Occupancy and average daily rate (ADR) declines and group cancellations brought about by a severe slowdown in travel following the September 11 terrorist attacks resulted in significantly decreased net income; earnings before interest, taxes, depreciation, amortization and non-cash items (EBITDA), and EBITDA margins. Positive factors in the quarter were cross-selling revenue that contributed to increases in market share for all of Hilton's brands, the continued strong performance of the Hilton Grand Vacations timeshare business and a decline in debt levels and interest rates.
    
The company reported fourth quarter net income of $4 million, versus $64 million in the comparable 2000 period. Diluted net income per share was $.01, compared with $.17 in fourth quarter 2000. For the full year, Hilton reported net income of $166 million, versus $272 million in 2000. Diluted net income per share was $.45 for the year compared to $.73 in 2000. The full year 2000 results included $.06 per share from gains on asset sales and from the termination of certain post-retirement benefit plans.

Comparable revenue per available room (RevPAR) at the company's U.S. owned-or-operated hotels decreased 22.8 percent in the quarter on an occupancy decline of 8.7 points to 59.7 percent and an 11.5 percent decrease in ADR to $124.64. Within the Hilton full-service brand, comparable owned-or-operated RevPAR declined 27.2 percent; occupancy was down 11.3 points to 60.1 percent, and ADR decreased 13.5 percent to $150.20.
    
For the full year, comparable RevPAR for U.S. owned-or-operated hotels declined 10.5 percent, with occupancy down 5.4 points to 68.0 percent and ADR declining 3.5 percent to $131.98. Within the Hilton full-service brand, comparable owned-or-operated RevPAR for the full year declined 13.1 percent; occupancy was off 6.3 points to 69.6 percent and ADR decreased 5.2 percent to $156.56.
    
The company reported fourth quarter revenue of $662 million, down 24 percent from the corresponding 2000 period. Full year revenue declined 12 percent to $3.050 billion. Total company EBITDA was $194 million in the fourth quarter, a 38 percent decline from the 2000 period. EBITDA for the full year declined 16 percent to $1.072 billion. Along with the September 11 attacks, the impact of 2000 and 2001 property sales (primarily the sale of leases back to RFS Hotel Investors, the CNL transaction and the sale of several Homewood Suites by Hilton properties) contributed to the full year decline in revenue and EBITDA. Excluding the impact of asset sales and the recognition of previously deferred timeshare sales in Hawaii, revenue and EBITDA for the full year declined 5 percent and 14 percent, respectively. Total company EBITDA margin for the quarter was 29.3 percent, and for the full year, 35.1 percent.

Across all brands, EBITDA from the company's owned hotels totaled $122 million in the fourth quarter, with comparable EBITDA down 43 percent from the same period a year ago. RevPAR from comparable owned properties declined 27.4 percent for the quarter, with EBITDA margins at these hotels dropping 8.9 points to 25.6 percent. While the business interruptions caused by September 11 adversely affected virtually all of the company's owned hotels, Hilton properties in several markets -- including New York, Chicago, New Orleans and Boston -- were able to report relatively solid occupancy levels of 65 percent or higher. The Washington, D.C., Honolulu and San Francisco markets showed especially prevalent business declines during the quarter. The margin decline was due to the aftermath of the September 11 attacks, resulting in an immediate and unforeseen decline in travel generally, and a significant decrease in high-margin food and beverage business due to group and convention cancellations.

For the full year, EBITDA from the company's owned hotels (across all brands) totaled $654 million, with comparable EBITDA down 24.0 percent. RevPAR from comparable owned properties declined 13.6 percent for the year. Owned property EBITDA margins were 30.4 percent for the full year, a decline of 4.8 points.

The largest quarterly declines were in markets dependent on air travel. "Drive-to" markets -- where the company's Hampton Inn, Hilton Garden Inn and Homewood Suites by Hilton hotels are primarily located -- were impacted to a significantly lesser degree.  However, throughout the entire Hilton hotel system -- including owned, managed and franchised properties -- occupancy levels and ADR improved generally from the first few weeks following the attacks.

System-wide RevPAR in the fourth quarter declined at each of the Hilton brands (including franchised properties) by the following percentages: Hampton Inn, 4.2 percent; Homewood Suites by Hilton, 11.3 percent; Hilton Garden Inn, 12.0 percent; Embassy Suites, 16.3 percent; Doubletree, 18.0 percent; Hilton, 22.9 percent.

For the full year, Hampton Inn showed a system-wide RevPAR gain of 1.3 percent. Full year system-wide RevPAR declines were reported at the other brands as follows: Hilton Garden Inn, 2.5 percent; Homewood Suites by Hilton, 3.0 percent; Doubletree, 7.3 percent; Embassy Suites, 7.7 percent; Hilton, 10.3 percent.

Management and franchise fees for the quarter totaled $72 million, a 16 percent decline. For the full year, fees declined 2 percent to $342 million.
    
Brand Development/Market Share

In a difficult environment making revenue growth harder to achieve, each of the brands in the Hilton portfolio continued to increase market share in 2001, with most of the brands commanding significant RevPAR premiums over their respective competitive sets.  With 100 representing a brand's RevPAR "fair share" of the market, the Hilton brands (according to data from Smith Travel Research) performed as follows year-to-date November 2001: Embassy Suites, 120.2 (+3.5 pts.); Hampton Inn, 116.2 (+6.5 pts.); Homewood Suites by Hilton, 113.9 (+5.7 pts.); Hilton, 106.4 (+0.6 pts.); Hilton Garden Inn, 105.5 (+3.2 pts.); Doubletree, 98.1 (+4.5 pts.). The Doubletree brand continued to make impressive market share gains during the year; the brand achieved a 100+ RevPAR index in the months of August, September and October.

Contributing to this strong brand performance was the company's continued successful program of cross-selling among and between all of the brands in the Hilton system. For the full year 2001, cross-selling through Hilton Reservations Worldwide generated $260 million in system-wide booked revenue, more than double the total from 2000.

The strength of the brands, cross-selling and Hilton HHonors were among the factors enabling the company to continue adding hotels at a rapid pace to its franchise system in the fourth quarter. During the quarter, Hilton added 35 hotels and 4,741 rooms to its system as follows: Hampton Inn, 18 hotels and 1,669 rooms; Hilton Garden Inn, 11 hotels and 1,505 rooms; Hilton, 2 hotels and 612 rooms; Embassy Suites, 2 hotels and 646 rooms; Red Lion, 2 hotels and 309 rooms.

Fifty hotels and 7,323 rooms were removed from the system during the fourth quarter due primarily to the Red Lion transaction.

For the full year, a total of 169 hotels and 23,818 rooms were added to the Hilton system. During the year, 103 hotels and 16,969 rooms were removed from the system, primarily as a result of the sale of leases back to RFS Hotel Investors in the first quarter and the Red Lion transaction in the fourth quarter.
    
At year-end 2001, the Hilton system consisted of 1,986 properties and 327,487 rooms.

The company's current development pipeline has approximately 390 hotels either approved, in design or under construction, the majority either Hampton Inns or Hilton Garden Inns. There are currently 11 new Doubletree hotels either in design or under construction, with a number of new projects in the approval stage.

In December, construction was initiated on the new 1,200-room convention hotel in Houston, Texas, a property which Hilton will manage.
    
Hilton Grand Vacations

Demonstrating its resiliency in the face of difficult economic conditions, Hilton Grand Vacations, the company's vacation ownership business, continued to post strong sales in the fourth quarter, with particularly good results at its newest property at the Hilton Hawaiian Village Beach Resort & Spa in Waikiki. Unit sales across the Hilton Grand Vacations system increased 10 percent over the 2000 quarter and 33 percent over full-year 2000.

Corporate Expense 

Corporate expense increased $13 million in the fourth quarter to $23 million. In the 2001 fourth quarter, the company recorded a $7 million bad debt expense (equal to $.01 per share) related to certain notes receivable (acquired in the Promus purchase) that, as a result of the events of September 11, were unlikely to be collected. In the 2000 fourth quarter, corporate expense included an $8 million benefit (equal to $.01 per share) due to termination of Hilton's post-retirement life insurance programs.

Red Lion/CNL Transactions
    
On December 31, 2001, the company sold the Red Lion hotel chain to WestCoast Hospitality Corporation (NYSE:WEH) through a sale of the capital stock of Red Lion Hotels, Inc. The Red Lion portfolio consisted of 41 Red Lion hotels (8 owned, 11 leased, 22 franchised) and two Doubletree hotels (one owned and one leased) with a total of 6,513 rooms. Total consideration in the cash-and-stock transaction was $50.6 million.

Hilton reported a $42 million pre-tax book loss on the transaction. As the sale also resulted in a large capital loss for tax purposes, the company was able to carryback a portion of these losses to offset capital gains recorded in the previous two years.  The benefit of the tax loss carryback is reflected in the tax provision in the 2001 fourth quarter. On an after-tax basis, the sale of the Red Lion Hotels, Inc. capital stock resulted in a gain of approximately $5 million, or $.01 per share. In addition, a significant amount of tax loss carryforwards remain available to offset potential future capital gains.

In October 2001, Hilton completed a transaction with CNL Hospitality Corp. in which the two companies formed a partnership that owns four hotel properties. Hilton will operate the four hotels under long-term management agreements and retain a minority ownership interest in the partnership.

Corporate Finance

At December 31, 2001, Hilton had total debt of $4.7 billion (net of $625 million of debt allocated to Park Place Entertainment.) Approximately 28 percent of the company's debt is floating rate debt, down from 53 percent at year-end 2000. Cash and equivalents totaled approximately $16 million at December 31, 2001. The company's average basic and diluted shares outstanding for the fourth quarter were 369 million and 394 million, respectively.

Consolidated interest expense declined 22 percent in the fourth quarter -- and 15 percent for the full year -- due to reduced debt balances and declining interest rates.

Hilton's debt currently has an average life of 6.8 years, at an average cost of approximately 6.3 percent.

During the quarter, the company worked successfully with its lenders to amend its debt covenants. The amendments, which eased leverage and debt service coverage ratios, will be filed as part of the company's 10-K, due to be released in late March 2002.

At December 31, 2001, the company had $730 million of available capacity under its various lines of credit.

First Quarter, Full Year 2002 Outlook
    
Due to a recovering but still relatively soft U.S. economy, significantly increased health care and insurance costs, a decline in international visitation and unfavorable comparisons with the 2001 period, Hilton anticipates that the first quarter of 2002 will remain challenging. The company expects general business trends in the quarter, however, to show continued improvement on a sequential basis from the fourth quarter of 2001. Gradual quarter-to-quarter improvement in RevPAR, EBITDA and margin percentage growth is expected through 2002 on the basis of a recovering economy, a continuing rebound in business travel, the ability to effectively control costs and favorable comparisons in the second half of 2002.

Accordingly, Hilton issued preliminary guidance for both the first quarter and full year 2002.

First Quarter 2002

The company anticipates an approximate 15 to 20 percent total revenue decline in the first quarter 2002 compared to the 2001 quarter due to: the impact of a mid-teens decrease in RevPAR at its comparable owned hotels; 2001 property sales; the recognition of deferred timeshare revenues in the 2001 first quarter, and lower fee revenues.

The impact of these items is expected to result in total company EBITDA in the $205-215 million range (versus $296 million in the 2001 quarter). Owned hotel EBITDA is expected to be in the $120-125 million range (versus $172 million in the 2001 quarter), with owned hotel EBITDA margins anticipated to be in the mid-20 percent range. Owned hotel EBITDA margins are expected to be impacted by reduced food and beverage revenues as a result of fewer group meetings during the quarter, along with increased insurance and health care costs.

Diluted earnings per share is expected to be approximately $.05, including $.03 from the new accounting rules pertaining to non-amortization of goodwill and certain intangible assets. Pro forma diluted EPS in the first quarter 2001 (including the $.03 per share) was $.18. The 2001 quarter included $.02 per share related to the recognition of previously deferred timeshare sales in Hawaii.

Full Year 2002

The company expects full year 2002 revenue to be down 1 percent due to 2001 property sales; the recognition of deferred timeshare revenues in the first quarter 2001, and flat fee revenue due to lower incentive management fees and franchise application fees. These declines will be partially offset by an expected 2 to 3 percent increase in RevPAR at comparable owned hotels.  Sequential quarterly RevPAR percentage growth is expected as the year progresses.

Total company EBITDA is expected to be up 1 to 2 percent, with owned hotel EBITDA in the $700 million range, or approximately 65 percent of total company EBITDA. The company expects owned hotel EBITDA margins to be in the low 30 percent range, with the company's aggressive cost control measures helping mitigate the impact of increased costs. Hilton noted that managing costs and maximizing margins -- particularly in an environment where top-line revenue growth will be challenged -- will be among the company's top priorities in 2002.

Diluted earnings per share are expected to be in the low $.60 range, including $.12 per share from the adoption of the new goodwill accounting rules. On a pro forma basis (including the $.12 per share), 2001 diluted EPS was $.57.
    
Hilton reaffirmed its previous guidance that total capital expenditures in 2002 will be approximately $250 million. Of this total, approximately $190 million is maintenance capital spending, including technology. Significant projects in progress during 2002 include guestroom and public space renovations at Hiltons in San Francisco and New Orleans, and construction of the new guestroom tower at the Hilton Portland.

Based on the company's EBITDA guidance, and after all capital expenditures, Hilton anticipates generating in excess of $300 million of free cash flow in 2002.

The sale of Red Lion and an increasingly difficult financing environment, are expected to impact new hotel openings in 2002 ...  though Hilton reconfirmed the guidance outlined in its third quarter 2001 press release. The company anticipates adding 130 to 160 hotels and 16,000 to 20,000 rooms to its system in 2002, with the upper end of those ranges made possible through brand conversions. As the result of the challenging economic environment for many operators and the proven market share performance of Hilton's brands, the company believes it will have the opportunity to convert several hotels to one of the Hilton brands in 2002, thereby potentially enhancing the company's unit growth and fee income stream.

Stephen F. Bollenbach, president and chief executive officer of Hilton Hotels Corporation, said: "The last 14 weeks of 2001 represented perhaps the most trying and difficult period in the history of the hotel business. Having been through the worst, however, we believe that the approach we took at Hilton of `managing for recovery' was the right course. We're not nearly all the way back, but business travel and consumer confidence are returning after hitting bottom in the immediate weeks following the September 11 attacks.

"We remain reasonably optimistic as we look to the future, given what we expect will be a strengthened U.S. economy and a resulting rebound in business and leisure travel, along with diminishing new hotel supply and an appetite among owners for high quality, high-performance hotel brands such as ours," he said.

"It is important, however, that we keep focused on the very real challenges ahead. The economy is in a recovery mode, but is still fragile, and we anticipate continued softness in some of our key markets. Costs, such as insurance and health care, are increasing at a dramatic pace; we must continue walking the delicate line between controlling costs and thereby maximizing margins while providing our guests and customers with the quality and service they expect and deserve. And it is incumbent on all of us in the travel industry to press on with the work of promoting tourism.

Mr. Bollenbach continued: "We had many significant accomplishments in 2001; the addition of 169 new hotels, market share increases for all of our brands, a banner year for our timeshare business, excellent revenue from cross-selling, J.D. Power satisfaction recognition for our brands, the opening of spectacular new facilities in Hawaii and Seattle, and the successful completion of $1 billion in capital market transactions at attractive rates.

"In 2002, we look forward to building on these accomplishments with a strategy that includes maximizing return on assets at our owned properties; showing strong fee income and adding hotels to our franchised and management system, and focusing on day-to-day operations.
    
"At our owned hotels, our primary focus will be on cost containment ... again without compromising customer service and quality.  Achieving the strongest possible margins is a top priority. Additionally, we will continue to maintain our hotels in optimal physical condition and make strategic, prudent investments to enhance these properties.
   
"All of our brands performed extremely well in 2001 compared to their competition, consistently increasing their market share.  Through our industry-leading marketing programs such as Hilton HHonors, cross-selling initiatives and global sales force, combined with powerful brand names and valued relationships with our owners, we look to further strengthen the position of these brands as the brands-of-choice for hotel owners."
    
Mr. Bollenbach concluded: "We are immensely proud of our people for pulling together and seeing us through the toughest times of 2001. As we look ahead, we are confident in our strategy and in the promise that 2002 holds for better things for our shareholders, employees, owners, franchisees and guests."
    
 

 
This press release contains "forward-looking statements" within the meaning of federal securities law, including statements concerning business strategies and their intended results, and similar statements concerning anticipated future events and expectations that are not historical facts.