Minding Our Business

HILTON HOTELS CORPORATION HILTON HOTELS CORPORATION 2002 ANNUAL REPORT 2002 ANNUAL REPORT Minding Our Business FINANCIAL SUMMARY About the cover: One of the world’s most spectacular resorts, the Hilton Waikoloa Village is a tropical paradise that stands as a jewel in the crown in Hilton’s collection of world-class hotel properties. The 1,240-room resort, on Hawaii’s Big Island, features water sports, golf, lush landscaping, waterfalls and extensive meeting space. Percent (in millions, except per share amounts) 01 02 Change Revenue $ 3,993 3,847 (4)% EBITDA 1 1,072 990 (8) Operating income 632 603 (5) Net income 166 198 19 Net income per share—diluted .45 .53 18 Cash earnings per share 2 1.03 1.08 5 1 Earnings before interest, taxes, depreciation, amortization, pre-opening expense and non-cash items. 2 Net income, adjusted for the effect ofdilutive convertible securities, plus depreciation and amortization less maintenance capital expenditures, divided by diluted shares outstanding. Revenue EBITDA Operating Income RevPAR (in millions) (in millions) (in millions) (comparable domestic Hilton brand owned hotels) $ 5,000 $1,400 $1,000 $ 140 1,200 120 4,000 800 1,000 100 3,000 600 800 80 600 60 2,000 400 400 40 1,000 200 200 20 0 0 0 0 98 99 00 01 02 98 99 00 01 02 98 99 00 01 02 98 99 00 01 02 $ 1,907 2,343 4,396 3,993 3,847 $ 596 695 1,271 1,072 990 $ 464 495 830 632 603 $ 123 127 140 118 116 AT HILTON, “MINDING OUR BUSINESS” IS ABOUT TENDING TO THE SPECIFIC NEEDS OF OUR FOUR PRIMARY CONSTITUENCIES: OUR CUSTOMERS, SHAREHOLDERS, HOTEL OWNERS, AND TEAM MEMBERS. DEAR FELLOW SHAREHOLDERS Focusing on the fundamentals. and deliver solid earnings. This OWNED HOTELS: Blocking and tackling. Attention focus on the basics contributed Occupancy Gains,Solid Margins to the basics. These phrases all to our company’s stock price Challenges remain, but these mean pretty much the same increasing 16percent in a year in should not detract from the very thing. Taken together, they tell which our industry competitors real recovery experienced by the story of Hilton Hotels and the broader market showed the hotel business in 2002. Corporation for 2002.We think significant declines. Consider this: occupancy across of it as “minding our business.” comparable owned hotels in the The lodging industry, as we Hilton system in 2002 was a very In 2002, a challenging year anticipated, showed steady solid 71 percent. These strong economically for our country improvement during the course occupancy levels were achieved and our industry, this focus of 2002 as travelers (especially in many markets at the expense on the fundamentals of our leisure customers) took to the of room rates, but our operating business enabled us to outper- road in increasing numbers. strategy in a difficult environ- form most of our competitors Frankly, however, the improvement of filling rooms at the best in revenue-per-available-room ment was not as dramatic as possible rates proved to be the growth in the markets where we had originally thought. right approach. we own hotels; once again post Independent business travelers the strongest margins in our did not return at the levels we As a result of these occupancy industry; add 143 properties to had expected early in the year. gains, coupled with easy our system; increase market The return of this important comparisons late in the year, share for each of our brands; business segment to full revenue-per-available-room enhance our timeshare business strengthwill be a catalyst for our growth at ourcomparable owned through sales of existing units company – and our industry – hotels improved steadily and and development of exciting in the years ahead. sequentially in each quarter new projects; reduce our debt; of 2002. HILTON HOTELS CORPORATION ANNUAL REPORT 2002 1 FOR OUR CUSTOMERS BY PROVIDING THE BEST SERVICE, VALUE AND AMENITIES, ALONG WITH A WIDE VARIETY OF HOTEL PRODUCTS AND We were very encouraged by the recovery in several of our PRICE POINTS, WE ARE most important markets, FOCUSED ON OUR MISSION including New York (which was OF BEING THE FIRST exceptionally strong during the CHOICE OF THE WORLD’S year), Washington, D.C. and Chicago. Hawaii continued to TRAVELERS. feel the effects of a downturn in travel from Japan, though robust visitation from the U.S. mainland helped keep occupancy levels strong. The San Francisco/ San Jose and Phoenix markets were soft as a result of demand pressure and the introduction of new full-service supply. We are happy to note, however, that in most of our key markets there continues to be little new full-service supply coming on line.New supply in the industry overall is declining steadily, and what is being introduced is generally in the mid-scale segment of the industry where we do not own many properties. This favorable supply situation was a positive for our owned hotels in 2002 and bodes well for the coming years. 2 HILTON HOTELS CORPORATION ANNUAL REPORT 2002 U.S. Lodging Supply Growth efficient deployment of staff goal of serving our guests well – (without resorting to significant also enabled us to continue 5% workforce reductions) and growing our franchising and technology advancements. brand development business. 4 This enabled us to once again It is a fact of this business that come through with margins energetic and dedicated em- that significantly exceeded ployees result in happy guests; 3 those of our competitors. guest satisfaction brings increased market share, which 2 Along with managing costs, in turn results in enthusiastic we made prudent and strategic owners who are more inclined investments in maintaining 1 to put one of our brand names and improving our properties. on their hotels. We kept our hotels in optimal 0 physical condition, completed Guest satisfaction continued 94 96 98 00 02 04 comprehensive renovations to be a hallmark of our brands Actual Projected at our hotels in San Francisco in 2002. Embassy Suites Hotels Source: Smith Travel Research, Lodging Econometrics and New Orleans and opened and Hilton Garden Inn both a new 327-room tower at the earned first place J.D. Power A tough room rate growth Hilton Portland. We also Awards for customer satisfaction environment, and increased strengthened our leadership in their respective categories … costs in healthcare and position in Hawaii by purchasing Embassy Suites Hotels for the insurance, made cost controls the 87 percent interest that we fourth consecutive year, and 2002 especially important in . did not previously own of the Hilton Garden Inn in only its In a service industry, however, 1,240-room Hilton Waikoloa second year of eligibility. balance between cost manage- Village on Hawaii’s Big Island. ment and customer service Every one of our brands increased is the key.It’s a balance we have FRANCHISING AND its market share (as measured BRAND DEVELOPMENT: by RevPAR index) during 2002. maintained very well. Market Share Gains, Hilton, Hampton, Embassy Suites Unit Growth Costs taken out at the property Hotels, Homewood Suites by level primarily involved items “Minding our business” – Hilton and Hilton Garden Inn all invisible to the customer, starting with the fundamental HILTON HOTELS CORPORATION ANNUAL REPORT 2002 3 continue to earn more than their fair share of RevPAR against their respective competitors in a given market. We are also very pleased with the ongoing progress being made at Doubletree, which has steadily increased its market share since we acquired the brand three years ago. Market Share Gains PT 2001 2002 CHANGE Hilton 107.2 109.8 +2.6 Hampton 114.6 118.4 +3.8 Embassy Suites 121.5 124.2 +2.7 Hotels Homewood Suites 114.0 118.1 +4.1 by Hilton Hilton Garden Inn 104.5 108.1 +3.6 Doubletree 98.8 98.9 +0.1 Source: Smith Travel Research A RevPAR index of 100 represents “fair share” vs. the competitive set. The ability to cross-sell among the entire Hilton family of brands helps ensure that we keep business within our system when FOR OUR SHAREHOLDERS BY TAKING CARE OF OUR CUSTOMERS, MAXIMIZING OUR GROWTH OPPORTUNITIES IN EACH OF OUR BUSINESS SEGMENTS, AND EFFECTIVELY MANAGING OUR COSTS, WE REMAIN DEDICATED TO ENHANCING SHAREHOLDER VALUE. 4 HILTON HOTELS CORPORATION ANNUAL REPORT 2002 a customer’s first choice industry’s most powerful loyalty 2003 Projected Unit Growth1 by Brand is not available. Cross-selling programs. The benefits of these accounted for more than $300 programs, and the resulting million in incremental system- market share gains, enable us Hampton 45% 21 2002 Hilton Garden Inn wide booked revenue in , to add a significant number Homewood Suites 14 by Hilton and illustrates the advantage of hotels to our system without Doubletree 9 of offering customers the widest using our own capital. Virtually Hilton 7 possible range of hotel products, all new hotel development in Embassy Suites 4 price points and locations. the U.S., as we have noted, is in 1 Projected 100-115 new hotels the mid-scale segment of the Total Cross-Sell Revenue industry, where we prefer to (in millions) TIMESHARE: be a franchisor rather than an Solid Sales, New Development owner. The mid-scale Hampton $ 320 In 2002, “minding our and Hilton Garden Inn brands 300 business” in timeshare meant account for the majority of our focusing on a select number 280 unit growth. of projects in strategic markets, 240 New management contracts – building sales and making 200 including a new convention prudent investments in new 160 hotel in Omaha, Nebraska and development.We saw continued a spectacular beach and golf 120 solid sales across our timeshare resort in Los Cabos, Mexico– business in 2002, most notably 80 are also part of our brand at our Hilton Hawaiian Village 40 development story.

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