Casino Corporation. This vessel serves as a complementary facility for Casino Windsor, adding an additional 25,000 square feet of casino space. The Company has a one-third interest in the consortium which operates and manages the temporary and river casinos for the Ontario provincial government. The existing temporary casino facility will be replaced by a permanent facility scheduled to open in early 1998. It is anticipated that the permanent facility will be partially financed by the consortium with a combination of long-term debt and equity. April 1995 marked the opening of the Conrad International Treasury hotel- casino in Brisbane, Australia. This $185 million project includes a 65,000 square foot casino and a 136-room luxury hotel. The Conrad International Treasury is owned by Jupiters Limited, a 19.9% owned affiliate, and is operated by Conrad International, the Company's international subsidiary. Construction is proceeding on the Conrad International Punta del Este, a hotel-casino in Punta del Este, Uruguay. This facility will feature a 300-room hotel and a 38,000 square foot casino at an estimated cost of $172 million. The casino is scheduled to open in January 1997; the hotel will open in late 1997. This approximately 43% owned project is being financed with a combination of long-term debt and equity. In January 1996 the Company replaced its 50% owned river casino located adjacent to the New Orleans Hilton Riverside with a smaller wholly-owned vessel. The smaller vessel, with 20,000 square feet of casino space, will be leased by the Company to the 50% owned joint venture. The joint venture has entered into an agreement to sell the larger vessel, with 30,000 square feet of casino space, to a third party. The Company is committed to keeping its properties in first-class condition. Refurbishment programs are continually underway at the Company's hotel and casino properties. Capital expenditures and investments in 1996, including funding requirements associated with the aforementioned projects, will approximate $370 million. The Company intends to fund its portion of these capital expenditures through internal cash flows and available debt capacity or new borrowings. LONG-TERM DEBT Long-term debt at December 31, 1995 totaled $1.1 billion, 42 percent of the Company's total capital, compared to $1.3 billion at December 31, 1994. The reduction is due primarily to the aforementioned $180.1 million increase in the current portion of long-term debt. During 1995 the Company repurchased $61.2 million of its long-term public debt, including $28.9 million of its $200 million Series B Medium Term Notes. At December 31, 1995, $30 million in financing under this program was still available. The Company has an effective shelf registration with the Securities and Exchange Commission for up to $65 million of new debt securities. The terms and conditions of these debt securities will be determined by market conditions at the time of issuance. The Company had $406.1 million in commercial paper and private notes outstanding at December 31, 1995. The Company has entered into various long- term revolving credit facilities with an aggregate commitment at December 31, 1995 of $597.5 million, of which $20.0 million expires in 1996, $67.5 million expires in 1997, $70.0 million expires in 1998, $325.0 million expires in 1999 and the remaining $115.0 million expires in 2000. At December 31, 1995, $406.1 million of the aggregate commitment supported the issuance of commercial paper. Excluding outstanding balances and the portion of the commitment which supports the issuance of commercial paper, $140.3 million of revolving bank debt financing was available to the Company at December 31, 1995. STOCKHOLDERS' EQUITY Stockholders' equity totaled $1.3 billion or $25.96 per share at December 31, 1995. Book value per share was $23.45 in 1994 and $22.11 in 1993. Dividends paid on common shares were $1.20 per share in 1995, 1994 and 1993. At December 31, 1995 and 1994 the company had investments in bond mutual funds, the aggregate value of which was $7.1 million and $8.1 million below cost, respectively. Unrealized losses, net of the related deferred tax benefit, of $4.6 million in 1995 and $5.3 million in 1994 are deducted from stockholders' equity. OTHER MATTERS Various lawsuits are pending against the Company. In management's opinion, disposition of these lawsuits is not expected to have a material effect on the Company's financial position or results of operations. 7 FORTY-TWO CONSOLIDATED STATEMENTS OF INCOME HILTON HOTELS CORPORATION AND SUBSIDIARIES
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Revenue Rooms $ 587.2 509.6 440.2 Food and beverage 265.7 247.2 236.8 Casino 511.0 480.6 502.1 Management and franchise fees 100.5 94.5 85.1 Other 125.4 124.2 93.8 Operating income from unconsolidated affiliates 59.6 57.8 35.5 -------- -------- -------- 1,649.4 1,513.9 1,393.5 -------- -------- -------- Expenses Rooms 186.4 171.8 152.5 Food and beverage 229.4 216.4 202.4 Casino 234.9 216.3 217.5 Other costs and expenses 613.2 596.5 554.4 Corporate expense 31.9 28.3 26.8 -------- -------- -------- 1,295.8 1,229.3 1,153.6 -------- -------- -------- Operating Income 353.6 284.6 239.9 Interest and dividend income 35.2 21.5 21.8 Interest expense (93.5) (85.7) (80.4) Interest expense, net, from unconsolidated affiliates (16.5) (12.2) (14.6) Property transactions, net 1.5 1.1 (4.5) Foreign currency losses -- (.7) (1.3) -------- -------- -------- Income Before Income Taxes and Minority Interest 280.3 208.6 160.9 Provision for income taxes 102.6 85.3 58.2 Minority interest, net 4.9 1.6 -- -------- -------- -------- Income Before Cumulative Effect of Accounting Changes 172.8 121.7 102.7 Cumulative effect of accounting changes, net -- -- 3.4 -------- -------- -------- Net Income $ 172.8 121.7 106.1 -------- -------- -------- -------- -------- -------- Income Per Share Before cumulative effect of accounting changes $ 3.56 2.52 2.14 Cumulative effect of accounting changes, net -- -- .07 -------- -------- -------- Net Income Per Share $ 3.56 2.52 2.21 -------- -------- -------- -------- -------- --------
See notes to consolidated financial statements 8 FORTY-THREE CONSOLIDATED BALANCE SHEETS HILTON HOTELS CORPORATION AND SUBSIDIARIES
(IN MILLIONS) DECEMBER 31, 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash and equivalents $ 338.0 184.4 Temporary investments 70.7 208.8 Deferred income taxes 24.1 26.0 Other current assets 284.5 254.5 -------- -------- Total current assets 717.3 673.7 -------- -------- Investments, Property and Investments in and notes from Other Assets unconsolidated affiliates 576.2 518.0 Other investments 19.1 18.7 Property and equipment, net 1,695.9 1,664.8 Other assets 51.8 50.7 -------- -------- Total investments, property and other assets 2,343.0 2,252.2 -------- -------- Total Assets $3,060.3 2,925.9 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Current liabilities $ 534.9 328.3 Long-term debt 1,069.7 1,251.9 Deferred income taxes 123.7 124.3 Insurance reserves and other 78.3 93.6 -------- -------- Total liabilities 1,806.6 1,798.1 -------- -------- Stockholders' Equity Preferred stock, none outstanding -- -- Common stock, 48.3 million and 48.1 million shares outstanding, respectively 127.6 127.6 Cumulative translation adjustment (1.4) (.7) Unrealized loss on marketable securities (4.6) (5.3) Retained earnings 1,274.6 1,160.7 -------- -------- 1,396.2 1,282.3 Less treasury shares, at cost 142.5 154.5 -------- -------- Total stockholders' equity 1,253.7 1,127.8 -------- -------- Total Liabilities and Stockholders' Equity $3,060.3 2,925.9 -------- -------- -------- --------
See notes to consolidated financial statements 9 FORTY-FOUR CONSOLIDATED STATEMENTS OF CASH FLOWS HILTON HOTELS CORPORATION AND SUBSIDIARIES
(IN MILLIONS) YEAR ENDED DECEMBER 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Activities Net income $ 172.8 121.7 106.1 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 141.9 133.3 118.9 Change in working capital components: Inventories (.7) .7 .7 Accounts receivable (20.6) (54.7) (17.9) Other current assets (7.2) (5.5) (19.9) Accounts payable and accrued expenses 24.1 35.9 (8.2) Income taxes payable 4.0 (1.2) (9.2) Change in deferred income taxes 1.0 (20.8) (6.6) Change in other liabilities (13.7) 7.8 29.4 Unconsolidated affiliates' distributions in excess of earnings 29.4 5.9 20.1 (Gain) loss from property transactions (1.5) (1.1) 4.5 Other 1.2 8.9 9.0 -------- -------- -------- Net cash provided by operating activities 330.7 230.9 226.9 -------- -------- -------- Investing Activities Capital expenditures (187.1) (254.4) (156.8) Additional investments (98.3) (156.7) (104.7) Decrease in long-term marketable securities 1.0 62.6 91.2 Change in temporary investments 139.1 (118.8) 64.3 Payments on notes and other 17.5 60.9 5.9 -------- -------- -------- Net cash used in investing activities (127.8) (406.4) (100.1) -------- -------- -------- Financing Activities Change in commercial paper borrowings and revolving loans 189.2 (112.9) .8 Long-term borrowings 1.0 170.0 1.0 Reduction of long-term debt (192.6) (31.5) (46.3) Issuance of common stock 11.0 11.5 6.9 Cash dividends (57.9) (57.6) (57.3) -------- -------- -------- Net cash used in financing activities (49.3) (20.5) (94.9) -------- -------- -------- Increase (Decrease) in Cash and Equivalents 153.6 (196.0) 31.9 Cash and Equivalents at Beginning of Year 184.4 380.4 348.5 -------- -------- -------- Cash and Equivalents at End of Year $ 338.0 184.4 380.4 -------- -------- -------- -------- -------- --------
See notes to consolidated financial statements 10 FORTY-FIVE CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY HILTON HOTELS CORPORATION AND SUBSIDIARIES
NUMBER OF ADDITIONAL CUMULATIVE TOTAL SHARES COMMON PAID-IN TRANSLATION UNREALIZED RETAINED TREASURY STOCKHOLDERS' (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) OUTSTANDING STOCK CAPITAL ADJUSTMENT LOSS EARNINGS SHARES EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1992 47.7 $127.6 4.4 -- -- 1,049.0 (178.5) 1,002.5 Exercise of stock options .1 -- (2.5) -- -- -- 9.4 6.9 Cumulative translation adjustment, net of deferred tax benefit of $.8 million (1.5) -- -- (1.5) Net income -- -- -- -- -- 106.1 -- 106.1 Dividends ($1.20 per share) -- -- -- -- -- (57.3) -- (57.3) ----------- ------ ----------- ---------- ---------- -------- -------- ------------ Balance, December 31, 1993 47.8 127.6 1.9 (1.5) -- 1,097.8 (169.1) 1,056.7 Exercise of stock options .3 -- (1.9) -- -- (1.2) 14.6 11.5 Cumulative translation adjustment, net of deferred tax of $.4 million -- -- -- .8 -- -- -- .8 Unrealized loss on marketable securities, net of deferred tax benefit of $2.8 million (5.3) (5.3) Net income -- -- -- -- -- 121.7 -- 121.7 Dividends ($1.20 per share) -- -- -- -- -- (57.6) -- (57.6) ----------- ------ ----------- ---------- ---------- -------- -------- ------------ Balance, December 31, 1994 48.1 127.6 -- (.7) (5.3) 1,160.7 (154.5) 1,127.8 Exercise of stock options .2 -- -- -- -- (1.0) 12.0 11.0 Cumulative translation adjustment, net of deferred tax benefit of $.4 million -- -- -- (.7) -- -- -- (.7) Change in unrealized loss on marketable securities, net of deferred tax of $.3 million -- -- -- -- .7 -- -- .7 Net income -- -- -- -- -- 172.8 -- 172.8 Dividends ($1.20 per share) -- -- -- -- -- (57.9) -- (57.9) ----------- ------ ----------- ---------- ---------- -------- -------- ------------ Balance, December 31, 1995 48.3 $127.6 -- (1.4) (4.6) 1,274.6 (142.5) 1,253.7 ----------- ------ ----------- ---------- ---------- -------- -------- ------------ ----------- ------ ----------- ---------- ---------- -------- -------- ------------
See notes to consolidated financial statements 11 FORTY-SIX NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HILTON HOTELS CORPORATION AND SUBSIDIARIES December 31, 1995 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Hilton Hotels Corporation and subsidiaries (the Company) is primarily engaged in the ownership, management and franchising of hotels, resorts and vacation ownership properties and the ownership and management of casinos and hotel- casino properties. The Company operates in select markets throughout the world, predominately in the United States. Revenue and income are derived from two business segments: hotel operations and gaming operations. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Hilton Hotels Corporation and its majority-owned subsidiaries. All material intercompany transactions are eliminated and net earnings are reduced by the portion of the earnings of affiliates applicable to minority shareowners. There are no significant restrictions on the transfer of funds from the Company's wholly- owned subsidiaries to Hilton Hotels Corporation. Investments in 50% or less owned affiliates over which the Company has the ability to exercise significant influence are accounted for using the equity method. CASH AND EQUIVALENTS Cash and equivalents include investments with initial maturities of three months or less. CASINO REVENUE AND PROMOTIONAL ALLOWANCES Casino revenue is the aggregate of gaming wins and losses. The revenue components presented in the consolidated financial statements and the notes thereto exclude the retail value of rooms, food and beverage provided to customers on a complimentary basis. The estimated cost of providing these promotional allowances is as follows:
(In millions) 1995 1994 1993 - -------------------------------------------------------------------------------- Rooms $ 9.5 8.5 8.9 Food and beverage 29.7 28.3 27.6 ------- ------- ------- Total cost of promotional allowances $ 39.2 36.8 36.5 ------- ------- ------- ------- ------- -------
The cost of promotional allowances has been allocated to expense as follows:
(In millions) 1995 1994 1993 - -------------------------------------------------------------------------------- Casino $ 32.1 29.6 27.6 Other costs and expenses 7.1 7.2 8.9 ------- ------- -------
CURRENCY TRANSLATION Assets and liabilities denominated in most foreign currencies are translated into U.S. dollars at year-end exchange rates and related gains and losses, net of applicable deferred income taxes, are reflected in stockholders' equity. Gains and losses from foreign currency transactions and translation of balance sheets in highly inflationary economies are included in earnings. PROPERTY, EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost. Interest incurred during construction of facilities is capitalized and amortized over the life of the asset. Costs of improvements are capitalized. Costs of normal repairs and maintenance are charged to expense as incurred. Upon the sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the respective accounts, and the resulting gain or loss, if any, is included in income. Depreciation is provided on a straight-line basis over the estimated useful life of the assets. Leasehold improvements are amortized over the shorter of the asset life or lease term. The service lives of assets are generally 40 years for buildings, 30 years for riverboats and eight years for building improvements and furniture and equipment. PRE-OPENING COSTS Costs associated with the opening of new properties or major additions to properties placed in service through December 31, 1994 were deferred and charged to income over a three year period after the opening date. For projects placed in service after December 31, 1994, pre-opening costs are deferred and amortized over the shorter of the period benefitted or one year. 12 FORTY-SEVEN UNAMORTIZED LOAN COSTS Debt discount and issuance costs incurred in connection with long-term debt are capitalized and amortized to expense, principally on the bonds outstanding method. SELF-INSURANCE The Company is self-insured for various levels of general liability, workers' compensation and employee medical and life insurance coverage. Insurance reserves include the present values of projected settlements for claims. ACCOUNTING CHANGES Effective January 1, 1993 the Company adopted Statement of Financial Accounting Standard (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The standard requires the cost of postretirement benefits to be accrued during the period up to the date covered employees are eligible to retire. Prior to the adoption of SFAS No. 106, the cost of these benefits was charged to expense as incurred. The Company elected to immediately recognize the prior periods' obligation as a cumulative adjustment in the first quarter of 1993. Also effective January 1, 1993 the Company adopted SFAS No. 109, "Accounting for Income Taxes", which requires, among other things, that deferred tax balances be determined using the enacted income tax rates for the years in which the taxes are actually paid or refunds received. The Company elected to adopt the standard through a cumulative adjustment in the first quarter of 1993. NET INCOME PER SHARE Net income per share is based on the weighted average number of common shares outstanding plus the common share equivalents which arise from the assumed exercise of stock options. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS The consolidated financial statements for prior years reflect certain reclassifications to conform with classifications adopted in 1995. These classifications have no effect on net income. ACCOUNTS AND NOTES RECEIVABLE Included in other current assets at December 31, 1995 and 1994 are accounts and notes receivable as follows:
(In millions) 1995 1994 - -------------------------------------------------------------------------------- Hotel accounts and notes receivable $ 148.3 144.8 Less allowance for doubtful accounts 8.4 11.4 ------- ------- 139.9 133.4 ------- ------- Casino accounts receivable 87.3 69.1 Less allowance for doubtful accounts 13.5 16.0 ------- ------- 73.8 53.1 ------- ------- Federal tax refund receivable 6.2 12.8 ------- ------- Total $ 219.9 199.3 ------- -------
The allowance provided for estimated uncollectible casino receivables, net of recoveries, is included in casino expenses in the amount of $17.3 million, $12.3 million and $9.5 million in 1995, 1994 and 1993, respectively. INVENTORIES Included in other current assets at December 31, 1995 and 1994 are inventories of $13.9 million and $13.2 million, respectively, determined on a first-in, first-out basis. 13 FORTY-EIGHT INVESTMENTS The composition of the Company's total investments in and notes from unconsolidated affiliates at December 31, 1995 and 1994 is as follows:
(In millions) 1995 1994 - -------------------------------------------------------------------------------- Investments 50% owned affiliates Hotels (seven in 1995 and 1994) $ 217.3 229.0 Riverboat casino 8.8 8.4 Other 1.3 13.8 Less than 50% owned affiliates Hotels (seven in 1995 and 1994) 89.4 87.4 Hotel-casinos (five in 1995 and 1994) 87.9 78.9 Other 13.9 10.3 ------- ------- 418.6 427.8 Notes receivable 157.6 90.2 ------- ------- Total $ 576.2 518.0 ------- ------- ------- -------
The changes in the Company's investments in such affiliates are as follows:
(In millions) 1995 1994 - -------------------------------------------------------------------------------- Investments, January 1 $ 427.8 351.9 Earnings, net of applicable taxes 37.3 37.9 Distributions received (66.7) (43.8) Additional investments 21.5 94.3 Transfer of assets -- (13.3) Other, net (1.3) .8 ------- ------- Investments, December 31 $ 418.6 427.8 ------- ------- ------- -------
Management fees totaling $39.4 million, $34.7 million and $30.2 million were charged by the Company to its unconsolidated affiliates in 1995, 1994 and 1993, respectively. Other group services were provided to unconsolidated affiliates with no significant element of profit. Summarized balance sheet information of the 50% owned affiliates at December 31, 1995 and 1994 is as follows:
(In millions) 1995 1994 - -------------------------------------------------------------------------------- Current assets $ 198.6 189.7 Property and other assets, net 756.6 749.2 Current liabilities 216.3 89.3 Long-term debt and other 251.8 326.9 Equity 487.1 522.7 ------- -------
Summarized balance sheet information of the less than 50% owned affiliates at December 31, 1995 and 1994 is as follows:
(In millions) 1995 1994 - -------------------------------------------------------------------------------- Current assets $ 148.4 140.9 Property and other assets, net 1,106.4 959.6 Current liabilities 146.8 121.7 Long-term debt and other 340.6 243.0 Equity 767.4 735.8 -------- ---------
Of long-term unconsolidated affiliate obligations totaling $592.4 million at December 31, 1995, $581.4 million is secured solely by venture assets or is guaranteed by other venture partners without recourse to the Company. The Company's proportionate shares of capital expenditures and depreciation expense of unconsolidated affiliates were $60.6 million and $40.2 million, respectively, in 1995, $60.6 million and $38.9 million, respectively, in 1994, and $54.3 million and $39.5 million, respectively, in 1993. 14 FORTY-NINE Summarized results of operations of the 50% owned affiliates for the three years ended December 31, 1995 are as follows:
(In millions) 1995 1994 1993 - -------------------------------------------------------------------------------- Revenue $ 709.1 643.2 516.2 Expenses 643.5 601.2 491.8 Net income 63.3 40.7 23.1 -------- -------- --------
Summarized results of operations of the less than 50% owned affiliates for the three years ended December 31, 1995 are as follows:
(In millions) 1995 1994 1993 - -------------------------------------------------------------------------------- Revenue $ 612.0 573.9 459.5 Expenses 540.0 473.9 407.8 Gain on extinguishment of debt -- -- 18.3 Net income 53.5 71.4 53.8 -------- -------- --------
Other investments at December 31, 1995 and 1994 consist of:
(In millions) 1995 1994 - -------------------------------------------------------------------------------- Long-term marketable securities $ -- 1.0 Other, net of $12.5 million reserve in 1995 and 1994 19.1 17.7 ------- ------- Total $ 19.1 18.7 ------- ------- ------- -------
PROPERTY AND EQUIPMENT Property and equipment at December 31, 1995 and 1994 are as follows:
(In millions) 1995 1994 - -------------------------------------------------------------------------------- Land $ 158.1 158.1 Buildings and leasehold improvements 1,749.6 1,617.1 Furniture and equipment 517.5 490.7 Property held for sale or development 36.8 57.2 Construction in progress 28.2 85.6 ---------- ---------- 2,490.2 2,408.7 Less accumulated depreciation 794.3 743.9 ---------- ---------- Total $ 1,695.9 1,664.8 ---------- ---------- ---------- ----------
Purchases of property and equipment financed with construction payables totaled $12.8 million, $14.4 million and $2.9 million at December 31, 1995, 1994 and 1993, respectively. CURRENT LIABILITIES Current liabilities at December 31, 1995 and 1994 are as follows:
(In millions) 1995 1994 - -------------------------------------------------------------------------------- Accounts payable and accrued expenses $ 306.5 284.0 Current maturities of long-term debt 216.8 36.7 Income taxes payable 11.6 7.6 ---------- ---------- Total $ 534.9 328.3 ---------- ---------- ---------- ----------
15 FIFTY LONG-TERM DEBT Long-term debt at December 31, 1995 and 1994 is as follows:
(In millions) 1995 1994 - -------------------------------------------------------------------------------- Industrial development revenue bonds at adjustable rates, due 2015 $ 82.0 82.0 Senior notes, 7.02% to 9.80%, due 1997 to 2002 636.6 827.2 Mortgage notes, 6.68% to 8.34%, due 1996 to 2011 103.5 105.2 Commercial paper 406.1 210.7 Revolving loans, with an average rate of 5.91% at December 31, 1995 51.1 57.3 Other 7.2 6.2 ---------- ---------- 1,286.5 1,288.6 Less current maturities 216.8 36.7 ---------- ---------- Net long-term debt $ 1,069.7 1,251.9 ---------- ---------- ---------- ----------
Interest paid, net of amounts capitalized, was $95.3 million, $88.3 million and $79.8 million in 1995, 1994 and 1993, respectively. Capitalized interest amounted to $3.3 million, $7.0 million and $2.0 million, respectively. Debt maturities during the next five years are as follows:
(In millions) - -------------------------------------------------------------------------------- 1996 $ 216.8 1997 72.1 1998 96.8 1999 367.5 2000 122.6 ----------
Secured debt obligations of $82.0 million at December 31, 1995 are collateralized by property with a net book value of $58.7 million and are payable over remaining terms ranging to 19 years. During 1995 the Company repurchased $61.2 million of its long-term debt, including $28.9 million of its $200 million Series B Medium Term Notes. Available financing under the Series B Medium Term Note program totaled $30 million at December 31, 1995. The Company has an effective shelf registration with the Securities and Exchange Commission for up to $65 million of new debt securities. The terms and conditions of these debt securities will be determined by market conditions at the time of issuance. During 1995, 1994 and 1993 the Company issued and renewed commercial paper and private notes for varying periods with interest at market rates. The Company had $406.1 million, $210.7 million and $358.4 million in commercial paper and private notes outstanding at December 31, 1995, 1994 and 1993, respectively. In 1995, 1994 and 1993 average amounts of commercial paper and private notes outstanding were $288.3 million, $231.3 million and $273.1 million, respectively, with the largest amounts outstanding at any one time being $417.8 million, $327.1 million, and $358.4 million, respectively. Weighted average interest rates were 5.98%, 4.33% and 3.16%, respectively. The Company has entered into various long-term revolving credit facilities with an aggregate commitment at December 31, 1995 of $597.5 million, of which $20.0 million expires in 1996, $67.5 million expires in 1997, $70.0 million expires in 1998, $325.0 million expires in 1999, and the remaining $115.0 million expires in 2000. At December 31, 1995, $406.1 million of the aggregate commitment supported the issuance of commercial paper. Excluding balances outstanding and the portion of the commitment which supports the issuance of commercial paper, $140.3 million of revolving bank debt financing was available to the Company at December 31, 1995. Provisions under various loan agreements require the Company to comply with certain financial covenants which include maintaining a minimum consolidated tangible net worth and limiting the amount of outstanding indebtedness. FINANCIAL INSTRUMENTS CASH EQUIVALENTS, TEMPORARY INVESTMENTS AND LONG-TERM MARKETABLE SECURITIES The fair value of cash equivalents, temporary investments and long-term marketable securities is estimated based on the quoted market price of the investments. OTHER FINANCIAL INSTRUMENTS It is not practicable to estimate the fair value of notes receivable and a cost basis investment, the carrying values of which totaled $167.9 million in 1995 and $114.7 million in 1994. The Company received cash payments of $43.3 million and $29.1 million with respect to such investments in 1995 and 1994, respectively. 16 FIFTY-ONE LONG-TERM DEBT The estimated fair value of long-term debt is based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. INTEREST RATE SWAP AGREEMENTS The Company enters into interest rate swap agreements to decrease its exposure to interest rate fluctuation on its floating rate debt. At December 31, 1995 the Company was party to two interest rate swap agreements having a total notional principal amount of $15.0 million. These swap agreements have a weighted average fixed rate of 8.46% and an average remaining life of .9 years. The Company is exposed to a potential financial loss in the event of nonperformance by the other parties to the swap agreements. However, the Company does not anticipate nonperformance by the counterparties. The fair value of interest rate swap agreements is the estimated amount that the Company would pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. FOREIGN CURRENCY EXCHANGE CONTRACTS The Company enters into foreign currency exchange contracts to hedge certain transactions and investments denominated in foreign currencies. The purpose of the Company's foreign currency hedge activities is to protect the Company from the risk that cash inflows from and investments in foreign operations will be affected by changes in exchange rates. The Company does not hold these contracts for trading purposes. The fair value of foreign currency exchange contracts in 1995, estimated based on the quoted market prices of these instruments, is not significant. No contracts were outstanding at December 31, 1994. The estimated fair values of the Company's financial instruments at December 31, 1995 and 1994 are as follows:
1995 1994 ------------------------------ ------------------------------- Carrying Fair Carrying Fair (In millions) Amount Value Amount Value - ------------------------------------------------------------------------------------------------------------------------------------ Cash and equivalents and temporary investments $ 408.7 408.5 393.2 392.8 Long-term marketable securities -- -- 1.0 1.0 Long-term debt (including current maturities) 1,286.5 1,317.7 1,288.6 1,261.7 Unrecognized financial instruments: Interest rate swaps in net payable position -- .6 -- 1.3 ---------- ---------- ---------- ----------
The Company invests primarily in debt securities which are held to maturity and valued at amortized cost. The aggregate fair value of debt securities at December 31, 1995 and 1994 was $306.5 million and $234.1 million, respectively. The Company also has investments in bond mutual funds. As these funds are open-ended and have no fixed maturities, the Company has classified this form of investment as a marketable equity security. At December 31, 1995 and 1994, the aggregate fair value of these investments totaled $70.7 million and $131.9 million, respectively, or $7.1 million and $8.1 million below cost, respectively. The unrealized loss, net of the related deferred tax benefit, at December 31, 1995 and 1994 of $4.6 million and $5.3 million, respectively, is deducted from stockholders' equity. INCOME TAXES Effective January 1, 1993 the Company adopted SFAS No. 109, "Accounting for Income Taxes." As permissible under the standard, the Company reflected the impact as a cumulative adjustment in the 1993 first quarter and did not restate prior periods. The cumulative adjustment had a favorable impact on net income of $8.0 million. The provisions for income taxes for the three years ended December 31, 1995 are as follows:
(In millions) 1995 1994 1993 - -------------------------------------------------------------------------------- Current Federal $ 80.8 84.2 65.9 State, foreign and local 20.4 19.4 1.5 ------- ------- ------- 101.2 103.6 67.4 Deferred 1.4 (18.3) (9.2) ------- ------- ------- Total $ 102.6 85.3 58.2 ------- ------- ------- ------- ------- -------
17 FIFTY-TWO The components of deferred income tax expense were as follows:
(In millions) 1995 1994 1993 - -------------------------------------------------------------------------------- Investments in unconsolidated affiliates $ 12.2 (9.3) -- Bad debt reserves -- (3.4) -- Self-insurance reserves 5.2 1.1 (2.1) Benefit plans (5.9) (4.1) (2.4) Other asset reserves -- -- (5.0) Other, net (10.1) (2.6) (3.0) ------- ------- ------- 1.4 (18.3) (12.5) Effect of the increase in the Federal statutory rate on deferred income tax balances -- -- 3.3 ------- ------- ------- Total $ 1.4 (18.3) (9.2) ------- ------- ------- ------- ------- -------
During 1995, 1994 and 1993 the Company paid income taxes of $94.7 million, $103.8 million and $74.1 million, respectively. The income tax effects of temporary differences between financial and income tax reporting that gave rise to deferred income tax assets and liabilities at December 31, 1995 and 1994, under the provisions of SFAS No. 109, are as follows:
(in millions) 1995 1994 - -------------------------------------------------------------------------------- Deferred tax assets Accrued expenses $ 13.4 14.4 Bad debt reserves 13.4 13.4 Self-insurance reserves 20.2 25.3 Benefit plans 9.7 3.8 Other asset reserves 5.6 5.5 Foreign tax credit carryovers (expire beginning 1999) 6.2 7.5 Other 25.7 15.8 -------- -------- 94.2 85.7 Valuation allowance (6.2) (7.5) -------- -------- 88.0 78.2 -------- -------- Deferred tax liabilities Fixed assets, primarily depreciation (97.8) (98.9) Investments in unconsolidated affiliates (68.4) (53.1) Other (21.4) (24.5) -------- -------- (187.6) (176.5) -------- -------- Net deferred tax liability $ (99.6) (98.3) -------- -------- -------- --------
Reconciliation of the Federal income tax rate and the Company's effective tax rate is as follows:
1995 1994 1993 - -------------------------------------------------------------------------------- Federal income tax rate 35.0% 35.0 35.0 Increase (reduction) in taxes: Adjustment to deferred tax balances due to increase in Federal statutory rate -- -- 2.0 State and local income taxes, net of Federal tax benefits 3.1 3.3 (.2) Foreign taxes, net (.9) .8 .9 Benefit of dividend income (.3) (.3) (.3) Other (.3) 2.1 (1.2) ------ ----- ----- Effective tax rate 36.6% 40.9 36.2 ------ ----- ----- ------ ----- -----
18 FIFTY-THREE CAPITAL STOCK Ninety million shares of common stock with a par value of $2.50 per share are authorized, of which 51.0 million were issued at December 31, 1995 and 1994, including treasury shares of 2.7 million and 2.9 million in 1995 and 1994, respectively. Ten million shares of preferred stock with a par value of $1.00 per share are authorized. The shares are issuable in series. No shares were issued or outstanding in 1995 or 1994. The Company has a Share Purchase Rights Plan, under which a right is attached to each share of the Company's common stock. The rights may only become exercisable under certain circumstances involving actual or potential acquisitions of the Company's common stock by a specified person or affiliated group. Depending on the circumstances, if the rights become exercisable, the holder may be entitled to purchase units of the Company's junior participating preferred stock, shares of the Company's common stock or shares of common stock of the acquiror. The rights remain in existence until July 25, 1998 unless they are terminated, exercised or redeemed. At December 31, 1995, 1.8 million shares of common stock were reserved for the exercise of options under the Company's stock option plans. Options may be granted to salaried officers and other key employees of the Company to purchase common stock at not less than fair market value at the date of grant. Options may be exercised in installments generally commencing one year after the date of grant. The plan also permits the granting of Stock Appreciation Rights (SARs). No SARs have been granted as of December 31, 1995.
Options Price Range Options Available (Per Share) Outstanding for Grant - ------------------------------------------------------------------------------------------- Balance at December 31, 1992 $21.31-111.63 1,491,874 474,339 Granted 46.94- 49.00 89,000 (89,000) Exercised 21.31- 52.06 (174,010) -- Cancelled 29.63-111.63 (54,438) 54,438 ------------- --------- --------- Balance at December 31, 1993 28.34- 53.19 1,352,426 439,777 Authorized -- 500,000 Granted 55.19- 69.63 753,300 (753,300) Exercised 28.34- 53.19 (269,810) -- Cancelled 29.63- 69.63 (64,851) 59,474 ------------- --------- --------- Balance at December 31, 1994 28.38- 69.63 1,771,065 245,951 Granted 65.88- 76.44 229,050 (229,050) Exercised 28.38- 69.63 (222,455) -- Cancelled 38.13- 69.63 (71,225) 69,725 ------------- --------- --------- Balance at December 31, 1995 29.44- 76.44 1,706,435 86,626 ------------- --------- --------- --------- --------- Exercisable at December 31, 1995 29.44- 69.63 897,279 ------------- ---------
Under provisions of Nevada, New Jersey and other gaming laws, and the Company's certificate of incorporation, certain securities of the Company are subject to restrictions on ownership which may be imposed by specified governmental authorities. Such restrictions may require the holder to dispose of the securities or, if the holder refuses to make such disposition, the Company may be obligated to repurchase the securities. EMPLOYEE BENEFIT PLANS The Company has a noncontributory retirement plan (Basic Plan) covering substantially all regular full-time, nonunion employees. The Company also has plans covering qualifying officers and non-officer directors (Supplemental Plans). Benefits for all plans are based upon years of service and compensation, as defined. The Company's funding policy is to contribute not less than the minimum amount required under Federal law, but not more than the maximum deductible for Federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for benefits expected to be earned in the future. 19 FIFTY-FOUR The following sets forth the funded status for the Basic Plan as of December 31, 1995 and 1994:
(In millions) 1995 1994 - -------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligation: Accumulated benefit obligation, including vested benefits of $(163.1) and $(145.7), respectively $(182.8) (151.4) ------- ------- ------- ------- Projected benefit obligation for service rendered to date $(233.2) (192.1) Plan assets at fair value, primarily listed securities and temporary investments 178.2 150.5 ------- ------- Projected benefit obligation in excess of plan assets (55.0) (41.6) Unrecognized net loss from changes in assumptions 45.4 43.7 Unrecognized net asset as of January 1, 1986 (6.7) (8.0) ------- ------- Accrued pension cost $ (16.3) (5.9) ------- ------- ------- ------- Pension cost includes the following components: Service cost $ 9.5 9.5 Interest cost on projected benefit obligation 15.2 13.6 Actual return on assets (33.4) (1.4) Net amortization 19.1 (11.7) ------- ------- Net periodic cost before allocation 10.4 10.0 Cost allocated to managed properties 1.6 2.3 ------- ------- Net periodic pension cost $ 8.8 7.7 ------- ------- ------- -------
Included in plan assets at fair value are securities of the Company of $18.6 million and $19.7 million at December 31, 1995 and 1994, respectively. The following sets forth the funded status for the Supplemental Plans as of December 31, 1995 and 1994:
(In millions) 1995 1994 - -------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligation: Accumulated benefit obligation, including vested benefits of $(18.9) and $(13.9), respectively $ (19.0) (13.9) ------- ------- ------- ------- Projected benefit obligation for service rendered to date $ (28.2) (15.8) Plan assets at fair value 13.8 13.1 ------- ------- Projected benefit obligation in excess of plan assets (14.4) (2.7) Unrecognized net loss from changes in assumptions 11.0 4.7 Unrecognized obligation as of January 1, 1986 1.7 2.1 ------- ------- (Accrued) prepaid pension cost $ (1.7) 4.1 ------- ------- ------- ------- Pension cost includes the following components: Service cost $ .9 1.1 Interest cost on projected benefit obligation 1.4 1.0 Actual return on assets (increase) decrease (.8) 1.0 Net amortization 4.4 5.1 ------- ------- Net periodic pension cost $ 5.9 8.2 ------- ------- ------- -------
The discount rates used in determining the actuarial present values of the projected benefit obligations were seven percent in 1995 and eight percent in 1994, with the rate of increase in future compensation projected at five percent in 1995 and five and one-half percent in 1994. The expected long-term rate of return on assets is nine percent. The unrecognized net (asset) obligation is being amortized over a 15 year period. Unrecognized net gains and losses on plan assets are amortized over a five year period. Net periodic pension cost of the Supplemental Plans reflects the impact of accelerated plan funding and participant terminations prior to normal retirement dates. A significant number of the Company's employees are covered by union sponsored, collectively bargained multi-employer pension plans. The Company contributed and charged to expense $9.8 million, $9.2 million and $9.3 million in 1995, 1994 and 1993, respectively, for such plans. Information from the plans' administrators is not sufficient to permit the Company to determine its share, if any, of unfunded vested benefits. The Company also has an employee investment plan whereby the Company contributes certain percentages of employee contributions. The cost of the plan is not significant. 20 FIFTY-FIVE POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides life insurance benefits to certain retired employees. Under terms of the plan covering such life insurance benefits, the Company reserves the right to change, modify or discontinue these benefits. The Company does not provide postretirement health care benefits to its employees. Effective January 1, 1993 the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." As permissible under the standard, the Company reflected the impact as a cumulative adjustment in the 1993 first quarter and did not restate prior periods. The cumulative adjustment resulted in a charge to net income of $4.6 million, net of a $2.3 million deferred tax benefit. The incremental effect on 1993 results of adopting SFAS No. 106 was a pretax charge of $.9 million. The Company's unfunded accumulated postretirement benefit obligations as of December 31, 1995 and 1994 are as follows:
(In millions) 1995 1994 - -------------------------------------------------------------------------------------------------- Retirees $ (3.5) (2.5) Active employees - fully eligible (2.9) (2.4) Active employees - not fully eligible (4.5) (3.1) ------- ------- (10.9) (8.0) Unrecognized net loss 1.3 .7 ------- ------- Accumulated postretirement benefit obligation $ (9.6) (7.3) ------- ------- ------- ------- Postretirement cost includes the following components: Service cost $ .4 .5 Interest cost on projected benefit obligation .7 .7 ------- ------- Total postretirement benefit cost $ 1.1 1.2 ------- ------- ------- -------
The discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation was seven percent in 1995 and eight percent in 1994, with the annual rate of increase in future compensation projected at five percent in 1995 and five and one-half percent in 1994. SEGMENTS OF BUSINESS Financial data of the Company's business segments for the years ended December 31, 1995, 1994 and 1993 are as follows:
(In millions) 1995 1994 1993 - -------------------------------------------------------------------------------------------------- Depreciation (1) Hotels $ 90.2 89.3 82.8 Gaming 80.9 72.9 65.1 Corporate 4.0 3.5 3.4 --------- --------- --------- Total $ 175.1 165.7 151.3 --------- --------- --------- --------- --------- --------- Capital expenditures (1) Hotels $ 75.1 87.5 65.2 Gaming 163.4 236.4 144.2 Corporate 7.6 2.6 1.9 --------- --------- --------- Total $ 246.1 326.5 211.3 --------- --------- --------- --------- --------- --------- Assets (2) Hotels $ 1,235.5 1,270.7 940.7 Gaming 1,332.9 1,172.5 1,085.7 Corporate 491.9 482.7 648.4 --------- --------- --------- Total $ 3,060.3 2,925.9 2,674.8 --------- --------- --------- --------- --------- ---------
(1) Includes proportionate share of unconsolidated affiliates. (2) Includes investments in unconsolidated affiliates. 21 FIFTY-SIX Supplemental hotels segment operating data for the three years ended December 31, 1995 are as follows:
(In millions) 1995 1994 1993 - -------------------------------------------------------------------------------------------------- Revenue Rooms $ 372.6 313.9 252.9 Food and beverage 141.4 127.7 113.5 Management and franchise fees 89.4 83.0 78.7 Other products and services 58.3 51.5 44.5 Operating income from unconsolidated affiliates 47.1 42.2 30.4 ------- ------- ------- 708.8 618.3 520.0 ------- ------- ------- Expenses Rooms 110.0 98.3 83.9 Food and beverage 115.2 107.5 93.7 Other costs and expenses 275.9 265.0 246.2 ------- ------- ------- 501.1 470.8 423.8 ------- ------- ------- Hotels operating income $ 207.7 147.5 96.2 ------- ------- ------- ------- ------- -------
Supplemental gaming segment operating data for the three years ended December 31, 1995 are as follows:
(In millions) 1995 1994 1993 - -------------------------------------------------------------------------------------------------- Revenue Rooms $ 214.6 195.7 187.3 Food and beverage 124.3 119.5 123.3 Casino 511.0 480.6 502.1 Other products and services 67.1 72.7 49.3 Management fees 11.1 11.5 6.4 Operating income from unconsolidated affiliates 12.5 15.6 5.1 ------- ------- ------- 940.6 895.6 873.5 ------- ------- ------- Expenses Rooms 76.4 73.5 68.6 Food and beverage 114.2 108.9 108.7 Casino 234.9 216.3 217.5 Other costs and expenses 337.3 331.5 308.2 ------- ------- ------- 762.8 730.2 703.0 ------- ------- ------- Gaming operating income $ 177.8 165.4 170.5 ------- ------- ------- ------- ------- -------
LEASES The Company operates eight properties under noncancellable operating leases, all of which are for land only, having remaining terms up to 38 years. Upon expiration of four of the leases, the Company has renewal options of 25, 30, 30 and 40 years. Seven leases require the payment of additional rentals based on varying percentages of revenue or income. Minimum lease commitments under all noncancellable operating leases are as follows:
Year ending December 31, (In millions) - -------------------------------------------------------------------------------------------------- 1996 $ 9.1 1997 8.7 1998 8.3 1999 8.1 2000 7.8 2001 to 2033 76.0 ------- Total $ 118.0 ------- -------
Total lease rental expense for all operating leases is composed of:
(In millions) 1995 1994 1993 - -------------------------------------------------------------------------------------------------- Minimum rentals $ 7.9 6.5 6.4 Additional rentals 7.4 6.8 4.9 ------- ------- ------- Total $ 15.3 13.3 11.3 ------- ------- ------- ------- ------- -------
22 FIFTY-SEVEN COMMITMENTS AND CONTINGENT LIABILITIES At December 31, 1995 the Company had contractual commitments at its wholly-owned or leased properties for major expansion and rehabilitation projects of approximately $110 million. Additionally, the Company is committed, under certain conditions, to invest or loan up to $74 million to entities developing hotel, gaming and vacation ownership properties. The Company has entered into a hotel management agreement whereby it guarantees certain payments and loans to the hotel owners if agreed upon levels of financial performance are not maintained. The Company does not believe it is likely that material payments will be required under this agreement. In addition, in the event the Company terminates this agreement, it may be obligated to pay $12.5 million to the hotel owners. Various lawsuits are pending against the Company. In management's opinion, disposition of these lawsuits is not expected to have a material effect on the Company's financial position or results of operations. SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) QUARTERLY FINANCIAL DATA
(In millions, except per share amounts, stock prices and percentages) Income Net Before Income Occupancy (1) Operating Income Net Per Dividends High/Low Hotels Gaming Revenue Income Taxes Income Share Per Share Stock Price ------------------------------------------------------------------------------------------------------------------------ 1995 1st Quarter 70% 84 $ 381.9 74.0 55.1 32.0 .66 .30 77.88/64.13 2nd Quarter 75 88 424.2 105.0 86.7 52.9 1.09 .30 79.75/65.63 3rd Quarter 76 87 385.7 52.6 33.0 24.8 .51 .30 74.13/60.38 4th Quarter 71 87 457.6 122.0 105.5 63.1 1.30 .30 68.75/60.63 ---- ---- -------- ----- ----- ----- ----- ----- ----------- Year 73% 86 $1,649.4 353.6 280.3 172.8 3.56 1.20 79.75/60.38 ---- ---- -------- ----- ----- ----- ----- ----- ----------- ---- ---- -------- ----- ----- ----- ----- ----- ----------- 1994 1st Quarter 66% 85 $ 340.4 57.3 39.3 22.7 .47 .30 74.00/54.50 2nd Quarter 72 90 383.0 75.8 57.8 33.9 .70 .30 61.25/49.75 3rd Quarter 72 90 382.7 64.2 48.2 27.0 .56 .30 66.63/53.25 4th Quarter 68 84 407.8 87.3 63.3 38.1 .79 .30 72.00/56.00 ---- ---- -------- ----- ----- ----- ----- ----- ----------- Year 70% 87 $1,513.9 284.6 208.6 121.7 2.52 1.20 74.00/49.75 ---- ---- -------- ----- ----- ----- ----- ----- ----------- ---- ---- -------- ----- ----- ----- ----- ----- -----------
(1) Properties owned or managed As of December 31, 1995 there were approximately 4,200 stockholders of record. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Hilton Hotels Corporation: We have audited the accompanying consolidated balance sheets of Hilton Hotels Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hilton Hotels Corporation and subsidiaries as of December 31, 1995 and 1994 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California February 1, 1996 23 FIFTY-EIGHT HILTON HOTELS CORPORATION AND SUBSIDIARIES TEN YEAR SUMMARY
(Dollars in millions, except per share amounts) 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------------------- Operating Data for Years Revenue Ended December 31 Hotels (1) $2,210.2 2,066.0 1,797.9 1,678.0 1,526.5 Management fees 51.1 45.7 42.7 37.0 35.4 Franchise fees 39.2 37.3 36.0 35.4 34.0 -------- -------- -------- -------- -------- Total hotels 2,300.5 2,149.0 1,876.6 1,750.4 1,595.9 Gaming (1) 1,704.2 1,445.3 1,062.0 932.4 839.3 -------- -------- -------- -------- -------- Total 4,004.7 3,594.3 2,938.6 2,682.8 2,435.2 Less nonconsolidated managed 2,414.9 2,138.2 1,580.6 1,479.6 1,352.8 -------- -------- -------- -------- -------- Total revenue from consolidated operations $1,589.8 1,456.1 1,358.0 1,203.2 1,082.4 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Operating income Hotels (2) $ 207.7 147.5 96.2 91.5 92.9 Gaming (2) 177.8 165.4 170.5 153.4 115.0 Corporate expense (31.9) (28.3) (26.8) (25.0) (23.1) -------- -------- -------- -------- -------- Total 353.6 284.6 239.9 219.9 184.8 Net interest expense (2) (74.8) (76.4) (73.2) (61.7) (62.4) Property transactions, net 1.5 1.1 (4.5) .9 .5 Foreign currency losses -- (.7) (1.3) -- -- Provision for income taxes (102.6) (85.3) (58.2) (55.2) (38.6) Minority interest, net (4.9) (1.6) -- -- -- -------- -------- -------- -------- -------- Net income before cumulative effect of accounting changes 172.8 121.7 102.7 103.9 84.3 Cumulative effect of accounting changes, net -- -- 3.4 -- -- -------- -------- -------- -------- -------- Net income $ 172.8 121.7 106.1 103.9 84.3 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Depreciation (2) 175.1 165.7 151.3 137.6 128.8 Capital expenditures (2) 246.1 326.5 211.3 266.5 102.2 -------- -------- -------- -------- -------- Stockholder Data Net income per share $ 3.56 2.52 2.21 2.17 1.76 Average common and equivalent shares 48.5 48.3 48.0 47.9 47.8 Stockholders' equity $1,253.7 1,127.8 1,056.7 1,002.5 952.8 Stockholders' equity per share 25.96 23.45 22.11 21.02 20.06 Return on average stockholders' equity 14.5% 11.1 10.3 10.6 9.0 Dividends per share $ 1.20 1.20 1.20 1.20 1.20 Market price per share - high/low 80/60 74/50 61/42 53/40 50/34 -------- -------- -------- -------- -------- Financial Position at Year End Working capital $ 182.4 345.4 449.1 310.6 306.6 Assets 3,060.3 2,925.9 2,674.8 2,659.4 2,186.8 Long-term debt 1,069.7 1,251.9 1,112.6 1,087.1 789.0 Ratio of long-term debt to total capital (3) .42 .48 .46 .47 .40 -------- -------- -------- -------- -------- General Information Percentage of occupancy (1) Hotels 73 70 67 66 64 Gaming 86 87 86 85 84 Number of properties at year end Wholly-owned or leased hotels 18 18 18 16 16 Partially owned hotels 15 15 15 15 15 Managed hotels 24 24 26 25 23 Franchised hotels 162 161 171 180 199 Wholly or partially owned hotel-casinos 8 7 7 7 5 -------- -------- -------- -------- -------- Total 227 225 237 243 258 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Available rooms at year end Wholly-owned or leased hotels 9,114 9,106 9,160 8,729 8,756 Partially owned hotels 14,984 14,992 14,991 13,982 13,938 Managed hotels 15,096 15,686 15,940 14,908 13,788 Franchised hotels 41,687 40,436 42,816 45,002 49,131 Wholly or partially owned hotel-casinos 12,782 12,080 12,045 12,557 9,929 -------- -------- -------- -------- -------- Total 93,663 92,300 94,952 95,178 95,542 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(1) Includes properties owned or managed. (2) Includes proportionate share of unconsolidated affiliates. (3) Total capital represents total assets less current liabilities. 24 FIFTY-NINE HILTON HOTELS CORPORATION AND SUBSIDIARIES TEN YEAR SUMMARY (CONTINUED)
(Dollars in millions, except per share amounts) 1990 1989 1988 1987 1986 - ---------------------------------------------------------------------------------------------------------------------------------- Operating Data for Years Revenue Ended December 31 Hotels (1) 1,558.4 1,500.6 1,395.2 1,279.4 1,228.3 Management fees 36.9 34.4 33.3 31.3 28.8 Franchise fees 34.6 34.2 33.5 31.9 30.7 -------- -------- -------- -------- -------- Total hotels 1,629.9 1,569.2 1,462.0 1,342.6 1,287.8 Gaming (1) 824.6 694.3 695.3 589.7 483.7 -------- -------- -------- -------- -------- Total 2,454.5 2,263.5 2,157.3 1,932.3 1,771.5 Less nonconsolidated managed 1,367.4 1,309.4 1,241.9 1,116.9 1,052.5 -------- -------- -------- -------- -------- Total revenue from consolidated operations 1,087.1 954.1 915.4 815.4 719.0 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Operating income Hotels (2) 120.6 129.3 115.1 100.7 83.6 Gaming (2) 130.4 102.6 128.6 107.7 88.1 Corporate expense (29.2) (25.6) (20.8) (18.3) (17.6) -------- -------- -------- -------- -------- Total 221.8 206.3 222.9 190.1 154.1 Net interest expense (2) (54.7) (43.8) (38.1) (22.0) (22.1) Property transactions, net -- (3.7) -- 43.8 (2.5) Foreign currency losses -- -- -- -- -- Provision for income taxes (54.6) (48.7) (53.9) (72.0) (31.7) Minority interest, net -- -- -- -- -- -------- -------- -------- -------- -------- Net income before cumulative effect of accounting changes 112.5 110.1 130.9 139.9 97.8 Cumulative effect of accounting changes, net -- -- -- -- -- -------- -------- -------- -------- -------- Net income 112.5 110.1 130.9 139.9 97.8 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Depreciation (2) 119.4 104.8 89.5 80.5 71.3 Capital expenditures (2) 262.4 367.1 386.8 205.6 240.7 -------- -------- -------- -------- -------- Stockholder Data Net income per share 2.34 2.27 2.72 2.80 1.96 Average common and equivalent shares 48.1 48.5 48.1 50.0 49.9 Stockholders' equity 923.3 883.0 814.1 772.8 707.3 Stockholders' equity per share 19.44 18.40 17.03 15.80 14.23 Return on average stockholders' equity 12.5 13.0 16.5 18.9 14.4 Dividends per share 1.15 1.00 .95 .90 .90 Market price per share - high/low 84/26 116/48 55/34 46/28 40/30 -------- -------- -------- -------- -------- Financial Position at Year End Working capital 43.8 22.9 279.5 206.9 173.4 Assets 1,926.7 2,216.0 1,892.5 1,423.6 1,302.3 Long-term debt 526.6 487.1 568.5 283.7 280.9 Ratio of long-term debt to total capital (3) .31 .30 .36 .22 .24 -------- -------- -------- -------- -------- General Information Percentage of occupancy (1) Hotels 68 69 70 68 65 Gaming 84 86 87 84 84 Number of properties at year end Wholly-owned or leased hotels 14 13 9 8 8 Partially owned hotels 15 14 12 13 14 Managed hotels 21 22 21 22 22 Franchised hotels 208 214 225 224 223 Wholly or partially owned hotel-casinos 5 4 4 4 4 -------- -------- -------- -------- -------- Total 263 267 271 271 271 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Available rooms at year end Wholly-owned or leased hotels 7,696 7,739 6,494 6,027 6,085 Partially owned hotels 14,311 13,750 13,409 13,528 14,350 Managed hotels 12,888 13,518 13,383 14,183 13,425 Franchised hotels 51,559 52,612 54,876 55,641 55,602 Wholly or partially owned hotel-casinos 9,929 7,411 7,326 7,318 7,318 -------- -------- -------- -------- -------- Total 96,383 95,030 95,488 96,697 96,780 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(1) Includes properties owned or managed. (2) Includes proportionate share of unconsolidated affiliates. (3) Total capital represents total assets less current liabilities. 25 EX-21 11 EXHIBIT 21 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF HILTON HOTELS CORPORATION
State or Country A. Wholly-owned Subsidiaries of Incorporation ------------------------- ---------------- Benco, Inc. (4) Nevada Conrad (Indonesia) Corporation (2) (5) Nevada Conrad International (Egypt) Corporation (2) (5) Nevada Conrad International Hotels Corporation (3) Nevada Conrad International Hotels (HK) Ltd. (5) Hong Kong Conrad International Hotels Limited (2) (6) Ireland Conrad International (Spain) Corporation (2) (5) Nevada Conrad International Investment Corporation (3) Nevada Conrad Royalty Corporation (3) Nevada Conrad (Thailand) Corporation (2) (5) Nevada Destination Resorts, Inc. Arizona Flamingo Hilton Corporation (4) Nevada Flamingo Hilton-Laughlin, Inc. (7) Nevada Flamingo Hilton - Reno, Inc. (4) Nevada Hapeville Investors, Inc. Delaware Hilton Employee Relief Fund California Hilton Equipment Corporation Delaware Hilton Gaming Corporation Nevada Hilton Gaming (Switzerland County) Corporation (4) Nevada Hilton Hawaii Corporation Delaware Hilton Hotels Partners I, Inc. Delaware Hilton Hotels Partners II, Inc. Delaware Hilton Hotels U.S.A., Inc. Delaware Hilton Inns, Inc. Delaware Hilton Insurance Corporation Vermont Hilton Kansas City Corporation (4) Missouri Hilton New Jersey Corporation (2) (4) New Jersey Hilton New Orleans Corporation (4) Louisiana Hilton Pennsylvania Hotel Corporation Delaware Hilton Recreation, Inc. Delaware Hilton Resorts Corporation Delaware Hilton San Diego Corporation California Hilton Suites, Inc. Delaware Hilton Supersports, Inc. (4) Nevada Hilton Systems, Inc. Nevada Hilton Washington Corporation New York HKC Advertising, Inc. (8) Missouri HKC Partners, Inc. (4) Missouri Hotels Statler Company, Inc. Delaware Kenner Investors, Inc. Delaware Las Vegas Hilton Corporation (4) Nevada
State or Country A. Wholly-owned Subsidiaries of Incorporation ------------------------- --------------- (Continued) Reno Hilton Resort Corporation (4) Nevada The BAC 1-11 Corporation (4) Nevada The Beverly Hilton Corporation (2) California The Hotel Waldorf-Astoria Corporation (2) New York The New Yorker Hotel Corporation (2) New York The Palmer House Hilton Hotel Company Illinois
_______________________________________________________________________________ (1) Inactive corporation. (2) Nameholding companies. (3) Indirect ownership. Wholly-owned by Hilton Hotels U.S.A., Inc., which is wholly-owned by Hilton Hotels Corporation. (4) Indirect ownership. Wholly-owned by Hilton Gaming Corporation, which is wholly-owned by Hilton Hotels Corporation. (5) Indirect ownership. Wholly-owned by Conrad International Hotels Corporation, which is wholly-owned by Hilton Hotels U.S.A., Inc., which is wholly-owned by Hilton Hotels Corporation. (6) Indirect ownership. Wholly-owned by Conrad Royalty Corporation, which is wholly-owned by Hilton Hotels U.S.A., Inc., which is wholly-owned by Hilton Hotels Corporation. (7) Indirect ownership. Wholly-owned by Flamingo Hilton Corporation, which is wholly-owned by Hilton Gaming Corporation, which is wholly-owned by Hilton Hotels Corporation. (8) Indirect ownership. Wholly-owned by Hilton Kansas City Corporation, which is wholly-owned by Hilton Gaming Corporation, which is wholly-owned by Hilton Hotels Corporation.
State or % Country of B. Partially-owned Subsidiaries Ownership Incorporation ---------------------------- --------- ------------- Attiki Casinos, H.S.A. 50% Greece Baluma S.A. (3) See (3) below. Uruguay Baluma Holdings S.A. (4) 37.75% The Bahamas Compass Computer Services, Inc. 50% Delaware Earlsfort Centre Hotel Proprietors Limited 14.7% Ireland Grand Vacations Realty, Inc. (1) 50% Delaware Greenroll Limited 30% Hong Kong Hilton Service Corporation 51% Delaware Indiana Ventures LLC (6) 48.5% Nevada International Company for Touristic Investments, S.A.E. 20% Egypt Jupiters Management Limited 66.6% Australia Jupiters Limited 19.9% Australia Pinnacle Gaming Development Corp. (7) 48.5% Colorado Switzerland County Development Corp. (5) 48.5% Nevada Washington Hilton Racquet Club (2) 50% District of Columbia Windsor Casino, Limited 33.3% Ontario, Canada Yeditepe Beynelmilel Otelcilik Turizm Ve Ticaret Anonim Sirketi (Seven Hills International Hotel, Tourism and Trade, A.S.) 25% Turkey
(1) This corporation is 50%-owned by Hilton Grand Vacations Company, a joint venture which is 50%-owned by Hilton Resorts Corporation, which is a wholly-owned subsidiary of Hilton Hotels Corporation. (2) This non-profit corporation is 50%-owned by Hilton Washington Corporation, which is a wholly-owned subsidiary of Hilton Hotels Corporation. (3) This corporation is 99.9%-owned by Baluma Holdings S.A., a Bahamas corporation [see (4) below.] The remaining .1% is owned by Conrad International Hotels Corporation, which is a wholly-owned subsidiary of Hilton Hotels U.S.A., Inc., which is a wholly-owned subsidiary of Hilton Hotels Corporation. (4) This corporation is 37.75%-owned by Conrad International Hotels Corporation, which is a wholly-owned subsidiary of Hilton Hotels U.S.A., Inc., which is a wholly-owned subsidiary of Hilton Hotels Corporation. (5) Formerly named Conrad (New Zealand) Corporation. This corporation is a wholly-owned subsidiary of Indiana Ventures LLC, which is 48.5%-owned by Hilton Gaming (Switzerland County) Corporation, which is a wholly- owned subsidiary of Hilton Gaming Corporation, which is a wholly-owned subsidiary of Hilton Hotels Corporation. (6) This limited-liability company is 48.5%-owned by Hilton Gaming (Switzerland County) Corporation, which is a wholly-owned subsidiary of Hilton Gaming Corporation, which is a wholly-owned subsidiary of Hilton Hotels Corporation. (7) This corporation is a wholly-owned subsidiary of Switzerland County Development Corp., which is a wholly-owned subsidiary of Indiana Ventures LLC, which is 48.5%-owned by Hilton Gaming (Switzerland County) Corporation, which is a wholly-owned subsidiary of Hilton Gaming Corporation, which is a wholly-owned subsidiary of Hilton Hotels Corporation. C. AFFILIATES The following are special purpose corporations formed in connection with the operation of beverage service at particular hotels. Hilton Hotels Corporation does not directly or indirectly own any of the shares of these corporations.
State of Name of Corporation Incorporation ------------------- ------------- Hilton Beverage Corporation Louisiana New Orleans Hilton Beverage Corporation Louisiana
EX-23 12 EXHIBIT 23 ARTHUR ANDERSEN CONSENT ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated February 1, 1996, included (or incorporated by reference) in this Form 10-K, for the year ended December 31, 1995, into the Company's previously filed Registration Statements (File Nos. 2-90922, 2-95746, 33-26112, 33-35883 and 33-35951). /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Los Angeles, California March 20, 1996 EX-27 13 FDS
5 This schedule contains summary financial information extracted from the company's consolidated statements of income and consolidated balance sheets and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 338,000 70,700 241,800 21,900 13,900 717,300 2,490,200 794,300 3,060,300 534,900 1,069,700 0 0 127,600 1,126,100 3,060,300 1,649,400 1,649,400 0 1,243,000 31,900 20,900 74,800 280,300 102,600 172,800 0 0 0 172,800 3.56 3.56
EX-99 14 EXHIBIT 99 EXHIBIT 99 UNDERTAKINGS For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933 (the "Securities Act"), the Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Statement on Form S-8 No. 2-90922 (filed May 2, 1990): Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. 35 -----END PRIVACY-ENHANCED MESSAGE-----