PROMUS HOTEL CORP/DE/, 10-Q, 1999-11-12

PROMUS HOTEL CORP/DE/
10-Q, 1999-11-12
HOTELS & MOTELS

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 1999
------------------

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

Commission File Number 1-13719

PROMUS HOTEL CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE I.R.S. NO. 62-1716020
(State of Incorporation) (I.R.S. Employer Identification No.)

755 CROSSOVER LANE
MEMPHIS, TENNESSEE 38117-4900
(Address of principal executive offices)(Zip Code)

(901) 374-5000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 1999.

Common Stock ................78,690,852 shares

<PAGE> 2
FORM 10-Q CROSS-REFERENCE INDEX

<TABLE>
<S> <C>
PART I--FINANCIAL INFORMATION.........................................1

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Consolidated Balance Sheets
December 31, 1998 and September 30, 1999................2
Consolidated Statements of Operations
September 30, 1998 and September 30, 1999...............3
Consolidated Statements of Cash Flows
September 30, 1998 and September 30, 1999...............4
Notes to Consolidated Financial Statements.................5

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........10

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.............................................25

PART II--OTHER INFORMATION...........................................26

ITEM 1. LEGAL PROCEEDINGS.......................................26

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...............26

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.........................26

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....26

ITEM 5. OTHER INFORMATION.......................................26

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................27

SIGNATURES......................................................28

</TABLE>
<PAGE> 3

PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The accompanying unaudited consolidated condensed financial statements of Promus
Hotel Corporation (Promus), incorporated in the state of Delaware, have been
prepared in accordance with the instructions to Form 10-Q, and therefore do not
include all information and notes necessary for complete financial statements in
conformity with generally accepted accounting principles. The results for the
periods indicated are unaudited, but reflect all adjustments (consisting only of
normal recurring adjustments) which management considers necessary for a fair
presentation of operating results. Results of operations for interim periods are
not necessarily indicative of a full year of operations. These unaudited
consolidated condensed financial statements should be read in conjunction with
Promus' consolidated financial statements and notes thereto included in Promus'
1998 Annual Report to Shareholders.

Page 1 of 30
Exhibit Index Page 29
<PAGE> 4

PROMUS HOTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
----------- -----------
<S> <C> <C>
ASSETS

Cash and cash equivalents ............................................... $ 6,466 $ 51,616
Accounts receivable, net ................................................ 101,742 103,103
Assets held for sale, net ............................................... -- 89,435
Notes receivable, short-term ............................................ -- 30,236
Other ................................................................... 44,485 37,360
----------- -----------
Total current assets ........................................... 152,693 311,750
----------- -----------

Property and equipment, net ............................................. 1,109,868 952,834
Investments ............................................................. 220,268 185,054
Management and franchise contracts, net ................................. 427,421 414,391
Goodwill, net ........................................................... 392,419 371,667
Notes receivable ........................................................ 68,991 89,435
Investment in franchise system .......................................... 57,023 62,056
Deferred costs and other assets ......................................... 45,318 42,119
----------- -----------
$ 2,474,001 $ 2,429,306
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable and accrued expenses ................................... $ 180,189 $ 170,046
Current portion of notes payable ........................................ 1,797 1,731
----------- -----------
Total current liabilities ...................................... 181,986 171,777
----------- -----------

Deferred income taxes ................................................... 276,498 265,598
Notes payable ........................................................... 768,891 750,359
Other long-term obligations ............................................. 87,931 86,619
----------- -----------
1,315,306 1,274,353
----------- -----------

Commitments and contingencies

Stockholders' equity:
Common stock, $0.01 par value. Authorized 500,000,000 shares;
87,457,099 and 87,973,152 shares issued and outstanding ........ 875 880
Additional paid-in capital ......................................... 898,900 913,051
Retained earnings .................................................. 379,423 522,231
Accumulated other comprehensive income (loss) ...................... (2,909) (5,234)
Treasury stock, at cost (3,620,000 and 9,282,300 shares) ........... (117,594) (275,975)
----------- -----------
1,158,695 1,154,953
----------- -----------
$ 2,474,001 $ 2,429,306
=========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated
condensed financial statements.

2
<PAGE> 5

PROMUS HOTEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Franchise and management fees ......... $ 59,341 $ 56,296 $ 167,773 $ 165,656
Owned hotel revenues .................. 107,355 110,671 300,946 322,788
Leased hotel revenues ................. 110,823 102,086 318,489 293,341
Purchasing and service fees ........... 7,091 6,781 18,379 16,786
Joint venture income and other revenues 11,617 9,316 35,910 33,831
--------- --------- --------- ---------
Total revenues .................... 296,227 285,150 841,497 832,402
--------- --------- --------- ---------
Operating costs and expenses:
General and administrative expenses ... 26,060 17,753 64,654 62,741
Owned hotel expenses .................. 64,752 68,926 184,489 204,163
Leased hotel expenses ................. 95,555 87,724 279,624 259,075
Depreciation and amortization ......... 20,086 18,587 58,623 61,317
Business combination expenses ......... -- 3,194 -- 3,194
--------- --------- --------- ---------
Total operating costs and expenses 206,453 196,184 587,390 590,490
--------- --------- --------- ---------
Net gain on asset dispositions ........ 8,541 26,719 10,826 26,011
--------- --------- --------- ---------
Operating income .................. 98,315 115,685 264,933 267,923
Interest and dividend income .......... 4,675 4,432 15,300 14,206
Interest expense, net ................. (16,290) (17,873) (46,518) (50,704)
--------- --------- --------- ---------
Income before income taxes and
minority interest ............ 86,700 102,244 233,715 231,425
Minority interest share of net income ...... (1,313) (1,150) (3,016) (2,566)
--------- --------- --------- ---------
Income before income taxes ........ 85,387 101,094 230,699 228,859
Income tax expense ......................... (33,557) (38,011) (90,665) (86,051)
--------- --------- --------- ---------
Net income ........................ $ 51,830 $ 63,083 $ 140,034 $ 142,808
========= ========= ========= =========
Net income per share
Basic ............................. $ 0.60 $ 0.80 $ 1.62 $ 1.76
========= ========= ========= =========
Diluted ........................... $ 0.60 $ 0.80 $ 1.60 $ 1.75
========= ========= ========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated
condensed financial statements.

3
<PAGE> 6

PROMUS HOTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ......................................................... $ 140,034 $ 142,808
Adjustments to reconcile net income to net cash
provided by operations:
Payment of business combination expenses .................... (44,321) (38,739)
Depreciation and amortization ............................... 58,623 61,317
Other non-cash income ....................................... (3,866) (564)
Equity in earnings of nonconsolidated affiliates ............ (16,050) (13,309)
Net gain on asset dispositions .............................. (10,826) (26,011)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net ............. (17,170) 2,960
Decrease in other current assets ............................ 9,636 9,897
(Decrease) increase in deferred costs and other assets ...... (4,041) (145)
Increase (decrease) in accounts payable and accrued expenses 7,084 30,603
Decrease in other long-term obligations and
deferred income taxes .................................... (1,319) (18,057)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............ 117,784 150,760
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions ................................................ (61,150) (5,026)
Purchases of property and equipment ......................... (126,101) (50,773)
Proceeds from sale of real estate, securities and investments 15,053 134,198
Investments in and advances to partnerships and affiliates .. (20,145) (7,472)
Distributions from partnerships and affiliates .............. 28,816 24,386
Net investment in management and franchise contracts ........ 149 (685)
Escrow deposits used for development ........................ 20,537 --
Loans to owners of managed and franchised hotels ............ (14,163) (36,809)
Collections of loans to owners of managed and
franchised hotels ........................................ 36,474 12,178
Other ....................................................... 424 (5,322)
--------- ---------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES ........................... (120,106) 64,675
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options .............. 31,555 11,760
Purchases of treasury stock ................................. (59,656) (158,381)
Net activity under revolving credit facility ................ 7,320 (19,250)
Proceeds from notes payable ................................. 14,422 80,000
Principal payments on notes payable ......................... (1,915) (84,414)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES ................ (8,274) (170,285)
--------- ---------
Net (decrease) increase in cash and cash equivalents ............... (10,596) 45,150
Cash and cash equivalents, beginning of period ..................... 24,066 6,466
--------- ---------
Cash and cash equivalents, end of period ........................... $ 13,470 $ 51,616
========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated
condensed financial statements.

4
<PAGE> 7

PROMUS HOTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
Promus Hotel Corporation (Promus) and its majority-owned subsidiaries. All
significant intercompany accounts and transactions are eliminated. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities. While
management seeks to make accurate estimates, actual results could differ from
these estimates.

During the first quarter of 1998, Promus adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." The standard requires that entities include within their financial
statements information on comprehensive income, which is defined as all
activity impacting equity from non-owner sources. For Promus, adjustments to
calculate comprehensive income are comprised exclusively of changes in
unrealized gains (losses), net of gains (losses) realized, on its investments
in marketable equity securities. The adjustments, net of tax, for the nine
months ended September 30, 1998 and 1999 were $(9,319,000) and $(2,325,000),
respectively.

NOTE 2 - NATURE OF OPERATIONS

Through its wholly-owned subsidiaries, Promus franchises and manages hotels
with the following brands: Doubletree Hotels, Doubletree Guest Suites,
Embassy Suites, Hampton Inn, Hampton Inn & Suites, Homewood Suites, Club
Hotels by Doubletree, and Red Lion Inns and Hotels. Promus may also own all
or a portion of these hotels or lease these hotels from others. In addition,
Promus leases and manages hotels that are not Promus-branded. At September
30, 1999, Promus franchised 1,112 hotels and operated 331 hotels, of which 51
hotels were wholly owned, 23 were partially owned through joint ventures, 73
were leased from third parties and 184 were managed for third parties. These
hotels were located in all 50 states, the District of Columbia, Puerto Rico
and six foreign countries. Promus also operates and licenses vacation
interval ownership systems under the Embassy Vacation Resort and Hampton
Vacation Resort names.

Promus' primary focus is to develop, grow and support its franchise and
management business. Promus' primary sources of revenues are from the
operations of owned and leased hotels, franchise royalty fees and management
fees. Promus charges franchisees a royalty fee of up to four percent of the
franchised hotels' room revenues. Management fees are based on a percentage
of the managed hotels' gross revenues, operating profits, cash flow, or a
combination thereof. Generally, Promus is also reimbursed for certain costs
associated with providing central reservations, sales, marketing, accounting,
data processing, internal audit and employee training services to hotels.

NOTE 3 - ACQUISITIONS AND BUSINESS COMBINATIONS

On September 3, 1999, Promus signed a definitive agreement with Hilton Hotels
Corporation (Hilton) whereby Hilton will acquire Promus for stock and cash.
The completion of the acquisition is anticipated on November 30, 1999,
pending approval by stockholders of both companies. The transaction will be
accounted for as a purchase. For more information, see Promus' Joint Proxy
Statement filed on Schedule 14A with the Securities and Exchange Commission
on October 21, 1999.

On December 19, 1997, Promus Hotel Corporation and Doubletree Corporation
merged. The merger was accounted for under the pooling of interests method.
In connection with the merger, Promus recorded a $115.0 million provision for
business combination expenses in December 1997 and an employee severance
accrual of $28.1 million in the fourth quarter of 1998. At September 30,
1999, all amounts accrued were paid.

5
<PAGE> 8

Acquisition of Harrison Conference Associates, Inc.

In January 1998, Promus acquired Harrison Conference Associates, Inc.
(Harrison) for approximately $61.2 million cash, including acquisition costs,
in a transaction accounted for as a purchase. Harrison is a leading
conference center operator with over 1,200 rooms under management, including
two owned and six managed properties.

Acquisition of Doubletree La Posada Resort

In June 1999, Promus acquired the remaining 50% interest in the Doubletree La
Posada Resort, a joint venture hotel, for $5.5 million in cash. The
transaction was accounted for as a purchase. Prior to its purchase Promus had
accounted for the joint venture as an equity investment.

NOTE 4 - ASSET DISPOSITIONS

In the third quarter of 1999, Promus identified 26 owned hotels to be sold as
part of a plan to reduce ownership of real estate. Fourteen of these hotels
were sold by September 30, 1999. The aggregate sales price for these hotels
was $135.3 million, of which $26.6 million was received in the form of a note
with a one year maturity. The total net book value for the 14 hotels was
$81.0 million and the total gain recognized, net of costs to sell, was $44.7
million. A portion of the gain, $5.8 million, was deferred and will be
recognized on the installment method as the note receivable is collected.
Promus signed franchise agreements for all of the sold hotels and will retain
management agreements for four of these hotels.

The remaining 12 hotels have been classified on the balance sheet as current
assets under the caption "Assets held for sale, net". The net assets of these
hotels totaled $89.4 million. A reserve of $17.3 million was recorded in the
third quarter to reduce the carrying value on two of the hotels to their
estimated net realizable values. This reserve is shown in the Consolidated
Statement of Operations in the line item "Net gain on asset dispositions".
Sales for nine of the hotels held for sale are scheduled to close in the
fourth quarter of 1999. Sales of the three remaining hotels should occur
within the next 12 months.

NOTE 5 - INVESTMENTS

Investments consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------- --------
<S> <C> <C>
Hotel partnerships ....................... $165,678 $133,295
Investments in common stock (at market)... 36,090 33,259
Convertible preferred stock .............. 18,500 18,500
-------- --------
$220,268 $185,054
======== ========
</TABLE>

Promus' non-controlling general and/or limited interests in hotel
partnerships range from less than 1.0% to 50.0%. Investments in common stock
are carried at market value. Promus' cost of these investments at September
30, 1999 was approximately $41.8 million.

6
<PAGE> 9

NOTE 6 - NOTES PAYABLE

Promus' indebtedness consists of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
--------- ---------
<S> <C> <C>
Promus Facility ................................... $ 634,250 $ 615,000
Mortgages, 6.4% - 8.6%, maturities
through 2008 .................................. 95,660 96,132
Convertible rate term loan ........................ 20,000 20,000
Notes payable and other unsecured debt, 6.0%-13.0%,
maturities through 2022 ....................... 20,778 20,958
--------- ---------
770,688 752,090
Current portion of notes payable .................. (1,797) (1,731)
--------- ---------
$ 768,891 $ 750,359
========= =========
</TABLE>

Derivative Financial Instruments

To manage its interest rate sensitivity, Promus maintains several interest
rate swap agreements, which serve to convert a portion of the Promus Facility
from a floating to a fixed rate. At September 30, 1999, the fair value of
Promus' swap agreements, which Promus would have been required to pay to
terminate them, was approximately $0.5 million.

NOTE 7 - STOCKHOLDERS' EQUITY

In August 1998, Promus' board of directors authorized the repurchase of up to
$200.0 million of its common stock for cash. The authorization provided for
Promus to conduct the repurchase program in the open market, or in negotiated
or block transactions at prevailing market prices until December 31, 1999. On
April 30, 1999, Promus' board of directors authorized a continuation of the
share repurchase program through December 31, 2000. This authorization allows
Promus to repurchase up to an additional $200.0 million of common stock for
cash under the same conditions as the August 1998 authorization. Through
September 30, 1999, Promus had repurchased a total of 9.3 million shares of
its common stock, pursuant to these authorizations, at a total cost of
approximately $275.6 million, excluding brokers' commissions. There were no
shares repurchased in the third quarter of 1999 due to the business
combination discussions with Hilton and no additional shares are expected to
be repurchased in the fourth quarter.

NOTE 8 - EARNINGS PER SHARE

The following table reflects Promus' weighted average common shares
outstanding and the impact of its dilutive common share equivalents (in
thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding . 86,552 78,673 86,631 81,156
Effect of dilutive securities:
Stock options and warrants .......... 447 233 721 272
------ ------ ------ ------
Diluted weighted average shares outstanding 86,999 78,906 87,352 81,428
====== ====== ====== ======
</TABLE>

Outstanding options to purchase shares of common stock, where the options'
exercise prices were greater than the average market price of the common
shares for the time period reported, must be excluded from the above
computations of diluted weighted average outstanding shares. For the three
months ended September 30, 1999, 9,644,075 options were excluded. For the
three months ended September 30, 1998, 5,713,750 options were excluded. For
the nine months ended September 30, 1999, 9,219,565 options were excluded.
For the nine months ended September 30, 1998, 137,346 options were excluded.

7
<PAGE> 10

NOTE 9 - STOCK OPTIONS

The 1997 Equity Participation Plan allows options to be granted to key
personnel to purchase shares of Promus' stock at a price not less than the
current market price at the date of grant. The options vest annually and
ratably over a four-year period from the date of grant and expire ten years
after the grant date. An aggregate of 10,000,000 shares has been authorized
for issuance under the plan. The plan also provides for the issuance of stock
appreciation rights, restricted stock or other awards.

Additionally, Promus and Doubletree had stock option plans prior to their
merger on December 19, 1997. On the date of the merger, options were issued
to replace the options outstanding under the prior plans. The replacement
options were issued with identical remaining terms and conditions, except the
replacement options vested immediately. The immediate vesting was in
accordance with the terms of the prior plans.

As of September 30, 1999, approximately 11,063,000 options were outstanding.

NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest, net of interest capitalized, amounted to $37.5
million and $38.4 million for the nine months ended September 30, 1998 and
1999, respectively. Cash paid for income taxes, net of refunds received,
amounted to $44.7 million and $63.9 million for the nine months ended
September 30, 1998 and 1999, respectively. Investments in marketable equity
securities, carried at market values, had unrealized losses of $2.7 million
at September 30, 1998 and unrealized losses of $8.7 million at September 30,
1999.

8
<PAGE> 11

NOTE 11 - SEGMENT REPORTING

On January 1, 1998, Promus adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." Under
SFAS No. 131, Promus has one operating segment, lodging, which is managed as
one business unit. The accounting policies of the segment are the same as
those described in the summary of significant accounting policies. Promus
does not record income taxes at the segment level.

The following table presents the revenues, operating profit and assets of
Promus' reportable segment for the nine months ended September 30, (in
thousands):

<TABLE>
<CAPTION>
1998 1999
------------ -------------
<S> <C> <C>
Revenues
Lodging................................ $ 819,268 $ 809,780
Other (a).............................. 22,229 22,622
------------ -------------
$ 841,497 $ 832,402
============ =============
Operating profit (b)
Lodging................................ $ 303,896 $ 292,119
Other.................................. 14,865 15,728
------------ -------------
$ 318,761 $ 307,847
============ =============
Depreciation and amortization
Lodging................................ $ 46,407 $ 49,014
Corporate.............................. 12,216 12,303
------------ -------------
$ 58,623 $ 61,317
============ =============
Segment assets
Lodging................................ $ 2,065,678 $ 2,049,884
Other.................................. 45,121 15,551
Corporate.............................. 342,264 363,871
------------ -------------
$ 2,453,063 $ 2,429,306
============ =============
Capital expenditures (c)
Lodging................................ $ 119,542 $ 43,030
Other.................................. - -
Corporate.............................. 6,559 7,743
------------ -------------
$ 126,101 $ 50,773
============ =============
</TABLE>

----------
(a) Other revenues are derived from Promus Vacation Resorts and Promus'
purchasing subsidiary.
(b) Operating profit excludes corporate and business combination expenses and
interest and net gain on asset dispositions.
(c) Capital expenditures do not include the purchase of Harrison in 1998 or
Doubletree LaPosada in 1999.

Promus does not record net gains on asset dispositions, interest and dividend
income, or interest expense at the segment level; therefore, segment assets
do not include investments or notes receivable.

9
<PAGE> 12

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

On September 3, 1999, Promus Hotel Corporation (Promus) signed a definitive
merger agreement with Hilton Hotels Corporation (Hilton). Under the terms of
the agreement, Hilton will acquire all of Promus' outstanding common stock
for cash and Hilton common stock. Promus stockholders may elect to receive
cash or stock but in any event, 55% of the Promus shares will be converted
into cash and 45% will be converted into Hilton common stock. Promus
stockholders of record at the close of business on October 15, 1999 are
eligible to vote on the merger. Promus filed a joint proxy statement with the
Securities and Exchange Commission on Schedule 14A on October 21, 1999. The
joint proxy statement includes the notice of the meeting of stockholders to
be held on November 30, 1999, a description and discussion of the merger, the
agreement and plan of merger, and other important information pertaining to
the merger. The definitive merger agreement also provides for various
covenants and other restrictions for us to follow until the merger is
complete. The merger is expected to be completed on November 30, 1999,
subject to the approval of the Promus and Hilton stockholders.

On September 30, 1999, the Promus system contained 1,443 hotels, representing
over 203,000 hotel rooms. Promus has hotels in all 50 states, the District of
Columbia, Puerto Rico, and six foreign countries. Our brands include:

- Doubletree Hotels
- Doubletree Guest Suites
- Doubletree Club Hotels
- Embassy Suites
- Hampton Inn
- Hampton Inn & Suites
- Homewood Suites
- Red Lion Inns and Hotels

The Promus system also includes certain properties that are not
Promus-branded.

Of these 1,443 hotels, 1,112 were owned/operated by franchisees and we
operated 331 and owned 51. Depending on the hotel brand, each franchisee is
charged royalty fees of up to four percent of suite or room revenues in
exchange for the use of one of our brand names and franchise-related
services.

At September 30, 1999, Promus operated properties included:

<TABLE>
<S> <C>
Wholly-owned hotels......................... 51
Leased hotels............................... 73
Joint venture hotels........................ 23
Hotels managed for third parties............ 184
-----
Total.............................. 331
=====
</TABLE>

We receive management fees for operating hotels. Management fees are based on
a percentage of the hotel's gross revenues, operating profits, cash flow, or
a combination of each. Our results of operations for owned and leased hotels
reflect the revenues and expenses of these hotels.

We also license eight vacation interval ownership properties under the
Embassy Vacation Resort and Hampton Vacation Resort brand names. We earn
franchise fees on net interval sales and on revenues related to the rental of
interval units. We also earn management fees for our role as manager of some
of the vacation resort properties.

We own a mix of Promus-brand hotels that enhance our role as manager and
franchisor for our brands. In the second quarter of 1999, we announced our
intention to reduce our ownership of real estate by opportunistically selling
our owned hotels. During the third quarter of 1999, we sold 10 Hampton Inns
and 4 Homewood Suites. For a more detailed discussion please see "Real Estate
Sales".

10
<PAGE> 13

RESULTS OF OPERATIONS

The principal factors affecting our results are:

- continued growth in the number of system-wide hotel rooms
- occupancy and room rates achieved by hotels
- the relative mix of owned, leased, managed and franchised hotels
- our ability to manage costs

The number of rooms at franchised and managed properties and revenue per
available room (RevPAR) significantly affect our results because franchise
royalty and management fees are generally based upon a percentage of room
revenues. Increases in franchise royalty and management fee revenues have a
favorable impact on our operating margin due to minimal incremental costs
associated with this type of revenue.

Almost all components of our revenues are favorably impacted by system-wide
increases in RevPAR, even though our revenues come from various sources. On a
comparable hotel basis, RevPAR increases were as follows:

Revenue per Available Room for
Comparable Hotels (a)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 INCREASE 1998 1999 INCREASE
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Doubletree Hotels.......... $75.63 $76.39 1.0 % $74.71 $75.83 1.5 %
Embassy Suites............. $88.49 $90.17 1.9 % $90.38 $91.92 1.7 %
Hampton Inn................ $52.02 $53.11 2.1 % $48.99 $49.77 1.6 %
Hampton Inn & Suites....... $65.56 $66.67 1.7 % $59.39 $60.93 2.6 %
Homewood Suites............ $70.17 $72.42 3.2 % $73.36 $72.70 (0.9)%
Other hotels (b)........... $73.21 $73.58 0.5 % $69.96 $70.87 1.3 %
</TABLE>

----------
(a) Revenue statistics are for comparable hotels, and include information
only for those hotels in the system as of September 30, 1999 and
managed or franchised by Promus since July 1, 1998, for the quarterly
comparison and since January 1, 1998 for the year-to-date comparison.
Doubletree franchised hotels are not included in the statistical
information.

(b) Includes results for the 15 Red Lion hotels as well as the results for
comparable hotels managed/leased under other franchisors' brands or as
independent hotels and/or conference centers.

11
<PAGE> 14

THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998

OPERATING REVENUES AND EXPENSES

Third quarter 1999 revenues decreased 3.7%, or $11.1 million, to $285.2
million compared to third quarter 1998 revenues of $296.2 million.

The following table compares operating revenues and expenses for the three
months ended September 30, 1998 and 1999 (dollars in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE PERCENTAGE
1998 1999 (DECREASE) CHANGE
---------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Franchise and management fees............ $ 59,341 $ 56,296 $ (3,045) (5.1) %
Owned hotel revenues..................... 107,355 110,671 3,316 3.1
Leased hotel revenues.................... 110,823 102,086 (8,737) (7.9)
Purchasing and service fees.............. 7,091 6,781 (310) (4.4)
Joint venture income and other revenues.. 11,617 9,316 (2,301) (19.8)
---------- ---------- --------- ------
Total operating revenues.......... 296,227 285,150 (11,077) (3.7)
---------- ---------- --------- ------
General and administrative expenses...... 26,060 17,753 8,307 31.9
Owned hotel expenses..................... 64,752 68,926 (4,174) (6.4)
Leased hotel expenses.................... 95,555 87,724 7,831 8.2
Depreciation and amortization............ 20,086 18,587 1,499 7.5
Business combination expenses............ - 3,194 (3,194) N/A
---------- ---------- --------- ------
Total operating expenses.......... 206,453 196,184 10,269 5.0
---------- ---------- --------- ------
Net gain on asset dispositions........... 8,541 26,719 18,178 212.8
---------- ---------- --------- ------
Operating income.................. $ 98,315 $ 115,685 $ 17,370 17.7 %
========== ========== ========= ======

Operating margins:
Total (a).............................. 33.2 % 40.6 %
Owned hotels (b)....................... 39.7 37.7
Leased hotels (c)...................... 13.8 14.1
</TABLE>

----------
(a) Operating income divided by total operating revenue.
(b) Owned hotel revenues less owned hotel expenses divided by owned hotel
revenues.
(c) Leased hotel revenues less leased hotel expenses divided by leased hotel
revenues.

Franchise and management fees - The decrease was due to lower termination
fees and incentive management fees that declined by $5.7 million from the
amounts received in the third quarter of 1998. Excluding the termination fees
of $3.6 million for the third quarter of 1998, franchise and management fees
would have been up 0.9%. Incentive management fees declined by $2.1 million
in the third quarter of 1999 from the third quarter of 1998 due mainly to
scheduled reductions in incentive fee percentages on three larger hotels'
management contracts. An increase in fees from new contracts and improved
performance at existing franchised and managed properties helped to offset
the declines. Since September 30, 1998 we added 144 franchise and management
contracts (net of terminations) to the Promus system.

Owned hotel revenues and expenses - Revenue and expense increases are due to
the addition of five hotels since September 30, 1998, partially offset by the
sale of 15 hotels, 14 of which closed in September 1999. Revenue growth also
occurred as a result of increases in RevPAR. The operating margin decline on
owned hotels primarily resulted from the impact of our new hotels opened
since the third quarter of 1998. New hotels typically generate lower
operating margins prior to reaching maturity.

Leased hotel revenues and expenses - Since September 30, 1998, the number of
leased hotels decreased by five, including four hotels which were converted
to management contracts. The decrease in the number of leased hotels caused a
decrease in revenues and expenses for the third quarter of 1999. The
operating margin for leased hotels increased to 14.1% for the quarter ended
September 30, 1999 from 13.8% for the same period in 1998.

12
<PAGE> 15

Purchasing and service fees - We negotiate preferred supplier agreements on
behalf of our franchised and managed hotels which generate rebates and we
manage various capital projects for a fee. Our fees decreased 4.4% for the
three months ended September 30, 1999, compared with the same period in 1998
due to a reduction in project management fees.

Joint venture income and other revenues - Compared to the third quarter of
1998, joint venture income and other revenues declined by $2.3 million, or
19.8%, versus the third quarter of 1999. The decline was primarily due to
gains recognized last year on several joint venture ownership positions, as
well as performance declines for the joint venture portfolio this year.

General and administrative expenses - Expenses for the third quarter of 1999
included a charge of $0.7 million for retention and employment-related
expenses associated with the management change following the
Promus/Doubletree merger. Expenses for the third quarter of 1998 included a
charge of $10.1 million relating to the resignation of Promus' then
Chairman/CEO and its President. Excluding the effect of these unusual items,
general and administrative expenses increased $1.1 million, or 6.8%, in the
third quarter of 1999 compared with the third quarter of 1998.

Depreciation and amortization - The decrease of $1.5 million for the third
quarter of 1999 compared to the third quarter of 1998 is primarily due to the
hotel sales as well as the discontinuance of depreciation on hotels held for
sale in the third quarter of 1999. These reductions were partially offset by
depreciation associated with the addition of five company-owned hotels, as
well as, property and equipment additions at existing hotels since the third
quarter of 1998.

Business combination expenses - In connection with our pending merger with
Hilton, we incurred $3.2 million of expenses in the third quarter of 1999.
The expenses were primarily for fees to investment bankers and attorneys,
travel related to the merger, and the write-off of certain deferred costs
whose benefit will not be realized after the merger.

OTHER ITEMS AFFECTING NET INCOME

Interest and dividend income - Interest and dividend income was $4.4 million
in the third quarter of 1999 compared to $4.7 million in the third quarter of
1998. The decrease was due to lower interest income from notes receivable.

Interest expense - Interest expense was $17.9 million in third quarter 1999
compared to $16.3 million in third quarter 1998. The increase was due to
higher average borrowings for the third quarter of 1999 over the third
quarter of 1998. Average borrowings increased to fund the repurchase of a
portion of Promus' outstanding common stock. A lower average interest rate
paid for borrowings in third quarter 1999 helped to reduce the increase in
interest expense caused by the higher average borrowings.

Operating results for the third quarter of 1999 reflected an overall tax rate
of 37.6%, compared with an overall rate of 39.3% for the third quarter of
1998. Minority interest share of net income reflects the profits allocable to
third party owners of consolidated joint venture hotels.

Net income and earnings per diluted share for the quarter ended September 30,
1999 were $63.1 million and $0.80, respectively, compared to $51.8 million
and $0.60, respectively for 1998. It is difficult to compare operating
results due to the inclusion in the third quarter of 1999 and 1998 of certain
unusual items. Included in third quarter 1999 results were (a) a $0.7 million
charge for retention and employment-related expenses associated with the
management change following the Promus/Doubletree merger, (b) charges of $3.2
million related to the Hilton/Promus business combination, and (c) $26.7
million of net gains on asset dispositions. Unusual items for the third
quarter of 1998 were (a) a gain of $8.5 million on the sale of securities and
(b) a charge of $10.1 million for severance costs related to the resignation
of Promus' then Chairman/CEO and its President. Excluding these items, net
income and earnings per diluted share for the third quarter of 1999 and 1998
would have been $48.9 million and $0.62 and $52.8 million and $0.61,
respectively.

13
<PAGE> 16

NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998

OPERATING REVENUES AND EXPENSES

Revenues for the first nine months of 1999 decreased 1.1%, or $9.1 million,
to $832.4 million compared to the revenues for the first nine months of 1998
of $841.5 million.

The following table compares operating revenues and expenses for the nine
months ended September 30, 1998 and 1999 (dollars in thousands):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE PERCENTAGE
1998 1999 (DECREASE) CHANGE
---------- ---------- ----------- ------
<S> <C> <C> <C> <C>
Franchise and management fees............ $ 167,773 $ 165,656 $ (2,117) (1.3) %
Owned hotel revenues..................... 300,946 322,788 21,842 7.3
Leased hotel revenues.................... 318,489 293,341 (25,148) (7.9)
Purchasing and service fees.............. 18,379 16,786 (1,593) (8.7)
Joint venture income and other revenues.. 35,910 33,831 (2,079) (5.8)
---------- ---------- ----------- ------
Total operating revenues.......... 841,497 832,402 (9,095) (1.1)
---------- ---------- ---------- ------
General and administrative expenses...... 64,654 62,741 1,913 3.0
Owned hotel expenses..................... 184,489 204,163 (19,674) (10.7)
Leased hotel expenses.................... 279,624 259,075 20,549 7.3
Depreciation and amortization............ 58,623 61,317 (2,694) (4.6)
Business combination expenses............ - 3,194 (3,194) N/A
---------- ---------- ---------- ------
Total operating expenses.......... 587,390 590,490 (3,100) (0.5)
---------- ---------- ---------- ------
Net gain on asset dispositions........... 10,826 26,011 15,185 140.3
---------- ---------- ---------- ------
Operating income.................. $ 264,933 $ 267,923 $ 2,990 1.1 %
========== ========== ========== ======

Operating margins:
Total (a).............................. 31.5 % 32.2 %
Owned hotels (b)....................... 38.7 36.8
Leased hotels (c)...................... 12.2 11.7
</TABLE>
----------
(a) Operating income divided by total operating revenue.
(b) Owned hotel revenues less owned hotel expenses divided by owned hotel
revenues.
(c) Leased hotel revenues less leased hotel expenses divided by leased
hotel revenues.

Franchise and management fees - Franchise and management fees declined by
1.3% for the first nine months of 1999, compared to the first nine months of
1998. The decreases were due to change of ownership fees, termination fees
and incentive management fees. These fee types decreased $14.1 million for
the nine months ended September 30, 1999, compared to the same period in
1998. The decrease in fee revenue was partially offset by the addition of 144
franchise and management contracts (net of terminations) since September 30,
1998 and by improved performance at existing franchised and managed
properties.

Owned hotel revenues and expenses - Revenue and expense increases are due to
the addition of five hotels since September 30, 1998, partially offset by the
sale of 15 hotels, 14 of which closed in September 1999. Revenue growth also
occurred as a result of increases in RevPAR. The operating margin decline on
owned hotels primarily resulted from the impact of the new hotels opened
since the beginning of 1998. New hotels typically generate lower operating
margins prior to reaching maturity.

Leased hotel revenues and expenses - Since September 30, 1998, the number of
leased hotels decreased by five, including four hotels which were converted
to management contracts. The decrease in the number of leased hotels caused a
decrease in revenues and expenses for the third quarter of 1999. A decline in
the performance at existing leased hotels also contributed to lower leased
revenue. The operating margin for leased hotels decreased to 11.7% for the
nine months ended September 30, 1999 from 12.2% for the same period in 1998.

14
<PAGE> 17

Purchasing and service fees - We negotiate preferred supplier agreements on
behalf of our franchised and managed hotels which generate rebates and we
manage various capital projects for a fee. Our fees decreased 8.7% for the
nine months ended September 30, 1999, over the same period in 1998 due to
lower project management fees. The decrease was partially offset by a 16%
increase in our preferred vendor programs.

Joint venture income and other revenues - During the first nine months of
1999, we realized a $1.3 million gain related to the sale of a joint venture
hotel. Also, during the first nine months of 1998 we realized a $1.3 million
gain on the sale of excess joint venture land. Excluding these unusual items,
joint venture income and other revenues for the nine months ended September
30, 1999 compared to the nine months ended September 30, 1998 decreased by
$2.1 million, or 6.1%. The decline was primarily due to gains recognized last
year on several joint venture ownership positions, as well as performance
declines for the joint venture portfolio this year.

General and administrative expenses - Expenses for the first nine months of
1999 included a charge of $9.7 million for retention and employment-related
expenses associated with the management change following the
Promus/Doubletree merger. Expenses for the first nine months of 1998 included
a charge of $10.1 million relating to the resignation of Promus' then
Chairman/CEO and its President. Excluding the effect of these unusual items,
general and administrative expenses decreased $1.5 million, or 2.8%, in the
first nine months of 1999 compared with the first nine months of 1998.

Depreciation and amortization - The increase of $2.7 million for the first
nine months of 1999 over the same period in 1998 was primarily due to the
addition of five owned hotels and property and equipment additions at
existing hotels since the first nine months of 1998. The increase was
partially offset by hotel sales and the discontinuance of depreciation on
hotels held for sale in the third quarter of 1999.

OTHER ITEMS AFFECTING NET INCOME

Interest and dividend income - Interest and dividend income was $14.2 million
in the first nine months of 1999 compared to $15.3 million in the first nine
months of 1998. The decrease was due to lower interest income from notes
receivable and escrow deposits. Escrow deposits represented proceeds from
hotel sales in 1997. We deposited these proceeds into interest earning
accounts until they were used for hotel purchases during the first quarter of
1998.

Interest expense - Interest expense was $50.7 million for the first nine
months of 1999 compared to $46.5 million for the first nine months of 1998.
The increase was due to higher average borrowings for the first nine months
of 1999 over the first nine months of 1998. Average borrowings increased to
fund the repurchase of a portion of Promus' outstanding common stock. A lower
average interest rate paid for borrowings in the first nine months of 1999
helped to reduce the increase in interest expense caused by the higher
average borrowings.

Operating results for the first nine months of 1999 reflected an overall tax
rate of 37.6%, compared with an overall rate of 39.3% for the first nine
months of 1998. Minority interest share of net income reflects the profits
allocable to third party owners of consolidated joint venture hotels.

Net income and earnings per diluted share for the nine months ended September
30, 1999 were $142.8 million and $1.75, respectively, compared to $140.0
million and $1.60, respectively for 1998. It is difficult to compare
operating results due to the inclusion in the first nine months of 1999 and
1998 of certain unusual items. Included in the results for the first nine
months of 1999 were (a) a $1.3 million gain on the sale of a joint venture
hotel, (b) $9.7 million in charges relating to employment-related expenses
associated with the management change following the Promus/Doubletree merger,
(c) charges of $3.2 million related to the Hilton/Promus business
combination, and (d) $26.0 million of net gains on asset dispositions.
Unusual items in the first nine months of 1998 included (a) a net gain of
$1.3 million on the sale of excess joint venture land, (b) gains of $0.6
million on the prior sale of hotels, (c) gains of $10.2 million on the sale
of securities, and (d) a charge of $10.1 million for severance costs related
to the resignation of Promus' then Chairman/CEO and its President. Excluding
these items, net income and earnings per diluted share for the first nine
months of 1999 and 1998 would have been $133.8 million and $1.64 and $138.8
million and $1.59, respectively.

15
<PAGE> 18

Overall

Promus' operating income, excluding the effect of unusual items, decreased
7.0% to $92.9 million for the third quarter of 1999 from $99.9 million for
the same period in 1998. Promus' operating income, excluding the effect of
unusual items, decreased 3.6% to $253.5 million for the first nine months of
1999 from $262.9 million for the same period in 1998. This decrease in
operating income was due to lower franchise and management fee revenue and
decreases in the operating income from leased hotels. These decreases were
partially offset by increases in operating income from owned hotels. The
decrease in franchise and management fee revenue from 1998 levels was due to
lower one-time fees from change of ownership and termination fees and lower
incentive management fees. The decrease in one-time fees has been offset
somewhat by our ability to grow our portfolio of franchised and managed
hotels. Due to the size and strength of our infrastructure and systems,
openings of additional franchised or managed properties require fewer
incremental costs.

EARNINGS BEFORE INTEREST EXPENSE, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)

We consider EBITDA to be a useful measure of our operating performance.
EBITDA is also considered useful by the investment community to aid in
understanding our results and can be used to measure our ability to service
debt or fund capital expenditures. EBITDA should not be used as an
alternative to net income, operating income, cash from operations or any
other operating or liquidity performance measure as defined by generally
accepted accounting principles. We will continue to incur cash expenditures
for interest expense and income taxes, which are not included in EBITDA. Our
EBITDA before unusual items for the third quarter of 1999 decreased $8.8
million or 7.0% compared to the third quarter of 1998. The decrease for the
first nine months of 1999 compared to the same period in 1998 was $7.9
million or 2.3%. Our interest coverage, defined as EBITDA before unusual
items divided by interest expense, was 6.5 times for the third quarter of
1999 compared to 7.7 times for the third quarter of 1998. Interest coverage
for the first nine months of 1999 was 6.5 times compared to 7.2 times for the
same period in 1998.

SYSTEM GROWTH

Hotels

In the first nine months of 1999, we added 106 net hotels and 11,522 net
rooms to our hotel system, compared to the addition of 114 net hotels and
11,379 net rooms during the first nine months of 1998. Net room additions,
by brand, were as follows:

<TABLE>
<CAPTION>
NET ROOMS ADDED
-------------------------------------------------------
QUARTERS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
------------------------ ---------------------------
1998 1999 1998 1999
------ ------- ------- -------
<S> <C> <C> <C> <C>
Doubletree Hotels .. 999 346 906 57
Hampton Inn ........ 1,922 3,184 7,145 7,301
Hampton Inn & Suites 460 790 1,900 1,742
Embassy Suites ..... 401 482 243 1,583
Homewood Suites .... 328 (2) 2,067 1,321
Other .............. (185) 240 (882) (482)
------ ------- ------- -------
3,925 5,040 11,379 11,522
====== ======= ======= =======
</TABLE>

Hampton Inn continued to lead Promus' unit growth, with 33 net property
additions during the quarter and 77 net properties added during the first
nine months. We expect to continue growing the Hampton Inn brand as demand
from franchisees and hotel guests appears strong. Doubletree added a net of
one hotel during the nine months ended September 30, 1999. Embassy Suites
added a net of five hotels in the first nine months of 1999. The greatest
percentage growth in the first nine months of 1999 occurred within the
Homewood Suites and Hampton Inn & Suites brands. Homewood Suites added 10
hotels, a 16.8% increase in total rooms. Hampton Inn & Suites added 15
hotels, a 31.2% increase in total rooms. Other non-Promus branded hotel rooms
decreased by a net of two management contracts, including terminations of
three contracts and an addition of one management contract.

16
<PAGE> 19

Promus' development pipeline as of September 30, 1999 contained 301
properties that were either in the design or construction phase, as follows:

<TABLE>
<CAPTION>
UNDER
CONSTRUCTION/ IN
CONVERSION DESIGN TOTAL
---------- ------ -----
<S> <C> <C> <C>
Hampton Inn ....................... 81 81 162
Homewood Suites ................... 13 15 28
Hampton Inn & Suites .............. 28 24 52
Embassy Suites .................... 10 25 35
Doubletree Hotels, Suites and Clubs 7 13 20
Other ............................. 1 3 4
--- --- ---
140 161 301
=== === ===
</TABLE>

The 161 properties in design represent over 22,000 rooms. During the quarter,
Promus' rate of rescissions of hotel projects in its development pipeline was
consistent with past history. We are developing 13 of the properties in the
pipeline for operation as company owned hotels until they are sold to third
parties. Franchisees are developing the remaining hotels in the pipeline.
Financing for our franchise driven brands continues to be made available by
local and regional banks. The underwriting on these loans remains
conservative with loan-to-cost ratios of 60-75%. This means the developers
are required to provide the balance of the funding. We expect to achieve our
target of opening 150 hotels in 1999.

Promus plans to grow its brands through franchising, the addition of
management contracts and construction of new hotels. In addition, we are
assessing the market position of individual properties/markets.

The success of our ability to grow our number of franchised and managed
hotels is affected by, among other things, national and regional economic
conditions, capital markets, credit availability, relationships with
franchisees and owners as well as competition from other hotel franchisors
and managers, and, temporarily, uncertainty relating to the pending merger
with Hilton.

Acquisitions

In June 1999, we purchased the remaining 50% interest in the Doubletree
LaPosada Resort, a joint venture hotel located in Phoenix, Arizona for $5.5
million in cash. The acquisition was accounted for as a purchase. Prior to
the hotel's purchase we accounted for the joint venture as an equity
investment.

In January 1998, Promus acquired Harrison Conference Associates, Inc. for
$61.2 million in cash, including acquisition costs. Harrison is a leading
conference center operator with over 1,200 rooms under management, including
two owned and six managed properties.

Vacation Resorts

We have two licensed Promus Vacation Resort products: Embassy Vacation
Resorts and Hampton Vacation Resorts. Promus Vacation Resort statistics are
as follows:

<TABLE>
<CAPTION>
DECEMBER 31, SEPT. 30,
1998 1999
------------ ---------
<S> <C> <C>
Total vacation resorts open................... 8 8
Total available timeshare units............... 1,374 1,374
Total available timeshare intervals........... 70,074 70,074
Total timeshare intervals sold*............... 24,425 36,187
</TABLE>

* Includes pre-sold intervals for resorts under construction

17
<PAGE> 20

Other

System growth comes mainly from construction of franchised hotels, strategic
alliances with others, and incentives provided to hotel owners as a means of
obtaining franchise and management contracts. The hotel industry is in a
period of consolidation, which is expected to continue.

CAPITAL SPENDING

We expect to spend between $175.0 million and $200.0 million during 1999 to
fund the following:

- hotel and resort development
- refurbish existing facilities
- support our hotel management and business systems
- loan funds to hotel owners
- invest in joint ventures
- and pursue other corporate related projects

In order to maintain our quality standards, ongoing refurbishment of existing
company owned and leased hotel properties will continue in 1999 with
estimated annual expenditures of approximately $65.0 million. Our capital
expenditures for refurbishment totaled $26.2 million for the nine months
ended September 30, 1999. Total capital expenditures for the items listed
above totaled $95.1 million in the first nine months of 1999. Additionally,
we spent $158.4 million in the first nine months of 1999 to reacquire a
portion of our outstanding shares under the share repurchase programs
authorized by our board of directors and announced in August 1998 and April
1999. The repurchase program announced in August 1998 was completed in the
second quarter of 1999. The share repurchase program announced in April 1999
is authorized through December 31, 2000. However, due to the business
combination discussions with Hilton, we did not repurchase any shares during
the third quarter of 1999 and we do not intend to repurchase shares in the
fourth quarter. The business combination with Hilton is subject to approval
by Hilton's and our stockholders. Stockholder meetings are scheduled for
November 30, 1999, for both Promus and Hilton. The 1999 projected capital
spending of $175.0 to $200.0 million does not include the share repurchase
programs.

Cash necessary to finance projects currently identified can be made available
from the following sources:

- operating cash flows
- our revolving credit facility
- joint venture partners
- specific project financing
- sales of existing hotel assets and/or investments
- and, if necessary, Promus debt and/or equity offerings

We are currently subject to certain restrictions as described in the merger
agreement with Hilton as to amounts of capital transactions over and above these
outlined in our capital spending plan for 1999.

LIQUIDITY AND CAPITAL RESOURCES

Net operating cash flows increased $33.0 million for the first nine months of
1999 over the comparable 1998 level. This increase was primarily due to the
decrease in accounts receivable, deferred costs and other assets in the first
nine months of 1999 compared to first nine months of 1998. Non-recurring
items in the first nine months of 1999 provided $14.4 million in pre-tax
operating cash flows, compared to $2.0 million in the first nine months of
1998.

18
<PAGE> 21

Net cash flows used in investing activities decreased by $184.8 million in
1999 from 1998 levels. Uses of cash for investing activities in 1998 included
$61.2 million for the purchase of Harrison and $126.1 million for purchases
of property and equipment. Proceeds from the sale of real estate and
securities and the use of escrow deposits provided $35.6 million in investing
cash flows in the first nine months of 1998. The decrease in cash flows used
in 1999 over 1998 was partially offset by increased loans, net of
collections, to owners of managed and franchised hotels in 1999, an increase
of $119.1 million in cash provided by sales of real estate and securities,
and a decrease of $75.3 million in cash used to purchase property and
equipment.

Net cash used in financing activities increased $162.0 million in the first
nine months of 1999 from the same period in 1998. The increase in net cash
used during the first nine months of 1999 was attributable to treasury stock
purchases of $158.4 million, compared to $59.7 million in the first nine
months of 1998. Proceeds from the exercise of stock options decreased by
$19.8 in the first nine months of 1999, compared to 1998. Increases in net
borrowings used to fund treasury stock purchases were partially offset by the
proceeds of real estate sales. Compared to 1998, cash used for net repayments
of borrowings increased $43.5 million for the first nine months of 1999.

On September 30, 1999, we had a working capital surplus of $140.0 million,
compared to a $29.3 million deficit at December 31, 1998. The change in
working capital from a deficit to a surplus was primarily due to the
reclassification of $89.4 million in net assets of 12 owned hotels to assets
held for sale. These net assets were shown as current assets because the
sales are anticipated to close within the next 12 months. Also contributing
to the change in working capital from a deficit to a surplus was the issuance
of a $26.6 million short-term note receivable. This note receivable was
issued to the purchaser of four Homewood Suites and is due on October 1,
2000.

Our cash management program uses all excess cash to pay down debt amounts
outstanding under the Promus Facility. We do not believe that the current
ratio is an appropriate measure of our short-term liquidity without
considering the aggregate availability of our capital resources. Strong
operating cash flow, borrowings available under the Promus Facility, and our
ability to obtain additional financing through various financial markets,
provide more than sufficient resources to meet our liquidity needs for the
next year.

REAL ESTATE SALES

In the third quarter of 1999, we sold four owned Homewood Suites and 10 owned
Hampton Inn hotels. Management and franchise agreements for the four Homewood
Suites and franchise agreements for the 10 Hampton Inn hotels were signed.
The aggregate sales price of these hotels was $135.3 million. The total net
book value of the 14 hotels was approximately $81.0 million. The total gain
recognized, net of costs to sell, was $44.7 million. In connection with the
sale of the four Homewood Suites, we issued a note receivable to the
purchaser in the amount of $26.6 million. This note represented 75% of the
sales price. The note requires monthly principal and interest payments and
will mature in October 2000. We deferred $5.8 million of the net gains on the
sale of the Homewood Suites under the installment method of accounting. The
deferred gain will be recognized over the term of the note as payments are
collected.

We have identified 12 additional hotels to be held for sale. Nine of these
hotels will be sold in the fourth quarter of this year. We expect to sell the
three remaining hotels within the next 12 months. A valuation reserve of
$17.3 million was recorded on two of the hotels held for sale. This valuation
reserve was recognized in the third quarter and included in operating income.

19
<PAGE> 22

YEAR 2000

The "Year 2000 Problem" is the result of many computer programs that were
designed to save valuable computer storage space by representing years with a
two-digit number such as `99' for 1999. When the change in the millennium
occurs and year 2000 is represented as `00', such computer programs as well
as certain chip-embedded technology systems may interpret the year as 1900.
If not corrected, computer applications could fail or deliver unreliable and
erroneous results.

As a franchisor, manager and owner of hotels, we rely heavily on computer
systems. These computer systems are present at our corporate offices and at
our franchised, managed and owned hotels.

Promus' Computer Technologies

Promus groups the computer technologies used in support of its business into
the following three categories:

- Enterprise-wide, mission-critical business systems that support Promus'
franchised, managed and owned hotels as well as other corporate
requirements, including reservation, marketing, property management,
and revenue management systems; financial, human resources and
operational reporting systems; and corporate support technologies that
provide external and internal management reporting.

Most of these systems were built and installed after 1990 when the Year
2000 Problem was well understood within the technology industry. These
systems were largely Year 2000 compliant when built.

- Property-based systems that perform functions relating to the
operational support of all of our franchised, managed and owned hotels,
including PBX, call accounting, point-of-sale, and local sales systems.
These systems are selected by the hotel owners and managers and are not
consistently implemented at all hotels.

- Facility systems that contain embedded computer chips and perform
functions relating to the operation of all of our franchised, managed
and owned hotels, including elevators, automated room key systems,
HVAC, and fire and safety systems. These systems also are selected by
the hotel owners and managers and are not consistently implemented at
all hotels.

Promus' Response to the Year 2000 Problem

Beginning in early 1997, Promus developed and began implementing a plan
designed to identify its exposure to the Year 2000 problem and to minimize
potential disruptions and losses. The initial steps in this plan are as
follows:

- Enterprise-Wide, Mission Critical Business Systems

The remediation steps for the enterprise-wide, mission-critical
business systems have been executed and tested. No significant issues
have surfaced in the integration testing. This phase was completed in
the second quarter of 1999.

- Vendor Identification and Contact

The external businesses that provide technology systems and other
products and services to Promus and its hotels have been sent letters
requesting verification of their Year 2000 readiness. Responses are
tracked and a vendor database is available through Promus' Intranet for
hotel owners and managers. This effort will continue throughout 1999.

20
<PAGE> 23

- Property-Based Systems and Facility Systems

Promus has engaged an independent consultant to perform on-site
inventories and assessments of the property-based systems and facility
systems at all hotels that are managed or owned by us. This phase is
complete, although it is anticipated that remediation activities will
continue throughout the remainder of the year. For franchised hotels,
we have provided their owners and general managers with a Year 2000
Compliance Guide and additional communications to assist them in
performing their assessments. We requested all franchise hotels sign a
Year 2000 compliance sign-off form indicating that remediation steps
and contingency plans are complete and that emergency procedures will
be reviewed by the hotel staff prior to December 31, 1999. Year 2000
readiness is part of our 1999 quality assurance audits of all hotels.

- Contingency Planning

Promus is developing contingency plans to respond to business
disruptions that may occur as a result of Year 2000 problems. The
principal areas of focus for contingency planning are hotel operations,
corporate finance, human resources, information technology, and
corporate facilities. The hotels have completed their plans, subject to
updating and refinement throughout the remainder of the year. The
remaining areas are scheduled for completion in November 1999.

Year 2000 Remediation Costs

During the first nine months of 1999, Promus spent approximately $0.6 million
on Year 2000 remediation costs. Since 1997, we have spent approximately $1.7
million on the remediation of the Year 2000 problem in the computer systems
at our corporate offices and hotels, most of which was internal labor costs.
We expect to incur approximately $0.4 million in additional Year 2000 problem
remediation costs over the remainder of 1999.

The costs associated with remediation of the Year 2000 problem of
property-based systems and facility systems at the hotels that are managed by
Promus and at the franchised hotels are borne by their respective owners.

Risks Arising from the Year 2000 Problem

Promus believes that the Year 2000 problem will not have a material adverse
effect on its business or its financial condition.

Promus believes that its enterprise-wide, mission-critical business systems,
as well as the property-based systems and facility systems at its owned
hotels, will be ready for Year 2000 in all material respects and will pose
minimal risks of business disruption. We cannot predict with certainty the
Year 2000 readiness of the property-based systems and facility systems at our
managed and franchised hotels, because the decision-making authority with
respect to Year 2000 assessment and remediation, and the incurrence of costs
related thereto, rests principally with the owners of those hotels.

Promus and all of its franchised, managed and owned hotels depend on numerous
independent, external providers of products and services. These external
businesses include suppliers of electricity, natural gas, telephone service
and other public utilities; financial institutions and credit card companies;
food, beverage and linen suppliers; and airlines, air traffic control
systems, car rental companies, and gasoline station operators. We do not
control these external businesses and cannot ensure that they and their
products and services will be ready for Year 2000. The most reasonably likely
worst case Year 2000 scenario for Promus and its hotels would be the failure
by one or more critical external businesses (e.g., airlines, utilities or
credit card companies) to be ready for Year 2000. This in turn could disrupt
service or cause potential hotel guests to postpone or cancel their travel
plans or make claims under the "100% Satisfaction Guarantee" program
available at most Promus-branded hotels, causing a disruption of our
business. We are seeking to verify the Year 2000 readiness of these external
businesses; however, if these external businesses - particularly critical
ones - were to experience a Year 2000 problem, the resulting business
disruption could have a material adverse effect on our results of operations
and financial condition.

21
<PAGE> 24

NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. It requires that an
entity recognize all derivatives either as assets or liabilities in the
statement of financial position and measure those instruments at fair value.

SFAS No. 133 allows an entity to designate a derivative instrument, if
certain conditions are met, as one of the following three types:

1) a Fair Value Hedge, which is a hedge of the exposure to
changes in the fair value of a recognized asset or liability,
or of an unrecognized firm commitment

2) a Cash Flow Hedge, which is a hedge of the exposure to
variability in the cash flow of a recognized asset or
liability, or of a forecasted transaction, or

3) a Foreign Currency Hedge, which is a hedge of the foreign
currency exposure of an unrecognized firm commitment, an
available-for-sale security, a forecasted transaction, or a
net investment in a foreign operation.

The accounting for changes in the fair value of a derivative (that is, gains
and losses) depends on the intended use of the derivative and the resulting
designation. Promus' derivatives at September 30, 1999 were cash flow hedges.

This Statement is effective for all fiscal quarters of fiscal years beginning
after September 15, 1999. The adoption of SFAS No. 133 is not anticipated to
have a material impact on the financial position or results of operations of
Promus.

FORWARD LOOKING STATEMENTS

Certain matters discussed in this report may constitute forward-looking
statements within the meaning of the federal securities laws.

Forward-looking statements are those that express management's view of future
performance and trends, and usually are preceded with "expects",
"anticipates", "believes", "hopes", "estimates", "plans" or similar phrasing,
and include statements regarding Year 2000 readiness and potential exposure,
Promus' ability to increase rates, margin improvements and projected
expenditures, capital spending and availability of capital resources and the
status of the pending merger with Hilton. Such statements are based on
management's beliefs, assumptions and expectations, which in turn are based
on information currently available to management. Our actual performance and
results could differ materially from those expressed in or contemplated by
the forward-looking statements due to a number of factors, many of which are
beyond our ability to predict or control. Such factors include, but are not
limited to, operations of existing hotel properties, including the effects of
competition and customer demand; changes in the size of Promus' hotel system,
including anticipated scope and opening dates of new developments, planned
future capital spending, terminations of franchise or management agreements
or dispositions of properties; relationships with third parties, including
franchisees, lessors, hotel owners, lenders and others; litigation or other
judicial actions; changes in the national economy or regional economies,
which among other things, affect business and leisure travel and expenditures
and capital availability for hotel development; and adverse changes in
interest rates for both Promus and its franchisees and business partners
which, among other things, affect new hotel development; real estate values;
and credit availability. Promus disclaims any obligation to update
forward-looking information. For further information on factors which could
impact Promus and the statements contained herein, please refer to the
current, quarterly and annual reports and other filings, including without
limitation our joint proxy statement on Schedule 14A filed on October 21,
1999, and our 10-K for the year ended December 31, 1998, made with the
Securities and Exchange Commission.

22
<PAGE> 25

PERFORMANCE STATISTICS

<TABLE>
<CAPTION>
NUMBER OF HOTELS NUMBER OF ROOMS/SUITES
------------------------------ ----------------------------------
AS OF CHANGE SINCE AS OF CHANGE SINCE
--------- ------------------- ---------- ---------------------
SEPT. 30, JUNE 30, DEC. 31, SEPT. 30, JUNE 30, DEC. 31,
1999 1999 1998 1999 1999 1998
----- ---- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Doubletree Hotels (a)
Company owned ..... 16 -- -- 4,649 -- (97)
Leased ............ 14 -- (4) 3,877 -- (935)
Joint venture (b) . 4 -- -- 1,100 -- 98
Management contract 91 -- 4 24,962 (123) 633
Franchised ........ 52 2 1 12,281 469 358
----- ---- -------- -------- ------- -------
177 2 1 46,869 346 57
Embassy Suites
Company owned ..... 6 -- -- 1,299 -- --
Joint venture (b) . 19 -- -- 5,098 -- 154
Management contract 60 -- 2 15,049 (1) 624
Franchised ........ 65 2 3 14,710 483 805
----- ---- -------- -------- ------- -------
150 2 5 36,156 482 1,583
Hampton Inn
Company owned ..... 0 (10) (11) -- (1,378) (1,504)
Leased ............ 18 -- -- 2,250 -- --
Management contract 7 -- -- 929 -- --
Franchised ........ 878 43 88 90,203 4,562 8,805
----- ---- -------- -------- ------- -------
903 33 77 93,382 3,184 7,301
Hampton Inn & Suites
Company owned ..... 1 1 1 133 133 133
Management contract 3 -- -- 408 -- --
Franchised ........ 59 6 14 6,792 657 1,609
----- ---- -------- -------- ------- -------
63 7 15 7,333 790 1,742
Homewood Suites
Company owned ..... 18 (4) (1) 2,127 (478) (105)
Management contract 8 4 3 949 478 395
Franchised ........ 58 -- 8 6,112 (2) 1,031
----- ---- -------- -------- ------- -------
84 -- 10 9,188 (2) 1,321
Other Hotels (c)
Company owned ..... 10 -- -- 1,622 2 2
Leased ............ 41 -- -- 6,433 -- --
Management Contract 15 1 (2) 2,583 238 (484)
----- ---- -------- -------- ------- -------
66 1 (2) 10,638 240 (482)
Total System
Company owned ..... 51 (13) (11) 9,830 (1,721) (1,571)
Leased ............ 73 -- (4) 12,560 -- (935)
Joint venture (b) . 23 -- -- 6,198 -- 252
Management contract 184 5 7 44,880 592 1,168
Franchised ........ 1,112 53 114 130,098 6,169 12,608
----- ---- -------- -------- ------- -------
1,443 45 106 203,566 5,040 11,522
===== ==== ======== ======== ======= =======
</TABLE>
- ----------
(a) Includes Doubletree Hotels, Doubletree Guest Suites and Doubletree Club
Hotel brands.
(b) For statistical purposes only, Promus classifies unconsolidated joint
ventures in which it holds less than a 20% interest as management
contracts and consolidated joint ventures in which it owns more than a
50% interest as company owned.
(c) Includes Red Lion Inns and Hotels, University Hotels and Conference
Centers, as well as hotels managed/leased under other franchisors'
brands or as independent hotels and/or conference centers.

23
<PAGE> 26

<TABLE>
<CAPTION>
MANAGED FRANCHISED TOTAL
---------------- --------------- ---------------
SEPT. 30, SEPT. 30, SEPT. 30,
---------------- --------------- ---------------
1998 1999 1998 1999 1998 1999 INCREASE
------- ------- ------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Promus Vacation Resorts
Resort properties........................ 5 5 3 3 8 8 -
Timeshare units.......................... 442 500 874 874 1,316 1,374 58
Timeshare intervals available............ 22,542 25,500 44,574 44,574 67,116 70,074 2,958
Timeshare intervals sold (a) ............ 12,324 22,020 8,939 14,167 21,263 36,187 14,924
</TABLE>

- ----------
(a) Includes pre-sales for resorts under construction but not yet open.

<TABLE>
<CAPTION>
THIRD QUARTER ENDED SEPT. 30,(a) NINE MONTHS ENDED SEPT. 30, (a)
-------------------------------- -------------------------------
1998 1999 CHANGE 1998 1999 CHANGE
------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Doubletree Hotels (b)
Occupancy ......... 74.2% 73.7% (0.5) pts 71.7 % 71.5% (0.2) pts
ADR ............... $101.97 $ 103.70 1.7 % $ 104.22 $ 105.99 1.7 %
RevPAR ............ $ 75.63 $ 76.39 1.0 % $ 74.71 $ 75.83 1.5 %

Embassy Suites
Occupancy ......... 74.5% 75.8% 1.3 pts 74.2 % 75.3% 1.1 pts
ADR ............... $118.77 $ 119.01 0.2 % $ 121.82 $ 122.06 0.2 %
RevPAR ............ $ 88.49 $ 90.17 1.9 % $ 90.38 $ 91.92 1.7 %

Hampton Inn
Occupancy ......... 74.9% 73.4% (1.5) pts 68.6 % 70.2% (1.6) pts
ADR ............... $ 69.54 $ 72.39 4.1 % $ 68.23 $ 70.89 3.9 %
RevPAR ............ $ 52.02 $ 53.11 2.1 % $ 48.99 $ 49.77 1.6 %

Hampton Inn & Suites
Occupancy ......... 74.1% 73.7% (0.4) pts 71.5 % 71.5% 0.0 pts
ADR ............... $ 88.62 $ 90.48 2.1 % $ 83.11 $ 85.27 2.6 %
RevPAR ............ $ 65.56 $ 66.67 1.7 % $ 59.39 $ 60.93 2.6 %

Homewood Suites
Occupancy ......... 73.9% 77.7% 3.8 pts 76.4 % 75.8% 0.6 pts
ADR ............... $ 94.93 $ 93.22 (1.8)% $ 97.55 $ 95.89 (1.7)%
RevPAR ............ $ 70.17 $ 72.42 3.2 % $ 73.36 $ 72.70 (0.9)%

Other Hotels (c)
Occupancy ......... 73.5% 71.2% (2.3) pts 70.6 % 68.7% (1.9) pts
ADR ............... $ 99.53 $ 103.31 3.8 % $ 98.96 $ 103.12 4.2 %
RevPAR ............ $ 73.21 $ 73.58 0.5 % $ 69.96 $ 70.87 1.3 %
</TABLE>

- ----------
(a) Revenue statistics are for comparable hotels, and include information only
for those hotels in the system as of September 30, 1999 and managed or
franchised by Promus or managed by Doubletree since July 1, 1998 for the
quarterly comparison and since January 1, 1998 for the year-to-date
comparison. Doubletree franchised hotels are not included in the
statistical information.

(b) Includes Doubletree Hotels, Doubletree Guest Suites and Doubletree Club
Hotel brands.
(c) Includes results for the 15 Red Lion hotels as well as the results for
comparable hotels managed/leased under other franchisors' brands or as
independent hotels and/or conference centers.

24
<PAGE> 27

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Promus is exposed to market risk, primarily changes in interest rates. We have
entered into derivative transactions to hedge our exposure to interest rate
changes. We do not hold or issue derivative financial instruments for trading
purposes and do not enter into derivative transactions that would be considered
speculative positions.

The table below provides information about our derivative financial instruments
and other financial instruments that are sensitive to changes in interest rates,
including interest rate swaps and debt obligations. For debt obligations, the
table presents principal cash flows and related weighted average interest rates
by expected maturity dates for fixed rate obligations and by earliest repricing
date for variable rate obligations. For interest rate swaps, the table presents
notional amounts and weighted average rates by contractual maturity dates.

<TABLE>
<CAPTION>
MATURITY DATE
---------------------------------------------------------------- FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE(1)
-------- ------- ------- ------- ------- ---------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Notes Receivable
Fixed rate ................ $ 0.4 $ 29.8 $ 18.6 $ -- $ 1.9 $ 53.4 $ 104.1 $ 102.6
Average interest rate ..... 7.1% 8.6% 13.2% -- 10.0% 7.9% 9.0%
Variable rate ............. $ 15.6 $ -- $ -- $ -- $ -- $ -- $ 15.6 $ 15.6
Average interest rate (2) 9.4% -- -- -- -- -- 9.4%

Liabilities:
Long-term debt
Fixed rate ................ $ 2.2 $ 1.9 $ 2.1 $ 37.9 $ 1.3 $ 56.6 $ 102.0 $ 99.9
Average interest rate ..... 7.9% 7.9% 7.9% 6.1% 7.5% 7.4% 6.9%
Variable rate ............. $ 650.1 $ -- $ -- $ -- $ -- $ -- $ 650.1 $ 650.1
Average interest rate (2) 5.8% -- -- -- -- -- 5.8%

Interest Rate Swaps:
Variable to Fixed ......... $ 175.0 $ -- $ -- $ 38.6 $ -- $ -- $ 213.6 $ (0.5)
Average pay rate ........ 6.1% -- -- 6.4% -- -- 6.1%
Average receive rate .... 5.5% -- -- 5.3% -- -- 5.5%
</TABLE>

- ----------
(1) The carrying values of variable rate notes receivable approximate fair
value due to their interest terms. The fair value of the fixed rate notes
receivable was based on discounted cash flows. The carrying values of
variable rate long-term debt approximate fair value due to their short
maturities and interest terms. The fair value of the fixed rate long-term
debt was based on market quotes for debt instruments with similar terms.
The fair value of the swap agreements was based on the price we would
have to pay to terminate them.
(2) The average interest rates were based on September 30, 1999, variable
rates. Actual rates in future periods could vary.

The notes receivable consist of secured and unsecured loans to our franchisees
and other nonconsolidated affiliates.

The long-term debt consists of an unsecured credit arrangement (the Promus
Facility), mortgage indebtedness, and other unsecured notes payable. For a more
detailed discussion of the Promus Facility and our other indebtedness, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Promus Facility and Other
Indebtedness" on page 30 and "Note 8 - Notes Payable" on pages 44 and 45 of the
1998 Annual Report to Shareholders, which information is incorporated herein by
reference.

The interest rate swap agreements contain a credit risk to Promus that the
counterparties may be unable to meet the terms of the agreements. We minimize
this risk by evaluating the creditworthiness of our counterparties, which are
limited to major banks and financial institutions.

25
<PAGE> 28

PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On or around September 7, 1999, two actions were filed in the Court of Chancery
for the State of Delaware by alleged common stockholders of Promus on behalf of
a purported class of similarly situated Promus stockholders. The actions are
styled Steven Goldstein v. Promus Hotel Corporation, et al., C.A. No. 17410NC
and Joseph Carco v. Promus Hotel Corporation, et al., C.A. No. 17411NC. The
complaints in the actions, which are substantially similar, name as defendants
Promus, the members of the Promus board of directors and Hilton, and allege that
the Promus directors breached their fiduciary duties to Promus stockholders by
agreeing to the acquisition and by allegedly failing to obtain the highest value
for Promus stockholders, and that Hilton allegedly aided and abetted such
alleged breaches of fiduciary duty. The complaints seek injunctive relief and
monetary damages in an unspecified amount. We intend to defend the actions
vigorously.

On or about October 11, 1999, an action was filed in the United States District
Court for the Southern District of Florida entitled Hotelrama Associates, Ltd.
v. Hilton Hotels Corporation (Case No. 99-CV02717). The plaintiff is the owner
of the Fountainebleu Hilton Resort & Towers in Miami, Florida, which is managed
by Hilton. The complaint alleges that the acquisition will cause Hilton to be in
violation of territorial restrictions contained in the management agreement. The
complaint seeks an injunction enjoining Hilton from violating the restrictive
covenant by its acquisition of Promus and for the entry of a judgment entitling
the plaintiff to any and all remedies available under Florida law. Hilton has
indicated that it intends to defend the action vigorously and we have filed a
motion to intervene in the proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

26
<PAGE> 29

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

EX-2 Agreement and Plan of Merger. (1)

EX-11 Computation of Per Share Earnings. (2)

EX-27 Financial Data Schedule. (2)

(b) Reports on Form 8-K (File No. 1-13719):

<TABLE>
<CAPTION>
Date of Current Report Subject
---------------------- -------
<S> <C>
September 3, 1999 Joint press release with Hilton Hotels Corporation
announcing an Agreement and Plan of Merger
providing for the merger of Promus Hotel Corporation
and a wholly owned subsidiary of Hilton, reported
under Item 5.

Agreement and Plan of Merger
dated as of September 3, 1999
among Promus Hotel Corporation
Hilton Hotels Corporation and
Chicago Hilton, Inc., reported
under Item 7.

October 26, 1999 Press release announcing Promus Hotel
Corporation's earnings for the three and nine months
ended September 30, 1999, reported under Item 5.

</TABLE>

- --------
Footnotes

(1) Incorporated by reference to Form 8-K filed September 3, 1999.
(2) Filed herewith.

27
<PAGE> 30

SIGNATURES

Pursuant to the requirements 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.

PROMUS HOTEL CORPORATION

November 12, 1999 By: /s/ DAN L. HALE
-------------------------------------------
Dan L. Hale
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)

28
<PAGE> 31

EXHIBIT INDEX

SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------

(a) EX-2 Agreement and Plan of Merger (1)

(b) EX-11 Computation of Per Share Earnings. (2) 30

(d) Reports on Form 8-K:

Agreement and Plan of Merger dated as of September 3, 1999
among Promus Hotel Corporation, Hilton Hotels Corporation and
Chicago Hilton, Inc., reported under Item 7.

October 26, 1999 Press release announcing Promus Hotel Corporation's earnings
for the three and nine months ended September 30, 1999,
reported under Item 5.
</TABLE>

- --------
Footnotes

(1) Incorporated by reference to Form 8-K filed September 3, 1999.
(2) Filed herewith.

<PAGE> 1

EXHIBIT 11

PROMUS HOTEL CORPORATION
COMPUTATIONS OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1998 1999 1998 1999
------- ------- -------- --------

<S> <C> <C> <C> <C>
Net income ............................ $51,830 $63,083 $140,034 $142,808
======= ======= ======== ========
Basic Earnings per Share:

Weighted average outstanding shares 86,552 78,673 86,631 81,156
======= ======= ======== ========
Net income per basic share ........ $ 0.60 $ 0.80 $ 1.62 $ 1.76
======= ======= ======== ========
Diluted Earnings per Share:

Weighted average outstanding shares 86,552 78,673 86,631 81,156
Effect of dilutive securities:
Stock options and warrants ..... 447 233 721 272
------- ------- -------- --------
Weighted average shares assuming
Conversion ..................... 86,999 78,906 87,352 81,428
======= ======= ======== ========
Net income per diluted share ...... $ 0.60 $ 0.80 $ 1.60 $ 1.75
======= ======= ======== ========
</TABLE>

<ARTICLE> 5
<MULTIPLIER>1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 51,616
<SECURITIES> 0
<RECEIVABLES> 103,103
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 311,750
<PP&E> 952,834
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,429,306
<CURRENT-LIABILITIES> 171,777
<BONDS> 750,359
0
0
<COMMON> 880
<OTHER-SE> 1,154,073
<TOTAL-LIABILITY-AND-EQUITY> 2,429,306
<SALES> 0
<TOTAL-REVENUES> 832,402
<CGS> 0
<TOTAL-COSTS> 590,490
<OTHER-EXPENSES> (26,011)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,704
<INCOME-PRETAX> 228,859
<INCOME-TAX> 86,051
<INCOME-CONTINUING> 142,808
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142,808
<EPS-BASIC> 1.76
<EPS-DILUTED> 1.75

</TABLE>