----

----

**SECURITIES EXCHANGECOMMISSION****Washington, D.C.  20549**

**FORM10-Q**

**(MARKONE)**

| ý | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED  JUNE 30, 2001**                                                                                      |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                            |
|   | **OR**                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                            |
| o      | **TRANSITION REPORT 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.******(Exact name of registrant as specified inits charter)

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

 

**700 Route 46 East, Fairfield, New Jersey  07004**(Address of principal executive offices)

**(973) 882-1010**(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 ý  No o |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                          |
| Indicate by check mark whether the  registrant has filed all documents and reports required to be filed by  Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to  the distribution of securities under a plan confirmed by a court.    Yes ý  No o                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                          |
| The registrant had 44,683,975 shares of  common stock, $.01 par value, outstanding as of August 1, 2001.                                                                                                                                                                                                                                                                                                                      |

 

----

----

 

**PRIMEHOSPITALITY CORP. AND SUBSIDIARIES**

**INDEX**

 

|       |                                                                                              |   |
|------------|---------------------------------------------------------------------------------------------------|--------|
| PART I.    | FINANCIAL INFORMATION                                                                             |   |
|       |                                                                                              |   |
| Item 1.    | Financial Statements                                                                              |   |
|       |                                                                                              |   |
|       | Consolidated Balance Sheets  June 30, 2001(Unaudited) and December 31, 2000                       |   |
|       |                                                                                              |   |
|       | Consolidated  Statements of Income Three and six months ended June 30, 2001 and 2000  (Unaudited) |   |
|       |                                                                                              |   |
|       | Consolidated  Statements of Cash Flows Six months ended June 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 |                                                                                              |   |
|            |                                                                                                   |        |  |

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

|                                                                                              | **June 30,  2001**                                                                                                                                                                   | ** **    | **December 31,  2000** | ** ** |
|---------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------|------------------------|------------|
|                                                                                              | ****                                                                                                                                                                                 |          | ****                   |       |
| **ASSETS**                                                                                        | (Unaudited                                                                                                                                                                           | )             |                   |       |
| ****                                                                                              |                                                                                                                                                                                 |          |                   |       |
| Current assets:                                                                                   |                                                                                                                                                                                 |          |                   |       |
|                                                                                              | Cash and cash equivalents                                                                                                                                                            | $             | 7,330                  |       | $ | 1,735 |   |
|                                                                                              | Marketable securities available  for sale                                                                                                                                            | 5,023         |                   | 3,325      |   |
|                                                                                              | Accounts receivable (net of  allowances of $1,125 and $1,067 at June 30, 2001   and December 31, 2000, respectively)                                                                 | 31,146        |                   | 27,916     |   |
|                                                                                              | Current portion of mortgages and  notes receivable                                                                                                                                   | 422           |                   | 3,306      |   |
|                                                                                              | Other current assets                                                                                                                                                                 | 16,678        |                   | 17,745     |   |
|                                                                                              |                                                                                                                                                                                 |               |                   |            |   |
|                                                                                              | Total current assets                                                                                                                                                                 | 60,599        |                   | 54,027     |   |
|                                                                                              |                                                                                                                                                                                 |          |                   |       |
| Property, equipment  and leasehold improvements,net  of accumulated depreciation and amortization | 1,022,610                                                                                                                                                                            |          | 1,019,474              |       |
| Properties held for  sale                                                                         | 21,149                                                                                                                                                                               |          | 32,517                 |       |
| Mortgages and notes  receivable, net ofcurrent  portion                                           | 11,969                                                                                                                                                                               |          | 11,991                 |       |
| Other assets                                                                                      | 39,304                                                                                                                                                                               |          | 41,831                 |       |
|                                                                                              |                                                                                                                                                                                      |          |                        |       |
|                                                                                              |                                                                                                                                                                                 |          |                   |       |
|                                                                                              | **TOTAL ASSETS**                                                                                                                                                                     | **$**         | **1,155,631**          | ** ** | **$** | **1,159,840** | ** ** |
|                                                                                              |                                                                                                                                                                                 | ****          |                   | ****       |   |
|                                                                                              |                                                                                                                                                                                 |          |                   |       |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                          |                                                                                                                                                                                 |          |                   |       |
| ****                                                                                              |                                                                                                                                                                                 |          |                   |       |
| Current liabilities:                                                                              |                                                                                                                                                                                 |          |                   |       |
|                                                                                              | Current portion of debt                                                                                                                                                              | $             | 5,740                  |       | $ | 4,702 |   |
|                                                                                              | Current portion of deferred  income                                                                                                                                                  | 7,562         |                   | 10,322     |   |
|                                                                                              | Other current liabilities                                                                                                                                                            | 66,240        |                   | 62,228     |   |
|                                                                                              |                                                                                                                                                                                 |               |                   |            |   |
|                                                                                              | Total current liabilities                                                                                                                                                            | 79,542        |                   | 77,252     |   |
|                                                                                              |                                                                                                                                                                                 |          |                   |       |
| Long-term debt, net of  current portion                                                           | 330,369                                                                                                                                                                              |          | 340,987                |       |
| Deferred income                                                                                   | 36,586                                                                                                                                                                               |          | 60,950                 |       |
| Other liabilities                                                                                 | 10,811                                                                                                                                                                               |          | 12,551                 |       |
|                                                                                              |                                                                                                                                                                                      |          |                        |       |
|                                                                                              |                                                                                                                                                                                 |          |                   |       |
|                                                                                              | Total liabilities                                                                                                                                                                    | 457,308       |                   | 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; 56,117,028 and 55,972,932 shares issued  and outstanding at June 30, 2001 and December 31, 2000, respectively | 561           |                   | 560        |   |
|                                                                                              | Capital in excess of par value                                                                                                                                                       | 527,218       |                   | 524,549    |   |
|                                                                                              | Retained earnings                                                                                                                                                                    | 287,193       |                   | 256,966    |   |
|                                                                                              | Accumulated other comprehensive  loss, net of taxes                                                                                                                                  | (1,802        | )                      | (2,838     | ) |
|                                                                                              | Treasury stock (11,507,078 and  11,130,878 shares at June 30, 2001 and December 31, 2000, respectively)                                                                              | (114,847      | )                      | (111,137   | ) |
|                                                                                              |                                                                                                                                                                                 |               |                   |            |   |
|                                                                                              | Total stockholders' equity                                                                                                                                                           | 698,323       |                   | 668,100    |   |
|                                                                                              |                                                                                                                                                                                 |               |                   |            |   |
|                                                                                              |                                                                                                                                                                                 |          |                   |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY**                                                    | **$**                                                                                                                                                                                | **1,155,631** | ** **             | **$**      | **1,159,840** | ** ** |
|                                                                                              | ****                                                                                                                                                                                 |          | ****                   |       |
|                                                                                              |                                                                                                                                                                                 | ** **    |                   | ** ** |
|                                                                                              |                                                                                                                                                                                 | ** **    |                   | ** ** |
| *See Accompanying Notes to Interim Consolidated Financial  Statements.*                           | * *                                                                                                                                                                             |
|                                                                                                   |                                                                                                                                                                                      |               |                        |            |  |  |  |  |  |

**PRIMEHOSPITALITY CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(Unaudited)THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000(In Thousands, Except Per Share Amounts)**

|                                                                          | **Three Months Ended**                                   |       | **Six Months Ended** |       |
|-------------------------------------------------------------------------------|----------------------------------------------------------|------------|----------------------|------------|
|                                                                          | **June 30,**                                             | ** ** | **June 30,**         | ** ** |
|                                                                          | **2001**                                                 |       | **2000**             |       | **2001** |   | **2000** | ** ** |
|                                                                          | ****                                                     |       | ****                 |       | **** |   | **** |   |
| Revenues:                                                                     |                                                     |       |                 |       |   |   |   |   |
|                                                                          | Hotel revenues                                           | $          | 128,880              |       | $ | 133,725 |   | $ | 256,049 |   | $ | 267,856 |   |
|                                                                          | Management, franchise and other  fees                    | 4,630      |                 | 5,976      |   | 8,305 |   | 8,826 |   |
|                                                                          | Rental and other  revenues                               | 686        |                 | 940        |   | 1,583 |   | 1,850 |   |
|                                                                          |                                                     |            |                 |            |   |  |   |  |   |
|                                                                          | Total revenues                                           | 134,196    |                 | 140,641    |   | 265,937 |   | 278,532 |   |
|                                                                          |                                                     |       |                 |       |   |   |   |   |
| Costs and expenses:                                                           |                                                     |       |                 |       |   |   |   |   |
|                                                                          | Hotel operating  expenses                                | 66,984     |                 | 64,661     |   | 134,627 |   | 135,348 |   |
|                                                                          | Rent and other  occupancy                                | 22,050     |                 | 19,026     |   | 45,436 |   | 37,613 |   |
|                                                                          | General and administrative                               | 8,778      |                 | 9,120      |   | 16,112 |   | 17,265 |   |
|                                                                          | Depreciation and amortization                            | 9,614      |                 | 11,083     |   | 19,042 |   | 21,782 |   |
|                                                                          |                                                     |            |                 |            |   |  |   |  |   |
|                                                                          | Total costs and expenses                                 | 107,426    |                 | 103,890    |   | 215,217 |   | 212,008 |   |
|                                                                          |                                                     |       |                 |       |   |   |   |   |
| Operating income                                                              | 26,770                                                   |       | 36,751               |       | 50,720 |   | 66,524 |   |
|                                                                          |                                                     |       |                 |       |   |   |   |   |
| Investment income                                                             | 588                                                      |       | 325                  |       | 1,164 |   | 565 |   |
| Interest expense                                                              | (8,407                                                   | )          | (10,562              | )          | (17,315 | ) | (23,292 | ) |
| Other income, net                                                             | 14,759                                                   |       | 13,481               |       | 14,759 |   | 13,833 |   |
|                                                                          |                                                          |       |                      |       |  |   |  |   |
|                                                                          |                                                     |       |                 |       |   |   |   |   |
| Income before income  taxes and extraordinary items                           | 33,710                                                   |       | 39,995               |       | 49,328 |   | 57,630 |   |
| Provision for income  taxes                                                   | 12,978                                                   |       | 15,598               |       | 18,992 |   | 22,476 |   |
|                                                                          |                                                          |       |                      |       |  |   |  |   |
|                                                                          |                                                     |       |                 |       |   |   |   |   |
| Income before  extraordinary items                                            | 20,732                                                   |       | 24,397               |       | 30,336 |   | 35,154 |   |
| Extraordinary items -  loss on dischargeof  indebtedness, net of income taxes | (110                                                     | )          |                 |       | (110 | ) | (302 | ) |
|                                                                          |                                                          |       |                      |       |  |   |  |   |
| Net income                                                                    | $                                                        | 20,622     |                 | $          | 24,397 |   | $ | 30,226 |   | $ | 34,852 |   |
|                                                                          |                                                          |       |                      |       |  |   |  |   |
|                                                                          |                                                     |       |                 |       |   |   |   |   |
| Earnings per common  share:                                                   |                                                     |       |                 |       |   |   |   |   |
| Basic:                                                                        |                                                     |       |                 |       |   |   |   |   |
|                                                                          |                                                     |       |                 |       |   |   |   |   |
|                                                                          | Income before extraordinary items                        | $          | 0.46                 |       | $ | 0.54 |   | $ | 0.68 |   | $ | 0.75 |   |
|                                                                          | Extraordinary items - loss on  discharge of indebtedness | --         |                 | --         |   | -- |   | -- |   |
|                                                                          |                                                     |            |                 |            |   |  |   |  |   |
| Net earnings                                                                  | $                                                        | 0.46       |                 | $          | 0.54 |   | $ | 0.68 |   | $ | 0.75 |   |
|                                                                          |                                                          |       |                      |       |  |   |  |   |
|                                                                          |                                                     |       |                 |       |   |   |   |   |
| Diluted:                                                                      |                                                     |       |                 |       |   |   |   |   |
|                                                                          |                                                     |       |                 |       |   |   |   |   |
|                                                                          | Income before extraordinary items                        | $          | 0.45                 |       | $ | 0.53 |   | $ | 0.66 |   | $ | 0.74 |   |
|                                                                          | Extraordinary items - loss on  discharge of indebtedness | --         |                 | --         |   | -- |   | -- |   |
|                                                                          |                                                     |            |                 |            |   |  |   |  |   |
| Net earnings                                                                  | $                                                        | 0.45       |                 | $          | 0.53 |   | $ | 0.66 |   | $ | 0.74 |   |
|                                                                          |                                                          |       |                      |       |  |   |  |   |
|                                                                          |                                                     | * *   |                 | * *   |   | * * |   | * * |
| *See Accompanying Notes to Interim Consolidated Financial  Statements.*       | * *                                                 |
|                                                                               |                                                          |            |                      |            |  |  |  |  |  |  |  |  |  |  |

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

|                                                                    |                                                                               |       |     |       |
|-------------------------------------------------------------------------|------------------------------------------------------------------------------------|------------|----------|------------|
|                                                                    | **2001**                                                                           | ** ** | **2000** | ** ** |
|                                                                    | ****                                                                               |       | ****     |       |
| Cash flows from  operating activities:                                  |                                                                               |       |     |       |
|                                                                    | Net income                                                                         | $          | 30,226   |       | $ | 34,852 |   |
|                                                                    | Adjustments to reconcile net  income to net cash provided by operating activities: |       |     |       |   |
|                                                                    | Depreciation and amortization                                                      | 19,042     |     | 21,781     |   |
|                                                                    | Extraordinary item - loss on  discharge of indebtedness                            | 110        |     | 496        |   |
|                                                                    | Amortization of deferred  financing costs                                          | 1,516      |     | 1,699      |   |
|                                                                    | Utilization of net  operating loss carryforwards                                   | 1,529      |     | 1,529      |   |
|                                                                    | Non-cash portion on  other income                                                  | (11,907    | )        | (13,833    | ) |
|                                                                    | Amortization of deferred income                                                    | (6,821     | )        | (4,992     | ) |
|                                                                    | Increase (decrease) from changes  in other operating assets and liabilities:       |       |     |       |   |
|                                                                    | Accounts receivable                                                                | (3,229     | )        | (6,898     | ) |
|                                                                    | Other current assets                                                               | 1,034      |     | 310        |   |
|                                                                    | Other liabilities                                                                  | (4,176     | )        | 1,170      |   |
|                                                                    |                                                                                    |       |          |       |
|                                                                    |                                                                               |       |     |       |
|                                                                    | Net cash provided by  operating activities                                         | 27,324     |     | 36,114     |   |
|                                                                    |                                                                               |       |     |       |
| Cash flows from  investing activities:                                  |                                                                               |       |     |       |
|                                                                    | Proceeds from  mortgages and notes receivable                                      | 1,554      |     | 184        |   |
|                                                                    | Disbursements for  mortgages and notes receivable                                  | (201       | )        | (355       | ) |
|                                                                    | Proceeds from sales of  property, equipment and leasehold improvements             | 10,033     |     | 157,849    |   |
|                                                                    | Construction and  conversion of hotels                                             | (9,863     | )        | (11,271    | ) |
|                                                                    | Purchases of property, equipment  and leasehold improvements                       | (11,151    | )        | (8,555     | ) |
|                                                                    | Other                                                                              | 95         |     | (2,183     | ) |
|                                                                    |                                                                               |            |     |            |   |
|                                                                    |                                                                               |       |     |       |   |
|                                                                    | Net cash (used in) provided by  investing activities                               | (9,533     | )        | 135,669    |   |
|                                                                    |                                                                               |       |     |       |
| Cash flows from  financing activities:                                  |                                                                               |       |     |       |
|                                                                    | Net proceeds from issuance of  debt                                                | 8,953      |     | 30,835     |   |
|                                                                    | Payments of debt                                                                   | (18,580    | )        | (153,778   | ) |
|                                                                    | Proceeds from the exercise of  stock options                                       | 1,141      |     | 276        |   |
|                                                                    | Treasury stock purchases                                                           | (3,710     | )        | (29,311    | ) |
|                                                                    |                                                                                    |       |          |       |
|                                                                    |                                                                               |       |     |       |
|                                                                    | Net cash used in  financing activities                                             | (12,196    | )        | (151,978   | ) |
|                                                                    |                                                                               |            |     |            |   |
|                                                                    |                                                                               |       |     |       |
|                                                                    | Net increase in cash  and cash equivalents                                         | 5,595      |     | 19,805     |   |
|                                                                    |                                                                               |       |     |       |
|                                                                    | Cash and cash equivalents at  beginning of period                                  | 1,735      |     | 7,240      |   |
|                                                                    |                                                                               |            |     |            |   |
|                                                                    | Cash and cash equivalents at end of  period                                        | $          | 7,330    |       | $ | 27,045 |   |
|                                                                    |                                                                               |            |     |            |   |
|                                                                    |                                                                               |       |     |       |
|                                                                    |                                                                               |       |     |       |
| **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                                                                      | $          | 17,302   |       | $ | 24,323 |   |
|                                                                    | Income taxes paid                                                                  | $          | 11,478   |       | $ | 13,698 |   |
|                                                                    |                                                                               |       |     |       |
| *See Accompanying Notes to Interim Consolidated Financial  Statements.* | * *                                                                           |
|                                                                         |                                                                                    |            |          |            |  |  |  |  |  |  |

**PRIMEHOSPITALITY CORP. AND SUBSIDIARIESNOTES TO INTERIM CONSOLIDATEDFINANCIAL STATEMENTSTHREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000(Unaudited)**

**Note 1 - Basis of Presentation**

             In the opinion of management, theaccompanying 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 June 30, 2001 andthe results of its operations for the three and six months ended June 30, 2001and 2000 and cash flows for the six months ended June 30, 2001 and 2000.

             The consolidated financialstatements for the three and six months ended June 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 June 30, 2000 consolidated financial statements to conformthem to the June 30, 2001 presentation.

             The consolidated results ofoperations for the three and six months ended June 30, 2001 are not necessarilyindicative 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 December 31,2000 has been derived from the audited financial statements at that date, butdoes not include all the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.

**Note 2 - Accounting Policies**

             In June 1999, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards No. 137, amending Statement of Financial Accounting Standards No.133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS133”), which extended the required date of adoption to fiscal years beginningafter June 15, 2000.  SFAS 133establishes accounting and reporting standards requiring that every derivativeinstrument (including certain derivative instruments embedded in othercontracts) be recorded on the balance sheet as either an asset or liabilitymeasured at its fair value.  SFAS 133requires that changes in the derivative’s fair value be recognized currently inearnings unless specific hedge accounting criteria are met.   The Company adopted SFAS 133 in 2001.  Currently SFAS 133 has no impact due to thelack of any derivative activity.

**Note 3 - Hotel Dispositions**

             MeriStarHospitality Corp. (“MeriStar”) exercised its termination rights on four hotelsit leased to the Company effective May 1, 2001.  The impact of the lease termination on Prime’s financialcondition is immaterial.  Under theterms of the lease agreement, MeriStar has paid Prime a termination fee of $2.9million.  The fee is based on a multipleof cash flow for the twelve months ended April 30, 2001.  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.

             Duringthe six months ended June 30, 2001, the Company also sold two Wellesley Innhotels for $7.1 million and a vacant land parcel for $5.0 million. The Companyhas retained the franchise rights on the two Wellesley Inn hotels under 20 yearfranchise agreements.

**Note 4 – Debt**

             Duringthe three months ended June 30, 2001 the Company retired $3.5 million of its$200 million Senior Subordinated Notes due 2007 (“Senior Subordinated Notes”)and $100,000 of its First Mortgage Notes due 2006.  Included in the accompanying consolidated financial statements isan extraordinary loss, net of taxes, on the discharge of indebtedness ofapproximately $110,000 relating to this retirement.

**Note 5 - Earnings Per CommonShare**

             Basic earnings per common share wascomputed 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 44.6 million and 45.1 million for the three months ended June 30,2001 and 2000, respectively, and 44.8 million and 46.5 million for the sixmonths ended June 30, 2001 and 2000, respectively.

             Diluted earnings per common sharereflect adjustments to basic earnings per common share for the dilutive effectof stock options.  The weighted averagenumber of common shares used in computing diluted earnings per common share was45.7 million and 45.9 million for the three months ended June 30, 2001 and2000, respectively, and 46.0 million and 47.2 million for the six months endedJune 30, 2001 and 2000, respectively

**Note 6 - Treasury Stock**

             In April 2001, the Company repurchased 377,000 shares of its common stockat an average price per share of $9.82.** **The Company’s $175 Million Revolving Credit Facility (the“Revolving Credit Facility”) allows for stock repurchases equal to 50% of netproceeds from asset sales with repurchases not to exceed $100.0 million.  As of April 30, 2001, the Company hasrepurchased $37.4 million of its shares under this covenant and has $46.7million of availability based on the proceeds from asset sales.

**Note 7 - Other Income, Net**

**            **Other Income, net for the three and six months ended June 30, 2001consisted primarily of the recognition of deferred gains on the termination offour hotel leases offset by reserves for certain charges related to contractdisputes.  Other income, net for thethree and six months ended June 30, 2000, consisted primarily of net gains onproperty transactions.

**Note 8- Comprehensive Income**

             For the three and six months endedJune 30, 2001 and 2000, comprehensive income consisted of the following (inthousands):

|                                                                                     | **Three months ended  June 30,** |   | **Six months ended****June  30,** |   |
|------------------------------------------------------------------------------------------|----------------------------------|--------|-----------------------------------|--------|
|                                                                                     | **2001**                         |   | **2000**                          |   | **2001** |   | **2000** |   |
|                                                                                     | ****                             |   | ****                              |   |
| Net  income                                                                              | $                                | 20,622 |                              | $      | 24,397 |   | $ | 30,226 |   | $ | 34,852 |   |
| Unrealized  gain (loss) on marketable securities available for sale, net of income taxes | 584                              |   | (235                              | )      | 1,036 |   | (233 | ) |
|                                                                                     |                                  |   |                                   |   |
|                                                                                     | Total                            | $      | 21,206                            |   | $ | 24,162 |   | $ | 31,262 |   | $ | 34,619 |   |
|                                                                                     |                             |        |                              |        |   |

The accumulated other comprehensive loss consistsprimarily of an unrealized loss on marketable securities available for sale,net of income taxes.

**Note 9 - Geographic andBusiness 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 134 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 26 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’snon-proprietary hotels are primarily located in the northeastern region of theUnited States.

             TheCompany evaluates the performance of its segments based primarily on earningsbefore interest, taxes and depreciation and amortization (“EBITDA”) generatedby the operations of its Owned Hotels. Interest expense is primarily related to debt incurred by the Companythrough its corporate obligations and collateralized by certain of its hotelproperties.  The Company’s taxes areincluded in the consolidated Federal income tax return. Other income, netconsists of property transactions, which are not part of the recurringoperation of the Company.  Theallocation of interest expense, taxes and other income, net are not evaluatedat the segment level and therefore, would be necessary in order to reconcileEBITDA to consolidated net income on the consolidated financial statements.

             Thefollowing table presents revenues and other financial information for the ownedand leased hotels by business segment for the three and six months ended June30, 2001 and 2000  (in thousands):

 

| **Three months ended June 30, 2001** | **All-Suites** |       | **Limited-Service** |       | **Full-Service** |       | **Corporate / Other** |       | **Consolidated** |       |
|--------------------------------------|----------------|------------|---------------------|------------|------------------|------------|-----------------------|------------|------------------|------------|
| ****                                 | ****           |       | ****                |       | ****             |       | ****                  |       | ****             |       |
| Total revenue                        | $              | 71,851     |                | $          | 24,063           |       | $                     | 33,019     |             | $          | 5,263 |   | $ | 134,196 |   |
| EBITDA (1)                           | 19,667         |       | 8,474               |       | 9,007            |       | (764                  | )          | 36,384           |       |
| Depreciation and  amortization       | 4,615          |       | 3,057               |       | 1,466            |       | 476                   |       | 9,614            |       |
| Capital expenditures                 | 10,003         |       | 2,728               |       | 801              |       | 795                   |       | 14,327           |       |
| Total Assets                         | $              | 611,016    |                | $          | 376,650          |       | $                     | 112,181    |             | $          | 55,784 |   | $ | 1,155,631 |   |
|                                      |           |
|                                 |           |       |                |       |             |       |                  |       |             |       |
| **Three months ended June 30, 2000** | **All-Suites** | ** ** | **Limited-Service** | ** ** | **Full-Service** | ** ** | **Corporate/Other**   | ** ** | **Consolidated** | ** ** |
| ****                                 | ****           |       | ****                |       | ****             |       | ****                  |       | ****             |       |
| Total revenue                        | $              | 61,499     |                | $          | 28,637           |       | $                     | 43,588     |             | $          | 6,917 |   | $ | 140,641 |   |
| EBITDA (1)                           | 21,961         |       | 11,598              |       | 12,253           |       | 2,022                 |       | 47,834           |       |
| Depreciation and  amortization       | 5,215          |       | 3,488               |       | 2,126            |       | 254                   |       | 11,083           |       |
| Capital expenditures.                | 5,788          |       | 1,805               |       | 963              |       | 1,226                 |       | 9,782            |       |
| Total Assets                         | $              | 588,969    |                | $          | 393,681          |       | $                     | 119,885    |             | $          | 97,346 |   | $ | 1,199,881 |   |
|                                      |           |

 

| **Six months ended June 30, 2001** | **All-Suites** |       | **Limited-Service** |       | **Full-Service** |       | **Corporate / Other** |       | **Consolidated** |       |
|------------------------------------|----------------|------------|---------------------|------------|------------------|------------|-----------------------|------------|------------------|------------|
| ****                               | ****           |       | ****                |       | ****             |       | ****                  |       | ****             |       |
| Total revenue                      | $              | 139,518    |                | $          | 51,496           |       | $                     | 65,154     |             | $          | 9,770 |   | $ | 265,938 |   |
| EBITDA (1)                         | 36,258         |       | 19,905              |       | 13,832           |       | (233                  | )          | 69,762           |       |
| Depreciation and  amortization     | 9,230          |       | 6,050               |       | 2,931            |       | 831                   |       | 19,042           |       |
| Capital expenditures               | 11,456         |       | 6,395               |       | 1,506            |       | 1,657                 |       | 21,014           |       |
| Total Assets                       | $              | 611,016    |                | $          | 376,650          |       | $                     | 112,181    |             | $          | 55,784 |   | $ | 1,155,631 |   |
|                                    |           |
|                               |           |       |                |       |             |       |                  |       |             |       |
| **Six months ended June 30, 2000** | **All-Suites** | ** ** | **Limited-Service** | ** ** | **Full-Service** | ** ** | **Corporate/Other**   | ** ** | **Consolidated** | ** ** |
| ****                               | ****           |       | ****                |       | ****             |       | ****                  |       | ****             |       |
| Total revenue                      | $              | 119,356    |                | $          | 58,587           |       | $                     | 89,913     |             | $          | 10,676 |   | $ | 278,532 |   |
| EBITDA (1)                         | 42,217         |       | 23,882              |       | 22,212           |       | (5                    | )          | 88,306           |       |
| Depreciation and  amortization     | 10,161         |       | 6,739               |       | 4,359            |       | 523                   |       | 21,782           |       |
| Capital expenditures               | 11,065         |       | 4,119               |       | 3,027            |       | 1,615                 |       | 19,826           |       |
| Total Assets                       | $              | 588,969    |                | $          | 393,681          |       | $                     | 119,885    |             | $          | 97,346 |   | $ | 1,199,881 |   |
|                                    |

----

**(**1) EBITDA representsearnings before interest, income taxes, depreciation and amortization.

**PART I.**            **FINANCIAL INFORMATION**

**Item 2.****Management's Discussion and Analysis of FinancialCondition and Results of Operations**

***General***

             PrimeHospitality Corp. (“Prime” or “the Company”) is an owner, operator andfranchisor of hotels, with 233 hotels in operation containing 29,947 roomslocated in 33 states (the “Portfolio”) as of August 1, 2001.  Prime controls two hotel brands —AmeriSuites (R) and Wellesley Inn & Suites (R) — as well as a portfolio ofnon-proprietary brand hotels, which are primarily upscale, full-service hotelsoperated under franchise agreements 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 August 1, 2001:

|                       | **Owned**  |   | **Leased** |   | **Managed** |   | **Franchised** |   | **Total**  |   |
|----------------------------|------------|--------|------------|--------|-------------|--------|----------------|--------|------------|--------|
|                       | **Hotels** |   | **Rooms**  |   | **Hotels**  |   | **Rooms**      |   | **Hotels** |   | **Rooms** |   | **Hotels** |   | **Rooms** |   | **Hotels** |   | **Rooms** |   |
|                       | ****       |   | ****       |   | ****        |   | ****           |   | ****       |   | **** |   | **** |   | **** |   | **** |   | **** |   |
| AmeriSuites                | 65         |   | 8,409      |   | 46          |   | 5,710          |   | 4          |   | 542 |   | 19 |   | 2,450 |   | 134 |   | 17,111 |   |
| Wellesley Inn & Suites | 57         |   | 6,691      |   |        |   |           |   | 7          |   | 748 |   | 9 |   | 836 |   | 73 |   | 8,275 |   |
| Non-Proprietary Brands     | 11         |   | 2,195      |   | 5           |   | 821            |   | 10         |   | 1,545 |   |   |   |   |   | 26 |   | 4,561 |   |
|                       |            |   |
|                       | Total      | 133    |       | 17,295 |        | 51     |           | 6,531  |       | 21     |   | 2,835 |   | 28 |   | 3,286 |   | 233 |   | 29,947 |   |
|                       |       |        |       |

             TheCompany’s strategy is to develop its proprietary AmeriSuites and Wellesley Inn& Suites brands, primarily through franchising.  Through the development of its proprietary brands, the Company istransforming itself from an owner/operator into a franchisor and manager andhas positioned itself to generate additional revenues with minimal capitalinvestment.

             InMay 2001, a 245-room franchised AmeriSuites located near Chicago O’Hare Airportopened, making it the largest AmeriSuites hotel in the system.  There are currently nine AmeriSuites hotelsunder construction including seven by franchisees.  In addition, Prime has a pipeline of another 60 executedfranchise agreements for new AmeriSuites to be built, eight of which arescheduled to begin construction this year. The Company also has a pipeline of nine executed Wellesley Inn &Suites franchise 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, two of which are franchised.

             InMay 2001, Prime began new national advertising campaigns for both itsbrands.  For AmeriSuites, the Companyran television ads on national cable channels including TNT and CNN.  In addition, the Company began advertisingits Wellesley chain on national radio. Both advertising campaigns have generated new interest in the brands,increasing call volume at the reservation center by 10% since July 1.  The Company is currently in the process ofimplementing a new expanded rewards program, which is on target to be effectivein September.  The new program willoffer frequent customers both points toward a free hotel room and airline milesfor each stay.  Currently, frequentguests account for nearly 10% of revenue at Prime’s brands and the Companybelieves it can significantly increase this percentage based on this newoffering.

             TheCompany’s strategy is also focused on growing the operating profits of its Portfolioas well as continuing to strengthen its financial condition.  With over 200 hotels in operation, theCompany believes it possesses the hotel management expertise to maximize theprofitability and value of its hotel assets.

             Forthe three months ended June 30, 2001, net income decreased by $3.8 million, to$20.6 million from $24.4 million for the same three-month period in 2000.  For the six months ended June 30, 2001, netincome was $30.2 million compared to $34.9 million for the same period in 2000.  Earnings before interest, taxes,depreciation and amortization (“EBITDA”) decreased by 23.8% and 21.0% to $36.4million and $69.8 million for the three and six months ended June 30, 2001,respectively. These results were primarily impacted by the reduction in overallbusiness travel due to the economic slowdown and the impact of assetdivestitures.

             TheCompany evaluates the performance of its segments based primarily onEBITDA.  EBITDA is not a measurement offinancial performance under accounting principles generally accepted in theUnited States and should not be considered as alternatives to net income as anindicator of the Company’s operating performance or as alternatives to cashflows as a measure of liquidity.

             Certainstatements in this Form 10-Q constitute “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements involveknown and unknown risks, uncertainties and other important factors that couldcause the actual results, performance or achievements of the Company, orindustry results, to differ materially from any future results, performance orachievements expressed or implied by such forward-looking statements.

             Forward-lookingstatements include the information about Prime’s possible or assumed futureresults of operations and statements preceded by, followed by or that includethe words “believe,” “except,” “anticipate,” “intend,” “plan,” “estimate,” orsimilar expressions, or the negative thereof. Actual results may differ materially from those expressed in theseforward-looking statements.  Readers ofthis Form 10-Q are cautioned not to unduly rely on any forward-lookingstatements.

             Thefollowing important factors, in addition to those discussed elsewhere in thisForm 10-Q or incorporated herein by reference, could cause results to differmaterially from those expressed in such forward-looking statements: competitionwithin each of the Company’s business segments in areas such as access,location, quality or accommodations and room rate structures; the balancebetween supply of and demand for hotel rooms and accommodations; the Company’scontinued ability to obtain new operating contracts and franchise agreements;the Company’s ability to develop and maintain positive relations with currentand potential hotel owners and other industry participants; the level of ratesand occupancy that can be achieved by such properties and the availability andterms of financing; changes in travel patterns, taxes and governmentregulations which influence or determine wages, prices, construction proceduresand costs; the effect of national and regional economic conditions that willaffect, among other things, demand for products and services at the Company’shotels; government approvals, actions and initiatives including the need forcompliance with environmental and safety requirements, and change in laws andregulations or the interpretation thereof and the potential effects of taxlegislative action; and other risks described from time to time in theCompany’s filings with the SEC, including its Form 10-K..

             Althoughthe Company believes the expectations reflected in these forward-lookingstatements are based upon reasonable assumptions, no assurance can be giventhat Prime will attain these expectations or that any deviations will not bematerial.  Except as otherwise requiredby the federal securities laws, the Company disclaims any obligation orundertaking to disseminate any updates or revisions to any forward-looking statementcontained herein to reflect any change in its expectations with regard theretoor any change in events, conditions or circumstances on which any suchstatement is based.

***Results ofOperations for the Three and Six Months ended June 30, 2001 Compared to theThree and Six Months ended June 30, 2000***

             Hotelrevenues consist of lodging revenues (which consist primarily of room,telephone and vending revenues) and food and beverage revenues.  Hotel revenues decreased by $4.9 million, or3.6%, from $133.8 million for the three-month period in 2000 to $128.9 millionfor the same period in 2001, primarily due to an overall slowdown in businesstravel which resulted in revenues at comparable hotels declining by 4.7%.  This decrease was also affected by the impactof asset divestitures offset by incremental hotel revenues generated by newhotels added during 2000 and 2001. These new hotels consisted primarily of the leasehold interests in 27Sumner Suites hotels acquired from Sholodge in July 2001 and subsequentlyconverted to AmeriSuites in November 2001. Hotel revenues for the six months ended June 30, 2001 decreased by $11.8million or 4.4%.  This decrease was dueto a 2.8% decrease in comparable hotel revenues and the impact of assetdivestitures partially offset by incremental revenues from the 27 newAmeriSuites.

             TheCompany operates three product types: its proprietary AmeriSuites which areupscale all-suites hotels; its proprietary Wellesley Inn & Suites which aremid-price limited service hotels and its non-proprietary brand hotels which areprimarily upscale full-service hotels.

             Thefollowing table illustrates the changes in REVPAR (“revenue per availableroom”) for the three and six-month periods ended June 30, 2001, by segment forall system-wide hotels, which were operated for comparable periods in 2001 and2000.

|                            |   | **Three Months****Ended****June 30,** |       |     |       | **Six Months****Ended  June 30,** |       |     |       |
|---------------------------------|--------|---------------------------------------|------------|----------|------------|-----------------------------------|------------|----------|------------|
|                            |   | **2001**                              | ** ** | **2000** | ** ** | **Change**                        | ** ** | **2001** | ** ** | **2000** | ** ** | **Change** | ** ** |
|                            |   | ****                                  |       | ****     |       | ****                              |       | ****     |       | **** |   | **** |   |
| **AmeriSuites**                 |   |                                  |       |     |       |                              |       |     |       |   |   |   |   |
| ****                            |   |                                  |       |     |       |                              |       |     |       |   |   |   |   |
| Occupancy                       |   | 69.3                                  | %          | 73.7     | %          | (4.4  pts.                        | )          | 66.2     | %          | 70.1 | % | (3.9  pts. | ) |
| ADR                             |   | $                                     | 82.25      |     | $          | 81.73                             |       | 0.6      | %          | $ | 84.27 |   | $ | 81.85 |   | 3.0 | % |
| REVPAR                          |   | $                                     | 56.99      |     | $          | 60.24                             |       | (5.4     | %)         | $ | 55.75 |   | $ | 57.34 |   | (2.8 | %) |
|                            |   |                                  |       |     |       |                              |       |     |       |   |   |   |   |
| **Wellesley  Inn & Suites** |   |                                  |       |     |       |                              |       |     |       |   |   |   |   |
| Occupancy                       |   | 65.2                                  | %          | 68.2     | %          | (3.0  pts.                        | )          | 64.0     | %          | 65.4 | % | (1.4  pts. | ) |
| ADR                             |   | $                                     | 60.77      |     | $          | 59.71                             |       | 1.8      | %          | $ | 64.58 |   | $ | 62.04 |   | 4.1 | % |
| REVPAR                          |   | $                                     | 39.62      |     | $          | 40.71                             |       | (2.7     | %)         | $ | 41.36 |   | $ | 40.56 |   | 2.0 | % |
|                            |   |                                  |       |     |       |                              |       |     |       |   |   |   |   |
| **Non-Proprietary  Brands**     |   |                                  |       |     |       |                              |       |     |       |   |   |   |   |
| Occupancy                       |   | 73.0                                  | %          | 78.0     | %          | (5.0  pts.                        | )          | 67.4     | %          | 68.5 | % | (1.1  pts. | ) |
| ADR                             |   | $                                     | 99.57      |     | $          | 98.89                             |       | 0.7      | %          | $ | 99.30 |   | $ | 97.75 |   | 1.6 | % |
| REVPAR                          |   | $                                     | 72.66      |     | $          | 77.12                             |       | (5.8     | %)         | $ | 66.96 |   | $ | 67.98 |   | (1.5 | %) |
|                            |   |                                  |       |     |       |                              |       |     |       |   |   |   |   |
| **Owned  Hotels**               |   |                                  |       |     |       |                              |       |     |       |   |   |   |   |
| Occupancy                       |   | 67.1                                  | %          | 70.9     | %          | (3.8  pts.                        | )          | 64.2     | %          | 67.2 | % | (3.0  pts. | ) |
| ADR                             |   | $                                     | 78.07      |     | $          | 77.47                             |       | 0.8      | %          | $ | 80.04 |   | $ | 77.85 |   | 2.8 | % |
| REVPAR                          |   | $                                     | 52.35      |     | $          | 54.95                             |       | (4.7     | %)         | $ | 51.37 |   | $ | 52.31 |   | (1.8 | %) |

 

             REVPARat comparable hotels was impacted for the three-month and six-month periods bythe slowdown in the economy which has primarily affected business travel.  A significant number of key corporatecustomers reduced their travel budgets, which decreased REVPAR at the upscaleAmeriSuites, particularly in the Dallas, Chicago, Cincinnati and Detroitmarkets, for the three and six-month periods by 5.4% and 2.8%, respectively.

             Ourmid-price Wellesley Inn & Suites brand, reported a 2.7% decrease in REVPARduring the three-month period ended June 30, 2001 attributed to weakness in theDallas, Austin and Detroit markets.  Forthe six-month period, the Wellesley Inn & Suites reported a 2.0% increasein REVPAR, as hotels in this segment have been less affected by the cutbacks inbusiness travel.

             TheCompany’s non-proprietary brands were affected by the performance of thefull-service hotels, which are primarily located in the Northeast.  These hotels registered 5.8% and 1.5% REVPARdecreases during the three and six months ended June 30, 2001 due to declinesin group business and softness in the greater New York City market.

             Management, franchise and otherfees consist primarily of base and incentive fees earned under managementagreements, royalties earned under franchise agreements and sales commissionsearned by the Company's national sales group. Management, franchise and other fees decreased by $1.3 million and$519,000, or 22.5% and 5.9%, for the three and six-month periods ended June 30,2001, respectively. The decreases were primarily due to management fee revenuesearned in 2000 associated with the termination of a management agreement and areduction in new franchise applications.

             Rental and other revenues consistof rental income, interest on mortgages and notes receivable and othermiscellaneous operating income. Rental and other revenues decreased by $254,000and $267,000 for the three and six-month periods ended June 30, 2001.

             Hotel operating expenses consist of all direct costsrelated to the operation of the Company’s properties (lodging, food &beverage, administration, selling and advertising, utilities and repairs andmaintenance). Hotel operating expenses increased by $2.3 million, or 3.6 %, forthe three-month period in 2001 compared to the same period in 2000 due tohigher energy costs, which rose by 15%. Excluding the impact of energy costs, hotel operating expenses forcomparable hotels decreased by approximately 2.0% due to the Company's costcontainment programs.  For the sixmonths ended June 30, 2001, hotel operating expenses decreased by $721,000 dueto properties sold subsequent to June 2000. For the comparable three and six-month periods, hotel operatingexpenses, as a percentage of hotel revenues, increased from 48.4% and 50.5% in2001, respectively, to 52.0% and 52.6% in 2000, respectively, due to the higherenergy costs.

             Rent and other occupancy expensesconsist primarily of rent expense, property insurance and real estate and othertaxes. Rent and other occupancy expenses increased by $3.0 million and $7.8million, or 15.9% and 20.8%, respectively, for the three and six months endedJune 30, 2001 as compared to the same period in 2000, primarily due to theaddition of the 27 leased hotels acquired from Sholodge 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 decreased by $342,000 and $1.2 million, or 3.8% and6.7%, respectively, for the three and six months ended June 30, 2001, dueprimarily to the Company’s cost containment programs.  This was offset by costs associated with the Company’s newnational television and radio advertising campaigns for its brands, which beganin May 2001.

             Depreciation and amortizationexpense decreased by $1.5 million and $2.7 million, or 13.3% and 12.6%,respectively, for the three and six months ended June 30, 2001. The decreaseswere primarily due to asset sales.

             Investment income increased by$263,000 and $599,000, or 3.1% and 106.0%, respectively, for the three and sixmonths ended June 30, 2001, primarily due to interest earned on securitydeposits on the leased hotels acquired from Sholodge.

             Interest expense decreased by $2.2million and $6.0 million, or 20.4% and 25.7%, respectively, for three and sixmonths ended June 30, 2001, primarily due to the reduction of debt resultingfrom asset sales and operating cash flow.

             Otherincome, net consists of property transactions and other items, which are notpart of the Company’s recurring operations. Other income, net for the three and six months ended June 30, 2001consisted primarily of the recognition of deferred gains on the termination offour hotel leases offset primarily by reserves for certain changes related tocontract disputes. Other income, net for the three and six months ended June30, 2000, consisted primarily of net gains on property transactions.

***Liquidity and Capital Resources***

             AtJune 30, 2001, the Company had cash, cash equivalents and current marketablesecurities of $12.4 million.  Inaddition, at June 30, 2001, the Company had $126.1 million available to itunder its Revolving Credit Facility.

             TheCompany's major sources of cash for the six months ended June 30, 2001 werecash flows from operations of $27.3 million, borrowings of $9.0 million and netproceeds from asset sales of $10.0 million. The Company's major uses of cash during the period were capitalexpenditures of $21.0 million and debt repayments of $18.6 million.

             Cashflow from operations was positively impacted by the utilization of netoperating loss carry-forwards ("NOLs") of $1.5 million.  At June 30, 2001 the Company had federalNOLs relating primarily to its predecessor, Prime Motor Inns, Inc.("PMI"), of approximately $48.0 million, which are subject to annualutilization limitations and expire in 2006.

             ***Sources of Capital****.* The Company has undertaken a strategicinitiative to dispose of hotel real estate while retaining the franchise rightsand to invest the proceeds in the reduction of debt, the growth of itsproprietary brands and the repurchase of the Company’s common stock.  The combination of asset sales and operatingcash flow continues to strengthen the Company’s overall financialcondition.  At June 30, 2001, theCompany’s debt to EBITDA ratio was 2.3 times and its debt to bookcapitalization was 33%.

             Duringthe six months ended June 30, 2001, the Company sold two Wellesley Inns hotelsfor $7.1 million, and an undeveloped land parcel in Pleasant Hill, CA for $5.0million.

             TheCompany has a $175.0 million Revolving Credit Facility, which bears interest atLIBOR plus 2.0%.  The facility isavailable through December 2001 and may be extended by the Company for anadditional year with a reduction in size to $125.0 million.  Borrowings under the facility are secured byfirst liens on certain of the Company’s hotels with recourse to theCompany.  Additional properties may beadded subject to the approval of the lenders. Availability under the facility is subject to a borrowing base test andcertain other covenants.  During the sixmonths ended June 30, 2001, the Company borrowed and subsequently repaid $9.0million under this facility.  At June30, 2001, the Company has $126.1 million available under its borrowing basetest.

             TheRevolving Credit Facility contains covenants requiring the Company to maintaincertain financial ratios and limitations on the incurrence of debt, liens,dividend payments, stock repurchases, certain investments, transactions withaffiliates, asset sales, mergers and consolidations and any change of controlof the Company.

             ***Uses of Capital.***During six months ended June 30, 2001, the Company retired $18.6 million of itsdebt outstanding.  Over the past 18months, the Company has paid down approximately $213 million of its debtbringing its debt balance to $336.1 million at June 30, 2001.

             TheCompany intends to continue the growth of its brands primarily throughfranchising and, therefore, its corporate brand development will belimited.  During the six months endedJune 30, 2001, the Company spent $9.9 million on new construction orconversions from other hotel brands. There are currently two AmeriSuites hotels under construction by theCompany.  In addition, the Companyconverted two owned Howard Johnson hotels to Wellesley Inns.  The Company expects to spend approximately$25-30 million in 2001 in corporate brand development.  In addition, during the six months endedJune 30, 2001, the Company also spent $11.2 million on capital improvements atits Owned Hotels and expects to spend a total of $20 million in 2001.  The Company plans to fund both its corporatedevelopment and capital improvements with internally generated cash flow.

             Duringthe six months ended June 30, 2001, the Company repurchased 377,000 shares ofits common stock at an average cost of $9.82. The Revolving Credit Facilitylimits the purchase of these shares to 50% of the proceeds from asset sales notto exceed $100 million.  As of July 31,2001, the Company has repurchased $37.4 million of its shares under thiscovenant and has $46.7 million of availability based on the proceeds from assetsales.

             Inorder to facilitate future tax–deferred exchanges of hotel properties,the Company from time to time enters into arrangements with an unaffiliatedthird party under Section 1031 of the Internal Revenue Code of 1986, asamended.  At June 30, 2001, the Companyhad advances of approximately $127.4 million to such third party, whichadvances are classified as property, equipment and leasehold improvements in theCompany’s accompanying financial statements.

**Item 3.****Quantitative and Qualitative Disclosures About MarketRisk**

             The Company is exposed to changes in interest rates primarily from itsfloating rate debt arrangements.  Ahypothetical 100 basis point adverse move (increase) in interest rates alongthe entire rate curve would adversely affect the Company’s annual interest costby approximately $ 143,000 annually.

**PART II.**           **OTHER INFORMATION**

**    Item 1.**         **Legal Proceedings**

             The Company is involved in certain legal proceedings incidental to thenormal conduct of its business.  TheCompany does not believe that its liabilities relating to any of the legalproceedings to which it is a party are likely to be, individually or in theaggregate, material to its consolidated financial position or results of operations.

**    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**

                           The Company held itsannual meeting of stockholders on May 24, 2001 (the “Annual Meeting”).  The Company’s stockholders were asked totake the following action at the meeting:

    1) Elect two Class III Directors to serveuntil the 2004 Annual Meeting of Stockholders

Withrespect to the Board Proposal, the two individuals nominated for director wereall elected by the affirmative vote of a majority of shares of common stockpresent at the Annual Meeting.  Thenominees and the votes received by each are as follows:

|             | **FOR**    |   | **WITHHELD** |
|------------------|------------|--------|--------------|
|             | ****       |   | ****         |
| Howard M. Lorber | 40,820,635 |   | 1,429,565    |
| Allen S. Kaplan  | 41,086,942 |   | 1,163,258    |

 

**    Item 5.**          **Other Information**

None.

**    Item 6.**         **Exhibits and 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:  | August 14, 2001                                    | By: | /s/A.F.Petrocelli |
|   |                                                    |   |
|   | A.F.  Petrocelli                                   |
|   | President  and Chief Executive Officer             |
|   |
|   |
| Date:  | August 14, 2001                                    | By: | /s/ Douglas Vicari |
|   |                                                    |   |
|   | Douglas Vicari                                     |
|   | Senior Vice President and Chief  Financial Officer |
|   |
|        |                                                    |  |  |  |  |  |