1342126--3/30/2007--Morgans_Hotel_Group

related topics

{property, intellectual, protect}

{debt, indebtedness, cash}

{stock, price, operating}

{cost, contract, operation}

{acquisition, growth, future}

{provision, law, control}

{competitive, industry, competition}

{operation, natural, condition}

{operation, international, foreign}

{personnel, key, retain}

{control, financial, internal}

{loss, insurance, financial}

{stock, price, share}

{cost, operation, labor}

{interest, director, officer}

{investment, property, distribution}

{financial, litigation, operation}

{tax, income, asset}

{loan, real, estate}

{regulation, government, change}

{cost, regulation, environmental}

{condition, economic, financial}

Risks Related to Our Business Boutique hotels are a highly competitive segment of the hospitality industry, which is generally subject to greater volatility than other segments of the industry. As a result, if we are unable to compete effectively or an economic slowdown occurs, our business and operations will be adversely affected by declines in our average daily room rates or occupancy. Our success depends on the value of our name, image and brand, and if demand for our hotels and their features decreases or the value of our name, image or brand diminishes, our business and operations would be adversely affected. Any failure to protect our trademarks could have a negative impact on the value of our brand names and adversely affect our business. Use of the Hard Rock brand name by entities other than us could damage the brand and our operations at the Hard Rock Hotel Casino in Las Vegas and adversely affect our business and results of operations. We may have disputes with, or be sued by, third parties for infringement or misappropriation of their proprietary rights, which could have a negative impact on our business. Our hotels are geographically concentrated in a limited number of cities and, accordingly, we could be disproportionately harmed by an economic downturn in these cities or a disaster, such as a terrorist attack. Our operations in Las Vegas, including the Hard Rock Hotel Casino and our planned development of the Delano Las Vegas and Mondrian Las Vegas properties, are subject to intense local competition that could impact our operations and adversely affect our business and results of operations. The threat of terrorism has adversely affected the hospitality industry generally and these adverse effects may continue or worsen. We are exposed to the risks of a global market which could hinder our ability to maintain and expand our international operations. We have incurred substantial losses and have a significant net deficit, and we expect that our net losses will continue and remain substantial for the foreseeable future, which may reduce our ability to raise capital. The hotel business is capital intensive; financing the rising cost of capital improvements and increasing operating expenses could reduce our cash flow and adversely affect our financial performance. We have high fixed costs, including property taxes and insurance costs, which we may be unable to adjust in a timely manner in response to a reduction in revenues. In addition, our property taxes have increased in recent years and we expect those increases to continue. Our strategy to acquire and develop or redevelop hotels creates timing, financing, operational and other risks that may adversely affect our business and operations. We may not be able to successfully compete for additional hotel properties. Integration of new hotels may be difficult and may adversely affect our business and operations. The use of joint ventures or other entities, over which we may not have full control, for hotel acquisitions could prevent us from achieving our objectives. We have recently invested, and may continue to invest in the future, in select non-hotel properties, such as condominium or other residential projects, and this strategy may not yield the returns we expect, may result in disruptions to our business or strain management resources. We have substantial debt, and we may incur additional indebtedness, which may negatively affect our business and financial results. We anticipate that we will refinance our indebtedness from time to time to repay our debt, and our inability to refinance on favorable terms, or at all, could harm our business and operations. Our revolving credit facility contains financial covenants that limit our operations and could lead to adverse consequences if we fail to comply. Our hedging strategies may not be successful in mitigating our risks associated with interest rates. Our operations are sensitive to currency exchange risks, and we cannot predict the impact of future exchange-rate fluctuations on our business and operating results. Our management has limited experience managing a public company. We may be exposed to potential risks relating to our internal controls over financial reporting. We depend on our key personnel for the future success of our business and the loss of one or more of our key personnel could have an adverse effect on our ability to manage our business and implement our growth strategies, or could be negatively perceived in the capital markets. The recent departure of our founder and certain members of our development and design teams could have an adverse effect on our ability to manage our business and implement our growth strategies. We depend on Jeffrey Chodorow for the management of our restaurants and certain of our bars. We depend on Golden Gaming to serve as the operator of the casino at the Hard Rock Hotel Casino in Las Vegas and to the extent Golden Gaming fails to provide these services, fails to make lease payments or if we were to become liable to third parties for the actions of Golden Gaming at the property, our cash flows and operating results could be adversely impacted. Because land underlying Sanderson is subject to a 150-year ground lease, Clift is leased pursuant to a 99-year lease and a portion of Hudson is the lease of a condominium interest, we are subject to the risk that these leases could be terminated and could cause us to lose the ability to operate these hotels. We are party to numerous contracts and operating agreements, certain of which limit our activities through restrictive covenants or consent rights. Violation of those covenants or failure to receive consents could lead to termination of those contracts or operating agreements. We are currently involved in litigation regarding our management of Shore Club. This litigation may harm our business or reputation and defense of this litigation may divert management resources from the operations of our business. Risks Related to the Hospitality Industry In addition to the risks enumerated above, a number of factors, many of which are common to the hospitality industry and beyond our control, could affect our business, including the following: Seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenues. The industries in which we operate are heavily regulated and a failure to comply with regulatory requirements may result in an adverse effect on our business. The illiquidity of real estate investments and the lack of alternative uses of hotel properties could significantly limit our ability to respond to adverse changes in the performance of our properties and harm our financial condition. Uninsured and underinsured losses could adversely affect our financial condition and results of operations. Environmental and other governmental laws and regulations could increase our compliance costs and liabilities and adversely affect our financial condition and results of operations. Our hotels may be faced with labor disputes or, upon expiration of a collective bargaining agreement, a strike, which would adversely affect the operation of our hotels. Risks Related to Our Organization and Corporate Structure We are a holding company with no operations. Provisions in our charter documents and Delaware law could discourage potential acquisition proposals, could delay, deter or prevent a change in control and could limit the price certain investors might be willing to pay for our stock. We may experience conflicts of interest with a significant stockholder and that stockholder may also exercise significant influence over our affairs. Our largest stockholder, NorthStar Capital Investment Corp., which we refer to as NCIC, beneficially owned approximately 30.3%, of the outstanding shares of our common stock at December 31, 2006. We may experience conflicts of interest in connection with competition with NCIC and its affiliates over the acquisition or disposition of hotel properties. We may experience conflicts of interest with certain of our directors and officers and significant stockholders as a result of their tax positions. Our basis in the hotels contributed to us is generally substantially less than their fair market value which will decrease the amount of our depreciation deductions and increase the amount of recognized gain upon sale. Upon an indirect transfer of an interest in our three New York City hotels as a result of subsequent sales of our common stock by NCIC or RSA Associates, L.P., we may be obligated to pay New York City and New York State transfer tax based on the value of our three New York hotels. Non-U.S. holders owning more than 5% of our common stock may be subject to Substantial sales of shares of our common stock may adversely impact the market price of our common stock and our ability to issue and sell shares in the future.

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1342126--3/30/2007--Morgans_Hotel_Group_Co.