| INTERSTATE HOTELS & RESORTS INC ITEM 1A RISK FACTORS You should carefully consider the risk factors set forth below as well as the other information contained in this Annual Report on Form 10-K in connection with evaluating us |
| Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, results of operations or financial condition |
| Certain statements in “Risk Factors” are forward-looking statements |
| Management’s Discussion and Analysis of Financial Condition and 14 _________________________________________________________________ Results of Operations — Forward Looking Statements” for additional information about our business, results of operations and financial condition |
| Risk Factors Related to Our Business We encounter industry risks related to operating and managing hotels that could cause our results of operations to suffer |
| Various factors could adversely affect our ability to generate revenues on which our management fees are based |
| Our business is subject to all of the operating risks inherent in the lodging industry |
| These risks include, but are not limited to, the following: • changes in national, regional and local economic conditions; • cyclical overbuilding in the lodging industry; • varying levels of demand for rooms and related services; • competition from other hotels, resorts and recreational properties, some of which may have greater marketing and financial resources than we or the owners of the properties we manage have; • the creditworthiness of the owners of the hotels that we manage and the risk of bankruptcy by hotel owners; • uninsured property, casualty and other losses; • disruptions due to weather conditions and other calamities; • labor disturbances or shortages of labor; • the ability of any joint ventures in which we invest to service any debt they incur and the risk of foreclosure associated with that debt; • present or future environmental legislation; • dependence on business and commercial travelers and tourism, which may fluctuate and be seasonal; • decreases in air travel; • fluctuations in operating costs; • the effects of owners not funding recurring costs of operations, necessary renovations, refurbishment and improvements of hotel properties; • changes in technology which may lead to changes in business, commercial and leisure travel frequency and/or patterns; • fluctuations in demand resulting from threatened or actual acts of terrorism or hostilities; • changes in governmental regulations that influence or determine wages, prices and construction and maintenance costs; and • changes in interest rates and the availability of credit |
| Demographic, geographic or other changes in one or more markets could impact the convenience or desirability of the sites of some hotels, which would, in turn, affect the operations of those hotels |
| 15 _________________________________________________________________ We encounter industry-related risks related to our investments in and ownership of hotels and other real estate that could adversely impact its value to us |
| As we hold or acquire interests in hotel properties, we are subject to the operating risks described in the immediately preceding risk factors |
| With respect to hotels and real estate where we hold an ownership interest, in addition to the risks already enumerated, we have the following additional risks: • changes in local real estate market conditions; • changes in the markets for particular types of assets; • present or future environmental legislation; • the recurring costs of necessary renovations, refurbishment and improvements of hotel properties; • adverse changes in zoning and other laws; • adverse changes in real estate tax assessments; • construction or renovation delays and cost overruns; and • limitations on our ability to quickly dispose of investments and respond to changes in the economic or competitive environment due to the relative illiquidity of real estate assets |
| As we expand through acquisition or development of real estate, the magnitude of these risks may increase |
| In addition, due to the level of fixed costs required to operate upscale and select-service hotels, significant expenditures necessary for the operation of these properties generally cannot be reduced when circumstances cause a reduction in revenue |
| The corporate housing business model has inherent risks that could negatively impact profits on our corporate housing assets |
| The corporate housing business generally operates with very low operating margins coupled with long average receivables collection cycles |
| In addition, unexpected declines in occupancy can lead to higher vacancy rates in the apartments we lease resulting in the costs of these uncovered leases offsetting the operating profits on the apartments that are occupied |
| This requires management to remain extremely diligent in evaluating and managing this business in order to maintain profitability and liquidity |
| While we believe we have the proper resources and senior management team in place to succeed in this industry, to the extent we were unable to maintain liquidity, the resulting impact could adversely affect our results of operations and financial position |
| The economy could adversely affect the performance of hotels and our retention of our existing hotel management agreements |
| The economic slowdown that occurred during 2001, 2002 and 2003 led to declines in room rates as hotels competed more aggressively for guests |
| As the economy enters growth cycles, it could result in the disposition by hotel owners of hotels we manage, which could result in the loss of management contracts, which could have an adverse effect on our revenues |
| If the economy again deteriorates, the economic slowdown may lead to an increased risk of bankruptcy by owners of hotels and/or foreclosures on the hotel properties, which may inhibit our ability to collect fees under our management agreements or may lead to their termination |
| Our management agreements may be terminated or not renewed under various circumstances, including if the properties to which they relate are sold or otherwise disposed of by their owners, potentially impacting our results of operations materially |
| If the owner of a property we manage disposes of the property, our management agreement may be terminated by the buyer |
| Similarly, if an owner of properties we manage is acquired, the subsequent owner may terminate our management agreements |
| Although the management agreements with our most significant owner, 16 _________________________________________________________________ MeriStar, contain termination fee provisions, our management agreements with other owners generally have limited or no termination fees payable to us if a hotel is sold and the agreement is terminated |
| The termination of management contracts as a result of hotel dispositions or otherwise could therefore have an adverse effect on our revenues |
| We record termination fees as management fee revenue as the related payments are received |
| As of December 31, 2005, approximately 83 of our management agreements had current terms scheduled to expire within two years |
| In addition, for certain of our owners, including MeriStar, we do not have the right to assign a management contract without prior written consent of the relevant hotel owner |
| A change in control of our company would require the consent of these owners |
| Our owners may also terminate a management agreement if specified performance standards at the hotel are not met in consecutive calendar years |
| In 2004, we were notified by MeriStar that they believed that we had failed to meet the performance standards for consecutive years at 11 hotels |
| We have come to an agreement to pay MeriStar approximately dlra0dtta6 million associated with the underperformance of these properties and accelerate a termination right, as noted earlier in “Item 1 |
| ” As of December 31, 2005, we managed 61 properties owned by MeriStar |
| During 2005, MeriStar sold nine hotels (one of which was the Hilton Durham, which we purchased) and in early 2006, they sold an additional 16 hotels and one golf and tennis club |
| We managed all 26 of these properties in 2005 and do not expect to continue to manage them after the transition period to the new owners |
| These properties accounted for dlra4dtta7 million, or 6dtta0prca of our total management fees in 2005 |
| We expect that the remaining termination fees for the 26 properties sold in 2005 and 2006 will amount to a minimum of dlra6dtta8 million |
| If we are terminated as manager upon the sale of a MeriStar-owned hotel, we will receive a termination fee |
| The termination fees are based upon an average of the present value of remaining estimated management fees due to us under the contract (a) discounted as annual payments and (b) discounted based on a lump sum payment at the end of the contract term |
| Any termination fee will be paid in 48 equal monthly installments, without interest, commencing the month following the termination |
| MeriStar may reduce the termination fee by providing a new hotel for us to manage within 30 months of the termination of the lost management contract to replace the terminated hotel |
| We agreed to provide MeriStar with a dlra2dtta5 million credit against termination fees owed for hotels to be sold all of which had been utilized as of December 31, 2005 |
| In connection with the termination of the intercompany agreement, MeriStar also received some additional termination rights, as described under “Item 1 |
| On February 21, 2006, MeriStar announced that it had entered into a definitive agreement to be acquired by affiliates of Blackstone |
| The acquisition is expected to close during the first half of 2006 |
| Our management agreements for 45 of the hotels Blackstone will acquire as a result of the transaction are currently in place and were not affected by the acquisition, and the Blackstone entities have and will have the same rights and duties (including with respect to budget setting, asset management and termination) as MeriStar under those contracts |
| We are currently in discussions with Blackstone as to its plans for MeriStar and the 45 hotels, but it is possible that Blackstone could terminate some or all of the management agreements with respect to those hotels or sell the hotels to new owners who might then terminate some or all of the agreements |
| Although, in most cases, Blackstone or the new owners would be required to pay us termination fees if the management agreements were terminated |
| The termination of these management contracts would most likely result in the write-off of management contract intangible assets of approximately dlra24 million and require an evaluation for potential impairment of our goodwill |
| These 45 hotels account for approximately 13cmam400 rooms and dlra13dtta8 million in management fees in 2005 |
| Therefore, the termination of the management agreements with respect to those hotels could have a material, adverse effect on our hotel management revenues and our profitability |
| A high percentage of the hotels we manage are upscale hotels, and our BridgeStreet corporate housing division primarily services business travelers and high-end leisure travelers, so we may be particularly susceptible to an economic downturn, which could have a material adverse effect on our results of operation and financial condition |
| Approximately 78prca of the rooms our hotel management division manages are in hotels that are classified as upscale, full-service hotels |
| These hotels generally command higher room rates |
| However, in an economic 17 _________________________________________________________________ downturn, these hotels may be more susceptible to a decrease in revenues, as compared to hotels in other categories that have lower room rates |
| This characteristic results from hotels in this segment generally targeting business and high-end leisure travelers |
| In periods of economic difficulties, business and leisure travelers may seek to reduce travel costs by limiting trips or seeking to reduce costs on their trips |
| The corporate housing segment is sensitive to economic conditions for the same reasons |
| Adverse changes in economic conditions could have a material adverse effect on our results of operations and financial condition |
| Due to the lease obligations of our corporate housing division, we may not be able to adjust our cost structure as a result of changes in demand for corporate housing, thereby leading to an adverse effect on our results of operations |
| Our corporate housing division has substantial commitments under leases that may not be cancelled |
| As a result, if demand for corporate housing decreases, we may not be able to adjust our cost structure to react to a decrease in demand, which could have an adverse effect on our results of operations |
| Similarly, in areas such as the United Kingdom, in which longer term leases are standard, we may not be able to readily adjust our corporate housing portfolio to take immediate advantage of shifting, advantageous growth and market conditions |
| Acts of terrorism, the threat of terrorism, the ongoing war against terrorism and other factors have impacted and will continue to impact the hotel industry and all hotel companies’ results of operations |
| The threat of terrorism could have a negative impact on hotel operations, causing lower than expected performance, particularly in weak economic cycles |
| The threat of terrorism could cause a significant decrease in hotels’ occupancy and average daily rate and result in disruptions in business and leisure travel patterns due to concerns about travel safety |
| Major metropolitan area and airport hotels have been adversely affected due to concerns about air travel safety and an overall decrease in the amount of air travel, particularly transient business travel |
| Future outbreaks of hostilities could have a material negative effect on air travel and on our business |
| In addition, increased security measures at airports or in major metropolitan areas may also cause disruptions to our operations |
| We have recently experienced significant improvements in operating levels compared to periods more proximate to the September 11, 2001 terrorist attacks |
| However, the uncertainty associated with subsequent incidents and threats and the possibility of future attacks may continue to hamper business and leisure travel patterns |
| In addition, potential future outbreaks of Severe Acute Respiratory Syndrome, Avian Influenza or other diseases and similar disruptive events could have a material adverse effect on our revenues and results of operations due to decreased travel and occupancy, especially in areas affected by the events |
| We are dependent on the owners of the hotel properties we manage to fund expenditures related to those properties, and if such funds are untimely or not paid, we are required to bear the cost |
| We incur significant expenditures related to the management of hotel properties, including salary and other benefit related costs and business and employee related insurance costs for which we are reimbursed by the hotel owners |
| However, to the extent an owner would not be able to reimburse these costs, due to a sudden and unexpected insolvency situation or otherwise, we would be required to pay these costs directly until such time as we could make other arrangements |
| Although, we would make every effort to eliminate these costs prior to the point at which an owner could not reimburse us and we would continue to pursue payment through all available legal means, our results of operations could be adversely affected if we were forced to bear those costs |
| 18 _________________________________________________________________ If we are unable to identify additional appropriate real estate acquisition or development opportunities and to arrange the financing necessary to complete these acquisitions or developments, our continued growth could be impaired |
| We continually evaluate potential real estate development and acquisition opportunities |
| Any future acquisitions or developments will be financed through a combination of internally generated funds, additional bank borrowings from existing or new credit facilities, public offerings or private placements of equity or debt securities |
| The nature of any future financing will depend on factors such as the size of the particular acquisition or development and our capital structure at the time of a project |
| We may not be able to identify appropriate new acquisition or development opportunities and necessary financing may not be available on suitable terms, if at all |
| An important part of our growth strategy will be the investment in, and acquisition of, hotels |
| Continued industry consolidation and competition for acquisitions could adversely affect our growth prospects going forward |
| We will compete for hotel and other investment opportunities with other companies, some of which may have greater financial or other resources than we have |
| Competitors may have a lower cost of capital and may be able to pay higher prices or assume greater risks than would be prudent for us to pay or assume |
| If we are unable to make real estate investments and acquisitions, our continued growth could be impaired |
| A significant factor in our strategic plan is the creation of joint ventures to acquire hospitality properties |
| Should we be unsuccessful in creating joint ventures, our continued growth could be impaired |
| The lodging industry and corporate housing market are highly competitive |
| There is no single competitor or small number of competitors that are dominant either in the hotel management, lodging or corporate housing business |
| We operate in areas that attract numerous competitors, some of which may have substantially greater resources than we or the owners of the properties that we manage have, including Marriott International, Inc, Starwood Hotel & Resorts Worldwide, Inc |
| and Hilton Hotels Corporation, among others |
| Competition in the lodging industry and corporate housing market is based generally on location, availability, room rates or corporate housing rates, range and quality of services and guest amenities offered |
| New or existing competitors could lower rates; offer greater conveniences, services or amenities; or significantly expand, improve or introduce new facilities in markets in which we compete |
| Any of these factors could adversely affect operations and the number of suitable business opportunities |
| In addition, we compete for hotel management contracts against numerous other companies, many of which may have more financial resources than we have |
| These competitors include the management divisions of the major hotel brands as well as independent, non-brand affiliated hotel managers |
| Our relationship with MeriStar may lead to conflicts of interest that adversely affect our stockholders’ interests |
| We have historically had a close business relationship with MeriStar, and as of December 31, 2005, we managed 61 of their properties |
| Paul W Whetsell is the Chief Executive Officer of MeriStar and is the Chairman of both companies |
| We and MeriStar may have conflicting views on the manner in which we manage MeriStar’s hotels, as well as our and their future acquisitions and dispositions |
| Whetsell may be presented with decisions that provide him the opportunity to benefit MeriStar to our detriment or benefit us to the detriment of MeriStar |
| Inherently, potential conflicts of interest will be present in all of the numerous transactions between us and MeriStar |
| In case of a potential conflict between us and MeriStar, we will form a special committee of our board of directors to consider the matter |
| Whetsell will recuse himself from all decision-making and deliberations relating to the matter, as will any other directors with interests in the matter |
| Furthermore, because of the independent trading of the two companies, stockholders in each company may have divergent interests that could lead to conflicts of interest |
| The divergence of interests could also reduce the anticipated benefits of our close relationship with MeriStar |
| 19 _________________________________________________________________ We may have conflicts relating to the sale of hotels subject to management agreements |
| As described in more detail below, MeriStar will generally be required to pay a termination fee to us if it elects to sell or transfer a hotel to a person or entity that is not an affiliate of MeriStar or if it elects to permanently close a hotel after a casualty and does not replace it with another hotel with a management fee equal to that payable under the management agreement to be terminated |
| MeriStar’s decision to sell a hotel may, therefore, have significantly different consequences for MeriStar and us |
| If MeriStar no longer qualifies as a REIT or is otherwise permitted to manage and operate hotels, our hotel management business could be adversely affected |
| For example, if MeriStar ceases to qualify as a REIT, it would have the right to operate newly acquired properties itself |
| If there is a change in the Internal Revenue Code that would permit MeriStar or one of its affiliates to operate hotels without adversely affecting MeriStar’s status as a REIT, MeriStar would not be required to enter into future renewals of our management agreements |
| Furthermore, the anticipated change in control of MeriStar through the purchase by Blackstone could have a negative effect on us, since our working relationship with Blackstone may not be the same as our working relationship with MeriStar |
| Our international operations expose us to additional risks, which, if we fail to manage them adequately, may adversely impact our results of operations |
| As we continue to grow our international presence, we are subject to various risks which include exposure to currency fluctuations, managing potential difficulties in enforcing contractual obligations and intellectual property rights, the burden of complying with a wide variety of laws and regulations and the effects of potential and actual international terrorism and hostilities |
| We are particularly sensitive to any factors that may influence international travel |
| In addition, we cannot be certain of the effect that changing political and economic conditions could have on our international hotel and corporate housing operations and on our ability to collect on loans to third-party owners overseas |
| Furthermore, the success of our international operations depends on our ability to attract and retain qualified management personnel who are familiar not only with our business and industry but also with the local commercial practices and economic environment |
| We manage three hotels in Moscow, Russia as of December 31, 2005 |
| Our management fees earned from hotels located in Russia were dlra8dtta2 million, dlra6dtta6 million and dlra5dtta4 million, or 10dtta5prca, 10dtta3prca and 8dtta5prca of total management fees for 2005, 2004 and 2003, respectively |
| We also manage three hotels in Canada as of December 31, 2005 |
| Our management fees earned from hotels located in Canada were dlra0dtta8 million, dlra1dtta1 million and dlra1dtta5 million, or 1dtta0prca, 1dtta7prca and 2dtta4prca of total management fees for 2005, 2004 and 2003, respectively |
| All of these management fees are paid in US dollars |
| We have receivables outstanding from our operations in Russia and former operations in Portugal of dlra3dtta3 million and dlra1dtta0 million, respectively, including the note receivable and other receivables that can only be paid upon the receipt of certain exemption letters from the IRS relating to foreign subsidiaries |
| These receivables are subject to the additional risks associated with international operations |
| Third-party hotel owners are not required to use the ancillary services we provide, which reduces the revenue we would otherwise receive from them |
| In addition to traditional hotel management services, we offer to third-party hotel owners several ancillary services such as purchasing, project management, insurance and risk management, information technology and telecommunication services, and centralized accounting services |
| We expect to derive a portion of our revenues from these services |
| Our management contracts do not obligate third-party hotel owners to utilize these services, and the failure of hotel owners to utilize these services could adversely affect our overall revenues |
| We may be adversely affected by the limitations in our franchising and licensing agreements |
| In addition, with respect to hotels for which we are not the franchisee, we may sign a manager acknowledgment agreement with the franchisor that details some of our rights and obligations with respect to the hotel and references the 20 _________________________________________________________________ hotel’s franchise agreement |
| The franchise agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of a hotel in order to maintain uniformity within the franchisor’s system |
| Those limitations may conflict with our philosophy of creating specific business plans tailored to each hotel and to each market |
| Standards are often subject to change over time, at the discretion of the franchisor, and may restrict a franchisee’s ability to make improvements or modifications to a hotel without the consent of the franchisor |
| In addition, compliance with standards could require a hotel owner to incur significant expenses or capital expenditures |
| Action or inaction by us or by the owner of a hotel could result in a breach of standards or other terms and conditions of the franchise agreements and could result in the loss or cancellation of a franchise license |
| Loss of franchise licenses without replacement would likely have an adverse effect on hotel revenues which could result in adverse affects to our overall revenues |
| In connection with terminating or changing the franchise affiliation of a hotel, the owner of the hotel may be required to incur significant expenses or capital expenditures |
| Moreover, the loss of a franchise license could have a material adverse effect upon the operation or the underlying value of the hotel covered by the franchise due to the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor |
| Franchise agreements covering the hotels we manage expire or terminate, without specified renewal rights, at various times and have differing remaining terms |
| As a condition to renewal, these franchise agreements frequently contemplate a renewal application process |
| This process may require an owner to make substantial capital improvements to a hotel |
| Although the management agreements generally require owners to make capital improvements to maintain the quality of a property, we are not able to directly control the timing or amount of those expenditures |
| Some of the franchise agreements under which we operate and manage hotels restrict the franchisee’s ability to own or operate another hotel within a specified territory or with regard to specific hotels |
| These limitations, if found to apply to us, may limit our ability to acquire new management agreements and potentially impair our continued growth |
| Costs of compliance with environmental laws could adversely affect operating results |
| Under various federal, state, local and foreign environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for noncompliance with applicable environmental and health and safety requirements for the costs of investigation, monitoring, removal or remediation of hazardous or toxic substances |
| These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances |
| The presence of these hazardous or toxic substances on a property could also result in personal injury or property damage or similar claims by private parties |
| In addition, the presence of contamination or the failure to report, investigate or properly remediate contaminated property, may adversely affect the operation of the property or the owner’s ability to sell or rent the property or to borrow using the property as collateral |
| Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of those substances at the disposal or treatment facility, whether or not that facility is or ever was owned or operated by that person |
| The operation and removal of underground storage tanks are also regulated by federal and state laws |
| In connection with the ownership and operation of hotels, the operators, such as us or the owners of those properties could be held liable for the costs of remedial action for regulated substances and storage tanks and related claims |
| Activities have been undertaken to close or remove storage tanks located on the property of several of the hotels that we own or manage |
| A significant number of the hotels that we own or manage have undergone Phase I environmental site assessments, which generally provide a non-intrusive physical inspection and database search, but not soil or groundwater analyses, by a qualified independent environmental consultant |
| The purpose of a Phase I assessment is to identify potential sources of contamination for which the hotel owner may be responsible |
| The Phase I assessments have not revealed, nor are we aware of, any environmental liability or compliance concerns that we believe would have a material adverse effect on our results of operations or financial condition |
| Nevertheless, it is possible that these environmental site assessments did not reveal all environmen- 21 _________________________________________________________________ tal liabilities or compliance concerns or that material environmental liabilities or compliance concerns exist of which we are currently unaware |
| In addition, a significant number of the hotels we own or manage have been inspected to determine the presence of asbestos |
| Federal, state and local environmental laws, ordinances and regulations also require abatement or removal of asbestos-containing materials and govern emissions of and exposure to asbestos fibers in the air |
| Asbestos-containing materials are present in various building materials such as sprayed-on ceiling treatments, roofing materials or floor tiles at some of the hotels |
| Operations and maintenance programs for maintaining asbestos-containing materials have been or are in the process of being designed and implemented, or the asbestos-containing materials have been scheduled to be or have been abated, at those hotels at which we are aware that asbestos-containing materials are present |
| Any liability resulting from non-compliance or other claims relating to environmental matters could have a material adverse effect on our results of operations or financial condition |
| Aspects of hotel, resort, conference center, corporate housing and restaurant operations are subject to governmental regulation, and changes in regulations may have significant effects on business |
| A number of states regulate various aspects of hotels, resorts, conference centers, corporate housing and restaurants, including liquor licensing, by requiring registration, disclosure statements and compliance with specific standards of conduct |
| We believe we are substantially in compliance with these requirements or, in the case of liquor licenses, that we have or will promptly obtain the appropriate licenses |
| Managers of hotels and providers of corporate housing are also subject to employment laws, including minimum wage requirements, overtime, working conditions and work permit requirements |
| Compliance with, or changes in, these laws could reduce the revenue and profitability of hotels and corporate housing units and could otherwise adversely affect our results of operations or financial condition |
| Under the Americans with Disabilities Act, or ADA, all public accommodations in the US are required to meet federal requirements related to access and use by disabled persons |
| These requirements became effective in 1992 |
| Although owners of hotels we manage have invested significant amounts in ADA-required upgrades, a determination that the hotels we own or the units leased by our BridgeStreet corporate housing division are not in compliance with the ADA could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants |
| Generally, hotel revenues are greater in the second and third calendar quarters than in the first and fourth calendar quarters |
| This may not be true, however, for hotels in major tourist destinations |
| Revenues for hotels in tourist areas generally are substantially greater during tourist season than other times of the year |
| Seasonal variations in revenue at the hotels we own or manage will cause quarterly fluctuations in revenues |
| Events beyond our control, such as extreme weather conditions, economic factors, geopolitical conflicts, actual or potential terrorist attacks, and other considerations affecting travel may also adversely affect our earnings |
| If we fail to retain our executive officers and key personnel our business could be harmed |
| Our ability to maintain our competitive position will depend, to a significant extent, on the efforts and ability of our senior management |
| Our ability to attract and retain highly qualified personnel is critical to our operations |
| Competition for personnel is intense, and we may not be successful in attracting and retaining our personnel |
| Our inability to attract and retain highly qualified personnel may adversely affect our results of operations and financial condition |
| 22 _________________________________________________________________ Risk Factors Related to Our Capital Structure Restrictions imposed by our debt agreements may limit our ability to execute our business strategy and increase the risk of default under our debt obligations |
| Our credit facility contains restrictive covenants |
| These restrictions include requirements to maintain financial ratios, which may significantly limit our ability to, among other things: • borrow additional money; • make capital expenditures and other investments; • pay dividends; • merge, consolidate or dispose of assets; • acquire assets; and • incur additional liens |
| For example, in connection with our purchase of the Hilton Concord in February 2005, we entered into an amendment to our amended and restated senior secured credit facility, referred to as the “Credit Facility,” in order to modify certain liquidity covenants that we would have otherwise failed pursuant to the purchase of the hotel |
| We entered into a second amendment to the Credit Facility in May 2005 |
| We are in compliance with the amended loan covenants and expect to be in compliance for the remainder of the loan term |
| While we believe that our current business plan and outlook will provide sufficient liquidity to fund our operations, a significant decline in our operations could reduce our cash from operations and cause us to be in default under other covenants in our debt agreements, leaving us unable to access our Credit Facility to supply needed liquidity to continue and implement new operations |
| We will, in the future, be required to repay, refinance or negotiate an extension of the maturity of our Credit Facility |
| However, our ability to complete a repayment, refinancing or extension is subject to a number of conditions, many of which are beyond our control |
| For example, if there were a disruption in the lodging or financial markets as a result of the occurrence of one of the risks identified above under “Risk Factors Related to Our Business” or any other event, we might be unable to access the financial markets |
| Failure to complete a repayment, refinancing or extension of our Credit Facility would have a material adverse effect on us |
| Impairments of assets or goodwill may increase the risk of default under our debt obligations |
| We are required to evaluate our assets, including goodwill, annually or upon certain trigger events in order to ascertain that the historical carrying value is not less than the fair market value of the asset |
| Should we determine that an asset’s carrying value is less than its fair market value, the asset would be considered impaired we would record a write-down of the asset to its current fair value |
| Our current debt covenants require us to maintain certain ratios, including a minimum net worth |
| If we are unable to obtain a waiver or amendment to the covenant the resulting default could adversely affect our liquidity |
| A deficit in working capital may reduce funds available to us for expansion of our business |
| As of December 31, 2005, we had a deficit in working capital of dlra5dtta7 million |
| This deficit in working capital may require us to make additional borrowings to pay our current obligations |
| Such borrowings would serve to reduce amounts available to us for pursuit of our business strategy of growing through securing additional management contracts and acquiring additional hotel, resort and conference center properties |
| 23 _________________________________________________________________ Our stockholder rights plan and the anti-takeover defense provisions of our charter documents may deter potential acquirers and depress our stock price |
| Under our stockholder rights plan, holders of our common stock hold one preferred share purchase right for each outstanding share of common stock they hold, exercisable under defined circumstances involving a potential change of control |
| The preferred share purchase rights have the anti-takeover effect of causing substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors |
| Those provisions could have a material adverse effect on the premium that potential acquirers might be willing to pay in an acquisition or that investors might be willing to pay in the future for shares of our common stock |
| Provisions of Delaware law and of our charter and bylaws may have the effect of discouraging a third party from making an acquisition proposal for us |
| These provisions could delay, defer or prevent a transaction or a change in control of us under circumstances that could otherwise give the holders of our common stock the opportunity to realize a premium over the then-prevailing market price of our common stock |
| These provisions include the following: • we are able to issue preferred shares with rights senior to our common stock; • our certificate of incorporation prohibits action by written consent of our stockholders, and our stockholders are not able to call special meetings; • our certificate of incorporation and bylaws provide for a classified Board of Directors; • our certificate of incorporation provides, with some exceptions, that holders of more than 35prca of MeriStar’s equity stock may not own more than 9dtta9prca of the shares of any class of our stock; • our directors are subject to removal only for cause and upon the vote of two-thirds of the outstanding shares of our common stock; • our bylaws require advance notice for the nomination of directors and for stockholder proposals; • we are subject to Section 203 of the Delaware General Corporation Law, which limits our ability to enter into business combination transactions with interested stockholders; and • specified provisions of our certificate of incorporation and bylaws may be amended only upon the affirmative vote of two-thirds of the outstanding shares |