** **

**FORM10-Q**

 

**SECURITIESEXCHANGE COMMISSION**

 

# **Washington, D.C.  20549**

 

 

**(MARKONE)**

**                       ****ý****        QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001**

 

# **OR**

 

**                       ****o****        TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**FOR THE TRANSITION PERIOD FROM                 TO**

 

# **Commission File No. 1-6869**

 

**PRIME HOSPITALITY CORP.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                     |   | **22-2640625**                        |
|----------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of |   | (I.R.S.  employer identification no.) |
| incorporation  or organization)  |   |                                  |

 

# **700 Route 46 East,Fairfield, New Jersey  07004**

(Addressof principal executive offices)

 

**(973) 882-1010**

(Registrant'stelephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.              Yes  ý  No  o

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Section 12, 13 or 15(d) of the Securities Exchange Actof 1934 subsequent to the distribution of securities under a plan confirmed bya court.

Yes  ý  No  o

 

Theregistrant had 44,765,130 shares of common stock, $.01 par value, outstandingas of November 1, 2001.

 

 

**PRIMEHOSPITALITY CORP. AND SUBSIDIARIES****INDEX**

 

 
|       |                                                                 |   |
|------------|----------------------------------------------------------------------|--------|
| PART  I.   | FINANCIAL  INFORMATION                                               |   |
|       |                                                                 |   |
| Item  1.   | Financial  Statements                                                |   |
|       |                                                                 |   |
|       | Consolidated Balance Sheets                                          |   |
|       | September 30,  2001(Unaudited) and December 31, 2000                 |   |
|       |                                                                 |   |
|       | Consolidated  Statements of Income                                   |   |
|       | Three and nine months  ended September 30, 2001 and 2000 (Unaudited) |   |
|       |                                                                 |   |
|       | Consolidated  Statements of Cash Flows                               |   |
|       | Nine months ended  September 30, 2001 and 2000 (Unaudited)           |   |
|       |                                                                 |   |
|       | Notes  to Interim Consolidated Financial Statements (Unaudited)      |   |
|       |                                                                 |   |
|       |                                                                 |   |
| Item  2.   | Management's  Discussion and Analysis of                             |   |
|       | Financial  Condition and Results of Operations                       |   |
|       |                                                                 |   |
| Item  3.   | Quantitative  and Qualitative                                        |   |
|       | Disclosures  About Market Risk                                       |   |
|       |                                                                 |   |
|       |                                                                 |   |
| PART II.   | OTHER INFORMATION                                                    |   |
|       |                                                                 |   |
| Item 1.    | Legal Proceedings                                                    |   |
|       |                                                                 |   |
| Item  2.   | Changes  in Securities and Use of Proceeds                           |   |
|       |                                                                 |   |
| Item 3.    | Defaults upon  Senior Securities                                     |   |
|       |                                                                 |   |
| Item  4.   | Submission  of Matters to a Vote of Security Holders                 |   |
|       |                                                                 |   |
| Item  5.   | Other  Information                                                   |   |
|       |                                                                 |   |
| Item 6.    | Exhibits and  Reports on Form 8-K                                    |   |
|       |                                                                 |   |
| Signatures |                                                                 |   |

 

 

**PRIME HOSPITALITY CORP.AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEETS(In Thousands, Except Share Data)**

** **

** **
|                                                                                                                                                                                       |   | **September 30,** |          | **December 31,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------------|------------------|--------|
|                                                                                                                                                                                       |   | **2001**          |          | **2000**         |   |
| **ASSETS**                                                                                                                                                                                 |   | **(Unaudited)**   |          |             |   |
| Current  assets:                                                                                                                                                                           |   |              |          |             |   |
| Cash  and cash equivalents                                                                                                                                                                 |   | $                 | 8,958         |             | $      | 1,735 |   |
| Marketable  securities available for sale                                                                                                                                                  |   | 3,524             |          | 3,325            |   |
| Accounts  receivable (net of allowances of $1,125 and $1,000 at September 30, 2001 and  December 31, 2000, respectively)                                                                   |   | 30,861            |          | 27,916           |   |
| Current  portion of mortgages and notes receivable                                                                                                                                         |   | 422               |          | 3,306            |   |
| Other  current assets                                                                                                                                                                      |   | 16,255            |          | 17,745           |   |
| Total  current assets                                                                                                                                                                      |   | 60,020            |          | 54,027           |   |
|                                                                                                                                                                                       |   |              |          |             |   |
| Property,  equipment and leasehold improvements, net of accumulated depreciation and  amortization                                                                                         |   | 1,010,020         |          | 1,019,474        |   |
| Properties  held for sale                                                                                                                                                                  |   | 31,684            |          | 32,517           |   |
| Mortgages  and notes receivable, net of current portion                                                                                                                                    |   | 12,096            |          | 11,991           |   |
| Other  assets                                                                                                                                                                              |   | 38,998            |          | 41,831           |   |
|                                                                                                                                                                                       |   |              |          |             |   |
| **TOTAL ASSETS**                                                                                                                                                                           |   | **$**             | **1,152,818** | ** **       | **$**  | **1,159,840** | ** ** |
|                                                                                                                                                                                       |   |              |          |             |   |
| **LIABILITIES  AND STOCKHOLDERS' EQUITY**                                                                                                                                                  |   |              |          |             |   |
| Current  liabilities:                                                                                                                                                                      |   |              |          |             |   |
| Current  portion of debt                                                                                                                                                                   |   | $                 | 10,275        |             | $      | 4,702 |   |
| Current  portion of deferred income                                                                                                                                                        |   | 6,762             |          | 10,322           |   |
| Other  current liabilities                                                                                                                                                                 |   | 72,224            |          | 62,228           |   |
| Total  current liabilities                                                                                                                                                                 |   | 89,261            |          | 77,252           |   |
|                                                                                                                                                                                       |   |              |          |             |   |
| Long-term  debt, net of current portion                                                                                                                                                    |   | 313,985           |          | 340,987          |   |
| Deferred  income                                                                                                                                                                           |   | 34,921            |          | 60,950           |   |
| Other  liabilities                                                                                                                                                                         |   | 10,379            |          | 12,551           |   |
|                                                                                                                                                                                       |   |              |          |             |   |
| Total  liabilities                                                                                                                                                                         |   | 448,546           |          | 491,740          |   |
|                                                                                                                                                                                       |   |              |          |             |   |
| Commitments  and contingencies                                                                                                                                                             |   | -----             |          | -----            |   |
|                                                                                                                                                                                       |   |              |          |             |   |
| Stockholders'  equity:                                                                                                                                                                     |   |              |          |             |   |
| Preferred  stock, par value $.10 per share; 20,000,000 shares authorized; none issued                                                                                                      |   | -----             |          | -----            |   |
| Common  stock, par value $.01 per share; 75,000,000 shares authorized; 56,189,319 and  55,972,932 shares issued and outstanding at September 30, 2001 and December  31, 2000, respectively |   | 562               |          | 560              |   |
| Capital  in excess of par value                                                                                                                                                            |   | 528,666           |          | 524,549          |   |
| Retained  earnings                                                                                                                                                                         |   | 292,362           |          | 256,966          |   |
| Accumulated  other comprehensive loss, net of taxes                                                                                                                                        |   | (2,471            | )             | (2,838           | )      |
| Treasury  stock (11,507,078 and 11,130,878 shares at  September 30, 2001 and December 31, 2000, respectively)                                                                              |   | (114,847          | )             | (111,137         | )      |
| Total  stockholders' equity                                                                                                                                                                |   | 704,272           |          | 668,100          |   |
|                                                                                                                                                                                       |   |              |          |             |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                                                                                             |   | **$**             | **1,152,818** | ** **       | **$**  | **1,159,840** | ** ** |

* *

*See Accompanying Notes to Interim Consolidated FinancialStatements.*

** **

 

**PRIME HOSPITALITY CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(Unaudited)THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000(In Thousands, Except Per Share Amounts)**

** **

** **
|                                                                         |   | **Three Months Ended** |    | **Nine Months Ended** |   |
|------------------------------------------------------------------------------|--------|------------------------|---------|-----------------------|--------|
|                                                                         |   | **September 30,**      |    | **September 30,**     |   |
|                                                                         |   | **2001**               |    | **2000**              |   | **2001** |   | **2000** |   |
| Revenues:                                                                    |   |                   |    |                  |   |   |   |   |   |
| Hotel  revenues                                                              |   | $                      | 115,338 |                  | $      | 141,381 |   | $ | 371,387 |   | $ | 409,237 |   |
| Management,  franchise and other fees                                        |   | 3,083                  |    | 3,635                 |   | 10,168 |   | 11,689 |   |
| Rental  and other revenues                                                   |   | 699                    |    | 1,299                 |   | 2,282 |   | 3,150 |   |
| Total  revenues                                                              |   | 119,120                |    | 146,315               |   | 383,837 |   | 424,076 |   |
|                                                                         |   |                   |    |                  |   |   |   |   |   |
| Costs  and expenses:                                                         |   |                   |    |                  |   |   |   |   |   |
| Hotel  operating expenses                                                    |   | 64,662                 |    | 71,143                |   | 199,290 |   | 206,491 |   |
| Rent  and other occupancy                                                    |   | 21,671                 |    | 25,472                |   | 67,107 |   | 64,793 |   |
| General  and administrative                                                  |   | 7,403                  |    | 6,098                 |   | 22,294 |   | 22,591 |   |
| Depreciation  and amortization                                               |   | 9,556                  |    | 9,999                 |   | 28,598 |   | 31,781 |   |
| Total  costs and expenses                                                    |   | 103,292                |    | 112,712               |   | 317,289 |   | 325,656 |   |
|                                                                         |   |                   |    |                  |   |   |   |   |   |
| Operating  income                                                            |   | 15,828                 |    | 33,603                |   | 66,548 |   | 98,420 |   |
|                                                                         |   |                   |    |                  |   |   |   |   |   |
| Investment  income                                                           |   | 593                    |    | 720                   |   | 1,757 |   | 1,285 |   |
| Interest  expense                                                            |   | (8,305                 | )       | (9,562                | )      | (25,620 | ) | (32,855 | ) |
| Other  income, net                                                           |   | 233                    |    | 900                   |   | 14,992 |   | 16,441 |   |
|                                                                         |   |                   |    |                  |   |   |   |   |   |
| Income  before income taxes and extraordinary items                          |   | 8,349                  |    | 25,661                |   | 57,677 |   | 83,291 |   |
| Provision  for income taxes                                                  |   | 3,214                  |    | 10,008                |   | 22,205 |   | 32,484 |   |
|                                                                         |   |                   |    |                  |   |   |   |   |   |
| Income  before extraordinary items                                           |   | 5,135                  |    | 15,653                |   | 35,472 |   | 50,807 |   |
| Extraordinary  items - loss on dischargeof indebtedness, net of income taxes |   | 34                     |    | --                    |   | (76 | ) | (302 | ) |
| Net  income                                                                  |   | $                      | 5,169   |                  | $      | 15,653 |   | $ | 35,396 |   | $ | 50,505 |   |
|                                                                         |   |                   |    |                  |   |   |   |   |   |
| Income  per common share:                                                    |   |                   |    |                  |   |   |   |   |   |
| Basic:                                                                       |   |                   |    |                  |   |   |   |   |   |
|                                                                         |   |                   |    |                  |   |   |   |   |   |
| Income  before extraordinary items                                           |   | $                      | 0.12    |                  | $      | 0.35 |   | $ | 0.79 |   | $ | 1.10 |   |
| Extraordinary  items - loss on discharge of indebtedness                     |   | --                     |    | --                    |   | -- |   | -- |   |
| Net  income per common share                                                 |   | $                      | 0.12    |                  | $      | 0.35 |   | $ | 0.79 |   | $ | 1.10 |   |
|                                                                         |   |                   |    |                  |   |   |   |   |   |
| Diluted:                                                                     |   |                   |    |                  |   |   |   |   |   |
|                                                                         |   |                   |    |                  |   |   |   |   |   |
| Income  before extraordinary items                                           |   | $                      | 0.11    |                  | $      | 0.34 |   | $ | 0.77 |   | $ | 1.08 |   |
| Extraordinary  items - loss on discharge of indebtedness                     |   | --                     |    | --                    |   | -- |   | -- |   |
| Net  income per common share                                                 |   | $                      | 0.11    |                  | $      | 0.34 |   | $ | 0.77 |   | $ | 1.08 |   |

** **

*See Accompanying Notes to Interim Consolidated FinancialStatements.*

** **

 

**PRIME HOSPITALITY CORP.AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000(In Thousands)**

** **
|                                                                               |   | **2001** |   | **2000** |   |
|------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Cash  flows from operating activities:                                             |   |     |   |     |   |
| Net  income                                                                        |   | $        | 35,396 |     | $      | 50,505 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |     |   |     |   |
| Depreciation  and amortization                                                     |   | 28,598   |   | 31,781   |   |
| Extraordinary  item - loss on discharge of indebtedness                            |   | 76       |   | 496      |   |
| Amortization  of deferred financing costs                                          |   | 2,269    |   | 2,526    |   |
| Utilization  of net operating loss carryforwards                                   |   | 2,293    |   | 2,293    |   |
| Non-cash  portion of other income, net                                             |   | (12,571  | )      | (13,881  | )      |
| Amortization  of deferred income                                                   |   | (8,486   | )      | (7,903   | )      |
| Increase  (decrease) from changes in other operating assets and liabilities:       |   |     |   |     |   |
| Accounts  receivable                                                               |   | (2,944   | )      | (9,047   | )      |
| Other  current assets                                                              |   | 1,230    |   | (5,198   | )      |
| Other  liabilities                                                                 |   | 639      |   | 14,255   |   |
|                                                                               |   |     |   |     |   |
| Net  cash provided by operating activities                                         |   | 46,500   |   | 65,827   |   |
|                                                                               |   |     |   |     |   |
| Cash  flows from investing activities:                                             |   |     |   |     |   |
| Proceeds  from mortgages and notes receivable                                      |   | 1,650    |   | 1,112    |   |
| Disbursements  for mortgages and notes receivable                                  |   | (446     | )      | (668     | )      |
| Proceeds  from sales of property, equipment and leasehold improvements             |   | 15,331   |   | 162,934  |   |
| Construction  and conversion of hotels                                             |   | (16,393  | )      | (15,951  | )      |
| Purchases  of property, equipment and leasehold improvements                       |   | (16,319  | )      | (14,578  | )      |
| Security  deposit                                                                  |   | -----    |   | (16,500  | )      |
| Other                                                                              |   | 282      |   | (1,381   | )      |
|                                                                               |   |     |   |     |   |
| Net  cash (used in) provided by investing activities                               |   | (15,895  | )      | 114,968  |   |
|                                                                               |   |     |   |     |   |
| Cash  flows from financing activities:                                             |   |     |   |     |   |
| Net  proceeds from issuance of debt                                                |   | 12,920   |   | 30,817   |   |
| Payments  of debt                                                                  |   | (34,420  | )      | (171,667 | )      |
| Proceeds  from the exercise of stock options                                       |   | 1,828    |   | 1,235    |   |
| Treasury  stock purchases                                                          |   | (3,710   | )      | (29,311  | )      |
|                                                                               |   |     |   |     |   |
| Net  cash used in financing activities                                             |   | (23,382  | )      | (168,926 | )      |
|                                                                               |   |     |   |     |   |
| Net  increase in cash and cash equivalents                                         |   | 7,223    |   | 11,869   |   |
|                                                                               |   |     |   |     |   |
| Cash  and cash equivalents at beginning of period                                  |   | 1,735    |   | 7,240    |   |
| Cash  and cash equivalents at end of period                                        |   | $        | 8,958  |     | $      | 19,109 |   |
|                                                                               |   |     |   |     |   |
| **Supplemental cash flow disclosures of non-cash activities:**                     |   |     |   |     |   |
| Hotels  sold in exchange for assumption of debt                                    |   | -----    |   | $        | 17,364 |   |
| Notes  receivable and equity interests received from the sales of hotels           |   | -----    |   | $        | 3,348  |   |
| Land  acquired in exchange for notes receivable                                    |   | $        | 1,952  |     | -----  |   |
|                                                                               |   |     |   |     |   |
| **Other cash flow disclosures:**                                                   |   |     |   |     |   |
| Interest  paid                                                                     |   | $        | 23,349 |     | $      | 31,171 |   |
| Income  taxes paid                                                                 |   | $        | 12,292 |     | $      | 18,582 |   |

** **

*See Accompanying Notes to Interim Consolidated FinancialStatements.*

** **

**PRIMEHOSPITALITY CORP. AND SUBSIDIARIES****NOTES TO INTERIM CONSOLIDATED FINANCIALSTATEMENTS****THREE ANDNINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000****(Unaudited)**

 

**Note 1- Basis of Presentation**

 

                In the opinion of management,the accompanying interim unaudited consolidated financial statements of PrimeHospitality Corp. and subsidiaries (the "Company") contain allmaterial adjustments, consisting of normal recurring adjustments, necessary topresent fairly the financial position of the Company as of September 30, 2001and the results of its operations for the three and nine months ended September30, 2001 and 2000 and cash flows for the nine months ended September 30, 2001and 2000.

 

                The consolidated financialstatements for the three and nine months ended September 30, 2001 and 2000 wereprepared on a consistent basis with the audited consolidated financialstatements for the year ended December 31, 2000. Certain reclassifications havebeen made to the September 30, 2000 consolidated financial statements toconform them to the September 30, 2001 presentation.

 

                The consolidated results ofoperations for the three and nine months ended September 30, 2001 are notnecessarily indicative of the results to be expected for the full year.  These interim unaudited consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements included in the Company's Annual Report onForm 10-K for the year ended December 31, 2000.

 

                The balance sheet at December31, 2000 has been derived from the audited financial statements at that date,but does not include all the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.

 

**Note 2- Accounting Policies**

 

**               **In June1999, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards No. 137, amending Statement of FinancialAccounting Standards No. 133, “Accounting for Derivative Instruments andHedging Activities” (“SFAS 133”), which extended the required date of adoptionto fiscal years beginning after September 15, 2000.  SFAS 133 establishes accounting and reporting standards requiringthat every derivative instrument (including certain derivative instrumentsembedded in other contracts) be recorded on the balance sheet as either anasset or liability measured at its fair value. SFAS 133 requires that changes in the derivative’s fair value berecognized currently in earnings unless specific hedge accounting criteria aremet.   The Company adopted SFAS 133 in2001.  Currently SFAS 133 has no impactdue to the lack of any derivative activity.

 

**Note 3- Hotel Dispositions**

 

MeriStar HospitalityCorp. (“MeriStar”) exercised its termination rights on four hotels it leased tothe Company effective May 1, 2001.  Theimpact of the lease termination on Prime’s financial condition isimmaterial.  Under the terms of thelease agreement, MeriStar paid Prime a termination fee of $2.9 million.  In addition, the Company has recorded theunamortized portion of the deferred gain on the initial sale of the hotels ofapproximately $21.9 million as other income in the second quarter 2001.  The deferred gain was being amortized intoincome as a reduction of rent expense of $3.5 million per year over the life ofthe lease.

 

                During the nine months endedSeptember 30, 2001, the Company also sold three Wellesley Inn hotels for $11.7million and a vacant land parcel for $5.0 million. The Company has retained thefranchise rights on the three Wellesley Inn hotels under 20 year franchiseagreements.

 

**Note 4– Debt**

 

                During the nine months endedSeptember 30, 2001, the Company retired $10.0 million of its $200 millionSenior Subordinated Notes due 2007 (“Senior Subordinated Notes”) and $100,000of its First Mortgage Notes due 2006. The Company also retired $4.5 million of debt related to a Wellesley Innin Wayne, New Jersey.  Included in theaccompanying unaudited consolidated financial statements is an extraordinaryloss, net of taxes, on the discharge of indebtedness of approximately $76,000related to these retirements.

 

**Note 5- Earnings Per Common Share**

 

                Basic earnings per common sharewas computed based on the weighted average number of common shares outstandingduring each period.  The weightedaverage number of common shares used in computing basic earnings per commonshare was 44.7 million and 44.9 million for the three months ended September 30,2001 and 2000, respectively, and 44.7 million and 46.0 million for the ninemonths ended September 30, 2001 and 2000, respectively.

 

                Diluted earnings per commonshare reflect adjustments to basic earnings per common share for the dilutiveeffect of stock options.  The weightedaverage number of common shares used in computing diluted earnings per commonshare was 45.8 million and 45.8 million for the three months ended September30, 2001 and 2000, respectively, and 45.9 million and 46.8 million for the ninemonths ended September 30, 2001 and 2000, respectively

 

**Note 6- Treasury Stock**

 

**               **In April2001, the Company repurchased 376,000 shares of its common stock at an averageprice per share of $9.86.** **TheCompany’s $175 Million Revolving Credit Facility (the “Revolving CreditFacility”) allows for stock repurchases equal to 50% of net proceeds from assetsales with repurchases not to exceed $100.0 million.  As of October 31, 2001, the Company has repurchased $37.4 millionof its shares under this covenant and has $48.9 million of availability basedon the proceeds from asset sales.

 

**Note 7- Other Income, Net**

 

**               **Otherincome, net for the three and nine months ended September 30, 2001 consistedprimarily of the recognition of deferred gains on the termination of four hotelleases offset by reserves for certain charges related to various contractdisputes.  Other income, net for thethree and nine months ended September 30, 2000, consisted primarily of netgains on property transactions.

 

**Note 8 - Comprehensive Income**

 

**               **For thethree and nine months ended September 30, 2001 and 2000, comprehensive incomeconsisted of the following (in thousands):

 
|                                                                                     |   | **Three  months ended** |   | **Nine  months ended** |   |
|------------------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                                                     |   | **September  30,**      |   | **September  30,**     |   |
|                                                                                     |   | **2001**                |   | **2000**               |   | **2001** |   | **2000** |   |
| Net income                                                                               |   | $                       | 5,169  |                   | $      | 15,653 |   | $ | 35,396 |   | $ | 50,505 |   |
| Unrealized gain (loss) on marketable  securities available for sale, net of income taxes |   | (669                    | )      | 253                    |   | 367 |   | 20 |   |
| Comprehensive Income                                                                     |   | $                       | 4,500  |                   | $      | 15,906 |   | $ | 35,763 |   | $ | 50,525 |   |

 

**Note 9– Contingencies**

 

**               **The Companyis currently in arbitration with its former general manager of the Frenchman’sReef Beach Resort hotel, who has filed a demand for arbitration with theAmerican Arbitration Association; which asserts that the Company had wrongfullyterminated his employment, thereby breaching his contract of employment.

                The Company is also currentlyinvolved in a lawsuit filed in the United States District Court for the VirginIslands by the same individual in which he seeks to recover the value of hisalleged interest in certain land adjacent to the Frenchman’s Reef hotel.  The Company sold the hotel and all of theadjacent land on March 15, 2000.

                At September 30, 2001, therewere other contingent liabilities for insurance and various other mattersoccurring in the ordinary course of business.

                On the basis of informationfurnished by counsel and others, the Company believes that none of thesecontingencies will have a material adverse effect on the financial position ofthe Company.

 

**Note 10- Geographic and Business Information**

 

**     **TheCompany’s hotels primarily operate in three major lodging industry segments:the all-suites segment, under its AmeriSuites brand; the limited-servicesegment, primarily under its Wellesley Inn & Suites brand; and thefull-service segment under major national franchises.  The Company’s 137 AmeriSuites are upscale hotels located in 31states throughout the United States. The 73 Wellesley Inn & Suites hotels compete in the mid-pricesegment, and are primarily located in the Northeast, Texas and Florida.  The Company also operates 25 non-proprietarybrand hotels, which compete primarily in the upscale full-service segment, withfood service and banquet facilities under franchise agreements with nationalhotel brands.  The Company’s non-proprietaryhotels are primarily located in the northeastern region of the United States.

 

      The Company evaluates the performance ofits segments based primarily on earnings before interest, taxes anddepreciation and amortization (“EBITDA”) generated by the operations of itsowned and leased hotels.  Interestexpense is primarily related to debt incurred by the Company through itscorporate obligations and collateralized by certain of its hotelproperties.  Other income, net consistsof property transactions, which are not part of the recurring operation of theCompany.  The allocation of interestexpense, taxes and other income, net are not evaluated at the segment level andtherefore, would be necessary in order to reconcile EBITDA to consolidated netincome on the consolidated financial statements.

 

            The following table presentsrevenues and other financial information for the owned and leased hotels bybusiness segment for the three and nine months ended September 30, 2001 and2000  (in thousands):

 
| **Three  months ended September 30, 2001** |   | **All-Suites** |    | **Limited-Service** |   | **Full-Service** |   | **Corporate  / Other** |    | **Consolidated** |   |
|--------------------------------------------|--------|----------------|---------|---------------------|--------|------------------|--------|------------------------|---------|------------------|--------|
|                                       |   |           |    |                |   |             |   |                   |    |             |   |
| Total  revenue                             |   | $              | 66,682  |                | $      | 21,710           |   | $                      | 26,989  |             | $      | 3,739 |   | $ | 119,120 |   |
| EBITDA  (1)                                |   | 14,503         |    | 6,413               |   | 3,821            |   | 647                    |    | 25,384           |   |
| Depreciation  and amortization             |   | 4,614          |    | 3,006               |   | 1,465            |   | 471                    |    | 9,556            |   |
| Capital  expenditures                      |   | 2,471          |    | 7,439               |   | 1,200            |   | 588                    |    | 11,698           |   |
| Total  Assets                              |   | $              | 608,900 |                | $      | 370,837          |   | $                      | 110,196 |             | $      | 62,885 |   | $ | 1,152,818 |   |

 
| **Three  months ended September 30, 2000** |   | **All-Suites** |    | **Limited-Service** |   | **Full-Service** |   | **Corporate/Other** |    | **Consolidated** |   |
|--------------------------------------------|--------|----------------|---------|---------------------|--------|------------------|--------|---------------------|---------|------------------|--------|
|                                       |   |           |    |                |   |             |   |                |    |             |   |
| Total  revenue                             |   | $              | 74,004  |                | $      | 26,446           |   | $                   | 40,931  |             | $      | 4,934 |   | $ | 146,315 |   |
| EBITDA  (1)                                |   | 22,175         |    | 10,077              |   | 10,553           |   | 797                 |    | 43,602           |   |
| Depreciation  and amortization             |   | 4,834          |    | 3,344               |   | 1,520            |   | 301                 |    | 9,999            |   |
| Capital  expenditures                      |   | 5,053          |    | 2,761               |   | 1,561            |   | 1,328               |    | 10,703           |   |
| Total  Assets                              |   | $              | 630,556 |                | $      | 385,961          |   | $                   | 118,107 |             | $      | 81,325 |   | $ | 1,215,949 |   |

** **

 
| **Nine  months ended September 30, 2001** |   | **All-Suites** |    | **Limited-Service** |   | **Full-Service** |   | **Corporate  / Other** |    | **Consolidated** |   |
|-------------------------------------------|--------|----------------|---------|---------------------|--------|------------------|--------|------------------------|---------|------------------|--------|
|                                      |   |           |    |                |   |             |   |                   |    |             |   |
| Total  revenue                            |   | $              | 206,200 |                | $      | 73,206           |   | $                      | 92,143  |             | $      | 12,288 |   | $ | 383,837 |   |
| EBITDA  (1)                               |   | 52,311         |    | 27,095              |   | 17,653           |   | (1,913                 | )       | 95,146           |   |
| Depreciation  and amortization            |   | 13,844         |    | 9,056               |   | 4,396            |   | 1,302                  |    | 28,598           |   |
| Capital  expenditures                     |   | 13,927         |    | 13,834              |   | 2,706            |   | 2,245                  |    | 32,712           |   |
| Total  Assets                             |   | $              | 608,900 |                | $      | 370,837          |   | $                      | 110,196 |             | $      | 62,885 |   | $ | 1,152,818 |   |

 
| **Nine  months ended September 30, 2000** |   | **All-Suites** |    | **Limited-Service** |   | **Full-Service** |   | **Corporate/Other** |    | **Consolidated** |   |
|-------------------------------------------|--------|----------------|---------|---------------------|--------|------------------|--------|---------------------|---------|------------------|--------|
|                                      |   |           |    |                |   |             |   |                |    |             |   |
| Total  revenue                            |   | $              | 193,360 |                | $      | 85,033           |   | $                   | 130,844 |             | $      | 14,839 |   | $ | 424,076 |   |
| EBITDA  (1)                               |   | 64,873         |    | 33,958              |   | 34,271           |   | (2,901              | )       | 130,201          |   |
| Depreciation  and amortization            |   | 14,995         |    | 10,083              |   | 5,879            |   | 824                 |    | 31,781           |   |
| Capital  expenditures                     |   | 16,118         |    | 6,880               |   | 4,588            |   | 2,943               |    | 30,529           |   |
| Total  Assets                             |   | $              | 630,556 |                | $      | 385,961          |   | $                   | 118,107 |             | $      | 81,325 |   | $ | 1,215,949 |   |

----

**(**1) EBITDArepresents earnings before interest, income taxes, depreciation andamortization.

 

 

**PART I.FINANCIAL INFORMATION**

 

**Item 2.    Management'sDiscussion and Analysis of Financial Condition and Results of Operations**

 

***General***

 

                Prime Hospitality Corp. (“Prime”or “the Company”) is an owner, operator and franchisor of hotels, with 235hotels in operation containing 30,170 rooms located in 33 states (the“Portfolio”) as of November 1, 2001. Prime controls two hotel brands — AmeriSuites (R) and Wellesley Inn& Suites (R) — as well as a portfolio of non-proprietary brand hotels,which are primarily upscale, full-service hotels operated under franchiseagreements with national hotel chains. Prime’s Portfolio consists primarily of new, well-maintained hotels,with an average age of approximately 7 years.

 

          The following table sets forthinformation with respect to the Portfolio as of November 1, 2001:
|                        |   | **Owned**  |   | **Leased** |   | **Managed** |   | **Franchised** |   | **Total**  |   |
|-----------------------------|--------|------------|--------|------------|--------|-------------|--------|----------------|--------|------------|--------|
|                        |   | **Hotels** |   | **Rooms**  |   | **Hotels**  |   | **Rooms**      |   | **Hotels** |   | **Rooms** |   | **Hotels** |   | **Rooms** |   | **Hotels** |   | **Rooms** |   |
| AmeriSuites                 |   | 65         |   | 8,408      |   | 46          |   | 5,710          |   | 5          |   | 670 |   | 21 |   | 2,655 |   | 137 |   | 17,443 |   |
| Wellesley  Inn & Suites |   | 56         |   | 6,588      |   |        |   |           |   | 5          |   | 558 |   | 12 |   | 1,126 |   | 73 |   | 8,272 |   |
| Non-Proprietary  Brands     |   | 11         |   | 2,195      |   | 5           |   | 821            |   | 9          |   | 1,439 |   |   |   |   |   | 25 |   | 4,455 |   |
| Total                       |   | 132        |   | 17,191     |   | 51          |   | 6,531          |   | 19         |   | 2,667 |   | 33 |   | 3,781 |   | 235 |   | 30,170 |   |

 

          The Company’s strategy is to developits proprietary AmeriSuites and Wellesley Inn & Suites brands, primarilythrough franchising.  Through thedevelopment of its proprietary brands, the Company is transforming itself froman owner/operator into a franchisor and manager and has positioned itself togenerate additional revenues with minimal capital investment.

 

          In 2001, four AmeriSuites have openedincluding a 245-room franchised AmeriSuites located near Chicago O’HareAirport, the largest AmeriSuites hotel in the system.  There are currently nine AmeriSuites hotels under constructionincluding seven by franchisees.  Inaddition, Prime has a pipeline of another 56 executed franchise agreements fornew AmeriSuites to be built.  TheCompany also has a pipeline of nine executed Wellesley Inn & Suitesfranchise agreements for new hotels. Building on the successful conversion of 38 hotels to the Wellesley Inn &Suites brand in 1999, Prime intends to further grow the brand throughconversions from other hotel brands. The Company has completed the conversions of four Howard Johnson hotelsto Wellesley Inns this year, and expects to complete a fifth property duringthe fourth quarter of 2001.

 

          As part of its brand developmentstrategy, Prime has implemented several new initiatives in 2001.  In May 2001, Prime began new nationaladvertising campaigns for both its brands. For AmeriSuites, the Company ran television ads on national cablechannels including TNT and CNN.  Inaddition, the Company began advertising its Wellesley chain on nationalradio.  In September 2001, the Companyimplemented a new expanded rewards program, which offers frequent customersboth points toward a free hotel room and airline miles for each stay.  Currently, frequent guests account fornearly 10% of revenue at Prime’s brands and the Company believes the newprogram will enhance its competitive position. Prime has already added approximately 13,000 new members since September1, increasing its membership by almost 15%.

 

          The Company’s strategy is also focusedon growing the operating profits of its Portfolio as well as continuing tostrengthen its financial condition. With over 200 hotels in operation, the Company believes it possesses thehotel management expertise to maximize the profitability and value of its hotelassets.

 

                Forthe three months ended September 30, 2001, net income decreased by $10.5million, to $5.2 million from $15.7 million for the same three-month period in2000.  For the nine months endedSeptember 30, 2001, net income was $35.4 million compared to $50.5 million forthe same period in 2000.  Earningsbefore interest, taxes, depreciation and amortization (“EBITDA”) decreased by41.8% and 26.9% to $ 25.4 million and $95.1 million for the three and ninemonths ended September 30, 2001, respectively. These results were primarilyimpacted by the reduction in overall business travel due to a softening economycompounded by the terrorist attacks in September.

 

          The Company evaluates the performanceof its segments based primarily on EBITDA. EBITDA is not a measurement of financial performance under accountingprinciples generally accepted in the United States and should not be consideredas alternatives to net income as an indicator of the Company’s operatingperformance or as alternatives to cash flows as a measure of liquidity.

 

***Recent Development***

** **

**               **On September11, 2001, the United States experienced significant terrorist attacks focusedon the World Trade Center complex in New York City and the Pentagon inArlington, Virginia.  These attacks havemeaningfully disrupted the travel and lodging industries as occupancy levelsdeclined markedly across the industry in the period immediately following theattacks.  We noted that at our hotelsREVPAR ("revenue per available room") decreased by 28% for the periodfrom September 11 through September 30 versus the prior year.  We have also noted that although occupancylevels have not yet returned to their former levels, we have recently observedindications of improvement in demand as the REVPAR decline from prior years'levels stabilized at 15% in October.

 

                In response to the slowdown intravel, the Company has implemented the following initiatives.  We have instituted cost containment programsat the hotel level such as revised variable staffing standards, fixed costpayroll reductions and energy conservation measures.  We are also limiting capital spending in the short-term to emergency,life safety and asset preservation items on existing hotels and restrictingdevelopment spending to the completion of two AmeriSuites hotels currentlyunder construction.

 

***Forward-Looking Statements***

 

          Certain statements in this Form 10-Qconstitute “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks,uncertainties and other important factors that could cause the actual results,performance or achievements of the Company, or industry results, to differmaterially from any future results, performance or achievements expressed orimplied by such forward-looking statements.

 

          Forward-looking statements include theinformation about Prime’s possible or assumed future results of operations andstatements preceded by, followed by or that include the words “believe,”“except,” “anticipate,” “intend,” “plan,” “estimate,” or similar expressions,or the negative thereof.  Actual resultsmay differ materially from those expressed in these forward-lookingstatements.  Readers of this Form 10-Qare cautioned not to unduly rely on any forward-looking statements.

 

          The following important factors, inaddition to those discussed elsewhere in this Form 10-Q or incorporated hereinby reference, could cause results to differ materially from those expressed insuch forward-looking statements: competition within each of the Company’sbusiness segments in areas such as access, location, quality or accommodationsand room rate structures; the balance between supply of and demand for hotelrooms and accommodations; the Company’s continued ability to obtain newoperating contracts and franchise agreements; the Company’s ability to developand maintain positive relations with current and potential hotel owners andother industry participants; the level of rates and occupancy that can beachieved by such properties and the availability and terms of financing;changes in travel patterns, taxes and government regulations which influence ordetermine wages, prices, construction procedures and costs; the effect ofnational and regional economic conditions that will affect, among other things,demand for products and services at the Company’s hotels; government approvals,actions and initiatives including the need for compliance with environmentaland safety requirements, and change in laws and regulations or theinterpretation thereof and the potential effects of tax legislative action; andother risks described from time to time in the Company’s filings with the SEC,including its Form 10-K.

 

          Although the Company believes theexpectations reflected in these forward-looking statements are based uponreasonable assumptions, no assurance can be given that Prime will attain theseexpectations or that any deviations will not be material.  Except as otherwise required by the federalsecurities laws, the Company disclaims any obligation or undertaking todisseminate any updates or revisions to any forward-looking statement containedherein to reflect any change in its expectations with regard thereto or anychange in events, conditions or circumstances on which any such statement isbased.

 

***Resultsof Operations for the Three and Nine Months ended September 30, 2001 Comparedto the Three and Nine Months ended September 30, 2000***

 

Hotel revenues consistof lodging revenues (which consist primarily of room, telephone and vendingrevenues) and food and beverage revenues. Hotel revenues decreased by $26.0 million and $37.9 million, or 18.4%and 9.2%, respectively for the three and nine months ended September 30, 2001.This decrease was primarily due to a softening economy compounded by theterrorist attacks in September.  Inaddition, asset divestitures have also had an impact on the decrease inrevenues partially offset by the addition of new hotels.

 

**          The Company operates three producttypes: its proprietary AmeriSuites which are upscale all-suites hotels; itsproprietary Wellesley Inn & Suites which are mid-price limited service hotelsand its non-proprietary brand hotels which are primarily upscale full-servicehotels.**

 

                The following table illustratesthe changes in REVPAR (“revenue per available room”) for the three andnine-month periods ended September 30, 2001, by segment for all system-widehotels, which were operated for comparable periods in 2001 and 2000.

** **

|                           | **Three Months  Ended  September 30,** |   |     |   | **Nine Months  Ended  September 30,** |   |     |   |
|--------------------------------|----------------------------------------|--------|----------|--------|---------------------------------------|--------|----------|--------|
|                           | **2001**                               |   | **2000** |   | **Change**                            |   | **2001** |   | **2000** |   | **Change** |   |
| **AmeriSuites**                |                                   |   |     |   |                                  |   |     |   |   |   |   |   |
| Occupancy                      | 67.9                                   | %      | 73.2     | %      | (5.3 pts.                             | )      | 66.7     | %      | 71.1 | % | (4.4 pts. | ) |
| ADR                            | $                                      | 77.54  |     | $      | 81.50                                 |   | (4.9     | )%     | $ | 81.97 |   | $ | 81.73 |   | 0.3 | % |
| REVPAR                         | $                                      | 52.65  |     | $      | 59.67                                 |   | (11.8    | )%     | $ | 54.71 |   | $ | 58.12 |   | (5.9 | )% |
|                           |                                   |   |     |   |                                  |   |     |   |   |   |   |   |
| **Wellesley Inn & Suites** |                                   |   |     |   |                                  |   |     |   |   |   |   |   |
| Occupancy                      | 62.9                                   | %      | 67.3     | %      | (4.4 pts.                             | )      | 64.1     | %      | 66.4 | % | (2.3   pts. | ) |
| ADR                            | $                                      | 56.88  |     | $      | 58.45                                 |   | (2.7     | )%     | $ | 61.99 |   | $ | 60.81 |   | 1.9 | % |
| REVPAR                         | $                                      | 35.75  |     | $      | 39.36                                 |   | (9.2     | )%     | $ | 39.75 |   | $ | 40.35 |   | (1.5 | )% |
|                           |                                   |   |     |   |                                  |   |     |   |   |   |   |   |
| **Non-Proprietary Brands**     |                                   |   |     |   |                                  |   |     |   |   |   |   |   |
| Occupancy                      | 68.2                                   | %      | 79.9     | %      | (11.7 pts.                            | )      | 67.6     | %      | 73.7 | % | (6.1 pts. | ) |
| ADR                            | $                                      | 114.34 |     | $      | 118.41                                |   | (3.4     | )%     | $ | 111.94 |   | $ | 111.94 |   | 0.0 | % |
| REVPAR                         | $                                      | 77.92  |     | $      | 94.57                                 |   | (17.6    | )%     | $ | 75.69 |   | $ | 82.47 |   | (8.2 | )% |
|                           |                                   |   |     |   |                                  |   |     |   |   |   |   |   |
| **Owned Hotels**               |                                   |   |     |   |                                  |   |     |   |   |   |   |   |
| Occupancy                      | 64.5                                   | %      | 70.7     | %      | (6.2 pts.                             | )      | 64.5     | %      | 68.5 | % | (4.0 pts. | ) |
| ADR                            | $                                      | 74.50  |     | $      | 78.16                                 |   | (4.7     | )%     | $ | 78.30 |   | $ | 78.14 |   | 0.2 | % |
| REVPAR                         | $                                      | 48.06  |     | $      | 55.23                                 |   | (13.0    | )%     | $ | 50.52 |   | $ | 53.52 |   | (5.6 | )% |

** **

**         **REVPARat our upscale AmeriSuites decreased by 11.8% and 5.9% for the three andnine-month periods, respectively affected by a reduction in business travel,particularly in the Chicago, Orlando and Cincinnati markets.

** **

**          Ourmid-price Wellesley Inn & Suites brand, reported 9.2% and 1.5% decreases inREVPAR during the three and nine-month periods ended September 30, 2001attributed to weakness in the South Florida, Austin and Detroit markets.**

** **

**                TheCompany’s non-proprietary brands were affected by the performance of thefull-service hotels, which are primarily located in the Northeast.  These hotels registered 17.6% and 8.2%REVPAR decreases during the three and nine months ended September 30, 2001 dueto declines in group business and softness in the greater New York City market.**

** **

          Management, franchiseand other fees consist primarily of base and incentive fees earned undermanagement agreements, royalties earned under franchise agreements and salescommissions earned by the Company's national sales group.  Management, franchise and other feesdecreased by $552,000 and $1.5 million, or 15.2% and 13.0%, for the three andnine-month periods ended September 30, 2001, respectively. The decreases wereprimarily due to lower revenues at managed and franchised hotels, a reductionin new franchise applications and management agreement terminations.

 

          Rental and other revenues consist ofrental income, interest on mortgages and notes receivable and othermiscellaneous operating income. Rental and other revenues decreased by $600,000and $868,000 for the three and nine-month periods ended September 30, 2001.

 

          Hotel operating expenses consist ofall direct costs related to the operation of the Company’s properties (lodging,food & beverage, administration, selling and advertising, utilities andrepairs and maintenance). Hotel operating expenses decreased by $6.5 millionand $7.2 million, or 9.1% and 3.5%, respectively, for the three and nine-monthperiods in 2001, compared to the same periods in 2000, due to cost containmentprograms, asset divestitures and lower occupancy.  Hotel operating expenses decreased despite higher energy costs, whichrose by 15%.

 

          Rent and other occupancy expensesconsist primarily of rent expense, property insurance and real estate and othertaxes. Rent and other occupancy expenses decreased by $3.8 million, or 14.9%,for the three-month period in 2001 compared to the same period in 2000primarily due to the divestiture of four leased hotels.  Rent and other occupancy expenses increasedby $2.3 million, or 3.6%, for the nine-month period in 2001 compared to thesame period in 2000 due to the addition of the 27 leased hotels acquired fromSholodge in July 2000.

 

          General and administrative expensesconsist primarily of centralized management expenses associated with operatingthe hotels, corporate expenses and national brand advertising expenses. Generaland administrative expenses for the three months ended September 30, 2001increased by $1.3 million, or 21.4%, primarily due to the timing of marketingexpenses and the launching of the new rewards program.  General and administrative expenses for thenine months ended September 30, 2001 decreased by $297,000 or 1.3%, compared tothe same period in 2000 due primarily to the Company’s cost containmentprograms.

 

          Depreciation and amortization expensedecreased by $443,000 and $3.2 million, or 4.4% and 10.0%, respectively, forthe three and nine months ended September 30, 2001. The decreases wereprimarily due to asset sales.

 

          Investment income decreased by$127,000 for the three-month period compared to the same period in 2000primarily due to a decrease in the Company’s weighted average cashbalance.  Investment income for thenine-month period ended September 30, 2001 compared to the same period in 2000,increased by $472,000 primarily due to interest earned on security deposits onthe leased hotels acquired from Sholodge in July 2000.

 

          Interest expense decreased by $1.3million and $7.2 million, or 13.1% and 22.0%, respectively, for three and ninemonths ended September 30, 2001, primarily due to the reduction of debtresulting from asset sales and operating cash flow.

 

                Other income, net consists of property transactionsand other items, which are not part of the Company’s recurring operations.  Other income, net for the three and ninemonths ended September 30, 2001 consisted primarily of the recognition ofdeferred gains on the termination of four hotel leases and net gains onproperty transactions offset by reserves for certain charges related to variouscontract disputes. Other income, net for the three and nine months endedSeptember 30, 2000, consisted primarily of net gains on property transactions.

 

***Liquidity and Capital Resources***

 

**         **At September30, 2001, the Company had cash, cash equivalents and current marketablesecurities of $12.5 million.  Inaddition, at September 30, 2001, the Company had $122.3 million available to itunder its Revolving Credit Facility.

 

**          The Company's major sources of cashfor the nine months ended September 30, 2001 were cash flows from operations of$46.5 million, borrowings of $12.9 million and net proceeds from asset sales of$15.3 million. The Company's major uses of cash during the period were capitalexpenditures of $32.7 million and debt repayments of $34.4 million.**

 

          Cash flow from operations waspositively impacted by the utilization of net operating loss carry-forwards("NOLs") of $2.3 million.  AtSeptember 30, 2001 the Company had federal NOLs relating primarily to itspredecessor, Prime Motor Inns, Inc. ("PMI"), of approximately $45.9million, which are subject to annual utilization limitations and expire in2006.

 

*                **Sources of Capital**.* The Companyhas undertaken a strategic initiative to dispose of hotel real estate whileretaining the franchise rights and to invest the proceeds in the reduction ofdebt, the growth of its proprietary brands and the repurchase of the Company’scommon stock.  The combination of assetsales and operating cash flow continues to strengthen the Company’s overallfinancial condition.  At September 30,2001, the Company’s debt to EBITDA ratio was 2.5 times and its debt to bookcapitalization was 32%.

 

          During the nine months ended September30, 2001, the Company sold three Wellesley Inns hotels for $11.7 million and anundeveloped land parcel for $5.0 million.

 

                The Company has a $175.0 millionRevolving Credit Facility, which bears interest at LIBOR plus 2.0%.  The facility is available through December2001 and may be extended by the Company for an additional year with a reductionin size to $125.0 million.  The Companyintends to exercise its extension option in December.  Borrowings under the facility are secured by first liens on certainof the Company’s hotels with recourse to the Company.  Additional properties may be added subject to the approval of thelenders.  Availability under thefacility is subject to a borrowing base test and certain other covenants.  During the nine months ended September 30,2001, the Company borrowed and subsequently repaid $13.0 million under thisfacility.  At September 30, 2001, theCompany had $122.3 million available under its borrowing base test.

 

          The Revolving Credit Facility containscovenants requiring the Company to maintain certain financial ratios andlimitations on the incurrence of debt, liens, dividend payments, stockrepurchases, certain investments, transactions with affiliates, asset sales,mergers and consolidations and any change of control of the Company.

 

*                **Uses of Capital.*** During thenine-month period ended September 30, 2001, the Company retired $34.4 millionof its debt outstanding.  Over the past21 months, the Company has paid down approximately $224 million of its debtbringing its debt balance to $324.3 million at September 30, 2001.

 

                The Company intends to continuethe growth of its brands primarily through franchising and, therefore, itscorporate brand development will be limited. During the nine months ended September 30, 2001, the Company spent $16.4million on new construction or conversions from other hotel brands.  There are currently two AmeriSuites hotelsunder construction by the Company.  Inaddition, the Company converted two owned Howard Johnson hotels to Wellesley Inns.  The Company expects to spend an additional$7.0 million in 2001 in corporate brand development to complete those projectsunder construction.  In addition, duringthe nine months ended September 30, 2001, the Company also spent $16.3 millionon capital improvements at its Owned Hotels and expects to spend a total of $20million in 2001.  The Company plans tofund both its corporate development and capital improvements with internallygenerated cash flow.

 

          Due to the slowdown inthe economy and the impact of the terrorist attacks the Company intends tolimit capital expenditures in 2002 to asset preservation, emergency andlife/safety items and does not plan at this time to initiate new developmentprojects.

 

                During the nine months endedSeptember 30, 2001, the Company repurchased 376,000 shares of its common stockat an average cost of $9.86. The Revolving Credit Facility limits the purchaseof these shares to 50% of the proceeds from asset sales not to exceed $100million.  As of October 31, 2001, theCompany has repurchased $37.4 million of its shares under this covenant and has$48.9 million of availability based on the proceeds from asset sales.

 

          In order to facilitate future tax–deferredexchanges of hotel properties, the Company from time to time enters intoarrangements with an unaffiliated third party under Section 1031 of theInternal Revenue Code of 1986, as amended. At September 30, 2001, the Company had advances of approximately $135.6million to such third party, which advances are classified as property,equipment and leasehold improvements in the Company’s accompanying financialstatements.

 

**Item 3.    Quantitativeand Qualitative Disclosures About Market Risk**

 

**         **The Companyis exposed to changes in interest rates primarily from its floating rate debtarrangements.  A hypothetical 100 basispoint adverse move (increase) in interest rates along the entire rate curvewould adversely affect the Company’s annual interest cost by approximately$134,800 annually.

 

 

 

**PART II.                OTHERINFORMATION**

 

**Item 1.             LegalProceedings**

 

**               **The Companycurrently and from time to time is involved in litigation arising in theordinary course of its business.  TheCompany does not believe that it is involved in any litigation that is likely,individually or in the aggregate, to have a material adverse effect on itsfinancial condition or results or operations or cash flows.

 

                *Pourzalv. Prime (Clv. No. 1999-139M)* This action was commenced on August 18, 1999, against Prime in thedistrict court of the Virgin Islands, Division of St. Thomas and St. John (the"Court").  The action is forbreach of a contract allegedly formed in 1978 between Nick Pourzal and AmericanMotor Inns, Inc., a predecessor of Prime. The plaintiff, a former employee of Prime, alleges that Prime or itspredecessor breached a contract to make certain payments to him with respect toa parcel of land in St. Thomas U.S.V.I. previously owned by Prime.  The plaintiff seeks a declaratory judgmentthat Prime is liable to him for payment of ten percent (10%) of Prime's pre-taxearnings on the land, as well as compensatory, incidental, and consequentialdamages, interest, costs, and attorneys' fees. Discovery is currently proceeding in this matter.  Prime believes that Plaintiff's action iswithout merit and intends to vigorously defend this case.

 

**Item 2.             Changesin Securities and Use of Proceeds**

 

          None.

 

**Item 3.             DefaultsUpon Senior Securities**

 

          None.

 

**Item 4.             Submissionof Matters to a Vote of Security Holders**

 

None

 

**Item 5.             OtherInformation**

 

          None.

 

**Item 6.             Exhibitsand Reports on Form 8-K**

 

          (a)           Exhibits

 

          Exhibit 11               Computation of Earnings Per Share

 

          (b)           Reportson Form 8-K

 

                          None.

 

 

**SIGNATURES**

 

          Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 
|   |               | PRIME  HOSPITALITY CORP. |
|--------|--------------------|--------------------------|
|   |               |                     |   |   |
|   |               |                     |   |   |
|   |               |                     |   |   |
| Date:  | November  13, 2001 |                     | By: | /s/A.F.Petrocelli |
|   |               |                     | A.F. Petrocelli |
|   |               |                     | President and Chief  Executive |
|   |               |                     | Officer |
|   |               |                     |   |   |
|   |               |                     |   |   |
| Date:  | November  13, 2001 |                     | By: | /s/  Douglas Vicari |
|   |               |                     | Douglas  Vicari |
|   |               |                     | Senior  Vice President and Chief |
|   |               |                     | Financial  Officer |