| HILTON HOTELS CORP Item 1A Risk Factors We are subject to all of the operating risks common in the lodging and timeshare industries and our results may be adversely impacted if any of these risks materialize |
| Our results are significantly affected by occupancy and room rates achieved by our hotels, our ability to manage costs, our relative mix of owned, leased, managed and franchised hotels, supply and demand changes for hotel rooms and timeshare intervals in our markets, the quantity and pricing of timeshare interval sales and changes in the number of available hotel rooms and timeshare intervals through acquisition, development and disposition |
| Unfavorable changes in these factors as well as the occurrence of other events described below could negatively impact hotel room demand and pricing which, in turn, could limit our ability to pass through operating cost increases in the form of higher room rates |
| Our ability to manage costs could be adversely impacted by significant increases in operating expenses, such as wages and other labor costs, healthcare, insurance, property taxes and energy, as well as increases in construction costs, resulting in lower operating margins |
| In addition, economic factors beyond our control in the US and internationally may create challenges for the lodging industry and us in 2006 and beyond |
| A downturn in economic conditions could impact the demand for hotel rooms and put pressure on room rates |
| Increases in transportation and fuel costs, the financial condition of the airline industry and its impact on air travel and sustained recessionary periods in the US and internationally could also unfavorably impact future results |
| Certain of our employees are covered by collective bargaining agreements and labor disputes may disrupt our operations |
| Employees at certain of our owned and managed hotels are covered by collective bargaining agreements that have either expired or will expire in 2006 |
| These agreements affect a broad array of hotels in New York, San Francisco, Boston, Chicago, Honolulu, Pittsburgh, Los Angeles and Toronto |
| UNITE HERE, the union representing a majority of our unionized employees, has announced its intent to specifically target activities at Hilton properties and, in several key markets, exclude us from traditional multiemployer negotiations |
| We are preparing for the impact of potential labor activities, which may cause the diversion of business to other hotels, thereby impacting our results negatively |
| However, at this time, we cannot predict when or whether new agreements will be reached and what the impact of prolonged negotiations may be |
| Labor disputes in markets in which we have employees covered by collective bargaining agreements could disrupt our operations and adversely impact our financial results in these and other markets |
| We derive a significant portion of our revenue from operations of our owned hotels and events in the markets where these properties are located could adversely affect our overall financial results |
| We derived approximately 46prca of our revenue in 2005 from the operations of our owned hotels |
| A significant portion of these revenues derived from our large convention hotels located in major US cities |
| In addition, we acquired 41 owned properties in the HI Acquisition |
| Soft economic conditions in any of the markets where our owned properties are located and reduced business travel could adversely affect our results from these properties and, therefore, our overall financial results |
| Our owned properties are also subject to risks that generally relate to investments in commercial real estate, including governmental regulations, real estate, insurance, zoning, tax and eminent domain laws, the ongoing need for capital improvements to maintain or upgrade properties, fluctuations in real estate values, and the relative illiquidity of real estate compared to other investments |
| If our owned properties do not generate sufficient revenue to meet operating expenses, including debt service and capital requirements, our financial results will be adversely affected |
| 17 ______________________________________________________________________ We face challenges in integrating the operations of HI, as well as risks related to owning and operating real estate and hotels in international locations |
| We may not achieve expected synergies from the HI Acquisition, which include combining technology and distribution activities, consolidating regional infrastructure and integrating our Conrad brand into regional operations |
| We may also experience difficulties integrating the operations of HI, including integrating personnel with disparate business backgrounds and corporate cultures and managing relationships with hotel owners, lessors and other business partners on a worldwide basis |
| As a result of the HI Acquisition, we are subject to varying degrees of risk relating to international real estate generally, including risks related to changes in local, political, economic and market conditions, interest rates, zoning laws, currency exchange rate fluctuations, compliance with environmental laws, costs and terms of financing and the potential for uninsured casualty and other losses |
| A number of the leased properties we acquired in the HI Acquisition are subject to long-term contracts requiring fixed payments to the lessor |
| If these properties do not generate sufficient revenues, we may be required to fund shortfalls to the lessors which could adversely impact our financial results |
| In acquiring an ongoing business, we have succeeded to certain obligations and liabilities related to the business acquired in the HI Acquisition and have limited rights of indemnification with respect to such matters |
| As a result of the HI Acquisition, we are now subject to the laws and regulations of approximately 80 countries, which will expose us to risks relating to changes in franchise, tax, environmental, zoning, employment, repatriation of money, liquor license and other laws in the countries in which we operate |
| Some international jurisdictions restrict the repatriation of non-US earnings |
| Various international jurisdictions also have laws limiting the ability of non-US entities to pay dividends and remit earnings to affiliated companies unless specified conditions have been met |
| Sales in international jurisdictions typically are made in local currencies, which subject us to risks associated with currency fluctuations |
| Currency devaluations and unfavorable changes in international monetary and tax policies could have a material adverse effect on our profitability and financing plans, as could other changes in the international regulatory climate and international economic conditions |
| In addition, the US government prohibits US companies from operating in certain countries that are subject to economic sanctions or are on the terrorist countries list |
| We will not do business in such countries, unless we develop or acquire a non-US affiliate that is capable of managing hotels or we get authorization from the US Treasury Department’s Office of Foreign Assets Control to do so |
| Some investors would be prohibited by state law or self-imposed policies from investing in our securities if we were to do business in such countries |
| We are more highly leveraged as a result of the recent consummation of the HI Acquisition |
| If we are unable to make planned dispositions of certain of our owned hotels acquired in the HI Acquisition, it would impede our ability to reduce our indebtedness |
| We are currently marketing for sale certain owned hotel properties we acquired in the HI Acquisition |
| We are required to use the net proceeds from such dispositions to repay amounts outstanding under our credit facilities which were incurred to finance the HI Acquisition |
| If we are unable to complete such dispositions on commercially reasonable terms within anticipated timeframes, our ability to reduce our outstanding borrowings may be adversely affected, which could negatively impact our cost of borrowings, our financial results and our ability to raise new capital to finance future growth |
| Our senior debt ratings were recently downgraded to Ba2 by Moody’s Investor Services and BB by Standard & Poor’s Ratings Group subsequent to our announcement in December 2005 of our agreement to acquire the lodging assets of Hilton Group plc |
| A downgrade by any rating agency of the Company’s credit rating adversely impacts the cost and availability of capital to us |
| Our higher level of debt and resulting interest expense may place us at a competitive disadvantage to competitors with lower amounts of indebtedness and/or higher credit ratings |
| 18 ______________________________________________________________________ If we have disputes with the owners of hotels we manage, we could be subject to litigation |
| For our managed hotels, we have the responsibility to manage each hotel at a level consistent with the standard required for its brand in the relevant management agreement |
| Such provisions vary in scope and may be subject to differing interpretations |
| In the ordinary course of business, we encounter disagreements with the owners of our managed hotels as to whether the duties in our management agreements have been satisfied |
| To the extent that such conflicts arise, we seek to resolve them by negotiation with the relevant parties |
| In the event that such resolution cannot be achieved, litigation may result in damages or other remedies against us |
| Such remedies could include termination of the right to manage the relevant property |
| We may not be able to negotiate successfully or otherwise resolve such conflicts in each instance |
| In competing for management, franchise and timeshare agreements and leases, we may make loans or provide guarantees to third parties and could experience losses under these loans or guarantee arrangements |
| The terms of our management, franchise and timeshare agreements and leases are influenced by contract terms offered by our competitors at the time such agreements are entered into |
| Accordingly, we may not enter into contracts or renew contracts in the future on terms that are as favorable to us as those under existing agreements |
| In connection with entering into these contracts, we may become obligated to make loans to or guarantee the obligations of third parties or guarantee minimum income to third parties |
| Weak performance, in particular as a result of a soft economy, could give rise to losses under these loans and guarantees |
| Changes in legislation or regulatory changes may be implemented that have the effect of favoring franchisees relative to brand owners |
| The growth of internet reservation channels could harm our profitability |
| Some of our hotel rooms are booked through internet travel intermediaries |
| If these bookings increase, these intermediaries may be able to obtain higher commissions or other significant contract concessions from us |
| We believe that the aim of such intermediaries is to have consumers develop loyalties to their reservation systems rather than to our lodging brands |
| Although we expect most of our business to continue to be derived from traditional channels and our proprietary branded internet websites, if the amount of sales made through internet intermediaries increases significantly, our ability to control the supply, presentation and price of our room inventory and our profitability may be harmed |
| We are a party to joint venture arrangements and investing through joint ventures decreases our ability to manage risk |
| Joint venturers often have shared control over the operation of the joint venture assets |
| Therefore, joint venture investments may involve risks such as the possibility that the co-venturer in an investment might become bankrupt, or have economic or business interests or goals that are inconsistent with our business interests or goals, or be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives |
| Consequently, actions by a co-venturer might subject hotels owned by the joint venture to additional risk |
| Additionally, we may be unable to take action without the approval of our joint venture partners, or our joint venture partners could take actions binding on the joint venture without our consent |
| 19 ______________________________________________________________________ Our timeshare business is subject to extensive regulation and if we fail to comply with such regulation our timeshare business could suffer |
| We develop, manage, market and sell timeshare intervals, which generally entitle the buyer to occupy a fully-furnished unit for a one-week period on either an annual or an alternative-year basis |
| We also provide financing to purchasers of timeshare intervals |
| Certain of these activities are subject to extensive state regulation in both the state in which the property is located and the states in which the property is marketed and sold, as well as Federal regulation of certain marketing practices |
| In addition, the laws of most states in which we sell timeshare intervals grant the purchaser a unilateral right to rescind the purchase contract within a statutory rescission period |
| If we fail to be in compliance with applicable Federal, state, and local laws and regulations to which timeshare properties, marketing, sales and operations are subject, including Federal telemarketing regulations, or a determination by a regulatory authority that we were not in compliance, our timeshare business could suffer |
| Our properties are subject to risks relating to acts of God, terrorist activity and war and any such event could materially adversely affect our operating results |
| Our financial and operating performance may be adversely affected by acts of God, such as natural disasters, particularly in locations where we own and/or operate significant properties |
| Some types of losses, such as those from earthquake, hurricane, terrorism and environmental hazards, may be either uninsurable or too expensive to justify insuring against |
| Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property |
| In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property |
| Similarly, war (including the potential for war) and terrorist activity (including threats of terrorist activity), epidemics (such as SARs and bird flu), travel-related accidents, as well as geopolitical uncertainty and international conflict, which impact domestic and international travel, have caused in the past, and may cause in the future, our results to differ materially from anticipated results |
| Terrorism incidents such as the events of September 11, 2001 and wars such as the Iraq war in 2003 significantly impact international travel and consequently global demand for hotel rooms |
| In addition, inadequate preparedness, contingency planning or recovery capability in relation to a major incident or crisis may prevent operational continuity and consequently impact the value of the brand or the reputation of our business |
| If we fail to comply with privacy regulations, we could be subject to fines or other restrictions on our business |
| We collect and maintain information relating to our guests for various business purposes, including maintaining guest preferences to enhance our customer service and for marketing and promotion purposes |
| The collection and use of personal data are governed by privacy laws and regulations enacted in the US and other international jurisdictions in which we operate |
| Privacy regulation is an evolving area in which different jurisdictions may subject us to inconsistent compliance requirements |
| Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to service our guests and market our products, properties and services to our guests |
| In addition, non-compliance with applicable privacy regulations by us (or in some circumstances non-compliance by third parties engaged by us) could result in fines or restrictions on our use or transfer of data |
| We rely on our proprietary reservation systems and any failures in such systems could negatively affect our business |
| We invest in sophisticated technology and systems for property management, procurement, reservations, and the operation of our HHonors customer loyalty program |
| If our systems fail to operate as anticipated, or we fail to replace our systems with new systems introduced by our competitors, our business could suffer |
| In addition, we intend to combine the systems used by the hotels acquired in the HI Acquisition with ours, and if we experience difficulties in merging these systems, it could disrupt our operations |
| 20 ______________________________________________________________________ In addition, see the cautionary factors set forth under Item 1 “Business—Additional Information—Competition” and “—Environmental Matters |