Annual Report (Form 10-K), fiscal year 1994

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 four hotels and two hotel-casinos operated by the Company's wholly-owned subsidiary, Conrad International Hotels Corporation and its subsidiaries ("Conrad").
On February 1, 1995, Hilton owned or leased and operated 23 hotels and managed 40 hotels partially or wholly-owned by others. In addition, 160 hotels were operated under the "Hilton," "Hilton Garden Inn" and "Hilton Suites" names by others pursuant to franchises granted by a subsidiary of Hilton.
Seven of the hotels have substantial gaming operations, five of which are wholly-owned by the Company and are located in Nevada and the other two 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 70%, 71% and 57% of its total operating income in 1992, 1993 and 1994, respectively. For additional information, see the Ten Year Summary on pages 56 and 57 in the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1994 (the "1994 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, and other entities in which the Company has an investment, are 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, 1994, the Company took advantage of various opportunities to expand its business, the most significant of which included the opening of a river casino in New Orleans, Louisiana; the opening by Conrad and its partners of a casino in Windsor, Ontario, Canada; the management of the Millenium Hilton in New York, New York; the purchase of an additional equity interest in the New Orleans Hilton Riverside; the opening of a new vacation ownership resort in Las Vegas, Nevada; and the completion of three new "Sky Villa" luxury suites at the Las Vegas Hilton. The Company has also engaged the investment banking firm of Smith Barney Inc. to study strategic alternatives to enhance shareholder value.
In February 1994, the Company commenced operation of a river casino located adjacent to the New Orleans Hilton Riverside. The initial 1,500 passenger vessel had a 20,000 square foot casino and was wholly-owned by the Company. This interim riverboat was leased to a joint venture, of which the Company owns a 50% interest. In November 1994, the interim riverboat was replaced by the "Flamingo Casino New Orleans," a permanent vessel owned by the joint venture featuring a 30,000 square foot casino and accommodating 2,400 passengers.
In May 1994, Conrad and the other two shareholders of Windsor Casino Limited ("WCL") commenced operation of the Casino Windsor, an interim 50,000 square foot casino in Windsor, Ontario, Canada. Hilton, through Conrad, owns a 33.3% interest in WCL, which operates this project for the Ontario provincial government. The Windsor project will open on a permanent basis in early 1997 with a hotel of at least 300 rooms, a 75,000 square foot casino, entertainment and meeting facilities.
In June 1994, Hilton became the manager of the 561-room Millenium Hilton in New York, New York. Also in June 1994, the Company purchased an additional 20.6% ownership interest in the New Orleans Hilton Riverside, increasing the Company's ownership interest in the hotel to 67.4%.
In January 1995, the Company, through its 50% owned Hilton Grand Vacations Company, commenced operation of a 200-unit vacation ownership resort adjacent to the Flamingo Hilton-Las Vegas. Hilton Grand Vacations Company also anticipates completion in summer 1995 of the first phase of a 360-unit vacation ownership resort adjacent to Sea World in Orlando, Florida.
In early 1995, the Company completed construction of three new 12,600 to 15,400 square foot "Sky Villa" luxury suites for premium players at the Las Vegas Hilton.
In addition, in November 1994, the Company engaged the investment banking firm of Smith Barney Inc. to undertake a study and make recommendations to the Company's management and Board of Directors for strategic alternatives to enhance shareholder value. These alternatives may include the sale of the entire Company in one or a series of transactions; spin-off of one or more of the Company's businesses; recapitalization; business combination; share repurchase program; or similar transaction.
The Company has also continued its ongoing program of monitoring and improving its franchise operations. The Company added four franchises to its system in 1994, while 13 franchise arrangements were terminated, many due to noncompliance with the Company's standards.
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, 1994, see "Segments of Business" in the Notes to the Company's Consolidated Financial Statements on pages 53 and 54 in the 1994 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 England, Ireland, Hong Kong, Turkey and Belgium. 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, 1995, the following hotels were owned in fee and operated by Hilton:
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(1) The Atlanta Airport Hilton and the New Orleans Airport Hilton were closed and demolished in 1986 and, thereafter, rebuilt and reopened in 1989.
(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 54 in the 1994 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, 1995, the following hotels were leased and operated by Hilton:
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(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) 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, 1994, Hilton paid aggregate rentals, including rentals attributable to the properties listed in the above table, of $9,500,000, $11,300,000 and $13,300,000, 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 54 in the 1994 Stockholders Report.
MANAGED HOTELS
On February 1, 1995, Hilton operated 34 domestic hotels and six 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 45, 46 and 47 in the 1994 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 pages 54 and 55 in the 1994 Stockholders Report.
On February 1, 1995, the following hotels were operated by Hilton under management agreements:
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(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 45, 46 and 47 in the 1994 Stockholders Report.
(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. See note 2 above.
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 150 to 200 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, 1995, there were 160 franchise hotels operated by others under the "Hilton," "Hilton Garden Inn" and "Hilton Suites" names. 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.
EXPANSION PROGRAM
Hilton has taken a reasoned approach to developing new domestic hotel properties due to prior overbuilding in the hotel industry. At present, there are no Company owned domestic hotels under construction. Hilton intends to expand its operation of hotels primarily through conversion of existing hotels into management and franchise properties in strategically significant markets. 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 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 in the Pacific Rim, the anticipated opening dates of which are indicated parenthetically: the 700-room Conrad Jakarta in Indonesia (1998) and the 400-room Conrad 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.
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 name. See "Hotel Operations," "Gaming Operations -- International Hotel-
Casinos" and Item 3 below. 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 has entered into agreements with The Prudential Insurance Company of America ("Prudential") which provide (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, (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, and (d) 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 1994, the Company recorded a $1,100,000 pretax gain from property transactions as a result of the sale of land to Hilton Grand Vacations Company for its vacation ownership project located adjacent to the Flamingo Hilton-Las Vegas. 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
In 1994, the Company recorded a $700,000 loss from foreign currency transactions due to transaction losses and exchange adjustments arising from the remeasurement of the Company's operations in highly inflationary economies. International operations are subject to certain economic and political risks, including foreign currency fluctuations. The Company monitors its foreign operations and, where appropriate, adopts 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 48 and 49 in the 1994 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 3,284-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 1994, the Las Vegas Hilton completed construction of two new 13,200 and 12,600 square foot "Sky Villa" luxury suites for premium players. The Las Vegas Hilton also converted its casino lounge into a 450-seat nightclub and completed an exterior remodeling and landscaping project. The Flamingo Hilton-Las Vegas completed construction of 250 rooms of a new 600-room tower and new public space and parking. The Flamingo Hilton-Laughlin added new casino signage and replaced 500 slot machines with new equipment. At the Reno Hilton, the Company completed renovation of the race and sports book, as well as convention, entertainment and public areas. The Flamingo Hilton-Reno completed remodeling of the buffet and coffee shop, relocated the keno pit, built a new sports bar at the race and sports book and renovated public areas.
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 -- 64,000 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.
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 V.I.P. 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, the Flamingo Hilton-Reno 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, the Flamingo Hilton-Reno and the Reno Hilton hosted 9, 0 and 27 special flight programs in 1994, compared to 22, 34 and 17 such programs in 1993, respectively.
Revenues from the Company's casinos are accounted for in accordance with applicable laws and rules and regulations of the State of Nevada and its agencies. 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 $47,000,000, subject to a $14,400,000 (approximately 31%) reserve, at December 31, 1992; $47,900,000, subject to a $7,600,000 (approximately 16%) reserve, at December 31, 1993, and $69,100,000, subject to a $16,000,000 (approximately 23%) reserve, at December 31, 1994.
INTERNATIONAL HOTEL-CASINOS
The Company, through Conrad, manages two international hotel-casinos which feature table games and slot machines similar to those offered at the Company's hotel-casinos in Nevada.
The Company has a 19.9% ownership interest in the 605-room Hotel Conrad & Jupiters Casino, which has a 70,000 square foot casino. This property has the exclusive rights to conduct casino gaming on Queensland's Gold Coast through 1995.
The Company has a 25% ownership interest in the 620-room Conrad Istanbul, which opened in 1992. This hotel-casino includes a 12,000 square foot casino.
CASINO WINDSOR
In May 1994, the Company and the other two shareholders of Windsor Casino Limited ("WCL") commenced operation of the Casino Windsor, an interim 50,000 square foot casino in Windsor, Ontario, Canada. The Company, through Conrad, owns a 33.3% interest in WCL, which operates this project for the Ontario provincial government. The Windsor project will open on a permanent basis in early 1997 with a hotel of at least 300 rooms, a 75,000 square foot casino, entertainment and meeting facilities.
RIVER CASINO
In February 1994, the Company commenced operation of a river casino located adjacent to the New Orleans Hilton Riverside. The initial 1,500 passenger vessel had a 20,000 square foot casino featuring table games and slot machines similar to those offered at the Company's hotel-casinos. This interim riverboat was wholly-owned by the Company and leased to a joint venture, of which the Company owns a 50% interest. In November 1994, the interim riverboat was replaced by the "Flamingo Casino New Orleans," a permanent vessel owned by the joint venture featuring a 30,000 square foot casino and accommodating 2,400 passengers.
EXPANSION PROGRAM
In January, 1995, the Company and Paramount Parks Inc. ("Paramount") announced plans to build a 40,000 square foot attraction at the Las Vegas Hilton to be called "Star Trek: The Experience." This attraction is scheduled to open in late 1996 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 early 1995, the Las Vegas Hilton completed construction of the third Sky Villa, a 15,400 square foot luxury suite for premium players. In 1995, the Las Vegas Hilton also plans to open a Hilton retail gift shop and remodel and rebuild the 362-foot marquee sign. The Flamingo Hilton-Las Vegas plans to complete an extensive expansion and renovation project, which will include the remaining 350 rooms of the new tower, a new race and sports book, a casino expansion of approximately 3,500 square feet, new entertainment, recreation and dining facilities, exterior enhancement and new signage. At the Flamingo Hilton-Laughlin, the Company plans to upgrade the pool, exercise area and outdoor entertainment venue, and continue its slot machine replacement program. At the Reno Hilton, the Company plans to continue to renovate the casino, entertainment and registration areas, and to open a new Johnny Rockets restaurant.
The government of Queensland, Australia has designated the owner of the Hotel Conrad & Jupiters Casino to own and develop a new 136-room hotel-casino project to be known as the Conrad Treasury in Brisbane, Australia. This property, which will feature a 65,000 square foot casino, will be managed by Conrad and will have the exclusive right to conduct casino gaming in Brisbane for a ten year period. Conrad will have a 19.9% equity interest in this project, which is scheduled to open in spring 1995.
In addition, the government of Uruguay has selected Conrad 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 will manage and have an equity interest of approximately 37% in the hotel-casino. Subject to completing satisfactory financing, the hotel-casino is scheduled for completion in early 1997.
Conrad 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 will manage and have a 10% equity interest in the hotel-casino, which is scheduled to open in late 1997.
The Company has also been selected to develop 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. Subject to the receipt of all required gaming licenses and permits, this project is scheduled to open in early 1996.
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 11 vacation ownership resorts in Florida. In January 1995, HGVC commenced operation of a 200-unit vacation ownership resort adjacent to the Flamingo Hilton-Las Vegas. HGVC also anticipates completion in summer 1995 of the first phase of a 360-unit vacation ownership resort adjacent to Sea World in Orlando, Florida. HGVC is actively seeking new development and acquisition opportunities in other resort locations.
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 V.I.P. 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 56 and 57 in the 1994 Stockholders Report.
BUSINESS RISKS
In 1994, the Company was able to increase prices to keep pace with the rate of inflation for the first year since 1989. The Company's future operating results could be adversely impacted by industry overcapacity and weak demand. The Company's business could also be adversely affected by increases in transportation and fuel costs. 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.
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. Three of the Company's competitors recently opened large new theme casinos in Las Vegas and several new casino projects are under construction. 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 recent 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 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, policies 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 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 his 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 29, 1994 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.
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.
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 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.
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 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, 1995, Hilton employed approximately 44,000 persons, of whom approximately 22,000 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 industry 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.



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.

ITEM 3. LEGAL PROCEEDINGS
In management's opinion, disposition of pending litigation against the Company, including the lawsuit described under "Commitments and Contingent Liabilities" in the Notes to the Company's Consolidated Financial Statements on pages 54 and 55 in the 1994 Stockholders Report, is not expected to have a material effect on the Company's financial position.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the executive officers of the Company:
Unless otherwise noted in the table, all positions and offices with the Company indicated have been continuously held since January 1990. 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 11, 1995 (the "Proxy Statement"). The Company expects to file the Proxy Statement with the Securities and Exchange Commission prior to April 30, 1995, and reference is expressly made thereto for the specific information incorporated herein by the aforesaid reference.
PART II
ITEM 5.

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 55 in the 1994 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.

ITEM 6. SELECTED FINANCIAL DATA
See the Company's Ten Year Summary on pages 56 and 57 in the 1994 Stockholders Report and "Segments of Business" in the Notes to the Company's Consolidated Financial Statements on pages 53 and 54 in the 1994 Stockholders Report.
The ratio of earnings to fixed charges for the five years ended December 31, 1994 is as follows: 1994 - 2.8 to 1; 1993 - 2.7 to 1; 1992 - 2.9 to 1; 1991 - 2.6 to 1; and 1990 - 2.8 to 1. The computation of the aforesaid ratios is set forth in Exhibit 12 hereto.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
See pages 34 through 39 in the 1994 Stockholders Report.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplemental information required by this Item are contained in the 1994 Stockholders Report on the pages indicated, which information is incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.



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.

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.

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.

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" and "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement, and reference is expressly made thereto for the specific information incorporated herein by the aforesaid reference.
PART IV
ITEM 14.

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:
All other schedules are inapplicable or the required information is included elsewhere herein.
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K, dated November 17, 1994, under the caption "Item 5. Other Events." This filing reported that the Company had engaged the investment banking firm of Smith Barney Inc. to undertake a study and make recommendations to the Company's management and Board of Directors for strategic alternatives to enhance shareholder value. See "Item 1. Business -- Recent Developments."
(C) EXHIBITS
Reference is made to the Index to Exhibits immediately preceding the exhibits hereto.
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, 1995. 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, 1995
HILTON HOTELS CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN MILLIONS)
---------------
(A) Represents unrealized holding losses on certain equity securities.
(B) Represents allowance for doubtful accounts of the Reno Hilton on the date of acquisition by the Company.
HILTON HOTELS CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 1994 AND 1993 (IN MILLIONS)
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 16, 1995.
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 16, 1995.
INDEX TO EXHIBITS
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* 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 sec. 229.601, 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.