Meristar Hospitality Operating Partnership 10-Q 2004 Q1 Quarterly report

Exhibit 13

PART I.          FINANCIAL INFORMATION

ITEM 1.          FINANCIAL STATEMENTS

MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED BALANCE SHEETS

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

			March 31,
			2004			December 31,
			(Unaudited)			2003
ASSETS
Property and equipment			$	2,437,395		$	2,481,752
Accumulated depreciation				(465,360	)		(446,032	)
				1,972,035			2,035,720
Assets held for sale				39,274			51,169
Investment in affiliate				15,000			15,000
Prepaid expenses and other assets				41,007			47,934
Accounts receivable, net of allowance for doubtful accounts of $2,751 and $2,040				69,076			64,709
Restricted cash				44,656			42,523
Cash and cash equivalents — unrestricted				194,977			230,884
			$	2,376,025		$	2,487,939
LIABILITIES AND STOCKHOLDERS’ EQUITY
Long-term debt			$	1,527,278		$	1,638,028
Accounts payable and accrued expenses				91,835			83,458
Accrued interest				37,449			46,813
Due to Interstate Hotels & Resorts				17,133			16,411
Other liabilities				12,213			11,831
Total liabilities				1,685,908			1,796,541
Minority interests				36,477			37,785
Stockholders’ equity:
	Common stock, par value $0.01 per share
		Authorized — 100,000 shares
		Issued — 75,446 and 69,135 shares		754			691
	Additional paid-in capital			1,379,430			1,338,959
	Accumulated deficit			(682,339	)		(642,094	)
	Accumulated other comprehensive loss			(1,239	)		(977	)
	Common stock held in treasury — 2,345 shares			(42,966	)		(42,966	)
Total stockholders’ equity				653,640			653,613
			$	2,376,025		$	2,487,939

See accompanying notes to the unaudited consolidated financial statements.

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MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

(Dollars in thousands, except per share amounts)

				Three Months
				Ended March 31,
				2004			2003
Revenue:
	Hotel operations:
		Rooms		$	135,666		$	131,567
		Food and beverage			51,879			52,176
		Other hotel operations			17,043			16,647
	Office rental, parking and other revenue				2,970			3,263
Total revenue					207,558			203,653
Hotel operating expenses:
		Rooms			33,224			31,209
		Food and beverage			38,881			37,566
		Other hotel operating expenses			10,363			9,505
Office rental, parking and other expenses					585			630
Other operating expenses:
		General and administrative			38,021			34,681
		Property operating costs			31,488			29,505
		Depreciation and amortization			26,218			24,169
		Property taxes, insurance and other			17,061			17,193
		Loss on asset impairments			1,238			—
Operating expenses					197,079			184,458
Operating income					10,479			19,195
Minority interest					946			3,677
Interest expense, net					(34,380	)		(34,718	)
Loss on early extinguishments of debt					(5,923	)		—
Loss before income taxes and discontinued operations					(28,878	)		(11,846	)
Income tax benefit					433			175
Loss from continuing operations					(28,445	)		(11,671	)
Discontinued operations:
	Loss from discontinued operations before income tax benefit				(11,980	)		(58,096	)
	Income tax benefit				180			21
Loss from discontinued operations					(11,800	)		(58,075	)
Net loss				$	(40,245	)	$	(69,746	)
Basic and diluted loss per share:
	Loss from continuing operations			$	(0.42	)	$	(0.26	)
	Loss from discontinued operations				(0.17	)		(1.27	)
			Net loss per basic and diluted share	$	(0.59	)	$	(1.53	)

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,
				2004			2003
Operating activities:
	Net loss			$	(40,245	)	$	(69,746	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			27,160			28,994
		Loss on asset impairments			5,011			56,677
		Loss on sale of assets, before tax effect			6,946			—
		Loss on early extinguishments of debt			5,923			—
		Minority interests			(946	)		(3,677	)
		Amortization of unearned stock-based compensation			587			976
		Change in value of interest rate swaps			—			(2,055	)
		Deferred income taxes			(487	)		(931	)
		Changes in operating assets and liabilities:
			Accounts receivable		(4,367	)		(12,937	)
			Prepaid expenses and other assets		4,920			1,416
			Due from/to Interstate Hotels & Resorts		(5,461	)		93
			Accounts payable, accrued expenses, accrued interest and other liabilities		(1,677	)		(9,039	)
Net cash used in operating activities					(2,636	)		(10,229	)
Investing activities:
	Capital expenditures for property and equipment				(23,737	)		(8,622	)
	Proceeds from sales of assets				74,075			12,650
	Payments from Interstate Hotels & Resorts				—			42,052
	Increase in restricted cash				(2,133	)		(1,656	)
	Costs associated with disposition program and other, net				(3,304	)		(299	)
Net cash provided by investing activities					44,901			44,125
Financing activities:
	Prepayments on long-term debt				(75,497	)		—
	Scheduled payments on long-term debt				(2,307	)		(1,889	)
	Distributions to minority investors				(141	)		(141	)
	Other				(77	)		—
Net cash used in financing activities					(78,022	)		(2,030	)
Effect of exchange rate changes on cash and cash equivalents					(150	)		(274	)
Net (decrease) increase in cash and cash equivalents					(35,907	)		31,592
Cash and cash equivalents, beginning of period					230,884			33,896
Cash and cash equivalents, end of period				$	194,977		$	65,488
Supplemental Cash Flow Information
Cash paid for interest and income taxes:
	Interest, net of capitalized interest			$	43,755		$	46,989
	Income taxes			$	275		$	207
Non-cash investing and financing activities:
	Senior subordinated debt redeemed in exchange for common stock			$	38,000		$	—
	Redemption of OP units			$	20		$	18,109

See accompanying notes to the unaudited consolidated financial statements.

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MERISTAR HOSPITALITY CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004

1.          Organization

     MeriStar Hospitality Corporation is a real estate investment trust, or REIT. We own a portfolio of primarily upper upscale, full-service hotels and resorts in the United States and one in Canada. Our portfolio is diversified geographically as well as by franchise and brand affiliations. As of March 31, 2004, we owned 81 hotels with 22,236 rooms, all of which were leased by our taxable subsidiaries and managed by Interstate Hotels & Resorts, Inc. (“Interstate Hotels”). Of our 81 hotels at March 31, 2004, eight were included in our non-core disposition program. Two of these assets with 371 rooms were sold during the second quarter of 2004.

     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 for each property to a subsidiary of Interstate Hotels. The taxable subsidiaries in turn make rental payments to our subsidiary operating partnership 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 an additional 1.5% of total hotel revenue. The agreements generally have initial terms 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, 2003.

     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.Our consolidated financial statements include the accounts of all wholly-owned and majority-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

     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.

     Cash and Cash Equivalents.We classify investments with original maturities of three months or less as cash equivalents. Our cash equivalents include investments in debt securities, including commercial paper, overnight repurchase agreements and money market funds.

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

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which require 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 to be recorded as discontinued operations. Any gains or losses on final disposition are also included in 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.

     Accounting for Costs Associated with Exit or Disposal Activities.We apply the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which require 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. Our strategy includes the disposition of certain hotel assets, all of which are managed under agreements that typically require payments to Interstate Hotels as a result of termination. 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. For further discussion of potential termination obligations, see “Asset Dispositions” included in Item 2 of this Quarterly Report on Form 10-Q.

     Stock-Based Compensation.We adopted the recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended 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 after. 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 stock options at fair market value, no compensation cost has been recognized. For our other equity-based compensation awards, we recognize compensation expense over the vesting period based on the fair market value of the award at the date of grant.

     Had compensation cost been determined based on fair value at the grant date for awards granted prior to our adoption of the fair value method, our net loss and per share amounts would have been adjusted to the pro forma amounts indicated as follows (in thousands, except per share amounts):

		Three Months Ended
		March 31,
		2004			2003
Net loss, as reported		$	(40,245	)	$	(69,746	)
	Add: Stock-based employee compensation expense included in reported net loss, net of related tax effect		587			929
	Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effect		(651	)		(1,081	)
Net loss, pro forma		$	(40,309	)	$	(69,898	)
Loss per share:
	Basic and diluted, as reported	$	(0.59	)	$	(1.53	)
	Basic and diluted, pro forma	$	(0.59	)	$	(1.53	)

     These pro forma compensation costs may not be representative of the actual effects on reported net loss and loss per share in future periods.

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     Derivative Instruments and Hedging Activities.Our interest rate risk management objective is to limit the effect of interest rate changes on earnings and cash flows. We look to manage interest rates through the use of a combination of fixed and variable rate debt. We only enter into derivative or interest rate transactions for hedging purposes. We recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income based on the derivative’s effectiveness and whether the derivative has been designated as a cash flow or fair value hedge.

3.          Comprehensive Loss

     Comprehensive loss was $40.5 million and $68.7 million for the three months ended March 31, 2004 and 2003, respectively. Comprehensive loss consisted of net loss ($40.2 million and $69.7 million for the three months ended March 31, 2004 and 2003, respectively) and foreign currency translation adjustments.

4.          Property and Equipment

     Property and equipment consisted of the following (in thousands):

	March 31,		December 31,
	2004		2003
Land	$	233,272	$	238,772
Buildings and improvements		1,873,018		1,930,155
Furniture, fixtures and equipment		280,150		284,602
Construction-in-progress		50,955		28,223
	$	2,437,395	$	2,481,752

     For the three months ended March 31, 2004 and 2003, we capitalized interest of $0.75 million and $0.78 million, respectively.

     During the first quarter of 2004, we recognized an additional impairment loss of $5.0 million, of which $3.8 million is recorded in discontinued operations (see Note 11). As of March 31, 2004, we had eight hotels remaining in our disposition program, five of which are classified as held for sale (see Note 5).

     The impairment charges are based on our estimates of the fair value of the properties we are actively marketing. 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. In nearly all cases, our estimates have reflected the results of an extensive marketing effort and negotiations with prospective buyers. Actual results could differ materially from these estimates.

5.          Assets Held for Sale

     At December 31, 2003, seven assets were classified as held for sale. Six of these assets were sold during the first quarter of 2004. At March 31, 2004, five of the eight properties remaining in our non-core disposition program met our criteria for classification as held for sale. The three other assets included in our asset

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disposition program did not meet the probability criteria as prescribed by SFAS No. 144 to classify them as held for sale. Assets held for sale consisted of the following (in thousands):

	March 31,			December 31,
	2004			2003
Land	$	3,138		$	5,061
Buildings and improvements		34,822			43,391
Furniture, fixtures and equipment		1,364			2,759
Construction-in-progress		253			1,114
		39,577			52,325
Accumulated depreciation		(303	)		(1,156	)
	$	39,274		$	51,169

6.          Investment in Affiliate

     In 1999, we invested $40 million in MeriStar Investment Partners, L.P. (“MIP”), a joint venture established to acquire upscale, full-service hotels. Our cost-basis investment is in the form of a partnership interest, in which we earn a 16% cumulative preferred return with outstanding balances compounded quarterly. While the return on this investment is preferred and cumulative, the underlying investment ranks equally with the investments of the other investors in MIP. We recognize the return quarterly as it becomes due to us. For the three months ended March 31, 2004 and 2003, we recognized a preferred return of $1.6 million and $2.0 million, respectively, from this investment. As of March 31, 2004 and December 31, 2003, cumulative preferred returns of $22.0 million and $19.6 million, respectively, were due from MIP. We have reserved a portion of this balance and have included the net $19.8 million and $18.2 million in accounts receivable on the accompanying consolidated balance sheets as of March 31, 2004 and December 31, 2003, respectively. We expect that any cumulative unpaid preferred returns will be paid in the future from excess cash flow above our current return and from potential partnership hotel disposition proceeds in excess of debt allocated to individual assets. Given the current economic environment, we do not expect MIP’s operations to provide adequate cash flow in the near term for significant payment of our current returns or repayments of our cumulative unpaid preferred returns, however we expect to receive payments from MIP during 2004 resulting from planned dispositions of certain assets combined with cash flow improvements on other assets. We evaluate the collectibility of our preferred return based on our preference to distributions and the underlying value of the hotel properties.

     While we believe that our current and cumulative returns continue to be fully collectible, the current value of our underlying investment declined due to the decline in MIP’s cash flow, particularly driven by results in four of its hotel markets. While we believe that the cash flow, and thus the value of our investment in MIP, will be recoverable over time, we expect that any such recovery will take a number of years to achieve. The accounting rules for cost basis investments require that declines in value that are other than temporary be recognized currently. Since the decline in the value of our underlying investment in MIP was other than temporary, we recognized a $25.0 million impairment loss on this investment during the fourth quarter of 2003.

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7.          Long-Term Debt

     Long-term debt consisted of the following (in thousands):

	March 31,			December 31,
	2004			2003
Senior unsecured notes due 2011 — 9.125%	$	364,665		$	400,000
Senior unsecured notes due 2008 — 9.0%		282,000			300,000
Senior unsecured notes due 2009 — 10.5%		231,787			250,000
Secured facility, due 2009		307,566			309,035
Secured facility, due 2013		100,397			100,765
Convertible subordinated notes		173,705			173,705
Senior subordinated notes		45,438			83,438
Mortgage debt		26,546			27,011
Unamortized issue discount		(4,826	)		(5,926	)
	$	1,527,278		$	1,638,028

     Aggregate future maturities as of March 31, 2004 were as follows (in thousands):

2004 (nine months)	$	10,862
2005		10,269
2006		11,125
2007		57,093
2008		292,315
Thereafter		1,145,614
	$	1,527,278

     As of March 31, 2004, all of our debt bore fixed rates of interest. Our overall weighted average interest rate was 8.9%. Based on market prices at March 31, 2004, the fair value of our long-term debt was $1.63 billion. On April 2, 2004, we entered into an interest rate swap on our secured facility due 2009, effectively converting the interest the facility bears from a fixed rate to a floating rate. The new floating rate is LIBOR plus 444 basis points. Our overall weighted average interest rate is currently 8.5% after giving effect to the interest rate swap.

     Credit facility.On December 23, 2003, we entered into a new three-year $50 million senior credit facility, secured by six of our hotels, and terminated our previous credit facility. The facility carries an annual interest rate of the London Interbank Offered Rate, or LIBOR, plus 450 basis points. As of March 31, 2004, we had no outstanding borrowings under this facility.

     The facility contains financial and other restrictive covenants. Our ability to borrow under this facility is subject to financial covenants, including leverage, fixed charge coverage and interest coverage ratios and minimum net worth requirements. Our compliance with these covenants in future periods will depend substantially upon the financial results of our hotels. The agreement governing our new senior credit facility limits our ability to effect mergers, asset sales and change of control events and limits the payments of dividends other than those required for us to maintain our status as a REIT and our ability to incur additional secured and total indebtedness.

     Senior unsecured notes.During the three months ended March 31, 2004, we repurchased from available cash approximately $71.5 million of our senior unsecured notes, including approximately $18.0 million of the 9.0% notes due 2008, approximately $35.3 million of the 9.125% notes due 2011 and approximately $18.2 million of the 10.5% notes due 2009. We recorded a loss on early extinguishment of debt of $4.6 million and wrote off deferred financing costs of $0.8 million related to these repurchases. The write-off of deferred financing costs is included in depreciation and amortization expense on the accompanying consolidated

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statements of operations. As of May 5, 2004, we had purchased an additional $7.6 million of our 10.5% notes due 2009, $1.5 million of our 9% notes due 2008, and $4.5 million of our 9.125% notes due 2011.

     These 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 covenants, limiting our ability to initiate or transact certain business activities if specific financial thresholds are not achieved. One of those thresholds is having a 2 to 1 fixed charge coverage ratio (as defined in the indentures, fixed charges only include interest on debt obligations and preferred equity) in order to enter into certain types of transactions. As of March 31, 2004, our fixed charge coverage ratio was significantly below 2 to 1, and therefore we were not permitted generally to enter into certain transactions, including the repurchase of our stock, the issuance of any preferred stock, the payment of dividends, the incurrence of any additional debt, or the repayment of outstanding debt before it comes due, except as noted below.

     There are certain exceptions with respect to the incurrence of additional debt and early repayment of debt features in the indentures. We have the ability to incur up to $250 million of secured financing within restricted subsidiaries, subject to meeting other maintenance tests under the indentures. We also have a general carve-out to incur $50 million of unspecified borrowings within a restricted subsidiary. Additionally, we are permitted to repay subordinated debt prior to its maturity from the proceeds of an equal or junior financing with a longer term than the debt refinanced, an equity offering, or a financing within an unrestricted subsidiary.

     Secured facilities.On September 26, 2003, as permitted by the indentures governing our senior unsecured notes and senior subordinated notes, we completed a $101 million commercial mortgage-backed securities financing, secured by a portfolio of four hotels. The loan carries a fixed annual interest rate of 6.88% and matures in 2013. The proceeds will be used to repay debt carrying higher interest rates, or to fund capital expenditures or acquisitions to the extent that higher interest rate debt cannot be acquired at attractive prices.

     We completed a $330 million non-recourse financing secured by a portfolio of 19 hotels in 1999. The loan bears a fixed annual 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 insurance. 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 (“NOI”) for the trailing twelve months declines below $57 million. 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 $32.4 million and $27.2 million of cash was held in escrow under this provision as of March 31, 2004 and December 31, 2003, respectively. In July 2003, we signed an amendment to the loan agreement that permits the release of cash placed in escrow for all capital expenditures incurred on the 19 encumbered properties on or after April 1, 2003. Although the servicer will continue to retain in escrow any excess cash from the encumbered hotels, they will release cash for all capital expenditures we have incurred from April 1, 2003 through the date of the amendment and future capital expenditures we incur on the 19 properties. Escrowed funds totaling approximately $23.6 million were available to fund capital expenditures under this provision as of March 31, 2004.

     Convertible subordinated notes.On July 1, 2003, we completed an offering of $170 million aggregate principal amount of 9.5% convertible subordinated notes due 2010. These notes are convertible into our common stock at any time prior to or at maturity, April 1, 2010, at a conversion price of $10.18 per share (equal to a conversion rate of 98.2318 shares per $1,000 principal amount of notes).

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     The proceeds from the new issuance were used to repurchase $150.6 million of our $154.3 million 4.75% convertible notes due 2004, at varying prices, resulting in an aggregate discount of approximately $1.4 million. These convertible notes are convertible into our common stock at a rate of 23.2558 shares per $1,000 in principal amount, which equals approximately $43.00 per share.

     Senior subordinated notes.The senior subordinated notes are unsecured obligations due in 2007 and provide for semi-annual payments of interest each February 15 and August 15 at an annual rate of 8.75%. The related indenture contains various restrictive covenants, which are similar to those in our senior unsecured notes.

     During the three months ended March 31, 2004, we acquired $38.0 million of our senior subordinated notes through the issuance of 6,304,146 shares of common stock. We recorded a loss on early extinguishment of debt of $1.3 million and wrote off deferred financing costs of $0.4 million related to this activity. The write off of deferred financing costs is included in depreciation and amortization expense on the accompanying consolidated statements of operations. In April 2004, we exchanged an additional $11.2 million aggregate principal amount of our senior subordinated notes for 1,834,582 shares of our common stock.

     Derivatives.During the three months ended March 31, 2003, we recognized $2.1 million of income related to the decrease in fair value of the liability recorded for the interest rate swaps in place in that time period. For the three months ended March 31, 2003, we made cash payments on those swaps of $2.1 million. The change in fair value and the swap payments are netted together on our statement of operations. These swaps expired during the fourth quarter of 2003.

8.          Stockholders’ Equity and Minority Interests

     Common Stock Transactions.During the three months ended March 31, 2004, we issued 6,304,146 shares of common stock in exchange for $38.0 million of our senior subordinated notes (see Note 7).

     During the three months ended March 31, 2004, we issued 3,339 shares of common stock with a value of $0.02 million, related to shares issued under our employee stock purchase plan.

     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 POPs.

     Common OP Unit holders converted 3,686 and 787,177 of their OP Units, with a value of $0.02 million and $18.1 million, respectively, into common stock during the three months ended March 31, 2004 and 2003, respectively. A POPs unit holder converted 15,000 POPs for cash during the three months ended March 31, 2004.

     On April 9, 2004, in accordance with the terms of the certificate of designation for the outstanding Class D OP Units of our operating partnership we redeemed all outstanding Class D OP Units plus accrued and unpaid preferential distributions on those units, for an aggregate consideration of approximately $8.8 million. The Class D OP Units had become redeemable at the option of the holder on April 1, 2004.

     On April 23, 2004, we announced an agreement with an underwriter to issue and sell 12.0 million shares of common stock at a price to the public of $6.25 per share pursuant to our effective shelf registration statement filed under the Securities Act of 1933. In addition, the underwriter was granted an over-allotment option to purchase up to an additional 1.8 million shares which expires on May 23, 2004. The offering closed on April 28, 2004 with net proceeds of $72.5 million. If the over-allotment were to be exercised in full by the underwriter an additional $10.9 million would be realized.

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9.          Loss Per Share

     The following table presents the computation of basic and diluted loss per share (in thousands, except per share amounts):

		Three Months Ended
		March 31,
		2004			2003
Basic and Diluted Loss Per Share:
	Loss from continuing operations	$	(28,445	)	$	(11,671	)
	Weighted average number of basic and diluted shares of common stock outstanding		68,640			45,548
	Basic and diluted loss per share from continuing operations	$	(0.42	)	$	(0.26	)

     For the quarter ended March 31, 2004 and 2003, 20,916,868 and 10,572,450 shares, respectively, consisting of shares issuable upon conversion, exchange or exercise of stock options, operating partnership units of MeriStar Hospitality Operating Partnership, L.P., and shares from our outstanding convertible notes, were excluded from the calculation of diluted loss per share as their inclusion would be anti-dilutive.

10.          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.

     Minimum Lease Payments.We lease the land at certain of our hotels and office space of our corporate headquarters 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, 2004 were as follows (in thousands):

2004 (nine months)	$	1,338
2005		1,746
2006		1,649
2007		1,672
2008		1,672
Thereafter		52,296
	$	60,373

     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, 2004 were as follows (in thousands):

2004 ( nine months)	$	3,207
2005		2,838
2006		1,943
2007		1,677
2008		992
Thereafter		1,909
	$	12,566

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     We may be obligated to pay Interstate Hotels termination fees of up to a maximum of approximately $11.1 million with respect to the 28 properties we have sold since January 1, 2003. In addition, as we dispose of the six remaining assets in our disposition program, we may incur termination obligations due to Interstate Hotels of up to a maximum of approximately $4.3 million, assuming the disposition of all six of the properties in 2004 and assuming buyers of our hotel properties elect to have the properties managed by parties other than Interstate Hotels or do not assume the obligation as part of the disposition transaction. Any obligation due under the termination provisions of the contract is payable over a period of 30 months after termination. Termination fees payable to Interstate Hotels may be reduced by amounts paid under replacement management contracts. Negotiations with Interstate Hotels are ongoing with respect to our hotel management agreements, including the method of calculation for the incentive fee and termination fees.

11.          Acquisitions and Dispositions

     As part of our asset acquisition strategy, in April 2004, we announced that we had signed a definitive agreement to acquire the four-star, four-diamond rated Ritz-Carlton, Pentagon City in Arlington, Virginia for $93 million. The 366-room luxury hotel will be operated by The Ritz-Carlton Hotel Company. The transaction is expected to close during the second quarter of 2004, subject to customary closing conditions.

     Since January 1, 2003 and as of March 31, 2004, we have sold 26 hotels with 5,345 rooms for total gross proceeds of $202.2 million. Of these 26 hotels, 15 hotels were sold in 2003, and 11 hotels were sold in the first quarter of 2004. As of March 31, 2004, we had eight hotels remaining in our non-core disposition program. Five of these hotels met our criteria for held-for-sale classification as of March 31, 2004 (see Note 5). Operating results for the sold hotels, and where applicable, the gain or loss on final disposition, and the five classified as held-for-sale are included in discontinued operations. Two of the eight hotels in our disposition program have been sold in the second quarter of 2004 for approximately $18 million.

     Summary financial information included in discontinued operations for these hotels were as follows (in thousands):

	Three Months
	Ended March 31,
	2004			2003
Revenue	$	12,222		$	39,513
Loss on asset impairments		(3,773	)		(56,677	)
Pretax loss from operations		(1,261	)		(1,419	)
Loss on disposal		(6,946	)		—

     Loss on disposal resulted primarily from the recognition of termination fees payable to Interstate Hotels with respect to these hotels’ management contracts.

12.          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 senior subordinated notes. We own a one percent general partner interest in MHOP, and MeriStar LP, Inc., our wholly-owned subsidiary, owns approximately a 93 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, 2004 and December 31, 2003, consolidating statements of operations for the three months ended March 31, 2004 and 2003, and consolidating statements of cash flows for the three months ended March 31, 2004 and 2003.

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