10-K/A

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

Amendment No. 1

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

OF THE SECURITIES EXCHANGE ACT OF 1934

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For Fiscal Year Ended December 31, 2004

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 and purchase rights

for Series A Junior Participating Preferred 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).     þ

The aggregate market value of common stock held by non-affiliates of the registrant was $97,054,852, (based on the closing sale price of $5.39 on June 30, 2004 as reported by the New York Stock Exchange). 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 1, 2005 was 30,718,375.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement relating to the Registrant’s 2005 Annual Meeting of Shareholders are incorporated by reference into Part III. We expect to file our proxy statement on or about April 15, 2005.

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, 2004 in order to file the consolidated financial statements of one 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 Exhibit 99.1 to this Form 10-K/A.

2

ITEM 8.     TOTAL FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Exhibit 99.1 is hereby incorporated by reference into this Item 8.

3

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 item 1.01 of Form 8-K dated and filed October 28, 2004 announced the Company entered into a Stock Purchase Agreement to acquire Sunstone Hotel Properties, Inc.

      (b) Financial Statement Schedules

N/ A

      (c) Exhibits

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 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 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)).

4

Exhibit
No.		Description of Document
	4.5	Stock purchase agreement for Sunstone Hotel Partnership, LLC dated October 26, 2004 (See Current report on Form 8-K (Item 1.01) dated and filed October 28, 2004)
	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).
	10.7	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**	Amended and Restated Registration Rights Agreement, dated as of August 17, 2004, among the Company and certain stockholders of the Company specified therein.
	10.12**	Employment Agreement, dated as of December 31, 2003, by and between Steven D. Jorns and the Company.
	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**	First Amendment to the Amended and Restated Senior Secured Credit Facility, dated February 4, 2005, among the registrant, Interstate Operating Company, LP, Societe Generale, SG Credit Lyonnais New York Branch, Citigroup, Inc and various other vendors.
	21**	Subsidiaries of the Company.
	23.1*	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*	Sarbanes-Oxley Act Section 906 Certifications of Chief Executive Officer and Chief Financial Officer.
	99.1*	Consolidated Financial Statements of MIP Lessee, L.P.

 * Filed herewith

** Previously filed

5

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/ Thomas F. Hewitt

Thomas F. Hewitt

Chief Executive Officer

Dated: March 31, 2005

      KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas F. Hewitt 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
/s/ Thomas F. Hewitt Thomas F. Hewitt	Chief Executive Officer (Principal Executive Officer)	March 31, 2005
* Paul W. Whetsell	Chairman of the Board	March 31, 2005
/s/ J. William Richardson J. William Richardson	Chief Financial Officer (Principal Financial and Accounting Officer)	March 31, 2005
* Leslie R. Doggett	Director	March 31, 2005
Joseph J. Flannery	Director	March   , 2005
Raymond C. Mikulich	Director	March   , 2005

6

* John J. Russell, Jr.	Director	March 31, 2005
* James B. McCurry	Director	March 31, 2005
Sherwood M. Weiser	Director	March   , 2005
* Steven D. Jorns	Director	March 31, 2005
* Mahmood J. Khimji	Director	March 31, 2005
Karim J. Alibhai	Director	March   , 2005
*By: /s/ Christopher L. Bennett Christopher L. Bennett Attorney-in-fact

7 EX-23.1 2 w06773a1exv23w1.htm EXHIBIT 23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Interstate Hotels & Resorts, Inc.:

We consent to incorporation by reference in the registration statements on Form S-3 (Nos. 333-118561, 333-107660 and 333-84531) and S-8 (Nos. 333-113229, 333-92109, 333-89740, 333-61731, 333-60545 and 333-60539) , of our reports dated March 16, 2005 with respect to the consolidated balance sheets of Interstate Hotels & Resorts, Inc. and subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 and the effectiveness of internal control over financial reporting as of December 31, 2004, and our report dated March 25, 2005 with respect to the consolidated balance sheets of MIP Lessee, L.P. and subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of operations, partners’ capital and cash flows for the years then ended which reports appear in the December 31, 2004 annual report on Form 10-K/A of Interstate Hotels & Resorts, Inc.

KPMG LLP

McLean, Virginia
March 31, 2005

EX-23.1

exv23w1

EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Thomas F. Hewitt, certify that:

1.	I have reviewed this annual report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A, of Interstate Hotels & Resorts, Inc.;
2.	Based on my knowledge, this 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 report;
3.	Based on my knowledge, the financial statements, and other financial information included in this 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 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), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and we 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 report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and
d.	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 reasonably 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 the registrant’s board of directors (or persons performing the equivalent functions):

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, 2005

/s/ Thomas F. Hewitt

Thomas F. Hewitt

Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, J. William Richardson, certify that:

1.	I have reviewed this annual report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A, of Interstate Hotels & Resorts, Inc.;
2.	Based on my knowledge, this 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 report;
3.	Based on my knowledge, the financial statements, and other financial information included in this 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 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), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and we 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 report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and
d.	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 reasonably 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 the registrant’s board of directors (or persons performing the equivalent functions):

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, 2005

/s/ J. William Richardson

J. William Richardson

Chief Financial Officer

EX-32

EXHIBIT 32

Section 906 Certification

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to 18 U.S.C. ss. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of Interstate Hotels & Resorts, Inc. hereby certify, to such officers’ knowledge, that:

(i)   the accompanying Annual Report of 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. for the period ended December 31, 2004 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the securities Exchange Act of 1934, as amended;

and

(ii)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 31, 2005

/s/ Thomas F. Hewitt

Thomas F. Hewitt

Chief Executive Officer

/s/ J. William Richardson

J. William Richardson

Chief Financial Officer

EX-99.1

EXHIBIT 99.1

MIP LESSEE, L.P.

Consolidated Financial Statements

December 31, 2004 and 2003

(With Independent Auditors’ Report Thereon)

Independent Auditors’ Report

The Partners
MIP Lessee, L.P.:

We have audited the accompanying consolidated balance sheets of MIP Lessee, L.P. and subsidiary (the Partnership) as of December 31, 2004 and 2003 and the related consolidated statements of operations, partners’ capital, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. 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 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, 2004 and 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 25, 2005

Mclean, Virginia

1

MIP LESSEE, L.P.

Consolidated Balance Sheets

December 31, 2004 and 2003

	2004		2003
Assets
Investments in hotel properties, net	$	238,863,851	$	255,413,652
Assets held for sale		—		34,366,647
Cash and cash equivalents		7,749,070		3,068,551
Accounts receivable, net of allowance for doubtful accounts of $77,258 and $87,779, respectively		3,124,228		2,906,545
Prepaid expenses		672,105		1,828,683
Deposits, inventory and other		521,260		901,331
Restricted cash		5,987,032		9,470,146
Intangible assets, net		3,693,084		5,674,685
Total assets	$	260,610,630	$	313,630,240
Liabilities and Partner’s Capital
Accounts payable	$	980,968	$	1,662,011
Accrued expenses and other liabilities		7,474,368		10,965,250
Distributions payable — MeriStar Hospitality Corporation		19,881,809		19,564,938
Accrued interest payable		502,209		228,071
Long-term debt		143,693,725		190,028,523
Total liabilities		172,533,079		222,448,793
Minority interest – MeriStar Hospitality Corporation		40,000,000		40,000,000
Commitments
Partners’ capital		48,077,551		51,181,447
	$	260,610,630	$	313,630,240

See accompanying notes to consolidated financial statements.

2

MIP LESSEE, L.P.

Consolidated Statements of Operations

Years ended December 31, 2004 and 2003

	2004			2003
Revenues:
Rooms	$	63,254,563		$	58,854,670
Food and beverage		23,576,307			22,786,094
Other operating departments		4,641,351			4,365,147
Total revenues		91,472,221			86,005,911
Operating costs and expenses:
Rooms		16,742,251			15,205,782
Food and beverage		16,092,309			15,766,867
Other operating expenses		3,166,212			2,874,097
Undistributed expenses:
Administrative and general		8,317,443			7,933,224
Property operating costs		18,740,949			17,430,191
Management fees		2,709,741			1,865,637
Property taxes, insurance, and other		5,545,714			6,090,100
Depreciation and amortization		10,212,980			10,495,125
Total operating expenses		81,527,599			77,661,023
Operating income		9,944,622			8,344,888
Interest expense, net		12,132,721			12,636,735
Loss before minority interest – MeriStar Hospitality Corporation		(2,188,099	)		(4,291,847	)
Minority interest – MeriStar Hospitality Corporation		10,316,870			8,757,217
Loss from continuing operations		(12,504,969	)		(13,049,064	)
Loss from discontinued operations		(598,927	)		(36,379,936	)
Net loss	$	(13,103,896	)	$	(49,429,000	)

See accompanying notes to consolidated financial statements.

3

MIP LESSEE, L.P.

Consolidated Statements of Partners’ Capital

Years ended December 31, 2004 and 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	)		(494,290	)		(48,934,710	)
Balance, December 31, 2003	$	51,181,447		$	511,814		$	50,669,633
Contributions		10,000,000			1,000,000			9,000,000
Net loss		(13,103,896	)		(131,039	)		(12,972,857	)
Balance, December 31, 2004	$	48,077,551		$	1,380,775		$	46,696,776

See accompanying notes to consolidated financial statements.

4

MIP LESSEE, L.P.

Consolidated Statements of Cash Flows

Years ended December 31, 2004 and 2003

	2004			2003
Cash flows from operating activities:
Net loss	$	(13,103,896	)	$	(49,429,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		12,367,388			14,882,808
Losses on impairment of investments in hotel properties		—			32,247,956
Minority interest — MeriStar Hospitality Corporation		10,316,870			8,757,217
Change in operating assets and liabilities:
Accounts receivable, net		148,971			926,187
Prepaid expenses		1,156,578			(948,683	)
Deposits, inventory and other assets		355,329			(342,405	)
Accounts payable		(681,043	)		592,431
Accrued expenses and other liabilities		(3,490,882	)		607,550
Accrued interest payable		274,138			(622,443	)
Distributions payable — MeriStar Hospitality Corporation		(10,000,000	)		—
Cash provided by (used in) operating activities		(2,656,547	)		6,671,618
Cash flows from investing activities:
Proceeds from sale of hotel properties		49,814,665			—
Capital expenditures for hotel properties		(9,625,915	)		(5,535,329	)
Change in restricted cash		3,483,114			(9,470,146	)
Cash provided by (used in) investing activities		43,671,864			(15,005,475	)
Cash flows from financing activities:
Partner contributions		10,000,000			—
Repayments of borrowings		(46,334,798	)		(183,342,683	)
Proceeds from borrowings		—			193,000,000
Deferred financing costs		—			(5,321,850	)
Cash provided by (used in) financing activities		(36,334,798	)		4,335,467
Net increase (decrease) in cash and cash equivalents		4,680,519			(3,998,390	)
Cash and cash equivalents, beginning of year		3,068,551			7,066,941
Cash and cash equivalents, end of year	$	7,749,070		$	3,068,551
Supplemental cash flow information:
Cash paid for interest, net of capitalized interest of $595,095 and $542,157, respectively	$	10,545,548		$	14,478,972

See accompanying notes to consolidated financial statements.

5

MIP LESSEE, L.P.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

(1)	Organization
	MIP Lessee, L.P. (the Partnership) is a limited partnership organized on March 31, 1999 to lease and operate the hotels owned by MeriStar Investment Partners, L.P. (MIP, L.P.). The general partners are MIP GP, LLC, an affiliate of Interstate Hotels & Resorts, Inc. (Interstate) and MIP Gen Par, LLC, an affiliate of Oak Hill Capital Management, Inc. (Oak Hill). The limited partners include Interstate H&R Operating Company, L.P., an affiliate of Interstate, and various affiliates of Oak Hill.
	The Partnership owns the general partnership interest in MIP, L.P., a limited partnership organized on March 31, 1999 to acquire and own upscale, full-service hotels. 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.
	MeriStar Hospitality Corporation (MeriStar), 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 or losses of MIP, L.P. except for its preferred return. MeriStar Hospitality Corporation’s preferred investment is presented as minority interest. MHOP earns a cumulative preferred return on its investment. Accrued but unpaid preferred returns are presented as distributions payable.
	At December 31, 2004, the Partnership leased the following hotels (the Hotels) owned by MIP, L.P.:

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

During 2004, the Partnership sold the Radisson Resort and Spa in Scottsdale, AZ and the Hilton Hotel in Newark, CA.

During December 2004, the partners agreed to amend the partnership agreements of the Partnership and MIP, LP. Pursuant to the agreement:

•   Oak Hill contributed $9 million and Interstate contributed $1 million to the Partnership. These contributions earn a 10% preferred return;

•   MeriStar received a $10 million payment toward its accrued preferred return;

•   MeriStar reduced its preferred return from 16% to 12%, on all but $3.5 million of its interest which was repaid subsequent to year end; and,

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MIP LESSEE, L.P.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

•   distribution priorities were amended.

While the above transactions occurred in December 2004, the amended partnership agreements could not be executed until such time as the outstanding long-term debt was refinanced. The debt was refinanced on February 9, 2005 (see note 8).

(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)	Investments 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 being amortized on a straight-line basis, which approximates the effective interest method, over the term of the related debt and are recorded as part of interest expense. 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). In accordance with SFAS 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.

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MIP LESSEE, L.P.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

	The Partnership classifies a hotel as held for sale in the period in which the decision to dispose of the hotel has been made, 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, if material, as held for sale on the balance sheet.
(g)	Derivative Financial Instruments and Hedging
	SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (SFAS 133), as amended, requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value.
	The Partnership is a party to 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.
	The Company has not prepared the contemporaneous documentation required by SFAS 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 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 distributions payable, and variable rate debt. The fair value

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MIP LESSEE, L.P.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

	of cash equivalents, accounts receivable, accounts payable and accrued expenses, and 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.
(m)	Reclassifications
	Certain prior year amounts have been reclassified to conform to current year presentation.

(3)	Investments in Hotel Properties
	Investments in hotel properties consist of the following at December 31, 2004 and 2003:

	2004			2003
Land	$	30,630,000		$	32,387,350
Buildings and building improvements		212,230,522			220,321,094
Furniture, fixtures, and equipment		39,493,775			33,556,803
Construction-in-progress		120,466			8,880,585
		282,474,763			295,145,832
Less accumulated depreciation		(43,610,912	)		(39,732,180	)
	$	238,863,851		$	255,413,652

(4)	Intangible Assets
	Intangible assets consist of the following at December 31, 2004 and 2003:

	2004			2003
Deferred financing costs	$	4,899,063		$	8,716,660
Franchise costs		440,900			433,015
Other		—			33,201
		5,339,963			9,182,876
Less accumulated amortization		(1,646,879	)		(3,508,191	)
	$	3,693,084		$	5,674,685

	The proceeds from the sale of two hotels were used to repay debt. During 2004, the Partnership wrote off deferred financing costs of $773,163 to interest expense in connection with these repayments.
(5)	Long-Term Debt
	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 refinance a credit facility. The Loan Agreement provided a principal amount of $135 million with a maturity date of April 9, 2006. The Mezzanine Loan Agreement provided a principal amount of $58 million with a maturity date of 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.

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MIP LESSEE, L.P.

Notes to Consolidated Financial Statements

December 31, 2004 and 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 were due monthly in accordance with an amortization schedule with all unpaid principal due at maturity.
	During 2004, the Partnership made repayments on the Loan Agreement and Mezzanine Loan in the aggregate amount of $46,334,798. These repayments included $29,956,058 and $12,114,050 for the Radisson Resort & Spa in Scottsdale, AZ and the Hilton Hotel in Newark CA, respectively which were required under the loan agreements at time of disposition of the hotels.
	During 2004, the Partnership incurred interest costs on the Loan Agreement and Mezzanine Loan Agreement of $5,159,481 and $6,255,300, respectively. During 2003, the Partnership incurred interest costs of 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, 2004 and 2003, the interest rate caps had a fair value of $281 and $290,933, respectively. During 2004 and 2003, a total of $290,652 and $259,117, respectively, was recorded to interest expense related to the changes in fair value of the interest rate caps.
(6)	Impairment of Long-Lived Assets and Discontinued Operations
	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 less costs to sell. The Partnership reclassified the related assets as held for sale in our consolidated balance sheet as of December 31, 2003. The liabilities are classified with accrued expenses and other liabilities. The following table sets forth the summarized balance sheet information for this hotel:

	2003
Property and equipment, net	$	33,999,993
Other assets		366,654
Total assets	$	34,366,647
Total liabilities, excluding long-term debt	$	1,792,658

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.

The Radisson Resort & Spa and Hilton Hotel were sold during 2004. The operating results and the loss on the dispositions are included in discontinued operations as follows:

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MIP LESSEE, L.P.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

	2004			2003
Revenues	$	12,784,313		$	22,384,411
Operating loss	$	(205,573	)	$	(4,131,980	)
Impairment loss		(393,354	)		(32,247,956	)
Loss from discontinued operations	$	(598,927	)	$	(36,379,936	)

(7)	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 $3,045,597 and $2,621,707 in 2004 and 2003, respectively.
(8)	Subsequent Events
	On February 9, 2005, MIP, L.P. entered into a loan agreement with German American Capital Corporation to borrow an aggregate of $175 million to repay amounts due under the Loan Agreement and Mezzanine Loan Agreement with Lehman Brothers Holdings Inc. and for other uses including the distribution of $9 million and $1 million to Oak Hill and Interstate, respectively, for the amounts contributed during December 2004, and an additional payment of $3.5 million to reduce the distributions payable to MeriStar. Following the closing of the refinancing, the amended partnership agreements were executed.

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