EMPLOYMENT AGREEMENT

 

NOW, THEREFORE, IT IS HEREBY AGREED THAT THE EMPLOYMENT AGREEMENT SHALL BE AMENDED AND RESTATED, EFFECTIVE AS OF JANUARY 1, 2005, TO READ AS FOLLOWS:

 

1.                                        Employment and Consulting Periods .

 

(a)                                   The Company shall continue to employ the Executive, and the Executive shall serve the Company, on the terms and conditions set forth in this Employment Agreement, for the period (the “Employment Period”) beginning on January 1, 2005 (the “Commencement Date”) and ending on December 31, 2007, unless sooner terminated pursuant to Section 4 below (the “Term”).  Upon the expiration of the Term, and subject to subparagraph (b) below, the Executive shall retire and the Executive’s employment by the Company shall not be further extended.  The Executive’s “Retirement Date” will be December 31, 2007 for purposes of the Company’s benefit plans and programs and the supplemental retirement benefit provided in Section 3(i) below.

 

(b)                                  Upon the termination of the Executive’s employment, the Consultancy will commence and the Company will engage the Executive as a consultant to the Executive’s successor and the Board through the day before the fifth anniversary of the date of such termination of employment (the “Consulting Period”).  Notwithstanding the foregoing, the Consulting Period will end, and the Company shall have no further obligation to make any payments to the Executive under subsection 3(k), in the event that the Executive shall materially breach his obligations to the Company under Section 8 below.

 

2

 

2.                                        Position and Duties .

 

(a)                                   During the Employment Period, the Executive shall continue to be employed as the Chief Executive Officer of the Company and, when applicable, the Company shall cause the Executive to be reelected as a member of the Board.  In his executive capacity, the Executive shall report to the Board.  During the Employment Period, the Executive shall have authority to make all executive decisions, plan the strategic direction of the Company, and hire, promote and terminate the employment of all personnel, subject to the direction of the Board.  During the Employment Period, the Executive shall have such reasonable and customary powers as are generally associated with the position of Chief Executive Officer, including, without limitation, authority to expend capital resources of the Company and shall have, subject to the direction of the Board, authority to fill all management positions.

 

(b)                                  During the Consulting Period, the Executive will perform such consulting services as may reasonably be requested of the Executive by the new CEO or the Board but such services will not be in excess of 20 hours per month and will be designed so as not to interfere with any other business obligations of the Executive.

 

(c)                                   If, during the Employment Period, Barron Hilton shall cease to serve as Chairman of the Board for any reason, the Company shall cause the Executive thereupon to be elected as Chairman of the Board in addition to the position of Chief Executive Officer and shall, as Chairman, report directly to the Board.

 

(d)                                  During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote principal attention and time during normal business hours to the business and affairs of the Company and, to the extent

 

3

 

necessary to discharge the responsibilities assigned to the Executive under this Employment Agreement, use the Executive’s reasonable best efforts to carry out such responsibilities faithfully and efficiently.  Notwithstanding the foregoing, nothing in this Employment Agreement shall be construed to limit the ability of the Executive from providing services to the entity which holds the Company’s former gaming operations.  It shall not be considered a violation of the foregoing for the Executive to (A) serve on corporate, civic or charitable boards or committees (excluding those which would create a conflict of interest), (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not materially interfere with the performance of the Executive’s responsibilities as an employee of the Company in accordance with this Employment Agreement.

 

(e)                                   The Executive’s services shall be performed primarily at the Company’s Headquarters in Beverly Hills, California.

 

3.                                        Compensation .

 

(a)                                   Base Salary .  During the Employment Period, the Executive shall receive an annual base salary (“Annual Base Salary”) of $1,000,000, payable in accordance with the regular payroll practices of the Company.

 

(b)                                  Bonuses .

 

(1)                                   Signing Bonus .  In consideration for the Executive’s agreement to enter into this amended and restated Employment Agreement, the Company shall establish a book entry account to which it shall credit as of January 2, 2005 a one-time non-recurring signing bonus of $193,194.

 

(2)                                   Annual Bonus .  In addition to the Annual Base Salary, the

 

4

 

Executive shall be eligible to earn, for each fiscal year ending during the Employment Period, an annual bonus (the “Annual Bonus”), pursuant to the Company’s annual incentive plan, with a target equal to 100% of Annual Base Salary and a maximum of 200% of Annual Base Salary.

 

(3)                                   Special Bonus .  In consideration for the Executive’s agreement to terminate the $10.0 million life insurance arrangement set forth in subsection 3(j) of the Employment Agreement prior to this amendment and restatement, and to release the Company of its obligations to make the annual premium contributions to the Supplemental Policy, as defined therein, the Executive shall be entitled, on the first business day in January in each calendar year, beginning with 2005 and through and including 2009, to receive from the Company a special annual bonus of $137,830, regardless of whether the Executive is then still employed by, or providing consulting services to, the Company.  If the Executive is still an employee of the Company on, or was an employee at any time within six months prior to, the date such bonus is due, such amount shall be credited to a book entry account to be established by the Company.  If the Executive has not been an employee of the Company on any date that is six months prior to the date such bonus is due, the Company shall pay such amount directly to the Executive within a reasonable period (but not later than 10 business days) after it is due.

 

(4)                                   Section 162(m) Deferrals .  That portion of any bonus to be paid to the Executive during any taxable year of the Company which, when added to any otherwise deductible compensation and benefits paid or provided to the Executive by the Company during such taxable year, would not be deductible by the Company in the taxable year such bonus is to be paid or accrued because of the applicable limitations under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), shall be deferred annually and paid to the Executive, in a lump sum, on first

 

5

 

date (the “Deferral Date”) which is after (i) the last day of the Company’s taxable year in which the Executive ceases to be a “covered employee,” within the meaning of Section 162(m)(3) of the Code, and (ii) the date which is six months and one day after the date on which the Executive’s employment terminated (except that this subclause (ii) shall not apply if the Executive’s employment with the Company terminates due to his death or “disability,” as defined in Section 409A of the Code).

 

(5)                                   Earnings on Deferrals .  Except as otherwise provided below, any amounts of bonus deferred or amounts credited to a book entry account, as provided above, shall be credited, from the date it would otherwise have been paid to the date the deferred amounts are paid, with interest at a floating rate equal to the rate which Morgan Guaranty announces from time to time as its prime lending rate, as in effect from time to time, compounded quarterly, and such accrued interest shall be paid to the Executive on the Deferral Date (said deferred bonus and credited amounts plus interest collectively referred to as the “Deferred Compensation”).  Notwithstanding the foregoing, the Executive may elect, prior to the end of each calendar year for which a bonus is deferred, to have all or any portion of the Deferred Compensation to be credited for that year treated as though invested in shares of the Company’s common stock, on a book entry account basis.  Such Deferred Compensation shall be deemed to be used to purchase such shares on the date the bonus would otherwise have been paid, based on the average of the high and low trading prices of the stock on such day.  The number of shares credited to the Executive’s account  under this subparagraph (5) shall be adjusted to reflect any changes to the Company’s capital structure in the same manner as if shares were actually issued to the Executive on the day the bonus would otherwise have been paid.  The Company shall also credit the Executive’s account with additional amounts equivalent to any

 

6

 

and all dividends or distributions paid on its shares of common stock (on the same basis as though such shares had been outstanding on the record date for such dividend or distribution), with any such dividends or distributions deemed invested in additional shares of the Company’s common stock based on the average of the high and low trading prices of the stock on the day the dividend or distribution is payable to shareholders of the Company.

 

(6)                                   Distribution of Deferred Compensation .  The Deferred Compensation shall be paid on the Deferral Date by wire transfer to an account designated by the Executive prior to the Deferral Date (or by transfer of shares of common stock to the extent of the account referred to in subparagraph (5)).

 

(c)                                   Other Benefits .  During the Employment Period: (i) the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs of the Company to at least the same extent as other senior executives of the Company, provided that the Executive’s right to receive additional grants after the date hereof under any long-term incentive plans shall be solely as specified in this Employment Agreement; and (ii) the Executive and/or the Executive’s family, as the case may be, shall be eligible for participation, and shall receive all benefits under, all welfare benefit plans, practices, policies and programs provided by the Company (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life insurance, group life insurance, accidental death and travel accident insurance plans and programs) to at least the same extent as other senior executives of the Company.

 

(d)                                  Expenses . During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in carrying out the Executive’s duties under this Employment Agreement, provided that the Executive complies with

 

7

 

the generally applicable policies, practices and procedures of the Company for submission of expense reports, receipts, or similar documentation of such expenses.

 

(e)                                   Fringe Benefits and Air Travel .  During the Employment Period, the Executive shall be entitled to fringe benefits and perquisites in accordance with the most favorable plans, practices, programs and policies of the Company as in effect at the time with respect to other senior executives of the Company, including, without limitation, the use of an automobile and payment of related expenses; and first-class travel accommodations on all commercial carriers for travel related to the business of the Company.  The Executive shall also be entitled to unrestricted, but not exclusive, use of the Company’s aircraft (leased or owned); provided, however, that if the Executive uses the Company’s aircraft for his personal purposes, he shall incur the Federal, state and local income tax consequences for the value of such usage, as determined in accordance with the Company’s cost determination methodology applied to the Company’s senior executives with respect to their personal use of the Company’s aircraft.

 

(f)                                     Office and Support Staff .  During the Employment Period, the Executive shall be entitled to his current office at the Company’s Beverly Hills Headquarters, and to secretarial and other assistance, at least equal to the most favorable of such as provided with respect to other senior executives of the Company.  Without limiting the generality of the foregoing, during the Employment Period, the Executive shall at all times have a personal secretary and a personal assistant.

 

(g)                                  Vacation .  During the Employment Period, the Executive shall be entitled to four weeks of paid vacation annually.

 

8

 

(h)                                  Stock Options:

 

(i)                                      Prior Option Grants .

 

1.                                        On December 31, 1998 (the “Incentive Option Grant Date”), the Executive was granted, inter alia , non-statutory stock options (the “Incentive Option”) under the Company’s 1996 Stock Incentive Plan, as amended (the “Old Stock Plan”) covering 2,000,000 shares of the Company’s common stock.  The exercise price of the shares subject to the Incentive Option is $27.52676.  The Incentive Option is exercisable for 10 years except as otherwise specifically provided in this Employment Agreement.  The Incentive Option shall vest and become exercisable on the date that is 9 years and 9 months following the Incentive Option Grant Date if the Executive continues in the employment of the Company through such date.  Notwithstanding the foregoing, all shares subject to the Incentive Option shall vest and become exercisable upon the occurrence of any of the following events (each of (A), (B) and (C) below a “Triggering Event”):

 

(A)                               termination of the Executive’s employment by the Company other than for Cause, as defined below;

 

(B)                                 termination of the Executive’s employment because of death or Disability;

 

(C)                                 termination of employment by the Executive for Good Reason, as defined below;

 

(D)                                retirement of the Executive on the Retirement Date; or

 

(E)                                  a Change of Control, as defined in the Old Stock Plan;

 

provided that if the Executive shall have materially breached the terms of the covenants contained in Section 8 below (i) on or prior to the Triggering Event, the Incentive Options shall not vest and become exercisable or (ii) after the Triggering Event, any portion of such Incentive Option that shall

 

9

 

have not been exercised shall cease to be exercisable; it being understood that such vesting and exercisability are part of the consideration for the Executive’s undertakings under Section 8.

 

2.                                        If a Triggering Event occurs, any portion of the Incentive Option that has become vested on or before the date of such Event (including without limitation, any portion that becomes exercisable due to such Triggering Event) shall remain exercisable until December 30, 2008.  All non-vested portions of the Incentive Option shall immediately terminate.

 

3.                                        The Executive may assign the right to exercise the Incentive Option to his spouse, children, grandchildren, or parents of a recipient, to trusts for the benefit of the Executive’s immediate family, to a family partnership or limited liability company designated by the Executive in which the Executive’s family members are the only partners or shareholders or to an entity exempt from federal income tax under Section 501(c)(3) of the Code.

 

4.                                        The Incentive Option shall be subject to the terms of the Old Stock Plan in all respects not described herein.

 

(ii)                                   New Option Grant .  In each year of the Employment Period (but subject to the Executive’s continued employment through the applicable grant date), the Executive shall be granted, at the same time each year as grants are made generally to other executives, a stock option covering 400,000 shares (each, a “New Option”) of the Company’s common stock under the Company’s 2004 Equity Compensation Plan (the “New Stock Plan”).  The exercise price of the shares subject to each New Option shall be the fair market value of a share on the date of grant of such New Option (each, a “New Option Grant Date”).  Each New Option shall become exercisable upon the earlier of (i) the Retirement Date and (ii) the date on which a Triggering Event (including a Change of Control, but as defined in the New Plan) occurs, but in either case only if the Executive is

 

10

 

continuously employed by the Company through the earlier of such dates.  Once exercisable, each New Option shall remain exercisable until March 31, 2013; provided, however, that any portion of each New Option that shall not have been exercised shall cease to be exercisable on the date, if any, that the Executive materially breaches his obligations under Section 8 below, it being recognized that such vesting and exercisability are part of the consideration for the Executive’s undertakings under Section 8.  The New Options shall be subject to the terms of the New Stock Plan in all respects not described herein; provided, however, that the provisions of subparagraph (i)(3) above shall also apply.

 

(iii)                                Performance Share Grant .  In each year of the Employment Period (but subject to the Executive’s continued employment through the applicable grant date), the Executive shall be granted, at the same time each year as grants are made generally to other executives, performance units (the “Performance Shares”) under the New Stock Plan that equate, at “targeted performance,” to 140,000 shares of the Company’s common stock.  The actual number of shares to be earned with respect to each such grant shall be determined by the Compensation Committee of the Board based on the performance goals established by the Compensation Committee with respect to performance share grants to the Company’s other executive officers made at such time.  Each grant of Performance Shares shall vest on the last day of the third year of the relevant performance period (even if that date is after the Retirement Date) provided that the Executive is employed until the Retirement Date.  In addition, each grant of Performance Shares shall also vest upon the occurrence of a Triggering Event (including a Change of Control, but as defined in the New Stock Plan).  The Performance Shares shall be subject to the terms of the New Stock Plan in all respects not described herein.

 

11

 

(iv)                               Release of Restrictions on Prior Option Shares .  Effective upon the execution of this Agreement and in consideration for the Executive’s agreement to extend the Employment Period, the Company hereby releases the Executive from the restrictions imposed pursuant to an agreement, dated September 10, 2003, between the Company and the Executive on his ability to resell certain shares of common stock acquired upon the exercise of the stock options referenced in such agreement.

 

(i)                                      Supplemental Retirement Benefit .

 

(i)                                      Phantom Share Interest .  Pursuant to the terms of this Employment Agreement, as in effect prior to the amendment and restatement hereof, the Executive elected to convert his right to receive the joint and survivor annuity provided thereunder into a phantom interest in the equivalent value of the Company’s common stock, resulting in a credit to a book entry account for the Executive of 700,000 of its common shares.  By reason of such election, the Executive shall be entitled to receive a distribution, on the Retirement Date, of 700,000 shares of common stock multiplied by his vested percentage.  As of the date of this amendment and restatement of the Employment Agreement, the Executive is 80% vested in such phantom interest.  The Executive shall become fully vested in such interest on the earliest to occur of (i) June 30, 2005, (ii) the date, if any, on which a Change of Control (as defined below) occurs, and (iii) the date, if any, on which the Executive’s employment is terminated by the Company other than for Cause or due to his death or disability, or by the Executive for Good Reason; provided that no additional vesting shall occur under subclause (i) or (ii) above unless the Executive is continuously employed by the Company through the date referred to therein.  Such distribution shall be made as soon as practicable after the Retirement Date (or such later date(s) as the Executive shall elect at least 13 months prior to the

 

12

 

Retirement Date but in no more than 10 annual installments); provided, however, that if the final 20% portion of the phantom interest becomes vested after December 31, 2004, the attributable distribution shall be made, irrespective of any election by the Executive, on the later of (i) the last day of the Company’s taxable year in which the Executive ceases to be a “covered employee,” within the meaning of Section 162(m)(3) of the Code, and (ii) the date which is six months and one day after the date on which the Executive’s employment terminated (except that this subclause (ii) shall not apply if the Executive’s employment with the Company terminates due to his death or “disability,” as defined in Section 409A of the Code).  The number of shares credited to the Executive’s account under this subparagraph shall be adjusted to reflect any changes to the Company’s capital structure in the same manner as if shares were actually issued to the Executive on March 9, 2000.  The Company shall also credit the Executive’s account with additional amounts equivalent to any and all dividends or distributions paid on its shares of common stock (on the same basis as though such shares had been outstanding on the record date for such dividend or distribution), with any such dividends or distributions deemed invested in additional shares of the Company’s common stock based on the average of the high and low trading prices of the stock on the day the dividend or distribution is payable to shareholders of the Company.

 

(j)                                      Death Benefit and Life Insurance .  During the Employment Period, the Executive shall be entitled to a Company-provided death benefit in the following amounts:

 

Date of Death		Amount of Benefit
On or before June 30, 2001		$5.0 million
After June 30, 2001 and before July 1, 2002		$4.0 million

 

13

 

After June 30, 2002 and before July 1, 2003		$3.0 million
After June 30, 2003 and before July 1, 2004		$2.0 million
After June 30, 2004 and before July 1, 2005		$1.0 million

 

The Company has purchased for the Executive a $10.0 million face amount, last to die, variable life insurance policy on the lives of the Executive and the Executive’s spouse (the “Supplemental Policy”).  In light of the prohibition of loans to executive officers under the Sarbanes-Oxley Act of 2002 and the uncertainty of its application to split-dollar life insurance arrangements, such as the Supplemental Policy, the Company and the Executive agree to terminate the Supplemental Policy and the provisions of this Section as in effect on March 9, 2000 (the “Split Dollar Arrangement”).  Under the Split Dollar Arrangement, the Company retained an interest in the Supplemental Policy equal to the lesser of the premiums the Company paid to the Supplemental Policy or the cash surrender value of the Supplemental Policy.  The parties now agree that the Executive shall take all actions necessary so as to permit the Company to withdraw from the Supplemental Policy, by December 31, 2004, the maximum amount that may be withdrawn from the Supplemental Policy without incurring any surrender charges or terminating the Supplemental Policy and the Company shall take such withdrawal no later than January 31, 2005.  The date on which the Company’s withdrawal from the Supplemental Policy shall be effected shall hereinafter be referred to as the “Withdrawal Date.”  As soon as practicable after the Withdrawal Date, the Executive shall pay to the Company an amount equal to the cash surrender value remaining in the Supplemental Policy as of the Withdrawal Date.  The Split-Dollar Arrangement shall be terminated effective as of the Withdrawal Date, with the effect that: (i) the Company shall release its collateral interest in the cash

 

14

 

surrender value of the Supplemental Policy, (ii) the Company shall have no obligation to make any premium contributions to the Supplemental Policy, and (iii) the Executive’s designated trust shall have an unfettered ownership interest in the Supplemental Policy.

 

(k)                                   Consulting Fee, etc .  During the Consulting