e10vkza

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HDl/Obqfa6fEGnpPODm63aXnqmDbV3t4Dx+622HgeCA1y9OjIpOaesYM84OpPZoj QkrHhuQDsv31rp4x6Bauug== 0000950133-04-001244.txt : 20040331 0000950133-04-001244.hdr.sgml : 20040331 20040331144442 ACCESSION NUMBER: 0000950133-04-001244 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERSTATE HOTELS & RESORTS INC CENTRAL INDEX KEY: 0001059341 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 510379982 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-14331 FILM NUMBER: 04705469 BUSINESS ADDRESS: STREET 1: 1010 WISCONSIN AVE NW CITY: WASHINGTON STATE: DC ZIP: 20007 BUSINESS PHONE: 2029654455 MAIL ADDRESS: STREET 1: 1010 WISCONSIN AVE N W CITY: WASHINGTON STATE: DC ZIP: 20007 FORMER COMPANY: FORMER CONFORMED NAME: MERISTAR HOTELS & RESORTS INC DATE OF NAME CHANGE: 19980407 10-K/A 1 w93680a1e10vkza.htm FORM 10-K/A FOR INTERSTATE HOTELS & RESORTS, INC. e10vkza

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For Fiscal Year Ended December 31, 2003

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-14331

Interstate Hotels & Resorts, Inc.


Delaware		52-2101815
(State of Incorporation)		(IRS Employer Identification No.)

4501 North Fairfax Drive

Arlington, VA 22203

703-387-3100

www.ihrco.com

This Form 10-K can be accessed at no charge through above web site.

(Former Name, Former Address and Former Fiscal Year,

if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock par value $0.01 per share New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period for which the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). o

The aggregate market value of common stock held by non-affiliates of the registrant was $53,516,559, (based on the closing sale price of $4.70 on June 30, 2003 as reported by the New York Stock Exchange Composite Tape). For this computation, the registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the registrant; such exclusion shall not be deemed to constitute an admission that such person is an “affiliate” of the registrant. The number of shares of Common Stock outstanding at March 18, 2004 was 30,102,187.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement relating to the Registrant’s 2004 Annual Meeting of Shareholders are incorporated by reference into Items 10, 11, 12, 13 and 14.

EXPLANATORY NOTE

The Registrant is filing this Amendment No. 1 on Form 10-K/A to its Annual Report on Form 10-K for the year ended December 31, 2003 in order to file the consolidated financial statements of certain of its 50% or less owned equity investees, as required by Rule 3-09 of Regulation S-X. These consolidated financial statements are attached as Exhibits 99.1 through 99.5 to this Form 10-K/A.

ITEM 8. TOTAL FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Exhibits 99.1 through 99.5 are hereby incorporated by reference into this Item 8.

PART IV


ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Index to Financial Statements and Financial Statement Schedules

1. Financial Statements

The Financial Statements included in this Annual Report on Form 10-K are provided under Item 8.

2. Reports on Form 8-K

Current report under items 5 and 7 of Form 8-K dated and filed October 23, 2003 announcing the promotion of Steven D. Jorns to chief executive officer of Interstate Hotels & Resorts, Inc.

(b) Financial Statement Schedules

N/ A


Exhibit
No.		Description of Document

	3.1	Amended and Restated Certificate of Incorporation of the Company, formerly MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form S-1/ A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).
	3.1.1	Certificate of Amendment of the Restated Certificate of Incorporation of the Company dated June 30, 2001 (incorporated by reference to Exhibit 3.1.1 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 8, 2002).
	3.1.2	Certificate of Merger of Interstate Hotels Corporation into MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 3.1.2 to the Company’s Form 8-A/ A filed with the Securities and Exchange Commission on August 2, 2002).
	3.1.3	Certificate of Amendment of the Restated Certificate of Incorporation of the Company dated July 31, 2002 (incorporated by reference to Exhibit 3.1.3 to the Company’s Form 8-A/ A filed with the Securities and Exchange Commission on August 2, 2002).
	3.2	By-laws of the Company, formerly MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Form S-1/ A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).
	3.2.1	Amendment to the By-laws of the Company (incorporated by reference to Exhibit 3.3 to the Company’s Form 8-A/ A filed with the Securities and Exchange Commission on August 2, 2002).


	4.1			Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-A/ A filed with the Securities and Exchange Commission on August 2, 2002).
	4.2			Preferred Share Purchase Rights Agreement, dated July 23, 1998, between the Company, formerly MeriStar Hotels & Resorts, Inc., and the Rights Agent (incorporated by reference to Exhibit 4.4 to the Company’s Form S-1/ A filed with the Securities and Exchange Commission on July 23, 1998(Registration No. 333-49881)).
	4.2.1			Amendment to Rights Agreement, dated December 8, 2000, between the Company, formerly MeriStar Hotels & Resorts, Inc., and the Rights Agent (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 12, 2000).
	4.2.2			Second Amendment to Rights Agreement, dated May 1, 2002, between the Copmpany, formerly MeriStar Hotels & Resorts, Inc., and the Rights Agent (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 3, 2002).
	4.3			Form of Rights Certificate (incorporated by reference to Exhibit 4.3 to the Company’s Form S-1/ A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).
	9.1			Board Composition Agreement, dated as of July 31, 2002, among the Company and certain stockholders of the Company specified therein (incorporated by reference to Exhibit 9.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on August 7, 2002).
	9.2**			Amendment to Board Composition Agreement, dated as of January 30, 2004, among the Company, and certain stockholders of the Registrant specified therein.
	10.1			Amended and Restated Agreement of Limited Partnership of MeriStar H&R Operating Company, L.P. dated as of August 3, 1998 (incorporated by reference to Exhibit 10.11 to the Company’s Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1998).
	10.2			Senior Credit Agreement (“Senior Credit Agreement”), dated as of July 31, 2002, among the Registrant, MeriStar H & R Operating Company, L.P., Societe Generale, SG Cowen Securities Corporation, Salomon Smith Barney Inc., Lehman Brothers, Inc., Credit Lyonnais New York Branch and various other lenders (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on August 7, 2002).
	10.2.1			First Amendment to the Senior Credit Agreement, dated as of August 15, 2002, among the Registrant, MeriStar H & R Operating Company, L.P., Societe Generale, SG Cowen Securities Corporation, Salomon Smith Barney Inc., Lehman Brothers, Inc., Credit Lyonnais New York Branch and various other lenders (incorporated by reference to Exhibit 10.18.1 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2002).
	10.2.2			Second Amendment to the Senior Secured Credit Agreement dated January 10, 2003 (incorporated by reference to Exhibit 10.2.2 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 27, 2003).
	10.2.3			Third Amendment to the Senior Secured Credit Agreement dated as of July 31, 2003. (incorporated by reference to Exhibit 10.2.3 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 6, 2003).
	10.2.4			Fourth Amendment to the Senior Secured Credit Agreement dated as of October 22, 2003. (incorporated by reference to Exhibit 10.2.4 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 6, 2003).
	10.3			Intercompany Agreement between MeriStar Hospitality Corporation, MeriStar Hospitality Operating Partnership, L.P., MeriStar Hotel Lessee, Inc., the Company (formerly MeriStar Hotels & Resorts, Inc.) and MeriStar H&R Operating Company L.P. (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-K filed with the Securities and Exchange Commission on April 15, 2002).


	10.3.1			Amendment to the Intercompany Agreement (incorporated by reference to Exhibit 10.15 to the Company’s Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2000).
	10.3.2			Second Amendment to the Intercompany Agreement dated April 1, 2003 (incorporated by reference to Exhibit 10.3.2 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 12, 2003).
	10.6			Subordinated Unsecured Term Loan, dated as of January 10, 2003, made by Lehman Commercial Paper, Inc., as Administrative Agent, to MeriStar H&R Operating Company, L.P. (incorporated by reference to Exhibit 10.6 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 27, 2003).
	10.6.1			First Amendment to Subordinated Unsecured Term Loan Agreement, dated as of July 31, 2003. (incorporated by reference to Exhibit 10.6.1 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 6, 2003).
	10.6.2			Second Amendment to Subordinated Unsecured Term Loan Agreement, dated as of October 22, 2003. (incorporated by reference to Exhibit 10.6.2 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 6, 2003).
	10.7			Agreement of Limited Partnership of MIP Lessee, L.P. (incorporated by reference to Exhibit 10.12 to the Company’s Form 10-Q filed with the Securities and Exchange Commission for the three months ended March 31, 1999).
	10.8			Amended and Restated Employee Incentive Plan of the Company (incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K filed with the Securities and Exchange Commission on August 7, 2002).
	10.9			The Non-Employee Directors’ Incentive Plan of the Company, formerly MeriStar Hotels & Resorts, Inc incorporated by reference to Exhibit 10.7 to the Company’s Form S-1/ A filed with the Securities and Exchange Commission on June 19, 1998 (Registration No. 333-49881)).
	10.9.1			Amendment to the Non-Employee Directors’ Incentive Plan (incorporated by reference to Exhibit 10.8.1 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 8, 2002).
	10.9.2			Second Amendment to the Registrant’s Non-Employee Directors’ Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company’s Form 8-K filed with the Securities and Exchange Commission on August 7, 2002).
	10.10			The Employee Stock Purchase Plan of the Company, formerly MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 10.9 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 8, 2002).
	10.10.1			Amendments to the Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.6 to the Company’s Form 8-K filed with the Securities and Exchange Commission on August 7, 2002).
	10.11			Registration Rights Agreement, dated as of July 31, 2002, among the Registrant and certain stockholders of the Registrant specified therein (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on August 7, 2002).
	10.12			Employment Agreement, dated as of November 1, 2001, between the Company (formerly MeriStar Hotels & Resorts, Inc.), MeriStar Management Company, LLC and Paul W. Whetsell (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed with the Securities and Exchange Commission for the three and nine months ended September 30, 2000).
	10.12.1			Amendment to Paul W. Whetsell’s Employment Agreement dated as of July 31, 2002 (incorporated by reference to Exhibit 10.12.1 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 27, 2003).
	10.12.2			Amendment to Paul W. Whetsell’s Employment Agreement dated as of December 13, 2002 (incorporated by reference to Exhibit 10.12.2 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 27, 2003).


	10.13			Employment Agreement, dated as of August 3, 1998, between the Company (formerly MeriStar Hotels & Resorts, Inc.) and Steven D. Jorns (incorporated by reference to Exhibit 10.2 to the Company’s Form S-1/ A filed with the Securities and Exchange Commission on June 19, 1998 (Registration No. 333-49881)).
	10.13.1			Amendment to Steven D. Jorns Employment Agreement dated as of October 10, 1998 (incorporated by reference to Exhibit 10.13.1 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 27, 2003).
	10.14			Employment Agreement, dated as of November 1, 2001, between the Company (formerly MeriStar Hotels & Resorts, Inc.), MeriStar Management Company, LLC and Robert Morse (incorporated by reference to Exhibit 10.14 to the Company’s Form 10-K filed with the Securities and Exchange Commission on April 15, 2002).
	10.15			Interstate Hotels & Resorts, Inc. Supplemental Deferred Compensation Plan. (inc. to s-8).
	10.16			Interstate Hotels & Resorts, Inc. Executive Fund Plan. (inc. to s-8).
	10.17			Registration Rights Agreement, dated March 31, 1999, between the Company (formerly MeriStar Hotels & Resorts, Inc.), Oak Hill Capital Partners, L.P. and Oak Hill Capital Management Partners, L.P. (incorporated by reference to Exhibit 4.7 to the Company’s Form 10-Q filed with the Securities and Exchange Commission for the three months ended March 31, 1999).
	21**			Subsidiaries of the Company.
	23.1**			Consent of KPMG LLP.
	23.2**			Consent of PriceWaterhouseCoopers LLP.
	23.3*			Consent of Ernst & Young LLP.
	23.4*			Consent of Independent Certified Public Accountants.
	23.5*			Consent of KPMG LLP
	24			Power of Attorney (see signature page).
	31.1*			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2*			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1*			Sarbanes-Oxley Act Section 906 Certifications of Chief Executive Officer.
	32.2*			Sarbanes-Oxley Act Section 906 Certifications of Chief Financial Officer.
	99.1*			Consolidated Financial Statements of CNL IHC Partners, L.P. and Subsidiaries
	99.2*			Financial Statements of S.D. Bridgeworks LLC
	99.3*			Consolidated Financial Statements of MIP Lessee, L.P.
	99.4*			Consolidated Financial Statements of FCH/IHC Leasing L.P.
	99.5*			Consolidated Financial Statements of FCH/IHC Hotels, L.P.

* Filed herewith

** Previously filed

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Interstate Hotels & Resorts, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

INTERSTATE HOTELS & RESORTS, INC.

By: /s/ STEVEN D. JORNS

Steven D. Jorns

Chief Executive Officer

Dated: March 31, 2004

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven D. Jorns and Christopher L. Bennett, such person’s true and lawful attorneys-in-fact and agents, with full power of substitution and revocation, for such person and in such person’s name, place and stead, in any and all capacities to sign any and all amendments (including post-effective amendments) to this report filed pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, and to file the same with all exhibits thereto, and the other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and things requisite and necessary to be done, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report and the foregoing Power of Attorney have been signed by the following persons in the capacities and on the dates indicated.



Signature	Title	Date


* Steven D. Jorns	Chief Executive Officer (Principal Executive Officer)	March 31, 2004

* Paul W. Whetsell	Chairman of the Board	March 31, 2004

* J. William Richardson	Chief Financial Officer (Principal Financial and Accounting Officer)	March 31, 2004

* Leslie R. Doggett	Director	March 31, 2004

Joseph J. Flannery	Director	March , 2004

Raymond C. Mikulich	Director	March , 2004



* John J. Russell, Jr.	Director	March 31, 2004

James B. McCurry	Director	March , 2004

* Sherwood M. Weiser	Director	March 31, 2004

* Thomas F. Hewitt	Director	March 31, 2004

Mahmood J. Khimji	Director	March , 2004

Karim J. Alibhai	Director	March , 2004

*By: /s/ Christopher L. Bennett Christopher L. Bennett Attorney-in-fact

EX-23.3 3 w93680a1exv23w3.htm CONSENT OF ERNST & YOUNG LLP exv23w3

Exhibit 23.3

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-84531 and Forms S-8 Nos. 333-113229, 333-92109, 333-60545, 333-60539, 333-61731 and 333-89740) of Interstate Hotels & Resorts, Inc. and its subsidiaries of our report dated February 21, 2004, with respect to the financial statements of S.D. Bridgeworks LLC included in this Annual Report (Form 10-K/A) for the year ended December 31, 2003.

/s/ Ernst & Young LLP

New York, New York
March 26, 2004 EX-23.4 4 w93680a1exv23w4.htm CONSENT INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS exv23w4

Exhibit 23.4

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-84531) and Forms S-8 (No.s 333-113229, 333-92109, 333-60545, 333-60539, 333-61731 and 333-89740) of Interstate Hotels & Resorts, Inc. and its subsidiaries of our report dated March 12, 2004 relating to the consolidated financial statements of CNL IHC Partners, LP and subsidiaries which appear this Form 10-K/A.

Orlando, Florida
March 29, 2004

EX-23.5 5 w93680a1exv23w5.htm CONSENT OF KPMG LLP exv23w5

EXHIBIT 23.5

INDEPENDENT AUDITORS’ CONSENT

The Board of Directors

Interstate Hotels & Resorts, Inc.:

We consent to incorporation by reference in the registration statements on Form S-3 (Nos. 333-107660 and 333-84531) and Form S-8 (Nos. 333-113229, 333-60545, 333-60539, 333-61731, 333-89740 and 333-92109) of Interstate Hotels & Resorts, Inc. of our report dated March 24, 2004, with respect to the consolidated balance sheet of MIP Lessee, L.P. and subsidiaries as of December 31, 2003 and the related consolidated statements of income, partners’ capital and cash flows for the year the ended; our report dated March 26, 2004, with respect to the consolidated balance sheet of FCH/IHC Leasing, L.P. and subsidiaries as of December 31, 2003 and the related consolidated statements of operations, partners’ deficit and cash flows for the year then ended; and, our report dated March 26, 2004, with respect to the consolidated balance sheet of FCH/IHC Hotels, L.P. and subsidiaries as of December 31, 2003 and the related consolidated statements of operations, partners’ capital and cash flows for the year the ended which reports appear as exhibits in the annual report on Form 10-K/A of Interstate Hotels & Resorts, Inc.

Washington, D.C.

March 30, 2004

EX-31.1 6 w93680a1exv31w1.htm CERTIFICATION exv31w1

EXHIBIT 31.1

CERTIFICATIONS

I, Steven D. Jorns, Chief Executive Officer of Interstate Hotels & Resorts, Inc., certify that:

1. I have reviewed this annual report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A, to which this certification is attached, of Interstate Hotels & Resorts, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: March 31, 2004

Steven D. Jorns

Chief Executive Officer

EX-31.2 7 w93680a1exv31w2.htm CERTIFICATION exv31w2

EXHIBIT 31.2

CERTIFICATIONS

I, J. William Richardson, Chief Financial Officer of Interstate Hotels & Resorts, Inc., certify that:

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: March 31, 2004

J. William Richardson

Chief Financial Officer

EX-32.1 8 w93680a1exv32w1.htm SARBANES-OXLEY CEO exv32w1

Exhibit 32.1

INTERSTATE HOTELS & RESORTS, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATIONS

In connection with this annual report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A, to which this certification is attached, of Interstate Hotels & Resorts, Inc. (the “Registrant”) for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven D. Jorns, Chief Executive Officer of the Registrant, hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Dated: March 31, 2004


		/s/ Steven D. Jorns
		Steven D. Jorns Chief Executive Officer

EX-32.2 9 w93680a1exv32w2.htm SARBANES-OXLEY CFO exv32w2

Exhibit 32.2

INTERSTATE HOTELS & RESORTS, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATIONS

In connection with this annual report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A, to which this certification is attached, of Interstate Hotels & Resorts, Inc. (the “Registrant”) for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. William Richardson, Chief Financial Officer of the Registrant, hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Dated: March 31, 2004


		/s/ J. William Richardson
		J. William Richardson Chief Financial Officer

EX-99.1 10 w93680a1exv99w1.htm EX-99.1 CONSOL FIN STMTS - CNL IHC PARTNERS, LP exv99w1

Exhibit 99.1

CNL IHC Partners, LP
and Subsidiaries
Consolidated Financial Statements
As of and for the year ended
December 31, 2003 and 2002

Report of Independent Certified Public Accountants

To the Partners of
CNL IHC Partners, LP

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, of partners’ capital and of cash flows present fairly, in all material respects, the financial position of CNL IHC Partners, LP and its subsidiaries at December 31, 2003 and 2002 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS, LLP

Orlando, Florida
March 12, 2004

CNL IHC Partners, LP and Subsidiaries
Consolidated Balance Sheets
December 31, 2003 and 2002


	2003		2002
Assets
Current assets:
Cash and cash equivalents	$	755,680	$	1,009,374
Accounts receivable, net		113,542		138,956
Prepaid expenses and other current assets		68,308		201,152
Deposits		745,322		469,106

Total current assets		1,682,852		1,818,588
Restricted cash		1,011,283		1,263,576
Property and equipment, less accumulated depreciation of $1,834,124 and $806,335		34,583,283		34,832,858
Loan costs, less accumulated amortization of $34,868 and $2,382		120,712		153,198

Total assets	$	37,398,130	$	38,068,220

Liabilities and Partners’ Capital
Current liabilities:
Accounts payable and accrued expenses	$	924,856	$	788,127
Current portion of mortgage notes payable		313,792		293,405
Distributions payable		130,038		405,733
Due to affiliates		15,651		25,617

Total current liabilities		1,384,337		1,512,882
Mortgage notes payable		15,320,617		15,615,964

Total liabilities		16,704,954		17,128,846
Partners’ capital		20,693,176		20,939,374

Total liabilities and partners’ capital	$	37,398,130	$	38,068,220

The accompanying notes are an integral part of these consolidated financial statements.

CNL IHC Partners, LP and Subsidiaries
Consolidated Statements of Earnings
December 31, 2003 and 2002


	2003		2002
Revenues:
Rooms	$	8,928,010	$	6,450,781
Other operating departments		477,583		373,812

Total revenue		9,405,593		6,824,593
Cost of sales and other expenses:
Rooms		2,211,555		1,579,820
Other operating departments		318,332		220,406
Property operations and maintenance		2,345,368		1,394,694
Management fees		291,830		214,491
General and administrative		928,027		623,066
Sales and marketing		418,060		340,917
Interest and loan cost amortization		1,313,482		805,526
Depreciation		1,027,789		734,500

Total costs and expenses		8,854,443		5,913,420

Net income	$	551,150	$	911,173

The accompanying notes are an integral part of these consolidated financial statements.

CNL IHC Partners, LP and Subsidiaries
Consolidated Statements of Partners’ Capital
For the year ended December 31, 2003 and 2002


	General			Limited
	Partner			Partners			Total
Balance, December 31, 2001	$	14,647		$	14,632,778		$	14,647,425
Contributions		6,354			6,347,202			6,353,556
Distributions		(973	)		(971,807	)		(972,780	)
Net income		911			910,262			911,173

Balance, December 31, 2002		20,939			20,918,435			20,939,374
Distributions		(797	)		(796,551	)		(797,348	)
Net income		551			550,599			551,150

Balance, December 31, 2003	$	20,693		$	20,672,483		$	20,693,176

The accompanying notes are an integral part of these consolidated financial statements.

CNL IHC Partners, LP and Subsidiaries
Consolidated Statements of Cash Flows
For the year ended December 31, 2003 and 2002


	2003			2002
Cash flows from operating activities:
Net income	$	551,150		$	911,173
Adjustments to reconcile net income to cash provided by operating activities:
Amortization		32,486			2,382
Depreciation		1,027,789			734,500
Bad debt expense		675			3,803
Changes in assets and liabilities:
Accounts receivable		24,739			(110,452	)
Prepaid expenses and other current assets		132,844			(85,960	)
Deposits		(276,216	)		(447,656	)
Accounts payable and accrued expenses		136,729			538,215
Due to affiliates		(9,966	)		25,617

Net cash provided by operating activities		1,620,230			1,571,622

Cash flows from investing activities:
Acquisition of property and equipment		(778,214	)		(5,430,966	)
Decrease (increase) in restricted cash		252,293			(1,012,999	)

Net cash used in investing activities		(525,921	)		(6,443,965	)

Cash flows from financing activities:
Principal payments on mortgage loans		(274,960	)		(140,928	)
Payment of loan costs		—			(27,789	)
Capital contributions from partners		—			6,353,556
Distributions to partners		(1,073,043	)		(567,047	)

Net cash provided by (used in) financing activities		(1,348,003	)		5,617,792

Net (decrease) increase in cash and cash equivalents		(253,694	)		745,449
Cash and cash equivalents, beginning of year		1,009,374			263,925

Cash and cash equivalents, end of year	$	755,680		$	1,009,374

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	1,280,996		$	803,144

Income taxes		52,252			7,057

Supplemental disclosure of non-cash financing activities:
Assumption of mortgage loan	$	—		$	9,326,914

Distributions declared but not paid to partners	$	130,038		$	405,733

The accompanying notes are an integral part of these consolidated financial statements.

CNL IHC Partners, LP and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003 and 2002

1. Business

Organization

CNL IHC Partners, LP (the “Partnership”) was organized pursuant to the laws of the State of Delaware on November 19, 2001. RI Manchester Hotel Partners, LP, CY Manchester Hotel Partners, LP, Galleria Hotel Partners, LP, RI Manchester Tenant Corporation, CY Manchester Tenant Corporation and Galleria Tenant Corporation are wholly owned subsidiaries of the Partnership. The Partnership’s general partner is CNL IHC, LLC (the “General Partner”) and limited partners are CNL Hospitality Partners, LP (“CNL LP”) and Interstate Manchester Company, LLC (“Interstate”), (collectively, the “Limited Partners”). The General Partner and CNL LP are collectively referred to as the CNL Partners.

The Partnership was originally formed in November 2001 to own and operate two Marriott hotel properties located in Manchester, Connecticut (the “Manchester Properties”). In September 2002, the Partnership acquired a Hampton Inn property located in Houston, Texas (the “Houston Property”). The Properties’ day-to-day operations are managed by affiliates of Interstate. However, all partners must agree to key decisions affecting the Properties.

The structure of the Partnership is designed to allow the parent of its majority owner to continue to qualify as a real estate investment trust, which is generally not subject to federal income taxes. In keeping with this objective, the Partnership operates its Properties through taxable REIT subsidiary (“TRS”) entities, as permitted by the REIT Modernization Act of 1999.

The General Partner and Limited Partners hold the following percentage interests in the Partnership:


Partner	Percentage Interest
General Partner		0.1	%
CNL LP		84.9	%
Interstate		15.0	%

Cash flow deficits are possible, although they are not expected, which may require additional funding. In that case, the Partnership would have to rely on capital contributions from its partners and borrowings under loans to fund capital expenditures, operating losses and negative cash flows.

Allocations and Distributions

Profits are allocated as follows: (i) first to the CNL Partners, pro rata until the aggregate profit allocated for the year and all prior years is equal to the aggregate amount (if any) of net cash flow distributed during the year and all prior years as preferred distributions, (ii) second, to Interstate until the aggregate profit allocated for the year and all prior years, is equal to the aggregate amount (if any) of net cash flow distributed during the year and all prior years as preferred distributions and (iii) thereafter, any remaining profits are to be allocated among the partners in proportion to their percentage interests.

CNL IHC Partners, LP and Subsidiaries
Notes to Consolidated Financial Statements — Continued
December 31, 2003 and 2002

Losses are allocated as follows: (i) first, to the extent that any partner’s capital account balance exceeds the sum of its capital account and unreturned additional capital, among such partners in proportion to and to the extent of such excess; (ii) second, to the extent any partner’s capital account balance exceeds such partner’s capital account, among such partners in proportion to and to the extent of such excess; (iii) third, to Interstate until the capital account balance of Interstate is reduced to zero; (iv) fourth, to the CNL Partners in proportion to their positive capital account balances until the CNL Partners’ capital account balances are reduced to zero; (v) fifth, among the partners that bear the economic risk of loss with respect to Partnership indebtedness, to the extent indebtedness in proportion to the manner in which such partners share such risk of loss; and (vi) thereafter, among the partners in proportion to their percentage interests.

Net cash flow, as defined in the Agreement, is distributed quarterly in accordance with the following order of priority; (i) first, to the CNL Partners, pro rata, until the unpaid preferred distributions that are payable to the CNL Partners with respect to such fiscal year have been reduced to zero; (ii) next, to Interstate until the unpaid preferred distribution that is payable to Interstate with respect to such fiscal year has been reduced to zero and (iii) thereafter, distributed to the partners in proportion to their percentage interest.

The preferred distribution for the Manchester Properties is a non-cumulative, non-compounded return equal to 11 percent per annum of the average weighted daily balance of each partner’s capital account for calendar year 2002, 11 percent for calendar year 2003, 11.5 percent for calendar year 2004, and 12 percent for calendar year 2005 and each year thereafter.

The preferred distribution for the Houston Property is a non-cumulative, non-compounded return equal to 11 percent per annum of the average weighted daily balance of each partner’s capital account for calendar year 2002, 11.5 percent for calendar year 2003, and 12 percent for calendar year 2004 and each year thereafter.

Capital proceeds, including capital proceeds distributed to partners in winding up the Partnership, are allocated as follows: (i) first, to establish any reserves pursuant to and subject to the provisions of which the General Partner reasonably determines to be necessary to provide for any contingent or unforeseen liabilities or obligations of the Partnership and the subsidiaries; but with the consent of Interstate, the balance of the reserves remaining after the payment of such contingencies shall be distributed in the manner of capital proceeds; (ii) next, to the CNL Partners, pro rata, in proportion to the respective amounts of their capital accounts, until the capital accounts of the CNL Partners is reduced to zero; (iii) next, to Interstate until the capital account of Interstate is reduced to zero; (iv) next, to all partners who have unreturned additional capital, pro rata, in proportion to the respective amounts of their unreturned additional capital, until unreturned additional capital is reduced to zero and (v) thereafter, among the partners, pro rata, in proportion to their respective percentage interests.

CNL IHC Partners, LP and Subsidiaries
Notes to Consolidated Financial Statements — Continued
December 31, 2003 and 2002

2. Summary of Significant Accounting Policies

A summary of significant accounting principles and practices used in the preparation of the financial statements follows:

Basis of Financial Statement Presentation

The Partnership prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclose contingent assets and liabilities at the date of consolidated financial statements and report amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of CNL IHC Partners, LP and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

The Partnership considers all amounts held in highly liquid instruments with original purchased maturities of three months or less as cash and cash equivalents. Cash and cash equivalents consists primarily of demand deposit accounts. Management believes the credit risk associated with cash and cash equivalents to be low due to the quality of the financial institutions in which these assets are held.

Restricted Cash

Certain amounts of cash are restricted under the management agreement with Interstate for maintenance and replacement of furniture, fixtures, and equipment at the Partnership’s Properties of which approximately $1.0 million and $0.4 million was classified as restricted cash in the accompanying consolidated balance sheets as of December 31, 2003 and 2002, respectively. These amounts are calculated as a percentage of sales in accordance with the hotel management agreement. Additionally, as of December 31, 2003 and 2002, the Partnership had $0.1 million and $0.9 million, respectively, of other restricted cash, which was restricted for budgeted renovations. The remainder of these funds is expected to be used in 2004.

Property and Equipment

Property and equipment is stated at cost and includes land, buildings and improvements, and furniture, fixtures and equipment. Buildings and equipment are depreciated on the straight — line method over the assets’ estimated useful lives of 40 and 7 years, respectively.

Expenditures for major renewals and betterments are capitalized and depreciated over the related assets’ estimated useful lives. Expenditures for repairs and maintenance are expensed when incurred. Interest and real estate taxes incurred relating to renovation of the properties and amenities are capitalized to construction in progress during the active renovation period.

CNL IHC Partners, LP and Subsidiaries
Notes to Consolidated Financial Statements — Continued
December 31, 2003 and 2002

Revenue Recognition

The Property’s revenues are derived from its operations and include revenues from the rental of rooms, food and beverage sales, telephone usage and other service revenue. Revenue is recognized when rooms are occupied and services have been performed. Cash received from customers for events occurring after the end of each respective year have been recorded as deposits and is included in accounts payable and accrued expenses in the accompanying consolidated statements of financial position. The Partnership does not have any advanced deposits recorded as of December 31, 2003 or 2002.

Sales and Marketing

The costs of advertising, promotional, sales and marketing programs are charged to operations in the year incurred and are included as sales and marketing expenses in the accompanying consolidated statements of earnings. Advertising, promotional, sales and marketing costs totaled approximately $0.4 million and $0.3 million, respectively, for the years ended December 31, 2003 and 2002.

Deferred Loan Costs

Loan costs, primarily loan origination and related fees, are capitalized and are being amortized over the term of the loan using the straight-line method which approximates the effective interest method.

Income Taxes

Under the provisions of the Internal Revenue Code and applicable state laws, the Partnership is only subject to taxation of income on the profits and losses from its TRS tenant operations. The tax consequences of other Partnership revenues and expenses, unrelated to the operation of the properties, will accrue to the partners. Certain of these other revenues and expenses may be treated differently in the Partnership’s income tax return than in the accompanying consolidated financial statements. Therefore, amounts reported in the consolidated financial statements may not be the same as reported in the partners’ income tax returns.

The Partnership accounts for federal and state income taxes on its TRS tenants using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax-credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

CNL IHC Partners, LP and Subsidiaries
Notes to Consolidated Financial Statements — Continued
December 31, 2003 and 2002

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company’s long-lived assets are tested for recoverability annually or whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The assessment is based on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds its fair value. If impairment is recognized, the adjusted carrying amount of a long-lived asset is its new cost basis. For the years ended December 31, 2003 and 2002, the LLC recorded no impairments.

Concentration of Credit Risk

Financial instruments which potentially subject the Partnership to a concentration of credit risk consist principally of guest and trade accounts receivable. Concentration of credit risk with respect to guest and trade accounts receivable is limited due to the wide variety of customers and industries to which the Property’s services are sold, as well as the dispersion of customers across many geographic areas.

Reclassification

Certain items in the prior years’ consolidated financial statements have been reclassified to conform with the 2003 presentation. These reclassifications had no effect on partners’ capital or net income.

3. Property and Equipment

Property and equipment consist of the following at December 31, 2003 and 2002:


	2003			2002
Land	$	4,806,119		$	4,801,721
Building and improvements		28,643,177			28,627,588
Furniture, fixtures and equipment		2,968,111			2,209,884

		36,417,407			35,639,193
Less: accumulated depreciation		(1,834,124	)		(806,335	)

	$	34,583,283		$	34,832,858

CNL IHC Partners, LP and Subsidiaries
Notes to Consolidated Financial Statements — Continued
December 31, 2003 and 2002

4. Mortgage Notes Payable

During 2001, the Partnership assumed a $6.7 million mortgage loan on one of the Manchester Properties. The loan requires monthly principal and interest payments of $53,933 and matures in November 2011. The outstanding principal balance bears interest at a rate of 8.32 percent per annum. During 2002, the Partnership assumed a $9.3 million mortgage loan associated with the Houston Property. The loan requires monthly principal and interest payments of $107,555 and matures in January 2023. The outstanding principal balance bears interest at a rate of 7.78 percent per annum. Both mortgages are collateralized by first mortgages and liens on the land, building and all other assets.

At December 31, 2003, the balances for these mortgages were $6.5 million and $9.1 million, respectively. The Partnership incurred interest expense of approximately $1.3 million and $0.8 million during the years ended December 31, 2003 and 2002, respectively.

As of December 31, 2003, scheduled principal payments on the mortgage loans are as follows:


2004	$	313,792
2005		339,708
2006		367,768
2007		398,149
2008		431,041
2009 and thereafter		13,783,951

Total	$	15,634,409

5. Related Parties Transactions

Hotel Management Agreement

The Partnership entered into an agreement with an affiliate of Interstate (the “Manager”) to manage the Properties. Under terms of the agreements, the Manager operates the Properties in return for a fixed management fee of 3 percent of gross revenues for each property, as defined in the management agreement. The Manager may also earn an incentive management fee equal to 30 percent of net operating income in excess of a threshold, as defined in the agreement. The Partnership incurred management fees and applicable sales tax on such fees of approximately $0.3 million and $0.2 million for the years ended December 31, 2003 and 2002, respectively.

CNL IHC Partners, LP and Subsidiaries
Notes to Consolidated Financial Statements — Continued
December 31, 2003 and 2002

Other

The Partnership has entered into various other agreements with related parties to provide services such as property, health, and workers’ compensation insurance. The Partnership incurred $0.4 million for such expenses for the year ended December 31, 2003, which is included in the accompanying consolidated statements of earnings.

6. Income Taxes

Under the provisions of the Internal Revenue Code and applicable state laws, the Partnership is only subject to taxation of income on the profits and losses from its TRS tenant operations. The components of the deferred taxes recognized in the accompanying consolidated balance sheet at December 31, 2003 and 2002 are as follows:


	2003			2002
Deferred tax asset:
Net operating losses	$	209,000	)	$	10,000	)
Deferred tax liability:
Valuation allowance		(209,000	)		(10,000	)

	$	—		$	—

The types of temporary differences between the tax basis of assets and liabilities and their financial statement reporting amounts are attributable principally to net operating losses. The TRS tenants had net operating loss carry-forwards for federal and state purposes of approximately $0.2 million and $0.5 million as of December 31, 2002 and 2003, respectively, to offset future taxable income.

The estimated net operating loss carry-forward expiration dates are as follows:


2021	$	25,444
2022		—
2023		531,261

	$	556,705

The Company has not recorded this potential future benefit because its TRS subsidiary does not have sufficient historical earnings on which to base a potential future benefit.

7. Commitments and Contingencies

The Partnership entered into franchise agreements with an affiliate of Marriott International, Inc. and an affiliate of Hilton Hotels Corporation. Under terms of the agreements, the affiliates get fees of 7.5 percent and 6.0 percent of hotel revenues, respectively. The Partnership incurred franchise fees of approximately $0.4 million and $0.6 million for the years ended December 31, 2003 and 2002, respectively.

From time to time the Partnership may be exposed to litigation arising from operations of its business in the ordinary course of business. Management does not believe that resolution of these matters will have a material adverse impact on the Partnership’s financial condition or results of operations.

* * * * *

EX-99.2 11 w93680a1exv99w2.htm EX-99.2 CONSOL FIN STMTS - S.D. BRIDGEWORKS LLC exv99w2

Exhibit 99.2

Financial Statements

S.D. Bridgeworks LLC (A Limited Liability Company)

For the years ended December 31, 2003 and 2002 with
Report of Independent Auditors

S.D. Bridgeworks LLC
(A Limited Liability Company)

Financial Statements

For the years ended December 31, 2003 and 2002

Contents


Report of Independent Auditors			1
Financial Statements
Balance Sheets			2
Statements of Income			3
Statement of Changes in Members’ Equity (Deficit)			4
Statements of Cash Flows			5
Notes to Financial Statements			6

Report of Independent Auditors

The Members
S.D. Bridgeworks LLC

We have audited the accompanying balance sheets of S.D. Bridgeworks LLC (the “Company”) as of December 31, 2003 and 2002 and the related statements of income, changes in members’ equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of S.D. Bridgeworks LLC at December 31, 2003 and 2002 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

New York, New York

February 21, 2004

S.D. Bridgeworks LLC
(A Limited Liability Company)

Balance Sheets


	December 31,
	2003			2002
Assets
Land	$	2,790,000		$	2,790,000
Building		42,073,330			42,073,330
Tenant improvements		1,006,690			994,202
Furniture, fixtures and equipment		5,030,530			4,784,785

		50,900,550			50,642,317
Accumulated depreciation		(6,209,090	)		(4,338,769	)

Fixed assets, net		44,691,460			46,303,548
Cash and cash equivalents		3,570,220			2,126,791
Accounts receivable		1,151,602			1,084,053
Prepaid expenses and other assets		253,366			470,639
Inventory		66,639			69,326
Deferred charges, net of accumulated amortization of $980,572 and $541,977 in 2003 and 2002, respectively		1,307,234			611,770

Total assets	$	51,040,521		$	50,666,127

Liabilities and members’ equity (deficit)
Liabilities:
Construction loan	$	46,000,000		$	35,466,286
Member note payable		3,260,076			3,728,026
Subordinated note payable		1,790,000			1,790,000
Affiliate payable		22,500			22,500
Accounts payable and accrued expenses		1,512,713			1,821,172

Total liabilities		52,585,289			42,827,984
Commitments and contingencies
Members’ equity (deficit)		(1,544,768	)		7,838,143

Total liabilities and members’ equity (deficit)	$	51,040,521		$	50,666,127

See accompanying notes.

S.D. Bridgeworks LLC
(A Limited Liability Company)

Statements of Income


	For the years ended December 31,
	2003		2002
Revenues:
Rooms	$	13,592,551	$	12,480,895
Food and beverage		2,011,503		1,710,099
Telephone		124,888		159,702
Other		1,886,524		1,713,745

		17,615,466		16,064,441

Expenses:
Rooms		2,653,269		2,478,685
Food and beverage		1,617,725		1,404,001
Telephone		119,342		127,982
Other		577,891		574,378

		4,968,227		4,585,046

Departmental profit:
Room		10,939,282		10,002,210
Food and beverage		393,778		306,098
Telephone		5,546		31,720
Other		1,308,633		1,139,367

		12,647,239		11,479,395

Unallocated operating expenses
General and administrative		1,337,395		1,135,102
Advertising and promotion		1,463,998		1,298,204
Repairs and maintenance		626,491		601,032
Heat, light and power		541,369		553,395

Total unallocated operating expenses		3,969,253		3,587,733

Gross operating profit		8,677,986		7,891,662

Property taxes and insurance		863,934		829,064
Property management and incentive fees		1,605,713		1,412,999
Interest expense		2,334,334		1,975,637
Depreciation and amortization		2,308,916		1,944,458

		7,112,897		6,162,158

Net income	$	1,565,089	$	1,729,504

See accompanying notes.

S.D. Bridgeworks LLC
(A Limited Liability Company)

Statement of Changes in Members’ Equity (Deficit)

For the years ended December 31, 2003 and 2002


	Harbor Fifth			AP			AP-Pelham			Meristar H&R
	Associates,			(Bridgeworks)			(Bridgeworks)			Operating Company,
	L.P.			LLC			LLC			L.P.			Total
	48.00%			36.12%			5.88%			10.00%			100.00%
Members’ equity at December 31, 2001	$	4,044,019		$	3,042,101		$	495,276		$	842,243		$	8,423,639
Capital distributions		(1,111,200	)		(836,178	)		(136,122	)		(231,500	)		(2,315,000	)
Net income for the year		830,162			624,697			101,695			172,950			1,729,504

Members’ equity at December 31, 2002		3,762,981			2,830,620			460,849			783,693			7,838,143
Capital distributions		(1,200,005	)		(686,280	)		(111,720	)		(249,995	)		(2,248,000	)
Net income for the year		751,243			565,310			92,027			156,509			1,565,089
Redemption distributions		—			(7,482,000	)		(1,218,000	)		—			(8,700,000	)
Reallocation of departing members’ deficit		(4,592,669	)		4,772,350			776,844			(956,525	)		—

Members’ deficit at December 31, 2003	$	(1,278,450	)	$	—		$	—		$	(266,318	)	$	(1,544,768	)

See accompanying notes.

S.D. Bridgeworks LLC
(A Limited Liability Company)

Statements of Cash Flows


	For the years ended
	December 31,
	2003			2002
Operating activities
Net income	$	1,565,089		$	1,729,504
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,308,916			1,944,458
Increase in accounts receivable		(67,549	)		(532,819	)
Decrease (increase) in prepaid expenses and other assets		217,273			(266,738	)
Decrease (increase) in inventory		2,687			(13,628	)
Decrease in affiliate payables		—			(33,588	)
(Decrease) increase in accounts payable and accrued expenses		(308,459	)		153,868

Net cash provided by operating activities		3,717,957			2,981,057

Investing activities
Additions to development costs		—			(243,365	)
Tenant improvements		(12,486	)		(109,658	)
Purchase of furniture, fixtures and equipment		(245,747	)		(289,585	)
Leasing commissions		(33,807	)		(8,164	)

Net cash used in investing activities		(292,040	)		(650,772	)

Financing activities
Financing costs paid		(1,100,252	)		(182,000	)
Distributions to members		(10,948,000	)		(2,315,000	)
Draws under construction loan		11,272,362			1,093,678
Repayment of construction loan		(738,648	)		(615,888	)
Repayment of loan from member		(752,000	)		—
Proceeds of loan from member		284,050			290,459

Net cash used in financing activities		(1,982,488	)		(1,728,751	)

Net increase in cash and cash equivalents		1,443,429			601,534
Cash and cash equivalents at beginning of year		2,126,791			1,525,257

Cash and cash equivalents at end of year	$	3,570,220		$	2,126,791

Supplemental disclosures of cash flow information
Cash paid during the year for interest	$	1,843,988		$	1,750,070

See accompanying notes.

S.D. Bridgeworks LLC
(A Limited Liability Company)

Notes to Financial Statements

December 31, 2003

1. Formation of Company

S.D. Bridgeworks LLC (the “Company”) is a Delaware limited liability company organized on June 10, 1998, for the purpose of acquiring an approximate 47,000 square foot site located in San Diego, California, and developing and managing a mixed use project incorporating a hotel of approximately 280 rooms, together with approximately 23,000 square feet of retail and loft space and a garage with approximately 140 parking spaces (the “Project”). The initial members of the Company were Harbor Fifth Associates, L.P. (“HFA”), AP (Bridgeworks) LLC, AP-Pelham (Bridgeworks) LLC (collectively the “AP-Pelham Group”), and Capstar Management Company II, L.P. (“Capstar”) (collectively, the “Members”), whose sharing interests, as defined, are 48%, 36.12%, 5.88% and 10%, respectively. The members, excluding HFA, are required to make capital contributions aggregating $4,886,484, as necessary. HFA contributed its right to acquire and develop the Project (including rights to the $1,000,000 deposit on the land underlying the Project) and work in process through November 1, 1997 related to certain pre-development activities. The value of this contribution, as determined by the members, was $4,778,000. On August 3, 1998, Capstar transferred its interest in the Company to Meristar H&R Operating Company, L.P. (“Meristar”), an affiliate. As a result of the merger in 2002 of MeriStar Hotels & Resorts, Inc. (the parent of MeriStar) and Interstate Hotels Corporation to form Interstate Hotels & Resorts, Inc., MeriStar is currently known as Interstate Operating Company, L.P.

On January 11, 1999, the $2,930,788 balance of capital contributions was made and the Company distributed to HFA approximately $266,000 pursuant to the Operating Agreement, to reduce HFA’s capital contribution to approximately $4,512,000. These funds represent costs incurred by HFA in connection with certain pre-development activities, which would have otherwise been capitalized.

On December 31, 2003, the Company entered into a series of transactions whereby it refinanced its mortgage (see Note 4) in order to fund a distribution, which was made to the AP-Pelham Group. The Company has treated the distribution from the transaction as a redemption of the interests of the AP-Pelham Group, and upon the distribution of $8.7 million to the AP-Pelham Group, adjusted the capital account balances of the AP-Pelham Group to zero and reallocated their deficit to the remaining members proportionally based on their sharing interests. As a result of the redemption of the interests of the AP-Pelham Group, the interests of HFA and Meristar were adjusted to 82.76% and 17.24%, respectively.

S.D. Bridgeworks LLC
(A Limited Liability Company)

Notes to Financial Statements (continued)

1. Formation of Company (continued)

The Company’s Operating Agreement, as amended, the term of which expires in 2038, sets forth, among other matters that the allocation of profits, losses and distributions, shall be as follows:

Profits and Losses

Profits are allocated to the Members in the same manner as distributions and losses are allocated to the Members in accordance with their respective sharing interests.

Distributions

a) To the Members, in accordance with their sharing interests (as adjusted), to repay their respective cash equity (as defined), then,

b) to HFA, but only upon the closing of any sale or future refinancing of the Project, $624,159, then,

c) to the Members, in accordance with their sharing interests (as adjusted), until each has received a 20% internal rate of return with respect to the total capital then attributable to their sharing interests, calculated and compounded on a quarterly basis from the date that each capital contribution is made (defined as the “Return Threshold” in the Operating Agreement), then,

d) to Meristar, in accordance with its sharing interest minus 8.289%, and to HFA, in accordance with its sharing interest plus 8.289% (defined as the “HFA Promote” in the Operating Agreement).

2. Summary of Significant Accounting Policies

Cash and Cash Equivalents

The Company considers all highly liquid financial instruments with maturities of three months or less when purchased to be cash equivalents.

S.D. Bridgeworks LLC
(A Limited Liability Company)

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Real Estate

All direct and operating costs associated with the acquisition, development and construction of the Project (inclusive of architectural, legal and permits) have been capitalized.

The Company measures impairment in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount. As of December 31, 2003, management believes no indicators of impairment are present.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Inventory

Inventory consists of food, beverage and supplies and is stated at the lower of cost (weighted average) or market value.

Property and Equipment

Property and equipment and tenant improvements are stated at cost less accumulated depreciation. The cost of the building and improvements, tenant improvements and equipment are depreciated on the straight-line method over estimated useful lives, as follows:

Building and improvements – 40 years
Furniture, fixtures and equipment – 7 years
Tenant improvements – term of lease

S.D. Bridgeworks LLC
(A Limited Liability Company)

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Deferred Costs

Costs associated with obtaining tenant leases have been deferred and are being amortized over the associated lease terms.

Costs associated with obtaining construction loan financing have been deferred and are being amortized over the term of the related loan.

Revenue Recognition

The Company leases retail space to various tenants pursuant to leases that are accounted for as operating leases. Rental revenue, which is included in other income in the accompanying statements of income, is recognized on a straight-line basis over the associated lease terms.

Income Taxes

As a limited liability company, the Company is deemed to be a partnership for federal and state income tax purposes. As such, no provision or credit has been made in the accompanying financial statements for federal or state income taxes since the members of the Company are required to include their respective share of profits or losses in their own tax returns.

3. Related Party Transactions

HFA, in its capacity as the Managing Member of the Company, is entitled to reimbursement of actual out of pocket costs, including appropriate allocation of HFA expenses, related to the coordination, oversight and management of the development, construction and operation of the Project. During 2003 and 2002, HFA was paid approximately, $396,000 and $333,000, respectively, which is included in property management and incentive fees in the accompanying statements of income for the years ended December 31, 2003 and 2002, respectively.

S.D. Bridgeworks LLC
(A Limited Liability Company)

Notes to Financial Statements (continued)

3. Related Party Transactions (continued)

In June 1998, the Company entered into the Hotel Management Agreement (the “Management Agreement”) with Capstar. On August 3, 1998, Capstar assigned its rights, duties and obligations under the Management Agreement to Meristar Management Company LLC, an affiliate. The Management Agreement has a fifteen-year term commencing on the date on which the hotel shall open for business. Capstar will earn a basic fee equal to the greater of (a) 2.5% of Total Revenues (as defined in the Management Agreement) or (b) $150,000 and two separately calculated and payable incentive fees, subject to certain limitations, based on (1) 5% of the Available Cash Flow (as defined in the Management Agreement) for each fiscal year; provided that no fee shall be payable if the Available Cash Flow is insufficient to pay a simple return to the members of the Company of 10% of their capital contributions and (2) 5% of the amount, if any, by which Available Cash Flow exceeds the Available Cash Flow projected in the approved budget. In addition, Capstar is entitled to receive a fee in the amount of $14,400 per annum related to the provision of certain services including centralized reservation, accounting and purchasing. Pursuant to the terms of the Management Agreement the Company paid approximately $545,000 and $522,000 for the years ended December 31, 2003 and 2002, respectively.

4. Construction Loan and Notes Payable

On January 11, 1999, the Company entered into a loan agreement (the “Loan Agreement”) with San Diego National Bank in the maximum principal amount of $33,100,000. The loan was secured by a deed of trust on the Project, provided for monthly payments of interest at rates based on LIBOR plus 2.50%, which is reset quarterly, and monthly principal payments of $51,324, and matured on February 28, 2003. Upon maturity, the loan was extended through December 31, 2003 with interest payable at a rate equal to the greater of LIBOR plus 3.00% or 5.25% and monthly principal payments of $63,600.

On December 31, 2003, the Company entered into a loan agreement (the “Revised Loan Agreement”) with San Diego National Bank in the amount of $46,000,000, a portion of which was utilized to fund the distributions made to the AP-Pelham Group (see Note 1). The loan is secured by a deed of trust on the Project, provides for interest at the greater of 4.50% or three-month LIBOR plus 3.25%, which is adjusted quarterly, monthly principal payments of $88,888 commencing on January 5, 2005, and matures on February 5, 2007.

S.D. Bridgeworks LLC
(A Limited Liability Company)

Notes to Financial Statements (continued)

4. Construction Loan and Notes Payable (continued)

Minimum future principal payments due under the Revised Loan Agreement at December 31, 2003 are as follows:


2004	$	—
2005		1,066,656
2006		1,066,656
2007		43,866,688

Total		46,000,000

On January 11, 1999, in connection with the acquisition of the land underlying the Project from the City of San Diego (the “City”), the Company entered into a loan agreement (the “Subordinate Loan”) with the City in the amount of $1,790,000, which is subordinate to the Loan Agreement. The Subordinate Loan is secured by a deed of trust on the Project. The loan provides for the annual payment of interest at the rate of 7% per annum, commencing to accrue on the date which is the earlier of: (a) thirty-six months after issuance by the City of a Certificate of Occupancy of the first portion of the retail portion of the Project to be completed; (b) fifty-one months after conveyance of title to the land; or (c) the date when at least eighty-five percent of the rentable space within the retail portion of the Project has a tenant open for business (the “Commencement Date”). The principal amount of the Subordinate Loan, together with all accrued and unpaid interest, shall mature on the tenth anniversary of the Commencement Date. Additionally, the Subordinate Loan provides for the City to participate in the Gross Rental Income (as defined) received by the Company from the retail portion of the Project. On December 21, 2001, the Company acquired the City’s participation rights in the Gross Rental Income from the retail portion of the Project (as defined) for $250,000. Such payment has been capitalized and included in deferred costs in the accompanying balance sheet and is being amortized over the term of the Subordinate Loan.

S.D. Bridgeworks LLC
(A Limited Liability Company)

Notes to Financial Statements (continued)

4. Construction Loan and Notes Payable (continued)

On January 11, 1999, the Company entered into a loan agreement (the “Mezzanine Loan”) with Meristar in the amount of $3,000,000, which is subordinate to the Loan Agreement and the Subordinate Loan. The Mezzanine Loan is secured by a pledge of the membership interests of each of the members of the Company. The loan provides for the accrual of interest at the rate of 12.50% per annum and the payment of interest at the same rate of interest due under the Loan Agreement with the difference between the payment rate and the accrual rate added to the principal amount of the Mezzanine Loan. The principal amount of the Mezzanine Loan, together with all accrued and unpaid interest, shall mature upon the earlier of the sale or transfer of the Project or January 11, 2006.

On December 31, 2003, in connection with the redemption of the AP-Pelham Group’s interests in the Company (see Note 1), the Mezzanine Loan was amended to provide for the utilization of 30% of cash flow available for distribution (as defined) for repayment of the Mezzanine Loan and for the elimination of the deferral of interest in excess of the rate of interest due under the revised Loan Agreement.

5. Future Minimum Rentals

Rental income from the Project, which is included in other income in the accompanying statements of income, is derived from leases with tenants, plus additional reimbursements for common area maintenance costs and real estate taxes.

Minimum future rentals for the ensuing five years and thereafter are approximately as follows:


2004	$	659,000
2005		721,000
2006		769,000
2007		671,000
2008		639,000
Thereafter		3,462,000

	$	6,921,000

EX-99.3 12 w93680a1exv99w3.htm EX-99.3 CONSOL FIN STMTS - MIP LESSEE, LP exv99w3

Exhibit 99.3

MIP LESSEE, L.P.

Consolidated Financial Statements

December 31, 2003

(With Independent Auditors’ Report Thereon)

Independent Auditors’ Report

The Partners
MIP Lessee, L.P.:

We have audited the accompanying consolidated balance sheet of MIP Lessee, L.P. and subsidiary (the Partnership) as of December 31, 2003 and the related consolidated statements of income, partners’ capital, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MIP Lessee, L.P. and subsidiary as of December 31, 2003 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

March 24, 2004

MIP LESSEE, L.P.

Consolidated Balance Sheet

December 31, 2003


Assets
Current assets:
Cash and cash equivalents	$	3,068,551
Accounts receivable, net of allowance for doubtful accounts of $87,779		2,906,545
Prepaid expenses		1,828,683
Deposits, inventory and other		901,331

Total current assets		8,705,110
Investments in hotel properties		295,145,832
Accumulated depreciation		(39,732,180	)

Investments in hotel properties, net		255,413,652
Assets held for sale		34,366,647
Restricted cash		9,470,146
Intangible assets, net of accumulated amortization of $3,508,191		5,674,685

Total assets	$	313,630,240

Liabilities and Partners’ Capital
Current liabilities:
Accounts payable	$	1,662,011
Accrued expenses and other liabilities		10,965,250
Distributions payable		19,564,938
Accrued interest payable		228,071

Total current liabilities		32,420,270
Long-term debt		190,028,523

Total liabilities		222,448,793

Minority interest - Meristar Hospitality Corporation		40,000,000
Commitments
Partners’ capital		51,181,447

	$	313,630,240

See accompanying notes to consolidated financial statements.

MIP LESSEE, L.P.

Consolidated Statement of Income

Year ended December 31, 2003


Revenues:
Rooms	$	63,137,834
Food and beverage		25,274,335
Other operating departments		4,586,451

Total revenues		92,998,620

Operating costs and expenses:
Rooms		16,596,259
Food and beverage		17,454,931
Other operating expenses		3,006,902
Undistributed expenses:
Administrative and general		8,802,545
Property operating costs		19,669,713
Management fees		2,005,484
Property taxes, insurance and other		7,184,738
Depreciation and amortization		13,096,760
Impairment of investments in hotel properties		24,000,000

Total operating expenses		111,817,332

Operating loss		(18,818,712	)
Interest expense, net		12,209,522

Loss before minority interest - MeriStar Hospitality Corporation		(31,028,234	)
Minority interest - MeriStar Hospitality Corporation		8,757,217

Net loss from continuing operations		(39,785,451	)
Loss from discontinued operations		(9,643,549	)

Net loss		(49,429,000	)

See accompanying notes to consolidated financial statements.

MIP LESSEE, L.P.

Consolidated Statement of Partners’ Capital

Year ended December 31, 2003


				General			Limited
				Partners			Partners
	Total			1%			99%
Balance, December 31, 2002		100,610,447			1,006,104			99,604,343
Net loss		(49,429,000	)		(49,429	)		(49,379,571	)

Balance, December 31, 2003	$	51,181,447		$	956,675		$	50,224,772

See accompanying notes to consolidated financial statements.

MIP LESSEE, L.P.

Consolidated Statement of Cash Flows

Year ended December 31, 2003


Cash flows from operating activities:
Net loss	$	(49,429,000	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		14,882,808
Impairment of investments in hotel properties		32,247,956
Minority interest		8,757,217
Change in operating assets and liabilities:
Accounts receivable, net		926,187
Prepaid expenses		(948,683	)
Deposits, inventory and other assets		(342,405	)
Accounts payable		592,431
Accrued expenses and other liabilities		607,550
Accrued interest payable		(622,443	)

Net cash provided by operating activities		6,671,618

Cash flows from investing activities:
Investments in hotel properties		(5,535,329	)
Increase in restricted cash		(9,470,146	)

Net cash used in investing activities		(15,005,475	)

Cash flows from financing activities:
Repayments of borrowings		(183,342,683	)
Proceeds from borrowings		193,000,000
Deferred financing costs paid		(5,321,850	)

Net cash provided by financing activities		4,335,467

Net decrease in cash and cash equivalents		(3,998,390	)
Cash and cash equivalents, beginning of year		7,066,941

Cash and cash equivalents, end of year	$	3,068,551

Supplemental cash flow information:
Cash paid for interest, net of capitalized interest of $542,157	$	14,478,972

See accompanying notes to consolidated financial statements.

MIP LESSEE, L.P.

Consolidated Statement of Cash Flows

December 31, 2003

(1) Organization

MIP Lessee, LP (the Partnership) is a limited partnership organized on March 31, 2000 to lease and operate the hotels owned by MeriStar Investment Partners, L.P. (MIP, L.P.). The following table lists the general partners and limited partners of the Partnership.


General Partners:
MIP GP, LLC
MIP Gen Par, LLC
Limited Partners:
Interstate H&R Operating Company, L.P.
Oak Hill Capital Management Partners, L.P.
MIP Scottsdale, Inc.
MIP Bloomington, Inc.
MIP San Diego, Inc.
MIP Iowa City, Inc.
MIP Trumbull, Inc.
MIP Anchorage, Inc.
MIP Newark, Inc.
MIP Milwaukee, Inc.
MIP Walnut Creek, Inc.
MIP Philadelphia, Inc.
Oak Hill Capital Partners, L.P.

MIP GP, LLC and Interstate H&R Operating Company, L.P. are affiliated with Interstate Hotels & Resorts, Inc. (Interstate). The remaining partners are affiliated with Oak Hill Capital Management, Inc.

The Partnership owns the general partnership interest in MIP, L.P., a limited partnership organized on March 31, 2000 to acquire and own upscale, full-service hotels. MeriStar Hospitality Corporation, a related party, through its subsidiary MeriStar Hospitality Operating Partnership (MHOP) owns the limited partnership interest in MIP, L.P. in the form of a preferred investment and does not participate in the earnings of MIP, L.P. in excess of its preferred return. Accordingly, the financial results of MIP, L.P., which include the operations of the hotels, have been included in the consolidated financial statements of the Partnership.

MIP LESSEE, L.P.

Notes to Consolidated Financial Statements

December 31, 2003

At December 31, 2003, Lessee leased the following hotels (the Hotels) owned by MIP, L.P.:


Name of Hotel		Location
Radisson Resort & Spa		Scottsdale, AZ
Hilton Airport Hotel		Minneapolis, MN
Radisson Hotel		San Diego, CA
Sheraton Hotel		Iowa City, IA
Marriott Hotel		Trumbull, CT
Sheraton Hotel		Anchorage, AK
Hilton Hotel		Newark, CA
Wyndham Hotel		Milwaukee, WI
Embassy Suites		Walnut Creek, CA
Embassy Suites		Philadelphia, PA

(2) Summary of Significant Accounting Policies

(a) Principles of Consolidation

The consolidated financial statements include the accounts of the Partnership and its subsidiary, MIP, L.P. All significant intercompany balances and transactions have been eliminated.

(b) Cash Equivalents

The Partnership considers all highly liquid instruments with original maturities of three months or less to be cash equivalents.

(c) Restricted Cash

Restricted cash includes repair and replacement reserves required by the lender.

(d) Investment in Hotel Properties

Investments in hotel properties are recorded at cost. Building and building improvements are depreciated on a straight-line basis over 40 years. Furniture and equipment are depreciated on a straight-line basis over estimated useful lives of five to seven years.

(e) Intangible Assets

Intangible assets primarily consist of deferred financing costs and franchise costs. Financing costs incurred in obtaining debt are amortized over the lives of the related debt instruments using a method that approximates the interest method. Franchise costs are amortized on a straight-line basis over the terms of the related franchise agreements.

(f) Impairment of Long-Lived Assets

The Partnership accounts for long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS No. 144 provides a single accounting model for long-lived assets to be disposed. SFAS No. 144 also change the criteria for classifying an asset as held for sale and broadens the scope of businesses to be disposed

MIP LESSEE, L.P.

Notes to Consolidated Financial Statements

December 31, 2003

of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations.

In accordance with SFAS No. 144, long-lived assets and certain intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to probable estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet.

The Partnership classifies a hotel as held for sale in the period in which it has made the decision to dispose of the hotel, a binding agreement to purchase the property has been signed under which the buyer has committed a significant amount of nonrefundable cash and no significant financing contingencies exist which could cause the transaction not to be completed in a timely manner. If these criteria are met, the Partnership records an impairment loss if the fair value less costs to sell is lower than the carrying amount of the hotel and will cease incurring depreciation. The Partnership classifies the loss, together with the related operating results, as discontinued operations on our statement of operations and classifies the assets and related liabilities as held for sale on the balance sheet.

(g) Derivative Financial Instruments and Hedging

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (FAS No. 133) requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS No. 137 and No. 138 amended certain provisions of FAS No. 133.

The Partnership is a party to two interest rate cap agreements. Under the cap agreements, the Partnership made initial premium payments to the counterparty in exchange for the right to receive payments from the counterparty if interest rates exceed specified levels during the agreement period. Parties to interest rate cap agreements are subject to market risk for changes in interest rates and credit risk in the event of nonperformance by the counterparty.

At the inception of these hedges, the Company did not prepare the contemporaneous documentation required by FAS 133. Accordingly, all changes in fair value of the interest rate cap were recorded in earnings.

(h) Partners’ Capital and Allocation of Profits

In general, the allocation of income and losses are made in proportion to the partners’ respective capital contributions.

MIP LESSEE, L.P.

Notes to Consolidated Financial Statements

December 31, 2003

(i) Revenue Recognition

Revenue is earned primarily through the operation and management of the Hotels and is recognized when earned.

(j) Income Taxes

No provision has been made for income taxes since any such amount is the liability of the individual partners.

(k) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the partners to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses recognized during the reporting period. Actual results could differ from those estimates.

(l) Fair Value of Financial Instruments

The Partnership's financial instruments include cash equivalents, accounts receivable, accounts payable and accrued expenses, including distribution payable, and variable rate debt. The fair value of cash equivalents, accounts receivable, accounts payable and accrued expenses, including distributions payable, were not materially different from their carrying values given their short-term nature or contractual values. The fair value of the LIBOR-based variable rate debt approximates its carrying value.

(3) Investments in Hotel Properties

Investments in hotel properties consist of the following at December 31, 2003:


Land	$	32,387,350
Buildings and building improvements		220,321,094
Furniture, fixtures, and equipment		33,556,803
Construction-in-progress		8,880,585

		295,145,832
Less accumulated depreciation		(39,732,180	)

	$	255,413,652

(4) Other Assets

Other assets consist of the following at December 31, 2003:


Deferred financing costs	$	8,716,660
Franchise costs		433,015
Other		33,201

		9,182,876
Less accumulated amortization		(3,508,191	)

	$	5,674,685

MIP LESSEE, L.P.

Notes to Consolidated Financial Statements

December 31, 2003

(5) Long-Term Debt

On March 31, 2000, MIP, L.P. entered into a $260 million senior secured acquisition credit facility (Credit Facility) with a syndicate of lenders. The Credit Facility had a three-year initial term and two one-year extensions at MIP, L.P.’s option. During the initial term, the interest rate on the Credit Facility was 300 basis points over the 30-day London Interbank Offered Rate (LIBOR). Outstanding borrowings on the

Credit Facility were repaid on March 27, 2003. During 2003, interest expense incurred on the Credit Facility was $267,610. The deferred financing costs associated with the Credit Facility were fully amortized on the repayment date.

On March 27, 2003, MIP, L.P. entered into two separate agreements with Lehman Brothers Holdings Inc. to borrow an aggregate of $193 million to repay amounts due under the Credit Facility. The Loan Agreement provided a principal amount of $135 million and matures on April 9, 2006. The Mezzanine Loan Agreement provided a principal amount of $58 million and matures on April 9, 2006. The loans are secured by the Hotels and various hotel reserve accounts as defined in the loan agreements. Both loan agreements were amended on April 15, 2003.

The amended Loan Agreement reduced the principal amount to $128,100,000 and amended certain of the other terms. The amended Loan agreement increased the interest rate from 175 basis points to 275 basis points over the 30-day London Interbank Offered Rate (LIBOR). Principal and interest are paid monthly in accordance with an amortization schedule with all unpaid principal due at maturity.

The amended Mezzanine Loan Agreement increased the principal amount to $64,900,000 and amended certain other terms. The amended Mezzanine Loan agreement decreased the interest rate from the 30-day London Interbank Offered Rate (LIBOR) plus 12.3319% to 30-day LIBOR plus 9.441063%. Principal and interest are paid monthly in accordance with an amortization schedule with all unpaid principal due at maturity.

During 2003, the Partnership incurred interest costs on the Loan Agreement and Mezzanine Loan Agreement of $6,636,902 and $7,219,627, respectively.

During 2003, the Partnership entered into two interest rate cap agreements. At December 31, 2003, the interest rate caps have a fair value of $290,933. During 2003, a total of $259,117 was recorded to interest expense related to the changes in fair value of the interest rate caps.

(6) Impairment of Long-Lived Assets

During 2003, the Partnership entered into a binding agreement to sell the Radisson Resort & Spa in Scottsdale, AZ. The assets relating to this hotel have been classified as held for sale and the Partnership recorded an impairment charge of $8,247,956 to reduce the carrying value of the hotel to its estimated fair value. The Partnership reclassified the assets and liabilities relating to this hotel as held for sale in our consolidated balance sheet as of December 31, 2003. The following table sets forth the balance sheet and statement of income detail of this hotel:


Property and equipment, net	$	33,999,993
Other assets		366,654

Total assets	$	34,366,647

Total liabilities	$	1,792,658

Revenues	$	15,406,395

Net operating loss	$	1,395,593

The operations of this hotel, including the impairment loss of $8,247,956 and net operating loss at $1,395,543 are classified as discontinued operations in the statement of operations.

During 2003, the Partnership recognized an impairment loss of $24,000,000 on the Hilton Hotel in Newark, CA to reduce the carrying value of this asset to its estimated fair value as a result of continuing negative trends in occupancy and operating results.

MIP LESSEE, L.P.

Notes to Consolidated Financial Statements

December 31, 2003

(7) Minority Interest

MHOP, the limited partner in MIP, L.P., earns a cumulative preferred return of 16% per annum on its investment. The preferred return is paid on a cumulative basis as provided in the MIP, L.P. partnership agreement. The Partnership accrued $8,757,217 for the preferred return in 2003 which is recorded as distributions payable on the consolidated balance sheet. Subsequent to 2001, the Partnership has not paid the preferred return.

(8) Commitments

MeriStar Management Company, L.L.C., a subsidiary of Interstate, provides management services to the Partnership under five-year management agreements. The management agreements include termination provisions upon the sale of a hotel. The management fees for the Hotels range from 2% to 4% of total revenue based on the operating performance of the individual hotel. The Partnership incurred management fees of $2,621,707 in 2003.

(9) Subsequent events

The partnership trailing twelve months debt service coverage ratio was below the minimum requirement of 1.15 times at December 31, 2003. As a result, all rents and proceeds with respect to the properties are currently deposited into a lender controlled lockbox as of March 23, 2004.

EX-99.4 13 w93680a1exv99w4.htm EX-99.4 CONSOL FIN STMTS - FCH/IHC LEASING, L.P. exv99w4

Exhibit 99.4

FCH/IHC LEASING, L.P.

Consolidated Financial Statements

December 31, 2003

(With Independent Auditors’ Report Thereon)

1988T

Independent Auditors’ Report

The Partners
FCH/IHC Leasing, L.P.:

We have audited the accompanying consolidated balance sheet of FCH/IHC Leasing, L.P. and subsidiaries (the Partnership) as of December 31, 2003, and the related consolidated statements of operations, partners’ deficit and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FCH/IHC Leasing, L.P. and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

March 26, 2004

FCH/IHC LEASING, L.P.

Consolidated Balance Sheet

December 31, 2003


Assets
Cash and cash equivalents	$	495,945
Accounts receivable, less allowance for doubtful accounts of $50,331		980,351
Inventory and other assets		67,783

Total assets	$	1,544,079

Liabilities and Partners’ Deficit
Accounts payable and other accrued expenses	$	1,655,179
Due to lessor - related party		7,286,057
Management fees payable - related party		62,774
Advance guest deposits		193,409

Total liabilities		9,197,419
Partners’ deficit		(7,653,340	)

Total liabilities and partners’ deficit	$	1,544,079

See accompanying notes to consolidated financial statements.

FCH/IHC LEASING, L.P.

Consolidated Statement of Operations

Year ended December 31, 2003


Lodging revenues:
Rooms	$	21,286,721
Food and beverage		1,281,638
Telephone		273,029
Other		837,590

		23,678,978
Lodging expenses		9,121,244

Operating profit		14,557,734

Property expenses:
Administrative and general		2,303,323
Management fees		710,368
Franchise fees		1,525,646
Advertising and sales		1,158,101
Repairs and maintenance		1,939,875
Heat, power and light		1,392,788
Insurance, taxes and other		705,946

Total property expenses		9,736,047
Other expenses:
Base lease expense		6,428,889
Percentage lease expense		2,046,943

Total other expenses		8,475,832

Net loss		(3,654,145	)

See accompanying notes to consolidated financial statements.

FCH/IHC LEASING, L.P.

Consolidated Statement of Partners’ Deficit

Year ended December 31, 2003


				General Partners			Limited Partners
	Total			1%			99%
Balance, December 31, 2002		(3,999,195	)		(39,992	)		(3,959,203	)
Net loss		(3,654,145	)		(36,541	)		(3,617,604	)

Balance, December 31, 2003		(7,653,340	)		(76,533	)		(7,576,807	)

See accompanying notes to consolidated financial statements.

FCH/IHC LEASING, L.P.

Consolidated Statement of Cash Flows

Year ended December 31, 2003


Cash flows from operating activities:
Net loss	$	(3,654,145	)
Adjustments to reconcile net loss to net cash used in operating activities:
Changes in assets and liabilities:
Accounts receivable		(228,878	)
Inventory and other assets		95,779
Accounts payable and accrued expenses		(3,769,785	)
Due to lessor - related party		7,442,959
Management fees payable - related party		(1,378	)
Advance guest deposits		175,050

Net cash provided by operating activities		59,602
Cash and cash equivalents at beginning of period		436,343

Cash and cash equivalents at end of period	$	495,945

See accompanying notes to consolidated financial statements.

FCH/IHC Leasing, L.P.

Notes to Consolidated Financial Statements

December 31, 2003

(1) Organization and Basis of Presentation

FCH/IHC Leasing, L.P. and its subsidiaries (the Partnership), a limited partnership, was formed pursuant to a Partnership Agreement (the Agreement) effective March 27, 2001, by Interstate/Dallas, GP, L.L.C. (Interstate GP), a Delaware limited liability company, and FCH/Interstate Leasing, L.L.C. (FCHI GP), a Delaware limited liability company, as general partners, and Interstate/Dallas Partnership, L.P. (Interstate LP) and BHR Operations, L.L.C. (BHR LP), as limited partners. FCHI GP and BHR LP are majority owned subsidiaries of FelCor Lodging Trust, Inc. (Felcor) and collectively had a 50% partnership interest at the formation of the Partnership. Interstate GP and Interstate LP are wholly owned subsidiaries of Interstate Hotels & Resorts, Inc. (Interstate and formerly, Interstate Hotels Corporation) and collectively had a 50% partnership interest at the formation of the Partnership. The partnership interests of FelCor and Interstate had substantially the same voting and distribution rights. Interstate GP and Interstate LP did not make a contribution resulting in a dilution of their partnership interest. At December 31, 2003, FCHI GP and BHR LP collectively have a 50.5% partnership interest and Interstate GP and Interstate LP collectively have a 49.5% partnership interest.

The Partnership leases eight limited-service hotels (the Hotels) through a series of wholly owned subsidiaries of the Partnership.


Hotel		Location
Atlanta-Downtown Fairfield Inn by Marriott		Atlanta, Georgia
Atlanta-Downtown Courtyard by Marriott		Atlanta, Georgia
Dallas-Regal Row Fairfield Inn by Marriott		Dallas, Texas
Houston-Near the Galleria Fairfield Inn by Marriott		Houston, Texas
Houston-Near the Galleria Courtyard by Marriott		Houston, Texas
Houston I-10 East Hampton Inn		Houston, Texas
Houston I-10 East Fairfield Inn by Marriott		Houston, Texas
Scottsdale-Downtown Fairfield Inn by Marriott		Scottsdale, Arizona

The Hotels are owned by FCH/IHC Hotels, L.P. (Lessor), an affiliate of the general and limited partners, and are managed by Interstate.

The term of the partnership shall continue until the occurrence of a dissolution or termination event as defined by the Agreement. In accordance with the terms of the partnership agreement, subsequent capital contributions from the partners may be required. Such capital contributions are to be made by the limited partners and the general partners at the discretion of the general partners and are to be paid in proportion to their respective partnership interest. The partnership agreement also provides for the exchange of partnership interests in the event of the failure of a partner to make subsequent capital contribution.

FCH/IHC Leasing, L.P.

Notes to Consolidated Financial Statements

December 31, 2003

(2) Summary of Significant Accounting Policies

(a) Principles of Consolidation

The consolidated financial statements include the accounts of the Partnership and its Subsidiaries as described in note 1. All significant intercompany transactions and balances have been eliminated in consolidation.

(b) Use of Estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

(c) Balance Sheet Presentation

The balance sheet of the Partnership is presented as unclassified in accordance with industry practice for real estate entities.

(d) Cash and Cash Equivalents

All unrestricted, highly liquid investments purchased with a remaining maturity of three months or less are considered to be cash equivalents. The Partnership maintains cash and cash equivalents with various financial institutions in excess of the amount insured by the Federal Deposit Insurance Corporation. Management believes the credit risk related to these cash and cash equivalents is minimal.

(e) Inventories

Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out (FIFO) method of accounting,

(f) Revenue Recognition

Revenue from rooms, food and beverage and other departments is recognized as earned on the close of each business day.

(g) Income Tax Status

For federal and state tax purposes, the Partnership is considered a partnership. Partnerships are generally not subject to state and federal income taxes. Accordingly, net income or loss and any available tax credits are allocated to the partners.

(3) Related Party Transactions

The Hotels are operated under management agreements with Crossroads Hospitality Management Company (CHMC), a wholly owned subsidiary of Interstate and an affiliate of Interstate G.P. and

FCH/IHC Leasing, L.P.

Notes to Consolidated Financial Statements

December 31, 2003

Interstate L.P. The management agreements provide for a management fee of 3% of gross revenues. During 2003, management fees were $710,368.

During 2003, accounting fees and other direct expenses of approximately $216,000 were recorded for services provided by CHMC. An affiliate of CHMC provides reinsurance to insurance carriers solely in connection with the insurance coverages that those carriers provide to certain of the Hotels.

The Partnership leases the Hotels from the Lessor. The initial term of these operating leases are for 10 years and expire on December 31, 2010. The leases can be extended by the mutual consent of the parties on the same terms for 2 periods of 5 years. Lease expense represents base lease expense and percentage lease expense that is based on a percentage of rooms, food, beverage, telephone and other revenues from the Hotels. For 2003, lease expense incurred by the Partnership was $8,475,832.

Minimum future lease payments are computed based on the base rent of each lease, as defined, and are as follows for the years ending December 31:


2004	$	6,392,300
2005		6,392,300
2006		6,392,300
2007		6,392,300
2008		6,392,300
Thereafter		12,784,600

	$	44,746,100

In connection with the formation of the Partnership, Capital Contribution Agreements (the Contribution Agreements) were entered into between FelCor Lodging Limited Partnership (FLLP), a limited partner of the Lessor, and various subsidiaries of the Partnership. The Contribution Agreements Require FLLP to contribute cash on behalf of FCHI GP and BHR LP to the Partnership annually, based upon specified levels as defined in the Contribution Agreements, to allow the Partnership to pay the amounts due under the leases that are not otherwise funded from the operations of the Hotels. FLLP is a majority owned subsidiary of Felcor.

(4) Franchise Agreements

The Hotels are operated under the following franchise names: Courtyard by Marriott (2) (the Courtyard Agreements), Fairfield Inn by Marriott (5) (the Fairfield Agreements) and Hampton Inn (1) (the Hampton Agreement), pursuant to franchise agreements between FCHI GP, the general partner of the Partnership and Marriott International and Hampton Inn. The initial terms of the Courtyard Agreements are 20 years and can be extended, by mutual consent of the parties and on the then current terms of Marriott International franchise agreements, for one period of ten years. The terms of the Fairfield Inn agreements are 20 years. The Courtyard Agreements and the Fairfield Agreements require ongoing fees, which are included in royalty expense in the consolidated statement of operations, amounting to 2.5% to 5.5%, respectively, of gross room revenues through the term of these agreements. In addition, other fees paid to Marriott International include a national advertising campaign fee of 2% to 3.5% of gross room revenues as well as fees for a national reservation system, networking, honored guest awards and other promotional programs.

FCH/IHC Leasing, L.P.

Notes to Consolidated Financial Statements

December 31, 2003

The Hampton Agreement was assigned to the Partnership on March 27, 2001 from the prior owner. The term of the Hampton Agreement is 12 years. The Hampton Agreement requires ongoing fees, which are included in royalty expense in the consolidated statement of operations and amounting to 4% of room revenues for the period. In addition, other fees paid to Hampton Inn, include a national advertising campaign fee of 4% of gross room revenues and other promotional programs.

During 2003, franchise fees totaled $1,525,646.

(5) Employee Benefits

Employees of the hotels leased by the Partnership are employees of Interstate and participate in the following Interstate-sponsored employee benefit plans. During 2003, the Partnership reimbursed Interstate $505,125 and $21,844 for health insurance premiums and
401(k) expenses, respectively.

EX-99.5 14 w93680a1exv99w5.htm EX-99.5 CONSOL FIN STMTS - FCH/IHC HOTELS, L.P. exv99w5

Exhibit 99.5

FCH/IHC HOTELS, L.P.

Consolidated Financial Statements

December 31, 2003

(With Independent Auditors’ Report Thereon)

1989MATYC

Independent Auditors’ Report

The Partners
FCH/IHC Hotels, L.P.:

We have audited the accompanying consolidated balance sheet of FCH/IHC Hotels, L.P. and subsidiaries (the Partnership) as of December 31, 2003, and the related consolidated statements of operation, partners’ capital and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FCH/IHC Hotels, L.P. and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

March 26, 2004

FCH/IHC HOTELS, L.P.
Consolidated Balance Sheet
December 31, 2003


Assets
Investment in hotel properties, net	$	78,422,032
Cash and cash equivalents		119,874
Restricted cash		1,414,328
Due from lessee – related party		7,286,057
Accounts receivable – related party		853,695
Other assets		109,503
Deferred costs, net of accumulated amortization of $431,835.		1,209,927

Total assets	$	89,415,416

Liabilities and Partners’ Capital
Accounts payable and accrued expenses	$	344,177
Accrued interest payable		4,666,663
Due to Felcor Lodging Trust, Inc. - related party		1,702,730
Due to Interstate Hotels & Resorts, Inc. - related party		947,270
Long-term debt		50,304,893

Total liabilities		57,965,733
Preferred partnership interest		16,581,000
Partners’ capital		14,868,683
Commitment and contingencies

Total liabilities and partners’ capital	$	89,415,416

See accompanying notes to consolidated financial statements.

FCH/IHC HOTELS, L.P.
Consolidated Statement of Operations
Year ended December 31, 2003


Revenues:
Base lease revenue	$	6,428,889
Percentage lease revenue		2,046,943

		8,475,832
Expenses:
General and administrative		397,426
Real estate and personal property taxes		1,133,122
Depreciation and amortization		3,569,888
Interest, net		3,892,312

Total expenses		8,992,748

Net loss		(516,916	)
Preferred partnership interest expense		1,705,725

Net loss applicable to partners		(2,222,641	)

See accompanying notes to consolidated financial statements.

FCH/IHC HOTELS, L.P.

Consolidated Statement of Partners’ Capital

Year ended December 31, 2003


				General Partners			Limited Partners
	Total			1%			99%
Balance, December 31, 2002	$	16,941,324			169,413			16,771,911
Contributions		150,000			1,500			148,500
Net loss applicable to partners		(2,222,641	)		(22,226	)		(2,200,415	)

Balance, December 31, 2003	$	14,868,683			148,687			14,719,996

See accompanying notes to consolidated financial statements.

FCH/IHC HOTELS, L.P.
Consolidated Statement of Cash Flows
Year ended December 31, 2003


Cash flows from operating activities:
Net loss	$	(2,222,641	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		3,569,888
Preferred partnership interest expense		1,705,725
Changes in assets and liabilities:
Due from lessee – related party		(7,442,949	)
Accounts receivable - related party		3,103,494
Other assets and accrued expenses		(106,003	)
Accrued interest payable		46,154

Net cash used in operating activities		(1,346,332	)
Cash flows from investing activities:
Restricted cash		373,103
Improvements to hotel properties and purchase of property and equipment		(1,165,306	)

Net cash used in investing activities		(792,203	)

Cash flows from financing activities:
Advances from related parties		2,650,000
Capital contribution		150,000
Payment on long-term debt		(779,263	)

Net cash provided by financing activities		2,020,737

Net change in cash and cash equivalents		(117,798	)
Cash and cash equivalents at beginning of period		237,672

Cash and cash equivalents at end of period	$	119,874

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	3,845,152

See accompanying notes to consolidated financial statements.

FCH/IHC HOTELS, L.P.

Notes to Consolidated Financial Statements

December 31, 2003

(1) Organization and Basis of Presentation

FCH/IHC Hotels, L.P. and subsidiaries (the Partnership), a limited partnership, was formed effective March 27, 2001 by Interstate/Dallas, GP, L.L.C. (Interstate GP), a Delaware limited liability company, and FelCor Hotel Asset Company, L.L.C. (FelCor GP), a Delaware limited liability company, as General Partners, and Interstate/Dallas Partnership, L.P. (Interstate LP) and FelCor Lodging Limited Partnership (FelCor LP), as Limited Partners. FelCor GP and FelCor LP are wholly owned by FelCor Lodging Trust, Inc. (Felcor) and collectively had a 50% partnership interest at the formation of the Partnership. Interstate GP and Interstate LP are wholly owned by Interstate Hotels & Resorts, Inc. (Interstate and formerly, Interstate Hotels Corporation) and collectively had a 50% partnership interest at the formation of the Partnership. The partnership interests of FelCor and Interstate have substantially the same voting and distribution rights. During 2003, FelCor GP and FelCor LP collectively made a capital contribution of $150,000. Interstate GP and Interstate LP did not make a contribution resulting in a dilution of their partnership interest. At December 31, 2003, FelCor GP and FelCor LP collectively have a 50.5% partnership interest and Interstate GP and Interstate LP collectively have a 49.5% partnership interest. FelCor LP also has a preferred partnership interest as described in note 7.

The Partnership was formed to acquire and lease limited service hotels. The Partnership owns eight limited-service hotels (the Hotels) through a series of wholly owned subsidiaries of the Partnership.


Hotel		Location
Atlanta-Downtown Fairfield Inn by Marriott		Atlanta, Georgia
Atlanta-Downtown Courtyard by Marriott		Atlanta, Georgia
Dallas-Regal Row Fairfield Inn by Marriott		Dallas, Texas
Houston-Near the Galleria Fairfield Inn by Marriott		Houston, Texas
Houston-Near the Galleria Courtyard by Marriott		Houston, Texas
Houston I-10-East Hampton Inn		Houston, Texas
Houston I-10-East Fairfield Inn by Marriott		Houston, Texas
Scottsdale-Downtown Fairfield Inn by Marriott		Scottsdale, Arizona

The Hotels are leased by FCH/IHC Leasing, L.P. (Lessee), an affiliate of the general and limited partners, and are managed by Interstate Hotels & Resorts, Inc. Revenues and expenses from the operation of the hotels included in the financial statements of the Lessee.

The term of the Partnership shall continue until the occurrence of a dissolution or termination event as defined by the Partnership agreement. In accordance with the terms of the partnership agreement, subsequent capital contributions from the partners may be required. Such capital contributions are to be made by the limited partners and the general partners at the discretion of the general partners and paid in proportion to their respective partnership interests. The partnership also provides for the exchange of partnership interests in the event of the failure of a partner to make subsequent capital contribution.

(Continued)

FCH/IHC HOTELS, L.P.

Notes to Consolidated Financial Statements

December 31, 2003

(2) Summary of Significant Accounting Policies

(a) Principles of Consolidation

The consolidated financial statements include the accounts of the Partnership as described in note 1. All significant intercompany transactions and balances have been eliminated in consolidation.

(b) Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

(c) Balance Sheet Presentation

The balance sheet of the Partnership is presented as unclassified in accordance with industry practice for real estate entities.

(d) Investment in Hotel Properties

The hotel properties are recorded at cost and are depreciated using the straight-line method over their estimated useful lives. The cost and the related accumulated depreciation applicable to property no longer in service are eliminated from the accounts, and any gain or loss thereon is included in operations. Maintenance and repairs are the responsibility of the Lessee; major renewals and improvements are capitalized.

(e) Cash and Cash Equivalents

All unrestricted, highly liquid investments purchased with a remaining maturity of three months or less are considered to be cash equivalents. The Partnership maintains cash and cash equivalents with various financial institutions in excess of the amount insured by the Federal Deposit Insurance Corporation. Management believes the credit risk related to these cash and cash equivalents is minimal.

(f) Restricted Cash

The borrowing arrangements with Lehman Brothers Bank, FSB as discussed in note 6 provide that certain cash from operations be restricted for the future acquisition of or for the replacement of property and equipment.

(g) Deferred Expenses

Deferred expenses consist primarily of loan acquisition costs and franchise fees. Loan acquisition costs are amortized over the life of the loans, which approximates the interest method. Franchise fee costs are being amortized on the straight-line method over the life of the underlying agreements, which range from 10 to 20 years.

(Continued)

FCH/IHC HOTELS, L.P.

Notes to Consolidated Financial Statements

December 31, 2003

(h) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The Partnership accounts for long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS No. 144 provides a single accounting model for long-lived assets to be disposed. SFAS No. 144 also changed the criteria for classifying an asset as held for sale and broadened the scope of businesses to be disposed that qualify for reporting as discontinued operations and changed the timing of recognizing losses on such operations.

In accordance with SFAS No. 144, long-lived assets and certain intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet. No assets are classified as held for sale in accordance with SFAS No. 144 as of December 31, 2003.

(i) Revenue Recognition

The Hotels are leased by the Partnership to the Lessee under a percentage lease agreement which provides for minimum base rent (Base Rent) and percentage rent based on fixed percentages of room revenue in excess of certain specified levels (Percentage Rent). Base lease revenue is recognized on a straight-line basis over the term of the related leases. Base Rent is paid monthly and Percentage Rent is paid on a schedule set forth in each percentage lease agreement.

Percentage lease revenue is reported as income over the lease term as it becomes receivable from the Lessee in accordance with the provisions of the leases.

(j) Income Tax Status

For federal and state tax purposes, the Partnership is considered a partnership. Partnerships are generally not subject to state and federal income taxes.

(Continued)

FCH/IHC HOTELS, L.P.

Notes to Consolidated Financial Statements

December 31, 2003

(3) Partner Advances

During 2003, FelCor and Interstate advanced $1,702,730 and $947,270, respectively, to the Partnership to fund operating requirements and property improvements. In February 2004, Interstate notified Felcor that they will not provide any additional capital contributions or advances to the Partnership. The Partnership will be dependent upon Felcor through its partnership interests, to provide additional funding, if required. Interstate’s partnership interests will be diluted to the extent that Felcor provides future capital contributions.

(4) Related Party Transactions

The Hotels are leased to the Lessee, an affiliate of the Partnership. The initial term of the leases are for 10 years and expire on December 31, 2010. The leases can be extended by the mutual consent of the parties on the same terms for 2 periods of 5 years. Lease revenue represents base lease revenue and percentage lease revenue that is based on a percentage of rooms, food, beverage, telephone, and other revenues from the Hotels, which is annually increased by the consumer price index and expire on December 31, 2010.

Minimum future lease revenue is computed based on the Base Rent of each lease, as defined, and is as follows for the years ending December 31:


2004	$	6,392,300
2005		6,392,300
2006		6,392,300
2007		6,392,300
2008		6,392,300
Thereafter		12,784,600

	$	44,746,100

Lease payments due from the Lessee are reported separately on the accompanying balance sheet as Accounts receivable - related party. Expenses paid on behalf of the hotels leased to the Lessee are reported separately on the accompanying balance sheet as Due from lessee - related party.

(Continued)

FCH/IHC HOTELS, L.P.

Notes to Consolidated Financial Statements

December 31, 2003

(5) Investment in Hotel Properties

Investment in hotel properties consisted of the following at December 31:


Land	$	7,416,232
Building		74,510,355
Furniture, fixtures, and equipment		11,944,470

Total		93,871,057
Less accumulated depreciation		(15,449,025	)

	$	78,422,032

During 2003, depreciation expense totaled $3,412,712.

(6) Long-Term Debt

On March 27, 2001, the wholly owned subsidiaries of the Partnership borrowed a total of $52,250,000 through a series of notes from Lehman Brothers Bank, FSB (the Notes). The proceeds from the Notes were used were used to purchase the Hotels. Additionally, $5,000,000 from the Notes proceeds was deposited into an escrow account to finance property improvements at the Hotels.

The Notes requires monthly principal and interest payments, with monthly interest payments beginning on March 27, 2001 and monthly principal payments beginning on April 11, 2001, pursuant to a twenty-five year amortization schedule. Interest is payable based on a fixed rate of 7.48%.

The Notes contain certain restrictive covenants including the limitations on the assumptions of additional indebtedness, change in the Partnership agreement, changes in the managing agent of the Hotels and the maintenance of compliance with the Americans with Disabilities Act. The Notes are cross-collateralized by substantially all of the Hotels’ assets, including the franchise agreements. Additionally, the Notes contain prepayment restrictions and yield maintenance provisions. At December 31, 2003, the Partnership would be required to pay a prepayment penalty of approximately $12 million in the event it decided to prepay the outstanding principal balance on the Notes.

Aggregate scheduled maturities of the Notes for each of the next five years ending December 31, and thereafter are as follows:


2004	$	828,614
2005		904,681
2006		975,687
2007		1,052,266
2008		1,124,664
Thereafter		45,418,981

Total	$	50,304,893

(Continued)

FCH/IHC HOTELS, L.P.

Notes to Consolidated Financial Statements

December 31, 2003

(7) Preferred Partnership Interest

At inception, FelCor LP contributed the Hotels to the Partnership. As consideration for its contribution of the Hotels, FelCor LP received a $16,581,000 preferred partnership interest. The preferred partnership interest contains certain privileges that include preferred return, profit, and loss allocations and distributions. The preferred partnership interest is redeemable at face value at the option of Partnership. The preferred interest is cumulative, accrues interest at 8.85% per annum and is payable from available cash flow, as defined in the partnership agreement. As of December 31, 2003, preferred interest payable was $4,447,284 and included in accrued interest payable on the accompanying balance sheet.

(8) Financial Instruments

The Partnership’s financial instruments include: cash and cash equivalents; restricted cash; and, long-term debt. The carrying value of the cash and cash equivalents and restricted cash approximates fair value because of the liquid nature and short-term maturity of the investments. The carrying value of the long-term debt is estimated to approximate its fair value.

(9) Commitments and Contingencies

The Hotels are operated under franchise agreements and are licensed as Courtyard by Marriott hotels (2), Fairfield Inn by Marriott hotels (5), and a Hampton Inn (1). The franchisors agreements require the payment of fees based on a percentage of hotel room revenue, beverage revenue, and food revenue, if applicable, which fees are paid by the Lessee, and therefore, are not included in the accompanying consolidated financial statements.

The Partnership has future lease commitments under a ground lease for one of the Hotels through April 30, 2068. Future minimum ground rent payable under this lease for each of the years ending December 31 are as follows:


2004	$	42,000
2005		42,000
2006		42,000
2007		42,000
2008		42,000
Thereafter		2,492,000

Total	$	2,702,000

(10) Subsequent events

The partnership trailing twelve months debt service coverage ratio was below the minimum requirement of 1.25 times at December 31, 2003. As a result, all rents and proceeds with respect to the properties are currently deposited into a lender controlled lockbox as of March 23, 2004.

-----END PRIVACY-ENHANCED MESSAGE-----


	1.	I have reviewed this annual report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A, to which this certification is attached, of Interstate Hotels & Resorts, Inc.;

	2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

	3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

	4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:


	a.	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;


	b.	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


	c.	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the registrant’s internal control over financial reporting; and


	a.	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


	b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


	1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


	2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

1.		Business

		Organization

		CNL IHC Partners, LP (the “Partnership”) was organized pursuant to the laws of the State of Delaware on November 19, 2001. RI Manchester Hotel Partners, LP, CY Manchester Hotel Partners, LP, Galleria Hotel Partners, LP, RI Manchester Tenant Corporation, CY Manchester Tenant Corporation and Galleria Tenant Corporation are wholly owned subsidiaries of the Partnership. The Partnership’s general partner is CNL IHC, LLC (the “General Partner”) and limited partners are CNL Hospitality Partners, LP (“CNL LP”) and Interstate Manchester Company, LLC (“Interstate”), (collectively, the “Limited Partners”). The General Partner and CNL LP are collectively referred to as the CNL Partners.

		The Partnership was originally formed in November 2001 to own and operate two Marriott hotel properties located in Manchester, Connecticut (the “Manchester Properties”). In September 2002, the Partnership acquired a Hampton Inn property located in Houston, Texas (the “Houston Property”). The Properties’ day-to-day operations are managed by affiliates of Interstate. However, all partners must agree to key decisions affecting the Properties.

		The structure of the Partnership is designed to allow the parent of its majority owner to continue to qualify as a real estate investment trust, which is generally not subject to federal income taxes. In keeping with this objective, the Partnership operates its Properties through taxable REIT subsidiary (“TRS”) entities, as permitted by the REIT Modernization Act of 1999.

		The General Partner and Limited Partners hold the following percentage interests in the Partnership:

		Cash flow deficits are possible, although they are not expected, which may require additional funding. In that case, the Partnership would have to rely on capital contributions from its partners and borrowings under loans to fund capital expenditures, operating losses and negative cash flows.

		Allocations and Distributions

		Profits are allocated as follows: (i) first to the CNL Partners, pro rata until the aggregate profit allocated for the year and all prior years is equal to the aggregate amount (if any) of net cash flow distributed during the year and all prior years as preferred distributions, (ii) second, to Interstate until the aggregate profit allocated for the year and all prior years, is equal to the aggregate amount (if any) of net cash flow distributed during the year and all prior years as preferred distributions and (iii) thereafter, any remaining profits are to be allocated among the partners in proportion to their percentage interests.

2.		Summary of Significant Accounting Policies

		A summary of significant accounting principles and practices used in the preparation of the financial statements follows:

		Basis of Financial Statement Presentation

		The Partnership prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclose contingent assets and liabilities at the date of consolidated financial statements and report amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

		Principles of Consolidation

		The accompanying consolidated financial statements include the accounts of CNL IHC Partners, LP and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

		Cash and Cash Equivalents

		The Partnership considers all amounts held in highly liquid instruments with original purchased maturities of three months or less as cash and cash equivalents. Cash and cash equivalents consists primarily of demand deposit accounts. Management believes the credit risk associated with cash and cash equivalents to be low due to the quality of the financial institutions in which these assets are held.

		Restricted Cash

		Certain amounts of cash are restricted under the management agreement with Interstate for maintenance and replacement of furniture, fixtures, and equipment at the Partnership’s Properties of which approximately $1.0 million and $0.4 million was classified as restricted cash in the accompanying consolidated balance sheets as of December 31, 2003 and 2002, respectively. These amounts are calculated as a percentage of sales in accordance with the hotel management agreement. Additionally, as of December 31, 2003 and 2002, the Partnership had $0.1 million and $0.9 million, respectively, of other restricted cash, which was restricted for budgeted renovations. The remainder of these funds is expected to be used in 2004.

		Property and Equipment

		Property and equipment is stated at cost and includes land, buildings and improvements, and furniture, fixtures and equipment. Buildings and equipment are depreciated on the straight — line method over the assets’ estimated useful lives of 40 and 7 years, respectively.

		Expenditures for major renewals and betterments are capitalized and depreciated over the related assets’ estimated useful lives. Expenditures for repairs and maintenance are expensed when incurred. Interest and real estate taxes incurred relating to renovation of the properties and amenities are capitalized to construction in progress during the active renovation period.

		Impairment of Long-Lived Assets

		In accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company’s long-lived assets are tested for recoverability annually or whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The assessment is based on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds its fair value. If impairment is recognized, the adjusted carrying amount of a long-lived asset is its new cost basis. For the years ended December 31, 2003 and 2002, the LLC recorded no impairments.

		Concentration of Credit Risk Financial instruments which potentially subject the Partnership to a concentration of credit risk consist principally of guest and trade accounts receivable. Concentration of credit risk with respect to guest and trade accounts receivable is limited due to the wide variety of customers and industries to which the Property’s services are sold, as well as the dispersion of customers across many geographic areas.

		Reclassification Certain items in the prior years’ consolidated financial statements have been reclassified to conform with the 2003 presentation. These reclassifications had no effect on partners’ capital or net income.

3.		Property and Equipment

		Property and equipment consist of the following at December 31, 2003 and 2002:

4.		Mortgage Notes Payable

		During 2001, the Partnership assumed a $6.7 million mortgage loan on one of the Manchester Properties. The loan requires monthly principal and interest payments of $53,933 and matures in November 2011. The outstanding principal balance bears interest at a rate of 8.32 percent per annum. During 2002, the Partnership assumed a $9.3 million mortgage loan associated with the Houston Property. The loan requires monthly principal and interest payments of $107,555 and matures in January 2023. The outstanding principal balance bears interest at a rate of 7.78 percent per annum. Both mortgages are collateralized by first mortgages and liens on the land, building and all other assets.

		At December 31, 2003, the balances for these mortgages were $6.5 million and $9.1 million, respectively. The Partnership incurred interest expense of approximately $1.3 million and $0.8 million during the years ended December 31, 2003 and 2002, respectively.

		As of December 31, 2003, scheduled principal payments on the mortgage loans are as follows:

5.		Related Parties Transactions

		Hotel Management Agreement

		The Partnership entered into an agreement with an affiliate of Interstate (the “Manager”) to manage the Properties. Under terms of the agreements, the Manager operates the Properties in return for a fixed management fee of 3 percent of gross revenues for each property, as defined in the management agreement. The Manager may also earn an incentive management fee equal to 30 percent of net operating income in excess of a threshold, as defined in the agreement. The Partnership incurred management fees and applicable sales tax on such fees of approximately $0.3 million and $0.2 million for the years ended December 31, 2003 and 2002, respectively.

		Other

		The Partnership has entered into various other agreements with related parties to provide services such as property, health, and workers’ compensation insurance. The Partnership incurred $0.4 million for such expenses for the year ended December 31, 2003, which is included in the accompanying consolidated statements of earnings.

6.		Income Taxes

		Under the provisions of the Internal Revenue Code and applicable state laws, the Partnership is only subject to taxation of income on the profits and losses from its TRS tenant operations. The components of the deferred taxes recognized in the accompanying consolidated balance sheet at December 31, 2003 and 2002 are as follows:

7.		Commitments and Contingencies


		The Partnership entered into franchise agreements with an affiliate of Marriott International, Inc. and an affiliate of Hilton Hotels Corporation. Under terms of the agreements, the affiliates get fees of 7.5 percent and 6.0 percent of hotel revenues, respectively. The Partnership incurred franchise fees of approximately $0.4 million and $0.6 million for the years ended December 31, 2003 and 2002, respectively.

		From time to time the Partnership may be exposed to litigation arising from operations of its business in the ordinary course of business. Management does not believe that resolution of these matters will have a material adverse impact on the Partnership’s financial condition or results of operations.

	a)		To the Members, in accordance with their sharing interests (as adjusted), to repay their respective cash equity (as defined), then,

	b)		to HFA, but only upon the closing of any sale or future refinancing of the Project, $624,159, then,

	c)		to the Members, in accordance with their sharing interests (as adjusted), until each has received a 20% internal rate of return with respect to the total capital then attributable to their sharing interests, calculated and compounded on a quarterly basis from the date that each capital contribution is made (defined as the “Return Threshold” in the Operating Agreement), then,

	d)		to Meristar, in accordance with its sharing interest minus 8.289%, and to HFA, in accordance with its sharing interest plus 8.289% (defined as the “HFA Promote” in the Operating Agreement).

(1)		Organization

		MIP Lessee, LP (the Partnership) is a limited partnership organized on March 31, 2000 to lease and operate the hotels owned by MeriStar Investment Partners, L.P. (MIP, L.P.). The following table lists the general partners and limited partners of the Partnership.

		MIP GP, LLC and Interstate H&R Operating Company, L.P. are affiliated with Interstate Hotels & Resorts, Inc. (Interstate). The remaining partners are affiliated with Oak Hill Capital Management, Inc.

		The Partnership owns the general partnership interest in MIP, L.P., a limited partnership organized on March 31, 2000 to acquire and own upscale, full-service hotels. MeriStar Hospitality Corporation, a related party, through its subsidiary MeriStar Hospitality Operating Partnership (MHOP) owns the limited partnership interest in MIP, L.P. in the form of a preferred investment and does not participate in the earnings of MIP, L.P. in excess of its preferred return. Accordingly, the financial results of MIP, L.P., which include the operations of the hotels, have been included in the consolidated financial statements of the Partnership.

	*(a)*		*Principles of Consolidation*

			The consolidated financial statements include the accounts of the Partnership and its subsidiary, MIP, L.P. All significant intercompany balances and transactions have been eliminated.

	*(b)*		*Cash Equivalents*

			The Partnership considers all highly liquid instruments with original maturities of three months or less to be cash equivalents.

	*(c)*		*Restricted Cash*

			Restricted cash includes repair and replacement reserves required by the lender.

	*(d)*		*Investment in Hotel Properties*

			Investments in hotel properties are recorded at cost. Building and building improvements are depreciated on a straight-line basis over 40 years. Furniture and equipment are depreciated on a straight-line basis over estimated useful lives of five to seven years.

	*(e)*		*Intangible Assets*

			Intangible assets primarily consist of deferred financing costs and franchise costs. Financing costs incurred in obtaining debt are amortized over the lives of the related debt instruments using a method that approximates the interest method. Franchise costs are amortized on a straight-line basis over the terms of the related franchise agreements.

	*(f)*		*Impairment of Long-Lived Assets*

			The Partnership accounts for long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS No. 144 provides a single accounting model for long-lived assets to be disposed. SFAS No. 144 also change the criteria for classifying an asset as held for sale and broadens the scope of businesses to be disposed

			of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations.

			In accordance with SFAS No. 144, long-lived assets and certain intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to probable estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet.

			The Partnership classifies a hotel as held for sale in the period in which it has made the decision to dispose of the hotel, a binding agreement to purchase the property has been signed under which the buyer has committed a significant amount of nonrefundable cash and no significant financing contingencies exist which could cause the transaction not to be completed in a timely manner. If these criteria are met, the Partnership records an impairment loss if the fair value less costs to sell is lower than the carrying amount of the hotel and will cease incurring depreciation. The Partnership classifies the loss, together with the related operating results, as discontinued operations on our statement of operations and classifies the assets and related liabilities as held for sale on the balance sheet.

	*(g)*		*Derivative Financial Instruments and Hedging*

			SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (FAS No. 133) requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS No. 137 and No. 138 amended certain provisions of FAS No. 133.

			The Partnership is a party to two interest rate cap agreements. Under the cap agreements, the Partnership made initial premium payments to the counterparty in exchange for the right to receive payments from the counterparty if interest rates exceed specified levels during the agreement period. Parties to interest rate cap agreements are subject to market risk for changes in interest rates and credit risk in the event of nonperformance by the counterparty.

			At the inception of these hedges, the Company did not prepare the contemporaneous documentation required by FAS 133. Accordingly, all changes in fair value of the interest rate cap were recorded in earnings.

	*(h)*		*Partners’ Capital and Allocation of Profits*

			In general, the allocation of income and losses are made in proportion to the partners’ respective capital contributions.

	*(i)*		*Revenue Recognition*

			Revenue is earned primarily through the operation and management of the Hotels and is recognized when earned.

	*(j)*		*Income Taxes*

			No provision has been made for income taxes since any such amount is the liability of the individual partners.

	*(k)*		*Use of Estimates*

			The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the partners to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses recognized during the reporting period. Actual results could differ from those estimates.

	*(l)*		*Fair Value of Financial Instruments*

			The Partnership's financial instruments include cash equivalents, accounts receivable, accounts payable and accrued expenses, including distribution payable, and variable rate debt. The fair value of cash equivalents, accounts receivable, accounts payable and accrued expenses, including distributions payable, were not materially different from their carrying values given their short-term nature or contractual values. The fair value of the LIBOR-based variable rate debt approximates its carrying value.

(3)		Investments in Hotel Properties

		Investments in hotel properties consist of the following at December 31, 2003:

(4)		Other Assets

		Other assets consist of the following at December 31, 2003:

(5)		Long-Term Debt

		On March 31, 2000, MIP, L.P. entered into a $260 million senior secured acquisition credit facility (Credit Facility) with a syndicate of lenders. The Credit Facility had a three-year initial term and two one-year extensions at MIP, L.P.’s option. During the initial term, the interest rate on the Credit Facility was 300 basis points over the 30-day London Interbank Offered Rate (LIBOR). Outstanding borrowings on the

		Credit Facility were repaid on March 27, 2003. During 2003, interest expense incurred on the Credit Facility was $267,610. The deferred financing costs associated with the Credit Facility were fully amortized on the repayment date.

		On March 27, 2003, MIP, L.P. entered into two separate agreements with Lehman Brothers Holdings Inc. to borrow an aggregate of $193 million to repay amounts due under the Credit Facility. The Loan Agreement provided a principal amount of $135 million and matures on April 9, 2006. The Mezzanine Loan Agreement provided a principal amount of $58 million and matures on April 9, 2006. The loans are secured by the Hotels and various hotel reserve accounts as defined in the loan agreements. Both loan agreements were amended on April 15, 2003.

		The amended Loan Agreement reduced the principal amount to $128,100,000 and amended certain of the other terms. The amended Loan agreement increased the interest rate from 175 basis points to 275 basis points over the 30-day London Interbank Offered Rate (LIBOR). Principal and interest are paid monthly in accordance with an amortization schedule with all unpaid principal due at maturity.

		The amended Mezzanine Loan Agreement increased the principal amount to $64,900,000 and amended certain other terms. The amended Mezzanine Loan agreement decreased the interest rate from the 30-day London Interbank Offered Rate (LIBOR) plus 12.3319% to 30-day LIBOR plus 9.441063%. Principal and interest are paid monthly in accordance with an amortization schedule with all unpaid principal due at maturity.

		During 2003, the Partnership incurred interest costs on the Loan Agreement and Mezzanine Loan Agreement of $6,636,902 and $7,219,627, respectively.

		During 2003, the Partnership entered into two interest rate cap agreements. At December 31, 2003, the interest rate caps have a fair value of $290,933. During 2003, a total of $259,117 was recorded to interest expense related to the changes in fair value of the interest rate caps.

(6)		Impairment of Long-Lived Assets

		During 2003, the Partnership entered into a binding agreement to sell the Radisson Resort & Spa in Scottsdale, AZ. The assets relating to this hotel have been classified as held for sale and the Partnership recorded an impairment charge of $8,247,956 to reduce the carrying value of the hotel to its estimated fair value. The Partnership reclassified the assets and liabilities relating to this hotel as held for sale in our consolidated balance sheet as of December 31, 2003. The following table sets forth the balance sheet and statement of income detail of this hotel:

		The operations of this hotel, including the impairment loss of $8,247,956 and net operating loss at $1,395,543 are classified as discontinued operations in the statement of operations.

		During 2003, the Partnership recognized an impairment loss of $24,000,000 on the Hilton Hotel in Newark, CA to reduce the carrying value of this asset to its estimated fair value as a result of continuing negative trends in occupancy and operating results.

(7)		Minority Interest

		MHOP, the limited partner in MIP, L.P., earns a cumulative preferred return of 16% per annum on its investment. The preferred return is paid on a cumulative basis as provided in the MIP, L.P. partnership agreement. The Partnership accrued $8,757,217 for the preferred return in 2003 which is recorded as distributions payable on the consolidated balance sheet. Subsequent to 2001, the Partnership has not paid the preferred return.

(8)		Commitments

		MeriStar Management Company, L.L.C., a subsidiary of Interstate, provides management services to the Partnership under five-year management agreements. The management agreements include termination provisions upon the sale of a hotel. The management fees for the Hotels range from 2% to 4% of total revenue based on the operating performance of the individual hotel. The Partnership incurred management fees of $2,621,707 in 2003.

(9)		Subsequent events

		The partnership trailing twelve months debt service coverage ratio was below the minimum requirement of 1.15 times at December 31, 2003. As a result, all rents and proceeds with respect to the properties are currently deposited into a lender controlled lockbox as of March 23, 2004.

(1)		Organization and Basis of Presentation

		FCH/IHC Leasing, L.P. and its subsidiaries (the Partnership), a limited partnership, was formed pursuant to a Partnership Agreement (the Agreement) effective March 27, 2001, by Interstate/Dallas, GP, L.L.C. (Interstate GP), a Delaware limited liability company, and FCH/Interstate Leasing, L.L.C. (FCHI GP), a Delaware limited liability company, as general partners, and Interstate/Dallas Partnership, L.P. (Interstate LP) and BHR Operations, L.L.C. (BHR LP), as limited partners. FCHI GP and BHR LP are majority owned subsidiaries of FelCor Lodging Trust, Inc. (Felcor) and collectively had a 50% partnership interest at the formation of the Partnership. Interstate GP and Interstate LP are wholly owned subsidiaries of Interstate Hotels & Resorts, Inc. (Interstate and formerly, Interstate Hotels Corporation) and collectively had a 50% partnership interest at the formation of the Partnership. The partnership interests of FelCor and Interstate had substantially the same voting and distribution rights. Interstate GP and Interstate LP did not make a contribution resulting in a dilution of their partnership interest. At December 31, 2003, FCHI GP and BHR LP collectively have a 50.5% partnership interest and Interstate GP and Interstate LP collectively have a 49.5% partnership interest.

		The Partnership leases eight limited-service hotels (the Hotels) through a series of wholly owned subsidiaries of the Partnership.

(3)		Related Party Transactions

		The Hotels are operated under management agreements with Crossroads Hospitality Management Company (CHMC), a wholly owned subsidiary of Interstate and an affiliate of Interstate G.P. and

		Interstate L.P. The management agreements provide for a management fee of 3% of gross revenues. During 2003, management fees were $710,368.

		During 2003, accounting fees and other direct expenses of approximately $216,000 were recorded for services provided by CHMC. An affiliate of CHMC provides reinsurance to insurance carriers solely in connection with the insurance coverages that those carriers provide to certain of the Hotels.

		The Partnership leases the Hotels from the Lessor. The initial term of these operating leases are for 10 years and expire on December 31, 2010. The leases can be extended by the mutual consent of the parties on the same terms for 2 periods of 5 years. Lease expense represents base lease expense and percentage lease expense that is based on a percentage of rooms, food, beverage, telephone and other revenues from the Hotels. For 2003, lease expense incurred by the Partnership was $8,475,832.

		Minimum future lease payments are computed based on the base rent of each lease, as defined, and are as follows for the years ending December 31: