Meristar Hospitality Operating Partnership 10-Q 2003 Q1 Quarterly report

Exhibit 13

MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars and shares in thousands, except per share amounts)

		March 31,
		2003			December 31,
		(Unaudited)			2002
ASSETS
Investments in hotel properties		$	2,943,118		$	3,020,909
Accumulated depreciation			(467,021	)		(460,972	)
			2,476,097			2,559,937
Restricted cash			22,021			20,365
Investments in and advances to affiliates			41,714			41,714
Note receivable from Interstate Hotels & Resorts			—			42,052
Prepaid expenses and other assets			40,729			43,228
Accounts receivable, net of allowance for doubtful accounts of $771 and $848			69,765			56,828
Cash and cash equivalents			65,488			33,896
		$	2,715,814		$	2,798,020
LIABILITIES AND STOCKHOLDERS’ EQUITY
Long-term debt		$	1,652,510		$	1,654,102
Accounts payable and accrued expenses			110,156			109,790
Accrued interest			40,744			52,907
Due to Interstate Hotels & Resorts			10,593			10,500
Other liabilities			19,712			18,013
Total liabilities			1,833,715			1,845,312
Minority interests			52,495			74,422
Stockholders’ equity:
	Common stock, par value $0.01 per share Authorized — 250,000 shares Issued — 50,392 and 49,555 shares		504			495
	Additional paid-in capital		1,215,046			1,196,025
	Retained deficit		(300,616	)		(230,870	)
	Accumulated other comprehensive loss		(5,994	)		(7,052	)
	Unearned stock-based compensation		(2,662	)		(3,638	)
	Common stock held in treasury — 4,324 shares		(76,674	)		(76,674	)
Total stockholders’ equity			829,604			878,286
		$	2,715,814		$	2,798,020

See accompanying notes to the unaudited consolidated financial statements.

MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

(Dollars in thousands, except per share amounts)

				Three Months Ended
				March 31,
				2003			2002
Revenue:
	Hotel operations:
		Rooms		$	158,260		$	164,740
		Food and beverage			62,830			60,988
		Other hotel operations			18,879			18,802
	Office rental, parking and other revenue				3,197			4,301
Total revenue					243,166			248,831
Hotel operating expenses:
		Rooms			38,586			37,524
		Food and beverage			46,086			43,567
		Other hotel operating expenses			11,125			10,519
Office rental, parking and other expenses					641			761
Other operating expenses:
		Administrative and general			42,551			42,233
		Property operating costs			36,980			35,622
		Depreciation and amortization			28,994			29,853
		Loss on asset impairments			56,677			—
		Property taxes, insurance and other			20,269			19,582
		Loss on fair value of non-hedging derivatives			—			4,735
		Write-off of deferred financing costs			—			1,529
Operating expenses					281,909			225,925
Operating (loss) income					(38,743	)		22,906
Interest expense, net					34,876			34,622
Loss before minority interests, income taxes, and discontinued operations					(73,619	)		(11,716	)
Minority interests					3,677			627
Income tax benefit					196			305
Loss from continuing operations					(69,746	)		(10,784	)
Income from discontinued operations, net of income taxes of $24					—			841
Net loss				$	(69,746	)	$	(9,943	)
Earnings per share:
	Basic:
		Loss from continuing operations		$	(1.53	)	$	(0.24	)
		Income from discontinued operations			—			0.02
			Net loss	$	(1.53	)	$	(0.22	)
	Diluted:
		Loss from continuing operations		$	(1.53	)	$	(0.24	)
		Income from discontinued operations			—			0.02
			Net loss	$	(1.53	)	$	(0.22	)

See accompanying notes to the unaudited consolidated financial statements.

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MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

(Dollars in thousands)

				Three Months Ended
				March 31,
				2003			2002
Operating activities:
	Net loss			$	(69,746	)	$	(9,943	)
	Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
		Depreciation and amortization			28,994			30,901
		Loss on asset impairments			56,677			—
		Write-off of deferred financing costs			—			1,529
		Loss on fair value of non-hedging derivatives			—			4,735
		Minority interests			(3,677	)		(627	)
		Amortization of unearned stock-based compensation			976			880
		Unrealized gain on interest rate swaps recognized in net loss			(2,055	)		(2,887	)
		Deferred income taxes			(931	)		(317	)
		Changes in operating assets and liabilities:
			Accounts receivable		(12,937	)		(12,254	)
			Prepaid expenses and other assets		1,416			1,634
			Due from/to Interstate Hotels & Resorts		93			(224	)
			Accounts payable, accrued expenses, accrued interest and other liabilities		(9,039	)		(4,285	)
Net cash (used in) provided by operating activities					(10,229	)		9,142
Investing activities:
	Investments in hotel properties				(8,622	)		(12,292	)
	Proceeds from sale of asset				12,650			—
	Net payments from (advances to) Interstate Hotels & Resorts				42,052			(9,000	)
	(Increase) decrease in restricted cash				(1,656	)		2,952
	Other, net				(299	)		—
Net cash provided by (used in) investing activities					44,125			(18,340	)
Financing activities:
	Deferred financing fees				—			(3,131	)
	Proceeds from issuance of long-term debt				—			234,545
	Principal payments on long-term debt				(1,889	)		(220,901	)
	Proceeds from issuances of common stock				—			3,155
	Purchases of common stock				—			(409	)
	Dividends paid to stockholders				—			(475	)
	Distributions to minority investors				(141	)		(789	)
Net cash (used in) provided by financing activities					(2,030	)		11,995
Effect of exchange rate changes on cash and cash equivalents					(274	)		(271	)
Net increase in cash and cash equivalents					31,592			2,526
Cash and cash equivalents, beginning of period					33,896			23,448
Cash and cash equivalents, end of period				$	65,488		$	25,974
Supplemental Cash Flow Information
Cash paid for interest and income taxes:
	Interest, net of capitalized interest			$	46,989		$	38,288
	Income taxes			$	207		$	93

                         See accompanying notes to the unaudited consolidated financial statements.

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MERISTAR HOSPITALITY CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2003

(Amounts in thousands, except per share and share amounts)

1.          Organization

      MeriStar Hospitality Corporation is a real estate investment trust, or REIT. We own a portfolio of upscale, full-service hotels and resorts in the United States and Canada. Our portfolio is diversified geographically and by franchise and brand affiliations. As of March 31, 2003, we owned 106 hotels with 27,432 rooms, all of which were leased by our taxable subsidiaries and managed by Interstate Hotels & Resorts, Inc. (“Interstate Hotels”).

      Our taxable subsidiaries are parties to management agreements with a subsidiary of Interstate Hotels to manage all of our hotels. Under these management agreements, the taxable subsidiaries pay a management fee to Interstate Hotels for each property. The taxable subsidiaries in turn make rental payments to us under the participating leases. Under the management agreements, the base management fee is 2.5% of total hotel revenue, plus incentive payments based on meeting performance thresholds that could total up to 1.5% of total hotel revenue. All of the agreements, except for two agreements with terms that renew annually, have an initial term of 10 years with three renewal periods of five years each at the option of Interstate Hotels, subject to some exceptions.

2.          Summary of Significant Accounting Policies

     Interim Financial Statements.We have prepared these unaudited interim financial statements according to the rules and regulations of the Securities and Exchange Commission. We have omitted certain information and footnote disclosures that are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States. These interim financial statements should be read in conjunction with the financial statements, accompanying notes and other information included in our Annual Report on Form 10-K for the year ended December 31, 2002. Certain 2002 amounts have been reclassified to conform to the 2003 presentation.

      In our opinion, the accompanying unaudited consolidated interim financial statements reflect all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the financial condition and results of operations and cash flows for the periods presented. The results of operations for the interim periods are not necessarily indicative of the results for the entire year.

     Principles of Consolidation.We adopted the Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” on January 1, 2003. The interpretation addresses how to identify variable interest entities and when to consolidate those entities. Consolidation of variable interest entities is required by the primary beneficiary. We do not have an interest in any variable interest entities.

     Held for Sale Properties.We classify the properties we are actively marketing as held for sale once all of the following conditions are met:

•    Our board has approved the sale,

•    We have a fully executed agreement with a qualified buyer which provides for no significant outstanding or continuing obligations with the property after sale, and

•    We have a significant non-refundable deposit.

      We carry properties held for sale at the lower of their carrying values or estimated fair values less costs to sell. We cease depreciation at the time the asset is classified as held for sale. If material to our total portfolio, we segregate the held for sale properties on our consolidated balance sheet.

     Impairment or Disposal of Long-Lived Assets.We adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” on

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January 1, 2002. SFAS No. 144 requires the current and prior period operating results of any asset that has been classified as held for sale or has been disposed of on or after January 1, 2002 and where we have no continuing involvement, including any gain or loss recognized, to be recorded as discontinued operations.

      The provisions of SFAS No. 144 also require that whenever events or changes in circumstances indicate that the carrying value of a long-lived asset may be impaired that an analysis be performed to determine the recoverability of the asset’s carrying value. We make estimates of the undiscounted cash flows from the expected future operations or potential sale of the asset. If the analysis indicates that the carrying value is not recoverable from these estimates of cash flows, we write down the asset to estimated fair value and recognize an impairment loss. Any impairment losses we recognize on assets held for use are recorded as operating expenses. We record any impairment losses on assets held for sale as a component of discontinued operations.

      We adopted the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” on January 1, 2003. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. As part of our strategy includes the disposition of certain hotel assets, all of which are managed under agreements which typically include termination penalty clauses with Interstate Hotels, we may incur termination obligations related to our asset dispositions. Any such liability will be recognized at the time the asset disposition is complete and a termination notice is provided to Interstate Hotels. At that time, the recognition of the termination obligation will be included in the calculation of the final gain or loss on sale and will be included in discontinued operations. For further discussion of potential termination obligations, see “Asset Dispositions” included in Item 2 of this Quarterly Report on Form 10-Q.

     Gains and Losses From Extinguishments of Debt.We adopted the provisions of SFAS No. 145, “Rescission of FASB Statements No. 4, No. 44 and No. 64, Amendment of SFAS No. 13, and Technical Corrections,” on January 1, 2003. The rescission of SFAS No. 4 and No. 64 requires that all gains and losses from extinguishments of debt be classified as extraordinary only if the gains and losses are from unusual or infrequent transactions. It also requires prior period gains or losses that are not from unusual or infrequent transactions to be reclassified as an operational expense. Adoption of the standard did not have a material impact on our results of operations for the three months ended March 31, 2003.

     Stock-Based Compensation.We adopted the recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended in December 2002 by SFAS No. 148, on January 1, 2003 for new stock options issued under our compensation programs. As permitted by SFAS No. 148, we elected to apply the provisions prospectively, which includes recognizing compensation expense for only those stock options issued in 2003 and forward. Adoption of the standard did not have a significant impact on our results of operations or financial condition. We apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for our stock options issued under our compensation programs prior to January 1, 2003. As we granted these compensation awards at market value, no compensation cost has been recognized. For our other equity-based compensation plans, we record the fair value of the cost at the time of issuance and recognize compensation expense over the respective vesting periods.

      Had compensation cost been determined based on fair value at the grant date for awards granted prior to our adoption of SFAS No. 123, as amended by SFAS No. 148, our net loss and per share amounts would have been adjusted to the pro forma amounts indicated as follows:

		Three Months Ended
		March 31,
		2003			2002
Net loss, as reported		$	(69,746	)	$	(9,943	)
	Add: Stock-based employee compensation expense included in reported net loss, net of related tax effect		929			1,891
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,081	)		(2,137	)
Net loss, pro forma		$	(69,898	)	$	(10,189	)

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		Three Months Ended
		March 31,
		2003			2002
Earnings per share
	Basic, as reported	$	(1.53	)	$	(0.22	)
	Basic, pro forma	$	(1.53	)	$	(0.23	)
	Diluted, as reported	$	(1.53	)	$	(0.22	)
	Diluted, pro forma	$	(1.53	)	$	(0.23	)

      The effects of applying SFAS No. 123 for disclosing pro forma compensation costs may not be representative of the actual effects on reported net income and earnings per share in future periods.

     Accounting for Guarantees.We adopted FASB FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34, on January 1, 2003. The interpretation requires disclosures, which we have included in Footnote 9, “Commitments and Contingencies.” The interpretation also requires recognition of liabilities at their fair value for newly issued guarantees. As we did not issue any new guarantees during the three months ended March 31, 2003, the adoption did not have a material impact on our results of operations or financial condition.

3.          Comprehensive Loss

      Comprehensive loss was $68,688 and $9,420 for the three months ended March 31, 2003 and 2002, respectively. Comprehensive loss consisted primarily of net loss ($69,746 and $9,943 for the three months ended March 31, 2003 and 2002, respectively), foreign currency translation adjustments, and in 2002 a $511 fair value adjustment for derivatives.

4.          Investments in Hotel Properties

      Investments in hotel properties consisted of the following:

	March 31,		December 31,
	2003		2002
Land	$	281,461	$	288,611
Buildings		2,287,118		2,351,769
Furniture, fixtures and equipment		331,406		344,541
Construction-in-progress		43,133		35,988
	$	2,943,118	$	3,020,909

      For the three months ended March 31, 2003 and 2002, we capitalized interest of $779 and $919, respectively.

      In late 2002, due to changes in economic conditions and the decision to market non-core assets as part of our program to sell assets that do not fit our long-term strategy, we performed an analysis to determine the recoverability of each of our hotel properties. Assets we have identified as “non-core” typically have one or more of the following characteristics: limited future growth potential, secondary market locations, secondary brand affiliations, higher than average future capital expenditure requirements, or an over-weighted market location.

      We recognized an impairment loss in 2002 on certain non-core assets we were then actively marketing. Late in the first quarter of 2003, we expanded our asset sales program to include a total of 16 non-core assets. We recognized an impairment loss of $56,677 related to these 16 hotels during the three months ended March 31, 2003.

      Subsequent to March 31, 2003, we identified an additional 19 non-core assets that we plan to dispose of. As a result of this change in our expected holding period for these assets, we updated our impairment analysis

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regarding these 19 assets. Based on expected net sales proceeds, we expect to incur an impairment charge of approximately $155,000 to $175,000 in the second quarter of 2003.

      The impairment charges discussed above are based on our estimates of the fair value of the properties we plan to dispose of. These estimates require us to make assumptions about the sales prices that we expect to realize for each property as well as the timing of a potential sale. In making these estimates, we consider the operating results of the assets, the market for comparable properties, and quotes from brokers, among other information. Actual results could differ materially from these estimates.

5.          Investments in and Advances to Affiliates

      In 1999, we invested $40,000 in MeriStar Investment Partners, LP (“MIP”), a joint venture established to acquire upscale, full-service hotels. Our investment is in the form of a preferred partnership interest, in which we receive a 16% preferred return on our investment. We account for this investment using the cost method. As of March 31, 2003, cumulative preferred returns of $12,840 were due from MIP. We have included this receivable in accounts receivable on the accompanying consolidated balance sheet. We evaluate the collectibility of our preferred return based on the underlying value of the hotel properties and our preference to distributions. On March 27, 2003, MIP completed a refinancing of its long-term debt, which allows the release of excess cash flow to pay our preferred return currently. We expect to begin receiving distributions representing payments of our current return during the second quarter of 2003. In the future, we expect that our cumulative unpaid preferred returns will be paid from excess cash flow above our current return and from potential disposition proceeds in excess of debt allocated to individual assets. Given the current economic environment, we do not expect the partnership’s operations to provide adequate cash flow in the near term for significant repayments of our cumulative unpaid preferred returns.

6.          Long-Term Debt

      Long-term debt consisted of the following:

	March 31,			December 31,
	2003			2002
Senior unsecured notes	$	950,000		$	950,000
Secured facility		313,270			314,626
Senior subordinated notes		205,000			205,000
Convertible notes		154,300			154,300
Mortgage debt and other		37,498			38,030
Unamortized issue discount		(7,558	)		(7,854	)
	$	1,652,510		$	1,654,102

      Aggregate future maturities as of March 31, 2003 were as follows:

2003 (nine months)	$	6,776
2004		170,715
2005		8,666
2006		9,407
2007		213,514
Thereafter		1,243,432
	$	1,652,510

      As of March 31, 2003, all of our debt bore fixed rates of interest. Our overall weighted average interest rate was 8.6%. The fair value of our fixed rate long-term debt was $1,419,651 at March 31, 2003. We determined fair value based on market prices as of March 31, 2003.

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     Senior unsecured notes.The notes are unsecured obligations of certain subsidiaries of ours, and we guarantee payment of principal and interest on the notes. These notes contain various restrictive incurrence covenants, limiting our ability to transact certain business activities, including additional borrowings, if specific financial thresholds are not achieved. One of those thresholds is maintaining a 2 to 1 fixed charge coverage ratio (as defined in the indentures, fixed charges only include interest on debt obligations and preferred equity). As of March 31, 2003, our fixed charge coverage ratio was 1.5 to 1, and therefore we were not able to enter into certain transactions. These limitations include the repurchase of our stock, the issuance of any preferred stock, the payment of dividends (unless required to maintain our status as a REIT), the incurrence of any additional debt, or the repayment of outstanding debt before it comes due.

      There are certain exceptions, or “carve-out,” features with respect to the incurrence of additional debt and early repayment of debt features in the indentures. We currently have the ability to incur $300,000 of secured non-recourse financing within restricted subsidiaries. Proceeds within the restricted subsidiaries could not be used to retire the Convertible Notes prior to their maturity but could be used to repay them at maturity. Additionally, we are permitted to invest five percent of consolidated net tangible assets in an unrestricted subsidiary. We would then be able to leverage the properties contributed to the unrestricted subsidiary and could use any proceeds from new financings to retire the Convertible Notes prior to their maturity. We also have a general carve-out to incur $50,000 of any type of additional debt within a restricted subsidiary.

     Credit facility. On October 29, 2002, we entered into a new three-year $100,000 senior revolving credit facility, secured by the equity interest in most of our subsidiaries. The initial interest rate is LIBOR plus 388 basis points. We terminated our previous credit facility with this new revolving credit facility and wrote off $1,615 of deferred financing costs related to this termination. As of March 31, 2003, there were no outstanding borrowings on the new facility.

      This facility contains customary compliance measures we must meet in order to borrow on the facility, which became more stringent on a quarterly basis beginning in the first quarter of 2003. The sale of two hotels during the fourth quarter of 2002 and one in January 2003, as well as the settlement of our note receivable with Interstate Hotels, impacted our leverage covenant due to the loss of trailing 12-month EBITDA (as defined in the credit agreement) on a pro forma basis. We have obtained a waiver of compliance with this leverage covenant from our lending group through May 20, 2003. We currently intend to request an extension of the waiver for a 90-day period. Because we do not anticipate needing to draw under the bank line or having borrowing capacity to do so in the near term, we expect to significantly reduce or terminate the facility. We have approximately $1,400 of unamortized capitalized financing costs related to this facility as of March 31, 2003. These costs, or a significant portion thereof, would be written off if we decide to terminate or significantly reduce the facility.

     Secured facility.We completed a $330,000 10-year non-recourse financing secured by a portfolio of 19 hotels in 1999. The loan bears a fixed interest rate of 8.01% and matures in 2009. The secured facility contains standard provisions that require the servicer to maintain in escrow cash balances for certain items such as property taxes and funding of capital expenditures. In addition, the facility contains a provision that requires our mortgage servicer to retain in escrow the excess cash from the encumbered hotels after payment of debt service (“Excess Cash”), if net hotel operating income after payment of FF&E reserves and franchise fees (“NOI”) for the trailing twelve months declines below $57,000. This provision was triggered in October 2002 and will be effective until the hotels generate the minimum cash flow required for two consecutive quarters, at which time the cash being held in escrow will be released to us. Approximately $8,800 of cash was held in escrow under this provision as of March 31, 2003. Additional amounts continue to be held in escrow. The security agreement permits us to substitute unleveraged properties into the portfolio in place of existing properties in order to increase the NOI to a level at which the portfolio will meet this requirement. We have begun discussions with the servicer regarding this substitution. We are also in the process of negotiating the release of up to $5,000 of cash held in escrow for funding of capital expenditures on the 19 encumbered properties.

     Derivatives.We have exposure going forward as the change in fair value of our non-hedging derivatives will have an impact on our operations. As of March 31, 2003, we had two non-hedged swap agreements with notional principal amounts totaling $200,000. These swap agreements are currently being marked to market through our statement of operations. During the three months ended March 31, 2003 and 2002, we recognized

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$2,055 and $2,887, respectively, of income related to the decrease in fair value of these interest rate swaps. For the three months ended March 31, 2003 and 2002, we made cash payments on these swaps of $2,105 and $2,876, respectively. The change in fair value and the swap payments are netted together on our statement of operations and included in net interest expense. The fair value of these swap agreements was a liability of $1,922 at March 31, 2003, and is included in other liabilities in the accompanying consolidated balance sheets.

      On April 14, 2003, one swap agreement with a notional principal amount of $100,000 expired with no significant impact on our results of operations or financial condition. The remaining swap with a notional principal amount of $100,000 expires in July 2003. As of March 31, 2003, the fair value of the liability related to this swap was $1,456. At that time, the 30-day LIBOR was 1.03%. If LIBOR remains at that rate through the expiration of the swap in July 2003, we would make additional cash payments of approximately $1,200. If LIBOR increases or decreases by 50 basis points during this same period, our payments would decrease or increase by approximately $100.

7.          Stockholders’ Equity and Minority Interests

     Common Stock Transactions.We issued 50,000 shares of common stock to an employee in connection with the formal separation of management functions with Interstate Hotels during the three months ended March 31, 2003. POPs totaling 50,000 were also relinquished in connection with the separation.

     OP Units. Substantially all of our assets are held indirectly by and operated through MeriStar Hospitality Operating Partnership, L.P., our subsidiary operating partnership (Commission file number 333-63768). Our operating partnership’s partnership agreement provides for five classes of partnership interests: Common OP Units, Class B OP Units, Class C OP Units, Class D OP Units and Profits-Only OP Units (POPs).

      Common OP Unit holders converted 787,000 of their OP Units, with a value of $18,109, into common stock during the three months ended March 31, 2003. There were no conversions for cash during the quarter.

8.          Earnings Per Share

      The following table presents the computation of basic and diluted earnings per share:

		Three Months Ended
		March 31,
		2003			2002
Basic and Diluted Earnings Per Share Computation:
	Net loss from continuing operations	$	(69,746	)	$	(10,784	)
	Dividends declared on unvested restricted stock		—			(2	)
	Loss available to common stockholders	$	(69,746	)	$	(10,786	)
	Weighted average number of basic and diluted shares of common stock outstanding		45,548			44,553
	Basic and diluted loss per share from continuing operations	$	(1.53	)	$	(0.24	)

      For the three months ended March 31, 2003 and 2002, 10,572 and 9,267 securities, respectively, were excluded from the calculation of diluted earnings per share as the effect of their inclusion would be anti-dilutive.

9.          Commitments and Contingencies

     Litigation.In the course of our normal business activities, various lawsuits, claims and proceedings have been or may be instituted or asserted against us. Based on currently available facts, we believe that the disposition of matters that are pending or asserted will not have a material adverse effect on our financial position, results of operations or liquidity.

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     Minimum Lease Payments.We lease the land at certain of our hotels under long-term arrangements from third parties. Certain leases contain contingent rent features based on gross revenues at the respective property. Future minimum lease payments required under these operating leases as of March 31, 2003 were as follows:

2003 (nine months)	$	1,078
2004		1,437
2005		1,440
2006		1,427
2007		1,427
Thereafter		56,368
	$	63,177

      Our obligations under other operating lease commitments, primarily for equipment, are not significant.

      We lease certain office, retail and parking space to outside parties under non-cancelable operating leases with initial or remaining terms in excess of one year. Future minimum rental receipts under these leases as of March 31, 2003 were as follows:

2003 (nine months)	$	3,523
2004		4,428
2005		2,896
2006		2,027
2007		1,456
Thereafter		1,929
	$	16,259

10.          Dispositions

      We sold five hotels during 2002. In January 2003, we sold one hotel classified as held for sale at December 31, 2002. Operating results for these six hotels have been reclassified as discontinued operations for the three months ended March 31, 2002. Revenue of $7,305 and pre-tax income of $865 is included in discontinued operations for 2002 related to these six hotels. Results of operations for the three months ended March 31, 2003 for the one hotel sold in January were insignificant and were therefore included in continuing operations. In April 2003, we completed the sale of another hotel for approximately $3,100.

11.          Consolidating Financial Statements

      We and certain subsidiaries of MeriStar Hospitality Operating Partnership, L.P. (MHOP), our subsidiary operating partnership, are guarantors of senior unsecured notes issued by MHOP. MHOP and certain of its subsidiaries are guarantors of our unsecured subordinated notes. We own a one percent general partner interest in MHOP, and MeriStar LP, Inc., our wholly-owned subsidiary, owns approximately a 90 percent limited partner interest in MHOP. All guarantees are full and unconditional, and joint and several. Exhibit 99.1 to this Quarterly Report on Form 10-Q presents supplementary consolidating financial statements for MHOP, including each of the guarantor subsidiaries. This exhibit presents MHOP’s consolidating balance sheets as of March 31, 2003 and December 31, 2002, consolidating statements of operations for the three months ended March 31, 2003 and 2002, and consolidating statements of cash flows for the three months ended March 31, 2003 and 2002.

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