exv13

MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(Dollars and units in thousands)

MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003

MeriStar Hospitality Operating Partnership, L.P. is the subsidiary operating partnership of MeriStar Hospitality Corporation (“MeriStar Hospitality,” which 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 as well as by franchise and brand affiliations. As of September 30, 2003, we owned 101 hotels, with 26,290 rooms, all of which were leased by our taxable subsidiaries and managed by Interstate Hotels & Resorts, Inc. (“Interstate Hotels”). In October 2003, we sold one hotel with 71 rooms.

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 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 an additional 1.5% of total hotel revenue. All of the agreements expire in 2010 and have three renewal periods of five years each at the option of Interstate Hotels, subject to some exceptions.

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, 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. In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.” 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. The interpretation applied immediately to variable interest entities created after January 31, 2003. The initial application of the interpretation did not affect our results of operations or financial condition as we have not obtained an interest in any qualifying entity on or after January 31, 2003. On October 9, 2003, the FASB issued FIN 46-6 which deferred to December 31, 2003 the effective date for applying the interpretation to variable interest entities created before February 1, 2003. We do not expect the application of the second phase of the interpretation to have a material effect on our results of operations or financial condition.

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.

Marketable Securities. We classify investments in equity securities and debt securities with original maturities greater than three months as marketable securities. We record debt securities at amortized cost and equity securities at market value based on quoted market prices. As of September 30, 2003, our marketable securities consisted of investments in debt securities, including commercial paper and agency discount notes. As of September 30, 2003, the securities had a fair value of $1 million.

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 adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” on 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. Our strategy includes the disposition of certain hotel assets, all of which are managed under agreements that typically require payments to Interstate Hotels upon termination. As a result, 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 and infrequent transactions to be reclassified. See Note 6 for details on the early extinguishment of substantially all of our 4.75% notes payable to MeriStar Hospitality and a portion of our 8.75% notes payable to MeriStar Hospitality during the third quarter of 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 after. During the nine months ended September 30, 2003, we granted 207,500 stock options to employees which vest ratably over three years. Compensation costs related to these stock options were not material to our results of operations for the nine months ended September 30, 2003. 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 plans, 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 prescribed in SFAS No. 123, as amended by SFAS No. 148, our net loss and per unit amounts would have been adjusted to the pro forma amounts indicated as follows (dollars in thousands, except per unit amounts):

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 unit in future periods.

Accounting for Guarantees. 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, became effective on January 1, 2003. The interpretation requires recognition of liabilities at their fair value for newly-issued guarantees. We have no guarantees which require recognition under the provisions of this interpretation.

Derivative Instruments and Hedging Activities. SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” became effective on July 1, 2003. The statement clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying derivative, and amends certain other provisions. This statement applies to any freestanding financial derivative instruments entered into or modified after June 30, 2003. This standard did not affect our results of operations or financial condition as we have not entered into any freestanding financial derivative instruments since June 30, 2003.

Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both

Liabilities and Equity” in May 2003. The provisions of the statement require many instruments which were previously classified as equity to now be classified as a liability (or an asset in some circumstances), including: mandatorily redeemable instruments, instruments with repurchase obligations and instruments with obligations to issue a variable number of shares. The statement applied immediately to any such financial instrument entered into or modified after May 31, 2003, and to all other instruments on July 1, 2003. We have not entered into or modified any financial instruments within the scope of this standard subsequent to May 31, 2003, nor do we have any existing financial instruments that fall within the scope of SFAS No. 150.

Comprehensive loss was $50.5 million and $31.5 million for the three months ended September 30, 2003 and 2002, respectively. Comprehensive loss consisted of net loss of $51.0 million and $30.7 million for the three months ended September 30, 2003 and 2002, respectively, and foreign currency translation adjustments.

Comprehensive loss was $335.5 million and $36.9 million for the nine months ended September 30, 2003 and 2002, respectively. Comprehensive loss consisted of net loss of $340.9 million and $37.6 million for the nine months ended September 30, 2003 and 2002, respectively, foreign currency translation adjustments, and in 2002 a $0.5 million fair value gain adjustment for derivatives.

For the nine months ended September 30, 2003 and 2002, we capitalized interest of $2.4 million and $3.1 million, respectively.

In late 2002, due to the decision to market non-core assets as a part of our program to dispose of assets that do not fit our long-term strategy and changes in economic conditions, 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: secondary market locations, secondary brand affiliations, higher than average future capital expenditure requirements, limited future growth potential, 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 disposition program to include a total of 16 non-core assets and recognized an impairment loss of $56.7 million as a result of the change in our expected holding period for these assets.

During the second quarter of 2003, we made the determination to dispose of an additional 19 non-core assets, for a total of 35 non-core assets included in our disposition program. Also during the second quarter, due to the market interest in certain of our other hotel assets, we decided to add an additional six assets to our disposition program. Due to this change in our expected holding period for these assets, we recognized an additional impairment loss of $208 million related to the contemplated disposition of these 41 assets during the second quarter of 2003.

During the third quarter of 2003, we made the determination to dispose of one additional asset and retain one of our assets previously included in our disposition program. We also changed our expected holding period

for another asset and revised our estimated sales prices on certain other assets included in our disposition program. As a result, we recognized an additional impairment loss of $21 million during the three months ended September 30, 2003. Including one asset sale in October, we have sold seven hotels included in our asset disposition program since January 1, 2003.

The impairment charges are based on our estimates of the fair value of the properties to be disposed 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. 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.

As of September 30, 2003, our property and equipment included $8.6 million for one asset (sold in October 2003 for a gain of approximately $7 million), which met our criteria for held-for-sale classification. The remaining hotels included in our asset disposition program do not meet the probability criteria as prescribed by SFAS No. 144 to classify as held-for-sale.

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. We recognize the return quarterly as it becomes due to us. As of September 30, 2003, cumulative preferred returns of $16.6 million were due from MIP and included in accounts receivable on the accompanying consolidated balance sheet. 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. We evaluate the collectibility of our preferred return based on our preference to distributions and the underlying value of the hotel properties. Should the current economic environment continue and the performance of the MIP properties not improve, the value of our original investment may also decline.

Aggregate future maturities as of September 30, 2003 were as follows (dollars in thousands):

As of September 30, 2003, all of our debt bore fixed rates of interest. Our overall weighted average interest rate was 8.91%. Based on market prices at September 30, 2003, the fair value of our long-term debt was $1.81 billion.

Senior unsecured notes. These notes are unsecured obligations of certain subsidiaries of ours, and MeriStar Hospitality guarantees payment of principal and interest on the notes. These notes contain various restrictive incurrence covenants, limiting our ability to initiate or transact certain business activities 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 September 30, 2003, our fixed charge coverage ratio was 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 currently have the ability to incur $300 million of secured financing within restricted subsidiaries. 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 a pari passu or junior financing with a longer term than the debt refinanced, an equity offering, or a financing within an unrestricted subsidiary. We are also permitted to invest five percent of consolidated net tangible assets (as defined in the indentures) in unrestricted subsidiaries and mortgage the properties contributed to the unrestricted subsidiaries. We completed a qualifying transaction under this exception during the third quarter of 2003 through a new secured facility financing (see discussion below).

Secured facilities. On September 26, 2003, we completed a $101 million, 10-year, commercial mortgage-backed securities financing, secured by a portfolio of four hotels, as permitted by the indentures to our senior unsecured notes and MeriStar Hospitality’s senior subordinated notes. The loan carries a fixed annual interest rate of 6.88% and matures in 2013. We incurred approximately $0.9 million in debt issuance costs related to the facility. 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 $19.9 million of cash was held in escrow under this provision as of September 30, 2003. 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 $11 million were available to fund capital expenditures under this provision as of September 30, 2003.

Notes payable to MeriStar Hospitality. On July 1, 2003, MeriStar Hospitality completed an offering of $170 million aggregate principal amount of 9.5% convertible subordinated notes due 2010. The convertible notes are unsecured obligations and provide for semi-annual payments of interest each October 1 and April 1. In conjunction with this transaction, we borrowed $170 million from MeriStar Hospitality under terms matching those of the 9.5% convertible subordinated notes. We incurred approximately $6.5 million in debt issuance costs related to the borrowing.

The proceeds from the new borrowing were used to repay $150.6 million of our 4.75% notes payable to MeriStar Hospitality due 2004, at an aggregate discount of approximately $1.4 million. The remaining proceeds from the borrowing were used to repurchase $22.6 million principal amount of our 8.75% notes payable to MeriStar Hospitality due in 2007, at varying prices, resulting in an aggregate discount of approximately $1.5 million. We recognized these gains, totaling $2.9 million, during the third quarter of 2003.

Also during the third quarter, we redeemed $18 million of the 8.75% notes payable to MeriStar Hospitality in exchange for 2,792,880 common OP units, resulting in a gain of $1.7 million. In October 2003, we repaid $59.3 million of these notes, at varying prices. We expect to recognize a loss of approximately $0.5 million during the fourth quarter related to these repurchases. As of November 1, 2003, we had approximately $105 million of the 8.75% notes payable to MeriStar Hospitality outstanding.

Credit facility. In May 2003, we reduced our borrowing capacity on our senior credit facility from $100 million to $50 million and wrote off approximately $0.7 million in related deferred financing costs. As of September 30, 2003, we had no outstanding borrowings under this facility.

This facility contains customary financial compliance measures, 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, two in the first half of 2003, as well as the settlement of our note receivable with Interstate Hotels, negatively affected our leverage covenant due to the loss of trailing 12-month EBITDA (as defined in the credit agreement) on a pro forma basis. If we are not in compliance with the leverage covenant or any other financial covenants at the end of a quarterly measuring period, we will be in default under the credit facility and will not be permitted to borrow under the credit facility. We have obtained a waiver of compliance with this leverage covenant from our lending group, which was extended through November 19, 2003. 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 terminate the facility in late 2003. We have approximately $0.6 million of unamortized capitalized financing costs related to this facility as of September 30, 2003, which would be written off should we decide to terminate the facility.

Derivatives. We had three swap agreements that did not qualify for treatment as cash-flow hedges under SFAS No. 133 expire since September 30, 2002, one in December 2002, one in April 2003 and one in July 2003. As of September 30, 2003, we had no outstanding derivative instruments.

During the three and nine months ended September 30, 2003, we recognized $0.6 million and $4.0 million, respectively, of income related to the decrease in fair value of the liability recorded for the interest rate swap in place in those time periods. For the three and nine months ended September 30, 2003, we made cash payments on this swap of $0.6 million and $4.0 million, respectively. The change in fair value and the swap payments are netted together on our statement of operations, resulting in no effect on net income

During the three and nine months ended September 30, 2002, we recognized $1.9 million and $4.8 million, respectively, of income related to the decrease in fair value of the liability recorded for the interest rate swaps in place in those time periods. For the three and nine months ended September 30, 2002, we made cash payments on those swaps of $3 million and $9 million, respectively. The change in fair value and the swap payments are netted together on our statement of operations. During the nine months ended September 30, 2002, we also recognized a $4.7 million loss on the fair value of derivatives no longer classified as cash-flow hedges due to the repayment of the related hedged debt.

OP Units. Our 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).

On September 24, 2003, MeriStar Hospitality issued 12,000,000 shares of its common stock at a price of $7.20 per share ($82.9 million of net proceeds). In October 2003, MeriStar Hospitality issued an additional 1,800,000 shares at a price of $7.20 per share for $12.4 million of net proceeds. In connection with this issuance, MeriStar LP, Inc., a wholly-owned subsidiary of MeriStar Hospitality, contributed the net proceeds to us in exchange for the same number of Common OP Units, thereby increasing their limited partner interest from 90 percent to approximately 93 percent.

During the third quarter of 2003, we issued 2,792,880 Common OP Units in exchange for the redemption of $18 million of our 8.75% notes payable to MeriStar Hospitality (see Note 6). Also during 2003, MeriStar Hospitality issued 211,721 shares of restricted stock to employees pursuant to employment agreements, with an aggregate value of $0.7 million.

Redeemable OP Unit holders converted 883,000 and 400,000 of their OP Units, with a value of $20.1 million and $6.1 million, into MeriStar Hospitality’s common stock during the nine months ended September 30, 2003 and 2002 respectively. There were no material conversions for cash during the nine months ended September 30, 2003 and 2002.

POPs totaling 50,000 were relinquished in connection with the formal separation of management functions with Interstate Hotels during the first quarter of 2003. MeriStar Hospitality also issued 50,000 shares of its common stock to a former executive officer and director in connection with the separation.

In May 2002, we issued 162,500 POPs to an executive officer pursuant to an employment agreement. If all of the vesting criteria for the POPs were met, then each POP would have a value equivalent to the value of one share of MeriStar Hospitality’s common stock, which for this issuance totaled $2.9 million.

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

For the three months ended September 30, 2003 and 2002, 18,556,838 and 5,806,522 units, respectively, consisting of OP units issuable upon exercise, redemption or conversion of outstanding operating partnership units, MeriStar Hospitality’s stock options and its convertible notes, were excluded from the calculation of diluted loss per unit as the effect of their inclusion would be anti-dilutive. For the nine months ended

September 30, 2003 and 2002, 10,331,176 and 5,855,456 units, respectively, underlying these instruments were excluded from the calculation of diluted loss per unit as the effect of their inclusion would be anti-dilutive.

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 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 September 30, 2003 were as follows (dollars in thousands):

Our obligations under other operating lease commitments, primarily for equipment and office space, 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 September 30, 2003 were as follows (dollars in thousands):

We sold three hotels during the third quarter of 2002, two hotels in the fourth quarter of 2002, one in the first quarter of 2003, one in the second quarter of 2003, and four hotels in the third quarter of 2003. In October 2003, we sold one hotel that met our criteria for held-for-sale classification as of September 30, 2003 (see Note 4). Operating results for these hotels, and where applicable the gain or loss on final disposition, are included in discontinued operations.

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

The properties we intend to dispose of represent approximately one-third of our total properties. For the nine months ended September 30, 2003, the 35 disposition assets accounted for approximately 20% of our consolidated revenue and approximately 13% of consolidated operating income. For purposes of this calculation, we exclude depreciation and amortization and loss on asset impairments from operating income.

Certain of our subsidiaries and MeriStar Hospitality are guarantors of our senior unsecured notes. Certain of our subsidiaries are guarantors of MeriStar Hospitality’s senior subordinated notes. All guarantees are full and unconditional, and joint and several. Exhibit 99.1 to this Quarterly Report on Form 10-Q presents our supplementary consolidating financial statements, including each of our guarantor subsidiaries. This exhibit presents our consolidating balance sheets as of September 30, 2003 and December 31, 2002, consolidating statements of operations for the three and nine months ended September 30, 2003 and 2002, and consolidating statements of cash flows for the nine months ended September 30, 2003 and 2002. In connection with the $101 million secured financing completed at the end of September 30, 2003 (see Note 6), certain of our guarantor subsidiaries became non-guarantor subsidiaries.


	September 30,
	2003			December 31,
	(Unaudited)			2002

ASSETS
Property and equipment	$	2,577,640		$	3,020,909
Accumulated depreciation		(426,576	)		(460,972	)

		2,151,064			2,559,937
Restricted cash		38,403			20,365
Investment in affiliate		40,000			40,000
Note receivable from Interstate Hotels & Resorts		—			42,052
Prepaid expenses and other assets		42,437			40,911
Accounts receivable, net of allowance for doubtful accounts of $1,709 and $848		64,469			56,828
Marketable securities (Note 2)		1,000			—
Cash and cash equivalents (Note 2)		270,274			33,889

	$	2,607,647		$	2,793,982


LIABILITIES AND PARTNERS’ CAPITAL
Long-term debt	$	1,392,032		$	1,296,597
Notes payable to MeriStar Hospitality Corporation		337,093			357,505
Accounts payable and accrued expenses		100,324			104,677
Accrued interest		40,185			52,907
Due to Interstate Hotels & Resorts		5,969			10,500
Other liabilities		12,734			15,967

Total liabilities		1,888,337			1,838,153

Minority interests		2,565			2,624
Redeemable OP units at redemption value, 3,312 and 4,195 outstanding		33,535			38,205
Partners’ capital – Common OP Units, 61,119 and 45,231 issued and outstanding		683,210			915,000

	$	2,607,647		$	2,793,982



			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2003			2002			2003			2002

Revenue:




	Hotel operations:
		Rooms	$	146,057		$	147,548		$	455,590		$	474,540
		Food and beverage		53,660			54,089			181,230			181,174
		Other hotel operations		17,570			17,469			56,736			55,174
	Office rental, parking and other revenue			3,579			3,309			10,337			12,331

Total revenue				220,866			222,415			703,893			723,219

Hotel operating expenses:
		Rooms		40,360			38,259			116,040			114,197
		Food and beverage		43,268			41,998			134,257			131,551
		Other hotel operating expenses		11,080			10,424			34,119			31,621
Office rental, parking and other expenses				933			740			2,147			2,237




Other operating expenses:
		General and administrative		39,426			39,781			121,679			121,936
		Property operating costs		37,730			37,287			109,844			109,275
		Depreciation and amortization		26,032			28,256			82,849			87,316
		Loss on asset impairments		21,000			—			263,377			—
		Property taxes, insurance and other		17,816			15,478			57,292			50,268

Operating expenses				237,645			212,223			921,604			648,401

Operating (loss) income				(16,779	)		10,192			(217,711	)		74,818
Gain on early extinguishments of debt				4,574			—			4,574			—
Change in fair value of non-hedging derivatives, net of swap payments				—			(1,132	)		—			(4,211	)
Loss on fair value of non-hedging derivatives				—			—			—			(4,735	)
Minority interest income (expense)				—			18			(6	)		10
Interest expense, net				(36,404	)		(33,949	)		(106,017	)		(102,786	)

Loss from continuing operations before income taxes				(48,609	)		(24,871	)		(319,160	)		(36,904	)
Income tax benefit				305			591			462			748

Loss from continuing operations				(48,304	)		(24,280	)		(318,698	)		(36,156	)




Discontinued operations:
	Loss from discontinued operations before income tax (expense) benefit			(2,737	)		(6,591	)		(22,168	)		(1,410	)
	Income tax benefit (expense)			—			132			(32	)		6

Loss from discontinued operations				(2,737	)		(6,459	)		(22,200	)		(1,404	)

Net loss			$	(51,041	)	$	(30,739	)	$	(340,898	)	$	(37,560	)

	Preferred distributions			(141	)		(141	)		(424	)		(424	)

	Net loss applicable to common unitholders		$	(51,182	)	$	(30,880	)	$	(341,322	)	$	(37,984	)

	Net loss applicable to general partner unitholder		$	(48,261	)	$	(28,437	)	$	(319,974	)	$	(34,922	)

	Net loss applicable to limited partner unitholders		$	(2,921	)	$	(2,443	)	$	(21,348	)	$	(3,062	)


Loss per unit:




	Basic and Diluted:
		Loss from continuing operations	$	(0.96	)	$	(0.50	)	$	(6.44	)	$	(0.75	)
		Loss from discontinued operations		(0.05	)		(0.13	)		(0.45	)		(0.03	)

	Net loss per basic and diluted unit		$	(1.01	)	$	(0.63	)	$	(6.89	)	$	(0.78	)



				Nine Months Ended
				September 30,

				2003			2002

Operating activities:
	Net loss			$	(340,898	)	$	(37,560	)




	Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation and amortization			84,095			93,299
		Loss on asset impairments			285,677			—
		Loss on sale of assets, before tax effect			2,772			6,403
		Gain on early extinguishments of debt			(4,574	)		—
		Loss on fair value of non-hedging derivatives			—			4,735
		Minority interests			6			(10	)
		Amortization of unearned stock-based compensation			2,380			3,538
		Change in value of interest rate swaps			(3,977	)		(4,787	)
		Deferred income taxes			(1,848	)		(772	)




		Changes in operating assets and liabilities:
			Accounts receivable		(7,641	)		(5,613	)
			Prepaid expenses and other assets		2,763			(5,051	)
			Due from/to Interstate Hotels & Resorts		(4,531	)		5,762
			Accounts payable, accrued expenses, accrued interest and other liabilities		(19,503	)		(12,628	)

Net cash (used in) provided by operating activities					(5,279	)		47,316

Investing activities:
	Capital expenditures for property and equipment				(21,826	)		(35,824	)
	Proceeds from sales of assets				74,470			25,150
	Purchases of marketable securities				(18,040	)		—
	Sales of marketable securities				17,040			—
	Net payments from (advances to) Interstate Hotels & Resorts				42,052			(7,000	)
	(Increase) decrease in restricted cash				(18,038	)		4,861
	Other, net				(299	)		—

Net cash provided by (used in) investing activities					75,359			(12,813	)

Financing activities:
	Principal payments on long-term debt				(179,309	)		(313,618	)
	Proceeds from issuance of long-term debt				271,000			283,138
	Deferred financing fees				(7,513	)		(3,416	)
	Contributions from partners				82,920			3,156
	Distributions paid to partners				(424	)		(2,467	)
	Purchase of limited partnership unit				(65	)		—

Net cash provided by (used in) financing activities					166,609			(33,207	)
Effect of exchange rate changes on cash and cash equivalents					(304	)		(9	)

Net increase in cash and cash equivalents					236,385			1,287
Cash and cash equivalents, beginning of period					33,889			23,441

Cash and cash equivalents, end of period				$	270,274		$	24,728

Supplemental Cash Flow Information




Cash paid for interest and income taxes:
	Interest, net of capitalized interest			$	118,739		$	110,619

	Income taxes			$	1,920		$	726



		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

Net loss, as reported		$	(51,041	)	$	(30,739	)	$	(340,898	)	$	(37,560	)
	Add: Stock-based employee compensation expense included in reported net loss, net of related tax effect		768			1,255			2,353			3,452
	Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effect		(890	)		(1,478	)		(2,790	)		(4,182	)

Net loss, pro forma		$	(51,163	)	$	(30,962	)	$	(341,335	)	$	(38,290	)

Loss per unit:
	Basic and diluted, as reported	$	(1.01	)	$	(0.63	)	$	(6.89	)	$	(0.78	)
	Basic and diluted, pro forma	$	(1.01	)	$	(0.63	)	$	(6.89	)	$	(0.78	)


	September 30,		December 31,
	2003		2002

Land	$	251,933	$	288,611
Buildings and improvements		2,005,884		2,351,769
Furniture, fixtures and equipment		286,007		344,541
Construction-in-progress		33,816		35,988

	$	2,577,640	$	3,020,909


2003 (three months)	$	2,255
2004		21,717
2005		10,375
2006		11,238
2007		175,560
Thereafter		1,507,980

	$	1,729,125


2003 (three months)	$	360
2004		1,437
2005		1,440
2006		1,427
2007		1,427
Thereafter		56,368

	$	62,459


2003 (three months)	$	1,175
2004		4,428
2005		2,896
2006		2,027
2007		1,456
Thereafter		1,929

	$	13,911